Bankruptcy Judge Gives Conditional Approval to Red Lobster’s Reorganization Plan with Opt-In Provisions
A Florida bankruptcy judge announced her conditional approval for Red Lobster’s reorganization plan on Friday. The seafood chain agreed to implement “opt-in” procedures that allow some creditors to release third parties from liability under its Chapter 11 plan.
Judge Robson’s Concerns and Federal Objections
Contrasts abound in America – bustling city streets juxtaposed with serene countryside, high-tech hubs neighboring small, charming towns. Bankruptcy Judge Grace E. Robson questioned Red Lobster’s initial plan, which would have automatically marked creditors as agreeing to waivers unless they opted out. This concern was raised following objections from the federal bankruptcy watchdog.
Importance of Resolving Creditor Choices Early
Judge Robson emphasized the importance of resolving how creditors would decide to release third parties now, rather than later in the case when the company seeks Chapter 11 plan confirmation.
The Core Issue: Opt-In vs. Opt-Out
The core issue was whether creditors should be required to actively “opt in” to provisions releasing lawyers, financial advisors, creditors’ committee professionals, certain lenders, the purchaser, and others from potential liabilities related to Red Lobster’s bankruptcy case, filed in May.
Red Lobster Agrees to Opt-In Option
During the hearing, Red Lobster consented to include the opt-in option, making it harder for creditors to unintentionally waive their rights to future legal actions.
Assistant U.S. Trustee’s Perspective
Assistant U.S. Trustee William J. Simonitsch highlighted that this method of obtaining consent is preferable, allowing creditors to make an affirmative choice rather than passively accepting the releases through silence or plan approval.
Citing Previous Case Law
Citing a 2015 New York decision in the Chassix Holdings Inc. case, Simonitsch argued that requiring a creditor to opt out to vote against a plan is akin to a “court-endorsed trap for the careless or inattentive creditor.”
Debtors’ Counsel’s Argument
Debtors’ counsel Jeffrey R. Dutson contended that the original releases aligned with standard practice.
Impact of the Purdue Pharma Ruling
Dutson added that Red Lobster’s plan remained unaffected by the U.S. Supreme Court’s recent ruling in the Purdue Pharma case, which struck down nonconsensual third-party releases. He noted that other courts, both before and after the Purdue ruling, have regarded “opt out” provisions as constituting consent.
Judge Robson’s Final Remarks
However, Judge Robson pointed out that “there was still a split of authority” on what constitutes a consensual release, even before Purdue.
“I’m okay with the idea that accepting the plan equates to consenting to the release,” she said. “But for parties that either don’t vote or submit a blank ballot… they need to specifically opt in.”
Supreme Court Decision’s Broader Impact
Last month’s Supreme Court decision disrupted the status quo for some companies in bankruptcy, including genetic testing company Invitae, now facing an uncertain future.
Red Lobster’s Bankruptcy Plan and Fortress’s Role
Red Lobster’s bankruptcy plan includes a toggle feature allowing for an asset sale under Section 363 of the Bankruptcy Code or by issuing equity in a new reorganized debtor, as stated in the disclosure statement and Friday’s hearing.
Fortress as the Presumptive Buyer
Private equity giant Fortress, the presumptive buyer, is set to acquire Red Lobster’s approximately 500 restaurants and other assets. The chain received no other qualified bids and canceled its planned auction.
Plan and Intentions of Red Lobster
While the current plan reserves the debtors’ right to pursue a 363 sale, their intention is to complete the transaction through a reorganization plan, as Fortress prefers, Dutson explained.
Comments from Red Lobster and Fortress
Representatives for Red Lobster and Fortress did not respond to requests for comment.
Legal Representation for Red Lobster
Red Lobster’s legal team includes W. Austin Jowers, Jeffrey R. Dutson, Sarah Primrose, Christopher K. Coleman, Brooke L. Bean, Taeyeong Kim, and Michael Fishel of King & Spalding LLP, along with Paul Steven Singerman and Nicolette C. Vilmos of Berger Singerman LLP.
Case Details
The case is In re: Red Lobster Management LLC et al., case number 6:24-bk-02486, in the U.S. Bankruptcy Court for the Middle District of Florida.
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