On January 6, 2017, Judge Robert D. Drain of the Bankruptcy Court for the Southern District of New York orally approved a prepackaged plan of reorganization (a “Prepack”) in In re Roust Corporation, et al. (Case No. 16-23786), only seven days after Roust Corporation (“Roust Corp”) and two of its affiliates, CEDC Finance Corporation LLC (“CEDC Finco”) and CEDC Finance Corporation International, Inc. (together with Roust Corp, the “Debtors”), filed petitions for relief under Chapter 11. By having a plan of reorganization confirmed in only seven days, In re Roust became the fourth shortest Chapter 11 reorganization in recent history, and the shortest in the Southern District of New York (Judge Drain noted that the average length of a true prepack in SDNY is thirty-five days). This blog post examines the seven most important steps the Debtors took to achieve such a speedy confirmation, and, along the way, highlights several notable legal holdings made by Judge Drain at confirmation.
The Facts and Circumstances of In re Roust
The Debtors and the Debt
The Debtors, all holding companies, filed petitions for relief under Chapter 11 on December 30, 2016 (the “Petition Date”). Roust Corp, the lead Debtor, wholly owned, directly or indirectly, the equity in several dozen non-Debtor affiliated entities (the “NDEs” and, together with the Debtors, the “Roust Group”). Through its operating entities, the Roust Group comprised one of the largest vodka producers in the world and the largest integrated spirit beverages business in Central and Eastern Europe. Roust Corp was ultimately wholly owned by a single individual—Roustam Tariko (“Tariko”), the founder and sole owner of the conglomerate known as the Russian Standard Group (“Russian Standard”), whose enterprises include Russian Standard Vodka (“RSV”), the largest domestic distiller and distributor of Vodka in Russia, and Russian Standard Bank, one of the largest Russian banks and leading consumer lender in Russia. Tariko, through Russian Standard, wholly owned Roust Trading Limited (“RTL”), which itself owned 100% of the equity in Roust Corp and, therefore, 100% of the Roust Group.
Tariko and Russian Standard acquired the Roust Group through the Chapter 11 reorganization of Central European Distribution Corporation (“CEDC”), which filed for Chapter 11 relief in the District of Delaware in 2013 (Case No. 13-10738-CSS). RTL had held a 19.5% equity stake in CEDC prior to its 2013 bankruptcy and, through a substantial capital contribution in CEDC’s Plan of Reorganization, acquired 100% of the equity in the reorganized CEDC, which was subsequently renamed Roust Corp.
As part of CDEC’s plan of reorganization in 2013, CEDC Finco was created and issued two set of notes: the Senior Secured Notes and the Senior Convertible PIK Notes (the “Convertible Notes” and, together with the Senior Secured Notes, the “Noteholders”), both due 2018. At the time of the Debtors’ filing in 2016, approximately $488 million in principal of the Senior Secured Notes and $279 million in principal of the Convertible Notes were outstanding. Although the NDE’s had various debts and credit facilities outstanding at the Petition Date, the Debtors did not propose to alter or impair any debts owed to non-Russian Standard third parties.
Simultaneously with their petitions for relief, the Debtors filed their Amended and Restated Joint Prepackaged Plan of Reorganization (the “Plan”) [Docket No. 8]. On January 6, 2017, Judge Drain held a hearing at which he approved confirmation of the Debtors’ Plan [Docket No. 39] and on January 10, 2017, Judge Drain issued his Findings of Fact, Conclusions of Law and Order Approving Confirmation (the “Confirmation Order”) [Docket No. 41]. The Debtors provided two reasons for why it was necessary to have the Plan confirmed so quickly: (1) there was a severe stigma attached to bankruptcy in the Eastern European markets in which the NDEs operated and (2) the Roust Group was required to pay significant exist taxes in Russia in January, and the capital infusion provided for in the Plan was necessary for those taxes to be paid. Confirmation Transcript [Docket No. 39] at p. 21, ln. 23 – p. 22, ln. 21.
The Plan impaired only three classes: the Senior Secured Notes, the Convertible Notes and Roust’s equity holder, RTL. First, the Plan provided for the Senior Secured Notes to receive new senior secured notes in principal amount of $385 million at 10% interest, cash consideration of $20 million, the right to participate in a $55 million rights offering (the “Share Placement”) and a debt-to-equity conversion for 12.08% of the common stock in Reorganized Roust. Second, the Plan provided for the Convertible Notes to receive 10.59% of the equity in Reorganized Roust through a debt-to-equity conversion, an additional 1.00% of equity contributed from Russian Standard and the right to participate in the Share Placement. Finally, Russian Standard, through RTL, was to receive 57.04% of the equity in Reorganized Roust in exchange for contributing Russian Standard Vodka to Reorganized Roust and forgiving $116 million of debt owing from Roust and RSV to RTL and its non-Roust subsidiaries. Additionally, $100 million owed to Roust by RTL and its non-Roust subsidiaries was deemed repaid.
The Plan also contained two broad categories of releases: (1) “Releases by the Debtors” [Art. 9(B)] and (2) “Releases by Holders of Claims” [Art. 9(C)]. Under Art. 9(B), the Debtors released all claims against the “Released Parties,” which included Noteholders, Notes Trustees, RSV, RTL, Russian Standard, the NDEs and all of the foregoing’s affiliates, subsidiaries, managers, etc. Under Art. 9(C), the definition of “Holders of Claims” was all-encompassing; thus, every creditor and interest holder in the case was releasing the Released Parties.
Seven Steps to Confirmation in Seven Days
The long term significance of Roust is contingent on whether it provides clear guidelines for how, and under what circumstances, such a quick path to confirmation can be achieved. The Seven Steps detailed below are an attempt to summarize the facts and legal issues Judge Drain focused on during the Confirmation Hearing, and, more importantly, the reasons Judge Drain found those facts and legal issues significant. Some of these steps involve relatively unique features of In re Roust—but even the most unique features can be partially replicated in other cases. For example, an extremely important feature in In re Roust was the fact that Tariko wholly owned the Russian Standard Group and therefore had the unilateral power to grant releases to the Debtors and NDEs. While this fact was influential because it removed the need for Judge Drain to conduct an exhaustive analysis of the propriety of those releases, Judge Drain’s questions and comments during the Confirmation Hearing made clear that the more the Debtors accomplished through private contractual arrangements, and the less they invoked the coercive power of the Bankruptcy Court, the more comfortable he was with confirming the Plan in such a short period of time. It is the lesson, not the fact, that might prove significant for prospective debtors attempting to secure a speedy confirmation of a prepackaged plan. It goes without saying that following the seven steps below won’t guarantee confirmation in seven days; every Debtor and every Judge has different issues and concerns that must be addressed.
Step 1. Secure Overwhelming—Preferably Unanimous—Support from All Impaired Classes under the Plan
First and foremost, Judge Drain made clear that such a quick confirmation would be all but impossible without the overwhelming support of creditors. All parties impaired by the Plan—Russian Standard, the Senior Secured Noteholders and the Convertible Noteholders—unanimously supported the plan. Not a single Noteholder voted against the Plan, with, by aggregate value, 90% of the Senior Notes and 93% of the Convertible Notes voting in favor of confirmation. Confirmation Transcript at p. 8, ln. 24 – p. 9, ln. 6. In contrast, only two parties objected to the Plan: the U.S. Trustee (the “Trustee”) and the IRS, and the latter’s objection was resolved consensually prior to the Confirmation Hearing.
The Trustee made numerous objections, but devoted most of its written objection to four issues: (1) insufficient notice; (2) unconfirmable non-Debtor releases; (3) inadequate evidence of feasibility; and (4) improper allowance of administrative claims for professionals retained by the Noteholders. U.S. Trustee’s Objection, Docket No. 22, at p. 11-20. And Judge Drain, in overruling the first three objections, repeatedly cited the impaired classes’ overwhelming support of the Plan as a basis for his rulings. When considering whether notice was sufficiently given, Judge Drain twice noted the sheer size of the Plan’s support. Confirmation Transcript at p. 40, ln. 3-5, p. 43, ln. 18-19. When considering the accuracy of the Debtors valuation, he reasoned that the overwhelming support of the impaired classes implied an accurate valuation. Confirmation Transcript at p. 72, ln. 8-14. When determining the propriety of the Plan’s releases, he noted that “the parties affected by it, now, have voted unanimously in favor of the Plan” and that “the lack of any objecting party with an economic stake” implied “that such parties are not aware of any potentially valuable claims against any of the released parties.” Confirmation Transcript at p. 85, ln. 17 – p. 86, ln. 2, p. 86, ln. 24 – p. 87, ln. 8.
Step 2. Give Notice—Lots of Notice
Second, the Debtors went above and beyond the requirements of the Code in giving pre-petition notice to the interested parties of both the terms of the Plan and the accelerated timeline in which the Debtors were seeking to confirm the Plan. First, nearly two months prior to filing, the Debtors sought and received a tentative date for their combined hearing on the Disclosure Statement and confirmation of the Plan. Second, on December 1, 2016, the Debtors mailed notice of the combined hearing to all parties in interest, mailed their solicitation materials and ballots to all parties entitled to vote upon the Plan and posted all of these documents online with Epiq Bankruptcy Solutions, LLC (“Epiq”) the Debtors’ voting and noticing agent. Third, the Debtors published notice of the hearing in the international edition of the Financial Times.
