STARK, U.S. District Judge.
These appeals arise from a dispute under a Collateral Agency and Intercreditor Agreement, dated August 16, 2005 ("ICA"), among members of the Ad Hoc Group of Second Lien Creditors (together "2L Group")
Thereafter, the Court entered a scheduling order to govern combined briefing on dispositive motions and the merits of both appeals. (See ICA Appeal, D.I. 20) LNV moved to dismiss both appeals as moot under 11 U.S.C. § 363(m) and the doctrine of equitable mootness. (Plan Appeal, D.I. 24; ICA Appeal, D.I. 12) ("Motions to Dismiss")
On July 15, 2019, 2L Group filed a Notice of Withdrawal in each appeal (Plan Appeal, D.I. 41; ICA Appeal, D.I. 23) indicating that, pursuant to a Settlement and Assignment Agreement dated June 6, 2019, certain members of 2L Group had agreed to withdraw and participate no further in the appeals. Accordingly, the sole remaining member of 2L Group (and sole appellant in these appeals) is Solus Alternative Asset Management LP. For ease of reference, however, the Court refers to appellant throughout as "2L Group."
For the reasons stated below, the Court will deny the Motions to Dismiss and affirm the Confirmation Order and ICA Decision.
Debtors owned and operated a natural gas fired power plant in McKittrick, California (the "Plant"). Prior to the commencement of the Chapter 11 cases on December 6, 2016 (the "Petition Date"), Debtors were indebted to LNV and 2L Group's members under certain credit agreements. On the Petition Date, La Paloma owed LNV approximately $330 million under two separate agreements dated February 20, 2014 (together, the "First-Lien Credit Agreements"): (i) a First-Lien Working Capital Agreement; and (ii) a First-Lien Credit Agreement.
La Paloma was indebted to 2L Group's members as lenders under a Second-Lien Credit Agreement dated February 20, 2014 (the "Second-Lien Credit Agreement"), under which approximately $110 million was outstanding on the Petition Date.
The ICA governs the parties' rights with respect to the "Collateral." As the recitals to the ICA state, the term "Collateral" embraces substantially all of the Debtors' assets.
The Deed of Trust subjects all of La Paloma's real property to liens, and does the same for "all rents, revenues, proceeds, issues, profits, royalties, income, and other benefits now or hereafter derived from [such] Property." (Deed of Trust, 4) (A356) The First-Lien Security Agreement subjects all of La Paloma's property, defined therein as "Pledged Collateral," to a security interest. (A412, First-Lien Security Agreement, at Art. III(a)) "Pledged Collateral" includes "general intangibles ... and accounts of [La Paloma] constituting any right to the payment of money" (id. at Art. III(a)(iii)) (A413) and "all [of La Paloma's] other cash, products, offspring, rents, revenues, issues, profits, payment intangibles, royalties, income" (id. at Art. III(a)(xi)) (A414) and all proceeds thereof (id.). Pledged Collateral embraces all such property, "wherever located and now owned or hereafter acquired by [La Paloma] or in which [La Paloma] now has or at any time in the future may acquire any right, title or interest." (Id. at Art. III(a)) (A412)
The ICA provides that, together with the Granting Documents and other "Collateral Documents," the parties intended that "the Liens securing the Second-Lien Obligations ... are subject and subordinate on terms contained in [the ICA] to the Liens securing the First-Lien Obligations." (ICA, § 2.1(2)) (A295) This priority is, as a matter of contract, unaffected by "the perfection of or
At the outset of the Chapter 11 cases, Debtors noted that some of the liens under the Granting Documents were unperfected as of the Petition Date
Debtors argued that they could avoid LNV's lien in personal property that was not also covered by the Deed of Trust, although Debtors recognized that LNV had defenses and that avoiding those liens would not benefit their estates if it meant LNV was unwilling to bid in cash. As part of the Settlement, LNV agreed to credit bid $150 million of its debt to buy the assets — double the highest amount indicated by a potential third-party purchaser — and to make other amounts available for unsecured creditors. In exchange for those compromises, Debtors agreed to release all avoidance actions against the Collateral Agent and preserve the liens under the Granting Documents for LNV's benefit.
