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IN RE SIDELL

February 6, 1978

IN THE MATTER OF LEON LAWRENCE SIDELL Debtor


This appeal has been taken from a decision of the Honorable Beryl E. McGuire, Bankruptcy Judge, denying the debtor's motion to reopen the voting on the real property plan which he had submitted to creditors. The appeal presents several questions for decision arising out of a sizable real property arrangement involving a substantial number of creditors and comes to this court in a complex procedural posture.

The debtor filed a Chapter XII petition in the Bankruptcy Court on March 12, 1976. His real property plan was filed on July 11, 1977. Shortly thereafter, a copy of the plan accompanied by a notice fixing the time for the filing of acceptances or rejections was sent to all creditors. A meeting of creditors was held on August 13, 1977, at which time National Fuel Gas [NFG] filed a written acceptance of the plan. *fn1" / Manufacturers Hanover Trust Company/Western N.A. [Manufacturers Hanover] filed objections to the affirmative NFG vote since it did not indicate the title of the signing officer. On September 22, 1977, the Bankruptcy Judge issued an order which reopened the voting period and rescheduled the meeting of creditors for October 7, 1977 to resolve all objections.

Prior to the October 7 meeting, NFG filed a withdrawal of its initial acceptance of the plan. Several other vote changes were submitted at the meeting itself. During the meeting, Manufacturers Hanover withdrew its initial objection to the NFG vote since that vote had been changed. Counsel for the debtor remained silent when the vote change was noted and the objections withdrawn. Judge McGuire closed the voting at the end of the meeting, but left the determination of the voting outcome to a later proceeding.

Following the meeting, counsel for the debtor undertook a tally of the vote on behalf of the court. Counting the changed NFG votes as rejections left the debtor short of the statutorily required two-thirds creditor acceptance by.04808%. In other terms, this is a shortfall of $300 in votes despite $430,000 of acceptance votes.

 On November 2, 1977, before the outcome had been certified by the Bankruptcy Judge, the debtor filed an order to show cause why the voting should not be reopened. In motion papers dated November 12, 1977 he modified his motion to request that the rejection votes from the October 7 meeting be changed to acceptances since cause had not been shown for the changes under Bankruptcy Rule 12-37(a). *fn2" / A hearing was held on November 16, 1977 and the order currently the subject of appeal was issued on December 1, 1977. In it the Bankruptcy Judge held that Rule 12-37(a) was only a technical requirement, that he found reason for approval of the changed votes, and that the debtor's counsel, by his silence at the October 7 meeting, had waived any objection to the changed votes.

 A notice of appeal was filed by the debtor on December 8, 1977 and the appeal was heard by this court on January 11, 1978.

 I.

 The main issue on appeal is debtor's contention that the vote change by NFG was in violation of Bankruptcy Rule 12-37(a) which requires court approval only "for good cause shown" before a creditor may change or withdraw his acceptance or rejection vote. The decision below clearly states that no such showing and request for court approval were made by NFG. Bankruptcy Court Order at 4.

 The Bankruptcy Judge held that this requirement was merely technical, finding that it would be preferable to judge each case on its particular facts rather than adopt a "hard and fast" rule. He then added that since the plan itself is complex and voluminous and offers unsecured creditors little prospect of payment on their claims, any court "would be hard put to deny a creditor the privilege of changing its mind within the voting period." The Bankruptcy Judge cited Continental Insurance Co. v. Louisiana Oil Refining Corp., 89 F.2d 333, 337 (5th Cir. 1937), and In re Frank Fehr Brewing Co., 268 F.2d 170 (6th Cir. 1959), to support the proposition that changes in a creditor's vote are to be permitted.

 After careful consideration, I must disagree with the characterization of Rule 12-37(a) as a mere technical requirement which may easily be dispensed with in this case and must reverse the order below.

 Rule 12-37(a) was adopted on April 28, 1975 and became effective on August 1, 1975. No previous judicial interpretation of the provision for a showing of good cause has been found. Language identical to that of the rule in question, however, is found for Chapter X proceedings in Bankruptcy Rule 10-305(a). This has been interpreted to prohibit withdrawal of an acceptance as a matter of right and to allow such action only upon judicial approval after a showing of substantial reason. 13 COLLIER ON BANKRUPTCY P10-305.03 at 10-305-8 (14th ed.) [and cases cited therein].

 The cases relied on by the court below also arise under Chapter X, but they provide no support for its conclusion that the vote may be changed without a showing to the court of good cause. In Continental Insurance the Fifth Circuit Court clearly states that

 withdrawals of consent ought not thereafter to be allowed as of right and without good reason. To do so would embarrass orderly procedure and make room for trafficking in votes.

 Meanwhile, the In re Frank Fehr Brewing Co. decision appears to me to have no relevance to the issues before the court. There the appellate court merely refused to hear objections to a confirmation vote which were raised for the first time at the appeal level. Even if the characterization by the Bankruptcy Judge of that decision as "less than an endorsement of the trustee's presumptious handling of the vote" is accurate, it does not offer any clear guidance for interpretation of the Rule's effect.

 Furthermore, to apply the Rule on a "case by case" basis results in frustration of its purpose. The court should give full effect to the language of this Rule which was adopted by the Supreme Court since it must assume that the provisions set forth were intended to serve a useful purpose. In this case, to do otherwise without weighty reason opens the door to potential abuse. There is no hint of any trafficking of votes in this case but, if the Bankruptcy Judge does not require the ...


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