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Full title: Reply by Interested Party Second Avenue Capital Partners, LLC, as the administrative agent and collateral agent for its own benefit and the benefit of CIT Northbridge LLC to 9 Motion for use of cash collateral, 94 Objection. An affidavit or verification, Memorandum of law. (Ratelle, Paul) (Entered: 02/02/2021)
Document posted on Feb 1, 2021 in the bankruptcy, 20 pages and 1 tables.
Bankrupt11 Summary (Automatically Generated)
InaccordancewiththetermsofthePrepetitionLoanAgreementreferencedabove,eachofthe Prepetition Loan Parties (as defined in the Prepetition Loan Agreement) granted continuing securityinterests and liens (collectively, the “Prepetition Liens”) to the Prepetition Agent, for the benefit of thePrepetitionSecuredParties,uponallofthecurrentlyexistingorhereafteracquiredright,title,andinterestofeachPrepetitionLoanPartyinandtoeachofthefollowing(collectively,the“PrepetitionCollateral”): a) all of the personal property now owned or at any time hereafter acquired by anyPrepetition Loan Party or in which any Prepetition Loan Party now has or at anytime in the future may acquire any right, title or interest, including all of eachPrepetitionLoanParty’sAccounts,ChattelPaper,DepositAccounts,Documents,Equipment, Fixtures, General Intangibles, Instruments, Intellectual Property (butexcluding any intent-to-use trademark applications), Inventory, InvestmentProperty,Letter-of-CreditRights,SupportingObligationsandallcommercialtortclaims(ineachcaseasdefinedinthePrepetitionCreditAgreement); b) allbooksandrecordspertainingtoanyoftheforegoing; c) allProceedsandproductsofanyoftheforegoing;and d) all collateral security and guarantees given by any Person with respect to any oftheforegoing; 14.As a result of the foregoing, the Prepetition Agent asserts that the Prepetition Liens havepriorityoverallotherliensexcept(a)valid,enforceable,non-avoidableandperfectedliensinexistenceon the Petition Date that are senior in priority to the Prepetition Liens1, and (b) valid, enforceable and non-avoidable Liensin existence onthePetition Datethatmaybe perfected subsequenttothePetitionDateaspermitted by section 546(b) of the BankruptcyCode ((a) and (b) being collectively defined as “PermittedPriorLiens”).In the Interim Order, the Debtor stipulated, among other things, the following: (i) thePrepetition Liens are valid, binding, enforceable, and perfected first priority liens (subject only to anyPermitted Prior Liens), and are not subject to avoidance, recharacterization, or subordination pursuant tothe Bankruptcy Code or applicable non-bankruptcy law, (ii) (a) the Prepetition Obligations constitute thelegal, valid, and binding obligations of the Debtor and other Prepetition Loan Parties, enforceable inaccordancewiththetermsofthePrepetitionLoanDocuments,(b)nooffsets,defenses,orcounterclaimstoany of the Prepetition Obligations exist, and (c) no portion of the Prepetition Obligations is subject toavoidance, recharacterization, or subordination pursuant to the Bankruptcy Code or applicable non-bankruptcylaw,(iii)neitherthePrepetitionLoanPartiesnortheDebtorhaveanyvalidclaims(assuchtermisdefinedinsection101(5)oftheBankruptcyCode)orcausesofactionagainsttheLenderwithrespecttothe Prepetition Financing Documents or otherwise,whether arising at lawor at equity, including, withoutlimitation, anyrecharacterization,subordination,disallowance,avoidanceorotherclaims arisingunder or 1 AstheCourtisaware,WorldwideD
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Page 1UNITEDSTATESBANKRUPTCYCOURT FORTHEDISTRICTOFMINNESOTA Inre: Chapter11 TEAOLIVEI,LLC, CaseNo.21-30037 Debtor. SECONDAVENUECAPITALPARTNERS,LLC’SREPLYTO OBJECTIONBYOFFICIALCREDITORS’COMMITTEETO DEBTOR’SMOTIONFORAUTHORITYTOUSECASHCOLLATERAL Second Avenue Capital Partners, LLC, in its capacity as administrative agent (“Prepetition Agent”)fortheDebtor’s(definedbelow)prepetitionseniorsecuredlenders (the “Prepetition Lenders”; and togetherwith the Prepetition Agent the “Prepetition Secured Parties”), by and through its undersigned attorneys,hereby submits this reply to the limited objection (“Objection”) filed by the Official Committee ofUnsecured Creditors (the “Committee”) to the Debtor’s Motion for Interim and Final Orders (A)AuthorizingPostpetitionUseofCashCollateral,(B)GrantingAdequateProtection,(C)SchedulingaFinalHearingPursuantToBankruptcyRule4001(b),and(D)GrantingRelatedRelief[ECFNo.16](the“CashCollateral Motion”). In replyto the Committee’s Objection, the Prepetition Agentrespectfullyrepresentsandsetsforththefollowing: PRELIMINARYSTATEMENT 1. TheCommittee’sobjectionstotheentryofafinalorder(the“FinalOrder”)approvingtheuse of Cash Collateral (defined below) are without merit, threaten the Debtor’s ability to maximize valuein this Chapter 11 case, attempt to contravene the proper exercise of the Debtor’s business judgment, andseekunilaterallytorewritethetermsonwhichtheDebtorandthePrepetitionSecuredPartieshaveagreedtotheuseoftheirCashCollateraltofundanorderlyliquidationprocesswhereby,ifsuccessful,thebenefitswould be enjoyed by all stakeholders while, if unsuccessful, the costs would be borne solely by thePrepetitionSecuredParties. 2. After extensive negotiations with its lenders, the Debtor entered bankruptcy with a planand fulsome budget to pursue a value-maximizing orderly liquidation plan for the benefit of all
