KRAMER LEVIN NAFTALIS & FRANKEL LLP Kenneth H. Eckstein Robert T. Schmidt P. Bradley O’Neill Daniel M. Eggermann 1177 Avenue of Americas New York, New York 10036 212-715-9100 Attorneys for JPMorgan Chase Bank, N.A., a s Collateral AgentUNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: DEWEY & LEBOEUF LLP, Debtor. Chapter 11 Case 12-12321 (MG) STATEMENT OF JPMORGAN CHASE BANK, N.A., AS COLLATERAL AGENT, IN SUPPORT OF DEBTOR’S MOTION FOR ENTRY OF A FINAL ORDER AUTHORIZING USE OF CASH COLLATERAL AND OTHER RELIEF 12-12321-mg Doc 83 Filed 06/11/12 Entered 06/11/12 15:48:58 Main Document Pg 1 of 23
23
Embed
Statement of JPMorgan Chase Bank NA as - Mg Statement
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
7/31/2019 Statement of JPMorgan Chase Bank NA as - Mg Statement
A. The Prepetition Secured Creditors are Entitled to Adequate Protection ............................. 4
B. Liens on the Avoidance Actions are Permissible and are Necessary Hereto Adequately Protect the Prepetition Secured Lenders from Diminutionin the Value of their Collateral .............................................................................................5
C. Section 506(c) Waivers are Appropriate ..............................................................................8
D. The Payment of Professional Fees is Warranted ...............................................................10
E. The Provision Governing the Compromise of Receivables is Appropriate .......................12
F. The Objections Relating to the Challenge Period and Investigation HaveBeen Addressed .................................................................................................................13
G. The Objections Relating to Indemnification Should Be Overruled ...................................14
H. The Former Partners Committee’s Objection Relating to the Carve-Outand Budget Should Be Overruled ......................................................................................15
I. Other Objections of the Former Partners Committee Have BeenAdequately Addressed or Should Otherwise Be Overruled ..............................................16
J. The Excess Cash Collateral Sweep is Appropriate ............................................................18
PRAYER FOR RELIEF .......................................................................................................................20
12-12321-mg Doc 83 Filed 06/11/12 Entered 06/11/12 15:48:58 Main DocumentPg 2 of 23
7/31/2019 Statement of JPMorgan Chase Bank NA as - Mg Statement
In re AFCO Enters., Inc., 35 B.R. 512 (Bankr. D. Utah 1983) ...................................................... 9
In re Amron Techs., Inc., 376 B.R. 49 (Bankr. M.D. Ga. 2007) ................................................... 11
In re AppliedTheory Corp.,No. 02-11868, 2008 Bankr. LEXIS 1373 (Bankr. S.D.N.Y. Apr. 24, 2008) ...................... 6
In re Carbone Cos., 395 B.R. 631 (Bankr. N.D. Ohio 2008) ......................................................... 5
In re Colad Group, Inc., 324 B.R. 208 (Bankr. W.D.N.Y. 2005) .................................................. 9
Hartford Fire Ins. Co. v. Norwest Bank Minn., N.A. (In re Lockwood Corp.),223 B.R. 170 (B.A.P. 8th Cir. 1998)................................................................................... 9
Mann v. Chase Manhattan Mortgage Corp., 316 F.3d 1 (1st Cir. 2003) ..................................... 11
United Savs. Ass’n of Texas v. Timbers of Inwood Forest Assoc. , Ltd.,484 U.S. 365 (1988) ..................................................................................................... 11-12
Unsecured Creditors Comm. of Debtor STN Enters. v. Noyes (In re STN Enters.) ,779 F.2d 901 (2d Cir. 1985).............................................................................................. 17
JPMorgan Chase Bank, N.A. (the “Collateral Agent”), in its capacity as collateral
agent under that certain Intercreditor Agreement dated as of April 16, 2010 (the “Intercreditor
Agreement”), hereby submits this statement (the “Statement”) (a) in support of the above-
captioned Debtor’s (“Dewey” or the “Debtor”) Corrected Motion for Entry of Interim and Final
Orders Pursuant to 11 U.S.C. §§ 105, 361, 362, 363 and 507, Rules 2002, 4001 and 9014 of the
Federal Rules of Bankruptcy Procedure (1) Authorizing Use of Cash Collateral, (2) Granting
Adequate Protection, (3) Modifying the Automatic Stay, and (4) Scheduling a Final Hearing (the
“Motion”), ECF No. 16, and (b) in response to certain objections thereto (the “Objections”).1 In
support of this Statement, the Collateral Agent respectfully submits as follows:
PRELIMINARY STATEMENT2
1. The Prepetition Secured Lenders supported Dewey while this once
prominent law firm explored stand-alone and merger alternatives, but ultimately failed. The
causes of that failure will be debated in the months and years to come, but it appears obvious that
the combination of substantial financial debt, mounting trade liabilities, pension liabilities,
increasing obligations to retired partners and the extraordinary contractual commitments to
current partners – the owners of the firm – overburdened the firm and ultimately caused it to fail.
