RANDOLPH J. HAINES, Bankruptcy Judge.
A secured creditor has moved to "designate," or disqualify, another secured creditor's acceptance of the plan of reorganization, pursuant to Bankruptcy Code § 1126(e),
This is a single asset real estate case. The Debtor, Bataa/Kierland LLC, is the owner of modern, class A office building and surface parking lot with an easement that provides additional parking in an adjacent parking structure owned by the Debtor's affiliate. The Debtor's building is subject to a lien in favor of JPMCC 2007-CIBC Greenway LLC (the "Lender"), who purchased the secured debt from Bank of America, who had acquired the debt from the Canadian Imperial Bank of Commerce. The Lender rejected the Debtor's plan of reorganization.
The acceptance the Lender seeks to disqualify was that of Joseph Annoreno, who had made a pre-petition loan to the Debtor in the amount of $5,000 for the purchase of computer equipment and accessories to be used in the operation of the Debtor's business. Annoreno is the Chief Executive Officer of a tenant of the adjacent building owned by the Debtor's affiliate, and had become friends with the Debtor's principal over the years. Annoreno also owns a holding company that makes small to medium size loans. The Debtor granted Annoreno a security interest in the computer equipment to secure the debt owed to Annoreno, and made payments on that debt for seven months prior to the filing of the bankruptcy case. The Debtor's plan pays Annoreno's allowed secured claim in full, with interest of 5% (less than the 8% rate in the promissory note), over a period of three years, and his unsecured deficiency claim will be treated as a Class 4 unsecured claim. Annoreno accepted the Debtor's plan, and it is this acceptance that the Lender seeks to disqualify as made in bad faith.
The Lender also objected to the classification of Maricopa County's secured tax claim, arguing that it was either not a valid claim at all, that it was not a valid secured claim, or that it was not impaired because it received the treatment required for a priority unsecured tax claim, but at the confirmation hearing the Court denied those objections. The Lender also objected to confirmation on the ground that there was no accepting impaired class so the plan failed to satisfy § 1129(a)(10).
The deadline for submitting ballots on the Debtor's plan was October 19, 2011. The Lender's objection to the plan was filed on October 20. In this 35 page objection the Lender asserted virtually every confirmation objection available to a secured creditor, including the alleged failure of the plan and voting to satisfy § 1129(a)(10). The Lender's primary objections to the acceptance by Annoreno were that his claim was "artificially" impaired because the Debtor could have paid for the computer equipment in full, because there was an artificial, gerrymandering classification that sought to "disenfranchise" the Lender, and because Annoreno may be an insider whose vote does not count for purposes of § 1129(a)(10). As part of the latter objection the Lender stated that Annoreno's refusal to sell his claim to the Lender for the full amount "suggests that any vote in favor of the Plan by Mr. Annoreno was made so that the Debtor would have an accepting impaired class." The objection stated, in one sentence and without citation to any authority, that the Court should "designate any vote in favor of the plan by Annoreno as a bad-faith vote under Section 1126(e)." The objection did not include any motion for designation of the Annoreno vote.
The initial, nonevidentiary hearing on confirmation of the plan was held on October 27, at which time the Court set an evidentiary hearing on confirmation for February 6 and 7, 2012. That hearing was postponed while the parties engaged in mediation. Although the parties reached a global settlement at the mediation, the Lender subsequently rejected that agreement. On March 21, the Court denied the
On May 24, the Lender filed a "Supplemental Objection" to the Debtor's plan after the conclusion of discovery. This objection did not object to either the claim or vote of Annoreno, nor seek its designation. The parties filed their joint pre-trial statement on May 25.
At 8:41 am on May 29, the Lender filed its objection to the Annoreno claim and its motion to "designate the vote submitted by Annoreno because the Annoreno claim was strategically incurred for the sole purpose of effectuating a cram-down." The two-day evidentiary hearing on confirmation began thirty minutes later, at 9:10 am.
On July 10, the Court issued a memorandum decision denying the Lender's objections and concluding that the Debtor's plan of reorganization should be confirmed. The final order confirming the plan was entered on August 2. The Lender appealed that order and its appeal is pending before the District Court for the District of Arizona.
