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Jeffrey L. Cohen T: +1 212 479 6218 [email protected]
VIA EMAIL
1114 AVENUE OF THE AMERICAS, NEW YORK, NY 10036 T: (212) 479-6000 F: (212) 479-6275 WWW.COOLEY.COM
March 10, 2014
Honorable Laurie Selber Silverstein United States Bankruptcy Court For the District of Delaware 824 North Market Street, 6th Floor Wilmington, DE 19801
RE: In re Hipcricket, Inc. (Case No. 15-10104-LSS)
Dear Judge Silverstein:
In connection with Your Honor’s consideration of the matters heard at yesterday’s hearing in the above-captioned case, the Official Committee of Unsecured Creditors (the “Committee”) of Hipcricket, Inc. (the “Debtor”) respectfully submits the enclosed hearing transcripts and sale order from the bankruptcy cases of Lenox Sales, Inc., et al. (“Lenox”) (Case No. 08-14679 (ALG)) (Bankr. S.D.N.Y) in which Cooley LLP represented the Official Committee of Unsecured Creditors. The attached order approves the sale of Lenox’s assets to a bidder whose original bid, submitted in the form of a plan of reorganization, was not qualified by Lenox because it was subject to various contingencies, including a financing contingency. Following a multi-day hearing, the Honorable Allan L. Gropper, ordered (i) that the bid, which had subsequently been improved to remove various contingencies, be accepted as a qualified bid in Lenox’s Section 363 sale process, and (ii) that the auction be re-opened to allow the bidder to submit its bid for the assets at auction. Ultimately, the previously unqualified bidder submitted the highest or otherwise best bid, and it was approved by the Court. The most relevant portion of the transcript, where Judge Gropper issued his ruling, can be found on page 93 of the transcript for the hearing held on February 25, 2009. It was mentioned at yesterday’s hearing that none of the parties were successful in identifying reported decisions on the issues currently before the Court in the Debtor’s case. While the attached documents are admittedly not precedential, the Committee respectfully submits them solely for the purpose of demonstrating that similar issues have indeed been addressed in other cases. Sincerely,
/s/ Jeffrey L. Cohen
Jeffrey L. Cohen
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March 10, 2014 Page Two
1114 AVENUE OF THE AMERICAS, NEW YORK, NY 10036 T: (212) 479-6000 F: (212) 479-6275 WWW.COOLEY.COM
Encl. Transcript of February 23-25, 2009 (In re Lenox Sales, Inc., et al.)
Order (I) Approving Asset Purchase Agreement and Authorizing the Sale of the Debtors’ Assets Outside the Ordinary Course of Business, (II) Authorizing the Sale of Assets Free and Clear of All Liens, Claims, Encumbrances and Interests, and (III) Granting Related Relief (Case No. 08-14679 (ALG)) (Bankr. S.D.N.Y) (Docket No. 347) (March 4, 2009)
cc. All Counsel of Record (by ECF)
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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
Case No. 08-14679-alg
- - - - - - - - - - - - - - - - - - - - -x
In the Matter of:
LENOX SALES, INC.,
Debtor.
- - - - - - - - - - - - - - - - - - - - -x
U.S. Bankruptcy Court
One Bowling Green
New York, New York
February 23, 2009
11:12 a.m.
B E F O R E:
HON. ALLAN L. GROPPER
U.S. BANKRUPTCY JUDGE
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1 SALE HEARING
2
3 MOTION of Debtor for Entry of an Order Authorizing and
4 Approving the Sale of Substantially all of Their Assets to
5 Upstairs Acquisition Corp.
6
7 MOTION of the Official Committee of Unsecured Creditors for
8 Entry of Order Extending Investigation Deadline With Respect to
9 Liens and Claims Asserted by Term Loan Lenders, and Directing
10 the Production of Documents, etcetera
11
12
13
14
15
16
17
18
19
20
21
22
23
24 Transcribed By: Esther Accardi
25
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1 A P P E A R A N C E S :
2 WEIL GOTSHAL & MANGES, LLP
3 Attorneys for Debtor
4 700 Louisiana
5 Houston, Texas 77002
6
7 BY: ALFREDO R. PEREZ, ESQ.
8
9
10 WEIL, GOTSHAL & MANGES LLP
11 Attorneys for Debtor
12 767 Fifth Avenue
13 New York, New York 10153
14
15 BY: AARON M. KLEIN, ESQ.
16 VERNON S. BRODERICK, ESQ.
17
18
19 KIRKLAND & ELLIS LLP
20 Attorneys for Upstairs Acquisition
21 153 East 53rd Street
22 New York, New York 10022
23
24 BY: YOSEF J. RIEMER, ESQ.
25 LISA LAUKITIS, ESQ.
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1 A P P E A R A N C E S : (continued)
2 COOLEY GODWARD KRONISH, LLP
3 Attorneys for the Creditors' Committee
4 1114 Avenue of the Americas
5 New York, New York 10036
6
7 BY: JEFFREY COHEN, ESQ.
8 CATHY HERSHCOPF, ESQ.
9 RICHELLE KALNIT, ESQ.
10
11
12 PAUL HASTINGS JANOFSKY & WALKER, LLP
13 Attorneys for UBS AG, Stamford Branch
14 600 Peachtree Street, NE
15 Atlanta, Georgia 30308
16
17 BY: JESSE H. AUSTIN, III, ESQ.
18
19
20 PAUL HASTINGS JANOFSKY & WALKER LLP
21 Attorneys for UBS AG, Stamford Branch
22 75 East 55th Street
23 New York, New York 10022
24
25 BY: KRISTINE M. SHRYOCK, ESQ.
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1 A P P E A R A N C E S : (continued)
2 SCHULTE ROTH & ZABEL, LLP
3 Attorneys for the Bank of New York Mellon
4 919 Third Avenue
5 New York, New York 10022
6
7 BY: ADAM C. HARRIS, ESQ.
8 MICHAEL L. COOK, ESQ.
9 ABBEY WALSH, ESQ.
10
11
12 GOLDBERG KOHN BELL BLACK ROSENBLOOM & MORITZ, LTD.
13 Attorneys for LBC Credit Partners II, L.P.
14 55 East Monroe Street
15 Chicago, Illinois 60603
16
17 BY: RANDALL KLEIN, ESQ.
18
19
20 KELLEY DRYE & WARREN, LLP
21 Attorneys for Birch Run Outlets
22 101 Park Avenue
23 New York, New York 10178
24
25 BY: HOWARD S. STEEL, ESQ.
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1 A P P E A R A N C E S : (continued)
2 GREENBERG TRAURIG, LLP
3 Attorneys for Jimmy Buffet
4 200 Park Avenue
5 New York, New York 10166
6
7 BY: KAITLIN R. WALSH, ESQ.
8
9
10 STEVENS & LEE, PC
11 Attorneys for Century Indemnity Company
12 485 Madison Avenue
13 New York, New York 10022
14
15 BY: CONSTANTINE POURAKIS, ESQ.
16
17
18 DAY PITNEY, LLP
19 Attorneys for Oracle USA, Inc.
20 7 Times Square
21 New York, New York 10036
22
23 BY: AMISH R. DOSHI, ESQ.
24
25
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1 A P P E A R A N C E S : (continued)
2 GIBSON DUNN & CRUTCHER, LLP
3 Attorneys for Jack Daniels & Properties, Inc.
4 200 Park Avenue
5 New York, New York 10166
6
7 BY: JANET M. WEISS, ESQ.
8
9
10 STATE OF NEW JERSEY
11 DEPARTMENT OF LAW & PUBLIC SAFETY
12 Attorneys for DEP
13 25 Market Street
14 Trenton, New Jersey 08825
15
16 BY: RACHEL JEANNE LEHR, ESQ.
17
18
19 ROPES & GRAY, LLP
20 Attorneys for Walt Disney Arts Classics
21 1211 Avenue of the Americas
22 New York, New York 10036
23
24 BY: NILA WILLIAMS, ESQ.
25
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1 A P P E A R A N C E S : (continued)
2 SEYFARTH SHAW, LLP
3 Attorneys for CB Commercial Properties
4 131 South Dearborn Street
5 Chicago, Illinois 60603
6
7 BY: SARA E. LORBER, ESQ.
8 (Telephonically)
9
10
11 CHOATE HALT & STEWART, LLP
12 Attorneys for Liberty Mutual Insurance Co.
13 Two International Place
14 Boston, Massachusetts 02110
15
16 BY: DOUGLAS R. GOODING, ESQ.
17 ELEANOR WILLIAMS, ESQ.
18 (Telephonically)
19
20
21
22
23
24
25
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1 P R O C E E D I N G S
2 THE COURT: We'll take appearances from those in the
3 courtroom first, and then from those on the telephone. Mr.
4 Perez?
5 MR. PEREZ: Good morning, Your Honor. Alfredo Perez,
6 Vernon Broderick and Aaron Klein for the debtors.
7 MR. HARRIS: Good morning, Your Honor. Adam Harris,
8 Michael Cook and Abbey Walsh from Schulte Roth & Zabel on
9 behalf of the term loan lenders.
10 Excuse me, Your Honor, in addition, we have with us
11 today Randall Klein who is an attorney for LBC Credit, one of
12 the term loan lenders who is in Court with us today. We filed
13 pro hac vice papers on Mr. Klein's behalf. I don't know if the
14 order's been entered.
15 THE COURT: I think it's been signed, I'm not sure.
16 But that's fine.
17 MR. HARRIS: Thank you, Your Honor.
18 MR. COHEN: Good morning, Your Honor. Jeffrey Cohen,
19 Cooley Godward Kronish on behalf of the committee. With me, my
20 colleague Richelle Kalnit. And to join me in due time, Cathy
21 Hershcopf.
22 MR. AUSTIN: Good morning, Your Honor. I'm Jess
23 Austin along with Kristine Shryrock from Paul Hastings on
24 behalf of the UBS, as the agent on the DIP loan.
25 MS. LAUKITIS: Good morning, Your Honor. Lisa
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1 Laukitis and Yosef Riemer from Kirkland & Ellis on behalf of
2 Upstairs Acquisition Corp., the successful bidder at the
3 auction.
4 MR. STEELE: Good morning, Your Honor. Howard Steel
5 of Kelley Drye, on behalf of landlord Birch Run Outlets.
6 MS. LEHR: Rachel Jeanne Lehr, Deputy Attorney
7 General for the State of New Jersey Department of Environmental
8 Protection.
9 MR. DOSHI: Good morning, Your Honor. Amish Doshi
10 with the firm of Day Pitney on behalf of Oracle USA Inc.
11 MS. WEISS: Janet Weiss from Gibson Dunn & Crutcher
12 from Jack Daniels & Properties Inc.
13 MS. WILLIAMS: Good morning, Your Honor. Nila
14 Williams From Ropes & Gray on behalf of Walt Disney Arts
15 Classics.
16 THE COURT: Anyone else in the courtroom? All right.
17 On the telephone? Anyone on the phone?
18 MS. LORBER: Yes, Your Honor. Sara Lorber on behalf
19 of landlord CB Commercial Properties.
20 THE COURT: All right. Anyone else on the phone.
21 Okay. Mr. Perez, where are we? Why don't we see where we are
22 with regard to the landlords, the assumption and assignment of
23 contracts, and any issues that, perhaps, I see from some of the
24 papers, drafts that were given to me just this morning, we may
25 not be dealing with today.
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1 MR. PEREZ: Correct, Your Honor. I believe with the
2 exception of the term loan lender's objection and the New
3 Jersey Department, I think that we have language in the
4 order -- I think we attempted to work out language with, both
5 the landlords and the other objectors, that would resolve their
6 objections.
7 Your Honor, we're in the process of sending out the
8 cure notices, those have not been sent out. And we wanted to
9 make sure -- everyone wanted to preserve their rights to make
10 sure that at the appropriate time they would have the right to
11 object. And we put in language with respect to various of
12 these, which I think would handle it. I think that Mr. Klein
13 has been working this up on the weekend, I think he could give
14 you a report on where we are with the individual ones.
15 THE COURT: All right. Well, do I understand that
16 you're dropping the assumption and assignment of leases and
17 executory contracts out of the sale order? That's the way I
18 read it. All the other sections appear to be simply excised
19 from the sale order today, and you have a blank for a date for
20 considering the assumption and assignment. So that would be
21 for all executory contracts?
22 MR. PEREZ: Correct, Your Honor. We're talking very
23 shortly. I mean, we're talking in the next couple or three
24 days. But, yes, Your Honor, we --
25 THE COURT: I understand that. We'll get to the date
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1 in just a moment. Now, what's your procedure -- I know there
2 are a lot of landlords, some are here some may not be here.
3 You haven't sent out the cure notice yet?
4 MR. PEREZ: They were actually finalized last night,
5 they will go out today.
6 THE COURT: All right.
7 MR. PEREZ: And they have ten days to --
8 THE COURT: But they still have the ten-day period?
9 MR. PEREZ: Ten-day period to object. Which would
10 basically put it at the 5th or the -- the 5th of March.
11 THE COURT: All right. Now, does that mean then that
12 the hearing that will take place in the next few days is simply
13 a hearing on assumption and assignment, that you're reserving
14 then to a later date the issue of cure amounts?
15 MR. PEREZ: Correct, Your Honor.
16 THE COURT: And if the parties don't agree on the
17 cure amount or the purchaser, whoever the purchaser is, doesn't
18 want to pay the cure amount then that particular contract gets
19 dropped from the assumed side of the ledger to the rejected
20 side of the ledger, maybe?
21 MR. PEREZ: Maybe. Maybe, Your Honor. That's
22 correct, Your Honor.
23 THE COURT: I get to have the pleasure of deciding
24 what the cure amount should be?
25 MR. PEREZ: Correct.
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1 THE COURT: Okay. But nobody's being forced to
2 accept any particular cure amount today, and their silence
3 doesn't constitute acceptance?
4 MR. PEREZ: Absolutely, Your Honor.
5 THE COURT: And I say that only so I could, perhaps,
6 obviate the need for speeches by every landlord reserving the
7 landlord's rights.
8 MR. PEREZ: Right.
9 THE COURT: I think it's assumed that their rights
10 are reserved and we'll take -- we won't take up everybody's
11 time. I don't want to bankrupt the debtor all over again by
12 virtue of those lawyers here today who think they're going to
13 be able to charge their legal fees to the debtor, one way or
14 the other.
15 MR. PEREZ: Your Honor, our goal today was to make
16 sure that everybody had the full ten-day period after we send
17 out the cure notices.
18 THE COURT: Okay. All right. And does the -- to the
19 term loan lenders, at least, by into this procedure, or accept
20 this procedure? You may have no real interest in it, but you
21 might.
22 MR. HARRIS: Your Honor, I think that that procedure
23 would be helpful to go through with respect to whoever is
24 ultimately the purchaser of the assets here. We need to
25 determine what the cures are. So getting that process rolling
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1 makes a lot of sense.
2 THE COURT: Good. All right, yes, sir? Do you want
3 to -- have we stolen your thunder?
4 MR. KLEIN: Yes, Your Honor.
5 THE COURT: We have. So, all right, any questions
6 then on the subject of landlords and other parties to executory
7 contracts other than the date? Well, I knew we'd have a
8 speech.
9 MR. STEEL: Your Honor, Howard Steel, Kelley Drye &
10 Warren on behalf of landlord Birch Run Outlets.
11 Maybe, just quickly, just for clarity. When do the
12 debtors portent to send adequate insurance information out?
13 THE COURT: I think I heard, and I think the
14 microphone carried to the back. They sent it out yesterday.
15 MR. STEEL: Did they?
16 THE COURT: And everybody will have -- is that right?
17 MR. PEREZ: It was finalized yesterday, it's going in
18 the mail this morning.
19 THE COURT: Oh.
20 MR. STEEL: That would be with the cure --
21 THE COURT: It's in the mail. But you'll get ten
22 days from the date of mail, or ten days from date of receipt?
23 MR. PEREZ: I think it's ten days from date of
24 mailing, Your Honor.
25 THE COURT: Date of mailing.
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1 MR. STEEL: That's great, that satisfies our
2 concerns.
3 THE COURT: So the only thing, then, we're going --
4 go ahead, if you have any other questions.
5 MR. STEEL: Well that was our first initial concern.
6 And then just -- Mr. Klein, we've had discussions on revising
7 the language, but I would also like to bring it to the Court's
8 attention, paragraph 4 of the sale order says the sale of the
9 purchased assets is approved in all respects. The APA includes
10 in this definition the purchased assets --
11 THE COURT: All right. Why don't you simply make a
12 note to take out the words "in all respects." By the way, I
13 don't approve sale -- I don't approve anything in all respects,
14 as a general rule. I think you can note that when you go back
15 to your office on your firm's computer, and strike those words
16 from your vocabulary, I think I've had prior cases in which I
17 may have done that, but I don't recall specifically.
18 MR. STEEL: Thank you, Your Honor. Just one last
19 little clarity point. I would also like to drop a footnote
20 after "purchased assets" tied into paragraph 18 of the sale
21 order, that "they're subject to the assumption."
22 THE COURT: If you want a footnote, why don't you
23 tell the gentleman over there.
24 MR. STEEL: I think we reached agreement, I just
25 wanted to confirm.
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1 MR. PEREZ: We have.
2 MR. STEEL: Thank you.
3 THE COURT: All right. Now, you want to set a date
4 then for the assumption and assignment of contracts. Without
5 getting into the question of cure amount, what date do you
6 suggest?
7 MR. PEREZ: Your Honor, whatever ten days would be
8 from today. I think that's the 5th, if that's available.
9 THE COURT: The 5th I'll be out of town. The 5th and
10 6th I'll be out of town. I can do it the following Monday.
11 MR. PEREZ: That's perfect, Your Honor.
12 THE COURT: But do you want an interim hearing? You
13 said the next day or two. I'm not sure we need that.
14 MR. PEREZ: Yeah, I don't think we need that, Your
15 Honor. I think there may be a couple that we've already been
16 talking to, that it might be at some point appropriate, since
17 we've already engaged in discussions.
18 THE COURT: I think assuming we have a purchaser
19 today, I think you can certainly provide stips, and the more
20 clarity we get the better, between now. But if we set it for
21 Monday at 11 o'clock -- that would be Monday the 9th.
22 MR. PEREZ: That's perfect, Your Honor.
23 THE COURT: All right. Monday, March 9th at 11. Is
24 that convenient to the landlords, or acceptable?
25 MS. LORBER: Your Honor, this is Sara Lorber on the
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1 phone. That's acceptable.
2 Can we set a time by which the debtors need to file
3 their proposed order, though, just so we make sure we have
4 enough time to review it before the time?
5 THE COURT: All right. I'm sure they will give you a
6 copy of the former sections, which have not been excised. But
7 what date, certainly by the preceding Thursday?
8 MS. LORBER: That sounds fine.
9 THE COURT: All right. And by that, should be ten
10 days. So I think the parties, obviously, should be able to
11 get -- make a lot of progress on the question of cure amounts.
12 And we'll -- I'll reserve time on that Monday to resolve any
13 issues. Perhaps, it would be useful to have a call with
14 chambers a week before to see whether testimony is going to be
15 necessary, or exactly how far we can get on that Monday.
16 Because I know that time is important.
17 MR. PEREZ: Your Honor, if the Court's out on the 5th
18 and 6th, we can have it on -- the 5th and 6th is a Thursday and
19 Friday?
20 THE COURT: Thursday and Friday. So it would be the
21 following Monday.
22 MR. PEREZ: So if the Court wanted to have a call on
23 Wednesday -- that Wednesday?
24 THE COURT: We could have a call on Wednesday, see
25 where we are.
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1 MR. PEREZ: Sounds good, Thank you, Your Honor.
2 THE COURT: All right.
3 MR. PEREZ: What time would it be?
4 THE COURT: Some time in the afternoon.
5 MR. PEREZ: Thanks.
6 THE COURT: All right.
7 MR. PEREZ: With that, I believe, Your Honor, Century
8 Indemnity is a little different. They are -- they have a
9 reimbursement policy on the site that is the subject of the New
10 Jersey Department of Environmental Quality's objection. And I
11 was -- that policy is not being assumed and assigned because
12 that site that we rent is not one of the assumed and assigned
13 contracts. I just wanted to represent that on the record with
14 respect to Century Indemnity Company, we're not rejecting it.
15 But it's not part of the KPS transaction, Your Honor.
16 THE COURT: Is that Century Indemnity's only interest
17 in this estate as far as you know? Are they here today?
18 MR. PEREZ: They're here today, Your Honor. That is
19 their only --
20 THE COURT: As far as you know? Because I've
21 received many pages of pleadings from them or their co-counsel
22 and I just want to know where they fit into the mix.
23 MR. PEREZ: I think we have a settlement agreement --
24 THE COURT: Your rights are reserved.
25 MR. PEREZ: Thank you, Your Honor.
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1 THE COURT: Anything else we can accomplish now? We
2 have the mention of New Jersey Department of Environmental
3 Protection's position or objection.
4 MR. PEREZ: Right, Your Honor. And counsel is here.
5 Your Honor, just very quickly, there is a site in New Jersey
6 that the debtors lease. That going back for a period of ten
7 years we've had basically a settlement with the New Jersey
8 Department of Environmental Quality. We entered into -- we had
9 insurance policies for that, they were the subject of a
10 settlement agreement, that's the Century piece. In addition,
11 Your Honor, we have a million-six letter of credit that
12 supports our clean-up -- our ongoing clean-up obligation at
13 this facility. This is a rental facility that will not be
14 assumed and assigned. Up until a couple of weeks ago --
15 THE COURT: Did you own it at one time?
16 MR. PEREZ: We owned it way back when.
17 THE COURT: And who did you sell it to?
18 MR. PEREZ: BTR.
19 THE COURT: Which is a -- is it a sale and leaseback
20 transaction, or what type of a transaction?
21 MR. PEREZ: Yeah, it was a sale and leaseback
22 transaction, Your Honor.
23 THE COURT: All right.
24 MR. PEREZ: And up until a couple of weeks ago, we
25 had been operating under this plan for many, many years. There
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1 was no issue about our compliance or our obligation. All of a
2 sudden the New Jersey Department of Environmental Quality is
3 saying that's not sufficient. So we're going to have an issue
4 as to that claim, Your Honor. But it really doesn't go to the
5 sale because this is not part of what's being -- part of what's
6 being sold, Your Honor. And it's really an issue for another
7 day.
8 THE COURT: All right. Is it your position and does
9 the purchaser -- well, a purchaser who doesn't care.
10 MR. PEREZ: Right.
11 THE COURT: Is it your position that the -- if they
12 have any lien, rights, or equitable rights, they adhere to the
13 proceeds of sale with the same rights that they had beforehand,
14 if they have any?
15 MR. PEREZ: Your Honor, to the extent that they had
16 any rights, which we don't believe that they do, I think that
17 they would adhere. They may have a right to the insurance
18 policies that are the subject of the Century Indemnity
19 settlement. They obviously have a right to the letter of
20 credit that's been posted to support that obligation. I'm not
21 sure what they have beyond that other than a claim. To the
22 extent that we're not correct that this ongoing performance
23 that's been going on for many, many years where we have been
24 complying with those obligations is not -- has not satisfied
25 it.
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1 THE COURT: All right. Let me hear -- all right,
2 I'll hear from the New Jersey in a moment. Do you have a --
3 MR. HARRIS: Your Honor, just one comment on --
4 THE COURT: State your name for the record, to keep
5 the record straight.
6 MR. HARRIS: I'm sorry. It's Adam Harris from
7 Schulte Roth & Zabel.
8 Your Honor, just with respect to the Century
9 Indemnity policy, I believe that the position with respect to
10 that policy that Mr. Perez put on the record is the position
11 relative to where Upstairs Acquisition Corp. is relative to
12 that policy. I don't know that my clients have the same
13 position. And depending on the outcome of the rest of the
14 hearing today, and other events that might take place, I think
15 we should sort of defer that issue till an ultimate
16 determination of who the successful bidder is and what that
17 bidder's position is relative to the particular policy, rather
18 than writing one in stone right now.
19 THE COURT: I don't think we're writing anything in
20 stone now. But this is the debtor's position with regard to --
21 it's not on their list of contracts to be assumed and assigned,
22 I think that's all -- that's where things stand now.
23 MR. HARRIS: As long as it's not intended to have a
24 preclusive affect on different potential buyer changing their
25 minds on that, that's fine, Your Honor.
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1 THE COURT: All right. I think we're going off into
2 another area now. That is, the New Jersey objection. I think
3 anybody who wishes to -- anybody who was just here because
4 they're a landlord, are interested in only the issues relating
5 to the assumption and assignment of contracts, can certainly be
6 free to leave, but you can certainly stay for all of the
7 proceedings as long as you wish. Yes, ma'am.
8 MS. LEHR: Regardless of what --
9 THE COURT: Please state your name for the record,
10 just so to keep the --
11 MS. LEHR: Rachel Jeanne Lehr, Deputy Attorney
12 General for the State of New Jersey Department of Environmental
13 Protection.
14 Regardless of what Mr. Perez says, this is not a
15 claim. This is a statute that makes it illegal for an
16 industrial establishment to be sold without complying with the
17 Industrial Site Recovery Act. I don't --
18 THE COURT: Are they selling the site?
19 MS. LEHR: No. They already had a remediation
20 agreement from when they sold the site, with two amendments.
21 And now they should have a third amendment. Because they are,
22 again, doing something that can't be done under ISRA without a
23 remediation agreement. And in --
24 THE COURT: But they're not -- the only thing I'm
25 considering today --
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1 MS. LEHR: Are the assets.
2 THE COURT: -- is a sale of certain specified assets
3 to one purchaser or another. If they are not selling assets in
4 which you are interested we may have a position on the position
5 of the sale of the other assets because from what you've stated
6 your client is a creditor of this estate. But as to the assets
7 in which you have a particular interest, that is the property
8 in New Jersey, they're not selling it. So that remains with
9 the debtor. And if you wish clarification in the order, that
10 the order doesn't cover these assets and that the lease of the
11 property is not going to be -- or is not on the assumption and
12 assignment list, I think that the parties would probably be
13 happy to accommodate you in that regard. Although, I don't
14 know that you need that further protection.
15 As to your assertion -- I read your papers, both the
16 original and the amended objection, and as I best understand
17 it, your position is that your rights somehow give you a
18 constructive trust over the proceeds of this transaction even
19 though the property, itself, isn't being sold. That somehow
20 your statutory rights in New Jersey give you a lien of sorts on
21 the proceeds of this transaction, even though the property
22 involved in New Jersey isn't part of the transaction. I'm not
23 sure you cited any authority other than your own statute that
24 gives you that right, or any precedent that would give you
25 these particular rights. But I don't think I'm ready to rule
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1 on how the proceeds of sale get whacked up until I know that we
2 really have proceeds of sale. And that might be later today,
3 that might not be for a while. And while I don't want to -- I
4 don't want to invite you to stay here for the rest of the day,
5 and you might be here all day, on the question who the
6 purchaser is because there is a dispute on that issue. It
7 seems to me that this is a separate issue that we don't get to
8 until we know whether there are proceeds.
9 I know, for example, that the DIP lenders, they want
10 to be paid out immediately from the proceeds of any sale. And
11 that's an issue I'll take up when we know who the purchaser is
12 and what the amount is. And in terms of your rights, it would
13 seem to me that you should preserve whatever rights you have.
14 And it would seem to me that other than to, perhaps, authorize
15 a payout of the DIP loan to stop the interest from running and
16 to get that taken care of, and because it is provided for in
17 prior court orders in this case, or something along those
18 lines, I'm not quoting the precise section, it seems to me that
19 there is plenty of proceeds over and above the payment to the
20 DIP lenders that would be sufficient to cover any of the rights
21 that you averted to in your memo.
22 By the way, I'm not in any way inclined that on the
23 basis of the papers you filed, I believe you have any
24 constructive trust rights or resulting lien rights of any type.
25 But I'm simply stating that I'll hear that later when we have
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1 proceeds, and I don't want to keep everybody in this room
2 waiting while we deal with that very distinct issue.
3 MS. LEHR: Can I just say one more thing about --
4 THE COURT: You can say as many things as you wish.
5 MS. LEHR: Thank you, Your Honor. When Lenox sold
6 the real property, which according to what I have, is only a
7 couple of years ago. According to what Mr. Perez says, it was
8 longer ago than that.
9 THE COURT: It was in the memory of people in this
10 room.
11 MS. LEHR: We have Lenox as having just sold it a few
12 years ago. But when that -- we could have objected to that
13 sale and you couldn't have had this argument because it was the
14 real property and they would have had to keep owning it until
15 the property was cleaned up, which as you can see is years.
16 But instead of doing that we had them sign a remediation
17 agreement, post a certain amount of remediation funding source,
18 and everyone went their merry way and was happy. Now, they are
19 selling the rest of the business. There's going to be no more
20 Lenox, and the property belonged to a new owner for at least
21 three years, and the money will be gone. And they will have
22 violated ISRA by selling the property. This is not -- there is
23 case law saying that this is not a claim, this is an
24 environmental obligation of the debtor, it's like injunctive
25 relief, it's like Section 106 of SIRPLA (ph.), in that there's
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1 no alternative right of payment. So we can't let this
2 remediation agreement be violated by not establishing a larger
3 remediation funding source, and they'll be gone and there will
4 be nobody to clean up but the people of New Jersey. We can't
5 do that.
6 THE COURT: All right.
7 MS. LEHR: So I wish that you would reconsider and
8 put some kind of an agreement into the sale document that I
9 think it's 4.70.
10 THE COURT: I made a ruling on the issue. I said I
11 would make all rulings with regard to disposition of amounts at
12 the end of the sale hearing so that I didn't have to get into
13 the issue right now and make a ruling. But from what you said,
14 and from your entire argument, first, as to what you could have
15 done several years ago. Unfortunately, we're in Bankruptcy
16 Court. Everyone here is -- or many of the creditors here are
17 saying, you know, what I could have done several years ago to
18 protect my position or I could have -- I could not have dealt
19 with this debtor and given them credit. But we have to take
20 the situation as we find it now.
21 As to your argument on the basis of cases such as
22 Chatagay (ph.), and I am bound by the Second Circuit --
23 MS. LEHR: I know.
24 THE COURT: -- of Environmental Law, not the Third
25 Circuit in New Jersey. But assuming, arguendo, that those
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1 cases are relevant in a situation where the debtor no longer
2 owns the property and entered into a remediation agreement in
3 the past. But assuming those principles are still applicable,
4 the very cases you cite me say that the environmental
5 authorities have an administrative claim, if I understand the
6 authority correctly. They don't have a lien on sale of other
7 assets. And I'm not deciding today whether or not your client
8 has an administrative claim or not. That is -- that's just not
9 an issue.
10 And in terms of the approval of this sale, I don't
11 think the question of whose got an administrative claim and who
12 doesn't have an administrative claim comes up. I'm certainly
13 not ruling against you on the administrative claim issue, I'm
14 not ruling for you either. I think that Chatagay is sometimes
15 difficult to parse, but Chatagay limits the administrative
16 claims that environmental authorities can assert in the Second
17 Circuit. But it is, it's a difficult complicated area, and
18 your rights in that respect are preserved. It's a question of
19 having a lien right relating to the sale of other assets. And
20 I don't think that's a -- I don't have to rule on that now.
21 But if it helps you -- prevents you from having to spend the
22 rest of the day here -- I don't see where the lien comes from,
23 but maybe I should hear from the debtors as well, or anything
24 else you wish to state now.
25 MS. LEHR: The last thing I wish to state is that the
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1 remediation agreement that the debtor signed agreed that they
2 would increase the financial assurance as necessary, and
3 they're not doing that. So they're violating the remediation
4 agreement as well as the statute.
5 THE COURT: They are. I mean, they're violating --
6 I'm sure that Mr. Perez can give you a list of pages long of
7 the agreements that they're violating, when we're talking about
8 rejecting contracts.
9 MS. LEHR: But this isn't exactly a contract, this is
10 a violation of state law.
11 THE COURT: Well, unfortunately, to the best of my
12 knowledge, acceptance so far as Chatagay holds, that violation
13 of an environmental statute gets you an administrative claim.
14 A violation of a remediation order with a state authority, I
15 don't think gets you a special priority in bankruptcy. And I
16 don't see anything in your papers that argues to the contrary.
17 You argue under Chatagay but maybe you have an administrative
18 claim. And I'm not take it away from you. If you want me to
19 take it away from you today I'll put you at the end of the
20 calendar, at the end of the day and I'll make a ruling, but I
21 don't think that would be fair to you.
22 MS. LEHR: No, I don't want you to do that.
23 THE COURT: All right.
24 MS. LEHR: I do want to say that the Tourwico (ph.)
25 matter, which his the Third Circuit, was based entirely on
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1 Chatagay. And Chatagay also says that a statue like ISRA,
2 without an alternate right to payment is not a claim, it's just
3 an obligation that must -- as I said before, it must be adhered
4 to just like Section 106 of SIRPLA.
5 And I thank Your Honor for listening.
6 THE COURT: Thank you. Anything on this point, Mr.
7 Perez?
8 MR. PEREZ: Your Honor, we don't have anything
9 further. We're trying to do the right thing and we'll work
10 through trying to see what the amount of the claim is. There
11 is, you know, at least a million-six and insurance coverage to
12 deal with this. And this is something we've been working on
13 for a long time.
14 THE COURT: All right. Anyone else on any other
15 issues? We have been -- the agenda you filed today, the first
16 matter is the committee's motion to extend time, that is marked
17 as uncontested, is that right?
18 MR. COHEN: Your Honor, Jeffrey Cohen on behalf of
19 the committee. I think uncontested is correct. But it is
20 perhaps more appropriate to deal with this after we know the
21 result of the sale hearing. Because I think if the auction
22 process is reopened as we mentioned to Your Honor last week,
23 and if ultimately the term loan lender is successful we
24 recognize we'll have to perform our investigation on a tighter
25 timeframe.
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1 If the sale is approved as proposed by the debtor to
2 UAC, I don't think we'll be constricted by that short a
3 timeframe. So I think the parties had agreed that an order
4 should be entered, but the timeframe will be dictated by the
5 result of today's hearing.
6 THE COURT: All right. Anyone else? Is that the
7 consensus?
8 MR. HARRIS: That's fine with us, Your Honor.
9 THE COURT: All right. Then we can proceed to the
10 sale order. And did I understand that the debtors wanted to
11 have a chamber's conference on the sale?
12 MR. PEREZ: Yes, Your Honor.
13 THE COURT: All right. We'll have that right here.
14 MR. PEREZ: Thank you.
15 THE COURT: And those who are principally interested,
16 obviously, are welcome to attend. We'll resume at 2 o'clock.
17 Are there any other specific issues that parties want to bring
18 up before the lunch break? All right, very good.
19 MR. PEREZ: Actually, on thing.
20 THE COURT: Yes.
21 MR. KLEIN: One of the objections was an objection by
22 Jimmy Buffet.
23 THE COURT: Yes.
24 MR. KLEIN: The issue is is that there were, I think,
25 these trinkets and parrot's products that were sold by D56 and
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1 with Lenox. And the proponent of the objection wants us to say
2 on the record that we won't -- we had reserved those parrots
3 for either destruction or not for sale. So I just wanted to
4 make a representation that we will not sell those parrots. And
5 they will be set aside for either destruction but not for sale.
6 THE COURT: All right. Can you reserve one parrot
7 for each -- see if you can reserve one parrot for each
8 participant in this case, myself excluded, however. I don't
9 think I could take it. But maybe when they look back on this
10 case in three or four or five years, they'll remember this day.
11 MR. KLEIN: I couldn't have said it any better
12 myself, Your Honor.
13 THE COURT: Thank you. We'll begin again at about 4
14 o'clock. You can leave your papers.
15 (Recess from 12:12 p.m. until 3:18 p.m.)
16 THE COURT: Please be seated. We're back on the
17 record in Lenox. Mr. Perez?
18 MR. PEREZ: Yes, Your Honor. Thank you for giving us
19 the opportunity to confer during the recess. And I'd like to
20 basically tell the Court where we are in terms of status and
21 then seek the Court's direction as to what the Court would like
22 us to do.
23 Your Honor, over the weekend -- or Friday, we did
24 receive additional documents from the term lenders and we've
25 had a series of discussions with them today and before with
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1 respect to these documents. The term -- we also received and
2 actually took the deposition of the debt commitment, LBC, and
3 have worked through the conditions and the comments.
4 With respect to the debt commitment, Your Honor.
5 there were several conditions that we had found that they were
6 unacceptable. And we've been able to work through most of
7 those conditions. And I'd like to describe where we are, Your
8 Honor, and then I'll characterize them later on.
9 One of the things that concerned us was the minimum
10 liquidity to close and they needed twenty million minimum
11 liquidity. They've agreed to reduce that to fifteen million.
12 Additionally, Your Honor, there were several reps and events of
13 default that were conditions to close and they've agreed to put
14 an MAE qualifier with respect to those representations and
15 events of default, just to make sure that we can actually close
16 the transaction.
17 Third, Your Honor, we had asked them to delink the
18 debt commitment from the equity commitment. They have not
19 agreed to do that, but instead, have responded that they have a
20 clean equity commitment and they have a clean debt commitment,
21 therefore, that's just the way the transaction works.
22 In addition, Your Honor --
23 THE COURT: By that you mean there are no conditions
24 to the closing of the equity commitment that are more onerous
25 than the conditions in the debt commitment?
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1 MR. PEREZ: Correct, Your Honor.
2 THE COURT: All right.
3 MR. PEREZ: Correct. In addition, Your Honor, there
4 was a concern that the KPS bid picked up the employee medical.
5 The current employee medical expenses, we were concerned that a
6 term lender bid would leave those hanging out there and weren't
7 going to be able to pay it. And I believe that's something
8 that will be addressed as well.
9 In addition, Your Honor, with respect to -- there was
10 a form of APA that was attached to their papers that were filed
11 on Friday. We assume that that was the form of APA that they
12 were going to use. We were told today during these discussions
13 that, in fact, that wasn't really the form of APA they were
14 going to use, but that directionally they were going to go in
15 that category. So they've represented to us -- and, again, we
16 don't have a form of APA. They've represented to us that with
17 respect to the reps conditions to close in events of default
18 that it will be no less burdensome than the KPSE.
19 THE COURT: No more burdensome.
20 MR. PEREZ: No more burdensome, that's right. No
21 more burdensome.
22 THE COURT: I'm sure it will be no less burdensome if
23 there is one.
24 MR. PEREZ: That there would be no more burdensome
25 than the KPS APA.
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1 Your Honor, we have a concern about the liquidity.
2 We think that while the models that we have run it indicates
3 that if everything works fine there will be some minimum
4 liquidity during the times of peak usage. But I think that our
5 witnesses would testify that the liquidity was thin. In
6 addition, Your Honor, it still doesn't really leave anything
7 else for the estate.
8 Having said all of that, Your Honor, had they brought
9 us this package at the time of the auction, we would have
10 qualified them as a bid. It's not a situation where there are
11 no conditions. But had they brought us this at the time of the
12 auction we would have qualified them as a bid.
13 Your Honor, from the standpoint of the debtor, we ran
14 a process and we're reporting to you where we think we are
15 right now. But the process that we've run culminated in
16 awarding the bid to KPS and we're prepared to go forward on
17 that subject to the Court's decisions.
18 THE COURT: All right. What do you suggest I do? I
19 start to take testimony on the issue as to whether or not
20 they're simply too late? Or do you have another suggestion?
21 Or shall I hear from them first?
22 MR. PEREZ: I think it would probably make sense to
23 hear, but we are certainly prepared to move forward, Your
24 Honor.
25 THE COURT: All right.
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1 MR. HARRIS: Your Honor, Adam Harris from Schulte
2 Roth & Zabel, for the term loan lenders.
3 First, I'd like to confirm the statements made by Mr.
4 Perez regarding the modification to the form agreements that we
5 submitted with our objection to the sale. We did make those
6 changes in order to meet certain of the concerns of the company
7 and to get to the point where the company is now comfortable
8 having us treated as a qualified bidder.
9 With respect to where we go from here, Your Honor --
10 actually, I just wanted to make a couple of other points. One
11 is, we are prepared to cover the accrued and unpaid employee
12 medical runoff claim. Mr. Perez had asked us to confirm that
13 and we will include that in our bid. I know that's a
14 significant suit concerning the company and its employees.
15 We also agreed to modify the definition of an MAE, to
16 conform it to what's in the KPS asset purchase agreement, so
17 there's no concern about there being any distinction in that
18 regard as to what constitutes the material adverse affect.
19 Your Honor, with respect to where we go from here, it
20 seems to me that as Your Honor indicated in the chambers
21 conference earlier, the case law is very clear that Your Honor
22 has broad discretion based upon facts and circumstances as
23 presented to cause the auction to recommence. And while we
24 certainly all can put on testimony to that affect, it seems to
25 us that to the extent the debtors are now comfortable with the
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1 quality of the term lender bid and the financing sources, it
2 ultimately comes down to Your Honor's discretion as to whether,
3 based upon the balancing of the factors identified in Financial
4 News Network, in other cases, which is the need to promote
5 finality and buyer expectations versus maximizing value,
6 whether that is -- whether that should be -- whether we need
7 testimony for that, Your Honor, or whether, Your Honor, based
8 upon the debtor's representations here, can make that
9 determination in the absence of actual testimony. We certainly
10 have all the witnesses here, Your Honor. I think, certainly,
11 from my client's perspective to the extent there were to be a
12 recommencement of an auction process, we are prepared to
13 immediately move forward and get involved in that and bid in
14 accordance with any bidding procedures or increments the Court
15 or the debtors would like to set. We believe that, frankly,
16 the time this afternoon would be better utilized moving in that
17 direction, rather than spending time putting on witnesses to
18 support an exercise of Your Honor's discretion, and then,
19 potentially, having to start later this afternoon should Your
20 Honor choose to exercise that discretion and have the auction
21 reopened.
22 THE COURT: Well, I don't know that I understand now
23 what the two bids are, as of this moment in time. No one has
24 really explained them to me, you're living with them day by
25 day. So I understand you understand what the differences are.
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1 But I've heard one difference loud and clear. And that is the
2 fact that your bid leaves nothing for the estate. I assume
3 that you outbid the purchaser, I'll use that term simply for
4 ease of reference because you have a lot of debt that you're
5 bidding in. But that's an important fact. So I understand
6 that to be one difference between the two bids. I think that
7 at some point the parties are going to need to explain to me
8 what the difference is between the other bids. It need not
9 necessarily be at this moment, but I do think that that goes to
10 the issue of whether or not I open up the bidding. But before
11 I go any further, I should hear from any other party who wishes
12 to be heard as to what they think I should do at this stage of
13 the game.
14 MR. HARRIS: That's fine, Your Honor, and I will
15 yield the podium to other parties. I think at this point, the
16 one thing that's clear is as formulated with the last bid
17 submitted to the company, neither the KPS offer nor the term
18 lender offer leave anything other than for payment of
19 professional fees, the DIP, and, effectively, cure costs, and
20 distributions to term lenders. You know, we've spoken to the
21 creditors' committee counsel, they've made it clear to us that
22 under certain circumstances they would expect us to share, if
23 you will, any value generated if this auction does go forward.
24 We said we would be happy to have that conversation with them.
25 There is no ask, there is no bid at this point, as between the
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1 two of us. That is a conversation we're clearly prepared to
2 have.
3 THE COURT: But you're saying the two offers are
4 identical in that respect?
5 MR. HARRIS: In terms of to the estate, Your Honor,
6 the only --
7 THE COURT: The cash that comes into the estate.
8 MR. HARRIS: The only creditors of the estate who
9 would get paid under either bid right now are professionals,
10 the DIP lender -- well, the way the waterfall as, at least,
11 laid out by the debtors, the only people who are getting any
12 money are the professionals, the DIP lenders, the term lenders,
13 and the payment of cure costs. There is no other consideration
14 flowing to any other creditor of the estate under either bid as
15 they stand right now.
16 THE COURT: All right.
17 MR. HARRIS: Thank you, Your Honor.
18 THE COURT: Thank you.
19 MR. COHEN: Good afternoon, Your Honor. Jeffrey
20 Cohen, Cooley Godward Kronish on behalf of the committee.
21 Your Honor, at the close of the auction last week,
22 twelve days ago, it was myself on behalf of the committee
23 standing up and saying that we didn't contest the business
24 judgment of the debtor, but strategically, we, likely, as a
25 committee, would have like to keep the auction open a few hours
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1 longer and given the term lenders an opportunity to take that
2 extra step towards qualifying. Again, we didn't question the
3 debtor's decision to conclude the auction. But it was at that
4 time we thought that was an appropriate statement and our hope
5 at the time we made that statement was that twelve hours later,
6 twenty-four hours later we would have definitive documentation
7 signed by the term lenders with terms that the estate can live
8 with that address all the concerns of the constituencies.
9 Here we are twelve days later, and during the break
10 we find out that the APA filed with their objection with the
11 Court is not an APA they're prepared to execute, but one that
12 is indicative of the direction they'd like to go. The changes
13 that they've acquiesced to during the break are, again, changes
14 that would still need to be made to documentation that is not
15 yet twelve days later in a form acceptable to the estates.
16 Perhaps, Your Honor, most concerning to the
17 creditors -- to the committee, that is, is an issue we've
18 raised to the Court earlier and in prior hearings, that in
19 light of the capital structure of this company what we do not
20 have is an expectation or anticipation of a meaningful dollar
21 distribution to creditors. What we can try to do is preserve
22 the best going forward platform. We can for this company. And
23 in assessing whether or not we should qualify someone to bid at
24 the auction, or whether to determine whether their financing is
25 sufficient, that should also include in the analysis of whether
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1 the capital would be adequate to operate this company after
2 they successfully close the transaction.
3 What we're hearing from the debtor in their analysis
4 of the debt facility preferred by the term is that --
5 THE COURT: What do you mean by that statement "to
6 operate the company after the closing?"
7 MR. COHEN: It's one thing to prove that you have the
8 cash to pay the DIP lender and the outstanding claims from the
9 case at the closing, but it's another thing to show us a
10 thirteen-month forecast over the next year that shows you have
11 adequate liquidity to operate this company and not be back
12 before Your Honor in Chapter 22 six months from now.
13 THE COURT: All right.
14 MR. COHEN: It is the committee's concern, based on
15 the debt facility submitted, which the debtors believe is
16 sufficient to qualify them as a bidder, that come May
17 availability from this facility is in the three to five million
18 dollar range. And it's my understanding that is with a very
19 skinny bound view of the administrative or the expenses of
20 operating the company at that point in time.
21 One mistake, Your Honor, in those forecasts can throw
22 this company back into this Court. What we've done in face-to-
23 face conversations with the business people at KPS, who, by the
24 way, submitted a perfectly acceptable definitive document
25 twelve days ago or fourteen days ago, when they were required
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1 to, have stood behind it, are ready to close. What we've heard
2 from the mouth of the founder of KPS is that that is not a
3 problem in their financing architecture. It is an all-equity
4 commitment. They are committed to putting in further equity to
5 cover the -- to provide adequate working capital to keep this
6 company operating and operating sinfully, so that vendors can
7 extend credit, so that landlords can expect to be paid on time.
8 And facing nothing else for the estate, Your Honor, as
9 articulated by the term lenders counsel, nothing else in either
10 bid will take the bid that keeps the company operating
11 successfully and comfortably. We'll take the bird in the hand
12 who's ready to close.
13 MR. AUSTIN: Good afternoon, Your Honor. Jess
14 Austin, Paul Hastings on behalf of EBS as the agent for the DIP
15 lenders.
16 With respect to this process and whether or not there
17 needs to be a reopening of the bid, we do appreciate the
18 comments made by, both the debtor as well as the term lenders,
19 that there have been some movement, there's been some changes,
20 there's been modifications to the term lender's proposals, had
21 those proposals been submitted, had those modifications been
22 evident on February 11th, that the term lenders would have been
23 deemed the qualified bidder at that time.
24 But we believe in the integrity of the process and we
25 note that the bidding procedures had dates and conditions
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1 negotiated by all of the parties and approved by this Court.
2 And that those dates and conditions on February the 11th were,
3 indeed, satisfied by KPS. And not the term lenders at that
4 time, but, apparently, today.
5 We do, however, recognize that this Court does have
6 discretion as set forth in Financial News Network case, that
7 the purpose may well be to improve the value of this estate, it
8 may improve the value with respect to the bids. We think that
9 before this Court may open up the bidding, again, and it
10 doesn't have that discretion to do so, we probably need a
11 determination for sure that we would say the term lenders are
12 real. We know that KPS is real, we probably need, as this
13 Court may have said, an outline of what both the respective
14 bids are, especially where the economics are relative to the
15 bids.
16 But as it relates to the DIP lenders, we would ask
17 for there actually to be a determination of three things. One,
18 that the term lenders unequivocally state that if there is a
19 reopening of this bid, and if they ultimately are deemed to be
20 the successful purchaser, they will be committed and ready to
21 close and will close within reasonable parameters. And that
22 that closing, secondly, would occur within the first or second
23 week of March. We actually ask that that closing is the first
24 or second week of March, be not only as to the term lenders but
25 also to KPS, which we understand is prepared to meet that time
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1 deadline. And that time deadline being important because the
2 company's liquidity position -- availability position under the
3 DIP credit agreement will be severely limited at that point.
4 And the last thing that we ask, Your Honor, is that
5 there be no question by any of the bidders here relative to an
6 issue of allocation of proceeds received. There's been
7 questions raised by, at least, the term lenders that depending
8 on who is the successful purchaser, that they may well contest
9 the allocation of the process and ask some of the proceeds be
10 placed into escrow. We certainly believe under these
11 circumstances that there's no reason to put anything into
12 escrow, and, certainly, from the DIP lenders standpoint. And
13 to reduce the cost of this estate. And that issue should be
14 put to bed. And whoever may well be deemed the successful
15 purchase, and should close this transaction, know that the
16 proceeds from the closing will be used to pay the DIP
17 obligations at that time. Thank you, Your Honor.
18 THE COURT: Did you say you had three issues?
19 MR. AUSTIN: Yes. The term lenders clearly say
20 that --
21 THE COURT: Committed to closing
22 MR. AUSTIN: -- they can close to -- they would be
23 prepared to close the first or second week of March. And,
24 three, there be no issue of allocation, the DIP loan will be
25 paid at the closing.
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1 THE COURT: All right.
2 MR. RIEMER: Your Honor, Yosef Riemer from Kirkland &
3 Ellis for KPS.
4 It's important for the Court to understand in
5 evaluating this what KPS is doing and has done. KPS has eight
6 million dollars that it has received from its limited partners
7 to fund the transaction, and hand and use that money to make
8 the deposit and other expenses. And it has made a capital call
9 to its limited partners for another sixty-seven million
10 dollars. It expects to have all of that money by this Friday,
11 bringing us to seventy-five million dollars. It has advised
12 its limited partners that it may need to make a capital call of
13 an additional ten to twenty million dollars in connection with
14 acquiring this business.
15 You are comparing, when you look at what KPS won the
16 auction with, an offer that has no debt, thus one need not
17 spend time talking about conditions of a debt document. There
18 is no debt component. The equity component has no upper cap on
19 it, we are committed to raise the money to operate this
20 business going forward, as evidenced by notifying the limited
21 partners of this additional ten to twenty million even before
22 we close.
23 Now, I go back to the questions the Court has posed
24 in this process. I'm not suggesting they're any decisions, but
25 they're very instructive. It's true, of course, that the Court
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1 has discretion, but discretion for what and why. This is not a
2 case in which anyone is suggesting that there was a mistake
3 made. Indeed, I think the exercise shows the concerns that the
4 debtors had were well founded. This is not a case in which
5 anybody is suggesting there was a flaw in the process in terms
6 of the actions that were taken, certainly by my client, but, as
7 well, there's no basis to complain about the actions taken by
8 the debtors. As this process moves along it becomes clearer
9 and clearer all the time. This is also not one of those
10 auctions, like some in the case law, where there were what I'll
11 call squishy procedures. And no one knew exactly how the
12 process would run. And a judge said at some point, well, let's
13 extend this because there hadn't been hard and fast deadlines.
14 These were hard and fast, and everybody knew what they were,
15 and everybody should have been taking that into account as they
16 went forward, starting with the deadline on February 6th for
17 making unconditional offers. And I believe February 9th for
18 demonstrating the ability to fund those.
19 My client met that deadline, they did not. They got
20 a first extension through February 11th. They got additional
21 extensions on February 11th from 10 a.m. to 2:18, from 2:18 to
22 4, from 4 to 4:23 p.m. And at none of those points did they
23 ever address the very real and legitimate concerns of the
24 debtors. The evidence shows that the principal concern has
25 always been the linkage of the equity obligation to the debt
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1 obligation. That was the single most important point that the
2 debtors raised.
3 And, therefore, I must tell you with all respect to
4 the debtors, I'm a little surprised to hear them say that they
5 would now have qualified them. The reality is that condition
6 remains. There were three things, that as I understand it, the
7 debtors asked the term loan lenders to do. One was to remove
8 that linkage, and that linkage remains. One was to reduce the
9 amount of the liquidity requirement or precondition for the
10 funding. And I think there was a five million dollar
11 reduction, but that remains. These are not significant
12 changes. It's all well and good for them to stand here now and
13 say had those changes been made then they would have qualified
14 the term loan lenders, but those changes were not made then,
15 they were made now after a process all of us have been relying
16 on. There is simply no reason to exercise discretion in that
17 regard. There is no reason to exercise discretion, however,
18 for a second reason. And that is that Your Honor has made
19 clear we have to have something unconditional. We don't yet
20 have anything from the term loan lenders that is unconditional.
21 We still have the most important condition that the debtors
22 wanted to get rid of, a linkage in the equity commitment to the
23 debt commitment actually funding, something they remain
24 unwilling to get rid of. Your Honor couldn't have been clearer
25 about Your Honor's preferences in that regard, and I think
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1 they, too, counsel against exercising discretion in a way to
2 ignore that failure.
3 And then we're left with the question Your Honor I
4 think raised so insightfully this morning. Of whether an
5 exercising discretion there would be anything for other
6 constituencies. And I think counsel who preceded me put it
7 very well in saying in these circumstances it's appropriate to
8 look at whether these offers will permit the business to go
9 forward as a going concern. Ours clearly will. No debt, no
10 upper limit on what we put in. And there's, man, that was,
11 Your Honor, not the most encouraging financial analysis I've
12 heard in my career. We were told that it's thin, that it's
13 close. This is a business that's heavily seasonable. And what
14 we've been told all along, that with the kinds of numbers that
15 are now being put on the board by the term loan lenders, the
16 company -- the business would be down two -- perhaps, three to
17 five million dollars in liquidity in the month of May. That is
18 an enormous risk to take. And I submit, Your Honor, not a
19 reason to exercise discretion. Because not only is there
20 nothing else for any other constituency, there's a real risk
21 that all the other constituencies end up much worse off. If
22 ever there was a case for not exercising discretion, for
23 balancing the competing considerations of promoting
24 participation in these things with predictable rules in trying
25 to get more money, it would not be this case. Where exercising
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1 this discretion to say oh, never mind, forget the fact it
2 wasn't done February 9th, forget the fact it wasn't done
3 February 11th, forget the fact it wasn't done in the
4 submissions over the weekend, forget the fact it wasn't done
5 this morning, we view with that risk.
6 Your Honor, we participating in this process and
7 we've been patient. But one has to look at this pile of
8 conditions and measure against a world where we aren't there
9 anymore. And we don't have to remain in this process if it
10 continues, we're committed to the deal but we're not committed
11 to being treated unfairly and having our time wasted. I say
12 that with the greatest respect for the Court, but with a client
13 who says to me fairly, we have played by the rules, what else
14 do we need to do.
15 I would tell the Court, with the greatest respect for
16 this process, that if the Court has any doubts about our
17 client's willingness to fund, which is what this should be
18 about, we're prepared to let the Court question him and counsel
19 question him. But I don't see anyone raising any questions
20 about those things.
21 Your Honor, this is the burden at hand, and what
22 you're being offered is a moving target that I still can't make
23 out the clear lines of. I have never seen anybody come into a
24 Court and say this weekend we gave the Court the APA that we
25 were prepared to sign. But now we're telling you it's
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1 directionally where we're going or what we would sign would be
2 no less unfavorable or no less burdensome to the debtors than
3 what KPS has offered. Well, how are we to evaluate that?
4 That's not a standard, that's not a contract, that's not
5 anything. That part of the transaction was due on February
6 6th. We're moving backwards not forwards.
7 Your Honor, there are cases where it will be a close
8 question whether Your Honor wants to exercise your discretion
9 to allow rebidding or reopening the process. I have
10 represented debtors many times in my career and I recognize the
11 competing considerations when one is representing a debtor.
12 And I understand why the debtors have, in affect, given this
13 decision to you, but I submit to Your Honor, this is not the
14 case in which your discretion is called for if it means trying
15 to undue how we got here. All of us should take responsibility
16 for the actions we've taken.
17 My client's actions were following the bidding
18 procedures the other parties to this negotiated. My client's
19 participation in this was looking at a situation where there
20 due diligence was being paid for by themselves, where they have
21 less access for information and the term loan lenders, where
22 they certainly didn't have the ability to credit bid and to
23 decide, based on the procedures, to come forward and put a
24 number on the table. We complied in every way with those
25 procedures. And even since the auction the APA with us is
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1 signed. There's no signed APA between the term loan lenders
2 and anyone else. Indeed, what they submitted and said they
3 would sign is now not operative.
4 We've got the money coming in, we're taking steps of
5 the kind you would expect somebody in our situation to be
6 taking, tax planning, planning meeting with customers, taking
7 steps to pursue the benefit plans for the employees and the
8 like. This is real, Your Honor. And with all respect, I don't
9 see anything on the other side that is sufficiently real to
10 cause Your Honor to exercise any power to set this aside and
11 start over again. Thank you.
12 THE COURT: Thank you.
13 MR. HARRIS: If I may, Your Honor, just a few
14 comments in response. And I can understand where Mr. Riemer
15 and his client are coming from on here. But just a couple of
16 things to clarify some of Mr. Riemer's comments, because I
17 think he misunderstands certain of the things that were
18 submitted over the weekend.
19 First of all, the asset purchase agreement that's
20 attached to the term loan agreement is simply there for
21 purposes of an agreement between the company and the term loan
22 lender as to the form of asset purchase agreement which they
23 would have to go along with, because we knew there was going to
24 be a negotiation between the asset purchase agreement we had
25 originally submitted and what we would ultimately come out
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1 with. And we wanted to define a standard so we wouldn't have
2 to keep going back to the lender and say would you agree to
3 this change, we agree to this change, we agree to this change.
4 We took the KPS APA, Your Honor, took their name off it and
5 said so long as these are the terms of the ultimate APA we
6 don't need you to consent anymore.
7 THE COURT: Well, when do you think this negotiation
8 should take place? It's already more than ten days after the
9 date of the auction. We have a bid that's ready to close in
10 another week or ten days, when is this APA negotiation going to
11 take place?
12 MR. HARRIS: Your Honor, what we had told the debtors
13 is that if we have an auction today we are prepared to have an
14 APA done with them by tomorrow morning.
15 THE COURT: Well --
16 MR. HARRIS: And, Your Honor --
17 THE COURT: -- I don't know which should come first,
18 frankly. I think in order for me to compare the bids in an
19 auction we should have either an APA on the table or, better,
20 you should commit to sign their APA and we'll be done with it.
21 That would make quite a simple negotiation tonight and you
22 wouldn't have to stay up all night doing it.
