Court Opinion Review: STG Takes LME Two-Step to Jersey, Fee Enhancement Denied in Yellow and a Messy Genesis Healthcare Sale

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 STG filing chapter 11 to cleanse its LME, a committee professional fee enhancement request in Yellow Corp. and a questionable sale process in Genesis Healthcare.

STG Turns Back the Clock

What’s that awful smell in New Jersey? No, it’s not the refineries, petrochemical plants or even the Jets: It’s the unmistakable whiff of sausage-making at the newest, hottest mega-case bankruptcy factory in Trenton. Break out your ’90’s revival grunge, warm up your pickleball paddles, and get ready to post your Wordle score on Twitter because this year’s biggest chapter 11 prom theme in the Garden State is “Houston Complex Panel Circa 2023.”

Like the old Eastern Bloc, trends take a while to filter down to the swamps of Central Jersey – but they’ve finally caught the LME Two-Step Fever, almost a year to the date after the Fifth Circuit declared that fad dead in equally malodorous Harris County. On Jan. 12, nine days after a New York Supreme Court judge allowed two excluded lenders’ challenge to its October 2024 drop-down to proceed to discovery, STG Logistics filed a textbook LME-cleansing chapter 11.

Recall our proposal for the LME two-step from way back in February 2023, after Serta Simmons ran to former judge David R. Jones to get a second opinion on a similar decision from a New York court: “Do the liability management transaction, but leave a couple steps undone. Get an RSA ready for the rest. File chapter 11 a few days after closing. Ask the bankruptcy judge to bless the whole thing, and fast, or else the deal craters and the company proceeds to liquidation.”

Revise “file chapter 11 a few days after closing” to “file a few days after a state court issues an unfavorable ruling for the company in the LME litigation,” and presto, you’ve got STG. The company filed with a restructuring support agreement and plan term sheet that, you guessed it, assumes the validity of the drop-down. Witness the parade of horribles, if you dare!

Add in a DIP from the participating lenders, and make sure both the RSA and the DIP go poof if the bankruptcy court doesn’t halt the state court litigation and rule for the company and participating lenders on a very tight time frame – here, 125 days – and then put it all in front of a friendly mega-case bankruptcy judge, putting the excluded lenders on the back foot from day one.

Times were, that friendly mega-case bankruptcy judge would’ve been one of the boys on the Houston complex panel. Alas, the Fifth Circuit put the kibosh on that one in the Serta case itself, so what refuge remains? The District of New Jersey and the Thirstiest Bankruptcy Judge in America. Just before New Years Eve, Judge Michael Kaplan approved a participating lender-led LME two-step DIP and set a six-week case schedule in United Site Services over the objection of an excluded lender; certainly that decision was fresh in the STG debtors’ minds when they filed.

(To be fair, the situation in USS is a bit different: The participating lenders specifically offered the excluded lender, Castleknight, a “pro rata share of the DIP, equity rights offering and exit term loan facility on exactly the same terms as the ad hoc group.” Castleknight also didn’t play the Serta/Convergeone card in its objection. Yawn. That’s why we’re talking STG instead, despite the obvious opportunity for toilet humor in USS.)

Except: Judge Kaplan didn’t get the STG case! Instead, it went to his colleague, Judge Michael E. Hall. Would Judge Hall dare risk being sent to his death in the Pine Barrens for endangering a stitched-up reorganization over something so unimportant as Due Process for the excluded lenders?

Alas, no. The excluded lenders duly objected to the debtors’ proposed DIP financing ahead of the first day hearing, arguing the debtors were attempting to “permanently extinguish the Minority Lenders’ rights while transfer[r]ing the Minority Lenders’ bargained-for value to the Favored Lenders.” According to the excluded lenders, interim approval of the DIP would “prejudge the outcome of the central litigation dispute between the Minority Lenders and the Favored Lenders in these bankruptcy cases.”

The excluded lenders also asserted that the proposed DIP was meant to set the stage for unequal treatment of similarly situated creditors in violation of ConvergeOne and Serta. Someone reads this column!

At the Jan. 13 first day hearing, counsel for the excluded lenders argued that the ad hoc group DIP “presupposes” the validity of the first lien debt, even though those liens were “stolen from us.” Which, duh. The debtors want “a lightning fast schedule,” counsel added, which, again, duh. According to counsel, the debtors were “seeking to silence and steamroll parties.” “If you enter [the DIP] order, it’s a fait accompli what’s going to happen here,” counsel said.

