Restructuring

Contributed by Doron P. Kenter.

“Life ain’t a track meet; no – it’s a marathon” – Ice Cube

In a recent decision, the United States Bankruptcy Court for the District of Massachusetts recognized that a successful reorganization does not necessarily mean that a reorganized debtor must turn wild profits (or any profits) right out of the gate; instead, the debtor must simply show that it is not likely to end up back in bankruptcy court (or in liquidation).  Moreover, the court affirmed its support for a debtor’s right to propose its own plan of reorganization without the input of its creditors, concluding that debtors need not undertake fruitless attempts to negotiate with even their most significant creditors.
In In re Wentworth Hills, LLC, the court confirmed the debtors’ joint plan of reorganization over a secured creditor’s objections.  Pursuant to their plan, the debtors proposed to “cram down” Mansfield Cooperative Bank to the value of its collateral and to repay the remaining obligation over five years at a five percent interest rate.  The bank, whose claim was secured by the debtors’ golf course, objected to the debtors’ valuation of the collateral and argued that the proposed plan was not feasible and was proposed in bad faith.
In light of the court’s ultimate valuation of the collateral at $2 million (over 50% more than the debtors’ proposed valuation), the bank first argued that the debtors’ plan was not feasible (and accordingly violated section 1129(a)(11) of the Bankruptcy Code) because (i) the debtors’ inexperienced management would fail to meet their overly ambitious income projections and (ii) payment on account of the bank’s secured claim would constitute a major drain on cash flow (and would, in fact, exceed the debtors’ projected net operating income after debt service in the first year after confirmation).
Rejecting the bank’s argument regarding feasibility, the bankruptcy court concluded that cash reserves would cover the initial shortfall in the debtors’ net operating income.  The court noted that the debtors had failed to meet their projections from the previous year because of the chapter 11 cases, a change in management, and a hurricane, and expressed confidence in the new management, which, while “not highly experienced,” was “certainly not incompetent” and could make adjustments as necessary to cut costs and to achieve projected revenues.  Based on the record before it, the court took a long view of the debtors’ anticipated reorganization, concluding that their long-term success would not be compromised by obstacles associated with their initial emergence from chapter 11.
The bank also argued that the debtors proposed their plan in bad faith because the debtors had failed to “sufficiently negotiate” with the bank and with other creditors.  In overruling that objection, the court noted that it was not aware of any obligation of a debtor to negotiate with its creditors (even, presumably, with the holders of the largest claims).  The court further observed that the debtors had, in fact, “tentatively explore[d]” a compromise with the bank, but that the bank had been “generally frosty” to such overtures.  Accordingly, then, the court held that a debtor’s failure to aggressively pursue a settlement with its primary creditors does not necessarily mean that such plan is somehow proposed “in bad faith.”  Though this observation is not surprising, it highlights the fact that (notwithstanding creditors’ bargained-for claims, rights, and remedies) debtors continue to retain primary control over plan formulation, which is subject only to the express provisions of the Bankruptcy Code.  So long as a creditor retains the rights afforded to it by the Bankruptcy Code, at least in this case, the bankruptcy court held that it will not be entitled to any additional control over the plan process.
Though not particularly surprising, the bankruptcy court’s decision is notable for its affirmation of a debtor’s right to control the plan proposal process as it sees fit and for its support for a long view of the post-emergence reorganization, despite certain immediate challenges.  With no disrespect to short- and middle-distance athletes, it is important to remember that emergence from bankruptcy is a marathon, not a sprint – a successful reorganization turns not on short-term gains, but on long-term success.