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In re Peabody Energy Corp.

United States Court of Appeals, Eighth Circuit

August 9, 2019

In re: Peabody Energy Corporation Debtor
v.
Peabody Energy Corporation; Citibank, N.A.; Aurelis Capital Management, LP; Elliott Management Corporation; South Dakota Investment Council; Panning Capital Management, LP; PointState Capital, LP; Contrarian Capital Management, LLC; Discovery Capital Management; South Dakota Retirement System; Wilmington Savings Fund Society, FSB; Official Committee of Unsecured Creditors of Peabody Energy Corporation Appellees Ad Hoc Committee of Non-Consenting Creditors Appellant

          Submitted: April 16, 2019

          Appeal from United States District Court for the Eastern District of Missouri - St. Louis

          Before SHEPHERD, MELLOY, and GRASZ, Circuit Judges.

          MELLOY, CIRCUIT JUDGE.

         In April 2016, Peabody Energy Corporation and its affiliates (the "Debtors") filed a voluntary reorganization petition under Chapter 11 of the Bankruptcy Code. In March 2017, over the objection of the Ad Hoc Committee of Non-Consenting Creditors (the "Ad Hoc Committee"), the bankruptcy court confirmed a reorganization plan proposed by the Debtors. The Ad Hoc Committee appealed to the district court, [1] which dismissed the appeal as equitably moot. Alternatively, the district court approved the plan on the merits, holding that the plan: (1) comported with the requirement in 11 U.S.C. § 1123(a)(4) that all claims in a particular class be treated the same; and (2) was proposed in good faith. We, too, affirm on the merits.

         I. Background

         The Debtors are an American coal company and some of its subsidiaries. Over the middle years of this decade, a variety of factors decreased the demand for and price of American-produced coal. The decreased demand and lower prices resulted in a sharp decline in the Debtors' revenues. Impacted by these falling revenues and weighed down by what the Debtors call "substantial debt obligations," the Debtors filed for reorganization under Chapter 11.

         Before filing their reorganization petition, however, a dispute arose between several of the Debtors' secured and senior-unsecured creditors (the "security-interest dispute"). The creditors disagreed over the extent to which the Debtors' assets served as collateral for the secured creditors' debts. The Debtors filed their petition and then, to resolve the security-interest dispute, commenced an adversary proceeding seeking a declaratory judgment on the matter.

         Non-binding mediation followed. Negotiations in the mediation gradually expanded from resolving the security-interest dispute to formulating a reorganization plan. The negotiating parties included the Debtors and a group of seven holders of the Debtors' second-lien and senior-unsecured notes. On appeal, the parties refer to this group as the "Noteholder Co-Proponents." Members of the Ad Hoc Committee did not participate in the mediation, though they did receive notice. Eventually, the negotiating parties crafted a complex plan for reorganization as part of a global settlement. The plan was expressly conditioned on approval by the bankruptcy court.

         In general, the plan that emerged from the mediation provided a way for the Debtors to raise $1.5 billion in new money to pay for distributions under the plan and fund operations following reorganization. This was to be accomplished by two sales. The first was a sale of common stock at a discount to certain classes of creditors. The second was an exclusive sale of discounted preferred stock to qualifying creditors. As will be discussed in greater detail below, creditors could qualify to buy the preferred stock by executing certain agreements that obligated them to: (1) buy a set amount of preferred stock; (2) agree to backstop (i.e., purchase shares of common and preferred stock that did not sell) both sales; and (3) support the plan in the confirmation process. The amount of preferred stock qualifying creditors could and were required to buy depended on the portion of the prebankruptcy debt they owned and also on when they became qualifying creditors (i.e., how quickly they took action to qualify). Qualifying creditors also received several premiums for executing the agreements.

         More specifically, the plan included the following elements. First, the plan required the reorganized Debtors to engage in a $750 million "Rights Offering" following reorganization. The Rights Offering allowed holders of certain unsecured notes known as Class-5B claims and second-lien note holders to purchase common stock in the reorganized company at a 45% discount to the value the negotiating parties agreed the common stock should be worth (what the Ad Hoc Committee refers to as "Plan Equity Value"). The parties agree that this element of the plan is not contested.

         Second, the plan required the reorganized Debtors to engage in a $750 million "Private Placement" whereby qualifying creditors could purchase preferred stock in the reorganized Debtors at a 35% discount to the Plan Equity Value. A creditor qualified to participate in the Private Placement if it: (1) held a second-lien note or Class-5B claim; (2) signed a "Private Placement Agreement" that committed the creditor to purchase a certain amount of preferred stock based on when it signed the agreement; (3) agreed to backstop the Rights Offering; and (4) agreed to support the reorganization plan throughout the confirmation process.

         The negotiating parties developed an intricate three-phase system for determining who could and must buy what in the Private Placement. In Phase One, the Noteholder Co-Proponents were given the exclusive right and obligation to purchase the first 22.5% of preferred stock at the discounted price. The Noteholder Co-Proponents also had to purchase what remained of the 77.5% of preferred stock that did not sell in the next two phases. In Phase Two, the Noteholder Co-Proponents plus any creditor who took action to qualify by an initial deadline (the "Phase-Two investors") received the exclusive right and obligation to purchase the next 5% of the preferred stock at the discounted price. The Phase-Two investors were also obligated to purchase whatever remained unsold of the 72.5% of preferred stock in the next phase. Finally, in Phase Three, the Noteholder Co-Proponents, the Phase-Two investors, plus any creditor who took action to qualify after Phase Two but before the close of the sale received the exclusive right and obligation to purchase the remaining 72.5% of preferred stock at the discounted price.

         The Debtors agreed to pay creditors who participated in the Private Placement certain premiums "in consideration for" their agreements. For agreeing to backstop the Rights Offering, the creditors were promised a "Backstop Commitment Premium" worth $60 million (i.e., 8% of the $750 million raised). They were also promised a "Ticking Premium" worth $18, 750, 000, which was to be paid monthly through a designated closing date. Corresponding commitment and ticking premiums were paid to creditors who agreed to buy their portion of ...


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