Editor's Note:This is a new column that will focus on issues that arise in pre-packaged cases. It will provide aforum for practitioners—who frequently rely on anecdotal experience rather than case law in this area—to share their experiences.

Practitioners planning to file a consensual chapter 11 proceeding (either as a pre-packaged or pre-arranged case) place their clients in a uniquely vulnerable situation. Of course, the benefits of filing a consensual case are well-known: certainty, speed and minimal impact on business operations, among others. There are, however, concomitant risks associated with such a strategic decision. Most obvious is the fact that the restructuring is public long before the company has the benefits and protections bestowed when a filing occurs. This period of active negotiations is particularly challenging, as inevitably, dissenters seek to exert influence over the process—influence that will likely dissipate upon a filing. Chief among the risks is an involuntary filing at a time and in a venue not determined by the company.

The recent decision In re NRG Energy Inc., 294 B.R. 71 (Bankr. D. Minn. 2003),² provides a road map for practitioners in developing a consensual plan while also minimizing the risk of an involuntary case. The NRG Energy court's decision to abstain from presiding over an involuntary case, even despite the absence of a formal pre-arranged or pre-packaged plan, demonstrates that proper case evaluation, planning and progress may forestall efforts by disgruntled creditors seeking to interfere with the preparations for a consensual restructuring.

In NRG Energy, former executives and officers of NRG Energy, a non-regulated power producer and marketing subsidiary of Xcel Energy Inc., filed an involuntary bankruptcy petition against NRG Energy and its subsidiaries on Nov. 22, 2002, pursuant to 11 U.S.C. §303(a).³ As terminated employees no longer receiving payments under various employment agreements and non-qualified benefit plans, the original petitioning creditors alleged NRG Energy "was not generally paying its debts as they became due."⁴ In response, NRG Energy filed an answer denying the allegations, stated affirmative defenses and contested petitioners' standing to commence the case.⁵ NRG Energy also included affirmative allegations that the original petitioners filed the involuntary petition in bad faith and may have received transfers avoidable under the Bankruptcy Code, and that the court should abstain from jurisdiction under 11 U.S.C. §305.⁶ Together with its answer, NRG Energy filed a motion pursuant to 11 U.S.C. §§305(a) and 303(j)⁷ seeking abstention and dismissal of the case.⁸

After several months of discovery and settlement negotiations, NRG Energy resolved its disputes with the original petitioning creditors, and the court conducted an evidentiary hearing on the abstention motion in April 2003. NRG Energy and the sole creditor in interest opposing the motion, Shaw Constructors Group,⁹ presented evidence at the hearing regarding NRG Energy's complicated debt structure and restructuring efforts to date. NRG Energy acknowledged direct and subsidiary debt obligations of more than $11 billion arranged in two tiers: (1) operating, revolving and note-holder obligations of NRG Energy totaling approximately $5 billion and (2) project finance bond issues and bank loans for NRG Energy-related subsidiaries of $5 billion to $6 billion. As the court noted, prior to the involuntary petition, NRG Energy had taken substantial steps toward achieving a consensual restructuring.¹⁰ In this respect, NRG Energy was already acting much like a debtor-in-possession. For example, NRG Energy had

identified several constituencies among its creditors, groups of them that had common interests under similar forms of financing or credit, and it enlisted members of these constituencies to form unofficial committees for the purposes of communication and negotiation. In addition, it prevailed on these committees to hire counsel, financial advisors and other professionals, and made their maintenance palatable by agreeing to pay the fees of such professionals "in most cases."¹¹

In the course of these negotiations, NRG Energy obtained general forbearances from its senior lenders in the form of "collateral call extension letters" that enabled it to "use revenues for the maintenance of current operations, rather than locking them into the illiquid form of supplementary collateral." Importantly, the court noted, "The consequence of this arrangement is that NRG has had the benefit of a general forbearance by its major lenders, under which none of them have taken any action that would affect any other's rights or those of the debtor."¹²

Develop a Case Plan

Recognizing its authority to abstain under 11 U.S.C. §305 based on the "interests of creditors and the debtor" as both "discretionary" and "extraordinary,"¹³ the court referred to such power as best exercised "by identifying the practical benefits to all constituencies of resolving a debtor's financial distress under the respective legal regimes and in their affiliated forums."¹⁴ Continuing, the court noted that "[s]ubstantial support by creditors for abstention and a non-bankruptcy process is an important factor in the analysis."¹⁵ Such a flexible standard and the implicit need for creditor support of a consensual restructuring emphasize the importance of case evaluation and planning. In arranging a company's pre-filing restructuring efforts, an advisor must chart a course and timeline that accounts for likely contingencies against the debtor, and act accordingly. NRG Energy succeeded in convincing the court to dismiss the involuntary petition because its progress toward a possible consensual filing accounted for its own interests as well as those of its senior creditors. Moreover, by obtaining forbearance agreements from its senior lenders while engaging in restructuring negotiations, NRG Energy positioned itself for other negotiations vis-à-vis its other creditors that it would otherwise not have been able to pay on a timely basis.

