Ad Hoc Comm. of Non-Consenting Creditors v. Peabody Energy Corp. (In Re Peabody Energy Corp.)

United States Court of Appeals
For the Eighth Circuit
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No. 18-1302
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In re: Peabody Energy Corporation

lllllllllllllllllllllDebtor

------------------------------

Ad Hoc Committee of Non-Consenting Creditors

lllllllllllllllllllllAppellant

v.

Peabody Energy Corporation; Citibank, N.A.; Aurelis Capital Management, LP;
Elliott Management Corporation; South Dakota Investment Council; Panning
Capital Management, LP; PointState Capital, LP; Contrarian Capital Management,
LLC; Discovery Capital Management; South Dakota Retirement System;
Wilmington Savings Fund Society, FSB; Official Committee of Unsecured
Creditors of Peabody Energy Corporation

lllllllllllllllllllllAppellees
____________

Appeal from United States District Court
for the Eastern District of Missouri - St. Louis
____________

Submitted: April 16, 2019
Filed: August 9, 2019
____________

Before SHEPHERD, MELLOY, and GRASZ, Circuit Judges.
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MELLOY, Circuit Judge.

In April 2016, Peabody Energy Corporation and its affiliates (the “Debtors”)
filed a voluntary reorganization petition under Chapter 11 of the Bankruptcy Code.
In March 2017, over the objection of the Ad Hoc Committee of Non-Consenting
Creditors (the “Ad Hoc Committee”), the bankruptcy court confirmed a
reorganization plan proposed by the Debtors. The Ad Hoc Committee appealed to
the district court,1 which dismissed the appeal as equitably moot. Alternatively, the
district court approved the plan on the merits, holding that the plan: (1) comported
with the requirement in 11 U.S.C. § 1123(a)(4) that all claims in a particular class be
treated the same; and (2) was proposed in good faith. We, too, affirm on the merits.

I. Background

The Debtors are an American coal company and some of its subsidiaries. Over
the middle years of this decade, a variety of factors decreased the demand for and
price of American-produced coal. The decreased demand and lower prices resulted
in a sharp decline in the Debtors’ revenues. Impacted by these falling revenues and
weighed down by what the Debtors call “substantial debt obligations,” the Debtors
filed for reorganization under Chapter 11.

Before filing their reorganization petition, however, a dispute arose between
several of the Debtors’ secured and senior-unsecured creditors (the “security-interest
dispute”). The creditors disagreed over the extent to which the Debtors’ assets served
as collateral for the secured creditors’ debts. The Debtors filed their petition and
then, to resolve the security-interest dispute, commenced an adversary proceeding
seeking a declaratory judgment on the matter.

1
The Honorable Audrey G. Fleissig, United States District Judge for the
Eastern District of Missouri.

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 Non-binding mediation followed. Negotiations in the mediation gradually
expanded from resolving the security-interest dispute to formulating a reorganization
plan. The negotiating parties included the Debtors and a group of seven holders of
the Debtors’ second-lien and senior-unsecured notes. On appeal, the parties refer to
this group as the “Noteholder Co-Proponents.” Members of the Ad Hoc Committee
did not participate in the mediation, though they did receive notice. Eventually, the
negotiating parties crafted a complex plan for reorganization as part of a global
settlement. The plan was expressly conditioned on approval by the bankruptcy court.

In general, the plan that emerged from the mediation provided a way for the
Debtors to raise $1.5 billion in new money to pay for distributions under the plan and
fund operations following reorganization. This was to be accomplished by two sales.
The first was a sale of common stock at a discount to certain classes of creditors. The
second was an exclusive sale of discounted preferred stock to qualifying creditors.
As will be discussed in greater detail below, creditors could qualify to buy the
preferred stock by executing certain agreements that obligated them to: (1) buy a set
amount of preferred stock; (2) agree to backstop (i.e., purchase shares of common and
preferred stock that did not sell) both sales; and (3) support the plan in the
confirmation process. The amount of preferred stock qualifying creditors could and
were required to buy depended on the portion of the prebankruptcy debt they owned
and also on when they became qualifying creditors (i.e., how quickly they took action
to qualify). Qualifying creditors also received several premiums for executing the
agreements.

More specifically, the plan included the following elements. First, the plan
required the reorganized Debtors to engage in a $750 million “Rights Offering”
following reorganization. The Rights Offering allowed holders of certain unsecured
notes known as Class-5B claims and second-lien note holders to purchase common
stock in the reorganized company at a 45% discount to the value the negotiating
parties agreed the common stock should be worth (what the Ad Hoc Committee refers
to as “Plan Equity Value”). The parties agree that this element of the plan is not
contested.
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 Second, the plan required the reorganized Debtors to engage in a $750 million
“Private Placement” whereby qualifying creditors could purchase preferred stock in
the reorganized Debtors at a 35% discount to the Plan Equity Value. A creditor
qualified to participate in the Private Placement if it: (1) held a second-lien note or
Class-5B claim; (2) signed a “Private Placement Agreement” that committed the
creditor to purchase a certain amount of preferred stock based on when it signed the
agreement; (3) agreed to backstop the Rights Offering; and (4) agreed to support the
reorganization plan throughout the confirmation process.

The negotiating parties developed an intricate three-phase system for
determining who could and must buy what in the Private Placement. In Phase One,
the Noteholder Co-Proponents were given the exclusive right and obligation to
purchase the first 22.5% of preferred stock at the discounted price. The Noteholder
Co-Proponents also had to purchase what remained of the 77.5% of preferred stock
that did not sell in the next two phases. In Phase Two, the Noteholder Co-Proponents
plus any creditor who took action to qualify by an initial deadline (the “Phase-Two
investors”) received the exclusive right and obligation to purchase the next 5% of the
preferred stock at the discounted price. The Phase-Two investors were also obligated
to purchase whatever remained unsold of the 72.5% of preferred stock in the next
phase. Finally, in Phase Three, the Noteholder Co-Proponents, the Phase-Two
investors, plus any creditor who took action to qualify after Phase Two but before the
close of the sale received the exclusive right and obligation to purchase the remaining
72.5% of preferred stock at the discounted price.

The Debtors agreed to pay creditors who participated in the Private Placement
certain premiums “in consideration for” their agreements. For agreeing to backstop
the Rights Offering, the creditors were promised a “Backstop Commitment Premium”
worth $60 million (i.e., 8% of the $750 million raised). They were also promised a
“Ticking Premium” worth $18,750,000, which was to be paid monthly through a
designated closing date. Corresponding commitment and ticking premiums were paid
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to creditors who agreed to buy their portion of the preferred stock in the Private
Placement. All the premiums were paid in common stock of the reorganized Debtors.

In essence, holders of second-lien and Class-5B claims could buy a significant
amount of stock in the reorganized Debtors at a discount and receive significant
premiums in exchange for promptly agreeing to backstop the arrangement and
support the plan. Moreover, under the plan, holders of second-lien and Class-5B
claims were also entitled to recover significant portions of their claims regardless of
whether they participated in the Private Placement. Holders of second-lien claims,
for instance, were expected to receive an estimated 52.4% of the face value of their
claims, and holders of Class-5B claims were expected to receive approximately
22.1%.

On December 22, 2016, the Debtors moved to approve a disclosure statement
and set a confirmation hearing date. The next day, the Debtors moved for an order
approving the Private Placement and backstop agreements and authorizing the
Debtors to enter into those agreements. This started the clock ticking on when
creditors had to qualify to participate in the various phases of the Private
Placement—creditors had three days to qualify to participate in Phase Two, and
thirty-three days to qualify to participate in Phase Three. The agreement-approval
motion also asked for authorization to enter into a plan-support agreement and for
approval of the Rights Offering.

Members of the Ad Hoc Committee elected not to sign the various agreements.
Thus, they never qualified to participate in the Private Placement. Instead, shortly
after the Debtors filed the motions just described, the Ad Hoc Committee submitted
the first of several alternative-plan proposals to the Debtors and the Official
Committee of Unsecured Creditors (the “Official Committee”). The proposals
included an offer to backstop a $1.77 billion rights offering that would take the place
of the Rights Offering and Private Placement proposed by the Debtors’ plan.
According to testimony and sworn statements from the Debtors’ CFO, each time the
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Debtors received an alternative-plan proposal, they reviewed the proposal with
advisors and considered it at board meetings, analyzing each proposal against the
Debtors’ main goals for reorganization.2 With each proposal, the Debtors determined
that the proposed alternative either: (1) would not accomplish their goals as well as
the Debtors’ proposed plan would; or (2) would add significant legal expenses and
delay to the already expensive and lengthy reorganization process. The Official
Committee independently reviewed the Ad Hoc Committee’s proposals and found
them to be inferior to the Debtors’ proposed plan.

On January 26, 2017, the bankruptcy court held a hearing on the Debtors’
motions. The bankruptcy court approved the disclosure statement and scheduled a
confirmation hearing. The bankruptcy court also, over the Ad Hoc Committee’s
objections, granted the Debtors’ agreement-approval motion. By the date of the
confirmation hearing, all twenty classes of the Debtors’ creditors had voted
overwhelmingly to approve the plan and approximately 95% of the Debtors’
unsecured creditors had agreed to participate in the Private Placement and make
backstop commitments. The bankruptcy court held the confirmation hearing and
confirmed the Debtors’ proposed plan. The Ad Hoc Committee promptly appealed
to the district court.

Following confirmation and the Debtors’ formal emergence from bankruptcy
as a reorganized company, the reorganized Debtors began consummating the plan.
By April 4, 2017, the reorganized Debtors had received $1.5 billion from investors
pursuant to the Rights Offering and Private Placement and had issued and distributed
millions of shares of preferred and common stock in the newly reorganized company

2
The Debtors have consistently declared throughout the bankruptcy
proceedings that their goals for reorganization were to: (1) emerge from bankruptcy
with adequate liquidity to weather the volatile business cycles inherent in the coal
industry; (2) ensure that following emergence they could pay their debts on time; (3)
maximize the size of their estate for the creditors’ benefits; and (4) achieve the
broadest consensus among creditors possible.
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to compensate those investors. The reorganized Debtors had also received exit
financing, paid over $3.5 billion in claim distributions under the plan, and completed
many more plan-related transactions before the district court reviewed the case.

Against that backdrop, the district court granted a motion to dismiss filed by
the Debtors. The district court held that the appeal was “equitably moot” because the
plan had been substantially consummated. Alternatively, the district court affirmed
the judgment of the bankruptcy court, finding that the equal-treatment requirement
of 11 U.S.C. § 1123(a)(4) had been satisfied and that the Debtors had proposed the
plan in good faith. The Ad Hoc Committee timely appealed.

II. Discussion

At issue before us is whether the bankruptcy court erred in determining that the
Debtors’ plan satisfied the equal-treatment rule and was proposed in good faith.
Because we find no error, we need not address the Debtors’ argument that the Ad Hoc
Committee’s appeal is equitably moot.

“As the second reviewing court in a bankruptcy case, we apply the same
standard of review as the district court.” Melikian Enters., LLLP v. McCormick, 863
F.3d 802, 806 (8th Cir. 2017) (citation omitted). We review the bankruptcy court’s
legal conclusions de novo and its factual findings for clear error. Id. “A finding is
clearly erroneous when although there is evidence to support it, the reviewing court
on the entire evidence is left with the definite and firm conviction that a mistake has
been committed.” Hill v. Snyder, 919 F.3d 1081, 1084 (8th Cir. 2019) (internal
quotation marks and citation omitted).

Whether a reorganization plan was proposed in good faith is a factual question.
See Hanson v. First Bank of S.D., N.A., 828 F.2d 1310, 1315 (8th Cir. 1987)
(reviewing a bankruptcy court’s finding that a plan had been proposed in good faith
for clear error), partially abrogated on other grounds by Pioneer Inv. Servs. Co v.
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Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 387 n.3, 394 (1993); see also In re
Andreuccetti, 975 F.2d 413, 420 (7th Cir. 1992) (stating that a finding whether a
reorganization plan was proposed in good faith “is one of fact, which we will not
overturn unless it is clearly erroneous”). We have not addressed whether a
determination that the equal-treatment rule has been satisfied is a factual finding
subject to clear-error review or a legal conclusion subject to de novo review. At least
one circuit has concluded that it is a factual finding and should not be disturbed
unless clearly erroneous. See Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d
1352, 1358 & n.4 (9th Cir. 1986). We need not decide the issue here. Even assuming
the standard of review is de novo, our conclusion as to the alleged equal-treatment
violation in this case would be the same.

A. Equal Treatment

The Ad Hoc Committee argues that the right of qualifying creditors to
participate in the Private Placement was unequal treatment for their claims, a
violation of 11 U.S.C. § 1123(a)(4). Section 1123(a)(4) states that a reorganization
plan must “provide the same treatment for each claim or interest of a particular class,
unless the holder of a particular claim or interest agrees to a less favorable treatment
of such particular claim or interest.” Neither the Supreme Court nor our Court has
interpreted that provision, and the Code does not define the standard of equal
treatment. See In re AOV Indus., Inc., 792 F.2d 1140, 1152 (D.C. Cir. 1986) (noting
that “neither the Code nor the legislative history precisely defines the standards of
equal treatment”).

Cases from other circuits that have dealt with the issue, however, appear to
agree that a reorganization plan may treat one set of claim holders more favorably
than another so long as the treatment is not for the claim but for distinct, legitimate
rights or contributions from the favored group separate from the claim. The Second
Circuit, for instance, held that § 1123(a)(4) was not violated where a plan treated an
equity holder better than other equity holders in the class because the equity holder:
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(1) had a secured claim separate from its equity interest; and (2) had “agreed to
attribute” to the reorganized debtor certain “causes of action against third parties.”
Ahuja v. LightSquared Inc., 644 F. App’x 24, 29 (2d Cir. 2016). The Fifth Circuit
concluded that a plan proponent’s payments to certain members of a debtor power
cooperative did not violate § 1123(a)(4) because the payments were “reimbursement
for plan and litigation expenses,” not payments “made in satisfaction of the
[members’] claims against [the debtor].” Mabey v. Sw. Elec. Power Co. (In re Cajun
Elec. Power Coop., Inc.), 150 F.3d 503, 518–19 (5th Cir. 1998). And the Ninth
Circuit upheld a plan that provided preferential treatment to one of a debtor’s
shareholders apparently because the preferential treatment was tied to the
shareholder’s service to the debtor as a director and officer of the debtor, not to the
shareholder’s ownership interest. See Acequia, 787 F.2d at 1362–63 (“[The
shareholder’s] position as director and officer of the Debtor is separate from her
position as an equity security holder.”).

Here, the opportunity to participate in the Private Placement was not “treatment
for” the participating creditors’ claims. 11 U.S.C. § 1123(a)(4). It was consideration
for valuable new commitments made by the participating creditors. The participating
creditors were investors who promised to support the plan, buy preferred stock that
did not sell in the Private Placement, and backstop the Rights Offering. In exchange,
they received the opportunity to buy preferred stock at a discount as well as premiums
designed to compensate them for shouldering significant risks.

The Ad Hoc Committee argues that Bank of America National Trust & Savings
Ass’n v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), calls for a
different conclusion. We disagree. In LaSalle, the Supreme Court rejected a
reorganization plan that gave a debtor’s prebankruptcy equity holders the exclusive
opportunity to receive ownership interests in the reorganized debtor if the equity
holders would invest new money in the reorganized debtor. Id. at 437. The plan in
LaSalle had been “crammed down” under 11 U.S.C. § 1129(b) despite the objections
of a senior class of the debtor’s impaired creditors who claimed that the plan violated
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the absolute priority rule. See id. at 441–43; see also 11 U.S.C. § 1129(b)(2)(B)(ii)
(stating that in a cramdown situation “the holder of any claim or interest that is junior
to the claims of [a class of unsecured claims may] not receive or retain under the
[proposed] plan on account of such junior claim or interest any property”). The Court
explained that the exclusive opportunity given to the equity holders was “a property
interest extended ‘on account of’” the equity holders’ equity interests in the
reorganizing debtor. LaSalle, 526 U.S. at 456. The Court found troubling the facts
that the equity holders had paid nothing for the valuable exclusive opportunity and
the debtor had not considered any alternative ways of raising capital. Id. Given these
facts, the Court concluded that the “very purpose of the whole transaction” must have
been, “at least in part, to do old equity a favor . . . because of old equity’s prior
interest” in the debtor. Id.

