Creativity and Section 1129(a) Confirmation of Administratively Insolvent Debtor
After operating in chapter 11 for a period of time, the debtors, telecommunication services providers, decided to liquidate their assets by attempting to sell their core assets. The debtors ultimately terminated their retail operations, sold certain enterprise companies and used the proceeds from such sales to reduce their unsecured debt, with only their wholesale operations remaining. The debtors were administratively insolvent, thereby precluding them from being able to confirm a reorganization plan, as they were not in a position to satisfy §1129(a)(9) of the Bankruptcy Code, which requires that a debtor pay all administrative and priority creditors in full on the plan's effective date unless an administrative creditor agrees to different treatment. Section 1129(a)(9) provides:
Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that11 U.S.C. §1129(a)(9).(A) with respect to a claim of a kind specified in §507(a)(1) or 507(a)(2) of this title, on the effective date of the plan, the holder of such claim will receive on account of such claim cash equal to the allowed amount of such claim;
(B) with respect to a class of claims of a kind specified in §507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6) or 507(a)(7) of this title, each holder of a claim of such class will receive—(i) if such class has accepted the plan, deferred cash payments of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or(C) with respect to a claim of a kind specified in §507(a)(8) of this title, the holder of such claim will receive an account of such claim deferred cash payments, over a period not exceeding six years after the date of assessment of such claim, of a value, as of the effective date of the plan, equal to the allowed amount of such claim.
(ii) if such class has not accepted the plan, cash on the effective date of the plan equal to the allowed amount of such claim; and
Notwithstanding the debtors' obvious state of administrative insolvency, the debtors' pre- and post-petition secured lenders and unsecured creditors' committee appointed in the cases negotiated and drafted a reorganization plan that provided, among other things, that the debtors would emerge from chapter 11 and would continue to operate their remaining wholesale business and that the lenders would fund the plan and would receive 100 percent of the equity in the reorganized debtors in exchange for their post-petition loans and secured claims. The plan also provided for a potential distribution to general unsecured creditors wherein the lenders agreed to (a) assign their collateral, which consisted of avoidance claims, to an unsecured claims estate representative, and (b) assign $300,000 to the unsecured claims estate representative to fund the investigation and prosecution of such avoidance actions.2
[W]here the fate of every party in interest is often reliant upon the success of a plan and where the action of each creditor may affect the rights of all parties, a creditor who has an objection to the treatment of his or her claim under a plan must not remain silent.
With regard to administrative and priority claims, the plan provided for a claim fund in the amount of $3.25 million available for distribution, as well as a convenience class for all administrative and priority claims in an amount of $3,000 or less, including all claims where the claimholder agreed to reduce his or her claim to $3,000 and opt into the convenience class.
There were a total of 2,006 administrative and priority creditors, of which approximately 75 percent held convenience class claims and did not have to be solicited for plan-voting purposes. As for the remaining 454 administrative and priority creditors, the debtors prepared a consent form that was sent to administrative and priority creditors as part of their disclosure statement, which explained that (1) the Bankruptcy Code required payment in full of all administrative and priority claims in order for a plan to be confirmed unless the claimholder agreed to different treatment, (2) the debtors were unable to pay administrative and priority claims in full, and (3) administrative and priority creditors would receive between 5 and 12 percent of their claims under the terms of their proposed plan if the plan was confirmed. The consent form also advised administrative and priority creditors that unless they agreed to accept the different treatment as proposed by the debtors under the plan, administrative and priority creditors would most likely not receive any distribution, and that the debtors' bankruptcy cases would most likely be dismissed or converted. The consent form gave administrative and priority creditors the following three choices: (1) agree to accept the plan's proposed treatment of a pro-rata share of the claim fund, (2) opt into the convenience class or (3) decline to accept the plan's treatment.
Perhaps the most significant aspect of the consent form was that it contained a clear and conspicuous notice that the debtors intended to ask the bankruptcy court to rule that any administrative or priority creditor that failed to return the consent form will be deemed to have accepted the plan's treatment of his or her claims. The debtors simplified the procedure for the return of the consent forms by allowing administrative and priority creditors to (1) mail the consent forms in the self-addressed stamped envelope they received by the debtors, (2) fax the consent forms to a toll-free number as provided in the consent form or (3) e-mail the information to the e-mail address provided in the consent forms. The consent form also listed a toll-free number for a call center established by the debtors to answer any questions about the consent forms, the treatment of administrative and priority claims or other issues. The debtors also initiated a targeted call campaign whereby each administrative and priority creditor was contacted and urged to return the consent form to the debtors.
