Court Opinion Review: ‘Manufactured’ Disclosure in Exela, the Marelli DIP Dispute, a Delayed Effective Date in Steward and the Linqto Houston Venue Decision

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 disclosure concerns in Exela, a DIP holdout in Marelli, Steward’s delayed effective date plan and a predictable venue decision from Judge Perez in Linqto.

Policy of Truth

What are disclosure statements for, anyway? Are they meant to provide accurate information to secure the informed consent of impaired creditors to the restructuring of their claims? Or are they sales brochures intended to persuade the unhappy creditors over at the kids’ table that the plan deal is the best they can possibly get? Or are they meaningless time sucks that started from a decent idea in the 1970s but never quite found a useful place in this world? A recent fight in the Exela chapter 11 gives us a clue what bankruptcy judges think.

We’ve talked about the difficulties of plan disclosure many times before, but to recap: Section 1125 of the Bankruptcy Code requires debtors to provide potential plan voters with “a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information.” Section 1125 defines “adequate information” as “information of a kind, and in sufficient detail” to enable a hypothetical investor “to make an informed judgment about the plan.”

Beyond the text of the Bankruptcy Code, judges have also created quasi-requirement that a plan should not be solicited if it is “patently unconformable” – basically, if the plan is so legally flawed from the outset that solicitation is a waste of time and resources (a high bar obviously). Alas, this judge-imposed requirement has now largely displaced the whole “adequate information” standard.

All this will soon be a topic in our excellent Bankruptcy Law 101 series, and it seems simple enough, right? Except that we know from prior cases that it is anything but. Bankruptcy judges usually spend considerably more time at disclosure statement hearings listening to and then punting premature confirmation objections than they do considering whether the information in the disclosure statement is “adequate” to enable voters to exercise informed consent or, more important, factually accurate.

That’s the problem in the very messy Exela case. We’re sure you remember when we first discussed Exela back in June 2021. If you don’t, queue up some Olivia Rodrigo or Justin Bieber’s “Peaches,” and it’ll come flowing back. Exela failed to pay a $60 million appraisal judgment to former shareholders of acquisition SourceHOV, and the shareholders asked a Delaware court to pierce the corporate veil of SourceHOV to reach the operating entities with assets and cash.

The vice chancellor allowed the claims to go forward, perhaps because Exela was at the time one of only two merger appraisal defendants in Delaware history not to immediately pay such a judgment. Exela ended up paying the judgment in installments, taking a queue from the kids financing their burritos on Klarna. In June 2023, Exela undertook a distressed consent exchange, swapping its 11.5% senior secured notes due 2026 into new structurally senior notes at a 20% discount. The company also started selling off “non-core” assets to raise cash. In August 2023 the company failed to file financials because it couldn’t find an accounting firm to replace KPMG.

In July 2024 Exela announced a plan to spin off its business process automation, or BPA, business to shareholders. Restructuring advisors were retained in February of this year, surprising absolutely no one. Clearly the BPA shareholder spinoff plan went over like Trussonomics because on March 3, dozens of Exela entities – but not parent Exela Technologies Inc., or ETI – finally filed chapter 11 in Houston with a whopping $100,000 in cash and a plan to turn most of the BPA business over to the holders of the 2023 exchange notes (75% of reorganized equity) and existing shareholders (25%).

A group of noteholders graciously agreed to provide $80 million in new-money DIP financing for a paltry fee of 5% of new BPA equity. Of course the first day hearing went fine, and Judge Christopher Lopez gave all the requested relief the Houston hand wave. After all, the debtors clearly needed the DIP, what with only $100,000 in cash on hand, and nobody had any time to object. Who would run a company down to $100,000 in cash before filing chapter 11? Maybe management running the company at the behest of noteholders, who wanted to push a strong case for their DIP-based “bankruptcy process sale”? Desperation is the strongest perfume for a debtor bent on speed-running a Houston reorganization.

Judge Lopez called the proposed $75 million first day rollup of the notes “not insignificant” but also not “egregious” in light of the DIP lenders’ gracious forbearance from demanding exorbitant DIP commitment and exit fees (other than that 5% equity kicker). Same reason I didn’t press charges when someone broke into my house and stole my prized collection of Franklin Mint U.K. Royal Family collectable plates – the emotional and financial loss was “not insignificant,” but think of all the stuff they didn’t steal!

