In the most recent signal that the legal challenge to Eletson Holdings Inc.’s Chapter 11 plan may be running out of options, Reed Smith LLP, Eletson’s former legal counsel, and the bankrupt shipping company’s former shareholders, officers and directors were ordered by a New York bankruptcy judge on Jan. 24 to comply with its Chapter 11 plan.
The judge overseeing the shipping company’s Chapter 11 case in New York’s Southern District, John P. Mastando III, ordered former Eletson shareholders to take “all steps reasonably necessary” to assist the reorganized company in amending or updating corporate governance documents within seven days of the court’s Jan. 24 ruling.
Judge Mastando warned that failure to do so would result in a hearing “on short notice” to determine whether any actions were taken to interfere with the implementation of Eletson’s Chapter 11 plan. Mastando made it clear that the confirmed reorganization plan put new owners in control of the company and the former board of directors ceased to exist.
Reorganized Eletson Holdings had filed a motion for an order imposing sanctions on Eletson’s former shareholders, officers, directors, and former debtor counsel Reed Smith for failure to comply with the Chapter 11 plan terms. Eletson said in court documents that its former owners, subsidiaries, affiliates, and personnel including directors and officers, principals, attorneys, and other professionals “attempted to subvert the confirmation order.” The official committee of unsecured Eletson creditors filed a statement of support for Eletson’s motion to sanction the company’s former owners and their attorneys.
Eletson’s case has been led by Louis M. Solomon of Reed Smith. According to Reed Smith’s website, Mr. Solomon is the firm’s Head of International Litigation (US). His listed practice areas focus on international litigation, trials, and complex commercial disputes, with no explicit mention of restructuring as a primary area of practice. Reed Smith’s erratic litigation strategy failed to withstand judicial scrutiny.
Reed Smith most recently drew criticism in the court for failing to update certain corporate governance documents to transfer ownership to the rightful owners of Eletson in Liberia and for filing baseless litigation against the company’s new owners using the debtor’s funds and resources that was deemed a collateral attack on U.S. court orders.
Reorganized Eletson also asked the judge to compel the debtors and their counsel, Reed Smith, to comply with the confirmation order and effectuate the Chapter 11 plan by updating the Liberian International Ship and Corporate Registry to reflect the reorganized company as the new owner of the reorganized debtor.
Eletson’s reorganization plan was approved by the U.S. Bankruptcy Court for the Southern District of New York on Oct. 25, 2024. Eletson announced on Nov. 19 that it completed its restructuring and emerged from Chapter 11 protection.
In Friday’s hearing, Judge Mastando reiterated to the court that the confirmation order recognizes a new board of Eletson Holdings Inc. and the new board of directors can take whatever actions it deems appropriate on behalf of Eletson. Despite the confirmation order, former debtor counsel Reed Smith has refused “to exercise their corporate authority to effectuate the transfer of ownership the plan requires,” according to a transcript of the Jan. 24 court hearing.
Eletson’s restructuring plan gave control of the reorganized company to petitioning creditors led by Pach Shemen LLC. Adam Spears was appointed the reorganized company’s new chief executive. New members of Eletson’s board include Spears, Leonard Hoskinson, and Timothy Matthews.
In Friday’s court hearing, the judge overseeing the case pointed out to the court that Eletson’s Chapter 11 plan became effective on Nov. 19, 2024. And, “pursuant to the plan the Reorganized Eletson Holdings was created, and the former board was dissolved and terminated.” Also, Judge Mastando noted that on the effective date, Reed Smith’s representation of Eletson Holdings was terminated. “The confirmation order and the Chapter 11 plan are binding on the former debtor’s counsel as these parties actively appeared and participated in the bankruptcy case,” the judge said. “These parties availed themselves of the Bankruptcy Court and are subject to enforcing the confirmation order and Chapter 11 plan.”
Eletson is the parent company of subsidiaries that own and operate a fleet of medium-range double-hull product tankers that carry refined petroleum products.
The shipping company’s bankruptcy is rooted in a dispute over Eletson Gas, a liquefied petroleum gas shipping venture that was the result of Eletson’s partnership with Blackstone Tactical Opportunities. Blackstone sold its preferred shares in the venture in November 2021 to Murchinson, an alternative investment management firm. The shares were held in a special purpose entity created by Murchinson that was called Levona Holdings Ltd. After Levona acquired the shares, Levona and Eletson began negotiating how the debtors could buy the shares back; while there was a binding offer letter in Feb. 2022, a dispute arose which led to an arbitration. At the same time Murchinson and Lenova negotiated to buy a majority of $300 million in debt with noteholders who had not received interest payments since 2018. Murchison formed a special purpose vehicle, Pach Shemen, in December 2022 to hold the new notes which were officially acquired in January 2023.
In March 2023 Pach Shemen and other entities filed an involuntary Chapter 7 bankruptcy against the debtor which was converted to a voluntary Chapter 11 in September 2023.
The dispute between Eletson and Levona has its roots in a 2022 agreement in which Levona provided cash to ensure five of the shipping company’s 14 vessels would not be seized by creditors. As part of the agreement Levona held preferred interests that Eletson could buy back. The dispute, which went into arbitration, was over whether Eletson executed its option to buy the interests in a timely fashion. The shipping company said it did so within 30 days of a Feb. 22, 2022, deadline. The dispute flared up when Levona tried to sell nine of Eletson’s ships to a competitor.
The pivotal question in arbitration was whether Eletson had exercised its right to buy the preferred interests in the company. Arbitration ruled in Eletson’s favor but Levona learned about relevant documents contradicting it had exercised the purchase option. The documents were not shared in the arbitration proceedings even though the process required both parties to share all relevant documents.
From March 2024 until June 2024 Levona fought for relief from the bankruptcy court’s protective order so they could present the documents to the court.
According to a Sept. 6, 2024, order and opinion from U.S. District Judge Lewis J. Liman, during the arbitration when Levona presented evidence the purchase option had not been exercised in the form of a July 13 email where Eletson’s CFO sent a buyout proposal, “Eletson lied about it.” And, “Eletson also withheld documents necessary to establish the purchase option had not been exercised,” according to Judge Liman’s opinion and order.
Liman noted further that “Eletson constructed extraordinary obstacles to prevent Levona uncovering its fraud. Levona time and again asked for the documents that might show that Eletson had withheld material evidence from the arbitrator. And Eletson time and time again engaged in efforts to frustrate Levona from obtaining that evidence.”
The judge also chastised Eletson for making meritless and “arguably frivolous arguments that the documents were not relevant” to the proceedings.