Filed Under Temporary Seal — Subject to the Protective Order by and among the Debtors and Debtors-in-Possession of OneWeb Global Limited, et al., SoftBank Group Corp., Airbus Group Proj B.V., Banco Azteca, S.A. Institucion de Banca Multiple, Qualcomm and the Official Committee of Unsecured Creditors of OneWeb Global Limited, et al. Luc A. Despins, Esq.
Pedro A. Jimenez, Esq. G. Alexander Bongartz, Esq. Shlomo Maza, Esq.
PAUL HASTINGS LLP 200 Park Avenue
New York, New York 10166 Telephone: (212) 318-6000 Facsimile: (212) 319-4090 [email protected] [email protected] [email protected] [email protected]
Counsel to the Official Committee of Unsecured Creditors
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK --- X
:
In re : Chapter 11
: OneWeb Global Limited, et al., : Case No. 20-22437-RDD
: (Jointly Administered)
Debtors.1 :
--- X
SUPPLEMENTAL OBJECTION OF OFFICIAL COMMITTEE OF
UNSECURED CREDITORS TO DISCLOSURE STATEMENT RELATING TO FIRST AMENDED JOINT CHAPTER 11 PLAN OF
REORGANIZATION OF ONEWEB GLOBAL LIMITED, ET AL.
1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, if
any, are: OneWeb Global Limited (N/A); OneWeb Holdings LLC (5429); OneWeb Communications Limited (9487); WorldVu Satellites Limited (7802); WorldVu Development LLC (9067); WorldVu JV Holdings LLC (N/A); 1021823 B.C. LTD (8609); Network Access Associates Limited (8566); OneWeb Limited (8662); WorldVu South Africa (Pty) Ltd. (1867); OneWeb Chile SpA (2336); WorldVu Australia Pty Ltd. (5436); WorldVu Unipessoal Lda. (2455); OneWeb Norway AS (0209); OneWeb ApS (9191); OneWeb Network Access Holdings Limited (8580); OneWeb G.K. (1396); OneWeb Ltd (8661); WorldVu Mexico S. DE R. L. DE C.V. (1234). The Debtors’ headquarters is located at 195 Wood Lane, West Works Building, 3rd Floor, London, W12 7FQ, UK.
Page
-i-
PRELIMINARY STATEMENT ... 1
SUPPLEMENTAL BACKGROUND ... 5
I. DEBTORS’ NEW DISCLOSURE STATEMENT AND NEW PLAN ... 5
SUPPLEMENTAL OBJECTION ... 7
I. NEW DISCLOSURE STATEMENT AND NEW PLAN HIGHLIGHT ABSENCE OF GOOD FAITH ... 7
a. New Disclosure Statement Ignores that Purported Settlement Violates PSA Order ... 8
b. New Disclosure Statement Ignores that Purported Settlement and Releases Benefit Only Insiders SoftBank and Other Purported Noteholders ... 11
c. New Disclosure Statement Ignores that Purported Settlement Benefits Insiders and Is Not Arms’ Length ... 16
d. New Disclosure Statement Ignores Distinction Between Consensual and Non-Consensual Derivative Standing ... 17
e. New Disclosure Statement Ignores Distinction Between Estate Claims and Direct Creditor Claims ... 20
f. New Disclosure Statement Is Replete with Other Misrepresentations and Misstatements ... 21
II. NEW DISCLOSURE STATEMENT AND NEW PLAN DEMONSTRATE DEBTORS’ ENGINEERING OF IMPAIRED ACCEPTING CLASS... 24
a. Gerrymandering of Class 5 ... 24
b. Deemed Consolidation and Artificial Creation of Impaired Accepting Classes... 25
III. ABSOLUTE PRIORITY RISKS MUST BE DISCLOSED AND WOULD RENDER NEW PLAN PATENTLY UNCONFIRMABLE ... 26
IV. OTHER SUPPLEMENTAL OBJECTIONS ... 27
-i- TABLE OF AUTHORITIES
Page(s) Cases
In re Adelphia Commc’ns Corp.,
330 B.R. 364 (Bankr. S.D.N.Y. 2005) ...19
In re Adelphia Commc’ns Corp.,
368 B.R. 140 (Bankr. S.D.N.Y. 2007) ...18, 19
In re Adelphia Commc’ns Corp.,
371 B.R. 660 (S.D.N.Y. 2007) ...18
In re Adelphia Commc’ns Corp.,
544 F.3d 420 (2d Cir. 2008)...17, 18, 19, 20
In re Aegean Marine Petroleum Network, Inc.,
599 B.R. 717 (Bankr. S.D.N.Y. 2019) ...20
In re Al-Karim, Inc.,
529 B.R. 366 (Bankr. N.D. Ga. 2015) ...14
In re AppliedTheory Corp.,
493 F.3d 82 (2d Cir. 2007)...20
Big Shanty Land Corp. v. Comer Properties, Inc.,
61 B.R. 272 (N.D. Ga. 1985) ...8
In re Bush Indus., Inc.,
315 B.R. 292 (Bankr. W.D.N.Y. 2004) ...7
In re CBBT, L.P.,
No. 11–30036–H3–11, 2011 WL 1770438 (Bankr. S.D. Tex. May 9, 2011) ...7
In re Charter Commc’ns,
419 B.R. 221 (Bankr. S.D.N.Y. 2009) ...26
In re Cresta Tech. Corp.,
No. 16–50808 MEH, 2018 WL 2422415 (Bankr. N.D. Cal. May 29, 2018) ...14
In re Cybergenics Corp.,
226 F.3d 237 (3d Cir. 2000)...22
In re Drexel Burnham Lambert Grp., Inc.,
134 B.R. 493 (Bankr. S.D.N.Y. 1991) ...16 Pg 3 of 37
(continued)
Page
-ii-
In re Econ. Cast Stone Co.,
16 B.R. 647 (Bankr. E.D. Va. 1981) ...9
In re Enron Corp.,
No. 01–16034 (Bankr. S.D.N.Y. July 15, 2004) ...26
In re Future Energy Corp.,
83 B.R. 470 (Bankr. S.D. Ohio 1988) ...12
In re Genco Shipping & Trading Ltd.,
513 B.R. 233 (Bankr. S.D.N.Y. 2014) ...7
In re Georgetown Ltd. P’ship,
209 B.R. 763 (Bankr. M.D. Ga. 1997) ...8
In re Gilchrist,
No. 10-02851-8-SWH, 2011 WL 66047 (Bankr. E.D.N.C. Jan. 10, 2011) ...14
In re Greystone III Joint Venture,
995 F.2d 1274 (5th Cir. 1991) ...28
In re Midwestern Companies, Inc.,
55 B.R. 856 (Bankr. W.D. Mo. 1985)...9 Pepper v. Litton, 308 U.S. 295 (1939) ...16 In re Quigley Co., 437 B.R. 102 (Bankr. S.D.N.Y. 2010) ...12 In re Reuter,
