Court Opinion Review: AmSurg Drop-Down Lenders Cash Out; Judge Kaplan Refuses to ‘Gamble’ Del Monte; Rite Aid Gets Super-Expedited Relief; Vote Designation in Yellow

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 as a whole. Today, we consider the end result of the Envision/AmSurg drop-down and chapter 11, approval of the Del Monte desperation DIP, Rite Aid’s five-day breach of contract suit against CVS and a novel justification for vote designation in Yellow.

AmSurg Lenders Cash In

Congratulations to the grand marshals of our latest mega-bankruptcy Parade of Wonderfuls: the second lien lenders that received the vast majority of equity in reorganized AmSurg under the former Envision ambulatory surgery division’s chapter 11 plan, which went effective in November 2023. On June 17, healthcare nonprofit Ascension announced it will acquire AmSurg at a reported valuation of approximately $3.9 billion, or $250 million more than the high end of PJT’s reorganized enterprise valuation during the bankruptcy.

This one isn’t just about bankruptcy but also about the careful prebankruptcy transactions that put the AmSurg second lien lenders in position to secure that windfall – including a non-pro-rata drop-down liability management exercise that we discussed in August 2023 and June 2023.

Long story, but here goes: In April 2022, Envision announced a partial drop-down that sent approximately 83% of the company’s profitable ambulatory surgery business to a new AmSurg subsidiary, splitting that business from Envision’s less lucrative physician services business. The new AmSurg entity then issued $1.1 billion in new first lien debt (not including a $200 million delayed-draw term loan) and exchanged select Envision debt for $1.3 billion in new AmSurg second lien debt.

For the uninitiated, ambulatory services are outpatient facilities where patients can receive same-day surgical care.

Poof! The favored lenders went from holding debt issued by a struggling company whose physician division’s losses were dragging down the surgery division’s profits to holding debt issued exclusively by the surgery division. Of course, the left-behind Envision lenders lost the security of all that profitable collateral at AmSurg.

At least the company secured a discount on the exchange of old Envision debt into new Amsurg second lien debt, though the fact that the favored lenders were willing to accept a discount tells you the favored lenders knew they were on to a good thing.

Clue No. 2 that this was a sweet deal for the favored lenders: Counsel for the left-behinds at Envision quickly instructed agent Credit Suisse to either resign or sue to invalidate the transaction – and Credit Suisse actually took the demand somewhat seriously, to our minor surprise.

In response, Envision offered the troublesome left-behinds a tip: participation in non-pro-rata uptier exchanges that would put them at the front of the line in the inevitable Envision bankruptcy. About 91% of the Envision leftovers took the deal; guess they figured being at the front of the line for garbage was better than being at the back of the line for garbage. Of course the uptier offering required the left-behinds to release any claims challenging the April 2022 AmSurg drop-down, but hey, they took the deal.

Lest you think bankruptcy planning wasn’t squarely in the works here, the new first lien term loan at AmSurg included a hefty prepayment premium that added approximately $230 million to bring the lenders’ bankruptcy claim up to $1.6 billion.

The drop-down and uptiers rendered the company’s clearly premeditated chapter 11 strategy a fait accompli: Both divisions would file at the same time, though proceed as essentially separate debtors. The drop-down lenders would take AmSurg, and the left-behinds who took the second place deal would take Envision, and the newly separated companies would “settle” intercompany claims for a pittance and exchange releases, putting all those unseemly fights behind them.

If bankruptcy was contemplated when the liability management exercises took place, then why didn’t the company and favored lenders just do all this in bankruptcy? Simple: Companies generally find it difficult to convince even a pliant Houston complex panel judge to let them spin off a division to a sub-group of favored creditors. At the very least, someone – even the U.S. Trustee – could demand a market test on a credit bid or argue that meaningless backstop fees shouldn’t allow quite so much of a power grab.

Either the 9% of remaining Envision left-behinds or the official committee of unsecured creditors would of course threaten to challenge the drop-down and uptiers, but there’s a tried-and-tested way to handle that: file chapter 11 in Houston, agree to an RSA/plan with controlling creditors that wraps everything up and get the complex panel to approve the deal to avoid a threatened, almost-always-made-up liquidation risk – yes, the “parade of horribles.” Presto: the LME two-step.

Remember: when you go down to the permit office to schedule a Parade of Wonderfuls, you must always threaten to schedule a Parade of Horribles.

