Court Opinion Review: Silver Lining in Purdue and Jarkesy; Wesco and Robertshaw Decisions Diverge on Remedy; NJ Stans for Debtors (Again) in Invitae

Reorg’s 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 Reorg as a whole. Today we consider the implications of the Purdue and Jarkesy U.S. Supreme Court decisions, the Wesco and Robertshaw liability management decisions and denial of the UCC uptier challenge standing motion in Invitae.

Near-Death Experience

Not much more we can say about Purdue that we haven’t already droned on about ad nauseam, and smarter folks than us can make the mistake of trying to predict the fallout from the Supreme Court’s June 27 decision knocking out nonconsensual nondebtor releases. The only surprise for us was that this one came down 5-4 – with the four original intent True Believers doing their second-grade grammar thing, we figured all three liberals would join to make it 7-2, with the Corporate Shill Caucus dissenting.

Yes, we had Justice Clarence Thomas with the shills, until he started suggesting at oral argument that even consensual nondebtor releases exceed bankruptcy courts’ authority. Justice Thomas said he didn’t “see what the difference is” between consensual and nonconsensual releases and asked counsel “what provision in the code” allows that. “Tell me why a consensual agreement, a release, is consistent with the Code,” Justice Thomas pressed – and never received a straight answer.

If you suspect that consensual releases may not be authorized by the Bankruptcy Code, you probably agree that nonconsensual releases cross the line. We often tell subscribers not to put too much stock in judicial queries during oral argument; sometimes judges pose the toughest questions and hypotheticals to the side they favor, if only to get an answer they can use in their opinion. But on those rare occasions when Justice Thomas talks … people listen.

So we’ll leave it at this, our prediction from October 2023: “[C]hamber of commerce types might regret stumping for the Sacklers in Purdue if a 5-4 Supreme Court majority composed of three liberal justices and two Federalist Society true believers ends nonconsensual nondebtor releases for good.” “There are two kinds of ‘conservative’ judges,” we suggested: “the pro-business Old School and the original intent true believers, and the latter may end up eating the offspring of the former.”

What the Supreme Court did not say is more interesting to us than tooting our own horn: The court declined to issue any sweeping policy statements limiting the power of bankruptcy courts to hear noncore matters and interfere with Article III and state courts’ constitutional monopoly on resolution of two-party legal disputes.

That was our major fear: that SCOTUS would use the extensive abuse of nonconsensual nondebtor releases exemplified by Purdue as an excuse to remind bankruptcy judges that they are not real courts despite the gavels and the robes and the seals. We worried they might knock bankruptcy judges down a peg, lumping them in with the administrative tribunals many justices detest, and see as an affront to the fundamental principles of the common law legal system. Maybe they couldn’t get the two liberals on board with that.

Which brings us to another decision issued by the Supreme Court on June 27, in another case we have discussed before (see that last link!): Jarkesy v. SEC. In May 2022, the hyper-conservative U.S. Court of Appeals for the Fifth Circuit held in Jarkesy that the use of agency tribunals by the U.S. Securities and Exchange Commission to resolve otherwise jury-triable securities fraud cases violates the Seventh Amendment, the nondelegation doctrine and the separation of powers.

As we have discussed, all three of those constitutional limitations could theoretically apply to bankruptcy courts. Bankruptcy courts resolve common law legal claims without a jury, including by estimation (that’s the whole point of mass tort cases), bankruptcy courts act under a broad delegation from Congress and bankruptcy courts may infringe on the powers of Article III courts.

An amicus brief filed by law professors in the 3M/Aearo chapter 11 dismissal appeal summed up the constitutional vulnerability of the bankruptcy system: “[t]he Bankruptcy Code provides powerful relief that potentially infringes on a host of constitutional guarantees: the right to have Article III courts resolve traditional causes of action, such as personal injury suits; the right to jury trial in such cases; and the right to a day in court and the right to have each individual case heard on the merits.”

