## Facts

- Journal Register Company and affiliates, a national newspaper and media business, filed Chapter 11 petitions on February 21, 2009 amid severe financial distress and approximately $695 million in secured debt.
- A syndicate of secured lenders held perfected first-priority liens on substantially all debtor assets, with JPMorgan Chase Bank, N.A. acting as administrative and collateral agent.
- The debtors proposed an amended joint plan that was negotiated with the secured lenders and later with the official unsecured creditors’ committee.
- Valuation testimony indicated the reorganized enterprise value was at most $300 million, leaving unsecured creditors and equity holders out of the money on a going-concern basis.
- The plan placed general unsecured claims in a single class but included a secured-lender-funded “trade account” of about $6.6 million to pay certain trade creditors.
- Eligibility for the trade-account distribution required that a trade creditor not object to the plan and provide releases in favor of the debtors and secured lenders; unused amounts would revert to the secured lenders.
- Central States (a multiemployer pension plan), the Guild (a union), the State of Connecticut (tax claim), and minority shareholders objected, arguing the plan’s structure was unlawful.

## Issues

1. Whether a secured-lender-funded distribution to only some creditors within a general unsecured class constituted impermissible differential treatment or “unfair discrimination” under the confirmation standards.
2. Whether the plan violated the absolute priority rule or other requirements of 11 U.S.C. § 1129 where equity received nothing but some unsecured creditors received a payment sourced from secured lenders.
3. Whether conditioning payment on non-objection and third-party releases rendered the plan unconfirmable.
4. Whether the plan satisfied the best-interests and feasibility requirements of § 1129(a).

## Decision

- The bankruptcy court overruled the objections and confirmed the amended plan.
- The court held that the trade-account payments were a voluntary secured-creditor carve-out and were structured as non-estate property, with reversion to the lenders if undistributed.
- The court found no unfair discrimination because unsecured creditors had no entitlement to estate value given the valuation and the secured debt; the challenged distribution did not deprive non-recipients of value to which they were legally entitled.
- The court held equity properly received no distribution under absolute priority because senior creditors were not being paid in full.
- The court approved the conditional releases/payment structure as part of the lenders’ bargained-for exchange for providing the gift.
- The court found the plan satisfied § 1129, including best interests (unsecured recovery would be zero in liquidation) and feasibility (plan supported ongoing operations and trade relationships).

## Legal Principles

- A secured creditor may voluntarily allocate part of its recovery to junior creditors through a plan where the transferred value is clearly structured as non-estate property and the plan otherwise satisfies § 1129.
- Differential payments funded by a secured creditor’s carve-out generally do not constitute “unfair discrimination” where the affected junior class is out of the money and has no legal entitlement to estate distributions.
- The absolute priority rule bars equity recovery when senior creditors are not paid in full, even if a senior creditor chooses to share its own recovery with selected junior creditors.
- Plan provisions conditioning receipt of a secured creditor’s voluntary contribution on releases and related commitments may be confirmable when supported by evidence that the consideration is essential to the contribution and the restructuring.
- Best-interests and feasibility findings may rest on valuation evidence showing no liquidation recovery for unsecured creditors and on testimony that the plan structure supports continued operations.

## Conclusion

The court confirmed a Chapter 11 plan permitting secured lenders to fund a non-estate “gift” to selected trade creditors conditioned on releases, reasoning that the debtors were deeply insolvent, unsecured creditors and equity had no entitlement to estate value, and the plan otherwise met § 1129’s confirmation requirements.


In re Journal Register Co., 407 B.R. 520 (Bankr. S.D.N.Y. 2009)