Page 2stakeholders.Aseveryone(includingtheCommittee)acknowledges,thepursuitofsuchatransactionwouldnot be possible without access to Cash Collateral critical to the Debtor’s ability to operate its businessduringtheliquidationprocess.Indeed,theCommitteeconcedesinitsObjection,asitmust,thatitsupportstheDebtor’suseofCashCollateraltoimplementtheliquidationprocess.CommitteeObjectionat¶7. 3. Under these circumstances, the relief proposed in the Final Order, including eachcomponent of the adequate protection package and each use of funds reflected in the budget -- is bothappropriate and necessary, and clearly within the sound business judgment of the Debtor. The proposedFinal Order was the product of difficult and arms-length negotiations between the Debtor and thePrepetitionSecuredParties.Asaresultofthesenegotiations,thepartiesultimatelyagreedtotheconsensualuse of Cash Collateral on the terms and conditions set forth in the Final Order, including each of theprotectionstothePrepetitionSecuredPartiesincludedtherein.Theresolution,avertingcostlyanduncertaincontestedlitigation,producedatangiblebenefittotheDebtor’sestate. 4. As there is no dispute as to the necessity for, and benefits of, the Debtor’s use of CashCollateral,theonlyissuesraisedbytheCommitteeconcernthetermsofsuchuse.Asdemonstratedhereinand in the Debtor’s Motion, the terms and conditions of the proposed Final Order are fair and reasonableunder the circumstances, and were negotiated by the parties and their professionals in good faith and atarm’s length. Moreover, disturbing any of the terms would fundamentally alter the operating budget,resulting in ripple effects detrimental to all stakeholders, and violate the Prepetition Secured Parties’constitutionallyandstatutorilyprotectedpropertyrights.Absentthenegotiatedandagreed-upontermsandprotections,thePrepetitionSecuredPartiesarenotwillingtoconsenttotheDebtor’suseofCashCollateral. As the Debtor continues to agree, the terms and provisions of the proposed Final Order are frequentlyapprovedbybankruptcycourtsacrossthecountryandarewarrantedbythecircumstanceshere. 5. With the foregoing in mind, the Prepetition Secured Parties are nevertheless prepared toassent to certain adjustments to the previously negotiated Cash Collateral agreement in order toaccommodatecertainoftheCommittee’srequests,aswillbeoutlinedingreaterdetailinSectionIIbelow.
Page 36. Insum,theDebtor’srequestfortheentryoftheFinalOrderapprovingtheDebtor’suseofCashCollateralshouldbegrantedinitsentirety. FACTS A. Introduction. 7. On January 10, 2021 (the “Petition Date”), Tea Olive I, LLC (the “Debtor”) filed avoluntary petition for relief under chapter 11 of title 11, Unites States Code, 11 U.S.C. §101, et seq. (the“BankruptcyCode”)withtheClerkofthisCourt(the“BankruptcyCourt”). 8. Since the Petition Date, the Debtor has been managing and operating its business andpropertyasadebtorinpossessionpursuanttosections1107(a)and1108oftitle11,UnitedStatesCode,§101,etseq.(the“BankruptcyCode”). 9. OnJanuary13,2021,theU.S.TrusteeappointedtheCommitteeinaccordancewithsection1102oftheBankruptcyCode. B. Background 10. TheDebtorisaMinnesotalimitedliabilitycompanyformedin2018andheadquarteredinEagan, Minnesota. It is a farm, home, and outdoor retailer, currently operating 25 stores across Illinois,Indiana,Ohio,Wisconsin,andMichigan.Thedebtor’scorporateheadquartersareinEagan,Minnesota. 11. Pursuanttothatcertain“InterimOrder(I)GrantingExpeditedRelief,(II)AuthorizingTheDebtor To Assume The Consulting Agreement With Liquidation Consultant, (III) Authorizing AndApprovingTheConductOfStoreClosingSales,WithSuchSalesToBeFreeAndClearOfAllLiens,ClaimsAnd Encumbrances, (IV) Permitting The Debtor To Abandon Any Property That Is Burdensome Or OfInconsequential Value, And (V) Granting Related Relief,” entered January 14, 2021 [ECF No. 55], theDebtor is conducting an orderly and efficient liquidation of its assets and business operations through theconductofgoing-out-of-business”andsimilarthemedsalesatallofitsretailstorelocations. C. PrepetitionSeniorSecuredCreditFacility 12. PursuanttothatcertainCreditAgreement,datedMarch3,2020(asamendedfromtimetotimepriortothePetitionDate,collectively,the“PrepetitionLoanAgreement”and,togetherwiththeother
Page 4“Loan Documents” (as defined in the Prepetition Loan Agreement), collectively, the “Prepetition LoanDocuments”),byandamongtheDebtor,thePrepetitionAgent,andthePrepetitionLenders,thePrepetitionSecured Parties provided a revolving credit facility to the Debtor in the maximum principal amount of$60,000,000. AsofthePetitionDate,theDebtorwasindebtedtothePrepetitionLendersinanamountnotlessthan$29,724,104,plusallinterestaccruedandaccruingthereonattheDefaultRate(asdefinedinthePrepetition Loan Agreement), together with all costs, fees, expenses (including attorneys’ fees and legalexpenses) and all other Obligations (as defined in the Prepetition Loan Agreement) accrued, accruing orchargeableinrespectthereoforinadditionthereto(collectively,the“PrepetitionObligations”). 