Identify Objectives, Initiate Restructuring Efforts and Make Tangible Progress

Tangible restructuring efforts may assist a debtor greatly in continuing a path of its own choosing. The NRG Energy court commented, "Clearly, the presentation of a pre-packaged plan in a bankruptcy case is the contingency against which NRG's bid for abstention must be evaluated."¹⁶ In reviewing this contingency, the court viewed favorably the efforts of NRG Energy to address its debt structure and exercised its discretion to abstain in deference to NRG Energy's objectives, stating "[t]he real question is whether NRG should be required to go forward in the confirmation process now in this case, at a time not quite of its own choosing, and before it has achieved a comfortable breadth of resolution and accord."¹⁷ The court relied heavily on evidence presented by NRG Energy of the time and expense associated with the initiation of formal proceedings under the Bankruptcy Code.¹⁸ The court noted the irony of an abstention motion: "NRG's management professes to be willing to leave its shelter under the bankruptcy jurisdiction, and to expose NRG to unrestrained creditor action, to avoid an immediate assumption of the transactional costs of a chapter 11 case."¹⁹

Account for the Interests of Creditors

While the NRG Energy court was deferential to the evidence presented by the alleged debtor as to its own objectives, the interests of creditors in general remained central to its decision to abstain.²⁰ The court noted, "[t]he question posed by this motion, then, is whether this outcome scenario, coupled with the prospect of a return to a chapter 11 on a voluntary basis at some future date, is more in the interests of creditors and NRG than leaving NRG in chapter 11 here, in this case."²¹ In considering the "interests of creditors and the debtor," the court observed that such interests coincide with the values of the Bankruptcy Code and:

include a level playing field among creditors similarly situated under non-bankruptcy law, in which no single one gets an undue advantage over others; an orderly administration of the value inherent in current assets or future revenue, and the preservation of as much of that value as possible during that administration; and the assurance of a responsible distribution to creditors, prioritized rateably in accordance with the expectancies each constituency properly had before the debtor's financial distress began.²²

NRG Energy's success in securing forbearance agreements from its senior lenders, as well as its ability to pay its trade-creditor obligations on a generally timely basis, may have been determinative in the court's review of the interests of creditors. NRG Energy's efforts as to both groups of creditors allowed the court to comment determinatively:

There is just too much in the record to indicate that progress in negotiations would be set back by days-to-weeks, were NRG locked into bankruptcy in this case. There is much more to establish that the transactional costs would be markedly greater than those for the completion of an out-of-court process, even were its results segued into a second chapter 11 case.²³

Additionally, the efforts directed to satisfying creditors were themselves a factor favoring abstention, "[b]eyond these specifics of cost in dollars, there is a more intangible aspect that goes to the efficacy of the process: the complex pace and momentum of settlement negotiations that are going on simultaneously on many different fronts, all focused back in on NRG directly or indirectly."²⁴ As noted by the court, "NRG has made substantial progress toward the milestones of a reorganization plan; it would not be starting from scratch in this case or [in another forum]."²⁵ Together, the decreased transactional costs associated with consensual negotiations²⁶ coupled with a demonstration that the interests of creditors were the focus of NRG Energy's general attention persuaded the court that the involuntary petition should be dismissed, even in the face of Shaw's arguments that dismissal would promote forum-shopping.²⁷

Conclusion

NRG Energy ultimately filed a non-consensual case in another forum. Such a filing, however, does not limit the broad application of NRG Energy. NRG Energy confirms several central tenets essential to planning and preparing a consensual case: (1) evaluate a client's debt structure and develop a case-management strategy well in advance of filing preparations; (2) obtain forbearance and financing arrangements sufficient for a debtor to pay debt obligations as they become due, and particularly debts to those not involved in the restructuring process; and (3) conduct meaningful restructuring negotiations, even to the point of bearing the associated costs. Such a course of action will optimize the likelihood (by managing associated risks) of a consensual restructuring even in the face of an involuntary petition.