Again, that’s kinda the point, fellas.

Counsel for the participating lenders hit all the usual notes. “We provided the debtors with a nice clean path to exit,” and “we were very thoughtful on how we set this up,” counsel said. The sale process – usually a transparent fig leaf intended to justify the eventual plan valuation that will give favored lenders ownership of the company with nothing for the excluded lenders, though the debtors denied this is the case here – is “already in action,” and the debtors are “already marketing.”

See what’s going on here? The excluded lenders argued that approving the DIP on an interim basis would lock in the validity of the drop-down, giving the participating lenders all of the company’s value and zero out the participating lenders without a real opportunity for litigation over the transaction. Did the participating lenders deny this?

No: They just argued that it is a fait accompli, and the only way out for the excluded lenders is a topping bid in the sale process. Mega-case judges want the case to be a stitch-up from the start.

We are not in Houston anymore. This is a real debtor-friendly mega-case jurisdiction, not some washed-up complex panel shorn of its founding members, futilely trying to hang on to past glories. Judge Hall duly overruled the objection. The judge also overruled an objection from prospective purchaser RenWave, which proposed its own DIP with arguably superior economic terms (and – on the other hand – a priming fight). What legal justification did he cite? Deference to the debtors’ business judgment, of course. Fiduciary duties and all that.

RenWave nailed what was really going on here in its objection: “RenWave offered – through both in-court and out-of-court structures – to purchase all of the Ad Hoc Group’s first-out claims at par, to which not a single member of the Ad Hoc Group expressed interest,” the objection recounts (emphasis added). “These facts lead to the unavoidable conclusion that the Ad Hoc Group seeks the Reorganized Equity at a discount to its true market value in contravention of the core principles of the Bankruptcy Code and at the expense of other stakeholders.”

“In the days and weeks prior to the filing, the Debtors conveyed to RenWave that any postpetition sale process will be fair, value-maximizing, and open to RenWave’s participation,” the objection says. But “[a] promised future process does not retroactively justify the selection of an inferior, AHG-favored DIP transaction today.”

Judge Hall undoubtedly had some qualms about this but also must have known the die was cast well before the hearing. After ruling, Judge Hall might have gazed at his gavel hand, then at Judge Kaplan, and wondered: What have I become? Welcome to the Dark Side, padawan.

One thing about our early discussion of the LME two-step that we didn’t mention up top: In February 2023, we actually supported the general concept. “We agree with the debtors and the participating lenders that the validity of the uptier exchange is a ‘core’ issue” in Serta, we said. “The plan is real and has real benefits for the company other than the releases for the participating lenders, and there is no reason to let the exchange get hashed out over two years in federal court.”

We still feel this way: It is totally legitimate for a bankruptcy court to take on litigation over a prepetition restructuring transaction when a more durable court-approved restructuring is in the cards, and to resolve the litigation on an expedited, but not absurdly compressed, basis. Big boys, fancy counsel, complex documents, all that.

However: After years of experience with these cases, it is very hard to trust mega-case judges who rarely question a debtors’ business judgment or call their bluff to do that fairly and honestly. Recall at the time we also said, “We do not agree with some of the more florid warnings by debtors’ and participating lenders’ counsel regarding the need to have the whole dispute heard in chapter 11, like, tomorrow.”

Running the LME dispute on a rocket docket “might put the current plan at risk, but that’s a risk debtors take when they propose plans despite pending litigation,” we added.

Time will tell whether Judge Hall deserves to be trusted with these cases and whether more of them will flow to New Jersey going forward. The final DIP hearing is not set, the sale process is ongoing, and theoretically there is still time to at least give the impression of taking the excluded lenders seriously.

But we know where this is going. It would take a bigger man than us to resist giving in to the fumes and starting to hallucinate imaginary chapter 7 liquidations and job losses should anything the debtors ask for be denied.

Flat Fees, Bankruptcy Style

Academics have been ringing the bell on professional fees in bankruptcy for so long that no one even bothers anymore. We simply accept that estate-compensated professionals will continue to charge more than $1,000 per hour on average and draw tens of millions in value from cash-poor, overlevered estates for the rest of time, with no real market test. Bankruptcy judges don’t know what other kinds of lawyers get paid, and mega-case judges want to stay mega-case judges.

