1 1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS 2 SHERMAN DIVISION 3 4 IN RE: ) BK. NO: 20-42492-BTR 5 ) 6 SPHERATURE INVESTMENTS, ) 7 LLC ) 8 D E B T O R. ) 9 10 11 * * * * * * * * * * 12 TRANSCRIPT OF PROCEEDINGS 13 * * * * * * * * * * 14 15 16 17 18 19 20 BE IT REMEMBERED, that on the 30th day of December, 21 2020, before the HONORABLE BRENDA T. RHOADES, United States 22 Bankruptcy Judge at Plano, Texas, the above styled and 23 numbered cause came on for hearing, and the following 24 constitutes the transcript of such proceedings as hereinafter 25 set forth: Case 20-42492 Doc 248 Filed 04/19/21 Entered 04/19/21 08:20:49 Desc Main Document Page 1 of 93
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1
1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS
2 SHERMAN DIVISION
3
4 IN RE: ) BK. NO: 20-42492-BTR
5 )
6 SPHERATURE INVESTMENTS, )
7 LLC )
8 D E B T O R. )
9
10
11 * * * * * * * * * *
12 TRANSCRIPT OF PROCEEDINGS
13 * * * * * * * * * *
14
15
16
17
18
19
20 BE IT REMEMBERED, that on the 30th day of December,
21 2020, before the HONORABLE BRENDA T. RHOADES, United States
22 Bankruptcy Judge at Plano, Texas, the above styled and
23 numbered cause came on for hearing, and the following
24 constitutes the transcript of such proceedings as hereinafter
25 set forth:
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1 P R O C E E D I N G S
2 COURTROOM DEPUTY: Spherature Investments,
3 LLC, case 20-42492; along with Rovia, LLC, case 20-42493;
4 World Ventures Marketing, LLC, case 20-42494; World Ventures
5 Marketing Holdings, LLC, case 20-42495; World Venture
6 Marketplace, LLC, case 20-42496; World Venture Services,
7 20-42497, in each of these cases, motions for joint
8 administration. And in the lead case, first day motions.
9 THE COURT: Appearances.
10 MR. HELT: Good morning, Your Honor. Marcus
11 Helt and Tom Scannell from the law firm of Foley Lardner,
12 proposed counsel for the debtors. Also representing the
13 debtors on the phone this morning is Mr. Erik Toth of Larx
14 Advisors, the proposed chief restructuring officer for the
15 debtors.
16 Thank you.
17 THE COURT: Okay.
18 MR. RUDD: Good morning, Your Honor. This is
19 Jason Rudd with Wick Phillips, also on the line is Scott
20 Lawrence with Wick Phillips, on behalf of Montgomery Capital
21 Partners, the agent for the senior secured lenders.
22 MR. LAMBERSON: Good morning, Your Honor.
23 This is Phillip Lamberson of Winstead PC appearing on behalf
24 of Seacret Direct, LLC.
25 MR. BINFORD: Good morning, Your Honor. Jason
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1 Binford with the Office of the Attorney General of Texas
2 representing the AG's Consumer Protection Division.
3 MS. SIMS: This is Kimberly Sims representing
4 creditor Dan Stamen.
5 MR. LINDEMANN: Good morning, Your Honor.
6 This is Blake Lindemann representing Melody Yiru on behalf of
7 herself and all other similarly situated.
8 MR. EASTLAKE: Good morning, Your Honor. This
9 is David Eastlake of Greenberg Traurig on behalf of SSP
10 Legacy Tennyson Center, LLC.
11 MS. HAWKINS: Good morning, Your Honor. This
12 is Tabitha Hawkins, pro se, creditor.
13 MR. SHELBY: Good morning, Your Honor. This
14 is Rick Shelby on behalf of Phelps Dunbar, a creditor.
15 MR. BERGER: Good morning, Your Honor. This
16 is Evan Berger from Becker & Poliakoff on behalf of creditor
17 Aviva (indecipherable word), LLC.
18 THE COURT: Okay. All right. Any other
19 appearances?
20 All right. Mr. Helt, it's your hearing. You may
21 proceed.
22 MR. HELT: Thank you, Your Honor. First and
23 foremost, thank you so much for making time to accommodate
24 our request for emergency consideration of first day motions.
25 Given the holiday season, we're especially grateful to
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1 Ms. Rasco and the rest of her staff for working really hard
2 for us. So thank you again for that.
