Case 19-43090 Doc 254 Filed 03/06/20 Entered 03/06/20 08

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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS

2 SHERMAN DIVISION

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4 IN RE: ) BK. NO: 19-43090-BTR

5 )

6 NUVECTRA CORPORATION )

7 D E B T O R. )

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11 TRANSCRIPT OF PROCEEDINGS

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20 BE IT REMEMBERED, that on the 18th day of November,

21 2019, before the HONORABLE BRENDA T. RHOADES, United States

22 Bankruptcy Judge at Plano, Texas, the above styled and

23 numbered cause came on for hearing, and the following

24 constitutes the transcript of such proceedings as hereinafter

25 set forth:

CINDY SUMNER, CSR (214) 802-7196

Case 19-43090 Doc 254 Filed 03/06/20 Entered 03/06/20 08:53:45 Desc MainDocument Page 1 of 81

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Docket #0254 Date Filed: 3/6/2020

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1 P R O C E E D I N G S

2 COURTROOM DEPUTY: First matter this morning

3 is Nuvectra Corporation. Case 19-43090. Thirteen first day

4 motions.

5 THE COURT: Okay. Appearances.

6 MR. MANNS: Good morning, Your Honor. Ryan

7 Manns, Toby Gerber, Laura Smith, and Shivani Shah on behalf

8 of the debtor.

9 THE COURT: Okay.

10 MS. HINES: Good morning, Your Honor. Sheri

11 Hines and David Eastlake of Greenberg Traurig on behalf of

12 Oxford Finance and Silicon Valley Bank.

13 THE COURT: All right.

14 MR. MANNS: Your Honor, if I may, I'd also

15 like to introduce the CEO of the debtor, Dr. Fred Parks,

16 along with the CFO of the debtor, Ms. Jennifer Gusari.

17 THE COURT: Okay.

18 MR. MANNS: We are also joined by Mr. John

19 Stewart, our declarant. He is with Alvarez & Marsal. And he

20 is a financial advisor to the debtor.


22 MR. MANNS: And last, but not least, Ms. Laura

23 Kalesnik, who is with Dorsey & Whitney. She is the outside

24 general counsel for the debtor and corporate and litigation

25 counsel.



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1 MR. SALITORE: Mark Salitore for the United

2 States Trustee.

3 THE COURT: Thank you. Okay. All right.

4 Where are we?

5 Do we have other telephonic appearances?

6 MR. JORDAN: Good morning. This is Rob Jordan

7 from KCC on the line.

8 THE COURT: Okay.

9 MR. VEGA: Good morning. This is Jason Ross

10 Vega. I'm from Jagoman & Company. We're an equity holder

11 and an interested party.

12 MS. JOHNSON: Carolyn Johnson on behalf of

13 Insight. We're an interested party.

14 THE COURT: We had one other appearance?

15 MR. WEISBERG: Yes. David -- can you hear me,

16 David Weisberg for interested party.

17 THE COURT: Okay. Which interested party?

18 MR. WEISBERG: Equity holder.

19 THE COURT: Which equity holder? I assume

20 there's more than one.

21 Sir?

22 MR. WEISBERG: Yes, hello.

23 THE COURT: So which equity holder are you

24 appearing for?

25 MR. WEISBERG: Oh, for myself.



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1 THE COURT: Oh, you are an equity holder.

2 Thank you.

3 MR. WEISBERG: Correct.

4 THE COURT: Thank you, sir.

5 All right. Mr. Manns.

6 MR. MANNS: Thank you, Your Honor. First of

7 all, thank you for allowing us to set these matters on an

8 expedited basis. And thank you at chambers for all of the

9 help with the logistics and preparing for this morning's

10 hearings.

11 Your Honor, if I may, I'd like to proceed by providing

12 a brief overview of the company before we present our first

13 day motions, if that works.

14 THE COURT: That would be just fine.

15 MR. MANNS: As a housekeeping matter, as I

16 mentioned, Mr. John Stewart, our first day declarant, is here

17 in the courtroom. He's available for examination by the

18 Court and also by parties in interest. We propose to move

19 forward and move for the admission of his declaration into

20 evidence. It can be found at docket number 27. And it is

21 also listed, or designated as Exhibit 1 on our witness and

22 exhibit list.

23 THE COURT: Any objection?

24 All right. Exhibit 1 is admitted, then.

25 MR. MANNS: Your Honor, in connection with our



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1 presentation this morning, we prepared a power point, which I

2 believe your Court has access to. We have hard copies, as

3 well.

4 THE COURT: It just came up on the screen.

5 Are you guys going to run it from the screen.

6 MR. MANNS: I can.

7 THE COURT: If you are I don't --

8 MR. MANNS: I have a hard copy, if you'd like

9 one.

10 THE COURT: I don't need a hard copy. I can

11 just work with your copy on the screen. That's fine. Thank

12 you.

13 MR. MANNS: Your Honor, the debtor is a

14 medical device company focused on the development and

15 commercialization of its technology platform for the

16 treatment of various disorders due to neurostimulation. It's

17 headquartered here in Plano, right off of Granite Parkway and

18 the Tollway.

19 The debtor was spun off in March of 2016 from its

20 parent, Integer Holdings. The Algovita Spinal Cord

21 Stimulation System is the debtor's first commercial offering

22 and treats chronic pain of the trunk and limbs. Algovita is

23 approved for sales in the European Union and the United

24 States. Over 4,000 individuals in the U.S. have been

25 implanted with the Algovita device.



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1 As of the petition date, the debtor has ceased all

2 product sales of Algovita, but has continued ongoing patient

3 clinical support. Since January 2017, the debtor has been

4 seeking approval from the FDA for the second application of

5 its technology platform, Virtis. Virtis is a medical device

6 for the treatment of chronic urinary retention and the

7 symptoms of overactive bladder. The debtor anticipates that

8 it will retain FDA approval of Virtis in the first half of

9 2020.

10 Your Honor, leading up to the filing of the case, the

11 debtor has been contending with a myriad of issues, including

12 significant operating losses, declining sales, loss of key

13 personnel, the delay of FDA approval of Virtis, and then

14 issues with the Algovita peripherals, as well as covenant

15 defaults under its credit facility.

16 In August of 2019, the company retained Piper Jaffray

17 to assist it with its pursuit of strategic options, including

18 a sale. For a number of reasons, the pre-petition sale

19 process did not result in a successful transaction. Having

20 exhausted its pursuit of strategic alternatives, the debtor

21 has ultimately concluded that commencing this bankruptcy

22 proceeding presented the best means to maximize value for

23 stakeholders, while continuing to emphasize ongoing patient

24 clinical support.

25 With respect to our proposed path forward in the case,



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1 as an extension of its pre-petition marketing process, the

2 debtor proposes to sell substantially all of its assets. The

3 debtor contends that a 363 sale will unlock value for its

4 assets in a way that hindered it outside of bankruptcy.

5 Multiple parties have already reached out to the debtor's

6 management team to express their interest in the debtor's

7 assets. In furtherance of the debtor's sale efforts, we plan

8 on filing retention papers for an investment banker within

9 the next week.

10 Although Piper Jaffray marketed the assets

11 pre-petition, they have declined to continue marketing the

12 assets post-petition. Retaining a separate firm is a

13 priority for the debtor going forward. And we've already

14 spoken to various parties in interest regarding this.

15 In the lead up to the filing, Your Honor, the debtor

16 concluded that it was in the best interest of all of its

17 stakeholders to cease all product sales of Algovita, as I

18 mentioned before, given its liquidity issues. And it started

19 to focus on maximizing its value of the estate in the

20 bankruptcy. And to focus on ongoing clinical patient

21 support.

22 Leading up to the filing, the debtor entered into

23 negotiations with its secured lender to discuss a pay down of

24 some of the term loan debt. And as a component of the

25 parties' overall agreement on the consent, we'll use cash



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1 collateral. As part of the debtor's agreement with the

2 Banks, the Banks have agreed to support the debtor's

3 post-petition marketing and sales process, subject to an

4 agreed-to budget, which is reflected as Exhibit A to the cash

5 collateral order.

6 Your Honor, this concludes my general overview of the

7 debtor. I'm happy to answer any questions that the Court

8 might have at this time.

9 THE COURT: I'll probably have some questions

10 in a little bit. Thank you.

11 MR. MANNS: Okay. As a housekeeping matter,

12 we'd like to note for the record that the debtor has filed a

13 certificate of service with respect to all of the first day

14 motions. That document can be found at docket number 28.

15 And at this time, I'll cede the podium to my colleague,

16 Shivani Shah, to handle the next matter on the agenda.

17 THE COURT: Ms. Shah.

18 MS. SHAH: Good morning, Your Honor. Shivani

19 Shah with Norton Rose Fulbright on behalf of the debtor.

20 Your Honor, we would like to present the motions today

21 in the order they're presented on the agenda. I will present

22 agenda items A through H. My colleague, Laura Smith, will

23 present agenda items I through L. And Mr. Manns will address

24 the final matter, agenda item N, the cash collateral motion,

25 if that's okay with Your Honor.



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2 MS. SHAH: The first matter on the agenda is

3 the notice of designation of a complex Chapter 11. That can

4 be found at docket number 2. The debtor believes this case

5 qualifies as a complex Chapter 11 case, because the total

6 debt exceeds $10 million, there are more than 50 parties in

7 interest, and it is a public company. For those reasons, the

8 debtor requests that the Court enter an order designating

9 this as a complex Chapter 11.

10 THE COURT: Does anyone wish to be heard with

11 respect to that matter?

12 Motion is granted. You'll upload the order.

13 MS. SHAH: We will. Thank you, Your Honor.

14 THE COURT: Thank you.

15 MS. SHAH: The next matter on the agenda is

16 the motion to waive the requirement to file an equity

17 security holder list. This can be found at docket number 6.

18 The debtor requests that the Court waive the requirement,

19 pursuant to Bankruptcy Rule 1007(a)(3), that a Chapter 11

20 debtor must file a list of its equity security holders.

21 Bankruptcy Rule 1007(a)(3) affords the Court the discretion

22 to waive this requirement. We think in this case that it's

23 appropriate to waive the requirement, because the debtor is

24 or was traded on the Nasdaq Global Market. And as of June

25 30th, 2019, there are approximately 18,000 shares of common



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1 stock that have been issued and are outstanding. Because

2 these shares were publicly traded, the list of equity

3 security holders is a cumbersome list to obtain. Given the

4 circumstances of this case, determining and filing such a

5 list would be burdensome and serve very little purpose.

6 We have not received any objections, nor have we

7 received any comments from the U.S. Trustee. Therefore, the

8 debtor requests the Court enter an order granting the motion.

9 If Your Honor has any questions, I'm happy to answer

10 those questions.

11 THE COURT: Okay. So how are we going to

12 provide notice to these equity holders of the existence of

13 the bankruptcy case, any specific issues that come up in the

14 case?

15 MS. SHAH: Well, as of now, we actually are --

16 we will also be requesting a motion to limit notice, because

17 there are a number of -- there's over 14,000 parties on the

18 creditor matrix. However, we will be serving a revised --

19 based on what happens today, we anticipate serving a revised

20 341 Meeting notice. And with that, we'll also include

21 information to direct people to the KCC website, so that all

22 parties in interest can receive notice through the KCC

23 website.

