Changes to Confirmed "Toggle" Chapter 11 Plan Required No Additional Disclosure and Voting Where Creditors' Rights Not Materially and Adversely Affected
Even after a bankruptcy court has confirmed a chapter 11 plan, changed circumstances prior to the plan's implementation and "substantial consummation" might make alterations to the plan necessary. If a proposed change is significant enough, it may be deemed a plan "modification," in which case the Bankruptcy Code may require that stakeholders be provided with additional disclosure regarding the alteration and an opportunity to vote on the plan as modified. The U.S. Bankruptcy Court for the Southern District of New York addressed the procedures governing post-confirmation modification of a chapter 11 plan in In re Celsius Network LLC, 2023 WL 8931299 (Bankr. S.D.N.Y. Dec. 27, 2023). In a case where the debtors' "toggle" chapter 11 plan expressly contemplated two alternative transactions, but the debtors proposed certain changes prior to the plan's implementation, the court held that, even if the alterations qualified as a plan "modification," no additional disclosure or voting was necessary because the changes did not materially and adversely impact creditors.
Solicitation of Votes on a Chapter 11 Plan
Generally, holders of allowed claims and interests have the right to vote to accept or reject a chapter 11 plan. See 11 U.S.C. § 1126(a). A class of claims accepts a plan if creditors (other than creditors whose votes are disallowed under section 1126(e)) holding at least two-thirds in amount and more than one-half in number of the allowed claims in the class (again, not counting disallowed claims) vote in favor of the plan. See 11 U.S.C. § 1126(c). For a class of equity interests to accept a plan, the holders of at least two-thirds of the interests voting must vote to accept it. See 11 U.S.C. § 1126(d). Creditors or interest holders whose claims or interests are not "impaired" under the plan (as defined in 11 U.S.C. § 1124), however, are conclusively deemed to accept the plan, "and solicitation of acceptances with respect to such class from the holders of claims or interests of such class is not required." See 11 U.S.C. § 1126(f). Creditors and interest holders that would receive or retain nothing under the plan are deemed to reject it. See 11 U.S.C. § 1126(g).
Section 1125(b) of the Bankruptcy Code provides that votes in favor of a chapter 11 plan can be solicited postpetition only after creditors and interest holders receive a court-approved disclosure document containing "adequate information," a concept defined in section 1125(a). See 11 U.S.C. § 1125; Fed. R. Bankr. P. 3016(b). This provision is "designed to 'discourage the undesirable practice of soliciting acceptance or rejection at a time when creditors and stockholders were too ill-informed to act capably in their own interests.'" In re Heritage Org., LLC, 376 B.R. 783, 794 (Bankr. N.D. Tex. 2007) (quoting In re Clamp-All Corp., 233 B.R. 198, 208 (Bankr. D. Mass. 1999)).
Modification of a Chapter 11 Plan
Section 1127(a) of the Bankruptcy Code states that the proponent of a chapter 11 plan on which votes have been solicited from creditors or interest holders "may modify such plan at any time before confirmation," unless the proposed modification violates the Bankruptcy Code's requirements regarding the classification of claims and interests or the contents of a plan. 11 U.S.C. § 1127(a) (emphasis added).
Section 1127(b) provides that the proponent of a plan or the reorganized debtor "may modify such plan at any time after confirmation of such plan and before substantial consummation of such plan," again unless the proposed modification violates the Bankruptcy Code's requirements regarding the classification of claims and interests or the contents of a plan. 11 U.S.C. § 1127(b) (emphasis added). It further states that "[s]uch plan as modified … becomes the plan only if circumstances warrant such modification and the court, after notice and a hearing, confirms such plan as modified, under section 1129 of [the Bankruptcy Code]."
Section 1127(c) of the Bankruptcy Code provides that any modification must comply with the requirement in section 1125 that the holders of claims and interests be given "adequate information" about the contents of a chapter 11 plan.
Under section 1127(d), a creditor or interest holder who accepts or rejects a chapter 11 plan prior to its modification is deemed to accept or reject, "as the case may be, such plan as modified, unless within the time frame fixed by the court, such holder changes such holder's previous acceptance or rejection."
Section 1141(a) of the Bankruptcy Code provides that the terms of a confirmed chapter 11 plan are binding on all parties.
Under section 1101(2), "substantial consummation" of a chapter 11 plan occurs when: (i) substantially all of the property to be transferred under the plan has been transferred; (ii) the debtor or its successor has assumed the business or management of substantially all of the property dealt with by the plan; and (iii) distributions under the plan have commenced.
Special rules regarding post-confirmation plan modifications apply to individual chapter 11 debtors under section 1127(e).
