In re Young Broadcasting, Inc., et al., 430 B.R. 99 (Bankr. S.D.N.Y. 2010)
The Debtor and the Official Committee of Unsecured Creditors each proposed competing plans of reorganization. Pursuant to the Committee’s plan, the Debtor would reorganize and reinstate its secured debt. The Secured Lenders objected to the Committee plan on the basis that the proposed stock classification and voting rights would trigger defaults under the loan’s change-of-ownership provisions, and that any alleged reinstatement would be followed by an immediate breach of the loans. The Committee argued that its proposal did not trigger the changein- control provisions, and that, even were it true that the plan triggered these provisions, the Committee had proposed an “alternative” ownership structure – mentioned in a footnote of its disclosure statement – and that this alternative constituted a non-material modification that did not require re-solicitation of the plan. The court rejected these arguments, declining to confirm the Committee plan. The court confirmed the Debtor’s plan, which provided for a sale of substantially all the Debtor’s assets to a newly created entity in which the Secured Lenders held the equity.
Young Broadcasting, Inc. and its affiliates owned television stations in several cities around the United States. Young had two primary sources of debt: a credit agreement secured by a first priority interest in substantially all of the Debtor’s assets; and senior subordinated notes, which were general unsecured obligations. As of the date of the Debtor’s chapter 11 filing, approximately $338 million was due the lenders under the Credit Agreement, and approximately $484 million was due under the subordinated notes.
Both the Debtor and the Committee of Unsecured Creditors presented reorganization plans for confirmation. The plans were submitted on the same timeline, and presented to the creditors by way of a single ballot.
The Debtor’s plan contemplated a sale of substantially all the Debtor’s assets to a new entity, in which the Secured Lenders would receive all of the equity interests in complete satisfaction of their $338 million in secured claims. This plan also provided unsecured creditors with their pro rata share of $1 million, and provided the Unsecured Noteholders with equity warrants in the new company if they voted to accept this plan. This plan completely deleveraged the Debtor.
The Committee’s plan would reinstate the $338 million owed to the Secured Lenders, which was scheduled to mature (by its terms) in late 2012, at which point a large balloon payment would come due. The Committee’s plan provided that the Unsecured Noteholders would receive a pro rata share of 10 percent of common stock, and the opportunity to participate in a rights offering under which these noteholders could purchase a pro rata share of preferred stock plus 80 percent of the common stock of the company. In addition, the Debtor’s founder, Mr. Young, would receive all of the Class B shares of common stock, which would convert to 10 percent of the Class A common stock of the company upon full repayment of the Secured Lenders’ debt in 2012.
The Secured Lenders argued that the Committee’s plan was premised upon an impermissible reinstatement of the secured debt, because the Committee’s allocation of voting rights would trigger an immediate and incurable changeof- control default under the credit agreement. The Committee argued that its proposal did not trigger a default, and that even were the Bankruptcy Court to find that the proposal did trigger the default, a footnote in the Committee’s plan set forth an alternative structure that conformed with the terms of the credit agreement, and that could be confirmed absent re-solicitation.
The credit agreement required that Mr. Young, his immediate family members, and certain other defined affiliates, have more than 40 percent of the voting stock by number of votes. Further, this agreement required that if any other person or group owned more than 30 percent of the total outstanding voting stock, then Mr. Young and his affiliates must own more than 30 percent, or have the right to elect or designate a majority of the board of directors.
Under the Committee plan, the board of directors and the voting stock would be divided into two groups, Class A and Class B. The proposed Class A stock would represent 90 percent of the equity interests, and Class B would represent 10 percent. Each class of stockholders would be able to vote for both classes of directors under a specific allocation. There would be six Class A directors and one Class B director. Mr. Young would have all votes for the Class B director and one vote for Class A directors. The combined total of director votes for both classes of stock would be 605,500,000, and Mr. Young could cast 500,500,000 of those votes (500,000 for Class A directors, and 500,000,000 for the Class B director). The Committee argued that this structure allocated more than 82 percent of the vote to Mr. Young and, “by number of votes,” technically complied with the credit agreement.
The Bankruptcy Court disagreed, and concluded that the Committee plan did cause an incurable default to occur. In addition, it held that the “alternative” structure proposed by the Committee was infeasible, and that the Debtor’s plan would be confirmed.
The Secured Lenders argued that the Committee was manipulating the vote allocation, and thereby circumventing the protections the control provisions of the credit agreement afforded the lenders. While the Committee’s plan allocated more than 40 percent of the votes for directors to Mr. Young, the plan prevented Mr. Young from electing 40 percent of the directors. In reality, he could elect only one of seven directors. The Secured Lenders also argued that the Committee plan violated the credit agreement by ceding more than 30 percent of the voting stock to a group other than Mr. Young and his affiliates. In this way, the Secured Lenders maintained that the Committee allocation did not comply with the credit agreement provision, and would trigger a change-of-control default.
While considering the Committee plan, the court noted that it must examine the competing plans by taking into account the requirements of section 1124(2) of the Bankruptcy Code, including, but not limited to, the requirement that a plan must (with certain enumerated exceptions) cure any defaults under a secured debt agreement before the agreement can be reinstated.
Looking at the credit agreement language, as well as the applicable legal authority, the Bankruptcy Court concluded that the credit agreement required that Mr. Young maintain the ability to elect at least 40 percent of the directors, and that the Committee plan only gave Mr. Young the ability to elect 15 percent of the directors. As such, the court decided, the Committee plan created an incurable default, and thus failed to satisfy the requirements of section 1124(2).
The court further found that the “alternative” equity structure disclosed in a footnote to the Committee’s disclosure statement provided insufficient information to be confirmable and that, because it was not adequately disclosed, and would constitute a material modification, re-solicitation was necessary before the alternative plan could be confirmed. Finally, the Bankruptcy Court held that, even had the modification been disclosed and voted on, the Committee’s plan was not feasible because the Committee failed to demonstrate that the Debtor could have either refinanced the obligations (including its proposed balloon payment), or sold its assets, prior to the maturity date of the secured debt.
Despite an objection from the Committee to the Debtor’s plan, the court found that the Debtor’s plan satisfied all applicable Bankruptcy Code requirements. The Bankruptcy Court, therefore, declined to confirm the Committee’s plan, and instead confirmed the Debtor’s plan.
Loan documents commonly contain change-of-control provisions. These provisions protect the lender’s interests in the borrower, and courts will examine reorganization proposals for their substantive effect on debtor ownership. Secured lenders must take care to ensure that their loan documents clearly and sufficiently protect their interests.