United States: First Impressions: Shutting Down A Chapter 11 Case Due To Patent Unconfirmability Of Plan

Last Updated: October 17 2012
Article by Scott J. Friedman

Before soliciting votes on its bankruptcy plan, a chapter 11 debtor that has filed for bankruptcy typically must obtain court approval of its disclosure statement. As part of the disclosure-statement approval process, interested parties are afforded the opportunity to object. For example, a party may object on the grounds that the disclosure statement lacks sufficient information about the debtor. Sometimes, however, a party objects to the disclosure statement because the chapter 1 1 plan described by the statement cannot be confirmed. Although issues regarding a plan's compliance with the Bankruptcy Code's confirmation requirements are typically deferred until the confirmation hearing, some courts may resolve those issues at the disclosure-statement hearing if the plan is unconfirmable on its face, or "patently unconfirmable."

In In re American Capital Equipment, LLC, 688 F.3d 145 (3d Cir. 2012), the Third Circuit Court of Appeals held as a matter of first impression that a bankruptcy court may, in certain circumstances, resolve confirmation issues at the disclosure-statement hearing. The Third Circuit affirmed a bankruptcy court's ruling at the disclosure-statement stage that: (i) the chapter 11 plan did not satisfy the Bankruptcy Code's requirements that the plan be "feasible" and proposed in "good faith"; and (ii) on the basis of the plan's patent unconfirmability (and the debtors' inability to propose a confirmable plan), the debtors' chapter 11 cases would be converted to chapter 7 liquidations.


Confirmation and consummation of a bankruptcy plan are the culmination of a chapter 11 debtor's bankruptcy case. Creditors and interest holders whose rights are "impaired" (e.g., detrimentally affected vis-à-vis treatment outside bankruptcy) by a chapter 11 plan and who are to receive a distribution are entitled to vote on the plan. After a bankruptcy case is commenced and with limited exceptions, a debtor (or other plan proponent) can solicit votes on the plan only if holders of claims or interests are provided with a "disclosure statement" which is approved, after notice and a hearing, by the bankruptcy court and which contains "adequate information." Thus, before soliciting votes, a chapter 11 debtor generally must obtain court approval of its disclosure statement, and interested parties must have the opportunity to challenge approval.

Following approval of the disclosure statement, the debtor may solicit votes on its plan and thereafter seek confirmation of the plan. To be confirmed, the plan must satisfy certain statutory requirements found in section 1129 of the Bankruptcy Code, including the following: (i) the plan complies with the Bankruptcy Code; (ii) the plan has been proposed in good faith; (iii) the plan has been accepted by at least one class of impaired creditors (without taking into account plan acceptances of insiders), if any class of creditors is impaired; (iv) each class of creditors and interest holders has accepted the plan (or is deemed to have accepted by reason of nonimpairment), or the plan is "fair and equitable" with respect to each dissenting class; and (v) the plan is "feasible," in that confirmation is not likely to be followed by the debtor's liquidation or need for further financial reorganization (unless contemplated by the plan). Parties may object to confirmation of the plan if it fails to satisfy one of those requirements, and those objections generally are heard at the confirmation hearing.

In American Capital Equipment, the Third Circuit considered whether a bankruptcy court may resolve objections to confirmation of a plan at the hearing to consider approval of the disclosure statement, rather than at the confirmation hearing.


Skinner Engine Company, founded in 1868, manufactured steamship engines and parts from the 1930s to the 1970s that allegedly contained asbestos. In 1998, American Capital Equipment, LLC (collectively with Skinner Engine Company, "Skinner"), acquired all of Skinner Engine Company's common stock. Both companies filed for chapter 11 protection in 2001 in Pennsylvania.

At that time, more than 29,000 asbestos claims were pending against Skinner. The asbestos cases were previously consolidated and, in 1996, were administratively dismissed by a maritime court without prejudice, as the claimants had not provided real medical or exposure history. These "asymptomatic cases" could be activated if the plaintiffs began to suffer impairment and could show evidence of asbestos-related injury as well as evidence of exposure to the defendants' products. After the dismissal, only a few dozen cases met the criteria for reinstatement, and none resulted in a judgment or settlement against Skinner.

