Lead Opinion
Judgе POOLER concurs in part and dissents in part in a separate opinion.
These consolidated appeals arise out of the bankruptcy of DBSD North America, Incorporated and its various subsidiaries (together, “DBSD”). The bankruptcy court confirmed a plan of reorganization for DBSD over the objections of the two appellants here, Sprint Nextel Corporation (“Sprint”) and DISH Network Corporation (“DISH”).
Before us, Sprint argues that the plan improperly gave shares and warrants to DBSD’s owner — whose interest lies below Sprint’s in priority — in violation of the absolute priority rule of 11 U.S.C. § 1129(b)(2)(B). DISH, meanwhile, argues that the bankruptcy court erred when it found DISH did not vote “in good faith” under 11 U.S.C. § 1126(e) and when, because of the § 1126(e) ruling, it disregarded DISH’s class for the purposes of counting votes under 11 U.S.C. § 1129(a)(8). DISH also argues that the bankruptcy court should not have confirmed the plan because the plan was not feasible. See 11 U.S.C. § 1129(a)(ll).
On Sprint’s appeal, we conclude (1) that Sprint has standing to appeal and (2) that the plan violated the absolute priority rule. On DISH’s appeal we find no error, and conclude (1) that the bankruptcy court did not err in designating DISH’s vote, (2) that, after designating DISH’s vote, the bankruptcy court properly disregarded DISH’s class for voting purposes, and (3) that the bankruptcy court did not err in finding the reorganization feasible. We therefore affirm in part, reverse in part, and remand for further proceedings.
BACKGROUND
The reader may find the full facts of this case in the decisions of both the bankruptcy court, In re DBSD North America, Inc. (“DBSD I”),
ICO Global Communications founded DBSD in 2004 to develop a mobile communications network that would use both satellites and land-based transmission towers. In its first five years, DBSD made progress toward this goal, successfully launching a satellite and obtaining certain spectrum licenses from the FCC, but it also accumulated a large amount of debt. Because its network remained in the developmental stage and had not become operational, DBSD had little if any revenue to offset its mounting obligations.
1. The First Lien Debt: a $40 million revolving credit facility that DBSD obtained in early 2008 to support its operations, with a first-priority security interest in substantially all of DBSD’s assets. It bore an initial interest rate of 12.5%.
2. The Second Lien Debt: $650 million in 7.5% convertible senior secured notes that DISH issued in August 2005, due August 2009. These notes hold a second-priority security interest in substantially all of DBSD’s assets. At the time of filing, the Second Lien Debt had grown to approximately $740 million. It constitutes the bulk of DBSD’s indebtedness.
3. Sprint’s Claim: an unliquidated,
unsecured claim based on a lawsuit against a DBSD subsidiary. Sprint had sued seeking reimbursement for DBSD’s share of certain spectrum relocation expenses under an FCC order. At the time of DBSD’s filing, that litigation was pending in the United States District Court for the Eastern District of Virginia and before the FCC. In the bankruptcy case, Sprint filed a claim against each of the DBSD entities jointly and severally, seeking $211 million. The bankruptcy court temporarily allowed Sprint’s claim in the amount of $2 million for voting purposes.1
After negotiations with various parties, DBSD proposed a plan of reorganization which, as amended, provided for “substantial de-leveraging,” a renewed focus on “core operations,” and a “continued path as a development-stage entеrprise.” The plan provided that the holders of the First Lien Debt would receive new obligations with a four-year maturity date and the same 12.5% interest rate, but with interest to be paid in kind (“PIK”), meaning that for the first four years the owners of the new obligations would receive as interest more debt from DBSD rather than cash. The holders of the Second Lien Debt would receive the bulk of the shares of the reorganized entity, which the bankruptcy court estimated would be worth between 51% and 73% of their original claims. The holders of unsecured claims, such as Sprint, would receive shares estimated as worth between 4% and 46% of their original claims. Finally, the existing shareholder (effectively just ICO Global, which owned 99.8% of DBSD) would receive shares and warrants in the reorganized entity.
Sprint objected to the plan, arguing among other things that the plan violates the absolute priority rule of 11 U.S.C. § 1129(b)(2)(B). That rule requires that, if a class of senior claim-holders will not receive the full value of their claims under the plan and the class does not accept the plan, no junior claim- or interest-holder may receive “any property” “under the plan on account of such junior claim or interest.” Id. In making its objection,
The bankruptcy court disagreed. It characterized the existing shareholder’s receipt of shares and warrants as a “gift” from the holders of the Second Lien Debt, who are senior to Sprint in priority yet who were themselves not rеceiving the full value of their claims, and who may therefore “voluntarily offer a portion of their recovered property to junior stakeholders” without violating the absolute priority rule. DBSD I,
Meanwhile, DISH, although not a creditor of DBSD before its filing, had purchased the claims of various creditors with an eye toward DBSD’s spectrum rights. As a provider of satellite television, DISH has launched a number of its own satellites, and it also has a significant investment in TerreStar Corporation, a direct competitor of DBSD’s in the developing field of hybrid satellite/terrestrial mobile communications. DISH desired to “reach some sort of transaction with [DBSD] in the future if [DBSD’s] spectrum could be useful in our business.”
