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In re Peabody Energy Corp.

United States District Court, E.D. Missouri, Eastern Division

December 29, 2017




         This matter arises out of the Chapter 11 bankruptcy of Peabody Energy Corporation and its subsidiaries (“Debtors”). The United States Bankruptcy Court for the Eastern District of Missouri (“Bankruptcy Court”) entered an order confirming the Debtors' plan of reorganization (the “Plan”) on March 17, 2017 (the “Confirmation Order”). The Ad Hoc Committee of Non-Consenting Creditors (“Ad Hoc Committee”) now appeals.[1] The Ad Hoc Committee is comprised, as of May 12, 2017, of seven beneficial holders (or investment managers or advisers to holders) of, among other things, second lien notes (“Second Lien Notes Claims”) and senior unsecured notes (“Class 5B Claims”).[2]

         On March 30, 2017, the Court denied the Ad Hoc Committee's emergency motion for a stay pending appeal. On April 21, 2017, the Debtors, who had by then reorganized, moved to dismiss the appeal as equitably moot because the Plan had been “substantially consummated.” The Official Committee of Unsecured Creditors (“Unsecured Creditors Committee”) appointed in the bankruptcy case, [3] and other creditors that supported the Plan (all named, with the Debtors, as Appellees in these proceedings) have joined the motion to dismiss. The motion to dismiss and the merits of this appeal were submitted to the Court at approximately the same time, and the Court heard oral argument on both on September 20, 2017. For the reasons set forth below, the Court finds that this appeal is equitably moot and will grant the motions to dismiss. In the alternative, the Court will affirm the judgment of the Bankruptcy Court.


         The Debtors filed for Chapter 11 bankruptcy on April 13, 2016. At that time, the coal industry was continuing to experience a decline, and the Debtors had approximately $8.8 billion in outstanding principal long-term debt. Approximately $4.3 billion of this debt was secured by collateral that included real property at the Debtors' larger coal mines. Another $3.7 billion of this debt was senior unsecured debt, with the remaining amounts represented by convertible junior subordinated debentures.

         Before the Debtors filed for bankruptcy, a significant contractual dispute developed between the Debtors' secured lenders and senior unsecured lenders regarding the extent of the secured lenders' security interests in the Debtors' larger coal mines. The parties referred to this dispute as the “CNTA dispute” based on a contractual term (“consolidated net tangible assets”) material to the dispute. As resolution of this dispute-involving a difference of over $1 billion-proved essential to any efforts to reorganize, the Debtors agreed, in a post-petition financing agreement approved by the Bankruptcy Court, to file an adversary proceeding seeking declaratory judgment related to this dispute. The Bankruptcy Court ordered all parties to that adversary proceeding, and parties who later intervened, to participate in a mediation beginning on September 7, 2016, which was overseen by the Honorable James L. Garrity, of the United States Bankruptcy Court for the Southern District of New York. Because of the significance of the CNTA dispute to any reorganization plan, the mediation was subsequently expanded to cover plan negotiations as a whole. The Ad Hoc Committee knew that the scope of the mediation had expanded and could have moved to intervene and participate in the mediation, but elected not to do so.[4]

         The Debtors assert that they approached these negotiations with four overarching goals: (1) to ensure that after reorganization, the Reorganized Debtors would have adequate liquidity to operate their business in the normal course, both in the short- and long-term, particularly given the volatile and cyclical nature of the coal industry; (2) to ensure that the capital structure of the Reorganized Debtors, including their funded debt balance at emergence, was of such a size that the Reorganized Debtors could service debts as they came due at every point in the business cycle, including during market highs and lows; (3) to maximize the value of the Debtors' estates for the benefit of creditors; and (4) to achieve broadest possible consensus among various stakeholders with respect to a reorganization plan. The Debtors ultimately determined that the best way to achieve these goals was to raise approximately $1.5 billion in new money in the form of an equity investment, which would allow them to satisfy the claims of their creditors holding first lien notes and to provide meaningful recovery to their unsecured creditors.

         Through mediation, the Debtors negotiated commitments for $1.5 billion in new money from some of the mediation participants, as part of a larger global settlement package that included settling the CNTA dispute and other disputes, and agreeing on the terms of a reorganization plan. The $1.5 billion raise would involve two components. First, the Debtors would raise $750 million through a private placement of preferred equity of the Reorganized Debtors, sold at ¶ 35% discount[5] (the “Private Placement Agreement” or “PPA”). Second, the Debtors would raise another $750 million through a rights offering exempted from registration under Section 1145 of the Bankruptcy Code, sold at ¶ 45% discount (the “Rights Offering”). The entities that committed to purchasing equity under the PPA were also required to (1) provide a full “backstop” of the Rights Offering (“Backstop Commitment Agreement”), such that if the Debtors did not raise the full $750 million in the Rights Offering, these entities would be obligated to exercise subscription rights that remained unfulfilled at the conclusion of the offering, and (2) sign a Plan Support Agreement (“PSA”), agreeing to support the Plan, subject to the Bankruptcy Court's approval of the disclosure statement required under the Bankruptcy Code.

