Court Opinion Review: Unprecedented Judicial Moves in Multi-Color, Counsel, Intercompany Conflicts in FAT Brands and Another Chapter 15 Rubber Stamp

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 Judge Michael Kaplan’s creative decisions in Multi-Color, a fight over counsel fees, conflicts in FAT Brands and Judge Martin Glenn’s Ardagh chapter 15 recognition decision.

Judge Kaplan Gets His Hands Dirty

A couple months ago we discussed Multi-Color’s New Jersey “prepack” (or as our colleague has aptly said: a PINO, or “prepack-in-name only”) as another example of Friend of the Show Judge Michael Kaplan’s apparent chapter 11 operating procedure: “setting an expedited schedule, quickly disposing of minority creditor objections and giving great deference to the debtors’ business judgment.” “The Thirstiest Bankruptcy Judge in America isn’t citing the prepack label as an excuse to do anything he wouldn’t otherwise do in a non-prepack case,” we quipped.

Well, let’s hope we were wrong and this is a special case, because in the last few weeks Judge Kaplan has taken two apparently unprecedented steps to get this prepack on the road on the debtors’ preferred (that is, highly accelerated) schedule. If this is how Judge Kaplan intends to handle every chapter 11 case tenuously connected to Trenton using a corporate shell bank account, then we might need even stronger medication for our judicial anger management issues (we’re having good results microdosing Geemonex these days).

First, a pretty remarkable DIP financing decision. On March 26, the judge approved $125 million in new money, but – in the face of furious objections – declined to approve the DIP lenders’ $125 million rollup. Cool! Maybe some leveling out of case leverage and opening the door to dealmaking? Well, not quite. The very next day, Judge Kaplan approved a $62.5 million rollup taken out of the new money, leaving just $62.5 million for the business – without any further notice or hearing.

The proposed DIP rollup in this case has been controversial from the start: Before the first day hearing, the ad hoc cross-holder group and a group of first lien lenders that refused to sign the restructuring support agreement objected to interim approval, arguing that participation in the DIP was unfairly conditioned on agreeing to preferential treatment for equity sponsor Clayton Dubilier & Rice and favored lenders. The cross-holder group also proposed its own alternative DIP with arguably better economic terms for the debtors.

Judge Kaplan brushed off these concerns, approving the DIP (and a $125 million rollup) on an interim basis in deference to – you guessed it – the debtors’ “business judgment.” To quote the DIP financing motion: Without the DIP, the debtors say they “would be unable to implement these chapter 11 cases and emerge as a going concern” because “there would be insufficient capital to fund ongoing operations and the administrative costs during these chapter 11 cases and make all necessary and timely payments to the Debtors’ essential vendor and supplier partners.”

And: The objected-to DIP Goodies (rollups, fees, premiums, control over the plan, etc.) “are an integral component of the overall terms of the DIP Facility, and were required by the DIP Secured Parties as consideration for the extension of postpetition financing.” Sure seems like standard law firm form bank stuff. Boxes checked.

The objecting groups continued to press their challenges through an evidentiary final DIP hearing, which began March 17 with testimony from the debtors’ independent directors that the DIP is necessary and superior to the cross-holders’ alternative proposal. The independent directors emphasized that the favored DIP was superior because it is stapled to the RSA.

This is a common argument these days and it’s had success in the debtor-friendly jurisdictions, but it’s also deeply hollow for a judge to say that a DIP that purchases control over the restructuring and determines the ultimate outcome of the case is inherently superior to one that merely provides the debtors with necessary financing to operate and pay administrative expenses on the best possible terms while negotiating the best possible restructuring.

Think for a second about how odd this must seem to those not immersed for years in the bankruptcy spice. Assume you are on the board of a company looking for financing to continue operating outside of chapter 11. The investment bankers pitch two options: one includes detailed requirements for restructuring the business and extremely tight covenants and one has the same or better economic terms but lacks the lockup, preserving your options for possible follow-up maneuvers.

Wouldn’t you generally prefer the latter? To Judge Kaplan and the other usual suspects, it seems like the former is superior by default, simply because it is faster and less uncertain.