23 MR. HARRIS: Your Honor, we have told the debtors, to
24 be very clear, we have a different transaction from KPS. We're
25 buying all the assets of the estate, including the D56 assets,
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1 they are not. We are assuming a different set of liabilities
2 from what they are, which I think is actually a greater set of
3 liabilities. But we have told the debtors were the changes to
4 conform to the deal that we are actually doing, which, by the
5 way, does benefit the estate, because it doesn't leave them
6 with this overhang of trying to actually deal with this D56
7 business, which they don't really know how to get rid of at the
8 moment. And we'll, obviosly, continue to cover costs of the
9 estate to actually keep it on and try and liquidate, and all
10 the rest of that stuff.
11 We're buying that business. We've told the debtors
12 subject to conforming the agreement to our transaction and
13 going through the actual provisions, we are prepared to sign
14 the KPS APA. We said that very clearly. So there shouldn't be
15 any doubt as to what it is we are prepared to sign, first of
16 all.
17 The second thing, Your Honor, is obviously there's a
18 material dispute between the term lenders and the company about
19 whether or not we should have been qualified at the auction,
20 whether we showed up with the right documentation or anything
21 else. The fact of the matter is, Your Honor, and I think this
22 is actually a divergence from where we're going, but I think
23 it's important to say here. The documentation that we have now
24 submitted, and the company has now said they would have been
25 willing to qualify us on had we had it in hand at the date of
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1 the auction, contains the exact same set of conditions and the
2 exact same set of terms that were in the term sheet that we
3 handed to the debtors on that day. We've made some
4 modifications to them at their request. But one of the biggest
5 concerns they had on that day, Your Honor, was that we didn't
6 have definitive loan documentation, we didn't have all the
7 other documents that go along with it. Well, we've done that.
8 We went out of our way to get all that stuff done, and get it
9 before the Court and other parties as quickly as we possibly
10 could because we knew that was the debtor's concern, we knew
11 what the case law said about Your Honor's discretion and the
12 importance of what happens if the sale order is actually
13 entered and how difficult, if not impossible, it is to overturn
14 at that point. We wanted to show, frankly, that what we
15 understood the debtor's position, that it is in some respects
16 unfounded. So we don't want to get into that debate, Your
17 Honor, we think it's probably an unproductive debate to get
18 into. The debtors have now said, basically, the conditions
19 that you have in your agreements, we believe are okay and we're
20 willing to qualify you based on that.
21 Which brings me to sort of the last issue, Your
22 Honor, which is -- well, two issues. One is this linkage
23 between the debt and the equity. Your Honor, we're not KPS,
24 we're not a single party, with a single person writing a check
25 to get this deal done. There was never any expectation,
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1 frankly, that the type of buyer who is now here today in the
2 form of KPS, would ever show up. And the bidding procedures
3 always contemplated that people could have one or more
4 financing commitments to support their deal. It's different,
5 it's not better, it's not worse, it's just different. And that
6 what really needs to happen is people need to look at the
7 actual terms of these agreements and figure out for themselves,
8 and assess whether there's real risk here or whether there's
9 just theoretical risk that people like to throw around in order
10 to say one thing is better than the other. We understand it's
11 coming from two different sources. We think that we've gotten
12 the company comfortable with the conditions as exist in the
13 term loan agreement at this point. And the only condition to
14 the equity is the term loan agreement funds. So the reason the
15 company wanted to delink them, if you will, was because they
16 were concerned about the conditionality of the term loan
17 agreement. They're now comfortable with that and they're
18 willing to effectively assess those risks and figure out
19 whether they're real or not. So the linkage issue really isn't
20 an issue anymore.
21 And, finally, Your Honor, I just need to address this
22 issue of unconditionally, if you will, that keeps coming up
23 relative to the KPS commitment. The KPS commitment, Your
24 Honor, is not unconditional. It has conditions in it which tie
25 directly to the conditions to closing in their asset purchase
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1 agreement. So one needs to look at what those conditions are
2 in order to determine whether there's a real risk that they
3 will close or not.
4 THE COURT: Are your conditions any different from
5 theirs?
6 MR. HARRIS: With the exception of 2, Your Honor, the
7 answer is no. And I believe that we have gotten the company
8 comfortable on both of those conditions. One is the liquidity
9 covenant that we have talked about. The second one is a
10 borrowing base availability, which I believe the company's CFO
11 and COO, who are the same person, is reasonably -- is
12 comfortable with. Because our borrowing base to get to the --
13 is enough to get us to twenty-five million. And the company's
14 own numbers show that the availability as of the anticipated
15 date of closing should be well north of forty.
16 THE COURT: And what do we do with the point raised
17 by the committee that within weeks this company may run out of
18 availability or run out of cash?
19 MR. HARRIS: Your Honor, nobody has sat down with us
20 to go through what our business plan looks like here.
21 THE COURT: Do you have one?
22 MR. HARRIS: We do have one. We have a very thorough
23 one. And, Your Honor, Trumpet Investors, who's putting in
24 thirty-five million dollars of equity of their own money here,
25 Your Honor. And LBC is putting up to twenty-five million of
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1 debt, have no interest in doing this deal to see it fail,
2 anymore than KPS does. We have a business plan, Your Honor, we
3 believe it works. We have a CEO of the company who's ready to
4 go. We've done all the same things that KPS has done relative
5 to working on development of benefit plans for employees. And
6 we are prepared to close on the exact same timetable as they
7 are.
8 THE COURT: So that means the first or second week of
9 March?
10 MR. HARRIS: That's correct, Your Honor.
11 THE COURT: All right.
12 MR. HARRIS: So, Your Honor, with all that we believe
13 with those representations Your Honor should exercise your
14 discretion to reopen this auction. And as I said, we are --
15 we're committing to what our form of asset purchase agreement
16 would look like. And with that, Your Honor, we think it's
17 important that we talk -- that we move to the issue of trying
18 to maximize the value of the assets of this entity for the
19 benefit of all constituencies. I understand -- I made the
20 representations and we've already had our conversations with
21 Mr. Cohen. I understand his concerns about the future of the
22 company and vendors being able to comfortably extend credit.
23 And we're happy to sit down with their financial advisors and
24 walk them through our business plan if they would like to do
25 that. Nobody's every asked us to do that, but we're happy to
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1 do it.
2 And, Your Honor, the last point I'll make here is
3 that under the KPS deal, obviously, we think in order to get
4 that approved there are some very significant legal issues the
5 Court would have to decide before approving that deal,
6 including the fact that there is in excess of seventy million
7 dollars worth of assets, subject to our security interest and
8 the DIP lender's security interest, which are being transferred
9 in return for a cash purchase price. Which, after giving
10 affect to the payments needs to make, will be less than forty
11 million dollars coming to the secured creditors here. Which
12 obviously creates some significant issues. But, Your Honor, we
13 don't need to go there because based upon where the debtors are
14 now relative to our bid, based upon the representations that
15 have been made on the record and to the other parties, we think
16 that it's within Your Honor's discretion to reopen the bidding
17 here, allow a full and fair competitive auction to take place,
18 and to have the true market determine the outcome of this
19 process rather than a perfunctory one, which is, obviously, the
20 conduct of which is in material dispute.
21 I'm not saying the debtors did anything wrong, but we
22 do have some significant disagreements with them about what
23 happened on the 11th and whether their conduct in not
24 qualifying us at that point on what is essentially the same
25 terms we have today, was right or wrong. We should have had a
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1 competitive auction, we didn't. It doesn't make sense to go
2 backward on that analysis, Your Honor. What makes sense, in
3 our view, is for Your Honor to exercise discretion and let's
4 let the market decide what these assets are really worth.
5 THE COURT: Am I wrong, though, that the only party
6 who benefits from my exercise of discretion to reopen the
7 bidding is your client. The debtor may or may not take some
8 additional risks, or, at least, the company being purchased,
9 certainly the unsecured creditors say there are more risks,
10 there's more uncertainty as to the nature of the deal, and
11 there are conditions to your debt financing, they exist, at a
12 minimum, and there's a history. The history we have is of your
13 client's inability to get their act together, of your client's
14 always being late, of your client's having had months and
15 months to get financing. I realize you're operating in the
16 worst market since the Great Depression. I realize that the
17 situation in this and in many other cases is a dreadful one for
18 everyone concern. But you're asking me to reopen bidding. And
19 I think that the only parties who would benefit from that are
20 your clients. Not that you don't have a position, not that
21 you're not a party-in-interest, and not that -- you're
22 certainly giving me an important reason to have an auction when
23 there really was never an auction. But am I wrong in that
24 conclusion?
25 MR. HARRIS: Your Honor, let me answer your question
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1 this way. And that is I can't give you a definitive answer
2 because we've had conversations with, both the committee and
3 the company, about providing benefits to other creditors. Now,
4 Mr. Cohen's made it pretty clear, it's very difficult to get a
5 material benefit to the unsecured creditors, given the size of
6 that pool. And his focus has really been on having a more
7 viable go-forward entity with the vendors and other people it
8 could do business with and making sure the employees,
9 obviously, are taken care of.
10 With respect to the company, Your Honor, it has
11 always been our intention up until the auction date and the
12 time when we were told that they were prepared to accept a bid
13 that was going to leave the debtors unable to confirm a plan.
14 It has always been our intention to try and move forward and
15 try to get a plan done here so that we wouldn't leave the
16 estate administratively insolvent, other than the payment of
17 professional fees. I don't know what that number is, Your
18 Honor. We've told the debtors we were prepared to have that
19 conversation. I will tell, Your Honor, I think there's one
20 material benefit to the estate, at least reopening this, which
21 Mr. Austin referred to. And that is under the bids that exist
22 right now with KPS there is no allocation of value between
23 revolving lender collateral and term lender collateral. And
24 this is a split collateral deal, Your Honor. We have a first
25 lien on the term lender collateral, their DIP has a first lien
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1 on the revolver priority collateral. When you talk about
2 selling seventy plus million dollars of assets for less than
3 forty million dollars it obviously raises an issue of
4 allocation, which will I think engender significant additional
5 litigation as between the parties as to whose money is what.
6 That gets eliminated, frankly, if you move forward on a
7 structure, where no matter what, the party who's buying the
8 assets commits to pay off the professional fees, pay off the
9 DIP lenders, pay off the cure creditors, and then we're really
10 talking about simply an apples to apples analysis of what the
11 recovery to the term lenders might be.
12 The other benefit, Your Honor, in reopening the
13 auction is that it provides the prospect that we would dispose
14 of all of the issues surrounding D56 today. We won't have to
15 have a overhang of a portion of this estate continuing, in
16 affect, with no assets -- with no money really to support it,
17 with no money to try and maximize any value for it, with no
18 employees to really oversee what's going on there. And, you
19 know, elimination of all the costs and expenses surrounding
20 that entire aspect.
21 One other benefit, Your Honor, is depending on how
22 this auction moves forward, should it do so, is we'll avoid any
23 and all litigation about working capital adjustments to
24 purchase prices. The way the KPS bid is set up, Your Honor, is
25 there's a working capital adjustment which occurs sixty days
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1 after closing. The problem is the debtors won't be around
2 sixty days after closing. So when KPS proposed their purchase
3 price adjustment, which the debtors are counting on for an
4 uptick in the purchase price, they'll have no employees to be
5 there to actually contest the analysis that KPS does, and no
6 money to fund it. So we can dispose of all of these issues,
7 Your Honor, and basically bring this entire estate to fairly
8 prompt resolution potentially in the context of an auction
9 which Your Honor has the discretion to reopen today.
10 So with all that, Your Honor, I do think that there
11 are benefits here. There's actual benefits to the estate.
12 There are potential benefits to other parties here. There is
13 the administrative benefit on the Court and the process as a
14 whole, where we can effectively bring this estate to a more
15 near term full resolution of all issues, rather than having a
16 large piece of it sold off, but then a very large overhang of
17 continuing issues that need to be resolved, both on an
18 intercreditor basis, liquidation of residual asset basis, or
19 anything else which is simply diminished the ultimate
20 recoveries for everybody here.
21 So with that, Your Honor, we do think that the
22 process itself of reopening the auction could have material
23 benefits. And as a result, would ask Your Honor to exercise
24 the discretion to see if we can accomplish all of those things
25 today. Thank you.
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1 THE COURT: All right.
2 MR. PEREZ: Your Honor, just a couple of points. I
3 won't go into the characterization of -- that Mr. Harris made
4 about the actions that we took on the day of the auction versus
5 the actions today. This is kind of a situation where no good
6 deed goes unpunished. And had we just said no on the 9th then,
7 perhaps, we wouldn't be here today with all of these issues. I
8 think the debtor throughout this whole period has been trying
9 to maximize value --
10 THE COURT: I think the debtor's action are without
11 question in the best spirit of trying to maximize value. But
12 without making a --
13 MR. HARRIS: Your Honor, I never meant to imply
14 otherwise.
15 THE COURT: Without making any determination as to
16 the issues as to what happened on the 11th and whether certain
17 conditions were met or weren't met, that may be moot as we look
18 at things today. Actually, let me withdraw that. It certainly
19 isn't moot as we look at things today, but it may be less
20 critical than some of the other issues we have before us. But
21 please go ahead.
22 MR. PEREZ: Your Honor, we agree with that. Your
23 Honor, just one other point and really the main point that I
24 wanted to make. We did have a plan support agreement pursuant
25 to which as part of the deal for setting up this process and
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1 doing it, the term lenders were going to fund a plan. We got a
2 letter over the weekend saying that we're backing away from
3 that. We obviously dispute that and, perhaps, when I get done
4 with this I'll send a letter back disputing it. And you've see
5 it in our papers. But that was the real material benefit that
6 would flow to the estate as a result of what we had set up.
7 Where we are with that is an issue for a different day, but we
8 still think that is really the only material benefit.
9 Otherwise, Your Honor, as the Court indicated, the only people
10 who would benefit are the term lenders, Your Honor.
11 THE COURT: All right, anything else? All right. I
12 think that one thing is clear, and none of you have raised
13 that. And that is that I unfortunately teach a class on Monday
14 nights and can't go beyond 5 o'clock. And we're getting to
15 that point now. It seems to me that I'm going to have to
16 adjourn this hearing until tomorrow morning at whatever time is
17 convenient for the parties, 9:30/10. I have first day orders
18 tomorrow in the new case that was filed today, The Journal
19 Record, I believe. I should know the name of the case but --
20 MR. PEREZ: Journal Register?
21 THE COURT: Journal Register, thank you. I'll know
22 by tomorrow. I've been reading papers in this case rather than
23 in that one, but I'll have some reading to do tonight. That's
24 at 2:30, so I don't know how long we'll go tomorrow, but why
25 don't we start at 10 o'clock if that's a convenient time for
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1 the parties.
2 I think that some of the issues that have been raised
3 by the parties this afternoon can be attended to between now
4 and tomorrow, so we really know where we stand. One is the
5 form of the asset purchase agreement. I suppose the more
6 things I put on the agenda to be done tonight the less sleep
7 the parties will get, and that isn't good either. But it seems
8 to me that it would be very helpful to know that we have an
9 asset purchase agreement in hand for a closing on -- by May the
10 10th, I believe. March, by the 1st or 2nd week of March.
11 And Mr. Harris, you tell me that you are ready to
12 discuss your business plan with the creditors' committee,
13 perhaps you can find some time to do that before tomorrow
14 morning, so we have some better understanding of just what your
15 clients are committed to. Because if what we're doing -- if
16 this was -- you're proposing that we sell all the assets of the
17 estate. And if we were doing this under a plan you certainly
18 would have to show feasibility in order for the debtors to
19 exercise their business judgment to sell all the assets of the
20 estate at this time, I think they have to have some comfort
21 that we're not going to have a second reorganization within a
22 matter of weeks or months. You tell me that your clients are
23 committed to the long-term future of this company I think we
24 need to have some information. Because in terms of exercising
25 discretion to reopening the bidding, I cited cases. The cases
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1 are out there, you can all read them. Financial News Network
2 is the leading case in the Second Circuit, and it speaks of the
3 judge's discretion. And that case and the other cases that
4 support the reopening of bidding in a sale situation,
5 particularly before the Court confirms the sale, are all cases
6 where you had a -- what I would call, and I'm not using a
7 technical term, a true auction. You had parties who were
8 bidding for the assets, if I recall correctly. And setting an
9 amount that they were worth. And you always get a better sense
10 what the market believes certain assets are worth by having at
11 least two bidders. Here, we have one bidder who's bidding in
12 death, and that puts that bidder at an advantage of sorts,
13 vis-a-vis, the third party who's come in. And in this case the
14 credit bidder made it very clear that it did not have
15 financing, that it would be able to attempt to get financing,
16 it's operating, as I said a few moments ago, in the worst
17 market since the Great Depression, something that's hampering
18 everyone, and everyone in this room, including the debtor,
19 itself.
20 But that being so, we have here a third-party bidder
21 who came into this situation in good faith with a bid of a
22 substantial amount of cash. I think you said, yourself, or
23 somebody said, that nobody expected that bid to come forward.
24 And I know this debtor made every effort to find a bidder a
25 year ago, or sometime in the last year when the market was a
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1 lot better, and couldn't do so. And now we have someone who is
2 here who is absolutely real and who has the cash on the
3 barrelhead. So I would want to get some of these loose ends
4 clarified because I think they go directly to the question as
5 to whether or not the estate, as a whole, would be better off
6 taking the burden at hand then a possible proverbial bird in
7 the bush. But I hope things can be clarified by tomorrow, and
8 I'll adjourn then until tomorrow at 10 o'clock.
9 MR. PEREZ: Thank you, Your Honor.
10 THE COURT: Thank you.
11 (Proceedings concluded at 4:17 p.m.)
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1
2 C E R T I F I C A T I O N
3
4 I, Esther Accardi, certify that the foregoing transcript is a
5 true and accurate record of the proceedings.
6
7 ___________________________________
8 ESTHER ACCARDI
9
10 Veritext LLC
11 200 Old Country Road
12 Suite 580
13 Mineola, New York 11501
14
15 Date: March 4, 2009
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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
Case No. 08-14679-alg
- - - - - - - - - - - - - - - - - - - - -x
In the Matter of:
LENOX SALES, INC.,
Debtors.
- - - - - - - - - - - - - - - - - - - - -x
U.S. Bankruptcy Court
One Bowling Green
New York, New York
February 24, 2009
10:55 AM
B E F O R E:
HON. ALLAN L. GROPPER
U.S. BANKRUPTCY JUDGE
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1
2 HEARING re Limited Objection Filed by Walt Disney Art Classics
3 to Debtors' Motion for Order Authorizing, Among Other Things,
4 Sale of Assets and Assignment of Executory Contracts
5
6 HEARING re Limited Objection and Reservation of Rights of
7 Century Indemnity Company to Debtors' Motion for an Order
8 Approving the Sale of Certain of the Debtors' Assets Free and
9 Clear of Liens, Claims Encumbrances, and Interests etc.
10
11 HEARING re Limited Objection and Reservation of Rights of Jack
12 Daniel's Properties, Inc. to Assumption and Assignment of the
13 Jack Daniel's Trademark License Agreement to Purchaser
14
15 HEARING re Objection and Reservation of Rights Filed by Oracle
16 USA, Inc. to Debtors' Motion for Orders Approving Sale etc.
17
18 HEARING re Objection Filed by Birch Run Outlets II, LLC for an
19 Order Approving Asset Purchase Agreement and Authorizing the
20 Sale of Debtors' Assets etc.
21
22 HEARING re Limited Objection Filed by Jimmy Buffett to the
23 Entry of an Order Approving Sale of Substantially All of the
24 Debtors' Assets Free and Clear of Liens, Claims, and
25 Encumbrances
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1
2 HEARING re Liberty Mutual Insurance Company's Joinder in the
3 Limited Objection and Reservation of Rights of Century
4 Indemnity Company to Debtors' Motion for an Order Approving the
5 Sale of Certain of the Debtors' Assets etc.
6
7 HEARING re Objection and Joinder in Birch Run Outlets II, LLC's
8 Objection to Entry of Order Approving Asset Purchase Agreement
9 and Authorizing Sale of the Debtors' Assets etc.
10
11 HEARING re Objection Filed by Bank of New York Mellon, in its
12 Capacity as Term Loan Agent for the Term Loan Lenders, to
13 Debtors' Motion for the Entry of an Order Authorizing and
14 Approving the Sale of Substantially All of Their Assets to
15 Upstairs Acquisition Corp.
16
17 HEARING re Sale
18
19 HEARING re Motion Filed by the Official Committee of Unsecured
20 Creditors for Entry of Order Extending Investigation Deadline
21 with Respect to Liens and Claims Asserted by Term Loan Lenders,
22 and Directing the Production of Documents etc.
23
24
25
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1
2 HEARING re Objection Filed by State of New Jersey, Department
3 of Environmental Protection, to the Turnover of the Proceeds of
4 the Asset Sale etc.
5
6 HEARING re Amended Objection Filed by the State of New Jersey,
7 Department of Environmental Protection, to the Turnover of the
8 Proceeds of the Asset Sale etc.
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24 Transcribed By: Clara Rubin
25
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1
2 A P P E A R A N C E S :
3 WEIL, GOTSHAL & MANGES LLP
4 Attorneys for Lenox Sales, Inc., Debtor
5 700 Louisiana
6 Suite 1600
7 Houston, TX 77002
8
9 BY: ALFREDO R. PEREZ, ESQ.
10
11
12 WEIL, GOTSHAL & MANGES LLP
13 Attorneys for Lenox Sales, Inc., Debtor
14 767 Fifth Avenue
15 New York, NY 10153
16
17 BY: AARON M. KLEIN, ESQ.
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1
2 COOLEY GODWARD KRONISH LLP
3 Attorneys for the Creditors' Committee
4 1114 Avenue of the Americas
5 New York, NY 10036
6
7 BY: CATHY HERSHCOPF, ESQ.
8 RONALD R. SUSSMAN, ESQ.
9 JEFFREY L. COHEN, ESQ.
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11
12 GOLDBERG, KOHN, BELL, BLACK, ROSENBLOOM & MORITZ, LTD.
13 Attorneys for LBC Credit Partners II, L.P. and its
14 Affiliates
15 55 East Monroe Street
16 Suite 3300
17 Chicago, IL 60603
18
19 BY: RANDALL L. KLEIN, ESQ.
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1
2 KIRKLAND & ELLIS LLP
3 Attorneys for Upstairs Acquisition Corp.
4 Citigroup Center
5 153 East 53rd Street
6 New York, NY 10022
7
8 BY: YOSEF J. RIEMER, ESQ.
9 LISA G. LAUKITIS, ESQ.
10
11
12 PAUL, HASTINGS, JANOFSKY & WALKER LLP
13 Attorneys for UBS AG, Stamford Branch, as Agent
14 600 Peachtree Street, NE
15 Suite 2400
16 Atlanta, GA 30308
17
18 BY: JESSE H. AUSTIN, III, ESQ.
19
20 PAUL, HASTINGS, JANOFSKY & WALKER LLP
21 Attorneys for UBS AG, Stamford Branch, as Agent
22 75 East 55th Street
23 New York, NY 10022
24
25 BY: KRISTINE M. SHRYOCK, ESQ.
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2 SCHULTE ROTH & ZABEL LLP
3 Attorneys for The Bank of New York Mellon, as Agent for
4 the Term Loan Lenders
5 919 Third Avenue
6 New York, NY 10022
7
8 BY: ADAM C. HARRIS, ESQ.
9 MICHAEL L. COOK, ESQ.
10 ABBEY WALSH, ESQ.
11
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13 DENNIS O'CONNOR, ESQ.
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1 P R O C E E D I N G S
2 THE CLERK: All rise.
3 THE COURT: Please be seated. May I have
4 appearances, please?
5 MR. PEREZ: Good morning, Your Honor. Alfredo Perez
6 and Aaron Klein for the debtors.
7 MR. HARRIS: Good morning, Your Honor. Adam Harris,
8 Michael Cook and Abbey Walsh on behalf of the term loan
9 lenders.
10 MR. RANDALL KLEIN: Good morning, Your Honor. Randy
11 Klein on behalf of LBC Credit Partners, one of the term loan
12 lenders and a proposed lender to the purchaser.
13 MR. COHEN: Good morning, Your Honor. Jeffrey Cohen,
14 Cooley Godward Kronish; with me today, my colleague, Ronald
15 Sussman, on behalf of the creditors' committee.
16 MR. AUSTIN: Jesse Austin on behalf of UBS as the
17 agent under the DIP loan, along with Kristine Shryock from Paul
18 Hastings.
19 MS. LAUKITIS: Good morning, Your Honor. Lisa
20 Laukitis and Yosef Riemer from Kirkland & Ellis on behalf of
21 Upstairs Acquisition Corp.
22 THE COURT: Good morning.
23 All right, Mr. Perez, where are we?
24 MR. PEREZ: Thank you, Your Honor. Your Honor, first
25 I want to thank you for the time that you gave us to continue
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1 discussions. I want to make the initial point that the debtor
2 is increasingly concerned about the way that we're treating
3 KPS. I mean, they've been here; they're ready to close. We
4 have been prepared to go forward with them. There were two
5 questions or concerns that had been raised during the course of
6 the last couple of days which I think have both been answered
7 to our satisfaction: One is their willingness to close within
8 the first or second week in March, and the other one, there was
9 a question raised about the wording in their working capital
10 adjustment, which I think, from a business standpoint, we're
11 comfortable that it would work out. So they've sat here
12 patiently, and I think that we're prepared to go forward with
13 them.
14 Reporting on what's transpired since last night, Your
15 Honor, we sat in your conference room till about -- some of us,
16 not myself, but someone sat in the conference room till about
17 8 o'clock last night and then continued working on the APA. In
18 addition to starting at 7 o'clock last night back at our
19 offices, there was a presentation of the business plan. We
20 made progress on the APA. I can't tell you that we have a
21 signed APA today that we're prepared to go forward on. There
22 was progress made. I don't know how much additional time we
23 would need to finalize that or if we get there.
24 Second, Your Honor, the term lenders are still taking
25 the position that they've rejected the plan support agreement,
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1 which was the basis of our understanding with them. They've
2 come back to us and put a million dollars on the table for
3 administrative and priority claims. I'm not sure that gets us
4 to a plan. I mean, I really had wanted to be able to do a plan
5 and wrap this case up. I'm not sure that that quite gets me
6 there.
7 And lastly, Your Honor, I think that, as it relates
8 to the ongoing business, there is a concern about whether there
9 is sufficient liquidity. I think the liquidity is tight. It's
10 a situation where it could work, and it's a situation where
11 there could be a concern about it.
12 So, hearkening back to where I started, the debtor
13 is, you know, very concerned about making sure that that KPS is
14 treated appropriately. And we've been working with the
15 committee. Perhaps they would have a statement on that.
16 THE COURT: All right.
17 MR. COHEN: Good morning, Your Honor. Again, for the
18 record, Jeffrey Cohen, Cooley Godward Kronish, on behalf of the
19 committee. Your Honor, we heard your guidance yesterday and
20 took it very seriously. Despite having requested the business
21 plan of the term loan lenders since, essentially, the date of
22 our formation on December 2nd and having not seen it since that
23 time, upon Your Honor's urging yesterday, a presentation was
24 offered to us last night. We attended that presentation. We,
25 instead of going ahead at an earlier time, waited until
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1 knowledgeable personnel from the company, including the
2 company's CEO, CFO, COO and chairman of the board, were all
3 available to sit in the room with us so they could ask learned
4 and pointed questions that maybe we didn't know to ask. So we
5 had the benefit of their knowledge. And essentially, Your
6 Honor, all it did was validate the concerns I expressed to Your
7 Honor yesterday.
8 We believe that, despite all of the failings and
9 missed deadlines to now, if we were to look at the term anew
10 and give them a complete fresh start and we forget all that and
11 just look at their business plan, it still looks like we could
12 be back before Your Honor next September or October. It looks
13 like availability gets very, very thin in September '09 to the
14 point that when you build in a minimum availability block
15 that's in the debt document, we can be talking about a million
16 dollars or less.
17 Your Honor, it's just not worth the risk. You know,
18 we sit here and are watching a potential bidder who's trying to
19 reopen the process do something akin to passing around a hat in
20 the hallway to try to scrape together pennies to try to
21 accomplish administrative solvency or provide a distribution to
22 creditors. And, you know, from a professional's perspective, I
23 respect their professionals. They've been working very hard to
24 get a deal done. If the money's not there, that's not their
25 fault. It may be the timing that's disadvantageous to them.
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1 Whatever it is, I think, to echo Mr. Perez's
2 concerns, we have a bid we like. We have a bid that is not
3 subject to this risk. And I think we're getting past the time
4 where we're disrespecting that bid. And the committee supports
5 moving forward with the KPS bid. We have way too much concern,
6 which, if Your Honor, in due course would like to hear greater
7 detail on, I'll do that. But I'll save Your Honor that now.
8 THE COURT: Well, is what you're telling me that even
9 if I reopen the bidding and I said I'll take their bid, their
10 current bid, as a qualified bid, and the debtors did say
11 yesterday that if the situation were looked at today, they
12 would view this bid as a qualified bid, you're telling me that
13 under all the facts and circumstances, the bid of the other
14 party is higher and better in your view?
15 MR. COHEN: Your Honor, from the committee's
16 perspective, the KPS bid would be higher or otherwise better,
17 yes. The KPS bid is all equity. It is not putting a twenty-
18 five million dollar debt facility in this company, which, in
19 the next few months, if the credit markets loosen up, they hope
20 to put a traditional ABL on top of that. Your Honor, once you
21 lay our traditional ABL on top of this term debt, capital
22 structure starts to look strikingly similar to the one that we
23 presented to Your Honor back in November. All we did was strip
24 the pension liability off the company.
25 So we're running into the same problems. And we've
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1 voiced our concerns. We walked through the numbers with
2 management of the company. I think they're willing to express
3 their concerns to Your Honor. We do not consider it to be
4 higher or otherwise better.
5 THE COURT: All right. Anyone else?
6 MR. AUSTIN: I'd like to present too, Your Honor, for
7 the term lenders.
8 THE COURT: All right.
9 MR. AUSTIN: For the record, Your Honor, I'm Jesse
10 Austin on behalf of UBS as the agent of the DIP loan. On
11 behalf of UBS as agent for the DIP lenders, we unequivocally
12 oppose reopening the auction for the Lenox assets. We share
13 the concern stated by the committee that the economics of the
14 proposed transaction is not going to provide enough ultimate
15 liquidity for this debtor to, I think, operate on a full going-
16 concern basis.
17 And as we may explain and a necessary and evidentiary
18 presentation will show, we do not see that these are the
19 circumstances where this Court should have indeed exercised
20 discretion to give the term loan lenders one more chance. I
21 think the comment by the debtors' counsel this morning that
22 there's still no final APA from the term lenders, along with
23 some other things that I'll point to, speaks volumes of where
24 we are or, as the case may be, are not. The fact that one
25 might say progress is being made, is progress is not the end.
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1 The fact that we may be getting closer, from where we stand,
2 close only counts in two areas: horseshoes and atom bombs, not
3 when you have an auction that had clear and concise and
4 detailed points that were negotiated by these term lenders to
5 come in here and present a final bid on the 6th, to present
6 evidence of financing on the 9th and clearly show up and be
7 ready to close on the 11th. We are here today now on the 24th;
8 they're still not there.
9 Under these circumstances, we believe for the term
10 lenders to continue their efforts, from what we see, to disrupt
11 this process threatens the loss, indeed the walk-away of the
12 one bidder. In fact, the bidder they frankly didn't think was
13 going to show up, KPS, which bid was in good faith, in
14 accordance with the rules and procedures, has no issues
15 relative to financing. It was done by the established rules.
16 We do not believe there should be a basis by reopening this
17 closed auction, and this Court should award the sale of the
18 assets to KPS.
19 And we reached this also from something that happened
20 subsequent to yesterday's hearing. As this Court may recall
21 from yesterday, UBS asked, if this Court was to reopen the bid,
22 for it to determine and otherwise require the term loan lenders
23 three things: an unequivocal statement and evidence they are
24 ready to close; that this case will -- that they can close and
25 will close by the first or second week in March; and that,
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1 irrespective of who won any reopened auction, the term loan
2 lenders would raise no issues on the issues of allocation of
3 the proceeds, and the DIP loan and obligations they were under
4 would be paid at the closing.
5 Following the adjournment of yesterday's hearing, the
6 term loan lenders, through Mr. Harris, essentially tried to
7 leverage UBS and the DIP lenders to supporting their term loan
8 by asking UBS to present to KPS or to pressure KPS to have its
9 bid confirmed through the allocation of proceeds as under the
10 term loan bid. Why is that important? Because that means you
11 can clearly see through that allocation that, to the extent
12 there is an increase on a cash basis, any bid, if it's
13 reopened, all that cash doesn't go to the debtors' estate; it
14 goes to the term loan lenders. And the direct statement by
15 Mr. Harris was that if we did not, if UBS and the DIP lenders
16 did not, in fact, try and get KPS to do this, the term loan
17 lenders had not agreed to drop any allocation issue. It would
18 oppose paying the DIP at the closing of the KPS transaction if
19 it was awarded the bid.
20 As was stated, neither the counsel nor their clients
21 have said that the DIP lenders would get paid at closing.
22 Frankly, this is not Mr. Harris' and his client's decision. It
23 is Your Honor's. And indeed it is consistent with paying us at
24 closing, what the bid procedures have always said. What we
25 believe is this statement and evidence is the continuing
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1 approach the term loan lenders have taken to effectively try
2 and manipulate this process to their benefit where they are not
3 ready to actually close this deal. And the risk we have, as
4 the committee has noted, is that we are running at risk of
5 losing a bidder that is to bid all cash and can operate this
6 business without any potential future leverage on this company.
7 We submit, Your Honor, that KPS bid and participated
8 in the process as set forth in the bidding procedures. It
9 presented its bid, as required, on February the 6th. It
10 presented its financing on February the 9th. It showed up on
11 February the 11th and sat through an all-day process where, at
12 the end, it was determined that, at that time and in accordance
13 with the bidding procedures, the term loan lenders were not a
14 qualified bidder.
15 Much to our surprise, KPS has not waivered from that
16 position. Indeed, it has been abundantly patient in the face
17 of the efforts to disrupt the process and now sitting through
18 what is the second day of a sale hearing. They are an all-cash
19 bidder ready to close. We believe it's now time to close this
20 sale and not to reopen this auction, and we ask the Court to so
21 rule and certainly, at the end of that, contrary to many
22 statements that may be made by the term loan lenders, that in
23 doing so and entering the order approving the sale, to order
24 that the DIP loan and its obligations thereunder be paid at
25 closing as the bidding procedures have always provided. Thank
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1 you.
2 MR. HARRIS: Good morning, Your Honor. On behalf of
3 the term loan lenders, Adam Harris. Your Honor, as you noted
4 in your comments to Mr. Cohen, yesterday Mr. Perez stood in
5 front of you and basically said, with the modifications that
6 have been made to the financing arrangements that have been
7 presented, the company deemed us to be, in their view, a
8 qualified bidder. We spent hours last night, Your Honor, after
9 we concluded the hearing in your conference room behind the
10 courtroom, walking through every provision of the asset
11 purchase agreement in order to meet the debtors' request that
12 we conform our asset purchase agreement to the form that had
13 been signed by KPS; so only for those changes that were
14 necessary because, frankly, we're doing a very different
15 transaction than KPS, the transaction which includes all of the
16 assets of this estate. It doesn't leave it with residual
17 issues to deal with and liabilities to pay relative to D 56 or
18 any other asset.
19 We delivered to Weil Gotshal, Your Honor, last night,
20 as quickly as we could, a markup of the asset purchase
21 agreement reflecting the changes that had been discussed and
22 showing the changes from the KPS agreement. And I believe,
23 Your Honor -- well, first off, we really received no response
24 from Weil Gotshal with respect to that APA, despite the fact
25 that we were prepared to spend the entire night getting it to
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1 conclusion, until just about the time the hearing this morning
2 was supposed to start.
3 I had a brief opportunity to review with Mr. Perez
4 the issues that he advised me of. I don't think there are any
5 that anybody could stand here and say are material or
6 significant. Some of them we've already cleared in terms of
7 saying that the changes that they wanted to our language from
8 last night are fine. But I don't think anybody could stand
9 before you and say there's a material issue that could not be
10 resolved through minimal additional discussions. That
11 opportunity, however, Your Honor, has not existed prior to --
12 as we stand here right now.
13 With respect to the term loan agreement, Your Honor,
14 we also delivered to Weil Gotshal a revised draft of the term
15 loan agreement reflecting the very few changes that we
16 represented on the record yesterday would be made to that
17 agreement, including reducing liquidity covenant and making
18 other changes to give greater assurance that the deal would
19 close as requested by the debtors and which gave rise to the
20 debtors' ultimate statement that they believe that we met the
21 financial qualifications to be a qualified bidder.
22 So those two elements, Your Honor, I believe, have
23 been basically accommodated as per the debtors' request. But
24 most importantly, Your Honor, we heard loud and clear what Your
25 Honor said yesterday about not just reopening this auction for
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1 the benefit of the term lenders. We understand that, and we
2 have made a proposal to the combination of the committee and
3 the company, Your Honor, that would give cash to the company
4 approximating five percent of the cash value of the KPS bid or
5 two million dollars in the aggregate. We've also, Your Honor,
6 said that if we do get into an auction and the recovery to the
7 term lenders exceeds certain thresholds that we would provide a
8 participation in the upside above that.
9 Now, one of the things that maybe we should have all
10 foreseen, Your Honor, but which we didn't necessarily is that I
11 can't control who gets the money once it comes into the estate.
12 I can only pay it. I would like to be able to accommodate
13 everybody's interests here, but we can't. And, frankly, Your
14 Honor, in light of the fact that under the UAC bid the estate
15 receives zero consideration for any creditor, any
16 administrative creditor, any 503(b)(9) creditor, any unsecured
17 creditor, priority secured tax claim, two million dollars,
18 which, as I said, represents about five percent of the cash
19 consideration from the UAC bid, is not an insignificant
20 contribution in order to basically show the Court and defer to
21 the view that there needs to be some benefit to somebody else
22 other than just ourselves from re-auctioning, particularly in
23 light of the fact, Your Honor, that there is a significant
24 admitted value differential from the company's own financial
25 advisor between the two offers that have been submitted here.
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1 It's not an insignificant difference. It's a very, very
2 significant difference, which only, frankly, grows larger, Your
3 Honor, in favor of the term loan lender bid as time passes.
4 And, now, I know everybody has said that -- you know,
5 KPS and everybody else say they're going to close by the second
6 week in March. There are final order requirements in
7 everybody's asset purchase agreements, Your Honor. So time,
8 while everybody's got a target date, is not written in stone,
9 and nobody said that they will close in the face of an appeal
10 here. Under our deal, Your Honor, we pick up and pay for the
11 incremental costs associated with the continuation of the
12 estate thereafter to a closing; they do not.
13 With respect to the analysis, the business plan, Your
14 Honor, and what happens in the future, let me address it this
15 way. I think, obviously, there is a significant disagreement
16 between the proponents of the term loan lender plan, the people
17 who are putting sixty million dollars of new money into this
18 deal, sixty million. That's independent of the credit bid.
19 They believe very forthrightly that the business plan and the
20 management team that they've assembled will be a success.
21 There is no question in their mind that that is, in fact, the
22 case. I understand the committee has looked at it through a
23 meeting they had last night. The company has looked at it
24 through the meeting they had last night. But, Your Honor, the
25 most important people who need to assess this are basically
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1 two: those who are putting in the new capital and those who
2 choose voluntarily, on whatever terms they deem appropriate, to
3 do business with this company in the future. The vendors, Your
4 Honor, the landlords, they can make their own decisions. We
5 should not be sitting here predetermining on what terms they
6 may want to do business with this company from and after the
7 date our acquisition vehicle may purchase it. We believe that
8 we can make the case on adequate assurance of future
9 performance, that that will not be an issue, and that we make
10 our own relationships with our own vendors and our own
11 customers thereafter. But for us to sit here today and
12 basically say we need to protect the future creditors of this
13 company seems to me to be getting a little ahead of ourselves,
14 Your Honor.
15 Now, with respect to a couple of other comments, Your
16 Honor, I just want to make sure that we understand what the
17 true facts are here. The acquisition vehicle of the term loan
18 lenders has no intention and has never had any intention to
19 layer an additional debt facility on top of the existing term
20 loan. The discussions regarding an asset-based loan facility
21 are intended to replace the term facility that was put in place
22 because the credit markets today simply couldn't provide us
23 with a market rate or market ABL-type facility. We're not
24 further levering up this. We're not going to replicate the
25 capital structure that Lenox put in place here. We've learned
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1 from that mistake for sure, given the amount of amount we've
2 already lost in this case.
3 So we have put together a sensible, financible,
4 sustainable deal that the people who want to do business with
5 us in the future will look at and judge for themselves.
6 The other piece, Your Honor, really relates to
7 Mr. Austin's comments, and that are these: We will
8 unequivocally state that we have the capability of closing. We
9 will unequivocally state that we will close by early March,
10 just the way that KPS has said that they will. What
11 Mr. Austin, frankly, asked us to do is to waive a legal right
12 that we have with respect to our collateral in order to,
13 effectively, get him to allow us to get back into a proceeding
14 as to which the debtors have already concluded that we should
15 be a qualified bidder.
16 We have a split collateral deal here, Your Honor, and
17 that's the basis upon which they funded. The DIP agreement
18 clearly says that. The intercreditor agreement clearly says
19 that. The DIP order that Your Honor signed and which they
20 drafted simply says that upon the sale, transfer or disposition
21 of revolver priority collateral, they get the proceeds of it.
22 The only thing that we have said, Your Honor, is that under the
23 KPS deal, I have no idea what constitutes revolver priority
24 collateral proceeds and what constitutes term lender priority
25 collateral proceeds.
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1 So under that basis, Your Honor, we simply said you
2 can have your money when we figure out what the appropriate
3 allocation is. We didn't threaten anybody. It is the order
4 that was agreed to by this Court and which has been in effect
5 since they put the financing in place back in November and
6 December. That was always the deal. We're not threatening
7 anybody. What we did say to the term lenders (sic), Your
8 Honor -- to the DIP lenders, Your Honor, what we said to other
9 people, is that under the structure of the transaction that's
10 been proposed by the term lenders where the buyer gives
11 absolute assurance to the estate, that professional fees get
12 paid, that the DIP gets paid and that cure costs get paid and
13 that there be a fixed-sum recovery to the term lenders, that
14 that is a situation where the estate no longer bears any risk
15 on timing of closing. Creditors bear no risk regarding what
16 the purchaser does. And then it all becomes, Your Honor, an
17 issue of value to the next creditor constituency in line.
18 So we have simply laid out what we believe to be a
19 substantially better structure from the estate's perspective so
20 that the estate and its other creditor constituencies are not
21 taking risk in this deal and that any auction that occurs,
22 should Your Honor exercise your discretion to do that, would
23 simply be based on recoveries to the term lenders without
24 anybody else having to worry about working capital adjustments,
25 interim operating losses, further accruals of professional fees
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1 or anything else. That's all for the buyer's account. We're
2 prepared to stand up behind that and take on those obligations
3 and take that risk and provide this benefit to the estate,
4 which I described earlier as well. And I have not heard that
5 from anybody else, Your Honor.
6 Based upon that, Your Honor -- and, as I said, we
7 think we've done everything that the parties have asked us to
8 do in order to get to the point of having Your Honor exercise
9 discretion to reopen the auction. Yesterday, we had the
10 debtors say that we would be a qualified bidder. We negotiated
11 the APA; we're basically done with that. We changed the term
12 loan agreement to meet everybody's concerns; we're done with
13 that. We put value on the table for other creditors.
14 THE COURT: Well, that's the two million you just
15 referred to?
16 MR. HARRIS: That's correct, Your Honor.
17 THE COURT: And that's over and above everything
18 else?
19 MR. HARRIS: That's over and above everything else.
20 THE COURT: Over and above your commitment to pay the
21 administrative expenses of the estate? Or is that going to the
22 administrative expenses of the estate?
23 MR. HARRIS: Your Honor, it's a two million dollar
24 contribution to the estate to be used to settle claims and deal
25 with other things, which is two million dollars greater than
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1 the estate is going to have under any kind of KPS proposal.
2 THE COURT: And greater than provided for in the
3 lockup agreement?
4 MR. HARRIS: The plan support agreement, Your Honor,
5 had a number of 2.15 million.
6 THE COURT: So it's essentially -- it's less than
7 the --
8 MR. HARRIS: It's 150,000 dollars less than the
9 projected amount necessary in order to do that, Your Honor.
10 Now, we and Mr. Perez --
11 THE COURT: And on what day can you walk away from
12 the plan support agreement? I know you've called a default,
13 but what's your theory on that?
14 MR. HARRIS: Your Honor, we can get into all the
15 issues on that. There is a termination event for failure to
16 enter into an asset purchase agreement with us by December
17 19th. That was never done; we've notified them of that. We
18 believe that the modifications to the bid procedures, which the
19 debtors suggested without ever consulting to us to accelerate
20 the dates, constituted a violation. There are a whole host of
21 things, Your Honor, which, frankly, we could get into which are
22 not particularly relevant, I don't think, because the fact of
23 the matter is, Your Honor, the estate right now is staring at
24 absolute goose egg on administrative insolvency here. And the
25 plan support agreement provides no obligation for us to provide
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1 even a dollar to the estate if we're not the winning bidder.
2 So we're trying to work through, consistent with Your
3 Honor's statements yesterday, to provide value to other
4 creditors of this estate which would not otherwise exist in
5 order to effectively get back in the game. That's where we
6 are, Your Honor.
7 THE COURT: All right. Do you want me to take any
8 testimony on the question before me now, which is whether I
9 should reopen the bidding?
10 MR. HARRIS: Your Honor, we would be prepared to put
11 witnesses on the stand to testify as to the bona fides of
12 everything I've just put on the record, Your Honor. But I
13 believe that there's really no dispute as to where we are
14 relative to the financing commitments or anything else. I
15 think the record yesterday was clear that the company was of
16 the view that, given the status of the financing that we have
17 provided, that we would be and should be deemed a qualified
18 bidder.
19 THE COURT: All right.
20 MR. PEREZ: Can I just respond to that? Your Honor,
21 we've really tried to keep this down the middle, and we
22 really -- and we probably, as a result, just -- you know,
23 nobody's happy with us. But that's not what I said yesterday.
24 What I said yesterday was had they, on either the 9th, the 10th
25 or even the day of the auction, come to us with that
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1 information, then probably we would have qualified them as a
2 bidder. That's what I said. But we're two weeks down the
3 road. I have a signed APA with KPS that we're very comfortable
4 that we can perform, that will get done. I don't have a signed
5 APA with the term loan lenders today.
6 And also, Your Honor, as it relates to the plan
7 support agreement, I have a lawsuit with respect to that.
8 That's what I have. That's the only thing I have. The plan
9 support agreement called for a minimum of 2,150,000 dollars for
10 administrative expenses, which, in large part, Your Honor, as
11 the Court knows, it's the 503(b)(9)s, I mean, that are now
12 administrative expenses. The offer that I got before was a
13 million dollars for that and then a million dollars elsewhere.
14 And it also had 100,000 dollars for a plan administrator so
15 that we could deal with all the claims, close out the estate.
16 I mean, it had a lot of things that made a lot of sense. I
17 don't have that. All I have is a lawsuit.
18 THE COURT: And what happens, then, later in the
19 case?
20 MR. PEREZ: You know --
21 THE COURT: Whatever happens, we'll see?
22 MR. PEREZ: -- unfortunately, I don't know. I can't
23 predict what happens.
24 THE COURT: What do you predict -- what is your view
25 as to the disposition of D 56?
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1 MR. PEREZ: Your Honor, the situation with D 56 is a
2 complex one. There's a building that, if it could be sold, it
3 has significant value. Obviously, the real estate market is
4 bad. We are not as pessimistic about being able to liquidate
5 that and get a several -- you know, six, seven million dollar
6 return. I'm happy to put on a witness with respect to that.
7 Yet it will be an ongoing issue. But I think we've had several
8 bidders that have come up. We actually think we can do better,
9 and that's why we've been working with it. There are lines,
10 except for the parrots of course, that can be sold.
11 So, I mean, that is -- no doubt that if it were taken
12 off our hands, that's great. But it's not something that we
13 just need to, at all costs, get it off our hands, Your Honor.
14 THE COURT: All right.
15 MR. HARRIS: Your Honor, just to be clear, because
16 Mr. Perez throwing around references to lawsuits is not really
17 productive to the overall cause. What the plan support
18 agreement says is if there's a plan of reorganization and we're
19 the prevailing purchaser, we'll fund, assuming it hasn't been
20 terminated and there haven't been breaches. Considering
21 Mr. Perez is not even prepared to qualify as a bidder, I don't
22 know what lawsuit he's planning on throwing around since we
23 can't possibly be the prevailing purchaser and there can't
24 possibly be a plan.
25 We came to him and to counsel of the committee in
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1 good faith after hearing Your Honor's comments yesterday and
2 made what we thought was a proposal to get the other creditors
3 of the estate -- and, again, I can't control who ultimately
4 gets it, but to get other creditors of the estate money they
5 would not otherwise get under the circumstance of acceptance of
6 the KPS bid. There's no mechanism provided in that bid and
7 none that I'm aware of under law that's going to allow the
8 estate to basically circumvent the payments required to the
9 secured creditors from a hundred percent of those proceeds that
10 are left over after paying whatever costs have to be paid to
11 get the deal closed.
12 So I'm not sure exactly where Mr. Perez is going with
13 this notion of some kind of lawsuit. But the whole point here,
14 Your Honor, is we heard what you said yesterday. We wanted to
15 put a good-faith offer on the table that would help the
16 situation. As I said, it's not an insignificant amount of
17 money given the cash consider -- even in comparison to the cash
18 consideration being provided by KPS. And Mr. Perez's statement
19 is telling, Your Honor. He said if we'd been there on the date
20 of the auction or on the 9th or the 6th, or whatever date
21 somebody wants to choose, with exactly the same financing, they
22 would have qualified us. And they would have qualified us,
23 Your Honor, to start the bidding. And would issues of our
24 business plan come up? Maybe. Would issues of us having to
25 fund another plan support agreement? Maybe. But now it seems,
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1 Your Honor, that those issues are actually driving the decision
2 of whether to have an auction at all rather than the other way
3 around.
4 So it seems to me, Your Honor, that where you've got
5 even a late bid, a bid that never showed up at the auction,
6 which certainly is not the case with us, where you've got
7 somebody who wanders in off the street and is prepared to
8 provided higher and greater value to the estate than is
9 otherwise being offered, this Court clearly has the discretion
10 to review that and determine whether, in its discretion, it
11 should reopen the auction and have it move forward.
12 And, Your Honor, we have never waivered, never
13 waivered, in our determination to pursue the assets of this
14 estate. And we've done everything in our power to basically
15 achieve that goal, including after being basically told you're
16 out of the game, to put together all the documentation that we
17 were able to submit to people so that Mr. Perez could actually
18 sit here yesterday and today and say, effectively, putting the
19 bid aside, you are a qualified bidder.
20 Now he's throwing it to Your Honor to basically make
21 the decision with that set of facts and circumstances as to
22 whether the auction should be reopened. He doesn't want to
23 take a position on that; I understand that. But when you have
24 two qualified bidders, Your Honor, no sale order's been
25 entered, no real expectation of finality from the other bidder,
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1 given both the terms of the bid procedures which say that no
2 offer is deemed accepted by the sellers until such time as a
3 sale order has been entered, the affirmative objection that was
4 put on the record at the proceedings on the 11th by the term
5 lenders, the knowledge by KPS that we were in this deal from
6 the very beginning and would be actively pursuing it, balance
7 that against the obligations of all parties to try and maximize
8 value for the estate, and we believe that that's a proper
9 foundation for Your Honor to be exercising discretion in this
10 case. Thank you.
11 MR. RIEMER: Your Honor?
12 THE COURT: Yes?
13 MR. RIEMER: For the record, Yosef Riemer from
14 Kirkland & Ellis for KPS. Let me, if I could, speak directly
15 to Mr. Harris' comments about discretion because we spent a
16 considerable amount of time last night looking at the case law
17 on discretion, and it's very instructive. The circumstances in
18 which case law from this circuit and other circuits have said
19 it's appropriate for a Court to exercise its discretion are
20 simply not present here. The issue isn't whether the Court has
21 discretion; it's whether it's an appropriate case to exercise
22 it.
23 We went through all the cases that talked about this,
24 and these are things that courts have relied on when they have
25 exercised that discretion: where there was fraud, unfairness
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1 or mistake in the conduct of the sale. That's the Food Barn
2 case from the Eighth Circuit cited by the term loan lenders.
3 No one is suggesting that occurred here.
4 Second, if the high --
5 THE COURT: You mean the Food Fair (ph.) decision?
6 MR. RIEMER: Yes, I do, Your Honor. Thank you.
7 THE COURT: All right.
8 MR. RIEMER: -- if the highest bid submitted at a
9 judicial sale is manifestly inadequate or the price is grossly
10 inadequate to shock the conscience of the Court. That's
11 discussed in the Food Fair case as well as the GilBern case
12 from the First Circuit. No one is asserting that to be the
13 case here.
14 Third, when no clear bidder had emerged from the
15 process. That's an issue in the Financial News case and a case
16 called Corporate Assets v. Paloian, 368 F.3d 761, decided by
17 the Seventh Circuit in 2004. This was also cited by the term
18 loan lenders in their papers. And the Court emphasized that
19 the debtors' counsel had not done anything to formally declare
20 a winner at the auction. We can't possibly view this case as
21 falling into that kind of situation. At the end of the
22 auction, the debtors were very clear. There was one, and only
23 one, qualifying bidder. And that was declared on the record,
24 and the Court has that transcript.
25 Fourth, when reopening the auction will not upset the
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1 reasonable expectation of the bidders. And cases discussing
2 this have emphasized that there are important notions of
3 finality and regularity in judicial auctions that have to be
4 balanced with bidders' reasonable expectations. We followed
5 the rules. We submitted by the 6th the bid. We submitted by
6 the 9th a proof of the financing that was required. We showed
7 up at the auction on the 11th and waited patiently while it was
8 extended and extended, were declared the winner, negotiated an
9 APA with the debtors, signed the APA with the debtors, all that
10 done by the 14th, called capital from our investors and have
11 taken steps toward a closing, working with other constituencies
12 and so on. And at the same time, frankly, we have monitored
13 what's gone on in this Court. And it has been obvious
14 throughout that no matter how generally representations are
15 made that the points Your Honor have set have never been
16 satisfied.
17 So I heard just now Mr. Harris saying no one can say
18 that there are material issues that would prevent us from
19 getting to an APA. What Mr. Perez told me was that there were
20 three pages of open issues. We have a signed APA; they don't.
21 They make general statements but they never get there. They
22 never do the things Your Honor makes clear throughout this
23 whole process have to be done. Your Honor couldn't have been
24 clearer last week. They had to have something unequivocal.
25 They did not have that in the papers that were submitted, and,
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1 indeed, I maintain they still don't have it.
2 There were three points that the debtors made
3 yesterday to them and assisted be changed. One was the
4 linkage, and there was no change, that is, of the equity and
5 the debt commitments. And the second was that there was
6 concern by the debtors about a condition in the term loan
7 lenders' debt document that there be minimum cash on hand of
8 twenty million dollars. That hasn't gone away. It was changed
9 to fifteen million dollars. There was also concern about a
10 condition of having a minimum borrowing base of twenty million.
11 That remains.
12 So in no way is this a case where reopening the
13 auction could be described as having no effect on reasonable
14 expectations of bidders, not just the reasonable expectations
15 that formed as a result of the bidding procedures but of the
16 clear lines Your Honor has set that very helpfully guided this
17 process along. Your Honor couldn't have been clearer
18 yesterday. We have a signed contract; they don't. I thought
19 we'd walk in this morning and maybe I'd be pleasantly
20 surprised; they would say here's the APA with our signatures.
21 We don't even have agreement on language. We have this general
22 statement that they don't think there are big issues there.
23 But what Mr. Perez said is progress has been made, I can't say
24 we'll get there. Well, when do we say we'll get there? They
25 had every opportunity. And Mr. Harris made a remarkable
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1 statement. He said there had been -- the opportunity has not
2 existed with respect to the APA. Really? That opportunity has
3 been there consistently and not been taken advantage of.
4 Finally, another factor that courts have looked at --
5 this is in the Financial News case, it's in the Food Fair
6 case -- is whether the procedures were fluid and flexible. The
7 more fluid, the more undefined the procedures, the more courts
8 are willing to accept -- to tack with the change of the wind,
9 in the language of the Financial News case. For example, in
10 the Food Fair case, the Court emphasized it's significant that
11 the judge chose to adopt a very informal and flexible bidding
12 procedure. And to the extent the method used can even be
13 called an auction, it was an auction marked by a lack of
14 applicable rules and guidelines. This is not that case, Your
15 Honor. Pages of bid procedures that were negotiated among the
16 parties and agreed to. In no way can we say this is a case
17 where the bidding procedures were fluid and permitted this sort
18 of improvisational process.
19 Now, one point I do want to highlight for the Court
20 is this issue of the record. It seems to me the parties have
21 submitted a wealth of deposition testimony. And from the
22 indications I've received, no one seems to be saying live
23 witnesses need to be heard. And I would assume, therefore,
24 that the depositions are part of the record and that the
25 Court's free to rely on that extensive deposition testimony in
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1 making whatever finding that it ultimately comes to, unless
2 there's something the Court identifies where it feels it needs
3 to have live testimony.
4 The most important word that's been used by Mr.
5 Harris in this process, and he must have used it repeatedly
6 yesterday -- I don't have a transcript, unfortunately -- is
7 "could". They have an offer they say that could deliver more
8 value. Now, no one, no one, to my understanding, has gone
9 through the process looking at the greater risks associated
10 with theirs of discounting that to reflect the greater risks
11 involved.
12 But "could" and "having" are two different things.
13 Mr. Harris' client's bid could be better, that it could be a
14 lot worse. And it seems entirely appropriate for a bankruptcy
15 court, as a court of equity hearing the testimony of the
16 unsecured creditors' committee and the others who had this
17 presentation, to take that factor into account. It would be a
18 different case if they were offering something which had no
19 risk or less risk, that that's clearly not the case when we're
20 talking about a proposal which, as I understand the analysis
21 done by the unsecured creditors' committee advisor, looks at
22 being down to potentially a million dollars, Mr. Perez said.
23 It could be enough; it could be very thin. And that's
24 obviously something the Court is entitled to take into account
25 as well either in deciding whether to exercise its discretion
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1 or under a variety of other legal standards that I think could
2 be applied here, any one of which leads to the same result.
3 I appreciate very much all the kind words about my
4 client's patience. I appreciate, as well, the difficult
5 position that the parties have placed Your Honor in. We still
6 stand here committed to this transaction, if we go forward, and
7 have the determination that needs to be made here. And I think
8 the record has clearly provided Your Honor with any number of
9 ways to come to that decision. This is not a question of
10 giving people a second chance. This is now a question of
11 giving people what's probably about a seventh chance. At some
12 point, Your Honor, it's got to end, not just because of a
13 desire for formalism or a concern that rules are rules,
14 important as those things are, not just, Your Honor, because of
15 the important policies involved that, what do you do in terms
16 of future auctions, do you encourage parties to stand on the
17 sidelines and see and improve their offers after an auction;
18 are you ultimately undercutting this important process? But it
19 has to end because what they are offering is not the same risk.
20 It's not less risk; it's more risk. And for every "could",
21 that somebody can say it could be better, Your Honor can't
22 close the Court's eyes to the ways in which it could be worse.
