Applicable Legal Standard A.
The approval of a disclosure statement is a two-step process. As a threshold 65.
matter, the reviewing court should examine the terms of the plan and determine whether on its face it is so fatally flawed that confirmation would be impossible. In re GSC, Inc., 453 B.R. 132, 157 n.27 (Bankr. S.D.N.Y. 2011) (“An unconfirmable plan is grounds for rejection of the disclosure statement; a disclosure statement that describes a plan patently unconfirmable on its face should not be approved.”); In re Quigley Co., 377 B.R. 110, 115-16 (Bankr. S.D.N.Y. 2007) (“If the plan is patently unconfirmable on its face, the application to approve the disclosure statement must be denied.”); In re Filex, 116 B.R. 37, 41 (Bankr. S.D.N.Y. 1990) (“A court approval of a disclosure statement for a plan which will not, nor [cannot], be confirmed by the Bankruptcy Court is a misleading and artificial charade which should not bear the imprimatur of the court.”); In re 266 Washington Assocs., 141 B.R. 275, 288 (Bankr. E.D.N.Y.), aff’d, 147 B.R. 827 (E.D.N.Y. 1992); In re Eastern Maine Elec. Coop., Inc., 125 B.R. 329, 333 (Bankr. D. Me. 1991); In re Cardinal Congregate I, 121 B.R. 760, 764 (Bankr. S.D. Ohio 1990); In re Dakota Rail, Inc., 104 B.R. 138 (Bankr. D. Minn. 1989). This rule is based on considerations of judicial economy and a desire to reduce the burden on the estate, because no purpose is served by proceeding further in respect of a disclosure statement describing a plan that cannot, as a matter of law, be confirmed. In re Monroe Well Service, Inc., 80 B.R. 324, 332 (Bankr. E.D. Pa. 1987); In re Pecht, 57 B.R. 137, 139 (Bankr. E.D. Va. 1986). As discussed below, the Debtors’ Amended Plan is patently unconfirmable and, therefore, the Amended Disclosure Statement cannot be approved.
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49 The factors that can inform whether a disclosure statement provides “adequate information” include: (1) the
events which led to the filing of a bankruptcy petition; (2) a description of the available assets and their value; (3) the anticipated future of the company; (4) the source of information stated in the disclosure statement; (5) a disclaimer; (6) the present condition of the debtor while in Chapter 11; (7) the scheduled claims; (8) the estimated return to creditors under a Chapter 7 liquidation; (9) the accounting method utilized to produce financial information and the name of the accountants responsible for such information; (10) the future management of the debtor; (11) the Chapter 11 plan or a summary thereof; (12) the estimated administrative expenses, including attorneys’ and accountants’ fees; (13) the collectability of accounts receivable; (14) financial information, data, valuations or projections relevant to the creditors' decision to accept or reject the Chapter 11 plan; (15) information relevant to the risks posed to creditors under the plan; (16) the actual or projected
In addition, the Court must consider whether the Amended Disclosure Statement 66.
provides “adequate information.” See 11 U.S.C. § 1125(a). “Adequate information” is defined as “information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor’s books and records . . . that would enable such a hypothetical reasonable investor of the relevant class to make an informed judgment about the plan . . . .” See 11 U.S.C. § 1125(a).
Whether a disclosure statement provides “adequate information will be 67.
determined by the facts and circumstances of each case.” See Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 417 (3d Cir. 1988). A debtor’s obligation to provide sufficient data “cannot [be] overemphasize[d],” id., 848 F.2d at 414, given that “[t]he disclosure statement was intended by Congress to be the primary source of information upon which creditors and shareholders could rely in making an informed judgment about a plan of reorganization.” In re Scioto Valley Mortg. Co., 88 B.R. 168, 170 (Bankr. S.D. Ohio 1988).
Courts consider numerous factors when determining the sufficiency of the 68.
information in a disclosure statement, including, but not limited to, “financial information, data, valuations or projections relevant to the creditors’ decision to accept or reject the Chapter 11 plan.” In re Divine Ripe LLC, 554 B.R. 395 at 401-02 (Bankr. S.D. Tex. 2016) (listing nineteen non-exhaustive factors set forth in In re Metrocraft Pub. Servs., Inc., 39 B.R. 567, 568 (Bankr.
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realizable value from recovery of preferential or otherwise voidable transfers; (17) litigation likely to arise in a non-bankruptcy context; (18) tax attributes of the debtor; and (19) the relationship of the debtor with the affiliates. Divine Ripe, 554 B.R. at 401-02.
N.D. Ga. 1984));49 see also In re Cypresswood Land Partners, I, 409 B.R. 396, 424 (Bankr. S.D. Tex. 2009) (applying the Metrocraft standard to determine adequacy of disclosure statement).
Whether a disclosure statement contains “adequate information” should be 69.
assessed from the perspective of the claims or interest holders with the ability to vote. See In re Phoenix Petroleum Co., 278 B.R. 385, 392-93 (Bankr. E.D. Pa. 2001) (citing In re Monroe Well Serv., Inc., 80 B.R. 324, 330 (Bankr. E.D. Pa. 1987)).
