In Re Gilbert
MEMORANDUM OPINION
FACTS
Bеfore the Court in this Chapter 11 case are a number of issues related to the voting rights of certain members of an unsecured class of creditors under Debtors’ proposed plan of reorganization, as well as alleged irregularities attending those votes. These issues must be resolved before the Court can evaluate the more substantive aspects of the confirmability of Debtors’ Plan pursuant to 11 U.S.C. Section 1129. In particular, the Court’s resolution of these matters will determine the necessity for examining the Plan’s compliance with the “cram down” provisions of Section 1129(b), or more specifically, whether it satisfies the so-called “absolute priority” rule. These latter issues shall not, however, be taken up at this time. As the Court previously indicated, it intends to bifurcate these issues from the questions presented in this dispute.
In January of 1988, this Court dismissed Debtors’ original filing under Chapter 12 because Debtors did not qualify under that chapter. Because the amount of Debtors’ unsecured debt prevented them from filing under Chapter 13, Debtors thereafter filed the instant Chapter 11 case on May 5,1988. In dispute are the votes of two members of a four member impaired class of unsecured creditors. This class has been designated in Debtors’ Plan as Class X. • The two members whose votes are challenged are Christine Gilbert, daughter of Debtors, and Jim Stulz, a business associate of Debtors. The two challenging creditors are Farmers Home Administration (hereinafter “FMHA”) and Commodity Credit Corporation (hereinafter “CCC”), both of which are represented by the United Statеs of America through the U.S. Attorney’s office. The United States seeks segregation of Christine Gilbert’s and Stulz’ votes from the other Class X votes for purposes of determining the class’ acceptance or rejection of Debtors’ Plan. The United States’ chief argument is that Christine Gilbert and Stulz are “insiders” within the meaning of 11 U.S.C. Section 101(30)(A) and, consequently, their votes should not be counted for purposes of determining whether Class X is an accepting class under 11 U.S.C. Section 1126(c). In addition to its averment of Stulz’ insider status, the United States asserts other reasons why his votes should not be counted towards determining Class X confirmation posture. These attacks include the improper allow-
Stulz is a creditor of Debtors by virtue of three claims (or arguably two, according to the United States’ position) he holds against their estate. One is a secured claim in the amount of $15,000.00, which is the sole claim contained in Class III under Debtors’ Plan. The other two are unsecured claims, both of which are in Class X. In addition to Stulz’ two claims, Class X contains three other unsecured claims, one each held by FMHA, CCC, and Christine Gilbert. The following is a breakdown of the relevant allowed amounts and voting results for each Class X claimant:
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The combined amount for the two claims rejecting Debtors’ Plan is $154,525.69, while the combined amount for the three claims accepting the Plan is $314,591.75. Stulz purchased the $169,571.00 claim from Citizens Bank & Trust Company (hereinafter “CBT”) in December of 1987 for $21,-500.00. The claim represents a loan which CBT had purchased from the Federal Deposit Insurance Company as part of a block of other loans. Stulz testified that his primary purpose in purchasing this claim was to assist Debtors towards getting their Plan confirmed. Stulz purchased the $143,-020.75 claim from Maple Tree Investment, Inc. (hereinafter “MTI”) in March of 1988 for $5,000.00. This transaction was accomplished through a written Assignment of Claim signed by MTI and approved by the Court. The Assignment substituted Stulz for MTI as the owner of the claim. Stulz will receive $4,200.00 on this claim if Debtors’ Plan is confirmed.
Stulz testified that his sole purpose in purchasing this claim was to protect his interest in the claim he had purchased from CBT. Stulz originally offered MTI $3,500.00 for its claim, but MTI declined. Stulz’ initial negotiation with MTI occurred in a telephone conversation with an MTI representative. In this conversation, he expressed his hope that MTI would vote in favor of Debtors’ Plan if it did not sell the claim. He explained to MTI that given his position as Debtors’ largest unsecured creditor, it was in his best interest to get the Plan confirmed. MTI responded with a counteroffer in which they indicated that they had not made a decision as to how they would vote on the Plan. These negotiations took place approximately four months prior to the filing of Debtors’ Plan and the Court’s approval of Debtors' Disclosure Statement. Subsequent to Stulz’ telephone conversation with MTI, MTI made Stulz a written counteroffer of $5,000.00 for the claim, indiсating that MTI had not made a decision as to whether they would vote to accept Debtors' Plan.
