Multi-Color Plan Confirmed in Wake of Settlements With Cross-Holder Group, UCC; Judge Kaplan Approves Opt-Out Nondebtor Releases

Relevant Document
Confirmation Order 

At a hearing this morning, Judge Michael Kaplan announced that he will confirm Multi-Color’s chapter 11 plan, overruling an objection from the U.S. Trustee. The judge agreed with the debtors that the plan’s opt-out nondebtor releases are consensual and do not violate the U.S. Supreme Court’s Purdue Pharma decision.

The UST was the lone objector to confirmation after the debtors filed an amended plan yesterday, April 15, incorporating a settlement between, on the one hand, the RSA parties (the secured ad hoc group and equity sponsor Clayton Dubilier & Rice) and, on the other, the ad hoc cross-holder group, excluded first lien lenders and the official committee of unsecured creditors. Judge Kaplan said the plan, which would deleverage the debtors by $3.9 billion and extend maturities on $1.9 billion of funded debt, reflects a “fully negotiated consensual restructuring and market tested outcome.”

Under Judge Kaplan’s final DIP order, plan confirmation will unlock $62.5 million of remaining new-money DIP loans and allow the debtors to rollup an additional $62.5 million of first lien debt on a 1:1 basis. The judge previously authorized $187.5 million of a proposed $250 million in new-money DIP loans and $187.5 million of a proposed $250 million rollup.

The latest version of the plan improves recoveries for holders of Class 5 junior funded debt holders, made up of first lien deficiency claims and unsecured notes claims. The non-RSA parties holding Class 5 claims would now receive new seven-year Series B warrants that could be converted to 5% of new common equity (subject to dilution by a management incentive plan) and $25 million of new debt. This is on top of the $57.5 million of cash and 5% of new common equity (subject to dilution by the MIP and new warrants) the initial plan provided the class as a whole.

The deal also provides for a waiver of 50% of first lien deficiency claims, the payment of the cross-holder group’s and unsecured notes trustee’s professional fees and a $17 million cash settlement payment from CD&R to the cross-holder group.

Today Judge Kaplan rejected the UST’s argument that the plan’s opt-out nondebtor releases are nonconsensual, noting that the opt-out mechanism is “not a novel or untested structure” and that he has repeatedly confirmed plans with similar provisions. Recent cases where the judge approved opt-out nondebtor releases include United Site Services, Bed Bath & Beyond and the two Rite Aid bankruptcies.

Judge Kaplan said he agrees with U.S. District Judge Lee Rosenthal’s view in the Container Store opinion that bankruptcy courts “cannot and should not rubberstamp opt-out releases.” Courts cannot infer consent “merely because notice was given and an opt-out box existed,” according to Judge Kaplan, but must look at the totality of circumstances.

“Bankruptcy is not a simple bilateral proceeding” and “the determination of consent is not binary,” the judge continued. He said that in the Multi-Color cases, the opt-out notice for nondebtor releases was clear and well-publicized, and 623 parties actually opted out. Judge Kaplan found that there was “reason to understand that silence will operate as assent” here and parties’ failure to opt out was “not passive inaction, it is informed inaction.” He concluded that the opt-out nondebtor releases are consensual and lawful.

Next, the judge overruled the UST’s objection to the debtor releases in the plan. Although the UST argued that the provision is too broad, Judge Kaplan found them “properly tailored.” He said the released parties made substantial contributions to the chapter 11 cases and allowed the debtors to build an “extraordinary level of consensus” on the plan. Litigating the released claims would be “highly speculative, uncertain and would be time-consuming and costly to pursue,” the judge said.

Judge Kaplan also rebuffed the UST’s objection to provisions stating that the plan is a settlement, and approving the releases under Bankruptcy Rule 9019, which governs settlements by a bankruptcy trustee. According to the judge, the standards for settlement approval are “functionally the same” under Bankruptcy Code section 1123(b)(3) (which provides for “the settlement or adjustment of any claim or interest belonging to the debtor or to the estate”) and Bankruptcy Rule 9019.

Judge Kaplan said the debtors have passed that test by showing that the plan settlements are fair, reasonable and in the estates’ best interests, and the UST has not identified binding authority that prohibits a plan from embodying a global settlement of claims against the debtor.

The judge also gave the nod to the plan’s gatekeeper provision, which requires claimants to ask the bankruptcy court for leave to assert potentially released claims. Judge Kaplan said that although the UST views the provision as “overbroad, unauthorized and an improper extension of the court’s equitable powers,” bankruptcy courts “routinely act as gatekeepers.”

Judge Kaplan called the gatekeeper provision a “procedural mechanism” instead of an expansion of substantive rights, saying that it does not empower the bankruptcy court to rule on whether the underlying claim is colorable. The court would only decide whether the “cause of action being pursued contravenes the discharge or release provisions” in the plan, according to the judge.

Judge Kaplan also waived the automatic 14-day stay of the confirmation order, noting that Multi-Color’s RSA milestones require the debtors to emerge within 90 days of the petition date, or April 29. Prolonging Multi-Color’s time in bankruptcy would increase administrative expenses and could disrupt vendor relationships, the judge said.

Debtors’ counsel said Multi-Color will submit a revised form of confirmation order for Judge Kaplan’s signature with slight changes requested by the UST.