Annoreno responded and objected to the Lender's motion to designate the Annoreno vote, and a nonevidentiary hearing on that motion was held on June 20, at which time the Court took the matter under advisement.
Section 1126(e) requires notice and a hearing before the court may designate a vote on plan confirmation.
The first issue in this case then becomes whether the motion to designate was timely, coming seven months after the balloting and the first hearing on confirmation, and just minutes before commencement of the final evidentiary hearing on confirmation. The acceptances by classes and the satisfaction of § 1129(a)(10) were determined at the May 29-30 final confirmation hearing, long before Annoreno was given any notice of a hearing on the Lender's attempt to disqualify his vote. The Lender was required to give notice to Annoreno that a hearing was going to be held to designate his vote before the conclusion of the confirmation hearing.
Nor was the motion to designate identified as an issue to be tried at confirmation in the Joint Pre-Trial Statement filed by the Lender and the Debtor. The Lender did identify in the Joint Pre-Trial Statement its contention that Annoreno's acceptance of the plan was not submitted in good faith, but did not give notice, and certainly none to Annoreno who was not a party to this Joint Pre-Trial Statement, that the § 1126(e) motion would be heard as part of the confirmation hearing. Since designation did not appear in the Joint Pre-Trial Statement for the confirmation
The motion to designate is also moot because the acceptance by Maricopa County satisfies § 1129(a)(10). Given the acceptance by Maricopa County, it will make no difference to confirmation of the plan whether Annoreno's vote is counted or not.
The Court recognizes, however, that the Lender has appealed the confirmation order, and that appeal will undoubtedly include the Lender's argument that the acceptance by Maricopa County cannot satisfy § 1129(a)(10). If the Court's denial of that argument is reversed on appeal, the acceptance by Annoreno would provide the only class capable of satisfying § 1129(a)(10). It therefore may serve judicial economy to address now the merits of the designation motion, even though it is moot.
The Lender makes several arguments that Class 2D, consisting solely of Annoreno's claim, cannot satisfy § 1129(a)(10) even if Annoreno's acceptance is allowed. For example, the Lender argues that Annoreno's claim could have been paid in full by the Debtor prior to the filing of this bankruptcy case, so the plan's payment of this claim over time constitutes "artificial impairment" or gerrymandering that cannot satisfy § 1129(a)(10).
Although "gerrymandering" is neither defined nor mentioned in the Bankruptcy Code, it has been used as a term of art in some bankruptcy cases to describe a very particular prohibited practice in the Chapter 11 plan confirmation process.
Moreover, it is not "the bankruptcy court's role to ask whether alternative payment structures could produce a different scenario in regard to impairment of
Here, the Debtor presented evidence that Annoreno had been granted a pre-petition security interest in certain computer equipment and accessories used in connection with the operation of the Debtor's business in exchange for the loan to purchase them. It is apparently undisputed that the Debtor made payments on the secured debt for approximately seven months prior to the bankruptcy filing. Annoreno's claim is a perfected secured claim, and the Lender presented no evidence to the contrary. In fact, during oral argument, counsel for the Lender dropped its claim objection and admitted that Annoreno's claim was both properly secured and properly classified. On these facts, there is no basis under the language of the Code or Ninth Circuit precedent to conclude that § 1129(a)(10) has not been satisfied on a theory of gerrymandering or artificial impairment.
Along with Maricopa County, Annoreno's claim is both properly classified and impaired under the plan, so Annoreno's acceptance also satisfies the § 1129(a)(10) requirement unless that acceptance is disqualified pursuant to § 1126(e).
Section 1126(e) provides that "[o]n request of a party in interest, and after notice and a hearing, the court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title." The language of the Code does not specify the consequences of so "designating" an acceptance, but the origins and history of the provision make clear, and the Ninth Circuit had held, that "In this context, designate means disqualify from voting."
But the meaning of "good faith," as used in § 1126(e), was also intentionally left undefined by Congress.
In Figter, the Ninth Circuit held that bad faith occurs when a person seeks to secure some "untoward advantage" over other creditors for some "ulterior" reason.
In Figter itself, the debtor appealed the bankruptcy court's ruling that a pre-petition secured creditor's purchase and voting of twenty-one unsecured claims was in good faith, which resulted in the debtor's plan being rendered unconfirmable because it was unable to satisfy § 1129(a)(10), even though the plan provided for full payment of the creditor's oversecured claim.
