HAHN & HESSEN LLP 488 Madison Avenue Facsimile: (212) 478 ...omnimgt.com/CMSVol2/pub_47319/732823_290.pdf · Allen Duralee Group Furniture, LLC (2835). The corporate headquarters

HAHN & HESSEN LLP 488 Madison Avenue New York, New York 10022 Telephone: (212) 478-7200 Facsimile: (212) 478-7400 Mark T. Power, Esq. Janine M. Figueiredo, Esq. Counsel for Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK ---------------------------------------------------------------------- X In re: Décor Holdings, Inc., et al.,1 Debtors.

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Chapter 11 Case No. 19-71020 (REG) Case No. 19-71022 (REG) Case No. 19-71023 (REG) Case No. 19-71024 (REG) Case No. 19-71025 (REG) Substantively Consolidated

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DEBTORS’ MEMORANDUM OF LAW (I) IN SUPPORT OF ENTRY OF AN ORDER (A) CONFIRMING THE THIRD AMENDED JOINT CHAPTER 11 PLAN

OF LIQUIDATION PROPOSED BY THE DEBTORS, AND (B) APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS’ ASSETS

The above-captioned debtors and debtors-in-possession (collectively, the “Debtors”),

submit this memorandum of law (the “Memorandum of Law”) in support of an order (a)

confirming the Third Amended Joint Chapter 11 Plan of Liquidation Proposed by the Debtors (the

1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, are: Décor Holdings, Inc. (4174); Décor Intermediate Holdings LLC (5414); The Robert Allen Duralee Group, Inc. (8435); The Robert Allen Duralee Group, LLC (1798); and The Robert Allen Duralee Group Furniture, LLC (2835). The corporate headquarters and the mailing address for the Debtors listed above is 49 Wireless Boulevard, Suite 150, Hauppauge, NY 11788. The Debtors also maintain a separate corporate office at 2 Hampshire Street, Suite 300, Foxboro, MA 02035.

Case 8-19-71020-reg Doc 290 Filed 05/02/19 Entered 05/02/19 01:11:27

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“Plan”),2 and (b) approving the sale of substantially all of the Debtors’ assets. For the

reasons stated herein, the Debtors believe that the Plan satisfies the requirements for

confirmation set forth in section 1129 of title 11 of the United States Code (the “Bankruptcy

Code”), and is otherwise in the best interest of the Debtors’ creditors and all parties in

interest in these chapter 11 cases. In support of this Memorandum of Law, the Debtors rely

on the (i) Declaration of Paul H. Deutch Regarding the Methodology for the Tabulation of Votes On

and Results of Voting with Respect to the Second Amended Joint Chapter 11 Plan of Liquidation

Proposed by the Debtors [D.I. 279] (the “Certification of Ballots”), and (ii) the proffered

testimony of Timothy Boates, Chief Restructuring Officer, in support of (i) confirmation of

the Plan and (ii) the Sale (the “Boates Testimony”), and the proffered testimony of J. Scott

Victor, Managing Director of SSG Advisors, LLC, investment bankers to the Debtors, in

support of the Sale (the “Victor Testimony”). In support of confirmation of the Plan, the

Debtors respectfully represent as follows:

I. PRELIMINARY STATEMENT

1. The Debtors’ proposed Plan, which includes and incorporates the sale of

substantially all of the Debtors’ assets as described herein (the “Sale”), should be confirmed.

The Plan provides a clear path for the successful conclusion of these chapter 11 cases, and is

overwhelmingly supported by, among others, the Debtors’ General Unsecured Creditors,

and DIP Lenders.

2. Prior to and after the commencement of these chapter 11 cases, the Debtors

and their professionals explored various strategies for resolving the Debtors’ significant

financial difficulties, including possible reorganization or liquidation. After extensive

2 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Plan.


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analysis and consideration, however, the Debtors determined that a marketing and sale of

substantially all of their assets as a going concern would be the best method for preserving

the value of their assets and would be in the best interests of their creditors. As such, the

Debtors’ ultimate goal throughout this chapter 11 process has been to consummate a going

concern sale of substantially all of their assets through the confirmation of a Plan.

3. The Plan is largely premised upon the Court’s approval of the Sale. Approval

of the Sale and confirmation of the Plan are so inextricably linked such that failure to

approve the Sale will ultimately render the Plan infeasible, leading to a liquidation of the

Debtors’ assets under chapter 7 of the Bankruptcy Code. As such, in support of both the

Plan and the Sale and as described in detail herein, the Debtors submit that (i) the Plan

complies with confirmation provisions of the Bankruptcy Code, (ii) the terms and

conditions of the Sale and its corresponding asset purchase agreement (the “APA”) are fair

and reasonable, (iii) the sale and purchase of the Purchased Assets (as defined herein)

pursuant to the Plan and APA, is non-collusive, fair and reasonable and was conducted

openly and in good faith, (iv) the transfer of the Purchased Assets represents an arm’s-length

transaction and was negotiated in good faith between the parties, (v) the Purchaser (as

defined herein), as transferee of the Purchased Assets, is a good faith purchaser under

Bankruptcy Code § 363(m) and, as such, should be entitled to the full protection of

Bankruptcy Code § 363(m), (vi) the Purchased Assets should be sold free and clear of all

claims, interests, and encumbrances pursuant to Bankruptcy Code § 1141(c) to maximize

the value of the Debtors’ assets, (vii) the Sale was not controlled by an agreement among

potential purchasers, (viii) no cause of action exists against the Purchaser or with respect to

the Sale of the Purchased Assets to the Purchaser under § 363(n), and (ix) any claims under


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§ 363(n) or any other claims as against the Purchaser should be released, waived and

discharged.

4. Confirmation of the Plan, and the related approval of the Sale, will achieve

the best possible result for the Debtors, their creditors, and all other parties-in-interest in

these chapter 11 cases. Accordingly, the Debtors respectfully request that the Court confirm

the Plan and approve the Sale.

II. BACKGROUND

A. General Background Regarding These Chapter 11 Cases

5. On February 12, 2019 (the “Petition Date”), each of the Debtors filed a

voluntary petition for relief under chapter 11 of the Bankruptcy Code.

6. The Debtors continue to operate their business as debtors in possession

pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.

7. No trustee or examiner has been appointed in these Chapter 11 Cases.

8. On February 15, 2019, Omni Management Group, Inc. (“Omni”) was

appointed as Claims and Noticing Agent for the Debtors. See Order Appointing Omni

Management Group, Inc. as Claims and Noticing Agent for the Debtors Pursuant to 28 U.S.C. §

156(C), 11 U.S.C. § 105(a), and Administrative Order No. 658 Nunc Pro Tunc to the Petition Date

[D.I. 46].

9. On March 19, 2019, pursuant to Bankruptcy Code Section 1102(a)(1), the

Office of the United States Trustee for the Eastern District of New York (the “U.S.

Trustee”) appointed three unsecured creditors to an Official Committee of Unsecured

Creditors. On March 22, 2019, the U.S. Trustee amended its notice, reducing the members


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of the Committee to two of those creditors. The Committee has selected Perkins Coie LLP

to act as its proposed counsel in these chapter 11 cases.

10. Prior to the Petition Date, the Debtors retained Timothy Boates of RAS

Management Advisors, LLC to perform the functions and hold the title of Chief

Restructuring Officer (the “CRO”). The CRO has taken over as the daily manager of the

Debtors, is responsible for managing the Debtors as debtors-in-possession in these chapter

11 cases, and has been intimately involved in the formulation, preparation, and

consummation of the Plan.

11. On April 5, 2019, the Debtors submitted their Motion for an Order Approving the

Substantive Consolidation of the Debtors for Purposes of Balloting, Solicitation of Votes and

Distributions under the Debtors’ Chapter 11 Plan [D.I. 213] (the “Substantive Consolidation

Motion”), which Motion was granted by the Court on April 11, 2019. See Order, Pursuant to

Bankruptcy Code Sections 105(a) and 302, Approving the Substantive Consolidation of the Debtors for

Purposes of Balloting, Solicitation of Votes and Distributions under the Debtors’ Chapter 11 Plan (the

“Substantive Consolidation Order”) [D.I. 230]. Pursuant to the Substantive Consolidation

Order, all of the Debtors’ chapter 11 cases were consolidated for both substantive and

administrative purposes into the Lead Case, docket number 19-71020. Further, as a result of

the Debtors’ substantive consolidation, all intercompany liabilities that existed between the

respective Debtor entities (the “Intercompany Claims”) were expunged.

12. On March 15, 2019, the Debtors filed a motion (the “Disclosure Statement

Motion”) for entry of an order, (i) approving the Disclosure Statement for Plan of

Liquidation Proposed by the Debtors (the “Initial Disclosure Statement”), (ii) establishing

solicitation and voting procedures for the Joint Chapter 11 Plan of Liquidation Proposed by


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the Debtors (the “Initial Chapter 11 Plan”), (iii) scheduling a Confirmation Hearing (the

“Confirmation Hearing”), and (iv) establishing notice and objection procedures for

confirmation of the Plan [D.I. 148].

13. Following receipt of comments from various interested parties, on April 9,

2019, the Debtors filed their First Amended Joint Chapter 11 Plan of Liquidation Proposed by the

Debtors (the “First Amended Plan”) and related Disclosure Statement for First Amended Plan of

Liquidation proposed by the Debtors (the “First Amended Disclosure Statement”) [D.I. 219].

14. Following the hearing to consider the approval of the First Amended

Disclosure Statement, the Debtors filed the Plan and the related Disclosure Statement for

Second Amended Plan of Liquidation Proposed by the Debtors (the “Disclosure Statement”) [D.I.

241].

15. On April 15, 2015, the Court entered the Order (I) Approving the Disclosure

Statement, (II) Establishing Plan Solicitation and Voting Procedures, (III) Scheduling a Confirmation

Hearing, and (IV) Establishing Notice and Objection Procedures for Confirmation of the Debtors’

Chapter 11 Plan of Liquidation (the “Disclosure Statement Order”) [D.I. 238], concluding that

the Disclosure Statement contained adequate information sufficient for a reasonable

hypothetical investor to make an informed judgment on the Plan; approving the Debtors’

proposed solicitation and voting procedures for the Plan (the “Solicitation Procedures”);

and establishing notice and objection procedures for confirmation of the Plan. Pursuant to

the Disclosure Statement Order, the Court scheduled the Confirmation Order for May 2,

2019, and set the deadline to object to confirmation of the Debtors’ Plan for April 29, 2019

(the “Plan Objection Deadline”). As of the Confirmation Hearing, the Debtors believe that

all formal and informal objections to confirmation of the Plan will have been resolved on a


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consensual basis, other than the vote by the holder of Class 2 Secured Claims to reject the

Plan, which will necessitate a finding by the Court to find that the Plan satisfies the

“cramdown” requirements of Section 1129(b) of the Bankruptcy Code since the Plan does

not discriminate unfairly and is fair and equitable as to Class 2.

B. The Plan

16. Among other things, the Plan facilitates the Sale, liquidates the Debtors’

estates following consummation of the Sale, and distributes the Debtors’ remaining assets –

principally cash – to the holders of Allowed Claims in accordance with the respective rights

and priorities. The Plan provides for the full satisfaction of all Administrative and Priority

Claims on the Plan’s effective date (the “Effective Date”), or as soon thereafter as

reasonably practicable. Proceeds of any Chapter 5 Claims (net any proceeds used to cover

shortfalls in any of the Reserve Funds) will be shared between the holders of Class 5

General Unsecured Claims and the holders of Class 1 Senior Secured Loan Claims under a

formula set forth in the Plan. The projected proceeds from the Sale will be insufficient to

satisfy the Class 1 Senior Secured Loan Claims.

17. The Plan provides for the classification of certain Classes of Claims as

Impaired or not Impaired, and provides for such classes’ voting rights. The Plan’s

classification scheme is set forth as follows:


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Class Claim Status Voting Rights

1 Senior Secured Loan Claims Impaired Entitled to Vote

2 Junior Secured Loan Claims Impaired Entitled to Vote

3 Other Secured Claims Impaired Entitled to Vote

4 Other Priority Claims Unimpaired Deemed to Accept

5 General Unsecured Claims Impaired Entitled to Vote

6 Intercompany Claims Impaired and No Distribution Deemed to Reject

7 Equity Interests Impaired and No Distribution Deemed to Reject

Thus, other than claims that are not required to be satisfied under the Bankruptcy Code, the

Plan provides for seven (7) different classes of Claims.

