The Debtor, Saratoga and North Creek Railway, LLC (the “Debtor”), is a “common carrier” that filed for protection under Chapter 11 of the Bankruptcy Code. In the Debtor’s Chapter 11 plan of liquidation, the Debtor proposed to sell through auction its largest non-cash asset: a real property easement created by virtue of a federal stipulated judgment. The State of New York, the New York State Department of Environmental Conservation, and the New York State Olympic Regional Development Authority (together, “New York”) contested confirmation on the basis of 11 U.S.C. §§ 1129(a)(1), (3), and (7).
The Court determined that requiring bidders to assume the common carrier obligation was a valid exercise of the Debtor’s business judgment and did not violate Section 1129(a)(1), as the Debtor had reason to believe that sale to a party willing to assume the common carrier obligation would be more readily approved by the Surface Transportation Board (“STB”). The Court further found that the plan satisfied the good-faith requirement of Section 1129(a)(3) in that the Debtor was engaged in an honest, sincere, and non-abusive effort to promptly confirm its plan, sell the easement, pay creditors, and exit bankruptcy. The Court further found that the plan was feasible, dismissing the argument that a prior denial, on procedural grounds, of the stalking-horse bidder’s pre-sale application to the STB, demonstrated that the plan was not feasible.
The Court dismissed the notion that determining feasibility under Section 1129(a)(3) was impossible because the plan did not provide for sale until after confirmation, noting that such procedure was common in Chapter 11 and is contemplated in Section 1123(a)(5)(D). While STB approval of the sale was not guaranteed, the Debtor had offered evidence that it had structured the sale with the intention of maximizing the odds that the sale would be approved, and had demonstrated that there is at least a “reasonable prospect” that the stalking horse or another bidder would be able to secure STB approval. The Court also rejected the argument that the plan was not proposed in good faith, citing the Debtor’s extensive efforts to market and sell the easement, including its establishment of a data room for potential purchasers and its entry into nondisclosure agreements with multiple potential buyers, and its securing of a stalking-horse bidder as evidence of its good faith effort.
The Court next rejected New York’s contention that the plan did not satisfy the best interests of creditors test of Section 1129(a)(7). The Court found the plan did not prohibit a bid in excess of the stalking horse’s bid; it merely established the requirement, deemed necessary in the Debtor’s business judgment, that a potential purchaser assume the Debtor’s common carrier obligation. And the plan did not propose to involve a Chapter 11 trustee in the management of the debtor’s assets, but rather an unpaid plan administrator. Since the manager would not be compensated, the proposed plan would be less expensive than liquidation by a Chapter 7 Trustee.
Having rejected New York’s objections, the Court confirmed the Debtor’s Chapter 11 plan.