Restructuring

The Bankruptcy Code’s cramdown provisions are a powerful tool for debtors in the plan confirmation process. Pursuant to section 1129(a)(10) of the Bankruptcy Code, a plan may be confirmed if, among other things, “at least one class of claims that is impaired under the plan has accepted the plan.” Once there is an impaired accepting class, and assuming certain requirements are met, the plan may then be “crammed down” on all other classes of impaired creditors that reject the plan and those creditors will be bound by the terms of a plan they rejected.

But what happens when the chapter 11 plan is a joint plan for multiple debtors and creditors hold claims against different debtors? Does acceptance by any one class of impaired creditors with claims against any one of the debtors satisfy 1129(a)(10) or does the Code require acceptance by an impaired class of creditors of each debtor that is party to the joint plan? Cue the “per plan” vs. “per debtor” debate – a debate the Ninth Circuit Court of Appeals recently weighed in on in JMPCC 2007-C1 Grasslawn Lodging LLC v. Transwest Resort Props. Inc., et al. (In re Transwest Resort Props.), 881 F.3d 724 (9th Cir. 2018).

Per Debtor

The “plain meaning” of section 1129(a)(10) may not be so plain – or so proponents of the “per debtor” view have argued. Pursuant to Bankruptcy Code section 102(7)’s rule of construction, “the singular includes the plural.” Thus, applying that provision to section 1129(a)(10) of the Bankruptcy Code, the term “plan” includes the plural “plans.” Under the “per debtor” view, each joint chapter 11 plan is constructed of multiple plans – one for each of the debtors. So, absent substantive consolidation, an impaired creditor class of each debtor must accept a joint plan in order to satisfy 1129(a)(10). Bankruptcy courts in Delaware have applied this “per debtor” interpretation.

Per Plan

By contrast, the “per plan” application of 1129(a)(10) dictates that, assuming the other requirements for confirmation are satisfied, a joint chapter 11 plan may be confirmed if a single impaired class of claimants with claims against any debtor accepts the joint plan. Bankruptcy courts in the Southern District of New York and the Middle District of Pennsylvania have applied this approach. Most recently, the Ninth Circuit also adopted this view in the Transwest Resorts decision, concluding that the “per plan” approach is the “plain language” interpretation of section 1129(a)(10).

The Ninth Circuit Stance: In re Transwest Resort Props.

Prior to the Ninth Circuit decision in Transwest, no Courts of Appeal had weighed in on the “per plan” versus “per debtor” debate. Transwest involved five related entities that commenced chapter 11 cases. Transwest Resort Properties Inc. was the debtor holding company and sole owner of two “Mezzanine” debtors. The Mezzanine debtors were the sole owners of two “Operating” debtors, which operated two resorts. The bankruptcy cases of the five debtor entities were jointly administered, but not substantively consolidated. The debtors’ bank lender (the “Lender”) held a $298 million prepetition claim against the Operating debtors. After the petition date, the Lender acquired a $39 million claim against the Mezzanine debtors, which made the Lender the lone creditor of the Mezzanine debtors.
The five debtors filed a joint chapter 11 plan, which several classes of impaired creditors – none of which held claims against the Mezzanine debtors – voted to approve. The Lender, however, voted to reject the plan and, thus, no class of impaired creditors of the Mezzanine debtors voted to approve the plan. The Lender objected to plan confirmation on the grounds that section 1129(a)(10) required the plan to be approved by an impaired class of creditors for each of the debtors – the “per debtor” approach. Notwithstanding the Lender’s objection, the Bankruptcy Court for the District of Arizona confirmed the joint plan. The district court affirmed, applying 1129(a)(10) on a “per plan” basis. The Lender appealed to the Ninth Circuit.
The Ninth Circuit affirmed. In support of its conclusion, the Ninth Circuit held that the plain language of section 1129(a)(10) indicates that Congress intended a “per plan” approach. The court explained, “[1129(a)(10)] makes no distinction concerning or reference to the creditors of different debtors under ‘the plan,’ nor does it distinguish between single-debtor and multi-debtor plans.” Rejecting the Lender’s interpretation of the Bankruptcy Code’s rule of construction, the Ninth Circuit held that section 102(7) of the Bankruptcy Code, which provides that the singular includes the plural, effectively amends section 1129(a)(10) to read: “at least one class of claims that is impaired under the plans has accepted the plans,” and the “per plan” approach is consistent with this reading. The Ninth Circuit also acknowledged the Lender’s argument that the “per plan” approach may produce bad policy results; however, the court reasoned that such policy considerations are “best left for Congress to resolve.” The court concluded, “Congress could have required plan approval from an impaired class for each debtor involved in a plan, but it did not do so. It is not our role to modify the plain language of a statute by interpretation.”

Conclusion

The case law is far from clear on how to interpret 1129(a)(10) of the Bankruptcy Code. The two most popular jurisdictions for chapter 11 filings, the District of Delaware and the Southern District of New York have produced case law on different sides of the debate, albeit none binding on other cases in those jurisdictions. With the Ninth Circuit issuing the first circuit court decision, only time will tell how other circuits choose to reconcile the split. In the meantime, debtors may think twice about filing in jurisdictions that mandate the stricter “per debtor” cramdown requirement. Instead, “per plan” jurisdictions, like the Ninth Circuit, may be more attractive venues for debtors, as the threat of a “per plan” cramdown may give debtors more leverage in their negotiations with creditors.
Weil summer associate Elissabeth Berdini contributed to this post.