In re Featherworks Corp.

Featherworks Corporation (debtor) bought and processed feathers and down. Featherworks filed for bankruptcy under Chapter 11. Walter E. Heller and Company (Heller) (creditor) held a $5 million lien on Featherworks’ inventory and accounts receivable. This collateral was worth only $3.5 million, leaving an unsecured deficiency of $1.5 million. Featherworks proposed a reorganization plan calling for unsecured creditors to receive 1.3 percent of their claims in cash. Heller and Farwest Garments, Inc. (Farwest) (creditor), another creditor, voted against the plan. After voting was complete, Heller petitioned the court to change its vote to an acceptance. Farwest objected, asserting that Heller had been paid $25,000 to change its vote in violation of Bankruptcy Code § 1126(e) and United States criminal law. Heller asserted that it had intended to accept the plan until it learned that Featherworks’ inventory was worth less than Featherworks had claimed. Heller said that it had therefore voted against the plan and filed suit for fraud against Featherworks, Featherworks’ president, and Featherworks’ parent company. Heller said it had accepted the $25,000 in payment for releases of liability in this second suit. Heller offered as evidence a letter in which it expressed its initial intent to vote in favor of the plan, but Heller did not offer evidence relating to its contention that the inventory was less valuable than Featherworks had claimed. The bankruptcy judge ruled that Heller’s change of vote was not in good faith and refused to allow Heller to change its vote. Featherworks appealed.