Shortly after DBSD filed its plan disclosure, DISH purchased all of the First Lien Debt at its full face value of $40 million, with an agreement that the sellers would make objections to the plan that DISH could adopt after the sale. As DISH admitted, it bought the First Lien Debt not just to acquire a “market piece of paper” but also to “be in a position to take advantage of [its claim] if things didn’t go well in a restructuring.” Internal DISH communications also promoted an “opportunity to obtain a blocking position in the [Second Lien Debt] and control the bankruptcy process for this potentially strategic asset.” In the end, DISH (through a subsidiary) purchased only $111 million of the Second Lien Debt — not nearly enough to control that class — with the small size of its stake due in part to DISH’s unwillingness to buy аny claims whose prior owners had already entered into an agreement to support the plan.
In addition to voting its claims against confirmation, DISH reasserted the objections that the sellers of those claims had made pursuant to the transfer agreement, arguing, among other things, that the plan was not feasible under 11 U.S.C. § 1129(a)(ll) and that the plan did not give DISH the “indubitable equivalent” of its First Lien Debt as required to cram down a dissenting class of secured creditors under 11 U.S.C. § 1129(b)(2)(A). Separately, DISH proposed to enter into a strategic transaction with DBSD, and requested permission to propose its own competing plan (a request it later withdrew).
DBSD responded by moving for the court to designate that DISH’s “rejection of [the] plan was not in good faith.” 11 U.S.C. § 1126(e). The bankruptcy court agreed, finding that DISH, a competitor to DBSD, was voting against the plan “not as a traditional creditor seeking to maximize
After designating DISH’s vote and rejecting all objections, the bankruptcy court confirmed the plan. See id. at 221. The district court affirmed, see DBSD III,
DISCUSSION
1. Sprint’s Appeal
Sprint raises only one issue on appeal: it asserts that the plan improperly gives property to DBSD’s shareholder without fully satisfying Sprint’s senior claim, in violation of the absolute priority rule. See 11 U.S.C. § 1129(b)(2)(B). That rule provides that a reorganization plan may not give “property” to the holders of any junior claims or interests “on account of’ those claims or interests, unless all classes of senior claims either receive the full value of their claims or give their consent. Id.; see In re Coltex Loop Cent. Three Partners, L.P.,
A. Sprint’s Standing to Appeal
Before we can address the merits of Sprint’s appeal, we must decide whether Sprint has standing to bring it. The current Bankruptcy Code prescribes no limits on standing beyond those implicit in Article III of the United States Constitution. See In re Gucci,
“As a general rule,” we grant standing to “creditors ... appealing] orders of the bankruptcy court disposing of property of the estate because such orders directly affect the creditors’ ability to receive payment of their claims.” Id. at 642; see In re Gucci
We likewise hold that Sprint has standing to appeal the confirmation of the plan in this case. Before confirmation, Sprint had a claim that the bankruptcy court valued at $2 million for voting purposes.
The appellees challenge the above analysis from two different perspectives, looking both at the confirmation of the plan as a whole and at the gifting provision that
Taking the broader perspective first, we decline to withhold standing merely because the bankruptcy court’s valuation of DBSD put Sprint’s claim under water. By the bankruptcy court’s estimate — which we accept for purposes of this appeal— DBSD is not worth enough to cover even the Second Lien Debt, much less the claims of unsecured creditors like Sprint who stand several rungs lower on the ladder of priority. But none of our prior appellate standing decisions — at least none involving creditors — have turned on estimations of valuation, or on whether a creditor was in the money or out of the money. We have never demanded more to accord a creditor standing than that it has a valid and impaired claim.
Cosmopolitan Aviation, the primary decision on which the appellees rely for their broader argument, is easily distinguishable. See In re Cosmopolitan Aviation Corp.,
The only case the appellees cite that comes close to denying a creditor standing is In re Ashford Hotels, Ltd.,
The three additional district court decisions cited by the dissent are equally distinguishable. The first two do not involve creditors. In one, In re Taylor, the appellant was a chapter 7 debtor, see No. 00 Civ. 5021(VM),
We think it plain that we should not forbid all appeals by out-of-the-money creditors. Such a rule would bar a large percentage of creditors in bankruptcy court, perhaps a majority of them, from ever reaching the district court or this Court, however erroneous the orders of the bankruptcy court might be. In this case, for instance, members of only two classes could appeal under the appellees’ proposed rule — the holders of the First Lien Debt and Second Lien Debt — even though the plan involved twenty-six classes of claims and interests in ten different levels. The other twenty-four classes would have to be satisfied with whatever the plan awarded them. This would remain true, under the appellees’ theory, even if the bankruptcy court had committed a fundamental error such as not allowing the out-of-the-money creditors to vote or not following another of the numerous requirements of § 1129. Such a result might benefit this Court’s docket, but would disserve the protection of the parties’ rights and the development of the law. We should not raise the standing bar so high, especially when it is a bar of our own creation and not one required by the language of the Code, which “does not contain any express restrictions on appellate standing.” Kane,
The appellees try to soften the negative consequences of their proposed rule by positing that a creditor in Sprint’s position may appeal if it at least argues — as Sprint did in the district court but does not in this Court — that the bankruptcy court undervalued the estate and that, under a true valuation, there was enough to cover its claim. But that rule would not separate appropriаte from inappropriate appeals by creditors; it would only increase the num
Even taking the narrower perspective, focusing not on the plan’s confirmation overall but only on the “gift” to the existing shareholder that Sprint challenges under the absolute priority rule, we still find standing. Sprint argues that the absolute priority rule entitled it to the full value of its claim before the plan could give any equity to the existing shareholder. A plan like this one that gives property to a junior interest-holder (the existing shareholder) must provide the senior claim-holder (Sprint) with “property of a value ... equal to the amount of [its] claim.” 11 U.S.C. § 1129(b)(2)(B). When the law requires full payment, getting less than full payment surely constitutes “direct” and “financial” injury.
