Court Opinion Review: Willkie Retention Rejected in Franchise Group, Judge Wiles Riffs on International Venue Abuse in Mega NewCo and Judge Lopez Rejects an Alex Jones Settlement

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, formerly Reorg, as a whole. Today we consider denial of Franchise Group’s application to retain Willkie as counsel, a chapter 15 venue shopping warning in Mega Newco and another loss for the Alex Jones chapter 7 trustee in Houston.

Endangering the Franchise

Hoo-boy, those judges in Delaware really do not want a big caseload, do they? Latest crucifix nailed on the courthouse door to ward off vampires: Judge Laurie Selber Silverstein’s Feb. 12 denial of Franchise Group’s application to retain Willkie as counsel. Maybe a bankruptcy court that wants to get cases can flirt with Serta-based objections to backstop goodies, diss a non-pro-rata rollup, bleed all over bidding procedures, refuse to quickie estimate claims and even reject the retention of local counsel. But when you kick out the firm that filed the case in Wilmington, you might finally get well and truly blacklisted (again?).

Maybe this is the sign, debtors’ counsel: They just aren’t that into you.

The fight over Willkie’s retention stems from a long-running dispute between the first lien ad hoc group, which holds first lien and opco debt and supports the debtors’ proposed plan, and the “Freedom Lenders,” a group holding holdco and second lien debt that opposes literally everything the debtors do, including selecting Willkie as bankruptcy counsel.

Kudos to Freedom Lender counsel White & Case for the fabulous group name. However, anything is better than “the ad hoc group of structurally subordinated and contractually subordinated lenders.”

On Feb. 1 the Freedom Lenders objected to Willkie’s retention, pointing to the firm’s prepetition representation of former CEO Brian Kahn in connection with an ill-fated 2023 management take-private transaction financed in part by the Freedom Lenders. Past representation of the CEO is not normally a big deal in the l’etat, c’est moi era of corporate governance, but there’s also the whole unindicted securities fraud co-conspirator thing. Unrelated, of course.

The Freedom Lenders are chuffed about the prospect of bringing claims against Kahn related to the take-private transaction, and the first lien group less so. This being a big chapter 11 case, the first liens were in charge of the proceedings before the Freedom Lenders could get their boots on, but removing Willkie would give the latter a sizable scalp and could even the playing field. Theoretically.

Who knows whether replacement counsel, without that unfortunate tie to the take-private – and possible litigation exposure if the transaction is successfully attacked – would be so willing to carry the first liens’ water on the take-private litigation issue? Hold that thought.

In response, the debtors trotted out the usual song and dance you’d expect. The Freedom Lenders are out of the money and throwing grenades, the official committee of unsecured creditors is on board (because of course they are), the take-private claims aren’t really a big deal, this case has been too litigious already, institutional knowledge, ethical walls, conflicts co-counsel, etc. It’s a good list of the typical excuses mega-case bankruptcy judges use to justify overlooking conflicts that would never fly in other contexts.

Judge Silverstein bought absolutely none of it. The debtors “need counsel that can advise on all aspects of a plan,” the judge said, and Willkie “cannot draft portions of the plan that touch upon claims against Kahn and itself” (emphasis ours – oof). The plan’s treatment of these claims is so “central to the case” that Willkie cannot possibly represent the debtors as general bankruptcy counsel, the judge declared.

Judge Silverstein also rejected the debtors’ practical arguments re: the difficulty of replacing counsel on the eve of a disclosure statement approval hearing. Such concerns “cannot outweigh conflict,” the judge declared. Are those goosebumps? HOW MANY TIMES has the opposite argument worked: “We picked this firm with obvious conflict issues and let them run our case for so long that no one else can replace them now.”

Finally, the judge also rejected the argument that co-counsel could handle issues related to Kahn, Willkie and the take-private transaction. Judge Silverstein sensibly pointed out that Willkie had already negotiated the plan on behalf of the debtors, without leaving the room for independent counsel to deal with the treatment of the take-private claims.

