Bond ' Supersedeas Bond

The bankruptcy court's ability to require the posting of a supersedeas bond is rooted in Rule 8005 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules), which provides that “[a] motion for a stay of the judgment, order, or decree of a bankruptcy judge, for approval a supersedeas bond, or for other relief pending appeal must ordinarily be presented to the bankruptcy judge in the first instance.” Fed. R. Bankr. P. 8005. A debtor emerging from bankruptcy pursuant to a confirmation order certainly has an interest in carrying on with its affairs without delay, and therefore, the requirement that parties seeking a stay pending appeal post a supersedeas bond, protects the debtor from the harm imposed by being prevented from commencing operations as a reorganized entity.

There is a significant difference, however, between the application of the supersedeas bond in the context of a litigation, and in the context of the confirmation of a plan of reorganization. In the litigation context, the judgment debtor's interest in overturning the judgment corresponds directly with a debt he or she would otherwise owe. In the context of a plan confirmation order, however, the value of the entire bankrupt entity is put at stake. Accordingly, if a supersedeas bond is required of such a party in an amount that protects the emerging bankrupt entity from loss during the period of the stay pending appeal, the opposing party could be required to procure a bond in an amount that far exceeds the value of their claim, and moreover, in a large bankruptcy case, may be so great that it is impossible for such a creditor to obtain a bond at all.

The Tribune Motion for Stay Pending Appeal

Aurelius Capital Management, LP, Law Debenture Trust Company of New York and Deutsche Bank Trust Company Americas (collectively, the Movants) appealed the entry of the bankruptcy court's order confirming Tribune's plan of reorganization, due to the fact that, among other issues, the plan included a settlement of claims against senior lenders in connection with the 2007 leveraged buyout of Tribune that left it insolvent. The Movants sought a stay pending appeal under Bankruptcy Rule 8005, requiring them to satisfy the following four part test: 1) they were likely to succeed on the merits; 2) they would be irreparably injured if a stay was not issued; 3) the issuance of a stay would not result in substantial injury to a non-moving party in interest, and 4) public interest favored the granting of a stay. In re Tribune, 2012 Bankr. Lexis 3893 at *21.

The bankruptcy court found that: 1) the Movants made enough of a showing of likelihood of success on the merits with respect to the issues on appeal to require analysis of the remaining factors; 2) there was a strong possibility that the Movants would be irreparably harmed; 3) the issuance of a stay could result in substantial injury to a non-moving party; and 4) the public interest factor did not favor either side.

More specifically with regard to the third prong of the test, the bankruptcy court agreed with testimony provided by the debtors that a stay could cause harm to non-moving parties-in-interest in five different ways: 1) by causing significant brand erosion; 2) by derailing strategic opportunities; 3) by hamstringing the ability to recruit and retain talent; 4) by imposing costly additional administrative expenses; and 5) by placing plan settlements in jeopardy. Id. at *33. Having concluded that a stay of the confirmation order could result in substantial injury to non-moving partners, the bankruptcy court held that the posting of a supersedeas bond was appropriate. In the words of the court, that “left the task of quantifying the potential harm for the purpose of fixing the amount of a bond.” Id.

Calculation of Supersedeas Bond Value

Determining the appropriate amount of the supersedeas bond proved to be a hotly contested topic. The plan proponents, including the debtors, offered substantial evidence at the hearing on the Movants' stay motions in support of the appropriate value for any supersedeas bond the bankruptcy court might require. While the plan proponents offered three alternative methodologies for calculating the bond amount, they advocated most forcefully for a test which considered the following five factors: 1) additional professional fees and administrative costs; 2) lost opportunity costs incurred by non-moving creditors due to the delay in reinvesting anticipated cash distributions under the plan; 3) lost opportunity costs incurred by non-moving creditors due to the delay in reinvesting anticipated free cash flow distributions after emergence from bankruptcy; 4) harm caused by delay in the debtors' new senior secured term loan; and 5) potential harm to non-moving creditors who are to receive equity under the plan, but whose equity holdings would be exposed to market volatility and other associated risks. See Id. at *32-33.

