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Full title: Statement of Statement and Limited Objection to Joint Sixth Amended Plan (RE: related document(s)1129 Amended Chapter 11 Plan). Filed by Interested Party Canyon Bridge Fund I, LP (Attachments: # 1 Declaration) (Alcantar Villagran, Jose) (Entered: 02/09/2021)
Document posted on Feb 8, 2021 in the bankruptcy, 10 pages and 0 tables.
Bankrupt11 Summary (Automatically Generated)
25 3 As set forth in the Proposed Plan’s Liquidating Trust: (i) there is no limitation on distributionto Tallwood on account of its Allowed claims (so Tallwood could conceivably recover more th26 100% of its allowed claims), and (ii) there is no provision for the Liquidating Trust Manager tomake distributions pursuant to the Plan’s waterfall (as set forth in Article III) even after Allow27 General Unsecured Claims and Allowed Tallwood Claims are satisfied in full.Canyon Bridge 6 shared concerns that the Plan should not be confirmed because Tallwood’s allowed claims coul7 be provided for more than in full (i.e., recover more than 100%), while junior classes were 8 impaired and eliminated.(“Class 14, 15, 16 and 18 are deemed to reject the Plan pursuant to Bankruptcy 5 Code section 1126(g) and, therefore, section 1129(a)(8) of the Bankruptcy Code has not been 6 satisfied with respect to these Classes.”).That they chose not to submit such evidence is perhaps an indication that there is in 27 fact a reasonable likelihood that value could low to classes junior to Tallwood under the 2 the Proposed Plan should not be confirmed absent modification so that “excess value [is] 3 allocated to junior classes of debt or equity, as the case may be.”However, relatively simple plan language 8 allocating to junior classes any excess in the Liquidating Trust Assets above those required to 9 satisfy 100% of Tallwood’s Allowed Claims would resolve this issue without impacting the 10 treatment of senior classes.
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kass@njfirm.com 2 Jose Raul Alcantar Villagran (SBN 304981) raul@njfirm.com 3 NASSIRI & JUNG LLP 1700 Montgomery Street, Suite 207 4 San Francisco, California 94111 Telephone: (415) 762-3100 5 Facsimile: (415) 534-3200 6 Attorneys for Interested Party CANYON BRIDGE FUND I, LP 7 UNITED STATES BANKRUPTCY COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 SAN JOSE DIVISION 10 In re: Case No. 20-50682 (MEH) 11 Chapter 11 (Jointly Administered) WAVE COMPUTING, INC., et al., 12 STATEMENT AND LIMITED OBJECTIO TO JOINT SIXTH AMENDED PLAN [ECF 13 Debtors.1 NO. 1129] 14 Date: February 10, 2021 Time: 10:15 a.m. (Pacific Time) 15 Judge: Hon. M. Elaine Hammond Place: Videoconference 16 Related to Docket No.: 1129 17 18 19 20 21 22 23 24 25 26 27 1 The Debtors in these chapter 11 cases are Wave Computing, Inc., MIPS Tech, Inc., Hellosoft,Page 2
I. INTRODUCTION 2 Interested Party Canyon Bridge Fund I, LP (“Canyon Bridge”) submits this statement 3 regarding and limited objection to the Debtors’ Joint Sixth Amended Plan [ECF No. 1129], file4 on February 8, 2020, (the “Proposed Plan”), to alert the Court of fundamental deficiencies that 5 remain and preclude confirmation. The Proposed Plan continues to fall short of the requiremen6 set forth in Bankruptcy Code sections 1129(a)(8) (that all impaired classes, including those 7 “deemed to reject,” accept a plan) and 1129(b) (that a plan be “fair and equitable” to all junior 8 classes by including safeguards that no senior class of creditors receives more than 100% of its9 allowed claims). 