9th Circuit Affirms “Per Plan” Approach to Interpret “Impaired Accepting Class” for Plan Confirmation Purposes Threatening Senior Mortgage Lender Protections in Common Real Estate Financing Structures: In re Transwest Resort Properties, Inc.
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As a case of First Impression at the Circuit Level, Ninth Circuit Holds That Impaired Accepting Class Requirement Applies to
Plan Confirmation on a “Per-Plan” Rather Than a “Per-Debtor” Basis
On January 25, 2018, the United States Court of Appeals of the Ninth Circuit (the “Ninth Circuit” or the “Court”) held that section 1129(a)(10) of the Bankruptcy Code, which requires that to confirm a plan there must be at least one impaired
accepting class, applies on a “per-plan” basis, rather than a “per-debtor” basis. JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props. Inc., et al. (In re Transwest Resort Props. Inc.), No. 16-16221, 2018 U.S. App. LEXIS 1947 (9th Cir. Jan. 25, 2018) (“Opinion”).
This Opinion is significant because under a “per-plan” approach, only a single impaired accepting class is required among all debtors covered under a joint plan. In other words, multiple debtors with a joint plan may cram their plan down on all creditors based on a single accepting class, even where the impaired accepting class has claims against different debtors than the crammed-down class.
The Ninth Circuit is the first circuit court to address the “per-debtor” versus “per-plan” issue, and lower courts in the Southern District of New York and District of Delaware remain split on the proper approach. This Opinion, which the Ninth Circuit marked for publication, is also available on the Ninth Circuit’s website:
JPMCC provides the first Circuit Court level support for the “per plan” approach and may be cause for concern for those who structure real estate investments relying upon a borrower’s corporate separateness from its affiliates and subsidiaries.
However, the concurring opinion of Judge Friedland provides insight to mezzanine lenders, and a strategy for countering the effect of this opinion. Since the concurring opinion emphasized that substantive consolidation cannot be trumped by the adoption of the “per plan” approach under section 1129(a)(10), mezzanine lenders should seek (and preserve for appeal) a substantive consolidation determination when a joint plan is proposed for non-substantively consolidated debtors.