HAHN & HESSEN LLP 488 Madison Avenue New York, New York 10022 Telephone: (212) 478-7200 Facsimile: (212) 478-7400 Mark T. Power, Esq. Janine M. Figueiredo, Esq. Counsel for Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK ---------------------------------------------------------------------- X In re: Décor Holdings, Inc., et al., 1 Debtors. : : : : : : : : : : Chapter 11 Case No. 19-71020 (REG) Case No. 19-71022 (REG) Case No. 19-71023 (REG) Case No. 19-71024 (REG) Case No. 19-71025 (REG) Substantively Consolidated ---------------------------------------------------------------------- X DEBTORS’ MEMORANDUM OF LAW (I) IN SUPPORT OF ENTRY OF AN ORDER (A) CONFIRMING THE THIRD AMENDED JOINT CHAPTER 11 PLAN OF LIQUIDATION PROPOSED BY THE DEBTORS, AND (B) APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS The above-captioned debtors and debtors-in-possession (collectively, the “Debtors”), submit this memorandum of law (the “Memorandum of Law”) in support of an order (a) confirming the Third Amended Joint Chapter 11 Plan of Liquidation Proposed by the Debtors (the 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, are: Décor Holdings, Inc. (4174); Décor Intermediate Holdings LLC (5414); The Robert Allen Duralee Group, Inc. (8435); The Robert Allen Duralee Group, LLC (1798); and The Robert Allen Duralee Group Furniture, LLC (2835). The corporate headquarters and the mailing address for the Debtors listed above is 49 Wireless Boulevard, Suite 150, Hauppauge, NY 11788. The Debtors also maintain a separate corporate office at 2 Hampshire Street, Suite 300, Foxboro, MA 02035. Case 8-19-71020-reg Doc 290 Filed 05/02/19 Entered 05/02/19 01:11:27
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HAHN & HESSEN LLP 488 Madison Avenue New York, New York 10022 Telephone: (212) 478-7200 Facsimile: (212) 478-7400 Mark T. Power, Esq. Janine M. Figueiredo, Esq. Counsel for Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK ---------------------------------------------------------------------- X In re: Décor Holdings, Inc., et al.,1 Debtors.
: : : : : : : : : :
Chapter 11 Case No. 19-71020 (REG) Case No. 19-71022 (REG) Case No. 19-71023 (REG) Case No. 19-71024 (REG) Case No. 19-71025 (REG) Substantively Consolidated
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DEBTORS’ MEMORANDUM OF LAW (I) IN SUPPORT OF ENTRY OF AN ORDER (A) CONFIRMING THE THIRD AMENDED JOINT CHAPTER 11 PLAN
OF LIQUIDATION PROPOSED BY THE DEBTORS, AND (B) APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS
The above-captioned debtors and debtors-in-possession (collectively, the “Debtors”),
submit this memorandum of law (the “Memorandum of Law”) in support of an order (a)
confirming the Third Amended Joint Chapter 11 Plan of Liquidation Proposed by the Debtors (the
1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, are: Décor Holdings, Inc. (4174); Décor Intermediate Holdings LLC (5414); The Robert Allen Duralee Group, Inc. (8435); The Robert Allen Duralee Group, LLC (1798); and The Robert Allen Duralee Group Furniture, LLC (2835). The corporate headquarters and the mailing address for the Debtors listed above is 49 Wireless Boulevard, Suite 150, Hauppauge, NY 11788. The Debtors also maintain a separate corporate office at 2 Hampshire Street, Suite 300, Foxboro, MA 02035.
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“Plan”),2 and (b) approving the sale of substantially all of the Debtors’ assets. For the
reasons stated herein, the Debtors believe that the Plan satisfies the requirements for
confirmation set forth in section 1129 of title 11 of the United States Code (the “Bankruptcy
Code”), and is otherwise in the best interest of the Debtors’ creditors and all parties in
interest in these chapter 11 cases. In support of this Memorandum of Law, the Debtors rely
on the (i) Declaration of Paul H. Deutch Regarding the Methodology for the Tabulation of Votes On
and Results of Voting with Respect to the Second Amended Joint Chapter 11 Plan of Liquidation
Proposed by the Debtors [D.I. 279] (the “Certification of Ballots”), and (ii) the proffered
testimony of Timothy Boates, Chief Restructuring Officer, in support of (i) confirmation of
the Plan and (ii) the Sale (the “Boates Testimony”), and the proffered testimony of J. Scott
Victor, Managing Director of SSG Advisors, LLC, investment bankers to the Debtors, in
support of the Sale (the “Victor Testimony”). In support of confirmation of the Plan, the
Debtors respectfully represent as follows:
I. PRELIMINARY STATEMENT
1. The Debtors’ proposed Plan, which includes and incorporates the sale of
substantially all of the Debtors’ assets as described herein (the “Sale”), should be confirmed.
The Plan provides a clear path for the successful conclusion of these chapter 11 cases, and is
overwhelmingly supported by, among others, the Debtors’ General Unsecured Creditors,
and DIP Lenders.
2. Prior to and after the commencement of these chapter 11 cases, the Debtors
and their professionals explored various strategies for resolving the Debtors’ significant
financial difficulties, including possible reorganization or liquidation. After extensive
2 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Plan.
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analysis and consideration, however, the Debtors determined that a marketing and sale of
substantially all of their assets as a going concern would be the best method for preserving
the value of their assets and would be in the best interests of their creditors. As such, the
Debtors’ ultimate goal throughout this chapter 11 process has been to consummate a going
concern sale of substantially all of their assets through the confirmation of a Plan.
3. The Plan is largely premised upon the Court’s approval of the Sale. Approval
of the Sale and confirmation of the Plan are so inextricably linked such that failure to
approve the Sale will ultimately render the Plan infeasible, leading to a liquidation of the
Debtors’ assets under chapter 7 of the Bankruptcy Code. As such, in support of both the
Plan and the Sale and as described in detail herein, the Debtors submit that (i) the Plan
complies with confirmation provisions of the Bankruptcy Code, (ii) the terms and
conditions of the Sale and its corresponding asset purchase agreement (the “APA”) are fair
and reasonable, (iii) the sale and purchase of the Purchased Assets (as defined herein)
pursuant to the Plan and APA, is non-collusive, fair and reasonable and was conducted
openly and in good faith, (iv) the transfer of the Purchased Assets represents an arm’s-length
transaction and was negotiated in good faith between the parties, (v) the Purchaser (as
defined herein), as transferee of the Purchased Assets, is a good faith purchaser under
Bankruptcy Code § 363(m) and, as such, should be entitled to the full protection of
Bankruptcy Code § 363(m), (vi) the Purchased Assets should be sold free and clear of all
claims, interests, and encumbrances pursuant to Bankruptcy Code § 1141(c) to maximize
the value of the Debtors’ assets, (vii) the Sale was not controlled by an agreement among
potential purchasers, (viii) no cause of action exists against the Purchaser or with respect to
the Sale of the Purchased Assets to the Purchaser under § 363(n), and (ix) any claims under
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§ 363(n) or any other claims as against the Purchaser should be released, waived and
discharged.
4. Confirmation of the Plan, and the related approval of the Sale, will achieve
the best possible result for the Debtors, their creditors, and all other parties-in-interest in
these chapter 11 cases. Accordingly, the Debtors respectfully request that the Court confirm
the Plan and approve the Sale.
II. BACKGROUND
A. General Background Regarding These Chapter 11 Cases
5. On February 12, 2019 (the “Petition Date”), each of the Debtors filed a
voluntary petition for relief under chapter 11 of the Bankruptcy Code.
6. The Debtors continue to operate their business as debtors in possession
pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.
