Opinion ID: 204196
Heading Depth: 2
Heading Rank: 2

Heading: DISH's Appeal

Text: DISH raises different objections to the bankruptcy court's order. [9] First, DISH contends that the bankruptcy court should not have designated its vote as not in good faith, 11 U.S.C. § 1126(e), and that, even after the designation, the bankruptcy court should not have disregarded the entire class that DISH's claim comprised. Second, DISH argues that the plan should have been rejected in its entirety as not feasible. We address these arguments in turn.

To confirm a plan of reorganization, Chapter 11 generally requires a vote of all holders of claims or interests impaired by that plan. See 11 U.S.C. §§ 1126, 1129(a)(8). This voting requirement has exceptions, however, including one that allows a bankruptcy court to designate (in effect, to disregard) the votes of any entity whose acceptance or rejection of such plan was not in good faith. Id. § 1126(e). The Code provides no guidance about what constitutes a bad faith vote to accept or reject a plan. Rather, § 1126(e)'s good faith test effectively delegates to the courts the task of deciding when a party steps over the boundary. See In re Figter Ltd., 118 F.3d 635, 638 (9th Cir.1997); see also Revision of the Bankruptcy Act: Hearing on H.R. 6439 Before the House Comm. on the Judiciary, 75th Cong. 181 (1937) [1937 Hearing] (statement of Jacob Weinstein) (describing good faith test of predecessor to § 1126(e) as delegation to the courts). Case by case, courts have taken up this responsibility. No circuit court has ever dealt with a case like this one, however, and neither we nor the Supreme Court have many precedents on the good faith voting requirement in any context; the most recent cases from both courts are now more than 65 years old and address § 1126(e)'s predecessor, § 203 of the Bankruptcy Act. See Young v. Higbee Co., 324 U.S. 204, 65 S.Ct. 594, 89 L.Ed. 890 (1945); In re P-R Holding Corp., 147 F.2d 895 (2d Cir.1945). Nevertheless, these cases, cases from other jurisdictions, legislative history, and the purposes of the good-faith requirement give us confidence in affirming the bankruptcy court's decision to designate DISH's vote in this case. We start with general principles that neither side disputes. Bankruptcy courts should employ § 1126(e) designation sparingly, as the exception, not the rule. In re Adelphia Commc'ns Corp., 359 B.R. 54, 61 (Bankr.S.D.N.Y.2006). For this reason, a party seeking to designate another's vote bears the burden of proving that it was not cast in good faith. See id. Merely purchasing claims in bankruptcy for the purpose of securing the approval or rejection of a plan does not of itself amount to `bad faith.' In re P-R Holding, 147 F.2d at 897; see In re 255 Park Plaza Assocs. Ltd. P'ship, 100 F.3d 1214, 1219 (6th Cir.1996). Nor will selfishness alone defeat a creditor's good faith; the Code assumes that parties will act in their own self interest and allows them to do so. See In re Figter, 118 F.3d at 639. Section 1126(e) comes into play when voters venture beyond mere self-interested promotion of their claims. [T]he section was intended to apply to those who were not attempting to protect their own proper interests, but who were, instead, attempting to obtain some benefit to which they were not entitled. In re Figter, 118 F.3d at 638. A bankruptcy court may, therefore, designate the vote of a party who votes in the hope that someone would pay them more than the ratable equivalent of their proportionate part of the bankrupt assets, Young, 324 U.S. at 211, 65 S.Ct. 594, or one who votes with an ulterior motive, 1937 Hearing, supra, at 180 (statement of SEC Commissioner William O. Douglas), that is, with an interest other than an interest as a creditor, In re P-R Holding, 147 F.2d at 897. Here, the debate centers on what sort of ulterior motives may trigger designation under § 1126(e), and whether DISH voted with such an impermissible motive. The first question is a question of law that we review de novo, and the second a question of fact that we review for clear error, see In re Baker, 604 F.3d at 729, recognizing that a decision that someone did or did not act in good faith hinges on an essentially factual inquiry and is driven by the data of practical human experience, In re Figter, 118 F.3d at 638 (quotation marks omitted). Clearly, not just any ulterior motive constitutes the sort of improper motive that will support a finding of bad faith. After all, most creditors have interests beyond their claim against a particular debtor, and those other interests will inevitably affect how they vote the claim. For instance, trade creditors who do regular business with a debtor may vote in the way most likely to allow them to continue to do business with the debtor after reorganization. See John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154, 161-62 (3d Cir.1993). And, as interest rates change, a fully secured creditor may seek liquidation to allow money once invested at unfavorable rates to be invested more favorably elsewhere. See In re Landing Assocs., Ltd., 157 B.R. 791, 807 (Bankr.W.D.Tex.1993). We do not purport to decide here the propriety