Apr 24, 2018
Westinghouse’s reorganization plan was confirmed on Mar. 28 by Judge Michael Wiles of the Southern District of New York Bankruptcy Court one day shy of the one-year anniversary of its bankruptcy filing. This is unusually fast considering that the filing was not a “prepack” — meaning there was no reorganization plan already accepted by creditors, or a solicitation of acceptances already underway. “Prepacks,” short for prepackaged, typically average 35 days to confirmation, according to one bankruptcy judge, whereas a “non-prepack” such as Westinghouse’s typically takes well over a year to complete.
With the crucial confirmation step out of the way, the Westinghouse bankruptcy cases — there are technically 30 separate companies that make up what is generally referred to as the Westinghouse bankruptcy — are moving toward their conclusion, making it a good time to look at what made these cases unusual.
In most bankruptcies, companies have a sizable secured term and/or revolving loan facility that the company had been using to pay its ongoing costs and expenses prior to filing for bankruptcy (what is regularly referred to as a “pre-petition secured facility” or “pre-petition secured debt”.) Such facilities are typically secured by the company’s assets such as inventory, intellectual property, real estate, and receivables. In fact, many companies filing for bankruptcy also have secured debt relating to a leveraged buyout (LBO). Although Westinghouse had more than 11,000 employees and over 35,000 creditors and a collateralized letter of credit facility, it did not have a secured term or revolving loan facility at the time of its bankruptcy filing. This is extremely rare. The existence of a pre-petition secured facility is generally bad news for unsecured creditors because an all-asset secured creditor must be paid in full before any unsecured creditor receives so much as a penny. Thus, if a debtor files for bankruptcy with $35 million of assets and $35 million of secured debt, there are likely no recoveries for unsecured creditors. While Westinghouse incurred an $800 million secured debtor in possession (DIP) facility early on in its bankruptcy, a debt that needs to be paid back before most other creditors, the Westinghouse DIP contributed new funds and did not need to be used to pay off a pre-petition secured facility as happens in most bankruptcies.
The lack of pre-petition secured debt in the Westinghouse case meant that reclamation claims actually had value — something that is unusual in typical bankruptcies. Reclamation is the right of a creditor to “reclaim” goods that were received while the buyer was insolvent within a statute-set time frame. But two hurdles stand in the way of exercising reclamation rights. First, the debtor must still possess the goods in question; if they have been sold, there is nothing to “reclaim.” Second, and particularly relevant for Westinghouse, a creditor’s reclamation right is junior to the interest of a creditor that has a security interest in the goods. Simply put, a pre-petition facility that has a security interest in a company’s inventory trumps any creditor’s reclamation rights.
Exercising reclamation rights in a retail case may simply involve returning goods from inventory and shelves to creditors, but that can’t be easily done for a debtor that provides design and engineering services for nuclear power plants. With no pre-petition secured facility trumping the rights of reclaiming creditors, Westinghouse needed to address the prospect of numerous creditors seeking to reclaim goods perhaps from the middle of a nuclear power plant. Not surprisingly, on Apr. 7, 2017, only nine days after the bankruptcy was filed, Westinghouse filed a reclamation procedure motion. Once approved, that motion led to approximately 40 creditors who had asserted proper reclamation claims receiving over $11 million in lieu of the actual goods in question. This was significant considering that in a typical case such creditors, if they bothered to try to reclaim their goods, would likely receive nothing for those reclamation claims. Instead, their claims would be classified as unsecured claims, junior to the pre-petition secured creditor.
While the Bankruptcy Code provides debtors with breathing room to try to reorganize, it does not require most creditors to continue to do business with the bankrupt company. Creditors who do provide post-petition goods or services to a debtor are entitled to an administrative claim, but some creditors are uncomfortable with that arrangement because debtors can become administratively insolvent — meaning they cannot even pay their administrative claims. To address this situation, and provide its creditors with some level of comfort, Westinghouse immediately sought court approval for two interim assessment agreements with the owners of the Vogtle and Summer newbuilds. Under those agreements, the project owners were essentially responsible for paying any post-petition work on the nuclear plants. Westinghouse explained that it did so in order to keep the projects alive because they were an important part of its intended reorganization. While Westinghouse remained directly liable to creditors who provided post-petition goods or services to the projects, those creditors did not have to solely rely on Westinghouse’s financial wherewithal because of the owners’ agreement to pay what was owed.
Westinghouse is one of the few large cases in recent history with a confirmed plan setting forth a 98.9%-100% return for non-insider unsecured creditors with allowed claims. Not only that, but Westinghouse is a rare case where such a large return is not based on the recoveries of a major litigation. Here, the money to pay the creditors comes almost entirely from the sale and the operation of the business, not from a litigation recovery. While the Westinghouse plan includes settlements against certain insiders, litigation played a very small role in the Westinghouse bankruptcy.
This article originally appeared on Nuclear Intelligence Weekly, April 20, 2018.