7. No trustee or examiner has been appointed in these Chapter 11 Cases.
8. On February 15, 2019, Omni Management Group, Inc. (“Omni”) was
appointed as Claims and Noticing Agent for the Debtors. See Order Appointing Omni
Management Group, Inc. as Claims and Noticing Agent for the Debtors Pursuant to 28 U.S.C. §
156(C), 11 U.S.C. § 105(a), and Administrative Order No. 658 Nunc Pro Tunc to the Petition Date
[D.I. 46].
9. On March 19, 2019, pursuant to Bankruptcy Code Section 1102(a)(1), the
Office of the United States Trustee for the Eastern District of New York (the “U.S.
Trustee”) appointed three unsecured creditors to an Official Committee of Unsecured
Creditors. On March 22, 2019, the U.S. Trustee amended its notice, reducing the members
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of the Committee to two of those creditors. The Committee has selected Perkins Coie LLP
to act as its proposed counsel in these chapter 11 cases.
10. Prior to the Petition Date, the Debtors retained Timothy Boates of RAS
Management Advisors, LLC to perform the functions and hold the title of Chief
Restructuring Officer (the “CRO”). The CRO has taken over as the daily manager of the
Debtors, is responsible for managing the Debtors as debtors-in-possession in these chapter
11 cases, and has been intimately involved in the formulation, preparation, and
consummation of the Plan.
11. On April 5, 2019, the Debtors submitted their Motion for an Order Approving the
Substantive Consolidation of the Debtors for Purposes of Balloting, Solicitation of Votes and
Distributions under the Debtors’ Chapter 11 Plan [D.I. 213] (the “Substantive Consolidation
Motion”), which Motion was granted by the Court on April 11, 2019. See Order, Pursuant to
Bankruptcy Code Sections 105(a) and 302, Approving the Substantive Consolidation of the Debtors for
Purposes of Balloting, Solicitation of Votes and Distributions under the Debtors’ Chapter 11 Plan (the
“Substantive Consolidation Order”) [D.I. 230]. Pursuant to the Substantive Consolidation
Order, all of the Debtors’ chapter 11 cases were consolidated for both substantive and
administrative purposes into the Lead Case, docket number 19-71020. Further, as a result of
the Debtors’ substantive consolidation, all intercompany liabilities that existed between the
respective Debtor entities (the “Intercompany Claims”) were expunged.
12. On March 15, 2019, the Debtors filed a motion (the “Disclosure Statement
Motion”) for entry of an order, (i) approving the Disclosure Statement for Plan of
Liquidation Proposed by the Debtors (the “Initial Disclosure Statement”), (ii) establishing
solicitation and voting procedures for the Joint Chapter 11 Plan of Liquidation Proposed by
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the Debtors (the “Initial Chapter 11 Plan”), (iii) scheduling a Confirmation Hearing (the
“Confirmation Hearing”), and (iv) establishing notice and objection procedures for
confirmation of the Plan [D.I. 148].
13. Following receipt of comments from various interested parties, on April 9,
2019, the Debtors filed their First Amended Joint Chapter 11 Plan of Liquidation Proposed by the
Debtors (the “First Amended Plan”) and related Disclosure Statement for First Amended Plan of
Liquidation proposed by the Debtors (the “First Amended Disclosure Statement”) [D.I. 219].
14. Following the hearing to consider the approval of the First Amended
Disclosure Statement, the Debtors filed the Plan and the related Disclosure Statement for
Second Amended Plan of Liquidation Proposed by the Debtors (the “Disclosure Statement”) [D.I.
241].
15. On April 15, 2015, the Court entered the Order (I) Approving the Disclosure
Statement, (II) Establishing Plan Solicitation and Voting Procedures, (III) Scheduling a Confirmation
Hearing, and (IV) Establishing Notice and Objection Procedures for Confirmation of the Debtors’
Chapter 11 Plan of Liquidation (the “Disclosure Statement Order”) [D.I. 238], concluding that
the Disclosure Statement contained adequate information sufficient for a reasonable
hypothetical investor to make an informed judgment on the Plan; approving the Debtors’
proposed solicitation and voting procedures for the Plan (the “Solicitation Procedures”);
and establishing notice and objection procedures for confirmation of the Plan. Pursuant to
the Disclosure Statement Order, the Court scheduled the Confirmation Order for May 2,
2019, and set the deadline to object to confirmation of the Debtors’ Plan for April 29, 2019
(the “Plan Objection Deadline”). As of the Confirmation Hearing, the Debtors believe that
all formal and informal objections to confirmation of the Plan will have been resolved on a
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consensual basis, other than the vote by the holder of Class 2 Secured Claims to reject the
Plan, which will necessitate a finding by the Court to find that the Plan satisfies the
“cramdown” requirements of Section 1129(b) of the Bankruptcy Code since the Plan does
not discriminate unfairly and is fair and equitable as to Class 2.
B. The Plan
16. Among other things, the Plan facilitates the Sale, liquidates the Debtors’
estates following consummation of the Sale, and distributes the Debtors’ remaining assets –
principally cash – to the holders of Allowed Claims in accordance with the respective rights
and priorities. The Plan provides for the full satisfaction of all Administrative and Priority
Claims on the Plan’s effective date (the “Effective Date”), or as soon thereafter as
reasonably practicable. Proceeds of any Chapter 5 Claims (net any proceeds used to cover
shortfalls in any of the Reserve Funds) will be shared between the holders of Class 5
General Unsecured Claims and the holders of Class 1 Senior Secured Loan Claims under a
formula set forth in the Plan. The projected proceeds from the Sale will be insufficient to
satisfy the Class 1 Senior Secured Loan Claims.
17. The Plan provides for the classification of certain Classes of Claims as
Impaired or not Impaired, and provides for such classes’ voting rights. The Plan’s
classification scheme is set forth as follows:
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Class Claim Status Voting Rights
1 Senior Secured Loan Claims Impaired Entitled to Vote
2 Junior Secured Loan Claims Impaired Entitled to Vote
3 Other Secured Claims Impaired Entitled to Vote
4 Other Priority Claims Unimpaired Deemed to Accept
5 General Unsecured Claims Impaired Entitled to Vote
6 Intercompany Claims Impaired and No Distribution Deemed to Reject
7 Equity Interests Impaired and No Distribution Deemed to Reject
Thus, other than claims that are not required to be satisfied under the Bankruptcy Code, the
Plan provides for seven (7) different classes of Claims.
18. Class 4 (Other Priority Claims) is not impaired under the Plan and is therefore
conclusively presumed to have accepted the Plan pursuant to section 1126(f) of the
Bankruptcy Code. Accordingly, the votes of holders of Class 4 Claims were not solicited.
See Certification of Ballots.
19. Holders of claims in Classes 6 and 7 (collectively, the “Deemed Rejecting
Classes”) are not entitled to receive or retain any property under the Plan. Section 1126(g)
of the Bankruptcy Code provides that “[n]otwithstanding any other provision of this section,
a class is deemed not to have accepted a plan if such plan provides that the claims or
interests of such class do not entitle holders of such claims or interests to receive or retain
any property under the plan on account of such claims and interests.” Under the Debtors’
Plan, holders of Intercompany Claims and Equity Interests in the Debtors will not receive
any distributions or retain any property on account of such Claims or Interests. As such,
these Deemed Rejecting Classes are conclusively presumed to have rejected the Plan and
votes of the Deemed Rejecting Classes were not solicited. See Certification of Ballots.
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20. Classes 1, 2, 3, and 5 (the “Voting Classes”) are impaired under the Plan.
The votes of holders of Claims in the Voting Classes were solicited. See Certification of
Ballots.
C. Solicitation of Votes and Noticing of Non-Voting Procedures
21. In accordance with the Solicitation Procedures, on April 12, 2019, the
Debtors commenced their solicitation (the “Solicitation”) of votes on the Plan by mailing
certain packages of information (the “Solicitation Packages”) to all creditors and interest-
holders entitled to receive the Solicitation Packages. Each Solicitation Package contained:
(a) the Confirmation Hearing Notice; (b) to Classes entitled to vote on the Plan: (1) the
Disclosure Statement Order (without attachments); (2) the Disclosure Statement, together
with all attachments (including the Plan); (3) a cover letter from the Creditors’ Committee
setting forth the Creditors’ Committee’s support thereof; (4) the applicable Ballot; and (5) a
return envelope; and (c) to Classes not entitled to vote: a Notice of Non-Voting Status. See
Certification of Ballots.
