Trouble with images? View as a Web page.

Share this article:

Facebook Twitter More...
Polsinelli Shughart Tax and Business Planning in the News

Tax and Business Planning Attorneys

James E. Bird
Practice Area Chair

Christopher A. Ward
Practice Area Vice Chair
Bankruptcy Reporter Editor

James H. Billingsley
Sherry K. Dreisewerd
Justin K. Edelson
David D. Ferguson
Daniel J. Flanigan
Edward M. Fox
John J. Hebert
Shanti M. Katona
Jason A. Nagi
Andrew J. Nazar
Thomas J. O'Neal
Wesley D. Ray
Philip R. Rudd
Cristel D. Shepherd
Randye B. Soref
Terrance M. Summers
Jerry L. Switzer, Jr.
Michael M. Tamburini
Jarrett K. Vine
Michael W. Zimmerman

 


To learn more about our Bankruptcy and Financial Restructuring
group or to see a
complete list of our
attorneys, click here

 

To learn more about our Creditors Rights, Loan Enforcement and Creditor Bankruptcy Representation
group or to see a
complete list of our
attorneys, click here

 

March 2013

 

Polsinelli Shughart Bankruptcy Reporter:

Delaware Opinion in Indianapolis Downs Case Expands Third Party Releases and Approves Post-Petition Lock-Up Agreements

By Christopher A. Ward and Jarrett Vine

 

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."

Conclusion

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.

Polsinelli Shughart PC is special litigation counsel to the Indianapolis Downs debtors in this case and was a participant in certain of the issues address in this opinion.

For More Information:

If you have questions or would like more information on this topic, please contact the authors or one of our Bankruptcy & Financial Restructuring attorneys.

 

  To learn more about our RSS feeds, click here. Click here to learn more about our RSS feeds. Click here to learn more about our RSS feeds.

Polsinelli Shughart | In the News

Headlines and Bylines from polsinelli.com


 

National Survey Recognizes Attorney Roy Bash as a Client Service All-Star

Polsinelli Shughart Grows its Tax Practice in the St. Louis Area

e-Alert: Proposed and Final Rules Released Regarding the ACA's Individual Mandate

Video: WEBINAR - Fraud and Abuse: A Year in Review

 

Get more news from polsinelli.com.

   
Click here to learn more about our RSS feeds.

 

ABOUT POLSINELLI SHUGHART:

    Facebook
Connect with us on Facebook. Connect with us on Twitter. Connect with us on LinkedIn.

Serving corporations, institutions, entrepreneurs, and individuals, our attorneys build enduring relationships by providing legal counsel informed by business insight to help clients achieve their objectives. This commitment to our clients' businesses has helped us become the fastest-growing, full-service law firm in America*. With more than 630 attorneys in 16 cities, our national law firm is a recognized leader in the industries driving our growth, including health care, financial services, real estate, life sciences and technology, energy and business litigation. The firm can be found online at www.polsinelli.com. Polsinelli Shughart PC. In California, Polsinelli Shughart LLP.

* Inc. Magazine, September 2012

 
Chicago, Dallas, Denver, Edwardsville, Jefferson City, Kansas City, Los Angeles, New York Overland Park, Phoenix, St. Joseph, St. Louis, Springfield, Topeka, Washington, D.C., Wilmington DE Redefining the business of law.  SM
 

To update your email preferences, please contact us at Interaction@polsinelli.com. To opt out of these communications, click the unsubscribe link below.

Polsinelli Shughart provides this material for informational purposes only. The material provided herein is general and is not intended to be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship.

Polsinelli Shughart is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and should not be based solely upon advertisements.

Polsinelli Shughart PC. In California, Polsinelli Shughart LLP.

Polsinelli Shughart® is a registered trademark of Polsinelli Shughart PC.

Copyright © 2013 Polsinelli Shughart PC ®.

 
Polsinelli Shughart PC Polsinelli Shughart PC Polsinelli Shughart PC