In confirming a liquidating chapter 11 plan, the Ninth Circuit Bankruptcy Appellate Panel held that the bankruptcy court cannot find compliance with the best interests test by assuming that a liquidating plan will generate as much for unsecured creditors as a chapter 7 liquidation.
The nonprecedential September 18 opinion by Bankruptcy Judge William Lafferty also says that the bankruptcy court should make a numerical comparison between the recovery in a chapter 7 liquidation and in the proposed chapter 11 plan. Judge Lafferty was writing for himself and Bankruptcy Judge Julia W. Brand.
The chapter 11 debtor was in the business of leasing well drilling equipment. The official creditors’ committee and the debtor proposed competing plans. The debtor’s owners would have retained ownership by making a $140,000 “new value” contribution. The committee proposed a liquidating plan.
The bankruptcy judge refused to confirm the debtor’s plan on several grounds and confirmed the committee’s plan. On appeal, the debtor was unable to persuade the BAP that its plan should have been confirmed, but the BAP set aside confirmation of the committee’s plan because the bankruptcy court had not made adequate findings regarding best interests.
The bankruptcy court had made a detailed computation finding that a hypothetical chapter 7 liquidation would yield a 48.35% recovery for unsecured creditors, while the debtor’s plan would deliver 40.75% for the same constituency. Judge Lafferty upheld denial of confirmation based on failure to satisfy the best interests test under Section 1129(a)(7) because the bankruptcy court’s findings were neither “illogical, implausible or without support in the record.”
The bankruptcy court found that the committee’s liquidating plan would generate less for unsecured creditors than the debtor’s plan. The bankruptcy court nonetheless found compliance with the best interests test on the theory that “it necessarily provides holders of claims and interests with full liquidation value.”
Judge Lafferty ruled that the bankruptcy court’s findings did not support confirmation, because the “bankruptcy court made no numerical comparison at all between the Committee’s plan and a hypothetical chapter 7 liquidation.” In other words, he interpreted the bankruptcy court as believing that the proposition of a liquidating plan meant there was no “need to determine the estimated return to general unsecured creditors under that plan.”
Ruling that the findings did not support confirmation, Judge Lafferty held that “a liquidating chapter 11 plan must conform to the same statutory requirements for confirmation as a chapter 11 reorganization.” In other words, he said, “it cannot be assumed that a liquidating plan would yield at least as much as a chapter 7 liquidation.”
The committee argued that the BAP could uphold confirmation based on any ground evident in the record. Judge Lafferty declined the invitation to construe the record because it “would require us to perform an extensive analysis of the record that is inappropriate for an appellate court.”
Judge Lafferty upheld denial of confirmation of the debtor’s plan but vacated confirmation of the committee’s plan and remanded for further proceedings, evidently permitting the bankruptcy court to make new findings to justify confirmation of the committee’s plan.
Bankruptcy Judge Laura S. Taylor concurred in the result. She would have upheld confirmation of the committee’s plan “were it not for a single fact in the record.”
Judge Taylor recited the committee’s testimony at the confirmation hearing that the liquidating plan would produce 47% for unsecured creditors, that is, less than a chapter 7 liquidation.
Unable to “disregard contrary evidence supplied by the Committee and engage in overt fact finding and the weighing of evidence,” Judge Taylor concurred in the result.
In substance, Judge Taylor told the bankruptcy court how to make the required findings based on evidence already in the record.
In confirming a liquidating chapter 11 plan, the Ninth Circuit Bankruptcy Appellate Panel held that the bankruptcy court cannot find compliance with the best interests test by assuming that a liquidating plan will generate as much for unsecured creditors as a chapter 7 liquidation.
The nonprecedential September 18 opinion by Bankruptcy Judge William Lafferty also says that the bankruptcy court should make a numerical comparison between the recovery in a chapter 7 liquidation and in the proposed chapter 11 plan. Judge Lafferty was writing for himself and Bankruptcy Judge Julia W. Brand.
The chapter 11 debtor was in the business of leasing well drilling equipment. The official creditors’ committee and the debtor proposed competing plans. The debtor’s owners would have retained ownership by making a $140,000 “new value” contribution. The committee proposed a liquidating plan.
The bankruptcy judge refused to confirm the debtor’s plan on several grounds and confirmed the committee’s plan. On appeal, the debtor was unable to persuade the BAP that its plan should have been confirmed, but the BAP set aside confirmation of the committee’s plan because the bankruptcy court had not made adequate findings regarding best interests.