As part of the Settlement, the parties identified and valued assets that may have been subject to avoidable liens. These included cash and non-cash assets, most of which were covered by the expired UCC-1 financing statement. (A73-75) (Disclosure Statement) The estimated $63.3 million value of these assets is defined in the Plan as the "Unencumbered Amount." This amount was used to allocate distributions
2L Group was not satisfied with the Settlement negotiated by LNV under the terms of the ICA. 2L Group's claims were entirely unsecured because the value of the property subject to liens securing the First-Lien Obligations was less than the outstanding First-Lien Obligations.
On November 20, 2017, 2L Group filed its appeal of the Confirmation Order. (Plan Appeal, D.I. 1). 2L Group identified as its sole issue whether the Bankruptcy Court had authority to modify the parties' rights under the ICA pursuant to the Plan. (Plan Appeal, D.I. 4 at 1) 2L Group did not seek a stay pending appeal. The Effective Date occurred and the Plan was substantially
On December 27, 2018, the Bankruptcy Court issued the ICA Decision. The ICA Decision determined that the ICA was not ambiguous and required the Subject Fund to be paid to LNV and not to the members of 2L Group. see La Paloma, 595 B.R. 466. In reaching its conclusion, the Bankruptcy Court relied on § 4.2(a) of the ICA. Section 4.2(a) requires Second-Lien Claimholders to turn over to LNV any Collateral or proceeds that they receive under the conditions specified therein. The Bankruptcy Court noted that 2L Group disputed that those conditions were satisfied with respect to the Subject Fund but did not dispute that the Subject Fund constituted Collateral or proceeds thereof. see id. at 472. The Bankruptcy Court determined that the distribution of the Subject Fund pursuant to the Plan indeed constitutes Collateral or proceeds of Collateral. See id. The Bankruptcy Court then proceeded to analyze the remaining elements of § 4.2(a) that the 2L Group argued were unsatisfied, such that its members could receive Collateral or its proceeds. Finding that each of these elements was satisfied under the circumstances, the Bankruptcy Court determined that 2L Group could not receive the Subject Fund.
On January 4, 2019, 2L Group filed its appeal of the ICA Decision. (ICA Appeal, D.I. 1)
The Court has jurisdiction over all final judgments, orders, and decrees pursuant to 28 U.S.C. § 158(a)(1). In conducting its review of the issues on appeal, this Court reviews the Bankruptcy Court's findings of fact for clear error and exercises plenary review over questions of law. see Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). The Court must "break down mixed questions of law and fact, applying the appropriate standard to each component." Meridian Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir. 1992).
LNV moves to dismiss the appeals as moot pursuant the doctrine of equitable mootness and § 363(m) of the Bankruptcy Code. With respect to equitable mootness, LNV argues that no review of the ICA Decision is permissible because the 2L's Group's requested relief would upset the terms of the Debtors' substantially consummated Plan. (ICA Appeal, D.I. 12 at 13-19) According to LNV, the Plan embodies a comprehensive settlement between LNV, the Debtors, and the Official Committee of Unsecured Creditors appointed in the Chapter 11 cases. This settlement was "the heart of" Plan and, in exchange for many concessions from LNV, the Debtors agreed to release all avoidance actions against the Collateral Agent under the Granting Documents, meaning that all liens of the Collateral Agent were preserved for the benefit of LNV and would be "valid, binding, and unavoidable." (Id.) (citing A87, Plan § 5.5) The Debtors further agreed that any distributions payable to Second Lien Claimholders from the $30 million Subject Fund would be and remain "Collateral or the proceeds of Collateral." According to LNV, 2L Group's appeals could only succeed if the Debtors' estates held unencumbered cash not subject to the ICA, and according to LNV, no such assets exist. Granting any relief to 2L Group would fatally scramble the Plan, invalidating the releases granted, liens preserved, and collateral determinations made in the
2L Group, of course, disagrees. 2L Group argues that the ICA Decision merely addressed a bilateral dispute over escrowed funds expressly contemplated by the Plan. As such, reversal of the ICA Decision would not even modify — let alone "fatally scramble" — the Plan or harm third parties. (ICA Appeal, D.I. 17 at 6-11)
With respect to statutory mootness under § 363(m), LNV contends that 2L Group did not obtain a stay of the Confirmation Order and argues that the relief sought in the appeals threatens the validity of the sale. (ICA Appeal, D.I. 12 at 19-21) According to LNV, the sale to LNV was inseparable from the Settlement, as LNV was only able to credit bid for the Debtors' assets as a consequence of the Settlement preserving all liens under the Granting Documents; likewise, the amount of its credit bid was a key settlement term. LNV contends that invalidating the avoidance actions releases and liens would impact the validity of the sale as it would erode the value of the consideration that LNV received in the transaction. (Id. at 20-21)
Again, 2L Group disagrees, arguing that LNV's argument under § 363(m) fails for the same reasons its equitable mootness argument fails. (ICA Appeal, D.I. 17 at 11) The sale cannot moot the appeals, according to 2L Group, because 2L Group does not seek to interfere with the sale any more than it seeks to interfere with the Settlement, which preserved the Intercreditor Dispute for later determination and escrowed the funds at issue. Moreover, 2L Group argues, even if the Court were to construe the Subject Fund as proceeds of the sale, § 363(m) preserves the validity of the sale and does not address the disposition of the proceeds of a sale. (Id.)
