Dan Kamensky Speaks on Exclusive Opportunism

In recent years, a troubling pattern has emerged in how debtors obtain support for plans of reorganization. Increasingly, debtors make, in effect, a side payment to a subset of creditors in the form of an exclusive opportunity to participate in equity or debt financing on favorable terms.

This benefits the controlling coalition at the expense of creditors who are not part of it and creates perceived, if not actual, conflicts for management teams (and their advisors). Exclusive opportunism goes hand in hand with other hostile out-of-court restructuring tactics that pit similarly situated creditors against one another. These transactions – whether inside or outside of bankruptcy – strain intercreditor dynamics, creating new fault lines and amplify distributional concerns among similarly situated creditors.

These hostile restructurings have captured the attention of influential trade associations and creditor advocacy groups and resulted in a flurry of litigation and media focus. To date, most of the consternation has been directed toward out-of-court “uptier†transactions, whereby distressed borrowers buy more time and runway by offering a subset of creditors the opportunity to jump ahead of other pari-passu creditors. Similarly, debtors engage in exclusive opportunism in bankruptcy by “buying†support from a subset of creditors for the debtors’ favored plan in exchange for the exclusive opportunity to receive valuable consideration without offering the same to other similarly situated creditors.

Exclusive opportunism has been justified as an inextricable part of a holistic bargain, usually embodied within the terms of a restructuring support agreement, and provided — not on account of a claim — but on account of a separate new money commitment. This claimed distinction was considered and squarely rejected in Bank of America Nat. Trust and Savings Assoc. v. 203 N. LaSalle St. P’ship, 526 US 434 (1999) (“LaSalleâ€), where the Supreme Court held that exclusive investment opportunities to existing stakeholders to buy discounted equity cannot constitute legitimate consideration for a new money commitment. The Court relied on the remedy of a market test to satisfy itself that an exclusive opportunity would result in full value to the estate. The rationale of LaSalle remains fully applicable to exclusive opportunism in its present form.

Until recently, courts (most notably in the Peabody Energy bankruptcy case) have failed to question these hostile transactions for fear of upsetting an interdependent restructuring transaction. But exclusive opportunism has come under renewed judicial scrutiny. Both Bankruptcy Judge Wiles in the Pacific Drilling case and Judge Goldblatt in TPC Group questioned whether these strategies comport with the Code’s requirements. Judge Goldblatt observed of the exclusive opportunism in that case:

And at some level it does seem as if, for example, the Supreme Court’s decision in 203 North LaSalle is highly relevant to that question and that, when you’re asked is the reason a party, a creditor or interest holder receiving certain treatment on account of their claim or interest, on the one hand, or on account of a plan transaction on the other, that the way that’s answered is by market testing.  And I’ve got some concerns that these transactions here aren’t market tested, which, if right, would counsel in favor of the view that it’s actually consideration being given on account of the claims, which would give rise to claims of discriminatory treatment.

In re TPC Group Inc., Case No. 22-10493 (CTG), Transcript of Hearing, at 189  (Bankr. Del. July 29, 2022).

Courts should be concerned about exclusive opportunism – whether inside or outside of bankruptcy – because they strain intercreditor dynamics, create new fault lines and amplify distributional concerns among similarly situated creditors. These transactions violate fundamental norms (most specifically, vote buying) and may cause dangerous ripple effects in the capital markets.

There are a variety of remedies available to address exclusive opportunism, including separate classification and the market-test approach suggested by the Supreme Court in LaSalle. A more effective response for courts would be to require that exclusive opportunities be opened up to an entire class of creditors. This solution is consistent with the relative priorities of the parties, avoids bifurcating the new money component from plan support or separately classifying claims (thereby risking plan failure) and avoids rent seeking. While some could argue that this could come at the expense of debtors forced to make up for lost consideration to the favored class, as the ultimate control parties, the residual owners are best placed to bear that burden. This approach would help restore the relative priority of the parties and restore the Supreme Court’s decision in LaSalle to its rightful place.