Bankruptcy Plan Confirmation Challenges: New Value, Vote Changes, Third-Party Guaranties, D&O Selection

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Bankruptcy Plan Confirmation Challenges: New Value, Vote Changes, Third-Party Guaranties, D&O Selection Recent Updates on Key Issues for Obtaining Plan Approval or Objecting to a Plan TUESDAY, NOVEMBER 18, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Michael E. Foreman, Partner, ForemanLaw, White Plains, N.Y. Michael J. Riela, Shareholder, Vedder Price, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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4 Bankruptcy Plan Confirmation Challenges: New Value, Vote Changes, Third-Party Guarantees and D&O Michael E. Foreman Foreman Law PLLC New York & White Plains, NY Selection November 18, 2014 Michael J. Riela Vedder Price P.C New York, NY VEDDER PRICE 4

5 Overview of Topics The applicability of the Absolute Priority Rule where an insider of an old equity holder proposes to provide new value. What constitutes cause shown to change a plan vote under Fed. R. Bankr. P. 3018(a)? The effect of third-party guarantees on claim classification. The selection of directors and officers of a reorganized debtor. 5

6 New Value and The Absolute Priority Rule 6

7 Section 1129(b) Cramdown If an impaired class of claims or interests does not accept the plan, the plan proponent may nevertheless try to cram down the plan on that class. The plan must not discriminate unfairly with respect to the dissenting impaired class, and The plan must be fair and equitable with respect to the dissenting impaired class. 7

8 Absolute Priority Rule Section 1129(b)(2)(B) requirements: The plan provides that each holder of a claim in the class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of the claim, or The holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property. 8

9 New Value Corollary to the Absolute Priority Rule Under the so-called New Value Corollary, holders of old equity interests may obtain the interests in the reorganized debtor over the objection of a class of impaired creditors, in exchange for a contribution of new capital. A plan that meets the New Value Corollary would not violate the Absolute Priority Rule because it would not give old equity property on account of its equity interest, but instead would allow the equity holders to participate in the reorganized debtor on account of a substantial, necessary, and fair new value contribution. Supreme Court declined to determine whether the New Value Corollary actually exists. Bank of America Nat l Trust & Sav. Ass n v. 203 N. LaSalle St. P ship 526 U.S. 434, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999). 9

10 203 N. LaSalle St. P Ship - Facts Single asset real estate case. Bank of America held a mortgage on the Debtor s property. Debtor defaulted and later filed chapter 11 case, which stayed the B of A s foreclosure action. During its exclusive period, debtor filed a plan under which certain former partners of the debtor would contribute new capital in exchange for all of the partnership interests in the reorganized debtor. These partners had the exclusive right to contribute the new capital. 10

11 203 N. LaSalle St. P Ship - Holding The Court held that the reorganization plan proposed by the original partnership could not be confirmed because the old equity holders were disqualified from participating in the new value transaction where senior classes were not being paid in full, finding that: (i) a causal relationship existed between holding a prior claim or interest and receiving or retaining property on account of the claim or interest, (ii) the partners exclusive opportunity to obtain equity in the reorganized partnership should be treated as property in its own right, and (iii) the exclusiveness of the opportunity, with protection against the market s scrutiny of the purchase price, rendered the partners right a property interest extended on account of the old equity position. As a result, the Court ruled that a plan that does not pay senior classes in full may not provide for creditor or equity holder in a junior class to obtain the equity in the reorganized debtor in exchange for new value unless the new value transaction is market tested (e.g., through competing bids or competing plans). 11

12 Is Market Test Required for New Equity to be Distributed to an Insider of Old Equity? Courts after LaSalle have not been unanimous in applying market test and competition mandate where new value is proposed by an insider of the debtor. Section 1129(b)(2)(B)(ii) does not expressly include insiders in its prohibition. Cases holding that market test is not required: In re Greenwood Point LP, 445 B.R. 885, (Bankr. S.D. Ind. 2011) Beal Bank, SSB v. Waters Edge Ltd. P ship, 248 B.R. 668, 680 (D. Mass. 2000) In re Woodscape Ltd. P ship, 134 B.R. 165, 174 (Bankr. D. Md. 1991) 12

