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The expense, disruption and value deterioration inherent in sustained Chapter 11 proceedings have in recent years led to faster paced cases which are often, if not prepackaged, at least pre-negotiated (or pre-arranged). Debtors and sophisticated stakeholders are increasingly using plan support agreements (PSAs), also known as restructuring support agreements, to provide structure to a Chapter 11 case and set forth the pre-negotiated terms of a Chapter 11 plan. A PSA is pre- or postpetition contract entered into by the debtor and certain significant creditors, usually right before the bankruptcy filing, pursuant to which the debtor and its creditors agree to support a proposed Chapter 11 plan, subject to specific terms or conditions. PSAs may help to reduce the cost, length and negative publicity associated with a bankruptcy filing by assuring the market, including prospective lenders or investors, that the debtor will exit bankruptcy without causing too much disruption to employees, customers or partners of the debtor. At the same time, if a debtor enters into a PSA with less than all of its significant stakeholders, it could be a recipe for litigation.

Benefits to Debtor

The heart of a PSA is the creditors’ pledge of support for the plan which typically is comprised of provisions requiring that such creditors (1) may not delay confirmation of a plan, (2) are required to support and vote in favor of a plan that is consistent with the terms of the PSA, and (3) may not assign claims that are subject to the PSA (unless the assignee agrees to sign onto the PSA and be bound by its terms). See Restructuring Support Agreements in Bankruptcy, Practice Law Bankruptcy and Practice Law Finance, at 3-4 (2018) (hereinafter, “Restructuring Support Agreements”). Other terms beneficial to the debtor that are commonly included in a PSA are (a) specific performance as a remedy for breach, (b) termination provisions upon certain events of default, and (c) a so-called “fiduciary out” for the debtor. Id. A fiduciary out is particularly important because it ensures the debtor is able to terminate the PSA and propose a different plan if the debtor determines that the agreement is no longer in the best interests of its estate. See, e.g., In re Genco Shipping & Trading Ltd., 509 B.R. 455, 464 (Bankr. S.D.N.Y. 2014) (“[T]he [PSA] provides a fiduciary out that gives the Debtors the ability to receive, review and negotiate unsolicited proposals for any better alternative transaction.”).

Benefits to Creditors

In addition to the benefits that PSAs confer upon the debtor, creditors may receive concessions from the debtor to encourage their participation, such as (i) milestones for achieving important Chapter 11 events, such as approval of post-petition financing, approval of a disclosure statement or confirmation of a plan, (ii) favorable payment terms, interest rates or payment schedules, (iii) debt-to-equity conversions, and (iv) liability releases, as well as more certainty regarding a restructuring timeline and outcome. See Restructuring Support Agreements, at 35. Other possible concessions could include lenders’ consent to debtor’s use of cash collateral or to post-petition DIP financing with priming liens. Id. Debtors may also agree to pay the legal and financial advisors of lenders and/or groups of creditors who agree to sign on to the PSA. Id.

Assumption of the PSA

For PSAs entered into pre-petition, a debtor would typically file a motion with the court seeking to assume the agreement as an executory contract under section 365 of the Bankruptcy Code. A court reviewing the PSA would approve the assumption of the PSA “upon a showing that the debtor’s decision to take such action will benefit the debtor’s estate and is an exercise of sound business judgment.” In re Genco, 509 B.R. at 462. While courts generally will not second-guess the debtor’s business judgment, the involvement of insiders will trigger heightened scrutiny. See 7 Collier on Bankruptcy ¶ 1108.07 (Richard Levin & Henry J. Sommer eds., 16th ed. 2015) (“[c]ourts have employed what has been described as a ‘sliding scale’ of scrutiny, with the most searching standard of review being accorded to…transactions in which there is a potential for managerial self-dealing.”). There have been some recent instances in which a debtor has entered into a pre-petition PSA but does not seek to assume it. In such a case, creditors would be bound by the terms of the PSA but the debtor technically would not. See 11 U.S.C. §365.

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