- Slip Op., Docket No. 13-3354 (3rd Cir., June 23, 2014)
- Third Circuit affirmed district court and bankruptcy court on decisions confirming plan of reorganization.
- Procedural context:
- Former shareholders of debtor company who had entered into an intercreditor agreement with debtor's secured lender at the time their shares were redeemed, objected to debtor's plan confirmation on grounds that their claims were improperly classified and that they were eligible to vote under the plan as an impaired class. Bankruptcy court ruled that the classification was proper, but that the shareholders' claim was impaired and eligible to vote. However, under the plain terms of the intercreditor agreement, the secured lender was entitled to vote the former shareholders' claim. Since the secured lender indicated that it would vote that claim in favor of the plan, the Bankruptcy Court confirmed the plan. The District Court affirmed and so did the Third Circuit.
- In 2008, Coastal Broadcasting Systems, Inc. (the "Debtor") was owned and operated by seven shareholders. In December 2008, as part of a reorganization of the company, the Debtor redeemed the shares of six of the seven shareholders. Edwin Rosenfeld and Wilbur Huf, Jr. (collectively, the "Objectors"), two of those six shareholders, redeemed their shares in exchange for promissory notes totaling approximately $1.7 million. The restructuring included refinancing with the Debtor's secured creditor, Sturdy Savings Bank ("Sturdy"), wherein Sturdy provided loans to the Debtor. As part of the reorganization, the former shareholders and Sturdy signed a Subordination and Intercreditor Agreement (the "Agreement"). Pursuant to the terms of the Agreement, the Objectors' promissory notes were subordinated to Sturdy's seniro debt. The Agreement further provided that, although the Objectors' held subordinated debt, they would continue to receive payments from the Debtor and accelerate the notes if the Debtor fell behind in payments. Other key provisions in the Agreement provided that, in the event of a bankruptcy of the Debtor, the Objectors' rights to payment and voting were assigned to Sturdy. The Debtor had difficulty making payments on the Objectors' notes, who declared a default and filed suit in Superior Court in New Jersey. In early 2011, the Debtor filed a Chapter 11 petition. As part of its bankruptcy case, the Debtor filed a plan that included five different classes. Sturdy was classified alone in Clase I as a secured creditor owed over $1.2 million. The Objectors and the other former shareholders were placed in Class IV. All other general unsecured creditors were placed in Class III. The disclosure statement provided that Class III would share pro rata in a distribution of $100,000 but that Class IV would receive nothing pursuant to the Agreement. The plan also noted that the Debtor's assets were worth less than the debt owed to Sturdy and, consequently, in a liquidation, the unsecured creditors would receive nothing. The Objectors objected to the plan on the following grounds: 1) their claims were impaired, entitling them to vote and 2) they were improperly classified from other unsecured creditors, and 3) the plan was not feasible. The Debtor filed a certification of balloting indicating that Class III, the only class the Debtor considered impaired, had voted in favor of the plan. At the confirmation hearing, the Bankruptcy Court inquired whether Sturdy was entitled to vote the Objectors' claims if the court found them to be impaired and, if so, whether Sturdy would vote in favor of the plan. Sturdy stated that it would do so. Following the confirmation hearing, the Bankruptcy Court asked the parties to brief whether Sturdy was entitled to vote on behalf of the Objectors pursuant to the Agreement. The Objectors argued that the voting rights were not assigned in the event of a reorganization. The Bankrutpcy Court ruled that the Objectors' claims were properly classified, but they were impaired. Nevertheless, the Bankruptcy Court determined that the Agreement unambiguously entitled Sturdy to vote the Objectors' claim, and because Sturdy represented that it would vote in favor of the plan, Sturdy could be deemed to have voted for confirmation. As a result, the Bankruptcy Court confirmed the plan. On appeal, the Objectors raised the same arguments and added two new ones: (a) the Agreement violated the Bankruptcy Code in allowing Sturdy to vote the Objectors' claims and (b) Sturdy could not be deemed to have voted for the plan under Section 1126(g). The District Court affirmed the decision of the Bankruptcy Court, and also ruled that the new arguments had been waived by not having raised before the Bankruptcy Court. The Third Circuit also ruled that the two new arguments first raised at the District Court level had been waived. In addition, the Third Circuit ruled that the Agreement plainly allowed Sturdy to vote on a plan of reorganization, rejecting the contention that the assignment was only effective upon a liquidation. As for classification, the Third Circuit adopted the reasoning of the District Court in noting that Section 1122(a) allows for grouping of similar claims in different classes if the classification is reasonable. Given that the Objectors' claims were uniquely subject to the Agreement, their classification in a separate class was not unreasonable. In addition, because Sturdy was allowed to vote the claims, any error in the classification was harmless. Finally, the Third Circuit adopted the determinations of the Bankruptcy Court and the District Court that the plan was feasible. The Third Circuit noted that the standard of review of such a determination is clear error. The Objectors' only argument in support ot this objection was that because the Debtor had a low monthly profit margin, the plan was not feasible. The Bankruptcy Court, however, determined that that the income was sufficeint, and the Objectors did not provide any compelling reason to believe the determination was clearly erroneous. As a result, the ruling on feasibility was also affirmed.
- Ambro, Greenberg and Barry
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