24 THE COURT: Well, okay, I understand that

25 part. But, you know, we have a due process issue. And if



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1 we're going to be affecting the rights of the equity holders,

2 whether you file the list or not, we need to provide some

3 type of notice, especially, for example, notice of the

4 bankruptcy filing and the key dates that are associated with

5 that.

6 So are you going to do some kind of notice with --

7 MS. SHAH: May I have one moment, Your Honor?

8 THE COURT: You can.

9 MS. SHAH: Your Honor, since it's a public

10 company, we will still be filing an 8-K. So they will still

11 receive notice through the public filings with the SEC.

12 THE COURT: But the 8-Ks are only filed

13 quarterly, right?

14 MS. SHAH: No, Your Honor.

15 THE COURT: Oh, you're going to file it

16 immediately?

17 So here's my question. Okay? Let's say you're going

18 to do a sale that will effectively wipe out equity. Equity

19 holders are entitled to know that and they're entitled to

20 show up and object. How are you going to notice them?

21 MR. GERBER: Your Honor, Toby Gerber for

22 Norton Rose and the debtor.

23 We've just been consulting. As Ms. Shah indicated, the

24 company is a public company. 8-Ks are regular and immediate

25 reporting on material events that happen. They're not the



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1 quarterly reports.

2 THE COURT: Right. But they occur after the

3 event has happened.

4 MR. GERBER: Well, we've been -- as things

5 happen, for example, a motion for the sale process --

6 THE COURT: You're going to file an 8-K every

7 time you file a motion with this Court?

8 MR. GERBER: Not every time we file a motion.

9 But for material information, the kind of thing that would

10 affect equity holders, we'd be obligated to file that we're

11 going to -- just as we filed in August of 2019 that the

12 company was going to undertake a process to sell the company.

13 So as to those material information that might affect

14 shareholders, we would be filing an 8-K to let them know what

15 was about to happen.

16 THE COURT: What I have seen in the past with

17 respect to the matters in bankruptcy, what I see in lieu of

18 specific notice to all of the equity holders, particularly

19 since equity can be traded and some of the interests are held

20 in street names, so you don't even know who those equity

21 holders are, typically what I see is some form of notice,

22 publication notice or otherwise with respect to matters that

23 specifically affect the rights of particular parties in

24 interest.

25 So the Court agrees the Court has the right to -- or



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1 has the ability to waive the requirement that you file the

2 list, okay. But I want to make sure you all understand that

3 does not get you around the notice issues associated with

4 each pleading that you file. If there are pleadings that are

5 filed that affect the rights of particular parties, they will

6 have to be noticed some how. And we'll get to those issues

7 with respect to the limitation of notice motion. But even

8 under that, you have to serve -- there's a limited notice,

9 limited list, and then you have to serve anybody who is

10 specifically affected by that motion, right? Like, if you

11 have -- if you file a motion to sell an interest free and

12 clear, you have to make sure anybody asserting a right, even

13 if they're not on your limited notice, that they get notice.

14 Right?

15 MR. GERBER: Yes.

16 THE COURT: Okay. So I want to make sure you

17 all understand it's the position of the Court that

18 notwithstanding the issues with respect to actually filing

19 the list of equity holders, which is what the motion is we're

20 dealing with now, that does not alter the notice obligations.

21 And somebody is going to have to be paying some attention to

22 who needs to be -- at what point in time does equity need to

23 be noticed and how are you going to do it.

24 MR. GERBER: Okay. I apologize.

25 THE COURT: And I don't believe filing 8-Ks



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1 after the fact will get there. But you all can convince me

2 otherwise. But I just want you all to be aware of the issue.

3 Okay?

4 MR. GERBER: I think we may have misunderstood

5 your question, Your Honor. We thought the question was, how

6 are you going to get them notice of things going on in the --

7 THE COURT: Well, that's what I'm talking

8 about. You all talk about doing a 363 sale. I'm going to

9 take a wild guess, without knowing, that it may affect the

10 rights of equity holders. And equity holders will be

11 entitled to notice. And I don't want to have a huge flub,

12 because those parties were not noticed and somebody shows up

13 later and says, gee whiz, it doesn't affect us, because we

14 didn't get notice.

15 MR. GERBER: Yes, Your Honor.

16 THE COURT: Right?

17 MR. GERBER: We couldn't agree more.

18 THE COURT: Exactly.

19 MR. GERBER: I think we misunderstood the

20 question. The question was how are we going to get notice to

21 them of things that might affect them. Our proposal is to,

22 among other things, give them notice in advance under 8-K, if

23 the company is going to go through a sale procedure. If

24 that's not sufficient, we'll seek permission from the Court

25 separately for that. But if that's not sufficient for the



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1 Court, that's fine. We'll do whatever the Court directs us

2 to do. Just misunderstood the question. We were here on --

3 the motion was what the motion was.

4 THE COURT: Understood.

5 MR. GERBER: We slipped to something else.

6 THE COURT: I just want to make sure -- the

7 Court will approve the motion to waive the requirement of the

8 filing of the list of equity holders, under the circumstances

9 of this case. I just want to make sure everybody has a heads

10 up, that doesn't mean I'm approving ahead of time some sort

11 of failure of notice that rises to the level of failure of

12 due process, right?

13 MS. SHAH: No, of course no, Your Honor. We

14 understand. Thank you for that.

15 THE COURT: Okay.

16 MS. SHAH: The next motion on the agenda is

17 the motion to extend the deadlines to file schedules and

18 statements. This case be found at docket number 3.

19 Currently the deadline for the debtor to file schedules and

20 statements is November 26th. Pursuant to Rule 1007(c), the

21 debtor requests an additional 14 days to extend that deadline

22 to December 10th. While the debtor has started their process

23 and completing schedules and statements and gathering the

24 requisite information with the aid of Alvarez & Marsal, due

25 to the nature of the debtor's business, the debtor needs some



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1 additional time to close its pre-petition books and records.

2 With that, Your Honor, I will note that the U.S.

3 Trustee has schedules the 341 Meeting for December 6th, which

4 is before the requested deadline to file schedules and

5 statements. However, we've been in communications with the

6 U.S. Trustee and believe they're amenable to re-scheduling

7 that 341 Meeting. Assuming that, if this motion is granted

8 and that the new deadline is December 10th, I believe the

9 U.S. Trustee said that the 341 would be re-scheduled to

10 December 20th. But that hasn't been locked down yet. But we

11 have been in communication with the U.S. Trustee.

12 With that, we've not received any other comments or

13 objections and request the Court enter an order.

14 THE COURT: Okay. Mr. Salitore.

15 MR. SALITORE: Yes, Your Honor. We have been

16 in communications with the debtor. And to back out a little

17 more broadly. There is some tension with the currently set

18 Creditor Meeting date of December 6th. And both were

19 requested to extend the schedules until after that point in

20 time, which will necessitate re-schedule -- moving the

21 meeting to December 20th. But, as well, and I imagine

22 debtors will get to this, with some of the dates for the

23 interim cash collateral usage period and/or the requirements

24 for a final order on cash collateral, there's -- just to

25 alert Your Honor, there is some tension between how fast



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1 those folks will move and the December 20th -- what appears

2 to be a December 20th reset.

3 MS. SHAH: Your Honor, we did speak with the

4 U.S. Trustee with regard to his concerns. And we've been in

5 communication with the lenders and their counsel, as well,

6 with regard to some of those overlapping dates and some

7 conflicts that there might be. We're still working with the

8 lender to make sure that whatever those dates that we have

9 for the lenders and milestones work with the U.S. Trustee.

10 And when schedules are filed and when the 341 are filed,

11 those are conversations that are ongoing. But we're aware of

12 the U.S. Trustee's concerns and we're working to address

13 them. We can also address some of those concerns in the

14 context of the cash collateral motion and the interim order

15 that we're proposing.

16 THE COURT: Okay. Are you addressing the cash

17 collateral matter?

18 MS. SHAH: I am not, Your Honor. It would be

19 Mr. Manns.

20 THE COURT: Oh, okay. Let's talk about that.

21 Mr. Manns, why don't we move ahead to the cash

22 collateral motion.

23 MR. MANNS: Okay.

24 THE COURT: And then we can address this issue

25 of the filing deadline when we address the cash collateral



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1 motion.

2 MR. MANNS: The cash collateral motion can be

3 found at docket number 19 on the -- I'm sorry, at docket

4 number 19.

5 The notice of the attorney check list and the proposed

6 form of order can be found at docket number 30. The

7 evidentiary predicate for the motion can be found at

8 paragraphs 104 and 105 of the Stewart declaration.

9 THE COURT: Okay.

10 MR. MANNS: Your Honor, without the use of

11 cash collateral, the debtor lacks sufficient liquidity to

12 meet ongoing obligations during the case. And the debtor

13 will be irreparably harmed, absent approval of its use of

14 cash collateral.

15 We have been in discussions over the last few days with

16 Mr. Salitore on a handful of items in connection with the

17 proposed form of order. I think we have largely narrowed

18 that list down to really two items. One is this

19 quote/unquote tension that he alluded to regarding the

20 December 2nd date that is proposed in the cash collateral

21 order for the termination of cash collateral on an interim

22 basis.

23 I think the parties are -- I don't want to speak for

24 Mr. Salitore and the lenders, but I think the parties agree

25 that we should probably move that date a little down the



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1 road. We haven't landed on a specific date that works. The

2 debtors, as Ms. Shah mentioned, are in the process of working

3 through schedules of assets and liabilities -- I'm sorry,

4 schedules of financial affairs and statement -- statements of

5 financial affairs and schedules of assets and liabilities.

6 It's a heavy lift and we have some staffing issues we're

7 working through, as well, to get those prepared as quickly as

8 possible. But I don't think that we'll be in a position to

9 get those on file before December 10th. And so as Ms. Shah

10 alluded to, we're working through Mr. Salitore's concerns

11 regarding getting those on file as quickly as possible,

12 setting up a 341 Meeting, and then also working through

13 deadlines associated with the termination of use of cash

14 collateral on an interim basis.

15 One thing that we proposed to Mr. Salitore is

16 potentially moving the proposed continued 341 Meeting up from

17 December 20th to possibly December 13th or December 14th and

18 then trying to schedule our final hearing somewhere in that

19 time frame, if the Court has availability. And so that was

20 at least one potential solve for the issues that Mr. Salitore

21 highlighted.

22 THE COURT: Okay. And what's the position of

23 the lenders, with respect to that issue?

24 MR. EASTLAKE: David Eastlake on behalf of the

25 lenders.



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1 We had a chance to talk to Mr. Salitore this morning.

2 We understand that there is, you know, he's asking to push

3 the final hearing. I believe our client is willing to do

4 that a short time. And in the meantime between now and

5 final, the agreement with the parties is we will work

6 together to set reasonable case milestones that will give the

7 debtor the runway it needs to complete its sale and plan

8 processes. There's some moving parts right now and that's

9 why they have not been set yet. But in the final, we would

10 come back and ask to establish those milestones.

11 THE COURT: Okay. So for purposes of today, I

12 just need to know how long the interim can extend and when we

13 need to set the final, because you all are consenting to the

14 use of the cash collateral. Those are the two issues. So my

15 question is, how long can the interim extend by agreement, I

16 guess. So where is the Bank on that issue?

