Postpetition Plan Support Agreements

Plan support agreements are an essential tool in out-of-court workouts and Chapter 11 cases, particularly so-called 'pre-negotiated' Chapter 11 cases (ie, cases where the debtor and its major stakeholders agree upon the terms of a Chapter 11 restructuring before commencing a Chapter 11 case, though the actual solicitation of votes to accept or reject the Chapter 11 plan does not occur until after the Chapter 11 filing). See generally Flaschen, supra (discussing plan support agreements); Rapisardi and Douglas, supra (same); Keach, supra (same). Such agreements memorialize the material terms of a restructuring proposal (often simply a term sheet) that has been agreed upon between a debtor and one or more of its major stakeholder classes. Where the restructuring proposal is to be implemented through a Chapter 11 plan of reorganization, the agreement will provide that the creditor signatories will, subject to the conditions in the agreement, support and pursue confirmation of a Chapter 11 plan of reorganization that implements the term sheet. Typically, the creditor signatories will agree to vote in favor of the plan when they are actually 'solicited' by the debtor to vote upon the plan, subject to the following conditions (among others): 1) the plan must be consistent with the term sheet; and 2) the creditor must receive a court-approved disclosure statement that is consistent with the term sheet and the information that the debtor provided to the creditor in connection with the lockup agreement. While plan support agreements include other provisions and covenants, their essential thrust is that they are conditional agreements to support a plan of reorganization to be filed in a Chapter 11 case.

The 2002 Delaware Bankruptcy Court Decisions

The Delaware Bankruptcy Court decisions announced in 2002 consisted of two unreported bench-rulings issued in the In re Stations Holding and In re NII Holdings cases. See Transcript of Omnibus Hearing, In re Stations Holding Co., Inc., Case No. 02-10882 (MFW) (Bankr. D. Del. Sept. 25, 2002); Transcript of Hearing, In re NII Holdings, Inc., Case No. 02-11505 (MFW) (Bankr. D. Del. Oct. 22, 2002).

In Stations Holding, an acquiror emerged during the Chapter 11 case who was willing to purchase the debtor's assets for a price satisfactory to the debtor and its creditors. Understandably, the acquirer (who needed to borrow substantial funds to consummate the acquisition) requested the major stakeholders (all of whom were sophisticated financial institutions) to sign a plan support agreement indicating that they would support a plan of reorganization to implement the acquisition. After the plan was in fact approved by the debtor's stakeholders through an official vote solicitation that included a court-approved disclosure statement, the United States Trustee sought to designate and invalidate the votes cast by the stakeholders who signed the plan support agreements on the basis that the agreements constituted a 'solicitation' in violation of ' 1125(b). The Delaware Bankrupt-cy Court agreed and voided the votes of these parties.

NII Holdings was a 'pre-negotiated' Chapter 11 case, in which all of the negotiations for the restructuring and the plan support agreements took place before the Chapter 11 case was commenced. However, because the debtor filed for Chapter 11 on the Friday before the Memorial Day holiday weekend, some of the agreements were dated and/or delivered a few days after the bankruptcy filing. The parties to the plan support agreements included, among others, the public noteholders, who held 99% of the debtor's unsecured claims and were providing $100 million of exit financing for the restructuring.

Despite the fact that the plan had been overwhelmingly approved and no economic stakeholder objected to the plan support agreements, the United States Trustee again sought to designate the votes of these creditors. And, again, the Court ruled that ' 1125(b) prohibits any plan support agreement that is delivered after the petition date, even where such acts are mere formalities in connection with a pre-negotiated Chapter 11 case where the parties have already substantively agreed upon the plan support agreement prior to the bankruptcy filing.

At bottom, the Delaware Bankruptcy Court's 2002 decisions ' both issued by Judge Walrath based on objections filed by the United States Trustee ' rested upon the legal conclusion that a plan support agreement is a 'solicitation' for purposes of ' 1125(b).

The Owens Corning Decision

The Delaware Bankruptcy Court's more recent June 2006 decision in the Owens Corning case reaches a different conclusion. At the time of the ruling, the Owens Corning Chapter 11 case, which involved numerous complex issues including enormous asbestos liabilities, had been pending for approximately 6 years. Several plans of reorganization had been proposed and hotly contested, including a plan that proposed a substantive consolidation of the debtors that had been confirmed, but was ultimately reversed on appeal. After this setback, the debtors negotiated anew with their stakeholders to craft another new plan of reorganization.

