Creditor Didn’t Improperly Solicit Votes on Ch. 11 Plan

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By Diane Davis

Nov. 10 — A secured creditor’s solicitation of the vote of a debtor’s largest unsecured creditor on a competing Chapter 11 plan wasn’t in bad faith, a bankruptcy court in New Mexico held Nov. 4 ( In re Sandia Resorts, Inc. , 2016 BL 369845, Bankr. D.N.M., No. 11-15-11532 JA, 11/4/16 ).

Judge Robert H. Jacobvitz of the U.S. Bankruptcy Court for the District of New Mexico concluded that a secured creditor’s negotiations with an unsecured creditor don’t show an improper ulterior motive justifying designation (disallowance) of the unsecured creditor. The secured creditor, NCG, was negotiating with unsecured creditor Ramada Worldwide, Inc. (RWI) about the future potential to “re-flag” or re-brand debtor Sandia Resorts’ hotel called “America’s Best Value Inn” after confirmation.

Sandia Resorts, which has filed its second Chapter 11 case, argued that NCG’s email communication to RWI was an improper solicitation because it was made before the bankruptcy court approved the debtor’s amended disclosure statement. The debtor asked the bankruptcy court to “designate the ballot” or basically disqualify RWI from voting on two competing Chapter 11 plans.

Chapter 11 allows companies to enjoy protections from creditors while they seek to reorganize their debt or liquidate under a plan that must be approved by the bankruptcy court.

The debtor proposed an amended Chapter 11 plan in which it would continue to operate the hotel and unsecured creditors would receive a pro rata share of $66,000 over a 60-month period beginning 60 days after the plan’s effective date. In a competing plan, NCG proposed to sell Sandia Resorts’ assets free and clear of all liens, claims, and encumbrances to NCG in satisfaction of its mortgage indebtedness. Under NCG’s plan, unsecured creditors would likely receive 15 cents on the dollar.

Designation (disallowance) of a creditor’s vote is a “drastic remedy” that is the “exception rather than the rule, according to Bloomberg Law: Bankruptcy Treatise, pt. V, ch. 175 (D. Michael Lynn et al. eds., 2016).

Bankruptcy Code Section 1126(e) “imposes a good faith requirement on a creditor’s or stockholder’s acceptance or rejection of a plan, authorizing the court to designate (disallow the votes of) any entity whose acceptance or rejection was not in good faith or was not solicited or procured in good faith after notice and a hearing,” the Bloomberg Law: Bankruptcy Treatise states.

The Bankruptcy Code, however, doesn’t define good faith for purposes of Section 1126(e), the court said. “Designation of an entity under 11 U.S.C. § 1126(e) may be appropriate if the solicitation taints the free-election process of creditor voting, or when a party uses the voting process to accomplish some improper, ulterior purpose,” the court said.

RWI is a sophisticated national creditor with bankruptcy counsel who is capable of evaluating the competing Chapter 11 plans to determine what it can expect to receive under each plan, the court said. “There was no danger that NCG’s communications concerning Sandia Resorts … would improperly influence RWI,” the court said.

“NCG’s suggestion to RWI that Sandia Resorts would not discharge its obligations to unsecured creditors under its plan does not warrant a designation,” the court concluded.

Shay E. Meagle, Meagle Law, P.A., Albuquerque, N.M.; Joshua R. Simms, Joshua R. Simms PC, Albuquerque, N.M., represented debtor Sandia Resorts, Inc.

Nathan C. Sprague, Albuquerque, N.M.; Ronald A. Tucker, Moses Dunn Farmer & Tuthill PC, Albuquerque, N.M., represented Receiver Western Receiver, Trustee & Consulting Services, Ltd.

U.S. Trustee Leonard K. Martinez-Metzgar, Albuquerque, N.M.

To contact the reporter on this story: Diane Davis in Washington, D.C. at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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