427 B.R. 727 (Bankr. W.D. Mo. 2010), aff’d, 443 B.R. 427 (B.A.P. 8th Cir.
2011), aff’d, 686 F.3d 511 (8th Cir. 2012)...8
In re Transwest Resort Properties, Inc.,
881 F.3d 724 (9th Cir. 2018) ...26
In re Tribune Co.,
464 B.R. 126 (Bankr. D. Del. 2011) ...11, 26
In re Tribune Co.,
472 B.R. 223 (Bankr. D. Del. 2012) ...25
In re Vitreous Steel Prods. Co.,
TABLE OF AUTHORITIES (continued) Page -iii- In re Wash. Mut., 442 B.R. 314 (Bankr. D. Del. 2011) ...20 Statutes 11 U.S.C. § 510(c)(2) ...22 11 U.S.C. § 1129(a) ...7 11 U.S.C. § 1145(a)(1)(A) ...27 Pg 5 of 37
The Official Committee of Unsecured Creditors (the “Committee”) of the
above-captioned debtors and debtors in possession (collectively, the “Debtors” or “OneWeb”), by and through its undersigned counsel, hereby submits this supplemental objection (the “Supplemental Objection”) in (i) further support of its Preliminary Objection1 to the Initial Disclosure
Statement2 and to the Disclosure Statement Motion and (ii) response to the Disclosure Statement
Relating to the First Amended Joint Chapter 11 of Reorganization of OneWeb Global Limited, et al. [Docket No. 519] (the “New Disclosure Statement”). In support of this Supplemental
Objection, the Committee respectfully states as follows:
PRELIMINARY STATEMENT
1. The Committee continues to support the going concern sale of the Debtors’ business, along with a confirmation process that fairly treats all stakeholders. However, the Debtors’ last minute and fundamental changes to the New Disclosure Statement and the plan it describes (the “New Plan”)3 leave the Committee with no alternative but to file this
Supplemental Objection, as they remove any doubt that the Debtors are no longer working to advance the interests of their estates, but only to aid the Purported Noteholders and the Directors and Officers.
2. Through the guise of a “settlement,” the Debtors have proposed a fundamentally new (and fundamentally flawed) chapter 11 plan that, among other things, (a) reduces by approximately $91 million the amount of cash consideration to be paid to SoftBank on account of its roll-up DIP loans (approximately $68.1 million plus interest) and new money DIP loans
1 The “Preliminary Objection” is the Preliminary Objection of Official Committee of Unsecured Creditors to
Disclosure Statement Relating to Joint Chapter 11 Plan of Reorganization of OneWeb Global Limited, et al.
[Docket No. 499]. Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Preliminary Objection.
2 The “Initial Disclosure Statement” is the Disclosure Statement Relating to the Joint Chapter 11 Plan of
Reorganization of OneWeb Global Limited, et al. [Docket No. 421].
2
(approximately $22.7 million plus interest) and (b) in exchange, transfers $87.9 million of additional new equity in BidCo (the “New BidCo Equity”) to SoftBank. The indisputable effect of the change in the mix of cash/equity consideration is that the Available $90 Million—i.e., the $90 million in cash consideration that, pursuant to the PSA Order, is to be made available to unsecured creditors if the Committee’s Challenge of the Purported Notes is successful—is reduced by $68.1 million (i.e., SoftBank’s portion of the roll-up DIP loan), all in a transparent attempt to shield SoftBank from the Committee’s Challenge. In addition, and to be clear, the remaining portion of the Available $90 Million, i.e., $21.9 million, would all go to Banco Azteca on account of its portion of the roll-up DIP loan. In other words, all of the cash is now going entirely to the entity that the Court mentioned as potentially being walled off from the
Committee’s Challenge.
3. As the Court will recall, the PSA and the previous version of the plan provided that (a) $100 million in new BidCo equity (i.e., the BidCo Equity Consideration) would be distributed to the Purported Noteholders and (b) $150 million in cash (i.e., the Cash
Consideration) would be made available to pay, among other things, the outstanding new money DIP loans ($30 million plus interest) and roll-up DIP loans ($90 million plus interest) of the original DIP lenders, i.e., SoftBank and Grupo Elektra (an affiliate of Purported Noteholder Banco Azteca). In the PSA Order, entered at the Debtors’ request on July 13, 2020, the Court made crystal clear that $90 million of the cash consideration (specifically, the portion of the cash to be used to repay the roll-up DIP loans) is available to be distributed to creditors in the event the Committee were to succeed on its challenge to the Purported Notes.
4. Nonetheless, the Debtors have now, without Court approval, reduced the
Available $90 Million by $68.1 million (i.e., SoftBank’s portion of the roll-up DIP loans) to only $21.9 million. Meanwhile, the Debtors continue to argue, as they have all along, that none of the
BidCo equity can be distributed to unsecured creditors without disrupting the New Plan and jeopardizing the BidCo Transaction. Thus, the only possible purpose of the Debtors’ convoluted changes to the mix of cash/equity consideration is to remove value from the reach of unsecured creditors and protect SoftBank from its exposure in the event the Committee’s Challenge is successful (and, as an ancillary benefit, allowing SoftBank to participate in the potential upside of the Debtors’ reorganization by receiving additional BidCo equity). Because these plan amendments both violate the PSA Order and demonstrate unequivocally that the Debtors are not proceeding in good faith, the New Disclosure Statement should not be approved.
5. Furthermore, as detailed herein, there are numerous other issues with the New Disclosure Statement and the New Plan, both as it relates to the adequacy of the disclosures and the confirmability of the New Plan.
6. Finally, the Committee objects to the Debtors’ tactics of filing a fundamentally different plan and disclosure statement only two days before the August 28, 2020 hearing on the New Disclosure Statement (the “Disclosure Statement Hearing”), thereby leaving the Committee and other parties in interest without an adequate opportunity to review and analyze the multitude of changes contained in these filings. As the Court is well aware, Bankruptcy Rule 2002(b) requires that parties in interest receive at least 28 days’ notice to file objections to a disclosure statement. While the Committee, of course, understands that it is common for a disclosure statement to be revised in the lead-up to the hearing to address, in this instance the Debtors have modified core features of the plan, including the mix of cash and equity consideration to be provided by BidCo and the treatment of all voting classes, and, moreover, they have now introduced a new settlement of the Committee’s Challenge to Purported Notes.4
4 The Committee has previously warned that the Debtors’ strategy is to present the Court with a Hobson’s choice
of confirming an unconfirmable plan or losing the BidCo Transaction. The purported settlement is the same tactic, and the Court should not approve the New Disclosure Statement unless the New Plan includes a
self-4
7. Indeed, as the Committee’s Preliminary Objection specifically pointed out, the Initial Disclosure Statement was devoid of even the most basic information needed for creditors to be able to adequately evaluate the Debtors’ initial proposed plan [Docket No. 420] (the “Initial Plan”),5 including, for example, such basic matters as the treatment of General Unsecured Claims and Ongoing Trade Claims. While the New Plan and the New Disclosure Statement fix several of these deficiencies, the Debtors have now added a total of 27 new pages to the New Disclosure Statement (excluding exhibits), almost all of which contain substantive (and one-sided)
discussions of the core legal disputes in these chapter 11 cases. As discussed herein, these additions themselves raise countless new issues.
8. The Debtors should not be able to use a placeholder skeleton of a disclosure statement to start the 28-day clock under Bankruptcy Rule 2002(b), and then file their
substantive pleadings on only 48-hours’ notice. Accordingly, the Committee has requested (and reiterates its request here) that the hearing on the New Disclosure Statement be adjourned for a very short period of time to allow the Committee and other parties in interest to fully review and analyze the New Disclosure Statement and the New Plan, including (among other things6) whether to seek an order form the Court enforcing the PSA Order and compelling the parties to return to the status quo ante of the Available $90 Million.7
executing provision that allows, and provides a mechanism for, the Committee the pursue the claims raised in the Committee’s Challenge in the event the purported settlement is denied at confirmation.
5 See Prelim. Obj. at 1 n.1.
6 The Court has already (over the Debtors’ objection) ordered the Debtors to provide the Committee with
discovery regarding the negotiation and execution of the proposed plan, including, specifically, provisions regarding the form of consideration to be paid by BidCo. The drastic changes to these very provisions will require to Committee to take and review additional discovery to fully understand these changes.
