## Facts

- Featherworks Corporation operated a business that bought and processed feathers and down and filed for Chapter 11 reorganization.
- Walter E. Heller & Co. held a $5 million lien on Featherworks’ inventory and accounts receivable.
- The collateral value was about $3.5 million, leaving Heller with an unsecured deficiency claim of roughly $1.5 million that was entitled to vote in the unsecured class.
- Featherworks proposed a plan providing unsecured creditors 1.3% of their claims in cash.
- Heller and Farwest Garments, Inc., an unsecured creditor, voted to reject the plan.
- After balloting closed, Heller asked to change its ballot from rejection to acceptance.
- Farwest objected, alleging Heller had been paid $25,000 to change its vote, violating 11 U.S.C. § 1126(e) and federal criminal law.
- Heller responded that it had initially intended to accept the plan (and produced a letter reflecting that intent), but later voted to reject after learning the inventory was worth less than Featherworks had represented.
- Heller also filed a separate fraud lawsuit against Featherworks, its president, and its parent company, and said the $25,000 payment was consideration for releases in that dispute; Heller did not submit proof supporting its asserted inventory-valuation change.
- The bankruptcy court reopened voting, but ultimately refused to allow Heller’s vote change, finding the change was not made in good faith under § 1126(e).
- In a separate opinion, the bankruptcy court denied confirmation of the plan (including on the evidence of what creditors would receive in a Chapter 7 liquidation), treated Windsor Trading Corp. as an insider for § 1129(a)(10) purposes, and issued rulings governing the role of the debtor’s former counsel, Kerwin & Elliott.
- Farwest appealed the reopening of voting; Heller appealed the denial of its vote change and the denial of confirmation. The district court consolidated the appeals.

## Issues

1. Whether the bankruptcy court erred in reopening the voting on the plan for reorganization.
2. Whether the bankruptcy court erred in refusing to permit Heller to change its vote from rejection to acceptance of the plan.
3. Whether the bankruptcy court erred in classifying Windsor Trading Corp. as an insider creditor for purposes of 11 U.S.C. § 1129(a)(10).
4. Whether the bankruptcy court erred in denying confirmation of the plan based on the evidence of what creditors would receive in a Chapter 7 liquidation.
5. Whether the bankruptcy court erred in its rulings concerning the participation of Kerwin & Elliott, the debtor’s former legal counsel.

## Decision

- Affirmed the order reopening voting because Farwest did not show harm from the reopening; no creditor changed its vote, and Heller’s requested change was denied in any event.
- Affirmed the refusal to allow Heller to change its ballot, holding the bankruptcy court could treat the request as not made in good faith under § 1126(e) on this record, including the circumstances of the $25,000 payment and Heller’s limited evidentiary showing.
- Affirmed the bankruptcy court’s classification of Windsor as an insider for § 1129(a)(10), finding no clear error.
- Affirmed denial of confirmation, agreeing the bankruptcy court’s findings and liquidation comparison supported the conclusion that statutory confirmation requirements were not met.
- Affirmed the bankruptcy court’s rulings regulating Kerwin & Elliott’s involvement, finding no reversible error.

## Legal Principles

- Reversal requires a showing of error and resulting harm; an order that has no effect on the outcome may be treated as harmless.
- Under 11 U.S.C. § 1126(e), a bankruptcy court may designate (disqualify) or refuse to credit votes not cast or procured in good faith; the court may consider surrounding facts, including payments tied to vote changes.
- A creditor seeking to change a plan ballot after voting closes must support the request with an adequate factual showing; the bankruptcy court may deny the change if the circumstances support a finding of lack of good faith.
- For § 1129(a)(10), acceptance by an insider cannot satisfy the requirement that at least one impaired class of non-insider claims accept the plan.
- The plan proponent bears the burden on confirmation, including showing compliance with the “best interests of creditors” test by credible evidence comparing plan recoveries with a Chapter 7 liquidation.
- On appeal, bankruptcy court fact findings are reviewed for clear error, and case-management and similar discretionary rulings receive deferential review.

## Conclusion

The district court affirmed all challenged bankruptcy court orders, holding that reopening voting caused no harm, that Heller’s post-balloting vote change was properly rejected for lack of good faith under § 1126(e), and that the bankruptcy court’s insider classification, liquidation-based confirmation findings, and rulings concerning former counsel were supported by the record and not reversible error.


In re Featherworks Corp., 36 B.R. 460 (1984)