Court Opinion Review

Reorg’s Court Opinion Review provides an update on recent noteworthy bankruptcy and creditors’ rights opinions, decisions and issues across courts. We use this space to comment on and discuss emerging trends in the bankruptcy world. Our opinions are not necessarily those of Reorg as a whole. Today we consider a sealed filing in Genesis Global, the sad state of the Hawaii fire compensation fund, the “Required Lender” fight in Robertshaw and the Yellow exclusivity extension decision.

Star Chamber Part MMXXIV

Apologies for the long break, but, honestly, we were told the Purdue decision was coming every week for two months. Why a clerk has failed to leak this one, we have no idea; no doubt primary voters would love to know if the high court supports nondebtor releases or reining in the renegade bankruptcy courts before casting their ballot.

Props to Judge Marvin Isgur’s daughter Sarah for maintaining her ideological consistency, at least: a New Yorker profile from Feb. 7 indicates that Isgur the Younger “believes that bankruptcy courts are unconstitutional, because they don’t follow the judicial-appointment procedure set out in the Constitution – this despite the fact that her father, Marvin Isgur, is a bankruptcy judge in Texas.” Like we said, True Believers.

Not to gild the lily here with judicial wife drama, but we would be remiss not to note some pretty over-the-top developments coming out of Texas investigative journalists digging into the scandal surrounding former judge Jones.

Anywho, while we have some spare time on the Hamptons Jitney, back to one of our old hobbyhorses: the bankruptcy Star Chamber! On June 4, the Genesis Global crypto debtors filed a motion to approve a $40 million settlement with a claimant whose identity is redacted. See for yourself:

The settlement resolves significant cross-claims and provides that the claimant will pay debtor Genesis Global Capital $40 million. According to footnote 3, the claimant’s identity has been withheld in accordance with the court’s September 2023 order requiring redaction of the personal information of “Individual Lenders.” The order provides that all parties are “directed to redact from any document or paper such parties in interest have filed or will file in these Chapter 11 Cases, the names, addresses, and contact information of” individual lenders.

The U.S. Trustee unsuccessfully objected to entry of that order in the Genesis case and dozens of other chapter 11s, reasonably pointing out that the Bankruptcy Code and Federal Rules of Bankruptcy Procedure do not allow this. “Public access is especially significant in the integrity of bankruptcy courts because it fosters confidence in creditors that the system is fair,” the UST argued, closing the barn door behind the horse. The UST also contends that a movant must “must demonstrate extraordinary circumstances” to redact creditor names (emphasis added).

Entry of these orders has nevertheless become standard operating procedure, because bankruptcy judges struggle with what “extraordinary” means. The extent of the redactions allowed in crypto cases differs: in the Celsius case, Judge Martin Glenn allowed the debtors to seal the contact info of individual creditors but not their actual names, while in the Voyager case Judge Michael Wiles agreed with Judge Sean Lane that even the names of individual customers could be “sensitive commercial information.”

In allowing the redactions, Judge Lane relied heavily on the idea that the “Individual Lenders” are the debtors’ customers and the debtors’ customer list is an asset of the estate. Well, beats allowing the redactions because someone, somewhere may have received an unwanted “Scam Likely” call from a dreaded claims trader. We’ll just point out that there is an easy way to sell a customer list without complying with the mandatory disclosure requirements of the Bankruptcy Code: do it outside bankruptcy. Radical, yes, but desperate times call for desperate measures. If you choose to file, well, them’s the breaks. Should’ve tried a Texas two-step.

Putting aside the propriety of allowing debtors to redact creditor names from their schedules at the beginning of a case, there really isn’t any justification for redacting the names of individual lenders from motions to approve $40 million settlements. The claimant filed a $230 million claim against the debtors, which is of course redacted; is this really someone who needs to remain anonymous? Then again, the parties seem to have filed every other important pleading in the case with redactions, so whatevs.

It would be interesting if Judge Lane seals the courtroom for the settlement hearing on June 25, but presumably the settlement will be approved without a hearing or without any presentation being required and the main parties having received notice of the actual name.

On the flip side here, the SDNY judges are livid over a data breach at Stretto opening up creditors in the Celsius and Voyager cases to potential phishing scams, and the potential for scams and skulduggery is certainly higher in crypto land, but that doesn’t really change the Bankruptcy Code’s plain language, right? We missed out on the hodl, which is why we are still saving up for a Cybertruck deposit rather than getting ours wrapped with a sick ad for Fundamentals by Reorg. If we wanted to trade securities and crypto, we could exercise our god-given capitalist right to go work somewhere else. Like we said, them’s the breaks.