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Footnotes

¹ Anup Sathy is a partner in the Chicago office of Kirkland & Ellis LLP in the Restructuring, Workout & Bankruptcy practice group. The author acknowledges the contributions of Thomas J. Augspurger in developing this article. Return to article

² Kirkland & Ellis LLP represented NRG Energy Inc. and its affiliates in the proceedings discussed in this article and in the proceedings now pending before the U.S. Bankruptcy Court for the Southern District of New York. Return to article

³ See, generally, 11 U.S.C. §303. Return to article

⁴ In re NRG Energy Inc., 294 B.R. 71, 73 (Bankr. D. Minn. 2003). Return to article

⁵ Section 303(d) specifies that "the debtor...may file an answer to a petition under this section." Return to article

⁶ NRG Energy, 294 B.R. at 73. Section 305(a) of the Bankruptcy Code provides:

(t)he court, after notice and a hearing, may dismiss a case under this title or may suspend all proceedings in a case under this title, at any time if—(1) the interests of creditors and the debtor would be better served by such dismissal or suspension.... Return to article

⁷ Section 303(j) provides that "[o]nly after notice to all creditors and a hearing may the court dismiss a petition filed under this section—(1) on the motion of a petitioner, (2) on consent of all petitioners and the debtor or (3) for want of prosecution." Return to article

⁸ NRG Energy moved in the alternative for a court order requiring the original petitioning creditors to post a bond pursuant to 11 U.S.C. §303(e) for amounts alleged due under §303(i). Return to article

⁹ In August 2002, Shaw sued NRG Energy and its subsidiary LSP-Pike Energy LLC, alleging breach of contract and other theories in the U.S. District Court for the Southern District of Mississippi. Return to article

¹⁰ NRG Energy, 294 B.R. at 71. Return to article

¹¹ NRG Energy, 294 B.R. at 76. Return to article

¹² NRG Energy, 294 B.R. at 77. Return to article

¹³ See NRG Energy, 294 B.R. at 80. Return to article

¹⁴ NRG Energy, 294 B.R. at 80, citing In re Spade, 269 B.R. 225, 227 (D. Colo. 2001). Additionally, the court noted that a seven-factor test has evolved over time in considering the application of the court's discretion:

1. the economy and efficiency of administration
2. the availability of another forum, or the actual pendency of an insolvency proceeding in one
3. the essentiality of federal jurisdiction to a just and equitable resolution
4. the availability of alternative means for an equitable distribution of assets and value
5. the lesser cost of a non-bankruptcy process that would serve all interests as well
6. the possibility that commencing administration in bankruptcy would duplicate previous effort toward a workout in a non-bankruptcy setting and
7. the purpose for which bankruptcy jurisdiction was sought by petitioners.

294. B.R. 80, citing In re Fax Station Inc., 118 B.R. 176, 177 ( Bankr. D. R.I. 1990). Return to article

¹⁵ NRG Energy, 294 B.R. at 81. Return to article

¹⁶ NRG Energy, 294 B.R. at 82. Return to article

¹⁷ NRG Energy, 294 B.R. at 82. Return to article

¹⁸ NRG Energy, 294 B.R. at 83-84. Return to article

¹⁹ NRG Energy, 294 B.R. at 83. Return to article

²⁰ Only Shaw presented evidence in opposition to the motion seeking abstention, and the absence of any evidence in objection from other creditors may have influenced the court's decision on this issue. 294 B.R. at 74-75. Return to article

²¹ NRG Energy, 294 B.R. at 83. Return to article

²² NRG Energy, 294 B.R. at 81 (citations omitted). Return to article

²³ NRG Energy, 294 B.R. at 85. Return to article

²⁴ NRG Energy, 294 B.R. at 85. Return to article

²⁵ NRG Energy, 294 B.R. at 83. Return to article

²⁶ The court observed:

The transactional costs—professional compensation, noticing expenses, the quarterly fee to the U.S. Trustee System Fund, among others—would be large. Many of them would be directly attributable to the presence in chapter 11, rather than to the general effort to adjust the terms of the debtor-creditor relationships.

NRG Energy, 294 B.R. at 83. Return to article

²⁷ NRG Energy, 294 B.R. at 85. The court noted:

If abstention is appropriate on the merits recognized by Congress, the result cannot be unseated by the prospect of a voluntary refiling for the very same relief in another forum. That has to be so [that] even if the successor forum turns out to be one to which a debtor is less "connected" in the maintenance of physical assets, the degree of local investment, the extent of creditor, management or employee presence locally, or any way other than the attenuated link of situs of incorporation.

Id. at 86-87. Return to article