But there was trouble in paradise. On March 28, nondebtor parent ETI and other nondebtor affiliates complained that they were cut out of the DIP at the “eleventh hour” even though they held 29% of the notes eligible to participate and even though they made “governance changes” demanded by the outside noteholders. Hmmm, wonder why the DIP lenders insisted on “governance changes” at ETI? We’ll get to that.

On April 4, the UCC objected to the DIP, arguing it had “never seen anything like this.” According to the committee, insiders holding about one-third of the notes – see ETI, above – participated in negotiations and may have breached duties of care and loyalty to the debtors. That argument feels almost cute in 2025, doesn’t it? The committee cited numerous other “red flags,” including a provision that would trigger a default if the UCC challenged prepetition transactions, a budget that would all but guarantee the RSA deal went through, and the rollup, which the UCC said was “excessive.”

We have, in fact, seen a lot of DIPs like this, actually. That’s just how bankruptcy process sales tend to work. Nice to see a committee flagging the “extraordinary circumstances” / “stuff that happens in virtually every large chapter 11 case” gambit, though. The committee also called the DIP “rushed,” which, just a reminder: This company has been teetering since 2021.

On April 9, another issue arose: The debtors told Judge Lopez that three minority DIP lenders changed their minds about funding the DIP and rolling it into exit debt. According to counsel for one of the holdouts, the debtors were showing little to no cash flow, and providing final DIP funding no longer made “economic sense.”

Counsel for another holdout cited an alleged bait-and-switch by the debtors: After initially seeking $60 million in exit financing, counsel said, the debtors increased their ask to $98 million. Stick a pin here.

So what, right? We know how borrowers and majority noteholders treat minority noteholders ’round these parts. Except: For some reason, the debtors and the majority gave the minority a veto right over the RSA. According to debtors’ counsel at an April 11 status conference, final DIP funding was contingent on at least one of the three minority holders agreeing to the RSA. Well gee, maybe that DIP was rushed. These are the perils of allowing a borrower to get to $100,000 in cash before filing a slipshod case with an unfinished DIP and RSA.

At first, we suspected the minority stance was straight-up hostage-taking. The debtors and majority gave them a veto right over final DIP funding to get interim DIP funding so they could file the bankruptcy, and the minority (wisely!) elected to exercise that leverage after the debtors’ head was in the lion’s mouth.

Then, on April 14 the UCC accused the debtors’ founder and ETI’s chief shareholder of a “brazen value grab.” The committee alleged that ETI caused the debtors to transfer valuable foreign operations beyond creditors’ reach and handed a business with $140 million in revenue and $30 million in earnings to a nondebtor ETI subsidiary. The debtors responded by calling the allegations “baseless,” “irrelevant” and in some cases “completely reckless (at best).”

Now those adjectives are a real “red flag.” Kevin’s First Law of Pleading Dynamics: The heat of a party’s rhetoric is inversely proportional to the strength of its case on the merits.

On Thursday, April 17, Judge Lopez approved an extension of the debtors’ securitization facility to keep the lights on over the coming weekend, which I’m sure counsel used to relax and have some quality time with their families. Monday, April 21, came around, and still no deal with the holdouts – though the committee got with the program under a global deal including plan treatment for GUCs. Keep that in mind. The debtors threatened “dire consequences” if the minority noteholders didn’t fold too.

Finally, on April 23 the debtors announced a final DIP/exit deal with the minority group, two minutes into debtors’ counsel’s presentation at the long-delayed final DIP hearing. On April 24, the debtors reached a deal to resolve ETI’s issues.

Whew. All that stress over dire consequences and founder finagling left us exhausted and ready for a nice, clean confirmation process. On May 8, Judge Lopez approved the debtors’ disclosure statement, which incorporated the UCC deal: a $4.75 million cash pool for general unsecured creditors. According to the disclosure statement, GUCs could expect to receive approximately 40.6% on their claims, assuming a total claim pool of about $12 million. Of course the cash pool would be funded in installments, because this company can’t afford to pay cash for anything.

