Challenges to Reinstatement of Debt under Young Broadcasting

Reinstatement Under the Bankruptcy Code

Section 1124(2) of the Bankruptcy Code governs the reinstatement of debt and provides that under a plan of reorganization, a debtor may de-accelerate debt and reinstate the terms of a pre-petition loan agreement that would otherwise be in default. 11 U.S.C. ' 1124(2). To reinstate the terms of a pre-petition loan agreement, including the original terms and maturity date, under a plan, the debtor must: 1) cure any pre-petition defaults; 2) compensate the lender for any damages incurred as a result of reasonable reliance on the acceleration of the debt; 3) compensate the lender for any actual pecuniary loss arising from the failure to perform a nonmonetary obligation; and 4) ensure that the plan does “not otherwise alter the legal, equitable, or contractual rights” of the lender. ' 1124(2). If the debtor can satisfy these requirements, such claims will be deemed unimpaired under a plan, and upon confirmation, the original terms and maturity of the loan will be reinstated. It will be as though the obligation never went into default.

The Charter Decision

In Charter, the debtors proposed a plan that sought to reinstate approximately $11.4 billion of their secured debt. Charter, 419 B.R. at 254. Approximately $1 billion of the debt was maturing or coming due in 2012, another $2 billion in 2013, and the remainder in 2014. In order to reinstate the secured debt, among other things, the debtors needed to ensure that the plan would not result in a change of control; an incurable non-monetary default under the relevant credit documents. Because the credit documents required that Paul Allan, the former principal of Charter, always possess at least 35% of the voting power over Charter's board of directors, but did not require that Mr. Allan hold any percentage of the equity of the company, the debtors incorporated into the plan a settlement with Mr. Allen that provided him with control over the board of directors of the reorganized company. In exchange for his participation in the settlement ' which would preserve approximately $3.5 billion in short and long-term monetary benefits to the company ' Mr. Allen would receive approximately $375 million in cash and equity. Charter, 419 B.R. at 253, 253 n.22. Following a vigorously contested confirmation hearing, Judge Peck confirmed the plan.

The Young Broadcasting Decision

In Young Broadcasting, two plans were submitted to the bankruptcy court for consideration; one by the debtors and the other by the official committee of unsecured creditors. Young Broadcasting, 2010 Bankr. LEXIS 1073, at *10-14. The debtors' plan involved an exchange of all of the senior secured debt for equity, resulting in the complete deleveraging of the company. The committee's plan proposed the reinstatement of $338 million in senior secured debt, which had a maturity date of November 2012, based upon provisions that closely mirrored the Charter reinstatement plan. The debtors and the committee decided to seek confirmation of the committee's reinstatement plan, in the first instance. The debtors would seek confirmation of their own plan only if the court denied confirmation of the committee plan. Id.

The relevant credit agreements provided that a change in control default would occur if Vincent Young, one of the debtors' founders, and certain members of the Young family (or entities they control), ceased to have control over at least 40% of the board of directors. The agreements also required that if any person or group were to hold more than
30% of the equity, then the Young control group had to own more than 30% of the equity or, alternatively, have the ability to control a majority of the debtors' board of directors. Therefore, to avoid triggering the change in control default, the committee proposed a Charter-like settlement that sought to grant Mr. Young all of the Class B stock in the reorganized company, constituting 10% of the equity, which Class B shares would be entitled to cast over 40% of the number of votes for the directors of the reorganized company. The remaining equity would be distributed to creditors under the plan. Id. at *20-23.

The senior secured lenders objected to confirmation, arguing, inter alia, that: 1) the proposed allocation of voting rights under the committee plan would trigger the change in control default and that any revision to the proposed allocation of voting rights would be a material modification requiring re-solicitation of the plan; 2) the plan was not feasible and the committee's expert, who testified about the debtors' ability to sell or refinance the senior secured debt in 2012, should be disqualified; and 3) the plan failed to meet the cramdown standard, because it violates the absolute priority rule.

