HTML Document View

Full title: Motion to Compromise and/or Settle under Fed.R.Bankr.P. 9019 filed by Jeffrey A Hokanson on behalf of Member Debtors Gregg Appliances, Inc., HHG Distributing LLC, Debtor hhgregg, Inc. (Attachments: (1) Exhibit A - Proposed Order on Motion to Approve Settlement (2) Exhibit B - Settlement Agreement) (Hokanson, Jeffrey) (Entered: 01/12/2021)

Document posted on Jan 11, 2021 in the bankruptcy, 9 pages and 0 tables.

Bankrupt11 Summary (Automatically Generated)

Indiana (the “Local Rules”), approving the settlement of claims [Claim Nos. 1019, 1286, 1313, 1314] filed by Illinois Department of Revenue (the “Illinois DOR”) on account of various administrative and priority tax claims and penalties and interests against Gregg Appliances, Inc. arising from accrued sales tax liabilities from 2011 to 2017 (the “Claims”).On January 6, 2020, the Illinois DOR filed amended proofs of claim [Claim Nos. 1313, 1314] asserting a revised priority tax claim of $596,226.55, a revised general unsecured claim of $13,453.69 and a revised administrative expense claim of $29,585.87. In full and complete satisfaction of the Claims and the releases contained herein, the Debtors will: (i) cause the payment to the Illinois DOR of $125,000 in cash (the “Settlement Payment”) within three (3) business days after the Effective Date (as defined below); and (ii) allow a single priority claim in the amount of $350,000 against Gregg Appliances, Inc. pursuant to section 507(a)(8) of the Bankruptcy Code.Former Officers), directors, equity holders, partners, members, managers, and employees (collectively, the “Debtor Releasees”) of and from any and all claims and liabilities, whether known or unknown, that the Creditor Releasor has or may have against the Debtor Releasees arising out of and/or related in any way to the Claims and any other claims for taxes of any nature and/or penalties and interest that could be asserted by the Illinois DOR against any of the Debtors Releasees for periods up to the date of the Settlement Agreement provided, however, that nothing in the Agreement shall be construed to release any of the Debtor Releasees from any liability, duty or obligation expressly arising under the Settlement Agreement.The Debtors seek the entry of an order, pursuant to sections 105(a), 363(b), 502, 503, 505 and 507 of the Bankruptcy Code, Bankruptcy Rules 4001, 6004, and 9019(a), and Local Rule B-9019-1, (a) approving the Settlement Agreement attached hereto as Exhibit B, and the Settlement described therein, and (b) authorizing and empowering the Debtors to settle the Claims set forth herein, pursuant to the terms set forth in the Settlement Agreement, and to take all steps necessary to carry out and otherwise effectuate the terms, conditions, and provisions of the Settlement Agreement.

List of Tables

Document Contents

IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION In re: Chapter 11 hhgregg, Inc., et al.,1 Case No. 17-01302-JJG-11 Debtors. (Jointly Administered) MOTION OF DEBTORS FOR ORDER APPROVING SETTLEMENT OF CLAIMS FILED BY ILLINOIS DEPARTMENT OF REVENUE hhgregg, Inc. and its above-captioned affiliated debtors and debtors-in-possession (each a “Debtor” and collectively, the “Debtors”) hereby move (the “Motion”) this Court for the entry of an order, substantially in the form attached hereto as Exhibit A (the “Proposed Order”), pursuant to sections 105(a), 363(b), 502, 503, 505 and 507 of title 11 of the United States Code (the “Bankruptcy Code”), Rules 4001, 6004, and 9019(a) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), and Rule B-9019-1 of the Local Rules of the United States Bankruptcy Court for the Southern District of Indiana (the “Local Rules”), approving the settlement of claims [Claim Nos. 1019, 1286, 1313, 1314] filed by Illinois Department of Revenue (the “Illinois DOR”) on account of various administrative and priority tax claims and penalties and interests against Gregg Appliances, Inc. arising from accrued sales tax liabilities from 2011 to 2017 (the “Claims”). The Committee (defined below) supports the Settlement (defined below). In support of this Motion, the Debtors respectfully state as follows: 1 The Debtors in these cases, along with the last four digits of each Debtor’s federal tax identification number, are:

