Aegerion Pharmaceuticals, Inc.

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re:
Aegerion Pharmaceuticals, Inc., et al.1
Debtors.
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FOR PUBLICATION
Chapter 11
Case No. 19-11632 (MG)
CORRECTED MEMORANDUM OPINION CONFIRMING DEBTORS’ FIRST AMENDED
JOINT CHAPTER 11 PLAN
A P P E A R A N C E S:
Willkie Farr & Gallagher LLP
Attorneys for Debtors
787 Seventh Avenue
New York, NY 10019-6099
By: 	Paul V. Shalhoub, Esq.
Andrew S. Mordkoff, Esq.
McGrail & Bensinger LLP
Counsel for Marc Beer
888-C 8th Avenue #107
New York, NY 10019
By: 	David C. McGrail, Esq.
Ilana Volkov, Esq.
Choate Hall & Stewart LLP
Counsel for Marc Beer
Two International Place
Boston, Massachusetts 02110
By: 	Douglas R. Gooding, Esq.
Melissa Bayer Tearney, Esq.
R.J. Cinquegrana, Esq.
Benjamin J. Higgins, Esq.
Office of the United States Trustee
201 Varick Street, Room 1006
New York, NY 10014
1 	The Debtors in these chapter 11 cases and the last four digits of each Debtor’s federal taxpayer
identification number are Aegerion Pharmaceuticals, Inc. (0116), and Aegerion Pharmaceuticals Holdings, Inc.
(1331). The Debtors’ executive headquarters are located at 245 First Street, Riverview II, 18th Floor, Cambridge,
MA 02142.
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Alan Maza, Esq.
Therese A. Scheuer, Esq.
United States Securities and Exchange Commission
Brookfield Place
200 Vesey Street, Suite 400
New York, NY 10281-1022
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
The Court held the confirmation hearing on September 5, 2019 on the Debtors’ First
Amended Joint Chapter 11 Plan. (“Plan,” ECF Doc. # 180.) The Plan is largely consensual; it
overwhelmingly received the required votes in number and amount of the three impaired classes
that were entitled to vote. The Plan was supported by the Official Committee of Unsecured
Creditors (the “Committee”). A separate confirmation order, including the Court’s findings of
fact and conclusions of law, will be entered addressing all of requirements for confirmation. The
Court writes only to address the sole objection to confirmation regarding classification of
unsecured creditors that was not resolved consensually before or during the confirmation
hearing. For the reasons discussed below, the remaining objection is overruled. Because the
Plan satisfies the requirements of the Bankruptcy Code, the Bankruptcy Rules and all other
applicable law, the Court confirms the Plan.
I. 	BACKGROUND
A. Documents Supporting the Plan
Debtors’ counsel submitted the following documents in support of confirmation:
Memorandum of Law in Support of Confirmation and Reply to Objections to Debtors’ First
Amended Joint Chapter 11 Plan (“MOL,” ECF Doc. # 277); declarations of: (a) John R.
Castellano, Chief Restructuring Officer of the Debtors and Managing Director of AP Services,
LLP (the “Castellano Declaration,” ECF Doc. # 274); (b) Ashish Contractor of Moelis &
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Company LLC (the “Contractor Declaration,” ECF Doc. # 275); and (c) Ben Harshbarger,
Interim Chief Executive Officer and General Counsel of Novelion Therapeutics Inc. (the
“Harshbarger Declaration,” ECF Doc. # 276.) The Committee also filed the Official Committee
of Unsecured Creditors’ Statement in Support of the Debtors’ Chapter 11 Plan and Reply to
D&O Objections. (“Committee Support,” ECF Doc. # 282.) The Debtors also rely upon the
balloting tabulation prepared by Prime Clerk LLC (“Prime Clerk”), the Debtors’ balloting agent,
(the “Voting Declaration,” ECF Doc. # 260), filed with the Court on August 22, 2019, and the
applicable affidavits of service and publication of Prime Clerk. (ECF Docs. ## 204, 211, 212 &
229 (service documents).) The Castellano Declaration, Contractor Declaration, Harshbarger
Declaration, and Voting Declaration were admitted in evidence at the confirmation hearing with
no objections. Beer’s counsel cross-examined Castellano during the hearing.
B. General Background
On May 20, 2019 (the “Petition Date”), each of the two Debtors filed a voluntary petition
for relief in this Court under chapter 11 of the Bankruptcy Code. These chapter 11 cases were
consolidated for procedural purposes only. On May 29, 2019, the United States Trustee for
Region 2 (the “U.S. Trustee”) appointed the Committee. No trustee or examiner has been
appointed in the Debtors’ cases. The events leading up to the Petition Date are set forth in the
Declaration of John R. Castellano in Support of Chapter 11 Petitions and First Day Pleadings
(ECF Doc. # 2), which was filed with the Court on the Petition Date.