We’ve said our piece before on “independent” directors and won’t get into it again here, but needless to say it doesn’t seem like that level of “protection” was helping here either. One DIP proposal ensured that the sponsor that appointed them ended up with control over the company, as the objectors pointed out. That’s the DIP the board recommended. We’ll let you take it from there.

On March 24, the cross-holder group objected to the debtors’ prepackaged plan – the one attached to the DIP – as a “bad faith scheme” by CD&R to retain a controlling equity interest in reorganized Multi-Color by “bribing” the senior ad hoc group for their votes. Unfortunately for the cross-holder group, under mega-case-judge math a legally flawed plan that is supported by a majority of senior creditors is usually superior to a plan that complies with the Bankruptcy Code but can’t be confirmed without getting your hands dirty. Keep that phrase in mind.

The next day, the judge held day two of the final DIP approval hearing, which included testimony from the cross-holders’ experts. The experts focused on the prepetition first lien credit agreement, which they say forbids a non-pro-rata DIP rollup (see our discussion of Judge Craig T. Goldblatt’s American Tire decision for more on that issue).

In an oral ruling on March 26, Judge Kaplan came out with a shocker: he approved the second draw of $125 million in new-money DIP financing on a final basis but deferred final approval of the $125 million rollup until confirmation, which had been scheduled for April 15. The judge explained “the impact of the rollup on the unsecured creditor body requires further analysis and a more expansive record” – a possible sop to the newly appointed official committee of unsecured creditors, which retained counsel a few days before the hearing.

(The debtors almost immediately moved to disband the UCC, arguing it is pointless because the plan would pay general unsecured creditors in full. The U.S. Trustee responded by removing a member the debtors targeted. That motion remains pending.)

We could not believe that OUR Judge Kaplan would call the DIP lenders’ bluff on final DIP approval and make them wait nearly a whole month, until the inevitable confirmation of the plan, to get final approval for the second $125 million rollup of their prepetition claims.

The DIP lenders sure seemed annoyed by this about-face from a judge who usually lets debtors and their allies Have It Their Way like the now-deposed Burger King. Counsel told Judge Kaplan they would not commit to funding the $125 million in approved new money without the rollup because the rollup is an integral part of the financing, yadda yadda. We don’t believe that, and neither should you.

The DIP lenders have spent millions litigating with the dissident groups over venue, interim DIP approval, plan voting and the allegedly sham sale process designed to ensure sponsor/DIP lender CD&R’s new value injection to retain control of the company is “market-tested.” We’ll see you on Kalshi if you want to bet they would walk away over being forced to wait a few weeks for final approval of their second rollup.

The whole point of these aggressive DIPs and their “goodies” is not to fund necessary business expenses and chapter 11 costs but to give the lenders incremental preferential treatment and incremental control over the case. (Don’t believe us? Read on!) Walking away would open the door for other options – and the whole point of this “PINO” seems to have been to foreclose other options.

So bravo to our favorite Jersey judge! No doubt calling the DIP lenders’ bluff resulted in the lenders coming back and proposing a better deal for the debtors and dissident creditors, as happens in virtually every other case in which a bankruptcy judge does that.

Well, not every case. The next day, March 27, the debtors announced a resolution with the DIP lenders: Instead of the $125 million in new money the debtors said was necessary to continue operating and fund the chapter 11, the debtors would get just $62.5 million – with the other $62.5 million in “new money” approved by Judge Kaplan earmarked to roll up the lenders’ prepetition claims.

That’s right: by our math – and please correct us if there’s something we are missing – rather than improving their offer or just waiting until confirmation to get rolled up, the DIP lenders reduced their new-money commitment by 50% to get 50% of their rollup. Isn’t that worse for the debtors?

Judge Kaplan approved this deal the same day, without any opportunity for the dissident groups to object or take discovery on why the debtors suddenly needed only $62.5 million in new money rather than the $125 million they were so desperate for a couple days earlier.

To be clear on Your Friend Kevin’s view: This is obviously insane. On March 26, Judge Kaplan granted final approval for the debtors to borrow $125 million in new money under section 364 of the Bankruptcy Code on the basis of the debtors’ representations and testimony that $125 million in new money was necessary.

