Vote Designation
Vote Designation is the Section 1126(e) remedy allowing a bankruptcy court, after notice and a hearing, to disregard an entity’s plan acceptance or rejection when the vote was not in good faith or was not solicited or procured in good faith or in accordance with the Bankruptcy Code.
How it works
Designation removes the affected vote from the class-acceptance calculation; it does not automatically disallow the underlying claim. Courts apply the remedy cautiously because creditors ordinarily may vote their economic interests. The inquiry focuses on whether the vote or its procurement crosses the governing good-faith line under the facts and controlling case law.
Section 1126(e) requires court action
A party in interest must request designation, and the court acts after notice and a hearing.
The statute reaches acceptance and rejection
A vote can be designated whether cast for or against the plan if the statutory good-faith or solicitation standards are violated.
Designation changes the voting denominator
Because designated entities are excluded under Section 1126(c) and (d), removing a vote can change whether a class accepts the plan.
Claim disallowance is a different doctrine
Designation generally addresses the vote. The allowed amount, validity or priority of the claim is governed by separate Bankruptcy Code provisions.
Worked example: class result changes after designation
Four creditors vote in a class. If one large rejecting vote is designated, the remaining vote totals are recalculated without that entity. The class can move from rejection to acceptance depending on the amount and number thresholds.
Economic self-interest is not automatically bad faith
Creditors normally vote to maximize their own recoveries. The legal issue is whether the conduct includes an improper purpose or improper solicitation sufficient under the governing cases.
Common mistakes
Assuming any blocking creditor acts in bad faith; equating designation with claim disallowance; forgetting that accepting votes can also be designated; and recalculating only the dollar threshold after a vote is removed.
Example
A creditor buys a blocking position in a class and votes against the plan. Buying claims to gain leverage does not automatically establish bad faith. If evidence instead shows the creditor is using the vote primarily to obtain an improper collateral advantage unrelated to its creditor interest, a party may seek designation under Section 1126(e).
Example
A creditor buys a blocking position in a class and votes against the plan. Buying claims to gain leverage does not automatically establish bad faith. If evidence instead shows the creditor is using the vote primarily to obtain an improper collateral advantage unrelated to its creditor interest, a party may seek designation under Section 1126(e).
Professional note
Vote Designation is exceptional. Distinguish hard bargaining, self-interested creditor conduct and ordinary plan opposition from conduct that the governing court treats as bad faith under Section 1126(e).
Related terms
- Impaired Class
An Impaired Class is a Chapter 11 class of claims or interests whose legal, equitable or contractual rights are altered by the plan in a manner that does not qualify as unimpaired treatment under Bankruptcy Code Section 1124.
- Plan of Reorganization
A Plan of Reorganization is the Chapter 11 plan that sets the classification and treatment of claims and interests and establishes the transactions, distributions, governance and other steps through which the debtor will reorganize or otherwise resolve the bankruptcy case.
- Allowed Claim
An Allowed Claim is a bankruptcy claim that has been recognized as allowable under the Bankruptcy Code, a confirmed plan or a court order, rather than remaining subject to unresolved objection or disallowance.
- Class Acceptance
Class Acceptance is the Chapter 11 voting determination under Section 1126 that establishes whether a class of claims or interests has accepted a proposed plan based on the votes actually cast by eligible holders.
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