Article/Intelligence
Court Opinion Review: The WeWork Mess; J&J Pushes a Talc Prepack; Gol Lockups Get Tossed; a Private Auction in Casa Systems
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 WeWork disclosure fiasco, J&J’s proposal for a prepackaged LTL 3.0, rejection of creditor lockups in Gol and an interesting private sale in Casa Systems.
WeWorked Over the Weekend
On April 29, Judge John K. Sherwood “conditionally” approved WeWork’s proposed disclosure statement, allowing the debtors to solicit votes on a widebody plan assembled by Kirkland & Ellis engineers at Mach 0.85 cruising speed. Note the finger quotes around “conditionally” – there is absolutely nothing conditional about Judge Sherwood’s approval of the solicitation package, though the same can’t be said for the plan and disclosure statement themselves in the runup to the hearing.
WeWork filed its first plan and disclosure statement on Feb. 4 with more plot holes than The Three-Body Problem. The placeholder contemplated a simple first lien debt-for-equity swap, as provided by the debtors’ prepetition restructuring support agreement. The plan featured a whopping 246 sets of brackets, which is a sign of what was going on. The RSA also required that a plan be filed by, you guessed it, Feb. 4, so no one but Reorg should’ve spent more than an hour on this.
Except: The debtors acted like they had filed a real plan and disclosure statement. On Feb. 17, they filed a motion to approve this bankruptcy equivalent of a circulatory system that walked through the kitchen and set a hearing for March 27, while targeting a May 2 confirmation hearing. In related news, on Feb. 17 the Chicago White Sox also reserved the streets of the Loop for their 2024 World Series championship parade.
So: We have a hearing set for March 27 on a bare-bones disclosure statement and plan, that seems like a leap, but hey, I’m sure the debtors will get around to filing that amended plan and disclosure statement with actual, actionable information long before the hearing, so creditors can carefully review and consider their options. Except: On Feb. 21, the debtors decided to move the hearing up, to March 20.
Perhaps the UCC’s litigation standing motion on Feb. 29 sobered the debtors up a bit, because on March 7 they bumped the hearing back to March 27. Then, on March 19, the combined standing motion and disclosure statement approval hearing was kicked indefinitely. Whew. Now they have plenty of time to work on a real plan supported by real disclosures!
Meanwhile … barefoot Adam Neumann was very publicly leaking his interest in taking back the company, and providing a DIP to get there.
One month later, on April 19, the debtors filed an amended plan and disclosure statement with a little more meat on the bones. Just a couple more minor details to be worked out, insignificant stuff like “maybe the debtors will secure some DIP financing to fund the case through confirmation, if you know anyone, hit us up (makes finger phone gesture).”
Nothing about Neumann explicitly in this version: According to the April 19 disclosure statement, the debtors believe DIP financing “may be prudent” to allow them to pay administrative claims in full on the effective date, you know, just a little tidying up to satisfy one of the key requirements for confirmation. “The Debtors remain open to all proposals for debtor-in-possession financing whether in the form of a DIP New Money Facility, a Rights Offering, or otherwise,” the disclosure statement says, and “the open points in the Debtors’ negotiations with the Consenting Stakeholders for a potential DIP New Money Facility have significantly narrowed in recent days.” More on that later.
Oh, well, that’s nice, good to hear, maybe you’ll have committed DIP financing in place soon, and you can file a real plan and disclosure statement with the details at that point, instead of now, when you do not have that commitment and cannot possibly secure confirmation of the plan that we just wasted two hours summarizing for our exasperated readers.
The same day this still-heavy-on-the-thoughts-and-prayers disclosure statement was filed, the debtors rescheduled the disclosure statement approval hearing for April 29 – 10 days later. Seems a bit hasty considering the disclosure statement at issue makes clear more deals and more disclosure are coming!
Oh, wait – this time they only asked for conditional approval of the disclosure statement. That means you aren’t actually going to go out to creditors and ask them to vote on this kludge, right? Actually, that is exactly what the debtors intended to do. Conditional DS approval grew out of prepackaged case practice and now seems to be a one-size-fits-all option for all debtors. According to the debtors’ conditional approval motion, the only difference between conditional and final approval of the disclosure statement is that conditional approval is “without prejudice to the right of any party in interest to argue at the Combined Hearing that the Disclosure Statement does not contain adequate information within the meaning of section 1125(a)(1) of the Bankruptcy Code.”