3 Pursuant to the agenda we filed on December 23rd at
4 docket number 24 in the lead case number, 20-42492, styled In
5 re Spherature Investments, LLC, there are currently a lot of
6 matters set for today's hearing. Those matters are motion
7 for joint administration, docket number 3; notice of complex
8 case designation, docket number 7; a motion to extend the
9 deadline to file schedules and statements of financial
10 affairs, docket number 8; motion for an interim -- to
11 establish interim notice procedures, docket number 9;
12 insurance motion, docket number 10; motion to honor customer
13 incentive programs, docket number 13; a wage motion, docket
14 number 16; tax motion, docket number 17; cash collateral,
15 docket number 18; utilities motion, docket number 19; and
16 cash management, docket number 21. For reference, I simply
17 just listed these in numerical order as they're filed on the
18 docket.
19 Before we get started on the specific motions, Your
20 Honor, I thought it might be helpful for me to give you a
21 brief background of the debtors and their business.
22 World Ventures was founded in 2005 and sells travel and
23 lifestyle memberships known as DreamTrips. There are four
24 membership levels. There's a silver, gold -- there's a
25 silver, there's a gold, there's platinum, and there's
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1 titanium with different price levels and different benefits.
2 Members utilize the website www.dreamtrips.com to book
3 curated group travel packages, also known as DreamTrips.
4 World Ventures uses a multi-level marketing strategy to
5 market its memberships to the general public through a sales
6 force of independent contractors, sales representatives.
7 World Ventures sales representatives sell the DreamTrips'
8 memberships to family, friends, and contacts to earn
9 commissions on the recurring monthly membership purchases.
10 Sales reps also have the opportunity to recruit other sales
11 reps into the World Ventures -- into World Ventures and earn
12 commissions on membership sales made by the sales reps in
13 what we call their down lines.
14 At this time, the plan for this bankruptcy case is to
15 continue a marketing and sale process culminating in a
16 transaction approved by this Court that maximizes the value
17 for all stakeholders, including sales reps and other
18 creditors. We currently have 21 parties, at least 21 parties
19 under NDA and active in the data room. We're also trying to
20 finalize a stalking horse agreement soon to get before Your
21 Honor for approval.
22 Now onto the service and the notice of today and the
23 relief sought today, Your Honor. Each voluntary petition in
24 the 11 first day motions were served by first-class mail on
25 December 22nd and December 23rd on the United States Trustee,
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1 Internal Revenue Service, counsel for the secured lender, the
2 top 40 non-insider creditors in each case, and all of the
3 parties that have requested notice in the case. The
4 insurance providers were served the voluntary petitions and
5 insurance motion, docket number 10, on December 23rd, 2020 by
6 first-class mail. The State taxing authorities were served
7 voluntary petitions and requests for emergency first day
8 hearing and the tax motion on December 23rd by first-class
9 mail. The proposed (indecipherable word) providers were
10 served the voluntary petitions, the request for emergency
11 hearing, and the utility motion on December 23rd, also by
12 first-class mail. We served this Court's order setting
13 today's hearing, docket number 22, and the notice of today's
14 hearing, docket number 23, we served those on December 23rd
15 on the entire matrix by first-class mail. And this matrix
16 includes the United States Trustee, Internal Revenue Service,
17 the secured lender, the top 40 non-insider creditors, and all
18 parties that have requested notice. Further, we've served
19 copies of the first day pleadings on December 23rd -- 22nd
20 and 23rd via electronic mail to every email address in our
21 possession for the parties potentially interested in the
22 first day relief.
23 The certificates of service representing the service
24 that I just mentioned are filed with the docket numbers 27,
25 28, 29, and 38. And they were filed by the debtors' proposed
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1 noticing agent confirming the parties served, the methods of
2 service, and the dates of service.
3 Since filing the motion, we've been in open and ongoing
4 negotiations with the secured lender, the United States
5 Trustee, and other parties regarding the first day matters.
6 We believe with this extensive service provided by the claims
7 agent, limited interim relief we're requesting today, and
8 with all right reserved for final relief, the notice provided
9 to the parties with interest in this case is good and
10 sufficient for today's purposes.
11 In support of the 11 motions set for today, the debtors
12 filed the declaration, the first day declaration of Erik
13 Toth. He's on the phone. That declaration was filed on
14 December 23rd and it's found on the docket at docket 20 in
15 the lead case. The declaration contains a detailed
16 description of the debtors, their operations, the nature of
17 the current financial distress, the need to file these cases,
18 and the specific support for each of the 11 first day
19 motions. Mr. Toth is also here today. He's present. He's
20 on the phone. He's able to be sworn in and can affirm that
21 the testimony that he put in the declaration is true and
22 correct.
23 Accordingly at this time, Your Honor, we'd ask the
24 Court to accept Mr. Toth's declaration testimony as his
25 proffer and then we'll move into the specific motions.
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1 THE COURT: All right. Docket number 20,
2 which constitutes the declaration will be admitted as the
3 debtors' -- as Mr. Toth's direct testimony.
