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And It's Just Not True

posted by Stephen Lubben

A bit on the overemphasis of the "absolute priority rule" in academia, over at Dealb%k.


I'm not sure I see the absolute priority issue here. If all of the debtors classes of claims and interests either accept the plan or are not impaired, confirmation can occur under 1129(a)(8) without having to satisfy 1129(b) generally and 1129(b)(2)(B)(ii) in particular.

In other words, absolute priority only kicks in when the court is cramming down a dissenting class of claims and has to ensure that the plan is "fair and equitable" as to that class.

If the noteholders accept a plan that makes a distribution to the preferred stockholders, I don't see the issue. An issue in USEC would only arise if the noteholders reject the plan, and Judge Sontchi confirms anyway. Given that this is a pre-pack, I doubt the issue has not already been discussed with the noteholders.

Is the issue in academia that absolute priority should be adhered to even when creditors consent to different treatment?

I will break my usual rule of "no comment" to note that D. makes a very good point here. The more precise academic problem is the tendency to ignore the ability to waive the APR and the concomitant tendency to assume that any consent to a "violation" of APR is non-voluntary. The second might have been the case in the 1980s, but as D notes you really can't get more voluntary than a prepack.

Just to follow up, my understanding of pre-packs is that they are used when there is a restructuring plan already in place pre-petition and that plan enjoys the support of enough creditors to satisfy 11 USC 1129 but less than 100% of all creditors. If everyone agreed, no bankruptcy case would be necessary. Thus, the bankruptcy case is used to essentially cram down the holdouts on the out of court restructuring.

We can probably assume that there are noteholders who do not support the current plan. However, we can probably also assume that they are both less than one half in number and less than 1/3 in amount.

Are they owed APR? If not, can they argue that classifying them with the assenting noteholders is discriminatory? If they were their own class, the plan would fail.

Just to further follow up on the above, it appears from the disclosure statement that the noteholders who are consenting to the debtor's plan are two entities known as Babcock and Wilcox Investment Company and Toshiba America Nuclear Energy Corporation. See DS at page 1, 3 ("As indicated above, the restructuring has the support of the Consenting Noteholders, B&W and Toshiba."). We can't be certain without a copy of the Noteholder Plan Support Agreement though.

If you go to page 32 of the DS, it looks like Toshiba and B&W own all of the preferred stock as well.

If it is correct that Toshiba and B&W dominate but are not the entirety of the noteholder class and own all the preferred stock, then they can confirm a plan under 1129(a) that violates APR by diverting assets from a class where they would share in the distribution pro rata to a class they are the entirety of.

That could create an interesting set of facts as 1129(b) offers no protection to the minority noteholders.

The absolute priority rule is violated all the time in chapter 11 when a stockholder purchases all the debtor's assets at a non-plan 363 sale and unsecured claims are extinguished from collection through an anti-suit injunction.

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