7 The Committee also recognizes that, under different circumstances, it would have already provided a letter for
inclusion in the Debtors’ solicitation package for consideration by general unsecured creditors. However, in this instance, given the multitude of last-minute, fundamental changes to the New Plan and the New Disclosure Statement, as well as a number of unresolved key issues (including, most notably, the Committee’s pending motion for derivative standing to pursue its challenge of the Purported Notes), it is impossible to prepare such a letter at this time. In this regard, the Committee also notes that, assuming a Committee letter will be included in
SUPPLEMENTAL BACKGROUND8
9. The Debtors filed their Initial Plan and the related Initial Disclosure Statement on July 17, 2020, less than four months after the March 27, 2020 Petition Date. The Committee filed its Preliminary Objection on August 17, 2020.
10. The Disclosure Statement Hearing was originally scheduled for August 24, 2020, and was adjourned by the Debtors to August 28, 2020.9 At approximately noon (ET) on August 26, 2020, the Debtors filed their substantially revised New Plan and New Disclosure Statement. I. Debtors’ New Disclosure Statement and New Plan
11. The New Plan makes numerous modifications to the Initial Plan, most notably to the mix of consideration to be provided by BidCo.10 This, in turn, directly affects the treatment of all voting classes, including Class 4 General Unsecured Claims and Class 5 Ongoing Trade Claims. The changes to the mix of cash and equity consideration between the Initial Plan and the New Plan consist of a labyrinth of defined terms, but, in essence, can be summarized as
follows:11
Step 1: The amount of the BidCo Equity Consideration—i.e., the consideration that funds the distributions to the Purported Noteholders—is reduced by $3 million from $100 million to $97 million.
the solicitation package, section VII.C.9 of the New Disclosure Statement and the order approving the disclosure statement should be revised to ensure that such letter receives the same protections as the New Disclosure Statement.
8 To avoid undue repetition, the Background section of the Preliminary Objection is incorporated by reference
herein.
9 See Notice of Adjournment of Aug. 24, 2020 Disclosure Statement and Omnibus Hr’g [Docket No. 507]. 10 The Committee’s review of the New Disclosure Statement and the New Plan is ongoing, and the Committee
reserves all rights accordingly.
11 The Committee notes that the following summary is based on the approximate numbers provided in the New
Plan and the New Disclosure Statement, and thus are subject to rounding errors and other potential imprecisions (e.g., accrued interest). The Committee is continuing to review these numbers and reserves all its rights in this regard.
General
Unsecured Claims
Not applicable, unless Committee’s Challenge successful
$6.1 million Increase of $6.1 million, but loss of challenge rights Other Approximately $30 million (depending on amount of interest on DIP loans) Approximately $30 million (depending on amount of interest on DIP loans) Allocation of New BidCo Equity
$100 million $184.9 million Increase of $84.9 million Purported Note
Claims (i.e., BidCo Equity Consideration)
$100 million $97 million Decrease of $3 million
SoftBank’s DIP Loans (i.e.,
SoftBank Rollover BidCo Equity)
Not Applicable $87.9 million Increase of $87.9 million
Total Equity and Cash Consideration
$250 million $250 million
SUPPLEMENTAL OBJECTION
I. New Disclosure Statement and New Plan Highlight Absence of Good Faith
13. The New Disclosure Statement should be denied because the New Plan was not filed in good faith and, therefore, cannot be confirmed. See In re CBBT, L.P., No. 11–30036– H3–11, 2011 WL 1770438, at *3 (Bankr. S.D. Tex. May 9, 2011) (“Debtor’s plan is patently unconfirmable because it is clear that it was not proposed in good faith”). The good faith
requirement “speaks more to the process of plan development than the content of the plan.” In re
Genco Shipping & Trading Ltd., 513 B.R. 233, 261–62 (Bankr. S.D.N.Y. 2014) (internal
citations removed). As discussed by one court, “[w]hile other provisions of 11 U.S.C. § 1129(a) speak to the content of a plan, subdivision (a)(3) imposes a strict mandate for proper process and methodology.” In re Bush Indus., Inc., 315 B.R. 292, 305–06 (Bankr. W.D.N.Y. 2004).
14. The good faith inquiry is not, however, limited to process; substantive
8
faith. See In re Georgetown Ltd. P’ship, 209 B.R. 763, 769–70 (Bankr. M.D. Ga. 1997) (“The failure to disclose relevant information in a bankruptcy case has been held to be a sufficient basis for finding bad faith in the proposal of a plan.”); Big Shanty Land Corp. v. Comer Properties,
Inc., 61 B.R. 272, 281 (N.D. Ga. 1985) (“there is sufficient precedent for resting a finding of bad
faith on nondisclosure or misrepresentation”); In re Reuter, 427 B.R. 727, 770 (Bankr. W.D. Mo. 2010), aff’d, 443 B.R. 427 (B.A.P. 8th Cir. 2011), aff’d, 686 F.3d 511 (8th Cir. 2012) (good faith determination requires court to consider “whether the debtor has made any fraudulent
misrepresentation to mislead the bankruptcy court”).
15. Here, the New Disclosure Statement and the New Plan contain numerous indicia that they were not filed in good faith. These indicia frequently intertwine throughout the Debtors’ description of the purported settlement of the Committee’s Challenge proposed in the New Plan and the releases granted to the Purported Noteholders and to the Directors and Officers, and are also replete in the Debtors’ responses to the Preliminary Objection.
a. New Disclosure Statement Ignores that Purported Settlement Violates PSA Order
16. As the Court will recall, the Committee negotiated, all parties agreed to, and the Court approved, various protections in the PSA Order so as not to impair the Committee’s Challenge or prejudice the plan confirmation process in any way. Of particular note, the Court’s PSA Order provided:
For the avoidance of doubt, in the event of a successful challenge by the Creditors’ Committee under the Cash Collateral Order of the Secured Notes Claims rolled up into Roll-Up Loans (as defined in the Order (I)
Authorizing Debtors To Obtain Postpetition Secured Financing, (II) Granting Liens And Providing Superpriority Administrative Expense Claims, (III) Modifying The Automatic Stay, and (IV) Granting Related Relief [Docket No. 121]) (in the approximate amount of $90 million), the
Cash Consideration provided for in the PSA will not be reduced and shall be distributed in accordance with the Bankruptcy Code and any applicable order of this Court to holders of allowed claims to the
extent necessary to satisfy such claims (or if applicable, interests), and no Exit Fee shall become due or be triggered under the DIP Amendment as a result thereof.14
17. The New Plan reduces the Available $90 Million to only $21.9 million and, thus, clearly violates the PSA Order. For that reason alone, it is not proposed in good faith. See In re
Econ. Cast Stone Co., 16 B.R. 647, 650 (Bankr. E.D. Va. 1981) (“The violation of an order of
the Court to the probable detriment of the creditors is shocking to the Court and this Court cannot find that the Debtor is operating in good faith under those circumstances.”). See also In
re Midwestern Companies, Inc., 55 B.R. 856, 864 (Bankr. W.D. Mo. 1985) (lack of good faith
where, among other things, plan proponents showed manifest “disregard for the directives of the court”).
