Opinion ID: 3062086
Heading Depth: 4
Heading Rank: 2

Heading: Fair and Equitable

Text: In addition to disputing whether the Joint Plan was proposed in good faith, SMDI raises substantive challenges to the Joint Plan’s terms. The Joint Plan, SMDI argues, should not have been confirmed because it was not fair and equitable. Section 1129(a)(8) requires that a plan be accepted by any class of claims or interests that is impaired. In § 1129(b), however, the Code provides an exception: if an impaired class does not accept the plan, the court “shall confirm the plan notwithstanding [§ 1129(a)(8)] if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class . . . that is impaired under, and has not accepted, the plan.” § 1129(b)(1). The Code explains that “the condition that a plan be fair and equitable with respect to a class includes” the requirement that “[w]ith respect to a class of interests . . . the holder of any interest that is junior to the interests of such class will not receive or retain under the plan on account of such junior interest any property.” §§ 1129(b)(2), 1129(b)(2)(C)(ii). This requirement, known as the absolute priority rule, “requires that certain classes of claimants be paid in full before any member of a subordinate class is paid.” See Allen v. Geneva Steel Co. (In re Geneva Steel Co.), 281 F.3d 1173, 1180 n.4 (10th Cir. 2002). In this case, SMDI held the residual interest; there was no junior class of interests that could have received property. SMDI, therefore, does not dispute that the rule was satisfied. Conf. App., Aplt. Br. at 47. SMDI argues, however, that compliance with the absolute priority rule does not necessarily end the “fair and equitable” analysis. The bankruptcy court concluded that the Joint Plan complied with § 1129(b) 42 because it “d[id] not discriminate unfairly in that all similar claims [we]re treated the same” and because the absolute priority rule was satisfied. Paige, 2007 WL 4143212, at . The district court concurred. Although it acknowledged that “some courts have found that the absolute priority rule does not end the ‘fair and equitable’ inquiry,” it reasoned that “the Tenth Circuit has indicated that a plan can be ‘fair and equitable’ once the absolute priority rule is satisfied.” Paige, 439 B.R. at 800 (citing Unruh v. Rushville State Bank, 987 F.2d 1506, 1507–08 (10th Cir. 1993)). SMDI contends that the district court read Unruh and the statutory language too narrowly. Conf. App., Aplt. Br. at 47. There is some authority for SMDI’s open-ended view of the fair and equitable requirement,10 but we need not decide here whether to endorse it. Even if we did, none of the Joint Plan provisions SMDI points to would have precluded the plan’s confirmation.
SMDI first argues that the Joint Plan was unfair because it included a provision expressly preventing the Liquidating Trustee from voluntarily accepting a monetary 10 See, e.g., Bank of N.Y. Trust Co. v. Official Unsecured Creditors Comm. (In re Pacific Lumber), 584 F.3d 229, 245–46 (5th Cir. 2009) (“Even a plan compliant with the[] alternative minimum standards [of § 1129(b)(2)] is not necessarily fair and equitable.”); In re Grandfather Mountain Ltd. P’ship, 207 B.R. 475, 487 (Bankr. M.D.N.C. 1996) (“[T]he plan must literally be fair and equitable. The determination . . . must be made on a case-by-case basis and depends upon the specific facts and circumstances of each case.” (citation omitted)); 7-1129 Collier on Bankruptcy ¶ 1129.03[4][b][ii] (16th ed. 2012) (“[S]ome courts have incorrectly read the interplay of section 1129(b)(1) and section 1129(b)(2) to be an exhaustive delineation of the fair and equitable rule . . . .”). 43 recovery in lieu of the Domain Name if he prevailed in the AP. According to SMDI, the estate had the right, under the APA, to take the value of the Domain Name instead of recovering the name itself. This right, SMDI argues, was worth millions of dollars.11 Conf. App., Aplt. Br. at 48–49. In consideration for the estate abandoning this right, ConsumerInfo promised in the Joint Plan to fund the Adversary Proceeding, subordinate the CCB Claims, and pay up to $300,000 to resolve claims (other than the CCB Claims) against the estate. Id. at 49. SMDI argues that the consideration the estate received was inadequate. This argument is flawed. We think the consideration ConsumerInfo provided was worth more and the right the estate waived was worth less than SMDI recognizes. While SMDI says ConsumerInfo failed to prove the value of subordination of the CCB Claims, the bankruptcy court estimated Claim 42-1 at $225,000, and nothing in the record suggests that Claim 27-2 was not worth its face value of over $130,000. SMDI also asserts that ConsumerInfo’s promise to fund the AP “provided no value to the estate” simply because the Trustee agreed not to elect a monetary remedy in lieu of the Domain Name. Conf. App., Aplt. Br. at 49. To the contrary, even if the estate planned to turn 11 SMDI reasons as follows: If the estate chose to accept the Domain Name, it had to turn it over to ConsumerInfo for no additional consideration. If, on the other hand, it accepted monetary compensation for SMDI’s conversion of the name, it would keep 75% of that recovery under § 1.1(d) of the APA. See APA § 1.1(d) (providing that ConsumerInfo would “receive 25% of the Net Proceeds from Monetary Recoveries”). Thus, if the Domain Name was worth $5,000,000, the estate waived the right to elect a $3,750,000 recovery. Conf. App., Aplt. Br. at 48–49. 