In re: Nuverra Environmental Solutions, Inc., et al.
MEMORANDUM ORDER: The Motion for Stay (D.I. 3 ) and Motion to Expedite (D.I. 4 ) are DENIED. Signed by Judge Richard G. Andrews on 8/3/2017. (nms)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
NUVERRA ENVIRONMENTAL SOLUTIONS, INC., et al.,
Case No. 17-10949-KJC
Civ. No. 17-1024-RGA
NUVERRA ENVIRONMENTAL SOLUTIONS, INC., et al.,
Before the Court is Appellant's Emergency Motion for Stay of Order Confirming the
Amended Prepackaged Plans of Reorganization ofNuverra Environmental Solutions, Inc. and its
Affiliated Debtors Pending Appeal (D.I. 3) and related Motion to Expedite (D.I. 4), seeking a stay
pending appeal of a July 25, 2017 order by the Bankruptcy Court (D.I. 1-1) ("Confirmation Order").
Debtors and the Official Committee of Unsecured Creditors have each filed briefs in opposition.
(D.I. 18, 19). For the reasons set forth below, the Motion for Stay is denied.
Background. The following facts appear to be undisputed. The Confirmation Order
approved a plan of reorganization pursuant to which the Debtors' secured creditors will not receive
100% recovery on their secured claims. Unsecured creditors are "out of the money" with respect to
any recovery in this case because their claims sit behind over $500 million of secured claims in a
company that has an uncontroverted value of $300 million. (B.D.I. 363 at 4:4-8). 1 To enable the
business to reorganize, secured creditors made a "gift" under the plan to general unsecured creditors
who would otherwise receive no distribution under the Bankruptcy Code's priority scheme.
The docket of the Chapter 11 cases, captioned In re Nuverra Environmental Solutions, Inc., No.
17-10949 (KJC) (Bankr. D. Del.), is cited herein as "B.D.I. _."
Despite the fact that unsecured creditors would receive no distribution absent the
gift, Appellant has appealed the Confirmation Order based on the fact that the plan places general
unsecured claims of the same priority into two separate classes and provides disparate treatment.
Class A6, comprised of holders of9.875% unsecured senior notes due 2018 ("2018 Notes"), will
receive an approximate 4%-6% recovery on account of their claims by virtue of the gift. Class A7,
on the other hand, comprised of trade and other creditors whose claims arise from the Debtors' day
to day operations, will receive a 100% recovery by virtue of the gift. Appellant is a holder of
approximately $450,000 of the 2018 Notes, or 1% of the claims in Class A6. Class A6 voted to
reject the plan, 2 while Class A7 voted to accept it. Because the plan is nonconsensual, Debtors had
the burden of"show[ing] that the plan meets the additional requirements of§ 1129(b), including the
requirements that the plan does not unfairly discriminate against dissenting classes and the
treatment of the dissenting classes is fair and equitable." In re Exide Techs., 303 B.R. 48, 58
(Bankr. D. Del. 2003). These requirements were addressed in the Debtors' confirmation brief and
declaration in support. (B.D.I. 302, 338).
Appellant was the sole objector at the hearing on plan confirmation and argued, inter
alia, that the plan: improperly classified his claim separately from other general unsecured claims
(see B.D.I. 290 at 6-7); unfairly discriminated against Class A6 (see id. at 7-11); and violated the
requirement that a nonconsensual plan be fair and equitable (see id at 11-12). Following argument
on July 21, 2017 (B.D.I. 362), the Bankruptcy Court took the matter under advisement and made a
bench ruling via telephonic hearing on July 24, 2017, overruling the objection and confirming the
plan (B.D.I. 363). The Bankruptcy Court determined that separate classification of trade creditors
Despite having approximately 80% in number of holders vote to accept the plan, the plan failed to
gain the support of 50% in dollar amount. Under section 1126(c) of the Bankruptcy Code, "[a]
class of claims has accepted a plan if such plan has been accepted by creditors that ... hold at least
two-thirds in amount and more than one-half in number of the allowed claims of such class held by
creditors ... that have accepted or rejected such plan." 11 U.S.C. § 1126(c).
and noteholders was reasonable on the basis that trade creditors were critical to the success of the
reorganized debtors. (B.D.I. 363 at 5:5-6:24). Judge Carey applied the Markell test 3 and
determined that, while the disparate treatment of the two classes raised a presumption of unfair
discrimination, that presumption was rebutted because class A6 is "indisputably out of the money
and not, otherwise, entitled to any distribution under the bankruptcy code's priority scheme and
provided further that the proposed classification and treatment of the unsecured creditors fosters a
reorganization of these debtors." (Id. at 8:25-9:3). The Bankruptcy Court also rejected Appellant's
argument that the gift was from estate property, violated the absolute priority rule, and thus the plan
was not "fair and equitable." (Id. at 10:8-12:12). The Bankruptcy Court ultimately determined that
its decision was consistent with leading cases and approved the plan. Appellant filed a timely
notice of appeal on July 25, 2017. (D.I. 1).
