Approval of Settlement Agreement Denied; Settlement Agreement Was In Conflict with Substantially Consummated Plan of Reorganization
Magten Asset Mngmnt. Corp. v. Northwestern Corp. (In re Northwestern Corp.), 352 B.R. 32 (D. Del. 2006) (Judge Joseph J. Farnan, Jr.)
The appellant, a creditor in the debtors’ bankruptcy case, appealed from a Bankruptcy Court decision denying approval under Federal Rule of Bankruptcy Procedure 9019 of the appellant’s motion to approve a global settlement of litigation and claims with the debtors. The District Court affirmed the Bankruptcy Court decision, holding that the express terms of the settlement agreement required that it be approved by the Court prior to becoming effective, and that the settlement agreement could not be approved because it was inconsistent with the debtors’ plan of reorganization. Because the plan had been substantially consummated, it could not be amended.
Appellant Magten Asset Management Corporation, a creditor of the debtors, appealed from an order of the Bankruptcy Court denying appellants’ motion under Federal Rule of Bankruptcy Procedure 9019 seeking approval of a global compromise and settlement with the debtors of litigation and claims among the parties in the debtors’ Chapter 11 case.The appellant contended that the Bankruptcy Court erred in concluding that the settlement agreement negotiated by appellant and the debtors was not a binding contract upon its execution. First, the appellant contended that, because the debtors’ plan of reorganization had already been confirmed, 11 U.S.C. § 363 no longer applied, and the settlement agreement did not require the approval of the Bankruptcy Court to be effective. The appellant also contended that the plain language of the settlement agreement showed that it was meant to be binding upon execution, and did not require Bankruptcy Court approval to be effective. The appellant had only filed the 9019 motion because the Bankruptcy Court ordered it to do so.
The appellant also contended that the Bankruptcy Court erred in concluding that the settlement agreement was inconsistent with the debtors’ plan of reorganization because, it alleged, the debtors drafted both the plan and the settlement agreement and represented to the Bankruptcy Court that the settlement agreement was consistent with the terms of the Plan. Finally, the appellant also contended that the settlement agreement provided the non-accepting holders of the Series A 8.45% Quarterly Income Preferred Securities, of which the appellant was one, with a recovery that was less than the amount that QUIPS holders would receive under their Class 9 treatment under the plan, and, therefore, an amendment to the plan was not required to implement the settlement agreement.
The debtors countered that they still believed a settlement of the instant litigation would have been in the best interests of the estate, but that they could not pursue the settlement agreement with the appellant once objections were filed by representatives of the Class 7 and Class 9 claimants. Because of the objections, the debtors contended that the settlement agreement required the approval of the Bankruptcy Court, as well as the execution of additional documents to become effective. The debtors also contended that the terms of the settlement agreement were inconsistent with the plan, because the plan gives non-accepting QUIPS holders the option of either (1) accepting the Plan and receiving a Class 8(b) distribution, or (2) rejecting the Plan and receiving only a Class 9 claim. The Debtors contended that the proposed settlement agreement would have provided non-accepting QUIPS holders with both types of recoveries. Therefore, amendment of the plan or the consent of the Class 7 and Class 9 claimants was required. However, the debtors pointed out that the plan had been confirmed and substantially consummated by the debtors, and therefore, amendment to the plan was not feasible.
The District Court affirmed the Bankruptcy Court’s decision. First, the District Court reviewed the settlement agreement, and determined that the express terms of the settlement agreement required that it be approved by the Bankruptcy Court, and that an order be entered, before the settlement agreement could be implemented. Accordingly, the Court rejected the appellant’s arguments that section 363 and the debtors’ reorganized status obviated the need for Bankruptcy Court approval.
Next, the Court considered the appellant’s contentions regarding harmony between the plan and the settlement agreement. Under the Plan, QUIPS holders could select one of two options; they could either select Option 1, which was a pro rata share of 505,591 shares of new common stock, plus warrants exercisable for an additional 2.3% of new common stock, or Option 2, which was a pro rata share of recoveries, if any, upon resolution of the QUIPS litigation.
The plan also provided that, to the extent shares allocated to Class 8(b) claimants were not distributed to Option 2 holders, those shares were to be distributed to Class 7 and Class 9 claimants. However, the settlement agreement diluted the distributions to which Class 7 and Class 9 claimants are entitled, and conflicted with the plan’s disbursement scheme, by providing QUIPS holders electing Option 2 with the full amount of stock set aside for them in the disputed claims reserve and the stock they would have received if they elected Option 1, stock which was to be divided among the Class 7 and Class 9 claimants. Therefore, an amendment to the Plan would have been necessary for the settlement agreement to be consistent with the plan. However, such an amendment was not feasible because the plan had been substantially consummated, and in any event, such an amendment would have been opposed on behalf of Class 7 and Class 9 claimants. Accordingly, the District Court concluded that the Bankruptcy Court's decision to deny the appellants’ Rule 9019 motion was not erroneous.