17 MR. EASTLAKE: Your Honor, and to the extent

18 that the 341 Meeting can be moved up and accomplished

19 earlier --

20 THE COURT: Moved up and accomplished earlier

21 than what?

22 MR. EASTLAKE: I believe the December 20th

23 date that Mr. Salitore had in mind.

24 MR. SALITORE: If it's informative to the

25 parties, since our conversations this morning, I have



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1 checked. We are unable to move the meeting earlier than the

2 December 20th setting.

3 THE COURT: Part of the issue is, just so you

4 all know, it's not just, you know, scheduling it in terms of

5 the U.S. Trustee's timetable, if you will. Part of the

6 problem is, they need to have time to analyze the schedules

7 and statements that are filed in advance of the 341 Meeting.

8 So the window that they're looking at right now, given what

9 the debtor has asked for for time to file the schedules and

10 statements, that's only two days. And so as a typical

11 matter, we give the Trustee seven days, in ordinary cases.

12 And you all have told me this is not the ordinary case. So

13 ten days doesn't seem to be at all outside the norm. Okay.

14 So that's where we are right now.

15 So you all want a final hearing some time in December;

16 is that right?

17 MR. MANNS: That's correct, Your Honor.

18 THE COURT: In late December? Let me see

19 here. What have we got?

20 Probably December 30th is what we're looking at as a

21 final hearing date, if you want to go past the 20th. Can you

22 get there on your interim?

23 MR. MANNS: Your Honor, that works for the

24 debtor.

25 MR. EASTLAKE: And, Your Honor, that works for



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1 the lenders. Assuming, of course, that we can get an interim

2 order entered, as agreed to by the parties today. We're

3 talking about extending the final, you know, to the end of

4 December. And so I think if we can get our interim order in

5 place and agreed to by the lenders and the debtor with the

6 adequate protection provisions, then, you now, we'll

7 accommodate the U.S. Trustee and will be okay with the

8 hearing December 30th.

9 THE COURT: Okay. So what are the bells and

10 whistles here for the lender? What kind of adequate

11 protection are we talking about for the interim period?

12 MR. EASTLAKE: Your Honor, fairly standard.

13 What you might expect. Replacement liens. There would also

14 be --

15 THE COURT: Replacement liens for what

16 purpose?

17 MR. EASTLAKE: To continue those liens

18 post-petition. Replacement liens on the pre-petition

19 collateral.

20 THE COURT: Okay. So you're going to have

21 replacement liens on like kind collateral, right, that's what

22 you're talking about?

23 MR. EASTLAKE: Right.

24 THE COURT: Okay. But that secures only the

25 value of the diminution in value of the collateral, right?



23

1 MR. EASTLAKE: Right. It would only be --

2 THE COURT: Okay. I just wanted to make sure

3 we're all clear.


5 THE COURT: Okay. So you're going to have a

6 replacement lien, to the extent of the diminution in value of

7 the collateral?

8 MR. EASTLAKE: That's correct.

9 THE COURT: What else are you going to take?

10 MR. EASTLAKE: We would also have a lien on

11 unencumbered assets.

12 THE COURT: For what purpose?

13 MR. EASTLAKE: To -- again, as adequate

14 protection. I mean, it's the --

15 THE COURT: Adequate protection, to the extent

16 of the diminution in value of your collateral, right?

17 MR. EASTLAKE: Yes, Your Honor. That applies

18 to --

19 THE COURT: Okay. Are you expecting that the

20 collateral is going to be diminished, the collateral position

21 will be diminished because you're using up the collateral?

22 MR. MANNS: Yes.

23 THE COURT: Okay. So you're going to have to

24 give up unencumbered assets. How much unencumbered assets

25 have you all got?



24

1 MR. MANNS: Well, it depends. I mean, right

2 now we're -- the goal is to market the IP portfolio. So

3 going --

4 THE COURT: Well, I'm just trying to

5 understand what are they taking and what's the value of that.

6 So what's the value of the unencumbered assets that they want

7 a lien on?

8 MR. MANNS: Well, as far as the IP is

9 concerned, that's the million dollar question in this case.

10 We're not sure exactly what that's going to bring at market.

11 And so that's going to be market tested in connection with

12 the post-petition marketing sales process.

13 THE COURT: Okay. So how much are you asking

14 for it?

15 MR. MANNS: You know, it's really difficult to

16 ascribe a value to it at this moment. And I know we have

17 some interested parties who actually have bowed in who are

18 going to be bidding on those assets. And so I'd prefer not

19 to speculate. But we have received some offers on those

20 assets and the assets as a whole, to this point. And we are

21 already entering into non-disclosure agreements with other

22 parties who have expressed interest in those same assets.

23 And so --

24 THE COURT: Okay. So how much money are you

25 going to be using between now and December 30th?



25

1 MR. MANNS: May I consult with our financial

2 advisor?

3 THE COURT: Sure.

4 MR. MANNS: Thank you.

5 Your Honor, less than 6 million. And if it would be

6 helpful, we could walk you through those numbers. But in

7 talking with Mr. Stewart, we believe it will be less than 6

8 million.

9 THE COURT: So you're looking for authority to

10 use a little bit less than $6 million between now and the end

11 of December, right?

12 MR. MANNS: That's correct.

13 THE COURT: Okay. So potentially that's the

14 diminution in value of your collateral is that $6 million?

15 MR. EASTLAKE: That is correct, Your Honor.

16 And it would only be to the extent of diminution in value.

17 THE COURT: Right. Okay. I don't recall your

18 declaration saying this. So point me to it -- if it doesn't,

19 maybe we need a little evidence on that issue. But are you

20 expecting -- I'm not talking about, you know, whenever we

21 have to look into the crystal ball, there's kind of a science

22 to it, or art to it, rather than science to it. But I want

23 to understand, is the debtor expecting that by spending this

24 $6 million to continue to operate in the sale process, that

25 there's going to be some amount of value to the debtor and to



26

1 the unsecured creditors who now have access to be paid from

2 these unencumbered assets?

3 MR. MANNS: We do, Your Honor. It all hinges

4 on the sale process. But we do think that is a very real

5 possibility.

6 THE COURT: Okay. Is that in the affidavit,

7 or do I need evidence of that?

8 MR. MANNS: We're happy to put on evidence of

9 that. I don't believe we've articulated that specifically in

10 the affidavit.

11 THE COURT: Okay. So in the situation where a

12 lender is taking, or asking for liens on unencumbered assets,

13 which would otherwise be available to other creditors, to

14 your general unsecured creditors and priority creditors,

15 because it's unencumbered, I want to -- expect to have some

16 evidence about how that doesn't harm them. So that's what

17 I'm looking for.

18 Yes, sir.

19 MR. EASTLAKE: And, Your Honor, I was just

20 going to point out one clarification is any liens on proceeds

21 of avoidance actions, we're not seeking to encumber those on

22 an interim basis. We're reserving our right to obviously

23 take them up on a final basis. But there is some carved out

24 portion of the unencumbered assets.

25 THE COURT: Okay. Well, that's good to know,



27

1 too. Because I don't grant them on an interim basis, unless

2 there's something really extraordinary going on, usually

3 involving debtor's counsel having investigated for a good

4 deal of time and representing to the Court they're not aware

5 of any. So I'll let Mr. Manns call his witness to put on the

6 evidence that we've discussed and we'll go from there.

7 You may proceed, Mr. Manns.

8 MR. MANNS: Your Honor, would now be a good

9 time for me to put on evidence of Mr. Stewart?

10 THE COURT: You may.

11 MR. MANNS: Thank you.

12 Your Honor, the debtors call Mr. John Stewart to the

13 stand.

14 THE COURT: If you'll step forward and be

15 sworn, sir.

16 (The witness was sworn by the courtroom deputy.)

17 JOHN STEWART

18 The witness, having been duly sworn to tell the truth,

19 testified on his oath as follows:

20 DIRECT EXAMINATION

21 BY MR. MANNS:

22 Q. Could you please state your name for the record.

23 A. John Stewart.

24 Q. And, Mr. Stewart, who are you employed by?

25 A. Alvarez & Marsal.



28

1 Q. And what position do you hold with Alvarez?

2 A. Managing director.

3 Q. And what is your specialty?

4 A. Working with distressed companies restructuring.

5 Q. And just ball park wise, how many distressed

6 companies have you worked with over the course of your

7 career?

8 A. Probably somewhere in the neighborhood of 40 to 50.

9 Q. And how long have you been working with the debtor

10 in this case?

11 A. Not long. Approximately three weeks.

12 Q. Have you been generally involved in the day-to-day

13 decisions of the debtor over the course of those three weeks?

14 A. I have.

15 Q. Are you familiar with the debtor's finances and

16 budget?

17 A. I'm generally familiar, yes.

18 Q. Did you help prepare the budget that's attached as

19 Exhibit A to the cash collateral motion?

20 A. I did.

21 Q. Have you been generally involved in the

22 negotiations regarding the cash collateral order?

23 A. I have.

24 Q. Are you familiar with the adequate protection that

25 has been proposed in the cash collateral order to the secured



29

1 lenders?

2 A. Yes.

3 Q. And you're aware that part of that adequate

4 protection package includes a lien on unencumbered assets?

5 A. That's my understanding.

6 Q. And how much do you think the debtor will spend

7 between now and the end of December?

8 A. I was eyeballing the budget. But as discussion

9 ensued, I believe it's somewhere in the neighborhood of 5 to

10 6 million.

11 Q. Are you aware that the debtors are pursuing a sales

12 process? Are you generally familiar with the sale process?

13 A. Yes, I am.

14 Q. Is it your opinion that the sale process could

15 (inaudible word) to the benefit of general unsecured

16 creditors?

17 A. Yes, I believe it could.

18 Q. Do you believe that the proposed (inaudible two

19 words), given the adequate protection package and the

20 proposed sale process is in the best interest of the estate?

21 A. I believe it is, yes.

22 MR. MANNS: Your Honor, I'll pass the witness.

23 THE COURT: Okay. Any cross?

24 MR. EASTLAKE: No, Your Honor.

25 THE COURT: Okay. If the company were to



30

1 liquidate today -- and don't get nervous, I just want to

2 understand it -- what would unsecured creditors get from the

3 liquidation?

4 THE WITNESS: Today I have the assumption that

5 we'd have cash on hand. We'd have the ability to liquidate

6 accounts receivable. We would have recovery from some real

7 property located in Minnesota. Beyond that, I'm not aware of

8 additional assets that we would have that would garner

9 valuing that type of liquidation. So I don't believe that

10 with priority claims and other claims, that general unsecured

11 creditors would receive anything, under that scenario.

12 THE COURT: Okay. So Eastern District, you

13 know, we have our own vernacular for a few things. So

14 they're out of the money?

15 THE WITNESS: They're out of the money.

16 THE COURT: Gotcha. Okay.

17 Anything further for this witness from anybody else?

18 MR. MANNS: Nothing further from the debtor.

19 THE COURT: All right. You may step down.

20 All right. Any other bells and whistles you need to

21 bring to my attention for the adequate protection for the

22 lenders that's not the norm?

23 MR. MANNS: Your Honor, I think it might be

24 helpful to highlight that in talking with the U.S. Trustee,

25 we've narrowed down his issues just to one remaining issue



31

1 and that is the granting of a super priority admin claim.

