This is the next post in Plan Proponent’s series on the plan confirmation-related recommendations in the ABI Commission Report (and, in particular, its Exiting the Case piece).We’ve switched over to Section F of the Report regarding “Plan Voting and Confirmation Issues.” Subsection 4, the focus of this post, addresses Plan Settlements and Compromises.
Background
Settlements and compromises in Chapter 11 come in 2 forms: (1) standalone settlements proposed under Rule 9019 and (2) settlements contained in a Chapter 11 plan. Although a plan “embodies a series of compromises between the debtor and its creditors to resolve the debtor’s financial distress,” the latter refers to more substantive settlements that do not necessarily relate to the claims allowance process.
Whereas standalone settlements clearly require notice and a hearing under Rule 9019, the extent to which Rule 9019 impacts, or should impact, settlements contained in plans is not as clear. As the Commission points out, courts approach it differently:
- Some evaluate a plan settlement via the confirmation process under Section 1129, without separate evidence and with an emphasis on the votes.
- Others require a separate Rule 9019 motion or, at least, separate evidence regarding the settlement at confirmation.
As the Commission also points out, there’s a definite interplay between settlements and plans. On the one hand, a pre-plan settlement might dictate the flow of funds or recoveries or do an end-run around confirmation requirements to such a degree that it’s a “sub rosa” plan (i.e., a plan that avoids the scrutiny that comes with Section 1129). (See also this post where we discussed the Commission’s recommendations on “gifting” provisions and the absolute priority rule. In particular, In re Iridium Operating, LLC, 478 F.3d 452 (2d Cir. 2007) addressed whether gifting provisions–as potential absolute priority rule workarounds–must be scrutinized via Rule 9019). On the other hand, a settlement in a plan might not be linked to class treatment, such that creditors might be unaware of the settlement or its potential impact on their claims.
Commission Recommendations
The Commission distinguishes between settlements that are integrated into the claims allowance process and those that should be subject to separate approval. Whereas the Commission believes that the former should be covered by the standard voting and confirmation process, it believes that the latter requires special attention by the court. Specifically, the “court should separately approve any consensual resolution of a material dispute affecting property of the estate, including matters in pending or threatened litigation or regulatory review.”
To that end, the Commission recommends that Section 1129(a) “be amended to require that the court specifically find that all settlements and compromises included in, or related to, the plan are ‘reasonable and in the best interests of the estate’ as part of the confirmation process” (but without the need for a separate motion or hearing).
See Section V.G (p. 183) of the Report for more about the Commission’s recommendations on the “Standard for Reviewing Settlements and Compromises.”
Our Take
To the extent that plan proponents are including in their plans what would other wise be standalone, material settlement proposals, the recommendation that Section 1129 be amended to address them explicitly and separately is sensible. However, in our experience–which very well might differ from others’ experience–sophisticated creditors with significant claims, especially those that are in dispute, tend to insist on separate, 9019-style agreements and even insist that such agreements be irrevocably binding on the debtor and not be conditioned on subsequent confirmation of a plan. Therefore, we’re a little more concerned about the potential for sub rosa plans, a topic that will surely come-up in later posts.
In our next post, we’ll wrap-up Section F with a discussion of “Discharge of Claims upon Confirmation.”