Appeals from a memorandum decision and order of the United States District Court for the Southern District of New York (Lewis A. Kaplan, Judge), affirming orders of the United States Bankruptcy Court for the Southern District of the United States (Robert E. Gerber, Bankruptcy Judge), that confirmed a plan of reorganization under 11 U.S.C. § 1129 and designated the votes of DISH Network Corporation as "not in good faith" under 11 U.S.C. § 1126(e).
The opinion of the court was delivered by: Gerard E. Lynch, Circuit Judge:
Nos. 10-1175, 10-1201, 10-1352
DISH Network Corp. v. DBSD North America, Inc., Sprint Nextel Corp. v. DBSD North America, Inc.
Decided: December 6, 2010
(Consolidated for disposition)
Before: POOLER, RAGGI, and LYNCH, Circuit Judges.
AFFIRMED in part and REVERSED in part.
Judge Pooler concurs in part and dissents in part in a separate opinion.
25 These consolidated appeals arise out of the bankruptcy of DBSD North America, 26 Incorporated and its various subsidiaries (together, "DBSD"). The bankruptcy court 27 confirmed a plan of reorganization for DBSD over the objections of the two appellants 28 here, Sprint Nextel Corporation ("Sprint") and DISH Network Corporation ("DISH"). 29 Before us, Sprint argues that the plan improperly gave shares and warrants to 30 DBSD's owner - whose interest lies below Sprint's in priority - in violation of the 1 absolute priority rule of 11 U.S.C. § 1129(b)(2)(B). DISH, meanwhile, argues that the 2 bankruptcy court erred when it found DISH did not vote "in good faith" under 11 U.S.C. 3 § 1126(e) and when, because of the § 1126(e) ruling, it disregarded DISH's class for the 4 purposes of counting votes under 11 U.S.C. § 1129(a)(8). DISH also argues that the 5 bankruptcy court should not have confirmed the plan because the plan was not feasible.
See 11 U.S.C. § 1129(a)(11).
On Sprint's appeal, we conclude (1) that Sprint has standing to appeal and (2) that 8 the plan violated the absolute priority rule. On DISH's appeal we find no error, and 9 conclude (1) that the bankruptcy court did not err in designating DISH's vote, (2) that, 10 after designating DISH's vote, the bankruptcy court properly disregarded DISH's class 11 for voting purposes, and (3) that the bankruptcy court did not err in finding the 12 reorganization feasible. We therefore affirm in part, reverse in part, and remand for 13 further proceedings.
The reader may find the full facts of this case in the decisions of both the 16 bankruptcy court, In re DBSD North America, Inc. ("DBSD I"), 419 B.R. 179 (Bankr. 17 S.D.N.Y. 2009); In re DBSD North America, Inc. ("DBSD II") 421 B.R. 133 (Bankr. 18 S.D.N.Y. 2009), and the district court, In re DBSD North America, Inc. ("DBSD III"), 19 Nos. 09-cv-10156 (LAK), 09-cv-10372 (LAK), 09-cv-10373 (LAK), 2010 WL 1223109 20 (S.D.N.Y. Mar. 24, 2010); see also In re DBSD North America, Inc. ("DBSD IV"), 427 1 B.R. 245 (S.D.N.Y. 2010) (affirming bankruptcy court's treatment of Sprint's claim). We 2 therefore focus only on the facts most pertinent to these appeals.
ICO Global Communications founded DBSD in 2004 to develop a mobile 4 communications network that would use both satellites and land-based transmission 5 towers. In its first five years, DBSD made progress toward this goal, successfully 6 launching a satellite and obtaining certain spectrum licenses from the FCC, but it also 7 accumulated a large amount of debt. Because its network remained in the developmental 8 stage and had not become operational, DBSD had little if any revenue to offset its 9 mounting obligations.
10 On May 15, 2009, DBSD (but not its parent ICO Global), filed a voluntary petition 11 in the United States Bankruptcy Court for the Southern District of New York, listing 12 liabilities of $813 million against assets with a book value of $627 million. Of the 13 various claims against DBSD, three have particular relevance here: 14 1. The First Lien Debt: a $40 million revolving credit facility that 15 DBSD obtained in early 2008 to support its operations, with a first- 16 priority security interest in substantially all of DBSD's assets. It 17 bore an initial interest rate of 12.5%.
2. The Second Lien Debt: $650 million in 7.5% convertible senior 19 secured notes that DISH issued in August 2005, due August 2009. 20 These notes hold a second-priority security interest in substantially 1 all of DBSD's assets. At the time of filing, the Second Lien Debt 2 had grown to approximately $740 million. It constitutes the bulk of 3 DBSD's indebtedness.
