This afternoon Judge Marvin Isgur surprised the Wesco/Incora uptier litigation parties at the
third day of closing arguments by indicating that “at this stage,” he believes “with a high degree of certainty” that Silver Point and Pimco’s injection of $250 million in new financing via the
March 2022 secured exchange was “unauthorized” by the 2026 notes indenture. According to Judge Isgur, after
30 days of trial the “clear and convincing” evidence suggests “the new money came in without authorization under the indenture.”
The judge did not provide an explanation for this conclusion - which he said is “going to be in the opinion” - though he hinted at one key finding: He told Benjamin Heidlage of Holwell Shuster, counsel for Silver Point and Pimco, he was unconvinced by their argument that the debtor could have walked away from the transaction after the issuance of the $250 million in new 2026 notes that gave Silver Point and Pimco the two-thirds majority necessary to strip the 2026 noteholders’ liens but before the liens were actually stripped.
The excluded noteholders argue the issuance of the new notes with majority consent violated the indenture because it led inexorably to the stripping of their liens, which required two-thirds consent. Silver Point and Pimco counter that the chain of causation between the new notes issuance and the lien stripping could have been broken by the debtors revoking their signatures after issuance of the new notes but before the lien stripping amendment. Judge Isgur said today he believes the signatures were already released.
According to Judge Isgur, after the execution of the third supplemental indenture that allowed the issuance of the new notes, “everything was automatic” and thus the “direct effect” of the third supplemental indenture was to “grant impermissible liens” to Silver Point and Pimco for their new-money contribution. As a result, the judge added, “the entire agreement” to undertake the transaction was “void,” and the 2026 noteholders’ liens must be restored - including the 59% held by Silver Point and Pimco before the exchange. “I’ve gotten there, without any question,” the judge remarked, though he noted he has “a lot of other issues to rule on.”
Judge Isgur also indicated he will not limit the excluded noteholders’ remedy to an inconsequential unsecured claim against the debtors, but intends to reshuffle the debtors’ capital structure. The judge told Heidlage that he is considering issuing a declaratory judgment restoring the liens securing all of the 2026 formerly secured notes and leaving Silver Point and Pimco with their own unsecured claim for the $250 million in new money.
Leaving the excluded noteholders with an unsecured claim, Judge Isgur told Heidlage, would allow Silver Point and Pimco to “get the entire benefit of their bargain knowing they cheated,” and “that’s not happening.” “If you think they win because of that, you haven’t practiced before me,” the judge said.
However, the judge explained that leaving Silver Point and Pimco with an unsecured claim for the new money they contributed via the transaction would be a “terribly unfair result.”
Judge Isgur suggested that one equitable solution could be to discount the excluded noteholders’ recovery to reflect the participating noteholders’ contribution of new money - perhaps by creating a hypothetical pro rata version of the secured exchange.
The judge said he has created a model with open inputs to reallocate the debtors’ capital structure based on equitable factors, which would require a further hearing.
For now, Judge Isgur said, he is interested only in determining whether he has the equitable authority to diminish the excluded noteholders’ recovery to reach a fair result even though the excluded noteholders have not been accused of any inequitable conduct.
Counsel for Silver Point and Pimco asked for the opportunity to brief the extent of Judge Isgur’s authority to provide equitable relief, and the judge directed the parties to file briefs by Wednesday, July 3, at 1 p.m. ET. Judge Isgur also continued the debtors’ confirmation hearing to July 29 at 10 a.m. ET from Monday, July 1, though it is unclear if the debtors can proceed with their
proposed plan if the judge reallocates their capital structure.
The judge’s surprising decision to reveal his thinking on the merits - he indicated at closing arguments on June 25 that he did not intend to rule today - seemed prompted by confusion among the parties regarding the purpose of today’s closing argument. The parties seemed to expect today’s arguments to focus on whether the
excluded noteholders would be entitled to equitable relief, in the form of the restoration of their liens, if the transaction breached the indenture.
But Judge Isgur made clear at the start that the issue for discussion was actually whether Silver Point and Pimco would be entitled to equitable relief from a decision restoring the excluded noteholders’ liens, to account for the value of their new-money contribution.
Susheel Kirpalani of Quinn Emanuel, counsel for the debtors, and Heidlage, for Silver Point and Pimco, pushed back against the idea that if the transaction violated the indenture, then the 2026 noteholders would be entitled to restoration of their liens. Kirpalani said the judge could only restore the 2026 noteholders’ liens if he found that the requirements for equitable subordination of Silver Point and Pimco under section 510(c) of the Bankruptcy Code were established.
But Judge Isgur told Kirpalani to focus on whether Silver Point and Pimco would be entitled to equitable relief from a judgment restoring the 2026 noteholders’ liens. The judge declared that “there is no way” the excluded noteholders’ remedy for breach of the indenture would be a “mere” unsecured claim. “That will not be the result,” Judge Isgur added, because “that would be the worst possible thing I could do.”
However, Heidlage continued to press the issue, arguing that the judge lacked authority to restore the 2026 noteholders’ liens as a matter of equity. Judge Isgur reiterated that the question is whether he has authority to grant Silver Point and Pimco equitable relief. If Silver Point and Pimco believe equitable relief is unavailable, the judge added, then he could “end this hearing now, grant legal relief” to the excluded noteholders and not “worry about what is fair to your side.”
Citing the U.S. Supreme Court’s 1939 decision in Pepper v. Litton, the judge suggested he has the power to “do justice to make things right.” Judge Isgur again clarified for Heidlage that he is thinking about using that power “for you, not against you.”
When Heidlage continued to resist the concept, arguing that he does not know of any “equitable tool” allowing a bankruptcy court to perform a “complete recreation of the capital structure,” the judge responded by indicating his view on the merits of the excluded noteholders’ breach claims. Based on his conclusions, Judge Isgur said, the 2026 noteholders “would get a first lien,” and “you would get no lien” with “the whole transaction invalid.”
That result would be “very unfair,” the judge remarked, but “very simple” - it would “make my life a hell of a lot easier.” Heidlage relented and requested the opportunity to brief the equitable authority issue, which Judge Isgur granted. “I hope you let me do the right thing,” the judge said.