In re: TRIBUNE COMPANY, et al., Debtors
No. 18-2909
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
August 26, 2020
PRECEDENTIAL
Opinions of the United States Court of Appeals for the Third Circuit
8-26-2020
In Re: Tribune Company
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Recommended Citation
“In Re: Tribune Company” (2020). 2020 Decisions. 816. https://digitalcommons.law.villanova.edu/thirdcircuit_2020/816
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DELAWARE TRUST COMPANY, as successor indenture trustee for certain series of Senior Notes and DEUTSCHE BANK TRUST COMPANY AMERICAS, solely in its capacity as successor Indenture Trustee for certain series of Senior Notes, Appellants
Appeal from the United States District Court for the District of Delaware (D.C. Civil Action Nos. 1-12-mc-00108, 1-12-cv 00128/01072/1073/1100/1106)
District Judge: Honorable Gregory M. Sleet
Argued November 12, 2019
Before: AMBRO, KRAUSE, and BIBAS, Circuit Judges
(Opinion filed: August 26, 2020)
Roy T. Englert, Jr. (Argued)
Matthew M. Madden
Mark T. Stancil
Robbins Russell Englert Orseck Untereiner & Sauber
2000 K Street, N.W., 4th Floor
Washington, DC 20006
Counsel for Appellant Delaware Trust Company
David J. Adler
McCarter & English
825 Eighth Avenue
Worldwide Plaza, 31st Floor
New York, NY 10019
Counsel for Appellant Deutsche Bank Trust Co Americas, as Successor Indenture Trustee
Kenneth P. Kansa
Sidley Austin
One South Dearborn Street
Chicago, IL 60603
James O. Johnston (Argued)
Jones Day
555 South Flower Street, 50th Floor
Los Angeles, CA 90071
J. Kate Stickles
Cole Schotz
500 Delaware Avenue, Suite 1410
Wilmington, DE 19801
Counsel for Appellee Tribune Co.
Hiller & Arban
1500 North French Street
2nd Floor
Wilmington, DE 19801
Jay Teitelbaum (Argued)
Teitelbaum Law Group
1 Barker Avenue, Third Floor
White Plains, NY 10601
Counsel for Appellee TM Retirees
OPINION OF THE COURT
AMBRO, Circuit Judge
Many of the contentious battles in bankruptcy involve the allocation of distributions among similarly situated creditors. We have such a battle here, where certain creditors of the Tribune Company, called the “Senior Noteholders,” claim Tribune‘s plan of reorganization (the “Plan“) misapplies their rights under the Bankruptcy Code by not according them the full benefit of their subordination agreements with other Tribune creditors. The Bankruptcy Court confirmed the Plan over the Senior Noteholders’ dissenting votes. In bankruptcy parlance, they were “crammed down.”
The provision in play was
Notwithstanding section 510(a) of this title [making subordination agreements enforceable in bankruptcy to the extent they would be in non bankruptcy law], if all of the applicable requirements of subsection (a) of this section [1129] other than paragraph (8) [for our purposes, this paragraph requires that each class of claims has accepted the plan] are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph [8] if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
To unpack terms of art, “discriminate unfairly” is a horizontal comparative assessment applied to similarly situated creditors (here unsecured creditors) where a subset of those creditors is classified separately, does not accept the plan, and claims inequitable treatment under it. Bruce A. Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 Am. Bankr. L.J. 227, 227–28 (1998). “[F]air and equitable” (a redundant term) should be pictured vertically, as it “regulates priority among classes of creditors having higher and lower priorities,” id. at 228. For example, secured creditors are a higher priority for payment than unsecured creditors. For the sake of completeness, “impaired” means a creditor whose rights under a plan are altered (obviously adversely).
In our case, the Senior Noteholders were assigned their own class (1E) of unsecured creditors in Tribune‘s Plan. When
they did not accept the Plan but other classes did, the Bankruptcy Court confirmed it under the cramdown provision, and they became bound by it. They appeal to us, contending that “[n]otwithstanding” in
We agree with the Bankruptcy and District Courts that the text of
The facts that follow, as typical in the transactional world, are complicated, and so at times is the legal analysis. Frame them, however, in the context set out above.
I. FACTS AND PROCEDURAL HISTORY
Prior to its bankruptcy, Tribune was the largest media conglomerate in the country, reaching 80% of American households each year. It owned the Chicago Tribune and the Los Angeles Times, as well as many regional newspapers, television and radio stations.
