Restructuring

Contributed by Conray C. Tseng
In his recent decision in the Lyondell Chemical Company chapter 11 case, Judge Gerber of the United States Bankruptcy Court for the Southern District of New York offered a bit of drafting advice for complex plan provisions – single-spaced, multi-page, kitchen-sink, run-on-sentence plan provisions may sacrifice clarity for “comprehensiveness.”  In this particular case, the lack of clarity in the chapter 11 plan’s exculpation provisions and the confirmation order’s good faith findings resulted in certain actions that may have been intended to have been protected from challenge under the plan and the confirmation order not receiving the benefit of the plan’s exculpation provisions. 
The underlying issue in Lyondell arises from a post-effective date lawsuit brought in New York state court by Highland Capital Management against the reorganized debtors and UBS Securities, LLC, as agent for the debtor’s exit financing facility.  Highland’s lawsuit sought damages as a result of the failure to include Highland among the lenders in the debtors’ exit financing lending syndicate.  The debtors and UBS brought a motion before the bankruptcy court claiming, among other things, that the plan’s exculpation provisions and the confirmation order’s good faith finding absolved UBS from any liability related to the syndication of the debtors’ exit facility.  (Note – In a separate discussion, Judge Gerber found that the administrative bar date protected the debtors from any liability because Highland did not timely file an administrative proof of claim.)
In a “drastically shortened form,” Judge Gerber quoted the plan’s exculpation provision as follows:

As of the Confirmation Date, the Debtors and their directors, officers, employees, financial advisors, attorneys, and other professionals and agents shall be deemed to have solicited acceptances of this Plan in good faith and in compliance with the Bankruptcy Code.  The Debtors, the Reorganized Debtors, … lenders under the Exit Facility (and the agents and arrangers under the Exit Facility) … and their respective principals, members, managers, officers, directors, employees, and agents (including any attorneys, financial advisors, and other professionals retained by such Persons) shall not have or incur any liability to any holder of any Claim or Equity Interest or any other Person for any act or omission taken or not taken in good faith in connection with, or arising out of, the Chapter 11 Cases, the Disclosure Statement, the Plan, … the Exit Financing, the solicitation of votes for and the pursuit of confirmation of the Plan, the offer and issuance of any securities under the Plan, the Rights Offering under the Plan, the consummation of the Plan, including, without limitation, the steps taken the transactions described in Section 5.4, or the administration of the Plan or the property to be distributed under the Plan, except for acts or omissions constituting willful misconduct or gross negligence or bad faith as determined by a Final Order; and in all respects such parties shall be entitled to rely upon the advice of counsel with respect to their duties and responsibilities under the Plan….

(emphasis added).
Highland argued that the plan’s exculpation provision does not absolve UBS because Highland’s claim against UBS arose after the confirmation date, and both sentences of the exculpation provision are limited by the first sentence’s initial clause “as of the Confirmation Date.”  In the alternative, Highland also argued that UBS’s refusal to include Highland in the lending syndicate was not in good faith and, in turn, not protected by exculpation provision.
As to Highland’s initial argument, Judge Gerber found the language was poorly drafted and unclear as to whether “as of the Confirmation Date” applied to both the first and second sentence of the exculpation provision.  Judge Gerber, however, mooted Highland’s initial argument by finding that UBS’s alleged bad acts occurred prior to the confirmation date. 
Nonetheless, Judge Gerber adopted Highland’s alternative position as to good faith.  Noting that, by its own terms, the exculpation provision is limited to “any act or omission taken or not taken in good faith,” Judge Gerber found that the exculpation provision applied only to the extent UBS acted in good faith.
In response, UBS cited the confirmation order’s two-page single-spaced good faith finding of fact.  Highland contended that the good faith finding was limited only to “good faith” for purposes of section 1125(e) of the Bankruptcy Code (which protects those who solicit acceptance or rejection of a plan in good faith from violations of any applicable law, rule, or regulation governing solicitation of acceptances or rejection of a plan or the offer, issuance, sale or purchase of securities).
The abbreviated version of the confirmation order’s good faith finding of fact is as follows:

Based on the record before the Bankruptcy Court in these Chapter 11 Cases, the Debtors and their directors, officers, employees, financial advisors, attorneys, and other professionals and agents have solicited acceptances of the plan in good faith and in compliance with the applicable provisions of the Bankruptcy Code.  The Debtors, the Reorganized Debtors … lenders under the Exit Facility (and the agents and arrangers under the Exit Facility) … and their respective principals, members, managers, officers, directors, employees and agents (including any attorneys, financial advisors, and other professionals retained by such Persons) have acted in “good faith” within the meaning of section 1125(e) of the Bankruptcy Code in compliance with the applicable provisions of the Bankruptcy Code and Bankruptcy Rules in connection with all their respective activities to the solicitation of acceptances of the Plan and in connection with the Rights Offering and their participation in the activities described in section 1125 of the Bankruptcy Code and, together with any of their respective successors or assigns, are entitled to the protections afforded by section 1125(e) of the Bankruptcy Code and the exculpation provisions set forth in Section 11.7 of the Plan, including, without limitation, for any act or omission taken or not taken in connection with, or arising out of, the Chapter 11 Cases, the Disclosure Statement, the Plan, … the Exit Financing, the solicitation of votes for and the pursuit of confirmation of the Plan, the offer and issuance of any securities under the Plan, the Rights Offering under the Plan, the consummation of the Plan, including, without limitation, the steps taken to effectuate the transactions described in Section 5.4 of the Plan, or the administration of the Plan or the property to be distributed under the Plan….

To aid its analysis, the Court revised and broke down the same provision as follows:

[“Sentence 1”:]  Based on the record before the Bankruptcy Court in these Chapter 11 Cases,

the Debtors and their directors, officers, employees, financial advisors, attorneys, and other professionals and agents

[“Solicitation Finding”:]  have solicited acceptances of the plan in good faith and in compliance with the applicable provisions of the Bankruptcy Code. 

[“Sentence 2”:]  The Debtors, the Reorganized Debtors … lenders under the Exit Facility (and the agents and arrangers under the Exit Facility) … and their respective principals, members, managers, officers, directors, employees and agents (including any attorneys, financial advisors, and other professionals retained by such Persons)

[“Acted Finding”:] have acted in “good faith” within the meaning of section 1125(e) of the Bankruptcy Code in compliance with the applicable provisions of the Bankruptcy Code and Bankruptcy Rules

[“Topic 1”:] in connection with all their respective activities to the solicitation of acceptances of the Plan and

[“Topic 2”:] in connection with the Rights Offering and their participation in the activities described in section 1125 of the Bankruptcy Code,

and, together with any of their respective successors or assigns,

[“Entitlement Finding”:] are entitled to the protections afforded by section 1125(e) of the Bankruptcy Code and the exculpation provisions set forth in Section 11.7 of the Plan,

including, without limitation, for any act or omission taken or not taken in connection with, or arising out of,

[“Protected Areas List”:] the Chapter 11 Cases, the Disclosure Statement, the Plan, … the Exit Financing, the solicitation of votes for and the pursuit of confirmation of the Plan, the offer and issuance of any securities under the Plan, the Rights Offering under the Plan, the consummation of the Plan, including, without limitation, the steps taken to effectuate the transactions described in Section 5.4 of the Plan, or the administration of the Plan or the property to be distributed under the Plan….

(emphasis added).

After breaking up the finding of fact into more manageable bite sizes, Judge Gerber concluded that both the “Solicitation Finding” and the “Acted Finding” were limited to solicitation and good faith “within the meaning of section 1125(e).”  While the “Entitlement Finding” was more broadly drafted and did reference the plan’s exculpation provision, Judge Gerber noted that the Entitlement Finding relies upon the Acted Finding and, in turn, is limited to the subject matter set forth in Topics 1 and 2.  Because syndication of the debtors’ exit facility was not within the scope of Topics 1 and 2, Judge Gerber held that the confirmation order’s good faith finding did not apply to UBS’s alleged bad acts.
While lawyers are trained to draft language to guard against the most unlikely worst case scenarios, kitchen-sink plan provisions may obfuscate their intended purpose.  Judge Gerber’s opinion cautions, “When contractual language important to parties’ protection appears in a huge mass of single spaced text, almost a full page in length (and with only two sentences in the entirety of that text), potential ambiguities result almost exponentially.”  As exculpation provisions are often the subject of many rounds of comments from committees and other interested parties, it is understandable that what may start off as clear language may end up as mush.  But if attorneys adopt the use of headings and/or white space as exemplified by Judge Gerber, we may be able to more readily parse complicated plan provisions and ensure that they serve their intended goals even when such provisions may be among the most heavily negotiated.