Recent caselaw demonstrates that there is a current judicial disagreement over whether the Bankruptcy Code will permit a cramdown in a jointly-administered bankruptcy case when a consenting class exists for only one of the debtors. This implicates the important issue of de facto substantive consolidation and the potential risks it poses to unsecured creditors.
Section 1129(a)(10) of the Bankruptcy Code allows a cramdown only if “at least one class of claims that is impaired under the plan has accepted the plan.” 11 U.S.C. § 1129(a)(10). A scenario involving a jointly-administered plan with multiple debtors confronts courts with the question of how this section should be construed. Should the cramdown calculus require the approval of an impaired creditor for every debtor involved, or is the approval of one impaired creditor sufficient as to all debtors? Two seminal cases to date have considered this issue, and their diametrically-opposed conclusions suggest that the issue remains a live one in complex, multi-debtor bankruptcies. The related doctrine of substantive consolidation may be the key to ensuring that fairness is achieved in a multi-debtor bankruptcy, regardless of how § 1129(a)(10) is construed.
In Tribune, the Bankruptcy Court for the District of Delaware interpreted § 1129(a)(10) to require the approval of an impaired creditor for every debtor involved in a multi-debtor bankruptcy. It characterized this interpretation as the “per debtor” approach. Faced with a disagreement between proponents of two competing plans about how votes should be calculated, the court noted that “[t]here exists little decisional authority on whether § 1129(a)(10) is to be applied ‘per debtor’ or ‘per plan.’” In construing the statute, the court looked to the “plain meaning” of the text and relied on § 102(7), which establishes that the singular includes the plural. Thus, the term “plan” in § 1129(a)(10) could be understood to refer to multiple plans in a jointly administered case where the debtors retained their separate entity status. Indeed, the court noted the importance of maintaining the distinction between entities in cases where substantive consolidation has not been approved: “[i]n the absence of substantive consolidation, entity separateness is fundamental.” The court found that the notion that separate debtors should be treated separately comports with the overall structure of § 1129, which protects the rights of impaired unsecured creditors. The convenience of joint administration in “large, complex, multiple-debtor chapter 11 proceedings,” held the court, does not justify eliding the fundamental creditor protections written into the Code. Thus, it concluded that there is “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.”
A recent decision of the Ninth Circuit espouses the opposite approach. In Transwest, the majority adopted the “per plan” approach, requiring approval of only one impaired creditor for the plan involved in a multi-debtor proceeding. The court opined that “the plain language of the statute supports the ‘per plan’ approach,” noting that § 1129(a)(10) does not “distinguish between single-debtor and multi-debtor plans.” Had Congress intended to draw such a distinction and impose an additional approval requirement for multi-debtor bankruptcies, the court deemed it could have done so. The court sharply distinguished Tribune on the grounds that § 102(7) does not alter the meaning of § 1129(a)(10): “[s]ection 102(7) effectively amends section 1129(a)(10) to read: ‘at least one class of claims that is impaired under the plans has accepted the plans.’” This phrasing, according to the Transwest court, still allows for per plan cramdown. Further, the court held that none of the other subparts of § 1129(a) require a “per debtor” approach, and that even if they did, the court was unconvinced by the argument that that would be dispositive of the correct reading of § 1129(a)(10). The court concluded by observing that the creditor advocating for the per debtor calculation had also argued that the plan being jointly administered was improperly functioning as a substantively consolidated plan. This objection was waived, however, because the creditor had failed to raise it before the bankruptcy court.
The fact that both the Tribune and the Transwest courts characterize their interpretations of § 1129(a)(10) as predicated on the “plain language” of the text, and yet reach opposite conclusions, would seem to indicate that the section is far from unambiguous.
Though Judge Friedland in Transwest agreed with the majority that the per plan approach was preferable, she noted in a concurrence that “any unfairness” in the case “resulted not from the interpretation of § 1129 that Lender challenged in this appeal, but instead from the fact that this particular reorganization treated the five Debtor entities as if they had been substantively consolidated” when they had not. She agreed with the majority that the appellate court could not reach the issue because it had not been raised before the bankruptcy court. “Joint administration is,” in Judge Friedland’s opinion, “a tool of convenience,” whereas substantive consolidation affects substantive rights. In Transwest, she agreed with the objecting creditor that though the debtor’s “respective bankruptcy estates may technically have remained separate,” they were treated under the plan “as a single entity.” Unfairness resulted, she contended, because the plan operated as a de facto substantive consolidation without any evaluation by the court of whether substantive consolidation was appropriate. Had the parties raised the issue, it “might have alleviated concerns about whether consolidation of the proceedings was in fact unfair.” Overall, Judge Friedland voiced “concerns that entangling various estates in a complex, multi-debtor reorganization diminishes the protections afforded to creditors by the Bankruptcy Code.”
Few other courts have considered this issue of cramdown in multi-debtor cases. At a minimum, the Transwest case illustrates the importance to creditors of ensuring that they raise and preserve the related issue of inappropriate substantive consolidation when confronting this issue in the future. If they do so, it is unclear whether the per plan approach will remain viable.