The Varying Paths to Consensual Confirmation in Subchapter V

By Nathan F. Smith

Although last in the enumerated duties of a subchapter V trustee found in § 1183(b), the trustee’s duty to “facilitate the development of a consensual plan of reorganization” has been described in the Small Business Reorganization Act of 2019 (SBRA) as the “primary” duty.1 According to the U.S. Trustee’s latest statistical compilation on subchapter V, trustees have been quite successful in this regard, with 52 percent of subchapter V cases ending in confirmation of a subchapter V plan and approximately 68 percent of those plans being confirmed consensually under § 1191(a).2 Nevertheless, consensual confirmation remains more elusive than national statistics might indicate in many districts, based on varying interpretations of what a consensual confirmation requires.

The Requirements of §§ 1191(a) and 1129(a)(8), and Rule 3018

Section 1191(a) provides that the court shall confirm a plan only if all the requirements of § 1129(a), other than paragraph (15), are met. Section 1126(a) provides that the holder of a claim “may accept or reject a plan.” Section 1129(a)(8) requires that with respect to each impaired class of claims, such class has accepted the plan. Section 1126(c) provides that an impaired class of claims has accepted a plan if it has been accepted by creditors holding at least two-thirds in amount and one-half in number of the allowed claims of the class. Finally, Rule 3018(c)(1) of the Federal Rules of Bankruptcy Procedure provides that “[a]n acceptance or rejection shall be in writing, identify the plan or plans accepted or rejected, be signed by the creditor ... or an authorized agent, and conform to the appropriate Official Form.”

The “Apathetic Creditor” Problem

Perhaps the most challenging, and certainly the most debated, requirement of consensual confirmation concerns satisfaction of the requirement that each impaired class has accepted the plan.3 Put simply, how should a court address the problem of “apathetic creditors,” which are impaired creditors who fail to either vote on or object to a plan.4

The Tenth Circuit’s Approach to the “Apathetic Creditor” Problem in In re Ruti-Sweetwater

Nearly four decades ago, the Tenth Circuit Court of Appeals addressed the consequence of an impaired creditor’s failure to vote on or object to a chapter 11 plan. The Ruti-Sweetwater court noted that § 1126(a) merely provided that a creditor “may accept or reject a plan,” and under the pre-1978 Bankruptcy Act, a failure to vote on a reorganization plan was deemed a rejection of the plan.5 Therefore, because this presumption was removed when the Bankruptcy Code was reformed in 1978, despite maintaining many other presumptions, such as those contained in §§ 1126(f) and (g), the Tenth Circuit concluded that nonvoting and nonobjecting impaired creditors are deemed to have accepted a plan.6

In connection with the requirements of §§ 1191(a) and 1129, § 1129(a)(8)’s requirement that all impaired classes accept the plan is perhaps the most daunting. However, in the Tenth Circuit, Ruti-Sweetwater and its progeny render § 1129(a)(8)’s hurdle exceedingly more attainable when it comes to nonvoting classes. In In re Frontline Medical Services LLC, the Tenth Circuit Bankruptcy Appellate Panel held, in connection with the confirmation of a subchapter V plan, that “[w]hen no class of claims or interests votes to reject the plan, it is considered consensual and § 1191(a) applies: a bankruptcy court shall confirm a plan under this subchapter only if all the requirements of section 1129(a), other than paragraph (15) of that section ... are met.”7

The Southern District of Texas’s Approach in In re Franco’s Paving LLC and In re Hot’z Power Wash

In In re Franco’s Paving LLC, Hon. David R. Jones of the U.S. Bankruptcy Court for the Southern District of Texas was confronted with the question of a nonvoting class in connection with the U.S. Trustee’s objection to confirmation of a plan under § 1191(a). Although Judge Jones acknowledged the Tenth Circuit’s decision in Ruti-Sweetwater, and indicated that he found it compelling, he clarified that he did not believe himself to be limited to “the binary choice between a ‘deemed acceptance’ and a ‘deemed rejection.”

