In 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), the Ninth Circuit was the first Circuit court to decide a significant split in the lower courts between the “per plan” or “per debtor” impaired accepting class requirement to confirmation. The decision is significant if adopted by other Circuit courts because it means that multiple debtors with a joint plan may cram their plan down on all creditors based on a single impaired accepting class, even where the impaired accepting class has claims against different debtors than the class that is crammed down.
The case involved five (5) debtors. The corporate structure involved a holding company that was the sole equity owner of two mezzanine debtors, which in turn were the sole equity owners of the two operating debtors, which owned and operated two resorts. The resorts were encumbered by a $209 million loan to the operating debtors (the “Operating Loan”). In addition, there was 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, thereby extinguishing 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, with interest payments due each month, and (c) no recovery on account of the Mezzanine Loan claims. Despite objection to confirmation by the holders of the Mezzanine Loan claims, the plan was confirmed because there were other impaired, accepting creditor classes holding claims against the operating debtors. The bankruptcy court, adopting the “per plan” approach, held that the plan could be confirmed even though there was no impaired accepting creditor class for the mezzanine debtors. On appeal, the district court applied the “per plan” approach and affirmed the bankruptcy court.
On appeal, the Ninth Circuit first analyzed the plain language of section 1129(a)(10), which requires that at least one impaired creditor class has accepted the plan. The Court found that the plain language of the statute supports the “per plan” approach. Section 1129(a)(10) requires that one impaired class “under the plan” approve “the plan.” It makes no distinction concerning the creditors of different debtors under “the plan,” nor does it distinguish between single-debtor and multi-debtor plans.
In addition, the Court rejected the mezzanine lender’s argument that section 102(7) required that section 1129(a)(10) apply on a “per debtor” basis. Section 102(7), a rule of statutory construction, provides that “the singular includes the plural.” Section 102(7), the Court found, effectively amends section 1129(a)(10) to read: “at least one class of claims that is impaired under the plans has accepted the plans.” The “per plan” approach is still consistent with this reading. Moreover, the Court found that the other subsections in section 1129(a) do not support a “per debtor” approach. Most importantly, the Court found no support for the position that all subsections must uniformly apply on a “per debtor” basis, especially when the Bankruptcy Code phrases each subsection differently.
Lastly, the Court addressed the mezzanine lender’s argument that although the plan was presented as a jointly administered plan, it was in fact a substantively consolidated plan based on the application of the “per-plan” approach. The Court identified two hurdles with this argument. First, the issue was not raised before the bankruptcy court and thus not properly before the Ninth Circuit. Second, to “the extent the Lender argues that the ‘per plan’ approach would result in a parade of horribles for mezzanine lenders, such hypothetical concerns are policy considerations best left for Congress to resolve.”
For these reasons, the Ninth Circuit adopted the “per plan” approach to confirmation. The opinion is significant because it is the first Circuit ruling on the “per plan” versus “per debtor” debate.
Interestingly, it is questionable whether the “per plan” approach is a form of substantive consolidation that is inappropriate and unfair in certain circumstances. In a concurrence authored by Judge Friedland, she argues that the problem in her view is not the interpretation of section 1129(a)(10); rather, the plan in Transwest Resort Props. effectively merged the debtors without an assessment of whether substantive consolidation was appropriate. Such an assessment would have required the bankruptcy court to evaluate whether it was fair to proceed on a consolidated basis. According to Judge Friedland, if a creditor believes that a reorganization plan inappropriately combines different estates, the creditor should object to the plan on a substantive consolidation basis rather than the requirements for confirming the plan under section 1129(a)(10).