Maybe this is an extreme situation, you say? Perhaps counsel that represented management or sponsors not accused of tanking the company in a take-private less than two years before the filing can breathe easy? Well, about that: Though she could have given the usual spiel about “extraordinary circumstances,” Judge Silverstein instead cited the Eastern District of Virginia’s decision rejecting the retention of Vinson & Elkins in Enviva, a real bete noir of the debtors’ bar.

In that case, Judge Brian F. Kenney sustained the U.S. Trustee’s objection to the debtors’ retention of Vinson & Elkins based on the firm’s concurrent representation of 43% equityholder Riverstone Investment Group in unrelated matters. You can see why that would be of such concern to debtors’ firms. A firm’s relationship with a sponsor – especially the large sponsors – is rarely limited to just restructuring work.

But the Richmond chapter 11 rocket docket was already dead thanks to other not-debtor-friendly decisions, so Enviva seemed like a dead letter – especially after Judge Michael Kaplan in New Jersey made clear he had no such qualms about sponsor conflicts in Invitae.

Well, by citing the Enviva ruling when she absolutely did not have to, Judge Silverstein suggested – perhaps intentionally but not necessarily! – that maybe other, less-fraught prepetition representations might justify forcing debtors to find new counsel mid-stream and, more importantly, require debtors’ counsel to eat all their fees for work done prior to the application being rejected. Remember, if retention is not approved, counsel can’t get paid by the estate for their work. Doug Emhoff has had a hell of a year.

At least Judge Silverstein kindly suggested retaining Willkie as “corporate” counsel; that will be a fun set of compensation applications.

After bouncing Willkie from the driver’s seat, Judge Silverstein sensibly continued the Thursday, Feb. 13, disclosure statement hearing – we weren’t exaggerating, this was literally on the eve of that hearing – to Wednesday, Feb. 19. Honestly, even that seemed optimistic – the debtors would have to retain new counsel and move forward with a disclosure hearing less than a week later.

Who did they bring on to pull off this impossible feat? Who else: Kirkland & Ellis. The Freedom Lenders asked the judge to push the disclosure hearing off, because come on, really? Have to give the soldiers at Kirkland credit: On Tuesday, Feb. 18, the debtors filed a revised plan and disclosure statement and reaffirmed that they intended to go forward the next day.

That must have been a fun weekend for the associates! I mean, the substantive revisions aren’t exactly earth-shattering – wonder how many big brains got paid more than $1,000 per hour to clarify that the definition of “Unexpired Leases” applies only to “non-residential real property” or to add a definition of “Filed” – but the new disclosure statement did eliminate the opt-out nondebtor release mechanic. Bravura stuff. As noted below, Kirkland did do a full rewrite of the plan and DS plumbing to bring the docs up to Death Star standards.

By the next day, the Freedom Lenders relented, agreeing to push most of their disclosure objections to confirmation. We have to admit that, at least publicly, the parties seem to be getting along a bit better post-Willkie, either because of the Kirkland Touch or because the Freedom Lenders lost an important argument for the unfairness of it all when they perhaps surprisingly got Willkie replaced with untainted counsel.

The Freedom Lenders tried to maintain the Willkie taint by accusing Kirkland of “rubber-stamping” the rejected firm’s work, but we don’t expect that to get too far. We do expect the debtors to point out that the additional fees for Kirkland to catch up further eroded any recoveries for the Freedom Lenders. Dog, meet car bumper.

One more note: Kirkland’s revisions to the plan and DS are a Rosetta Stone-like guide to the Kirkland method. Check out the rewritten disclosure about the disclosure statement’s limits (no doubt learned the hard way when a bankruptcy DS was mistaken for a public securities offering … Oh wait, that has never happened and never will). And don’t get us started about the catechism-like question-and-answer approach to DS writing.