And lo, it came to pass: On May 15, 2023, just over a year after the April 2022 drop-down – which, hmm, isn’t the insider preferential transfer look-back period one year? – the company filed chapter 11 in Houston. In his first day declaration the CRO swore that the LMEs were intended to get the company through 2025, but darned if those “lingering impacts from COVID-19” didn’t do it in. I’m sure they were absolutely shocked.

Under twin RSAs – one for Envision, one for AmSurg – AmSurg would purchase the remaining 17% of the ambulatory surgical business left at Envision. AmSurg first lien lenders would be repaid (inclusive of that prepayment premium), and second lien lenders (the favored creditors who participated in the drop-down exchange) would receive 100% of AmSurg reorganized equity, subject to “dilution” by a $300 million rights offering open to “all” second lien lenders (which they could participate in!) at a 30% discount to plan value, the rights offering backstop premium equity (which they received!) and a management incentive plan.

This reminds us of the ancient riddle: “When a backstop party backstops itself, does it really make a sound?”

First-out Envision term lenders (the left-behinds who participated in the uptiers) would receive 100% of reorganized equity in the new Envision-only entity, minus a to-be-determined percentage to be distributed to second-out lenders and subject to dilution by a management incentive plan and warrants issued to holders of third-out, fourth-out and nonparticipating uptier claims and unsecured notes claims, if those losers voted to accept the plan in their last opportunity to get with the program.

To the lenders’ credit, they did not force the company to accept a patently unnecessary DIP to lock in the deal at the start. Nice, I guess.

On June 26 the committee objected to final approval of cash collateral use on the terms offered by the lenders, arguing the deal would encumber considerable unencumbered assets (including $80 million in cash in non-controlled accounts and interests in over 200 joint ventures).

This was not your typical “committee makes up perfection issues to gin up some leverage and get a bigger carve-out and longer challenge period” situations. The UCC also took aim at the spinoff. According to the committee, the AmSurg assets “could be worth as much as $4.5 billion” and, if sold, could provide a meaningful distribution to Envision and its creditors.

The UCC pointed out that the prepetition AmSurg marketing process was half-hearted even by bankruptcy “market test” standards and had been discontinued. In other words, but for the drop-down, this would have to be treated as one company, with assets available for all.

Wait – don’t debtors generally prefer to sell assets in chapter 11? There’s Clue No. 3 – please keep up – that the AmSurg lenders knew they were getting a good deal. If they were concerned about taking AmSurg equity, why not run a bankruptcy sale process as an alternative? Buyers arguably pay more for distressed assets in bankruptcy than outside – something mega-case bankruptcy judges often seem to forget – see below – so that would make sense, no? Yeah, unless you really, really want to own AmSurg.

On June 29, 2023, the debtors filed their boilerplate placeholder disclosure statements and plans – another move to convince Judge Christopher Lopez just how shovel-ready this restructuring would be. This is the equivalent of a sports franchise unveiling a glossy, unrealistic stadium rendering right before a city council meeting where they’ll be begging for billions in taxpayer subsidies – it’s just part of the show for the local yokels.

To avoid leaving any doubt as to the purpose of these placeholder plans, the debtors filed them about half an hour before the cash collateral hearing started.

At the hearing, counsel for the UCC compared the proposed adequate protection payments to prepetition lenders to a homeowner that files chapter 13 bankruptcy and proposes using unencumbered assets to pay for improvements and insurance on a fully mortgaged house without any possibility the outlay would generate positive equity.

The unencumbered assets used by that debtor solely to improve the mortgage lender’s position would be unavailable to pay the debtors’ credit card or tax debts, counsel continued, and “that’s bad.”

Counsel for the AmSurg lenders responded by pointing out that the UCC was composed exclusively of Envision creditors and warned that by opposing the deal, the committee could compromise full payment of AmSurg unsecured creditors – all $1.5 million of them. Pretty flaccid Parade of Horribles, but it’ll do.

Judge Lopez of course said he understood the committee’s issues – at that empty gesture, counsel for the UCC probably stopped taking notes – but found there is “no question” the debtors need to use cash collateral to continue operating, and cessation of operations could mean “life or death” for patients. Yup, he went to the old “worry about the hardworking common folk” trope, again.

