Late in the evening on Feb. 23, 2021, the department store chain Belk Inc. and 17 affiliates filed prepackaged bankruptcy cases in the U.S. Bankruptcy Court for the Southern District of Texas. In addition to filing first-day motions, Belk also filed its disclosure statement and plan of reorganization, which already had been solicited and accepted by the vast majority of those entitled to vote.
That same night, Belk filed a notice of hearing on its first-day motions and plan confirmation that was scheduled for Feb. 24, 2021, at 8 a.m. (CT). Through one of its initial filings, Belk requested the bankruptcy court confirm its plan by Feb. 24, 2021, so it would “emerge from these cases in record speed.” The combined confirmation and first-day hearing was held electronically before Judge Marvin Isgur. At approximately 10:08 a.m. (CT) on Feb. 24, 2021, Judge Isgur confirmed Belk’s plan, resulting in the fastest prepack in chapter 11 history.
In just over 12 hours, Belk received approval for $225 million of new capital, reduced its debt by approximately $450 million and extended maturities on its term loans by three years. (The prior record for confirming a prepack was approximately 19 hours in the Sungard Availability Services Capital Inc. case filed in the U.S. Bankruptcy Court for the Southern District of New York.)
Prepacks are not new and have been increasing in popularity among companies of all sizes. Many companies considering bankruptcy view a prepack as an opportunity to adjust their balance sheet and to get in and out of chapter 11 quickly, without incurring the associated administrative costs. Prepacks are often referred to as “balance sheet” or “de-leveraging” chapter 11 cases and are not designed to adjust any operational issues in the business. These cases are most useful to debtors burdened with overwhelming loans but do not require restructuring of their operations. For these reasons, prepacks usually have a less-negative impact on a debtor’s operations, when compared to a typical chapter 11. For example, because trade creditors in prepacks know prior to the petition date that their claims will be unimpaired, and therefore, paid in full in the ordinary course of business, these suppliers are less likely to disrupt deliveries and/or production. If a distressed business decides to proceed with a prepack, ensuring adequate notice to all creditors and parties in interest is arguably the most important task.
Although Belk did not file its prepack until Feb. 23, Belk spent a substantial time preparing its cases and indicating its intentions. In accordance with securities laws, Belk began to solicit votes on its plan nearly a month before filing its petitions. Indeed, on Jan. 26, 2021, Belk mailed confirmation hearing notices to more than 90,000 creditors and posted electronic copies of the confirmation hearing notice, the plan and disclosure statement on its claims agent’s website. On Jan. 29, 2021, the notice was published in the New York Times and the Charlotte Observer. The notice explained Belk would request, inter alia, plan confirmation at its first-day hearing and designated 4 p.m. (CT) on Feb. 23, 2021, as the deadline for parties to object.
The plan, which received nearly unanimous support from Belk’s first- and second-lien lenders, sets forth nine classes of creditors. Of these nine classes, only three were entitled to vote to accept or reject the plan. Four classes, including general unsecured creditors, were unimpaired and not entitled to vote on the plan. While the plan did impair the claims of the remaining two classes, these creditors were not entitled to vote and were deemed to reject the plan.
The Office of the U.S. Trustee filed the only objection to the plan, asserting concerns regarding statutory and due process rights to adequate notice and the opportunity to object. The U.S. Trustee specifically raised concerns regarding the plan’s “unintelligible” 630-word release, focusing on controlling case law from the U.S. Court of Appeals for the Fifth Circuit that prohibits non-consensual third-party releases of non-debtor liability. In other words, a creditor’s deemed acceptance and/or mere silence when facing a third-party release does not constitute the consent necessary for such releases.
In response, and in consultation with Belk and the U.S. Trustee, Judge Isgur entered a due process preservation order. Despite entry of the confirmation order, the due process order controls and specifies: “No prejudice will be imposed on any such person or governmental unit based on estoppel or mootness as a consequence of the Plan or the Confirmation Order.” The due process order set forth a process by which an opt-out notice would be prepared and served on each “Releasing Party.” The due process order also provides that any person or governmental unit may opt out of the plan’s releases until March 31, 2021.
The due process order permits counterparties to Belk’s executory contracts and unexpired leases to object to assumption and/or assignment under the plan; accordingly, the jurisdiction to resolve objections and/or disputes regarding the terms of any assumption and/or assignment of executory contracts and unexpired leases remains with the bankruptcy court. Furthermore, the due process order bars Belk from commencing disputes regarding the allowance and/or treatment of certain classes of claims in the bankruptcy court and prevents Belk from removing these disputes to other federal courts. On the other hand, the due process order provides the bankruptcy court with exclusive jurisdiction over disputes raised by creditors in certain other classes relating to the allowance and/or treatment of their claims.
Overall, Belk’s prepack was a success, not only in terms of speed, but because Belk will emerge from chapter 11 with the same majority owner and all of its stores, while also protecting the jobs of its 17,000 employees. Nevertheless, in the light of the due process order and controlling Fifth Circuit case law, much of what is typically handled prior to plan confirmation remains open for consideration by bankruptcy court in the future. Such matters include notice of the third-party releases to all parties in interest, the scope and application of the plan’s third-party releases and exculpation provisions, disputes regarding the assumption/assignment of executory contracts and unexpired leases, disputes regarding the allowance and treatment of certain claims, and any allegations regarding the deprivation of due process rights as to the plan and confirmation order.