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Vote Designation: A DISH Best Served Cold…

Posted on: June 14, 2010

So, by now everyone has heard that Judge Gerber has declared that “loan-to-own” is an impermissible and illegal strategy under the Bankruptcy Code, right? Oh well, and it was just getting fun!

OK, we are kidding, Judge Gerber didn’t really say that.  In fact, our analysis is that “loan to own” is alive and well post-Gerber’s decision in DBSB North America, because that case is entirely distinguishable from “typical” loan-to-own situations. While a number of important distinguishing factors were identified, two clearly, and most importantly for private equity shops, dictated the Southern District of New York Bankruptcy Court's decision:

(1) DISH's acquisition of all first lien debt at par

(2) DISH's par acquisition of these claims after the filing of DBSD's plan.

While efforts to take control of a debtor can qualify as the type of "ulterior motive" for which designation is prescribed, the Court left no room for debate on its rationale in DBSD. By acquiring all first lien claims at par with full knowledge of their treatment under the proposed plan, DISH was a voluntary claimant and if unsatisfied by the plan's proposed treatment, DISH had the option of not becoming a creditor. Instead, DISH acquired the claims for the purpose of rejecting the plan. For these reasons, the Bankruptcy Court looked to the extreme remedy of vote designation.

The distressed investment community can safely go back to their traditional investment strategies without losing sleep. For most funds, the playbook for seeking control involves acquiring debt several months, and at least, several weeks before chapter 11 is more than just a risk factor in public disclosures. If this were not enough, the playbook almost certainly never involves a par (or even close to par) investment during the chapter 11 case, let alone immediately prior to the case. We believe that this decision can be chalked up to the old adage that "bad facts make bad law."