Eighth Circuit Holds A Reorganization Plan May Treat Creditors More Favorably in Exchange For “Valuable New Commitments” Without Violating Section 1123(a)(4)

By: Morgan C. Liptak

St. John’s University School of Law

American Bankruptcy Institute Law Review, Staff Member

Under section 1123(a)(4) of title 11 of the United States Code (the “Bankruptcy Code”), a reorganization plan should provide equal treatment for each claim of a particular class, unless the claim holder specifically agrees to less favorable treatment.[1] In In re Peabody Energy Corporation, the United States Court of Appeals for the Eighth Circuit held that “consideration for valuable new commitments” made by certain members of a creditor class under a reorganization plan did not violate this equal treatment requirement.[2] In April 2016, Peabody Energy Corporation and its affiliates (the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Missouri.[3]  The Debtors proposed a Chapter 11 plan pursuant to which they would raise $1.5 billion in new money.[4]  A group of Non-Consenting Creditors (the “Ad Hoc Committee”) contested the Private Placement element of the plan, which allowed qualifying creditors to purchase preferred stock at a 35% discount.[5] To qualify for the Private Placement, a creditor needed to meet four requirements: hold a second lien note or Class-5B claim; sign an agreement committing to purchase a certain amount of preferred stock; agree to backstop the Rights Offering; and agree to support the reorganization plan throughout the confirmation process.[6] The Ad Hoc Committee chose not to participate in the Private Placement and objected to the proposed plan.[7] The bankruptcy court overruled the Ad Hoc Committee’s objection and confirmed the Debtors’ plan.[8] On appeal, the District Court for the Eastern District of Missouri affirmed the judgment of the bankruptcy court and the Ad Hoc Committee then appealed to the United States Court of Appeals for the Eighth Circuit.[9]

The Eighth Circuit interpreted the standard of equal treatment required by section 1223(a)(4), which is not defined by the Bankruptcy Code.[10] In doing so, it joined the Second, Fifth, and Ninth Circuits, in holding that a plan may treat one set of claim holders more favorably as long as the treatment is for distinct, legitimate rights or contributions from the favored group separate from the claim.[11] According to the Eight Circuit, the creditors’ promise to both backstop the Rights Offering and to support the reorganization was a distinct, legitimate contribution from the group and therefore the opportunity to buy preferred stock at a discount did not violate section 1123(a)(4).[12] Additionally, the court distinguished In re Peabody Energy Corp. from Bank of America Nat’l Trust & Savings Ass’n v. 203 North LaSalle Street P’ship, in which the Supreme Court held that the reorganization plan violated the equal opportunity requirement because the plan was adopted without the consideration of any alternatives.[13] The Eighth Circuit emphasized three key differences between the cases: (1) the Ad Hoc Committee was not excluded from any opportunity, unlike the creditors in Lasalle; (2) the creditors in Peabody Energy gave up something of value in exchange for the right to participate in the plan, unlike the equity holders in LaSalle; and (3) the Debtors considered several alternative ways to raise capital, unlike the debtors in LaSalle.[14] The Eighth Circuit held that because the stock discount and the premiums received where “in consideration for” the creditors agreement to backstop the arrangement, rather than as “treatment for” a claim, the reorganization plan did not violate section 1123(a)(4) of the Bankruptcy Code.[15]

With this holding, the Eighth Circuit joined the Second, Fifth, and Ninth Circuits in finding that there is somewhat of an exception to this equal treatment rule when the favorable treatment is in consideration for valuable new commitments to the company.[16] In distinguishing Peabody Energy from LaSalle, the court found it permissible for a plan to treat certain creditors more favorably as long as no creditor was excluded from the offer, the creditors gave up something valuable in return for the right to participate, and the Debtors considered a number of alternative plans before determining that theirs was superior.[17] The Eighth Circuit’s holding provides debtors with a way to incentivize creditors to support a reorganization plan without violating section 1123(a)(4). As neither the Supreme Court nor the Bankruptcy Code give any definition for the standard of equal treatment in regard to this rule, with another Circuit adopting this interpretation the circuit courts have created a standard for the equal treatment rule which gives debtors the opportunity to treat certain creditors more favorably in exchange for their support .[18]

[1] 11 U.S.C. § 1123(a)(4) (2012).

[2] See Ad Hoc Comm. Of Non-Consenting Creditors v. Peabody Energy Corp. (In re Peabody Energy Corp.), 933 F.3d 918, 927 (8th Cir. 2019).

[3] Id. at 922.

[4] Id.

[5] Id. (“[T]he plan required the reorganized Debtors to engage in a $750 million ‘Private Placement’ whereby qualifying creditors could purchase preferred stock in the reorganized Debtors at a 35% discount to the Plan Equity Value.”)

[6] Id.

[7] Id. at 923.

[8] Id. at 923­–24.

[9] Id. at 927.

[10]Id. at 925; see also In re AOV Indus., Inc., 792 F.2d 1140, 1152 (D.C. Cir. 1986).

[11] Id.

[12] Id. (“[T]he opportunity to participate in the Private Placement was not ‘treatment for’ the participating creditors’ claims. It was consideration for valuable new commitments made by the participating creditors.”)

[13] Id.; see also Bank of America Nat’l Trust & Savings Ass’n v. 203 North LaSalle Street P’ship, 526 U.S. 434, 456 (1999) (rejecting a plan that gave “a debtor's prebankruptcy equity holders … [the opportunity to] contribute new capital and receive ownership interests in the reorganized entity, when that opportunity [was] given exclusively to the old equity holders under a plan adopted without consideration of alternatives.”)

[14] In re Peabody Energy Corp., 933 F.3d at 926.

[15] Id. at 927.

[16] Id. at 925; see also Ahuja v. LightSquared Inc., 644 F. App’x 24 (2d Cir. 2016); Mabey v. Sw. Elec. Power Co. (In re Cajun Elec. Power Coop., Inc.), 150 F.3d 503 (5th Cir. 1998); Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352 (9th Cir. 1986).

[17] In re Peabody Energy Corp., 933 F.3d at 926.

[18] Id. at 925.