Purchasing claims to block bankruptcy "cramdown" plans: A new weapon for creditors

Banking Law Journal

Volumn 115, Issue 1, 1998, Pages 4-17

  Gutcho, Lawrence B ^a   Fidler, David A ^b  

^a Loeb and Loeb LLP   (United States)

^b UNIVERSITY OF CALIFORNIA   (United States)

Author keywords

[No Author keywords available]

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EID: 0346688166     PISSN: 00055506     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (63)

1. 1997 WL 342895 (9th Cir. 1997).
2. The strategy can be used in any bankruptcy; however, non-real estate bankruptcies often have more possible consenting impaired classes.
3. Section 1126(c) sets out the voting criteria for a class of claims to accept a plan. In relevant part, that section provides: "A class of claims has accepted a plan if such plan has been accepted by creditors . . . that hold at least two-thirds in amount and more than one-half in number of the allowed claims." 11 USC § 1126(c) (emphasis added). Thus, Teachers' offer to purchase 100 percent of the unsecured claims could have effectively barred acceptance by Class 3 two alternative ways. First, Teachers could have purchased more than one-third in amount of the unsecured claims and voted them against the debtor's plan. Second, Teachers could have purchased over one-half of the number of claims, and voted each claim against the plan. The claims successfully purchased by Teachers reflected the latter possibility - less than one-third in amount, but more than one-half in number.
4. Under the general provision of Section 1129(a), a court cannot confirm a plan if it does not meet the requirement of Section 1129(a)(10). In relevant part, that section provides: "If a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan." 11 USC § 1129(a)(10).
5. Therefore, if the debtor's argument were to be accepted, TIAA would have only one vote despite holding twenty-one of the thirty-six unsecured claims, and thus could not block acceptance of the plan by Class 3.
6. 1997 WL 342895, at * 5.
7. 11 USC § 1126(e).
8. Section 203 provided: If the acceptance or failure to accept a plan by the holder of any claim or stock is not in good faith, in the light of or irrespective of the time of acquisition thereof, the judge may, after hearing upon notice, direct that such claim or stock be disqualified for the purpose of determining the requisite majority for the acceptance of a plan.
9. Rule 10-305(d) provided: For the purpose of determining the requisite number of acceptances, the court after hearing on notice to the creditor or stockholder may disqualify any acceptance or rejection of a plan or modification of a plan if such acceptance or rejection was not in good faith in the light of or irrespective of the time of the acquisition of the claim or stock by such creditor or stockholder.
10. See 5 Collier on Bankruptcy ¶ 1126.06, at 1126-17 (15th ed. rev. 1997).
11. 324 US 204, 65 S. Ct. 594, 89 L. Ed. 890 (1945).
12. Id. at 211 n.10.
13. Id.
14. For an excellent summary on post-Code court's consideration of the issue see In re Kovalchick, 175 BR 863, 874-876 (Bankr. ED Pa. 1994).
15. In re P-R Holding Corp., 147 F2d 895, 897 (2d. Cir. 1945).
16. In re Gilbert, 104 BR 206, 216 (Bankr. WD Mo. 1989).
17. 1997 WL 342895, at * 3.
18. Id. at 4.
19. Id.
20. Id. at 3.
21. See 5 James F. Queenan, Jr. et al. Chapter 11 Theory and Practice: A Guide to Reorganization § 30:25, at p. 30:101 (1994).
22. 104 BR 206 (Bankr. WD Mo. 1989).
23. Id. at 217.
24. Id. at 216.
25. 90 BR at 646-648.
26. Id. at 651. See also In re Federal Support, 859 F2d 17 (4th Cir. 1988); In re Lloyd McKee Motors, Inc., 157 BR 487 (Bankr. DNM 1993); In re Landau Boat Co., 8 BR 432 (Bankr. WD Mo. 1981).
27. 142 BR 374, 378-379 (ND Cal. 1994).
28. In Marin, the holder of the claim was not a preexisting creditor but rather a purchaser of the debtor's note. Nonetheless, the court found that this distinction was irrelevant as by purchasing the note. The new holder effectively stepped into the shoes of the preexisting creditor.