This, however, was not enough for the Trustee, who objected on the grounds that the Debtors had not met the notice requirements of Bankruptcy Rule 3017, which requires that holders and claims and interests be given at least 28 days notice of the hearing on approval of the DS, and Bankruptcy Rule 2002, which requires 28 days notice of the deadline for filing objections to approval of the DS. U.S. Trustee’s Objection at pp. 11-14. The Trustee also argued that the Debtors had failed to give “any party in interest any ability to object because the objection deadline passed even before the Petitions were actually filed.” Id. at p. 14.
Judge Drain, however, disagreed, on the basis that “Bankruptcy Rule 2002 provides for twenty-eight days’ notice. It doesn’t say twenty-eight days after the Petition Date.” Confirmation Transcript at p. 36, ln. 11-13. As he explained, the Bankruptcy Code clearly contemplates prepackaged plans of reorganization and neither Bankruptcy Rule 2002 nor Rule 3007 tie their required notice periods to the date of the petition. Id. at p. 44-45. Thus, so long as the notice was not deficient and twenty-eight days’ notice was given to the required parties, “you’ve complied with the rules.” Id. at p. 37, ln. 11-16. Judge Drain also rejected the Trustee’s contention that the parties in interest lacked the ability to object, noting that (1) the parties in interest were still given thirty days to object (by mailing an objection to the Debtors pre-petition) and (2) the Court would have given any objecting party more time if someone had requested additional time. Id. at p. 42, ln.. 4-9.
This is perhaps the most significant legal ruling in In re Roust; as Judge Drain noted, the average duration of a prepack “is about thirty-five days.” Id. at p. 45, ln. 13. Although few prepacks might have the necessary characteristics that allow confirmation seven days after filing, many prepacks may have some of these characteristics, which may enable confirmation fifteen, twenty, or twenty five days after filing. Although many prospective debtors will have substantial reasons not to publicly disclose their impending bankruptcy filing—most notably, publicly traded companies or debtors with significant confidentiality concerns—Judge Drain’s interpretation of Bankruptcy Rules 2002 and 3007 pave the way for debtors without need of confidentiality to significantly shorten the period of time they spend in Chapter 11.
Step 3. Identify All of Your Unsecured Creditors
Perhaps the most unusual characteristic of In re Roust, in comparison to a typical corporate Chapter 11 case, was the unsecured creditor pool. First, because all three Debtors were holding companies, they had only eleven unsecured creditors. Id. at p. 26, ln. 10 – p. 27, ln. 5. Second, all of these unsecured creditors were professionals, a fact that proves significant in Step Four. Id. at p. 27, ln. 1-5. Third, the Debtors had identified each unsecured creditor specifically and had given notice of the confirmation hearing to each unsecured creditor individually. Id. at p. 33, ln. 19 – p. 34, ln. 16. The de minimis number of unsecured creditors, the Debtors’ specific identification and noticing of each unsecured creditor, and the fact that the unsecured creditors were not being impaired, combined, seemed to play a significant role in minimizing any concerns Judge Drain may have had regarding the adequacy of notice by making it extremely reasonable for Judge Drain to infer that it was highly unlikely that any unsecured creditors had not been given notice and a chance to be heard.
Step 4. Demonstrate that All Interested Parties, Especially Impaired Parties, Are Sophisticated and Capable of Protecting Their Own Interests
Fourth, the fact that all of the Debtors’ creditors were sophisticated parties clearly increased Judge Drain’s comfort with the notice given by the Debtors and with the speed of confirmation. In responding to the Trustee’s assertion that it wasn’t clear whether the unsecured creditors were sophisticated enough to know if they should, or even how to, object to confirmation, Judge Drain immediately responded that “looking at who they are, I think they are.” Confirmation Transcript at p. 39, ln. 20 – p. 40, ln. 11. In overruling the Trustee’s objection that insufficient or inadequate notice had been given, Judge Drain specifically noted that “this is not a request to bless a notice to moms and pops or even dentists and doctors.” Id. at p. 49, ln. 6-13. Similarly, in approving the Disclosure Statement, Judge Drain found it important that “the people who are impaired here are all qualified institutional investors” and therefore the Disclosure Statement was sufficient “under the securities laws, too.” Confirmation Transcript at p. 50, ln. 20 – p. 51, ln. 11. Finally, in approving the releases under the Plan, Judge Drain noted that “with sophisticated advisors and they [the Noteholders] themselves being sophisticated,” the release language in the ballots and the Plan more than sufficiently “warned parties of their contents.” Id. at p. 85, ln. 17-25.
In short, the sophistication of the parties in interest belied any concern Judge Drain may have had that seven days from filing to confirmation was too short a time for the affected parties to digest the terms of the Plan or to determine how their interests would be affected. In combination with the overwhelming support of the Noteholders, and the miniscule number of unsecured creditors, it appears that Judge Drain concluded that elongating the case would serve no useful purpose.
