Restructuring

Contributed by Sara Coelho
Among the many interesting holdings contained in the opinion denying confirmation of the reorganization plan of Quigley Company, Inc., is the bankruptcy court’s decision to designate the votes of numerous tort claimants who settled prepetition with the debtor’s parent, Pfizer, Inc.  The Quigley decision is notable because the court designated the votes of an entire category of voters, and because it did so based not on the conduct of the creditors themselves, but on the conduct of the party seeking to procure their votes.  The decision shows that, although rarely sought and even more rarely granted, designation of votes is a powerful tool to protect the voting process.  The Quigley decision provides a useful guidepost in an area of the law where the Bankruptcy Code permits broad exercise of judicial discretion and a range of results.

Previous posts have described the facts of the case and have reported on other aspects of the decision.  One here describes the court’s finding that Quigley’s plan was proposed in bad faith because the vote on the plan was tainted by prepetition settlements between Pfizer and certain asbestos tort victims.  Specifically, under those settlements, Pfizer, which had or may have had derivative liability for asbestos-related injuries resulting from Quigley products, settled its own liability, but preserved a small “stub” claim for each claimant against Quigley.  Historically such settlements would have released both Pfizer and Quigley, and the court inferred that the Quigley claims were purposefully preserved for purposes of influencing the outcome of Quigley’s chapter 11 case.  Moreover, Pfizer agreed to pay the settling claimants an additional payment in the event that Quigley’s plan was confirmed, leading the court to conclude that Pfizer “created and incentivized an impaired subclass consisting of the majority of the members of Class 4 [Asbestos Personal Injury Claimants] to vote in favor of Quigley’s plan.”
Typically courts designate votes where there is bad faith on the part of the claimholder, and typically designation occurs because the claimholder has attempted to “extort personal advantage not available to other creditors” or has acted with an “ulterior motive.”  In fact, recent controversies have focused on designation of votes by claims purchasers that bought their claims for the purpose of influencing the reorganization.  The facts here are the flip side of such a fact pattern, as Pfizer attempted to influence the outcome of the vote without purchasing and voting the underlying claims.  The court notes that Pfizer probably did not acquire the claims outright because most jurisdictions prohibit the assignment of personal injury claims, and because, as an insider, Pfizer’s votes would not count for purposes of establishing an impaired accepting class.  In designating the votes of the settling claimants, the court did not pass on the motives of the settling claimants in casting their votes.  Instead, it found that Pfizer’s settlements were in effect purchases of votes for the purpose of ensuring passage of a reorganization plan under which it would benefit from a channeling injunction for future Quigley derivative claims against it.  Section 1126(e) of the Bankruptcy Code gives the court discretion to designate votes of creditors whose acceptance or rejection of a plan is “not solicited or procured in good faith,” and the court relied on this language in making its determination.
The court briefly considered whether the settlement agreements were similar to lock-up agreements, which also secure votes in exchange for some consideration.  It rejected the comparison because the settlement payments “do not involve the typical lockup or postpetition plan agreement that provides for payments under a plan by the debtor (or gifted by a secured creditor) to an entire class.”  It also stated that any plan based on a lockup agreement that would secure an advantage for insiders at the expense of creditors would be proposed in bad faith, and that Pfizer’s overall strategy was to “squeeze out” the non-settling claimants by stripping them of their derivative claims against Pfizer for a projected 7.5% distribution under the plan.  The discussion is sparse, but it does distinguish between securing a vote under a lockup and buying a vote through a settlement on the basis that the former is procured only in exchange for distributions to entire classes made from the property of the debtor, whether directly or through a gift by a secured creditor giving up rights to collateral owned by the debtor.
Since vote designation is discretionary relief, and because in most cases courts are loathe to disenfranchise creditors, it is hard to know the bounds of vote designation from reading the cases.  The recent DBSD case in which votes of a claims purchaser who sought to acquire control of the company through its purchase of claims and participation in the bankruptcy has generated controversy for just this reason — the conduct described in that case is not uncommon so it is difficult to understand why vote designation occurred there, but not in other cases.  In re DBSD North America, Inc. et al., 421 B.R. 133 (Bankr. S.D.N.Y. 2009).  The main case cited by DBSD, Allegheny, is not terribly helpful for the opposite reason: there the facts supporting designation are extreme.  In re Allegheny International, Inc., 118 B.R. 282 (Bankr. W.D. Pa. 1990).  The discussion of vote designation and good faith in Quigley however, highlights the purpose of vote designation:  maintaining the integrity of the voting process and checking efforts that would manipulate it to the disadvantage of minority creditors.  One suspects that so long as this concern is met, courts will decline motions to designate votes.