[1]In some bankruptcy courts, the use of combined hearings on chapter 11 disclosure statements and plans in non-prepackaged, non-small business cases is expressly contemplated by local rule and relatively common.[2] Delaware, which is so often on the cutting edge of chapter 11 practice, has not spoken one way or the other on the use of combined hearings in non-prepackaged, non-small business cases in its local rules or standing orders. Perhaps for this reason, the use of such combined hearings in Delaware has historically been rare outside of prepackaged chapter 11 plans.
However, the recent use of combined hearings in a handful of non-prepackaged, non-small business Delaware chapter 11 cases may provide an indication that in the appropriate case, the use of combined hearings in Delaware may be utilized. While the use of a combined hearing is neither necessary nor appropriate in the majority of chapter 11 cases, the authors regard this as a positive development that brings needed efficiency to the exceptional case. Although other circumstances may also warrant the use of such combined hearings, this streamlined process can literally “add value” to chapter 11 cases with limited immediate cash on hand that might otherwise convert to chapter 7 or seek a structured dismissal for fear of the administrative claims that may be incurred in chapter 11 prior to plan confirmation, which often happens following the sale of substantially all of a debtor’s assets. For the chapter 11 case that only has enough cash on hand to provide a brief runway in chapter 11, minimizing the time spent to confirm a liquidation plan will reduce cash burn, all while maximizing the chances of confirming a liquidation plan, and will maximize the remaining value for unsecured creditors when cash on hand is small but large enough to allow for a chapter 11 plan.
The Law Governing Combined Disclosure Statement and Plan Hearings
While the typical avenue for soliciting votes on a chapter 11 plan requires receiving court approval of the disclosure statement for the chapter 11 plan prior to solicitation, a split of authority exists regarding when the Bankruptcy Code specifically provides for a simultaneous process.[3] In cases involving small business debtors, the court is expressly empowered to conditionally approve the disclosure statement, permit post-petition solicitation and combine the two hearings on approval of the disclosure statement and confirmation of the plan by § 1125(f)(3) of the Bankruptcy Code.[4] In addition, in cases involving prepackaged plans, which are subject to a pre-petition solicitation of votes that was in compliance with applicable nonbankruptcy law, courts routinely conduct combined hearings to approve the disclosure statement, plan and solicitation procedures shortly after a debtor files its chapter 11 petition.[5]
Outside of § 1125(f)(3), there are no specific procedures for conditional approval of a disclosure statement in a regular chapter 11 case in the Bankruptcy Code, but § 105(d)(2)(B)(vi) does expressly authorize a court to combine a hearing on the adequacy of a disclosure statement with a hearing on confirmation of a chapter plan to ensure the economic and expeditious administration of a case, provided that granting such relief does not violate other provisions of the Bankruptcy Code or Bankruptcy Rules. At least one court has held in a published opinion that § 105(d)(2)(B)(vi) authorizes the court to combine a hearing on the adequacy of a disclosure statement with a hearing on the confirmation of a chapter 11 plan in a non-small business, non-prepackaged case.[6] At least one other court has confirmed a plan via a written opinion following a conditionally approved disclosure statement and, with the parties’ consent, considered the adequacy of the disclosure statement, together with plan confirmation, at a single hearing in a regular chapter 11 case.[7] However, at least one other court has refused to authorize a combined hearing after questioning whether § 105(d) conflicted with § 1125(b) except in prepackaged cases or small business cases.[8]
Bankruptcy Courts’ Institutionalization of Combined Disclosure Statement and Plan Hearings
Although some case law has held that the use of combined hearings on chapter 11 disclosure statements and plans is only permitted in prepackaged or small business cases, a number of other bankruptcy courts have taken the contrary position so far as to expressly allow and/or provide additional procedures for the use of such combined hearings in non-prepackaged and non-small business cases, including the same conditional approval of a disclosure statement available in small business cases. For instance, the local rules of the U.S. Bankruptcy Court for the District of Nevada provide that Fed. R. Bankr. P. 3017.1, which provides procedures for preliminary approval of disclosure statements and combined final approval in small business chapter 11 cases, “shall apply to all non-small business cases.”[9] The local rule also provides additional expedited chapter 11 confirmation procedures that are applicable to all chapter 11 cases, including providing a process for conditional approval of the disclosure statement without hearing.[10] Meanwhile, in the U.S. Bankruptcy Court for the District of Massachusetts, the local rules provide that “[u]pon motion and for cause shown, the Court may issue an order combining the hearing on the approval of the disclosure statement with the notice of the hearing on confirmation of the plan” in non-small business chapter 11 cases.[11]
In the U.S. Bankruptcy Court for the Eastern District of Michigan, a process for preliminary approval of disclosure statements and combined hearings is not in the local rules, but it is actually the default process in all chapter 11 cases by administrative orders of almost all of the district’s bankruptcy judges. The local rules set forth rules governing approval of disclosure statements that “apply only when the court has not entered an order requiring a combined plan and disclosure statement,”[12] and most judges have a form order granting preliminary approval of a disclosure statement and requirements for a combined plan and disclosure statement.[13]
The Delaware Experience
Delaware does not institutionally endorse conditional approval of disclosure statements, nor combined disclosure statement and plan hearings, in non-prepackaged, non-small business cases in the way that certain other bankruptcy courts do, and the use of combined hearings is rare outside of these two contexts. However, such combined hearings have been utilized in several recent cases, which indicate a recent recognition that, in the appropriate case, such procedures may be utilized in an effort to maximize the value of debtors’ estates.