The United States argues that Stulz’ insider status stems from his business association with Jerry Gilbert in an entity by the name of Ag Management International (hereinafter “AMI”). AMI is a financial consulting operation which serves as an advocate and advisor for financially distressed farmers. Stulz and Jerry Gilbert are the sole general partners of AMI. Through Stulz, AMI has periodically advised Debtors in matters related to their bankruptcy and has attended hearings in this Court on behalf of Debtors. Stulz also assisted Debtors to a limited extent in composing their reorganization plan. As to Christine Gilbert, the United States claims that as daughter of Debtors, she is an insider as that term is defined under 11 U.S.C. Section 101(30)(A)(i).
Also pertinent to this discussion is Class III under Debtors’ Plan. The sole claimant in Class III is Metropolitan Life Insurance Company (hereinafter “Metropolitan”). Class III is an impaired class that has affirmatively accepted Debtors’ Plan.
QUESTIONS PRESENTED
1. Whether an individual creditor is an “insider” for purposes of plan confirmation
2. Whether one entity holding two or more disparate claims is entitled to vote them separately within that entity’s class for purposes of determining under 11 U.S.C. Section 1126(c) whether the class has accepted or rejected the plan.
3. If one impaired noninsider class has accepted the plan, thereby meeting the requirement of 11 U.S.C. Section 1129(a)(10), should the acceptance of any remaining impaired classes be determined under 11 U.S.C. Section 1126(c) with the inclusion of insider acceptances in such classes?
4. Whether the communications between Stulz and Maple Tree Investment Company constituted an impermissible “solicitation” within the meaning of 11 U.S.C. Section 1125(b).
5. Whether Stulz’ purchase of two unsecured claims at a discount to gain a class, majority acceptance vote was for an improper motive and violative of 11 U.S.C. Section 1126(e).
DISCUSSION
I. Insider Status
The United States claims that Christine Gilbert and Stulz are insiders within the meaning of Section 101(30)(A). Debtors’ counsel has not expressly denied this assertion, nor has he definitively conceded it. A determination of this issue does not, as it turns out, alter the outcоme of the Court’s ultimate decision in this matter. Nevertheless, the United States has raised the issue and Court anticipates that it has the potential to impact future confirmation issues in this case. Section 101(30)(A) provides that if the debtor is an individual, an “insider” includes a:
(i) relative of the debtor or of a general partner of the debtor;
(ii) partnership in which the debtor is a general partner;
(iii) general partner of the debtor;
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No analysis is necessary to conclude that Christine Gilbert is an insider. As a daughter of Debtors, she fits precisely one of the enumerated descriptions of an insider. Section 101(30)(A)(i);
see, In re Atkinson,
As Section 101(30)(A) suggests, illustrations shape the meaning of “insider”. The Code’s use of the word “includes” is intended to denote a general class for which the statute provides a nonexhaustive list of members. As 11 U.S.C. Section 102(3) makes clear, the terms “include” and “including” are not limiting. The legislative history accompanying the statutory definition of insider states that “[a]n insider is one who has a
sufficiently close relationship
with the debtor that his conduct is made subject to closer scrutiny than those dealing at
arms length
with the debtor.” H.R.Rep. No. 95-595, 95th Cong., 2d Sess. 312 (1977), U.S.Code Cong. & Admin.News 1978, p. 6269; S.Rep. No. 95-989, 95th Cong., 2d Sess. 25 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5810 (emphasis added). An insider may, therefore, be a person or entity other than those enumerated in Section 101(30), provided the particular relationship meets these guidelines.
