Excel Maritime Carriers Ltd., et al.

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In the Matter of:
EXCEL MARITIME CARRIERS LTD., ET AL., 	Case No. 13-23060-rdd
Debtors.
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B E F O R E:
HON. ROBERT DRAIN
U.S. BANKRUPTCY JUDGE
A P P E A R A N C E S :
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
Attorneys for the Debtors
Four Times Square
New York, NY 10036
BY: 	JAY M. GOFFMAN, ESQ.
MARK A. MCDERMOTT, ESQ.
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JONATHAN FRANK, ESQ.
SHANA A. ELBERG, ESQ. (TELEPHONICALLY)
AKIN GUMP STRAUSS HAUER & FELD LLP
Attorneys for the Official Creditors' Committee
One Bryant Park
New York, NY 10036
BY: 	MICHAEL S. STAMER, ESQ.
SEAN E. O'DONNELL, ESQ.
AKIN GUMP STRAUSS HAUER & FELD LLP
Attorneys for the Official Creditors' Committee
1700 Pacific Avenue
Suite 4100
Dallas, TX 75201
BY: 	SARAH LINK SCHULTZ, ESQ.
BRACEWELL & GIULIANI
Attorneys for Ivory Shipping
225 Asylum Street
Suite 2600
Hartford, CT 06103
BY: 	GREGORY W. NYE, ESQ.
HOLLAND & KNIGHT LLP
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Attorneys for Secured Lenders, Administrative
Agent & Steering Committee
10 St. James Avenue
11th Floor
Boston, MA 02116
BY: 	JOHN J. MONAGHAN, ESQ.
HOLLAND & KNIGHT, LLP
Attorneys for Secured Lenders, Administrative
Agent & Steering Committee
31 West 52nd Street
New York, NY 10019
BY: 	BARBRA R. PARLIN, ESQ.
JOVI TENEV, ESQ.
MOSES & SINGER, LLP
Attorneys for Christiana Trust
405 Lexington Avenue
New York, NY 10174
BY: 	ALAN GAMZA, ESQ.
WEIL, GOTSHAL & MANGES LLP
Attorneys for DVB Group Merchant Bank
767 Fifth Avenue
New York, NY 10153
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BY: 	GABRIEL A. MORGAN, ESQ. (TELEPHONICALLY)
UNITED STATES DEPARTMENT OF JUSTICE
Office of the United States Trustee
201 Varick Street
Suite 1006
New York, NY 10014
BY: 	RICHARD C. MORRISSEY, ESQ. (TELEPHONICALLY)
MCKOOL SMITH
Attorneys for Robertson Maritime Investors
600 Travis Street, Suite 7000
Houston, TX 77002
BY: 	HUGH M. RAY, III, ESQ. (TELEPHONICALLY)
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Attorneys for Oaktree Capital Management
1285 Avenue of the Americas
New York, NY 10019
BY: 	PHILIP A. WEINTRAUB, ESQ. (TELEPHONICALLY)
MARGARET A. PHILLIPS, ESQ. (TELEPHONICALLY)
SEWARD & KISSEL, LLP
Attorneys for Seward & Kissel, LLP
One Battery Park Plaza
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New York, NY 10004
BY: 	RONALD L. COHEN, ESQ. (TELEPHONICALLY)
WILLIAM MUNNO, ESQ. (TELEPHONICALLY)
MODIFIED BENCH RULING
I have before me a motion by the official unsecured
creditors' committee, which is supported by the trustee for the
unsecured debt, for an order terminating the debtors' exclusive
periods under Section 1121 of the Bankruptcy Code to file and
obtain confirmation of a Chapter 11 plan.
We are well within the debtors' initial exclusive
periods under the Bankruptcy Code to file and solicit vote on a
plan, and the debtors have filed a Chapter 11 plan and
disclosure statement and have a hearing on the adequacy of the
disclosure statement scheduled at the end of September.
So the case is clearly moving forward with a plan that
is also clearly supported by the debtors' largest creditor body
by debt. 	In other words, the case is moving forward at a pace
that for a case of this size is rapid and, as I said, well
within the exclusive periods set forth by Congress in the
Bankruptcy Code.
