Prepackaged Chapter 11 in the United States: An Overview
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If a company in financial distress is a US entity, or has sufficient contact with the United States to satisfy the jurisdictional predicates of the US Bankruptcy Code, that company will have access to a prepackaged plan process that is likely the most fully developed and sophisticated in the world. Prepackaged Chapter 11 cases have been widely used in the United States since the late 1980s and have become ever more prevalent in the past 10 years.[2] The near four decades of experience that has resulted has given the US bar and bench the opportunity to refine the governing principles for prepackaged Chapter 11 cases.[3]
As a result, several options exist for prepackaged Chapter 11 cases, with all seeking to minimise the time that the debtor remains or operates in Chapter 11 by completing (or all but completing) the time-consuming task of negotiating and gaining acceptances to a plan of reorganisation prior to the filing of the Chapter 11 petition, but with each permutation permitting the debtor, as set forth herein, to address issues and circumstances specific to its financial situation and creditor body.
Origins of prepackaged cases
Prepackaged Chapter 11 cases have their origins in nineteenth-century equity receivership practice.[4] An equity receivership proceeding involved the formation of a protective committee of bondholders (or other funded secured creditors), with all bondholders being offered the opportunity to deposit their bonds with the protective committee pursuant to the terms of a ‘deposit agreement’. The protective committee would thereafter propose a plan of reorganisation and seek its expeditious confirmation.[5] Seeking to address allegations that protective committees had (to the detriment of public bondholders) often come under the control of insiders and senior creditors, in 1938, Congress made provision for two distinct forms of bankruptcy reorganisation.[6] The first, Chapter X, which was intended to supplant the reorganisations that had previously been implemented through equity receivership proceedings, banned the solicitation of plan acceptances prior to the commencement of a reorganisation case. The second, Chapter XI, which was intended to be used for arrangements involving unsecured debt and small non-public companies, retained the authorisation for a debtor to solicit acceptances prior to filing a bankruptcy case as long as the solicitation complied with applicable non-bankruptcy law.[7]
When Congress enacted the Bankruptcy Code in 1978, it consolidated the two reorganisation regimes into one overarching chapter: Chapter 11.[8] In the process, it abandoned the Chapter X prohibition against prepackaged plans and incorporated several provisions to promote prepackaged Chapter 11 cases, such as:
- allowing Chapter 11 plans to be filed with debtors’ petitions;[9]
- authorising ad hoc prepetition committees to be appointed as statutory creditors’ committees;[10] and
- allowing votes solicited prior to the commencement of a Chapter 11 case to be counted for purposes of confirmation.[11]
In addition, Rule 3018(b) of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules) was adopted in a form that expressly provides for voting on a plan of reorganisation prior to the commencement of the case; Section 1102(b)(1) authorises ad hoc prepetition committees to be appointed as statutory creditors’ committees; and Section 1121(a) permits Chapter 11 plans to be filed at the same time as debtors’ petitions.[12] In so doing, Congress opened a new path to reorganisation that has broadened steadily over the past four decades. According to some accounts, the Crystal Oil case was the first prepackaged bankruptcy under the Bankruptcy Code of any significant size,[13] and it has been followed by hundreds of prepackaged cases, large and small, in the ensuing years, thereby laying the foundation for the by now well-established prepackaged Chapter 11 practice in New York and Delaware.[14]
Overview of key restructuring tools
There are various ways to restructure a company’s capital structure in the United States, both through prepackaged Chapter 11 plans and through more traditional means, all as discussed below.
Pre-insolvency processes
Out-of-court restructuring
An out-of-court restructuring is a restructuring of a distressed company’s balance sheet that is consummated without filing a bankruptcy petition and using the restructuring tools available under the Bankruptcy Code. These restructurings are typically implemented through an agreement with existing debtholders (and sometimes equity holders) or through an ‘exchange offer’.
In an exchange offer, the issuer of the relevant debt instruments makes an offer to exchange the existing outstanding securities for new securities. If the issuer is in financial distress, the new securities will usually have lower face amounts (i.e., holders are being asked to take a ‘haircut’). Those holders that consent to the terms of the exchange offer will tender their existing securities and receive the new securities. Any holders that ‘hold out’ (i.e., decline to consent to the exchange offer) will continue to hold old securities and will be entitled to full payment in accordance with the original terms of their securities. In light of the incentive thereby afforded to hold out (i.e., the right to receive generally higher interest and principal payments under the existing securities), consummation of most exchange offers is conditioned on achieving a specified minimal percentage of holders that must agree to the exchange (typically at least 85 per cent). In addition, to counteract the incentive for the security holders to hold out, the issuer may combine a ‘carrot’ with a ‘stick’ by threatening to file a Chapter 11 case if the requisite level of consenting holders is not achieved; amending the documents governing the existing securities to ‘strip’ protective covenants; and offering new securities with better terms (e.g., higher interest rates, shorter maturities, senior ranking or additional protective covenants).
Insolvency processes
Traditional (also known as ‘free fall’) Chapter 11 cases
In a traditional Chapter 11 case, the debtor files a Chapter 11 petition without having been able to negotiate the terms of its restructuring with any of its key stakeholders. Under these circumstances, achieving consensus on the elements of a Chapter 11 plan that will permit the debtor to exit Chapter 11 protection is deferred until the debtor’s business has been stabilised and the debtor has availed itself of the numerous benefits of Chapter 11 to address operational issues, such as the automatic stay, rejection of burdensome contracts and leases and other matters.
Prenegotiated (also known as ‘prearranged’) Chapter 11 cases
In a prenegotiated case, the putative debtor seeks to reach an agreement with as many of its creditors as possible prior to filing for bankruptcy, but does not solicit actual votes on a Chapter 11 plan prior to filing. Instead, the debtor files its Chapter 11 plan and related disclosure statement at the same time as its petition, or as soon thereafter as possible, with a request that approval of the disclosure statement by the bankruptcy court, solicitation of votes and confirmation of the plan all proceed on an expedited timetable.[15] In a successful prenegotiated case, the additional time required to achieve confirmation can be as little as 60 to 90 days (i.e., including, among other factors, the time mandated by the Bankruptcy Rules for a hearing on the disclosure statement and solicitation of acceptances and rejections) after the filing for Chapter 11 protection.[16]
Prepackaged Chapter 11 cases
As already discussed in this and other chapters, a prepackaged Chapter 11 case is one in which a company in financial distress reaches agreement on the terms of a Chapter 11 plan with its key creditors and solicits acceptances for that plan prior to filing for bankruptcy protection. Only with the requisite votes in favour of the plan (i.e., in the percentages as to amount and number mandated by the Bankruptcy Code) in hand does the company file a Chapter 11 petition, along with the proposed Chapter 11 plan, and ask the bankruptcy court to confirm the plan and approve the related disclosure statement and solicitation procedures on an expedited basis. A prepackaged case is not a panacea for all cases of financial distress. This technique is practical only in those situations where the debtor’s financial distress is primarily caused by burdensome funded debt levels and the company does not need a comprehensive restructuring of its business operations. All the tools otherwise available under Chapter 11 for business restructuring are available to a debtor in a prepackaged case, but their use may result in time-consuming litigation that would frustrate the principal benefit of a prepackaged case – reduced time under court supervision.[17]
There are generally three types of prepackaged cases.
Single-track pre-pack
This is the most common type of prepackaged case. The debtor solicits the votes of its impaired creditors on a prepackaged Chapter 11 plan prepetition and does not attempt a simultaneous exchange offer. Examples of successful single-track prepackaged cases are numerous, including: In re Seegrid Corp;[18] In re Elec Components Int’l, Inc;[19] In re IWO Holdings, Inc;[20] In re Sungard Availability Servs Cap, Inc;[21] and In re Choice One Commc’n Inc.[22]
Dual-track pre-pack
In this type of prepackaged case, the debtor moves on two tracks simultaneously, combining a traditional exchange offer with a solicitation of votes on a prepackaged Chapter 11 plan. If the requisite consent percentage is achieved for the out-of-court exchange offer, the debtor will consummate the exchange offer and not pursue a Chapter 11 filing. However, if the targeted consent percentage is not achieved, the debtor, assuming any other conditions for an out-of-court restructuring are met, will use the acceptances on the prepackaged plan and file a Chapter 11 case.[23] The prospect of an imminent Chapter 11 filing may incentivise the security holders to consent to the out-of-court exchange, thus minimising the hold-out problem. Cases where the dual-track method has been used successfully include: In re FullBeauty Brands Holdings Corp;[24] In re InSight Health Servs Holdings Corp;[25] In re MTS, Inc;[26] and In re Pioneer Fin Corp.[27]
Partial pre-pack
In this hybrid approach (which is the least common), the debtor solicits the votes of key creditors already on board with the proposed reorganisation prior to the commencement of the Chapter 11 case, while deferring the solicitation of other creditors until after the Chapter 11 filing. Thus, the debtor might solicit the consent of its funded debt creditors prepetition while postponing solicitation of its trade creditors until after the Chapter 11 petition has been filed. A successful example of a partial pre-pack case was In re Sunshine Precious Metals, Inc,[28] where the court held that it was permissible for the debtor to have solicited the votes of all bondholders other than those that resided in California prior to the Chapter 11 filing, and to have solicited bondholders that were California residents after the filing.[29]
Advantages of a prepackaged Chapter 11 case
A prepackaged Chapter 11 case has several advantages over a traditional Chapter 11 case and an out-of-court restructuring, as discussed below.
Traditional Chapter 11 case
Time and certainty of outcome
The two most significant advantages of a prepackaged Chapter 11 case vis-à-vis a free-fall Chapter 11 case are: the time spent under bankruptcy protection is shorter (often considerably shorter); and there is much greater certainty as to the results that may be achieved and the ultimate exit from Chapter 11. Because the terms of the Chapter 11 plan have been agreed on and the solicitation of votes in support of the plan has taken place prior to the commencement of the Chapter 11 case, the duration of the Chapter 11 case is generally abbreviated.[30] Once a prepackaged case has been filed, all that remains for the court to do is to approve (retroactively) the disclosure statement (as containing adequate information) and confirm the Chapter 11 plan. Both matters are generally addressed at a combined hearing that typically occurs within approximately 30 days of the filing date and, sometimes, much sooner.[31]
Retention of control
Because the votes necessary to confirm the plan have already been obtained in a prepackaged Chapter 11 plan, it is also less likely that management will be displaced or otherwise lose control. Thus, for example, because the debtor will have already filed the plan and even obtained the support of the requisite majority of affected creditors, the debtor will avoid any skirmishes around the exclusive right to file a plan and solicit votes thereon conferred on the debtor by Section 1121 of the Bankruptcy Code.[32] Similarly, for the same reasons, creditors would be less likely to lobby to appoint a ‘chief restructuring officer’, or seek more radical remedies, such as the appointment of an examiner to investigate the debtor’s affairs[33] or a trustee to replace management and the board of directors.[34]
Effects on business
The abbreviated time spent under the supervision of a bankruptcy court and greater certainty as to an outcome mitigate many of the negative effects of a free-fall Chapter 11 filing on the debtor’s business operations. For example, the debtor will be able to provide assurances to its suppliers and customers that a seamless exit from Chapter 11 and a deleveraged, more sustainable capital structure are within reach. In addition, trade creditors will know from the inception of the case that their claims will be left ‘unimpaired’ and, thus, will have no reason to disrupt deliveries or production.[35] For the same reason, competitors will have less opportunity to use the debtor’s Chapter 11 filing to lure the debtor’s customers away. As an added, less tangible, benefit, the absence of contentious inter-creditor disputes is likely to lead to fewer negative, value-destroying news stories about the company.
Lower administrative costs
The shorter duration of a prepackaged Chapter 11 case will also enable the debtor to minimise administrative costs, as compared to a traditional Chapter 11 case.
The Bankruptcy Code and Bankruptcy Rules impose burdensome reporting requirements on traditional Chapter 11 debtors, such as filing detailed schedules of assets and liabilities and statements of financial affairs.[36] In a prepackaged Chapter 11 case – because most of the claimants generally listed in the schedules and statements will be unimpaired by the prepackaged plan – these requirements are often waived.
The Office of the United States Trustee (the US Trustee) imposes additional reporting requirements on a Chapter 11 debtor, such as the filing of monthly operating reports.[37] In a prepackaged Chapter 11 case, due to the abbreviated time the debtor generally spends in bankruptcy, this administrative burden on a debtor is minimised.
In a traditional Chapter 11 case, Section 341 of the Bankruptcy Code requires the US Trustee to conduct a meeting of the debtor’s creditors shortly after the commencement of the case (a Section 341 Meeting).[38] However, Section 341(e) permits the US Trustee to forego the Section 341 Meeting where the debtor has filed a prepackaged plan because, in a prepackaged case, creditors have either signed on to support the plan or are deemed to accept it, thus obviating the need to conduct a Section 341 Meeting.[39]
Very significantly, and for many of the same reasons, in prepackaged Chapter 11 cases, the US Trustee will often elect not to appoint an official committee of unsecured creditors. In most Chapter 11 cases, this committee is appointed and charged with, among other tasks, participating in the formulation of the Chapter 11 plan.[40] However, in prepackaged cases, where the Chapter 11 plan proposes to leave unsecured creditors ‘unimpaired’, it is generally determined to be unnecessary to appoint a creditors’ committee, unless the terms of the plan appear likely to be subject to material challenge.[41] This will further reduce the debtor’s administrative expenses as compared to a traditional Chapter 11 case.[42] Conversely, if a group of creditors has already engaged in discussions with the debtor, and wishes to continue that engagement during the prepackaged case, that group of creditors may be authorised to serve as the official committee, subject to certain conditions.[43]
Out-of-court restructuring
Ability to bind holdouts
Most debt instruments governed by US law require the consent of all holders (i.e., unanimous consent) to effectuate significant changes to the terms of the instruments (e.g., to change principal, interest or maturity date). Obtaining unanimous consent is an almost impossible undertaking for a number of reasons, not the least of which is the difficulty and expense of identifying all the beneficial holders.[44] Even if all these holders could be identified, smaller holders might not, without further efforts, respond to the debtor’s solicitation materials. Non-consenting holders, who do not tender their securities into the exchange offer, retain all the rights to which they are contractually entitled under the original instruments and, accordingly, without additional incentives, these holders have every reason to reject the ‘haircut’ proposed by the debtor and become ‘holdouts’, thereby jeopardising the debtor’s overall effort to rationalise and streamline its capital structure.
The use of a prepackaged Chapter 11 plan eliminates the ‘holdout’ problem by providing a mechanism through which a majority of holders (in number and amount) can bind the minority to the terms of a confirmed plan, notwithstanding the unanimity required by the controlling debt documents. Under Section 1126 of the Bankruptcy Code, a class of claims is deemed to accept the plan if it is accepted by at least two-thirds in amount and one-half in number of the creditors in the class that voted on the plan.[45]
A threat by the debtor to file a prepackaged Chapter 11 case if the number of acceptances received to the exchange offer falls short of the number desired to effectuate the restructuring may strip holders of some of the incentives they might otherwise have to hold out. The existence of the prepackaged Chapter 11 alternative is likely to persuade the potential holdouts to participate in the exchange offer because: (1) with a class distribution enforceable under a Chapter 11 plan, there will be little chance of payment in full under any scenario; (2) this will be especially so if (as is often the case) the potential distribution under the prepackaged Chapter 11 plan is less favourable than in the out-of-court exchange offer; and (3) the potential negative effects of a Chapter 11 filing on the debtor’s business would exacerbate concerns that the securities the creditors would receive in a Chapter 11 would be less valuable than the nearly identical securities they had been offered in the out-of-court exchange.
Tax advantages
A restructuring through Chapter 11 affords the debtor a number of tax advantages. First, the Internal Revenue Code provides that a reduction or cancellation of debt in Chapter 11 (i.e., the COD income), which would be taxable as gross income outside of bankruptcy, is not treated as taxable income if effectuated under a Chapter 11 plan.[46] Second, a debtor’s net operating losses receive more favourable treatment in a restructuring through Chapter 11 than in an out-of-court restructuring, as long as the majority of new stockholders of the reorganised debtor are former creditors.[47]
Bankruptcy powers
To the extent that a company would like to take advantage of the full range of benefits conferred on a debtor by the Bankruptcy Code (e.g., the power to assume, assign or reject contracts and leases, sell assets free and clear of liens), those benefits are available only in Chapter 11 and not in an out-of-court restructuring.
Implementation of prepackaged Chapter 11 plans in United States
Given the long history of prepackaged Chapter 11 cases in the United States, there are well-established procedures for the successful formulation and implementation of prepackaged Chapter 11 plans. Such extensive guidance is required because, unlike in traditional Chapter 11 cases, the bankruptcy court has a more limited role in a prepackaged Chapter 11 case and, therefore, will not necessarily be on the scene to steer the prepackaged plan proponents towards confirmation and closure.
In a traditional Chapter 11 case, the Bankruptcy Code mandates that the bankruptcy court consider and approve the extent of required disclosure, appropriate solicitation procedures, classification of claims and interests and other key matters before any plan vote is undertaken. In a prepackaged Chapter 11 case, by contrast, the court rules on the disclosure provided and the solicitation steps taken only after the solicitation has been completed and the case commenced.
