View original on Law360: https://www.law360.com/articles/1173110/the-upside-of-the-fastest-chapter-11-confirmation-ever
A mere 19 hours after filing for bankruptcy, Sungard Availability Services Capital Inc., et al. confirmed a prepackaged plan of reorganization.[1] Sungard now holds the record for fastest confirmation of a Chapter 11 plan in the United States.
Generally, confirmation is a marathon — not a sprint. But fast-tracking confirmation is becoming more acceptable, at least among commercially minded judges. So when the need for speed is compelling, a disclosure statement and prepackaged plan may be approved simultaneously and now in as little as a day.
A one-day prepack offers several advantages to creditors and debtors alike. There are almost no administrative costs for the bankruptcy case; the debtor is more likely to retain its suppliers, customers and employees (as applicable); unimpaired creditors are paid in full in the ordinary course; and management can focus its efforts on the debtor’s business rather than prosecuting a drawn-out bankruptcy case. More than that, a quick reorganization may save the debtor from having to liquidate under Chapter 7.
Even if not expressly stated, the Bankruptcy Code permits accelerated confirmation of prepacks.
Section 1125(g) authorizes a plan proponent to solicit votes accepting or rejecting the plan before the debtor files for bankruptcy if done “in a manner complying with applicable nonbankruptcy law.”[2] Prepetition solicitation is what distinguishes a “prepackaged” plan from a “prenegotiated” plan.
Under Section 1126(b) of the Bankruptcy Code, a claimant or interest holder who accepts or rejects the plan before the bankruptcy case is filed is “deemed to have accepted or rejected the plan, as the case may be” if that solicitation complies with “applicable nonbankruptcy law,” such as state or federal securities laws or, if those laws are inapplicable, the claimant received “adequate information” regarding the plan in compliance with Section 1125(a) of the Bankruptcy Code.[3]
Bankruptcy Rule 3018(b), titled “Acceptances or Rejections Obtained Before Petition,” provides in relevant part:
A holder of a claim or interest who has accepted or rejected a plan before the commencement of the case under the Code shall not be deemed to have accepted or rejected the plan if the court finds after notice and hearing that the plan was not transmitted to substantially all creditors and equity security holders of the same class, that an unreasonably short time was prescribed for such creditors and equity security holders to accept or reject the plan, or that the solicitation was not in compliance with [Section] 1126(b) of the Code.[4]
In prepackaged reorganizations, due process concerns are more pressing and, therefore, Bankruptcy Rule 3018(b) imposes a duty on bankruptcy judges to be extra vigilant.
While Bankruptcy Rules 3017 and 2002 require 28 days’ notice of the hearings to consider approval of the disclosure statement and confirmation of the plan,[5] nothing prevents a plan proponent from providing this notice before the petition date (most likely concurrently with the solicitation package).[6] In the Sungard case, the debtor provided notice to impaired creditors and published ads indicating that a prepackaged bankruptcy case was being filed. Further, certain jurisdictions have procedures specifically designed for prepacks that, in effect, modify or supplement the Bankruptcy Rules so the debtor can reach confirmation faster.
For example, the Bankruptcy Court for the Southern District of New York has created a comprehensive scheme for prepackaged Chapter 11 cases.[7] Under the court’s guidelines, hearings on approval of the disclosure statement and plan may be combined[8] and the court has discretion to shorten the 28-day notice period.[9] Further, at least one judge has interpreted the guidelines as requiring that only impaired creditors receive notice of the hearings.[10]
The Southern District of New York developed these procedures “to provide bankruptcy practitioners with help in dealing with practical matters which either is not addressed at all by statute or rules or are addressed indirectly in a piecemeal fashion by statutes, general rules, and/or local rules that were not enacted specifically with prepackaged Chapter 11 cases in mind.”[11] So it seems that Congress’ silence on prepacks mobilized the Southern District to act.[12]
Prepackaged cases are inherently fast because negotiation and solicitation must occur before the case is filed. Some debtors, however, are reorganizing at lightning speed.
Roust Corp. and its affiliates also confirmed their prepackaged cases in less than a week.[13] The Blue Bird Body debtors, which held the record for fastest confirmation for years, took only 32 hours.[14] But this year, the debtors in FullBeauty and Sungard picked up the pace: They confirmed their prepacks in 20 and 19 hours, respectively.[15]
Not all cases are suited for such an expedited confirmation process. Balance sheet restructurings of one or two obligations only[16] or restructurings that call for the reissuance of debt or securities have the best prospects for making it to the finish line within 24 hours. In Sungard, for example, general unsecured creditors were left unimpaired, with only three classes of creditors impacted — noteholders and term lenders (who voted to accept the plan) and old equity (which was cancelled).
Importantly, the plan proponent should demonstrate that there are exigent circumstances that justify bypassing the usual, more robust procedures for solicitation, disclosure and confirmation.
The debtors in Roust, for example, were vodka distillers and distributors that operated primarily in Russia, Poland, Ukraine and Hungary — countries where people view bankruptcy as a death knell. So even a brief Chapter 11 bankruptcy would have spurred the debtors’ employees, vendors and other critical parties to walk away.[17] Similarly, in Blue Bird, the debtors successfully argued that a bankruptcy lasting more than a day or two would have eviscerated the debtors’ going concern value. The debtors in Blue Bird manufactured school buses and sold them to school districts through North American dealers. Because the debtors’ business depended so heavily on their reputation and goodwill, an extended stay in Chapter 11 would have forced the debtors into liquidation.[18] And most recently, in Sungard, the debtors’ key customers indicated that they would defect to the debtors’ competitors if the debtors were to remain in bankruptcy.[19] There was also a substantial risk that the debtors’ contractual counterparties in other countries would not grasp the unique protections afforded to debtors under the Bankruptcy Code.
Recognizing these urgencies, the bankruptcy courts in Roust, Blue Bird and Sungard confirmed the debtors’ prepacks without delay. With these precedents, future debtors seeking a prompt restructuring may be able to bypass the costly and often lengthy stays in bankruptcy, thereby increasing their prospects for a successful reorganization.
