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December 13, 2017 | Posted by Alexander J. Nicas | Permalink

The Bottom Line

Third-party releases attract significant attention and debate in Chapter 11 cases.  A Southern District of New York bankruptcy court recently weighed in on this hot topic and issued a decision in In re SunEdison, Inc., et al., Case No. 16-10992 (SMB) (Bankr. S.D.N.Y. Nov. 8, 2017), Docket No. 4253, that deals a blow to debtors seeking confirmation of a plan of reorganization that includes broad non-consensual third-party releases.  In his decision, Judge Stuart Bernstein denied the Debtors’ request to force non-voting creditors to release non-debtor third-parties under their Chapter 11 plan of reorganization (the “Plan”) because the Debtors had failed to demonstrate that: (a) non-voting creditors had impliedly consented to the releases set forth in the Plan, (b) the bankruptcy court had jurisdiction to release the non-voting creditors’ third-party claims, or (c) approval of the requested non-consensual third-party releases were appropriate under governing Second Circuit law – Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005) (“Metromedia”). 

Why This Case is Interesting

The bankruptcy court’s decision in SunEdison adds to the debate over the propriety of third-party releases and the bankruptcy court’s authorization to approve them.  These releases are often a significant part of pre-petition negotiations among various parties, whether as part of plan funding or to facilitate the settlement of material disputed claims.  The decision recognizes that such releases are permissible in the Second Circuit so long as there is a proper evidentiary record to establish that non-consensual third-party releases satisfy the standards set forth in Metromedia.  The decision also provides interesting insight on the ability to shift the burden to an impacted creditor through “deemed consent,” but it cuts against recent bankruptcy court decisions that have approved releases on this basis when clear and unambiguous language in a disclosure statement and voting ballot states that third-party releases will bind both voting and non-voting creditors.  And, it directly questions whether consent can ever be inferred by inaction, regardless of whether disclosure is appropriate.

One issue that the SunEdison decision does not touch on directly is whether Stern v. Marshall, 564 U.S. 462 (2011) prohibits a bankruptcy court from entering a final confirmation order approving non-consensual third-party releases.  Although Stern was mentioned in footnote 5 of the SunEdison decision, the bankruptcy court punted on this issue because Judge Bernstein denied the third-party release in its proposed form.  Whether Stern precludes a bankruptcy court from issuing a final confirmation order approving third-party releases was recently dealt with in Millennium Lab II, LLC, et. al., Case No. 15-12284 (LSS), (Bankr. D. Del. Oct. 3, 2017), Docket No. 476.  In Millennium Lab, Judge Laurie Selber Silverstein authored a 69 page opinion in which she found that bankruptcy courts have constitutional adjudicatory authority to enter a final order confirming a plan of reorganization, even if the plan contains non-consensual third-party releases.  Kramer Levin Corporate and Restructuring partner Adam C. Rogoff recently participated in a Debtwire podcast discussing the Delaware bankruptcy court’s decision in Millennium Lab

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December 1, 2017 | Posted by Kramer Levin | Permalink
Corporate Restructuring and Bankruptcy partner Adam C. Rogoff joined Debtwire's Richard Goldman for a podcast discussion on the makewhole premium and replacement note interest rate disputes at the heart of Momentive Performance Materials. read more
November 30, 2017 | Posted by Andrew Pollack | Permalink

The Bottom Line

The Fifth Circuit, in In the Matter of: ATP Oil & Gas Corp. (Tow v. Bulmahn, et. al.), dismissed breach of fiduciary duty claims and fraudulent transfer claims brought by a chapter 7 trustee relating to cash bonuses and dividend payments made pre-bankruptcy to the officers and directors of a financially distressed company.  In doing so, the Fifth Circuit identified several key shortcomings in the trustee’s complaint, and reaffirmed the protections of the business judgment rule when it comes to the decisions that officers and directors make while a company is in financial trouble, particularly with respect to executive compensation.

Why This Case is Interesting

There are two ramifications of the decision – one specific and one more general.  By identifying several shortcomings in the trustee’s complaint against the defendant officers and directors, this case clearly signals the Fifth Circuit’s views regarding the specificity needed for a complaint of this nature.  This includes clearly identified defendants and their respective roles, non-conclusory allegations as to the impropriety of a bonus award, and more than bare-bones assertions as to a company’s insolvency. 