22. As provided in the Disclosure Statement Order, the deadline to vote on the
Debtors’ Plan was set for April 26, 2016 and 4:00 p.m. (prevailing Eastern Time) (the
“Voting Deadline”).
23. The Debtors received 87 valid votes, totaling $33,100,989.91 in liabilities from
holders of Claims in the Voting Classes by the Voting Deadline. See Certification of Ballots.
As set forth below and in the Certification of Ballots, Classes 1 and 5 voted in favor of the
Plan by overwhelming percentages. Class 2 voted to reject the Plan (the “Rejecting Class”
and together with the Deemed Rejecting Classes, the “Rejecting Classes”). Id. No votes
were received from holders of claims in Class 3, and as such Class 3 neither accepted nor
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rejected the Plan. A breakdown of the Voting Classes’ votes on the Plan have been set forth
24. On the Petition Date, the Debtors filed a Motion for Entry of (A) an Order (I)
Approving Bid Procedures (the “Bid Procedures”) in Connection with the Sale of
Substantially All of the Debtors’ Assets, (II) Authorizing the Debtors to Enter into Stalking
Horse Agreements and Approving Certain Bid Protections, (III) Scheduling an Auction
(the “Auction”) for and Hearing to Approve Sale of Assets, (IV) Approving Notice of Date,
Time and Place for Auction and for Hearing on Approval of Sale, (V) Approving
Procedures for the Assumption and Assignment of Certain Executory Contracts and
Unexpired Leases (the “Assignment Procedures”), (VI) Approving Form and Manner of
Notice Thereof, and (VII) Granting Related Relief; and (B) an Order Authorizing and
Approving (I) the Sale of Substantially All of the Debtors’ Assets Free and Clear of Liens,
Claims, Rights, Encumbrances, and Other Interests, (II) the Assumption and Assignment of
Certain Executory Contracts and Unexpired Leases and (III) Granting Related Relief [D.I.
21] (the “Sale Motion”).
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25. In order to properly and effectively market the Debtors’ assets and to create a
robust and active Auction for the Sale, the Debtors retained SSG Capital Advisors (“SSG”)
as its investment banker. SSG has solicited various potentially interested buyers for the
Debtors’ assets and has actively marketed the Debtors’ assets throughout these chapter 11
cases.
26. On March 15, 2019, the Court entered an order (a) approving the Debtors’
proposed Bid Procedures in connection with the Sale, (b) authorizing the Debtors to enter
into Stalking Hose Asset Purchase Agreements and approving certain bid protections, (c)
scheduling the Auction, and (d) approving the Notice of date, time, and place for the
Auction [D.I. 145] (the “Bid Procedures Order”).
27. On April 12, 2019, the Debtors entered into a stalking horse asset purchase
agreement (the “Stalking Horse APA” or “APA”) with RADG Holdings, LLC, a Delaware
limited liability company (the “Stalking Horse Bidder”). The Debtors concurrently filed a
Notice of Designation of RADG Holdings LLC as Stalking Horse Bidder [D.I. 232] (the “Stalking
Horse Bid Notice”), together with the Stalking Horse APA, as required by the Bid
Procedures and Bid Procedures Order.
28. Shortly thereafter, pursuant to the Bid Procedures, the Stalking Horse Bidder
provided the Debtors with certain future performance information (the “Adequate
Assurance Information”) including, among other things, information regarding the Stalking
Horse Bidder’s current financial condition and ability to consummate the Sale.
29. Pursuant to the Bid Procedures and Bid Procedures Order, all other potential
bidders who desired to make a bid for the Debtors’ assets were required to submit such bids
by April 25, 2019, at 5:00 p.m. (prevailing Eastern Time) (the “Bid Deadline”).
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E. Cancellation of Auction and Designation of the Stalking Horse Bidder as Successful Bidder
30. The Debtors did not receive any Qualified Bids (as defined in the Bid
Procedures) by the Bid Deadline. Shortly thereafter, the Debtors cancelled the Auction and
declared the Stalking Horse Bidder as the successful bidder (the “Successful Bidder” or
“Purchaser”).
31. On April 26, 2019, the Debtors filed a Notice of (I) Cancellation of Auction and
Designation of Stalking Horse Bidder as the Successful Bidder and (II) Proposed Assumption and
Assignment of Certain Executory Contracts and Unexpired Real Property Leases (the “Notice of
Successful Bidder”) [D.I. 276], which identified certain executory contracts and unexpired
leases proposed to be assumed by the Successful Bidder. The Notice of Successful Bidder
was immediately served on all parties in interest and on the applicable Non-Debtor
Counterparties (defined below) to the Debtors’ executory contracts and unexpired leases.
F. The APA and Transition Services Agreement
32. Pursuant to the terms of the APA, the Purchaser has agreed to purchase
substantially all of the Debtors’ business-related assets for an estimated purchase price of
$19,000,000, which amount is comprised of (i) a cash payment of $8,000,000 at the time of
the closing of the Sale (the “Closing”), plus (ii) a post-Closing cash payment in an amount
of not less than $10,000,000 and not more than $11,000,000, payable out of the first $11
million in pre-Closing receivables collected after the Closing, less any out-of-pocket costs
collection, and (iii) the assumption of certain assumed liabilities (the “Purchase Price”). See
APA § 2.2. The Purchase Price is subject to, among other things, a working capital
adjustment if the level of inventory and receivables fall below certain thresholds at the time
of the Closing. See APA § 2.4.
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33. “Purchased Assets” include, among other things, the Debtors’ (i) inventory
(except where specifically excluded) and receivables, (ii) tangible personal property, (iii)
ownership interest in Robert Allen Fabrics (Canada), Ltd., (iv) unfulfilled customer orders,
and (v) intellectual property. See APA § 2.1.
34. “Assumed Liabilities” include, among other things, (i) liabilities arising after
the Closing in connection with the operation and use of all Purchased Assets, (ii) liabilities
under all assigned contracts and leases, (iii) cure costs relating to all assigned contracts and
leases (iv) certain PTO obligations owed to employees of the Debtors who are retained by
the Purchaser after the Closing, and (v) the Debtors’ outstanding liabilities related to the
Debtors’ customer programs, including customer credits. See APA § 2.3.
35. The Horse APA also provides for Excluded Assets to be retained by the
Debtors, including certain (i) cash, cash equivalents, and marketable securities, (ii) equity
interests and capital stock, (iii) pre-Closing tax refunds and tax attributes, (iv) assets of the
Plan maintained by the Debtors, (v) insurance policies, (vi) contract rights, (vii) security
deposits and utility deposits relating to an Excluded Asset, and (vii) Avoidance Actions,
including Chapter 5 Claims. See APA § 1.1 (defining “Excluded Assets”).
36. The Stalking Horse APA provides for the Closing to occur no later than three
business days after the entry of the order confirming the Debtors’ Plan, subject to the
occurrence of certain conditions precedent to closing having been satisfied or waived by
either the Debtors or the Purchaser. APA § 9.1. The Closing of the Sale is expressly
conditioned upon the Court’s confirmation of the Plan. See APA §§ 8.3, 9.1.
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37. The APA also envisions the parties entering into a post-closing Transition
Services Agreement, which is currently being finalized with the Buyer and will be filed with
the Court.