10 Canyon Bridge alerted the Debtors, the creditors’ committee, and Tallwood of its 11 concerns on January 21 and 22, 2021 with respect to the then Fifth Amended Plan. The current12 Proposed Plan does not address the concerns raised by Canyon Bridge and continues to suffer 13 from these deficiencies and should not be confirmed. Specifically, under the Restructuring2 14 scenario, the proposed distribution scheme provides for the potential overpayment of Tallwood15 claims from the Liquidating Trust Assets above and beyond 100% the allowed amount, absolut16 precluding junior classes from receiving any value on their claims and interests. Specifically, 17 while other distributions to allowed claims from Liquidating Trust Assets will only be made un18 they “have been paid in full,” no such limitation is present for Tallwood’s allowed claims. (Se19 Proposed Plan Section IV.G.7(a)(iii).). This is a textbook violation of the “fair and equitable” 20 standard under Bankruptcy Code section 1129(b).3 Notably, the Debtors’ confirmation brief do21 not address how the Proposed Plan satisfies section 1129(b) at all, even though the provision 22 23 2 Capitalized terms used but not defined herein have the meaning ascribed to them in the 24 Proposed Plan. 25 3 As set forth in the Proposed Plan’s Liquidating Trust: (i) there is no limitation on distributionto Tallwood on account of its Allowed claims (so Tallwood could conceivably recover more th26 100% of its allowed claims), and (ii) there is no provision for the Liquidating Trust Manager tomake distributions pursuant to the Plan’s waterfall (as set forth in Article III) even after Allow27 General Unsecured Claims and Allowed Tallwood Claims are satisfied in full. (Proposed Plan,Page 3
2 are indisputably impaired and “deemed to reject.” [Proposed Plan at Page 32 of 92.] This 3 precludes confirmation of the Plan because “[t]he Court has an affirmative duty to determine 4 whether each provision of § 1129 is satisfied, regardless of the absence of valid confirmation5 objections.”5 6 Nevertheless, relatively simple plan language allocating to junior classes any excess in 7 Liquidating Trust Assets above those required to satisfy 100% of Tallwood’s Allowed Claims 8 would resolve this issue without impacting the treatment of senior classes. Specifically, the 9 Proposed Plan could be modified by: (i) inserting language in Proposed Plan Section 10 IV.G.7(a)(iii) limiting the recovery of Tallwood Claims from the Liquidating Trust Assets to o11 100% of the claims’ allowed amount (i.e., only until they have been paid in full); and (ii) 12 thereafter, providing for an “overflow” provision such that, after all Allowed Tallwood Claims 13 have been repaid in full, any remaining Liquidated Trust Assets shall be distributed in accorda14 with the distribution waterfall already set forth in Section III.A of the Proposed Plan. 15 II. THE PROPOSED PLAN ALLOWS TALLWOOD TO RECOVER MORE THAN 100% OF ITS ALLOWED CLAIMS FROM THE LIQUIDATING TRUST 16 ASSETS, WHILE JUNIOR CLASSES RECEIVE NOTHING 17 The Debtors’ confirmation brief falsely states that, although “the Debtors received cert18 informal comments and requests for clarification from various parties in interest[,] as of the fili19 of this Confirmation Memorandum, the Debtors have resolved … all such informal comments 20 and requests.” [ECF No. 1134 at Page 13 of 41.] 21 22 4 See In re Metro-Goldwyn-Mayer Studios, Inc., No. 10-15774(SMB), 2010 WL 5136417, at *23 (Bankr. S.D.N.Y. Dec. 6, 2010) (“Class 7 is deemed to reject the Plan and, therefore, section 24 1129(a)(8) of the Bankruptcy Code has not been satisfied with respect to that Class. Neverthel… the Plan may be confirmed because the Debtors have met the requirements of section 1129(25 of the Bankruptcy Code.”).; 26 5 See In re Flintkote Co., 486 B.R. 99, 122 (Bankr. D. Del. 2012), aff'd, 526 B.R. 515 (D. Del. 2014) (citing In re Lernout & Hauspie Speech Prods., N.V., 301 B.R. 651, 656 (Bankr. D. Del. 27 2003)) (emphasis supplied).Page 4
