Voluntary Petition for Chapter 11 Bankruptcy
Modification to a Chapter 11 Reorganization Plan
New Disclosure Statement and Another Opportunity to Vote Required
Federal Rule of Bankruptcy Procedure 3019(a)
Appeal from the United States District Court for the Southern District of Florida D.C. Docket No. 1:20-cv-23120-DPG
Just before the Chapter 11 reorganization plans of Caribevision Holdings, Inc. and Caribevision TV Network, LLC were set to be confirmed, the debtors filed an emergency motion to modify the plans under 11 U.S.C. § 1127(a). The initial plans called for equity in the reorganized companies to be split between four shareholders: Ramon Diez-Barroso, Pegaso Television Corp., Emilio Braun, and Vasallo TV Group. The modification, after being approved by the bankruptcy court, stripped the first three of their equity and allocated full ownership to the fourth—a company controlled by the debtors’ Chief Executive Officer. Taken by surprise, the three ousted shareholders, who collectively call themselves the Pegaso Equity Holders, now challenge the bankruptcy court’s order granting the debtors’ emergency motion to modify the reorganization plans. They contend that they were entitled to a revised disclosure statement and a second opportunity to vote on the plans under Federal Rule of Bankruptcy Procedure 3019(a)—a procedural protection the bankruptcy court did not provide them. We agree. When a modification to a Chapter 11 reorganization plan materially and adversely affects the treatment of a class of claim or interest holders, those claim or interest holders are entitled to a new disclosure statement and another opportunity to vote. Because the modification materially and adversely affected the Pegaso Equity Holders, we reverse and remand to the bankruptcy court.
(…) In May 2019, the holding companies—along with two operating companies they own—filed voluntary petitions for Chapter 11 bankruptcy. The Chapter 11 proceeding would restructure the companies’ debt obligations while maintaining ongoing operations. Each company authorized Carlos Vasallo, the networks’ President and Chief Executive Officer, to make all decisions regarding the Chapter 11 petitions.
To finance the discharge of debt obligations and maintain operations, the proposed reorganization plans called for the post-petition holding companies’ equity holders to make a new $500,000 capital contribution and execute a $1.6 million line of credit. The new equity in the reorganized holding companies was to be allocated in proportion to the amount of capital each post-petition shareholder contributed. To achieve this, the plans “cancelled and extinguished” the equity interests in the pre-petition entities and “simultaneously” issued new equity interests in the reorganized holding companies. The three Pegaso Equity Holders were each to receive individual shares that collectively amount to 65.8% of the equity interests in each reorganized holding company—50.1% to Diez-Barroso, 11.9% to Pegaso Television Corp., and 3.8% to Braun. The remainder was to go to the Vasallo TV Group, LLC—a company owned by Carlos Vasallo. The plans classified all the equity interest holders together into the same class—Class 3.
At first this bankruptcy case was proceeding like any other. The debtors submitted the plans to the bankruptcy court along with a disclosure statement. Minor objections were made; an amended disclosure statement was filed. The bankruptcy court approved it, votes on the reorganization plans were solicited, and ballots were filed. A year into the bankruptcy, everything was going according to plan. Until it wasn’t. Two weeks before the confirmation hearing, the same day as the deadline to cast a ballot, the debtors informed the Pegaso Equity Holders that they needed the exit financing three days before the confirmation hearing. The debtors believed that this was necessary to comply with their view of the bankruptcy court’s requirement to certify that funding was available. But the Pegaso Equity Holders assert that this was unexpected. The reorganization plans, along with the disclosure statement, provided that the financial contributions were to be made “on the Effective Date”—a date that would not occur until after the Confirmation Order became a final order.
(…) The court immediately proceeded to consider confirmation. Confirmation of a Chapter 11 plan typically requires the impaired classes of creditors and equity interest holders to accept the plan. 11 U.S.C. § 1129(a)(8). When it came time to count the votes, no one in Class 3—the equity interest holders of the pre-petition holding companies—had cast a ballot. But under the Code, if a plan provides that the interests of a class do not entitle the interest holders to “receive or retain any property under the plan on account of” their interests, then they are “deemed not to have accepted a plan.” 11 U.S.C. § 1126(g). The court read the initial reorganization plans to extinguish the pre-petition equity interests without giving those interest holders anything in return. So the court’s solution was to “deem” that Class 3 had rejected the plans. It then confirmed the modified plans via a “cramdown” over the deemed dissent of the Class 3 interest holders. See 11 U.S.C. § 1129(b).