3. Sprint's Claim: an unliquidated, unsecured claim based on a lawsuit 5 against a DBSD subsidiary. Sprint had sued seeking reimbursement 6 for DBSD's share of certain spectrum relocation expenses under an 7 FCC order. At the time of DBSD's filing, that litigation was pending 8 in the United States District Court for the Eastern District of Virginia 9 and before the FCC. In the bankruptcy case, Sprint filed a claim 10 against each of the DBSD entities jointly and severally, seeking $211 11 million. The bankruptcy court temporarily allowed Sprint's claim in 12 the amount of $2 million for voting purposes.*fn1
13 After negotiations with various parties, DBSD proposed a plan of reorganization 14 which, as amended, provided for "substantial de-leveraging," a renewed focus on "core 15 operations," and a "continued path as a development-stage enterprise." The plan 16 provided that the holders of the First Lien Debt would receive new obligations with a 17 four-year maturity date and the same 12.5% interest rate, but with interest to be paid in 1 kind ("PIK"), meaning that for the first four years the owners of the new obligations 2 would receive as interest more debt from DBSD rather than cash.
The holders of the 3 Second Lien Debt would receive the bulk of the shares of the reorganized entity, which 4 the bankruptcy court estimated would be worth between 51% and 73% of their original 5 claims. The holders of unsecured claims, such as Sprint, would receive shares estimated 6 as worth between 4% and 46% of their original claims. Finally, the existing shareholder 7 (effectively just ICO Global, which owned 99.8% of DBSD) would receive shares and 8 warrants in the reorganized entity.
9 Sprint objected to the plan, arguing among other things that the plan violates the 10 absolute priority rule of 11 U.S.C. § 1129(b)(2)(B). That rule requires that, if a class of 11 senior claim-holders will not receive the full value of their claims under the plan and the 12 class does not accept the plan, no junior claim- or interest-holder may receive "any 13 property" "under the plan on account of such junior claim or interest." Id. In making its 14 objection, Sprint noted that the plan provided for the existing shareholder, whose interest 15 is junior to Sprint's class of general unsecured claims, to receive substantial quantities of 16 shares and warrants under the plan - in fact, much more than all the unsecured creditors 17 received together. Sprint argued that "[b]ecause the Plan fails to satisfy" the absolute 18 priority rule, "it cannot be confirmed."
19 The bankruptcy court disagreed. It characterized the existing shareholder's receipt 20 of shares and warrants as a "gift" from the holders of the Second Lien Debt, who are 1 senior to Sprint in priority yet who were themselves not receiving the full value of their 2 claims, and who may therefore "voluntarily offer a portion of their recovered property to 3 junior stakeholders" without violating the absolute priority rule. DBSD I, 419 B.R. at 4 210. It held that it would permit such gifting "at least where, as here, the gift comes from 5 secured creditors, there is no doubt as to their secured creditor status, where there are 6 understandable reasons for the gift, where there are no ulterior, improper ends . . . and 7 where the complaining creditor would get no more if the gift had not been made." Id. at 8 212 (footnotes and quotation marks omitted).
9 Meanwhile, DISH, although not a creditor of DBSD before its filing, had 10 purchased the claims of various creditors with an eye toward DBSD's spectrum rights. 11 As a provider of satellite television, DISH has launched a number of its own satellites, 12 and it also has a significant investment in TerreStar Corporation, a direct competitor of 13 DSDB's in the developing field of hybrid satellite/terrestrial mobile communications.
14 DISH desired to "reach some sort of transaction with [DBSD] in the future if [DBSD's] 15 spectrum could be useful in our business."
16 Shortly after DBSD filed its plan disclosure, DISH purchased all of the First Lien 17 Debt at its full face value of $40 million, with an agreement that the sellers would make 18 objections to the plan that DISH could adopt after the sale. As DISH admitted, it bought 19 the First Lien Debt not just to acquire a "market piece of paper" but also to "be in a 20 position to take advantage of [its claim] if things didn't go well in a restructuring."
1 Internal DISH communications also promoted an "opportunity to obtain a blocking 2 position in the [Second Lien Debt] and control the bankruptcy process for this potentially 3 strategic asset. " In the end, DISH (through a subsidiary) purchased only $111 million of 4 the Second Lien Debt - not nearly enough to control that class - with the small size of its 5 stake due in part to DISH's unwillingness to buy any claims whose prior owners had 6 already entered into an agreement to support the plan.
