On Sunday, February 3, 2019, at 6:52 p.m., retailer FullBeauty Brands Holdings Corp. and nine of its affiliates filed for bankruptcy in the Southern District of New York. In re FullBeauty Brands Holdings Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y.). Less than 24 hours later, FullBeauty confirmed its First Amended Joint Prepackaged Chapter 11 Plan and, in the process, broke the record for the fastest Chapter 11 case in the history of the U.S. Bankruptcy Code.1
In a world of liquidating Chapter 11 cases and fast sales pursuant to Section 363 of the Bankruptcy Code, FullBeauty is one of a growing number of debtors that are bucking the trend and using the Chapter 11 process as it was intended:2 to restructure and afford “honest but unfortunate debtor[s]” the opportunity “to start afresh[,] free from the obligations and responsibilities consequent upon business misfortunes.”3
FullBeauty and its ilk are not effectuating traditional reorganizations, whereby debtors move slowly through bankruptcy and plan confirmation serves as the culmination of a court-supervised process from start to finish. Instead, these companies are leveraging mechanisms within the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure to their fullest extent and filing “prepackaged” bankruptcies,4 a colloquial term referring to bankruptcies in which debtors solicit and garner approval of their plans of reorganization prior to filing Chapter 11 petitions.5
By filing prepackaged cases, these debtors reap many of the benefits of the bankruptcy system while truncating the in-court process, lowering their execution risk, and minimizing bankruptcy costs.
Although not a new phenomenon, prepackaged cases are gaining in popularity.6 Companies file prepackaged cases for a variety of reasons.
Frequently, debtors seeking to consummate out-of-court balance sheet restructurings turn to prepackaged bankruptcies if they have the support of a majority of their noteholders or lenders but cannot reach a resolution with certain holdouts who, outside of bankruptcy, can block such transactions. In those cases, debtors know from the outset that they will have sufficient votes to confirm a plan (see Bankruptcy Code Section 1126(c)). For these debtors, a prepackaged filing provides an orderly, efficient mechanism to restructure over the objections of a small number of nonconsenting parties. Trade and similar creditors commonly “ride through” these prepackaged cases and receive full payment on their claims.
Prepackaged filings also appeal to retailers looking to minimize their time in Chapter 11 and to maintain consumer confidence, which can be easier to do in a shorter proceeding. Prepackaged cases are also attractive to companies with asbestos liabilities looking for a binding structure to address current and future asbestos claims and to permanently enjoin future asbestos litigation via a channeling injunction. These businesses often reach agreements on a plan with known asbestos claimants and quickly confirm the plan with minimal disruption to their operations and capital structures.
Regardless of the reasons that debtors turn to prepackaged filings, their cases frequently share key features. Many are operationally sound but are operating under unmanageable debt loads (or, in the case of asbestos debtors, under the specter of unliquidated tort liabilities). They are generally not looking to benefit from the automatic stay or nonconsensual third-party releases, nor are they interested in rightsizing their real estate footprints or rejecting significant contractual obligations.
Instead, these debtors are looking to consummate quick, consensual restructurings with minimal disruption to their business operations. To effectuate these prepackaged cases, debtors often pay general unsecured claims in full or have them “ride through” bankruptcy and receive payment in the ordinary course. Similarly, employees are generally unaffected under prepackaged plans. In leaving these parties unimpaired, debtors avoid the need to solicit them (see Bankruptcy Code Section 1126(f)), thus streamlining their bankruptcy processes and saving time and money.
Not only do prepackaged cases promote stability, they also frequently result in reduced overall costs versus conventional Chapter 11 cases. Although companies incur significant prepetition legal and advisory fees as they negotiate with their lenders and other key constituencies, draft and negotiate key documents and pleadings, and solicit votes on their plans, their short time in Chapter 11 often results in limited legal and advisory fees on behalf of official committees. In particularly fast-moving cases, debtors may avoid the appointment of a committee altogether.
Moreover, by limiting their time in bankruptcy, debtors in prepackaged cases minimize the statutory fees due and owing to the United States Trustee (see 28 U.S.C. Section 1930(a)(6)). Prepackaged filings may enable debtors to operate through the consensual use of cash collateral, without the need to secure debtor-in-possession financing, with its attendant fees and expenses. Lastly, the significantly reduced execution risk and time in Chapter 11 reduce the normal and often unavoidable “creep” of costs and expenses attendant to longer proceedings.
Prepackaged cases are not without drawbacks, however. By disclosing their intention to file for bankruptcy, debtors run the risk of their creditors and interest holders taking steps to protect themselves, to the detriment of the debtors and their other creditors. For example, noteholders or lenders may cease funding debtors’ operations or limit debtors’ availability under existing facilities, demand that debtors provide excess collateral, commence litigation, execute on extant judgments, orchestrate involuntary bankruptcy proceedings, or exercise other available remedies. Similarly, aggressive trade creditors may opt to shorten or eliminate payment terms, stop providing goods or services entirely, or take other available steps to protect themselves.
