Recently, the Ninth Circuit decided JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props. Inc., et al. (In re Transwest Resort Props. Inc.), Case No. 16-16221, 2018 U.S. App. LEXIS 1947 (9th Cir. Jan. 25, 2018)(“In re Transwest“). Prior to this case, there was a significant split in the lower courts between the “per plan” or “per debtor” impaired accepting class requirement to the confirmation of chapter 11 plans of reorganization. The Ninth Circuit was the first Circuit court to render a decision on this issue.
If this decision is adopted by other Circuit courts it may have a significant effect on cram downs involving multiple debtors with a joint plan. As a result of In re Transwest, debtors may cram their plan down on all creditors based on a single impaired accepting class, including those situations where the impaired accepting class has claims against different debtors than the class crammed down.
In re Transwest involved five (5) debtors and a corporate structure of a holding company that was the sole equity owner of two mezzanine debtors, which were the sole equity owners of two operating debtors in the resort business. The resorts were encumbered by a $209 million loan to the operating debtors (the “Operating Loan”), as well as a $21.5 million loan secured by the mezzanine debtors’ equity interests in the operating debtors (the “Mezzanine Loan”).
The debtors’ plan provided for (a) a sale of the operating debtors for $30 million, which would thereby extinguish the mezzanine debtors’ ownership interest in the operating debtors; (b) a restructuring of the Operating Loan to a 21-year note with a principal amount of $247 million, interest payments due and payable monthly, and (c) no recovery for the Mezzanine Loan claimants.
The holders of the Mezzanine Loan claims objected to confirmation of the plan, which was nonetheless confirmed because there were other impaired, accepting creditor classes with claims against the operating debtors. The bankruptcy court adopted the “per plan” approach and held that it could confirm the plan despite the fact there was no impaired accepting creditor class for the mezzanine debtors. On appeal, the district court also applied the “per plan” approach, thus affirming the bankruptcy court’s decision.
Upon analysis of the plain language of section 1129(a)(10) that one impaired class “under the plan” approve “the plan,” the Ninth Circuit found that the plain language of the statute supports the “per plan” approach as it makes no distinction concerning the creditors of different debtors under “the plan,” nor does it distinguish between single-debtor and multi-debtor plans.
Section 102(7), a rule of statutory construction, provides that “the singular includes the plural.” Because of this provision, the mezzanine lenders argued that section 102(7) required that section 1129(a)(10) apply on a “per debtor” basis. Not only did the Court find that the “per plan” approach is consistent with this interpretation, the Court then found no support for the position that all subsections must uniformly apply on a “per debtor” basis, especially when each subsection of the Bankruptcy Code is phrased differently. Section 102(7) effectively amends section 1129(a)(10) to read: “at least one class of claims that is impaired under the plans has accepted the plans.”
Some experts question whether the “per plan” approach is a form of substantive consolidation that is inappropriate and unfair in certain circumstances. The opinion is significant because it is the first Circuit Court ruling on the “per plan” versus “per debtor” issue.
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