The bankruptcy courts actually raise an additional constitutional issue: unlike administrative tribunals, which handle only federal law claims, the bankruptcy courts’ interference with state law proceedings (and state claims, a la the governmental claims against the Sacklers in Purdue) could raise federalism concerns.

The most frightening part of the Fifth Circuit’s Jarkesy decision was the standard the court of appeals applied in determining that the use of administrative tribunals violated the Seventh Amendment: the two-part standard from the Supreme Court’s 1989 Granfinanciera, S.A. v. Nordberg decision. That is a bankruptcy case, friends. In that case, the Supreme Court said Congress could not abrogate a party’s jury trial “by assigning to administrative agencies or courts of equity all causes of action not grounded in state law, whether they originate in a newly fashioned regulatory scheme or possess a long line of common law forebears.” Shudder.

In its 6-3 Jarkesy decision (take a wild guess who dissented), the Supreme Court affirms the Fifth Circuit’s limitations on administrative tribunals but limits itself to the “straightforward” Seventh Amendment jury trial issue. The majority quickly determines that the securities fraud claims brought against Jarkesy qualify as legal claims that trigger the Seventh Amendment; this is rarely in question when determining whether bankruptcy courts can adjudicate nonbankruptcy claims, so we’ll leave it at that.

The majority then moves on to the second prong of the Granfinanciera test: whether the SEC’s claims qualify for nonjury resolution under the “public rights’ exception – also the deciding factor in everyone’s favorite bankruptcy decision, 2011’s Stern v. Marshall. We are absolutely not going to go through all the back and forth between the majority and the dissent (and Justice Neal Gorsuch’s concurring opinion) on how the founders might feel about securities fraud claims being adjudicated by the executive.

Instead, we’ll leave it at this: unlike the Fifth Circuit’s broad-brush rejection of non-Article III tribunals when it heard Jarkesy’s claims, there is absolutely nothing new in the Supreme Court’s Jarkesy decision that should scare bankruptcy judges and lawyers. This is all the same Stern stuff we have successfully worked around for 13 years.

And that is exceptionally good news, because it would have been very convenient for the Fed Soc crowd to issue twin decisions on June 27 clipping the wings of both administrative tribunals and bankruptcy courts. Even better news might have been a reference to the rarely cited, break-glass-in-case-of-emergency Bankruptcy Clause and – goosebumps – that maybe the bankruptcy system has a special constitutional status.

Yes, we lost releases, but we anticipate the usual bankruptcy judge maneuvering to get nondebtor contributors what they want notwithstanding the Purdue ruling – see the sad fate of Merit Management.

Through opt-outs, noticing regimes and good old fashioned vote-buying, debtors will get enough claimants on board to satisfy insiders that they have bought peace for the price of plan sponsorship. Courts in the Fifth Circuit – including Houston – have been working around a ban on nonconsensual nondebtor releases since 2009; the Tehum two-step case wouldn’t have been filed in the home of the Trashtros if they weren’t confident they could get releases despite that prohibition.

For a good example of how to do this, check out the Endo plan. Under that plan, certain classes had the option to opt in to the nondebtor releases, while others had the option to opt out – making the releases consensual (fingers crossed!) and thus kosher under Purdue (at least until Justice Thomas gets his way). Creditors that opted in were given a bonus distribution of four times what they would have received if they did not – a carrot to encourage claimants to get on board.

Side note: the U.S. Trustee is feeling its oats and is already taking the microscope to every release up for confirmation. It seems even opt-in releases are going to be nitpicked till the high wears off. See, e.g., SVB. We are more confident than Tim Naki splitting aces that the next year is going to see conflicting and irreconcilable case law on release consent as a result.

There are also sticks available to debtors in our post-Purdue reality, including “death trap” provisions forfeiting distributions for opt-outs and gatekeeper provisions requiring opt-outs to go through the bankruptcy court or mediation before they can get to a jury.