2L Group argues that the ICA Decision must be reversed because: (i) the filing of a proof of claim was not the exercise of a right or remedy in contravention of the ICA, since the ICA expressly permits such an action; (ii) the Subject Fund is not Collateral or "intended" to be Collateral under the ICA, since it is comprised entirely of Avoidance Proceeds, which cannot be Collateral or "intended" to be Collateral under the ICA, since such avoidance actions are not property of the Debtors; and (iii) the ICA provides for only lien subordination and not payment subordination.
LNV responds that 2L Group has completely changed its legal strategy. (ICA Appeal, D.I. 21 at 16) According to LNV, 2L Group argued to the Bankruptcy Court that it could receive the Subject Fund, even if the fund constituted Collateral, because some of the other conditions of ICA Section 4.2(a) had not been met. (Id.) (citing B.D.I. 695, ¶¶ 16-24 (A226-30)) On appeal, however, 2L Group concedes that it cannot receive the Subject Fund if it is Collateral but argues that the Subject Fund is not Collateral because it constitutes the proceeds of an avoidance action. (ICA Appeal, D.I. 14 at ¶¶ 20-31) LNV argues that 2L Group's approach narrows, if not eliminates, the issues in the appeals, "as the plain terms of the ICA and the Plan make clear that the Subject Fund constitutes Collateral." (Id.) As such, LNV contends, the Subject Fund cannot be paid to 2L Group, and the ICA Order should be affirmed.
Equitable mootness is a judge-made abstention doctrine which can be
Parties seeking to dismiss an appeal as equitably moot contend that "even if the implemented plan is imperfect, granting the relief requested [in the appeal] would cause more harm than good." Id. In light of the responsibility of federal courts to exercise their jurisdictional mandate, the Third Circuit has cautioned that an appellate court must "proceed most carefully before dismissing an appeal as equitably moot." Id. at 318. "Before there is a basis to forgo jurisdiction, granting relief on appeal must be almost certain to produce a perverse outcome — chaos in the bankruptcy court from a plan in tatters and/or significant injury to third parties. Only then is equitable mootness a valid consideration." Id. at 320 (internal citations and quotation marks omitted).
To determine whether to dismiss an appeal of a bankruptcy order as equitably moot, the court undertakes a two-step inquiry. see In re Tribune Media Co., 799 F.3d 272, 278 (3d Cir. 2015). The Court must assess: "(1) whether a confirmed plan has been substantially consummated; and (2) if so, whether granting the relief requested in the appeal will (a) fatally scramble the plan and/or (b) significantly harm third parties who have justifiably relied on plan confirmation." SemCrude, 728 F.3d at 321.
LNV, as the party seeking dismissal of the appeal on equitable mootness grounds, bears the burden of proving that, weighing these factors, dismissal is warranted. See id. Because dismissal of an appeal over which the Court has jurisdiction "should be the rare exception and not the rule," any such dismissal must "also be based on an evidentiary record, and not speculation." Id.