The appellees respond that Sprint is entitled to nothing under the priority rules and only receives anything because it itself is the beneficiary of a gift under the plan. Rejecting this plan would not give anything to Sprint, they argue: although an alternative plan might give Sprint the full value of its claim in order to maintain the gift to the existing shareholder, an alternative plan might well cut out both Sprint and the shareholder entirely. But we rejected just such an argument in Kane. In that case, we accepted the possibility that the appellant, Kane, actually benefitted from the plan he was challenging and could have fared worse under alternative plans.
Kane might receive more under this Plan than he would receive in liquidation. However, he might do better still under alternative plans. Since the ... Plan gives Kane less than what he might have received, he is directly and adversely affected pecuniarily by it, and he therefore has standing to challenge it on appeal.
Id. at 642. We did not investigate any particular alternative plan or estimate the likelihood that a plan more advantageous to Kane would actually be adopted if the existing plan were rejected; rather, we found it sufficient for appellate standing that Kane “might” receive more under a different plan.
Here, too, Sprint “might do better still under alternative plans.” Id. As the bankruptcy court found, “there were good business reasons for the ... gifts” to the existing shareholder, DBSD I,
Like the appellees, our dissenting colleague does not argue that all out-of-the-money creditors lack standing to challenge a plan for violating the absolute priority rule. See Dissent. Op. at 111. Rather, adopting an approach not argued by appellees, Judge Pooler finds that Sprint lacks standing because it is not only out of the money but has an unliquidated claim that might turn out to be valueless on its own merits. We do not find the ultimate merits of Sprint’s claim against DBSD relevant. Standing to appeal “in no way depends on the merits” of the issue appealed, Warth v. Seldin,
Even if it were appropriate for us to consider the merits or ultimate worth of Sprint’s claim, we would have no way to make that determination, lacking any briefing from the parties or much information in the record on appeal regarding the merits of that claim, which will turn not only on the potential offset of its obligations to the government (as the dissent recognizes) but also on the date that the relevant DBSD subsidiary occupied a specific band of the transmission spectrum. See DBSD IV,
A rule that would turn a claimant’s standing to appeal a bankruptcy court’s ruling on the as-yet-undetermined merits of the claimant’s underlying claim would unduly complicate the standing determination, and require district and circuit courts prematurely to address the merits of issues the bankruptcy court has not yet addressed. We see no need for such an inquiry. The bankruptcy court’s temporary allowance of Sprint’s claim for voting purposes was enough to allow it to object below, where no one argues that Sprint lacked standing. The ultimate merits of that claim should not determine standing here, where we have less ability than the bankruptcy court to decide those merits.
Accordingly, we conclude that Sprint has standing to appeal the denial of its objection to the confirmation of the reorganization plan. We therefore turn to the merits of that objection.
B. Gifting and the Absolute Priority Rule
Sprint argues that the plan violated the absolute priority rule by giving shares and warrants to a junior class (the existing shareholder) although a more sen
Long before anyone had imagined such a thing as Chapter 11 bankruptcy, it was already “well settled that stockholders are not entitled to any share of the capital stock nor to any dividend of the profits until all the debts of the corporation are paid.” Chi., Rock Island & Pac. R.R. v. Howard, 74 U.S. (7 Wall) 392, 409-10,
In response to this practice, the Supreme Court developed a “fixed principle” for reorganizations: that all “creditors were entitled to be paid before the stockholders could retain [shares] for any purpose whatever.” N. Pac. Ry. Co. v. Boyd,
The Bankruptcy Code incorporates a form of the absolute priority rule in its provisions for confirming a Chapter 11 plan of reorganization. For a district court to confirm a plan over the vote of a dissenting class of claims, the Code demands that the plan be “fair and equitable, with respect to each class of claims ... that is impaired under, and has not accepted, the plan.” 11 U.S.C. § 1129(b)(1). The Code does not define the full extent of “fair and equitable,” but it includes a form of the absolute priority rule as a prerequisite. According to the Code, a plan is not “fair and equitable” unless:
With respect to a class of unsecured claims—
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property....
Id. § 1129(b)(2)(B). Absent the consent of all impaired classes of unsecured claimants, therefore, a confirmable plan must ensure either (i) that the dissenting class receives the full value of its claim, or (ii) that no classes junior to that class receive any property under the plan on account of their junior clаims or interests.
Under the plan in this ease, Sprint does not receive “property of a value ... equal to the allowed amount” of its claim. Rather, Sprint gets less than half the value of its claim. The plan may be confirmed, therefore, only if the existing shareholder, whose interest is junior to Sprint’s, does “not receive or retain” “any property” “under the plan on account of such junior ... interest.” We hold that the existing shareholder did receive property under the plan on account of its interest, and that the bankruptcy court therefore should not have confirmed the plan.
