In the bankruptcy case of Virgin Orbit, Bankruptcy No. 23-10408, 2024 WL 973644 (March 6, 2024), the U.S. Bankruptcy Court for the District of Delaware (the court) addressed a motion, pursuant to 11 U.S.C. Section 1144, filed by a former equity holder who sought to revoke the confirmation order. In particular, the equity owner asserted that the confirmation order that was previously entered by the court should be revoked based on the equity owner’s claim that value was lost due to improper sale and marketing efforts by the debtors and its professionals both pre- and post-bankruptcy and, as such, they should have been “in the money” and entitled to a distribution under the confirmed plan.

In this particular case, the debtors, Virgin Orbit Holdings, Inc., Virgin Orbit National Systems, LLC, Vieco USA, Inc., Virgin Orbit, LLC, and JACM Holdings, Inc. (collectively, the debtors), provided satellite launch services to both domestic and international private and public customers. Prior to filing for bankruptcy, the debtors had tried to market the company for sale but were unsuccessful. Facing a significant liquidity crisis, the debtors filed for Chapter 11 bankruptcy relief in early 2023 with the idea of trying to maximize value for all stakeholders by having a 363 sale of substantially all of their assets. As part of the bankruptcy case, the debtors obtained an order approving certain bidding procedures, which, among other things, included an auction date and notice of the sale hearing. The bid procedures order was entered on an uncontested basis and, as part of this order, the court “determined that the bidding procedures were in the best interests of the estates, fair, reasonable, appropriate, and reasonably designed to maximize value.” In addition, the court also approved the form and manner of the sale notice as being appropriate and “reasonably calculated to provide proper notice of the auction, sale hearing and the bidding procedure.”

Following approval of the bidding procedures, a stalking horse purchaser was selected for some but not all of the debtors’ assets. In making this designation, the debtors’ investment banker explained that it had contacted over 200 potential strategic and financial bidders for the assets, solicited offers for both a going-concern sale for piecemeal asset sales, established a virtual data room, and to the extent appropriate, gave access to potential bidders to “the debtors’ management team, operational personnel and facilities.” Although multiple parties proposed indications of interest, as noted by the court, the “debtors and their advisors determined that selection of the stalking horse’s bid to establish a floor price for the subject assets in anticipation of the future auction would maximize recoveries for all stakeholders and was in the best interest of the debtors.” Following the selection of the stalking horse, the debtor, its investment banker, and the Official Committee of Unsecured Creditors (the committee) ultimately decided that it would make sense for the debtors’ assets to be sold in five distinct groups. These groups of assets were auctioned, and while there were four non-insider winning bidders for four of the asset groups, the fifth asset group was not sold.

The court eventually conducted a sale hearing. At that sale hearing, the debtors’ investment banker, along with the debtors’ CEO, submitted evidence regarding “the marketing of the debtors’ assets, the competitive bidding process [the debtors undertook], the auction, the value of the winning bids, and the good faith, noninclusive behaviors of the debtors and the purchasers.” As a result of this evidence, the court approved the four sales. With respect to the fifth group of assets that had not been sold, the debtor eventually found another bidder. Again, similar evidence was presented in support of this sale and eventually the court approved it. As noted by the court, in entering the five sale orders, the court “ruled that, among other things, the notice of the bid procedures sale, auction, objection deadline, and sale hearing was sufficiently provided to all interested parties, [and as such], the Debtors acted in compliance with the bid procedures order, [that] entering into the sales constituted a valid and sound exercise of the debtors’ business judgment, [that] the debtors and purchasers acted in good faith, and [that] the consideration provided by the purchasers was the highest and best offers for the purchased assets.”

Unfortunately, notwithstanding the ‘success” of these five sales, the proceeds generated from these sales was insufficient to repay even the debtors’ DIP financing in full, let alone any pre-petition debt or claim. Nevertheless, a settlement was eventually reached among the debtors, the committee and the DIP lender that permitted “the debtors to propose a plan [that would] satisfy administrative expense and other priority claims and provide a small distribution to holders of allowed unsecured claims.” As part of the plan, the DIP lender would receive “significantly less than full payment on account of its senior secured claims.”

The debtors’ plan had nine classes of claims and interest. Class 3 was the debtors’ pre-petition secured claim held by the DIP lender. Classes 4 and 5 were general unsecured claims and Class 9 contained the equity interests of the debtors. As part of its treatment, the plan allowed the secured creditor’s Class 3 claim in the principal amount of $28.4 million. In full and final satisfaction of this claim and the DIP claim, the debtor essentially abandoned whatever remaining intellectual property assets that were owned by the debtors and that were not sold in the prior 363 sales. As part of its plan and disclosure statement, the debtors projected that the secured creditor would ultimately recover less than half of its DIP claim and nothing on account of its prepetition secured claim. Nevertheless, as part of the settlement, the secured creditor agreed to waive whatever deficiency claim it may have against the debtors’ estates. The plan also provided that unsecured creditors would receive, at best, anywhere from 1.29% to 5.46% of their claims, although there was a convenience class established for claims in an amount of $5,000 and less. For the convenience class, these creditors were projected to receive a much higher percentage distribution but still less than a full recovery.