13. InaccordancewiththetermsofthePrepetitionLoanAgreementreferencedabove,eachofthe Prepetition Loan Parties (as defined in the Prepetition Loan Agreement) granted continuing securityinterests and liens (collectively, the “Prepetition Liens”) to the Prepetition Agent, for the benefit of thePrepetitionSecuredParties,uponallofthecurrentlyexistingorhereafteracquiredright,title,andinterestofeachPrepetitionLoanPartyinandtoeachofthefollowing(collectively,the“PrepetitionCollateral”): a) all of the personal property now owned or at any time hereafter acquired by anyPrepetition Loan Party or in which any Prepetition Loan Party now has or at anytime in the future may acquire any right, title or interest, including all of eachPrepetitionLoanParty’sAccounts,ChattelPaper,DepositAccounts,Documents,Equipment, Fixtures, General Intangibles, Instruments, Intellectual Property (butexcluding any intent-to-use trademark applications), Inventory, InvestmentProperty,Letter-of-CreditRights,SupportingObligationsandallcommercialtortclaims(ineachcaseasdefinedinthePrepetitionCreditAgreement); b) allbooksandrecordspertainingtoanyoftheforegoing; c) allProceedsandproductsofanyoftheforegoing;and d) all collateral security and guarantees given by any Person with respect to any oftheforegoing; 14. As a result of the foregoing, the Prepetition Agent asserts that the Prepetition Liens havepriorityoverallotherliensexcept(a)valid,enforceable,non-avoidableandperfectedliensinexistenceon
Page 5the Petition Date that are senior in priority to the Prepetition Liens1, and (b) valid, enforceable and non-avoidable Liensin existence onthePetition Datethatmaybe perfected subsequenttothePetitionDateaspermitted by section 546(b) of the BankruptcyCode ((a) and (b) being collectively defined as “PermittedPriorLiens”). 15. Pursuant to that certain Interim Order (I) Authorizing Use Of Cash Collateral andAffordingAdequateProtection,(II)ModifyingAutomaticStay,and(III)SchedulingaFinalHearing”,datedJanuary14,2021[ECFNo.53](the“InterimOrder”),theCourtgrantedtheDebtor’smotiononaninterimbasis. It is withthe benefit of the interimrelief afforded under the InterimOrder that the Debtor has beenproceedingdownitsorderlyliquidationpath. 16. In the Interim Order, the Debtor stipulated, among other things, the following: (i) thePrepetition Liens are valid, binding, enforceable, and perfected first priority liens (subject only to anyPermitted Prior Liens), and are not subject to avoidance, recharacterization, or subordination pursuant tothe Bankruptcy Code or applicable non-bankruptcy law, (ii) (a) the Prepetition Obligations constitute thelegal, valid, and binding obligations of the Debtor and other Prepetition Loan Parties, enforceable inaccordancewiththetermsofthePrepetitionLoanDocuments,(b)nooffsets,defenses,orcounterclaimstoany of the Prepetition Obligations exist, and (c) no portion of the Prepetition Obligations is subject toavoidance, recharacterization, or subordination pursuant to the Bankruptcy Code or applicable non-bankruptcylaw,(iii)neitherthePrepetitionLoanPartiesnortheDebtorhaveanyvalidclaims(assuchtermisdefinedinsection101(5)oftheBankruptcyCode)orcausesofactionagainsttheLenderwithrespecttothe Prepetition Financing Documents or otherwise,whether arising at lawor at equity, including, withoutlimitation, anyrecharacterization,subordination,disallowance,avoidanceorotherclaims arisingunder or 1 AstheCourtisaware,WorldwideDistributors(“Worldwide”)hasappearedinthiscaseandhasassertedthatit is the holder of a Permitted Prior Lien entitled to priority over the Prepetition Liens. The Prepetition Agent, andpossiblytheCommittee,disputetheextent,validityandprioritystatusofWorldwide’sassertedliensandclaims,andpresentlyreservesallrightswithrespectthereto.
Page 6pursuant to sections 105, 510, 541 or 542 through 553, inclusive, of the Bankruptcy Code, and (iv) thePrepetitionObligationsconstitutesavalidsecuredclaimintheamountstatedtherein.2D. TheCashCollateralMotion. 17. TheCashCollateralMotionrequestsauthorityfortheDebtortouse,onafinalbasis,morethan $20 million of the Prepetition Secured Parties’ cash collateral (the “Cash Collateral”) and all of itsnon-cash collateral (i.e., the inventory and other tangible assets in which the Prepetition Secured Partieshaveaperfected,seniorsecurityinterestsandliens(hereinafter,the“Collateral”). 18. As the Debtor has asserted, and as the committee seemingly concedes, access to CashCollateral is critical to the Debtor’s ability to operate its business while pursuing a value-maximizingliquidation transaction for the benefit of all stakeholders. Avoiding value-destructive litigation with thePrepetitionSecuredPartiesinpursuitofthataccessisequallycriticaltopreservingthevalueoftheDebtor’sestate for the benefit of all of the Debtor’s stakeholders, including the Committee’s unsecured creditorconstituency.ThereliefproposedintheFinalOrder,includingeachcomponentoftheadequateprotectionpackage and each use of funds reflected in the budget, was the product of difficult and hard-foughtnegotiations between the Debtor (who requested consent to use the Prepetition Secured Parties’ CashCollateralwhileitpursuedthecurrentliquidationprocess)andthePrepetitionSecuredParties(whodidnotwant to see further deterioration in their collateral value and risk the return on their secured claims). ThePrepetition Secured Parties ultimately agreed to the consensual use of Cash Collateral, but such consentwas conditioned on each and every one of the protections afforded to them in the proposed Final Order. Although the Committee would like to improve the proposedterms for its benefit, such modifications arenotappropriateunderthefactsandcircumstancesofthiscase. 2 TheDebtor’sStipulations(asdefinedintheInterimOrder)areexpresslysubjecttothechallengeprovisionsfoundinParagraph17oftheInterimOrder,whichareunchangedundertheproposedFinalOrder.
