Keybank Nat'l Ass'n v. Franklin Advisers, Inc.

• Decision Date: 26 March 2019
• Docket Number: No. 18-CV-3755 (RA), No. 18-CV-3762(RA),18-CV-3755 (RA)
• Citation: 600 B.R. 214
• Parties: KEYBANK NATIONAL ASSOCIATION, Plaintiff, v. FRANKLIN ADVISERS, INC., et al., Defendants. Fifth Third Bank, Plaintiff, v. Franklin Advisers, Inc., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

600 B.R. 214

KEYBANK NATIONAL ASSOCIATION, Plaintiff,

v.FRANKLIN ADVISERS, INC., et al., Defendants.

Fifth Third Bank, Plaintiff,

v.Franklin Advisers, Inc., et al., Defendants.

No. 18-CV-3755 (RA)

No. 18-CV-3762(RA)

United States District Court, S.D. New York.

Signed March 26, 2019

Jonathan Peter Gordon, Peter S. Clark, II, Reed Smith LLP, New York, NY, Kurt Gwynne, Reed smith LLP, Wilmington, DE, for Plaintiff KeyBank National Association.

Michael James Edelman, Marc Brett Schlesinger, Vedder Price P.C., New York, NY, for Plaintiff Fifth Third Bank.

Peter Friedman, O'Melveny & Myers LLP, Washington, DC, Stephanie Ann Drotar, Daniel Steven Shamah, O'Melveny & Myers LLP, New York, NY, for Defendants.

OPINION & ORDER

RONNIE ABRAMS, United States District Judge:

These cases concern a contractual dispute among creditors that provided financing to a bankrupt Chapter 11 debtor so that the debtor could continue operating during its reorganization. Plaintiffs KeyBank National Association and Fifth Third Bank initially brought this action in the Supreme Court for the State of New York, New York County, asserting state law claims for breach of contract, breach of the covenant of good faith and fair dealing, tortious interference with contract, and a declaratory judgment against Defendant Franklin Advisers, Inc. and seven mutual funds (collectively, "Defendants").¹ In short, Plaintiffs allege that Defendants' decision to enter into a financing agreement with the Chapter 11 debtor, in which Plaintiffs declined to partake, violated the terms of an earlier financing agreement between Plaintiffs, Defendants, the debtor, and related parties. After Plaintiffs filed their Complaints, Defendants timely removed these actions to this Court, pursuant to the bankruptcy removal statute, 28 U.S.C. § 1452. Now before the Court is a threshold dispute over where these cases should proceed: Plaintiffs seek to have these actions remanded to New York State Court, while Defendants seek to have them transferred to the United States District Court for the District of Delaware. For the reasons that follow, these cases will be consolidated and both parties' motions denied, such that this case will proceed in this Court, where it will be referred to the Bankruptcy Court for the Southern District of New York, pursuant to the Amended Standing Order of Reference Re: Title 11 (S.D.N.Y. Jan. 31, 2012).

FACTUAL BACKGROUND²

In June 2013, Appvion Inc. and certain of its affiliates (together, "Appvion") entered into a credit agreement with several lenders (the "pre-petition credit agreement"), including Plaintiffs and seven of the eight Defendants in these cases, among others (the "pre-petition lenders").³ A few years later, on October 1, 2017 (the "Petition Date"), Appvion filed petitions to commence reorganization under 11 U.S.C. §§ 101 et seq. , in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). See In re Appvion, Inc. , No. 17-12082 (Bankr. D. Del.) ("In re Appvion "). As a result, Appvion became a debtor in possession ("DIP").⁴ At that time, $ 253.3 million remained outstanding under the pre-petition credit agreement.

Like many Chapter 11 debtors-in-possession, Appvion needed further credit to complete its reorganization. To that end, on October 2, 2017, Appvion sought the Bankruptcy Court's permission to obtain post-petition financing through a proposed debtor-in-possession credit agreement (the "Original DIP Agreement") with certain of the pre-petition lenders, including Plaintiffs and six of the Defendants.⁵ See 11 U.S.C. § 364 (authorizing debtors-in-possession to obtain, after notice and a hearing, certain post-petition financing from lenders, in exchange for providing lenders with various security enhancements, such as priority claims to, and liens on, the DIP collateral); Fed. Bank. R. 4001(c) (setting forth the procedural requirements for requests to obtain post-petition credit under 11 U.S.C. § 364 ). The Original DIP Agreement was intended to replace the pre-petition credit agreement.