The consequences of inadequate disclosure or improper solicitation under these circumstances are potentially draconian: votes might have to be re-solicited during the case, the plan subject to reformulation and the prepackaged case transformed into a free-fall Chapter 11, with all of the concomitant risks and uncertainties.[48] It is impossible to entirely foreclose such adverse developments, but a debtor seeking to successfully consummate a prepackaged Chapter 11 plan would do well to avoid atypical plan formulations and conservatively apply all relevant disclosure and solicitation requirements.
Prepetition disclosure requirements
The Bankruptcy Code provides that votes in favour of a plan obtained prior to the filing of the bankruptcy petition are valid and binding if:
- the solicitation of the acceptances or rejections was in compliance with any applicable non-bankruptcy law, rule or regulation governing the adequacy of disclosure in connection with the solicitation; or
- there is no such law, rule or regulation, the acceptance or rejection was solicited after disclosure to the holder of adequate information, as defined in Section 1125(a) of this title.[49]
There are no non-bankruptcy statutes or rules that apply expressly to Chapter 11 plans of reorganisation. However, prepackaged plans often involve the cancellation, exchange or issuance of ‘securities’, and to the extent that the relevant plan does so provide, the securities law, including the antifraud provisions set for in Section 10(b)(5) of the Securities Act,[50] would apply to the solicitation of votes for the plan.[51] Thus, insofar as the relevant prepackaged plan provides for the cancellation, exchange or issuance of securities, the relevant debtor should seek to satisfy both the Bankruptcy Code and securities law disclosure standards.
Anti-fraud provisions of securities laws
The federal securities laws impose civil liability for failure to make proper disclosure in a prospectus or other filing made publicly available in connection with the issuance of securities. Under the Securities Act, liability can be imposed on any issuer for damages that arise from any prospectus or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements, in the light of the circumstances under which they were made, not misleading.[52] Similarly, the Exchange Act[53] imposes liability on issuers and their agents for any statements in documents filed with the Securities and Exchange Commission (SEC) that were, at the time and in the light of the circumstances under which they were made, false or misleading with respect to any material fact.[54] In short, the federal securities law requirements focus on the absolute truth (not the amount or scope) of disclosure provided by the issuer.
Adequate information under the Bankruptcy Code
By contrast, the Bankruptcy Code provides a content-oriented disclosure standard, requiring only that ‘adequate information’ be provided to those voting on a plan; no reference is made to truthfulness per se, or whether the information is ‘material’ and ‘false’, or ‘likely to mislead’.[55] The Bankruptcy Code standard is a flexible one,[56] which is tailored to the circumstances of particular cases, based on the availability of relevant information and assessed in light of the relative sophistication of the parties.[57]
In light of these more flexible criteria, courts have interpreted the Bankruptcy Code’s ‘adequate information’ standard to require information that might not generally be deemed necessary in federal securities laws filings. A disclosure statement, for example, will generally contain the following items, many of which will not also be contained in a registration statement:
- a summary of the proposed plan of reorganisation;
- a description of all asset values and the basis on which the values were ascertained;
- a description of the claims against the debtor’s estate;
- a liquidation analysis;
- an estimate of all administrative expenses of the Chapter 11 case;
- projections as to results achieved by the future operations of the reorganised debtor;
- a description and estimate of success of possible litigation on behalf of the estate; and
- a list of the parties that served on the negotiating committees in preparing the plan.[58]
Safe harbour
Section 1125(e) of the Bankruptcy Code expressly provides for a ‘safe harbor’ from liability under state and federal securities laws for good faith solicitations of votes on a Chapter 11 plan. It remains unclear, however, whether the safe harbour thus created is applicable to prepetition solicitations of votes on prepackaged Chapter 11 plans. Although Section 1126(b) of the Bankruptcy Code expressly sanctions the prepetition solicitation of votes, the legislative history of Section 1125(e) suggests that the safe harbour of Section 1125(e) was intended to protect only solicitations made in reliance on a court-approved disclosure statement – which technically is not possible if the entity has yet to file a bankruptcy petition.[59] Commentators take different positions on the issue.[60]
Weighing against the availability of the safe harbour in this context is the heading of Section 1125 of the Bankruptcy Code, which expressly references postpetition disclosure and solicitation, although section headings are generally deemed to be neither conclusive nor binding.[61] Pointing in the opposite direction is the plain language of Section 1125(e) itself, which exempts from liability all solicitation undertaken in good faith and in compliance with the applicable provisions of this title.[62] Thus, it can be credibly argued that if a prepackaged plan complies with the requirements of Section 1126(b) of the Bankruptcy Code governing prepetition disclosure, liability will not arise.[63] However, in the absence of definitive guidance on the issue, the risk that the safe harbour will not be recognised will remain.
The requirement of good faith
The Bankruptcy Code provides that votes in favour of a Chapter 11 plan may be disregarded or ‘designated’ if they are not solicited or procured in ‘good faith’ or in accordance with other provisions of the Bankruptcy Code.[64] A vote, for example, will be disallowed as having been cast in ‘bad faith’: if the claimant is using obstructive tactics and holdup techniques to extract better treatment for its claim than the treatment afforded to the claims of other holders within the same class; if the holder of the claim casts its vote for the ulterior purpose of securing some advantage to which it would not otherwise be entitled; or when the motivation for the vote is not consistent with the creditor’s protection of its own self-interest.[65]
While the Bankruptcy Code itself does not shed any further light on what constitutes ‘bad faith’ in the prepackaged plan solicitation context, traditional Chapter 11 case law does provide some guidance:
In In re Allegheny Int’l, Inc,[66] the vote of a third party that was interested in obtaining control of the debtors was designated because it had purchased sufficient claims in two key classes to block acceptance of the debtors’ Chapter 11 plan. As a threshold matter, the Allegheny court found that the purchase of claims for the purpose of blocking acceptance is not tantamount to ‘bad faith’, as long as the purchaser is acting in its own economic interest. However, in the end, the Allegheny court found that the relevant purchaser had the ulterior and undisclosed motive of obtaining control of the debtors through the plan process, which, the court found, constituted sufficient cause to designate its vote.[67]
In another non-prepackaged Chapter 11 case, Figter Ltd v. Teachers Ins & Annuity Ass’n of Am (In re Figter Ltd ),[68] the United States Court of Appeals for the Ninth Circuit addressed the good-faith requirement in greater detail. In Figter, a secured creditor purchased unsecured claims against a debtor for the purpose of undermining confirmation of the debtor’s plan. The Figter debtor sought to have those votes designated (i.e., not tabulated for voting purposes) as cast in bad faith under Section 1126(e),[69] but the Court found that Section 1126(e) was intended to apply only to creditors ‘whose selfish purpose was to obstruct a fair and reasonable reorganization in the hope that someone would pay them more than the ratable equivalent of their proportionate part of the bankrupt assets’.[70] The requisite ‘selfish purpose’ was not found in Figter because the mere purchase of claims to block confirmation is not bad faith per se, in the absence of specific facts showing pure malice, an effort to blackmail, the intent to destroy a competitor’s business or some similar ulterior motive.
In In re MacLeod Co,[71] the court designated the vote of a creditor as lacking good faith where the creditor was employed by a competitor of the debtor; and based upon the creditor’s stance in the Chapter 11 case, it appeared that the creditor cast its vote with the ulterior purpose of destroying or injuring the debtor’s business so that the competitor’s business would benefit.
In DISH Network Corp v. DBSD North Am Inc (In re DBSD North America Inc),[72] the court designated the vote of a senior creditor that was also the debtor’s competitor and that acquired its claims during the Chapter 11 case because it was ‘attempting to obtain some benefit to which [it was] not entitled’ by buying a blocking position with the intention of using its status as a creditor to vote against any plan that did not give it a strategic interest in the reorganised company.[73]
Finally, in Pacific Western Bank v. Fagerdala USA-Lompoc, Inc (In re Fagerdala USA-Lompoc, Inc),[74] the Ninth Circuit overturned a bankruptcy court decision granting designation. In so doing, it noted that the concept of good faith under Section 1126(e) is fluid, and distinguished between a ‘creditor’s self-interest as a creditor and a motive which is ulterior to the purpose of protecting a creditor’s interest’.[75] At a minimum, there must be some evidence that a creditor is seeking ‘to secure some untoward advantage over other creditors for some ulterior motive’.[76] In the absence of the requisite ulterior motive, the mere failure to make purchase offers to all outstanding creditors does not support a bad-faith finding – even if the outstanding creditors will be adversely affected by a decision to block the reorganisation plan.
It is important to note that a creditor or interest holder is entitled to act in its own self-interest and that doing so does not mean that the creditor is acting in bad faith. A creditor, for example, may take a blocking position with respect to the plan, or purchase claims or the vote of a deficiency claim to block confirmation of a plan without acting in bad faith. However, a creditor must always be cognisant, in both the prepackaged and traditional Chapter 11 plan context, of the risk of vote designation. That risk increases if the creditor acquires its claims (or additional claims) during the Chapter 11 case and is particularly acute if the creditor is a competitor or has a significant stake in a competitor of the debtor.[77]
Procedural requirements
Separate and apart from the foregoing disclosure and intent issues, successful implementation of a prepackaged Chapter 11 plan will turn in large measure on compliance with a number of procedural requirements.
Entitlement to vote
Bankruptcy Rule 3018(b) requires that, to accept or reject a Chapter 11 plan, securities must be voted by ‘the holder of record of the security’.[78] On the other hand, Bankruptcy Rule 3017(e) states that, before a disclosure statement may be approved, the plan and disclosure statement must be transmitted ‘to beneficial holders of stock, bonds, debentures, notes, and other securities’.[79] Based upon the language of Bankruptcy Rule 3017(e) and ignoring Bankruptcy Rule 3018(a)’s reference to ‘holders of record’, bankruptcy courts generally require that plan proponents solicit beneficial owners of securities, not the holders whose names are registered in the books and records of the company or the registry maintained by the trustees for the relevant indentures.[80]
Mandating that the beneficial holders, and not the record holders, of publicly held securities vote on a Chapter 11 plan makes the solicitation process for a prepackaged Chapter 11 plan exponentially more difficult. The record holders of these securities are generally ‘nominees’, such as the Depository Trust Company (also known as Cede & Co). These nominees do little more than maintain records of the holdings and trades of their member institutions, which include brokers, investment advisers and other financial institutions. These institutions, in turn, hold securities both for their own account, and ‘in street name’, for the benefit of various, often far-flung third parties. Making matters worse, several layers of intermediaries may stand between the nominee and the ultimate beneficial holders, each of which may have the option of electing – which it often exercises – to not reveal its identity and holdings to the issuer. Under these circumstances, the identity of the beneficial holders can only be ascertained with the cooperation of the record holders, which is generally obtained with the assistance of firms specialising in public securities solicitations. With this cooperation and assistance, the debtor can arrange for the relevant disclosure documents to be distributed down the ownership chain to the beneficial holders and for the ballots to travel back up that chain to the debtor or its solicitation agent. Thus, the requisite solicitation process is complex and, because it is fraught with opportunities for missteps, should be constructed very carefully, with detailed instructions given to each layer of intermediaries, such that the debtor is able to persuade the bankruptcy court at the time of the confirmation hearing that the appropriate parties had been properly solicited.
The ‘beneficial holder identification’ problem exists, to one degree or another, in any Chapter 11 case, but its impact is exacerbated in the prepackaged plan context because no bankruptcy court is on the scene to aid the debtor. In a non-prepackaged plan context, the bankruptcy court can all but eliminate the problem by ordering the financial institutions to disclose the identity of the beneficial holders.[81] Moreover, in a traditional case, the bankruptcy court will have approved in advance the debtor’s solicitation process, including its proposal for furnishing information to, and tabulating votes received from, the beneficial holders of securities, pursuant to the various subsections of Section 1125 of the Bankruptcy Code. In the absence of these options, the prepackaged Chapter 11 plan proponent should take special care to ensure that it takes all the necessary steps to effectively communicate with the beneficial holders of public securities.
Tabulation of votes
The acceptance of a Chapter 11 plan (traditional or prepackaged) by a class of claims requires a vote in favour of the plan by: two-thirds of the amount of claims actually voting; and a majority in number of the holders of the claims.[82] The second requirement, generally referred to as the ‘numerosity’ test, has no counterpart outside of Chapter 11. Where only the votes of fully disclosed individual holders are at issue, the ‘numerosity’ requirement raises few issues, but where the relevant securities are held in ‘street name’, the story is different, both in and outside of bankruptcy. After the filing of a Chapter 11 case, as discussed above, the plan proponent can request that the court direct the brokerage houses and banks to disclose the identities of their clients pursuant to Bankruptcy Rule 1007(i).[83] In the prepackaged Chapter 11 context, there is no perfect, error-free mechanism to tabulate the number of beneficial holders voting when securities are held in ‘street name’, but the methodology most often adopted is for a plan proponent to require two levels of ballots – the ‘master ballots’ and the ‘baby ballots’ or ‘individual class ballots’.
When this procedure is adopted, the depository trust company or any other relevant depository authorises distribution of solicitation materials directly to their financial institutions’ intermediary clients by executing an omnibus proxy. Both ‘master’ and ‘baby’ ballots are then distributed to the brokerage houses and banks identified by the depository. The brokerage houses and banks retain the master ballot and distribute the baby ballots and the disclosure statements to their customers. Banks typically execute the blank baby ballots before distribution and instruct their customers to return them directly to the plan proponent. Brokerage houses usually collect the baby ballots from their customers and record their votes on the master ballots. The master ballots are then submitted to the plan proponent for tabulation in accordance with the applicable procedures.
Length of solicitation period
Bankruptcy Rule 3018(b) mandates that votes on a prepackaged plan will not be counted if ‘an unreasonably short time was prescribed . . . to accept or reject the plan’.[84] Neither the Bankruptcy Code nor the Bankruptcy Rules shed any light on the meaning of ‘unreasonably short time’ in this context. In light of the statutory silence on the subject – and the fact that most proponents will also wish to satisfy the securities laws – the most relevant guidance is to be found in the securities law timelines. By way of example, the relevant securities laws rules prescribe that (1) tender offers and exchange offers must remain open for a minimum of 20 business days from the time the tender offer or exchange is first published or sent to security holders;[85] and (2) the minimum time for completion of a proxy solicitation under the securities laws is 10 days.[86]
However, the time prescribed under the securities laws may or may not be sufficient for the purposes of Bankruptcy Rule 3018(b). Bankruptcy courts have found, and could again find, that the circumstances of a Chapter 11 solicitation require a longer period than that applicable with respect to an otherwise analogous securities law solicitation.[87] Thus, when soliciting prepetition acceptances of prepackaged plans, the proponent should allocate more time than mandated by the securities laws or any other applicable non-bankruptcy law for completion of the solicitation. The minimum time required by the securities laws may be the starting point, but this period should be adjusted upward to ensure that the beneficial holders have sufficient time to review the solicitation materials, and take into account circumstances such as whether (1) the securities are widely held, are held by foreign creditors or are held through numerous intermediaries; and (2) the solicitation is undertaken during a holiday period that might impact the beneficial holders’ opportunity to meaningfully review the materials. In light of this, any solicitation period proposed for a prepackaged plan should be at least 30 calendar days.[88]
Registration requirements
Section 5 of the Securities Act prohibits the offer or sale of securities of an issuer, including a debtor or its successor under a Chapter 11 plan, unless either the securities have been registered with the SEC or an exemption from registration is available under any applicable statute or regulation.[89] In addition to any exemptions that may be available under the securities laws, Section 1145 of the Bankruptcy Code provides an exemption for the express benefit of Chapter 11 debtors.[90] Under Section 1145, the offer or sale of securities of a Chapter 11 debtor, an affiliate of a debtor participating in a joint plan with the debtor, or a successor of a debtor under a Chapter 11 plan in exchange for claims against or interests in that debtor is exempt from the registration requirements under Section 5 of the Securities Act. This exemption is available to all entities other than ‘underwriters’.[91] Thus, except for underwriters, registration of most securities issued under Chapter 11 plans, in satisfaction of creditor claims, or ‘principally’ in satisfaction of those claims, is not an issue in a traditional Chapter 11 case.
The applicability of Section 1145 in prepackaged cases is not as clear-cut. In fact, the SEC has taken the position that the Section 1145 exemption does not apply in the context of a prepackaged case.[92] The relevant argument, which is highly technical, is based on the SEC’s view as to when the offer and sale of the securities are deemed to occur in the prepackaged plan context. According to the SEC, both the offer and the sale of the securities occur prior to the commencement of the Chapter 11 case, with the offer being made when the disclosure statement is distributed and the sale occurring when the holders of the security vote for the plan (i.e., at the time those holders make the investment decision to accept the new securities).[93] Because, in the case of a prepackaged plan, both of these events occur prior to filing, the SEC has argued that Section 1145 does not apply. Another argument is that Section 1145 exempts only the offer and sale of securities of a debtor. Prior to the commencement of the Chapter 11 case, the prospective issuer of the new securities is not a debtor under Chapter 11.
The countervailing argument is that the prepackaged Chapter 11 process and the contingencies it entails make the solicitation of votes as to a Chapter 11 plan prior to the filing of a Chapter 11 petition too remote and attenuated a communication to be deemed a cognisable ‘offer’ to sell securities. At this stage, it is still possible that:
- the issuer will fail to obtain the necessary votes to confirm the plan;
- a determination will be made by the company not to commence a Chapter 11 case for any other reason;
- the bankruptcy court will decline to approve the disclosure statement;
- the plan is modified to such an extent that a re-solicitation will become necessary;[94]
- the bankruptcy court will decline to confirm the plan;
- the order confirming the plan will be reversed on appeal; and
- some condition precedent to the effectiveness of the plan is not satisfied or waived.