2 The debtor views this deal point as part of the overall

3 deal. And the order, as a whole, has been negotiated

4 extensively between the debtor and the lender's counsel over

5 the last several days. And so from our perspective, we

6 believe that the total package of adequate protection that's

7 being afforded to the lenders is part of the quid pro quo in

8 the case. And it's in the best interest of the estate.

9 THE COURT: Okay. You're talking about the

10 super priority administrative priority claim?

11 MR. MANNS: Yes.

12 THE COURT: Okay. Mr. Salitore, tell me about

13 what your concerns are, please.

14 MR. SALITORE: Yes, Your Honor.

15 We were concerned about the necessity of super priority

16 administrative claims, at least at this stage. In addition

17 to that, those are provided for in at least the last copy of

18 the order that I saw at paragraph 7. We were also concerned

19 about adequate protection, including the payment of interest

20 on the loans contained in paragraph --

21 THE COURT: Okay. Are there payments? Let's

22 talk about that. How much are the payments?

23 MR. MANNS: Your Honor, approximately 400,000.

24 There are two payments due between now and December 30th.

25 THE COURT: So $800,000?



32

1 MR. MANNS: No. 400,000 total.

2 THE COURT: Oh, total. Okay.

3 All right. What else do you have, Mr. Salitore?

4 MR. SALITORE: We were also concerned about

5 the proposed adequate protection, including payment of lender

6 fees. And that's contained in paragraph 12. More ancillary,

7 related to adequate protection in the carve out, has to do

8 with paragraphs 16, 17, and 18. The Committee appears to be

9 limited to $25,000 for the investigation or pursuit of

10 pre-petition claims or Chapter 5s. We were concerned that

11 that amount was too low. And we were concerned that

12 paragraphs 17 and 18 restricted, to too great a degree the

13 Committee's ability to pursue those claims, once it found

14 them.

15 Those are our concerns, as it relates to adequate

16 protection. We have a couple of other issues. But as to

17 adequate protection, that's it.

18 THE COURT: Okay. Let me -- let's take a

19 brief recess. I want to review this real quick in a little

20 more detail. Let's take a 15 minute recess.

21 (Brief recess ensued.)

22 COURTROOM DEPUTY: We're back on the record in

23 the Nuvectra Corporation case, 19-43090.

24 THE COURT: Okay. In the -- during the

25 recess, I got the order you all are working from, because



33

1 that's not the order that was in your notebook. So it gave

2 me a little bit more information than I had.

3 Okay. So I do have some questions about the order.

4 And I'm not sure if the order I'm working from is necessarily

5 your final, because I know it's been the subject of more

6 negotiations. So you all will have to let me know. Okay?

7 MR. MANNS: Your Honor, may I just speak to

8 that for a moment?

9 THE COURT: Yes, sir.

10 MR. MANNS: So we filed the proposed form of

11 order at docket number 30. And I believe that's what you're

12 referring to. And so that's the one that we've been

13 discussing this morning.

14 THE COURT: Right. Yeah. That was filed last

15 night; is that right?

16 MR. MANNS: That's correct, yeah.

17 THE COURT: Well, I don't want to shock you

18 all, or anything, but I want to tell you that at 6:13 at

19 night on a Sunday night, I was not sitting at my computer

20 waiting for you all to upload the document. So I hadn't seen

21 it before.

22 MR. MANNS: We appreciate that.

23 THE COURT: Okay. So -- but, again, I was

24 looking at the order in your notebook, which was, I guess, a

25 copy of the order that was filed with the motion. So it



34

1 didn't match any of the paragraph numbers you all were

2 referring to on the record. So now I think I have a better

3 handle on it.

4 So, I do have some questions and concerns that we can

5 talk about and you all can walk me through it.

6 Okay. I don't understand this concept of paying

7 interest payments, when I thought you all were telling me

8 that it's -- there's some question, yet, about whether this

9 lender is under secured or over secured. Am I wrong about

10 that?

11 MR. MANNS: Well, there hasn't been a

12 determination made, you're right. But I think that just

13 based on we've got 5.6 million, or so, in AR to collect.

14 We've got about 9.6 million in cash today.

15 THE COURT: Okay. And does the lender have

16 security interest in both?

17 MR. MANNS: They do.

18 THE COURT: Okay. So -- okay.

19 MR. MANNS: So I think just based on that,

20 there's a very good argument they've over secured.

21 THE COURT: Well, that assumes you're going to

22 collect 100 percent of the ARs. And they're pretty close,

23 right?

24 MR. MANNS: Correct.

25 THE COURT: Because I thought the total amount



35

1 of the debt was in excess of 15 million, but under 16

2 million. Is that not correct?


4 THE COURT: Okay. And then is it going to go

5 up by 6 million over the course of the next two months?

6 MR. MANNS: The debtor -- is the -- I'm sorry.

7 THE COURT: Well, I guess it just depends on

8 if there's a diminution in value of the collateral, right?

9 MR. MANNS: Correct. Correct.

10 THE COURT: Okay. But you said that you

11 thought there would be, because you're using it. You're not

12 creating any more ARs or --

13 MR. MANNS: That's correct. Well, there's 10

14 million in principal owed on the debt, on the loans right

15 now. And then other, call it 5 point probably 7 or 8 in fees

16 associated with that. And, again, the debtor has about 9.6

17 million in cash at the moment. About 5.6 in AR to collect.

18 And then --

19 THE COURT: So the debtor has almost 10

20 million in cash?


22 THE COURT: All of which are encumbered by the

23 lender?


25 THE COURT: Okay. And then you also have 5 or



36

1 6 -- a little bit more than 5 million in ARs?


3 THE COURT: Okay. Okay. And you have done

4 some level of investigation into the validity of the liens

5 and --

6 MR. MANNS: We believe they are properly

7 perfected, Your Honor. We have --

8 THE COURT: Okay. That's one question.

9 Second question. I'm not sure we're going to be working from

10 the same documents, so let me try to do it by paragraph

11 numbers, like you suggested.

12 Paragraph 6, line 1, 2, 3, 4, 5, 6, 7. So the sentence

13 that starts on line 6 that says, except as provided herein --

14 MR. MANNS: Yes, Your Honor.

15 THE COURT: Okay. The adequate protection

16 lien shall not be made subject to or pari passu with any lien

17 or security interest by any Court order heretofore or

18 hereafter entered.

19 Question, are you -- is anybody interpreting this to

20 somehow be a priming lien? You all are not priming anybody,

21 right?


23 THE COURT: Okay. I just want to make sure

24 that nobody was trying to use this heretofore or hereafter

25 language as somehow being priming somebody else out there.



37

1 MR. EASTLAKE: And to the extent -- just to

2 clarify, Your Honor -- there are any encumbered assets with

3 existing liens, we would take a junior position on that.

4 THE COURT: Understood. That's the reason I

5 just want to make sure. Because right here, it says you're

6 going to take -- you're not going to be subject to or pari

7 passu with any lien. And so that suggests you're not going

8 to take a junior lien. Just so you all know, right. So

9 that's inconsistent with what you just told me.

10 MR. EASTLAKE: Right. In terms of anything

11 that's already encumbered in existing liens, it would be a

12 junior.

13 THE COURT: Okay. So maybe you all need to

14 clarify that a little. But I just want to make sure --

15 because the way I read this, is you're not taking a junior on

16 anybody and there may be some argument about whether this is

17 priming or not. But I understand from the parties' position

18 that it's not intended to be interpreted as priming, right?

19 Adequate protection obligation. Is that defined

20 somewhere?

21 MR. MANNS: Your Honor, it's on page 7 right

22 above paragraph G.

23 THE COURT: Okay. Okay. Perfect. That works

24 then.

25 Okay. This business about fees and expenses on



38

1 paragraph 12. Why would the Court authorize interim

2 application to pay all, quote, all reasonable and documented

3 fees and expenses of the collateral agent?

4 MR. MANNS: Your Honor, on that point, we

5 think it's reasonable and it's the market term. And I will

6 note that the parties have seven days to object to whatever

7 they notice out with respect to their fees. And we look at

8 this as just one deal point after many deal points when

9 negotiating these terms with the lenders. And from our

10 perspective, they are appropriate.

11 THE COURT: Okay. I'm talking about -- just

12 so you all understand. I'm talking about it in the context

13 of an interim application, right? An interim application on

14 very limited notice. The Court's questions would be

15 different in a final application where the stuff has been

16 vetted a little more, when people have had an opportunity to

17 look at it and see what they want to do about it. Right?

18 And so the concern is this notion of approving a pig

19 and a poke, as long as it's reasonable. And I don't know

20 what that is. I don't know if there are challenges. There

21 may not be. I don't know. But on an interim basis, the

22 Court's very leery about providing this type of authorization

23 up front, especially when you are suggesting that the loan

24 itself is 10 million principal and the balance is some kind

25 of fees and expenses and such. And I think the application



39

1 said the amount of the lender's claim was a little bit north

2 of 15 million. So, again, that just makes me more leery.

3 Why does this need to be an interim, as opposed to in

4 the final?

5 MR. EASTLAKE: Well, Your Honor, I think I can

6 point out what I believe has already been stated before. And

7 that is, any cash coming in the door is simply collections on

8 pre-petition accounts receivable. There are no receivables

9 being generated post-petition. And we're dealing here with a

10 company that has already told the market it's looking to

11 liquidate and sale process. So, you know, in that scenario,

12 there's a concern and a risk that people just don't pay.

13 That it may be hard to actually collect on those receivables.

14 THE COURT: Well, it's going to be a lot

15 harder if they shut down and you have to go collect them.

16 So -- and these fees and expenses, whatever they are, they're

17 not even itemized fees of certain kinds of fees. They're not

18 associated with anything. It's just whatever they are. So I

19 don't -- again, I don't understand why that needs to be done

20 on an interim -- in an interim application. If there's more

21 definition and there's a -- and we get to a final

22 application -- a final hearing so that people have had

23 chances to ask questions about these kinds of thing, that may

24 be different. But right now, the seven days doesn't even get

25 you anywhere close to the final hearing at all. And there's



40

1 been limited notice on this. So, again, what's the -- what's

2 the hurry and what are these expenses?

3 MR. EASTLAKE: So a couple of points, Your

4 Honor, in terms of the fees. You brought up the seven days.

5 This is not a blank check. There's a built-in review

6 process, a process to object. In terms of the fees on an

7 interim basis --

8 THE COURT: Well, isn't that the seven days?

9 MR. EASTLAKE: I'm sorry, Your Honor. Could

10 you repeat that?

11 THE COURT: The seven days is the time to

12 object.

13 MR. EASTLAKE: That's what's in the order,

14 yes.

15 THE COURT: Okay.

16 MR. EASTLAKE: So there will be multiple

17 parties scrutinizing these fees and determining whether they

18 believe it's reasonable or not. And if they don't, there's

19 an opportunity to object. And if there's an objection, we

20 don't get paid on the portion of the fees objected to

21 until --

22 THE COURT: Okay. Doesn't the Court get an

23 opportunity to look at this, or are you suggesting that I'm

24 supposed just advocate the Court's obligations and just say,

25 you all go do what you think is reasonable?



41

1 MR. EASTLAKE: Your Honor, I think the Court

2 would look to at it, to the extent there's an objection. I

3 mean, the U.S. Trustee. If there's going to be a Committee.

4 If the debtor's think --

5 THE COURT: Yeah. But of all of those people,

6 the person who's the most experience with fees is this Court.

7 But, again, why does this need to be done on an interim -- is

8 there some reason, there's some sort of expense that needs to

9 be paid, or some reason why this stuff needs to be done in an

10 interim application? That's the Court's concern.

11 MR. EASTLAKE: Right, Your Honor. And again,

12 we go back to the first part of the hearing on cash

13 collateral. We're now looking at pushing a final hearing to

14 December 30th. That's a long time.

15 THE COURT: Uh-huh.

16 MR. EASTLAKE: This case was filed November

17 12th. So we're in a languish in bankruptcy six to seven

18 weeks hoping we collect on receivables. And like I said,

19 it's not intended to be a blank check by any means. It can

20 be scrutinized. There can be objections, if someone doesn't

21 think they're reasonable. But the lenders would like to

22 have --

23 THE COURT: What are these fees for?

24 MR. EASTLAKE: Professionals.

25 THE COURT: For what? Doing what work?



42

1 MR. EASTLAKE: Well, cash collateral.

2 THE COURT: So your attorney's fees?

3 MR. EASTLAKE: Correct. They would include

4 attorney's fees, yes. And going back to that. We would

5 obviously be circulating our invoices and subjecting it to

6 scrutiny.

7 THE COURT: So what you're looking for in this

8 paragraph is just a process for getting that paid; is that

9 right?

10 MR. EASTLAKE: That's correct.

11 THE COURT: Okay. Well, then you need to

12 change it. Because I'm not authorize the debtor to make the

13 payments. We'll a put a provision in there for the process.

14 And if the process happens, occurs and there's no objections,

15 then the debtor would be authorized. So that paragraph needs

16 to be revised to provide that the lender -- the collateral

17 agent will provide copies of all fees and expenses to the

18 Court, the debtor, the U.S. Trustee, and -- the Creditor's

19 Committee, if one is appointed, it's not going to be -- I

20 don't know when and if one would be appointed. And anyone

21 else who requests a copy, okay, of those invoices. That

22 should be done -- okay. And then when you've filed the

23 documents and such, you can contact my courtroom deputy to

24 get a default setting date, so that we'll have a hearing date

25 which will be on a minimum of -- will be approximately 14



43

1 days from the date of the filing of your documents. Okay?

2 So you can get a hearing date. That way, if there's an

3 objection, we'll already have a hearing date that we can take

4 care of it on. If there is no objection, then we'll have the

5 hearing. And if the Court has questions, we'll have

6 questions.

7 MR. EASTLAKE: And just some clarification,

8 Your Honor. When you say filing, do you mean filing like

9 with the Court on the docket? Because I don't think that was

10 intended. Rather, circulating copies to all of the various

11 notice parties that Your Honor just mentioned. We're happy

12 to do that.

13 THE COURT: Okay. How is the Court going to

14 know what your fees are and such?

15 MR. EASTLAKE: Because we would be sending the

16 Court -- I --

17 THE COURT: How would you send the Court,

18 except to file? See, normally, the way -- but for these

19 issues, the standard way is the creditor would file a proof

20 of claim. That proof of claim would say, you owe me X

21 dollars, Y dollars. You know, X dollars for principal, Y

22 dollars for interest. And here are all of our fees and such.

23 Right? That's kind of the -- so the Court would see that.

24 Okay. Here, you're talking about circulating something among

25 yourselves. The Court wouldn't see it at all. You all would



44

1 do whatever you're going to do on this limited notice right

2 now. And I'm very uncomfortable with it.

3 If there's appropriate notice, people get to see it and

4 the Court gets to see it. We may not have any questions.

5 Okay? But we need to have -- I think we've talked and I

6 think you've probably heard me say this before, Mr. Manns,

7 but in bankruptcy it's about open kimono. That applies to

8 creditors' claims too, right? So if you all want a default

9 process for getting these things done so that they get paid

10 in the ordinary course, we can put into the order a default

11 process. But that process had to include the Court. Okay?

12 And, this stuff sounds like you're paying pre-petition

13 stuff too. Is that what's intended? And, frankly, that's

14 what drew my attention to this to start with. It sounded

15 like there's a bunch of pre-petition attorney's fees,

16 financial advisors, accounting fees and professional fees

17 which based on what you all told me earlier, could amount to

18 something like $5 million. And you want to just pay it after

19 you've provided some documents saying, this is what you need

20 to pay.

21 MR. MANNS: No, Your Honor. Just to clarify,

22 that's not what we were referencing with respect to the 5 or

23 $6 million. That spend is contemplated in the debtor's

24 budget for really just the limited or streamline operations

25 between now and December 30th. So that doesn't include -- I



45

1 guess a small component of that might be professional fees

2 for some of the estate professionals. And then we've also

3 included the lender's professionals and that budget. But I

4 think that piece of it is only approximately $600,000 or so.

5 And so out of the 5 to 6 million that we quoted, perhaps

6 600,000 for all of the case professionals is included in

7 that.

8 THE COURT: Okay. All of that is pre-petition

9 claims, right?

10 MR. MANNS: No.

11 THE COURT: What part of that is

12 post-petition?

13 MR. MANNS: All of it.

14 THE COURT: 600,000 since -- so the creditor

15 has spent more than $600,000 since November 11th, is it, when

16 the case was filed?

17 MR. MANNS: No, Your Honor. I'm sorry. That

18 would be for all estate professionals. And so in our budget

19 we've only -- we haven't broken down the various

20 professionals and what has been allocated for them in the

21 budget. And so the lump sum for estate professionals and

22 also for lender professionals is 600,000. And that does not

23 include pre-petition.

24 THE COURT: Okay. What are the fees and

25 expenses that you all are trying to get approved on a default



46

1 basis in paragraph 12?

2 MR. MANNS: Post-petition fees that the lender

3 incurs on account of its professionals. And so primarily for

4 its attorneys.

5 MR. EASTLAKE: That's correct, Your Honor.

6 It's really intended to cover the lender's professionals.

7 And we hear the Court and we're happy to provide the Court,

8 or to make -- put a process in place, as Your Honor spelled

9 out.

10 THE COURT: Okay. So you all can spell out

11 the process. But this paragraph doesn't say anything about

12 post-petition fees and expenses. This paragraph says you're

13 authorized to pay all reasonable fees and expenses. So I

14 think the first change needs to be the post-petition

15 expenses.

16 MR. EASTLAKE: And, Your Honor, that's a

17 little over 15 million number, in terms of the outstanding

18 obligations. That's where it would be included in terms of

19 fees and expenses up until the filing of the case. This is a

20 go forward, getting the lender's professionals paid, subject

21 to a process while the case plays out.

22 THE COURT: Okay. So if this is limited --

23 paragraph 12 is limited to post-petition fees and expenses of

24 the collateral agent and it's done on -- I think in the

25 interim period, 7 days is going to be way too short, during



47

1 the interim until we get to a final. So I want you to do it

2 on 14 day's notice. I think if you just revise paragraph 12

3 to provide that this is only for post-petition fees and

4 expenses and do it on 14 day's notice to object. If there's

5 an objection, you'll have to contact the Court to get a

6 hearing date. Okay? It will be incumbent on the collateral

7 agent to contact the Court to get a hearing date. Otherwise,

8 I think that paragraph will work. Okay?

9 MR. EASTLAKE: Thank you, Your Honor.

10 Okay. In the carve out, how much has been set aside in

11 the budget for the carve out? Like, as long as there's no

12 default, what's the normal fees that can be paid, the amount?

13 MR. MANNS: 600,000 for all estate

14 professionals and --

15 THE COURT: For the entire --

16 MR. MANNS: Per month.

17 THE COURT: 600 per month?

18 MR. MANNS: Per month, correct.

19 THE COURT: For all estate professionals, not

20 just Committee -- not just debtor's counsel, right?


22 THE COURT: Because I think in your synopsis

23 in the motion, I think it said debtor's counsel. I don't

24 remember it saying all professionals. So that's why I wanted

25 to confirm.



48

1 MR. MANNS: Right.

2 THE COURT: Okay. All right. And then

3 post-default, if there is a default or a termination, it's --

4 the carve out is the 350, right?


6 THE COURT: Okay. The lien review period

7 needs to run from the final order, not from the interim

8 order. The payment of interest -- the paragraph on the

9 payment of interest needs to provide that that can be clawed

10 back, if there is an objection timely filed and there's

11 some -- and that objection is sustained. Objection to the

12 claim, the lien -- I'm sorry, an objection or a claim -- or

13 an adversary filed as a result of the lien review period. So

14 it's that there's some determination that the lien is not

15 valid, for whatever reason, or the lien is actually under

16 secured, for example, then the interest payments could be

17 clawed back. So I just wanted to make sure you all are clear

18 about that. Because I'm accepting the debtor's

19 representation and evidence today. But, again, it's on

20 limited notice. So I'm going to be -- you're asking the

21 Court to authorize the payments, but if there's a problem

22 later discovered with respect to the lender's position, then

23 you'll have to pay it back. Right?

24 Okay. The super priority admin claim is just --

25 it's -- that's if there's a failure of adequate protection



49

1 from the replacement liens and the additional lien, right?

2 MR. EASTLAKE: Just one second, Your Honor.

3 I think the way it's set up, Your Honor, in the order

4 right now is it would not be, to the extent the other

5 adequate protection is not sufficient.

6 THE COURT: Right. That's what it should be.

7 MR. EASTLAKE: It would be a super priority

8 admin claim.

9 THE COURT: Right. So to the extent that

10 the -- in other words, to the extent the other adequate

11 protection, meaning the interest payments, the super -- I'm

12 sorry, the replacement liens and the liens on unencumbered

13 property are insufficient to protect you, then you have a

14 super priority claim, right?

15 MR. EASTLAKE: Again, I don't know that the

16 order reads that way. It was just a super priority adequate

17 protection claim. But we hear Your Honor. I think that's a

18 reasonable approach. And that just may be another paragraph

19 to clarify.

20 THE COURT: Okay. You all will clarify that.

21 And then, again, no liens on Chapter 5 causes of action

22 or avoidance causes of action yet, right? You'll be granted

23 that in a final order.

24 MR. EASTLAKE: That's correct, Your Honor.

25 And also I'll just point out for the super priority admin



50

1 claim, there is a carve out for payment of that from proceeds

2 of avoidance actions during the interim period. So we've

3 tabled that issue to final.

4 THE COURT: Okay. All right. Is there any

5 other open issues with respect to the cash collateral motion?

6 MR. MANNS: Not from the debtor's perspective,

7 Your Honor.

8 MR. EASTLAKE: Nor from the lenders.

9 THE COURT: All right. Mr. Salitore?

10 MR. SALITORE: I'm sorry, Your Honor. The

11 only -- and these are very minor points, compared to the

12 others.

13 In paragraph 14 that addresses events of default, in

14 sub J, restricts the debtor for a sale outside of the

15 ordinary course without lender consent. It also in sub K

16 talks about a cutoff of December 9th for being (inaudible few

17 words). That will be inconsistent with kind of what has been

18 discussed today. In sub M, would the -- whatever investment

19 banker apparently requires lender approval. And in paragraph

20 13, it requires lender consent for disposition of assets.

21 The U.S. Trustee's only concern here is that on this interim

22 basis, that may be too much of a restriction on the debtor's

23 ability to effectively use Chapter 11 for the benefit of all

24 of the creditors. That would be it for the U.S. Trustee's

25 concerns.