LaSalle is distinguishable from this case in at least three ways. First, the Ad
Hoc Committee was not excluded from any opportunity like the creditors in LaSalle
were. The Ad Hoc Committee could have participated in the Private Placement at any
phase had they timely taken the necessary actions to qualify.3 Second, unlike the
equity holders in LaSalle, creditors who participated in the Private Placement gave
something of value up front in exchange for their right to participate: They promised
to support the plan, buy preferred stock that did not sell in the Private Placement, and
backstop the Rights Offering.4 Third, unlike the debtor in LaSalle, the Debtors here

3
To the extent that the Ad Hoc Committee argues that it was unable to
participate in the first phase of the Private Placement, we note, as did the bankruptcy
court, that the Ad Hoc Committee could have intervened in the non-binding
mediation that resulted in the formulation of the plan. See Fed. R. Bankr. P. 2018(a)
(“In a case under the Code, after hearing on such notice as the court directs and for
cause shown, the court may permit any interested entity to intervene generally or with
respect to any specified matter.”).
4
The Ad Hoc Committee focuses on the fact that under the Private Placement
and backstop agreements the participants were paid handsome premiums for their
agreement to buy all unsold preferred stock and backstop the Rights Offering. The
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considered several alternative ways to raise capital, including proposals submitted by
the Ad Hoc Committee. The Debtors reviewed each alternative-plan proposal with
advisors and analyzed the merits of each at board meetings.5 With each proposal, the
Debtors determined that the proposed alternative would either be less effective at
accomplishing their goals than their plan, or it would cost too much in terms of time
or money. Indeed, the Debtors’ CFO testified at the confirmation hearing that delay
was likely to cost the Debtors around $30 million per month, not including any
litigation expenses related to resolving the security-interest dispute. Moreover, the
Official Committee, acting in a fiduciary capacity, independently reviewed the Ad
Hoc Committee’s proposals and found them to be inferior to the Debtors’ proposed
plan. Because it is distinguishable, LaSalle does not convince us that § 1123(a)(4)
has been violated here.

In sum, we agree with the bankruptcy court that the right to participate in the
Private Placement was not “treatment for” a claim. 11 U.S.C. § 1123(a)(4). The right
to participate in the Private Placement was consideration for valuable new
commitments. Consequently, the plan did not violate the equal-treatment rule of
§ 1123(a)(4).

right to buy the preferred stock at a discount, the Ad Hoc Committee argues, could
not also have been consideration for those commitments. We disagree. The Private
Placement participants did receive premiums for committing to buy the unsold
preferred stock and to backstop the Rights Offering. However, the right to buy the
preferred stock at a discount may also be seen as an incentive to agree to support the
plan or to stop pursuing the security-interest dispute. Moreover, the right to buy at
a discount and the premiums could, together, be viewed as necessary consideration
for the promises to buy the unsold preferred stock and to backstop the Rights
Offering, especially given the volatility of coal markets at the time and uncertainty
as to the Debtors’ future.
5
The Ad Hoc Committee does not challenge the Debtors’ assertion that the
Debtors consulted with advisors and considered the alternative-plan proposals at
board meetings.
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 B. Good Faith

The second issue before us is whether the bankruptcy court erred in
determining that the Debtors proposed their plan in good faith. The Ad Hoc
Committee argues a lack of good faith for three reasons: (1) “the Plan failed to
maximize the value of the Debtors’ estate” because the preferred stock was not sold
for its full value; (2) “the Plan gave certain class members additional benefits in
exchange for settling class-wide disputes”—namely, the Noteholder Co-Proponents
were able to buy more preferred stock in the Private Placement than other members
of their class; and (3) “the Plan Proponents employed a coercive process that induced
holders to vote to accept the Plan.” (Emphasis omitted).

