Century Glove, Inc. v. First American Bank of New York
860 F.2d 94, 100 A.L.R. Fed. 207, 20 Collier Bankr. Cas. 2d 742 (1988)
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Rule of Law:
Under 11 U.S.C. § 1125(b), once a court-approved disclosure statement has been provided to creditors, a party does not engage in improper solicitation by providing additional information to urge rejection of the debtor's plan. Furthermore, presenting a draft of an unfiled alternative plan for discussion and consideration, without a specific request for a vote, constitutes permissible negotiation and not an unlawful solicitation of acceptances.
Facts:
- Century Glove, Inc. filed for bankruptcy reorganization and submitted a reorganization plan to its creditors.
- First American Bank (FAB), a major creditor, believed Century Glove's plan was based on speculative lawsuits and drafted its own alternative plan.
- After the court approved and distributed Century Glove's disclosure statement, an attorney for FAB telephoned attorneys for other creditors, including Latham Four and Bankers Trust New York Corporation (BTNY).
- During these calls, FAB's attorney sought to convince the other creditors to vote against Century Glove's plan.
- Upon request from the other creditors' attorneys, FAB provided them with copies of its unfiled alternative plan, which were marked "draft" and sent with letters stating they were for comments.
- FAB also provided Latham Four with a copy of a letter critical of Century Glove's plan, which had been written by the unsecured creditors' committee's counsel.
Procedural Posture:
- Century Glove, Inc. filed a petition for reorganization in the U.S. Bankruptcy Court.
- Century Glove petitioned the bankruptcy court to invalidate the votes of FAB and other creditors, alleging improper solicitation.
- The bankruptcy court found that FAB had violated 11 U.S.C. § 1125(b), invalidated one creditor's vote, and ordered FAB to pay Century Glove's litigation costs.
- Both parties appealed to the U.S. District Court.
- The district court reversed the bankruptcy court's decision, finding FAB's actions were lawful and reversing the sanctions and the invalidation of the vote.
- Century Glove, as appellant, appealed the district court's decision to the U.S. Court of Appeals for the Third Circuit, with FAB as the appellee.
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Issue:
Under 11 U.S.C. § 1125(b), does a creditor engage in unlawful solicitation by communicating with other creditors, after a court-approved disclosure statement has been distributed, to urge rejection of a debtor's plan and by providing a draft of an unfiled alternative plan for discussion?
Opinions:
Majority - James Hunter, III
No. A creditor does not engage in unlawful solicitation by providing additional materials to other creditors after a court-approved disclosure statement has been distributed. The court reasoned that 11 U.S.C. § 1125(b) establishes a minimum informational floor, not a ceiling, on the communications creditors may have. The statute's purpose is to guarantee a minimum amount of information, not to limit creditors to only court-approved materials, as this would stifle the negotiation process central to Chapter 11. The court further held that "solicitation" must be narrowly construed. Providing a draft of an alternative plan for discussion, without requesting an official vote, is a legitimate part of negotiation, not a prohibited solicitation of acceptances. The debtor's exclusive right under § 1121 is to file a plan, not to have its plan considered exclusively, and allowing creditors to compare proposals is a vital part of the reorganization process.
Analysis:
This decision significantly clarifies the scope of permissible communications between creditors during a Chapter 11 reorganization, promoting free and open negotiation. By interpreting § 1125(b) as setting an informational floor rather than a ceiling, the court empowers creditors to challenge a debtor's plan more effectively. The narrow definition of "solicitation" allows creditors to circulate and discuss alternative plans without running afoul of bankruptcy rules, thereby increasing their leverage and facilitating more robust negotiations over the terms of a reorganization.
