Restructuring Support Agreements

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The history of bankruptcy practice in the Bankruptcy Code era,[1] 1979 to present, has been one of eliminating chance and uncertainty. This has been accomplished by consolidating jurisdiction of most meaningful matters in a few chosen jurisdictions and by generally transforming the practice from one in which debtors and creditors regularly litigated their differences to one in which the bankruptcy court has become the chosen forum for an agreed upon consensual treatment of debt. This evolution has changed the practice from a litigation-based practice to a transaction-based practice. The previously “extraordinary” relief of selling all of the assets of the debtor at the very outset of the case has become the “ordinary” course for many Chapter 11 proceedings.

An important tool for controlling the process is the Restructuring Support Agreement or Plan Support Agreement (“RSA”).[2] These agreements are written contracts usually between the debtor and one or more creditors (or representative trustees or ad hoc committees), that set forth an agreed upon framework for the treatment of debt and a timeline for accomplishing the reorganization. While the agreements can, subject to the approval of the bankruptcy court, be entered into after the commencement of the case, they are most useful when deployed prior to the case commencement. The agreements generally differ from the more formal “pre-packaged” bankruptcy process or “prepack,” the form of which is incorporated within the Bankruptcy Code by allowing for the pre-filing preparation of a plan of reorganization and disclosure statement.[3] The RSA is a tool that can play an important part of the more common and efficient “pre negotiated” bankruptcy process that may or not provide for the filing of a plan of reorganization. The RSA allows the parties involved to negotiate and agree upon the terms of the treatment of claims and the course of the bankruptcy process before the commencement of the case and to memorialize those agreements in the form of a written agreement. The negotiation of the RSA goes far in reducing the uncertainty for both debtors and creditors with respect to the course of the bankruptcy proceeding.

Generally, the RSA will: a) state with particularity the agreed upon treatment of the claims of the creditor signatories to the agreement (and may also include commitments to debtor in possession financing and the proposed treatment of non-signatories); b) incorporate creditor promises not to support other or alternative plans and the debtor promise not to propose alternative plans; c) establish deadlines for the operative elements of the agreed upon “plan” such as a deadline for filing a sale motion or a plan of reorganization; and d) permit termination of the agreement by parties usually based on failure to meet certain agreed upon deadlines (including the commencement of the bankruptcy case by a date certain).

The RSA almost always includes a so-called “fiduciary out”[4] which permits the debtor to refrain from taking any action (including those incorporated within the RSA) that would cause the debtor to “breach any fiduciary obligations they have under applicable law.”

The RSA benefits the debtor by committing creditors and others to a plan of action within the context of the bankruptcy case and reducing uncertainty about how they will respond to the debtor’s reorganization proposals. It allows the debtor to negotiate with key creditors without the pressure and attendant oversight implicated once a bankruptcy case is commenced.

Creditors who are parties to the RSA benefit from the agreed upon “plan” being established prior to the commencement of the case and from an agreed upon calendar for events to take place within the case and a deadline for the commencement of the case itself. The RSA reduces uncertainty about what the debtor will or will not do once the bankruptcy case has been filed.

For both debtors and creditors, the RSA will likely result in a Chapter 11 process that is more efficient and less costly than one in which the parties resolve their differences through an adversarial process in front of the bankruptcy court. In reducing uncertainty about the path of the bankruptcy case, the RSA also permits the debtor and creditors who are parties to the RSA to assure internal and external constituents about the most likely path of the case.

Once the RSA is executed, some parties may have securities law obligations to publish the agreement. Baring that pre-filing occurrence, the RSA (or a description of its terms) will usually become public at the time of the commencement of the case consistent with the debtor’s obligations to disclose material facts to the court and others.

The debtor may also at the time of the commencement of the case seek to “assume” the RSA as an executory contract, but this is not always the case. Creditors who find themselves on the outside of the RSA can seek to challenge any assumption of the RSA or to press the issue of the debtor’s fiduciary out. The RSA binds particular parties to a course of action, however, ultimately the Bankruptcy Court retains control of the process and the decisions to enter or not enter the various orders necessary to the reorganization. The bankruptcy process though favors consensus and the RSA goes far in promoting that goal.

The RSA is an important and useful tool for all parties to the reorganization process and in larger cases should be strongly considered in any planned bankruptcy filing.


[1] The current Bankruptcy Code was enacted in 1978 by § 101 of the Bankruptcy Reform Act of 1978 (Pub.L. 95–598, 92 Stat. 2549, November 6, 1978), while there have been many subsequent amendments and some challenges, see Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed.2d 598 (1982), the process which governs the self-directed reorganization process for business, “Chapter 11”, has followed a common scheme since the 1978 Act went into effect in 1979.

[2] See generally, Douglas G. Baird, Bankruptcy's Quiet Revolution, 91 AM. BANKR. L. J. 593, 598 (2017)

[3] See 11 USC § 1126(b) and Bankruptcy Rule 3018.

[4] See, In re Genco Shipping & Trading Ltd., 509 B.R. 455, 464 (Bankr. S.D.N.Y. 2014)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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