13 Is Market Test Required for New Equity to be Distributed to an Insider of Old Equity? (cont d) Cases holding that market test is required: In re Global Ocean Carriers Ltd., 251 B.R. 31, 49 (Bankr. D. Del 2000) In re Castleton Plaza, LP, 707 F.3d 821 (7th Cir. 2013) Courts have examined the entire Bankruptcy Code definition of insider under Section 101(31), including person in control of debtor. A straw man cannot be used to get around the fact that a person is in control of the debtor, and, therefore, an insider. What is the current trend? 13

14 In re Castleton Plaza, LP - Facts Debtor owned a shopping center. George Broadbent owned all of the debtor s interests. EL-SNPR Notes Holdings was the only secured lender. Debtor s plan provided for the secured lender to receive a new note with significantly worse terms, and for unsecured creditors to receive only a 15% recovery. 14

15 In re Castleton Plaza, LP Facts (cont d) Debtor s plan also provided for 100% of the equity of the reorganized debtor to be issued to Broadbent s wife in exchange for a $75,000 new investment. Amount of proposed new investment was later increased to $375,000. Plan did not provide for a market test of the new value transaction. Bankruptcy court confirmed the plan. 15

16 In re Castleton Plaza, LP 7th Circuit s Holding and Observations The Seventh Circuit reversed, holding that competition is required when a plan gives an insider an option to obtain equity in the reorganized debtor in exchange for new value. The Seventh Circuit observed that the Supreme Court in LaSalle devised the competition requirement to curtail evasion of the absolute priority rule. 16

17 In re Castleton Plaza, LP 7th Circuit s Holding and Observations (cont d) A plan that provides new equity to the old equity holder s spouse can evade the absolute priority rule, just like a plan that provides new equity to the old equity holder. Insiders and equity holders are treated the same way under other sections of the Bankruptcy Code. George Broadbent used his control over the Debtor to propose a plan that directed a valuable opportunity to his wife. 17

18 After Castleton Plaza In re RAMZ Real Estate Co., LLC, 2014 Bankr. LEXIS 2553, 2013 WL (Bankr. S.D.N.Y. May 9, 2014): Based on the LaSalle market test mandate, Court must deny confirmation of the Debtor s new value plan that provided for Debtor s equity holder to retain equity interest in reorganized Debtor in exchange for providing new value, where senior classes would not be paid in full and Debtor did not provide for a competing plan and gave no other party an opportunity to bid on the equity interest. CRE/ADC Venture 2013, LLC v. Rocky Mt. Land Co., LLC (In re Rocky Mt. Land Co. LLC), 2014 Bankr. LEXIS 1370, 2014 WL (Bankr. D. Col. April 3, 2014): Court found that proposed new value plan did not provide sufficient opportunity for competition, where plan s overbid and possible guarantee requirements chilled bidding by establishing significant hurdles designed to protect the proposed new value contribution. 18

19 After Castleton Plaza (cont d) Polite Enters. Corp. PTY v. N. Am. Safety Prods., 2014 U.S. Dist. LEXIS 10723, 2014 WL (N.D. Ill. January 29, 2014): Debtor s new value plan satisfied LaSalle competition requirement where Debtor terminated plan exclusivity and provided notice of auction to all creditors and by publication but did not hire consultant to conduct sale process, where objecting creditor failed to submit bid or competing plan. In re Batista-Sanechez, 505 B.R. 222 (Bankr. N.D. Ill. January 21, 2014): Under Castleton, Debtor may not retain an interest in the reorganized debtor without satisfying the absolute priority rule or at least providing for a credit bid from undersecured creditors. Court rejected debtor s argument that there is an exception to the absolute priority rule for individual chapter 11 debtors. Court rejected debtor s argument that Castleton should be confined to single-asset real estate cases 19

20 After Castleton Plaza (cont d) In re GAC Storage Lansing, LLC, 489 B.R. 747, (Bankr. N.D. Ill. 2013): Where Debtor s plan gave preferential access to an investment opportunity in the reorganized Debtor to a person who was not a direct owner or investor but was in control of debtor and therefore an insider under the Bankruptcy Code, Castleton instructed that the Debtor s plan had to provide an opportunity for competition. In re Meruelo Maddux Props., 2013 U.S. Dist. LEXIS , 2013 WL (C.D. Cal. 2013): LaSalle competition mandate satisfied where confirmation process employed by bankruptcy court permitting more than one group to propose a chapter 11 plan. In re Deming Hospitality, LLC, 2013 Bankr. LEXIS 1428, 2013 WL (Bankr. D. N. M. 2013): Court disapproved disclosure statement because of creditor s commitment to vote against and object to plan, where plan violated LaSalle prohibition against providing junior interest holders with exclusive opportunities free from competition and without the benefit of market valuation. 20