Victims Opt Out of ‘Ohana

Back in December 2023 we mentioned the state of Hawaii’s plan to compensate personal injury victims of the Lahaina wildfire via a $175 million statutory fund in partnership with fellow litigation targets Hawaiian Electric Co. ($75 million), Kamehameha Schools, Maui County, Charter/Spectrum, Hawaiian Telecom and West Maui Land Co. – the “One ‘Ohana Initiative.” We liked the idea of a statutory mass tort settlement fund in principle but warned that the conditions placed on participation – namely, the requirement that claimants also release their much more lucrative property damage claims against the defendants – could scare plaintiffs away.

And, lo, it came to pass: on May 29, Hawaii Gov. Josh Green announced a second extension of the deadline for personal injury victims to assert claims against the fund. According to Green, only 48 families of wrongful death victims and 17 personal injury victims have filed claims; about 100 people were killed by the fire. Going to go out on a limb and guess most of the claimants who signed up did not own property destroyed by the fire.

Meanwhile, on May 24 plaintiffs’ leadership counsel in coordinated state court litigation accused One ‘Ohana Fund representatives of directly contacting claimants represented by counsel despite being told not to do so. The plaintiffs also say fund representatives “have made misleading statements to potential participants,” including “I’m sure your attorneys have told you not to talk to me,” “[p]articipation in the fund will not impact your claims against the Defendants” and “[i]t will take 5 years to complete the lawsuit.” But we’re all family here, right?

Sigh. Maybe the statutory benefit fund approach to resolving mass torts would be better implemented by states who aren’t defendants in the lawsuits being settled, in partnership with other defendants. The concern is that One ‘Ohana is starting to look like a statutory LLT/LTL Management. A status conference in the coordinated litigation is set for June 7; we expect the state to repeatedly accuse rapacious plaintiffs’ lawyers of being in it for the money, unlike the defendants, who just want to get everyone fairly and efficiently compensated yadda, yadda.

Robertshaw Redux

Props to Invesco for pulling back the curtain on DIP, stalking horse and plan goodies for bankruptcy process purchasers in the Robertshaw “Required Lenders” trial. Way back in December 2021, we suggested that for controlling lenders, chapter 11 is not a crisis but a “Parade of Wonderfuls,” and Invesco has gone and put that under oath.

“[S]omething seems off with our” – read: bankruptcy judges’ – “calculation of the risks investors take in bankruptcy,” we said, “and that calculation is the basis for the level of compensation they receive for that risk and the level of deference they receive when judges bend the Bankruptcy Code to get their preferred plan through confirmation over the objections of holdouts.” Judge Christopher Lopez is getting thisclose to realizing this in Robertshaw.

Recall that Invesco really, really wants to reacquire the Robertshaw bankruptcy process it thought it had purchased by accumulating “Required Lender” status in the company’s first- and second-out debt after a May 2023 uptier exchange. According to Invesco, the ad hoc group of first-out lenders and sponsor One Rock swindled Invesco out of control by – the nerve! – paying off Invesco’s first-out loans, with a make whole premium, via a convoluted transaction in December 2023.

Part of Invesco’s burden is proving that notwithstanding repayment of its loans at par plus, it was still harmed by the transaction. That’s where the goodies come in. During day two of the trial on May 24, Invesco called expert witness Jonathan Foster to attest that Invesco’s rights as required lender before the December 2023 transaction were much more valuable than the amount of its debt because they entitled Invesco to lead “high yield” DIP financing and make a stalking horse credit bid with breakup protections. There’s the harm.

Meanwhile, Randall Eisenberg, the company’s financial advisor/investment banker at AlixPartners, testified that the December 2023 transaction was done for the company’s benefit, securing $40 million of additional liquidity, and was not specifically intended to give the ad hoc group and sponsor now controlling the bankruptcy control over the bankruptcy. That was just a happy accident!

Here in the real world, the December 2023 transaction bought the debtors less than two months outside of bankruptcy, which the debtors and the ad hoc group insist was crucial in renegotiating supplier and customer contracts. Many companies file chapter 11 for the express purpose of securing additional leverage to do that, but, sure, whatever.

And, as Invesco has repeatedly pointed out, the ad hoc group’s advisors were already talking about putting the company into bankruptcy shortly after the transaction. Again, here in reality, the ad hoc group in fact offered a “high yield” DIP facility (at least, higher yielding than Invesco’s counteroffer, which was summarily rejected because Invesco is not the controlling lender anymore) and secured credit-bidding rights with the usual goodies, including a seemingly pointless $850,000 backstop fee. So … it just so happened that everything Invesco wanted to do the ad hoc group and One Rock did instead?

