Horizontal Gifting Upheld in Chapter 11 Plan in the Third Circuit

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By Rama Douglas (Kramer Levin Naftalis & Frankel LLP)

In Hargreaves v. Nuverra Environmental Solutions Inc. (In re Nuverra Environmental Solutions Inc.), 17-1024 (D. Del. Aug. 21, 2018), a Delaware district court upheld a bankruptcy court’s ruling that the secured creditors’ “gift” of cash and stock to holders of unsecured claims pursuant to a Chapter 11 plan did not violate the confirmation standards for approving a plan under Chapter 11, even though certain classes of unsecured claims (trade and business-related unsecured claims) received larger distributions from the gift than another class of unsecured claims (noteholders). The decision focuses on the permissible effect of “horizontal” gifting whereby the disparate treatment is among separate classes of the same priority level of creditors — here, separately classified general unsecured claims.

Debtors looking to pursue a reorganization may seek to provide a recovery to certain types of creditors (such as trade) within a class, but not others. Such discrimination is not permissible for value distributed by the debtor’s estate under a plan. Gifting has been a technique — subject to criticism (especially when class skipping is involved) — to provide disparate treatment. While the Third Circuit has not ruled on gifting, this latest Delaware district court decision supports the use of horizontal gifting. Such a decision will certainly be the focus of attention by supporters and critics of gifting.

The full article is available here.

Awaiting the Second Circuit’s Decision in Marblegate

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We anxiously await the Second Circuit’s decision in Marblegate, which was argued earlier this year. John Bessonette of Kramer Levin briefly summarizes the stakes:

“Section 316(b) of the Trust Indenture Act provides that ‘the right of any holder of any indenture security to receive payment of the principal of an interest on such indenture security . . . shall not be impaired or affected without the consent of such holder . . . .’ Various plaintiffs used this provision this past year to successfully challenge out-of-court restructurings in Marblegate and Caesars. In both cases, the Federal District Court for the Southern District of New York held that § 316(b) not only protects the formal legal right to receive payment under an indenture, but also restricts non-consensual out of court debt reorganizations, even where no express terms of the indenture are violated.

“However, neither case provided a limiting principle for when out-of-court restructurings violate § 316(b), and plaintiff firms are now taking advantage of this murkiness. In the last year, three lawsuits challenging distressed exchange offers have been filed by retail holders of unsecured bonds. Each lawsuit involves an exchange offer made to qualified institutional buyers by a distressed energy company, and retail bondholders who object to their bonds being subordinated to the secured bonds issued to QIBs as part of the exchange.

“The cases are still pending and it remains to be seen whether the courts will clarify the ambiguity around § 316(b). Meanwhile, this obscure provision of the TIA will occupy a more prominent role in out-of-court debt restructurings and serve as a new weapon for plaintiffs challenging such restructurings.”

His full memo is available here.

The Roundtable has issued multiple posts on the Marblegate litigation and the Trust Indenture Act. Mark Roe wrote what the appropriate limiting principle should be for courts when invalidating exit consent transactions under section 316(b) of the Act. He further argued that courts alone cannot solve the fundamental problems: The SEC must also act. The Roundtable also covered the 28-law-firm white paper on how courts should handle that section. See our archives for more.