Chesapeake, Franklin Head to Bankruptcy Showdown With Creditors

By Steven Church
(Bloomberg)

Chesapeake Energy Corp. and Franklin Resources Inc. will need to defend their debt restructuring plan in December from attack by unsecured creditors who claim the proposal is built on a fraudulent scheme, a judge said Friday.U.S. Bankruptcy Judge David Jones said he’ll consider the creditors’ claims Dec. 15 when he decides whether to approve Chesapeake’s proposal to exit bankruptcy by handing the company to senior lenders including Franklin. Jones also approved a disclosure statement that creditors will use to decide how to vote on Chesapeake’s reorganization plan.Between now and Dec. 15, a committee of unsecured creditors will prepare their case against Chesapeake and Franklin. The committee said in court papers that the two firms concocted a “liability management scheme” that shifted value to Franklin and other senior lenders at the expense of unsecured noteholders. The plan “infected” Chesapeake’s capital structure with $1.5 billion in debt from a unit that should have been responsible for paying the liability on its own, unsecured creditor lawyer Robert Stark said in court Friday.Franklin disputes the allegations and will fight them, said Michael S. Stamer, an attorney for the investing giant.

“Mr. Stark has gone out of his way to poke the bear during his presentation,” Stamer told Jones during the hearing, which was held by telephone.

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Chesapeake also disagrees with the unsecured committee’s claims, company attorney Patrick J. Nash said during the hearing.

The creditor committee want Jones to let them file a so-called fraudulent transfer lawsuit that would challenge the legitimacy of billions of dollars of senior debt. Jones said he will consider that request as part of a broader hearing into whether Chesapeake’s reorganization plan should be approved.

Chesapeake, based in Oklahoma City, Oklahoma, filed for bankruptcy in June. The committee is arguing Chesapeake was insolvent and should have filed earlier, but delayed in order to make debt held by Franklin and other lenders more difficult to challenge.