18. Further evidencing the Debtors’ lack of good faith, the New Disclosure Statement does not include a single reference to the Available $90 Million under the PSA Order and the elimination of this basic concept to which all parties had previously agreed. Indeed, the fate of the Available $90 Million only becomes apparent after a careful review of a tangled web of defined terms. This obfuscation is particularly egregious in light of the fact that—in an effort to establish that no equity in BidCo can be made available to unsecured creditors (whether directly or indirectly)—the New Disclosure Statement quotes, on three separate occasions, the Court’s statement at the July 28 hearing that “the remedies that the Committee would see [in the event of a successful challenge] would be limited to the other aspects of the consideration provided by BidCo, which is ninety million dollars.”15
19. Worse, the Debtors have gone farther than to hide behind a tangled web of defined terms and have actively misrepresented their true intentions regarding the Available $90
14 PSA Order ¶ 7 (emphasis added) [Docket No. 400].
10
Million. In Exhibit A to the Debtors’ Reply, the Debtors summarize certain of the Committee’s objection and the Debtors’ response. One of these summaries states that the Committee has objected to the lack of information regarding the status of the Committee’s Challenge, including as it relates to the “procedure for unwinding the $90 million on account of the ‘roll up’ DIP loan.”16 The Debtors simply respond that they have determined that no “additional disclosure is warranted at this time.” Entirely absent from the Debtors’ response is the real truth: the Debtors have not provided any further information on the process for unwinding the Available $90 Million because they have unilaterally eliminated this cash as a source of recovery for unsecured creditors.
20. The fact that the Debtors did not unveil this drastic change in the BidCo
Transaction structure until two days before the Disclosure Statement Hearing is further evidence that the Debtors are not acting in good faith here. This conclusion is not altered by the
settlement discussions held with the Committee during the brief adjournment of the Disclosure Statement Hearing (from August 24, 2020 to August 28, 2020), to which the Debtors’ Reply attaches great significance. To the contrary, the Debtors’ conduct during these settlement discussions actually underscores that they were not negotiating in good faith. Despite the clear terms of the PSA Order, the Court’s clear directive at the Preliminary Challenge Hearing that the Debtors “set[] aside the ninety million and not specifically allocat[e] it at this point,”17 and the Debtors’ own statement in the Initial Disclosure Statement that the Available $90 Million “provided for in the Plan Support Agreement shall not be reduced and shall be distributed in accordance with the Bankruptcy Code,” during none of these discussions—including the
settlement conference held in the afternoon of August 25, 2020, the day before the Debtors filed
16 Debtors’ Reply to Objections to the Disclosure Statement (the “Debtors’ Reply”), Ex. A at 2 [Docket No. 517]. 17 Preliminary Challenge Hr’g Tr. 116:17-19 (emphasis added).
the New Disclosure Statement and New Plan—did the Debtors see fit to advise the Committee that they had changed the entire structure of the BidCo consideration to eliminate the Available $90 Million as a source of recovery for general unsecured creditors if the Committee’s Challenge is successful.
21. A crucial element of good faith is participation of the official committee of unsecured creditors in settlement negotiations. See In re Tribune Co., 464 B.R. 126, 156–57 (Bankr. D. Del. 2011) (participation of creditors’ committee in settlement negotiations “is highly relevant when considering whether the . . . Plan Settlements were negotiated in good faith”). Moreover, a committee’s participation in plan negotiations is especially important in these cases, where the Debtors are negotiating with insiders that have granted themselves releases and where there are no other constituencies to act as a counterweight to the insiders-debtors monolith.18 The Committee submits that “negotiations” in which the Committee, based on the Debtors’ own statements and pleadings, was operating under critical assumptions the Debtors knew no longer to be true are, in fact, not negotiations at all.
22. In sum, as a matter of process and substance, the Debtors’ New Plan represents an eleventh-hour bait and switch that is contrary to the Debtors’ representations to this Court, to all parties in interest (including the Committee), violates the PSA Order, and, ultimately, evidences that the Debtors have not acted in good faith.
b. New Disclosure Statement Ignores that Purported Settlement and Releases Benefit Only Insiders SoftBank and Other Purported Noteholders
23. As the Committee explained in its Preliminary Objection (and in other parts of this Supplemental Objection), the Debtors have focused at every turn on protecting and
18 For example, this is not a case with a multi-tiered capital structure; there are no “second lien” holders that could
push back against the Purported Noteholders; nor is there a “fulcrum security” that is partially in the money. Other than the Purported Noteholders (who control the Debtors through their representatives on the Debtors’ board), the unsecured creditors represented by the Committee are the only interested party (or constituency).
12
advancing the interests of their controlling insiders at the expense of other constituencies. “Clearly, an attempt by a debtor-in-possession to give favorable treatment to an insider is violative of § 1129(a)(3)’s good faith requirement.” In re Future Energy Corp., 83 B.R. 470, 487 (Bankr. S.D. Ohio 1988); see also In re Quigley Co., 437 B.R. 102, 126–27 (Bankr. S.D.N.Y. 2010) (lack of good faith where controlling shareholder Pfizer “wrongfully
manipulated the voting process to assure confirmation of the Quigley plan, and thereby gain the benefit of the channeling injunction for itself,” where Pfizer “conceived and executed the global strategy,” was “the only source of chapter 11,” “the real proponent of this plan,” and where plan was “designed to free the Pfizer Protected Parties from derivative liability, and only incidentally, to reorganize Quigley to the extent necessary to confirm the plan”).
24. The Debtors are offering unsecured creditors $6.1 million in satisfaction of all unsecured claims and as a purported settlement of the Committee’s Challenge of the Purported Notes and all claims against the Directors and Officers. Absent from the New Disclosure Statement, however, is any explanation of the convoluted scheme the Debtors are putting in place to re-allocate the mix of cash and equity consideration to free up this $6.1 million in consideration for general unsecured creditors—and, critically, how that scheme is for the singular benefit of SoftBank.
25. Contrary to the intimations in the New Disclosure Statement, the purpose of altering the mix of cash and equity consideration is not to fund a recovery to unsecured creditors. That purpose could have been achieved without altering the BidCo Transaction structure and simply (for example) allocating $6.1 million of the Available $90 Million to general unsecured creditors.19 By contrast, the Cash Exchange does not benefit unsecured
19 For the avoidance of doubt, the Committee does not believe that the payment of $6.1 million is a reasonable
settlement of the Committee’s Challenge and other claims the estates have against the Directors and Officers.
creditors, nor does it provide any new benefit to the Debtors (in fact, one can only wonder why the Debtors, which have repeatedly raised concerns over their ability to pay administrative
expenses, would modify an agreement to prioritize the receipt of equity over cash by the estates). Nor is the Cash Exchange necessary to enable the BidCo Transaction to close, as BidCo had already agreed to pay the Original Cash Consideration in an amount of $150 million. The Cash Exchange does, however, benefit SoftBank, which now has converted $68.1 million of its recovery on the roll-up DIP loans from cash into New BidCo Equity, for the transparent purpose of placing that consideration beyond the reach of unsecured creditors, even if the
Committee’s Challenge is successful.20 The New Disclosure Statement explains none of this, nor does it explain that because equity in BidCo is arguably (and based on the Court’s
preliminary views expressed at the July 28, 2020 hearing) less vulnerable to the Committee’s Challenge, the Cash Exchange is designed to insulate the entirety of SoftBank’s recovery (both on account of the roll-up DIP loans and on account of its Purported Notes) from the Committee’s Challenge.
26. Relatedly, the Debtors assert that they needed to release SoftBank and the other Purported Noteholders because their consent is necessary for the New Plan. The Debtors ignore, however, that under their own Liquidation Analysis, (i) the new money DIP loans would receive no more than a 21% recovery and (ii) the roll-up DIP loans and the Purported Notes would receive a zero recovery. It is hard to understand, therefore, what Softbank and the other Purported Noteholders (whether in their capacity as DIP lenders or as holders of the Purported Notes) were giving up when they agreed to support the New Plan: according to the Debtors, their
20 To be clear, the Committee does not concede that unsecured creditors would be unable to qualify as minority
investors in BidCo, so that they could receive (through an intermediary, such as a liquidating trustee) equity in BidCo. Furthermore, the Committee reiterates its position that—even if unsecured creditors could not qualify— in the event of a successful challenge, it would violate the absolute priority rule for the Purported Noteholders to receive any consideration before unsecured creditors are paid in full.
