What do you do if a debtor fails to adhere to their confirmed bankruptcy plan?

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A recent opinion from the Michigan Court of Appeals explained that when a debtor defaults under a confirmed Chapter 11 bankruptcy plan, a creditor can enforce their rights in a court of state, and possibly in bankruptcy court as well.

In City of Southfield v Shefa, LLC,[1] a debtor who owned a hotel filed for bankruptcy under Chapter 11 of the Bankruptcy Code in 2015. The bankruptcy court upheld the debtor’s plan in 2016. The plan imposed a number of obligations on the debtor. Among these was the requirement that the debtor execute a mortgage in favor of the town of Southfield to secure the debtor’s obligation to make certain physical improvements to his property. The mortgage also required the debtor to keep up to date with his taxes and allowed for the appointment of a receiver in the event of default.

In 2019, the city sued the debtor in Oakland County Circuit Court, claiming the debtor violated the terms of the mortgage. The City requested the appointment of a receiver and the seizure of the mortgage. The Circuit Court dismissed the case, holding that only the bankruptcy court could hear the dispute (i.e. it had jurisdiction over the matter).

In a reasoned opinion, the Michigan Court of Appeals reversed, explaining that although the bankruptcy court had exclusive jurisdiction over certain aspects of the bankruptcy proceedings and may have had jurisdiction over the city’s lawsuit , its jurisdiction over the city lawsuit was not exclusive. The circuit court had concurrent jurisdiction with the bankruptcy court over the city’s lawsuit, meaning it could also hear that dispute and therefore should not have dismissed the suit.

the Shefa This case is a reminder that a confirmed bankruptcy plan often imposes obligations on both debtors and creditors. If a debtor breaches its plan, a state court often has the ability to enforce the obligations of the plan, especially those based on state law. This can be good news for creditors who are uncomfortable litigates in bankruptcy court, a place that may seem unfamiliar to them.

[1] No. 350885, 2022 WL 413923 (Mich. Ct. App. February 10, 2022).

© 2022 Miller, Canfield, Paddock and Stone PLC National Law Review, Volume XII, Number 46

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