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Same Class, Different Recoveries — No Bar to Plan Confirmation
Equal treatment of claims in the same class within a plan of reorganization is an important creditor protection in Chapter 11. However, is it possible to provide certain benefits to some creditors within a single class and not others without running afoul of the Bankruptcy Code? In a recent ruling on an issue of first impression, the U.S. Court of Appeals for the Eighth Circuit certainly made clear it thought so in Ad Hoc Committee of Non-Consenting Creditors v. Peabody Energy, (In re Peabody Energy), No. 18-1302, 2019 U.S. App. LEXIS 23824 (8th Cir. Aug. 9, 2019). In Peabody, the Eighth Circuit held that a debtors' Chapter 11 plan complied with Bankruptcy Code Section 1123(a)(4) (which mandates that a plan provide the same treatment to all members of a particular class), despite providing more favorable treatment to creditors that agreed to backstop a rights offering by paying the participating creditors significant premiums and allowing them to purchase preferred stock at a deep discount.
Peabody Energy Corp., a coal company, and certain of its affiliates filed voluntary Chapter 11 bankruptcy petitions during a time of falling demand and prices in the industry that resulted in a steep decline in the debtors' revenues. At the time of the bankruptcy filings, there was an ongoing dispute between several of the debtors' secured and senior-unsecured creditors over the extent to which the debtors' assets served as collateral for the secured creditors' debts. After filing for bankruptcy protection, the debtors commenced an adversary proceeding seeking a declaratory judgment regarding that dispute. The mediation that followed expanded beyond resolution of the security-interest fight and ultimately culminated in a global settlement that included a proposed plan of reorganization as its centerpiece.
The proposed plan sought to deleverage the debtors' balance sheet and included, among other things, a $1.5 billion equity raise through a $750 million backstopped rights offering of common stock and $750 million backstopped private placement that involved an exclusive sale of discounted preferred stock to qualifying creditors. Under the $750 million backstopped private placement, creditors could qualify to buy the preferred stock by executing certain agreements that obligated them to: buy a set amount of preferred stock; agree to backstop the rights offering and private placement (i.e., purchase the unsold shares of common and preferred stock); and support the plan in the confirmation process. The amount of preferred stock qualifying creditors could and were required to buy depended on the portion of the pre-bankruptcy debt they held and on how swiftly they took action to qualify. In addition to purchasing the preferred shares at a discount, qualifying creditors also received several payment premiums for executing the agreements. In short, the creditors received preferred stock at a discount and significant premiums in exchange for their prompt agreement to backstop the arrangement and support the bankruptcy plan. Regardless of whether a creditor participated in the private placement, it would receive the same distributions as other creditors in its class under the plan.
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