U.S. Court of Appeals, Second Circuit
In Re WestPoint Stevens Inc.
Appealed from the Southern District of New York
Background: WestPoint Stevens Inc., the debtor, is a domestic company engaged in the manufacture and distribution of textiles. Beginning in 2000, due to “an overleveraged debt structure and an increase in foreign competition,” the debtor faced financial difficulties that required substantial sacrifices to its operations and workforce. Through the next several years, the debtor initiated strategies to improve its ailing financial health, to no avail. By 2003, the debtor concluded it would be in the best interests of its creditors and shareholders to effectuate a consensual reorganization under the Bankruptcy Code. The debtor commenced bankruptcy proceedings by filing a petition pursuant to Chapter 11 of the Bankruptcy Code. Secured creditor Aretex LLC, its affiliates — WestPoint International Inc. and WestPoint Home Inc. — and Wilmington Trust Co., the administrative agent for the junior secured creditors, appealed from the district court’s reversal of the the Bankruptcy Court order permitting the distribution of unregistered securities and subscription rights to satisfy the liens held by senior secured creditors, and distribution of the remaining subscription rights to junior secured creditors. Objecting senior secured creditors, Contrarian Funds LLC, Satellite Senior Income Fund LLC, and others, the “Contrarians,” cross-appeal from the orders of the district court to the extent that they affirm the Bankruptcy Court’s order of adequate protection payments to the junior secured creditors.
Ruling: The district court’s ruling is reversed in part and affirmed in part. If a mere reference to that court’s remedial authority could supersede any specific agreements made in the stay stipulation, then the entire stipulation would not be a binding agreement between the parties, but merely advisory guidelines for the district court’s discretion to create a remedy. Since that cannot be, the court concludes that the district court erred when it read the stay stipulation to have stayed the lien release and claim-satisfaction provisions of the sale order. Upon reading section 3.15 of the senior credit agreement in its entirety, the court also concludes section 3.15(c) does not serve to override the requirement that the first lien lenders be satisfied in cash. Accordingly, the “second securities” could not have been distributed to the second lien lenders as “permitted mandatory prepayments.”
Philip A. Lacovara of Mayer Brown LLP for the appellants, and BruceBennett of Hennigan, Bennett & Dorman LLP for the appellees