Eleventh Circuit Establishes Bright-Line Rule on Additional Disclosure and Re-Solicitation of Votes for Modified Chapter 11 Plan
A chapter 11 plan may be modified after votes have been solicited on the plan, but prior to confirmation, without providing creditors and interest holders with an amended disclosure statement and another opportunity to vote on the modified plan, provided, among other things, that the modifications do not adversely affect creditors or interest holders who previously voted to accept the plan. However, the Bankruptcy Code is less clear regarding the need for additional disclosure and re-solicitation of votes from creditors or interest holders who did not vote on the plan or who were deemed to have rejected it because they received or retained nothing under the plan.
The U.S. Court of Appeals for the Eleventh Circuit recently addressed this question in Braun v. America-CV Station Group Inc. (In re America-CV Station Group Inc.), 56 F.4th 1302 (11th Cir. 2023), petition for reh'g filed, No. 21-13774 (11th Cir. Jan. 27, 2023), motion to stay mandate pending petition for cert., No. 21-13774 (11th Cir. Feb. 28, 2023). The court established a bright-line rule requiring that, if a proposed post-voting, pre-confirmation modification of a chapter 11 plan materially and adversely affects a class of creditors or shareholders compared to their treatment in a prior plan, the plan proponent must provide the affected class with an amended disclosure statement and another opportunity to vote on the plan as modified. Applying this rule, the Eleventh Circuit reversed lower court rulings depriving a shareholder class of additional disclosure and the right to vote on plan modifications that stripped some, but not all, class members of the right under a previous plan to receive new equity in exchange for a capital contribution and exit financing.
Modification of a Chapter 11 Plan Prior to Confirmation
Section 1127(a) of the Bankruptcy Code provides that the proponent of a chapter 11 plan on which votes have been solicited from creditors or interest holders "may modify such plan at any time before confirmation," unless the proposed modification violates the Bankruptcy Code's requirements regarding the classification of claims and interests or the contents of a plan. 11 U.S.C. § 1127(a).
Under section 1127(d) of the Bankruptcy Code, a creditor or interest holder who accepts or rejects a chapter 11 plan prior to its modification is deemed to accept or reject, "as the case may be, such plan as modified, unless, within the time fixed by the court, such holder changes such holder's previous acceptance or rejection."
Rule 3019(a) of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") provides that, in a chapter 11 case, the plan proponent may file with the court a modification of a chapter 11 plan after it has been accepted but prior to confirmation. It further states that:
If the court finds after hearing on notice to the trustee, any committee appointed under the Code, and any other entity designated by the court that the proposed modification does not adversely change the treatment of the claim of any creditor or the interest of any equity security holder who has not accepted in writing the modification, it shall be deemed accepted by all creditors and equity security holders who have previously accepted the plan.
Fed. R. Bankr. P. 3019(a) (emphasis added).
Solicitation of Votes on a Chapter 11 Plan
Generally, holders of allowed claims and interests have the right to vote to accept or reject a chapter 11 plan. See 11 U.S.C. § 1126(a). A class of claims accepts a plan if creditors (other than creditors whose votes are disallowed under section 1126(e)) holding at least two-thirds in amount and more than one-half in number of the allowed claims voting in the class (again, not counting disallowed claims) vote in favor of the plan. See 11 U.S.C. § 1126(c). For a class of equity interests to accept a plan, the holders of at least two-thirds of the interests voting must vote to accept it. See 11 U.S.C. § 1126(d). Creditors or interest holders whose claims or interests are not "impaired" under the plan (as defined in 11 U.S.C. § 1124), however, are conclusively deemed to accept the plan, "and solicitation of acceptances with respect to such class from the holders of claims or interests of such class is not required." See 11 U.S.C. § 1126(f). Creditors and interest holders that would receive or retain nothing under the plan are deemed to reject it. See 11 U.S.C. § 1126(g).