The Company‘s 2008 bankruptcy followed on the heels of its failed leveraged buyout (“LBO“),1 which left it with
almost $13 billion of debt and a complex capital structure. In 2012, after years of contentious proceedings, the Bankruptcy Court confirmed the Plan over the dissenting votes of the Senior Noteholders.2 Initial distributions under the Plan were made at the end of that year, as the Bankruptcy Court rejected the Senior Noteholders’ request for a stay.
This is the second time Tribune‘s dissenting creditors are before us. In In re Tribune Media Co., 799 F.3d 272 (3d Cir. 2015) (”Tribune I“), we reversed in part the District Court‘s determination that the Senior Noteholders’ claims were, because the Plan‘s distributions had already occurred, equitably moot and sent them back for further proceedings on the merits. On remand, that Court affirmed the Bankruptcy Court‘s confirmation order over the Senior Noteholders’ objections. In re Tribune Media Co., 587 B.R. 606 (D. Del. 2018). We review their appeal here.
1. Overview of Tribune‘s creditors
Prior to the 2007 LBO, Tribune had a market capitalization of $8 billion and $5 billion in debt, which had been amassed over decades. The Senior Noteholders loaned to Tribune unsecured debt between 1992 and 2005 (the “Senior
Notes“). Covenants in the Senior Notes’ indentures require that they are paid before any other debt incurred by the company. When Tribune filed for reorganization, the outstanding amount due on those Notes was $1.283 billion.3
In 1999, Tribune also issued $1.256 billion of unsecured exchangeable subordinated debentures (the “PHONES Notes“). Their indenture provided that they are subordinate in payment to all “‘Senior Indebtedness’ of Tribune,” which included the Senior Notes. In re Tribune Co., 464 B.R. 126, 138 (Bankr. D. Del. 2011) (the “2011 Opinion“). At the time of its bankruptcy, the outstanding principal on the PHONES Notes was $759 million.
The LBO added approximately $8 billion of debt to Tribune‘s capital structure. As part of the merger financing, Tribune issued $225 million of unsecured debt (the
Also among the billions of dollars of Tribune‘s debt are an unsecured $150.9 million “Swap Claim” (which is tied to the termination of an interest rate swap agreement to offset the interest rate exposure from the LBO); $105 million of
unsecured claims by Tribune Media Retirees (the “Retirees“); and $8.8 million of unsecured claims by trade and miscellaneous creditors (the “Trade Creditors“).
From Tribune‘s perspective, these unsecured creditors—the holders of Senior Notes, the PHONES and EGI Notes, and Swap Claim, plus the Retirees and the Trade Creditors—are of equal priority. But the subordination provisions in the PHONES and EGI Notes’ indentures—which were entered outside Tribune‘s bankruptcy—limit their repayment until all Senior Obligations are paid in full. Thus, whether a creditor should benefit from these subordination provisions depends on its claim qualifying as a Senior Obligation.
2. The Bankruptcy Court Proceedings
During the bankruptcy proceedings, several groups of stakeholders proposed plans to reorganize Tribune‘s debt. The Bankruptcy Court‘s 2011 Opinion on competing plans coalesced support around the Plan sponsored by Tribune, its Official Committee of Unsecured Creditors, and certain lenders. It settled many of the Creditors’ Committee‘s claims against the LBO lenders, directors and officers of the old Tribune, real estate investor Samuel Zell (who orchestrated the LBO5), and others, for $369 million paid to Tribune‘s estate.
The Plan organized Tribune‘s unsecured creditors into distinct classes. The Senior Noteholders, which comprise
Class 1E, argue that the Plan favored Class 1F, which is made up of the Swap Claim, the Retirees, and the Trade Creditors (collectively this class includes over 700 unsecured creditors). It paid both Class 1E and Class 1F creditors 33.6% of their outstanding claims from the initial distributions under the Plan. In re Tribune Co., 472 B.R. 223, 237 & n.17 (Bankr. D. Del. 2012) (the “Allocation Opinion“). These payments included monies from the subordination of the PHONES and EGI Notes.