In other words, a satisfactory disclosure statement must provide some degree of 70.
corroborating factual information to encourage intelligent or “enlightened” voting. See In re Ferretti, 128 B.R. 16, 19 (Bankr. D.N.H. 1991) (disclosure statement must contain “simple and clear language delineating the consequences of the . . . plan so that [parties] can intelligently accept or reject the Plan”); BSL Operating Corp. v. 125 East Taverns, Inc. (In re BSL Operating Corp.), 57 B.R. 945, 950 (Bankr. S.D.N.Y. 1986) (“[D]isclosure statement . . . is evaluated . . . in terms of whether it provides sufficient information to permit enlightened voting by holders of claims or interests.”).
The Amended Disclosure Statement Does Not Provide Adequate B.
Information
The Debtors filed their Disclosure Statement and commenced solicitation on the 71.
Petition Date: that is, 35 days before the Amended Disclosure Statement was filed. The Amended Disclosure Statement (which describes an entirely different plan), filed only two days prior to the deadline to vote on the Amended Plan, is missing too many critical pieces of information to “permit enlightened voting” by the Second Lien Lenders. See In re BSL
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50 See Disclosure Statement, Ex. D. 51 See id.
Operating Corp., 57 B.R. at 950. The Amended Disclosure Statement suffers from the following material informational defects, each exacerbated by the minimal time provided by the Debtors to review it prior to voting:
The Valuation Analysis Does Not Provide A Reliable Valuation of the 1.
Debtors Or Their Unencumbered Assets
The Debtors attempt to comply with disclosure requirements to provide parties in 72.
interest with a valuation of the Debtors’ business through inclusion of the Valuation Analysis prepared by Moelis. However, as described above, the Valuation Analysis is based on Financial Projections that are, without explanation, dramatically lower than financial projections provided to investors only weeks prior, and that ignore the Debtors’ subsequent actual performance. The Valuation Analysis thus fails to provide potential voters with adequate information regarding the value of the Debtors.
Additionally, the Valuation Analysis does not provide a reliable analysis of the 73.
Debtors’ unencumbered assets. As described above, the Valuation Analysis provides no analysis of the Debtors’ unencumbered real property or the equity in the Debtors’ joint ventures. The Disclosure Statement also contains no facts or data to support Moelis’s “view” that the “estimated going concern value of the foreign entity unencumbered assets of the Reorganized Debtors would be in a range between $7.0 million and $13.5 million.”50 Indeed, Moelis indicates that relying on a single methodology for valuation, as Moelis did when valuing the Unencumbered Foreign Equity “could create a misleading or incomplete conclusion as to unencumbered value.”51 Therefore, the Valuation Analysis does not provide adequate information on the Debtors’ value or its unencumbered assets to permit “enlightened” voting on the Debtors’ Amended Plan.
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52 Amended Plan at § I.1.1.153. 53 Disclosure Statement at § 6.04(f).
The Amended Disclosure Statement Fails to Provide Creditors with 2.
Adequate Information Regarding the Treatment of Claims
The Amended Disclosure Statement provides that recoveries to Class 5 consist of 74.
their pro rata share of “a percentage of such New Jason Equity . . . equal to the value of any Unencumbered Asset Value minus (a) Other Secured Claims secured by the Unencumbered Property, minus (b) Administrative Claims (other than on account of Diminution in Value) against the applicable Debtor, minus (c) Other Priority Claims against the applicable Debtor, and minus (d) Diminution in Value, each as applicable.”52
This information is inadequate in several ways. First, the Amended Disclosure 75.
Statement also provides that all New Jason Equity is subject to dilution by the MIP and the New Junior Convertible Term Loan.53 The Amended Disclosure Statement, however, does not provide any analysis or discussion of that dilution, let alone the “simple and clear language delineating the consequences of the . . . plan” required by the law. See In re Ferretti, 128 B.R. at 19. As was the case with the previous Plan and Disclosure Statement, the New Junior Convertible Term Loan will soak up the lion’s share of the upside to the equity recovery, and saddle the equity with an expensive debt instrument. Because it does not “delineate the consequences” of the issuance of the New Junior Convertible Term Loan on Class 5 recovery, the Amended Disclosure Statement provides inadequate information.
Second, the Debtors have provided no evidence or analysis, either in the 76.
Amended Disclosure Statement or elsewhere, of the purported “deducts” to the Unencumbered Plan Recovery, including estimated administrative expenses and purported diminution claims. Without this information, creditors in Class 5 have no ability to determine what their recovery
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will be, and thus cannot make an informed judgment about the Amended Plan. See Divine Ripe, 554 B.R. at 402.
The Liquidation Analysis Fails to Provide Creditors with Adequate 3.
Information Regarding Estimated Chapter 7 Recoveries
The Liquidation Analysis is intended to demonstrate compliance with the “best 77.
interests test” under Bankruptcy Code section 1129(a)(7) and inform holders of Class 5 claims that their projected recovery under the Amended Plan is greater than or equal to what they might receive under a Chapter 7 liquidation. However, the Liquidation Analysis disregards the fact that there is substantial value that is unencumbered by the First Lien Lenders’ liens in determining potential recoveries to Second Lien Lenders and General Unsecured Creditors in a Chapter 7 liquidation. The Liquidation Analysis also posits $17 million to $18 million in Wind- Down Expenses without providing any data in support of that estimate. These deficiencies limit the utility of the Liquidation Analysis for holders of Class 5 claims and this Court alike. As such, the Amended Disclosure Statement is unapprovable.
THE AMENDED PLAN CANNOT BE CONFIRMED