Restructuring

Contributed by Frank Grese
It is not unusual for a chapter 11 plan of reorganization to summarily describe the material terms of an important agreement between the debtor and a third party that is critical to the debtor’s ability to effectuate its plan and reorganize.  For example, if a chapter 11 debtor requires financing to emerge from bankruptcy, fulfill its obligations under the plan, or operate post-bankruptcy, its plan of reorganization would include the key terms of any such “exit financing”.   In addition to describing in the plan the key terms of the agreement, the best practice is to attach a substantially final draft of the relevant agreement to the plan or file it as part of a plan supplement document prior to the hearing considering confirmation of the plan.  In certain circumstances, however, it may not be practicable or possible to file substantially final draft agreements.  As an alternative, a term sheet or other summary document agreed to by the relevant parties, such as a commitment letter in the loan context, can be attached to the plan or filed as part of a plan supplement document before the plan confirmation hearing; such document typically provides that the parties will execute definitive documentation at a later date.  Using the exit financing example again, it is not unusual for a plan or confirmation order to authorize the debtor, prior to the plan’s effective date, to enter into a formal credit agreement and such other documentation as may be required or appropriate, consistent with material terms set forth in the plan or term sheet, and without further court approval.  What happens, however, if the debtor and the third party are unable to agree on the definitive documentation memorializing the terms of the plan or term sheet?
In a recent opinion, In re Chatham Parkway Self Storage, LLC, the United States Bankruptcy Court for the Southern District of Georgia directed the debtor and a secured lender to execute loan documents pursuant to the court’s authority under section 1142(b) of the Bankruptcy Code, which governs implementation of a chapter 11 plan.  Specifically, section 1142(b) allows the court to “direct the debtor and any other necessary party to execute or deliver or to join in the execution or delivery of any instrument required to effect a transfer of property dealt with by a confirmed plan, and to perform any other act . . . that is necessary for the consummation of the plan.”
In Chatham Parkway, debtor Chatham Parkway Self Storage, LLC, filed for bankruptcy under chapter 11 of the Bankruptcy Code in November, 2012 with the goal of continuing to manage a self-storage facility and own the property where the storage facility is located.  Ameris Bank was the assignee under a certain loan document and held a first priority lien in the property.  After Ameris objected to the debtor’s plan, Ameris and the debtor submitted to mediation and eventually reached a settlement regarding the treatment of Ameris’s claim.  The debtor then amended its plan to reflect the mediated settlement, including by attaching an addendum incorporating the mediated settlement.  Ameris withdrew its objection to the plan, and amended its previously cast ballot rejecting the plan to a ballot accepting the plan as amended by the addendum.  In July, 2013, the debtor’s amended plan was confirmed by the court.
The amended plan included the material terms of the Ameris loan repayment, including the amount of the claim that was secured, retention of the existing lien, treatment of the twelve initial interest only payments, treatment of the remaining amortized payments, payment due dates, interest rates, final balloon payment, effects of prepayment, responsibilities of the guarantors, and consequences of default.  The plan also required the debtor to execute new loan documents in favor of Ameris, which were to govern the terms of its repayment of Ameris’s secured claim as set forth in the plan, and required Ameris to provide the debtor with the loan documents not less than fifteen days prior to the effective date of the plan.  The plan also required that the loan documents include provisions requiring the debtor to deliver to Ameris:  (i) annual tax returns of the debtor and all guarantors; (ii) annual personal financial statement for all guarantors; (iii) monthly profit and loss statements, balance sheets and quarterly site inspection reports; and (iv) other financial documents that are reasonable and customary for a commercial loan of this nature.
Post-confirmation, when the debtor and Ameris could not agree on whose version of the loan documents should be executed, the debtor filed a motion asking the court to compel Ameris to execute the loan documents as drafted by the debtor, direct further mediation or hold a hearing determine the appropriate terms to be included in the loan documents.
The court found that it had authority under section 1142(b) of the Bankruptcy Code to direct the parties to execute the loan documents to protect the confirmation order and aid in the plan’s execution.  In support of its holding, the court first quoted Collier on Bankruptcy, a well-known bankruptcy treatise, which, in discussing the application of section 1142(b), provides that “if the plan provides that a claim is to be secured by property of the estate, the court can order the debtor or such other person as may be necessary to execute a security agreement, mortgage, or similar instrument.”  The court reasoned that “if a court has the authority to order a party to execute an instrument simply because the plan calls for a claim to be secured by property of the estate, it would have that same authority to aid in a plan’s consummation by ordering the execution of an instrument expressly called for by the plan,” which the court noted, was the case there.
The court acknowledged that there are instances where courts have refused to order the execution of an agreement referred to in the plan because the material terms were not included in the plan, but found such cases distinguishable given that the debtor’s plan detailed the terms concerning the repayment of the Ameris claim.  The court noted that the debtor’s plan contained sufficient agreed-upon material terms to infer a meeting of the minds and a willingness to be bound by the loan documents incorporating these terms and that “it was not reasonable to expect a plan of reorganization in bankruptcy to contain the amount of minute detail that is typically found in commercial loan documents,” which, presumably, “is why the [a]ddendum called for the parties to execute [l]oan [d]ocuments after confirmation.”
The court then turned its attention to the disputed provisions of the draft loan documents and noted that the plan was silent on those provisions.  Noting that a plan is a contract between a reorganized debtor and its creditors, the court reiterated that the plan was clear that the debtor and Ameris desired and expected to execute loan documents, which, at a minimum, would contain the specific material terms set forth in the plan.  The court also pointed out that because the parties had not executed loan documents as required by the plan, they were arguably in default under the plan.  After citing caselaw for the proposition that a bankruptcy court may clarify a plan where it is silent or ambiguous and interpret plan provisions to further equitable concerns, the court concluded that it has the authority to supply commercially reasonable terms and conditions to the loan documents where the plan is silent and which do not alter any provision of the plan.
Each party submitted to the court its version of the loan documents that were “dramatically different” from one another.  Ameris urged the court to adopt its “standard form” documents.  The court agreed that Ameris’s loan documents were standard and ultimately decided to work off of them, but refused to adopt them without change.  Ultimately, the court resolved the differences by determining that the debtor was entitled to: (i) a grace period for late payments; (ii) modification of a provision triggering an event of default upon the death of a single guarantor where the note was guaranteed by more than one guarantor; (iii) a 90-day (rather than 30-day) grace period to clear any adverse governmental filings or liens; and (iv) the addition of “reasonable belief” language in the material adverse change or MAC clause.
Conclusion
Chatham Parkway serves as a reminder that relying on a term sheet or similar summary document and waiting to execute definitive documentation post-confirmation can be an invitation for judicial intervention if a dispute between the debtor and the counterparty arises.  As noted above, parties should strive to file with the court substantially final draft agreements prior to the confirmation hearing.  If this is not possible, however, parties can mitigate their risk by ensuring that the term sheet is as comprehensive as reasonably possible and covers all material terms.