14
alternative was far worse, and these concessions (if any) were driven by a desire to maximize their own recovery, not some altruistic gesture to help the estates. See In re Cresta Tech. Corp., No. 16–50808 MEH, 2018 WL 2422415, at *7 (Bankr. N.D. Cal. May 29, 2018) (“A
compromise is defined as an agreement for the settlement of a real or supposed claim in which each party surrenders something in concession to the other.”) (internal quotation marks omitted).
27. Furthermore, the Debtors’ Reply states that the Purported Notes claims “are presumptively valid,” which the Debtors present as an additional reason why the Debtors
required SoftBank and the Purported Noteholders to consent to the New Plan. This is simply not the law: a “proof of claim is prima facie valid unless an objecting party makes a colorable
challenge to the proof of claim.” In re Al-Karim, Inc., 529 B.R. 366, 372-73 (Bankr. N.D. Ga. 2015) (internal citations omitted); In re Gilchrist, No. 10-02851-8-SWH, 2011 WL 66047, at *2 (Bankr. E.D.N.C. Jan. 10, 2011) (“If the objecting party establishes a colorable challenge to the claim, the burden shifts back to the claimant to prove the claim’s validity.”) (internal quotation marks omitted).
28. At the Preliminary Challenge Hearing, the Court stated, with regards to the claims asserted in the Committee’s Challenge, that “it does appear to me that the claims are
colorable.”21 Further, even apart from the Committee’s Challenge, the Committee has filed an objection to the Purported Noteholders’ alleged secured claims under section 502(b) of the Bankruptcy Code, which objection will remain pending regardless of whether the Court grants the Standing Motion. As such, it is simply not true that the Purported Noteholders’ alleged secured claims are presumptively valid. In any event, if the Debtors were truly the honest brokers that they pretend to be, the New Plan would, as the Court has previously suggested, contain a mechanism to allow the Committee to pursue its challenge
21 Preliminary Challenge Hr’g Tr. 104:17-18.
confirmation in the event the Court declined to approve the insider settlement of $6.1 million. The absence of such a mechanism is another reason not to approve the New Disclosure Statement.
29. Further, the New Disclosure Statement explains that SoftBank’s consent to the New Plan (which consent was not really required, and could have been obtained without the releases) was obtained on July 9, 2020 when SoftBank executed a joinder to the PSA. According to the New Disclosure Statement, this joinder was contingent on the releases it would be granted. The problem with this assertion, and what the New Disclosure Statement ignores, is that the Court rejected this construct. Indeed, the PSA Order explicitly precludes the possibility that anything in the PSA, or a joinder thereto, could have any effect on the Committee’s challenge rights or somehow give the Purported Noteholders a veto right over any chapter 11 plan.22
30. Finally, the Committee notes that only SoftBank—and not the other Purported Noteholders and DIP lenders—executed a joinder to the PSA. As such, whatever consideration SoftBank may have provided in exchange for its releases, the other Purported Noteholders and DIP lenders did not provide such consideration and there is no basis for these parties to benefit from the releases.23
31. In sum, creditors, when evaluating the Debtors’ proposed “settlement” of the Committee’s Challenge and the release of the Purported Noteholders, should have the benefit of
22 See PSA Order 9 (“For the avoidance of doubt, any party that executes a joinder to the Plan Support
Agreement . . . shall not, solely by reason of executing a joinder agreement, have any rights as a party to the Plan Support Agreement, including without limitation not having (a) any veto rights, (b) any release or indemnification rights under the Plan Support Agreement other than to terminate the joinder in the event the Plan does not contain the release or indemnification as contemplated by the Plan Support Agreement, or (c) any right to terminate the Plan Support Agreement as between the Debtors and the Plan Sponsor.”).
The PSA Order also precludes the possibility that it could have any effect on the recovery of unsecured creditors “including as it relates to the prosecution of any avoidance actions and distributions of proceeds
thereof.” PSA Order ¶ 7.
23 Alternatively, for these non-signatories to be considered to have provided consideration, it must be that (as the
16
a full analysis of these issues and an explanation from the Debtors as to why they awarded these releases in light of SoftBank and the Purported Noteholders’ limited leverage.
c. New Disclosure Statement Ignores that Purported Settlement Benefits Insiders and Is Not Arms’ Length
32. The New Disclosure Statement contains numerous generic statements that the releases and the purported settlement are supported by the Debtors’ business judgment. However, the Debtors ignore that insiders “dealing[] with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.” Pepper v. Litton, 308 U.S. 295, 306 (1939).
33. The Debtors assert, without explanation, that the purported settlement “was the result of arms’ length bargaining among the Debtors, the Plan Sponsor, and SoftBank.” This assertion, of course, ignores—as the Court has recognized—that it “is indisputable that SoftBank is an insider.”24 Nor does the New Disclosure Statement mention that settlements negotiated with insiders are subject to heightened scrutiny, as they raise obvious concerns about who is really controlling the debtor and benefitting from a given transaction or settlement. See In re
Drexel Burnham Lambert Grp., Inc., 134 B.R. 493, 498 (Bankr. S.D.N.Y. 1991) (“Lastly, this
agreement was negotiated by Debtors with an insider. We subjected the agreement to closer scrutiny because it was negotiated with an insider, and hold that closer scrutiny of insider
agreements should be added to the cook book list of factors that Courts use to determine whether a settlement is fair and reasonable.”).
24 Preliminary Challenge Hr’g Tr. 98:10.
34. In fact, the Debtors attempt to hide this issue by stating that none of the Purported Noteholders “independently controls the Debtors” or their management.25 Of course, this essentially (if unintentionally) recognizes the obvious truth that, as a whole, the Purported Noteholders do control the Debtors and their management.
d. New Disclosure Statement Ignores Distinction Between Consensual and Non-Consensual Derivative Standing
35. The Debtors have asserted that their releases in favor of the Directors and Officers and the Purported Noteholders are appropriate because, the Debtors argue, they may exercise total control over the settlement of the claims with respect to which the Committee seeks
derivative standing, even if the Committee is granted derivative standing to pursue such claims.26 36. It is, of course, ultimately left for the Court to determine whether to grant the Committee the exclusive right to settle the claims asserted in the Committee’s Challenge and it is, therefore, possible that the Debtors will be able to settle these claims. However, what the Debtors cannot do is change the legal and factual landscape prior to approval of a settlement in a way that will make it impossible for the Committee to pursue the claims in the event the Court denies the insider settlement. Moreover, the Committee submits that the Debtors are wrong, and that—under these circumstances—they would not, and should not, retain settlement authority if the Standing Motion is granted.
37. The Debtors rely on the Second Circuit’s decision in In re Adelphia Commc’ns
Corp., 544 F.3d 420 (2d Cir. 2008) (“Adelphia III”), which affirmed Judge Gerber’s approval of
a plan settlement over the objection of an equity committee that had previously been granted
25 New Disclosure Statement § V.B.2.
26 The Committee has obviously sought authorization to pursue the claims against the Purported Noteholders, and
reserves all rights to seek similar authority with respect to claims in excess of $6 million against the Directors and Officers.
18
derivative standing. For several reasons, however, this decision does not support the Debtors’ position.
