624 B.R. 799
Bankr. S.D. Tex.2020Background
- Debtors Stephen and David Dernick filed chapter 11 petitions in May 2018; the cases were later jointly administered and a Mediated Settlement Agreement (MSA) was approved January 30, 2020.
- Debtors proposed a jointly administered Chapter 11 plan filed July 11, 2020 to implement the MSA, including creation of an Unsecured Creditors’ Trust (UCT) funded by Riley Exploration Permian, LLC (REP) receipts and a first‑priority lien on 100% of the Dernicks’ REP interests ("REP Units").
- Two major creditors, NorthStar Gas Ventures, LLC and David H. Russell Family LP (allowed claims ≈ $3.7M and $11.4M), filed a joint objection to confirmation and cast rejecting ballots.
- Debtors moved under 11 U.S.C. § 1126(e) to designate those rejecting ballots as cast in bad faith, alleging the ballots were motivated by an ulterior desire to obtain REP Units rather than creditor interests.
- After a September 16, 2020 hearing, the court denied Debtors’ motion to designate ballots, sustained many of NorthStar/Russell’s objections to the Plan/Disclosure/Trust Agreement as inconsistent with the MSA (ordering specific amendments), and declined to confirm the Plan because it failed § 1126(c)/§ 1129(a)(10) vote requirements.
Issues
| Issue | Debtors' Argument | NorthStar/Russell's Argument | Held |
|---|---|---|---|
| Whether the rejecting ballots should be designated as cast in bad faith under § 1126(e) | Ballots were cast to force a default and secure REP Units (an ulterior motive), so votes should be disregarded | Ballots were legitimate creditor votes based on claimed MSA noncompliance | Denied—ballots not designated; creditors’ objections deemed filed in good faith |
| Whether the Plan was proposed in good faith under § 1129(a)(3) | Plan proposed honestly, complies substantially with MSA and provides feasible cure mechanics | Plan violates/omits MSA terms and so lacks good faith | Granted for Debtors—Plan was proposed in good faith (but still unconfirmable for other reasons) |
| Whether Class 3 accepted the Plan under § 1126(c) / whether § 1129(a)(10) is satisfied | If creditor ballots were designated, Class 3 would have sufficient acceptances; otherwise plan fails | Creditor votes are valid rejections preventing statutory acceptance | Held against Debtors—Class 3 did not meet §1126(c); §1129(a)(10) unsatisfied; Plan unconfirmable |
| Whether Plan/Disclosure/Trust Agreement properly incorporate and implement the MSA (including definitions, payments, releases, Trust governance, and cure/perfection mechanics) | Plan/Trust largely consistent with MSA; debtors’ flexibility to cure increases feasibility | Plan contains numerous provisions inconsistent with or adverse to the MSA and must be amended | Court sustained many creditor objections, ordered specific textual amendments to Plan, Disclosure, and Trust Agreement, required resolved Pledge/Security form or further hearing, and rejected Debtors’ last‑minute confirmation order |
Key Cases Cited
- Stern v. Marshall, 564 U.S. 462 (2011) (limits on bankruptcy courts’ constitutional authority to enter final judgment in certain state‑law counterclaims)
- Save Our Springs Alliance, Inc. v. WSI (II)-COS, L.L.C., 632 F.3d 168 (5th Cir. 2011) (discusses §1126(e) bad‑faith vote designation principles)
- In re Save Our Springs Alliance, Inc., 388 B.R. 202 (Bankr. W.D. Tex. 2008) (bankruptcy court discussion of creditor motives and vote designation)
- Garvin v. Cook Invs. NW, SPNWY, LLC, 922 F.3d 1031 (9th Cir. 2019) (interpretation of §1129(a)(3) and "means forbidden by law" language)
- Young v. Higbee Co., 324 U.S. 204 (1945) (historical authority on courts denying creditor voting rights for bad faith under predecessor statute)
- In re T-H New Orleans Ltd. P'ship, 116 F.3d 790 (5th Cir. 1997) (totality‑of‑circumstances test for good faith in plan proposal)