In the Matter of TCI 2 Holdings, LLC, 428 B.R. 117 (Bankr. D.N.J. 2010)
This is a heavyweight battle between Donald Trump in one corner and Carl Icahn in the other. The subject of the fight is three Atlantic City casinos operating under the Trump brand. These casinos (owned and/or managed by the debtors and Trump) filed for chapter 11 bankruptcy. Two plans of reorganization were proposed, one by the alliance of Trump, the debtors, and the Ad Hoc Committee of Second Lien Noteholders, and the other by the alliance of Icahn and the First Lien Lender. Each plan proponent objected to the other’s plan. In particular, Icahn objected to Trump’s plan on the grounds that it did not comply with section 510(a) of the Bankruptcy Code because the plan violated several provisions of the intercreditor agreement among the First Lien Lender and Second Lien Noteholders. Thus, Icahn argued Trump’s plan was not confirmable under section 1129(a)(1). The Bankruptcy Court essentially found Icahn’s objection irrelevant, because the plan was being confirmed as a nonconsensual plan under section 1129(b)(1). That section begins with the phrase “notwithstanding section 510(a),” which this court interpreted to mean that a plan can be confirmed under section 1129(b)(1), despite an alleged breach of the intercreditor agreement. Ultimately, the court determined that both plans were confirmable, and since the overwhelming majority of creditors had voted in favor of Trump’s plan, the court confirmed that plan.
The Bankruptcy Court noted that, to its knowledge, it was the first court to ever consider the meaning of “notwithstanding section 510(a)” in this context, and its holding would be the first and only case law authority on the issue.
Several affiliated companies owned or managed three casinos in Atlantic City (Trump Taj Mahal, Trump Plaza, and Trump Marina). With the economy declining, these companies were unable to make an interest payment to the Second Lien Noteholders, and filed chapter 11 petitions on February 17, 2009. As of that date, the debtors owed $488 million to the First Lien Lender, Beal Bank; $1.25 billion to the Second Lien Noteholders; and $39 million to general unsecured creditors.
The debtors proposed the first plan, which was originally supported by the First Lien Lender and Trump. A few weeks later, the Ad Hoc Committee filed a plan. Trump then terminated his arrangement with the First Lien Lender and committed his support to the Committee’s plan, a/k/a Trump’s plan. The debtors subsequently announced their support for Trump’s plan as well.
At about this same time, Beal Bank filed its own plan. Within days of this filing, Carl Icahn purchased 51 percent of the First Lien Lender’s claims from Beal Bank and became a co-proponent of the Bank’s plan, a/k/a Icahn’s plan. Trump’s plan proposed to contribute $225 million in new equity capital from a rights offering representing 70 percent of the new common stock, backstopped by certain Second Lien Noteholders who would receive 20 percent of the new common stock as consideration for the backstopping. This plan also proposed to pay Icahn and the First Lien Lender $125 million in cash and to issue a new term note in the amount equal to the debtors’ enterprise valuation ($459 million), less the $125 million cash payment, with interest payable at a market rate (proposed to be 11 percent). The Second Lien Noteholders would receive an equity distribution equal to their pro rata share of 5 percent of the new common stock. The plan also proposed certain injunctions, releases, and the reimbursement of certain professional fees.
Icahn’s plan was premised on a complete deleveraging of the debtors, proposing the conversion of the entire amount of First Lien Debt into equity, with no distribution to the Second Lien Noteholders and general unsecured creditors. This plan also proposed a $45 million DIP loan to bridge the gap between confirmation and the effective date of the plan, which would convert to equity on the effective date. This plan further provided for certain releases, injunctions, and indemnifications.
The Bankruptcy Court began by stating that a plan must satisfy the requirements of section 1129 of the Bankruptcy Code in order to be confirmed. Each plan proponent objected to the other’s plan, specifying different subsections of 1129 in support of their objections. The Bankruptcy Court carefully discussed each objection raised. In each instance, the Bankruptcy Court either found that the plan provision alleged to violate section 1129 did not, or that modification or deletion of the contested provision would satisfy section 1129.
Of significant interest is the Bankruptcy Court’s discussion of the intercreditor agreement (IA). The First Lien Lender and the Second Lien Noteholders had entered into the IA more than a year before the chapter 11 filings. Icahn and the First Lien Lender pointed to multiple provisions of the IA in their objection. The relevant portions of the IA provided that: until First Lien Obligations had been paid in full, no proceeds of shared collateral could be distributed to the Second Lien Noteholders; the Second Lien Noteholders could not propose their own reorganization plan; and the Second Lien Noteholders were prohibited from objecting to or contesting the payment of any adequate protection payment to the First Lien Lender, or contesting the status of its secured claims. Icahn and the First Lien Lender asserted that these alleged IA breaches violated section 510(a) of the Bankruptcy Code.