18. Class 4 (Other Priority Claims) is not impaired under the Plan and is therefore

conclusively presumed to have accepted the Plan pursuant to section 1126(f) of the

Bankruptcy Code. Accordingly, the votes of holders of Class 4 Claims were not solicited.

See Certification of Ballots.

19. Holders of claims in Classes 6 and 7 (collectively, the “Deemed Rejecting

Classes”) are not entitled to receive or retain any property under the Plan. Section 1126(g)

of the Bankruptcy Code provides that “[n]otwithstanding any other provision of this section,

a class is deemed not to have accepted a plan if such plan provides that the claims or

interests of such class do not entitle holders of such claims or interests to receive or retain

any property under the plan on account of such claims and interests.” Under the Debtors’

Plan, holders of Intercompany Claims and Equity Interests in the Debtors will not receive

any distributions or retain any property on account of such Claims or Interests. As such,

these Deemed Rejecting Classes are conclusively presumed to have rejected the Plan and

votes of the Deemed Rejecting Classes were not solicited. See Certification of Ballots.


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20. Classes 1, 2, 3, and 5 (the “Voting Classes”) are impaired under the Plan.

The votes of holders of Claims in the Voting Classes were solicited. See Certification of

Ballots.

C. Solicitation of Votes and Noticing of Non-Voting Procedures

21. In accordance with the Solicitation Procedures, on April 12, 2019, the

Debtors commenced their solicitation (the “Solicitation”) of votes on the Plan by mailing

certain packages of information (the “Solicitation Packages”) to all creditors and interest-

holders entitled to receive the Solicitation Packages. Each Solicitation Package contained:

(a) the Confirmation Hearing Notice; (b) to Classes entitled to vote on the Plan: (1) the

Disclosure Statement Order (without attachments); (2) the Disclosure Statement, together

with all attachments (including the Plan); (3) a cover letter from the Creditors’ Committee

setting forth the Creditors’ Committee’s support thereof; (4) the applicable Ballot; and (5) a

return envelope; and (c) to Classes not entitled to vote: a Notice of Non-Voting Status. See

Certification of Ballots.

22. As provided in the Disclosure Statement Order, the deadline to vote on the

Debtors’ Plan was set for April 26, 2016 and 4:00 p.m. (prevailing Eastern Time) (the

“Voting Deadline”).

23. The Debtors received 87 valid votes, totaling $33,100,989.91 in liabilities from

holders of Claims in the Voting Classes by the Voting Deadline. See Certification of Ballots.

As set forth below and in the Certification of Ballots, Classes 1 and 5 voted in favor of the

Plan by overwhelming percentages. Class 2 voted to reject the Plan (the “Rejecting Class”

and together with the Deemed Rejecting Classes, the “Rejecting Classes”). Id. No votes

were received from holders of claims in Class 3, and as such Class 3 neither accepted nor


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rejected the Plan. A breakdown of the Voting Classes’ votes on the Plan have been set forth

in the following table:

Class Total Accepted Rejected Outcome

1 $22, 245,679.48 $22, 245,679.48 (100%) $0 (0%) ACCEPTED

2 $5,871,903.37 $0 (0%) $5,871,903.37 (100%) REJECTED

3 $N/A $N/A $N/A N/A

5 $4,983,407.06 $4,401,188.43 (88.32%) $582,218.63 (11.68%) ACCEPTED

TOTAL $33,100,989.91 $26,646,867.91 $6,454,122.00

D. The Sale Process

24. On the Petition Date, the Debtors filed a Motion for Entry of (A) an Order (I)

Approving Bid Procedures (the “Bid Procedures”) in Connection with the Sale of

Substantially All of the Debtors’ Assets, (II) Authorizing the Debtors to Enter into Stalking

Horse Agreements and Approving Certain Bid Protections, (III) Scheduling an Auction

(the “Auction”) for and Hearing to Approve Sale of Assets, (IV) Approving Notice of Date,

Time and Place for Auction and for Hearing on Approval of Sale, (V) Approving

Procedures for the Assumption and Assignment of Certain Executory Contracts and

Unexpired Leases (the “Assignment Procedures”), (VI) Approving Form and Manner of

Notice Thereof, and (VII) Granting Related Relief; and (B) an Order Authorizing and

Approving (I) the Sale of Substantially All of the Debtors’ Assets Free and Clear of Liens,

Claims, Rights, Encumbrances, and Other Interests, (II) the Assumption and Assignment of

Certain Executory Contracts and Unexpired Leases and (III) Granting Related Relief [D.I.

21] (the “Sale Motion”).


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25. In order to properly and effectively market the Debtors’ assets and to create a

robust and active Auction for the Sale, the Debtors retained SSG Capital Advisors (“SSG”)

as its investment banker. SSG has solicited various potentially interested buyers for the

Debtors’ assets and has actively marketed the Debtors’ assets throughout these chapter 11

cases.

26. On March 15, 2019, the Court entered an order (a) approving the Debtors’

proposed Bid Procedures in connection with the Sale, (b) authorizing the Debtors to enter

into Stalking Hose Asset Purchase Agreements and approving certain bid protections, (c)

scheduling the Auction, and (d) approving the Notice of date, time, and place for the

Auction [D.I. 145] (the “Bid Procedures Order”).

27. On April 12, 2019, the Debtors entered into a stalking horse asset purchase

agreement (the “Stalking Horse APA” or “APA”) with RADG Holdings, LLC, a Delaware

limited liability company (the “Stalking Horse Bidder”). The Debtors concurrently filed a

Notice of Designation of RADG Holdings LLC as Stalking Horse Bidder [D.I. 232] (the “Stalking

Horse Bid Notice”), together with the Stalking Horse APA, as required by the Bid

Procedures and Bid Procedures Order.

28. Shortly thereafter, pursuant to the Bid Procedures, the Stalking Horse Bidder

provided the Debtors with certain future performance information (the “Adequate

Assurance Information”) including, among other things, information regarding the Stalking

Horse Bidder’s current financial condition and ability to consummate the Sale.

29. Pursuant to the Bid Procedures and Bid Procedures Order, all other potential

bidders who desired to make a bid for the Debtors’ assets were required to submit such bids

by April 25, 2019, at 5:00 p.m. (prevailing Eastern Time) (the “Bid Deadline”).


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E. Cancellation of Auction and Designation of the Stalking Horse Bidder as Successful Bidder

30. The Debtors did not receive any Qualified Bids (as defined in the Bid

Procedures) by the Bid Deadline. Shortly thereafter, the Debtors cancelled the Auction and

declared the Stalking Horse Bidder as the successful bidder (the “Successful Bidder” or

“Purchaser”).

31. On April 26, 2019, the Debtors filed a Notice of (I) Cancellation of Auction and

Designation of Stalking Horse Bidder as the Successful Bidder and (II) Proposed Assumption and

Assignment of Certain Executory Contracts and Unexpired Real Property Leases (the “Notice of

Successful Bidder”) [D.I. 276], which identified certain executory contracts and unexpired

leases proposed to be assumed by the Successful Bidder. The Notice of Successful Bidder

was immediately served on all parties in interest and on the applicable Non-Debtor

Counterparties (defined below) to the Debtors’ executory contracts and unexpired leases.

F. The APA and Transition Services Agreement

32. Pursuant to the terms of the APA, the Purchaser has agreed to purchase

substantially all of the Debtors’ business-related assets for an estimated purchase price of

$19,000,000, which amount is comprised of (i) a cash payment of $8,000,000 at the time of

the closing of the Sale (the “Closing”), plus (ii) a post-Closing cash payment in an amount

of not less than $10,000,000 and not more than $11,000,000, payable out of the first $11

million in pre-Closing receivables collected after the Closing, less any out-of-pocket costs

collection, and (iii) the assumption of certain assumed liabilities (the “Purchase Price”). See

APA § 2.2. The Purchase Price is subject to, among other things, a working capital

adjustment if the level of inventory and receivables fall below certain thresholds at the time

of the Closing. See APA § 2.4.


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33. “Purchased Assets” include, among other things, the Debtors’ (i) inventory

(except where specifically excluded) and receivables, (ii) tangible personal property, (iii)

ownership interest in Robert Allen Fabrics (Canada), Ltd., (iv) unfulfilled customer orders,

and (v) intellectual property. See APA § 2.1.

34. “Assumed Liabilities” include, among other things, (i) liabilities arising after

the Closing in connection with the operation and use of all Purchased Assets, (ii) liabilities

under all assigned contracts and leases, (iii) cure costs relating to all assigned contracts and

leases (iv) certain PTO obligations owed to employees of the Debtors who are retained by

the Purchaser after the Closing, and (v) the Debtors’ outstanding liabilities related to the

Debtors’ customer programs, including customer credits. See APA § 2.3.

35. The Horse APA also provides for Excluded Assets to be retained by the

Debtors, including certain (i) cash, cash equivalents, and marketable securities, (ii) equity

interests and capital stock, (iii) pre-Closing tax refunds and tax attributes, (iv) assets of the

Plan maintained by the Debtors, (v) insurance policies, (vi) contract rights, (vii) security

deposits and utility deposits relating to an Excluded Asset, and (vii) Avoidance Actions,

including Chapter 5 Claims. See APA § 1.1 (defining “Excluded Assets”).

36. The Stalking Horse APA provides for the Closing to occur no later than three

business days after the entry of the order confirming the Debtors’ Plan, subject to the

occurrence of certain conditions precedent to closing having been satisfied or waived by

either the Debtors or the Purchaser. APA § 9.1. The Closing of the Sale is expressly

conditioned upon the Court’s confirmation of the Plan. See APA §§ 8.3, 9.1.


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37. The APA also envisions the parties entering into a post-closing Transition

Services Agreement, which is currently being finalized with the Buyer and will be filed with

the Court.

G. The Assumption and Assignment Process

38. On April 15, 2019, the Court entered the Order Approving the Assignment

Procedures [D.I. 239] (the “Assignment Procedures Order”). On the same day, the Debtors

served the Assignment Procedures Order, as well as the Notice of Assignment Procedures and

Possible Assumption and Assignment of Certain Executory Contracts and Unexpired Leases in

Connection with Sale (the “Potential Assumption and Assignment Notice”) on all

counterparties to the Debtors’ executory contracts (the “Non-Debtor Counterparties”).3 See

Omni Affidavit of Service [D.I. 254]. The Debtors attached a schedule (the “Cure

Schedule”) to the Potential Assumption and Assignment Notice which described all of the

Debtors’ executory contracts and unexpired leases, along with their respective cure amounts

(the “Cure Costs”), to provide the Non-Debtor Counterparties with sufficient cure

information.

39. On April 26, 2019, following the declaration of the Stalking Horse Bidder as

the Successful Bidder, the Debtors served the Notice of Successful Bidder on all Non-Debtor

Counterparties whose contracts the Purchaser proposed to assumed pursuant to the terms of

the APA (the “Proposed Assigned Contracts”). All other executory contracts and

unexpired leases which were not listed on the Notice of Successful Bidder were to be

rejected upon confirmation of the Plan.

3 The Debtors also filed the Assumption and Assignment Notice on the Debtors’ docket for purposes of additional notice and for executory contract counterparties’ convenience. See D.I. 240.


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40. Pursuant to the Assignment Procedures, Non-Debtor Counterparties were

given until April 24, 2019, at 4:00 p.m. (Eastern Time) (the “Cure Cost/Assignment

Objection Deadline”) to object to (i) the Debtors’ proposed cure cost for assuming and

assigning a Non-Debtor Counterparty’s contract, (ii) the proposed assumption, assignment

and/or transfer of such Non-Debtor Counterparty’s Contract, and (iii) the identity of, or

adequate assurance of future performance provided by, the Stalking Horse (each respective

objection, a “Cure Cost/Assignment Objection”).