We even accept that in the event the estate turns out to be administratively insolvent, trade creditors, rather than those professionals, will absorb the deficit, making them de facto involuntary lenders to the five or six firms that do debtor and committee work even though the trade creditors are legally equal in priority to the professionals. That’s just the way it is. But there is one area where bankruptcy judges seem willing to hold the line: flat fees.

Take, for example, Judge Craig Goldblatt’s Dec. 18 decision rejecting a fixed fee enhancement request in the Yellow case. We get it, dear reader, you are tired of Yellow, but: The unique circumstances of that case (huge pile of post-liquidation cash, possible equity value, aggressive creditors, intense animosity and a thoughtful judge not afraid to make hard decisions) mean it continues to serve up interesting rulings! If you don’t like it, start a Substack or something. At least you never have to hear about Sanchez again!

On Nov. 25, the Yellow official committee of unsecured creditors filed a supplemental application for court approval to double investment banker Miller Buckfire’s $3.75 million fixed fee under section 328(a) of the Bankruptcy Code. Section 328(a) provides that a trustee, debtor or official committee may employ a professional “on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis.”

Bankruptcy judges have long interpreted section 328(a) as allowing them to preapprove a fixed fee for a professional at the beginning of the case, locking in the professional’s compensation without subsequent review via fee applications. However, there is an out: Section 328(a) also provides that a court can modify the preapproved fixed fee at the end of the professional’s employment if the preapproved fee proves “to have been improvident in light of developments not capable of being anticipated” at the time of engagement.

In the supplemental application, the Yellow UCC argued that the preapproved $3.75 million fee for Miller Buckfire should be doubled because the original fee proved to be improvident in light of unanticipated developments in the case. Specifically, the committee maintained that “the extent and intensity of services required by the Committee from Miller Buckfire were dramatically more extensive than those contemplated when the Committee initially engaged Miller Buckfire, in significant part due to the protracted timeline of these Chapter 11 Cases.”

According to the committee, when it hired Miller Buckfire the debtors hoped to undertake a sale of all of their assets quickly and in one go. Instead, the debtors ended up selling everything piecemeal over more than two years (with some assets still being marketed). The protracted sale process was apparently so unexpected that it must be both bolded and underlined: “[T]he asset monetization process will have taken approximately 29 months in total, and approximately 27 months longer than originally contemplated at the outset of these Chapter 11 Cases.”

“The amount of time and resources expended by Miller Buckfire in rendering its services have far exceeded levels that were, or reasonably could have been, expected at the time of negotiation and execution of the original Engagement Letter,” the committee concludes.

This being the Yellow case, the committee must have known this request would draw an objection. Unsurprisingly, on Dec. 11 the U.S. Trustee chimed in with a hard no: “Because the circumstances described in the Supplemental Application are within the scope of services for which Miller Buckfire was retained, it cannot be concluded that the developments of this case were incapable of being anticipated, thus rendering the terms of Miller Buckfire’s initial retention improvident and justifying approval of the requested fee enhancement.”

According to the UST, “[I]t appears that Miller Buckfire misjudged the timing of the Debtors’ sale process.” There goes the U.S. government, blaming the victim again.

Of course, it wouldn’t be a Yellow party without shareholder/creditor MFN showing up. On the same day, MFN filed a joinder to the UST’s objection. MFN points out that Miller Buckfire already received the $3.75 million fee and had done little work on the case thereafter. The UCC “does not seek to change the scope of Miller Buckfire’s employment, or the services Miller Buckfire is engaged to perform,” according to MFN. “[I]t seeks only to change the fee structure for work already agreed to be performed by Miller Buckfire under their existing fee structure.”

MFN also cattily notes that the committee complained numerous times about the absurd accumulation of professional fees in the case and made that continuing drain a key part of its arguments for confirmation of a liquidating plan that would stem the bleeding. Judge Goldblatt himself largely accepted the ongoing chapter 11 burn rate as a justification for confirming the plan, MFN adds – while simultaneously leaving the company in the hands of the same committee seeking a gratuitous bump for its banker.

At the hearing on Dec. 18, Judge Goldblatt was immediately skeptical. In a “preview” of his thinking, the judge told committee counsel that he understood the sale process took longer than anticipated, but the fee arrangement also included a monthly component in addition to the fixed fee. The judge further pointed out that the “universe of assets sold” was “the same universe you knew were there when the arrangement was first negotiated.”