4 Does anyone wish to cross-examine the witness?
5 MR. LINDEMANN: Your Honor, this is Blake
6 Lindemann. Ms. Yiru Would like to cross-examine the witness
7 as to certain issues on the first day motions.
8 THE COURT: Okay. We'll get there -- to that
9 point in just a moment. So you may cross-examine in just a
10 little bit, okay, after I take opening statements from
11 everybody.
12 Okay. Was there any other opening statements to be
13 made by you, Mr. Helt?
14 MR. HELT: Only -- the only other opening
15 statement is, if it pleases the Court, Mr. Scannell and I are
16 going to share the presentation of the first day matters,
17 given the number of the matters on the docket today. Unless
18 you have specific preference of order, I would propose that
19 we take up the cash collateral first and then move on to the
20 less substantive and sort of more administrative motions from
21 there.
22 THE COURT: I mean that's fine. I think I'd
23 like to handle the joint administration motion first so that
24 once we get that taken care of, everything from that point on
25 will be in the lead case.
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1 MR. HELT: Great. Thank you, Your Honor.
2 THE COURT: Okay.
3 MR. HELT: Mr. Scannell will handle joint
4 administration and then I'll come back to handle cash
5 collateral.
6 THE COURT: Thank you.
7 MR. HELT: Thank you.
8 MR. BINFORD: Your Honor, this is Jason
9 Binford. If I could just make a short opening statement on
10 behalf of the Attorney General's Office.
11 THE COURT: I'll hear you now. Thank you.
12 MR. BINFORD: Thank you, Your Honor.
13 I will have a few specific comments to the customer
14 program motion, but I think I'll just take those up when the
15 debtor takes that up. But I have more general comments that
16 I suppose qualify more as sort of opening statements.
17 I am appearing this morning on behalf of the Consumer
18 Protection Division of the Attorney General's Office. And
19 the Consumer Protection Division has had a fairly long
20 history with these debtors regarding customer complaints that
21 they have received not only directly to the AG's Office, but
22 through other channels, such as the Better Business Bureau.
23 The history of that has been, I would describe it as spotty
24 regarding the debtors' willingness to respond to those
25 customer complaints and cooperate with the Attorney General's
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1 role in that process.
2 The only thing I'll say is that I look forward to
3 working with debtors' counsel on this. As Your Honor
4 probably knows, they're my former colleagues. And I think
5 that level of familiarity will hopefully bear fruit in
6 having some open discussions. But the main point that the
7 AG's Office wants to make is that the debtors do look to
8 enjoy the awesome powers of the Bankruptcy Code, whether
9 that's 363 or 1129. And we're going to -- we're hopeful that
10 they understand the responsibilities to act as a good
11 corporate citizen during that process, including, but
12 certainly not limited to dealing with their ongoing
13 obligation to address customer issues.
14 So that's really going to be our role in this case on
15 those issues. And, again, I do have just a couple of small
16 comments regarding the customer program motion. But I'll
17 reserve when that gets taken up.
18 THE COURT: Okay. Does anyone else wish to
19 make an opening statement?
20 All right. Then let's start with the --
21 MR. LAMBERSON: Your Honor, I'm sorry, this is
22 Phillip Lamberson on behalf of Seacret Direct. I'll be very
23 brief.
24 I just wanted to mention that Seacret is actually a
25 multi-level marketing business that sells beauty, health, and
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1 wellness products. As indicated in Mr. Toth's affidavit, the
2 debtors have entered into an agreement with Seacret in the
3 summer, actually, of 2020 to sell -- to allow their agents to
4 sell Seacret products. That agreement was reconstituted
5 shortly before the filing in November of 2020 to basically
6 allow the World Ventures agents to join Seacret, if they
7 chose, to sell Seacret products while they also sold World
8 Venture products and obtained commissions. It was, frankly,
9 an attempt to give the debtors an ability to help retain some
10 of their agents, considering the pandemic effect on the
11 travel services, which was not similar to Seacret's products,
12 which again are health and beauty products. So I just wanted
13 to give you a little bit of background as to what Seacret's
14 participation is here.
15 We also -- we also have a term sheet with the debtors.
16 We're trying to put together an APA. Mr. Helt had mentioned
17 a stalking horse buyer. I think he probably was referring to
18 us. We know there are a couple of other buyers in the mix.
19 But I just wanted to give the Court a little bit of
20 background as to Seacret's participation here, which is
21 actually not as a creditor, but as an interested party and a
22 potential purchaser.
23 THE COURT: Okay. All right. Thank you.
24 All right. Let's then turn to the joint administration
25 motion.