On the Petition Date, the Debtors filed initial versions of their chapter 11 plan (ECF Doc.
# 20) and related disclosure statement. (ECF Doc. # 21.) On July 9, 2019, the Debtors filed their
first amended Plan and amended Disclosure Statement. (“Disclosure Statement,” ECF Doc. #
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121.) On July 11, 2019, the Court entered an order approving the Disclosure Statement.
(“Disclosure Statement Order,” ECF Doc. # 191.)
C. The Plan
The Plan provides for:
(a) the Plan Investor to acquire 100% of the equity interests of Reorganized
Aegerion in exchange for New Common Stock of the Plan Investor in
the amounts set forth in the Plan and the Plan Funding Agreement;
(b) a balance sheet restructuring regarding the Debtors’ current debt
obligations under the Novelion Intercompany Loan Credit Agreement,
the 	Convertible 	Notes 	Indenture, 	and 	the 	Bridge 	Loan 	Credit
Agreement;
(c) the unimpairment of the Debtors’ ongoing trade creditors and all
Government Settlement Claims;
(d) conversion of the Novelion Intercompany Loan and Other General
Unsecured Claims (which include the Convertible Notes Claims,
Claims held by former officers, directors, or employees of the Debtors
for 	indemnification, 	contribution 	or 	advancement 	expenses, 	and
contract rejection damages Claims) into the new equity of the Plan
Investor and New Convertible Notes, subject to dilution on account of
any management incentive plan, the Rights Offering, the Plan Investor
Equity Raise, conversion of the New Convertible Notes, and any
contingent value rights issued to existing shareholders of the Plan
Investor;
(e) refinancing of the Bridge Loan into a new secured term loan facility of
reorganized Aegerion, with an extended maturity date of five years;
(f) a new equity raise of $60 million—all of which is being backstopped by
the 	Backstop 	Parties—giving 	eligible 	holders 	the 	opportunity 	to
purchase shares of New Common Stock at a 20% discount; and
(g) no recovery to the holders of Existing Securities Law Claims or Existing
Interests on account of their respective Claims and Interests.
(See Disclosure Statement, Article II at 18 (summary chart); Plan passim.)
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D. Plan Classification
The Plan designates a total of nine classes of Claims and Interests of the Debtors. (Plan,
Article IV at 29–31 (titled “Classification of Claims and Interests”).) Under the Plan, four
classes are unimpaired and therefore deemed to have accepted the plan pursuant to section
1126(f) of the Bankruptcy Code. A summary of the classes, their impairment status, and their
voting entitlement was provided in Article IV of the Plan as follows:
The Disclosure Statement provides a summary of the treatment of claims and interests
under the plan. (Disclosure Statement § 2.2.) As relevant to the Beer objection, the Disclosure
Statement provides the following summary of the Plan treatment for Classes 6A and 6B.
Class 6A’s (Ongoing Trade Claims) proposed treatment is:
Except to the extent that a holder of an Allowed Ongoing Trade Claim
agrees to a different treatment, on the applicable Distribution Date each
holder of an Allowed Ongoing Trade Claim shall, at the election of the
Reorganized Debtors, and to the extent that such Allowed Ongoing Trade
Claim was not previously paid pursuant to an order of the Bankruptcy
Court: (i) be paid in full in Cash on the applicable Distribution Date, plus
postpetition interest at the Applicable Interest Rate, computed daily from
the Petition Date through the Effective Date, from Plan Cash, (ii) as to any
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Ongoing Trade Claim incurred in the ordinary course of business and on
normal credit terms where payment comes due following the Effective
Date, receive such treatment that leaves unaltered the legal, equitable, or
contractual rights to which the holder of such Allowed Ongoing Trade
Claim is entitled, or (iii) such other treatment that would render such
Ongoing Trade Claim Unimpaired.
(Plan at 27–28 (within table of class descriptions).) In other words, under section 5.6 of the Plan,
ongoing trade creditors are to be paid in full, in cash, with postpetition interest paid from the
petition date through the distribution dates under the Plan. The default postpetition interest rate
will be the Federal Judgment Rate, unless an ongoing trade creditor contests the use of the
Federal Judgment Rate on the basis of a higher interest rate in its contract, in which case the
Court will determine the proper intertest rate. With respect to those ongoing trade creditors with
executory contracts that will be assumed, cure amounts will include payment of higher interest
rates if the contracts that will be cured and assumed include provisions for payment of higher
interest rates. The Debtors’ counsel represented at the hearing that no objection to the Federal
Judgment Rate has been raised.
