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How Unsecured Creditors can Benefit from the Stabilizing Effect of Chapter 11

Financial Restructuring and Bankruptcy Alert | March 20, 2015
By: Earl M. Forte

The United States Bankruptcy Court for the District of Delaware has approved a bankruptcy reorganization plan that will pay general unsecured creditors of the Debtor, Phoenix Payment Systems, Inc. (“Phoenix”), 100% of their allowed claims filed in the case. The plan of reorganization was co-sponsored by Phoenix and its Official Committee of Unsecured Creditors. The highly successful plan, approved by Delaware bankruptcy Judge Mary F. Walrath on March 10, 2015, was the culmination of a $50 million sale of Phoenix’s assets that closed in October 2014, a deal that M&A Advisor named the 2014 Distressed M&A Deal of the Year in the $25 million to $100 million category.

In May 2012, Phoenix had defaulted on its agreements with its secured lender. After forbearance agreements, Phoenix hired investment banker Raymond James & Associates, Inc. to advise on strategic options. After several rounds of bidding in May and June of 2014, Phoenix signed a Stalking Horse Agreement with North American Bancard, LLC (“NAB”) for a sale of its assets. This gave Phoenix a firm commitment not subject to financing or due diligence contingencies, thereby providing Phoenix with a floor against other bids through a bankruptcy auction. An Asset Purchase Agreement was signed with an affiliate of NAB on July 31, 2014. Phoenix filed its bankruptcy petition on August 4, 2014, deal in hand, and rapidly obtained bankruptcy court approval of debtor-in-possession financing and the proposed bidding procedures. While three objections were received to Phoenix’s bidding procedures motion, two were resolved and one was left for future resolution. On September 23, 2014, the bankruptcy court approved the sale to NAB, which closed on October 23, 2014. The approximate $50 million raised from the sale of assets to NAB funded Phoenix’s Chapter 11 plan and payment to unsecured creditors on the full amount of their allowed claims.

The Phoenix case is a great example of how unsecured creditors can benefit from the stabilizing effect of a Chapter 11 filing through an improved sale environment conducted under court supervision, with a free and clear purchase of distressed assets. Three main takeaways from this case for unsecured creditors are:

  • an anticipated bankruptcy filing by a company can often have a stabilizing effect on the company and increase its ability to consummate a transaction that will bring enhanced value to creditors, due to the protective nature of the bankruptcy process;
  • many bankruptcy courts have become increasingly sensitized to the need to show financial success in the cases before them; and,
  • the draining expense of litigation in bankruptcy matters can be minimized or even avoided if all creditor constituencies are determined to have a case that is very successful for creditors.

White and Williams acted as Delaware counsel to the Official Committee of Unsecured Creditors in the Phoenix case M&A deal as well as the bankruptcy proceedings. For further information or advice, please contact Earl Forte (215.864.6822fortee@whiteandwilliams.com) or Marc Casarino (302.467.4520; casarinom@whiteandwilliams.com). 

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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