February 14, 2013

Post-Petition Lock-Up Agreement Permitted by Delaware Bankruptcy Court

Wilmington and Philadelphia partner Andy Kassner and associate Joe Argentina co-wrote an article for The Legal Intelligencer titled, “Post-Petition Lock-Up Agreement Permitted by Delaware Bankruptcy Court.”

The article discusses the recent ruling in In re Indianapolis Downs, LLC, in which the United States Bankruptcy Court for the District of Delaware permitted a post-bankruptcy filing plan support agreement to go ahead.

In that case, after filing a Chapter 11 bankruptcy petition, the debtors and certain secured creditors spent several months negotiating possible plans of reorganization, which ultimately resulted in a Restructuring Support Agreement (RSA) that provided for two possible paths to reorganization. Objecting parties, however, argued that by negotiating and executing the RSA, the non-debtor parties’ votes had been improperly solicited prior to court approval of the disclosure statement.

The debtors argued the term “solicitation” should be narrowly construed and that vote designation is a harsh remedy that should be rarely used.  The court agreed with the debtors and declined to designate the non-debtor parties’ votes, confirming the reorganization plan:

“[T]he filing of a Chapter 11 petition is an invitation to negotiate,” said the judge. “Congress has carefully calibrated the Chapter 11 process - using the automatic stay, exclusivity, the right of secured creditors to adequate protection and a host of other statutory provisions - to provide stakeholders with leverage or bargaining chips to advance their respective agendas. The purpose, at bottom, is to permit parties to have a voice and to make their own economic decisions.” 

Andy and Joe discuss the court’s reasoning in this decision and the impact on future filings. They say the ruling “provides some comfort to sophisticated creditors who actively participate in the restructuring process and enter into post-petition plan support agreements,” however, “careful attention should be paid to the creditors involved and drafting of these agreements to ensure that they do not attempt to replace the section 1125 solicitation process.”

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