Rejecting the formalistic approach, the Delaware Bankruptcy Court in Indianapolis Downs, LLC1 focused on the policies underlying the idea of the disclosure statement to uphold a post-petition lock-up agreement, entered into before approval of a disclosure statement, with sophisticated financial players who had access to the material information that the disclosure statement would have provided.
This opinion represents a potentially significant relaxation of the bankruptcy solicitation rules and validates what has become a standard and often essential practice of involving major creditors in the negotiations leading to a proposed plan. When those negotiations produce a result acceptable to the creditors, the proposed plan terms are outlined in a plan support agreement with the creditors agreeing to vote for a plan embodying those terms. This opinion validates such an agreement even if it obligates the creditor to vote for a particular plan before the disclosure statement has been approved.
The objectors in Indianapolis Downs argued that such an approach violates the Bankruptcy Code’s vote solicitation rules. Under section 1125(b) of the Bankruptcy Code, a creditor’s “acceptance or rejection of a plan may not be solicited” until after the creditor is provided with a court-approved disclosure statement. Thus, as argued by the objectors, the binding lock-up agreement constituted the solicitation of a vote and, since the creditors entered into the agreement before approval of the disclosure statement, their votes were solicited in violation of section 1125(b). As a remedy for the alleged solicitation violation, the objectors sought to disqualify the votes of locked-up creditors under section 1126(e), which permits the court to “designate” votes that were not procured “in accordance with the provisions of” the Code.
Indianapolis Downs represents the logical extension of a series of cases relaxing the solicitation rules that began with the Third Circuit’s decision in Century Glove.2 There, the Court adopted a narrow reading of “solicitation” and emphasized chapter 11’s goal of encouraging creditor negotiations. However, unlike Century Glove, this opinion extends the pro-negotiation reasoning to blur the Third Circuit’s apparent distinction between preliminary negotiations and a formal request for a vote. While the Century Glove Court found “no principled, predictable difference between negotiation and solicitation of future acceptances,” it did emphasize that the negotiations in that case did not involve a request for the creditor’s vote and that the creditor had “a chance to reconsider its preliminary decision” after approval of the disclosure statement and before casting its final vote.3
In contrast, the Indianapolis Downs restructuring support agreement included a provision requiring the locked-up creditors to vote for a conforming plan and expressly providing for the remedy of specific performance of the voting commitment. The Court held that such terms did not “automatically” require designation of the votes cast by the locked-up creditors. The agreement in this case provided that it became binding on the locked-up creditors upon signature but was not binding on the debtor until after the Court approved a disclosure statement.
The agreement and a proposed disclosure statement were filed with the Court immediately after the agreement was executed. While the opinion noted that technically the creditors agreed to vote for the plan only after approval of the disclosure statement, it did not rely solely upon that distinction to support its conclusion. Instead, the Court emphasized that the “[n]egotiation and formulation of a plan in a large, complex Chapter 11 case … is not a hypothetical exercise” and that “the parties were entitled to demand and rely upon assurances that accepting votes would be cast by the parties” to the agreement.4
While Indianapolis Downs may provide new flexibility for plan negotiations and allows a plan proponent to obtain binding voting commitments, the case does not establish a bright line test for when a lock-up agreement will satisfy the Bankruptcy Code’s solicitation rules. Rather the test is fact-specific and limited to situations that do not pose a “material risk to the important interests sought to be protected by the Bankruptcy Code’s disclosure requirements.”5 Thus, use of lock-up provisions carries some risk for the plan proponent. Factors noted by the Court that may bear upon the propriety of such agreements include case complexity, good faith, party sophistication and access to independent professional advice, access to material information, the extent of negotiations, and prompt disclosure of the agreement.
Note that Indianapolis Downs involved an attempt by dissenters to designate the votes of the locked-up creditors. Designation would have disqualified the votes of the “overwhelming majority of creditors and stakeholders” and blocked confirmation of a plan with broad support. Because voting is a critical feature of chapter 11, courts view designation as a drastic remedy and require a strong showing of bad faith or wrongdoing impose it. No bad faith or wrongdoing was alleged in this case. Thus, an alternative reading of Indianapolis Downs is that the Court merely exercised its discretion not to impose the designation remedy for a lock-up obtained in circumstances that did not threaten chapter 11’s goal of informed creditor participation.
1 In re Indianapolis Downs, LLC., __ B.R. __, 2013WL395137 (Bankr. D. Del. 1/31/13) (Shannon, J.). up
2 Century Glove Inc. v. First Am. Bank (In re Century Glove Inc.), 860 F.2d 94 (3d Cir. 1988). up
3 Id. at 102. up
4 Indianapolis Downs, at *6. up
5 Id. at *7.©2014 Greenberg Traurig, LLP. All rights reserved.