Case Type:
Case Status:
21-1123 (9th Circuit, Jul 12,2022) Not Published
Affirming the U.S. Bankruptcy Court for the Central District of California (BC), the Bankruptcy Appellate Panel of the Ninth Circuit (BAP) discerned no abuse of discretion or err in its confirmation of the chapter 11 plan (Plan) of three debtors (DRs) (and underlying rulings) without allowing participants in the DRs'' Employee Stock Ownership Plan and Trust (ESOP) to either direct the ESOP trustee's vote or vote as unsecured creditors, appellants having attacked this decision as barred by ERIA, the ESOP document, and AZ law, and the plan as tainted by conflict and full of verboten provisions.
Procedural context:
The former employees and individual participants in the CPES ESOP (the ESOP Participants) were the appellants, while the appellees were Oxford Restructuring Advisors, LLC, the liquidating trustee of the CPES Liquidating Trust (Liquidating Trustee), which was created pursuant to the chapter 11 plan, and the DRs themselves. After a substantial sale of all their assets had been approved and consummated with nary an appeal, the DRs filed the Plan, purely a liquidating one, as well as an accompanying disclosure statement, both of which were subsequently amended. The Plan, as amended, proposed a 100% payout to general unsecured creditors, with interest, to be overseen by a liquidating trustee appointed by the bankruptcy court under § 1123(b)(3)(B). The three DRs were to be dissolved. The liquidation analysis in the amended disclosure statement estimated that $8.4 million would be available for distribution to the ESOP Trust after payment of allowed claims, compared to $8 million in a chapter 7 liquidation. The Plan provided that any ESOP Participant wishing to vote on it would need to hold a claim in Class 3 (general unsecured creditors) that is “separate and apart from” a direct ESOP claim and that any direct ESOP claims would be asserted by the ESOP Trustee on behalf of all holders of beneficial interests in the ESOP. Separately, the ESOP Participants were classified as Class 6 equity interests. Finally, per the Plan, “[t]he ESOP Trustee, on behalf of the ESOP Trust, the sole Holder of Class 6 Equity Interests, [wa]s entitled to vote to accept or reject the Plan.” As typical, the motion to approve the disclosure statement included a request to establish procedures for solicitation and tabulation of votes. A flurry of motions and arguments ensued. First, Appellants moved to appoint a chapter 11 trustee or convert the case to chapter 7; the BC denied this request. Second, Appellants moved for temporary allowance of individual ESOP Participants’ claims or an order estimating those claims for purposes of voting on the Plan; the BC denied this motion as well. Third, Appellants objected to confirmation of the Plan, asserting that the Plan violated their voting rights and their right to bring claims for breaches of ERISA fiduciary duties, contained verboten release and exculpation provisions, and was unconfirmable because it provided for a discharge of the DRs and because it violated the best interests of creditors test. Relatedly, Appellants filed Appellants tendered a response to the DRs’ confirmation memorandum and an objection to the proposed findings of fact and conclusions of law regarding plan confirmation. The BC overruled the objections and thus confirmed the Plan. The Appellants timely appealed, teeing up four issues for the BAP’s attention: should the appeal be dismissed? Did the BC err in denying the motion to appoint a trustee or convert the case? Did the BC err in denying the motion for temporary allowance? And did the BC abuse its discretion in confirming the Plan?
Prepetition, the DRs offered behavioral health services via day treatment centers and programs in California and Arizona. Of the three, two—NDS Liquidating, Inc., fka Novelles Developmental Services, Inc. (Novelles), and CPESCA Liquidating, Inc., fka CPES California, Inc. (CPESCA)—were owned by a third: CPESAZ Liquidating, Inc. fka Community Provider of Enrichment Services, Inc. (CPESAZ). CPESAZ and Novelles filed their chapter 11 petitions; CPESCA filed its own in August 2020. The three cases were jointly administered, CPESAZ designated as the lead, and no creditors’ committee was ever appointed. As of the petition date, all shares of CPESAZ capital stock were held by the Community Provider of Enrichment Services, Inc. (CPES) ESOP. In November 2020, the BC approved the sale of substantially all of the DRs’ assets. No appeal followed, and the sale was consummated by the time of the instant appeal.
William J. Lafferty III; Scott H. Gan; and Laura S. Taylor

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