Classes 3 through 5 of the plan were entitled to vote on the Plan. Class 3 did not vote but Classes 4 and 5 did and accepted the plan. Ultimately, the court held a confirmation hearing. While there were pending objections filed to confirmation, these objections did not address treatment of claims and equity interests nor did the objections related to the valuation of the debtor’s assets or the debtors’ good faith in proposing the plan.

Importantly, however, the equity holders (as defined below) did not object to the plan. At the confirmation hearing, either the objections were resolved or were denied by the court and, as a result, the court confirmed the plan and entered the confirmation order. As part of the confirmation order, the court “found and concluded that, among other things, notice of the of the confirmation hearing was appropriate, the global settlement as incorporated and implemented by the plan was fair, equitable, reasonable and in the best interest of the debtors and their estates, the Plan complied with all applicable provisions of Section 1129, and the plan was proposed in good faith and not by any means forbidden by the law.” The confirmation order was not appealed and eventually became a final order.

Approximately five months after entry of the confirmation order, Dr. Hampel, a former equity holder of the debtor, filed a motion pursuant to Section 1144 of the Bankruptcy Code to revoke the confirmation order. Additional equity holders joined in this Motion (and together with Dr. Hampel, the “equity holders”). The debtors filed a response to the motion and the court eventually held an evidentiary hearing to consider this contested matter. As noted by the court, essentially the equity holders sought to revoke the confirmation order based on “an overarching belief that the debtors’ assets were worth approximately $3.7 billion as a going concern but were improperly marketed and sold in piece-meal fashion during bankruptcy ‘fire sales.’” As a result of this unfair sales process, the equity holders claimed that the value of the remaining IP assets were essentially misrepresented by the debtors and were distributed to the secured creditor at the expense of the debtors’ other creditors and interest holders. It was the position of the equity holders that this was a deliberate and intentional act by the debtors which amounted to “fraud and led to the unlawful cancellation of their equity interest.”

The court noted that the argument that the debtors did not undertake a fair and proper marketing and sale process was barred by the doctrine of res judicata. According to the court, res judicata is “a judicial doctrine that precludes parties from relitigating claims that could have been raised or litigated in an earlier action.” In reviewing the equity holders’ arguments, the court found that these arguments were essentially challenges/critiques of the sale orders and were in direct contrast to the findings and conclusions the court made when approving the bidding procedures and the respective sale orders approving such sale. The court also noted that these orders were not appealed and, as such, were final orders. Since the equity holders had an opportunity to object and be heard at these hearings and they chose not to object or participate, they were accordingly bound by the results.

The court then turned its attention to the requirements of Section 1144 in order to determine whether the confirmation order should be revoked. Citing the case of In re Melinta Therapeutics, 623 B.R. 257, 263-64 (Bankr. D. Del. 2020), the court opined that in order to show that a confirmation order was procured by fraud, the movant must demonstrate the following:

(1) that the debtor made a representation regarding compliance with Code Section 1129 which was materially false; (2) that the representation was either known by the debtor to be false, or was made without belief in its truth, or was made with reckless disregard for the truth; (3) that the representation was made to induce the court to rely upon it; (4) [that] the court did rely upon it; and (5) that as a consequence of such reliance, the court entered the confirmation order.

The court also noted that this standard was a “high” to protect “the finality of confirmation orders.”

With these factors in mind, the court then turned its attention to the equity holders’ arguments and found that they had not met the high bar necessary to revoke the confirmation order. The court found that the equity holders did not “identify with precision any alleged false representations regarding the requirements of Section 1129 that the debtors made to obtain confirmation of the plan.” Furthermore, the court also found that the equity holders “did not submit any evidence sufficient to show that the debtors’ statements were materially false.”  While the court noted that although the equity holders’ produced some evidence to support their position, their evidence was “not persuasive evidence to prove the value of the debtors’ remaining IP assets at the time of the confirmation, let alone that such value exceeded the amounts of claims senior to equity interests such that equity holders were entitled to obtain a recovery in these cases.” Furthermore, the court expressly found that the value of these assets “was determined by the marketplace after an open and fair sale process overseen by the court” and “[that this] valuation method was the ‘gold standard.’” While the sales did not yield the value the debtors and stakeholders had hoped, the court noted that in light of the sale process, the market itself determined that there simply was not enough value in the estates to allow the debtors’ equity holders to obtain a recovery. Although the court noted that this was “unfortunate,” it was not enough to revoke the confirmation order.

This opinion is a very strong reminder to those representing “out of the money” constituents that, notwithstanding debtors’ prepetition marketing materials, newspaper articles, business models/forecasts, and SEC filings, in bankruptcy things unfortunately can and will happen that ultimately disappoint a lot of people, especially equity holders. Furthermore, absent clear and convincing evidence to demonstrate value, it is almost impossible to second guess a sale process, let alone revoke a confirmation order, and clients’ expectations should be managed accordingly.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.