51

1 THE COURT: Okay. The disposition of assets.

2 Which paragraph was that you're referring to?

3 MR. SALITORE: Paragraph 13, as well as

4 paragraph 14, event of default, sub J and perhaps sub M, as

5 in Michael.

6 It's clear the parties are headed towards a sale of the

7 assets. We're just -- we would want to be concerned about

8 the debtor's ability to maximize value in that sale process.

9 MR. MANNS: Your Honor, we wouldn't be able to

10 dispose of any collateral without their consent any ways.

11 And so I'm not sure that that's really inconsistent with

12 what's in K, as it stands. On M, it only requires that the

13 investment banker is reasonably acceptable to a collateral

14 agent. And so we've qualified it. And I don't think that it

15 really restricts the debtor from going out and selecting an

16 investment banker. We will consult with the lenders on that

17 point.

18 THE COURT: Okay. So you're saying you can't

19 sell it without their consent, because they have liens on

20 everything?

21 MR. MANNS: They do.

22 THE COURT: Okay. All right. What about the

23 cutoff date? What is that going to be? We discussed at the

24 beginning that that was going to have to be pushed out

25 because of the final hearing date, right?



52

1 MR. MANNS: I think that will need to reflect

2 December 30th now.

3 MR. EASTLAKE: Agreed, Your Honor.

4 THE COURT: That's December 30th for interim

5 order and then the final order it will be something else,

6 assuming you get to a final order, or that's going to be it?

7 MR. MANNS: Well, I think it just provides

8 that the final order needs to be entered by December 30th.

9 THE COURT: Okay. You all are going to get --

10 we're going to have a hearing on the 30th. Are you going to

11 get me that order by the 30th?

12 MR. MANNS: That will be the intention.

13 THE COURT: Okay. Because I can enter my own

14 order, you know, three paragraphs long. But I'm pretty sure

15 that's not what you all want me to do.

16 MR. EASTLAKE: No. We will definitely make

17 sure it's before the Court with sufficient --

18 THE COURT: Why don't we make it the 31st.

19 MR. MANNS: Okay.

20 THE COURT: That will give you all time to

21 conclude the hearing, conclude your negotiations on the

22 documents, dot your Is, cross your Ts, so you can upload it

23 after that. Is that workable for everybody?

24 MR. EASTLAKE: Your Honor, I'm sorry, I missed

25 the date.



53

1 THE COURT: The 31st, the day after the

2 hearing.

3 MR. EASTLAKE: Okay.

4 THE COURT: So that gives you that -- you can

5 work all night because, you know, that's what you all do.


7 THE COURT: And get us the final document.

8 Okay? Is that fair? Let's do that.

9 And then -- okay. I do request that with respect to

10 the paragraph on the disposition of assets, you're saying you

11 can't sell any assets because they're subject to -- or you

12 can't -- yeah, you can't sell outside the ordinary course of

13 business without the prior written consent. I would like

14 to -- I'm assuming, based on what you all have told me, that

15 they have liens on everything. But I would like that

16 paragraph to provide that to the extent they have a lien on

17 assets, you can't sell any of their collateral without their

18 prior written consent. Okay? That way if, you know,

19 magically you find something that everybody forgot about, or

20 there's something that is unencumbered, you may be able to

21 sell it without their consent. I don't know what that is.

22 But since we're sitting here with very limited notice, I

23 think that's fair. Any problems with that?


25 THE COURT: Okay. Thank you.



54

1 All right. With all of the changes we've discussed on

2 the record, the Court will approve the sale -- I'm sorry,

3 will approve the cash collateral motion as negotiated by the

4 parties and as discussed -- with the modifications we've

5 discussed on the record today.

6 MR. MANNS: Thank you, Your Honor.

7 MR. EASTLAKE: Thank you.

8 THE COURT: All right. And you have your

9 final hearing date, right?

10 MR. MANNS: Would it be best -- should we

11 contact chambers regarding a time, Your Honor, or would you

12 like to --

13 THE COURT: No. Let's do that right now.

14 Let's make it 10:00; is that good?

15 Okay. We'll make it 10:00. That gives you all the

16 morning to try and knock out whatever you all need to knock

17 out. And then --

18 MR. EASTLAKE: That would be on the 30th,

19 correct?

20 THE COURT: On the 30th, right. Okay?


22 MR. EASTLAKE: Thank you.

23 THE COURT: All right. Okay. So let's then

24 return to the motion to extend the time for filing schedules

25 and statement of financial affairs.



55

1 Does anyone wish to be heard any further with respect

2 to that matter?

3 All right. Based on the arguments before the Court and

4 the Court having approved the use of cash collateral on an

5 interim basis and set a final hearing, the Court will approve

6 the extension of time to December 10th. Okay? I want you

7 all to -- I know that with a bankruptcy filing, there's all

8 kinds of things coming at everybody, the debtor's pretty

9 quickly and things. But this is a very important issue for

10 the Court. We really can't get much running, until we see

11 those documents, those papers. And so I would encourage you

12 all to look at our local rules about any further extensions

13 beyond the 10th, beyond the initial 15 days. They're very

14 difficult to obtain. And there's a reason for that. And if

15 we can't get a 341 Meeting conducted, your case is going to

16 really be moored. Okay? So I like to move your case along

17 fairly quickly, so that you all can get to the results that

18 you all are looking for. But we can't go there without your

19 schedules and statements. So this is not just a check the

20 box issue. This is an issue with -- for making sure that you

21 can get your case moving along smoothly. Okay?

22 MS. SHAH: For the record, again, Your Honor,

23 Shivani Shah on behalf of the debtors. We appreciate that

24 and understand the importance. And so we will diligently

25 work to get those done.



56

1 THE COURT: Okay. And then I'm understanding

2 that we will need to amend the -- because of the extension,

3 there will have to be a new notice sent out to creditors and

4 you're going to work with your -- the noticing agent to send

5 out the revised bankruptcy filing 341 Meeting notice?

6 MS. SHAH: Yes, Your Honor. Once we've

7 confirmed that there's a new 341 that's scheduled, we will

8 serve out that notice.

9 THE COURT: Perfect. Okay.

10 MR. SALITORE: Just very briefly. We would

11 schedule that meeting for December 20th at 10:30 at the Plano

12 Center. And we would ask that that notice also include a

13 reference or notification about the, or at least publish the

14 website that I understand the claims administer is going to

15 be preparing or putting up.

16 MS. SHAH: We will do that, Your Honor.

17 THE COURT: Okay.

18 MS. SHAH: And the website is up and live.

19 THE COURT: Okay. So you're going to file

20 that notice with the Court, right, and then serve it?

21 MS. SHAH: Yes.

22 THE COURT: Okay. Thank you.

23 All right. Are we ready to move on to the next item?

24 MS. SHAH: Yes, Your Honor.

25 The next item on the docket -- the agenda is the motion



57

1 to limit notice. And I know we've briefly touched on this

2 and we're in agreement with Your Honor that notice and due

3 process are incredibly important.

4 Due to the nature of the debtor's creditor matrix and

5 the fact that there are a number of equity holders, we're

6 requesting that we limit notice with regard to motions so

7 that they're not served on all of the equity holders and like

8 vendor creditors. However, when issues are directly relevant

9 to equity holders, prior to an event happening, we will file

10 8-Ks, as well as issue press releases. So, for example,

11 prior to filing -- as soon as we are able to retain an

12 investment banker, or when we determine the sales process,

13 we'll make sure that those documents and notices go out prior

14 to anything being finalized so that everyone has the ability

15 to be in the know and to have an opportunity to attend or

16 speak, if there's an issue.

17 THE COURT: Okay. Does anyone else wish to be

18 heard with respect to this matter?

19 MR. SALITORE: Your Honor, the U.S. Trustee

20 initially had concerns with the publication of the website

21 going out to the creditor body. With the re-issue of the

22 Creditor Meeting, we no longer have any issue.

23 THE COURT: Okay. All right. I think that

24 the motion, then, should be approved. You'll upload that

25 order, with the modification that we just discussed on the



58

1 record, right?

2 MS. SHAH: Yes. Thank you, Your Honor.


4 MS. SHAH: The next item on the agenda is the

5 application to retain Kurtzman Carson Consultants, LLC as a

6 claims and noticing agent. That can be found at docket

7 number 4.

8 The debtor selected KCC due to their extensive

9 experience and their competitive, yet, reasonable rates.

10 Also, because they have familiarity with Your Honor and have

11 previously worked with cases in this District. Given the

12 types of service that KCC will be providing in these cases,

13 in this case, particularly, give the number of parties on the

14 creditor matrix, the claims and noticing agent is crucial to

15 the debtor's ability to properly serve and notice all parties

16 in interest.

17 On the line telephonically appearing, we have Robert

18 Jordan, who is a declarant in support of KCC's application,

19 if Your Honor has any questions.

20 THE COURT: Do you have the declaration, or

21 are you offering the declaration as evidence?

22 MS. SHAH: Yes. And I believe it should be in

23 the -- it's in the exhibit notebook.


25 MS. SHAH: Number 2.



59

1 THE COURT: Okay. So Exhibit 2, declaration

2 of Robert Jordan is being offered as evidence. Any

3 objections?

4 MR. EASTLAKE: No objection.

5 THE COURT: Okay. Exhibit 2 is admitted.

6 Okay. As the noticing agent, they'll be noticing out

7 all of the Court's orders, all of the scheduled hearings and

8 such, right?

9 MS. SHAH: Yes, Your Honor.

10 THE COURT: Okay.

11 MS. SHAH: And I'd also like to add, just as a

12 housekeeping matter to make sure we have a complete record,

13 Exhibit Number 3 is their engagement letter.

14 THE COURT: Okay. Do you want to offer that?

15 MS. SHAH: Yes, Your Honor. We'd like to

16 offer Exhibit 3, Kurtzman Carson Consultants, LLC's agreement

17 for services. This is also attached as Exhibit C to their

18 application.

19 THE COURT: Okay. Any objections to Exhibit

20 3?

21 MR. EASTLAKE: No objection, Your Honor.

22 THE COURT: Exhibit 3 is admitted.

23 MS. SHAH: Thank you, Your Honor.

24 To answer your question, Your Honor, KCC will be

25 noticing and serving -- they will be serving all notices,



60

1 orders, and motions to everything that is filed.

2 THE COURT: Okay. How are they going --

3 mechanically, how are they going to know about the orders and

4 motions that they need to serve? Is KCC going to just simply

5 pick it up off the docket, or are they going to -- are you

6 all sending it over to them? Or how does that work?

7 MS. SHAH: Yes, Your Honor. So every time

8 something is filed, we're in constant communication with KCC.

9 So every time we file something, we email KCC and let them

10 know that this needs to be served. And we also provide them

11 instructions on who it needs to be served on.

12 THE COURT: Okay.

13 MS. SHAH: So that all appropriate parties are

14 receiving notice and service.

15 THE COURT: Okay. How about orders entered?

16 MS. SHAH: We will also do that with orders.

17 THE COURT: Okay. So you'll be sending them

18 on to KCC?

19 MS. SHAH: Yes. They will also be monitoring

20 the docket. And, I believe, are also in the process of

21 gaining ECF, so that they can also file certificates of

22 service and are able to monitor the docket, as well.

