United States District Court, D. Delaware
IN RE NUVERRA ENVIRONMENTAL SOLUTIONS, INC., et al., Debtors.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC., et al., Appellees. DAVID HARGREAVES, Appellant,
K. Kortanek. Esq., Drinker Biddle & Reath LLP,
Wilmington, DE; James H. Millar, Esq. (argued), Clay J.
Pierce, Esq., and Stacy A. Lutkus, Esq., Drinker Biddle &
Reath LLP, New York, NY, attorneys for Appellant David
Pauline K. Morgan, Esq., Kenneth J. Enos, Esq., and Jaime
Luton Chapman, Esq., Young Conaway Stargatt & Taylor,
LLP, Wilmington, DE; Frederic Sosnick, Esq. (argued), and
Sara Coelho, Esq., Shearman & Sterling LLP, New York, NY,
attorneys for Appellees, Reorganized Debtors.
ANDREWS, UNITED STATES DISTRICT JUDGE
before the Court is the appeal (D.I. 1) of David Hargreaves
with respect to the Bankruptcy Court's Order Confirming
the Amended Prepackaged Plans of Reorganization of Nuverra
Environmental Solutions, Inc. and its Affiliated Debtors,
dated July 25, 2017 (B.D.I. 366)("Confirmation
Order"). The merits of the appeal are fully briefed.
Also before the Court is the Reorganized Debtors' motion
to dismiss the appeal (D.I. 31) ("Motion to
Dismiss") on the basis of equitable mootness. For the
reasons set forth below, the appeal meets the criteria for
equitable mootness, and the Court rules in the alternative
that the Confirmation Order is affirmed.
appeal arises from Debtors' plan of reorganization,
pursuant to which secured creditors, who would not receive
100% recovery on their secured claims, made a gift to general
unsecured creditors, who would otherwise receive no
distribution under the Bankruptcy Code's priority scheme,
in order to enable the Debtors to reorganize. Even though
unsecured creditors would receive no distribution absent the
gift, Appellant has appealed the Confirmation Order based on
the fact that the plan placed general unsecured claims of the
same priority into separate classes and provided disparate
relevant facts are uncontested. In the months leading up to
the bankruptcy filing, Debtors struggled with liquidity and
negotiated with certain creditors toward a prepackaged plan
of reorganization. On April 28, 2017, Debtors commenced a
prepetition solicitation of votes on the negotiated plan.
(See B.D.I. 14). On May 1, 2017, Debtors commenced
their chapter 11 cases ("Petition Date"), at which
time Debtors had approximately $500 million in secured debt
and an uncontroverted value of approximately $302.5 million.
(See B.D.I. 14 at Art. VIII). On the Petition Date,
Debtors filed an initial plan of reorganization, which was
amended on June 21, 2017 (B.D.I. 366) ("Plan").
to Reorganized Debtors, to ensure that the Debtors'
businesses remain viable and positioned for growth, the Plan
eliminated approximately $500 million of funded debt through
the conversion to equity of certain 12.5%/10% senior secured
second lien notes due 2021 (the "2021 Notes"), the
Debtors' 9.875% unsecured senior notes due 2018
("2018 Notes"), a term loan facility provided for
under the term loan agreement dated April 15, 2016 (the
"Term Loan Facility"), and a $12.5 million senior
secured, super-priority debtor in possession term credit
facility (the "DIP Term Loan Facility").
Significant concessions by senior creditors funded gifted
distributions to holders of out-of-the-money general
unsecured claims under the Plan.
Reorganized Debtors argue that the Plan treated unsecured
creditors in distinct ways based upon their respective legal
rights, their importance to the ongoing operation and the
profitability of the Debtors' businesses, and the
practical limitations impeding the Debtors' ability to
provide such creditors with a recovery. (See D.I 37
at 8; 7/21/17 Hr'g Tr. 60:1-62:5). Creditors holding
claims derived from the purchase of 2018 Notes, which were
classified in Class A6, received a combination of stock and
cash by virtue of the gifted distributions from senior
creditors, with an aggregate recovery to holders in Class A6
valued at approximately 4-6%. (See 7/21/17 Hr'g
Tr. at 30:23-25). In contrast, trade and certain other
creditors related to the Debtors' business and operations
("Trade and Business-Related Claims"), classified
in Class A7, B7, and C7,  were reinstated under the Plan, and,
therefore, holders of such claims were entitled to receive a
100% recovery by virtue of the gifted distributions.