In Endo, the carrots worked. The U.S. Trustee responded to the plan with a reservation of rights expressing “concerns regarding the Releases and Exculpation Provisions” but did not file the usual screed attacking nonconsensual nondebtor releases. A Canadian opioid claimant did object to the releases but also opted out. The confirmation hearing focused on equal treatment issues, not the releases, and Judge John T. Dorsey duly confirmed. We can do this. But a bold statement casting doubt on the status of bankruptcy judges in Purdue or Jarkesy would’ve been harder to work around.

Managing Liability Management Decisions

Hoo-boy has Judge Marvin Isgur’s July 10 Wesco/Incora uptier ruling (and his surprise June 26 preview) got the transactional find-and-replace jockeys in a lather! Turns out – depending on your docs – you can’t use a bare majority to strip the liens of nonconsenting noteholders just by purchasing some new pari passu notes to give yourself a legal-microsecond supermajority. More importantly, if you do it, you could end up with a DOA plan and holding an unsecured claim for your uptier new money contribution.

We discussed the Wesco/Incora dispute back in January, so we’ll stick to a quick refresher: In early 2023, two groups of secured 2024/2026 noteholders proposed transactions to get the company $250 million in desperately needed financing. Silver Point and Pimco offered to provide the new money in exchange for uptiering their notes and stripping the liens from the excluded noteholders, and a minority group offered pro rata financing secured by a third-party letter of credit.

Since Silver Point and Pimco held a two-thirds supermajority of the 2024 notes and thought it held a supermajority of the 2026 notes, you can guess which deal the company chose. Unfortunately, Silver Point and Pimco turned out not to hold a supermajority of the 2026 notes since some of their holdings were out on loan; this meant the participants had to come up with a way to give Silver Point and Pimco the two-thirds required to strip the liens off the 2026 notes.

To get around the minority’s blocking position, the company sold $250 million in new, pari passu 2026 notes to Silver Point and Pimco. That seemed fine under the indenture, which only required a simple majority to increase the new notes basket from $75 million to $250 million. As a result of the new 2026 notes, Silver Point and Pimco held a majority, which they then immediately voted in favor of the exchange and stripping of the 2026 notes liens.

The excluded noteholders argued that the two key steps of the transaction – the third amendment that authorized the issuance of the new 2026 notes and the fourth amendment that authorized the exchange and lien-stripping – should be “collapsed” into a single, integrated transaction that required two-thirds consent from the beginning. The participants responded that the collapsing doctrine only applies in the fraudulent transfer and tax contexts – e.g., where the interests of absent third parties like other creditors and the IRS, not other noteholders, are affected.

Thorny question for Judge Isgur – but he sidestepped it quite neatly using a specific phrase in the indenture – the exact kind of careful word-parsing the participants tried to apply to get their exchange done.

On June 26, after 30 days of evidence and on the third day of closing arguments, Judge Isgur dropped his latest hit: He suddenly informed the parties that he intended to find that the secured exchange transaction was “unauthorized” by the 2026 indenture and thus “illegal.” On July 10, he explained why: The indenture requires two-thirds consent to any amendment that could “have the effect” of impairing the noteholders’ liens.

According to Judge Isgur, the phrase “have the effect” requires that any transaction whose execution causes or leads inevitably or inexorably to the stripping of the 2026 notes’ liens requires two-thirds consent. Because the execution of the third amendment – which authorized the new notes – led automatically to the release of signatures and closing of the fourth amendment and the exchange transaction, the judge reasoned, the participants needed two-thirds consent when the third amendment was executed. They didn’t have it.

Judge Isgur walked through the steps of the uptier closing in painstaking detail. By 7:18 a.m., the parties exchanged fully executed signature pages for all of the transaction documents in escrow, the judge recounted. At 8:26 a.m., Silver Point and Pimco confirmed the release of funds from escrow. At 8:27 a.m., trustee’s counsel verified that the $250 million for the new 2026 notes had been received. At 8:53 a.m., the parties confirmed by email the transaction was complete.