21 Changing Votes on a Plan 21

22 Federal Rule of Bankruptcy Procedure 3018(a) Bankruptcy Rule 3018(a), which governs acceptance or rejection of a plan in a Chapter 11 case, provides, in relevant part that For cause shown, the court after notice and hearing may permit a creditor or equity security holder to change or withdraw an acceptance or rejection. Cause is not defined in Bankruptcy Rule Bankruptcy court has discretion to determine whether cause exists in each particular case amendment to the rule permits a vote change even if the voting deadline has expired. 22

23 Federal Rule of Bankruptcy Procedure 3018(a) (cont d) Issue has recently been addressed in two contexts: Where a party opposing a plan acquires the claim of a creditor that had voted for the plan and seeks to change that creditor s vote from acceptance to rejection. In re J.C. Householder Land Trust #1, 501 B.R. 441 (Bankr. M.D. Fla. 2013). Where creditors seek to avoid adverse treatment resulting by operation of the plan s toggle, or carrot-sand-stick or fish-or-cut-bait or death-trap provision, which provides for different plan treatment to a class of creditors depending on whether it votes to accept or reject the plan. In re MPM Silicones, LLC, 2014 Bankr. LEXIS 4062 (Bankr. S.D.N.Y. Sept. 17, 2014). Courts usually permit vote changes, so long as the change is not improperly motivated. However, if one dissenting creditor opposing another objector s request to change its vote, courts generally will permit the vote change if the plan proponent does not object. A vote change could impact a plan proponent s ability to meet the requirement of Section 1129(a)(10) of the Bankruptcy Code. 23

24 Some Earlier Cases In re Windmill Durango Office, LLC, 481 B.R. 51 (B.A.P. 9th Cir. 2012): Affirmed bankruptcy court s denial of a secured creditor s vote change motion, where the secured creditor acquired an unsecured creditor s claim and sought to change the unsecured creditor s vote from accept to reject in order to block confirmation of debtor s plan. In re Kellogg Square P ship, 160 B.R. 332 (Bankr. D. Minn. 1993: Denied a secured creditor s vote change motion, where the secured creditor acquired twelve unsecured creditors claims and sought to change those unsecured creditors votes from accept to reject in order to block confirmation of debtor s plan. In re Cajun Electric Power Co-Op., Inc., 230 B.R. 715 (Bankr. M.D. La. 1999): Court held that cause existed to change a vote from reject to accept in connection with the consensual resolution of the creditor s objection to the plan. 24

25 In re J.C. Householder Land Trust #1 In In re J.C. Householder Land Trust #1, the bankruptcy court denied a secured creditor s vote change motion, where the secured creditor acquired an unsecured creditor s alreadyvoted claim and sought to change the unsecured creditor s vote from accept to reject. Secured creditor sought to block confirmation of debtor s plan by rendering the debtor unable to satisfy the plan confirmation requirement of Section 1129(a)(10), which requires that a plan be accepted by at least one class of impaired claims. If secured creditor had been permitted to change the vote of the acquired claim, it would have blocked the debtor s efforts to cram down secured creditor s claim. 25

26 In re J.C. Householder Land Trust #1 Facts Debtor owed just over $1 million to SPCP Group V, LLC, a secured creditor. SPCP held a lien on the debtor s real property. Debtor was unable to refinance the secured loan at maturity, and SPCP commenced foreclosure proceedings. Debtor filed its chapter 11 case to preserve equity value in the real property. Debtor subsequently proposed a chapter 11 plan that SPCP found unacceptable. 26

27 In re J.C. Householder Land Trust #1 Facts (cont d) Debtor had two unsecured creditors at the time of its chapter 11 filing: Tampa Electric Company and Tom Murtha. Murtha submitted a timely ballot to accept the plan. Tampa Electric did not submit a timely ballot. SPCP purchased Murtha s claim one week before the confirmation hearing, and sought leave of the bankruptcy court to change Murtha s ballot from accept to reject. 27

28 In re J.C. Householder Land Trust #1 Holding The bankruptcy court denied SPCP s motion to change Murtha s vote to reject. Bankruptcy court noted that neither Rule 3018 nor the Bankruptcy Code define what constitutes cause, and used Black s Law Dictionary definition of good cause to mean a legally sufficient reason. The court explained that legally sufficient must be determined in context. In this case, a legally sufficient reason to change Murtha s vote would exist only if the change would promote the two public policies underlying chapter 11 cases: preserving going concerns, and maximizing property available to satisfy creditors. The court determined that permitting a creditor to acquire an already-voted claim and change the vote to block confirmation does not promote those two policies. 28

