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Full title: Reply to the Sale Objection of the Official Committee of Unsecured Creditors. Filed by ASAIG, LLC, Aztec/Shaffer, LLC (O'Connor, Ryan) (Entered: 04/14/2021)
Document posted on Apr 13, 2021 in the bankruptcy, 21 pages and 0 tables.
Bankrupt11 Summary (Automatically Generated)
Specifically, the Bidding Procedures Order states: “[a]ny objections to the relief requested in the Sale Motion as relates to the sale of the Purchased Assets to the Successful Bidder (a “Sale Objection”) must: (a) set out in writing and describe with specificity the factual and legal basis for the Sale Objection; (b) comply with the Bankruptcy Rules and Bankruptcy Local Rules; (c) be filed with the Clerk of the Court no later than 5:00 p.m. (prevailing Central Time) on March 26, 2021 (the “Sale Objection Deadline”) …” Bidding Procedures Order, ¶ 20(ii) (emphasis in original).Not surprisingly, pursuant to section 2.1(b)(ix) of the Stalking Horse Agreement, the Stalking Horse Purchaser sought to purchase all claims and causes of action of the Debtors to the extent related to the other Purchased Assets; provided, however, that the Debtors and the Stalking Horse Purchaser ultimately agreed that any and all claims or causes of action under chapter 5 of the Bankruptcy Code would be designated as “Excluded Assets” rather than Purchased Assets pursuant to section 2.2(b)(xiii) of the Stalking Horse Agreement.In a recent case, this Court approved an asset sale that included, among other things, claims and causes of action similar to those designated as Purchased Actions in this Sale.In the Debtors’ business judgment, the proposed Sale, including the transfer of all Purchased Actions as Purchased Assets under the APA, is in the best interests of the Debtors, their estates, creditors, and all parties in interest.Given the expansive definition of “Released Parties” that have already been released by the Debtors’ estates in the Final DIP Order, it is unclear why the Committee believes there are any claims against “unintended third parties” that could be released in the proposed Sale Order when they could have provided for some theoretical recovery to unsecured creditors.
List of Tables
Document ContentsIN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re: § § Case No. 20-35600 ASAIG, LLC, et al., § § Chapter 11 Debtors.1 § § (Jointly Administered) DEBTORS’ REPLY TO THE SALE OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS (Relates to ECF #s 155, 178 and 269) ASAIG, LLC, et al., the above-captioned debtors and debtors in possession (collectively, the “Debtors”), hereby file this Reply (the “Reply”) to the Sale Objection of the Official Committee of Unsecured Creditors [ECF # 269] (the “Sale Objection”), and in support hereof, respectfully submit as follows: I. PRELIMINARY STATEMENT 1. The Official Committee of Unsecured Creditors (the “Committee”) filed an untimely Sale Objection that fails to set forth any actual evidence supporting its objections to the sale of substantially all of the Debtors’ assets (the “Sale”) to AAS BIDCO, LLC (the “Buyer”), and offers no legitimate basis to challenge the Debtors’ sound exercise of business judgment and approval of the Sale upon the terms and conditions set forth in the APA (defined herein). As set forth herein, and as will be further demonstrated upon the record at the Sale Hearing, there are sound business reasons supporting the Sale, and the Sale is undoubtedly in the best interests of the Debtors’ estates. The Committee’s Sale Objection should be overruled. 1 The debtors and debtors in possession these chapter 11 cases, along with the last four digits of their respective Employer Identification Numbers, are as follows: Aztec / Shaffer, LLC (2038); and ASAIG, LLC (2323). The Debtors’ service address is: 601 W. 6th Street, Houston, Texas 77007.
1II. BACKGROUND A. The Chapter 11 Cases 2. These cases (the “Chapter 11 Cases”) commenced on November 17, 2020 (the “ASAIG Petition Date”), when ASAIG, LLC (“ASAIG”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Court”). At the same time, ASAIG directed its subsidiary, Aztec/Shaffer, LLC (“Aztec”), to also seek chapter 11 relief. 3. Pursuant to Bankruptcy Code sections 1107(a) and 1108, the Debtors are operating their businesses and managing their property as debtors in possession. No request has been made for the appointment of a trustee or examiner. The Committee was appointed on January 13, 2021. [ECF # 144]. 4. On December 15, 2020, the Court entered its Interim Order (I) Authorizing the Debtors to Obtain Postpetition Financing; (II) Authorizing the Debtors to Use Cash Collateral; (III) Granting Liens and Providing Superpriority Administrative Expense Status; (IV) Granting Adequate Protection, (V) Modifying the Automatic Stay; (VI) Scheduling a Final Hearing; and (VII) Granting Related Relief [ECF # 96] (the “Interim DIP Order”). 5. On January 6, 2021, the Court entered its Final Order (I) Authorizing the Debtors to Obtain Postpetition Financing, (II) Authorizing the Debtors to Use Cash Collateral, (III) Granting Liens and Providing Superpriority Administrative Expense Status, (IV) Granting Adequate Protection, (V) Modifying the Automatic Stay, and (VI) Granting Related Relief [ECF # 126] (the “Final DIP Order”). 2 The Final DIP Order contained certain admissions, stipulations, 2 Capitalized terms used but not defined herein shall have the meanings ascribed in the Final DIP Order [ECF # 126], Sale Motion [ECF # 155], the Bidding Procedures Order [ECF # 178], or the proposed Asset Purchase Agreement, as applicable.
2acknowledgments and agreements by the Debtors (collectively defined in the Final DIP Order as the “Debtors’ Stipulations”), including the following:
|Stipulation||Summary of Debtors’ Stipulation in Final DIP Order|
|Pre-Petition First Lien
|As of the Aztec Petition Date, the Debtors were indebted and jointly and
severally liable to the Pre-Petition First Lien Secured Parties in the aggregate
principal amount outstanding under the Pre-Petition First Lien Facility of
See Final DIP Order, ¶ G(ii).
|As of the Aztec Petition Date, the Debtors were indebted and jointly and
severally liable to the Pre-Petition Second Lien Secured Parties in the
aggregate principal amount outstanding under Second Lien Pre-Petition
Facility of $6,048,143.94.
See Final DIP Order, ¶ G(v).
Perfection and Priority
of Pre-Petition Liens and
|As of the Aztec Petition Date, the Pre-Petition Liens on the Pre-Petition
Collateral were valid, binding, enforceable, non-avoidable, properly
perfected, senior in priority over all other liens on the Pre-Petition Collateral,
and not subject to any challenge or defense.
The Debtors and their Estates have no claims or causes of action, including
avoidance claims under chapter 5 of the Bankruptcy Code, for recovery or
disgorgement against any of the Pre-Petition Secured Parties.
The Debtors waived, discharged, and released any right to challenge any of
the Pre-Petition Obligations, including the priority, validity, and extent of the
liens securing the Pre-Petition Obligations.
The Pre-Petition Obligations constitute allowed, secured claims within the
meaning of sections 502 and 506 of the Bankruptcy Code.
See Final DIP Order, ¶ G(vii).
|Pre-Petition PGA TOUR
|Termination of the Pre-Petition PGA TOUR Contract on November 24, 2020
was legal, valid, and binding on the parties. As of the Aztec Petition Date,
Aztec was indebted and liable to the PGA TOUR in the amount of $4,688,909
under the Pre-Petition PGA TOUR Contract.
See Final DIP Order, ¶G(viii).
37. The Debtors have incurred over $11 million in post-petition secured debt in the form of DIP Obligations owed to the DIP Lenders in these Chapter 11 Cases. When added to the total to the prepetition secured debt owed to the AIG Lenders set forth in the Debtors’ schedules and detailed in the Final DIP Order, the Debtors have total outstanding secured debt in excess of $60 million. 8. If the Sale is not consummated, the financing provided by the DIP Lenders to the Debtors is set to terminate as early as April 21, 2021. See Stipulation and Agreed Order Extending Certain Sale and DIP Financing Deadlines [ECF # 244]. B. Marketing and Sale Process 9. On January 18, 2021, the Debtors filed their Emergency Motion for (A) Entry of an Order (I) Approving Bidding Procedures, (II) Approving Procedures for the Assumption and Assignment of Executory Contracts and Unexpired Leases, (III) Approving Stalking Horse Protections, (IV) Scheduling Bid Deadline, Auction Date and Sale Hearing Date, and (V) Approving Form of Notice Thereof; (B) Entry of an Order After the Sale Hearing (I) Authorizing the Debtors to Sell Their Assets, and (II) Authorizing the Debtors to Assume and Assign Certain Executory Contracts and Unexpired Leases; and (C) Granting Related Relief [ECF # 155] (the “Sale Motion”). By the Sale Motion, the Debtors sought to market and sell substantially all of their assets as “Purchased Assets” and implement certain bidding procedures (the “Bidding Procedures”) to ensure that consideration ultimately paid for the Purchased Assets would be fair, reasonable, and in the best interest of the Debtors’ estates and creditors. Id. 10. The Committee filed an objection [ECF # 163] related to the proposed Bidding Procedures Order on January 21, 2021. Thereafter, the Debtors, the DIP Lenders, and the Committee reached a resolution whereby the Committee supported entry of the Bidding Procedures Order.