Jurisdiction. Appeals from the Bankruptcy Court to this Court are governed by 28
U.S.C. § 158. District courts have mandatory jurisdiction to hear appeals "from final judgments,
orders, and decrees." 28 U.S.C. § 158(a)(l).
Discussion. "The granting of a motion for stay pending appeal is discretionary with
the court." See In re Trans World Airlines, Inc., 2001 WL 1820325, at *2-3 (Bankr. D. Del. Mar.
27, 2001). Appellant bears the burden of proving that a stay of the Confirmation Order is warranted
based on the following criteria: (1) whether the movant has made "a strong showing" that it is likely
to succeed on the merits; (2) whether the movant will be irreparably injured absent a stay; (3)
Under the Markell test (named for a professor, not for a case), a rebuttable presumption of unfair
when there is (1) a dissenting class; (2) another class of the same priority; and (3) a difference
in the plan's treatment of the two classes that results in either (a) a materially lower
percentage recovery for the dissenting class (measured in terms of the net present value of
all payments), or (b) regardless of percentage recovery, an allocation under the plan of
materially greater risk to the dissenting class in connection with its proposed distribution.
In re Tribune Co., 472 B.R. 223, 241-42 (Bankr. D. Del. 2012) (adopting Markell test).
whether a stay will substantially injure other interested parties; and (4) where the public interest
lies. Republic ofPhil. v. Westinghouse Electric Corp., 949 F.2d 653, 658 (3d Cir. 1991). The most
critical factors, according to the Supreme Court, are the first two: whether the stay movant has
demonstrated (1) "a strong showing" of the likelihood of success, and (2) that it will suffer
irreparable harm - the latter referring to harm that cannot be prevented or fully rectified by a
successful appeal. In re Revel AC, Inc., 802 F.3d 558, 568 (3d Cir. 2015) (citing.Nken v. Holder,
556 U.S. 418, 434 (2009) (internal citations omitted). The Court's analysis should proceed as
Did the applicant make a sufficient showing that (a) it can win on the merits (significantly
better than negligible but not greater than 50%) and (b) will suffer irreparable harm absent
a stay? If it has, we balance the relative harms considering all four factors using a sliding
scale approach. However, if the movant does not make the requisite showings on either of
these first two factors, the inquiry into the balance of harms and the public interest is
unnecessary, and the stay should be denied without further analysis.
Revel AC, 802 F.3d at 571 (emphasis in text) (internal quotations and citations omitted).
Likelihood of success on the merits. As to the first factor, Appellant has not met his
burden of making "a strong showing" that he is likely to succeed on the merits. According to the
Motion for Stay, Appellant's argument on appeal is that, having determined under the Markell test
that the disparate treatment of Classes A6 and A 7 gave rise to a presumption of unfair
discrimination, the Bankruptcy Court erred in finding that the presumption was rebutted and the gift
"constitute[d] no unfair discrimination" because "class A6 was indisputably out of the money and
not, otherwise, entitled to any distribution under the Bankruptcy Code's priority scheme and
provided further that the proposed classification and treatment of other unsecured creditors fosters a
reorganization of these debtors." (D.I. 3 at 6). Appellant argues that the Bankruptcy Court's
reliance on the gifting doctrine was error because "[g]ifting is simply wrong as a matter oflaw."
(Id. at 7). In support, Appellant argues that, in Armstrong World Industries, Inc., 432 F.3d 502 (3d
Cir. 2005), the Third Circuit held that "vertical class skipping" - the gifting of a distribution from a
senior class of creditors in a manner that skips over an intermediary junior class, such that it violates
the absolute priority rule- "is not allowed ifthe gift is property of the estate." (Id.) "By the same
token," Appellant argues, horizontal class skipping - preferring one class of creditors over another
class of creditors with claims of the same priority, as here - should be impermissible also: "gifting
in violation of the requirement that a class not be unfairly discriminated against should not be
allowed if the 'gift' is property of the estate." (Id.) Appellant is unlikely to succeed on the merits
of this argument for several reasons.
