CHAPTER 8, A. Prepackaged Plans in 24 Hours

• Jurisdiction: United States

A. Prepackaged Plans in 24 Hours

ABI Journal

September 2019

David I. Swan

McGuireWoods LLP

Tysons, Va.

Thuc-Doan Phan

McGuireWoods LLP

Tysons, Va.

Much quicker and generally less expensive than the traditional chapter 11 filing, prepackaged chapter 11 filings (also called "prepacks") have been on a steep rise in the last few years. Alongside this rise in prepack filings is the emergence of "super speedy prepacks."

In the first half of 2019, there were at least four notable large reorganizations completed within a matter of days: Arsenal Energy Holdings completed its reorganization within 11 days in February 2019;¹ Jones Energy emerged from bankruptcy in May 2019 within 33 days of filing for chapter 11;² on Feb. 4, 2019, FullBeauty Brands Holdings Corp. had its plan confirmed within 24 hours;³ and on May 1, 2019, Sungard Availability Services' plan was confirmed within 19 hours.⁴

While cases completed in mere days and plans confirmed within hours might appear revolutionary, the immediate confirmation of a prepackaged chapter 11 plan is not an entirely new concept. In January 2006, in the case of Blue Bird Body Co., the U.S. Bankruptcy Court for the District of Nevada confirmed the debtors' chapter 11 plan just two days after the petition date.⁵

Blue Bird manufactured school buses that were distributed to school districts through a nationwide dealership network, and it had shut down its production facilities one month prior to filing for bankruptcy. The debtors' chief financial officer testified that the prepackaged plan needed to be effectuated as expeditiously as possible to restart its supply chain, and "any Chapter 11 proceeding that lasts more than a day or two likely [would] result in a complete collapse of the business and the total evaporation of all going-concern value."⁶ The bankruptcy court overruled a due-process objection to the accelerated plan confirmation, finding that the objecting creditor had been on notice and "had full and adequate knowledge of the exigencies of the circumstances."⁷

Prepackaged Chapter 11 Filing

A prepack typically refers to a chapter 11 reorganization plan whereby a debtor has both the time and cooperation from its creditors to negotiate, prepare and solicit acceptances of the plan prior to filing the case. The typical structure of a prepackaged bankruptcy involves a significant reduction of secured debt, a conversion of bondholder or other funded debt to equity, and trade creditors riding through the bankruptcy unimpaired. They are more common when the debtor has a straightforward capital structure and a small number of secured creditor classes.

A bankruptcy case might be required, as opposed to an out-of-court restructuring, because the loan documents require unanimous consent to approve the proposed transaction, or at least a higher rate of approval than is required to confirm a plan under the Bankruptcy Code. Thus, an objecting or unresponsive lender or bondholder can be outvoted if more than one-half in number and two-thirds in dollar value of creditors by class approve, in accordance with § 1126(c) of the Bankruptcy Code.

On the other hand, prepacks can be more difficult — or impossible — to achieve if the debtor has a less concentrated capital structure and an unmanageable amount of trade claims, burdensome executory contracts, employee claims or multiple landlords who are not yet represented or organized to negotiate as a group. When it is not advisable (or even feasible) for the debtor to reinstate or pay these creditors in full, the chapter 11 filing might be necessary prior to negotiation with these groups to gain sufficient leverage and a more organized platform.

As previously noted, the number of prepackaged bankruptcy cases has been on the rise, and, combined with the number of prenegotiated bankruptcies,⁸ they now regularly constitute more than half of all large bankruptcy filings that emerge from chapter 11 with a confirmed plan. According to a summary reported in the ABI Journal, 65 percent of large cases (i.e., more than $50 million in liabilities on the petition date) that emerged from chapter 11 with a confirmed plan in 2016-18 were prepackaged or prenegotiated, compared to 37 percent in 2010-15.⁹

Moreover, the average length of prepackaged cases has decreased from 91 days in 2017 to 44 days in the first part of 2019.¹⁰ In sum, prepacks are becoming more frequent, and much shorter.

Notice and Disclosure Requirements

Section 1125(g) of the Bankruptcy Code provides that "an acceptance or rejection...