Skinner maintained insurance to provide coverage for such claims. Litigation concerning the scope of the insurance coverage commenced in 2005. Under its policies, Skinner was obligated to cooperate in the defense of claims and obtain the insurers' consent to claim settlements. As will be seen, these policies were a factor in the Third Circuit's decision.

In June 2001, Skinner filed its first chapter 11 plan. Following various objections, Skinner amended that plan. However, creditors voted to reject Skinner's second chapter 11 plan. Thereafter, Skinner sold its assets and paid the proceeds (other than certain funds to cover processing of asbestos claims) to its secured lender.

Following the sale, Skinner filed yet another chapter 11 plan, its third. Under the plan, common stock of "Reorganized Skinner," insurance recoveries, and $35,000 in cash from Skinner's secured lender would fund a section 524(g) asbestos trust to provide for current and future asbestos claimants. Section 524(g) of the Bankruptcy Code establishes a procedure for dealing with future personal-injury asbestos claims against a chapter 11 debtor that entails the creation of a trust to pay future claims and the issuance of an injunction to prevent future claimants from suing the debtor. All claims based upon asbestos-related injuries are channeled to the trust.

As part of Skinner's third plan, asbestos claimants would need to show asbestos injuries and exposure to Skinner's products. Further, any cash from insurance actions and policies otherwise payable to asbestos claimants would be subject to a 10 percent "surcharge," which would be used to pay other creditors from a "Plan Payment Fund." Following bankruptcy-court approval of the disclosure statement in February 2005, Skinner's creditors voted to accept the plan.

A few months later, Skinner's insurers moved to dismiss its bankruptcy cases because Skinner allegedly was no longer proceeding in good faith. In denying that motion (a ruling that was affirmed on appeal by a district court and the Third Circuit), the bankruptcy court stated that it could not approve a section 524(g) trust because Skinner was not a going concern. Thereafter, Skinner filed a fourth chapter 1 1 plan, omitting the section 524(g) trust but providing for a 20 percent surcharge on insurance recoveries to pay nonasbestos creditors under the Plan Payment Fund and retaining a process for allowance of asbestos claims (including future claims). Although asbestos claimants could resort to tort litigation to seek recovery, claimants were enjoined under the plan from doing so until claims allowed in the bankruptcy cases were paid. After the bankruptcy court rejected the injunction and questioned the propriety of the surcharge, Skinner filed a fifth plan.

The fifth chapter 11 plan omitted the injunction but retained the surcharge on insurance proceeds payable to asbestos claimants who opted into the plan's settlement process. The surcharge would be used to pay creditors through the Plan Payment Fund and to fund a claims-resolution process for asbestos claimants called the "Court Approved Distribution Procedures" (the "CADP"). Specifically, the CADP provided that:

Each Asbestos Claimant shall maintain full and complete ownership of his or her Asbestos Claim, including, without limitation, the right to prosecute or settle any Asbestos Claim, but upon the Asbestos Claimant submitting his or her claim to the CADP, he or she shall thereby have agreed to pay the Surcharge Cash from any amounts paid on account of the Asbestos Claim under and through the CADP.

The CADP provided a basis for the plan trustee to evaluate asbestos claims and would have implemented claims-allowance criteria similar to those in the third and fourth plans. Insurers disagreeing with the plan trustee's determination of a claim could elect to seek a bankruptcy-court "determination" of that issue. However, a court determination was limited; the court was required to accept the amount proposed by either the trustee or the insurance company, and any decision would be binding and nonappealable by the insurers. Further, the plan's success depended on the surcharge to pay creditors and fund the CADP.


At the disclosure-statement hearing, the bankruptcy court ruled that the fifth plan was "facially unconfirmable" because it failed to satisfy: (a) section 1129(a)(3) of the Bankruptcy Code, in that it was not proposed in good faith and was forbidden by law; and (b) section 1129(a)(11), because it was not feasible. The bankruptcy court also converted the cases to chapter 7, on the basis of its finding that Skinner would not be able to propose a confirmable plan. On appeal, the district court affirmed, and an appeal to the Third Circuit followed.


A three-judge panel of the Third Circuit addressed three primary issues on appeal.

