Solicitation of Plan Rejections without Court Approval Throwing Mud at the Proponents Plan
Though authorizing the solicitation of rejections after approval of a proponent's disclosure statement, §1125 does not address the procedure for obtaining authority to seek rejections, nor how a party may solicit rejections. Section 1125's silence on this issue has led to differing authority among courts as to what, if any, authority is necessary prior to a plan opponent soliciting rejections from holders of claims and interests, and how a party may seek rejections.
Section 1125 and the Authority Necessary to Solicit Votes
Pursuant to 11 U.S.C. §1125, "[a]n acceptance or rejection of a plan may not be solicited after the commencement of the case under this title...unless, at the time of or before such solicitation, there is transmitted to such holder the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information." Noticeably, §1125 does not limit the ability to solicit acceptances or rejections to plan proponents.
Nor does §1125 require approval of a plan opponent's solicitation materials prior to dissemination, only the approval of a disclosure statement. Due to §1125's express provisions, therefore, certain courts have held that any party, whether aligned with the plan proponent or not, may solicit acceptances or rejections after the court approves a plan proponent's disclosure statement. See Century Glove Inc. v. First American Bank of New York, 860 F.2d 94 (3d Cir. 1988).
In Century Glove, the debtor filed a reorganization plan, obtained court approval of its disclosure statement and solicited votes in support thereof. 860 F.2d at 95. Counsel for one creditor then presented a letter to several key creditors asking them to vote against the proposed plan and to comment on an alternative plan drafted by the creditor, a copy of which was included with the letter. Id. At no time did counsel solicit other creditors to vote on its alternative plan, which was clearly marked "draft." Id. at 102.
While the bankruptcy court held that the creditor had violated 11 U.S.C. §1125(b) by "providing additional materials such as the copies of its draft plan...," both the district court and the Third Circuit disagreed. Id. at 96. In fact, the Third Circuit determined that §1125 "never limits the facts which a creditor may receive, but only the time when a creditor may be solicited." Id. at 100 (emphasis in original). After all, "Congress was concerned not that creditors' votes were based on misinformation, but that they were based on no information at all." Id.
The Third Circuit, therefore, determined that §1125(b) "does not on its face empower the bankruptcy court to require that all communications between creditors be approved by the court." Id.; cf. In re Apex Oil Co., 111 B.R. 245, 249 (E.D. Mo. 1990) (stating that parties should proceed with caution when soliciting rejections with additional information). In fact, the Third Circuit stated that while a debtor "temporarily has the exclusive right to file a plan," the debtor does not have the right "to have its plan considered exclusively." Id. at 102 (emphasis in original). Accordingly, "a party does not solicit acceptances when it presents a draft plan for the consideration of another creditor, but does not request that creditor's vote." Id. at 102; cf. In re Temple Retirement Community Inc., 80 B.R. 367 (Bankr. W.D. Tex. 1987) (holding that correspondence stating another plan had been drafted if the debtor's plan was rejected violated §1125(b)).
In so doing, the Third Circuit interpreted "solicitation" narrowly so as to not inhibit creditor negotiations. See Id. at 101. Therefore, while a soliciting party may not suggest an alternative unapproved plan, it may react to and present contrary views regarding the plan reflected in the approved disclosure statement. In re Clamp-All Corp., 233 B.R. 198 (Bankr. D. Mass. 1999).
The Propriety of Disseminating Additional Information in Soliciting Votes
Though a plan opponent may seek rejections, without additional court authority the propriety of disseminating additional information remains questionable, particularly if such additional information is misleading or inaccurate. See Apex Oil, 111 B.R. at 249. After all, most would argue that inaccurate information is inadequate information, which should prevent the dissemination thereof.
Century Glove, although briefly addressing the issue, expressed little concern that such information might include misrepresentations. In fact, the Third Circuit held that "[o]nce adequate information has been provided to a creditor, §1125(b) does not limit communications between creditors. It is not an antifraud device." Id. at 101 (emphasis added).
