Judges Kevin Carey and Mary Walrath of the United States Bankruptcy Court for the District of Delaware issued opinions in In re Tribune Co.1 and In re JER/Jameson Mezz Borrower II, LLC2, respectively, that shake up the landscape for restructuring real estate investments with multiple layers of debt. The crux of the issue that was addressed in Tribune — and later affirmed in JER — was whether, absent substantive consolidation3, a plan of reorganization for jointly-administered debtors must have an impaired consenting class of creditors for each debtor, or whether a single impaired consenting class under a joint plan satisfies section 1129(a)(10) of Chapter 11 of Title 11 of the United States Code, 11 U.S.C. § 101 et seq. (the Bankruptcy Code).
In other words, whether the voting requirements under section 1129 of the Bankruptcy Code should be treated on a “per plan” or “per debtor” basis, an issue on which little decisional authority exists. Tribune, as later supported by JER, held that the strictures of section 1129(a)(10) of the Bankruptcy Code require that joint plans in multi-debtor cases (absent substantive consolidation) must be accepted by an impaired consenting class on a per debtor basis and not on a per plan basis. That is, each jointly administered debtor entity must have their own impaired consenting class of creditors to satisfy section 1129(a)(10) of the Bankruptcy Code.
Tribune’s holding raises several challenges for complex reorganizations with multiple layers of debt — particularly in the real estate context5 — where corporate structures are designed to have multiple, bankruptcy-remote entities6 holding multiple tranches of debt, with a single creditor per debtor, thereby making it extremely difficult, if not impossible (under the Tribune “per debtor” standard), to cram down a plan of reorganization on that lone creditor class.
This Client Alert provides a brief discussion of the Tribune and JER opinions; and the potential implications of these opinions on real estate restructurings including the availability of “cramdown7” under section 1129(b) of the Bankruptcy Code.
In Tribune, Judge Carey issued a 126-page opinion denying confirmation of two competing plans of reorganization because, among other things, the plans did not satisfy section 1129(a)(10) of the Bankruptcy Code. Under one of the plans, only two of 111 debtors had an impaired consenting class and under an alternative plan, only 72 of 111 debtors had an impaired consenting class. Judge Carey’s ruling, relying largely on statutory interpretation, highlights that section 1129(a)(10), in the absence of substantive consolidation, must be satisfied on a per debtor basis and not on a per plan basis. The practical outcome of this conclusion is that section 1129(a)(10) required each of the 111 debtors to have an impaired consenting class and that, absent substantive consolidation, having only one impaired class from any (rather than each) debtor under a jointly administered plan will not satisfy section 1129(a)(10) of the Bankruptcy Code.
JER is a case with different facts than Tribune but nonetheless affirms Tribune’s section 1129, per-debtor analysis. JER/Jameson Mezz Borrower II LLC (Mezz II) filed for chapter 11 protection on the eve of its sole creditor’s (Colony) planned UCC auction of its sole asset, the membership interest in its subsidiary, who itself was the borrower under a structurally senior mezzanine loan. Colony sought to, among other things, dismiss Mezz II’s bankruptcy case for bad faith as a litigation tactic to forestall the auction, and claimed that Mezz II had no rehabilitation prospects as a going concern because the entity had no active operations or direct employees. Relying on Tribune, Judge Walrath dismissed the case and agreed that there was no realistic chance of reorganization because, among other things, no plan could be confirmed absent Colony’s consent8. Absent substantive consolidation with its other debtor affiliates, Mezz II would need at least one impaired consenting class to confirm a plan, however, because Colony was the sole creditor entitled to vote on the plan, no such other impaired consenting creditor existed9.
Real Estate Restructuring Implications
Although at this juncture it is unclear whether other jurisdictions will adopt the “per debtor” analysis utilized in Tribune and JER, these decisions raise many issues for real estate companies evaluating restructuring considerations10. Notably, real estate companies are often structured with the use of many bankruptcy-remote (special purpose) entities that have no active operations or employees and a sole asset securing indebtedness from a single creditor. Under Tribune and JER, entities in such structures would not be able to satisfy the cramdown requirements of the Bankruptcy Code absent substantive consolidation. Furthermore, emboldened by the precedent set by Tribune and JER, creditors may object more often to debtor plans that incorporate a “per plan” impaired consenting class scheme. These constraints may cause real estate companies to re-evaluate which debtors they place into bankruptcy or alternatively, seek substantive consolidation.
In addition, joint plans of reorganization are traditionally utilized for the convenience of the parties and the court. As the Tribune court notes, however, while joint plans may propose a single distribution scheme, in which sources of plan funding and distribution are designed without regard to where assets are found or where liabilities lie, typically, those distribution schemes are reached after consensus is reached between the various stakeholders (or the lack of an objection). But, as Tribune and JER highlight, convenience alone is not sufficient reason to disturb the rights of impaired classes of creditors of a debtor not meeting the confirmation standards of section 1129 of the Bankruptcy Code. In other words, in real estate restructurings with multiple layers of debt, parties may need to focus on consensus far earlier and far more aggressively than before Tribune and JER.
Ultimately, Tribune and JER raise interesting and novel issues for companies with complex capital structures where, absent substantive consolidation, corporate separateness will be enforced throughout the bankruptcy case. In such cases, plan proponents will need to develop a new methodology for obtaining the requisite impaired consenting class vote on a “per debtor” basis.