First, the Third Circuit rejected Skinner's argument that the bankruptcy court erred by finding the plan unconfirmable absent a confirmation hearing. Agreeing with other courts that have addressed this issue, the Third Circuit ruled that a bankruptcy court can (subject to addressing due-process concerns) resolve confirmation issues at the disclosure-statement stage if the plan is patently unconfirmable. According to the court, a plan is patently unconfirmable if it has defects that cannot be overcome by the voting results and that concern matters for which all material facts are undisputed or have been developed at the disclosure-statement hearing.

Second, the Third Circuit agreed that the plan was not feasible and had not been proposed in good faith. As to feasibility, the court explained, a plan—including a liquidation plan—can be confirmed only if it is not likely to be followed by liquidation or further financial reorganization of the debtor or a successor under the plan, unless the liquidation or reorganization is proposed in the plan. Success need not be guaranteed; however, the plan must be reasonably likely to succeed. Thus, if the plan's success turns on uncertain and speculative litigation, it is not feasible, because success is only possible, not reasonably likely.

According to the Third Circuit, Skinner's plan was not feasible (i.e., it was not likely to succeed) because its sole source of funding was a surcharge on what the court characterized as "wholly speculative litigation proceeds." Not only did the plan depend on a sufficient number of claimants opting into the CADP rather than the court system, but even in that case, it could succeed only if enough claimants prevailed and contributed sufficient surcharge funds. Most of the claims, however, had been administratively dismissed and had so far been overwhelmingly unsuccessful. Because Skinner admitted that no plan would work absent a surcharge, the feasibility issue could not be cured. As there were no remaining disputed material facts, the Third Circuit concluded that the plan was patently unconfirmable on the grounds of unfeasibility.

In addressing the good-faith issue, the Third Circuit noted that what constitutes good faith depends on the context (and as a result, the Third Circuit's previous good-faith ruling in connection with the motion to dismiss did not dictate the results of the good-faith determination in the confirmation context). For purposes of plan confirmation, the court explained, the focus of the inquiry is the plan itself and whether the plan will achieve a result consistent with the objectives of the Bankruptcy Code. A debtor can pursue a valid bankruptcy goal (such as maximizing assets, thereby proceeding in good faith for purposes of determining whether the debtor's case should be dismissed), yet still propose a plan that is inconsistent with the Bankruptcy Code (and thus have a plan that has not been proposed in good faith).

The Third Circuit concluded that the plan was not proposed in good faith. The plan, the court explained, contained an inherent conflict of interest. On the one hand, Skinner could pay its creditors under the plan only if asbestos claimants obtained settlements and paid the surcharge. On the other hand, Skinner was obligated to cooperate in defending against the asbestos claims (thereby minimizing the amount of allowed claims as well as the surcharge). The Third Circuit agreed with the bankruptcy court's conclusion that the plan established a system under which Skinner would be "financially incentivized to sabotage its own defense."

At the same time, the Third Circuit emphasized, the claims process limited or eliminated the insurers' rights, including the right to take discovery and to appeal, without the protections of section 524(g). Finally, the plan trust was inconsistent with the asbestos-trust provisions of section 524(g). Under section 524(g), the court explained, a debtor is to fund the trust (at least partially) with its securities, and the trust, in turn, pays the asbestos claimants. Under Skinner's plan, however, the opposite would occur: contributions from participating asbestos claimants would be made to a fund that would be used to pay attorneys and other creditors.

While the Third Circuit did not rule that such provisions were per se impermissible, it found good faith lacking where: (i) Skinner's bankruptcy, which was due to cash-flow problems, was unrelated to the asbestos litigation, which involved mostly "asymptomatic" cases; (ii) the CADP, rather than being funded by the debtor (or its profits) to pay asbestos claimants, was funded by the asbestos claimants to pay creditors and attorneys; and (iii) the surcharge created an inherent conflict of interest, while the claims process deprived the insurers of their rights.

Finally, the Third Circuit affirmed the order converting Skinner's chapter 11 cases to chapter 7 liquidations.


By agreeing with those courts that have enabled parties to prevail on confirmation objections at the disclosure-statement stage, the Third Circuit has confirmed in American Capital Equipment that bankruptcy courts can avoid the expense and delay of pursuing confirmation of a plan that is destined to fail.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.