Section 1125(b) of the Bankruptcy Code provides that votes in favor of a chapter 11 plan can be solicited postpetition only after creditors and interest holders receive a court-approved disclosure document containing "adequate information," a concept defined in section 1125(a). See 11 U.S.C. § 1125; Fed. R. Bankr. P. 3016(b). This provision is "designed to 'discourage the undesirable practice of soliciting acceptance or rejection at a time when creditors and stockholders were too ill-informed to act capably in their own interests.'" In re Heritage Org., LLC, 376 B.R. 783, 794 (Bankr. N.D. Tex. 2007) (quoting In re Clamp-All Corp., 233 B.R. 198, 208 (Bankr. D. Mass. 1999)).
Caribevision Holdings, Inc. ("CHI") and Caribevision TV Network, LLC ("CTV") are holding companies for Spanish-language television networks in Florida, New York, and Puerto Rico. In May 2019, CHI, CTV, and two of their operating affiliates (collectively, the "debtors") filed for chapter 11 protection in the Southern District of Florida. At the time of the filing, the debtors' president and CEO was Carlos Vasallo.
The debtors proposed separate chapter 11 plans for each of the debtors. Under the CHI and CTV plans, the shareholders of CHI and CTV—Ramon Diez-Barroso ("Diez-Barroso"); the Vasallo TV Group ("Vasallo TV"), which was owned by CEO Carlos Vasallo; Pegaso Television Corp. ("Pegaso"); and Emilio Braun ("Braun")—would receive new equity interests in the reorganized companies in exchange for a $500,000 capital contribution and a commitment to provide $1.6 million in exit financing. The new shares were to be allocated in proportion to each shareholder's capital contribution or loan commitment under the plan—50.1% to Diez-Barroso, 34.2% to Vasallo TV, 11.9% to Pegaso, and 3.8% to Braun.
The CHI and CTV plans provided that the $500,000 equity infusion and the commitment to provide the exit financing had to be made no later than the effective date of the plans for feasibility purposes. The existing equity interests of the shareholders were to be canceled under the chapter 11 plans and were classified together in Class 3. The plans identified Class 3 as impaired and provided that the Class 3 members were entitled to vote on the plans.
On April 13, 2020, the bankruptcy court approved an amended disclosure statement for the proposed plans, authorized the solicitation of votes and scheduled a plan confirmation hearing for May 28, 2020.
Two weeks before the confirmation hearing (the date of which was also the deadline for casting ballots), CHI and CTV, controlled by Carlos Vasallo, informed the Class 3 shareholders that the capital contribution and exit financing commitment had to be received three days prior to the scheduled confirmation hearing—May 25, 2020—rather than the plans' effective date.
Class 3 shareholders Braun, Diez-Barroso, and Pegaso (collectively, the "appellants") timely executed a form credit agreement for the exit financing. However, although they initiated a wire transfer of their portions of the $500,000 capital contribution on May 22, 2020, that wire transfer was not received by CHI and CTV until May 26, 2020, because May 25 was a federal bank holiday. Moreover, the appellants deposited the wire transfer into the wrong account, after which they initiated a new wire transfer that CHI and CTV received on May 27, 2020.
Given the delay, Vasallo TV (at Carlos Vasallo's direction) took this opportunity to pay the entire $500,000 capital contribution and committed to provide the exit financing itself prior to May 25, 2020.
On May 26, 2020, CHI and CTV filed an emergency motion to make "non-material modifications" to their chapter 11 plans to provide that, because Vasallo TV paid the entire capital contribution, the new equity interests would be distributed only to Vasallo TV. The debtors did not serve the motion on the appellants. However, the appellants did receive notice of the confirmation hearing and, at some point prior to the confirmation hearing, became aware that the modification motion had been filed. During the hours prior to the confirmation hearing, the debtors and the appellants exchanged emails in which the debtors assured the appellants that the debtors would "try to resolve the situation."
The appellants did not cast votes on the plans, nor did they appear at the confirmation hearing. Vasallo TV also did not cast a ballot. All creditor classes entitled to vote on the CHI and CTV plans accepted the plans. Despite having received the appellants' capital contributions prior to the confirmation hearing, CHI and CTV decided to proceed with the motion to modify the plans.