Page 7E. TheCommittee’sObjection 19. As notedabove, the Committee’s Objection doesnot take issue withthe Debtor’sneedtouseCashCollateraltoimplementanorderlyliquidationprocess.NordoestheCommitteechallengeanyoftheassumptionsinthebudgetunderlyinganddeterminingtheneedforsuchuseofCashCollateral. Rather,theCommitteesimplyseekstorewritethetermsthepartiesagreedtofortheuseofthePrepetitionSecuredParties’ Cash Collateral, asserting that the Final Order includes a host of unwarranted and excessiveprotections. 20. TheCommittee’sobjectionsareuntenable,donotprovidegroundstosupplanttheDebtor’sbusinessjudgment and, as the Debtor hasshown,cannot be implemented withoutdeleterious effect totheDebtor’s orderly liquidation process. The Court should overrule the Objection and approve the reliefrequestedintheMotion. ARGUMENT I. THETERMSOFTHEFINALORDERAREFAIR,REASONABLE ANDCUSTOMARY,ANDTHEDEBTOR’SAGREEMENTTOTHEFINAL ORDERISAPROPEREXERCISEOFTHEDEBTOR’SBUSINESSJUDGMENT 21. In accordance withsection363(c)(2) oftheBankruptcyCode, adebtorisprohibited fromusingasecuredcreditor’s“cashcollateral”unless“(A)eachentitythathasaninterestinsuchcashcollateralconsents;or(B)thecourt,afternoticeandahearing,authorizessuchuse...”11U.S.C.§363(c)(2). Thisrestriction is critical “for the obvious reason that cash collateral is highly volatile, subject to rapiddissipation and requires special protective safeguards in order to assure that a holder of a lien on ‘cashcollateral’isnotdeprivedofitscollateralthroughunprotectedusebytheDebtor.” InreEarth-Lite,Inc.,9B.R. 440, 443(Bankr. M.D. Fla.1981); see alsoInreEESLambert Associates,62 B.R. 328, 343 (Bankr. N.D. Ill. 1986) (“[c]ash collateral is a unique form of collateral that requires special protection since it ismostlikelytobeconsumedduringthereorganizationprocessandisattimessubjecttochangeonanalmostdailybasis.”).
Page 822. Accordingly, a court may grant a debtor authorization to use cash collateral only if thelender is provided with adequate protection. It is the debtor’s burden to demonstrate that the adequateprotectionitisproposingtoprovideissufficient. See11U.S.C.§363(p)(1).Inthisregard,theBankruptcyCourtfortheCentralDistrictofIllinoishasindicated: “Adequate protection is designed to preserve the secured creditor’spositionasitexistedatthetimeofthebankruptcyfiling....Afindingofadequate protection should be premised on facts, or on projectionsgroundedonafirmevidentiarybasis.Congressdidnotcontemplatethatasecured creditor could find its position eroded and, as compensation forthe erosion, be offered an opportunity to recoup dependent upon thesuccessofabusinesswithinherentlyriskyprospects....Theburdenisonthemovanttoprovethatexistinglienholdersareadequatelyprotected.”11U.S.C.§364(d)(2)[internalcitationsomitted]. InreWindsorHotel,L.L.C.,295B.R.307,314(Bankr.C.D.Ill.2003). SeealsoInreLyons,193B.R.637(Bankr.D.Mass.1996);InRe:Mosello,195B.R.277,287(Bankr.S.D.N.Y.1996). 23. It is the secured party’s burden to establish the validity, priority and extent of its securityinterest. 11U.S.C.§363(p)(2);seeInreMosello,195B.R.277,287(Bankr.S.D.N.Y.1996).Seealso,Inre EES Lambert Associates, 62 B.R. at 343. This is readily done here because (a) the Prepetition LoanDocuments provide prima facie evidence of the validity, priority, and extent of the Prepetition Agent’ssecurity interest in the Collateral, including Cash Collateral, and (b) as noted above, the Debtor’sStipulationsintheInterimOrder(andcarriedthroughintheFinalOrder,subjecttothechallengeprovisionsfoundin Paragraph 17thereof)support such afinding. Accordingly, the Prepetition Secured Parties havemettheirburdenpursuantto11U.S.C.§363(p)(2). 24. Cashcollateralisthehighestandbestformofcollateral,andbecauseitisrapidlyconsumedbyadebtor’songoingoperations,thereisahighstandardforadequateprotectionofalender’sinterest. Inre Earth-Lite, Inc., 9 B.R. at 443. Adequate protection is required to protect against the decline in valuecausedbothbyadebtor’suseofcashcollateralandalsobygeneraleconomicconditions. SeegenerallyInreMarkosGurneePartnership,252B.R.712(Bankr.N.D.Ill.1997)(adequateprotectionmeanttoassurethat secured creditor does not suffer decline in value of interest in estate's property); In re Addison Prop. Ltd.P’ship,185B.R.766,769(Bankr.N.D.Ill.1995);Inre160BleeckerStreetAssocs,156B.R.405,413