However, the decision also more generally recognizes that there are numerous decisions that a distressed company’s board must make in navigating the choppy waters of distress which events may ultimately lead to a potential filing.  By embracing the flexibility afforded by the business judgment rule, including to stabilize operations, the court recognizes that executive compensation may be a bona fide consideration for a financially distressed business to retain key personnel and, therefore, bonuses are not per se improper.  Nonetheless, boards should proceed with caution as to the timing and size of any such bonuses and comparable support before awarding them.  One thing remains clear – pre-bankruptcy bonuses will always attract scrutiny (whether or not ultimately found to be within the business judgment rule).


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November 3, 2017 | Posted by Alana Katz | Permalink

The Bottom Line

The Third Circuit recently held, in Schepis v. Burtch (In re Pursuit Capital Management, LLC), No. 16-3953, 2017 WL 4783009 (3d Cir. Oct. 24, 2017), that under section 363(m) of the Bankruptcy Code, if a party does not seek a stay pending appeal of a sale order, it is highly likely that any appeal of such sale will be determined statutorily moot.  That was certainly the case here.


Why This Case is Interesting

This case reiterates that fact that the highest bid is not always the best bid if the so-called higher bidder does not following the bidding rules.  The Pursuit Parties’ failure to abide by the court-ordered bidding procedures caused the Bankruptcy Court to rule in favor of the Creditor Group.  Additionally, the Pursuit Parties’ failure to obtain a stay pending appeal, a standard rule for appealing sale orders, caused their appeal to be statutorily moot.  The Third Circuit noted in its decision that if the Pursuit Parties had obtained a stay, they could have avoided the mootness ruling on that basis alone and potentially received a decision on the merits.  This serves as an important reminder for parties and practitioners that following bidding procedures and, if dissatisfied seeking a stay pending appeal, is critical in asset sales. read more
November 3, 2017 | Posted by Gregory A. Horowitz and Marsha Sukach | Permalink

The Bottom Line

On October 20, 2017, the U.S. Court of Appeals for the Second Circuit issued a long-awaited decision in In re MPM Silicones, LLC (“Momentive”) holding that, with one important exception, that the plan of reorganization confirmed by the bankruptcy court comports with Chapter 11.  Case No. 15-1682 (2d Cir. Oct. 20, 2017). 

The Second Circuit opinion has particular importance in its holding that the bankruptcy court had erred in the process that it used to determine the proper interest rate under the cramdown provision of Chapter 11, and that use of the market rate is appropriate where an efficient market exists.  In affirming the bankruptcy court’s holding that the senior lien noteholders were not entitled to a make-whole premium, the Second Circuit has also introduced a split with the Third Circuit on an issue which has significant implications for borrowers and lenders, and should be taken into account in drafting future credit documents.

The appeal, brought by senior and subordinated noteholders, also challenged the bankruptcy court’s conclusions that their claims are subordinate to the second-lien noteholders’ claims, and presented a recurring issue as to when an appeal from a consummated bankruptcy plan of reorganization must be dismissed as equitably moot.  These issues, while interesting, are not discussed here. 

Why This Case is Interesting

This decision, compounded with the Second Circuit’s prior ruling in AMR, should inform the drafting of language in indentures and credit agreements going forward.  Because the make-whole question turns on the interpretation of contract language and can be addressed in drafting, this case will likely help shape contractual provisions surrounding make-wholes. 

It is impossible, however, to contract around the appropriate cramdown interest rate – this makes the cramdown analysis in the Second Circuit’s decision more impactful for future bankruptcy cases.  The cramdown rate analysis thus sets important precedent regarding the rights of secured creditors.

It is still an open question how the appropriate cramdown interest rate will be determined on remand in Momentive.  In particular, the fact that the effective date of the plan has already passed means that evidence is available regarding the replacement notes’ actual trading price as of the effective date – which indicated that the formula-based interest rate set by the court in the first instance was too low.  It remains to be seen whether Judge Drain will hold a new evidentiary hearing and, if so, whether he will consider such evidence on remand.

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