What options does a creditor have when frustrated with how a debtor is handling their Chapter 11 bankruptcy case? In In re PWM Property Management LLC, the Delaware bankruptcy court denied a motion by creditors and interest holders to file a draft plan of reorganization as evidence of their opposition to the debtors’ motion to extend the exclusivity period. the PWM Property Management The decision serves as an important reminder of the strict limits on who can file and seek a plan of reorganization and when filing a plan is appropriate.
Debtors in In re PWM Property Management LLC own both a 44-story commercial office tower located at 245 Park Avenue in New York City and a 50-story commercial office tower located at 181 West Madison Street in Chicago. On October 31, 2021, the debtors filed for Chapter 11 protection in Delaware, attributing the bankruptcy in part to the failure of their property manager for 245 Park Avenue, SL Green Management Corp. (“SLG”), to recruit “ ” tenants and the loss of Major League Baseball as the anchor tenant of this property. MLB’s decision to terminate its lease with Debtors gave Debtors’ primary lenders the right to sweep certain excess Debtor cash flows, thereby prohibiting Debtors from making their preferred equity contributions to their minority business partner, 245 Park Member LLC (a subsidiary of SLG) and triggering a forced sale of 245 Park Avenue to SLG or a third party purchaser.
The first significant step the debtors took after the petition was to reject their property management agreement (“PMA”) for 245 Park Avenue with SLG. In response, 245 Park Member LLC filed a motion to dismiss the cases for bad faith, alleging that the debtors lacked authority to file pursuant to the incorporation documents, improperly appointed independent agents to authorize the filing, were not insolvent or financially distressed, and only sought to strip SLG and their negotiated rights, including the right to force the sale of 245 Park Avenue. The majority of debtors’ mezzanine lenders joined the motion to dismiss.
SLG also opposed the Debtors’ motion to dismiss the PMA, arguing that the Debtors’ motion should be adjourned until 245 Park Member LLC’s motion to dismiss has been resolved. SLG explained that the PMA already gave debtors the right to terminate the PMA for any material breach, but that debtors had never complained about SLG’s services. SLG argued that since the date of the petition it had assisted debtors with their schedules and statements, and that for the purposes of SLG’s right to post-petition costs, any dismissal of the PMA should not be effective. nunc pro tunc on the date of the request.
On December 13, 2021, the bankruptcy court denied 245 Park Member LLC’s motion to dismiss, noting it was a “tight decision.” On December 20, 2021, the court subsequently granted the Debtors’ motion to dismiss the PMA, finding that the Debtors had properly exercised their business judgment in making the dismissal decision. 245 Park Member LLC and several mezzanine lenders have appealed both rulings, but as of this writing, the District Court for the District of Delaware has yet to issue a ruling on either issue. . On January 21, 2022, the bankruptcy court approved the debtors’ request to retain G&E Real Estate Management Services Inc. and Newmark & Co. Real Estate Inc. as new property managers for 245 Park Avenue.
The coup attempt
Although SLG is no longer the property manager of 245 Park Avenue, 245 Park Member LLC is still one of the debtors’ two preferred shareholders. In an attempt to regain control over the fate of 245 Park Avenue, 245 Park Member LLC and the mezzanine lenders began drafting a debtors’ plan of reorganization (the “Creditors’ Plan”).
On February 27, 2022, the debtors filed a motion to extend their exclusive plans filing and solicitation periods by 120 days for the first time. In response, on March 7, 2022, 245 Park Member LLC and the Mezzanine Lenders filed an Objection to the Exclusivity Extension Motion intending to include the Creditors’ Plan, which was filed under seal (the “objection”). The objection argued in part that any plan proposed by the debtors would be unable to be confirmed because it would not be supported by the mezzanine lenders. In addition to the Objection, the Creditors also filed a corresponding Motion to Seal the Creditors’ Plan (the “Motion to Seal”), arguing that the Creditors’ Plan would allow the Debtors to quickly exit Chapter 11.
On March 17, 2022, the debtors filed a response to the sealing motion, asserting that by accepting the creditors’ plan and entering into a “cooperation agreement” prohibiting the creditors from considering, supporting or discussing any other plan of reorganization, 245 Park Member LLC and the mezzanine lenders had violated Sections 1121(b) and 1125(b) of the Bankruptcy Code and could not rely on Section 107 to file the creditors’ plan under seal.