First, under the challenged plan, the existing shareholder receives “property” in the form of shares and warrants in the reorganized entity. The term “property” in § 1129(b)(2)(B) is meant to be interpreted broadly. See Ahlers,
Second, the existing shareholder receives that property “under the plan.” The disclosure statement for the second amended plan, under the heading “ARTICLE IV: THE JOINT PLAN,” states:
Class 9 — Existing Stockholder Interests
____ In full and final satisfaction, settlement, release, and discharge of each Existing Stockholder Interest, and on account of all valuable consideration provided by the Existing Stockholder, including, without limitation, certain consideration provided in the Support Agreement, ... the Holder of such Class 9 Existing Stockholder Interest shall receive the Existing Stockholder Shares and the Warrants.
(emphasis added). We need not decide whether the Code would allow the existing shareholder and Senior Noteholders to agree to transfer shares outside of the plan, for, on the present record, the existing shareholder clearly receives these shares and warrants “under the plan.”
Finally, the existing shareholder receives its shares and warrants “on account of’ its junior interest. The Supreme Court has noted that “on account of’ could take one of several interpretations. See Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship,
The gift here even more easily satisfies the two less restrictive tests the Supreme Court examined (and viewed more favorably) in 203 North LaSalle, both of which read “on account of’ to mean some form of “because of.” Id. at 450, 119 5. Ct. 1411. The existing shareholder received its property “because of,” and thus “on account of,” its prior interest, for the same reasons set forth above.
This conclusion is not undermined by the fact that the disclosure statement recites, and the district court found, additional reasons why the existing shareholder merited receiving the shares and warrants. First, a transfer partly on account of factors other than the prior interest is still partly “on account of’ that interest. “If Congress had intended to modify [‘on account of] with the addition of the words ‘only,’ ‘solely,’ or even ‘primarily,’ it would have done so.” In re Coltex Loop,
Second, the other reasons that the appellees assert drove the award of warrants and shares to old equity here are themselves “on account of’ the existing shareholder’s prior interest. The existing shareholder did not contribute additional capital to the reorganized entity, see, e.g., id. at 443,
In sum, we conclude that the existing shareholder received “property,” that it
The Supreme Court’s interpretations of § 1129(b)(2)(B) give us confidence in ours. Although that Court has not addressed the exact scenario presented here under the codified absolute priority rule, its two postcode cases on the rule are instruсtive. In both cases, the prior owners tried to avoid the absolute priority rule by arguing that they received distributions not on account of their prior interests but rather on account of the new value that they would contribute to the entity. See 203 N. LaSalle,
203 North LaSalle and Ahlers indicate a preference for reading the rule strictly. Given that the Supreme Court has hesitated to allow old owners to receive new ownership interests even when contributing new value, it is doubtful the Court would allow old owners to receive new ownership without contributing any new value, as in this case. As the Court explained in Ahlers, “the statutory language and the legislative history of § 1129(b) clearly bar any expansion of any exception to the absolute priority rule beyond that recognized in our cases at the time Congress enacted the 1978 Bankruptcy Code.” Ahlers,
The appellees, unsurprisingly, see the case in a different light. They contend that, under the “gifting doctrine,” the shares and warrants rightfully belonged to the secured creditors, who were entitled to share them with the existing shareholder as they saw fit. Citing In re SPM Manufacturing Corp.,
Most fatally, this interpretation does not square with the text of the Bankruptcy Code. The Code extends the absolute priority rule to “any property,” 11 U.S.C. § 1129(b)(2)(B)(ii), not “any property not covered by a senior creditor’s lien.” The Code focuses entirely on who “receive[s]” or “retain[s]” the property “under the plan,” id., not on who would receive it under a liquidation plan. And it applies the rule to any distribution “under the plan on account of’ a junior interest, id., regardless of whether the distribution could have been made outside the plan,
We distinguish this case from In re SPM on several grounds. In that case, a secured creditor and the general unsecured creditors agreed to seek liquidation of the debtor and to share the proceeds from the liquidation.
The first and most important distinction is that In re SPM involved Chapter 7, not Chapter 11, and thus involved a liquidation of the debtor, not a reorganization. Id. at 1309. Chapter 7 does not include the rigid absolute priority rule of § 1129(b)(2)(B). See In re Armstrong,
Furthermore, the bankruptcy court in In re SPM had granted the secured creditor relief from the automatic stay,
Even if the text of § 1129(b)(2)(B) left any room for the appellees’ view of the case, we would hesitate to accept it in light of the Supreme Court’s long history of rejecting such views. That history begins at least as early as 1868, in Howard, 74 U.S. (7 Wall) 392. In that case, the stockholders and mortgagees of a failing railroad agreed to foreclose on the railroad and convey its property to a new corporation, with the old stockholders receiving some of the new shares. Id. at 408-09. The agreement gave nothing, however, to certain intermediate creditors, who sought a share of the distribution in the courts. Id. at 408.
The road was mortgaged for near three times its value.... If, then, these stockholders have got anything, it must be because the bondholders have surrendered a part of their fund to them. If the fund belonged to the bondholders, they had a right so to surrender a part or a whole of it. And if the bondholders did so surrender their own property to the stockholders, it became the private property of these last; a gift, or, if you please, a transfer for consideration from the bondholders---- What right have these complainants to such property in the hands of the stockholders?
Id. at 400. Even in 1868, however, the Supreme Court found that “[ejxtended discussion of that proposition is not necessary.” Id. at 414. “Holders of bonds secured by mortgages as in this case,” the Court noted, “may exact the whole amount of the bonds, principal and interest, or they may, if they see fit, accept a percentage as a compromise in full discharge of their respective claims, but whenever their lien is legally discharged, the property embraced in the mortgage, or whatever remains of it, belongs to the corporation” for distribution to other creditors. Id. Similarly, in this case, the secured creditors could have demanded a plan in which they received all of the reorganized corporation, but, having chosen not to, they may not “surrender” part of the value of the estate for distribution “to the stockholder ],” as “a gift.” Id. at 400. Whatever the secured creditors here did not take remains in the estate for the benefit of other claim-holders.
