Purchasing Claims and Changing Votes: Establishing 'Cause' Under Rule 3018(a)

Abstract

Chapter 11 of the Bankruptcy Code gives creditors whose rights will be impaired the right to vote to accept or reject a proposed plan of reorganization. Bankruptcy law subjects this right of franchise to two limitations. Section 1126(e) provides that a vote cast “not in good faith” or “not solicited or procured in good faith” may be “designated” or nullified. The second restriction on voting, the subject of this article, is set forth in the penultimate sentence of Federal Rule of Bankruptcy Procedure 3018(a), which requires “a creditor or equity security holder” seeking “to change or withdraw an acceptance or rejection” to demonstrate “cause.” Even though Rule 3018(a) contains the sole constraint on the right to change or withdraw a previously cast vote in the whole of bankruptcy law, its text and commentary provide no definition. Existing precedent, moreover, is sparse and filled with flaws, large and small.

To make up for these defects, this article proposes a new standard to guide the exercise of discretion countenanced by Rule 3018(a)’s deceptively plain “cause.” Part II surveys the present — and deficient — legal landscape. Part III summarizes the prevailing standards for interpreting federal rules generally and explains how bankruptcy law’s specialized character compels these precepts’ alteration when a bankruptcy rule is at issue. Parts III and IV employ these modified tenets to delineate the effective range of “cause” in Rule 3018(a). This article thus makes two contributions to the literature and the case law: (1) it explains the unique interpretive constraints applicable to construing the Bankruptcy Rules, which few have dissected in such detail, and (2) it shows how Rule 3018(a) must be understood in light of those constraints and such modern phenomena as claims trading.

In short, this article limns an interpretive blueprint, general and specific, that can be used to construe Rule 3018(a) but also every other rule of bankruptcy, evidence, and procedure.

Note: Copyright is held by the American Bankruptcy Law Journal. This article has been cited by three different courts in 2015-17.

Keywords: bankruptcy, claims trading, code, bankruptcy code, bankruptcy rules, canons, rules enabling act, 2075, chapter 11, reorganization, liquidation, kellogg, mcorp, householder, durango, interpretation, constructions, canons, claims trading

JEL Classification: K00