Invesco’s damages analysis pegged the value of the lost control rights at approximately $220 million, considerably greater than the amount it received on its first-out debt. Think about this for a second – Invesco is admitting it purchased its first-out debt with the specific goal of not getting paid back – at least not in cash. This is the Parade of Wonderfuls in its purest, uncut form. You could use Invesco’s damages model as a formula to determine the value of bankruptcy process sales in virtually every case.

Either way, the debtors and the ad hoc group don’t deny that it’s good to be the king; they just deny they dethroned Invesco with any intention of seizing the throne themselves, Bolingbroke-style. “Out of this nettle, danger, we pluck this flower, safety.”

After the parties concluded oral argument on May 31, Judge Lopez delivered a Shakespearean speech of his own. The judge lamented lenders fighting over control of a bankruptcy that would, in his mind and his mind alone, be filed and overseen not by them but by the debtors. “Everybody is chasing ‘Required Lender’ status, and why did everyone think it yielded unlimited power?” Judge Lopez asked, apparently without irony, after overseeing six days of testimony on exactly why the lenders thought that.

“Everyone was acting as if the debtor-in-possession had nothing to say,” the judge added.

While it’s fun to see all this out in the open, the parties’ motivations – per se – may not be what drives the outcome here.

Our money is on Judge Lopez finding that the transaction may have breached the credit agreement by circumventing restrictions on new indebtedness or issuance of new loans to manipulate voting, but denying Invesco’s request for restoration of its controlling lender status. Instead, the judge will say the remedy for any breach was repayment of the debt with a premium – exactly what Invesco received from the transaction.

That would give the Houston judge a vaguely anti-debtor decision to cite in his next “I am not a layup for debtors” speech, while also giving the ad hoc group and One Rock – erm, the debtors-in-possession – exactly what they really want. The customer is always right, former judge David R. Jones would probably say. Not that we entirely disagree with the outcome – as the debtors have pointed out, Invesco knew it could have purchased just $3.5 million in additional debt to prevent a first-out payoff from removing its control and declined – but we are a little bit cynical about the motivation.

The bigger question is whether Judge Lopez will remember his exasperation at two lenders fighting over a bankruptcy process sale the next time a controlling ad hoc group pushes an expensive DIP with an immediate rollup and threatens to walk if they don’t get their way at the first day hearing. Or the next time a controlling ad hoc group demands unnecessary breakup fees or backstop protections as part of a credit bid or rights offering.

Appgate-Gate

Now wait just a second, you are probably muttering while reading this on the toilet, management has a fiduciary duty to make sure the company is not taken advantage of by lenders! That December 2023 Robertshaw transaction was pursued by Neal Goldman, the debtors’ independent director, who was approved by Invesco! Well, you know what we think about the independence of independent directors and the much-vaunted fiduciary duties of management.

For a good example of why we take this jaded view, how about the Appgate chapter 11? The cybersecurity company filed a prepack on May 6 in the Southern District of Florida with a plan to turn the company over to convertible noteholders. Nothing too abusive here – the DIP will be equitized and no prepetition debt rolled up.

But check out the first day declaration: According to CFO Rene Rodriguez, on April 3 the company brought in two consultants “to aid the Debtors in their evaluation of alternatives and contingency planning efforts.” However, the consultants were not appointed as disinterested directors – e.g., fiduciaries – and appointed to special board committees with authority over possibly conflicted transactions until May 2.

At that point – four days before the filing of a prepack – the independent directors were “delegated sole authority on all matters relating to consideration and negotiation of a restructuring, reorganization, or other transaction,” including with respect to “matters in which a conflict of interest exists or is reasonably likely to exist” between the company and shareholders.

But it gets better! The company actually commenced solicitation on the plan on May 3, one whole day after the independent directors were first given some level of authority and took on fiduciary duties. Voting was complete by May 4, two days after the appointment. The deal was obviously a fait accompli.

Sure, the CFO says the independent directors are currently busy at work on an “independent investigation of the Conflict Matters since before the Petition Date,” including “potential Claims that could be asserted by the Debtors’ Estates with respect to such matters.” Further, the releases in the prepackaged plan “are subject to the Special Committees’ Independent Investigation.”

Gee, I wonder if the independent directors are going to stand up at confirmation and try to scotch the plan because they found something untoward? Spoiler alert: That absolutely will not happen.