As the Court built upon Howard to develop the absolute priority rule, it continued to reject arguments similar to the ones the appellees make before us. For example, in Louisville Trust Co. v. Louisville, New Albany & Chicago Railway Co., the Court noted that “if the bondholder wishes to foreclose and exclude inferior lienholders or general unsecured creditors and stockholders, he may do so; but a foreclosure which attempts to preserve any interest or right of the mortgagor in the property after the sale must necessarily secure and preserve the prior rights of general creditors thereof.”
Those cases dealt with facts much like the facts of this one: an over-leveraged corporation whose undersecured senior lenders agree to give shares to prior shareholders while intermediate lenders receive less than the value of their claim. See Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. Chi. L.Rev. 738, 739-44 (1988). And it was on the basis of those facts that the Supreme Court developed the absolute priority rule, with the aim of stopping the very sort of transaction that the appellees propose here. See In re Iridium,
It deserves noting, however, that there are substantial policy arguments in favor of the rule. Shareholders retain substantial control over the Chapter 11 process, and with that control comes significant opportunity for self-enrichment at the expense of creditors. See, e.g., 11 U.S.C. § 1121(b) (giving debtor, which is usually controlled by old shareholders, exclusive 120-day period in which to propose plan). This case provides a nice example. Although no one alleges any untoward conduct here, it is noticeable how much larger a distribution the existing shareholder will receive under this plan (4.99% of all equity in the reorganized entity) than the general unsecured creditors put together (0.15% of all equity), despite the latter’s technical seniority. Indeed, based on the debtor’s estimate that the reorganized entity would be worth approximately $572 million, the existing shareholder will receive approximately $28.5 million worth of equity under the plan while the unsecured creditors must share only $850,000. And if the parties here were less scrupulous or the bankruptcy court less vigilant, a weakened absolute priority rule could allow for serious mischief between senior creditors and existing shareholders.
Whatever the policy merits of the absolute priority rule, however, Congress was well aware of both its benefits and disadvantages when it codified the rule in the Bankruptcy Code. The policy objections to the rule are not new ones; the rule has attracted controversy from its early days. Four Justices dissented from the Supreme Court’s 1913 holding in Boyd, see
II. DISH’s Appeal
DISH raises different objections to the bankruptcy court’s order.
A. The Treatment of DISH’s Vote
1. Designating DISH’s Vote as “Not in Good Faith ”
To confirm a plan of reorganization, Chapter 11 generally requires a vote of all holders of claims or interests impaired by that plan. See 11 U.S.C. §§ 1126, 1129(a)(8). This voting requirement has exceptions, however, including one that allows a bankruptcy court to designate (in effect, to disregard) the votes of “any entity whose acceptance or rejection of such plan was not in good faith.” Id. § 1126(e).
The Code provides no guidance about what constitutes a bad faith vote to accept or reject a plan. Rather, § 1126(e)’s “good faith” test effectively delegates to the courts the task of deciding when a party steps over the boundary. See In re Figter Ltd.,
We start with general principles that neither side disputes. Bankruptcy courts should employ § 1126(e) designation sparingly, as “the exception, not the rule.” In re Adelphia Commc’ns Corp.,
Section 1126(e) comes into play when voters venture beyond mere self-interested promotion of their claims. “[T]he section was intended to apply to those who were not attempting to protect their own proper interests, but who were, instead, attempting to obtain some benefit to which they were not entitled.” In re Figter,
Here, the debate centers on what sort of “ulterior motives” may trigger designation under § 1126(e), and whether DISH voted with such an impermissible motive. The first question is a question of law that we review de novo, and the second a question of fact that we review for clear error, see In re Baker,
Clearly, not just any ulterior motive constitutes the sort of improper motive that will support a finding of bad faith. After all, most creditors have interests beyond their claim against a particular debtor, and those other interests will inevitably affect how they vote the claim. For instance, trade creditors who do regular business with a debtor may vote in the way most likely to allow them to continue to do business with the debtor after reorganization. See John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs.,
The sort of ulterior motive that § 1126(e) targets is illustrated by the case that motivated the creation of the “good faith” rule in the first place, Texas Hotel Securities Corp. v. Waco Development Co.,
That case spurred Congress to require good faith in voting claims. As the Supreme Court has noted, the legislative history of the predecessor to § 1126(e) “make[s] clear the purpose of the [House] Committee [on the Judiciary] to pass legislation which would bar creditors from a vote who were prompted by such a purpose” as Hilton’s. Young,
We envisage that “good faith” clause to enable the courts to affirm a plan over the opposition of a minority attempting to block the adoption of a plan merely for selfish purposes. The Waco case ... was such a situation. If my memory does not serve me wrong it was a ease where a minority group of security holders refused to vote in favor of the plan unless that group were given some particular preferential treatment, such as the management of the company. That is, there-were ulterior reasons for their actions.
