Wednesday, February 27, 2013

Restructuring Support Agreement Not an
Improper Solicitation, Consent to Third Party
Releases Can Be Inferred From Failure to Act

On January 31, 2013 the United States Bankruptcy Court for the District of Delaware, Judge Shannon presiding, issued an important confirmation decision, In re Indianapolis Downs LLC. Two aspects of the decision are of unique importance.

When Indianapolis Downs, a racino in Indiana, filed bankruptcy, it had first lien debt of $98,000,000, second lien debt of $375,000,000 and third lien debt of $78,000,000.  Following the filing of the Debtor’s bankruptcy petition, the Debtor, the holder of the third lien and an Ad Hoc Committee of second lien holders (the “Ad Hoc Committee”) engaged in a process of litigation and negotiation that culminated in a Restructuring Support Agreement pursuant to which the Debtor agreed to pursue a parallel path to either sell or recapitalize the business.  The Restructuring Support Agreement set forth the details of the parallel path, prohibited the parties from supporting opposing plans and required them to vote “yes” for a plan that conformed to the Restructuring Support Agreement.  Thereafter, the Debtor filed its Plan and Disclosure Statement (both of which thoroughly described the Restructuring Support Agreement, which was also filed with the court) and as part of the Debtor’s effort to sell the business, received a bid in excess of $500,000,000 for its assets.

At the hearing to approve the sale and confirm the Plan, the Oliver parties, the out of the money equity and debt holders, objected to confirmation on the ground that, inter alia, the Restructuring Support Agreement was a wrongful post-petition solicitation conducted in the absence of a court-approved disclosure statement and, therefore, the votes of the restructuring support parties should be designated and disqualified.  In such an event, the Debtor would have insufficient votes to confirm its Plan.

The Court reviewed the law on solicitation and drew a distinction between solicitation and negotiation, finding that Chapter 11 is itself an invitation to negotiate.  The Court also noted that these sophisticated parties, with significant knowledge and understanding of the case, were not the type of parties that the solicitation provisions of the Bankruptcy Code were designed to protect.  Further, the Court felt that “solicitation” needed to be narrowly construed to promote creditor’s suffrage.  For these reasons, the Court determined that the Restructuring Support Agreement did not constitute an improper solicitation and that the votes would count.

One other confirmation objection of significance was the objection by the Oliver Parties and the U.S. Trustee that the Plan contained third-party releases that would be binding on creditors who did not affirmably consent, such as creditors who were paid in full and hence unimpaired, creditors who failed to vote, or creditors who voted against the Plan but failed to check the block on the ballot indicating that they would not consent to third-party releases.

Recognizing that case law permits third-party releases where there is “consent,” the Court noted that this issue was whether consent had to be affirmative or whether consent could be inferred from the failure to act.  As to the unimpaired class, the Court had no difficulty concluding that a release would be appropriate for a class that was paid in full.  For the other two categories, the Court found that there was adequate disclosure in the Plan and Disclosure Statement regarding the consequences should a creditor fail to “check the box” and, therefore, consent was implied.

Both of these are nuance issues, but they are of great importance to the Chapter 11 process and this opinion adds certainty for parties in the plan process.

Karen Lee ("Kitt") Turner
Eckert Seamans Cherin & Mellott, LLC
Philadelphia, Pennsylvania

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