G. The Assumption and Assignment Process
38. On April 15, 2019, the Court entered the Order Approving the Assignment
Procedures [D.I. 239] (the “Assignment Procedures Order”). On the same day, the Debtors
served the Assignment Procedures Order, as well as the Notice of Assignment Procedures and
Possible Assumption and Assignment of Certain Executory Contracts and Unexpired Leases in
Connection with Sale (the “Potential Assumption and Assignment Notice”) on all
counterparties to the Debtors’ executory contracts (the “Non-Debtor Counterparties”).3 See
Omni Affidavit of Service [D.I. 254]. The Debtors attached a schedule (the “Cure
Schedule”) to the Potential Assumption and Assignment Notice which described all of the
Debtors’ executory contracts and unexpired leases, along with their respective cure amounts
(the “Cure Costs”), to provide the Non-Debtor Counterparties with sufficient cure
information.
39. On April 26, 2019, following the declaration of the Stalking Horse Bidder as
the Successful Bidder, the Debtors served the Notice of Successful Bidder on all Non-Debtor
Counterparties whose contracts the Purchaser proposed to assumed pursuant to the terms of
the APA (the “Proposed Assigned Contracts”). All other executory contracts and
unexpired leases which were not listed on the Notice of Successful Bidder were to be
rejected upon confirmation of the Plan.
3 The Debtors also filed the Assumption and Assignment Notice on the Debtors’ docket for purposes of additional notice and for executory contract counterparties’ convenience. See D.I. 240.
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40. Pursuant to the Assignment Procedures, Non-Debtor Counterparties were
given until April 24, 2019, at 4:00 p.m. (Eastern Time) (the “Cure Cost/Assignment
Objection Deadline”) to object to (i) the Debtors’ proposed cure cost for assuming and
assigning a Non-Debtor Counterparty’s contract, (ii) the proposed assumption, assignment
and/or transfer of such Non-Debtor Counterparty’s Contract, and (iii) the identity of, or
adequate assurance of future performance provided by, the Stalking Horse (each respective
objection, a “Cure Cost/Assignment Objection”).
41. Six Non-Debtor Counterparties filed Cure Cost/Assignment Objections prior
to the Cure Cost Assignment Objection Deadline, and a small number of Non-Debtor
Counterparties submitted informal objections (collectively, the “Objecting Non-Debtor
Counterparties”). The Debtors have been working together with the Objecting Non-Debtor
Counterparties in good faith to resolve all outstanding Objections. Many have been resolved
by mutual agreement, or have been deemed irrelevant based on the Purchaser’s
determination to reject such executory contract or unexpired lease. To the extent the
Debtors and the Objecting Non-Debtor Counterparties cannot resolve their outstanding
Objections, however, the Debtors intend to resolve such Objections at or after the
Confirmation Hearing. Furthermore, if any Cure Cost/Assignment Objections remain
unresolved after the Confirmation Hearing, the Assignment Procedures and Plan provide
for the adjournment of such outstanding Objections to a subsequent hearing, along with the
establishment of a Cure Claim Reserve Fund to reserve for any disputed amounts relating to
the Cure Costs of such executory contracts or unexpired leases.
III. THE PLAN SHOULD BE CONFIRMED
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42. To obtain confirmation of the Plan, the Debtors must demonstrate that the
Plan satisfies the applicable provisions of section 1129 of the Bankruptcy Code by a
preponderance of the evidence. As set forth by the United States Court of Appeals for the
Fifth Circuit in Heartland Savings & Loan Association v. Briscoe Enterprises., Ltd. II (In re Briscoe
Enterprises., Ltd. II):
The combination of legislative silence, Supreme Court holdings, and the structure of the [Bankruptcy] Code leads this Court to conclude that preponderance of the evidence is the debtor’s appropriate standard of proof under both § 1129(a) and in a cramdown.
994 F.2d 1160, 1165 (5th Cir. 1993); see also In re 20 Bayard Views, LLC 445 B.R. 83, 93
(Bankr. E.D.N.Y. 2011); In re Young Broad, Inc., 430 B.R. 99, 128 (Bankr. S.D.N.Y. 2010);
In re Armstrong World Indus., Inc., 348 B.R. 111, 120 (D. Del. 2006). Applicable case law
holds that when considering confirmation of a chapter 11 plan, creditor democracy – an
integral element in a chapter 11 case – should be afforded substantial deference in the
absence of a clear impediment to plan confirmation. See, e.g., Williams v. Hibernia Nat’l Bank
(In re Williams), 850 F.2d 250, 253 (5th Cir. 1988). The Supreme Court has emphasized that
the creditors should be permitted to decide whether a proposed plan is in their best interests.
See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 207 (1988); see also Coltex Loop Cent.
Three Partners, L.P. v. BT/SAP Pool C Assocs., L.P. (In re Coltex Loop Central Three Partners,
L.P.), 138 F.3d 39, 44 (2d Cir. 1998) (“The Code thus strikes a considered balance between
creditor and debtor interests, which… courts must scrupulously respect.”).
43. As further described herein, and as evidenced in the Boates Testimony and
Certification of Ballots, the Debtors submit that the proposed Plan satisfies all applicable
subsections of section 1129 of the Bankruptcy Code other than section 1129(a)(8). As
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described more fully below, however, the Plan may be confirmed notwithstanding the fact
that not all Classes of Claims or Equity Interests have voted in favor of the Debtors’ Plan.
Accordingly, the Debtors request that the Plan be confirmed.
A. Section 1129(a)(1): Compliance with Applicable Provisions of the Bankruptcy Code
44. Section 1129(a)(1) of the Bankruptcy Code provides that a plan may be
confirmed only if “[t]he plan complies with the applicable provisions of this title.” 11 U.S.C.
§ 1129(a)(1).
45. The legislative history of section 1129(a)(1) explains that this provision
embodies the requirements of, among others, sections 1122 and 1123 of the Bankruptcy
Code governing, respectively, the classification of claims and the contents of the plan. H.R.
(1978); see also Kane v. Johns-Manville Corp. (In re Johns-Manville Corp.), 843 F.2d 636, 648-49
(2d Cir. 1988) (“[T]he legislative history of subsection 1129(a)(1) suggests that Congress
intended the phrase ‘applicable provisions’ in this subsection to mean provisions of Chapter
11 that concern the form and content of reorganization plans.”); In re Drexel Burnham
Lambert Group Inc., 138 B.R. 723, 757 (Bankr. S.D.N.Y. 1992); In re Sabine Oil & Gas Corp.,
555 B.R. 180, 310 (Bankr. S.D.N.Y. 2016) (“In order to determine whether a plan complies
with section 1129(a)(1) of the Code, a court must ensure that the requirements of sections
1122 and 1123 are met.”); In re Texaco Inc., 84 B.R. 893, 905 (Bankr. S.D.N.Y. 1988) (“In
determining whether a plan complies with section 1129(a)(1), reference must be made to
Code §§ 1122 and 1123 with respect to the classification of claims and the contents of a plan
of reorganization”). As described herein, the Plan complies with the requirements of
sections 1122 and 1123 and all other applicable provisions of the Bankruptcy Code.
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i. Section 1122: Classification
46. Section 1122 of the Bankruptcy Code provides:
1. Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.
2. A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.4
11 U.S.C. § 1122.
47. For a plan to comply with Section 1122, it is not necessary that all
substantially similar claims or interests be designated in the same class, but only that all
claims in a particular class be substantially similar to each other, and have substantially
similar rights to the Debtors’ assets. In re One Times Square Assocs. Ltd. P’Ship, 159 B.R. 695,
703 (Bankr. S.D.N.Y. 2007). Thus, courts generally afford a plan proponent significant
flexibility in classifying claims under section 1122, as long as a reasonable legal and/or
factual basis exists for the proposed classifications, and all claims within a particular class
are substantially similar. See, e.g., In re Jersey City Med. Ctr., 817 F.2d 1055, 1060–61 (3d Cir.
