A POTENTIALLY MOMENTOUS DECISION: SECOND CIRCUIT EXPLAINS HOW TO CALCULATE CHAPTER 11 CRAMDOWN INTEREST RATE Stuart I. Gordon and Matthew V.

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1 LEXISNEXIS A.S. PRATT FEBRUARY/MARCH 2018 EDITOR S NOTE: DECISIONS, DECISIONS Steven A. Meyerowitz A POTENTIALLY MOMENTOUS DECISION: SECOND CIRCUIT EXPLAINS HOW TO CALCULATE CHAPTER 11 CRAMDOWN INTEREST RATE Stuart I. Gordon and Matthew V. Spero CIRCUIT DISSONANCE: DOES RETENTION OF COLLATERAL SEIZED PREPETITION VIOLATE THE AUTOMATIC STAY? Peter C. Blain FIFTH CIRCUIT REJECTS BREACH OF FIDUCIARY DUTY AND FRAUDULENT TRANSFER CLAIMS Michael L. Cook NEW YORK BANKRUPTCY COURT ISSUES OPINION DENYING PROPOSED THIRD-PARTY RELEASES IN SUNEDISON Matthew A. Feldman, Christopher S. Koenig, and Jason D. St. John THE OCC S FINAL GUIDANCE FOR RECOVERY PLANNING: GETTING STARTED GUIDE Michael Nonaka and Randy Benjenk OUTCOMES IN SINGLE ASSET REAL ESTATE CHAPTER 11 CASES Jerry L. Switzer, Jr., Jason A. Nagi, and James H. Billingsley

2 Pratt s Journal of Bankruptcy Law VOLUME 14 NUMBER 2 FEB./MAR Editor s Note: Decisions, Decisions... Steven A. Meyerowitz 53 A Potentially Momentous Decision: Second Circuit Explains How to Calculate Chapter 11 Cramdown Interest Rate Stuart I. Gordon and Matthew V. Spero 55 Circuit Dissonance: Does Retention of Collateral Seized Prepetition Violate the Automatic Stay? Peter C. Blain 63 Fifth Circuit Rejects Breach of Fiduciary Duty and Fraudulent Transfer Claims Michael L. Cook 69 New York Bankruptcy Court Issues Opinion Denying Proposed Third-Party Releases in SunEdison Matthew A. Feldman, Christopher S. Koenig, and Jason D. St. John 76 The OCC s Final Guidance for Recovery Planning: Getting Started Guide Michael Nonaka and Randy Benjenk 81 Outcomes in Single Asset Real Estate Chapter 11 Cases Jerry L. Switzer, Jr., Jason A. Nagi, and James H. Billingsley 93

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4 Editor-in-Chief, Editor & Board of Editors EDITOR-IN-CHIEF STEVEN A. MEYEROWITZ President, Meyerowitz Communications Inc. EDITOR VICTORIA PRUSSEN SPEARS Senior Vice President, Meyerowitz Communications Inc. BOARD OF EDITORS SCOTT L. BAENA Bilzin Sumberg Baena Price & Axelrod LLP LESLIE A. BERKOFF Moritt Hock & Hamroff LLP TED A. BERKOWITZ Farrell Fritz, P.C. ANDREW P. BROZMAN Clifford Chance US LLP MICHAEL L. COOK Schulte Roth & Zabel LLP MARK G. DOUGLAS Jones Day MARK J. FRIEDMAN DLA Piper STUART I. GORDON Rivkin Radler LLP PATRICK E. MEARS Barnes & Thornburg LLP DERYCK A. PALMER Pillsbury Winthrop Shaw Pittman LLP iii