23 And so, in the end, what you compare is what you
24 have, and what you have is a signed APA. What you have is an
25 unlimited obligation to put in equity to fund this. What you
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1 have is a bidder who, on Friday, will have seventy-five million
2 dollars sent in by its limited partners to go ahead and do this
3 transaction. That, Your Honor, is real. Everything else is
4 the land of "could". And I submit, in a case like this, "real"
5 ought to trump "could". And with that, I'll sit down. Thank
6 you.
7 THE COURT: Anyone else?
8 MR. COHEN: If I might. Again, for the record,
9 Jeffrey Cohen on behalf of the committee. Just a few short
10 responses to a comment or two that Mr. Harris made. In
11 comparing the administrative insolvency or administrative
12 solvency of both bids, all Mr. Harris is doing is pointing to
13 the KPS bid and saying it potentially could lead to
14 administrative insolvency or doesn't provide a roadmap to the
15 exit of this case. He doesn't, on the converse, say that his
16 new enhanced bid provides for administrative solvency. He's
17 saying it might provide for less administrative insolvency.
18 That, to me, does not solve a problem. That problem remains.
19 With respect to the business plan --
20 THE COURT: What do you think the administrative
21 expenses in this case will amount to?
22 MR. COHEN: The administrative expenses that I am
23 aware of are based on the debtors' numbers, and I understand
24 them to be in the three million dollar range. I could be
25 corrected by Mr. Perez, but I think --
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1 MR. PEREZ: It's probably a little bit less than
2 that. It's, like, 2.2, 2.3.
3 MR. COHEN: And that's, again, setting aside a return
4 for general unsecured creditors. I think when you're standing
5 up and asking for an auction process to be reopened, it
6 shouldn't be judged I'm going to make them less
7 administratively insolvent. It should be something more
8 concrete than that.
9 With respect to the business plan, that vendors and
10 landlords can make their own decision, respectfully, Judge,
11 that's why the committee's appointed, because it took the
12 committee months of asking to finally get the business plan.
13 Vendors and landlords should decide the terms. Their business
14 plan decides terms for them. In order to get to this million
15 dollars of raw billing in September, it assumes a return to
16 historical trade terms within ninety days of closing. Just
17 really to have that minimum availability, they assume the trade
18 is doing that for them. And by the way, the employees don't
19 get that choice. The employees don't get to make the credit
20 decision that each individual credit manager makes for their
21 company. The employees are going to have a go-forward company
22 they expect to keep their job with.
23 Your Honor, the committee strongly believes that
24 reopening this process puts the quote/unquote "success" of this
25 case, the go-forward, the stable, the feasible go-forward
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1 operation significantly at risk.
2 THE COURT: Now do you think I have the ability to
3 take any testimony on that point? Who can testify on that
4 point? We're really talking about feasibility. We're talking
5 about feasibility in a nonplan context. But I think we have a
6 real -- or do we have a dispute, Mr. Harris?
7 MR. HARRIS: Your Honor, we can pull together
8 witnesses to go through the company's plan and the commitment
9 of the funds that are putting up the money behind all this. If
10 the issue of feasibility is what's going to turn Your Honor's
11 decision, then we'd be happy to pull that testimony together
12 and present it. It seems to me, Your Honor, that feasibility
13 is a decision which comes after one starts an auction and sees
14 what's available on the table and what people are willing to do
15 and not a hurdle. If we go back and look at the bidding
16 procedures, Your Honor, nobody said you had to present a
17 business plan with a guarantee of employment and minimum
18 availability in order to get in the door. You had to show up
19 with financing commitments, which everybody thought were
20 written evidence of your financial ability to close. We've
21 substantially changed that hurdle. And I understand we're at a
22 different point in time, asking Your Honor to do something in
23 your discretion, but it seems to me that the issue of
24 feasibility, the issues that Mr. Riemer raised about
25 conditionality, to the extent any continues to exist, are
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1 issues that one looks at in the context of comparing actual
2 bids.
3 Right now, there is no comparison because there is no
4 auction because we are not qualified. Nobody is willing to say
5 or even listen to or have compelled themselves to do the actual
6 hard-work analysis to see whether the issues that people are
7 raising here are real or whether they are simply ghosts against
8 which we're all trying to fight.
9 What we have, Your Honor, is we have -- we're
10 fighting against a reputation, okay? People stand up here and
11 they say KPS will do this, all right? They are a well-known
12 fund, everybody knows who their name is, and I think the world
13 of them. They're wonderful. I'm sure that they can do what
14 they say they can do. The fact of the matter is, Your Honor,
15 there is no legal right to enforce anything against KPS, zero.
16 Their letter runs to their Acquisition Corp. Any commitment
17 they say they will give here is just that, it's a statement on
18 the record, which is unenforceable by the debtor.
19 So we need, Your Honor, to really have the
20 conversation and assess the risks and look at two bids side by
21 side and make a comparison.
22 THE COURT: Well, I have two bids at the moment. I
23 mean, you have a bid on the table; they have a bid on the
24 table. And in a sense, that's exactly what I'm doing. I'm
25 doing it in the context of considering whether or not to open
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1 up bidding. But I really have, in a sense, two bids on the
2 table. And it would seem to me that it is somewhat
3 counterintuitive to reopen the bidding if I'm reopening it for
4 the purpose of looking at a bid that really isn't higher and
5 better.
6 The committee seems to be telling me that your bid is
7 not higher and better, despite all of the risks that the debtor
8 is left with. The debtor seems to be telling that, even though
9 today you would be deemed, or you would have been deemed, a
10 qualified bidder if your client was timely in terms of making
11 its bid, that your bid is still not higher and better because
12 of the certainty that we have that this willing bidder, who has
13 come in from left field, without that term being at all
14 pejorative, but who has come in and made a bid and seems really
15 to want this company and to want to make a go of it in the
16 future and not simply take it for whatever purpose and have a,
17 if you will, constrained commitment for the future.
18 MR. HARRIS: Your Honor, if I may just address that
19 point for a moment because it's a follow-on to a comment Your
20 Honor actually made in chambers yesterday. The commitment
21 of -- I'm going to do this the way I probably should have
22 always done it. The commitment of Clarion Capital Management,
23 who is the principal term loan lender here, whose affiliate,
24 Trumpet Investors, has issued the thirty-five million dollar
25 equity commitment, is to own, operate and grow this business.
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1 And it has always been that way. They were the competitor to
2 KPS in the auction for the Waterford Wedgwood assets. They
3 want to be in this business. They identified a CEO early on.
4 He's been out at the company helping work with them on
5 operating changes and other things that they would implement in
6 order to improve and not replicate the mistakes of the
7 operations of this company. They are not just in this, Your
8 Honor, to flip this company or anything like that, and
9 certainly not to liquidate it. The amount of new-money
10 investment that they've committed to this deal approximates the
11 total amount of money that all the lenders have in this deal
12 already. They're effectively doubling-down, and they're not
13 doing it simply because they think they can make a short-swing
14 profit. That's not what they do. They buy, own and operate
15 companies.
16 So they are KPS with a different name and a different
17 financing structure. Beyond that, there is no difference in
18 investment intent, zero. We are in this for the long haul. We
19 are intending to support it to make sure that it works. We
20 made every effort last night, and Mr. Riemer makes an
21 interesting point and he says Your Honor said go get an APA
22 done. Well, Your Honor, we did. We sat here last night, we
23 went through the entire APA with the debtors' attorneys, we
24 turned a draft of it and got it to them, and we had nobody to
25 negotiate with because they never got us their comments back
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1 until after the hearing started this morning. We are perfectly
2 happy to close that loop as quickly as possible. And I can't
3 speak for Mr. Perez. He wasn't in the room, and the people who
4 were aren't here. But I do not believe, having reviewed the
5 list of issues, that there is anything significant or material
6 that would stop us from signing a deal.
7 We sat in the room last night, and what I heard over
8 and over again from Mr. Perez's colleague was you must match
9 the KPS deal. And in virtually all respects, Your Honor, we
10 have done that, except, as I said before, we're doing a
11 different transaction. We are doing a different transaction.
12 So there, of course, are going to be changes.
13 And, in fact, Your Honor, just so we put a fine point
14 on this and understand, one of the things KPS was not taking
15 were any of the D 56 employees. They weren't picking up any of
16 their medical or any of their stuff. They weren't picking up
17 their accrued vacation. That's not in the consideration that
18 we offered to Mr. Perez today, but we're paying for that stuff.
19 There are other incidental things that I haven't quantified for
20 Your Honor but which, if we actually sat down with the
21 company's financial advisor and said okay, look at the APA,
22 look at and evaluate this bid and all the incidental benefits
23 to it and the cash they've now put on the table and match it up
24 against the KPS bid and tell us what you really think the
25 difference is, how do you value this?
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1 THE COURT: Well, that's where we're going to be very
2 shortly if I open up the bidding.
3 MR. HARRIS: I understand, Your Honor, and --
4 THE COURT: And we're going to have to value the two
5 bids apples to apples one way or another.
6 MR. HARRIS: And we're perfectly prepared to do that,
7 Your Honor. That's where we've always wanted to go because we
8 got to where we thought the fair place to be was. We take
9 responsibility for the fact that we are where we are, and we
10 understand what we're asking Your Honor to do. But we think
11 that, given where we are right now, the statements made by
12 debtors' counsel that, had we had this all in place as it is
13 today back on the 11th or the 9th, that there would have been a
14 true competitive auction and analysis done as of that date.
15 Your Honor, we understand it's not that date, it is a later
16 date. But it is not a date where, if we did it today, it would
17 prejudice this estate at all since everybody has said if we get
18 it done, we can all close by the second week in March.
19 Everybody is committed to that, and we are there as well.
20 Thank you.
21 THE COURT: All right.
22 MR. PEREZ: Your Honor, we're ready to put on
23 Mr. Spivak, who is the CEO of the company, to talk about the
24 concerns he has about the liquidity in the business plan
25 presented to us by the term lenders.
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1 THE COURT: All right.
2 MR. PEREZ: Should I call him, Your Honor?
3 THE COURT: Yes.
4 Please state your name for the record.
5 MR. SPIVAK: Fred Spivak.
6 (Witness duly sworn)
7 THE COURT: Please be seated.
8 MR. HARRIS: Your Honor, may I ask a question?
9 THE COURT: Yes.
10 MR. HARRIS: The testimony that's being presented is
11 for the purpose of an analysis of the feasibility of our
12 company post-closing? Are we doing this is in the context of
13 we're a qualified bidder and explaining why they're discounting
14 the bid? What's the purpose of the testimony that's being
15 offered?
16 THE COURT: I think that the testimony goes to the
17 question as to whether, in looking at all of the equities of
18 the matter, I should reopen the bidding under the
19 circumstances.
20 MR. HARRIS: Okay. Thank you, Your Honor.
21 MR. PEREZ: Your Honor, I'd like to hand the witness
22 what I have marked as Exhibit number 52. And, Your Honor,
23 what --
24 THE COURT: That's in your binder?
25 MR. PEREZ: No, Your Honor. It's not in our binder.
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1 It's a subsequent exhibit.
2 THE COURT: All right.
3 MR. PEREZ: This is a draft of a model business plan
4 that we received from LBC, the financing source, at the time of
5 their deposition. It is dated February 16th, 2009, and it is
6 an earlier version of a draft that we received last night,
7 which I believe is dated February 23rd, 2009. I do not have --
8 I have a lot of copies of the one that was dated the 16th. I
9 do not have a lot of copies of the one that was dated the 23rd.
10 I believe that they are, for all intents and purposes, almost
11 identical. There are some changes. But I'd like to ask the
12 witness if he could identify the document.
13 MR. HARRIS: Your Honor, we're going to object unless
14 the witness can lay a foundation as to what this document is
15 because there was no foundation questions asked in the context
16 of Mr. Calabrese's deposition. What's been handed to me,
17 there's no markings as to what its source is. I don't know
18 whose handwriting is on it.
19 THE COURT: Maybe we should start by just putting in
20 the record who the witness is and --
21 MR. PEREZ: Yes, Your Honor.
22 THE COURT: -- two minutes of his background, and
23 then you can show him the document and ask him if he's ever
24 seen it before.
25 MR. PEREZ: Yes Your Honor.
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1 DIRECT EXAMINATION
2 BY MR. PEREZ:
3 Q. Would you please state your name for the record?
4 A. Fred Spivak.
5 Q. And, Mr. Spivak, how are you employed?
6 A. I am the chief operating officer and chief financial
7 officer of Lenox Group, Inc.
8 Q. And how long have you been the chief financial officer and
9 chief operating officer at Lenox Group, Inc.?
10 A. Since November of 2007.
11 Q. And what is your educational background, sir?
12 A. I have a degree in accounting from the State University of
13 New York at Buffalo, and I am a certified public accountant.
14 Q. And would you tell the Court briefly what your business
15 background has been?
16 A. Yes. I have an extensive background in finance
17 operations, principally in consumer product-type companies.
18 I've been the CFO of a public company, Lifetime Brands. I've
19 had another experience as a CFO of a company with publicly
20 traded bonds and done restructuring work. I had a consulting
21 practice for three years which was geared towards middle-market
22 companies, restructurings, turnaround work, and had assignments
23 that included being on the board of directors of Oneida,
24 consulting practice -- a consulting assignment at Oneida,
25 representing Bear Stearns' interest at a portfolio company also
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1 in this industry and as a chief restructuring officer of a
2 crystal company.
3 Q. Okay. And what have your duties and responsibilities been
4 at Lenox?
5 A. I was brought in to assist in the restructuring of the
6 operations of the company to help define strategically the
7 future of where the company would go, responsible on a day-to-
8 day basis for finance, treasury, distribution, and, you know,
9 worked through the strategic alternatives process, worked
10 through the bankruptcy process, worked heavily with the outside
11 financial advisors of the company as well as our legal counsel,
12 and assisted Mr. Marc Pfefferle, our chief restructuring
13 officer, in many of these processes and the operations of the
14 company.
15 Q. And are you familiar with -- have you been involved in the
16 sales process?
17 A. Yes, I have.
18 Q. And what has been your involvement in the sales process?
19 A. I participated, to my knowledge, in most of the meetings,
20 including board meetings, and decided to go through the
21 process, strategical meetings with our advisors and attorneys,
22 put models together, reviewing models, meeting with and making
23 presentations to many potential purchasers.
24 Q. Okay. Are you familiar with the company's cash flow?
25 A. I am.
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1 Q. And how are you familiar with that?
2 A. I am responsible for the cash flow of the company. I've
3 been involved in preparing or contributing to prepare thirteen-
4 week cash flows. I review documents sometimes on a daily or
5 weekly basis relating to the cash flows. I make certain
6 decisions as to when certain payments could be made.
7 Q. All right. And have you, in connection with the
8 evaluation of the term loan lenders' bid, done any work or
9 analysis with respect to the cash flows under that bid?
10 A. I was shown a series of documents at a presentation last
11 night that I participated in, which included members of our
12 company as well as the committee representing the unsecured.
13 Q. Okay. And what did the -- what was the presentation that
14 was given to you?
15 A. It was a presentation of where the term loan lenders or
16 their advisors thought that the operations of the company would
17 lead them prospectively from a cash-flow basis.
18 Q. All right. Now, are you familiar with the credit facility
19 that the term loan lenders are proposing to enter into?
20 A. I have read through it, and I made myself familiar with
21 parts of it and all of the document.
22 Q. Okay. And have you looked at the financial impact of that
23 facility on the company?
24 A. Yes, I have.
25 Q. All right. Now, let me hand you what I have marked as
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1 Exhibit number 52 and ask if you could identify it, sir.
2 A. This document, in form and substance, is the format and
3 presentation that I've been given as to the models that have
4 been put together by the term lenders and their financial
5 advisors.
6 MR. PEREZ: Your Honor, may I approach and hand the
7 Court a copy?
8 MR. HARRIS: Your Honor, can I voir dire the witness
9 with respect to the item that he's looking at right now?
10 THE COURT: Sure. Shall I take a copy in the --
11 MR. PEREZ: Yes.
12 THE COURT: -- in the meantime? Thank you.
13 VOIR DIRE EXAMINATION
14 BY MR. HARRIS:
15 Q. Mr. Spivak, Adam Harris on behalf of the term loan
16 lenders. Mr. Spivak, have you ever seen this particular
17 document before?
18 A. I've seen two documents. I was given one document that, I
19 believe, came out of a deposition. And I saw a second document
20 last night. I can't ascertain exactly which of the two it is.
21 It appears to me this could be the earlier document. And what
22 I've focused on directionally is, which I have all along, is
23 the peak season of the company --
24 Q. Mr. Spivak, just answer the question, please. Have you
25 ever seen this particular document before?
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1 A. I can't say assuredly that this is exactly the same
2 document that I saw.
3 Q. Okay, and do you know whose handwriting and markings that
4 are on this document?
5 A. I do not.
6 Q. And do you know who prepared this document?
7 A. It is my belief that the document was prepared by the
8 financial advisors of the term debt.
9 Q. But you don't know that for a fact?
10 A. I do not.
11 Q. Do you know what assumptions were used in creating this
12 document other than what's on the page?
13 A. Again, from my conversations with the term debt and, in
14 fact, because I've provided a good amount of the financial
15 information to their financial advisors, I believe that I do
16 have a good knowledge of some of the basis and data that would
17 create such a model.
18 Q. But this is not the company's business plan, right? This
19 is the --
20 A. No, it is not.
21 Q. -- term lenders'?
22 A. That's --
23 Q. And that was developed independently of the company,
24 correct?
25 A. I would say not independently; in fact, that the basis on
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1 which they started was data provided to them from the company.
2 Q. Have you ever written -- have you actually read this
3 entire document before turning the pages right now?
4 A. In order for me to know whether I've read the entire
5 document, I have to look at the pages to see what they are.
6 Q. But you can't confirm actually whether you've seen this
7 before?
8 A. Again, what I've said to you from my testimony is I've
9 seen two versions of this. I cannot attest that this is
10 exactly one of those two versions. But directionally it
11 appears that the numbers are very similar to the two versions
12 I've seen.
13 MR. HARRIS: Your Honor, I don't believe the witness
14 has sufficient familiarity to talk about what's in this
15 document given that he can't even confirm that he's actually
16 seen it before.
17 THE COURT: Well, there are two documents that, I
18 gather, were produced by your clients, that we're not playing
19 games here. We're trying to get at some important facts. We
20 don't know whether this is the one produced at the deposition
21 or the one produced last night or neither.
22 MR. HARRIS: Your Honor, this document was given
23 to --
24 THE COURT: Do you know?
25 MR. HARRIS: Yes, Your Honor.
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1 MR. RANDALL KLEIN: Randy Klein on behalf of LBC
2 Credit Partners, Your Honor. I defended the deposition of
3 Christopher Calabrese last Sunday evening. During that
4 deposition, counsel for the company asked Mr. Calabrese whether
5 he reviewed any documents in preparation for his deposition,
6 and he answered yes. He described what those documents were.
7 He was asked whether any of those documents were in his
8 possession; he said yes. They were asked that that they be
9 produced as long as they were not privileged. We produced a
10 draft business plan that Mr. Calabrese had in his possession,
11 and that, I believe, is the document that has been submitted to
12 the witness.
13 THE COURT: Is that the document that's been referred
14 to as the document produced at the deposition --
15 MR. RANDALL KLEIN: I believe that is --
16 MR. COHEN: -- as far as you know?
17 MR. RANDALL KLEIN: After the deposition, Your Honor.
18 He was not questioned about the document during the deposition
19 whatsoever. It was produced after the deposition as an
20 accommodation.
21 THE COURT: But there wasn't another similar document
22 produced in connection with the deposition, as far as you know?
23 MR. RANDALL KLEIN: I believe that's incorrect, Your
24 Honor. We also had in our possession a more fulsome business
25 model, which we also disclosed on that day. And I think that
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1 that is probably what the company and its advisors reviewed
2 last night, not this document.
3 THE COURT: All right. So this is likely to be,
4 then, one of the documents that the witness -- or the document
5 that the witness referred to is the document received at the
6 deposition, or received in connection with the deposition?
7 MR. RANDALL KLEIN: That's correct, Your Honor.
8 THE COURT: All right. I think we've identified the
9 document sufficiently.
10 MR. COHEN: Your Honor, just to add a little further
11 clarity to the two documents, I was at the meeting last night.
12 The purpose of the meeting was to walk the committee through
13 the plan. I've just handed to Mr. Perez the plan that I was
14 walked through.
15 MR. PEREZ: Right.
16 MR. COHEN: So -- and Mr. Spivak was there and walked
17 through with us. That is --
18 THE COURT: And that's the more recent version?
19 MR. COHEN: That is the second version they're
20 talking about and the more recent version, as far as I
21 understand.
22 THE COURT: And Mr. Spivak may be able to identify
23 that?
24 MR. PEREZ: I have that, Your Honor. Unfortunately,
25 I --
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1 THE COURT: Well, let's mark that Exhibit 53 and see
2 if the witness can identify it. But Mr. Harris needs a copy
3 too, or does he have one? He may have one, and you may have
4 one in your files.
5 MR. PEREZ: I don't have any extra copies. That's
6 why I had used the prior copy, Your Honor. I have one extra
7 copy, Your Honor, but which has handwriting. That one doesn't
8 have any handwriting on it.
9 THE COURT: All right, that'll be the marked copy.
10 (Unmarked draft business plan was hereby marked as Exhibit 53
11 for identification, as of this date.)
12 CONTINUED DIRECT EXAMINATION
13 BY MR. PEREZ:
14 Q. Mr. Spivak, I've handed you a document labeled Exhibit
15 number 53. Could you please identify that, sir?
16 A. Yes. I believe this is the document that I reviewed last
17 evening at a presentation made by the term debt to the UCC and
18 myself and others.
19 Q. And how long was that presentation?
20 A. I would say it was more than one hour, maybe two hours.
21 Q. And did you have an opportunity to ask questions about the
22 presentation?
23 A. Yes.
24 MR. PEREZ: Your Honor, I would move admission of
25 Exhibit number 53 into evidence.
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1 THE COURT: Any objection?
2 MR. PEREZ: We're trying to get a copy for the Court,
3 Your Honor. I think we're --
4 THE COURT: Go ahead.
5 MR. PEREZ: Okay.
6 THE COURT: But, first, any objection?
7 MR. HARRIS: To introduction of 53?
8 THE COURT: Yes.
9 MR. HARRIS: So we can validate them, in fact, as the
10 presentation that was made last night, Your Honor, no.
11 THE COURT: Well, take a look at it and if you --
12 were you there?
13 MR. HARRIS: I was not there, Your Honor. I was
14 negotiating the asset purchase agreement.
15 THE COURT: But was one of your colleagues there?
16 MR. HARRIS: You know, I could show it to one of my
17 colleagues, Your Honor.
18 THE COURT: Sure. Show it to somebody who was there.
19 Let's see if we have any question as to whether it was the
20 document or not.
21 (Pause)
22 MR. HARRIS: Your Honor, assuming that what's being
23 introduced is the one that does not include the handwriting on
24 it --
25 THE COURT: Yes.
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1 MR. HARRIS: -- then we have no objection, because
2 this is the one that was presented last night.
3 THE COURT: All right. Thank you.
4 MR. PEREZ: All right. Your Honor --
5 THE COURT: Admitted.
6 (Unmarked draft business plan was hereby received into evidence
7 as Exhibit 53 for identification, as of this date.)
8 MR. PEREZ: It might make sense if the Court would
9 take the one that has no handwriting, and this one, which does
10 have handwriting, he can testify from that and I can ask him
11 questions from the prior model.
12 THE COURT: All right. Thank you.
13 BY MR. PEREZ:
14 Q. All right. Mr. Spivak, would you tell the Court what this
15 first page is?
16 A. This first page is analysis of what is the ending, or
17 projected ending cash balances.
18 Q. All right. And, now, how did they arrive at that?
19 A. They started with what was the assumed equity and --
20 MR. HARRIS: Objection, Your Honor. What's the basis
21 for the testimony about how somebody else prepared this model?
22 He hasn't laid a foundation on --
23 THE COURT: I think you're absolutely right. He
24 can't testify as to what they did, but he can testify as to
25 what he was told last night.
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1 MR. PEREZ: All right.
2 Q. Let me rephrase the question. Mr. Spivak, what were you
3 told that this was?
4 A. What I was told this was is their representation of a
5 model that reflected the expected equity contribution and
6 funding of the company; in addition to that, proceeds from a
7 potential sale of the assets of Department 56. Weighed against
8 that was distributions that would need to be made at the time
9 of a closing to come to a starting cash position, ultimately
10 laying in a cash forecast based upon their model of the
11 projected operations of the company.
12 Q. Okay. And did you have an opportunity to study this last
13 night?
14 A. Yes, we reviewed it, and I was able to ask questions.
15 Q. And do you feel comfortable, based on your experience,
16 that you understand how this model works?
17 A. Yes, I do.
18 Q. All right. Now, with respect to the assumptions that you
19 were told with respect to this model, were there any key
20 assumptions that you had any concerns about?
21 A. Yes.
22 Q. And what were those, sir?
23 A. The first question that I raised was that it was my
24 understanding from the loan documents that there was a five
25 million dollar -- a minimum cash requirement, and I wanted to
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1 understand if they took that into consideration when they
2 prepared this model because my chief focus was September, which
3 is our time from being a seasonal business, where there's the
4 most risk in terms of not having availability. So the
5 question, specifically, was does the 6.2 million dollars take
6 into consideration the 5 million dollar requirement in terms of
7 understanding the liquidity of the company? And I was told
8 that it did not so that the 6.2 million needs to be reduced by
9 5 million to come to an availability of 1.2 million.
10 Q. Were there any other assumptions that you were told that
11 gave you concern about?
12 A. That my next question was I just wanted to get a sense of
13 what was used for a revenue number to drive the model, and the
14 reason I asked that question, specifically, was in our first
15 forecast that we gave the term lenders. They had been
16 produced, I believe, back in October/November and had a sales
17 number that was at risk. It was my knowledge that in models
18 that would have been presented from them for financing that
19 they had a more conservative viewpoint because their models
20 were created later than ours and were more reflective of what
21 was going on in the marketplace. And we have most recently
22 redone our models and so our models reflect the more current
23 view.
24 In addition to that, one of our significant customers,
25 Fortunoff's, we believe will either go out of business or be
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1 liquidated, and that was a material impact. So I wanted to
2 understand their view of what was used as revenue to drive this
3 as compared to where the company thought we were today.
4 Q. And what did you learn when you asked that?
5 A. That the revenue basis that this was built on is
6 approximately fifteen million dollars higher than what is the
7 current company view.
8 Q. And does that cause you any concern?
9 A. It does.
10 Q. And why is that?
11 A. Well, what we tried to do was to come to a balanced
12 understanding. Any time you put a model together, there are
13 gives and takes and it's a forecast. It's not something that's
14 tried into stone. So we then went through an exercise in
15 trying to determine where the plusses and the minuses were.
16 And so it was prepared to us that the, for example, the
17 Department 56 proceeds of 2.5 million was conservative, and so
18 I happen to agree with that. And so we tried to come to a
19 consensus as a group of where the pluses and the minuses were.
20 So we went through several different issues. I think that
21 the amount that they used in here for operating expenses was
22 conservative. I thought they have an opportunity there. I do
23 think there's an opportunity in Department 56. Offset that is
24 taking out potential revenue from Fortunoff's, adding the
25 liquidity block of the five million dollars.
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1 So we went through that. And there was one additional
2 question which was brought to my attention at the end of the
3 meeting by our financial advisor, who I've worked with, putting
4 our models together, Walt Denikis (ph.), who asked me to take a
5 look at the potential impact of accounts payable on this model.
6 And his concern was that they did not have an accurate starting
7 point, so, in effect, it was creating -- the model was creating
8 a potential positive cash flow coming out of accounts payable,
9 which he did not think was appropriate.
10 Q. Now, did you, on the basis of your knowledge of the
11 company and on the basis of the presentation and your review of
12 this document, did you come to any conclusions with respect to
13 the go-forward liquidity?
14 A. I did.
15 Q. And what was that conclusion?
16 A. I felt that before I addressed the accounts payable issue
17 that, in my mind, putting all the pluses and minuses, that if
18 you put a hard kind of number in the middle in terms of the
19 opportunities, pluses and minuses, that it came to probably an
20 availability in September of about six million dollars. And
21 then, from that point of view, we needed to take off whatever
22 the agreed-to amount of administrative expenses that determined
23 it would ultimately agree to. And I believe they purported
24 today to be willing to put two million dollars in. So I
25 believe that would have to come off the six million, which
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1 would bring it down to four million. And, in addition to that,
2 whereas I don't have the number, and I confirmed this morning
3 with Mr. Denikis, he believes that that number would be further
4 impaired by the calculations of the accounts payable.
5 Based on that, I've come to the conclusion, or the
6 opinion, that the range could be anywhere from having no
7 availability or a potentially negative availability to maybe
8 having a six million dollar availability. And my reaction to
9 that was that, as the CFO of the company responsible for
10 managing the cash flow, it did give me concerns that I would
11 end up being in the same position I was in September of this
12 year, managing cash flows rather than managing the business.
13 Q. And, based on your experience, is that something that
14 would be of significant concern to you?
15 A. Yes, for several reasons. One is just from the ability to
16 operate the business. Knowing what this economic environment
17 is, I would think it's fair to say that not only would I -- but
18 any financial expert would say, in looking at any projections
19 today, there's more downside risk, potentially, than upside
20 risk, that -- and lenders, I think, would look at it the same
21 way, that my concern was having already gone through a
22 bankruptcy one time. And this model makes an assumption that
23 our accounts payable go back to a full value of availability,
24 is, you know, if we started holding back payments, what that
25 might do to our ability to continue to get dating from the
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1 various constituencies.
2 And I was concerned, frankly, from the employee
3 perspective. The employees at Lenox have gone through a
4 tremendous amount in the last three, four, five years, starting
5 with when the company was put up for sale and was sold to
6 Department 56, and that was a very traumatic experience for the
7 employees. The transition between the Department 56 management
8 running the business and their interaction with the Lenox
9 employees was also very traumatic. And it was a lot of
10 hostilities created on that basis.
11 Subsequent to that, we brought Carl Marks in as an
12 advisory group which created another whole set of uncertainty
13 and all morale challenges for the employees. Now they're hit
14 with the economy, no raises, etcetera, going through a
15 bankruptcy, okay? And it's my opinion that if we got to a
16 point last year and, again, had financial difficulties, that it
17 would have a definitive impact on the morale and the ability of
18 the employees to perform their work effectively.
19 MR. PEREZ: Thank you, Your Honor. I have nothing
20 further.
21 CROSS-EXAMINATION
22 BY MR. HARRIS:
23 Q. Mr. Spivak, do you have in your possession, and can you
24 deliver to me, a copy of the KPS business plan for Lenox post-
25 acquisition?
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1 A. No, I cannot.
2 Q. And you never got one, did you?
3 A. No, I did not.
4 Q. So you've never actually looked at a business plan for KPS
5 to figure out what they're going to do with this business post-
6 acquisition, have you?
7 A. No, I have not.
8 Q. So you have no idea, given that they're potentially buying
9 Waterford Wedgwood, whether they'll pay all the employees
10 severance, shut down the U.S. facilities and merge them all
11 into a single manufacturing plant and use the Lenox name, do
12 you? Do you have any idea what they're planning on doing with
13 this business after they buy it?
14 A. In my conversations with them --
15 MR. HARRIS: Your Honor, strike this as hearsay.
16 THE COURT: No, you asked the question. His view of
17 what they intend to do has to come from conversations with them
18 or with someone if he's not a mind-reader. On the other hand,
19 I'll take into account the point that he is stating hearsay and
20 that we have no certainty as to what they'll do or what anybody
21 else will do in the future.
22 MR. HARRIS: Your Honor, let me withdraw the question
23 and ask it this way.
24 Q. Do you have a definitive business plan that you've
25 reviewed and/or shared with the committee that tells you what
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1 KPS is going to do with this business once they buy it?
2 A. I do not.
3 Q. So you have no idea whether they're going to leverage it
4 up and have their own sign of cash flow issues similar to what
5 you've just testified regarding the term lenders' vehicle?
6 A. Based on my conversations with our financial advisors, who
7 I've asked these types of questions to, they've advised me that
8 KPS has the wherewithal economically to run the business
9 without having these type of liquidating concerns.
10 Q. Assuming they want to run it at all, isn't that right?
11 A. I'm not here to make assumptions.
12 Q. When you talked about the --
13 MR. HARRIS: Strike that.
14 Q. Mr. Spivak, aside from the testimony you gave in your
15 deposition, when was the last conversation you had with anybody
16 at Miller Buckfire about your concerns regarding the liquidity
17 of this business post-acquisition if the term loan lenders were
18 to acquire it?
19 A. That would probably be part of a conversation that they
20 included me in as it related to their trying to get financing
21 from Wells Fargo and CIT.
22 Q. But the issue of the ability of this company to function
23 post-acquisition was never raised with the term loan lenders in
24 the context of discussions regarding a bid before, was it?
25 A. Nope.
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1 Q. Now, with respect to what you referred to as, sort of, the
2 gives and takes on the analysis of the cash flows that you were
3 looking at, I believe you said the cash flows contemplated a
4 recovery of an access to about two and a half million dollars
5 of proceeds from D 56 liquidation.
6 A. Yes.
7 Q. Is that right? And is it a fact that the company, for
8 purposes of doing a bid analysis between the term lenders' bid
9 and the KPS bid, actually had a hypothetical proceeds number of
10 roughly eleven million dollars?
11 A. Yes.
12 Q. And so that would provide the company with approximately
13 eight and a half million of additional liquidity if they were
14 able to liquidate at the values that the company ascribed on a
15 hypothetical basis, is that right?
16 A. Those values were on a hypothetical basis, if that's your
17 question.
18 Q. But you were willing to use them for a comparative
19 analysis for purposes of looking at the KPS bid versus the term
20 lender bid, is that right?
21 A. Yes.
22 Q. And that would change, obviously, depending on timing,
23 that low-peak number that you testified to earlier of maybe
24 zero to one million dollars up to maybe eight, eight or more,
25 is that right?
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1 A. I'm not sure what you're referring to with those numbers.
2 Q. Well, you testified earlier that you thought that the
3 availability number in September of '09 could be as low as 6.2
4 million before reserves, is that right?
5 A. I thought I said -- I'm sure I said it could potentially
6 be negative based upon the accounts payable adjustment.
7 Q. But you don't know that for a fact?
8 A. I do not.
9 Q. And you haven't done the analysis to reach that
10 conclusion, have you?
11 A. I have done the analysis to reach the conclusion that
12 prior to the adjustment for AP that it could be anywhere from
13 no availability to six million dollars of availability. So my
14 take from that is if the AP prepares it at all, we could be
15 negative. And, frankly, what I said last night and say again
16 today is when you're running a business of this size, it
17 doesn't matter if the number is two million or five million,
18 okay? When I've been asked in the past by our chairman of the
19 board what I think the minimum availability needs to be for
20 this company where I could sleep at night, the answer I gave
21 him is fifteen million. And so, to me, whether it's two
22 million or five million, I have the same risk.
23 Q. That's your view of the world, though, right?
24 A. Yes, it is.
25 Q. And have you had any conversations with anyone at Clarion
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1 Capital or Trumpet Investors about their commitment to this
2 deal?
3 A. Yes.
4 Q. And have you asked them whether, if there was an
5 availability issue here, they would be willing to make any kind
6 of additional contribution to save their thirty-five million
7 dollar investment?
8 A. I don't know that I've asked that question specifically,
9 but I do have a point of view on it.
10 Q. But you haven't asked the question specifically?
11 A. I don't think I did.
12 Q. And with respect to the information you have from KPS as
13 to their intentions, the company has no written commitment that
14 they could enforce to compel them to provide additional capital
15 that you're aware of, does it?
16 A. Not that I'm aware of.
17 MR. HARRIS: Your Honor, a moment, please.
18 THE COURT: Surely.
19 (Pause)
20 Q. Mr. Spivak, I think you testified earlier that the two
21 million dollars of additional value that the term lenders were
22 willing to provide to the estate would be a deduct against cash
23 on the balance sheet, is that right?
24 A. Yes.
25 Q. Do you know what the source of that two million dollars of
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1 cash actually is or are you just speculating that it was going
2 to be coming out of the company?
3 A. I wasn't speculating. The statement that I believe I made
4 was that if the two million -- that I did not initially take
5 the two million dollars into consideration but that -- I don't
6 know where it's coming from.
7 Q. So if it were coming from a source outside the company, in
8 whole or in part, it would have no impact on availability?
9 A. That's correct.
10 Q. Do you have an analysis that shows what the liquidity of
11 Lenox is going to be immediately post-closing under the KPS
12 transaction?
13 A. I do not.
14 MR. HARRIS: I have no further questions, Your Honor.
15 CROSS-EXAMINATION
16 BY MR. AUSTIN:
17 Q. Mr. Spivak, this is Jesse Austin, and I have a few
18 question for you.
19 A. I believe your testimony was you have a point of view as
20 to whether Clarion, I guess, through Trumpet, makes additional
21 equity fundings in this acquisition. Mr. Harris then asked
22 that question. What is your point of view on that?
23 MR. HARRIS: Objection, Your Honor. Calls for
24 speculation from a nonexpert witness.
25 THE COURT: Well, we'll get the answer, and then
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1 we'll see whether we strike it. Overruled.
2 A. I find myself in a very awkward position, giving testimony
3 that could be detrimental to the people who could potentially
4 be my next employers. And what I don't understand, very
5 frankly, and you're asking for my judgment and my -- to answer
6 the question, which is that, if they have the capability of
7 supporting this cash flow, why they didn't put the money on the
8 table today, and, you know, take that question off the table,
9 you know. When we discussed it last night, I was told that
10 there potentially is available additional equity, that it
11 didn't make sense for them to put sixty million dollars into
12 the company and let it go into a liquidation come September.
13 And that made sense to me, frankly, and I understood that. But
14 I didn't understand why they wouldn't commit to putting the
15 capital up today and take that concern off the table.
16 Q. Was there any indication in the discussions last evening
17 as to how much additional capital might be available?
18 MR. HARRIS: Objection, Your Honor. Can we find out
19 who these conversations were allegedly with and whether this is
20 actually admissions of a party or whether this is just side
21 conversations with people?
22 THE COURT: I think that's fair. Was anything said?
23 MR. AUSTIN: I think she had the conversations
24 with Ms. --
25 THE WITNESS: This was conversations that took place
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1 at the presentation last evening; and so all the participants
2 that were there, including, to my recollection, the UCC
3 representatives, our representatives, Mr. Goundrey representing
4 the term debt. Peter Cameron was on telephonically. I believe
5 Mr. Utay was on telephonically.
6 MR. AUSTIN: Okay.
7 Q. And what person, if at all, as representatives of the term
8 lenders, advised you there may be some additional capital that
9 the term lenders or Clarion may invest in this transaction?
10 A. Mr. Goundrey.
11 Q. And what did Mr. Goundrey say?
12 A. I don't remember the specific terms or words that he used,
13 but the essence, to me, was that they were not going to invest,
14 you know, sixty million dollars and put themselves in a
15 position of not having liquidity come September.
16 Q. All right. But did they give you an actual number?
17 A. I don't recall where the number came from. I've heard
18 somewhere in this process a number of five million dollars. I
19 don't recall if it was in that conversation or a conversation
20 that I had with any other party prior.
21 Q. Did anyone representing the term lenders last night give
22 any assurance of unlimited contribution?
23 A. No, they did not.
24 Q. It's your understanding that term loan, that model that
25 was discussed last night, is part of its success based on the
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1 subsequent sale or disposition of D 56 and its assets?
2 A. Yes.
3 Q. And so if that sale doesn't take place, then clearly more
4 capital is going to be required?
5 A. Yes.
6 Q. And what was the time frame that was disclosed to you
7 relative to that D 56 disposition?
8 A. There was no time frame given, but the capital was put
9 into the model assuming it was done at closing.
10 Q. At closing?
11 A. Yes.
12 Q. Between now and early March?
13 A. Again, in referring to the schedule that's in front of me,
14 they have a calculation of sources of 62.5 million dollars.
15 And it's not clear to me, from looking at this, whether or not
16 that that was their initial intent.
17 Q. You mean to have the D 56 proceeds at the actual closing
18 on this transaction --
19 A. Yes.
20 Q. -- if the term lenders were the acquiring --
21 A. Yes.
22 Q. Was there any discussion last night about the term lenders
23 needing to find a replacement ABL facility sometime in the
24 summer of 2009 for the term loan of twenty-five million
25 dollars?
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1 A. I did not hear the word "needed". My belief, based on
2 what they said, was at such time as the markets allowed for it
3 that they would try to replace the term loan with a traditional
4 revolver. But I did not hear from them at any point a need to
5 do it at that point in time.
6 Q. All right. Based on your experience of working with the
7 company, in working with these debtors, did you have an
8 understanding, outside of the term loan that's being proposed
9 here by the term lenders to finance their proposed bid, did you
10 have any understanding of what level, what is the amount of an
11 ABL facility that the term loan lenders were looking for from
12 third parties to provide the financing for this transaction?
13 A. The number changed over time, and part of it, possibly,
14 had to do with their expectations for Department 56. But
15 anywhere from 80 million to 110 million.
16 Q. So they didn't get that. They only got twenty-five, that
17 you know of, committed today, correct?
18 A. But to compare apples to apples, I think you'd have to add
19 their equity --
20 Q. Well, I was going to add in that their equity, that ABL
21 facility between 85 and 110 also included an equity investment,
22 correct?
23 MR. HARRIS: Objection, Your Honor. Is that a
24 question?
25 Q. Do you know if it included an equity investment by --
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1 A. I don't know to -- I've been advised that there -- that an
2 equity investment was going to be required. I did not know the
3 amount of it.
4 Q. One last question. The accounts receivable and inventory
5 being acquired by KPS, based on your experience and knowledge
6 of this company, do you believe that those accounts receivables
7 and inventory is in excess the amount owed to the debtor-in-
8 possession lenders?
9 MR. HARRIS: Objection, Your Honor. Relevance as to
10 the feasibility of the future entity. This is a whole hornet's
11 nest that Mr. Austin would like to open up today.
12 THE COURT: Sustained.
13 MR. AUSTIN: I reserve the right, then, to recall
14 this witness, Your Honor.
15 THE COURT: Well, you certainly may at an appropriate
16 time.
17 MR. AUSTIN: Thank you.
18 THE COURT: We'll get to those issues if we get to
19 those issues, but I don't know if it'll be this morning before
20 lunch.
21 MR. COHEN: Your Honor, if I may ask a few questions?
22 THE COURT: Certainly.
23 CROSS-EXAMINATION
24 BY MR. COHEN:
25 Q. 'Afternoon, Mr. Spivak.
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1 A. Good afternoon.
2 Q. Earlier on cross-examination, a question was asked of you
3 and withdrawn which I'm interested in hearing the answer to.
4 Do you have an understanding on KPS's intentions for the go-
5 forward operations of this company?
6 MR. HARRIS: Objection, Your Honor. Calls for
7 hearsay.
8 MR. COHEN: I asked if he had an understanding.
9 MR. HARRIS: You got to get it from somebody else.
10 MR. COHEN: We'll find that out.
11 THE COURT: Sustained. I think he's already been
12 asked a question as to whether he had any knowledge of a
13 business plan or anything of that nature, and he said no. If
14 you want to ask him a broader question, all right, go ahead.
15 Overruled.
16 Q. Do you have an --
17 A. Please re-ask the question.
18 Q. Do you have an understanding of what KPS's intentions are
19 with the go-forward operations of this company?
20 THE COURT: I'll allow the answer, not for the
21 purpose as to what KPS is or isn't --
22 MR. COHEN: Yes.
23 THE COURT: -- going to do as a fact but as a part of
24 the debtors' judgment in terms of where it stands today.
25 MR. COHEN: Thank you, Your Honor.
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1 A. Based upon my conversations to date with the parties,
2 based upon my own knowledge of how the business world works,
3 it's my assumption that they would buy Lenox with the intention
4 of running it, that if, in fact, they were successful in also
5 buying Waterford Wedgwood that the two operations would be
6 merged. And I don't have any details or did not have any
7 conversations to know if that, in fact, occurred, where the
8 basis in running the business would be, which employees would
9 stay and run the business, whether it would be a combination of
10 both, but that's my going in belief in terms of what would
11 happen.
12 Q. Thank you.
13 MR. COHEN: That's all, Your Honor. Thank you.
14 MR. PEREZ: Three questions, Your Honor.
15 THE COURT: Anything else?
16 MR. PEREZ: Three questions.
17 THE COURT: All right.
18 REDIRECT EXAMINATION
19 BY MR. PEREZ:
20 Q. Does KPS have a deposit?
21 A. Yes.
22 Q. How much?
23 A. 4.5 million dollars.
24 Q. Do the term lenders have a deposit?
25 A. No.
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1 MR. PEREZ: Thank you.
2 RECROSS-EXAMINATION
3 BY MR. HARRIS:
4 Q. The timing with respect to D 56 sale proceeds, since
5 they're only two and a half million dollars in the model,
6 doesn't really matter until you get to that September time
7 period, correct, given the other availability limits?
8 A. The only way in which it matters, which I don't have an
9 opinion on, is from the perspective of how long they run that
10 business and what the impact is on the cash flow of operating
11 it during that time period.
12 Q. Under the assumptions that are in the model, that two and
13 a half million dollars, given all the other assumptions, really
14 only starts to affect availability when you get to the low
15 point that you posited as September of '09, isn't that right?
16 A. Yes.
17 Q. And the company currently has an offer to sell the Eden
18 Prairie building for approximately 2.5 million dollars, isn't
19 that right?
20 A. I can't speak to that offer.
21 Q. Do you know whether such an offer exists?
22 A. I don't.
23 Q. The 80 to 110 million dollar number you referred to with
24 respect to the size of the ABL facilities that you understand
25 the term lenders were looking for, those are commitment levels,
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1 correct?
2 A. Yes.
3 Q. Which are comparable to the 175 million dollar commitment
4 level the company had under its pre-petition revolver?
5 A. Yes.
6 Q. And really does not reflect either availability or actual
7 borrowing need with respect to the company itself, is that
8 right?
9 A. It does not -- ask the question again, please.
10 Q. I'll rephrase it. While a commitment level doesn't
11 actually tell you how much you can borrow under a facility,
12 correct -- that's usually in an ABL deal -- tell with by virtue
13 of the borrowing base?
14 A. That's correct.
15 Q. It simply sets an upper limit as to how much you could
16 ever borrow, isn't that right?
17 A. That's correct.
18 Q. Okay. So, for instance, under the pre-petition facility
19 that Lenox had, it had a 175 million dollar commitment, but its
20 average outstandings were substantially lower than that, isn't
21 that right?
22 A. That's correct.
23 Q. So the headline number of 80 to 110 million really doesn't
24 reflect what the company's actual operating needs would be.
25 That would be determined independently through things such as a
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1 business plan, isn't that right?
2 A. It -- partially right. There's usually a relationship
3 between what your needs are and what the amount of that
4 commitment would be.
5 Q. But that would generally be calculated based upon a model
6 which says our business is going to look like a certain thing,
7 and, therefore, at some point in time, we may need this much in
8 terms of how much we can borrow, isn't that right?
9 A. Yes.
10 Q. Okay. It was never anybody's expectation that the company
11 was going to need to borrow 80 to 110 million dollars to close
12 the transaction or operate in 2009, was it?
13 A. No. I don't believe it was.
14 Q. Okay. With respect to the deposit issue, you testified
15 that KPS has 4.25 million dollars at risk in this deal if they
16 don't close, is that right?
17 A. Yes.
18 Q. And the term lenders have lent the company 100 million
19 dollars which, if they don't close, they lose, isn't that
20 right?
21 MR. PEREZ: Objection, Your Honor. I think it calls
22 for a legal conclusion, and I'm not sure what they mean by
23 "lose".
24 THE COURT: Well, I'll take that if that's a
25 representation on the part of the term loan lenders. I accept
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1 it. It is a legal conclusion, but I think that's --
2 MR. HARRIS: Let me rephrase, Your Honor.
3 THE COURT: That's a good principle to put in the
4 deal, that if the term loan lenders win, if I reopen and the
5 term loan lenders win and they'll close, it soon may be a
6 question of equitable subordination, which is probably the same
7 thing. But, anyway, --
8 MR. HARRIS: Your Honor, this is what happens when we
9 do --
10 THE COURT: -- we're not there.
11 MR. HARRIS: Because we do cross-examination without
12 having adequate time to prepare.
13 Q. The term loan lenders, we have a hundred million dollars
14 at risk of loss would probably be a better way to phrase it,
15 isn't that right?
16 MR. PEREZ: Same objection, Your Honor.
17 THE COURT: Well, I think he can answer that. I
18 think the answer is pretty close. Pretty clear that they have
19 a lot of money already sunk into this deal. But you can answer
20 the question, if you can.
21 A. I think the distinction, though, is that that money was
22 pre-contributed money, that the term that it was in for, before
23 this whole process started and the four and a half million
24 dollars was fresh cash, that was put in as part of the process.
25 MR. HARRIS: I have no further questions, Your Honor.
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1 MR. PEREZ: Nothing, Your Honor.
2 THE COURT: All right. You may step down.
3 MR. PEREZ: Your Honor, the only other piece of
4 evidence is I'd like to publish a paragraph of Exhibit number
5 48. I don't believe this is disputed. It was Exhibit G. It
6 was attached to the APA that was filed. It's a court document.
7 THE COURT: Exhibits 48 in your binder?
8 MR. PEREZ: In our binder, Your Honor, yes. Your
9 Honor, I have an extra copy if you don't want to --
10 THE COURT: I'll find it. I've got the right binder.
11 All right.
12 MR. PEREZ: Your Honor, this is the financing
13 commitment to Upstairs Acquisition Corporation from KPS Special
14 Situations Fund III and KPS Special Situations Fund III-A,
15 L.P., and I'd like to publish the second paragraph on the first
16 page, which says, "In order to enable the purchaser to
17 consummate the acquisition, KPS Special Situations Funds III-A
18 LP ("KPS III-A) and KPS Special Situations Funds III, L.P.
19 ("KPS III"), and together with KPS III-A, KPS are pleased to
20 commit to invest a cash amount in the aggregate amount
21 sufficient to: 1) pay the purchase price to the sellers on the
22 terms and subject to the conditions set forth in the agreement
23 and the related fees and expenses, and 2) fund the ongoing
24 working capital needs of the business. Each of KPS III-A, KPS,
25 shall be jointly and separately liable for the commitment
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1 therein." Thank you, Your Honor. That's all.
2 THE COURT: All right. Now, as a matter of contract
3 law, am I to assume that this is a binding commitment for all
4 time?
5 MR. PEREZ: Your Honor, I don't think you can make an
6 assumption that this is a binding commitment for all time. I
7 think the purpose of putting this here is that in doing the
8 diligence that the debtor has done, having this letter which we
9 negotiated to make sure that it was satisfactory to us based on
10 the representations, based on the diligence that we did with
11 respect to the financial capability of these two funds, based
12 on our experience, this is what we relied on in determining
13 that the KPS bid had adequate financing not only to close but
14 to continue.
15 THE COURT: I don't think anybody has challenged the
16 debtors' judgment in that --
17 MR. PEREZ: Yes. And that was the whole purpose of
18 it. This is not intended to be a --
19 THE COURT: I'd be happy to construe this as a
20 binding commitment for all time, but I don't think --
21 MR. PEREZ: Mr. Riemer might have a different issue.
22 THE COURT: I don't think any party -- none of the
23 lawyers in the room would, I think, make that assertion.
24 MR. HARRIS: Your Honor, with respect to the letter
25 to which Mr. Perez just published, paragraph 2, it would be
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1 helpful if Mr. Perez would also agree to stipulate that: a) it
2 has no third-party beneficiary language, b) that specific
3 language, that effect was requested from KPS and c) KPS
4 declined the invitation to provide that, all in the context of
5 the auction. I can call a witness to testify to that, as
6 Mr. Zughayer did in his deposition, but we can expedite this by
7 Mr. Perez simply stipulating that those are, in fact, the true
8 set of facts.
9 THE COURT: Well, I think we are looking at issues of
10 judgment, and a lot of different factors go into judgments that
11 parties make.
12 MR. HARRIS: I understand that, Your Honor, but to
13 the extent we're incorporating this letter into the record as a
14 statement of a commitment, I think it also bears on the level
15 of that commitment that there was a request that the debtors be
16 able to enforce it and that that was declined. It's simply a
17 matter for the record and to take it also into consideration as
18 to just how committed they are when the only person who can
19 enforce their letter is their own shell company. And if
20 Mr. Perez would stipulate to that, that would be fine. If not,
21 I can certainly ask that Mr. Zughayer take the stand to testify
22 to that set of facts.
23 MR. PEREZ: Your Honor, I am sure that we would have
24 asked for a cash deposit of the entire amount first, then a
25 letter of credit, then a third-party guarantee. We obviously
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1 did ask for a third-party guarantee so that we could enforce it
2 as a third-party beneficiary. That's not what we got. We got
3 what was in there, which we felt comfortable with as a matter
4 of our business judgment.
5 THE COURT: All right. All right. Anything further,
6 Mr. Perez?
7 MR. PEREZ: I don't have anything further, Your
8 Honor.
9 THE COURT: All right. The committee?
10 MR. COHEN: Nothing at the moment, Your Honor.
11 THE COURT: All right. Mr. Harris?
12 MR. HARRIS: Your Honor, we would be prepared to put
13 on testimony regarding the financial capability of our
14 acquisition company. We'd like a short break, frankly, to
15 prepare for it since we didn't understand that would be the
16 subject matter of today's testimony. We have the people here
17 in the courtroom, and we'll be prepared to do so in short
18 order.
19 THE COURT: I think we should take a break. And I
20 guess my only -- I have first-day orders at 2:30; I would like
21 to postpone that. But the lawyers in the room understand what
22 those are, and there are other parties who would be quite
23 miffed by my postponing them. So I think that will take an
24 hour or an hour and a half at 2:30. I can start again at 2.
25 Perhaps it would make more sense if I started again at 3:30 and
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1 gave you conference rooms in the meantime which you might be
2 able to use. I do think that the testimony I've been taking as
3 I've been -- it certainly is helpful, but it goes more to the
4 question as to who's made on today's record the higher and
5 better offer than to the question of should I open up the
6 record. But I have half the story, or at least I have the
7 position of one of the parties stated in good faith, and I
8 should have the final position of the term loan lenders.
9 I could certainly take testimony for a half an hour
10 at 2 and use that time, or maybe it would make more sense if we
11 just started at 3:30. What's your --
12 MR. HARRIS: Your Honor, I think -- I mean, rather
13 than start, then stop and then start up again, I think it would
14 make more sense --
15 THE COURT: Not that I'm urging you to have more than
16 a half an hour of testimony, but you should have as much time
17 as you --
18 MR. HARRIS: We intend to be as efficient as
19 possible.
20 THE COURT: -- as you believe to be useful. I think
21 we should go as far as we can. I've heard some grumblings from
22 counsel for the DIP lender as to the amount of time that has
23 been taken by the breaks and the like. I certainly would
24 understand it if, Mr. Austin, you decided that you don't
25 necessarily have a dog in this particular fight, although I
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1 certainly recall your position and your client's position and I
2 hear that loud and clear. But you're welcome to come back if
3 you wish, but you certainly don't have to. Your colleague has
4 represented your client's interests very well to date and has
5 done a yeoman job of convincing me that your clients have not
6 been altogether unreasonable in some of their positions.
7 MR. AUSTIN: We appreciate that, Your Honor. I am
8 here for the duration. I think our concern relative to breaks
9 is, frankly, more directed to the fact that, I guess, being the
10 direct spokesman, in part, for KPS, who's been here and wanted
11 to make sure it stays --
12 THE COURT: Well, I understand your client's desire
13 to get out, and I certainly understand the benefits of
14 certainty, of stopping interest accruing and of turning over
15 the reins of this business. I think everybody seems to agree
16 on one thing: that the reins of the business should be turned
17 over as soon as possible and also in the most efficient and
18 cost-effective way that we can. Thank you all.
19 IN UNISON: Thank you, Your Honor.
20 THE COURT: We'll start again at 3:30.
21 (Recess from 12:54 p.m. until 4:25 p.m.)
22 THE COURT: We're on the record in Lenox. I'm sorry,
23 the prior proceedings took as long as they did. But I think we
24 were at a stage where Mr. Harris was going to consider whether
25 he wanted to call any of his clients.
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1 MR. HARRIS: Your Honor, yes. We would like to call
2 witnesses on behalf of our case, both as to the issue of why
3 the Court should exercise it's discretion to reopen the
4 auction, as well as on the issues presented regarding the
5 future "financial capability" of our acquisition vehicle. So
6 we would like to proceed, Your Honor. And I will cede the
7 podium to my colleague, Mr. Cook, to present our witness. The
8 first witness.
9 THE COURT: All right.
10 MR. COOK: Your Honor, I'm going to call James L.
11 Doak to the stand.
12 THE COURT: Please state your name for the record.
13 THE WITNESS: James L. Doak.
14 THE COURT: D-O-A-K?
15 THE WITNESS: D-O-A-K.
16 (Witness is sworn)
17 THE COURT: Please be seated.
18 DIRECT EXAMINATION
19 BY MR. COOK:
20 Q. Mr. Doak, by whom are you employed?
21 A. Miller Buckfire & Company.
22 Q. In what capacity?
23 A. I'm an investment banker there, I'm a managing director.
24 Q. What are your duties as managing director?
25 A. I -- we represent stakeholders surrounding distress
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1 situations, corporate distress matters. I, as a managing
2 director, assist our clients in that capacity. I execute our
3 engagements. I lead the execution of our engagements. I
4 market the firm's services and also assist in the various
5 governance activities of the firm.
6 Q. Do you have any degrees from any institution of higher
7 education?
8 A. Yes.
9 Q. What are they?
10 A. I have a Bachelor's Degree from Harvard College. I have a
11 Master's of Business Administration from Harvard Business
12 School. And I have a JD from Harvard Law School.
13 Q. And how long have you been at Miller Buckfire?
14 A. I've been at Miller Buckfire since it's founding in 2002.
15 It's predecessor organization is Dressner Klein & Wasserstein
16 and Wasserstein Parella, would stretch my entire time at the
17 firm back to 2000. So eight years in total.
18 Q. And prior to Miller Buckfire and it's predecessor were you
19 employed by Goldman Sachs?
20 A. I was employed by Goldman Sachs as an investment banking
21 analyst in the mid-'90s.
22 Q. Okay. And did there come a time when you became engaged
23 by the term lenders to work on a matter involving these debtors
24 of Lenox Group, et al.?
25 A. Yes. Miller Buckfire was retained by Schulte Roth in
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1 their capacity as advising the agent to the term loan of Lenox
2 Group Inc. that occurred in the mid-September 2008 timeframe.
3 Q. And since you were engaged in September of 2008 did Miller
4 Buckfire do an analysis of the KPS bid and the lender group --
5 the term lender group bids, the two bids that have been
6 discussed here today?
7 A. Yes. Fast-forwarding substantially from September. But
8 most recently surrounding the sale process, we did do that.
9 Q. Okay. And have you had any experience with financing
10 prior to this engagement?
11 A. Yes,
12 Q. In approximately how many transactions?
13 A. Almost all of the engagements that we're involved in
14 involve an aspect of financing, renegotiation, amendment or
15 recommitment of debtor, occasionally equity, various forms of
16 secured debt, ADL facilities, term loan facilities. In total,
17 I would say probably well over 2,000 situations.
18 Q. Okay. Getting back to the question I asked you earlier
19 about this comparative recovery analysis, when did you do it?