Preserving patients’ right to “get the healthcare they deserve in this day and age is very important to me,” Judge Lopez said. Awwwww. This is the equivalent of the city council member worrying aloud about “all those little boys and girls who love [insert sports franchise here]” when justifying those billions in taxpayer stadium subsidies.

UCC counsel countered by sensibly pointing out that the welfare of patients is irrelevant because there was absolutely no friggin’ way the lenders would “take their ball and go home.” Some might use a time machine to kill Hitler or buy Berkshire stock in the 1960s. Your humble author would use it to stand up and slow-clap this dogged, if futile, effort by the UCC.

Would you go to all the trouble of two liability management transactions to split a company up and prevent litigation, negotiate two RSAs and file chapter 11 just to walk if the committee got an extra three months to investigate?

Of course Judge Lopez declined to call the lenders’ obvious bluff. “People need to get paid,” he said.

At that point the case was essentially over. The bog standard Houston rational basis review was in effect (rather than the compelling interest standard reserved, in Houston, for chapter 7 trustee motions and mass tort cases).

In an amended disclosure statement filed Aug. 2, 2023 – just before the DS hearing, of course – the AmSurg debtors predicted that second lien lenders would recover 73% on approximately $1.5 billion in claims. This 27% “haircut” was calculated by reference to the debtors’ plan value. Regardless of numbers, it seems pretty clear that they were more than happy to own AmSurg rather than remain stuck with the suckers holding Envision claims.

Maybe a better (and counterfactual) question would be whether the lenders would have been happy to take a 100% cash payout if the whole thing were subject to a market test and a buyer materialized.

(Editor’s Note: somewhere out there in the Octus readership are the clerks that wrote 203 N. LaSalle. Do they weep, or are they the ones that did this to us?)

Mad props to UCC counsel at White & Case, who did not do the expected and fold quickly for a class-action style deal where they would get paid and Envision claimants would receive a coupon for 5% off any joint replacement surgery at the AmSurg facility of their choice.

The committee objected to the disclosure statements and objected to the secured status of prepetition lender claims, arguing that “almost forty of the joint ventures are unencumbered due to explicit pledge restrictions, transfer restrictions, and assignment restrictions in their respective organizational documents.”

The leftover non-uptiered Envision creditors also filed a complaint challenging the uptiers on Aug. 1 – the day before the disclosure statement hearing. Now the UCC and left-behinds were playing the “file the pleading right before the hearing” game.

On Aug. 2 Judge Lopez approved the disclosure statements. Did the judge nevertheless provide a meaningless moral victory throwaway line and insist he had not decided confirmation yet? You know it! But the UCC kept fighting. On Aug. 11, 2023, the committee filed a motion for standing to bring claims challenging the controlling creditors’ liens on various assets, including the joint venture interests.

Then, on Aug. 18, the committee filed a motion for standing to challenge the AmSurg drop-down transaction that pretty much nailed what was going on here: Via a “series of liability management exercises that has been described as the most coercive ever,” the debtors created “a brand-new class of creditors within the enterprise consisting of new money lenders and exchange parties trading into the AmSurg debt facilities,” accompanied by the debtors’ commitment to pay hundreds of millions of dollars in fees and make wholes when the “inevitable” chapter 11 was filed.

For the record, in February 2025 Octus’ ace financial analysts put the AmSurg drop-down somewhere in the middle of our ranking of the LMEs that shifted the most value to favored creditors. The trick here is not that the drop-down was hyper-aggressive in the abstract but that it was hyper-cynical – clearly focused on giving favored creditors the entire value of the AmSurg business in an inevitable chapter 11 at the expense of left-behind Envision creditors.

The committee asserted there was “no business purpose” to the drop-down transaction, and the intended result was to “place these valuable AmSurg assets under the control of a select and preferred group of secured lenders at AmSurg.” Nodding. The uptiers “manufactured an Envision class of consenting creditors, again trading away hundreds of millions of dollars of estate assets to gain the support of the top priority tranches of the term loan lenders” for eventual bankruptcy plans. Yup.

Alas, the very next day the committee finally gave up the ghost and settled, securing $35 million of cash and 1.5% of Envision reorganized equity for Envision unsecured noteholders and an additional $5 million for Envision general unsecured creditors. For once, we can’t criticize a committee for taking the deal. They pushed potential claims a lot further than most UCCs would have, despite knowing they were doomed from the cash collateral hearing at the very latest. Fortis cadere, cedere non potest.

On Sept. 29, 2023, Octus estimated Amsurg’s implied equity value at approximately $1.46 billion, using a trading price of 67.5 from Sept. 21. That implied an enterprise valuation of $3.4 billion – or $250 million less than the high end of the plan value at confirmation and $500 million less than the current Ascension deal’s reported valuation. Welp.

Just how much will the AmSurg lenders cash out from the Ascension deal? To the back of the envelope! Our best guess as to AmSurg’s debt load right now is the effective date amount – about $1.9 billion. That means the company’s equity value was about $2 billion at a $3.9 billion acquisition valuation.

All in, including AmSurg drop-down new money, Envision-to-AmSurg converted debt, rights offerings, etc., we estimate the AmSurg lenders received over 1.3x return on their investment from the time of the drop-down transaction, excluding any proceeds from interest and dividends and using the exchange rates for the Envision-exchanged debt at the time of the transaction as a proxy for cost basis at that time.

Even if they made zero profit on the trade, they sure as heck made out better than if they had remained Envision creditors, and all those clues cited above suggest they very much knew they would.

Did Judge Lopez take any of that into account? Doesn’t seem like it. He sided with the company because “people need to get paid” and “patients.”

Look, we obviously don’t blame controlling lenders for trying to juice their returns; after all, they use those returns to pay for their Octus subscriptions. It’s not their job to balance that profit interest against legal limitations and due process – it’s up to bankruptcy judges to make sure leverage between controlling creditors and minority creditors is properly calibrated as intended by the Bankruptcy Code.

We are, we know, beating a dead horse here, but let’s just lay it out quickly: There was no reason to think that the AmSurg lenders were going to walk from their hand-crafted deal, and it sure seems like a lot of the planning in this case factored in inevitable approval in bankruptcy.

Of course, if the AmSurg lenders thought there was a real risk of everything going under the microscope, they might not have undertaken this whole mess of transactions. We are old enough to remember when scrutiny and going “full kimono” was a downside risk in bankruptcy. Now, it seems like the predictability of mega-case judges in particular forums, combined with essentially unlimited venue freedom, has distorted the market to encourage expensive finagling instead of straightforward debtor-creditor negotiations.

As we’ve said before in the context of LME cases, in the long run, the predictability of these judges creates more litigation and expense than it saves by encouraging what would otherwise be risky maneuvers by companies and controlling lenders.

Can of Worms

Speaking of which, we have to give New Jersey’s Judge Michael Kaplan props: He knows we are on to his game of giving debtors whatever they want to attract cases, and he isn’t afraid to say so. He even trolled us at the Del Monte first day hearing on July 2.

Noting his experience as a panelist at bankruptcy industry events, the judge said, “I’ve heard the argument” that “courts should start calling the bluff” of lenders and debtors when they say “dire consequences” will follow if an emergency DIP is not approved. But rather than “gamble,” Judge Kaplan nevertheless approved an aggressive first day rollup. As the kids say: aura.

Del Monte isn’t the most sexy case around – what with the canned peas and carrots being a pretty 19th-century kind of thing, and the human rights abuses seemingly concentrated in the foreign side of the business that didn’t file. But the company’s August 2024 liability management exercise was state of the art in terms of shifting value to the participants. Look at this bloodbath:

Unfortunately, much of the drama from the company’s inevitable post-LME chapter 11 (seriously, how many of these exercises end up managing a company’s liabilities for more than a year?) drained away when the defendants settled Delaware Chancery litigation over the validity of the drop-down after trial. Oh, dadgummit!

Still, a group of minority lenders left out of the DIP did show up at the first day hearing and objected to the proposed $150 million first day rollup. Counsel for the minority group pleaded due process and urged the judge not to approve the rollup and “excessive fees,” which would “dramatically improve” participating DIP lenders’ positions relative to all others.

The fees? A backstop premium of 10% of the new-money commitments and a 4% new-money commitment fee, both payable in kind. Yeah, the usual DIP and backstop goodies designed to goose the recovery of a group of favored lenders over the rest. Sure, bogus fees happen all the time – but maybe hold off on approving them until the final DIP hearing?

Since everything pre-bankruptcy is now an LME, surely any value grab via DIP financing can also be an LME? Nothing like a postpetition LME to go with that hyper-aggressive prepetition LME. This company has a taste for blood. Canned blood!