29 In re J.C. Householder Land Trust #1 Holding (cont d) The court agreed with the outcome of the Kellogg Square and Windmill Durango cases, but did not use their test for cause whether the decision to change the vote was tainted by an improper motivation because it was not comfortable with the reasoning in those cases. Court believed that Kellogg Square and Windmill Durango, by basing their decisions on the law of assignment pursuant to which the assignee was bound to limitations place on the transferred claim by the assignor s vote, did not squarely address the issue of cause under Rule 3018(a). Court was uncertain whether Kellogg Square and Windmill Durango merely adopted the test used by courts prior to the 1991 amendment of rule 3018(a), which permitted vote changes after the voting deadline, since the tainted by improper motivation test had been used under the prior version of Rule 3018(a) with respect to predeadline vote changes. 29

30 In re J.C. Householder Land Trust #1 Holding (cont d) Rather, the court held that the Bankruptcy Code promotes its dual policies by laying out a bankruptcy process that encourages consensual negotiation and fair bargaining. Accordingly, Court ruled that it must determine whether allowing a creditor to buy an already-voted claim and change the vote to block confirmation promotes consensual negotiation and fair bargaining. The single thread running through all of the cases allowing a creditor change a previously cast vote was that the change in vote advanced the dual objectives of Chapter

31 In re J.C. Householder Land Trust #1 Holding (cont d) The Court articulated a number of evils that would result from permitting the vote change under these circumstances, including that it would: Destroy the carefully constructed balance between debtor and creditors in the confirmation process, sharply shifting the balance toward the creditor attaining the blocking position Encourage side deals leading to plans that unfairly treating other creditors and the debtor. Permit the blocking creditor from dictating the terms of any potential reorganization. Create a huge risk of opportunistic behavior and encourage behavior that is inconsistent with consensual negotiation and fair bargaining. Would negatively impact the otherwise orderly reorganization process by eliminating final or definitive negotiations voting, throwing into doubt previous negotiations and arrangements, and threatening creditor confidence in the process of investing time and money toward negotiations. 31

32 In re MPM Silicones, LLC (Momentive Performance Materials) In In re MPM Silicones, LLC, Case No , 2014 WL (Bankr. S.D.N.Y. Sept. 17, 2014), debtors toggle plan provided that if the classes of first liens and 1.5 liens accepted the plan, they would receive payment of their claims in full and in cash, but without any make-wholes or other premiums. If either of those two classes rejected the plan, the rejecting class(es) would receive replacement notes instead. Both classes rejected the plan. The bankruptcy court subsequently denied the requests for make-wholes, and concluded that plan could be confirmed once the debtor amended the plan to conform with the court s ruling regarding the proper cram down interest rate. 32

33 Momentive Performance Materials (cont d) Thereafter, the trading prices on the first lien notes substantially decreased. As a result, certain holders of first lien claims and 1.5 lien claims then sought to change their votes from reject to accept, in order to receive repayment in cash instead of replacement notes. The debtors objected to the request, advising the court that the plan s toggle offer was no longer open, and that, if the court granted the motion, the debtor would seek to amend the plan. Playing out what would happen if the court were to grant the motion, it assumes that the second lien holders who supported the plan and were backstopping its rights offering would support the plan amendment and potentially withdraw their backstop of the rights offering. 33

34 Momentive Performance Materials Holding The bankruptcy court rejected the creditors contention that cause existed, finding that the proposed vote changes were not a choice to achieve consensus, but, rather, and invitation for the court to force on the plan proponents a result that they did believe was advisable. The movants were sophisticated institutions represented by knowledgeable and sophisticated professionals, and knowingly made the choice to vote against the plan. They had the chance to accept the plan before the lengthy and expensive confirmation hearing. The bankruptcy court stated that it would not be proper to allow the creditors to change their votes in order to avoid the consequences of their initial decision to reject the plan. 34