Remember, the lodestar for approval of a secured DIP facility under section 364 of the Bankruptcy Code is necessity: The debtors need such-and-such amount of new money to stay in business and pay for the chapter 11, so they ask the bankruptcy judge to approve the new money and, along with it, any related goodies for the lenders – rollups, fees, waivers, etc.

So in declarations and a two-day trial on final DIP approval, the debtors told Judge Kaplan the $125 million final approval rollup was essential for them to secure $125 million in sorely needed – nay, essential – new money to pay vendors, lawyers, etc. You would not want to risk harming those precious “employees, vendors, and investors” by forcing the debtors into liquidation, right judge? CASH RULES EVERYTHING AROUND ME.

Then, when Judge Kaplan rejected the rollup, the debtors said it turns out we only need $62.5 million in new money to pay those essential vendors and lawyers and whatnot, so we’ll just use $62.5 million of that “new money” to pay off the prepetition lenders’ claims with new, super senior debt.

Think of it this way: What if a debtor did this on the first day, without even asking for a rollup? Your honor, we only have $1.50 in our accounts (funny how that happens) and we need $150 million in new money from this group of controlling lenders immediately or we will have to convert to chapter 7, blah blah blah. The judge duly approves the $150 million in new money, in accordance with a proposed budget to pay essential vendors, administrative expenses and what-have-you.

Then, the next day, the debtors say, “Wait a second – we decided we will use $50 million of that new money you approved to pay off prepetition lenders’ claims rather than those essential vendors and advisors we were talking about. Turns out, we only needed $100 million to avoid liquidation. That’s cool, right? Oh, and please approve this today.” To be clear, that would absolutely not be cool.

Yeah, the debtor can ask for a $50 million rollup from the start. But here, the debtors said they needed $125 million for nonrollup expenses plus the rollup and just … changed their mind about how much they needed in reaction to Judge Kaplan’s ruling. At the very least, you’d think a bankruptcy judge would be a little skeptical and want to hold another hearing on the proposal, to give other creditors an opportunity to object, conduct discovery and present their evidence. Not our Judge Kaplan.

The judge remarked that “while academics and pundits are quick to stand on the sidelines and urge courts to challenge the deals that are presented, they do so without having to get their hands dirty, without having to bear the consequences of the decisions.” OK, that feels personal, but we give it pretty good and are happy to take our lumps. “Friend” in “Friend of the Show” is not hyperbole.

To be clear: Judge Kaplan also does not have to “bear the consequences” of his decision – the dissident creditor groups do. The debtors wanted to pile $125 million in new debt on top of the dissident’s claims, but at least it would go to the business. Instead, thanks to the revised proposal, the debtors will indeed borrow $125 million on top of the dissident’s claims, but only $62.5 million will go to the business.

If getting your hands “dirty” means anything for these bankruptcy judges, it’s saving jobs and businesses by bringing in necessary new funding, even if the sausage-making sucks. That’s not what’s going on here: Less money is coming in, and the minority creditors bear the burden. Pretending this is about jobs and such strikes your author as nonsense.

What we do have a stake in is the continued legitimacy and health of a very successful chapter 11 reorganization regime that is being undermined by judges who skirt and bend the law under the guise of “getting their hands dirty” even when the decision has nothing to do with the health of the company. Why should minority creditors have any faith in this system when anything other than the confirmation freight train is dismissed as the nattering of “academics and pundits”?

Counsel for the cross-holder group rightfully condemned the overnight reallocation of half of the debtors’ essential new-money DIP to the majority lenders. According to counsel, “this is not the order that your Honor articulated yesterday,” and the new proposal is “a motion for reconsideration at best, improperly made, and without any statement of grounds.”

Counsel added that the cross-holder group’s alternative DIP would actually give the company $125 million in new money, which the debtors “said they needed when they swore under penalty of perjury.” Sure sounds like someone with skin in the game was taking issue here, Your Honor. Of course, Judge Kaplan didn’t budge. According to the judge, “it’s not for the court” to “substitute its judgment for the business judgment of the debtor and other economic stakeholders.”