20 A. We perform a comparative recovery analysis for our clients
21 post the auction and most recently we had an opportunity to
22 refresh that last night.
23 Q. Last night. And who at Miller Buckfire prepared that
24 analysis?
25 A. The analysis was prepared by myself, with the assistance
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1 of Steven Bremer and Adam Fitzner. They're two junior
2 investment bankers who have been working on the assignment with
3 me throughout the term of our engagement.
4 Q. Where did you get the facts to prepare the analysis?
5 A. The majority of the facts that we put together were
6 actually pulled from an analysis shared by Berenson & Company
7 with the term lenders. In addition, there are some items where
8 we felt that the numbers that were inserted by Berenson were
9 not the -- there were better numbers out there. So certain of
10 the numbers, including matters around a fair range of the cure
11 costs, potential value of D56 either in litigation or sale, we
12 had to take a look at the Berenson numbers and, also, assess
13 from everything we knew about the bids that were available and
14 other matters that had been provided from the company from time
15 to time in their various forecasts surrounding Chapter 11, the
16 cash flows, and other forms of analysis.
17 Q. You said better, better in what sense?
18 A. Well, several of the calculations that Berenson employed
19 were, we thought, too optimistic given where we were in the
20 process right now. And given the opportunities on the table in
21 regards to D56. Also, the range of cure costs that they chose
22 to use in their analysis did not reflect the full range of
23 potential cure costs that the company had previously supplied
24 to us. When they had provided some other analysis they also
25 chose to use a -- they had a range recovery, they used a high
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1 end to do some comparison work. But that's basically why we
2 went by alternative numbers that we felt more accurately
3 reflected, although they're still some substantial concerns, a
4 comparison of the two opportunities.
5 Q. When you did this analysis yesterday, and you looked at
6 the Berenson numbers, when did Berenson prepare those numbers?
7 A. Berenson prepared those numbers -- well, we don't know.
8 But we were supplied the analysis approximately a day after the
9 auction.
10 Q. And the auction would have been on February 11th?
11 A. So we were provided the analysis on the 12th.
12 Q. February 12th, okay. And in your recovery analysis did
13 you reach a conclusion?
14 A. We did. We reached a conclusion that on their face the
15 two comparative proposals were substantially different in
16 potential recovery to the estate, and recovery to the lien
17 holders of the estate, no matter how one would want to take a
18 look at how one allocated the proceeds amongst the lien
19 holders.
20 Q. And when you made this analysis late yesterday and the
21 facts you were relying on were current, you knew them to be the
22 best you could get at the time?
23 A. They were the best available. And some of them involved
24 facts as current as the fact that we had a proposal out to the
25 UCC committee for a potential recovery -- modest recovery
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1 sharing with them of one million dollars. So it reflected our
2 best information as we had it, as we could put it in as of last
3 night.
4 Q. So let me understand -- correct me if I'm wrong, your
5 conclusion was that under the term lenders bid there would be a
6 higher recovery for the estate?
7 A. That's correct.
8 Q. How did you get there?
9 A. We took the two bids, we -- first on the KPS bid, we took
10 a look at the cash offer that KPS had placed on the table.
11 Took a look at the assumed liabilities. Took a look at the
12 other incremental costs that were recovered. And then on the
13 term lenders side we took a look at the amount of their debt
14 that we were -- the term lender's debt that we were credit
15 bidding. The cash expenses that we were offering to pay and
16 the assumed liabilities that we were taking on, we put that all
17 together in a summary series of two short pages.
18 Q. Okay. And do you remember all the details of that
19 analysis, as you sit here right now?
20 A. Not every single one.
21 Q. If I show you Exhibit --
22 MR. COOK: Let me ask the reporter to mark this. We
23 marked this for identification as Exhibit 39.
24 THE COURT: This is Term Lender's Exhibit 39, not to
25 be confused with the debtors.
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1 MR. COOK: That's right. Term Lenders 39, that's why
2 it's called TL.
3 THE WITNESS: Thank you.
4 Q. Exhibit 39 for identification, does that reflect your
5 recollection, Mr. Doak?
6 A. Yes. This is the analysis that we prepared over last
7 evening, based on our running analysis of the two comparative
8 bids. And we provided this to our clients via -- and Schulte
9 for their guidance.
10 Q. Okay. And where in Exhibit 39 does it show, as you put
11 it, a greater recovery to the estate?
12 A. It is shown at the bottom of the first page. What the
13 first page shows is the recovery to the estate, covering for
14 the purposes, I think, of simplicity for all the parties here,
15 covering the amounts that are owed under the DIP loan.
16 Covering, in comparison, the amount of our term loan that we
17 bid versus the amount of anticipated recovery for the term
18 lenders in the KPS bid. This is subject to considerable
19 revision and movement. We calculated on the following page,
20 but we'll get there later. The professional fees that are
21 covered in both situations, the offer that we made to the
22 general unsecureds and the UCC by the UCC. The assumed
23 liabilities which were the same in the two cases. And then we
24 also covered reimbursement of required estate payments. We had
25 cure costs in it. We had an estimate for additional legal
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1 fees, including Schulte Roth. We have the Berenson success fee
2 and the Miller Buckfire success fee. We then go down to the
3 bottom of the page where these numbers are summarized. And you
4 can see that for the purposes of this analysis, with the
5 assumption that the DIP loan is paid off in full, the DIP
6 lenders recoveries are the same in both circumstances. The
7 term lender recoveries, however, are very different. And,
8 finally, moving over to the furthest right column you can see
9 that we add things up in total for the estate looking at the
10 variances and the total proceeds to Lenox under the KPS bid
11 with substantial amount potential for revision here is slightly
12 under eighty million dollars. The value of the credit bid and
13 overall deal proposal from the term lenders group as it was
14 represented last night, was approximately 103 million. And so
15 that's a variance of twenty-three million dollars -- over
16 twenty-three million dollars. Since then things continue to
17 shift. And if --
18 Q. Could you take a look at specifically total general
19 unsecured and administrative payments, lower right-hand corner,
20 that one million dollar number, has that shifted?
21 A. The latest state of play was that number was closest, I
22 believe, to two million. Now, whether that can be -- actually,
23 that would be appropriately described as general unsecured and
24 administrative payments. It's -- that's how it was proposed.
25 That's now two, that would further differentiate the two
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1 proposals by a modest amount.
2 Q. Fine. Now, moving on to the term lenders financing
3 commitment, did you participate with the term lenders coming up
4 with evidence of a financing commitment?
5 A. Yes.
6 Q. What did you do?
7 A. In preparation for the sale process we assisted the terms
8 lenders in soliciting commercial debt financing from third
9 parties. When those efforts concluded --
10 Q. Just before we get there, during what time period?
11 A. Those efforts began in earnest marketing to third-party
12 commercial lending institutions in December.
13 Q. December of 2008?
14 A. December of 2008 we were limited for a variety of reasons
15 by all the activities that had to take place before we got
16 to -- we got into Chapter 11. I guess if you would consider
17 the fact that we've been negotiating or were negotiating with
18 UBS to maintain some form of participation and finance us
19 through a DIP and then exit, I guess you can say our efforts
20 began all the way back sometime in September or October. But
21 we contacted third parties in December.
22 Q. During the last quarter of 2008, how many potential
23 lending institutions did you contact?
24 A. I would say approximately -- probably close to two dozens,
25 all told during the course of the process.
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1 Q. And who were some of the -- just who were the top two or
2 three that you dealt with?
3 A. The major providers of asset-based lending. JPMorgan,
4 Wells Fargo, Wachovia, Credit Suisse, CIT, some smaller
5 institutions, Regions Bank, PNC.
6 Q. And during this process did you, on behalf of the term
7 lenders, involve the debtors in this process?
8 A. At various points we involved the debtors and updated them
9 as to the status of our process. Clearly, it was our process,
10 they were running their own competitive sale process, but made
11 it a point at various times to share with them our solicitation
12 document. We shared with them probably the institutions we are
13 going to. The debtors, themselves, shared with us some other
14 institutions that we could consider going to. Most of those we
15 had already tapped, or else we knew that they were already not
16 in the business of making ADL commitments. And we had other
17 ways to confirm that. And then subsequently in January, when
18 we were moving beyond the timeframe of soliciting, gathering
19 new parties, although we did that throughout January and -- and
20 even into February. We were keeping the debtor apprised as to
21 our process with the commercial lenders that we had chosen. In
22 addition, we were working with the debtors in facilitating the
23 due diligence process that the -- two of the institutions that
24 we picked to lead the financing, Wells Fargo and CIT, the due
25 diligence process that they were engaged in, which included
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1 general due diligence, the appraisals for borrowing based type
2 calculations. Due diligence efforts that they understood and
3 they were intimately involved in in that capacity.
4 Q. Did -- while you were doing all this work, did the debtors
5 ever tell you that any of the lenders you were talking to were
6 inadequate, improper?
7 A. No, they never made any statement in that regard.
8 Q. Okay. Now, let's go to the auction that took place on
9 February 11th. What did the -- what did you do with the term
10 lenders to prepare for this auction?
11 A. In preparation for the auction having learned over the
12 latter part of the week, concluding on the 6th, that our
13 commercial lending process was not going to come to a
14 successful commitment. We worked non-stop with our -- with all
15 of the term lenders and refashioned the financing commitments
16 and our bid proposal that we were providing to the debtors. We
17 did so by -- and we refashioned the bid, we prepared an equity
18 commitment letter that governed and controlled and described
19 the equity commitment that Trumpet Investors, the vehicle of
20 Clearing Capital Partners, was prepared to fund into our bid on
21 an equity basis of thirty-five million. In addition, we
22 completed and negotiated a commitment letter from two of our
23 other institutions inside our term lender group for debt
24 financing, a term loan facility that was asset-backed. Those
25 two institutions were LVC and Clinton Magnolia Fund.
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1 Q. Okay. I'm going to show you what we've marked for
2 identification as Term Lender's Exhibit 12, which is a February
3 11, 2009 equity commitment letter addressed to LDG Delaware
4 Holdco. Exhibit 13 for identification, debt commitment letter
5 from LB Sub to LDG Opco Inc. Exhibit 31 for identification,
6 which is in the term lender's binders, so-called backstop
7 rights purchase agreement dated February 20, 2009. And Exhibit
8 30, Term Lender's 30 for identification, which has been marked
9 as the -- it's the so-called term loan agreement. I'm going to
10 show you those four exhibits. Are those the agreements that
11 you've just described?
12 A. You've described several documents and those appear to be
13 the ones you placed in front of me.
14 Q. They were placed -- that you've just described.
15 A. Yes. Oh, sorry, exactly.
16 Q. Fine.
17 A. Well, these are the two commitment letters, the backstop
18 rights purchase agreement is a -- quite frankly, is a ladder
19 document. And the credit agreement in this form is a ladder
20 document.
21 Q. Fine.
22 MR. COOK: I'm going to offer Exhibits 12, 13, 31, 30
23 into evidence.
24 THE COURT: Any objection?
25 MR. PEREZ: Your Honor, we have no objections to
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1 those exhibits. I think there's -- he's testifying about what
2 happened at the auction. Some of these exhibits are not --
3 have nothing to do with the auction process. So I'm not quite
4 sure what the predicate was for those exhibits.
5 THE COURT: Fine. Understood on that basis, they'll
6 be received.
7 (February 11, 2009 equity commitment letter addressed to LDG
8 Delaware Holdco was hereby received as Term Lender's Exhibit 12
9 for identification, as of this date.)
10 (Debt commitment letter from LB Sub to LDG Opco Inc. was hereby
11 received as Term Lender's Exhibit 13 for identification, as of
12 this date.)
13 (Term lender's binders, so-called backstop rights purchase
14 agreement dated February 20, 2009 was hereby received as Term
15 Lender's Exhibit 31 for identification, as of this date.)
16 (So-called term loan agreement was hereby received as Term
17 Lender's Exhibit 30 for identification, as of this date.)
18 MR. COOK: Thank you.
19 Q. But these documents were delivered to the debtors on or
20 about the time of the auction?
21 A. To be clear --
22 Q. Sure.
23 A. -- the two commitment letters were. And the credit
24 agreement and this particular backstop rights purchase
25 agreement I'm not aware of whether these were delivered at the
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1 auction, I would assume they're not because they're postdated.
2 Q. Were they delivered at the time that they knew of the
3 document?
4 A. To the best of my knowledge, the credit agreement that you
5 placed in front of me --
6 Q. Yes.
7 A. -- is the -- is a final form or nearly final form of our
8 current credit agreement that we've been in the process of
9 discussing recently. And the backstop rights purchase
10 agreement dated February 20th, I do not have knowledge as to
11 when this was provided to the debtors. However, the two
12 commitment letters that you've discussed --
13 Q. Yes.
14 A. -- these particular documents were delivered to the
15 debtors on the 11th.
16 Q. Okay. But you do know that that other documents were
17 delivered prior to today?
18 A. I --
19 Q. The credit agreement, for example?
20 A. Well, I know the credit agreement is something that the
21 parties have been reviewing over the last two days. So, yes.
22 Q. Okay. Now, did you participate in the preparation --
23 particularly, what have been marked as Exhibits 14 and 12, the
24 debt commitment and the equity commitment letters. Did you
25 have any basis for comparison in terms of the form of the
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1 letter?
2 A. Well, the forms of the letter as far as what goes into a
3 commitment letter, we do. We see commitment letters frequently
4 in our business. The -- first of all, the equity commitment
5 letter put together by Trumpet, it's a document that we saw in
6 several formats over the course of January and February. And
7 it's something that we assisted in creating, and something
8 that's -- that has been used in other, sort of similar, rights
9 offering types of situations. There are some exhibits in the
10 back that you can see quite specifically we created for the
11 benefit of the term lenders.
12 Q. And did you create them from scratch or did you base them
13 on something else?
14 A. These agreements are based on largely the -- some standard
15 forms as to how one would go about creating an equity backstop
16 to a rights offering. What are the key things that would be
17 included. How you would represent the responsibilities and
18 obligations and rights of the various parties. The debt
19 commitment letter, Exhibit 13, is much more, I would say,
20 formulaic. There's -- how it is shaped up in the form of a
21 commitment letter that's followed by a recitation of the terms
22 of the would-be facility is what we would classically refer to
23 as a commitment letter. And it's broadly what we would -- you
24 know, what we would expect to see in -- certainly in format
25 when we go out and raise financings, when you're looking for a
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1 commitment letter that's subsequently going to -- then
2 subsequently you go to documentation.
3 Q. Did Miller Buckfire, the term lender's counsel, obtain
4 copies of other forms of commitment letters?
5 A. We have. We've reviewed a substantial amount of
6 commitment letters. We have also asked Schulte to see what
7 they could find out in the marketing in regard to other debt
8 commitment letters of commercial institutions. We've received
9 a substantial amount of information back. We were particularly
10 interested in the conditions sections of the commitment letters
11 as that seemed to be an area of particular discussion with the
12 debtors when it came to what occurred on the 11th.
13 Q. And did you -- just over the past few days, did you get
14 copies of any representative UBS commitment letters, for
15 example?
16 A. Yes. We've received several UBS -- portions of several
17 UBS commitment letters.
18 Q. And do you know who provided them?
19 A. I understand that they came by way of Paul Hastings and
20 the current individuals from UBS who work with the -- work in
21 their agent capacity on the DIP loan.
22 Q. And the names of the borrowers were redacted and other
23 sensitive proprietary information?
24 A. That's right, yes.
25 Q. I'm going to show you what's been marked -- it's in the
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1 terms lender's binder as Exhibit 28 for identification.
2 (Pause)
3 Q. Okay, Mr. Doak, have you had a chance to take a quick look
4 through Exhibit 28, for identification?
5 A. Yes, I have.
6 Q. And are these the documents that we provided you from UBS?
7 A. That's correct.
8 Q. Thank you.
9 MR. COOK: We offer Exhibit 28?
10 MR. AUSTIN: Objection, Your Honor, to the issue of
11 relevance. None of these proposed commitment letters are in
12 any way connected to any type of 363 sale financing. And every
13 one substantially is significantly different type of financings
14 and what is before this Court. So there's no relevance to any
15 of those commitment letters for the purpose of today's hearing.
16 MR. COOK: Granted, Your Honor, they don't have the
17 same borrowers, but they are typical of customary financing
18 commitment letters. That's what we're offering them for.
19 THE COURT: Are they -- is it apparent on the face of
20 them what the financing is for?
21 MR. AUSTIN: It's apparent that they're not for any
22 type of bankruptcy-type financing, Your Honor.
23 THE COURT: All right. So understood, and I'll
24 overruled the objection and admit them subject to the caveat
25 that they may each be for a very different financing
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1 transaction.
2 MR. COOK: Thank you.
3 Q. Mr. Doak --
4 THE COURT: And, also, they're also from a different
5 time period. Although, I see the first one is December 8,
6 2008, which is within the dreadful time frame that we're now
7 living in.
8 MR. COOK: Thank you.
9 Q. Now, Mr. Doak, you attended the auction on February the
10 11th, did you not?
11 A. Yes, I did.
12 Q. And at the time of the auction had the term lenders
13 presented evidence of their financing commitment?
14 A. These two letters were delivered during the course of the
15 day.
16 Q. And when you state these two letters, you're referring to
17 Exhibits 12 and 13 in evidence?
18 A. Yes.
19 Q. And was there a disagreement as to whether they evidenced
20 the financing commitment?
21 A. Yes. There was a disagreement with the debtors in regards
22 to whether the terms lenders were a qualified bid. And the
23 issues that the debtors were raising were associated with the
24 language and terms that were imbedded in these two commitment
25 letters. And, accordingly, they were also pointing to
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1 provisions in the bidding procedures associated with financing
2 commitment.
3 Q. Essentially, as you understand it as you were there, there
4 was a disagreement. What was the substance of what you heard?
5 A. The substance of the agreement -- sorry. The substance of
6 the disagreement was that, you know, these particular letters
7 and how they were interrelated was -- was considered
8 unacceptable by the -- by the debtors. So because they
9 considered them unacceptable, they basically said we were not a
10 qualified bid. Our position on these letters was that these
11 letters represented financing equipments in every commercial
12 sense, that they were adequate to allow our bid to be qualified
13 and we should move forward with the auction. If our position
14 was that if there was an issue surrounding concerns over our
15 ability to execute on these commitment letters, or the party's
16 ability to execute on these commitment letters, then it would
17 be -- that would be an appropriate investigation that could be
18 carried out either by -- you know, suspending the auction and
19 engaging in that due diligence, engaging in that due diligence
20 immediately, we had the parties there. Or working further with
21 us to resolve the issue. We felt on it's -- in the context of
22 the auction, but we never got there. We never got to the
23 auction, all we had was -- all we had was the one KPS bid and
24 we were deemed to be -- we were not deemed to be a qualified
25 bid.
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1 Q. But as I understand your testimony, because of the form of
2 the commitment letters?
3 A. Well, because of the language in the commitment letter.
4 Q. What in particular in Exhibits 12 and 13?
5 A. The debtors took odds with a condition in both of the
6 commitment letters that they were conditioned -- each letter
7 was conditioned on the other commitment. And, in addition, the
8 debtors had issues on the financing commitment with, you know,
9 concepts and conditions such as the documentation and other
10 sort of conditions that we viewed as certainly being customary
11 for those that are in regular way commitment letters. Or put
12 more specifically, the commitment letters that people receive
13 in 363 auctions, and as a result they were not letting us move
14 forward as a qualified bid. There were some issues about their
15 lack of understanding on how the rights offering would work
16 within the overall structure of the equity commitment. That
17 was after a considerable amount of discussion, sort of more
18 discussion than we thought we were going to have to have. That
19 appeared to be resolved only after we went on the record
20 explaining that this was, effectively, a commitment of Clarion
21 for thirty-five million.
22 Q. When you refer to the backstop, you're referring to
23 Exhibit 31 in evidence, are you not?
24 A. Well, the -- effectively, the backstop is now -- is now
25 represented by what's -- what's in Exhibit 31. At the time it
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1 was -- what we had was the commitment letter in Exhibit 12.
2 Q. Thank you. And after the auction did the term lenders --
3 you mentioned a -- what's called a term loan agreement, and
4 it's in evidence as Exhibit 30. What specifically is Exhibit
5 30 in evidence?
6 A. Exhibit 30 is the credit agreement for the term loan that
7 our acquisition vehicle is -- you know, is now prepared to
8 execute with LBC as the administrative agent and it's a funding
9 commitment -- more than a funding commitment, it's the document
10 that LBC and Clinton will be funding their respective debt
11 commitments into. We developed it coming out of the auction
12 day. Frankly, feeling that it was -- that the discretion or
13 the fact that what had happened with the bidding procedures --
14 effectively, with the rules kind of getting, we felt, changed
15 on us. We felt the only way to represent our bona fides and
16 the bona fides of this particular debt commitment letter was to
17 go through the added expense and challenges and devotion of
18 resources to appear before the Court with the credit agreement
19 full stop. So that is what -- that's what 30 is.
20 Q. Okay. So I was going to ask you why the term lenders came
21 up with the negotiated credit agreement. And you said, the
22 word you used, to represent their bona fides. For those people
23 who haven't had Latin, in plain English, why did the term
24 lenders provide the credit agreement?
25 A. We felt it was the best -- best way, a) to evidence the
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1 seriousness of our willingness to move forward with our
2 acquisition of the Lenox assets. That has been the first and
3 primary goal of our group from the -- probably before day
4 Miller Buckfire was hired. But that has been our focus. It
5 was also the best way that we could prove that the
6 contingencies or -- excuse me, the conditions that the company,
7 you know, had raised, we felt inappropriately, were, you
8 know -- were easily or were practically resolvable.
9 MR. COOK: No further questions. Thank you, Mr.
10 Doak.
11 CROSS-EXAMINATION
12 BY MR. PEREZ:
13 Q. Good afternoon, Mr. Doak. My names is Alfredo Perez.
14 A. Hi.
15 Q. I want to go over some facts with you. Did the term
16 lenders have committed financing on February 9th?
17 A. We had a -- I believe at that time we had an equity
18 commitment letter. We did not provide you with a debt
19 commitment letter.
20 Q. Did you provide an equity commitment letter on February
21 9th?
22 A. I don't recall whether we provided you with a copy of the
23 letter. I know we provided you with a copy on the 6th. But
24 that's sub -- that subsequently changed.
25 Q. So did you provide us with a copy of committed financing
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1 on February 10th?
2 A. No.
3 Q. Did you provide us with a copy of committed financing at
4 the beginning of the auction?
5 A. The -- I would have to recall when the auction was called
6 to order.
7 Q. It was called to order at 10 o'clock in the morning.
8 A. So no, we had not.
9 Q. Okay. And did you ever provide us with copies of signed
10 documents on February 11th?
11 A. I believe we -- I believe we did provide you with a number
12 of different si -- different signed documents. We provided you
13 with the document that Trumpet Investors had executed with the
14 company, with our acquisition vehicle, with Peter Cameron's
15 signature and Eric Cogan's signature. When it came to the debt
16 commitment, you know, I think we provided you again -- it was
17 obviously late in the day --
18 Q. Have you ever seen a signed debt commitment letter?
19 THE COURT: Let the witness finish his answers,
20 please.
21 MR. PEREZ: I apologize, Your Honor.
22 THE COURT: That's all right.
23 MR. PEREZ: I apologize.
24 A. Well, I -- my -- I thought I saw it on that day. Okay? I
25 thought -- my belief was that it was provided to you on that
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1 day.
2 Q. Would it surprise you to know that we've never seen a
3 signed debt commitment document?
4 A. I don't have any knowledge of --
5 MR. HARRIS: Your Honor, is this question ever or on
6 the 11th?
7 THE COURT: The question, as I understand it, is
8 ever.
9 MR. PEREZ: I'll move on, Your Honor. I'll move on.
10 Q. Now, Mr. Doak, as we stand here today, there is still no
11 final agreement on an APA with the term lenders. You
12 understand that, correct?
13 A. There -- my understanding is there are several outstanding
14 points.
15 Q. Okay. And now we're two weeks after the auction, correct?
16 A. We obviously lost a lot of time where we could have been
17 negotiating.
18 Q. All right. And there is no signed credit agreement, is
19 there?
20 A. There is not a signed credit agreement. There's not a
21 need to sign the credit agreement at this point.
22 THE COURT: Now, before we go too much further, I'm
23 looking at Exhibit 13, which was admitted into evidence. It is
24 marked SR&Z, which I assume is Schulte Roth & Zabel draft. It
25 looks like -- looks to me like the so-called debt commitment
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1 letter dated February 11th. And my copies are signed in
2 counterparts. Peter Cameron signed one. LBC Sub has signed
3 another, and Clinton-Magnolia Master Fund Ltd. has signed
4 another. And this isn't the first time I've seen these
5 documents.
6 MR. PEREZ: Excuse me, Your Honor.
7 THE COURT: I said this isn't the first time I've
8 seen these documents.
9 MR. PEREZ: Your Honor, I think that when we
10 submitted those documents to the Court, we agreed to disagree.
11 Because we had never actually seen those documents prior to the
12 time that they were submitted to the Court.
13 THE COURT: All right. Okay.
14 MR. HARRIS: Your Honor, just for the record, I have
15 my partner Dave Rosewater here in the courtroom today, who was
16 at the auction and will testify that he advised Weil Gotshal on
17 that date that signature pages had been released. And we
18 believe we delivered them to Weil Gotshal attorneys.
19 THE COURT: Well, I know that there are only about
20 1,000 Weil Gotshal attorneys, and I know how chaotic these
21 situations could be. And I have no doubt that everyone is
22 proceeding and was proceeding at the time in good faith and
23 making the best judgments they could at the time. I haven't
24 heard any testimony to the contrary. But I don't know that
25 that is -- but, I'm listening. Please go ahead. I interrupted
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1 your testimony.
2 A. The debt commitment was provided in unsigned form for you
3 all to review during the course of the day. So my
4 understanding was the signature pages were later.
5 BY MR. PEREZ:
6 Q. Okay. Now, do you remember what the key issue was at the
7 end of the day at the auction?
8 A. Um --
9 Q. Well, let me refresh your memory. Do you recall that
10 around 4 o'clock the representatives of the debtor came in and
11 asked the term lenders to delink the debt commitment from the
12 equity commitment? Do you remember that?
13 A. Yes, I do.
14 Q. Were you in the room when that happened?
15 A. Yes, I was.
16 Q. And do you recall that the term lenders refused to do
17 that?
18 A. That's correct.
19 Q. All right. And do you recall that that was the basis of
20 why the debtor did not qualify the bid?
21 A. I don't know why you didn't qualify the bid. That's your
22 determination. We felt the bid was qualified. It matched the
23 bidding procedures until you had a different bid. And you
24 chose to change the rules to a format where, you know, things
25 had to look different because you had an all equity cash bid.
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1 Q. Why did the term lenders refuse to delink the equity
2 commitment from the debt commitment?
3 MR. HARRIS: Objection, Your Honor. Calls for a
4 request of what the term lenders did. The term lenders did not
5 issue the equity commitment.
6 THE COURT: Well, I think he can testify as to his
7 knowledge, since he has testified that he represented the group
8 and he also presented the documents. But if he has no
9 knowledge, then obviously he can't testify on the point.
10 A. We did not delink because we wanted the debtor to consider
11 a fully-financed 60 million dollar bid. And we also felt that
12 the -- what we had provided in the form of the two commitment
13 letters was completely acceptable for what should go as being a
14 qualified bid to get us into the auction. At that point there
15 was no -- we felt that there was no reason for us to make
16 further change to our bid.
17 Q. But was the concern about not delinking that you needed to
18 have the debt commitment in order to put in the equity
19 commitment?
20 A. Well, the documents say that both of the commitments are
21 dependent on the other.
22 Q. So, does --
23 A. I mean, we had an equity commitment that had terms that
24 were obviously negotiated and negotiated in regards of the form
25 of the debt commitment. And the debt commitment that was --
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1 that had been negotiated based on knowledge of the terms of the
2 equity commitment.
3 Q. All right. Now, first of all, understand, all of these
4 commitments are being provided by the term lenders?
5 A. The shell -- the acquisition vehicle has executed the
6 commitment letters with the specific term lenders from within
7 our group who were providing the various forms of financing.
8 Q. So there's no third party out there --
9 A. Right.
10 Q. -- that's providing any of this?
11 A. That was basically our only choice when the third party
12 market fell apart. And it's one of the reasons why we think
13 these are even more bona fide than an independent third party.
14 It's certainly been helpful in getting them to completion.
15 Q. But do you think that the term lenders would have superior
16 knowledge about the bona fides of the debt commitment -- the
17 equity commitment than the debtor?
18 MR. HARRIS: Objection, Your Honor. What does that
19 question mean?
20 THE COURT: I'm not sure I understand. Maybe you
21 could rephrase the question.
22 MR. PEREZ: Let me rephrase.
23 Q. Do you think that --
24 THE COURT: And don't worry. You can use Latin all
25 you wish. If it's only bona fides. I can get that far.
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1 MR. PEREZ: Okay.
2 Q. Let me ask you a question. Do you think that the term
3 lenders knew more about the financial ability of the person
4 providing the debt commitment and the person providing the
5 equity commitment to perform, than the debtor did?
6 A. Their financial capacity? You know, I can't say. I mean,
7 generally the term lenders all know -- you know, know much more
8 about each other and the funds that they have under management.
9 I mean, it's certainly a great line of inquiry that should have
10 been explored on the 11th.
11 Q. Well, can you answer my question? Is the answer yes or
12 no?
13 A. I guess the answer would be yes, the way you've asked it.
14 Financial capacity.
15 Q. Okay. And you understood that the debt commitment was
16 linked to all of the conditions in the asset purchase
17 agreement?
18 A. Can you ask that differently?
19 Q. Well, that the funding under the debt commitment was
20 conditioned upon basically having a satisfactory asset purchase
21 agreement, from the lenders' standpoint?
22 A. I believe that -- I believe that generally characterizes
23 one of the conditions that's represented in this commitment
24 letter.
25 Q. And you knew that the form of asset purchase agreement was
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1 not acceptable to the debtors?
2 A. Well, I -- we got -- we had an asset purchase agreement
3 that we submitted as part of our bid. We were under the
4 mistaken belief that we'd be admitted into the auction and have
5 an opportunity to engage in a dialogue with the debtors about
6 what provisions they needed removed and what value they would
7 give for the differential provisions that we had inserted into
8 the document. I'm not quite sure I'm answering you question,
9 though.
10 Q. That's all right. I'll move on. Let's turn back to --
11 let me just make sure. The Exhibits number -- and I just want
12 to clarify that -- 31 and 30, 30 and 31, those were not
13 presented at the auction?
14 A. That's correct.
15 Q. Okay. And they were -- I guess drafts of those were what
16 was filed last Friday?
17 A. I believe drafts were filed on Friday, yes.
18 Q. Why didn't the term lenders, after the day after the
19 auction, come to the debtors with committed financing?
20 A. Well, we came to you with committed financing, as far as
21 we were concerned. That was the commitment letters. These are
22 representative of the type of commitment letters that people
23 secure to participate in 363 auctions. We did not come to you
24 with these particular documents the day after the auction,
25 because amongst other things, we were waiting for a lot of
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1 information that was supposed to be produced at the auction by
2 the debtors and their advisors that we thought we were going to
3 get the ability to see. And also these -- we had to make the
4 decision that given where we were, we had to go ahead and
5 create these.
6 Q. Let's turn to Exhibit number 39, please. In terms of the
7 recovery that the term lenders are going to receive under the
8 credit bid proposal, how much of that is in cash?
9 A. The entire portion of the term lender recoveries under the
10 credit bid for the term lender group is received in -- it's our
11 equity bid, so it's zero.
12 Q. And how much, under your analysis of the KPS bid, how much
13 of that is received in cash?
14 A. It's a very big TBD. We believe it is most likely a
15 figure that is under 20 million right now, given the direction
16 that a number of these various items are changing. But you can
17 see, as it's represented on this particular page, it's at 22.3
18 million of cash recovery to the term lenders. There are
19 several items that are going to continue to change that,
20 including how the estate disposes of D 56, whether there's
21 actually a benefit to the working capital adjustment. And
22 these can all be seen on page 2. There's also just the
23 question of whether -- you know, where the cure costs will end
24 up, given the fact that if we move forward with this, KPS would
25 have a large role in determining those, and it would not be
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1 valued determinative to them. So, you know, here's a range. I
2 think it's -- I would characterize it as optimistic, standing
3 before you today.
4 Q. But what's the number in Exhibit 39?
5 A. Well, I think the answer is that there's not a number. I
6 can tell you that the number that's on page 1 is 22.3. And
7 I -- you know, I guess at night I could hope and pray that
8 that's the actual recovery if we move forward with KPS. But
9 there's -- that there's a substantial likelihood that it's
10 going to be much worse. We chose to put this together using
11 the numbers that -- in many cases, that Berenson had used. We
12 only departed from their numbers on a couple different
13 circumstances to facilitate, you know, all parties'
14 understanding of what we wanted to present. We presented it to
15 our term lenders and we figured, you know, hey, it could get
16 used here.
17 Q. All right. Let me ask you a question. You recognize that
18 liquidity is going to be very tight for Lenox if the term
19 lenders purchase it in September -- in August/September of this
20 year?
21 MR. HARRIS: Objection, Your Honor. Beyond the scope
22 of direct. This witness didn't testify anything about the
23 liquidity of the company.
24 THE COURT: Overruled. If he doesn't know anything
25 about the subject, he can say so.
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1 A. My understanding is that there was -- from sitting in the
2 courtroom, that there was a set of projections that was
3 provided and that there was a certain amount of liquidity under
4 those projections in the September time frame.
5 Q. But --
6 A. I can't tell you right now. I mean, that's a very, very
7 specific set of projections. I can't tell you if that's the
8 direction Clarion and the other term lenders are going to go
9 in. There's clearly going to be corporate opportunities,
10 liquidity maximizing opportunities, could be strategic
11 opportunities. But when asked to put a set of numbers in front
12 of people, that's the -- that was one particular forecast that
13 they chose to use for the purpose, I guess originally of
14 providing something to the -- their would-be new term lenders.
15 Q. Did you review these numbers at all before they went out?
16 A. I did not review that set of materials.
17 Q. Did anybody with Miller Buckfire review this set of
18 materials?
19 A. Yes.
20 Q. And what was their involvement in doing it?
21 A. Well, we worked collaboratively with Clarion throughout
22 the process. I can see from the format of the document that
23 this is a Clarion forecast that they put together. You know,
24 from time to time we put together other forecasts, so they're
25 prob -- you know, when we would move forward we would make sure
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1 that we had a general understanding of what they had put
2 together. But as to the assumptions that are in there as well
3 as the opportunities of the business on a go-forward basis to
4 seek additional capital, to make necessary operating changes,
5 to improve liquidity, you know, I think there's probably better
6 people to speak to that than me.
7 Q. All right. And so you wouldn't dispute any of Mr.
8 Spivak's testimony about his concerns about liquidity and --
9 A. I --
10 Q. -- amount of liquidity?
11 A. -- generally, I take issue with a couple of his points and
12 the way that he characterized the forecasts and the level of
13 deal elements that he applied to the forecast before he was
14 prepared to try, as to whether they indicated an entity that
15 was going forward with thin liquidity or thick liquidity.
16 But -- you know, but that's really not what, you know -- that
17 there's probably others that can speak better to it.
18 Q. All right. And you don't dispute that the sales figures
19 here are 15 million higher than in the debtor's --
20 A. If -- you know, if Mr. Spivak says that his latest
21 estimates have revenues that are 15 million below our revenues,
22 I don't know. But what I do know that was inappropriately
23 characterized for the Court is some sense that that has a --
24 you know, what size of liquidity gap does that actually have?
25 What does that do? And I think that the Court got a very short
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1 story as to what the true liquidity impact of that is. Because
2 in the end of the day you have to look at margin, you have to
3 look at inventory buying, you have to look at other decisions
4 that can be made if revenues are going down. But once again, I
5 think other people can speak better to that topic.
6 MR. PEREZ: I have no further questions, Your Honor.
7 THE COURT: Anyone else?
8 MR. PEREZ: Just a moment.
9 (Pause)
10 MR. PEREZ: I have a couple more questions, Your
11 Honor.
12 Q. Mr. Doak, did the debtors declare a winner at the end of
13 the auction?
14 A. I don't know if you're trying to use the specific terms
15 inside the bidding procedure, but at the conclusion of the
16 day's events, in the transcript, yes. You said that the
17 successful bidder is KPS.
18 Q. Okay. Are you aware of any fraud that was committed in
19 connection with the bidding -- with the auction process?
20 A. Not to my knowledge.
21 Q. Okay. Were there written bid procedures?
22 A. There were. I do not -- we can discuss whether they were
23 observed or not.
24 Q. And did KPS present an all equity offer at the auction?
25 A. Yes.
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1 Q. And were they declared the winner at the auction?
2 A. They were declared the successful bid.
3 MR. PEREZ: I have nothing further, Your Honor.
4 THE COURT: Anything else from anyone?
5 MR. AUSTIN: I have some questions, Your Honor.
6 CROSS-EXAMINATION
7 BY MR. AUSTIN:
8 Q. Good afternoon, Mr. Doak. I'm Jesse Austin on behalf of
9 counsel for UBS.
10 A. Good afternoon.
11 Q. Now, I think your testimony was, you've been the advisor
12 to these term loan lenders from even prior to or during the
13 beginning of this Chapter 11 case. Is that right?
14 A. Since mid-September when we were selected.
15 Q. And so obviously -- and I think your testimony was, you're
16 aware of the difficulties in the capital markets regarding
17 financing from third parties? It's very difficult, correct?
18 A. That's correct.
19 Q. All right. I believe your testimony also was that LBC and
20 Clinton-Magnolia, as well as the Trumpet Fund, which I believe
21 is controlled by Clarion, the debt and equity providers for the
22 term loan lenders' proposal, they're all related and/or holders
23 of term loan debt, correct?
24 A. That's correct. They may not be the specific fund
25 entities, but they're the parties that we've broadly -- they
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1 are some of the parties that we call the term lenders.
2 Q. So one thing I've had a question about is that if you've
3 known from the very beginning that the capital markets were
4 very difficult for finding third-party financing, and if at the
5 end of the day the term loan lenders themselves are providing
6 both the debt and equity financing, why did it take the term
7 loan lenders so long to come forward and present both an equity
8 financing and a debt financing to support their proposed bid?
9 A. I don't have specific knowledge as to them, but my comment
10 would be we believe that we'd be able to -- we'd be able to
11 obtain third-party commercial institution commitments. You
12 know, certainly those did not come forward for a variety of
13 reasons. We thought your clients were putting together a
14 proposal, took considerable time and then chose to put
15 something that we had some challenges with. And we, continuing
16 throughout January, felt that we would have a commitment letter
17 that would be good to go and would represent a valid commitment
18 for purposes of the auction with third-party lenders. That
19 process fell apart on or around the 5th or 6th of February.
20 And at that point, the term lenders who had, from the start,
21 wanted to retain this business, wanted to own this business,
22 you know, had to make a decision, and they made a decision to
23 dig deep and put together the financing and restructure their
24 commitments on there and do this on their own.
25 Q. But they had no plan B up to that point, did they?
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1 A. We were continually assessing what our alternatives were.
2 We were engaged with some third-party dialogues while we were
3 still engaged with UBS.
4 Q. Well, Mr. Calabrese, for LBC, testified at a deposition
5 that he didn't even start underwriting the debt commitment
6 until on or about February 6. Do you believe that to be
7 incorrect?
8 A. That could be correct. He's only one of several
9 institutions. I'm sorry, he's only --
10 Q. I'm talking about the term loan lenders themselves.
11 A. I know, but, sorry, he's only one of several individuals
12 at LBC. So there's other individuals at LBC that have been
13 involved, actually, much more closely than Chris at various
14 times in this process. And the discussions associated with, as
15 you're referring to it, a plan B, you know, certainly occurred
16 before the 16th and involved other individuals from his
17 institution.
18 Q. But on February the 9th, you still didn't have either a
19 debt financing commitment or an equity financing commitment,
20 did you, from the term loan lenders?
21 A. The two commitment letters -- sorry, the two commitment
22 letters were provided on the 11th. They were not provided on
23 the 9th.
24 Q. Two days later?
25 A. You could be a banker too.
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1 Q. Now, let's ask one thing about the debt commitment; I
2 believe that's Exhibit 13.
3 A. Yes.
4 Q. That debt commitment's being provided by both LBC and
5 Clinton-Magnolia Fund, correct?
6 A. That's correct.
7 Q. Jointly, not severally, correct?
8 A. I believe that statement is not correct.
9 Q. May I see the letter? Let me rephrase my question. LBC
10 is underwriting only its portion of that letter, that funding,
11 correct?
12 A. That's correct.
13 Q. And Clinton-Magnolia is underwriting its portion of the
14 twenty-five million dollars, correct?
15 A. That's correct. This would be what I would refer to as a
16 deal.
17 Q. And so either one of them can choose not to fund, correct?
18 We have a letter that says they can choose not to fund in their
19 sole discretion?
20 A. That's not the language of the term -- that's not the
21 language of the commitment letter. There's conditions, and
22 it's the -- you know, their choices are governed by the
23 commitment letter. You know, this shouldn't have been a
24 surprise to the debtors. They knew we were working with CIT
25 and Wells. They knew that we were putting together a club
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1 deal. So the concept that we'd be coming to somebody with a
2 commitment letter with more than one party on it, you know, if
3 they had an issue with that, it would have been -- their
4 behavior was otherwise.
5 Q. May I see that exhibit again? Look at page 2.
6 A. Yes.
7 Q. I believe on page 2 it specifically says that the
8 commitment of each lender is several and not joint, correct?
9 A. That's correct.
10 Q. And so you're saying that either one of them -- they both
11 have to fund to make this full twenty-five million dollars,
12 correct?
13 A. Well, that's one way to -- that's certainly one way to get
14 there. LBC was responsible for twenty million of the
15 commitment. Clinton was responsible for five of the
16 commitment. If the five did not come in, then you wouldn't --
17 then there's not an obligation from LBC, under the terms of
18 this, to provide the five.
19 Q. I thought the makeup had shifted to where LBC was funding
20 seventeen and a half million and Clinton-Magnolia was funding
21 seven and a half million. That's what Mr. Calabrese testified
22 to.
23 A. You were referring to the commitment letter.
24 Q. I understand this letter. Have you understood whether
25 they've changed the sharing of the funding in the commitment
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1 letter?
2 A. My understanding is that the commitment letter has not
3 changed subsequently. However, annex A of the term loan
4 agreement has LBC providing 17.5 and Clinton-Magnolia providing
5 7-1/2.
6 Q. Have you seen a form of a commitment letter where there
7 was a requirement that the LDG-Delaware Opco reimburse LBC for
8 fees and expenses?
9 A. I know that there has been expense reimbursement that has
10 been agreed upon between the entities.
11 Q. Do you know if it's in a written commitment letter?
12 A. I don't know if it's represented in a commitment letter or
13 whether it's embodied in the particular provisions of this
14 particular commitment letter.
15 Q. Okay. Now, with respect to your testimony with Mr. Perez,
16 I think you've said the debt financing is contingent on
17 obtaining the equity funding of thirty-five million, and the
18 equity financing is contingent on also obtaining the twenty-
19 five million dollar term loan, correct?
20 A. That was the way the commitment letters were structured on
21 the 11th.
22 Q. And that's the way they're structured today, correct?
23 A. Well, today we have -- you know, today we're considerably
24 further along in what we have before the Court.
25 Q. Well, let me be clear. The equity group here is not going
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1 to put in thirty-five million dollars of equity unless there is
2 indeed a twenty-five million dollar term loan, correct? Isn't
3 that your understanding?
4 A. The commitments are still, to use the language that
5 everyone loves to use here, linked. And what we have at this
6 point is the completed back stub rights agreement and then
7 also, you know, a completed form of credit agreement.
8 Q. Well, why didn't Trumpet here just provide -- agree to go
9 ahead and provide all of the necessary financing to close this
10 transaction?
11 A. I don't know.
12 Q. All right. Now, Trumpet is proposing to put in thirty-
13 five million dollars of equity, correct?
14 A. That's correct.
15 Q. Do you have a perspective of -- do you have an
16 understanding of how much funds have actually been submitted to
17 or are under management in the Trumpet Fund? Is it 100
18 million, 200, 250 million dollars?
19 A. My understanding is that it's -- from what I understand,
20 it's above 200 million.
21 Q. How much?
22 A. I don't have the particular data.
23 Q. You are the financial advisor to the term loan lenders,
24 correct?
25 A. That's correct.
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1 Q. So what diligence did you do on the term loan lenders on
2 their ability to fund the equity commitment under their equity
3 letter?
4 A. We confirmed with them that they would have adequate
5 funding available to honor the equity commitment.
6 Q. Which is thirty-five million dollars?
7 A. That's correct.
8 Q. All right. Have you checked, though, how much more they
9 might have available?
10 A. I'm aware because they shared that they do have the policy
11 to provide additional funding.
12 Q. How much?
13 A. I don't have that figure.
14 Q. Is it five million?
15 A. I don't have that figure, Jesse.
16 Q. All right, so if this company needs funds -- if the sale's
17 done, it needs additional funds in September, you have no
18 knowledge whether Trumpet has the ability to actually fund
19 additional dollars to keep the company going?
20 A. Great question for the 11th. First of all --
21 Q. No, I'm asking you today, in your capacity --
22 A. Yes. Yes. My understanding, from what they've
23 represented to me -- I haven't asked for a particular number --
24 is they have additional capacity to provide funding. They also
25 have LBs. They also have -- they could pursue a variety of
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1 options to raise additional capital if they needed it.
2 Q. But have nothing committed today, though?
3 A. No. It would be highly unusual to do that. I don't see
4 KPS providing a commitment that is to be honored in September.
5 We wouldn't do something like that either. We think the
6 business is adequately capitalized as -- sorry, the bid is --
7 provides for an adequately capitalized company.
8 Q. All right. Look at Exhibit -- turn to 139. And I believe
9 your testimony was that this exhibit is an analysis to show
10 that compared to what you believe to be the values between the
11 KPS bid -- the recovery values between the KPS bid and the
12 credit bid from term loan lenders, correct?
13 A. Before the comparative recovery for the estate and also
14 specifically for the term lenders under one methodology.
15 Q. All right, now, first big group in here, you have the
16 outline of the DIP lender recoveries, and it's the same on
17 both, the KPS side and the same on the credit bid from term
18 loan lender side, correct?
19 A. The numbers are the same, yes.
20 Q. All right. Then you get to the term loan lenders'
21 recovery; that's different, and I think that, from your
22 testimony with Mr. Perez, is because the 44,500,000 dollars
23 under the credit bid from the term loan, that's just the credit
24 bid allocation that you've put in here from the term loan
25 lenders' bid, correct?
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1 A. That's correct.
2 Q. All right. Then you get to professional fee --
3 THE COURT: Let me make -- while we're going through
4 this document, let me make sure I understand that, even though
5 it's not in Latin. The approximately 21.8 million dollars to
6 the DIP lenders assumes that they're going to be paid off in
7 full, is that correct?
8 THE WITNESS: That's what I understand.
9 THE COURT: That's the amount of the outstandings to
10 the so-called revolving credit lenders?
11 THE WITNESS: As of February 28th, that was our
12 estimate.
13 THE COURT: As of --
14 THE WITNESS: It may change slightly.
15 THE COURT: As of the second week, the first or
16 second week of March, it might change slightly, but is it
17 expected to change materially, as far as you know?
18 THE WITNESS: Modestly higher, but not materially.
19 THE COURT: Not materially. So that 22 million,
20 21.8, 22 million dollars has got to be provided in cash by both
21 the DIP lenders and KPS. KPS' bid is all cash, so that makes
22 it easy. Is that right?
23 THE WITNESS: I guess I would disagree with you --
24 THE COURT: All right.
25 THE WITNESS: -- on how one should -- if we move down
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1 the avenue of the KPS bid, you know, how the proceeds from the
2 asset purchase get divided amongst the DIP loan, which has a
3 lien on the -- you know, on the quick assets of the company --
4 THE COURT: Yes.
5 THE WITNESS: -- and the amount of the bid that gets
6 allocated to the term lenders, who have the first lien on the
7 fixed assets and the IP of the company.
8 THE COURT: Okay. Now, how --
9 THE WITNESS: But for --
10 THE COURT: All right.
11 THE WITNESS: -- for comparison purposes, because we
12 chose to represent it this way so that people can see the --
13 you've got to choose some way to do it, but this shows you the
14 difference to the estate. It also shows you potentially, if
15 you were to go with this particular methodology, as you were
16 suggesting, the significant differences, as we view it, in the
17 recovery of our secured constituency.
18 THE COURT: All right. But in terms of cash, the
19 entire bid of KPS under the KPS bid rubric, the first part,
20 21.8 million, whatever that is, it's cash?
21 THE WITNESS: That's right. On the second page,
22 you'll see we showed what's going on on the bid itself and
23 coming to total sale proceeds. And so we have in each one of
24 the scenarios for KPS, we have the 42.5; it's up at the top
25 left. And then --
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1 THE COURT: 42.5, yes, cash consideration.
2 THE WITNESS: Yeah, and then you have the working
3 capital adjustment, which is something that has to be performed
4 subsequent to the sale by KPS.
5 THE COURT: Okay.
6 THE WITNESS: Okay, then we all have --
7 THE COURT: And can the working capital adjustment go
8 either way or does it only go up?
9 THE WITNESS: Oh, it can go either way.
10 THE COURT: It can go either way. But this is your
11 best --
12 THE WITNESS: This is not our best estimate. This is
13 the number that the companies used and Berenson has used.
14 THE COURT: All right. Do you have another estimate?
15 THE WITNESS: We believe that the estate will be very
16 lucky if they get a positive adjustment here considering that
17 you have a situation where the buyer is performing the
18 services. And you also have a situation where it's being
19 checked by someone who's about to be employed by the buyer or,
20 by that point, is employed by the buyer. There's nobody left
21 in the estate for checks and balances. You also have a
22 situation where, you know, probably -- you know, can it go less
23 than zero? I think, at that point, the estate has probably
24 given out all its value. But it probably could to the extent
25 that when you get down to the hypothetical D 56 proceeds,
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1 whatever we sell D 56 for, if that cash is somehow still laying
2 around the estate, we actually -- most likely we have a lien on
3 it, so it's ours. But in theory, if there's some residual
4 value, the working capital could go negative.
5 THE COURT: All right. So you're assuming, then,
6 that almost twenty-two million of the forty-five million goes
7 to pay off the DIP lenders?
8 THE WITNESS: Well, we don't have any -- I mean,
9 these are the company's assumptions. We --
10 THE COURT: All right. You're not making any
11 assumption?
12 THE WITNESS: Well, some of the assumptions are ours.
13 THE COURT: Okay.
14 THE WITNESS: Okay. We believe that, given where
15 D 56 is on what we're going to realize, given the unlikelihood
16 that we get the full working capital adjustment, that what you
17 have to do is you'd have to go to the low end of our estimate,
18 which is the 19.256, and further deduct --
19 THE COURT: Where do we find that?
20 THE WITNESS: That's --
21 THE COURT: We find that here on the right, on the
22 second page?
23 THE WITNESS: Right, on the second page, at the
24 bottom.
25 (Pause)
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1 THE COURT: All right, you're still assuming, and I
2 guess you're analyzing the KPS bid, that the DIP is paid in
3 full, is that right?
4 THE WITNESS: That's what these calculations are
5 based on.
6 THE COURT: It's now 23.8, but it includes the two
7 million dollar carve-out?
8 MR. AUSTIN: Includes the priority obligations.
9 THE WITNESS: This is DIP and priority obligations.
10 THE COURT: Yeah, it inclu --
11 THE WITNESS: So this is sort of a -- this is a
12 waterfall, basically --
13 THE COURT: All right, it --
14 THE WITNESS: -- and we're at the bottom.
15 THE COURT: -- it includes the carve-out?
16 THE WITNESS: Yes.
17 THE COURT: All right, so it's 23.8. And then cash
18 costs, cash cure costs.
19 THE WITNESS: That's right. The KPS contract says
20 that they pay for the -- they hand over to the estate 42.5 less
21 the cure costs. So we have to deduct those as we go down the
22 waterfall to determine what's left for distributions.
23 THE COURT: All right.
24 THE WITNESS: The next line is estimated -- well,
25 this was Schulte Roth & Zabel fees. This was because in the
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1 Berenson calculations -- or the debtors' calculations, sorry,
2 they -- you know, it was our -- when we're thinking about term
3 loan lender recovery, somebody has to pay Schulte's fees that
4 are not covered under the professional fee carve-out right now.
5 So we deduct that. We deduct the Berenson fee which reflects
6 the DIP fee that was already provided to that. And we deduct
7 the Miller Buckfire -- I guess I'd probably call it a
8 transaction fee, the success fee.
9 THE COURT: I think that's probably very wise.
10 THE WITNESS: Yeah. So you have the required
11 payments by the estate. And then you refer those down to the
12 final part of the waterfall, and you have the cash proceeds.
13 This is pulled over from the other side of the page.
14 THE COURT: Yes.
15 THE WITNESS: Yeah, and then we have, deducting out,
16 the DIP and priority debt obligations. And Schulte would
17 probably want me to remind you that, once again, this is real
18 estate purposes. Then we have the total required commitments
19 by the estate for where we are on adequate protection and what
20 we've agreed to on paying the financial advisors. And that
21 gets us down to a net recovery to the term lender group.
22 THE COURT: All right. Now, we take this to the
23 other --
24 THE WITNESS: So, yeah, we have to take --
25 THE COURT: It's all right.
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1 THE WITNESS: -- the net recovery of the term lender
2 group to take that over to the other side because we have to
3 compare a lot more than just what some stakeholders are
4 receiving in this situation.
5 THE COURT: Okay.
6 THE WITNESS: You have to take a look at what sort of
7 liabilities are being assumed as well. And we have here on
8 this page, once again, the DIP lender recoveries, the term
9 lender recoveries, which we just covered, the professional fee
10 carve-out, which we covered on the other page, the comparison
11 here in the circumstances that we're augmenting our bids with
12 additional compensation or recovery-sharing either to the
13 unsecureds or to fund an additional amount of the
14 administrative payments to the estate. That's that one million
15 figure.
16 We then get down to the assumed liabilities, and this
17 is a number that comes out -- that comes in the spreadsheets.
18 You see it's the same in both cases. So the -- and the
19 reimbursement of required estate expenses, you'll recall that's
20 the -- it's a similar number again here. We have the middle
21 line of the cure costs from Miller Buckfire's analysis, the
22 Schulte fees, Berenson and Miller Buckfire transaction fees.
23 And then we look back and we add it all up.
24 So we have the DIP lender recovery, the term lender
25 recovery, the professional fee carve-out, the incremental
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1 payments to the unsecureds or admin, to the extent that there
2 is any, the assumed liabilities and the required estate
3 payments. And then you come up with what we view to be the
4 comparative proceeds to the estate. And at this point, we
5 think the difference is around twenty-three million.
6 There's -- I've seen another number prepared by the debtors'
7 financial advisor. It's closer to fifteen million. One of the
8 reasons why the difference was less was they were taking their
9 high -- I would say their quite high-end assumption on what
10 they could sell D 56 for a separate -- on a separate basis.
11 They, of course, didn't -- they didn't have in the admin
12 payments.
13 THE COURT: I know. Is the D 56 proceeds -- I see
14 them taken into consideration on page 2, in the left-hand
15 columns.
16 THE WITNESS: Yes.
17 THE COURT: Are they taken into consideration on page
18 1?
19 THE WITNESS: They are. They're effectively built
20 into the term lender recovery.
21 THE COURT: Your recovery is higher, in your view,
22 because you're assuming you get those proceeds, is that -- so
23 they're built into the nineteen million dollar --
24 THE WITNESS: They're built into the --
25 THE COURT: The forty-four million dollar number?
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1 THE WITNESS: They're -- well, the -- in the
2 circumstance where we credit bid and we acquire the D 56
3 assets --
4 THE COURT: Yes?
5 THE WITNESS: -- then we may choose to sell the
6 assets on a go-forward basis. If we do, that will provide
7 liquidity to our go-forward business. In the KPS bid, to keep
8 this sort of apples to apples, we've assumed that the estate
9 has sold the liquidated D 56 and has come up with cash proceeds
10 up 5.75 million. So this is -- what's run on page 1 is the
11 midpoint case --
12 THE COURT: Right.
13 THE WITNESS: -- of what's on page 2 there. And so
14 part of that 22.3, in a KPS scenario, is 5.7 from the
15 monetization of D 56. You know, this is -- once again, it's
16 midpoint. We think it's very -- frankly, I think that's
17 aggressive, but we'll have to see what the --
18 THE COURT: So both the -- in your methodology, both
19 the 22.3 million dollar term lender recovery for the KPS bid
20 and the 44.5 million dollars, as you characterize the term
21 lender bid, both of those numbers include, for comparative
22 purposes, an assumed 5.75 million for the hypothetical D 56
23 proceeds?
24 THE WITNESS: There's not a particular monetization
25 assumed in a credit bid. We own it. And subsequently if we
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1 choose to sell, we'll sell it. I guess you could say it's part
2 of the value that we are acquiring. But it's not an individual
3 component of that item. However, in the KPS bid, we -- you
4 know, this is not a standalone entity. It has to be sold to
5 another party at this point or liquidated. The real estate,
6 which is the Eden Prairie facility, has to be sold. And those
7 proceeds will, on this analysis, go to the term lenders.
8 THE COURT: So does the 22.3 hypothetical recovery to
9 the term loan lenders on the KPS bid include a hypothetical
10 5.75 million for D 56 proceeds?
11 THE WITNESS: Yes.
12 THE COURT: All right. Now, in your forty-four
13 million dollar number --
14 THE WITNESS: Right.
15 THE COURT: -- does that number include the value of
16 D 56 on the same basis?
17 THE WITNESS: Well, it does in that we value the debt
18 that we are credit bidding, and we've submitted that and we've
19 taken the business on.
20 THE COURT: But if we took D 56 out of the equation
21 on both sides, would we subtract 5.75 from the 22.3 and from
22 the 44.5 from both sides --
23 THE WITNESS: Well, if you --
24 THE COURT: -- from both columns?
25 THE WITNESS: It's a little bit of an apples and
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1 oranges-type situation.
2 THE COURT: Well, I'm trying to get apples to apples,
3 which is why -- I'm not asking the question for any other
4 purpose.
5 THE WITNESS: Okay. You --
6 THE COURT: Your credit bid includes the value of
7 D 56 premised on the same analysis as you have on page 2, is
8 that correct?
9 THE WITNESS: We're -- I -- yeah.
10 THE COURT: Your credit bid includes --
11 THE WITNESS: Yeah.
12 THE COURT: -- more assets than the --
13 THE WITNESS: Yeah, that -- yes.
14 THE COURT: -- cash bid --
15 THE WITNESS: Sorry. Yes, it does.
16 THE COURT: -- of KPS?
17 THE WITNESS: Yes, it does.
18 THE COURT: All right. So it's in both sides.
19 THE WITNESS: Yeah.
20 THE COURT: So you basically --
21 THE WITNESS: You could sort of see that.
22 THE COURT: You grossed up your hypothetical recovery
23 from KPS to create a comparison that you believe is accurate or
24 fair?