1

JURISDICTION AND VENUE 1. This Court has jurisdiction to consider this Motion pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). 2. The statutory and legal predicates for the relief requested herein are sections 105(a), 363(b), 502, 503, 505 and 507 of the Bankruptcy Code, Bankruptcy Rules 6004, and 9019(a), Local Rule B-9019-1. FACTUAL BACKGROUND 3. On March 6, 2017 (the “Petition Date”), each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 4. The Debtors continue to operate and maintain their businesses as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 5. On March 10, 2017, the Office of the United States Trustee appointed an official committee of unsecured creditors (the “Committee”). No request has been made for the appointment of a trustee or examiner in these chapter 11 cases. 6. As of the Petition Date, the Debtors operated 220 brick-and-mortar stores offering furniture, appliances, and electronics in 19 states under the names hhgregg and Fine Lines. As of the date of this Motion, the Debtors, while working with the Committee, have liquidated the Debtors’ assets at their stores through store closing sales and most, but not all, of their litigation assets have been liquidated. This process has resulted in the repayment in full of the Debtors’ secured debt, and the Debtors have only a small number of material remaining adversary proceedings in which the Debtors are expecting $8 million to $10 million in recoveries to be used for distribution to their remaining administrative and priority creditors, and to the extent there are sufficient remaining proceeds, to their general unsecured creditors.

2

7. Depending on the outcome of these actions, the Debtors anticipate filing a chapter 11 liquidating plan. To assess, however, whether a liquidating plan is feasible and confirmable, the Debtors have begun analyzing the merits and scope of administrative and priority claims. To facilitate this process, by not later than March 31, 2021, the Debtors anticipate filing a motion to establish a deadline for filing administrative, priority and non-priority proofs of claims assuming the remaining adversary proceedings continue to liquidate as projected. 8. As part of their initial administrative claims review process, the Debtors have been reviewing their tax claims, which include a proof of claim filed on August 7, 2017 by the Illinois DOR [Claim No. 1019] against Gregg Appliances, Inc. asserting a priority tax claim of $589,161.58 and a general unsecured claim in the amount of $10,297.40. On October 11, 2018, the Illinois DOR also filed a separate proof of claim [Claim No. 1286] asserting an administrative expense claim in the amount of $12,213.54. On January 6, 2020, the Illinois DOR filed amended proofs of claim [Claim Nos. 1313, 1314] asserting a revised priority tax claim of $596,226.55, a revised general unsecured claim of $13,453.69 and a revised administrative expense claim of $29,585.87. These Claims all relate to sales tax audits, which may implicate trust fund issues. 9. The Debtors have engaged with the Illinois DOR to determine whether the Claim amounts will be further amended and whether further information in support of the audit is required. While the Debtors dispute the amount of the Claims, they have determined that the litigation costs alone of completing and challenging the audit and resolving the merits of the Claims may cost more than the cost of settling the Claims pursuant to this Motion. 10. If that were not enough, the Debtors also learned that the Illinois DOR asserted the Claims against certain former officers of the Debtors (the “Former Officers”) (none of whom are working on issues related to these cases) on “responsible person” theories of recovery. The Former

3

Officers have been asking for documents they believe are necessary to litigate the Claims asserted against them. The Debtors have been therefore dealing with litigation issues on two fronts. 11. To stem the cost of litigation and document production, the Debtors in consultation with the Committee, engaged in months of negotiation with the Illinois DOR, and the parties (with the approval and support of the Committee) have agreed upon the terms of a settlement to resolve the Claims on the terms set forth in the attached settlement agreement (the “Settlement” and the “Settlement Agreement”). A copy of the Settlement Agreement is attached as Exhibit Band incorporated herein. THE SETTLEMENT AGREEMENT 12. With the proviso that the specific terms of the Settlement Agreement take precedence over the following summary description, the Settlement Agreement generally provides as follows: (a) Settlement Payment and Partial Allowance of Claims. In full and complete satisfaction of the Claims and the releases contained herein, the Debtors will: (i) cause the payment to the Illinois DOR of $125,000 in cash (the “Settlement Payment”) within three (3) business days after the Effective Date (as defined below); and (ii) allow a single priority claim in the amount of $350,000 against Gregg Appliances, Inc. pursuant to section 507(a)(8) of the Bankruptcy Code. (b) Bankruptcy Court Approval. The Settlement Agreement is subject to approval by the Court and all parties thereto shall seek expedited approval of the Settlement Agreement by the Court. (c) Effective Date. The Settlement Agreement will become effective upon the occurrence of both of the following: (a) the execution by each of the parties thereto, and (b) the Court entering an order approving the Settlement Agreement and such order becoming a Final Order2 (the “Effective Date”). (d) Mutual Releases. Subject to the occurrence of: (a) the Effective Date, and (b) the receipt of the Settlement Payment by the Illinois DOR, (i) the Illinois DOR 2 “Final Order” shall mean (i) the order has not been reversed, modified or amended, and is not stayed; (ii) the time to appeal from or to seek review or rehearing or petition for certiorari with respect to such order has expired; and (iii) the order is no longer subject to review, reversal, modification or amendment; provided, however, that the mere possibility that a motion under Rule 60 of the Federal Rules of Civil Procedure, or any analogous rule, may be filed relating to such order or judgment shall not cause such order not to be a “Final Order.”