During the confirmation hearing, counsel for the Debtors represented that all ongoing
trade claims in class 6A are liquidated in amount, and also that the amount of postpetition
interest that will be paid to the entire class of ongoing trade creditors in Class 6A (including
ongoing trade creditors with executory contracts that will be cured and assumed) is estimated to
be $200,000.00. Of that amount, only about $5,000 in postpetition interest will be paid to
ongoing trade creditors who do not have executory contracts.
Class 6B’s (Other General Unsecured Claims) proposed treatment is:
Except to the extent that a holder of an Allowed Other General Unsecured
Claim agrees to less favorable treatment, each holder of an Allowed Other
General Unsecured Claim shall receive, on the applicable Distribution Date
and in full and final satisfaction, settlement and release of such Allowed
Other General Unsecured Claim, its Pro Rata Share of: (i) New Convertible
Notes in the principal amount of $125,000,000 less the portion of New
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Convertible Notes distributed to (x) holders of DIP Claims (to the extent the
DIP Claims are not repaid in full in Cash and receive a distribution of New
Convertible Notes pursuant to Section 3.1 of the Plan), and (y) the holders
of Roll Up Loan Claims pursuant to Section 5.3(a)(ii) of the Plan; and (ii)
the Class 6B New Common Stock Distribution (including any New
Common Stock issuable upon exercise of the New Warrants).
(Plan at 28–29 (within table of class descriptions).) The proposed distribution to Class 6B would
cover 80.7% of that class’s current estimated amount of claims of $305,000,000. (Id.)
E. Plan Solicitation and Voting Results
Following entry of the Disclosure Statement Order on July 18, 2019, the Debtors began
soliciting votes on the Plan. Specifically, the Debtors transmitted: (a) written notice of (i) the
Court’s approval of the Disclosure Statement, (ii) the deadline for voting on the Plan, (iii) the
date of the Confirmation Hearing, and (iv) the deadline and procedures for filing objections to
confirmation of the Plan; (b) copies of the Plan and the Disclosure Statement on a USB flash
drive; and (c) the appropriate ballot and ballot return envelope. (See Disclosure Statement Order
¶ 3; ECF Docs. ## 211, 225 & 229 (affidavits of service).) Voting creditors had until August 15,
2019 at 4:00 p.m. (prevailing Eastern Time) to vote on the Plan (i.e., 28 days following the
solicitation mailing date).
In addition, as required by the Disclosure Statement Order, the Debtors transmitted to
each member of Class 1 (Priority Non-Tax Claims), Class 2 (Other Secured Claims), Class 5
(Government Settlement Claims), Class 6A (Ongoing Trade Claims), Class 7 (Existing
Securities Law Claims) and Class 8 (Existing Interests) a notice indicating that such person was
not entitled to vote on the Plan, as applicable, on account of such person’s Claims or
Interests. (See Disclosure Statement Order ¶ 4; ECF Docs. ## 211, 225 & 229 (affidavits of
service).)
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Following these solicitations, the Debtors received acceptance of the Plan from all three
voting classes. (See Voting Declaration, Ex. A at 6 (tabulation summary chart).) A summary of
the voting results is: (1) Class 3 (Bridge Loan Claims) voted by 100% in amount and number of
claims to accept; (2) Class 4 (Novelion Intercompany Loan Claims) voted by 100% in amount
and number of claims to accept; and (3) Class 6B (Other General Unsecured Claims) voted by
98.77% in amount and 88.89% in number of claims to accept the plan. (Id.)
F. 	Beer Objection
Counsel for Marc Beer filed the Objection of Marc Beer to Confirmation of the Debtors’
First Amended Joint Chapter 11 Plan (“Beer Objection,” ECF Doc. #247) on August 22, 2019.
Several parties joined the Beer Objection. (ECF Docs. ## 248, 249, 253, 257.) By way of
background, Beer served as Chief Executive Officer of Aegerion from August 2010 until July
2015. In addition to the standard by-laws entitlement to the right of indemnification protecting
all of the officers and directors of Aegerion, Beer entered into a separate indemnification
agreement with Aegerion effective August 19, 2010. Aegerion indemnified Beer continuously
since 2013 and advanced his legal fees and expenses through December 31, 2018. (Beer
Objection ¶ 3.) Beer and other former officers and directors have incurred legal fees and
expenses in defending government investigations that resulted in the Class 5 Government
Settlement Claims that will be paid in full under the Plan. The investigations continue, however,
with respect to some or all of the former officers and directors so they are likely to continue to
incur legal fees and expenses.
Beer objects to the Plan’s creation of only two classes of general unsecured creditors’
claims—Class 6A (Ongoing Trade Creditors) and Class 6B (Other Unsecured Claims). Beer’s
claim and those of other former officers and directors were included in Class 6B Other
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Unsecured Creditors, along with all unsecured creditors other than the ongoing trade creditors.