So the debtors are not looking to extend their
exclusive periods, where they would have the burden to do so
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for cause under Section 1121(d). 	Instead, the committee is
looking to terminate the period that the debtors have to obtain
acceptances, in order to file its own competing plan and seek
to obtain acceptances of that plan.
Under the Code, the committee therefore has the burden
to show cause for termination. 11 U.S.C. § 1121(d)(1). 	“Cause”
is not defined in the statute, and most cases with regard to
the exclusive periods discuss cause in a slightly different
context, that is, cause to extend the exclusive periods rather
than to terminate them.
I agree with the few cases that have dealt with this
type of situation and conclude that the burden here is a heavy
one, that terminating exclusivity -- particularly during the
initial exclusivity period is an extraordinary thing in a
bankruptcy case. In re Energy Conversion Devices, Inc., 474
B.R. 503, 508 (Bankr. E.D. Mich. 2012); In re Geriatrics
Nursing Home, 187 B.R. 128, 132 (D.N.J. 1995); In re Interco,
Inc., 137 B.R. 999, 1000 (Bankr. E.D. Mo. 1992).
Usually -- and it's hard to say “usually” because
there are not that many published opinions where exclusivity is
terminated during the initial exclusive periods -- the periods
are terminated because of some conduct by the debtor that is
short of conduct that would justify the appointment of a
trustee (where the statute provides that the exclusive period
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is terminated automatically) but, still, troubling conduct, for
example where the debtor appears to be unable to negotiate a
plan because of internal conflicts, or is mismanaging the
bankruptcy case short of the need to replace management, or is
otherwise using exclusivity in a way that Congress didn't
contemplate when it gave debtors in possession the exclusive
time to propose and obtain confirmation of a plan. In re
Texaco, Inc., 81 B.R. 806, 812 (Bankr. S.D.N.Y. 1988). 	The
mere fact that key players want to file a competing plan is not
sufficient cause to terminate a debtor’s exclusive periods. In
re Geriatrics Nursing Home, 187 B.R. 128, 132 (D.N.J. 1995).
The ultimate test is left to considerable discretion
by the Court, and it is very fact driven. Id. 	Both sides have
cited Judge Gerber's opinions in the Adelphia case where he
detailed several factors that, depending on the particular
context, may be relevant -- nine factors -- that is: 	the size
and complexity to the case; the necessity for sufficient time
to permit the debtor to negotiate a plan of reorganization and
prepare adequate information; the existence of good faith
progress toward reorganization; the fact that the debtor is
paying its bills as they become due; whether the debtor has
demonstrated reasonable prospects for filing a viable plan;
whether the debtor has made progress in negotiations with its
creditors; the amount of time which has elapsed in the case;
whether the debtor is seeking an extension of exclusivity in
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order to pressure creditors to submit to the debtor’s
reorganization demands; and whether an unresolved contingency
exists. In re Adelphia Communications Corp., 352 B.R. 578, 587
(Bankr. S.D.N.Y. 2006), which quotes an earlier opinion in the
same case by Judge Gerber that was subsequently affirmed at 342
B.R. 122 (S.D.N.Y. 2006).
Those or similar factors have been cited in other
cases, including relatively recently by Judge Glenn in In re
Border's Group, Inc., 460 B.R. 818 (Bankr. S.D.N.Y. 2011).
However, Judge Gerber would be the first to note that
the context is what is most important, and, as he stated in the
Adelphia case, the ultimate consideration for the Court was
what will best move the case forward in the best interest of
all parties.
And given the unusual facts here that's what I've
ultimately focused on. 	As I think would be clear based on my
recitation of where the case stands at this point, most of the
factors that I have listed would argue for not terminating
exclusivity. 	The debtors have moved ahead with a plan. 	They
have the support of their largest creditor group on that plan.
A disclosure statement will be considered very shortly. And
this is not a case where it appears to me that the debtors’
plan is a plan that's DOA or one that is obviously not in good
faith, which is another way of saying it is not DOA.
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On the other hand, it is a plan that at least is
premised upon a transaction that involves insiders, through the
Ivory Shipping transaction, obtaining a significant amount of
equity in either the reorganized debtor under the plan or as a
consequence of the plan.
