Landis Rath & Cobb LLP is a premier boutique law firm concentrating on commercial bankruptcy, corporate restructuring and business litigation. We provide sophisticated legal advice and services to national, international and local clients in and out of federal and state courts. Our proven record of success is backed by a commitment to advocate for our clients' interests with personalized service and expert counsel.

Representative Matters

DBCI: Kim Brown on Bankruptcy Court Upholds the Sanctity of the Final Order

In the April 19, 2017 edition of the Delaware Business Court Insider, LRC associate Kim Brown writes on Bankruptcy Court Upholds the Sanctity of the Final Order.

Bankruptcy Court Upholds the Sanctity of the Final Order

By Kimberly A. Brown

In In re Paragon Offshore, PLC, Case No. 16-10386 (CSS) (Bankr. D. Del. Feb. 21, 2017) (“Paragon”), the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) denied the Official Committee of Unsecured Creditors’ (the “Creditors’ Committee”) of Paragon Offshore PLC and its affiliated debtors-in-possession (collectively, the “Debtors”) request to reconsider and modify a final cash collateral order of the Bankruptcy Court almost one (1) year after its entry.

The issue arose following the appointment of the Creditors’ Committee by the Office of the United States Trustee for the District of Delaware (the “U.S. Trustee”) nearly a year after the Debtors filed petitions for relief under Chapter 11 of Title 11 of the United States Code (as amended or modified, the “Bankruptcy Code”).  When the Debtors commenced their bankruptcy cases, they filed a “prepackaged” plan of reorganization that was supported by over two-thirds in amount of the Debtors’ unsecured noteholders (the “Noteholders”) and over two-thirds in outstanding principal amount of their secured revolving bank loans (as amended, the “Plan”).  Ultimately, the Bankruptcy Court denied confirmation of the Plan supported by the Noteholders.  After denial of such Plan, the Debtors proposed a further amended Plan that no longer enjoyed the Noteholders’ support.

At the time the Creditors’ Committee was formed, the claims of nearly all other unsecured creditors had been satisfied through various “first- and second-day” orders that had been entered by the Bankruptcy Court to prevent the Debtors from suffering irreparable harm and to ease their offshore drilling businesses’ transition into Chapter 11.  Of the three (3) members of the Creditors’ Committee – all of whom were Noteholders – two (2) had been actively involved in the Debtors’ restructuring efforts before the Chapter 11 cases were filed.

A week after its formation, the Creditors’ Committee filed a motion (the “Modification Motion”) seeking to modify the Bankruptcy Court’s final order authorizing, among other things, the Debtors to utilize the cash collateral of their prepetition secured creditors (the “Prepetition Secured Parties”) to finance their ongoing operations and restructuring efforts (as amended, the “Final Cash Collateral Order”).  Through the Modification Motion, the Creditors’ Committee requested, among other things, that the Bankruptcy Court “extend” the period to challenge the Prepetition Secured Parties’ liens and claims (the “Challenge Period”) – a deadline that had expired pursuant to its terms nearly a year prior – by forty-five (45) days and require up to $150,000 be made available to the Creditors’ Committee to conduct such investigation.

The Creditors’ Committee asserted that the Bankruptcy Court had the authority to grant the Modification Motion under rule 60(b)(6) of the Federal Rules of Civil Procedure (“Rule 60(b)(6)”), made applicable pursuant to rule 9024 of the Federal Rules of Bankruptcy Procedure, which provides that “[o]n motion and just terms, the court may relieve a party … from a final judgment, order or proceeding for…any other reason that justifies relief.”  The Creditors Committee argued that the circumstances of the Debtors’ bankruptcy cases – where an official committee was appointed nearly a year after the Final Cash Collateral Order was entered and the Debtors proposed a Plan that meaningfully implicated the Prepetition Secured Parties’ liens and claims – were the types of “extraordinary circumstances” Rule 60(b)(6) was designed to protect against.  Alternatively, the Creditors’ Committee asserted that the Bankruptcy Court could revisit the Final Cash Collateral Order pursuant to Bankruptcy Code section 105(a), which generally provides bankruptcy courts with independent authority to reconsider their own orders on equitable grounds.  The Creditors’ Committee argued that if the Modification Motion was not granted, it would be unable to properly discharge its statutory investigatory obligations in derogation of the Bankruptcy Code.