411. On January 26, 2021, the Court entered its Order (I) Approving and Authorizing Bidding Procedures in Connection with the Sale of Substantially All Assets (II) Approving Stalking Horse Protections, (III) Approving Procedures Related to the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases, (IV) Scheduling Bid Deadline Auction Date, and Sale Hearing Date, and (V) Approving the Form and Manner of Notice Thereof [ECF # 178] (the “Bidding Procedures Order”), which among other things, established Bidding Procedures that govern the manner in which the Purchased Assets of the Debtors were to be marketed and sold. The Bidding Procedures Order required all Sale Objections to be filed on or before March 26, 2021. Specifically, the Bidding Procedures Order states: “[a]ny objections to the relief requested in the Sale Motion as relates to the sale of the Purchased Assets to the Successful Bidder (a “Sale Objection”) must: (a) set out in writing and describe with specificity the factual and legal basis for the Sale Objection; (b) comply with the Bankruptcy Rules and Bankruptcy Local Rules; (c) be filed with the Clerk of the Court no later than 5:00 p.m. (prevailing Central Time) on March 26, 2021 (the “Sale Objection Deadline”) …” Bidding Procedures Order, ¶ 20(ii) (emphasis in original). The Bidding Procedures Order further provides that: “[t]he failure of any person or entity to file a Sale Objection by the Sale Objection Deadline shall be deemed a consent to the sale of the Purchased Assets to the Stalking Horse Purchaser or other Successful Bidder and the other relief requested in the Sale Motion for purposes of Bankruptcy Code section 363(f). Further, the failure to file a Sale Objection by the Sale Objection Deadline shall be a bar to the assertion, at the Sale Hearing or thereafter, of (i) any objection to the Sale Motion; (ii) the sale of the Purchased Assets free and clear of any liens, claims, and encumbrances; and (iii) the Debtors’ consummation and performance of the Stalking Horse Agreement(s) or other Asset Purchase Agreement, as applicable.” Bidding Procedures Order, ¶ 20(iii). 12. In accordance with the Bidding Procedures Order, the Debtors promptly began marketing substantially all of their assets as potential Purchased Assets pursuant to section 363 of the Bankruptcy Code. On January 21, 2021, Livingstone Partners, LLC (“Livingstone”)
5commenced outreach to potential third-party buyers. As part of their comprehensive market outreach, Livingstone sent out teasers to two hundred thirty-five (235) parties consisting of a broad range of potential buyers, including industry participants, pure-play competitors, strategic groups in related industries, and a host of private equity and distressed investor groups throughout the United States and Europe. Thereafter, forty-one (41) parties agreed to sign confidentiality agreements and accessed the data room. 13. The Debtors also uploaded a form of Asset Purchase Agreement into the data room for interested bidders to mark up and submit their bids, which necessarily includes defining the scope of the Purchased Assets and any excluded assets. As a starting point for future bargaining and negotiations with bidders, the Debtors’ form agreement sought to exclude potential chapter 5 causes of action from the Purchased Assets. 14. As the marketing process continued, and in furtherance of their efforts to obtain the highest and best value for the estates in the Sale process, the Debtors twice extended certain Sale deadlines to afford more time for interested bidders to conduct due diligence and submit bids. Specifically, on March 4, 2021, in accordance with the Bidding Procedures Order, the Debtors filed a Notice of Extension of Stalking Horse Designation Deadline [ECF # 202], extending the Stalking Horse Designation Deadline to and including March 12, 2021. Further, on March 23, 2021, the Court entered the Stipulation and Agreed Order Extending Certain Sale and DIP Financing Deadlines [ECF # 247] which, among other things, extended the Bid Deadline to April 2, 2021, rescheduled the Auction to April 6, 2021, and extended the Auction Objection Deadline to April 7, 2021. However, the Sale Objection deadline was not extended. The Committee was a signatory to the stipulation. See ECF # 247.