Although debtors may attempt to negotiate waiver or forbearance agreements to prevent such outcomes, without the protection of the automatic stay, creditors may be unwilling to negotiate and are fully empowered to resort to state law and other remedies. Creditors may also take the opportunity to exert leverage in negotiations and may seek to fix the amount of their claims or resolve nonmonetary disputes, as debtors are often incentivized to negotiate to secure votes and/or eliminate potential objections to their prepackaged plans.
FullBeauty’s bankruptcy filing is a case study in the possibilities of a prepackaged Chapter 11 case. FullBeauty’s journey through bankruptcy began in the second half of 2018, when it began negotiating with its lenders in an effort to increase its liquidity and delever its balance sheet.7 Those efforts resulted in a restructuring support agreement (RSA) that eliminated approximately $900 million of FullBeauty’s $1.2 billion in funded debt by converting first lien debt to equity in the reorganized debtor (Riesbeck Declaration, ¶¶ 6,37).
The first lien debt holders also agreed to provide FullBeauty with up to $35 million in new money, in the form of a junior loan, to fund ongoing operations post-emergence (Riesbeck Declaration, ¶ 64). The RSA garnered the support of the vast majority of FullBeauty’s prepetition lenders as well as its private equity owners (Riesbeck Declaration, ¶ 6).
A month before filing for bankruptcy, FullBeauty issued a press release announcing the parameters of the RSA (Riesbeck Declaration, ¶ 8). The next day, it provided notice of the plan, disclosure statement, and a scheduled February 4, 2019, combined hearing to all impaired parties and the United States Trustee (Id.). FullBeauty also published notice of its impending filing in the Wall Street Journal and Financial Times International Edition (Id.). It then began soliciting votes on its plan (Riesbeck Declaration, ¶ 9).
According to FullBeauty, the plan represented a global settlement of all claims and interests in the debtors (Riesbeck Declaration, ¶ 64). Among other things, the plan provided that general unsecured claims would be reinstated or paid in full in cash in the ordinary course of business (Riesbeck Declaration, ¶ 53). Accordingly, FullBeauty’s general unsecured creditors were neither solicited nor entitled to vote on the plan. The plan also provided that all contracts and leases would be assumed and would “rid[e] through” the bankruptcy (Riesbeck Declaration, ¶ 11). The plan preserved approximately 1,600 jobs (Riesbeck Declaration, ¶ 14). Ultimately, every class of impaired creditors voted in favor of the plan (Riesbeck Declaration, ¶ 9).
On February 3, 2019, FullBeauty filed for bankruptcy. Although the company did not formally request expedited consideration of its plan,8 it stated in its first day declaration that a short stay in bankruptcy would allow it to dedicate its cash to developing its business instead of paying fees and expenses while in bankruptcy (Riesbeck Declaration, ¶ 13). As stated by FullBeauty’s counsel, “In this situation, every day in court is another day of costs without any corresponding benefit.”9 FullBeauty also noted that a prolonged foray into Chapter 11 could negatively impact its relationships with its trade creditors, to the detriment of its reorganization efforts (Riesbeck Declaration, ¶ 13).
The morning after the case was filed, the U.S. Trustee filed an objection to confirmation of the plan (see U.S. Trustee Objection, note 8). The U.S. Trustee argued, among other things, that FullBeauty had not provided adequate “time for parties in interest and the Court properly to consider the Plan and any potential objections they might raise, or to understand the process and import of the Debtors’ proposals” (U.S. Trustee Objection, pp. 10-11). The U.S. Trustee also objected to the debtors’ management incentive plan and its proposed retention and incentive bonus programs, arguing that the debtors had not sought appropriate approval or provided adequate information regarding those programs (U.S. Trustee Objection, pp. 14-15). Lastly, the U.S. Trustee argued that the plan’s broad exculpation provisions extended beyond fiduciaries; did not contain a carveout for acts of gross negligence, willful misconduct, and fraud; and did not comply with the New York Rules of Professional Conduct.
Despite these substantive and procedural objections, the court overruled the objection, approved the disclosure statement, and confirmed the plan that same afternoon.10 The plan went into effect three days later,11 and 42 days after that, the case was closed.
FullBeauty’s bankruptcy case presents a stellar example of the possibilities of a prepackaged case and highlights the potential that the Bankruptcy Code and courts provide for debtors in need of a restructuring but wary of the time, expense, and risk of a traditional bankruptcy proceeding. Although prepackaged bankruptcies represent a fraction of overall filings, their increasing popularity demonstrates the value they provide to debtors and creditors looking to effectuate expedited, largely consensual restructurings,12 allowing debtors to emerge as renewed entities with reduced liabilities and high hopes.13