## Facts

- Crowthers McCall Pattern, Inc. manufactured and sold home sewing patterns largely through dealer-distributors and held a large U.S. market share despite industry decline.
- The debtor filed for Chapter 11 and remained a debtor in possession while the business was marketed for more than two years.
- Sale efforts included an extended marketing process, a non-judicial auction (August 1989), and an attempted judicial auction (October 1989) that did not proceed.
- The debtor entered a merger agreement with Dimeling & Schreiber through McCall Acquisition Co., under which Acquisition would merge into the debtor and the surviving entity would continue operations.
- The transaction provided $45 million in cash plus an estimated purchase-price adjustment of about $2.16 million, and the reorganized company would assume specified prepetition ordinary-course liabilities and postpetition administrative claims (subject to limits on professional fees).
- The disclosure statement included a liquidation analysis estimating approximately $35.5 million in Chapter 7 liquidation value, supported by testimony that orderly liquidations often yield a fraction of wholesale value for inventory and weak recoveries on receivables.
- Reginald F. Lewis, a common stockholder, objected to confirmation, challenging the liquidation analysis and the plan’s treatment of equity, and arguing that transferring estate litigation claims to a post-confirmation trust was improper.

## Issues

1. Whether the plan satisfied the confirmation requirements of 11 U.S.C. § 1129, including the best-interests test under § 1129(a)(7) and, as to dissenting equity, the fair-and-equitable requirement under § 1129(b).
2. Whether the plan’s transfer of certain estate causes of action to a post-confirmation liquidating trust was authorized by 11 U.S.C. § 1123(b)(3)(B) or was an impermissible assignment.
3. Whether the plan proponent’s liquidation analysis and valuation evidence were sufficiently reliable to support confirmation over the equity holder’s objections.

## Decision

- The court confirmed the Second Amended and Restated Joint Plan of Reorganization.
- The court found the plan satisfied § 1129(a), and the objector’s challenges did not defeat confirmation.
- The plan met § 1129(a)(7) because the evidence supported that creditors (and equity) would not receive more in a hypothetical Chapter 7 liquidation than under the plan.
- The plan could be confirmed over the dissenting equity class under § 1129(b) because it was fair and equitable and complied with absolute priority; common stock was properly cancelled given the demonstrated value available for distribution.
- The plan’s post-confirmation retention and enforcement structure for litigation claims, including transfer to a liquidating trust or estate representative, was permitted under § 1123(b)(3)(B).

## Legal Principles

- A Chapter 11 plan satisfies § 1129(a)(7) when each impaired holder receives at least as much as it would receive in a hypothetical Chapter 7 liquidation, supported by credible liquidation valuation evidence.
- For cramdown under § 1129(b), a plan is fair and equitable as to equity when it respects absolute priority; existing equity cannot retain or receive value unless senior claims are paid in full or consent.
- Market testing through sustained marketing efforts and failed or aborted auctions may be persuasive evidence of enterprise value and may support confirmation where an objector claims liquidation would produce higher recoveries.
- A plan may provide for retention and enforcement of estate claims by a post-confirmation representative, including a liquidating trust, under § 1123(b)(3)(B), and such a structure is not an impermissible assignment when authorized by the plan.

## Conclusion

The bankruptcy court confirmed the Chapter 11 plan based on substantial evidence that the merger consideration exceeded reasonable liquidation value, that cancellation of common stock complied with absolute priority for cramdown purposes, and that the plan permissibly designated a post-confirmation vehicle to pursue estate litigation claims under § 1123(b)(3)(B).


In re Crowthers McCall Pattern, Inc., 120 B.R. 279 (Bankr. S.D.N.Y. 1990)