The Senior Noteholders objected to the Plan. They argued that it allocated more than $30 million of their recovery from the subordinated PHONES and EGI Notes to Class 1F when only the Senior Noteholders in Class 1E qualified as Senior Obligations, and thus they alone should benefit from those subordination agreements. Specifically, they asserted that the Plan violated the Bankruptcy Code‘s standards for confirmation because it did not fully enforce the subordination provisions per
To resolve these and other intercreditor claims, the Bankruptcy Court established an allocation dispute process, which called
reflects our understanding of these various recovery scenarios (“The Stipulated Recovery Percentage Table“).
| Stipulated Recovery Percentage: | Class 1E Senior Notes ($1.283B claim) | Class 1F (claim) | |||
|---|---|---|---|---|---|
| Swap Claim ($150.9M) | Retirees ($105M) | Trade ($8.8M) | |||
| 1 | Under the Plan | 33.6% | 33.6% | 33.6% | 33.6% |
| 2 | Before subordination of PHONES and EGI claims | 21.9% | 24.4% | 21.9% | 21.9% |
| 3 | If Class 1E benefits from subordination | 35.9% | 24.4% | 21.9% | 21.9% |
| 4 | If Class 1E and the Swap Claim benefit from subordination | 34.5% | 36.9% | 21.9% | 21.9% |
| 5 | If Class 1E, the Swap Claim, and Retirees benefit from subordination | 33.7% | 36.1% | 33.7% | 21.9% |
Allocation Opinion, 472 B.R. at 238 (describing recovery under the Plan); J.A. 327.6
n.19. Notably, the Court did not decide whether the Retirees’ claim qualified as a Senior Obligation.8 Id.
The Court‘s footnote stating that the Swap Claim qualified as a Senior Obligation reduced the Senior Noteholders’ unfair-discrimination claim of approximately $30 million by over $17 million, thereby leaving roughly $13 million in dispute (a small sum relative to their overall $1.283 billion claim).9 To put this in a picture, they ask us to reallocate payments to reflect the fourth row of the Stipulated Recovery Percentage Table (“If Class 1E and the Swap Claim benefit from subordination“) rather than the first row, increasing initial distributions toward their claim recovery from 33.6% to 34.5%.10
3. The Senior Noteholders’ appeal
The Senior Noteholders appealed the Plan‘s confirmation to the District Court, renewing their argument that it violated
While the appeal was pending, Tribune consummated the Plan by making the distributions called for in it. We nonetheless held that the Senior Noteholders’ arguments before us now could proceed.11 Tribune I, 799 F.3d at 283–84. They still came up short on remand, and appeal to us again.
II. JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction over this appeal under
findings for clear error, and its exercises of discretion for abuse thereof.” Id.
III. DISCUSSION
Cramdown plans are an antidote to one or more classes of claims holding up confirmation of an otherwise consensual plan. See generally Kenneth N. Klee, All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code, 53 Am. Bankr. L.J. 133 (1979). The cramdown provision in
A. Subsection 1129(b)(1) does not require subordination agreements to be enforced strictly.
The Senior Noteholders first contend that the Bankruptcy Court should not have confirmed the Plan because it does not enforce strictly the PHONES and EGI Notes’ subordination agreements under Code
The Senior Noteholders argue
1. The text of § 1129(b)(1)
Section 510(a) provides that “[a] subordination agreement is enforceable in [bankruptcy] to the same extent that such agreement is enforceable under applicable nonbankruptcy law.” But
We have previously defined the phrase “notwithstanding” in the bankruptcy context to mean “‘in spite of’ or ‘without prevention or obstruction from or by.‘” Goody‘s, 610 F.3d at 817 (quoting Webster‘s Third Int‘l Dictionary 1545 (1971)); see also In re Federal-Mogul Global Inc., 684 F.3d 355, 369 (3d Cir. 2012) (reading
evidence of Congress’ preemptive intent.” 684 F.3d at 369 (internal quotation marks omitted).
Applying the lessons of Goody‘s and Federal-Mogul here,
2. The purpose of § 1129(b)(1)
Section 1129(b)(1)‘s purpose affirms this analysis. The provision allows a court to confirm a plan if it protects the interests of a dissenting class, here the Class 1E Senior Noteholders. Those interests are primarily preserved by the fair-and-equitable test (not in play here, as our dispute involves only unsecured creditors) and the unfair-discrimination test, the latter protecting the relative payments to same-rank creditor classes whose recovery has been affected, inter alia, by intercreditor subordination agreements.
Both
of intercreditor rights. It also attempts to ensure that debtors and courts do not have carte blanche to disregard pre bankruptcy contractual arrangements, while leaving play in the joints.12
To date, we are aware of only one court that has spoken in a published opinion to the effect of
“House Report“). They rely on that discrimination principle, and not on
To save their reading of
Professor Klee‘s proposal, we rely on the plain language of
Hence we affirm the holding of the Bankruptcy and District Courts that subordination agreements need not be strictly enforced for a court to confirm a cramdown plan. They correctly evaluated the Senior Noteholders’ claim under the unfair-discrimination test rather than a rigid application of
B. The Plan‘s allocation of a small portion of subordinated sums to Class 1F creditors does not unfairly discriminate against the Senior Noteholders.