Needless to say, a disclosure-based challenge at a combined final disclosure statement approval and plan confirmation hearing is not going to get very far.
Here in the real world, we know how this is going to play out: Everyone will treat that conditional disclosure hearing like a real disclosure hearing because they know that once the solicitation package goes out, any objections to the adequacy of disclosure under section 1125 will be steamrolled at the confirmation hearing. Everyone also knows that the real disclosure statement to be considered at that very real hearing would be filed at the last minute, leaving them unable to lodge any real objections.
And, lo, it came to pass: When 4 p.m. ET arrived on Friday, April 26, no new plan or disclosure statement had been filed, and everybody had to pretend the April 19 disclosure statement was a real thing that mattered and needed to be improved with more disclosure. The objections started rolling in, all of them premised on a phony disclosure statement that literally everyone knew would be a worthless dead letter within 48 hours. This is what wealth management under hyperinflation must feel like.
Naturally, the debtors filed their real amended plan a couple of hours later on Friday night, and a real amended disclosure statement on April 27. Reader, I promise you: This was about as well received here at Reorg as it was at Adam Neumann’s house or yurt or whatever, but unlike Neumann, we are professionals. A keen reader will not detect any scorn in our April 29 story, written on Sunday and published early Monday morning, in which we carefully detailed objections filed by real creditors to a phony disclosure statement and plan that everyone knew was phony when they objected and had now been lapped twice over by reality.
Our favorite part: The debtors actually bothered to file a phony reply to the phony objections that, without a hint of irony, generally responded that the objections had been addressed by the real disclosure statement and plan. “Yeah, we agree with you guys, could’ve been more in that April 19 disclosure statement so we filed a new one, over the weekend before the hearing, after taking a really close look at your complaint. You’re welcome.”
Then, at 6 a.m. on Monday morning – four hours before the “conditional” disclosure approval hearing – WeWork filed another materially modified plan and disclosure statement, this time including new settlements with the UCC and unsecured noteholder group.
Prior to settling, the UCC objected to this shambolic march toward solicitation in an objection filed April 22, complaining that “efforts to try to avoid losing time in the confirmation noticing process and to drive the RSA Parties to reach an agreement are not excuses to jam stakeholders’ ability to have adequate time to review the Revised Disclosure Statement, deny stakeholders due process or jeopardize these cases.”
The unsecured noteholder group seemed more into the whole brevity thing:
Unfortunately, as with most objections we agree with, these became moot when the UCC and the unsecured noteholders folded. That left Neumann to stand up for common sense, which, a stopped clock, etc. Counsel for Neumann argued that the disclosure statement “is a mountain of unintelligible and oxymoronic language” and a “long-winded effort at misdirection,” filled with “gobbledygook,” especially when discussing the actual post-reorg equity splits.
Judge Sherwood kindly asked WeWork counsel to walk him through those equity splits, and counsel obliged. Problem solved. Anyway, it’s just “conditional” approval, Neumann can raise those objections again at confirmation, after the debtors have filed three or four more plans.
Then, two days later, the debtors filed a motion to approve their $450 million “DIP facility” – which is really a $50 million DIP and $400 million in exit financing that will exist for no longer than a microsecond in the quantum legalverse before emergence. Anyway, let’s assume this is actually a DIP facility: Maybe creditors should have been able to review the detailed terms in, say, the disclosure statement?
If Judge Reorg somehow managed to sneak into the complex panel in Houston (“Houston Mega-Case Filings Decline to Zero, Reorg Data Shows”) we would cut through this nonsense – which happens to some extent, though not as egregious, in virtually every large case – by creating an ironclad “Deadline to Reach Deals to Be Included in a Proposed Disclosure Statement,” instead of using disclosure hearings as the “dynamic pressure” for settlement.