44 over to ConsumerInfo the primary fruit of the AP—the Domain Name—it also hoped to recover monetary damages (of which it would retain 75%). Thus, it still stood to gain from ConsumerInfo funding the AP. More critically, however, SMDI overlooks the fact that the election of remedies waiver was worth very little if, as the bankruptcy court and district court both believed, the APA already required the estate to do its best to recover the Domain Name. In confirming the Joint Plan, the bankruptcy court concluded that the APA did not give the estate the option of accepting money instead of the Domain Name in the first place. Paige, 2007 WL 4143212, at  (“The court further finds that there is a reasonable basis for the Trustee to convey the Domain Name to ConsumerInfo, if recovered, because the Trustee is obligated to do so under the APA.”). The bankruptcy court restated the same conclusion more explicitly two years later in its Adversary Proceeding decision. There, it concluded that the “APA required that . . . if the Trustee was successful in proving that the Domain Name was the property of the estate, or otherwise recovered the Domain Name, he would be required to deliver the Domain Name to ConsumerInfo. The . . . APA did not contemplate the delivery of value of the Domain Name in lieu of the Domain Name itself.” Paige, 413 B.R. at 901. The district court agreed that the 75%-25% provision existed to allocate damages recovered in addition to the Domain Name. Paige, 443 B.R. at 891. To the extent it could do so in good faith, the Trustee had a duty to recover the Domain Name and turn it over to ConsumerInfo. If these courts were correct, then ConsumerInfo was not, as SMDI claims, buying a right worth $3,750,000. Rather, 45 ConsumerInfo was buying only peace of mind by gaining the estate’s express abandonment of a right it probably did not even possess. We need not decide whether the bankruptcy court and district court were right on this point or not. We only have to determine whether the chances of SMDI’s interpretation prevailing were sufficiently doubtful that the estate’s acceptance of less than 75% of the Domain Name’s value was fair. We think that even if the courts’ interpretation of the APA was not the only possible reading of that document, it was at least a reasonable one. Thus, the Joint Plan only deprived the estate of a right to elect remedies that likely did not exist. Even if an unfair compromise of claims could have made the Joint Plan unfair to SMDI’s interest under § 1129(b), we reject SMDI’s argument that the consideration the estate received was inadequate.
SMDI’s second argument has to do with the Joint Plan’s provision that objections to the CCB Claims “shall be deferred until there are Monetary Recoveries or other funds to pay them.” Conf. App., Joint Plan ¶ 3.3. Such funds would become available, if at all, only after the conclusion of the AP.12 SMDI, however, wished to object to the CCB Claims before the AP terminated. If, while the AP was pending, SMDI had been able to eliminate the CCB Claims or significantly lower their estimated value, SMDI argues that 12 Such monetary recoveries, of course, would have been paid by SMDI. Ultimately, the bankruptcy court did not award any damages to the Liquidating Trust. The Trustee appealed the issue to the district court, which affirmed, and he did not appeal further. 46 it would have had sufficient funds to settle the AP by paying all claims against the estate. Conf. App., Aplt. Br. at 12–13, 15. Once the AP was over, a successful objection to the CCB Claims could no longer permit SMDI to settle the AP and keep the Domain Name. SMDI argues, therefore, that deferment of objections to the CCB Claims was an inequitable term designed to inflict “special prejudice” on SMDI. Conf. App., Aplt. Br. at 50 (quoting Grandfather Mountain Ltd. P’ship, 207 B.R. at 487). Like the bankruptcy court, we are not blind to the parties’ intentions in this litigation. We have no doubt that the objection-delaying provision was of strategic value in ConsumerInfo’s effort to see the AP litigated to its conclusion. But SMDI simply does not provide any authority for the proposition that this provision inflicted the kind of “special prejudice” that could require denial of the Joint Plan’s confirmation. Any legitimate claims or interests SMDI had in this case were protected under the Joint Plan. SMDI’s claims, like those of other creditors, were paid in full, with interest. Moreover, the Joint Plan specified that if the Liquidating Trust were to recover funds that could benefit SMDI’s interest, SMDI would have its chance to object to the CCB Claims (which would otherwise be paid first). In its capacity as an interest-holder, SMDI had nothing to gain from objecting to the CCB Claims unless and until there was a monetary recovery in the AP. To the extent that SMDI was prejudiced by the Joint Plan, the prejudice had nothing to do with its status as a creditor or interest-holder in the estate. Of course, SMDI wanted a plan that would ensure settlement of the AP, while ConsumerInfo wanted a plan 47 that would make settlement less likely. But to the extent that SMDI had a right to try to maneuver the confirmation process toward a settlement that would let it keep property it obtained in violation of the automatic stay, this simply was not a right the Joint Plan was obligated to protect. iii. Bar on SMDI Objecting to Post-Confirmation Fees Finally, the Joint Plan barred SMDI from objecting to the Liquidating Trustee’s fees and provided that only the U.S. Trustee had standing to do so. SMDI argues that this restriction on fee objections was also a term of “special prejudice.” Conf. App., Aplt. Br. at 50. We cannot agree. ConsumerInfo and the Trustee had a legitimate reason for including this term. If they had not included it, SMDI could have continued to challenge the Liquidating Trustee’s fees in order to impede his ability to litigate the AP against SMDI. We do not see how SMDI was unfairly prejudiced by its inability to do so.