Full title: Reply by Debtor 1 Tea Olive I, LLC to 9 Motion for use of cash collateral, 93 Objection, 94 Objection. (Cutler, Clinton) (Entered: 02/02/2021)
Document posted on Feb 1, 2021 in the bankruptcy, 7 pages and 0 tables.
Bankrupt11 Summary (Automatically Generated)
REPLY OF DEBTOR TO OBJECTIONS TO ENTRY OF FINAL ORDER ON MOTION FOR USE OF CASH COLLATERAL
Tea Olive I, LLC, the debtor and debtor-in-possession (the “Debtor”), hereby submits this reply (the “Reply”) to the objections of Worldwide Distributors (“Worldwide”)Instead, Worldwide primarily objects to use of cash collateral to pay down the Debtor’s obligations to the Prepetition Lenders and the Committee objects to certain aspects of the Debtor’s agreement to provide adequate protection to the Prepetition Lenders.The Debtor notes that the Agency Agreement dated February 27, 2019 between the Debtor and Worldwide, provides:
[Debtor] will be solely responsible for payment to vendors and suppliers for goods which WORLDWIDE’S ASSERTED POSITION
Setting aside funds to adequately protect Worldwide’s asserted interest in cash collateral is only half of the solution. Agent agrees to furnish suitable forms of documents such as purchase orders, invoices, and remittance instructions, and Buyer agrees to employ such forms with respect to goods obtained through Worldwide Distributor's agency.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MINNESOTA
Tea Olive I, LLC d/b/a Stock+Field, Case No.: 21-30037
Chapter 11 Case
REPLY OF DEBTOR TO OBJECTIONS TO ENTRY OF FINAL ORDER ON MOTION FOR USE OF CASH COLLATERAL
Tea Olive I, LLC, the debtor and debtor-in-possession (the “Debtor”), hereby submits this reply (the “Reply”) to the objections of Worldwide Distributors (“Worldwide”) (Dkt. No.
93) and the Committee (Dkt. No. 94) to the Debtor’s Motion for Order (I) Granting Expedited Relief and (II) Authorizing the Use of Cash Collateral on an Interim and Final Basis (Dkt. No. 9) (the “Motion”).
Importantly, neither Worldwide nor the Committee object to the proposed use of cash collateral for the Debtor’s operating expenses, or to the proposed use of cash collateral to conduct the store closing sales.
Instead, Worldwide primarily objects to use of cash collateral to pay down the Debtor’s obligations to the Prepetition Lenders and the Committee objects to certain aspects of the Debtor’s agreement to provide adequate protection to the Prepetition Lenders. The Debtor is in the process of negotiating changes to the proposed final order to address these objections and expects to submit a revised proposed order prior to the final hearing. The Debtor also anticipates filing a revised version of the Budget prior to the final hearing.
I. THE DEBTOR AND OTHER CONSTITUENTS HAVE NOT FULLY ASSESSED WORLDWIDE’S ASSERTED POSITION AND CLAIM
Worldwide asserts a senior interest in cash collateral. It asserts that the Debtor granted it a security interest by executing a Security Agreement dated February 27, 2019. It asserts that its security interest was perfected by the filing of a UCC-1 with the Minnesota Secretary of State on January 9, 2020, which pre-dates the UCC-1 filed by the Prepetition Agent on behalf of itself and the Prepetition Lenders. Worldwide asserts that its senior security interest secures an obligation of approximately $3.3 million, based primarily on the Debtor’s purchases of goods from vendors who are members of Worldwide. Worldwide asserts that it has an obligation to pay those vendors, but has not disclosed which, if any, of the vendor invoices that it has actually paid.
Worldwide further asserts that its claim amount will grow over time with the addition of 18% interest and attorneys’ fees.
Regarding the amount of Worldwide’s asserted claim, the Debtor is in the process of reconciling the invoices relating to the purchases from the applicable vendors. Setting aside the precise dollar amount asserted, however, the Debtor is still assessing whether its obligations under the invoices are secured by Worldwide’s asserted security interest. The Debtor notes that the Agency Agreement dated February 27, 2019 between the Debtor and Worldwide, provides:
[Debtor] will be solely responsible for payment to vendors and suppliers for goods which [Debtor] purchases through
[Worldwide]. [Worldwide] shall have no independent
responsibility for such payment.
Agency Agreement, § 2. A copy of the Agency Agreement is attached hereto as Exhibit A.
Worldwide did not include a copy of the Agency Agreement with its objection. The Debtor
further notes that the Handbook, which Debtor’s counsel just received, states on the very first page:
As a final note to the handbook, it is important to remember that Worldwide has no independent responsibility to pay the vendor.
Even when Worldwide pays the Vendor for merchandise ordered by you, such payment by Worldwide shall be deemed an advance by Worldwide on behalf of and in its capacity as a paying agent for you, the Member.
Exhibit D to Dkt. No. 93, p.1. Both of these provisions are directly contrary to Worldwide’s assertions. At the very least, there is ambiguity regarding the amounts that are actually owed to Worldwide, and thereby secured by its security interest.1
The Debtor further understands that both the Prepetition Lenders and the Committee have independently raised questions regarding validity and priority of the Worldwide security interest and the amount of Worldwide’s claim. The Debtor and other constituents need time to assess the validity and amount of Worldwide’s claim.