Step 5. Achieve as Much as Possible Through Contractual Arrangements and Minimize Usage of the Coercive Power of the Bankruptcy Court
In contrast to the Trustee’s objections, Judge Drain’s focus was on ensuring that the Plan distinguished between (1) what actions in the Plan Judge Drain was ordering under the authority of the Bankruptcy Code and (2) what actions in the Plan were occurring as the result of private negotiations by and among the Debtors, Noteholders and Russian Standard. In determining that the third party releases in the Plan were appropriate, Judge Drain repeatedly sought clarification from the Debtors that the releases by Russian Standard entities of claims against the Debtors and the NDEs were not being foisted upon Russian Standard by Judge Drain, and instead were being released voluntarily by Russian Standard. Confirmation Transcript at Transcript at p. 15, ln. 24 – p. 16, ln. 1., p. 40, ln. 24 – p. 41, ln. 4., p. 73, ln. 14 – p. 80, ln. 9. Similarly, the Plan provided that intercompany claims would be reinstated, but “subject to the express contractual subordination to the new Senior Secured Notes” or “released, waived and discharged, treated as a dividend, or contributed to capital or exchanged for equity.” Judge Drain noted that such treatment in a plan of reorganization clearly qualified as impairment. The Debtors, in response, clarified that these intercompany claims were not being altered through the Plan, but through private contractual arrangements among the RSA parties—the language in the Plan merely memorialized these arrangements. Id. at p. 78, ln. 6 – p. 80, ln. 5. A similar exchange occurred over the treatment of executory contracts, Id. at p. 77, ln. 17 – p. 78, ln. 2.
Step 6. Provide a Mechanism of Review for All Post-Petition Professional Fees and Expenses Being Paid under the Plan
The Trustee did, however, unequivocally win one of its objections, although not in the way the Trustee hoped. Although the Debtors professional were to be compensated through the normal process of § 327 and § 330 of the Code, the Debtors proposed, under Article I(A)(64) and (110) of the Plan, to allow as administrative claims the professional fees and expenses of the RSA Parties and the Notes Trustees without any need for those professionals to apply to the Bankruptcy Court for compensation. The Trustee argued that the Court’s previous holding in In re Lehman Bros. Holdings Inc., 487 B.R. 181 (Bankr. S.D.N.Y. 2013), vacated and remanded on other grounds, 508 B.R. 283 (S.D.N.Y. 2014) established that that Sections 1123(b)(6) and 1129(a)(4) of the Code could not serve as a basis for paying the professional fees and expenses of creditors without the necessity of filing an application and meeting their evidentiary burden for payment under Section 503(b) of the Code. Trustee’s Objection at p. 17-20.
Judge Drain disagreed with the Trustee’s arguments, and held that Lehman Brothers should be read narrowly to apply to the professional fees and expenses of official creditors’ committee’s members, and not broadly to all creditors. Confirmation Transcript at p. 67, ln. 24 – p. 70, ln. 4. Nonetheless, the Court held that § 1129(a)(4) requires that any fees being paid under that provision “be reasonable and be subject to court review” and therefore an objective third party was needed “to make the type of objection that objective third parties make.” Id. at p. 70, ln. 17-22. Thus, the Court simply required that Notes Trustees and RSA Parties submit a copy of their professional fees and expenses claims; if the Trustee objected, the Court would determine whether the claims were reasonable, but if the Trustee did not object, the professional claims would be allowed. Id. at p. 67, ln. 17-19.
Step 7. Be Flexible and Willing to Compromise
Finally, and perhaps most importantly, Roust demonstrates the importance of flexibility. A prepack, by its nature, heightens a number of judicial concerns, and those concerns skyrocket when confirmation is sought only seven days after filing. The Debtors in Roust succeeded in confirming precisely because they were willing to bend on every peripheral issue that was raised. The Debtors added language to the Plan to resolve nascent objections from White & Case, the largest unsecured creditor, and the IRS. Judge Drain required at least a dozen clarifications be made in the Plan, all of which the Debtors assented to. And most notably, the Debtors, in response to Judge Drain’s concerns, volunteered to carve the unsecured creditors entirely out of the third-party releases in the Plan, in order to ensure that the unimpaired status of the unsecured creditors was clear. Id. at p. 84, ln. 3-8. Any practitioner wishing to confirm a plan in only seven days must know exactly what the core terms of her Plan are and being willing to concede on everything else.
Ultimately, every case is confirmed on its facts. In re Roust presents a unique set of facts that may not be widely generalizable. And although the vast majority of cases will not share the unique facts of In re Roust, those facts were important because they mitigated specific concerns the Court had in confirming a plan shortly after the Petition Date. Those concerns will be important in any prepack that seeks a speedy confirmation, and the Seven Steps above merely illustrate how these Debtors met them. It will be interesting to see what creative solutions other debtors craft in the future to address these concerns.