A. The Original DIP Agreement

Fundamentally, the Original DIP Agreement proposed to (1) convert approximately $ 240 million of outstanding loans under the pre-petition credit agreement into post-petition loans, which is commonly referred to in bankruptcy as a "roll-up" (the "Original Roll-Up Loans"); and (2) to provide Appvion with $ 85 million of new financing (the "Original New Money Loans") (together, the "DIP Loans"). Plaintiffs did not participate in the financing of the Original New Money Loans. In exchange for providing the DIP Loans, the loans would be given, among other things, "superpriority" status and senior security liens on all of the DIP Collateral. See 11 U.S.C. § 364(c) (providing that these protections are available to creditors who provide post-petition financing).⁶

On October 3, 2017, the Bankruptcy Court approved the Original DIP Agreement on an interim basis, and on October 31, 2017, after a final hearing, the Bankruptcy Court issued a final order (the "Original DIP Order") approving the Original DIP Agreement. See Original DIP Order, Oct. 31, 2017, KeyBank Compl., Ex. A (Dkt. 1-1); Fifth Third Compl., Ex. A (Dkt 1-1). The terms of the Original DIP Agreement and Original DIP Order most relevant to these cases provide as follows:

(1) the Original Roll-Up Loans and Original New Money Loans are to be secured by liens of equal priority and are entitled to pari passu (i.e., equal) payment priority unless the Roll Up Lenders agree otherwise (the "pari passu treatment provision")⁷ ;

(2) any modification of the Original DIP Order must not affect lien priority or payment priority of the DIP Loans, and any lien priming requires KeyBank and Fifth Third to Consent (the "priming lien prohibition");

(3) any disproportionate payment received by any lender must be shared pro rata with all of the other DIP Lenders (the "pro rata sharing requirement");

(4) any material amendment or modification to the Original DIP Order requires Plaintiffs' consent (the "material modification consent provision");

(5) any waivers, modifications, or amendments that would reduce the principal of any DIP Loan require the consent of each Lender entitled to such amount (the "principal payment reduction bar"); and

(6) the release of all or substantially all of the collateral in any transaction or series of related transaction requires the written consent of each DIP Lender (the "collateral release prohibition").⁸

Plaintiffs argue that Defendants' subsequent conduct in the bankruptcy proceeding, as detailed below, breached each of these provisions of the Original DIP Agreement.

B. The Stalking Horse Purchase and Sale Motion

At the end of 2017, Appvion defaulted on certain of its obligations under the Original DIP Agreement. Defendants and Appvion then negotiated a series of transactions in January 2018 to keep Appvion alive. Under these proposed transactions: (1) Defendants would direct the agent of the Original DIP Agreement to waive Appvion's defaults thereunder; (2) Defendants would guarantee to provide $ 15 million in additional new money loans; and (3) Defendants would direct the DIP agent to facilitate the formation of an entity to serve as a stalking horse bidder in an auction for substantially all of Appvion's assets—upon approval of the Bankruptcy Court. See 11 U.S.C. § 363. Under the proposed stalking horse bid, the $ 85 million of the Original New Money Loans would be assumed by the purchaser, while the holders of the $ 240 million in Original Roll-Up Loans, including Plaintiffs, would receive equity in the acquired company as part of a credit bid.⁹ On February 8, 2018, Appvion filed the "sale motion" seeking the Bankruptcy Court's approval of the Stalking Horse Purchase Agreement.

Plaintiffs objected to the Sale Motion. Because the Original New Money Loans would be assumed by the Stalking Horse Purchaser, while the Original Roll-Up Loans would be subject to a credit bid, Plaintiffs argued that this effectively prioritized the Original New Money Loans over the Original Roll-Up Loans, in violation of several terms of the Original DIP Agreement. In response, Defendants withdrew their proposal and revised it in a supposed effort to accommodate Plaintiffs' objections over the disparate treatment of the Original Roll-Up and New Money loans.

C. The Amended DIP Agreement & Revised Stalking Horse Procedures

Appvion and Defendants ultimately revised their proposed agreement so that the Stalking Horse Purchaser would no longer directly assume the $ 85 million in Original New Money loans. Instead, they would seek to amend the Original DIP Agreement so that the $ 85 million of Original New Money Loans would be rolled up into a new $ 100 million loan, with the extra $ 15 million constituting additional new money loans from Defendants. This new $ 100 million loan would serve as a new debtor-in-possession credit facility (the "New DIP Facility") with priority claims to, and liens on, the DIP Collateral senior to the existing claims and liens of the Original Roll-Up Loans. The Stalking Horse Purchaser would then assume the New DIP Facility, as opposed to any of the Original DIP Loans, while the Original Roll-Up Loans would be subject to a credit bid for equity in the Stalking Horse Purchaser. Thus, under these revisions, the Original Roll-Up Loans would become subordinate to the New DIP Facility, which would be made up in part of the Original New Money Loans.

On March 5, 2018, Appvion filed a revised Stalking Horse Purchase Agreement as well as a motion seeking approval of the Amended DIP Agreement that would incorporate the above amendments into the Original DIP Agreement. See Appvion Mot. to Approve DIP Financing (Bankr. Dkt. 520); Revised Asset Purchase Agreement (Bankr. Dkt. 530). After an interim hearing on March 12, 2018, and a final hearing on March 29, 2018, the Bankruptcy Court approved the proposed Amended DIP Agreement. Importantly, however, the...