Page 9(S.D.N.Y.1993). TheinteresttobeprotectedhereisthethreattothePrepetitionSecuredPartiespresentedbyalossoftherighttoapplyallproceedsoftheirCollateraltosatisfyarrearagesunderthePrepetitionLoanDocuments. InreEESLambertAssociates,62B.R.at343-344. 25. “Exactly what constitutes adequate protection must be decided on a case-by-case basis... Thefocusoftherequirementistoprotectasecuredcreditor...fromdiminutioninthevalueofitsinterestin collateral during the reorganization process.” In re Energy Partners, 409 B.R. 211, 236, (Bankr. S.D. Tex.2009)[internalcitationsomitted];seealsoInreCarboneCompanies,Inc.,395B.R.631,634(Bankr. N.D.Ohio2008);InreO.P.Held,Inc.,74B.R.777,782(Bankr.N.D.N.Y.1987). Inthatregard,andasstated in Federal Nat. Mortg. Ass’n, federal bankruptcy courts “should take whatever steps are necessaryto ensure [secured creditors are] afforded in federal bankruptcy court the same protection he would havehadunderstatelawifnobankruptcyhadensued….”153B.R.204,211(Bankr.N.D.Ill.1993). 26. While a court should be flexible in applying the adequate protection standard, “suchflexibilitymust not operateto the detriment ofthesecured creditor’s interest.”Inre McCombs PropertiesVI,Ltd., 88 B.R.261, 267(Bankr.C.D. Cal. 1988);Inre EESLambert Associates, 62 B.R.at 343(use ofcashcollateralmustbeprohibitedorconditionedasisnecessarytoprovideadequateprotectionofsecuredcreditor’sinterest). 27. In assessing the reasonableness of a debtor’s agreement with its prepetition lenders overuses of cash collateral and the scope of adequate protection to be provided in consideration thereof,bankruptcycourtsroutinelyandproperlydefertoadebtor’sbusinessjudgmentonthedecisiontoenterintoa post-petition financingarrangement.SeeIn re TransWorldAirlines, Inc.,163B.R. 964, 974 (Bankr. D. Del.1994)(approvinganinterimloan,receivablesfacilityandasset-basedfacilitybecausethey“reflect[ed]soundandprudentbusinessjudgment…[were]reasonableunderthecircumstancesandinthebestinterestof[thedebtor]anditscreditors);seealsoInreAmesDept.Stores,Inc.,115B.R.34,40(Bankr.S.D.N.Y. 1990)(“[A]court’sdiscretionundersection364istobeutilizedongroundsthatpermitreasonablebusinessjudgment to be exercised so long as the financing agreement does not contain terms that leverage thebankruptcyprocessandpowersoritspurposeisnotsomuchtobenefittheestateasitistobenefitaparty-
Page 10in-interest.”). Asonebankruptcycourthasobserved,businessjudgments“shouldbelefttotheboardroomandnotto[the]court.”InreSimaskoProd.Co.,47B.R.444,449(Bankr.D.Colo.1985). 28. As recited in the Motion, the Debtor has determined, in the reasonable and independentexercise of its business judgment that access to Cash Collateral on the terms provided in the Final OrderoffersthebestopportunitytomaximizethevalueoftheDebtor’sestate.TheFinalOrderenablestheDebtorto continue to operate its business while pursuing a value-maximizing orderly liquidation process for thebenefitofallstakeholders. Underthesecircumstances,thisCourtshouldnotsecondguesstheagreementsbetweentheparties(asurgedbytheCommittee),butshouldinsteadgrantthereliefrequestedbytheDebtorintheMotiononafinalbasis.TheDebtor’sdecisiontouseCashCollateralonthetermsoftheFinalOrderisasoundexerciseofitsbusinessjudgmentandshouldnotbedisturbed. 29. Moreover,the Committee has made no showingwhatsoever that its proposed eliminationormodificationofprovisionsintheextensivelynegotiatedFinalOrderwouldleavethePrepetitionSecuredPartiesadequatelyprotectedfortheuseoftheirCashCollateral.TheprotectionstothePrepetitionSecuredPartiesincludedintheFinalOrderreflecttheoutcomeofarms’lengthnegotiationsbetweentheDebtorandthePrepetitionSecuredParties,bothadvisedbyfinancialadviserswhoconcurredthatonlywiththepackageof protections included in the Final Order would the Prepetition Secured Parties be adequately protectedfortheuseoftheirCashCollateral.TheCommitteehassubmittednoevidencethattheproposeddeletionsand modifications of provisions in the Final Order would still leave the Prepetition Secured PartiesadequatelyprotectedfortheuseoftheirCashCollateral. 30. For these reasons and those that follow, the Court should overrule the Committee’sObjectionandgranttheDebtor’sMotiononafinalbasis.
