The Bankruptcy Court for the District of Delaware recently issued an opinion confirming a chapter 11 plan (i) based on a lock-up agreement between the debtor and its major creditors and (ii) containing third party releases that bound creditors unless they affirmatively "opted out" in a ballot actually returned to the balloting agent. In In re Indianapolis Downs, LLC, Judge Shannon confirmed the debtors' joint plan over the objection of the United States Trustee and several other creditors, holding to a theme espoused numerous times throughout the case: "that the filing of a Chapter 11 petition is an invitation to negotiate." In re Indianapolis Downs, LLC, No. No. 11-11046, 2013 WL 395137, at *7 (Bankr. D. Del. Jan. 31, 2013).
Post-Petition Lock-Up Agreements
Once the debtors commenced their bankruptcy cases, they engaged in protracted litigation and negotiation with their first lien lender, an ad hoc committee of second lien lenders, and other constituencies. The negotiations culminated in a restructuring support agreement in which certain of the parties agreed to a plan for the sale of the debtors' assets under section 363 of the Bankruptcy Code or, if there were no satisfactory bids for the debtors' assets, a recapitalization under a plan of reorganization. The agreement also required the debtors to propose a plan by a date certain and that the parties to the restructuring support agreement would affirmatively vote to support the plan.
After Judge Walrath's orders in In re Stations Holdings Co., Inc. and In re NII Holdings, Inc., however, debtors and their major constituencies were concerned that a lock up agreement entered into post-petition would run afoul of the section 1125(b)'s requirement that a solicitation for a plan must be accompanied by a court approved disclosure statement. In Indianapolis Downs, Judge Shannon concluded that the parties' agreement to vote in favor of the plan did not violate section 1125(b).
Judge Shannon first noted that the two prior orders in Stations Holdings and NII Holdings were only two page orders, not opinions, and that those types of orders are of "limited (if any) precedential value." Second, the Court construed "solicitation" in section 1125(b) narrowly to allow debtors and their creditors to openly negotiate on a plan and to memorialize their agreement. Third, the concern of section 1125(b) – that debtors would solicit votes on a plan while creditors and other stakeholders remained uninformed – was not present in Indianapolis Downs. Judge Shannon stated that the debtors and lenders were sophisticated financial parties and had experienced counsel negotiating their agreement. Finally, the Court was not concerned that the agreement provided for the remedy of specific performance. He noted that the parties agreed to vote for a plan that complied with their agreement. If the debtors proposed such a plan, the parties should be entitled to demand that each other comply with the agreement.
Third Party Releases
The objecting parties argued that the third party release provisions were impermissible under applicable law because they third party releases applied to parties who: (i) voted on the plan but did not opt out of the releases, (ii) had unimpaired claims and deemed to accept the plan, or (iii) did not submit a ballot or otherwise opt out of the releases. The objecting parties argued that the releases were unenforceable absent the creditor's affirmative consent to such releases.
Judge Shannon rejected the objecting parties' argument, stating that bankruptcy courts take a more flexible approach in determining whether third party releases are consensual. He opined that bankruptcy courts have approved third party releases even where returning a ballot was not a requirement for the releases or where impaired creditors abstained from voting or did not opt out of the releases. As is customary in Delaware and in the Third Circuit, in Indianapolis Downs, the plan provided creditors with instructions on how to "opt out" of the third party releases in their ballot. Yet some creditors determined not to vote on the plan and did not return their ballots. Judge Shannon concluded that notice to the creditors of the "opt out" requirement and their knowing failure to "opt out" made the third party releases consensual.
This reasoning may conflict with Judge Walrath's decision in 2011 in In re Washington Mutual, Inc. where the court struck down the imposition of third party releases on creditors who did not submit a ballot. See 442 B.R. 314, 354-55 (Bankr. D. Del. 2011). In Washington Mutual, the debtors' ballots contained an "opt out" provision for third party releases, yet the plan provided that creditors would grant the releases regardless of their choice to "opt out" because the releases were essential to the global settlement that formed the basis of the plan.
In the face of almost all parties objecting, the Washington Mutual debtors modified the plan so that creditors were given the choice to "opt out" of the third party releases. But those who "opted out" would not be entitled a distribution. And importantly, creditors who did not submit a ballot would be deemed to have approved the third party releases. Judge Walrath stated that this default approval of the releases for those who did not return a ballot could not pass muster, "[f]ailing to return a ballot is not a sufficient manifestation of consent to a third party release."
The Indianapolis Downs decision appears to address two plan-related issues in Delaware in a manner favorable to debtors. First, the Court permitted a post-petition lock-up agreement among the major constituencies in the case in advance of formal solicitation of a plan. This holding allows, at least in one Delaware Judge's view, parties to document their intentions with respect to a global settlement after a chapter 11 bankruptcy petition is filed but before a formal plan is promulgated, thus allowing the parties to resolve overarching issues in principle before undertaking the time and expense of a plan process.
Second, Judge Shannon appears to have expanded the breadth of third party releases in Delaware. Although on its face Judge Shannon's opinion in Indianapolis Downs seems to contradict Judge Walrath's opinion in Washington Mutual, there are enough factual difference in the cases (e.g., rejection of releases was not an impediment to a distribution in Indianapolis Downs) to justify the expansion of third party releases. Regardless, the roadmap for approval of broader third party releases has been drawn in Delaware in a manner more favorable to chapter 11 debtors.