“I appreciate the complexity and volume of what was being sold” and how that complicated Miller Buckfire’s role, Judge Goldblatt added, but “that’s complicated in a way that when this case filed, reading the New York Times, you knew that was coming.” We don’t ever read the New York Times (apart from the Spelling Bee comments section), and even we knew this case was going to be a doozy.

Counsel for the UCC responded by pointing to the difficulty of selling the debtors’ rolling stock, the debtors’ unexpected retention of a real estate broker and other sale complications. Counsel also told the judge, apparently in response to MFN’s comments, that the committee is “incredibly sensitive” about the fee burn in the case, but Miller Buckfire’s contributions were “so far above and beyond” what it envisioned when it agreed to the preapproved fee.

UST counsel pointed out that “everything they’ve done is what they contracted to do in the engagement letter” and emphasized that section 328(a) creates a “two-way ratchet.” In some cases, the UST explained, the preapproved fee will end up being a windfall for the professional, if it turns out they had to do much less work than expected. Therefore, professionals also have to accept the scenario in which the preapproved fee turns out to be insufficient.

Counsel for MFN emphasized the obvious: Miller Buckfire was not obligated to seek preapproval of a flat fee under section 328(a) – they chose to do so. In exchange for the certainty of a fixed fee with no subsequent court approval process, Miller Buckfire surrendered the flexibility to charge more if the case dragged on, MFN suggested.

Judge Goldblatt asked MFN counsel to provide an example where a fee enhancement would be appropriate under section 328(a). Counsel quickly answered that an enhancement would be fair if “new assets were uncovered far beyond the original scope” of the known assets at the time of the engagement. When asked the same question, the UST said an enhancement would be appropriate where a professional “takes on a role doing something it did not originally contract to do.”

In his oral ruling, Judge Goldblatt sided with the UST and MFN. The judge specifically cited MFN’s point that Miller Buckfire accepted a trade-off between certainty and flexibility when it agreed to be compensated under section 328(a).

The “safety valve” for “improvident” flat fees in section 328(a) is intended to cover situations where “everyone thinks it’s an easy case,” but “for circumstances nobody knew” the case “turns out to be hard,” Judge Goldblatt explained. “If you’ve got a big, complicated case that turns out to be big and complicated, that doesn’t meet the standard,” according to the judge.

You’re not going to be surprised that we agree with Judge Goldblatt on this one. Nonbankruptcy lawyers and other professionals must consider the benefits and drawbacks of taking a case on a flat or contingency fee before signing the retention letter, so why shouldn’t bankruptcy professionals?

But here’s the bigger issue for us: No one asked why the committee filed the supplemental application and spent attorney time – more money from the estate! – pushing to double its investment banker’s flat fee. It’s telling that in bankruptcy nobody even thinks about how strange it is for a client to request more fees than the client originally agreed to pay. A client was asking to double the fees it pays to its professionals, and no one even commented on it.

The obvious answer is that, of course, the committee is not paying Miller Buckfire’s fees – the estate is. So why not ask and incur additional fees they also aren’t paying to defend the request against objections that they must have known would be coming?

This is not news: Debtors and committees are notoriously budget-blind when throwing around money that belongs to creditors. Remember back in October 2022, when we discussed Judge James Garrity Jr.’s rejection of a $12 million section 328(a) fee enhancement for the debtors’ investment banker PJT in the LATAM Airlines case? If not, we are certain you recall our April 2022 breakdown of Northeast Gas Generation’s unsuccessful attempt to reopen its case and rewrite its long-consummated plan just to give secured lender Beal Bank $275 million in additional first lien debt.

“How often does a corporation out in the Real World enter into an agreement for the purchase of one-of-a-kind, (hopefully) once-in-a-lifetime services at a fixed fee, and then, after the job is done, decide they should pay the seller an extra 50% or so, just for their trouble?” we asked in our piece on the LATAM ruling.

More importantly, we emphasized that situations like this, where an estate fiduciary’s position openly conflicts with what a private client would do, tend to throw doubt on the hallowed business judgment and fiduciary duties that supposedly justify deference to those fiduciaries’ decisions in bankruptcy court. No doubt bankruptcy is a sort of upside-down to typical legal practice – but that justifies reviewing fiduciary decisions in bankruptcy with skepticism, not blind deference (see above!).

Unfortunately, judges who actually do that don’t tend to get many big bankruptcy cases, especially when they do that in the context of professional fees. We highly doubt any of you will be filing a big chapter 11 case in the Eastern District of Virginia or Idaho anytime soon.