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1 MR. SCANNELL: Thank you, Your Honor. For the
2 record, this is Tom Scannell, Foley & Lardner, proposed
3 counsel to the debtors.
4 At docket number 3 in the lead case, number 20-42492,
5 styled In re Spherature Investments, LLC, the debtors filed a
6 motion for joint administration of the six affiliated cases
7 pending before Your Honor. We have also filed identical
8 conforming motions for joint administration in each of the
9 affiliate cases pending before the Court and called onto the
10 record of today's hearing.
11 The proposed lead debtor, Spherature Investments,
12 formerly known as World Ventures Holdings, is the sole parent
13 of the affiliated debtors Rovia, LLC; World Marketing -- or
14 World Ventures Marketing, LLC; and World Venture Marketing
15 Holdings, LLC. Likewise, World Ventures Marketing Holdings,
16 LLC is the sole parent of World Ventures Marketplace and
17 World Ventures Services. Accordingly, all six debtors are
18 parents, subsidiary, affiliates of one another.
19 Under Bankruptcy Rule 1015(b) and local Bankruptcy Rule
20 1015-1, Your Honor has the discretion to order the
21 administration of the estates among the debtor affiliates.
22 We are seeking today the entry of an order, proposed as an
23 exhibit to the motions, jointly administering the six cases
24 under the lead case number 20-42492 styled as In re
25 Spherature Investments, LLC. Under the proposed order
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1 schedules, monthly operating reports, statements of financial
2 affairs, and proofs of claim will be filed separately in each
3 of the cases. Other than that, all matters filed in either
4 of the six cases should be filed in the lead case under a
5 consolidated docket for administrative purposes only. We
6 believe these cases are appropriate for joint administration.
7 We have not received any objections to this motion. I'm
8 happy to answer any questions the Court has at this time.
9 THE COURT: Okay. Does anyone wish to be
10 heard with respect to the joint administration motion?
11 All right. Based on the evidence before the Court, the
12 Court will grant the motion for joint administration. I
13 think I understood from Mr. Helt, he wanted to address the
14 cash collateral motion next?
15 MR. HELT: Yes, ma'am.
16 THE COURT: Okay.
17 MR. HELT: Thank you, Your Honor.
18 The debtors' cash collateral motion is found on the
19 docket at docket number 18. I'm happy to report to the Court
20 that we've reached an agreement with the pre-petition lender,
21 Montgomery Capital Advisors, on the debtors' use of cash
22 collateral at least through an interim period, which covers
23 the petition date through January 22nd.
24 Attached to the cash collateral motion was a proposed
25 order. The agreed order -- the order that has been agreed
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1 modifies that proposed order. This morning at docket number
2 44 -- and for the Court's convenience, we filed a red-line
3 comparing the proposed order to the agreed order. This
4 red-line shows the changes made to the proposed order. The
5 changes reflect the concessions made by the debtor in
6 response to the informal objection raised by the lender.
7 I'm happy to let the Court go through that and talk
8 about it. The intention of the order was to preserve most of
9 the rights, if not all of the rights of the debtor, and grant
10 the lender some adequate protection in the form of an
11 interest payment on a per month basis and some reporting
12 requirements.
13 If the Court or the parties on the phone were to look
14 at docket number 44-2, you would see the red-line and some of
15 the changes in paragraphs H and paragraphs B, C, D, and E.
16 Most of those changes reflect adequate protection concessions
17 given by the debtor to the lender.
18 So unless the Court has a specific question, I would
19 ask the Court to enter the agreed order that's been entered,
20 that's been uploaded.
21 THE COURT: Okay. I have not had a chance yet
22 to review in detail the order that was uploaded today, the
23 red-line. So if you would go through on the record the
24 specific details --
25 MR. HELT: Sure.
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1 THE COURT: -- of your agreement and the
2 proposed cash collateral order, please.
3 MR. HELT: Sure. Thank you, Your Honor.
4 If the Court would turn to docket number 44-2 at the
5 top, it's page 3 of 10. You'll see recital H where the
6 lender just asserts that its owned in principal amount a
7 number not to exceed approximately $5.5 million. And they
8 claim, or they assert a lien in substantially all of the
9 debtors' assets, including the cash that's being held on hand
10 and it's held at, what we call the credit card companies or
11 the merchants. We call it merchant reserves. That's what
12 that paragraph intended to address.
13 And, Your Honor, if you go to paragraph 2-A, page 4 of
14 10 at the top, the very last sentence. The next material
15 change is the lender reserves the right to assert interest at
16 the default rate and payment of reasonable fees and expenses
17 and such other amounts, in addition to the adequate
18 protection payments that we are paying currently. Subject,
19 of course, to further order of this Court.