35 Momentive Performance Materials Holding (cont d) If it were the case here that the plan proponents supported the requested vote change as part of a consensual resolution of the parties' disputes (and the facts did not indicate any extra consideration being offered for the changed vote--although I would in all likelihood hold a hearing focused on that issue), I would approve the changed vote. However, it is clear to me that this is not the case. [I]t is crystal clear that the requested vote change is not, in effect, a consensual settlement. It is seeking to undo a choice that had originally been made. I believe that there is not sufficient cause for that result. Citing to J.C. Householder Land Trust #1, court found that changing a vote to obtain an after-the-fact tactical advantage that would not resolve confirmation on a consensual basis with the plan proponent raises the same concerns with respect to the plan confirmation process as a vote change seeking to block confirmation. Court was not persuaded by movants argument that the vote change would resulting in the end of plan confirmation and intercreditor litigation they had brought. 35

36 The Effect of Third-Party Guarantees on Claim Classification 36

37 Section 1122(a) of the Bankruptcy Code Except as provided in subsection (b) of this section [relating to convenience class claims], a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class. Dissimilar claims cannot be placed in the same class. Bankruptcy Code does not require that all substantially similar claims be placed in the same class. 37

38 Section 1122(a) of the Bankruptcy Code (cont d) Courts generally permit substantially similar claims to be placed in different classes if the plan proponent can show a business or economic justification for doing so. Courts will not approve plans that place similar claims in different classes solely to gerrymander a consenting impaired class. 38

39 What is Substantially Similar? The Bankruptcy Code does not define substantially similar. To determine whether claims are substantially similar, courts generally evaluate: the nature or character of each claim (e.g., senior or subordinated, secured or unsecured), and the relationship of each claim to property of the debtor. Bankruptcy courts have discretion in determining whether claims are substantially similar. 39

40 Some Earlier Cases In re Barakat, 99 F.3d 1520 (9th Cir. 1996) (affirming bankruptcy court s holding that creditor s mortgage deficiency claim under section 1111(b) was substantially similar to other general unsecured claims, and that there was no valid justification for classifying the deficiency claim separately). In re Woodbrook Assocs., 19 F.3d 312 (7th Cir. 1994) (holding that where the debtor is a partnership comprised of a fully encumbered single asset, the legal rights of a Section 1111(b) claimant are substantially different from those of a general unsecured claimant, so separate classification of the Section 1111(b) claimant s claim was required). 40

41 Some Earlier Cases (cont d) In re Johnston, 21 F.3d 323 (9th Cir. 1994) (affirming bankruptcy court s holding that one claim was not substantially similar to other unsecured claims, where the claim at issue was partially secured by collateral pledged by the debtor s company, was the subject of litigation, and was subject to counterclaims by the debtor). 41

42 In re Loop 76, LLC In In re Loop 76, LLC, 465 B.R. 525 (B.A.P. 9th Cir. 2012), the court held that a third party source of recovery on a creditor s unsecured claim (such as a guaranty) is a factor the bankruptcy court may consider when determining whether claims are substantially similar. 42

43 In re Loop 76, LLC Facts Debtor owned an office/retail complex in Arizona, and obtained a secured construction loan from Wells Fargo. Debtor s owners guaranteed the Wells Fargo loan. Debtor defaulted on the loan, and later commenced a chapter 11 case. Wells Fargo s claim was undersecured. 43

44 In re Loop 76, LLC - Facts Debtor s plan provided that if Wells Fargo did not make the Section 1111(b) election, its deficiency claim would be placed in its own class. Wells Fargo did not make the Section 1111(b) election. Wells Fargo voted to reject the plan. All other general unsecured creditors were placed in a separate class from the Wells Fargo deficiency claim. This class voted to accept the plan. 44

45 In re Loop 76, LLC Facts (cont d) Wells Fargo filed a motion to have its deficiency claim reclassified such that it would be placed in the same class as the other general unsecured claims. Wells Fargo argued that the separate classification of its deficiency claim constituted impermissible gerrymandering. Debtor opposed the motion, arguing that the deficiency claim was not substantially similar to the other general unsecured claims because (a) Wells Fargo was partially secured and (b) the debt to Wells Fargo was guaranteed by the debtors owners. 45

46 In re Loop 76, LLC Bankruptcy Court Decision The bankruptcy court denied Wells Fargo s motion to reclassify its deficiency claim, holding that a claimant who has an alternative source of repayment is dissimilar from claimants who do not have such an alternative source. 46