Substantial consummation is defined in the Bankruptcy Code to mean the:
11 U.S.C. § 1101(2). "Satisfaction of this statutory standard indicates that implementation of the plan has progressed to the point that turning back may be imprudent." SemCrude, 728 F.3d at 321. Neither party disputes that the Plan is substantially consummated, and the record supports this finding.
"If [the substantial consummation] threshold is satisfied, a court should continue to the next step in the analysis. It should look to whether granting relief will require undoing the plan as opposed to
LNV argues that the appeals should be dismissed as moot "so as not to disturb the complex and comprehensive Settlement embodied in the Plan." (ICA Appeal, D.I. 12 at 13) As part of the Settlement, LNV argues, all liens in favor of the Collateral Agent were preserved as "valid, binding, and unavoidable" and the Subject Fund remains "Collateral or the proceeds of Collateral." LNV argues that this was one "get" that LNV got in exchange for a myriad of "gives." Id. According to LNV, 2L Group seeks to deprive LNV of its bargain at a time when the rest of the deal cannot be undone. To grant 2L Group any relief in connection with the appeals, then, would unravel the comprehensive Settlement at the heart of the Plan.
2L Group argues that the relief sought by the appeals would not even
2L Group finds strong support for its position in the Tribune case, as both questions of equitable mootness addressed there by the Third Circuit are, in 2L Group's view, determinative here. (See D.I. 17 at 8-9) (citing Tribune, 799 F.3d at 278-83) In Tribune, the Third Circuit held that (1) certain noteholders' appeal, "which seeks to undo the crucial component [i.e., a settlement of avoidance claims] of the now consummated plan, should be deemed [equitably] moot," but that (ii) certain Trustees' appeal, "seek[ing] disgorgement from other creditors of $30 million that Trustees believe they are contractually entitled to receive ... is not equitably moot." Tribune, 799 F.3d at 274. 2L Group argues that it is unlike the noteholders in Tribune — whose claims were equitably moot — but like the Trustees in Tribune — whose claims were not equitably moot — because, in 2L Group's appeals, "[o]ther third parties will not be harmed, nor is the Plan even remotely called into question." Id. at 284.
The Court agrees with 2L Group's application of Tribune here. In Tribune, the noteholders' appeal of the settlement was deemed equitably moot because the appellants sought "modification of the confirmation order to reinstate" certain claims against the debtors' former lenders, directors, and officers "that the Settlement had resolved[,] so that the claims can be fully litigated." Id. at 277. Here, by contrast, 2L Group is not seeking to "reinstate" claims that the Plan "resolved." Rather, 2L Group is continuing to litigate a claim that the Plan expressly left unresolved.
Additionally, in Tribune, the Trustees' appeal was not equitably moot, for reasons whose application here leads to the same conclusion. In that case, the Trustees in Class 1E "contend[ed] that they [were] beneficiaries of a subordination agreement that guarantees that they will receive any recovery that goes to the holders of [certain notes] ahead of a class of trade and other creditors (Class 1F)." Id. at 282. The Third Circuit determined that, to the extent Class 1F had already received the disputed distributions, "disgorgement could be ordered against those Class 1F holders who have received more than their fair share." Id. at 282-83. The Third Circuit held that the Trustees' appeal did not seek to scramble the plan; "[n]or, if the Trustees rightly read the subordination agreement, has anyone `justifiably relied,'... on the finality of the confirmation order with respect to the $30 million." Id. at 283 (citing SemCrude, 728 F.3d at 321). "It would be
Likewise, here, the Intercreditor Dispute is about whether 2L Group's right to $30 million in distributions as unsecured creditors under the Plan is contractually subordinated to LNV's priority right to proceeds of Collateral under the ICA. As in Tribune, this bilateral intercreditor dispute has "no chance" of "unravel[ling] the Plan." Id. at 283. Also, as in Tribune, if 2L Group "rightly read the subordination agreement," LNV cannot argue that it
The Court agrees with 2L Group that the appeals are not equitably moot, and the Court "finds no prudent reason to forbear from deciding the merits of the [] appeal[s]." Tribune, 799 F.3d at 282.
