By: Donald L Swanson
A “silent” creditor in Subchapter V is one who does not vote on the debtor’s plan and does not object to that plan. The “silent” creditor is a problem for Subchapter V cases.
The Problem
Here’s the problem:
- Subchapter V plans are prevented from being confirmed as “consensual”[fn. 1] when a class of creditors remains “silent”—i.e., does not object to the plan and does not vote on the plan;
- it’s not that any creditor is against the plan—it’s just that a creditor does . . . nothing;
- a “silent” creditor with an allowed secured claim creates a particularly-acute problem:
- that’s because such a creditor must be placed in its own, separate class in a Subchapter V plan; and
- one such “silent” creditor can prevent, all by itself, a plan confirmation from being “consensual”; and
- the problem is magnified because some secured creditors (e.g., the Small Business Administration) are almost always silent—i.e., that’s what they do . . . even when every voting creditor in the case accepts the plan.
The Empowering Statute
The statute empowering the silent creditor to prevent a consensual confirmation is § 1129(a)(8), which says (emphasis added):
- “With respect to each class of claims or interests—(A) such class has accepted the plan; or (B) such class is not impaired under the plan.”
The latest bankruptcy court opinion declares this “has accepted” requirement to be unambiguous and to require an actual, accepting vote from an impaired secured creditor.
- The opinion is In re M.V.J. Auto World, Inc., Case No. 23-16612, in the Southern Florida Bankruptcy Court (decided 6/24/2024, Doc. 129).
Majority & Minority Views
The M.V.J. opinion represents the majority view—and it’s a large majority.
But minority views exist because of a sense that the majority view is bad policy and needs to be changed. Attempts to depart from the majority view by judicial action include:
- In re Ruti-Sweetwater, Inc., 836 F.2d 1263 (10th Cir. 1988) (a silent creditor is deemed to have accepted the plan);
- In re Franco’s Paving LLC, 654 B.R. 107 (Bankr. S.D. Tex. 2023) (a silent creditor is ignored because the mathematical formula for computing class acceptance cannot be resolved when no creditor in a class of claims votes); and
- In re Hot’z Power Wash, Inc., 655 B.R. 107, 118 (Bankr. S.D. Tex. 2023) (“computation for a nonvoting class is absurd, unsolvable, and was not contemplated by Congress”).
The M.V.J. opinion specifically discusses each of the three foregoing opinions . . . and rejects them all, finding no ambiguity in the statutory “has accepted” language and adding this proposition:
- “the Supreme Court and this Court have warned on countless occasions against judges ‘improving’ plain statutory language in order to better carry out what they perceive to be the legislative purposes.”
Nevertheless, the sense remains among many in the bankruptcy community that allowing a silent secured creditor to prevent a consensual confirmation is bad policy in Subchapter V.
Task Force Recommendation
That’s why the American Bankruptcy Institute’s Subchapter V Task Force recommends changing statutory language on the silent class to allow a consensual confirmation in circumstance where:
- “all of the requirements of section 1129(a), other than paragraphs (8), (10), and (15) of that section, of this title are met”;
- “all of the requirements of section 1191(b) are met”; and
- “no class of claims or interests that is impaired under the plan votes to reject the plan and no creditor within such class objects to confirmation of the plan.”
Conclusion
The M.V.J. opinion emphasizes the clarity of statutory language enabling a single, “silent” secured creditor to prevent “consensual” confirmation of a plan in all Subchapter V cases.
And the M.V.J. opinion illustrates the need for Congress to enact the Subchapter V Task Force’s recommendation on the “silent” class problem!
———————–
Footnote 1. The words “consensual” and “nonconsensual” do not appear in Subchapter V statutes. Instead, a “consensual” plan is one confirmed under § 1191(a). A “nonconsensual” plan is one confirmed under § 1191(b), which requires compliance with § 1129(a)(8), which in turn requires that each “impaired” class of claims must “accept” the plan. Differences in the effects of a confirmed plan, whether confirmed consensually or nonconsensually, are significant (see, e.g., § 1183(c), § 1192 and § 1193(b)).
** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.
Feed Original Url