The bankruptcy court granted the requested modifications and confirmed the plans, finding that, because the existing equity was extinguished under the CHI and CTV chapter 11 plans, Class 3 was deemed to reject the plans under section 1126(g) of the Bankruptcy Code. The court did not require an amended disclosure statement or the re-solicitation of votes on the plans.
The appellants filed a motion for reconsideration, asking the bankruptcy court to reconsider the confirmation order and the order approving the emergency motion to modify the CHI and CTV plans. The appellants argued that: (i) they had timely transferred their required capital contributions in accordance with the terms of the plans; (ii) they should have received formal disclosure of the debtors' requested plan modifications; and (iii) the equity in the reorganized debtors issued under the plans should be reallocated according to the percentages set forth in the unmodified plans.
Before the court ruled on the motion for reconsideration, the debtors filed a notice of the occurrence of the plans' effective date. The next day, the appellants moved to strike or equitably toll the notice, but the bankruptcy court denied the appellants' motions, stating:
[T]he Court believes the issue is not whether the modifications to the Plans were material and adverse to the holders of the old pre-petition equity interests under the [CHI plan and the CTV plan], as those equity classes were already impaired under the Plans, prior to any modifications, and were already deemed to have rejected such Plans pursuant to 11 U.S.C. § 1126(g). Therefore, the [appellants] did not have a voting right under the [CHI plan or the CTV plan], and therefore no voting rights were taken away as a result of the Motion to Modify.
In re America-CV Station Grp., Inc., No. 19-16355-BKC-AJC (Bankr. S.D. Fla. July 16, 2020) p. 12 (Docket No. 309), aff'd, 2021 WL 5095965 (S.D. Fla. Sep. 30, 2021), rev'd and remanded, 56 F.4th 1302 (11th Cir. 2023), petition for reh'g filed, No. 21-13774 (11th Cir. Jan. 27, 2023), motion to stay mandate pending petition for cert., No. 21-13774 (11th Cir. Feb. 28, 2023).
The bankruptcy court also concluded that, because the plans provided that the appellants' equity interests in the debtors were extinguished, the appellants were deemed to have rejected the CHI and CTV chapter 11 plans, and they were not entitled to any further disclosure or re-solicitation of votes in connection with the plans:
The law is clear that modifications to a plan only require further disclosure and re-solicitation in respect of those parties who previously voted for the Plans. See In re Nat'l Truck Funding LLC, 588 B.R. 175, 178 (Bankr. S.D. Miss. 2018). Because the applicable classes of pre-petition equity interests (including the [appellants]) were deemed to have rejected the [CHI plan and the CTV plan] under section 1126(g) of the Bankruptcy Code, the [appellants] were not entitled to any further disclosure or re-solicitation in connection with the Plans, as a matter of law.
Id. at p. 14. The district court affirmed the ruling on appeal, stating that "a class of creditors or equity interest holders who have not accepted a plan have no say in whether that plan can be modified." The court also rejected the debtors' argument that the appeal was equitably moot based on its finding that effective relief could be fashioned even though the plans had been substantially consummated.
The appellants appealed to the Eleventh Circuit.
The Eleventh Circuit's Ruling
A three-judge panel of the Eleventh Circuit reversed and remanded the case below.
Writing for the panel, U.S. Circuit Judge Britt C. Grant explained that, although modification of a plan before confirmation is "easy" by design to promote negotiation among stakeholders, various provisions of the Bankruptcy Code constrain such modifications, including: (i) section 1127(a), which provides that a modified plan must comply with the Bankruptcy Code's substantive requirements, including section 1122's rules regarding the classification of claims and interests; and (ii) the requirement in section 1123(a)(4) that, unless a creditor or interest holder in a class consents, the modified plan must "provide the same treatment for each claim or interest of a particular class."
