Court Opinion Review: Swedish Debtors Intrum and Northvolt Seek Shelter in Houston, Judge Goldblatt Rejects American Tire Non-Pro-Rata DIP Rollup and SDNY District Court Keeps Claims Against the Sacklers on Ice

Octus’ 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 Octus, formerly Reorg, as a whole. Today we consider Swedish companies shopping for a Houston venue, rejection of American Tire Distributor’s non-pro-rata DIP rollup proposal and the never-ending Purdue litigation injunction, again.

Swedish Fishing for Venue

According to Yelp, the best Swedish restaurant in Houston is the IKEA cafe, so it can’t be the home cooking that convinced Swedish debtors Intrum and Northvolt to file in the Southern District of Texas last month. Well, it could be home cooking, but of a different sort – the comfort food that nowadays debtors can only get from the complex panel.

First, Intrum: On Friday, Nov. 15, the Swedish debt collection giant filed a prepack in Houston that would secure the company about €526 million in new investment and extend its revolver maturity. Why do big chapter 11s rarely file on Friday? That gave a dissenting group of Swedish-law noteholders the whole weekend to get a motion to dismiss on file before the first day hearing.

This being Houston, and this being the Americas Court Opinion Review, we give the dissenting group’s motion the same odds as the Giants riding into the playoffs on the arm of Tommy Cutlets. The debtors may share our outlook and have been refreshingly honest about manufacturing jurisdiction: Just before filing, they created a new entity, Intrum Texas, and had it guarantee all of Intrium’s debt, including the notes, so it could serve as an anchor baby for the case.

Why go to the trouble? Intrum is also pretty honest in its disclosure statement that it might not be able to get the prepack plan approved by a Swedish court under Swedish law. So, according to the dissenting noteholders, Intrum wants Judge Lopez to issue an injunction barring parties subject to his jurisdiction – for example, any noteholder with assets in the U.S. – from objecting to the plan in a Swedish court, where it eventually must file a proceeding. If no one can object, then maybe the Swedish court will let the company skate through.

In their motion to dismiss, the dissenting noteholders argue that Judge Lopez should dismiss the case as a bad-faith filing because of the Texas guarantee/venue shopping maneuver, which is kind of like asking the fox to leave the henhouse. This sure seems like what the Houston judges want; they could stop it anytime, and have not. Why would the complex panel take issue with venue shopping by a Swedish company when they have no qualms with venue shopping by companies headquartered at a UPS Store?

Apparently clear-eyed that the motion to dismiss is almost certainly a dead letter, the dissenters also filed a suit in Sweden to avoid the Texas entity guarantee and asked Judge Lopez for stay relief to proceed with the action and, man, why do they even bother? Westlaw still costs money, right? Houston creditor filings could be a fantastic use case for generative AI.

In response, the debtors point out that even if Intrum Texas’ guarantee of the Swedish notes is avoided, the “local” entity’s other debt – namely, its guarantee of Intrum’s other obligations – would remain for reorganization and, seriously, why does anyone even file briefs in Houston, with cites and everything, when we all know how this turns out?

We think Judge Lopez tipped his hand by scheduling the motion to dismiss for hearing on Dec. 16 at the same time as confirmation. You think he is going to dismiss the case after setting aside a whole day for confirmation, with all those witnesses, supporting creditors and their counsel on hand? Yeah, neither do we.

Swedish EV battery manufacturer Northvolt almost got as lucky as Intrum when it filed in Houston on Nov. 21 – the case was originally assigned to Judge Lopez but quickly reassigned to Judge Alfredo Perez. Judge Perez is less of a known quantity than Judge Lopez, but he knew about the complex panel, and what seems to be expected of its judges, prior to taking the gig, so. Unlike Intrum, Northvolt has no prepackaged plan; in fact, it appears to have no plan at all other than trying to find someone, anyone, to save the company.

