Google+ Followers

Wednesday, May 29, 2013

Equitable Mootness Ends the Charter Saga

Professor Robert Lawless at Credit Slips has a short post explaining briefly why he half-heartedly signed on to an amicus brief filed with the Supreme Court by a bunch of law professors in support of the certiorari petition in Law Debenture Trust Co. v. Charter Communications, Inc. (No. 12-847).  The Court denied the application so the Second Circuit's underlying decision stands, that Law Debenture Trust's appeal of the confirmation order in the Charter chapter 11 case was equitably moot because the plan had been substantially consummated approximately three years earlier.

The Charter POR was particularly aggressive, even unsavory, and it is unfortunate that no appellate review will ever be applied. 

Here are just a few of the alarming facets of the confirmed plan:

1) Many classes of bondholders received much less than par - according to the petition for cert, the issue petitioner represented only received 32.7% -- and voted  against the plan.

2) The plan had a $1.6B rights offering for new equity as its central feature but the price was set almost a year before the plan was confirmed and as the petition for cert says in footnote 2: "When the plan became effective, those shares immediately traded at nearly twice their acquisition price—a massive, overnight return. Compare CCI 2009 Form 10-K Annual Report F-13 (Feb. 26, 2010), and CCI S-1 Registration  Statement, at item 15 (Dec. 31, 2009), with CCI  2010 Form 10-K Annual Report 31."

3) Shareholders in general were wiped out, but the controlling shareholder, Paul Allen, was not.  Instead, he (a) was paid $200 million (ostensibly by the creditors behind the rights offering, but really at the expense of other noteholders) to cooperate with the POR, (b) allowed to retain an ownership interest in a subsidiary in order to preserve its NOL, to shelter the COD income that would arise under the POR and protect the other tax attributes, and also (c) allowed to retain a 35% voting stake in the company, to avoid (the bankruptcy court found) a "change of control" default under a credit agreement that the rights offering sponsors wanted to preserve (at the time the restructuring was negotiated, in early 09, reinstatement of the billions of bank debt was crucial to the plan  because it carried a LIBOR+250 interest rate, which was anywhere from 500 to 700 bps cheaper than market at the time; ironically, interest rates fell so much throughout 09 that the reorganized debtors replaced the facility within 5 months of emerging, and promptly removed Allen from the board.  As the cherry on his sundae, Allen and many others got broad releases and bars against lawsuits related to their stewardship of Charter and their participation in the reorganization.

4) To permit confirmation in the face of such substantial creditor rejection of the plan, the bankruptcy court took the aggressive view that, in seeking confirmation of a plan proposed by multiple debtors, only one debtor needed to satisfy the criterion of 1129(a)(10) that, where any class of creditors is impaired, at least one such class must accept the plan by the voting thresholds specified by section 1126.  (that "one accepting impaired class per plan" interpretation was wisely rejected by Judge Carey in the Tribune chapter 11; he read the section to mean "one accepting impaired class per debtor" which makes much more sense as a matter of interpreting 1129).

With all those aggressive and in some cases questionable goings-on, the case deserved appellate scrutiny.  Unfortunately for the appellant/petitioner, the Second Circuit makes it pretty hard to review confirmation orders, and imposes a presumption in favor of mootness as long as the plan has been consummated (which Charter did the day after appellant's motion for a stay pending appeal was denied).  As a result, like many other large cases with contested confirmation battles coming out of the Southern District - Adelphia, Calpine, Delta, ION Media, Journal Register, just to name a few recent reported opinions dismissing appeals from confirmation orders on grounds of equitable mootness, the legal decisions of the bankruptcy judge involving very large sums and important principles of reorganization law went unreviewed.

Although I would have liked the Court to take the case, I was not entirely surprised because the doctrine, being equitable, is hard to position as something worthy of Supreme Court intervention.  The petitioner strove to depict a "well entrenched" conflict among the circuits but, even without looking at the respondents' brief in opposition, I could tell that the depiction was exaggerated, as many of the decisions cited by petitioners were merely from district courts, not circuit courts of appeal.  The respondent did an excellent job knocking that argument down.  Also, the respondent, probably in exaggerated fashion, depicted the case as particularly unique and thus not a good vehicle for the Court to make pronouncements about the doctrine generally, harping, almost embarrassingly, on the unusual depth of the financial crisis (since confirmation took place in late 2009, I found that argument grossly overstated).

The law professors supported the application for certiorari, and the petitioners' characterization of the state of the law.  Their brief is fairly neutral on the doctrine of equitable mootness, but in writings outside of the brief, including Lawless's blog post, they plainly want to see the doctrine cut back or removed entirely.  Although I would have liked to see Charter reviewed and the lower court's holdings eliminated as precedents, I don't at all agree with their antipathy toward equitable mootness.
They argue it prevents appellate courts from reviewing and harmonizing chapter 11 doctrines.  That may be true, but it's hardly the only relevant factor.  The professors failed to balance that benefit against the practical impact on chapter 11 of diluting the equitable mootness doctrine, which I think would deter investments of fresh capital to fund emergence.  Even though I think Charter's POR was so outside the pale that it should never have been confirmed and deserved to be overturned on appeal to the extent possible. it is a case where fresh capital of $1.6 billion was infused into a grossly over-levered enterprise and that kind of investment needs to be encouraged and protected, from the perspective of the public policy behind reorganization of businesses. Weakening the doctrine to the point where potential investors shy away from investments that reorganize troubled companies strikes me as a terrible practical outcome that cannot be justified by increased doctrinal clarity.  The professors' attention to harmonizing the case law that they teach in their classrooms comes off as a classic example of "ivory tower" perspective that ignores the real world financial impact of their position.  

The best solution, it seems to me, is to have much more liberal standards to get a stay pending appeal at the district court level in large chapter 11 cases.  That would enable appellate review but protect investments of fresh capital from an intolerable risk of having carefully negotiated investments upset after the fact by appellate courts.