Restructuring

Contributed by Kelly E. McDonald
This is the first in a series of blog posts discussing the highly contentious decision in In re Boston Generating, LLC, in which the United States Bankruptcy Court for the Southern District of New York approved a sale of substantially all of the debtors’ assets over the objections of the debtors’ second lien lenders and the unsecured creditors’ committee.  This post addresses the bankruptcy court’s determination that the debtors properly exercised their fiduciary duties in pursuing the sale transaction and that approval of the sale was appropriate under the Second Circuit’s standard.  The court’s holding with respect to the debtors’ ability to satisfy section 363(f) of the Bankruptcy Code, the intercreditor issues raised by the debtors’ first and second lien lenders, and whether an “entire fairness” standard (instead of a “business judgment” standard) was applicable to the sale transaction will be explored more fully in subsequent posts.
Following a six-day evidentiary hearing, the court in In re Boston Generating, LLC, No. 10-14419 (SCC) (Bankr. S.D.N.Y. Dec. 3, 2010) issued a memorandum opinion approving, pursuant to section 363 of the Bankruptcy Code, a sale of substantially all of the debtors’ assets to Constellation Holdings, Inc.  The net proceeds of the sale transaction, coupled with cash on hand, would be sufficient to pay approximately 98.5% of the first lien debt, but would leave no recovery for second lien debt or the debtors’ unsecured creditors. 
Consistent with the terms of the asset purchase agreement, which was executed prepetition, immediately following the petition date, the debtors filed their sale motion seeking approval of, among other things, bidding procedures and the sale of substantially all of their assets.  The bankruptcy court approved the debtor’s bid and established a bid deadline and sale hearing date.  Although the debtors had obtained the requisite approval and support from their first lien lenders to pursue the asset sale, the debtors’ second lien lenders, predictably, did not approve of the sale.  To counter the proposed sale to Constellation, one of the debtor’s second lien lenders, MatlinPatterson Global Advisers LLC, submitted the only other “bid” the debtors received.  Matlin proposed a term sheet for a plan of reorganization, but the debtors determined that Matlin’s bid was neither a “qualified bid” under the bid procedures nor a confirmable plan and proceeded to seek approval of the sale to Constellation.  
Disheartened by the debtors’ decision to more forward with their proposed sale transaction, Matlin, the second lien administrative agent and collateral agent (Wilmington Trust FSB), the unsecured creditors’ committee, and certain others objected to the sale.
Matlin and the Second Lien Agent argued that the debtors did not properly exercise fiduciary duties in pursuing the sale transaction and did not satisfy the relevant Second Circuit standard.  In determining whether to approve the proposed sale, the bankruptcy court looked to the standards enunciated by the United States Court of Appeals for the Second Circuit in Committee of Equity Security Holders v. Lionel Corp. (In re Lionel), 722 F.2d 1063 (2d Cir. 1983) and its progeny.  It considered, among other things, the value of the assets sought to be sold relative to the debtors estate as a whole, whether a plan would be proposed and confirmed in the near future, the effect of the proposed sale on future plans, and whether the assets were increasing or decreasing in value. 
The court found that the debtors satisfied Lionel by showing, among other things, that there was no basis on which the court could find that a plan would be proposed and could be confirmed in the near future, let alone by the date the debtors projected that they would run out of cash—April 30, 2011.  The court also found that the alternative plan proposed by Matlin was not confirmable because no other lender or other constituency supported it.  The court also agreed with the independent financial adviser for a special committee of the Board of Directors who testified that it would have been “commercially reckless” to abandon the Constellation bid and embark on a freefall bankruptcy so as to pursue the alternative plan proposed by Matlin.  Ultimately, the court concluded that the proposed sale was the best determination of the value of the debtors and that the sale process was both well-executed and robust. 
Supplementing its examination of the Lionel factors, the court also evaluated the proposed sale to Constellation under the factors set forth in In re General Motors Corp., 407 B.R. 463, 490 (Bankr. S.D.N.Y. 2009) (Gerber, J.).  In doing so, it considered whether the estate had liquidity to survive until confirmation of a plan, whether the sale opportunity would exist later on, whether an alternative sale opportunity would be available, and whether there was a risk that by deferring the sale, the “patient would die on the operating table.” 
The court found that the sale satisfied the GM factors because the debtors did not have sufficient liquidity to survive until confirmation of a plan, given the costs and time associated with confirming a contested plan; the sale transaction probably would not exist at the time of a plan confirmation; no other potential bidder submitted a qualified bid to the debtors by the bid deadline, therefore it was unlikely that there would be a satisfactory alternative sale opportunity or a stand-alone plan that was equally desirable or better for creditors; and there was material risk that the debtors’ condition could significantly deteriorate by deferring the sale. 
The court also found that proper notice was given to all creditors and interested parties, the proposed sale was fair and reasonable, and the purchaser proceeded in good faith.  The court further concluded that the sale did not constitute a prohibited sub rosa plan of reorganization because the debtors’ assets were being sold and the first lien lenders would receive most of the proceeds in accordance with the priority scheme provided in the Bankruptcy Code.  Therefore, the court approved the section 363 sale motion in its entirety. 
The Boston Generating decision has generated multiple appeals and appears to have spawned additional litigation.  Matlin and the Second Lien Agent appealed the sale order, sought a stay of the sale order pending appeal, and sought direct certification of their appeals to the Second Circuit.  The bankruptcy court granted their motion for direct certification to the Second Circuit, but denied the requests for a stay of the sale order pending the appeals.  The Second Circuit, similarly, denied the request for a stay pending appeal.  The sale closed on January 3, 2011.
Separately, the unsecured creditors’ committee has filed a motion seeking standing to bring a fraudulent conveyance action against the first and second lien lenders arising out of their prior loan transactions with the debtors and has filed an adversary proceeding objecting to the claims of the first and second lien lenders.  The hearing on the motion for standing is pending before the bankruptcy court.  
The court’s ruling in In re Boston Generating appeared to be predicated, in part, on its finding that the debtors effectively had no alternative to the sale transaction because they were running out of liquidity and the plan proposed by Matlin had not garnered any support.  Perhaps if the court had found that Matlin’s plan could be confirmed or that the debtors had ample liquidity, it might have denied the debtors’ proposed sale.  For now, the Boston Generating decision will continue to generate some “electricity” of its own as the bankruptcy court’s decision is reviewed on appeal.