USA: Claiming Care or New Investment?


Recently, the Eighth Circuit became the first circuit court to weigh in on the issue of whether a Chapter 11 plan could offer only a few creditors in a class the right to invest in a reorganized debtor.

While affirming bankruptcy and district court decisions while Peabody Energy Corp. bankruptcy proceedings, the Eighth Circuit joined other courts in finding that a Chapter 11 agreement could handle one group of investors in the same class more favorably as long as the more favorable treatment is attributed to different, legitimate rights or donations.

During the bankruptcy, there were disputes between the secured Peabody and Nsecured creditors as to the extent of the guaranteed creditors ‘ claims on the debtor’s assets. The mediation parties included the debtors and a group of second-lien and unsecured notes holders of the debtors that eventually joined the debtors as the plan’s co-proponents.

The settlement ultimately led to the development of a proposal under Chapter 11, which promised that the debtors would collect $1.5 billion in new money to fund payments and activities of the debtors after the reorganization. The amount of preferred stock available for purchase by eligible investors relied on the amount of debt kept in advance of the petition And when the borrower became a “qualifying creditor,” the first 22.5% of the private placement was reserved exclusively for the co-proponents of the noteholder.

Upon discussing the recommendations of the ad hoc committee with their counsel and considering them at board meetings, the debtors decided that the proposals were inferior to the strategy of the debtors, raising costs and slowing the process of reorganization.

The creditors ‘ committee also favored the strategy of the debtors to the plans of the ad hoc committee. The debtors agreed to review, and all 20 creditor types voted overwhelmingly at the confirmation hearing to approve the proposal and Approximately 95% of the unsecured creditors of the debtors agreed to take part in the private placement.

The debtors began to consummate the plan during the pending appeal, and by April 4, 2017, the reorganized debtors had received the $1.5 billion pursuant to the rights offering and private placement and distributed millions of preferred and common stock shares in the newly reorganized company.

Additionally, the reorganized debtors transferred over $3.5 billion to creditors and concluded other plan-related activities before the lawsuit was heard by the district court.