Canyon Bridge Fund I, LP v. Wave Computing, Inc.

Background

Wave Computing, Inc. and six subsidiaries filed for Chapter 11 bankruptcy. After a sale process and auction, Tallwood Technology Partners, LLC won with a $61.3 million bid for Wave’s assets. Wave’s plan placed creditors and interests into classes. Canyon Bridge’s most senior claims were in Class 7, and the plan extinguished the claims in that class.

The plan assigned to a Liquidating Trust possible claims relating to Wave’s 2019 settlement with Windtree. Wave had paid Windtree $40 million in cash, and lawyers had spent more than $1 million investigating possible recovery claims. Canyon Bridge argued that a recovery from those claims could provide enough money to satisfy Class 5 general unsecured claims and then give Tallwood, which held Class 3 claims, more than the allowed amount of its claims.

Canyon Bridge filed its objection to confirmation one day before the confirmation hearing, arguing that the plan was not “fair and equitable” under 11 U.S.C. § 1129(b). The bankruptcy court considered the objection but found that the effective-date funds were approximately $14 million short of providing a full distribution. It confirmed the plan, which became effective on February 26, 2021. Canyon Bridge appealed without seeking a stay.

Standing

The court first considered whether Canyon Bridge had standing, meaning a sufficient legally recognized injury to bring the appeal. Under the bankruptcy-specific standard, an appellant must be directly and adversely affected financially by the bankruptcy order.

The plan required general unsecured claims in Class 5, Tallwood’s allowed Class 3 claims, and the Class 6 intercompany interest to be satisfied before Canyon Bridge could recover. The parties’ supplemental briefing indicated that at least $11.6 million, and possibly substantially more, stood ahead of Canyon Bridge. The court remained skeptical about standing but concluded that Canyon Bridge might be directly and adversely affected financially. It therefore found that Canyon Bridge had standing.

Fair-and-Equitable Requirement

The court affirmed the bankruptcy court’s finding that the plan was “fair and equitable.” A bankruptcy court may confirm a plan over a creditor’s objection—a process often called a cramdown—if the plan meets statutory requirements, including the rule that a junior interest holder may not receive property on account of that junior interest when a senior class is not fully paid. The court also explained that a creditor may not receive property worth more than the full amount of its claim.

The bankruptcy court found that the available funds were about $14 million short of the amount needed for a full distribution as of the plan’s effective date. The district court held that this finding was not clearly erroneous, meaning the record did not leave it with a firm conviction that the bankruptcy court had made a mistake. Because of the shortfall, the speculative and unasserted Windtree claims did not establish that any class would receive a windfall.

The district court agreed that the present value of the Windtree claims was more than zero and that Wave could have done more to evaluate them. But Canyon Bridge did not identify evidence showing that their value exceeded the $14 million shortfall as of the effective date. The claims’ $40 million face amount and the investigation expenses did not establish that the claims were worth more than the shortfall.

Other Arguments

The court rejected Canyon Bridge’s argument that the bankruptcy court improperly placed the burden of proof on Canyon Bridge. In a cramdown, the debtor bears the burden of showing that the plan is fair and equitable, and the record showed that the bankruptcy judge recognized that Wave had that burden.

The court also rejected Canyon Bridge’s evidentiary challenge to statements by Wave’s counsel about the shortfall and tax consequences. Canyon Bridge had not raised those objections during the bankruptcy hearing, and the district court treated the objections as waived. In addition, the counsel’s statements cited materials in the record, which the bankruptcy court considered.

Finally, the court rejected Canyon Bridge’s due-process argument. It found that the bankruptcy court allowed Canyon Bridge’s counsel to speak for several minutes and that the record did not show counsel was interrupted before finishing or had more to say.

Disposition

The court concluded that the bankruptcy court did not clearly err in finding the plan fair and equitable and did not abuse its discretion in confirming the plan. It affirmed the confirmation order.