of either of these motives, but they at least demonstrate that allowing the disqualification of votes on account of any ulterior motive could have far-reaching consequences and might leave few votes upheld. The sort of ulterior motive that § 1126(e) targets is illustrated by the case that motivated the creation of the good faith rule in the first place, Texas Hotel Securities Corp. v. Waco Development Co., 87 F.2d 395 (5th Cir.1936). In that case, Conrad Hilton purchased claims of a debtor to block a plan of reorganization that would have given a lease on the debtor's propertyonce held by Hilton's company, later cancelledto a third party. Id. at 397-99. Hilton and his partners sought, by buying and voting the claims, to force [a plan] that would give them again the operation of the hotel or otherwise reestablish an interest that they felt they justly had in the property. Id. at 398. The district court refused to count Hilton's vote, but the court of appeals reversed, seeing no authority in the Bankruptcy Act for looking into the motives of creditors voting against a plan. Id. at 400. That case spurred Congress to require good faith in voting claims. As the Supreme Court has noted, the legislative history of the predecessor to § 1126(e) make[s] clear the purpose of the [House] Committee [on the Judiciary] to pass legislation which would bar creditors from a vote who were prompted by such a purpose as Hilton's. Young, 324 U.S. at 211 n. 10, 65 S.Ct. 594. As then-SEC Commissioner Douglas explained to the House Committee: We envisage that good faith clause to enable the courts to affirm a plan over the opposition of a minority attempting to block the adoption of a plan merely for selfish purposes. The Waco case... was such a situation. If my memory does not serve me wrong it was a case where a minority group of security holders refused to vote in favor of the plan unless that group were given some particular preferential treatment, such as the management of the company. That is, there were ulterior reasons for their actions. 1937 Hearing, supra, at 181-82. [10] One year after Commissioner Douglas's testimony, and two years after the Waco case, Congress enacted the proposed good faith clause as part of the Chandler Act of 1938. Pub.L. 75-575, § 203, 52 Stat. 840, 894. The Bankruptcy Code of 1978 preserved this good faith requirement, with some rewording, as 11 U.S.C. § 1126(e). [11] Modern cases have found ulterior motives in a variety of situations. In perhaps the most famous case, and one on which the bankruptcy court in our case relied heavily, a court found bad faith because a party bought a blocking position in several classes after the debtor proposed a plan of reorganization, and then sought to defeat that plan and to promote its own plan that would have given it control over the debtor. See In re Allegheny Int'l, Inc., 118 B.R. 282, 289-90 (Bankr.W.D.Pa. 1990). In another case, the court designated the votes of parties affiliated with a competitor who bought their claims in an attempt to obstruct the debtor's reorganization and thereby to further the interests of their own business. See In re MacLeod Co., 63 B.R. 654, 655-56 (Bankr.S.D.Ohio 1986). In a third case, the court found bad faith where an affiliate of the debtor purchased claims not for the purpose of collecting on those claims but to prevent confirmation of a competing plan. See In re Applegate Prop., Ltd., 133 B.R. 827, 833-35 (Bankr.W.D.Tex.1991). Although we express no view on the correctness of the specific findings of bad faith of the parties in those specific cases, we think that this case fits in the general constellation they form. As the bankruptcy court found, DISH, as an indirect competitor of DBSD and part-owner of a direct competitor, bought a blocking position in (and in fact the entirety of) a class of claims, after a plan had been proposed, with the intention not to maximize its return on the debt but to enter a strategic transaction with DBSD and to use status as a creditor to provide advantages over proposing a plan as an outsider, or making a traditional bid for the company or its assets. DBSD II, 421 B.R. at 139-40. In effect, DISH purchased the claims as votes it could use as levers to bend the bankruptcy process toward its own strategic objective of acquiring DBSD's spectrum rights, not toward protecting its claim. We conclude that the bankruptcy court permissibly designated DISH's vote based on the facts above. This case echoes the Waco case that motivated Congress to impose the good faith requirement in the first place. In that case, a competitor bought claims with the intent of voting against any plan that did not give it a lease in or management of the debtor's property. 