(See B.D.I. 14 at 12).
A6 voted to reject the Plan. Because the Plan was
nonconsensual, Debtors had the burden of "show[ing] that
the plan meets the additional requirements of § 1129(b),
including the requirements that the plan does not unfairly
discriminate against dissenting classes and the treatment of
the dissenting classes is fair and equitable." In re
Exide Techs., 303 B.R. 48, 58 (Bankr. D. Del. 2003).
These requirements were addressed in the Debtors'
confirmation brief and declaration in support. (See
B.D.I. 302, 338).
who held approximately $450, 000 of the 2018 Notes that had
been classified in Class A6, objected to confirmation of the
Plan (B.D.I. 290) on the grounds that (i) Appellant would
receive a distribution of less value than certain of the
Debtors' other unsecured creditors who also held
unsecured claims (i.e., Trade and Business-Related Claims);
and (ii) the classification scheme contemplated in the Plan
was improper. Appellant was the sole objector to confirmation
of the Plan. (7/24/17 Hr'g Tr. at 3:24-4:3). At the
confirmation hearing on July 21, 2017, Appellant made
arguments and examined and presented witnesses. (See
7/21/17 Hr'g Tr.). Appellant offered no evidence to
controvert assertions with respect to the existing debt and
value of Debtors' businesses. (See id.)
Following the evidentiary hearing and argument on July 21,
2017, the Bankruptcy Court took the matter under advisement
and made a bench ruling via telephonic hearing on July 24,
2017, overruling Appellant's objection and confirming the
Plan. (See 7/24/17 Hr'g Tr.).
Bankruptcy Court made the specific finding that
"[u]nsecured creditors, including among others, trade
creditors and holders of 2018 [N]otes are out of the money
because they sit behind over $500 million dollars of secured
debt in the company that has an uncontroverted value of
approximately $300 million dollars." (7/24/17 Hr'g
Tr. at 4:4-10). Addressing Appellant's classification
objection, the Bankruptcy Court determined that separate
classification of trade creditors and noteholders was
reasonable on the basis that trade creditors were critical to
the success of the reorganized debtors. (See Id. at
5:5-6:24). Addressing Appellant's unfair discrimination
objection, the Bankruptcy Court determined that, while the
disparate treatment of Class A6 gave rise to a rebuttable
presumption of unfair discrimination (id. at
9:12-14), that presumption was rebutted because Class A6 is
"indisputably out of the money and not, otherwise,
entitled to any distribution under the bankruptcy code's
priority scheme and provided further that the proposed
classification and treatment of the unsecured creditors
fosters a reorganization of these debtors."
(Id. at 8:24-9:3). The Bankruptcy Court determined
that its decision was consistent with leading cases governing
the issue of gifting (9:14-12:12) and rejected
Appellant's argument that the gift was from estate
property, violated the absolute priority rule, and thus the
Plan was not "fair and equitable." (See
id.) The Bankruptcy Court overruled the objection,
confirmed the Plan (id. at 13:24-14:5), and further
held that any request for a stay of the Confirmation Order
beyond the 10- day period included therein "would serve
no purpose" as a stay was not warranted. (See
Id. at 14:19-15:3).
filed a timely notice of appeal on July 25, 2017. (D.I. 1).
Contemporaneously, Appellant filed an emergency motion for
stay of the Confirmation Order pending appeal (D.I. 3)
("Stay Motion") and a related motion for expedited
consideration (D.I. 4). On August 3, 2017, the Court denied
the Stay Motion on the basis that Appellant was unlikely to
succeed on the merits of the appeal and had failed to
establish irreparable harm absent a stay. (D.I. 20). On
October 16, 2017, Debtors filed the Motion to Dismiss. (D.I.
31). The parties have fully briefed the Motion to Dismiss
(D.I. 31, 32, 36, 40) and the merits of the appeal (D.I. 29,
37, 41). On May 14, 2018, the Court held oral argument on
both the Motion to Dismiss and the merits of the appeal.
raises the following issues on appeal: (i) whether the
Bankruptcy Court erred by concluding that the Plan did not
discriminate unfairly in finding that the "gift"
under the Plan made by secured creditors to unsecured
creditors providing varying levels of claim recovery did not
constitute unfair discrimination under § 1129(b)(1) of
the Bankruptcy Code; and (ii) whether the Bankruptcy Court
erred by concluding that the Plan properly classified 2018
Note claims separately from other general unsecured claims.