Given the uncertainty as to the availability of Section 1145, the proponent of an otherwise acceptable prepackaged plan should consider registering the offer and sale of the plan securities or avail itself of another exemption from registration. The downside of registration is that it could add significant expense and likely not less than six weeks to the process.[95] The upside, however, is substantial, insofar as it will both avoid a subsequent objection by the SEC and obviate the restrictions inherent in the otherwise applicable exemptions from registration made available under Section 3 of the Securities Act.
The exemption most commonly invoked in the Chapter 11 context is that set forth in Section 3(a)(9) of the Securities Act, which exempts the exchange of any security by the issuer where: (1) the exchanging holders are all existing security holders of the issuer; and (2) no commission or other remuneration is paid or given directly or indirectly for soliciting the exchange.[96] Unless, as is unlikely to be the case, an unrelated third party is issuing its securities to fund the debtor’s plan, the latter (i.e., no remuneration) requirement is the critical consideration in the prepackaged Chapter 11 case.[97]
Whether the ‘no remuneration’ requirement has been satisfied necessarily turns on: (1) who will be reaching out to the holders of the securities on the debtor’s behalf; (2) the nature of the communications between the holders and the debtor’s designee;[98] and (3) the nature of any compensation to be paid to that designee. While it is likely acceptable for the debtor, through its employees, to solicit the exchange,[99] the payment of a fee to any party (such as a proxy agent or financial adviser) contingent upon the success of the solicitation would give rise to an argument that a party has received an impermissible ‘incentive’ to obtain the holder’s support and, thus, constitute an improper ‘solicitation’ that would invalidate any claim to a Section 3(a)(9) exemption.
Classification of claims
Parties in interest may object to a Chapter 11 plan on, among other grounds, the contention that it improperly classifies claims.[100] As it is often impracticable to affirmatively obtain consent from trade creditors during the pre-filing negotiation process, prepackaged plans almost uniformly provide that trade creditors will receive full payment under the plan (i.e., be unimpaired). To achieve this result, trade creditors must be classified separately from other unsecured creditors, such as public debtholders. However, the unsecured creditors in these other classes, who are treated differently under the plan than the trade creditors, may argue that the plan is predicated on an improper classification.
As a general matter, most courts allow separate classification of legally similar claims so long as the plan classification is ‘reasonable’ and ‘necessary to a successful reorganisation’.[101] Although separate classification of similar claims cannot be used to manipulate class voting (i.e., for gerrymandering purposes),[102] most courts accept the typically proffered rationale as to why it is reasonable to classify trade creditors separately from funded debt holders.[103] However, because this is a fact-intensive, far from black-and-white test, prepackaged plans with separate classifications may nonetheless receive special scrutiny from, and might not be readily confirmed by, the bankruptcy court. Hence, a plan proponent should proceed with circumspection when affording the classification and treatment to obtain the support of key classes.
Treatment
A holder’s claim will be deemed ‘impaired’ if a plan alters any of the holder’s legal, equitable or contractual rights.[104] Even the ‘slightest’ change in a holder’s rights can create impairment.[105] Impairment occurs, for example, when collateral is surrendered;[106] when voting rights are modified;[107] and even when an arguably insolvent guarantor is replaced by a financially stronger one.[108]
For a Chapter 11 plan to be confirmed, the Bankruptcy Code requires that at least one impaired class accept the plan (without taking into account any votes cast by insiders).[109] On occasion, to achieve this result, a plan proponent may resort to ‘intentional impairment’ or ‘artificial impairment’.[110] To obtain the ‘impaired accepting class’, the plan proponent may, for example, offer the members of a particular class a 99 per cent recovery or stretch the payments of a 100 per cent recovery over several months. While acknowledging the broad flexibility a debtor has in classifying claims, some courts have declined to approve ‘creative classification’ of this type.[111] Other courts have approved artificial impairment when it is found to be necessary to achieve an effective reorganisation.[112] With no certainty as to likely outcomes in any given case, the plan proponent should be circumspect about exposing any prepackaged plan to challenge by objecting parties on the ground of artificial impairment.
In addition, if the plan must be confirmed under Section 1129(b) (i.e., ‘crammed down’ on at least one rejecting class), the plan proponent must demonstrate that the plan does not ‘discriminate unfairly’ against the rejecting class.[113] As prepackaged plans often classify trade creditors separately and provide for their payment in full, other unsecured creditors may argue that the plan unfairly discriminates against them. While Section 1129(b)(1) of the Bankruptcy Code prohibits only unfair discrimination among similarly situated creditors, the plan proponent must be able to demonstrate why the proposed discrimination is rationally based and necessary for successful reorganisation.[114]
Feasibility
Critical to the confirmation of any Chapter 11 plan is a showing by the plan proponent that the plan is ‘feasible’ (i.e., that it is ‘not likely to be followed by the liquidation, or the need for further financial reorganization’ of the debtor unless that liquidation or reorganisation is part of the plan).[115]
Feasibility can be subject to challenge in the prepackaged plan context due to the same summary approach and expedited timeline that render prepackaged plans otherwise desirable. To streamline confirmation of a prepackaged Chapter 11 plan, the plan proponent will likely be inclined to allow as many contingent or unliquidated claims (e.g., potentially significant environmental claims) as possible to ‘roll’ or ‘ride’ through bankruptcy (i.e., continue unimpaired) and, therefore, be enforceable after reorganisation. If, however, too many contingent or unliquidated claims remain after reorganisation, an objecting creditor might argue that the debtor’s future operations will be undermined and there will be a need for a further reorganisation. If a court agrees, the plan will fail to meet the feasibility requirement. Accordingly, a debtor must balance the need to minimise the time spent on claims litigation while maximising the amount of liabilities that are discharged under the plan.
Choice of venue and local guidelines
The bankruptcy courts for the Southern District of New York and the District of Delaware are, by a large margin, the venues of choice for debtors seeking to file prepackaged Chapter 11 plans.
General venue considerations
In Delaware, the bankruptcy bench is very experienced in dealing with prepackaged bankruptcies. Nationwide, more than half of all prepackaged bankruptcies are filed in Delaware and, by some accounts, this is twice as many as have been filed in New York.[116]
However, there are also at least two drawbacks to filing in Delaware. The first is that the District of Delaware, unlike the Southern District of New York, does not have any specific local rules governing prepackaged bankruptcy cases.[117] The second is that, at least by some measures, prepackaged bankruptcies in Delaware have had, at various junctures, the highest rate of failure in the nation, with one study (evaluating prepackaged cases filed between 1991 and 1996) having concluded that more than 64 per cent of these plans failed.[118] More recent studies show that success rates in Delaware as well as elsewhere have improved in the ensuing years, but a material risk of failure (i.e., finding it necessary to file for Chapter 11 a second time) remains.[119]
The United States Bankruptcy Court for the Southern District of New York has bankruptcy judges with substantial experience in handling mega-cases of national importance, including many filed on a prepackaged basis.[120] In addition, as discussed below, it also has specific local rules governing procedures for prepackaged bankruptcies.[121]
Still, according to the same 2002 study, more than 33 per cent of prepackaged plans filed in New York failed, a far lower percentage than in Delaware, but still higher than the 20 per cent average rate of failure that prepackaged bankruptcies had in all states other than Delaware and New York.[122] As in Delaware, the long-term success rate of these plans in New York has improved, but a non-de minimis risk of failure remains.[123]
Local guidelines
In an effort to facilitate uniformity of results and to avoid unnecessary litigation, the United States Bankruptcy Court for the Southern District of New York (among other districts) has promulgated procedural guidelines (the SDNY Guidelines) for commencing and administering prepackaged Chapter 11 cases filed in that district, which, along with Delaware, is the venue of choice for most large Chapter 11 debtors.[124] The SDNY Guidelines are, in large measure, advisory and, more specifically, provide direction with respect to, among other topics:
- pre-filing notification to the US Trustee and the court clerk;[125]
- the retention of professionals;[126]
- balloting and soliciting procedures;[127]
- disclosure regarding the prepackaged plan;[128]
- first day motions and orders;[129]
- creditor committee meetings;[130] and
- notice requirements.[131]
General SDNY Guidelines
The SDNY Guidelines deal, for the most part, with practical matters, including information about filing documents and establishing a confirmation schedule, and are intended to streamline the process of commencing and administering a prepackaged Chapter 11 case.
Specific SDNY Guidelines include guidance as to the following.
| Guideline | Topic |
|---|---|
| II | Definition of prepackaged Chapter 11 case |
| III, VI | Motions filed to commence a prepackaged Chapter 11 case |
| IV | Type of notice to be given and to whom upon filing prepackaged case |
| VII | Solicitation procedures for prepackaged plan, including information about the voting period, ballots and notice |
| VIII | Organisational meetings and, in particular, the Section 341 Meeting |
| IX | Proofs of claim |
| X | Notice of hearing procedures |
First day filings
In addition to the petition and the standard first day pleadings,[132] the first day filings in a prepackaged case generally include the following.
| SDNY Guideline | First day filing |
|---|---|
| II | Chapter 11 plan and related disclosure statement, in the form presented to and accepted by the requisite number of creditors[133] |
| III.A | Motion to set joint hearing for approval of disclosure statement and confirmation. This motion is generally referred to as the pre-pack scheduling motion and is intended to not only request the scheduling of the joint hearing on the approval of the disclosure statement and the confirmation of the proposed prepackaged plan, but also to: (1) obtain approval for the debtor’s solicitation of votes to accept or reject the plan; (2) confirm that the requisite acceptances of the plan have been obtained; and (3) clarify, in the event of a cramdown, that the debtor is requesting that the court approve its plan pursuant to Section 1129(b) of the Bankruptcy Code.[134] |
| VI.C.16 | Motion for authority to pay general unsecured claims in the ordinary course of business. This motion discloses the types of claims the debtor proposes to pay (generally trade creditors supplying goods or services) and explains that paying them is justified because these creditors are expected to receive payment in full under the plan.[135] |
| VI.C.4 | Motion to waive filing of schedules of assets and liabilities and statements of financial affairs pending confirmation of the plan. This motion requests an order dispensing with the requirement that the debtor file schedules and statements of financial affairs in the event the debtor is not seeking to bar and subsequently discharge all or certain categories of debt.[136] |
Timeline considerations and factors
Indicative timeline for typical prepackaged case
As a general matter, a prepackaged Chapter 11 plan can be confirmed within 30 days of filing the Chapter 11 petition, in accordance with the following indicative timeline.
| Date[137] | Event | Description |
|---|---|---|
| -365 | Negotiation of plan | Debtor undertakes, sometimes over a period of many months, to negotiate terms of plan with all creditors whose claims will be altered or impaired by the plan |
| -30 | Solicitation commences | After negotiations have concluded and agreement has been reached on the terms of the plan and form of disclosure statement, but prior to filing any Chapter 11 petitions, the debtor commences solicitation with a voting deadline set approximately 30 days later |
| 0 | Chapter 11 case filed | If the debtor obtains votes sufficient to confirm the proposed prepackaged plan, then, on the voting deadline or shortly thereafter, the debtor will file its Chapter 11 petition, plan, disclosure statement and first day pleadings |
| +2 | First day hearing | Subject to the bankruptcy court’s calendar, but generally within two days of the Chapter 11 petition filing, a first day hearing will take place. At that hearing, the court will consider the pre-pack scheduling motion and other first day pleadings and, subject to any objections thereto, enter orders (1) scheduling the joint disclosure statement and confirmation hearing, as well as the objection deadlines relating thereto; and (2) granting the relief requested in the other first day pleadings. |
| +30 | Disclosure statement/ plan objection deadline | In compliance with Bankruptcy Rule 2002, the deadline to object to the adequacy of the disclosure statement and confirmation of the plan is generally set at least 28 days after the first day hearing, and the confirmation hearing generally takes place five to seven days thereafter |
| +35 | Confirmation hearing | Confirmation hearing is held, any objections resolved and the confirmation order is entered |
| +35–+49 | Possible stay of confirmation order | Bankruptcy Rule 3020(e) provides for a stay of the confirmation order for 14 days, but courts are often willing to order a shorter stay or waive the stay entirely[138] |
| +40–+54 | Effective date | After the stay expires or has been waived – and subject to the satisfaction of any documentation or other conditions precedent – the debtor may consummate the plan (with the date on which this occurs usually referred to as the ‘effective date’)[139] |
Expedited confirmation and consummation
The foregoing indicative timeline notwithstanding, prepackaged Chapter 11 plans have been, and continue to be, confirmed and consummated on more expedited timelines, as illustrated by the following list of prepackaged Chapter 11 cases.
| Case | Court | Filing date | Confirmation | Duration |
|---|---|---|---|---|
| In re Lumileds Holding BV, No. 22-11155 (LGB) | S.D.N.Y. | 29 August 2022 | 14 October 2022 | 46 days |
| In re Carestream Health, No. 22-10778 (JKS) | D. Del. | 23 August 2022 | 28 September 2022 | 36 days |
| In re OSG Holdings Inc, No. 22-10718 (JTD) | D. Del. | 6 August 2022 | 29 August 2022 | 23 days |
| In re Hospitality Investors Trust, Inc, No. 21-10831 (CTG) | D. Del. | 19 May 2021 | 23 June 2021 | 35 days |
| In re Sundance Energy Inc, No. 21-30882 (DRJ) | S.D. Tex. | 9 March 2021 | 19 April 2021 | 42 days |
| In re Belk, Inc, No. 1-30630 (MI) | S.D. Tex. | 23 February 2021 | 24 February 2021 | 16 hours |
| In re Highpoint Res Corp, No. 21-10565 (CSS) | D. Del. | 14 March 2021 | 18 March 2021 | 4 days |
| In re Guitar Ctr, Inc, No. 20-34656 (KRH) | E.D. Va. | 21 November 2020 | 17 December 2020 | 26 days |
| In re Chaparral Energy, Inc, No, 20-11947 (MFW) | D. Del. | 16 August 2020 | 1 October 2020 | 46 days |
| In re Mood Media Corp, No 20-33768 (MI) | S.D. Tex. | 30 July 2020 | 31 July 2020 | 1 day |
| In re BroadVision, Inc, No. 20-10701 (CSS) | D. Del. | 30 March 2020 | 15 May 2020 | 46 days |
| In re Sungard Availability Servs Cap Inc, No. 19-22915 (RDD) | S.D.N.Y. | 1 May 2019 | 2 May 2019 | 19 hours |
| In re Jones Energy, Inc, No. 19-32112 (DRJ) | S.D. Tex. | 14 April 2019 | 6 May 2019 | 22 days |
| In re FullBeauty Brands Holding Corp, No. 19-22185 (RDD) | S.D.N.Y. | 3 February 2019 | 5 February 2019 | 1 day |
| In re Arsenal Energy, No. 19-10226 (BLS) | D. Del. | 3 February 2019 | 13 February 2019 | 10 days |
| In re David’s Bridal, Inc, No. 18-12635 (LSS) | D. Del. | 19 November 2018 | 4 January 2019 | 46 days |
| In re Gastar Expl Inc, No. 18-36057 (MI) | S.D. Tex. | 31 October 2018 | 20 December 2018 | 50 days |
| In re Mattress Firm, Inc, No. 18-12241 (CSS) | D. Del. | 5 October 2018 | 16 November 2018 | 42 days |
| In re Remington Outdoor Co, Inc., No. 18-10684 (BLS) | D. Del. | 25 March 2018 | 4 May 2018 | 40 days |
| In re Rand Logistics, No. 18-10175 (BLS) | D. Del. | 29 January 2018 | 28 February 2018 | 30 days |
| In re Global A&T Electronics Ltd, No. 17-23931 (RDD) | S.D.N.Y. | 17 December 2017 | 22 December 2017 | 4 days |
| In re Roust Corp, No. 16-23786 (RDD) | S.D.N.Y. | 30 December 2016 | 6 January 2017 | 6 days |
| In re Southcross Holdings, No. 16-20111 (CSS) | S.D. Tex. | 27 March 2016 | 11 April 2016 | 15 days |
| In re Elec Components Int’l, Inc, No. 10-11054 (KJC) | D. Del. | 30 March 2010 | 11 May 2010 | 41 days |
| In re True Temper Sports, Inc, No. 09-13446 (PJW) | D. Del. | 8 October 2009 | 30 November 2009 | 53 days |
| In re JGW Holdco, LLC, No. 09-11731 (CSS) | D. Del. | 19 May 2009 | 1 June 2009 | 13 days |
| In re Davis Petroleum Corp, No. 06-20152 (MI) | S.D. Tex. | 8 March 2006 | 10 March 2006 | 3 days |
| In re Blue Bird Body Co, No. 06-50026 (GWZ) | D. Nev. | 26 January 2006 | 27 January 2006 | 2 days |
| In re IWO Holdings, In., No. 05-10009 (PJW) | D. Del. | 4 January 2005 | 7 February 2005 | 34 days |
| In re Choice One Commc’n Inc, No. 04-6433 (RDD) | S.D.N.Y. | 5 October 2004 | 9 November 2004 | 35 days |
With these cases, among others, as precedents, we appear to have entered the era of what one industry veteran has called the ‘super speedy’ pre-pack.[140] As a result, it is no longer atypical for prepackaged Chapter 11 plans to be confirmed and consummated within weeks or even days of filing. Eight of the 15 filings that exited from Chapter 11 protection through a plan of reorganisation in the first quarter of 2019 were prepackaged plans that, on average, took just 44 days from filing to emergence.[141]
It could be argued that ‘super speedy’ pre-packs are not a novel phenomenon and simply reflect the ever-increasing ability of motivated debtors and supportive creditors to consummate all the preparations and negotiations required to confirm, with the aid of willing judges, Chapter 11 plans prior to filing – continuing a trend of shorter case lengths based upon pre-packs that has been developing for a number of years.[142] However, this assessment would not tell the full story, as the debtors implementing ‘super speedy’ pre-packs all appear to have been presented with case attributes that facilitated these expedited paths through the Chapter 11 process. By way of a common denominator, these cases, while large, featured relatively simple capital structures, with few creditor classes and an indisputable fulcrum security.
