Lenders Beware: The 9th Circuit Dilutes Voting Power in Multi-Debtor Cases (In re Transwest Resort Properties Inc.)
Courts are often faced with the situation in which affiliated debtors file for Chapter 11 reorganization and request to have their cases jointly administered. While joint administration does not, without more, cause substantive consolidation of the assets and liabilities of the corporate group, jointly-administered debtors may propose a single plan of reorganization that establishes the recovery for all of the debtors’ creditors. In the recent case of In re Transwest Resort Properties Inc., a case featuring a jointly administered, multi-debtor Chapter 11 plan of reorganization, the 9th Circuit was asked to decide whether the acceptance requirements of the Bankruptcy Code should be determined on a per debtor basis or on a per plan basis. The 9th Circuit adopted the per plan approach – establishing that only a single impaired accepting class amongst all debtors was necessary to confirm the plan.
Per Debtor v. Per Plan – What’s the Difference?
In broad terms, a predicate to confirmation of a Chapter 11 plan of reorganization is that each class of “impaired” creditors votes to accept the plan. Acceptance is determined by the favorable vote of not less than majority in number of creditors and two-thirds in dollar amount of the claimants in each class. While “cramdown”1 exists as an exception to overcome a negative vote of an impaired class, there must be at least one accepting impaired class in order for confirmation to occur.2 In the event of a multi-debtor Chapter 11 bankruptcy and a proposed reorganization under a single plan, a question arises as to whether the debtors need acceptance from one impaired class from each debtor (the per debtor approach), or whether one impaired class from across all debtors will suffice (the per plan approach).3
In re Transwest Resort Properties Inc.
In Transwest, the 9th Circuit affirmed the bankruptcy court’s decision confirming a plan of reorganization of five related debtors. The Circuit Court held that §1129(a)(10), which requires that at least one impaired class accept a plan, applies on a per plan, rather than a per debtor basis.4
Transwest and its affiliated debtors acquired two Westin hotel resorts in 2007. The five entities consisted of two operating companies, two mezzanine entities and a holding company. The holding company was the sole owner of the mezzanine entities which, in turn, were the sole owners of the operating companies who ran the resorts. The acquisition was funded by a loan to the operating companies from a primary lender, secured by liens on the resorts, and a separate loan from a third party to the mezzanine entities, secured by pledges of the mezzanine entities’ ownership interests in the operating companies.
Three years later, all five debtors filed petitions under Chapter 11 and their cases were jointly administered, but not substantively consolidated. By plan time, the primary lender, who filed a claim in the amount of $298 million based on its loan to the operating companies, had also acquired the mezzanine loan in the amount of $39 million. The mezzanine loan was the only debt of the mezzanine debtors; therefore the lender was the only creditor voting with respect to those debtors. When a joint plan of reorganization was proposed that would extinguish the mezzanine loan, the lender voted against the plan. Nevertheless, the bankruptcy court ultimately confirmed the plan because several other impaired classes of creditors (of the operating debtors) voted in favor of the plan.
The lender asserted that section 1129(a)(10), which requires that at least one impaired class accept the reorganization plan, applied on a per debtor, not a per plan basis. The Lender argued that because (i) it was the only class member for the mezzanine debtors, and (ii) it did not consent to the plan, the plan should not have been confirmed.
The Circuit Court based its holding on the plain language of the statute.
“The plain language of the statute supports the ‘per plan’ approach. Section 1129(a)(10) requires that one impaired class "under the plan" approve ‘the plan.’ It 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. Under its plain language, once a single impaired class accepts a plan, section 1129(a)(10) is satisfied as to the entire plan. Obviously, 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.”5
While the only other bankruptcy court to address the issue – in Delaware – adopted the per debtor rule6, the 9th Circuit decision should sound alarms for lenders. Financing structures often seek to isolate a borrowing entity to provide a lender with control (especially in a Chapter 11 situation). The Transwest decision markedly thwarts those structures within the 9th Circuit. Rather than maintaining control over a vote and plan process, it is now possible that the only creditor of a debtor may have little to no voice in that entity’s reorganization plan, should creditors of the other affiliated debtors vote in favor of the joint plan.
1 11 USC § 1129(b).
2 11 USC § 1129(a)(10).
3 Suzanne Brindise, Choosing the “Per-Debtor” Approach To Plan Confirmation In Multi-Debtor Chapter 11 Proceedings, (2014) available at https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1005&context=nulr.
4 In re Transwest Resort Props., 2018 U.S. App. LEXIS 1947 (9th Cir. 2018).
5 Id. at 12.
6 In re Tribune Co., 464 B.R. 126, 182-83 (Bankr. D. Del. 2011).