As reported by the Insolvency Law Committee, a district court in Delaware has held that disparate “gifts” from senior secured creditors to two different classes of unsecured creditors does not unfairly discriminate against the least-favored class and does not violate the “absolute priority” rule in a Chapter 11 reorganization. [In re Nuverra Environmental Solutions, Inc., 2018 Westlaw 3991471 (D. Del.).]
In the context of a prepackaged Chapter 11 plan, a group of senior secured creditors agreed to provide “gifts” to two different classes of unsecured creditors, both of which would have been “out of the money” without the gifts. The unsecured noteholders received roughly 4% of their claims in the form of gifts, and the unsecured vendors and trade creditors received 100% of their claims. The equity holders received nothing. The noteholders voted against the plan, but the separate class of trade creditors voted in favor of it, thus enabling a “cramdown” reorganization.
One of the unsecured noteholders objected to the confirmation of the plan, claiming that it unfairly discriminated against the noteholders while providing full payment to the unsecured trade creditors. Read the eBulletin here.