This could be the worst episode of 24 ever, but it makes his point: There was no way the execution of the third amendment would not lead to the execution of the fourth amendment. There was absolutely no way Silver Point and Pimco would have let the company walk away after they paid $250 million for the new 2026 pari passu notes – once the “dominoes” started falling under what the judge repeatedly called the “domino agreement,” Silver Point and Pimco were not at risk and would definitely end up with new first lien notes – and the 2026 notes would be unsecured.

Judge Isgur effectively collapsed the transaction without “collapsing” the transaction, using the language of the indenture itself – pretty clever, really. We’re going to miss him on the SDTX complex panel.

But what’s the big deal? Other judges have concluded that a liability management transaction breached a credit agreement or indenture – even in Houston, and even in June 2024. On June 20, Judge Christopher Lopez issued a ruling in the Robertshaw/Invesco “Required Lender” fight, finding that the company’s December 2023 payoff of Invesco’s first-out loans, which gave an ad hoc group of three other lenders control over the company’s restructuring, breached the credit agreement.

We’ve also discussed Robertshaw before, so again, a quick primer: Before December 2023, Invesco held a majority of the company’s first- and second-out loans (after a May 2023 uptier, which was not at issue) and arm-barred the debtors into planning a January 2024 bankruptcy with Invesco as DIP lender and stalking horse credit bidder. When the ad hoc group – Bain, Canyon and Eaton Vance – got wind of this, they hatched a scheme to take the restructuring goodies for themselves.

To do this, they basically engineered the mirror image of the Wesco/Incora transaction, since they lacked the majority necessary to authorize the issuance of new pari passu loans: They lent $228 million to a new entity, RS Funding, that immediately sent the funds to Robertshaw as an equity contribution, and the company used those funds to pay off virtually all of the first-out loans, with a make whole premium. Robertshaw paid down debt, altering voting rights as a result; Wesco/Incora diluted debt, altering vote rights as a result.

Invesco was heavily weighted in the first-out loans. The resulting reduction in Invesco’s holdings gave the ad hoc group the majority of the first- and second-out loans and allowed them to step into Invesco’s shoes as DIP lender and stalking horse in a mid-February bankruptcy. The company got $40 million in financing and a whole month and change of nonbankruptcy existence.

After just six days of trial, Judge Lopez found in his June 20 opinion that the Robertshaw transaction breached the loan agreement because the new entity created for the transaciton – RS Funding – qualified as a subsidiary of Robertshaw covered by the new indebtedness covenant in the agreement. When RS Funding borrowed $228 million to make the equity contribution used to pay off the first-out loans, the covenant was breached.

To this point, there is nothing really inconsistent between the decisions in Wesco and Robertshaw – in both cases, the judges found that maneuvering to manipulate the company’s capital structure and favor one group of creditors over another breached the governing agreements. But Wesco has folks trumpeting the End of the LME, and no one is concerned about Robertshaw.

Why? Because of the very different remedies ordered in each case.

In Robertshaw, Judge Lopez found that under the credit agreement the only remedy for breach of the new indebtedness covenant is a monetary claim for repayment of the loans in order of priority using the proceeds of the forbidden indebtedness, to the extent not already used for that purpose. That means Invesco gets a claim for its pro rata share of the difference between the $228 million lent to RS Funding and the $148 million of those funds used to pay off the first-out loans.

What Invesco does not get is restoration of its “Required Lender” position as if the transaction never happened – and that is what Invesco really wanted. Instead, Invesco gets a claim against the debtors, and the ad hoc group keeps its majority – and all the goodies that come from being the DIP lender and stalking horse bidder. Accordingly, on June 21 – the day after the opinion – Judge Lopez approved the credit bid sale of the debtors’ assets to the ad hoc group, and the debtors filed an amended plan sponsored by the ad hoc group.

We anticipated that Judge Lopez would split the baby with his decision, if only to avoid further accusations that he just might be a “layup” for debtors – and that is exactly what he did. He concluded there was a breach while making sure the debtors’ sale and plan path moved ahead unimpeded.

