Although courts will likely continue to grapple with what constitutes bad faith under §1126(e) of the Bankruptcy Code for purposes of vote designation, a few key axioms do emerge when examining the relevant case law and legislative history of the provision and its legislative predecessors. Most important among them is that selflessness is not a necessary precondition to avoid designation, but a creditor is nevertheless restricted from wrongfully using the voting process for an "ulterior" purpose. Moreover, while a court's inquiry is, and will remain, highly fact-intensive and require a close examination of the surrounding circumstances and motivations, creditors and strategic investors alike must be at all times wary of the timing, nature and extent of their actions.
Jayme T. Goldstein and Kenneth Pasquale are partners, and Jonathan Canfield is an associate, at Stroock & Stroock & Lavan, where they practice in the financial restructuring group.
1. See In re Adelphia Commc'ns, 359 B.R. 54, 56 (Bankr. S.D.N.Y. 2006).
2. No. 12-51156 (Bankr. D. Nev. 2012).
3. Recent decisions in which a court either (i) designated the vote of a creditor, or (ii) upheld a lower court decision to designate such vote include DISH Network v. DBSD N. Am. (In re DBSD N. Am.), 634 F.3d 79 (2d Cir. 2011) (discussed in detail herein), In re Derby Dev., No. 10-50259, 2012 WL 2501064 (Bankr. D. Conn. June 27, 2012) (bankruptcy court designated a creditor's vote after it determined that the creditor was formed as a sham to advance the debtor's interest in obtaining plan confirmation over the objection of a secured creditor) and In re RLD, No. 11-14071, 2012 WL 3638009 (Bankr. N.D. Cal. Aug. 22, 2012) (bankruptcy court found that a secured creditor acted in bad faith by voting to reject a plan of reorganization in order to correct a mistake made by that creditor).
4. Although not the focus of this article, §1126(e) of the Bankruptcy Code also leaves open the possibility that a court may, in very specific circumstances, designate the votes of a creditor as a result of a "technical violation" of the Bankruptcy Code (i.e., a vote that was "not solicited or procured…in accordance with the provisions of [the Bankruptcy Code]"). See, e.g., In re Stations Holdings Co., Case No. 02-10882 (Bankr. D. Del.); In re NII Holdings, Case No. 02-11505 (Bankr. D. Del.).
5. See In re Dune Deck Owners, 175 B.R. 839, 843 (Bankr. S.D.N.Y. 1995).
6. As discussed in various cases dealing with vote designation, §203 of the Bankruptcy Act of 1898 (as amended) provided, in relevant part, that "[i]f the acceptance or failure to accept a plan by the holder of any claim or stock is not in good faith, in the light of or irrespective of the time of acquisition thereof, the judge may, after hearing upon notice, direct that such claim or stock be disqualified for the purpose of determining the requisite majority for the acceptance of a plan." 11 U.S.C. §603 (repealed 1978). Bankruptcy Rule 10-305(d) contained language that was substantially similar. See In re Dune Deck Owners, 175 B.R. at 843 n.8.
7. 11 U.S.C. §1126(e) (2012).
8. See Figter v. Teachers Ins. & Annuity Ass'n of Am. (In re Figter), 118 F.3d 635, 638 (9th Cir. 1997).
9. See Young v. Higbee, 324 U.S. 204, 211, 211 n.10 (1945); In re Dune Deck Owners, 175 B.R. at 844.
10. See Young, 324 U.S. at 211.