7 In addition to voting its claims against confirmation, DISH reasserted the 8 objections that the sellers of those claims had made pursuant to the transfer agreement, 9 arguing, among other things, that the plan was not feasible under 11 U.S.C. § 1129(a)(11) 10 and that the plan did not give DISH the "indubitable equivalent" of its First Lien Debt as 11 required to cram down a dissenting class of secured creditors under 11 U.S.C. 12 § 1129(b)(2)(A). Separately, DISH proposed to enter into a strategic transaction with 13 DBSD, and requested permission to propose its own competing plan (a request it later 14 withdrew).
15 DBSD responded by moving for the court to designate that DISH's "rejection of 16 [the] plan was not in good faith." 11 U.S.C.§ 1126(e). The bankruptcy court agreed, 17 finding that DISH, a competitor to DBSD, was voting against the plan "not as a 18 traditional creditor seeking to maximize its return on the debt it holds, but . . . 'to 19 establish control over this strategic asset.'" DBSD II, 421 B.R. at 137 (quoting DISH's 20 own internal presentation slides). The bankruptcy court therefore designated DISH's vote 1 and disregarded DISH's wholly-owned class of First Lien Debt for the purposes of 2 determining plan acceptance under 11 U.S.C. § 1129(a)(8). Id. at 143; DBSD I, 419 B.R. 3 at 206.*fn2 The court also rejected DISH's objections to the plan, finding that the plan was 4 feasible and that, even assuming that DISH's vote counted, the plan gave DISH the 5 "indubitable equivalent" of its First Lien Debt claim and could thus be crammed down 6 over DISH's dissent. DBSD I, 419 B.R. at 203, 208-09.
7 After designating DISH's vote and rejecting all objections, the bankruptcy court 8 confirmed the plan. See id. at 221. The district court affirmed, see DBSD III, 2010 WL 9 1223109, and DISH and Sprint appealed to this Court. After oral argument, DBSD 10 received approval from the FCC to transfer its spectrum rights to the reorganized entity - 11 the last hurdle before consummation of the reorganization. We subsequently stayed 12 consummation of the plan and then, on December 6, 2010, issued an order disposing of 13 the case and vacating our stay so that the proceedings could continue below without 14 further delay, indicating that an opinion would follow. See In re DBSD North America, 15 Inc., 627 F.3d 496 (2d Cir. 2010). This is that opinion.
Sprint raises only one issue on appeal: it asserts that the plan improperly gives 1 property to DBSD's shareholder without fully satisfying Sprint's senior claim, in 2 violation of the absolute priority rule. See 11 U.S.C. § 1129(b)(2)(B). That rule provides 3 that a reorganization plan may not give "property" to the holders of any junior claims or 4 interests "on account of" those claims or interests, unless all classes of senior claims 5 either receive the full value of their claims or give their consent. Id.; see In re Coltex 6 Loop Cent. Three Partners, L.P., 138 F.3d 39, 42 (2d Cir. 1998); see also In re Armstrong 7 World Indus., Inc., 432 F.3d 507, 512 (3d Cir. 2005). Because the existing shareholder 8 received shares and warrants on account of its junior interest, Sprint argues, Sprint's class 9 of general unsecured creditors had a right to receive "full satisfaction of their claims" or 10 at least "an amount sufficient to obtain approval from the class."
But the plan provided 11 neither, and so Sprint asks us to vacate the order confirming it or to provide other relief 12 that would satisfy Sprint's claim.
13 A. Sprint's Standing to Appeal
14 Before we can address the merits of Sprint's appeal, we must decide whether 15 Sprint has standing to bring it. The current Bankruptcy Code prescribes no limits on 16 standing beyond those implicit in Article III of the United States Constitution. See In re 17 Gucci, 126 F.3d 380, 388 (2d Cir. 1997). Congress has given us jurisdiction over "all 18 final decisions, judgments, orders, and decrees" of the district courts in bankruptcy cases, 19 28 U.S.C. § 158(d)(1), which courts in turn have jurisdiction to review all "final 20 judgments, orders, and decrees" of the bankruptcy courts, id. § 158(a)(1). Nevertheless, 1 for practical reasons this Court and others have "adopted the general rule, loosely 2 modeled on the former Bankruptcy Act, that in order to have standing to appeal from a 3 bankruptcy court ruling, an appellant must be 'a person aggrieved' - a person 'directly 4 and adversely affected pecuniarily' by the challenged order of the bankruptcy court."*fn3 5 Int'l Trade Admin. v. Rensselaer Polytechnic Inst., 936 F.2d 744, 747 (2d Cir. 1991) 6 (citation omitted). An appellant like Sprint, therefore, must show not only "injury in fact" 7 under Article III but also that the injury is "direct" and "financial." Kane v. Johns- 8 Manville Corp., 843 F.2d 636, 642 & n.2 (2d Cir. 1988).
