The Bottom Line:

The Bankruptcy Appellate Panel for United States Court of Appeals for the Ninth Circuit (the “BAP”) affirmed that a creditor failed to show cause to change the vote of a purchased claim in order to prevent the “cramdown” of a plan in a single-asset bankruptcy.  Windmill Durango Office, LLC, LLC v. Beal Bank USA, BAP No. NV-11-1728-DKiPa, 2012 Bankr. LEXIS 2947 (9th Cir. BAP 2012).  This decision is notable as one of the first appellate decisions to address the circumstances under which a bankruptcy court has discretion to prevent a creditor from changing its prior vote, under Rule 3018(a) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), to block the confirmation of a chapter 11 reorganization plan.

What Happened:

Windmill Durango Office, LLC (the “Debtor”) was the owner and operator of a single office building (the “Building”) whose space was primarily leased to Allegiant Air.  The building was purchased through a bank loan originally issued by two now defunct banks and later purchased by Beal Bank USA (the “Bank”).  This loan was secured by a mortgage on the Building.  The Debtor failed to make payments on the loan and the Bank filed an action in state court for breach of contract and requested a receiver to be appointed.  Windmill subsequently filed for bankruptcy on August 17, 2010.  The Bank held a claim for approximately $16.2 million which was one of only two secured claims; the other secured claim was held by a company that performed maintenance on the Building and was in the amount of $3,000.  The Building was valued at $19.4 million.  The debtors scheduled several non-priority unsecured claims in relatively small amounts no larger than $32,200.

The Debtor placed the Bank into its own class for the purposes of voting on the plan and all unsecured non-priority creditors into another class.  The Debtor proposed to pay the bank the principle plus 2.75% interest amortized over thirty years (it later amended the plan, in light of the Bank’s objections, to provide for a 4.25% interest rate).  The Debtor proposed to pay 100% of the allowed claims to all unsecured non-priority creditors, which would be paid ninety days after the effective date of the plan and without interest; as such, the class was deemed “impaired” for the purposes of voting on the plan.

After the solicitation period began, the Bank purchased the claim of one of the unsecured non-priority creditors and filed an “Unconditional Transfer and Assignment of Claim After Proof of Claim Filed" with the court and a motion under Rule 3018(a) of the Bankruptcy Rules seeking to change the vote previously cast by the transferring creditor for the purchased claim (the “Motion”).  The Bank admitted in its Motion that its proposed change of vote was motivated by a desire to block confirmation of the Debtor’s plan.  Under Rule 3018(a), a creditor may move to allow it “to change or withdraw an acceptance or rejection” for “cause shown.”  The bankruptcy court held that the Bank had not demonstrated “cause” for the change of vote, because it was not sufficient cause to seek to block the confirmation.  Further, the court noted that the Bank “[did] the process violence by the buying of a claim to specifically block confirmation after [the balloting was done]."  Because the Bank was not authorized to change the vote, the court held that the impaired class voted in favor of the plan and the Debtor had met its burden under section 1129(a)(1) of the Bankruptcy Code, which requires at least one impaired class to vote in favor of the plan before it is confirmed over the objection of any class of creditors.

The bankruptcy court also rejected the Bank’s arguments regarding the plan’s feasibility, the Debtor’s good faith, and the sufficiency of the interest rate to be paid to the Bank under the plan.  The Bank argued that the plan was not feasible because the Debtor might not have sufficient cash to pay the Bank’s claim.  The court believed that the Debtors had demonstrated a reasonable likelihood of being able to meet the necessary debt service payments to the Bank.  It rejected the good faith argument that the Debtor had improperly manipulated the impairment of unsecured creditors’ class because the court credited the Debtor’s argument that it had insufficient cash to pay interest on the unsecured claims during the ninety days after the effective date.  Finally, the court rejected the insufficiency of the interest to be paid to the Bank because it felt that the Bank’s expert had “double calculated” the interest rate and otherwise not followed the Till formula.  Id. at * 15-16 (citing Till v. SCS Creditor Corp., 541 U.S. 465, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (2004)).

The BAP reviewed the bankruptcy court’s decision regarding the Bank’s Motion pursuant to Rule 3018(a) under the abuse of discretion standard.  It held that the court had acted within its discretion, although it noted that it was a “close question,” when it did not allow the Bank to change the vote of its purchased claim.  The Bank argued that “cause” should be assumed wherever a creditor seeks to change its vote before the ballot deadline.  This presumption, the Bank argued, would ensure that creditors retained “the full benefit of their right of franchise under Chapter 11.”  The Bank thus argued that it only had to show that it had no “tainted” or improper motive in its desire to change the vote.  The BAP disagreed with this rationale, noting that it does not comport with the case law or plain language of Rule 3018, which does require a showing of cause to change a creditor’s vote.  Further, the court noted that the Bankruptcy Court made a finding of improper motive for the proposed vote change in that it found that the change would “do violence to the process.”  The BAP embraced the logic relied on in In re Kellogg Square P'ship, 160 B.R. 332 (Bankr. D. Minn. 1993), that a creditor bought a claim as a successor-in-interest such that it accepted the transferred claim with any pre-purchased vote immutable.

The BAP additionally upheld the bankruptcy court’s rulings on the plan’s feasibility, the Debtor’s good faith, and the sufficiency of the interest rate such that the BAP upheld the bankruptcy court’s confirmation of the Debtor’s plan.

Why the Case is Interesting:

There is little appellate guidance on whether a creditor may purchase a claim in order to change a vote and block confirmation of a plan.  This decision affirms that changing a vote requires a showing of “cause” and that seeking to impede confirmation of a plan opposed by the purchasing creditor may not satisfy the cause requirement.