A Practitioners Guide to Counting Ballots for a Chapter 11 Plan
The Bankruptcy Code provides some—but not enough—guidance to a debtor's attorney on counting ballots received on a chapter 11 plan in preparation for the confirmation hearing. Case law and legislative history provides direction in filling in the gaps. This article sets forth what ballots should be counted and how they should be counted.
The Bankruptcy Code
Section 1126 of title 11 of the U.S. Code sets out the relevant provisions for counting ballots that accept a chapter 11 plan of reorganization. This section provides, in pertinent part:
(a) The holder of a claim or interest allowed under §502 of this title may accept or reject a plan. If the United States is a creditor or equity security holder, the Secretary of the Treasury may accept or reject the plan on behalf of the United States...
(c) A class of claims has accepted a plan if such plan has been accepted by creditors, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class, held by creditors, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.1
(d) A class of interests has accepted a plan if such plan has been accepted by holders of such interests, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount of allowed interests of such class held by holders of such interests, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan...
(f) Notwithstanding any other provision of this section, a class that is not impaired under a plan, and each holder of a claim or interest of such class, are conclusively presumed to have accepted the plan, and solicitation of acceptances with respect to such class from the holders of claims or interests of such class is not required.
(g) Notwithstanding any other provision of this section, a class is deemed not to have accepted a plan if such plan provides that the claims or interests of such class do not entitle the holders of such claims or interests to receive or retain any property under the plan on account of such claims or interests.
The Starting Point
First, examine whether the class in question is impaired under the plan. If the class is not impaired, then you need look no further. Subsection 1126(f) provides that an unimpaired class is conclusively presumed to have accepted the chapter 11 plan.
Second, if the plan provides that a class will not receive or retain any property under the plan, then this is another quick closure. Subsection 1126(g) sets forth that this class is deemed not to have accepted the plan.
If neither of the above provisions applies to the class at hand, then move on to the following questions, which will be expanded upon below.
(1) Is the claim or interest an "allowed" claim or interest?
(2) Did the claim or interest holder actually vote on the plan?
(3) In what dollar amount will the claim or interest be counted?
After these initial questions are answered, the practitioner may calculate the more than two-thirds in amount and more than one-half in number of the allowed claims of the class, as set forth in §§1126(c) and (d).
"Allowed" Claim or Interest
Subsection 1126(a) states that only "allowed" claim or interest holders may accept or reject a plan. Eligibility to vote depends on whether a claim or interest is allowed or deemed allowed pursuant to §502.2
First, a practitioner must look at whether a claim was filed. An "allowed" claim or interest must actually be filed or be deemed filed. For a claim to be deemed filed, pursuant to 11 U.S.C. §1111(a), the claim or interest must be listed in the debtor's chapter 11 schedules, but not specified as disputed, contingent or unliquidated.3 Otherwise, to be considered for voting, a party must file a proof of claim or interest as provided by Bankruptcy Rule 3003(c)(2).4
Where a claim has been listed in the debtor's schedules as disputed, contingent or unliquidated, then a claimant must file a proof of claim to be treated as a creditor for voting purposes. See In re Grand Union Co., 204 B.R. 864, 871 (Bankr. D. Del. 1997) (Holder of disputed, contingent or unliquidated claim who fails to timely file a proof of claim is not entitled to vote or participate in debtor's reorganization); In re Spirco Inc., 201 B.R. 744, 749 (Bankr. W.D. Pa. 1996) (Where claim is scheduled as disputed the creditor must file a proof of claim to be entitled to vote); In re Johnston, 140 B.R. 526, 529 (9th Cir. BAP 1992), aff'd 21 F.3d 323 (9th Cir. 1994) (Where creditor's claim was listed as contingent and creditor did not file a proof of claim, it is not treated as a creditor for purposes of voting); In re Claremont Towers Co., 175 B.R. 157, 161 (Bankr. D. N.J. 1994) (Disputed claimant must file a proof of claim to be considered as a creditor for voting purposes); In re Nutri Bevco Inc., 117 B.R. 771, 778 (Bankr. S.D.N.Y. 1990) (Holders of disputed and unliquidated claims who failed to file a timely proof of claim are not deemed to have claims). If the holder of a disputed, contingent or unliquidated claim has filed a timely proof of claim, that claim will be considered as actually filed.
