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Insider’s Scoop: An Rare Examination of Challenge Period and Release Provisions in a Final DIP Order

n re Outer Harbor Terminal, LLC, 16-10283 (LSS) (Bench Ruling, May 5, 2017)

In issuing this Bench Ruling, the Honorable Laurie Selber Silverstein of the Delaware Bankruptcy Court had the unusual opportunity to analyze and parse challenge period and lender release provisions contained in a final DIP order.  Examining the plain language of the provisions in light of the entire context of the DIP documents before it, the Court concluded that a creditors committee’s investigation period expired long before it was formed by the United States Trustee.  Her Honor also held that the general releases granted to the DIP lenders in all their capacities did not extend to claims the debtor may have against affiliates of the DIP lenders that were separate and apart from the DIP lender’s relationship with the debtor despite the fact that those affiliates were included as released parties.

Almost a year after the commencement of Outer Harbor Terminal, LLC’s chapter 11 bankruptcy case and the entry of the Final DIP Order, a creditors committee was appointed.  The committee soon began an investigation into monies owed by the debtor to affiliates (the “PA Entities”) of the debtor’s insider-DIP lender (HHH Oakland) pursuant to a series of shared services agreements between the debtor and the PA entities.  However, under the Final DIP Order, HHH Oakland (in all of its capacities) as well as its affiliates, including the PA Entities, received certain releases from the debtor subject to parties’ rights to challenge the released claims within a prescribed investigation period.  In this case, the Final DIP Order required a challenge “by no later than the earlier of (i) sixty (60) days from the date of the official committee’s formation . . . or (ii) seventy-five (75) days from the date of entry of the Interim Financing Order for all [other] parties . . . .”  While the committee argued that the 75-day period for non-committee parties did not cut off its own 60-day investigation period, the Court held that such an interpretation would not give meaning to the plain language of the Final DIP Order – in particular, the words “the earlier of”.  Accordingly, the committee’s challenge period was long expired and for its investigation into the shared services agreements to continue, the related claims against the PA Entities must be outside the scope of the DIP release.

The page-long release began with a generic list of claims released by the debtor (e.g., claims, demands, liabilities whether known, unknown, asserted, unasserted).  Then, separated by a comma, it continued:  “including without limitation, all legal and equitable theories of recovery, arising under common law, statute, or regulation or by contract, of every nature and description, . . .” “arising out of, in connection with or relating to the DIP Facility, the DIP Loan Documents, their interests in the Debtor, or the transactions and relationships contemplated hereunder or thereunder . . . .”  The question before the Court was whether the PA Entities were granted a general release of all claims, including those detailed in the “arising under phrase” or whether they were granted a limited release of just the “arising under” claims.

While the Court’s attempted use of certain canons of interpretation did not help it interpret the release provision in isolation, it did not find the provision ambiguous.  Rather, the Court expanded its review to the entire Final DIP Order, DIP Term Sheet, and DIP Motion to find context and party intent and expectation.  The ultimate answer?  The PA Entities were given a release of only claims derivative of those released against the DIP lenders and not of claims related to their own independent relationship with the debtor, including the share services agreements which were the target of the committee’s investigation.

The Court provided nine points in support of its conclusion.  Importantly, the DIP Term Sheet required only a general release of the DIP agent and the DIP lenders in all capacities and did not mention affiliates, revealing to the Court that the typical release language detailing the long litany of added releasees – e.g., affiliates, former, current, or future officers, employees, directors, agents – was not a purposeful or thoughtful addition but rather a “stereotypical example of standardized, ritualistic language.”  Op. at 18.  This holding was buttressed by the fact that the various DIP documents did not reference HHH Oakland’s affiliates, any shared services agreements, or monies owed thereunder.  There were no debtor stipulations, allowance provisions, disclosures, or defense waivers regarding the shared services agreements and claims.  The specific references in the lengthy release addressed the DIP Facility, the DIP Loan Documents, and interests in the Debtor, none of which implicated the affiliates or the shared services agreements.  In sum, there was no evidence that the shared services agreements were in the contemplation of the parties when the post-petition financing was negotiated and thus, the Court determined that related claims were not the subject of the release.

While the release in Outer Harbor was atypical, the Ruling serves as a helpful reminder of the importance of careful, clear, and specific drafting of contract provisions, oft-forgotten in the overly verbose and tedious DIP orders commonplace in the Delaware Bankruptcy Court.  As an author once said, “More isn’t always better.  Sometimes it’s just more.”