Section 1127 does not apply in small business debtor reorganization cases filed under subchapter V of chapter 11. Instead, in subchapter V cases, section 1193 of the Bankruptcy Code sets forth substantially similar requirements for pre- and post-confirmation, pre-substantial consummation modification of a chapter 11 plan. See generally Collier on Bankruptcy ("Collier") ¶ 1127.06 (16th ed. 2023) (discussing differences between modification of subchapter V plans and ordinary chapter 11 plans).
Rule 3019(a) of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") provides that, in a chapter 9 or chapter 11 case, the plan proponent may file with the court a modification of a chapter 11 plan after it has been accepted but prior to confirmation. It further states that:
If the court finds after hearing on notice to the trustee, any committee appointed under the Code, and any other entity designated by the court that the proposed modification does not adversely change the treatment of the claim of any creditor or the interest of any equity security holder who has not accepted in writing the modification, it shall be deemed accepted by all creditors and equity security holders who have previously accepted the plan.
Fed. R. Bankr. P. 3019(a) (emphasis added). Bankruptcy Rule 3019(b) establishes the procedure for post-confirmation modifications to a plan in an individual chapter 11 case.
Sections 1127 and 1141, when taken together with other related provisions of the Bankruptcy Code, impose an important element of finality in chapter 11 cases that allows stakeholders to rely on the provisions of a confirmed chapter 11 plan. See generally Collier at ¶ 1127.03[2][a] ("In enacting section 1127(b), Congress intended to 'safeguard the finality of plan confirmation.'").
The term "modify" within the meaning of section 1127 is not defined in the Bankruptcy Code or the Bankruptcy Rules. Courts determine what constitutes a "modification" to a chapter 11 plan on a case-by-case basis. See Collier at ¶ 1127.03. Some courts have concluded that "modification" means "alter[ing] the legal relationships among the debtor and its creditors and other parties in interest." See In re Ionosphere Clubs, Inc., 208 B.R. 812, 816 (S.D.N.Y. 1997); accord Matter of Highland Capital Mgmt., L.P., 57 F.4th 494, 503 (5th Cir. 2023) (ruling that a change that "alters the parties' rights, obligations, and expectations" is a plan modification); In re Oakhurst Lodge, Inc., 582 B.R. 784, 798 (Bankr. E.D. Cal. 2018) (a settlement that "alters the legal relationships among the debtor and its creditors" under a confirmed plan constitutes a plan modification).
The U.S. Court of Appeals for the Second Circuit has characterized a restructuring of a trust established under a chapter 11 plan for the payment of asbestos-related personal injury claims as a "modification" because the restructuring effectively altered a "payment right" under the plan. See Findley v. Blinken (In re Johns-Manville Corp.), 982 F.2d 721, 747–48 (2d Cir. 1992) ("Even if the concept of 'modification' implies some distinction between significant changes of substance, which are prohibited, and minor changes of procedure, which might be allowed, the alterations accomplished [here] are both substantive and significant."), modified on alternate grounds, 993 F.2d 7 (2d Cir. 1993).
The Second Circuit has also concluded that "procedural" modifications of a chapter 11 plan may be permitted if the bankruptcy court's authority to make such modifications is expressly reserved in the plan and the modification does not affect the "substantive rights" of stakeholders. See State Gov't Creditors' Committee for Property Damage Claims v. McKay (In re Johns-Manville Corp.), 920 F.2d 121, 128 (2d Cir. 1990); accord Findley, 982 F.2d at 746; see also Ionosphere, 208 B.R. at 816 (the requirements of section 1127 apply even when the plan or supporting documents expressly contemplate the possibility of amendments).
If a post-voting plan modification is substantive (i.e., it materially and adversely affects stakeholders), the plan proponent must provide creditors and interest holders with a new disclosure statement and another opportunity to vote on the plan. See In re Am.-CV Station Group Inc., 56 F.4th 1302, 1309 (11th Cir. 2023); In re Sentinel Mgmt. Grp., Inc., 395 B.R. 281, 301 (Bankr. N.D. Ill. 2008); In re Am. Solar King Corp., 90 B.R. 808, 825 (Bankr. W.D. Tex. 1988).
Courts have rejected attempts to circumvent section 1127(b) by characterizing a proposed plan modification as a motion to modify, clarify, or reconsider the chapter 11 plan confirmation order or to modify a plan-related document. See, e.g., Findley, 982 F.2d at 748; In re Rickel & Assocs., 260 B.R. 673, 677 (Bankr. S.D.N.Y. 2001); In re United States Brass Corp., 255 B.R. 189, 194 (Bankr. E.D. Tex. 2000); In re Planet Hollywood Int'l, 274 B.R. 391, 399 (Bankr. D. Del. 2001); In re U.S. Repeating Arms Co., 98 B.R. 138, 140 (Bankr. D. Conn. 1989); In re Charterhouse, Inc., 84 B.R. 147, 150 (Bankr. D. Minn. 1988).