38. First, neither Adelphia III, nor the bankruptcy court and district court decisions it affirmed,27 actually hold that the Debtors may exercise total control over settlements. This is because Adelphia involved debtors that had essentially been “cleared” of any improper motives in connection with failing to pursue the claims for which the Adelphia equity committee had obtained derivative standing. See, e.g., Adelphia III at 425 (noting that the bankruptcy court “emphasized that it had not found any improper motive on the part of the Debtors in failing to pursue the claims”). Put another way, Adelphia merely stands for “the proposition that a debtor-in-possession may assert control over an adversary proceeding notwithstanding a committee’s derivative standing, where that standing was granted for reasons other than debtor misconduct.” Adelphia II, at 671 (emphasis added).
39. Here, by contrast, the Committee seeks derivative standing precisely because of the Debtors’ conduct, and failure to investigate or pursue claims against the insiders who (i) are the Debtors’ management or (ii) control the Debtors’ management. These are issues that
Adelphia I expressly did not address (and, that, therefore, were not addressed by either Adelphia II or Adelphia III). As explained by Judge Gerber:
I don’t need to decide, and don’t now decide, whether a debtor might lose the power to discontinue or settle litigation brought on its behalf under
STN authority where STN authority was granted because the Debtor
had improper motive or couldn’t be relied upon to act responsibly, or where a court, when issuing STN authority, chose to take the debtor's control away. Here we have neither of those scenarios.
Adelphia I, at 272 n.319 (emphasis added).
27 See In re Adelphia Commc’ns Corp., 371 B.R. 660 (S.D.N.Y. 2007) (“Adelphia II”) and In re Adelphia
Commc’ns Corp., 368 B.R. 140 (Bankr. S.D.N.Y. 2007) (“Adelphia I” and, together with Adelphia II and Adelphia III, “Adelphia”).
40. The Committee’s allegations strike at exactly the points that Judge Gerber did not decide in Adelphia. The Committee raises serious questions about the Debtors’ motives in failing to pursue the claims asserted by the Committee and whether the Debtors can be relied on to act as responsible fiduciaries. Thus, Adelphia plainly does not control whether the Debtors can settle the claims asserted by the Committee.
41. Second, and compounding the foregoing point, the facts of Adelphia with respect to the Adelphia equity committee’s derivative standing rights could hardly be any different from the facts here. For example, in Adelphia, the equity committee was a secondary player in the litigation28 at issue, which was being pursued by the debtors and official committee of
unsecured creditors as co-plaintiffs. See Adelphia I, at 272. In addition, the Adelphia debtors did not oppose the equity committee’s request for derivative standing (which was only requested with respect to certain additional claims not already being pursued by the debtors and the
creditors’ committee), and the equity committee had signed a stipulation providing explicitly that the debtors retained the right to settle the litigation. See Adelphia I, at 272-73. In fact, for these reasons the bankruptcy court stated that the equity committee’s proceeding to obtain derivative standing “resembled one in which the debtor-in-possession consented.” Adelphia III, at 425 (citing the Adelphia Initial Standing Decision, at 368 n.2). That is the exact opposite of the scenario here, where the debtors have refused to even investigate the claims being asserted by the Committee, have opposed the Committee’s efforts to pursue such claims, and now seek to immediately settle away the claims for less than a pittance.
42. Moreover, the Committee notes that the Debtors have mischaracterized the Second Circuit’s holding in Adelphia III in a transparent attempt to gloss over these key factual
28 This litigation alleged that certain bank lenders and others had aided and abetted fiduciary breaches by the
debtors’ principals. See In re Adelphia Commc’ns Corp., 330 B.R. 364, 372 (Bankr. S.D.N.Y. 2005) (the
20
distinctions. Quoting the Second Circuit, the Debtors state that a committee that has been granted standing “serves with the approval and supervision of a bankruptcy court and shares the labor of litigation with the debtor-in-possession.”29 For all the reasons detailed above, however, while the equity committee in Adelphia may have shared the litigation with the debtors, it is not the case that all committees receive derivative standing do so—and it is certainly not the case here.
43. For all the forgoing reasons, the Debtors’ assertion of absolute settlement rights regardless of the Committee’s derivative standing should be rejected.
e. New Disclosure Statement Ignores Distinction Between Estate Claims and Direct Creditor Claims
44. As noted above, the Debtors’ assertion that they can settle the claims they own is, at the very least, questionable under these circumstances (and this is especially true for the claims against the Purported Noteholders, which the Debtors have released). Regardless, the Debtors ignore that individual unsecured creditors have direct (not derivative) standing to seek equitable subordination of the Purported Noteholders’ claims. See In re AppliedTheory Corp., 493 F.3d 82 (2d Cir. 2007) (discussing In re Vitreous Steel Prods. Co., 911 F.2d 1223 (7th Cir.1990)).
45. The Debtors have asserted that the Third Party Releases (which would release unsecured creditors’ direct claims) “are consensual.”30 The Committee has already detailed its
29 Adelphia III at 427 (internal quotation marks omitted)
30 Debtors’ Reply ¶ 41. It is not clear whether the Debtors are also arguing, in the alternative, that the Third Party
Releases satisfy the standard for non-consensual releases in the Second Circuit. The Committee reserves all rights in that regard, and notes that (i) in light of the Debtors’ Liquidation Analysis and the alternatives facing them, the Purported Noteholders’ concessions are not quite so valuable or as hard to obtain as the Debtors would have the Court believe and (ii) with respect to the releases granted to the Directors and Officers, “there is no basis for granting third party releases of the Debtors’ officers and directors, . . . . [as] [t]he only
‘contribution’ made by them was in the negotiation of the Global Settlement and the Plan, [which] activities are nothing more than what is required of directors and officers of debtors in possession (for which they have received compensation and will be exculpated).” In re Wash. Mut., 442 B.R. 314, 354 (Bankr. D. Del. 2011);
see also In re Aegean Marine Petroleum Network, Inc., 599 B.R. 717, 728-29 (Bankr. S.D.N.Y. 2019) (“[T]he Pg 25 of 37
objection to the use of an “opt-out” structure, both as a general matter and under the particular facts of these cases, and incorporates those arguments here. However, even if the Court were inclined to approve the opt-out structure, the Debtors’ disclosures are inadequate. The New Disclosure Statement should explain to creditors that (i) a creditor may vote for the New Plan and still opt out of the Third Party Releases, (ii) opting out of the Third Party Releases will preserve a creditor’s right to bring direct claims, including the U.K. Insolvency Claims and equitable subordination claims, and (iii) the Court has already determined (based on the Debtors’ misleading press release and other factors) that there are colorable claims of equitable
subordination against the Purported Noteholders.
f. New Disclosure Statement Is Replete with Other Misrepresentations and Misstatements
46. In addition to the above, the New Disclosure Statement contains numerous misleading statements, misrepresentations, and outright falsehoods, including many that were highlighted by the Preliminary Objection and now are only exacerbated in the New Disclosure Statement. While the Committee has not yet completed its review of the eleventh-hour
pleadings, it has compiled the below list of some of the more egregious examples:
The Debtors have included a lengthy discussion of the Standing Motion and the Committee’s Challenge, including detailed presentations of the responses to the Committee’s arguments. However, the Debtors make no mention of the fact that at the Preliminary Challenge Hearing the Court concluded that “it does appear to me that the claims are colorable.”31 This failure is particularly egregious in light of the inappropriately argumentative tone adopted in the New Disclosure Statement, which is not a legal brief, yet routinely uses hyperbolic and conclusory statements to describe the Committee’s claims as meritless, baseless, without basis, and not colorable. It is hard to imagine that the Court could make a finding that the New Disclosure Statement contains “adequate information” in the face of such hyperbole.
directors did what they were paid to do, and that does not mean they are entitled to releases of third-party claims, particularly when those releases really are not necessary or important to the accomplishment of the restructuring transactions.”).