20 If you go to paragraph 2-B, Your Honor, just below
21 that. There's a sentence midway through, other than as set
22 forth here in the replacement liens shall not be made subject
23 to or pari passu with any lien, or with any lien or security
24 interest previously or hereafter granted in any of the cases.
25 And then there's a standard sentence, the replacement lien
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1 shall be valid, binding, and enforceable against any Trustee
2 or the estate representative appointed in the case.
3 THE COURT: Okay. And what is the
4 investment -- or what is the replacement lien for?
5 MR. HELT: To the extent of diminution in
6 value, Your Honor. Adequate protection, to the extent of
7 diminution in value.
8 THE COURT: Value of the collateral, right?
9 MR. HELT: Correct.
10 THE COURT: Okay.
11 MR. HELT: On an aggregate basis. If you --
12 if you go to the sentence that I just referred to that says,
13 other than as set forth herein, the immediately preceding
14 sentence says, the replacement lien is in the same nature,
15 extent, priority and such liens, if any existed on the
16 petition date, subject to and strictly limited only to the
17 extent of the amount equal to the aggregate diminution in
18 value of the pre-petition collateral.
19 THE COURT: Okay. All right.
20 The adequate protection payments that you're suggesting
21 as part of the agreement, what is the amount of those
22 payments and when would it be paid?
23 MR. HELT: Sure. Sure, Your Honor.
24 There's a budget, revised budget that was part of the
25 packet that was filed. It's 44-1. It says --
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1 THE COURT: Hold on. Hold on. Let me find
2 it. 44-1?
3 MR. HELT: Yes, ma'am.
4 THE COURT: My computer is a little slow. You
5 have to work with me here.
6 MR. HELT: No problem. Mine -- I have a hard
7 copy and it's really small print, so I have to work with
8 myself on that.
9 MR. RUDD: And, Your Honor, this is Jason Rudd
10 for the lenders.
11 The amount is also referenced in the order itself, if
12 you look at paragraph 2 on page 4 of the red-line, sub A.
13 There is a specific narrative related to the payment of the
14 monthly interest at the non-default rate. And the amount is
15 set forth there in --
16 THE COURT: Okay. How much is the amount?
17 MR. RUDD: It's $73,334.68, which is the
18 contractual rate, non-default rate under the loan documents,
19 given the pre-petition debt amount.
20 THE COURT: That's a monthly rate?
21 MR. RUDD: That is the monthly amount of a
22 payment on an annual rate of 60 percent, which is the
23 non-default rate of these loans.
24 THE COURT: Okay. When is the proposed first
25 adequate protection payment?
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1 MR. RUDD: January 4th, 2021, which is also
2 included in lines Sub A of the paragraph of the adequate
3 protection payments in the order.
4 MR. HELT: It's also, Your Honor, in week 3 of
5 the budget, of the revised budget found at 44-1.
6 THE COURT: Okay. 44-1?
7 MR. HELT: At the top, Exhibit A.
8 THE COURT: By itself? Oh, okay, you want me
9 to look at Exhibit A?
10 MR. HELT: Yeah. I think it's Exhibit A to
11 44, which was the clean version.
12 THE COURT: Is there a budget attached to it?
13 Hold on. It takes a few minutes to work through all of those
14 different documents and get to the point that you all are
15 talking about. So if you would bear with me for just a
16 minute.
17 Okay. I see the budget. And the funds -- and the
18 payment is included in this?
19 MR. HELT: Yes, ma'am. If you look at, it
20 looks like week 3 is the first payment.
21 THE COURT: Okay. Any other form of adequate
22 protection being proposed?
23 MR. HELT: Yes, ma'am. There is, in paragraph
24 2-C at the top of page 6 of 10 on the red-line, docket 44-2,
25 there's an adequate protection, super-priority claim equal to
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1 the diminution in value that we discussed consistent with 503
2 and 507-B.
3 THE COURT: That's only if adequate -- the
4 other adequate protection measures fail?
5 MR. HELT: Yes, ma'am.
6 THE COURT: Does it say that in the order?
7 MR. HELT: Let's see. Yes, proves -- to the
8 extent that adequate protection provided herein proves
9 inadequate to cover diminution in value beyond the equity
10 cushion. That's in paragraph -- the previous page, page 5 of
11 10, paragraph C.
12 THE COURT: Okay. What does diminution in
13 value beyond the equity cushion mean?
14 MR. HELT: I think, actually, Your Honor, it
15 should have just said -- it should just say, to cover
16 diminution in value, period. There was a delineation above
17 that out that equity cushion. But we don't think there will
18 be diminution in value because there's an equity cushion.
19 But to the extent there is diminution in value, then there is
20 a super-priority claim granted.