Modifying a Chapter 11 reorganization plan before confirmation is relatively easy: the “proponent of a plan may modify such plan at any time before confirmation.” 11 U.S.C. § 1127(a). This is by design. The Bankruptcy Code seeks to facilitate negotiation between the debtor and its creditors, equity holders, and other interested parties. Collier on Bankruptcy ¶ 1127.03[1] (16th ed. 2022). Easy modification allows negotiated outcomes to quickly become part of the plan. But there are a few constraints. The modified plan must still comply with the Code’s substantive requirements for any reorganization plan. 11 U.S.C. § 1127(a). This means that the modification must comply with § 1122’s restrictions on the classification of claims and interests and § 1123’s requirements for the contents of a reorganization plan. Id. An important substantive requirement for our purposes is found in § 1123(a)(4). Unless the disfavored class members consent, the modified plan must “provide the same treatment for each claim or interest of a particular class.” Id. § 1123(a)(4). There are also procedural constraints. A modification must comply with § 1125’s requirement that claim and interest holders be given “adequate information” about the contents of a plan. Id. § 1127(c). Before a modification is filed, this is accomplished in a disclosure statement, which must be approved by the bankruptcy court as containing adequate information. Id. § 1125(b); Fed. R. Bankr. P. 3016(b). A sufficient statement ensures that investors can make an informed vote. See 11 U.S.C. § 1125(a)(1).
Under certain circumstances, when a modification is made after votes are cast based on an old disclosure statement, the debtor must provide a new disclosure statement and call for another round of voting. In re New Power Co., 438 F.3d 1113, 1117–18 (11th Cir. 2006). But not all modifications trigger this requirement. A claim or interest holder is entitled to this procedural protection only if, after a hearing, the bankruptcy court finds that the modification “materially and adversely changes the way that claim or interest holder is treated.” Id. Because these determinations are mixed questions of law and fact, we review them de novo. Id. at 1117.
The rule provides that if the court finds that “the proposed modification does not adversely change the treatment of the claim of any creditor or the interest of any equity security holder who has not accepted in writing the modification, it shall be deemed accepted by all creditors and equity security holders who have previously accepted the plan.” Fed. R. Bankr. P. 3019(a) (emphasis added). The key word here is “any.” “Read naturally, the word ‘any’ has an expansive meaning, that is, ‘one or some indiscriminately of whatever kind.’” United States v. Gonzales, 520 U.S. 1, 5 (1997) (citation omitted); accord Merritt v. Dillard Paper Co., 120 F.3d 1181, 1186 (11th Cir. 1997). The repeated use of the word “any” refers to creditors or equity security holders of whatever kind. The text does not permit any narrower interpretation. The rule therefore requires additional disclosure and voting if the modification materially and adversely affects any creditor or interest holder, not just those voting to accept the plan.
Our precedent likewise does not distinguish between classes. We have said that “the bankruptcy court may deem a claim or interest holder’s vote for or against a plan as a corresponding vote in relation to a modified plan unless the modification materially and adversely changes the way that claim or interest holder is treated.” New Power, 438 F.3d at 1117–18 (emphasis added). “If it does,” we continued, “the claim or interest holder is entitled to a new disclosure statement and another vote.” Id. at 1118. The text of the rule and our precedent thus both make clear that if a modification materially and adversely changes the treatment of any claim or interest holder who has not accepted the modification in writing, then that claim or interest holder is entitled to a new disclosure statement and resolicitation of votes. So too here.
To be sure, for a creditor or equity interest holder that already voted to reject a plan, a second rejection vote in response to a modification that materially and adversely affects its interest will have little effect. On the other hand, a creditor or equity interest holder that previously voted to accept a plan benefits from the added disclosure and revoting because it can change its vote to reject the plan—recourse not available to a creditor or equity interest holder that voted to reject the initial plan. But a dissenting vote on a Chapter 11 plan does not give the debtor a free pass to modify the plan to the detriment of that dissenting claim or interest holder. This case shows exactly why a new disclosure statement can protect a claim or interest holder who previously voted to reject the plans. A new disclosure statement with additional time to vote would have given the Pegaso Equity Holders an opportunity to object to the modification on substantive grounds.
Secondary Sources: Collier on Bankruptcy ¶ 1127.03[1] (16th ed. 2022)
(U.S. Court of Appeals for the Eleventh Circuit, Jan. 5, 2023, Emilio Braun v. America-CV Station Group, Inc., et al., Docket No. 21-13774, Published)
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