Introduction

Chief Judge Stuart M. Bernstein of the Bankruptcy Court for the Southern District of New York in the fall of last year issued a memorandum decision in In re Teligent, Inc., et al. (the “Debtors”), Chapter 11, Case No. 01-12974 (SMB), 282 B.R. 765 (Bankr. S.D.N.Y., Sept. 13, 2002), regarding implied consent to different and less favorable treatment than the specific treatment set out in Section 1129(a)(9) of the Bankruptcy Code. This decision under certain circumstances seems to allow confirmation of a plan proposed by an administratively insolvent debtor.

Factual Background

After operating in Chapter 11 for a period of time, the Debtors, telecommunication services providers, decided to liquidate their assets by attempting to sell their core assets. The Debtors ultimately terminated their retail operations, sold certain enterprise companies and used the proceeds from such sales to reduce their unsecured debt, with only their wholesale operations remaining. At this time the Debtors were administratively insolvent, thereby precluding the Debtors from being able to confirm a plan of reorganization as they were not in a position to satisfy Section 1129(a)(9) of the Bankruptcy Code, which requires that a debtor pay all administrative and priority creditors in full on the plan’s effective date unless an administrative creditor agrees to different treatment. Section 1129(a)(9) provides:

Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that

• (A) with respect to a claim of a kind specified in section 507(a)(1) or 507(a)(2) of this title, on the effective date of the plan, the holder of such claim will receive on account of such claim cash equal to the allowed amount of such claim;

• (B) with respect to a class of claims of a kind specified in section 507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6), or 507(a)(7) of this title, each holder of a claim of such class will receive -

  (i) if such class has accepted the plan, deferred cash payments of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or

  (ii) if such class has not accepted the plan, cash on the effective date of the plan equal to the allowed amount of such claim; and

• (C) with respect to a claim of a kind specified in section 507(a)(8) of this title, the holder of such claim will receive an account of such claim deferred cash payments, over a period not exceeding six years after the date of assessment of such claim, of a value, as of the effective date of the plan, equal to the allowed amount of such claim.

11 U.S.C. § 1129(a)(9).

Notwithstanding the Debtors’ obvious state of administrative insolvency, the Debtors’ pre and post-petition secured lenders (the “Lenders”) and committee of unsecured creditors appointed in the cases (the “Committee”) negotiated and drafted a plan of reorganization which provided, among other things, that the Debtors would emerge from Chapter 11 and would continue to operate their remaining wholesale business and that the Lenders would fund the plan and would receive 100% of the equity in the reorganized Debtors in exchange for their post-petition loans and secured claims. The plan also provided for a potential distribution to general unsecured creditors wherein the Lenders agreed to (a) assign their collateral, which consisted of avoidance claims, to an unsecured claims estate representative, and (b) assign $300,000 to the unsecured claims estate representative to fund the investigation and prosecution of such avoidance actions.2

With regard to administrative and priority claims, the plan provided for a claim fund in the amount of $3.25 million available for distribution, as well as a convenience class for all administrative and priority claims in an amount of $3,000 or less, including all claims where the claimholder agreed to reduce his or her claim to $3,000 and opt in the convenience class.

There were a total of 2,006 administrative and priority creditors, of which approximately 75% held convenience class claims and did not have to be solicited for plan voting purposes. As for the remaining 454 administrative and priority creditors, the Debtors prepared a consent form which was sent to administrative and priority creditors as part of their disclosure statement which explained that:
(i) the Bankruptcy Code required payment in full of all administrative and priority claims in order for a plan to be confirmed unless the claimholder agreed to different treatment;
(ii) the Debtors were unable to pay administrative and priority claims in full; and
(iii) administrative and priority creditors would receive between 5% and 12% of their claims under the terms of their proposed plan if the plan was confirmed.
The consent form also advised administrative and priority creditors that unless they agreed to accept the different treatment as proposed by the Debtors under the plan, administrative and priority creditors would most likely not receive any distribution and that the Debtors’ bankruptcy cases would most likely be dismissed or converted. The consent from gave administrative and priority creditors the following three choices:
(i) agree to accept the plan’s proposed treatment of a pro-rata share of the claim fund;
(ii) opt into the convenience class; or
(iii) decline to accept the plan’s treatment.

Perhaps the most significant aspect of the consent form was that it contained a clear and conspicuous notice that the Debtors intended to ask the Bankruptcy Court to rule that any administrative or priority creditor who failed to return the consent form will be deemed to have accepted the plan’s treatment of his or her claims. The Debtors simplified the procedure for the return of the consent forms by allowing administrative and priority creditors to
(i) mail the consent forms in the self-addressed stamped envelope they received by the Debtors; (ii) fax the consent forms to a toll-free number as provided in the consent form; or
(iii) email the information to the email address provided in the consent forms.

The consent form also listed a toll-free number for a call center established by the Debtors to answer any questions about the consent forms, the treatment of administrative and priority claims or other issues. The Debtors also initiated a targeted call campaign whereby each administrative and priority creditor was contacted and urged to return the consent form to the Debtors.

