Yesterday, many citizens all over the country voted for local and state leaders and proposed ballot measures in their districts. Social media was abuzz with uploaded photos of individuals donning “I voted” stickers, and timelines were flooded with status messages urging people to exercise their civic rights and vote. Nevertheless, there were also those that opted not to vote, and their respective reasons varied. Some people claimed they could not get to the polls on time, others didn’t like the set of candidates running in their districts, and a great many pondered, “If I don’t vote, will my non-vote really matter?” A person’s decision not to vote for any particular candidate does not then result in the default selection of one of the candidates. Similarly, in determining whether a particular ballot measure has passed, election officials cannot use the non-votes of possible voters to conclude that their failure to vote was an implicit acceptance of the proposed measure.

A general election is not the only forum in which voting and the effect of not casting a ballot is discussed. In bankruptcy, the votes of a plan’s creditors and equity interest holders may make the crucial difference as to whether a plan can be confirmed. So it is not surprising that, in the bankruptcy context, the same types of questions that confront potential voters in general elections are faced by creditors deciding whether to vote on a plan.

The paradigm for confirmation of a plan – including voting to accept or reject it – is set forth in various sections of the Bankruptcy Code and in the Federal Bankruptcy Rules. Section 1129(a) of the Bankruptcy Code contains the confirmation requirements for a chapter 11 plan. In particular, section 1129(a)(10) of the Bankruptcy Code requires that, if a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan. The meaning of “accepted” for purposes of section 1129(a)(10) has been, and continues to be, the subject of debate.

Recently, the United States Bankruptcy Court for the District of New Mexico in In re Nancy Akbari-Shamirzadi considered whether the a creditor’s failure to vote on a chapter 11 plan can be deemed to be an acceptance of the plan in satisfaction of the requirements of section 1129(a)(10).

Background

In Akbari-Shamirzadi, the debtor filed a plan of reorganization that consisted of six classes of claims. Only one of the scheduled 32 unsecured creditors voted on the plan. Voting on the plan was sparse, to put it mildly. The one creditor that submitted a vote, voted against the plan. Additionally, another creditor, in a different class, objected to the plan but was unable to vote because its claim was treated as unimpaired under the plan. No other votes were submitted or objections asserted. The debtor argued that the requirements of section 1129(a)(10) were satisfied because creditors in an impaired class that did not vote on the plan or object to the plan are deemed to have accepted the plan. In support of its position, the debtor cited to the Tenth Circuit decision in Heins v. Ruti-Sweetwater, Inc.

The bankruptcy court began its analysis by discussing Ruti-Sweetwater, which addressed the issue of whether a creditor that did not vote on or object to a plan of reorganization could subsequently attack the confirmed plan as failing to comply with the section 1129(b) “cramdown” requirements. In pertinent part, the Tenth Circuit held that voluntarily opting to not vote on a plan and failing to object to a plan before its confirmation barred a creditor from subsequently challenging a plan or asserting that the plan discriminated unfairly and was not fair and equitable.

The debtor sought to apply the rationale adopted by the Tenth Circuit in Ruti-Sweetwater in regard to the cramdown provision of section 1129(b) in order to deem those creditors who failed to vote on the plan to have accepted the plan for purposes of section 1129(a)(10). According to the debtor’s position, the impaired class that had no creditors vote would be deemed to have accepted the plan and, moreover, the class where one creditor voted to reject the plan would also be deemed to have accepted because the eight non-voting creditors would be deemed to have accepted the plan and outweigh the vote of the only actual voter. Thus, the requirement of section 1129(a)(10) that at least one class of impaired claims vote to accept the plan would be satisfied.

The court, however, did not agree with the debtor’s interpretation of Ruti-Sweetwater. While agreeing with the rule of law set forth in Ruti-Sweetwater and its progeny that adopted its holding, including In re Adelphia Communications Corp., the court noted that the Tenth Circuit approved the concept of “deemed acceptance” solely in connection with the requirements of sections 1129(a)(8) and 1129(b) of the Bankruptcy Code. The court stressed that the holding in Ruti-Sweetwater did not address, and has never been considered to address, a plan proponent’s ability to satisfy the requirements of section 1129(a)(10) through “deemed acceptance.” The court further recognized that a finding to the contrary would conflict with the language of section 1126(c) of the Bankruptcy Codewhich provides for only those votes actually cast to be counted in determining whether a class of claims has accepted a plan. Section 1126(c) focuses not on the creditors eligible to vote but on those that have actually voted. Consistent with the treatment of non-votes for purposes of section 1126(c), the court found that section 1129(a)(10) requires that, with respect to a class impaired under the plan, at least one creditor in such class has actually voted to accept the plan. Given that the only vote casted rejected the plan and was from a creditor in an impaired class, the court held that the debtor’s plan could not be confirmed because it was not “actually accepted” by at least one impaired class.

Conclusion

It’s true that in some limited contexts certain classes are “deemed to accept” or “deemed to reject” a plan. The decision in Akbari-Shamirzadi, however, further endorses the general practice that a creditor that is eligible to vote on a plan and doesn’t vote to accept or reject the plan will not be deemed to have accepted it.

For those of you who did not participate in yesterday’s election process, you may rest assured that your failure to vote was not counted as some sort of “deemed” vote. And, asAkbari-Shamirzadi shows, that principle applies in bankruptcy too.