In less than a week after its bankruptcy filing, a debtor was able to obtain confirmation of its prepackaged plan of reorganization in the Bankruptcy Court for the Southern District of New York. In allowing the case to be confirmed on a compressed timeframe that was unprecedented for cases filed in the Southern District of New York, the Bankruptcy Court held that the 28-day notice period for confirmation of a chapter 11 plan could run coextensively with the period under which creditor votes on the plan were solicited prior to the commencement of the bankruptcy case. Although the Bankruptcy Court in Roust Corporation, et al. was very clear that its decision should not be given precedential effect, in reaching its decision, it relied on three other unreported decisions. The reasoning of the Roust decision, especially when viewed together with the cases that the Bankruptcy Court relied upon, suggests that under appropriate circumstances the notice period for confirmation of a prepackaged chapter 11 case could start to run even before the case is commenced.
On December 30, 2016, Roust and certain of its affiliates, some of the world’s largest vodka producers, filed voluntary petitions for bankruptcy relief along with their prepackaged chapter 11 Plan and Disclosure Statement. The Plan was based upon an RSA—a Restructuring Support Agreement—entered into by the Debtors and certain of their principal constituencies on November 9, 2016, which resulted in a reduction of the Debtors’ debt burden by approximately $462 million through noteholders’ relinquishment of existing claims in exchange for certain consideration.
Approximately 30 days prior to the bankruptcy filing, on or around December 1, 2016, the Debtors commenced solicitation by mailing a notice of a combined hearing on the Disclosure Statement and confirmation of the Plan—a procedure which is specifically recognized by the Local Bankruptcy Rules for the SDNY Bankruptcy Court—to all of their known creditors and interest holders of record. The voting deadline remained open until December 30, 2016, after which the Debtors certified that all voting classes had voted to accept the Plan.
On January 4, 2017, the United States Trustee filed an omnibus objection to confirmation of the Plan, characterizing the case as a “pre-petition bankruptcy case” designed to avoid scrutiny and the procedural protections of the bankruptcy process. The United States Trustee argued, among other things, that the Debtors sought expedited approval of confirmation of their cases—less than a week after the bankruptcy cases were filed—without making a formal request to shorten notice of the 28-day notice period for confirmation contained in the Bankruptcy Rules.
On January 10, 2017, Bankruptcy Judge Drain entered an order approving the Disclosure Statement and confirming the Plan. The Bankruptcy Court found that service of the Plan and Disclosure Statement was adequate and sufficient under the circumstances and complied with the Bankruptcy Code and Bankruptcy Rules.
In reaching his decision, Judge Drain noted that the solicitation process started on December 1, and while the Bankruptcy Rules provide for 28 days’ notice, the Rules do not require 28 days’ notice after the petition date; instead, the notice period can commence prepetition. Although the United States Trustee argued that the speed at which the cases progressed was unprecedented, Judge Drain referenced three unreported cases that actually confirmed plans on timelines faster than in Roust.
The Bankruptcy Court also was persuaded by the Debtors’ argument that all key constituencies in the cases were sophisticated parties who had ample opportunities to review the solicitation documents. The Bankruptcy Court also appeared to accept the Debtors’ argument that they were required to pay significant excise taxes in Russia in January to avoid significant harm to their operations, which required that the new funds from the rights offering be available to pay those taxes, making it critically important that the plan be confirmed on such an expedited basis because absent such payments, the Debtors would suffer significant risk to their operations.
The facts of these cases were particularly noteworthy. As referenced by the United States Trustee in its objection, all objections to the Plan and Disclosure Statement (which consisted of thousands of pages of supporting documentation, including the RSA and an Offering Memorandum) were due at 4:00 p.m. on the bankruptcy filing date; the voluntary petitions, however, were not filed until 9:10 p.m. that evening. In spite of the obvious difficulty this created for any party that had wished to file an objection, the Debtors successfully argued that the Plan achieves a result consistent with the objectives and purposes of the Bankruptcy Code, including a policy of favoring consensual reorganization.
To overcome the timing challenges, the Debtors stressed the overwhelming acceptance of the Plan by each of the classes of creditors entitled to vote; indeed, every creditor who voted, voted to accept the Plan. The Bankruptcy Court also took note of the fact that the creditors included a major law firm and institutional bondholders. And finally, no objections to confirmation of the Plan were filed by any party with an economic interest in the case.
The basic principle of due process requires notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections. Judge Drain found that under the facts and circumstances of this case, notice was sufficient and appropriate, and as a result, an order was entered confirming the Plan.
The Roust decision opens the door for even more expedited confirmation of prepackaged chapter 11 cases in the Southern District of New York. Although, as the Bankruptcy Court warned, other debtors with less compelling facts (including the sophisticated nature of the creditor body that was solicited, its overwhelming support of the Plan, the full 28-day solicitation process prior to the commencement of the case, and the Debtors’ justification as to why confirmation was needed so quickly) should not assume that they will be able to proceed in such an expedited manner, the decision provides for the possibility for greatly expedited confirmation hearings in prepackaged chapter 11 cases filed in the Southern District of New York under the right circumstances. When viewed together with the other unreported decisions cited by Judge Drain, it appears as though the argument could prevail in other jurisdictions as well.