25 THE WITNESS: This is a fair comparison. There's --
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1 as I mentioned, we have some issues with some of the line
2 items, but this is a fair side-by-side comparison.
3 THE COURT: All right, now, I understand the cash
4 that is being put up by KPS -- let me understand the cash that
5 you're putting up, which is what we've been talking about for
6 the past couple of hours. In order to make this work,
7 assuming, arguendo, that the DIP lenders were entitled to get
8 paid, to get cashed out altogether, you'd have to come up with,
9 and I'm going down the line here, 21.8 million dollars of cash
10 for the DIP lenders on that assumption?
11 THE WITNESS: Yes.
12 THE COURT: Is that correct?
13 THE WITNESS: Yes.
14 THE COURT: You're going to have to come up with two
15 million dollars in cash for the carve-out?
16 THE WITNESS: Yes.
17 THE COURT: That's 23.8.
18 THE WITNESS: Um-hum.
19 THE COURT: Another two million for the estate. I
20 believe the one million number is now two.
21 THE WITNESS: That's the offer, yeah.
22 THE COURT: All right. So that's 25.8 --
23 THE WITNESS: Um-hum.
24 THE COURT: -- is that right? 25.8. Don't let me do
25 any of the math. Okay. Assumed liabilities.
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1 THE WITNESS: That's the --
2 THE COURT: That's not a cash item on either side.
3 Tell me what the assumed liabilities are as far as you
4 understand them.
5 THE WITNESS: Assumed liabilities are going to be the
6 payables of the company, the amount that --
7 THE COURT: These are the post-petition payables?
8 THE WITNESS: Yes. Yeah.
9 THE COURT: All right.
10 THE WITNESS: Other various accrued liabilities.
11 THE COURT: All right. We have, next, cure costs.
12 That's a cash item for both parties, is it not?
13 THE WITNESS: Yes, it is.
14 THE COURT: Although, I gather, the cure costs for
15 the KPS bid comes out of their gross bid, is that right?
16 THE WITNESS: That's right.
17 THE COURT: And in your bid?
18 THE WITNESS: It doesn't come out of our bid, but we
19 still have to fund it.
20 THE COURT: You have to fund it.
21 THE WITNESS: Yeah.
22 THE COURT: You have to fund your own lawyers' fee --
23 THE WITNESS: Yeah. Yeah.
24 THE COURT: -- the Berenson so-called success fee
25 that was --
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1 THE WITNESS: Yeah.
2 THE COURT: -- compromised, the Miller Buckfire
3 transaction fee, as it's more appropriately called.
4 THE WITNESS: Yeah.
5 THE COURT: All right. So we have an idea, then, of
6 the amount of cash is 25.8 million plus --
7 THE WITNESS: It's thirty-one --
8 THE COURT: -- cure costs plus the other fees.
9 THE WITNESS: It's 31.5.
10 THE COURT: 31.5. All right.
11 THE WITNESS: And we actually -- obviously we don't
12 have it today in front of us right now, but we have a sources-
13 and-uses piece of paper, in fact, and that number, what we just
14 did in our -- on real time, subscribes to that. So we've
15 raised sixty-eight cash, right? We have our 25 from our debt
16 commitment, our 35 from our equity commitment, and we have now
17 28.5 of liquidity.
18 THE COURT: All right. All right, thank you. I'm
19 sorry I've interrupted your questioning.
20 MR. AUSTIN: You asked the level of questions that I
21 was going to ask, Your Honor. I have no more questions.
22 MR. HARRIS: Your Honor, we have a couple questions
23 on redirect, if that's okay.
24 THE COURT: Sure.
25 REDIRECT EXAMINATION
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1 BY MR. HARRIS:
2 Q. Mr. Doak, I must admit I'm a little bit confused. We've
3 heard a lot of argument today and some testimony about the
4 potential issues with respect to the go-forward liquidity of
5 the term loan lenders' company should they win this bid. You
6 were in the courtroom when you heard a lot of that?
7 A. Yes.
8 Q. And you were actually asked some questions earlier about
9 the potential tightness of liquidity at some points during the
10 year based upon a set of forecasts that have been prepared?
11 A. Yes, I was.
12 MR. PEREZ: Your Honor, two objections. One, I think
13 the question is leading. And second, although I recognize
14 that -- I also practice in Texas, but we generally don't get to
15 have two persons question the witness at the same time.
16 THE COURT: Well, no, I think that's generally a good
17 rule. As for the leading part of it, I do think that -- this
18 is redirect, so I think -- and it's also late in the day, so I
19 think, on both scores, there's no jury here and I don't think,
20 unless the parties sitting in the jury box would like to act as
21 jurors -- I'd be happy to turn this matter over to them -- but
22 we don't have a jury here, so why don't we let the question be
23 asked, and I'll ask the questioner to avoid being too leading
24 under the circumstances.
25 MR. HARRIS: I will do my best, Your Honor.
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1 BY MR. HARRIS:
2 Q. The issue of delinking has come up and you were questioned
3 about that. Do you recall that question?
4 A. Yes.
5 Q. Okay. What is your understanding of what it is the
6 debtors wanted in terms of the delinking?
7 A. The debtors wanted the equity commitment letter to remove
8 provisions -- remove the condition associated with the debt
9 commitment letter.
10 Q. Do you recall whether the debtors took a position as to
11 whether they would deem the term lender bid qualified if they
12 delinked the equity from the debt?
13 A. The debtors represented that they would consider the bid
14 qualified.
15 Q. With a thirty-five million dollar equity commitment
16 standing by itself, is that right?
17 A. That's correct.
18 Q. Mr. Doak, how, if you can, do you reconcile the debtors'
19 willingness to accept a thirty-five million dollar equity
20 commitment as the sole funding source and be a qualified bid
21 when we're having conversations today about whether sixty
22 million dollars is enough?
23 A. I don't think I can -- I can't really reconcile the two.
24 Q. Mr. Perez asked you a question about --
25 MR. HARRIS: Strike that.
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1 Q. When you look at Term Lender 39, other than the recoveries
2 to the term lenders, is every other constituency under the term
3 lender bid receiving cash?
4 A. Yes. The way this is structured, they are.
5 Q. And the same is true under the KPS bid except the term
6 lender recovery is also in cash, is that right?
7 A. That's correct.
8 Q. Have you had any conversations with any of the term
9 lenders about whether they prefer to take the equity of the
10 company at an implied value of forty-four and a half million
11 versus the KPS cash?
12 MR. PEREZ: Two objections, Your Honor. Hearsay, and
13 it's leading.
14 THE COURT: Well, I'll overrule the second objection.
15 The first objection, he represents the group, and I think he --
16 unless we got every single member of the group to come in,
17 which is impractical, I think, he can state what he knows about
18 the position of the group, and he has been, I think,
19 throughout.
20 MR. HARRIS: I can rephrase the question, Your Honor.
21 Q. Has the term lender group expressed to you --
22 MR. HARRIS: Strike that. I'll strike that.
23 Q. If the term lender group wanted to accept the KPS bid and
24 the cash that's offered, could they do that right now?
25 THE COURT: I think I can take judicial notice of
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1 that. And if they do, would you please let us know before this
2 goes on any longer?
3 MR. HARRIS: I'm going to ask if I can open the
4 question now, Your Honor.
5 A. Yeah, we could. Yes, we could all end this.
6 Q. And can you infer from the conduct of the lenders as to
7 whether they would prefer the equity in this company versus the
8 KPS cash of these recovery letters?
9 A. The lenders would prefer to acquire the company.
10 Q. Mr. Doak, what was your role in negotiation of the bid
11 procedures that were approved by the Court back in December of
12 2008?
13 A. I reviewed and provided my commentary and dialogue with
14 the term lenders and Schulte in regards to what was getting put
15 together in the original bid procedures and then was -- then
16 also participated in the process as they were subsequently
17 modified when -- before the Court.
18 Q. Based on your involvement in the negotiations of those
19 procedures, did you, based upon your experiences as an
20 investment banker of Miller Buckfire, have an expectation of
21 what it was that needed to be delivered in order to be a
22 qualified bidder at the auction on the 11th?
23 MR. PEREZ: Your Honor, this is redirect now, and it
24 really goes beyond both the scope of the direct --
25 THE COURT: I think we are getting -- I'll let this
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1 question be asked, but I think we're getting into repetitive
2 testimony.
3 A. Our belief, based on the language that was in the bid
4 procedures, the behavior of the debtors and their professionals
5 coming into the auction and during the course of our due
6 diligence and then our would-be lender's due diligence, was
7 that coming forward with commercially, I would say, standard
8 commitment letters would be an acceptable form of committed
9 financing. When -- I participated in auctions where that is an
10 acceptable form, and we were surprised when we found out that
11 it was not here.
12 MR. HARRIS: I have no other questions, Your Honor.
13 Thank you.
14 MR. PEREZ: One question.
15 THE COURT: All right.
16 MR. PEREZ: Actually, two questions.
17 RECROSS-EXAMINATION
18 BY MR. PEREZ:
19 Q. If you knew that, by delinking, your bid would be
20 qualified, why didn't you delink?
21 A. As I mentioned earlier when we were speaking, we felt that
22 the bid that we had, which should be valued as a sixty million
23 dollar financing financed bid, was a qualified bid. And,
24 frankly, as we have seen, it's sort of good to be paranoid in
25 this situation because we were concerned about why the debtors
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1 would want us to do that. The -- we had a qualified bid, so we
2 thought we didn't need to make the change to move on to the
3 auction.
4 Q. Okay.
5 MR. PEREZ: That's all. Thank you, Your Honor.
6 THE COURT: All right. Anything else?
7 MR. HARRIS: May the witness step down, Your Honor?
8 THE COURT: Yes, the witness may step down. Thank
9 you, Mr. Doak. You may step down.
10 THE WITNESS: Thank you.
11 MR. HARRIS: Your Honor, may I have just a minute to
12 confer with my clients as to whether -- we do have additional
13 witnesses we're intending to put on to rebut the testimony on
14 the issues of the financial projections. We think we've
15 addressed the Court's issue with respect to -- going to the
16 issue of why the Court should use its discretion to reopen the
17 bidding based upon Mr. Doak's testimony, but we'd be happy to
18 put on additional witnesses relative to other matters on the
19 projections and so forth that parties have called into question
20 here today, even though, given the debtors' own admissions that
21 they would have qualified the bid with a simple thirty-five
22 million dollar commitment. It's not entirely clear why that
23 issue was even relevant, but we are happy to put on testimony
24 to that effect.
25 THE COURT: Well, I think you have to decide what
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1 testimony you want to put on, but you certainly can have a
2 break to consult with your colleagues. I think we should bring
3 these -- I mean, it's now, obviously, 6:10. Parties here may
4 have other commitments. I'll go -- I'll start tomorrow morning
5 if you do want to put on other testimony. I'm afraid, though,
6 if I put this over till tomorrow, you'll be more inclined to
7 put on more witnesses tomorrow.
8 MR. HARRIS: Your Honor, I --
9 THE COURT: I think we should bring this to a
10 conclusion and I should rule one way or another, after which
11 we'll either have a confirmed sale or we'll have an auction on
12 the spot. I just want to let -- I think I've said that before,
13 but I want to reiterate that. I really don't want to bring
14 everybody back. Certainly the businesspeople have better
15 things to do in terms of running the company. But I don't know
16 if the parties really want to go any later into the evening.
17 MR. PEREZ: Your Honor, we'll certainly be guided by
18 your instructions. But when we first started this, I thought
19 this was really limited testimony as to whether the bid was
20 feasible. We did not -- this testimony went to what happened
21 at the auction. We certainly --
22 THE COURT: I don't think -- as I understand -- I
23 did, I listened to the testimony. I don't think there is any
24 dispute, in my view, as to what happened at the auction. I
25 have a transcript which is -- I don't know whether it's in the
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1 record, but I read it. I don't hear any dis -- I hear a
2 dispute as to the implications of what was done and what should
3 have been done, but I don't think there's any dispute as to
4 what one party said to another --
5 MR. PEREZ: Right, and we would --
6 THE COURT: -- and what happened.
7 MR. PEREZ: Right. We would have about ten minutes
8 of testimony as to our business judgment as to --
9 THE COURT: If you wanted --
10 MR. PEREZ: -- the delinking.
11 THE COURT: If you want to put another spin on that
12 and complete the record --
13 MR. PEREZ: Yeah.
14 THE COURT: -- you're absolutely entitled to do so.
15 We did get into a lot of the testimony that I think was
16 projected for yesterday and that I had hoped that we would not
17 necessarily need at all. But you have clearly, as do the other
18 parties, an opportunity to make whatever record you deem
19 appropriate and necessary under the circumstances. But the
20 only question now -- and so do the term loan lenders, the only
21 question now being do we continue after a five-minute break
22 into the evening or do we start again at 10 tomorrow morning?
23 MR. HARRIS: Your Honor, subject to Your Honor --
24 THE COURT: I have all day tomorrow; it's probably
25 the stupidest thing to tell the group here. I should say I
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1 have only a very limited amount of time tomorrow, but, in fact,
2 I'll be forthright, I have all -- I have one telephonic
3 conference at 10 tomorrow, and we can start at 10 or we can
4 start at 10:15.
5 MR. PEREZ: Your Honor, I think our testimony would
6 literally be ten minutes, at most.
7 THE COURT: All right.
8 MR. PEREZ: And --
9 THE COURT: And do you want to put that on today so
10 you don't have to have people come back tomorrow and -- is that
11 what you'd like to do?
12 MR. PEREZ: I would, Your Honor, if poss -- subject
13 to the que -- I mean, we'll --
14 THE COURT: And it has to do not with the projections
15 but with the --
16 MR. PEREZ: The conduct of the auction.
17 THE COURT: The conduct of the auction and
18 Mr. Doak's --
19 MR. PEREZ: -- characterization.
20 THE COURT: -- testimony and characterization. Any
21 objection to that? And then tomorrow you can let me know if
22 you want to rest or if you want to put on a witness on the
23 other issues. And clearly you can put on a witness on whatever
24 issues you have.
25 MR. HARRIS: Your Honor, I think that, subject to
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1 Your Honor's availability, we're happy to come back tomorrow.
2 I think that it would be the best for everybody in the
3 courtroom if we could have the opportunity to conclude the
4 testimony tonight. I don't know how late Your Honor's prepared
5 to stay. We'll obviously go with whatever Your Honor wants to
6 do in that accord, but there are obviously a lot of people
7 here. We are prepared to conclude with --
8 THE COURT: How long will your witnesses take?
9 MR. HARRIS: My guess is a half hour, a half hour --
10 THE COURT: How many -- who are you talking about?
11 How many witnesses?
12 MR. HARRIS: Well, we have two people from Clarion,
13 Your Honor: the individual who actually was principally
14 responsible for putting these projections together that had
15 been called into question here today, and then the managing
16 director of Clarion to basically testify as to the bona fides
17 of his firm and the commitment that they're putting into this
18 particular transaction.
19 MR. PEREZ: You know, I --
20 MR. HARRIS: So -- which, you know, Your Honor, when
21 we broke just before the lunch break, Your Honor, Your Honor
22 made what I thought was a very important comment, not that all
23 Your Honor's comments aren't important. This one was
24 particularly insightful relative to where I thought we were
25 going this afternoon. And Your Honor said something to the
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1 effect that I've heard something about the bids themselves and
2 what might be -- taking into account for determining what's
3 higher or better, but I haven't really heard any testimony
4 about why I should exercise my discretion to consider reopening
5 the auction. We believe Mr. Doak's testimony went to the heart
6 of that issue, particularly with respect to the analysis of the
7 various recoveries to both the estate, all the other parties-
8 in-interest and to the lenders.'
9 We all understand what happened at the auction. I
10 shouldn't say that. We understand the actual facts of what
11 happened at the auction. We don't all agree on why they
12 happened or understand the decisions as to why they were made.
13 And we could spend a lot of time actually getting into those
14 issues because, I think, in the deposition testimony, a lot of
15 those issues, and some very serious issues, came out of that.
16 But I guess the question, really, to Your Honor is the question
17 of the exercise of the debtors' business judgment at the
18 auction is a given. They reached a conclusion. It is what it
19 is. We have --
20 THE COURT: Well, if Mr. Perez wants to put on a
21 witness for ten minutes or so so he doesn't have to bring him
22 back tomorrow, I don't think that's going to break the camel's
23 back, although I perhaps should use Latin instead of an analogy
24 like this. Just, though, let me ask you a question. You just
25 said the values and your offer's so much better than theirs. I
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1 understand that you've attributed a much better recovery to the
2 term loan lenders from your offer. But both parties are
3 putting up a certain amount of cash --
4 MR. HARRIS: Correct.
5 THE COURT: -- and getting certain proceeds for that
6 cash and getting into the game. Your credit bid that gets you
7 up to a recovery of 44.5 million is entirely a credit bid.
8 It's entirely your client's sunk money. You could have bid, I
9 gather, based upon the amount of debt you have, doubled this
10 and --
11 MR. HARRIS: 98.5, Your Honor. We could have --
12 THE COURT: -- and you would show a credit bid, and
13 your recovery on this analysis would be not 44.5 million but
14 88, 89 million.
15 MR. HARRIS: We could have --
16 THE COURT: Yeah. Theoretically.
17 MR. HARRIS: -- Your Honor. 363(k) contemplates that
18 you could do that. What I think that analysis shows, Your
19 Honor, is that every other creditor of this estate is
20 absolutely agnostic subject to closing risk between these two
21 bids. The only people who are affected which way we go --
22 THE COURT: Except for the two million dollars that
23 you're putting in for the benefit of the estate --
24 MR. HARRIS: That's correct.
25 THE COURT: -- and as to which the debtors have
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1 not -- they haven't given me any indication of how they're
2 going to prevent administrative insolvency for this estate if
3 the KPS bid is accepted.
4 MR. HARRIS: That's correct, Your Honor, and I think
5 the -- it's not an inference. The fact is that the term
6 lenders said we're prepared to deal with every other creditor
7 of this estate the same way KPS is. We're prepared for two
8 million dollars on the table for the -- did you say --
9 THE COURT: All right. Just as long as I understand
10 the -- I am trying to get the bids to match apples to apples
11 and oranges to oranges.
12 MR. HARRIS: It simply comes down to this, Your
13 Honor: The term lenders would prefer to own and operate the
14 business than get cashed out for twenty-one million dollars.
15 That's really what it comes down to. And that's what 363(k)
16 sort of says that they can do with their secured claims.
17 THE COURT: All right. I'm going to take a five-
18 minute break. The parties can discuss scheduling, exactly how
19 long you're likely to take. I am somewhat reluctant to go to 7
20 or 8 in the evening if we're going to have to come back
21 tomorrow anyway. But if certain parties have to leave town or
22 get back to more pressing matters, such as operating this
23 business as well as possible, and if anybody has twenty minutes
24 of testimony, I'm not going to say -- I'll certainly stay for
25 that.
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1 MR. PEREZ: And, Your Honor, with respect to the
2 witnesses that he's just identified, we asked him to tell us
3 who he was going to present at this hearing. We produced all
4 of our witnesses. We're only going to call two of the four
5 that we produced. We were told that there were going to be two
6 witnesses: Mr. Doak and Mr. Calabrese. Those other witnesses
7 have been well-known. For him to say now that he's going to
8 present these witnesses where we had no opportunity to depose
9 them, when we were never told there would even be the
10 possibility that they would be called, is not appropriate, Your
11 Honor.
12 MR. HARRIS: Your Honor, speaking to that point, the
13 issue of financial capability of the residual company has never
14 been an issue in this case until it was first brought, frankly,
15 today. The debtors, at the auction, were prepared to qualify a
16 thirty-five million dollar equity-only bid to go forward in
17 terms of an auction and, presumably, if it were determined to
18 be the high bid, to close on it. So there's no inference in
19 that gesture of any concern about what happens the day after.
20 They can tell you that they assumed that we would do certain
21 things, that we would make sure that our debt financing closed,
22 but their own conduct, Your Honor, basically said we're going
23 to leave it to you to make sure it happens correctly. And for
24 them now to raise all these issues about financial capability
25 and liquidity and other things is never raised in a single
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1 piece of paper that they ever filed with you. So we're simply
2 responding to this in real time.
3 THE COURT: In fairness, some of the issues have been
4 raised by the creditors' committee, which has expressed
5 particular concern about the future of the company. These are
6 new issues. You've convinced me that we should take them up
7 perhaps at the earliest, tomorrow, not tonight, so the others
8 get a chance to regroup. On the other hand, in terms of
9 depositions, I don't think that there's a question here about
10 credibility or that any party is going to be particularly at a
11 disadvantage because of depositions.
12 So I'm going to take that five-minute break. And if
13 the debtors want to call one witness who's not going to be
14 available tomorrow, I'll hear him. If he's going to be here
15 tomorrow and we can take him tomorrow in order, then maybe we
16 should stop, you know --
17 MR. PEREZ: Let met just confer, Your Honor.
18 THE COURT: -- for the night, and -- well, I'll still
19 take that break.
20 MR. PEREZ: Okay.
21 THE COURT: You can certainly -- you can all confer.
22 If you want to start again tomorrow, send a -- actually, you
23 don't have to send a representative down because the messenger
24 will not be shot. But if you come down and tell me you want to
25 start up again, I'll assure you the messenger won't be shot.
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1 MR. PEREZ: Thank you, Your Honor.
2 THE COURT: Thank you.
3 (Recess from 6:20 p.m. until 6:38 p.m.)
4 MR. HARRIS: Your Honor, just a housekeeping matter,
5 if we can, for just one second. Mr. Klein needs to catch a
6 plane back to Chicago tonight, and we need him to put a
7 statement on the record before he leaves. There's been a back-
8 and-forth debate between the debtors and the term lenders in
9 trying to finalize the asset purchase agreement, which I
10 understand is basically down to two items. One is that the
11 company is requesting that there actually be an executed copy
12 of the term loan agreement attached to the asset purchase
13 agreement. Mr. Klein has asked to address the Court and make
14 certain representations relative to trying to close the gap
15 between the two parties on that issue. We thought the company
16 were prepared to -- that we would attach it in what is
17 substantially final form. The company wants it signed. There
18 are reasons why it can't be signed right now, but Mr. Cohen
19 (sic) would like to -- Mr. Klein would like to make a
20 representation on the record on behalf of LBC relative to that
21 issue so he can then, if Your Honor is okay with it, be excused
22 and try and make his plane.
23 THE COURT: And what's the other dispute relating to
24 the asset purchase agreement?
25 MR. HARRIS: The other dispute, Your Honor, believe
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1 it or not, is a request by the term lenders that the company
2 provide a representation that it has no actual knowledge which,
3 under the terms of the agreement, doesn't require any inquiry
4 or diligence on their part. It's the actual knowledge of
5 certain individuals that no customer or supplier, to their
6 knowledge, has basically told them they were going to stop
7 doing business with the company. And a breach of that rep
8 would only give us a right to not close if it rose to the level
9 of material adverse effect. The company's position basically
10 is we're not going to give you that, it's not in the KPS deal,
11 we shouldn't have to do it. We think it's a fairly
12 straightforward representation, pretty typical of asset
13 purchase agreements. It's got -- and the e-qualifier on it, so
14 it would have to be an inordinately large problem before we
15 could even begin to take the position that we had a right to
16 not close on it.
17 But I believe those are the only two issues that
18 still remain outstanding.
19 MR. PEREZ: Your Honor, this is a company that's in
20 bankruptcy. Having a representation that people -- that
21 customers or suppliers aren't threatening to leave, it just
22 doesn't make sense. I mean, it's not in the KPS deal, Your
23 Honor, so --
24 THE COURT: I would have hoped we would have been
25 beyond this. You know, you're either going to have a clean
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1 deal or you're not. You don't have to do it this moment, but I
2 do think we need a clean deal going forward. But if you want
3 to have your witness state why he can't provide a signed copy
4 today, you're certainly entitled to do that.
5 MR. HARRIS: Your Honor, counsel for LBC is here and
6 he'd like to --
7 THE COURT: All right. Sure.
8 MR. HARRIS: -- make a representation on the record.
9 MR. RANDALL KLEIN: Thank you, Your Honor. Randy
10 Klein on behalf of LBC Credit Partners, the entity that has
11 provided the debt financing commitment. After the break this
12 afternoon, our client was asked to sign the form of credit
13 agreement in favor of the borrower, who has not yet been
14 declared the winning bidder, to finance and close on a
15 transaction that is not yet set to close and won't until March.
16 The credit agreement itself is set up as a sign-and-
17 close document contemporaneously. We understand the parties'
18 concerns about the form of the credit agreement. And what I
19 had proposed to Mr. Perez right before Your Honor came back on
20 the bench was that we would attach the form of credit agreement
21 that has now been finalized to the commitment letter that
22 Mr. Calabrese previously executed. We will initial the
23 commitment letter that it refers to the form of a credit
24 agreement attached to the commitment letter. Mr. Calabrese
25 will initial the commitment letter and deliver that original to
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1 Mr. Perez as evidence of our commitment.
2 And I will also state on the record that in the event
3 that LBC's borrower is declared the winning bidder, LBC will
4 then fund in accordance with the terms of the commitment letter
5 and the attached credit agreement at the time of closing in
6 accordance with the terms of that loan document.
7 THE COURT: And the reasons why the document can't be
8 signed today are?
9 MR. KLEIN: The primary reason, Your Honor, is that
10 we don't have -- literally, if this were an ordinary
11 transaction there would have been two dozen documents that are
12 referred to in any credit agreement that are requirements of
13 closing, things as innocuous as a secretary certificate and the
14 like, and delivery of all those ancillary documents. And we've
15 done the best that we can to describe the substantially all of
16 the material ancillary document that are going to have to be
17 documented and signed in connection with any credit agreement.
18 But frankly, we think it would be irresponsible for us to sign
19 a document committing our client to fund money when we don't
20 have all of those documents in their final form, because we're
21 not at a closing table.
22 But if we are committed contractually, no differently
23 than the loan agreement pursuant to the commitment, we think
24 economically it's the same. And when I related this
25 alternative to Mr. Perez, he said he would confer with his
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1 corporate counsel to see if it was satisfactory. And his
2 primary concern, at least expressed to me, was he wanted an
3 original commitment letter signed by my client?
4 THE COURT: And he has that?
5 MR. KLEIN: That's what I'm going to deliver now.
6 THE COURT: In the courtroom?
7 MR. KLEIN: Yes, Your Honor.
8 THE COURT: All right. Well, let's get that done.
9 MR. KLEIN: Okay.
10 THE COURT: But you can certainly do it after we
11 close the record today. But let's get that done.
12 MR. PEREZ: Does that include Clinton, who's
13 providing 7.5 of the 25 million?
14 MR. KLEIN: I'm seeing representatives of Clinton-
15 Magnolia nod their head, Your Honor, so I think the answer's
16 yes.
17 THE COURT: All right. Well, let's get that done.
18 You know, I did think we were beyond some of my cases where the
19 parties bring the money order with them to court and only turn
20 it over to the landlord when they get here. But I hope that
21 the relations between the parties are better than that going
22 forward. I know everyone -- you know, emotions run high.
23 Certainly everyone in this proceeding has been extremely
24 professional. And I'm assuming that that will continue no
25 matter which way I rule or any other court rules.
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1 All right, now. I have that representation on the
2 record. I'll take any other comments on that. Or if you're
3 ready, Mr. Perez, to call your witness. And I don't know when
4 the last plane to Chicago leaves, but you're welcome to leave
5 at any time. I'm told it's going to be twenty minutes.
6 MR. KLEIN: Thank you, Your Honor.
7 THE COURT: If we keep you here, you might prevail on
8 your colleagues to keep their cross examination very brief.
9 MR. PEREZ: Your Honor, I would call Sam Zughayer.
10 THE COURT: All right. Please state your name for
11 the record.
12 THE WITNESS: Sam Zughayer.
13 THE COURT: And would you spell your last name?
14 THE WITNESS: Z-U-G-H-A-Y-E-R.
15 (Witness sworn)
16 DIRECT EXAMINATION
17 BY MR. PEREZ:
18 Q. Good afternoon, Mr. Zughayer.
19 A. Good evening.
20 Q. You've testified before this Court before, correct?
21 A. I have.
22 Q. And at that time you gave your educational background and
23 job employment. Has anything changed since that time?
24 A. Yes, I think so. I'm now a managing director at Berenson
25 & Company.
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1 Q. Thank you. Would you please turn to Exhibit number 4,
2 please? I think it's opened in front of you?
3 THE COURT: Did that happen before or after the
4 transaction fee was approved by the Court?
5 THE WITNESS: Probably simultaneous, Your Honor.
6 Q. Do you have the bid procedures in front of you?
7 A. Well, Exhibit 4 is the order.
8 Q. Yes. Just go back a couple of pages behind it.
9 A. Can you tell me which page?
10 Q. Would you identify what that document is?
11 A. Showing the bidding procedures that were negotiated by the
12 debtor, the DIP lender, the term lenders and the UCC.
13 Q. Okay. And were those the bid procedures that you used in
14 connection with the sales process?
15 A. They were.
16 Q. And in connection with the sales process, did you expend a
17 considerable time and energy in conducting the sales process?
18 A. We did.
19 Q. Could you tell the Court very briefly what you did?
20 A. Sure. In advance of -- about a year before, or January of
21 '08, we commenced a sale process to sell Lenox in its entirety.
22 We contacted almost a hundred potential buyers. We signed
23 dozens of CAs. We had over a dozen management presentations.
24 And during that period we were running into some fairly strong
25 headwinds with respect to what was going on in the market
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1 generally, especially in the consumer discretionary environment
2 and what was going on in Lenox.
3 I believe the EBITDA of the business when we started the
4 sale process was about 35 million, and when we concluded it, we
5 predicted it to be about 14. So that had a deleterious impact
6 on the process
7 Q. Okay. Let me fast-forward you. These bid procedures were
8 entered by order dated December 16. What did you do with
9 respect to the sales process after the bid procedures were
10 entered?
11 A. Well, we leveraged as much as we could off the original
12 sale process. We had good market information and good
13 intelligence on which potential financial and strategic buyers
14 were interested in these assets. So we were able to conduct a
15 more concentrate and focused auction, given that we knew we had
16 a truncated timeline. And we thought we could do it in a very
17 robust way. So we hit the ground running, if you will. And we
18 had a good mix between strategic buyers, financial buyers, that
19 were interested in the entire business. And certain buyers
20 that were just interested in the Lenox assets, and some buyers
21 were just interested in the D56 assets.
22 Q. When it came time on February 6th, how many bidders
23 submitted bids for the Lenox assets?
24 A. On February 6th we had two bidders that submitted bids for
25 the entire Lenox assets -- for the Lenox business.
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1 Q. Okay. Did any liquidators or so-called liquidators submit
2 a bid?
3 A. No. We had four liquidators as part of the process. One
4 liquidator submitted an engagement letter and was requesting to
5 be retained to sell the assets for a fee. But no liquidators
6 stepped up and wanted to commit equity out of capital. So sell
7 the business.
8 Q. All right. Now, let me show you paragraph number 1 of the
9 bid procedures. What does paragraph 1 set forth?
10 A. It's the timetable by which was would run the sale process
11 and the subsequent auction.
12 Q. Does that have the various dates and timeline?
13 A. It does.
14 Q. Now, could you please read paragraph (g) into the record?
15 A. 1(g)?
16 Q. 1(g)
17 A. "As set forth herein to be a qualified bidder, the term
18 loan lenders must satisfy the requirements of Section 3(c)(2)
19 through (6) of these bidding procedures, including obtaining
20 committed financing. Unless and until the term lenders submit
21 a qualified bid, there will be no minimum overbid, as defined
22 below, for qualified bids."
23 Q. All right. Now, did you -- could you describe the bid of
24 the term loan lenders that you received on February 6th?
25 A. Sure. It was effectively a credit bid. I believe they
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1 bid forty-four and a half million dollars. And decided to put
2 a series of cure costs, some professional fees.
3 Q. Was it accompanied with any debt or equity commitment?
4 A. It was not.
5 Q. Did you subsequently receive any --
6 A. Well, let me -- I'm sorry, let me restate that. As part
7 of the bid they included a twenty million dollar equity
8 commitment or approved equity commitment in their bid letter.
9 Q. And who was that proposed twenty million dollar equity
10 commitment?
11 A. I believe it was Clarion through Trumpet.
12 Q. Okay. So that was twenty million on February 6th?
13 A. Yes. And it was conditioned on a rights offering.
14 Q. Okay. Did you -- and let's talk about -- what's a
15 backstop rights offering? Let's make sure everybody
16 understands what that is?
17 A. I believe they were going to give other members of their
18 group, and we don't -- exactly sure how it came about, because
19 they were fairly opaque about it as they were going through the
20 process. Other members of the group the opportunity to buy
21 into the equity commitment.
22 Q. Okay. Did you receive anything from the term lenders on
23 February 9th?
24 A. We did not.
25 Q. Did you have any discussions with them on February 9th?
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1 A. We had a whole series of discussions with them from
2 February 5th, 6th, 7th, 8th, 9th, 10th.
3 Q. And what were the nature of those discussions?
4 A. On February 5th Adam Harris reached out to us and asked
5 that we delay the auction, or extend the timeline for them to
6 submit proof of financing and delay the auction. I believe the
7 first request was a couple of days. He called back a day or
8 two later and requested that we delay auction, I believe, ten
9 or eleven days, because of their inability to secure financing.
10 I think their financing commitment that they thought they were
11 going to get, just didn't happen.
12 Q. And during this time period were you making any effort to
13 qualify their bid?
14 A. We made every effort possible. We considered the request
15 they gave us. They asked -- to extend the auction we would
16 have needed the consent of the DIP lenders. In our DIP
17 agreement there was a series of milestones in the DIP where we
18 had to conduct the auction pursuant to this timeline. The DIP
19 lenders refused to do that. We discussed it internally and we
20 decided to use our discretion in the bid procedures to allow
21 the term lenders to -- to allow the term lenders extra time to
22 submit proof of financing.
23 Q. And did you, in fact, do that?
24 A. We did. The 9th came and went. The 10th came and went.
25 And at the auction we received some letters late in the day.
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1 Q. All right. Now, what had you received from KPS by the
2 time of the auction?
3 A. Nothing. Well, on KPS, filed the bid procedures. On
4 February 6th we received a letter from them and an asset
5 purchase agreement. On the 9th asked them to clarify some of
6 the language in their letter to reassure us and to belt and
7 suspender the fact that they were going to fund any future
8 working capital to get the business through their equity, which
9 they did. We asked them to show us proof -- show us evidence
10 that they had the wherewithal to do this transaction within
11 their fund, which they did to our satisfaction. They basically
12 followed the bid procedures as stated here.
13 Q. And what about the form of the asset purchase agreement?
14 A. We originally received an asset purchase agreement that we
15 thought had some things in there that we didn't like. But it
16 was, for the most part, close to the form APA. We were fairly
17 pleased with it. During the auction we used the time -- the
18 waiting time that we had to continue to work with them on their
19 asset purchase agreement and got it to a form that was
20 acceptable to us.
21 Q. All right. Let me bring you to the date of the auction.
22 And when was the auction convened?
23 A. Well, it was scheduled to start on February 11th at 10
24 a.m.
25 Q. And who was there at that time?
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1 A. The DIP lenders and the representatives were there. The
2 UCC lawyers and I believe financial advisors were there. We,
3 the debtor, were there. Management. And the financial
4 advisors from the debtor as well Weil was there. Some members
5 of the term lender group came, but they were all waiting for
6 Adam Harris, who showed up an hour late.
7 Q. And was KPS there?
8 A. KPS was there on time.
9 Q. All right. Now, did you -- during the course of the day
10 did you have discussions with the term lenders with respect to
11 their bid?
12 A. Like I said we had -- just to rewind a couple of days. On
13 the 9th we had spoken to them and they told us they were trying
14 to figure it out. On the 10th we had a series of discussions
15 with them. I know they were working on potentially getting us
16 something on the 10th for our view. This was during the period
17 that we -- during the extension period that we gave them. You
18 and I spoke to Adam Harris and, I believe, Adam Fitzner at --
19 from Miller Buckfire on the evening of the 10th, and they
20 suggested that they may change their bid from sale pursuant to
21 a plan to a 363. Why should they pay admin expense if KPS
22 weren't. So we had that discussion, that was a surprise to us.
23 We were waiting around all night to receive a bid so we could
24 analyze it, and get to the auction at 10 a.m. and have two
25 bids, we can have a competing auction. I believe I e-mailed
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1 Adam Fitzner on midnight -- right before midnight on the 10th
2 and asked where was your bid. He told us one wasn't coming.
3 We decided to go home and get a few hours of sleep and hope
4 they would give us something the morning of the 11th.
5 Q. All right. Let's move to the date of the auction. What
6 was the first document that you received from them the date of
7 the auction?
8 A. The first document we received from them was an equity
9 commitment letter.
10 Q. And was that equity commitment letter acceptable to you as
11 drafted?
12 A. No.
13 Q. And why was that?
14 A. Well, when we received the equity commitment letter, I
15 mean, we had -- the DIP lenders reviewed it, the UCC reviewed
16 it, and we, the debtors, both Berenson and Weil, reviewed it.
17 We all, I think, pretty much had the same comments and
18 reconciled our collective comments fairly quickly. It was a
19 letter that was highly contingent on a host of things
20 happening. A rights offering, a DIP financing happening, and a
21 few other things. A few other things was in that letter.
22 Q. Okay. Did you then have subsequent discussions with the
23 term lenders with respect to the equity commitment letter?
24 A. We did. Once we reconciled our comments with the other
25 creditor constituencies, which, again, were pretty much the
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1 same. I mean, the comments overlapped. We went down to their
2 conference room and told them what our issues with their letter
3 was.
4 Q. And did you have discussions and concessions made by the
5 term lenders?
6 A. We did. I think we received the letter sometime
7 afternoon, 12/12:30. We sat down with the term lenders, the
8 first thing we asked them to remove was the rights offering,
9 which they did. That was contingent on a rights offering
10 happening. We told them however -- how you prosecute your
11 rights offering is not a concern of ours. We just want to make
12 sure you have the equity. We then removed a few other issues
13 that we had in the equity letter, which they complied with and
14 we were happy with. The big issue was that the equity
15 commitment was linked to the debt commitment.
16 Q. And when did you receive the debt commitment?
17 A. Later in the afternoon, probably around 2/2:15.
18 Q. And what form did it take?
19 A. Well, the first one we received was missing a page. We
20 had to go back and get the page. And when we finally got the
21 full document it was a -- it was a debt commitment that
22 basically had a term sheet attached to it with lots of
23 conditions.
24 Q. And did you have any concerns about the conditions?
25 A. We did. We had between the equity commitment, the debt
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1 commitment and their asset purchase agreement, we had a
2 condition, upon condition, upon condition. The equity
3 commitment was linked to the debt commitment. Both were linked
4 to the asset purchase agreement. Their asset purchase
5 agreement had a full series of conditions that weren't
6 acceptable to us. And when I say us, I mean the debtor Weil
7 and Berenson, the DIP, and the UCC. There was unanimity in
8 that room about the conditionality of that bid and how -- and
9 the fact that it was unacceptable to us. Especially, in light
10 of the fact that we had KPS sitting in a conference room with a
11 bid that was acceptable to us, waiting while we went back and
12 forth trying to get -- trying to find some way to qualify the
13 term lenders bid, which we were almost desperate to do. We
14 wanted to have a two-horse race.
15 Q. Why did you want to qualify the bid?
16 A. We wanted to put the KPS bid, we wanted to have a
17 competitive auction, and we wanted to do it in a way that was
18 fair. One group followed -- did almost everything we asked
19 pursuant to the bid procedures. And one up to the time we
20 received the letters, did almost nothing we asked.
21 Q. Now -- I'm sorry, go ahead.
22 A. With that said, we used all the discretion allowed to us.
23 All the discretion allowed to us in the bid procedures to
24 continue to give the term lenders more time. Every time we
25 displayed flexibility and in many instances maximum
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1 flexibility, we did it to the benefit of the term lenders and
2 to the detriment of KPS. But we did that so we can have an
3 auction.
4 Q. Now, was there -- did there come a time when KPS was
5 declared the initial bidder at the auction?
6 A. There was.
7 Q. And what time was that?
8 A. I believe it was at 2:18 when we went on record, and
9 declared them as initial bidder.
10 Q. And then what happened after -- between 2:18 and 4:23?
11 A. We announced at 2:18, when we convened all the parties at
12 2:18, which was I guess the official start of the auction. We
13 announced to the parties that we were anointing KPS as the
14 auction starting bidder. We walked the parties through what
15 that bid. We explained to the parties in the room that we were
16 still working with the terms lenders to find some way to
17 qualify their bid. The DIP lenders, Jess Austin, raised an
18 objection as to why we continue to give them more time. KPS
19 was unhappy and asked why we were giving them more time. I
20 said on the record, that this was a long process, this is a
21 tail end of along process. We begged for people's patience as
22 we continued to try to find a way to qualify their bid.
23 Q. Okay. So then what happened after we left the auction
24 room?
25 A. We received the debt commitment letter. I'm not sure if
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1 we received it right before we went into the room or right
2 after. We went to the same process when we received their debt
3 commitment letter and term sheet. We all sat down, we had a
4 fairly heavy markup. We reconciled our markup with the DIP. I
5 believe the UCC was in the room with us. There was unanimity in
6 terms of our view of the conditionality in the letter,
7 especially in the context of the auction, where we had a
8 qualified bidder sitting there ready to go. We went down to
9 the conference room that the term lenders were in and we asked
10 them to address their conditionality issues in the letter.
11 Q. And what did they say?
12 A. Well, Adam Harris became the spokesperson for the group.
13 I'm not sure of all who was in that room, there seemed to be a
14 lot of activity in that room. We were told that this is
15 standard, that we shouldn't be worried about it, that we should
16 just qualify them. We explained to them, look, we have a DIP,
17 we have to abide by these options, we have to close this deal,
18 we're going to run out of cash and we have a bidder who has
19 told us they will walk that day. So we want you to remove
20 these conditions and make it something -- make it consistent
21 with the KPS bid, which had almost no conditions to speak of
22 and an asset purchase agreement that was as close to the form
23 APA that we, the debtor, sent out, as possible.
24 Q. And then after that conversation did you -- did you have
25 any further conversations with the term lenders?
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1 A. Well, they -- to our surprise, I guess -- and maybe not
2 surprise, but we didn't make much headway the second go around
3 when we went down there and walked through the letters. We
4 went back upstairs, we called our chairman of the board, Stuart
5 Kasin, who was powered by the other board of directors to make
6 decisions on behalf of the board. And we explained to Stuart
7 and -- again, when I say we, I believe the UCC was in the room.
8 I believe Tom -- Tom Donnelly from UBS came in the room, the
9 DIP lender. And we explained to Stuart the situation, we
10 walked him through where we were with respect to our inability
11 to remove the conditions. I believe I described it to Stuart
12 as an avalanche of conditions that just gave us no comfort --
13 no comfort that they would eventually close. Especially -- and
14 if history was any guide, given the fact that they couldn't get
15 there on the 6th or the 9th or anytime preceding that, the time
16 we called Stuart, that we -- you know, we should declare KPS
17 the winner. We decided, however, in the abundance of trying to
18 give the term lenders as much opportunity as possible to get
19 qualified -- to get qualified, not announce the lead bidder but
20 to get qualified, that we would simply go down there and ask
21 them to delink their equity commitment from their debt
22 commitment.
23 Q. And why did you do that?
24 A. Well, a couple -- the equity commitment at the time was
25 35,000,000 dollars. That was being provided by Trumpet.
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1 Earlier in the day I asked Jim Doak to explain to me how big
2 Trumpet's fund was and how much money was in that fund. We had
3 gone on their website, it something like 250,000,000 dollars.
4 It looks like they made a bunch of investments out of that
5 fund. So I didn't know how much was left in there. The answer
6 Jim gave me was the answer he gave today, which is I don't
7 know, remarkably. And so we didn't have much comfort there.
8 But, again, in terms of using our -- the flexibility allowed
9 under the bid procedures, we went down and said look, if you
10 delink and we can get one of your parties -- there were
11 multiple parties there with, I think, disparate point of view
12 in that room, to commit thirty-five million dollars, we will
13 qualify you as a bidder. We're not going to announce you as a
14 lead bidder, but we'll qualify you as a bidder in order to
15 continue the auction, give you time to get your ducks in a row
16 with respect to your debt financing, and begin working on
17 trying to reconcile your APA to the KPS APA. That was one last
18 ditch effort, an olive branch we extended out to the term
19 lenders so we can have an auction.
20 Q. And then what happened?
21 A. Adam Harris said no. He went back in the room, I think
22 they consulted amongst each other for five minutes and came
23 back and said nope.
24 Q. And did he give you any reason?
25 A. I'm going to paraphrase here. You know, I think they
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1 didn't want to be on the hook, the equity providers.
2 MR. HARRIS: Objection, Your Honor. Is this
3 speculation or is this supposed to be a recitation of a
4 statement that I actually made.
5 THE COURT: Well, I think he has to state his best
6 recollection of what was said at the time. And if he doesn't
7 have a recollection of exactly what was said then he should so
8 state for the record.
9 MR. HARRIS: I believe the introduction -- the
10 comments he just made, Your Honor --
11 THE WITNESS: Can I rephrase.
12 MR. HARRIS: -- are not intended to actually be a
13 recollection of the exact statement that was made.
14 Q. Let me -- do you have a recollection of what was actually
15 said?
16 A. I don't think it was Adam Harris, I believe Mark Utay when
17 we were discussing the conditionality, suggested that they
18 don't want to be on the hook for the equity commitment if the
19 debt commitment didn't occur. Again, that's paraphrasing. You
20 know, there was a lot going on. But that was my recollection,
21 I believe Simian Gold and Weil's recollection. And it went to
22 the point of the delinking issue. At the end of the day, our
23 view was that the term lenders did not want to delink the
24 commitments because it would have implied more risk than they
25 wanted to take and they wanted to transfer that risk onto the
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1 debtor to the extent that the debt commitment didn't go
2 through. And the debtor was just simply unwilling to take that
3 risk given the truncated time period that we had and the
4 procedures.
5 Q. All right. And did you believe at the time that it was
6 appropriate to ask them to delink?
7 A. I did.
8 Q. And --
9 A. And as did the DIP lenders, the UCC, and my guess is
10 KPS -- KPS was not part of that process.
11 Q. Now, do you believe that you ran a fair auction?
12 A. We did.
13 Q. And why do you say that?
14 A. We followed the bid procedures that were heavily
15 negotiated a few weeks earlier between the parties. We used
16 our discretion within the bid procedures to provide one of the
17 parties that was unable to provide financing, more time.
18 Again, we think that was allowed to us -- that discretion -- we
19 had that discretion through the bid procedures. And we used
20 our business judgment based on the facts that we had at the
21 time to make an informed decision as to who should be the
22 ultimate winner of the auction.
23 Q. Do you believe that if you had not taken the KPS bid and
24 the term lenders had failed to close, that the debtors would
25 have been criticized?
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1 A. Well, we were criticized --
2 MR. HARRIS: Your Honor, calls for speculation.
3 THE COURT: I think you can rephrase the question.
4 MR. PEREZ: Yes.
5 Q. What would have been the result of not taking the KPS bids
6 and the term lenders not closing on their bid?
7 A. We were criticized throughout this process by the DIP
8 lenders, by KPS, and in some instances, by the UCC for
9 continuing to show flexibility toward the term lenders given
10 that they didn't abide by the bid procedures. Had we not taken
11 the KPS bid and accepted a highly conditional -- highly
12 conditional equity and commitment letter and asset purchase
13 agreement from the term lenders, we would have been criticized
14 and justifiably so. In my view, it would have been reckless.
15 Q. And do you believe that there was any unfairness or any
16 mistakes made in connection with the auction?
17 A. KPS told us they were being treated unfairly the day of
18 the auction because they sat there and sat there, patiently.
19 And I kept going in the room and saying listen, we beg your
20 patience here. And so I suppose they could say they were being
21 treated unfairly. But I cannot see how the term lenders can
22 argue they were treated unfairly.
23 Q. Did a clear winner emerge from the auction?
24 A. They did.
25 Q. And who was that?
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1 A. KPS.
2 Q. Now, we're here on a motion to approve the sale, and,
3 obviously, the judge is taking any -- is taking evidence on the
4 objections, but Mr. Zughayer, do you have any reservation about
5 the motion that we're here on and about the sales process that
6 we ran?
7 A. I have none.
8 Q. Okay.
9 MR. PEREZ: I have nothing further, Your Honor.
10 MR. HARRIS: Your Honor, I may be a little bit of
11 time on cross. I'll take direction from Your Honor whether you
12 want to do it now --
13 THE COURT: Yes, let's do it.
14 MR. HARRIS: Okay.
15 THE COURT: Unless anybody else wants -- either the
16 DIP or the creditors' committee have any questions of their
17 own? Maybe we should get those.
18 MR. AUSTIN: No questions from the DIP lender, Your
19 Honor.
20 THE COURT: All right, very good.
21 MR. HARRIS: Thank you, Your Honor.
22 CROSS-EXAMINATION
23 BY MR. HARRIS:
24 Q. Mr. Zughayer, I believe you testified that the events, in
25 fact, leading up to the commencement of these cases and the
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1 ultimate sale process that you ran in December and January,
2 followed on an earlier sale process that began in January of
3 2008, is that right?
4 A. Yes.
5 Q. And that process basically turned into a failed sale
6 process, couldn't find any buyers for the company at a price
7 that was acceptable, is that right?
8 A. Well, we received, I believe, three offers that reflected
9 the current financial state of the business at the time we
10 concluded the sale process which was an EBIDTA that was seventy
11 percent lower than when we started. But it wasn't enough to
12 clear the term lenders' claims so we decided to end the
13 process.
14 Q. And in September 2008, you attended a meeting with counsel
15 for the company, management of the company, the term lenders,
16 the revolving lenders, where effectively the company offered to
17 throw the keys, if you will, to the term lenders as the fulcrum
18 security in the capital structure, remember that?
19 A. September 2008?
20 Q. Yes.
21 A. I vaguely remember a meeting. I'm not sure anybody
22 offered to throw keys anywhere.
23 Q. Do you recall the meeting at Paul Hastings' offices with
24 Mr. Pfefferle, Mr. Spivak, Mr. Miller from Weil Gotshal was
25 there in which you were in attendance?
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1 A. I do.
2 Q. Okay. And at that meeting, did the company basically
3 advise the term lenders that they were basically entitled to
4 prepare to turn over control of the company to the term lenders
5 as the fulcrum security and that there was no equity remaining
6 in the company?
7 A. I don't remember the exact content of the meeting. I do
8 know that it was part of the company's -- the company at the
9 time's effort to be proactive with respect to dealing with the
10 over-leverage balance sheet and the difficult operating
11 authority we found ourselves in. And we wanted to be as
12 consensual as possible with our various creditors.
13 Q. But at the time, you'd been unable to effectively find a
14 strategic alternative that would satisfy the debt obligations
15 and respectively restructure the company, is that right?
16 A. That's correct.
17 Q. Okay. Would you turn to, I believe it's Exhibit 4, which
18 I think is the order approving the bid procedures and the bid
19 change themselves, if you will.
20 A. Okay. I'm there.
21 Q. Okay. But I'm not, so let me catch up to you. Taking a
22 look at the bid procedures, and in particular Section 3(c),
23 little Roman numeral vi.
24 A. Okay.
25 Q. And that provision states, "That the bid contains written
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1 evidence of such qualifying bidders' financial ability to,
2 paren, little x, close paren, (x), consummate the transactions
3 contemplated by its qualified bid, paren, (including without
4 limitation" -- it should say any; it says and -- "debt or
5 equity financing commitment)", close paren. You see that?
6 A. Yes.
7 Q. Okay. Now, at the time the bid procedures were
8 negotiated, where was the state of the capital markets in terms
9 of the ability to raise new debtor equity, do you recall?
10 A. Yes.
11 Q. Pretty bad?
12 A. That's a way to put it, yes.
13 Q. And, in fact, when I asked you in your deposition, as I
14 think you say you're head of the capital markets efforts at
15 Berenson, I think you told me that you hadn't been able to
16 close a financing on behalf of your clients in the last six
17 months, is that right?
18 A. Well, we did get the DIP done here.
19 Q. Other than the DIP?
20 A. I believe I said I can't recall, but I couldn't think of
21 one of the deficits right out.
22 Q. So at the time that we put those words on the page, "debt
23 and equity financing commitments", was anyone led to believe
24 that that meant anything other than debt and equity commitments
25 in customary form for transactions of the type?
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1 A. I'm not sure what that means.
2 Q. Well, financing commitments conjures up a particular
3 expectation in the minds of people in the marketplace, doesn't
4 it, as to what their form would be?
5 A. I suppose.
6 Q. Okay. And is there anything in the bid procedures that
7 would lead one to conclude that financing or debt commitments
8 in customary form would be unacceptable?
9 A. Well, I think commitment is the operative word. We wanted
10 commitments, not conditional financing.
11 Q. Is your testimony that financing commitments don't usually
12 have conditions in them?
13 A. My testimony is what we were provided for in commitments.
14 Q. And that's because they had conditions to closing them
15 that you found unacceptable, isn't that right?
16 A. It had conditions to closing that we, the DIP lenders, the
17 UCC, all found unacceptable in relative short order after
18 reading the documents you gave us.
19 Q. Mr. Zughayer, isn't it, in fact, the case that the
20 standard that the debtors employed for determining the
21 acceptability of financing commitments and debt commitments
22 changed after they received the KPS letter?
23 A. No.
24 Q. So if I'd walked in with a standard commitment letter from
25 Wells Fargo or CIT, with which I know you are personally
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1 familiar, for an ADL type facility, is it your testimony that
2 you would have qualified the bid?
3 A. I think the problem is you're asking the question about
4 Jim and I know Jim spoke earlier about some examples they found
5 about various form commitments. You can't look at this in a
6 vacuum. We had a competitive auction. We had a bidder that
7 had committed financing. And we had a period of time to get
8 this done in and a bidder that was going to walk. We had a DIP
9 that was about to expire and the company was running out of
10 cash. So form commitments in a healthy environment are much
11 different than the threshold that is set in a 363. We've run
12 363s in the past. We've asked bidders in the past to remove
13 contingencies if they wanted to continue as part of a 363
14 process. Some do it, some don't. We use that as part of our
15 decision to inform who's going to be the ultimate winner
16 because assurance of closing in these types of matters where
17 you have to close within a certain period of time or it could
18 put the business in peril means something. So I don't know
19 what you mean by form commitments but we didn't reinvent the
20 wheel here. We did pretty cookie-cutter stuff for these types
21 of auctions.
22 Q. Well, I think you just said, Mr. Zughayer, that you used a
23 conditionality of the bid to inform yourselves as to which bid
24 is higher or better. You didn't say that you use it in order
25 to determine whether they're qualified at all, did you?
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1 A. Well, we never -- we didn't receive the most -- we didn't
2 receive the most basic documents for me to just qualify you as
3 a bidder. We set a very low threshold for you, as you all
4 described earlier, and we still couldn't qualify you as a
5 bidder cause of the conditionality. We have to take that into
6 consideration.
7 Q. Mr. Zughayer, where in these bid procedures does it say
8 that the company reserves the right to review the
9 conditionality of each financing commitment to determine
10 whether you can be a qualified bidder other than general
11 statements about business judgment?
12 A. Well, I'm going to read those general statements and I'm
13 happy -- there's probably five or six places in these bid
14 procedures that talk about not allow -- that the bid shall
15 be -- should not be contingent up getting financing, okay. And
16 when we negotiated this, we all knew what we meant by that and
17 it's pretty straightforward. And if you want me to go through
18 the bid procedure in good detail, I'm happy to lay out those
19 five or six, but I think Alfredo, in our papers that we filed,
20 did a pretty good job of laying out why we couldn't accept
21 conditional financing in the place of commitment financing.
22 Q. So now I'm trying to understand, Mr. Zughayer, your
23 position on this because you personally were involved and your
24 team from Berenson were personally involved in discussions in
25 diligence with respect to prospective lenders that the term
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1 lenders were speaking with to provide a financing commitment
2 for an ADL facility to support their bid, correct?
3 A. We were.
4 Q. Okay. And you know those were standard commercial
5 lenders, don't you? Pretty typical commercial ADL lenders?
6 A. We're familiar with them, yes.
7 Q. Okay. I'm trying not to use names, Your Honor, to protect
8 the innocent here. But what I hear you saying, Mr. Zughayer,
9 is if we'd shown up with the typical standard customary ABL
10 type commitment letter from those lenders with whom you are
11 personally familiar, you would have said too conditional, not
12 good enough, isn't that right?
13 A. No.
14 Q. Really? You're saying that if we'd shown up with a
15 typical Wells Fargo commitment letter that was conditioned on
16 documentation, you would have been fine with that?
17 A. If your equity commitment was conditioned on debt
18 commitment happening and both of your equity and debt
19 commitments were conditioned on an APA agreement that had a ton
20 of conditions happening, we would have come to the same exact
21 conclusion irrespective of whose name was on the letterhead of
22 that commitment.
23 Q. All right. Let's talk about the APA for a second. Were
24 you not informed, at the auction on the 11th, that the term
25 lenders were prepared to negotiate directionally towards the
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1 KPS form?
2 A. You did tell us that, yes.
3 Q. Okay. So the issue about the conditionality of the APA
4 was something you already knew we were prepared to deal with in
5 the context of continuing negotiations, correct?
6 A. What happened leading up to the auction and the behavior
7 of the parties leading up to the auction informs how we -- how
8 much weight we put on that. We had been negotiating the APA
9 with your group for weeks. Every time we sent a draft back,
10 not only did you not take our comments but in some instances,
11 it came back worse. Based on that and, again, if history is
12 any guide, we didn't have a whole lot of confidence that in a
13 matter of an hour or two you guys wouldn't have conformed your
14 APA to something that was acceptable to us. And we are here,
15 February 24th, and I believe it's 7:30, and I still don't have
16 a signed APA.
17 Q. And do you know why you don't have a signed APA?
18 A. I'll talk to our friends at Weil, but -- it's in
19 negotiation.
20 Q. Could it be because after receiving the draft after
21 midnight last night they never bothered to respond to the
22 comments until this morning? In part --
23 A. I can't speak to that.
24 Q. No. With respect to negotiations regarding the APA
25 leading up to the auction, I direct your attention, Your
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1 Honor -- Mr. Zughayer, to Exhibit 24 that's in your binder.
2 A. Okay.
3 THE COURT: The same binder?
4 MR. HARRIS: Yes, sir.
5 Q. And, in particular, I would like you to take a look at the
6 attached e-mail from Vaughan Petherbridge to Lou Fantin. Do
7 you know who Lou Fantin is?
8 A. He's the general counsel of the debtor.
9 Q. Okay. And could you read to us Mr. Petherbridge's e-mail
10 to Mr. Fantin of January 31st, please?
11 A. Start from the top?
12 Q. Where it says, "SRZ" --
13 A. Okay. "SRZ has" -- it's blanked out in this version.
14 Q. I think it's "officially sent us".
15 A. -- "sent us an updated draft of the APA that includes
16 additional changes to the last draft of the APA that they sent
17 us on 12/14/08. For your reference, I have attached below a
18 consolidated blackline of their latest draft against the last
19 draft we sent to them on 12/11/08. As you may recall, we did
20 not conduct a full review of their 12/14/08 draft as the
21 decision was made to put pens down on any further negotiations
22 until they were a qualified bidder."
23 Q. Now, Mr. Zughayer, do you know who had given the
24 instruction to Mr. Petherbridge and the other people at Weil to
25 put pens down and to stop negotiations on the APA?