The bankruptcy court was persuaded by the debtors' testimony that the first four factors under this methodology were relevant in determining the potential loss a stay could impose, and accepted the debtors' conclusions that potential losses under those factors could result in as much as a $555 million loss to non-moving parties-in-interest. Id. at *39-42. The court took issue with the method for calculating the fifth factor, the so-called “downside market risk.” While the court did not reject the notion that downside market risks should be factored into the value of the supersedeas bond, it refused to adopt the debtors' experts' proposed method of providing coverage for that risk by treating it essentially as an equity put option, noting that no court had ever adopted such an approach in similar circumstances, and further noting that use of expert testimony in arriving at the value of the downside market risk was inappropriate. Id. at *41. Instead, the bankruptcy court cited approvingly to the debtors' testimony regarding their “real” concerns of downside market risk during the stay of the confirmation order, and noted specifically the impact a stay would have on “the right to receive a controlling share of stock of the reorganized debtor, including board designation rights, the right to trade their equity in a more favorable post-emergence market or to share in increased equity value.” Id. at *42.

Because the bankruptcy court had rejected the proposed calculation of the downside market risk, it was left with no method for determining what the appropriate figure should be assigned to that risk. Not satisfied that the $555 million total from the first four factors of the debtors' five-factor test adequately protected the non-moving parties in interest, the bankruptcy court opted to adopt the “sum advanced most vigorously by the [plan proponents]: $1.5 billion.” Id. at * 42-43. In doing so, the court also noted that it believed the two methods that the plan proponents had not opted to argue strongly for (the post-emergence equity value and the difference between the reorganization and liquidation value), “under these circumstances, and on this record, could serve as reasonable and justifiable bases for the fixing of a supersedeas bond.” Id. at *42. Thus, according to the bankruptcy court, the fixing of a supersedeas bond in an amount of as much as $4.515 billion was justified in that case.

The Movants' Appeal

The Movants sought to have the bankruptcy court order requiring the posting of the supersedeas quashed by the Delaware District Court on the basis that the perceived risks set forth by the debtors were hypothetical and speculative, and that the bond amount was prohibitively high. The district court denied the Movants' request to modify the bankruptcy court's order. The Movants next sought a stay of the bond requirement from the Third Circuit Court of Appeals, but the Third Circuit dismissed the action as moot, determining that it lacked jurisdiction to alter the bond order as it was not final or otherwise appealable as an injunction.

Conclusion

By requiring the posting of a bond in an amount that accounted for potential losses to a debtor whose value upon emergence from bankruptcy was in excess of $4 billion, the bankruptcy court's $1.5 billion bond requirement imposed an extraordinary financial undertaking on those opposing parties. The court commented that the result it reached achieves “the appropriate balance” of preserving a party's ability to appeal a bankruptcy court's confirmation order, while simultaneously preserving and protecting the underlying confirmed plan.

Practically speaking, however, the bankruptcy court's decision effectively made the decision to seek a stay only worthwhile, or even possible, to those creditors who: 1) believed that they stood to lose a significant amount of money; and 2) were sufficiently financially sound such that a bond agency would agree to post that bond on their behalf. Creditors and strategic investors, when strategizing how best to seek a return for their claim, should absolutely take note of this red flag issued from the Delaware bankruptcy court, and should discount the viability of the appeals process accordingly. Creditors should work vigorously to either maximize the value of their claims by negotiating their treatment under the plan with the debtor, or resolving disputes regarding their claims by order of the bankruptcy court prior to, or as part of, the plan confirmation process. As the Movants discovered in the In re Tribune case, even where a valid dispute exists with respect to a confirmed plan, supersedeas bond requirements can all but preclude the pursuit of an appeal. The simply stated takeaway, then, from this Tribune decision is as follows: You have to pay to play.

Steven B. Smith is a partner and William D. Currie is an associate in the Restructuring & Insolvency department at Edwards Wildman Palmer LLP. Smith is a member of this newsletter's Board of Editors. They are resident in New York and Boston, respectively and may be reached at [email protected] and [email protected].

Cue the 007 theme song; there's a new bond in town. The Delaware Bankruptcy Court, in the Chapter 11 cases of In re Tribune Company, et al. (In re Tribune), Case No. 08-13141 (Bankr. D. Del. Aug. 22, 2012), recently granted a motion for a stay pending appeal of its order confirming Tribune's fourth amended joint plan of reorganization (and other confirmation-related decisions), but conditioned the imposition of the stay upon the posting of a $1.5 billion supersedeas bond. No, that's not a typo; it's billion, with a capital “B.” Noting the classic clash of competing interests to be reconciled in determining whether to grant the requested stay pending appeal ' no meaningful appellate review of bankruptcy court rulings, on the one hand; significant additional estate costs and potential plan collapse, on the other ' the bankruptcy court calculated that a stay pending appeal, together with a $1.5 billion bond, was necessary to achieve the appropriate balance between these two legitimate, competing interests. How the bankruptcy court reached this calculation, and what creditors need to take away from this decision, is the subject of this article.