Beer does not object to the separate classification of Class 6A (Ongoing Trade Creditors).
Rather, he and the other former officers and directors who joined Beer’s objection contend that
they should have been separately classified in a class of unsecured former employee claims
rather than lumped with all Other General Unsecured Claims. In other words, rather than
arguing that former directors and officers were improperly grouped with dissimilar claims, Beer
argues that there should have been an additional class that separately grouped claims even more
similar to his own. Beer contends that the failure to separately classify their claims fails to
satisfy sections 1129(a)(1) and 1129(a)(3). (Id. ¶ 11.)
First, the Beer Objection charges that the Plan improperly joins together remaining
unsecured claims in Class 6B, despite differences in the origin of the claims, legal entitlement to
recoveries against the Debtors, and ability for claim holders to negotiate their treatment prior to
the Debtors’ bankruptcy filing. (Id. ¶ 12.) The Beer Objection argues that the Plan is an
improper attempt to gerrymander acceptance of an impaired class, violating section 1122(a). (Id.
¶ 13.) The Beer Objection argues that Debtors failed to provide an explanation justifying the
separate classification of ongoing trade claims from other general unsecured claims, and then
grouping together all other general unsecured claims into a single class (Class 6B). (Id. ¶ 14.)
Beer charges that the consequence of the classification scheme is to disenfranchise Beer, other
former officers and directors, and holders of contract rejection damage claims. (Id. ¶ 16.)
Second, the Beer Objection argues that the Plan, by treating Beer’s unsecured claim less
favorably than Class 6A Ongoing Trade Claims, which will receive payment in full, in cash, plus
postpetition interest, violates the unfair discrimination and fair and equitable requirements of
section 1129(b)(1). That subsection, when it applies, requires that a plan “does not discriminate
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unfairly” and is “fair and equitable.” But those requirements only apply to creditors in a
rejecting class. Dissenting creditors in an accepting class are only protected by section
1129(a)(7)—the best interests test—which requires that dissenting creditors receive at least as
much as they would in a chapter 7 liquidation. No one argues that any creditors under the Plan
will receive less than they would in a chapter 7 liquidation, a point that the liquidation analysis
makes abundantly clear. If the former officers’ and directors’ claims were properly classified in
the class of Other Unsecured Creditors, Beer and the other former officers and directors who
voted against the Plan are dissenting members of the accepting Class 6B, and they gained no
protection from section 1129(b)(1).
Third, the Beer Objection argues that the Plan fails to satisfy section 1129(a)(1) because
it seeks to reject Beer’s indemnification agreement in violation of section 1123(b)(2). Beer
argues that his indemnification agreement is not an executory contract that can be rejected under
Section 365. (Id. ¶ 19.) The Beer Objection cites decisions holding that a contract containing an
indemnity provision is not executory if the indemnitee has fully performed the contract. (Id. ¶
22.) The Beer Objection argues that since the only performance remaining under Beer’s
indemnification agreement is the Debtors’ payments pursuant to that agreement, the agreement is
not-executory and, therefore, cannot be rejected under section 365. Beer argues that the Debtors
remain bound to their obligations in the indemnification agreement. Beer also filed a proof of
claim contending that the Debtors have breached the indemnity agreement. In re Nuverra Envtl.
Sols., Inc. (Id. ¶ 23.) The Court agrees with Beer that the indemnity agreement is not executory.
But that conclusion does not help Beer. Beer’s counsel agreed at the confirmation hearing that
whether the contract was executory or not was a difference without distinction. Though the
Debtors’ listed the contract as rejected, the outcome, nonetheless, as Debtors’ counsel
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acknowledged at the hearing, is that the Debtors breached the contract and, to the extent
necessary, Beer will be entitled to pursue his damages claim pursuant to state law as part of the
claims-allowance process. This may well prove to be an academic exercise, in any event, as the
Court has approved a stipulation, entered by the Debtors and the former officers and directors,
lifting the automatic stay to permit the D&O Insurance Carriers to reimburse the former officers’
and directors’ unpaid attorneys’ fees (the basis for their proofs of claim) in connection with those
individuals representation in ongoing governmental investigations. (ECF Doc. # 297.)
Approximately $12 million in D&O insurance coverage remains available, substantially
exceeding the current amount of unreimbursed legal fees and expenses.
Fourth, the Beer Objection argues that the Plan fails to satisfy section 1129(a)(3) because
it was not proposed in good faith. The Beer Objection contests that the Plan proposes to
reorganize the Debtors through a merger with Amyrt instead of an asset sale in part to relieve the
Debtors of indemnification obligations owed to Beer if there was an asset sale. (Id. ¶ 26-27.) In
sum, the Beer Objection finds that the Plan’s proposed merger, classification scheme and alleged
attempt to reject Beer’s indemnification agreement all evince the Debtors’ intent to “manipulate”
the Code’s voting and classification scheme. (Id. ¶ 28.)
