Inference Alone Is Not Enough

by Cadwalader, Wickersham & Taft LLP

That was the admonition that Judge Robert E. Gerber of the United States Bankruptcy Court delivered to a class of claimants seeking to partially revoke the confirmation order entered in Motors Liquidation Company’s bankruptcy cases on account of alleged fraud perpetuated on the Court.  The Court held that (i) section 1144 of the Bankruptcy Code does not permit partial revocation of a confirmation order and (ii) the Plaintiffs “failed to allege facts that give rise to a strong inference of fraudulent intent.”  Morgenstein v. Motors Liquidation Company (In re Motors Liquidation Company), Case No. 11-9409, 2012 WL 130740, at *7 (Bankr. S.D.N.Y. Jan. 18, 2012).

The claimants were three individuals who owned Chevrolet Impalas produced in 2007 and 2008.  The claimants alleged that Impalas were defective and that MLC knew of this defect in 2008, but failed to list the claimants as creditors of MLC’s estate in its schedules.  As a result, the claimants argued that MLC caused the plan to be confirmed based upon materially false information by failing to list the claimants on MLC’s schedules.  To redress this alleged harm, claimants motioned the Court to partially revoke the confirmation order under section 1144 of the Bankruptcy Code to enable the claimants to file a class proof of claim against MLC.

The Court began its analysis by looking to the plain language of section 1144 of the Bankruptcy Code, which provides that “[o]n request of a party in interest . . . the court may revoke such [confirmation] order if and only if such order was produced by fraud.”  In the first instance, the Court found that section 1144 of the Bankruptcy Code makes no reference to partial revocation or modification of the confirmation order.  Instead, section 1144 of the Bankruptcy Code utilizes the term revoke, which unequivocally means a total or absolute revocation, as anything less would be a mere modification.  Accordingly, the Court held that a court cannot partially revoke a confirmation order under section 1144 of the Bankruptcy Court.

Second, the Court analyzed whether the claimants alleged sufficient facts to give rise to a strong inference of fraudulent intent, which may be established either (a) by alleging facts to show that defendants had motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial of conscious misbehavior or recklessness.  Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124, 1128 (2d Cir. 1994).  The Court found that the claimants could not satisfy either prong.  On the first prong, the Court reasoned that MLC had no motive to defraud the court because MLC’s plan was a liquidating plan, and that MLC would not have been affected by the inclusion of the claimants in MLC’s schedules.  Regarding the second prong, the Court found that the claimants had not established that MLC intentionally withheld known facts from the Court.  Having found that the claimants failed to satisfy either prong, the Court held that the claimants failed to plead fraud with sufficient particularity and denied the claimants’ motion.

This case demonstrates (i) that section 1144 of the Bankruptcy Code does not permit partial revocation of a confirmation order and (ii) that claimants cannot rely on mere inferences or conclusory allegations when seeking to revoke a confirmation order.

This entry was posted in Analysis.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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