615. On March 16, 2021, in consultation with the Consultation Parties, the Debtors filed their Notice of Selection of Stalking Horse Purchaser [ECF # 231] and attached the proposed Stalking Horse Agreement thereto. Not surprisingly, pursuant to section 2.1(b)(ix) of the Stalking Horse Agreement, the Stalking Horse Purchaser sought to purchase all claims and causes of action of the Debtors to the extent related to the other Purchased Assets; provided, however, that the Debtors and the Stalking Horse Purchaser ultimately agreed that any and all claims or causes of action under chapter 5 of the Bankruptcy Code would be designated as “Excluded Assets” rather than Purchased Assets pursuant to section 2.2(b)(xiii) of the Stalking Horse Agreement. 16. The designation of chapter 5 causes of action as Excluded Assets in the Stalking Horse Agreement was the result of extensive bargaining with the Stalking Horse Purchaser and was supported by the Committee. However, it would come as no surprise that other bidders might also seek to include chapter 5 causes of action, or any other potential causes of action, as Purchased Assets in their bids. Thus, the Committee was well aware that chapter 5 causes of action were being bargained for. 17. The Debtors received the following Qualified Bids by the Bid Deadline:
|Qualified Bidder Estimated Total Consideration||None|
|Whole Company Bids||None|
|PRO EM Holdings, LLC $10,300,000||None|
|AAS BIDCO, LLC $25,600,000||None|
|Aztec Only Bids||None|
|BSE Aztec, LLC||$4,900,000|
|Peerless Events & Tents, LLC||$5,244,000|
|AAS BIDCO, LLC||$5,300,000|
718. Each of the Qualified Bids designated at least some causes of action as Purchased Assets. Copies of all Qualified Bids were uploaded into the data room and made available to the Committee and all other Qualified Bidders. The Debtors did not receive any Shaffer Only Bids as defined in the Bidding Procedures Order, nor did any Qualified Bidder indicate interest in bidding solely on the Debtors’ “Shaffer Sports” assets or operations when given the express opportunity at the Auction. 19. The Debtors’ robust marketing and sale process culminated with the Auction held on April 6, 2021, which the Committee attended in its capacity as a Consultation Party. That same day, the Debtors filed their Notice of Selection of Successful Bidder and Back-Up Bidder [ECF # 260] identifying AAS BIDCO, LLC as the Successful Bidder. Among other things, the Buyer’s Successful Bid includes a credit bid of the AIG Prepetition Obligations in the amount of $14,000,000, as well as cash in an amount necessary to pay all of the outstanding DIP Obligations at Closing, which is estimated at $11,600,000. The Successful Bid was more than double the value of the next highest Whole Company Bid submitted by the Bid Deadline, and no other Qualified Bidders were willing to top this Successful Bid at the Auction. Likewise, the Back-Up Bid submitted by the AIG Lenders is a credit bid on substantially similar terms, including the scope of the purchased assets, and does not contemplate leaving behind a war chest for the Committee. 20. Since the conclusion of the Auction, the Debtors and the Buyer have continued to negotiate the final form of an Asset Purchase Agreement (the “APA”) for the sale of the Purchased Assets. The Sale Hearing has been reset by the Court for April 16, 2021 at 8:00 a.m. (prevailing Central Time). See ECF # 286.
821. The Committee filed its Sale Objection on April 8, 2021, after the Sale Objection Deadline passed.3 The Committee principally objects to the proposed Sale to Buyer on the basis that: (i) the Purchased Assets include certain Causes of Action belonging to the Debtors, including Avoidance Actions; (ii) the cash left in the estates following the Sale is insufficient to fund a fiduciary’s investigative efforts; and (iii) the Sale purportedly constitutes an impermissible sub rosa plan. As set forth in this Reply, and upon the record of the Sale Hearing, the Court should overrule the Committee’s Sale Objection and enter the Sale Order authorizing the sale of the Purchased Assets and approving the APA between the Debtors and the Buyer. III. REPLY 22. As a preliminary matter, the Court should summarily deny the Sale Objection because it is untimely. See S.E.C. v. Faulkner, No. 3:16-CV-1735-D, 2020 WL 2042339, at * 3 n. 7 (Bankr. N.D. Tex. April 28, 2020) (overruling plan objection as untimely when objector failed to file objection by deadline and failed to demonstrate cause for failing to file by court-ordered deadline). However, even if the Court were to consider Sale Objection (and it need not), the Court should overrule the Committee’s objections. 23. The Sale Objection is nothing more than an attempted cash grab by the Committee to investigate and pursue unspecified causes of action that, by its own admission, may not even exist or have any value. The Committee offers many vague statements of “concern” regarding the proposed Sale, but no actual evidence sufficient to challenge the sound business justifications the Debtors have demonstrated supporting the Sale upon the terms of the APA. See In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983) (party objecting to section 363(b) sale is required to produce 3 The Sale Objection Deadline passed on March 26, 2021. Only the Auction Objection Deadline remained. On April 6, 2021, after the conclusion of the Auction, the Debtors agreed to extend the Committee’s remaining objection deadline, which was set for April 7, 2021 at 5:00 p.m. pursuant to the Court’s order [ECF # 247, ¶ 6], by one day to April 8, 2021 at 5:00 p.m.