A bankruptcy court “shall confirm a plan only if . . . [t]he plan has been
proposed in good faith.” 11 U.S.C. § 1129(a)(3). “[T]he term ‘good faith’ is left
undefined by the Code.” Hanson, 828 F.2d at 1315. However, “[i]n the context of
a chapter 11 reorganization, . . . a plan is considered proposed in good faith ‘if there
is a reasonable likelihood that the plan will achieve a result consistent with the
standards prescribed under the Code.’” Id. (citation omitted). To determine whether
a plan has been proposed in good faith, the “totality of the circumstances”
surrounding the creation of the plan must be considered. In re Madison Hotel
Assocs., 749 F.2d 410, 425 (7th Cir. 1984) (quoting Jasik v. Conrad (In re Jasik), 727
F.2d 1379, 1383 (5th Cir. 1984)). Because “[t]he bankruptcy judge is in the best
position to assess the good faith of the parties’ proposals,” id. (alteration in original)
(citation omitted), we review the question of good faith for clear error, see Hanson,
828 F.2d at 1312, 1315 (articulating the standard of review).

We hold that the bankruptcy court did not clearly err in finding that the Debtors
proposed their plan in good faith. The record shows that the Debtors mediated with
their creditors to resolve a major dispute between those creditors. The Debtors
reached a settlement with substantial input from the negotiating parties. Other
creditors who received notice, including members of the Ad Hoc Committee, could
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have joined had they chosen to intervene in the mediation. The settlement revolved
around a plan that allowed all first-lien holders to be paid off, all second-lien holders
to receive approximately 52.4% of the face value of their claims, and all unsecured
creditors to receive approximately 22.1% of their claims’ face value. The plan
garnered tremendous consensus—all twenty classes of creditors voted
overwhelmingly to approve the plan and approximately 95% of the Debtors’
unsecured creditors agreed to participate in the Private Placement and make backstop
commitments. And the Debtors permitted alternative plans to be proposed, all of
which the Debtors considered with advisors and at board meetings.

The Ad Hoc Committee disagrees, arguing that the plan failed to maximize
value. We acknowledge that the Debtors might have made more money selling the
preferred stock at full price. However, this argument ignores the point that the
Debtors might not have convinced the parties to the security-interest dispute to settle
or commit to any number of the other agreements if the Debtors had not offered the
preferred stock at a discount. The Debtors’ overall efforts to reorganize might have
otherwise been thwarted had they followed the course proposed by the Ad Hoc
Committee. We cannot look merely at the potential virtues of the Ad Hoc
Committee’s proposed alternative while ignoring the potential risks involved. See
In re Madison Hotel Assocs., 749 F.2d at 425 (stating that when considering whether
a plan has been proposed in good faith, the totality of the circumstances must be
considered).

The Ad Hoc Committee also argues that the Noteholder Co-Proponents
received a disproportionate opportunity to participate in the Private Placement. We
see no merit to their concern. A sub-group of a creditor class certainly obtained
favored treatment by participating in the mediation and in the offerings formulated
in that mediation. However, that sub-group took on more obligations than other
members of the class: They put themselves on the hook to buy more of the preferred
stock if it did not sell, something that might easily have happened as the Debtors were
emerging from mediation during volatile coal-market seasons.
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 Finally, the Ad Hoc Committee argues that the Debtors coercively solicited
votes in favor of the plan. We are somewhat sympathetic to this argument. It is
troubling that creditors wishing to take part in the Private Placement had to elect to
do so before approval of all the agreements and the disclosure statement. We are
convinced, however, by the Debtors’ argument that time was of the essence given the
volatile nature of the coal market. Moreover, as noted above, delay was likely to cost
the Debtors around $30 million per month in addition to other litigation costs. We
also find convincing an argument made by the Official Committee that, were it not
for the existence of a support agreement, Private Placement parties might have had
an incentive to sabotage the plan and obtain breakup fees should coal-market
conditions worsen.

Thus, despite any reservation we might have regarding the good faith question,
we have not been left with a “definite and firm conviction that a mistake has been
committed.” Hill, 919 F.3d at 1084 (citation omitted). We therefore do not disturb
the bankruptcy court’s factual finding that the Debtors proposed their plan in good
faith.

III. Conclusion

We affirm the judgment of the district court on the merits.
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