Contemplative of the calculation required by § 1126(c), Judge Jones explained that the calculation cannot be performed in the case of a nonvoting class because the answer was indeterminate or undefined. Therefore, in a situation where no votes were cast within a class, he held that the class should not be counted for purposes of § 1129(a)(8).8

In In re Hot’z Power Wash Inc., Hon. Eduardo V. Rodriguez, finding himself in the same predicament as Judge Jones, expressly rejected Ruti-Sweetwater.9 However, he agreed with Judge Jones in holding that “[t]he mathematical calculation required by § 1126(c) requires that the number of accepting votes be divided by total votes cast in a class. As discussed, nonvotes are not counted pursuant to Bankruptcy Rule 3018(c). Because nonvotes are not counted, a class of nonvotes results in the mathematical calculation of 0/0, an unsolvable and undefined quotient.”10 In fact, Judge Rodriguez deemed such a computation to be “absurd, unsolvable, and ... not contemplated by Congress.”11

Majority Approach to Nonvoting Classes

In contrast to the Tenth Circuit and the U.S. Bankruptcy Court for the Southern District of Texas, a clear majority of courts have held that impaired classes can neither accept a chapter 11 plan by silence, nor should they be discounted in connection with determining whether an impaired class has accepted a plan for purposes of §§ 1129(a)(8) and 1126(c).12

Hon. Paul W. Bonapfel of the U.S. Bankruptcy Court for the Northern District of Georgia, and author of the eminently important Guide to the Small Business Reorganization Act of 2019 and the updates thereto, expressly rejected both Ruti-Sweetwater and the decisions of Judges Jones and Rodriguez. In so doing, Judge Bonapfel explained that § 1129(a)(8) requires affirmative acceptance. Therefore, a nonvoting class cannot be deemed to have accepted a plan, nor can it be ignored.13

Hon. Rachel Blise of the U.S. Bankruptcy Court for the Eastern District of Wisconsin similarly explained that the express provisions of § 1126 provide that an impaired class of claims has accepted the plan if the plan “has been accepted by creditors ... that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class ... that have accepted or rejected such plan.”14 Thus, only the votes actually cast are counted to determine whether the class as a whole has accepted the plan. When at least one creditor in a class votes, silent creditors are not deemed to have accepted the plan when counting acceptances and rejections. Silent creditors should not be treated differently when no creditors in a class vote.15

Judge Blise also noted that § 1126 includes “relevant presumptions,” namely “that a class of creditors that is not impaired is presumed to have accepted the plan.... [a]nd a class of creditors that will receive no distribution is presumed to have rejected the plan.” As such, she theorized that “if Congress intended that a nonvoting creditor would be presumed to have accepted the plan, Congress knew how to write that presumption into the statute. Congress did not,” and held that “[a] creditor’s acceptance of a chapter 11 plan, whether under subchapter V or otherwise, must be in writing and conform to the requirements of Rule 3018.”16c

Perks of Consensual Confirmation and Flexibility in Connection with Nonconsensual Plans

Consensual confirmation comes with significant benefits, chief among them being immediate discharge and vesting of estate property in the reorganized debtor upon confirmation.17 Another notable benefit is greater flexibility in modifying a plan after confirmation.18 For the subchapter V trustee, consensual confirmation brings discharge after substantial consummation of a consensual plan.19 Although § 1194(b) provides that the subchapter V trustee shall serve as the disbursing agent under a confirmed plan unless otherwise provided in the plan or order confirming it, in practice subchapter V plans routinely provide that the reorganized debtor will serve as the disbursing agent. Thus, there are significant incentives to pursuing consensual confirmation regardless of which of the foregoing standards apply.

Conclusion and Potential Solutions

Consensual confirmation might remain an elusive goal for many debtors until “apathetic creditors” are explicitly addressed through an amendment to § 1191(a).20 Undoubtedly, such an amendment would further the SBRA’s legislative purpose by easing subchapter V trustees’ duty to facilitate confirmation of consensual plans, thereby increasing the rate of consensual confirmations.21

Nathan Smith is a partner with Malcolm & Cisneros, ALC in Irvine, Calif., and represents creditors and bankruptcy trustees in bankruptcy cases, litigation and appeals. He also serves as a subchapter V trustee in the U.S. Bankruptcy Court for the District of Nevada.