Don’t Rock the Vote, Baby: 11th Circuit Confirms That Materially Adverse Ch. 11 Plan Modifications Require a New Disclosure Statement and Resolicitation of Voting on the Plan By Affected Interest Holders

In a detailed and emphatic ruling on January 5, 2023, the U.S. Court of Appeals for the 11^th Circuit made it clear that if a pending Chapter 11 plan, after initial plan solicitation and voting by creditors, is modified in any way that “materially and adversely changes the treatment of any claim or interest holder who has not accepted the modification in writing” — regardless of whether the holder of the claim or interest originally voted for or against the plan — “then that claim or interest holder is entitled to a new disclosure statement and resolicitation of votes” so that it is afforded a reasonable opportunity to cast its vote again and submit any objections to the modification.

In Braun v. America-CV Station Group Inc. (In re America-CV Station Group Inc.), 2023 WL 109967 (11^th Cir. 2023), the debtors — a set of Spanish language television networks — had proposed and solicited votes on a so-called “new value” Chapter 11 plan that provided for equity in the reorganized holding companies to be split pro rata between four shareholders, based on their respective contributions of both $500,000 in new capital and commitments on a $1.6 million line of credit. The plan also provided for the four proposed shareholders to be placed in a single creditor class, Class 3. During the plan solicitation period, the shareholders neglected to cast any ballots on the plan. On the relative eve of the confirmation hearing, however, the debtor asserted that all exit financing needed to be in hand further in advance of the hearing than the disclosure statement and plan provided, an unexpected deadline that three of the proposed shareholders in the reorganized company missed (although they did deliver their contributions, as provided in the plan, prior to the confirmation hearing). In the interim, the fourth proposed shareholder, Vasallo TV Group, made the entire contribution of new capital itself and executed the line of credit on its own. Vasallo then caused the debtor to file an emergency motion to modify the plan and provide Vasallo with 100% of the equity in the reorganized companies, excluding the other three shareholders (the “Excluded Equity Holders”) entirely, which the bankruptcy court granted. The court then proceeded immediately to confirm the plan as modified, without requiring a new disclosure statement or resolicitation of votes. After the bankruptcy court denied a motion for reconsideration by the Excluded Equity Holders and the U.S. District Court for the Southern District of Florida affirmed that ruling on appeal, the Excluded Equity Holders appealed to the 11^th Circuit.

In its opinion, the 11^th Circuit considered and summarily rejected each of the debtor’s arguments as to why confirmation of the modified plan was not contrary to the requirements of the Bankruptcy Code and Rules, or alternately, that any error by the lower courts was harmless because the Excluded Equity Holders were already deemed to have rejected the plans. The court first summarized the basic requirements for confirmation of a Chapter 11 reorganization plan, including the substantive requirements for confirmation under section 1127 of the Code, and the requirement in section 1123 that, unless the disfavored class members consent, a modified plan must “provide the same treatment for each claim or interest of a particular class.” America-CV Station Group at *4. The court also reiterated its decision in In re New Power Co., 438 F.3d 113 (11^th Cir. 2006), that if modification of a Chapter 11 plan after votes have been cast “materially and adversely changes the way that [a] claim or interest holder is treated,” then “the debtor must provide a new disclosure statement and call for another round of voting.” Id. Rejecting each of the lower courts’ rulings in turn, the court concluded that the bankruptcy court had erred as a threshold matter by failing to conduct this review of the plan modification for materiality and adversity, Id., and then compounded that error with a series of other rulings that contravened the requirements for Chapter 11 plan confirmation.

First, the court rejected the bankruptcy court’s conclusion that the Excluded Equity Holders were deemed to have rejected the original plan, citing section 1126(g) for the proposition that a class is deemed to have rejected a plan only if the plan provides that the claims or interests of the class do not entitle the holders to “receive or retain any property under the plan on account of such claims or interests.” Under the original plan, however, the Excluded Equity Holders, by virtue of their ownership interests in the debtor entities, were slated to receive, on an exclusive basis not available to the market at large, equity in the reorganized entities in exchange for a capital contribution and undertaking obligations on the new line of credit — most certainly the receipt or retention of property under the plan. This conclusion was further confirmed by the fact that the original plan expressly and repeatedly stated that the Excluded Equity Holders were eligible to vote. The Excluded Equity Holders thus were not deemed to have rejected the plan before it was modified, and thus were entitled to a new disclosure statement and vote once they were adversely excluded from entitlement to that material property interest in the plan modification. Id. at *5-6.

Second, the court dismissed as error the bankruptcy court’s determination that additional disclosure and voting is required only when a claim or interest holder materially and adversely affected by the proposed plan modification previously voted to accept the original plan. This conclusion, said the court, contravened the plain text of Bankruptcy Rule 3019(a). “The rule . . . requires additional disclosure and voting if the modification materially and adversely affects any creditor or interest holder, not just those voting to accept the [original] plan.” Id. at *6 (emphasis added).

Third, the court rejected the debtor’s assertion that the bankruptcy court’s error was harmless as a procedural matter because the Excluded Equity Holders were deemed to have rejected the plan as modified, and thus the bankruptcy court “treated [them] exactly as they ask[ed] — as having rejected the plans.” The court dismissed this assertion as incorrect as well, explaining that even “a dissenting vote on a Chapter 11 plan does not give the debtor a free pass to modify the plan to the detriment of that dissenting claim or interest holder. . . . A new disclosure statement with additional time to vote would have given the [Excluded Equity Holders] an opportunity to object to the modification on substantive grounds.” Further, the court determined that the resulting confirmation of the plan by the bankruptcy court was substantively improper because, of the four proposed shareholders in Class 3 under the plan, one member (Vasallo) received property under the plan while the others (the Excluded Equity Holders) received nothing. This result violated the confirmation requirement in section 1123(a)(4) that a plan provide “the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment . . .” Id. at *7.

Having determined that the bankruptcy court erred in confirming the debtor’s plan, the 11^th Circuit was then left — over two years after the fact — to consider what remedy to afford the Excluded Equity Holders. After determining that the appeal was not equitably moot, however, and assuming that it remained “possible to grant effective judicial relief,” the court determined to “leave the exact contours of that relief to the bankruptcy court in the first instance,” and accordingly remanded the case back to that court “to fashion an equitable remedy.” Id. at *8.

Given the thorough and emphatic nature of the court’s decision in America-CV Station Group Inc., there can be no remaining doubt about what is required in the 11^th Circuit when a plan is modified after voting and “materially and adversely changes the way that [a] claim or interest holder is treated.” In that event, and with few or no exceptions, debtors are required to issue an additional disclosure statement and facilitate another round of voting on the plan, even if the affected claimant or interest holder never voted in favor of the original plan.