47 In re Loop 76, LLC BAP Decision The Ninth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court s decision. BAP summarized the classification standards under both Chapter X and Chapter XI of the old Bankruptcy Act, and concluded that the Bankruptcy Code s standards more closely resemble the more flexible Chapter XI standards. Thus, in determining the proper classification of a claim, courts are not limited to examining only the nature of the claim as it relates to the assets of the debtor. 47

48 In re Loop 76, LLC BAP Decision (cont d) In determining the proper classification of claims, bankruptcy courts may consider sources outside of the debtor s assets, such as the potential for recovery from a non-debtor source. An unsecured claim that has the benefit of a thirdparty guarantor is dissimilar from unsecured claims that have no such guarantee. Ninth Circuit declined to address this issue on appeal, because another class of impaired claims accepted the plan anyway. 48

49 Subsequent Cases Disagreeing With In re Loop 76 Holding In re 18 RVC, LLC, 485 B.R. 492 (Bankr. E.D.N.Y. 2012). In re 4th Street East Investors, Inc., 2012 WL (Bankr. C.D. Cal. May 15, 2012). 49

50 D&O Selection 50

51 Section 1129(a)(5) 1129(a)(5)(A)(i): Plan proponent must disclose the identity and affiliations of any individual proposed to serve, after confirmation of the plan, as a director, officer, or voting trustee of the debtor, an affiliate of the debtor participating in a joint plan with the debtor, or a successor to the debtor under the plan. 1129(a)(5)(A)(ii): A plan may be confirmed only if the appointment to, or continuance in, such office of such individual, is consistent with the interests of creditors and equity security holders and with public policy. 51

52 Cases in Which Plan Was Confirmed In re 203 N. LaSalle Street P Ship, 195 B.R. 692 (N.D. Ill. 1996), rev d on other grounds (affirming bankruptcy court s confirmation of plan that provided for existing management to continue, where management had not engaged in a general course of conduct prejudicial to creditors). In re Sentinel Management Group, Inc., 398 B.R. 281 (Bankr. N.D. Ill. 2008) (holding that Section 1129(a)(5)(A) was inapplicable to the plan because the debtor would cease to exist post-confirmation). 52

53 Cases in Which Plan Was Confirmed (cont d) In re Bashas Inc., 437 B.R. 874 (Bankr. D. Ariz. 2010) (confirming plan under which two independent outside directors would be appointed, and the insider D&Os that would continue to serve were knowledgeable and experienced). 53

54 Cases in Which Plan Confirmation Was Denied In re SM 104 Ltd., 160 B.R. 202 (Bankr. S.D. Fla. 1993) (denying confirmation of plan that provided for debtor s principal and sole owner, who engaged in various bad acts, to remain a director and officer of reorganized debtor). In re Beyond.com Corp., 289 B.R. 138 (Bankr. N.D. Cal. 2003) (denying approval of disclosure statement where there may be insufficient safeguards with respect to post-confirmation governance to ensure that the interests of creditors and equity holders were protected). In re Machne Menachem Inc., 304 B.R. 140 (Bankr. M.D. Pa. 2003) (plan for non-profit corporation violated Section 1123(a)(7) because it provided for summary removal of the debtor s directors, in violation of New York State s non-profit corporation law). 54

55 In re Digerati Technologies, Inc. In In re Digerati Technologies, Inc., Case No , 2014 WL (Bankr. S.D. Tex. May 27, 2014), the bankruptcy court denied confirmation of a plan where: Court was concerned that the two proposed D&Os would not adequately represent the interests of other shareholders, and The D&Os had employment contracts that included unreasonably lucrative severance packages. 55

56 In re Digerati Technologies Inc. (cont d) The bankruptcy court suggested a non-exhaustive list of nine factors to consider in determining whether the appointment of an individual to serve as a D&O would be consistent with public policy: does the proposed plan keep the debtor in existence as an ongoing company, or is the debtor extinguished? is the debtor a publicly-held company or a privately-held company? 56

57 In re Digerati Technologies Inc. (cont d) does continued service of the individual perpetuate incompetence, lack of direction, inexperience or affiliations with groups inimical to the best interests of the debtor? does the continued service of the individual provide adequate representation of all creditors and equity security owners? does the retention of the individual violate state law? is the individual a disinterested person? 57

58 In re Digerati Technologies Inc. (cont d) is the individual capable and competent to serve in the proposed capacity assigned to him or her? are the salaries and benefits that the individual will receive reasonable based on the size of the debtor s operations, the complexity of those operations and the revenues to be generated? are any new independent outside directors being appointed under the proposed plan? 58