The Figter opinion also held that good faith is a fluid standard that is not controlled by one single factor or set of factors. "[T]he bankruptcy court must simply approach each good faith determination with a perspicacity derived from the data of its informed practical experience," while at the same time differentiating between "a creditor's self interest as a creditor and a motive which is ulterior to the purpose of protecting a creditor's interest."
Although the Figter opinion never explicitly defined "ulterior," nor what the bad faith motive must be ulterior to, the numerous examples mentioned leave the inescapable conclusion that the Ninth Circuit required the disqualifying "ulterior" motive to be ulterior to the creditor's status as a creditor. The opinion effectively holds that a creditor's enlightened self interest, qua creditor, cannot be deemed ulterior, and that an ulterior motive must
Other modern cases applying § 1126(e) concur that bad faith is primarily to be found in ulterior motives, and that motives are deemed "ulterior" only when they are ulterior to the creditor's capacity as a creditor. The Landing opinion, cited in Figter, was quite explicit that § 1126(e) applies only "when the voting process is being used as a device with which to accomplish some ulterior purpose, out of keeping with the purpose of the reorganization process itself, and [is] only incidentally related to the creditor's status qua creditor."
Because Ninth Circuit precedent controls this case, the issue here becomes whether a pre-petition creditor's acceptance of debtor's plan was cast in good faith when the creditor's motive was to see the debtor succeed by supplying the acceptance required by § 1129(a)(10). Stated more simply, the issue is whether it is an ulterior motive for a "friendly" creditor to hold out from having his interest purchased by another claimholder who sought to block the debtor's plan.
To obtain a designation of Annoreno's vote, the Lender has a heavy burden of proof because designation is a narrow exception to the ordinary democratic process, and because bad faith is akin to fraud, which is never presumed. But the Lender has not provided
Based on this Court's "perspicacity derived from the data of its informed practical experience," and the controlling authority in the Ninth Circuit, this Court finds that Annoreno's vote was cast in good faith, and not for any ulterior motive, for purposes of §§ 1126(e) and 1129(a)(10).
The more difficult question may be whether it was bad faith if, as the Lender suggests without evidence, the Debtor purposely created the Annoreno secured claim in contemplation of the bankruptcy filing in order to create an accepting impaired class.
Section 1126(e) contains two distinct grounds for designating a vote — if it was cast by the voter in bad faith, or if its was "solicited or procured" by the plan proponent in bad faith. Here, the former focuses on Annoreno's good faith, while the latter focuses on the Debtor's good faith. Although the Lender's motion never specifically requests designation of the Annoreno vote on the second ground — that it was "solicited or procured" in bad faith — it might be interpreted as seeking designation on either of the alternative grounds,
There are two serious problems with the Lender's argument that the Debtor's alleged creation of the Annoreno claim, months before the bankruptcy filing, could constitute a basis to designate the Annoreno vote. The first problem is that § 1126(e) does not specifically refer to a bad faith creation of a claim as a basis to designate a vote. It only applies to bad faith in the solicitation or procurement of the vote, not to the creation of the claim on which the vote is cast. And most cases, following the seminal decision in Century Glove, hold that such "solicitation" is only a specific request for a creditor's official vote, not a mere hope or even understanding that the creditor will support a contemplated plan.
The second problem is that Figter and virtually all of the case law under § 1126(e) deal with
The only logical extrapolation of Figter to the debtor/plan proponent is to conclude that the disqualifying "ulterior" motive must be a motive that is ulterior to the party's role or capacity in the bankruptcy case. Indeed, authorities under the Act predecessor made exactly this analysis and adopted the same "ulterior motive" test to creditors and to equity, based on their proper role as and capacities in the case.