1937 Hearing, supra, at 181-82.
Modern cases have found “ulterior motives” in a variety of situations. In perhaps the most famous case, and one on which the bankruptcy court in our case relied heavily, a court found bad faith because a party bought a blocking position in several classes after the debtor proposed a plan of reorganization, and then sought to defeat that plan and to promote its own plan that would have given it control over the debtor. See In re Allegheny Int'l, Inc.,
Although we express no view on the correctness of the specific findings of bad faith of the parties in those specific cases, we think that this case fits in the general constellation they form. As the bankruptcy court found, DISH, as an indirect competitor of DBSD and part-owner of a direct competitor, bought a blocking position in (and in fact the entirety of) a class of claims, after a plan had been proposed, with the intention not to maximize its return on the debt but to enter a strategic transaction with DBSD and “to use status as a creditor to provide advantages over proposing a plan as an outsider, or making a traditional bid for the company or its assets.” DBSD II,
We conclude that the bankruptcy court permissibly designated DISH’s vote based on the facts above. This case echoes the Waco case that motivated Congress to impose the good faith requirement in the first place. In that case, a competitor bought claims with the intent of voting against any plan that did not give it a lease in or management of the debtor’s property.
We also find that, just as the law supports the bankruptcy court’s legal conclusion, so the evidence supports its relevant factual findings. DISH’s motive — the most controversial finding — is evinced by DISH’s own admissions in court, by its position as a competitor to DBSD,
The Loan Syndications and Trading Association (LSTA), as amicus curiae, argues that courts should encourage acquisitions and other strategic transactions because such transactions can benefit all parties in bankruptcy. We agree. But our holding does not “shut[ ] the door to strategic transactions,” as the LSTA suggests. Rather, it simply limits the methods by which parties may pursue them. DISH had every right to propose for consideration whatever strategic transaction it wanted — a right it took advantage of here — and DISH still retained this right even after it purchased its claims. All that the bankruptcy court stopped DISH from doing here was using the votes it had bought to secure an advantage in pursuing that strategic transaction.
DISH argues that, if we uphold the decision below, “future creditors looking for potential strategic transactions with chapter 11 debtors will be deterred from exploring such deals for fear of forfeiting their rights as creditors.” But our ruling today should deter only attempts to “obtain a blocking position” and thereby “control the bankruptcy process for [a] potentially strategic asset” (as DISH’s own internal documents stated). We leave for another day the situation in which a preexisting creditor votes with strategic intentions. Cf. In re Pine Hill Collieries Co.,
2. Disregarding DISH’s Class for Voting Purposes
DISH next argues that the bankruptcy court erred when, after designating DISH’s vote, it disregarded the entire class of the First Lien Debt for the purpose of determining plan acceptance under 11 U.S.C. § 1129(a)(8). Section 1129(a)(8) provides that each impaired class must vote in favor of a plan for the bankruptcy court to confirm it without resorting to the (more arduous) cram-down standards of § 1129(b). Faced with a class that effectively contained zero claims — because DISH’s claim had been designated — the bankruptcy court concluded that “[t]he most appropriate way to deal with that [situation] is by disregarding [DISH’s class] for the purposes of section 1129(a)(8).” DBSD I,
The Code measures the acceptance of a plan not creditor-by-ereditor or claim-by-claim, but class-by-class. The relevant provision explains how to tally acceptances within a class of claims to arrive at the vote of the overall class:
A class of claims has accepted a plan if such plan has been accepted by creditors, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held bycreditors, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.
11 U.S.C. § 1126(c) (emphasis added). For each class, then, the bankruptcy court must calculate two fractions based on the non-designated, allowed claims in the class. To arrive at the first fraction, the court divides the value of such claims that vote to accept the plan by the value of all claims that vote either way. For the second fraction, the court uses the number of claims rather than their value. If the first fraction equals two-thirds or more, and the second fraction more than one-half, then the class as a whole votes to accept the plan.
The arithmetic breaks down in cases like this one. Because the only claim in DISH’s class belongs to DISH, whose vote the court designated, each fraction ends up as zero divided by zero. In this case, the plain meaning of the statute and common sense lead clearly to one answer: just as a bankruptcy court properly ignores designated claims when calculating the vote of a class, see 11 U.S.C. § 1126(e), so it should ignore a wholly designated class when deciding to confirm a plan under § 1129(a)(8).
3. Indubitable Equivalence
Finally, because we affirm the bankruptcy court’s treatment of both DISH’s vote and its class’s vote, we do not reach that court’s alternative theory that it could cram the plan down over DISH’s objection because DISH realized “the indubitable equivalent” of its First Lien Debt under the plan. 11 U.S.C. § 1129(b)(2)(A)(iii).
B. The Feasibility of the Plan
To confirm a plan under Chapter 11, a bankruptcy court must find that the plan is feasible, or, more precisely, that “Confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor ... unless such liquidation or reorganization is proposed in the plan.” 11 U.S.C. § 1129(a)(ll). DISH argues that the feasibility of this plan is “purely speculative” and that the bankruptcy court therefore should not have confirmed it. We review a finding of feasibility only for clear error, see In re Webb,
For a plan to be feasible, it must “offer[] a reasonable assurance of success,” but it need not “guarantee[ ]” success. Kane,
First, the plan “dramatically deleverage[s]” DBSD. Id. at 202; see In re Piece Goods Shops Co.,
Second, the court found it likely that DBSD would be able to obtain the capital it needs. DBSD has already received commitments for a credit facility to provide working capital for the first two years. DBSD I,
Third, the court found little risk of default on DBSD’s secured obligations to DISH, and still less risk that any such default would lead to the liquidation or financial reorganization that § 1129(a)(ll) seeks to avert. Id. at 203. The plan makes the interest on DISH’s First Lien Debt, which had been payable in cash, payable only in kind, with no cash due for four years. This feature buys DBSD breathing room to shore up its position before it becomes necessary to secure significant additional capital, as described above.
