Consensual Plans with Non-voting Classes When the Failure to Vote Means Acceptance

Consensual Plans with Non-voting Classes When the Failure to Vote Means Acceptance

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When soliciting votes for a chapter 11 plan, plan proponents want as many acceptances as possible. After all, more acceptances equate to more accepting classes. And the acceptance of a plan by all classes of creditors allows for a consensual plan, as opposed to a cramdown plan. While success is certainly obtainable with a cramdown plan, a consensual plan is always preferable because the plan proponent avoids the necessity of proving compliance with the Bankruptcy Code's cramdown provisions, as well as avoiding an appeal and the accompanying costs and delays.

Plan proponents, however, cannot force claimants to vote to accept a plan, or even to vote at all. The Bankruptcy Code, after all, imposes no punishment upon non-voting claimants. Instead, a claimant may choose not to vote at all, thereby allowing the chips to fall where they may. It is unlikely, however, that any claimant that is truly interested in the bankruptcy case's outcome will not vote.

Based on such theory, arguments have successfully been made that the failure of a class to vote equates to it "deemed acceptance." These arguments, and opinions accepting them, are based on the concept of estoppel in that if a claimant is not concerned enough to vote, it should not be heard to later complain. This concept is not universally accepted, but can be a useful tool for practitioners when and where it applies.

Voting Requirements in Chapter 11

Pursuant to 11 U.S.C. §1126(c), "a class of claims has accepted a plan if such plan has been accepted by creditors...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...that have accepted or rejected such plan. Thus, to determine whether a class of creditors has accepted a plan, one must calculate the number of creditors voting and the respective amount of the voting creditors' claim or interest, and examine whether the number of creditors voting equates to 51 percent of the creditors in that class voting, and whether the dollar amount of claims or interests voted equates to more than 66 percent of the aggregate amount of claims of creditors that voted. This calculation differs from the formula applied under the Bankruptcy Act, whereby the total amount of creditors entitled to vote was calculated.

While the Sweetwater doctrine may be controversial, it can be a useful tool at a confirmation hearing because it provides for an efficient confirmation hearing process.

As a result, obtaining an accepting class is easier because non-voting creditors are not counted in calculating class acceptance. The Bankruptcy Code, however, does not address the result of a class in which no creditors voted. A non-voting class is possible, particularly when a single creditor, typically a secured creditor, is the only member of that class. Classes with one secured creditor are common because of the differing treatment among secured creditors in most bankruptcy cases.

A single, secured creditor in a class may choose not to vote for a variety of reasons, such as apathy and/or the desire to save any and all expense. Such non-participation is rare because of the secured creditors' desire to protect its rights. When a secured creditor that has participated in the bankruptcy case does not vote, therefore, it is logical to assume that its failure to vote is not a rejection of the plan. Indeed, an acceptance or rejection must be in writing, so the failure to vote is not a rejection. Fed. R. Bankr. P. 3018(c). Certain courts have adopted this logic and held that a non-voting single member of a class is deemed to have accepted a plan. In re Ruti-Sweetwater, 836 F.2d 1263 (10th Cir. 1988).

Sweetwater and Its Progreny

In Sweetwater, judgment lien creditors were separately classified under the debtors' plan of reorganization. Throughout the term of the bankruptcy proceeding, the judgment creditors did not appear or otherwise participate. At the confirmation hearing, the bankruptcy court accepted the debtors' assertion that the judgment creditors' failure to object or vote on the plan, despite adequate notice, should be deemed an acceptance of the debtors' plan, thereby allowing the debtors to avoid the cramdown requirements set forth in 11 U.S.C. §1129(b).

Subsequently, the judgment creditors appeared and attacked certain provisions of the debtors' confirmed plan, which affected their liens. The bankruptcy court rejected all such arguments and held that the judgment creditors were bound by the debtors' confirmed plan. Upon the judgment creditors' appeal of the order confirming the debtors' plan, the district court affirmed the bankruptcy court.

The district court reasoned that under the Bankruptcy Act, non-voting creditors in a class were deemed to reject the plan, as a debtor had to carry class by counting the total members of a class, as opposed to just the voting members. Under the Bankruptcy Code, however, non-voting members were not deemed to have rejected the plan. Therefore, a court could deem a class as having accepted the plan, even though the single creditor in that class did not vote.

The Tenth Circuit affirmed and held that "to hold otherwise would be to endorse the proposition that a creditor may sit idly by, not participate in any manner in the formulation and adoption of a plan [of] reorganization, and thereafter, subsequent to the adoption of the plan, raise a challenge to the plan for the first time." In re Ruti-Sweetwater Inc., 836 F.2d 1263, 1266 (10th Cir. 1988). Since adopting the judgment creditors' argument would relieve creditors from taking an active role in protecting their claims, the Tenth Circuit held that the judgment creditors' inaction constituted an acceptance of the debtors' plan for purposes of §1129(b). But, see In re M. Long Arabians, 103 B.R. 211, 215 (Bankr. 9th Cir. BAP 1989) (where the court held that there can be no deemed acceptance where a creditor objected to the plan, regardless of voting).

The Tenth Circuit's holding has been adopted by other courts, which have likewise held that a non-objecting, non-voting secured creditor that is the single member of a class is deemed to have accepted the plan for purposes of §1129(b). See In re Campbell, 89 B.R. 187 (N.D. Fla. 1988).

The Tenth Circuit, however, could have reached its result without finding a deemed acceptance for §1129(b) purposes. After all, it can be argued that a creditor that does not object consents by acquiescence and waives the objection. Thus, any following appeal is subject to dismissal because of the failure to timely raise the issue during the bankruptcy case. Indeed, many courts have found that failing to participate and vote does not equate to a deemed acceptance of a plan.

Rejection of the Sweetwater Doctrine

While most circuit appeals courts have not ruled on the Sweetwater doctrine, other courts have rejected the theory. See In re Townco Realty Inc., 81 B.R. 707 (Bankr. S.D. Fla. 1987); In re Friese, 103 B.R. 90 (Bankr. S.D.N.Y. 1989); In re Adkisson Village Apartments of Bradley Co. Ltd., 133 B.R. 923 (Bankr. S.D. Ohio 1991). The only reason to avoid §1129's cramdown requirements is if they cannot be met. If such requirements cannot be met, then the purpose of §1129 and of calculating acceptance by affirmative votes is fulfilled.

Many of the cases rejecting Sweetwater, however, actually distinguish themselves based on the facts of the case, i.e., the class that is allegedly deemed to accept, affirmatively and timely objected to the plan. See M. Long Arabians, 103 B.R. at 215. In fact, there has yet to be an appeals court to reject Sweetwater. The lack of such a case is not surprising, however, because the Sweetwater doctrine applies when creditors have not participated. Most creditors that acquiesce during the bankruptcy case do not actively participate after confirmation. Thus, few cases or controversies arise, lending credibility to Sweetwater through the lack of controverting precedent.


While the Sweetwater doctrine may be controversial, it can be a useful tool at a confirmation hearing because it provides for an efficient confirmation hearing process. Further, circumstances could arise whereby no impaired classes have accepted a plan, and the deemed acceptance is necessary for the plan to comply with §1129(a)(10). While such an application would extend the Sweetwater doctrine, it is surely possible. The question would then arise as to who had standing to appeal the issue—objecting creditors, or the non-voting, non-participating creditors.

Journal Date: 
Friday, March 1, 2002