9some evidence respecting its objections). Further, the proposed Sale does not constitute an impermissible sub rosa plan. A. The Sale is a Sound Exercise of the Debtors’ Business Judgment 24. Notwithstanding the Committee’s unfounded assertion that the Debtors are pulling a “bait and switch” at the behest of the Buyer, the Debtors have articulated a sound business purpose for the transaction contemplated by the APA, including with respect to the Sale of the causes of action designated as “Purchased Actions” in the APA. The Court should approve the proposed Sale to the Buyer because the Debtors have acted in good faith at all times during the Sale process in order to obtain the highest and best value for the estates. Further, the terms of the proposed Sale as reflected in the APA are fair and reasonable under the circumstances of these Chapter 11 Cases. 25. Bankruptcy Code section 363(b)(1) provides that a debtor, “after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.” 11 U.S.C. § 363(b)(1). The Debtors may sell estate property outside of the ordinary course if the sale is supported by a sound business justification and the sale is in the best interests of the estates. See, e.g., Institutional Creditors of Continental Air Lines, Inc. v. Continental Air Lines, Inc., et al. (In re Continental Air Lines, Inc.), 780 F.2d 1223, 1226 (5th Cir. 1986) (adopting In re Lionel Corp and articulating factors courts should consider in determining whether there is a sufficient business justification); In re Lionel Corp., 722 F.2d 1063, 1070; see also, Fulton State Bank v. Schipper, 933 F.2d 513, 515 (7th Cir. 1991); In re San Jacinto Glass Industries, Inc., 93 B.R. 934, 944 (Bankr. S.D. Tex. 1988); In re Condere Corp., 228 B.R. 615, 628-69 (Bankr. S.D. Miss. 1998). Additionally, the Debtors may sell substantially all of their assets pursuant to section 363(b), including their “crown jewels,” provided the proposed sale meets these requirements. See
10In re Torch Offshore, Inc., 327 B.R. 254, 260 n. 7 (E.D. La. 2005) (noting sales may dispose of essentially all assets of the estate and citing cases). 26. To determine whether there is a sound business reason for the proposed sale, Continental Airlines mandates that the Court should consider: “all salient factors pertaining to the proceeding and, accordingly act to further the diverse interests of the debtor, creditors and equity holders, alike. [The Court] might, for example, look to such relevant factors as the proportionate value of the asset to the estate as a whole, the amount of elapsed time since the filing, the likelihood that a plan of reorganization will be proposed and confirmed in the near future, the effect of the proposed disposition on future plans of reorganization, the proceeds to be obtained from the disposition vis-à-vis any appraisals of the property, which of the alternatives of use, sale or lease the proposal envisions and, most importantly perhaps, whether the asset is increasing or decreasing in value. This list is not intended to be exclusive, but merely provide guidance to the bankruptcy judge.” Continental Airlines, 780 F.2d at 1226. 27. In addition to the Continental Airlines factors, Judge Steen in Gulf Coast enumerated thirteen (13) factors to be considered when approving a sale under section 363(b) of the Bankruptcy Code: (i) Is there a need for speed? (ii) What is the business justification? (iii) Is the case sufficiently mature to assure due process? (iv) Is the proposed APA sufficiently straightforward to facilitate competitive bids or is the purchaser the only interested party? (v) Have the assets been aggressively marketed in an active market? (vi) Are the fiduciaries that control the debtor truly disinterested? (vii) Does the proposed sale include all of the debtor’s assets and does it include the “crown jewel?” (viii) What extraordinary protections does the purchaser want? (ix) How burdensome would it be to propose the sale as part of confirmation of a chapter 11 plan? (x) Who will benefit from the sale? (xi) Are the Special Adequate Protection Measures Necessary and Possible? (xii) Was the hearing a true adversary presentation? Is the integrity of the bankruptcy process protected? (xiii) Other factors that apply to the case at hand?
11In re Gulf Coast Oil Corp., 404 B.R. 407, 423-27 (Bankr. S.D. Tex. 2009); see also In re 9 Houston LLC, 578 B.R. 600, 610 (Bankr. S.D. Tex. 2017). 28. Lastly, once a debtor articulates a valid business justification, “[t]he business judgment rule ‘is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was in the best interests of the company.’” In re Integrated Resources, Inc., 147 B.R. 650, 656 (Bankr. S.D.N.Y. 1992) (quoting Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985)). A “debtor-in possession’s business decision should be approved by the court unless it is shown to be so manifestly unreasonable that it could not be based upon sound business judgment, but only on bad faith, or whim or caprice.” In re 9 Houston, 578 B.R. at 619. Accordingly, if a debtor's actions satisfy the business judgment rule, then the transaction in question should be approved under section 363(b)(1) of Bankruptcy Code. 29. Here, the Debtors’ decision to sell the Purchased Assets, including all of the Purchased Actions, is supported by sound business justifications. First and foremost, there is a need for speed in approving the Sale because the Credit Agreement approved pursuant to the Final DIP Order terminates on April 21, 2021. See ECF # 247. There is also a sound business justification for consummating the Sale because, as explained in the chart above, the second highest Qualified Bid was for a mere $10,300,000 in cash, and would have left the Debtors’ estates with insufficient cash to pay off the DIP Obligations, let alone other allowed administrative and priority claims. By consummating the proposed Sale with this Buyer, the Debtors can ensure that all DIP Obligations are timely repaid, all administrative creditors are paid in full, and that numerous other contract counterparties and vendors are paid and have a viable business partner to
12operate the Purchased Assets well into the future. Thus, the proposed Sale maximizes value for the estates and provides the greatest amount of benefit to a broad range of parties in interest. 30. Moreover, the Committee’s bare assertion that the Debtors are simply “rolling over” or acting at the behest the AIG Lenders is entirely misplaced. As the Debtors stated in their Emergency Motion for Entry of an Order Continuing Sale Hearing [ECF # 272], the Debtors have endeavored to negotiate the best possible Sale terms in an APA with the Buyer, and the parties agreed to reset the Sale Hearing to a later date in order to facilitate those efforts. From an aggressive marketing campaign to their relentless efforts to negotiate favorable Sale terms, there can be little doubt that the Debtors have gone to great lengths to maximize value in these Chapter 11 Cases. The Court should overrule the Committee’s Sale Objection because the proposed Sale upholds the integrity of the bankruptcy process, and is in the best interests of the Debtors’ estates. B. The Sale of the Purchased Actions is Permissible 31. Recognizing that any Sale in these Chapter 11 Cases will not result in a recovery to unsecured creditors given the market value of the Purchased Assets and the exorbitant amount of secured debt, the Committee’s Sale Objection is focused on ensuring that claims against potential litigation targets are excluded from the APA. It is not satisfactory to the Committee that the APA already proposes to carve out litigation against certain “insiders” of the Debtors who will no longer be connected to the business. Rather, the Committee believes that pursuing litigation against the Debtors’ trade vendors, at a time when new ownership will endeavor to maintain and build upon these vendor relationships, represents a material source of recovery for the unsecured creditor constituency. Accordingly, the Committee seeks to re-write various portions of the APA, including the definitions of “Purchased Actions” and “Excluded Actions.”