FullBeauty Brands, for example, was an online apparel retailer with no problematic bricks-and-mortar footprint, that had a pre-filing capital structure comprised solely of a small asset-based lending and ‘first lien, last out’ loans, a US$780 million first lien term loan and a US$345 million second lien term loan,[143] and Belk Inc, another retailer, had a pre-filing capital structure consisting largely of a US$999.45 million first lien term loan and a US$550 million second lien term loan.[144] Similarly, the US$1.3 billion prepetition capital stack in the Sungard case comprised a small revolver, two first lien term loans with an aggregate outstanding balance of US$800 million and a US$425 million unsecured note issue, and required the support of just two impaired voting classes for confirmation,[145] while Jones Energy’s pre-filing capital stack of US$1 billion largely consisted of a US$450 million first lien senior secured note and two unsecured notes with an aggregate outstanding balance of US$550 million.[146]
Each of these plans had the overwhelming (in some cases, near-unanimous) support of affected creditors, which generally included well-organised groups of distressed investors prepared to convert their debt to equity and, in the process, assume ownership of the relevant debtors after emergence from Chapter 11 protection.[147] In addition, these distressed investors had committed debtor-in-possession, exit, backstop financing to support the relevant Chapter 11 plans, thereby reducing the time, expense and uncertainty that might have ensued if financing had been sought elsewhere.[148]
Finally, in each of these cases, the claims of general unsecured creditors were treated as unimpaired, with the relevant plans providing that these creditors receive either cash recoveries in full or reinstatement.[149] For these creditors, including suppliers of merchandise and services, it was as if the relevant Chapter 11 filings had never occurred, which minimised any potential for business disruption resulting from loss of vendor support. Senior creditors (mostly distressed investors with large positions bought at significant discounts to face value), which were first in line but still impaired and willing to be equitised, essentially gifted part of their recoveries to junior creditors in exchange for pre-filing plan consent and third-party releases or other exculpation provisions. By making these value-sharing concessions up front during pre-filing negotiations, the senior creditors were able to avoid protracted and costly post-filing entanglements and litigation with dissatisfied junior creditors bent on obtaining a better recovery. In so doing, senior creditors materially enhanced the likelihood of an expeditious[150] and relatively conflict-free confirmation of their respective prepackaged plans.[151]
Alternative to prepackaged Chapter 11 plan: the prenegotiated plan
If the parties have failed to reach an agreement with respect to a prepackaged plan, the next best alternative is a ‘prenegotiated’ or ‘prearranged’ plan.
In a prenegotiated scenario, the company negotiates a Chapter 11 plan with certain of its creditors prior to filing for bankruptcy protection, but does not solicit votes prior to the petition date. Instead, the company typically files the plan and the corresponding disclosure statement simultaneously with the filing of its petition, or shortly thereafter, obtains approval of the disclosure statement from the bankruptcy court, and only then solicits acceptances on the proposed plan.
Advantages and disadvantages
A prenegotiated case lies somewhere on the spectrum between a prepackaged case and a traditional Chapter 11 case: it has fewer of the advantages of a prepackaged case, but also fewer of the disadvantages. For example, a prenegotiated case generally takes more time than a prepackaged case, but less time than a traditional case.[152] Similarly, because negotiations have occurred but solicitation has not, there is less certainty and more execution risk in a prenegotiated case than in a prepackaged case, but more than in a traditional case. A prenegotiated case, in contrast to a prepackaged case, gives the debtor an opportunity to impair trade claims and use some of the bankruptcy powers. As such, a prenegotiated case may be preferable to a prepackaged case for a company that has operational issues for which it needs to use the Bankruptcy Code tools discussed above.
Plan support agreements
Indispensable to any prenegotiated case is the execution of a ‘plan support agreement’ with key stakeholders prior to the filing for bankruptcy protection.[153] These agreements are also called lock-up agreements or restructuring support agreements. The plan support agreements bind those stakeholders to support the debtor’s restructuring on the terms, and subject to the conditions, contained in a term sheet that is usually attached to the agreements. The conditions typically include the receipt of a court-approved disclosure statement, the lack of a material adverse change in the debtor’s business and compliance with agreed-upon ‘milestones’ for various events that must take place in the bankruptcy case. For their part, the ‘locked up’ creditors agree not to transfer their claims unless their transferees agree to be bound by the terms of the plan support agreement.
These types of agreements are important for both debtors and creditors. They give comfort to the debtor that creditors will remain committed to the restructuring that was negotiated, while at the same time providing a guarantee to the consenting creditors that other creditors will not change their minds later. It is important to note that plan support agreements are likely not enforceable against the debtor as it is unlikely that a court would bind a debtor to a particular course of action. Thus, these agreements primarily create contractual obligations among creditors that can be enforceable against a breaching creditor (at least for damages, if not specific performance).
In general, prepetition plan support agreements have not been controversial. In fact, bankruptcy courts have held that they do not have jurisdiction over these agreements.[154] In certain jurisdictions, however, creditors that sign prepetition plan support agreements may be barred from serving on an official committee of unsecured creditors. The rationale is that members of the creditors’ committee are fiduciaries whose duties in representing all unsecured creditors must remain unfettered. For example, the US Trustee for the District of Delaware has taken the position that any creditor that executes a prepetition lock-up agreement is ineligible to serve on a US Trustee-appointed creditors’ committee.[155] In the Southern District of New York, however, the US Trustee does not consider the execution of a lock-up agreement as necessarily fatal to membership on the creditors’ committee. However, the lock-up agreement must explicitly provide that if the creditor is appointed to the committee, it will remain free to exercise its fiduciary duties (i.e., it must have a ‘fiduciary out’) without violating the terms of the lock-up agreement.
Postpetition plan support agreements, on the other hand, have been a source of controversy, although they have become more acceptable in recent years. In the past, courts had found these agreements to be unenforceable under the rationale that their use impermissibly bypasses the requirements of Section 1125(b) of the Bankruptcy Code, which prohibits a debtor from soliciting votes on the plan until after the court has approved a disclosure statement.[156] In each of these cases, the votes of the creditors that were parties to the postpetition lock-up agreement were designated under Section 1126(e) of the Bankruptcy Code.[157] However, more recently, in the Indianapolis Downs case, a Delaware bankruptcy court declined to designate the votes of parties to a postpetition plan support agreement.[158] Although the court in Indianapolis Downs did not explicitly disagree with the two prior Delaware decisions cited above, it sought to limit them to their facts and stated that they were ‘of only the most limited (if any) precedential value’.[159] Other courts appear to have adopted a similar view.[160] As a result, it has become more common in recent years for debtors to seek court approval of plan support agreements,[161] including through motions seeking the assumption of prepetition plan support agreements.[162]
The future of prepackaged Chapter 11 plans
The future of prepackaged plans in the United States is a matter for debate. At least one commentator has seen in ‘super speedy' pre-packs both the future, and the fulfilment of the past promise, of Chapter 11; naysayers have articulated a different, less optimistic view.[163]
On the one hand – as the Office of the US Trustee and some disenfranchised creditors have argued – prepackaged plan proponents, in seeking to confirm plans on shorter and shorter timetables, have been empowered to ‘race through the Chapter 11 too quickly’,[164] and in the process, decline to ‘provide time for parties-in-interest, governmental agencies, and the Court sufficient to evaluate – let alone respond or object to the Plan’.[165] The Bankruptcy Code, these critics argue, does authorise prepackaged bankruptcy plans ‘in which much of the activity precedes the filing of the Chapter 11 petition(s), but it does not condone debtor(s) seeking to short-circuit the bankruptcy process so as to avoid post-petition scrutiny or to violate basic principles of due process’.[166] The ‘speedier’ and more ‘compressed’ plan timelines become, the more likely it is that parties in interest, governmental agencies and the court will be ‘deprived of their Code- and Rule-given rights to an adequate period of time to evaluate, respond and object to the relevant plan’.[167] Side by side with these concerns about due process has been the question of whether greater speed necessarily yields better results. The compressed time frame, some have argued, may benefit senior creditors, minimise employee and trade union uncertainty, and lessen disruption to operations, but, conversely, there is a risk that accelerated valuations or asset sales can be rushed to closure without being fully market-tested, thereby adversely affecting the recoveries of claim holders at lower levels in the priority waterfall than the senior creditors driving the prepackaged plan process.[168] No study currently exists as to the precise relationship between the expedited duration of today’s Chapter 11 proceedings and the percentage recoveries received by creditors – particularly unsecured creditors – versus historical averages, and, in the absence thereof, the debate as to this issue is likely to continue.[169]
Finally, still other critics have asked whether prepackaged plans are able to accomplish anything other than an expedited balance sheet restructuring.[170] Proponents of pre-packs will argue that business issues are addressed as well, mostly pertaining to the shedding of unfavourable executory contracts and unexpired leases, and that these bankruptcy remedies are available and sometimes invoked in prepackaged cases, thereby improving the business prospects of the reorganised debtor. However, sceptics still tend to view prepackaged plans as quick fixes that do not adequately address the full spectrum of a debtor’s restructuring needs.[171]
Prepackaged plan supporters, by contrast, have argued that properly implemented prepackaged plans bring Chapter 11 back to its roots and afford all parties in interest greater protections than are currently available in the other Chapter 11 contexts. In a world of liquidating Chapter 11 plans and ‘rocket docket’ sales pursuant to Section 363 of the Bankruptcy Code, FullBeauty and Sunguard are among the growing number of debtors that have bucked the trend and used the Chapter 11 process as it was intended – to restructure and afford ‘honest but unfortunate debtor[s]’ the opportunity ‘to start afresh[,] free from the obligations and responsibilities consequent upon business misfortunes’.[172]
FullBeauty and its peer prepackaged cases have not sought to execute traditional reorganisations, whereby debtors spend months (and potentially years) under Chapter 11 protection, moving slowly towards plan confirmation as the culmination of a long, court-supervised process. However, unlike proponents of the accelerated Section 363 sale approach to Chapter 11, they have not fully forsaken the broader mandate and benefits of the Bankruptcy Code.[173] Instead, these debtors seek to leverage options available to any Chapter 11 debtor under the Bankruptcy Code and the Bankruptcy Rules to their own fullest advantage in the prepackaged plan context, thereby reaping many of the benefits of the Bankruptcy Code, while truncating the in-court process, lowering execution risk and minimising bankruptcy costs.[174]
In the final analysis, stakeholders are right to ask whether ‘super speedy’ pre-packs are a sign of things to come as key Chapter 11 constituents increasingly prioritise expedience above other considerations, but these stakeholders should remain wary of concluding that prepackaged Chapter 11 cases can provide a panacea for all fiscal ills.[175] Debtors with complex capital structures, highly fragmented creditor groups or those in dire need of an operational turnaround will not be able to go this route.[176] Hence, it is not feasible for many reorganisations.[177] However, for debtors with the attributes described elsewhere herein, it may be a template that continues to win the approval of the courts, as even those judges with some misgivings about the speed of these proceedings can take comfort in the Section 1129 confirmation protections that continue to apply and, in the end, may be reluctant to stand in the way of an otherwise confirmable plan that enjoys the overwhelming support of diverse creditor groups.
Notes
[1] Dennis F Dunne and Nelly Almeida are partners at Milbank LLP.
[2] Out of the more than 300 cases studied by one commentator with plans confirmed between 2003 and 2016, 22 per cent involved a prepackaged plan. Fitch Ratings, ‘Shrinking Length of U.S. Bankruptcies’ (7 August 2018). Among all public companies listed with assets of US$500 million to US$10 billion and Chapter 11 cases filed between January 2003 and December 2017, the number of prepackaged cases, as a percentage of all public company filings, increased dramatically – from approximately 6 per cent in 2003 to 42 per cent in 2017. See Norman Kinel, ‘The Ever-Shrinking Chapter 11 Case’, eSquire Global Crossing (20 August 2018) (citing BankruptcyData.com (25 September 2019)). Much of this increase has occurred in just the past few years. See ‘BankruptcyData’s 2017 Corporate Bankruptcy Review: Energy & Retail Sectors Dominate; Prepackaged Chapter 11 Bankruptcies Up 75% and Looming Debt Maturities Point to Increased Chapter 11 Activity’, BankruptcyData.com (10 January 2018) (‘2017 also saw a notable uptick in prepackaged or prenegotiated public company Chapter 11 restructurings, with half of the ten largest and 23% of the year’s total bankruptcies employing this technique, a 44% rise from 2016’s 16% of total prepackaged bankruptcies.’); John Yozzo and Samuel Star, ‘For Better or Worse, Prepackaged and Pre-Negotiated Filings Now Account for Most Reorganizations’, 38-NOV Am. Bankr. Inst. J. 18 (November 2018) (reviewing filings of debtors with liabilities greater than US$50 million at the time of filing between 2010 and 2018 and concluding that 44 per cent of ‘cases that emerged from chapter 11 in 2010–18 (191 of 434) were . . . either prepackaged or prearranged/pre-negotiated cases’).
[3] The literature on prepackaged Chapter 11 cases and practice over these four decades has been extensive. Among the more comprehensive (although somewhat out-of-date) articles are: Marcia Goldstein and Sharon Youdelman, ‘Prepackaged Chapter 11 Case Considerations and Techniques’, Int’l Insolv. Inst., 8th Annual International Insolvency Conference, 9–10 June 2008; Ronit J Berkovich and Christopher Hopkins, ‘Prepackaged and Prenegotiated Chapter 11 Cases’ (31 October 2014), in Recent Developments in Distressed Debt, Restructurings and Workouts (PLI 2017); and Nicholas P Saggese and Alesia Ranney-Marinelli, A Practical Guide To Out-Of-Court Restructurings And Prepackaged Plans Of Reorganization (2d ed. 1998). The authors' debt to each of the foregoing in assembling this chapter is acknowledged.
[4] Until 1933, corporate reorganisations involving secured debt were generally undertaken by means of the non-statutory mechanism of the federal equity receivership. See 1 Collier on Bankruptcy ¶ 21.04 (16th ed. 2022); Edward H Levi and James W Moore, ‘Bankruptcy and Reorganisation: A Survey of Changes’, II, 5 U. Chi. L. Rev. 219, 225 (1937).
[5] See 1 Collier on Bankruptcy ¶ 21.04[2][e] (16th ed. 2022); Charles J Tabb, ‘The History of the Bankruptcy Laws in the United States’, 3 Am. Bankr. Inst. L. Rev. 5, 21–23 (1995).
[6] See Law of 22 June 1938, Ch. 575, 52 Stat. 840 (repealed 1978); see generally 1 Collier on Bankruptcy ¶ 20.01(d) (16th ed. 2022).
[7] 1 Collier on Bankruptcy ¶ 20.01(d) (16th ed. 2022); Jackson Report, Receivership and Bankruptcy Proceedings in United States Courts, S. Doc. No. 268, 74th Cong., 2d Sess. 3 (1936).
[8] 1 Collier on Bankruptcy ¶ 20.02 (16th ed. 2022); 7 Collier on Bankruptcy ¶ 1101.01 (16th ed. 2022).
[9] 11 U.S.C. § 1121(a).
[10] id. § 1102(b)(1).
[11] id. § 1126(b).
[12] See Fed. R. Bankr. P. 3018(b); 11 U.S.C. § 1102(b)(1); id. § 1121(a).
[13] In re Crystal Oil Co., Case No. 86-02834 (Bankr. W.D. La. 1986).
