Consumer Law League of America Newsletter, November 2013
The primary goal of any chapter 11 bankruptcy case is to confirm (approve) a plan of reorganization. A chapter 11 plan that is confirmed by the Bankruptcy Court binds all parties, including the debtor, its creditors and all other parties in interest, and governs practically every aspect of the post-confirmation entity.
The right to propose a chapter 11 plan for the Court’s consideration, therefore, is significant. Although initially only the debtor has the right to propose a plan, that right may later be extended to other parties. This could result in the filing of multiple plans. But the Court is permitted to confirm only one plan. How does the Court determine which of the various plans to confirm? The United States Bankruptcy Code (the “Bankruptcy Code”) provides only some (but not enough) guidance.
Bankruptcy Code Section 1129(c) provides that, when faced with multiple plans, “[i]f the requirements of subsections (a) and (b) of this section [i.e., Bankruptcy Code Section 1129, enumerating various requirements for confirmation] are met . . . the court shall consider the preferences of creditors and equity security holders in determining which plan to confirm.” 11 U.S.C. § 1129(c) (emphasis added). Two things are clear from this subsection.
First, in deciding between multiple plans, a court must ascertain whether the plans are otherwise “confirmable” under either section 1129(a) or 1129(b). This is a threshold requirement. In other words, if only one plan meets those requirements, the analysis is over and the choice is simple. Second, if more than one plan is “confirmable,” the Court must “consider the preferences of creditors and equity security holders,” which generally are voiced through ballots cast before the plan confirmation hearing. Section 1129(c) provides nothing further and, at first glance, it seems as if the section 1129(c) analysis is complete at this point. That is not the case, however.
Based on a careful reading of section 1129(c), courts generally are in agreement that it only requires consideration of, not complete surrender to, creditor and shareholder preference. See, e.g., In re River Village Associates, 181 B.R. 795, 807 (E.D. Penn. 1995) (confirming competing non-debtor plan over the debtor’s plan although “[n]early all of the equity interests, who were impaired under both plans, voted to accept the Debtor’s plan and to reject [the non-debtor] plan”); In re TCI 2 Holdings, LLC, 428 B.R. 117, 182 (Bankr. D.N.J. 2010) (agreeing that preferences must be considered, not obeyed); In re Asarco LLC, 420 B.R. 314, 327 (S.D. Tex. 2009) (same). This conclusion makes sense given the “cardinal rule of statutory construction [that] the plain meaning of a statute controls . . . .” Security Leasing Partners, LP v. Proalert, LLC (In re Proalert, LLC), 314 B.R. 436, 441 (B.A.P. 9th Cir. 2004) (citing In re Transcon Lines, 58 F.3d 1432, 1437 (9th Cir. 1995). Nowhere in section 1129(c) does it say that creditor/shareholder preference conclusively determines this plan confirmation issue.
Clearly, then, the section 1129(c) analysis is much more involved than a mere tally of the votes cast by creditors and equity holders. But nowhere in the Bankruptcy Code does it say what else a court must assess to determine which plan to confirm.
Case law fills in the void by outlining the following four variables – only one of which is creditor/shareholder preference – that a court should assess in deciding between multiple confirmable plans (see, e.g., Asarco, 420 B.R. at 327):
- Type of Plan: This generally looks to whether the plan calls for the reorganization or liquidation of the debtor.
- Treatment of Creditors and Equity Security Holders: This looks to how the plan proposes to deal with creditor claims and shareholders’ stock (e.g., the extent of repayment of claims, the time period over which claims will be paid or whether shareholders will retain or lose their shares).
- Feasibility of the Plan: This generally looks to whether enough money is available to make the payments that must be made immediately under the plan and whether there will be enough money to make the payments that must be made later under the plan.
- Preferences of Creditors and Equity Security Holders: This generally is based on what creditors and shareholders select in their plan ballots (as noted above).
Although the creditor and shareholder preference is not the only factor considered, it is a factor and, in fact, has been found by some courts to be the most significant factor. See, e.g., TCI 2 Holdings, 428 B.R. at 183-84. This could result in a plan proponent’s ability to tip the scales in favor of its plan.
Therefore, one tricky area is whether the Court should give any weight to those “insider” votes when considering preferences under Section 1129(c). The answer is not clear, but the concern is real. For example, under bankruptcy law, creditors are permitted to sell their claims (and along with it, goes the right to vote on a plan) to other parties, including insiders. This would mean that insiders could buy multiple claims and stack the deck in favor of their plan. At least one court has warned about giving much weight to insider votes, especially in the face of “the practice of buying claims.” See In re La Guardia Associates, L.P., 2006 Bankr. LEXIS 4735, *75 (Bankr. E.D. Penn. Sept. 13, 2006).
On the other hand, the plain language of section 1129(c) seems to suggest that the Court should equally weigh all preferences, regardless of who is submitting the ballot. The plain language does not distinguish between the type of creditor or shareholder in directing courts to consider creditor/shareholder preference. This takes the analysis full circle.
As noted above, in concluding that creditor preference is only a consideration under section 1129(c), and not a conclusive factor, courts point to the plain language of section 1129(c) as only mandating preferences be considered, not obeyed. The same logic applies here regarding insider preferences. The section’s plain language only says a court must consider the “preferences of creditors and equity holders,” not the preferences of non-insider creditors. Moreover, the fact that section 1129(c) directs the Court to consider the preferences of equity holders – who almost always are insiders of at least one of the plans – seems to make clear that Congress intended to include (rather than exclude) insider preferences in the Court’s analysis.
In sum, in a competing plan scenario, when a plan is preferred by creditors and equity holders, the proponent of that plan should not be complacent solely with the ballot results and should ensure that as many of the other variables support the Court’s selection of its plan. When a plan is not preferred by creditors and equity holders, the proponent of that plan should urge the Court to consider the other factors before making a final decision.