Fifth, the Beer Objection argues that by including Beer as a “Releasing Party,” even
though he chose not to opt into the releases, the Plan’s release provisions are impermissibly
broad. (Id. ¶ 29.) In response to this objection, the Debtors amended the Plan provisions by
removing Beer (and the other former officers) as a Releasing Party. Beer’s counsel
acknowledged at the hearing that this change resolved this portion of the Beer Objection.
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II. 	LEGAL STANDARD
A. 11 U.S.C. § 1129(a)(1)
Section 1129(a)(1) of the Bankruptcy Code provides that a court may confirm a chapter
11 plan only if “[t]he plan complies with the applicable provisions of [the Bankruptcy Code].”
11 U.S.C. § 1129(a)(1). The phrase “applicable provisions” has been interpreted to include
sections 1122 and 1123 of the Bankruptcy Code, which govern the classification of claims and
interests and the contents of a chapter 11 plan. See Kane v. Johns-Manville Corp. (In re Johns-
Manville Corp.), 843 F.2d 636, 648-49 (2d Cir. 1988) (“Manville I”); In re Century Glove, Inc.,
No. 90-400-SLR, 1993 WL 239489, at *6 (D. Del. Feb. 10, 1993); H.R. Rep. No. 95-595, at 412
(1977) as reprinted in 1978 U.S.C.C.A.N. 5963, 6368; S. Rep. No. 95-989, at 126 (1978) as
reprinted in 1978 U.S.C.C.A.N. 5787, 5912.
Section 1122(a) of the Bankruptcy Code provides that a plan may place a claim or
interest in a particular class only if it is substantially similar to other claims or interests in the
class. See 11 U.S.C. § 1122(a). “Substantially similar” generally has been interpreted to mean
similar in legal character to other claims against a debtor’s assets or to other interests in a debtor.
See In re Drexel Burnham Lambert Grp., Inc., 138 B.R. 714, 715-716 (Bankr. S.D.N.Y. 1992)
order aff’d, 140 B.R. 347 (S.D.N.Y. 1992) (“Drexel Burnham Lambert I”); In re MCorp
Fin., Inc., 137 B.R. 219, 226 (Bankr. S.D. Tex. 1992), appeal dismissed, 139 B.R. 820 (S.D.
Tex. 1992).
“A debtor in bankruptcy has considerable discretion to classify claims and interests.” In
re Wabash Valley Power Ass’n, 72 F.3d 1305, 1321 (7th Cir. 1995); accord Aetna Cas. & Sur.
Co. v. Clerk, U.S. Bankr. Court (In re Chateaugay Corp.), 89 F.3d 942, 949-51 (2d Cir. 1996); In
re 500 Fifth Ave. Assocs., 148 B.R. 1010, 1018 (Bankr. S.D.N.Y. 1993). Section 1122(a) of the
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Bankruptcy Code does “not require that similar classes be grouped together, but merely that any
group be homogenous.” Drexel Burnham Lambert I, 138 B.R. at 715; see also In re Boston Post
Rd., L.P., 21 F.3d 477, 483 (2d Cir. 1994) (allowing classification of claims of same rank in
different classes); In re Source Enters., Inc., 392 B.R. 541, 556 (S.D.N.Y. 2008) (same); In re
Ionosphere Clubs, Inc., 98 B.R. 174, 177–78 (Bankr. S.D.N.Y. 1989) (same). Thus, section
1122 of the Bankruptcy Code provides a debtor with a great degree of flexibility to create
classification schemes that will facilitate its chapter 11 plan.
This case is a far cry from cases such as Phoenix Mutual Life Ins. Co. v. Greystone III
Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274 (5th Cir. 1991), where the court
rejected a plan that separately classified a secured creditor’s large unsecured deficiency claim
from a small class of unsecured trade creditors. The plan did so in order to obtain an accepting
impaired class allowing confirmation of the plan by cramming down the plan on rejecting class
with the unsecured deficiency claim. Indeed, the prototypical case for rejecting classification
because of gerrymandering is a single asset real estate case, with a large unsecured deficiency
claim that would otherwise outvote (and prevent confirmation) in a case with a small accepting
class of unsecured trade creditors. Here, separate classification of ongoing trade creditors and
other unsecured creditors is supported by evidence (which the Court finds persuasive) that the
Debtors had good business reasons for the separate classification. See, e.g., Teamsters Nat’l
Freight Indus. Negotiating Comm. v. U.S. Truck Co. (In re U.S. Truck Co.), 800 F.2d 581 (6th
Cir. 1986).
