One-Day Restructuring: The New Trend of “Super Speed” Prepacks
In a prepackaged bankruptcy—colloquially known as a “prepack”—a distressed company negotiates and solicits support of a chapter 11 plan of reorganization before commencing its chapter 11 case. The company then files for bankruptcy court protection to implement the plan, knowing that it has the requisite creditor support for its reorganization. While prepacks have always been permitted under chapter 11 of the U.S. Bankruptcy Code, a recent trend of ultra-fast prepacks has emerged, beginning with the four-day chapter 11 case of In re FULLBEAUTY Brands Holdings Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 2019). Since FULLBEAUTY, several other distressed companies have pursued a similar, ultra-fast prepackaged chapter 11 strategy, with chapter 11 cases sometimes measured in hours, rather than days, weeks, or months. This article explores this recent trend of “super speed” prepackaged chapter 11 cases.
The “Super Speed” Prepack
A prepackaged chapter 11 case provides at least two significant benefits over a traditional chapter 11 case. First, it allows a company to solicit and obtain support for a chapter 11 plan of reorganization prior to actually commencing a chapter 11 case. This provides the company and its key stakeholders with certainty that the requisite support for the proposed restructuring transaction has been obtained before any in-court process begins. Doing so allows the company to, among other things, assure vendors, customers, employees, and others that the company will continue “business as usual” notwithstanding the commencement of a chapter 11 bankruptcy case.
Second, a typical prepackaged chapter 11 case has a much shorter timeframe than a traditional chapter 11 case. Whereas many chapter 11 cases may last months, if not years, a typical prepackaged chapter 11 case may last only 30 to 60 days. See, e.g., In re Chaparral Energy, Inc., Case No. 20-11947 (MFW) (Bankr. D. Del. 2020) (prepackaged plan went effective within 59 days of the petition date) In re Broadvision, Inc., Case No. 20-10701 (CSS) (Bankr. D. Del. 2020) (49 days); In re Atlas Resource Partners, L.P., Case No. 16-12149 (SHL) (Bankr. S.D.N.Y. 2016) (36 days). This shortened timeframe is key. Less time in a court-supervised chapter 11 case means less costs, less risk, and less potential for disruption to the company’s business operations and trade relationships.
As part of a recent trend starting with the FULLBEAUTY case, restructuring professionals and distressed companies have been accelerating the “in court” time of certain prepackaged chapter 11 cases. These shorter cases can enhance the benefits discussed above. In some instances, a company’s chapter 11 case may last for so little time that it is over before vendors, customers, employees or other parties even notice. Plus, the shortened in-court stay further reduces potential costs, risks, and business disruption. For example, the recent February 2021 prepackaged chapter 11 case of Belk, Inc., an American department store chain with over 300 locations in 16 states, lasted less than 24 hours from commencement to emergence from chapter 11, representing one of the quickest chapter 11 reorganizations ever. In re Belk, Inc., Case No. 21-30630 (MI) (Bankr. S.D. Tex. 2021). Other recent cases have made it through chapter 11 at similar speeds. See, e.g., In re Mood Media Corporation, Case No. 20-33768 (MI) (Bankr. S.D. Tex. 2020) (less than 24 hours); In re SunGard Availability Services Capital, Inc., Case No. 19-22915 (RDD) (Bankr. S.D.N.Y. 2019) (less than 40 hours).
“Super Speed” Prepacks are Best Suited for Financial Restructuring
Despite the benefits a prepack may afford, prepacks are not conducive to every situation. Prepacks are best suited for operationally sound companies in need of balance sheet restructuring, but typically are ill-suited for addressing operational concerns such as restructuring burdensome contracts or leases or right-sizing workforce obligations.
The Belk department store case mentioned above is a good example. Belk commenced its prepackaged chapter 11 on the evening of February 23, 2021, with a prepackaged plan of reorganization focused on restructuring hundreds of millions in funded indebtedness, while leaving unaffected all of its leases and contracts, as well as its obligations to vendors, customers, and employees. The prepack model allowed Belk to swiftly enter and exit bankruptcy in under 24 hours. This was possible because Belk did not engage in any operational restructuring. Had Belk desired to use chapter 11 to shed burdensome leases or contracts, adjust workforce obligations, or address trade creditors, it likely would have required a more traditional restructuring.
“Super Speed” Prepacks Require Significant Out-of-Court Effort
Prepacks require a significant out-of-court effort, and even more so for “super speed” prepacks. To shorten the in-court portion of a reorganization, prepacks typically require a great deal of negotiation and coordination prior to filing. In many cases, preparation for the filing begins months in advance. Because prepacks typically are best suited for and focused on a balance-sheet restructuring, the company and its advisors most often are negotiating opposite sophisticated financial institutions that hold the company’s funded indebtedness, rather than smaller trade creditors. For complex capital structures with multiple tiers of funded indebtedness, this may mean engaging with several institutions or groups of institutions, each with differing claims and priorities to the company’s assets.