If the purpose for creating the debt was to create a class that would likely satisfy § 1129(a)(10) and therefore render the plan confirmable, such a motive is not at
And the prepetition creation of a potentially accepting class does not exact for the debtor any particular preferential advantage that he is not entitled to, because even if the plan is therefore rendered confirmable it cannot yield anything more than the debtor is entitled to under all the other confirmation requirements. The plan must, for example, still satisfy the best interests of creditors test, the no unfair discrimination requirement, and the fair and equitable requirement. Note, however, that it might be a different case if the vote were being used to avoid any of those requirements, because it could then be argued to have been solicited to obtain something more for the debtor that he would not otherwise have been entitled to, but that is not the case when the only purpose is to satisfy § 1129(a)(10). And the creation of the debt is certainly not a preferential advantage to the debtor but rather a cost to the debtor, who still must pay the debt, together with interest at a rate that the creditor will accept, in this case 5%. It would turn the history and purpose of §§ 203/1126(e) on its head to disqualify a vote solicited by someone who is getting less out of the case, rather than more, because he had to create and pay a debt in order to confirm a plan.
Based on Figter's controlling holding that equates bad faith with a motive that is ulterior to the party's proper role and capacity in the bankruptcy case, and applying this Court's "perspicacity derived from the data of its informed practical experience," I must find there is no analysis, allegation or argument, must less evidence, that the alleged creation of the Annoreno claim was in bad faith for purposes of §§ 1126(e) and 1129(a)(10), even if the Lender could prove at evidentiary hearing that the Annoreno claim was manufactured in contemplation of bankruptcy and for the purpose of satisfying § 1129(a)(10).
Perhaps the Lender will argue that there is something in the origin or history of § 1126(e) that necessitates a different standard for debtors than for creditors, so that it is not valid to extrapolate Figter's ulterior motive definition — ulterior to the party's proper role and capacity in the case — to debtors or plan proponents. Indeed, notwithstanding the requirement of Arizona Ethical Rule 3.3(a)(2) which requires disclosure of "legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client," the Lender's motion never even cites Figter, as if it has no bearing on the requirements for designation of a vote solicited by the debtor/plan proponent.
Figter said nothing explicit about how its ulterior motive analysis might apply to someone other than a creditor. Therefore to determine whether Figter might possibly allow for a different definition of good faith for debtors or plan proponents than for creditors, it necessary to analyze the analytical approach applied in Figter to determine whether that same approach, applied to a very different kind of party in a case, might yield a different result. There are at least three methods of analysis: a comparison of the factual background
On the first two approaches, it is rather easy to conclude that the Ninth Circuit had the perfect opportunity in Figter to define good faith for purposes of § 1126(e) in terms very different from a motive that is ulterior to the party's role and capacity in the case. It would have been much easier for the Ninth Circuit to adopt the same meaning for "good faith" for purposes of § 1126(e) as it had previously adopted for the same term as it is used just three sections later, in § 1129(a)(3). That would have meant that "good faith" would be found to exist when either the plan as a whole, or the challenged vote in particular, "achieves a result consistent with the objectives and purposes of the Code."
The adoption of the general definition of good faith for purposes of Chapter 11, under the Bankruptcy Code as distinct from the Act, might have generated a different result for the secured creditor on the Figter facts, but not a different result here. Considering the secured creditor's purchase and voting of unsecured claims in light of the "objectives and purposes of the Code" would have entailed an analysis of the purposes and objectives of § 1129(a)(10) in particular, because that was the precise object of the purpose and voting of those claims. That analysis would have concluded, based on all the existing authorities, that the only purpose of § 1129(a)(10), which had no predecessor or counterpart under the prior Bankruptcy Act, was to require "some indicia of creditor support for the debtor's schemes."
When the Figter facts are analyzed using the accepted § 1129(a)(3) meaning of "good faith," the result in Figter might well have been different for the secured creditor. The Ninth Circuit might well have concluded that the effort to purchase claims, in a class in which the purchasing creditor had absolutely no interest, for the sole purpose of outvoting the existing creditors in that class who supported the debtor's plan, was contrary to the purpose and objective of § 1129(a)(10) — to find some indicia of creditor support for the debtor's plan. It is difficult even to hypothesize an argument the creditor could make that its actions were not contrary to that purpose. That was, admittedly, its
But that definition of good faith would not necessitate a different result here. Even if the Debtor created the Annoreno debt in contemplation of bankruptcy and of needing an accepting impaired class, nothing in that conduct is even arguably inconsistent
So this potential alternative definition of good faith does not support a conclusion that the Debtor's method of obtaining an acceptance from the Annoreno creditor class lacked good faith, even if there were a basis to apply a different good faith standard to debtor than applies to creditors.
