In Re Tci 2 Holdings, LLC
428 B.R. 117, 2010 Bankr. LEXIS 1169, 2010 WL 1540115 (2010)
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Rule of Law:
When two or more competing Chapter 11 reorganization plans meet the statutory requirements for confirmation, the court must consider the preferences of creditors and equity security holders in determining which plan to confirm, with creditor voting preferences being the most significant factor.
Facts:
- Trump Entertainment Resorts, Inc. (TER) and its affiliates, which owned three casino properties in Atlantic City, experienced declining gaming revenues.
- TER failed to make a required interest payment due on December 1, 2008, on its $1.25 billion in Second Lien Notes.
- At the time of its bankruptcy filing, TER owed approximately $488 million in First Lien debt to Beal Bank and $1.25 billion in Second Lien Notes.
- Donald J. Trump, former Chairman of TER's Board of Directors, initially partnered with Beal Bank on a reorganization plan.
- Trump later terminated his arrangement with Beal Bank and entered into the 'DJT Settlement Agreement' with the Ad Hoc Committee of Second Lien Note Holders (AHC), agreeing to support their plan.
- In exchange for 5% of the new company's stock, warrants, and releases from liability (including a personal guaranty), Trump agreed to provide an amended trademark license for the continued use of his name.
- Investor Carl Icahn's entities purchased a majority of the First Lien debt from Beal Bank.
- Icahn and Beal Bank became joint proponents of a competing reorganization plan that would convert their debt into 100% equity ownership of the reorganized company.
Procedural Posture:
- TCI 2 Holdings, LLC and its affiliates ('debtors') filed voluntary petitions for Chapter 11 bankruptcy relief in the U.S. Bankruptcy Court for the District of New Jersey on February 17, 2009.
- During their exclusive period to file a plan, the debtors proposed a reorganization plan supported by First Lien Lender Beal Bank and Donald J. Trump.
- The Ad Hoc Committee of Second Lien Note Holders (AHC) filed a motion to terminate the debtors' exclusivity period, which the court granted.
- The AHC then filed its own plan of reorganization, which the debtors and Trump subsequently joined as co-proponents (the 'AHC/Debtor Plan').
- Beal Bank, along with Icahn Partners who had purchased a majority of the First Lien debt, filed a competing plan of reorganization (the 'Beal/Icahn Plan').
- The Bankruptcy Court conducted a consolidated confirmation hearing to consider both competing plans.
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Issue:
When two competing Chapter 11 reorganization plans are both found to be confirmable with certain modifications, which plan should the court confirm?
Opinions:
Majority - Judith H. Wizmur
The court should confirm the AHC/Debtor Plan. When multiple Chapter 11 plans are confirmable, § 1129(c) directs the court to consider the preferences of creditors and equity security holders. Here, the court's analysis involved three steps: first, determining if each plan was confirmable under § 1129; second, identifying required modifications to make them confirmable; and third, choosing between the two confirmable plans. The court found both the AHC/Debtor Plan and the Beal/Icahn Plan confirmable, but only after mandating several modifications. For the AHC/Debtor Plan, the court struck down non-consensual third-party releases for Donald Trump's personal guaranty and for the AHC members, finding they failed the Third Circuit's test from In re Continental Airlines as they were not fair or necessary for the reorganization. It also required that all professional fee payments be subject to court review under § 503(b). For the Beal/Icahn Plan, the court removed a provision that capped administrative expense payments, finding it violated § 1129(a)(9)'s requirement to pay such claims in full. With both plans deemed confirmable after these modifications, the court turned to § 1129(c). The court weighed the plans' treatment of creditors, their feasibility, and creditor preferences. Although the Beal/Icahn Plan offered superior feasibility by creating a debt-free company, this was offset by regulatory hurdles and rebranding risks. The AHC/Debtor plan offered a nominal recovery to junior creditors, which the Beal/Icahn plan did not. The dispositive factor was the overwhelming preference of the largest creditor constituency, the Second Lien Noteholders, who voted decisively in favor of the AHC/Debtor Plan and against the Beal/Icahn Plan. This creditor preference compelled the court to confirm the AHC/Debtor Plan.
Analysis:
This case provides a detailed framework for adjudicating a 'battle of the plans' in a complex Chapter 11 bankruptcy. It reinforces the high bar for approving non-consensual third-party releases of non-debtors, strictly applying the 'fairness and necessity' test from In re Continental Airlines. The opinion is most significant for its application of § 1129(c), establishing that when two viable plans compete, creditor preference expressed through voting is the paramount, albeit not sole, consideration. This precedent affirms that a court's role is not simply to pick the financially 'best' plan in a vacuum, but to honor the collective business judgment of the affected creditor classes, thereby giving significant power to the largest voting bloc.