2 January 21 and 22, 2021, Canyon Bridge wrote to counsel for the Debtors, the unsecured 3 creditors’ committee, and Tallwood that, as written, the (then) Joint Fifth Amended Plan provi4 for the potential overpayment of Tallwood’s claims above and beyond their allowed claims, an5 that this violated the “fair and equitable” standard applicable to confirmation. Canyon Bridge 6 shared concerns that the Plan should not be confirmed because Tallwood’s allowed claims coul7 be provided for more than in full (i.e., recover more than 100%), while junior classes were 8 impaired and eliminated. (See Declaration of Jose Raul Alcantar Villagran [“Alcantar Decl.”], 9 A.) Canyon Bridge sought “simple clarifying language” in the Plan, Liquidating Trust, and/or t10 Confirmation Order to address this simple but important concern. (Id.) The Proposed Plan, file11 on February 8, 2021, did not address this concern, and the Debtors’ confirmation brief also 12 completely fails to address how the Proposed Plan meets the “fair and equitable” standard und13 section 1129(b). 14 III. THE PROPOSED PLAN DOES NOT SATISFY THE REQUIREMENTS OF SECTION 1129(A)(8) BECAUSE IT IS UNDISPUTABLE THAT CLASSES 7-15 15 ARE IMPAIRED AND DID NOT VOTE TO ACCEPT 16 Section 1129(a)(8) of the Bankruptcy Code requires that each class of claims or interest17 must either accept or be unimpaired under a plan. Here, it is undisputed that the Proposed Plan18 Classes 7 through 15 are impaired and did not vote to accept the Proposed Plan – they were 19 “deemed to reject” it. [Proposed Plan at Page 32 of 92.] Canyon Bridge holds impaired claims 20 and interests in Proposed Plan Classes 8-10 and was deemed to reject the Proposed Plan. [ECF 21 No. 1129 at Page 32 of 92.] Thus, contrary to the assertion made in the Debtors’ confirmation 22 brief, Bankruptcy Code section 1129(a)(8) is not satisfied because Classes 7 through 15 are 23 impaired and did not accept the Proposed Plan.6 See, e.g., In re Castle Arch Real Estate Inv. C24 LLC, No. 11-35082, 2013 WL 2467974, at *8 (Bankr. D. Utah June 7, 2013) (§ 1129(a)(8) 25 26 6 Bankruptcy Code section 1129(a)(8) provides, in the pertinent part, that, “[t]he court shall confirm a plan only if all of the following requirements are met: [w]ith respect to each class of 27 claims or interests— (A) such class has accepted the plan; or (B) such class is not impaired unPage 5
2 reject” the plan under § 1126(g), requiring confirmation pursuant to cram-down provisions of 3 1129(b)); In re CIT Grp. Inc., No. 09-16565 (ALG), 2009 WL 4824498, at *9 (Bankr. S.D.N. 4 Dec. 8, 2009) (“Class 14, 15, 16 and 18 are deemed to reject the Plan pursuant to Bankruptcy 5 Code section 1126(g) and, therefore, section 1129(a)(8) of the Bankruptcy Code has not been 6 satisfied with respect to these Classes.”). 7 IV. THE PROPOSED PLAN IS NOT “FAIR AND EQUITABLE” UNDER SECTIO1129(B) BECAUSE IT VIOLATES THE ABSOLUTE PRIORITY RULE 8 Because section 1129(a)(8) is not satisfied, to be confirmed, the Proposed Plan must 9 therefore meet the “cram-down” requirements of section 1129(b), including that the Proposed 10 Plan be “fair and equitable.” The Debtors’ confirmation brief does not address how the Plan is 11 “fair and equitable,” or otherwise satisfies section 1129(b)’s cram-down requirements, at all. [S12 ECF No. 1134.] 13 The notion of “fair and equitable” incorporates the absolute priority rule embodied in 14 section 1129(b), which precludes senior creditors from receiving more than payment in full at t15 expense of junior classes.7 “The reason for this rule is obvious, and goes back to the basic 16 understanding between debt and equity.” 