Once it is determined that a claim or interest has actually been filed or deemed filed, the next question is whether there has been an objection to the claim or interest. A claim or interest actually filed or deemed filed will be considered "allowed" under §502(a) unless there has been an objection to the claim.5
If there has been an objection to the claim, the claim holder will not be able to vote on the plan, unless that claim holder has received temporary allowance of his claim from the court or the court has settled the claim in the claimholder's favor.6
Temporary allowance of a claim may be gained pursuant to Bankruptcy Rule 3018(a). This rule states that, notwithstanding objection to a claim or interest, the court may temporarily allow a claim or interest in an amount the court deems proper for the purpose of accepting or rejecting a plan.
Neither the Bankruptcy Code nor the Rules provide any method for estimating a claim. Thus, estimating a claim for voting purposes is left to the reasonable discretion of the court and the court will use whatever method is best suited to the circumstances of the case. In re Ralph Lauren Womenswear Inc., 197 B.R. 771, 775 (Bankr. S.D.N.Y. 1996); In re Hydrox Chemical Co., 194 B.R. 617, 623 (Bankr. N.D. Ill. 1996); In re Thomson McKinnon Securities Inc., 191 B.R. 976, 979 (Bankr. S.D.N.Y. 1996); In re Rusty Jones Inc., 143 B.R. 499, 505 (Bankr. N.D. Ill. 1992).
Accordingly, upon a determination that a claim or interest is "allowed" as set forth by these provisions, the practitioner may move on to the subject of voting on the plan.
Affirmatively Voting for or Against the Plan
Practitioners often question what ballots are to be counted under 11 U.S.C. subsections (c) and (d). In calculating the one-half in number and two-thirds in amount requirements, are non-voting claims considered? Is a failure to vote considered an acceptance or rejection of the plan?
Legislative history provides guidance here. The House and Senate Reports point out that only those votes that are actually cast for or against a plan can be counted for purposes of subsections (c) and (d).7
This subject, however, has been a frequent issue in the courts. Essentially all of the courts have followed the Congressional guidance and determined that only creditors that affirmatively vote for or against a plan can be counted. In re Jim Beck Inc., 207 B.R. 1010, 1015 (Bankr. W.D. Va. 1997); In re Westwood Plaza Apartments Ltd., 192 B.R. 693, 696 (E.D. Tex. 1996); In re Higgins Slacks Co., 178 B.R. 853, 855 (Bankr. N.D. Ala. 1995); In re 7th Street and Beardsley Partnership, 181 B.R. 426, 432 (Bankr. D. Ariz. 1994); In re River Capital Corp., 155 B.R. 382, 385-86 ftn. 3 (Bankr. E.D. Va. 1991); In re M. Long Arabians, 103 B.R. 211 (9th Cir. 1989); In re Friese, 103 B.R. 90 (Bankr. S.D.N.Y. 1989); In re Townco Realty Inc., 81 B.R. 707, 708 (Bankr. S.D. Fla. 1987); In re Jeppson, 66 B.R. 269, 294 (Bankr. D. Utah 1986). But see In re Ruti-Sweetwater Inc., 836 F.2d 1263 (10th Cir. 1988) and In re Campbell, 89 B.R. 187 (Bankr. N.D. Fla. 1988) (Both courts held that a non-voting creditor who did not object to confirmation of the plan is deemed to have accepted the plan.).
Thus, unless a practitioner is appearing in the Tenth Circuit or Northern District of Florida, for purposes of calculating the one-half in number and two-thirds in amount requirement of 11 U.S.C. §§1126(c) and (d), only votes actually cast shall be counted.
Determining the Dollar Amount
The Bankruptcy Code does not designate what dollar amount should be used in calculating the two-thirds in amount of allowed claims of a class. There are three options: the amount listed in the debtor's schedules, the amount listed in the creditor's proof of claim or the amount settled by the court.
In re American Solar King Corp., 90 B.R. 808, 830 (Bankr. W.D. Tex. 1988), sets forth the principles to be followed.
(1) Where a proof of claim is on file, that amount is used.
(2) If no proof of claim is on file, the amount indicated in the debtor's schedules should be used.
(3) If the claim has been settled by the court, that amount should be used, as it overrides what might otherwise be listed in the proof of claim or debtor's schedules.
Solar King, 90 B.R. at 830. See, also, In re Rothenberg, 203 B.R. 827, 843 (Bankr. D. D.C. 1996) (Holder of an unsecured claim scheduled in the wrong amount who fails to file a proof of claim will be allowed only amount scheduled by chapter 11 debtor).
Example No. 1: A class of claims has the following creditors: Creditor A with a claim of $10,000; Creditor B with a claim of $10,000; Creditor C with a claim of $30,000; and Creditor D with a claim of $40,000. All claims are scheduled by the debtor and none of the claims were listed as contingent, disputed or unliquidated. Creditors A and D vote to accept the plan; Creditor C does not vote; Creditor B votes to reject the plan.
