2009 Chapter 11 Recent Developments (Part I)

Issues: Whether the bankruptcy court could - and correctly did - withdraw the derivative standing it had conferred on a creditor committee over such committee's objection.

Rules: In addition to having the authority to confer derivative standing upon a committee, "a court may withdraw a committee's derivative standing and transfer the management of its claims, even in the absence of that committee's consent, if the court concludes that such a transfer is in the best interests of the bankruptcy estate."

Holding: Affirmed.

Reasoning: Ultimately, the debtor or the trustee has a central role in the administration of the estate. In this case, in granting derivative standing to begin with, the bankruptcy court emphasized that it did not find any improper motive on the debtor's part in not pursuing the litigation that Equity sought standing to pursue. Moreover, the transfer of Equity's standing to the litigation trust does not jeopardize Equity's claims because the trustees of the trust have a fiduciary duty to act in the best interests of the beneficiaries, and the trustees are thus unlikely to breach their duties and fail to effectively litigate Equity's causes of action. Additionally, the imposition of the litigation trust, to which is transferred all of the multiple debtors' claims is not a de facto substantive consolidation of the cases despite the fact that recoveries on the different debtors' claims are being distributed solely according to the Plan's priority scheme.

In re New Century TRS Holdings, Inc., et. al., 390 B.R. 140 (Bankr. D. Del. 2008)

Facts: An ad hoc committee (the "Ad Hoc Committee") of the debtors objected to the debtor's plan of reorganization (the "Plan") on three grounds: (i) the Plan "provides for substantive consolidation of the Debtors in violation of the Third Circuit Court of Appeals' decision in In re Owens Corning, 419 F.3d 195 (3rd Cir. 2005),..." (ii) the Plan does not comply with § 1123(a)(4) because it treats members of the same class differently and (iii) the Plan does not comply with § 1129(a)(7) because it has not shown that the Ad Hoc Committee creditors are receiving more in chapter 11 than they would have received in chapter 7. The Plan grouped the numerous debtors into three groups and classifies claims based on the three debtor groups. "The Plan provides for distribution of the net cash available from the assets of the Debtors in each Debtor Group to the holders of allowed unsecured claim against the Debtors in that Debtor Group." The Plan also provides, pursuant to a settlement agreement, that certain creditors who hold claims against more than one debtor are to receive over a 100% distribution of their allowed claims from one of the debtors and a 0% distribution as against the other debtor (the "Multi-Debtor Claim Protocol"). Various other settlement agreements led to asset distribution among the debtor groups as well as the treatment of intercompany claims. The debtors ask that the various settlements be approved.

Issues: Whether the Plan should be confirmed and whether the settlement agreements should be approved.

Rules:

(1)

Substantive consolidation of debtors, absent consent, may be allowed if it can be proved that the debtors "(1) prepetition... disregarded separateness so significantly their creditors relied on the breakdown of entity borders and treated them as one legal entity, or (2) postpetition their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors." The Third Circuit also has certain principals it wants a court to keep in mind in considering substantive consolidation.

(2)

Section 1123(a)(4) states that a plan "shall provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable