Norton Rose Fulbright US LLP represented Adeptus Health, Inc. and 139 of its affiliates (“Adeptus”)—together, the largest operator of free-standing emergency rooms in the US—in their Chapter 11 cases filed in the US Bankruptcy Court for the Northern District of Texas. Adeptus filed for bankruptcy under the weight of nearly $400 million in liabilities, sagging demand, and increasing costs. The cases were contentious from the start; and throughout, Adeptus successfully fought off challenges by post-petition purchasers of equity (and later, an official committee of equity holders), putative class claimants, and other key stakeholders. On September 27, 2017—a mere five months after filing bankruptcy—Adeptus’s Chapter 11 plan was confirmed, and days later the company emerged from bankruptcy. The Adeptus bankruptcy team was led by Louis R. Strubeck, Jr., Liz Boydston, and John N. Schwartz. The cases intersected numerous practice areas, and other key members of the Norton Rose Fulbright team were Michael Flamenbaum, Scott P. Drake, Scarlet McNellie, Greg Wilkes, Rebecca Winthrop, Benjamin Ratliff, Tim Springer, Julie G. Harrison, and Shivani Shah.
Adeptus’s reorganization was predicated on a hard-fought global settlement with the unsecured creditors’ and equity holders’ committees and Deerfield Management Company, a private equity firm and Adeptus’s secured lender. In broad strokes, the plan called for the substantive consolidation of Adeptus’s 140 different debtor entities for plan, voting, and distribution purposes; Deerfield’s contribution to equity holders of a portion of its recoveries on its significant deficiency claims from a litigation trust; and the vesting of the reorganized entities’ equity in Deerfield in exchange for its secured and DIP debt. Despite the global settlement, a handful of other creditors and the US Trustee objected to the plan’s confirmation arguing, among other things, that substantive consolidation and Deerfield’s sharing plan proceeds with equity violates Bankruptcy Code priorities and the Supreme Court’s recent decision in Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 197 L. Ed. 2d 398 (2017). After a two-day confirmation trial, Judge Stacey G.C. Jernigan overruled those objections, confirmed the plan, and later issued a written memorandum opinion, which provide practitioners and interested parties with useful guidance on key Chapter 11 issues, substantive consolidation and gifting post-Jevic.
Judge Jernigan first examined substantive consolidation, noting that the Fifth Circuit has not yet developed its own standard. After canvassing the leading substantive-consolidation standards and cases, Judge Jernigan determined that consolidation is appropriate under any test; her decision turned on a litany of facts and factors, including that (i) the company’s “nerve center” is its Texas headquarters and all payroll for employees is effectuated from there, (ii) the company’s centralized cash-management system and three bank accounts, (iii) all debtor entities were controlled by common officers and directors, (iv) the existence of substantial intercompany claims, (v) credible testimony demonstrated that preparing individual schedules was extraordinarily difficult and required numerous amendments, (vi) a substantial amount of creditors treated the debtors as a single unit, and (vii) that credible counsel had determined that the primary assets of many debtors—D&O litigation claims—are jointly owned by the debtors. Simply put, absent substantive consolidation, it would be too costly to allocate claims and disentangle 140 otherwise thoroughly integrated estates.
Judge Jernigan then examined the settlement between Deerfield and the equity committee. Various unsecured creditors and the US Trustee argued that the settlement effected an improper class-skipping gift, and thus, violated the absolute-priority rule. Judge Jernigan rejected those objections noting that the evidence demonstrated the settlement was in fact a discrete resolution of direct claims that existing equity threatened to assert against Deerfield. She also found that the settlement, even if treated as a class-skipping gift, was consistent with Jevic. Analyzing Jevic, Judge Jernigan discussed a potential exception to the absolute priority rule in cases where “significant Code-related objectives” are implicated. Ultimately, she distinguished Jevic, reasoning that Adeptus’s reorganization plan left creditors better off than in a Chapter 7 liquidation, while the gift in Jevic’s structured dismissal provided no such benefit. Judge Jernigan also noted that the consideration paid by Deerfield to equity was only “a very remote contingent right to recovery,” which arguably, was not estate property.