The debtors of course responded that the business would shut down unless Judge Kaplan let them have exactly what they want, now. Which we don’t doubt! Companies with $1 million in cash as of the petition date generally lack the wherewithal to continue operating in chapter 11. The debtors also suggested the minority lenders just sign up to the RSA and participate in the DIP, but that wouldn’t solve the fees going to the backstop group, and, as counsel pointed out, they hadn’t even had time to read the RSA yet.

However, maybe companies with only $1 million in the bank that cannot secure funding to operate without undertaking a value transfer from one group of pro rata creditors to another, as a follow-on to a similar maneuver targeting other disfavored lenders a year earlier, should not continue operating.

Think of it this way: We doubt any judge would force the majority lenders to provide financing if they were unwilling to do so. Theoretically he could allow the debtors to use lenders’ cash collateral without their consent if they are adequately protected, but when was the last time that actually happened in a mega-case? Shouldn’t the same ground rules apply for minority lenders?

Let’s assume, hypothetically, that the minority is correct and the DIP would transfer $100 million in value to the majority. What if a debtor and its majority creditors proposed a DIP that required the minority creditors to fund a $100 million commitment fee? Of course, the debtors and the majority say that without the payment, there would be no DIP and everything shuts down. Could any judge approve that deal and order the junior creditors to fund the $100 million to avoid a liquidation? We really, really hope not.

Nevertheless, Judge Kaplan duly approved the Del Monte rollup on the first day of the case, with less than 24 hours’ notice, based solely on the debtors’ need for the financing. The judge of course said he understood the minority lenders’ frustration – you folks can stop taking notes now – but the debtors’ need to keep operating trumps all.

The judge cited the absence of any competing DIP, which, that’s not grounds to approve the potentially problematic DIP in front of you. If the only DIP the debtors can get is one that robs from Peter to pay Paul, there is no need for some good Samaritan to walk in the courtroom and say hey, we’ll offer financing that complies with the Bankruptcy Code and the parties’ contractual rights.

(Editor’s Note: There are a lot of third party DIP lenders with seemingly a lot of dry powder; would be fun to see them actually stride into one of these situations and throw a curveball.)

This is also where Judge Kaplan gave those of us his little shout-out. He has “heard the argument” that “courts should start calling the bluff” of lenders and debtors when they say “dire consequences” will follow if an emergency DIP is not approved. But: “this court does not wish to gamble with interests of employees, vendors, and investors.”

Life is full of gambles. We could be attacked by an angry owl while taking the trash out or suffer a fatal aneurysm when some bankruptcy judge invokes the interests of non-parties such as patients to justify giving debtors and secured creditors whatever they want. Yes, telling debtors and putative DIP lenders they can’t have absolutely everything they want on day one of a bankruptcy case might be a “gamble,” in this sense.

Yet we still get up, throw on some jammies and expose ourselves to bankruptcy, day after day, trying to provide our subscribers with valuable intelligence and a few funny YouTube videos. Judges have jobs too. Maybe, just maybe, that goes so far as to say “perhaps this company should stop operating if its lenders won’t give it any money unless I approve a nonconsensual value transfer from other similarly situated creditors with less than 24 hours’ notice.”

Maybe employees will lose their jobs, maybe not – in our experience, the DIP lenders would come back with a less problematic proposal because keeping the company operating is also in their best interests. How many times have lenders who committed to provide a DIP just walked when a bankruptcy judge called their bluff and refused to approve an aggressive maneuver to secure extra value? Does it ever happen?

Judges are supposed to make tough decisions. They have to weigh the legal rights of junior creditors and the requirements of the Bankruptcy Code against keeping the debtor’s doors open, for example. They have to worry whether a ruling might torpedo a restructuring that the parties spent months and millions negotiating.

They also have to consider whether bending the law or abusing junior creditors’ rights to keep this particular debtor in business might have negative consequences in future cases that outweigh the harm of sending this company to the boneyard. Let us be very clear: The parties and their lawyers do not have this responsibility. But the judges do.

But Wait, There’s More!

We are not sure New Jersey will be leading the way on this point. If you aren’t convinced yet, see Judge Kaplan’s July 8 decision in the Rite Aid chapter 22 deciding a $50 million to $60 million asset purchase dispute with CVS on five days’ notice over a holiday weekend. Sure feels like SDTX-style hijinks to us.