COMI Karma

We knew the finest stand-up comedians in America are working the downtown comedy clubs of New York City, but we had no idea they were holding open-mic nights at Bowling Green, or the level of talent involved, until we took in Judge Michael E. Wiles Feb. 24 set in the Mega NewCo chapter 15 case. A newly formed venue-shopping debtor named Mega Newco? Très drôle, and it only gets better from there.

This might sound familiar: In September 2024, Mexican company Operadora de Servicios Mega SA de CV SOFOM ER formed a new U.K. subsidiary – you guessed it, Mega Newco – solely to file an insolvency proceeding in – you also guessed it – the United Kingdom, where the parent could not have otherwise filed. To get the parent’s debt into the U.K. proceeding, Mega NewCo guaranteed all of said debt. The U.K. two-step?

Why did the company want to file in the U.K.? Because the creditors, clearly leery of a Mexican proceeding, wanted a U.K. court to approve a scheme of arrangement to restructure the parent. Can’t say we blame them. The parent has New York-law debt, so that meant Mega NewCo also had to file a chapter 15 case seeking recognition of the U.K. restructuring in New York – that’s how Judge Wiles ended up telling this zany shaggy-dog story.

Naturally, none of the creditors objected to recognition of the U.K. proceeding by Judge Wiles generally or the U.K. venue maneuver specifically. Despite that, Judge Wiles just couldn’t pass up the opportunity to drop some classic deadpan bankruptcy humor in a written opinion on Mega NewCo’s not-so-long strange trip.

The judge’s decision recognizing the company’s U.K. proceeding on Feb. 24 is positively dripping with irony. Judge Wiles insists – wink wink – that he is very concerned that a company might manipulate its center of main interest, or COMI – basically, its principal place of business – by forming a new entity in a particular jurisdiction, just to take advantage of that jurisdiction’s courts and laws.

Oh my, Judge Wiles wonders, can you just imagine? – presumably while theatrically fanning himself and fighting off a fainting spell.

According to Judge Wiles, this process could be used in an “unfair way” to “thwart” creditor expectations. You don’t say! Nevertheless, Judge Wiles concludes that just this once, with all the creditors on board, okay, we’ll allow it, no thwarting here!

Comedy is not just in what the comedian says, but what he doesn’t say, and Judge Wiles really nails that trick here. The judge’s opinion makes not a single mention of the fact that U.S. companies pull this kind of maneuver all the time, forming new entities, manipulating their principal place of business or changing their mailing address so they can file in, say, Houston to take advantage of that court’s, uh, expertise.

Nor does Judge Wiles mention that a Swedish company, Intrum, pulled an identical Mega Newco maneuver – form a new entity and have it guarantee the parent’s debts – to manufacture venue for a chapter 11 in Houston just four months ago. You see, as a gifted comedian the judge knows he doesn’t have to spell that out for his audience. The unspoken implication is obvious: This sort of thing is absurd.

“If we were routinely to allow this structure in all cases, no matter what the circumstances, the ordinary predicates for Chapter 15 relief could be stripped of meaning,” Judge Wiles remarks, obviously tongue-in-cheek. “Any debtor company could restructure its obligations anywhere it chose without even subjecting itself to a foreign proceeding.”

“All that a debtor would need to do is to form a new subsidiary in a jurisdiction of its choice and then cause that new subsidiary to assume the parent company’s obligations,” the judge warns, and “[t]he laws of the chosen jurisdiction would govern a restructuring, no matter how those laws might affect the legitimate expectations of creditors and regardless of whether the debtor had chosen a particular jurisdiction for the purpose of favoring insiders or for other improper reasons.”

Truly brilliant, edgy stuff. Real craftsman, that Judge Wiles. “If we were routinely to allow this structure,” killing us here.