9 "As a general rule," we grant standing to "creditors . . . appeal[ing] orders of the 10 bankruptcy court disposing of property of the estate because such orders directly affect 11 the creditors' ability to receive payment of their claims." Id. at 642; see In re Gucci, 126 12 F.3d at 388. In Kane, for instance, we did not hesitate to grant standing to an asbestos- 13 injury claimant who appealed the confirmation of a plan of reorganization. The plan in 14 that case was even more generous to the appellant than the plan in this case, since it 15 promised him "the full amount of whatever compensatory damages he is awarded."
1 Kane, 843 F.2d at 640. The Court, however, held that Kane was an aggrieved party 2 entitled to appeal: as "a creditor, [he had] economic interests . . . directly impaired by the 3 Plan" because the plan limited his recourse to the courts, eliminated the possibility of 4 punitive damages, and made his recovery "subject to the Trust's being fully funded." Id. 5 at 642. Other courts have generally found standing for impaired creditors*fn4 when their 6 "interests are directly and pecuniarily affected by the order of the Bankruptcy Court." In 7 re Combustion Eng'g, Inc., 391 F.3d 190, 223-24 (3d Cir. 2004); see also In re P.R.T.C., 8 Inc., 177 F.3d 774, 778 (9th Cir. 1999) (noting that creditors "have a direct pecuniary 9 interest in a bankruptcy court's order transferring the assets of the estate").
10 We likewise hold that Sprint has standing to appeal the confirmation of the plan in 11 this case. Before confirmation, Sprint had a claim that the bankruptcy court valued at $2 12 million for voting purposes.*fn5 After confirmation, however, Sprint stood to receive 13 property worth less than half (between 4% and 46%) of that amount.
Therefore, 14 confirmation of the plan affected Sprint "directly" and "financially." 15 The appellees challenge the above analysis from two different perspectives, 16 looking both at the confirmation of the plan as a whole and at the gifting provision that 1 Sprint protests. First, and more broadly, they argue that confirmation could not have 2 harmed Sprint's interests because those interests were already worthless: with insufficient 3 value in DBSD to pay off the secured creditors, Sprint's unsecured claim entitled it to 4 nothing. Second, and more narrowly, they argue that the gift to the existing shareholder 5 did not harm Sprint's interests because the absolute priority rule requires either that the 6 objecting class receive the full value of its claim (which would more than double Sprint's 7 recovery) or that junior classes receive nothing (which could lead to a reduced recovery 8 for Sprint), so even a strict interpretation of that rule would not guarantee any benefit for 9 Sprint. None of our cases directly address the level of generality at which we should 10 consider standing; because we reject the appellees' analysis at both levels, however, we 11 need not decide whether either perspective is generally preferable.
12 Taking the broader perspective first, we decline to withhold standing merely 13 because the bankruptcy court's valuation of DBSD put Sprint's claim under water. By 14 the bankruptcy court's estimate - which we accept for purposes of this appeal - DBSD is 15 not worth enough to cover even the Second Lien Debt, much less the claims of unsecured 16 creditors like Sprint who stand several rungs lower on the ladder of priority. But none of 17 our prior appellate standing decisions - at least none involving creditors - have turned on 18 estimations of valuation, or on whether a creditor was in the money or out of the money.
19 We have never demanded more to accord a creditor standing than that it has a valid and 20 impaired claim.
1 Cosmopolitan Aviation, the primary decision on which the appellees rely for their 2 broader argument, is easily distinguishable. See In re Cosmopolitan Aviation Corp., 763 3 F.2d 507, 513 (2d Cir. 1985), abrogated on other grounds by Pioneer Inv. Servs. Co. v. 4 Brunswick Assocs. Ltd. P'ship, 507 U.S. 380 (1993). In that case, a state court had held 5 that a debtor's lease had expired before it filed for bankruptcy. Id. at 511. The 6 bankruptcy court found that the debtor was hopelessly insolvent, with or without the 7 lease, and ordered the debtor's liquidation. Id. The debtor did not then appeal. It 8 appealed only a later order to turn over the land - apparently solely for purposes of delay. 9 Id. at 512-13. We held that, because the debtor could no longer contest the first two 10 rulings, it no longer had any interest in the land or even any right to "continued 11 existence," and therefore would suffer no injury from the turn-over. Id. at 513.
