A Game of Survivor The Competing-plan Challenge

Journal Issue

Oct 2000

Column Name

Journal HTML Content

Being crowned the ultimate "survivor" from among a field of competing plan proponents takes more than
forging alliances to gain the most creditor and shareholder votes. The Code mandates that the preferences
of creditors and shareholders be considered, but the tribal-council approach of counting creditor and
shareholder votes will not necessarily determine the victor. Success is only assured if the proponent also
demonstrates that its torch is the brightest and that it will burn the surest and strongest after confirmation.

A third-party plan proponent faces many challenges in gaining confirmation of its plan. Under §1121(b) of
the Code, a debtor-in-possession normally has the exclusive right to propose a plan for the first 120 days of
the case. Exclusivity is often extended well beyond the first 120 days, although courts may be more inclined
to open the field to competing plans after the Supreme Court's decision in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of America National Trust
& Savings Assoc. v. 203 N. LaSalle Street Partnership, 526 U.S. 534 (1999)</a>, especially where the debtor
proposes a "new value" plan. Even if exclusivity is lifted, a third-party proponent must satisfy the Code's
multiple requirements for plan confirmation, including proper classification, good faith, best interests of
creditors, acceptance by the required classes, absence of unfair discrimination and fair and equitable treatment
of dissenting classes. It is not surprising, therefore, that there are few reported cases where the court finds not
one but two plans that meet all the confirmation requirements.

<h3>The Statutory Scheme</h3>

Section 1129(c) of the Code provides that the court may confirm only one plan, but provides only
limited guidance on how to choose which plan to confirm:
<blockquote>
If the requirements of subsections (a) and (b) of this section are met with respect to more than one
plan, the court shall consider the preference of creditors and equity security-holders in determining
which plan to confirm.
</blockquote>
The legislative history of §1129(c) merely restates the statutory language and adds no additional criteria
for evaluating competing plans.<a href="#1" name="1a">1</a> Pre-Code law provides some basis to inform a court's decision, as
multiple plans were permitted in certain circumstances under chapter X of the former Bankruptcy Act.
Former Bankruptcy Rule 10-307(a)(2) (1973) provided, in part, that if more than one plan received the
requisite acceptances, the court should consider the preferences indicated by creditors and shareholders on
their ballots. The Advisory Committee's note to this rule anticipated the need for discretion in applying the
rule:

<blockquote>
In this, the court will have to exercise some discretion, taking into consideration all of the relevant
circumstances, particularly where the different classes of parties and parties within the same class
may express different preferences and there is no overwhelming percentage in favor of one of such
plans.
</blockquote>

<blockquote><blockquote>
<hr>
<big><center>
As courts have been presented with more difficult choices between competing plans, they have developed
additional criteria to help choose which plan to confirm.
</center></big>
<hr>
</blockquote></blockquote>

<h3>Case Law Under the Code</h3>

Not surprisingly, some early cases decided under §1129(c) placed great emphasis on the expressed
preferences of creditors and shareholders. In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Rolling Green Country Club, 26 B.R. 729, 735 (Bankr.
D. Minn. 1982)</a>, the creditors' committee supported the debtor's plan and opposed the creditor's competing
plan. The court stated that it was bound to consider those preferences but would be free to make its own
determination. Finding nothing under the circumstances to compel a contrary result, the court confirmed
the debtor's plan on the strength of the creditors' preferences. In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Turner Engineering Inc., 109 B.R.
956 (Bankr. D. Mont. 1989)</a>, plans filed by the debtor and the committee had both been accepted by the
creditors and were found to satisfy all of the confirmation requirements. The judge found that the creditors
would recover an additional eight percent under the committee's plan, but that the creditors preferred the
debtor's plan by a margin of 31-17: "All matters considered, I find that creditor preference as submitted by
ballots should be the element which tips the balance in favor of confirmation of the debtor's plan of
reorganization." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 961</a>.

As courts have been presented with more difficult choices between competing plans, they have
developed additional criteria to help choose which plan to confirm. Some courts have stated a preference
for reorganization plans over liquidating plans, citing the policy of the Code to promote reorganization.<a href="#2" name="2a">2</a>
Others have discounted the bias in favor of reorganization plans in the single-asset real estate context where
a creditor's liquidating plan will have no impact on employees or the value of a continuing business.<a href="#3" name="3a">3</a>

In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Sound Radio Inc., 93 B.R. 849 (Bankr. D. N.J. 1988), rev'd on other grounds, 103 B.R. 521
(D. N.J. 1989), aff'd. without op., 908 F.2d 964 (3d Cir. 1990)</a>, the bankruptcy court confronted a situation
where one plan was proposed by a shareholder claiming to own a majority of the stock in the debtor, but
the other shareholders clearly preferred a third-party plan. Both plans provided for full payment to creditors
with interest, but non-insider creditors expressed a clear preference for the third-party plan. To reconcile
the conflicting preferences under §1129(c), the court adopted a modified "best interest of creditors" test to
determine which plan presented the "best choice" under all of the circumstances. Applying this test, the
court ordered confirmation of the third-party plan after determining that it provided a greater return to
shareholders and could be implemented immediately without the need for prior resolution of pending state
court litigation.