Section 363(m) of the Bankruptcy Code shields from appellate review orders approving good faith sales of estate property:
11 U.S.C. § 363(m). LNV argues that the Bankruptcy Court approved the sale of the Debtors' assets under § 363 as part of the Settlement and made all findings necessary for § 363(m) to apply.
LNV continues by arguing that "the sale and the Settlement are inseparable." (ICA Appeal, D.I. 12 at 20) "LNV was able to credit bid for the Debtors' asset package only as a consequence of the Settlement preserving all liens under the Granting Documents; likewise, the amount of its credit bid was a key settlement term."
To 2L Group, LNV is wrong for essentially the same reasons it was wrong on equitable mootness. 2L Group contends that the sale cannot moot the appeals because 2L Group does not seek to interfere with the sale any more than it seeks to interfere with the Settlement. (ICA Appeal, D.I. 17 at 11) Moreover, even were the Court to construe the Subject Fund as proceeds of the sale, "a live controversy about who should get the money generated by the sale [of a bankruptcy debtor's assets under section 363(m)] ... does not concern mootness." Id. (citing Trinity 83 Dev., LLC v. ColFin Midwest Funding, LLC, 917 F.3d 599, 602 (7th Cir. 2019)). 2L Group argues that § 363(m) by its terms preserves only "the validity of [the] sale," which 2L Group does not contest. "Section 363(m) does not say one word about the disposition of the proceeds of a sale or lease." Trinity 83, 917 F.3d at 602 (collecting cases).
The Court concludes that 2L Group's pursuit of the Intercreditor Dispute (now, the appeals) will not impact the validity of the sale. LNV's argument under § 363(m) is unpersuasive. The Settlement embodied in the Plan — which LNV argues is "inseparable from the sale" — did not resolve the Intercreditor Dispute. Rather, the Plan expressly preserved the Intercreditor Dispute to be resolved separately and segregated the Subject Fund pending the later resolution of that dispute. The Disclosure Statement also confirmed that the Plan was "neutral and properly preserves all rights and arguments in connection with this dispute." (A40, Disclosure Statement, § II.E(ii)) The Plan clearly contemplated the possibility that the Bankruptcy Court could determine the Intercreditor Dispute in 2L Group's favor. LNV's credit bid and other consideration given in the sale were not dependent on the outcome of the Intercreditor Dispute.
Thus, under the facts here, § 363(m) does not bar review of the ICA Decision.
Having determined that the appeals should not be dismissed on the basis of either statutory mootness or equitable mootness, the Court turns to the merits of 2L Group's appeals.
As of the date of the confirmation hearing, on October 30, 2017, 2L Group and LNV had separately filed — but the Bankruptcy Court had not yet heard — the summary judgment motions concerning the Intercreditor Dispute. The issues on appeal arise from the ICA Decision, issued a year later, on December 27, 2018.
As noted in the briefing, the essential dispute in this matter is between 2L Group and LNV. 2L Group filed the Plan Appeal "solely to prevent a two-step argument from LNV that it should prevail in the Intercreditor Dispute because (a) the Plan governs the outcome there and (b) [2L Group] did not appeal confirmation of the Plan." (Plan Appeal, D.I. 30 at 5; see also ICA Appeal, D.I. 14 at 6, ¶ 10) 2L Group asserts that the Plan Appeal does not seek to undo any element of the Settlement or the Plan, assuming both are read to preserve 2L Group's rights as against LNV under the ICA and the Plan does not purport to modify the ICA. It is 2L Group's position that the Confirmation Order should be reversed solely to the extent that the Plan purports to modify 2L Group's rights, LNV's rights, the definition of "Collateral," or any other aspect of the ICA. (Plan Appeal, D.I. 30 at 8)
Under the Settlement, LNV was allowed a deficiency claim of approximately $153 million, which recovers pari passu with 2L Group's allowed deficiency claim of approximately $109 million. (Plan §§ 1.51; 1.92, 6.4; Disclosure Statement § II.D.(ii)) Pursuant to the Plan, LNV funded payment in full to all other unsecured creditors. (Disclosure Statement § II.D.(ii)) Accordingly, LNV and 2L Group are essentially the only unsecured creditors recovering from the Liquidating Trust.