But 40.6% is a pretty good recovery for general unsecured creditors in this tire fire, and they voted to accept, as recommended by the committee. On June 23, Judge Lopez duly confirmed the plan over the sole objection of the U.S. Trustee to the opt-out releases – live view of the UST’s office here – and everything was groovy. Yeah, it was a rushed, slapdash process, but we got here. Hard work, tough negotiations, worthy adversaries, etc.

Except: On July 15, about 10 days before the plan was supposed to go effective, the UCC filed a mysterious sealed adversary complaint. On July 17 we got the redacted version, and it was toasty to the touch – according to the UCC, the debtors pulled a bait-and-switch on GUCs in the settlement negotiations and disclosure statement.

According to the UCC, after the plan was confirmed with the UCC’s support, the debtors got together with that trusted fiduciary at ETI and decided to reject a whole passel of additional executory contracts and leases, which would dramatically increase the GUC class and dilute their recovery from the projected 40% to just over 20%. The committee alleged that the debtors’ advisors intentionally understated the anticipated size of the GUC class to get the committee on board, then pulled the rug.

Our first thought was, tough break, kid: The UCC agreed to a cash pool rather than a recovery percentage and failed to get any written promise from the debtors regarding contract rejection. And that’s exactly what we expected the debtors to argue: The deal says what it says. On July 20, the debtors filed a brief kinda saying that but also offering an additional $1.4 million for GUCs.

Our spidey senses were full-on tingle maxxing. As Nixon put it, “I didn’t do it, and I won’t do it again.” But Judge Lopez seemed to dismiss the UCC’s accusations of fraudulent inducement out of hand and instead focused on disclosure: whether the debtors violated section 1125 by providing voters with a disclosure statement that grossly overestimated their potential recoveries.

“I am going to read the disclosure statement, and someone is going to explain to me why the numbers changed so much,” the judge remarked at a status conference. “If the answer is that the UCC cut a deal, it’s going to be an answer, but not a good one.” Reminder: “X cut a deal” is the Houston debtor’s mating call, and we don’t recall it failing often; Judge Lopez was talking tough, but of course we’ve seen that rhetorical hedge before.

And so it went with Exela. As a compromise, the debtors offered the UCC a flat 30% recovery for GUCs, which the committee duly rejected – remember, they thought they were going to get 35%-45%. Maybe more important: The debtors wanted to cap UCC fees at $2.2 million, an $800,000 increase from the original $1.4 million cap. Sounds nice! Except: That $800,000 would come directly out of the distribution to convenience class claimants. Kind of a bad look for the committee to get its fees paid directly from the pockets of its constituents.

Maybe the offer was all show for Judge Lopez. Did the debtors really think the committee could possibly agree to a deal that explicitly diverted distributions to unsecured creditors directly into counsels’ hands? Maybe the debtors only made the offer to get the 30% recovery figure out there so Judge Lopez could seize on it. If so, they were absolutely correct!

Trial took place on July 25, and Judge Lopez delivered an oral ruling concluding that yeah, the disclosure statement was flat-out wrong. “We’re not talking about being off by a point or two,” or a claim “coming out of the woodwork,” the judge said. “This was manufactured.” Sounds nasty!

Section 1125 provides that a debtor must provide voting creditors with a disclosure statement that includes “adequate” – and presumably that includes “accurate” – information to provide informed consent to confirmation. That obviously didn’t happen here, according to Judge Lopez. So the judge did the right thing: He revoked the confirmation order obtained under false pretenses and instructed the debtors to resolicit using a disclosure statement with accurate projected recoveries based on the new contract rejections.

Just kidding! Instead of unraveling confirmation, Judge Lopez directed the UCC to accept the debtors’ 30% compromise offer. “I do think there is some duty to the court” to be honest in a disclosure statement, Judge Lopez said, which sure surprised those of us reading disclosure statement financial projections and valuation analyses with two functioning brain cells. What does that duty mean in Exela? The debtors (and their future shareholders, including ETI) would have to pony up a whopping $2.2 million in additional cash.

So, as “punishment” for the debtors’ disclosure misdeeds, Judge Lopez allowed them to emerge and imposed the debtors’ settlement offer of 5% to 15% less than estimated plan recoveries on GUCs. Is a 5% overstatement of potential recoveries in a disclosure statement material to voting creditors? 15%? The message seems to be: Go ahead and say whatever you want about projected recoveries (which, if trusted, are often the most important single consideration for a general unsecured creditor in a chapter 11 case), get your votes, and then renegotiate after confirmation. It’ll be fine.