Of the 454 administrative and priority creditors, 85 agreed to accept the plan's treatment, 205 opted into the convenience class, 49 settled their claims with the debtors, and eight initially elected not to accept the plan's treatment but later changed their minds and accepted the plan's treatment. The face amount of all the claims held by administrative and priority creditors who accepted the plan's treatment or opted into the convenience class was approximately $48 million. The remaining 107 administrative and priority creditors who did not return the consent forms to the debtors represented $4,529,270 of the face value of their claims.
The debtors nonetheless continued to follow up with each creditor who did not return a consent form, during which time no creditor objected to the debtors' proposed treatment under the plan. Those from this group who responded either stated that they saw no reason to return the consent forms, since they would receive the same treatment under the plan as if they accepted such treatment, or stated that they wanted to have nothing to do with the bankruptcy cases.
The legal issue presented to the bankruptcy court was whether, under §1129(a)(9), it was appropriate to deem the silence of the 107 creditors who did not return the consent forms to the debtors—but, at the same time, did not object to the consent forms or object to the debtors' stated intention to ask the bankruptcy court to treat their silence as consent—as consent to the debtors' proposed treatment of their claims.
The court began by stating that while §1129(a)(9) requires that all administrative and priority creditors be paid in full unless they agree to different treatment of their claims, §1129(a)(9) does not say "how" such creditors may agree to such other treatment. In re Teligent Inc., 282 B.R. at 770. While some courts have concluded that similar provisions applicable to chapter 13 plans require express consent, the court was of the view that a creditor's agreement to different treatment within the meaning of §1129(a)(9) may, in appropriate circumstances, be implied from his or her conduct. The court arrived at this conclusion based on a number of observations. First, the court looked to the plain meaning of the statute. While §1129(a)(9) requires an agreement, the court stated that §1129(a)(9) does not state that such agreement must be express as compared, for example, to §1126(c) of the Bankruptcy Code, which requires an affirmative act to accept a plan by the requisite majority of creditors within a class. Since "Congress intends the words in its enactments to carry their ordinary contemporary, common meaning," Judge Bernstein directed that courts apply such objectives unless there exists a sufficient basis to do otherwise.3
Second, the court looked to the ordinary and common meaning of the term "agree," which includes "to grant consent," which may be stated expressly or implied from one's conduct without any direct expression.4 Thus, based on its ordinary and plain meaning, the court concluded that Congress's use of the word "agree" in §1129(a)(9) should be construed as to include implied consent.
Third, the court looked to the general principles of contact law, which provide exceptions to the general rule that an offeror cannot treat silence or inaction as acceptance, where silence will be deemed as acceptance where an offeree has a duty to speak and remains silent. In the context of a bankruptcy proceeding, specifically with regard to the plan process, where the fate of every party in interest is often reliant upon the success of a plan and where the action of each creditor may affect the rights of all parties, a creditor who has an objection to the treatment of his or her claim under a plan must not remain silent. As Judge Bernstein stated, "[si]mply put, one's general right to remain silent in the face of an offer should be subject to question and reconsideration where passivity will threaten the fundamental goals of bankruptcy—rehabilitation, saving jobs and equality of distribution." Id. at 772.
Judge Bernstein concluded that the failure of those administrative and priority creditors to return their consent forms implied their agreement to the debtors' proposed treatment to their claims within the meaning of §1129(a)(9). Given that (a) the debtors' bankruptcy cases were administratively insolvent and the only means by which the debtors' plan could be confirmed was by having all administrative and priority creditors agree to the debtors' proposed treatment of their claims; (b) any administrative or priority creditor who objected to the debtors' proposed treatment to his or her claim should have and could have communicated such objection with the debtors; (c) the debtors provided a quick, easy and inexpensive way for each administrative and priority creditor to make his or her election by way of the consent forms; and (d) the record made at the plan confirmation hearing supported the finding that the non-responding creditors intended to accept the debtors' proposed treatment to their claims, the court concluded by stating, "I do not presume that their failure to return the consent form indicated an intent to forego a distribution and cause the case to crater." Id. at 733.
The case presents a viable and creative alternative to the conversion or structured dismissal of administratively insolvent debtors.
1 Mr. Silfen is a member of the Financial Restructuring and Bankruptcy Group in the New York office of Arent Fox Kintner Plotkin & Kahn PLLC. Ms. Eisenberg is an associate of Arent Fox located in the New York office. Return to article
2 For a decision addressing the issue of allowing a secured creditor to share in the distribution of the proceeds of its secured claim with unsecured creditors notwithstanding the fact that administrative and priority creditors were not getting paid in full, see In re SPM Mfg. Corp., 984 F.2d 1305, 1313-15 (1st Cir. 1993). Return to article