In re Indianapolis Downs, LLC, et al., 486 B.R. 286 (Bankr. D. Del. 2013)
After filing its chapter 11 petition, the debtor entered into a Reorganization Support Agreement with certain creditors, which required those creditors to vote in favor of the debtor’s plan. Once executed, the debtor filed the RSA with the bankruptcy court, together with the debtor’s plan of reorganization and disclosure statement. Certain other creditors, equity holders and the U.S. trustee objected to plan confirmation, and sought designation of the RSA creditor votes, arguing that the RSA constituted a vote solicitation violative of Bankruptcy Code sections 1125 and 1126. The objecting parties also asserted that third-party releases in the plan were overly broad. The court held that: (i) the RSA did not impermissibly solicit votes; (ii) the RSA creditors, in negotiating the RSA, were afforded adequate information upon which to base participation in the RSA; (iii) the RSA parties had not acted in bad faith, and thus designation was not warranted; and, (iv) the ballot provisions regarding how to opt out of (or be deemed to be bound by) the releases provided sufficient information so a voting party would know whether it had consented to the releases or not. The court therefore confirmed the plan.
Indianapolis Downs operated a racetrack and casino in Indiana. Unable to service its debt obligations, and unable to reach a restructuring agreement with certain creditors and equity holders, it filed a chapter 11 bankruptcy petition. Following months of negotiations, the debtor, and certain creditors, including Fortress (a third tier creditor) and the debtor’s Ad Hoc Second Lien Committee, executed a Restructuring Support Agreement, which provided that the debtor would seek sufficiently high bids in the market to sell assets under section 363, and, if sufficiently high bids were not obtained, the debtor would proceed with a recapitalization. The RSA contained explicit financial terms of, and creditor treatment under, a potential sale or recapitalization, timeframes, restrictions, and a requirement that the RSA parties vote to accept a plan that complied with the terms of the RSA. The RSA was filed with the court immediately after its execution, and the proposed disclosure statement and plan were filed that same day.
The court approved the disclosure statement and conducted a confirmation hearing. Certain other creditors, equity holders, and the United States Trustee objected to plan confirmation, asserting that the RSA constituted a wrongful post-petition solicitation of votes on a plan prior to court approval of the disclosure statement, and sought designation of the RSA parties’ ballots. If the RSA votes were designated, the debtors would not have sufficient votes to confirm their plan. There were also objections to confirmation on the grounds that the third-party releases were overly broad and non-consensual.
The court denied the objections and confirmed the plan.
Vote Designation– The structure for the chapter 11 process is well known: a debtor has a period of exclusivity in which to formulate a plan of reorganization, and when that plan is filed with the court, an accompanying disclosure statement is filed, which is intended to provide stakeholders with adequate information upon which they can make an informed decision to vote for or against the plan. Sections 1125 and 1126 of the Bankruptcy Code set forth the vote solicitation requirements. Section 1125(b) states that votes may not be solicited until after a court-approved disclosure plan is conveyed to the stakeholders being solicited. Section 1126(e) provides that the court may designate any entity whose acceptance or rejection of the plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of chapter 11.
The court examined case law regarding solicitation and the sanction of designation. The "seminal" case in the Third Circuit, In re Century Glove, held that solicitation must be read narrowly because a broad reading of section 1125 could seriously inhibit creditor negotiations, and that there is no requirement that only court-approved statements could be communicated to creditors. The court found the reasoning and analysis of this seminal case to be dispositive. "Congress intended that creditors have the opportunity to negotiate with debtors and amongst each other; to the extent that those negotiations bear fruit, a narrow construction of ‘solicitation’ affords these parties the opportunity to memorialize their agreements in a way that allows a Chapter 11 case to move forward." The court also noted that designation of votes in this case would be inconsistent with the bedrock principle of creditor suffrage, especially where there is no bad faith, and the overwhelming majority of creditors voted to accept that plan.
Even "more to the point," "the interests that section 1125 and the disclosure requirements are intended to protect are not at material risk in this case." The RSA parties were sophisticated financial parties, well represented by counsel, and had engaged in months of negotiations. "It would grossly elevate form over substance to contend that section 1125(b) requires designation of their votes because they should have been afforded the chance to review a court-approved disclosure statement prior to making or supporting a deal with the Debtor."
The objecting parties placed special emphasis on the RSA requirements that the RSA parties vote to accept the plan. The court likewise rejected this argument because the parties were sophisticated, the agreement had been heavily negotiated, and in this "large, complex" case, the parties were entitled to "demand and rely upon assurances that accepting votes would be cast by the parties thereto," so long as the plan conformed to the terms set forth in the RSA. Therefore, the court held that "the filing of a chapter 11 petition is an invitation to negotiate…. When a deal is negotiated in good faith between a debtor and sophisticated parties, and that arrangement is memorialized a [sic] written commitment and promptly disclosed, section 1126 will not automatically require designation of the votes of the participants."
Release Objections– The objecting parties argued that the third-party releases were impermissible because they applied to those who (i) voted on the plan but did not opt out of the releases; (ii) had unimpaired claims and were deemed to accept the plan; and (iii) did not submit a ballot or otherwise opt out of the releases. The objecting parties urged that the releases could only be enforceable with the creditors’ affirmative consent.
The objecting parties cited In re Washington Mut. Inc., a Delaware bankruptcy case, in support of the proposition that affirmative consent was required for the third-party releases to be enforceable. The court distinguished Washington Mutual, because the release contained in the plan in Washington Mutual was deemed by the debtor to be essential to its reorganization, so creditors were not able to effectively opt out of the release. In this case, however, the court found the plan provisions to be clear and sufficient in informing a creditor the circumstances under which it would be bound by the releases. The court held that affirmative consent was not required to enforce the releases, and that "case law teaches that no such hard and fast rule applies." The court adopted "a more flexible approach in evaluating whether a third party release [is] consensual."
The court overruled all objections, and confirmed the debtor’s plan.
The court emphasized that encouraging a free rein in negotiations among the debtor and stakeholders is a vital aspect of the bankruptcy process, and that memorializing negotiations in a post-petition, pre-disclosure statement approval agreement is not a per se violation of section 1125. Thus, imposing the sanction of vote designation is a harsh remedy that should sparingly be used. There had been no allegation of bad faith in this case, and the court found no evidence of bad faith. The court made clear, though, that the exercise of bad faith could result in vote designation, so parties executing lock-up agreements must deal in good faith.Additionally, this court made clear that affirmative consent to third-party releases isnot a requirement, and that courts will take a "flexible approach" in assessing theseissues. Creditors (especially in the important jurisdiction of Delaware) must evaluate carefully the release provisions in proposed plans in order to protect their rights,and in order to avoid releasing any parties from liability that should not be released.