These negotiations produced a consensus regarding a reorganization plan that the parties memorialized in a plan support agreement signed by, among others, the debtors, the official asbestos claimants committee, the representative for future asbestos claimants, and numerous significant holders of the debtor's bonds. The plan support agreement included the typical conditions, including that the signatories would vote in favor of the plan only if they received a court-approved disclosure statement that provided information consistent with the information that was given to the signatories in connection with the plan support agreement. The debtors then sought court approval of the plan support agreement as a settlement pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure. Relying upon the rulings in NII and Staions Holding, the United States Trustee again objected that the plan support agreement amounted to a 'solicitation' that violated ' 1125(b).

However, this time the Delaware Bankruptcy Court rejected the Trustee's position and held unequivocally that 'the Plan Support Agreement is not a solicitation.' In re Owens Corning, Case No. 00-3837 (Bankr. D. Del. June 23, 2006) (docket no. 18233 (transcript at 8-9). In so doing, the court joined the majority of courts that have recognized that Chapter 11 is, by its nature, a negotiated process and therefore, what constitutes an impermissible postpetition 'solicitation' under ' 1125(b) should be interpreted narrowly and should be limited to the formal balloting process to obtain official votes on a Chapter 11 plan. See Century Glove, Inc. v. First Am. Bank of N.Y., 860 F.2d 94, 101'02 (3d Cir. 1988); In re Kellogg, 160 B.R. 336, 339'40 (Bankr. D. Minn. 1993); In re Snyder, 51 B.R. 432, 437 (Bankr. D. Utah 1985); Zentek GBV Fund IV, LLC v. Vesper, Nos. 00-5385, 00-5386, 2001 WL 1042217, **9 (6th Cir. Aug. 29, 2001); In re Gilbert, 104 B.R. 206, 214 (Bankr. W.D. Mo. 1989); In re Pleasant Hill Partners, L.P., 163 B.R. 388, 391 (Bankr. N.D. Ga. 1994); In re Texaco, 81 B.R. 813, 814'15 (Bankr. S.D.N.Y. 1988); In re Cal. Fid., Inc., 198 B.R. 567, 571'72 (B.A.P. 9th Cir. 1996); In re Dow Corning Corp., 227 B.R. 111, 118 (Bankr. E.D. Mich. 1999); Keach RJ: infra at 45 (noting that a majority of courts define 'solicitation' narrowly out of concern that 'broad reading of [Section] 1125 can seriously inhibit free creditor negotiations.”). Indeed, the court declared that a plan support agreement 'clearly is [not] a request for an official vote. There is no ballot, no plan.' In re Owens Corning, (Docket no. 18233, transcript at 9).

Rather, the court determined that the plan support agreement was merely an agreement to cast an official vote in the future subject to important conditions, including compliance with ' 1125(b)'s requirement of a disclosure statement at the time of the official vote. See In re Owens Corning, (docket no. 18233, transcript at 12-14 ('There is nothing in the Plan Support Agreement that demands or solicits a vote unless the plan proposed meets with the satisfaction of the Plan Support Agreement parties. And those parties have put together in the Plan Support Agreement the information that tells the plan proponents what the parameters of the plan must be to achieve the favorable vote of the creditors who are parties.'); see also In re Kellogg, 160 B.R. at 340 (finding postpetition lockup agreement not to be ' 1125(b) solicitation because solicitation did not occur until court approved disclosure statement was distributed for official votes); In re Pioneer Fin. Corp., 246 B.R. 626, 631'33 (Bankr. D. Nev. 2000) (finding language of consent solicitation that is similar to lockup agreement language not to be an 'acceptance' of a plan, but an 'agree[ment] to agree on a plan'); Century Glove, 860 F.2d at 101'02 ('We find no principled, predictable difference between negotiations and solicitation of future acceptances. We therefore reject any definition of solicitation which might cause creditors to limit their negotiations.'); In re Dow Corning, 227 B.R. at 118 ('Solicitation '[does] not encompass discussions, exchanges of information, negotiations or tentative agreements that may be made by the various parties in interest in a bankruptcy case which may lead to the development of a disclosure statement or plan of reorganization or information to be included therein.” (quoting In re Snyder, 51 B.R. 432, 437 (Bankr. D. Utah 1985))).

As noted, Owens Corning was decided by Visiting Judge Fitzgerald, while NII Holdings and Stations Holding were both issued by Judge Walrath, so it remains to be seen whether Owens Corning represents a change in direction in Delaware, or merely a difference of opinion. Nevertheless, it is certainly encouraging to see that the most recent Delaware decision has joined the majority view to interpret ' 1125(b) in a flexible manner that promotes the consensual resolution of Chapter 11 cases. This ruling should provide comfort to practitioners seeking to memorialize consensual Chapter 11 resolutions, particularly where the parties seek court approval of such agreements under Bankruptcy Rule 9019.