The fact that Northvolt chose to pursue its freefall filing in Houston says volumes about the complex panel. There is no pending litigation in an unfriendly court, no proposed plan with tricky provisions a Swedish court might not approve, no Fifth Circuit case law on bad-faith dismissal to take advantage of. Northvolt simply scanned the globe for the most friendly insolvency court to do, well, anything, and the answer was obvious.

If Northvolt was worried about its choice, it didn’t need to wait long for reassurance: The company filed at about 1 p.m. ET, and Judge Perez scheduled a first day hearing three hours later. Now that is customer service; Mr. Porter can’t get a pair of Margiela replicas to an aging Chelsea hipster that fast, even if he needs them for the LCD Soundsystem concert that night.

Are we witnessing the end of what was once the Southern District of New York’s iron grip on foreign debtor cases via chapter 15? Keep an eye on the fight for chapter 15 recognition of Intercement’s Brazilian proceeding, currently under advisement with Judge Martin Glenn at One Bowling Green.

On Nov. 6 an ad hoc noteholder group objected to recognition, arguing that Intercement’s center of main interests, or COMI, is in Spain or the Netherlands rather than Brazil and that the Brazilian proceeding is a sham to take advantage of Brazil’s pro-debtor insolvency system. Naturally, the foreign representative disagrees, pointing out that the noteholders stipulated that they expected a restructuring to take place in Brazil.

Judge Glenn held an evidentiary hearing on Nov. 21. Our money is on the bankruptcy judge siding with the debtors (of course, that’s where our money always goes). Still, why bother with a foreign proceeding in a pro-debtor jurisdiction and the extra costs and risks of a chapter 15 recognition fight when you can just form a Texas entity and file chapter 11 in Houston? Is there a jurisdiction in the world more mega-case debtor-friendly than the Southern District of Texas?

Before anyone gets too sour on chapter 15, check out this Expert View piece on Octus reviewing new developments in non-U.S. restructuring regimes that includes a fun teaser at the end suggesting that chapter 15 could be an alternative route to releases that otherwise wouldn’t pass muster after Purdue.

Burning Rubber

Back in June 2023 we suggested that it is pretty easy to pull off a postpetition uptier exchange favoring a select group of creditors over the rest of their class after filing chapter 11. There are two standard ways to do this: Reserve the DIP for the ad hoc group/steering committee but don’t do a rollup or offer the DIP and/or rollup to everybody but create enough fees (backstop or otherwise) for the ad hoc committee/steerco members to guarantee they control the reorganized equity/exit financing. Bingo, you’re living Invesco’s Robertshaw dream, the bankruptcy “parade of wonderfuls.”

For a good recent example of the former, check out the seemingly overinflated DIP facility in Spirit Airlines. The lenders have kindly offered $300 million in financing to a company that had more than $800 million in cash on Oct. 24 and anticipates holding more than $700 million in cash, excluding the DIP proceeds, by the end of the year.

Why bother? My editor is going to play the bankruptcy straightman here and say that airline bankruptcies are sensitive and a meaty DIP reassures the public and investors that stakeholders support the process. Your more-jaded author believes the DIP ensures that a privileged group of lenders gets control over the bankruptcy and the post-emergence company – the “bankruptcy process sale.” We expect the new controlling shareholders to either sell their shares to an acquirer such as Frontier or cause the board to buy the shares back quickly/pay out dividends for a massive short-swing profit, a la Hertz. Otherwise, neither the DIP nor the broader restructuring’s meager contemplated debt reduction make any sense.

The real kicker: The Spirit DIP lenders will receive a 3% “put option premium,” payable in kind, allegedly “to maintain their commitments without approval of the DIP Facility pursuant to the Interim Order.” So they are being protected from not loaning the debtors money at the end of the first day hearing? Or are they being rewarded for the possibility they may not have to loan the debtors money at all? Yeah, opportunity cost, sure. But they could have simply forced the debtors to take their money on an interim basis if that were really a concern.