The Debtors and the Prepetition Secured Parties objected to the Modification Motion.  The Debtors asserted that any modification to the Final Cash Collateral Order without the consent of the Prepetition Secured Parties would trigger a termination of the Debtors’ authority to use cash collateral and, in turn, jeopardize their reorganization efforts.  The Prepetition Secured Parties argued that the Creditors’ Committee had made no showing that “extraordinary circumstances” existed that would warrant relief under Rule 60(b)(6) or Bankruptcy Code section 105(a), particularly in light of the Noteholders’ involvement throughout the bankruptcy cases including, among other things, expressly consenting to the terms of, and deadlines imposed under, the Final Cash Collateral Order.

In reaching its decision to deny the Modification Motion, the Bankruptcy Court stressed that parties in interest need to be able to rely on final orders of the court.  While acknowledging it has broad discretion to revisit its orders under Rule 60(b)(6), Bankruptcy Code section 105(a) and general equitable principles, the Bankruptcy Court warned that such discretion must be wielded “very carefully and very narrowly to ensure that parties who have relied upon agreements and rulings by the Court in final orders can do so [] fairly, they can take actions based on that reliance, and the case can move forward.”

Additionally, the Bankruptcy Court held that, to a certain extent, the history of these bankruptcy cases had to be laid at the feet of the Creditors’ Committee and its current membership.  While noting the Creditors’ Committee is an independent fiduciary to all unsecured creditors not bound by the prior actions of its individual members, the Bankruptcy Court found that the history of these bankruptcy cases could not be ignored.  The Bankruptcy Court noted that two (2) of the three (3) members of the Creditors’ Committee were on board with the strategy and trajectory of these bankruptcy cases before they were even filed.  These entities made fully informed, strategic, tactical decisions to support the Debtors’ prior Plan when there was always a risk that it would not be confirmed.  The Bankruptcy Court explained that, with full knowledge of the risks involved, the two (2) members of the Creditors’ Committee and their professionals made informed decisions (i) not to force the formation of an official committee, (ii) not to contest the Final Cash Collateral and (iii) to allow the Challenge Period to expire without seeking any extension thereof.  As such, the Bankruptcy Court concluded that the history of the Debtors’ bankruptcy cases did not support modifying the Final Cash Collateral Order and that the provisions of the Final Cash Collateral Order must be interpreted faithfully.  As a final point, the Bankruptcy Court noted that even if it were to look at the plain language of the Final Cash Collateral Order, the term “extension” does not mean “resuscitation.”  Thus, the Bankruptcy Court held that it did not have an inherent power under the express terms of the Final Cash Collateral Order to extend the Challenge period because that period had already expired.

Thus, based on the Bankruptcy Court’s ruling in Paragon, parties must be vigilant in preserving rights under orders issued by the Bankruptcy Court to account for all foreseeable outcomes because if a final order is entered that impairs any such rights, parties cannot later rely on Rule 60(b)(6), Bankruptcy Code section 105(a) or general equitable principles to revisit a final order of the Bankruptcy Court when circumstances change to the parties’ detriment.

Kimberly A. Brown is an associate at Landis Rath & Cobb LLP, a Wilmington, Delaware-based law firm concentrating in commercial bankruptcy, restructuring, creditor’s rights and business litigation.  She can be reached at 302.467.4436 or brown@lrclaw.com.

 Reprinted with permission from the April 19, 2017 issue of the Delaware Business Court Insider. © 2017 ALM Media Properties. Further duplication without permission is prohibited.