23 THE COURT: Okay. That's in the works. I

24 think we discussed that the other day.

25 All right. We've done that with them in the CFO case,



61

1 as well. So I think they kind of know how things work here.

2 All right. Does anyone wish to be heard with respect

3 to the appointment of Kurtzman Carson Consultants as the

4 claims and noticing agent?

5 Okay. All right. The Court will approve the

6 application.

7 MS. SHAH: Thank you, Your Honor. We'll

8 upload that order.


10 MS. SHAH: The next item on the agenda is the

11 motion for an order authorizing implementation of procedures

12 to protect confidential patient information.


14 MS. SHAH: This can be found at docket number

15 12.

16 Since the debtor sells implants and services medical --

17 used to sell implant and service medical devices used by

18 patients, the debtor maintains confidential patient

19 information. Pursuant to the Health Insurance Portability

20 and Accountability Act, also known at HIPPA, healthcare

21 providers are required to meet stringent confidentiality

22 standards with regard to the use and disclosure of certain

23 patient information.

24 While the debtor isn't a healthcare provider, the

25 debtor is still subject to HIPPA regulations, because it is a



62

1 business associate of a healthcare provider. In the case,

2 doctors and hospitals. The unauthorized disclosure of

3 protected health information, including the identification of

4 a patient or any identifiable information can lead to

5 significant monetary penalties. Oftentimes penalties include

6 $50,000 fines for each violation. And this can add up to

7 over $1.5 million a year. The Bankruptcy Code requires the

8 debtor to file a list of all creditors and to disclose all

9 assets and liabilities. This inevitably would include this

10 kind of -- this protected patient information.

11 The debtor proposes that patients be excluded from the

12 creditor matrix and that their names and addresses are

13 excluded. However, what will be done, instead, is each

14 patient will be replaced with patient 1, patient 2, patient

15 3. KCC will then maintain a patient list that stays

16 confidential. And it will be made available to parties in

17 interest only after an order from this Court is entered.

18 The debtor has not received any objections or any

19 comments on this motion. Pursuant to Bankruptcy Rule 9018,

20 the debtor requests the Court approve the proposed privacy

21 procedures to maintain confidential patient information, as

22 required by HIPPA.



25 All right. The Court will approve the motion.



63


2 The next motion on the agenda is the motion to pay

3 wages. This is docket number 17. Just a little bit of

4 background for Your Honor.

5 The debtor employs, currently employs, or as of the

6 petition date employs about 137 employees. About 134 of

7 those are full time. They also have 33 independent

8 contractors, about 11 sales agents, and 5 temps. These

9 personnel provide a variety of critical functions, which

10 include, but are not limited to, patient clinical support,

11 physician support, regulatory compliance, product support,

12 intellectual property development and maintenance, and then a

13 number of different services that maintain the business on a

14 going basis.

15 Due to the fact that the debtor is a medical device

16 company, these personnel possess specialized knowledge,

17 skill, and understanding of these products' technology. And

18 most importantly, the relationships with doctors, patients,

19 and these vendors. And all of this is essential to the

20 debtor's business.

21 For a little bit more procedural background. The

22 debtor makes payroll about every two weeks. The most recent

23 payroll was on November 8th. And the next payroll is this

24 Friday, November 22nd. In order for the debtor to make this

25 payroll, they need to fund the account by tomorrow. So it's



64

1 crucial that we are able to enter an order today. Part of

2 the next payroll includes commissions earned for the month of

3 October. As of the petition date, the debtor estimates that

4 approximately $830,000, among other compensation and unpaid

5 salary, wages, and commissions are owed on account of

6 pre-petition services to employees. Approximately $475,000

7 is owed to contractors and agents. Specifically between

8 October 1st and the petition date, November 12th, the debtor

9 estimates that employees and agents are owed about $800,000

10 in commission.

11 Furthermore, in the ordinary course of business, the

12 debtor also reimburses employees and sales agents for

13 expenses incurred in the scope of their employment. And this

14 generally includes travel reimbursements, including airfare,

15 meals, and lodging. As of the petition date, the debtor

16 estimates that approximately $100,000 is owed to employees

17 and agents. This is an approximation, because reimbursed

18 expenses are often submitted at the will of an employee.

19 It's a little bit difficult, sometimes, to predict who has

20 submitted all of their reimbursements. But to the best of

21 the debtor's knowledge, this is the estimate that we've been

22 able to put together.

23 With all of these requests, the debtor requests the

24 authority to honor and pay outstanding wages, salaries,

25 commissions, and reimburseable expenses up to but not



65

1 exceeding the priority cap of $13,650. In addition to wages,

2 salaries, commissions, and expenses, the debtor provides a

3 number of benefits to its full-time employees. This

4 includes, but is not limited to paid time off; health,

5 dental, and vision insurance; life, accident, and disability

6 insurance; as well as 401K.

7 The debtor has not received any objections. We did

8 receive a few informal comments from the U.S. Trustee. And

9 believe with our revised order that we will upload, we have

10 resolved the U.S. Trustee's comments. And with that, the

11 debtor requests that the Court grant the order -- grant the

12 motion and enter the order.

13 THE COURT: All right. Does anyone else wish

14 to be heard?

15 MR. SALITORE: Mark Salitore for the U.S.

16 Trustee.

17 I wanted to say that's correct, Your Honor. Thank you.

18 THE COURT: All right. So you're seeking

19 authority to pay a little over -- so 475,000, approximately,

20 for pre-petition wages and reimbursable expenses, plus an

21 additional 797,000 in commission; is that correct?

22 MS. SHAH: That is correct. Those are the

23 estimated and outstanding. However, these will be subject to

24 the priority limit.

25 THE COURT: Well, if the numbers are --



66

1 MS. SHAH: So it should be a little bit less

2 than these numbers, is what should actually be paid. But as

3 of the petition date, and we're still trying to work through

4 the numbers on where things line up and which employees are

5 above and below. These are the whole numbers that the debtor

6 has outstanding.

7 THE COURT: Okay. All right. Are any of

8 these individuals insiders, who are being paid?

9 MS. SHAH: Can I have a moment, Your Honor?

10 THE COURT: You can.

11 MS. SHAH: This does include payments to

12 officers and directors, but not to any majority shareholders.

13 THE COURT: Okay. But they are being paid

14 what they have been paid customarily, or historically; is

15 that correct?

16 MS. SHAH: Yes.

17 THE COURT: Okay. So we didn't get any, like,

18 nice little bonuses or step up in pay right before bankruptcy

19 was filed?

20 MS. SHAH: No. Not to my knowledge.

21 None of these numbers include bonuses. So bonuses are

22 not even --

23 THE COURT: Well, okay. There are bonuses and

24 then there are raises, right? So my question is -- I just

25 want to make sure we're clear. It's not as if somebody was



67

1 normally paid X dollars and some time during the

2 restructuring prior to bankruptcy they get, we're going to

3 give you a raise of X plus Y dollars. We're not doing

4 anything like that, right?

5 MS. SHAH: Can we have a moment, Your Honor?

6 THE COURT: Sure.

7 MS. SHAH: Thank you.

8 No, Your Honor, there are no special payments that were

9 made, or changes or increase in wages, or anything like that.

10 THE COURT: Perfect. Thank you.

11 Okay. Does anyone else wish to be heard with respect

12 to this matter?

13 All right. Based on the evidence before the Court and

14 having heard the arguments of counsel, the Court will grant

15 the motion to pay the pre-petition wages and salaries and

16 compensation, subject to the priority cap. Okay?

17 If there's any other payments to be made, you'll have

18 to file a separate motion and we'll take it up in that

19 manner. But you can pay up to the cap. Okay?

20 MS. SHAH: Understood. Thank you, Your Honor.


22 MS. SHAH: The final motion that I'll be

23 addressing, Your Honor, is the utilities motion. That can be

24 found at docket number 15.

25 The debtor uses traditional utility services, such as



68

1 telephone, electricity, water, security lease management for

2 its various offices. The debtor has made an extensive and

3 good-faith effort to identify all of the utility providers.

4 A list identifying the various utility providers is attached

5 to the motion as Exhibit B and is in the exhibit binder at

6 Tab 4. I will note that at a first glance, this list may

7 seem incomplete, especially for the Plano location. However,

8 a number of those utilities are included in the debtor's rent

9 and, therefore, are not separate utilities.

10 Pursuant to Section 366 of the Bankruptcy Code, the

11 debtor seeks an order from the Court prohibiting these

12 providers from discontinuing services on account of

13 pre-petition invoices. Because without these basic

14 utilities, the debtor cannot operate its business.

15 Additionally, the debtor seeks approval of a proposed

16 one month utility deposit. These deposits will be held in a

17 segregated account. And the motion also sets forth a number

18 of proposed procedures, if a utility provider seeks

19 additional adequate assurance.

20 With that, Your Honor, we've received no objections and

21 no comments from the U.S. Trustee. And request that the

22 Court grant the motion and enter the proposed interim order.

23 THE COURT: Okay. Does anyone wish to be


25 The motion is approved.



69


2 THE COURT: Thank you, ma'am.

3 MS. SHAH: At this time I'll cede the podium

4 to my colleague, Ms. Laura Smith.

5 THE COURT: Okay.

6 MS. SMITH: Good afternoon, Your Honor. Laura

7 Smith, Norton Rose Fulbright, on behalf of the debtor. I'll

8 be addressing agenda items I through L.

9 The first motion I'll be addressing is the insurance

10 motion. It was filed on November 13th, 2019 and can be found

11 at docket entry number 9.

12 By this motion, the debtor, pursuant to Sections

13 105(a), 363, 364, and 1107 of the Bankruptcy Code seeks entry

14 of an interim order authorizing, but not directing the debtor

15 to maintain its insurance programs to satisfy the payment of

16 any pre-petition obligations relating to these insurance

17 programs in the ordinary course of its business and to renew,

18 supplement, amend, or enter into new programs in the ordinary

19 course.

20 The debtor maintains numerous insurance policies with

21 multiple insurers and includes business automobile liability,

22 products liability, Worker's Comp., general commercial

23 liability, directors and officer liability, as well as excess

24 liability, employment practices liability, kidnap and ransom

25 liability, fiduciary liability, flood, cyber, and multiple



70

1 excess products liability policies.

2 I'd refer the Court to Exhibit 5 in the debtor's

3 witness and exhibit list, which lists the debtor's various

4 insurance programs. And this list was also attached to the

5 insurance motion as Exhibit A.

6 THE COURT: Okay.

7 MS. SMITH: With regard to each of these

8 policies, the debtor pays premiums to the carriers in full

9 with the commencement of the respective policy period or on a

10 prorated basis. Some policies may expire following the

11 petition date. And the debtor may be required to pay such

12 premiums in connection with the renewal of such policies.

13 And requests authority to do so as part of this motion.

14 There are no objections filed. And we did not receive

15 any additional comments on the motion of proposed form of

16 order from the U.S. Trustee. Unless the Court has any

17 additional questions or concerns, we'd ask the Court to grant

18 the relief requested therein.

19 THE COURT: Okay. Does anyone wish to be


21 All right. The motion is approved.

22 MS. SMITH: Thank you, Your Honor.

23 Moving on to the next agenda item is the cash

24 management motion. This motion was filed on November 13th,

25 2019 and can be found at docket entry number 18.



