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Ninth Circuit Ruling Eases Plan Acceptance Requirement in Multi-Debtor Plans of Reorganization
In a case of first impression at the circuit level, the United States Court of Appeals for the Ninth Circuit held that section 1129(a)(10) of the Bankruptcy Code — which requires a favorable vote of at least one impaired class of creditors in order to confirm a Chapter 11 plan — applies on a “per-plan” basis, rather than a “per-debtor” basis. See, JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props. Inc., et al. (In re Transwest Resort Props. Inc.), No. 16-16221, 2018 WL 615431 (9th Cir. Jan. 25, 2018).
Bankruptcy Code section 1129(a) sets forth the legal requirements that must be met before a court may confirm a Chapter 11 plan of reorganization. Among them are the creditor acceptance requirements necessary for plan confirmation. A Chapter 11 plan must divide creditors into classes of similarly situated creditors — generally according to the priority level of their claims. 11 U.S.C. §1122. Impaired creditors vote on a Chapter 11 plan together with other members of their class. A class of creditors is deemed to accept when at least two thirds by number of creditors and over one half by dollar amount votes in favor of the plan. 11 U.S.C. §1126. Bankruptcy Code section 1129(a)(8) suggests that all creditor classes must vote to accept in order to confirm a Chapter 11 plan. However, if certain additional statutory requirements are met, a “cramdown” plan may be confirmed under section 1129(a)(10), provided that at least one class of impaired creditors has voted to accept the plan.
It is commonplace for a single Chapter 11 plan to cover multiple affiliated debtor entities. Section 1129(a), however, is silent as to this practice and as to whether its requirements apply on a per-debtor or per-plan basis. For example, if a plan has two debtors — a parent and a subsidiary — each with three voting classes, have the voting requirements been met as to the parent debtor where only one (or even all) of the subsidiary's classes voted to accept the plan and none of the parents' creditors did? Under the Ninth Circuit's ruling, the answer is “yes.” As discussed herein, the Ninth Circuit's holding runs counter to commonly understood practice within other circuits, invites gerrymandering and raises corporate separateness and substantive consolidation concerns.
Transwest Facts and Ninth Circuit Analysis
The Transwest case began in 2010 when five related entities (the Debtors) filed for Chapter 11 bankruptcy. Prior to filing, the Debtors had acquired various resort properties, financed by: 1) a $209 million mortgage loan (the Operating Loan) to the three operating debtors (the Operating Debtors) from JPMCC 2007-C1 Grasslawn Lodging, LLC (the Lender); and 2) a $21.5 million loan (the Mezzanine Loan) from Ashford Hospitality Finance, LP (the Mezzanine Lender”), secured by the interests of the two subsidiary debtors (the Mezzanine Debtors) in the Operating Debtors. The Lender filed a claim for $298 million, based on the Operating Loan, and the Mezzanine Lender filed a $39 million claim based on the Mezzanine Loan. Subsequently, the Lender then acquired the Mezzanine Lender's claim.
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