21 THE COURT: So this -- again, I'm not quite
22 sure I understand what it means to be beyond the equity
23 cushion. So diminution in value beyond the equity cushion
24 meaning at a point at which a secured claim becomes an
25 unsecured claim?
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1 MR. HELT: I think actually, Your Honor, the
2 words beyond the equity cushion should be eliminated.
3 MR. RUDD: And, Your Honor, this is Jason Rudd
4 for the lenders. That's correct. In the revisions to the
5 order that were exchanged late last night and this morning,
6 the language not already covered by the equity cushion was
7 removed from other provisions in this order. It was intended
8 to be removed from that provision, as well. And I apparently
9 didn't make it to the final draft that was uploaded. So that
10 language in the final interim order that is submitted for
11 signing that, in value beyond the equity cushion, can be
12 removed. And hopefully that addresses Your Honor's concern
13 about the meaning of that provision.
14 THE COURT: Okay. But what we're talking
15 about is the diminution in value of the creditor's
16 collateral, right?
17 MR. RUDD: Yes, Your Honor.
18 THE COURT: Okay. Let's say that, of the
19 collateral. Is collateral defined as a cap C collateral? I
20 don't think it is.
21 MR. RUDD: It is, Your Honor, is Sub B of the
22 preamble.
23 THE COURT: If you will correct that. Okay?
24 MR. RUDD: Yes, Your Honor. Thank you.
25 THE COURT: Thank you.
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1 And what is the evidence of immediate and irreparable
2 harm?
3 MR. HELT: Mr. Toth's declaration, Your Honor,
4 that without the use of cash collateral, we can't pay our
5 expenses in the ordinary course of business.
6 THE COURT: And how is that immediate and
7 irreparable harm?
8 MR. HELT: If we don't pay the expenses, then
9 we can't operate our business. If we can't operate our
10 business, we call into jeopardy our ability to close the
11 transactions that we're contemplating that will return what
12 we hope to be a dividend to the creditors.
13 THE COURT: Thank you.
14 MR. HELT: Thank you, Your Honor.
15 I just wanted to point out, Your Honor, a couple of
16 more -- you had asked is there additional adequate
17 protection. There's some reporting requirements further in
18 the order.
19 THE COURT: Okay.
20 MR. HELT: And the agreement to make -- which
21 I think is probably unwritten, at least in all cases in which
22 I'm the debtor's counsel, but we put it in here any way that
23 the debtors' counsel and the professionals will be made
24 available at reasonable times and upon reasonable notice to
25 answer questions for the lender. So that's also adequate
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1 protection.
2 And then, finally, there's an adequate protection
3 requirement to maintain insurance coverage. Which, again, I
4 think goes without saying, given the U.S. Trustee guidelines
5 and requirements. But it's in here, as well.
6 THE COURT: Okay.
7 MR. HELT: And then finally, the termination
8 date, it's called the interim termination date. It's on page
9 8 of 10. This consent -- this -- the provisions of this
10 order, this order terminates on January 22nd. So the
11 contemplation is is that the week of -- that week, we come
12 and have a second, either a second interim or a final
13 hearing, depending on the constitution of any sort of
14 Creditor's Committee that week, at some time that's
15 convenient for the Court's calendar.
16 THE COURT: Okay.
17 MR. HELT: The 22nd is a Friday, Your Honor,
18 just for your own clarification, understanding.
19 Other than that, unless the Court has specific
20 questions, I would ask the Court to enter the proposed agreed
21 order as modified on the record. And we will make that
22 change, Your Honor, and we can send to chambers a red-line
23 showing that change. And then if you can enter it, that
24 would be great.
25 THE COURT: Okay. So I have -- first of all,
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1 does anyone else wish to be heard with respect to the cash
2 collateral motion?
3 MR. LINDEMANN: This is Blake Lindemann, Your
4 Honor. I would request to be heard.
5 THE COURT: All right. You may proceed.
6 MR. LINDEMANN: Thank you.
7 So first with the changes that were made to the most
8 recent cash collateral order. It's uncertain whether the
9 proposed lien will attach to avoidance power actions.
10 Docket --
11 THE COURT: No. I can tell you right now, in
12 17 years I've never signed order that does that, an interim
13 order. So I won't be signing that order, if it does. Okay?