29. Id. at 378-379.
30. Id.
31. Id. at 379 (quoting In re Pine Hill Collieries, 46 F. Supp 669, 671 (ED Pa. 1942)).
32. Id. (quoting Federal Support, 859 F2d at 19).
33. Figter, 1997 WL 342895, at * 3.
34. Figter, 1997 WL 342895, at * 2. See also United States v. McConney, 728 F2d 1195, 1203-1204 (9th Cir. 1984) (en banc).
35. Id. at 4.
36. Id.
37. Id.
38. Id. at 3; See generally Pine Hill, 46 F. Supp. at 671.
39. See 5 Colliers on Bankruptcy ¶ 1126.06, at 1126.17 (15th ed. rev. 1997).
40. 118 BR 282 (Bankr. WD Pa. 1990).
41. Id. at 288-289.
42. Id. at 289.
43. See, e.g., In re Pleasant Hills Partners, LP, 163 BR 388, 394 (Bankr. ND Ga. 1994).
44. 47 BR 966 (D. Colo. 1985).
45. Id. at 971.
46. 63 BR 654 (Bankr. SD Ohio 1986).
47. Id. at 656.
48. 167 BR 381 (Bankr. ED Pa. 1994).
49. Section 1129(a)(10) provides: "If a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by an insider." 11 USC § 1129(a)(10) (emphasis added).
50. Holly Knoll, 167 BR at 388.
51. Id.
52. 11 USC § 1126(c) (emphasis added).
53. For this proposition, the debtor cited various turn-of-the-century cases decided under the repealed Bankruptcy Acts of 1867 and 1898. See, e.g., In re ET Kenney Co., 136 F. 451, 455 (D. Ind. 1905); In re Columbia Iron Works, 142 F. 234, 242 (ED Mich. 1904); In re Messengill, 113 F. 366, 367 (EDNC 1902).
54. The courts' finding that the language of Section 1126(c) is unambiguous had important implications. The debtor sought support from the Supreme Court's indication in Dewsnup v. Timm, 502 US 410, 419-420 (1992), that ambiguous language in the Bankruptcy Code should not be construed as effecting a major change in pre-Code practice unless there is a discussion in the legislative history indicating such an intent. The debtor argued that by counting "claims" rather than "creditors" who voted for or against a plan, the court was embarking on such a change of pre-Code practice without any reference in the legislative history of Section 1126(c) to justify such a departure. In response, Teachers' pointed to the Supreme Court's statement in Connecticut Nat'l Bank v. Germain, 503 US 249 (1992), regarding the mandatory canon of statutory construction to read a statute in accordance with its plain meaning. There, the court noted: We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there. . . . When the words of a statute are unambiguous, then this first canon is also the last: "judicial inquiry is complete." Connecticut Nat'l Bank, 503 US at 253 (citing United States v. Ron Pair Enters., 489 US 235, 241 (1989)).
55. In re Gilbert, 104 BR at 211; In re Concord Square Apartments of Wood Cty., Ltd 174 BR 71, 74 (Bankr. SD Ohio 1994).
56. Figter, 1997 WL 342895, at * 5.
57. Section 12 of the Bankruptcy Act of 1898 provided as follows: "An application for the confirmation of a composition may be filed in the court of bankruptcy after, but not before, it has been accepted in writing by a majority in number of all creditors whose claims have been allowed, which number must represent a majority in amount of such claims." However, the successor to Section 12 of the Bankruptcy Act of 1898, Section 1126(c) of the Code, uses language markedly different. Section 1126(c) provides that: "A class of claims has accepted a plan if such plan has been accepted by creditors . . . that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors . . . that have accepted or rejected such plan."
58. Bankruptcy Act of 1898, ch. 541, § 12, 30 Stat. 544, 549-550 (repealed 1938).
59. Figter, 1997 WL 342895, at * 5.
60. 115 BR 458 (Bankr. SONY 1990).
61. In relevant part, Section 303(b)(1) provides: An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title - (1) by three or more entities, each of which is either a holder of a claim against such person . . . or an indenture trustee representing such a holder." 11 USC § 303(b)(1) (emphasis added).
62. Gilbert, 115 BR at 461. See also In re Averil, Inc., 33 BR 562, 563 (Bankr. SD Fla. 1983).
63. Figter, 1997 WL 342895, at * 6.