Many commentators have remarked that a “new normal” has evolved for Chapter 11 proceedings, wherein the major constituents negotiate the salient terms and exit strategy of the debtor’s restructuring prior to the filing of the bankruptcy petition, generally leading to shorter, less litigious cases. This dynamic, often evidenced by a plan support agreement, a proposed sale of assets under Section 363 of the Bankruptcy Code, or a pre-packaged plan of reorganization for which creditor approval has already been solicited and obtained, has led to expeditious resolutions in many recent large and complex corporate restructurings.
Allied Systems Holdings clearly did not get the memo.
Its Chapter 11 case, now in its sixteenth month, has been a scorched-earth battleground featuring internal fights among its first lien lenders, conflicts between its secured and unsecured creditors, and litigation brought by its creditors’ committee against its major shareholder.
Allied Systems Holdings emerged from an earlier Chapter 11 case several years ago with a new senior credit facility and controlled by private equity firm Yucaipa. As Allied’s business was negatively affected by the downturn of the U.S. automobile industry, Yucaipa began buying up Allied’s first lien debt. This led to a pitched battle between Yucaipa and two of the first lien lenders, Black Diamond Capital Partners and Spectrum Investment Partners. Those firms contended that the loan document terms had been specifically intended to prevent Yucaipa, as Allied’s controlling shareholder, from gaining control of the first lien debt as well. Yucaipa countered that the first lien loan documents had been properly amended to permit it to make the purchases. The dispute ultimately led to the filing of an involuntary bankruptcy petition against Allied by Black Diamond and Spectrum in May 2012.
The conflict continued to play out in both the bankruptcy court and New York state court, and was not resolved until late July of this year, when Judge Christopher Sontchi of the U.S. Bankruptcy Court for the District of Delaware ruled in favor of Black Diamond and Spectrum.
In the meantime, Allied’s creditors’ committee also sued Yucaipa, alleging that Yucaipa sought to advance its own interests at the expense of Allied’s general unsecured creditors, and seeking the recharacterization or subordination of Yucaipa’s claims. Although a motion seeking approval of a proposed settlement has been filed, Black Diamond and Spectrum have objected to it and it remains pending.
Mediation efforts aimed at resolving the numerous disputes appeared to succeed earlier this summer, with the approval of an auction process that was scheduled for mid-August. A $105 million bid (consisting of $40.5 million in cash and a credit bid of $64.5) from Black Diamond and Spectrum, now ensconced as the “requisite lenders” in control of the first lien debt, was declared the winning bid.
Rather than leading to peace among the parties, however, a new round of hostilities broke out when the creditors’ committee objected and moved for a new auction, arguing that the auction failed to comply with the bidding procedures and that a competing all cash $100 million bid from a strategic bidder, Jack Cooper Transport Co., was actually a “higher and better” offer for Allied’s assets. When Jack Cooper thereafter submitted a new bid in the amount of $135 million, Allied effectively threw up its hands and joined in the committee’s request for the auction to be reopened.
A new auction was held on September 11, at which Jack Cooper’s new bid, consisting of $125 million in cash and $10 million in notes, was determined to be the winning bid. The proposed sale to Jack Cooper bid was approved yesterday by Judge Sontchi.
Allied’s Chapter 11 case has unquestionably been an outlier, bucking the recent trend towards prepackaged or pre-negotiated cases that are concluded in months, and sometimes weeks. It remains to be seen if the sale to Jack Cooper will finally bring about a consensual resolution to these long-running proceedings.