Within the past year, streamlined procedures have been used in at least three non-prepackaged, non-small business chapter 11 cases in Delaware: In re Prommis Holdings LLC,[14] In re Devonshire PGA Holdings LLC[15] and In re LMI Legacy Holdings Inc.[16] In both LMI and Prommis, a combined hearing was held to reduce the administrative expenses that were accruing prior to confirmation of liquidating plans following asset sales, and in both cases was sought with the approval of the creditors’ committee and lenders.[17] In Devonshire, the process was utilized for a pre-negotiated reorganization plan where the sole voting creditors intended to support the plan, but had not yet been formally solicited.[18]
Taken together, these cases indicate that in exigent circumstances and with the support of major constituencies in the case, the use of a combined disclosure statement and plan hearing in a non-prepackaged, non-small business Delaware chapter 11 case can be considered as a potential option. Such an option is not devoid of potential drawbacks. As warned by Hon. Brendan Linehan Shannon in Prommis, “the debtors take the risk” that there may be a disclosure issue that impairs the plan process at the combined hearing on the disclosure statement and confirmation.[19] However, in the right case, which would be of sufficiently small size that the debtors and other plan supporters would believe that a disclosure issue is unlikely to materialize and of such size that the savings from a combined hearing can be enough to merit such treatment, a combined hearing may be the best path forward.
[1] The opinions expressed herein are those of the authors and do not necessarily reflect the views of their firms or clients.
[2] Other authorities have held that the use of such combined hearings is proper only in the context of a prepackaged or small business chapter 11 plan. See infra.
[3] See 11 U.S.C. § 1125(b) (precluding post-petition solicitation of acceptance or rejection of chapter 11 plan until court has approved disclosure statement for chapter 11 plan after notice and hearing, and proponent has transmitted plan (or summary) and approved disclosure statement to holders of claims and interests).
[4] See 11 U.S.C. § 1125(f)(3) (providing that in cases involving small-business debtor, notwithstanding § 1125(b), “the hearing on the disclosure statement may be combined with the hearing on confirmation of a plan”).
[5] See, e.g., In re Franklin Credit Holding Corp., Case No. 12-2441 (Bankr. D.N.J. 2012); In re SuperMedia Inc., Case No. 13-10545 (Bankr. D. Del. 2013).
[6] See In re Gulf Coast Oil Corp., 404 B.R. 407, 425 (Bankr. S.D. Tex. 2009) (finding that “section 1125(f) authorizes combined plans and disclosure statements [hearings] in small business cases and section 105(d) authorizes the court to combine them in other cases”). The practice of allowing combined hearings in non-small business cases after the passage of § 1125(f) in 1994 comports with the pre-1994 practice of using this procedure, even though it was not expressly set forth anywhere in the Bankruptcy Code at the time. See Hon. A. Thomas Small, “Small Business Bankruptcy Cases,” 1 Am. Bankr. Inst. L. Rev. 305 (1993) (discussing pre-1994 practice).
[7] See In re 203 N. LaSalle St. Ltd. P’ship., 190 B.R. 567, 573 (Bankr. N.D. Ill. 1995), rev’d on other grounds, 526 U.S. 434. The import of conditionally approving a disclosure statement is discussed in Judge Small’s article discussing the use of conditionally approved disclosure statements and combined hearings prior to the adoption of § 1125(f)(3). See Small, “Small Business Bankruptcy Cases,” 1 Am. Bankr. Inst. L. Rev. at 309-18.
[8] See In re Amster Yard Assocs., 214 B.R. 122, 124 (Bankr. S.D.N.Y. 1997) (questioning whether court could conditionally approve disclosure statement in regular chapter 11 case and refusing to do so under facts of case). Scott H. Bernstein, “Combined Hearings on Approval of Disclosure Statement and Confirmation of Plan,” 8 ABI Business Reorganization Committee Newsletter 9 (August 2009) (discusses Gulf Coast Oil Corp. and Amster Yard Assocs. cases in greater detail), available at www.abiworld.org/committees/newsletters/business-reorganization/vol8num… (last visited July 21, 2014).
[9] See L.R. 3017 of the U.S. Bankruptcy Court for the District of Nevada. See also Fed. R. Bankr. P. 3017.1.
[10] See L.R. 3017 of the U.S. Bankruptcy Court for the District of Nevada.
[11] See MLBR 3017-1, titled “Approval of Disclosure Statements in Chapter 11 Cases Other Than Small Business Cases.” Small business cases are addressed by a separate local rule, MLBR 3017-2.
[12] See Local Rule 3017-1 of the U.S. Bankruptcy Court for the Eastern District of Michigan.
[13] For instance, the chambers page of Hon. Steven W. Rhodes states that the judge “uses a fast-track system for all Chapter 11 cases unless it is determined that it is not practical. The Judge’s requirements for information to include in the combined chapter 11 plan and disclosure statement can be found on this website.” See www.mieb.uscourts.gov/judges-info/judge-rhodes (last visited July 21, 2014). The majority of the district’s other judges have adopted the same or substantially similar procedures and requirements.
[14] Case No. 13-10551 (Bankr. D. Del. 2013) (Hon. Brendan Linehan Shannon).
[15] Case No. 13-12460 (Bankr. D. Del. 2013) (Hon. Christopher S. Sontchi). Young Conaway Stargatt & Taylor LLP served as counsel to the debtors in Devonshire.
[16] Case No. 13-12098 (Bankr. D. Del. 2014) (Judge Sontchi). Mr. Rucki and his firm served as co-counsel to the debtors in LMI.
[17] See Transcript of Oct. 24, 2013, Hearing.
[18] See Motion for Conditional Approval of Disclosure Statement and Authorization to Solicit Acceptances of Plan [Docket No. 22]. The request for conditional approval of the disclosure statement was abandoned by the debtors following comments made by Judge Sontchi at the first-day hearing in the case, although the request for a combined hearing remained and was granted.
[19] See Transcript of Oct. 24, 2013, Hearing.