Supersedeas Bonds in General

Black's Law Dictionary defines a supersedeas bond as a “bond required of one who petitions to set aside a judgment or execution and from which the other party may be made whole if the action is unsuccessful.” See Black's Law Dictionary 1438 (6th ed. 1990). In the traditional litigation context, a supersedeas bond benefits the plaintiff because it allows the plaintiff to collect on its judgment immediately, regardless of the fact that the defendant has filed an appeal, thus avoiding potentially significant delays in its recovery. See Daniel McCloskey, Celotex Corp. v. Edwards: The Supreme Court Expands the Jurisdiction of Bankruptcy Courts by Barring Collateral Attacks Against Their Injunctions, but Some Questions Remain Unanswered, 24 Pepp. L. Rev. 1039, 1050 (1997).

The bankruptcy court's ability to require the posting of a supersedeas bond is rooted in Rule 8005 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules), which provides that “[a] motion for a stay of the judgment, order, or decree of a bankruptcy judge, for approval a supersedeas bond, or for other relief pending appeal must ordinarily be presented to the bankruptcy judge in the first instance.” Fed. R. Bankr. P. 8005. A debtor emerging from bankruptcy pursuant to a confirmation order certainly has an interest in carrying on with its affairs without delay, and therefore, the requirement that parties seeking a stay pending appeal post a supersedeas bond, protects the debtor from the harm imposed by being prevented from commencing operations as a reorganized entity.

There is a significant difference, however, between the application of the supersedeas bond in the context of a litigation, and in the context of the confirmation of a plan of reorganization. In the litigation context, the judgment debtor's interest in overturning the judgment corresponds directly with a debt he or she would otherwise owe. In the context of a plan confirmation order, however, the value of the entire bankrupt entity is put at stake. Accordingly, if a supersedeas bond is required of such a party in an amount that protects the emerging bankrupt entity from loss during the period of the stay pending appeal, the opposing party could be required to procure a bond in an amount that far exceeds the value of their claim, and moreover, in a large bankruptcy case, may be so great that it is impossible for such a creditor to obtain a bond at all.

The Tribune Motion for Stay Pending Appeal

Aurelius Capital Management, LP, Law Debenture Trust Company of New York and Deutsche Bank Trust Company Americas (collectively, the Movants) appealed the entry of the bankruptcy court's order confirming Tribune's plan of reorganization, due to the fact that, among other issues, the plan included a settlement of claims against senior lenders in connection with the 2007 leveraged buyout of Tribune that left it insolvent. The Movants sought a stay pending appeal under Bankruptcy Rule 8005, requiring them to satisfy the following four part test: 1) they were likely to succeed on the merits; 2) they would be irreparably injured if a stay was not issued; 3) the issuance of a stay would not result in substantial injury to a non-moving party in interest, and 4) public interest favored the granting of a stay. In re Tribune, 2012 Bankr. Lexis 3893 at *21.

The bankruptcy court found that: 1) the Movants made enough of a showing of likelihood of success on the merits with respect to the issues on appeal to require analysis of the remaining factors; 2) there was a strong possibility that the Movants would be irreparably harmed; 3) the issuance of a stay could result in substantial injury to a non-moving party; and 4) the public interest factor did not favor either side.

More specifically with regard to the third prong of the test, the bankruptcy court agreed with testimony provided by the debtors that a stay could cause harm to non-moving parties-in-interest in five different ways: 1) by causing significant brand erosion; 2) by derailing strategic opportunities; 3) by hamstringing the ability to recruit and retain talent; 4) by imposing costly additional administrative expenses; and 5) by placing plan settlements in jeopardy. Id. at *33. Having concluded that a stay of the confirmation order could result in substantial injury to non-moving partners, the bankruptcy court held that the posting of a supersedeas bond was appropriate. In the words of the court, that “left the task of quantifying the potential harm for the purpose of fixing the amount of a bond.” Id.

Calculation of Supersedeas Bond Value

Determining the appropriate amount of the supersedeas bond proved to be a hotly contested topic. The plan proponents, including the debtors, offered substantial evidence at the hearing on the Movants' stay motions in support of the appropriate value for any supersedeas bond the bankruptcy court might require. While the plan proponents offered three alternative methodologies for calculating the bond amount, they advocated most forcefully for a test which considered the following five factors: 1) additional professional fees and administrative costs; 2) lost opportunity costs incurred by non-moving creditors due to the delay in reinvesting anticipated cash distributions under the plan; 3) lost opportunity costs incurred by non-moving creditors due to the delay in reinvesting anticipated free cash flow distributions after emergence from bankruptcy; 4) harm caused by delay in the debtors' new senior secured term loan; and 5) potential harm to non-moving creditors who are to receive equity under the plan, but whose equity holdings would be exposed to market volatility and other associated risks. See Id. at *32-33.