More significantly, the Figter opinion clearly indicates that the § 1129(a)(3) meaning of good faith is
As noted above, although the Ninth Circuit clearly derived its "ulterior motive" definition of bad faith from the history and origins in § 1126(e), the analysis of that history in the Figter opinion was extremely truncated. It relied solely on some Supreme Court dictum in a case decided in a very different context (whether an appeal should be dismissed when the stockholder who brought it sold his stock and appeal rights to the adverse party, without sharing the payment with other stockholders who would have benefitted from the appeal). The Figter opinion never mentioned who drafted the predecessor of § 1126(e), what facts generated the felt need for the provision, nor how that predecessor functioned under the prior Bankruptcy Act (indeed, the opinion does not even recognize that the predecessor was not in the Bankruptcy Code, but under the prior Bankruptcy Act). Therefore it is possible that a more thorough analysis of that origin, purpose and legislative history of § 1126(e) might have generated a different result when applied to a debtor/plan proponent. In fact, however, a more complete historical analysis suggests that while the result in Figter itself might have been different, the result here would be unchanged.
The first general corporate reorganization statute that was adopted in 1933, § 77B, for the first time allowed corporations access to statutory reorganization, and in so doing rapidly expanded the jurisdiction of bankruptcy courts.
In Texas Hotel Securities v. Waco Development, the district court held that a competitor and former lessee of the debtor could not vote, against the debtor's plan of reorganization, the notes that it had acquired with the sole intent of preventing the debtor's reorganization so that it could obtain control of the debtor's hotel.
Under both § 77B and the subsequent Chapter X added to the Bankruptcy Act by the 1938 Chandler Act amendments, the newly created Securities and Exchange Commission played a major role. It was required to pass on plans of reorganization prior to their consideration by the bankruptcy court. And it played a major role in the drafting of the Chandler Act, primarily to identify and recommend solutions to abuses that it found to have occurred under equity receiverships and § 77B.
When the Chandler Act was drafted to supersede section 77B and add Chapters X, XI, XII and XIII to the Bankruptcy Act in 1938, the Securities and Exchange Commission drafted and urged the adoption of what became Act § 203.
Perhaps the earliest equation of bad faith with ulterior motives was the First Circuit's 1936 decision in Downtown Investment Association that was quoted at some length in the SEC Protective Committee Report.
But where acceptances were solicited before the court determined the plan to be fair and equitable, the SEC Protective Committee Report concluded that "Section 77B was deficient in not specifically giving to courts the power to disregard the votes of those holding a veto control who dissented from a plan in order to serve some ulterior selfish purpose."
Rather, the SEC's concern, and therefore the drafter's understanding of a lack of good faith, was with "ulterior reasons
Thus when the good faith requirement for voting was originally drafted, it was intended and understood that "ulterior motive" referred to a motive ulterior to the interests of the other members of the class whose vote was being dominated. That was what "ulterior motive" meant in the first Circuit Court opinion to use the term in 1936, that is what it was understood to mean when the SEC drafted § 203 and when Commissioner Douglas testified before Congress in 1937, and what it meant in the first subsequent Supreme Court decision to use the term in a highly relevant
That was the same meaning understood for "good faith" when the Code and § 1126(e) was adopted in 1978. That was the meaning understood by the leading authority at the time, Collier on Bankruptcy: "The test, then, seems to be whether or not those sought to be disqualified have some `ulterior' reason for their action which looks to some special advantage or increment to be gained thereby."
If "ulterior motive" is understood in the context of the history of its use as a definition of good faith for purposes of §§ 203 and 1126(e), the disqualifying "ulterior motive" exists whenever a party is motivated by interests that are not common to the class of votes that it seeks to dominate, even if that motive may be entirely appropriate in light of the party's other interests, even interests that are appropriate to its role and capacity in the case. On that analysis, the result in Figter clearly would have been different. A secured creditor who purchases unsecured claims, when that secured creditor has no unsecured claim of its own because it is oversecured, clearly has an ulterior motive. Its motive, as recognized by the Figter opinion, was to dominate the unsecured creditor class vote solely in order to protect its interests as a secured creditor-an interest not shared or common to the other members of the unsecured creditor class. Justice Douglas would have had no problem identifying that as an ulterior motive that equates with bad faith.