So, Judge Reorg says no more “placeholder” plans. You have until May 1 to get everything together. Then you file the real plan and disclosure statement after that date and set a hearing with actual notice of the real disclosure statement and plan. Make sense? Maybe. Never gonna happen.
LTL Rides Again
Bravo to Johnson & Johnson for finally finding a way to get the voice of the people heard in a chapter 11 cosmetic talc case. For almost three years, this plucky little conglomerate, besieged on all sides by the nefarious plaintiffs’ bar, ivory-tower appellate judges, populist demagogues in Congress and scientific journals with readership in the single digits, has fought tirelessly for the alleged victims of its once-ubiquitous baby powder, trying to get them fair compensation despite the schemes and conspiracies of, well, the lawyers the victims hired specifically to get them fair compensation from Johnson & Johnson. That’s all J&J wants, you see – to help these people who brought totally frivolous claims against Johnson & Johnson. It’s their credo.
And now, all that struggle seems to have paid off: On May 1, J&J announced a prepackaged bankruptcy plan that would settle about 100,000 ovarian cancer claims for approximately $6.5 billion in present value if more than 75% of claimants vote to accept during a three-month prepetition solicitation process. If the plan hits that 75% threshold – the supermajority required for the asbestos-specific bankruptcy channeling injunctions allowed under section 524(g) of the Bankruptcy Code; this isn’t a Purdue problem (we hope) – erstwhile debtor LTL Management (now LLT Management, the laziest mass-tort name change since Exxon Mediterranean) will reorganize again and file a chapter 11 for a new talc claims vehicle, Red River Talc, somewhere in Texas, gee, I wonder where?
Maybe they’ll wait to decide on the basis of the “Next Judge Up” billboard the Dallas bankruptcy court put up.
According to Johnson & Johnson, the prepackaged plan strategy finally provides the little people manipulated by their evil lawyers with the chance to vote for or against a settlement, “an opportunity they were denied in prior bankruptcy cases.” I love democracy, indeed.
If we put aside everything we know about Johnson & Johnson’s previous bankruptcy efforts, the plan actually sounds pretty fair, whether that is what J&J intended or not. There will be no prior restraint, illusory funding agreement, phony frustration of purpose arguments, “extraordinary” but bog-standard nondebtor litigation injunction, hurried or eternally delayed estimation process, stooge future claims representative or problematic judicial mediation.
This time, J&J promises to keep litigating, at least while the prepetition solicitation proceeds, which, we wonder if that has anything to do with their recent talc litigation victories, see also the Bayer Roundup switcheroo? Refreshingly, Johnson & Johnson has been quite candid that Judge Michael A. Shipp’s March 27 decision to reopen briefing on the admissibility of the plaintiffs’ expert testimony in the federal multidistrict cosmetic talc litigation has a lot to do with starting the process now, because it puts additional pressure on the plaintiffs’ firms to accept the deal rather than face potential annihilation.
There’s just this one little thing nagging at us: Johnson & Johnson says it is confident the prepack will hit the 75% threshold, on the basis of “representations” from plaintiffs’ firms. That sounds nice, but LTL also touted overwhelming plaintiffs’ counsel support for its second bankruptcy filing, with an ad hoc supporting committee and everything. According to the tort claimants committee opposed to the bankruptcy filings, many of those supporting claims were bogus, and LTL was attempting to stuff the ballot box (see also Boy Scouts), with manufactured accepting claims.
Johnson & Johnson has not said that it has convinced some of its TCC opponents to support the new deal, which, if they did, they would say that, right? In an investor call, J&J reps told analysts that the only big plaintiffs’ firm still fighting the deal would be Beasley Allen, one of the company’s principal antagonists from the LTL cases (and a target of J&J’s ongoing war on the plaintiffs’ bar and experts). Are the other TCC firms now on board? If so, why not say that?
Because if they aren’t, and if J&J intends to rely on the votes of the same possibly bogus claims it counted as supporting the second LTL bankruptcy, then we might take issue with the whole creditor democracy shtick. We might be tempted to wonder if the prepetition solicitation thing is really a way to limit dissenting claimants’ objections to questionable votes in bankruptcy court.
