Relevant Document:
Agenda
In a decision with major implications for both the Mallinckrodt debtors’ proposed plan and enforcement of make whole premiums in chapter 11 cases generally, Judge John Dorsey this afternoon overruled the Mallinckrodt
first lien lenders’
objection to the reinstatement of their claims under the debtors’
proposed plan without accounting for a $94 million
make whole premium.
Reorg’s live blog coverage of the ruling can be found
HERE. The debtors’ confirmation hearing will now be adjourned, with the Humana/Attestor
administrative expense claims trial scheduled to begin Monday, Nov. 8, at 10 a.m. ET.
Judge Dorsey found that section 1124(2) of the Bankruptcy Code, which governs reinstatement of unimpaired claims in chapter 11 plans, allows the debtors to “decelerate” the
first lien obligations and “roll[] back the clock” to before the default that gave rise to the premium - the debtors’ chapter 11 filing itself. Section 1124(2) requires debtors to cure defaults in order to reinstate debt, the judge noted, but not if the debt at issue arose solely as a result of the chapter 11 filing - and the make whole premium sought by the first lien noteholders arose solely as a result of Mallinckrodt’s filing, the only default cited by the noteholders.
Forcing the debtors to pay or reinstate the premium, the judge added, would impose a “bankruptcy penalty” on the debtors, confer a “windfall” on the noteholders solely by the “happenstance” of the debtors’ filing and would be contrary to public policy. Section 1124(2) allows for reinstatement without cure of defaults triggered by filing, the judge said, and “this is precisely the type of situation section 1124 contemplates,” as confirmed by statements in the legislative history.
Judge Dorsey also rejected the first lien noteholders’ contention that the plan impairs their rights under intercreditor agreements with
pari passu first lien lenders and junior second lien lenders by allocating distributions to those creditors outside of the sharing provisions of the intercreditor agreements. The sharing provisions only apply if a “continuing event of default” exists, the judge noted, and reinstatement would effectively cure the only default cited by the noteholders - the bankruptcy filing itself - as a matter of law.
Further, Judge Dorsey reasoned, the sharing provisions of the first lien intercreditor agreement only apply to distributions from the proceeds of shared collateral, and the satisfaction of the first lien lenders’ claims under the plan would be made from the proceeds of new exit financing rather than existing assets. The first lien noteholders’ collateral and priority are thus “not adversely affected by the plan,” according to the judge.
Finally, the judge held that the sharing provisions of the second lien intercreditor agreement are similarly not violated by the distribution of new take-back notes to the second lien noteholders because the issuance of new debt under a plan is not a “distribution of the debtors’ property.” The new second lien notes will also remain junior to the reinstated first lien notes, the judge pointed out, and the intercreditor agreements would continue to govern.
This morning, prior to the ruling, the debtors published
cleansing materials indicating the parties’ negotiating positions on the terms of any consensual take-back notes to resolve the dispute. Second lien noteholders previously
agreed to accept
10% take-back notes under the plan.