Technical Knock Out (“TKO”): a boxing term used to describe a situation where one boxer is deemed the winner after knocking the other down three times.  In this case, a TKO can also be used to describe a recent ruling by the United States District Court for the District of New Mexico.

In a one, two, three punch combo, the district court adopted the Magistrate Judge’s proposed findings and recommended disposition, affirmed the prior decision of the United States Bankruptcy Court for the District of New Mexico, which was previously analyzed on the Bankruptcy Blog, and dismissed the appeal. 

Let’s take a trip down memory lane. . .

The Bankruptcy Court Decision

The debtor sought to confirm a plan of reorganization where only one creditor voted, and that creditor voted against the plan.  The debtor argued that the requirements of section 1129(a)(10) of the Bankruptcy Codewere satisfied because other creditors in an impaired class did not vote and, therefore, were deemed to have voted to accept the plan.

The bankruptcy court, analyzing the Tenth Circuit’s decision in Heins v. Ruti-Sweetwater, held that although a deemed acceptance by a class in which no creditor votes could satisfy the requirement of section 1129(b) of the Bankruptcy Code under the Ruti-Sweetwater rationale, the mandate of 1129(a)(10) must still be satisfied to confirm a chapter 11 plan in a cramdown context.  The bankruptcy court further found that to hold otherwise would conflict with the language of section 1126(c) of the Bankruptcy Code, which states that only those votes actually cast are counted in determining whether a class of claims has accepted a plan.  Therefore, the bankruptcy court declined to confirm the debtor’s chapter 11 plan, since the requirement of an accepting impaired class was not satisfied.

The District Court Decision

The district court, after analyzing the magistrate judge’s proposed findings and recommended disposition, confirmed the bankruptcy court decision on this point.  Once again turning to In re Ruti-Sweetwater, the district court noted, as did the Tenth Circuit, the difference between 1129(b) and 1129(a)(10) with regard to the impact of nonvoting creditors.  The district court agreed with the prior circuit court ruling that actual acceptance of a plan by at least one class of impaired claims is necessary for the requirement of at least one impaired class voting to accept a plan—deemed acceptance where no creditor in a class votes will not suffice.  Therefore, the district court once against denied the confirmation of the debtor’s plan.

Lesson Learned

As three judges in two courts have now made it clear, section 1129(a)(10) requirements cannot be satisfied through deemed acceptance.  To confirm a chapter 11 plan of either an individual or a corporation, there must be at least one affirmatively accepting class of impaired creditors.  We will keep you posted should the debtor decide to bring this issue back to the Tenth Circuit.