On August 3, 2016, Delaware Trust Company, as trustee for the EFIH first lien notes, filed a petition for certiorari with the United States Supreme Court, asking the Court to review the Energy Future Holding debtors’ settlement with the EFIH first lien noteholders. The Trustee challenges the Third Circuit’s holding in In re Energy Future Holdings Corp. that pre-plan settlements are not subject to the same equal treatment rules as plans of reorganization, and that settlement offers that would give creditors different economic value in exchange for their claims do not necessarily treat them unequally.
The Trustee’s petition follows the United States Supreme Court’s grant of certiorari in Czyzewski v. Jevic Holding Corp., also on appeal from the Third Circuit, where the Court agreed to review the propriety of structured dismissals that deviate from the absolute priority rule. The grant of certiorari in Jevic, and the potential grant of certiorari in EFH, makes the next term of the United States Supreme Court one to watch, as the Court will tackle bankruptcy courts’ powers to approve settlements (and distributions of proceeds of such settlements) outside of a plan of reorganization that do not comply with the Bankruptcy Code’s provisions governing treatment of a creditor class under a plan – namely, the priority scheme set forth in the Bankruptcy Code, and potentially also the Bankruptcy Code’s equal treatment rule under section 1123(a)(4) of the Bankruptcy Code.
We have previously analyzed the Third Circuit’s decision in EFH and the background to that dispute in our post, Third Circuit Adopts Nuanced View of “Equal Treatment” in Context of Pre-Plan Settlement Offers. As a refresher, the settlement at issue was offered to EFIH first lien noteholders at the beginning of the EFH chapter 11 case and provided some noteholders a greater recovery on the total potential value of their disputed make-whole claims. The Third Circuit found that although similarly situated creditors are entitled to equal treatment under section 1123(a)(4) of the Bankruptcy Code, the plain language of the provision applies only to a plan of reorganization, and not to pre-confirmation settlements. The Third Circuit went on to rule that a settlement can treat similarly situated creditors differently if the debtor presents a specific and credible ground for doing so. In reaching this conclusion, the Third Circuit relied on its decision in Jevic, where the Third Circuit held that settlements reached through a structured dismissal need not comply with the absolutely priority rule if the debtor can present specific and credible grounds to justify the deviation from the absolute priority rule. In so ruling, the Third Circuit rejected the Fifth Circuit’s per se rule that pre-plan settlements must satisfy the absolute priority rule and adopted the Second Circuit’s more flexible approach.
In its petition for certiorari, the Trustee argues that pre-plan settlements, like the one at issue in EFH, may lock in the terms of a debt restructuring prior to consideration of a chapter 11 plan, and run the risk of undermining the substantive and procedural protections of chapter 11. The Trustee asks the Court to grant the petition alongside Jevic because (i) the equal treatment rule is intertwined with the absolute priority rule at issue in Jevic and (ii) EFH involves a pre-plan settlement, in contrast to the structured dismissal in Jevic, and therefore the Court will be in a position to consider all dimensions of how settlements can be used outside of a plan of reorganization. In the alternative, the Trustee asks the Court to hold the petition pending the disposition of Jevic.
A Supreme Court decision in EFH, like Jevic, has the potential to impact negotiations between creditors and the debtor in large chapter 11 cases. On one side of these cases is the need for flexibility in entering into settlements and compromising claims that can affect the nature and extent of the bankruptcy estate. On the other side is the concern over collusion between debtors and certain creditors and the fair treatment of creditors in pre-plan settlements. We will continue to monitor the case docket and the briefing on the petition (the response is due September 1), and will update our readers on whether the Supreme Court agrees to review EFH alongside Jevic.