Other courts have held that solicitations similar to Century Glove violate §1125. See, e.g., In re Aspen Limousine Service Inc., 198 B.R. 341, 347 (D. Colo. 1996). In Aspen Limousine, a plan opponent sent a six-page letter to all creditors apprising them of its alternate plan and urging them to reject the proposed plan. The letter further stated that creditors that already voted could change their votes and use the enclosed ballot. Though somewhat factually similar to the Century Glove fact pattern, the plan opponent in Aspen Limousine was far more aggressive in its solicitation, to which the court took exception.
The court distinguished Century Glove because (a) Century Glove did not involve a small business debtor under §§1121(e) and 1125(f); (b) the plan opponent admittedly was not seeking comments on its plan, but was actually soliciting votes; and (c) the plan opponent sent its plan to all creditors, instead of those merely requesting information about the alternate plan. See Id. at 348. In fact, the court found that the plan opponent's solicitations were a "deliberate and unabashed attempt to circumvent the confirmation and solicitation procedures." See Id. at 348-49.
Similarly, sending a draft competing plan could violate §1125(b) if that draft competing plan contained "falsehoods or mischaracterizations" or otherwise distorted the voting process. See In re Gulph Woods Corp., 83 B.R. 339, 342-43 (Bankr. E.D. Pa. 1988). In Gulph Woods, a plan opponent disseminated pre-marked ballots that requested return service to the plan opponent instead of the plan proponent, which the court held distorted the voting process because it was bound to cause confusion among creditors. See Id. at 343.
The cases reflect circumstances where plan opponents sent solicitation materials without seeking prior approval. Often the damage caused by the additional solicitation materials will not be known until late in the balloting process. Nonetheless, plan proponents are not without countermeasures.
Remedies for Scorned Plan Proponents
In finding violations of §1125(b), courts might sanction the offending creditor. See, e.g., Aspen Limousine, 198 B.R. at 350-51. Sanctioning the offending creditor may not remedy the damage caused by such solicitations. The Bankruptcy Code, however, contains its own remedy for bad-faith solicitations. See 11 U.S.C. §1126(e).
Section 1126(e) authorizes a bankruptcy court to disqualify votes, whether acceptances or rejections, if such votes were solicited or procured in bad faith. In one of the few cases addressing this point, the bankruptcy court in In re Walnut Equipment Leasing Co. cited to §1126(e) and stated, with little or no additional analysis, that correspondence sent urging support of a plan "sufficiently tainted the vote...to justify ignoring that class's acceptance of the plan...." Case No. 97-19699DWS, 1999 WL 1068448, at *4 (Bankr. E.D. Pa. 1999). The Walnut Equipment opinion, however, does not include much analysis or factual discussion. While the court found bad faith, it did not discuss what act, in particular, constituted bad faith.
Another court has held that an unsecured creditors' committee did not act in bad faith, and therefore did not implicate §1126(e), when it sent a letter of "recommendation to its constituents" about a proposed plan. See In re Cajun Electric Power Cooperative Inc., 230 B.R. 715, 743 (Bankr. M.D. La. 1999). In Cajun Electric, however, the court expressly noted that no allegations of "factual inaccuracy or omission" were asserted with regard to the letter. Id. In doing so, the court implied that the existence of factual inaccuracies or omissions would support a bad-faith finding resulting in the disallowance of votes. See Id.; 11 U.S.C. §1126(e).
Therefore, while little case law exists, based on the holdings of Walnut Equipment and Cajun Electric, one can conclude that dissemination of correspondence sent in bad faith that sufficiently taints the voting process supports the disallowance of votes under §1126(e) and that factual inaccuracies and omissions are factors to consider when determining bad faith.
Though Century Glove is considered the pinnacle case, the guidance given in Apex Oil appears to succinctly state the rule: Prior court approval is not necessary only if (a) the information provided is truthful and absent of any false or misleading statements or legal or factual mischaracterizations; (b) the information is presented in good faith; and (c) the soliciting party does not propose or suggest an alternative plan that has yet to gain court approval or otherwise failed to travel through the appropriate legal channels, as dictated by the Code. See Apex Oil, 111 B.R. at 249.
While §§105(a) and 1126(e) provide certain remedies, other countermeasures are available. For example, a creditor that supports a proposed plan could send additional information that criticizes the plan opponent's correspondence and explains the inaccuracies therein. Again, such counter-measures should not include a solicitation for votes accepting the plan and should narrowly focus on attacking the rejection solicitation materials.