Page 11TheSection506(c)WaiverProvisionsAreEnforceableandAppropriate31. The Committee protests the Debtor’s agreed waiver of its section 506(c) surcharge and552(b) “equities of the case” rights under the Final Order. These objections are without merit under thefactsofthiscase. 32. First, the Debtor prepared a Budget, which specifies the post-petition costs and expensesthat the Debtor intends to incur and pay in order to fund the ongoing liquidation sale process. ThePrepetitionSecuredPartieshaveagreedtoprovidetheDebtorwiththefinancingviauseofCashCollateralnecessarytocovertheexpensessetforthintheBudget.Thus,iftheDebtorfollowstheBudget,theorderlyliquidationprocessandpreservationofthePrepetitionSecuredParties’Collateralshouldbefullypaidfor. If, on the other hand, the Debtor deviates from the Budget, the Prepetition Secured Parties should not besurcharged for that. Hence, a section 506(c) waiver is appropriate here, as the Prepetition Secured Partieshave made adequate provision for the payment of all expenses associated with the maintenance,preservationanddispositionoftheirCollateralthroughtheuseoftheirCashCollateral. 33. Second,therighttouse,andthuswaive,section506(c)torecoverthecostsofpreserving,or disposing of the Collateral securing an allowed secured claim, is expressly limited to a trustee (or thedebtor-in-possession).See11U.S.C.§§506(c)and1107;seealsoHartfordUnderwritersInsuranceCo.v. UnionPlantersBank,N.A.,530U.S.1,6,120S.Ct.1942(2000);seealsoInreSmartWorldTechs,LLC,423 F.3d 166, 181-82 (2d Cir. 2005)(“Section 506(c)…allows only the ‘trustee,’ or debtor-in-possession,to take advantage of this exception…We read Hartford Underwriters to stand for the proposition that §1109(b) does not entitle parties in interest, such as Smart World’s creditors, to usurp the debtor-in-possession’sroleaslegalrepresentativeoftheestate.”);InreRiverCtr.Holdings,LLC,394B.R.704,717(Bankr.S.D.N.Y.2008)(“TheSupremeCourthasmadeclearthatonlythetrusteehasthepower,undertheplainlanguageoftheCode,toassertasection506(c)claim.”)Accordingly,theCommitteehasnobasistochallengetheDebtor’swaiverhere. 34. Third,andin allevents,theDebtor is well within itsbusinessjudgment to agree to waivesection506(c)claimsinordertoobtainuseofCashCollateral. Inthisconnection,thequestionbeforethe
Page 12Court is a narrow one, and should not be controversial. A debtor need not show that each and everyprovisionofafinancingtransactionisthemostfavorabletermpossible,onlythatithasreasonablyexercisedits business judgment. See, e.g., In re Alpha Nat. Res., Inc., 546 B.R. 348, 356 (Bankr. E.D. Va. 2016)(noting, under §363(b),that courts apply a “deferential business judgment test,” which asks only whetherthe transaction at issue “is within the fair and reasonable business judgment of the [d]ebtors” (internalquotation marks omitted)); In re Crowthers McCall Pattern, Inc., 114 B.R. 877, 888 (Bankr. S.D.N.Y. 1990) (“But [the objectingcreditor] did not negotiate the Agreement and the Court is not to second guessthe inclusion of some provisions as long as the Agreement as a whole is within reasonable businessjudgment, and the subject provisions do not distort the balance Congress struck in Chapter 11.”); In reRoblinIndus.,Inc.,52B.R.241,245(Bankr.W.D.N.Y.1985)(“TheCourtcanonlyapproveordisapprovethe proposed arrangement. It cannot require the Banks to put additional funds at risk against their betterjudgment.”). 35. It is indisputable that there are numerous examples where courts have entered ordersapproving a debtor’s exercise of its business judgment to grant section 506(c) waivers. Such waivers alsoare notan irregularprotection for lenders; the section506(c) waiver (and section552(b) waiverdiscussedbelow) are customary and routine protections for lenders agreeingtothe use of their cash collateral. See,e.g.,InreSLTHoldco,Inc.,No.20-18-368(Bankr.D.NJJulyb29,2020);InreStageStores,Inc.,No.20-32564(DRJ)(Bankr.SD.Tx.June10,2020)(approvingasection506(c)waiverinliquidatingretailchapter11 case); In re Modell’s Sporting Goods,Inc., No. 20-14179 (VFP) (Bankr. D.NJ June 11, 2020) (same);InrePier1Imports,Inc.,No-20-30805(KRH)(Bankr.EDVa.March13,2020)(same);InreForever21,Inc.,No.19-12122(KG)(Bankr.D.Del.Nov.5,2019)(same);InreBlackhawkMiningLLC,No.l9-11595(LSS)(Bankr.D.Del.Aug.13,2019)(same);InreZGallerie,LLC,No.19-10488(LSS)(Bankr.D.Del. Apr.9,2019)(same);InreThingsRemembered,Inc.,No.19-10234(KG)(Bankr.D.Del.Mar.29,2019)(same); In re PES Holdings, LLC, No. 18-10122 (KG) (Bankr. D. Del. Feb. 27, 2018) (same); In re Toys“R” Us, Inc., No. 17-34665 (Bankr. ED VA. Oct. 24, 2017)(same); In re Loehmanns Holdings, Inc., No. 13-14050(Bankr.SDNYJan,16,2014);InreDaffy’s,Inc.,No.12-13312(Bankr.SDNYAug.29,2012).