1987) (“Congress intended to afford bankruptcy judges broad discretion [pursuant to section
1122] to decide the propriety of plans in light of the facts”); Olympia & York Fla. Equity Corp.
v. Bank of N.Y. (In re Holywell Corp.), 913 F.2d 873, 880 (11th Cir. 1990) (proponent of plan
has considerable discretion in classifying claims and interests according to relevant facts and
circumstance of case); Teamster’s Nat’l Freight Indus. Negotiating Comm. v. U.S. Truck Co., Inc.
(In re U.S. Truck Co., Inc.), 800 F.2d 581, 586 (6th Cir. 1986) (noting court’s “broad
4 Section 1122(b) of the Bankruptcy Code is inapplicable here because the Plan does not include a convenience class.
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discretion” to determine proper classifications); Windels Marx Lane & Mittendorf, LLP v.
Source Enters., Inc. (In re Source Enters., Inc.), 392 B.R. 541, 556 (S.D.N.Y. 2008) (“Moreover,
‘[a] plan proponent is afforded significant flexibility in classifying claims under § 1122(a) if
there is a reasonable basis for the classification scheme and if all claims within a particular
class are substantially similar.”) (quoting In re Drexel Burnham Lambert Grp., Inc., 138 B.R.
723, 757 (Bankr. S.D.N.Y. 1992)).
48. With the exception of Administrative Claims, Professional Fee Claims, the
DIP Loan Claim, and Priority Tax Claims, which need not be classified pursuant to section
1123(a)(1) of the Bankruptcy Code, Articles 3 and 4 of the Plan provide for separate
classification of Claims against and Equity Interests in the Debtors based upon the legal
nature and priority of such Claims and Interests. See generally Plan, Articles 3 and 4. This
classification scheme complies with section 1122(a) of the Bankruptcy Code because the
Claims or Interests within each particular Class are substantially similar to each other.
Similar Claims have not been placed into different Classes in order to dictate the outcome of
the vote on the Plan. Further, valid business, legal, and factual reasons exist for separately
classifying the various Classes. Accordingly, the Debtors submit that the classification
scheme in the Plan satisfies section 1122 of the Bankruptcy Code.
ii. Section 1123(a)
49. Section 1123(a) of the Bankruptcy Code sets forth seven applicable
requirements with which all chapter 11 plans must comply. See 11 U.S.C. § 1123(a). The
Debtors submit that the Plan fully complies with each enumerated requirement.
a. Section 1123(a)(1): Designation of Classes of Claims and Interests
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50. Section 1123(a)(1) provides that a plan must designate, subject to section 1122
of the Bankruptcy Code, classes of claims and equity interests. See 11 U.S.C. § 1123(a)(1).
The Plan designates seven (7) Classes of Claims against and Equity Interests in the Debtors,
subject to section 1122. See generally Plan, Articles 3 and 4. Accordingly, the Plan satisfies
the requirements of Section 1123(a)(1) of the Bankruptcy Code.
b. Section 1123(a)(2): Specification of Classes that are Not Impaired by the Plan
51. Section 1123(a)(2) of the Bankruptcy Code requires that a plan specify which
classes of claims or interests are unimpaired by the plan. See 11 U.S.C. § 1123(a)(2). Article
3 of the Plan specifies that Class 4 is Unimpaired. See Plan, Article 3. Accordingly, the Plan
satisfies the requirements of section 1123(a)(2) of the Bankruptcy Code.
c. Section 1123(a)(3): Specification of Treatment of Classes that are Impaired by the Plan
52. Section 1123(a)(3) of the Bankruptcy Code requires that a plan specify how it
will treat impaired classes of claims or interests. See 11 U.S.C. § 1123(a)(3). Articles 3 and 4
of the Plan specify that the Voting Classes and Deemed Rejecting Classes are Impaired and
clearly specify the treatment of the Claims and Interests in those Classes. See Plan, Articles 3
and 4. Accordingly, the Plan satisfies the requirements of section 1123(a)(3) of the
Bankruptcy Code.
d. Section 1123(a)(4): Equal Treatment of Claims Within Each Class
53. Section 1123(a)(4) requires that a plan provide the same treatment for each
claim or interest within a particular class unless any claim or interest holder agrees to
receive less favorable treatment than other class members. See 11 U.S.C. 1123(a)(4).
Pursuant to the Plan, the treatment of each Claim against or Equity Interest in the Debtors
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in each respective Class is the same as the treatment of every other Claim or Interest in such
Class, unless the holder of a particular Claim or Interest has agreed to less favorable
treatment for such Claim or Interest. See Plan, Article 4. Accordingly, the Plan satisfies the
requirements of section 1123(a)(4) of the Bankruptcy Code.
e. Section 1123(a)(5): Adequate Means for Implementation
54. Section 1123(a)(5) of the Bankruptcy Code requires that a plan provide
“adequate means” for its implementation. 11 U.S.C. § 1123(a)(5). Adequate means for
implementation of a plan may include, inter alia, retention by the debtor of all or part of its
property and the transfer of property of the estate to one or more entities. See In re MF Global
Inc., 478 B.R. 611, 618 (Bankr. S.D.N.Y. 2012) (“Section 1123(a)(5) provides a means for
the estate to transfer property as part of a confirmed plan, requiring that a plan of
reorganization provide means for implementation . . . .”).
55. Article 5 of the Plan provides adequate and proper means for the
implementation of the Plan. As described in section 5.1 of the Plan, by virtue of the Court
entering the Substantive Consolidation Order, the Debtors have eliminated all
Intercompany Claims, have consolidated all obligations and guarantees of each respective
Debtor, have consolidated all Claims filed or to be filed against the Debtors in these chapter
11 cases, and have consolidated all joint and several liabilities. As a result of the substantive
consolidation of assets and liabilities, upon the Effective Date of the Plan, all claims based
upon guarantees of collection, payment, or performance by one Debtor as to the obligations
of another Debtor will be released and discharged.
56. Section 5.2 of the Plan provides that the Debtors shall consummate the Sale
of the Debtors’ assets to the Purchaser selected pursuant to the Bid Procedures and Bid
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Procedures Order. Pursuant to Section 9.1 of the Plan, all Estate Assets will vest in the
Post-Confirmation Debtors free and clear of all liens, encumbrances, charges and other
interests, except as provided for in the Plan. Concurrently, the proceeds of the Sale will be
distributed to Creditors by the Plan Administrator in accordance with the terms of the Plan.
57. Sections 5.4 through 5.6 of the Plan provide for the appointment of a Plan
Administrator in order to, among other things: (a) consummate the Sale, (b) make
distributions to certain Classes of Creditors, (c) prosecute objections to Claims and
compromise or settle any Claims, and (d) wind-down the Debtors’ affairs.
58. Section 5.7 of the Plan provides for the appointment of a Litigation
Administrator for the purposes of pursuing Chapter 5 Claims and Other Claims for the
benefit of Class 1 Senior Secured Loan Claims and Class 5 Class 5 General Unsecured
Claims. The proceeds of any Chapter 5 Claims (less amounts used to cover any shortfall in
any Reserve Funds) will be shared between the Holders of Class 5 General Unsecured
Claims and the Holders of Senior Secured Claims in a priority order and percentage set
forth in the Plan, which has been agreed-to between the Committee and the Holders of
Senior Secured Loan Claims. The Plan provides for the establishment of a Plan Expense
Reserve Fund, which will be used to satisfy any costs and obligations in connection with the
administration of the Plan after the Effective Date.
