## Facts

- Metromedia Fiber Network, Inc. and affiliates filed for Chapter 11 and proposed a plan of reorganization.
- Deutsche Bank AG (London Branch) and Bear, Stearns & Co., Inc. held subordinated note claims under a prepetition subordination agreement.
- The plan distributed cash, stock, and stock warrants on account of the subordinated notes, but senior creditors asserted entitlement to those distributions under the subordination agreement.
- The noteholders conceded that cash and stock could be redirected to senior creditors, but argued an “X-Clause” exception allowed them to retain the warrants.
- The plan also included releases barring creditors from pursuing claims against various nondebtors, including the debtor’s former controlling shareholders and certain officers and directors.
- The bankruptcy court confirmed the plan over the noteholders’ objections; the district court affirmed.
- The reorganized debtors argued on appeal that the case was equitably moot because the plan had been substantially implemented and no stay had been obtained.

## Issues

1. Whether the subordination agreement required that stock warrants distributed under the plan “in respect of” subordinated notes be turned over to senior creditors, notwithstanding the asserted X-Clause exception.
2. Whether a Chapter 11 plan may include nondebtor third-party releases absent a showing of truly unusual circumstances making the releases important to the plan’s success.
3. Whether the appeal was equitably moot because the plan had been substantially consummated and appellants did not obtain a stay.

## Decision

- The Second Circuit held the appeal was not equitably moot because effective, targeted relief could be granted without undoing the plan’s core transactions.
- The court affirmed confirmation insofar as it reallocated the stock warrants to senior creditors under the subordination agreement.
- The court reversed confirmation insofar as it approved the nondebtor releases and remanded for further proceedings consistent with striking or justifying those releases.

## Legal Principles

- Subordination agreements are enforced according to their terms; plan consideration distributed “in respect of” subordinated debt (including equity-linked instruments such as warrants) is generally subject to subordination unless the contract clearly provides otherwise.
- Nondebtor third-party releases in a Chapter 11 plan are extraordinary and should not be approved absent findings that truly unusual circumstances make the release terms important to the success of the plan.
- Factors sometimes relevant to evaluating nondebtor releases include identity of interests between debtor and released party, substantial contribution by the released party, necessity of the injunction to reorganization, creditor support for the releases, and the extent to which affected claims are paid.
- Equitable mootness is a prudential doctrine; an appeal from a confirmed plan may proceed when the court can grant meaningful relief without destabilizing consummated plan transactions.

## Conclusion

The Second Circuit enforced the subordination agreement to require turnover of warrants distributed on account of subordinated notes, but vacated broad nondebtor releases because the record did not show truly unusual circumstances making those releases necessary to the plan’s success, and it reached the merits because effective relief remained feasible.


Deutsche Bank AG, London Branch v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005)