12 Cosmopolitan Aviation is thus a far cry from this case, where the bankruptcy court 13 provisionally allowed Sprint's claim against the debtor, where the plan already gives 14 Sprint some recovery, and where Sprint has appealed the adverse order directly.
15 The only case the appellees cite that comes close to denying a creditor standing is 16 In re Ashford Hotels, Ltd., 235 B.R. 734 (S.D.N.Y. 1999). But in that case the district 17 court never accepted the appellants' attempts to characterize themselves as creditors. Id. 18 at 738. The so-called creditors had sued the debtor in state court, not to win any damages 19 but to rescind a contract under which they were liable to the debtor. Id. at 736. In the 20 bankruptcy proceeding, they sought to stop funding the defense against their lawsuit and, 1 after losing that attempt, they appealed. Id. at 737-38. The district court found that the 2 appellants had no interest in the debtor besides their desire to stop the defense of the 3 rescission lawsuit and thereby thwart the debtor from collecting against them. Id. at 738.
4 Noting that other courts had found no standing where "a party's interest in a Bankruptcy 5 Court appeal is (only) that of a potential defendant to another lawsuit," the district court 6 likewise denied standing to the appellants in that case, because they were not "'directly 7 and adversely affected pecuniarily' by the Bankruptcy Court's order except as adversaries 8 to the Debtor's estate in other litigations." Id. at 739. That case is therefore nothing like 9 this one, where Sprint is clearly a creditor (albeit one with an unliquidated claim) and 10 where Sprint appeals seeking to enlarge its recovery, not to head off the collection of 11 debts against it.
12 The three additional district court decisions cited by the dissent are equally 13 distinguishable. The first two do not involve creditors. In one, In re Taylor, the appellant 14 was a chapter 7 debtor, see No. 00 Civ. 5021 (VM), 2000 WL 1634371, at *1-2 15 (S.D.N.Y. Oct. 30, 2000), a member of a class that often lacks standing in the bankruptcy 16 court as well as on appeal, see In re 60 E. 80th St. Equities, Inc., 218 F.3d 109, 115-16 17 (2d Cir. 2000). In the other, Freeman v. Journal Register Co., it was a shareholder of the 18 debtor who appealed. See No. 09 Civ. 7296 (JGK), 2010 WL 768942, at *3 (S.D.N.Y. 19 Mar. 8, 2010). Although this case does not require us to address shareholder standing in 20 bankruptcy cases, we note that some courts have been more cautious in granting standing 1 to shareholders than to creditors. See In re Troutman Enters., Inc., 286 F.3d 359, 364-65 2 (6th Cir. 2002). Finally, in the third case, Bartel v. Bar Harbor Airways, Inc., the 3 appellant was a creditor, but a creditor whose claim the bankruptcy court disallowed 4 because the debtor had already settled it. See 196 B.R. 268, 271-72 (S.D.N.Y. 1996).
5 There is all the difference in the world between a claim that has already been disallowed 6 by the bankruptcy court, as in Bartel, and one like Sprint's that remains allowed and 7 pending, whatever appellate judges might guess about its chances of success. None of 8 these decisions have any bearing on the case before us. 9 We think it plain that we should not forbid all appeals by out-of-the-money 10 creditors. Such a rule would bar a large percentage of creditors in bankruptcy court, 11 perhaps a majority of them, from ever reaching the district court or this Court, however 12 erroneous the orders of the bankruptcy court might be. In this case, for instance, 13 members of only two classes could appeal under the appellees' proposed rule - the 14 holders of the First Lien Debt and Second Lien Debt - even though the plan involved 15 twenty-six classes of claims and interests in ten different levels. The other twenty-four 16 classes would have to be satisfied with whatever the plan awarded them. This would 17 remain true, under the appellees' theory, even if the bankruptcy court had committed a 18 fundamental error such as not allowing the out-of-the-money creditors to vote or not 19 following another of the numerous requirements of § 1129. Such a result might benefit 20 this Court's docket, but would disserve the protection of the parties' rights and the 1 development of the law. We should not raise the standing bar so high, especially when it 2 is a bar of our own creation and not one required by the language of the Code, which 3 "does not contain any express restrictions on appellate standing." Kane, 843 F.2d at 642.
4 The appellees try to soften the negative consequences of their proposed rule by 5 positing that a creditor in Sprint's position may appeal if it at least argues - as Sprint did 6 in the district court but does not in this Court - that the bankruptcy court undervalued the 7 estate and that, under a true valuation, there was enough to cover its claim. But that rule 8 would not separate appropriate from inappropriate appeals by creditors; it would only 9 increase the number of appeals involving frivolous valuation ...