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1 A. Well, you showed me this at deposition and you told me it
2 was Alfredo Perez. Or you showed me a subsequent e-mail that
3 suggested it was Alfredo, and I've since confirmed that.
4 Q. So, in fact, there were no negotiations with the term
5 lenders relative to a form of asset purchase agreement after
6 December 14th because you had concluded, why waste the time,
7 they're not qualified bidders.
8 A. I wouldn't put it that way. Lawyers are very expensive
9 and we went through multiple drafts and the bill was being
10 racked up. And I think when Lou Fantin and Fred Spivak, our
11 CFO, saw the legal bills and saw how much of the legal bills
12 were allocated to this APA and the fact that we were making
13 negative progress, we said we're going to put our pens down
14 until we qualify you as a bidder because the meter was running.
15 Q. So there's no -- it shouldn't come as a surprise to you
16 that the asset purchase agreement, with respect to the term
17 lenders as of the auction date, was fairly far behind what you
18 otherwise had been working out with KPS, isn't that right?
19 A. You can say that.
20 Q. Now, on the issue of the -- on the issue of delinking,
21 which has come up from time to time today, I believe it's your
22 testimony that the company, the unsecured creditors' committee,
23 maybe even the DIP lenders were in agreement that it would be
24 appropriate to ask the equity to delink its bid -- its equity
25 commitment from the debt commitment as a basis to qualify that
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1 bid. Isn't that what you said?
2 A. Yes.
3 Q. Okay. And you've been in the courtroom pretty much most
4 of the day and you heard Mr. Spivak's testimony earlier this
5 morning?
6 A. I did.
7 Q. Okay. And you heard the concerns expressed by the
8 unsecured creditors' committee regarding the go for viability
9 of the company in the event we are the successful bidder and
10 have sixty million dollars of available financing. You
11 remember that?
12 A. I do and I agree with that position.
13 Q. But on February 11th, you were prepared, on behalf of the
14 company, to allow the term lenders, with a mere thirty-five
15 million dollars, to bid for the assets of this company as a
16 qualified bidder with no concern about what would happen the
17 next day if they actually won, did you?
18 A. Well, that's not accurate.
19 Q. Well, let's break it down. Did you or did you not walk
20 into the room and say, "If you delink with the bid with your
21 thirty -- and you make a thirty-five million dollar commitment
22 hard, independent of anything else, we will qualify you as a
23 bidder", yes or no?
24 MR. PEREZ: Your Honor, I would request counsel to
25 let the witness answer the question.
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1 THE COURT: I think the witness should be able to
2 answer the question but I think this question's been asked and
3 answered several times.
4 THE WITNESS: You want me to answer it again?
5 THE COURT: Sure.
6 A. Okay. We --
7 THE COURT: As best you can.
8 THE WITNESS: Sure.
9 A. I guess, Adam, I'll classify this under no good deed goes
10 unpunished here and we lowered the bar for you guys. We said
11 we will qualify you but we did not say we were going to qualify
12 you and keep KPS as the lead bidder of the auction. Once we
13 qualified you -- I'm sorry, the auction starting bidder. Once
14 we qualified you, that would at least given us the ability to
15 go back to KPS and say look, we've qualified them, we're going
16 to continue to work with them on all these other issues.
17 There was a lot of activity in the room -- in your room,
18 and we were hopeful that you were much further along than we
19 eventually found out you were. But -- in abundance of showing
20 you guys flexibility and allowing you to firm up your bid, we
21 were willing to delink and qualify you and work with you to
22 improve your bid.
23 Q. The auction concluded at approximately 4:18 on the
24 afternoon of the 11th?
25 A. Yes.
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1 Q. And 4 o'clock is the deadline that you had sort of preset
2 for when this was going to end, isn't it?
3 A. 4 o'clock was the deadline that I believe we all agreed at
4 the 2/18 meeting two hours -- a couple hours before that would
5 give you guys to show us you had the financing.
6 Q. And I believe the transcript reflects that the statement
7 made was that the parties would reconvene at 4 o'clock for
8 further proceedings, isn't that correct?
9 A. I'd have to read the transcripts, but I'll tell you the
10 intent was to work with you to be able to qualify as a debtor.
11 Q. For an hour and a half, between 2:30 and 4 o'clock?
12 A. Adam, you showed up an hour late. You gave us a debt --
13 an equity commitment at noon. You gave us a debt commitment at
14 2:15, okay. So, you know, we worked quickly and we tried to
15 get back to you and we tried to be flexible but we had to -- we
16 had a bidder that was a bird in the hand that was acceptable to
17 us that was apoplectic and was -- and pretty much us told us
18 they were going to walk.
19 THE COURT: I think the record's quite clear; we
20 don't have to go over the same things over and over again.
21 MR. HARRIS: I understand, Your Honor. I'll try and
22 keep this brief.
23 Q. You testified before that you were aware that the DIP
24 letter -- that the term lenders have made a request for an
25 extension of the auction date, right?
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1 A. Yes.
2 Q. Okay. Now -- and you said that you were part of the
3 negotiations with -- leading up to the development of the bid
4 procedure, is that right?
5 A. Yes.
6 Q. Would you please turn to what's been marked as Term Lender
7 34 in your binder, please?
8 A. I have nothing at 34.
9 (Pause)
10 Q. Have you had an opportunity to read what's been --
11 MR. HARRIS: Your Honor, does your binder have 34 in
12 it?
13 THE COURT: It does.
14 MR. HARRIS: Okay.
15 THE COURT: No, it doesn't. It's a blank.
16 Q. Did you have an opportunity to read the e-mail that's been
17 marked as Term Lender Exhibit 34?
18 A. One second.
19 Q. Sure.
20 A. Okay.
21 Q. And do you see the sentence in there that starts with the
22 words, "The debtor would reserve the right to move the auction
23 back a few days if it needed more time to verify the bona fides
24 or the financing proposal instead of disqualifying otherwise
25 worthy bids?
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1 A. Yes.
2 Q. Okay. And when the term lenders made their request and
3 then subsequently showed up, did the debtors take any actions
4 of the sort identified in this to actually do what Mr. Perez
5 told Mr. Austin he would do if he needed a couple of days to
6 verify the bona fides for the financing proposal?
7 A. I think, unfortunately, we used those couple of days to
8 wait for the letters.
9 Q. I'm sorry. Did the delay in the letters change the
10 auction date?
11 A. Well, let me look. Okay, this is an e-mail from Alfredo
12 to Jesse Austin on November 30th.
13 Q. Correct, in connection with the development of the bid
14 procedures.
15 A. Yes.
16 Q. And do you remember the negotiations over the dates that
17 were going to be in the bid procedures?
18 A. Vaguely.
19 Q. And you don't recall that those were hotly debated between
20 the company, the term lenders, and the DIP lenders?
21 A. I think that's accurate.
22 Q. Okay. And do you recall that the DIP lenders were pushing
23 for much shorter milestone dates and the term lenders were
24 asking for more extended dates out through the end of February?
25 A. Yes.
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1 Q. Okay. So do you understand the context of this e-mail is
2 Mr. Perez effectively saying to Mr. Austin look, we'll agree to
3 this earlier date but we reserve the right to give bidders more
4 time if we think it's a good idea?
5 A. Well, this was an e-mail from Alfredo to Jess and you,
6 there's a copy to Ronit, so I wasn't on this e-mail.
7 Q. So in reading it, you have to idea what this statement
8 actually means that said, "The debtors would reserve the right
9 to move the auction back a few days if it needed to nor time to
10 verify the bona fides of a financing proposal instead of
11 disqualifying otherwise worthy bids"?
12 A. No, you'll have to ask Alfredo what the purpose of this
13 was, but it looks like we were trying to as the intermed -- as
14 the kind of mediator here figure out a way to reconcile what
15 the DIP lenders wanted and what you wanted.
16 Q. Right. But when the term lenders asked for the extension
17 rather than pushing the DIP lenders to give a couple additional
18 days or a few additional days to do exactly what this e-mail
19 suggests, they said no and you said fine, we're going forward.
20 A. Well, a couple points. One, I think had anyone
21 anticipated that we would have a cash bid that was getting
22 ready to walk on the 11th, that would have informed what we
23 were going to do. Two, we had DIP lenders and we had
24 milestones in that agreement that they were unwilling to change
25 the milestones. Three, you weren't even close on your
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1 commitment letters. There was condition upon condition upon
2 condition and you guys didn't show much flexibility in terms of
3 removing those conditions. You just told us we should accept
4 it, it's a commitment; this is how it's done.
5 Q. Well, let's talk about showing flexibility. You've
6 already testified under the equity commitment we got you
7 satisfied that the equity commitment was not conditional on
8 anything other than the debt financing, is that right?
9 A. And we appreciated that.
10 Q. Okay. And on the APA, we've already talked about the fact
11 that you were advised that the term loan lenders were prepared
12 to work directionally with the company to get to something
13 along the lines of the KPS APA, so that condition could have
14 been satisfied had you spent the time on it, correct?
15 A. Well, the key word is directionally. It's the 24th now
16 and we are still working directionally towards an APA that we
17 don't have signed.
18 Q. Do you know when that discussion about directionally
19 getting towards the KBS APA started?
20 A. Adam, we had an hour or two and we spent weeks with you as
21 to an APA and we weren't making progress. So while we would
22 hope we'd have made progress, we weren't going to put all our
23 eggs in that basket with a cash bid that was about to walk.
24 Q. Did you ever ask the term lenders, who are owed a hundred
25 million dollars in this case, whether they wanted the cash that
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1 was being offered by the KPS bid?
2 A. Repeatedly.
3 Q. And what did they say?
4 A. No.
5 Q. And what effect did that have on your ultimate decision
6 making?
7 A. We weren't going to put the company in peril and risk
8 liquidation. We had a cash bid that would have paid off the
9 debt. Okay. They were a party there too. We had a potential
10 bidder that was going to demonstrate the ability to continue
11 the running of this business as a going concern, preserve 1800
12 jobs, and that satisfied the UCC. And we were going to get you
13 some cash recovery. You made it clear to us that you wanted
14 sixty cents on the dollar, I believe was the word you used.
15 Our job, as the debtor, was to get the highest and best value,
16 not to get certain term lenders out at their entry point. Some
17 were in a par -- some were at sixty, some were probably at
18 less. I can't take that into account. What I can do is try to
19 run a process that gives us the highest and best offer with the
20 most assurance of closing.
21 Q. And you were very concerned, I think you testified, that
22 KPS would walk away and therefore not be available to accept
23 their bid. Isn't that what you said?
24 A. I believe we all shared that concern.
25 Q. Can you turn to what's been marked as Term Loan Lender 23
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1 in your binder, please? Hopefully, it's actually there.
2 THE COURT: I have 23. How much longer is this going
3 to take?
4 MR. HARRIS: Just a couple of minutes, Your Honor,
5 and I'll be done.
6 THE COURT: All right. I certainly think parties
7 might do much better to negotiate the APA than to go over the
8 same matters again and again. But, please, let's see what 23
9 is.
10 Q. Your Honor -- I'm sorry, Mr. Zughayer, in your deposition,
11 I showed you this e-mail which is a copy of an e-mail from you
12 to the various people at Berenson, the company and Weil
13 Gotshal. Do you recall seeing this e-mail before when I showed
14 it to you last Friday at your deposition?
15 A. I do recall it, yes.
16 Q. And this is an e-mail from you forwarding an e-mail from
17 Raquel Palmer at KPS, is it not?
18 A. Yes.
19 Q. And in your e-mail forwarding, the second -- the third
20 sentence reads, "She also confirmed that they intend on moving
21 forward on their -- regardless of the request for delay or the
22 outcome of Waterford." Now, there's a word missing in there
23 but the -- reference to request for delay, that refers to the
24 term lenders' request for an extension of the bid deadline and
25 auction date, does it not?
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1 A. I believe it does, Adam.
2 Q. So KPS actually was okay with the extension that you had
3 socialized with them after we made that request to you, isn't
4 that right?
5 A. Well, the discussion I had with Raquel was when she was
6 not happy. She said, "Let me go back and talk to my team.".
7 We told her to be patient. This was showing we had -- the
8 discretion was in the bid procedures to do this. I believe she
9 went back and talked to K&E and she came back and said -- and
10 we also asked -- we also, at the time, realized that she didn't
11 know that you all had not submitted your financing. So we went
12 back to KPS and to see if we could kind of get them to improve
13 their bid. And we knew that they were -- they, and I believe
14 Clarion at the time, were involved in the Waterford auction.
15 So all that was going into it. But she had called back, per my
16 request, told me that they were going to move forward with
17 their bid.
18 Q. And that they had no problem with the request for delay?
19 A. I said regardless of their request for delay.
20 Q. Okay.
21 A. I'm not sure. I was commenting on whether she liked it or
22 not.
23 Q. And when you spoke to the unsecured creditors' committee
24 counsel and socialized the idea of an extension with them, they
25 did not protest to an extension either, did they?
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1 A. The unsecureds?
2 Q. The unsecureds.
3 A. I don't believe they did. I think they bought our
4 argument that we wanted to give you guys more time so we can
5 have an option.
6 MR. HARRIS: Your Honor, I have no further questions.
7 THE COURT: Mr. Perez?
8 MR. PEREZ: I don't have anything, Your Honor.
9 THE COURT: All right. Thank you very much,
10 Mr. Zughayer. You may step down. All right. I think we've
11 come to the end today.
12 I do have a brief telephonic conference tomorrow
13 morning at 10; I should be done by 10:15. So why don't we
14 start again at 10:15 tomorrow morning, unless the parties think
15 that they can better spend their time getting a signed asset
16 purchase agreement before the Court. But if not, I'll be ready
17 to start at 10:15. Thank you very much.
18 MR. HARRIS: Thank you, Your Honor.
19 MS. SPEAKER: Your Honor --
20 THE COURT: Oh, before we stop, yes?
21 MS. SPEAKER: Mr. Klein, who had to leave, wants to
22 know if he has permission to dial in telephonically when our
23 proceedings are tomorrow.
24 THE COURT: Yes, we ought to set up a number where we
25 can call him.
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1 MS. SPEAKER: Okay.
2 THE COURT: You can do that -- the simplest way is
3 just to get his number. If he'll be at that --
4 MS. SPEAKER: His client may also want to be on the
5 phone. Can you do -- if it's more than --
6 THE COURT: Excuse me?
7 MS. SPEAKER: His client will not be present in the
8 same place as he will be, so we will need to --
9 THE COURT: Then you ought to set up a --
10 MS. SPEAKER: Set up a dial-in?
11 THE COURT: -- dial number but it doesn't have to be
12 CourtCall, as far as I'm concerned.
13 MS. SPEAKER: Okay. All right. We'll work it out,
14 then.
15 THE COURT: It can be whatever number. By the way,
16 before we close, I have the compilation document marked as Term
17 Lenders' 39 that was inquired about but I don't think was ever
18 admitted.
19 MR. HARRIS: We would move --
20 THE COURT: Do you want that admitted?
21 MR. HARRIS: We would move that into evidence, Your
22 Honor.
23 MR. O'CONNELL: The problem I have was we can move
24 it -- what we move to --
25 THE COURT: It's a compilation, as I understand it.
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1 MR. O'CONNELL: Yes, Your Honor.
2 THE COURT: It's admitted as such, not for the truth.
3 MR. O'CONNELL: All right.
4 THE COURT: All right, we'll admit it as such.
5 (Compilation document was hereby received as Term Lenders'
6 Exhibit 39 for identification, as of this date.)
7 MR. HARRIS: Thank you, Your Honor.
8 THE COURT: I believe so. But if you want to argue
9 against its admission tomorrow?
10 MR. O'CONNELL: No, I would say that --
11 THE COURT: We'll save that for tomorrow.
12 MR. O'CONNELL: -- I was thinking of a Latin phrase.
13 MR. HARRIS: Your Honor, one administrative matter,
14 if I might?
15 THE COURT: Yes.
16 MR. HARRIS: I just want to let the court record
17 reflect that I'm handing Mr. Perez the original executed copy
18 of the commitment letter and credit agreement as per
19 Mr. Klein's comments earlier tonight, executed and initialed by
20 both claimant and LBC.
21 THE COURT: If you have a money order for the cash --
22 well, we'll deal with that tomorrow.
23 MR. HARRIS: Thank you, Your Honor.
24 MS. SPEAKER: Thank you, Your Honor.
25 THE COURT: Thank you.
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1 (Whereupon proceedings concluded at 7:44 p.m.)
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1 I N D E X
2
3 T E S T I M O N Y
4 WITNESS EXAM BY PAGE LINE
5 Fred Spivak Mr. Perez 49 3
6 Fred Spivak Mr. Harris 52 15
7 Fred Spivak Mr. Perez 57 14
8 Fred Spivak Mr. Harris 65 23
9 Fred Spivak Mr. Austin 71 17
10 Fred Spivak Mr. Cohen 76 25
11 Fred Spivak Mr. Perez 78 20
12 Fred Spivak Mr. Harris 79 4
13 James L. Doak Mr. Cook 89 20
14 James L. Doak Mr. Perez 110 13
15 James L. Doak Mr. Austin 124 8
16 James L. Doak Mr. Harris 147 2
17 James L. Doak Mr. Perez 151 19
18 Sam Zughayer Mr. Perez 167 18
19 Sam Zughayer Mr. Harris 185 24
20
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1 I N D E X (cont'd.)
2
3 E X H I B I T S
4 PARTY NO DESCRIPTION ID. EVID.
5 53 Draft business plan 57 59
6 12 Equity commitment 101
7 letter addressed to
8 LDG Delaware Holdco
9 13 Debt commitment letter from 101
10 LB Sub to LDG Opco Inc.
11 31 Term lenders' binders, 101
12 so-called backstop rights
13 purchase agreement dated
14 February 20, 2009
15 30 So-called term loan agreement 101
16 39 Compilation document 208
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1
2 C E R T I F I C A T I O N
3
4 I, Clara Rubin, certify that the foregoing transcript is a true
5 and accurate record of the proceedings.
6
7 ___________________________________
8 Clara Rubin
9
10 Veritext LLC
11 200 Old Country Road
12 Suite 580
13 Mineola, NY 11501
14
15 Date: March 4, 2009
16
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25
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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
Case No. 08-14679-alg
- - - - - - - - - - - - - - - - - - - - -x
In the Matter of:
LENOX SALES, INC.,
Debtors.
- - - - - - - - - - - - - - - - - - - - -x
U.S. Bankruptcy Court
One Bowling Green
New York, New York
February 25, 2009
10:35 AM
B E F O R E:
HON. ALLAN L. GROPPER
U.S. BANKRUPTCY JUDGE
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1
2 HEARING re Limited Objection Filed by Walt Disney Art Classics
3 to Debtors' Motion for Order Authorizing, Among Other Things,
4 Sale of Assets and Assignment of Executory Contracts
5
6 HEARING re Limited Objection and Reservation of Rights of
7 Century Indemnity Company to Debtors' Motion for an Order
8 Approving the Sale of Certain of the Debtors' Assets Free and
9 Clear of Liens, Claims Encumbrances, and Interests etc.
10
11 HEARING re Limited Objection and Reservation of Rights of Jack
12 Daniel's Properties, Inc. to Assumption and Assignment of the
13 Jack Daniel's Trademark License Agreement to Purchaser
14
15 HEARING re Objection and Reservation of Rights Filed by Oracle
16 USA, Inc. to Debtors' Motion for Orders Approving Sale etc.
17
18 HEARING re Objection Filed by Birch Run Outlets II, LLC for an
19 Order Approving Asset Purchase Agreement and Authorizing the
20 Sale of Debtors' Assets etc.
21
22 HEARING re Limited Objection Filed by Jimmy Buffett to the
23 Entry of an Order Approving Sale of Substantially All of the
24 Debtors' Assets Free and Clear of Liens, Claims, and
25 Encumbrances
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1
2 HEARING re Liberty Mutual Insurance Company's Joinder in the
3 Limited Objection and Reservation of Rights of Century
4 Indemnity Company to Debtors' Motion for an Order Approving the
5 Sale of Certain of the Debtors' Assets etc.
6
7 HEARING re Objection and Joinder in Birch Run Outlets II, LLC's
8 Objection to Entry of Order Approving Asset Purchase Agreement
9 and Authorizing Sale of the Debtors' Assets etc.
10
11 HEARING re Objection Filed by Bank of New York Mellon, in its
12 Capacity as Term Loan Agent for the Term Loan Lenders, to
13 Debtors' Motion for the Entry of an Order Authorizing and
14 Approving the Sale of Substantially All of Their Assets to
15 Upstairs Acquisition Corp.
16
17 Continued Sale Hearing
18
19 HEARING re Motion Filed by the Official Committee of Unsecured
20 Creditors for Entry of Order Extending Investigation Deadline
21 with Respect to Liens and Claims Asserted by Term Loan Lenders,
22 and Directing the Production of Documents etc.
23
24
25
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1
2 HEARING re Objection Filed by State of New Jersey, Department
3 of Environmental Protection, to the Turnover of the Proceeds of
4 the Asset Sale etc.
5
6 HEARING re Amended Objection Filed by the State of New Jersey,
7 Department of Environmental Protection, to the Turnover of the
8 Proceeds of the Asset Sale etc.
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24 Transcribed By: Clara Rubin
25
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1
2 A P P E A R A N C E S :
3 WEIL, GOTSHAL & MANGES LLP
4 Attorneys for Lenox Sales, Inc., Debtor
5 700 Louisiana
6 Suite 1600
7 Houston, TX 77002
8
9 BY: ALFREDO R. PEREZ, ESQ.
10
11 WEIL, GOTSHAL & MANGES LLP
12 Attorneys for Lenox Sales, Inc., Debtor
13 767 Fifth Avenue
14 New York, NY 10153
15
16 BY: AARON M. KLEIN, ESQ.
17
18 COOLEY GODWARD KRONISH LLP
19 Attorneys for the Creditors' Committee
20 1114 Avenue of the Americas
21 New York, NY 10036
22
23 BY: CATHY HERSHCOPF, ESQ.
24 RICHELLE KALNIT, ESQ.
25 RONALD R. SUSSMAN, ESQ. (TELEPHONICALLY)
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1
2 KIRKLAND & ELLIS LLP
3 Attorneys for KPS Capital
4 Citigroup Center
5 153 East 53rd Street
6 New York, NY 10022
7
8 BY: YOSEF J. RIEMER, ESQ.
9 LISA LAUKITIS, ESQ.
10
11 PAUL, HASTINGS, JANOFSKY & WALKER LLP
12 Attorneys for UBS AG, Stamford Branch, as Agent
13 600 Peachtree Street, NE
14 Suite 2400
15 Atlanta, GA 30308
16
17 BY: JESSE H. AUSTIN, III, ESQ.
18
19 PAUL, HASTINGS, JANOFSKY & WALKER LLP
20 Attorneys for UBS AG, Stamford Branch, as Agent
21 75 East 55th Street
22 New York, NY 10022
23
24 BY: KRISTINE M. SHRYOCK, ESQ.
25
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1
2 SCHULTE ROTH & ZABEL LLP
3 Attorneys for The Bank of New York Mellon, as Agent for
4 the Term Loan Lenders
5 919 Third Avenue
6 New York, NY 10022
7
8 BY: ADAM C. HARRIS, ESQ.
9 MICHAEL L. COOK, ESQ.
10 ABBEY WALSH, ESQ.
11
12 GOLDBERG, KOHN, BELL, BLACK, ROSENBLOOM & MORITZ, LTD.
13 Attorneys for LBC Credit Partners II, L.P.
14 55 East Monroe Street
15 Suite 3300
16 Chicago, IL 60603
17
18 BY: RANDALL KLEIN, ESQ. (TELEPHONICALLY)
19
20 BAIRS (ph.)
21 BY: SAM GADERA (ph.), ESQ. (TELEPHONICALLY)
22
23 INTERESTED PARTIES:
24 TOM DONNELLY (TELEPHONICALLY)
25 CHRISTOPHER J. CALABRESE, LBC CREDIT PARTNERS II, L.P.
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1 P R O C E E D I N G S
2 THE COURT: All right, yes, let's start on -- and
3 first, and then from anyone on the telephone.
4 MR. PEREZ: Good morning, Your Honor. Alfredo Perez,
5 Aaron Klein, for the debtors.
6 MR. HARRIS: Good morning, Your Honor. Adam Harris,
7 Michael Cook and Abbey Walsh on behalf of the term lenders.
8 MS. HERSHCOPF: Cathy Hershcopf and Richelle Kalnit,
9 Cooley Godward Kronish, on behalf of the committee, Your Honor.
10 MS. SHRYOCK: Good morning, Your Honor. Kristine
11 Shryock and Jesse Austin with Paul Hastings on behalf of UBS as
12 the DIP agent.
13 THE COURT: Anyone else appearing?
14 MR. SUSSMAN: Good morning, Your Honor. Ronald
15 Sussman, Cooley, on behalf of the creditors.
16 MS. LAUKITIS: Good morning, Your Honor. Lisa
17 Laukitis and Yosef Riemer from Kirkland & Ellis on behalf of
18 KPS.
19 THE COURT: Thank you. Anyone else on the telephone?
20 MR. KLEIN: Good morning, Your Honor. Randy Klein on
21 behalf of LBC Credit Partners and affiliates.
22 THE COURT: Anyone else? Well, I had six
23 individual -- there's a sixth caller, I'm told, on the calls,
24 so there must be some more people on the telephone.
25 MS. SHRYOCK: Your Honor, we do have one of our
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1 clients dialed into the call as opposed to appearing in court
2 today, and it's Mr. Tom Donnelly.
3 THE COURT: All right. Anyone else on the phone?
4 MR. CALABRESE: Chris Calabrese with LBC Credit
5 Partners.
6 THE COURT: Very good.
7 MR. GADERA: Good morning, Your Honor. Sam Gadera
8 (ph.) from Bairns (ph.). I just joined.
9 THE COURT: All right. Anyone else? Okay. I think
10 we're ready to start. I think the ball is in your court,
11 Mr. Harris.
12 MR. HARRIS: Yes, Your Honor. I believe, for the
13 moment, after consulting with Mr. Perez, he's done with his
14 witnesses for now, I guess, until he hears what mine may have
15 to say. Your Honor, in order to, sort of, move things along
16 this morning, there are two witnesses that we had intended to
17 introduce testimony from. But if it would be acceptable to the
18 Court and the other parties, I'd be happy to proffer their
19 testimony. They are both in the courtroom and available for
20 cross-examination. If other parties would like to hear
21 directly from the witnesses now, I'd be happy to put it on.
22 But I would hopefully like to move things along a little more
23 quickly if we do that through proffer.
24 THE COURT: Any objections to proceeding by way of
25 proffer, keeping in mind that cross-examination is available to
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1 the same extent as if the witness testified directly?
2 MR. PEREZ: No, Your Honor.
3 THE COURT: No. All right. Any other objection?
4 All right, then we'll proceed in that fashion.
5 MR. HARRIS: Thank you, Your Honor. The first
6 witness we would intend to call this morning would be
7 Mr. Thomas Goundrey. And if called to testify --
8 THE COURT: Could you spell his name?
9 MR. HARRIS: Certainly, Your Honor. Last name is
10 Goundrey, G-O-U-N-D-R-E-Y.
11 THE COURT: All right.
12 MR. HARRIS: If called to testify, Your Honor,
13 Mr. Goundrey would testify as follows: He is and has been a
14 partner in Clarion Capital Management since January of 2006.
15 He graduated from Georgetown University with majors in
16 accounting and finance in 1994, at which point he went to work
17 for Morgan Stanley Capital Partners for two years. He
18 subsequently attended Harvard Business School and graduated in
19 1998. After graduating from Harvard, Mr. Goundrey went to work
20 at a private equity firm by the name of Rohn, which I believe
21 is R-O-H-N, Capital Management, where he continued employment
22 from 1998 through 2004. During the period of his employment at
23 Rohn Capital, Mr. Goundrey was principally responsible for
24 Rohn's investment in a portfolio company by the name of Primus,
25 P-R-I-M-U-S, International, where he subsequently became the
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1 chief financial officer from the fall of 2004 until January
2 2006 when he joined Clarion Capital Management.
3 During the time that he was at Rohn Capital,
4 Mr. Goundrey would testify that he was principally responsible
5 for interfacing with the management of Primus International to
6 deal with circumstances resulting from the events of September
7 11th. Primus International was, among other things, engaged in
8 the aerospace business. Mr. Goundrey would testify that, as a
9 result of the September 11th attacks, Primus' sales dropped
10 dramatically, that they were faced with significant working
11 capital and liquidity issues and that he and the management
12 team of Primus successfully dealt with those issues, overcame
13 the problems resulting from September 11th and regrew the
14 company to its prior profitable status.
15 Mr. Goundrey would further testify that he is the
16 principal partner at Clarion Capital Management, involved with
17 the investment of Clarion in Lenox Group, Inc., that he began
18 taking that primary responsibility in July of 2008, about nine
19 months ago. He would also testify that Clarion was familiar
20 with the assets and business of Lenox since they actually
21 looked at the business at the time it was sold to D 56 several
22 years earlier.
23 Mr. Goundrey would testify that he has principal day-
24 to-day responsibility and has had principal day-to-day
25 responsibility since July of 2008 with respect to this
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1 investment and the investment decision, that he conducted the
2 original diligence with respect to the acquisition of the debt
3 and that the intention of Clarion all along has been to lead a
4 restructuring of the company to ultimately obtain an ownership
5 stake and control position as a result of that restructuring.
6 Mr. Goundrey would testify that in September of 2008
7 he attended a meeting hosted by Paul Hastings here in New York,
8 and in attendance were representatives of the company,
9 representatives of the term lenders and representatives of the
10 revolving lenders, at which point the company announced that
11 they had run an auction -- a sale process for the company which
12 had not been successful and that they believed the term lenders
13 were the fulcrum security and were prepared to, in
14 Mr. Goundrey's words, turn over the keys in whatever fashion
15 the terms lenders felt appropriate.
16 At that point in time, Your Honor, Mr. Goundrey would
17 testify that Clarion engaged a gentleman by the name of Peter
18 Cameron, Mr. Cameron is someone with whom Clarion and its
19 principals have had a longstanding relationship and that
20 Mr. Cameron is the former CEO of Waterford Wedgood, that
21 Mr. Cameron was engaged by Clarion for themselves and on behalf
22 of the other term lenders to work with Mr. Goundrey and other
23 specialists in the areas of retail inventory control,
24 marketing, benefits and operations to assess Lenox's business
25 model and to prepare short-term and long-term forecasts which
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1 could be used for numerous purposes. One of those purposes,
2 Your Honor, would be to create the multi-hundred-page
3 investment memorandum which Mr. Goundrey was responsible for
4 principally, which had to be presented to all of the investment
5 principals at Clarion for purposes of deciding whether they
6 wanted to make the material additional investment to take
7 ownership, and ultimately control, of the Lenox assets.
8 The other purpose, he would testify, is to create a
9 set of projections which could be used to engage in discussions
10 with prospective third-party lenders for the purposes of
11 attracting a debt financing commitment and ultimately a
12 financing facility to support the business in addition to the
13 equity that they were prepared to put in.
14 He would further testify that iterations of the
15 financial projections were shared with members of management of
16 Lenox, including Mr. Spivak, including as early as December of
17 last year, that there have been several iterations since then
18 to make adjustments to the model based upon changes to the
19 outlook with respect to D 56 and to update it for the company's
20 thirteen-week forecast but that there's never been any question
21 to Mr. Goundrey about the projections or any question as to the
22 financial viability of the company based on the projects that
23 had been put together.
24 Mr. Goundrey would testify that, in connection with
25 discussions with the lenders, that they were asked to run
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1 certain sensitivities to the model, including sensitivities
2 which assumed fifteen to twenty percent declines in sales, and
3 that was different, Your Honor, than the model that was shown
4 to the unsecured creditors' committee and the debtors the other
5 night, which is the baseline case, and that those sensitivities
6 showed that, after giving effect to a fifteen to twenty percent
7 sales decline, the company would still have adequate liquidity
8 to operate its business in the ordinary course without any need
9 for any amendment to the proposed loan agreement with LBC and
10 Clinton. He would describe why that would be, including the
11 interrelationship between sales, margins, working capital and
12 how those adjustments are actually consistent with the way
13 Lenox's cash flows have worked as their sales have declined
14 over the last several years.
15 Mr. Goundrey would further testify, Your Honor, that
16 when the investment memorandum was provided to all the other
17 investment managers at Clarion, all of whose assent is required
18 before Clarion could make the investment, he had numerous
19 conversations with those investment managers, that he was
20 challenged on the underlying assumptions, particularly in a
21 deteriorating economy and particularly the current retail
22 economy, and that each of the investment managers at Clarion,
23 based on their experience, was satisfied that this was an
24 investment to which they should commit substantial amount of
25 capital.
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1 He would testify that the projections that had been
2 prepared were done so on what they believe to be conservative
3 assumptions for reasons that include their belief that the
4 lenders to whom they showed them would be setting covenant
5 packages off of them and therefore, pending aggressive sets of
6 assumptions, would not be in their best interests and that,
7 with respect to the particular issue that had been raised by
8 parties regarding the September liquidity, that in his view
9 that is not an issue that the projections which show that
10 contemplate a sort of static operating plan and that that was
11 not really consistent with the way people actually run
12 businesses where you're making day-to-day operational decisions
13 to proactively deal with changes in the business environment to
14 assure yourself that you would never get into that position.
15 Mr. Goundrey would testify that while the number on the piece
16 of paper shows 6.2 million dollars of liquidity in September of
17 '09 and only potential 1.2 million above the reserve level,
18 that in operating the business they would simply never let it
19 get to that level.
20 And that would be the substance of Mr. Goundrey's
21 testimony, Your Honor.
22 Your Honor, I should mention that we would use what
23 was marked as Exhibit 53 yesterday. Mr. Goundrey would testify
24 that he was one of the principal parties involved in the
25 development of what was marked as Exhibit 53, which is the
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1 projections.
2 THE COURT: All right.
3 MR. PEREZ: Your Honor, I'm not sure that I have any
4 questions, but he did reference two other documents. I'd like
5 to see those documents before I decide whether I have any
6 questions; that would be the investment memorandum and the
7 other sensitivity which shows the fifteen to twenty percent
8 difference sensitivity. I was told last night that the only
9 document that was going to be referred to was Exhibit 53.
10 These are two new documents. I'd like to see those before I
11 decide whether to cross-examine him.
12 THE COURT: Are they in the books or do you have
13 them?
14 MR. HARRIS: Your Honor, they're not in the books,
15 and I don't have copies of them here. I believe what I told
16 Mr. Perez last night is the only document that I would be
17 asking the witness questions about that had been in any of the
18 exhibit lists was Exhibit 53. I was not planning on
19 introducing either of those other two. It's simply
20 Mr. Goundrey's as to that.
21 THE COURT: Well, if he has copies with him here
22 today, or anybody does, Mr. Perez would have a right to look at
23 them. He could certainly question about them if he wants to,
24 to the extent the witness recalls the document. I'll take a --
25 you want me to take a brief recess while you make your decision
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1 as to --
2 MR. PEREZ: Your Honor, I just need to see them to
3 see --
4 MR. HARRIS: Let me find out if they're here, Your
5 Honor. I don't know if --
6 THE COURT: Well, I gather -- the heads are being
7 shaken no. Let's find out if they're here.
8 (Pause)
9 MR. HARRIS: Your Honor, I'm advised by the clients
10 that we do not have any copies of the sensitivities here, that
11 we do not have a copy of the investment memorandum here and
12 that, in any event, the purpose of the testimony was simply to
13 describe the process through which Clarion decided to make this
14 investment and to describe the level of comfort, if you will,
15 that they got to relative to the forecast and the decision to
16 invest the thirty-five million dollars. It was not intended to
17 go line item by line item as to the analysis that's in the
18 investment memorandum. It was a process point more than
19 anything else.
20 MR. PEREZ: Your Honor, it's fine if it's not here,
21 but I would just move to strike the testimony. I mean, he
22 testified that based on the sensitivity he was still
23 comfortable. I would have liked to have seen what that said
24 and what it was. He testified that based on the information
25 provided in hundred-page document that they got comfortable. I
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1 would like to have seen what those were. It's not here, it's
2 not here. But I would move to strike all testimony that had
3 anything to do with either the sensitivities or the investment
4 memorandum.
5 THE COURT: I'll strike testimony with regard to the
6 investment memorandum and what Clarion's other principals did
7 or didn't do. Obviously, I think the record shows that Clarion
8 decided to make an investment. We have that investment. How
9 they came to that decision may well be beside the point.
10 Obviously, counsel thought that it was worthwhile trying to get
11 that in. But, I agree, that should be stricken.
12 With regard to the sensitivity analysis, I will
13 strike any reference to there having been a written analysis,
14 but I do think that he can testify here today that he's
15 performed sensitivity analyses, that, as far as he's concerned,
16 the analyses are satisfactory. You can either, or both, one,
17 tell me I should disregard his testimony because it's vague and
18 unsupported by the document that he could have brought here
19 today but didn't, and I should have an inference that his
20 testimony probably isn't worth very much, you can certainly
21 tell me that, and you can, alternatively, ask him some
22 questions about it if you want to.
23 MR. PEREZ: Your Honor, I don't think there's any
24 need to ask him any questions. Obviously, I wouldn't know what
25 to be asking, one, but I think the Court can give it
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1 whatever --
2 THE COURT: Well, I think you could figure out some
3 questions to ask him without having the document.
4 MR. PEREZ: I think the Court can give it whatever
5 weight it deems appropriate.
6 THE COURT: All right. Okay. So does anybody else
7 have any questions for Mr. Goundrey? Well, I'm sure
8 Mr. Goundrey's going to be very disappointed that he can't take
9 the witness -- that he's not going to be taking the witness
10 stand personally. What else do you have for me today?
11 MR. HARRIS: Your Honor, the only other witness that
12 we had intended to call today was Marc Utay, last name's
13 spelling, U-T-A-Y. And I would proffer his testimony as well.
14 THE COURT: Before you start, somebody joined the
15 call during the proffer of Mr. Goundrey. Who is that? Who
16 joined the call just a few moments ago, or rejoined the call?
17 No one is willing to take the step up? All right. Why don't
18 you go on?
19 MR. HARRIS: Your Honor, if called to testify, Marc
20 Utay, that's Marc with a C, Utay would testify as follows:
21 that he is presently the managing partner of Clarion Capital
22 Management, a firm he established in 1999; that Clarion Capital
23 is a private equity fund that focuses on middle market private
24 equity investments and ownership of portfolio companies; that
25 their investment focus is taking control of positions in
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1 businesses; that they made similar investments in similar
2 businesses to Lenox, including Hartmann Luggage and a company
3 called All-Clad, which is in the, sort of, pots and pans
4 business; so they're very familiar with the retail sector of
5 the industry, including the sales and distribution channels for
6 companies similar to Lenox. They also have an investment focus
7 and horizon that goes out several years and, in the view of
8 Mr. Utay, an investment horizon that exceeds the average
9 investment horizon of most private equity firms.
10 Mr. Utay would testify that he went to college,
11 undergrad, at University of Pennsylvania and Wharton School of
12 Business, where he did a joint degree program, graduating in
13 1981. He then went on to work in the beverage division of
14 General Foods for two years, after which he became a partner at
15 Drexel Burnham Lambert beginning in 1983. Mr. Utay was
16 employed at Drexel as a partner until 1990, at which point he
17 started his own firm called Kent Capital, which was a, sort of,
18 merchant banking investment firm, where he was employed by
19 himself for two years until he joined Bankers Trust, where he
20 was a managing director in the mergers and acquisitions and
21 leveraged finance group. In 1993, he became one of the
22 managing partners of Wasserstein Perella, where he stayed until
23 he formed Clarion Capital in 1999.
24 Mr. Utay would testify that Clarion Capital currently
25 has eight portfolio companies under its -- as investments; that
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1 they have, as I said, had those investments for several years
2 and they had a long-term investment horizon with respect to
3 them; that they, because of their long-term investment horizon,
4 from time to time are presented with the need to decide whether
5 to inject additional capital into those companies to deal with
6 either investment opportunities in the marketplace, liquidity
7 issues, cyclicality in business cycles or other reasons; and
8 would further testify that where the demonstrated need for
9 liquidity -- that they had had worked with the company's
10 existing lenders and had made follow-on capital investments
11 where the circumstances have dictated and in a situational-by-
12 situational basis.
13 He would testify that he has reviewed Exhibit 53, the
14 financial projections, in connection with the investment
15 decision which Clarion made and is familiar with those
16 projections and is very comfortable with the business forecasts
17 that have been put together by the prospective management team
18 as well as his colleagues at Clarion and Miller Buckfire; that
19 he had a critical role, together with all the other the
20 investment professionals at Clarion, in making the investment
21 decisions; that they are very comfortable with their management
22 team and the industry; that he did have an opportunity to and
23 took the opportunity to do a critical analysis of the
24 projections and other information available relative to making
25 investment decisions that on oftentimes times he challenged the
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1 assumptions and projections and ultimately he and the other
2 investment professionals at Clarion were prepared to sign the
3 equity commitment to make this investment.
4 He would further testify that, in light of the --
5 given the commentary of some of the other parties in the case,
6 which he's heard sitting in court, that if there were a
7 situation where the company were to need additional liquidity,
8 if there's some shortfall at some point in time, that Clarion
9 certainly has the resources available to it to deal with that
10 situation.
11 Mr. Utay would also testify that he has reviewed the
12 asset purchase agreement and the bid that was made by KPS in
13 this case which purports to provide a recovery to the term
14 lenders in combination with the liquidation of the D 56 assets
15 of approximately twenty-two million, and that is compared to
16 the potential for receipt of the equity company that he -- that
17 Clarion has absolutely no interest in taking the cash offer,
18 assuming that cash were actually available.
19 Mr. Utay would further testify that he believes that
20 the twenty-two million dollars, which has been hypothesized as
21 the recovery for term lenders here, is actually illusory in
22 several respects and that the certainty of receiving that is
23 not certain at all. And he would testify that, based upon his
24 review of the contract, that there are at least two material
25 conditions to closing which concern him as a term lender. One
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1 is the final order requirement with respect to the final order
2 of this Court, particularly in light of the objections that
3 have been interposed by the New Jersey Department of
4 Environmental Protection which were presented to this Court on
5 Monday. And the second, Your Honor, is the conditions set
6 forth in section 802(i) of the proposed asset purchase
7 agreement with Upstairs Acquisition Corp., that provision, Your
8 Honor. And his concerns emanate principally from the fact that
9 it is his understanding that KPS or one of its affiliates has
10 either entered into a letter of intent or it has been announced
11 to be the successful purchaser for the Waterford Wedgwood
12 assets. And the condition to closing that concerns Mr. Utay,
13 as I said, is in section 8 at .02(i) of the agreement headed
14 "Absence of Investigations and Proceedings".
15 He would testify that, based upon his review of the
16 initial form contract and the contract that is now before the
17 Court, this is a provision that was added by KPS in their
18 markup and which reads, "There shall not be in effect any order
19 by a governmental authority of competent jurisdiction
20 restraining, enjoining or otherwise prohibiting the
21 consummation of the transactions contemplated hereby. There
22 shall have not been commenced or threatened any proceeding or
23 investigation by a governmental authority of competent
24 jurisdiction for the purpose of restraining, prohibiting or
25 materially restricting the consummation of such transactions or
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1 materially limiting or materially restricting Purchaser's
2 conduct or operation of the business following the consummation
3 of the transactions or requiring Purchaser or its affiliates to
4 divest or hold separate any assets or business."
5 Mr. Utay would testify, Your Honor, that, given his
6 experience through his years at Drexel and Bankers Trust, at
7 Wasserstein and at Clarion Capital, that he believes, including
8 by virtue of the fact that Clarion itself was a bidder for
9 Waterford Wedgwood, that the condition to closing presents a
10 material risk given its breadth, that the transactions here may
11 never close in light of the Waterford Wedgwood relationship
12 with KPS and therefore the twenty-two million dollar --
13 THE COURT: Are you saying it raises Hart-Scott-type
14 issues?
15 MR. HARRIS: I believe it raises Hart-Scott-type
16 issues as well as potential other issues, Your Honor, both in
17 terms of the initial review and a potential for an
18 investigation and second request by the Justice Department. So
19 Mr. --
20 THE COURT: Do these transactions require Hart-Scott
21 clearance?
22 MR. HARRIS: I would have to defer Your Honor to my
23 corporate partner on that. I know our --
24 THE COURT: Is it a certain --
25 MR. HARRIS: -- our transaction does not.
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1 THE COURT: Your transaction does not?
2 MR. HARRIS: Our transaction does not. We clearly
3 fall below the limits and are exempt for other reasons. May I
4 just confer with --
5 THE COURT: Well --
6 MR. HARRIS: Mr. Utay's testimony --
7 MR. PEREZ: -- all right, you've represented that, as
8 far as you know, yours does not. I'm not asking anybody else
9 to comment right now. They'll be able to comment, to the
10 extent they wish, when you're finished with your proffer.
11 MR. HARRIS: So in that aspect, Mr. Utay would
12 testify that, in his view, this transaction has material risk
13 of not closing at all, which obviously would have a serious
14 effect on whether the term lenders ever get the portion of the
15 purchase price represented by the KPS cash consideration.
16 He would also testify that, even if the transaction
17 closes, the timing of that closing is at serious risk relative
18 to the same two issues he already identified, meaning the final
19 order requirement as well as getting whatever clearances there
20 needed to be from Department of Justice and other authorities,
21 and that given the way the transaction is set up, the recovery
22 to term lenders deteriorates over time because -- due to the
23 fact that the company's methodology for allocation of proceeds
24 is to have all the money first allocated to paying off the DIP
25 lenders with the residual simply being what's available at the
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1 end of the day for the term lenders.
2 So, you know, the interim issues of timing, funding
3 of additional losses of the company, the incurrence of
4 additional professional fees, et cetera, all fall on the term
5 lenders to basically bear the burden as timing goes on. And
6 Mr. Utay would testify that, in the aggregate, if this
7 transaction were to not occur until closer to the ultimate
8 termination date in the agreement, which is April 30, the
9 recoveries for term lenders from the portion of the
10 consideration coming from KPS would go from a projected
11 nineteen million dollars to a projected four to five million
12 dollars.
13 He would further testify, Your Honor, in conclusion,
14 that that working capital adjustment, which in theory is
15 intended to compensate for a portion of that, is completely
16 within the control of KPS given that they developed the closing
17 statement, they set the initial adjustments and that there will
18 be nobody at the company and no resources of the company to
19 ever contest that.
20 And that would be the substance of his testimony.
21 THE COURT: All right. Now, you mentioned the New
22 Jersey authorities and, obviously, representative/lawyer was
23 here the other day, and I'm not going to get into the position
24 that she's taking. But I think it was commented that your
25 position and the, as far as you know, the KPS or the UAC
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1 position with regard to the New Jersey property was different.
2 Perhaps you should explain at least your client's position and
3 then what you understand the KPS position to be.
4 MR. HARRIS: Your Honor, the KPS position, as per
5 their original contract, is they needed to get an order of this
6 Court, which I believe is imbedded in the sale order they
7 presented, which effectively insulates them from, in their
8 view, any liability relative to the ISRA liability that
9 Ms. Lehrer (ph.) was taking about when she was here the other
10 day. And they have a final order requirement that says if
11 anybody appeals, then obviously they don't have to close until
12 the appeal has been resolved or they determine that they want
13 to waive the requirement. As one of the oddities of the
14 negotiation that's occurred over the past several days, Your
15 Honor, our original approach to the New Jersey Department of
16 Environmental Protection has actually moved to the KPS, one,
17 because that's what the debtors have asked us to do is to take
18 their contract. Now, our original approach, Your Honor, was
19 actually to approach the New Jersey Department of Environmental
20 Protection and try and negotiate effectively a successorship-
21 type agreement with them where we would agree to undertake to
22 perform the obligations of the company under the existing
23 remediation agreement with the state, which is currently backed
24 by a letter of credit which, I believe, is in the amount of
25 either 1.6 or 1.8 million dollars.
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1 So our approach was decidedly different, Your Honor.
2 We wanted to go make peace with the state of New Jersey if we
3 could; ultimately, I suspect really a fallback, if we could
4 not, of a position more consistent with KPS'. But at the
5 moment, that was our original intent. And we had actually
6 started to have some discussions with them in that regard when,
7 obviously, things went sort of sideways. But, obviously, we
8 would be, and continue to be, prepared to engage in that
9 discussion with the state to perform the obligations on the
10 remediation, which is a wholly independent set of consideration
11 from what's actually coming directly to the creditors to the
12 estate.
13 THE COURT: Well, I gather that the difference in
14 approach also would appear to be dictated by the difference in
15 deal or in transaction. You're taking all of the assets of the
16 estate, and one of the -- as I understand it, and one of the
17 benefits that you state the estate receives from your
18 transaction is that it has no ongoing expenses of any kind
19 other than to try to confirm a plan; how is not quite so clear.
20 MR. HARRIS: That's not directly tied to our approach
21 to the state of New Jersey, Your Honor, but it is true --
22 THE COURT: Well, it is in the sense that you're
23 taking all the property, which would include the lease. You're
24 rejecting -- I guess you would -- the debtor would reject that
25 lease 'cause it doesn't own the property any longer.
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1 MR. HARRIS: Your Honor, at the time we were first
2 negotiating the provisions relative to how we were going to
3 approach the state of New Jersey, which were back in early
4 December, the company, I believe, had a service center there as
5 well as a retail outlet. And it was our understanding at the
6 time it would be very difficult to relocate those people to
7 anyplace else. Therefore, our approach was going to be to
8 actually assume the lease in Pomona, New Jersey, continue the
9 operations there and deal with the state of New Jersey.
10 We've subsequently been advised by the company that
11 they are actually relocating those businesses out of Pomona.
12 We do believe that there continue to be issues about
13 responsibility relative to the state of New Jersey even if you
14 reject the lease, which is the position Ms. Lehrer was taking
15 when she was here the other day. Our approach, until we were
16 asked to conform to the KPS contract, was to engage the state
17 of New Jersey rather than rebuff the state of New Jersey.
18 THE COURT: All right.
19 MR. HARRIS: Thank you, Your Honor.
20 THE COURT: All right, any cross, or do you want a
21 few minutes to consider --
22 MR. PEREZ: No, Your Honor, I definitely want to
23 cross.
24 THE COURT: Okay. You ready?
25 MR. PEREZ: I'm ready.
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1 THE COURT: All right. Please state your name for
2 the record.
3 MR. UTAY: Marc Alan Utay.
4 (Witness duly sworn)
5 THE COURT: Please be seated. And I assume you adopt
6 under oath the proffer that your counsel just made?
7 THE WITNESS: I do.
8 THE COURT: Thank you.
9 CROSS-EXAMINATION
10 BY MR. PEREZ:
11 Q. Good morning, Mr. Utay. My name's Alfredo Perez. I
12 represent the debtors. Let me ask you a question. Did Clarion
13 bid for the Waterford Wedgwood assets?
14 A. Clarion was involved in the process of bidding for the
15 Waterford Wedgwood assets, yes.
16 Q. And did Clarion prevail in that bid?
17 A. No.
18 Q. All right. Now, you said that you had reviewed the
19 various drafts of the APA, is that correct, of the KPS APA?
20 A. I think what we testified is we read this last -- we read
21 this last draft of the APA. I have seen other ones also.
22 Q. Okay. Well, so when did you focus on the two conditions
23 to closing that your counsel pointed out?
24 A. I can't give a specific time in the last week as we've
25 been asked to adopt their contract. We've read the provisions.
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1 And as recently as last night, we went through and reread all
2 of the conditions to compare them to our own deal.
3 Q. Okay, now, you were in court when counsel for the New
4 Jersey State was here, correct?
5 A. Yes.
6 Q. And is it your understanding that their objection is to
7 the sale or their objection is to the allocation of the
8 purchase price proceeds?
9 MR. HARRIS: Objection, Your Honor. Asking for him
10 to call a legal conclusion.
11 THE COURT: Well, his conclusion isn't binding. It
12 is what it is. I'd certainly ask him what his understanding
13 is.
14 A. I couldn't answer that question specifically because it
15 requires my knowledge of the law that I don't have. My common-
16 sense understanding of what she said in court was that she
17 wanted to make sure that someone was responsible for cleaning
18 this up and that, unless she was satisfied, that she could
19 object to the closing of this transaction.
20 Q. So those are the exact words that you heard, "the closing
21 of this transaction"?
22 A. I couldn't tell you word for word what she said.
23 Q. Well, do you have any recollection as to what she said?
24 A. That was what I understood her to say.
25 Q. Okay. Now, in terms of the objection to the final order,
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1 if you're not the successful bidder, is it your intent to
2 object and file an appeal?
3 A. We've made no decision as to what we would do if we were
4 not the successful bidder.
5 Q. In connection with the plan support agreement, which you
6 signed -- you did sign the plan support agreement, correct?
7 MR. HARRIS: Objection, Your Honor. Goes beyond the
8 scope. Never asked him about the plan support agreement.
9 THE COURT: Overruled.
10 Q. You did sign the plan support agreement, right?
11 A. The term lenders, at one point, signed the plan support
12 agreement.
13 Q. Did you sign the plan support agreement?
14 A. I don't know if I personally signed it or not.
15 Q. Did Clarion sign the plan support agreement?
16 A. I don't know if Clarion supported -- if Clarion signed it.
17 We were part of the term lender group.
18 Q. Well, did you ever believe that you had any obligation
19 under the plan support agreement?
20 A. We believed that if we proceeded with the plan that we
21 would proceed under the plan support agreement.
22 Q. Well, but the plan support agreement talks about a
23 situation where you're not the successful bidder, correct?
24 A. Yes.
25 Q. And it says that you will abide by the outcome of the
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1 auction, doesn't it?
2 MR. HARRIS: No, it does not, Your Honor. Objection.
3 Why doesn't he show him the document and take him through it if
4 he wants --
5 THE COURT: He can ask him the question as to best he
6 recalls. If he doesn't recall, well, I'm sure he'll tell us
7 that he doesn't recall. And his views are, of course, subject
8 to what the document provides.
9 A. I don't believe that's the case.
10 Q. Okay, so you never understood that if the auction was run
11 pursuant to the bidding procedures and you were not the winner
12 that you did -- that there was never any agreement on your part
13 to abide by the results of the auction? Is that your
14 understanding? Is that your testimony?
15 A. My testimony is that we -- if we proceeded along those
16 plans that we would abide by that agreement. We did not in any
17 way proceed along those plans. This is a different process.
18 And, therefore, we don't believe that document is binding.
19 Q. Okay, so you don't believe that the auction that was
20 conducted was conducted pursuant to the bid procedures?
21 A. No.
22 Q. Okay. Thank you. What was it conducted pursuant to?
23 A. You'd have to ask the people who conducted it.
24 Q. So as we sit here today, is it your testimony that you
25 have no obligations under the plan support agreement?
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1 A. You'd have to ask my counsel whether or not I have any
2 obligations under that agreement. I don't believe I do.
3 Q. Okay. And when was the last time you read the plan
4 support agreement? Let me, first of all -- I'm sorry, have you
5 ever read the plan support agreement?
6 A. Yes.
7 Q. When was the last time you read it?
8 A. I think December.
9 Q. And do you recall the provision that it says not only that
10 you will abide by the results of the auction but that you won't
11 do anything to frustrate implementation of that result?
12 A. I don't recall any specific provisions of that document.
13 I haven't read it in months.
14 Q. Okay. Now, Mr. Utay, have you contacted any governmental
15 authorities about asking them to conduct an investigation to
16 the sale of these assets to KPS?
17 A. No.
18 Q. Have you instructed anyone to do that?
19 A. No.
20 Q. Has anyone that you know of done that?
21 A. I have no knowledge of that.
22 Q. Is it your intent to do that?
23 A. I have no intent to do so.
24 Q. You have no present intent to do so, is that what you
25 said?
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1 A. I said I have no intent to do so.
2 Q. So you're testifying that you're not going to do anything
3 to cause an investigation to come up?
4 A. What I am testifying is I have no intent to do it. I'm
5 not testifying as to what I may want to do a week from now or
6 two weeks from now or two years from now.
7 Q. Or tomorrow?
8 A. Or tomorrow.
9 Q. Or five minutes from now?
10 A. I think I can give you the assurance I won't do that in
11 the next five minutes.
12 Q. Thank you. I appreciate that. How much term debt does
13 Clarion own?
14 A. We own, I think, approximately thirty percent of the term
15 loan.
16 Q. And when did you buy it?
17 A. We bought it in several stages. The first, I believe,
18 twenty-seven million we bought in either July or August of this
19 year.
20 Q. That was after Lenox had announced that the sale was a
21 frustrated sale and that they had not been able to sell the
22 assets, correct?
23 A. I believe it was right or about that time.
24 Q. There was an 8-K filed after Lenox concluded that there
25 was a sale that had not cleared, that would not clear the term
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1 debt. Do you recall that?
2 A. Yes, I do.
3 Q. And you bought after that?
4 A. I believe we did, yes.
5 Q. And then when was the last time you bought?
6 A. I believe we bought some in the last month from one of the
7 lenders who wanted to sell.
8 Q. Last month? After the filing?
9 A. Yeah, after. Definitely after the filing.
10 Q. After the plan support agreement?
11 A. I think. I don't recall when the last piece was bought.
12 Q. Okay. Do you know there are provisions in the plan
13 support agreement with respect to the transfer of claims?
14 Correct?
15 A. I have no such recollection.
16 Q. Okay. Now, how much capital does Trumpet have?
17 A. Two hundred and fifty-five million.
18 Q. And how much of that is committed?
19 A. Roughly 180 million.
20 Q. And so that'd be an additional thirty-five million that's
21 going to be added onto this -- to that?
22 A. Yes.
23 Q. Okay. So, I'm not very good at math, but 180 plus 35 is
24 215; so there'll be roughly 40 million dollars that will be
25 remaining?
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1 A. Yes.
2 Q. Now, in your testimony, you said many, many times if there
3 were a need for additional capital, we certainly have the
4 resources to make it available. Is that correct?
5 A. I don't think I used the word "many", but I believe the
6 rest of that is what was said.
7 Q. Okay, well, could you restate what you said, please?
8 A. Yes. If resources -- if additional resources are
9 necessary, for instance, for Lenox, we have them available.
10 Q. Okay. Why don't you commit to do that?
11 A. Because that's not the business we're in. We're in the
12 business of capitalizing the company so it's sufficient. If it
13 turns out that those needs change, either because the business
14 plan changes or the environment changes, we put in additional
15 capital.
16 Q. Has it ever crossed your mind that this company might need
17 more resources?
18 A. Sure.
19 Q. And has it ever crossed your mind that, had you committed
20 to it, we wouldn't be here?
21 A. No.
22 Q. So what you're basically saying is we'll take a wait-and-
23 see attitude and then maybe at the time after the liquidity
24 crisis comes, you would consider putting money in? That's what
25 you're saying?
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1 A. I'm not saying anything of the sort.
2 Q. Okay. But you're -- but what you are saying is that
3 you're not willing to commit today?
4 A. What I am saying is we have run businesses over a long
5 period of time in a responsible fashion. We have never run a
6 business that is undercapitalized. We have never had a
7 business that has had any problems paying its bills, ever. So
8 what I am testifying is that problems in businesses do not
9 happen overnight. You have time to react to them and manage
10 the situation. If, after managing that, we think there's
11 additional capital required, we're happy to put it in, and we
12 have put it in in those circumstan -- in similar circumstances.