First, Creditor C's claim is not counted for voting purposes because he did not affirmatively cast a vote. Taken together, Creditors A and D hold two votes out of three votes that were submitted and hold $50,000 of the total amount of voting claims of $60,000. Creditors A and D hold at least two-thirds in amount ($50,000 is over two-thirds of $60,000) and more than one-half in number of the allowed claims (two claims out of three voting claims). Therefore, this class is considered to have accepted the plan.
Example No. 2: A plan is accepted by 75 percent in number of creditors but rejected by 75 percent in amount of claims. In this case, the class holds more than one-half in number of the allowed claims, but does not hold at least two-thirds in amount of the allowed claims. Thus, the class is considered to have rejected the plan. In re Eitemiller, 149 B.R. 626 (Bankr. D. Idaho 1993).
Example No. 3: A class consists of only two claims, and one of the claimants refuses to accept the plan. It is impossible for this class to accept the plan because more than one-half in number must accept the plan; thus, this class is considered to have rejected the plan. See In re Birdneck Associates L.P., 156 B.R. 499, 504 ftn. 10 (Bankr. E.D. Va. 1993).
When counting ballots received on a chapter 11 plan of reorganization, review the following steps:
(1) Is the claim or interest scheduled?
(a) No: A proof of claim must be filed for the creditor to have an allowed claim. If a proof of claim has been filed Go to Step 2. If not, stop.
(b) Yes: Is the claim or interest scheduled as disputed, contingent, or unliquidated?(1) Yes: A proof of claim must be filed. If a proof of claim has been filed Go to Step 2. If not, stop.
(2) No: Go to Step 2.
(2) Is there an objection to the claim or interest?
(a) No: This is an allowed claim or interest. Go to Step 3.
(b) Yes: Has the objection been resolved by the court in the creditor's favor, or has the court temporarily allowed the claim or interest?(1) Yes: This is an allowed claim or interest. Go to Step 3.
(2) No: This is not an allowed claim. Stop here.
(3) Continue with this step only if the creditor has an allowed claim or interest as determined in steps 1 and 2 above. Did the claimant affirmatively vote for or against the plan?
(a) No: The claim or interest cannot be counted. Stop here.(4) Continue with this step only if the creditor with an allowed claim or interest has affirmatively voted for or against the plan as determined in Step 3 above. In what amount is the claim or interest counted?
(b) Yes: The ballot can be counted. Go to Step 4.
(a) If there is a proof of claim filed then use that amount.
(b) If there is no proof of claim then use the amount in debtor's schedules.
(c) If the court has settled the claim amount then the settled amount should be used, as it overrides the proof of claim and schedules.
(5) The figures calculated in Step 4 may now be used to determine whether a class has accepted or rejected a chapter 11 plan, pursuant to the requirements of either 11 U.S.C. §§1126(c) or (d).
1Subsection (e) addresses the court's designation of an entity whose acceptance or rejection of the plan was not made in good faith or solicited in good faith. This article does not deal with this subject. [Return to Text]
3See In re Chattanooga Wholesale Antiques Inc., 67 B.R. 899 (Bankr. E.D. Tenn. 1986) (Statutes, rules and chapter 11 plan did not require bank to file proof of claim, where claim was not scheduled as disputed, contingent or unliquidated, and thus was "deemed allowed" without filing proof of claim.) [Return to Text]
6See In re Miami Trucolor Offset Service Co., 187 B.R. 767, 769 (Where the debtor objected to two claims and neither claimholder sought temporary allowance; the creditors were not allowed to accept or reject the plan); In re M. Long Arabians, 103 B.R. 211, 215 (9th Cir. BAP 1989) (The debtor objected to the claims of a creditor "Bell Road." Bell Road did not seek temporary allowance of its claims; thus, the court held that Bell Road did not hold an allowed claim and had no right to accept or reject the plan.); In re General Homes Corp., 134 B.R. 853, 860 (Bankr. S.D. Tex. 1991) (A creditor is not entitled to vote where its claim is subject to a filed objection for which no temporary allowance for voting purposes had been sought.). But, see, In re Amarex, 61 B.R. 301 (Bankr. W.D. Okla. 1985); In re Goldstein, 114 B.R. 430 (Bankr. E.D. Pa. 1990); In re Coral Petroleum Inc., 60 B.R. 377 (Bankr. S.D. Tex. 1984); In re Pizza of Hawaii Inc., 761 F.2d 1374, 1382 (9th Cir. 1985) (all cases holding that the question of whether a claimant to whose claim an objection has been filed is entitled to vote is a matter left to the discretion of the court). [Return to Text]