More recently, the court in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Holly Garden Apartments Ltd., 238 B.R. 488 (Bankr. M.D. Fla. 1999)</a>,
formulated a four-part test under which the court considered the (1) type of plan, (2) treatment of creditors,
(3) feasibility of the plan, and (4) preference of creditors and equity security holders. Under this test, the
court considered how the equities of the situation related to the success of the reorganization and the
policies of the Code. In confirming the debtor's plan, the court gave particular consideration to the
preferences of creditors unrelated to the competing plan proponent, the liquidating nature of the creditor's
plan and the better treatment that creditors and equity security holders would receive under the debtor's
plan.

<h3>The Sands Hotel and Casino Case</h3>

The recent decision by Bankruptcy Judge Judith Wizmur in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Greate Bay Hotel & Casino Inc., 251
B.R. 213 (Bankr. D. N.J. 2000)</a>, provides an excellent illustration of the multiple factors a court will
consider in determining which of two competing plans to confirm. The debtors in this case owned and
operated the Sands Hotel and Casino in Atlantic City, N.J. They owed about $182 million on pre-petition
mortgage bonds and about $6.7 million in general unsecured debt. After several extensions and the filing
of a stand-alone plan by the debtor, the debtor's exclusivity period terminated. Competing plan proposals
were then submitted by two bondholders groups. Park Place, the holder of 14.5 percent of the bonds, filed
a plan that was supported by Merrill Lynch Asset Management L.P. (MLAM), the holder of 38.5 percent
of the bonds. High River, representing the interests of Carl Icahn, owned approximately 34.4 percent of the
bonds and submitted a competing plan. Both the High River and Park Place plans were found to satisfy all
of the requirements of §1129(a) and (b). Thus, the court was left to choose between the two plans under
§1129(c). The court relied on the Sound Radio and Holly Gardens Apartments decisions for the standards
for choosing between the plans.

The preferences of creditors were subject to conflicting interpretations.<a href="#4" name="4a">4</a> The bondholders' class favored
the Park Place plan by a margin of 55 percent to 45 percent. However, of the 55 percent, 53 percent
represented the votes of Park Place and MLAM. Of the 45 percent favoring the High River plan, 34.4 percent
was held by High River. The court ruled that the support of a majority of bondholders for the Park Place plan
was a factor to be considered but was not controlling. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 246</a>. The general unsecured creditors were found
to have overwhelmingly supported the High River plan, but as with the bondholders' votes, their preferences
were considered as a factor in selecting a plan but were not controlling, in part because unsecured creditors
would be cashed out on the effective date of either plan. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;

The controlling factors considered by the court in the Greate Bay case were the relative recoveries for
creditors and the relative feasibility of the two plans. The court found that the High River plan would yield
89.7 percent for bondholders and 80 percent for general unsecured creditors. By contrast, the court found
that the Park Place plan would yield 86.5 percent for bondholders and 70 percent for general unsecured
creditors. The superior recovery for bondholders and for general unsecured creditors under the High River
plan was a key factor in choosing to confirm the High River plan. However, the court also focused on the
capital structure and projections for future operations under both plans. The court found that the High River
plan provided for a more solid and certain capital structure with more cash and less debt, thus positioning
the company to better meet the uncertainties of the Atlantic City competitive environment. The absence
of any delay in licensing the casino operations under the High River plan was another factor supporting the
court's selection, since the creditors would be paid sooner and would not be exposed to the delay inherent
in obtaining regulatory approvals needed for the Park Place plan.

<h3>Lessons To Be Learned</h3>

With few established guidelines under §1129(c), plan proponents should strive for the highest possible
acceptance rate among creditors and shareholders, particularly those unrelated to the proponent. The
preference of creditors and shareholders is the only factor contained in the statute, and the preferences of
creditors and shareholders undoubtedly will form the starting point for decisions between competing plans.

As the case law has developed under §1129(c), there has been a move away from the simple
ballot-counting approach, and many other factors are taken into account. The proponent should stress the
reorganization aspects of its plan, but when liquidation is contemplated, the emphasis should shift to the
plan's feasibility. Finally, the proponent should position its plan as the "best choice" for creditors and
shareholders by stressing total return to creditors and shareholders, stability of capital structure and
feasibility of future operations. In the final analysis, the preferences of creditors and shareholders may have
less to do with determining the survivor in the competing-plan arena than the bankruptcy judge's
independent determination of which plan is the "best" choice.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> S. Rep. No. 989, 95th Cong., 2d Sess. 128 (1978); H.R. Rep. No. 595, 95th Cong., 1st Sess. 418 (1977). <a href="#1a">Return to article</a>

<a name="2">2</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Oaks Partners Ltd., 141 B.R. 453, 465 (Bankr. N.D. Ga. 1992)</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re River Village Assocs., 181 B.R 795, 807 (E.D. Pa. 1995)</a> (also holding that §1129(c) only obligates a court to consider the preferences of creditors and shareholders, not to obey them). <a href="#3a">Return to article</a>

<a name="4">4</a> The interests of stockholders were cancelled under both plans, so the court did not have to consider the preferences of equity security-holders. <a href="#4a">Return to article</a>

Journal Authors

Daniel J. Carragher

Journal Date

Sunday, October 1, 2000 - 12:00