1332. In reality, the APA and proposed Sale of avoidance actions has nothing to do with the Debtors’ independence or purported “allegiance” to the secured lenders as alleged by the Committee. See Sale Objection, ¶ 3. Rather, the decision to include any avoidance action in the sale is a product of substantial arms-length bargaining, represents a valid exercise of the Debtors’ business judgment, and is supported by applicable law. 33. A sale of chapter 5 causes of action is permitted so long as the requirements of Bankruptcy Code section 363(b) are satisfied. In re Moore, 608 F.3d 253, 261-62 (5th Cir. 2010). Further, as the Committee notes, other jurisdictions have held that avoidance actions may be transferred, even where the transferee will abandon those claims, so long as the overall value obtained for the transfer is appropriate. See In re BNP Petroleum Corp., 642 Fed. Appx. 429, 434 (5th Cir. 2016) (“[a] trustee may sell litigation claims that belong to the estate, as it can other estate property, pursuant to 11 U.S.C. § 363(b)”); In re Metropolitan Elec. Mfg. Co., 295 B.R. 7, 13 (Bankr. E.D.N.Y. 2003) (recognizing avoidance actions may be sold if such sale is with the consent of the debtor, in the best interest of the estate, and necessary and beneficial to the efficient and fair resolution of the bankruptcy cases); Silverman as Tr. Of Stanley C. Silverman Revocable Tr., dated Aug. 26, 2006 v. Birdsell, 796 Fed. Appx. 935, 937 (9th Cir. 2020) (affirming the sale of avoidance actions under section 363 of the Bankruptcy Code); In re Dura Automotive Systems, LLC, Case No. 19-bk-12378 (Bankr. D. Del. May 15, 2020); In re Briggs & Stratton Corp., Case No. 20-43597-399, Docket No. 898 (Bankr. E.D. Mo. Sep. 15, 2020) (approving sale of substantially all assets of debtor that included chapter 5 causes of action as acquired assets). 34. Courts in this district have also approved such sales. In a recent case, this Court approved an asset sale that included, among other things, claims and causes of action similar to those designated as Purchased Actions in this Sale. Specifically, the Court approved a sale that
14included causes of action against: (i) any customers, suppliers, or vendors of the debtors who, in the sole discretion of the buyer, would continue to be customers, suppliers, or vendors after closing; and (ii) certain insiders employed by the debtors who, in the sole discretion of the buyer, would be continuing with the buyer after closing. In re Country Fresh Holding Company Inc., et al., Case No. 21-30574, Docket No. 437 (Bankr. S.D. Tex. Mar. 29, 2021). 35. Here, the sale of the Purchased Actions is supported by sound business reasons and for appropriate value, and the Purchased Actions are integral aspects of the Purchased Asset mix as a whole. Many of the Purchased Actions being targeted by the Committee are causes of action against the Debtors’ vendors and trade partners. The Buyer specifically negotiated to purchase those claims for value to protect its go-forward vendors, contract counterparties and other commercial partners from the threat of aggressive litigation initiated by the Committee (or at the direction of the Committee) at the same time the Buyer is working to build such commercial relationships. 36. Given that the Buyer intends to continue to operate the Debtors’ businesses as a going concern, and wishes to maintain favorable business relationships with these exact vendors, it should come as no surprise that the Buyer has negotiated to purchase these claims in an effort to maintain these valuable relationships going forward. Similar objections to those raised by the Committee in the Sale Objection were lodged by another committee in In re KB US Holdings, Inc. At the sale hearing, the bankruptcy court for the Southern District of New York found that chapter 5 causes of action, among others, were appropriately included in the debtor’s sale because “these assets have value to [the buyer] as part of a peaceful transition of the businesses being sold as a going concern.” Sale Hrg. Tr. at 19:21-25, In re KB US Holdings, Inc., Case No. 20-22962-SHL (Bankr. S.D.NY. Oct. 23, 2020).