[14] See, e.g., In re Anglo Energy, Inc., Case No. 88-B-10360 (BRL) (Bankr. S.D.N.Y. 22 February 1988); In re Circle Express, Inc., Case No. 90-07980 (RLB) (Bankr. D. Ind. 1990); In re La Salle Energy Corp., Case No. 90-05508-H3-11 (LC) (Bankr. S.D. Tex. 1990); In re Southland Corp., Case No. 390-37119-11 (Bankr. N.D. Tex. 1990); In re JPS Textile Grp., Inc., Case No. 91-B-10546 (JAG) (Bankr. S.D.N.Y. 1991); In re MB Holdings, Inc., Case No. 91-B-15617 (BRL) (Bankr. S.D.N.Y. 1992); In re Memorex Telex N.V. & Memorex Telex Corp., Case No. 92-8 (Bankr. D. Del. 7 February 1992); In re Pioneer Fin. Corp., Case No. 99-11404 (LBR) (Bankr. D. Nev. 22 May 2000); In re Choice One Commc’n Inc., Case No. 04-16433 (RDD) (Bankr. S.D.N.Y. 2004); In re MTS, Inc., Case No. 04-10394 (PJW) (Bankr. D. Del. 2004); In re IWO Holdings, Inc., Case No. 05-10009 (PJW) (Bankr. D. Del. 16 March 2005); In re Blue Bird Body Co., Case No. 06-50026 (GWZ) (Bankr. D. Nev. 26 January 2006); In re InSight Health Servs. Holdings Corp., Case No. 07-10700 (BLS) (Bankr. D. Del. 10 July 2007); In re JGW Holdco, LLC, Case No. 09-11731 (CSS) (Bankr. D. Del. 1 June 2009); In re True Temper Sports, Inc., Case No. 09-13446 (PJW) (Bankr. D. Del. 30 November 2009); In re Elec. Components Int’l, Inc., Case No. 10-11054 (KJC) (Bankr. D. Del. 2010); In re Southcross Holdings, LP, Case No. 16-20111 (CSS) (Bankr. S.D. Tex. 11 April 2016); In re Roust Corp., Case No. 16-23786 (RDD) (Bankr. S.D.N.Y. 10 January 2017); In re Global A&T Elecs. Ltd., Case No. 17-23931 (RDD) (Bankr. S.D.N.Y. 25 January 2018); In re Rand Logistics, Inc., Case No. 18-10175 (BLS) (Bankr. D. Del. 28 February 2018); In re Remington Outdoor Co., Inc., Case No. 18-10684 (BLS) (Bankr. D. Del. 4 May 2018); In re Mattress Firm, Inc., Case No. 18-12241 (CSS) (Bankr. D. Del. 16 November 2018); In re Gastar Expl. Inc., Case No. 18-36057 (MI) (Bankr. S.D. Tex. 20 December 2018); In re David’s Bridal, Inc., Case No. 18-12635 (LSS) (Bankr. D. Del. 4 January 2019); and In re Arsenal Energy Holdings LLC, Case No. 19-10226 (BLS) (Bankr. D. Del. 13 February 2019).
[15] Two examples of prenegotiated Chapter 11 cases confirmed expeditiously and with limited complication are: (1) In re Penn-Virginia Corp., Case No. 16-3239 (Bankr. E.D. Va. 11 August 2016), which was filed on 12 March 2016 and confirmed on 11 August 2016; and (2) In re Hexion Holdings, LLC, Case No. 19-10684 (Bankr. D. Del. 26 June 2019), which was filed on 1 April 2019 and confirmed on 26 June 2019. In both cases, prior to filing, the debtors had negotiated plan terms with ad hoc committees of noteholders and secured lenders and reflected these terms in restructuring support agreements executed by the consenting creditors.
[16] Bankruptcy Rule 2002 requires 28 days’ notice of the deadline for filing objections to a disclosure statement and of the hearing to consider approval thereof. Fed. R. Bankr. P. 2002(b). The length of the solicitation period deemed appropriate will vary depending on the number of holders of claims and interests and whether these claims are based on public securities. A 30-day voting period is usually sufficient, but even shorter periods have been proposed and approved. See, e.g., 9 Collier on Bankruptcy ¶ 2002.03 (16th ed. 2022) (‘The 28-day period may be shortened or expanded, as provided by [Bankruptcy] Rule 9006.’); see also, e.g., In re Epic Assoc., V, 62 B.R. 918, 922 (Bankr. E.D. Va. 1986) (acting sua sponte and shortening time on hearing on plan confirmation); In re Holland, 85 B.R. 735, 736–37 (Bankr. W.D. Tex. 1988).
[17] As a result, prepackaged plans are not well suited for debtors in a number of situations, including those: requiring the protection of the automatic stay with respect to prepetition judgments; in need of postpetition financing to continue operations; seeking to shed burdensome contracts or leases through rejection under Section 365 of the Bankruptcy Code; unable to confirm a plan without litigating, estimating or compromising significant unliquidated or contingent claims; and seeking to reorganise operating companies with numerous trade (and not just financial) creditors.
[18] Case No. 14-12391 (MFW) (Bank. D. Del. 20 January 2018).
[19] Case No. 10-11054 (KJC) (Bankr. D. Del. 11 May 2010).
[20] Case No. 05-10009 (PJW) (Bankr. D. Del. 9 February 2005).
[21] Case No. 19-22915 (RDD) (Bankr. S.D.N.Y. 2 May 2019).
[22] Case No. 04-16433 (RDD) (Bankr. S.D.N.Y. 9 November 2004).
[23] A debtor using the dual-track method may either distribute, together with the exchange offer materials, ballots meeting the Bankruptcy Code requirements, or rely on the tender of securities into the exchange offer as ‘votes’ in favour of the Chapter 11 plan. See Fed. R. Bank. P. 3018(c).
[24] Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 3 February 2019).
[25] Case No. 07-10700 (BLS) (Bankr. D. Del. 29 May 2007).
[26] Case No. 04-10394 PJW (Bankr. D. Del. 4 February 2004).
[27] Case No. 99-11404 (LBR) (Bankr. D. Nev. 1999).
[28] 142 B.R. 918 (Bankr. D. Idaho 1992).
[29] The Sunshine debtor chose this course of action because a prepetition solicitation (unlike a postpetition solicitation) must comply with applicable non-bankruptcy law, and the debtor sought to avoid compliance with the California law requirements regarding solicitation of California residents. 142 B.R. at 922; see also 'Procedural Guidelines For Prepackaged Chapter 11 Cases in the United States Bankruptcy Court for the Southern District of New York' § III(d)(ii) (‘The Court may, upon request of the Debtor or other party in interest in an appropriate case, apply some or all of these guidelines to . . . partial prepackaged Chapter 11 cases – i.e., cases in which acceptances of the Debtor’s plan were solicited prior to the commencement of the case from some, but not all, classes of claims or interests whose solicitation is required to confirm the Debtor’s plan.’).
[30] However, in light of the time required to achieve a consensus on the terms of the plan, the aggregate time required by the debtor to consummate a successful restructuring is not necessarily shorter in a prepackaged Chapter 11 case.
[31] By contrast and contingent on the presence of a number of risk factors, including ‘multi-level, multi-issuer debt structures’, ‘legacy liabilities’ and ‘poor timing’, confirmation of traditional Chapter 11 plans can consume considerably more time. Fitch Ratings, 'Shrinking Length of U.S. Bankruptcies' (7 August 2018). Examples of lengthy Chapter 11 cases resulting from ‘complex capital structures’ include: Energy Future Holdings (48 months); Mirant Corporation (29 months); Calpine Corporation (24 months); and Caesars Entertainment Operating Company, Inc. (24 months). ibid. These sprawling Chapter 11 cases involved leveraged buyout transactions, numerous secured and unsecured lenders, complex intercompany transactions or litigious inter-creditor disputes. ibid. Chapter 11 cases where ‘legacy liabilities’ – such as union and labour issues and underfunded pensions plans – have affected the length of cases include: ASARCO LLC (52 months); Interstate Bakeries Corp. (51 months); and UAL Corp. (38 months). ibid. Finally, a prime example of a Chapter 11 case that was the victim of ‘poor timing’ was that of Delphi Corporation – which required almost four years to reach closure, in large part due to its filing for Chapter 11 protection on the eve of a severe industry downturn.
[32] Pursuant to Section 1121(b) of the Bankruptcy Code, ‘only the debtor may file a plan until after 120 days after the date of the order for relief under this chapter’. 11 U.S.C. § 1121(b). Furthermore, if the debtor files a plan within this period, only the debtor has the right to solicit votes on a Chapter 11 plan. id. §1121(c). The purpose of these exclusive rights is to keep the focus on achieving consensus with respect to a single plan, rather than allowing multiple parties to present their own plans for consideration, which might unproductively divert attention from the plan proposed by the debtor. But see Vista Del Mar Assocs., Inc. v. W. Coast Land Fund (In re Vista del Mar Assocs., Inc.), 181 B.R. 422 (B.A.P. 9th Cir. 1995) (permitting a secured creditor to file a plan and ultimately confirming this plan).
[33] Section 1104(c) of the Bankruptcy Code permits the court to appoint an examiner in any case where the debtor’s liquidated, unsecured debts exceed US$5 million. 11 U.S.C. § 1104(c)(2).
[34] Section 1104(a) of the Bankruptcy Code authorises the court to appoint a trustee upon the request of a party in interest ‘for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management’. id. § 1104(a)(1). In addition, a court must order the appointment of a trustee if it ‘is in the interests of creditors, any equity security holders, and other interests of the estate’. id. § 1104(a)(2). Like the appointment of an examiner, the appointment of a trustee is considered to be an extreme remedy, and these appointments can be used by creditors as a tactic to derail a debtor’s control over the plan process.
[35] A creditor’s claim is ‘impaired’ when the plan alters the legal, contractual or equitable rights to which the creditor is entitled on account of the claim. id. § 1124. Generally, unsecured claims are ‘unimpaired’ if they are paid in full, in cash, on the effective date of the plan (and, in solvent-debtor cases, with interest). See In re Texas Rangers Baseball Partners, 434 B.R. 393, 406 (Bankr. N.D. Tex. 2010) (‘[I]f a creditor receives under a plan everything to which the creditor would be entitled in a judgment entered immediately following the plan’s effective date, the creditor is receiving treatment that, as required by section 1124(1), honors all the creditor’s “legal, equitable, and contractual rights.” For the typical unsecured creditor, those rights equate to payment of the debt owed with interest as allowed by law.’). The reasons for prepackaged Chapter 11 plans to leave trade creditors unimpaired are discussed below.
[36] 11 U.S.C. § 521; Fed. R. Bankr. P. 1007.
[37] Pursuant to 28 U.S.C. § 586(a)(3), the Office of the United States Trustee (the US Trustee) is directed to supervise the administration of all Chapter 11 cases, which each regional office does, in part, through the promulgation of operating guidelines, which generally require the filing of ‘monthly operating reports’.
[38] See 11 U.S.C. § 341 (‘Within a reasonable time after the order for relief in a case under [Chapter 11], the United States trustee shall convene and preside at a meeting of creditors.’).
[39] See id. § 341(e) (‘[T]he court, on the request of a party in interest and after notice and a hearing, for cause may order that the United States trustee not convene a meeting of creditors or equity security holders if the debtor has filed a plan as to which the debtor solicited acceptances prior to the commencement of the case.’).
[40] See id. §§ 1102(a)(1), 1103(c)(3).
[41] See, e.g., Adoption of Prepackaged Chapter 11 Amended Guidelines, Admin. Order M-454, at § VIII(C) (Bankr. S.D.N.Y. 2013).
[42] A Chapter 11 debtor is required to pay not only the fees and expenses of its own professionals, but also the fees and expenses of the professionals retained by any official committee. 11 U.S.C. § 1103(a); id. § 330(a). If there is no creditors’ committee, there will be no official committee professionals to pay. However, while the debtor may not be contractually or statutorily obliged to pay its unsecured creditors’ advisers’ fees outside of bankruptcy, as a practical matter, the debtor often agrees to do so to induce its creditors to engage in restructuring negotiations, which necessarily precede the filing of any prepackaged plan.
[43] id. § 1102(b)(1); see also Fed. R. Bankr. P. 2007(b).
[44] As explained in greater detail infra § IV(f)(1), public debt is generally held anonymously (i.e., in ‘street name’), and efforts to reach out to the underlying beneficial holders can be difficult, unlikely to meet with complete success and prohibitively expensive.
[45] 11 U.S.C. § 1126(c).
[46] 26 U.S.C. § 108.
[47] id. § 382(l)(5).
[48] A prepackaged Chapter 11 case usually reflects a consensual understanding between the debtor and key stakeholders arrived at prior to the filing of the Chapter 11 case. However, agreement among the requisite majorities of these creditors does not foreclose the possibility that dissident creditors will emerge and seek to extract additional concessions for their own benefit. See, e.g., In re Seegrid Corp., Case No. 14-12391 (Bankr. D. Del. 27 October 2016) (confirming prepackaged plan over opposition of former CEO and dissident investor group challenging feasibility and other issues); In re Millennium Lab Holdings II LLC, Case No. 15-12284 (Bankr. D. Del. 18 December 2015) (confirming prepackaged plan over objections to third-party liability releases and indemnifications raised by a dissident creditor group and the US Trustee); In re Zenith Elecs. Corp., 241 B.R. 92–98 (Bankr. D. Del 1999) (involving unsuccessful objection of official committee of equity holders and a number of shareholders to adequacy of the debtors’ disclosure statement and confirmation of the plan); In re Southland Corp., 124 B.R. 211 (Bankr. N.D. Tex. 1991) (involving minority group of bondholders that had been outvoted during the prepetition voting successfully challenged the debtors’ solicitation procedures). Whether successful or not, these challenges can delay and potentially derail bargains reflected in the relevant prepackaged plan.
[49] 11 U.S.C. § 1126(b).
[50] Securities Act of 1933, 15 U.S.C. § 77a et seq. (the Securities Act).
[51] Under the Securities Act, ‘security’ is defined as:
[A]ny note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganisation certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
15 U.S.C. § 77b(a)(1).
[52] See id. § 12(a)(2); 15 U.S.C. § 77l(a)(2).
[53] Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (the Exchange Act).
[54] See id. § 18(a); 15 U.S.C. § 78r(a).
[55] See 11 U.S.C. § 1125(b).
[56] See ibid.; H.R. Rep. No. 95-595, at 226–27 (1977), reprinted in 1978 U.S.C.C.A.N., 5963, 6186. In accordance with this flexible standard, Section 1125(a)(1) of the Bankruptcy Code, as amended in 2005, provides that, in determining whether a disclosure statement provides adequate information, the court must consider the complexity of the case, the benefit of additional information to creditors and other parties in interest and the cost of providing the additional information.
[57] See 11 U.S.C. § 1125(a). Requiring the information that would enable a ‘hypothetical’ investor of the relevant class to make an informed judgement about the plan. The issue of truthfulness is subsumed in the larger question of adequacy; if material false statements or omissions are shown to exist, a court can refuse to approve a disclosure statement as inadequate.
[58] Additional requirements that courts have developed include: (1) the circumstances that gave rise to the filing of the bankruptcy petition; (2) the sources of the information provided in the disclosure statement; (3) a disclaimer that no statements concerning the debtor are authorised other than those set forth in the disclosure statement; (4) the condition and performance of the debtor while in Chapter 11; (5) the accounting and valuation method used to produce the financial information; (6) information regarding the future management of the debtor, including compensation to be paid to insiders, directors and officers; (7) an assessment of the collectability of accounts receivable; (8) any financial statements, valuations or pro forma projections relevant to determinations of whether to accept or reject the plan; (9) a discussion of the risks taken by the creditors and interest holders; (10) the estimated amounts to be recovered in connection with avoidable transfers; (11) the tax consequences of the plan; and (12) the debtor’s relationships with its affiliates. See In re Scioto Valley Mortg. Co., 88 B.R. 168, 170–71 (Bankr. S.D. Ohio 1988) (listing factors courts have considered in determining adequacy of information in disclosure statement); see also In re Phoenix Petroleum Co., 278 B.R. 385, 393 (Bankr. E.D. Pa. 2001); In re Westland Oil Dev. Corp. v. MCorp Mgmt. Sols., Inc., 157 B.R. 100, 102 (S.D. Tex. 1993); In re Ferretti, 128 B.R. 16, 18–19 (Bankr. D.N.H. 1991); In re U.S. Brass Corp., 194 B.R. 420, 424–25 (Bankr. E.D. Tex. 1996); In re Metrocraft Publ’g Servs., Inc., 39 B.R. 567, 568 (Bankr. N.D. Ga. 1984) (same).
[59] Gary L Kaplan, ‘Understanding the Chapter 11 Acceptance Process’, Law360 (14 August 2013) (‘A proponent of a prepackaged plan may not have the protection of the safe harbor provision in Section 1125(e) . . . and cannot utilise the securities laws exemption under Section 1145.’); Douglas Foley and James Van Horn, ‘Prepacks on the Rise in Chapter 11 Bankruptcies: Prenegotiated Plans Can Accelerate Reorganizations’ (‘Because the debtor solicited a disclosure statement that had not been previously approved by the Bankruptcy Court, it may not be able to take advantage of the safe harbor protections of Bankruptcy Code Section 1125(e).’); A Ranney-Marinelli and S Feld, ‘Selected Securities Issues For Publicly Held Debtors’, in Southeastern Bankruptcy Law Institute Seminar (March 2009) (citing H.R. Rep. No. 95-595, at 229, reprinted in 1978 U.S.C.C.A.N. 5963 at 6189 (same)).