7 Collier on Bankruptcy 1129.04[4][a][ii].8 17 18 7 This fundamental aspect of the absolute priority rule is underscored in the legislative history t19 section 1129(b): “One requirement applies generally to all classes before the court may confirunder this subsection (1129(b)). No class may be paid more than in full.” House Report No. 9520 595, 95th Cong., 1st Sess. 413-418 (1977). A plan which allows a senior class to be paid more than 100% at the expense of a junior class is, by definition, not fair and equitable to the junior 21 class. “The safeguards that no claim or interest receive more than 100 percent of the allowed amount of such claim or interest and that no class be discriminated against unfairly will insure 22 that the plan is fair and equitable with respect to the dissenting class of interests.” 124 Cong. R23 H 11, 103 (Sept. 28, 1978) (emphasis supplied). 8 There is no dispute that a class of creditors cannot receive more than full consideration for 24 its claims, and that excess value must be allocated to junior classes of debt or equity, as the 25 case may be. See, e.g., New England Coal & Coke Co. v. Rutland Co., 143 F.2d 179, 186 (2d Cir.1944) (Bankruptcy Act case); In re Exide Techs., 303 B.R. 48, 61 (Bankr. D. Del. 2003) (“[26 corollary of the absolute priority rule is that a senior class cannot receive more than full compensation for its claims.”); In re Future Energy Corp., 83 B.R. 470, 495 n. 39 (Bankr. S.D. 27 Ohio 1988) (“Clearly, overpayment of senior creditors is violative of the fair and equitablePage 6
2 ensure that the strictures of § 1129(b) are met with regard to impaired dissenting classes of 3 creditors in a Chapter 11 cram down. To be “fair and equitable[,]” 4 a dissenting class should be assured that no senior class receives more than 100 percent of the amount of its claims. … The safeguards that no claim 5 or interest receive more than 100 percent of the allowed amount of such claim or interest and that no class be discriminated against unfairly will 6 insure that the plan is fair and equitable with respect to the dissenting class of interests. 7 … 8 If former stockholders’ interests are eliminated, a valuation is required to make sure that the senior classes of claims are not being provided for more 9 than in full. If former shareholders' interests are impaired and a class of creditors is provided for more than in full, the plan will not be confirmed. 10 Conversely, for a plan to be confirmed when stockholders are eliminated, creditors must not be provided for more than in full. 11 … 12 Thus, “[i]t's undisputed that the ‘fair and equitable’ requirement encompasses a rule that a senior class cannot receive more than full 13 compensation for its claims. Courts will deny confirmation if a plan undervalues a debtor and therefore would have resulted in paying senior 14 creditors more than full compensation for their allowed claims.” In re 15 Chemtura Corp., 439 B.R. 561, 592 (Bankr. S.D.N.Y. 2010); In re Granite Broadcasting Corp., 369 B.R. 120, 140 (Bankr. S.D.N.Y. 2007) (“There is 16 no dispute that a class of creditors cannot receive more than full consideration for its claims, and that excess value must be allocated to 17 junior classes of debt or equity, as the case may be.”). 18 In re Brewery Park Assocs., L.P., No. BR 10-11555, 2011 WL 1980289, at *10–11 (Bankr. E. 19 Pa. Apr. 29, 2011) (emphases supplied). 20 V. THE RECOVERY PROJECTIONS IN THE DEC. 3, 2020, DISCLOSURE STATEMENT ARE STALE IN LIGHT OF RECENT “ROBUST” 21 IMPROVEMENTS TO THE PROPOSED PLAN’S ECONOMICS AND THE DEBTORS HAVE PRESENTED NO EVIDENCE THAT THE PROPOSED PLA 22 IS “FAIR AND EQUITABLE” AS CURRENTLY DRAFTED 23 This is not a hypothetical or theoretical breach of the “fair and equitable” standard. Her24 the disclosure statement approved by the Court on December 3, 2020 [ECF No. 859], already 25 disclosed projected recoveries to Class 5 (General Unsecured Claims) in the 70.3%-83.8% ran26 27 “would do violence to the “fair and equitable” standard by paying [the creditor] more than itsPage 7