22
The New Disclosure Statement includes the patently false statement that the Committee has conceded “that only two out of the eleven recharacterization factors could conceivably weigh in favor of recharacterization in this case.”32 Similarly, the New Disclosure Statement claims that the Purported Notes have
fixed “interest payments,”33 which is not the case, as the interest on the Purported Notes were PIK’ed and no interest payments were ever made. The Debtors assert that it was always understood that BidCo would be
purchasing the Retained Causes of Action, including the Avoidance Actions.34 However, neither the PSA itself nor the motion seeking its approval make any mention of this aspect of the sale to BidCo, nor was it ever raised in any discussions with the Committee—a consultation party under the Bidding Procedures Order. To the contrary, the PSA Order states that nothing in the PSA Order shall have any impact on the recovery of unsecured creditors “including as it relates to the prosecution of any avoidance actions and distributions of proceeds thereof.”35 Particularly in light of this language, as well as bankruptcy courts’ ambiguity regarding the sale of avoidance actions,
see generally In re Cybergenics Corp., 226 F.3d 237 (3d Cir. 2000) (sale of all
of debtor’s “assets and business as a going concern” did not include avoidance actions), the purported proposed sale of the Retained Causes of Action should have been explicit in the PSA documents and the PSA Order and not
subsumed into the general sale of all non-excluded assets. In fact, discovery the Committee has received to date reveals that as late as two days prior to the filing of the Initial Plan, the Debtors were proposing that the Retained Causes of Action would remain property of the Liquidating Debtors—not the
Reorganized Debtors being purchased by BidCo.
The Debtors assert that the Committee’s equitable subordination claim is without any merit, but make no mention of the press release that the Court acknowledged may support the Committee’s claim. Moreover, the Debtors ignore that even if the Committee were to prevail only with respect to certain of the defendants, unsecured creditors would still benefit greatly as the Court may “order that any lien securing [the equitably subordinated] claim[s] be transferred to the estate.” 11 U.S.C. § 510(c)(2).
The New Disclosure Statement asserts that the retention payments paid to management on the eve of bankruptcy were “made upon the review and advice of outside employment advisors,”36 yet does not even attempt to
32 New Disclosure Statement § IV.J.1.b.. 33 New Disclosure Statement § IV.J.1.a.. 34 New Disclosure Statement § IV.H.1.. 35 PSA Order ¶ 7.
36 New Disclosure Statement § IV.H.3.b.
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Challenge; that both the Directors and Officers and the Purported Noteholders must satisfy the applicable standards for approval of releases that benefit them—especially in light of the opportunity for insiders to offer each other mutual favors; that, at the very least, the Available $90 Million should be made available for general unsecured creditors in the event of a successful challenge; and, perhaps most importantly, none of these concerns should negatively impact the BidCo Transaction.
The Preliminary Objection asked the Debtors to identify what processes were followed to approve transfers to the Directors and Officers. The Debtors highlight that the one independent director voted to approve these transfers, but the Debtors ignore (and would have the Court ignore) that (i) this independent director receives the same releases and (ii) having one
independent director vote together with the insiders is not a substitute for an independent process, and such lack of process means the directors cannot rely on the relatively easily satisfied business judgment rule and, instead, must satisfy the stricter entire fairness standard.
The New Plan also contains modifications that suggest that the Debtors will file, seven days before the Voting Deadline, a notice of proposed assumption to contract counterparties who did not previously receive a notice. The Debtors should explain why such additional notice is needed, why the
objection period is shortened for such counterparties, and the interplay of that notice with the Rejection Schedule.
II. New Disclosure Statement and New Plan Demonstrate Debtors’ Engineering of Impaired Accepting Class
47. Numerous aspects of the New Disclosure Statement and the New Plan demonstrate the various machinations to obtain an impaired accepting class.
a. Gerrymandering of Class 5
48. The Debtors (as requested by the Preliminary Objection) have explained that the Ongoing Trade Recovery Pool will be $350,000. The Debtors have also modified the Class 5 recoveries to provide that holders of claims in Class 5 will receive their share of (a) the General Unsecured Claims Distribution and (b) Ongoing Trade Recovery Pool (as opposed to just a share of the $350,000). However, the Debtors’ structure for Class 5 only reinforces the concerns articulated in the Preliminary Objection. For one, the Debtors have not provided any information about which creditors will be in Class 5, creating the possibility of a “secret class” selected to
ensure voting outcomes. The fact that very few creditors will be in Class 5 makes it particularly important to know who those creditors are, and the Court should be particularly wary about the possibility of the New Plan being confirmed on the strength of an impaired accepting class of (for example) a handful of creditors. Moreover, given the Debtors’ recent conduct, the inclusion of the Death Trap (which reveals that the Debtors have no economic need for the holders of claims in Class 5 and that the Death Trap is, instead, designed to coerce claim holders to vote for the New Plan) it is apparent that Class 5 is a gerrymandered class.
49. Additionally, the Debtors have now explained that claims in Class 5 will receive recoveries as high as 57.8%, while unsecured claims in Class 4 will receive no more than 9.1%. Even if the Debtors can demonstrate a satisfactory business and economic justification to favor the claims in Class 5, courts have explained that the upper limit on the extent of permissible discrimination is a treatment that is so widely disparate cannot be confirmed. In re Tribune Co., 472 B.R. 223, 243 (Bankr. D. Del. 2012) (subsequent history omitted) (“Courts considering the issue of unfair discrimination have roundly rejected plans proposing grossly disparate
treatment.”).
b. Deemed Consolidation and Artificial Creation of Impaired Accepting Classes 50. The Preliminary Objection asked the Debtors to clarify seemingly contradictory statements in the Initial Plan and Initial Disclosure Statement regarding whether the Debtors were seeking to substantively consolidate these cases. In the New Disclosure Statement, the Debtors explain that the New Plan is proposed as a joint plan of reorganization and constitutes a separate chapter 11 plan of reorganization for each Debtor. Nonetheless, the Debtors propose a “deemed consolidation” that would effectively ask the Court to treat all impaired classes as though they are creditors of a single entity for purposes of section 1129(a)(10) of the Bankruptcy Code. This is contrary to the plain language of the Bankruptcy Code, which requires that a plan
26
must be confirmed creates a “per debtor” basis. See In re Transwest Resort Properties, Inc., 881 F.3d 724 (9th Cir. 2018); In re Tribune Co., 464 B.R. 126 (Bankr. D. Del. 2011); but see In re
Charter Commc’ns, 419 B.R. 221, 266 (Bankr. S.D.N.Y. 2009); Order Confirming Suppl. Modified Fifth Am. Joint Plan, In re Enron Corp., No. 01–16034 (Bankr. S.D.N.Y. July 15,
2004) [Docket No. 19759].
51. Moreover, the deemed consolidation is egregious in these cases for two reasons: first, because the Purported Noteholders do not hold claims against all Debtors, yet will be deemed to do so through the deemed consolidation, the deemed consolidation allows the Purported Noteholders (the most likely impaired accepting creditors) to vote in the cases of Debtors they are not a creditor of.41 Second, and relatedly, is the interaction of the deemed consolidation provision with a different, also objectionable, provision of the Solicitation Procedures. Specifically, the Solicitation Procedures provides that any class that is entitled to, but has not, voted will be deemed to have accepted the New Plan. This creates the possibility that the impaired accepting class for all of the Debtors (on a deemed consolidated basis) will come from one class that did not cast a vote at all.
