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Postpetition Plan Support Agreements
The propriety of postpetition plan support agreements (aka 'lockup' agreements) has been the subject of considerable controversy since 2002 when Judge Mary Walrath of the U.S. Bankruptcy Court for the District of Delaware issued two unreported decisions announcing a 'bright-line' rule that such agreements are 'solicitations' within the meaning of ' 1125(b) of the Bankruptcy Code. In light of these rulings, parties seeking to memorialize a heavily negotiated consensus to support confirmation of a plan of reorganization have run the risk that any such consensus that is reduced to writing could be deemed a violation of ' 1125(b) unless it was accompanied by a prior court-approved disclosure statement. Furthermore, parties to such agreements also faced the significant risk that they could be disenfranchised from the Chapter 11 process through designation of their votes regarding the plan that they have agreed to support.
Critics argued that these decisions adopted an unnecessarily rigid 'bright-line' rule that undermined the essential negotiated process that is at the heart of Chapter 11 reorganizations. See Flaschen ED: Goodbye, Wilmington. Daily Deal, Jan. 15, 2003; Keach RJ: A Hole in the Glove: Why 'Negotiation' Should Trump 'Solicitation.' Am Bankr Inst. J., June 2003, at 22; Rapisardi JJ, Douglas MG: Lockup Lockout?, Daily Deal, Jan. 7, 2003, at 7; see also Brennan T: Locking Up Lock-ups. The Deal.com (Apr. 30, 2003); DeFranceschi DJ: Delaware Bankruptcy Court Announces Bright-line Rule for Use of Lock-up Agreements in Chapter 11 Cases. Am Bankr. Inst. J., Feb. 2003; Novikoff HS, Polebaum BM: Lock-Up Agreements in Chapter 11 Cases. (July 14, 2003) (unpublished ALI-ABA course materials). In a new 2006 unreported decision, Judge Judith K. Fitzgerald, a visiting judge of the Delaware Bankruptcy Court, concluded that postpetition plan support agreements are not 'solicitations' for purposes of ' 1125(b), signaling a possible shift away from the rigid test applied in 2002. This article discusses this notable development.
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