71

1 By this motion the debtor seeks, pursuant to Sections

2 105(a), 363(b), and 345 of the Bankruptcy Code for entry of

3 an interim order authorizing the debtor's continued use of

4 its existing cash management system, the maintenance of its

5 existing bank accounts, use of any existing business forms,

6 and maintenance of its existing investment practices.

7 The debtor maintains four accounts at Silicon Valley

8 Bank, which is an authorized depository on the United States

9 Trustee's guidelines for Chapter 11 cases in the Eastern

10 District. A list of these various bank accounts is set forth

11 on Exhibit 6 of our witness and exhibit list. And was also

12 attached to the motion as Exhibit C.

13 THE COURT: Okay.

14 MS. SMITH: These various accounts include a

15 lock box cash collateral account, a checking account, a sweep

16 account, and an asset management account.

17 In the ordinary course of business, customers will send

18 payments to the debtor's lock box cash collateral account.

19 At the end of each day, the lock box cash collateral account

20 funds are actually sent to the debtor's checking account.

21 When the debtor's vendors receive payments that have been

22 sent by the debtor, the payment amounts are deducted from the

23 checking account. The checking account is either swept or

24 funded respectively nightly with the debtor's sweep account.

25 So in that scenario, if the debtor has received more from its



72

1 customers than has been paid to vendors, the excess is sent

2 to the sweep account. On the other hand, if the debtor has

3 paid more to its vendors than it has received from customers,

4 the shortfall is funded from the sweep account to offset the

5 negative amount owing.

6 Cash is also held by the debtor in an asset management

7 account. And that's account number 1350. When transferring

8 money out of the asset management account, the debtor can

9 only send such funds to the debtor's checking account. And

10 approximately every two weeks, typically on Friday mornings,

11 the debtor transfers an amount between 3 to 5 million out of

12 the asset management account and into the checking account.

13 And the debtor maintains approximately $5 million in its

14 checking account at all times.

15 In addition to the cash management system in the

16 existing bank accounts, the debtor uses in the ordinary

17 course of its business numerous forms, but mostly checks.

18 The debtor requests authority to use its existing check

19 stock, but would include a debtor in possession stamp on any

20 existing checks that go out the door.

21 We did not receive any objections to the cash

22 management motion, but we did receive several informal

23 comments from the U.S. Trustee on the proposed form of order.

24 Specifically, the U.S. Trustee asked that we take out

25 language in paragraph 6 of the proposed order, which had a



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1 blanket waiver of Section 345. In his comment, the U.S.

2 Trustee had indicated to us that he was already in contact

3 with the Bank. And they had already agreed to post the bond

4 required under Section 345(b). So we now have removed that

5 blanket waiver language from paragraph 6, as indicated in the

6 red line we handed up earlier. The U.S. Trustee also

7 requested that we designate existing accounts as debtor in

8 possession accounts. And we revised Section 2.1 of the

9 proposed order to reflect that change, as well.

10 Unless the Court has any additional questions, we'd ask

11 that the Court enter the proposed interim order.



14 MR. SALITORE: Mark Salitore for the U.S.

15 Trustee.

16 That is correct, Your Honor. Thank you.

17 THE COURT: All right. Well, you caught my

18 niche. Based on the changes as announced on the record

19 today, the Court will approve the motion.


21 Moving along. We are at the taxes motion, which was

22 filed on November 13th, 2019. It can be found at docket

23 entry number 8.

24 By this motion, the debtor requests entry of an interim

25 order pursuant to Sections 105(a), 363(b), 507(a)(8), 541,



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1 and 1107 of the Bankruptcy Code authorizing the debtor to

2 remit and pay certain pre-petition taxes and fees that will

3 become payable during the pendency of the case.

4 In the ordinary course of its business, the debtor

5 collects, withholds, and incurs sales, use, excise, income

6 withholding; franchise OPT; commercial activity severance,

7 commerce, and property taxes; as well as other business

8 environmental and regulatory fees, which I'll collectively

9 refer to today as the taxes and fees.

10 The debtor remits these taxes and fees to various

11 federal, state, and local governments, including taxing and

12 licensing authorities. A schedule identifying these various

13 authorities, along with the amount of taxes and fees known or

14 really estimated is set forth in Exhibit 7 of the witness and

15 exhibit list and was attached to the motion as Exhibit A.

16 The debtor pays the taxes and fees on a periodic basis,

17 submitting them monthly, quarterly, semi-annually, or

18 annually, depending on the nature and incurrence of these

19 taxes and fees.

20 The debtor believes that it's substantially current

21 with its taxes and fees. But seeks authority, pursuant to

22 this motion, to make any payments where taxes and fees

23 accrued or incurred post-petition; taxes and fees accrued or

24 incurred pre-petition, but were not paid pre-petition, or

25 were paid in an amount less than actually owed; and finally



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1 where taxes and fees were paid pre-petition by the debtor,

2 but were lost or otherwise not received in full.

3 There are no objections filed to the motion. And we

4 did not receive any comments from the United States Trustee.

5 So unless the Court has any additional questions or concerns,

6 we'd ask that the interim order be entered.

7 THE COURT: All right. Does anyone else wish

8 to be heard with respect to this matter?

9 All right. Based on the Court's review of the motion

10 and having heard the arguments of counsel, the Court will

11 approve the motion.


13 The final motion is the warranty motion. This was

14 filed on November 13th, 2019. It can be found at docket

15 entry number 14.

16 The debtor seeks authority pursuant to Sections 105(a)

17 and 363(b) of the Bankruptcy Code to maintain and honor its

18 existing warranty program and the obligations there under.

19 As part of the debtor's business, the debtor offers a

20 limited warranty on its Algovita System. The specific terms

21 and conditions of the warranty are set forth in a limited

22 warranty, a copy of which was included as Exhibit 8 on the

23 debtor's witness and exhibit list and which was attached as

24 Exhibit C to the warranty motion.

25 In 2018, there was approximately $1.5 million in claims



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1 made under the debtor's warranty program. In conjunction

2 with the warranty program and as a component of its current

3 liability, the debtor maintains a warranty reserve on its

4 financial books and records for any potential claims that

5 customers may have. The debtor estimates its warranty

6 reserve, based upon an analysis of all identified or expected

7 claims in an estimate of the cost to resolve such claims.

8 Factors that affect the debtor's warranty liability include

9 the number of units sold, historical and anticipated rates of

10 warranty claims, and the differences between actual and

11 expected warranty cost per claim. The debtor periodically

12 assesses the adequacy of its warranty liability and adjusts

13 them out, as necessary. The reserve amount on the debtor's

14 financial books and records as of the petition date was

15 approximately $282,000. As of the petition date, the debtor

16 does not have any open warranty claims. But claims may arise

17 under the program after the petition date, because

18 approximately 2,000 patients have been implanted with the

19 device in the last 12 months.

20 Additionally as part of its warranty program, the

21 debtor also has a financial assistance policy pursuant to

22 which it gives replacements for certain items that may

23 otherwise be out of warranty, such as adhesive patches. And

24 the debtor provides for such replacements out of its existing

25 inventory that it has on hand. From a pure cost perspective,



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1 the debtor estimates that such replacements are roughly

2 100,000 per month.

3 It's customary and expected in the debtor's industry

4 that customers obtain a warranty to assure the value and

5 quality of the debtor's products. The damage to the debtor's

6 reputation, in the event it's unable to honor its warranty

7 program would be significant. Moreover, there is exigency in

8 improving this requested relief, because the warranty program

9 covers medical devices. It's, therefore, critical to the

10 ongoing success of the debtor's operations that the debtor

11 honor and maintain its existing warranty program.

12 There were no objections filed to the motion. And we

13 did not receive any comments from the United States Trustee.

14 Unless the Court has any additional concerns, we'd ask that

15 the interim order be entered.

16 THE COURT: All right. Does anyone wish to be


18 All right. The motion's approved.


20 And just as a housekeeping matter. To the extent that

21 we did not formally offer our exhibits today, I would

22 formally offer the Debtor's Exhibits 1 through 9.

23 THE COURT: Okay. Any objections to -- I

24 think we've already gotten 1 through 3. So any objections to

25 any of the Exhibits 1 through 9?



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1 All right. The exhibits are admitted. Thank you.

2 Okay. And one other housekeeping matter. All of the interim

3 motions, final hearing is the same date as the final hearing

4 on your cash collateral motion. Okay?


6 THE COURT: Yes, sir.

7 MR. MANNS: Your Honor, I just have one more

8 clarifying comment. I just want to make sure we're

9 completely responsive to the Court's question with respect to

10 the wages motion.

11 So to answer your question, it includes only

12 pre-petition unpaid wages and commissions, et cetera. And

13 only to the amount of the priority cap. Pre-petition, the

14 debtor did make some payments to certain employees. Under

15 agreement for retention, these payments will be disclosed in

16 the statement of financial affairs. And they will be

17 available for review by creditors and the United States

18 Trustee.

19 THE COURT: Perfect. I just wanted to make

20 sure that with respect to the motion to pay the pre-petition

21 claims that was on for hearing today, that if there were

22 insider payments, particularly where they've gotten, you

23 know, raises recently, that the Court was aware of that and

24 aware of what the magnitude of that is before the Court

25 approves it. But given the representations that there



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1 weren't anything like that, that the Court has approved the

2 motion.

3 And then with respect to any other wage issues,

4 particularly with respect to insiders or those in control,

5 we'll take that up when it needs to be and you all will file

6 your motions, I'm sure, if you need to. Okay?


8 THE COURT: All right. Is there anything else

9 we need to take up for today's hearing?

10 MR. MANNS: No, Your Honor. That's it on the

11 debtor's agenda.

12 THE COURT: All right. Thank you. Parties

13 are excused.

14 Oh, yes. If you haven't been here a lot before, you

15 all should know that you should email Ms. Rasco when the

16 orders are uploaded, so she knows to go look for them.

17 Especially things that need to be signed today. We have

18 another hearing after your's. We're hoping to take a brief

19 recess before we call the next hearing. But that's the most

20 effective way to contact the courtroom deputy to let her know

21 when the orders are uploaded, okay, is through email. Email

22 it to the CRD email. You know what that is? That's our

23 generic courtroom deputy email address so that other staff

24 members can go look for that, if Ms. Rasco is otherwise

25 occupied or unavailable. Okay?



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1 So email it to that email address. I'm not talking

2 about emailing the document. You're going to upload the

3 document through eOrders upload. You just email Ms. Rasco to

4 tell her it's there, so she can go look for it so we can get

5 it signed for you today. Okay?

6 MS. SHAH: We'll do that, Your Honor. Thank

7 you.

8 THE COURT: Thank you. Parties are excused.

9 (End of Proceedings.)

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1 C E R T I F I C A T E

2 I, CINDY SUMNER, do hereby certify that the

3 foregoing constitutes a full, true, and complete

4 transcription of the proceedings as heretofore set forth in

5 the above-captioned and numbered cause in typewriting before

6 me.

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14 /s/Cindy Sumner

15 ______________________________

16 CINDY SUMNER, CSR #5832 Expires 12-31-19

17 Cindy Sumner, CSR 5001 Vineyard Lane

18 McKinney, Texas 75070 214 802-7196

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Documents

Case 19-43090 Doc 254 Filed 03/06/20 Entered 03/06/20 08