## Facts

- Zenith Electronics Corporation, a Delaware consumer electronics company, suffered sustained operating losses and financial distress over many years.
- LG Electronics, Inc. (LGE) became Zenith’s controlling shareholder and also its largest creditor after significant equity investments and credit support.
- Zenith pursued a prepackaged Chapter 11 plan after negotiations with LGE and major bondholders amid continuing losses and limited financing alternatives.
- Before filing, Zenith solicited votes on the plan using an SEC-reviewed disclosure statement; bondholder classes accepted the plan, while an equity committee and minority shareholders objected.
- The plan used a going-concern valuation of roughly $310 million and reallocated ownership so LGE and creditors would receive substantially all new equity, leaving existing shareholders with little or no recovery.
- The plan also contained releases and injunctions benefiting LGE and other nondebtors.

## Issues

1. Whether the prepetition disclosure materials provided “adequate information” under 11 U.S.C. § 1125 so that prepetition votes could be counted under § 1126(b).
2. Whether the plan’s valuation and distributions satisfied the best-interests test (§ 1129(a)(7)) and were fair and equitable to equity under the absolute priority rule (§ 1129(b)).
3. Whether the plan was proposed in good faith under § 1129(a)(3) despite allegations that the controlling shareholder engineered an undervaluation to eliminate minority equity.
4. Whether plan provisions granting nondebtor releases and related injunctions were permissible, and if not, whether confirmation could be conditioned on narrowing them.

## Decision

- The court overruled the objections, approved the disclosure statement, and held that the plan satisfied confirmation requirements.
- The court found the disclosure adequate for § 1125 and concluded the prepetition solicitation complied with § 1126(b), permitting the votes to be counted.
- The court credited the debtor’s valuation evidence as within a reasonable range and determined senior claims exceeded enterprise value, leaving equity out of the money.
- The court found the plan was proposed in good faith and pursued legitimate reorganization objectives consistent with the Bankruptcy Code’s priority scheme.
- The court required modification of certain overbroad nondebtor release provisions as a condition to confirmation.

## Legal Principles

- Prepetition acceptances may be counted under § 1126(b) if solicitation complies with applicable nonbankruptcy law and the materials contain adequate information satisfying § 1125.
- On contested confirmation, the bankruptcy court determines enterprise value based on the evidentiary record; a valuation need only fall within a reasonable range supported by credible methodologies and testimony.
- Under the absolute priority rule, equity cannot receive value unless senior classes are paid in full; if enterprise value is insufficient to satisfy senior claims, equity may be eliminated without violating § 1129(b).
- A plan satisfies § 1129(a)(3) good faith when proposed for legitimate reorganizational purposes and consistent with the Bankruptcy Code, even if a controlling stakeholder benefits, so long as distributions follow statutory priorities.
- Nondebtor releases and related injunctions require careful tailoring and justification; overbroad provisions may prevent confirmation unless narrowed to fit governing standards.

## Conclusion

The bankruptcy court approved Zenith’s prepack disclosure and conditionally confirmed the plan, holding that SEC-reviewed, information-rich solicitation supported counting prepetition votes; the debtor’s valuation showed equity was out of the money under absolute priority; the plan was proposed in good faith; and confirmation required narrowing nondebtor release provisions.


In re Zenith Elecs. Corp., 241 B.R. 92 (Bankr. D. Del. 1999)