CENTURY GLOVE, INC. V. FIRST AMERICAN BANK OF NEW YORK 860 F.2d 94 (3rd. Cir. 1988) CASE BRIEF

CENTURY GLOVE, INC. V. FIRST AMERICAN BANK OF NEW YORK

860 F.2d 94 (3rd. Cir. 1988)

NATURE OF THE CASE: Century (P), debtor, appealed an order dismissing sanctions imposed on its creditors, claiming one of its creditors unlawfully solicited the votes of other creditors in violation of §1125.

FACTS: P sought reorganization and filed its reorganization plan, along with a draft of the disclosure statement to be presented along with the plan. First (D) argued that P's largest claimed assets are speculative lawsuits (including one against D). D presented a copy of an alternative plan to the unsecured creditors' committee. D advised that it would seek court approval to present its plan as soon as possible. The committee rejected the plan in favor of P's. On December 2, the court approved P's disclosure statement. A copy of the plan, the statement, and a sample ballot were then sent to P's creditors entitled to vote on the plan's acceptance. Between December 12 and December 17 an attorney for D telephoned attorneys representing several of P's creditors. D sought to find out what they thought of the proposed reorganization, and to convince them to vote against the plan. D had drafted a plan and had tried to file it. The creditors' attorneys then asked for a copy of the plan, which D provided. The copies were marked 'draft' and covering letters stated that they were submitted to the creditors for their comments. D also sent a copy of a letter written to the unsecured creditors' committee. In the letter, D questioned the committee's endorsement of the P plan, arguing that the lawsuits which P claims as assets are too speculative. P began receiving rejections of its plan and then P learned of everything done by D and petitioned the court to have D and two other creditors' votes invalidated in that D acted in bad faith. The court held that D had violated §1125(b), which allows solicitation of acceptance or rejections only after an approved disclosure statement has been provided the creditor. The court found that D violated the section by providing additional materials such as copies of its draft plan. It invalidated the vote of another rejecting creditor. It also found that D had violated 'the spirit of § 1121(b), since D was apparently seeking approval of a plan which was not yet filed and which it could not file. . . .' The bankruptcy court held invalid Latham Four's vote. The court ordered D to pay for 'all costs incurred by P in prosecuting' its motions. The amount of these damages was not specified. The district court reversed the designation of Latham Four and the imposition of money sanctions against D. It disagreed that §1125(b) requires approval for all materials accompanying a solicitation, and found such a reading in conflict with the bankruptcy code's policy of fostering free negotiation among creditors. The district court held that merely supplying additional information does not constitute 'bad faith' or a violation of the bankruptcy rules. The court found that, in order to facilitate negotiations, communications between creditors should not easily be read as solicitations. P appealed.

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LEGAL ANALYSIS:

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