“The world is full of obvious things which nobody by any chance ever observes.”
Readers of this blog are probably very familiar with restructuring support agreements, also known as plan support agreements or lock-up agreements (collectively, an “RSA”). After all, RSAs are currently de rigueur in chapter 11 cases, appearing in almost every prearranged, pre-negotiated, or prepackaged filing. In a typical RSA, certain of a debtor’s creditors, who are often instrumental in negotiating the terms of the plan, will agree to affirmatively support and not oppose a debtor’s plan in return for the debtor’s agreement to seek confirmation of the agreed upon plan in accordance with certain milestones. Now I’m sure you, as lawyers and savvy Bankruptcy Blog readers, have at times wondered how strictly a court would interpret the common provision of an RSA that requires creditors not to oppose the debtor’s plan and, perhaps, have even fantasized (likely in the midst of the umpteenth round of late night negotiations with stubborn debtor’s counsel) about what would happen if you simply objected to confirmation of the debtor’s plan. Well never fear dear blog readers, recently the United States District Court for the District of Delaware provided an answer to this most pressing question in Morris Propp II and Morris Propp II Foundation v. Swift Energy Co. when it found in the context of denying an emergency motion for a stay pending appeal that prosecution of a proceeding seeking a reversal of a confirmation order violated the terms of an RSA.
Morris Propp II and Morris Propp II Foundation v. Swift Energy Co. involved a convoluted procedural history. On December 31, 2015, the petition date, the Debtors entered into an RSA with certain of their noteholders. On February 2, 2016, the bankruptcy court approved the Debtors’ $75 million debtor in possession financing facility (the “DIP Facility”) which facility afforded a 7.5% backstop fee to the initial DIP Lenders in return for the agreement made by certain senior noteholders to backstop the entire DIP Facility if syndication was unsuccessful. On March 23, 2016, Appellants, who held approximately $1.07 million of the Debtors’ unsecured notes, objected to confirmation of the Debtors’ plan, arguing that their claim was improperly classified in the Plan because, unlike certain other members of their class, they were not given the opportunity to participate in the syndication of the Debtors’ DIP Facility. In response to Appellants’ confirmation objection, the Debtors provided all of their unsecured noteholders with an opportunity to participate in their DIP Facility and extended the deadline to do so until April 4, 2016. At the confirmation hearing on March 30, 2016, the Debtors informed the bankruptcy court that all of their noteholders, including the Appellants, would be able to participate in the DIP Facility, and the bankruptcy court entered an order confirming the plan and overruling the Appellants’ objection. On April 4, 2016, the Debtors’ claims and noticing agent received subscription documents which indicated that the Appellants intended to participate in the DIP Facility. The subscription documents included a signed joinder agreement to the RSA. Pursuant to the joinder agreement, Appellants became party to the RSA and were required, among other things, to support the plan and not to object to the plan or to take any action inconsistent with confirmation or consummation of the Plan. Notwithstanding the joinder agreement, on April 14, 2016, Appellants filed a notice of appeal of the confirmation order, arguing that (i) the terms of the extended syndication offer were less favorable than the initial syndication offer because it did not include the backstop fee and (ii) the bankruptcy court did not properly consider the merits of their objection (the “First Appeal”). In response, the Debtors filed a motion to enforce the RSA and the Confirmation Order. Appellants filed an objection to the Debtors’ enforcement motion arguing that (i) the bankruptcy court lacked jurisdiction to hear the Enforcement Motion, (ii) the RSA did not prohibit the First Appeal, and (iii) if the RSA did prohibit the First Appeal, it was unconscionable. On May 26, 2016, the bankruptcy court granted the Debtors’ enforcement motion (the “Enforcement Order”). Thereafter, Appellants appealed the Enforcement Order and filed a motion to stay the Enforcement Order pending appeal with both the bankruptcy court and the district court. The bankruptcy court denied the motion to stay on June 2, 2016. The district’s court’s denial of the Appellants’ motion to stay the Enforcement Order pending appeal was entered on June 29, 2016.
Noting that granting a stay pending appeal was discretionary with the court, the district court analyzed the Appellants’ motion to stay the Enforcement Order pending appeal using the following criteria: (i) whether the Appellants had made a strong showing that they were likely to succeed on the merits, (ii) whether the Appellants would be irreparably injured absent a stay, (iii) whether a stay would substantially injure other interested parties, and (iv) where the public interests lie. The district court quickly dispensed with the first two factors, finding that the Appellants did not make a strong showing of a likelihood of success on the merits or that they would be irreparably injured absent a stay, and, citing the Third Circuit’s recent decision in In re Revel AC, Inc. which adopted a sliding scale approach in applying the factors, found that consideration of the remaining factors was unnecessary because the Appellants did not make the requisite showing under the first two, most critical, criteria. Notably, in analyzing Appellants’ likelihood of success on the merits, the district court gave short shrift to the Appellants’ arguments that the First Appeal did not violate the RSA and that any limitation on a party’s right to appeal the RSA was unconscionable. The district court found that based on a plain reading of the terms of the RSA, Appellants’ prosecution of the First Appeal clearly violated the terms of the RSA. The district court also found that the RSA provisions which limited the Appellants’ right to appeal the confirmation order were neither procedurally nor substantively unconscionable, noting, among other things, that Appellants were sophisticated investors who freely chose to enter into the subscription documents, including the joinder agreement, in order to participate in the DIP Facility and that the provisions in the RSA requiring the Appellants to support the plan were unambiguous. The district court found that Appellants were the victims of “their own attempt to hedge their own bets” and that “[h]aving committed to support the Plan under the RSA, Appellants cannot now have it both ways: Appellants cannot maintain their appeal of the Confirmation Order, in an attempt to receive more favorable treatment, while at the same time maintaining the benefits they will receive under the RSA and Plan should their appeal be unsuccessful.”
Though the outcome may seem obvious, Morris Propp II and Morris Propp II Foundation v. Swift Energy Co. serves as a useful reminder to practitioners not to get so caught up in advancing your client’s positions that you forget, or even ignore, certain fundamental truths. After all, as every first year law student knows, upon signing a contract, a party accepts both its benefits and its burdens.