A whole month ago we discussed the extremely fast and incredibly secret process for the sale of Rite Aid’s pharmacy assets and criticized Judge Kaplan’s approval of bidding procedures at the first day hearing. On May 21 – 15 days after the petition date and five days after the UCC was appointed – Judge Kaplan approved Rite Aid’s sale of 90 million prescriptions and 64 stores to 13 buyers, including CVS. How much did CVS agree to pay? We have no idea because that information is under seal.

We do know, thanks to a motion filed by Rite Aid late on Thursday, July 3, that CVS requested a downward purchase price adjustment of $50 million to $60 million, based on what the debtors call “three baseless contract interpretation disputes.” Sure, fine, CVS might breach the contract if it fails to close at the original price… But isn’t the usual response to take the deposit and sue for more?

Except: According to Rite Aid, the dispute had to be decided by Judge Kaplan before the final DIP hearing began on Tuesday, July 8 – five days later, with three of those days being July Fourth, a Saturday and a Sunday – because the CVS dispute allegedly affects the DIP budget, which “contemplates CVS paying the entire amount owed under the plain terms of the APAs.”

Yeah, but couldn’t that be true of every dispute in bankruptcy involving funds due to the estate? Let’s say the debtor has potential preference claims to recover $50 million paid to vendors in the 90 days before bankruptcy. Can the debtor get those claims resolved in two business days by filing a motion – not a complaint, a simple motion – before the final DIP hearing and arguing that hey, if we get that $50 million tomorrow, it will be in the DIP budget?

Seems dicey, but it’s 2025, and the future of transatlantic security rests on who calls who “daddy,” and maybe no debtor thought of this before, and now this is the new playbook. YOLO.

What if the debtors assume a certain amount of collections on accounts receivable for their budget, but one of their customers objects to the goods provided as defective and refuses to pay? Does that mean the debtors can file a motion and get the dispute resolved in just a few business days, without real notice or any opportunity for discovery, just because the outcome could affect the debtors’ budget? Still seems dicey!

Real world, very relevant example: In the first Rite Aid case, the debtors sued McKesson for breach of contract in their first day papers. Why didn’t they just include their hoped-for recovery from the suit in the DIP budget and ask Judge Kaplan to decide the matter before the first day hearing? Next time…

In other words: Why should the due process rights of nondebtors be compromised solely by a debtor’s inclusion of an anticipated recovery in the DIP budget? If the DIP budget relies on recoveries from a breach of contract action, isn’t it kinda the debtors’ problem to make sure there is time to collect or that the purchaser provided a sufficient deposit?

Maybe not? According to Judge Kaplan’s ruling on July 8 – again, two business days after the motion was filed – the burden is on the nondebtor to prove their entire case, right now, to ensure the DIP lenders don’t walk. Instead of telling the debtors to figure out their budget problem themselves, Judge Kaplan decided he would “take the opportunity to essentially reform the contract to be consistent with the intent of the parties,” because “this is a debtor that is on life support.”

Just a reminder here: Rite Aid is not on life support. It is arguably already dead. It has joined the choir invisible. On May 21, Judge Kaplan himself approved sales of substantially all of the debtors’ most valuable assets, the pharmacy records. The company has closed more than 300 stores. This is a chapter 22 case.

Even if Rite Aid was reorganizing, how can $50 million to $60 million be material to the budget for a DIP/cash collateral facility of almost $2 billion? We’d compare the amount sought to the budget itself to determine materiality, but of course the budget isn’t on file because everything in this case is need-to-know. Even assuming the amount is material, what are the DIP lenders going to do – terminate the facility, get stay relief and sell their collateral outside of bankruptcy?

The collateral is already being sold, and again, the lenders know they’ll get more for the assets in chapter 11 sales. If the response is the DIP is all a rollup, and the money from CVS is what’s funding the case, isn’t that proving our point?

Sure seems like what is happening here is the court ignoring obvious but inconvenient facts. So, Judge Kaplan went ahead and “reformed” the CVS APA – even though no one asked for such relief – in accordance with what he determined was “the intent of the parties.”

Unsurprisingly, Judge Kaplan’s reformation is pretty close to the debtors’ view of “the intent of the parties.” Not exactly, though – so the debtors had to push their final DIP hearing to July 10 anyway to consider the ruling. Almost like July 8 wasn’t the crucial date after all!

