Thu 01/19/2023 15:02 PM
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Judge Craig Goldblatt paved the way for the Kabbage Inc. dba KServicing debtors to solicit votes on their plan after approving their disclosure statement at a hearing today, subject to the debtors amending the Class 4 general unsecured claims ballot to permit holders to opt out of the plan’s third-party releases even if they vote to accept the plan. Judge Goldblatt required this revision after remarking that he is “not comfortable” with the debtors’ original proposal - to send out ballots stating that any creditor voting to accept the plan would also irrevocably be consenting to the plan’s third-party releases. The judge reserved his right to issue a written decision “flesh[ing] out” his reasoning.

The court’s ruling today partially sustained the U.S. Trustee’s objection, which raised several issues relating to the plan’s third-party releases and the debtors’ solicitation materials. Debtors’ counsel announced at the outset that the DS objections filed by Cross River Bank and the U.S. government on behalf of the Small Business Administration were resolved ahead of the hearing through revisions to the plan and the proposed DS order.

Although counsel to the UST acknowledged that ballots tying acceptance of a plan to consenting to the third-party releases (like the one proposed by the debtors) are commonly used in the jurisdiction, Judge Goldblatt expressed “concern” with the practice. The judge remarked that he wanted to be “respectful of existing practices” in the Delaware bankruptcy court, both regarding “formal and informal” practices, and that it was not his intent to create a “profoundly different” rule than his colleagues. However, this did not preclude him from ever departing from such practices, the judge stated, emphasizing that he “wouldn’t do it lightly” given the importance of creating “clarity and consistency.” The UST observed that, aside from the TPC Group and RCS Capital Corp. cases (discussed below), the issue does not appear to have been raised repeatedly, depriving the rest of the Delaware bankruptcy bench of the ability “to pressure test” whether the judges “are aligned or view it differently.”

The judge explained his “overarching view” that, under Third Circuit precedent, the release provision is like any other plan provision, and it depends on the facts and circumstances in evidence whether it is a lawful or an unlawful provision. That question is best addressed at the confirmation stage, added the judge. In practice, there is a plan objection deadline, and if a party raises an objection to the release provision, the debtor either proves that it is lawful or carves out the objecting party, Judge Goldblatt said.

Judge Goldblatt questioned whether he should be approving solicitation procedures that inform creditors that they are granting an irrevocable third-party release if they vote to accept the plan, “unless I can confirm a plan that does meet Continental?” In the 2000 Continental Airlines decision, the Third Circuit said that the “hallmarks” of nonconsensual releases are “fairness and necessity to the reorganization,” supported by specific factual findings. When a ballot ties plan acceptance to granting third-party releases, Judge Goldblatt explained, “I think that mechanism essentially puts undue pressure on the granting of the consent so it takes it out of the world of consensual.” “So I am disinclined to hav[e] them tied,” he said.

The judge also noted that he did not “have a problem” with the debtors’ proposal to not “send a ballot to someone who doesn’t vote” because a debtor is not required to give a party that is not entitled to vote the chance to opt out of releases. Judge Goldblatt also said that although he has “sympathy” for the view that the proposed third-party release is “too broad,” objections to the scope of the release can be addressed at confirmation.

Candace Arthur of Weil Gotshal, counsel for the debtors, argued that the facts of this case were “unique enough,” in the limited number and sophistication of creditors, to warrant tying acceptance of the plan to granting a third-party release. Arthur pointed to Judge Mary Walrath’s 2016 DS approval ruling in the RCS Capital case as being squarely on point, noting that Judge Walrath found in that case that the affirmative action of voting to accept a plan was “enough to consider it a consensual release.”

Rosa Sierra-Fox for the UST pushed back, saying that the partial transcript the debtors provided of Judge Walrath’s ruling in RCS “does not answer the question at all” and failed to provide the court with a fulsome picture of the facts and circumstances in that case as well as the factors that went into Judge Walrath’s reasoning. Sierra-Fox further argued that treatment under a plan is “separate and distinct” from accepting every plan provision and that parties “take for granted” that accepting a plan is not the same as “truly” consenting to a plan.

Sierra-Fox also criticized the debtors’ suggestion that the number or sophistication of the debtors’ creditors makes this case unique, arguing that these factual issues should instead be left for plan confirmation.

The UST urged Judge Goldblatt to stick to his reasoning and ruling in TPC Group, where he required the debtors to modify their voting ballots to give general unsecured creditors the option to opt out of the plan’s third-party release regardless of whether they voted to accept or reject the plan. Judge Goldblatt observed that when he ruled in TPC, he thought that plan solicitation materials “proposing to deny accepting creditors the opportunity to opt out” were “uncommon.” “Hearing that this procedure is common I guess surprises me,” quipped the judge.

Arthur, for the debtors, argued that the ballots, as drafted, give creditors notice of the releases as the “worst treatment” possible under the plan, and that the potential for an objection that eliminates or amends the release, or carves out creditors, means that there is “only upside” for voters. The fact that creditors would be given the opportunity to object provides them with sufficient “procedural safeguards,” insisted Arthur.

Judge Goldblatt disagreed, questioning whether it would be “misleading” to distribute ballots conditioned on an irrevocable release, when that release could very well be altered or potentially even eliminated in the confirmed plan.

The judge ultimately found that the DS contained the necessary information for voting classes to make an informed decision on the plan but that, before the debtors could send out their solicitation materials, they would have to modify the ballots for Class 4 GUCs to provide such holders with an opportunity to opt out of the third-party releases, separate from their vote to accept or reject the plan.
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