41. Six Non-Debtor Counterparties filed Cure Cost/Assignment Objections prior

to the Cure Cost Assignment Objection Deadline, and a small number of Non-Debtor

Counterparties submitted informal objections (collectively, the “Objecting Non-Debtor

Counterparties”). The Debtors have been working together with the Objecting Non-Debtor

Counterparties in good faith to resolve all outstanding Objections. Many have been resolved

by mutual agreement, or have been deemed irrelevant based on the Purchaser’s

determination to reject such executory contract or unexpired lease. To the extent the

Debtors and the Objecting Non-Debtor Counterparties cannot resolve their outstanding

Objections, however, the Debtors intend to resolve such Objections at or after the

Confirmation Hearing. Furthermore, if any Cure Cost/Assignment Objections remain

unresolved after the Confirmation Hearing, the Assignment Procedures and Plan provide

for the adjournment of such outstanding Objections to a subsequent hearing, along with the

establishment of a Cure Claim Reserve Fund to reserve for any disputed amounts relating to

the Cure Costs of such executory contracts or unexpired leases.

III. THE PLAN SHOULD BE CONFIRMED


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42. To obtain confirmation of the Plan, the Debtors must demonstrate that the

Plan satisfies the applicable provisions of section 1129 of the Bankruptcy Code by a

preponderance of the evidence. As set forth by the United States Court of Appeals for the

Fifth Circuit in Heartland Savings & Loan Association v. Briscoe Enterprises., Ltd. II (In re Briscoe

Enterprises., Ltd. II):

The combination of legislative silence, Supreme Court holdings, and the structure of the [Bankruptcy] Code leads this Court to conclude that preponderance of the evidence is the debtor’s appropriate standard of proof under both § 1129(a) and in a cramdown.

994 F.2d 1160, 1165 (5th Cir. 1993); see also In re 20 Bayard Views, LLC 445 B.R. 83, 93

(Bankr. E.D.N.Y. 2011); In re Young Broad, Inc., 430 B.R. 99, 128 (Bankr. S.D.N.Y. 2010);

In re Armstrong World Indus., Inc., 348 B.R. 111, 120 (D. Del. 2006). Applicable case law

holds that when considering confirmation of a chapter 11 plan, creditor democracy – an

integral element in a chapter 11 case – should be afforded substantial deference in the

absence of a clear impediment to plan confirmation. See, e.g., Williams v. Hibernia Nat’l Bank

(In re Williams), 850 F.2d 250, 253 (5th Cir. 1988). The Supreme Court has emphasized that

the creditors should be permitted to decide whether a proposed plan is in their best interests.

See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 207 (1988); see also Coltex Loop Cent.

Three Partners, L.P. v. BT/SAP Pool C Assocs., L.P. (In re Coltex Loop Central Three Partners,

L.P.), 138 F.3d 39, 44 (2d Cir. 1998) (“The Code thus strikes a considered balance between

creditor and debtor interests, which… courts must scrupulously respect.”).

43. As further described herein, and as evidenced in the Boates Testimony and

Certification of Ballots, the Debtors submit that the proposed Plan satisfies all applicable

subsections of section 1129 of the Bankruptcy Code other than section 1129(a)(8). As


17

described more fully below, however, the Plan may be confirmed notwithstanding the fact

that not all Classes of Claims or Equity Interests have voted in favor of the Debtors’ Plan.

Accordingly, the Debtors request that the Plan be confirmed.

A. Section 1129(a)(1): Compliance with Applicable Provisions of the Bankruptcy Code

44. Section 1129(a)(1) of the Bankruptcy Code provides that a plan may be

confirmed only if “[t]he plan complies with the applicable provisions of this title.” 11 U.S.C.

§ 1129(a)(1).

45. The legislative history of section 1129(a)(1) explains that this provision

embodies the requirements of, among others, sections 1122 and 1123 of the Bankruptcy

Code governing, respectively, the classification of claims and the contents of the plan. H.R.

Rep. No. 595, 95th Cong., 1st Sess. 412 (1977); S. Rep. No. 989, 95th Cong., 2d Sess. 126

(1978); see also Kane v. Johns-Manville Corp. (In re Johns-Manville Corp.), 843 F.2d 636, 648-49

(2d Cir. 1988) (“[T]he legislative history of subsection 1129(a)(1) suggests that Congress

intended the phrase ‘applicable provisions’ in this subsection to mean provisions of Chapter

11 that concern the form and content of reorganization plans.”); In re Drexel Burnham

Lambert Group Inc., 138 B.R. 723, 757 (Bankr. S.D.N.Y. 1992); In re Sabine Oil & Gas Corp.,

555 B.R. 180, 310 (Bankr. S.D.N.Y. 2016) (“In order to determine whether a plan complies

with section 1129(a)(1) of the Code, a court must ensure that the requirements of sections

1122 and 1123 are met.”); In re Texaco Inc., 84 B.R. 893, 905 (Bankr. S.D.N.Y. 1988) (“In

determining whether a plan complies with section 1129(a)(1), reference must be made to

Code §§ 1122 and 1123 with respect to the classification of claims and the contents of a plan

of reorganization”). As described herein, the Plan complies with the requirements of

sections 1122 and 1123 and all other applicable provisions of the Bankruptcy Code.


18

i. Section 1122: Classification

46. Section 1122 of the Bankruptcy Code provides:

1. Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.

2. A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.4

11 U.S.C. § 1122.

47. For a plan to comply with Section 1122, it is not necessary that all

substantially similar claims or interests be designated in the same class, but only that all

claims in a particular class be substantially similar to each other, and have substantially

similar rights to the Debtors’ assets. In re One Times Square Assocs. Ltd. P’Ship, 159 B.R. 695,

703 (Bankr. S.D.N.Y. 2007). Thus, courts generally afford a plan proponent significant

flexibility in classifying claims under section 1122, as long as a reasonable legal and/or

factual basis exists for the proposed classifications, and all claims within a particular class

are substantially similar. See, e.g., In re Jersey City Med. Ctr., 817 F.2d 1055, 1060–61 (3d Cir.

1987) (“Congress intended to afford bankruptcy judges broad discretion [pursuant to section

1122] to decide the propriety of plans in light of the facts”); Olympia & York Fla. Equity Corp.

v. Bank of N.Y. (In re Holywell Corp.), 913 F.2d 873, 880 (11th Cir. 1990) (proponent of plan

has considerable discretion in classifying claims and interests according to relevant facts and

circumstance of case); Teamster’s Nat’l Freight Indus. Negotiating Comm. v. U.S. Truck Co., Inc.

(In re U.S. Truck Co., Inc.), 800 F.2d 581, 586 (6th Cir. 1986) (noting court’s “broad

4 Section 1122(b) of the Bankruptcy Code is inapplicable here because the Plan does not include a convenience class.


19

discretion” to determine proper classifications); Windels Marx Lane & Mittendorf, LLP v.

Source Enters., Inc. (In re Source Enters., Inc.), 392 B.R. 541, 556 (S.D.N.Y. 2008) (“Moreover,

‘[a] plan proponent is afforded significant flexibility in classifying claims under § 1122(a) if

there is a reasonable basis for the classification scheme and if all claims within a particular

class are substantially similar.”) (quoting In re Drexel Burnham Lambert Grp., Inc., 138 B.R.

723, 757 (Bankr. S.D.N.Y. 1992)).

48. With the exception of Administrative Claims, Professional Fee Claims, the

DIP Loan Claim, and Priority Tax Claims, which need not be classified pursuant to section

1123(a)(1) of the Bankruptcy Code, Articles 3 and 4 of the Plan provide for separate

classification of Claims against and Equity Interests in the Debtors based upon the legal

nature and priority of such Claims and Interests. See generally Plan, Articles 3 and 4. This

classification scheme complies with section 1122(a) of the Bankruptcy Code because the

Claims or Interests within each particular Class are substantially similar to each other.

Similar Claims have not been placed into different Classes in order to dictate the outcome of

the vote on the Plan. Further, valid business, legal, and factual reasons exist for separately

classifying the various Classes. Accordingly, the Debtors submit that the classification

scheme in the Plan satisfies section 1122 of the Bankruptcy Code.

ii. Section 1123(a)

49. Section 1123(a) of the Bankruptcy Code sets forth seven applicable

requirements with which all chapter 11 plans must comply. See 11 U.S.C. § 1123(a). The

Debtors submit that the Plan fully complies with each enumerated requirement.

a. Section 1123(a)(1): Designation of Classes of Claims and Interests


20

50. Section 1123(a)(1) provides that a plan must designate, subject to section 1122

of the Bankruptcy Code, classes of claims and equity interests. See 11 U.S.C. § 1123(a)(1).

The Plan designates seven (7) Classes of Claims against and Equity Interests in the Debtors,

subject to section 1122. See generally Plan, Articles 3 and 4. Accordingly, the Plan satisfies

the requirements of Section 1123(a)(1) of the Bankruptcy Code.

b. Section 1123(a)(2): Specification of Classes that are Not Impaired by the Plan

51. Section 1123(a)(2) of the Bankruptcy Code requires that a plan specify which

classes of claims or interests are unimpaired by the plan. See 11 U.S.C. § 1123(a)(2). Article

3 of the Plan specifies that Class 4 is Unimpaired. See Plan, Article 3. Accordingly, the Plan

satisfies the requirements of section 1123(a)(2) of the Bankruptcy Code.

c. Section 1123(a)(3): Specification of Treatment of Classes that are Impaired by the Plan

52. Section 1123(a)(3) of the Bankruptcy Code requires that a plan specify how it

will treat impaired classes of claims or interests. See 11 U.S.C. § 1123(a)(3). Articles 3 and 4

of the Plan specify that the Voting Classes and Deemed Rejecting Classes are Impaired and

clearly specify the treatment of the Claims and Interests in those Classes. See Plan, Articles 3

and 4. Accordingly, the Plan satisfies the requirements of section 1123(a)(3) of the

Bankruptcy Code.

d. Section 1123(a)(4): Equal Treatment of Claims Within Each Class

53. Section 1123(a)(4) requires that a plan provide the same treatment for each

claim or interest within a particular class unless any claim or interest holder agrees to

receive less favorable treatment than other class members. See 11 U.S.C. 1123(a)(4).

Pursuant to the Plan, the treatment of each Claim against or Equity Interest in the Debtors


21

in each respective Class is the same as the treatment of every other Claim or Interest in such

Class, unless the holder of a particular Claim or Interest has agreed to less favorable

treatment for such Claim or Interest. See Plan, Article 4. Accordingly, the Plan satisfies the

requirements of section 1123(a)(4) of the Bankruptcy Code.

e. Section 1123(a)(5): Adequate Means for Implementation

54. Section 1123(a)(5) of the Bankruptcy Code requires that a plan provide

“adequate means” for its implementation. 11 U.S.C. § 1123(a)(5). Adequate means for

implementation of a plan may include, inter alia, retention by the debtor of all or part of its

property and the transfer of property of the estate to one or more entities. See In re MF Global

Inc., 478 B.R. 611, 618 (Bankr. S.D.N.Y. 2012) (“Section 1123(a)(5) provides a means for

the estate to transfer property as part of a confirmed plan, requiring that a plan of

reorganization provide means for implementation . . . .”).

55. Article 5 of the Plan provides adequate and proper means for the

implementation of the Plan. As described in section 5.1 of the Plan, by virtue of the Court

entering the Substantive Consolidation Order, the Debtors have eliminated all

Intercompany Claims, have consolidated all obligations and guarantees of each respective

Debtor, have consolidated all Claims filed or to be filed against the Debtors in these chapter

11 cases, and have consolidated all joint and several liabilities. As a result of the substantive

consolidation of assets and liabilities, upon the Effective Date of the Plan, all claims based

upon guarantees of collection, payment, or performance by one Debtor as to the obligations

of another Debtor will be released and discharged.

56. Section 5.2 of the Plan provides that the Debtors shall consummate the Sale

of the Debtors’ assets to the Purchaser selected pursuant to the Bid Procedures and Bid


22

Procedures Order. Pursuant to Section 9.1 of the Plan, all Estate Assets will vest in the

Post-Confirmation Debtors free and clear of all liens, encumbrances, charges and other

interests, except as provided for in the Plan. Concurrently, the proceeds of the Sale will be

distributed to Creditors by the Plan Administrator in accordance with the terms of the Plan.

57. Sections 5.4 through 5.6 of the Plan provide for the appointment of a Plan

Administrator in order to, among other things: (a) consummate the Sale, (b) make

distributions to certain Classes of Creditors, (c) prosecute objections to Claims and

compromise or settle any Claims, and (d) wind-down the Debtors’ affairs.

