Robert E. Gerber, United States Bankruptcy Judge.
In this contested matter in the chapter 11 case of debtor Motors Liquidation Company, the Ignition Switch Plaintiffs
Background facts are set forth in the Motion to Enforce Decision,
I find particularly significant the following facts, which bear on the exercise of my discretion on this motion:
Determining this motion requires me to decide:
I conclude that under the facts here:
As a threshold matter, the GUC Trust contends that I should not even consider the potential grant of a stay delaying distributions — arguing that "[p]ursuant to the Plan and the GUC Trust Agreement, the GUC Trust is not only authorized, it is required to make quarterly distributions to GUC Trust Unitholders to the extent that assets of the GUC Trust are available for distribution and exceed certain thresholds."
While I agree that additional requirements that section 1127(b) would impose plainly have not been satisfied, I otherwise cannot agree.
As the predicate for this contention, the GUC Trust cites a provision of the Plan — its Paragraph 6.2(l) — but does not quote it. That paragraph, in an Article 6.2 captioned "The GUC Trust" and itself labeled "Distribution of GUC Trust Assets," provides, in relevant part:
That provision follows a separate provision of the Plan, its Paragraph 4.3(a) (in an earlier Article 4.3 providing for the treatment of general unsecured claims), providing (along with other unsecured creditor entitlements) for an initial distribution to Old GM unsecured creditors on or about the Plan's Effective Date of New GM stock and warrants, and GUC Trust Units, which would provide Old GM creditors with the bulk of their distributions.
Especially when read in context, Paragraph 6.2(l) is a timing provision, calling for supplemental distributions to Unitholders (who would be a combination of initial Old GM unsecured creditors and subsequent purchasers of GUC Trust Units) "to the extent there are sufficient assets available for distribution," and then the "appropriate amount." But it does not specify how those matters are to be determined, or what the GUC Trust should do when a court determines that assets should not be
That is not to say that interfering with Unitholder distributions isn't serious business. Unitholders have a justified expectation of receiving those distributions in the absence of very good reasons to the contrary. In fact, that very important concern underlies several of my mootness conclusions as discussed back at the time of the Motion to Enforce Decision. But with appropriate protections, a judicial determination that payment now isn't "appropriate" — and a stay making funds temporarily unavailable for distribution — wouldn't be violative of the Plan.
Though I'm not as persuaded as the Ignition Switch Plaintiffs seem to be that the standards applicable to a Rule 8007(a)(1)(C) injunction motion should be regarded as the same as those to a Rule 8007(a)(1)(A) motion for a stay of an order or judgment itself, I don't need to decide that, as I don't think the difference here matters. The applicable standards on similar requests have been stated slightly differently, but they can be distilled into a requirement of irreparable injury; the degree of prejudice to the party to be enjoined; a showing of a likelihood of success (albeit to somewhat varying degrees); and the public interest.
First, I think there's no doubt that the Ignition Switch Plaintiffs have shown irreparable injury. I don't need to decide, and don't decide, whether the possibility that an appeal would be mooted or further mooted is sufficient by itself to constitute irreparable injury — since here, as a practical matter, it would be impossible or very difficult to get any distributions back. So I consider this factor satisfied, and consider it in a major way.
The second factor, prejudice to the other side, can be looked at in two separate ways. At one level (the level at which the Ignition Switch Plaintiffs prefer to examine it), the requested relief amounts to a preservation of the status quo, which by itself represents no more than modest injury. But as the GUC Trust properly observes, that view ignores an obvious injury of another type. The GUC Trust has shown that the yields that the GUC Trust gets on its invested cash, in the current interest rate environment, are extraordinarily low — only 0.12%. That's quite a bit less than 1% — very close to zero. And investing in instruments that might generate materially higher yields isn't an option, because the GUC Trust is limited to investing in Permitted Investments, and for very good reason. The GUC Trust is holding its reserves as a fiduciary, with the
So there's what one might call a species of negative arbitrage here. Holding on to cash equivalents that generate such a low yield is dreadful from a business perspective. Thus I conclude that the GUC Trust — and in particular, its beneficiaries — would be prejudiced too, because it's been shown to my satisfaction that GUC Trust Unitholders could get greater yields once they received their distributions, and they'll suffer material losses by reason of the difference.
Generally, and here as well, I consider prejudice to the party to be enjoined to be weighed quite heavily. But I also recognize that prejudice of this character can at least often be addressed by a bond, so we'll come back to this momentarily.
Then I turn to the requirement for a showing of likelihood of success. How much of a likelihood of success needs to be shown depends somewhat on whether we look at this as we might if this were an application for a stay pending appeal — which it is in one sense, but not in another — or an ordinary request for a TRO or preliminary injunction.
