District Judge Sue L. Robinson of Delaware upheld the bankruptcy court by ruling that the record date pursuant to a plan exclusively determines which shareholders are entitled to receive distributions, even if U.S. securities regulations might call for distributions to holders who purchased securities after the record date.
The opinion is important, because a decision to the contrary would have complicated distributions in chapter 11 cases and likely would have ended up requiring different and less clearly defined record dates for equity holders than for creditors.
The case, however, did not involve chapter 11. Instead, a Canadian company filed a petition in Canada for arrangement under the Companies’ Creditors Arrangement Act. Simultaneously, the company filed a chapter 15 petition in Delaware.
The Canadian court approved the company’s plan, which was recognized by the Delaware bankruptcy court in an order that gave the plan full force and effect in the U.S. The plan provided for distributions to unit holders once all creditors were paid in full. The company’s units, effectively equity securities, were traded in the over-the-counter market in the U.S., thus invoking the regulatory regime under the Financial Industry Regulatory Authority, or FINRA.
As usual, the plan bound all creditors and equity holders, along with successors and assigns. The plan provided for distributions to unit holders as of a record date to be established under the plan.
After notices published in newspapers, along with a press release on Dec. 15, 2014, the company established Dec. 18, 2014, as the unit holders’ record date. Beginning Dec. 16 and continuing through Jan. 22, 2015, when the distribution was actually made and trading in the units halted, the plaintiffs purchased units. The purchasers therefore did not receive any of the distributions, because they would have had to have bought the securities before Dec. 15 on account of the three-day settlement process before the transactions became effective.
The purchasers sued in bankruptcy court, contending that the company violated FINRA regulations. Bankruptcy Judge Kevin Gross granted the company’s motion to dismiss and was upheld by Judge Robinson in her June 14 opinion.
The plaintiffs conceded that the company had made the distribution in accordance with the plan. Had the FINRA regulations been employed, the plaintiffs contended that they would have been entitled to receive the distribution, not the sellers from whom they acquired the units.
Judge Robinson held that the company “had a duty to comply with the plan – not the FINRA Rules.” She rejected the argument that the company had a “concurrent and additional” obligation, not contained in the plan, to follow FINRA.
Invoking res judicata, she said that the “plan sets forth an exclusive procedure for distributions to unit holders . . . and it is a final order on the merits.” She added that the “plan imposed no obligations . . . to comply with FINRA Rules or any authority outside of” Canadian law and orders of the U.S. and Canadian courts.
Judge Robinson said there was no way to harmonize the plan and the FINRA rules. If the rules also applied, the company would have been required to make the same distribution twice: the first payment to the holders on the record date and another in the same amount to those who purchased the units later.
Although the res judicata ruling was enough to affirm the lower court, Judge Robinson also upheld dismissal because the plan gave releases to the defendants.
District Judge Sue L. Robinson of Delaware upheld the bankruptcy court by ruling that the record date pursuant to a plan exclusively determines which shareholders are entitled to receive distributions, even if U.S. securities regulations might call for distributions to holders who purchased securities after the record date.