Post-Petition Lock-Up Agreement Permitted By Del. Bankruptcy Court

Substantial increases in the cost of administering Chapter 11 cases over the years resulted in new strategies to advance more efficient restructurings. The negotiation of pre-packaged and pre-negotiated reorganization plans as part of prebankruptcy discussions among the various stakeholders is now commonplace. These restructuring dialogues are followed by Chapter 11 filings and the filing of plans of reorganization in the early stages of the case. Often, plan support agreements are executed by significant creditors involved in the negotiations. These agreements typically provide for the filing of a plan within a specified time, the treatment of the creditors' claims, and a commitment the creditors will support the plan when voting occurs and not support any competing plan.

Post-bankruptcy filing plan support agreements have been criticized as an attempt by the debtor to solicit acceptance of a plan before solicitation is authorized by the bankruptcy court. Key constituents in Chapter 11 reorganizations who wish to enter into such agreements after the bankruptcy filing may breathe a little easier following a recent decision by U.S. Bankruptcy Judge Brendan Shannon of the District of Delaware in In re Indianapolis Downs LLC, No. 11-11046 (BLS) (Jan. 31, 2013). In the opinion, Shannon declined to designate, or disallow, the votes of several large creditors who signed a plan support agreement after the bankruptcy filing providing they would vote in favor of the debtors' plan of reorganization. The dissenting stakeholders alleged the creditors and the debtors violated the solicitation provisions of the Bankruptcy Code by entering into an agreement whereby the creditors were bound to vote for a plan of reorganization before a disclosure statement containing information about the debtor and the plan was approved by the court.

Indianapolis Downs and Its Creditors' Negotiations

According to the opinion, the debtors, Indianapolis Downs LLC and Indiana Downs Capital Corp., operate a "racino," which combines a horse racing track and casino, along with an assortment of other wagering games. Thedebtors had three levels of prepetition secured debt in an aggregate amount in excess of $551 million. The second and third lien debt, which accounted for approximately $453 million, was guaranteed by the debtors and secured by their assets. The opinion describes that in late 2010, the debtors failed to make a required interest payment on the secondtier secured...