I say in one sense but not in another because the Ignition Switch Plaintiffs are not asking for a stay of the underlying Judgment itself — i.e., of the order or judgment appealed from. Instead they're asking me to enjoin a separate event, the fairness of proceeding with an act which could be affected by the outcome of a now ongoing appeal. As previously noted,
I'm not as persuaded as the Ignition Switch Plaintiffs are that the standards — and in particular, the likelihood of success standards — for a stay pending appeal under (a)(1)(A) and for an injunction under (a)(1)(C) are the same. The cases the Ignition Switch Plaintiffs cite all precede the 2014 revisions in the 8000 series of Bankruptcy Rules. Rule 8007, which comes from former Rule 8005,
Here I don't find either a likelihood of success on the appeal nor a substantial
So I don't see it as particularly likely that a reversal would be forthcoming based on a failure on my part to have considered the Accordion Feature. And importantly, the Ignition Switch Plaintiffs are trying to access not just value that might become newly available under the Accordion Feature but also funds already in the GUC Trust that GUC Trust Beneficiaries would reasonably have expected to tap. Even if the Ignition Switch Plaintiffs were right in their contention that they could access incremental value that might come in under the Accordion Feature, they would be particularly unlikely to succeed in arguing on appeal that they should access the funds now in the GUC Trust — which are the funds whose distribution the Ignition Switch Plaintiffs want to block — unless they came up with a different argument, which they haven't made yet if they ever will.
Nevertheless, I find that the Ignition Switch Plaintiffs have shown enough in the way of likelihood of success to meet the requirements for injunctive relief now. A traditional alternate basis for injunctive relief in this Circuit — as a substitute for showing a likelihood of success — has been "sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief."
Finally, I turn to the public interest. The GUC Trust properly notes what I said in Chemtura
Looking at the factors as a whole, and weighing the first two factors most heavily, I believe that if a satisfactory bond were posted, the requirements for a preliminary injunction delaying the distributions would then be satisfied. So I'll issue the requested stay. The real issue is the amount of the bond that I should require to compensate the GUC Trust Unitholders, through the GUC Trust itself, for the delay in receiving their distributions.
On the matter of the bond, there is no dispute as to the underlying legal framework. The purpose of requiring a bond in this context is to indemnify the party prevailing in the original action against loss caused by an unsuccessful attempt to reverse the holding of the bankruptcy court.
It is agreed that the posting of a bond is a matter within my discretion.
Preliminarily, I agree with the GUC Trust that a bond is necessary. There can be no serious dispute that GUC Trust Unitholders will be prejudiced by a delay in distributions when the underlying assets would continue to draw a 0.12% yield while the stay is in place, and those assets would generate much higher yields after receipt by their recipients. Though the prejudice here is not as large as it was in the Adelphia chapter 11 case on my watch (where the estate suffered monetary losses of $2.33 million per day (and $49 million in the aggregate) during a period of an unbonded stay before the district court required a bond),
So I then must determine how large a bond should be required. The principles incident to setting an appropriate level of bond here are very much like those employed by Judge Carey in Tribune-Bankruptcy — in which he required a $1.5 billion bond in the largely similar, though not identical, context of a request to stay confirmation, in an analysis later stated in Tribune-Circuit to be as "well-considered and as convincing as the alchemy of valuation in bankruptcy can be."
Here, I consider one element in particular of the several types of losses analyzed in Tribune-Bankruptcy — opportunity costs to GUC Trust Unitholders whose distributions would be delayed. After doing so, I consider the $18.4 million for which the GUC Trust argues, and the zero for which the Ignition Switch Plaintiffs argue, to be way too high and low, respectively. I conclude, contrary to the positions taken by each of them, that the opportunity cost should be regarded as $10.6 million — based on an annual estimated yield of 9.23% (compounded) for what I believe should be estimated to be a 10-month delay — resulting in the $10.6 million that I fix as the bond.
The yield that we should assume as the alternative yield that we could expect the universe of GUC Trust Beneficiaries to obtain if their distributions were not stayed is a function of (1) the duration of the time during which the distribution would be delayed if stayed, and (2) the yield on the alternative investments that could be made if the distribution could be made as planned. The latter, in turn, is a function of the particular yields that could be obtained on various types of alternate investments, and, if more than one type of investment were considered, the mix — and consequent weighting — of the investments that GUC Trust Unitholders might make.
The Ignition Switch Plaintiffs note that (at Judge Furman's direction), they filed a motion for an expedited appeal (which was unopposed), and that as a result, I should assume a stay of a duration less than the 12 months that the GUC Trust assumed. As of the time of this writing, the Second Circuit has not ruled on the motion, and there can be no assurance that it will be granted. But assuming that it is, I note the timing the Ignition Switch Plaintiffs proposed. Their motion contemplated the filing of the last round of briefs on February 22, and oral argument on March 8, 2016 or the earliest possible date thereafter.