First, although the Bankruptcy Court cited relevant case law from this district in
support its ruling, Appellant fails to address those cases in his Motion for Stay or explain how the
Bankruptcy Court erred in relying on those cases. In determining that the plan did not unfairly
discriminate, the Bankruptcy Court relied on In re Genesis Health Ventures, Inc., 266 B.R. 591
(Bankr. D. Del. 2001). (See B.D.I. 363 at 10:12-12:12). The bankruptcy court in Genesis
confirmed a similar plan, under which secured lenders made a gift from their own recovery to
certain, but not all, classes of general unsecured creditors, premised upon the assumption that even
if senior lenders received all the debt and equity distributed under the plan, the senior lenders'
claims still would not be satisfied in full. See Genesis, 266 B.R. at 602. Under the plan in that case,
secured creditors did not make a gift to certain classes of general unsecured creditors (e.g., creditors
holding punitive damages claims), and those creditors objected to plan confirmation on the basis of
unfair discrimination. While the disparate treatment gave rise to presumption of unfair
discrimination under the Markell test, the Genesis court ultimately concluded that the presumption
[T]he recovery by Classes G4 and M4 of a dividend in the form of New Common Stock and
Warrants is based on the agreement of the Senior Lenders to allocate a portion of the value
they would have otherwise received to Classes G4 and GS. The disparate treatment ... is a
permissible allocation by the secured creditors of a portion of the distribution to which they
would otherwise be entitled, rather than unfair discrimination against Classes G7 and M7 by
the proponents of the plan.
Id. at 612. Thus, Genesis held that the presumption of unfair discrimination is rebutted where the
distribution is based on the agreement of senior lenders to allocate a portion of the value to which
they would have otherwise been entitled under the Bankruptcy Code. The Bankruptcy Court's ruling
here is consistent with Genesis, and Appellant points to no differences between these cases that
requires a different outcome or would make his success on appeal likely.
Appellant's reliance on the Third Circuit's holdings in Armstrong and !CL is
misplaced. Under the proposed plan in Armstrong, an unsecured creditor class would receive and
automatically transfer warrants to purchase common stock (property of the estate) to a class of
equity holders, despite the fact that the plan did not provide full recovery for all unsecured creditors
in classes senior to the equity holders. See Armstrong, 432 F.3d at 514. The Third Circuit
determined that vertical class skipping gifts like these violated the absolute priority rule, which is
codified as part of the "fair and equitable" requirements of section l 129(b). "Under the statute, a
plan is fair and equitable with respect to an impaired, dissenting class of unsecured claims if ( 1) it
pays the class's claims in full, or if (2) it does not allow holders of any junior claims or interests to
receive or retain any property under the plan 'on account of such claims or interests." Id. at 512
(citing 11 U.S.C. § 1129(b)(2)(B)(i)-(ii). The Armstrong court concluded that the plain language of
the statute makes clear that a plan cannot give property to junior claimants over the objection of a
more senior class that is impaired. Id. at 513. In the context of gifts, the Third Circuit noted that
"section 1129 was at least designed to address 'give-up' situations where a senior class gave
property to a class junior to the dissenting class." Id. Unlike Armstrong, the gift at issue here is a
voluntary carve out from the senior lender's liens, and the plan does not involve vertical class
skipping as it does not provide a distribution to a class junior to the dissenting class - Class A6.
Appellant further cites the Third Circuit's ruling in !CL - a case decided in the
context of a settlement agreement in connection with an asset sale, not a plan of reorganization - for
the rule that gifts are permissible only if they are not made from estate property. In re !CL Holding
Co., Inc., 802 F.3d 547 (3d Cir. 2015). While Appellant appears to argue that the gift in this case
was made from estate property and was thus impermissible (see D.I. 3 at 7), Appellant provides no
support for his argument. As noted above, a similar gift from senior lenders to certain, but not all,
classes of general unsecured creditors was approved in Genesis. As the Bankruptcy Court noted in
its ruling, Armstrong distinguished the very similar "arrangement in Genesis as an ordinary carveout of the senior creditor's lien for the junior claimant's benefit" but did not reject it. (See B.D.I.