Fourth, and finally, the bankruptcy court noted that general credit markets at the time of its decision in October 2009 had improved from their low a year before. Id. Although no one can predict market conditions two or four years down the road, the improvement the bankruptcy court noted was real, and increased the likelihood that DBSD will be able to repay its creditors.
Based on all of these factors, the bankruptcy court found the plan of reorganization feasible. Id. We find the bankruptcy court’s analysis thorough and persuasive. DISH’s arguments to the contrary do not successfully identify any clear error in it.
First, DISH argues that the bankruptcy court employed the wrong legal standard. DISH claims that a bankruptcy court cannot confirm a plan unless the proponents prove “specifics ... as to how the Debtors would be able to meet their repayment obligations at the end of the Plan period.” That is true at some level of genеrality, but exactly how specific those “specifics” must be depends on the circumstances. In most situations, the time immediately following bankruptcy will call for fairly specific proof of the company’s ability to meet its obligations — as here, where it was “undisputed that the Debtors have commitments for working capital financing for the next two years.” DBSD I,
Second, DISH argues that the district court clearly erred in its fact-finding. At most, DISH’s arguments on this front demonstrate that there is some chance that DBSD might eventually face liquidation or further reorganization. But that small chance does not change the feasibility analysis, which requires only a “reasonable assurance of success,” not an absolute “guarantee[ ].” Kane,
CONCLUSION
For the reasons set forth above, we REVERSE the order of confirmation on absolute-priority grounds, AFFIRM on all other grounds, and REMAND for further proceedings consistent with this opinion.
Notes
. The bankruptcy court allowed Sprint’s claim against only one of the several DBSD entities. See DBSD IV,
. The court did not designate DISH's vote on its Second Lien Debt claims, because DISH’s stake in that class was too small to make any difference. See DBSD II,
. “While the 'pecuniary interest' formulation is an often used and often useful test of standing in the bankruptcy context, it ‘is not the only test.' ” In re Zamel,
. The Code treats a claim as impaired unless the plan leaves in place all rights to which the claim entitles its holder, except for certain rights to accelerate payments after default. See 11 U.S.C. § 1124.
. Sprint’s lawsuit against a DBSD entity has not yet been resolved. The claim therefore could turn out to be worth as much as $211 million or as little as nothing, but we follow the bankruptcy court's tentative valuation for the purposes of this appeal.
. We note that not all distributions of property to a junior class are necessarily "on account of” the junior claims or interests. For example, the Supreme Court has left open the pоssibility that old equity could take under a plan if it invests new value in the reorganized entity, at least as long as a "market valuation” tests the adequacy of its contribution. 203 North LaSalle, 526 U.S. at 458,
. Most importantly, the Code now determines objections on a class-by-class basis, not creditor-by-creditor. See 11 U.S.C. § 1129(b)(2)(B); Markell, 44 Stan. L.Rev. at 88.
. This House Report references an earlier version of the bill, as the House Committee on the Judiciary reported it to the full House on September 8, 1977. See B Collier on Bankruptcy App. Pt. 4(d) at 4-873, 4-988 (15th ed.2009). Section 1129(b)(2) received several largely stylistic changes between that version and its eventual passage, but none altered the operation of the absolute priority rule in any way relevant here.
. Our conclusion with respect to Sprint's appeal in itself requires reversal of the district court’s order and vacation of the bankruptcy court’s confirmation of the reorganization plan. It remains appropriate to consider DISH's appeal, however, because DISH raises distinct objections to the plan that, if accepted, would require revision of different aspects of the plan.
. Commissioner Douglas also described the Hilton claim-holders telling the other parties, in effect, "For a price you can have our vote.” 1937 Hearing, supra, at 182. In this respect, Douglas’s memory may have served him wrong, since at least the opinion of the court of appeals records nothing along these lines, unless one interprets "a price” broadly to include reinstatement of a lease or reassignment of management rights.
. Based on a House committee report, some have cited a further case, Aladdin Hotel Co. v. Bloom,
. Courts have been especially wary of the good faith of parties who purchase claims against their competitors. See In re MacLeod,
. The fact that DISH bought the First Lien Debt at par is circumstantial evidence of its intent, though we do not put as much weight on the price as the bankruptcy court did. See DBSD II,
. We state no conclusion on whether the same result is appropriate for other tests that the Code imposes, such as in §§ 1129(a)(7) and 1129(a)(10). We likewise do not decide how the bankruptcy court should treat classes in which no creditor files a timely vote. Compare In re Ruti-Sweetwater, Inc.,
. DISH argues that "[t]he plain language of section 1126(c) dictates that in order for a class to be deemed to have accepted a plan of reorganization, it must have actively voted in favor of the plan,” and that, because "the votes of any entity designated ... are excluded from both the numerator and denominator in determining whether a class has accepted a plan,” DISH’s class cannot be found to have voted in favor of the plan. This makes no sense. A class with no qualifying members cannot be required to accept a plan by an affirmative vote.
Concurrence Opinion
concurring in part, dissenting in part.
I join Judge Lynch’s thoughtful opinion affirming the Bankruptcy Court’s and District Court’s orders concerning the appeal of DISH Network Corporation (“DISH”). I, however, respectfully dissent from the portion of the opinion granting appellate standing to Sprint Nextel Corporation (“Sprint”).