14 MR. LINDEMANN: Thank you for that, Your
15 Honor.
16 The second concern we had is the structure and history
17 of this loan transaction. Typically, as Your Honor knows,
18 when there's a loan that's given by a legitimate lender like
19 Wells Fargo with the security at the time of lending, it's
20 common that these requests would be made. The issue we here
21 is we have a twisted history. We have a securitization of a
22 loan in December of 2019. I saw some documents that were
23 filed late last evening. I didn't see any UCC-1s that would
24 reflect an actual security. I didn't see any evidence that
25 these loans were actually funded two years before that. And
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1 the concern we have is that there were never actually any
2 loans. And the second concern we have is that this loan may
3 be subject to avoidance, because it seems -- seemingly the
4 security was perfected within one year. And the third issue
5 we have, Your Honor, is there's no disclosure as to whether
6 any of these secured parties, or the representatives, or
7 shareholders are insiders. And given the claims that will be
8 made in this case, it appears there's going to be significant
9 avoidance power actions. We don't know the extent that there
10 are avoidance power actions against these very parties.
11 So from our perspective, it's premature to be issuing
12 any adequate protection payments to various parties that may
13 be subject to avoidance power actions. It's premature to be
14 giving any money out to a party that hasn't demonstrated a
15 loan was funded or that they have a valid security interest
16 in the assets and UCC-1.
17 And for those reasons, we would object to the use of
18 cash collateral, to the extent either super priority is
19 given, or adequate protection payments are offered until
20 further proof is given.
21 THE COURT: All right. Does anyone else wish
22 to be heard with respect to the cash collateral motion?
23 MR. RUDD: Your Honor, this is Jason Rudd for
24 the lenders.
25 Your Honor, first, I would say that we -- the lenders,
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1 we submitted a witness and exhibit list with a copy of our
2 exhibits at docket number 36, which includes the general loan
3 documents, as well as the UCC-1 supporting the perfection of
4 the liens that are referenced in the cash collateral order.
5 And I would move for admission of MCA Exhibits A through I.
6 THE COURT: And that's docket number what?
7 MR. RUDD: Docket number 36, Your Honor.
8 THE COURT: All right. Any objections?
9 All right. Exhibit A through Exhibit I, MCA Exhibits A
10 through I which has been reflected on the Court's docket as
11 docket number 36 is admitted, or are admitted.
12 All right. Anything further on the cash collateral
13 motion?
14 MR. RUDD: And, Your Honor, even further
15 response to the arguments that were just made, the
16 declaration that was filed by the debtors walks through the
17 balance of the loan used to fund the debtors, as well as the
18 secured nature of the debtors. But more importantly, as an
19 interim order, this order is not seeking affirmation by the
20 debtors or this Court of the validity, extent, and priority
21 of these liens. It is merely providing us adequate
22 protection, to the extent there is a diminution in value and
23 collateral in which we actually have a lien. So the rights
24 and concerns that were raised by counsel are just not at
25 issue in an interim hearing for purposes of this order.
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1 Those issues can be addressed at a final hearing. And we
2 would anticipate addressing them at the hearing that
3 Mr. Helt requested for the week of January 18th.
4 MR. LINDEMANN: Your Honor, this is -- go
5 ahead, I'm sorry.
6 MR. EASTLAKE: Your Honor, this is David
7 Eastlake of Greenberg Traurig on behalf of SSP Legacy
8 Tennyson Center, LLC, which I'll just refer to at this
9 hearing as SSP. SSP is a landlord on two commercial office
10 spaces leased by the debtors.
11 We filed an objection, a limited objection and
12 reservation of rights last night to the debtors' motion for
13 interim use of cash collateral. And I'd just like to start
14 by saying, Your Honor, at the outset, we don't have an
15 objection to the debtors' use of cash collateral generally.
16 We understand that. But what we do object to is the budget.
17 And specifically the fact that the budget fails to include
18 sufficient budgeted amounts for payment of post-petition
19 lease obligations, which payments are required under Section
20 365(b)(3).
21 And if you look at the budget filed as recently as this
22 morning at docket number 44-1, there is a line item for rent.
23 And if you look at that line item over the 13-week budget
24 period, only $3,000 in rent is budgeted for that period, with
25 essentially $1,000 being budgeted the first week of January,
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1 the first week of February, and the first week of March.
2 The rental obligations that will become due to SSP
3 under the leases far exceeds this amount. We're talking a
4 six figure difference here. And I reached out yesterday, I
5 had some discussions with Mr. Scannell. It's my
6 understanding in talking to him that the post-petition rent
7 payable to SSP is not included anywhere in the proposed
8 budget, notwithstanding the fact that the Bankruptcy Code
9 requires the debtors to timely perform and pay all
10 post-petition commercial lease obligations as they become due
11 under the leases, until those leases are assumed or rejected.
12 And I'll posit here, Your Honor, there is not even a motion
13 to reject currently on file with respect to these two leases
14 in which SSP is the landlord.
