When are Debtors and Creditors Bound to the Provisions of Confirmed Reorganization Plans?

(Excerpt) Generally, when a debtor files for protection under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”), a plan of reorganization is filed at some point with the bankruptcy court. The court then holds a hearing to determine whether the judge will confirm the reorganization plan. The judge will confirm the plan if it meets the criteria of Section 1129 of the Bankruptcy Code, which requires, among other things, that any payments made in connection with the plan are reasonable. A plan of reorganization is a significant component of a debtor’s emergence from bankruptcy, as it affects the rights of the debtor and its creditors by binding both debtors and creditors to the provisions of the plan, whether or not all of the creditors have accepted the plan. In In re Relativity Fashion, LLC, the United States Bankruptcy Court for the Southern District of New York held that Netflix was not permitted to stream certain films before they were theatrically released because the debtors\u27 confirmed reorganization plan contemplated the theatrical release of the movies prior to Netflix’s streaming. The debtors’ anticipated release of the films yielded specific financial projections and was a critical factor in the court’s determination that the plan was feasible as required by the Bankruptcy Code. The court concluded that the provisions of the confirmed reorganization plan were binding on the debtors and creditors, restraining Netflix from releasing the films. This holding illustrates the notion that a court will generally enforce reorganization plans that have been previously confirmed absent an extreme circumstance. What process does the court use to determine whether debtors and creditors are bound to a reorganization plan? This memorandum will examine this question by considering two main inquiries that courts explore before deciding whether the parties must abide by a plan’s provisions. Part I analyzes the doctrine of res judicata and its application to the validity of subsequent actions that challenge a reorganization plan. Part II examines the effect of an independent judgment on the effectiveness and enforceability of a reorganization plan