Finally, it should be noted that additional protection for postpetition plan support agreements in prenegotiated Chapter 11 cases may also be found in new ' 1125(g) of the Bankruptcy Code. 11 U.S.C. ' 1125(g). See Mayr KA: Unlocking the Lockup: The Revival of Plan Support Agree-ments Under New ' 1125(g) of the Bankruptcy Code. 15 J Bankr L. & Prac, Issue No. 6 (forthcoming Dec. 2006) (discussing new ' 1125(g) safeharbor for plan support agreements in prenegotiated and prepackaged Chapter 11 cases). That provision ex-empts from ' 1125(b) the continuation or completion of a 'solicitation' that began before commencement of the Chapter 11 case. Thus, even assuming that a lockup agreement is a solicitation, ' 1125(g) would permit the type of activity that occurred in the NII Holdings case provided that such activity complied with applicable non-bankruptcy law.

Kurt A. Mayr is a member of the Financial Restructuring group of Bingham McCutchen LLP. He has represented official committees, creditors, acquirors, debtors and other parties in a variety of complex reorganizations. Further information regarding the author can be found at www.bingham.com and he can be contacted at [email protected]. The author thanks and acknowledges his colleague Evan D. Flaschen for his consultation and support regarding this article.

The propriety of postpetition plan support agreements (aka 'lockup' agreements) has been the subject of considerable controversy since 2002 when Judge Mary Walrath of the U.S. Bankruptcy Court for the District of Delaware issued two unreported decisions announcing a 'bright-line' rule that such agreements are 'solicitations' within the meaning of ' 1125(b) of the Bankruptcy Code. In light of these rulings, parties seeking to memorialize a heavily negotiated consensus to support confirmation of a plan of reorganization have run the risk that any such consensus that is reduced to writing could be deemed a violation of ' 1125(b) unless it was accompanied by a prior court-approved disclosure statement. Furthermore, parties to such agreements also faced the significant risk that they could be disenfranchised from the Chapter 11 process through designation of their votes regarding the plan that they have agreed to support.

Critics argued that these decisions adopted an unnecessarily rigid 'bright-line' rule that undermined the essential negotiated process that is at the heart of Chapter 11 reorganizations. See Flaschen ED: Goodbye, Wilmington. Daily Deal, Jan. 15, 2003; Keach RJ: A Hole in the Glove: Why 'Negotiation' Should Trump 'Solicitation.' Am Bankr Inst. J., June 2003, at 22; Rapisardi JJ, Douglas MG: Lockup Lockout?, Daily Deal, Jan. 7, 2003, at 7; see also Brennan T: Locking Up Lock-ups. The Deal.com (Apr. 30, 2003); DeFranceschi DJ: Delaware Bankruptcy Court Announces Bright-line Rule for Use of Lock-up Agreements in Chapter 11 Cases. Am Bankr. Inst. J., Feb. 2003; Novikoff HS, Polebaum BM: Lock-Up Agreements in Chapter 11 Cases. (July 14, 2003) (unpublished ALI-ABA course materials). In a new 2006 unreported decision, Judge Judith K. Fitzgerald, a visiting judge of the Delaware Bankruptcy Court, concluded that postpetition plan support agreements are not 'solicitations' for purposes of ' 1125(b), signaling a possible shift away from the rigid test applied in 2002. This article discusses this notable development.

Plan Support Agreements Defined

Plan support agreements are an essential tool in out-of-court workouts and Chapter 11 cases, particularly so-called 'pre-negotiated' Chapter 11 cases (ie, cases where the debtor and its major stakeholders agree upon the terms of a Chapter 11 restructuring before commencing a Chapter 11 case, though the actual solicitation of votes to accept or reject the Chapter 11 plan does not occur until after the Chapter 11 filing). See generally Flaschen, supra (discussing plan support agreements); Rapisardi and Douglas, supra (same); Keach, supra (same). Such agreements memorialize the material terms of a restructuring proposal (often simply a term sheet) that has been agreed upon between a debtor and one or more of its major stakeholder classes. Where the restructuring proposal is to be implemented through a Chapter 11 plan of reorganization, the agreement will provide that the creditor signatories will, subject to the conditions in the agreement, support and pursue confirmation of a Chapter 11 plan of reorganization that implements the term sheet. Typically, the creditor signatories will agree to vote in favor of the plan when they are actually 'solicited' by the debtor to vote upon the plan, subject to the following conditions (among others): 1) the plan must be consistent with the term sheet; and 2) the creditor must receive a court-approved disclosure statement that is consistent with the term sheet and the information that the debtor provided to the creditor in connection with the lockup agreement. While plan support agreements include other provisions and covenants, their essential thrust is that they are conditional agreements to support a plan of reorganization to be filed in a Chapter 11 case.