15 I spoke -- as part of my discussions with Mr. Scannell
16 yesterday, we were surprised late in the afternoon that the
17 debtor is taking the position that, you know, the premises
18 were formerly surrendered prior to the petition date and that
19 they would soon be filing a motion to reject. Your Honor, we
20 dispute that the lease premises were ever formally
21 surrendered. It is our assertion that the debtors remain in
22 possession and are responsible for timely payment of
23 post-petition rent under Section 365(b)(3). As I said, Your
24 Honor, we just found out about this late afternoon. SSP is
25 in the process of reviewing its records and gathering
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1 additional facts. But here's what I can tell the Court
2 preliminarily about this issue.
3 First, I'm informed that SSP has not been able to
4 locate, at least thus far, any formal written notification
5 from the debtors of their intent to vacate and surrender the
6 premises prior to the petition date. I asked Mr. Scannell if
7 he could provide any prior written correspondence to -- that
8 would evidence the debtors' intent to formally surrender
9 prior to the petition date and I've received no response.
10 Second, Your Honor, it doesn't appear the debtor has
11 ever attempted, even attempted to schedule a walk through of
12 the premises which, of course, is commonly done upon
13 surrender. Nor have the debtors, it appears, ever returned
14 their access key cards to the building and lease spaces. The
15 debtors have subtenants at each of the office buildings that
16 are subleasing a portion of each of the premises. And it is
17 my understanding that those subtenants are still there. They
18 have not surrendered and vacated the premises.
19 And, Your Honor, I found out -- I was informed right
20 before the hearing this morning that the building lead
21 engineer was actually onsite at the 5100 Tennyson Parkway
22 building to conduct routine maintenance and to check the
23 building management system for proper operation. This is
24 routine for the building lead engineer to do this. He was in
25 there this morning at approximately just shortly after 9 a.m.
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1 to insure that the system is working properly and that there
2 were no alarms in the system that would require any
3 maintenance or repairs. This is particularly important right
4 now, Your Honor, with COVID and office spaces being largely
5 vacant.
6 The building management system is located in the
7 electrical room on the fourth floor of the building. And we
8 are told that -- by the building lead engineer that while he
9 was on his way to this room, he did observe that World
10 Ventures had furniture, computers, marketing apparel, office
11 supplies, and other items present on the first and fourth
12 floors of the building.
13 Your Honor, as we uncover additional facts and
14 information, we're confident that we will be able to present
15 sufficient evidence the debtors' lack of surrender at the
16 appropriate time. As I said, Mr. Scannell indicated
17 yesterday the debtors would soon be filing a motion to reject
18 the leases nunc pro tunc to the petition date, which we will
19 obviously contest. We do not believe and we dispute the fact
20 that the leases were ever -- the lease spaces were ever
21 surrendered prior to the petition date.
22 And what we're asking for simply today, Your Honor, is
23 that until such time as this dispute is teed up and
24 adjudicated, presumably again in connection with the debtors'
25 forthcoming motion to reject the leases nunc pro tunc to the
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1 petition date, that the budget should include all
2 post-petition lease obligations that will become due and
3 payable to SSP, including January rent that will become due
4 as early as this Friday.
5 Your Honor, SSP, part of our limited objection was our
6 rights we're reserving and preserving all of our rights and
7 remedies under the leases available to it at law
8 (indecipherable word) equity. And, Your Honor, for these
9 reasons, we believe the cash collateral motion should not be
10 granted, absent modification of the debtors' budget to
11 include all post-petition lease obligations that will become
12 due and owing and payable to SSP under the leases until those
13 leases are formally assumed or rejected by the Court.
14 THE COURT: Okay. Does anyone else wish to be
15 heard with respect to cash collateral?
16 MR. HELT: Your Honor, this is Marcus Helt.
17 Just a couple of brief follow-up.
18 THE COURT: Hold on. Let me make sure there's
19 no one other than the debtor that wants to be heard on the
20 cash collateral matter.
21 MR. HELT: Thank you.
22 THE COURT: Does anyone else wish to be heard
23 with respect to cash collateral?
24 MS. HAWKINS: Yes. My name is Tabitha Hawkins
25 pro se as a creditor.
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1 In regards to the severance payments, I would like to
2 see those broken out as to how those severance payments would
3 be remitted and to whom they would be remitted to.
4 THE COURT: Okay. Are you one of the people
5 that would be receiving a severance payment?
6 MS. HAWKINS: Yes, ma'am. Yes.
7 THE COURT: Okay. All right. Let me hear
8 from the debtor.
9 MR. HELT: Sure, Your Honor.
10 With respect to severance, I know severance payments
11 are being made during this interim period. We have it in the
12 budget in a future time for a placeholder, subject to further
13 order of this Court, because those severance payments are