To be fair, chapter 15 venue rules are based on legislation implementing international standards for bankruptcy cooperation and are much more comprehensive than the almost total lack of guidance in the Bankruptcy Code regarding venue for domestic bankruptcies. Judge Wiles may truly see venue in chapter 15 as apples and venue in chapter 11 as oranges … but we don’t.

Chapter 7 Judge Lopez vs. Chapter 11 Judge Lopez

The chapter 7 trustee in the Alex Jones/InfoWars case simply cannot catch a break from Judge Christopher Lopez lately. First, there was Judge Lopez’s unusual rejection of the trustee’s proposed sale of Jones’ nutritional supplement and edgelord AI image prompt concern to The Onion, which we discussed in early January.

At the time, we wondered how the judge could possibly refuse to approve a proposed sale supported by all of the debtors’ significant creditors under the extremely lenient business judgment standard for section 363 sales. Our answer: Judge Lopez decided not to give the trustee the benefit of the business judgment standard. But wait! There’s more.

On Feb. 5 Judge Lopez delivered another doozy, refusing to approve – or even consider approving – a proposed settlement between the trustee and the two groups of Sandy Hook school shooting claimants under Rule 9019 of the Federal Rules of Bankruptcy Procedure. Somehow, Judge Lopez’s offhand rejection of the settlement is even more mystifying than his section 363 sale decision.

The settlement would have allocated distributions by Jones’ chapter 7 estate and former debtor Free Speech Systems between the two groups of claimants – the Connecticut plaintiffs and the Texas plaintiffs – by granting the plaintiffs allowed claims against both the estate and Free Speech Systems.

The judge dismissed Free Speech System’s chapter 11 in June 2024 because it had hung around for two years, despite the claimants’ filing of a joint proposed plan, which – Judge Lopez thinks two years is a long time for a dicey mass tort chapter 11 to hang around! But more on Tehum Care (filing date Feb. 13, 2023) later.

The friction between the two groups of claimants stems from the different jury awards they secured outside of bankruptcy: the Connecticut plaintiffs hold a $1.5 billion state court judgment against Jones and FSS while the Texas plaintiffs hold a judgment for only $49.3 million. Until the Free Speech case was dismissed, the claimants presented a united front in opposition to Jones; after the dismissal, fissures started to open.

The Free Speech dismissal was supported by one group of Sandy Hook claimants, the Texas judgment plaintiffs, and opposed by the other, the Connecticut judgment plaintiffs, who preferred conversion to chapter 7. The Texas claimants apparently felt they would win the “race to the courthouse” with a Texas judgment against a Texas entity, while the Connecticut plaintiffs preferred keeping the stay in place and enforcing their larger judgment in bankruptcy.

The settlement was intended to end all that. Under the settlement, the two claimant groups would have specific allowed claims against both nondebtor FSS and Jones’ chapter 7 estate, allowing them to divvy up the assets of both. The Texas plaintiffs would receive a $1 million interim distribution and the next $3 million of estate claim recoveries, with the Connecticut plaintiffs receiving the remainder.

How could the trustee for Jones’ estate agree to the allowance of claims against nondebtor Free Speech and the distribution of its assets? Simple: In September 2024, Judge Lopez himself entered a post-dismissal order vesting all property of Free Speech’s bankruptcy estate in the Jones chapter 7 estate and specifically granting control of such property to the trustee.

Of course Jones objected to the proposed settlement, and of course that objection is dubious at best. In the objection, Jones maintains that the settlement could not be approved because it would effect a “coup d’é·tat” that prejudiced his ability to appeal Judge Lopez’s October 2023 ruling that many of the claims against Jones are nondischargeable. To give you an idea, here’s the conclusion:

“The Connecticut Plaintiffs and the Texas Plaintiffs are so fearful of the appellate consideration of the constitutional infirmities of their Judgments, and the Trustee so intent on acting on the Plaintiffs’ behalf, even to the detriment of other creditors and in particular Jones’ and FFS’s recognized right to protection of their ‘fundamental constitutional rights’ from dismissal without appellate review, that it not only participates in this deception, but is the leader.”