B. 11 U.S.C. § 1129(b)(1)
Section 1129(b)(1) of the Code provides:
Notwithstanding section 510(a) of this title, if all of the applicable
requirements of subsection (a) of this section other than paragraph (8) are
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met with respect to a plan, the court, on request of the proponent of the plan,
shall confirm the plan notwithstanding the requirements of such paragraph
if the plan does not discriminate unfairly, and is fair and equitable, with
respect to each class of claims or interests that is impaired under, and has
not accepted, the plan.
11 U.S.C. § 1129(b)(1). Section 1129(b)(1) is applicable in cases where a debtor seeks to
confirm a plan over a dissenting class of creditors—in bankruptcy jargon, a cramdown. In cases
where there is a voting class of creditors that has rejected the plan, this section of the Bankruptcy
Code provides extra protection for the “crammed-down” class of creditors by requiring that the
plan’s proponent prove that, as to the rejecting class, the plan is both fair and equitable and does
not discriminate unfairly. See 7 COLLIER ON BANKRUPTCY ¶ 1129.03.
C. 11 U.S.C. § 1129(a)(7)—the “Best Interest” Test
Section 1129(a)(7), colloquially referred to as the Best Interest Test, provides that:
With respect to each impaired class of claims or interests—
(A) each holder of a claim or interest of such class—
(i) has accepted the plan; or
(ii) will receive or retain under the plan on account of such claim or
interest property of a value, as of the effective date of the plan, that
is not less than the amount that such holder would so receive or
retain if the debtor were liquidated under chapter 7 of this title on
such date; or
(B) if section 1111(b)(2) of this title applies to the claims of such class, each
holder of a claim of such class will receive or retain under the plan on
account of such claim property of a value, as of the effective date of the
plan, that is not less than the value of such holder’s interest in the estate’s
interest in the property that secures such claims.
11 U.S.C. § 1129(a)(7).
III. 	DISCUSSION
The Court concludes that Beer’s first objection, namely that the Debtors impermissibly
separately classified Class 6A Ongoing Trade Claims and Class 6B Other General Unsecured
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Claims, is without merit. (See Beer Objection ¶ 14.) Caselaw is clear that “[a] debtor in
bankruptcy has considerable discretion to classify claims and interests in a chapter 11
reorganization plan.” Wabash Valley Power Ass’n, 72 F.3d 1305, 1321 (7th Cir. 1995); accord
In re Chateaugay Corp., 89 F.3d at 949-51.
Further, courts have confirmed plans that separately classify trade creditors and other
general unsecured creditors where, as is the case here, trade creditors are vital to the debtors’
ongoing, post-emergence business. See, e.g., Hargreaves v. Nuverra Envtl. Sols., Inc. (In re
Nuverra Envtl. Sols., Inc.), No. 17-10949 (KJC), 2017 WL 3326453 (D. Del. Aug. 3, 2017)
(confirming plan that separately classified trade creditors from holders of unsecured notes, the
court rejected classification objection because trade creditors were critical to success of
reorganized debtors); Polite Enters. Corp. Pty Ltd. v. N. Am. Safety Prods., Inc., No. 13-cv-
01089, 2014 WL 321668, at *5 (N.D. Ill. Jan. 29, 2014) (affirming bankruptcy court’s
confirmation of plan that separately classified ongoing trade claims). Indeed, it is common for
plans to propose “better” treatment of ongoing trade creditors, paying their claims in cash, in full,
while other classes of unsecured creditors receive different forms of consideration and are not
paid in full. As long as the other classes of unsecured creditors vote in favor of the plan, the
ongoing trade creditors may receive better treatment, and the plan can be approved. While
Beer’s counsel cross examined Castellano on the validity of the separation of trade creditors
from other unsecured creditors in this case, the Court was unpersuaded. Castellano provided
compelling reasons for classifying all ongoing trade claims in a separate class from other general
unsecured creditors. The evidence establishes that the ongoing trade creditors will continue to
have important relationships with the reorganized debtors; the other unsecured creditors will not.
Castellano testified, and the Court credits his testimony, that the reorganized debtors’ reputation
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in the marketplace will be harmed if it does not provide the enhanced treatment to the Class 6A
creditors. The Debtors were not required to cherry pick among the Class 6A creditors and treat
some better than others. The standard for including creditors in Class 6A is not the same as the
standard for approving critical vendor payments to some select prepetition creditors before
confirmation of a plan. The group of ongoing trade creditors without executory contracts that
will be assumed was estimated at the hearing to be approximately $650,000 out of the entire
class of ongoing trade creditors totaling approximately $12 million. Good business reasons were
given for not treating the small group of ongoing trade creditors that do not have executory
contracts differently from the rest of Class 6A. Here, Class 6B creditors voted overwhelmingly
to approve the Plan that provided better treatment for Class 6A Ongoing Trade Creditors. Where
a debtor can be rehabilitated and continue as a going concern, there is greater value available for
creditor recoveries. Maintaining credibility in the marketplace and continuing important ongoing
trade relationships can be essential to a successful reorganization and support the business
judgment for better treatment for ongoing trade creditors. The evidence at the confirmation
hearing supports that conclusion here.
