In re Lehman Brothers Holdings Inc., 591 B.R. 153 (2018), United States Bankruptcy Court, S.D. New York
The Bankruptcy Court for the Southern District of New York denied a motion to permit a plan administrator to cause a debtor to issue preferred stock under the terms of its pre-effective date charter in substitution for Enhanced Capital Advantaged Preferred Securities (ECAPS) issued by affiliates of the debtor, as if such preferred stock were being issued prior to the petition date. The Bankruptcy Court held that the plan administrator lacked authority under the debtor’s chapter 11 plan to cause the issuance of the stock because the issuance was not expressly authorized by the plan and would contravene core provisions of the plan. The Court further held that the plan administrator lacked authority under the Bankruptcy Code to cause the issuance because the Bankruptcy Code does not confer substantive rights on a party beyond what is provided for in the plan or authorize courts to create substantive rights that are not otherwise available under applicable law.
Between 2005 and 2007, Lehman Brothers Holdings Inc. (“LBHI”) and certain other parties established five limited partnerships that were each indirectly controlled by LBHI (the “LPs”). The LPs issued equity securities called Enhanced Capital Advantaged Preferred Securities, or “ECAPS”. The LPs used the proceeds of the ECAPS to purchase subordinated debt of LBHI or Lehman Brothers Holdings plc (“LBH plc”). Certain of the LPs also invested in money market funds, the proceeds of which were held by LBHI. The value of the ECAPS was approximately equal to the value of the LP assets, so an investment in ECAPS was essentially an indirect investment in the subordinated debt of LBHI or LBH plc.
Under the terms of the ECAPS, upon the occurrence of certain trigger events (which included a bankruptcy of LBHI), the general partner of the LPs was required to take all reasonable steps to substitute the ECAPS for preferred stock of LBHI. The substituted preferred stock would be “fully-paid non-cumulative preferred stock issued directly by LBHI bearing a right to dividends calculated in the same manner as the [ECAPS], having no voting rights (except as required by law).” Pursuant to the LBHI charter in effect prior to the petition date, LBHI was authorized to issue such preferred stock, with over 17,000,000 shares available for issue.
On September 15, 2008, LBHI filed for bankruptcy under chapter 11. Following LBHI’s filing for bankruptcy, the general partner of the LPs did not take steps to effect the substitution of ECAPS for preferred stock of LBHI. LBHI’s chapter 11 plan became effective on March 6, 2012 (the “Effective Date”).
Under its chapter 11 plan, LBHI was named plan administrator and, in such capacity, was provided with broad authority to carry out and implement the plan, including the authority to exercise reasonable business judgment to direct and control the liquidation of the debtors’ assets to maximize distributions to holders of allowed claims and to perform other duties and functions consistent with the plan’s implementation. Pursuant to the plan, all outstanding stock of LBHI was cancelled in exchange for a single new share of common stock issued to the plan trust, and the charter and bylaws of LBHI were amended and restated to prohibit LBHI from issuing non-voting capital stock except for the one share of common stock held by the plan trust.
In November 2017, the plan administrator filed a motion seeking authority to cause LBHI to issue substituted preferred stock under its pre-Effective Date charter as if such stock had been issued prior to the petition date, which preferred stock would then be delivered by the general partner of the LPs to the ECAPS holders in substitution for the ECAPS. Such substitution would entitle the ECAPS holders to a portion of the distributions for holders of LBHI equity interests under the plan.
The Bankruptcy Court held that the plan administrator did not have authority under the plan to cause the debtor to issue the substituted preferred stock because the plan did not expressly authorize LBHI to retroactively issue such stock under its pre-Effective Date charter, and because such issuance would contravene core provisions of the plan. Specifically, the issuance would be inconsistent with the plan’s nullification of the pre-Effective Date charter in favor of an amended and restated charter which prohibited LBHI from issuing new, non-voting stock to any party other than the plan trust. The Court noted that “The Pre-Effective Date Charter cannot selectively be brought back to life.”
The Bankruptcy Court further held that the plan administrator did not have authority under the Bankruptcy Code to cause the issuance of the substituted preferred stock. The Court noted that, while Section 1142(b) of the Bankruptcy Code permits a bankruptcy court to direct parties to perform any act that is necessary for consummation of the plan, it does not confer any substantive rights on a party beyond what is provided for in the plan. Furthermore, the equitable power given to the Bankruptcy Court under Section 105(a) of the Bankruptcy Code, which provides courts with the power to issue any order that is necessary or appropriate to carry out the provisions of the Bankruptcy Code, does not authorize a court to create substantive rights that are not otherwise available under applicable law.
Summary courtesty of Margaret G. Parker-Yavuz of Akin Gump.