But that convenient line of thinking doesn’t work if Invesco’s monetary claim could be very large and very secured. At the sale hearing on June 21, Invesco said it intends to argue that its damages claim under the decision is something like $40 million – after the judge hinted he thinks it might fall around $3 million. Invesco submitted its proof of claim July 12: $118 million to $154 million, all secured. Ouch.

Judge Lopez appeared surprised by the fact that his decision opened the door for a large secured claim that could still endanger the sale and confirmation. We’d wager – maybe not Tim Naki-level confidence though – that Judge Lopez will figure a way around it.

And that’s still better for the debtors than the remedy Judge Isgur ordered in Wesco/Incora. Instead of giving the excluded noteholders a monetary claim, the judge declared that the transaction never took effect and that the liens securing the 2026 notes still exist. Judge Isgur said that leaving the excluded noteholders with a monetary claim would effectively reward Silver Point and Pimco for cheating on the indenture’s consent provisions.

Even worse, Judge Isgur said he would give Silver Point and Pimco an unsecured claim for the $250 million in new money, unless they could provide a basis for some kind of equitable adjustment to avoid that “very unfair” result.

Counsel for Silver Point and Pimco walked into court for day three of closing thinking they would argue that the excluded noteholders were entitled only to an unsecured claim, not equitable restoration of their liens, even if the transaction breached the indenture – a la Robertshaw. They left the hearing with directions to convince the judge that they shouldn’t be left with an unsecured claim for their $250 million in new money on an equitable basis. Life comes at you fast!

Everyone filed briefs on July 3 agreeing that Judge Isgur has equitable authority, from somewhere, to give Silver Point and Pimco some value for the new money rather than a worthless unsecured claim. But in his July 10 oral ruling, the judge did not mention any such relief. He simply sent the debtors out to renegotiate their plan – which, like the Robertshaw plan, assumed the validity of the transaction and that the formerly secured 2026 noteholders would remain so – with their capital structure blown to pieces.

Now that is a scary thought for LME debtors. The idea was that if you got caught up in litigation over a liability management transaction in the unfriendly New York courts, you could always file in Houston and get a quick decision either validating the transaction – see former judge David R. Jones’ Serta decision – or, if the transaction did breach the agreements, leaving the excluded creditors with a worthless claim that could be released under a plan.

Now as things stand, you could be locked up in a trial for six months, lose on breach, and have to go back to square one negotiating a plan with a totally revised capital structure. Best stay and fight in New York, Mitel.

But we doubt Judge Isgur’s decision will have a serious lasting impact on LME bankruptcies. That’s as big an overreaction as the folks who trumpeted former judge David R. Jones’ vibes-based Serta decision as kicking off the Golden Age of the LME Two-Step (gulp).

Remember, Judge Isgur’s decision in Wesco/Incora was very, very closely linked to the (not universal) “have the effect” indenture language. That makes it easy to distinguish in future cases. For real consequences, we need to move from Houston to New Orleans: Serta is on appeal at the Fifth Circuit, and with the amount of scrutiny former judge Jones is under these days, we might be in for a first-rate bench slapping. That could have legs.

And Judge Isgur expects to leave the Houston complex panel any day now, to be replaced by Judge Alfredo Perez. Judge Perez will no doubt feel pressure to restore Houston’s tarnished reputation – for debtor-friendly customer service, among other things.

Creativity (and cynicism) always wins, and even if there were very anti-LME language coming from the Fifth Circuit, we’d posit there will be a bankruptcy court out there willing to say the moon is made of green cheese if $2,000-an-hour bankruptcy counsel asks nicely enough, or even not-nicely enough.

Which brings us to …

Invitaetion to a Coronation

The winner in the Debtor-Friendly Bankruptcy Judge of the Future pageant: Judge Michael Kaplan in New Jersey! We were pretty confident Judge Kaplan would walk away with this award after he aced the Gross Pandering in the Financial Media competition, offered to open the floodgates in LTL 1.0 and passed the Ignoring Obvious Conflicts in Debtors’ Counsel Retention test in Invitae (that’s where we lost Judge Brian F. Kenney, thanks for playing). We got a little concerned when he ixnayed a complex panel, but his latest Invitae decision denying committee standing to challenge an uptier put him over the top.

