• Bankruptcy Court Permits Post-Petition "Lock-Up" Agreement and Confirms Plan
  • February 21, 2013
  • Law Firm: Morris James LLP - Wilmington Office
  • In re: Indianapolis Downs, LLC et al., Case No. 11-11046 (BLS) (January 31, 2013)

    Bankruptcy Court declined to designate the votes of the parties of a post-petition Restructuring Support Agreement (the “RSA”) (i.e., a lock-up agreement) and confirmed the Indianapolis Downs, LLC and Indiana Downs Capital Corp. (collectively, the “Debtors”) Modified Second Amended Joint Plan of Reorganization (the “Plan”). Confirmation was opposed by certain members of senior management and holders of equity and debt of the Debtors (the “Oliver Parties”). The Oliver Parties argued that the RSA constituted an impermissible post-petition solicitation of votes contrary to section 1125(b) of the Bankruptcy Code. The Oliver Parties also argued that the votes of the parties of the RSA should be designated pursuant to section 1126(e) of the Bankruptcy Code which would ultimately result in rendering the Debtors unable of securing adequate votes for confirmation of the Plan. The Court found that the RSA did not constitute an improper solicitation of votes and refused to designate the votes of the parties to the RSA.

    Discussion:

    By way of background, the Debtors operated a combined horse racing track and casino, or, a “racino” in Shelbyville, Indiana. The Debtors filed voluntary Chapter 11 petitions in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) on April 7, 2011 (the “Petition Date”).

    The Debtors entered bankruptcy with substantial secured debt. The Debtors filings reflected outstanding first lien debt in excess of $98 million as of the Petition Date, second lien debt of $375 million, plus accrued interest and fees. A group of holders of the second lien debt (the “Ad Hoc Second Lien Committee”) actively participated in the matter both before and after the Petition Date. The Debtors also issued third lien debt of approximately $78 million (plus accrued interest). Fortress Investment Group, LLC (“Fortress”) held a substantial portion of the second and third lien debt. The second and third lien obligations are guaranteed by substantially all of the Debtors’ assets. The Debtors struggled to service their debt and Fortress, the Ad Hoc Second Lien Committee and the Debtors’ equity owners made formal and informal restructuring proposals to resolve the Debtors’ financial distress. Consensus was reached following months of negotiations between these parties as to a process that provided for a “parallel path” approach to reorganization. The plan contemplated would allow the Debtors to test the market to determine whether bids would be made for their assets that would be supported by the major creditor constituents. As an alternative, if these efforts failed to produce adequate offers, then the plan would be to permit the Debtors to proceed with a recapitalization. The RSA embodied this parallel path.[1]

    The marketing efforts provided to be successful, culminating in a bid from Centaur LLC (“Centaur”) for the purchase of substantially all of the Debtors’ assets for a price of $500,000,001. The sale was approved by the Court by Order dated October 31, 2012.

    The Oliver Parties argued that the RSA constituted a wrongful post-petition solicitation of votes on a plan prior to Court approval of a disclosure statement. To remedy its issue, the Oliver Parties requested that the ballots of the parties to the RSA not be counted pursuant to sections 1125(g) and 1126(e) of the Bankruptcy Code (and the result of which would cause the Debtors to lack sufficient votes to gain plan confirmation). By contrast, the Debtors and the Restructuring Support Parties disputed that developing and executing the RSA is a “solicitation” within the meanings of sections 1125 and 1126 and argued that the Court should narrowly define what constitutes solicitation based on case law (see e.g. In re Century Glove, 860 F.2d 94 (3d Cir. 1988); In re Heritage Organization, L.L.C., 376 B.R. 783 (Bankr. N.D. Tex. 2007)).

    In agreeing with the Debtors and the Restructuring Support Parties, the Bankruptcy Court reasoned that “Congress intended that creditors have the opportunity to negotiate with debtors and amongst each other; to the extent that those negotiations bear fruit, a narrow construction of ‘solicitation’ affords these parties the opportunity to memorialize their agreements in a way that allows a Chapter 11 case to move forward.” Op. at 9. Further, the Bankruptcy Court explained that “[d]esignation of votes in this case would be demonstrably inconsistent with the purposes of the Bankruptcy Code” because “creditor suffrage is a bedrock component of Chapter 11” and “it would indeed be anomalous, in the absence of a showing of bad faith or wrongful conduct, to discount or ignore the votes of the overwhelming majority of the creditors and stakeholders, and deny confirmation of the plan.” Id.

    The “interests that § 1125 and the disclosure requirements are intended to protect are not at material risk in this case.” Id. at 10. The parties here to the RSA were “all sophisticated financial players and have been represented by able and experienced professionals throughout these proceedings,” and as a result, the Court noted that it would “grossly elevate form over substance to contend that § 1125(b) requires designation of their votes because they should have been afforded the chance to review a court-approved disclosure statement prior to making or supporting a deal with the Debtor.” Id.

    The “decision whether to designate a creditor’s ballot is within the sound discretion of the Court” and that in “situations where creditors have acted with the apparent goal of furthering their own self-interest and maximizing their recoveries, courts have been extremely reluctant to penalize such parties through designation.” Id. at 11. Accordingly, the Bankruptcy Court held that disallowance of the votes of the Restructuring Support Parties to the RSA was “neither required nor warranted.” Id. Here, the requirement that the parties to the RSA vote for the plan, and the provision of specific performance to enforce such a commitment, was “not dispositive” and that the parties “negotiated a deal and memorialized it” in the restructuring support agreement which predictably “contained a commitment to vote for a plan that embodied that deal.” Id. The Bankruptcy Court noted that “the filing of a Chapter 11 petition is an invitation to negotiate” and that “courts must be chary of construing those disclosure and solicitation provisions [of the Bankruptcy Code] in a way that chills or hamstrings the negotiation process that is at the heart of Chapter 11.” Id. at 12. Thus, when “a deal is negotiated in good faith between a debtor and sophisticated parties, and that arrangement is memorialized [by] a written commitment and promptly disclosed, § 1126 will not automatically require designation of the votes of the participants. Id.

    Following resolution of the Oliver Parties’ Motion to Designate, the Court then overruled confirmation objections and confirmed the Pl


    [1] The RSA provided for (i) specific terms of the dual track plan of reorganization, including the financial terms of, and creditor treatment under, a potential sale or in the recapitalization transaction; (ii) the requirement that the Debtors propose a plan of reorganization within a time frame set in the RSA; (iii) a prohibition upon any party to the RSA proposing, supporting or voting for a competing plan of reorganization; (iv) the requirement (enforceable by an order of specific performance) that the parties to the RSA vote “yes” for a plan that complies with the RSA. The RSA would become binding upon the Debtors only upon approval by the Court of a disclosure statement. The Court approved the Debtors’ Disclosure Statement after a hearing on June 21, 2012.