As we resolved the first issue in favor of Tribune, we turn to the Senior Noteholders’ alternative argument: The Plan unfairly discriminates against them. The Bankruptcy Court‘s unfair-discrimination analysis compared Class 1E‘s initial distribution recovery percentage under the Plan—33.6%—to its recovery were there strict enforcement of the subordination agreements—34.5%—and determined that 0.9% was not a material difference in recovery. Allocation Opinion, 472 B.R. at 243 n.21. Thus it held there was no unfair discrimination to bar Plan confirmation.
The Senior Noteholders allege two flaws in that analysis. First, they claim the Court failed to compare only recoveries from the Tribune estate. That is, it should have compared Class 1E‘s and Class 1F‘s Plan recoveries as if no subordination agreements were in effect. As the parties stipulated in the Stipulated Percentage Recovery Table that the Senior Noteholders in Class 1E recovered only 21.9% of
the subordinated creditors and should be excluded from the unfair-discrimination analysis.
Second, they claim that the Court’s refusal to compare their Class 1E percentage recovery with Class 1F’s percentage recovery, and its decision to compare instead only Class 1E’s recovery under the Plan with its recovery had the subordination agreements been fully enforced, were incorrect. Once these errors are addressed, they assert the difference between Class 1E’s recovery under the Plan absent subordination (21.9%), and the Plan recovery of Class 1F’s non-Swap Claim creditors including subordination benefits (33.6%), is material, evidencing unfair discrimination that should have prevented the Plan’s confirmation.
The Bankruptcy Code does not define unfair discrimination. It “is something of an orphan in Chapter 11 reorganization practice. . . . [J]ust what suffices to avoid unfair discrimination is uncertain.” Markell, A New Perspective, supra, at 227. “Generally speaking, this standard ensures that a dissenting class will receive relative value equal to the value given to all other similarly situated classes.” In re Armstrong World Indus., Inc., 348 B.R. 111, 121 (D. Del. 2006) (quoting In re Johns-Manville Corp., 68 B.R. 618, 636 (Bankr. S.D.N.Y. 1986)). Since unfair discrimination’s inclusion in the Bankruptcy Code (it appeared for a short time in the 1930s in revisions to the Bankruptcy Act of 1898), courts have relied primarily on one of four tests to determine what unfairness means and, in some of those tests, whether, if a presumption of unfairness exists, it can be rebutted. See generally Denise R. Polivy, Unfair Discrimination in Chapter 11: A Comprehensive Compilation of Current Case Law, 72 Am. Bankr. L.J. 191, 196–208 (1998) (collecting and discussing cases applying the various tests).
The “mechanical” test prohibits all discrimination, that is, it requires that similarly situated creditors’ recoveries be 100% pro rata. See In re Greystone III Joint Venture, 102 B.R. 560, 571–72 (Bankr. W.D. Tex. 1989) (reasoning that paying the trade creditors a higher percentage of their claims than other unsecured creditors would constitute unfair discrimination), rev’d on other grounds, 995 F.2d 1274 (5th Cir. 1992). The “restrictive” approach narrowly defines unfair discrimination such that, “[i]n the absence of subordination, . . . no disparate treatment of similarly situated creators would qualify,” Polivy, supra, at 200. Both tests have support in the House Report: it noted “there is no unfair discrimination as long as the total consideration given all other classes of equal rank does not exceed the amount that would result from an exact aliquot distribution,” House Report, supra, at 416, and the examples given involved subordinated creditors, id. at 416–17; see also In re Acequia, Inc., 787 F.2d 1352, 1364 & n.18 (9th Cir. 1986). Neither of these tests appears to be widely adopted, however. See Polivy, supra, at 200–201 (collecting cases); cf. Aztec, 107 B.R. at 588–89 (rejecting both the restrictive and mechanical tests).
