533 B.R. 64
Bankr. S.D.N.Y.2015Background
- Chassix Holdings, Inc. (Holdings) and several U.S. subsidiaries filed Chapter 11; Holdings issued $150M Unsecured Notes in 2013 and paid a large dividend to its private equity owner, Platinum Equity ("Platinum").
- Debtors negotiated a Modified Second Amended Joint Plan that converts much secured and unsecured debt to equity, funds operations, and provides distributions to creditors (unsecured noteholders get ~11.9%).
- Plan includes settlements with Platinum (including Platinum waiving certain stock-loss and intercompany claims and contributing value) and broad third-party release provisions benefitting Platinum and many other parties.
- Benefit Street (holder of Unsecured Notes) objected, arguing: Holdings has valuable litigation claims against Platinum arising from the dividend; the settlement undervalues those claims; the Plan fails the best-interest test (§1129(a)(7)); third-party releases are improper; and the Plan was proposed in bad faith.
- At confirmation hearing the court admitted testimony and exhibits from Debtors’ financial, tax and valuation experts; Benefit Street presented no contrary evidence on claim value or solvency; major creditor groups (including most noteholders) supported the settlement and Plan.
Issues
| Issue | Plaintiff's Argument (Benefit Street) | Defendant's Argument (Debtors/Platinum) | Held |
|---|---|---|---|
| Whether the settlement of dividend/fraudulent-transfer claims with Platinum should be approved | Settlement undervalues claims; pursuing litigation would yield greater recovery | Settlement was negotiated at arm’s-length, provides tax and cash concessions, and litigation value is speculative and likely insufficient net of costs | Court approved settlement: benefits exceed likely litigation recovery; creditors largely support settlement |
| Whether Plan satisfies §1129(a)(7) (best-interest test) for Unsecured Noteholders | A Chapter 7 liquidation of Holdings pursuing claims against Platinum would give creditors better recoveries than the Plan | Expert analyses show litigation costs, contingency fees, and low probability of recoverable claims make liquidation recoveries speculative and likely lower | Court held Plan satisfies best-interest test; evidence does not support likely superior Chapter 7 recovery |
| Whether the Plan was proposed in good faith (§1129(a)(3)) | Inclusion of Holdings aimed primarily to obtain releases for Platinum, not to further reorganization | Holdings was insolvent; inclusion produced tax benefits and enabled creditor recoveries; plan consistently negotiated and supported | Court found Plan proposed in good faith and serving Bankruptcy Code objectives |
| Whether third-party releases are permissible as drafted | Releases overly broad; improper to bind non-consenting creditors; solicitation procedure (deemed consent/opt-out) improper | Debtors argued votes and solicitation justified treating some votes as consent; releases necessary to effect settlement | Court required modifications: releases apply only to actual consenting creditors (explicit opt-in or affirmative vote), clarified scope to matters involving Debtors; unimpaired and inactive creditors are not deemed to consent |
Key Cases Cited
- W.T. Grant Co. v. W.T. Grant Co. (Cosoff v. Rodman), 699 F.2d 599 (2d Cir.) (settlement approval reviewed under business-judgment range-of-reasonableness standard)
- Iridium Operating LLC v. Motorola, Inc., 478 F.3d 452 (2d Cir.) (factors for evaluating settlements in bankruptcy)
- Trenwick Am. Litig. Trust v. Ernst & Young, 906 A.2d 168 (Del. Ch.) (parent may take dividends from solvent subsidiary without breaching fiduciary duties)
- Metromedia Fiber Network, Inc. v. Deutsche Bank AG (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir.) (third-party releases are disfavored and appropriate only in narrow circumstances)
- Specialty Equip. Cos. v. Campbell (In re Specialty Equipment Cos.), 3 F.3d 1043 (7th Cir.) (vote in favor of plan can constitute consent to releases)