The Restructuring Report

Subchapter V of chapter 11 of the U.S. Bankruptcy Code provides a streamlined reorganization process for small business debtors. Similar to a normal chapter 11 case, subchapter V allows a debtor to cramdown a plan without the approval of the unsecured class as long as certain requirements are satisfied. However, subchapter V implements a number of negative consequences for cramdown plans (also referred to as nonconsensual plans in the subchapter V context), including a delayed discharge, the designation of the subchapter V trustee as the default distributor of plan payments, restrictions on plan modifications, and the administrative costs of the subchapter V trustee remaining in place post-confirmation. Due to the significant effects of a nonconsensual determination, subchapter V incentivizes debtors to seek confirmation of consensual plans. However, what happens if an impaired class does not vote on the plan? Should the court deem such inaction as the equivalent of a rejection (thus creating a nonconsensual plan) or an acceptance (and a consensual plan)?

One line of cases holds that impaired creditors who did not cast ballots should not be counted for purposes of whether section 1129(a)(8) of the Bankruptcy Code is satisfied. In In re Franco’s Paving, LLC, the bankruptcy court examined the failure to vote in the context of section 1126(c)’s requirements for calculating whether a class of claims votes to accept a plan. For a class to vote to accept a plan, “at least two-thirds in amount and more than one-half in number of the allowed claims of such class” must vote to accept under section 1126(c). The Franco’s Paving court noted the impossibility of conducting this calculation with a class of impaired creditors that did not cast a ballot. The court concluded that, “[b]y implementing a denominator that includes only votes actually cast in § 1126, it logically follows that Congress presumed that at least one vote was cast.” The court in In re Hot’z Power Wash, Inc., reached the same conclusion and ultimately expanded on it – “Thus, since the application of the mathematical calculation in § 1126(c) is absurd as applied to a nonvoting class, and because the Code is silent on the correct treatment of a nonvoting class, this Court is left with only one option: when an impaired class of creditors fails to cast a ballot, that class will not be counted for purposes of whether § 1129(a)(8) is satisfied.” In an oral ruling in In re Caring Hands Home Care, Inc., Case No. 23-60214, Judge Michael Ridgway of the U.S. Bankruptcy Court for the District of Minnesota reached a similar conclusion.

However, the court in In re M.V.J. Auto World, Inc., rejected this line of reasoning. The M.V.J. court instead held that section 1129(a)(8) requires each impaired class to accept the plan and that, for an impaired class to accept a plan under section 1126(c), there must be sufficient votes to accept. The court concluded that “section 1129(a)(8) does not compel acceptance or rejection; section 1129(a)(8) looks to whether a class has accepted a plan, not whether a class has rejected a plan or stood silent.” A number of other courts, including In re Thomas Orthodontics, S.C., In re Florist Atlanta, Inc. and In re Sushi Zushi of Texas, LLC, also determined that a plan could not be confirmed as a consensual plan under section 1191(a) if an impaired class did not vote on the plan.

This split in authority underscores the ongoing uncertainty surrounding the treatment of nonvoting impaired classes in Subchapter V cases—an issue that remains critical to determining whether a plan can be confirmed consensually or must proceed as a nonconsensual cramdown with its attendant consequences.