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6 New York Bankruptcy Court Issues Opinion Denying Proposed Third-Party Releases in SunEdison By Matthew A. Feldman, Christopher S. Koenig, and Jason D. St. John * Bankruptcy Judge Stuart M. Bernstein refused to approve the SunEdison debtors proposed third-party releases, ruling that (i) parties that failed to vote on the plan of reorganization could not be deemed to have consented to the releases, (ii) the bankruptcy court did not have the jurisdiction to approve the releases in their proposed form, and (iii) the debtors did not demonstrate the unique circumstances necessary to approve releases under the standard set forth by the U.S. Court of Appeals for the Second Circuit. The bankruptcy court allowed the debtors to propose modifications to the releases for the court to consider. The authors of this article discuss the ruling and its implications. The Bankruptcy Court for the Southern District of New York issued an opinion in In re SunEdison, Inc., 1 ruling that the third-party releases proposed in the debtors plan of reorganization could not be approved. The bankruptcy court held that there was no subject matter jurisdiction over the proposed releases and the debtors did not satisfy the high standard for the approval of releases set forth by the U.S. Court of Appeals for the Second Circuit. The bankruptcy court also ruled that parties that did not return a ballot on the plan of reorganization did not thereby consent to the releases. BACKGROUND Bankruptcy Court Confirms the Plan and Reserves Decision on Third- Party Releases for Non-Voting Creditors SunEdison, Inc., a renewable-energy and solar energy developer, and certain of its affiliates (collectively, the debtors or SunEdison ), filed for Chapter 11 * Matthew A. Feldman is co-chairman of Willkie Farr & Gallagher LLP, managing partner of the firm s Washington office, a member of the firm s Executive Committee and a partner and co-chair of the Business Reorganization & Restructuring Department. His clients include debtors, creditors, investors, lenders, governmental agencies, and committees. Christopher S. Koenig and Jason D. St. John are associates in the firm s Business Reorganization & Restructuring Department. The authors may be reached at mfeldman@willkie.com, ckoenig@willkie.com, and jstjohn@willkie.com, respectively. 1 In re SunEdison, Inc., Case No (SMB) (Bankr. S.D.N.Y. Nov. 8, 2017). 76

7 SUNEDISON COURT DENIES PROPOSED THIRD-PARTY RELEASES protection on April 21, The debtors proposed a joint plan of reorganization (the Plan ) and on July 28, 2017, the bankruptcy court entered an order confirming the Plan (the Confirmation Order ) except with respect to the debtors proposed third-party releases, which sought to release various parties from claims relating to the debtors or their restructuring. The parties to have been released included (i) the debtors officers, directors, employees, financial advisors, attorneys and other professionals, (ii) the debtor-in-possession lenders, (iii) many of the debtors prepetition lenders, and (iv) each of the foregoing s affiliates, advisors, principals, members and professionals. Background on Third-Party Releases Third-party releases are provisions in a plan of reorganization that release the liability of non-debtor parties on claims related to the debtor. If a party votes in favor of a plan, it consents to the third-party releases, but debtors often seek to have the bankruptcy court approve the releases as to nonconsenting parties as well. The legality of nonconsensual releases is controversial because the Bankruptcy Code does not explicitly prohibit or authorize them, and courts have ruled that they are only appropriate in rare circumstances. In fact, as noted by the bankruptcy court in the decision, the only time that the Bankruptcy Code explicitly allows third-party releases is in Section 524(g), regarding asbestos liabilities. 2 Plan proponents have tried to expand the impact of third-party releases by arguing that parties have consented to the releases unless they specifically opt out of those releases. Plan proponents sometimes argue that a creditor must mark a specific box on the plan voting ballot if it is choosing to reject the releases (even if it votes against the plan). In SunEdison, no non-voting claimholder objected to the releases. 3 However, the bankruptcy court still requested supplemental briefing from the debtors on the proposed releases. The debtors submitted a supplemental memorandum of law in support of the releases, 4 arguing that the release provisions in the Plan were appropriate and should apply to those claimholders that did not vote against the Plan. On November 8, the bankruptcy court entered its decision on this issue. THE BANKRUPTCY COURT S DECISION ON THE PROPOSED RELEASES The bankruptcy court concluded in its decision that the debtors failed to 2 In re SunEdison, Inc., supra note 1 at Id. at 1. 4 Hereinafter Memorandum of Law. 77