58. Section 5.7 of the Plan provides for the appointment of a Litigation

Administrator for the purposes of pursuing Chapter 5 Claims and Other Claims for the

benefit of Class 1 Senior Secured Loan Claims and Class 5 Class 5 General Unsecured

Claims. The proceeds of any Chapter 5 Claims (less amounts used to cover any shortfall in

any Reserve Funds) will be shared between the Holders of Class 5 General Unsecured

Claims and the Holders of Senior Secured Claims in a priority order and percentage set

forth in the Plan, which has been agreed-to between the Committee and the Holders of

Senior Secured Loan Claims. The Plan provides for the establishment of a Plan Expense

Reserve Fund, which will be used to satisfy any costs and obligations in connection with the

administration of the Plan after the Effective Date.

59. The Debtors submit that the forgoing provisions in the Plan, together with the

documents and agreements contemplated therein, provide adequate means for

implementing the Plan as required by section 1123(a)(5) of the Bankruptcy Code.

f. Section 1123(a)(6): NOT APPLICABLE


23

60. Section 1123(a)(6) of the Bankruptcy Code requires that a debtor’s corporate

documents prohibit the issuance of non-voting equity securities and requires an amendment

of a debtor’s charter to so provide. See 11 U.S.C. § 1123(a)(6). The Plan provides for the

liquidation of the Debtors and the cancellation of all Equity Interests in the Debtors. Neither

the Debtors nor the Post-Confirmation Debtor will issue any equity securities. Therefore,

section 1123(a)(6) of the Bankruptcy Code is not applicable to the Plan.

g. Section 1123(a)(7): Directors and Officers

61. Section 1123(a)(7) of the Bankruptcy Code requires that a plan “contain only

provisions that are consistent with the interests of creditors and equity security holders and

with public policy with respect to the manner of selection of any officer, director, or trustee

under the plan and any successor to such officer, director, or trustee.” 11 U.S.C. §

1123(a)(7).

62. The Plan provides that on the Effective Date, the Plan Administrator will be

deemed the sole shareholder, officer and director of the Post-Confirmation Debtors in order

to effectively administer the Plan. See Plan § 5.4. Timothy Boates, the Debtors’ current

CRO, has been designated in the Plan as the proposed Plan Administrator based upon his

familiarity with the Debtors’ operations as well as his understanding of the Plan and these

chapter 11 cases. The Plan provides for the CRO’s removal by the Bankruptcy Court upon

a showing of good cause. See Plan § 5.5. The Debtors submit that the appointment

contemplated by the Plan, as well as the corresponding oversight, removal, and replacement

procedures provided therein, are consistent with the interests the Debtors’ creditors and

consistent with public policy.

iii. Section 1123(b)


24

63. Section 1123(b) of the Bankruptcy Code sets forth certain permissive

provisions that may be incorporated into a chapter 11 plan. The contents of the Plan are

consistent with these provisions.

a. Section 1123(b)(1): Impairment and Non-Impairment of Claims

64. Section 1123(b)(1) provides that a plan “may impair or leave unimpaired any

class of claims, secured or unsecured, or of interests.” 11 U.S.C. § 1123(b)(1). As described

above, the Plan deems the Voting Classes and Deemed Rejecting Classes Impaired and

Class 4 (Other Priority Claims) Unimpaired. Therefore, the Plan is consistent with section

1123(b)(1) of the Bankruptcy Code.

b. Section 1123(b)(2): Executory Contracts and Unexpired Leases

65. Section 1123(b)(2) allows a plan to provide for assumption, assumption and

assignment, or rejection of executory contracts and unexpired leases pursuant to section 365

of the Bankruptcy Code.

66. Subject to the occurrence of the Effective Date, the confirmation of the Plan

will constitute approval of the assumption of the leases and executory contracts listed on

Exhibit 1 (the “Schedule of Assumed Contracts”) annexed to the proposed order confirming

the Debtors’ Plan. Confirmation of the Plan will also act as an approval of the assignment

of the leases and executory contracts to the Purchaser. See Plan § 7.1.

67. The Plan provides for the creation of a Cure Claim Reserve Fund in the event

there are outstanding Cure Cost/Assignment Objections at the time the Plan is confirmed

and to the extent the APA does not require the Purchaser of the Debtors’ assets to pay all

cure amounts of assumed contracts. While the Debtors are working diligently to resolve all


25

of the Cure Cost/Assignment Objection prior to confirmation of the Plan, the Plan has

safeguarded against the possibility that certain Objection may not promptly be resolved.

68. The Plan also constitutes a motion under section 365(a) of the Bankruptcy

Code for authorization to reject certain executory contracts and unexpired leases not

previously assumed, assigned or rejected. Except as otherwise set forth in the Plan, the

Debtors intend to reject the executory contracts and unexpired leases identified on Exhibit 2

(the “Schedule of Rejected Executory Contracts and Unexpired Leases”) annexed to the

proposed order confirming the Plan as of the effective dates set forth therein.5 Any

executory contract or unexpired lease that is not assumed by the Purchaser or identified on

the Schedule of Rejected Executory Contracts and Unexpired Leases will be deemed

rejected by the Debtors upon confirmation of the Plan.

69. All Non-Debtor Counterparties have received adequate notice of any and all

Cure Costs existing under their executory contracts and unexpired leases, as well as the

proposed assumption of their contracts or leases by the Purchaser. Accordingly, the

provisions of Article 7 of the Plan are permitted by section 1123(b)(2) of the Bankruptcy

Code.

c. Section 1123(b)(3): Settlements and Retention of Claims

70. Section 1123(b)(3) of the Bankruptcy Code provides that a plan may “provide

for (a) the settlement or adjustment of any claim or interest belonging to the debtor or to the

5 See DIESEL USA, Inc., Case No. 19-10432 (MFW), Docket No. 116, Confirmation Order ¶ 8 (April 12, 2019) (On April 12, 2019, United States Bankruptcy Judge for the District of Delaware, Mary F. Walrath, entered the Findings of Facts, Conclusions of Law and Order (I) Approving the Disclosure Statement and (II) Confirming the First Amended Chapter 11 Plan of Reorganization of Diesel USA, Inc. (the “Confirmation Order”), which, among other things, provided for an effective date of rejection for certain unexpired leases as of “[t]he later of the Plan Effective Date and the date of surrender of the premises”); see also DIESEL USA, Inc., Case No. 19-10432 (MFW), Docket No. 89, First Amended Plan Supplement, Exhibit A, Amended Rejection Schedule (April 5, 2019) (Identifying those unexpired leases to be rejected as of “[t]he later of the Plan Effective Date and the date of surrender of the premises”).


26

estate; or (b) the retention and enforcement by the debtor, by the trustee, or by a

representative of the estate appointed for such purpose, of any such claim or interest.” 11

U.S.C. § 1123(b)(3).

71. On the Effective Date, any right, claim or cause of action, belonging to the

Debtors or their estates against any Person or Entity, including without limitation, any

Chapter 5 Claims, that was not previously released by the Debtors or released in the Plan

will be retained by the Post-Confirmation Debtors, to the extent not previously adjudicated,

assigned and/or released. The Plan contemplates the appointment of a Litigation

Administrator who will be responsible for pursuing, settling, or releasing all Chapter 5

Claims and Other Claims for the benefit of the Debtors’ Class 1 Senior Secured Claimants

and Class 5 General Unsecured Claimants. Further, the Plan Administrator will be

responsible for pursuing Other Claims under the APA, if any, belonging to the Debtors or

their estates. The Debtors submit that these provisions of the Plan comply with section

1123(b)(3) of the Bankruptcy Code.

d. Section 1123(b)(4): Sale of Property and Distribution of Proceeds

72. Section 1123(b)(4) of the Bankruptcy Code permits a plan to provide for the

sale of all or substantially all of the property of the estate, and the distribution of the

proceeds of the sale among holders of claims or interests. See 11 U.S.C. 1123(b)(4).

73. As discussed in detail in the Disclosure Statement, this Memorandum of Law,

and various other documents filed in these chapter 11 cases, the Plan provides for the sale of

substantially all of the Debtors’ assets to the Purchaser and subsequent distribution of the

proceeds from such Sale to the Debtors’ Creditors. Liquidating plans such as the Plan

proposed by the Debtors which contemplate a sale of substantially all of a debtor’s assets


27

and subsequent distribution of assets have consistently been found to be permissible under

the Bankruptcy Code. See, e.g., Solow v. PPI Enters. (U.S.), Inc. (In re PPI Enters. (U.S.), Inc.,

324 F.3d 197, 211 (3d Cir. 2003) (“the Code clearly contemplates liquidating plans under 11

U.S.C. § 1123(b)(4)”); Coolwater LLC v. Camp Arrowhead (In re Camp Arrowhead), 2010 U.S.

Dist. LEXIS 4970, at *16 (W.D. Tex. Jan. 22, 2010) (“While it is true that a Chapter 11

debtor must demonstrate an ability to effectuate a viable plan of reorganization, the Debtor

may propose a liquidating plan, which is permitted under Section 1123(b)(4).”).

Accordingly, the Debtors’ Plan is permitted by and complies with section 1123(b)(4) of the

Bankruptcy Code.

e. Section 1123(b)(5): Modification of Rights of Holders of Claims

74. Section 1123(b)(5) provides that a plan may “modify the rights of holders of

secured claims, other than a claim secured only by a security interest in real property that is

the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the

rights of holders of any class of claims.” 11 U.S.C. § 1123(b)(5).

75. As permitted by section 1123(b)(5) of the Bankruptcy Code, the Plan modifies

the rights of Holders of Claims and Interests in the Voting Classes and Deemed Rejecting

Classes. The Plan leaves unaffected the rights of holders of Class 4 Claims.

f. Section 1123(b)(6): Other Provisions

76. Section 1123(b)(6) of the Bankruptcy Code provides that a Plan may “include

any other appropriate provision not inconsistent with the applicable provisions of this title.”

11 U.S.C. § 1123(b)(6). The Debtors’ Plan includes additional provisions which are not

inconsistent with applicable sections of the Bankruptcy Code, including, but not limited to:

(i) Plan § 5.4 (appointment of Plan Administrator); (ii) Plan § 5.8 (appointment of Litigation


28

Administrator); (iii) Plan § 5.10 (establishment of Plan Expense Reserve Fund); Plan § 6.4

(establishment of Disputed Claims Reserve); Plan § 6.8 (no distributions of less than twenty

($20) dollars); Plan § 7.4 (establishment of Cure Claim Reserve Fund); Plan § 11.6

(exculpation in favor of the Released Parties); Plan § 11.7 (releases by the Debtors and their

estates of the Released Parties); Plan § 11.8 (injunction against actions outside of the Plan).

The Debtors submit that all provisions of Plan, including those described herein, are

consistent with the Bankruptcy Code, and thus, the Plan complies with section 1123(b)(6) of

the Bankruptcy Code.

iv. Section 1123(d): Cure of Defaults INAPPLICABLE

77. Section 1123(d) of the Bankruptcy Code provides that, “if it is proposed in a

plan to cure a default the amount necessary to cure the default shall be determined in

accordance with the underlying agreement and applicable nonbankruptcy law.” 11 U.S.C. §

1123(d).

78. The Debtors do not believe that any such default exists and, therefore, the

Debtors submit that the Plan complies with the applicable provisions sections 1122 and

1123 of the Bankruptcy Code and meets the requirements of section 1129(a)(1) of the

Bankruptcy Code.

B. Section 1129(a)(2): Compliance with Sections 1125 and 1126 of the Bankruptcy Code

79. Section 1129(a)(2) of the Bankruptcy Code requires that the proponent of a

plan comply with the applicable provisions of the Bankruptcy Code. 11 U.S.C. § 1129(a)(2).

The legislative history of section 1129(a)(2) reflects that this provision is intended to

encompass the disclosure and solicitation requirements under sections 1125 and 1126 of the

Bankruptcy Code. See H.R. Rep. No. 95-595, at 412 (1977); S. Rep. No. 95-989, at 126


29

(1978) (“Paragraph (2) [of § 1129(a)] requires that the proponent of the plan comply with the

applicable provisions of chapter 11, such as section 1125 regarding disclosure.”); see also In re

PWS Holding Corp., 228 F.3d 224, 248 (3d Cir. 2000).