[60] Compare D Palmer and J Fink, ‘Prepackaged Bankruptcy and Prearranged Bankruptcy Process’, in Recent Developments in Distressed Debt, Restructurings and Workouts – Fallout from the Credit Crunch 2008, at 7 (PLI Comm. L. & Prac. Course Handbook Series No. #19870, 2008) (‘Commentators have argued that the safe harbor does apply to prepackaged bankruptcies based on the plain language of the section.’); Richard M Cieri, et al., ‘Safe Harbor in Uncharted Waters: The Securities Law Exemptions under Section 1125(e) of the Bankruptcy Code’, 51 Bus. Law. 379 (1996) ('[S]ection 1125(e) exemption should be available for solicitations connected with prepackaged plans of reorganization') and Stephen H Case and Mitchell A Harwood, ‘Current Issues in Prepackaged Chapter 11 Plans of Reorganization and Using the Federated Declaratory Judgment Act for Instant Reorganizations’, 1991 Ann. Surv. Am. L. 75, 184–85 (1992) (rejecting the argument that Section 1125(e) should not apply to prepackaged plans of reorganisation), with Kaplan, footnote 59 (‘A proponent of a prepackaged plan may not have the protection of the safe harbor provision in Section 1125(e).’); Steven F Gross and George E B Maguire, ‘Prepackaged Chapter 11 Plans’, in Chapter 11 Business Reorganizations 1994, at 475 (PLI Comm. L. & Prac. Course Handbook Series No. A4-4444, 1994) (stating that prepetition solicitation is subject to the securities laws), and Stephen E Sherman, ‘Overview of Bankruptcy from the Indenture Trustee’s Perspective’, in The Problems of Indenture Trustees and Bondholders 1994: Defaulted Bonds, High Yield Issues and Bankruptcy, at 367 (PLI Comm. L. & Prac. Course Handbook Series No. N4-4582, 1994) (‘Pre-filing solicitation will almost always require SEC review of the proxy materials while post-filing requires only approval of the bankruptcy court under section 1125.’), and Richard M Cieri, et al. (above), at footnote 23 (listing commentators who have implied that Section 1125(e) does not apply to prepackaged plans of reorganisation and citing Karen E Wagner, ‘Representing a Business Debtor’, in Understanding Business, at 51 (PLI Comm. L. & Prac. Course Handbook Series No. A4-4393, 1992)).
[61] 11 U.S.C. § 1125.
[62] id. § 1125(e).
[63] id. § 1126(e).
[64] ibid.
[65] Noted examples of bad faith include: a non-pre-existing creditor ‘purchas[ing] a claim for the purpose of blocking an action against it’, competitors purchasing claims to ‘destroy the debtor’s business in order to further their own’ or a debtor arranging to have an insider purchase claims to entrench its control of the debtor. See Figter Ltd. v. Teachers Ins. & Annuity Ass’n of Am. (In re Figter Ltd.) 118 F.3d 635 (9th Cir. 1997) (citing In re Keyworth, 47 B.R. 966, 971-72 (Bankr. D. Colo. 1985)); In re Holly Knoll P’ship, 167 B.R. 381, 389 (Bankr. E.D. Pa. 1994); In re Applegate Prop., Ltd., 133 B.R. 827, 834–5 (Bankr. W.D. Tex. 1991); In re Allegheny Int’l, Inc., 118 B.R. 282, 289 (Bankr. W.D. Pa. 1990); In re MacLeod Co., 63 B.R. 654, 655 (Bankr. S.D. Ohio 1986). Thus, merely protecting a claim to its fullest extent cannot be evidence of bad faith; there must be some evidence beyond negative impact on other creditors.
[66] 118 B.R. 282 (Bankr. W.D. Pa. 1990).
[67] id. 289–90.
[68] 118 F.3d 635 (9th Cir.), cert. denied, 522 U.S. 996 (1997).
[69] ibid.
[70] id. 638 (quoting Young v. Higbee Co., 324 U.S. 204, 210–11 (1945)).
[71] 63 B.R. 654, 655-56 (Bankr. S.D. Ohio 1986).
[72] 634 F.3d 79 (2d Cir. 2011).
[73] id. 102 (quoting In re Figter Ltd., 118 F.3d 635, 638 (9th Cir. 1997)).
[74] 891 F.3d 848 (9th Cir. 2018).
[75] id. 853(b) (quoting Figter, 118 F.3d at 639).
[76] id. 854; see also Principal Mut. Life Ins. Co. v. Lakeside Assocs. (In re Deluca), 194 B.R. 797 (Bankr. E.D. Va. 1996); 255 Park Plaza Assocs. Ltd. P’ship v. Conn. Gen. Life Ins. Co. (In re 225 Park Plaza Assocs. Ltd.), 100 F.3d 1214 (6th Cir. 1996).
[77] Although most of the cases construing Section 1126(e) of the Bankruptcy Code have addressed plan ‘rejections’, there is case law that appears to mandate that plan ‘acceptances’ also be made in good faith. See, e.g., In re Quigley Co., Inc., 437 B.R. 102, 126, 131–32 (Bankr. S.D.N.Y. 2010) (designating votes under Section 1126(e) after finding that the debtor’s non-debtor parent ‘wrongfully manipulated the voting process to assure confirmation of the [debtor’s] plan, and thereby gain the benefit of the channeling injunction for itself’); In re Machne Menachem, Inc., 233 F. App’x 119, 120 (3d Cir. 19 April 2007) (upholding order vacating confirmation of Chapter 11 plan because an insider purchased unsecured claims to ensure that impaired unsecured class would vote in favour of the plan); In re Wiston XXIV, L.P, 153 B.R. 322, 326 (Bankr. D. Kan. 1993) (involving promise by secured creditor, in exchange for lessor’s vote, that it would not attempt to recover prepetition transfers from, and would make additional payments to, lessor); In re Applegate Prop., Ltd., 133 B.R. 827, 832 (Bankr. W.D. Tex. 1991) (disqualifying votes cast by insider as to claims acquired for purposes of confirming plan); In re Featherworks Corp., 25 B.R. 634, 640–41 (Bankr. E.D.N.Y. 1982) (disallowing vote in postpetition context, where it appeared that votes were ‘bought’ by the debtor’s parent), aff’d, 36 B.R. 460 (E.D.N.Y. 1984).
[78] Fed. R. Bankr. P. 3018(b).
[79] id. 3017(e).
[80] See e.g., In re Pioneer Fin., Corp., 246 B.R. 626 (Bankr. D. Nev. 2000) (denying confirmation of plan where debtor solicited votes from registered holders of bonds only); In re City of Colo., Springs Spring Creek Gen. Improvement. Dist., 177 B.R. 684, 691 (Bankr. D. Colo. 1995) (same); In re Tenn-Fla Partners, 1993 Bankr. LEXIS 789, 6 (Bankr. W.D. Tenn. 29 April 1993) (same); In re Southland Corp., 124 B.R. 211, 221–223 (Bankr. N.D. Tex. 1991) (ordering a re-solicitation of the vote to reach beneficial holders).
[81] Bankruptcy Rule 1007(i) provides, in relevant part, that ‘[a]fter notice and hearing and for cause shown, the court may direct any entity other than the debtor or trustee to disclose any list of security holders of the debtor in its possession or under its control, indicating the name, address and security held by any of them’.
[82] 11 U.S.C. § 1126(c).
[83] Fed. R. Bankr. P. 1017(i).
[84] Fed. R. Bankr. P. 3018(b).
[85] See 17 C.F.R. § 240.14e-1(a) (2005).
[86] id. § 240.14a-6(a).
[87] In In re Southland Corp., for example, the bankruptcy court found the then applicable securities laws standard of 10 days to be ‘unreasonably short’. 124 B.R. 211, 227 (Bankr. N.D. Tex. 1991). Essential to the court’s conclusion was the recognition that, while record owners might have 10 days to engage with the debtors, the beneficial owners (to whom the record owners were to distribute the solicitation materials) would have at most only eight days from their receipt of the materials to respond. ibid. The Southland court ordered re-solicitation, and, invoking the Bankruptcy Rule 2002 standard that would apply to traditional postpetition solicitations, required that the debtor provide a minimum of 25 days’ notice. See In re Remington Outdoor Co., Inc., Case No. 18-10684 (BLS) (Bankr. D. Del. 4 May 2018) [Docket No. 248] (involving postpetition approval of commencement of solicitation period prior to petition date); In re Roust Corp., Case No. 16-23786 (RDD) (Bankr. S.D.N.Y. 10 January 2017) [Docket No. 41] (noting that recently amended Bankruptcy Rules provide for 28 days’ notice as to disclosure statement/confirmation hearing, but holding that the Bankruptcy Rules do not require that relevant 28 days’ notice period commence after petition date; instead, the notice period can commence prepetition).
[88] Section 1125(g), which was added to the Bankruptcy Code by amendments enacted in 2005, eliminates any uncertainty as to whether a debtor that began solicitation of its prepackaged plan prior to filing its petition can continue solicitation postpetition in the absence of a court-approved disclosure statement by providing that ‘acceptance or rejection of the plan may be solicited from a holder of a claim or interest if such solicitation complies with applicable nonbankruptcy law and if such holder was solicited before the commencement of the case in a manner complying with applicable nonbankruptcy law'. 11 U.S.C. §1125(g).
[89] 15 U.S.C. § 77e. Various states’ ‘blue sky’ laws contain similar restrictions.
[90] 11 U.S.C. § 1145(b)(1).
[91] Section 1145(b)(1) of the Bankruptcy Code provides that an entity is an ‘underwriter’ if it:
(A) purchases a claim against, interest in, or claim for an administrative expense in the case concerning, the debtor, if such purchase is with a view to distribution of any security received or to be received in exchange for such a claim or interest; (B) offers to sell securities offered or sold under the plan for the holders of such securities; (C) offers to buy securities offered or sold under the plan from the holders of such securities, if such offer to buy is (i) with a view to distribution of such securities; and (ii) under an agreement made in connection with the plan, with the consummation of the plan, or with the offer or sale of securities under the plan; or (D) is an issuer, as used in [§ 2(11) of the Securities Act], with respect to such securities.
[92] John Bessonette, ‘Investors’ Ability to Receive Freely Transferable Securities in a Plan of Reorganization’, Kramer Levin Debt Dialogue (6 June 2018); Gary L Kaplan, ‘A Close Look at Securities Law Issues in Chapter 11’, Law360 (25 September 2013); Jonathan Friedland, ‘Out-of-court Workouts, Prepacks and Pre-arranged Cases – A Primer’, ABI L.J. (April 2005); Abigail Arms, ‘Current Issues and Rulemaking Projects, in Conducting Due Diligence 1996’, at 747, 871 (PLI Corp. L. & Prac. Course Handbook Series No. B4-7131, 1996); Timothy R Pohl et. al., ‘Out-of-Court Restructurings and Prepackaged Plans, in Dealing With Secured Claims & Structured Financial Products In Bankruptcy Cases’, at 443–44 (PLI Comm. L. & Prac. Course Handbook Series No. A0-00HP, 2003).
[93] Arms, footnote 92, at 747, 871; Kaplan, footnote 92, at 2.
[94] A re-solicitation will be required if the plan modification is material and the existing disclosure statement does not sufficiently describe the plan, as modified. See 11 U.S.C. § 1127(c).
[95] The Securities and Exchange Commission (SEC) is required to provide initial comments on filed registration materials within 10 days. Securities Act § 8(b), 15 U.S.C. § 77h(b). It usually takes another two weeks for the company to respond to the comments and for the SEC to declare the registration effective. However, the process of resolving the SEC’s comments can take much longer, depending on, among other considerations, the financial state of the company and whether its debt is privately held.
[96] 15 U.S.C. § 77c(a)(9).
[97] The prohibition on payments applies only to third-party advisers facilitating the exchange, not the security holders. To obtain the holders’ expeditious acceptance of plan terms, early consent fees can be and have been offered to consenting holders both in and outside of the prepackaged Chapter 11 plan context. Outside of Chapter 11, issuers have often sought to ‘create incentives for security holders to tender early’ by establishing an early tender premium (or early consent payment) for debt securities tendered earlier in the tender offer period. See David S Baxter, Restructuring Debt Securities: A Primer for Issuer Tender Offers, Debt Exchange Offers, Repurchases and Other Liability Management Matters (June 2019). In a traditional offer open for 20 business days, the early bird premium, which is commonly expressed as a specific dollar amount per US$1,000 principal amount of tendered debt securities, is provided to security holders that tender in the first 10 business days. ibid. ‘This approach is appealing to issuers because it provides earlier visibility as to the likely success of a debt tender offer (and any related consent solicitation).’ ibid. An issuer typically structures the right to withdraw a tender concurrent with any early tender premium deadline or early consent payment deadline. ibid. The same rationale has supported the use of these premiums in the pre-pack context, generally when the dual-track approach is used. See, e.g., In re Glob. A&T Elecs. Ltd., Case No. 17-23931 (involving a prepackaged plan providing that ‘a portion of the New Secured Notes would be used to fund a forbearance fee payable to the Initial Noteholders and Additional Noteholders that executed the Restructuring Support Agreement by certain milestones’).
[98] Communications between third parties, such as financial advisers, accountants and attorneys hired by the debtor, and the holders of the debtor’s securities are permissible as long as the nature of the communications are limited. For example, it would be permissible for the debtor’s financial adviser to respond to questions from security holders by directing their attention to the responsive portions of the registration materials.
[99] However, this becomes less certain if the employees’ duties are exclusively related to the solicitation (e.g., the employee was hired for that purpose).
[100] Section 1122 of the Bankruptcy Code is meant to ensure that all members of a voting class have similar interests so that the plan, if confirmed, affects all class members similarly. To achieve this objective, Section 1122 prohibits placing disparate types of claims in the same class. 11 U.S.C. § 1122(a) (‘[A] plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.’).
[101] See, e.g., Class Five Nev. Claimants (00-2516) v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648, 656 (6th Cir. 2002); Aetna Cas. & Sur. Co. v. Clerk, U.S. Bankr. Court, New York, NY (In re Chateaugay Corp.), 89 F.3d 942, 950 (2d Cir. 1996); Hanson v. First Bank of S.D., N.A., 828 F.2d 1310, 1315 (8th Cir. 1987); In re Jersey City Med. Ctr., 817 F.2d 1055, 1061 (3d Cir. 1987); In re Draiman, 450 B.R. 777, 803 (Bankr. N.D. Ill. 2011); In re Orchards Vill. Invs., LLC, No. 09-30893, 2010 WL 143706, at *7–8 (Bankr. D. Or. 8 January 2010); In re Sentinel Mgmt. Grp., Inc., 398 B.R. 281, 298 (Bankr. N.D. Ill. 2008); In re Exide Techs., 303 B.R. 48, 78 (Bankr. D. Del. 2003); WHBA Real Estate L.P. v. Lafayette Hotel P’ship (In re Lafayette Hotel P’ship), 227 B.R. 445, 449 (S.D.N.Y. 1998). But see In re Marlow Manor Downtown, LLC, 499 B.R. 717, 725–26 (Bankr. D. Alaska 2013) (holding that the separate classification of claim arising under second-lien promissory note issued by insider separately from various other non-insider unsecured claims was improper); In re Somerset Props. SPE, LLC, 2012 Bankr. LEXIS 3867, at *6 (Bankr. E.D.N.C. 23 August 2012) (holding that assertedly different unsecured claims should be classified in same class); In re National/Northway L.P., 279 B.R. 17 (Bankr. D. Mass. 2002) (holding that general unsecured claims must be classified together); In re Stoneridge Apts., 125 B.R. 794, 796 (Bankr. W.D. Mo. 1991) (holding that similar claims may not be classified separately).
[102] See, e.g., Boston Post Road Ltd. P’ship v. FDIC (In re Boston Post Road Ltd. P’ship), 21 F.3d 477, 483 (2d Cir. 1994) (‘[S]eparate classification of unsecured claims solely to create an impaired assenting class will not be permitted; the debtor must adduce credible proof of a legitimate reason for separate classification of similar claims.’); In re Somerset Props. SPE, LLC, 2012 Bankr. LEXIS 3867, at *6 (Bankr. E.D.N.C. 2012) (‘[I]t is well-established that separate classification may not be created with the sole intent to achieve cram-down.’); accord In re Combustion Eng’g, Inc., 391 F.3d 190, 242–45 (3d Cir. 2004); Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274 (5th Cir.), cert. denied, 506 U.S. 821 (1992); Granada Wines, Inc. v. New England Teamsters & Trucking Ind. Pension Fund, 748 F.2d 42 (1st Cir. 1984).
[103] JPMorgan Chase Bank, N.A. v. Charter Commc’ns Operating, LLC (In re Charter Communications), 419 B.R. 221 (Bankr. S.D.N.Y. 17 November 2009) (authorising separate classification of noteholder and trade claims); In re Calpine, Case No. 05–60200, 2007 WL 4565223 (Bankr. S.D.N.Y. 19 December 2007) (confirming Chapter 11 plan separately classifying convertible unsecured notes claims from general unsecured claims); aff’d, 354 F. App’x 479 (2d Cir. 2009); In re Coram Healthcare Corp., 315 B.R. 321, 350–51 (Bankr. D. Del. 2004) (finding noteholders represented ‘a voting interest that is sufficiently distinct from the trade creditors to merit a separate voice in this reorganization case’); see generally Bruce A Markell, ‘A New Perspective on Unfair Discrimination’, 72 Am. Bankr. L.J. 227 (1998) (noting separate classification proper because ‘it is generally recognised that [t]rade creditors have short–term maturities [and] debenture holders have long-term expectations’).
[104] See 11 U.S.C. § 1124(1).
[105] See, e.g., Solow v. PPI Enters. (U.S.), Inc. (In re PPI Enters. (U.S.), Inc.), 324 F.3d 197, 202 (3d Cir. 2003); In re K Lunde, LLC, 513 B.R. 587, 595–96 (Bankr. D. Col. 2014); Cutliff v. Reuter (In re Reuter), 427 B.R. 727, 773 (Bankr. W.D. Mo. 2010); In re Coram Healthcare Corp., 315 B.R. 321, 351 (Bankr. D. Del. 2004); In re Wilhelm, 101 B.R. 120 (Bankr. W.D. Mo. 1989); In re Am. Solar King Corp., 90 B.R. 808 (Bankr. W.D. Tex. 1988).