It appears to be undisputed that 2L Group's allowed claim entitles it to pari passu distributions from the Liquidating Trust. The dispute is whether 2L Group must then turn over that recovery to LNV in accordance with the ICA. The Plan preserved the parties' arguments concerning the effect of the ICA on the ultimate disposition of 2L Group's distributions under the Plan.
On October 5, 2017, 2L Group filed the 2L Motion, and on October 16, 2017, LNV filed the 1L Motion relating to the same controversy. LNV asserted that under the terms of the ICA, "all principal and other amounts" payable to LNV in respect of the First-Lien Obligations must be paid in full before 2L Group would be allowed to receive any recovery on account of the Second Lien Obligations. 2L Group asserted that because the First Liens lapsed prior to the Petition Date, all money should be distributed in accordance with the Plan, which includes to 2L Group, pursuant to its proof of claim. Neither party alleged that the ICA was ambiguous; rather, each party relied on its own "plain reading" in reaching competing results.
The Bankruptcy Court heard oral argument on November 6, 2017 and took the matter under advisement. (B.D.I. 871) On December 27, 2018, the Bankruptcy Court issued the ICA Decision. The Bankruptcy Court's analysis centered on § 4.2(a) of the ICA,
La Paloma, 595 B.R. at 471. The Bankruptcy Court ultimately determined that all four elements were satisfied.
On appeal, 2L Group argues that the Bankruptcy Court erred because (i) the unsecured distribution is not Collateral or "intend[ed]" to be Collateral under the ICA; (ii) 2L Group's filing of a proof of claim was not the exercise of a right or remedy in contravention of the ICA; and (iii) the ICA provides for lien subordination, not payment subordination. (See ICA Appeal, D.I. 14 at 7-19)
2L Group asserts that the Bankruptcy Court erred in concluding that the Subject Fund is Collateral or proceeds thereof. (ICA Appeal, D.I. 14 at 11-12)
As an initial matter, the Court agrees with LNV that 2L Group has waived this argument, having failed to include it in its briefing before the Bankruptcy Court and having raised it for the first time at oral argument. (See ICA Appeal, D.I. 21 at 25-28) The record supports LNV's waiver argument. (See B.D.I. 695, 834 (briefing in support of 2L Motion failing to raise argument); B.D.I. 847, ¶ 10 (one sentence response to collateral assertion in 1L Motion); 11/7/2017 Hr'g Tr., 36:6-16 (A854) (2L Group's counsel: "I simply think the problem [LNV] ha[s] ... is that this is the proceeds of an avoidance action, and an avoidance action can't be part of prepetition collateral. It's — I mean, if Your Honor wants, I mean we've got, I don't know, I've got half a dozen cases that I can cite to you that say that, but we didn't think that was necessary because we all do this.") The ICA Decision notes: "The [2L Group] assert[s], without argument, that there
Even if 2L Group had not waived its argument with respect to Collateral, that argument must be rejected. To determine whether distributions under the Plan would be "Collateral or proceeds thereof," the Bankruptcy Court looked to § 1.2 of the ICA, which defines "Collateral" as "all of the Property of any Grantor, whether real, personal, mixed, constituting or intending to constitute all of the First-Lien Collateral, the Second-Lien Collateral or the Third-Lien Collateral." La Paloma, 595 B.R. at 472. The Bankruptcy Court noted that § 2.1(b) of the ICA clarifies that the First-Lien Lenders' priority over the Second-Lien Lenders in Collateral is not affected by any issue concerning "(iii) the perfection of or avoidability of such liens
Based on these provisions, the Bankruptcy Court was "hard-pressed" to find that such a broad definition of `Collateral' does not include substantially all of the assets of the Debtors." Id. The Bankruptcy Court noted that "[s]ubstantially all of the Debtors' assets were sold pursuant to the Plan" to LNV — "whether or not [those assets were] subject to a validly perfected security interest" — and that the sale proceeds were distributed as part of the Confirmed Plan." Id. & n.25. "Intuitively, there are no truer definition[s] of `proceeds of Collateral' other than the proceeds from the sale of that Collateral." Id. (citing Aircraft Trading Servs., Inc. v. Braniff, Inc., 819 F.2d 1227, 1233 (2d Cir. 1987)). Hence, the Bankruptcy Court found that "distributions pursuant to the Plan are `Collateral or proceeds thereof.'" Id.