That fact is troubling in the context of a debtor’s
continuing assertion of exclusivity, first, on the most basic
point, in that it's long been held that exclusivity should not
be used simply to pressure a creditor to accede to the debtor’s
point of view on a critical issue. 	See for example, In re
McLean Industries, Inc., 87 B.R. 830, 834 (Bankr. S.D.N.Y.,
1987),and, second, perhaps more importantly, because the
Supreme Court in Bank of American National Trust and Savings
Association v. 203 North LaSalle Street Partnership, 526 U.S.
434 (1999), has made it pretty clear that if a plan is properly
viewed as a new value plan and, therefore, confirmable only
under the new value exception to the absolute priority rule
(which the 203 North LaSalle court neither endorsed nor
abrogated) the debtor will not be successful in even getting
out of the gate with such a plan if the Court concludes that
the insider “purchaser” in essence had an exclusive option to
obtain the reorganized equity.
It's clear from the discussion in the 203 North
LaSalle case that one way to lift that cloud over such a plan
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is to terminate exclusivity, Id. at 454-56.
I have had a few hearings in this case already, some
of which have been contested. 	From the record of those
hearings, it appears to me that the debtors engaged in a
prolonged period of negotiations with their senior lender group
prepetition. 	It appears to me that those negotiations were
difficult. 	It appears to me that I cannot say today whether
the debtors because of the difficulty of those negotiations and
their own -- the exigencies of their own financial problems --
were effectively precluded from negotiating with the remaining
unsecured creditors during the prepetition period.
In any event, even if the debtors filed this case with
the full support of their senior lender group, it was clearly
with a plan that was not at all attractive on an objective
basis to the unsecured creditor group, unless the unsecured
creditor group accepted the valuation assumptions of the plan
as well as the structure of the plan.
Therefore, it appears to me that while this case is on
a fast track and that track is generally something that courts
and Congress approve of, some facts argue for placing a limit
on the exclusive periods. 	Thus, there is some danger here that
if I denied the committee's motion, the debtors would simply
continue on their present track -- and this is an important
fact -- get to confirmation sometime in October or early
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November with a contested confirmation hearing and at least the
prospect of the Court not approving confirmation, at which time
the debtor would have very little cash on hand, and someone
would have to pay the bill thereafter to get to a plan that
would be confirmed.
The testimony at the prior hearing that I mentioned on
cash collateral is that there would be roughly four or five
million dollars of cash left in the debtors at that time. 	So
the committee has argued and the indenture trustee has argued
that really there is a need at this point to open up the
playing field because the alternatives are so bleak that either
they will lose a significant amount of the value in the debtors
by further delay of opening up their ability to file a plan,
or, alternatively, they will be coerced into voting for a plan
without any meaningful negotiations. 	Those factors all argue
strongly for terminating exclusivity, notwithstanding the
strong arguments that I began with for keeping exclusivity in
place.
A couple of facts have come out and been confirmed on
the record that are in addition relevant to the resolution of
the problem. 	First, it is clear that the restructuring support
agreement with the senior lenders that underpins the debtors'
plan, as well as the cash collateral order that is in place, do
not prohibit the debtors or the senior lender group from
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negotiating a plan and considering plan proposals, including
proposals supported by third-party investment or by the
committee. 	The debtors have a clear fiduciary “out,” which has
been reaffirmed by their counsel today, and the lenders
recognize that “out” and recognize that there's no limitation
on their talking and negotiating with third parties regarding
alternative plans to the plan on the table. 	If that had not
been the case, I believe the balance would have been tipped to
terminating exclusivity so those negotiations could take place.
But that's not required.
On the other hand, it is clear that if exclusivity is
terminated, that fact in and of itself will not trigger a
default under the cash collateral order or the restructuring
support agreement, either.
However, it does appear to me to be clear -- and this
is based upon my experience reviewing fee applications and both
reviewing pre-trial discovery, as well as contested plan
confirmation hearings, and, frankly, having done both of those
things before I went on the bench, that the cost, the added
cost, to the estate of terminating exclusivity and having a
prompt filing of an alternative Chapter 11 plan, which I have
no doubt would happen (the committee has been very upfront
about that) would be large here. 	As things stand, there will
already be a significant cost to litigating confirmation of the
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debtors' plan that's on file today. However, I think that cost
would increase dramatically if I terminated exclusivity and the
parties engaged, as I trust they would, in the pursuit of not
one, but two contested Chapter 11 plans.