The bankruptcy court was persuaded by the debtors' testimony that the first four factors under this methodology were relevant in determining the potential loss a stay could impose, and accepted the debtors' conclusions that potential losses under those factors could result in as much as a $555 million loss to non-moving parties-in-interest. Id. at *39-42. The court took issue with the method for calculating the fifth factor, the so-called “downside market risk.” While the court did not reject the notion that downside market risks should be factored into the value of the supersedeas bond, it refused to adopt the debtors' experts' proposed method of providing coverage for that risk by treating it essentially as an equity put option, noting that no court had ever adopted such an approach in similar circumstances, and further noting that use of expert testimony in arriving at the value of the downside market risk was inappropriate. Id. at *41. Instead, the bankruptcy court cited approvingly to the debtors' testimony regarding their “real” concerns of downside market risk during the stay of the confirmation order, and noted specifically the impact a stay would have on “the right to receive a controlling share of stock of the reorganized debtor, including board designation rights, the right to trade their equity in a more favorable post-emergence market or to share in increased equity value.” Id. at *42.

Because the bankruptcy court had rejected the proposed calculation of the downside market risk, it was left with no method for determining what the appropriate figure should be assigned to that risk. Not satisfied that the $555 million total from the first four factors of the debtors' five-factor test adequately protected the non-moving parties in interest, the bankruptcy court opted to adopt the “sum advanced most vigorously by the [plan proponents]: $1.5 billion.” Id. at * 42-43. In doing so, the court also noted that it believed the two methods that the plan proponents had not opted to argue strongly for (the post-emergence equity value and the difference between the reorganization and liquidation value), “under these circumstances, and on this record, could serve as reasonable and justifiable bases for the fixing of a supersedeas bond.” Id. at *42. Thus, according to the bankruptcy court, the fixing of a supersedeas bond in an amount of as much as $4.515 billion was justified in that case.

The Movants' Appeal

The Movants sought to have the bankruptcy court order requiring the posting of the supersedeas quashed by the Delaware District Court on the basis that the perceived risks set forth by the debtors were hypothetical and speculative, and that the bond amount was prohibitively high. The district court denied the Movants' request to modify the bankruptcy court's order. The Movants next sought a stay of the bond requirement from the Third Circuit Court of Appeals, but the Third Circuit dismissed the action as moot, determining that it lacked jurisdiction to alter the bond order as it was not final or otherwise appealable as an injunction.

Conclusion

By requiring the posting of a bond in an amount that accounted for potential losses to a debtor whose value upon emergence from bankruptcy was in excess of $4 billion, the bankruptcy court's $1.5 billion bond requirement imposed an extraordinary financial undertaking on those opposing parties. The court commented that the result it reached achieves “the appropriate balance” of preserving a party's ability to appeal a bankruptcy court's confirmation order, while simultaneously preserving and protecting the underlying confirmed plan.

Practically speaking, however, the bankruptcy court's decision effectively made the decision to seek a stay only worthwhile, or even possible, to those creditors who: 1) believed that they stood to lose a significant amount of money; and 2) were sufficiently financially sound such that a bond agency would agree to post that bond on their behalf. Creditors and strategic investors, when strategizing how best to seek a return for their claim, should absolutely take note of this red flag issued from the Delaware bankruptcy court, and should discount the viability of the appeals process accordingly. Creditors should work vigorously to either maximize the value of their claims by negotiating their treatment under the plan with the debtor, or resolving disputes regarding their claims by order of the bankruptcy court prior to, or as part of, the plan confirmation process. As the Movants discovered in the In re Tribune case, even where a valid dispute exists with respect to a confirmed plan, supersedeas bond requirements can all but preclude the pursuit of an appeal. The simply stated takeaway, then, from this Tribune decision is as follows: You have to pay to play.

Steven B. Smith is a partner and William D. Currie is an associate in the Restructuring & Insolvency department at Edwards Wildman Palmer LLP. Smith is a member of this newsletter's Board of Editors. They are resident in New York and Boston, respectively and may be reached at [email protected] and [email protected].