The “broad” approach is generally applied as a four-factor test that originated in the Chapter 13 case In re Kovich, 4 B.R. 403, 407 (Bankr. W.D. Mich. 1980). To determine whether the plan unfairly discriminates, the test considers whether: (1) a reasonable basis for discrimination exists; (2) the debtor cannot consummate its plan without discrimination; (3) the discrimination is imposed in good faith; and (4) the degree of discrimination is directly
In response to criticisms of these tests, Professor Bruce Markell proposed the “rebuttable presumption” test, which was applied by the Bankruptcy Court in this case, 472 B.R. at 242.16
A rebuttable presumption of unfair discrimination exists when there is
(1) a dissenting class; (2) another class of the same priority; and (3) a difference in the plan’s treatment of the two classes that results in either (a) a materially lower percentage recovery for the dissenting class (measured in terms of the net present value of all payments), or (b) regardless of percentage recovery, an allocation under the plan of materially greater risk to the dissenting class in connection with its proposed distribution.
Markell, A New Perspective, supra, at 228, 249; see also Dow Corning, 244 B.R. at 702.
Under this test, a presumption of unfair discrimination may be overcome if the court finds that
a lower recovery for the dissenting class is consistent with the results that would obtain outside of bankruptcy, or that a greater recovery for the other class is offset by contributions from that class to the reorganization. The presumption of unfairness based on differing risks may be overcome by a showing that the risks are allocated in a manner consistent with the prebankruptcy expectations of the parties.
Markell, A New Perspective, supra, at 228; cf. Comm. on Bankr. and Corp. Reorg. of the Ass’n of the Bar of the City of New York, Making the Test for Unfair Discrimination More “Fair“: A Proposal, 58 Bus. Law. 83, 106–07 (2002) (proposing amendments to this test that narrow the circumstances where it is appropriate to overcome the presumption of unfair discrimination).
The Senior Noteholders’ unfair-discrimination claim involves mixed questions of law and facts. A bankruptcy court’s initial determination of which test to use is reviewed as “a legal conclusion without the slightest deference.” U.S. Bank Nat‘l Ass‘n ex rel. CWCapital Asset Mgmt. LLC v. Vill. at Lakeridge LLC, 138 S. Ct. 960, 965 (2018). Reviewing the Bankruptcy Court’s choice of legal test de novo, we agree that it was appropriate in these circumstances to take a pragmatic approach to measure the Plan’s discrimination. Thereafter, Village at Lakeridge asks whether applying the law to the facts “entails primarily legal or factual work.” Id. at 967. This inquiry sounds simple, but often it will depend on how a court approaches its analysis. Our approach here sets up a fact-specific question: How does discrimination affect Class 1E’s actual recovery? Thus we review the application of legal precepts to the facts in this instance for clear error. (Even were we instead to apply de novo review, the result would not change).
1. Principles framing the “unfair-discrimination” standard
We distill the following principles from the various unfair-discrimination analyses.
First, though
This reading is also consistent with our holding in Section A above. A subordination agreement does not need to be enforced to the letter in the case of a cramdown, and subordinated amounts may be allocated to other classes not entitled outside bankruptcy to benefit from subordination agreements as long as that allocation is not presumptively unfair (and, if so, the presumption is not rebutted).
Second, the cramdown provision’s text also makes plain that unfair discrimination applies only to classes of creditors (not the individual creditors that comprise them), and then only to classes that dissent. Thus a disapproving creditor within a class that approves a plan cannot claim unfair discrimination, and the standard does not “apply directly with respect to other classes unless they too have dissented.” Klee, Cram Down, supra, at 141 n.67.
Third, unfair discrimination is determined from the perspective of the dissenting class. House Report, supra, at 416–17. What this means, however, is subject to interpretation. Courts and commentators nearly always consider this a comparison between the allegedly preferred class and the dissenting class. See, e.g., In re Greate Bay Hotel & Casino, Inc., 251 B.R. 213, 231 (Bankr. D.N.J. 2000) (collecting cases comparing the recovery of the dissenting class to that of the preferred class or classes); Klee, Cram Down, supra, at 142 (“[I]f the plan protects the legal rights of a dissenting class in a manner consistent with the treatment of other classes . . . , then the plan does not discriminate unfairly with respect to the dissenting class.“). However, as was done in this case, a court may in certain circumstances consider the difference between what the dissenting class argues it is entitled to recover and what it actually received under the plan. In other words, a comparison between the recovery of the preferred class and the dissenting class is by far the preferred but not always the only acceptable approach. Other measures that allow courts to assess the magnitude
Fourth, the need for classes to be aligned correctly is a precursor to an effective assessment. A typical refrain in bankruptcy is that many plan disputes in
Fifth, courts should resolve how a plan proposes to pay each creditor’s recovery “measured in terms of the net present value of all payments” or the “allocation . . . of materially greater risk . . . in connection with its proposed distribution.” Markell, A New Perspective, supra, at 228. This allows future distributions to be made reasonably equivalent to the actual value distributed at the time of the unfair-discrimination comparison.
