## Facts

- Allegheny International, Inc. and numerous subsidiaries filed Chapter 11 petitions on May 3, 1988 in the Western District of Pennsylvania.
- The debtor filed a plan of reorganization on December 29, 1989; a disclosure statement was approved.
- Japonica Partners, L.P., initially without a significant stake, acquired debentures and filed a competing plan on January 24, 1990 seeking to obtain control of the debtor.
- After disclosure-statement approval, Japonica conducted large-scale claims purchases and tender offers across multiple voting classes, accumulating enough claims by the March 30, 1990 voting deadline to defeat the debtor’s plan.
- The debtor moved under 11 U.S.C. § 1126(e) to designate Japonica’s votes as not cast in good faith; Japonica and others filed cross-motions to designate certain votes.
- Prepetition secured lenders brought an adversary proceeding seeking equitable relief related to Japonica’s conduct; the court consolidated extensive confirmation, designation, and related disputes.
- The plan incorporated a settlement with secured lender groups, opposed by the Equity Committee and other parties.
- The court conducted hearings addressing vote designation, valuation, settlement approval, confirmation objections, and requested equitable relief.

## Issues

1. Whether votes procured through post-disclosure claims purchases and tender offers could be designated under 11 U.S.C. § 1126(e) for lack of good faith.
2. Whether a control-seeking investor’s claim-trading program constituted obstructive conduct justifying disqualification of plan votes.
3. Whether Japonica’s conduct and access to information warranted insider-like scrutiny or fiduciary-style restrictions in the Chapter 11 process.
4. Whether the plan’s settlement with secured lenders was fair and equitable and properly approved as part of reorganization.
5. Whether the debtor’s plan satisfied confirmation requirements, including best interests, feasibility, and cramdown standards under 11 U.S.C. § 1129.
6. Whether the court could grant equitable relief under 11 U.S.C. § 105, including enforcing charter-based control provisions to prevent inequitable control profits.

## Decision

- The court confirmed the debtor’s plan of reorganization, subject to stated conditions and limitations.
- The court designated certain plan votes under § 1126(e), including votes connected to Japonica’s control-oriented claim acquisitions, to the extent the votes were found not cast or procured in good faith.
- The court refused to recognize Japonica’s claimed blocking position as a proper basis to defeat confirmation where the voting conduct functioned as an obstruction to a fair reorganization.
- The court approved the plan’s settlement with secured lenders as fair and equitable in light of litigation risk, cost, and the reorganization’s overall structure.
- The court exercised equitable authority to prevent exploitation of the Chapter 11 process for private control premiums and to give effect to control-related protections consistent with bankruptcy objectives.

## Legal Principles

- Under 11 U.S.C. § 1126(e), a bankruptcy court may designate (disregard) plan acceptances or rejections that were not cast in good faith or were solicited or procured in bad faith.
- Good-faith voting permits self-interested creditor behavior, but not use of voting power primarily to obstruct reorganization or extract a private advantage inconsistent with collective bankruptcy distribution.
- Claims trading is not inherently improper; however, when acquisitions and voting are principally aimed at obtaining corporate control or leverage through a blocking position, designation may be warranted.
- A party’s attempt to dominate the reorganization for control-related gain can justify heightened scrutiny and equitable limitations to protect creditor equality and the integrity of the confirmation process.
- Plan settlements may be approved when they fall within a reasonable range of outcomes considering risk, expense, and delay, and when they support a confirmable plan without unlawful discrimination.
- Confirmation requires satisfaction of § 1129 standards, including best interests, feasibility, and (as applicable) cramdown’s “fair and equitable” requirements and the absolute-priority rule.
- Under 11 U.S.C. § 105(a), bankruptcy courts may issue orders necessary to carry out the Code, including equitable relief aimed at preventing inequitable control profits that would distort Chapter 11’s distribution scheme.

## Conclusion

The bankruptcy court confirmed Allegheny’s Chapter 11 plan while using § 1126(e) to designate votes tied to a control-driven claims-buying strategy that the court found inconsistent with good-faith plan voting, and it approved lender settlements and equitable protections needed to preserve a fair reorganization.


In re Allegheny Int'l, Inc., 118 B.R. 282 (Bankr. W.D. Pa. 1990)