In Re Coastal Broadcasting Systems, Inc., 570 F. App'x 188

Background

Coastal Broadcasting restructured in Dec. 2008: six shareholders redeemed; Rosenfeld and Huf received subordinated promissory notes (~$1.7M) and Sturdy Savings Bank (Sturdy) refinanced Senior Debt.
Rosenfeld and Huf signed a Subordination and Intercreditor Agreement assigning certain rights to Sturdy: Subordinated Debt subordinated to Senior Debt, but scheduled payments could continue; §3.1–3.2 purported to direct payments and authorize Sturdy to act (including vote the Subordinated Debt) upon a "reorganization" or similar proceeding.
Coastal later defaulted on obligations to various creditors and filed Chapter 11 in Jan. 2011; Coastal’s plan placed Sturdy alone in Class I (secured), general unsecureds in Class III, and Rosenfeld/Huf (and other former shareholders) in Class IV, which the disclosure said would receive nothing per the Agreement.
Rosenfeld and Huf objected to confirmation—arguing their claims were impaired (so they could vote), that separate classification was improper, and the plan was not feasible. Bankruptcy Court found their claims impaired but concluded §3.2 plainly authorized Sturdy to vote their claims and Sturdy would vote for the plan; it confirmed the plan.
District Court affirmed; Rosenfeld and Huf raised additional arguments on appeal (agreement violates Code; §1126(g) deemed rejection) that were deemed waived or without merit. Third Circuit reviews de novo on legal issues and affirms in all respects.

Issues

Issue	Plaintiff's Argument (Rosenfeld/Huf)	Defendant's Argument (Coastal/Sturdy)	Held
Whether the Agreement assigns voting rights to Sturdy for a Chapter 11 reorganization	§3.2 applies only to liquidation, not reorganization; no assignment for Chapter 11	§3.1 expressly lists "reorganization" and §3.2 authorizes Sturdy to vote Subordinated Debt	Agreement unambiguously authorizes Sturdy to vote in a reorganization; assignment enforceable
Whether Class IV (Objectors) may be separately classified from other unsecured creditors	Separate classification was improper and claims should be in same class as other unsecured creditors	Objectors’ claims are uniquely subject to the Agreement, so separate classification is reasonable; any error harmless because Sturdy would vote in favor	Separate classification was reasonable and permissible under §1122(a); affirmed
Feasibility of the plan under 11 U.S.C. §1129(a)(11)	Plan not feasible due to Coastal’s low profit margins and risk of further reorganization/liquidation	Bankruptcy Court found income projections sufficient; no clear error in feasibility finding	Feasibility finding not clearly erroneous; plan satisfies §1129(a)(11)
Whether §1126(g) "deemed rejection" prohibited Sturdy from voting	Because the class receives nothing, §1126(g) deems the class to have rejected and Sturdy cannot override that status by voting	Argument raised only on appeal; waived and without merit in any event	Argument waived; §1126(g) did not prevent Sturdy from voting under the Agreement

Key Cases Cited

In re O’Brien Envtl. Energy, Inc., 188 F.3d 116 (3d Cir. 1999) (standard of appellate review of bankruptcy appeals)
In re Trans World Airlines, Inc., 145 F.3d 124 (3d Cir. 1998) (standards for reviewing bankruptcy court orders)
In re Handel, 570 F.3d 140 (3d Cir. 2009) (enforceability of voting assignments reviewed de novo)
Travelers Indemnity Co. v. Dammann & Co., 594 F.3d 238 (3d Cir. 2010) (contract interpretation under state law follows plain language)
Transportes Ferreos de Venezuela II CA v. NKK Corp., 239 F.3d 555 (3d Cir. 2001) (choice-of-law: application of New Jersey contract law)
In re Kaiser Grp. Int’l Inc., 399 F.3d 558 (3d Cir. 2005) (issues not raised in bankruptcy court are waived on appeal)
In re DBSD N. Am. Inc., 634 F.3d 79 (2d Cir. 2011) (standard for reviewing feasibility findings)
Shire U.S., Inc. v. Barr Labs, Inc., 329 F.3d 348 (3d Cir. 2003) (clear-error standard for factual findings)
In re Jersey City Med. Ctr., 817 F.2d 1055 (3d Cir. 1987) (reasonableness standard for plan classification under §1122(a))
In re W.R. Grace & Co., 729 F.3d 311 (3d Cir. 2013) (bankruptcy court’s discretion in plan classification reviewed for reasonableness)