On March 21, 2022, the debtors filed a reply brief in support of their motion for extension of exclusivity, and also attached as attachments two documents related to the creditors’ plan: the unredacted cooperation agreement and the associated condition sheet. On the same day, 245 Park Member LLC and the mezzanine lenders filed a brief in support of their objection and sealing motion.
On March 24, 2022, in an oral decision, the bankruptcy court denied the creditors’ objection and granted the debtors’ motion to extend the exclusivity period for an additional 120 days. During the same hearing, the court also rejected the sealing request. In doing so, the court considered three applicable articles of the Bankruptcy Code. The court first held that while it appreciated that the creditors requested a process to get the creditors’ plan into court, Section 1121(b) is clear that during the exclusivity period “only the debtor may file a plan” and that any party is not permitted to attempt to file a plan during this period.
The court then turned to Section 1125(b) of the Bankruptcy Code, which requires that before a holder of a claim or interest seeks a plan from another creditor, that creditor must have received the plan (or a summary of the plan) and a court-approved written statement. Here, the creditors’ plan was not accompanied by a court-approved disclosure statement. The court ruled that the actions of the creditors “exceeded the bounds” of simply discussing acceptable terms of the plan with other creditors and that any solicitation must first be approved by the court.
Finally, the court noted that Section 107(b) of the Bankruptcy Code was not applicable to the creditors’ plan, which did not include “trade secrets or research, development or confidential business information; or . . . scandalous or defamatory remarks”.
Take away food
The exclusivity period is a powerful tool that allows a debtor to control which reorganization proposals and supporting information are released to creditors. Section 1121 of the Bankruptcy Code grants the debtor an initial period of 120 days after the date of the petition to file a plan, and this period may be extended up to 18 months after the date of the petition with the approval of the bankruptcy court.
the PWM Property Management shows how strictly some courts will enforce the exclusivity period. After all, the creditors in this case did not seek to solicit the creditors’ plan and did not publicly file the creditors’ plan, cooperation agreement, term sheet, or any other related document. Instead, they only asked permission to include a redacted creditors’ version of the plan as an exhibit to their objection to the debtors’ request for extension of exclusivity. Even so, the bankruptcy court denied the sealing petition. Indeed, the debtors’ decision to annex the cooperation agreement and the term sheet to its response brief was frowned upon by the court, the court finding that the debtors’ decision “poured oil on the fire” and that it “should not have been done”. .”
An alternative strategy that a creditor/shareholder could have used to achieve much the same result, and not risk violating the Bankruptcy Code, would have been for 245 Park Member LLC or one of the mezzanine lenders only draft the creditors’ plan and not share it with any other party. Subsequently, 245 Park Member LLC and the mezzanine lenders could have jointly filed the objection and referred to the fact that one of the parties had drafted, but not yet solicited from a party (including other objecting creditors) , the plan of the creditors. The objection would make it clear that the creditors’ plan would not be solicited until the debtors’ exclusivity period had ended and an accompanying statement regarding the creditors’ plan had been approved. With this strategy, creditors avoid violating (a) section 1121(b) because the creditors’ plan would not be filed, or (b) section 1125(b) because the creditors’ plan would not be solicited. once a corresponding disclosure statement has been approved by the court. This strategy would also have addressed the court’s concerns about parties actively negotiating a plan during the debtors’ exclusivity period instead of simply discussing acceptable terms of the plan. Further, it would have obviated the need for the sealing motion, thus rendering Rule 107(b) inapplicable.
Here, since this was the debtors’ first request for an exclusivity extension, it is not surprising that the court gave debtors an additional 120 days to file and apply for a plan, especially given all the litigation debtors have faced regarding PMA, the motion to dismiss, and various issues raised by mezzanine lenders. But in the future, it’s possible that in other cases, we’ll start to see variations of this creditor’s plan strategy used by agitated creditors.
© Copyright 2022 Squire Patton Boggs (USA) LLPNational Law Review, Volume XII, Number 123