87 F.2d at 397-99. In this case, a competitor bought claims with the intent of voting against any plan that did not give it a strategic interest in the reorganized company. The purchasing party in both cases was less interested in maximizing the return on its claim than in diverting the progress of the proceedings to achieve an outside benefit. In 1936, no authority allowed disregarding votes in such a situation, but Congress created that authority two years later with cases like Waco in mind. We therefore hold that a court may designate a creditor's vote in these circumstances. We also find that, just as the law supports the bankruptcy court's legal conclusion, so the evidence supports its relevant factual findings. DISH's motive the most controversial findingis evinced by DISH's own admissions in court, by its position as a competitor to DBSD, [12] by its willingness to overpay for the claims it bought, [13] by its attempt to propose its own plan, and especially by its internal communications, which, although addressing the Second Lien Debt rather than the First Lien Debt at issue here, nevertheless showed a desire to to obtain a blocking position and control the bankruptcy process for this potentially strategic asset. The Loan Syndications and Trading Association (LSTA), as amicus curiae, argues that courts should encourage acquisitions and other strategic transactions because such transactions can benefit all parties in bankruptcy. We agree. But our holding does not shut[] the door to strategic transactions, as the LSTA suggests. Rather, it simply limits the methods by which parties may pursue them. DISH had every right to propose for consideration whatever strategic transaction it wanteda right it took advantage of hereand DISH still retained this right even after it purchased its claims. All that the bankruptcy court stopped DISH from doing here was using the votes it had bought to secure an advantage in pursuing that strategic transaction. DISH argues that, if we uphold the decision below, future creditors looking for potential strategic transactions with chapter 11 debtors will be deterred from exploring such deals for fear of forfeiting their rights as creditors. But our ruling today should deter only attempts to  obtain a blocking position and thereby control the bankruptcy process for [a] potentially strategic asset (as DISH's own internal documents stated). We leave for another day the situation in which a preexisting creditor votes with strategic intentions. Cf. In re Pine Hill Collieries Co., 46 F.Supp. 669, 672 (E.D.Pa.1942). We emphasize, moreover, that our opinion imposes no categorical prohibition on purchasing claims with acquisitive or other strategic intentions. On other facts, such purchases may be appropriate. Whether a vote has been properly designated is a fact-intensive question that must be based on the totality of the circumstances, according considerable deference to the expertise of bankruptcy judges. Having reviewed the careful and fact-specific decision of the bankruptcy court here, we find no error in its decision to designate DISH's vote as not having been cast in good faith.
DISH next argues that the bankruptcy court erred when, after designating DISH's vote, it disregarded the entire class of the First Lien Debt for the purpose of determining plan acceptance under 11 U.S.C. § 1129(a)(8). Section 1129(a)(8) provides that each impaired class must vote in favor of a plan for the bankruptcy court to confirm it without resorting to the (more arduous) cram-down standards of § 1129(b). Faced with a class that effectively contained zero claimsbecause DISH's claim had been designatedthe bankruptcy court concluded that [t]he most appropriate way to deal with that [situation] is by disregarding [DISH's class] for the purposes of section 1129(a)(8). DBSD I, 419 B.R. at 206. We agree with the bankruptcy court. Common sense demands this result, which is consistent with (if not explicitly demanded by) the text of the Bankruptcy Code. The Code measures the acceptance of a plan not creditor-by-creditor or claim-by-claim, but class-by-class. The relevant provision explains how to tally acceptances within a class of claims to arrive at the vote of the overall class: A class of claims has accepted a plan if such plan has been accepted by creditors, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan. 11 U.S.C. § 1126(c) (emphasis added). For each class, then, the bankruptcy court must calculate two fractions based on the non-designated, allowed claims in the class. To arrive at the first fraction, the court divides the value of such claims that vote to accept the plan by the value of all claims that vote either way. For the second fraction, the court uses the number of claims rather than their value. If the first fraction equals two-thirds or more, and the second fraction more than one-half, then the class as a whole votes to accept the plan. The arithmetic breaks down in cases like this one. Because the only claim in DISH's class belongs to DISH, whose vote the court designated, each fraction ends up as zero divided by zero. In this case, the plain meaning of the statute and common sense lead clearly to one answer: just as a bankruptcy court properly ignores designated claims when calculating the vote of a class, see 11 U.S.C. § 1126(e), so it should ignore a wholly designated class when deciding to confirm a plan under § 1129(a)(8). [14] We agree with the bankruptcy court that any other rule would make [the] designation ruling meaningless in this context. DBSD I, 419 B.R. at 206. [15] We therefore affirm the bankruptcy court's treatment of DISH's class.