In re Poage,
Most of the insider status litigation occurs in the context of preferential transfers. The focus in these cases is whether the creditor’s relationship with the debtor places the creditor in á position to influence or
control the debtor’s actions
such that the interests of other creditors are frustrated.
See, e.g., In re F & S Central Mfg. Corp.,
The Court’s function then, given the current development of the law, is to determine whether Stulz’ relationship with Jerry Gilbert is one that implicitly belongs among the general class of insiders sketched out by the Code. The United States relies upon two insider definitions in asserting Stulz’ insider status. One is Section 101(30)(A)(ii), which defines an insider as a partnership in which the debtor is a general partner, and the other is Section 101(30)(A)(iii), which defines the term as one who is a general partner of the debtor. Armed with these definitions, the United States’ argument that Stulz is an insider because he and Jerry Gilbert are general partnérs in AMI has a powerful siren-like effect analogous to the one known in Greek mythology where the singing of certain female creatures lured mariners to their destruction. Admittedly, it does not seem to be much of a stretch, analytically, to reason that if a debtor’s interest as a general partner in a creditor-partnership can render thе partnership an insider, his debt- or-creditor relationship with a fellow general partner in a noncreditor partnership should also qualify the general partner as an insider. The Court refuses under the instant facts, however, to succumb to this facially appealing argument. Whether a person qualifies as an insider is a question of fact which must be determined on a case-by-case basis.
In re Henderson,
The facts of this case do not support a conclusion that Stulz’ relationship with Jerry Gilbert is such that either is capable of exercising undue influence over the other. Stulz’ activities as an advisor to Debtors in their bankruptcy and other business affairs
II. Voting Rights of One Creditor Holding Multiple Claims
The next item requiring the Court’s attention is the issue of how many votes Stulz is entitled to as a noninsider member of Class X. The Court agrees with the United States’ observation that the status of a creditor’s right to vote is determined at the time the vote is taken, not at the time the debt arises.
In re Featherworks,
The Code does not underwrite such magic. The formula contained in Section 1126(c)
1
speaks in terms of the
number of claims,
not the number of creditors, that actually vote for or against the plan.
In re Jeppson,
III. Relationship Between 1129(a)(10) and 1126(c) For Purposes of Insider Voting and Class Acceptance
Among the requirements that a reorganization plan must meet before it can be confirmed is the one impaired class acceptance requirement of 11 U.S.C. Section 1129(a)(10) which provides that:
If a class of claims is impaired under the plan, at least one class of claims that isimpaired under the plan has acceptеd the plan determined without including any acceptance of the plan by any insider.
(emphasis added).
Much of counsels’ arguments on this issue have centered around the vitality, interpretation, and relevance of
In re Landau Boat,
In its brief, the United States quotes excerpted language from
Landau Boat,
which, paraphrased, states that in making the Section 1126(c) calculation to determine whether a class has accepted the plan for purposes of the Section 1129(a)(10) eonfir-mation requirement, the court must disregard the votes of insiders.
Id.
The court found this requirement met since there was
a class
who was “deemed” to have accepted by virtue of the unimpaired status of four of its members who, together, satisfied the voting thresholds of Section 1126(c).
See also, In re Jartran, Inc.,
The Court, and Debtors’ counsel, could find only one reported post-Amendment case on all foürs with this issue.
2
In the case of
In re Grimes Furniture, Inc.,
In parsing the relationship between Section 1129(a)(10) and Section 1126(c), the Court’s initial attention is briefly drawn to the simple fact that the former section appears under the heading of “Confirmation of Plan”, while the latter section appears under the heading of “Acceptance of
Further support for the Court’s construction of the relationship between Section 1126(c) and Section 1129(a)(10) is found within the other confirmation provisions that refer to the acceptance of an impaired class. The confirmation prerequisite of Section 1129(a)(7)(A) requires that each member of an impaired class either accept the plan or receive or retain under the plan property of a value that is not less than what that claimholder would receive if the debtor were liquidated under Chapter 7. Section 1129(a)(8) requires for a noncram-down confirmation that every impaired class accept the plan. As the Court stands back and surveys the codal structure relevant to this issue, reference to a maxim of statutory
construction
— expressio
unius est exclusio alterius
— is useful. The import of this canon is that if a statute specifies certain exceptions to the general application, other exceptions are excluded and are not to be implied absent evidence of a contrary legislative intent.
