Simply saying the debtor will pay creditors in full is not enough. To warrant confirmation, a chapter 11 plan must explain how the debtor will start from Point A and arrive at Point B, according to Chief Bankruptcy Judge Whitman L. Holt of Spokane, Wash.
The debtor was a vineyard owner and wine producer in Washington State’s Columbia Valley. The debtor’s finances were decimated by a glut of grapes and the Covid pandemic. The debtor filed a chapter 11 petition when the secured lender was on the cusp of having a receiver appointed in state court.
The debtor and the lender filed competing plans. The debtor’s plan promised to pay all creditors in full over five years, with interest. The debtor would re-amortize the lender’s mortgage with payments over the first four years and a balloon payment in the fifth year.
Unsecured creditors were to receive equal payments each year.
The plan said the debtor would make payments from operations, refinancing, or sale.
The lender objected to the plan. In his January 14 opinion, Judge Holt decided that the debtor’s plan was not worthy of confirmation. The plan had some fatal defects. We will discuss several.
Among the confirmation requirements, Section 1123(a)(5) requires that the plan “provide adequate means for the plan’s implementation.”
“The plan does state that creditors will receive payments via funds from operations, asset sales, or future refinancing,” Judge Holt said. However, he went on to say that “the plan omits details explaining when and which option will be selected and the process for executing the chosen option.”
If the debtor’s projections were proven incorrect, Judge Holt said that “the plan contains no trigger requiring the reorganized debtor to shift course, no firm milestones for commencing or completing a sale or refinancing, and no range of sale or refinancing terms to which the reorganized debtor is bound.”
Judge Holt characterized the plan as “a five-year runway and near boundless latitude to adopt and execute a strategy to fully repay creditors from illiquid assets.” For creditors, he called the plan a “hope certificate.”
Judge Holt held that the plan did not comply with Section 1123(a)(5) given its lack of “detail and . . . firm processes that could constitute adequate means for the plan’s implementation.”
For the same reasons, Judge Holt found a failure to comply with Section 1123(a)(3), which requires that a plan “specify the treatment” of impaired classes of claims. He said that the plan “promised an outcome but left [the lender] in the dark about how the reorganized debtor will achieve that outcome.”
Ruling that the plan failed to comply with Section 1123(a)(3), Judge Holt said that the plan had a “high degree of uncertainty for [the lender] — the flipside of the substantial flexibility reserved for the debtors.”
The debtor’s owners had given their personal guarantees to the secured lender. The plan extended the guarantees of the debtor’s obligations as modified by the plan. The lender objected.
Ruling again for the lender, Judge Holt declined to give a broad reading to Blixseth v. Credit Suisse, 961 F.3d 1074, 1083 (9th Cir. 2020).
The Ninth Circuit had been understood as having a categorical ban on nondebtor, third-party releases. Narrowing three earlier opinions in Blixseth, the Ninth Circuit explicitly aligned itself with the Third Circuit by permitting nonconsensual, third-party releases in chapter 11 plans that exculpate participants in the reorganization from claims based on actions taken during the case. To read ABI’s report on Blixseth, click here.
In Blixseth, Judge Holt said that the Ninth Circuit “reiterated” how “section 524(e) precludes a co-obligor of a bankrupt debtor from piggybacking on rights the debtor enjoys under the Bankruptcy Code, including the right to discharge or restructure indebtedness.”
Judge Holt said that the plan transgressed Section 524(e) because it was a “de facto restructuring of nondebtors’ liability to [the lender and] thus runs afoul of section 524(e) and prevents confirmation absent [the lender’s] consent.”
Judge Holt denied confirmation of the debtor’s plan and devoted the remainder of his opinion to explaining why he was confirming the lender’s liquidating plan.
Simply saying the debtor will pay creditors in full is not enough. To warrant confirmation, a chapter 11 plan must explain how the debtor will start from Point A and arrive at Point B, according to Chief Bankruptcy Judge Whitman L. Holt of Spokane, Wash.
The debtor was a vineyard owner and wine producer in Washington State’s Columbia Valley. The debtor’s finances were decimated by a glut of grapes and the Covid pandemic. The debtor filed a chapter 11 petition when the secured lender was on the cusp of having a receiver appointed in state court.
The debtor and the lender filed competing plans. The debtor’s plan promised to pay all creditors in full over five years, with interest. The debtor would re-amortize the lender’s mortgage with payments over the first four years and a balloon payment in the fifth year.
Unsecured creditors were to receive equal payments each year.
The plan said the debtor would make payments from operations, refinancing, or sale.
The lender objected to the plan. In his January 14 opinion, Judge Holt decided that the debtor’s plan was not worthy of confirmation.