565 B.R. 732
Bankr. D. Del.2016Background
- Hercules Offshore and affiliated debtors filed prepackaged chapter 11 cases (Petition Date June 5, 2016) after emerging from a 2015 chapter 11 with a $450M first-lien facility; market collapse left the company burning cash and facing likely 2017 covenant breaches.
- A Special Committee and advisors (PJT, Akin Gump) ran a marketing process that produced bids but, given market realities, concluded value-maximizing alternatives were limited.
- Lenders alleged post-closing covenant defaults (Nigerian vessel-registration delay and Gibraltar dissolution obligation). Debtors disputed the defaults but entered successive forbearance agreements.
- An escrow of $200M (for the Highlander rig payment) was released to first-lien lenders after an amended forbearance/novation transaction; Debtors and consenting lenders negotiated an RSA that provided (among other things) full recovery for unsecured creditors and payments to equity.
- Equity Committee objected to confirmation, raising four principal objections: (1) debtor and third-party releases/exculpations impermissible; (2) plan not proposed in good faith (1129(a)(3)); (3) plan fails the best‑interests (1129(a)(7)) test; and (4) cramdown standards (1129(b)). Court held for Debtors and confirmed the plan.
Issues
| Issue | Plaintiff's Argument (Equity Committee) | Defendant's Argument (Debtors / Lenders) | Held |
|---|---|---|---|
| Validity of Debtor and third‑party releases / exculpations | Releases improperly bar colorable claims against directors, officers, and lenders and are therefore impermissible | Releases are supported by statutory authority, the releases are necessary to effect the RSA, lenders made substantial concessions and the Special Committee acted on informed business judgment | Releases and exculpations are permissible; Court finds factors (identity of interest, substantial contribution, necessity, acceptance, payment of claims) satisfied and upholds releases |
| Good faith of the plan (11 U.S.C. §1129(a)(3)) | Plan was a product of lender pressure and not proposed in good faith; disclosure allegedly deficient | Plan was negotiated through mediation, supported by board and Special Committee after informed review; Disclosure Statement adequate | Plan was proposed in good faith; Disclosure Statement provided adequate information |
| Best‑interests test (11 U.S.C. §1129(a)(7)) | Equity could recover more in hypothetical chapter 7; releases deprive creditors/equity of claims available in liquidation | Liquidation analysis shows no value for equity in chapter 7; plan provides at least as much as liquidation | Best‑interests test satisfied; equity would not receive more in chapter 7 |
| Cramdown / fair and equitable (11 U.S.C. §1129(b)) | Plan unfairly discriminates and is not fair and equitable to dissenting equity class | Plan gives no recovery to juniors and does not pay any senior class more than full value; classification supported by legitimate rationale | Plan satisfies cramdown: does not discriminate unfairly and is fair and equitable to dissenting class |
Key Cases Cited
- In re Washington Mutual, Inc., 442 B.R. 314 (Bankr. D. Del. 2011) (factors for approving plan releases)
- In re Exide Techs., 303 B.R. 48 (Bankr. D. Del. 2003) (confirmation standards and business judgment deference)
- In re Tribune Co., 464 B.R. 126 (Bankr. D. Del. 2011) (good‑faith and confirmation burden allocation)
- In re Winstar Commc’ns, Inc., 554 F.3d 382 (3d Cir. 2009) (creditors’ claims may not be equitably subordinated to equity)
- Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006) (business judgment rule and board decision review)
- In re Am. Capital Equip., LLC, 688 F.3d 145 (3d Cir. 2012) (good‑faith standard in plan confirmation)