Anyway, and back to our two flavors of “postpetition uptiers,” for some reason, the American Tire Distributors DIP lenders – an ad hoc group of prepetition lenders – we’ll call them the “participating lenders” to keep the terminology consistent with our coverage of litigation over prepetition uptiers – decided to push the envelope. They offered the debtors a $1.12 billion term DIP that featured a non-pro-rata rollup that favored the participating lenders, allowing them, and only them, to exchange their prepetition debt for DIP loans.

On Nov. 12, a minority group of “excluded lenders” – again, keeping the argot straight – duly objected to the unequal rollup because it breaches the pro rata treatment provisions of the credit agreement. According to the objection, the non-pro-rata rollup/uptier would allow the controlling lenders to “get 100% of the benefit” of the proposed rollup while holding only 90% of the debtors’ prepetition term loans. Well, duh.

The excluded lenders also pointed out that making the rollup pro rata would have a “modest effect” on the participating lenders’ expected recoveries but that excluding them “devastates” their chance of recovery. The participating lenders cut the excluded lenders out of the rollup out of spite? Hold that thought.

The debtors and participating lenders responded with the typical “parade of horribles.” According to the debtors, the uptier was an integral element of the proposed DIP blah blah blah oh noes liquidation you know the drill by now. The debtors and participating lenders also argued that the uptier did not breach the credit agreement because the agreement does not require that DIP financing be offered to all lenders, which, fine, but it does require that all lenders get paid pro rata, whether from a DIP or otherwise.

The debtors filed in Delaware and drew Friend of the Show Judge Craig T. Goldblatt. At a hearing on Nov. 19, Judge Goldblatt said sure, he would approve the DIP and the rollup – but he would not do anything to prevent the excluded lenders from suing the participating lenders for breach of the credit agreement.

Although he didn’t need to rule on the merits of such a suit, Judge Goldblatt helpfully told the excluded lenders he thinks they would win. The judge noted that reading a pro rata sharing exception for DIP loans into the credit agreement did not make any economic sense and would be “a preposterous overreach.”

Because the uptier was an integral part of the DIP facility, Judge Goldblatt’s refusal to give the participating lenders immunity from future suits killed the DIP, forcing the debtors to immediately fire all their employees and liquidate. Bahahahaha, no, seriously, we never tire of making that joke. Instead, in a serious blow for fans of rational choice theory, the participating lenders quickly agreed to drop the rollup entirely.

That’s right – they would rather forgo a rollup of their loans than share the rollup with the excluded lenders. They even agreed to retroactively reverse the interim rollup. Oh, there is definitely something going on behind the scenes with these two groups. Reader, do tell! On Nov. 21, Judge Goldblatt approved the revised DIP on a final basis, capping an incredibly pyrrhic victory for the excluded lenders.

Meanwhile, folks are asking questions about whether non-pro-rata treatment breaches prepetition cooperation agreements, specifically the non-pro-rata goodies for the control group in the Hearthside Food case. The proposed restructuring in Hearthside would reserve 35% of a reorganized equity rights offering for the steering committee of first lien lenders – not the entire first lien ad hoc group – in addition to a 10% DIP backstop premium.

As discussed above, this wouldn’t normally trigger alarms but for a prepetition cooperation agreement that maybe gives non-steerco ad hoc group lenders additional rights to block a non-pro-rata transaction that excludes them. No suits filed yet, but stay tuned.

Adding a layer to the game theory scenarios here, these types of disputes may be more and more front and center after the Supreme Court’s Purdue Pharma decision, which prevents debtors from using plan releases to protect nondebtors – including participating lenders in these postpetition uptiers – from suits by excluded lenders after emergence. With that backdrop, Judge Goldblatt’s refusal to approve DIP releases of the excluded lenders’ claims was so meaningful in American Tire, there would be no second bite at the apple at confirmation.

