Even when a creditor has direct claims against other creditors that it could have asserted before bankruptcy in its own right, the Revlon opinion by Bankruptcy Judge David S. Jones of New York can be cited for the proposition that the creditor lacks standing to pursue its claims if the “transaction [under attack] is of general interest to the estate” and would unwind a “transaction [that] belongs to the estate.”
In the waning days of the chapter 11 reorganization of Revlon Inc. that began in June 2022, Judge Jones dismissed a lawsuit by a group of secured creditors filed against the debtor. The suit alleged that the debtor and another group of lenders took away their collateral.
The 2016, 2019 and 2020 Secured Financings
To finance the acquisition of Elizabeth Arden in 2016, Revlon took down a $1.8 billion term loan secured by intellectual property, among other collateral. As Revlon’s finances deteriorated, the company needed additional financing. Revlon failed to win approval from the majority of the 2016 term lenders to release collateral demanded by new lenders.
To circumvent the 2016 lenders’ refusal to release collateral, Revlon entered into a series of complex transactions in 2019 and 2020 that had the effect of releasing some of the collateral that in turn was pledged to new lenders. Some of the 2016 lenders participated in the new loans and thus benefitted from collateral that was taken away from other 2016 lenders.
Lenders from 2016 who did not benefit from the new loans lodged objections at the time, but to no avail. We will refer to them as the objecting lenders.
The Lawsuit in the Chapter 11 Case
Immediately after the chapter 11 filing, Revlon sought so-called DIP financing from the new lenders. The bankruptcy loan “rolled up” the new lenders’ loans from 2019-2020. The loan approval order established a deadline for objections to the rollup. The objecting lenders did not object to the DIP loan by the deadline.
However, the creditors’ committee did object by the deadline and obtained extensions of the time for objecting. Eventually, the committee agreed to a settlement with the lenders that will come before Judge Jones for approval.
A few months after the chapter 11 filing, the objecting lenders filed an adversary proceeding in bankruptcy court against Revlon. The complaint did not assert preference or fraudulent transfer claims that would belong to the bankrupt estate. Rather, the complaint sought equitable remedies that would have the effect of taking the disputed collateral away from the new lenders and directing it to the objecting lenders.
Revlon, the debtor, filed a motion to dismiss based on the idea that the objecting lenders lacked standing. Judge Jones granted the motion in an opinion on February 14 that he amended in nonsubstantive respects on February 24.
The Claims Were Derivative
To this writer, it appears that the objecting lenders had plausible claims that the 2019-2020 transactions violated their rights under the 2016 loan agreement. Notably, though, the objecting lenders did not prosecute a suit on their claims before bankruptcy. But that’s not the end of the story.
In Judge Jones’ words, the debtor argued that the objecting lenders “lack standing to pursue their equitable relief claims because such claims are derivative of claims that belong exclusively to Debtors’ estates and therefore must be dismissed.”
Judge Jones explained how the debtor could have pursued the same claims under the rubric of preference and fraudulent transfer. Indeed, he recited how the official committee, but not the objecting lenders, raised an objection to the DIP financing and the rollup.
The objecting lenders’ lawsuit asserted claims for equitable relief, but not for preference or fraudulent transfer, which “indisputably belong to the estate,” Judge Jones said. He continued by observing that the objecting lenders’ “other theories for relief [arose] from the same facts and same asserted injuries.”
Judge Jones characterized the objecting lenders as “mounting an attack on the key underpinnings of Debtors’ current capital structure and possible estate entitlements, an effort that in substance replicates the fraudulent transfer and potential similar estate claims that the [official creditors’ committee] and the estate have investigated and provisionally settled.” He went on to say that the objecting lenders’
claims for equitable relief thus entirely overlap with claims and proposed forms of relief that either were, or could have been, sought by the [official committee] or any other authorized estate representative regarding fraudulent transfers, preferences, or other voidable transactions.
Based on Second Circuit authority, Judge Jones explained how
the bar on creditors individually asserting “derivative” claims in bankruptcy cases flows from the need to prevent individual creditors from pursuing individual collection actions that would usurp or interfere with potential recoveries or remedies that form part of the assets of the estate.
Again citing Second Circuit authority, Judges Jones said that the objecting lenders were “simply ‘pleading around’ causes of action that they would need to concede are derivative or exclusively reserved for the trustee and the estate, while seeking substantively identical relief.”
Judge Jones noted the instances when the objecting lenders could have attacked the 2019-2020 transactions but didn’t. He also said that they could have sought to enjoin the 2019 and 2020 transactions, but didn’t, and never lodged an objection to the DIP financing.
Granting the motion to dismiss the suit against the debtors for lack of standing, Judge Jones said it was “inescapable that this transaction is of general interest to the estate and that the entitlement to seek to unwind the transaction belongs to the estate.”
Update
After Judge Jones ruled, the parties settled, removing an obstacle to confirmation of Revlon’s plan. Do you suppose that his decision was the impetus for settlement?
Had the objecting lenders persisted, Judge Jones could have confirmed the plan. Consummation of the plan may have made their appeal equitably moot.
Even when a creditor has direct claims against other creditors that it could have asserted before bankruptcy in its own right, the Revlon opinion by Bankruptcy Judge David S. Jones of New York can be cited for the proposition that the creditor lacks standing to pursue its claims if the “transaction [under attack] is of general interest to the estate” and would unwind a “transaction [that] belongs to the estate.”
In the waning days of the chapter 11 reorganization of Revlon Inc. that began in June 2022, Judge Jones dismissed a lawsuit by a group of secured creditors filed against the debtor. The suit alleged that the debtor and another group of lenders took away their collateral.