In addition, Judge Grant noted, there are procedural constraints to pre-confirmation plan modifications. For example, any proposed modification must comply with section 1125's mandate that creditors and interest holders be provided with "adequate information" about the plan's provisions. According to Judge Grant, if a bankruptcy court concludes that a proposed modification "'materially and adversely changes the way that a claim or interest holder is treated,'" the plan proponent is obligated to provide a new disclosure statement and re-solicit votes on the plan. America-CV, 56 F.4th at 1309 (quoting In re New Power Corp., 438 F.3d 1113, 117 (11th Cir. 2006)).
The Eleventh Circuit panel ruled that the lower courts erred by holding that: (i) the appellants were deemed to reject the unmodified plans; and (ii) as a result, additional disclosure and the re-solicitation of votes from the appellants was not required. Judge Grant explained that, because the Class 3 interest holders (including the appellants) were entitled to receive property under the unmodified plans—and the appellants, in aggregate, were entitled to receive 65.8% of the equity in the reorganized debtors issued under the plans—the bankruptcy court (and the district court on appeal) improperly determined that the appellants were deemed to have rejected the plans under section 1126(g) of the Bankruptcy Code. Moreover, the panel held that, even if the appellants—who did not vote—had actually rejected the plans, under Bankruptcy Rule 3019(a), "interest holders that previously rejected (or did not vote for) a reorganization plan are still entitled to additional disclosure and voting if the treatment of their interests is materially and adversely affected by a modification." Id.
The Eleventh Circuit also ruled that the modified CHI and CTV plans were improperly confirmed because they violated section 1123(a)(4) by providing for disparate treatment of the various Class 3 interest holders. According to Judge Grant, the plans violated the "same treatment" requirement by distributing nothing to the appellants, but giving Vasallo TV 100% of the equity in the reorganized companies.
Finally, the Eleventh Circuit found no error with the district court's conclusion that the appeal was not equitably moot, even though the plan had been substantially consummated for more than two years. The Eleventh Circuit stated that while it "assume[d]" that effective judicial relief could still be granted, it would remand the case to the bankruptcy court for a determination of "the exact contours of that relief." Id. at 1313.
The Eleventh Circuit articulated a bright-line rule in America-CV regarding a plan proponent's obligation to provide an amended disclosure statement and re-solicit votes for a pre-confirmation modification of a chapter 11 plan that materially and adversely affects any creditor or interest holder, whether or not the creditor or interest holder accepted or rejected the original plan, or abstained from voting.
The Eleventh Circuit's reasoning regarding section 1123(a)(4)'s "same treatment" requirement is somewhat opaque. According to the court, Vasallo TV received more favorable treatment than the other Class 3 interest holders under the modified plans—and the modified plans therefore violated section 1123(a)(4) of the Bankruptcy Code and could not be confirmed. Whether the plans actually violated section 1124(a)(4) is debatable, however, because: (i) the plans arguably treated all Class 3 interests alike by canceling the interests; and (ii) Vasallo TV arguably did not receive or retain any value under the plan "in respect of" its Class 3 interest, but was given new equity in exchange for a $500,000 capital infusion and a $1.6 million financing commitment. The value of the equity may have exceeded the value of the capital infusion and financing commitment, but this is not clearly addressed in the opinion. In this regard, the Eleventh Circuit also did not address whether the arrangement in the original plans or the modified plans might have satisfied the "new value" exception to the absolute priority rule.
Finally, the tone of the Eleventh Circuit's opinion suggests that the court was skeptical of CEO Carlos Vasallo's motivations, given Vasallo TV's apparently opportunistic effort on the eve of confirmation to squeeze out the other shareholders of CHI and CTV and take control of the companies.
The debtors asked the Eleventh Circuit to reconsider its ruling in a January 27, 2023, motion. On February 28, 2023, the debtors sought a 90-day stay of the issuance of the mandate with respect to the Eleventh Circuit's decision to give them an opportunity to seek U.S. Supreme Court review. According to the debtors, if allowed to stand, the decision "will disrupt, if not foment chaos in, any Chapter 11 reorganization proceeding in which there are potential new investors, equity owners, or plan sponsors."
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