Stock Voting Provisions Fail to Satisfy Change in Control Covenant

The senior secured lenders argued that the new corporate governance provisions in the committee plan would trigger a change in control default under the terms of the relevant credit agreement. Id. at *27-28. In particular, the Young family was required to hold 40% of the “voting stock” of the company, which was defined as capital stock “pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect the board of directors, managers or trustee ' (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency).” Id. at *21. While the committee's proposed voting provisions for the reorganized company would give Mr. Young all of the Class B shares, which, by number of shares, would constitute over 40% of the shares of the company, the votes of the Class B shares did not have equal weight as the votes of the Class A shares for the purpose of voting on directors. While holding more that 40% in number of the “voting stock,” Mr. Young would only have the ability to appoint one of eight directors of the reorganized company. The committee argued that this arrangement complied with the specific language in the credit documents and would not result in a change of control default, citing Charter in support of the proposition that such voting requirements in credit agreements can be manipulated and should be given a narrow interpretation to allow borrowers to engineer solutions that technically conform to their requirements. Id. at *35, 37. The senior secured lenders, on the other hand, argued that the change in control provisions were clearly intended to ensure that Mr. Young have the power to control the election for 40% of the board of directors, and that the committee's proposed voting provisions would result in an immediate default under the credit agreement. Id. at *19, 37.

Applying New York contract interpretation principles to the change of control provisions in the credit agreement, Judge Arthur J. Gonzalez determined that “all of the provisions must be read as part of an integrated agreement and each clause must be intended to have some effect” and therefore concluded that because the purpose of the provisions was to ensure that the Young control group retain 40% of the actual voting power over the members of the board of directors, the committee plan would trigger a change in control default. Id. at *31-38. The court noted that in Charter, although the relevant control group only held 10% of the equity, it maintained the requisite 35% of the voting power over management. Id. at *35-36. Judge Gonzalez also rejected the committee's argument that any modification of the voting provisions would not be a material modification finding that because the proposed modification would alter the corporate governance of the company, it was material, altering the rights of the sole accepting class of creditors that would receive the remaining equity under the plan. Id. at 45-46. The court commented that although it might have allowed the committee to re-solicit a revised plan under other circumstances, it would not reach that issue in this case in light of other defects present in the proposed reinstatement plan. Id.

Reinstatement Plan Not Feasable

Under section 1129(a)(11) of the Bankruptcy Code, to be confirmed, a plan must not be “likely to be followed by the liquidation or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.” 11 U.S.C. ' 1129(a)(11). This feasibility requirement puts the burden on the plan proponent to establish that “a plan is workable and has a reasonable likelihood of success.” Young Broadcasting, 2010 Bankr. LEXIS 1073, at *68 (quoting In re WorldCom, Inc., No. 02-13533, 2003 Bankr. LEXIS 1401, *168 (Bankr. S.D.N.Y. 2003)). The Young Broadcasting bankruptcy court concluded that the “key issue” in determining feasibility of the committee plan was whether it was “reasonably probable” that the senior secured debt could be refinanced in November 2012 when it would come due. Id. at *72. The committee and the senior secured lenders both offered experts on the issue of feasibility. The senior secured lenders objected to the admissibility of the expert testimony of the committee expert, which the court granted in part, excluding the committee expert's testimony as to valuation as lacking sufficient basis, while admitting the committee expert's testimony regarding a potential sale or refinance transaction in 2012. Id. at 53-67. The court considered the admissible expert testimony of the committee expert and the testimony of the senior secured lenders' expert and proceeded to make its own findings.

Judge Gonzalez first concluded that the committee's projections were not reasonable or reliable: In light of past performance, the projected growth was “aggressive and unrealistic,” and the court was “skeptical” about the ability of the debtors “to accurately make business projections and competently execute them as the same management group has historically failed at both tasks.” Id. at 80-82. In the court's opinion, the debtor had also underestimated corporate expenses and capital expenditures. Id. at 83-89. The court identified the key deficiency in the debtors' business plan as follows:

the projected rate of growth in revenue necessarily presumes either a substantial improvement in the industry, increased industry market share within 2.5 years of emerging from bankruptcy, or both ' . [I]t is unreasonable to project that the Company could achieve substantially higher rate of growth than those of its competitors in an industry that shows no sign of dramatic turnaround within the next 2.5 years.

Id. at *90.

Second, Judge Gonzalez concluded that the committee had failed to establish that there was a reasonable probability of a sale of the company or a refinance of the senior secured debt by November 2012. Id. at *97-98. In fact, the court found that “the prospect of the Company's assumed sale at a price equivalent to its future common equity value in November 2012 is both unsubstantiated and purely speculative.” Id. at *93. Likewise, the court found the committee's projections about a possible refinance unreasonable, because they were based on the assumption that excess cash would be used not to make dividends, but to pay down approximately $90 million in principal by the maturity date. Id. at *93-98. Accordingly, the court concluded that the committee had failed to meet its burden of establishing that the reinstatement plan was feasible.

Unlike in Young Broadcasting, feasibility of the reinstatement plan was not at issue in Charter, where the Charter debtors were valued at $15.4 billion, and there was some evidence that the debtors were worth in excess of $21 billion in the year prior to their bankruptcy filing. Charter, 419 B.R. at 235. The total debt being reinstated in Charter was $11.4 billion, significantly less than the unchallenged value of the company. Moreover, the vast majority of that debt would not come due until 2014, approximately five years after the date of confirmation.

Reinstatement Plan Violates the Absolute Priority Rule

The senior secured lenders objected to the inclusion within the plan of the settlement with Mr. Young, arguing that its terms violated the absolute priority rule. Young Broadcasting, 2010 Bankr. LEXIS 1073, at *99, 104-05. Under ' 1129(b)(2)(B)(ii) of the Bankruptcy Code, for a plan to be “fair and equitable” with respect to a class of unsecured claims, “the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.” 11 U.S.C. ' 1129(b)(2)(B)(ii). For there to be a violation of the absolute priority rule, there must be “a causal relationship between holding the prior claim or interest and receiving or retaining property” under the plan. Young Broadcasting, 2010 Bankr. LEXIS 1073, at *103 (quoting Bank of Am. Nat'l Trust & Savings Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 424, 451, 119 S. Ct. 1411, 143 L. Ed. 2d 607 (1999)).

Judge Gonzalez ultimately ruled that the committee had failed to meets its burden on this issue, finding that there was “insufficient evidence on the record to evaluate whether the direct and indirect benefits to the Debtors of reinstating the Credit Agreement are of a greater value than the 10% interest distributed to Young under the Committee Plan.” Id. at *106. Judge Gonzalez then distinguished Young Broadcasting from Charter, where the court specifically found that the $375 million paid to old equity “was outweighed by an estimated $3 billion in benefits and savings to the debtor.” Id. at *105. In Young Broadcasting, the committee simply failed to “quantify the value” of reinstating the credit agreement. Id. at *106.

In light of each of the foregoing reasons, the bankruptcy court denied confirmation of the committee's reinstatement plan and proceeded to confirm the debtors' plan under the cramdown standard of
' 1129(b) of the Bankruptcy Code.

Reinstatement Requires Both a Compelling Legal and Business Argument

Restructuring professionals wishing to formulate a restructuring transaction around a reinstatement plan would be wise to consider all of the issues the Bankruptcy Court for the Southern District of New York considered before approving confirmation of the Charter reinstatement plan, on the one hand, and denying the Young Broadcasting reinstatement plan, on the other. Indeed, it is critical to remember that a compelling legal argument for the reinstatement of secured debt, alone, is insufficient. A debtor must be able to advance a compelling business argument in support of the proposed reinstatement as well. In particular, a proponent of a reinstatement plan must introduce sufficient evidence to: 1) justify whatever accommodations must be made to old equity to prevent the common change in control default under applicable credit agreements; and 2) establish the feasibility of such a reinstatement plan. In Young Broadcasting, it was ultimately not the legal arguments for reinstatement that fell short; it was the inability to make the business case for the reinstatement that led the bankruptcy court to deny confirmation.

Steven B. Smith ([email protected]), a member of this newsletter's Board of Editors, is Counsel and Nicole Herther Spiro ([email protected]) is an associate in Dechert LLP's Business Restructuring and Reorganization department.

De-acceleration or reinstatement of debt under ' 1124(2) of the Bankruptcy Code has long been an option available to debtors. However, to be worthwhile of pursuit, certain conditions must generally exist: namely, a period of easy credit and favorable loans and low interest rates followed by a period of very tight and scarce credit and high interest rates. Under these conditions, a loan agreement containing terms and interest rates much more favorable than present market conditions may be a valuable asset of a debtor that is worth preserving through reinstatement under ' 1124(2).