Look, we understand that on a purely accounting basis, a deeply underwater company bringing in new-money financing will send any unused portion of those funds to senior lenders under a plan. But (i) valuation is something that’s supposed to be proven, and (ii) things sometimes fall apart.

And then Judge Kaplan pulled his second unprecedented move: Four days later, on March 31, he appointed himself to mediate discussions between the debtors, equity sponsor CD&R, the majority lender group, the cross-holder group, the excluded first lien group and the UCC. According to Octus CreditAI 3.0, this has never happened in any other bankruptcy in our records. Do let us know if you can think of another.

Probably a good reason for that. How, exactly, would that work? You’ve been to a mediation: Both sides make a presentation and then retire to conference rooms. The mediator then takes turns lecturing each side on the weaknesses of their cases, telling everyone that the judge is going to rule against them and they’ll get nothing if they don’t settle.

Someone orders sandwiches for lunch, someone didn’t get their roast beef and had to eat egg salad, some Big Shot from the whitest of white shoe firms will only eat extra large, golf-ball sized grapes. Rinse and repeat.

We’ve discussed the problems with mediation by the judge down the hall in this context, citing Professor Melissa Jacoby’s excellent research on the subject. Having a judicial colleague mediate could chill open discussion, Jacoby says, because parties “might reasonably worry about the extent to which a mediating judge and presiding judge talk amongst themselves about the case and the behavior of lawyers and parties.” Additionally, participants “may not want to exit mediations they perceive as futile, worried the presiding judge will learn who walked out first,” she adds.

Imagine how serious these problems become when the presiding judge is the mediator. Picture it: Judge Kaplan steps into your breakout room and tells you the judge – you know, me – is going to dropkick your objections into the dumpster if you don’t take the latest proposal and insist on sticking to what you view as your legal rights. Is that a ruling? How strongly should you argue to the presiding judge that he is wrong and will be reversed on appeal? How can you discuss potential facts that might never get into evidence?

Remember we are going into year two of litigation fallout from a judge mediating a case with his live-in romantic partner.

Sure, the mediation order in Multi-Color provides that the appointment of Judge Kaplan to mediate his own case was “consensual.” Regardless of whose idea it was, how could whoever was on the outside and is approached with this suggestion possibly object? Presumably Judge Kaplan would know they did so and might take umbrage with that. Even proposing the presiding judge as a mediator could be coercive.

The parties also agree in the order that Judge Kaplan’s appointment as mediator “shall not serve as a basis for any Mediation Party to seek to disqualify Judge Kaplan from presiding over these chapter 11 cases.” Your “We agree Judge Kaplan’s appointment as mediator is not grounds for disqualification” T-shirt has people asking a lot of questions already answered by your T-shirt.

Unsurprisingly, on April 15 the debtors announced a deal with the cross-holder group and excluded first lien group. Thousands of pages of revised docs were filed hours and minutes before the now fait accompli confirmation hearing with only the poor UST raising a stick. In a show of courageous deference to due process, Judge Kaplan held off a whole day to review said thousands of pages but then confirmed the debtors’ plan the next day over the UST’s opt-out release objection. Duh the second.

Not that there was really ever much doubt about how this would end. Yes, Judge Kaplan called the DIP lenders’ bluff, briefly – but then he immediately approved a deal that cut the debtors’ new money in half, without any due process.

And then Judge Kaplan named himself mediator, and it all got buttoned up. We’ll never know what happened since mediation privilege still holds even in this bizarre circumstance. So, barring a secret affair between Judge Kaplan and one of the lawyers, no one will ever know what happened in that mediation.

The academics and pundits shouldn’t be the only ones questioning the legitimacy of this outcome. First we have Houston and now we have New Jersey. When Houston was ascendent, most prepacks didn’t even have DIPs – now we are through the looking glass. It’s an arms race to the bottom.

Until some kind of venue reform (we aren’t holding our breath), everyone who loans big money to a company must now take into account that we live IN A WORLD where the borrower can always find a bankruptcy judge to rubber-stamp whatever bonkers idea the sponsor and the majority – which you might not be lucky enough to join – proposes.

