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Jim Millar
We asked our expert Contributors to weigh in on Exclusive Opportunism – the trend of preserving exclusive financial opportunities for select creditors without offering that opportunity to all creditors of the relevant class — all in exchange for voting in favor of the debtor’s plan. While the Peabody case seemed an outlier at the time, it has since become the go-to strategy for debtors making it the namesake for this inaugural award. Contributor Paul Silverstein provides a high level summary of the issues relating to exclusive opportunism, focusing on potential violations of Section 1123(a)(4) and of the Supreme Court’s decision…
Jim Millar Read Jim’s recent article on the topic:
We tackle transparency in the bankruptcy process this week. Both creditors and debtors bemoan the increased transparency that comes from participating in the Chapter 11 process. Debtors often fear disclosure of financial information, business plans or cost cutting details that could put them at a competitive disadvantage and/or impact internal morale. Creditors, on the other hand, often fear disclosing their trading details could alert competitors to their strategy in the case. The ABI Commission noted in its Final Report that “none of [Chapter 11’s] required disclosures provide . . . parties in interest with financial data that could assist the…
When I hear about efforts to make creditors disclose more information as a prerequisite to participating in a chapter 11 case, I think about a couple questions: What is the purpose of the requested disclosure? And is that purpose legitimate? Let’s think about some basic disclosure by a creditor as to the amount, priority and security for its claim. In the first instance, that information is obviously necessary to ensure that the creditor has standing—it needs a stake in the outcome of whatever issue is before the court. Moreover, a bankruptcy court should have the benefit of knowing those details…
The second topic our Contributors take on is the practice of appointing “independent directors” for troubled companies, often on the eve of bankruptcy. We received a wide range of responses from our Contributors with many feeling the process is “at least superficially, if not substantively, flawed” (Albanese). That was not a uniform reaction though and the diversity of our Contributors showed the differing views of the market. Many did not want the actions of a few bad apples to overshadow the essential role independent directors can play in “stabilizing” an uncertain situation (Heimowitz) and for calling out “bullsh*t” if necessary (Lederman).…
The fundamental issue here revolves around a breakdown in trust—that is, trust in the process. Some stakeholders in the restructuring process have reached the point where they simply don’t accept that independent directors are doing their job fairly and diligently. While people can debate whether in a given case the independent director did—or didn’t—properly discharge their duty, a critical mass (including professionals and judges) have expressed concern.
Tell us what you think of recent decisions by the District Courts in the SDNY and EDVA reversing plan confirmation based on presence of non-consensual third-party releases? Did these Judges get it right? How do non-consensual third-party releases affect creditor rights (both positively and negatively)? What are the implications of these decisions more broadly for the efficacy and integrity of the Chapter 11 process?
The recent decisions are ultimately likely to be helpful to creditors because, going forward, the review of third-party releases will need to be much more rigorous. The bottom line is that third-party releases fall into a bucket of chapter 11 provisions that bankruptcy courts typically review, broadly speaking, under fairly vague standards, such as “did the recipients of the release provide ‘substantial value’?” or “are the releases ‘necessary for the success of the reorganization?’” Creditors pursuing confirmation objections based on those standards have an exceedingly difficult job, and they regularly get overruled. These decisions put the brakes on, to some extent, the free-flow of third party releases, which should result in chapter 11 plans that are ultimately fairer to all creditors.