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Delaware Bankruptcy Court Decision Strictly Construes Plan Provisions Putting Burden on Subscribers to Properly Prepare and Submit Subscription Forms in Rights Offerings

November 18, 2010

In In re Accuride Corp., et al., Case No. 09-13449 (Bankr. D. Del. Nov. 17, 2010) (the “Accuride” case), the United States Bankruptcy Court for the District of Delaware addressed who holds the burden when a noteholder (the "Noteholder") sends a debtor (the "Debtor") erroneous information in its subscription to a rights offering under a plan of reorganization (the “Plan”). The Court held that under the terms of the Plan, the Debtor provided the Noteholder with ample opportunity to cure the defect in its subscription to the rights offering. In addition, the Court held that the confirmed Plan placed the burden on the Noteholder to adequately cure its subscription defect and to ensure the Debtor used the correct information to distribute the correct amount.

The Noteholder filed a motion to enforce the Plan, asking the Court to order the Debtor to make an additional distribution to the Noteholder. The Plan entitled the Noteholder to subscribe to rights offering notes (the “New Notes”) up to its allowed claim amount. In order for the New Notes to be distributed, the Plan obligated the Debtor to mail a subscription form to the Noteholder and required the Noteholder to exercise its subscription rights by returning a completed subscription form to the Debtor. Before the Plan became effective, the Noteholder provided the Debtor with a subscription form that listed the face value amount of the notes rather than the allowed claim amount. Shortly after the Debtor implemented the Plan and consummated the transactions contemplated by the rights offering, the Noteholder sent a demand letter identifying the error in the amounts and seeking additional notes or compensation to make up the difference between the face value amount and the allowed claim amount. The Debtor refused to meet the demands; thus, the Noteholder filed the motion seeking an additional distribution.

The Court began its analysis by referring to 11 U.S.C. § 1141(a) which states that “the provisions of a confirmed plan bind the debtor, any entity issuing securities under the plan, any entity acquiring property under the plan and any creditor.” In addition, the Court noted that the Plan is an enforceable contract between the parties.
The Plan required the Debtor to disseminate subscription forms to the Noteholder and placed the burden on the Noteholder to ensure that the Debtor received the completed subscription forms by the deadline. In addition, the Plan required the Noteholder to inform the Debtor of the amount of notes that the Noteholder intended to subscribe to up to the allowed claim amount. Further, the Plan required the Debtor to “use commercially reasonable efforts to give notice” of defects in the subscription form. Importantly, the Plan provided that “[a] Subscription Form shall be deemed not to have been received or accepted until all irregularities have been waived or cured.” Thus, the Court held that the Noteholder had the burden of submitting to the Debtor the information to “actually and validly exercise its subscription rights” and to cure any defects in the subscription forms.

The Court determined that the Noteholder did not meet its burden to cure defects in its subscription submissions. After receiving the subscriptions, the Debtor informed the Noteholder that the subscription confirmation was defective as it did not inform the Debtor of the proper allocation of the New Notes among the five entities listed as comprising the Noteholder. The Debtor advised that it could not issue the New Notes until this was corrected, and asked the Noteholder to ensure the “correct quantity of corresponding rights goes to each account.” Thereafter, the Noteholder provided the Debtor the allocation of the face amount and not the claim amount. The Debtor and the Noteholder engaged in further correspondence, in each instance using the face amount and not the claim amount, and the Noteholder did not dispute the amounts at any time prior to the Plan’s effective date. Throughout the correspondences between the parties, the Court found “no evidence that [the Noteholder] inquired about or contested the amounts in [the] New Notes that the Debtor was scheduled to distribute to [the Noteholder].” Because the relevant Plan provisions placed the burden on the Noteholder to “actually and validly subscribe to the New Notes in the amount it desired, up to the Claim Amount,” the burden remained on the Noteholder to adequately cure its subscription defect and ensure that the Debtor had the exact information necessary to distribute the amount of New Notes intended by the Noteholder.

The Court also found that although the Noteholder and the Debtor both erred in their use of the face value amount of the notes rather than the allowed claim amount, the Debtor is not liable for the error. The Plan placed the burden on the Noteholder to adequately cure any defects and to ensure that the Debtor had the correct subscription information. The Court found that under the Plan “the burden of submission, at all times, remained with [the Noteholder].” Further, the Plan stated that neither the Debtor nor Reorganized Debtor "shall incur any liability for giving, or failing to give, such notification and opportunity to cure” defects in the subscription forms. Therefore, the Court held that the Debtor was not liable for any errors that arose after the Debtor informed the Noteholder of the defects in the initial subscription submissions.

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The use of rights offerings in chapter 11 plans is prevalent in the current market. While each plan and rights offering will have its own unique features, the Accuride opinion demonstrates the importance of submitting accurate information to the Debtor when attempting to subscribe to a rights offering, and to fully understand the requirements of such plan provisions. Even if a particular plan or rights offering has language different than the Accuride Plan, it is critical that counsel and the subscribing client carefully complete the subscription forms they prepare and submit to a debtor to ensure they are accurate. Subscribing parties should not risk relying on the debtor to detect errors in the subscription forms or to know that the subscribing party's intent is different from what such party submitted. Further, debtors may want to ensure they have a similar plan provision that shields the debtor from liability in connection with similar subscription form errors.