Official Comm. of Unsecured Creditors v. Constellation Enters. LLC (In re Constellation Enters. LLC)

587 B.R. 275
CourtDistrict Court, D. Delaware
DecidedMarch 22, 2018
DocketBankr. Case No. 16–11213–CSS (Jointly Administered); Civ. No. 17–757–RGA; Civ. No. 17–1430–RGA; Misc. No. 17–276–RGA
StatusPublished
Cited by7 cases

This text of 587 B.R. 275 (Official Comm. of Unsecured Creditors v. Constellation Enters. LLC (In re Constellation Enters. LLC)) is published on Counsel Stack Legal Research, covering District Court, D. Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Official Comm. of Unsecured Creditors v. Constellation Enters. LLC (In re Constellation Enters. LLC), 587 B.R. 275 (D. Del. 2018).

Opinion

RICHARD G. ANDREWS, United States District Judge

Appellant, the former Official Committee of Unsecured Creditors ("Committee") appointed under 11 U.S.C. § 1102(a)(1) in the chapter 11 cases of Constellation Enterprises LLC and nine related companies ("Debtors"), has appealed the Bankruptcy Court's denial of a settlement approval *278motion (B.D.I. 963)1 ("Settlement Denial Order") (Civ. No. 17-757) and the Bankruptcy Court's order granting Debtors' motion to convert their chapter 11 cases to cases under chapter 7 (B.D.I. 1130) ("Conversion Order") (Civ. No. 17-1430). The Committee has also filed a motion for stay of the Conversion Order pending appeal (Misc. No. 17-276) ("Motion to Stay"). Appellees, the United States Trustee ("Trustee") and the DDTL Parties2 have each moved to dismiss the appeals. For the reasons set forth below, the Court will dismiss both appeals and will dismiss the Motion to Stay.

I. BACKGROUND

On May 16, 2016, the Debtors filed for relief under chapter 11. Following court-approved sales of substantially all of their assets, the Debtors and the Committee, on September 8, 2016, filed the Joint Motion of the Debtors and Creditors' Committee for an Order Approving Settlement by and Among the Debtors, the Creditors' Committee, the Purchaser and the Ad Hoc Noteholders Group (B.D.I. 560) ("Settlement Motion"). The Settlement Motion sought approval of a "structured dismissal" that included a case-ending mechanism and a settlement agreement to distribute assets to certain creditors. While the motion was pending before the Bankruptcy Court, the Supreme Court issued Czyzewski v. Jevic Holding Corp. , --- U.S. ----, 137 S.Ct. 973, 197 L.Ed.2d 398 (2017), a landmark decision that held that a bankruptcy court cannot approve end-of-case distributions that do not follow ordinary priority rules without the affected creditors' consent. The Committee maintained that its settlement was still permissible under a pre- Jevic decision, In re ICL Holding Co., Inc. , 802 F.3d 547 (3d Cir. 2015). In that case, the Third Circuit held that a party that purchased a debtor's assets could pay money to certain creditors to resolve their objections to the sale, even though such payment did not follow normal priority rules. See ICL , 802 F.3d at 555-56. The Third Circuit reasoned that while the secured lenders paid cash to resolve sale objections, those funds were not paid at the debtor's direction, were not proceeds from the secured lenders' liens, did not at any time belong to the estate, and would not become part of the estate even as a pass-through. See id.

The proposed settlement at issue here was a structured transaction whereby the Debtors transferred assets to their secured creditor in an asset sale, and in turn, the secured creditor would transfer these assets to a settlement trust for distribution to unsecured creditors while skipping creditors of higher priority. The Committee posited that this was permissible because the settlement assets to be distributed to unsecured creditors were not estate property. The Bankruptcy Court rejected that argument, holding that, even if ICL Holding survived Jevic , the proposed settlement, as a matter of fact, did not fall within the ambit of ICL Holding , and thus denied the motion to settle. (See Civ. No. 17-757, D.I. 10-1, 5/16/17 Hr'g. Tr. at 246:23-248:15). The Settlement Denial Order was entered on May 16, 2017. (B.D.I. 963). On May 30, 2017, the Committee timely appealed the Settlement Denial Order. (See Civ. No. 17-757, D.I. 1). The Debtors did not appeal the Settlement Denial Order, nor did any individual creditor or other party in interest.

*279On June 23, 2017, the Debtors moved to convert their chapter 11 cases to chapter 7 pursuant to § 1112(a) of the Bankruptcy Code (B.D.I. 1008) ("Conversion Motion"), citing, inter alia , the administrative insolvency of the chapter 11 cases. (Id. at 4-5; B.D.I. 1126). The Committee urged the Bankruptcy Court to deny the Conversion Motion based on an "equitable analysis of the facts," namely, that the Debtors had agreed to support the Settlement Motion, that conversion would jeopardize the Committee's appeal of the Settlement Denial Order, and that, absent reversal of the Settlement Denial Order, the unsecured creditors stood no chance of recovery on their claims. (See B.D.I. 1028 at 1-3, 13-16) (citing In re Adler , 329 B.R. 406 (Bankr. S.D.N.Y. 2005) ). The Bankruptcy Court held a hearing on the Conversion Motion on September 27, 2017. (See Misc. No. 17-276, D.I. 1-1, 9/27/17 Hr'g. Tr.). The Debtors' Conversion Motion was supported by the Trustee and DDTL Parties. (See B.D.I. 1024; 9/27/17 Hr'g. Tr. at 29:15-35:8). The Bankruptcy Court concluded that no evidentiary hearing was necessary and converted the cases to chapter 7, effective October 2, 2017 (B.D.I. 1130) (the "Conversion Order"), based on, inter alia , § 1112(a) of the Bankruptcy Code, the Debtors' undisputed eligibility to be debtors under chapter 7, and the "record that has been established over months of this case" regarding administrative insolvency of the cases. (See 9/27/17 Hr'g. Tr. at 35:10-39:16). The Committee timely appealed the Conversion Order on October 11, 2017. (B.D.I. 1145). On the same day, the Committee moved for a stay pending appeal in this Court, bypassing the Bankruptcy Court. (Misc. No. 17-276, D.I. 1). No other party appealed the Conversion Order. The Debtors' cases are now in Chapter 7, and the Trustee has appointed a Chapter 7 trustee. (B.D.I. 1143).

The Trustee and the DDTL Parties have moved to dismiss the appeal of the Settlement Denial Order (Civ. No. 17-757, D.I. 43 & 44) and the appeal of the Conversion Order (Civ. No. 17-1430, D.I. 8 & 9) ("Motions to Dismiss"). The merits of the appeal of the Settlement Denial Order are fully briefed. (Civ. No. 17-757, D.I. 25, 33, 38, 42). Merits briefing on the appeal of the Conversion Order was stayed at the request of the parties pending the Court's decision on the Motions to Dismiss. (See Civ. No. 17-1430, D.I. 29). The Motions to Dismiss are fully briefed (Civ. No. 17-757, D.I. 43, 44, 45, 48, 49; Civ. No. 17-1430, D.I. 8, 9, 30, 31, 32). On February 9, 2018, the Court held oral argument on the Motions to Dismiss. (See Civ. No. 17-757, D.I. 57).

II. CONTENTIONS

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Bluebook (online)
587 B.R. 275, Counsel Stack Legal Research, https://law.counselstack.com/opinion/official-comm-of-unsecured-creditors-v-constellation-enters-llc-in-re-ded-2018.