Plan Confirmation Principles Not Categorically Applied in the Settlement Context

In re Energy Future Holdings, Corp., No. 15-1591, 2016 WL 2343322 (3d Cir. May 4, 2016)

The Third Circuit recently determined that a settlement in the form of a tender offer did not violate the Bankruptcy Code and was within the Bankruptcy Court’s discretion to approve.  In its ruling, the Court examined whether principles applicable to a plan of reorganization, such as the “equal treatment” rule embodied in 11 U.S.C. § 1123(a)(4), must be categorically applied in the settlement context, and found there is no such requirement.  Nonetheless, the Court affirmed the lower courts’ ruling on the grounds that the settlement in this case provided equal treatment to creditors.

Before debtor Energy Future Holdings Corporation’s (along with its debtor subsidiaries, the “Debtors”) make-whole dispute began, the Debtors offered its first lien noteholders 105% of their notes’ principal amount and 101% of the accrued interest (the “Tender Offer”) in exchange for a release of any potential make-whole premium claim.  Depending on the specific first lien note (6 7/8% or 10%), the return would vary because of the differing interest rates.  The Bankruptcy Court later approved the Tender Offer in the form of a settlement under Bankruptcy Rule 9019.  Certain non-settling first lien noteholders, through an indenture trustee (the “Trustee”), objected to the settlement and appealed its approval, first to the District Court, which affirmed the Bankruptcy Court, and then to the Third Circuit.  Here is a link to our previous blog post analyzing the District Court’s Opinion.

In its ruling, the Court held as an initial matter that the Tender Offer “was merely a mechanism to communicate the settlement offer”, and nothing in the Bankruptcy Code forbids settlements that are achieved via a tender offer process.  The Trustee argued that several Bankruptcy Code provisions, such as § 1125 (requiring court approval for solicitation of a plan), § 1126(c) (providing for class voting on plans), and § 1128 (plan confirmation), mandated a contrary result, but the Court found that none of these code sections apply to settlements outside of the plan confirmation context.  After finding that the Tender Offer did not violate the Bankruptcy Code, the Court easily found that the Bankruptcy Court acted within its discretion to approve the settlement under Bankruptcy Rule 9019.

Next, the Court evaluated the Trustee’s contention that certain first lien noteholders received different percentages of the potential value of their make-whole premiums, which allegedly violates the Bankruptcy Code’s “equal treatment” rule.  See 11 U.S.C. § 1123(a)(4).  As recently stated by the Third Circuit in Jevic, certain bankruptcy principles applicable to plan confirmation are not categorically applied in the settlement context.  Rather, bankruptcy courts have latitude to decline to strictly follow plan confirmation rules in the settlement context so long as creditors are treated in an “evenhanded and predictable” fashion.  Op. at *10.  Nonetheless, the Court affirmed the Bankruptcy Court in concluding that equal treatment was, in fact, provided to each first lien noteholder.  The settlement provided each first lien noteholder the same choice—agree to settle its make-whole claim for set percentages and release its make-whole claim, or retain their make-whole claim.  This equality of treatment to all creditors is “all that the Bankruptcy Code requires.”  Op. at *11.  “[M]ere differences in potential final outcomes resulting from choices made by individual creditors do not violate the equal treatment” rule.  Op. at *12.