By: Donald L Swanson
Here’s the latest opinion on a controversial question: In re Franco’s Paving LLC, Case No. 23-20069, Southern Texas Bankruptcy Court, (decided 10/5/2023; Doc. 74).
The Question & Answer
Voter apathy is a problem in Subchapter V cases. That apathy is in the form of creditors failing or refusing to vote on a Subchapter V plan. The In re Franco’s opinion addresses this apathy problem head-on.
The Question in the Opinion: When a class of creditors fails to vote on a Subchapter V plan, does that inaction prevent confirmation of the plan as consensual under § 1191(a)?
The Answer in the Opinion: No.
Facts
Debtor files a Subchapter V bankruptcy and a proposed plan. Creditors object, and the plan is amended in a manner that resolves all the objections.
The plan contains six classes. Votes accepting the plan are cast in Classes 1, 3 and 4.
But there is not any vote cast—none whatsoever—in Classes 2, 5 and 6:
- Class 2 is the secured claim of the U.S. Small Business Administration;
- Class 5 is the priority unsecured claim of the Internal Revenue Service; and
- Class 6 is the general unsecured claim of the IRS, the deficiency claim of the SBA and other unknown unsecured claims.
–Editorial Note
SBA and IRS are notorious for refusing to cast a ballot on any Subchapter V plan in any Subchapter V case.
This refusal is a problem for Subchapter V cases because SBA and IRS claims often need to be in their own separate class. That means this: in any case where SBA or IRS claims require a separate classification, their refusal to cast a ballot can prevent confirmation of the Subchapter V plan as consensual.
–U.S. Trustee Objection
U.S. Trustee objects to confirmation on various grounds—all of which objections are either satisfied or abandoned at confirmation.
In closing argument, however, U.S. Trustee adds a new objection: that Debtor’s plan cannot be confirmed as a consensual plan under § 1191(a) because of the lack of votes in classes 2, 5 and 6. That’s because § 1129(a)(8) requires each impaired class to “accept” the plan.[Fn. 1]
Rationale
What follows is a summary of the Court’s rational for its “No” answer.
–Consensual v. Non-consensual
Confirmation of a Subchapter V plan is governed by 11 U.S.C. § 1191:
- § 1191(a) provides for consensual confirmation—“The court shall confirm a plan under this subchapter only if all of the requirements of section 1129(a), other than paragraph (15) of that section, of this title are met”; and
- § 1191(b) provides for non-consensual confirmation—“If all of the applicable requirements of section 1129(a) of this title, other than paragraphs (8), (10), and (15) of that section, are met . . . , the court, on request of the debtor, shall confirm the plan . . . “
A non-consensual confirmation, under § 1191(b), has implications for the debtor, such as (i) requiring additional evidence to support confirmation, (ii) expanding what qualifies as property of the estate, (iii) delaying entry of a discharge order, (iv) leaving the trustee in place for the term of the plan, and (v) affecting plan modification rights.
–Acceptance
§ 1129(a)(8) requires acceptance of the plan by each impaired class of creditors.
§ 1126 says how acceptance of a plan by creditors occurs: allowed claims in a creditor class representing “at least two-thirds in amount and more than one-half in number” can accept a plan (§ 1126(c)).
But what about when, as in the instant Subchapter V case, no creditor in a class votes at all?
- When no vote is cast, the “at least two-thirds in amount” and “more than one-half in number” equations cannot be solved; and
- the two computations become two-thirds of 0 and one-half of 0—both of which equal 0.
–Controlling Principals
So, the following principals control:
- when faced with an “unusual case, certainly not contemplated in the statute,” a court should read the statute to align with congressional intent and “the statute’s design”; and
- a bankruptcy court is a court of equity, “seeking to administer the law according to the law’s spirit—not merely by its letter.”
–Math
Accordingly, the Court finds that attempting to do what the laws of mathematics prohibit is an absurd proposition and could not have been intended when Congress enacting § 1126.
By requiring a calculation, in § 1126, that includes only votes actually cast, it logically follows that Congress presumed that at least one vote would be cast.
—In re Ruti-Sweetwater
The only circuit court to address this issue is in In re Ruti-Sweetwater, Inc., 836 F.2d 1263 (10th Cir. 1988). In such case, the Tenth Circuit:
- notes that Congress, in enacting § 1126 of the Bankruptcy Code:
- rejected the prior Bankruptcy Act provision that non-voting creditors are presumed to reject the plan and
- provided, instead, that non-voting creditors are bound by the decision of creditors who actually vote;
- notes that the Bankruptcy Code requires creditors to take an active role in protecting their claims; and
- concludes that, in situations where no vote in a class is cast, the non-voting creditors have consented to debtor’s plan—i.e., that such inaction amounts to a deemed acceptance.
–Reactions to Ruti-Sweetwater
Ruti-Sweetwater is both adopted and criticized by bankruptcy courts in the Southern District of Texas, from which the In re Franco’s opinion issues. See. e.g.:
- In re Cypresswood Land Partners, I, 409 B.R. 396, 430 (Bankr. S.D. Tex. 2009) (adopting the logic of Ruti-Sweetwater); and
- In re Castaneda, No. 09-50101 (Bankr. S.D. Tex. Nov. 2, 2009) (rejecting the logic of Ruti-Sweetwater).
The Court, in In re Franco’s, finds the policy underlying Ruti-Sweetwater compelling.
However, the In re Franco’s Court does not believe it is limited to the binary choice between a “deemed acceptance” and a “deemed rejection” because:
- Subchapter V is intended to encourage consensual plans;
- one of the Subchapter V trustee’s enumerated duties is to “facilitate the development of a consensual plan”—a duty that is unique to a Subchapter V trustee (§ 1183(b)(7));
- a creditor that agrees to a debtor’s plan may express its consent by affirmatively voting for a plan or by simply choosing not to file an objection; and
- by including the two-thirds/one-third calculations for acceptance in § 1126(c), Congress presumed the existence of at least one vote in each class.
–Court’s Conclusion
In situations where no vote is cast for a plan, the non-voting class won’t be counted for purposes of § 1129(a)(8).
The In re Franco’s Court therefore overrules the U.S. Trustee’s objection and confirms the Debtor’s plan as a consensual plan under § 1191(a).
Observations
Voter apathy is a problem in Subchapter V cases. And it’s hard to understand how that apathy can be the difference between confirmation of a Subchapter V plan as consensual or non-consensual. Yet, controversy continues on that issue.
However, the In re Franco’s opinion is persuasive—especially with its focus the Subchapter V priority of achieving a consensual plan.
The stated goal in § 1183(b)(7) of developing a consensual plan—and making the pursuit of that goal a “duty” of the Subchapter V trustee—highlights and emphasizes Congress’s intent to prioritize the achievement of a “consensual plan” in Subchapter V.
Based on that expression of Congressional intent, it makes perfect sense that:
- the hurdle (created by § 1129(8)’s requirement of acceptance by each impaired class) be lowered in Subchapter V cases; and
- creditor apathy not be allowed to veto a consensual plan.
Conclusion
It will be interesting to see how the controversial Subchapter V issue, of consensual v. non-consensual confirmation when a class doesn’t vote, will ultimately be resolved.
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Footnote 1. 11 U.S.C. § 1129(a)(8) provides: “(8) With respect to each class of claims or interests—(A) such class has accepted the plan; or (B) such class is not impaired under the plan.”
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