(See D.I. 22 at ¶ l-3).
respect to equitable mootness, Reorganized Debtors argue that
the Plan has been substantially consummated. Reorganized
Debtors assert that, if I agree with Appellant that the Plan
unfairly discriminated against and/or improperly classified
Class A6 claims, correcting those errors would require a
wholesale reversal of the Plan, restoration of the
Reorganized Debtors' estates to the status quo
ante prior to the Effective Date, and disgorgement of
the gifted distributions, which is not possible as a
practical matter and which would necessarily harm third
parties who reasonably relied on plan confirmation.
(See D.I. 31 at 3).
to Appellant, this argument fails, as "[t]he Debtors can
easily pay [him] the full amount of his claim if his appeal
is successful" as such "additional recovery by
[Appellant] does not present a risk of fatally scrambling the
Plan; nor does it present a risk of significant harm to third
parties." (See D.I. 36 at 1, 12). Appellant
urges the Court to use its remedial powers to fashion the
relief he proposes: an order directing Reorganized Debtors to
pay 100% of Appellant's claim, plus several months'
interest, so he may "receive the same treatment of
holders of general unsecured creditors in Class A7."
(See Id. at 12-13).
respect to the merits, Appellant argues that the Bankruptcy
Court erred in concluding that the Plan did not improperly
classify Class A6 Claims separately from other general
unsecured claims. Appellant argues the separate
classification was motivated "solely for the
discriminatory purpose of not having to pay holders of the
2018 Notes Claims in full." (See D.I. 29 at 14;
31-35). Appellant argues that even if the Plan's separate
classification of general unsecured claims was proper, the
Plan unfairly discriminates in its treatment of 2018 Note
claims, and that the Bankruptcy Court erred in its
application of the Markell test (discussed below). (See
Id. at 15-18). Appellant argues that the Bankruptcy
Court failed to properly consider whether Debtors had
rebutted the presumption of unfair discrimination and relied
instead merely on gifting. (See Id. at 16-18).
Appellant argues that such a gift cannot rebut the
presumption of unfair discrimination under the Markell test,
and that the entire concept of gifting has been flatly
rejected by the Third Circuit. (See Id. at 28-29).
Reorganized Debtors argue that Appellant relies on cases that
prohibit the use of gifts in contravention of the absolute
priority rule, which is not at issue in this appeal.
(See D.I. 37 at 14). "That body of law
prohibits the gifting of a distribution from a senior class
of creditors in a manner that skips over an intermediary
junior class of dissenting creditors - "vertical
gifting" -because it violates the strict requirements of
the absolute priority rule." (Id.) The
distribution in this case concerns unequal gifts by a secured
creditor to two classes of junior creditors - horizontal
gifting - which is not foreclosed under Third Circuit law.
(See Id. at 25). According to Reorganized Debtors,
courts in this circuit have held that such a horizontal gift
is not unfair discrimination against the class that does not
receive the larger gift when (i) the creditor that does not
receive the larger gift is not entitled to a distribution
under a plan, and (ii) no class junior to the creditor
receives a distribution under the plan. (See Id. at
12-13). Debtors argue that confirmation of the Plan is
consistent with controlling caselaw on the issue as well as
the legislative history of § 1129(b), which makes clear
that unfair discrimination is not an absolute rule, but is
instead evaluated case by case from the dissenting
"class's own perspective." (See Id. at
12 (citing H.R. Rep. No. 595, 1st Sess. 417 (1977)). Finally,
the Reorganized Debtors contend that the Bankruptcy Court
correctly concluded that the Plan's classification
complied with legal standards in this circuit, which permit
separate classification of trade and bondholder claims based
on their legal attributes. Reorganized Debtors argue the
uncontroverted record supports the Bankruptcy Court's
finding that separate classification of Trade and
Business-Related Claims serves the rational purpose of
fostering the Debtors' reorganization. (See Id.
Court has jurisdiction to hear an appeal from a final
judgment of the Bankruptcy Court pursuant to 28 U.S.C. §
158(a)(1). In reviewing the bankruptcy court's
determinations, this Court "review[s] the bankruptcy
court's legal determinations de novo, its
factual findings for clear error and its exercise of
discretion for abuse thereof." See In re Trans World
Airlines, Inc., 145 F.3d 124, 130 (3d Cir. 1998) (noting
that both the Third Circuit and the district court
"exercise the same standard of review") (internal
quotations and citations omitted).