The Genesis Healthcare Mess

More evidence that deferring to a debtors’ business judgment might not be the best idea: the ridiculous Genesis Healthcare sale saga. The skilled nursing home operator filed chapter 11 on July 9 in the Northern District of Texas – must’ve been a clerical error – with a plan to sell all of its assets. ReGen Healthcare, an entity affiliated with insiders, offered to serve a stalking horse to buy everything, including estate claims against those same insiders.

But don’t worry, the sale of insider claims and the deal generally were cleared by “independent” directors. Fiduciary duties!

On Aug. 11, the official committee of unsecured creditors objected to a proposed insider DIP and the bidding procedures, arguing the proposed sale was intended solely to benefit the insiders. According to the UCC, the proposed DIP would “hand control” of the restructuring to insider DIP lenders, and the sale would allow the insiders to “buy and bury” claims against themselves for “no consideration.”

The committee helpfully pointed out that ReGen holds convertible subordinated notes with rights to 93% of the debtors’ equity and the right to appoint three debtor board members, including the chairman – meaning the fox would really be buying the henhouse here.

The UCC had its own possible ulterior motive: As trade creditor PharMerica Corp. pointed out in an Aug. 12 motion to reconstitute the committee, litigation claimants held a 71% majority on the seven-member committee despite representing only $259 million (17%) of more than $1.5 billion in unsecured claims. On Sept. 29, the UCC opposed an extension of the automatic stay to protect nondebtor litigation defendants, which does seem kinda sorta like a tort litigant thing, especially since the estates may be on the cusp of administrative insolvency.

In their response to the committee’s accusations, the debtors called the UCC’s effort to find an alternative DIP “half-baked” and insisted that the insider DIP was the only option to prevent liquidation, which, of course they did. The debtors also unsurprisingly leaned on the “​independent” directors’ business judgment in approving the stalking horse bid. These are honorable men!

At a hearing on Aug. 21, Acclaimed Novelist and Bankruptcy Judge Stacey G.C. Jernigan pumped the brakes, indicating that she felt the final DIP hearing should be postponed. The judge credited testimony from the debtors’ investment banker that the DIP was the best available option but – wait, there’s a but here? Isn’t that always enough? – according to Judge Jernigan, the debtors’ liquidity situation gave time to “see if there is a better game in town.” At this point debtors’ counsel’s eyes popped out of their head and rolled across the floor.

At a continued hearing on Aug. 30, Judge Jernigan gave in and approved the DIP and bidding procedures, pointing to a reduced interest rate, an expanded UCC lien challenge period and a carve-out for liens on avoidance actions and other claims. Gee, who knew that calling the debtors’ bluff might occasionally improve the supposedly ironclad terms originally on offer? “I don’t know if it is the best DIP I’ve ever seen, but it is reasonable,” the judge remarked.

She made an independent determination of the reasonableness of the debtors’ business judgment. In Judge Jernigan’s honor, Octus ordered 100 copies of He Watches All My Paths to hand out as Christmas bonuses to employees in lieu of cash payments. Maybe she’ll ask us to blurb the next one!

On Oct. 17, pretty much everyone but the debtors and the insider stalking horse objected to the proposed asset sale – especially the transfer of claims against insiders to an entity affiliated with those insiders. Even Sen. Elizabeth Warren chimed in, suggesting the sale would abuse “our bankruptcy system” – Our bankruptcy system? Step off – “to wipe away Genesis’ debts and claims to victims by selling the company at a discount to insiders.” The parties agreed to mediate with retired judge Harlin DeWayne Hale – now that is a name that belongs on the bench in Texas – and pushed the sale hearing to Dec. 10.

Under this withering fire, the debtors stuck to their guns, filing a notice on Dec. 1 designating an insider affiliate as successful bidder. Three days later, tort claimants asked for the appointment of an examiner to investigate, claiming non-insider bidder Genie 3 Partners made an “objectively better” arm’s-length bid and the whole auction was a sham designed to insulate management and insiders from liability. The next day, the committee asked for derivative standing to assert the claims against insiders that the debtors were trying to sell to the insiders.

On Dec. 9, the day before the sale hearing, another round of vehement objections was filed. The UCC, trade creditor Omnicare and unsuccessful bidder Genie 3 called the sale process “skewed” and “riddled with irregularities” to ensure the company’s assets remained under the control of Genesis insider and private equity owner Joel Landau. The UCC argued that the Genie 3 bid, valued at approximately $1 billion under the debtors’ own scorecard, was superior to the $982 million stalking horse bid.

