A modification of a Chapter 11 bankruptcy plan on the eve of the hearing on confirmation of that plan requires re-solicitation of votes and re-voting if the modification materially and adversely affects a class of claims or interests, i.e., equity holders, according to the Eleventh Circuit’s opinion in In re America-CV Station Group, Inc., 56 F.4th 1302 (11th Cir. Jan. 5, 2023). The court reversed the bankruptcy court’s order confirming the plan, which had been affirmed by the district court on the first level of appeal.

The case arose from the Chapter 11 bankruptcies of Caribevision Holdings, Inc. and affiliates, which owned and operated a set of Spanish-language television networks. The proposed reorganization plans were so-called “new value” plans that provided for the extinguishment of the existing equity in the holding companies and the issuance of new equity in exchange for a $500,000 capital contribution and execution of a line of credit by the new equity holders. The shares of new equity were allocated to existing equity holders based on the proportion of the new equity holders’ respective capital contributions.

The problem arose when one of the equity holders, who was the CEO and authorized to make decisions on behalf of the debtors, decided to make the entire capital contribution himself and filed an emergency motion to modify the plans to grant him all the equity in the reorganized companies. The other equity holders were apparently slow to become aware of this development and did not attend the confirmation hearing. The bankruptcy court approved the modifications and did not require a new disclosure statement be approved or that votes be re-solicited. Because the equity holders’ existing interests were to be extinguished under the plans, the bankruptcy court construed section 1126(g) of the Bankruptcy Code to deem them to have rejected the plans. The bankruptcy court then proceeded to confirm the modified plans, by a so-called cramdown, over the deemed dissents of the class of interest holders. Once they realized what happened, the other equity holders moved for reconsideration, but the bankruptcy court denied that motion. The district court affirmed.

The Eleventh Circuit began its analysis by observing that even pre-confirmation modifications of a Chapter 11 plan are subject to some constraints, including the substantive requirement that the modified plan comply with the Bankruptcy Code’s confirmation requirements. The court focused on one such requirement, section 1123(a)(4) of the Code, which requires that a plan “provide the same treatment for each claim or interest of a particular class.”

The court also pointed out that modification must comply procedurally with section 1125’s requirement that claim and interest holders be given “adequate information” about the contents of the plan in a disclosure statement approved by the court. If a plan modification materially and adversely changes the way that a claim or interest is treated, then the debtor must provide a new disclosure statement and call for another round of voting.

Here, the ousted equity holders would have had majority control of the equity in the reorganized entities. The court viewed the original plans as giving them the exclusive opportunity to obtain the controlling position and concluded that “[t]he sole purpose of the modification was to strip them of this equity.” Even if they rejected the plan or were deemed to do so, they still were entitled to additional disclosure and voting because the treatment of their interest was materially and adversely affected by the modification.

On the deemed rejection, the court went on to hold that the bankruptcy court erred in deeming the equity holders to have rejected the plans. Rather than providing solely for extinguishment of their old equity interests, the unmodified plans also granted them an exclusive opportunity to acquire equity in the reorganized entities. This meant that section 1126(g), the foundation for the bankruptcy court’s opinion, did not apply.

The court also pointed out that bankruptcy courts have an independent duty, even in the absence of an objection, to ensure that plan confirmation requirements are met with respect to dissenting classes of creditors before ordering a cramdown confirmation.

The court concluded with consideration of the remedy. Consummation of the plan was not stayed pending appeal, and thus a question of equitable mootness was presented. The district court denied the motion to dismiss the appeal as moot, stating that it was still possible to fashion effective judicial relief. The Eleventh Circuit assumed that possibility still existed, but decided to leave “the exact contours of that relief to the bankruptcy court in the first instance.”

A remarkable aspect of this controversy is that what appears to be an obviously problematic switcheroo by one of the debtors’ controlling shareholders was approved by the bankruptcy court and affirmed by the district court. Sometimes the “reorganization express” needs an emergency brake, and it took the circuit court to reach for it here.