On October 31, 2011, the Honorable Kevin J. Carey, Bankruptcy Judge of the United States Bankruptcy Court for the District of Delaware, issued an opinion denying confirmation of two competing proposed plans of reorganization in the chapter 11 cases of In re Tribune Company, et al. (the “Tribune Cases”).1 In his decision, Judge Carey determined that both proposed plans of reorganization were not confirmable because, among other reasons, they did not satisfy the requirement of section 1129(a)(10) of the Bankruptcy Code, which provides that a plan of reorganization must be accepted by at least one impaired class (without counting the votes of insiders) if any classes are impaired under the plan. Judge Carey held that the section 1129(a)(10) requirement applies for each debtor included in a joint plan instead of applying only on a per plan basis. This decision has the potential to alter the dynamics of jointly-filed plans in chapter 11 cases.
After the Tribune debtors‟ exclusivity period expired, two competing plans were filed, approved for distribution to creditors for voting, and submitted to the Bankruptcy Court for confirmation by the respective plan proponents. One plan was proposed by the debtors, the official committee of unsecured creditors and lenders (referred to as the “DCL Plan”) and the other plan was proposed by certain noteholders (referred to as the “Noteholder Plan”).
Both the DCL Plan and the Noteholder Plan included all of the debtors within their respective plans. However, neither the DCL Plan nor the Noteholder Plan received the affirmative vote of an impaired class for each debtor included in the respective joint plans. The DCL Plan proponents argued that the Noteholder Plan was not confirmable because it did not satisfy section 1129(a)(10), since only two debtors out of 111 had a class of impaired creditors that voted to accept the Noteholder Plan. The proponents of the Noteholder Plan pointed out that the DCL Plan suffered the same infirmity as it lacked an impaired accepting class of creditors for 39 of 111 debtors. The DCL Plan proponents attempted to distinguish their situation by noting that the DCL Plan was accepted by an impaired class at every debtor for which votes were cast.
Per Plan versus Per Debtor
Section 1129(a)(10) provides that one of the requirements for confirming a chapter 11 plan is that “[i]f 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, determined without including any acceptance of the plan by an insider.”
The issue before Judge Carey was whether section 1129(a)(10) requires each debtor that is part of a joint plan, but is not substantively consolidated with the other debtors, to have at least one class of impaired claims to accept the plan, if any classes are impaired. One position is that section 1129(a)(10) only requires one accepting impaired class from any debtor in connection with a multi-debtor joint plan (a per plan requirement). The other position is that section 1129(a)(10) requires one accepting impaired class for each debtor in a multi-debtor joint plan (a per debtor requirement).
As Judge Carey noted, the case law is sparse on whether section 1129(a)(10) should be applied per plan or per debtor.2 Judge Carey speculated that this issue does not arise often in jointly-administered chapter 11 cases because, in most cases, either the constituents agree on a single distribution scheme without regard to where the assets and liabilities lie, or no creditor or party in interest objects.3
In his decision, Judge Carey explained why he was not persuaded by three cases that arguably support the per plan interpretation: (i) In re SGPA, Inc.,4 (ii) In re Enron,5 and (iii) JPMorgan Chase Bank, N.A. v. Charter Commc’n Operating, LLC (In re Charter Commc’n).6 The court in In re SGPA agreed with the per plan interpretation and held that it was unnecessary “to have an impaired class of creditors of each Debtor to vote to accept the Plan.”7 Judge Carey, however, noted that the court in SGPA found that the objecting creditors suffered no adverse effect and the court relied on the fact that the result would have been the same had the debtors been substantively consolidated.8 The Enron decision also supports the per plan interpretation, but Judge Carey highlighted that in addition to being “Not For Publication,” the decision relied on “the substantive consolidation component of the global compromise” up for consideration and also relied upon the In re SGPA decision.9 More specifically, the Enron court stated that “by virtue of the substantive consolidation component of the global compromise, the requirements of section 1129(a)(10) are satisfied as to each of the Debtors lacking an impaired accepting class because those Debtors are part of the global compromise embodied in the Plan.”10 With respect to In re Charter Communications,11 the issue before the court was whether certain creditor classes were artificially impaired to satisfy section 1129(a)(10). In overruling the objection, the court stated that section 1129(a)(10) is to be applied per plan rather than per debtor. As a result, Judge Carey‟s view was that the court‟s statement about section 1129(a)(10) was either “an alternative ruling or dicta.”12 Judge Carey then noted that “[a]rguably, none of the three courts considered the § 1129(a)(10) issue central to its decision in the matter before it.”13
Judge Carey’s Statutory Analysis
Based primarily on statutory analysis, Judge Carey held that section 1129(a)(10) is to be applied per debtor. Judge Carey stated that he “find[s] nothing ambiguous in the language of § 1129(a)(10), which, absent substantive consolidation or consent, must be satisfied by each debtor in a joint plan.”14
Judge Carey explained, however, that “the fact that § 1129(a)(10) refers to „plan‟ in the singular is not basis, alone, upon which to conclude that, in a multiple debtor case, only one debtor—or any number fewer than all debtors—must [have an impaired accepting class]” because section 102(7) of the Bankruptcy Code provides that “the singular includes the plural.”15
Judge Carey next examined the “non-substantive consolidation” provisions found in both the DCL Plan and the Noteholder Plan, which essentially provided:
that the respective Debtors‟ estates are not being substantively consolidated, that a claim against multiple Debtors will be treated as a separate claim against each, that claims are to be satisfied only from assets of the particular Debtor against which a claim is made, that obligations of any particular Debtor shall remain with that particular Debtor and no Debtor is to become liable for the obligations of another.16
Judge Carey explained that the “practical effect” of such provisions is that each joint plan “actually consists of a separate plan for each Debtor.”17 Accordingly, Judge Carey concluded that it is “entirely logical” to “ascrib[e] the plural to the meaning of „plan‟ in § 1129(a)(10).”18 Judge Carey further noted that, absent substantive consolidation, a court should regard each debtor as a separate entity.19
To further support the interpretation that section 1129(a)(10) applies per debtor, Judge Carey relied on the rule of statutory construction that “a statute is to be read as a whole, since the meaning of statutory language, plain or not, depends on context.”20 Judge Carey noted that section 1129(a) contains many “plan (stated in the singular)” requirements, which must be satisfied by each debtor. As examples, Judge Carey highlighted sections 1129(a)(1) and (3), which, respectively, require that a plan complies with the applicable provisions of the Bankruptcy Code and has been proposed in good faith and not by any means forbidden by law. Judge Carey explained that these requirements clearly cannot be satisfied by compliance by one or more—but fewer than all—debtors proposing a joint plan.
Judge Carey acknowledged that “large, complex multiple-debtor chapter 11 proceedings are often jointly administered for the convenience of the parties and the court,” but that convenience “is not sufficient reason to disturb the rights of impaired classes of creditors of a debtor not meeting confirmation standards.”21 In light of objections to a proposed per plan scheme, Judge Carey leaves two alternatives for debtors in a jointly administered case: (i) remove the debtors that cannot satisfy section 1129(a)(10) or (ii) substantively consolidate the debtors.
Since Judge Carey‟s decision holds that each debtor reorganizing under a multi-debtor joint plan must satisfy section 1129(a)(10) unless substantively consolidated, it is likely that more creditors will object to multiple-debtor joint plans that attempt to satisfy section 1129(a)(10) with a per plan scheme. It remains to be seen, however, whether Judge Carey‟s analysis and conclusion will be adopted by other bankruptcy courts, including those within the Southern District of New York, where In re Charter Communications was decided. Ultimately, the resolution of this important issue probably will be left to the appellate courts.