Sure, whatever. Those “other creditors” are of course Jones and his affiliates, which you probably figured out by now.

Everyone who expected Judge Lopez to consider the constitutional merits of a chapter 7 trustee’s coup d’etat at the Feb. 5 settlement hearing would be deeply disappointed. Instead of holding the hearing, Judge Lopez told the parties upfront that he had already made up his mind: “I don’t have the authority,” the judge declared, to “allow a claim against an entity that I dismissed” – e.g., Free Speech. Then he sent everybody home.

Why do we care? Because, again, Judge Lopez refused to grant the trustee relief that bankruptcy judges routinely grant chapter 11 debtors. If bankruptcy judges truly lack authority to approve a settlement resolving consenting nondebtors’ claims against consenting nondebtor co-defendants, then, brother, we got bigger problems in bankruptcy-land, because that happens all the time.

Take, for example, the proposed settlement in literally every mass tort chapter 11 ever filed. Specifically, consider the plan confirmed by Judge Lopez in the Tehum Care case on March 3. The Tehum plan incorporates a settlement among consenting claimants, the Texas two-step debtor entity and nondebtor co-defendant/two-step survivor YesCare whereby consenting claimants would surrender their claims against YesCare in exchange for a share of $50 million.

Don’t see the allowance of claims in there? Well, the consenting claimants’ claims against YesCare are being allowed, on a final basis, at zero dollars. Same thing that will happen when the Sacklers’ new Purdue settlement is approved, or Judge Lopez approves the Red River/Johnson & Johnson talc settlement (yes, trial is ongoing, and, yes, Judge Lopez will absolutely confirm the Red River plan, without fretting about lacking authority to consensually resolve claims against Johnson & Johnson).

Wait, is Judge Lopez’s only beef with allowing claims against nondebtors in amounts greater than zero? Why would that be a problem, but not allowing claims at zero or releasing them?

In both cases, the jurisdictional hook is the benefits for the debtor from the settlement: Bankruptcy judges consistently find that the mere existence of a settlement that accrues some purported value to the debtor, in the form of new funding from the nondebtor, diminished litigation expenses or “certainty,” creates a sufficient nexus to the bankruptcy to give them “related to” jurisdiction to resolve claims against the nondebtor.

In the Alex Jones case, the connections between the settlement and the debtors are even more pronounced. As we mentioned, Judge Lopez entered an order vesting all property of Free Speech’s bankruptcy estate in the Jones chapter 7 estate and granting control of such property to the chapter 7 trustee. So, the property of the nondebtor here is actually property of the chapter 7 estate, under the control of the trustee, under the judge’s own order.

Before the Supreme Court’s Purdue decision, bankruptcy judges often approved plans incorporating settlements that wiped out nondebtor claimants’ claims against nondebtor codefendants without the claimants’ consent. Now they lack authority to allow claims against a nondebtor when everyone agrees? We obviously had some beef with nonconsensual nondebtor releases, but if the claimants consent to the treatment of their claims against the debtors and the nondebtors together, who are we to interfere with true love?

Why would “related to” bankruptcy jurisdiction exist to approve a consensual wiping-out of claims against a nondebtor but not a consensual dollar figure or cap at a specified amount? Is there any jurisdictional difference between Johnson & Johnson agreeing to pay a specified amount to Red River to resolve talc claims against both of them and giving claimants specified allowed claims against both Red River and Johnson & Johnson, if both sides are cool with the arrangement?

Brother, you know the answer. What we have here, as with the section 363 sale decision, is Judge Lopez applying a totally different set of rules in a chapter 7 case that he would never apply in a complex chapter 11 case. Maybe chapter 7 Judge Lopez is the outtie and chapter 11 Judge Lopez is the innie. Either way, judicial Severance is not what the Bankruptcy Code intended; Rule 9019, like section 363, applies in all cases.