United States: Continued Recession Not "Extraordinary Circumstance" Justifying Modification Of Confirmed Chapter 11 Plan

Last Updated: February 12 2013
Article by David G. Marks

Affirming the bankruptcy court below in a case of first impression, in In re Caviata Attached Homes, LLC, 481 B.R. 34 (B.A.P. 9th Cir. 2012), a Ninth Circuit bankruptcy appellate panel held that a relapse into economic recession following a chapter 11 debtor's emergence from bankruptcy was not an "extraordinary circumstance" that would justify the filing of a new chapter 11 case for the purpose of modifying the debtor's previously confirmed plan of reorganization.


Section 1141(a) of the Bankruptcy Code provides that the terms of a confirmed chapter 11 plan are binding on all parties. Section 1127(b) provides that a confirmed chapter 11 plan may be modified only before the plan has been substantially consummated. Under section 1101(2), "substantial consummation" occurs when: (i) substantially all of the property to be transferred under the plan has been transferred; (ii) the debtor or its successor has assumed the business or management of substantially all of the property dealt with by the plan; and (iii) distributions under the plan have commenced. Taken together, sections 1127(b) and 1141(a) impose an important element of finality in chapter 11 cases that allows stakeholders to rely on the provisions of a confirmed chapter 11 plan.

Although section 1127(b) prohibits modification of a substantially consummated plan, some courts have ruled that "serial" (successive) chapter 11 filings are not per se impermissible and that a second plan may modify the first plan if there has been an unforeseeable or unanticipated change in circumstances. See Elmwood Dev. Co. v. Gen. Electric Pension Trust (In re Elmwood Dev. Co.), 964 F.2d 508 (5th Cir. 1992); In re 1633 Broadway Mars Rest. Corp., 388 B.R. 490 (Bankr. S.D.N.Y. 2008). However, as noted by the court in In re Adams, 218 B.R. 597 (Bankr. D. Kan. 1998), "[e]ven extraordinary and unforeseeable changes will not support a new Chapter 11, if these changes do not substantially impair the debtor's performance under the confirmed plan." Examples of unforeseen changed circumstances justifying a second chapter 11 filing and modification of a previous plan have included federal-law changes affecting tenancy of an apartment building, termination of service by major airlines that had provided vital customers for an airport hotel, crops or livestock lost due to weather or natural disaster, and substantial adverse judgments. The bankruptcy appellate panel considered this question in Caviata Attached Homes.


In 2005, Caviata Attached Homes, LLC ("Caviata") obtained a $40.7 million recourse loan from California National Bank ("CNB") to develop a 184-apartment housing complex. In exchange, Caviata executed a promissory note and deed of trust, which assigned Caviata's right, title, and interest in the apartment complex to CNB. Caviata soon defaulted on the loan. In response, the parties entered into a series of forbearance agreements. Caviata, however, defaulted yet again. This time, CNB sued in state court to foreclose. CNB subsequently sold the loan to U.S. Bank, N.A. ("U.S. Bank").

In 2009, before the scheduled foreclosure trial, Caviata filed for chapter 11 protection in Nevada. The company filed a chapter 11 plan proposing to make payments on U.S. Bank's $27.5 million secured claim at a reduced rate of interest for three years, by the end of which Caviata would either sell the apartment complex or refinance the loan.

In its approved disclosure statement, Caviata expressly warned of the risks posed by a continued downturn in the economy on the value of the property and on Caviata's ability either to refinance the U.S. Bank loan or to realize sufficient value from a sale in three years to pay the secured claim of U.S. Bank in full.

U.S. Bank objected to confirmation, arguing that the plan was not feasible, because of, among other things, the declining value of the apartment complex and continued uncertainty in the real estate market. The bankruptcy court overruled U.S. Bank's objections and confirmed the plan. In so ruling, the court agreed with Caviata's witnesses that the apartment complex could be sold for at least $34 million within three years, "when the cycle of downturn would improve."

Caviata filed a second chapter 1 1 petition in Nevada 15 months later, in August 2011. Although it had not yet defaulted under its confirmed chapter 11 plan, Caviata contended that it would soon be unable to perform, due to an "unexpected" relapse into recession, particularly in the real estate market. At the time of Caviata's second chapter 11 filing, the value of the apartment complex was appraised at $21 million to $23 million.

U.S. Bank sought dismissal of the second chapter 11 case, arguing that the filing was a bad-faith attempt to circumvent the prohibition in section 1127 against modifications to a substantially consummated plan. Caviata countered that section 1127's prohibition does not apply where "extraordinary circumstances" substantially impair a debtor's ability to perform under its confirmed plan.

The bankruptcy court dismissed the case for "cause" under section 1112(b) of the Bankruptcy Code. The court ruled that, although Caviata did not act in bad faith by filing a second chapter 11 case, section 1127 barred the modifications that Caviata sought to make to its confirmed plan. According to the court, "[T]he fact that the economy changes doesn't relieve people from their contractual obligations." It added that "in 2010 there were certainly inklings that the economy was very bad" and that "just being wrong that the economy is worse than [Caviata] thought it was going to be is [not] a basis for filing a new plan." Caviata appealed the dismissal order.


The bankruptcy appellate panel affirmed, holding that changed market conditions cannot justify a second chapter 11 filing unless the changes were both unforeseeable and fundamental to the market itself. In Caviata's case, the court explained, the risk that the real estate and lending markets would not improve as expected was specifically identified by both Caviata in its disclosure statement and U.S. Bank in its objection to confirmation. It could not be said, therefore, that those conditions were unforeseeable. According to the appellate panel, Caviata did nothing wrong by using its "best guess" for an economic recovery when formulating its chapter 11 plan. Guessing wrong, however, was not an excuse to undo the plan once it was confirmed.


From a creditor's perspective, Caviata Attached Homes underscores the importance of testing a plan proponent's assumptions in a proposed chapter 1 1 plan with a view toward blocking confirmation if the plan is unfeasible for whatever reason. Building a strong evidentiary record in connection with plan confirmation can forestall subsequent assertion in a serial chapter 11 filing that an eventuality was unanticipated or unforeseeable.

As in other contexts (e.g., orders approving asset sales), the finality of an order confirming a chapter 11 plan is an important part of U.S. bankruptcy jurisprudence. Caviata Attached Homes indicates that such finality is not easily skirted (regardless of how the subsequent challenge is formally framed), and stakeholders seldom receive another bite at the apple absent compliance with the Bankruptcy Code's strict requirements or, in some cases, a showing of extraordinary circumstances.

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.

David G. Marks
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.