The ultimate goal of these negotiations is to reach the terms of a comprehensive balance-sheet restructuring that addresses, and has the support of the holders of, each tranche of the company’s funded indebtedness. If consensus is reached, the parties typically execute an agreement containing the essential terms of the restructuring transactions, often called a “restructuring support agreement” or “RSA”.
The RSA serves as the framework for the chapter 11 plan. Once the chapter 11 plan is formulated, the company then must begin soliciting acceptances of the plan prior to commencing its chapter 11 case. Because the cost associated with formulating and soliciting a prepackaged chapter 11 plan can be significant, many companies will not begin to do so unless and until they know they have the support of the requisite majorities of the relevant debt holders.
In addition to the RSA and the plan itself, prepackaged cases often involve the negotiation of other complex transaction documents, such as new corporate organizational documents and new debt or equity financing documents. As with the plan, the essential terms or framework for these documents typically are set out in the RSA, with the actual documents being further negotiated and finalized once the RSA is executed.
Only after the prepackaged chapter 11 plan has been finalized and solicitation is underway will the company commence its chapter 11 case to implement the agreed-upon restructuring transactions.
“Super Speed” Prepacks Have Drawn Criticism
“Super speed” prepacks are not free from controversy and criticism. Among the harshest critics has been the Office of the United States Trustee (the “U.S. Trustee”), a U.S. government agency charged with oversight of the federal bankruptcy system. The U.S. Trustee’s primary concern and criticism of “super speed” prepacks is that the greatly-accelerated timeframe leaves little time for notice and due process for creditors and other parties in interest.
For example, in both the Belk and SunGard cases, the U.S. Trustee filed objections arguing that the expedited timeframe of the case violated principles of due process because the U.S. Trustee, the bankruptcy court, and other parties in interest that were not involved in pre-filing negotiations had little or no time to evaluate the company’s proposed restructuring transactions. In both objections the U.S. Trustee argued that the “super speed” prepacks drastically deviate from the more traditional prepackaged bankruptcies contemplated in the U.S. Bankruptcy Code, arguing that procedural rules require at least 28 days’ post-commencement notice of a prepackaged plan.
To date, however, the U.S. Trustee’s objections have not impeded “super speed” prepacks. In SunGard, the bankruptcy court overruled the U.S. Trustee’s objection, noting the lack of creditor objections to confirmation of the plan and finding that the U.S. Bankruptcy Code permitted confirmation of a prepackaged chapter 11 plan on less than a day’s notice. In Belk, the bankruptcy court similarly confirmed the company’s plan on less than a day’s notice. Notably, however, the bankruptcy court in Belk entered a “due process preservation order” (to which Belk agreed) to partially resolve the U.S. Trustee’s objection and alleviate concerns that affected parties may have been excluded from pre-filing negotiations. The order preserves parties’ rights to raise due process objections at a later date. Belk and the U.S. Trustee agreed that the bankruptcy court’s preservation order would control over the bankruptcy court’s order confirming the prepackaged chapter 11 plan.
Conclusion
The prepackaged chapter 11 process presents an attractive option for a distressed company looking to restructure or deleverage its balance sheet without the costs and risks associated with a more traditional chapter 11 case. In the right circumstances, and with sufficient pre-planning and negotiation, a “super speed” prepack may present an even more attractive option for minimizing costs and risks, allowing a distressed company to “right size” its balance sheet in a chapter 11 case that lasts mere hours, rather than days, weeks, or months. As with any innovative process, however, the “super speed” is not without its critics. But at least to date, criticisms have not significantly impeded the “super speed” prepack.
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Matthew B. Harvey, Paige N. Topper, “One-Day Restructuring: The New Trend of “Super Speed” Prepacks,” TOUCHPOINT - INSOL’s Insolvency Practice Group Newsletter (April 2021)
Copyright © Morris, Nichols, Arsht & Tunnell LLP. These materials have been prepared solely for informational and educational purposes, do not create an attorney-client relationship with the author(s) or Morris, Nichols, Arsht & Tunnell LLP, and should not be used as a substitute for legal counseling in specific situations. These materials reflect only the personal views of the author(s) and are not necessarily the views of Morris, Nichols, Arsht & Tunnell LLP or its clients.
About TOUCHPOINT - INSOL’s Insolvency Practice Group Newsletter
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Eric is a member of INSOL International’s Small Practice Group Newsletter Editorial Committee. The full April 2021 newsletter features various article contributions covering topics of current and international interest to insolvency/bankruptcy practitioners.