In declarations filed the same day, the debtors defended the insider bid, suggesting the Genie 3 bid was plagued with “fatal flaws” and execution risk. An “independent” director and the CRO ​​emphasized the “material regulatory and closing risks” associated with Genie 3, pointing to the involvement of Ari Schwartz, a principal in the Genie 3 group subject to a “voluntary 10-year federal healthcare funding exclusion.” According to the CRO, Schwartz’s involvement created a “substantial risk” regulators could freeze Medicare and Medicaid funding, which accounts for 80% of the debtors’ revenue.

Investment banker Jefferies provided a detailed valuation analysis acknowledging Genie 3’s higher nominal cash component but arguing that the debtors’ “risk-adjusted” scoring properly discounted Genie 3’s $100 million promissory note to $67 million due to its subordinate position and lack of collateral, putting the insider bid ahead. The investment banker failed to explain why the debtors completely discounted that unlike the insider bidder, Genie 3 would not be buying the insider claims the UCC filed a motion to prosecute, which the committee values in the hundreds of millions of dollars. Maybe ask the “independent” directors about that.

The evidentiary sale hearing kicked off on Dec. 10. In a twist we wouldn’t believe if it was featured in one of Judge Jernigan’s novels, during the second day of the hearing, the judge took a break to consider allegations that one of Genie 3’s funders was “scared” and “frightened” by threats from insider Landau. The UST then requested to reopen the auction to address “serious irregularities” in the bidding and asked that the UST be involved in reviewing bids and monitoring the proceedings.

Judge Jernigan seemed to have finally had enough. At the end of the second day of the sale hearing on Dec. 11, she refused to approve the insider sale and ordered that a new auction be held, overseen by the UCC’s investment banker and the U.S. Trustee. Most importantly, the judge ordered that the sale not include estate claims against insiders.

Judge Jernigan also credited the committee’s testimony regarding numerous flaws in the auction, including the lack of any deposit requirement for the stalking horse bidder and the debtors’ decision not to designate a backup bidder despite disqualifying one bidder at least in part for refusing to agree to serve as backup. According to the committee’s expert, the debtors also waived the bid procedures’ committed financing requirement only to “yank the rug” and reject Genie 3’s bid on this basis, and failed to disclose a joint venture settlement that affected the sale.

A reminder: The “independent” directors, exercising their fiduciary duties, thought this was all just fine and dandy.

Finally, on Jan. 14 the debtors filed a notice designating 101 West State Street LLC as successful bidder and Genie 3 as backup bidder. The winning bidder appears to be an affiliate of assisted living operator NewGen Health, which acquired 19 Genesis Healthcare facilities in 2020. The insiders did not bid again – unsurprising, considering they probably didn’t want to spend north of $900 million and still get sued.

According to the notice, 101 West State Street’s bid topped Genie 3’s stalking horse bid by more than $100 million, with a valuation of $1.015 billion. The debtors valued Genie 3’s backup bid at $991 million.

A reminder: The debtors’ investment banker valued the insider stalking horse bid – the bid the debtors clung to like Rose Calvert in the North Atlantic despite opposition from virtually every party in interest other than insiders – at $981 million, and that bid, unlike the 101 West State Street and Genie 3 offers, included potentially valuable estate claims against the insiders that will now be prosecuted for the benefit of general unsecured creditors.

On Jan. 16, the auction monitor deployed by the UST filed a report concluding that the new auction was “fair and transparent.” The auction procedures “were clearly announced and shared among all constituencies,” according to the monitor, and the mediator – former judge Hale – “provided a sounding board for the auction participants’ concerns and questions” and was “instrumental in the smooth running of the Second Auction.” You know we have issues with judicial mediation, but maybe judicial auctioneering is a good idea?

The whole sordid mess illustrates a basic point that bankruptcy judges would be wise to keep in mind: Business judgment is not the end-all, be-all in bankruptcy. In chapter 11, debtors remain under the control of insiders, and insiders might sometimes have ulterior motives that do not align with their fiduciary duties to creditors. If you really doubt that, I’ve got 10% bankruptcy-approved management incentive plans, massive KEIPs and KERPs and extremely lucrative prepetition stock compensation cash buyouts that suggest you might be wrong.