2L Group contends this finding is erroneous. 2L Group asserts that the Settlement embodied in the Plan had two major features — "Sale of the Acquired Assets" and the "First Lien Settlement." (ICA Appeal, D.I. 14 at 11) According to 2L Group, the "Sale of Acquired Assets" feature provides that, "in exchange for a credit bid by LNV of $150 million in satisfaction of its First Lien Claim, LNV will acquire the Acquired Assets," while the "First Lien Settlement" feature provides that, in exchange for the extinguishment of the Lien Avoidance Claim, "the Debtors' estate[s] received the Avoidance Proceeds, constituting $63.3 million of unencumbered cash to be used, after payment of certain allowed administrative, priority and other secured claims, to fund a liquidating trust for general unsecured creditors ..." (Id. at 5) 2L Group asserts that "[t]he Bankruptcy Court erred in focusing on the Sale of the Acquired Assets to the exclusion of the First Lien Settlement and concluding that there were no unencumbered assets to be distributed under the Plan." (Id. at 11)
"Avoidance Proceeds" is a term not used in the ICA, Plan, or any other relevant document; rather, it is a term 2L Group employed in its statement of issues. (See ICA Appeal, D.I. 14 at 1) The Plan does not support 2L Group's argument that the Subject Fund constitutes proceeds of an avoidance action. Rather, as LNV correctly contends, the $63.3 million was not an amount "paid" in exchange for release of the avoidance claims. Instead, this amount is referred to in the Plan as the "Unencumbered Amount,"
2L Group's Avoidance Proceeds arguments are also incompatible with the terms of the ICA. The core of 2L Group's argument is that the UCC-1 lapse, the Debtors' bankruptcy filing, the resulting availability of avoidance actions, and ultimate settlement of avoidance claims makes the Subject Fund proceeds of an avoidance action, which cannot be subject to a lien as a matter of law. (See ICA Appeal, D.I. 14, ¶¶ 20-28) But as LNV correctly observes, none of these circumstances changes the fact that the parties agreed that the Subject Fund would be Collateral as between them by virtue of it being security under the First-Lien Security Agreement. The definition of "Collateral" extending to property "intend[ed]" to constitute security for the First-Lien Obligations can serve only one purpose: to preserve the parties' respective rights and priorities even when the property is not actually subject to a perfected or enforceable security interest.
Other provisions of the ICA confirm this. Section 2.1(b) of the ICA provides that "notwithstanding ... the perfection or avoidability of such Liens or claims secured thereby, ... any provision of the UCC, ... any other Legal Requirement, ... any defect or deficiencies in, or failure to perfect, the Liens securing the First-Lien Obligations or ... any other circumstances whatsoever," the priority of the parties' interest in the Collateral will be unaffected. The ICA prohibits 2L Group from circumventing the ICA's priority scheme due to any defects in LNV's liens.
The Bankruptcy Court's finding that the Subject Fund is Collateral is supported by the record, including the Granting Documents, the ICA, the Disclosure Statement, and the evidence and argument presented at the confirmation hearing. 2L Group misreads the Plan. The record does not support its argument that there were unencumbered assets by virtue of the settlement of the avoidance claim or that the Bankruptcy Court erred in finding that the Subject Fund constitutes Collateral under the ICA.