The Beer Objection complains that the cash payment in full to the Class 6A Trade
Creditors, while Class B creditors are paid notes and stock, results in unfair discrimination and is
not fair and equitable under section 1129(b)(1).2 “Unfair discrimination” and “fair and
2 	The Amended Plan provides the following treatment for Ongoing Trade Claims:
5.6. Ongoing Trade Claims (Class 6A).
(a) Treatment: Except to the extent that a holder of an Allowed Ongoing Trade Claim
agrees to a different treatment, on the applicable Distribution Date each holder of an
Allowed Ongoing Trade Claim shall, at the election of the Reorganized Debtors, and to the
extent that such Allowed Ongoing Trade Claim was not previously paid pursuant to an
order of the Bankruptcy Court: (i) be paid in full in Cash on the applicable Distribution
Date, plus postpetition interest at the Applicable Interest Rate, computed daily from the
Petition Date through the Effective Date, from Plan Cash, (ii) as to any Ongoing Trade
Claim incurred in the ordinary course of business and on normal credit terms where
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equitable” requirements of that section apply “with respect to each class of claims or interests
that is impaired, and has not accepted, the plan.” (Emphasis added.) Here, of course, the
impaired class in which the former officers and directors have been placed has accepted the plan,
so section 1129(b)(1) does not apply. Dissenting members of the accepting class (Class 6B) are
protected by section 1129(a)(7)(A)(ii)—the “best interests” test—which assures that dissenting
creditors in an accepting impaired class receive value, as of the effective date of the plan, “not
less than the amount that such holder would so receive or retain if the debtor were liquidated
under chapter 7 of this title on such date . . . .” No creditors have objected that the best interests
test is not satisfied. The Court finds that all creditors will receive at least as much as they would
receive in a chapter 7 liquidation.
The Beer Objection cites In re Young Broad. Inc., 430 B.R. 99 (Bankr. S.D.N.Y. 2010),
in support of their objection that the Plan violates section 1129(b)(1). In Young, Judge Gonzalez
explained:
Under 1129(b)(1), a plan unfairly discriminates when it treats
similarly situated classes differently without a reasonable basis for
the disparate treatment. See Johns–Manville, 68 B.R. at 636; In re
Pine 	Lake 	Village 	Apartment 	Co., 	19 	B.R. 	819, 	829–30
(Bankr.S.D.N.Y.1982). Where, however, a reasonable basis for the
disparate treatment of two classes of similarly situated creditors
exists, there is no unfair discrimination. See In re WorldCom, Inc.,
No. 02–13533(AJG), 2003 WL 23861928, at *59 (Bankr. S.D.N.Y.
Oct.31, 2003).
payment comes due following the Effective Date, receive such treatment that leaves
unaltered the legal, equitable, or contractual rights to which the holder of such Allowed
Ongoing Trade Claim is entitled, or (iii) such other treatment that would render such
Ongoing Trade Claim Unimpaired.
(b) Voting: The Allowed Ongoing Trade (b) Claims are Unimpaired Claims. In accordance
with section 1126(f) of the Bankruptcy Code, the holders of Allowed Ongoing Trade
Claims are conclusively presumed to accept this Plan and are not entitled to vote to accept
or reject the Plan, and the votes of such holders will not be solicited with respect to such
Allowed Ongoing Trade Claims.
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Id. at 139–40.
The Beer Objection also cites In re Johns-Manville Corp, 68 B.R. 618 (Bankr. S.D.N.Y.
1986). In that opinion, Judge Lifland explained:
The language and legislative history of the statute provides little
guidance in applying the “unfair discrimination” standard of §
1129(b)(1). 	Generally speaking, this standard ensures that a
dissenting class will receive relative value equal to the value given
to all other similarly situated classes. 	Weintraub and Resnick,
Bankruptcy Law Manual, ¶ 8.23[3] at p. 8–109–110 (revised ed.