13 Q. What would be the circumstances when you would put it in?
14 A. Well, if the much-discussed question of adequate working
15 capital came up, I believe we -- that would be a circumstance
16 where we would put more money up.
17 Q. Okay. And do you think you would have the resources at
18 that time to do it?
19 A. The CFO testified yesterday that he thought, as long as we
20 had fifteen million dollars of room, that he could handle that.
21 We're talking about something that is within our resources,
22 therefore.
23 Q. Let me ask you a question going back. When you originally
24 tried to obtain third-party financing, was it your expectation
25 at the time that you would put in between ten and fifteen
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1 million dollars of equity?
2 A. Our expectation was probably that we would put in ten
3 million dollars of equity.
4 Q. Okay, and that just didn't prove to be enough, correct?
5 A. True.
6 Q. Okay. And then as late as February 6th, you were still
7 only putting in twenty million dollars of equity?
8 A. That was the proposal that was on the table with the
9 lenders, yes.
10 Q. And then it's only at the time of the auction that the
11 number of thirty-five million came in, correct?
12 A. It was at the time. Well, a couple days before that, we
13 shifted deal structure and we committed to thirty-five.
14 Q. Originally you thought you would only have to put in ten
15 to get these assets?
16 A. Put in ten to get these assets?
17 Q. Put in ten million dollars of equity.
18 A. No, we all have additional equity. We have ninety-eight
19 and a half million dollars of term debt that is becoming equity
20 in the company. And then we felt at the time, after
21 consultation with both our advisors and the lenders, that an
22 additional ten million dollars might be required.
23 I would add one thing here, which is, I think we've
24 demonstrated our commitment to put up more capital. You just
25 said it yourself: We went from ten million to twenty million
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1 to thirty-five million. And in the ten million, Clarion was
2 putting up perhaps thirty percent of the money, and now we're
3 putting up a hundred percent of the new money.
4 So if you look at it, I think, prima facie, we've made the
5 case that you wanted to get from us and the company wanted to
6 get from us, which is that, when necessary, we've stepped right
7 up and put more money in.
8 Q. Well, unfortunately, it's the judge who decides who makes
9 the prima facie case. But I have no further questions,
10 Mr. Utay. Thank you.
11 THE COURT: Before we have redirect, let's have any
12 further cross.
13 MR. AUSTIN: Thank you, Your Honor. For the record,
14 I'm Jesse Austin on behalf of UBS.
15 CROSS-EXAMINATION
16 BY MR. AUSTIN:
17 Q. Good morning, Mr. Utay. In the line of questions from
18 Mr. Perez, I think you outlined that the Trumpet Fund, which is
19 the fund by which the equity dollars are coming for this
20 investment, has capital of 255 million. Is that correct?
21 A. Yes.
22 Q. And as he walked it down, you have 180 committed with 35
23 additional for the Lenox deal, which leaves you net 40,
24 correct?
25 A. Yes.
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1 Q. If needed, could the Trumpet Fund put all of the forty
2 million dollars into the Lenox deal?
3 A. Not without consent of our limiteds.
4 Q. Well, how much more of that forty million, then, could the
5 Trumpet Fund put into the Lenox deal without having to go get
6 consent from your limited partners?
7 A. Plus or minus another ten to twelve million dollars.
8 Q. Okay. Now, Mr. Harris asked you a number of questions
9 that basically went to Hart-Scott approval. And Mr. Perez
10 asked you the question whether you or anyone on behalf of
11 Clarion had contacted any authorities for purposes of
12 initiating any type of investigation. I believe your testimony
13 was you had not and that you had no intent, at least as of
14 today, to do so. Is that correct?
15 A. Yes.
16 Q. All right. Do you know if any other of the term lenders
17 have made any phone calls, made any inquiries to initiate any
18 investigations?
19 A. I have no knowledge of any.
20 Q. Okay. Now, with respect to Hart-Scott, I presume you're
21 not an expert on Hart-Scott, are you?
22 A. No.
23 Q. Okay. Do you know if the KPS transaction even needs Hart-
24 Scott review?
25 A. I do not.
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1 Q. Okay. Do you know even what the dollar threshold amount
2 is that may trigger a Hart-Scott review these days?
3 A. I do.
4 Q. What is that?
5 A. I think it's around sixty million dollars.
6 Q. All right. And the KPS deal is certainly less than that,
7 correct?
8 A. As this deal in isolation, it is. I'm not sure that
9 that's the technical analysis when they have a letter of intent
10 to buy a major competitor.
11 Q. Okay. Mr. Harris asked you a number of questions relative
12 to one of your concerns about the KPS transaction being the
13 need for a final order. Isn't it correct that any APA which
14 term lenders have submitted has a need for a final order to
15 approve a sale?
16 A. It is. The distinction I'd make is that we were --
17 Q. No, no, do you have a requirement? Do you --
18 MR. HARRIS: The witness answered the question.
19 THE COURT: I think the witness can answer the
20 question. He says there is a -- you said there was a
21 requirement, did you not?
22 MR. HARRIS: No, he said there may be a distinction,
23 Your Honor. He didn't say yes or no yet.
24 THE WITNESS: No, I said there's a requirement.
25 THE COURT: There is a requirement.
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1 MR. HARRIS: Okay.
2 THE WITNESS: There's a requirement.
3 THE COURT: So your question has been answered.
4 Rather than wait for his counsel to ask the next question, why
5 don't you let him --
6 MR. AUSTIN: That's fine.
7 THE COURT: -- finish his answer?
8 A. I think the distinction is that we previously indicated a
9 willingness to work with the state of New Jersey in a way which
10 wouldn't raise an objection. And it's only when we conformed
11 our APA to KPS that we put ourselves in a position where we're
12 in conflict with New Jersey. And we view that as a significant
13 risk.
14 Q. Now, you do acknowledge that, as of the deadline provided
15 under the bidding procedures of February 9th, that the term
16 lenders did not have financing available to finance their
17 proposed transaction, correct?
18 A. Yes.
19 Q. And you also didn't have all of that financing available
20 even at the beginning of the auction on February the 11th,
21 correct?
22 A. I think the final letter was not done. I would take
23 the -- I would take the position that we were finishing up some
24 wording on the letter and we -- we were ready to go.
25 Q. Well, I'm talking about at the beginning, at 10 o'clock in
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1 the morning. You didn't have the debt financing letter yet,
2 did you?
3 A. We didn't have the debt financing letter finished by then,
4 yes.
5 Q. And both of your letters, both your equity financing
6 letter and your debt financing letter, are tied to actually
7 closing on an acceptable purchase agreement, correct?
8 A. Yes.
9 Q. Okay. And that as of February 11th, you didn't have an
10 asset purchase agreement agreed to between the term lenders and
11 the debtors, correct?
12 A. We didn't have a term -- we did not have an APA agreed to,
13 but we had an APA we'd close on. We'd given it to you. The
14 fact that -- I believe the testimony yesterday, Your Honor, was
15 that you told your lawyers to put the pencil down and not
16 negotiate with us. But I had a document I would close on.
17 Q. That you would close on?
18 A. Yes. We would close --
19 Q. The debtor --
20 A. -- on the document we submitted.
21 Q. The debtor wasn't prepared to close on it, though,
22 correct?
23 A. Well, the debtor really never told us what its objections
24 to, so -- were to it, so I don't know why that is my problem.
25 Q. Now, the other issue that Mr. Harris asked you about, I
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1 believe, was that to the extent that the KPS transaction goes
2 forward, the term lenders believe there may be an issue on how
3 you allocate the proceeds, correct?
4 A. Yes.
5 Q. So are you basically saying that, if that KPS deal goes
6 forward, you will attempt to prevent the payment of the DIP
7 loan and other distributions of those proceeds at the closing?
8 A. I think there's a legitimate question as to how those
9 proceeds should be allocated, and we'll make our decision
10 following the auction.
11 Q. Well, as of today, is it your intent to oppose paying off
12 the DIP loan at the closing if the KPS transaction goes
13 forward?
14 A. We have to know what the KPS transaction is that goes
15 forward in order to know.
16 Q. As currently proposed. You said you've reviewed it.
17 A. We'll make the decision afterwards. But that's the
18 answer.
19 Q. Well, you would agree that under the proposed debt
20 financing that's been presented to the term lenders by LBC and
21 Clinton-Magnolia to close that debt financing, you have to have
22 a borrowing base showing a borrowing base of at least twenty-
23 five million dollars of value, correct?
24 MR. HARRIS: Objection, Your Honor. Why is this in
25 any way relevant to the subject matter of either the direct or
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1 the hearing? We're talking about an allocation of proceeds.
2 The testimony was, on the debtors' methodology, which presumes
3 the DIP lenders get paid first, there could be a substantial
4 deterioration. We never got into the issue of allocation of
5 what might happen if the KPS consideration was paid in and
6 there needed to be some potential escrow in fighting over it.
7 THE COURT: I do think that the question of
8 allocation is not before us today. And if the question only
9 has to do with allocation, I think it's probably objectionable.
10 I do think, though, that the record could be clarified, and not
11 by this witness but by counsel, as to the question that if
12 ultimately, at the end of the day, the term loan lenders are
13 the successful bidders, and I'm not -- by asking the question,
14 I'm not implying anything. But if you're the successful
15 bidders, Mr. Schiff (sic) --
16 MR. HARRIS: Harris.
17 THE COURT: Mr. Harris. I beg your pardon.
18 MR. HARRIS: It's a great first name; wrong last
19 name.
20 THE COURT: Mr. Harris. I've done this before, I
21 think, at your -- you're certainly --
22 MR. HARRIS: We're friends, Your Honor. Schiff and
23 I'd be happy to be interchanged.
24 THE COURT: Mr. Harris, if you're the successful
25 bidder, you're putting up X dollars in cash to pay off the DIP
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1 lenders, and there's no issue whatsoever?
2 MR. HARRIS: No question, Your Honor.
3 THE COURT: All right. That's what I've always
4 assumed from the record. I wonder there really is an issue if
5 KPS is the successful bidder. Maybe we have to get to that and
6 maybe we won't.
7 MR. AUSTIN: Well, Your Honor, my line of question
8 was a result of what I thought was the opening -- one of the
9 objections that the term lenders had to the KPS transaction was
10 the issue, as Mr. Utay did say he thought there was an issue of
11 allocation and how you present it, which was effectively, from
12 our perspective, an implied -- and it's actually not implied;
13 it's a direct threat, that one reason to not have this Court
14 move forward on the KPS deal is that the term lenders are
15 threatening additional litigation over the issue. But that --
16 we'll save that for argument. That's all the questions I have.
17 THE COURT: Well, I don't know that this witness can
18 speak for all of the term lenders; maybe he can. But I can
19 assure you that if we have to deal with that particular issue
20 later on, it will likely be dealt with very speedily and should
21 not weigh very heavily in the mix. I've already stated in
22 chambers that I don't believe that the argument that the term
23 loan lenders made has very much weight. The motion -- I've
24 never formally dealt with it, but I do have before me a motion
25 which purports to call a default and take other steps because
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1 of alleged breaches --
2 MR. AUSTIN: That's all the questions I have, Your
3 Honor.
4 THE COURT: -- lack of consent. I'm really speaking
5 right now, I should say, about the 363(f)(2) argument --
6 MR. AUSTIN: Right.
7 THE COURT: -- that, if KPS is the winning bidder,
8 that the term loan lenders haven't consented. And I stated in
9 chambers and I'll state -- I'll certainly listen on closing
10 argument when we're done is when I'll make a decision, but I've
11 already stated that I don't think that weighs very heavily in
12 the mix or at all.
13 MR. AUSTIN: That's all the questions I have of
14 Mr. Utay, Your Honor.
15 THE COURT: All right. Anyone else?
16 MS. HERSHCOPF: Your Honor, could I just confer with
17 the debtor for a few minutes before we --
18 THE COURT: All right, why don't I take a --
19 MS. HERSHCOPF: -- just propose what's on the cross?
20 THE COURT: I'll take a five-minute break, and then
21 you'll examine. And Mr. Harris has a few extra -- some further
22 questions?
23 MR. HARRIS: I may or may not.
24 THE COURT: You may or may not. All right.
25 MR. HARRIS: I could take a minute with the debtors.
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1 THE COURT: But we'll take a break. I'll ask the
2 witness, please do not discuss your testimony with anyone
3 during the break.
4 (Recess from 11:48 a.m. until 11:49 a.m.)
5 THE COURT: All right, Mr. Utay. You're still under
6 oath. Any cross? Any further questioning by the creditors'
7 committee?
8 MS. HERSHCOPF: I think, Your Honor, that the
9 debtor's going to ask the final question.
10 THE COURT: All right. Do you want --
11 MS. HERSHCOPF: Did you want me to do it?
12 MR. PEREZ: No, no, no, no, no. I just didn't want
13 to go out of turn.
14 THE COURT: Well, I think we're now on cross. I
15 think now's the time for you --
16 MS. HERSHCOPF: Right.
17 MR. PEREZ: Okay. Thank you, Your Honor.
18 MS. HERSHCOPF: It's our turn to finish.
19 THE COURT: And then we'll have Mr. Harris on
20 redirect.
21 RECROSS EXAMINATION
22 BY MR. PEREZ:
23 Q. Mr. Utay, what would be the circumstances under which you
24 would not fund any additional monies into Lenox?
25 A. I suppose, like most investors, if we concluded that Lenox
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1 did not have a viable business.
2 Q. Okay. And what would you look for in order to determine
3 whether it didn't have a viable business?
4 A. That's a fairly broad question. We would look at
5 everything about the business. I find it almost inconceivable
6 that you could reach that conclusion over the next year or two
7 about Lenox itself. It has thirty-eight percent of the market
8 for china. Its market share has not changed; if anything, it's
9 gone up. It has a viable product with a strong demand. The
10 fact that the company can be run better doesn't take away from
11 the fact that there's a reason for this business to exist. And
12 well-run, it should succeed. So it's sort of inconceivable you
13 could reach that conclusion over any finite period of time.
14 Q. And had you -- were you going to use the Trumpet Fund also
15 to purchase Waterford Wedgwood?
16 MR. HARRIS: Objection, Your Honor. What's the
17 relevance of this, considering the fact that it's already been
18 awarded to somebody else?
19 THE COURT: Well, I'll allow it if he can answer the
20 question.
21 A. Part of the money for the Waterford transaction was
22 certainly to come from the Trumpet Fund.
23 Q. And would you have had sufficient monies in the Trumpet
24 Fund to do Lenox, do Waterford Wedgford (sic) and support Lenox
25 in the future?
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1 A. Not out of the Trumpet Fund itself, but we have partners
2 in that deal.
3 Q. Okay. And is Clarion out in the business world trying to
4 do deals?
5 A. Sure.
6 MR. PEREZ: Nothing further, Your Honor.
7 THE COURT: All right. Mr. --
8 MR. HARRIS: I have no redirect, Your Honor.
9 THE COURT: All right. Mr. Utay, you may step down.
10 Thank you very much.
11 MR. HARRIS: Your Honor, if we could take care of
12 just a couple of housekeeping details on exhibits?
13 THE COURT: All right.
14 MR. HARRIS: I've spoken with debtors' counsel, and
15 we've stipulated to the introduction of a series of exhibits
16 which have been referenced during the course of the proceedings
17 and, in some respects, shown to witnesses but which we didn't
18 take care of last night. Your Honor, those would be Exhibit
19 28. And 28 may have come in; we just couldn't recall. Those
20 were the forms of UBS commitment letters that were shown
21 yesterday to Mr. Doke (ph.). So we've stipulated to 28 coming
22 into evidence Your Honor.
23 THE COURT: All right. Does anyone wish to be heard?
24 All right. So admitted.
25 (Forms of UBS commitment letters were hereby received into
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1 evidence as Exhibit 28, as of this date.)
2 MR. HARRIS: Exhibit 23, Your Honor, which was the
3 e-mail from Mr. Zughayer to various members of the debtor's
4 legal team and professionals in management regarding KPS, which
5 we discussed last night with Mr. Zughayer on his testimony.
6 THE COURT: Um-hum. Anyone wish to be heard? All
7 right, we'll admit that.
8 (E-mail from Mr. Zughayer regarding KPS was hereby received
9 into evidence as Exhibit 23, as of this date.)
10 MR. HARRIS: Exhibit 24, Your Honor, which was the
11 e-mail from Vaughan Petherbridge at Weil Gotshal to Lou Fantin
12 with a reference to the pens-down reference in there.
13 THE COURT: To the high cost of lawyers, yes. I
14 remember that very well.
15 (E-mail from Vaughan Petherbridge to Lou Fantin was hereby
16 received into evidence as Exhibit 24, as of this date.)
17 MR. HARRIS: The Exhibit 34, Your Honor, which was
18 Mr. Perez's e-mail to Jesse Austin and to me dated November 30,
19 2008.
20 THE COURT: That's exhibit number --
21 MR. HARRIS: 34.
22 THE COURT: All right, that comes in. Anyone wish to
23 be heard? All right. Admitted.
24 (E-mail from A. Perez to J. Austin and A. Harris dated 11/30/08
25 was hereby received into evidence as Exhibit 34, as of this
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1 date.)
2 MR. HARRIS: Your Honor, Exhibit number 1, which is
3 actually a copy of the plan support agreement, which has been
4 referred to but never introduced.
5 THE COURT: Well, that's part of the record, but I
6 think we can certainly admit that. That makes sense.
7 (Plan support agreement was hereby received into evidence as
8 Exhibit 1, as of this date.)
9 MR. HARRIS: Exhibit 4, Your Honor, which is a full
10 version of the order authorizing and approving bid procedures
11 in related matters, which include the bid procedures as Exhibit
12 1, but we -- I don't know, it's been talked about, but I don't
13 believe it's ever been introduced.
14 THE COURT: Well, that cer -- that's also in the
15 record, but we'll admit that, Exhibit 4, unless anyone wishes
16 to be heard, Exhibit 4.
17 (Order authorizing and approving bid procedures was hereby
18 received into evidence as Exhibit 4, as of this date.)
19 MR. HARRIS: And the last one, Your Honor, is Exhibit
20 25, which is a copy of the termination notice sent by the term
21 lenders to the debtors with respect to the plan support
22 agreement which, had we not stipulated to it, I would have
23 introduced through Mr. Utay.
24 THE COURT: Anyone wish to be heard? All right,
25 we'll put that in, for what it's worth.
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1 (Termination notice sent by lenders to debtors re: plan support
2 agreement was hereby received into evidence as Exhibit 25, as
3 of this date.)
4 MR. HARRIS: That's it, Your Honor, in terms of the
5 housekeeping.
6 THE COURT: All right.
7 MR. PEREZ: Excuse me.
8 THE COURT: And you're -- otherwise you rest,
9 Mr. Harris?
10 MR. HARRIS: I believe it's -- well, did we introduce
11 Exhibit 53?
12 MR. PEREZ: No, 53 is in. Exhibit 15, which is the
13 transcript of the auction.
14 MR. HARRIS: That's fine, Your Honor.
15 THE COURT: Auction transcript. Anyone wish to be
16 heard? All right. That's admitted.
17 (Transcript of auction was hereby received into evidence as
18 Exhibit 15, as of this date.)
19 THE COURT: And Exhibit 53 is in?
20 MR. HARRIS: I believe is in. Those were the
21 projections.
22 THE COURT: All right. So the term loan lenders
23 rest?
24 MR. HARRIS: Your Honor, we're not -- we're prepared
25 with respect to all other matters to rely on the papers that
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1 we've submitted to Your Honor, including the objection and the
2 legal briefs in there. We have no further evidentiary
3 witnesses. And to the extent Your Honor wants to hear
4 argument, we're prepared to move forward on that.
5 THE COURT: All right. Anything further, Mr. Perez?
6 MR. PEREZ: No, Your Honor. We don't have anything
7 further.
8 THE COURT: Mr. Austin?
9 MR. AUSTIN: No, Your Honor.
10 THE COURT: And from the committee?
11 MS. HERSHCOPF: Nothing further, Your Honor.
12 THE COURT: Anyone else? All right, do you wish to
13 make brief closing statements?
14 MR. PEREZ: Yes, Your Honor. I'll be very brief.
15 THE COURT: All right.
16 MR. PEREZ: First of all, Your Honor, thank you for
17 taking the time to listen to us over these last three days. We
18 certainly never anticipated that it would take this long, and
19 we appreciate the Court's indulgence.
20 Your Honor, I think we're here on a relatively narrow
21 issue, and that issue is did we exercise our business judgment
22 discretion in awarding the bid to KPS? I believe, Your Honor,
23 that the testimony that the Court has heard fully supports the
24 fact that we exercised our business judgment. And we find
25 ourselves in an extremely odd situation because basically what
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1 the term lenders are saying is we have the toughest credit
2 market we've seen since the Great Depression; as a result, we
3 have had a very difficult time despite our efforts going back
4 to November, hiring Miller Buckfire in September, countless
5 discussions with the company going out to thirty financing
6 sources, doing all of those things; we've had the toughest time
7 ever getting to the point where we were able to put together
8 what we've put together to bring here; while at the same time
9 they're criticizing the debtor for taking a transaction which
10 has certainty of closing. So it's like they really can't --
11 they can't have it both ways. We can't be criticized for
12 trying to address the very issue that is a problem or that has
13 been a problem that everybody recognizes is a problem.
14 Your Honor, I think that, based on the testimony that
15 there is nothing in this record, nothing that the Court has
16 heard which would indicate that any of the standards --
17 obviously the Court has absolute discretion, but any of the
18 standards that the other cases --
19 THE COURT: I don't have absolute discretion. Let me
20 be clear. I have --
21 MR. PEREZ: The Court has discretion.
22 THE COURT: I have some degree of discretion, and
23 I'll exercise it based upon the authorities that --
24 MR. PEREZ: Right.
25 THE COURT: -- I've referred to and that the other
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1 parties have referred to. They're not secret.
2 MR. PEREZ: Right. And, Your Honor, and if we look
3 at the Second Circuit case, the Financial News Network, clearly
4 that case allows the Court discretions. But the facts in that
5 case are not really coincident with the facts and the testimony
6 that has been developed here.
7 Your Honor, we simply believe that we ran and -- we
8 entered into a plan support agreement which indicated that we
9 would run an auction. And, in fact, as Mr. Harris indicated,
10 it was really the term lenders' idea to do the auction to kind
11 of validate the process, which we agreed, and because there was
12 the concern additionally of the fact that they may not have
13 financing to take out the DIP and to make the necessary
14 payments and to have sufficient liquidity to go forward. All
15 of those things remain true.
16 We entered into these documents. We thought we were
17 going to run a smooth process. Unfortunately, term lenders
18 didn't like the result. But I don't think invalidates the
19 process, and I don't think that invalidates our business
20 judgment, and I don't think that that casts a shadow over what
21 was done or why we did what we did. I think that in terms of
22 the actions that the debtor took in response to the various
23 situations that it faced in every circumstance, it was a
24 considered decision in the exercise of its business judgment.
25 And I don't believe, Your Honor, that there's anything in the
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1 record other than an affirmation of the fact that we should go
2 forward with the KPS bid. Thank you.
3 THE COURT: Let me ask you two questions.
4 MR. PEREZ: Yes.
5 THE COURT: First, I think that the debtor's
6 judgment, as it stands today and as it stood on February 11th,
7 bears on the issues and can't be discounted. On the other
8 hand, I think, under the authorities, including Financial News
9 Network, it's just one of the issues that the Court has to
10 consider. It isn't the only issue. And as I read several of
11 the cases, even if the term loan lenders' bid was late but if
12 they have a higher and better offer today, I have to consider
13 that. It doesn't mean I have to state it should be taken, but
14 I do think I am entitled and obligated to consider it. Do you
15 disagree with that?
16 MR. PEREZ: I do not disagree with that, Your Honor.
17 THE COURT: All right. And the second question is,
18 let us assume I refuse to reopen the bidding, I confirm the
19 sale to KPS today. And let's assume it closes and the debtor
20 is left with some property in New Jersey and some -- I guess,
21 the D 56 assets and some other miscellaneous assets, all of
22 which, as far as I know, are subject to the term loan lenders'
23 liens. What do we do? What do we do with the case? The term
24 loan lenders have already moved for relief from the stay; let's
25 assume that that motion was litigation tactics and we'll put it
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1 aside. But what do we do? We have a, don't we, have a totally
2 administratively insolvent estate?
3 MR. PEREZ: Your Honor, we may, and I think we
4 probably would. There is a million-two of escrow that has been
5 set aside, which will deal with all taxes that will have
6 accrued through the case. There may be miscellaneous --
7 THE COURT: And there's a carve-out --
8 MR. PEREZ: For professionals.
9 THE COURT: -- for professionals.
10 MR. PEREZ: There may be miscellaneous other
11 administrative expenses, but I think both parties are picking
12 up post-petition payables. What the real issue here is the
13 503(b)(9)s. That is the real issue. And, Your Honor, we have
14 had lots of discussions about how to deal with that issue.
15 Perhaps at a break I could consult and come back to you,
16 'cause, clearly, that has been the most focus of, you know,
17 Mr. Kasen (ph.), who's been here, and management, how do we
18 address that issue, because we all want to have a case that we
19 can get rid of. And I think all of --
20 THE COURT: Well, that we could --
21 MR. PEREZ: Close. Close.
22 THE COURT: Close. Close is appropriate. I'm sure
23 we have a case that we want to get rid of.
24 MR. PEREZ: Close is appropriate here, Your Honor.
25 THE COURT: But we want to close it appropriately.
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1 But how much do you believe the 503(b)(9) obligations
2 aggregate?
3 MR. PEREZ: Your Honor, we think that originally they
4 were in the neighborhood of between 1.8 and 2.2 million. The
5 Court, as you recall, entered an order allowing us to pay those
6 if they exercised -- if they gave us post-petition credit.
7 Some of those have been paid. We just had the bar date on the
8 15th and were going through that. But we think it's probably
9 in the neighborhood of -- you know, certainly -- we think it's
10 certainly over two million dollars -- I mean under two million
11 dollars. But it was in that neighborhood. It could be less.
12 But that's really the main rub. If we had about two and a half
13 million dollars, we could completely deal with this case.
14 THE COURT: Now, I gather the term loan lenders' bid
15 provides, assuming they're the successful bidder, provides, at
16 the moment, two million. The plan support agreement would
17 provide 2,150,000.
18 MR. PEREZ: Actually, it would provide 2,150,000 plus
19 250,000 plus 100,000. So it really would provide 2.5 million.
20 THE COURT: Right. Well, you know, I think I've
21 already stated I don't think that they can just simply
22 terminate an agreement of that nature unless they really do
23 have grounds for it. But I'm not sure that's directly
24 relevant. I hadn't been thinking that the difference between
25 2 million and 2.5 million was really material.
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1 MR. PEREZ: It may not be.
2 THE COURT: It may not be. It may not be. But
3 certainly the 2.5 million is a relevant factor under the facts
4 and circumstances of this case, so it appears to me.
5 MR. PEREZ: We don't dispute that, Your Honor.
6 THE COURT: All right, thank you.
7 MR. PEREZ: Thank you, Your Honor.
8 THE COURT: Anyone else?
9 MR. AUSTIN: For the record, Your Honor, Jesse Austin
10 on behalf of UBS as the agent for the DIP lenders. Your Honor,
11 we think that the issue that this Court does have to decide
12 goes to, somewhat, the colloquy you had with Mr. Perez, which
13 is whether this Court should exercise discretion and reopen the
14 auction for the debtors' assets. We submit that the Court
15 should not reopen the auction and should affirm that KPS, as
16 determined by the debtors on February 11th, is the successful
17 bidders.
18 If you look at the cases, we recognize the Court may
19 well have some discretion. We don't think there's been any
20 evidence shown here by the term loan lenders of extraordinary
21 circumstances or unusual circumstances here that would
22 necessarily justify reopening the bid process. This auction
23 was conducted in accordance with clear rules drafted and agreed
24 to by the term loan lenders. Those rules -- those bidding
25 procedures had clear dates by which anyone submitting a bid had
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1 to comply. There was some limited discretion by the debtors to
2 modify some of those dates, and they did indeed in this case,
3 to give the term loan lenders every effort to try and comply
4 and be a qualified bidder by the auction on February the 11th.
5 There's been no showing of fraud in the process.
6 Indeed, I believe Mr. Dokes confirmed that he didn't see any
7 fraud in the process.
8 THE COURT: I don't see any fraud in the process;
9 I'll state that.
10 MR. AUSTIN: And that -- and I think one of the other
11 conditions as far as looking at whether you would look at your
12 discretion to reopen is, I think, the price that's at least
13 being presented by KPS is, to me, certainly not what the term
14 lenders were hoping for; maybe even what the debtors were not
15 hoping for. But that price is not so low as to shock the
16 conscience.
17 We think the evidence that has been presented showed
18 that the debtors exercised appropriate business judgment in
19 deciding on February the 11th that the term loan lenders were
20 not qualified bidders. And while the term loan lenders may
21 show up today and say we're ready now, we've got everything in
22 together, we've got an APA, although, at least as of yesterday
23 they still didn't have one and I don't know where that stands
24 right now, the evidence clearly shows that they were not
25 qualified on February the 11th. They did not have financing to
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1 support their transaction which was backed up by an acceptable
2 asset purchase agreement in which financings did not otherwise
3 have conditions which, from the debtor, in consultation with
4 the committee and the DIP lenders, all three decided did not
5 meet appropriate standards to decide that the term loan lenders
6 were qualified.
7 For the term loan lenders to now say they're ready is
8 irrelevant. We submit it's too little, it's too late, and they
9 should have been there on February the 11th. They have known
10 from the very beginning of this process that we had a very
11 difficult, if not impossible, financing market. And where did
12 they ultimately find the financing? From themselves at the
13 eleventh hour.
14 THE COURT: Well, you know, which way does the
15 dreadful financing market tilt a reasonable judge? We may --
16 I'm not asking you to assume that that's what we have here.
17 MR. AUSTIN: Well, I think you are a reasonable
18 judge, Your Honor.
19 THE COURT: No, you have to say that, but --
20 MR. AUSTIN: Well --
21 THE COURT: -- which way should that tilt my
22 discretion? We all agree the financing market is horrendous.
23 MR. AUSTIN: Well, I would suggest -- excuse me.
24 THE COURT: And one can say that in this market it's
25 nice when you've got a buyer who seems to have unlimited
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1 amounts of money. On the other hand, we have parties who have,
2 with some difficulty, but, I mean, they're not exactly
3 impoverished, they seem to have funds available to them. They
4 seem to be very, you know, serious. And they have a hundred
5 million dollars as a group, some of -- all of them, in prima
6 facie, some costs, although what their costs of purchase
7 actually are I don't have any idea.
8 MR. AUSTIN: And we recognize that, Your Honor. We
9 recognize they have skin in this game, as one would say. Where
10 we would say the difficulty in the financial market sways is
11 that they knew that coming in. They made the arguments before
12 this Court in November to say give us as much time as possible,
13 Judge, because we have a difficult financing market. But what
14 they ended up making decision -- they made a calculated
15 decision to put all their eggs in the basket of going to that
16 market to find third-party financing, which, when on the eve of
17 having to submit their bid, didn't materialize. And it was
18 only then they turned to themselves to come up with financing.
19 We submit, Your Honor, that they should not have
20 delayed. They should have had a plan B from the very
21 beginning. They should have gone to themselves, which they
22 finally did, to look at it and say hey, guys, we got to come up
23 with our financing. You could have always had that in your
24 back pocket. They didn't have that. They put everything out
25 there knowing where the market was, and they finally -- and it
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1 came up short. And only then were they scrambling. And even
2 then, you're, like, okay, if I'm financing myself, what takes
3 so long to come up to provide financing for myself on a deal
4 I've already invested in? Why did it take from February the
5 6th to, at best, 4 o'clock on February the 11th to actually
6 come up with a commitment letter?
7 THE COURT: How many banks or how many institutions
8 are in your group, Mr. Austin?
9 MR. AUSTIN: There's six, Your Honor.
10 THE COURT: And you're asking me why it took four
11 days to get a group of lenders to decide on the time of day?
12 MR. AUSTIN: I understand, Your Honor, but my point
13 on it is they waited too late for that purpose.
14 THE COURT: Well, that argument I understand.
15 Obviously, I can't take judicial notice of the matter, but I
16 would think getting anything done in a couple of days shows
17 some determination in --
18 MR. AUSTIN: It does show determination.
19 THE COURT: -- in the world, as I understand it.
20 MR. AUSTIN: It shows determination, but it also
21 shows they waited too late, Your Honor. And from that
22 standpoint --
23 THE COURT: That I understand.
24 MR. AUSTIN: And that's where we say you have to look
25 at where things were on February the 11th because what the term
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1 loan lenders are asking you to do is effectively second-guess
2 the debtors as well as the committee, as well as UBS and the
3 DIP agent in looking at what was before us on February the 11th
4 and having to make a determination to say did the term loan
5 lenders comply? And the answer was that the discretion, the
6 business judgment by the debtors affirmed by both the debtor --
7 by UBS as the agent and the committee was you've exercised your
8 business judgment because KPS is there ready; it's ready to
9 close, we've looked at it and we need to move on.
10 And so we submit, Your Honor, that based on all those
11 factors, that while it may ultimately be a tough decision
12 because, yes, the term loan lenders look like now they're
13 there, the real issue is was the judgment of the debtors
14 appropriately exercised on February the 11th? We think it was,
15 and as a result, this Court should not reopen the auction and
16 should award this sale of these assets to KPS. Thank you.
17 MS. HERSHCOPF: Your Honor, the committee would have
18 liked nothing better in this case than to have a vibrant
19 auction that would have paid the term lenders in full and
20 produced a meaningful return to unsecured creditors. But the
21 capital structure of this company pre-petition conspired
22 against even a possibility of that happening. Given the
23 economic realities in this case, we thought the term loan
24 lenders would have the clear advantage here. In fact, we've
25 thought all along that their ability to credit bid would make
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1 them the successful bidder and at some times, in fact, the only
2 bidder. So coming to the auction and finding them unprepared
3 was surprising to us, at best.
4 We really think the question at the auction was who
5 was successful. The bid procedures were fairly clear on how to
6 look at who was the successful bidder. No one's talked very
7 much about the bid procedures here except to say that there
8 were no fraud, there were some allegations that they were
9 modified or changed, the testimony yesterday. I think the
10 debtors' testimony of Berenson went fairly clearly through what
11 happened at the auction, the opportunities given to the term
12 loan lender to become a bidder to put forth a bid that could
13 participate in the auction and be successful. But they weren't
14 the successful bidder.
15 Why weren't they the successful bidder? They weren't
16 the bidder because they didn't have financing. There was no
17 fraud. There are allegations of deviations from the bid
18 procedures but no real evidence of that. And as we stand here
19 today, there's no real evidence that the term loan lenders' bid
20 today is higher or otherwise best. That's still a close call
21 for us.
22 We'd like nothing better than to have the term loan
23 lenders close and to have even that small return to unsecured
24 creditors, to have an administratively solvent estate. But we
25 stand here today as concerned as we were that it still might
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1 not happen.
2 THE COURT: Why is that?
3 MS. HERSHCOPF: Your Honor, their metering in step by
4 step of incremental steps towards closing make everyone
5 concerned, the committee included, that they may not get to the
6 goal line. Yes, they've made a lot of progress, and it was the
7 committee who stood up at the end of the auction and left open
8 that door for them to make that progress because --
9 THE COURT: Well, they still could make more progress
10 in that all I do is open the auction. I don't give them the
11 prize. I give -- obviously, they put in a bid. You said you
12 don't believe it's higher and better. They say it is. And I
13 don't think anybody's argued that it doesn't provide certain
14 consideration that is present. It provides them with a higher
15 return in terms of the credit bid. It provides two million
16 dollars to the estate. And that two million may prevent
17 administrative insolvency. Does it not?
18 MS. HERSHCOPF: And, Your Honor, if they --
19 THE COURT: And -- but I understand your concern that
20 it might not happen.
21 MS. HERSHCOPF: And --
22 THE COURT: But when I say that all I do is reopen
23 it, to finish that thought, I don't view my job today as to
24 award the bid to them. I realize KPS might or might not be
25 here, but KPS has an opportunity to be heard and to bid further
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1 if I open it up. And I also have to make the determination if
2 there is any real dispute that they have a higher and better
3 offer today.
4 MS. HERSHCOPF: Right.
5 THE COURT: But I -- and that is part of the record.
6 That is certainly part of the record.
7 MS. HERSHCOPF: And we haven't, Your Honor, had the
8 opportunity to look at their credit bid and say what the real
9 value of their credit bid is. Perhaps --
10 THE COURT: Well, if they make -- all right.
11 MS. HERSHCOPF: It's concerning. It's concerning as
12 we stand here today.
13 THE COURT: Well, what is confused? I have a
14 schedule. I don't know if you were here yesterday for that
15 part of the --
16 MS. HERSHCOPF: I was, Your Honor.
17 THE COURT: -- testimony. I have a schedule. I
18 realize it's only a compilation, and I realize that some of the
19 specifics could be disputed. And I certainly understand that
20 the credit bid number, which is 44.5 million, is a somewhat
21 artificial number because it is a credit bid. But I have the
22 other numbers here. And there is some benefit to the estate
23 from the two million dollar infusion for creditors. It may not
24 get down to unsecured creditors, but it's for creditors.
25 MS. HERSHCOPF: But some of those 503(b)(9)
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1 creditors, Your Honor, are unsecured creditors as well as --
2 THE COURT: No, all of them --
3 MS. HERSHCOPF: -- 503(b)(9) cre --
4 THE COURT: -- all of them are if there's nothing to
5 cover their priority claim. And I also have on this schedule
6 their willingness to take everything immediately and to reduce,
7 possibly reduce, some expenses to the estate.
8 MS. HERSHCOPF: And, Your Honor, there was a time
9 when we thought they were the only alternative. And for most
10 of the time, we thought how does anyone even bid against them?
11 And if Your Honor opens the auction today, how does someone bid
12 against what's almost an unlimited credit bid, somewhere
13 between forty-four and ninety-eight million dollars? Where do
14 we stop, Your Honor, in allowing them to credit bid the
15 elusive --
16 THE COURT: Well, I certainly agree --
17 MS. HERSHCOPF: -- potentially undersecured --
18 THE COURT: -- that perhaps that should be factored
19 in in the sense of fairness to KPS, which has spent a lot of
20 time and money in these proceedings. But perhaps you answered
21 it yourself by saying that -- or maybe it was Mr. Austin who
22 said that every nickel they put in this has been done with some
23 deliberation and some care. I don't know at what number they
24 say it's yours or if there is such a number. I just -- I don't
25 know. We won't know unless we have an auction. And everybody
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1 seems to say that there's some benefit in having an auction if
2 we can. But in order to get there, I have to make a
3 determination first. And my mind is open.
4 So I understand the difficulty in bidding under these
5 circumstances, and I think that that should be factored in.
6 MS. HERSHCOPF: Thank you, Your Honor.
7 THE COURT: Thank you.
8 MR. RIEMER: Your Honor?
9 THE COURT: Yes.
10 MR. RIEMER: Yosef Riemer from Kirkland & Ellis for
11 the Upstairs Acquisition Corp., or KPS Group. I want to do two
12 things, Your Honor. I want to try to put into perspective what
13 the evidence has shown, but I also want to respond to any
14 questions the Court has and, in particular, some points that
15 were brought out in the proffer that I think are easily dealt
16 with.
17 There are, I would submit, two reasons why Your Honor
18 ought to go with the result of the auction that has occurred.
19 The first is that, I think, now that we have the evidence, and
20 there's a great deal of evidence, frankly, my client did not
21 know, it is clear to us, that, and I think that has two parts,
22 they were not a qualified bidder at the time when it mattered,
23 and this is not an appropriate case for the exercise of any
24 discretion by the Court, given the numerous exercises of
25 discretion by the debtors, all of which operated to favor them
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1 and none of which operated to favor my client.
2 The evidence is compelling. We have admissions from
3 the stand that they did not meet the requirements on February
4 9th in a bid procedures document they negotiated. We didn't;
5 they did. The evidence is compelling that on February 11th,
6 after showing up an hour late and providing unsigned documents,
7 providing the last of the documents, I believe, after
8 4 o'clock, if I'm recalling the testimony correctly, that there
9 was, to quote the excellent testimony yesterday by the debtors'
10 financial advisor, condition piled on condition piled on
11 condition. And Mr. Harris keeps trying to say take it apart,
12 oh, well, we're directionally going in the right place on one
13 of them and pay no attention to the other. But these are
14 compelling, compelling problems.
15 I join Mr. Perez in, I think, responding to the
16 question Your Honor has framed as a key question. I think in
17 this credit market the uncertainties and risks around us in
18 closing transactions made it entirely appropriate for the
19 debtors to want to eliminate uncertainty, to eliminate closing
20 risk. And this is what they were faced with in that regard.
21 They were faced with an APA which, according to the evidence,
22 after a month of exchanging drafts, was not progressing toward
23 resolving serious issues the debtors remain dissatisfied with.
24 It is wonderful to say we gave them an APA we would sign. But,
25 Your Honor, it takes two parties, and the evidence is no one
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1 was close to that.
2 THE COURT: Well, I have some evidence in the record
3 that the debtors concluded reasonably in December that they
4 should avoid the expense of negotiating an APA in advance
5 because they might never need it and, to save money, they'll
6 put off the further negotiation.
7 MR. RIEMER: Your Honor, they didn't -- we didn't
8 have a negotiated APA on February 11th. But after winning the
9 auction, we negotiated it and signed it. We gave them an APA
10 with far less in the way of differences from the APA they had
11 given us than the term loan lenders did. That was the
12 instruction, to take the debtors' APA and mark it up. And
13 obviously the fewer changes you make from that, the better off
14 you are. If you have the advantage they had of having spent a
15 month getting comments from the company about the APA and
16 nonetheless disregarded those comments for that month and then
17 again in what you submit, you do so at your own peril. And
18 that's the fundamental reality. It happens over and over. For
19 a party to stand here and ask the Court to exercise its
20 discretion, the Court's discretion, it should have gone the
21 extra mile. These people didn't cross the street. They stand
22 here before Your Honor and they say we don't want to do this,
23 we don't want to do this, we don't want to do this but Your
24 Honor should exercise this extraordinary power. That's what
25 the evidence is on the APA with a month of negotiation.
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1 Again, we didn't have a signed APA on February 11th
2 or an agreement on an APA February 11th, but after being
3 selected as the winning bidder, something which -- as the only
4 qualified bidder, something which certainly goes to our
5 expectations, we did negotiate and come to an agreement and
6 sign that APA. Number one.
7 With regard to the credit documents, again, we don't
8 need a DIP document because we're not using debt at all. But
9 at the beginning of this process, Your Honor said they needed
10 something that was entirely unconditional. I, frankly, thought
11 that by the time we got the papers over the weekend, they would
12 present us with a DIP document that was entirely unconditional
13 to meet Your Honor's concerns. They didn't then; they haven't
14 now. Yesterday, yesterday, the gentleman from their client
15 stood before Your Honor and explained that it would be wrong
16 for them to sign the credit agreement, the DIP document,
17 because there are so many ancillary documents that have not
18 been created. Even now they're unwilling to sign it because
19 these other documents need to be created.
20 At the beginning of this, the debtors made clear that
21 there were three problems with the DIP document. Delinkage of
22 debt and equity, nothing has changed on that. From the
23 beginning of this process until now, nothing has changed. They
24 have never delinked those two. And yesterday Mr. Perez asked
25 the question why? Did you hear, Your Honor, from the witness
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1 some explanation of why it would operate to their detriment,
2 why it would be prejudicial to them, why it would create some
3 problem? They don't want to do it. That's been their answer
4 over and over again. They want Your Honor to exercise this
5 extraordinary remedy, but they are unwilling to take any steps
6 to convince the debtor or anyone else in this climate that
7 people ought to take that risk. They want those risks to
8 remain, and they're not willing to take them.
9 So we have the APA where we continue as recently as
10 yesterday, Your Honor. The evidence was they are holding out
11 for some representation by the debtors about what customers
12 have said, something which is not in our APA at all. So we
13 have issues in the APA. We continue to have issues in the DIP
14 document, which is not signed, that is, the agreement itself,
15 and which they are unwilling to sign because these other
16 agreements don't exist. And there are still important
17 conditions.
18 When we began this hearing process, the debtors said
19 they wanted to get rid of a requirement that there be a minimum
20 borrowing base of twenty million dollars and a requirement of a
21 minimum amount of cash of twenty million dollars be on hand
22 under the DIP documents. One of those didn't change at all.
23 The other of them changed the minimum cash on hand, I believe,
24 from twenty million dollars to fifteen million dollars. Again,
25 they're not taking the steps that clearly would need to be
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1 taken to be asking for the relief they're seeking on the APA.
2 They're not doing it on the DIP document. The linkage remains.
3 The linkage remains in the equity document. And so on.
4 And now we're told with respect to equity that they
5 have lots of money. We didn't hear anything about whether
6 there are any reserves that their fund requires for fees and so
7 on. They're out looking for other transactions. We have well
8 over a billion dollars under commitments to us. But here's the
9 point: There was a time when they had to give that
10 information. The debtors' financial advisor said yesterday on
11 the witness stand that they asked for that information with
12 regard to both bidders and that they never could get it from
13 the term loan lenders but they were completely satisfied with
14 the answers that we gave them. You can't come to court and ask
15 the Court to exercise its discretion to have a do-over when you
16 had chance after chance after chance to address obvious
17 situations like this and, for whatever reason, didn't.
18 This is a problem of their own making, despite the
19 fact -- and we didn't know to what extent this had happened,
20 that so much discretion had been exercised in their favor. I
21 have not heard one word of testimony suggesting that any
22 provision of the bid procedures was waived for my client, that
23 my client was given an extension, a waiver of anything.
24 Indeed, as I recall, the bid procedures required the sale
25 hearing to have occurred last week, and obviously we'll address
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1 this in the context of the Court's schedule. But that's an
2 example of how we're giving extensions, in effect, to get to
3 today.
4 Now, you have that evidence, and I won't repeat the
5 factors, which I think I went through very clearly yesterday.
6 THE COURT: You did.
7 MR. RIEMER: And I submit --
8 THE COURT: The cases. You certainly did.
9 MR. RIEMER: The record could not be clearer. I'm
10 not suggesting those are the only conditions under which one
11 could exercise discretion to start an auction, but I do think
12 they are instructive of the kinds of conditions one should
13 have. And we have nothing that is in the spirit of those
14 situations. Indeed, I think we have the opposite. I think we
15 have somebody who could have prevented, by their own conduct,
16 ending up in this position. I don't have to go to the point of
17 saying what they should have been doing in February with a plan
18 B. If they've got multiple people, they've got multiple
19 people. But they seem to make some moves always after the fact
20 and never all of the moves, and that's their choice. If
21 they're going to invest as a group and it takes them longer to
22 take a decision, that's something they have to live with. But
23 it's a risk that's on the debtors because it will always be so.
24 They will always have to get multiple people involved, and they
25 don't seem to be able to address these concerns.
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1 And I agree with Mr. Perez; they can't have it both
2 ways. The debtors are surely entitled in this market to say I
3 don't care if on a non-363 sale in another time somebody
4 didn't -- it could take a particular condition out, but where I
5 have an all-cash offer at a time where the markets are in this
6 condition and a 363 sale, I want to know that your money is
7 going to be there.
8 Now, I think, in deciding about discretion, Your
9 Honor, there's one part of this that can't be lost, which is
10 the context for the company. They acknowledge in their brief
11 on page 14 that one way of handling this is to discount their
12 bid for the closing risk. And certainly -- and that's on page
13 14 of their brief.
14 THE COURT: No, I recall that.
15 MR. RIEMER: And certainly the evidence that's been
16 put before you about the concerns the debtors have had for that
17 process could be an appropriate basis in one of two ways; I
18 think either one is legally acceptable: either in making the
19 decision that they haven't shown theirs really is higher and
20 better because of the additional uncertainty it involves; or,
21 if one wants to look at it as a matter of exercising
22 discretion, that the fact that it isn't clearly higher and
23 better because it is subject to so much uncertainty makes it an
24 appropriate case to exercise discretion. I don't think that
25 would ever be enough to exercise discretion, but I think
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1 it's -- but I think the existence of that greater risk makes it
2 an inappropriate case to exercise discretion. I think under
3 either analysis it is not only relevant but compelling. You
4 get to the same point either way. There's no question there is
5 more uncertainty even today with respect to their offer than
6 ours.
7 Now, let me address the uncertainty they tried to
8 create with respect of ours. Number one, there was a reference
9 to an objection or to a deal having been awarded. We have no
10 contract at this moment to buy the Wedgwood business. We have
11 a nonbinding letter of intent. Number two, the witness
12 admitted he doesn't know about Hart-Scott. I don't hold myself
13 as an expert in Hart-Scott, but my partner, who is, tells me
14 that we are firmly of the view that this is not, that is, the
15 Lenox transaction, is not a reportable transaction under Hart-
16 Scott and requires no clearance under Hart-Scott and is
17 currently structured -- if we get from a nonbinding letter of
18 intent to something that is binding, we also believe that that
19 transaction is not one that's going to require Hart-Scott
20 approval in advance.
21 So we don't have the other transaction. We have a
22 nonbinding letter of intent, as I understand it. And in any
23 event, as we analyze this, neither of these at this point seems
24 to be reportable. So that is a risk that we don't see how it
25 exists. And then even if it's a reportable transaction, one
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1 would still have to work through the language to conclude that
2 it in some way barred a sale, and I'm not convinced that there
3 is any prospect of that.
4 With regard to the New Jersey matter and the order
5 of -- the element of the sale order being a condition, I've
6 never heard of a 363 sale where there isn't a requirement that
7 there be a sale order entered. I, frankly, think that we are
8 talking about a timing issue and that the thing that will delay
9 a final order is if they pursue an appeal, if that's the way
10 Your Honor rules. I am not at all convinced that they have a
11 right to pursue the appeal under the credit support agreement,
12 though I don't know that Your Honor can decide in a way which
13 barred them. In other words, Your Honor may have a view of
14 what the credit support agreement requires them to do and bars
15 them from doing, and then they'll have to make their own
16 conclusions about what remedies they want to pursue from that.
17 But the important point is that, with regard to this
18 New Jersey issue, we're all going to have -- I don't want to be
19 presumptuous, but if I assume that Your Honor does rule for us,
20 we're all going to have an order; we're all going to be able to
21 look at it. It's either going to be something we think is
22 acceptable in addressing New Jersey or not. I heard nothing in
23 court Monday in Your Honor's colloquy with the Attorney General
24 representative from New Jersey that gives us any pause in this
25 regard.
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1 But, you know, we will work through language on the
2 form of sale order before a sale order is entered. I don't
3 understand how that can be a problem in terms of getting to a
4 closing unless, somehow or other, in the context of an appeal,
5 there's an order -- without being presumptuous, if Your Honor
6 were to rule for us, if there was an order that says we
7 couldn't, well, that's different, but that's not what I think
8 they're saying.
9 With regard to the question Your Honor posed about
10 the --
11 THE COURT: Let me just comment --
12 MR. RIEMER: Go ahead.
13 THE COURT: -- that however I rule, I'm not ruling
14 for or against your client.
15 MR. RIEMER: I understand that, Your Honor.
16 THE COURT: I'm either sustaining or overruling the
17 objection to sale and confirming the sale, which everyone has
18 agreed, and in connection with which, your client has acted in
19 complete conformance with the rules and in the best of faith,
20 as far as I can tell, throughout.
21 MR. RIEMER: Your Honor, I apologize if my
22 shorthanding was suggesting anything else, but, of course. I
23 appreciate your clarifying that, Your Honor.
24 Your Honor asked a question with regard to this set
25 of admin claims. And we have been having discussions with the
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1 debtors to see if there is something that could be done in that
2 regard, and we will continue to talk about that. And if that's
3 the only issue the Court has, frankly, we, you know, would
4 welcome the opportunity to address that with some ideas that we
5 have. We view that as a very different situation than
6 reopening the auction, which, for all the reasons we've talked
7 about, we don't think is appropriate here.
8 I have never been given an indication from my client
9 that if the auction is reopened that they would participate,
10 given the way this has transpired. But it might be possible to
11 resolve that issue. In particular, we noted that that is the
12 issue of the admin claims if, in fact, the Court was prepared
13 to go ahead and enter a ruling approving the sale. In
14 particular, one point that we had been discussing even before
15 this is that there will need to be some kind of transition
16 services mechanism -- I should say it might be appropriate to
17 provide for transition services with respect to the D 56 assets
18 and how they're going to be operated and the assets we'd be
19 purchasing. And one of the items we started talking about is
20 whether there is the possibility of structuring a transition
21 services agreement in a way which would allow some
22 consideration to -- and I will say this in basic terms, and I
23 may not have the nomenclature perfect in terms of the
24 Bankruptcy Code -- but in a way which would allow consideration
25 to flow in a way that would provide a basis to allow it to be
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1 used to satisfy those admin claims. And that's something we
2 have been talking about and can talk about further if that's
3 something the Court has an interest in.
4 But that's not something that anybody should, based
5 on what I'm hearing from my client, be certain would be on the
6 table if the auction is reopened. And -- but that's where we
7 are. We've been talking about that with them. And to the
8 extent that's a concern of Your Honor's, we can try to bring
9 that to a conclusion.
10 Fundamentally, that's the only issue I've heard that
11 anyone has raised in this, that anybody could say is open as to
12 us. Let's contrast that. On the other side, we have an open
13 APA. We have people who are refusing to sign the debt
14 document, who want to initial something else. But they say
15 they're important documents. They had them drafted. We still
16 have the linkage between the debt documents and the equity
17 documents. We have the CFO of the company who knows its
18 finances, I would submit, as well as anyone, expressing what
19 seem to me to be grave concerns about the viability of the
20 business going forward, the jobs involved and so on, under
21 their proposal.
22 I don't think this is a case where anybody has
23 provided a basis to ask this Court to exercise the discretion.
24 I do think in the end one can look as well at burdens of proof.
25 The debtor certainly has an obligation to satisfy Your Honor
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1 that the requirements of 363 are met, and I think they have by
2 an overwhelming margin. But surely the term lenders have the
3 heavy burden of proof of convincing Your Honor to exercise
4 discretion if 363 was satisfied, as it was. And in no way, it
5 seems to me, have they come forward with what would be needed
6 to justify that kind of decision.
7 With that, unless Your Honor has any more questions,
8 I will join the others in thanking Your Honor for the time
9 we've had.
10 THE COURT: Thank you very much.
11 MR. HARRIS: Your Honor, I'm going to try and be
12 concise in the few comments that I have relative to what has
13 evolved over the last several days. Your Honor, I do think
14 we're in the clear zone of asking Your Honor to exercise
15 discretion to give this estate an opportunity to see what
16 results would occur from a full and fair competitive auction
17 that everybody contemplated from the get-go would occur. We
18 have never contested the fact, Your Honor, that our financing
19 was not in place on February 9th. It's a foregone conclusion.
20 The facts state what they are. What there is, however, Your
21 Honor, is a significant difference of opinion as to what was
22 required to be delivered pursuant to the terms of the bid
23 procedures order in order to be deemed a qualified bidder and
24 to move to the next level of real analysis that would include
25 the negotiation of potential terms of those commitments, the
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1 APA and so forth.
2 You heard Mr. Doke state very clearly that he was
3 involved personally in the negotiation of those bid procedures
4 and that, with references to written evidence of ability to
5 consummate the transaction, in his mind and based on his
6 experience, meant delivery of financing commitments, in form
7 and substance, customary for transactions of this type. You
8 heard Mr. Zughayer basically say that was not the standard that
9 was used at the auction for determining it, at least not in the
10 views of the debtors, or that they didn't believe that they
11 were in that form. We have a serious disagreement in that
12 regard, Your Honor.
13 Now, I think what Your Honor, in the context of the
14 case law that we've reviewed, and I'm sure Your Honor has read
15 this as well -- I mean, there's a balancing that Your Honor
16 needs to do in determining whether to exercise discretion here.
17 There is obviously the reasonable expectation of the
18 marketplace with respect to finality of auctions, but there's
19 also obviously, on the counterbalance, maximizing the value to
20 the estate.
21 And here, Your Honor, the only testimony in the
22 record, the only testimony, and the debtor's financial
23 consultant actually didn't even address the issue, didn't
24 dispute what Mr. Doke said, didn't dispute his analysis of what
25 the results are. The only evidence in the record of what the
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1 bids compare to in the value to the estate is what was put in
2 by the term lenders. And there, Your Honor, I actually think
3 Mr. Doke's analysis understates the transaction to the estate
4 aside from the incremental value which the term lenders think
5 they'll get under their bid versus KPS. Mr. Doke's analysis,
6 the compilation which Your Honor did take into evidence, shows
7 the estate, at a minimum, will receive two million dollars of
8 cash in order to assist in the satisfaction of admin claims,
9 503(b)(9) claims, et cetera.
10 Now, I heard Mr. Riemer at the end of his statement
11 say that his client is now willing or is engaging or is
12 thinking about talking to the debtor about potentially trying
13 to find a way to maybe satisfy some of that stuff. Sounds like
14 he's increasing his bid to me, Your Honor. But putting that
15 aside for the moment, the notion of having to satisfy
16 administrative expense claims was actually included in the bid
17 procedures in describing the bid that the term loan lenders
18 anticipated putting before them. Everybody who knew -- who
19 read those bid procedures should have known that it was the
20 debtor's desire to have something on the table to be able to
21 avoid administrative insolvency so that now we come back to the
22 Court and say well, now we're thinking about it because we
23 otherwise weren't going to do that, but now we -- maybe we can
24 try to assume some of that or do something else creative. It
25 seems to me they always had the option to do that. They never
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1 chose to do that. Our deal does that. There's two million
2 dollars there right off the bat.
3 The second thing our deal does, which actually
4 doesn't show up in the numbers but which Your Honor has alluded
5 to on a couple of occasions, is we're taking all the assets of
6 the estate and we're making -- we've committed to make offers
7 of employment to all the employees, including those that are at
8 D 56 right now.
9 So there isn't going to be a need for residual wind-
10 downs here. We're going to take on the obligation to deal with
11 all that stuff ourselves. And, therefore, there's not going to
12 be a further discussion between the debtors and the secured
13 creditors about where's the cash going to come from to pay the
14 employees or run the business, or can we use proceeds of asset
15 sales or anything, or do we need budgets or any of that stuff.
16 None of that is going to need to exist because there won't be
17 any assets left in the estate. The estate won't have
18 employees; we'll have employees.
19 And the corollary of that piece, Your Honor, which
20 also is not in the numbers, is that under the KPS deal where
21 they leave the D 56 people and the assets behind, there's
22 nobody to pay the accrued and unpaid vacation for the D 56
23 employees when they're ultimately terminated. That number, if
24 I understand it correctly, is pretty significant and may be
25 north of two million dollars. That comes along with the
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1 business we are buying and the assets we are buying as part of
2 the asset purchase agreement.
3 Now, while I'm on the subject of the asset purchase
4 agreement, let me just give the Court an update on what my
5 understanding of the status is. We have -- the body of the
6 asset purchase agreement has been resolved in its entirety. We
7 have released a signature page and given it to the debtors.
8 The debtors have not agreed to sign it because we proffered
9 treatment with respect to severance for senior management
10 employees, which is different than what KPS offered up. We
11 created one collective plan for all salaried employees. They
12 bifurcated it between senior management and salaried. It's not
13 a closing condition, Your Honor; it's an issue of how they
14 value our bid.
15 But other than that, all the terms of the asset
16 purchase agreement itself, all the issues on reps and
17 warranties, all the issues on our financing commitment and the
18 rep regarding the financing commitment are all resolved.