The 2002 Delaware Bankruptcy Court Decisions

The Delaware Bankruptcy Court decisions announced in 2002 consisted of two unreported bench-rulings issued in the In re Stations Holding and In re NII Holdings cases. See Transcript of Omnibus Hearing, In re Stations Holding Co., Inc., Case No. 02-10882 (MFW) (Bankr. D. Del. Sept. 25, 2002); Transcript of Hearing, In re NII Holdings, Inc., Case No. 02-11505 (MFW) (Bankr. D. Del. Oct. 22, 2002).

In Stations Holding, an acquiror emerged during the Chapter 11 case who was willing to purchase the debtor's assets for a price satisfactory to the debtor and its creditors. Understandably, the acquirer (who needed to borrow substantial funds to consummate the acquisition) requested the major stakeholders (all of whom were sophisticated financial institutions) to sign a plan support agreement indicating that they would support a plan of reorganization to implement the acquisition. After the plan was in fact approved by the debtor's stakeholders through an official vote solicitation that included a court-approved disclosure statement, the United States Trustee sought to designate and invalidate the votes cast by the stakeholders who signed the plan support agreements on the basis that the agreements constituted a 'solicitation' in violation of ' 1125(b). The Delaware Bankrupt-cy Court agreed and voided the votes of these parties.

NII Holdings was a 'pre-negotiated' Chapter 11 case, in which all of the negotiations for the restructuring and the plan support agreements took place before the Chapter 11 case was commenced. However, because the debtor filed for Chapter 11 on the Friday before the Memorial Day holiday weekend, some of the agreements were dated and/or delivered a few days after the bankruptcy filing. The parties to the plan support agreements included, among others, the public noteholders, who held 99% of the debtor's unsecured claims and were providing $100 million of exit financing for the restructuring.

Despite the fact that the plan had been overwhelmingly approved and no economic stakeholder objected to the plan support agreements, the United States Trustee again sought to designate the votes of these creditors. And, again, the Court ruled that ' 1125(b) prohibits any plan support agreement that is delivered after the petition date, even where such acts are mere formalities in connection with a pre-negotiated Chapter 11 case where the parties have already substantively agreed upon the plan support agreement prior to the bankruptcy filing.

At bottom, the Delaware Bankruptcy Court's 2002 decisions ' both issued by Judge Walrath based on objections filed by the United States Trustee ' rested upon the legal conclusion that a plan support agreement is a 'solicitation' for purposes of ' 1125(b).

The Owens Corning Decision

The Delaware Bankruptcy Court's more recent June 2006 decision in the Owens Corning case reaches a different conclusion. At the time of the ruling, the Owens Corning Chapter 11 case, which involved numerous complex issues including enormous asbestos liabilities, had been pending for approximately 6 years. Several plans of reorganization had been proposed and hotly contested, including a plan that proposed a substantive consolidation of the debtors that had been confirmed, but was ultimately reversed on appeal. After this setback, the debtors negotiated anew with their stakeholders to craft another new plan of reorganization.

These negotiations produced a consensus regarding a reorganization plan that the parties memorialized in a plan support agreement signed by, among others, the debtors, the official asbestos claimants committee, the representative for future asbestos claimants, and numerous significant holders of the debtor's bonds. The plan support agreement included the typical conditions, including that the signatories would vote in favor of the plan only if they received a court-approved disclosure statement that provided information consistent with the information that was given to the signatories in connection with the plan support agreement. The debtors then sought court approval of the plan support agreement as a settlement pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure. Relying upon the rulings in NII and Staions Holding, the United States Trustee again objected that the plan support agreement amounted to a 'solicitation' that violated ' 1125(b).