The question before us is whether Sprint, an out-of-the-money unsecured creditor with an unliquidated claim, has standing to challenge a Chapter 11 confirmation plan (the “Plan”) approved by all the creditors save the two who are before us, and affirmed by the bankruptcy and district courts below. See DBSD II,
BACKGROUND
Sprint brings before this Court a claim initially brought against debtor New Satellite Services (“New Satellite”). New Satellite is one of the debtors that joined together to form a business still in the developmental stage, for the purpose of providing mobile satellite services. DBSD, North America, Inc. (“DBSD”), the lead debtor, is a holding company and the direct or indirect corporate parent of the other debtors, including New Satellite. See DBSD IV,
Before rejecting Sprint’s claim of joint and several liability, the bankruptcy court temporarily allowed Sprint’s claim for voting purposes only in the amount of $2 million. In re DBSD North America, Inc., Case No. 09-13061(REG) (Sept. 11, 2009); see also DBSD I,
Twenty-four classes of claims ultimately voted in favor of the confirmation plan. Sprint and DISH were the only two creditors to object. Because DISH’s votes were designated, Sprint — holding a contingent, disputed, and unliquidated claim— singlehandedly prevented the confirmation of a Plan that would have resulted in a reorganized entity worth between an undisputed $ 492 million to $692 million. DBSD I,
DISCUSSION
The preliminary issue raised on appeal is whether Sprint has standing before this Court. If so, then the merits of its sole claim on appeal must be addressed— whether a gift from the senior noteholders to the existing stockholder and unsecured creditors, including Sprint, violates the absolute priority rule. Because I do not believe thаt Sprint has standing, I do not reach the merits of Sprint’s challenge.
Standing is raised for the first time before this Court, as Sprint had standing below based on its challenge to the bankruptcy court’s valuation of the estate. Sprint abandoned its position contesting the bankruptcy court’s valuation on appeal, thus raising the question of whether an out-of-the-money, unsecured creditor with an unliquidated claim has standing.
The claims initially allowed in a bankruptcy proceeding are broad under the language of 11 U.S.C. § 101(4), and it is well-settled within our Circuit that the definition of such a claim “is to have wide scope.” In re Chateaugay Corp.,
The situation before us, however, includes an additional wrinkle not addressed by today’s opinion: Sprint is not merely an out-of-the-money unsecured creditor, but its alleged direct and adverse pecuniary effect is based entirely on an unliquidated claim. That is, not only does Sprint get nothing under the Plan as an unsecured creditor, but as of today, Sprint has failed to demonstrate it is entitled to a single cent from DBSD, much less $2 million.
Sprint’s argument that it has standing to appeal the confirmation order because it “might do better still under alternative plans” thus remains entirely speculative. Despite the indisputably weak foundation of Sprint’s request, I address its misguided reliance on Kane, which Sprint interprets to mean that showing one “might” do better under an alternative plan is all that is required for standing. Sprint and the Court both misinterpret Kane. First, Kane reiterated the rule that standing in a bankruptcy appeal requires a showing of direct and adverse pecuniary effect.
While it may be true that оur Court should not bar all appeals from out-of-the money unsecured creditors, I, respectfully, cannot join an opinion that characterizes Sprint as a run-of-the-mill, out-of-the-money, unsecured creditor who has been “pecuniarily affected.” The opinion does not adequately address the facts before the Court, nor a possibility inherent in today’s ruling, that a creditor with a claim as tangential as Sprint’s may succeed in preventing the reorganization of an entity that may ultimately owe it nothing.
I decline to decide on the facts of this case whether an out-of-the-money creditor must take an appeal from a valuation decision to have standing. Indeed, I find it is less significant that Sprint failed to pursue its challenge to the bankruptcy court’s factual findings regarding the estate’s valuation, than that it failed to prove it is owed any amount of money in the first instance. In this regard Sprint is more akin to the creditors in In re Ashford,
Insofar as the Court characterizes the above discussion as addressing “the ultimate merits of Sprint’s claim,” the Court misunderstands the purpose of such a discussion. The question before us is whether Sprint has standing — that is, whether Sprint has been “directly and adversely affected pecuniarily by the challenged order,” Rensselaer, 936 at 747. The answer requires identifying the nexus between Sprint and the bankruptcy proceeding in the first instance, as it is a task of Herculean proportions to find that a pecuniary interest has been adversely affected where no loss has been identified, and no connection to the bankruptcy proceeding established. The silence on this issue is, as the Court indicates, telling — yet it is more a testament to the oddity of the claim before us, than to the propriety of the standing analysis.
While the Court relies heavily on the fact that the parties did not brief the issue in the specific context of standing, our decision is based on the facts provided by the parties themselves. And just as the Court relies on the bankruptcy court’s emphatically temporary allowance of Sprint’s claim in its decision, I rely on the facts set forth by both parties, as found by two different courts below us, which neither party claims were clearly erroneous. In re Baker,
Under no reasonable understanding of Sprint’s claim can it show that it suffered a pecuniary injury as a result of the confirmation plan. Accordingly, Sprint should
. The Court’s distinction between the levels of generality at which Sprint's standing can be considered, is largely academic: if we hold Sprint has no standing to appeal based on the lack of direct and adverse pecuniary effect, there is no standing to appeal either the Plan generally, or one provision of the Plan in particular.