In re Mueller,
Accordingly, the vote of Christine Gilbert may be included in determining whether Class X is an accepting class. According to the balloting report filed, the inclusion in Class X of Ms. Gilbert’s "and Stulz’ votes as authorized by the Court’s findings herein makes Class X an accepting class. Section 1129(a)(8) is, therefore, satisfied as this leaves no impaired class rejecting Debtors’ Plan. The Court is keenly aware that permitting the inclusion of insider acceptances will render, as it has in this case, an otherwise rejecting class an “accepting class”, thereby taking such class out of the fair and equitable provisions of Section 1129(b).
IV. Prohibited Solicitations Under Section 1125(b)
The United States questions the reasonablenеss of Stulz’ alleged solicitation of MTI’s vote approximately four months pri- or to the Court’s approval of Debtors’ Plan and Disclosure Statement. While the point of this accusation is not clearly expressed, the Court can only take it to mean that Stulz’ telephone conversation with MTI in October of 1988 was a violation of the Code’s prohibition against vote solicitation. Consequently, the United States seeks the Court invalidation of the vote representing this claim. The Code sections relevant to this claim are Section 1125(b) and Section 1126(e). Section 1125(b), in pertinent part, provides:
An acceptance or rejection of a plan may not be solicited after the commencement of the case under this title from a holder of а claim or interest with respect to such claim or interest, unless, at the time of or before such solicitation, there is transmitted to such holder the plan or summary of the plan, and a written disclosure statement approved, after notice and hearing, by the court as containing adequate information 3 ....
Section 1126(e) provides:
On request of a party in interest, and after notice and a hearing, the court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title.
Whether a communication is a “solicitation” and violates Section 1125(b) is a matter of fact and law, and the section provides for no specific рenalty. Section 1126(e), on the other hand, proscribes a broader range of communications, specifically allowing the court to designate a vote for
any conduct
that defiled the voting process, whether it violates a specific provision or is in “bad faith.”
Century Glove, Inc. v. First American Bank of New York,
The Code does not define the term “solicited.” The term must nevertheless be very narrowly interpreted to mean only specific requests for an official vote for or against the reorganization plan.
In re Snyder,
First of all, there is nothing about Stulz’ conduct to suggest bad faith on his part. Factors that might signal bad faith include a transmission during the voting period of materials clearly presented as a solicitation that contain falsehoods or mischaracteriza-tions, or any form of communication that tends to confuse or distort the voting proсess.
Id.
at' 342-43. The demonstrated purpose of Stulz’ conversation with MTI was to purchase MTI’s claim in order to protect his other unsecured claim. In his “solicitation” of MTI’s future support for Debtors’ Plan, Stulz did not, for example, attempt to sell or even suggest an unfiled alternative plan that was not backed up by adequate disclosure.
See, e.g., In re Media Central, Inc.,
V. Purchasing Claims to Procure Votes and Section 1126(e)
The Court has been asked to consider whether the vote Stulz purchased from MTI should be invalidated under Section 1126(e) on the grounds that it was procured for an improper purpose. This debate arguably overlaps with the issue of solicitation, but the Court chooses to dignify the issue with a separate discussion in the interest of clarity. What sets these two discussions apart is the focus of the Court’s inquiry. While the solicitation question turned on Stulz’ conduct relative to his communications with MTI, the focus here is on his motive for purchasing and voting MTI’s claim.