I have reviewed the committee’s proposed backstop
agreement and the exhibits to it, including the plan summary,
and heard counsel for the senior lenders as well as counsel for
the debtors on it, and I have no doubt that there are
sufficient difficult issues pertaining to confirmation of a
plan that would be premised upon the structure in those
documents to warrant a significant confirmation fight on issues
that are not limited simply to legal determinations based on
agreed facts, but, instead, issues based upon feasibility and
projections pertaining to the reorganized debtors that would
emerge under the committee's plan, which, at this point, I have
no assurance would be the same type of reorganized debtors that
would emerge under the debtors' plan.
No one has given me testimony on what that additional
cost would be; however, again based on my own experience,
primarily reviewing fee applications, I believe that the
debtors would be in danger of having their remaining cash
completely eroded by such a fight: 	that is, that the
additional cost of terminating exclusivity and having a plan
confirmation fight on not one but two plans could exceed five
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million dollars. 	That clearly would trigger a default under
the cash collateral order, and, more importantly, not be good
for the debtors and their business and their creditors.
Obviously, someone would bear that cost. 	I can't
imagine the debtors would go out of business over it; someone,
the lenders or, if they were truly serious, the proposed
investors in the committee's plan would find some way to pick
up that cost, but it would interject a significant layer of
uncertainty over the debtors' business and not be good for the
business by any means.
Frankly, I believe that the parties are sufficiently
well informed and now have the ability to negotiate that they
didn't have prepetition, as a practical matter seeing the
obvious alternative end results -- which are either an agreed
plan or coming close to running out of cash before then -- and
thus they should be able to negotiate a plan that is clearly
confirmable or consensual in large measure. 	Frankly, I think
that the money saved could go to bridge a negotiating gap, but
there are many other ways one could imagine negotiating a plan
that would have some chance of getting consensual support.
It seems to me, given the balance that Congress struck
in Section 1121, and particularly where the debtors are
proceeding, I believe, as Congress contemplated by promptly
moving ahead with their plan, that they should be given the
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chance to try to negotiate a plan that will have broader
support.
I appreciate that one of the objections that would be
raised to the current plan is that it is not being proposed and
sought in good faith under Section 1129(a)(3) of the Bankruptcy
Code. 	Clearly if those negotiations don't proceed, clearly if,
instead, the unsecured creditors are left with only a death
trap provision without those negotiations, a court might well
be inclined to say that, one way or another, whether it's under
the LaSalle case or Section 1129(a)(3), something is wrong at
confirmation, given that exclusivity was left in place. 	I
think the debtors, the senior lenders, Ivory Shipping, all
should understand that risk as well as other risks that I've
highlighted during the course of this hearing, and they should
be prepared to negotiate in light of that.
At the same time, the unsecured creditors should
certainly be prepared to understand the types of risks and
concerns that have been articulated by the senior lenders, as
well as the debtors, not just on valuation, but also on
feasibility.
It seems to me that, and maybe this is just like
saying I like apple pie and milk, the parties’ time is better
served without going down the path of two competing plans, but,
instead, in appreciating that there'll be no high fives at the
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end of this process unless they negotiate and see if they can
reach an agreement that gets over the problems in the plan that
have been identified by the committee.
So I will not, at this time, grant the motion to
terminate. 	I have been very clear that at some point there may
be a problem with this plan if, in fact, the debtors aren't
able to show that there's been a fair opportunity to propose an
alternative, under LaSalle. 	And whether that's under LaSalle
or Section 1129(a)(3), that's just -- that's going to be an
issue. 	So I hope that I won't ever have to ever get to that
point. 	So I’ll ask debtors' counsel, Mr. McDermott, if you
could submit an order denying the motion for the reasons stated
on the record.
Dated: White Plains, NY
September 13, 2013 	/s/Robert D. Drain
United States Bankruptcy Judge
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