8 PRATT S JOURNAL OF BANKRUPTCY LAW show that the non-voting claimholders consented to the releases, that the bankruptcy court had jurisdiction to release the third-party claims, or that the releases were appropriate under the standard set forth in Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.) ( Metromedia ). 5 The Non-Voting Claimholders Did Not Consent to the Releases The debtors had argued that the non-voting claimholders that did not vote on the Plan should be deemed to have consented to the releases, 6 because the Plan and disclosure statement provided ample notice to creditors that by abstaining from voting, they would be deemed to consent to the releases. 7 The debtors also cited to previous cases in which creditors were deemed to have consented to the release provisions in a plan if they did not affirmatively act. 8 The bankruptcy court rejected these arguments. First, the bankruptcy court noted that courts apply contract principles to determine if a creditor has consented to a third-party release. 9 The bankruptcy court explained that under general New York contract law, silence does not constitute consent, with a few exceptions when silence is misleading and deceives the other party. 10 However, these exceptions did not apply, and the bankruptcy court ruled that the disclosure statement s announcement of the releases did not create a duty for all creditors to opt out of the releases affirmatively. 11 The bankruptcy court also cited Chassix and Washington Mutual as recent cases that support the conclusion that consent cannot be based only on a creditor s inaction F. 3d 136 (2d Cir. 2005). See In re SunEdison, Inc., supra note 1 at 2. The debtors submitted briefing on the constitutional authority of the bankruptcy court to approve the Release Provisions as well. Memorandum of Law at The bankruptcy court ruled that the issue of its constitutional authority was relevant, but because the releases were not being approved, the bankruptcy court did not need to resolve the question. In re SunEdison, Inc., supra note 1 at 5 n.5. 6 Memorandum of Law at 4. 7 Id. 8 See, e.g., In re Conseco Inc., 301 B.R. 525 (Bankr. N.D. Ill. 2003); In re DBSD North America, Inc., 419 B.R. 179 (Bankr. S.D.N.Y. 2009), aff d in part, rev d on other grounds in part, 627 F. 3d 496 (2d Cir. 2010); see Memorandum of Law at 6 9 (for full discussion of same). 9 In re SunEdison, Inc., supra note 1 at See id. at Id. at Id. at 9 10; see also In re Chassix Holdings, Inc., 533 B.R. 64 (Bankr. S.D.N.Y. 2015); In re Washington Mutual, Inc., 442 B.R. 314 (Bankr. D. Del. 2011). 78

9 SUNEDISON COURT DENIES PROPOSED THIRD-PARTY RELEASES The Bankruptcy Court Does Not Have Jurisdiction and the Releases Are Not Appropriate Under Metromedia In order for a bankruptcy court to have subject matter jurisdiction to enter an order, the relief requested must have some effect on the debtor s estate. In the context of third-party releases, that means that the proposed releases must provide some benefit to the debtor s estate. The debtors argued that the bankruptcy court had jurisdiction over the releases because the debtors had indemnification obligations to certain released parties, and the third-party releases meant that the debtors would not be required to make any indemnification payments to such parties. Although the bankruptcy court recognized that indemnification obligations can provide subject matter jurisdiction, Judge Bernstein rejected the argument that the debtors indemnification obligations provided subject matter jurisdiction over all of the proposed releases. First, Judge Bernstein noted that the possible third-party actions that are barred by the releases are far broader than the debtors are required to indemnify, and moreover, the parties being released include unidentifiable agents, representatives and other parties, to whom the debtors owe no indemnification obligations. 13 The bankruptcy court also noted that under Metromedia, third-party nonconsensual releases are proper only in rare and unique circumstances. 14 Under Metromedia, a third-party nonconsensual release may be appropriate if the estate received substantial consideration from the third party, if the claims were channeled to a settlement fund, if the enjoined claims would indirectly impact the reorganization by indemnity, or if the plan provides for the full payment of enjoined claims. 15 The bankruptcy court found that the debtors had not established the unique circumstances necessary to approve nonconsensual third-party releases. Judge Bernstein provided the debtors with 30 days to propose a modified form of a release for the bankruptcy court s consideration. The bankruptcy court explained that any modified release must specify the released parties by name or their identities must be readily identifiable, and the debtors must demonstrate how the released claims may impact the debtors estates. 16 IMPLICATIONS This decision is another example of increasing scrutiny from bankruptcy 13 In re SunEdison, Inc., supra note 1 at Id. at Metromedia, 416 F. 3d at In re SunEdison, Inc., supra note 1 at

10 PRATT S JOURNAL OF BANKRUPTCY LAW courts to proposed third-party releases. The decision continues the recent trend of bankruptcy court rulings (most notably, in Chassix and Washington Mutual) that creditors consent to releases by voting for the plan or affirmatively opting into releases failing to vote or opt out is insufficient to constitute consent to releases. Additionally, the bankruptcy court required the SunEdison debtors to provide much more detail on the parties being released and specifically how those claims impacted the debtors estate. Future plan proponents will have to consider in more detail how their proposed releases affect the debtor s estate in case the proposed releases meet with significant judicial scrutiny. 80