In March 2023, struggling pharma company Invitae agreed to exchange $305.7 million in 2024 convertible notes for $275.3 million in 2028 secured notes and 14.2 million shares of common stock to secure $30 million in new money. The exchange magically transformed majority convertible noteholder Deerfield Partners into a controlling secured lender, while also giving Deerfield a huge chunk of equity. Plus, the newly secured noteholders received a $27.5 million make whole claim should the company file chapter 11. Then, in August 2023, another $17.2 million in convertible notes were exchanged for more than $15.8 million in common stock.

As the UCC later put it, the exchanges gave “significant control over the Company, its ability to raise additional financing, and its ability to operate and restructure its business” to Deerfield. Of course, the board of directors and management, with their fiduciary duties to the company, would never allow Deerfield to unduly influence them to do its bidding, right?

But fret not! According to the first day declaration, one month after hiring Kirkland & Ellis as restructuring counsel in September 2023, the debtors hired an independent director, former Shearman & Sterling and Weil restructuring attorney Jill Frizzley, to get to the bottom of this whole Deerfield thing. The declaration helpfully notes that Frizzley previously served as a director of bankrupt companies Proterra, iMedia, Virgin Orbit, Surgalign and Avaya.

This brief list really undersells Frizzley’s experience as an independent director for bankrupt companies. For example, they forgot CalAmp. And KidKraft. And Plastiq. And Voyager Digital. And Bromford Industries. And Independent Pet Partners. And Greensill Capital. And iQor. And Vivus. And Dura Automotive.

(Deep inhale) And Rue21. And BlockFi. And Rapid Metals. And Big Village Holding. And Envision. And BH Cosmetics. And GBG USA. And Carlson Travel. Oh and don’t forget EYP, though that one got a bit ugly. This is a person distressed companies absolutely love to bring in as an independent director. I wonder why.

According to Frizzley’s March 1 declaration in the Proterra case, she has served as a director for more than 50 companies since 2019, so presumably she knows how to spot potential claims against directors, officers, sponsors and secured creditors and provide tons of reasons why they should not be brought.

In Invitae, Frizzley’s counsel in her investigation is Kirkland & Ellis, the same counsel who represents the debtors, oh and yeah Deerfield as well.

The UCC helpfully pointed out in an April 5 retention objection that Kirkland intended to represent the debtors, possible litigation target Deerfield and “independent” director Jill Frizzley at the same time. According to the objection, Kirkland has an actual conflict of interest with respect to matters related to the 2023 exchange because it represents the board members who approved the 2023 exchange and advised the special board committee, including Frizzley. The debtors and the board, the UCC explains, “would of course prefer that not to be the case and their prior decisions be blessed.” Of course.

The UST agreed. Because potential issues with the exchange and claims against Deerfield would be central to the cases, Kirkland’s co-representation of Deerfield, even in unrelated matters, means the firm is not disinterested and holds an adverse interest against the estate, the UST said.

Nah, Judge Kaplan responded. Deerfield’s work just wasn’t a big enough deal for Kirkland’s bottom line to threaten its independent professional judgment, according to the judge. He also noted that Kirkland wasn’t counsel at the time of the 2023 transactions, Deerfield was separately represented at the time, and the company had conflicts counsel at the time.

Despite its dual representation now, Judge Kaplan also declined to limit the scope of Kirkland’s retention to matters other than dealing with Deerfield because it is the “major secured party” and such limitations would be impractical.

Yup, you heard that right – Kirkland must be allowed to represent the debtors in negotiations and possibly litigation against Deerfield and its director appointees because those negotiations and that litigation are too important to be left to someone without such conflicts. Bravo.

So, what’s an obvious way to allow the debtors to retain Kirkland while also ensuring a full and independent fiduciary investigation of the uptier and potential claims against Deerfield and the directions? Well, the UCC suggested, you could just give us standing to bring those claims! We’re a fiduciary too!