2 and material improvements have apparently been made to the plan’s economics, such as the 3 improved Tallwood winning bid and settlement with the CIP Parties, such that it is not out of t4 question that General Unsecured Claims could recover 100%, and some value could flow to 5 junior classes, if Tallwood Claims were properly limited to only recover 100% of their Allowe6 amount. The improved economics are summarized as follows: 7 Since the filing of the initial Tallwood-sponsored Plan in October 2020, the Debtors successfully negotiated for increased value that will be 8 provided to general unsecured creditors under the Plan by over $10 million and, in the process, garnered the support of the official committee 9 of unsecured creditors (the “Committee” and, together with the Debtors and Tallwood, the “Plan Proponents”). 10 11 In addition, and with the assistance of Tallwood and the Committee, the Debtors resolved their $60 million cure dispute with CIP United Co. Ltd. 12 and Prestige Century Investments Limited (together, the “CIP Parties”). Such resolution knocked the cure amount for assumption of the license 13 agreements to zero, netted $20 million for the Debtors’ estates in the form of a buyout arrangement, and eliminated the remaining gating item to a 14 successful Plan confirmation. 15 [Debtors’ Confirmation Brief, ECF No. 1134 at Page 9 of 41.] Notably, the apparently material16 resolution of the cure dispute with the CIP Parties occurred just last week, on February 3, 202117 [See ECF No. 111.] 18 The Debtors’ representations of a more than robust recovery for general unsecured 19 creditors are in direct conflict with the Proposed Plant’s current distribution scheme, under the 20 restructuring option. As set forth in the Liquidating Trust: (i) there currently is no limitation on21 distributions to Tallwood on account of its Allowed claims (so Tallwood could conceivably 22 recover more than 100% of its allowed claims from the Liquidating Trust Assets),9 and (ii) the23 is no provision for the Liquidating Trust Manager to make distributions pursuant to the Plan’s 24 waterfall (as set forth in Article III) even after Allowed General Unsecured Claims and Allowe25 Tallwood Claims are satisfied in full. (Proposed Plan, Section IV.G.7(a)(iii) (“Other 26 27 9Page 8
2 Tallwood Claims in full, as allowed, Tallwood will retain every last scrap of value in its capaci3 as a creditor, giving it more than 100% recovery of its Allowed claims. 4 Although the Debtors bear the burden to confirm the Proposed Plan under section 11295 they have not issued any updated recovery projections to demonstrate that distributable assets a6 certain to stop short of paying Tallwood Claims in full, such that no overflow provision in the 7 Liquidating Trust is necessary. “[T]o obtain confirmation of a reorganization plan that 8 completely extinguishes equity interests, the plan's proponent must prove that there is no val9 left once the creditors have had their turn.” In re Dave's Detailing, Inc., No. 13-08077 (RLM10 2015 WL 4601726, at *16 (Bankr. S.D. Ind. July 30, 2015) (citing In re Oneida Ltd., 351 B.R. 11 79, 87 (Bankr. S.D.N.Y.) (citing Protective Comm. for Indep. Stockholders of TMT Trailer Fer12 Inc. v. Anderson, 390 U.S. 414, 441 (1968)) (“Since participation by junior interests depends 13 upon the claims of senior interests being fully satisfied, whether a plan of reorganization 14 excluding junior interests is fair and equitable depends upon the value of the reorganized 15 company.”) (emphasis supplied). No such evidence or argument addressing section 1129(b) ha16 even attempted by the Debtors to carry the burden here.11 17 18 10 The plan proponent bears the burden of proof by a preponderance of the evidence. See In re 19 Cellular Info. Sys., Inc., 171 B.R. 926, 937 (Bankr. S.D.N.Y. 1994). 