In Confirming Indianapolis Downs Chapter 11 Plan, Delaware Bankruptcy Court Provides Guidance On Permissibility Of Binding Plan Support Agreements

On January 31, 2013, the United States Bankruptcy Court for the District of Delaware (the court) upheld a post-petition "lock-up" agreement in approving confirmation of the proposed plan in In re Indianapolis Downs, LLC, 2013 Bankr. LEXIS 384 (Bankr. D. Del. Jan. 31, 2013) (Indy Downs). In issuing its ruling, the court provided significant new guidance on how the court will scrutinize the propriety of these increasingly common agreements.

A lock-up agreement, which is also commonly known as a plan support agreement, is an agreement between a creditor and debtor, pursuant to which the creditor becomes bound to vote for a plan as long as certain key plan provisions are included in the proposed plan. Through the plan support agreement, the parties bind one another to a deal, even though the underlying plan and disclosure statement remain to be drafted and executed.

In Indy Downs, the debtors and certain key creditors engaged in extensive negotiations and achieved agreement on an approach to the debtors' reorganization. The terms of that agreement were memorialized in a plan support agreement, which provided for: (i) specific terms of the plan of reorganization to be proposed; (ii) the requisite timeframe for the debtors to propose the plan; (iii) a prohibition against any party to the agreement proposing, supporting, or voting for a competing plan of reorganization; and (iv) the requirement, enforceable by an order of specific performance, that the signatories to the plan support agreement vote for the plan. Under its terms, the plan support agreement was binding upon its non-debtor signatories upon execution and binding upon the debtors only upon approval of a disclosure statement.

A conforming plan of reorganization was filed and thereafter approved by the majority of the creditors and stakeholders of the debtors' estates. However, certain parties objected to plan confirmation and filed a motion to designate the claims of the parties to the plan support agreement pursuant to Section 1126 of the Bankruptcy Code, which allows the court to designate the votes of any entity whose acceptance or rejection of a plan was not solicited in accordance with the provisions of the Bankruptcy Code. In so moving, the objecting parties argued that the plan support agreement constituted an impermissible post-petition solicitation of votes prior to court approval of a disclosure statement, in violation of Section 1125 of the Bankruptcy Code. The significance...