The issue is “good faith” which is left undefined under the Code. The United States Supreme Court set the standard for good faith in
Young v. Higbee Co.,
To customize this general template of “bad faith” to a situation like the one before the Court where creditors’ interests are purchased for the purpose of securing approval of a plan, the following reasoning of the Second Circuit is useful:
The mere fact that a purchase of creditors’ interests is for the purpose of securing the approval or rejection of a plan does not of itself amount to “bad faith”. When that purchase is in aid of an interest other than an interest as a creditor, such purchases may amount to “bad faith” under section 203 of the Bankruptcy Act [the predecessor to Section 1126(e)]. (citation omitted). And certainly there is “bad faith” when those purchases result in discrimination in favor of the creditors selling their interests.
In re P-R Holding Corp.,
An evaluation of the facts of this case under the foregoing standards indicates that Stulz’ purchаse and subsequent vote of MTI’s claim were not inspired by a prohibited ulterior purpose. He did not approach MTI with the hope of cultivating a market for his other unsecured claim. Nor is there evidence that he cast the purchased MTI vote to manipulate other creditors or to coerce Debtors into paying him more than his fair ratable share of Debtors’ estate. And there is no evidence suggesting that his votes were acquired to destroy an enterprise of other Class X members, much less Debtors, in order to advance his interests in a competing business. Stulz’ testimony was that the sole purpose behind his purchase and subsequent voté of the MTI claim was. to protect his other claims against Debtors’ estate. This testimony was, in fact, elicited at trial on several occasions by the United States during its cross-examination of Stulz, and remains un-controverted. A cursory look at the relevant circumstances corroborates Stulz’ testimony. Part of his self-interest lies in protecting his $15,000.00 claim classified in Class VIII. As Debtors point out in their brief, the transactional costs associated with a straight liquidation of Debtors would necessarily cause Stulz in that event to receive less for this claim than under Debtors’ Plan. Stulz’ purchase of the MTI claim to gain the needed Class X vote was also designed to insure greater recovery on his other unsecured claim of $169,571.00. Where a creditor sufficiently manifests such motivations, the Court will not hazard to second-guess the wisdom of that creditor’s business judgment as displayed by his voting decision. Even if Stulz’ projected
CONCLUSION
Based on the Court’s examination of the evidence under the foregoing analysis it, makes the following findings of fact and conclusions of law:
1. Christine Gilbert is an insidеr as a matter of law pursuant to Section 101(30)(A)(i). Stulz is not an insider within the meaning of Section 101(30)(A)(ii) or (iii).
2. Stulz is entitled to one vote for each unsecured Class X claim he holds pursuant to Section 1126(c).
3. Because there exists in Class III under Debtors’ Plan one accepting impaired noninsider class, the confirmation requirement of Section 1129(a)(10) is satisfied. As a result, the insider vote of Christine Gilbert may be included in counting the acceptance votes of the impaired Class X for purposes of Section 1126(c). The United States’ motion to segregate the votes of Stulz and Christine Gilbert from Class X is DENIED.
4. While the communications between Stulz and MTI constitute a technical violation of the solicitation prohibition of Section 1125(b), no sanction is warranted on the evidence under either Section 1125(b) or Section 1126(e). The United State’s motion to disallow his Class X votes on these grounds is, therefore, DENIED.
5. Stulz’ purchase of MTI’s claim to gain control of Class X’s‘ vote to accept Debtors’ Plan was in good faith. The United State’s motion to disallow this Class X vote on these grounds is, therefore, DENIED.
SO ORDERED.
The foregoing Memorandum Opinion constitutes Findings of Fact and Conclusions of Law as required under Rule 7052, Rules of Bankruptcy.
Notes
. Section 1126(c) provides:
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 by creditors, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.
(emphasis added).
. This is not surprising'given the relatively short amount of time that the amended language of 1129(a)(10) has been in effect.
. "Adequate information” is defined under 1125(a)(1) to mean:
[information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor’s books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan ...
The "reasonable investor” typical of its class include those, in particular, who have the "ability to obtain such information from sources other than the disclosure required by this section as holders of claims or interests in such class generally have.” 1125(a)(2)(C).
. Section 203 of Chapter X of the Bankruptcy Act, 11 U.S.C. § 603.