On September 20, 2005, the Eleventh Circuit Court of Appeals held in FINOVA Capital Corp. v. Larson Pharmacy Inc., et al. (In re Optical Technologies, Inc.), 2005 WL 2276420 (11th Cir. 2005), that an order confirming a plan of reorganization acts as a judgment given preclusive effect, and a bankruptcy court may not later void parts of its confirmation order based on “second thoughts” about its jurisdiction. The bankruptcy court “is bound to enforce the terms of the Plan as written” once confirmed. This case serves as a warning to all creditors that their rights and claims�even with respect to non-debtors�may be affected by a reorganization plan. Every party receiving a plan and disclosure statement should therefore carefully review these documents to determine whether their rights and claims may be affected and, if necessary, object to the plan or appeal the confirmation order before their rights are deemed waived.

In FINOVA Capital, the Debtors leased billboards and kiosks to their customers (the “Lessees”) for advertising, and then assigned their lessor interests under the leases to finance companies (the “Lessors”) including FINOVA Capital Corp. The Debtors and Lessees also entered into advertising contracts under which the Debtors provided the Lessees with a share of the advertising fees, which the parties believed would more than cover the rent on the billboard and kiosk leases. In 1995, the Debtors began experiencing cash-flow problems and ceased paying the Lessees their share of the advertising fees. The Lessees, in turn, ceased making rent payments and brought suit against the Debtors.

In 1996, the Debtors commenced Chapter 11 cases. On May 3, 1998, the bankruptcy court confirmed the Fourth Amended Plan of Reorganization of the Debtors (the “Plan”). Among other things, the Plan purported to modify the leases of all “participating lessees” that were parties to advertising contracts with the Debtors and who would have owed rent on or after December 31, 1995. These lease-modifying provisions of the Plan were unchanged from a prior version of the plan that had been served on the Lessees.

After the confirmation order became final and non-appealable, FINOVA sought to enforce the Plan’s lease-modifying provisions. The Lessees balked at FINOVA’s attempt to apply the Plan to the kiosk leases, arguing that the bankruptcy court lacked jurisdiction to enforce such a modification because the leases were between non-debtor parties, some of the leases had expired before the Debtors had commenced its bankruptcy case, and the Lessees were not given sufficient notice that the leases would be modified by the Plan. The bankruptcy court agreed with the Lessees and rejected the lease modifications. However, the district court reversed and held that the confirmation order was res judicata, and that the bankruptcy court was not authorized to review its subject matter jurisdiction de novo.

On appeal, the Eleventh Circuit affirmed the district court’s judgment. The Court stated that the confirmation order acts as a judgment that can be given preclusive effect, citing its prior decision in In re Justice Oaks II, Ltd., 898 F.2d 1544 (11th Cir. 1990). Accordingly, the confirmation order and the Plan were binding on the Lessees, unless the confirmation order was voidable due to constitutionally defective failure of process. The Court found that the confirmation order was clearly not void as to the Lessees, because they were scheduled as creditors of the Debtors and were served with copies of the Third Amended Plan, summaries of the Fourth Amended Plan, and copies of the disclosure statement, which satisfied the notice requirement for bankruptcy purposes. The Lessees could have objected to the Plan and challenged jurisdiction in the confirmation stage of the case but failed to do so. As a result, the Court held that the Lessees could not collaterally attack the terms of the Plan and confirmation order by challenging the bankruptcy court’s jurisdiction over the leases, regardless of whether the leases had expired prior to confirmation. A bankruptcy court does not have the authority to “tunnel back to prior judgments for the purpose of reassessing prior jurisdiction de novo.” Having already opened Pandora’s Box, the bankruptcy court was bound to enforce the terms of the Plan as written.

Written by: Jenny Park Garner