607 B.R. 781
Bankr. S.D.N.Y.2019Background
- Debtors (Stearns and affiliates) filed Chapter 11 on July 9, 2019 to preserve operations and maximize value; Blackstone (≈70% equity) served as stalking‑horse plan sponsor.
- PIMCO‑managed holders owned ~67% of $183M senior secured Notes; Debtors negotiated a Restructuring Support Agreement (RSA) dated Sept. 5, 2019 among Debtors, Blackstone, PIMCO, and other consenting noteholders (the Global Settlement).
- The Amended Plan (filed Sept. 19/26, 2019) implements the Global Settlement: unsecured creditors (Classes 4 & 5) receive 100% cash; Noteholders receive $65M cash, warrants, and capped 5% notes; Blackstone funds New Money and receives reorganized equity.
- The Amended Plan includes third‑party releases, an exculpation clause, exit financing (Cash Flow Exit Facility and Exit Repo Facilities), and payment/reimbursement of certain professionals’ fees as part of the settlement.
- The U.S. Trustee (UST) was the sole objector, challenging the third‑party releases, exculpation, treatment (impairment) of postpetition interest for Classes 4 & 5, and payment of professional fees; the Court held a confirmation hearing and admitted declarations without cross‑examination.
- The Court found jurisdiction, approved the Global Settlement under Bankruptcy Rule 9019, overruled the UST objections, and confirmed the Amended Plan.
Issues
| Issue | UST's Argument | Debtors' Argument | Held |
|---|---|---|---|
| Third‑party releases | No jurisdiction to approve; releases not consensual; must meet Metromedia standards | Bankruptcy jurisdiction covers plan releases; ballots gave opt‑out consent; releases limited in scope and integral to settlement | Court has jurisdiction; releases deemed consensual (opt‑out ballots adequate) and satisfy Metromedia—UST objection overruled |
| Exculpation clause | Impermissibly shields non‑estate fiduciaries; conflicts with NY RPC Rule 1.8(h)(1) | Exculpation customary for substantial contributors; carve‑outs preserve liability for gross negligence, fraud, willful misconduct | Approved with carve‑outs intact; RPC argument not a basis to modify plan |
| Postpetition interest / impairment (Classes 4 & 5) | Payment in full without postpetition interest renders classes impaired | Section 502(b)(2) bars postpetition interest; other circuits treat similar treatment as unimpaired; creditors receive improved recoveries | Court overruled UST: given insolvency, increased recoveries, and no objections, classes treated as unimpaired |
| Payment of professionals’ fees (PIMCO/Blackstone/Indenture Trustee) | Must comply with retention (§327) or administrative claim procedures (§503) and fee applications | Fees are part of RSA/Global Settlement previously approved under §363(b) and are properly authorized by Rule 9019 settlement | Court approved payment as integral to Global Settlement and RSA; UST objection overruled |
Key Cases Cited
- Metromedia Fiber Network, Inc. v. Deutsche Bank AG, 416 F.3d 136 (2d Cir. 2005) (third‑party releases disfavored and permissible only in rare, defined circumstances)
- Iridium Operating LLC v. Motorola, Inc., 478 F.3d 452 (2d Cir. 2007) (factors for approving settlements under Bankruptcy Rule 9019)
- Johns‑Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns‑Manville), 517 F.3d 52 (2d Cir. 2008) (bankruptcy jurisdiction to enjoin third‑party claims that directly affect the estate)
- Quigley Co. v. Family Savings Bank (In re Quigley Co.), 676 F.3d 45 (2d Cir. 2012) ("conceivable effect" test for bankruptcy jurisdiction over third‑party claims)
- Drexel Burnham Lambert Group, Inc., 960 F.2d 285 (2d Cir. 1992) (non‑consensual releases may be appropriate where integral to plan)
- Ultra Petroleum Corp. v. Ad Hoc Comm. Of Unsecured Creditors (In re Ultra Petroleum Corp.), 913 F.3d 533 (5th Cir. 2019) (treatment without postpetition interest can be unimpaired)
- Solow v. PPI Enters. (In re PPI Enters.), 324 F.3d 197 (3d Cir. 2003) (postpetition interest analysis related to impairment)
- Thompson v. Ky. Lumber Co. (In re Ky. Lumber Co.), 860 F.2d 674 (6th Cir. 1988) (similar approach on postpetition interest)
- In re Sabine Oil & Gas Corp., 555 B.R. 180 (Bankr. S.D.N.Y. 2016) (jurisdictional and third‑party release analysis under "conceivable effect" test)
- In re Enron Corp., 335 B.R. 22 (S.D.N.Y. 2005) (authority approving reimbursement of fees under §363 in appropriate circumstances)