Section 510(a) provides that “a subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law.” The Second Lien Noteholders offered several defenses to the claim that the plan breached the IA. The Bankruptcy Court, however, declined to address whether the IA was breached. Instead, the Bankruptcy Court discussed section 1129(b)(1) of the Bankruptcy Code. Section 1129(b)(1) provides, in relevant part, “Notwithstanding section 510(a) … if all of the applicable requirements … are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan … if the plan does not discriminate unfairly, and is fair and equitable….”
The Bankruptcy Court stated, “[t]he only logical reading of the term ‘notwithstanding’ in section 1129(b)(1) seems to be: ‘Even though section 510(a) requires the enforceability of a subordination agreement in a bankruptcy case to the same extent that the agreement is enforceable under nonbankruptcy law, if a nonconsensual plan meets all of the section 1129(a) and (b) requirements, the court ‘shall confirm the plan.’ The phrase ‘notwithstanding section 510(a) of this title’ removes section 510(a) from the scope of 1129(a)(1), which requires compliance with ‘the applicable provisions of this title.’” (Emphasis added.)
In essence, then, the Bankruptcy Court concluded that section 1129(b)(1), which governs the confirmation requirements of nonconsensual plans, removed section 510(a) from the confirmation equation.
On this issue, the Bankruptcy Court concluded that, even if the Second Lien Noteholders did breach the IA, “it would not impede the confirmation of the AHC/ Debtor Plan as proposed.” The Bankruptcy Court therefore overruled Icahn’s and the First Lien Lender’s objections.
The Court Chooses a Plan
After thoroughly addressing all objections raised by the plans’ proponents, the Bankruptcy Court determined that, with certain modifications, each plan satisfied section 1129 and was thus confirmable. Section 1129(c) instructs a court considering multiple confirmable plans to “consider the preferences of creditors and equity security holders.” In addition, the case law compelled the Bankruptcy Court to consider: the type of plan, the treatment of creditors and equity security holders, and the feasibility of the plan.
Both plans provided full recovery to Icahn and the First Lien Lender (Icahn’s plan provided immediate recovery and Trump’s plan provided partial immediate recovery with the balance to be paid on a deferred basis). The plans treated all other creditors very differently, however. Icahn’s plan provided nothing to Second Lien Noteholders and general unsecured creditors. Trump’s plan provided a nominal amount of cash and subscription rights to the Second Lien Noteholders and other creditors. More significantly though, Trump’s plan provided, to more than 60 percent of the Second Lien Noteholders, “the opportunity to receive the only value that is left in the case after satisfaction of the First Lien Lenders’ Claims. That value is the potential future benefit of the reorganization, if the reorganization succeeds.” In addition, Trump’s plan would immediately contribute $225 million to the debtors. “The treatment of creditors favors the AHC/Debtor Plan in this regard.”
The Bankruptcy Court did find that Trump’s plan was feasible but that the feasibility consideration favored Icahn’s plan since it completely deleveraged the debtors. “The most significant element in choosing between two confirmable plans is the statutory direction to the court to ‘consider the preferences of the creditors and the equity security holders in determining which plan to confirm.’” The Bankruptcy Court examined the plan voting results and found that an overwhelming number of creditors voted for Trump’s plan and against Icahn’s plan. Therefore, “the significant support for the AHC/Debtor Plan by the largest creditor constituency, coupled with the treatment of creditors and the feasibility considerations noted above, compels the conclusion that the AHC/Debtor Plan, as modified, should be confirmed. Confirmation of the AHC/Debtor Plan will allow the debtor to shed approximately $1.4 billion in secured debt, to pay the First Lien Lenders in full, and to offer to creditors the opportunity to participate in the upside potential of the debtors.”
As one might imagine, this decision is on appeal and its impact is yet to be determined. With respect to intercreditor agreements, in other cases, courts have upheld some contractual limitations on junior creditors’ rights, and courts have struck down other limitations. The Bankruptcy Court, however, stated that, “[w] e have not found cases analyzing the import of this phrase [“notwithstanding section 510(a)”] upon a cramdown plan which arguably subverts a pre-petition subordination agreement between creditors.” Therefore, the Bankruptcy Court’s opinion here is the first on the issue. If the Bankruptcy Court’s decision is upheld on appeal, it will significantly impact the enforceability of (not to mention the comfort level of senior lien holders with) intercreditor agreements. The best advice at this point is to keep a sharp eye out for the appellate decision. It is also worth noting that nothing in the Bankruptcy Court’s decision prevents Icahn and/ or the First Lien Lender from pursuing non-bankruptcy breach-of-contract claims against the Second Lien Noteholders with respect to the intercreditor agreement.