80. As previously noted, this Court has already approved the Debtors’ Disclosure

Statement pursuant to section 1125 as containing “adequate information” of a kind and in

sufficient detail to enable hypothetical reasonable investors typical of the Debtors’ creditors

to make an informed judgment whether to accept or reject the Plan. See Disclosure

Statement Order.

81. Section 1126 of the Bankruptcy Code specifies the requirements for

acceptance of a plan. In addition to approving the Debtors’ Disclosure Statement, the Court

also approved the Debtors’ Solicitation Procedures with respect to voting on the Plan.

Under section 1126, only holders of allowed claims and allowed equity interests in impaired

classes of claims or equity interests that will receive or retain property under a plan on

account of such claims or equity interests may vote to accept or reject such plan. See 11

U.S.C. § 1126. As set forth in the Certification of Ballots, the Debtors only solicited votes

on the Plan from holders of Claims in the Voting Classes, and have otherwise have fully

complied with the Solicitation Procedures and Disclosure Statement Order regarding

solicitation and tabulation of votes on the Plan. Moreover, the Debtors gave proper notice

to all Creditors of the Confirmation Objection Deadline, as well as the time and date of the

Confirmation Hearing by promptly serving the Confirmation Hearing Notice as part of each

respective Creditor’s Solicitation Package.


30

82. Based on the foregoing, the Debtors submit that the requirements of section

1125 and 1126 of the Bankruptcy Code have been satisfied and as such the Debtors have

complied with section 1129(a)(2) of the Bankruptcy Code.

C. Section 1129(a)(3): Plan Proposed in Good Faith

83. Section 1129(a)(3) of the Bankruptcy Code requires that a chapter 11 plan be

“proposed in good faith and not by any means forbidden by law.” 11 U.S.C. § 1129(a)(3). In

particular, “[g]ood faith should be evaluated ‘in light of the totality of the circumstances

surrounding establishment of [the] plan,’ mindful of the purposes underlying the Bankruptcy

Code. In re Chemtura Corp., 439 B.R. 561, 608 (Bankr. S.D.N.Y. 2010) (quoting In re Madison

Hotel Assocs., 749 F.2d 410, 425 (7th Cir. 1984)). “Whether a reorganization plan has been

proposed in good faith must be viewed in the totality of the circumstances, and the

requirement of Section 1129(a)(3) ‘speaks more to the process of plan development than to

the content of the plan.’” Id. (quoting In re Bush Indus., Inc., 315 B.R. 292, 304 (Bankr.

W.D.N.Y. 2004)). Moreover, “The term ‘good faith’ . . . is generally interpreted to mean

that there exists a reasonable likelihood that the plan will achieve a result consistent with the

objectives and purposes of the Bankruptcy Code.” In re Chassix Holdings, Inc., 533 B.R. 64,

74 (Bankr. S.D.N.Y. 2015).

84. The Debtors submit that the Plan was proposed with the legitimate and

honest purpose of maximizing the value of the Debtors’ estates and to effectuate a

distribution of such value to the Debtors’ Creditors, and therefore was proposed in good

faith. The Plan provides for the approval of the APA, which was the product of arm’s

length bargaining among the Purchaser and key constituencies in these chapter 11 cases.

The Plan also provides for the distribution of proceeds following the Sale in a manner that is


31

consistent with the Bankruptcy Code. The good faith of the Plan is further evidenced by the

fact that the Debtors’ Class 1 Senior Secured Loan Voting Class and Class 5 General

Unsecured Claim Voting Class voted in its favor, which demonstrates the informed

judgment of such Creditors that the Plan is in their best interests. Accordingly, the Debtors

submit that the Plan complies with Section 1129(a)(3) of the Bankruptcy Code.

D. Section 1129(a)(4): Payment of Services and Expenses is Subject to Bankruptcy Court Approval

85. Section 1129(a)(4) of the Bankruptcy Code requires that any payments by a

debtor “for services or for costs and expenses in or in connection with the case, or in

connection with the plan and incident to the case,” either be approved by the Bankruptcy

Court as reasonable or subject to approval of the Bankruptcy Court as reasonable. 11 U.S.C.

§ 1129(a)(4). In essence, this subsection requires that any and all fees promised or received

from the estate in connection with or in contemplation of a chapter 11 case must be

disclosed and made subject to the court’s approval. Davis v. Elliot Mgmt. Corp. (In re Lehman

Bros. Holdings Inc.), 508 B.R. 283, 294 n. 9 (S.D.N.Y. 2014) (“Section 1129(a)(4) is partly

focused on ensuring disclosure of payments made in connection with the plan, but not

written into the plan.”); In re Journal Register Co., 407 B.R. 520, 537 (Bankr. S.D.N.Y. 2009);

see In re Johns-Manville Corp., 68 B.R. 618, 632 (Bankr. S.D.N.Y. 1986) (implying that court

must be permitted to review and approve reasonableness of professional fees made from

estate assets).

86. In these chapter 11 cases, only the Debtors’ retained professionals and the

Creditors Committee’s counsel are requesting payment which qualifies for disclosure under

section 1129(a)(4). Pursuant to section 2.3 of the Plan, each Professional requesting

compensation for services provided during these chapter 11 cases and incurred prior to the


32

Effective Date of the Plan is required to submit an application for allowance of final

compensation and reimbursement of expenses before the forty-fifth (45th) day after the

Effective Date. For fees incurred after the Effective Date, the Plan Administrator is granted

the authority to review and object to all requests for payment for post-Effective Date services

provided, which review is subject to further Bankruptcy Court review in the event of a

dispute regarding any post-Effective Date Professional Fee Claims. Given the procedures

provided in the Plan regarding Professional Fee Claims, the Debtors submit that the Plan

satisfies section 1129(a)(4) of the Bankruptcy Code.

E. Section 1129(a)(5): Disclosure Regarding Post-Confirmation Directors, Management, and Insiders

87. Section 1129(a)(5)(A)(i) of the Bankruptcy Code requires that the plan

proponent disclose the identity and affiliations of any individual proposed to serve, after

confirmation of a plan, as director, officer or voting trustee of the debtor, an affiliate of the

debtor participating in a joint plan with the debtor, or a successor to the debtor under the

plan. Further, section 1129(a)(5) requires that the appointment of such individual be

“consistent with the interests of creditors and equity security holders and with public policy .

. . .” 11 U.S.C. § 1129(a)(5)(A)(ii).

88. The Plan complies with section 1129(a)(5)(A)(i) of the Bankruptcy Code. The

Plan discloses the appointment of the Debtor’s current CRO as Plan Administrator to

consummate the Sale, complete the Debtor’s wind-down, and to make distributions to

certain Classes of Creditors entitled to receive distributions. See Plan §§ 1.52, 5.4 (“[o]n the

Effective Date and automatically and without further action, the Plan Administrator shall

be deemed the sole shareholder, officer and director of the Post-Confirmation Debtors…”).

The Plan also discloses the establishment of a Litigation Administrator designated by the


33

Creditors Committee to pursue Chapter 5 Claims and Other Claims on behalf of certain

Classes of Creditors. See Plan § 5.4, 5.8. The Plan relates solely to the Debtor and not to any

other person or entity. Thus, the Plan complies with section 1129(a)(5)(A)(i) of the

Bankruptcy Code to the extent applicable.

89. The Plan also complies with section 1129(a)(5)(A)(ii) of the Bankruptcy

Code. The appointment of the Debtors’ CRO is entirely consistent with the interests of the

holders of Claims against and Equity Interests in the Debtors and with public policy. The

Debtors’ CRO was selected after an extensive interview process, and has a complete

knowledge of the Debtors’ operations, bankruptcy cases, and Plan such that the Plan can be

implemented in an efficient and cost-effective manner. Further, the Senior Secured Loan

Creditors and the Creditors Committee have not expressed any concerns regarding the

Debtors’ CRO acting as Plan Administrator. Accordingly, the Debtors submit that the

requirements of section 1129(a)(5) are satisfied.

F. Section 1129(a)(6): NOT APPLICABLE

90. Section 1129(a)(6) of the Bankruptcy Code requires, with respect to a debtor

whose rates are subject to governmental regulation following confirmation, that appropriate

governmental approval has been obtained for any rate change provided for in the plan, or

that such rate change be expressly conditioned on such approval. 11 U.S.C. §1129(a)(6).

Section 1129(a)(6) of the Bankruptcy Code does not apply to the Plan as there is no

governmental regulatory commission that has jurisdiction over any rates of the Debtor.

G. Section 1129(a)(7): “Best Interests” Test

91. The Bankruptcy Code protects creditors and equity holders who are impaired

by a plan and who have not voted to accept a plan through the “Best Interests” test of


34

section 1129(a)(7). The Best Interests test requires that, with respect to each impaired class

of claims or interests, each holder of a claim in such classes has either accepted the plan, or

will receive property of a value not less than what such holder would receive if the debtor

were liquidated under chapter 7. See 11 U.S.C. § 1129(a)(7)(A)(ii); see also In re Jennifer

Convertibles, Inc., 447 B.R. 713, 724 (Bankr. S.D.N.Y. 2011).

92. The Debtors believe that the holders of Claims against and Equity Interests

in the Debtors will have an equal or greater recovery as a result of the Sale and under the

Plan than could be realized in a chapter 7 liquidation. The Plan provides for the

liquidation of the Post-Confirmation Debtors, and the Debtors are not seeking to require

Creditors to accept non-cash consideration so that the Debtors can pursue going-concern

value. Therefore, the only question remaining is whether non-accepting, Impaired

Creditors will have recovered more (or at least as much) under the Plan than they would

recover through an asset liquidation by a chapter 7 trustee.

93. Attached to the Debtors’ Disclosure Statement as Exhibit B is a liquidation

analysis (the “Liquidation Analysis”) which shows that Creditors are projected to realize

approximately $5.0 million less in a chapter 7 liquidation than the projected net recovery

from the Stalking Horse Bid in a going concern sale. If the Debtors’ assets are liquidated by

a chapter 7 trustee, the Debtors project that the maximum recovery for all Creditors would

be substantially less than what will be recovered if the Plan is confirmed and the Sale is

consummated. The Debtors intend to reduce virtually all of their assets to Cash through

selling substantially all of their assets to the Purchaser. In anticipation of the Sale, the

Debtors have already established systems and protocols for the efficient disposition of their

assets. The significantly increased costs and expenses of a chapter 7 liquidation, including


35

fees payable to a chapter 7 trustee, as well as the accompanying delay in the liquidation of

the Debtors’ assets, will only further decrease recoveries below that which will be recovered

through confirmation of the Plan and consummation of the Sale. Accordingly, the Debtors

submit that the Plan satisfies the Best Interests Test of section 1129(a)(7) with respect to all

Classes in the Plan.

H. Section 1129(a)(8): Acceptance by All Impaired Classes

94. Section 1129(a)(8) of the Bankruptcy Code requires that each class of claims

or interests under a plan has either accepted the plan or is not impaired under the plan. All

holders of Claims in Classes entitled to vote on the Plan received Solicitation Packages and

were given adequate opportunity to accept or reject the Plan. See Certification of Ballots.

With respect to holders of Claims in Class 4 whose claims are unimpaired, such claimants

have been “conclusively presumed” to have accepted the plan and need not be further

examined under section 1129(a)(8). See 11 U.S.C. 1126(f).

95. As set forth in the Certification of Ballots, Classes 1 and 5 have affirmatively

voted in favor of the Plan, which Classes are Impaired and eligible to vote on the Plan

(together with Class 4, the “Accepting Classes”). Therefore, section 1129(a)(8) is satisfied

with respect to the Accepting Classes.

96. The Plan does not satisfy section 1129(a)(8) of the Bankruptcy Code,

however, with respect to the Rejecting Classes. As described below, however,

notwithstanding the Rejecting Classes’ affirmative and automatic rejections of the Plan, the

Plan may still be confirmed pursuant to the “cramdown” provisions of section 1129(b) of

the Bankruptcy Code.

I. Section 1129(a)(9): Payment in Full of Allowed Priority Claimants


36

97. Section 1129(a)(9) of the Bankruptcy Code requires that certain priority

claims be paid in full on the effective date of a plan. The Debtors’ Plan satisfies each of the

requirements of section 1129(a)(9).

