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In re Bataa/Kierland: Bankruptcy Court Denies Motion to Designate Creditor's Vote
Practical Law Legal Update 6-521-3461 (Approx. 5 pages)
In re Bataa/Kierland: Bankruptcy Court Denies Motion to Designate Creditor's Vote
by PLC Finance
| Published on 17 Sep 2012 • USA (National/Federal) |
The US Bankruptcy Court for the District of Arizona in In re Bataa/Kierland, LLC denied a creditor's motion to designate another creditor's acceptance of the debtor's proposed Chapter 11 plan. The bankruptcy court ruled that it was not an ulterior motive for a creditor to want the debtor's reorganization to succeed so that it could continue to do business with the debtor. It also found that the debtor's creation of a potentially accepting class in contemplation of bankruptcy was permissible and that the debtor did not solicit or procure the creditor's vote in bad faith.
On September 4, 2012, the US Bankruptcy Court for the District of Arizona issued an opinion in the Chapter 11 bankruptcy case of Bataa/Kierland, LLC (debtor) in which it denied a secured creditor's motion to designate (or disqualify) another secured creditor's acceptance of the debtor's Chapter 11 plan. Among other things, the bankruptcy court held that there was no ulterior motive for a creditor to want a debtor's reorganization to succeed so that it could continue to do business with the reorganized debtor.
Background
The debtor is the owner of an office building subject to a lien in favor of JPMCC 2007-CIBC Greenway LLC (JPMCC). The debtor had also granted a security interest in computer equipment to Joseph Annoreno (Annoreno), who had made a $5,000 prepetition loan to the debtor. The debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code and its proposed plan of reorganization would pay Annoreno's secured claim in full with an interest rate of 5% over three years. This rate was less than the 8% contractual interest rate on the loan.
Under section 1126(e) of the Bankruptcy Code, a court may designate the vote of any creditor to accept or reject a Chapter 11 plan that was not cast, solicited or procured in good faith. Annoreno voted in favor of the debtor's plan and JPMCC moved to designate Annoreno's vote under section 1126(e), alleging that Annoreno accepted the plan in bad faith because Annoreno wanted the reorganization to succeed so Annoreno could continue to do business with the reorganized debtor. Annoreno rejected an offer from another creditor to buy its claim, because that creditor sought to block the debtor's plan.
Under section 1129(a)(10) of the Bankruptcy Code, at least one impaired class must accept the plan as a condition to confirmation of a cramdown plan under section 1129(b). The debtor classified Annoreno's claim in its own class, and Annoreno voted to accept the plan. However, JPMCC also argued that even if Annoreno's acceptance is allowed under section 1126(e) because it was cast in good faith, that acceptance cannot be used to satisfy the requirement of section 1129(a)(10) because:
- The debtor's creation of a potentially accepting class in contemplation of a bankruptcy filing constituted the solicitation or procurement of Annoreno's vote in bad faith under section 1126(e) of the Bankruptcy Code.
- The debtor classified Annoreno's claim with an improper motive.
Key Litigated Issues
The issues considered by the bankruptcy court were whether:
- Annoreno's favorable vote was cast in bad faith; and
- the debtor solicited or procured Annoreno's vote in bad faith by creating a potentially accepting class in contemplation of a bankruptcy filing.
- Classifying Annoreno's claim in its own class constituted impermissible manipulation of the vote so that Annoreno's acceptance of the plan could not be used to satisfy the requirement of section 1129(a)(10) of the Bankruptcy Code.
Outcome
Vote Not Cast in Bad Faith
The bankruptcy court found that Annoreno's vote was cast in good faith and was not cast for an improper ulterior motive because it is not an improper ulterior motive for a creditor to be "friendly" to a reorganization so that the reorganization will succeed and allow the creditor to continue to do business with the debtor. A creditor's pursuit of its enlightened self-interest is not necessarily an improper ulterior motive because not all ulterior motives support the finding of bad faith necessary to designate a vote. Creditors often have interests beyond their claims which affect how they may vote. In this case, there was no suggestion of malice, blackmail, competitive motive or an attempt to obtain more than the creditor was entitled to receive on its claim. Therefore, the bankruptcy court denied JPMCC's motion under section 1126(e) of the Bankruptcy Code to designate Annoreno's vote as being cast in bad faith.
Vote Not Solicited or Procured in Bad Faith
The bankruptcy court also held that it was not bad faith on the part of the debtor to create a potentially accepting class in contemplation of a bankruptcy filing. Even if the debtor incurred the debt to Annoreno in the months leading up to its bankruptcy with the specific purpose of creating an impaired class that would accept its plan, that alone falls short of meeting the "bad faith solicitation or procurement" required by section 1126(e) of the Bankruptcy Code to designate a creditor's vote.
Vote designation for bad faith solicitation or procurement of a vote requires the debtor's motive to be ulterior to its interests as a debtor who is a plan proponent. The motive of wanting a proposed plan to be confirmed is natural for all debtors who are plan proponents and, therefore, is not an ulterior motive. Further, because section 1129(a)(10) is a purely technical requirement, a court would not inquire into the debtor's motives for the alleged manipulation of the vote if:
- These motives are consistent with the debtor's proper role and capacity in the case.
- There is no:
- fraud or injury to anyone's rights or interests; and
- attempt to extort more than the debtor would be entitled to under the other confirmation requirements.
Artificial Impairment
The bankruptcy court also held that the class consisting only of Annoreno's claim met the Bankruptcy Code's plan confirmation requirement under section 1129(a)(10) that at least one impaired class accept the plan.
JPMCC had argued that:
- The debtor could have paid Annoreno in full before the bankruptcy filing.
- The proposed plan's payment of the claim over time constituted artificial impairment or gerrymandering.
Gerrymandering consists of placing substantially similar plans in separate classes for the sole purpose of satisfying section 1129(a)(10) of the Bankruptcy Code. However, following a line of cases in the US Court of Appeals for the Ninth Circuit, the bankruptcy court rejected these arguments. It ruled that Annoreno's claim was both properly secured and properly classified, therefore, there was no reason to inquire into the debtor's motive for the claim's treatment under the plan. Further, it is not the role of the bankruptcy court to consider if alternate payment structures may produce a different class structure for the purpose of impairment.
Practical Implications
This ruling illustrates:
- How the determination of good faith is highly fact-specific.
- That not every ulterior motive is improper or constitutes the bad faith necessary to support designation of a creditor's vote.
The bankruptcy court referred to the US Court of Appeals for the Second Circuit's recent decision in In re DBSD North America, Inc. in making this point (see Legal Update, Second Circuit Delivers Opinion in DBSD North America, Inc.). Further, this decision provides additional support for the view that the use of artificial impairment for the purpose of meeting the requirements to confirm a cramdown plan under section 1129(a)(10) of the Bankruptcy Code is permissible, an issue over which courts have been split.