1537. In overruling the committee’s objection in that case, the bankruptcy court went on to state: “[t]he Court also rejects the committee’s position as an improper attempt to dictate the terms of the [the buyer’s] bid. The Court has no authority, nor is it wise policy, for the Court to cherry pick provisions of a proposed sale; rather, it is the role of the Court to determine whether a sale should be approved as part of the Debtors’ sound business judgment … None of the parties here, including the committee, dispute that [the buyer’s] bid is the highest and best offer or that the auction was … a fair and competitive process, and the Court has already found that the sale meets the standards of Section 363 of the Bankruptcy Code.” Id. at 21:20 – 22:7. The bankruptcy court’s reasoning in KB US Holdings, Inc. is pertinent given the analogous arguments raised by the Committee regarding this Sale. 38. Here, the Debtors believe that the consideration received for the Purchased Actions is abundantly reasonable under the circumstances, especially given that the aggregate amount of consideration was more than double the amount offered by any other Qualified Bidder. As the Committee is aware from reviewing the Qualified Bids, each of the Qualified Bidders sought to purchase some of the same causes of action that the Committee now complains about, albeit for much less consideration. 39. Further, if the Court were to decline to approve this Sale to the Buyer, then the Back-Up Bid of the AIG Lenders, which includes provisions for the sale of causes of action, would take its place in accordance with the Bidding Procedures Order. Assuming, arguendo, that the Committee also lodged an objection to that sale on the same grounds, then the Debtors’ estates would be left without a going concern transaction. 40. In sum, this Sale is about whether the APA constitutes the highest and best value for the estates. The Committee’s efforts to cherry pick and dictate the terms of the Sale are misplaced. In the Debtors’ business judgment, the proposed Sale, including the transfer of all
16Purchased Actions as Purchased Assets under the APA, is in the best interests of the Debtors, their estates, creditors, and all parties in interest. C. The Committee Cannot Force the Debtors or Buyer to Leave Behind a War Chest 41. The Committee has demanded that a “reasonable” sum be left behind by the Debtors and the Buyer so that the Committee (or some other liquidating fiduciary selected by the Committee) will be left with a war chest to pursue unencumbered litigation claims against the parties in their crosshairs. Indeed, notwithstanding the detrimental impact to secured creditors who hold liens in the Debtors’ cash, the Committee is posturing so that a liquidating fiduciary with carte blanche authority to sue certain of the Debtors’ vendors, officers, and directors can prosecute causes of action for the benefit of the unsecured creditor constituency. Notably, the two largest holders of unsecured claims in these Chapter 11 Cases are (i) PGA TOUR, Inc., with an unsecured claim of $4,688,909.00 as stipulated in the Final DIP Order; and (ii) the AIG Lenders, with an unsecured deficiency claim of approximately $30 million resulting from the Sale process. Thus, the majority of any recovery for unsecured creditors will be paid back to these same DIP Lenders as the holders of the vast majority of unsecured debt.4 42. Nevertheless, the Debtors and the Buyer should not be forced to leave behind a massive war chest for the future benefit of unsecured creditors when the Debtors’ current secured creditors holding priority claims over the unsecured creditor constituency will not even be paid in full. The Committee’s efforts to hold this Sale hostage, and to demand concessions that would violate the Bankruptcy Code’s statutory priority scheme, should be dismissed by the Court. 43. As the Court is aware, these Chapter 11 Cases were extremely volatile at their outset. To make it this far, the Debtors have strictly operated within the confines of the Final DIP 4 The Debtors estimate that excluding the DIP Lenders’ unsecured claims, the remaining unsecured claims are approximately $10 million. Of that amount, $3.3 million relates to the Debtors’ prepetition PPP Loan.
