By Rama Douglas (Kramer Levin Naftalis & Frankel LLP)
In Hargreaves v. Nuverra Environmental Solutions Inc. (In re Nuverra Environmental Solutions Inc.), 17-1024 (D. Del. Aug. 21, 2018), a Delaware district court upheld a bankruptcy court’s ruling that the secured creditors’ “gift” of cash and stock to holders of unsecured claims pursuant to a Chapter 11 plan did not violate the confirmation standards for approving a plan under Chapter 11, even though certain classes of unsecured claims (trade and business-related unsecured claims) received larger distributions from the gift than another class of unsecured claims (noteholders). The decision focuses on the permissible effect of “horizontal” gifting whereby the disparate treatment is among separate classes of the same priority level of creditors — here, separately classified general unsecured claims.
Debtors looking to pursue a reorganization may seek to provide a recovery to certain types of creditors (such as trade) within a class, but not others. Such discrimination is not permissible for value distributed by the debtor’s estate under a plan. Gifting has been a technique — subject to criticism (especially when class skipping is involved) — to provide disparate treatment. While the Third Circuit has not ruled on gifting, this latest Delaware district court decision supports the use of horizontal gifting. Such a decision will certainly be the focus of attention by supporters and critics of gifting.
The full article is available here.