59. The Debtors submit that the forgoing provisions in the Plan, together with the
documents and agreements contemplated therein, provide adequate means for
implementing the Plan as required by section 1123(a)(5) of the Bankruptcy Code.
f. Section 1123(a)(6): NOT APPLICABLE
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60. Section 1123(a)(6) of the Bankruptcy Code requires that a debtor’s corporate
documents prohibit the issuance of non-voting equity securities and requires an amendment
of a debtor’s charter to so provide. See 11 U.S.C. § 1123(a)(6). The Plan provides for the
liquidation of the Debtors and the cancellation of all Equity Interests in the Debtors. Neither
the Debtors nor the Post-Confirmation Debtor will issue any equity securities. Therefore,
section 1123(a)(6) of the Bankruptcy Code is not applicable to the Plan.
g. Section 1123(a)(7): Directors and Officers
61. Section 1123(a)(7) of the Bankruptcy Code requires that a plan “contain only
provisions that are consistent with the interests of creditors and equity security holders and
with public policy with respect to the manner of selection of any officer, director, or trustee
under the plan and any successor to such officer, director, or trustee.” 11 U.S.C. §
1123(a)(7).
62. The Plan provides that on the Effective Date, the Plan Administrator will be
deemed the sole shareholder, officer and director of the Post-Confirmation Debtors in order
to effectively administer the Plan. See Plan § 5.4. Timothy Boates, the Debtors’ current
CRO, has been designated in the Plan as the proposed Plan Administrator based upon his
familiarity with the Debtors’ operations as well as his understanding of the Plan and these
chapter 11 cases. The Plan provides for the CRO’s removal by the Bankruptcy Court upon
a showing of good cause. See Plan § 5.5. The Debtors submit that the appointment
contemplated by the Plan, as well as the corresponding oversight, removal, and replacement
procedures provided therein, are consistent with the interests the Debtors’ creditors and
consistent with public policy.
iii. Section 1123(b)
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63. Section 1123(b) of the Bankruptcy Code sets forth certain permissive
provisions that may be incorporated into a chapter 11 plan. The contents of the Plan are
consistent with these provisions.
a. Section 1123(b)(1): Impairment and Non-Impairment of Claims
64. Section 1123(b)(1) provides that a plan “may impair or leave unimpaired any
class of claims, secured or unsecured, or of interests.” 11 U.S.C. § 1123(b)(1). As described
above, the Plan deems the Voting Classes and Deemed Rejecting Classes Impaired and
Class 4 (Other Priority Claims) Unimpaired. Therefore, the Plan is consistent with section
1123(b)(1) of the Bankruptcy Code.
b. Section 1123(b)(2): Executory Contracts and Unexpired Leases
65. Section 1123(b)(2) allows a plan to provide for assumption, assumption and
assignment, or rejection of executory contracts and unexpired leases pursuant to section 365
of the Bankruptcy Code.
66. Subject to the occurrence of the Effective Date, the confirmation of the Plan
will constitute approval of the assumption of the leases and executory contracts listed on
Exhibit 1 (the “Schedule of Assumed Contracts”) annexed to the proposed order confirming
the Debtors’ Plan. Confirmation of the Plan will also act as an approval of the assignment
of the leases and executory contracts to the Purchaser. See Plan § 7.1.
67. The Plan provides for the creation of a Cure Claim Reserve Fund in the event
there are outstanding Cure Cost/Assignment Objections at the time the Plan is confirmed
and to the extent the APA does not require the Purchaser of the Debtors’ assets to pay all
cure amounts of assumed contracts. While the Debtors are working diligently to resolve all
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of the Cure Cost/Assignment Objection prior to confirmation of the Plan, the Plan has
safeguarded against the possibility that certain Objection may not promptly be resolved.
68. The Plan also constitutes a motion under section 365(a) of the Bankruptcy
Code for authorization to reject certain executory contracts and unexpired leases not
previously assumed, assigned or rejected. Except as otherwise set forth in the Plan, the
Debtors intend to reject the executory contracts and unexpired leases identified on Exhibit 2
(the “Schedule of Rejected Executory Contracts and Unexpired Leases”) annexed to the
proposed order confirming the Plan as of the effective dates set forth therein.5 Any
executory contract or unexpired lease that is not assumed by the Purchaser or identified on
the Schedule of Rejected Executory Contracts and Unexpired Leases will be deemed
rejected by the Debtors upon confirmation of the Plan.
69. All Non-Debtor Counterparties have received adequate notice of any and all
Cure Costs existing under their executory contracts and unexpired leases, as well as the
proposed assumption of their contracts or leases by the Purchaser. Accordingly, the
provisions of Article 7 of the Plan are permitted by section 1123(b)(2) of the Bankruptcy
Code.
c. Section 1123(b)(3): Settlements and Retention of Claims
70. Section 1123(b)(3) of the Bankruptcy Code provides that a plan may “provide
for (a) the settlement or adjustment of any claim or interest belonging to the debtor or to the
5 See DIESEL USA, Inc., Case No. 19-10432 (MFW), Docket No. 116, Confirmation Order ¶ 8 (April 12, 2019) (On April 12, 2019, United States Bankruptcy Judge for the District of Delaware, Mary F. Walrath, entered the Findings of Facts, Conclusions of Law and Order (I) Approving the Disclosure Statement and (II) Confirming the First Amended Chapter 11 Plan of Reorganization of Diesel USA, Inc. (the “Confirmation Order”), which, among other things, provided for an effective date of rejection for certain unexpired leases as of “[t]he later of the Plan Effective Date and the date of surrender of the premises”); see also DIESEL USA, Inc., Case No. 19-10432 (MFW), Docket No. 89, First Amended Plan Supplement, Exhibit A, Amended Rejection Schedule (April 5, 2019) (Identifying those unexpired leases to be rejected as of “[t]he later of the Plan Effective Date and the date of surrender of the premises”).
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estate; or (b) the retention and enforcement by the debtor, by the trustee, or by a
representative of the estate appointed for such purpose, of any such claim or interest.” 11
U.S.C. § 1123(b)(3).
71. On the Effective Date, any right, claim or cause of action, belonging to the
Debtors or their estates against any Person or Entity, including without limitation, any
Chapter 5 Claims, that was not previously released by the Debtors or released in the Plan
will be retained by the Post-Confirmation Debtors, to the extent not previously adjudicated,
assigned and/or released. The Plan contemplates the appointment of a Litigation
Administrator who will be responsible for pursuing, settling, or releasing all Chapter 5
Claims and Other Claims for the benefit of the Debtors’ Class 1 Senior Secured Claimants
and Class 5 General Unsecured Claimants. Further, the Plan Administrator will be
responsible for pursuing Other Claims under the APA, if any, belonging to the Debtors or
their estates. The Debtors submit that these provisions of the Plan comply with section
1123(b)(3) of the Bankruptcy Code.
d. Section 1123(b)(4): Sale of Property and Distribution of Proceeds
72. Section 1123(b)(4) of the Bankruptcy Code permits a plan to provide for the
sale of all or substantially all of the property of the estate, and the distribution of the
proceeds of the sale among holders of claims or interests. See 11 U.S.C. 1123(b)(4).
73. As discussed in detail in the Disclosure Statement, this Memorandum of Law,
and various other documents filed in these chapter 11 cases, the Plan provides for the sale of
substantially all of the Debtors’ assets to the Purchaser and subsequent distribution of the
proceeds from such Sale to the Debtors’ Creditors. Liquidating plans such as the Plan
proposed by the Debtors which contemplate a sale of substantially all of a debtor’s assets
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and subsequent distribution of assets have consistently been found to be permissible under
the Bankruptcy Code. See, e.g., Solow v. PPI Enters. (U.S.), Inc. (In re PPI Enters. (U.S.), Inc.,
92. The Debtors believe that the holders of Claims against and Equity Interests
in the Debtors will have an equal or greater recovery as a result of the Sale and under the
Plan than could be realized in a chapter 7 liquidation. The Plan provides for the
liquidation of the Post-Confirmation Debtors, and the Debtors are not seeking to require
Creditors to accept non-cash consideration so that the Debtors can pursue going-concern
value. Therefore, the only question remaining is whether non-accepting, Impaired
Creditors will have recovered more (or at least as much) under the Plan than they would
recover through an asset liquidation by a chapter 7 trustee.