Hey, maybe you’ll get lucky and creditors won’t figure out they’ve been bait-and-switched until after the effective date. That’s what happened in PG&E, according to a pleading filed by longtime wine country electricity industry gadfly William Abrams on June 17.

We’ve talked about the raw deal for PG&E fire victims before, but a quick refresher: PG&E and the tort claimants committee representing fire victims assured the victims they would receive full payment on their claims under the company’s chapter 11 plan, even though they would be accepting half of their payout in stock rather than the 100% cash paid to claims purchasers holding subrogation claims originally asserted by insurers.

The TCC even went so far as to spurn an offer from investors that would also pay the fire victims in cash because it might endanger the deadline for the debtors’ participation in California’s wildfire compensation fund – a concern that even at the time seemed spurious but was later shown to be complete fantasy. Just like that promise of full payment for fire victims!

In September 2024, the fire victims trustee announced a distribution that would get victims to 70% of their allowed claims. In a July 21 letter, the trustee indicated that there will be one more distribution, but it will not increase recoveries by more than 1%. Suffice to say, the promise of full payment in the PG&E disclosure statement ended up being off by more than “a point or two,” as Judge Lopez put it in Exela. Sure seems like the full payment promise was “manufactured.”

Too bad the PG&E plan went effective on July 1, 2020 – just over five years ago, sheesh – so the debtors don’t even have to ask Judge Dennis Montali to pull a Lopez and unilaterally impose a 71% recovery on fire victims as the debtors’ “punishment” for breaching their duty to be honest with the court in their disclosure statement.

Abrams gives it a go by accusing virtually everyone involved in the case with fraud and incompetence, but we don’t expect any of this to get a thorough hearing. Judge Montali scheduled a status conference for Aug. 19, but we expect him to do little more than deliver a stern lecture to Abrams about filing searchable pdfs on the docket (seriously, you think Acrobat Pro is free?) and send him on his way.

A good lesson for creditors anyway: The entire disclosure process is pretty farcical at this point, we live in a post-facts “reality,” and it often feels like debtors can say whatever they want and retrade later. Thank you for your attention to this matter!

Promises, Promises

Full disclosure: As the former owner of a stereotypically unreliable Italian car, we have yowled some pretty awful curses about auto parts maker Marelli while shredding our hands splicing wires to get the damn turn signals to work. So maybe we were rooting for Mizuho a little when it decided to make Marelli’s reorganization unnecessarily difficult, time-consuming and expensive by insisting on repayment of some emergency loans from the proceeds of the debtors’ DIP. That’s right: It’s bait-and-switch season!

If Lucas Electrics ever files, we might buy some claims and raise hell just to ruin their experience. Serves them right.

Marelli filed on June 11 with a $1.1 billion DIP (including rollup) that would partially convert to reorganized equity on emergence. Among other things, the debtors said they intended to use the new-money portion of the DIP to pay off a $350 million emergency loan from Mizuho. Or so Mizuho thought! Judge Craig T. Goldblatt granted interim approval at an unremarkable first day hearing on June 12.

But there was a hint of trouble: According to debtors’ counsel, ​​the company’s senior loan facility is split evenly between a Japanese lender group that includes Mizuho and an ad hoc group of non-Japanese lenders, leaving neither group with the supermajority support necessary to approve a major decision. This made the prepetition negotiations pretty precarious, with talks dragging on for a year – but the debtors were “able to reach consensus on courthouse steps,” as debtors’ counsel put it, by securing Mizuho’s consent. Now, a nice, easy chapter 11!

Since we are talking about the case, you know it wasn’t that simple. On July 22, Mizuho, the final piece of the restructuring puzzle, instead objected to final DIP approval, alleging that the final DIP financing agreement, unlike the RSA, did not provide for immediate payment of the emergency loan using the DIP proceeds. Instead, Mizuho said, the emergency loan would be primed by the DIP. Maybe it was a… bait and switch?