Back in the prehistoric bankruptcy days, when nondebtor releases first became a thing in truly “rare and exceptional circumstances,” there was some legitimate justification for protecting nondebtors from post-emergence litigation. For example, the promise of such releases might have actually been necessary for the debtors to secure DIP financing or plan sponsorship, or to induce management targeted by securities litigation to file. We don’t deny that the “parade of horribles” emerged from what at one point were legitimate concerns.

The problem is that the “rare and exceptional circumstances” became every single large chapter 11 case, and bankruptcy judges stopped actually considering whether a debtor proved the “extraordinary” relief was really necessary, instead deferring to “business judgment” and obviously self-serving baloney from lenders. When mass tort debtors noticed this and started filing bankruptcy en masse to stall litigation and reduce the claim pool, bankruptcy judges just kept doing it, seemingly in every single case, and often on the basis of dubious evidence of necessity or none at all.

Thanks to lax policing of bankruptcy tools by bankruptcy judges, protecting lenders who really deserve releases is now impossible. Bankruptcy courts forced the Supreme Court’s hand, and now we can’t have nondebtor releases when we might actually need them. Or, maybe, nondebtor litigation injunctions – which brings us to the next item! Segue.

Just a Little More Time

Speaking of penny-wise, pound-foolish: In early November, we discussed the absurdity of extending Purdue’s “preliminary” five-year injunction protecting the Sacklers from opioid litigation in the wake of the Supreme Court’s Purdue Pharma decision prohibiting nonconsensual nondebtor injunctions. It seemed obvious to us that if the Sacklers will eventually have to defend claims by opt-outs, then why shouldn’t the opt-outs be allowed to pursue claims now?

The only answer the debtors have provided is that the Sacklers will walk from mediation if they must defend themselves. As we have said many times, this is obviously bunkum – the Sacklers also threatened to walk if they didn’t get nondebtor releases, and here they are, still negotiating. But Judge Sean Lane bought it.

The state of Maryland duly appealed Judge Lane’s extension of the injunction and on Nov. 21, Judge Colleen McMahon affirmed – though not without agreeing with us on a few points. At oral argument on Nov. 14, Judge McMahon stated the obvious: “There’s nothing very preliminary about an injunction that lasts five years.” The judge also compared Purdue’s incessant “we are this close to a deal” justification for the injunction to a scene in Mel Brooks’ Spaceballs. Generally, watching mega-case bankruptcy judges brings another Brooks masterpiece to mind, but we’ll take it.

In response, counsel for the debtors pointed to a statement from the mediator that allowing litigation to proceed could endanger the settlement talks, but Judge McMahon responded that she is “skeptical” of that assertion. “I guess I don’t believe it’s not possible to litigate and mediate,” the district judge added, noting, “That happens all the time.” Hallelujah.

“Are you honestly telling me that if everybody files a lawsuit next week, that’s the end, there will be no more settlement talks, there will be no more mediation?” the judge asked counsel for the debtors. Of course counsel could not answer that affirmatively, so they asked Judge McMahon to defer to the business judgment of the debtors and the consenting creditor groups and Judge Lane’s legal judgment on the issue.

Unfortunately, in the end, that is exactly what Judge McMahon did. In an opinion issued Nov. 27, the district judge concludes that the Supreme Court’s Purdue Pharma decision did not prevent bankruptcy courts from temporarily enjoining nondebtor claims against nondebtors, which, we remind you: the “temporary injunction has been in place for five years.

Judge McMahon wonders aloud in the opinion if the time has come to reconsider whether a bankruptcy court that indisputably cannot permanently block nondebtors from suing nondebtors can still do so “temporarily” for years on end but leaves the issue to the Second Circuit. Hold that thought.

Turning from whether Judge Lane could enjoin claims against the Sacklers to whether he should have done so, Judge McMahon admits she doubts lifting the injunction would result in the irreparable harm claimed by the debtors – the immediate end of mediation with the Sacklers. Nevertheless, Judge McMahon defers to Judge Lane’s finding that “if ‘the war of all-against-all’ were to break out now – and apparently it would if anyone crossed the line and started a lawsuit or administrative proceeding – mediation efforts would cease.”

