The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
In a recent published opinion, the Eleventh Circuit Court of Appeals (the Court) ruled that if a modification of a proposed chapter 11 plan materially and adversely changed the way that equity holders were treated, they were entitled to a new disclosure statement and a second chance to cast ballots despite their failure to vote on the original plan. Braun v America-CV Station Group, Inc., 56 F.4th 1302 (11th Cir. Jan. 5, 2023).
To view the opinion, click here.
Chapter 11 debtors Caribevision Holdings, Inc. and Caribevision TV Network, LLC (collectively Debtors) are holding companies of a set of Spanish-language television networks in South Florida, New York and Puerto Rico, claiming to operate the largest independent Spanish language television conglomerate in the United States. They filed their bankruptcy petitions in 2019 and later filed a proposed chapter 11 plan which required a cash infusion of $500,000 to be provided as a capital contribution from certain shareholders, along with their execution of a $1.6 million line of credit. Four existing shareholders would provide the capital contributions. The original plan called for all existing shares to be extinguished, with new shares to be issued to the contributing shareholders in proportion to their cash contributions as follows: 50.1% to Ramon Diez-Barroso, 11.9% to Pegaso Television Corp, 3.8% to Emilio Braun (these three shareholders are referred to as the “Pegaso Equity Holders”) and 34.2% to Vasallo TV Group, LLC (Vasallo LLC), a company owned by CEO Carlos Vasallo. The original plan placed all the contributing shareholders in Class 3, the only entities in that class. None of the Class 3 interest holders voted on the original plan.
Two weeks before the confirmation hearing, Debtors advised the Pegaso Equity Holders that they needed the exit financing three days before the confirmation hearing, not before the effective date (after confirmation) as originally required. The Pegaso Equity Holders missed this unexpected new deadline (although the funds were on hand before the confirmation hearing) and Vasallo LLC seized the chance to fund the entire amount and execute the line of credit. Debtors then filed an emergency motion, not served on the Pegaso Equity Holders who had not entered an appearance, which sought to modify the plan, inserting Vasallo LLC as the new 100% shareholder and extinguishing all equity of the Pegaso Equity Holders. The bankruptcy court approved the modification and proceeded to confirm the plan. When the Pegaso Equity Holders learned of this change two days later, they moved for reconsideration, seeking to reallocate the new equity but not otherwise upset the confirmed plan. They argued they were entitled to a new disclosure statement and a new opportunity to vote on the modified plan.
The bankruptcy court denied reconsideration, reasoning that the Class 3 interest holders were not entitled to additional disclosure and voting because they had already been deemed to have rejected the original plan under 11 U.S.C. § 1126(g) because their interests were to be extinguished. The bankruptcy court ruled that only those who had previously voted in favor of the plan were entitled to a new vote, relying on an out-of-circuit bankruptcy court decision. The Pegaso Equity Holders appealed to the district court, which affirmed, ruling that “a class of creditors or equity interest holders who have not accepted a plan have no say in whether that plan can be modified.” The Pegaso Equity Holders further appealed to the Court, which reversed and remanded.
Eleventh Circuit authority requires a new disclosure statement and another round of voting if a proposed modification “materially and adversely changes the way that claim or interest holder[s] [are] treated.” In re New Power Co, 438 F. 3d 1113, 1117-18 (11th Cir. 2006). The Court quickly concluded that this requirement applied here, where the sole outcome of the modification was to strip the Pegaso Equity Holders of their equity in the reorganized companies. The Court rejected the bankruptcy and district court conclusions that the non-vote of Class 3 interests meant they were deemed to have rejected the plan under 11 U.S. C. § 1126(g) because that section only applies if the “interests of such class do not entitle the holders…. to receive or retain any property under the plan.” Even though the existing shares of Class 3 holders were to be extinguished under the original plan, these holders were accorded the opportunity to be issued new shares based on the new capital contributions which they had promised to make, a property interest not given to other classes. Since they were not deemed to have rejected the plan and the modification materially and adversely affected them, they were entitled to new disclosures and new voting.
In addition, even if they were deemed to have rejected, nothing in Eleventh Circuit authority meant they had lost the chance for a new vote if the modification adversely affected them. The lower courts had improperly narrowed Bankruptcy Rule 3019(a), which 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.” The Court reasoned that the word “any” was broad and applied to interest holders whether or not they had previously voted in favor of the plan. The Rule as applied here did not obviate the need for new disclosures because the modification had adversely affected the class of interest holders by denying them the opportunity to participate as shareholders in the reorganized debtors.
Finally, the Court focused on the unequal treatment of the Class 3 interest holders created by the modification. Section 1123(a)(4) of the Bankruptcy Code requires that a plan provide “the same treatment for each claim or interest of a particular class” absent consent. The shareholder controlled by the CEO, Vasallo LLC, would retain 100% of the equity in the reorganized debtor whereas the Pegaso Equity Holders would retain nothing, an unequal treatment. Therefore, the bankruptcy court should not have confirmed the modified plan because of this statutory failure. The Court left the fine-tuning of the remedy after reversal to the bankruptcy court.
The bankruptcy court and district court had relied on out-of-circuit bankruptcy level authority for their conclusion that an interest which was deemed to have rejected a plan was not entitled to new disclosures and a vote. This opinion persuasively concludes otherwise, first by noting the misinterpretation of the effect of § 1126 (a)(4), and then by following its own authority that any creditor or interest holder adversely and materially affected by modification was entitled to new notice, disclosures and balloting. Nothing else makes sense. Why would the appellants have needed to vote in the first place, since their continued ability to be owners of the companies was assured by the original plan? Additionally, the record shows that these shareholders had invested tens of millions of dollars in Debtors and their only chance to recoup any of those dollars was by retaining interests in the reorganized companies, which they believed could become profitable again because of their market share. This entire modification scheme looks to have been orchestrated by the CEO to benefit his own company over others. Fortunately, the Court prevented that unjust outcome.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.