12 Mar PHILIP J. MCNUTT’S TAKE ON BANKRUPTCY – CHAPTER 11 PLAN CONFIRMATION, SUBSTANTIVE CONSOLIDATION.
The Ninth Circuit Court of Appeals recently decided a contested confirmation hearing siding with the Debtor and affirming the bankruptcy court’s confirmation of the Debtor’s Plan of Reorganization over the objection of a secured lender. The Creditor had complained that it was not allowed to object to the plan as to two of the five debtors for whom the Plan was presented. The problem was that the Creditor, the only creditor of two of the five debtors, had failed to object to a substantive consolidation of the debtors’ cases, meaning that the court and the debtors were free to confirm a plan that dealt with all creditors of all five debtors as if there was only one debtor and one set of assets, rather than five. The substantive consolidation which was granted early in the case, significantly impacted the secured creditors ability to collect from its two borrowers, two of the five debtors.
That’s why it is so important for creditors to be active and proactive from the start of bankruptcy cases. While smaller cases are often slow moving and less substantive in their early stages, larger cases are often quite the opposite with debtors attempting to rush matters through the court before creditors can organize or get appropriate representation. Ironically, while unsecured creditors have representation almost from the start of a Chapter 11 case (through a creditors’ committee and/or required notice to the top twenty unsecured creditors), secured creditors are “on their own.” Yes, they have rights – some significant – but savvy debtors with experienced counsel are able to use the bankruptcy court’s general powers, and knowledge of bankruptcy procedure to avoid or evade, certain obligations. In the case discussed above the debtor asked the Court to consolidate the five debtor cases. That consolidation could have been procedural (more common) or substantive. In substantive consolidation the debtor is required to show (among other factors) that there are no significant claims that will be treated differently as a result of the consolidation sought by the debtors.
In our case above, though, it appears the debtor was able to convince the court that there were no factors which prevented substantive consolidation and the creditor failed to preserve its rights when it failed to object to the substantive consolidation proposed by the debtor.
AN OLD LESSON IS STILL VALUABLE TODAY
“He who hesitates is lost.”
Joseph Addison’s Cato (1713).
In a case in which Philip J. McNutt represented one of the major creditors (and group of creditors), in the largest non-public entity, oil and gas bankruptcy of its time, a small group of creditors attorneys, including Philip J. McNutt. representing hundreds of millions of dollars of oil and gas interests, most of which were secured, but subordinate to the bank lenders. This group of counsel were able to thwart the efforts of the debtor and its primary lender group to liquidate assets for the sole benefit of the lender.
Many of those creditors, including Philip J. McNutt’s client, anticipated the bankruptcy filing and had representation almost from the very beginning of the Chapter 11. That case involved over $2 Billion of primary lending debt and over 29 debtor companies, U.S. and foreign.