In a demonstrative handed up to the Court, the Ignition Switch Plaintiffs ran numbers assuming stay durations of from 4 to 12 months. But I consider all but the
Turning now to the alternate yields, there is little dispute (and in any event I find) that the Unitholders' prospective loss should be measured by comparing the GUC Trust's projected returns of 0.12% on the Permitted Investments in which it expects to hold its cash (e.g., a mix of short-term U.S. Treasuries)
Here, as in Tribune-Bankruptcy, evidence of the yield on alternative investments was offered by the party opposing the stay. In Tribune-Bankruptcy, Judge Carey was provided with a declaration from an investment banker at Lazard, drawing conclusions from yield information taken from a commonly-used index to analyze the high yield — sometimes called "junk bond" — market.
But different types of investments generate different yields, and those yields can fluctuate over time. The two sides thus debate whether I should go with a historical mean (or "trimmed" mean, discarding outlier years), on the one hand, or a yield high enough to minimize likely prejudice to Unitholders (a
I agree with the GUC Trust that use of some kind of Protection Return Rate — and not just a 10-year mean — is generally necessary and appropriate. By definition, use of a mean will understate results, on a weighted basis, 50% of the time.
But by the same token, I believe that particular Protection Rate methodology proposed by the GUC Trust — one based on the weighted average of the third-best year from the last ten years of annual investment returns for each asset class (the
Then, with respect to weighting, the evidence showed that yields obtained by hedge funds would typically exceed —
That would result in 60.25% of GUC Trust Unitholders being assumed to invest in hedge fund type investments (47% + 13.25%), and 13.25% in each of the other three kinds.
Then we turn to the yields I should assume for each class of investment. In each case, GUC Trust expert Scruton used historic data, trimmed to peel off what some might regard as outlier data — the highest and lowest historical returns.
Historic data is appropriate — and, in fact, necessary, in my view — with respect to hedge fund, equities and fixed income investments, for lack of any better basis upon which to make an intelligent decision as to investment results in the upcoming 10 months. But we know more with respect to money market equivalents. I think I can assume with nearly total certainty that given the present level of money market interest rates, and recent events in the economy and actions by the Federal Reserve Board, that yields on U.S. Treasuries will not climb to the 3.21% trimmed mean — much less the 4.29% Protection Return Rate for which the GUC Trust argues — in the upcoming year. We know (and the Ignition Switch Plaintiffs showed, by their Exh. C, showing the Department of the Treasury's Yield Curve Rates) that a 1-Year Treasury would have a yield of 0.36% and even a 10-Year Treasury would have a yield of only 2.20% (each, as of the day before the evidentiary hearing on this matter). As I consider it reasonable to assume that in this environment, with no more than modest increases in interest rates likely in the next 10 months, there would be at most modest
Accordingly, I choose to work with Scruton Decl. Exh. D-1's "Scenario 3" "Trimmed Mean" data, as modified in two respects: (1) to substitute 2.2% (in place of 3.21%) as the rate of return for the 13.25% of Unitholders who would be assumed to be making money market-type investments; and (2) to increase the assumed yield on each of the four classes of investments by adding 1/3 of the difference between the trimmed mean, as adjusted above, and the 3rd Highest Return to the adjusted trimmed mean to provide a less aggressive (and less inclusive) Protection Return Rate than the one proposed by the GUC Trust, but that is more inclusive than a rate based on the historical trimmed mean. That results in a new "Scenario 4", adapted from "Scenario 3," as follows:
3 rd Adjusted Court-Determined
Highest Trimmed Trimmed Protection
% of Return Mean Mean Return
Asset Class Index Name Unitholders ('05-'15) ('05-'15) ('05-'15) Rate
Equity S&P 500 Index 13.25% 15.99% 10.65% 10.65% 12.43%
Bank of America
Fixed Income Merrill Lynch US
High Grade Master
Index 13.25% 9.52% 4.92% 4.92% 6.45%
Credit Suisse Even
Driven Multi-Strategy
Hedge Fund Hedge Fund
Index52 60.25% 16.38% 7.71% 7.71% 10.60%
Money Market US Treasury 10-Year 13.25% 4.29% 3.21% 2.20% 2.56%
Weighted Average Protection Return Rate 13.82% 7.13% 7.00% 9.23%
[
Thus, instead of the 13.82% Weighted Average Protection Return Rate proposed by the GUC Trust, I consider it more appropriate to use a "Court-Determined Protection Return Rate" of 9.23%. That assumed alternative yield, in the exercise of my discretion — informed by the data discussed above — most fairly protects the GUC Trust in connection with the distribution that would be delayed by reason of the imposition of a stay.
Then I need to determine the size of the bond that would compensate the GUC Trust and its Unitholders for the delay in making that $135 million distribution. Conceptually, that is roughly ($135 million) × (9.23% per year) × (10/12 of a year)-or about $10.38 million.
Scruton testified upon my questioning under Rule 614 that compounding would result in about a 10% increase (over this time period) as compared to a simple interest computation.
The bond is fixed in the amount of $10.6 million. But distributions by the GUC Trust will be stayed for a period of 14 days from this order to allow the Ignition Switch Plaintiffs time to post the bond, or, if they are so advised, to pursue an appellate modification of this determination.
This order takes effect immediately. But either party may settle a more formal order if it is so advised.
SO ORDERED.