In 2009, as credit markets around the world tightened, these conditions came together, and reinstatement plans returned to the bankruptcy professional's toolkit. Charter Communications, for example, commenced its Chapter 11 cases in March 2009 and sought and obtained, over the objection of various lenders, confirmation of an ambitious plan of reorganization that reinstated $11.4 billion in secured debt. See JP Morgan Chase Bank, N.A. v. Charter Commc'ns Operating, LLC (In re Charter Commc'ns), 419 B.R. 221 (Bankr. S.D.N.Y. 2009). Three months after Charter commenced its Chapter 11 cases, Young Broadcasting commenced its Chapter 11 cases, also in the S.D.N.Y., and proposed a Charter-like reinstatement plan. And while both cases focused upon whether the proposed reinstatement would trigger change-in-control provisions in the relevant credit documents, there were facts present in the Young Broadcasting case that distinguished it from Charter. As a result, the Young Broadcasting bankruptcy court sustained the objections of the senior secured lenders and denied the reinstatement plan. See In re Young Broadcasting, Inc., 2010 Bankr. LEXIS 1073 (Bankr. S.D.N.Y. Apr. 19, 2010).

This article explores the facts and circumstances present in both Charter and Young Broadcasting that led the Bankruptcy Court for the Southern District of New York to reach different conclusions regarding what appeared to be substantially similar reinstatement plans.

Reinstatement Under the Bankruptcy Code

Section 1124(2) of the Bankruptcy Code governs the reinstatement of debt and provides that under a plan of reorganization, a debtor may de-accelerate debt and reinstate the terms of a pre-petition loan agreement that would otherwise be in default. 11 U.S.C. ' 1124(2). To reinstate the terms of a pre-petition loan agreement, including the original terms and maturity date, under a plan, the debtor must: 1) cure any pre-petition defaults; 2) compensate the lender for any damages incurred as a result of reasonable reliance on the acceleration of the debt; 3) compensate the lender for any actual pecuniary loss arising from the failure to perform a nonmonetary obligation; and 4) ensure that the plan does “not otherwise alter the legal, equitable, or contractual rights” of the lender. ' 1124(2). If the debtor can satisfy these requirements, such claims will be deemed unimpaired under a plan, and upon confirmation, the original terms and maturity of the loan will be reinstated. It will be as though the obligation never went into default.

The Charter Decision

In Charter, the debtors proposed a plan that sought to reinstate approximately $11.4 billion of their secured debt. Charter, 419 B.R. at 254. Approximately $1 billion of the debt was maturing or coming due in 2012, another $2 billion in 2013, and the remainder in 2014. In order to reinstate the secured debt, among other things, the debtors needed to ensure that the plan would not result in a change of control; an incurable non-monetary default under the relevant credit documents. Because the credit documents required that Paul Allan, the former principal of Charter, always possess at least 35% of the voting power over Charter's board of directors, but did not require that Mr. Allan hold any percentage of the equity of the company, the debtors incorporated into the plan a settlement with Mr. Allen that provided him with control over the board of directors of the reorganized company. In exchange for his participation in the settlement ' which would preserve approximately $3.5 billion in short and long-term monetary benefits to the company ' Mr. Allen would receive approximately $375 million in cash and equity. Charter, 419 B.R. at 253, 253 n.22. Following a vigorously contested confirmation hearing, Judge Peck confirmed the plan.

The Young Broadcasting Decision

In Young Broadcasting, two plans were submitted to the bankruptcy court for consideration; one by the debtors and the other by the official committee of unsecured creditors. Young Broadcasting, 2010 Bankr. LEXIS 1073, at *10-14. The debtors' plan involved an exchange of all of the senior secured debt for equity, resulting in the complete deleveraging of the company. The committee's plan proposed the reinstatement of $338 million in senior secured debt, which had a maturity date of November 2012, based upon provisions that closely mirrored the Charter reinstatement plan. The debtors and the committee decided to seek confirmation of the committee's reinstatement plan, in the first instance. The debtors would seek confirmation of their own plan only if the court denied confirmation of the committee plan. Id.

The relevant credit agreements provided that a change in control default would occur if Vincent Young, one of the debtors' founders, and certain members of the Young family (or entities they control), ceased to have control over at least 40% of the board of directors. The agreements also required that if any person or group were to hold more than
30% of the equity, then the Young control group had to own more than 30% of the equity or, alternatively, have the ability to control a majority of the debtors' board of directors. Therefore, to avoid triggering the change in control default, the committee proposed a Charter-like settlement that sought to grant Mr. Young all of the Class B stock in the reorganized company, constituting 10% of the equity, which Class B shares would be entitled to cast over 40% of the number of votes for the directors of the reorganized company. The remaining equity would be distributed to creditors under the plan. Id. at *20-23.