Absent modification of a chapter 11 plan or an order revoking confirmation (see 11 U.S.C. § 1144, which authorizes the court to revoke a confirmation order "only if such order was procured by fraud" within 180 days of confirmation), appeal of an order confirming a chapter 11 plan is the only recourse. However, such an appeal may be deemed moot absent a stay pending appeal if the plan has been substantially consummated before the appeal can be heard. See generally Collier at ¶ 1129.09 (discussing the doctrine of "equitable mootness").
Celsius Network
Cryptocurrency lender Celsius Network LLC and certain affiliates (collectively, the "debtors") filed for chapter 11 protection on June 12, 2022, in the Southern District of New York. In October 2022, the debtors began a marketing and sale process for substantially all of their assets. Following a May 2023 auction, Fahrenheit LLC ("Fahrenheit") emerged as the successful bidder, and the backup bidder was Blockchain Recovery Investment Consortium ("BRIC").
The bankruptcy court confirmed the debtors' chapter 11 plan on November 9, 2023. Various parties appealed the confirmation order, challenging discrete issues, including ownership of certain loan collateral and the scope of the plan's release and exculpation provisions, rather than the plan's overall structure or the transactions that it contemplated.
The plan contemplated two alternative transactions. The primary transaction (the "NewCo transaction") involved: (i) the creation of a new public company ("NewCo") managed by Fahrenheit, as plan sponsor, to monetize the debtors' illiquid assets, including the bitcoin mining and cryptocurrency staking operations; (ii) an initial distribution of NewCo stock and liquid cryptocurrency to creditors, funded in part by $450 million in liquid cryptocurrency "seed funding"; (iii) $39.5 million provided by digital asset mining company US Bitcoin Corp. ("US Bitcoin") to fund the buildout and energization of mining facilities; and (iv) Fahrenheit's commitment to provide $50 million as a "plan sponsor contribution."
If the NewCo transaction was not feasible, the plan provided that the debtors could "toggle" to an alternative transaction involving an orderly wind down (the "OWD"). If activated, the OWD would eliminate certain (then unnecessary) provisions of the NewCo transaction, substitute provisions governing a mining-only public company, and substitute BRIC for Fahrenheit as the plan sponsor. The plan and disclosure statement stated that the debtors could "select a different Backup Plan Sponsor if a different party provides terms superior to those provided by BRIC," and that the "different party" might be US Bitcoin.
In the disclosure statement, the debtors notified creditors and interest holders that a vote to accept the plan would be a vote "to accept both the NewCo Transaction and the [OWD]."
Shortly after confirmation of the debtors' chapter 11 plan, the SEC informed the debtors that it would not approve the NewCo transaction, but that it would not require pre-clearance for the debtors to pursue the registration of a mining-only company.
Accordingly, on November 30, 2023, the debtors sought bankruptcy court approval to implement the OWD, but with certain changes from the original transaction. Specifically, after performing a market check, the debtors determined that US Bitcoin offered better terms than BRIC and decided to change the backup plan sponsor to US Bitcoin. After BRIC objected, the debtors and BRIC reached a separate agreement whereby BRIC would instead serve as a litigation administrator entrusted with monetizing illiquid assets, causes of action, and claims. The plan expressly contemplated such an eventuality, providing that "one or more Liquidation Administrators" could be appointed by the creditors' committee "to prosecute, settle, or otherwise resolve any remaining Disputed Claims." BRIC's fees as litigation administrator, including a "recovery incentive fee," were to be funded by reductions in fees otherwise payable pursuant to the terms of the original OWD.
The Office of the U.S. Trustee (the "UST") and a borrower group objected to the OWD implementation motion. The UST argued that the new "MiningCo transaction" with US Bitcoin was a material modification of the plan that required a new disclosure statement and vote because: (i) it changed the legal relationships between the debtors and unsecured creditors, and changed the mining manager from BRIC to US Bitcoin; (ii) it materially altered the substantive rights of creditors by changing the amount and type of finds recoverable; (iii) the proposed funding under the transaction was dramatically different than that proposed under the plan; and (iv) the OWD implementation motion was missing critical details that should be provided to creditors in an amended disclosure statement. The borrower group echoed some of these concerns, adding that the bankruptcy court should implement the original OWD and that the court lacked jurisdiction to hear the motion because the plan confirmation order had been appealed.
The Bankruptcy Court's Ruling
The bankruptcy court granted the debtors' motion to implement the MiningCo transaction without requiring a new disclosure statement and voting.