1986); Klee, “All You Ever Wanted to Know About Cram Down
Under the New Bankruptcy Code,” 53 Am.Bankr.L.J. 133, 142
(1979). Thus a plan proponent may not segregate two similar claims
or groups of claims into separate classes and provide disparate
treatment for those classes. 	See, e.g. In re Pine Lake Village
Apartment Co., 19 B.R. 819 (Bankr.S.D.N.Y.1982); compare In re
Jartran, 	Inc., 	44 	B.R. 	331 	(Bankr.N.D.Ill.1984) 	(no 	unfair
discrimination where separate classes receiving disparate treatment
do not have comparable claims.).
In re Johns-Manville Corp., 68 B.R. 618, 636 (Bankr. S.D.N.Y. 1986), aff’d sub nom. In re
Johns-Manville Corp., 78 B.R. 407 (S.D.N.Y. 1987), aff’d sub nom. Kane v. Johns-Manville
Corp., 843 F.2d 636 (2d Cir. 1988).
While the language quoted from Young does not make the point clearly that the “unfair
discrimination” and “fair and equitable” tests only apply for distributions to a class that has not
accepted the plan, Johns-Manville, on the other hand, makes the point clearly: the “standard
ensures that a dissenting class will receive relative value equal to the value given to all other
similarly situated classes.” Id. Both Young and Johns-Manville involved the issue of the
treatment of creditors in a non-accepting class. Here, the former officers and directors are part of
an accepting class. The language of section 1129(b)(1) controls so those two tests cannot be
imported to dissenting members of an accepting class.
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The point is that Class 6B is not a dissenting class. Therefore, if the best interests test is
satisfied, as the Court finds it is, dissenting members of Class 6B cannot complain about the
treatment for creditors in Class 6A.3
The Court rejects the Beer Objection’s next argument that the Debtors incorrectly
classified dissimilar claims together in Class 6B (i.e., combining former D&O claims with the
Convertible Notes Claims) in order to “gerrymander” an impaired accepting Class to be
unfounded. In this case, the Debtors’ two other impaired Classes (Classes 3 and 4) unanimously
voted to accept the Plan. Further, the Beer Objection suggests that the Debtors should have
created a separate class comprised exclusively of claims of former directors and officers and that
after such class rejected the Plan,4 the Debtors would be unable to satisfy cramdown without
providing payments in full in cash for this new class of unsecured creditors similar to the
treatment provided to the Class 6A creditors. Courts have rejected “unfair discrimination”
arguments in cases where trade creditors are treated better than other unsecured classes that have
rejected a plan. See In re Nuverra Envtl. Sols., Inc., 2017 WL 3326453 (rejecting creditor’s
objection to separate classification because (i) creditor was indisputably out of the money and
not otherwise entitled to any distribution under the Bankruptcy Code, and (ii) separate
classification and disparate treatment of trade claims fostered debtors’ reorganization); Journal
3 	Case law is unclear whether unsecured creditors must receive postpetition interest (in addition to the
principal amount of their claims), and if so at what interest rate, in order to be considered “unimpaired” under the
Code. See Ultra Petroleum Corp. v. Ad Hoc Com. Of Unsecured Creditors (In re Ultra Petroleum Corp.), 913 F.3d
533 (5th Cir. 2019). If postpetition interest was not required to make a class of unsecured creditors “unimpaired,”
then Class 6A could arguably be receiving more than the amount necessary to make them whole. If this were the
case, a class deemed to have rejected the plan, such as equity interests, could object that the plan is not fair and
equitable. That said, no objections have been raised in this case on this point and any postpetition interest to be paid
to the ongoing trade creditors without executory contracts will be minimal compared to the haircut that Class 6B is
receiving. Thus, equity would not be better off if postpetition interest was not paid to Class 6A so there is no unfair
discrimination.
4 	Mr. Beer’s hypothetical result—and baseless assertion that the Debtors are seeking to “disenfranchise”
former director and officers—is undermined by the fact that most former directors and officers in Class 6B abstained
from voting and, in fact, one former officer voted in favor of the Plan. (See Voting Declaration, Exhibit A.)
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Register, 407 B.R. at 532 n.6 (noting that any alleged unfair discrimination under the plan was
reasonable in light of substantial evidence submitted why trade creditors (whose good will was
essential to postconfirmation success of debtors’ business) were favored over other unsecured
creditors); In re Rexford Props. LLC, 558 B.R. 352, 366 (Bankr. C.D. Cal. 2016) (allowing
disparate treatment of certain unsecured creditors because a legitimate business justification
existed, and decision was made “in a manner reasonably calculated to induce those vendors to
continue supporting [debtor] following confirmation of a plan”).
IV. 	CONCLUSION
For the foregoing reasons, the Court has concluded that the Plan complies with all
requirements for confirmation in the Bankruptcy Code, the Bankruptcy Rules, and other
applicable law. As such, the Beer Objection is overruled, and the Plan is confirmed. A separate
Confirmation Order will be entered.
Dated: 	September 10, 2019
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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