363 at 11:8-12:9). 4 The Bankruptcy Court's ruling is consistent with these cases, and Appellant
offers no reason why he is likely to succeed on appeal in establishing that the gift in this case was
from estate property or otherwise offends the absolute priority rule.
Finally, Appellant relies on Sentry, a case outside this circuit, in which the
Bankruptcy Court for the Southern District of Texas held that a secured creditor should never be
permitted to "decide which creditors get paid and how much those creditors get paid." In re Sentry
Operating Co. of Texas, Inc., 264 B.R. 850, 865 (Bankr. S.D. Tex. 2001). Because Appellant has
failed to address case law in this district to the contrary, his reliance on a case outside this circuit
does not establish a likelihood of success on appeal.
Irreparable harm. Appellant has failed to establish that he would suffer irreparable
harm in the absence of a stay. To do so, Appellant must establish a resulting injury "that cannot be
In Armstrong, this Court distinguished Genesis on the facts as involving a distribution of property
subject to the senior creditor's liens that was "carved out" voluntarily for junior claimants. See In
re Armstrong World Indus., 320 B.R. 523, 539 (D. Del. 2005). The Third Circuit adopted this
reading of that case, characterizing the Genesis decision as having allowed a secured creditor to "(1)
give up their proceeds under the reorganization plan to holders of unsecured and subordinated
claims, without including the holders of punitive damages in the arrangement, and (2) allocate part
of their value under the plan to the debtor's officers and directors as an employment incentive
package." See id. at 513-14. See also In re World Health Alternatives, Inc., 344 B.R. 291, 298-99
(Bankr. D. Del. 2006) (discussing Armstrong and Genesis and concluding "[s]uch a carve out does
not offend the absolute priority rule or the Bankruptcy Code's distribution scheme because the
property belongs to the secured creditor- not the estate").
redressed by a legal or equitable remedy." Instant Air Freight Co. v. CF. Air Freight, Inc., 882
F.2d 797, 801 (3d Cir. 1989). Appellant merely argues that if no stay is granted, and the plan is
consummated, he may be barred from arguing the merits of his appeal based on equitable mootness.
(See D.l. 3 at 3, 8). The possibility that an appeal may become moot does not alone constitute
irreparable harm for purposes of obtaining a stay. 5 If the plan goes effective, Appellant will be
entitled to the same distribution as other Class A6 creditors, and Appellant does not argue that he
ultimately is entitled to the full payment of his claim. 6 Debtors argue the company's valuation is
uncontroverted, and it is undisputed that unsecured creditors are entitled to no distribution under the
Bankruptcy Code. (See D.l. 19 at 15). Thus, it appears that even if Appellant succeeded on appeal,
unsecured creditors would receive no value under a new proposed plan or in a liquidation. (See id.)
The court agrees with Debtors that "because there is no value that Appellant is entitled to seek or
likely to obtain in this appeal, Appellant cannot establish that he will suffer irreparable harm." (Id.)
Having evaluated Appellant's likelihood of success on the merits and irreparable
harm absent a stay, and having determined that Appellant has failed to carry his burden as to either
element, the Court is satisfied no further analysis is required. See Revel AC, 802 F.3d at 571.
Conclusion. The Bankruptcy Court's ruling is consistent with existing precedent,
and Appellant has failed to establish that he will suffer irreparable harm in absence of a stay.
This alleged harm would be purely economic, and, as such, it also would not satisfy the
requirement See e.g., Regal Ware, Inc. v. Global Home Prods., LLC, 2006 WL 2381918, at *l (D.
Del. Aug. 17, 2006) ("[T]he fact that [the movant' s] appeal could be rendered moot ... does not in
and of itself constitute irreparable harm."); In re Tribune Co., 477 B.R. 465, 477 n.12 (Bankr. D.
Del. 2012) ("[t]he possibility of equitable mootness, while a factor here for irreparable harm, is not
dispositive of the ultimate question of whether to grant a stay pending appeal.")
See Revel AC, 802 F.3d at 572 ("[A] purely economic injury, compensable in money, cannot
satisfy the irreparable injury requirement" unless "the potential economic loss is so great as to
threaten the existence of the movant's business.")
NOW, THEREFORE, it is HEREBY ORDERED that the Motion for Stay (D.I. 3) and
Motion to Expedite (DJ. 4) are DENIED.
day of August, 2017.
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