In other words: What Judge Isgur did, what Judge Kaplan does now and what the next judge does two years from now is important to our business, at a fundamental level. Bankruptcy courts were always debtor friendly, but now we seem to be getting to a place where there is no bridge too far. And that is infuriating.

We’ve been to this rodeo twice. Nothing surprises us. And we are certain there will be a new Debtor Depot whenever the gig is up in Trenton. The incentives for judges interested in taking on big, WSJ-front-page cases are simply too obvious, and the process is too easy at this point. Is this really the way an ostensibly judicial process is supposed to operate? There is only one answer: Venue Reform Now! Sigh.

Pachulski’s FAT Beef

Speaking of conflicts: Interesting intercompany fight brewing in the FAT Brands case. Recall that FAT financed a slew of restaurant brand acquisitions using whole-business securitization, or WBS, financing facilities. The purpose of WBS is to separate the revenue-generating part of a business – for FAT, the securitization entities that receive fees from restaurant franchisees – from management by ensuring that only a limited amount of cash flows upstream to the manager entities.

This creates an obvious conflict for the debtors (and their counsel). The manager entities are necessarily creditors of the securitization entities. And if the manager entities have their own creditors distinct from the securitization noteholders, then even the official committee of unsecured creditors might have a conflict issue.

Pachulski Stang flew somewhat under the radar in the FAT cases until the firm objected to interim approval of the debtors’ proposed DIP financing from securitization noteholders in its own name on March 19. According to Pachulski, it was brought in by overall debtors’ counsel Latham & Watkins to represent the manager entities in pursuing their interests in the case due to those inherent conflicts we just hinted at. Your first sign that things were not all hunky dory: Pachulski calls its retention an “an attempt to cure their conflict.”

According to the objection, the securitization entities owe the manager entities north of $250 million for advances under the securitization agreements. This “placed the Managers directly in conflict with the Securitization Entities they managed.” So Latham brought in Pachulski to “attempt” to resolve that conflict, and Pachulski (and independent manager counsel Steptoe) duly advocated for the manager entities’ interests at the mediation that resulted in the securitization noteholders’ DIP proposal and a deal to pay the debtors’ CEO $5 million to go away already.

According to Pachulski, however, the DIP lenders then sought to punish the firm for its advocacy by not including Pachulski’s fees in the DIP’s professional fee carve-out. Pachulski pointed out that the proposed DIP provides for the payment of all estate professionals other than Pachulski and Steptoe, adding these are the professionals that “played an outsized role in reaching the Settlement and resolving the critical issues underpinning these Chapter 11 Cases.”

“All estate professionals, whether at the Manager or Securitization Entity levels, must be treated the same and the DIP must provide for appropriate reserves to pay all fees, expenses, and other administrative claims approved by this Court,” Pachulski argued.

We hate to bite the hand that pays for the monthly engine rebuild on our 1979 MGB, but: Is that actually true? We’ve pointed out numerous times that estate professionals, despite their apparent expectations, do not have any legal entitlement to payment senior to other section 503 administrative priority creditors, like vendors that sell goods to debtors postpetition or commercial landlords whose premises the debtors continue to occupy.

We’ve also pointed out numerous times that despite this, nonprofessional section 503 administrative claimants frequently get jobbed in chapter 11 cases – asked to accept haircuts on their allowed claims, forced to wait until confirmation to get paid – while professionals (except in highly unusual and laudable cases) usually get paid on an ongoing, monthly basis, and benefit from carve-outs ensuring they will be paid from a DIP facility even if the facility is terminated.

What legal authority exists to compel a DIP lender to pay one kind of administrative expenses (professionals) and not others (vendors and landlords)? Is there any legal authority for the proposition that a DIP lender cannot condition financing on payment of fewer than all of the professionals?

Landlords object to DIP facilities that fail to include administrative stub rent claims in the budget all the time – see a recent example in the Sailormen restaurant case – and those requests are generally evaluated in terms of what the Bankruptcy Code requires. You know – like a court of law would handle a dispute. But Pachulski’s objection – admittedly fired out after the DIP was disclosed the night before the hearing – does not cite any case law for the proposition that all estate professionals must be included in any DIP carve-out that would pay some of them.