Despite defaults on its secured obligations, the Prepetition Secured Lenders granted waivers,
extensions and concessions and allowed the firm to continue to use cash collateral to pay payroll,
rent, insurance and other operating expenses. When it became clear that merger transactions
would not succeed and that the firm’s options were severely limited, the Prepetition Secured
Lenders, at the request of the firm’s management, continued to fund the firm outside of a court
1 Specifically, this Statement responds to the Objections filed by (i) the Official Committee of Former Partners (the“Former Partners Committee”), ECF No. 74 (the “Former Partners Committee Objection”), and (ii) the PensionBenefit Guaranty Corporation (the “PBGC”), ECF No. 72 (the “PBGC Objection”).
2 Capitalized terms not defined herein have the meanings ascribed to them in the Motion or in the Interim Order.
12-12321-mg Doc 83 Filed 06/11/12 Entered 06/11/12 15:48:58 Main DocumentPg 4 of 23
7/31/2019 Statement of JPMorgan Chase Bank NA as - Mg Statement
4. As they committed to do at the first day hearing, the Debtor and the
Collateral Agent reached out to the estate’s unsecured creditor fiduciaries seeking to negotiate
the form of a final cash collateral order and budget to govern the Debtor’s operations for the next
seven weeks. The official committee of unsecured creditors appointed in this Case (the
“Creditors’ Committee”) accepted this invitation and entered into discussions. After days of
negotiations, the Debtor, the Collateral Agent, a majority of the Prepetition Secured Creditors
and the Creditors’ Committee have reached agreement on the terms of a consensual cash
collateral order. The Collateral Agent and the Prepetition Secured Lenders believe that this
agreement represents a material step toward consensus among creditors in this Case and lays the
foundation for an orderly resolution of estate affairs.
5. The parties’ agreement is in the process of being documented in the form
of a proposed Final Order (the “Proposed Final Order”) that will be submitted to the Court in
advance of the Final Hearing (although we understand that the budget (the “Budget”) may still
be in the process of negotiation at the time this Statement is filed). Its principal terms include the
following:
The Debtor will be permitted to use the Prepetition Secured Lenders’ CashCollateral through the end of July, in accordance with the Budget, to allowthis Case to stabilize and to permit the Debtor and its creditor constituents toexplore whether a reasonable partner settlement could be achieved, therebyavoiding a litigation morass. The Budget will contemplate the use of CashCollateral to pay various ongoing expenses to facilitate the wind-down,including the funding of employee payroll, benefits, insurance, file storage,and rent. The Budget will also provide funding for estate professionals,including separate legal counsel for both Committees and a financial advisorwhose services can be made available to both Committees. As adequateprotection for diminution in value of the Collateral, the Prepetition SecuredLenders will receive adequate protection liens on all assets of the Debtor,including chapter 5 causes of action and the proceeds thereof solely to theextent of all expenditures authorized under the Interim Order and the FinalOrder. The Prepetition Lenders have agreed not to seek adequate protectionfor any other losses or decline in collateral value during this period.
12-12321-mg Doc 83 Filed 06/11/12 Entered 06/11/12 15:48:58 Main DocumentPg 6 of 23
7/31/2019 Statement of JPMorgan Chase Bank NA as - Mg Statement
The Creditors’ Committee’s challenge period shall be extended to 90 days andits investigation budget shall be capped at $100,000.