Page 1336. Indeed, many courts have recognized that a section 506(c) waiver can be an integral partofthefinancingarrangementreachedbetweenadebtoranditslenders,whichisthepositionthePrepetitionSecuredPartiesoccupybyvirtueoftheiragreementtotheDebtor’suseoftheirCashCollateraltofundthesalesprocess.See,e.g.,InreAnticoMfg.Co.,31B.R.103,106n.1(Bankr.E.D.N.Y.1983)(regardinganobjectiontoa506(c)waiver,thecourtnotedthat“[c]ertainly,theparagraphinquestionisnotsodetrimentalorimproperastojeopardizethelossoftheentirefinancingpackage”). 37. In addition to providing adequate protection in the Cash Collateral, the Debtor must alsobe required to provide the Prepetition Secured Parties with adequate protection for its use of their othertangible Collateral. The Prepetition Secured Parties’ other tangible Collateral (principally inventory andfurniture,tradefixtures andrelatedequipment used inthe conduct ofthe businessin the normal course ofaretailoperation),liketheCashCollateral,areinherentlywastingassetsthatdeteriorateinvaluewitheverypassingday. InreZeoli,249B.R.61,64(Bankr.S.D.N.Y.2000)(noting,incontextofadequateprotectionofcreditor’sinterestinacar,that“[t]herecanbenodoubtthat...thevehicle,likealmostallusedcars,isa wasting asset”); In re Kenny Kar Leasing, 5 B.R. 304, 305, 309 (Bankr. C.D. Cal. 1980) (holding thatwhere creditor of debtor engaged in leasing of automobiles was secured by non-cash collateral consistingofautomobilesandrentalstreamfromleasethereof,“thedepreciationassociatedwith[debtor’s]useofthenon-cash collateral  expose[d] [creditor] to a decrease in the value of its interests”). Here, the Debtor’sproposed use of the Prepetition Secured Parties’ tangible collateral without guarantees that there will bereplacement collateral generated indisputably exposes the Prepetition Secured Parties to a decrease in thevalue of their interests therein, thus providing further support for Debtor’s agreement to the waivers inquestion.
Page 14TheSection552(b)“EquitiesoftheCase”WaiverisNecessaryandAppropriate38. Section 552(b) waivers, similar to waivers of section 506(c), are typical in final cashcollateral orders. As a condition to consent to use of cash collateral, prepetition lenders often requirecertainty that debtors will not seek to strip liens on postpetition proceeds of prepetition collateral, anddebtorscommonlyprovidethisprotectioninexchangeforthatconsent39. A creditor’s interest in collateral extends to postpetition proceeds of that collateral to thesame extent that it would extend to prepetition proceeds of such collateral. 11 U.S.C. §552(b). But abankruptcycourthasthediscretiontoalterthatgeneralrulebasedonthe“equitiesofthecase.”Id.Securedcreditors routinely insist upon a waiver of section 552(b) “equities of the case” claims in connection withthe consensual use of theircashcollateral,andcourtsregularlyapprove such waivers.See, e.g.,In re SLTHoldco, Inc., No. 20-18-368 (Bankr. D.NJ July b29, 2020); In re Stage Stores, Inc., No. 20-32564 (DRJ)(Bankr.SD.Tx.June10,2020)(approvingasection506(c)waiverinliquidatingretailchapter11case);Inre Modell’s Sporting Goods, Inc., No. 20-14179 (VFP) (Bankr. D.NJ June 11, 2020) (same); In re Pier 1Imports,Inc.,No-20-30805(KRH)(Bankr.EDVa.March13,2020)(same);InreForever21,Inc.,No.19-12122 (KG) (Bankr. D. Del. Nov. 5, 2019) (same); In re Blackhawk Mining LLC, No. l9-11595 (LSS)(Bankr.D.Del.Aug.13,2019)(same);InreZGallerie,LLC,No.19-10488(LSS)(Bankr.D.Del.Apr.9,2019)(same);InreThingsRemembered,Inc.,No.19-10234(KG)(Bankr.D.Del.Mar.29,2019)(same);In re PESHoldings,LLC,No.18-10122 (KG) (Bankr. D. Del.Feb. 27, 2018)(same); In re Toys “R”Us,Inc.,No.17-34665(Bankr.EDVA.Oct.24,2017)(same);InreLoehmannsHoldings,Inc.,No.13-14050(Bankr.SDNYJan,16,2014);InreDaffy’s,Inc.,No.12-13312(Bankr.SDNYAug.29,2012). 40. Aswiththesection506(c)waiver,theDebtoragreedtoprovidethesection552(b)waiverfollowing negotiations with the Prepetition Secured Parties, during which the parties agreed to defer thewaivertoentryoftheFinalOrder,basedontheDebtor’sbeliefthataccesstoCashCollateralontermsthatincludeasection552(b)waiverwerewarrantedunderthecircumstances.