At the outset of his opinion, Chief U.S. Bankruptcy Judge Martin Glenn explained that the chapter 11 plan and the disclosure statement "explicitly provide for the possibility of an alternate Backup Plan Sponsor on terms superior to those negotiated with the BRIC," and the confirmation order authorized the debtors to make this toggle if they, the committee, and their advisors elected to do so in good faith and consistent with their fiduciary duties. Celsius Network, 2023 WL 8931299, at *8. As such, Judge Glenn noted, the inquiry before him was whether the terms of the deal with US Bitcoin were better than the terms of the deal with BRIC, and if so, "whether any of the modified terms are materially adverse to creditors such that the change (although contemplated) nevertheless constitutes a modification requiring solicitation." Id.
Judge Glenn found that the terms of the MiningCo transaction with US Bitcoin were superior to those negotiated with BRIC as part of the original OWD. However, he acknowledged that it was difficult to perform an "apples-to-apples comparison" of the two due to the many post-confirmation developments in the debtors' chapter 11 cases that rendered certain provisions in the original deal with BRIC obsolete and replaced certain terms with other agreements involving a variety of parties. For this reason, Judge Glenn focused on "the more measurable and more salient impact on the creditors; namely, the recoveries they receive." Id. at *11.
Judge Glenn painstakingly compared the anticipated creditor recoveries under the MiningCo transaction and the original OWD. He concluded that, under the former, the debtors "are giving each creditor a bigger [recovery salad], which contains different proportions of each original ingredient; but crucially, the new salad contains at least as much of each ingredient as the original did." Id. at *13.
Judge Glenn emphasized that the debtors stated in the disclosure statement that a vote to accept the plan would be a vote to accept both the NewCo transaction and the OWD, and the OWD expressly permitted the selection of an alternate backup plan sponsor in a deal involving terms no worse than the terms of the OWD. Thus, he concluded, the substitution of US Bitcoin for BRIC was not a "modification" of the plan "and section 1127(b) is not per se triggered." Id. at *14.
Even so, the bankruptcy court explained, even a change expressly contemplated in a plan cannot violate section 1127(b). Any change that "materially and adversely changes the way that a claim or interest holder is treated," Judge Glenn noted, constitutes a modification entitling creditors and interest holders to a new disclosure statement and another opportunity to vote on the modified plan. Id. (citations omitted).
In this case, however, Judge Glenn found that the MiningCo transaction did not involve a material and adverse change from the terms of the original plan. Among other things, he reasoned: (i) creditors' legal relationships were not changed because the MiningCo transaction was "within the letter of the Plan"; and (ii) creditors' substantive rights were not affected because the transaction would provide creditors with their pro rata portion of the same kinds of distributions as the original OWD, and "no creditor's recovery would be reduced or augmented disproportionately with respect to other creditors." Id. (citation omitted). The bankruptcy court was highly critical of the borrower group's argument that the original OWD should be implemented despite the changed circumstances and that their rights or recoveries were harmed because cryptocurrency prices had inflated significantly since the court confirmed the debtors' chapter 11 plan.
Finally, the bankruptcy court rejected the argument that it lacked jurisdiction to rule on the debtors' motion due to the pending appeal of the plan confirmation order. According to Judge Glenn, "[b]ankruptcy courts commonly implement unstayed, confirmed plans while an appeal is pending." Id. at *15 (citations omitted). Moreover, he noted, even in cases involving a "modification" of a plan within the meaning of section 1127(b), a bankruptcy court is not divested of jurisdiction to decide issues collateral to those at issue in an appeal, which was the case here.
Outlook
Celsius Networks is an interesting case study regarding the mechanics and requirements governing post-confirmation chapter 11 plan modifications. The court readily found that the plan, the disclosure statement, and the confirmation order expressly contemplated the NewCo transaction, the OWD, and the possibility that certain changes might be made to the OWD based on clearly identified future developments. In addition, after carefully examining the terms of the original OWD and the MiningCo transaction, the court concluded that, even if the MiningCo transaction qualified as a "modification" of the chapter 11 plan within the meaning of section 1127(b), no additional disclosure or voting was necessary because creditors' rights and recoveries were not materially and adversely affected by the modification.
The ruling also highlights the difficulty of comparing creditor recoveries and rights under complex chapter 11 transactions, particularly in cases involving fluctuating asset values.
Another key takeaway from Celsius Networks is that the proponents of a confirmed chapter 11 plan are understandably loathe to characterize a change to the plan as a "modification" because additional disclosure and resolicitation of the plan are costly in terms of time and money, particularly in large cases involving thousands of creditors.
