What options does a creditor have when they are frustrated with how a debtor is conducting its chapter 11 bankruptcy case? In In re PWM Property Management LLC, the Delaware bankruptcy court denied a motion by creditors and interest holders to file a proposed plan of reorganization as an exhibit to their opposition to the debtors’ motion to extend the exclusivity period. The PWM Property Management decision serves as an important reminder of the strict limits on who can file and solicit a plan of reorganization and when filing of a plan is appropriate.
The debtors in In re PWM Property Management LLC own both a 44-story commercial office tower located at 245 Park Avenue in New York and a 50-story commercial office tower located at 181 West Madison Street in Chicago. On October 31, 2021, the debtors filed for chapter 11 protection in Delaware, attributing the bankruptcy in part to the failure of their property manager for 245 Park Avenue, S.L. Green Management Corp. (“SLG”), to recruit “world-class” tenants and the loss of Major League Baseball as the anchor tenant for that property. The MLB’s decision to end its lease with the debtors gave the debtors’ senior lenders the right to sweep certain excess cash flows from the debtors, thus prohibiting the debtors from making their preferred equity contributions to their minority business partner, 245 Park Member LLC (an affiliate of SLG), and triggering a forced sale of 245 Park Avenue to SLG or a third party buyer.
The first significant measure the debtors undertook post-petition was to reject their property management agreement (“PMA”) for 245 Park Avenue with SLG. In response, 245 Park Member LLC filed a motion to dismiss the cases for bad faith, alleging that the debtors lacked corporate authority to file according to the governing documents, improperly appointed independent agents to authorize the filing, were not insolvent or in financial distress, and only sought to strip SLG’s and their bargained-for rights, including the right to force a sale of 245 Park Avenue. A majority of the debtors’ mezzanine lenders joined the motion to dismiss.
SLG likewise objected to the debtors’ motion to reject the PMA, arguing that the debtors’ motion should be adjourned until 245 Park Member LLC’s motion to dismiss was decided. SLG explained that the PMA already granted the debtors the right to terminate the PMA for any material breaches, but that the debtors had never complained about SLG’s services. SLG argued that since the petition date, it had assisted the debtors with their schedules and statements, and that for purposes of SLG’s right to postpetition fees, any rejection of the PMA should not be effective nunc pro tunc to the petition date.
On December 13, 2021, the bankruptcy court denied 245 Park Member LLC’s motion to dismiss, noting that it was a “close decision.” On December 20, 2021, the court subsequently granted the debtors’ motion to reject the PMA, holding that the debtors had properly exercised their business judgment in making the rejection decision. 245 Park Member LLC and several mezzanine lenders appealed both decisions, but as of the writing of this post, the District Court for the District of Delaware has not yet entered a ruling on either matter. On January 21, 2022, the bankruptcy court approved the debtors’ application to retain G&E Real Estate Management Services Inc. and Newmark & Co. Real Estate Inc. as their new property managers for 245 Park Avenue.
The Attempted Coup
Although SLG is no longer the property manager for 245 Park Avenue, 245 Park Member LLC is still one of the debtors’ two preferred equity holders. In an attempt to regain control regarding the fate of 245 Park Avenue, 245 Park Member LLC and the mezzanine lenders began to draft a proposed plan of reorganization for the debtors (the “Creditor Plan”).
On February 27, 2022, the debtors filed a motion to extend their exclusive plan filing and solicitation periods for the first time by 120 days. In response, on March 7, 2022, 245 Park Member LLC and the mezzanine lenders filed an objection to the exclusivity extension motion with the intention of including the Creditor Plan, which was filed under seal (the “Objection”). The Objection argued in part that any plan proposed by the debtors would be incapable of being confirmed because it would not be supported by the mezzanine lenders. In addition to the Objection, the creditors also filed a corresponding motion to seal with respect to the Creditor Plan (the “Motion to Seal”), arguing that the Creditor Plan would permit the debtors to quickly emerge from chapter 11.