[106] See In re Elijah, 41 B.R. 348, 350 (Bankr. W.D. Mo. 1984) (‘Alteration is synonymous with impairment.’).
[107] See Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352 (9th Cir. 1986); see generally Adam J Levitin, Business Bankruptcy: Financial Restructuring and Modern Commercial Markets, at 727 (2d ed. 2019).
[108] See In re Estate of LaRosa, Case No. 03-4115, 2009 WL 1172843 (Bankr. N.D. W. Va. 25 March 2009); In re Eller Bros., Inc., 553 B.R. 10 (Bankr. M.D. Tenn. 1985); In re Barrington Oaks Gen. P’ship, 15 B.R. 952 (Bankr. D. Utah 1981).
[109] See 11 U.S.C. § 1129(a)(10).
[110] See In re Autterson, 547 B.R. 376, 396–97 (Bankr. D. Colo. 2016) (‘Artificial impairment occurs when the plan proponent “causes the class to be impaired without an economic justification for doing so, for the apparent purpose of obtaining the required vote” of an impaired class.’); In re Deming Hospitality, LLC, Case No. 11-12-13377, 2013 WL 1397458 at *2 (Bankr. D.N.M. 5 April 2013) (same); In re Swartville, LLC, 2012 WL 211034, *2 (Bankr. E.D.N.C. 17 August 2012) (noting that ‘artificial impairment’ refers to a scenario where a debtor ‘deliberately impairs a de minimis claim solely for the purpose of achieving a forced confirmation over the objection of a creditor’); see also L & J Anaheim Assocs. v. Kawasaki Leasing Int’l, Inc. (In re L & J Anaheim Assocs.), 995 F.2d 940, 943 (9th Cir. 1993) (noting ‘the plain language of section 1124 says that a creditor’s claim is “impaired” unless its rights are left “unaltered” by the plan’, and ‘[t]here is no suggestion here that only alterations of a particular kind or degree can constitute impairment’); accord In re Greate Bay Hotel & Casino, Inc., 251 B.R. 213 (Bankr. D.N.J. 2000); In re Duval Manor Assocs., 191 B.R. 622 (Bankr. E.D. Pa. 1996).
[111] See, e.g., In re Combustion Eng’g, Inc., 391 F.3d 190, 242–45 (3d Cir. 2004) (remanding for further consideration of artificial impairment and good faith after finding that the use of a class consisting of slightly impaired ‘stub claims’ held by a subset of asbestos claimants that reached a deal with the debtor as the impaired accepting class is problematic); Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274 (5th Cir. 1991) (finding that separate classification of deficiency claims and trade claims was improper in a cramdown plan where, among other things, the plan treated the claims the same), cert. denied, 506 U.S. 821 (1992); Granada Wines, Inc. v. New England Teamsters & Trucking Ind. Pension Fund, 748 F.2d 42 (1st Cir. 1984) (finding that the fact that withdrawal liability does not have the same legal character as other general unsecured claims is not a sufficient basis for distinguishing a pension fund claim from other general unsecured claims where the debtor attempted to use the cramdown provision to support a 50 per cent reduction in withdrawal liability); In re Autterson, 547 B.R. at 397 (finding that where the debtor offered no explanation to justify creating a separate administrative convenience class with only one claim and then impairing the claim by paying US$8,000 instead of US$10,000, the debtor artificially impaired the class); In re Swartville, LLC, 2012 WL 3564171, at *5 (finding a debtor artificially impaired claims where the debtor’s proposed treatment of the claims was to pay them in full within 60 days of the effective date notwithstanding clear testimony of the debtor’s manager that the claims could be paid immediately).
[112] See, e.g., Aetna Cas. & Sur. Co. v. Clerk, U.S. Bankr. Court, New York, NY (In re Chateaugay Corp.), 89 F.3d 942 (2d Cir. 1996); Hanson v. First Bank of S.D., 828 F.2d 1310 (8th Cir. 1987); Conn. Gen. Life Ins. Co. v. Hotel Assocs. of Tucson (In re Hotel Assocs. of Tucson), 165 B.R. 470, 475 (B.A.P. 9th Cir. 1994); L & J Anaheim Assocs. v. Kawasaki Leasing Int’l, Inc. (In re L & J Anaheim Assocs.), 995 F.2d 940, 943 (9th Cir. 1993); In re Club Assocs., 107 B.R. 385, 401 (Bankr. N.D. Ga. 1989), aff’d, 956 F.2d 1065 (11th Cir. 1992).
[113] See 11 U.S.C. § 1129(b)(1).
[114] Courts have struggled to formulate an ‘objective standard’ for the unfair discrimination test. 7 Collier on Bankruptcy ¶ 1129.03(3)(a) (16th ed. 2022). In the Chapter 11 context, some courts have borrowed from the Chapter 13 unfair discrimination rule provided for in 11 U.S.C.§ 1322(b)(1) and proposed a test that examines the factors based on reasonableness of the discrimination. See In re Sutton, 2012 WL 433480 (Bankr. E.D. N.C. 9 February 2012) (surveying competing standards); In re Aztec Co., 107 B.R. 585, 590 (Bankr. M.D. Tenn. 1989) (setting forth ‘four-factor’ test often used for determining whether plan unfairly discriminates against similarly situated creditors). But see In re Mason, 456 B.R. 245, 250 (N.D. W.Va. 2011) (criticising competing tests as to ‘too strict’, ‘too loose’ and ‘too vague’); In re 203 N. LaSalle St., L.P., 190 B.R. 567, 585–86 (Bankr. N.D. Ill. 1995) (rejecting factors applied in Aztec, and instead, considering whether the discrimination is supported by legally acceptable rationale), aff’d sub. nom. Bank of Am., Ill. v. 203 N. LaSalle St. P’ship, 195 B.R. 692 (N.D. Ill. 1996), aff’d sub. nom. In re 203 N. LaSalle St. P’ship, 126 F.3d 955 (7th Cir. 1997), rev.d on other grounds sub. nom. Bank of Am. Nat.l Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434 (1999); In re Lernout & Hauspie Speech Prods., N.V., 301 B.R. 651, 661 (Bankr. D. Del. 2003) (adopting codified test based upon rebuttable presumption that plan is unfairly discriminatory under specified circumstances) (citing In re Dow Corning Corp., 244 B.R. 696, 702 (Bankr. E.D. Mich. 1999)); see generally Stephen L Sepinuck, ‘Rethinking Unfair Discrimination in Chapter 13’, 74 Am. Bankr.L.J., 341, 384–87 (2000).
[115] 11 U.S.C. § 1129(a)(11). This ‘feasibility’ requirement had its origins in the Bankruptcy Act of 1898, which, by virtue of a number of provisions, mandated that the court find that the plan was ‘feasible’. As the United States Supreme Court observed in 1936, in Tennessee Publishing Co. v. American Nat. Bank: ‘However honest in its efforts the debtor may be, and however sincere its motives, the district court is not bound to clog its docket with visionary or impracticable schemes for resuscitation.’ Tennessee Pub. Co. v. Am. Nat. Bank, 299 U.S. 18 (1936). A more recent variation of the same maxim was proffered by the Ninth Circuit Court of Appeals in In re Pizza of Hawaii, in remarking that the purpose of Subsection 1129(a)(11) is ‘to avoid confirmation of visionary schemes which promise creditors more under a proposed plan than the debtor can possibly attain after confirmation’. Pizza of Hawaii, Inc. v. Shakey’s Inc. (In re Pizza of Hawaii, Inc.), 761 F.2d 1374 (9th Cir. 1985) (quoting 5 Collier on Bankruptcy ¶ 1129.02[11] at 1129–34 (15th ed. 1984)).
[116] See Florida-UCLA-LoPucki Bankruptcy Research Database (31 December 2022) (based on a survey of more than 1,000 large, public company Chapter 11 filings involving since 1980, of all prepackaged and prenegotiated Chapter 11 plans filed in New York and Delaware, 66.4 per cent have been filed in Delaware and 33.6 per cent filed in New York). Another survey of public company Chapter 11 filings with more than US$50 million in liabilities at the time of filing (between 2010 and 2018) showed that (1) filings in Delaware accounted for 42 per cent of all Chapter 11 filings; (2) filings in Delaware accounted for 54 per cent of all prepackaged and prenegotiated plan cases; (3) 57 per cent of all cases filed in Delaware were prepackaged and prenegotiated plan filings (104 of 182), versus 44 per cent across all venues; and (4) 34 per cent (61 of 182) of all Delaware filings involved prepackaged plans. See Yozzo and Star, footnote 2, at 3. Additionally, in the past three years, there has been an increase in the amount of prepackaged Chapter 11 plans filed in Texas. See Florida-UCLA-LoPucki Bankruptcy Research Database (31 December 2022).
[117] Mette Kurth, ‘Prepackaged and Prenegotiated Plans of Reorganisation: An Introduction’, at 19 (25 June 2009).
[118] id. 18–19 (citing Lynn M Lopucki and Joseph W Doherty, ‘Why Are Delaware and New York Bankruptcy Reorganizations Failing?’ 55 Vand. L. Rev. 1933, 1975 (2002)); see also Foteini Teloni, ‘Chapter 11 Duration, Preplanned Cases, and Refiling Rates: An Empirical Analysis in the Post-BAPCPA Era’, Am. Bankr. Inst. L. Rev. (2015) (‘[T]he [Lopucki and Doheny] data showed that firms emerging from the generally speedy Delaware Chapter 11 bankruptcies during that period were more likely to refile than companies emerging from other jurisdictions’ reorganisations.’); Edward I Altman, ‘Revisiting the Recidivism – Chapter 22 Phenomenon in the U.S. Bankruptcy System’, 8 Brooklyn J. Corp., Fin. & Comm. Law 253 (2014) (same).
[119] John Yozzo and Samuel Star, ‘Chapter 22 Filings Deserve a More Nuanced Narrative’, 38-NOV Am. Bankr. Inst. J. 30, 76 (November 2019) (concluding that failure rates for Chapter 11 plans generally have remained stable in the 15 to 20 per cent range since 1984. One recent example of this is Sungard Availability Services, which completed a pre-pack in 2019 and filed another Chapter 11. In re Sungard Availability Servs. Cap., Inc., Case No. 19-22915 (RDD) (Bankr. S.D.N.Y. 2019); ibid. (Bankr. S.D. Tex. 2022).
[120] According to one study addressing Chapter 11 cases filed between January 2010 and June 2018 with more than US$50 million in liabilities at the time of filing: (1) Chapter 11 filings in the Southern District of New York accounted for 17 per cent of all filings; (2) these filings accounted for 20 per cent of all prepackaged and prenegotiated plan filings; and (3) 52 per cent of cases (38 of 73) filed in this district were prepackaged and prenegotiated plan filings, versus 44 per cent across all venues. See Yozzo and Star, footnote 2, at Exhibit 1 (Pre-Filings by Venue).
[121] See Kurth, footnote 117, at 20.
[122] id. 19.
[123] See Florida-UCLA-LoPucki Bankruptcy Research Database (31 December 2022) (based on a survey of more than 1,000 large, public company Chapter 11 filings involving (since 1980): 23 of 103 (22.3 per cent) prepackaged Chapter 11 cases that refiled for Chapter 11 five years after emergence; only three of those 23 cases (13 per cent) involved a prepackaged plan previously confirmed by the Southern District of New York Bankruptcy Court).
[124] On 2 February 1999, the Board of Judges for the Southern District of New York adopted General Order 201 (as amended on 24 February 1999 by General Order 203), which set forth original prepackaged Chapter 11 case guidelines, which were amended in 2013 by General Order M-454. See Adoption of Prepackaged Chapter 11 Amended Guidelines, Admin. Order M-454, at § VIII(C) (Bankr. S.D.N.Y. 2013).
[125] Pursuant to the SDNY Guidelines, at least three days prior to filing a prepackaged Chapter 11 case, the debtor should notify the US Trustee and the Clerk of the Court of its intention to file a prepackaged case, and provide to the US Trustee copies of the debtor’s plan and disclosure statement. If possible, the debtor should also provide drafts of all pleadings and corresponding proposed orders to be filed on the petition date (i.e., the ‘first day’ motions) at least one day prior to the filing of the case. SDNY Guidelines § IV(a)–(c).
[126] Under the SDNY Guidelines, it is unnecessary for the debtor to retain, pursuant to Section 327 of the Bankruptcy Code, accountants, investment advisers, vote tabulators, solicitation agents or similar non-legal professionals that were retained by the debtor prepetition and are not seeking additional payments for services provided postpetition. These non-legal professionals may continue to provide nominal services, such as testifying at the debtor’s confirmation hearing; however, if these professionals will be providing substantive services to the debtor, they must be retained pursuant to Section 327 of the Bankruptcy Code. SDNY Guidelines § VI(c)(6).
[127] Among other things, the SDNY Guidelines suggest that a reasonable time period for creditors or equity security holders to cast their acceptances or rejections on the debtor’s plan is: (1) 21 days from the commencement of the mailing of the ballots, in the case of publicly traded securities and all other claims or interests; or (2) 14 days for securities that are not publicly traded or debt that is not evidenced by a publicly traded security. The Guidelines also provide form ballots for both beneficial and record holders, as well as for other claims and interests, to be used in connection with a prepackaged plan solicitation. SDNY Guidelines § VII(a)(1)–(3).
[128] For example, the SDNY Guidelines provide a form to be used to summarise the debtor’s prepackaged plan of reorganisation and to provide notice of the hearing to consider the adequacy of the disclosure statement and confirmation of the plan. SDNY Guidelines, Ex. D.
[129] The SDNY Guidelines provide a list of the typical first day motions, including, but not limited to: a motion setting the deadline for filing proofs of claims or interests; applications to employ appropriate professionals (i.e., attorneys, accountants, financial advisers); and a motion authorising the debtor to obtain postpetition financing, as well as the motions set forth infra § IV(b)(2). SDNY Guidelines § VI(c)(1)–(20).
[130] The SDNY Guidelines state that ‘[t]ypically, no creditors’ committee will be appointed in a Prepackaged Chapter 11 case where the unsecured creditors are unimpaired. However, where members of a prepetition committee seek to serve as a member of an official creditor’s committee, they shall demonstrate to the United States Trustee their compliance with Fed. R. Bankr. P. 2007(b).’ SDNY Guidelines § VIII(c).
[131] The SDNY Guidelines set forth specifications with respect to the contents of the notice to be given to creditors regarding the filing of the debtor’s prepackaged plan and disclosure statement and the hearings to consider the adequacy of the disclosure statement and confirmation of the plan. For example, the notice of the disclosure statement and confirmation hearing must: (1) set forth the date, time and place of the hearing, and the date and time by which objections to the foregoing must be filed and served; (2) include a chart summarising distributions under the plan; (3) set forth the name, address and telephone number of the person from whom copies of the plan and disclosure statement can be obtained (at the debtor’s expense); and (4) state that the plan and disclosure statement can be viewed electronically and explain briefly how electronic access to these documents may be obtained. SDNY Guidelines § X(a)–(d).
[132] Standard first day pleadings include: (1) a motion for joint administration of the debtors’ case; (2) a motion for an order authorising the debtor to maintain its existing bank accounts and cash management system; (3) a motion for an order authorising the debtor to pay prepetition wages, salaries and commissions; (4) a motion for an order authorising payment of prepetition sales and use taxes; (5) a motion for an order authorising payment of prepetition claims relating to insurance programmes; (6) a motion for an order prohibiting utilities from altering, refusing or discontinuing services on account of prepetition claims; (7) a motion for an interim order authorising the debtor’s use of cash collateral or to obtain postpetition financing; (8) a motion for an order authorising the debtor to employ appropriate professionals (e.g., attorneys, accountants, financial advisers); (9) a motion for an order authorising employment and payment without fee applications of professionals used in the ordinary course of business; and (10) a motion for an order establishing procedures for compensation and reimbursement of expenses of professionals and others. SDNY Guidelines § VI.C1-20.
[133] See, e.g., In re Belk, Inc., Case No. 21-30630 (MI) (Bankr. S.D. Tex. 23 February 2021) [Docket No. 10]; In re FullBeauty Brands Holdings Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 3 February 2019) [Docket No. 11]; In re Remington Outdoor Co., Inc., Case No. 18-10684 (BLS) (Bankr. D. Del. 25 March 2018) [Docket No. 13]; In re Vertis Holdings, Inc., Case No. 08-1460 (CSS) (Bankr. D. Del. 15 July 2008) [Docket No. 14].
[134] See, e.g., In re Belk, Inc., Case No. 21-30630 (MI) (Bankr. S.D. Tex. 23 February 2021) [Docket No. 14]; In re FullBeauty Brands Holdings Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 3 February 2019) [Docket No. 23]; In re Remington Outdoor Co., Inc., Case No. 18-10684 (BLS) (Bankr. D. Del. 25 March 2018) [Docket No. 12]; In re Vertis Holdings, Inc., Case No. 08-1460 (CSS) (Bankr. D. Del. 15 July 2008) [Docket No. 21].