The Appeal Meets the Criteria for Equitable Mootness
mootness' is a narrow doctrine by which an appellate
court deems it prudent for practical reasons to forbear
deciding an appeal when to grant the relief requested will
undermine the finality and reliability of consummated plans
of reorganization." Tribune, 799 F.3d at 277. A
court assesses equitable mootness through the application of
"prudential" considerations that address
"concerns unique to bankruptcy proceedings." In
re Philadelphia Newspapers, LLC, 690 F.3d 161, 168 (3d
Cir. 2012). The Third Circuit's recent decisions have
synthesized the test for equitable mootness as
"proceed[ing] in two analytical steps: (1) whether a
confirmed plan has been substantially consummated; and (2) if
so, whether granting the relief requested in the appeal will
(a) fatally scramble the plan and/or (b) significantly harm
third parties who have justifiably relied on plan
confirmation." In re Tribune Media Co., 799
F.3d 272, 278 (3d Cir. 2015) (quoting In re
SemCrude, 728 F.3d 314, 321 (3d Cir. 2013)). Reorganized
Debtors, as the proponents of an equitable mootness
dismissal, "bear the burden of overcoming the strong
presumption that appeals from confirmation orders of
reorganization plans - even those not only approved by
confirmation but implemented thereafter (called
'substantial consummation' or simply
'consummation') -need to be decided."
Id. at 278.
Whether the Plan Has Been Substantially Consummated
Bankruptcy Code defines "substantial consummation"
(A) transfer of all or substantially all of the property
proposed by the plan to be transferred;
(B) assumption by the debtor or by the successor to the
debtor under the plan of the business or of the management of
all or substantially all of the property dealt with by the
(C) commencement of distribution under the plan.
11 U.S.C. § 1101(2). Appellant concedes that the Plan
has been substantially consummated. (See D.I. 36 at
12 (conceding that "the Plan has been substantially
consummated"); see also D.I. 44 at 17:20-18:2).
The record supports this conclusion.
is established that substantial consummation has occurred,
the next step for a court considering equitable mootness is
to "look to whether granting relief will require undoing
the plan as opposed to modifying it in a manner that does not
cause its collapse." SemCrude, 728 F.3d at 321.
A court "should also consider the extent that a
successful appeal, by altering the plan or otherwise, will
harm third parties who have acted reasonably in reliance on
the finality of plan confirmation." Id.
Granting Appellant Higher Individual Recovery than Class
apparently does not seek revocation of the Plan and the
imposition of a new chapter 11 plan in its place. (D.I. 44 at
17:19-18:2). Although Appellant's confirmation objection
sought denial of Plan confirmation only, Appellant argues
"that does not mean that the only relief available after
the substantial consummation of the Plan is a complete
unwinding of the Plan and a return to bankruptcy for the
Debtors." (D.I. 36 at 13). Rather than apply
equitable mootness and dismiss his appeal, however, Appellant
contends that the Court should exercise its remedial powers
and fashion relief in a way that would not upset the Plan -
i.e., "by ordering payment of his claim in
full" so Appellant may "receive the same treatment
as the holders of general unsecured creditors in Class
A7." (See id at 12-13).
Third Circuit instructs that the "starting point is the
relief an appellant specifically asks for."
Tribune, 799 F.3d at 278 (citations omitted). The
only specific relief Appellant proposes is "full
recovery" which is a much higher individual recovery
than other holders of claims in Class A6. (See D.I.
44 at 23:22-24:9) Thus, in considering available relief to
cure unfair discrimination, the Court's "starting
point" is an order directing Reorganized Debtors to
"provide [Appellant] with the same treatment as general
unsecured creditors - payment of 100 cents on the dollar plus
interest" - as compared with the 4-6% recovery provided
to other members of Class A6. (Id.) According to
Appellant, "because no bondholder other than Mr.
Hargreaves filed a timely objection to the Plan, there is no
danger that paying Mr. Hargreaves would require additional
payments to any other bondholder." (See id.)
That such relief would result in disparate treatment of
Appellant's claim as compared with all other bondholder
claims in Class A6 - precisely the issue that predicates the
appeal - is of little ...