98. First, with respect to Allowed Administrative Claims (i.e., § 507(a)(2) and §

507(a)(3) claims), the Plan provides that such Claims will be paid: (i) the full amount thereof,

without interest, in Cash, as soon as practicable after the later of (a) the Effective Date, (b) the

date on which such Claim becomes an Allowed Claim, or (c) such other date as the holder

of an Allowed Administrative Claim and the Debtors might otherwise agree, or (ii) such

lesser amount as the holder of an Allowed Administrative Claim and the Debtors might

otherwise agree on such date as the holder of an Allowed Administrative Claim and the

Debtors might otherwise agree. See Plan § 2.2 (emphasis added).

99. Second, with respect to Other Priority Claims (all Priority Claims except

Priority Tax Claims) under section 507 of the Bankruptcy Code, the Plan provides that

“[o]n the Effective Date, or as soon thereafter as is reasonably practicable, each holder of an

Allowed Other Priority Claim will receive in full and final satisfaction of such Allowed

Other Priority Claim, except to the extent that such holder agrees to a less favorable

treatment, payment in full in Cash out of the Senior Claims Reserve Fund or other treatment

rendering such Claim Unimpaired.” Plan § 4.5 (emphasis added).

100. Third, with respect to Priority Tax Claims, the Plan provides that “[o]n the

Effective Date, or as soon thereafter as is reasonably practical, in full and final satisfaction

of such Allowed Priority Tax Claim, each holder of an Allowed Priority Tax Claim shall be

paid out of the Senior Claim Reserve Fund (a) an amount in Cash equal to the Allowed amount


37

of such Priority Tax Claim, or (b) such other treatment as to which the Debtors and the holder of such

Allowed Priority Tax Claim shall have agreed upon in writing.” Plan § 2.5 (emphasis added).

101. Based upon and Plan provisions set forth above, the Debtors submit that the

Plan satisfies section 1129(a)(9) of the Bankruptcy Code.

J. Section 1129(a)(10): Acceptance by at Least One Impaired Class

102. Section 1129(a)(10) of the Bankruptcy Code requires the affirmative

acceptance of a plan by at least one class of impaired claims, “determined without including

any acceptance of the plan by any insider.” 11 U.S.C § 1129(a)(10).

103. As previously described above and as evidenced by the Certification of

Ballots, holders of Claims in Classes 1 and 5 voted to accept the Plan, without including the

acceptance of the Plan by insiders within such Classes. See Certification of Ballots.

Therefore, the Debtors have satisfied section 1129(a)(10) of the Bankruptcy Code.

K. Section 1129(a)(11): Feasibility

104. Pursuant to section 1129(a)(11) of the Bankruptcy Code, a plan may be

confirmed only if “[c]onfirmation of the plan is not likely to be followed by the liquidation,

or the need for further financial reorganization, of the debtor or any successor to the debtor

under the plan, unless such liquidation or reorganization is proposed in the plan.” 11 U.S.C.

§ 1129(a)(11).

105. Since the Plan expressly provides for the liquidation of the Debtors’ assets,

section 1129(a)(11) of the Bankruptcy Code is satisfied. See In re Revco, 131 B.R. 615, 622

(Bankr. N.D. Ohio 1990) (holding that “[s]ection 1129(a)(11) is satisfied as the plan

provides that the property of [the] Debtors shall be liquidated”). The Debtors forecast that

the Cash payments to be made pursuant to the Plan will be funded through the amounts


38

obtained from the Sale and through the pursuit of Chapter 5 Claims. Further, the sale

proceeds and funding under the DIP Loan are projected to provide sufficient resources for

the Plan Administrator and the Litigation Administrator to timely meet all of the Post-

Confirmation Debtors’ obligations under the Plan. Accordingly, the Debtors submit that

the Plan meets the feasibility requirements of section 1129 of the Bankruptcy Code.

L. Section 1129(a)(12): Fees Payable Under 28 U.S.C. § 1930

106. Section 1129(a)(12) of the Bankruptcy Code requires the payment of “[a]ll

fees payable under section 1930 [of title 28 of the United States Code], as determined by the

court at the hearing on confirmation of the plan.” 11 U.S.C. § 1129(a)(12). Section 507 of

the Bankruptcy Code provides that “any fees and charges assessed against the estate under

[section 1930 of] chapter 123 of title 28” are afforded priority as administrative expenses. 11

U.S.C. § 507(a)(2). In accordance with these provisions, the Debtors submit that all fees

incurred and payable pursuant to section 1930 of title 28 of the United States Code shall be

paid in accordance with the section 2.2 of the Plan (payment of Allowed Administrative

Claims) on the Effective Date, or thereafter as and when they become due and owing until

entry of final decrees closing the Debtors’ chapter 11 cases. Thus, the Plan satisfies section

1129(a)(12) of the Bankruptcy Code.

M. Section 1129(a)(13): Retiree Benefits

107. Section 1129(a)(13) of the Bankruptcy Code requires that a plan provide for

the continuation, after the plan’s effective date, of all retiree benefits at the level established

by agreement or by court order pursuant to section 1114 of the Bankruptcy Code at any time

prior to confirmation of the plan, for the duration of the period that the debtor has obligated

itself to provide such benefits. 11 U.S.C. § 1129(a)(13).


39

108. While the Debtors do not believe that any retiree benefits (as defined by the

Bankruptcy Code) are owed at this time, the Debtors’ Plan provides for the payment of all

retiree benefits, if any, that are established or maintained by the Debtors prior to the

Effective Date. See Plan § 11.13. Accordingly, the Debtors submit that section 1129(a)(13)

of the Plan is satisfied.

N. Sections 1129(a)(14), (a)(15), and (a)(16): NOT APPLICABLE

109. Section 1129(a)(14) of the Bankruptcy Code relates to the payment of

domestic support obligations. The Debtors are not subject to any domestic support

obligations and, as such, section 1129(a)(14) does not apply. Section 1129(a)(15) of the

Bankruptcy Code applies only in cases in which the debtor is an “individual” (as that term is

defined in the Bankruptcy Code). None of the Debtors are “individuals” and, accordingly,

section 1129(a)(15) is inapplicable. Section 1129(a)(16) of the Bankruptcy Code applies to

transfers of property by a corporation or trust that is not a moneyed, business, or

commercial corporation or trust. All of the Debtors are businesses and accordingly, section

1129(a)(16) is inapplicable.

O. Section 1129(b): Cramdown

110. Section 1129(b) of the Bankruptcy Code provides a mechanism for

confirmation of a plan in circumstances where not all impaired classes of claims and equity

interests vote to accept a plan. This mechanism is known colloquially as “cram down.”

111. Section 1129(b) provides, in pertinent part:

[I]f all of the applicable requirements of [section 1229(a) of the Bankruptcy Code] other than [the requirement contained in section 1129(a)(8) that a plan must be accepted by all impaired classes] are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan


40

does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.

11 U.S.C. 1129(b)(1). Thus, pursuant to section 1129(b), a court may “cram down” a plan

over the rejection of such plan by impaired classes of claims or equity interests as long as the

plan does not “discriminate unfairly” and is “fair and equitable” with respect to such

classes. See, e.g., Kane v. Johns-Manville Corp., 843 F.2d at 650. Class 2 voted to reject the

Plan in addition to the Deemed Rejecting Classes. As such, the Debtors must satisfy section

1129(b) with respect to Class 2 as well as the Deemed Rejecting Classes.

i. The Plan Does Not Discriminate Unfairly

112. In general, courts have held that a plan unfairly discriminates in violation of

section 1129(b) of the Bankruptcy Code only if it provides materially different treatment for

creditors and interest holders with similar legal rights without compelling justifications for

doing so. See In re LightSquared, Inc., 513 B.R. 56, 99 (Bankr. S.D.N.Y. 2014); In re Lernout &

Hauspie Speech Prods., N.V., 301 B.R. 651, 661 (Bankr. D. Del. 2003) (permitting different

treatment of two classes of similarly situated creditors upon a determination that the debtors

showed a legitimate basis for such discrimination). A threshold inquiry for assessing

whether a proposed chapter 11 plan unfairly discriminates against a dissenting class is

whether the dissenting class is equally situated to a class allegedly receiving more favorable

treatment. See Johns-Manville Corp., 68 B.R. at 636 (finding no unfair discrimination where

interests of objecting class were not similar or comparable to those of any other class).

113. With respect to the holders of Junior Secured Claims in Class 2, there are no

similarly situated Classes receiving more favorable treatment under the Plan. Holders of

Claims in Class 2 are junior and subordinate pursuant to an intercreditor agreement to the


41

Senior Secured Loan Claims of Class 1 and are entitled to receive the net proceeds, if any,

from the Sale to the extent such proceeds exceed the Senior Secured Loan Claims are

satisfied. The projected proceeds from the Sale will be insufficient to satisfy the Senior

Secured Loan Claims in full. As a result, under the intercreditor agreement, the Holder of

Class 2 Junior Secured Claim is contractually not entitled to receive any distribution from

the Sale proceeds.

114. Furthermore, the Plan does not discriminate against the Deemed Rejecting

Classes. There are no similarly situated classes receiving more favorable treatment under

the Plan. The Deemed Rejecting Classes include Class 6 Intercompany Claims – which

have been entirely expunged as a result of the Substantive Consolidation Order – and Class

7 Equity Interests. No other Class of Claims in the Debtors’ Plan is similarly situated to

Class 6 or Class 7. Therefore, the Plan does not discriminate unfairly against these Classes

in contravention of section 1129(b)(1) of the Bankruptcy Code.

ii. The Plan is Fair and Equitable

a. Class 2 Junior Secured Claims

115. A plan is “fair and equitable” with regard to a secured creditor if it provides:

(i) that the secured creditor retains a lien securing such claim and receives "deferred cash

payments" totaling allowed amount of such claim, (ii) that the property is sold with the

secured creditor's liens attaching to proceeds of sale, or (iii) that the secured creditor receives

"indubitable equivalent" of its claim. See 11 U.S.C. § 1129(b)(2)(A)(i)-(iii); see also In re Fur

Creations by Varriale, Ltd., 188 B.R. 754, 761 (Bankr. S.D.N.Y. 1995).

116. The Plan is “fair and equitable” as to the holders of claims in Class 2 as such

claimants’ liens attach to the proceeds of the Sale. See Plan § 4.3. Specifically the Plan


42

provides that Junior Secured Loan Claims shall receive “the net proceeds, if any, from the

Sale or other disposition of the Estate Assets which secure such Claims, after payment, in

full, of any other claims that hold a security interest in the Estate Assets that is senior to the

Junior Secured Loan Claims’ interest…” Id. Further, the projected proceeds from the Sale

will be insufficient to satisfy the Senior Secured Loan Claims in full. As a result, under the

intercreditor agreement, the Holder of Class 2 Junior Secured Claim is contractually not

entitled to receive any distribution from the Sale proceeds so it is receiving the "indubitable

equivalent" of its claim under the Plan. Accordingly, the Debtors submit that the Plan is

“fair and equitable” with respect to Class 2.

b. Deemed Rejecting Classes

117. A plan is “fair and equitable” with respect to an impaired class of unsecured

claims or interests that rejects a plan (or is deemed to reject a plan) if it follows the “absolute

priority” rule. See 11 U.S.C. § 1129(b)(2)(B)(ii) & (C)(ii); Bank of Am. Nat. Trust & Sav. Ass’n

v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 441-42 (1999). The Absolute Priority Rule is

satisfied with respect to a class of impaired unsecured claims or interests so long as the

holder of any claim or interest that is junior to the claims or interests of such class will not

receive or retain any property under the plan on account of such junior claim or interest. See

11 U.S.C. 1129(b)(2)(B)(ii) and (C)(ii). The Plan satisfies the absolute priority rule with

respect to the Deemed Rejecting Classes as there are no Claims against or Interests in the

Debtors that are junior to those of the Deemed Rejecting Classes.

118. The Plan does not violate the “fair and equitable” requirement of section

1129(b)(2) with regard to Class 2 or the Deemed Rejecting Classes and does not unfairly


43

discriminate against such Classes pursuant to section 1129(b)(1). Accordingly, the Plan

meets the cram down requirements of section 1129(b) of the Bankruptcy Code.

