In an appeal from confirmation of the mammoth reorganization of publisher Tribune Co., District Judge Gregory M. Sleet of Delaware gave contour to the meaning of “discriminate unfairly” when a chapter 11 plan is crammed down on a dissenting class under Section 1129(b)(1).
Agreeing with the rationale employed by Bankruptcy Judge Kevin J. Carey in confirming the Tribune plan, Judge Sleet held that cramdown is permissible even if the plan does not fully enforce a subordination agreement. Although Judge Sleet did not lay out all the math in his July 30 opinion, his decision means that there is no unfair discrimination, even though the dissenter’s recovery was reduced by about $30 million and the distribution was almost 7% smaller than it would have been were the subordination agreement enforced strictly.
Prior Appeals and Procedural History
Bankruptcy Judge Carey confirmed the Tribune plan in July 2012. Two groups of bondholders appealed. In August 2015, the Third Circuit upheld dismissal of the appeal by one group of bondholders, agreeing with Judge Sleet that the appeal was equitably moot.
However, the Third Circuit reversed District Judge Sleet by holding that the appeal by a second group of bondholders, with senior debt issued before the leveraged buyout, was not equitably moot because it would not be unfair if the class that got the extra $30 million were forced to pay it back.
The Third Circuit remanded the appeal to Judge Sleet. Arguing the merits on remand, the senior bondholders complained that the plan discriminated unfairly and thus violated Section 1129(b)(1), because some of the recovery they would have received from subordinated debt holders was directed to other creditors.
Judge Sleet Upholds the Plan on Remand
Analyzing the merits entailed Sections 510(a) and 1129(b)(1). The former provides that a subordination agreement is enforced in bankruptcy “to the same extent” it would be enforceable under nonbankruptcy law. If the plan must be confirmed (or crammed down) over the objection of a dissenting class, Section 1129(b)(1) requires, among other things, that the plan must “not discriminate unfairly.”
As the plan was written and confirmed, the dissenting bondholders would receive a recovery of 33.6%. If subordination were strictly enforced, the bondholders’ recovery would have risen to 35.9%, a difference of 2.3 percentage points. In other words, the recovery would have been about 7% larger if subordination had been fully enforced.
Upholding confirmation on the merits, Judge Sleet rejected the bondholders’ contention that the plan discriminated unfairly because the plan did not strictly enforce the subordination agreement.
The Third Circuit is yet to define “unfair discrimination,” Judge Sleet said. To evaluate whether the plan unfairly discriminated, the parties, Bankruptcy Judge Carey and Judge Sleet all adopted the so-called Markell test, which raises a presumption of unfair discrimination if a similar class receives “a materially lower percentage recovery.”
Judge Sleet held that “[m]inor or immaterial differences . . . do not rise to the level of unfair discrimination.” The plan did not unfairly discriminate, he said, because the dissenting class would receive “a percentage recovery that was, at most, 2.3 percentage points lower than the recovery to which they claim they were entitled.”
“While the actual amount of money at issue is large,” Judge Sleet said, “the percentage difference is not significant or material,” meaning there was no presumption of unfair discrimination under the Markell test.