Briggs & Stratton Corporation – SEC and U.S. Trustee Object to Amended Plan, Taking Issue with Release Mechanism

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December 11, 2020 – The United States Securities and Exchange Commission (the “SEC”) and the United States Trustee assigned to the Debtors' cases (“the U.S. Trustee”) each filed an objection to the Debtors’ Amended Plan [Docket Nos. 1401 and 1405, respectively].

The objections take issue with what has become a familiar point of contention in respect of Chapter 11 plans: third-party releases and the proper mechanism for obtaining creditor and interest holder consent to those releases.

SEC Objection

The SEC objects to the Plan because it: (i) contains provisions that release and discharge the liability of numerous non-debtor parties in a manner that contravenes applicable law in the Eighth Circuit and Section 524(e) of the Bankruptcy Code; and (ii) does not provide an opportunity for claim and interest holders subject to these releases to affirmatively consent to be bound by them.

The SEC’s objection [Docket No. 1401] reads: “As a general matter, non-debtor third party releases contravene Section 524(e) of the Bankruptcy Code, which provides that only debts of the debtor are affected by the Chapter 11 discharge provisions. Such releases have special significance for public investors because they enable non-debtors to benefit from a debtor’s bankruptcy by obtaining their own releases with respect to past misconduct, including violations of the federal securities laws or breaches of fiduciary duty under state law. Such provisions are at odds with sound public policy considerations underlying the rights of investors to pursue legitimate claims against wrongdoers.

In this case, such releases are especially troubling because under the Plan, public investors will receive nothing, their shares will be canceled and they are not allowed to vote. In addition, the releases here benefit a litany of unnamed entities and individuals (some of whom may have no direct connection to the Chapter 11 cases) who are providing no consideration in exchange for the releases… In an attempt to relieve the Debtors of their burden to show that this is an extraordinary case justifying the imposition of nonconsensual third-party releases, the Debtors assert that the inclusion of an opt-out election renders the releases consensual with respect to public investors. However, investor silence, in the form of a failure to opt out, does not constitute ‘consent’ to third party releases in our view. Consent to releases can be achieved only if affected parties are given an opportunity to provide affirmative and unambiguous consent by opting in to the releases. It makes little sense that a shareholder would agree to be bound by a release in exchange for nothing; it is therefore paramount that consent to such releases be unequivocal…. 

There is no evidence of the extraordinary circumstances that would justify the imposition of the Releases on claim and interest holders. If releases such as these can be approved, then almost any third party release would pass muster, a result that would undermine the policy recognized by the Eighth Circuit that third party releases should be rare ‘so as to prevent an abuse of the bankruptcy process.’ To avoid having to satisfy the Master Mortgage standard, the Debtors contend that the Releases may be deemed consensual — and hence permissible under applicable law — as to holders of claims and interests who do not opt out of the Releases. In the SEC’s view, however, a release is consensual only when the affected parties are given an opportunity to affirmatively and unambiguously grant the release, separate and apart from voting on the plan, by making a specific election on the ballot or non-voting notice to opt in to the release. Because no such mechanism was provided for creditors and shareholders to affirmatively consent to the Releases, they are not consensual."

U.S. Trustee Objection

The U.S. Trustee objects to the Plan on various grounds, including:

  • The Plan improperly proposes non-consensual third-party releases in favor of numerous non-Debtors through an opt out election.
  • The Plan inappropriately extends exculpation coverage beyond estate fiduciaries. The U.S. Trustee says the exculpation also is not limited to actions or inactions taking place during the bankruptcy cases, as required by applicable law.
  • The Plan seeks to improperly pay Indentured Trustee Fees and Expenses.
  • The Plan Compromise and Settlement is overbroad seeking to bind parties that did not consent.

The U.S. Trustee's objection [Docket No. 1405] states, “The Debtors appear to view the third-party releases included in the Plan as being consensual, but the existence of this ‘consent’ is questionable. Under the definition of Releasing Parties included in the Plan, the third-party releases are deemed effective against any creditor or interest holder that, are entitled to vote and do not or those that reject the plan and fail to complete the opt out. The fact that a claimant who had the right to vote on the plan and did not return a ballot does not mean that such party consented to giving a third-party release. Rather, their silence could mean that the solicitation package never reached them, or it did not reach them in a timely manner. There may be several reason a claimant did not complete the ballot, including but not limited to the fact the claimant may not have received a ballot and opt out form.

In this case, according to Debtors’ Noticing Agent, KCC, a few thousand claimants have undeliverable mailing addresses. General unsecured creditors and other claimants should not bear the risk of mail errors, especially when they are projected to receive little to no distribution. Misunderstanding, mistake or inattentiveness are other reasons claimants may not return an opt out form."

The U.S. Trustee's objection further states, "The Debtors have failed to explain why it is appropriate to extend the exculpation provisions to these non-estate fiduciaries. As such, the U.S. Trustee objects to the Exculpation Clause of the Plan because it exculpates persons and entities that are not fiduciaries of the estate. The exculpation also is not limited to actions or inactions taking place during the bankruptcy cases, as required by applicable law.”

Plan Background

On November 9, 2020, the Debtors filed the Plan, which generally provides for the distribution of remaining cash sale proceeds and the orderly wind-down of the Debtors’ estates. Under the Plan, unsecured creditors of BSC, which include holders of outstanding unsecured notes in the aggregate principal amount of $203.5 million, will receive remaining available cash for an estimated 6% – 8% recovery. All existing equity interests in BSC will be extinguished, and shareholders will receive no distribution and are deemed to reject the Plan. Section 510(b) claimants also will receive no consideration and are deemed to reject the Plan.

On November 9th, the Debtors filed an updated Amended Plan and the related Disclosure Statement [Docket Nos. 1226 and 1227, respectively]. The amended Plan documents include changes reflecting a settlement reached with the Debtors’ official committee of unsecured creditors (the “Creditors’ Committee”) and the Pension Benefit Guaranty Corporation (“PBGC”)

On November 10th, the Court approved the (i) adequacy of the Debtors' Disclosure Statement, (ii) Plan solicitation and voting procedures and (iii) a timetable culminating in a December 18th Plan confirmation hearing [Docket No. 1233].

About the Debtors

According to the Debtors: “Briggs & Stratton Corporation (NYSE: BGG), headquartered in Milwaukee, Wisconsin, is focused on providing power to get work done and make people’s lives better. Briggs & Stratton is the world’s largest producer of gasoline engines for outdoor power equipment, and is a leading designer, manufacturer and marketer of power generation, pressure washer, lawn and garden, turf care and job site products through its Briggs & Stratton®, Simplicity®, Snapper®, Ferris®, Vanguard®, Allmand®, Billy Goat®, Murray®, Branco® and Victa® brands. Briggs & Stratton products are designed, manufactured, marketed and serviced in over 100 countries on six continents.”

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