Massachusetts Bankruptcy Court Adopts "Per Plan" Approach To Impaired Class Acceptance Requirement For Confirmation Of Joint Chapter 11 Plan

• Published date: 13 June 2023
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Jones Day

If any class of creditors under a chapter 11 plan is "impaired," the Bankruptcy Code provides that the plan can be confirmed by the bankruptcy court only if at least one impaired class of non-insider creditors votes to accept the plan. This "impaired class acceptance" requirement'stated in section 1129(a)(10) of the Bankruptcy Code'is straightforward in cases involving a single debtor, or in cases where the bankruptcy estates of several debtors are "substantively consolidated" so that the assets and liabilities of each debtor are deemed to belong to a single consolidated entity.

However, the requirement is more difficult to apply in cases involving multiple affiliated debtors that propose a joint chapter 11 plan, but whose estates are not substantively consolidated, or are consolidated only for purposes of plan confirmation (sometimes referred to as "deemed substantive consolidation"). In such cases, the question is whether an impaired class of each debtor must accept the plan (the "per debtor" approach) or whether the acceptance of the joint plan by an impaired class of a single debtor, or fewer than all of the debtors, is sufficient (the "per plan" approach). This question is disputed among the courts.

The U.S. Bankruptcy Court for the District of Massachusetts recently weighed in on this issue in In re NESV ICE, LLC, 2023 WL 2278603 (Bankr. D. Mass. Feb. 28, 2023). In a case where a chapter 11 plan provided that related debtors were deemed to be substantively consolidated, but would remain separate after confirmation of a joint chapter 11 plan, the court adopted the "per plan" approach. It also held that a junior secured creditor would not be deprived of its right to vote on the plan in accordance with a chapter 11 plan voting rights assignment in a prepetition subordination agreement.

"Per Debtor" Versus "Per Plan" Impaired Creditor Acceptance

Section 1129(a)(10) of the Bankruptcy Code provides that, if any creditor class is impaired under a chapter 11 plan, at least one impaired class must vote in favor of the plan, excluding any acceptance of the plan by an insider. This provision, which has been called the "statutory gatekeeper" to cramdown, must be satisfied for a chapter 11 plan to be confirmed either consensually or under the nonconsensual plan confirmation requirements set forth in section 1129(b). See In re 266 Washington Assocs., 141 B.R. 275, 287 (Bankr. E.D.N.Y.), aff'd, 147 B.R. 827 (E.D.N.Y. 1992). Thus, any chapter 11 plan, including a cramdown plan, cannot be confirmed in the absence of an accepting impaired class.

Determining whether a plan satisfies section 1129(a)(10) is relatively easy in cases involving a single debtor and its classes of creditors (although even simple cases sometimes present the prospect of "artificial impairment" or "gerrymandering" to create an accepting impaired class). Making such a determination is more difficult, however, in complex chapter 11 cases, which commonly involve multiple debtors and joint chapter 11 plans.

In such cases, courts have been divided as to whether section 1129(a)(10) applies on a "per debtor" or "per plan" basis. If the requirement applies on a "per debtor" basis, at least one impaired class of creditors for each debtor would have to accept the plan for it to be confirmed. By contrast, the "per plan" approach requires only that at least one impaired class of creditors votes to accept the plan, irrespective of whether the creditors in the class hold claims against one, some, or all of the debtors

Another common aspect of chapter 11 cases involving multiple affiliated debtors is "substantive consolidation." Under this remedy, all assets and liabilities of multiple debtors are grouped together or consolidated to form a single estate to satisfy the claims of all creditors and interests of interest holders. Substantive consolidation is typically granted under circumstances where creditors dealt with affiliated debtors as a "single economic unit" or when the debtors' affairs "are so entangled that consolidation will benefit all creditors." In re Bonham, 229 F.3d 750 (9th Cir. 2000). When multiple debtors in a complex chapter 11 case have been substantively consolidated, the section 1129(a)(10) voting requirement is straightforward because the substantively consolidated entities are treated as a single debtor.

In multiple-debtor chapter 11 cases, the bankruptcy judges in the District of Delaware and the Middle District of Florida have adopted the "per debtor" approach when applying section 1129(a)(10). See In re Tribune Co., 464 B.R. 126, 182-83 (Bankr. D. Del. 2011), on reconsideration in part...