Finding no error in the Bankruptcy Court's determination that the Subject
2L Group argues that the Bankruptcy Court erred in its determinations that (i) filing a proof of claim is an exercise of remedies; and (ii) payment on that proof of claim would contravene the ICA. (ICA Appeal, D.I. 14 at 9-10)
The Bankruptcy Court concluded that filing a proof of claim was an exercise of remedies because the right to do so was specifically carved out from the general prohibition on members of 2L Group exercising remedies. see La Paloma, 595 B.R. at 473-74. Section 3.1 of the ICA, entitled "Exercise of Remedies," governs what remedies a junior creditor may and may not exercise. Sub-sections (a) and (b) each contain provisions limiting the exercise of remedies by Second-Lien Claimholders before the First-Lien Obligations are fully satisfied. (ICA § 3.1(a), (b)) (A299-301) Subsection (k) sets forth exceptions to the general prohibition: "[n]otwithstanding the foregoing, the [2L Group's members] may... file a claim or statement of interest in a Bankruptcy of La Paloma or any other Grantor...." (Id. at § 3.1(k)) (A305) Applying the interpretative rules that the specific controls over the general, and that no term should be rendered meaningless, the Bankruptcy Court found that filing a proof of claim was an exercise of remedies. see La Paloma, 595 B.R. at 472-74.
The Bankruptcy Court's conclusion is well-reasoned. As LNV correctly points out, if filing a proof of claim were
The Bankruptcy Court also concluded that receiving payment on account of the filed proof of claim would contravene the ICA. see La Paloma, 595 B.R. at 474. This is because the Bankruptcy Court found that the distributions on the proof of claim would constitute Collateral or proceeds of Collateral which, under § 3.1(c) of the ICA, 2L Group's members cannot receive until LNV has been paid in full. See id. The Court agrees with this conclusion as well.
Section 3.1(c) provides, in relevant part, as follows:
Thus, § 3.1(c) forbids members of 2L Group from (i) taking or receiving proceeds of Collateral (ii) in connection with their exercise of rights with respect to Collateral as creditors (iii) so long as First-Lien Obligations remain outstanding. As LNV correctly argues, with elements (i) and (iii) undisputed by 2L Group in the Bankruptcy Court, the Bankruptcy Court needed only to find element (ii) satisfied in order to conclude that § 3.1(c) bars the Second-Lien Claimholders from receiving the Subject Fund.
The Court agrees that 2L Group's members, in seeking payment on their claims, are exercising rights as creditors. Payment
2L Group complains the Bankruptcy Court's analysis compels the anomalous result that its members would have been allowed their desired distribution had they relied solely on their scheduled claim, but must be denied distributions because they filed a proof of claim. (ICA Appeal, D.I. 14, ¶¶ 16-17) The Court agrees with LNV that this argument must also be rejected.
The Bankruptcy Court correctly interpreted § 3.1(c) and the ICA as a whole as prohibiting the Second-Lien Claimholders from receiving Collateral proceeds on account of their rights as creditors until LNV is fully paid. see La Paloma, 595 B.R. at 474. Receiving and retaining proceeds of Collateral on account of a scheduled claim would violate § 3.1(c) to the same extent that doing so on account of a proof of claim would. Here, proof of claim or no proof of claim, 2L Group concedes its members "are required to pay over all Collateral and proceeds of Collateral to [LNV] until [LNV] [is] paid in full" (ICA Appeal, D.I. 14, ¶ 34), which has not yet occurred.
Finally, 2L Group contends that the Bankruptcy Court erroneously interpreted the ICA as an agreement for payment subordination, rather than lien subordination. (ICA Appeal, D.I. 14 at 15-16) 2L Group cites the Bankruptcy Court's statement that: "Reading the Intercreditor Agreement as a whole, including the subordination of the Second-Lien Obligations and the waterfall provision in Section 4.1[,] indicate[s] that the parties intended for the First-Lien Obligations to be paid in full before the Second-Lien Lenders are allowed to receive
The Court agrees with LNV. Ultimately, this issue is nothing more than semantics. Lien subordination was the functional equivalent of payment subordination given the Bankruptcy Court's finding that all remaining distributable assets constituted Collateral. see id. at 472 & n.21. The Bankruptcy Court was, therefore, correct when it said "the parties intended for the First-Lien Obligations to be paid in full before the Second-Lien Lenders are allowed to receive any recovery on behalf of the Second-Lien Obligations." Id. at 476. It was not necessary for the Bankruptcy Court to qualify the words "paid in full" and "recovery" with "from the Collateral" when all disputed payments and recoveries would necessarily be from the Collateral. Still, the Bankruptcy Court committed no error.
For the reasons explained above, the Court denies the Motions to Dismiss and
(ICA, § 4.2(a) (emphasis added))
