In Motorola, Inc. v. Official Committee of Unsecured Creditors (In re Iridium Operating LLC, 478 F.3d 452 (2d Cir. 2007), the Second Circuit held that the most important factor for a bankruptcy court to consider in approving a pre-plan settlement pursuant to Bankruptcy Rule 9019 is whether the settlement’s distribution scheme complies with the Bankruptcy Code’s priority scheme. Prior to this ruling, courts in the Second Circuit generally considered the following factors when approving settlement agreements:

(i) the balance between the litigation’s possibility of success and the settlement’s future benefits; (ii) the likelihood of complex and protracted litigation; (iii) the paramount interests of the creditors and the degree to which creditors support the proposed settlement; (iv) whether other parties in interest support the settlement; (v) the competency and experience of counsel supporting, and the experience and knowledge of the bankruptcy court judge reviewing, the settlement; (vi) the nature and breadth of any releases to be obtained officers and directors; and (vii) the extent to which the settlement is the product of arm’s length bargaining (collectively, the “Traditional Factors”).

Background

Spun off by Motorola, Inc. (Motorola) in 1993, Iridium Operating LLC (collectively with its affiliated debtors, “Iridium”) entered into bankruptcy on August 13, 1999 (the “Petition Date”). Prior to the sale of substantially all its assets in bankruptcy, Iridium owned and operated a global telecommunications system that was designed to permit telephone calls and alpha-numeric pages to be made and received on a global basis outside the coverage areas of traditional terrestrial wireline and wireless systems.

During Iridium’s bankruptcy, the Official Committee of Unsecured Creditors (the Committee) received court authorization to pursue claims on behalf of Iridium against (i) a consortium of lenders represented by JPMorgan Chase Bank, N.A. (collectively, the “Lenders”) and (ii) Motorola. With respect to the Lenders, the Committee challenged the validity of the Lenders’ liens on the basis that approximately 90 percent of Iridium’s cash and securities as of the Petition Date was transferred to Iridium within 90 days of the Petition Date, and therefore any security interest or lien asserted by the Lenders in

In Motorola, Inc. v. Official Committee of Unsecured Creditors (In re Iridium Operating LLC, 478 F.3d 452 (2d Cir. 2007), the Second Circuit held that the most important factor for a bankruptcy court to consider in approving a pre-plan settlement pursuant to Bankruptcy Rule 9019 is whether the settlement’s distribution scheme complies with the Bankruptcy Code’s priority scheme. Prior to this ruling, courts in the Second Circuit generally considered the following factors when approving settlement agreements:

(i) the balance between the litigation’s possibility of success and the settlement’s future benefits; (ii) the likelihood of complex and protracted litigation; (iii) the paramount interests of the creditors and the degree to which creditors support the proposed settlement; (iv) whether other parties in interest support the settlement; (v) the competency and experience of counsel supporting, and the experience and knowledge of the bankruptcy court judge reviewing, the settlement; (vi) the nature and breadth of any releases to be obtained officers and directors; and (vii) the extent to which the settlement is the product of arm’s length bargaining (collectively, the “Traditional Factors”).

Background

Spun off by Motorola, Inc. (Motorola) in 1993, Iridium Operating LLC (collectively with its affiliated debtors, “Iridium”) entered into bankruptcy on August 13, 1999 (the “Petition Date”). Prior to the sale of substantially all its assets in bankruptcy, Iridium owned and operated a global telecommunications system that was designed to permit telephone calls and alpha-numeric pages to be made and received on a global basis outside the coverage areas of traditional terrestrial wireline and wireless systems.

During Iridium’s bankruptcy, the Official Committee of Unsecured Creditors (the Committee) received court authorization to pursue claims on behalf of Iridium against (i) a consortium of lenders represented by JPMorgan Chase Bank, N.A. (collectively, the “Lenders”) and (ii) Motorola. With respect to the Lenders, the Committee challenged the validity of the Lenders’ liens on the basis that approximately 90 percent of Iridium’s cash and securities as of the Petition Date was transferred to Iridium within 90 days of the Petition Date, and therefore any security interest or lien asserted by the Lenders in Second Circuit Analysis Regarding Bankruptcy Rule 9019 The Second Circuit began its analysis by listing the Traditional Factors that courts in the circuit have applied to evaluate whether a settlement is fair and equitable for purposes of approval under Bankruptcy Rule 9019. The Court then noted that the phrase “fair and equitable” is derived from Section 1129(b)(2)(B)(ii) of the Bankruptcy Code, which sets forth one of the conditions under which a plan can be approved notwithstanding rejection of a plan by an impaired class of unsecured claims. This section of the Bankruptcy Code provides, in pertinent part, the condition that: “the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.” This provision of the Bankruptcy Code is often referred to as the “absolute priority rule.” The Court also noted that, if a settlement is not being approved as part of a plan, the absolute priority rule of Section 1129 of the Bankruptcy Code is not necessarily implicated.

The Second Circuit examined the Fifth Circuit’s decision in United States v. AWECO, Inc. (In re AWECO, Inc.), 725 F.2d 293 (5th Cir. 1984), which held that the absolute priority rule also applies to settlements outside of a plan, because Second Circuit Analysis Regarding Bankruptcy Rule 9019 The Second Circuit began its analysis by listing the Traditional Factors that courts in the circuit have applied to evaluate whether a settlement is fair and equitable for purposes of approval under Bankruptcy Rule 9019. The Court then noted that the phrase “fair and equitable” is derived from Section 1129(b)(2)(B)(ii) of the Bankruptcy Code, which sets forth one of the conditions under which a plan can be approved notwithstanding rejection of a plan by an impaired class of unsecured claims. This section of the Bankruptcy Code provides, in pertinent part, the condition that: “the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.” This provision of the Bankruptcy Code is often referred to as the “absolute priority rule.” The Court also noted that, if a settlement is not being approved as part of a plan, the absolute priority rule of Section 1129 of the Bankruptcy Code is not necessarily implicated.

The Second Circuit examined the Fifth Circuit’s decision in United States v. AWECO, Inc. (In re AWECO, Inc.), 725 F.2d 293 (5th Cir. 1984), which held that the absolute priority rule also applies to settlements outside of a plan, because