Restructuring

Contributed by Doron P. Kenter.
In a recent decision in In re Windmill Durango Office, LLC, the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals concluded that the bankruptcy court had not abused its discretion in denying a creditor’s motion to change its vote on the debtor’s plan of reorganization where the holder of the unsecured claim had purchased the claim for the apparent sole purpose of blocking confirmation of the debtor’s plan so as to prevent its other, secured, claim from being crammed down.  The BAP, however, left open the question of whether the bankruptcy court could have concluded that the creditor’s attempt to block the plan constituted a legitimate basis for changing a vote.
Bankruptcy Rule 3018(a) allows creditors to change their votes on a proposed plan upon a showing of “cause.”  The rule does not provide any further detail regarding what constitutes “cause,” but at least one court has held that the threshold should be a relatively low one, and one which allows the voting entity to “intelligently express its will.”  As written, Bankruptcy Rule 3018(a) does not necessarily mean that a creditor seeking to change its vote must show “good cause” for such change, but it does deprive creditors of an ability to alter their votes unilaterally, as of right.
In Windmill Durango, Beal Bank was the only secured creditor of the debtor that was owed well over $10 million on account of secured loans.  In its chapter 11 case, Windmill Durango (the debtor), ultimately solicited votes on a “cramdown” plan of reorganization that provided for the repayment of Beal Bank’s claim over time, at an interest rate that was subsequently approved by the bankruptcy court.  It quickly became clear that Beal Bank would vote to reject the plan, while the only two remaining holders of unsecured claims had voted to accept the plan.  Seeing an opportunity to prevent confirmation of the proposed plan, Beal Bank bought one of the two unsecured claims for about 82% of its face value, or $1,250.  Beal Bank then sought, pursuant to Bankruptcy Rule 3018(a), to withdraw the vote that had been cast on account of the unsecured creditor’s claim and submit a substitute ballot rejecting the plan.  If the bank’s motion were granted, the debtor would then lose its sole impaired accepting class, and the plan would necessarily fail to meet the plan confirmation requirements set forth in section 1129(a) of the Bankruptcy Code.
The bankruptcy court denied the bank’s motion to change its vote on account of its newly-purchased unsecured claim.  The bankruptcy court agreed with the bank that, by becoming the assignee of the unsecured claim, the bank could conceivably change its vote on account of the unsecured claim.  The court, however, held that pursuant to Bankruptcy Rule 3018(a), such a right included only the ability to move the court to change its vote upon a showing of “cause.”  In connection with that analysis, the court observed that it was not appropriate for creditors “to wait ‘til the plans [were] balloted and then decide what claims [they were] going to buy” and that the bank’s attempt to change its vote so as to block confirmation was improperly motivated and “did the process violence.”  Accordingly, the bankruptcy court denied the bank’s motion to change its vote for failure to show cause for such a change.
On appeal, the Bankruptcy Appellate Panel affirmed the bankruptcy court’s denial of the bank’s motion.  The appellate panel specifically noted the question was a “close” one, and limited its ruling on this question to the issue of whether the bankruptcy court had “abuse[d] its discretion” in so ruling.  Accordingly, the appellate panel’s decision (albeit in dicta) suggests that another bankruptcy court, conceivably, could conclude that a creditor’s desire to change its vote so as to block confirmation – rather than, for example, because of newly discovered information or advice – would constitute sufficient cause for changing its vote.
In Windmill Durango, the secured creditor ultimately failed in its attempt to buy a controlling position in the bankruptcy case (so as to eliminate the possibility of confirming a cramdown plan).  Perhaps this is because its timing was bad (indeed, if the bank had bought the claim before voting commenced, it would likely have been able to vote its unsecured claim however it saw fit).  In any event, the appellate panel’s decision reminds us that many questions remain regarding what “cause” must be shown by parties who, presumably, come into late-game blocking positions in chapter 11 cases and seek to modify votes submitted by the former creditor.