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It is an unfortunate reality that the legacy shareholders of Energy XXI Ltd are billions of dollars out of the money. Faced with this reality, the Equity Committee—knowing that its valuation arguments will fail and that shareholders are entitled to nothing—has filed the above-described motions designed to transform worthless equity interests into a variety of potential unsecured tort claims, with the goal of having those purported claims certified as a class, estimated at an astronomical value, and voted against the plan in sufficient magnitude to control the general unsecured claims class at EXXI, the Bermuda parent company from which public equity was issued. This creative approach aimed at thwarting an otherwise-consensual reorganization is contrary to the Bankruptcy Code and must be rejected.
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The Equity Committee improperly is attempting to convert the lost equity investments of EXXI’s legacy shareholders into tort and breach of contract claims to avoid the consequences of the absolute priority rule and share in the recoveries of the general unsecured creditors. Bankruptcy Code § 510(b) is specifically designed to prevent this strategy by subordinating such claims to the claims of actual unsecured creditors. In re Telegroup, Inc., 281 F.3d 138, 142 (3rd Cir. 2002) (“Congress enacted § 510(b) to prevent disappointed shareholders from recovering their investment loss by using fraud and other securities claims to bootstrap their way to parity with general unsecured creditors in a bankruptcy proceeding.”). Thus, even if some portion of the Equity Committee’s Claim were allowed, it would be subject to § 510(b) in its entirety.
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