Of the 454 administrative and priority creditors, 85 agreed to accept the plan’s treatment, 205 opted into the convenience class, 49 settled their claims with the Debtors and 8 initially elected not to accept the plan’s treatment but later changed their minds and accepted the plan’s treatment. The face amount of all the claims held by administrative and priority creditors who accepted the plan’s treatment or opted into the convenience class was approximately $48 million. The remaining 107 administrative and priority creditors who did not return the consent forms to the Debtors represented $4,529,270 of the face value of their claims.

The Debtors nonetheless continued to followed up with each creditor who did not return his or her consent form, during which time not one creditor objected to the Debtors’ proposed treatment under the plan. Those creditors who responded to the Debtors either stated that they saw no reason to return the consent forms since they would receive the same treatment under the plan as if they accepted such treatment or stated that they wanted to have nothing to do with the bankruptcy cases.

Discussion

The legal issue presented to the Bankruptcy Court was whether, under Section 1129(a)(9), it was appropriate to deem the silence of the 107 creditors who did not return the consent forms to the Debtors – but, at the same time, did not object to the consent forms or object to the Debtors’ stated intention to ask the Bankruptcy Court to treat their silence as consent – as consent to the Debtors’ proposed treatment of their claims under their plan.

The Court began by stating that while Section 1129(a)(9) requires that all administrative and priority creditors be paid in full unless they agree to different treatment of their claims, Section 1129(a)(9) does not say “how” such creditors may agree to such other treatment. In re Teligent, Inc., 282 B.R. at 770. While some courts have concluded that similar provisions applicable to Chapter 13 plans require express consent, the Court was of the view that a creditor’s agreement to different treatment within the meaning of Section 1129(a)(9), may, in appropriate circumstances, be implied from his or her conduct. The Court arrived at this conclusion based upon a number of observations. First, the Court looked to the plain meaning of the statute. While Section 1129(a)(9) requires an agreement, the Court stated that Section 1129(a)(9) does not state that such agreement must be express, as compared, for example, to Section 1126(c) of the Bankruptcy Code, which requires an affirmative act to accept a plan by the requisite majority of creditors within a class. Since “Congress intends the words in its enactments to carry their ordinary contemporary, common meaning,” Judge Bernstein directed that courts apply such objectives unless there exists a sufficient basis to do otherwise. Id. at 771 (citing Pioneer Inv. Serv. Co. v. Brunswick Assocs. Ltd. Partnership, 507 U.S. 380, 388, 123 L. Ed. 2d 74, 113 S. Ct. 1489 (1993)).

Second, the Court looked to the ordinary and common meaning of the term “agree” which includes “to grant consent” which may be stated expressly or implied from one’s conduct without any direct expression. See id. at 771 (citing WEBSTER’S II NEW COLLEGE DICTIONARY 23 (1999); AMERICAN HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE 36 (1996); BLACK’S LAW DICTIONARY 300 (7th ed. 1999)). Thus, based upon its ordinary and plain meaning, the Court concluded that Congress’s use of the word “agree” in Section 1129(a)(9) of the Bankruptcy Code should be construed as to include implied consent.

Third, the Court looked to the general principles of contact law which provide exceptions to the general rule that an offeror cannot treat silence or inaction as acceptance, where silence will be deemed as acceptance where an offeree has a duty to speak and remains silent. Judge Bernstein believed that in the context of a bankruptcy proceeding, specifically with regard to the plan process, where the fate of every party in interest is often reliant upon the success of a plan and where the action of each creditor may affect the rights of all parties, a creditor who has an objection to the treatment of his or her claim under a plan must not remain silent. As Judge Bernstein eloquently stated, “[si]mply put, one’s general right to remain silent in the face of an offer should be subject to question and reconsideration where passivity will threaten the fundamental goals of bankruptcy–rehabilitation, saving jobs and equality of distribution.” Id. at 772.

Applying these principals to the facts before the Court, Judge Bernstein concluded that the failure of those administrative and priority creditors to return their consent forms implied their agreement to the Debtors’ proposed treatment to their claims within the meaning of Section 1129(a)(9) of the Bankruptcy Code. Given that (a) the Debtors’ bankruptcy cases were administratively insolvent and the only means by which the Debtors’ plan could be confirmed was by having all administrative and priority creditors agree to the Debtors’ proposed treatment of their claims; (b) any administrative or priority creditor who objected to the Debtors’ proposed treatment to his or her claim should have and could have communicated such objection with the Debtors; (c) the Debtors provided a quick, easy and inexpensive way for each administrative and priority creditor to make his or her election by way of the consent forms, the procedure for returning the consent forms, establishing both a toll-free number for the call center and the targeted call campaign; (d) the record made at the plan confirmation hearing supported the finding that the non-responding creditors intended to accept the Debtors’ proposed treatment to their claims where they were on notice that the Debtors intended to treat all non-responses as consent to the Debtors’ different treatment of their claims and did not object to such proposed treatment, the Court concluded by stating “I do not presume that their failure to return the Consent Form indicated an intent to forego a distribution and cause the case to crater.” Id. at 733.

Conclusion

The case presents a viable alternative to the conversion or structured dismissal of administratively insolvent debtors.