The Committees will be provided with certain consent rights with respect tocertain material modifications to the Budget or modifications to the cash
management system. The Committees will also be given notice of reductionsor write-downs of accounts receivable or works-in-process that exceed$200,000. They will also be provided with the same financial reporting that isprovided to the Collateral Agent. The Proposed Final Order will be modifiedso that the mere commencement of a Challenge no longer results in an Eventof Default. Finally, the Proposed Final Order will include a Section 506(c)waiver as well as a waiver only by the Debtor and the Committees of seeking“equities of the case” relief under Section 552(b) (but preserving the Court’sability to consider “the equities of the case”).
6. Although the order does not reflect an agreement with the Former Partners
Committee, the issues raised by both Committees were largely identical and each of the issues
has been addressed in the resolution reached with the Creditors’ Committee. The Collateral
Agent, however, has engaged in a dialogue with counsel for the Former Partners Committee and
will continue to do so.
7. For the reasons set forth below, the revised Proposed Final Order, as
supported by the Creditors’ Committee, is reasonable and appropriate and should be approved by
the Court in its entirety.
ARGUMENT
A. The Prepetition Secured Creditors are Entitled to Adequate Protection
8. Section 363(c)(2) of the Bankruptcy Code clearly provides that a debtor
may not use a secured creditor’s cash collateral unless that creditor consents or unless the court,
after notice and a hearing, authorizes such use in accordance with the other provisions of Section
363. Section 363(e), in turn, requires the court to condition the use of cash collateral upon the
provision of “adequate protection” or to prohibit its use outright. 11 U.S.C. § 363(c)(2) and (e).
12-12321-mg Doc 83 Filed 06/11/12 Entered 06/11/12 15:48:58 Main DocumentPg 7 of 23
7/31/2019 Statement of JPMorgan Chase Bank NA as - Mg Statement
13. Here, the Proposed Final Order provides that, as adequate protection, the
Collateral Agent shall be granted additional and replacement liens on all assets of the Debtor and
its estate. Those assets include all rights, claims and causes of action of the Debtor and its estate,
including, without limitation, any claims or causes of action arising under chapter 5 of the
Bankruptcy Code and the proceeds thereof.
14. While the Former Partners Committee argues that the granting of such
liens is improper, it offers no legal basis on which to treat chapter 5 causes of action differently
from other unencumbered property of the estate. Section 541 of the Bankruptcy Code provides
that the commencement of a chapter 11 case creates an estate comprised of, among other things,
(i) all legal or equitable interests of the debtor in property as of the commencement of the case
and (ii) any interest in property that the trustee recovers under Section 550 of the Bankruptcy
Code (which provides the mechanism for recovery under chapter 5 causes of action). Nothing in
Section 541 distinguishes between avoidance action proceeds and any other property of the
estate, much less limits a debtor-in-possession’s ability to encumber those assets for the benefit
of the estate. Indeed, as Judge Gerber recognized in In re AppliedTheory Corp., such avoidance
action proceeds, like other property of the estate, can be encumbered to provide adequate
protection to a secured lender:
I was surprised to see the Creditors’ Committee arguing that under nocircumstances could the Lenders have a claim on the proceeds of avoidance actions and other initially unencumbered assets, even if necessary to give them adequate protection. Of course those assets startedout unencumbered. But those assets can thereafter be encumbered (ormade available to satisfy superpriority claims), if necessary to provideadequate protection. That’s expressly authorized under section 361(2).
No. 02-11868, 2008 Bankr. LEXIS 1373, at *3-4 (Bankr. S.D.N.Y. April 24, 2008).
15. On this basis, courts have authorized the grant of liens on the proceeds of
avoidance actions in order to adequately protect a secured creditor from diminution in the value
12-12321-mg Doc 83 Filed 06/11/12 Entered 06/11/12 15:48:58 Main DocumentPg 9 of 23
7/31/2019 Statement of JPMorgan Chase Bank NA as - Mg Statement
20. The Former Partners Committee’s sole basis for objection is its conclusory
assertion that that “this case will be run almost entirely for the benefit of the Secured Lenders.”
(Former Partners Committee Objection ¶ 14.) But that is not the case at all. The expenditures
contemplated by the Budget will fund the orderly administration of this Case, and include many
items that benefit all parties-in-interest – including former partners. Among other things, the
Budget provides for the payment of Debtor and Committee professional fees, employee salaries,
rent, insurance and the orderly management and disposition of client files and records (an
obligation that the estate, as a law firm partnership, undoubtedly owes to its clients). Apart from
that, unsecured creditors will benefit from an orderly and accurate claims reconciliation process
and from the successful pursuit or resolution of litigation against third parties (including former
partners and possibly their new firms). Expenditures leading to the collection of accounts
receivable will reduce the Prepetition Secured Lenders’ potential deficiency claims, which will
also redound to the benefit of unsecured creditors. As a result of these significant expenditures
and other concessions, the Creditors’ Committee has affirmatively consented to a Section 506(c)
waiver.