But would that mean the Debtor's motives here, in allegedly creating the Annoreno secured debt, must be deemed ulterior? The Debtor's motives in doing so — to obtain a class whose acceptance can render the plan confirmable under § 1129(a)(10) — do not seem to be at all inconsistent with either the Debtor/plan proponent's role or capacity in the case, nor with the interests of the class with which he is most naturally aligned — the class of equity holders. Both the Debtor, the plan proponent, and the
And by allegedly creating the Annoreno class, the Debtor/plan proponent has done nothing to dominate the votes or interests of any other class of creditors — the original concern of the drafters of the predecessor of § 1126(e). The Annoreno vote has not affected the vote of either the other classes of secured creditors, or the class of unsecured creditors. And if any such domination could have occurred, it is fully remedied by segregating the Annoreno vote in its own class. As the Avon Park opinion noted, where there is a need for the protection "of one class of investors from the encroachments of another," an appropriate remedy would be "the separate classification of claimants."
This expanded historical analysis supports the conclusion that while the secured creditor's vote in Figter may have been in bad faith, because it was used to dominate the votes of another class whose interests conflicted with those of the secured creditor, the Debtor's alleged strategic manufacture of the Annoreno debt, class and vote would not be in bad faith, because that vote did not dominate the votes of any other creditors. Indeed, this conclusion and analysis reveals an even more fundamental reason why the Ninth Circuit did not adopt the historical and drafter's understanding of "ulterior motive," and why the good faith standard for acceptance under the Bankruptcy Act does not require the same standard for acceptance for purposes of § 1129(a)(10) under the Code. It is because the acceptances whose good faith is now being questioned for purposes of § 1129(a)(10) under the Code serve a very different purpose from the acceptances whose good faith was questioned under the Chandler Act.
Under the 77B and Chapter X cases, the voting that was being manipulated by the voting of purchased claims was the vote as to whether the plan was fair and equitable and could be approved. In other words, the purchased votes were being cast for purposes of influencing the court's determination as to whether the plan's treatment of that class of creditors was fair and equitable. All of the Act cases indicate that what is bad faith is to manipulate such votes in an effort to extort special treatment. That is not the case with votes such as those under consideration here, or under all of the relevant Code cases, which are limited to satisfaction of § 1129(a)(10), and have no bearing on the treatment of creditors under the plan.
Section 1129(a)(10) did not exist under the Act, had no predecessor under the Act, and was not the reason why anyone sought to manipulate the votes under any of the Act cases that construed and applied Act § 203. The Chandler Act amendments to the Bankruptcy Act did not expressly require that there be any accepting impaired class, so long as the treatment of all classes satisfied the best interests of creditors and the fair and equitable requirements for their treatment. Yet without any statutory authority, some courts, led by the Seventh Circuit's 1941 decision in Herweg, had held that acceptance by some
In 1973, when the Commission On the Bankruptcy Laws of the United States submitted its Report recommending revision of the bankruptcy law and consolidating Chapters X, XI and XII, it did not contain any provision expressly requiring an accepting class. Instead, the Commission's draft retained a structure similar to what had existed under the Act, permitting cram down treatment of dissenting classes and determining acceptance "exclusive of those creditors and equity security holders who are [so] provided for."
In 1977, however, while Congress was considering both the Bankruptcy Commission's draft bankruptcy code and the Judges' bill,
Apparently in reaction to these two decisions Congress considered an amendment to the proposed Bankruptcy Code to require at least one accepting class.
Section 1129(a)(10) is therefore a purely "technical requirement for confirmation," but "is not a substantive right of objecting creditors."
Therefore, in applying its perspicacity derived from the data of its informed practical experience in dealing with debtors and their creditors, this Court finds as a fact that there was no bad faith in this Debtor's solicitation or procurement of Annoreno's acceptance, even if the Annoreno claim had been created (without fraud or harm to anyone's legitimate interests) with intent to use it to satisfy § 1129(a)(10). The Lender's motion to designate the Annoreno acceptance is therefore denied because the Lender could not satisfy its burden of proof even if it could prove all of its suspicions.
