In a case of first impression among the courts of appeals, the Ninth Circuit held that Section 1129(a)(10) does not require every debtor in a joint plan to have an accepting impaired class. On the question of whether there must be an accepting class on a “per plan” or a “per debtor” basis, the appeals court agreed with a bankruptcy court in New York but disagreed with a bankruptcy court in Delaware.
The Ninth Circuit also held in its Jan. 25 opinion that confirmation of a “cramdown” plan does not require the plan to include a due-on-sale clause when a secured lender has taken the Section 1111(b)(2) election.
Even though Section 1129(a)(10) by itself does not require each debtor in a multi-debtor plan to have an accepting class, one circuit judge insinuated in a concurring opinion that a secured creditor could defeat confirmation by claiming that a consolidated plan must comply with the standards for substantive consolidation.
The Tortured History of Transwest Resort Properties
Five debtors owned a hotel in a vertical ownership structure. The chapter 11 cases were not substantively consolidated. One lender held both the mortgage debt on the operating entity that owned the real estate and the mezzanine debt secured by the mezzanine borrower’s ownership interest in the operating company.
For the mortgage in the original principal amount of $209 million, the plan gave the lender a new $247 million note due in 21 years, paying interest only with a balloon payment on maturity. Although the mortgage originally had no due-on-sale clause, the new mortgage contained a due-on-sale clause.
If the buyer sold the project between the fifth and fifteenth years, the plan provided that the due-on-sale clause would not apply. Instead, a buyer in the 10-year gap would take ownership subject to the mortgage created at confirmation.
The joint plan for all five debtors had 10 classes of creditors. Five accepted the plan. The secured lender voted both claims against the plan and elected under Section 1111(b)(2) to have the entire mortgage claim treated as secured.
Because the mezzanine lender had the only claim against two mezzanine borrowers, the lender contended that cramdown requirements were not met because those two debtors had no accepting class. Contending that the 10-year gap in the due-on-sale clause depressed the value of the Section 1111(b)(2) election, the lender also argued that Section 1111(b)(2) requires a plan to have a due-on-sale clause.
The plan was sponsored by a purchaser who invested $30 million to acquire the equity.
The bankruptcy judge confirmed the plan in December 2011. Chief District Judge Raner C. Collins of Tucson, Ariz., dismissed the lender’s original appeal on the ground of equitable mootness, because the plan had been consummated in the absence of a stay and the buyer had made its investment. Over a vigorous dissent, the Ninth Circuit held in September 2015 that a buyer who actively participates in reorganization is not protected by equitable mootness should a creditor appeal but not obtain a stay preventing consummation of the plan. JPMCC 2007-C1 Grasslawn Lodging LLC v. Transwest Resort Properties Inc. (In re Transwest Resort Properties Inc.), 801 F.3d 1161 (9th Cir. Sept. 15, 2015).
Denying a motion for rehearing en banc, the circuit remanded the case to Judge Collins, who upheld confirmation on the merits in June 2016. He ruled that one accepting class per plan is sufficient and that Section 1111(b) does not require a due-on-sale clause. To read ABI’s discussion of Judge Collins’ opinion, click here.
The lender appealed a second time, resulting in the Ninth Circuit’s new opinion on Jan. 25 upholding confirmation and rejecting both of the lender’s arguments.
Due-on-Sale Not Required on an 1111(b) Election
When a secured lender is undersecured, Section 1111(b) allows the lender to “elect to have its entire claim treated as a secured claim,” Circuit Judge Milan D. Smith said in his opinion for the Ninth Circuit. The lender urged the appeals court to rule that a mortgage modified under a plan must include a due-on-sale clause to protect the value of the Section 1111(b) election.
Judge Smith said that the argument “finds no support in the text of the statute, nor does the language of the statute implicitly require the inclusion of such a clause.” He added that the “broader statutory context of chapter 11 further undermines the lender’s position.”
Judge Smith said that Section 1123(b)(5) allows modification of a secured lender’s claim, while Section 1129(b)(2)(A)(i)(I) “expressly allows a debtor to sell the collateral to another entity so long as the creditor retains the lien securing its claims, yet the statute does not mention any due-on-sale requirement . . . .”
Judge Smith found support from the Seventh Circuit, which had held that a due-on-sale clause is not a lien that must be retained for the court to confirm a plan. In re Airadigm Communications Inc., 519 F.3d 640 (7th Cir. 2008).
He therefore held “that Section 1111(b)(2) does not require that a plan involving an electing creditor contain a due-on-sale clause.”
One Accepting Class Per Plan Is Enough
Judge Smith said that the “plain language” of Section 1129(a)(10) “supports the ‘per plan’ approach.” He said the section “requires that one impaired class ‘under the plan’ approve ‘the plan.’”
The statute, the judge said, does not distinguish between single-debtor and multi-debtor plans: “[O]nce a single impaired class accepts a plan, Section 1129(a)(10) is satisfied as to the entire plan.”
Judge Smith found fault with the rationale in In re Tribune Co., 464 B.R. 126, 182–83 (Bankr. D. Del. 2011), where a bankruptcy judge in Delaware held that each debtor must have an accepting class in a multi-debtor plan. Although he did not cite the case, a bankruptcy court in New York had held that one accepting class is sufficient in a joint plan for several debtors. JPMorgan Chase Bank N.A. v. Charter Communications Operating, LLC (In re Charter Communications), 419 B.R. 221, 264–66 (Bankr. S.D.N.Y. 2009).
In his opinion for the court, Judge Smith alluded to a shortcoming in the lender’s litigation strategy that the concurring opinion developed. Judge Smith said that the lender did not object to confirmation by arguing that the joint plan amounted to substantive consolidation.
The Concurring Opinion
Circuit Judge Michelle T. Friedland wrote a concurring opinion where she agreed that Section 1111(b)(2) does not require a due-on-sale clause.
Finding the statute “somewhat ambiguous,” Judge Friedland also agreed that the “better reading” of Section 1129(a)(10) leads to the conclusion that one acceptance per plan, not one per debtor, is sufficient.
Judge Friedland wrote a concurring opinion to say that objecting to the plan as de facto substantive consolidation may have enabled the lender to block confirmation. She said that the “problem” was “that the plan effectively merged the debtors without an assessment of whether consolidation was appropriate” under Ninth Circuit standards.
Judge Friedland said the lender did not object to confirmation by raising the issue of substantive consolidation and thus was barred from raising the theory on appeal.
Judge Friedland’s opinion does not cite any authority for the proposition that substantive consolidation standards must be applied to multi-debtor plans. If joint plans could be confirmed only when substantive consolidation was proper, few multi-debtor plans would ever be approved.
Judge Friedland did not mention that Section 1129(a) contains several protections for dissenting creditors in a joint plan, such as the requirement that the plan must give the dissenter at least what it would receive in a liquidation. There was apparently no issue that the plan satisfied the best interests test for the dissenting mezzanine lender.
In a case of first impression among the courts of appeals, the Ninth Circuit held that Section 1129(a)(10) does not require every debtor in a joint plan to have an accepting impaired class. On the question of whether there must be an accepting class on a “per plan” or a “per debtor” basis, the appeals court agreed with a bankruptcy court in New York but disagreed with a bankruptcy court in Delaware.