Unsecured Creditors Represented in Constellation Enterprises Case

 

Norman Kinel

Norman Kinel

An attorney with Squire Patton Boggs, Norman Kinel has extensive experience in complex business bankruptcy cases involving chapter 11 filings.

In August 2017, Norman Kinel represented a committee of Constellation Enterprises LLC’s unsecured creditors in urging a federal appeals court judge to overturn a Bankruptcy Court decision denying approval of a settlement agreement negotiated by the creditors’ committee for the benefit of unsecured creditors.

The settlement was denied on the basis that it ran afoul of the U.S. Supreme Court’s recent decision in Czyzewski v. Jevic Holding Corp. The Committee argued, however, that the holding in Jevic did not apply to the facts presented in the Constellation case and thus should not have been relied upon as a basis for the decision. In particular, the Committee argued that there is no priority scheme within the Bankruptcy Code that governs the distribution of non-estate assets. In addition, unlike the Constellation case, Jevic had nothing to do with a third-party purchaser’s rights to contribute its own property or funds to other creditors.

The Committee further argued that the Bankruptcy Court had failed to apply the ruling in In re ICL Holding, a Third Circuit precedent that permitted a third-party to contribute non-estate property in connection with a settlement, even if the distributions to be made were not in strict accordance with the absolute priority rule.

Unfortunately, when the Constellation chapter 11 cases was converted to chapter 7, the Committee’s appeal was dismissed and certain noteholder parties to the settlement agreement, who were to have contributed substantial cash and other consideration to a trust to be established for the benefit of unsecured creditors, instead received a multi-million-dollar windfall, with unsecured creditors receiving no distribution.