According to Judge Kaplan, he was disregarding Bankruptcy Rule 7001, which generally requires the commencement of an adversary proceeding to collect debts owed to the debtor – with service of process, an answering period, discovery, etc. – “to offer an expedited resolution of the issues.”

As precedent for this generosity, the judge cited himself – namely, his ruling on the debtors’ motion to compel purchaser Medimpact during their first bankruptcy case. But have no fear: Judge Kaplan made sure to say his ruling was “preliminary,” and he would be willing to reconsider after hearing evidence at a “plenary hearing” on July 25.

Sure. Even if Judge Kaplan is serious and reconsiders his off-the-cuff ruling on July 25, that would mean he effectively forced CVS to lend the debtors whatever amount his ruling requires for 17 days to plug a hole in their DIP budget – without any of the usual protections afforded a DIP lender (e.g., adequate protection payments, liens or superpriority claims).

CVS called the hearing a “trial by ambush,” and we can’t disagree. This is not how the process is supposed to work, folks. Sure, keep taking your big cases to Judge Kaplan, keep your clients winning – we enjoy some barrel-based fish shooting as much as the next guy. But we will continue to beat our dead horse: The more bankruptcy courts push the envelope, the more they risk eroding their legitimacy in the eyes of the appellate courts and the public, and that’s bad for all of us in the long run.

A New Design for Designation

Judge Craig Goldblatt is really on a tear making new law lately, especially in the Yellow case – and at the June 17 hearing on equityholder MFN’s motion to convert, he threatened to make some more in one of our favorite (if often meaningless) areas: the plan voting process.

Recall that to confirm a chapter 11 plan, a debtor must secure acceptance from at least one impaired class – meaning two-thirds in amount and a bare majority in number of creditors in an impaired class must vote to accept. This creates a problem where the vote of the sole impaired class is controlled by creditors opposed to the plan; that group would appear to hold a veto right on any plan that impairs them.

In Yellow, the issue is the class of general unsecured creditors. That class – and, perhaps more importantly, the official committee of unsecured creditors – is dominated by massive withdrawal claims asserted by the debtors’ former multiemployer pension funds, or MEPPs, which are generally affiliated, directly or indirectly, with the former employees’ unions, including the Teamsters.

So, remember back on day one of the case, when the debtors elected to accuse the unions – specifically the Teamsters – of intentionally destroying the company by maliciously threatening to strike in July 2023? CRO Matthew Doheny laid it on pretty thick in the first day declaration, asserting that the debtors shut down because of a liquidity crisis “orchestrated by” the Teamsters and accusing union leadership of engaging “in a series of egregious breaches of Yellow’s collective bargaining agreement.”

Whatever the truth – and Judge Goldblatt kinda sorta laid blame at the unions’ feet in his decision rejecting the unions’ WARN claims – the bickering and objections to the MEPPs’ and unions’ claims seemed to poison the well for plan negotiations. The debtors, apparently out of necessity, aligned themselves with MFN in a scorched-earth campaign to reduce the MEPP claims and maintain control over a post-bankruptcy liquidating trust.

In November 2024, the debtors filed a second amended plan, with MFN’s blessing, that provided for a liquidating trust overseen by insiders (read: folks appointed or supported by MFN) to continue litigating against the unions and MEPPs. The UCC (read: the MEPPs and unions controlling the committee) responded with a motion to convert, arguing that the second amended plan was dead on arrival because the MEPPs would never vote to accept, and they control the one impaired class entitled to vote.

The debtors and MFN opposed the committee’s conversion motion, though MFN’s response was considerably more strident. In their considerably less fiery brief, the debtors hinted at a new development: “progress resolving disputes” with the UCC members. Anyway, Judge Goldblatt denied the UCC’s motion to convert in an interesting decision we discussed in June 2024.

However, the debtors apparently saw the writing on the wall: To secure the votes necessary to confirm the plan, they had to hold their noses and play ball with the unions and MEPPs. At a status conference on March 26, the debtors announced they had reached claims settlements with the largest MEPP claimants, effectively buying their votes with allowed claims prior to a key summary judgment ruling on discounting and subordination of the claims.