4

(the “Creditor Releasor”) releases the Debtors and each of their current and former officers (including the Former Officers), directors, equity holders, partners, members, managers, and employees (collectively, the “Debtor Releasees”) of and from any and all claims and liabilities, whether known or unknown, that the Creditor Releasor has or may have against the Debtor Releasees arising out of and/or related in any way to the Claims and any other claims for taxes of any nature and/or penalties and interest that could be asserted by the Illinois DOR against any of the Debtors Releasees for periods up to the date of the Settlement Agreement provided, however, that nothing in the Agreement shall be construed to release any of the Debtor Releasees from any liability, duty or obligation expressly arising under the Settlement Agreement. The Debtors release the Illinois DOR from all liabilities or claims, including claims for refunds or credits, whether known or unknown, that they could otherwise assert against the Illinois DOR for all periods up to the date of the Settlement Agreement. RELIEF REQUESTED 13. The Debtors seek the entry of an order, pursuant to sections 105(a), 363(b), 502, 503, 505 and 507 of the Bankruptcy Code, Bankruptcy Rules 4001, 6004, and 9019(a), and Local Rule B-9019-1, (a) approving the Settlement Agreement attached hereto as Exhibit B, and the Settlement described therein, and (b) authorizing and empowering the Debtors to settle the Claims set forth herein, pursuant to the terms set forth in the Settlement Agreement, and to take all steps necessary to carry out and otherwise effectuate the terms, conditions, and provisions of the Settlement Agreement. BASIS FOR RELIEF 14. The Settlement represents the results of good faith negotiations between the Debtors and the Illinois DOR and the Debtors believe the approval of the Settlement Agreement is in the estates’ and their creditors’ best interests. 15. Bankruptcy Rule 9019(a) provides, in relevant part: On motion by the [debtor in possession] and after notice and a hearing, the court may approve a compromise or Settlement Agreement. Notice shall be given to creditors, the United States trustee, . . . and indenture trustee as provided in Rule 2002 and to any other entity as the court may direct.

5

Fed. R. Bankr. P. 9019(a). The law favors compromise. 10 Collier on Bankruptcy ¶ 9019.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). The approval of a motion to compromise is within this Court’s discretion. In re Del Grosso, 106 B.R. 165, 167 (Bankr. N.D. Ill. 1989) (citations omitted). In exercising this discretion, a bankruptcy court should consider the probability of success, any anticipated collection difficulties, and the complexity, expense, inconvenience and delay associated with litigation. In re Doctors Hosp. of Hyde Park, Inc., 474 F.3d 421, 426 (7th Cir. 2007). Generally, a settlement will be approved if it is in the best interest of the estate. In re Am. Reserve Corp., 841 F.2d 159, 161 (7th Cir. 1987). The Debtors believe that the Settlement Agreement represents a fair and reasonable compromise of the disputed issues regarding the Claims and is in the best interest of the Debtors’ estates. 16. The analysis under Bankruptcy Rule 9019 is ultimately whether the Settlement falls below the low end of the range of possible litigation outcomes. See, e.g., In re Holly Marine Towing, Inc., 669 F.3d 796, 801-02 (7th Cir. 2012) (holding that where one possible outcome was that the estate would receive nothing, a settlement giving it 50 percent of the value of the asset in question was reasonable); Doctors Hosp. of Hyde Park, Inc., 474 F.3d at 426. 17. While the Court must “determine whether the proposed settlement is fair and equitable and in the best interest of the estate[,]” the Court is not required to conduct a full evidentiary hearing regarding the propriety of settlement. Depoister v. Mary M. Holloway Found., 36 F.3d 582, 586-87 (7th Cir. 1994) (stating “It is clear that Rule 9019(a) itself does not expressly obligate the court to hold an evidentiary hearing prior to approving a compromise under Rule 9019(a).”). Stated differently, in reaching a decision on whether to approve a settlement, the Court must make an informed and independent judgment but need not make an independent investigation of the facts, and it may give weight to the trustee’s informed judgment and consider the competency and experience of counsel supporting the compromise. Id.; Matter of Rimsat, Ltd.,

