11 U.S.C. Section 1126 - Acceptance of Plan

What Is Section 1126?

Section 1126 governs voting on a Chapter 11 plan. It tells courts who may vote, what thresholds a class must meet to be deemed to have accepted the plan, when a class is deemed to accept or reject without voting, and how a court may "designate" (i.e., disqualify) a vote that was not cast in good faith.

The structure of Section 1126 reflects two organizing ideas. First, voting in bankruptcy is by class rather than by individual creditor, with the class's acceptance binding holdouts within the class. Second, the voting rules apply differently depending on whether a class is impaired: unimpaired classes are presumed to accept and need not vote, while classes receiving nothing are presumed to reject.

Who May Vote: Section 1126(a)

Section 1126(a) provides that the holder of a claim or interest allowed under Section 502 may accept or reject a plan. Allowance is normally established by the proof-of-claim process (or by the deemed-filed rule of Section 1111(a)) and the absence of a successful objection. The court may temporarily allow a disputed claim for voting purposes under Bankruptcy Rule 3018(a).

Acceptance Thresholds: Section 1126(c) and (d)

Section 1126(c) sets the threshold for a class of claims: a class has accepted the plan if "creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors . . . that have accepted or rejected such plan" voted to accept. Critically, the denominator counts only votes actually cast; non-voters are ignored for purposes of computing the threshold.

Section 1126(d) sets the threshold for a class of interests: a class of interests has accepted if holders of at least two-thirds in amount of the interests in the class voted to accept (no separate number requirement). Interest-class voting matters mostly in equity-impairing plans.

Deemed Acceptance: Section 1126(f)

Section 1126(f) provides that any class that is not impaired under the plan is conclusively presumed to have accepted the plan. Solicitation of acceptances from unimpaired classes is unnecessary. Whether a class is impaired is determined under Section 1124: a class is impaired unless the plan leaves the legal, equitable, and contractual rights of each claimholder unaltered.

Deemed Rejection: Section 1126(g)

Section 1126(g) provides that any class that is "denied any property" under the plan is deemed to have rejected the plan. Zero-recovery classes need not vote; their deemed rejection is automatic. Where a deemed-rejected class is impaired and the plan proponent seeks to cram down the plan, the proponent must satisfy the fair-and-equitable and unfair-discrimination tests of Section 1129(b).

Vote Designation for Bad Faith: Section 1126(e)

Section 1126(e) authorizes the court, on request of a party in interest and after notice and a hearing, to "designate" any entity whose acceptance or rejection of the plan was "not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title." A designated vote is disregarded for purposes of computing acceptance thresholds.

Vote designation is the principal tool for combating strategic vote-buying, secondary-market accumulation of claims at deep discounts to defeat a plan, and votes cast for ulterior motives unrelated to the economic interest of the claimholder. The Supreme Court in Young v. Higbee Co., 324 U.S. 204 (1945), discussed the underlying duty of good faith in bankruptcy voting.

Major Doctrinal Cases

• In re DBSD North America, Inc., 634 F.3d 79 (2d Cir. 2011) - Affirmed designation of votes cast by a strategic competitor that purchased claims at face value to defeat the plan and acquire the debtor's spectrum assets.
• In re Adelphia Communications Corp., 359 B.R. 54 (Bankr. S.D.N.Y. 2006) - Discussed the high standard for vote designation and emphasized that "bad faith" requires more than mere self-interest.
• In re Figter Ltd., 118 F.3d 635 (9th Cir. 1997) - Single-creditor purchase of multiple claims to block confirmation did not warrant designation absent showing of ulterior motive.
• In re Allegheny International, Inc., 118 B.R. 282 (Bankr. W.D. Pa. 1990) - Designation of votes purchased to advance a competing plan.
• Young v. Higbee Co., 324 U.S. 204 (1945) - Supreme Court foundational discussion of fiduciary aspects of voting in reorganization cases.
• In re Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2004) - Addressed gerrymandering concerns in plan classification that bear on vote-aggregation strategy.

Solicitation and the Disclosure Statement

Section 1126(b) addresses prepetition acceptances and rejections, used in prepackaged Chapter 11 cases. A prepetition acceptance is valid if it complied with applicable nonbankruptcy law or, in the absence of such law, was solicited after disclosure of "adequate information" as defined in Section 1125(a).

Postpetition solicitation requires court approval of a disclosure statement under Section 1125. Soliciting votes without an approved disclosure statement is a basis to disregard the votes received.

Related Bankruptcy Code Sections

• Section 1122 - Classification of claims
• Section 1123 - Contents of plan
• Section 1124 - Impairment of claims
• Section 1125 - Disclosure statement and solicitation
• Section 1129 - Confirmation requirements including cramdown
• Section 1111 - Claims and interests including deemed-filed rule

For deeper coverage of voting topics, see the primers at section-1126-acceptance-of-plan/.