Delaware Bankruptcy Court Confirms The Validity Of Plan Support Agreements

Chapter 11 debtors and sophisticated creditor and/or shareholder constituencies are increasingly using postpetition plan support agreements (sometimes referred to as "lockup" agreements) to set forth prenegotiated terms of a chapter 11 plan prior to the filing of a disclosure statement and a plan with the bankruptcy court. Under such lockup agreements, if the debtor ultimately proposes a chapter 11 plan that includes prenegotiated terms, signatories are typically obligated to vote in favor of the plan. As a result, the outcome of voting on a chapter 11 plan is often largely determined even before the bankruptcy court approves the disclosure statement, if sufficient stakeholder constituencies are parties to a lockup agreement. Such were the circumstances in a recent bankruptcy case in Delaware. In In re Indianapolis Downs, LLC, 486 B.R. 286 (Bankr. D. Del. 2013), certain of the debtor's equity holders attempted to thwart confirmation of a prenegotiated chapter 11 plan by arguing that a postpetition lockup agreement among the debtors and a large group of secured creditors violated the plan solicitation requirements of the Bankruptcy Code and that the votes of the signatory creditors should therefore be disallowed, or "designated." The bankruptcy court rejected the argument in an important ruling that may put to rest any lingering doubts about the validity of postpetition lockup agreements. Lockup Agreements Lockup agreements are a common feature of out-of-court workouts. They ensure that signatories remain committed, at least contractually, to a negotiated proposal potentially involving many competing creditor or shareholder groups. Without that commitment, the time and resources of workout participants may be wasted if a creditor or a creditor group reneges on an agreement in principle necessary to the success of the workout. Many successful restructurings begin outside court but ultimately end up as "prepackaged" or "prenegotiated" bankruptcy cases. This is typically the case where the company is able to reach an agreement with some or perhaps even all of its creditors concerning the terms of a restructuring but needs the benefits of the Bankruptcy Code to implement the necessary adjustments to its balance sheet and capital structure. For instance, if a company reaches an agreement with some but not all of its creditors, a bankruptcy filing may be necessary to bind the holdouts to the terms of a proposed restructuring incorporated in a plan of reorganization confirmed by the bankruptcy court. Also, the Bankruptcy Code under certain circumstances allows a reorganizing debtor to issue new securities without complying with the registration requirements imposed by federal securities laws. If the company strikes a deal with requisite majorities of its creditor constituencies and decides to file for bankruptcy to complete the workout, it can file a prepackaged bankruptcy case. This kind of case involves the solicitation of creditor votes for a restructuring proposal prior to filing a chapter 11 case, as well as bankruptcy-court...