On May 23, the committee filed its standing motion and proposed complaint. According to the UCC’s unredacted standing motion, filed July 15, Invitae has “a tortured history of vaporizing capital” – nice – and management “squandered” more than $1.4 billion in a “series of acquisitions and dispositions transactions.” But the standing motion focuses on the uptier, which the committee says “gave one group of unsecured creditors all of the equity value of the Debtors’ estates and attempted to leave more than $1 billion of similarly situated unsecured creditors with nothing.”

If the company had filed chapter 11 in October 2022, the committee says, the debtors would have had “approximately three-quarters of a billion dollars in equity in their assets.” But instead of doing that, the standing motion reads, the company undertook the uptier and “pledged the entirety of the unencumbered value of their assets” to Deerfield in exchange for a measly $30 million in new money and a four-year maturity extension everybody knew the company would never reach.

According to the UCC, “if the Debtors needed another 10,000 feet of runway to lift the Invitae jet off of the ground, they spent all of their unencumbered value and liquidity to build 100 feet of runway and a crash pad.” Double nice. “In effect, the $700 million of equity the Debtors had in their assets within a year of this filing was used for no legitimate purpose. It did not keep the Debtors out of bankruptcy. Did not reduce their leverage. Did not benefit their liquidity,” the committee says. Oh, the committee adds, the debtors also paid $12 million in bonuses to management on the eve of filing.

The debtors responded by calling the exchange “plain vanilla” and accused the UCC of trying to gin up leverage to get more cash from Deerfield. Which, yeah. The debtors also tout their experienced board of directors and disinterested advisors and arm’s-length negotiations and public company and runway and yadda yadda. The real gist of the response is that the debtors already used the threat of litigation – based on “unsubstantiated, false, and misleading allegations,” according to the debtors – to extract sufficient concessions from Deerfield.

The trustee for the secured notes argued, incredibly, that giving the UCC standing or disallowing the make whole premium could end the debt markets as we know it because secondary market purchasers bought the secured notes in reliance on their secured status and the premium. I guess that could be true, if literally none of those purchasers have a Reorg subscription, where they can read about challenges to uptiers and make whole premiums every single day.

Deerfield countered that the uptier “solved the Company’s most pressing and ‘mission critical’ issues” and created “runway to stabilize cash burn” and raise additional capital. Maybe, but isn’t that a defense on the merits? Deerfield also accuses the committee of abandoning its fiduciary duties by pursuing the interests of the convertible noteholders and endangering the 94% recovery of trade creditors and I’m rubber, you’re glue.

How did Judge Kaplan resolve the issue? Tie goes to the debtors: The UCC failed to overcome the “high threshold” set by the debtors’ business judgment in undertaking the uptier, the judge found. The committee’s business judgment is irrelevant.

Judge Kaplan also cited secured creditor and massive shareholder Deerfield’s non-insider status at the time of the transaction, Frizzley’s independent judgment and the retention of professional advisors to consider the transaction, sigh.

In case you are wondering if Purdue matters here, and why can’t the convertible noteholders just sue Deerfield later: nope. The Purdue decision bars nonconsensual releases of nondebtor claims; the derivative claims belong to the debtor.

But Judge Kaplan is no layup! He made clear that his rejection of the UCC’s standing motion is preliminary and reserved the right to “change its mind” on the basis of the evidence at the confirmation hearing set for July 22. Sure. If that’s actually possible, why give a “preliminary” ruling at all?

The debtors asked Judge Kaplan to kick the standing fight to confirmation way back on May 28, five days after the motion was filed. The UCC objected. Why not just grant the motion to continue and hear the evidence for the first and only time at confirmation, instead of holding an entirely separate hearing and telling the debtors they are going to win, maybe, probably, and then hearing evidence on the same issues at confirmation for the second time?

If Judge Kaplan actually reconsiders his “preliminary” standing ruling at confirmation, we’ll volunteer as unpaid security for the next Argentina-Colombia match.