P. Section 1129(c): Only One Plan

119. Subject to certain conditions, section 1129(c) of the Bankruptcy Code requires

that the Court confirm only one plan. The Plan is the only plan being confirmed in these

chapter 11 cases and, therefore, section 1129(c) is satisfied.

Q. Section 1129(d): Principal Purpose of the Plan

120. Section 1129(d) of the Bankruptcy Code states that “the court may not

confirm a plan if the principal purpose of the plan is the avoidance of taxes or the avoidance

of the application of section 5 of the Securities Act of 1933.” The principal purpose of the

Plan is not the avoidance of taxes or the application of section 5 of the Securities Act of

1933. Moreover, no party that is a governmental unit, or any other entity, has requested

that the Court decline to confirm the Plan on the grounds that the principal purpose of the

Plan is the avoidance of taxes or the avoidance of the application of section 5 of the

Securities Act of 1933. Thus, the Debtors submit that the Plan satisfies the requirements of

section 1129(d) of the Bankruptcy Code.

R. Section 1129(e): NOT APPLICABLE

121. None of the Debtors’ chapter 11 cases are a “small business case” as defined

in the Bankruptcy Code and, accordingly, section 1129(e) of the Bankruptcy Code is

inapplicable to the Debtors’ Plan.

IV. THE EXCULPATIONS, RELEASES, AND INJUNCTIONS IN THE PLAN SHOULD BE APPROVED

122. The Debtors request approval of certain exculpations, releases, and

injunctions in favor of the “Released Parties.” The Released Parties include: (i) the Debtors’


44

former and current directors, officers, chief restructuring officer, members, shareholders,

employees and agents, attorneys, financial advisors (including such attorneys’ and financial

advisors’ successors or assigns, and any direct or indirect members, managing members,

owners, employees, officers, shareholders or directors), (ii) RAS Management, (including its

successors or assigns, and any direct or indirect members, managing members, owners,

employees, officers, shareholders or directors), and (iii) the Plan Administrator.

123. All injunctive, release and exculpation provisions were all included in the

Plan and Disclosure Statement and the release provision was written in capitalized typeface

in order to draw attention to this provision to ensure its due consideration by holders of

Claims entitled to vote on the Plan. These provisions are appropriate because, among other

things, they were a necessary aspect of the Plan development process and are crucial to the

implementation of the Plan. Moreover, they have been overwhelmingly accepted by holders

of Senior Secured Claims and General Unsecured Claims, which Classes have

overwhelmingly voted to accept the Plan. Further, no objections to these provisions have

been submitted by the Confirmation Objection Deadline and the based on subsequent

negotiations with the Committee, potential claims which are covered by the Debtors’

Directors & Officers Insurance Policy are expressly carved out of the Release provision.

The Debtors, therefore, submit that the exculpations, releases, and injunctions should be

approved in all respects.

124. Exculpation

125. Section 11.6 of the Plan provides for an exculpation limiting the liability of

the Released Parties for acts or omissions in connection with, related to, or arising out of the

Debtors’ chapter 11 cases. The provision exculpates the Released Parties, including the


45

Debtors’ professionals, who have played significant roles in connection with the success of

these chapter 11 cases and the Plan. Further, the exculpation provision does not relieve any

party of liability for gross negligence or willful misconduct.

126. The Released Parties played key roles in negotiating and formulating the

Plan, have significantly contributed to the Plan and to these chapter 11 cases, and the

cooperation of each Party is necessary to implement the provisions of the Plan. The

significant efforts of the Released Parties have also lead to the Debtors’ proposed Sale,

which will maximize potential recoveries available to Creditors. The exculpation provision

of the Plan will prevent collateral attacks against parties that have made substantial

contributions to these chapter 11 cases and have negotiated the chapter 11 plan that is

ultimately confirmed by the Court.

127. Further, exculpations like those contained in section 11.6 of the Plan, which

are limited to liability for acts and omissions related to these chapter 11 cases, other than

liability for fraud, willful misconduct and gross negligence, are viewed as reasonable and

customary in this jurisdiction. Indeed, courts have recognized that, without the protections

afforded by limited exculpation provisions, “negotiation of a [plan in a reorganization case]

would not…[be] possible.” In re Enron Corp., 326 B.R. 497, 501-03 (S.D.N.Y. 2005)

(endorsing the findings of the bankruptcy court concerning the propriety and justification for

the limited exculpation contained in that plan); see also In re Oneida Ltd., 351 B.R. 79, 94 n.

22 (Bankr. S.D.N.Y. 2006) (exculpation provision contained in chapter 11 plan which

provided for a release of prepetition and postpetition claims related to various matters

associated with confirmation of a chapter 11 plan “sufficiently narrow to be

unexceptionable.”).


46

128. Courts in the Second Circuit evaluate the appropriateness of similar

exculpation provisions based on a number of factors, including whether the plan was

proposed in good faith, whether the provision is integral to the plan, and whether the

exculpation provision was necessary for plan negotiations. See, e.g., In re Bally Total Fitness,

2007 WL 2779438 at *8 (finding exculpation, release and injunction provisions appropriate

because they were necessary to successful reorganization and integral to plan); Upstream

Energy Servs. v. Enron Corp. (In re Enron Corp.), 326 B.R. 497, 501, 503-04 (S.D.N.Y. 2005)

(affirming approval of exculpation provision where it was necessary to effectuate plan and

excluded gross negligence and willful misconduct; also noting that excising similar

exculpation provisions would “tend to unravel the entire fabric of the Plan, and would be

inequitable to all those who participated in good faith to bring it into fruition”). Thus, courts

have found that exculpation for participating in the chapter 11 process is appropriate when

the plan has been proposed in good faith and otherwise meets the requirements for plan

confirmation, and plan negotiations could not have occurred without protection from

liability for parties involved in those negotiations. See In re Drexel Burnham Lambert Group,

Inc., 960 F.2d at 293 (finding that where a debtor’s plan of reorganization requires the

settlement of numerous, complex issues, protection of third parties against legal exposure

may be a key component of the settlement).

129. The exculpation provision of the Plan is wholly justified, properly limited,

and should be approved. The exculpation provision is appropriately crafted so as to insulate

those parties whose efforts have been instrumental in connection with the formulation and

development, confirmation and consummation of the Plan, as well as the consummation of

the Sale, from certain types of liability. Moreover, the exculpation provision, including its


47

carve-out for fraud, willful misconduct and gross negligence, is entirely consistent with

established practice in this circuit. See, e.g., In re DBSD N. Am., Inc., 419 B.R. 179, 217-18

(Bankr. S.D.N.Y. 2009), aff’d in part, rev’d in part, 627 F.3d 496 (2d Cir. 2010); ACC

Bondholder Grp. v. Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.), 368 B.R. at 267

(same). Accordingly, the Released Parties should be provided the exculpations set forth in

Section 11.6 of the Plan.

A. Releases

130. Section 11.7 of the Plan provides for releases of the Released Parties by the

Debtors and their estates from any claims and liabilities, whether known or unknown, and

whether existing before, as of, or after the occurrence of the Effective Date, in any way

arising, directly or indirectly, or connected with, the Debtors and their Estates, these chapter

11 cases, or the Plan (collectively, the “Releases”). The Releases do not apply, however, to

acts or omissions of the Debtors’ current directors and officers, the CRO, the Debtors’

professionals, and their respective representatives, that are determined in a final order to

constitute gross negligence or willful misconduct.

131. A plan that proposes to release a claim or cause of action belonging to a

debtor is considered a “settlement” for purposes of satisfying section 1123(b)(3)(A) of the

Bankruptcy Code. Settlements pursuant to a plan are generally subject to the same

“reasonable business judgment” standard applied to settlements under Rule 9019 of the

Bankruptcy Rules, which provides: “after notice and a hearing, the court may approve a

compromise or settlement.” Fed. R. Bankr. P. 9019. See In re Bally Total Fitness, 2007 WL

2779438, at *12 (“To the extent that a release or other provision in the Plan constitutes a

compromise of a controversy, this Confirmation Order shall constitute an order under


48

Bankruptcy Rule 9019 approving such compromise.”); In re Spiegel, Inc., No. 03-11540, 2005

WL 1278094, at * 11 (Bankr. S.D.N.Y. May 25, 2005) (approving releases pursuant to

section 1123(b)(3) of the Bankruptcy Code and Rule 9019 of the Bankruptcy Rules). The

legal standard for determining the propriety of a bankruptcy settlement is whether it is in the

“best interests of the estate and does not fall below the lowest point in the range of

reasonableness. See Plaza Equities LLC v. Pauker (In re Copperfield Invs., LLC), 401 B.R. 87, 91

(Bankr. E.D.N.Y. 2009); In re Purofied Down Prods. Corp., 150 B.R. 519, 523 (S.D.N.Y.

1993).

132. The Debtors submit that the Releases are reasonable and satisfy the standards

set forth above. The Released Parties, including the Debtors’ professionals, current

Directors and Officers, and CRO, have each respectively devoted substantial time and effort

to the consummation of the Sale, the effectuation of the Plan, and the general success of

these chapter 11 cases. Without the substantial contributions made by the Released Parties

to these chapter 11 cases, the consummation of the Sale and the Plan would not have been

possible, resulting in substantially limited recoveries for all of the Debtors’ creditors. The

Released Parties’ efforts were nothing less than integral to the success of these chapter 11

cases. Further, the based on subsequent negotiations with the Committee, potential claims

which are covered by the Debtors’ Directors & Officers Insurance Policy are expressly

carved out of the Release provision. Accordingly, the Debtor submits that the Releases are

consistent with applicable law, represent a valid settlement and a valid exercise of the

Debtor’s business judgment, and should be approved

B. Injunctions


49

133. Section 11.8 of the Plan permanently enjoins entities or persons who held or

are currently holding Claims against the Debtors or Equity Interests in the Debtors, with

respect to any such Claims or Equity Interests, from: (i) commencing, conducting, or

continuing any lawsuit or other proceeding against the Debtors, Post-Confirmation Debtors,

and other related parties and property (collectively, the “Injunction Parties”) (ii) enforcing,

levying, attaching, collecting or otherwise recovering by any manner or means whether

directly or indirectly, of any judgment, award, decree or order against the Injunction Parties

(iii) creating, perfecting or otherwise enforcing any encumbrances of any kind against the

Injunction Parties, and (iv) taking any actions that do not conform to or comply with the

provisions of the Plan (collectively, the “Injunctions”).

134. In the Second Circuit, bankruptcy courts have approved injunctions in

situations where injunctions were an integral part of the chapter 11 plan, conferred material

benefits on a debtor’s estate and its creditors, or were necessary to effectuate the plan. See In

re Bally Total Fitness, 2007 WL 2779438, at *8 (finding injunctions provisions appropriate

because they were fair and equitable, necessary to a successful reorganization, and integral

to the plan); In re Ionosphere Clubs, Inc., 184 B.R. 648, 655 (S.D.N.Y. 1995) (“Courts may

issue injunctions enjoining creditors from suing third parties…in order to resolve finally all

claims in connection with the estate and to give finality to a reorganization plan.”).

135. The Injunctions are necessary to enforce the Releases and exculpation

provisions in the Plan. Since the Releases and exculpation provisions are central to the Plan,

the Injunctions are also essential. Thus, if the Bankruptcy Court finds that the Releases and

exculpation provisions are appropriate, the Bankruptcy Court should also find the

Injunctions are appropriate.


50

V. THE SALE SHOULD BE APPROVED

136. The Debtors’ submit that the Sale of the Debtors’ assets pursuant to the terms

of the APA is an integral and necessary part of the Plan that should be approved. As set

forth below in detail, the Sale and accompanying APA satisfy the requirements of sections

363 and 365 of the Bankruptcy Code. Consummation of the Sale is a sound and proper

exercise of the Debtors’ business judgment, and is clearly in the best interests of all parties in

these chapter 11 cases.

A. The Sale is Within the Debtors’ Sound Business Judgment

137. Section 363(b)(1) of the Bankruptcy Code provides that a debtor, “after notice

and a hearing, may use, sell, or lease, other than in the ordinary course of business, property

of the estate[.]” 11 U.S.C. § 363(b)(1). Section 105(a) of the Bankruptcy Code in turn

provides, in relevant part, that “[t]he court may issue any order, process, or judgement that

is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a).

