Get Out the Vote
The voting in one of my recent chapter 11 cases with more than $1 million in trade debt showed $468,888 in trade creditor claims voting for the plan and $4,952 voting against. Surely this was an overwhelming show of support and plan acceptance, right? As in other situations, voting in bankruptcy cases is not quite as simple as it might appear.
A chapter 11 plan outlines how creditors will be paid. Creditors may vote for or against the proposed plan to reorganize a debtor's financial affairs. By the time the ballot reaches their hands, a significant amount of work has already been done. The plan has been filed, a disclosure statement describing the plan has been filed and approved by the bankruptcy court, and both documents have been mailed to all creditors.
Chapter 11 plans describe how claims will be treated, and plans must include two very fundamental elements. A plan must first separate claims into classes of substantially similar claims.1 Second, a plan must specify how the claims in each class are treated.2 If a plan will leave a class of claims unimpaired, the plan must say that as well.3
After the disclosure statement is approved, it and the plan are distributed to creditors to vote either for or against the plan. Only those ballots following the required procedures are counted.4 Trade creditors must look for, and carefully follow, the voting procedures printed on the ballot or included in with the plan. In smaller cases, the instructions may be part of the disclosure statement.
Creditor voting is neither "one creditor, one vote," nor are all dollars treated equally. Instead, votes are counted by class to determine if each class accepts or rejects the plan.
For a class to accept a plan, more than one half in number and at least two-thirds in amount of eligible claims that actually vote must vote for the plan.5 The higher standard for accepting a plan shows that Congress apparently believes that those with the most at stake should have a louder, but not exclusive, voice in how their claims are paid. It is important to note that the actual ballots, not the total number of creditors in a class, are counted. There is no "quorum" requiring a certain percentage of either the creditors or claims to actually vote before a class can accept a plan.6
A vote may be disregarded if, after notice and a hearing, the bankruptcy court finds that the vote was (a) not cast in good faith, (b) not solicited in good faith, or (c) was solicited in ways outside the Bankruptcy Code's limitations.7 While this is rare, it can still occur.
"Allowed," "Deemed Allowed" and "Temporarily Allowed" Claims
Creditors with "allowed" claims are entitled to vote on a plan.8 Claims are "allowed" if a timely proof of claim has been filed and either no one objected to the claim or any objection has been resolved with an order allowing the claim.9 In chapter 11 cases, a claim is deemed filed if it is listed in the debtor's schedules and not listed as unliquidated, contingent or disputed.10
One might wonder whether a party ever objected to selected claims merely to affect which ballots are counted. (This could also be described as selectively objecting to claims to disenfranchise specific creditors to affect which creditors' claims are counted.) It is unlikely that anyone would admit to such an activity but the effect would still be the same: a creditor's vote being disqualified since it did not have an allowed claim.
Creditors are not without remedy when they want their vote to count notwithstanding a pending objection. A claim may be "temporarily allowed" and counted for voting purposes after notice and a hearing.11 In that instance, the amount "temporarily allowed" is also set by the bankruptcy court.
Why It Matters
Whether one class accepts or rejects a plan can, in and of itself, determine confirmation. If an unsecured creditor class rejects the plan, the plan can only be confirmed if the "absolute priority rule" is satisfied. Confirming a plan over a rejecting creditor class is colloquially referred to as a "cramdown" plan.
The "absolute priority rule" generally requires that plans not provide any value to a junior class of creditors if an unsecured class rejects the plan.12 If a plan rejected by the trade creditor class provides that subordinated creditors or shareholders are to receive anything of value, the entire plan could be defeated by the trade creditors. At that point, the debtor would have the unenviable choice of either revising the plan to satisfy its trade creditors or face liquidation. Most debtors choose amending the plan over corporate suicide.
Example of When Voting Really Counted
Back to the case where the ballot tally showed $468,888 in trade creditor claims voting for the plan and $4,952 voting against. Although there were well over 100 trade creditors with over $1 million in claims, only three voted—one to accept and two to reject. If one rejecting creditor had instead accepted or if only two more creditors had voted to accept the plan, a cramdown could have been avoided. Instead, less than $5,000 in claims controlled the destiny of more than $1 million in trade claims.
"One man, one vote" works well for representative democracy, but in chapter 11 voting, "one creditor, one vote" has an entirely different meaning.
6 Some courts have held that not voting can be found to mean acceptance of the plan. "None of the secured creditors who appeared at the June 8, 1984, confirmation hearings voiced an objection to the bankruptcy court's finding that the 'non-voted creditors will be deemed to have accepted [the plan] for the purpose of the cramdown provisions.' Since the Heins did not object to the plan at any time prior to its confirmation and because the Heins unilaterally opted not to vote on the confirmation of the plan, the bankruptcy court did not err in presuming their acceptance of the plan for purposes of §1129(b)." In re Ruti-Sweetwater Inc., 836 F.2d 1263, 1267-8 (10th Cir. 1988). Many courts have criticized this case and limited it to its unique facts. Return to article
12 11 U.S.C. §1129(b)(2)(B). A discussion of whether a "new value exception" to the absolute priority rule exists, and if so, what it requires is beyond the scope of this article and, some might argue, beyond the grasp of the Supreme Court. "We do not decide whether the statute includes a new value corollary or exception, but hold that on any reading respondent's proposed plan fails to satisfy the statute, and accordingly reverse." Bank of America Nat. Trust and Sav. Ass'n v. 203 North LaSalle Street Partnership, 119 S.Ct. 1411, 1417, 143 L.Ed.2d 607, (U.S. 1999). Return to article