Like the minority lenders in Exela, Mizuho fretted that the debtors’ earnings and exit financing would not be sufficient to pay the emergency loan at emergence. “If the hundreds of millions of dollars of additional priming is permitted, there is simply no guarantee, commitment, or evidence that the Emergency Loan Claims will be fully satisfied in the Chapter 11 Cases,” Mizuho said.

Also like the minority lenders in Exela, Mizuho had very strong leverage to get what it wanted because its votes were needed to achieve the supermajority required for the RSA and plan voting.

The debtors responded by offering Mizuho replacement liens on unencumbered assets as adequate protection. According to the debtors, these adequate protection liens were “extremely valuable,” unlike cases where substantially all assets are encumbered by prepetition liens. Which tells you how inadequate the “protection” those liens give lenders in the typical, fully encumbered mega-case chapter 11. The ad hoc group of supporting lenders insisted full payment of the emergency loan from the DIP proceeds was never “guaranteed.” Is anything anymore?

Unfortunately for us rubberneckers, on July 24 the debtors announced a deal with Mizuho that was reached “on the courthouse steps.” The Wilmington courthouse has some pretty remarkable steps, apparently; watch out for blind pilgrims and scallop shells.

Under the deal, the debtors agreed to pay Mizuho $8.375 million per month in adequate protection payments on the emergency loans, subject to the consent of the debtors and the ad hoc group. Skipped payments would accrue interest at 10%, with the whole shebang payable in full on the effective date. On July 31, Judge Goldblatt granted final DIP approval.

Why bring up such a non-event? Well, look what happened in Exela. When you give minority creditors a veto right, they will take it. In the modern world of creditor-on-creditor violence, the constant distrust among holders creates friction, and temptation. Let’s see what the debtors promise Mizuho in that disclosure statement; keep a close eye on those plan redlines folks!

Good Steward

Speaking of Houston: On July 16, Judge Lopez unsurprisingly confirmed the Steward Health plan over several objections, including the quite sensible argument that maybe it isn’t a good idea to confirm a plan in 2025 that may not go effective until 2027 because the debtors cannot pay all of their administrative creditors right now, as required by section 1129(a)(9) of the Bankruptcy Code.

For some reason, Judge Lopez cited the Sears delayed-effective-date administratively insolvent plan as support for doing this, rather than attempting to distinguish former Judge Robert Drain’s “confirmation at all costs” masterpiece.

But don’t worry – Judge Lopez promised to watch the post-confirmation administrative claim process super closely. He even made clear that if the plan is not effective by June 15, 2027, he will convert the case to chapter 7. Mark the tape! He also directed the debtors to clarify in the plan that payment of all administrative claims in full is a condition precedent to the effective date that cannot be waived. Funny, we thought that was already pretty clear from the plain language of section 1129(a)(9) of the Bankruptcy Code.

One thing suggested by the objectors that Judge Lopez wouldn’t agree to do: allow administrative creditors or a chapter 7 trustee to seek disgorgement of professional fees if they end up not getting paid in full. As the objectors pointed out, professional fee claims are pari passu with other administrative claims – so making sure they get paid now while the other admins wait two years to maybe get paid seems a bit unfair.

According to Judge Lopez, “the concept of disgorgement, to me, means someone lied to me or someone did something really bad,” and disgorgement “isn’t the right answer” in this case. To be clear, there is no “the favored creditors didn’t do anything really bad” exception to the requirement of equal treatment of claims of similar priority in bankruptcy. We’re going to shut up and continue breathing into a paper bag.

We’d note that the list of courts where this sort of plan would pass muster is narrowing. We’ve seen the Delaware judges make mincemeat out of these “confirm now and pay later” plans. But it seems like Judge Lopez simply cannot bear to not confirm a plan at the end of a confirmation hearing. That’s why we guaranteed he would confirm in our last installment – and if we’re going to be taking mea culpas, we also get to do victory laps.

See No Evil

Opponents of bankruptcy venue reform love to point out that there is already a mechanism to prevent debtors from filing wherever they want and effectively picking their judge: Parties can always ask the judge to transfer the case to a more appropriate venue. Of course, these same opponents of bankruptcy venue reform will invariably object to such a motion, and they will invariably win, because the judges who they pick want to keep the cases.