93. Attached to the Debtors’ Disclosure Statement as Exhibit B is a liquidation
analysis (the “Liquidation Analysis”) which shows that Creditors are projected to realize
approximately $5.0 million less in a chapter 7 liquidation than the projected net recovery
from the Stalking Horse Bid in a going concern sale. If the Debtors’ assets are liquidated by
a chapter 7 trustee, the Debtors project that the maximum recovery for all Creditors would
be substantially less than what will be recovered if the Plan is confirmed and the Sale is
consummated. The Debtors intend to reduce virtually all of their assets to Cash through
selling substantially all of their assets to the Purchaser. In anticipation of the Sale, the
Debtors have already established systems and protocols for the efficient disposition of their
assets. The significantly increased costs and expenses of a chapter 7 liquidation, including
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fees payable to a chapter 7 trustee, as well as the accompanying delay in the liquidation of
the Debtors’ assets, will only further decrease recoveries below that which will be recovered
through confirmation of the Plan and consummation of the Sale. Accordingly, the Debtors
submit that the Plan satisfies the Best Interests Test of section 1129(a)(7) with respect to all
Classes in the Plan.
H. Section 1129(a)(8): Acceptance by All Impaired Classes
94. Section 1129(a)(8) of the Bankruptcy Code requires that each class of claims
or interests under a plan has either accepted the plan or is not impaired under the plan. All
holders of Claims in Classes entitled to vote on the Plan received Solicitation Packages and
were given adequate opportunity to accept or reject the Plan. See Certification of Ballots.
With respect to holders of Claims in Class 4 whose claims are unimpaired, such claimants
have been “conclusively presumed” to have accepted the plan and need not be further
examined under section 1129(a)(8). See 11 U.S.C. 1126(f).
95. As set forth in the Certification of Ballots, Classes 1 and 5 have affirmatively
voted in favor of the Plan, which Classes are Impaired and eligible to vote on the Plan
(together with Class 4, the “Accepting Classes”). Therefore, section 1129(a)(8) is satisfied
with respect to the Accepting Classes.
96. The Plan does not satisfy section 1129(a)(8) of the Bankruptcy Code,
however, with respect to the Rejecting Classes. As described below, however,
notwithstanding the Rejecting Classes’ affirmative and automatic rejections of the Plan, the
Plan may still be confirmed pursuant to the “cramdown” provisions of section 1129(b) of
the Bankruptcy Code.
I. Section 1129(a)(9): Payment in Full of Allowed Priority Claimants
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97. Section 1129(a)(9) of the Bankruptcy Code requires that certain priority
claims be paid in full on the effective date of a plan. The Debtors’ Plan satisfies each of the
requirements of section 1129(a)(9).
98. First, with respect to Allowed Administrative Claims (i.e., § 507(a)(2) and §
507(a)(3) claims), the Plan provides that such Claims will be paid: (i) the full amount thereof,
without interest, in Cash, as soon as practicable after the later of (a) the Effective Date, (b) the
date on which such Claim becomes an Allowed Claim, or (c) such other date as the holder
of an Allowed Administrative Claim and the Debtors might otherwise agree, or (ii) such
lesser amount as the holder of an Allowed Administrative Claim and the Debtors might
otherwise agree on such date as the holder of an Allowed Administrative Claim and the
Debtors might otherwise agree. See Plan § 2.2 (emphasis added).
99. Second, with respect to Other Priority Claims (all Priority Claims except
Priority Tax Claims) under section 507 of the Bankruptcy Code, the Plan provides that
“[o]n the Effective Date, or as soon thereafter as is reasonably practicable, each holder of an
Allowed Other Priority Claim will receive in full and final satisfaction of such Allowed
Other Priority Claim, except to the extent that such holder agrees to a less favorable
treatment, payment in full in Cash out of the Senior Claims Reserve Fund or other treatment
rendering such Claim Unimpaired.” Plan § 4.5 (emphasis added).
100. Third, with respect to Priority Tax Claims, the Plan provides that “[o]n the
Effective Date, or as soon thereafter as is reasonably practical, in full and final satisfaction
of such Allowed Priority Tax Claim, each holder of an Allowed Priority Tax Claim shall be
paid out of the Senior Claim Reserve Fund (a) an amount in Cash equal to the Allowed amount
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of such Priority Tax Claim, or (b) such other treatment as to which the Debtors and the holder of such
Allowed Priority Tax Claim shall have agreed upon in writing.” Plan § 2.5 (emphasis added).
101. Based upon and Plan provisions set forth above, the Debtors submit that the
Plan satisfies section 1129(a)(9) of the Bankruptcy Code.
J. Section 1129(a)(10): Acceptance by at Least One Impaired Class
102. Section 1129(a)(10) of the Bankruptcy Code requires the affirmative
acceptance of a plan by at least one class of impaired claims, “determined without including
any acceptance of the plan by any insider.” 11 U.S.C § 1129(a)(10).
103. As previously described above and as evidenced by the Certification of
Ballots, holders of Claims in Classes 1 and 5 voted to accept the Plan, without including the
acceptance of the Plan by insiders within such Classes. See Certification of Ballots.
Therefore, the Debtors have satisfied section 1129(a)(10) of the Bankruptcy Code.
K. Section 1129(a)(11): Feasibility
104. Pursuant to section 1129(a)(11) of the Bankruptcy Code, a plan may be
confirmed only if “[c]onfirmation of the plan is not likely to be followed by the liquidation,
or the need for further financial reorganization, of the debtor or any successor to the debtor
under the plan, unless such liquidation or reorganization is proposed in the plan.” 11 U.S.C.
§ 1129(a)(11).
105. Since the Plan expressly provides for the liquidation of the Debtors’ assets,
section 1129(a)(11) of the Bankruptcy Code is satisfied. See In re Revco, 131 B.R. 615, 622
(Bankr. N.D. Ohio 1990) (holding that “[s]ection 1129(a)(11) is satisfied as the plan
provides that the property of [the] Debtors shall be liquidated”). The Debtors forecast that
the Cash payments to be made pursuant to the Plan will be funded through the amounts
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obtained from the Sale and through the pursuit of Chapter 5 Claims. Further, the sale
proceeds and funding under the DIP Loan are projected to provide sufficient resources for
the Plan Administrator and the Litigation Administrator to timely meet all of the Post-
Confirmation Debtors’ obligations under the Plan. Accordingly, the Debtors submit that
the Plan meets the feasibility requirements of section 1129 of the Bankruptcy Code.
L. Section 1129(a)(12): Fees Payable Under 28 U.S.C. § 1930
106. Section 1129(a)(12) of the Bankruptcy Code requires the payment of “[a]ll
fees payable under section 1930 [of title 28 of the United States Code], as determined by the
court at the hearing on confirmation of the plan.” 11 U.S.C. § 1129(a)(12). Section 507 of
the Bankruptcy Code provides that “any fees and charges assessed against the estate under
[section 1930 of] chapter 123 of title 28” are afforded priority as administrative expenses. 11
U.S.C. § 507(a)(2). In accordance with these provisions, the Debtors submit that all fees
incurred and payable pursuant to section 1930 of title 28 of the United States Code shall be
paid in accordance with the section 2.2 of the Plan (payment of Allowed Administrative
Claims) on the Effective Date, or thereafter as and when they become due and owing until
entry of final decrees closing the Debtors’ chapter 11 cases. Thus, the Plan satisfies section
1129(a)(12) of the Bankruptcy Code.
M. Section 1129(a)(13): Retiree Benefits
107. Section 1129(a)(13) of the Bankruptcy Code requires that a plan provide for
the continuation, after the plan’s effective date, of all retiree benefits at the level established
by agreement or by court order pursuant to section 1114 of the Bankruptcy Code at any time
prior to confirmation of the plan, for the duration of the period that the debtor has obligated
itself to provide such benefits. 11 U.S.C. § 1129(a)(13).
