585 B.R. 145
10th Cir. BAP2018Background
- Novinda Corp., a developer of a mercury-removal product, filed Chapter 11 after losing market viability and after an exclusive manufacturer (Colloid) demanded a 50% immediate price increase; appellants (Colloid, Minerals Technologies, AMCOL) were creditors and 18% equity holders who had invested about $7.2M.
- The estate sold substantially all assets to funds (the Funds); remaining material asset was potential litigation against the Appellants.
- Debtor proposed a liquidating Chapter 11 plan (Second Amended Plan) with 12 classes: priority wage claims (Class 1), secured (Class 2), trade and Funds unsecured (Class 3), Appellants’ unsecured claims (Class 4), administrative convenience small claims (Class 5), and equity classes (6–12).
- The Funds agreed to contribute $400,000 to the estate (up to $25,000 allowed for investigating claims versus the Funds); distribution to Classes 3 and 4 depended largely on success of post-confirmation litigation pursued by a Plan Administrator.
- Appellants objected to: (1) separate classification of their claims (gerrymandering), (2) Plan Administrator bias toward the Funds, (3) infeasibility because recoveries depended on speculative litigation, (4) unfair discrimination and lack of good faith. Bankruptcy Court overruled objections and confirmed the plan; appellants appealed.
Issues
| Issue | Plaintiff's Argument (Appellants) | Defendant's Argument (Debtor/Funds) | Held |
|---|---|---|---|
| 1. Proper classification under §1122(a) | Separate classification of Appellants (Class 4) was improper gerrymandering to disadvantage them | Separate classes (including administrative convenience class) were justified by: non-similar priority wage claims, Appellants’ non-creditor motivations, preservation of equitable subordination claims, and administrative convenience | Affirmed: separate classification permissible; Court found reasonable business/factual bases and no gerrymandering to obtain an impaired accepting class |
| 2. Unfair discrimination under §1129(b)(1) | Different treatment of Appellants is unfair discrimination because similarly ranked unsecured creditors get disparate treatment | Treatment does not unfairly discriminate: Class 4’s percentage recovery and timing equal to Class 3; Funds’ voluntary subordination benefits others but does not harm Appellants’ recovery | Affirmed: plan does not unfairly discriminate as Appellants’ recovery percentage and risk are not materially worse |
| 3. Good faith of plan proposal (§1129(a)(3)) | Separate classification and treatment evidence lack of good faith | Plan proposed in good faith; classifications and disclosures supported by record | Affirmed: Bankruptcy Court’s factual finding of good faith not clearly erroneous |
| 4. Feasibility (§1129(a)(11)) | Plan is speculative because distributions depend on uncertain litigation recoveries | Primary funding is the Funds’ $400,000 contribution (not contingent); litigation proceeds are ancillary; plan is a liquidating plan but feasibility analysis supports confirmation | Affirmed: plan feasible — Court found reasonable prospect of performance given Funds’ contribution and non-contingent sources |
Key Cases Cited
- Lenox MacLaren Surgical Corp. v. Medtronic, Inc., 847 F.3d 1221 (10th Cir. 2017) (distinguishing legal vs. factual review on issues like classification)
- Search Mkt. Direct, Inc. v. Jubber (In re Paige), 685 F.3d 1160 (10th Cir. 2012) (equitable mootness standard and appellate review principles)
- Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture, 995 F.2d 1274 (5th Cir. 1991) (the ‘‘one clear rule’’: no gerrymandering to secure an impaired consenting class)
- In re Armstrong World Indus., Inc., 348 B.R. 111 (D. Del. 2006) (framework for unfair discrimination: comparing percentage recovery and allocation of risk)
- In re Am. Capital Equip., LLC, 688 F.3d 145 (3d Cir. 2012) (plans hinging primarily on speculative litigation may be infeasible)
- In re Heritage Org., L.L.C., 375 B.R. 230 (Bankr. N.D. Tex. 2007) (liquidating plan feasibility analysis and when feasibility need be considered)