These issues will not be resolved by the final hearing on cash collateral. The Debtor intends to work with the parties to frame the issues for determination by the Court in an evidentiary hearing or pursuant to an adversary proceeding so the issues can be determined as expeditiously as possible. Therefore, as discussed below, the Debtor’s proposal for adequate protection for Worldwide is to segregate the estimated and alleged amount of its secured claim, with the rights of the parties to attach to the segregated funds.
1 The Debtor reserves all rights to challenge the Worldwide claim, and raises these issues solely for the purpose of demonstrating the need for further discussions and/or judicial determination.
II. WORLDWIDE’S OBJECTION TO THE USE OF CASH COLLATERAL CAN BE ADDRESSED BY SETTING ASIDE FUNDS
As noted in its objection, Worldwide does not object to the proposed use of cash collateral for the Debtor’s operating expenses pursuant to the Budget, or to the proposed use of cash collateral to conduct the store closing sales. Worldwide’s objection to payments to the Prepetition Lenders in connection with interim use of cash collateral was resolved by setting aside proceeds from the ongoing sales to adequately protect Worldwide’s interest in cash collateral, should its security interest prove to be valid. The Debtor has proposed a similar resolution in connection with final use of cash collateral. The parties are in discussions regarding the amount, timing of funding, and other details, and the Debtor hopes to have obtained consensus on a form of proposed order by the time of the hearing.
III. THE DEBTOR REQUESTS AN EVIDENTIARY HEARING TO PROMPTLY RESOLVE ANY CHALLENGES TO WORLDWIDE’S ASSERTED POSITION
Setting aside funds to adequately protect Worldwide’s asserted interest in cash collateral is only half of the solution. It is in the estate’s interest to resolve the dispute regarding Worldwide’s asserted secured claim promptly and efficiently. Worldwide is asserting the right to add 18% interest and attorneys’ fees to its claim. To this end, the Debtor requests an evidentiary hearing to promptly resolve the amount, secured status, and priority of the Worldwide claims.
IV. THE DEBTOR IS WORKING TO ADDRESS THE COMMITTEE’S OBJECTIONS
The Committee has filed a limited objection to the Motion. The Debtor has been in communication with the Committee and the Prepetition Lenders regarding resolution of the
issues raised by the Committee. The Debtor expects to present a revised proposed order prior to the final hearing to address and narrow any areas of dispute.
The Debtor is seeking to use cash collateral to conduct its operations. No party is objecting to the Debtor’s overall strategy or use of cash. Instead, the only two objections have focused on issues of appropriate adequate protection. The Debtor submits that Worldwide’s main objection to the Debtor’s use of cash collateral can be addressed by setting aside proceeds of the ongoing sales and promptly scheduling an evidentiary hearing. Worldwide has also requested additional adequate protection in the form of reporting, a streamlined ability to challenge the Prepetition Lenders’ liens or claim, and expedited access to stay relief. The Debtor is in the process of negotiating changes to the proposed form of order to address these requests and the Committee’s limited objections. In the event the parties are unable to reach a resolution, the Debtor will present the issues to the Court at the final hearing.
Dated: February 2, 2021 /e/ Clinton E. Cutler
Clinton E. Cutler (#0158094)
James C. Brand (#0387362)
Steven R. Kinsella (#0392289)
Samuel M. Andre (#0399669)
FREDRIKSON & BYRON, P.A.
200 South Sixth Street
Minneapolis, MN 55402-1425
ATTORNEYS FOR THE DEBTOR
This agreement dated this d-7 day of fe , 20 l e/ by and between Tea Olive I, LLC, a member or prospective member of Worldwide Distributors, hereinafter referred to as "Buyer," and Worldwide Distributors, a cooperative association, hereinafter referred to as "Agent,"
WHEREAS, Buyer has been admitted to membership (or prospective membership) in Worldwide Distributors, and
WHEREAS, one of the main services provided its members by Worldwide Distributors is promotion of opportunities for Buyer to obtain goods at discount or other favorable terms all as arranged for Buyer by Agent, and
WHEREAS, the parties wish to reduce to writing their understanding of certain terms and conditions of such services.
NOW, THEREFORE, It is hereby agreed that
1. Buyer will abide by all terms and conditions related to transactions arranged for Buyer by Agent.
2. Buyer will be solely responsible for payment to vendors and suppliers for goods which Buyer purchases through agent. Agent shall have no independent responsibility for such payment.
3. Agent shall negotiate terms and furnish information respecting the purchase of goods from suppliers or vendors, including but not limited to trade discount, delivery date, availability, promotional displays for Buyers, and other like services, for which Buyer shall compensate Agent in accordance with the schedule of charges then in effect.
4. Agent agrees to furnish suitable forms of documents such as purchase orders, invoices, and remittance instructions, and Buyer agrees to employ such forms with respect to goods obtained through Worldwide Distributor's agency.
BUYER (Legal Corporate Name) Tea Olive I, LLC.
Buyer's authorized agent signature: