In Subchapter V, a Class with No Votes Isn’t Counted (and a flute with no holes is not a flute)

November 17, 2023

Two bankruptcy judges in Houston agree: In confirming a chapter 11 plan in Subchapter V, a non-voting, impaired creditor class will not be counted in deciding whether the debtor has satisfied Section 1129(a)(8), which requires that every class of creditors under a plan must be unimpaired or must have accepted the plan. If the non-voting class is deemed to have voted against the plan, the debtor must satisfy the so-called cramdown requirements.

Holding that non-voting classes are disregarded in deciding whether all classes have accepted a plan, Bankruptcy Judge Eduardo V. Rodriguez agreed with former Bankruptcy Judge David R. Jones in In re Franco’s Paving LLC, 654 B.R. 107 (Bankr. S.D. Tex. Oct. 4, 2023).

The Non-Voting Class

In the case before Judge Rodriguez, the Subchapter V plan had three classes: (1) a secured class with one creditor; (2) a class of unsecured creditors; and (3) a class for the secured claim of the Internal Revenue Service. The IRS did not vote, but creditors in the other two classes voted in favor of confirmation.

Anticipating that a class might not vote, the debtor’s plan said in bold letters that a non-voting class would be assumed to have accepted the plan.

Raising the only objection to confirmation, the U.S. Trustee contended that the non-voting IRS class should be counted as having voted against the plan, compelling the debtor to satisfy the requirements for confirming a cramdown plan in Sections 1129(b) and 1191(b).

In his November 7 opinion, Judge Rodriguez held that the non-voting class could not be deemed to have accepted the plan, but he ruled that non-voting classes are not considered in deciding whether the class voted for or against the plan.

No Deemed Acceptance

Judge Rodriguez “quickly” rejected the idea that a non-voting class is deemed to have accepted the plan.  He found “no authority” for the proposition that Bankruptcy Rule 3018(c) is inapplicable in Subchapter V cases.

Titled “Form of Acceptance or Rejection,” the rule provides that an “acceptance or rejection shall be in writing, identify the plan or plans accepted or rejected, be signed by the creditor or equity security holder or an authorized agent, and conform to the appropriate Official Form.” The rule allows a creditor to vote for or against more than one plan and to rank competing plans in order of preference.

Judge Rodriguez found no merit in the debtor’s argument that Rule 3018(c) is inapplicable in Subchapter V, because “the rule merely provides that an acceptance or rejection may be filed for each plan transmitted.”

Next, Judge Rodriguez held “that Bankruptcy Rule 3018(c) precludes the use of plan language to deem non-voting creditors as having accepted the plan.”

To rule that the plan provision was invalid, Judge Rodriguez relied on his prior decision in In re Bressler, 20-31024, 2021 WL 126184 (Bankr. S.D. Tex. Jan. 13, 2021), where he held that failure to cast a written vote constitutes neither acceptance nor rejection of a plan.

Non-Voting Isn’t Implicit Acceptance

The debtor believed that a non-voting class implicitly accepted the plan.  Judge Rodriguez disagreed, citing Section 1129(a)(8).  One of the requisites for confirmation, the subsection provides that each class must be unimpaired or must have accepted the plan.

Judge Rodriguez held that the “attempt to treat a non-voting class as having implicitly accepted the plan similarly also contravenes” Bressler.

The Treatment of Non-Voting Classes

Judge Rodriguez found “significant disagreement” about the treatment of non-voting classes. Some courts view non-voting as acceptance; others see non-voting as rejection, and others don’t count non-voting classes.

In In re Ruti-Sweetwater, Inc., 36 F.2d 1263 (10th Cir. 1988), the Tenth Circuit held that a non-voting but impaired class is deemed to have accepted.  The Denver-based appeals court noted how the former Bankruptcy Act treated a non-voting class as rejecting, but a similar provision was omitted from the Bankruptcy Code in 1978.

Although “some courts” have adopted Ruti-Sweetwater, Judge Rodriguez said that “most agree that a nonvote cannot be construed as an implicit acceptance.” Like them, he held “that a nonvoting creditor class cannot be deemed to have implicitly accepted the plan.”

Non-Voting Isn’t Rejection

Courts rejecting Ruti-Sweetwater unanimously hold that the debtor must confirm by cramdown, Judge Rodriguez said. “[W]ithout providing critical analysis,” he said that those courts equate non-voting with rejection.

“This court disagrees,” Judge Rodriguez said, because acceptances and rejections must both satisfy the formality requirements in Rule 3018(c). He therefore dismissed the notion that a non-voting class rejects a plan.

Ignoring a Non-Voting Class

Judge Rodriguez followed the opinion of former Bankruptcy Judge David Jones in Franco’ssupra, by holding that “a nonvoting class should not be counted for purposes of § 1126 and plan confirmation.” He said that the “mathematical calculation required by § 1126(c) requires that the number of accepting votes be divided by total votes cast in a class.”

When the numerator and denominator are both zero, the result would be “an unsolvable and undefined quotient,” yielding a computation that “is absurd, unsolvable, and was not contemplated by Congress,” Judge Rodriguez said.

Judge Rodriguez found himself left with “only one option: when an impaired class of creditors fails to cast a ballot, that class will not be counted for purposes of whether § 1129(a)(8) is satisfied.” He found policy grounds for disregarding a non-voting class.

Requiring cramdown, Judge Rodriguez said, would force debtors and creditors “to shoulder the additional administrative burdens and expenses associated with cramdown merely because a creditor class was negligent or apathetic about asserting their rights.” Invoking cramdown, he said, would “defeat[] the overarching policy preferences of Subchapter V.”

Overruling the U.S. Trustee’s objection, Judge Rodriguez disregarded the non-voting IRS class and confirmed the plan because the two voting classes had accepted the plan.

Leave a Comment

Your email address will not be published. Required fields are marked *