[135] See, e.g., In re Belk, Inc., Case No. 21-30630 (MI) (Bankr. S.D. Tex. 23 February 2021) [Docket No. 36]; In re FullBeauty Brands Holdings Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 3 February 2019) [Docket No. 6]; In re Remington Outdoor Co., Inc., Case No. 18-10684 (BLS) (Bankr. D. Del. 25 March 2018) [Docket No. 6]; In re Vertis Holdings, Inc., Case No. 08-1460 (CSS) (Bankr. D. Del. 15 July 2008) [Docket No. 11].
[136] See, e.g., In re Belk, Inc., Case No. 21-30630 (MI) (Bankr. S.D. Tex. 23 Feb 2021) [Docket No. 14]; In re FullBeauty Brands Holdings Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 3 February 2019) [Docket No. 4]; In re Remington Outdoor Co., Inc., Case No. 18-10684 (BLS) (Bankr. D. Del. 25 March 2018) [Docket No. 4]; In re Vertis Holdings, Inc., Case No. 08-1460 (CSS) (Bankr. D. Del. 15 July 2008) [Docket No. 3].
[137] Dates are designated in relation to how many days they occur before (-) or after (+) the relevant Petition Date.
[138] Bankruptcy Rule 3020(e) states that ‘[a]n order confirming a plan is stayed until the expiration of 14 days after the entry of the order, unless the court orders otherwise'. Fed. R. Bankr. P. 3020(e).
[139] Bankruptcy Rule 2002(b) requires ‘not less than 28 days’ notice by mail’ to the debtor, the trustee, all creditors and indenture trustees of the objection deadline and hearings with respect to each of the approval of the disclosure statement and confirmation of the plan. Fed. R. Bankr. P. 2002(b). (Note, however, that under Bankruptcy Rule 2002(l), ‘[t]he court may order notice by publication if it finds that notice by mail is impracticable or that it is desirable to supplement the notice.’) Bankruptcy Rule 3017(d) additionally provides that ‘notice of the time fixed for filing objections and the hearing on confirmation shall be mailed to all creditors and equity security holders in accordance with [Bankruptcy] Rule 2002(b)'. Fed. R. Bankr. P. 3017(d). This separate notice period is included in part because all creditors, including those that are unimpaired under a plan (and thus not eligible to vote on the plan), are entitled to notice of the time fixed for filing objections and notice of the hearing to consider confirmation of the plan. Creditors with claims that ride through the bankruptcy have a right to object to the plan on other grounds, such as feasibility under Section 1129(a)(11) of the Bankruptcy Code. 11 U.S.C. § 1129(a)(11). Similarly, even those classes that are deemed to reject and therefore do not have a vote should have an opportunity to object to the plan. Either of these two notice periods may be reduced for cause shown in the bankruptcy court’s discretion pursuant to Bankruptcy Rule 9006(c). Fed. R. Bankr. P. 9006(c).
[140] Michael Eisenband, ‘The “Super Speedy Prepack” Has Arrived . . . Is that A Big Deal?’ (FTI 2019).
[141] ibid.; see also Dennis A Meloro, et al., ‘The Fast and Laborious: Chapter 11 Case Trends’, ABI Journal (March 2013); James H M Sprayregen, et al., ‘Need for Speed: Utilising Hybrid Solicitation Strategies to Shorten Ch. 11 Cases’, 24 BBLR 1351 (2012); Brian K Tester, et al., ‘Need for Speed: Prepackaged and Prenegotiated Bankruptcy Plans’, ABI 17th Annual Northeast Bankruptcy Conference, 511, 520-521 (2010); Mike Spector, ‘The Quickie Bankruptcy: More Companies Enter Court, and Exit, in a Flash’, Wall Street Journal (5 January 2010).
[142] Fitch Ratings, one of the ‘big three’ credit rating agencies, has confirmed this trend, concluding that the median duration from the date of filing of a Chapter 11 petition to the date of confirmation of a plan of reorganisation or liquidation has been declining significantly in recent years – with four months being the median duration for the 30 US cases studied with plans confirmed in 2017 and five months for the 34 cases studied with plans confirmed in 2016. Fitch Ratings, 'Shrinking Length of US Bankruptcies' (7 August 2018). By contrast, the median duration for the 304 cases that Fitch studied where plans were confirmed between 2003 and early 2018 was seven months, broken down as follows by type of chapter filing: traditional Chapter 11 (11 months); prearranged (or prenegotiated) (four months); and prepackaged cases (two months).
[143] In re FullBeauty Brands Holding Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 3 February 2019) [Docket No. 14 (Disclosure Statement, at 3)].
[144] In re Belk, Inc., Case No. 21-30630 (MI) (Bankr. S.D. Tex. 23 February 2021) [Docket No. 9 (Disclosure Statement, at 2)].
[145] In re Sungard Availability Servs. Cap., Inc., Case No. 19-22915 (RDD) (Bankr. S.D.N.Y. 1 May 2019) [Docket No. 16 (Disclosure Statement, at 1)].
[146] In re Jones Energy, Inc., Case No. 19-32112 (DRJ) (Bankr. S.D. Tex. 14 April 2019) [Docket No. 19 (Disclosure Statement, at 1–2)].
[147] FullBeauty Brands [Docket No. 14 (Disclosure Statement, at 4–5)]; Sungard Availability [Docket No. 16 (Disclosure Statement, at 5)]; Jones Energy [Docket No. 19 (Disclosure Statement, at 5–6)].
[148] FullBeauty Brands [Docket No. 14 (Disclosure Statement, at 5)]; Sungard Availability [Docket No. 16 (Disclosure Statement, at 5)].
[149] FullBeauty Brands [Docket No. 14 (Disclosure Statement, at 2)]; Sungard Availability [Docket No. 16 (Disclosure Statement, at 2)]; Jones Energy [Docket No. 19 (Disclosure Statement, at 6].
[150] As set forth above, the FullBeauty Brands Chapter 11 plan was confirmed in just two days; the Sungard Availability plan in less than one day; and the Jones Energy plan in 22 days.
[151] In the Belk, FullBeauty Brands and Sungard Availability cases, as well as other prepackaged cases, the sole objections filed have come from the US Trustee, who argued that ‘[i]f allowed to proceed on such an accelerated track, the Debtors will have succeeded in depriving parties-in-interest, governmental agencies, and the Court of their Code- and Rule- given rights to an adequate period of time to evaluate, respond and object to the Plan.’ (In re Sunguard Availability Servs. Cap. Inc., Case No. 19-22915 (RDD) (Bankr. S.D.N.Y. 2 May 2019) [Docket No. 37 (U.S.T. Objection, at 2)].) More specifically, the US Trustee argued, without success, that Bankruptcy Rule 3017 requires the court to hold a hearing on at least 28 days’ notice ‘after a disclosure statement is filed in accordance with Rule 3016(b) to the debtor, creditors, equity security holders and other parties in interest as provided in Rule 2002 to consider the disclosure statement and any objections or modifications thereto'. Fed. R. Bankr. P. 3017; Bankruptcy Rule 2002 requires ‘the clerk, or some other person as the court may direct’, to give not less than 28 days’ notice to the debtor and all creditors of the deadline for ‘filing objections and the hearing to consider approval of a disclosure statement . . . and for filing objections and the hearing to consider confirmation of a chapter 9 or chapter 11 plan’. Fed. R. Bankr. P. 2002(b)(1); and Bankruptcy Rule 3020(b)(1) provides that objections to confirmation of a plan must be filed and served ‘within a time fixed by the court’, and that the ‘court shall rule on confirmation of the plan after notice and hearing as provided in Rule 2002’. Fed. R. Bankr. P. 3020(b)(1), (2)); see In re Sunguard Availability Servs. Cap., Inc., Case No. 19-22915 (RDD) (Bankr. S.D.N.Y. 2 May 2019) [Docket No. 37 (U.S.T. Objection, at 11–12]); In re Belk, Inc., Case No. 21-30630 (MI) (Bankr. S.D. Tex. 23 February 2021) [Docket No. 44 (U.S.T. Objection, at 8–10)]; In re FullBeauty Brands Holding Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 4 February 2019) [Docket No. 34 (U.S.T. Objection, at 11–12)].
[152] By way of illustration and as set forth above, the median duration for plans confirmed between 2003 and early 2018 was 11 months for traditional Chapter 11 cases; four months for prearranged (or prenegotiated) cases; and two months for prepackaged cases. Fitch Ratings, 'Shrinking Length of U.S. Bankruptcies' (7 August 2018).
[153] Plan support agreements are also generally obtained in connection with prepackaged plans, but, because the votes are cast prior to the filing of the petition and the plan, these agreements have substantially less significance in that context.
[154] See, e.g., In re NII Holdings Inc., Case No. 02-11505 (MFW) (Bankr. D. Del. 2002) [Docket No. 1] (finding lock-up agreements executed prior to the filing of the bankruptcy to be valid because the court did not have jurisdiction over agreements where the creditors had the opportunity to cast their votes after the bankruptcy court approved the disclosure statement); but see In re Innkeepers U.S.A. Trust, 442 B.R. 227 (Bankr. S.D.N.Y. 2010) (discussed below).
[155] See In re NII Holdings Inc., Case No. 02-11505 (MFW) (Bankr. D. Del. 25 June 2002) [Docket No. 137] (upholding decision of the US Trustee for the District of Delaware refusing to appoint bondholders that signed a lock-up agreement to statutory committee).
[156] 11 U.S.C. § 1125(b); see, e.g., In re NII Holdings Inc., Case No. 02-11505 (MFW) (Bankr. D. Del. 2002) [Docket No. 367] (holding that lock-up agreements executed postpetition violated Section 1125(b) of the Bankruptcy Code); accord In re Stations Holdings, Case No. 02-10882 (MFW) (Bankr. D. Del. 30 September 2002) [Docket No. 177].
[157] See 11 U.S.C. § 1126(e) (‘On request of a party in interest, and after notice and a hearing, the court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title.’).
[158] See In re Indianapolis Downs, LLC (Indianapolis Downs), 486 B.R. 286 (Bankr. D. Del. 2013) (refusing to designate the votes of creditors that signed a postpetition plan support agreement).
[159] id. 295.
[160] See, e.g., In re Residential Cap., LLC, Case No. 12-12020 (MG) (Bankr. S.D.N.Y. 27 June 2013) [Docket No. 4102] (approving postpetition plan support agreement); In re Heritage Org., L.L.C., 376 B.R. 783, 793–94 (Bankr. N.D. Tex. 2007) (refusing to designate the votes of parties that had signed a postpetition agreement to support a particular plan).
[161] The bankruptcy court’s blessing ensures that the court will not designate the votes cast by parties to the plan support agreement as the product of improper solicitation. Seeking court approval may also be seen as evidence of good faith in that it fully discloses the negotiations that have taken place and informs parties in interest (and the public) that a deal has been struck. See, e.g., Indianapolis Downs, 486 B.R. at 297 (‘When a deal is negotiated in good faith between a debtor and sophisticated parties, and that arrangement is memorialised in a written commitment and promptly disclosed, § 1126 will not automatically require designation of the votes of the participants.’).
[162] See, e.g., In re Residential Cap., LLC, Case No. 12-12020 (MG) (Bankr. S.D.N.Y. 11 June 2012) [Docket No. 318]; In re TBS Shipping Servs. Inc., Case No. 12-22224 (RDD) (Bankr. S.D.N.Y. 20 February 2012) [Docket No. 177]; In re MES Int’l, Inc., Case No. 09-14109 (PJW) (Bankr. D. Del. 20 November 2009) [Docket No. 22]; but see In re Innkeepers USA Trust, 442 B.R. 227, 235 (Bankr. S.D.N.Y. 2010) (denying motion to assume prepetition plan support agreement, and stating that ‘without the burden of the restrictions imposed by the plan support agreement, the Debtors will have a wide berth to fulfill their fiduciary duties to conduct a plan process which maximises value for all of the estates and treats the various tranches of debt with greater neutrality’).
[163] Eisenband, footnote 140; see also Meloro, et al., footnote 141; Sprayregen, et al., footnote 141, 1351; Tester, et al., footnote 141, 511, 520–521 (2010).
[164] In re FullBeauty Brands Holding Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 4 February 2019) [Docket No. 34 (U.S.T. Objection, at 2)].
[165] ibid.
[166] ibid.
[167] ibid.
[168] Norman Kinel, ‘The Ever-Shrinking Chapter 11 Case’, eSquire Global Crossing (20 August 2018), at 2; see also see also Foteini Teloni, ‘Chapter 11 Duration, Preplanned Cases, and Refiling Rates: An Empirical Analysis in the Post-BAPCPA Era’, Am. Bankr. Inst. L. Rev., at 8 (2015) (‘Indeed, the quick resolution of Chapter 11 cases, particularly through the implementation of prepackaged reorganisations, might imply that operational problems of the company have been ignored in favor of a swift confirmation of a reorganisation plan that focuses solely on the firm’s financial restructuring. It follows that the company emerges quickly from its Chapter 11, but not truly rehabilitated, incurring, therefore, a greater risk to seek again bankruptcy protection.’).
[169] Kinel, footnote 168, at 2.
[170] Eisenband, footnote 140; Sprayregen, et al., footnote 141, 1351; Tester, et al., footnote 141, 511, 520–521.
[171] Eisenband, footnote 140, at 3; but see Meloro, et al., footnote 141, at 3 (‘The increase in pre-planned and prepackaged cases is largely driven by relatively solvent, viable companies that are seeking to restructure without the potential unknowns of a long, drawn-out chapter 11 case [and] chose this route to avoid spiraling administrative and professional costs as well as to promptly resume business as usual.’).
[172] Norman Pernick and Rebecca Hollander, ‘Recent Prepacks Stay True to Chapter 11’s Intent – with a Speedy Twist’, at 1, TMA Journal of Corp. Renewal (June 2019).
[173] ibid. The main competitor to the prepackaged plan, in terms of other recently popular restructuring tools, has been the Section 363 sale of all or substantially all the debtor’s assets on an accelerated timetable. ibid. Auctions of public companies in bankruptcy have gone, according to one commentator, from being the exception in the 1990s to nearly half of all cases by 2015, and have continued to increase in popularity in ensuing years. See UCLA School of Law, UCLA-LoPucki Bankrutpcy Database (28 September 2019). These sales, moreover, have often been consummated in time frames that rival those found in recent prepackaged plan cases. ibid. RadioShack, for example, was able to auction off more than 1,700 stores as going concerns just 39 days after filing for Chapter 11 relief in 2015. See Stephen B Selbst, ‘RadioShack Dissected: The Decline, Fall and Possible Rebirth’, ABF Journal (March 2016). However, as many commentators have observed, Section 363 sales are often proposed and approved without making available to stakeholders any of the voting, anti-discrimination and fairness protections afforded to these stakeholders when confirmation of a Chapter 11 plan is sought. See American Bankruptcy Institute, ‘Final Report of ABI Commission to Study Reform of Chapter 11’, at 84 (‘The primary concerns of courts and commentators with this practice are premised on the absence of stakeholder protections that are otherwise incorporated into the section 1129 plan process.’); Harvey R Miller and Shai Y Waisman, ‘Is Chapter 11 Bankrupt?’, 47 Boston Coll. L. Rev. 129, 156–57 (2005) (‘[T]he creditor-in-possession phenomenon has certainly contributed to the increasing prevalence of bankruptcy sales [because] [c]reditors often prefer Chapter 11 as a mechanism to facilitate asset sales rather than as a tool for reorganisation, given that immediate sales produce a greater certainty of return.’); Jessica Uziel, ‘Section 363(b) Restructuring Meets the Sound Business Purpose Test with Bite: An Opportunity to Rebalance the Competing Interests of Bankruptcy Law’, 159 U. Pa. L. Rev. 1189, 1214 (2011) (‘Section 363 sales’ expedited process and lesser disclosure requirements make investigation of the purchaser’s behavior vital in order to protect creditors, equity security holders, and debtors from exploitation. Increased potential for abuse threatens creditors’ interests as well as the debtor’s ability to maximise the value of the estate.’); see also In re Fisker Auto. Holdings, Inc., 510 B.R. 55, 60–61 (Bankr. D. Del. 2014) (‘It is the Court’s view that [the stalking horse bidder’s] rush to purchase and to persist in such effort is inconsistent with the notions of fairness in the bankruptcy process. The [debtor’s] failure has damaged too many people, companies and taxpayers to permit [the stalking horse bidder] to short-circuit the bankruptcy process.’).
[174] Pernick and Hollander, footnote 172, at 2.
[175] Marcia Goldstein and Sharon Youdelman, ‘Prepackaged Chapter 11 Case Considerations and Techniques’, Int’l Insolv. Inst., 8th Annual International Insolvency Conference, 9–10 June 2008, at 9 (‘A prepackaged case is not a panacea for all situations of financial distress.’); Sprayregen, et al., footnote 141, 1351, 1352 (‘If a debtor can make the case that a shorter proceeding may result in increased recoveries for stakeholders, [a prepackaged plan effectuated through] Section 1125(g) provides an opportunity to potentially move quickly through Chapter 11.’).
[176] id. 3; Eisenband, footnote 140, at 3.
[177] Teloni, footnote 168, at 8 (‘[T]he quick resolution of Chapter 11 cases, particularly through the implementation of prepackaged reorganisations, might imply that operational problems of the company have been ignored in favor of a swift confirmation of a reorganisation plan that focuses solely on the firm’s financial restructuring [and] that the company emerges quickly from its Chapter 11, but not truly rehabilitated, incurring, therefore, a greater risk to seek again bankruptcy protection.’).