This is why we made such a Big Deal out of Judge Christopher Lopez’s 2023 decision forcing the Diamond Sports Group debtors – see you again soon! – to pay administrative royalties to Major League Baseball.

Bankruptcy judges are very skilled at finding excuses to deny nonprofessional administrative creditors’ requests for current payment during a case, and not just in retail cases during Covid-19. But when professionals object to the extremely rare DIP budget that shorts their administrative claims, it can seem like full payment for estate professionals was laid out in Magna Carta. At the hearing on March 19, Judge Alfredo Perez flat-out declared that he would not approve the FAT Brands DIP, or any other, that did not include all professionals in the carveout.

Judge Perez did not provide any legal justification for this. Wonder why! A DIP lender, like any other lender, has the right to demand limitations on the use of the loan proceeds, and if the debtor agrees, the Bankruptcy Code is pretty clear: section 1129(a)(9), which requires full payment of administrative claims to secure confirmation, is a creditors’ only recourse. This happens in virtually every case with professional fees to investigate prepetition liens, for obvious reasons.

Remember when we said we hate to bite the hand that feeds? Well it seems to pain Judge Perez more, and he was quick to say all professionals had to be budgeted for. Unfortunately for us, the DIP lenders got the hint and agreed to include Pachulski and Steptoe in the carve-out after some hallway discussions. Judge Perez granted interim approval, and everybody moved on.

(Our admiration is reserved for Moelis, the putative investment banker for the manager entities. According to Pachulski, Moelis was so “disgusted” with the course of events that it simply walked away from its fees and bailed from the case before the DIP hearing. Serious Big Professional Energy.)

But the conflicts inherent in the WBS structure didn’t go away with the DIP order. On April 1, Pachulski filed a reservation of rights objecting to official committee of unsecured creditors’ counsel Paul Hastings handling the UCC’s investigation into the manager entities’ $250 million claim against the securitization entities. According to Pachulski, the UCC needs to retain its very own Pachulski – conflicts counsel to represent the unsecured creditors of the manager entities and prosecute the claim.

Any recovery on the manager entities’ claims would accrue solely to the management entities’ creditors, Pachulski explains, creating a conflict for committee counsel representing all of the debtors’ creditors.

On April 2, the committee filed a certificate of counsel noting Pachulski’s reservation of rights but representing that no formal objections were filed. On April 5, Judge Perez signed the retention order. The order doesn’t appear to address the conflict issue raised by Pachulski.

Everyone seems to be hoping for a consensual deal. Maybe the magic of judicial mediation will result in a settlement that allocates sufficient value to manager entity creditors on account of that $255 million claim. Of course, we have all our fingers and toes crossed and our rally caps on hoping we get some litigation. Maybe some more professionals can get added to that carveo-ut! We know how Judge Perez feels about that, after all.

We do appear to be entering an era of uncharted water when it comes to big firm bankruptcy representation norms. Estates have filed a bevy of malpractice suits recently, and Jones Day was booted from a case in the Northern District of New York for – gasp! – representing a nondebtor parent company prebankruptcy. Interesting times indeed.

You’re Only a Tourist

More chapter 15 fun from the Southern District of New York’s Rest-of-World Judge Kaplan, Judge Martin Glenn. On March 25, Judge Glenn granted chapter 15 recognition for the Luxembourg restructuring of Ardagh affiliate ARD Finance SA over objections from minority holders of ARD’s PIK noteholders that the Luxembourg court may ignore their claims challenging a pre-proceeding liability management exercise.

It seems Judge Glenn has carved a niche for himself by enforcing edge-case foreign plans, even if they contain nonconsensual nondebtor releases the U.S. Supreme Court explicitly prohibited in chapter 11 plans. That Odebrecht ruling already appears to have laid out a blueprint for using chapter 15 to quash tort claims – see Judge Glenn’s October 2025 preliminary recognition decision in the aptly named Asbestos Corp. case. Now the ARD case is rebuilding the LME Two-Step from first principles, this time using a foreign court.

Sure, the March 25 ruling preliminarily recognized the ARD foreign proceeding, with no Luxembourg plan approved yet – and the judge said he will consider the minority noteholders’ objections again if the debtors secure plan approval in Luxembourg. We’ve heard that before.
The standards for chapter 15 recognition and enforcement of foreign proceedings have become incredibly loose, and Judge Glenn handles more than his fair share of such cases.