         Participation in the PPA was initially limited to a small group of holders of Second Lien Notes and Class 5B Claims (“Noteholder Co-Proponents”). The Noteholder Co-Proponents held approximately 40% of such claims, and they were also involved in the CNTA dispute. Under the PPA, the Noteholder Co-Proponents had the exclusive right and obligation to purchase the first 22.5% of preferred equity, and were required to sign the Backstop Commitment Agreement and PSA. The Noteholder Co-Proponents and other Second Lien Notes and Class 5B Claims holders that signed the Backstop Commitment Agreement and PSA prior to an initial deadline had the exclusive right and obligation to purchase their pro rata share of the next 5%. And these two groups plus an additional group of Second Lien Notes and Class 5B Claims holders that signed the Backstop Commitment Agreement and PSA prior to a final deadline had the exclusive right and obligation to purchase their pro rata share of the remaining 72.5% of preferred equity.

         The Second Lien Notes and Class 5B Claims holders who did not sign the Backstop Commitment Agreement and PSA could participate in the Rights Offering, but were neither entitled nor obligated to purchase the preferred equity available under the PPA.

         The Plan provided that “[f]or the avoidance of doubt, any Preferred Equity purchased by the Private Placement Parties in the Private Placement pursuant to the [PPA] shall be solely on account of the new money provided in the Private Placement and not on account of any purchaser's Second Lien Notes Claims or Unsecured Senior Notes Claims.” Plan Section IV.B.3, ECF No. 6-15 at 49. The PPA and Backstop Commitment Agreement also provided for the payment of certain premiums and fees to the signatories of those agreements in exchange for their financing commitments. These included an 8% “Private Placement Commitment Premium, ” payable on the effective date in the form of common stock in the reorganized company (worth approximately $60 million); a “Private Placement Ticking Premium, ” which was a 2.5% monthly ticking commitment premium beginning on April 3, 2017, until the effective date, and also in the form of common stock in the reorganized company; and, in the event the agreements were terminated, breakup payments of $120 million in lieu of the aforementioned commitment premiums.

         As a result of obtaining the commitments in the PPA and related agreements on the stated terms, the Debtors were able to secure exit financing, including a term loan commitment for $1.95 billion in exit debt financing; a commitment from PNC Bank for an expanded $250 million accounts receivable securitization facility upon emergence; and $854 million in new surety bonds to be issued at emergence.

         On December 22, 2016, the Debtors filed a motion in the Bankruptcy Court to approve the disclosure statement related to the Plan. The next day, the Debtors moved to approve the PPA and related agreements. The Ad Hoc Committee objected to these motions, and a hearing was set in the Bankruptcy Court for January 26, 2017.

         The PPA and Backstop Commitment Agreement were subject to an unqualified “fiduciary out” provision to permit the Debtors and the Unsecured Creditors Committee to pursue, without incurring break-up fees, any alternative transactions they determined to be superior. Pursuant to this provision, during the time between the initial filing of the Plan on December 22, 2016, and the hearing on January 26, 2017, the Ad Hoc Committee submitted a series of alternative proposals, including proposals submitted on January 16, 2017 and January 20, 2017, and a proposal made on March 1, 2017.

         The alternative proposals offered the Debtors more money than the PPA provided for the preferred equity, up to $1.77 billion, but did not include all of the same terms as the Plan. The Debtors and the Unsecured Creditors Committee each independently evaluated and rejected the alternative proposals as inferior to the Plan because, among other reasons, the alternative proposals presented risks that the Debtors would emerge from bankruptcy with more funded indebtedness than the Debtors believed they could responsibly bear and that such emergence would be delayed, which due to the volatile market for coal, would threaten existing financing commitments.

         On January 26, 2017, the Bankruptcy Court heard oral argument on the Debtors' motions, and the next day, the Bankruptcy Court entered orders granting the motions, and approving the disclosure statement and the PPA and related agreements, over the Ad Hoc Committee's objections. In these orders, the Bankruptcy Court made findings, including that:

(i) the relief requested in the Motion is in the best interests of the Debtors and their estates and creditors;
(ii) the decision to enter into the Plan Support Agreement, Private Placement Agreement and Backstop Commitment Agreement is an appropriate exercise of the Debtors' business judgment; [and]
(iii) the proposed dates and deadlines for the implementation of the Section 1145 Rights Offering, as set forth in the Section 1145 Rights Offering Procedures, are reasonable and appropriate and allow a reasonable amount of time for Rights Offering Eligible Creditors to make an informed decision regarding whether to exercise their respective subscription rights[.]

Bankr. Case No. 16-42529, ECF No. 2233 at 2 (Bankr. E.D. Mo. Jan. 27, 2017). The Ad Hoc Committee appealed these orders to the United States Bankruptcy Appellate Panel for the Eighth Circuit, but that appeal was dismissed as interlocutory on February 8, 2017, with the panel noting that the Ad Hoc Committee could raise its objections if the Plan was ultimately confirmed.

         Approximately 95% of the Second Lien Notes and Class 5B Claims holders agreed to participate in the PPA, support the Plan, and provide the backstop commitment. The Ad Hoc Committee represents those holders who did not so agree.

         On March 9, 2017, the Ad Hoc Committee objected to confirmation of the Plan, specifically challenging the PPA for the following reasons: (1) it resulted in the unequal treatment of claims in the same class, in violation of §1123(a)(4) of the Bankruptcy Code, (2) it violated the good faith requirement of §1129(a)(3) of the Code because it failed to maximize the value of the Debtors' estate, and (3) it ...

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