Restructuring

Contributed by Abigail Lerner
Generally when parties to a dispute work out a settlement they can breathe a sigh of relief and put their differences behind them.  OK – it’s a little more complicated than that when one of the parties is a chapter 11 debtor that must seek relief from the bankruptcy court to approve the settlement.  But what if a party objects?  Things get a bit more complicated.  And what if the objecting party has no apparent pecuniary interest at stake?  In that scenario, the settling parties can rest a little easier as the bankruptcy court in In re Alpha Natural Resources Inc. recently denied standing to parties who lacked a pecuniary interest in Alpha’s bankruptcy case to object to a settlement agreement that resolved a dispute involving over $200 million. 
Alpha Natural Resources and its subsidiaries operate coal mines and mining related properties throughout the state of West Virginia.  Because of their operations, Alpha and its subsidiaries are subject to regulation by the West Virginia Department of Environmental Protection (“DEP”).  Alpha, as a mine operator, is required to obtain a mining permit from the DEP before any surface mining operations can begin and must, before the permit is issued, post a bond payable to the state of West Virginia to secure its regulatory obligations, including those relating to reclamation (i.e., regulations requiring miners to return land to its natural state following completion of mining operations).  If a mine operator meets certain criteria relating to its financial solvency, it may self-bond and need not obtain a bond backed by a third-party.
Alpha met the criteria and was self-bonding with the permission of the DEP until July 2015 when DEP notified Alpha that due to its vulnerable financial condition, DEP would no longer permit it to satisfy any further bonding obligations through self-bonding.  On August 3, 2015, Alpha and certain subsidiaries commenced bankruptcy cases in the Bankruptcy Court for the Eastern District of Virginia.  Two days later, the debtors informed DEP that they believed they no longer satisfied the self-bonding requirements.  DEP confirmed that the debtors would require a substitute form of bond.  The amount of the self-bond that needed replacing totaled over $240 million.  DEP encouraged the debtors to reach out to the Department to work out a consensual solution.
The debtors and DEP ultimately reached resolution, agreeing to a settlement that would, among other things, require the debtors to post a $15 million letter of credit in favor of DEP and grant DEP a superpriority claim in the amount of $24 million, which amount fully exhausted the funds available for bonding accommodations under the debtors’ postpetition lending facility.  On December 7, 2015, the debtors filed a motion seeking bankruptcy court approval of the settlement.  Although no creditor filed an objection to the proposed settlement, certain environmental groups opposed the motion, arguing that the settlement violated the laws of the United States and West Virginia.
Before deciding whether the proposed settlement was fair and equitable, the court addressed a threshold matter – whether the environmental parties had standing to object to the settlement motion.  First, the court addressed the standing requirement of Article III of the Constitution, which gives federal courts jurisdiction to hear cases and controversies.  The court noted that a party must have standing to meet the Article III case or controversy requirement.  Under Supreme Court precedent, a party must have suffered a “concrete and particularized injury in fact” that is “fairly traceable to the challenged action of the defendant, and that can be redressed by a favorable judicial decision” to demonstrate standing. Second, the court held that section 1109(b) of the Bankruptcy Code imposes an additional standing requirement for a party to be heard in a chapter 11 case:  “A party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.”  The court explained that, because the environmental parties did not fall into any of the specified categories listed in section 1109(b), in order to have standing, they must be categorized as a “party in interest.”
Recognizing that the term “party in interest” is not defined in the Bankruptcy Code, the court considered previous Fourth Circuit rulings, as well as those of other circuits, to determine whether the environmental parties could be deemed a party in interest.  The court concluded that courts consistently have held that a party in interest includes all persons whose pecuniary interests are directly affected by the bankruptcy proceedings.  Here, the court noted that the environmental parties had failed to plead any concrete and particularized injury in fact that would result from approval of the West Virginia settlement.  The court further noted that even if the environmental parties had some pecuniary interest, standing only would attach under section 1109(b) if the pecuniary interest would be “directly affected” by the bankruptcy proceeding.  A remote pecuniary interest, the court held, would not suffice.  Indeed, the court stated that the only allegations set forth in the environmental parties’ objection were that the settlement violates law, and, even if true, such allegations could not confer standing on the environmental parties.  Thus, the court overruled the objection and approved the settlement, finding it would best preserve the value of the debtors’ bankruptcy estates, maximize the return to creditors, help preserve jobs, and give the debtors the opportunity to reorganize their business affairs.
This decision serves as a helpful reminder that just because someone might not agree with the way a debtor proposes to settle a matter does not mean that they will have a right to oppose it.  If a party is not a creditor or equity holder, it should make sure that it can demonstrate a pecuniary interest that would be directly affected by a debtor’s action before objecting to the relief the debtor seeks.  Otherwise, the objector may not have a right to be heard.