In re Genco Shipping & Trading Ltd.

United States Bankruptcy Court for the Southern District of New York · Corporations

CorporationsBankruptcyChapter 11Executory contractsPrepackaged plansRSArestructuring support agreementSection 365

Facts

Genco operated a large drybulk shipping business and had a highly leveraged capital structure with over $1.3 billion in secured debt and $125 million in unsecured convertible notes. Before the petition date, the Debtors entered into an RSA with overwhelming support from secured lenders and a large majority of noteholders, establishing a prepackaged restructuring that would convert about $1.2 billion of debt to equity, provide $100 million in new money through a fully backstopped rights offering, leave trade creditors unimpaired, and give some recovery to existing equity through warrants. The RSA required the Debtors to support the restructuring but included a fiduciary out allowing them to receive and negotiate unsolicited alternative transactions. If the Debtors terminated the RSA to pursue an alternative transaction that was later consummated, they would have to pay supporting 2007 facility lenders and noteholders a $26.5 million termination fee plus expenses as an administrative expense.

Issue

Whether the Debtors could assume the RSA under Section 365 as a valid exercise of business judgment, and whether the RSA's $26.5 million termination fee was permissible under the applicable business judgment framework. The court also considered whether the objections based on speed, equity value, and lack of irreparable harm prevented approval.

Rule

Under Section 365, a debtor may assume an executory contract if assumption will benefit the estate and reflects sound business judgment, and courts generally defer to the debtor's judgment absent a sufficient basis to overcome that presumption. For use of estate property outside the ordinary course under Section 363, the same business judgment standard applies; where a fee resembles a break-up fee, courts may ask whether the negotiation was tainted by self-dealing or manipulation, whether the fee hampers rather than encourages superior proposals, and whether the amount is unreasonable relative to the value of the overall transaction. A motion to assume is a summary proceeding, not the forum for litigating plan confirmation issues.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

A freight carrier based in Baltimore files a prepackaged Chapter 11 case and moves to assume a restructuring support agreement with most of its secured lenders and noteholders. The agreement converts a large block of debt to equity, includes a fully backstopped new-money infusion, preserves payment of trade creditors, and permits the company to receive and negotiate unsolicited superior proposals.

How should the bankruptcy court most likely rule on the motion to assume the agreement?

Explanation. Under the majority opinion, an executory agreement may be assumed under Section 365 if assumption will benefit the estate and is a sound exercise of business judgment. Courts generally defer to that judgment absent a sufficient basis to overcome the presumption of validity. A consensual restructuring that deleverages the company, adds liquidity, protects trade creditors, and preserves a fiduciary out for unsolicited alternatives fits that standard. Approval of the agreement does not require full adjudication of plan confirmation issues. (Derived from In re Genco Shipping & Trading Ltd. (n.d.).)