There’s a reason the Roman censor was such a powerful figure in the Republic: He who decides who can vote can decide the election. We know, Stalin probably didn’t say that famous quote, but there’s a reason it was attributed to Stalin.
You can be sure LLT will have the first crack at deciding whose votes count and whose should be disqualified because, for example, the master ballot submitted by a plaintiffs’ firm for its clients “does not conform to the template provided with the Master Ballot, including the formatting of each field included in the Master Ballot exhibit template,” as required by the balloting procedures (emphasis on seemingly very nitpicky requirement added). The opponents will have the burden of convincing a bankruptcy judge, probably in Houston, that accepting votes must be thrown out; good luck with that.
Hopefully this isn’t the case. Hopefully, when J&J says it has 75% acceptance, that means 75% of legitimate claims – of course, J&J maintains there are none of those – and this plan will be confirmed after a legitimate vote. Fingers crossed.
Gol Lockups Locked Out
Speaking of creditor democracy, back in January 2022 we discussed the enforceability of lockup agreements – provisions in claim settlement agreements requiring creditors to vote in favor of a plan – in the LATAM and Grupo Aeroméxico cases from retired Judge Shelley Chapman and Judge James L. Garrity Jr. On April 10, Judge Martin Glenn issued another decision on the issue – coincidentally, in another Latin American airline case, the Gol Linhas Aéreas Inteligentes chapter 11. This time, Judge Glenn unequivocally says lockups are no bueno.
The Gol debtors sought approval of four aircraft lessor claim stipulations, including one with AerCap, their largest lessor. Each of the stipulations required the lessor to “support any plan the debtor proposes as long as it has X, Y, Z,” as Judge Glenn eloquently put it. On April 3, the U.S. Trustee and the UCC objected, with the UCC arguing that the lockup provisions would obligate the lessors to vote in favor of “virtually any chapter 11 plan” that incorporates the claim stipulation – even though “there is no approved disclosure statement, plan term sheet, or even a business plan.”
The UCC theorized that the lockups were intended as a “quasi-poison pill” to prevent the lessors from supporting a sale to competitor Azul, allowing majority shareholder Abra Group Ltd. “to retain control over the Debtors without the necessity of complying with the absolute priority rule.”
Which, of course. Debtors lock creditors up to prevent them from supporting alternative plans they don’t like. That’s the whole point. But is that legit? The UST argued that section 1125(b) of the Bankruptcy Code “unequivocally prohibits the post-petition solicitation of an acceptance or rejection of a plan prior to the approval of a disclosure statement approved by the Court.” The UST also pointed out that the stipulations specifically provide for the severance of the lockup provisions from the claim settlement if necessary.
In their April 9 response, the debtors call the objections “frivolous.” Gol also played the parade of horribles card, arguing that the lockup provisions are part of “comprehensive commercial agreements reflected in the Settlements” that “are the full, final, and complete deal among those parties.”
Except, what about that severance provision? And the fact that, according to the debtors, the lockup provisions have enough exceptions to obviate any vote-buying concerns: The lessors could still vote to reject a plan proposed by Gol if the court “does not approve a disclosure statement (to which the lessors may object on any grounds), if the Debtors default under the modified leases, if the Debtors do not meet certain key liquidity and leverage metrics, if the plan treats the lessor’s claim unfairly, or if the plan fails to adhere to the terms of the relevant Settlements.”
So: The lockup agreements are too important to remove but not so important that we didn’t give the lessors a bunch of outs and a severance provision that ensures that the “full, final, and complete deal” can be red-penciled by the judge. Gotcha.
At the hearing on April 10, Judge Glenn found the objections were very much not frivolous. The judge said the evidence showed that “it was the debtor who insisted” on the plan support provisions and that “at least some of the lessors” resisted them during negotiations. Again: Of course. Why would the lessors ask to be locked up? Why wouldn’t they ask not to be locked up?
More importantly, Judge Glenn worried about the effect of lessor voting commitments on “other creditors who were not at the table.” “My concern is, you may have bought the votes necessary to confirm a plan when other creditors have absolutely no say,” the judge commented. He suggested that if the lessors were largely locked into voting for the debtors’ plan, “you could run roughshod over almost everyone else in the case other than the funded debt.”
