629 B.R. 289
Bankr. D. Kan.2021Background:
- Fencepost Productions, NPB Company, and Old Dominion (jointly administered Chapter 11 debtors) borrowed from Associated Bank; contemporaneously the BMS Group (several related individuals/entities) executed subordination agreements in favor of Associated.
- Subordination Agreements subordinated BMS Group payment rights to Associated and purport to permit Associated to receive payments, file/prove claims, and vote the BMS Group’s claims in bankruptcy.
- Associated filed a proof of claim (~$7.7M); the BMS Group filed subordinated unsecured claims (~$5.3M). Debtors proposed a plan where Associated’s unsecured portion gets 15% over 36 months; BMS claims are in a subordinated class with modest payments that would inure to Associated.
- Debtors objected to the BMS Group proofs of claim and moved to (a) disqualify subordinated creditor votes, (b) designate plan rejection, (c) invalidate unsigned ballots, and (d) strike the BMS Group’s plan/disclosure-statement objection; Associated supports Debtors.
- The BMS Group voted to reject the plan and also cast ballots; Associated voted the BMS Group claims to accept. Court held a hearing and considered legal issues about enforceability of voting waivers, claim allowance, and standing to participate in confirmation.
Issues:
| Issue | Debtors' Argument | BMS Group's Argument | Held |
|---|---|---|---|
| Enforceability of provisions that assign/vacate BMS voting rights to Associated | Subordination agreements validly transfer voting power to Associated; BMS ballots unauthorized | Subordination only alters payment priority; it does not transfer voting rights | Court: Voting-waiver/assignment provisions unenforceable; subordinated creditors retain statutory right to vote (follows LaSalle Street) |
| Allowance of BMS proofs of claim | Claims should be disallowed because BMS have no right to payments or votes under the agreements | Claims remain valid unsecured claims, albeit subordinated in priority | Court: Overrules objections — claims allowed; subordination affects priority only |
| Standing to participate in confirmation (object/vote) | BMS lack prudential standing because under all scenarios they will receive nothing; their participation would assert third-party rights | BMS are creditors and parties in interest under §1109 and can object/vote | Court: Statutory standing exists, but prudential standing bars BMS from litigating issues that do not directly affect their pecuniary interests (they lack prudential standing to oppose plan on third-party rights) |
| Disqualification/designation of ballots; invalidation of unsigned ballots; striking objections | Ballots should be disqualified/designated or invalidated because of subordination and form; objections should be struck as interfering with Associated | BMS ballots valid; objections permissible | Court: Moot in view of ruling that BMS lack prudential standing; ballots/objections will not be considered |
Key Cases Cited
- Bank of Am., Nat’l Ass’n v. N. LaSalle St. Ltd. P’ship (In re 203 N. LaSalle St. P’ship), 246 B.R. 325 (Bankr. N.D. Ill. 2000) (holding subordination agreements do not strip subordinated creditor of statutory voting rights)
- Blue Ridge Invs., II, LP v. Wachovia Bank, N.A. (In re Aerosol Packaging, LLC), 362 B.R. 43 (Bankr. N.D. Ga. 2006) (upholding enforcement of subordination agreement authorizing senior creditor to vote junior creditor’s claim)
- In re Tribune Co., 972 F.3d 228 (3d Cir. 2020) (discusses treatment of subordinated claims and unfair discrimination in cramdown context)
- Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988) (explaining prudential third-party standing limits in bankruptcy)
- In re Tascosa Petroleum Corp., 196 B.R. 856 (D. Kan. 1996) (affirming prudential limitations on a creditor’s ability to litigate rights of other classes)