3 The Former Partners Committee Objection ignores these extensive recent precedents permitting Section 506(c)
waivers in this district, focusing instead on dated precedent from other jurisdictions. This precedent is inappositehere. See Hartford Fire Ins. Co. v. Norwest Bank Minn., N.A. (In re Lockwood Corp.), 223 B.R. 170, 176, 176 n.7(B.A.P. 8th Cir. 1998) (striking 506(c) waiver on the basis of binding Eighth Circuit precedent and noting criticallythat such precedent “makes it difficult for debtors in possession to negotiate cash collateral agreements with theirprepetition lenders,” that it “will also hinder courts from allowing the use of cash collateral,” and that courts’ abilityto provide adequate protection “has now become, in many situations, an exceedingly difficult task to accomplish”); In re Colad Group, Inc., 324 B.R. 208, 220-222, 224 (Bankr. W.D.N.Y. 2005) (declining to grant 506(c) waiver toprepetition/DIP lender where, among other things, court found that enforcement of DIP financing terms wouldconstitute criminal usury under New York law); In re AFCO Enters., Inc., 35 B.R. 512, 515 (Bankr. D. Utah 1983)(permitting trustee to levy 506(c) surcharge against secured creditor where no 506(c) waiver was present).
12-12321-mg Doc 83 Filed 06/11/12 Entered 06/11/12 15:48:58 Main DocumentPg 12 of 23
7/31/2019 Statement of JPMorgan Chase Bank NA as - Mg Statement
24. Notwithstanding this body of law, the Former Partners Committee argues
that adequate protection payments measured by a lender’s legal fees somehow run afoul of
Section 506(b) of the Bankruptcy Code, which permits oversecured creditors to include legal
fees and expenses in the amount of their secured claims. This argument is a red herring.
25. The payments of fees and expenses contemplated by the Proposed Final
Cash Collateral Order are not payments of the Prepetition Secured Lenders’ claims under Section
506(b); they are adequate protection payments made to compensate the Prepetition Secured
Lenders for the acknowledged diminution in value flowing from the use of their collateral during
this Case. (Former Partners Committee Objection at 2 (“[T]he use of cash collateral is likely to
result . . . in a dollar-for-dollar diminution of the Secured Lenders’ lien.”).) As such, Section
506(b) is not implicated by the proposed payment of the Prepetition Secured Lenders’
professional fees as a form of adequate protection.
26. The Former Partners Committee relies principally on an unpublished
bench decision in TCI 2 Holdings, LLC (No. 09-13654) (Bankr. D.N.J. Mar. 17, 2009) (Wizmur,
J.), ECF No. 258, which is, in turn, premised upon a misapplication of the Supreme Court’s
decision in United Savs. Ass’n of Texas v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365
(1988).4 In Timbers, the Supreme Court held that a secured creditor whose collateral was
actually increasing in value was not entitled to adequate protection payments to compensate it
for the bare inability to lift the stay and foreclose. Timbers, 484 U.S. at 368-69. In so ruling, the
Supreme Court noted that an award of interest to the creditor (who was undersecured) would be
inconsistent with the limitations of Section 506(b). But that observation is plainly not
4 The other cases cited by the Former Partners Committee do not address whether adequate protection paymentscould be paid in amounts equal to professional fees and expenses. See Mann v. Chase Manhattan Mortgage Corp.,316 F.3d 1, 6 (1st Cir. 2003) (secured creditor does not violate automatic stay by failing to file a 506(b) applicationwhile continuing to accrue postpetition legal fees chargeable to chapter 13 debtor); In re Amron Techs., Inc., 376B.R. 49, 54 (Bankr. M.D. Ga. 2007) (oversecured creditor entitled to fees under § 506(b)).
12-12321-mg Doc 83 Filed 06/11/12 Entered 06/11/12 15:48:58 Main DocumentPg 14 of 23
7/31/2019 Statement of JPMorgan Chase Bank NA as - Mg Statement