Case in point: on Aug. 5, Judge Alfredo R. Perez denied a shareholder’s motion to transfer the Linqto chapter 11to Delaware from Houston. The shareholder helpfully pointed out that the only reason the venue was originally proper in Houston was the company’s formation of a new entity, Linqto Texas, on the 91st day before the filing. Why 91st day? Because the venue rules require that a debtor file in the district where it was domiciled for the majority of the 180 days before the petition date.

Sure seems legit to us! And to Judge Perez, of course. The shareholder accused the debtors of forum shopping, duh, but in an absolutely shameless display of either naivete or cynicism (you know our view), Judge Perez said the shareholder failed to provide any reason why the debtors might want to forum-shop their cases to Houston. Maybe they really wanted to go to an Astros game! The summer weather in Houston is delightful!

What’s a humble debtor lawyer going to say? “You are a stooge for debtors who will confirm anything we put in front of you” is not something we see in many transcripts. And of course Judge Perez didn’t himself ask the debtors why they bothered to form a new entity just to file their case in Houston. Instead, he prattled on about how Delaware is so far away and the debtors have customers and a single employee in Texas. An anchor employee!

Let’s assume you are the absolute ruler of a small, soon-to-be-inundated island nation. One day, large multinational corporations from all over the world start opening principal places of business in your country’s sole UPS Store. Of course you are a wise and just ruler, so you are curious why this is happening. Maybe you would ask one of them?

Don’t be fatuous, Jeffrey. Of course you wouldn’t! At least not on the record. Because you don’t want to hear an honest answer. In a case where a creditor or shareholder wants to move the bankruptcy proceedings to Spokane, Wash., Judge Perez might actually ask – because that would give debtors’ counsel the opportunity to praise the court’s experience with large cases and close coordination with debtors and the clerk’s office and legal sophistication. Oh, counsel, you’re making me blush – go on.

Obviously Judge Perez couldn’t ask in the Linqto case, because the shareholder wanted the case moved to Delaware – where the judges also have experience with large cases and close coordination with debtors and the clerk’s office. So, if you’re Judge Perez you keep your trap shut and require the shareholder to state the obvious: Like any good lawyer, the debtors venue-shopped for a judge they believe will favor their case.

Of course, it isn’t just the Houston judges who do this. On July 31, Judge Laurie Selber Silverstein denied the Board of Regents of the University System of Georgia’s motion to transfer venue of the Corvias Campus Living case from Delaware to, well, Georgia. The regents argued that the debtors’ student housing project is in Georgia, and the debtors’ main non-real estate asset is a contract with the regents who are in, say it with me, Georgia.

Although the real property is in Georgia, and the regents of the Georgia state university system are, as Judge Silverstein put it, “presumably located in Georgia,” the judge noted that other creditors “are located from California to Illinois to Massachusetts, and places in between, as well as in Bermuda and Germany.” Why, what a whirlwind tour! She might as well send the case to Germany as Georgia!

The case is “not about the debtor’s operations” in Georgia, the judge continued. We would respectfully note it isn’t so simple: The debtors own real property in Georgia that makes money via a student housing contract with the Georgia regents that they want to renegotiate. According to Judge Silverstein, this doesn’t matter because the debtors say they would reject the regents contract if it is not successfully renegotiated.

To which we reply: The whole bankruptcy is about that renegotiation. The idea that a case that revolves around a contract with the state university system of Georgia that provides for student housing in Georgia is not a Georgia-focused case is bonkers. If a bankruptcy case involving Georgia real property filed to resolve a dispute with an arm of the Georgia government does not get transferred to Georgia, then what case ever would?

We know they never do. Big-case bankruptcy judges like to stay big-case bankruptcy judges, and that status requires them to respect the choice of filers who appear to manufacture venue to get cases in a small cluster of courts.

When push comes to shove, the venue transfer argument against bankruptcy venue reform is complete and total bunkum, and the case placers and judges know it. They also know the damage it does to the legitimacy of bankruptcy courts, and the further damage done when the judge naively acts like they don’t know. They do not seem to care.

For debtors’ counsel, that’s totally understandable – it’s not their job to care. They owe a duty to their clients to file in the best court for debtors if possible, and it’s always possible. For the judges, it’s much harder to excuse.