Provided that a bankruptcy court does not employ its equitable powers to achieve a result

not contemplated by the Bankruptcy Code, the exercise of its section 105(a) power is proper.

Pincus v. Graduate Loan Ctr. (In re Pincus), 280 B.R. 303, 312 (Bankr. S.D.N.Y. 2002).

138. Section 363 of the Bankruptcy Code does not set forth a standard for

determining when it is appropriate for a court to authorize the use, sale, or lease of property

of the estate. However, courts in this Circuit and elsewhere hold that the sale or use of

property outside the ordinary course of business should be approved where the debtors can

articulate a business justification for the transaction. See Comm. of Equity Sec. Holders v. Lionel

Corp. (In re Lionel Corp.), 722 F.2d 1063, 1070 (2d Cir. 1983); In re CPJFK, LLC, 496 B.R.

290, 304 (Bankr. E.D.N.Y. 2011) (adopting Lionel Corp. standard for sound business


51

justification); In re Ionosphere Clubs, Inc., 100 B.R. 670, 680 (Bankr. S.D.N.Y. 1989).

Whether or not there are sufficient business reasons to justify a transaction depends upon

the facts and circumstances of each case. Lionel, 722 F.2d at 1071.

139. There is more than an adequate business justification to consummate the Sale

in the present circumstances. When comparing the Debtors’ Liquidation Analysis with the

Sale, it is exceedingly clear that the best way to maximize the value of the Debtors’ assets is

to sell the Debtors’ assets as a going concern, thereby preserving the substantial goodwill of

the business, maintaining the Debtors’ customer and vendor relationships, and avoiding a

liquidation sale of the Debtors’ inventory at exceedingly depressed prices. The Debtors’

Liquidation Analysis provides that Creditors were projected to realize approximately $5.0

million less in a chapter 7 liquidation than the projected net recovery from the Stalking

Horse Bid as a going concern sale. This analysis alone provides sufficient business

justification for the Sale.

140. As described in the Debtors’ Disclosure Statement and various other

documents submitted in these chapter 11 cases, the Debtors commenced these chapter 11

cases primarily to undertake and consummate a going concern sale of their businesses in the

belief that doing so will preserve and maximize the value of the business for all parties in

interest. The Sale as provided herein will achieve this goal.

B. The Sale Process was Conducted Fairly

141. The Debtors submit that the Sale process was conducted in a fair and open

manner which was reasonably calculated to produce the best and highest offer for the

Debtors’ Assets under the circumstances.


52

1. The Debtors retained SSG – an investment banker with significant expertise

in mergers and acquisitions, recapitalizations, and restructuring – to explore a potential sale

of the Debtors’ assets. As part of this effort, SSG immediately began facilitating a robust

marketing process for the potential purchase of the Debtors’ assets, and contacted a

substantial number of potential strategic and financial acquirers (the “Interested Parties”) to

garner interest in pursuing such transaction. The testimony of Scott Victor will show that

approximately 161 Parties (60 strategic and 101 financial) were contacted, 56 non-disclosure

agreements were executed (19 strategic and 37 financial), interested bidders conducted 5

Management calls (3 strategic and 2 financial) and 3 Site visits (2 strategic and 1 financial) and 44

qualified bidders conducted diligence (18 strategic and 26 financial). From these interested parties, 1

qualified bid was received from the Purchaser.

142. Thereafter, the Debtors, in consultation with their advisors, entered into good

faith, arm’s-length negotiations with the Stalking Horse Bidder and its advisors, and entered

into the Stalking Horse APA, subject to higher and otherwise better offers.

143. The Bid Procedures, which were approved pursuant to Bid Procedures Order,

were designed to maximize the value received for the assets and to facilitate a fair and open

Sale process in which all Interested Parties had an opportunity to participate. While the

Debtors were unable to obtain any other Qualified Bids needed to conduct an auction, the

Debtors submit that the marketing and solicitation processes which were conducted

throughout these chapter 11 cases were sufficient to establish the fair market value of the

Debtors’ assets. Given the Debtors’ extensive marketing efforts prior to the Sale and the

open manner in which the Debtors’ professionals marketed the Debtors’ assets, the Debtors

submit that the Sale process was fair and allowed the Debtors to maximize the value of their

assets.


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C. The Purchaser is a Good Faith Purchaser

144. Pursuant to Section 363(m) of the Bankruptcy Code, a “good faith” purchaser

is one who purchases assets for value, in good faith, and without notice of adverse claims.

See Licensing by Paolo v. Sinatra (In re Guuci), 126 F.3d 380, 390 (2d Cir. 1997); In re Mark Bell

Furniture Warehouse, Inc., 992 F.2d 7, 9 (1st Cir. 1993); In re Abbotts Diaries of Penn, Inc., 788

F.2d 143, 147 (3d Cir. 1986); In re Willemain v. Kivitz, 764 F.2d 1019, 1023 (4th Cir. 1985).

145. The APA is the result of extensive arms’ length negotiations between the

Debtors and the Purchaser, with all parties represented by their own counsel and without

any form of collusion. Further, the Successful Bid is the result of an open and fair

marketing process, which was undertaken with strict adherence to the terms of the Bid

Procedures and Bid Procedures Order such that neither the Debtors nor the Purchaser

engaged in any conduct during the Sale process that would cause the avoidance of the APA

or Sale, or the imposition of costs and damages against the Purchaser under Section 363(n)

of the Bankruptcy Code.

146. There is no common identity of incorporators, directors, or stockholders

between the Debtors and the Purchaser. The Purchaser is not an “insider” of the Debtors as

the term is defined in the Bankruptcy Code. See 11 U.S.C. 101(31). The Purchaser is not

holding itself out to the public as a continuation of the Debtors. Further, given that the

Purchaser is acquiring certain specific assets and not acquiring any equity in the Debtors,

the Sale does not amount to a consolidation, merger or de facto merger of the Purchaser and

the Debtors or the Debtors’ estate.

147. The Successful Bid represents of market value for the Debtors’ assets, and

constitutes substantial value which will be used to satisfy the Debtors’ obligations under the


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Plan. The Sale process was conducted fairly and openly, and the ensuing APA was subject

to substantial negotiations between the Purchaser, the Debtors, and other key parties in

interest which encompasses this fair Sale process. Accordingly, the Debtors submit that the

Purchaser is a good faith purchaser pursuant to section 363(m) of the Bankruptcy Code.

D. The Debtors Should be Permitted to Sell the Purchased Assets Free and Clear of All Interests

148. In the interests of maximizing the value of the Debtors’ assets and

consummating the Sale pursuant to the terms of the APA, the Debtors submit that the sale

of their assets should be free and clear of all liens, interests, and encumbrances (collectively,

the “Interests”) in accordance with section 363(f) of the Bankruptcy Code, with any such

Interest attaching to the net proceeds of the Sale, as and to the extent applicable.

149. Section 363(f) of the Bankruptcy Code authorizes a debtor to sell assets free

and clear of liens, claims, interests, and encumbrances if:

1. applicable non-bankruptcy law permits sale of such property free and

clear of such interests;

2. such entity consents;

3. such interest is a lien and the price at which such property is to be sold is

greater than the value of all liens on such property;

4. such interest is a bona fide dispute; or

5. such entity could be compelled, in a legal or equitable proceeding, to

accept a money satisfaction of such interest.

11 U.S.C. 363(f)(1)-(5); Citicorp Homeowners Serv., Inc. v. Elliot (In re Elliot), 94 B.R. 343, 345

(E.D. Pa. 1988) (noting that section 363(f) of the Bankruptcy Code is written in the

disjunctive; therefore, a court may approve a sale “free and clear” provided at least one of


55

the subsections is met); see also In re Dundee Equity Corp., No. 89-B-10233, 1992 Bankr.

LEXIS 436, at *12 (Bankr. S.D.N.Y. Mar. 6, 1992) (same); In re Bygaph, Inc., 56 B.R. 596,

606 n.8 (Bankr. S.D.N.Y. 1986) (same).

150. Section 363(f) is supplemented by section 105(a) of the Bankruptcy Code,

which provides that “[t]he Court may issue any order, process or judgment that is necessary

or appropriate to carry out the provisions of [the Bankruptcy Code].” 11 U.S.C. § 105(a).

Courts concluding that section 363(f) does not empower them to convey assets free and

clear of prepetition claims, have nonetheless held that Bankruptcy Code section 105(a)

provides them with the equitable power to authorize sales free and clear of interests that are

not specifically covered by section 363(f). See, e.g., In re General Motors Corp., 407 B.R. 463,

499-504 (Bankr. S.D.N.Y. 2009) (discussing Second Circuit precedent permitting sale of

assets “free and clear” of successor liability claims pursuant to section 363(f) and 105(a))

(internal citations omitted); Volvo White Truck Corp. v. Chambersburg Beverage, Inc. (In re White

Motor Credit Corp.), 75 B.R. 944, 948 (Bankr. N.D. Ohio 1987).

151. The Debtors submit that one or more of the conditions set forth in section

363(f) of the Bankruptcy Code will be satisfied with respect to the Sale. In particular, the

Debtors believe that at least section 363(f)(2) will be satisfied because each of the parties

holding liens against the Debtors’ assets have consented, or have been deemed to have

consented to the Sale by virtue of not filing an objection to the Sale.??] All lienholders are

adequately protected as their liens will attach to the proceeds of the Sale, in the same order

and priority, and with the same validity, force, and effect that such Creditors had prior to

the sale, subject to any claims and defenses that the Debtors and their estates possess with


56

respect thereto. Accordingly, the Debtors request that the Debtors’ assets be sold free and

clear of any Encumbrances pursuant to section 363(f) of the Bankruptcy Code.

E. The Executory Contract Non-Debtor Counterparties Have Received Adequate Notice

152. The Non-Debtor Counterparties to the Debtors’ executory contracts and

unexpired leases were provided sufficient notice of any and all Cure Costs existing under

their respective contracts and leases. Specifically, pursuant to the Assignment Procedures

Order, the Non-Debtor Counterparties were provided the Potential Assignment and

Assumption Notice and accompanying Cure Schedule, which described the Cure Costs for

each executory contract and unexpired lease. The Non-Debtor Counterparties were given

sufficient time to review the Potential Assignment and Assumption Notice and Cure

Schedule and object if they deemed appropriate.

153. While certain Non-Debtor Counterparties have filed Cure Cost/Assignment

Objections to the Debtors’ proposed Cure Costs and Assignments, the Debtors submit that

all such Objections are in the Process of being reconciled to the extent these Counterparties’

executory contracts and unexpired leases are being assumed and assigned. The Debtors

complied with the Assignment Procedures and Assignment Procedures Order by timely

filing and serving the Notice of Successful Bidder on all applicable Non-Debtor

Counterparties, thus affording these Non-Debtor Counterparties sufficient notice of the

assumption and assignment of their executory contracts and unexpired leases to the

Purchaser.

154. The Debtors’ have fully complied with the terms and conditions of the

Assumption Procedures Order by providing the Non-Debtor Counterparties with the

requisite information regarding, among other things, the Cure Costs associated with their


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contracts and unexpired leases, as well as the Adequate Assurance Information of the

Purchaser. Thus, the Debtors submit that the Non-Debtors Counterparties have received

adequate notice.

[Remainder of Page Intentionally Left Blank]


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VI. CONCLUSION

Based upon the foregoing, the Debtors respectfully request that this Court enter an

order (i) confirming the Debtors’ Plan, (ii) approving the Sale, and (iii) granting the Debtors

such other and further relief as is just and proper.

Dated: May 1, 2019 New York, New York

Respectfully submitted,

/s/ Mark T. Power HAHN & HESSEN LLP 488 Madison Avenue New York, New York Telephone: (212) 478-7200 Facsimile: (212) 478-7400 Mark T. Power, Esq. Janine M. Figueiredo, Esq. Jacob T. Schwartz, Esq. Jeremiah P. Ledwidge, Esq. Counsel for the Debtors and Debtors in Possession


Documents

HAHN & HESSEN LLP 488 Madison Avenue Facsimile: (212) 478 ...omnimgt.com/CMSVol2/pub_47319/732823_290.pdf · Allen Duralee Group Furniture, LLC (2835). The corporate headquarters