III. Absolute Priority Risks Must Be Disclosed and Would Render New Plan Patently Unconfirmable
52. The Debtors argue that (i) the Committee’s absolute priority objection is premature and that (ii) even in the event the Committee’s Challenge is successful, distributing the BidCo Equity Consideration to the recharacterized equity will not violate the absolute priority rule because the BidCo Equity Consideration is non-estate property to which the absolute priority rule does not apply. Each of these assertions is wrong.
41 The Committee has argued in its Preliminary Objection that the class of Purported Noteholders cannot qualify
as an impaired accepting class, and reserves all rights in this regard.
53. First, the purpose of a disclosure statement is (among other things) to explain to creditors the risks created by the plan it describes. This certainly includes the risk that the New Plan cannot be confirmed because it violates the absolute priority rule—especially where that outcome automatically follows if the Committee succeeds on claims the Court has already determined are colorable. In other words, the Debtors urge the Court to focus on the current situation and not “hypotheticals”—yet ignore that, as of now, there is a real possibility that the Committee’s Challenge will be successful.
54. Second, the Debtors’ argument that the absolute priority rule is not violated because the BidCo Equity Consideration has not entered the Debtors’ estates is simply inaccurate. The New Disclosure Statement explains, multiple times, that the BidCo Equity Consideration is distribution to the Purported Noteholders on account of and in satisfaction of the Purported Notes claims.42 Moreover, the New Plan seeks to take advantage of the securities law exemption in section 1145 of the Bankruptcy Code. However, this exemption is only available when new securities (such as the BidCo Equity Consideration) are offered “in
exchange for a claim against [or] an interest in” the debtor. 11 U.S.C. § 1145(a)(1)(A). There is, therefore, no truth to the Debtors’ assertion that the BidCo Equity Consideration never entered the estate.
IV. Other Supplemental Objections
55. In addition to all of the above, the New Disclosure Statement and New Plan contain numerous other defects and inconsistencies.43
56. First, the Committee continues to take issue with the Debtors’ proposed timing in connection with the Rejection Schedule. As explained in the Preliminary Statement—and,
42 New Disclosure Statement § VIII.A.2.a. 43 The below are listed in no particular order.
28
indeed, as the Debtors have argued—the size of the unsecured claims pool is a critical piece of information in these cases. Accordingly, the Committee submits (regardless of what has been done in other cases) that in these cases the Debtors should not be able to add executory contracts or unexpired leases to the Rejection Schedule after the Voting Deadline, as this invites the prospect of the Debtors “punishing” voters who vote against the New Plan by, after the Voting Deadline, adding them to the Rejection Schedule.
57. Second, and relatedly, the Solicitation Procedures, as currently proposed, would allow counterparties to assumed executory contracts to vote on the New Plan. It should be clarified that such counterparties are not entitled to vote, as their claims are paid in full. See,
e.g., In re Greystone III Joint Venture, 995 F.2d 1274, 1281 (5th Cir. 1991) (“The rights created
by assumption of the lease constitute a post-petition administrative claim under section 503(b)(1)(A) of the Code. . . The holder of such a claim is not entitled to vote on a plan of reorganization.”) (internal citations omitted).
58. Third, the Solicitation Procedures require additional clarifications and changes regarding the effect of a claim objection on a creditor’s right to vote. Section III.C of the
Solicitation Procedures provides that if a claim in a voting class “is subject to an objection that is filed with the Court on a timely basis on or before the Voting Deadline, the applicable holder will not be entitled to vote to accept or reject the plan on account of such claims unless” (i) the claim is allowed, (ii), the claim is temporarily allowed for voting purposes, (iii) the claimholder and the Debtors agree to a temporary or permanent allowance or (iv) the “pending objection is voluntarily withdrawn by the objecting party.”44
59. Taken together, the emphasized language indicates that any objection, regardless of by whom it was filed, makes a claim ineligible for voting, which outcome the Committee
44 Disclosure Statement Mot., Ex. A, Ex. 1, Solicitation Procedures § III.C..
supports. However, it is not clear how section III.C can be reconciled with section IV.B of the Solicitation Procedures, which lays out the general rule that any creditor can vote the amount scheduled or the amount in its proof of claim, provided that (among other things) “if the Debtors have filed an objection to a Claim by two calendar days prior to the Voting Deadline, the
Debtors propose that such Claims be disallowed for voting purposes only and not for purposes of allowance or distribution, except to the extent and in manner as may be set forth in such
objection.”45 This section seems to contemplate that the restriction on voting applies only to claim objections filed by the Debtors—an outcome that is not appropriate, is inconsistent with section III.C of the Solicitation Procedures, and which the Committee does not support.
60. Accordingly, the Committee requests that the Solicitation Procedures be clarified to ensure that any claim objection that successfully defeats the prima facie presumption of validity disqualify the affected creditor from voting on the New Plan. The Committee further submits that (i) the Debtors should not be able to agree to the temporary, let alone permanent, allowance of a claim subject to a claim objection filed by a party other than the Debtor and (ii) only claim objections filed at least five business days prior to the Voting Deadline (not 2 days as currently proposed) should have the effect of disqualifying the affected claim from voting, as any shorter period will not allow the affected creditor to file a motion for temporary allowance or come to a consensual resolution with the objecting party.
61. Fourth, the New Plan’s treatment of the equity interests in the various Debtors violates the absolute priority rule. Under the New Plan, the equity interests in each of the Debtor entities are unimpaired. The Committee suspects that the New Plan is structured this way to enable BidCo to obtain the Debtors’ favorable tax attributes (the Debtors have presumably incurred billions in losses over the years)—the Debtors should disclose this information and
30
whether that value could flow to creditors if not for this structure. Moreover, the effect of this structure is that, for any individual debtor, its equity holders will receive a distribution even though creditors have not been paid in full. However, there is no basis for this in the Bankruptcy Code.
62. The Committee expects the Debtors will argue that the absolute priority rule can be ignored under an “administrative convenience” exception that would permit corporate affiliates to retain their ownership interests in the debtors even if creditors are not being paid in full. Whatever the legality of this exception, the Committee submits that it should not be applied here where, because the Purported Noteholders do not have claims against every Debtor, there would be value left for creditors if not for the blatant violation of the absolute priority rule.46
63. Fifth, the New Plan introduces the concept of “Fiduciary Exculpated Parties.” The Committee requests that this provision be clarified to ensure that the Committee, the Committee members, and their respective professionals receive the benefit of this provision, regardless of whether the Debtors believe that they are estate fiduciaries.
64. Sixth, the New Plan provides that even after their cancellation, the Purported Notes (and the Secured Notes Agent) will continue to receive compensation, indemnification, and reimbursement under the credit agreement.47 The Debtors provide no explanation for
46 The Committee recognizes that, in the MPM Silicones chapter 11 cases, this Court approved this
“administrative convenience” exception, but, in that case, (i) the secured creditor could have gone through the expensive and timely process of foreclosing on all of the stock in each entity only to recreate those entities and (ii) the complaining creditor lacked standing as the result of an intercreditor agreement. Of course, neither of these conditions are present here.
47 See New Plan § IV.R. (allowing Secured Notes Agent to “seek compensation and reimbursement for any
reasonable and documented fees and expenses incurred in connection with the implementation of the Plan; (4) maintain, enforce, and exercise any right or obligation to compensation, indemnification, expense
reimbursement, or contribution, or any other claim or entitlement that the DIP Agent or Secured Notes Agent may have under the applicable credit agreement, note purchase agreement, collateral agreements, or pledge agreements, in each case solely as against the holders of the Secured Notes Claims”).