That “apparently” tells you all you need to know about what Judge McMahon really thinks. Look, we congratulated Judge McMahon for her judicial courage in reversing the Purdue confirmation order in the first place. We thought that maybe her courage being vindicated by a Supreme Court decision essentially adopting her dissenting view might embolden her to take the next step and put an end to the endless “temporary” injunction protecting the Sacklers, which at this point cannot possibly be the one thing keeping the Sacklers and the debtors talking.

Instead, Judge McMahon took the easy way out. Yeah, we’ve done it. But by doing so, the district judge set us on a collision course for another possible blockbuster from the Second Circuit or the Supreme Court. On Nov. 29, Maryland appealed Judge McMahon’s decision affirming the prior extension to the Second Circuit – meaning the circuit court could well take up the issue the district judge felt unable to address: whether the Purdue decision implicitly prevents bankruptcy courts from “temporarily” halting claims against nondebtors for years on end.

Why does this matter? We’ve been screaming about it for years: By continuing to expand their reach in every single case as a matter of course, bankruptcy judges are simply begging appellate courts to rein them in, and hard. During oral argument, Judge McMahon herself suggested that the Supreme Court might have gone a little further in Purdue than bankruptcy courts seem to believe. “I have to say, you know, it’s at least arguable that what [the Supreme Court] said, meant, was bankruptcy courts, stay in your lane. Deal with debtors and get out of the business of resolving mass torts involving nondebtors.”

If the Supreme Court thought bankruptcy lawyers and judges would acknowledge their own limitations without explicitly being told to do so, then hoo-boy, they are more naive than we thought. Reining in runaway bankruptcy courts will require a strong, definitive statement. That has always been our fear – that by pushing the envelope, especially in mass tort cases outside their core competencies, bankruptcy lawyers and judges have dared the appellate courts to forcibly cut them down to size and treat them like non-Article III courts with limited jurisdiction and limited competency.

In our view, bankruptcy judges got lucky in Purdue by escaping without a bold statement from the Supreme Court about just how limited their powers are, at a time when the Supreme Court seems intent on doing exactly that to other sub-Article III tribunals. We would all suffer if the Second Circuit or the Supreme Court said bankruptcy courts cannot temporarily – as in not indefinitely, for five-plus years – halt suits against nondebtors, including sponsors, lenders, management and nondebtor affiliates, in truly extraordinary circumstances.

Once again, a bizarre addiction to solving perceived issues in the mass tort system and the steadfast refusal of bankruptcy judges to take a hint already have brought us to the brink of losing another tool useful for bankruptcy courts’ core mission.

By not putting her foot down and ending the Sackler injunction now, Judge McMahon opened the door once again for the higher appellate courts to clip bankruptcy’s wings in a decidedly unsympathetic case. Sure, the debtors could have appealed if Judge McMahon reversed Judge Lane and lifted the injunction – but maybe, just maybe, they would have realized it is in everyone’s best interests not to do so.

Or – more likely – the absence of the injunction would have made a settlement before any appellate decision more urgent because litigation pressure is what leads to settlements, not the absence of litigation pressure. After all, the last time the Sacklers agreed to pony up more cash to settle opioid claims was after Judge McMahon’s decision on nondebtor releases.

Judge McMahon herself predicted that the “temporary” stay affirmed in her opinion would no doubt be extended yet again, and, lo, it came to pass: On Nov. 26, five days after Judge McMahon affirmed the previous extension and one day before her opinion, Judge Lane granted another one – this time through Dec. 23. The debtors have asked for an extension through Jan. 9, 2025. No doubt the amazing progress in mediation will justify a further extension request before then.

Meanwhile, on Dec. 2, Judge Lopez extended the Red River Talc litigation stay protecting nondebtor Johnson & Johnson entities through March 15, 2025. Tick tock…