In other words, the lessors are just too important to be locked up early in the case. “I do think it makes a difference at what stage of the case you’re talking about,” Judge Glenn said, and the Gol debtors are at a “very early stage of the case.” SAS “was still fairly early” when Judge Michael Wiles rejected a lockup provision in a proposed settlement between the SAS debtors and pilot unions, the judge noted, which, what’s the deal with airlines and lockups?
Anyway, about Judge Glenn’s little “too important to lock up early” thing: Does this apply only to nonfunded debt creditors? Because, as LATAM pointed out in its follow-up argument on the vote-buying issue, funded debt creditors get locked up prepetition in virtually every big case. That’s what restructuring support agreements are for.
Sure, the term sheet attached to the RSA is usually more specific about what can be included in the plan than a claim stipulation, but it still isn’t approved under section 1125. Somehow, important funded debt creditors are allowed to lock themselves into a plan – which often allows the debtors to “run roughshod over almost everyone else in the case other than the funded debt” – but unsophisticated non-funded debt creditors need the court’s protection?
Maybe that’s fine? Except: the Bankruptcy Code makes no distinction between funded and nonfunded debt. Is it time Congress explicitly addressed the real-world differences between funded debt creditors and trade creditors in the Bankruptcy Code, which we see play out in bankruptcy cases every day, and bahahahahaha sorry we can’t even.
Private Sales Done Right?
Remember way back in February when we discussed the new trend of private bankruptcy asset sales? How about another one: On April 3, communications technology company Casa Systems filed chapter 11 in Delaware and proposed a private sale of its cloud/RAN assets to avid software business collector Lumine Group US Holdco Inc. for approximately $15 million with the blessing (or the insistence?) of its term lenders. This one is interesting because it potentially offers a third way between totally private sale and section 363 bid procedures: the private auction.
According to the company, the proceeds of the cloud/RAN sale would be used to fund the case, including a more fulsome section 363 sales process for other assets. Naturally, the debtors and the lenders insisted the sale had to close by April 29, because the lenders didn’t want to provide DIP financing or get primed by someone else to get the debtors past that date, which, hey, fair enough, we don’t either.
On April 19, the debtors notified Judge Karen Owens that they received a higher bid for the cloud/RAN assets from ESW Capital but didn’t intend to proceed with that offer because of the usual “execution risk” (for example, the lenders really don’t want to provide DIP financing and maybe ESW can’t close by April 29) and possible opposition to the bid by key counterparty Verizon. Counsel also noted that if forced to bid against ESW, Lumine would take its ball and go home, the bogus argument everyone makes in support of stalking horse breakup fees.
At that point, Judge Owens made clear she is really not a big fan of private sales, but kept her powder dry on whether she might approve it anyway, a very Judge David S. Jones maneuver. The debtors and lenders seemed to get the message, because on April 24 they pivoted to a “private auction” process, with a $20 million bid from both Lumine and ESW (careful readers please note: The parade of horrible here lasted less than a week). The auction would be held the next day. Judge Owens made clear that the debtor would have to satisfy a high burden to obtain approval for the sale, given that the auction process was not public, but approved the hastily assembled bidding procedures – again, a smart move in a case with little room for error.
On April 25 the debtors announced that Lumine won the auction with a bid of $32.5 million, more than double their original offer. Hey, it’s almost like competitive bidding increases prices for assets!
The next day, Judge Owens duly approved the sale; you can’t argue with success, though one wonders what a truly open process would have yielded. Of course, the debtors insisted they didn’t have time for that. Judge Owens emphasized that UCC support was “critical” to her approval of the sale and observed that a private auction is not the preferred, “gold standard” public auction process.
Judge Owens added that notice was sufficient to attract willing bidders and made clear she would not approve a private sale that resulted from a lender or other party-in-interest seeking to “manufacture” extreme liquidity issues.
So, a well-handled sticky situation where a bankruptcy judge balanced pragmatic concerns against the requirements of the Bankruptcy Code and everyone ended up better off without taking any huge risks. This is why debtors’ firms hate you now, Delaware.