However, this time the Delaware Bankruptcy Court rejected the Trustee's position and held unequivocally that 'the Plan Support Agreement is not a solicitation.' In re Owens Corning , Case No. 00-3837 (Bankr. D. Del. June 23, 2006) (docket no. 18233 (transcript at 8-9). In so doing, the court joined the majority of courts that have recognized that Chapter 11 is, by its nature, a negotiated process and therefore, what constitutes an impermissible postpetition 'solicitation' under ' 1125(b) should be interpreted narrowly and should be limited to the formal balloting process to obtain official votes on a Chapter 11 plan. See Century Glove, Inc. v. First Am. Bank of N.Y. , 860 F.2d 94, 101'02 (3d Cir. 1988); In re Kellogg, 160 B.R. 336, 339'40 (Bankr. D. Minn. 1993); In re Snyder, 51 B.R. 432, 437 (Bankr. D. Utah 1985); Zentek GBV Fund IV, LLC v. Vesper, Nos. 00-5385, 00-5386, 2001 WL 1042217, **9 (6th Cir. Aug. 29, 2001); In re Gilbert, 104 B.R. 206, 214 (Bankr. W.D. Mo. 1989); In re Pleasant Hill Partners, L.P., 163 B.R. 388, 391 (Bankr. N.D. Ga. 1994); In re Texaco, 81 B.R. 813, 814'15 (Bankr. S.D.N.Y. 1988); In re Cal. Fid., Inc., 198 B.R. 567, 571'72 (B.A.P. 9th Cir. 1996); In re Dow Corning Corp., 227 B.R. 111, 118 (Bankr. E.D. Mich. 1999); Keach RJ: infra at 45 (noting that a majority of courts define 'solicitation' narrowly out of concern that 'broad reading of [Section] 1125 can seriously inhibit free creditor negotiations.”). Indeed, the court declared that a plan support agreement 'clearly is [not] a request for an official vote. There is no ballot, no plan.' In re Owens Corning, (Docket no. 18233, transcript at 9).

Rather, the court determined that the plan support agreement was merely an agreement to cast an official vote in the future subject to important conditions, including compliance with ' 1125(b)'s requirement of a disclosure statement at the time of the official vote. See In re Owens Corning, (docket no. 18233, transcript at 12-14 ('There is nothing in the Plan Support Agreement that demands or solicits a vote unless the plan proposed meets with the satisfaction of the Plan Support Agreement parties. And those parties have put together in the Plan Support Agreement the information that tells the plan proponents what the parameters of the plan must be to achieve the favorable vote of the creditors who are parties.'); see also In re Kellogg, 160 B.R. at 340 (finding postpetition lockup agreement not to be ' 1125(b) solicitation because solicitation did not occur until court approved disclosure statement was distributed for official votes); In re Pioneer Fin. Corp., 246 B.R. 626, 631'33 (Bankr. D. Nev. 2000) (finding language of consent solicitation that is similar to lockup agreement language not to be an 'acceptance' of a plan, but an 'agree[ment] to agree on a plan'); Century Glove, 860 F.2d at 101'02 ('We find no principled, predictable difference between negotiations and solicitation of future acceptances. We therefore reject any definition of solicitation which might cause creditors to limit their negotiations.'); In re Dow Corning, 227 B.R. at 118 ('Solicitation '[does] not encompass discussions, exchanges of information, negotiations or tentative agreements that may be made by the various parties in interest in a bankruptcy case which may lead to the development of a disclosure statement or plan of reorganization or information to be included therein.” (quoting In re Snyder, 51 B.R. 432, 437 (Bankr. D. Utah 1985))).

As noted, Owens Corning was decided by Visiting Judge Fitzgerald, while NII Holdings and Stations Holding were both issued by Judge Walrath, so it remains to be seen whether Owens Corning represents a change in direction in Delaware, or merely a difference of opinion. Nevertheless, it is certainly encouraging to see that the most recent Delaware decision has joined the majority view to interpret ' 1125(b) in a flexible manner that promotes the consensual resolution of Chapter 11 cases. This ruling should provide comfort to practitioners seeking to memorialize consensual Chapter 11 resolutions, particularly where the parties seek court approval of such agreements under Bankruptcy Rule 9019.

Finally, it should be noted that additional protection for postpetition plan support agreements in prenegotiated Chapter 11 cases may also be found in new ' 1125(g) of the Bankruptcy Code. 11 U.S.C. ' 1125(g). See Mayr KA: Unlocking the Lockup: The Revival of Plan Support Agree-ments Under New ' 1125(g) of the Bankruptcy Code. 15 J Bankr L. & Prac, Issue No. 6 (forthcoming Dec. 2006) (discussing new ' 1125(g) safeharbor for plan support agreements in prenegotiated and prepackaged Chapter 11 cases). That provision ex-empts from ' 1125(b) the continuation or completion of a 'solicitation' that began before commencement of the Chapter 11 case. Thus, even assuming that a lockup agreement is a solicitation, ' 1125(g) would permit the type of activity that occurred in the NII Holdings case provided that such activity complied with applicable non-bankruptcy law.

Kurt A. Mayr is a member of the Financial Restructuring group of Bingham McCutchen LLP. He has represented official committees, creditors, acquirors, debtors and other parties in a variety of complex reorganizations. Further information regarding the author can be found at www.bingham.com and he can be contacted at [email protected]. The author thanks and acknowledges his colleague Evan D. Flaschen for his consultation and support regarding this article.