By: Donald L Swanson
What happens when a creditor class fails or refuses to vote on confirmation of a Subchapter V plan? Does that prevent a consensual confirmation?
We have a recent answer from In re Creason, Case No. 22-00988, Western Michigan Bankruptcy Court (opinion issued 2/23/2023).
Facts
The Subchapter V Debtor is a sole-proprietor dentist.
Debtor proposes a Subchapter V plan that is accepted by all classes of claims—except for one. That one class contains a single creditor—a lienholder with an avoidable lien—who, out of defiance or neglect, declines to vote on the plan.
Hardships of Non-Consensual Confirmation
The one creditor’s non-vote results in confirmation of Debtor’s plan as nonconsensual under § 1191(b), instead of consensual under § 1191(a).
That result is disappointing to Debtor and the bankruptcy estate, because the hardships of a nonconsensual confirmation include:
- continued involvement and expense of a trustee (see § 1183(c)(1));
- changes to the timing and scope of a discharge (see § 1192, § 1141(d) & § 1181(a)); and
- applicability of the “fair and equitable” standard to confirmation (see § 1129(b)(2)(A) & § 1191(b)&(c)).
Non-Vote Precludes Consensual Confirmation
So . . . why does the absence of one creditor’s ballot preclude a consensual confirmation? What follows is a summary of the Bankruptcy Court’s explanation.
§ 1129(a)(8) requires that each class of creditors has either “accepted” the plan, or is not impaired.
Though Congress provides a precise definition of what constitutes acceptance, it does not address what happens when a creditor class fails to submit a ballot.
Courts in the Tenth Circuit “deem” the non-voting creditor to have accepted. However:
- that is a convenient but extra-statutory position; and
- the districts of Michigan are in the Sixth Circuit, not the Tenth.
The Bankruptcy Court declines to follow the Tenth Circuit’s rule because:
- the Bankruptcy Court has an independent duty to ensure compliance with all statutory requirements for confirmation, even if no creditor raises the issue;
- the Tenth Circuit’s “deemed acceptance” rule is a minority position that:
- has been described by a leading bankruptcy commentator as “an unfortunate decision….” (7 Collier on Bankruptcy ¶ 1129.02 (16th ed. 2022));
- has not been followed by any reported decision within the Sixth Circuit; and
- the notion of “deemed acceptance” cannot be reconciled with the formal voting requirements of Fed.R.Bankr.P. 3018(c).
Classification Issues
Perhaps Debtor could and should have put the non-voting Creditor into the general unsecured creditor class, where accepting creditors would have prevailed, rendering Creditor’s inaction a nullity.
But Debtor did not do that—putting Creditor, instead, into a class by itself and empowering Creditor to veto a consensual confirmation by inaction.
That was, in retrospect, a mistake.
Here’s how the non-voting Creditor could have been placed into the general unsecured class: Creditor asserts a security interest, but such interest is vulnerable to avoidance under § 544(a) because,
- Creditor’s financing statement improperly identifies Debtor as an “organization” with the name “Paul Kevin Creason dba Dr Paul Creason Family Dentistry”—obviously more than his parents had in mind when they named him; and
- a search using that name, under Michigan Secretary of State’s search logic, would be seriously misleading.
So, the plan’s treatment of Creditor’s claim as unsecured offers the “indubitable equivalent” of Creditor’s claim, as required for confirmation under § 1191(b).
Confirmation
The Court finds that Creditor’s failure to participate in the confirmation process backfires because:
- the plan is fair and equitable in revesting Creditor’s supposed collateral in Debtor, free and clear of Creditor’s lien;
- Debtor’s Ballot Report is accepted as to all ballots cast; and
- Debtor’s plan is confirmed as a nonconsensual plan.
Conclusion
Creditor’s inaction ultimately backfires and achieves no tangible benefit.
By contrast, the Bankruptcy Court suggests:
- the result of a nonconsensual confirmation creates hardship for Debtor and the bankruptcy estate; and
- such a result might have been avoided by a different classification of the non-voting creditor’s claim.
But I’d like to stand up for Debtor’s counsel here:
- it’s easy to say, after all plan confirmation details are in, that Debtor’s counsel might have taken a different approach;
- in drafting the plan, Debtor’s counsel had no way to know how Creditor would actually respond—or not respond; and
- Debtor’s counsel undoubtedly took a best-judgment approach based on information available at the time.
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