The senior secured lenders objected to confirmation, arguing, inter alia, that: 1) the proposed allocation of voting rights under the committee plan would trigger the change in control default and that any revision to the proposed allocation of voting rights would be a material modification requiring re-solicitation of the plan; 2) the plan was not feasible and the committee's expert, who testified about the debtors' ability to sell or refinance the senior secured debt in 2012, should be disqualified; and 3) the plan failed to meet the cramdown standard, because it violates the absolute priority rule.

Stock Voting Provisions Fail to Satisfy Change in Control Covenant

The senior secured lenders argued that the new corporate governance provisions in the committee plan would trigger a change in control default under the terms of the relevant credit agreement. Id. at *27-28. In particular, the Young family was required to hold 40% of the “voting stock” of the company, which was defined as capital stock “pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect the board of directors, managers or trustee ' (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency).” Id. at *21. While the committee's proposed voting provisions for the reorganized company would give Mr. Young all of the Class B shares, which, by number of shares, would constitute over 40% of the shares of the company, the votes of the Class B shares did not have equal weight as the votes of the Class A shares for the purpose of voting on directors. While holding more that 40% in number of the “voting stock,” Mr. Young would only have the ability to appoint one of eight directors of the reorganized company. The committee argued that this arrangement complied with the specific language in the credit documents and would not result in a change of control default, citing Charter in support of the proposition that such voting requirements in credit agreements can be manipulated and should be given a narrow interpretation to allow borrowers to engineer solutions that technically conform to their requirements. Id. at *35, 37. The senior secured lenders, on the other hand, argued that the change in control provisions were clearly intended to ensure that Mr. Young have the power to control the election for 40% of the board of directors, and that the committee's proposed voting provisions would result in an immediate default under the credit agreement. Id. at *19, 37.

Applying New York contract interpretation principles to the change of control provisions in the credit agreement, Judge Arthur J. Gonzalez determined that “all of the provisions must be read as part of an integrated agreement and each clause must be intended to have some effect” and therefore concluded that because the purpose of the provisions was to ensure that the Young control group retain 40% of the actual voting power over the members of the board of directors, the committee plan would trigger a change in control default. Id. at *31-38. The court noted that in Charter, although the relevant control group only held 10% of the equity, it maintained the requisite 35% of the voting power over management. Id. at *35-36. Judge Gonzalez also rejected the committee's argument that any modification of the voting provisions would not be a material modification finding that because the proposed modification would alter the corporate governance of the company, it was material, altering the rights of the sole accepting class of creditors that would receive the remaining equity under the plan. Id. at 45-46. The court commented that although it might have allowed the committee to re-solicit a revised plan under other circumstances, it would not reach that issue in this case in light of other defects present in the proposed reinstatement plan. Id.

Reinstatement Plan Not Feasable

Under section 1129(a)(11) of the Bankruptcy Code, to be confirmed, a plan must not be “likely to be followed by the liquidation or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.” 11 U.S.C. ' 1129(a)(11). This feasibility requirement puts the burden on the plan proponent to establish that “a plan is workable and has a reasonable likelihood of success.” Young Broadcasting, 2010 Bankr. LEXIS 1073, at *68 (quoting In re WorldCom, Inc., No. 02-13533, 2003 Bankr. LEXIS 1401, *168 (Bankr. S.D.N.Y. 2003)). The Young Broadcasting bankruptcy court concluded that the “key issue” in determining feasibility of the committee plan was whether it was “reasonably probable” that the senior secured debt could be refinanced in November 2012 when it would come due. Id. at *72. The committee and the senior secured lenders both offered experts on the issue of feasibility. The senior secured lenders objected to the admissibility of the expert testimony of the committee expert, which the court granted in part, excluding the committee expert's testimony as to valuation as lacking sufficient basis, while admitting the committee expert's testimony regarding a potential sale or refinance transaction in 2012. Id. at 53-67. The court considered the admissible expert testimony of the committee expert and the testimony of the senior secured lenders' expert and proceeded to make its own findings.

Judge Gonzalez first concluded that the committee's projections were not reasonable or reliable: In light of past performance, the projected growth was “aggressive and unrealistic,” and the court was “skeptical” about the ability of the debtors “to accurately make business projections and competently execute them as the same management group has historically failed at both tasks.” Id. at 80-82. In the court's opinion, the debtor had also underestimated corporate expenses and capital expenditures. Id. at 83-89. The court identified the key deficiency in the debtors' business plan as follows:

the projected rate of growth in revenue necessarily presumes either a substantial improvement in the industry, increased industry market share within 2.5 years of emerging from bankruptcy, or both ' . [I]t is unreasonable to project that the Company could achieve substantially higher rate of growth than those of its competitors in an industry that shows no sign of dramatic turnaround within the next 2.5 years.