Look, we’ll stipulate that there may be some arcane corporate law reason why in this instance the independents couldn’t be real independents until a month after they were hired (email us if you have a suggestion!). But if we are going to rail on judges for allowing even the appearance of impropriety, we feel like the same goes for the debtors. Absent a real explanation, it sure seems plausible that the “independent” directors were appointed this way to test the waters before real authority was turned over.

If fiduciary duties are worth something in bankruptcy, everybody has to be on board with that. Or at the very least keep up appearances?

Yellow Management

Speaking of fiduciary duties, fascinating oral ruling by Judge Craig T. Goldblatt in the Yellow Corp. case on June 3. In the course of granting the debtors’ request for 90-day exclusivity extensions over the objection of the official committee of unsecured creditors, Judge Goldblatt added another made-up presumption to his repertoire while questioning the very nature of fiduciary obligations for insolvent companies.

The UCC maintained that exclusivity should be terminated because the debtors are pursuing a “triple lindy” to deliver recoveries to equityholders – specifically, 42.5%-shareholder MFN – with the mounting professional expenses charged to the unsecured creditors. According to the UCC, the debtors’ critical fights with the Teamsters, pension funds, WARN Act claimants and environmental creditors should be turned over via a plan to a liquidating trustee, who would have fewer professional “mouths to feed” – reducing the estates’ colossal $20 million-per-month burn rate.

The debtors responded by hinting that they are working on a plan to place their remaining real estate assets in a REIT – a possible alternative to the simple waterfall liquidating plan suggested by the UCC. Rather than placating the UCC, this actually made the dispute worse because the committee maintains the REIT idea came from MFN and would give MFN a greater recovery on its equity than it deserves, which, according to the UCC, is absolutely nothing.

The debtors countered that they have rejected the MFN plan but that it would be churlish to dismiss the idea out of hand, and, anyway, the biggest fight in the case – over whether pension plans that received federal funds have billions in valid withdrawal and contribution claims – is set for trial beginning Aug. 6. After that issue is resolved, the debtors argued, they can propose a plan that gives creditors some idea of what they might actually receive.

(Judge Goldblatt absolutely shocked us by asking the debtors whether the claims disputes need to be resolved before they propose a plan, citing the “modern practice” of bankruptcy issues being reserved for post-confirmation. Why is this shocking? In his decision keeping the pension claims fight in bankruptcy, the judge specifically concluded that bankruptcy courts have an absolute duty to litigate claims objections. Maybe Judge Goldblatt reads this column? If so, there is some praise coming, we promise.)

To Judge Goldblatt, the whole fight boiled down to the question of what obligations debtors’ management owes creditors and shareholders when it isn’t yet clear which group is the “fulcrum security.” With characteristic thoughtfulness (see, your honor?) the judge mused that the issue of “who decides which projects make sense” when the fulcrum group is unknown “has plagued corporate law forever.” This governance problem is “endemic,” the judge added, citing the Delaware courts’ struggles with defining when management’s fiduciary duties shift from shareholders to creditors.

“The way I think about” the fiduciary duties of management, the judge remarked during argument, is that when you “don’t know the fulcrum, you take action indifferent to where the waterfall ends.” In his ruling, Judge Goldblatt chiseled this notion into a more definite rule. According to the judge, the Bankruptcy Code’s vesting of continued control in management after a chapter 11 filing creates a presumption that management should continue in sole control – e.g., maintain plan filing exclusivity – until someone presents evidence that it is not seeking to maximize recoveries for everyone. Make the pie bigger, without worrying about who will eat it.

According to the UCC, the pie is as big as it is going to get and is quickly shrinking as the professionals take their slices. But Judge Goldblatt was not ready to make that leap or to allow the committee into the bake-off tent to distract management.

The UCC might reasonably disagree with the debtors’ business judgment as to what projects would best serve the interests of all stakeholders, the judge explained, but the committee did not present sufficient evidence that management was not acting in good faith for the benefit of everyone in the waterfall. There is enough “common sense” in the debtors’ approach to defer to management’s business judgment, Judge Goldblatt concluded.

The judge warned that there “may well be circumstances when it is appropriate to be concerned” that a party controlling management – cough MFN cough – is causing the debtors to pursue projects that could benefit itself at the cost of another constituency. But the judge said that he “expects all fiduciaries to act like fiduciaries.”

In other words, the judge kicked the can down the road. If the pension fund or WARN Act claims are allowed in an amount sufficient to prevent any surplus for distribution to equity – e.g., when the fulcrum security is established – we will get a real look at exactly how valuable those fiduciary duties are for unsecured creditors. The cynic in us says that if the creditors prevail and MFN is out of the money, the debtors will still propose a complex REIT plan funded by MFN.