Finally, because we affirm the bankruptcy court's treatment of both DISH's vote and its class's vote, we do not reach that court's alternative theory that it could cram the plan down over DISH's objection because DISH realized the indubitable equivalent of its First Lien Debt under the plan. 11 U.S.C. § 1129(b)(2)(A)(iii).
To confirm a plan under Chapter 11, a bankruptcy court must find that the plan is feasible, or, more precisely, that [c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor ... unless such liquidation or reorganization is proposed in the plan. 11 U.S.C. § 1129(a)(11). DISH argues that the feasibility of this plan is purely speculative and that the bankruptcy court therefore should not have confirmed it. We review a finding of feasibility only for clear error, see In re Webb, 932 F.2d 155, 158 (2d Cir.1991), and we find none here. For a plan to be feasible, it must offer[] a reasonable assurance of success, but it need not guarantee[] success. Kane, 843 F.2d at 649. Some possibility of liquidation or further reorganization is acceptable and often unavoidable. The bankruptcy court applied this standard and found this plan feasible based primarily on four factors. DBSD I, 419 B.R. at 201-03. First, the plan dramatically deleverage[s] DBSD. Id. at 202; see In re Piece Goods Shops Co., 188 B.R. 778, 798 (Bankr.M.D.N.C.1995). Before bankruptcy, DBSD owed over $800 million; the projected debt of the reformed DBSD would be as low as $260 million as late as 2013. Given the bankruptcy court's valuation of a reorganized DBSD as worth between $492 million and $692 million, this debt reduction makes a big difference. Second, the court found it likely that DBSD would be able to obtain the capital it needs. DBSD has already received commitments for a credit facility to provide working capital for the first two years. DBSD I, 419 B.R. at 203. After two years, DBSD would need further capital, but the court found very reasonable the possibility that DBSD will be able to secure either more financing or a strategic investor. Id. As evidence of this possibility, the court pointed to expert testimony, actual offers that had been made (including DISH's own offer), and the ability of similar companies to access the capital markets. The court also noted the likely attractiveness to future investors of DBSD's control over 20MHz of prime bandwidth, a finite and very valuable resource. Id. at 194. Third, the court found little risk of default on DBSD's secured obligations to DISH, and still less risk that any such default would lead to the liquidation or financial reorganization that § 1129(a)(11) seeks to avert. Id. at 203. The plan makes the interest on DISH's First Lien Debt, which had been payable in cash, payable only in kind, with no cash due for four years. This feature buys DBSD breathing room to shore up its position before it becomes necessary to secure significant additional capital, as described above. Fourth, and finally, the bankruptcy court noted that general credit markets at the time of its decision in October 2009 had improved from their low a year before. Id. Although no one can predict market conditions two or four years down the road, the improvement the bankruptcy court noted was real, and increased the likelihood that DBSD will be able to repay its creditors. Based on all of these factors, the bankruptcy court found the plan of reorganization feasible. Id. We find the bankruptcy court's analysis thorough and persuasive. DISH's arguments to the contrary do not successfully identify any clear error in it. First, DISH argues that the bankruptcy court employed the wrong legal standard. DISH claims that a bankruptcy court cannot confirm a plan unless the proponents prove specifics ... as to how the Debtors would be able to meet their repayment obligations at the end of the Plan period. That is true at some level of generality, but exactly how specific those specifics must be depends on the circumstances. In most situations, the time immediately following bankruptcy will call for fairly specific proof of the company's ability to meet its obligationsas here, where it was undisputed that the Debtors have commitments for working capital financing for the next two years. DBSD I, 419 B.R. at 203. As one moves further away from the time of confirmation, however, the proof will necessarily become less and less specific. Had DBSD's plan called for the issuance of 20-year notes, for instance, no one would expect specifics about the sort of financing it might get in year 19. When a court is dealing with an intermediate time frame like the four years after which the balloon payment comes due in this case, the level of proof required will be somewhere in the middle. In this context, the bankruptcy court based its feasibility finding on sufficiently specific proof to conclude that DBSD would be likely to avoid reorganization or liquidation even after four years. Overall, the bankruptcy court both stated and applied the correct standard in this case, dooming DISH's legal challenge. Second, DISH argues that the district court clearly erred in its fact-finding. At most, DISH's arguments on this front demonstrate that there is some chance that DBSD might eventually face liquidation or further reorganization. But that small chance does not change the feasibility analysis, which requires only a reasonable assurance of success, not an absolute guarantee[]. Kane, 843 F.2d at 649. A small or even moderate chance of failure does not mean that the plan is  likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor. 11 U.S.C. § 1129(a)(11) (emphasis added). We therefore uphold the bankruptcy court's feasibility determination.