Id. at *90.

Second, Judge Gonzalez concluded that the committee had failed to establish that there was a reasonable probability of a sale of the company or a refinance of the senior secured debt by November 2012. Id. at *97-98. In fact, the court found that “the prospect of the Company's assumed sale at a price equivalent to its future common equity value in November 2012 is both unsubstantiated and purely speculative.” Id. at *93. Likewise, the court found the committee's projections about a possible refinance unreasonable, because they were based on the assumption that excess cash would be used not to make dividends, but to pay down approximately $90 million in principal by the maturity date. Id. at *93-98. Accordingly, the court concluded that the committee had failed to meet its burden of establishing that the reinstatement plan was feasible.

Unlike in Young Broadcasting, feasibility of the reinstatement plan was not at issue in Charter, where the Charter debtors were valued at $15.4 billion, and there was some evidence that the debtors were worth in excess of $21 billion in the year prior to their bankruptcy filing. Charter, 419 B.R. at 235. The total debt being reinstated in Charter was $11.4 billion, significantly less than the unchallenged value of the company. Moreover, the vast majority of that debt would not come due until 2014, approximately five years after the date of confirmation.

Reinstatement Plan Violates the Absolute Priority Rule

The senior secured lenders objected to the inclusion within the plan of the settlement with Mr. Young, arguing that its terms violated the absolute priority rule. Young Broadcasting, 2010 Bankr. LEXIS 1073, at *99, 104-05. Under ' 1129(b)(2)(B)(ii) of the Bankruptcy Code, for a plan to be “fair and equitable” with respect to a class of unsecured claims, “the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.” 11 U.S.C. ' 1129(b)(2)(B)(ii). For there to be a violation of the absolute priority rule, there must be “a causal relationship between holding the prior claim or interest and receiving or retaining property” under the plan. Young Broadcasting, 2010 Bankr. LEXIS 1073, at *103 (quoting Bank of Am. Nat'l Trust & Savings Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 424, 451, 119 S. Ct. 1411, 143 L. Ed. 2d 607 (1999)).

Judge Gonzalez ultimately ruled that the committee had failed to meets its burden on this issue, finding that there was “insufficient evidence on the record to evaluate whether the direct and indirect benefits to the Debtors of reinstating the Credit Agreement are of a greater value than the 10% interest distributed to Young under the Committee Plan.” Id. at *106. Judge Gonzalez then distinguished Young Broadcasting from Charter, where the court specifically found that the $375 million paid to old equity “was outweighed by an estimated $3 billion in benefits and savings to the debtor.” Id. at *105. In Young Broadcasting, the committee simply failed to “quantify the value” of reinstating the credit agreement. Id. at *106.

In light of each of the foregoing reasons, the bankruptcy court denied confirmation of the committee's reinstatement plan and proceeded to confirm the debtors' plan under the cramdown standard of
' 1129(b) of the Bankruptcy Code.

Reinstatement Requires Both a Compelling Legal and Business Argument

Restructuring professionals wishing to formulate a restructuring transaction around a reinstatement plan would be wise to consider all of the issues the Bankruptcy Court for the Southern District of New York considered before approving confirmation of the Charter reinstatement plan, on the one hand, and denying the Young Broadcasting reinstatement plan, on the other. Indeed, it is critical to remember that a compelling legal argument for the reinstatement of secured debt, alone, is insufficient. A debtor must be able to advance a compelling business argument in support of the proposed reinstatement as well. In particular, a proponent of a reinstatement plan must introduce sufficient evidence to: 1) justify whatever accommodations must be made to old equity to prevent the common change in control default under applicable credit agreements; and 2) establish the feasibility of such a reinstatement plan. In Young Broadcasting, it was ultimately not the legal arguments for reinstatement that fell short; it was the inability to make the business case for the reinstatement that led the bankruptcy court to deny confirmation.

Steven B. Smith ([email protected]), a member of this newsletter's Board of Editors, is Counsel and Nicole Herther Spiro ([email protected]) is an associate in Dechert LLP's Business Restructuring and Reorganization department.