Page 1541. Accordingly, more than ample authority exists for this Court to permit the section 506(c)and 552(b) “equities of the case” waivers set forth in the Final Order, and the authorities cited by theCommitteeoffernobasistothecontrary. TheDebtor’sMarshallingWaiverisAlsoAppropriate 42. In the Eighth Circuit, if a senior creditor may reach two funds, and a junior creditor mayonlyreachoneofthosefunds,thentheseniorcreditormayberequiredtoexhaustthefundtowhichonlyithas access before proceeding against the common funds. In re Bame, 279 B.R. 833, 837 (B.A.P. 8th Cir. 2002).Marshalingis apurelyequitable doctrine,and isnotroutinelyimposed where senior creditorsmayreachbothcommonandexclusivefunds.Rather,itonlyapplieswhendoingsowould“promotefairdealingand justice and is applied when it can be equitably fashioned as to all parties.” Id. (citations omitted). Therefore,courtsintheEighthCircuithaveheldthat“incertainlimitedsituations,whenfraud,misconduct,orbadfaithonthepartofashareholder/guarantorisfound,courtshaveutilizedequitableconsiderationtoexpand the doctrine of marshaling to treat the collateral of the guaranty of the individualshareholder/guarantorasafundofthedebtor.”InreLibertyOutdoors,Inc.,204B.R.746,749(Bankr.E.D. Mo. 1997); see alsoIn re Laeupple, 87 B.R. 74,75 (Bankr. W.D. Mo. 1988). Marshaling, additionally, isinappropriatewhereitwouldcauseprejudicetoanyparty.Bame,279B.R.at837;MatterofSt.CloudTool&DieCo.,533F.2d387,390-91(8thCir.1976)(findingmarshalingnotpermittedwherepartieswouldbeprejudiced). 43. As with the agreed upon section 506(c) and 552(b) waivers, the Committee similarlyopposes the Debtor’s agreement to waive any claim that would require the Prepetition Secured Parties tomarshal its collateral. While opposing this waiver, the Committee makes no claim that the PrepetitionSecured Parties engaged in any inequitable conduct, or that in obtaining additional collateral to supporttheirclaimsthattheiractionshavesomehowprejudiced anyotherconstituency.TheCommitteealsofailsto address the prejudice that will befall the Prepetition Secured Parties fromany marshalling requirementhere,aswellastheprejudicethatmaybesufferedbycertainthirdpartieswhohaveagreedthattheirassetswill be available to satisfy the Prepetition Secured Parties’ claims, but who never agreed that those same
Page 16assetswouldbeavailabletosatisfytheclaimsoftheDebtor’screditorswhohavenostatutory,contractualorotherrelationshiptothoseassets. TheBudgetMakesSufficientFinancialAccommodations toEnabletheCommitteetoSatisfyitsFiduciaryDuties 44. TheDebtordeterminedinitsbusinessjudgmenttheamountsapportionedtotherespectiveestateprofessionalsinlightoftheparticularfactsandcircumstancesofthisChapter11case.Inthisregard,theCommitteeacknowledgesthattheamountprovidedintheBudgetfortheCommittee’sprofessionalsisadequate and sufficient under the circumstances. That said, the Committee argues that any guardrailsestablished around the permitted uses of said funds inappropriately impairs the Committee’s ability todischargeitsstatutoryfunction. ThePrepetitionSecuredPartiesdisagree. 45. In fact, it is entirely customary in post-petition financing transactions, including cashcollateral facilities, to restrict an official committee’s ability to use the lender’s collateral, including cashcollateral,tochallengethelenders’claimsand/orliens.Inthisregard,itisentirelyinequitabletorequirealendertofinance,throughtheuseoftheproceedsofitsowncollateral,achallengetoitsownclaims/liens. Despite this inequity, the Prepetition Secured Parties have nevertheless made an accommodation in theFinal Order that affords the Committee access to Cash Collateral for purposes of investigating – but notchallenging – the Prepetition Secured Parties’ claims and/or liens.3 In this regard, as a furtheraccommodation, the Prepetition Secured Parties are prepared to increase the amount of Cash Collateralavailable to the Committee for its investigation purposes from the current $25,000 to $50,000. ThePrepetitionSecuredPartiessubmitthatthisapproach,acceptedbycourtsnationwide,strikesanappropriatebalancebetweentheCommittee’sdutiesandtherightsofthePrepetitionSecuredParties. 3 AsacknowledgedbytheCommitteeintheObjection,thePrepetitionSecuredPartiesretainandreservetheright to object to allowance of any fees and expenses of the Committee, including any charges associated with theCommittee’sinvestigation(asdistinguishedfromchallenge)oftheirclaimsandliens.
Page 17II. THEREVISEDFORMOFFINALORDERADEQUATELY ADDRESSESTHECOMMITTEE’SREMAININGOBJECTIONS 46. Asnotedabove,thereliefproposedintheFinalOrder--includingeachcomponentoftheadequateprotectionpackageandeachuseoffundsreflectedinthebudget--istheproductofdifficultandarms-length negotiations between the Debtor and the Prepetition Secured Parties, strikes an appropriatebalance between the Debtor’s desire to achieve a value maximizing outcome for the benefit of allstakeholdersandtheinterestsofthePrepetitionSecuredParties,andthusisbothappropriateandnecessary. Theproprietyoftheproposedcashcollateralarrangementnotwithstanding,thePrepetitionSecuredPartiesareneverthelesspreparedtoaccommodatecertainadjustmentstothepreviouslynegotiatedCashCollateralagreementinordertoaccommodatecertainoftheCommittee’sremainingrequests,asreflectedinthetablebelow:
|The Debtor and the Prepetition Secured Parties
have provided in the proposed Final Order a
mechanism, similar to the mechanism from the
Interim Order, where the Debtor builds a
conditional Worldwide reserve/escrow from
|DeliverallfinancialreportstotheCommittee||The proposed Final Order shall provide that the
reports being provided to the Prepetition Secured
|The proposed Final Order shall be revised to
provide that the Debtor shall provide notice to the
of Cash Collateral consented to by the Prepetition
Secured Parties. The Debtor shall be required to
seek court approval of any such non-conforming
|The proposed Final Order shall be revised to
Parties are determined by this Court to have been
undersecured as of the Petition Date, then the
ability of the Court to reallocate and re-apply any
reduce the outstanding principal balance owed
under the Prepetition Loan Agreement, or as