In a matter of first impression at the Circuit level, the United States Court of Appeals for the Ninth Circuit held that a court may confirm a plan filed on behalf of multiple debtors that has been approved by an impaired class of creditors of only one of the debtors. JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Properties Inc. (In re Transwest Resort Properties, Inc.), 881 F.3d 724 (9th Cir. 2018). This ruling is in contrast with the Delaware bankruptcy court’s ruling in the Tribune Company Chapter 11 case, where as successfully advocated by Norton Rose Fulbright attorneys, the court held that a plan must be approved by an impaired class of creditors of each of the debtors party to the plan. The following is a brief description of the case background and the court’s analysis.
The Debtors’ corporate structure consisted of a holding company, two mezzanine companies, and two operating companies that owned and operated two resorts. The Debtors financed the acquisition of the two resorts with (1) a mortgage loan to the operating debtors that was secured by the resorts, and (2) a loan to the mezzanine companies secured by the mezzanine companies’ interest in the operating companies. In 2010, all five companies filed for bankruptcy, and their bankruptcy cases were jointly administered. In the Chapter 11 cases, the operating lender filed a claim for $298 million based on the mortgage loan. In addition, the mezzanine lender filed a claim for $39 million based on the mezzanine loan. The operating lender subsequently acquired the mezzanine lender’s claim.
The Debtors proposed a joint Chapter 11 plan (the “Plan”), pursuant to which a third-party investor would acquire the operating debtors, and the mezzanine debtors’ ownership interest therein would be extinguished. Under the Plan, the lender, on account of the mortgage loan, would receive a replacement note payable over time, subject to certain rates and conditions. The Plan did not provide a recovery to the lender on account of the mezzanine loan if it voted against the Plan.
The lender, which was the only impaired class of creditors of the mezzanine debtors, voted against the Plan. Several other impaired classes of creditors of the other debtors voted to accept the Plan. Despite the lender’s opposition, the bankruptcy court confirmed the Plan. The case worked its way up to the Ninth Circuit, where the lender argued that the Plan could not be approved because, among other things, the Plan was not approved by at least one class of impaired creditors of each of the Debtors. The Ninth Circuit disagreed.
A Plan Need Not Be Confirmed on a “Per Debtor” Basis
Section 1129 of the Bankruptcy Code lists the requirements for confirmation of a Chapter 11 plan. In particular, section 1129(a)(10) requires that at least one class of impaired claims must vote in favor of the Plan. Unimpaired claims are deemed to have voted in favor of the Plan.
The lender argued that the Plan, which was filed on behalf of each of the five Debtors, could only be confirmed if at least one class of impaired creditors of each of the Debtors voted in favor of the Plan. In this instance, the lender argued that the Plan could not be confirmed because the lender, which was the only creditor of the mezzanine debtors, had voted against the Plan. The Debtors disagreed and argued that the Bankruptcy Code requires only approval from an impaired class of creditors of any single debtor that is subject to the Plan.
The Ninth Circuit agreed with the Debtors. According to the court of appeals, the plain language of section 1129(a)(10) refers to an impaired class “under the plan,” and does not draw a distinction between a plan filed by a single debtor and a plan filed by multiple debtors. Consequently, according to the court, section 1129(a)(10)’s requirement is satisfied as long as one class of impaired creditors of any of the debtors accepts the plan. The court acknowledged that the Delaware bankruptcy court previously held that section 1129(a)(10) applies on a “per debtor” basis. Ultimately, however, the Ninth Circuit disagreed with the lender (and the Delaware bankruptcy court), and held that section 1129(a)(10) applies on a “per plan” and not a “per debtor” basis.
In a concurring opinion, one of the judges noted that the Ninth Circuit’s ruling deprived the lender of its ability to object to the reorganization of the mezzanine debtors. This unfairness, however, was the result of the fact that the Plan effectively substantively consolidated the Debtors, treating them as one for purposes of distributions, and not because of the court’s interpretation of section 1129(a)(10). The lesson? The lender should have objected to the substantive consolidation of the Debtors. “Had the Debtors–and thus their reorganization plans–remained separate, there would have been no need to invoke the ‘per debtor’ approach to preserve the effectiveness of any objection Lender had.”
The Ninth Circuit’s decision is binding in California, Alaska, Arizona, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington. Other courts, however, are not bound by the decision, and indeed the Delaware bankruptcy court has previously held that a plan proposed on behalf of multiple debtors must be approved by a class of impaired creditors of each of the debtors. Nevertheless, a creditor of a debtor that is part of a larger group should be aware of the Ninth Circuit’s ruling and consider objecting to any plan provision that would effectively substantively consolidate the debtor’s estates. Reliance on a “per debtor” argument may not be sufficient to defeat a joint Chapter 11 plan.