The debtors filed a third amended plan incorporating the MEPP settlements on March 29 and asked Judge Goldblatt to refrain from ruling on summary judgment until after confirmation. Obviously, the debtors and MEPPs were concerned that the judge would rule for MFN and, well, the debtors, reducing the claims substantially enough to make the third amended plan settlements too generous to defend at confirmation.

To the judge’s credit, on May 31 he indicated he would not hold off on his summary judgment ruling just because a decision might crater the third amended plan. Judge Goldblatt acknowledged that releasing the summary judgment decision prior to confirmation could be “massively disruptive” and “interfere with [the] progress” the parties made in negotiations, but MFN is “entitled to an adjudication” of the objections it “properly brought before the Court.”

A bankruptcy judge deciding to rule on a dispute rather than defer to the plan? Are we on mescaline? Ibogaine?

On April 7, Judge Goldblatt issued a “preliminary” opinion siding with MFN, crushing the remaining MEPP claims on summary judgment and rendering the settlements in the third amended plan completely laughable. This put the debtors right back into the same quandary between placating the MEPPs and unions (who had the votes) and mollifying MFN (who had the legal victory).

The debtors chose to pursue further negotiations with the MEPPs on allowed claims, recognizing the voting roadblock that the MEPPs still provided even with their reduced claims. Whatever they did to try and mollify MFN failed miserably; on April 29, MFN filed a motion to convert arguing that the mere proposal of the MEPP claim amounts in the third amended plan demonstrated that the debtors were no longer trustworthy fiduciaries. MFN said it had “lost all faith in the Debtors’ ability to steward these cases.”

Instead of standing firm in the face of the committee’s objections, MFN asserted, the debtors agreed to “grossly inflated allowed claims” for favored members of the committee to buy confirmation of a plan that wiped out shareholders and diluted non-MEPP creditors’ recoveries. The debtors did this “just for the sake of confirming a plan” and avoiding chapter 7. Wait – is that frowned upon now?

Then, at the June 17 hearing on MFN’s motion to convert, Judge Goldblatt out of the blue hinted at a way for the debtors to get around the roadblock presented by the unions/MEPPs/committee members without giving them outsized allowed claims: If the claimants voted to reject just because the debtors didn’t give them allowed claims, he could simply throw out their votes via designation under section 1126(e) of the Bankruptcy Code.

Section 1126(e) is a rarely used provision that allows a bankruptcy judge to “designate” – e.g., disregard – the vote of any entity whose acceptance or rejection of a plan “was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title.” We talked about designation way back in December 2021 in the context of potential vote-buying and pre-DS approval solicitation in the Grupo Aeroméxico and LATAM cases.

Generally, designation only applies to vote-buying and rejecting votes by a creditor/competitor with an ulterior motive. But what Judge Goldblatt was proposing seems new to us: designating rejecting votes because the debtor refused to buy acceptance.

According to Judge Goldblatt’s potential, still inchoate idea, creditors who object not to the plan’s treatment of their claims but to the continued prosecution of objections to their claims – e.g., the MEPPs – open themselves up to designation. The MEPPs are entitled to use the leverage their voting rights give them to secure friendly plan treatment for their allowed claims, the judge suggested, but it is something else to use those voting rights as a means to secure allowed claim amounts they “might not have otherwise received.”

To us this seems like a pretty dramatic extension of the designation power under section 1126(e). Sure, buying votes is bad – though almost never grounds for actual designation. But should a creditor lose its precious voting rights – and get a plan effectively crammed down on its head – because the debtors refused to settle?

Going further: Could a debtor build a case for designation by simply including proposed allowed claim amounts in a plan? Say a creditor asserts a claim for $1 billion. The debtor files a plan that provides acceptable treatment for the creditor’s claims – e.g., pro rata sharing with other general unsecured creditors – but makes clear it believes the claim should be zeroed out and says it will bring preference claims against the creditor.

If the creditor controls the class and rejects, can the judge still confirm the plan by disregarding the rejecting vote and only counting the other general unsecured creditors – a distinct minority of the class that accepted the plan?

One note: Voting only really matters in the case where there isn’t another impaired, accepting class.

Anyway, this might all be academic since the debtors seem to have finally calmed down both the MEPPs and MFN for now. At a status conference on July 8, the debtors announced they had abandoned the MEPP settlement concept and pivoted to negotiating a straightforward waterfall plan with the UCC, which MFN endorsed – except for that whole post-effective-date trust governance issue we previewed. Stay tuned …