On March 17, 2022, the debtors filed a response to the Motion to Seal, asserting that by agreeing to the Creditor Plan and entering into a “cooperation agreement” that prohibited the creditors from considering, supporting, or discussing any other plan of reorganization, 245 Park Member LLC and the mezzanine lenders had violated sections 1121(b) and 1125(b) of the Bankruptcy Code and could not rely on section 107 to file the Creditor Plan under seal.
On March 21, 2022, the debtors filed a reply brief in support of their exclusivity extension motion, and also attached as exhibits two Creditor Plan-related documents: the unredacted cooperation agreement and related term sheet. That same day, 245 Park Member LLC and the mezzanine lenders filed a brief in support of their Objection and Motion to Seal.
The Court’s Holding
On March 24, 2022, in an oral ruling, the bankruptcy court overruled the creditors’ Objection and granted the debtors’ motion to extend the exclusivity period another 120 days. During the same hearing, the court also denied the Motion to Seal. In so doing, the court addressed three applicable Bankruptcy Code sections. The court first held that although it appreciated that the creditors sought a process to get the Creditor Plan before the court, section 1121(b) is clear that during the exclusivity period “only the debtor may file a plan” and that it is not permissible for any party to try to file a plan during this period.
The court then turned to section 1125(b) of the Bankruptcy Code, which requires that before a holder of a claim or interest solicits a plan to another creditor, such creditor must have received the plan (or a summary of the plan) and a court-approved written disclosure statement. Here, the Creditor Plan was not accompanied with a court-approved disclosure statement. The court held that the creditors’ actions “stepped over the line” of merely discussing acceptable plan terms with other creditors and any solicitations would first have to be approved by the court.
Finally, the court noted that section 107(b) of the Bankruptcy Code was not applicable to the Creditor Plan, which did not include “trade secret or confidential research, development, or commercial information; or . . . scandalous or defamatory matter.”
The exclusivity period is a powerful tool that permits a debtor to control what reorganization proposals, and supporting information, are disseminated to creditors. Section 1121 of the Bankruptcy Code grants a debtor with an initial 120 day period after the petition date to file a plan, and this deadline may be extended for up to 18 months after the petition date with bankruptcy court approval.
The PWM Property Management case shows how strictly some courts will enforce the exclusivity period. After all, the creditors in this case did not seek to solicit the Creditor Plan and did not publicly file the Creditor Plan, cooperation agreement, term sheet, or any related documents. Instead, they only sought permission to include a redacted version of the Creditor Plan as an exhibit to their objection to the debtors’ exclusivity extension motion. Even so, the bankruptcy court denied the Motion to Seal. Indeed, the debtors’ decision to annex the cooperation agreement and term sheet to its reply brief was frowned upon by the court, with the court holding that the debtors’ decision “put gasoline on the fire” and that it “should not have been done.”
An alternative strategy that a creditor/equity holder could have utilized to achieve nearly the same result, and not risk violating the Bankruptcy Code, would have been for either 245 Park Member LLC or one of the mezzanine lenders to solely draft the Creditor Plan and not share it with any other party. Thereafter, 245 Park Member LLC and the mezzanine lenders could have jointly filed the Objection and made reference to the fact that one of the parties had drafted, but not yet solicited to any party (including the other objecting creditors), the Creditor Plan. The Objection would make clear that the Creditor Plan would not be solicited until the debtors’ exclusivity period was terminated and an accompanying disclosure statement concerning the Creditor Plan was approved. With this strategy, the creditors avoid violating (a) section 1121(b) because the Creditor Plan would not be filed, or (b) section 1125(b) because the Creditor Plan would only be solicited once a corresponding disclosure statement was approved by the court. This strategy would also have addressed the court’s concerns with parties actively negotiating a plan during the debtors’ exclusivity period as opposed to merely discussing acceptable plan terms. Further, this would have obviated the need for the Motion to Seal, thus making section 107(b) inapplicable.
Here, since this was the debtors’ first exclusivity extension request, it is not surprising that the court gave the debtors another 120 days to file and solicit a plan, especially considering all of the litigation the debtors have faced concerning the PMA, the motion to dismiss, and various issues raised by the mezzanine lenders. But moving forward, it is possible that in other cases we will begin to see variations of this Creditor Plan strategy used by agitated creditors.