17Order and approved budget, and there can be no guarantee that there will be a “reasonable” amount of cash left behind to pursue a costly plan of liquidation and establish a war chest that will satisfy the Committee. The Debtors continue to evaluate the best course of action for winding up their estates, and one such course of action includes the potential for conversion of the Chapter 11 Cases to cases under chapter 7 of the Bankruptcy Code. This would allow a chapter 7 trustee to evaluate and liquidate any remaining assets. 44. The Committee’s demand that an undetermined “reasonable” sum be set aside for a liquidating fiduciary is not grounds for a Sale Objection and has no bearing on whether the proposed Sale is in the best interests of the Debtors and their estates. D. The Sale Does Not Constitute an Impermissible Sub Rosa Plan 45. Finally, as a last-ditch effort, the Committee asserts that the proposed Sale must be denied because it constitutes a sub rosa plan. See Sale Objection, ¶ 38. Just claiming a sale is a sub rosa plan is not enough, however, to sustain an objection to a sale motion. “Parties that oppose sale transactions under 11 U.S.C. § 363(b) on the basis that they constitute a sub rosa chapter 11 bankruptcy plan must articulate the specific rights that they contend are denied by the transaction.” Gulf Coast Oil Corp., 404 B.R. at 422. The Court need not turn the Sale Hearing into a mini-confirmation hearing merely because the Committee argues that there will be scant value left in the estate. Id. 46. The Fifth Circuit analyzed the issue of sub rosa plans in Braniff, which was cited by the Committee in its Sale Objection. The Braniff Court held that the proposed sale was impermissible under section 363 of the Bankruptcy Code because, among other things, the purchase agreement required “significant restructuring of the rights of [the debtor’s] creditors” and that certain portions of the transaction fell outside the scope of section 363 because they had the practical effect of dictating the terms of a future reorganization plan. PBGC v. Braniff Airways,
18Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 939-40 (5th Cir. 1983), reh’g denied, 705 F.2d 450 (5th Cir. 1983). By way of example, the Fifth Circuit explained that the terms of the purchase agreement required the secured creditors to vote their deficiency claim in favor of any future reorganization plan supported by the unsecured creditors committee, which thwarts the Bankruptcy Code’s scheme for creditor enfranchisement regarding plans. Id. at 940. The transaction also provided for the release of claims by all parties against the Debtor, its secured creditors, and its officers and directors. Id. 47. In this case, the Sale does not dictate the terms of any future plan, or restrict rights afforded to creditors under the Bankruptcy Code, like the right to vote on a proposed plan. Further, the transaction does not require all parties to release claims against the Debtors and their officers and directors, as was the case in Braniff. Without any of these hallmarks, there is no reason for the Court to find that the Sale constitutes an impermissible sub rosa plan. See 9 Houston LLC, 578 B.R. at 620 (distinguishing Braniff, finding proposed sale was not improper sub rosa plan, and overruling sale objection). 48. Further, the Committee fails to adequately articulate the specific rights they contend are being denied. Indeed, the Committee makes no effort to argue that the Sale would effectively evade the “carefully crafted scheme” of the chapter 11 plan confirmation process, such as by denying rights under sections 1125, 1126, 1129(a)(7), and 1129(b)(2) of the Bankruptcy Code, in violation Gulf Coast. 49. The Committee broadly complains that that the proposed Sale Order contains releases for the designated “Buyer Entities” as defined in the APA, which necessarily includes the AIG Lenders. Yet, as discussed above, the Committee never asserted a Challenge against the AIG Lenders with respect to their liens or releases in the Final DIP Order—despite having the
19opportunity to do so during the Challenge Period. Given the expansive definition of “Released Parties” that have already been released by the Debtors’ estates in the Final DIP Order, it is unclear why the Committee believes there are any claims against “unintended third parties” that could be released in the proposed Sale Order when they could have provided for some theoretical recovery to unsecured creditors. Regardless, the Committee has failed to articulate their release argument with any specificity. See 9 Houston LLC, 578 B.R. at 620-21 (objector failed to specify exactly what protections it was being denied). Nor has the Committee articulated how the proposed Sale “treats all or substantially all of the claims against the estates . . . as if the proposed Sale were itself a chapter 11 plan.” Sale Objection, ¶ 39. Lastly, the proposed Sale does not leave the estate with “scant value” or without “potential sources of recovery.” Id. Among other things, the APA expressly provides that the Debtors retain certain causes of action against directors, officers, equity holders, and other insiders, as well as Insurance Policies relating thereto. 50. The Court should overrule the Committee’s Sale Objection because the proposed Sale does not constitute an impermissible sub rosa plan under section 363 of the Bankruptcy Code. IV. PRAYER WHEREFORE, the Debtors respectfully request that the Court: (i) overrule the Committee’s Sale Objection; (ii) approve the APA between the Debtors and the Buyer; (iii) enter the Sale Order granting the relief requested in the Sale Motion; and (iv) grant such other and further relief as the Court may deem just and proper.
20Respectfully submitted on the 14th day of April, 2021. OKIN ADAMS LLP By: /s/ Matthew S. Okin Matthew S. Okin Texas Bar No. 00784695 Email: firstname.lastname@example.org David L. Curry, Jr. Texas Bar No. 24065107 Email: email@example.com Ryan A. O’Connor Texas Bar No. 24098190 Email: firstname.lastname@example.org 1113 Vine St., Suite 240 Houston, Texas 77002 Tel: 713.228.4100 Fax: 888.865.2118 ATTORNEYS FOR THE DEBTORS CERTIFICATE OF SERVICE I hereby certify that on April 14, 2021, a true and correct copy of the foregoing Reply was served via the Court’s CM/ECF system to all parties consenting to service through the same. By: /s/ Ryan A. O’Connor Ryan A. O’Connor