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108. While the Debtors do not believe that any retiree benefits (as defined by the
Bankruptcy Code) are owed at this time, the Debtors’ Plan provides for the payment of all
retiree benefits, if any, that are established or maintained by the Debtors prior to the
Effective Date. See Plan § 11.13. Accordingly, the Debtors submit that section 1129(a)(13)
of the Plan is satisfied.
N. Sections 1129(a)(14), (a)(15), and (a)(16): NOT APPLICABLE
109. Section 1129(a)(14) of the Bankruptcy Code relates to the payment of
domestic support obligations. The Debtors are not subject to any domestic support
obligations and, as such, section 1129(a)(14) does not apply. Section 1129(a)(15) of the
Bankruptcy Code applies only in cases in which the debtor is an “individual” (as that term is
defined in the Bankruptcy Code). None of the Debtors are “individuals” and, accordingly,
section 1129(a)(15) is inapplicable. Section 1129(a)(16) of the Bankruptcy Code applies to
transfers of property by a corporation or trust that is not a moneyed, business, or
commercial corporation or trust. All of the Debtors are businesses and accordingly, section
1129(a)(16) is inapplicable.
O. Section 1129(b): Cramdown
110. Section 1129(b) of the Bankruptcy Code provides a mechanism for
confirmation of a plan in circumstances where not all impaired classes of claims and equity
interests vote to accept a plan. This mechanism is known colloquially as “cram down.”
111. Section 1129(b) provides, in pertinent part:
[I]f all of the applicable requirements of [section 1229(a) of the Bankruptcy Code] other than [the requirement contained in section 1129(a)(8) that a plan must be accepted by all impaired classes] are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan
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does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
11 U.S.C. 1129(b)(1). Thus, pursuant to section 1129(b), a court may “cram down” a plan
over the rejection of such plan by impaired classes of claims or equity interests as long as the
plan does not “discriminate unfairly” and is “fair and equitable” with respect to such
classes. See, e.g., Kane v. Johns-Manville Corp., 843 F.2d at 650. Class 2 voted to reject the
Plan in addition to the Deemed Rejecting Classes. As such, the Debtors must satisfy section
1129(b) with respect to Class 2 as well as the Deemed Rejecting Classes.
i. The Plan Does Not Discriminate Unfairly
112. In general, courts have held that a plan unfairly discriminates in violation of
section 1129(b) of the Bankruptcy Code only if it provides materially different treatment for
creditors and interest holders with similar legal rights without compelling justifications for
doing so. See In re LightSquared, Inc., 513 B.R. 56, 99 (Bankr. S.D.N.Y. 2014); In re Lernout &
Hauspie Speech Prods., N.V., 301 B.R. 651, 661 (Bankr. D. Del. 2003) (permitting different
treatment of two classes of similarly situated creditors upon a determination that the debtors
showed a legitimate basis for such discrimination). A threshold inquiry for assessing
whether a proposed chapter 11 plan unfairly discriminates against a dissenting class is
whether the dissenting class is equally situated to a class allegedly receiving more favorable
treatment. See Johns-Manville Corp., 68 B.R. at 636 (finding no unfair discrimination where
interests of objecting class were not similar or comparable to those of any other class).
113. With respect to the holders of Junior Secured Claims in Class 2, there are no
similarly situated Classes receiving more favorable treatment under the Plan. Holders of
Claims in Class 2 are junior and subordinate pursuant to an intercreditor agreement to the
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Senior Secured Loan Claims of Class 1 and are entitled to receive the net proceeds, if any,
from the Sale to the extent such proceeds exceed the Senior Secured Loan Claims are
satisfied. The projected proceeds from the Sale will be insufficient to satisfy the Senior
Secured Loan Claims in full. As a result, under the intercreditor agreement, the Holder of
Class 2 Junior Secured Claim is contractually not entitled to receive any distribution from
the Sale proceeds.
114. Furthermore, the Plan does not discriminate against the Deemed Rejecting
Classes. There are no similarly situated classes receiving more favorable treatment under
the Plan. The Deemed Rejecting Classes include Class 6 Intercompany Claims – which
have been entirely expunged as a result of the Substantive Consolidation Order – and Class
7 Equity Interests. No other Class of Claims in the Debtors’ Plan is similarly situated to
Class 6 or Class 7. Therefore, the Plan does not discriminate unfairly against these Classes
in contravention of section 1129(b)(1) of the Bankruptcy Code.
ii. The Plan is Fair and Equitable
a. Class 2 Junior Secured Claims
115. A plan is “fair and equitable” with regard to a secured creditor if it provides:
(i) that the secured creditor retains a lien securing such claim and receives "deferred cash
payments" totaling allowed amount of such claim, (ii) that the property is sold with the
secured creditor's liens attaching to proceeds of sale, or (iii) that the secured creditor receives
"indubitable equivalent" of its claim. See 11 U.S.C. § 1129(b)(2)(A)(i)-(iii); see also In re Fur
151. The Debtors submit that one or more of the conditions set forth in section
363(f) of the Bankruptcy Code will be satisfied with respect to the Sale. In particular, the
Debtors believe that at least section 363(f)(2) will be satisfied because each of the parties
holding liens against the Debtors’ assets have consented, or have been deemed to have
consented to the Sale by virtue of not filing an objection to the Sale.??] All lienholders are
adequately protected as their liens will attach to the proceeds of the Sale, in the same order
and priority, and with the same validity, force, and effect that such Creditors had prior to
the sale, subject to any claims and defenses that the Debtors and their estates possess with
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respect thereto. Accordingly, the Debtors request that the Debtors’ assets be sold free and
clear of any Encumbrances pursuant to section 363(f) of the Bankruptcy Code.
E. The Executory Contract Non-Debtor Counterparties Have Received Adequate Notice
152. The Non-Debtor Counterparties to the Debtors’ executory contracts and
unexpired leases were provided sufficient notice of any and all Cure Costs existing under
their respective contracts and leases. Specifically, pursuant to the Assignment Procedures
Order, the Non-Debtor Counterparties were provided the Potential Assignment and
Assumption Notice and accompanying Cure Schedule, which described the Cure Costs for
each executory contract and unexpired lease. The Non-Debtor Counterparties were given
sufficient time to review the Potential Assignment and Assumption Notice and Cure
Schedule and object if they deemed appropriate.
153. While certain Non-Debtor Counterparties have filed Cure Cost/Assignment
Objections to the Debtors’ proposed Cure Costs and Assignments, the Debtors submit that
all such Objections are in the Process of being reconciled to the extent these Counterparties’
executory contracts and unexpired leases are being assumed and assigned. The Debtors
complied with the Assignment Procedures and Assignment Procedures Order by timely
filing and serving the Notice of Successful Bidder on all applicable Non-Debtor
Counterparties, thus affording these Non-Debtor Counterparties sufficient notice of the
assumption and assignment of their executory contracts and unexpired leases to the
Purchaser.
154. The Debtors’ have fully complied with the terms and conditions of the
Assumption Procedures Order by providing the Non-Debtor Counterparties with the
requisite information regarding, among other things, the Cure Costs associated with their
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contracts and unexpired leases, as well as the Adequate Assurance Information of the
Purchaser. Thus, the Debtors submit that the Non-Debtors Counterparties have received
adequate notice.
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VI. CONCLUSION
Based upon the foregoing, the Debtors respectfully request that this Court enter an
order (i) confirming the Debtors’ Plan, (ii) approving the Sale, and (iii) granting the Debtors
such other and further relief as is just and proper.
Dated: May 1, 2019 New York, New York
Respectfully submitted,
/s/ Mark T. Power HAHN & HESSEN LLP 488 Madison Avenue New York, New York Telephone: (212) 478-7200 Facsimile: (212) 478-7400 Mark T. Power, Esq. Janine M. Figueiredo, Esq. Jacob T. Schwartz, Esq. Jeremiah P. Ledwidge, Esq. Counsel for the Debtors and Debtors in Possession
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