The Office of the U.S. Trustee and two creditor groups called Friday for the rejection of a case dismissal deal in Constellation Enterprises LLC’s Delaware Chapter 11, saying the settlement “launders” assets and runs afoul of a recent U.S. Supreme Court “structured dismissal” ruling.
In an objection filed on behalf of Acting Region Three Trustee Andrew R. Vara, the agency wrote that the former metal and plastics fabricator’s plan resorts to a “fiction of gifting” to avoid the Bankruptcy Code’s absolute priority hierarchy for distribution of what would otherwise be estate assets.
The dodge would allegedly be possible through a case settlement agreement and terms that guide actions and movement of assets just before and after the Chapter 11 is dismissed and outside of regular bankruptcy control.
Similar contortions were reversed earlier this year when the Supreme Court overturned the “In re Jevic Holding Corp.” case, which structured a post-dismissal distribution of estate funds to unsecured creditors and estate professionals. Skipped over were former trucking company employees who had a secured judgment for Worker Adjustment and Retraining Notification Act violations.
“Gifting here unleashes the very harms that the [Supreme] Court sought to avoid, namely seeming collusion between debtors and favored creditors to squeeze out disfavored creditors and the increased difficulty of reaching global settlements,” the Trustee objection said.
Constellation sold all of its industrial assets last year in deals that yielded $138 million for the estate. With little left to distribute, however, the company, its committee of unsecured creditors and other creditors agreed in a series of moves to transfer causes of action and other potential sources of litigation recoveries to the purchaser as part of the sale.
The causes of action rights would subsequently be relayed to a General Unsecured Creditor Trust, while Constellation’s debtor-in-possession lender or the purchaser would also chip in $2.05 million for unsecured creditor committee professionals, among other terms.
An objection filed by Constellation’s prepetition delayed draw term loan, or DDTL, lenders and their agent accused architects of the settlement of attempting to create “a fiction whereby estate assets would be laundered through the purchaser in a bald attempt to differentiate this case from Jevic.”
Without the structured dismissal, the DDTL lenders argued, unsecured creditors would receive nothing. The group also said that the debtors proposed the maneuvering as “fair and reasonable” despite its potential to leave the estate worse off.
The U.S. Trustee’s objection described the settlement as a two-step dismissal that would distribute estate property in violation of priority rules, including professional fee payments financed by a carve-out from secured lender collateral.
“Any finding otherwise could promote gamesmanship in the structuring of structured dismissals to evade Jevic and its ban on non-consensual, priority-violating final distribution,” Vara’s objection said.
Also joining the U.S. Trustee’s objection was Trevor Miller, a claimant representative for former employees with an interest in an escrow that was to have been developed for possible Constellation company WARN Act liabilities.
“Contrary to the ostensible language of the sale order and dismissal motion, the first priority recipient of the escrow funds will not be the employees but the noteholders,” attorneys for Miller wrote in an objection joinder.
The employee objection said the settlement would throw employee creditors into a non-bankruptcy arrangement controlled by noteholders unbound by Chapter 11 duties.
Vara’s objection said that advocates of the settlement argued that the deal would maximize recoveries for the largest number of creditors possible, but dismissed the assurance as irrelevant in light of the distributions to lower-ranking creditors without consent of senior creditors.
“Such unpredictability undermines the integrity of a comprehensive bankruptcy process by creating tension between professionals and clients and by forcing all parties to scramble for scraps,” the U.S. Trustee objection said.
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Trevor Miller et al. are represented by Christopher D. Loizides of Loizides PA and Jack A. Raisner and Rene S. Roupinian of Outten & Golden LLP.
The case is In re: Constellation Enterprises LLC et al., case number 1:16-bk-11213, in the U.S. Bankruptcy Court for the District of Delaware.