The Bottom Line
The District Court for the Southern District of New York (the “District Court”), in In re Republic Airways Holdings Inc., 582 B.R. 278 (S.D.N.Y. March 28, 2018), affirmed the Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) decision that substantive consolidation of two debtors would not discriminate against two creditors. The creditors had separate claims against the operating subsidiary (based on leases) and the parent (based upon a guarantee). The case is interesting as the subsidiary Debtor had unique defenses it could assert against the claims under New York contract law whereas the parent Debtor had given an unconditional guarantee of the subsidiary Debtor’s obligations, and likely could not assert those same defenses. The Chapter 11 plan eliminated the guarantee claim. The two creditors argued that their claim against the parent Debtor was worth substantially more than the claim against the subsidiary Debtor. To solve the objection, the Bankruptcy Court required that the Debtors modify the Chapter 11 plan to provide the creditors with an option to “opt-out” of the treatment under a substantive consolidation scenario. The creditors objected that they should get the benefit of the higher recovery from substantive consolidation without giving up the guarantee claim. The Bankruptcy Court and District Court disagreed, dismissing the creditors’ contentions of unfair discrimination, improper application of the Augie/Restivo factors and inadequate disclosure.
What Happened
Republic Airways Holdings Inc. (“Republic”), the parent Debtor, and Shuttle America Corporation, (“Shuttle” and together with Republic, the “Debtors”) filed for bankruptcy and rejected several aircraft leases. The rejection triggered a liquidated damages provision for which the two creditors, Wells Fargo Bank Northwest, N.A. and ALF VI, Inc. (collectively, “Residco”) claimed total damages of $57 million.
The Debtors proposed a plan which substantively consolidated Republic and Shuttle. The Debtors reasoned that substantive consolidation would provide unsecured creditors with a forty-five cents on the dollar recovery versus a two cents on the dollar recovery absent consolidation. However, Residco alleged its claim was worth significantly less because consolidation would eliminate Residco’s claim against Republic. Residco argued its guarantee claim was worth $50 million, whereas the underlying lease claim was only $7 million.
In...