In ARD, the noteholders’ key argument is that the Luxembourg proceeding is actually intended to bless a restructuring that took place before it was filed – Ardagh Group’s November 2025 out-of-court recapitalization transaction. “Without any judicial scrutiny, the PIK Issuer has purportedly transferred all of its assets to an affiliate for a quantum of consideration that the PIK Issuer had no hand in negotiating and for which it has presented no evidence is in any way legal, economically, or equitably justifiable,” the objectors argue.

That restructuring improperly stripped the noteholders’ liens, the objectors say, meaning they cannot meaningfully participate in the Luxembourg proceeding intended to cleanse the transaction. Absent that restructuring, the noteholders assert, the “Secured PIK Notes would qualify as ‘extraordinary’ creditors whose consent would be necessary to approval” of the Luxembourg plan. The noteholders have lodged objections in the Luxembourg court but don’t seem confident they will be taken seriously (see below – even the debtors say the merits of the LME shouldn’t/won’t be heard in Luxembourg).

According to the noteholders, the Luxembourg proceeding – a new procedure known as a procédure de réorganisation judiciaire par accord collectif, or JRP, that has never before been tested under chapter 15 – lacks “core features that render it insufficiently ‘collective’ to qualify as a foreign proceeding,” the noteholders conclude, mainly because it does not permit the PIK noteholders to “examine the facts and circumstances” of the restructuring.

This isn’t an objection to chapter 15 recognition – it’s a blueprint for using chapter 15 to avoid scrutiny of a questionable LME. The debtors undertook a liability management exercise that reshuffled creditor priorities (and channeled $300 million to equity) and then filed in Luxembourg to end-run litigation over the transaction by holdouts, in the hope the newly-minted foreign process would rubber-stamp a plan that assumes the validity of the LME and crushes the holdouts. Get chapter 15 recognition, and boom – you have the Luxembourg Two-Step.

Since the Fifth Circuit’s Serta decision made the LME Two-Step a bit more difficult and expensive to pull off in Houston (if not in New Jersey), this seems like a solid end-run around any kind of scrutiny of a prepetition restructuring. And if Judge Glenn thinks that nonconsensual nondebtor releases specifically banned by the freaking Supreme Court pass muster in chapter 15, then even a foreign insolvency order validating a pre-proceeding LME without even considering its legality is going to get the rubber stamp.

In their response, the debtors suggested that the Luxembourg court probably won’t look at the recapitalization transaction – basically, that even a vibes-based ruling from former judge David R. Jones is not necessary. However, according to the debtors, this simply doesn’t matter: Just because “the scope of the Luxembourg Proceeding is not as broad as the PIK AHG would like is no basis to deny recognition,” they argue. “If the PIK AHG wishes to challenge the Recapitalization Transaction, it may seek relief in an appropriate court,” the debtors conclude.

Where, exactly, can they challenge the transaction if the Luxembourg court approves a plan that assumes its validity and Judge Glenn enforces the plan under chapter 15? Well, that’s not the debtors’ problem.

In his opinion, Judge Glenn agrees with the debtors. “The time and place for the PIK AHG to raise [their objections] is in the Luxembourg Proceeding,” the judge says – ignoring that the whole point of the Luxembourg proceeding seems to be to avoid those objections – and “[a]ll creditors whose claims are impacted are entitled to vote on the plan.”

The noteholders aren’t entitled to vote as “extraordinary” creditors thanks to the LME or to seek to restore that status in Luxembourg, but according to Judge Glenn, “the fact that the Luxembourg Proceeding does not examine” the LME “does not, on its own, indicate that the Proceeding is contrary to the public policy of the United States.” “The public-policy exception is an exacting standard,” the judge notes. Especially in the Southern District of New York!

Quick question: How, exactly, does one open a bank account for a debtor shell entity in Luxembourg City? Maybe you guys have some tips on setting up a principal place of business in a boîte postale? Asking for a friend. Enjoy some gromperekichelcher, but don’t call them latkes.