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Bankruptcy Court Follows Narrow Interpretation of Improper Plan Solicitation to Confirm Plan

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Judge Brendan Linehan Shannon of the United States Bankruptcy Court for the District of Delaware (the “Court”) confirmed a Joint Plan of Reorganization over opposition seeking to designate certain votes cast by parties to a restructuring and support agreement as a wrongful post-petition solicitation pursuant to 11 U.S.C. §§ 1125 and 1126. In re Indianapolis Downs, LLC, 2013 WL 395137 (Bkrtcy.D.Del.,2013).

The Debtors’ horse racing track and casino operations entered bankruptcy with substantial secured indebtedness, including second and third lien debt of over $450 million (the second and third lien debt referred to herein as the “Junior Secured Debt”). Following months of negotiations, certain holders of the Junior Secured Debt agreed with the Debtors on a parallel plan to explore (i) the sale of substantially all assets, and (in the event not successful at obtaining adequate sale offers) (ii) a process of recapitalization, all of which was embodied in a Restructuring Support Agreement (the “(RSA”) entered into by the Debtors and a majority of holders of Junior Secured Debt. Following entry into the RSA, the RSA, disclosure statement and accompanying plan were each filed with the Court on the same day. The Court approved the disclosure statement and held a combined sale hearing and plan confirmation hearing at which certain senior management and holders of debt and equity instruments (the “Objecting Parties”) objected to plan confirmation on the basis that, among other things, the RSA constituted an improper solicitation. The Objecting Parties sought to disregard the votes of those creditor parties to the RSA as the remedy for the alleged improper solicitation.

In overruling the Objecting Parties improper solicitation and designation arguments, the Court cited to the seminal case in the Third Circuit, In re Century Glove, 860 F.2d 94 (3d Cir. 1988) for its holding that solicitation must be read narrowly to not inhibit the importance of free creditor negotiations. The underlying facts in this case including the absence of bad faith or wrongful conduct, as well as the existence of sophisticated financial parties to the RSA, eliminated any concern that the Court may otherwise have had that the solicitation was made of creditors and stockholders that were too ill-informed to act capably in their own interests. The Court further noted that designation of a creditor’s vote is a drastic remedy and, therefore, is the exception, not the rule.

The additional objections raised by the Objecting Parties and the United States Trustee, including feasibility overly broad releases and exculpations were also overruled.

A copy of the Court’s opinion is available here.

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