Sixth, in making an unfair-discrimination determination, start by adding up all proposed plan distributions from the debtor’s estate and divide by the number of creditors sharing the same priority. This provides a pro rata baseline. Then look at what actually happens if the plan is implemented. Where there are no subordination agreements involved, the analysis is simple: look at the difference between the recovery percentage under the plan of a preferred class and that of a dissenting class. Where subordination agreements are involved, courts should resolve in the first instance which creditors are entitled to benefit from those agreements. They should make their comparisons after including subordinated sums in the plan distributions, for what may be in dispute often is the amount the dissenting class would be entitled under full enforcement of
Seventh, to presume unfair discrimination, there must be “a ‘materially lower’ percentage recovery for the dissenting class or a ‘materially greater risk to the dissenting class in connection with its proposed distribution.’” Greate Bay Hotel, 251 B.R. at 229 (quoting Dow Corning, 244 B.R. at 702). The rebuttable presumption test intentionally leaves opaque what is, under the circumstances, “material.” Such line drawing has been left primarily to bankruptcy courts. See Bruce A. Markell, Slouching Toward Fairness: A Reply to the ABCNY’s Proposal on Unfair Discrimination, 58 Bus. Law. 109, 116 (2002) (“Congress has left the important area of nonconsensual confirmation to the common law method of incremental decision-making.“). We too leave this for judicial development.
2. Application of the principles
To review, the Bankruptcy Court compared Class 1E’s recovery under the Plan (33.6%) to its recovery if it and the Swap Claim were the only creditors to benefit from the subordination agreements (34.5%). 472 B.R. at 243 n.21. The Senior Noteholders point out that typically a court will compare the recovery percentages of the dissenting and preferred classes and ask whether the difference in recovery, if any, is material. Trustees’ Br. 41. If that analysis had been applied here, the Court would have needed to resolve the relative priority of all the creditors in Classes 1E and 1F to determine which creditors qualified as Senior Obligations under the PHONES and EGI Notes before comparing the treatment of the two classes under the Plan.
Yet neither the text of
The Senior Noteholders argue that the Court should have compared their recovery from the estate absent subordination (21.9%) to the Trade Creditors’ recovery under the Plan with the reallocated subordination payments (33.6%). To measure discrimination this way is to ignore that the Plan brought into the Tribune estate not only the subordinated sums distributed to non-beneficiaries of that subordination, but all payments from the subordinated creditors (and indeed it allocated the overwhelming majority of those sums to the Senior Noteholders and the Swap Claim).
In this context, the Bankruptcy Court did not necessarily err when it compared the Senior Noteholders’ desired recovery under the fourth row of the Stipulated Recovery Percentage Table (34.5%) to their actual recovery under the Plan (33.6%). To repeat, this is not the preferred way to test whether the allocation of subordinated amounts under a plan to initially non-benefitted creditors unfairly discriminates. It may, however, be an appropriate metric (or cross-check) given the circumstances of a case.
This is such a case. Because the claims of the Retirees ($105M) and Trade Creditors ($8.8M) are so substantially smaller than the Senior Noteholders’ claims ($1.283B), the increases in the recovery percentage for the Retirees’ and Trade Creditors’ claims from reallocated subordinated amounts result in only a minimal reduction of the recovery percentage
As an aside, we note that the Bankruptcy Court looked to cases comparing the differences in the dissenting class and the preferred class recoveries as a baseline for its materiality determination. See Allocation Opinion, 472 B.R. at 243 (collecting cases). Because it adopted a different framework for its analysis than the courts it cited, id. at 242–43, it did not need to apply their metric for materiality. What constitutes a material difference in recovery when analyzing the effect of a plan on the dissenting class is a distinct and context-specific inquiry. We do not address the outer boundary of that inquiry here. Wherever it may lie, the nine-tenths of a percentage point difference in the Senior Noteholders’ recovery is, without a doubt, not material.
* * * * *
Unfair discrimination is rough justice. It exemplifies the Code’s tendency to replace stringent requirements with more flexible tests that increase the likelihood that a plan can be negotiated and confirmed. This flexibility is balanced by the Code’s inherent concern with equality of treatment. We seek to maintain this balance in our interpretation of
The Code does not compel courts reviewing cramdown plans to enforce subordination agreements strictly, though not to do so must conform with the constraints set out in the cramdown provision. The pragmatic approach taken by the Bankruptcy Court, affirmed by the District Court, reached the right result. Thus we also affirm.