6

224 B.R. 685, 688 (Bankr. N.D. Ind. 1997) (citations omitted). The Seventh Circuit has directed that whether or not a settlement is reasonably equivalent to the value of what is given up depends upon whether the settlement falls within the range of possible litigation outcomes. Doctors Hosp. of Hyde Park, 474 F.3d at 426. 18. Additionally, section 363(b)(1) of the Bankruptcy Code authorizes a bankruptcy court, after notice and a hearing, to authorize a debtor to “use, sell, or lease, other than in the ordinary course of business, property of the estate.” 11 U.S.C. § 363(b)(1). To approve a use, sale or lease of property other than in the ordinary course of business, the court must find that the settlement is in the “best interest of the estate”. In re Telesphere Communications, Inc., 179 B.R. 544 (Bankr. N.D. Il. 1994) (citing Energy Co-op., Inc., 886 F.2d 921, 927 (7th Cir. 1989) (“The benchmark for determining the propriety of a bankruptcy settlement is whether the settlement is in the best interests of the estate”). 19. The Debtors believe that the Settlement is fair, equitable, in the best interests of the Debtors’ estates, appropriate in the Debtors’ business judgment, and easily falls within the reasonable range of outcomes. The Settlement Agreement is the culmination of several months of negotiations among the Debtors and the Illinois DOR and represents a comprehensive resolution of the Claims. All use of the Debtors’ property contemplated by the Settlement Agreement, including the releases and any stipulations contemplated thereby is, in the Debtors’ business judgment, appropriate given the circumstances. 20. The Settlement avoids the expense, delay, and uncertainty inherent in disputing the Claims. The Debtors’ post-petition sales tax liability could easily exceed the amount the Illinois DOR has asserted as an administrative claim and the administrative cost of completing a substantive audit and litigation of the Claims is expected to materially exceed the overall cost of

7

the settlement. Finally, the cost of dealing with document requests and indemnification claims by the Former Officers are also expected to be borne by the estates. Accordingly, the Settlement is in the economic best interest of the Debtors. 21. Moreover, the Settlement reflects a compromise that the Debtors believe is well within the range of possible litigation outcomes, was negotiated between the parties in good faith and at arm’s length. The Settlement reduces the estates’ potential administrative and priority tax liability by at least $150,000 in the aggregate based on the amounts asserted in the Claims, which the Debtors believe is in the best interest of the estate. 22. Accordingly, for the reasons set forth above, the Debtors believe that the Settlement Agreement should be approved under Bankruptcy Rule 9019(a) as it is fair and equitable, a valid exercise of the Debtors’ reasonable and prudent business judgment and in the best interest of the Debtors’ estates, creditors and all parties in interest. WHEREFORE, the Debtors respectfully request that the Court enter the Proposed Order, substantially in the form attached as Exhibit A, granting the relief requested herein and granting all other just and proper relief. Respectfully submitted, MORGAN, LEWIS & BOCKIUS LLP Craig A. Wolfe Andrew J. Gallo 101 Park Avenue New York, NY 10178 Telephone: (212) 309-6000 craig.wolfe@morganlewis.com andrew.gallo@morganlewis.com - and – ICE MILLER LLP /s/ Jeffrey A. Hokanson Jeffrey A. Hokanson (No. 14579-49)

8

One American Square, Suite 2900 Indianapolis, IN 46282-0200 Telephone: (317) 236-2100 Jeff.Hokanson@icemiller.com Counsel to the Debtors and Debtors in Possession

9