20 11 The lack of any attempt by the Debtors to meet the mandatory cram-down requirements for confirmation, given that not all impaired classes have voted to accept the Proposed Plan, is fata21 As in In re Delphi Corp., the Debtors could have attempted to meet their burden that the PropoPlan is “fair and equitable” by submitting supplemental evidence that no senior classes were 22 receiving more than full payment: 23 The Modified Plan is fair and equitable and does not discriminate unfairly against the holders of claims that have rejected or that have been deemed to reject the Modified Pl24 [A]s evidenced by the estimates contained in the Disclosure Statement and admitted intevidence at the Modification Approval Hearing, no Class of Claims or Interests senior t25 such Class is receiving more than full payment on account of such Claims or Interests. 26 No. 05-44481RDD, 2009 WL 2482146, at *16 (Bankr. S.D.N.Y. July 30, 2009) (emphasis supplied). That they chose not to submit such evidence is perhaps an indication that there is in 27 fact a reasonable likelihood that value could low to classes junior to Tallwood under thePage 9
2 the Proposed Plan should not be confirmed absent modification so that “excess value [is] 3 allocated to junior classes of debt or equity, as the case may be.” See In re Granite Broad. Cor4 369 B.R. 120, 140 (Bankr.S.D.N.Y.2007) (a class of creditors cannot receive more than full 5 consideration for its claims).12 6 The Proposed Plan must be amended to meet Bankruptcy Code’s section 1129’s “fair a7 equitable” standard before it can be confirmed. However, relatively simple plan language 8 allocating to junior classes any excess in the Liquidating Trust Assets above those required to 9 satisfy 100% of Tallwood’s Allowed Claims would resolve this issue without impacting the 10 treatment of senior classes. Specifically, the Proposed Plan could be modified by: (i) inserting 11 language in Section IV.G.7(a)(iii) limiting the recovery of Tallwood Claims from the Liquidati12 Trust Assets to 100% of the claims’ allowed amount (i.e., only until they have been paid in full13 and (ii) thereafter, providing for an “overflow” provision such that, after all Allowed Tallwood14 Claims have been repaid in full, any remaining Liquidated Trust Assets shall be distributed in 15 accordance with the distribution waterfall already set forth in Section III.A of the Proposed Pla16 17 18 19 20 21 12 That the creditors’ committee supports the Proposed Plan does not overcome its fundamenta22 flaw that the Proposed Plan is not “fair and equitable” to classes junior to general unsecured creditors, because it is only concerned with recovery for its constituency. As the bankruptcy co23 in In re Pilgrim's Pride Corp. aptly observed: 24 [i]f the debtor is solvent or appears to be solvent, the concern is that a creditors' committee will negotiate a plan based on a conservative estimate 25 of the debtor's worth that captures all of the value of the reorganized 26 entity, including value possibly in excess of the unsecured claims, through the issuance of new stock to the creditors at the expense of old equity 27 whose shares will be cancelled.Page 10
Pursuant to its independent duty, the Court should not confirm the Proposed Plan, abse2 satisfactory amendment to meet the requirements of Bankruptcy Code section 1129, including 3 “fair and equitable” standard. 4 5 DATED: February 9, 2021 Respectfully submitted, NASSIRI & JUNG LLP 6 7 By: /s/ Jose Raul Alcantar Villagran 8 Jose Raul Alcantar Villagran 9 Attorneys for Interested Party CANYON BRIDGE FUND I, LP 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
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