19 Secondly, on the loan agreement itself, and it's my
20 understanding that there are -- there have been no comments
21 that we have received back after we made the modifications that
22 the debtors requested to the loan agreement to reflect the
23 changes on closing conditions and in the modification to the
24 liquidity covenant. So as far as I know, Your Honor, since
25 we've heard nothing back on that, there are no continuing
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1 issues on that.
2 The representation that was made by Mr. Klein
3 yesterday on the record, we built that into the asset purchase
4 agreement last night with agreed language from Weil Gotshal,
5 and it is done. And the ancillary documents, which Mr. Riemer
6 referred to, like officer certificates and other documents
7 traditionally delivered in connection with a closing, are not
8 things that present any material risk to a closing. Now -- and
9 even if they did, Your Honor, our view would be discounted in
10 the context of the overall bid analysis. It's not an issue for
11 figuring out whether or not we should be having a competitive
12 auction.
13 Now, you know, it's interesting to me, Your Honor,
14 that people talk about how we are the ones who are shifting the
15 risk to the company, we want to leave all the risk on the
16 company's side. And it's particularly interesting, and I
17 think, frankly, this really belongs in the discussion and
18 analysis of the two bids side to side. But when we talk about
19 shifting the risk to the company, Mr. Riemer gets up here and
20 says we're so confident there's not an antitrust problem here.
21 That's not a risk. That's not a risk shift to the company.
22 But they were the ones who introduced the concept into the
23 asset purchase agreement. If they were so confident, why'd
24 they put it in there?
25 So they shift risk, Your Honor. They shifted risk by
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1 saying they needed a final order knowing the New Jersey
2 Department of Environmental Protection was going to have a
3 problem with the form of order which allowed them to be
4 insulated from his reliability. They introduced that. It
5 wasn't the company. The company didn't have that in their
6 original asset purchase agreement.
7 So when you look at --
8 THE COURT: Is the form of sale order attached to the
9 APA or does the APA merely say that the form of sale agreement
10 has to be reasonably acceptable to the parties?
11 MR. HARRIS: The sale -- our sale order, Your Honor,
12 or their sale -- the sale order that they --
13 THE COURT: Is there any sale order attached to the
14 APA in form or is it just a requirement that the purchaser be
15 satisfied or reasonably satisfied with the sale order?
16 MR. HARRIS: It is the form that's been submitted to
17 Your Honor, both --
18 THE COURT: Is it an attachment --
19 MR. HARRIS: I --
20 THE COURT: -- or is it just the form that's
21 currently being discussed?
22 MR. PEREZ: I believe, Your Honor, we filed a redline
23 or a blackline form --
24 THE COURT: Yes.
25 MR. PEREZ: -- in the last few days, and I think that
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1 that covers it. Obviously, in dealing with the various
2 objections, you know, there will obviously need to be more
3 tweaks to it.
4 MR. HARRIS: But -- and that form, Your Honor, is
5 something that, I believe, both parties have agreed would
6 suffice for the sale order condition. But the parties
7 obviously started with materially different views on what would
8 happen relative to New Jersey. And it was their introduction
9 of the notion that they didn't want to take the Department of
10 Environmental Protection risk and wanted insulation from that.
11 And it was interesting because what Mr. Riemer said
12 is in any event, these are best-timing issues. Well, Your
13 Honor, timing issues matter when your proposal is to provide a
14 fixed pool of consideration and from that fixed pool the
15 recipient party takes all the risk on continuing business
16 losses, incurrence of professional fees, other expenses which
17 eat into it for which there is no, or may be no, compensation
18 through some amorphous future working capital adjustment which
19 the debtors won't have any employees around to go chase in any
20 event.
21 So, Your Honor, we think that, given all the facts
22 and circumstances and the state of play as it exists today,
23 that Your Honor does and should exercise discretion to see what
24 a true competitive auction will actually generate for this
25 estate. The parties are here. I don't know what KPS' position
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1 is on it. Mr. Riemer didn't give a definitive position. But
2 we believe, Your Honor, that the facts and circumstances as
3 they've been laid out in the testimony make it eminently clear
4 that there is a basis to exercise discretion today, and, Your
5 Honor, we would ask that you do so. Thank you.
6 THE COURT: Thank you. All right. I think, if
7 there's, you know, one minute of further comment, I'll take it.
8 But I think I understand the issues, and it's time for me to
9 give a decision.
10 MR. PEREZ: Yeah, can I just address the D 56
11 vacation time? All of the employees at D 56 have been paid
12 vacation up to the priority amount. What ended up happening,
13 Your Honor, is that when D 56 bought Lenox, they went to the
14 Lenox vacation system. The D 56 vacation plan allowed you to
15 accrue years of vacation. But the number is much lower than
16 Mr. Harris indicated. And with respect to -- it's not an
17 administrative insolvency issue because they've all been paid
18 to the priority amount.
19 MR. HARRIS: The point being, Your Honor, that
20 whatever the excess is, we're now going to be picking it up.
21 My understanding was the aggregate number was two million, and
22 maybe some portion of that was paid. But we'll be picking it
23 up, whatever its value is, and that can also be factored into
24 the bid.
25 THE COURT: All right. All right. I want to thank
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1 the parties for excellent presentations. I think what I should
2 do is take a lunch break, and then I'll give you my decision.
3 And so we should reconvene at 2.
4 MR. PEREZ: Thank you, Your Honor.
5 MR. HARRIS: Thank you, Your Honor.
6 THE COURT: Thank you.
7 (Recess from 12:59 p.m. until 2:36 p.m.)
8 THE COURT: I'm sorry. My timing prediction was
9 about as accurate as the parties' prediction of how long these
10 hearings would take, but I think that's just consistent with
11 prior practice and normal practice.
12 Here is my decision on the matter before me. This is
13 a motion by the debtors to confirm a sale held pursuant to
14 prior court order. The motion is opposed by the so-called term
15 loan lenders who hold debt of approximately a hundred million
16 dollars secured by a first lien on certain of the assets of the
17 estate and a second lien on substantially all of the other
18 assets. The term loan lenders asked the Court to exercise its
19 discretion to reopen the bidding and hold an auction at which
20 they and the successful purchaser at the initial sale
21 proceedings or bidding proceedings, Upstairs Acquisition Corp.
22 ("UAC"), would both be entitled to bid further.
23 A motion to confirm the sale to UAC is supported by
24 the DIP loan lenders, who are the so-called revolver lenders,
25 who hold a first lien above the term loan lenders on certain
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1 assets of the estate and a second lien behind the term loan
2 lenders on the remaining assets. The motion also generally has
3 the support of the unsecured creditors' committee.
4 The first issue before the Court is whether the
5 bidding should be reopened or the original sale confirmed. The
6 facts relating to the events at the time of the sale
7 proceedings or auction are not substantially at issue. There
8 is no question that UAC submitted a bid that was a qualified
9 bid in conformity with the terms and conditions of the sale
10 order and procedures and that UAC has, since then, worked
11 expeditiously and in good faith to get in a position to close
12 by the first or second week of March.
13 There is no question that the term loan lenders
14 submitted a competing bid that was deemed by the debtors to be
15 qualified except with respect to the financing commitments that
16 the term loan lenders brought to the table on February 11th.
17 The term loan lenders' need to obtain financing was
18 longstanding and was apparent from a number of the parties'
19 prior agreements and pleadings.
20 It appears that the lenders' efforts to obtain third-
21 party financing fell through shortly before the February 11th
22 date, that they had scrambled to put together alternative
23 financing. And by the time of the sale, which had been
24 adjourned for their benefit, already they managed to obtain an
25 acceptable twenty-five million dollar equity commitment. But
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1 their debt commitment was deemed sufficiently conditional as to
2 fail to qualify their bid under the bid procedures in the
3 Court's prior order.
4 The lenders also would not divorce their equity
5 commitment from their debt commitment, and their bid was deemed
6 unacceptable and unqualified. The debtors' counsel described
7 the term loan lenders' financing as having the following
8 contingencies in the debtors' letter to the Court dated
9 February 16, 2000, quote: "Specifically, the term loan
10 lenders' equity commitment was conditioned on the closing of
11 the debt financing component. Similarly, the term loan
12 lenders' debt proposal was contingent upon the satisfaction of
13 material closing conditions, including all conditions to the
14 debtors' obligations contained in the asset purchase agreement,
15 and the negotiation, execution and delivery of definitive loan
16 documentation in form and in substance satisfactory to the term
17 loan lenders." It is clear that these provisions gave the term
18 loan lenders an out if they wanted to take it. On the other
19 hand, they can also be viewed as lawyers' boilerplate to
20 protect their clients pending a closing. And there were no
21 specific conditions contained in the term loan lenders'
22 proposal that absolutely could not be satisfied and that would
23 have thereby disqualified their bid.
24 In any event, faced with a threat from UAC that it
25 would withdraw its qualified bid if the auction were further
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1 delayed and the possible loss of an unconditional offer, the
2 debtors concluded that the term loan lenders had not submitted
3 a qualified bid after consultation with the DIP lenders and the
4 creditors' committee. The debtors endorsed the bid from UAC
5 and brought on the instant motion to confirm the sale to UAC.
6 Since that motion was filed, the term loan lenders
7 have fully documented their debt and equity commitments. And
8 the debtors stated on the record on the first day of these
9 hearings on Monday that if the term loan lenders had timely
10 submitted the financing commitments they have now documented,
11 they would have been deemed qualified bidders.
12 They have done more since then. The testimony of the
13 parties providing debt and equity financing commitments for the
14 term loan lenders' offer and the current state of documentation
15 convinces me that the lenders are committed to the transaction
16 and that concern about closing should not cause the Court to
17 disqualify them as a bidder or weigh heavily against reopening
18 the bidding. Moreover, their own financial interests militate
19 in favor of closing as they have collectively some costs in an
20 original amount of a hundred million dollars. Further, as I
21 have commented at one time during these proceedings, if they
22 unreasonably fail to close and the result is damaging to the
23 estate, I would expect the question of equitable subordination
24 to be raised.
25 However, I'm getting way ahead of myself. It is
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1 argued that I must look at the state of affairs as they existed
2 on February 11th and validate the debtors' business judgment if
3 it was reasonable. Given the fact that Mr. Zughayer of
4 Berenson stated that the debtors very much wanted there to be a
5 real auction with two competing bidders, a position that
6 counsel for the creditors' committee echoed today, I am not
7 sure that the debtors made the right decision disqualifying the
8 term lenders rather than discounting their bid for closing
9 concern or pending further vetting of the documents.
10 But I have had the luxury of days of testimony and
11 consideration, and I do not believe the debtors' decision is
12 reasonably subject to second-guessing. Nor is it necessary for
13 me to rest my decision on what happened on February 11th as the
14 circumstances have developed. There is no authority that I
15 know of that I must ignore what has transpired in the interim.
16 And more important, there is very substantial authority that a
17 bankruptcy court has discretion to reopen the bidding to permit
18 the interposition of a bid even if the bid is unquestionably
19 late.
20 In this circuit, the leading authority is In re
21 Financial News Network, 98 F.3d 165, where the circuit court
22 rejected a First Circuit case that had refused to reopen
23 bidding where an adequate bid had been received in a fairly
24 held sale merely because a slightly higher bid was received
25 later. The Second Circuit's decision speaks of the broad
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1 discretion and flexibility a bankruptcy court must necessarily
2 exercise to, and these are the critical words, enhance the
3 value of the estate. The Court said this was especially true
4 where the bidding scenario was complex and fluid, as it was in
5 this situation, at least in retrospect, again, without
6 challenging the debtors' decision.
7 It is interesting that the district court in
8 Financial News Network had simply reversed the refusal of the
9 bankruptcy judge to reopen the bidding, focusing on achieving
10 the maximum benefit for the estate against overly strict
11 adherence to bidding rules. Obviously, I'm following the
12 Second Circuit decision, but I note that case, which is part of
13 the applicable authority.
14 Courts have drawn a continuum between maximizing the
15 estate and adherence to rules that promote the policy, goals,
16 the finality and the integrity of the bidding process. Where a
17 bankruptcy court has confirmed a sale, there is a strong public
18 interest in finality and integrity. Where, as here, the sale
19 has not been confirmed, the expectations of the parties are
20 necessarily different, and a court has discretion to entertain
21 even a late bid. Corporate Assets, Inc. v. Paloian, 368 F.3d
22 761, 768 (7th Cir. 2004), citing and quoting In re Food Barn
23 Stores, 107 F.3d 558, 565-66 (8th Cir. 1991). Where, as here,
24 the competing bidders submitted bids that were timely,
25 admitting, of course, that the debtors had extended the bid
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1 period but one bid was deemed unqualified because of concerns
2 regarding conditionality that have since been cured, the facts
3 and circumstances point clearly in the direction of opening up
4 the bidding. That is particularly true because, as mentioned
5 above, there has never been an auction, as the bid submitted by
6 the term loan lenders was deemed unqualified.
7 I do not read the cases as narrowly as counsel for
8 UAC does. It is certainly true the Courts will exercise
9 discretion to reopen bidding where there has been fraud or
10 unfairness or where the winning bid appears manifestly
11 inadequate. We do not have those situations here, although the
12 KPS bid or the UAC bid certainly leaves this debtor in a highly
13 precarious position or worse.
14 It appears to the Court, nevertheless, that reopening
15 the auction should not frustrate the reasonable expectation of
16 the parties as the sale order has not been entered, and UAC
17 could not have reasonably expected that its bid would be
18 unopposed on February 11th and that there would not be any
19 auction at all.
20 In any event, we come back to the critical issue that
21 has been central to all of the cases and that I think is
22 central to the decision here: whether an order to reopen
23 bidding will enhance the value of the estate. It is this
24 question that has most concerned the Court. The debtors, the
25 unsecured creditors' committee and the DIP lenders all urged
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1 the Court to leave the matter as it is and confirm the sale to
2 UAC primarily because UAC is more certain to close and they
3 feel more comfortable with UAC as manager of the business after
4 the sale both from the perspective of commitment to the
5 business and availability of financing. The Court has already
6 commented that certainty of closing is a very close issue and
7 that the testimony has convinced me that the term loan lenders
8 have debt and equity commitments that are real and that will
9 allow them to close forthwith.
10 As to the future management of the assets, the term
11 loan lenders have represented that they will continue the
12 employment of all of the debtors' employees, including those in
13 the D 56 division. I realize that this commitment doesn't
14 commit them to employ all of the employees forever, but then
15 the UAC commitment is not a forever commitment. As Mr. Spivak
16 commented in his testimony, he doesn't really know what their
17 long-term commitment is even if, as is assumed, UAC's
18 affiliates acquire Waterford.
19 As to the future management of the new company, there
20 is evidence that the lenders' projections show tight
21 availability, particularly next fall. However, even if I were
22 to imply a feasibility requirement in a 363 sale, I believe
23 there is sufficient evidence that the term loan lenders are not
24 acquiring the assets to liquidate them or the business and that
25 there is no likelihood of another reorganization in the near
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1 future.
2 However, I don't believe that I should imply a
3 feasibility requirement in a 363 sale. The creditors of this
4 estate are not receiving a share of the new company. And while
5 the interests of the employees and management is an important
6 factor, the paramount interests are those of the existing
7 creditors as creditors. The question of future management does
8 go into the question of business judgment. And I recognize
9 that the debtors and committee appear to feel more comfortable
10 with UAC. I also recognize that they, and perhaps everyone in
11 this room, would like this to be over with for once and for all
12 right now. However, these desires cannot overcome the real
13 factor that the cases tell me I should consider, and that is
14 enhancement of the bankruptcy estate. The term loan lenders
15 convincingly demonstrate that their offer is already higher and
16 better than the offer submitted by UAC. First, it provides a
17 much greater return to them. It might be argued that I should
18 discount this factor since they were late, but they are the
19 largest creditor group in the case, and no one has disputed
20 that they are the fulcrum creditors here.
21 However, the critical enhancement is the fact that
22 their offer, by committing to take all of the assets of the
23 estate immediately and by committing to a two million dollar
24 infusion to pay administrative and other expenses, will benefit
25 the estate materially. The debtors have expressed no other
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1 means of avoiding possible administrative insolvency. UAC's
2 counsel recognized this aspect of the record very clearly when
3 its counsel forthrightly stated that it would negotiate with
4 the debtor to help the debtor out in this regard. I commend
5 counsel for this suggestion. But the place to provide benefit
6 to the estate is not by post-sale negotiations to enhance an
7 offer but in a fair auction where both parties have the ability
8 to bid and where the bids can be fairly valued.
9 In conclusion, I believe the term loan lenders have
10 shown enough to cause me to give them an opportunity to bid as
11 qualified bidders, an opportunity they have not had to date. I
12 am not making any final determinations with regard to comparing
13 one bid against the other except to state that, on the record
14 that I have before me, the term loan lenders' bid substantially
15 enhances the value to the estate.
16 I have stated before and suggest again that the
17 auction should start immediately. It can start in open court
18 or the parties can repair to more elegant and more efficient
19 proceedings. I think I should take a break and let the parties
20 digest what I've said.
21 However, I note the following as well. I'm not going
22 to allow important issues in this case to get sidetracked by
23 legal maneuvering. I've given no weight in the foregoing
24 determination as to the contention of the term loan lenders
25 that they have not consented to an auction within the meaning
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1 of 363(f)(2) of the Bankruptcy Code. If we proceed, if I open
2 up the bidding and we proceed to an auction, it will be so it
3 can take place fairly and not be subject to subversion later in
4 the proceeding by any party disappointed in the results.
5 Accordingly, the term loan lenders will have to
6 confirm as a condition to further bidding that they have indeed
7 consented to the sale of the assets at auction for purposes of
8 363 so everyone can proceed on a fair and level playing field
9 going forward. I think it would be very helpful for the term
10 loan lenders to retract their purported termination of the plan
11 support agreement as well, but that can, if necessary, be dealt
12 with another day.
13 All right, that's my ruling. Why don't I -- shall I
14 take a recess? And I'd ask -- I'll be in chambers. When the
15 parties decide how they wish to proceed or when they wish to
16 have further proceedings, just come down -- or send someone
17 down to chambers if I'm needed further. Thank you. Again, I
18 do thank the parties for excellent presentations and an
19 excellent record. And I hope that -- obviously, litigation
20 always causes some discomfort, but businesspeople know that
21 they should discount everything that happens in the courtroom
22 to a certain extent and move forward for everyone's benefit.
23 And we don't have a winning bidder yet. We unquestionably
24 don't have a -- all we have is an auction, and we have a
25 debtor. And I'm delighted to hear that everyone in this room
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1 is concerned about the future of the debtor and believes that
2 this debtor has a bright future. We have a lot of parties
3 here, all of whom believe that this debtor is reorganizable and
4 all of whom are committed to getting on with it very quickly
5 and getting out of court. I'm sure everyone here will agree
6 that they would probably like to get out of court, and that's
7 fine. I'm available if you need me. Thank you.
8 (Recess from 2:58 p.m. until 5:15 p.m.)
9 THE COURT: All right, we're back on the record in
10 Lenox. Who would wish to start? Mr. Perez?
11 MR. PEREZ: Thank you, Your Honor. We've had an
12 opportunity to confer and discuss it with all constituencies in
13 light of the Court's ruling. In light of the Court's ruling,
14 we went back and evaluated what an additional bid would have
15 had to have been by KPS in order to have topped the term lender
16 bid, both recognizing that, if there was a discount for
17 conditionality, it would be small in light of the Court's
18 pronouncements, and additionally the fact that a credit bid was
19 dollar for dollar, real money.
20 We thought, based on the calculations that we had
21 done, it took almost thirty-six million dollars -- they would
22 have had to increase their bid by about thirty-six million
23 dollars in order for them to have a higher bid on that basis,
24 Your Honor. They, at that point, declined to continue to
25 participate. You know, so the term loan lenders are, in
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1 essence, the winner of the auction.
2 THE COURT: Is it everyone's view that we should
3 proceed in that fashion, in other words, for the -- I don't, in
4 any way, dispute the debtor's calculation or accept it, neither
5 one nor the other, and I don't -- and I'm not suggesting that's
6 not the way to proceed. But we are proceeding in an unusual
7 situation. We have a credit bid on the one hand and we have a
8 real -- we have a cash bid, let me put it that way, both are
9 real; we have a cash bid on the other. Are we ruling out the
10 possibility that there will be a cash bid that will come in
11 somewhere between the original KPS bid and a bid plus thirty-
12 six million dollars, which is a large number, that the term
13 loan lenders, and the only party interested in the differences
14 are the term loan lenders themselves? So long as we reserve
15 the same 2 million for the estate or 2.5 million for the estate
16 and so forth, are we, in effect, ruling out the possibility
17 that the term loan lenders will say we'll take something in
18 between? Or have they told you irretrievably that they're not
19 going to take anything in between?
20 MR. PEREZ: Your Honor --
21 THE COURT: I see Mr. -- you don't know, but I do,
22 that Mr. Harris has stood.
23 MR. PEREZ: Well, Your Honor, not only have they told
24 us that they won't accept anything in between but they've told
25 us that this was not necessarily where they would end, that
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1 this was only -- the only -- this would be just to get them to
2 a higher bid.
3 THE COURT: All right.
4 MR. HARRIS: That's correct, Your Honor. We had
5 conferred with the required lenders under the term loan
6 agreement and advised the company that there would need to be a
7 cash bid with a, sort of, guaranteed dollar recovery to us of
8 at least what we had bid before the auction could really go
9 forward, and --
10 THE COURT: Well, the auction can go forward but
11 before parties aren't wasting their time.
12 MR. HARRIS: That's obviously a better way to phrase
13 it, Your Honor. And we did not give any assurances that we
14 wouldn't move our credit bid up from there. So, I guess, in
15 light of those facts, UAC chose to not continue.
16 THE COURT: All right.
17 MR. PEREZ: In view of that, Your Honor, I have a
18 couple comments, additional comments. I think that, for the
19 most part, the APA is finalized. There are still a few issues
20 in the disclosure statement and disclosure schedule.
21 There's -- a German antitrust compliance just kind of came in
22 in the last couple of -- you know, in the last day or so; we're
23 trying to get clarity on that. There is a very significant
24 disparity between the KPS bid and the term lenders' bid with
25 respect to severance. We brought that to their attention. We
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1 invited them to change it. They have indicated that they would
2 consider it on a case-by-case basis, which we're not happy
3 about.
4 In addition -- and so that will continue to be a
5 source of discussion. In addition, Your Honor, they have
6 agreed to live up to the obligations under the plan support
7 agreement. So it would be the two and a half million dollar
8 funding --
9 THE COURT: That's certainly good to hear.
10 MR. PEREZ: -- not the two million dollar funding.
11 Over the break, I spoke with Ms. Hershcopf about the best way
12 to conclude the case and let's get through the sale, and then
13 we will come back to the court as soon as we can to figure out
14 how to do it in the most expeditious and cost-effective
15 fashion.
16 In addition, Your Honor, I think, in view of all
17 that's transpired, the debtor is prepared to terminate the KPS
18 APA and return their deposit to them under --
19 THE COURT: But I don't recall what the bidding
20 procedures say about holding the second bidder's consideration.
21 But I certainly am not going to stand in the way. I have no
22 doubt that the term loan lenders are going to close, but -- and
23 close quickly.
24 MR. PEREZ: So we really -- we're hopeful that we can
25 put to bed the --
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1 THE COURT: But, obviously, they have a big interest
2 in the case too, and they can be heard.
3 MR. PEREZ: Right.
4 THE COURT: But I do think that KPS has been
5 absolutely fair and extremely well-represented in these
6 proceedings and --
7 MR. PEREZ: Yeah. And, Your Honor, having said all
8 of that, obviously we would like to confirm the bid of the term
9 loan lenders so we can get to a closing as quickly as possible.
10 And we'll continue to work on the severance issue, which
11 remains a big thorn.
12 THE COURT: Well, I certainly have expressed the hope
13 that the strong feelings on all sides that the principals
14 undoubtedly have should not affect the result. And the parties
15 have done the best for this debtor that they could under the
16 circumstances. They are trying to preserve jobs for many
17 individuals. And if parties are going to leave, I certainly
18 would express the hope that there's no difference between one
19 result and the other. This has always been a question of
20 equity. I was not aware of that particular issue. But I think
21 I'll leave it at that.
22 There are a couple of other matters on the calendar.
23 MR. PEREZ: Yes, Your Honor.
24 THE COURT: One is the --
25 MR. PEREZ: Thank you, Your Honor.
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1 THE COURT: -- the question of the distribution of
2 proceeds. But let me hear from KPS first.
3 MS. LAUKITIS: Thank you, Your Honor. Just for the
4 sake of clarification, since there was a reference to the
5 provisions in the bidding procedures regarding the return of
6 the deposit, there were many statements over the last few days
7 about there being no accommodations made for the benefit of KPS
8 during the process, and I believe we may have found one that
9 was made.
10 THE COURT: All right.
11 MS. LAUKITIS: That KPS' bid was conditioned on the
12 fact that it would terminate if another successful bidder was
13 named at the auction. And another bidder has been named. That
14 bid, including that term, was accepted at the auction.
15 THE COURT: I accepted the -- without even knowing
16 that, I accepted the proposition that you should get your
17 deposit back --
18 MS. LAUKITIS: Thank you.
19 THE COURT: -- immediately. And if there is any
20 hiccup, you'll be the first to know it, I'm sure.
21 MS. LAUKITIS: Thank you, Your Honor.
22 MR. AUSTIN: Good afternoon, Your Honor. Jesse
23 Austin, for the record. At least with the term loan lenders, I
24 don't believe there is an issue on the allocation of the
25 proceeds. I believe that --
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1 THE COURT: So that's -- there is a silver lining.
2 MR. AUSTIN: There's a silver lining on that issue,
3 Your Honor. I think, with Mr. Harris, that he's always said
4 and that --
5 THE COURT: I never asked you as to why you were
6 arguing so vigorously about the possible creation of another
7 issue, and I'm not going to ask you now, but --
8 MR. AUSTIN: With respect to the one other issue that
9 is there, though, is that when these bidding procedures were
10 first approved by the Court, and one of the comments that we
11 had made on behalf of the DIP lenders was that, where the term
12 loan lenders wanted to be treated effectively like others, that
13 we thought they should be. And one of those requirements was
14 that, to the extent that it ultimately was determined to be the
15 winner of the bid, that it be required to put up a ten percent
16 cash deposit relative to their cash portion of their bids. And
17 so the Court, at that time when the bidding procedures, I
18 believe, were entered, says if that comes to pass, we may visit
19 it when we get to the auction. We're now at the auction. And
20 we are asking that, in respect of the bidding procedures, that
21 in light of the developments, especially where we don't have in
22 this instance a backup bidder, there has been a lot going on to
23 get to this point, and we do ask the Court require of the term
24 loan lenders to put up a ten percent deposit equal to the cash
25 portion of their bid, which I think would be somewhere around
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1 2.3 or 2.5 million dollars.
2 THE COURT: Would you like them to put it up in a
3 Swiss account or here in New York?
4 MR. AUSTIN: I would prefer in the United States.
5 THE COURT: All right. I'm glad to hear that.
6 MR. AUSTIN: And if we could find some type of sound
7 investment, we would welcome that.
8 THE COURT: All right. I don't know if Mr. -- I see
9 Mr. Harris. Is that your suitcase there on the floor in back
10 of you? I don't know if you brought that --
11 MR. HARRIS: It's not; nor is it filled with money,
12 Your Honor.
13 THE COURT: -- if you brought it with you today.
14 MR. HARRIS: Your Honor, I had an opportunity to
15 speak with some of the clients about Mr. Austin's request, Your
16 Honor. I think -- Your Honor made some fairly direct comments
17 in your ruling today regarding where the term lenders might
18 find themselves in this case should we unreasonably fail to
19 close this transaction. I'm having a hundred million dollars
20 at risk already and a potential for facing issues of equitable
21 subordination. A deposit even of two million dollars sort of
22 pales in comparison to that sort of potential remedy. I'm
23 certainly happy to ask the client whether they'd be prepared to
24 do that, Your Honor. But given what we've done in this case
25 and where we've come from and what we've committed to do, I'm
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1 not sure that two million dollars in a bank account shows any
2 more devotion to and commitment to closing than what we've
3 shown so far.
4 THE COURT: Well, if, in fact, they're obligated to
5 do it, I really don't want to hear from Mr. Austin again
6 because it might cost two million dollars for him to come down
7 here. And I gather the estate is paying his bills and the
8 bills of many other parties here today. So I hope your clients
9 will exercise business judgment to avoid further legal
10 proceedings. Certainly, I think that under the circumstances,
11 since you have a hundred million dollars in the deal, and we're
12 talking about a week or ten days, I think, it's possible that
13 the businesspeople may determine that no more legal work needs
14 to be attended to. I'll hope that the issue doesn't become a
15 contentious one since I think --
16 MR. HARRIS: Your Honor, the --
17 THE COURT: -- that we are coming to the end here.
18 MR. HARRIS: Yes. Your Honor, given the structure of
19 our bid, which is that we effectively end up paying on closing
20 all the professional fees, the last thing we want is any more
21 controversy in this case that results in unnecessary legal fees
22 or any other kinds of fees.
23 THE COURT: I think, probably, we all agree with
24 that. All right.
25 MR. HARRIS: Your Honor, I guess, with respect to
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1 just simply administratively moving forward at this point,
2 assuming Your Honor is prepared to approve the sale to the term
3 lenders, I guess we suggest that we will revise the form of
4 order that was presented to Your Honor in connection with the
5 KPS bid, attach to it the final form of the asset purchase
6 agreement, circulate that to parties for any comments they
7 have. Certainly I know there's one comment I'm certain to get
8 from Mr. Austin regarding the payment of his DIP obligations at
9 closing in an absolutely clear fashion. And we would like,
10 then, if it's okay with Your Honor --
11 THE COURT: Well, that would save you some money,
12 probably.
13 MR. HARRIS: In fact, I'd be happy to draft a form
14 'cause I think I know exactly what it needs to say. And then
15 we would submit that form of order to Your Honor after we've
16 gotten comments from the committee, the DIP lenders. And,
17 obviously, we'd work with the debtors to put that together.
18 THE COURT: All right. I have Kirkland's version of
19 a sale order. They have -- they revised it to get some of the
20 duplication out of it. It's now only -- only, I say -- thirty
21 pages. I'll wait for the order. My usual rule is that I will
22 enter an order that says that by virtue of the transactions in
23 the bankruptcy court, there is no successor liability. But to
24 be even broader than that, it seems to me, is giving parties
25 assurances that I have no power to give. And I'm certain this
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1 Court is certainly not a guarantor.
2 So I ask you to look at the language from that
3 perspective. I gather you're going to discuss the issues with
4 the lawyer for the state of New Jersey --
5 MR. HARRIS: We are, Your Honor.
6 THE COURT: -- which is an important factor. There
7 were two other matters on the calendar. One is the motion of
8 the unsecured creditors' committee for an extension of time to
9 review the position of the term loan lenders.
10 MS. KALNIT: That's correct, Your Honor. Richelle
11 Kalnit of Cooley Godward Kronish on behalf of the committee.
12 It's not lost on me that you've been here for three days, so
13 I'll be brief. As you know, we filed a motion to extend the
14 investigation termination date and to compel the production of
15 documents, as to which there was no objection. You've read the
16 motion. Your Honor has read the motion.
17 THE COURT: Right. I think the only issue was that
18 you were going to --
19 MS. KALNIT: The timing.
20 THE COURT: -- give me a time --
21 MS. KALNIT: Yes.
22 THE COURT: -- which depended upon whether or not KPS
23 or the term loan lenders were the winning bidder.
24 MS. KALNIT: That's correct, Your --
25 THE COURT: So what date should I put in there, if
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1 any?
2 MS. KALNIT: Yes, we would like definitive dates.
3 We've agreed with UBS that they will produce documents by the
4 end of the day on March 2nd, which is Monday. And then what we
5 would ask is that the investigation termination date be
6 extended to a date that is two business days prior to the
7 closing of the sale, whatever closing date that may be.
8 THE COURT: That may be just a few days after.
9 MS. KALNIT: It may be, and we're willing to work
10 quickly.
11 THE COURT: All right. I appreciate that. All
12 right.
13 MS. KALNIT: The order --
14 THE COURT: Is that acceptable to the term loan
15 lenders?
16 MR. HARRIS: It is, Your Honor. In fact, I'll go one
17 step further and I will give the committee as much notice as we
18 possibly can as to what our anticipated closing date will be.
19 THE COURT: Well, I'm sure they'll want to be there
20 even though they're not necessarily getting a check.
21 MR. HARRIS: Depends on whether or not they're going
22 to charge me for it, Your Honor.
23 THE COURT: Well -- why don't you give me a revised
24 order?
25 MS. KALNIT: We will do that.
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1 THE COURT: Then there was also a motion by the --
2 well, there is no issue on the record as to lack of consent to
3 this transaction under 363(f)(2). There was also a motion on
4 the calendar, I think, for next week by the term loan lenders
5 for relief from the stay. Do you remember that one,
6 Mr. Harris?
7 MR. HARRIS: Your Honor, I don't think we actually
8 ever filed it, Your Honor.
9 THE COURT: All right.
10 MR. HARRIS: We had circulated drafts, and then --
11 THE COURT: All right, I'll mark it off. If we have
12 it on our internal calendar, I'll mark it off.
13 MR. HARRIS: Your Honor, there is one other
14 housekeeping matter that I was discussing with Mr. Klein during
15 the break, and that relates to the assumption -- the cure
16 notices and the hearing on --
17 THE COURT: Yes.
18 MR. HARRIS: -- assumption of executory contracts. I
19 guess because of what's been going on in the last three days,
20 the cure notices actually have not gone out yet. I believe
21 that the debtors are going to try and get them out tomorrow --
22 THE COURT: All right.
23 MR. HARRIS: -- which will make it a little tight in
24 terms of the March 9th date Your Honor had previously set for
25 that hearing.
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1 THE COURT: Okay.
2 MR. HARRIS: Depending on whether or not the debtors
3 actually get it out tomorrow, Your Honor, if they do, we can
4 still make ten days and be here on the 9th. If not, we may
5 need to slip that hearing a day or so in order to accommodate
6 the ten-day time period for the counterparties to review those
7 cure notices and file any objections.
8 THE COURT: That's fine. I'll be here -- I believe
9 I'll be here all that week, and I'm sure I can give you time.
10 MR. HARRIS: Okay. The other thing, Your Honor, is
11 we've been talking to the debtors about potentially filing a
12 motion to extend the time to assume or reject executory
13 contracts relative to real estate leases to give us some time
14 to work through some of those and determine whether we want to
15 take some of those leases or not. We would obviously cover --
16 it wouldn't stop the closing. It would give us an opportunity
17 to potentially make some decisions on those leases post-
18 closing. And obviously we would cover all the costs relative
19 to that until such time as the decision would be made. We're
20 not --
21 THE COURT: Are we coming up to the 120th day?
22 MR. PEREZ: Your Honor, we filed November 23rd, so I
23 think we have a little bit of time.
24 THE COURT: Well, just as long as we --
25 MR. HARRIS: March 23rd would be the --
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1 THE COURT: Just as long as we watch the date.
2 MR. HARRIS: Right. March 23rd, I believe, is 120
3 days or thereabouts, Your Honor. So I think the idea was there
4 would be a motion to file to extend for, you know, up to ninety
5 days. And we would certainly work diligently to try and make
6 decisions prior to that. But it wouldn't hold up the closing.
7 It would simply give us an opportunity to make some decisions
8 shortly thereafter.
9 THE COURT: Well, you're really using the debtor's
10 powers. If the debtor brings the motion and gives notice to
11 the counterparties, you can certainly bring on a motion, and --
12 but it should be on notice. And if there are any issues, I'll
13 take them up. It may be that the landlords will be happy to
14 talk to you.
15 MR. HARRIS: Okay, Your Honor. Thank you very much.
16 THE COURT: All right.
17 MR. PEREZ: Your Honor, I will say that in The Daily
18 Deal the headline was "Jimmy Buffett Thinks the Lenox Sale Is
19 for the Birds".
20 THE COURT: Well, I'm always glad to find that our
21 proceedings are followed carefully by the press.
22 MR. PEREZ: I think that had to do with the parrots.
23 THE COURT: Yes, I -- I still think we ought to get
24 parrots for all, and, Mr. Harris, I'll ask you. No, I turn
25 that over to Mr. Cook. Ask Mr. Cook if he can arrange for
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1 parrots to --
2 MR. HARRIS: He would like nothing more than to be in
3 charge of the parrots, Your Honor.
4 THE COURT: All right. Thanks very much.
5 IN UNISON: Thank you, Your Honor.
6 THE COURT: Good night.
7 (Proceedings concluded at 5:39 p.m.)
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1
2 I N D E X
3
4 T E S T I M O N Y
5 WITNESS EXAM BY PAGE LINE
6 Marc Utay Alfredo R. Perez 30 11
7 Marc Utay Jesse H. Austin, III 40 17
8 Marc Utay Alfredo R. Perez 49 23
9
10 E X H I B I T S
11 PARTY NO DESCRIPTION ID. EVID.
12 1 Plan support agreement 53
13 4 Order authorizing and 53
14 approving bid procedures
15 15 Transcript of auction 54
16 23 E-mail from Mr. Zughayer 52
17 re: KPS
18 24 E-mail from Vaughan 52
19 Petherbridge to
20 Lou Fantin
21 25 Termination notice sent by 53
22 lenders to debtors
23 28 Forms of UBS commitment 51
24 letters
25
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1
2 E X H I B I T S (cont'd.)
3 PARTY NO DESCRIPTION ID. EVID.
4 34 E-mail from A. Perez to 52
5 to J. Austin and A. Harris
6 dated 11/30/08
7
8 R U L I N G S
9 DESCRIPTION PAGE LINE
10 Motion to reopen bidding and hold 102 9
11 an auction granted
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2 C E R T I F I C A T I O N
3
4 I, Clara Rubin, certify that the foregoing transcript is a true
5 and accurate record of the proceedings.
6
7 ___________________________________
8 Clara Rubin
9
10 Veritext LLC
11 200 Old Country Road
12 Suite 580
13 Mineola, NY 11501
14
15 Date: March 2, 2009
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SRZ-10850403.4
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------x : In re : Chapter 11 Case No. : LENOX SALES, INC., et al. : 08-14679 (ALG) : Debtors. : (Jointly Administered) : ---------------------------------------------------------------x
ORDER (I) APPROVING ASSET PURCHASE AGREEMENT AND AUTHORIZING THE SALE OF THE DEBTORS’ ASSETS OUTSIDE
THE ORDINARY COURSE OF BUSINESS, (II) AUTHORIZING THE SALE OF ASSETS FREE AND CLEAR OF ALL LIENS, CLAIMS,
ENCUMBRANCES AND INTERESTS, AND (III) GRANTING RELATED RELIEF
Upon the motion, dated December 1, 2009 (the “Sale Motion”), of the above-captioned
debtors and debtors-in-possession (the “Debtors”) for the entry of an order pursuant to sections
105, 363 and 365 of title 11 of the United States Code (the “Bankruptcy Code”) and Rules 2002,
6004, 6006 and 9014 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) (i)
approving, among other things, (A) certain bidding procedures in connection with the sale of all
or substantially all of the Debtors’ assets; (B) the form of asset purchase agreement, (C) the sale
of all or substantially all of the Debtors’ assets free and clear of all Liens1, Claims,
Encumbrances and Interests (as defined herein); and (ii) granting related relief; and the
Bankruptcy Court having entered an order dated December 16, 2008 (the “Bidding Procedures
Order”) authorizing the Debtors to solicit and consider offers for the Purchased Assets and
conduct the Auction in accordance with the terms and conditions of the Bidding Procedures and
approving, inter alia, (i) the Bidding Procedures; (ii) the form and manner of notice of the
1 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Sale
Motion, the Agreement, or the Bidding Procedures Order as applicable.
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Auction, Sale Hearing and the Assumption and Assignment Notice; and (iii) procedures relating
to the assumption and assignment of certain unexpired leases and executory contracts, including
notice of proposed Determined Cure Costs; and the Bankruptcy Court having established the
date of the Sale Hearing; and the Bankruptcy Court having jurisdiction to consider the Sale
Motion and the relief requested therein in accordance with 28 U.S.C. §§ 157(b)(2) and 1334;2
and consideration of the Sale Motion, the relief requested therein, and the responses thereto
being a core proceeding in accordance with 28 U.S.C. § 157(b); and the appearance of all
interested parties and all responses and objections to the Sale Motion having been duly noted in
the record of the Sale Hearing; and upon the record of the Sale Hearing, and all other pleadings
and proceedings in this case, including the Sale Motion; and it appearing that the relief requested
in the Sale Motion is in the best interests of the Debtors, their estates, their creditors and all other
parties in interest; and after due deliberation and sufficient cause appearing therefore;
IT IS HEREBY FOUND, DETERMINED AND CONCLUDED THAT:3
A. The findings and conclusions set forth herein constitute the Bankruptcy Court’s
findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052, made applicable to
this proceeding pursuant to Bankruptcy Rule 9014.
B. To the extent any of the following findings of fact constitute conclusions of law,
they are adopted as such. To the extent any of the following conclusions of law constitute
findings of fact, they are adopted as such.
C. The Bankruptcy Court has jurisdiction over this matter and over the Debtors’
estates and their property pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core 2 The “Bankruptcy Court” shall mean the United States Bankruptcy Court for the Southern District of New York.
3 All findings of fact and conclusions of law announced by the Bankruptcy Court at the Sale Hearing in relation to the Sale Motion are hereby incorporated herein to the extent not inconsistent herewith.
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proceeding pursuant to 28 U.S.C. § 157(b)(2). Venue of these chapter 11 cases in this district is
proper pursuant to 28 U.S.C. §§ 1408 and 1409.
D. That certain asset purchase agreement, dated as of February [25], 2009, between
LDG-Delaware Opco, Inc. (“New Lenox” or “Purchaser”), and the Debtors (the “Agreement”) is
substantially in the form approved by the Bidding Procedures Order, except as otherwise noted
on the redlined copy filed with the Bankruptcy Court on March 2, 2009 (docket # 340). New
Lenox is an entity owned and controlled (indirectly) by the persons that are the lenders (the
“Term Loan Lenders”) party to that certain Amended and Restated Term Loan Credit Agreement
dated as of April 20, 2007, and was formed for the purpose of acquiring the Debtors’ assets.
E. The Purchased Assets (as such term is defined in the Agreement) constitute
property of the Debtors’ estates and title thereto is vested in the Debtors’ estates within the
meaning of section 541(a) of the Bankruptcy Code.
F. The statutory predicates for the relief sought in the Sale Motion and the basis for
the approvals and authorizations herein are (i) sections 102, 105, 363, and 365 of the Bankruptcy
Code, and (ii) Bankruptcy Rules 2002, 6004, 6006 and 9014.
G. As evidenced by the affidavits of services filed with the Bankruptcy Court,
proper, timely, adequate, and sufficient notice of the Sale Motion, the Auction, and the Sale
Hearing have been provided in accordance with sections 102(1) and 363(b) of the Bankruptcy
Code, Bankruptcy Rules 2002, 6004, 9006, 9007, 9008 and 9014, the local rules of this
Bankruptcy Court, and in compliance with the Bidding Procedures Order. Such notice was good
and sufficient and appropriate under the particular circumstances. No other or further notice of
the Sale Motion, the Auction, the Sale Hearing, or of the entry of this Order is necessary or shall
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be required. A reasonable opportunity to object or be heard regarding the requested relief has
been afforded to all interested persons and entities.
H. The Debtors have demonstrated a sufficient basis and compelling circumstances
requiring them to enter into the Agreement, sell the Purchased Assets under section 363 of the
Bankruptcy Code, and such action is an appropriate exercise of the Debtors’ business judgment
and in the best interests of the Debtors, their estates and their creditors. Such business reasons
include, but are not limited to, the facts that (i) there is substantial risk of deterioration of the
value of the Purchased Assets if the sale is not consummated quickly; (ii) the Agreement
constitutes the highest or best offer for the Purchased Assets; (iii) the Agreement and the Closing
(as defined in the Agreement) will present the best opportunity to realize the value of the Debtors
on a going concern basis and avoid decline and devaluation of the Debtors’ business; (iv) the sale
of the Purchased Assets pursuant to the Agreement will provide the Debtors with $2,500,000 to
pay, inter alia, administrative, priority and secured tax claims that would not otherwise be paid,
and (v) unless the sale is concluded expeditiously as provided for in the Sale Motion and
pursuant to the Agreement, creditors’ recoveries may be diminished.
I. The Debtors and their professionals (i) provided potential purchasers, upon
request, sufficient information to enable them to make an informed judgment on whether to bid
on the Purchased Assets, (ii) afforded interested potential purchasers a full, fair and reasonable
opportunity to conduct due diligence and submit offers prior to the Bid Deadline. As of the Bid
Deadline, the only offers received by the Debtors for the Purchased Assets were from Upstairs
Acquisition Corp. (“UAC”) and New Lenox.
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J. At the Auction, the Debtors determined that the offer submitted by New Lenox
did not constitute a Qualified Bid; as a result, the Debtors declared the UAC offer to be the
Successful Bid.
K. The Debtors filed a Supplement to the Sale Motion seeking approval of the sale to
UAC.
L. The Bank of New York Mellon, in its capacity as agent for the Term Loan
Lenders, filed an objection to the sale on the grounds, inter alia, that (i) the Bidding Procedures
were not properly implemented and that New Lenox should have been a Qualified Bidder, (ii)
the UAC purchase price was grossly inadequate, and (iii) the sale to UAC did not satisfy section
363(f) of the Bankruptcy Code (the “Term Lender Objection”). The Term Lender Objection also
requested that the Bankruptcy Court deny approval of the UAC sale and that the Bankruptcy
Court exercise its discretion to reopen the Auction.
M. The Bankruptcy Court conducted hearings in respect of the Sale Motion on
February 23, 24 and 25, 2009. At the conclusion of the hearings, the Bankruptcy Court
determined that it should exercise its discretion to reopen the Auction, and directed that an
Auction be conducted with New Lenox as a Qualified Bidder.
N. At the commencement of the Auction, the Debtors determined that the offer of
New Lenox was highest and best. UAC declined to submit any further offer; as a result, the
Debtors declared New Lenox to be the Successful Purchaser. Thereafter, the Debtors and the
Purchaser entered into the Agreement, a copy of which is annexed hereto as Exhibit A.
O. The Purchaser is the Successful Bidder for the Purchased Assets in accordance
with the Bidding Procedures Order and further order of the Bankruptcy Court. The offer of the
Purchaser, upon the terms and conditions set forth in the Agreement, including the form and total
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consideration to be realized by the Debtors pursuant to the Agreement, (i) is the highest and best
offer received by the Debtors; (ii) is fair and reasonable; (iii) is in the best interests of the
Debtors’ creditors and estates; (iv) constitutes full and adequate consideration and reasonably
equivalent value for the Purchased Assets; (v) provides the Debtors with $2,500,000 to pay, inter
alia, administrative, priority and secured tax claims that would not otherwise be paid, and (vi)
will provide a greater recovery for the Debtors than would be provided by the UAC offer or
liquidation.
P. The Purchaser is a buyer in good faith, as that term is used in the Bankruptcy
Code and the decisions thereunder, and is entitled to the protections of section 363(m) of the
Bankruptcy Code with respect to all of the Purchased Assets. The Agreement was negotiated
and entered into in good faith and without collusion or fraud of any kind. Neither the Debtors
nor the Purchaser has engaged in any conduct that would prevent the application of section
363(m) of the Bankruptcy Code or cause the application of or implicate section 363(n) of the
Bankruptcy Code to the Agreement or to the consummation of the sale transaction and transfer
of the Purchased Assets. The Purchaser is entitled to all the protections and immunities of
section 363(m) of the Bankruptcy Code.
Q. The Debtors have full corporate power and authority to execute the Agreement
and all other documents contemplated thereby, and the sale of the Purchased Assets has been
duly and validly authorized by all necessary corporate authority by the Debtors to consummate
the transactions contemplated by the Agreement. No consents or approvals, other than as may be
expressly provided for in the Agreement, are required by the Debtors to consummate such
transactions.
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R. Except as otherwise provided in the Agreement, the Purchased Assets shall be
sold free and clear of all mortgages, restrictions, hypothecations, charges, indentures, loan
agreements, instruments, leases, licenses, options, deeds of trust, security interests, conditional
sale or other title retention agreements, pledges, liens (including, without limitation, mechanics’,
materialmens’ and other consensual and non-consensual liens and statutory liens), judgments,
demands, encumbrances, rights of first refusal, offsets, contracts, recoupment, rights of recovery,
claims for reimbursement, contribution, indemnity, exoneration, products liability, alter-ego,
environmental, pension, or tax, decrees of any court or foreign or domestic governmental entity,
or charges of any kind or nature, if any, including, but not limited to, any restriction on the use,
voting, transfer, receipt of income or other exercise of any attributes of ownership, debts arising
in any way in connection with any agreements, acts, or failures to act, of the Debtors or the
Debtors’ predecessors or affiliates, claims (as that term is used in the Bankruptcy Code),
reclamation claims, obligations, liabilities, demands, guaranties, options, rights, contractual or
other commitments, restrictions, interests and matters of any kind and nature, whether known or
unknown, choate or inchoate, filed or unfiled, scheduled or unscheduled, noticed or unnoticed,
recorded or unrecorded, perfected or unperfected, allowed or disallowed, contingent or non-
contingent, liquidated or unliquidated, matured or unmatured, material or non-material, disputed
or undisputed, whether arising prior to or subsequent to the commencement of the bankruptcy
case, and whether imposed by agreement, understanding, law, equity or otherwise, including
claims otherwise arising under doctrines of successor liability (other than as expressly provided
in the Agreement; collectively, “Liens, Claims, Encumbrances and Interests”) with such Liens,
Claims, Encumbrances and Interests to attach to the consideration to be received by the Debtors
in the same priority as before the Closing, and the Purchaser would not enter into the Agreement
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SRZ-10850403.4 8
to purchase the Purchased Assets otherwise. Notwithstanding the foregoing, nothing in this
Order finding that the Purchased Assets will be sold free and clear of Liens, Claims,
Encumbrances and Interests applies to Assumed Contracts and Assumed Leases that will be
subject to a separate order.
S. The transfer of the Purchased Assets to the Purchaser is a legal, valid and
effective transfer of the Purchased Assets, and, except as may otherwise be provided in the
Agreement, shall vest the Purchaser with all right, title and interest of the Debtors to the
Purchased Assets free and clear of any and all Liens, Claims, Encumbrances and Interests.
Except as specifically provided in the Agreement or this Order, the Purchaser shall not assume or
become liable for any Liens, Claims, Encumbrances and Interests relating to the Purchased
Assets being sold by the Debtors.
T. The transfer of the Purchased Assets to the Purchaser free and clear of all Liens,
Claims, Encumbrances and Interests will not result in any undue burden or prejudice to any
holders of any Liens, Claims, Encumbrances and Interests as all such Liens, Claims,
Encumbrances and Interests of any kind or nature whatsoever shall attach to the net proceeds of
the sale of the Purchased Assets received by the Debtors in the order of their priority, with the
same validity, force and effect which they now have as against the Purchased Assets. All
persons having Liens, Claims, Encumbrances or Interests of any kind or nature whatsoever
against or in any of the Debtors or the Purchased Assets shall be forever barred, estopped and
permanently enjoined from pursuing or asserting such Liens, Claims, Encumbrances or Interests
against the Purchaser, any of its assets, property, successors or assigns, or the Purchased Assets.
U. The Debtors may sell the Purchased Assets free and clear of all Liens, Claims,
Encumbrances and Interests of any kind or nature whatsoever because, in each case, one or more
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SRZ-10850403.4 9
of the standards set forth in section 363(f) of the Bankruptcy Code has been satisfied. Not
selling the Purchased Assets free and clear of all Liens, Claims, Interests and Encumbrances
would adversely impact the Debtors’ estates, and the sale of Purchased Assets other than one free
and clear of all Liens, Claims, Interests and Encumbrances would be of substantially less value
to the Debtors’ estates.
V. In the absence of a stay pending appeal, the Purchaser is acting in good faith,
pursuant to section 363(m) of the Bankruptcy Code, in closing the transactions contemplated by
the Agreement at any time on or after the entry of this Order and cause has been shown as to why
this Order should not be subject to the stay provided by Bankruptcy Rules 6004(h) and 6006(d).
W. The transactions contemplated under the Agreement do not amount to a
consolidation, merger or de facto merger of the Purchaser and the Debtors and/or the Debtors’
estates, there is not substantial continuity between the Purchaser and the Debtors, there is no
common identity between the Debtors and the Purchaser, there is no continuity of enterprise
between the Debtors and the Purchaser, the Purchaser is not a mere continuation of the Debtors
or their estates, and the Purchaser does not constitute a successor to the Debtors or their estates.
Other than the Assumed Liabilities, the Purchaser shall have no obligations with respect to any
liabilities of the Debtors, including, without limitation, the Excluded Liabilities, and the Debtors
and the Committee will release and forever discharge the Purchaser and its successors and
assigns from any and all claims, causes of action, obligations, liabilities, demands, losses, costs
and expenses of any kind, character or nature whatsoever, known or unknown, fixed or
contingent, relating to the sale, except for liabilities and obligations under the Agreement.
X. The sale of the Purchased Assets outside of a plan of reorganization pursuant to
the Agreement neither impermissibly restructures the rights of the Debtors’ creditors nor
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impermissibly dictates the terms of a liquidating plan of reorganization for the Debtors. The sale
does not constitute a sub rosa chapter 11 plan.
Y. The total consideration provided by the Purchaser for the Purchased Assets is the
highest and best offer received by the Debtors, and the Purchase Price provided by the Purchaser
under the Agreement is fair and reasonable and constitutes for all purposes a transfer for
reasonably equivalent value and fair consideration under the Bankruptcy Code and any other
similar applicable law.
NOW, THEREFORE, BASED UPON ALL OF THE FOREGOING, IT IS HEREBY ORDERED, ADJUDGED AND DECREED THAT:
1. The relief requested in the Sale Motion is granted, subject to the terms and conditions
contained herein. The Sale Motion complies with all aspects of Local Rule 6004-1.
2. All objections, responses, and requests for continuance concerning the Sale Motion
are resolved in accordance with the terms of this Order and as set forth in the record of the Sale
Hearing.
3. Notice of the Sale Hearing was fair and equitable under the circumstances and
complied in all respects with section 102(1) of the Bankruptcy Code and Bankruptcy Rules 2002,
6004 and 6006.
Approval of Sale
4. The sale of the Purchased Assets,4 the terms and conditions of the Agreement
(including all schedules and exhibits affixed thereto), and the transactions contemplated thereby
be, and hereby are, authorized and approved, except as provided in decretal paragraph 17 of this
Order.
4 Any reference in this Order to Purchased Assets is made subject to the provisions of paragraph 17 of this Order.
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5. The sale of the Purchased Assets and the consideration provided by the Purchaser
under the Agreement is fair and reasonable and shall be deemed for all purposes to constitute a
transfer for reasonably equivalent value and fair consideration under the Bankruptcy Code and
any other applicable law.
6. The Purchaser is hereby granted and is entitled to all of the protections provided to a
good faith buyer under section 363(m) of the Bankruptcy Code. Pursuant to section 363(m) of
the Bankruptcy Code, if any or all of the provisions of this Order are hereafter reversed,
modified, or vacated by a subsequent order of this Bankruptcy Court or any other court, such
reversal, modification, or vacatur shall not affect the validity and enforceability of any transfer
under the Agreement or obligation or right granted pursuant to the terms of this Order (unless
stayed pending appeal), and notwithstanding any reversal, modification or vacatur shall be
governed in all respects by the original provisions of this Order and the Agreement, as the case
may be.
7. At the Closing, the Debtors will be authorized to fully perform under, consummate
and implement the terms of the Agreement together with any and all additional instruments and
documents that may be reasonably necessary or desirable to implement and effectuate the terms
of the Agreement, this Order and sale of the Purchased Assets contemplated thereby including,
without limitation, deeds, assignments, stock powers and other instruments of transfer, and to
take all further actions as may reasonably be requested by the Purchaser for the purpose of
assigning, transferring, granting, conveying and conferring to the Purchaser, or reducing to
possession any or all of the Purchased Assets or Assumed Liabilities, as may be necessary or
appropriate to the performance of the Debtors’ obligations as contemplated by the Agreement,
without any further corporate action or orders of this Bankruptcy Court. The Purchaser shall
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have no obligation to proceed with the Closing of the Agreement until all conditions precedent to
their obligations to do so have been met, satisfied or waived.
8. The Debtors are further authorized and empowered to cause to be filed with the
secretary of state of any state or other applicable officials of any applicable governmental units,
any and all certificates, agreements, or amendments necessary or appropriate to effectuate the
transactions contemplated by the Agreement, any related agreements and this Order, including
amended and restated certificates or articles of incorporation and by-laws or certificates or
articles of amendment, and all such other actions, filings, or recordings as may be required under
appropriate provisions of the applicable laws of all applicable governmental units or as any of
the officers of the Debtors may determine are necessary or appropriate. The execution of any
such document or the taking of any such action shall be, and hereby is, deemed conclusive
evidence of the authority of such person to so act.
9. Effective as of the Closing (a) the sale of the Purchased Assets by the Debtors to the
Purchaser shall constitute a legal, valid and effective transfer of the Purchased Assets
notwithstanding any requirement for approval or consent by any person and vests the Purchaser
with all right, title and interest of the Debtors in and to the Purchased Assets, free and clear of all
Liens, Claims, Interests and Encumbrances of any kind, pursuant to section 363(f) of the
Bankruptcy Code, and (b) the assumption of any Assumed Liabilities by the Purchaser
constitutes a legal, valid and effective delegation of any Assumed Liabilities to the Purchaser and
divests the Debtors of all liability with respect to any Assumed Liabilities.
Transfer of Assets
10. Except to the extent specifically provided in the Agreement, upon the Closing, the
Debtors shall be, and hereby are, authorized, empowered, and directed, pursuant to sections 105,
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363(b) and 363(f) of the Bankruptcy Code, to sell the Purchased Assets to the Purchaser. The
sale of the Purchased Assets vests the Purchaser with all right, title and interest of the Debtors to
the Purchased Assets free and clear of any and all Liens, Claims, Interests and Encumbrances
and other liabilities, whether arising prior to or subsequent to the Petition Date, whether imposed
by agreement, understanding, law, equity or otherwise, with all such Liens, Claims, Interests and
Encumbrances to attach only to the proceeds of the sale with the same priority, validity, force,
and effect as they now have in or against the Purchased Assets. The Sale Motion shall be
deemed to provide sufficient notice as to the sale of the Purchased Assets free and clear of Liens,
Claims, Interests and Encumbrances in accordance with Local Rule 6004-1. Following the
Closing, no holder of any Liens, Claims, Interests and Encumbrances in the Purchased Assets
may interfere with the Purchaser’s use and enjoyment of the Purchased Assets based on or
related to such Liens, Claims, Interests and Encumbrances, or any actions that the Debtors may
take in their chapter 11 cases and no person may take any action to prevent, interfere with or
otherwise enjoin consummation of the transactions contemplated in or by the Agreement or this
Order.
11. The provisions of this Order authorizing the sale of the Purchased Assets free and
clear of Liens, Claims, Encumbrances and Interests and the Assumed Liabilities, shall be self-
executing, and neither the Debtors nor the Purchaser shall be required to execute or file releases,
termination statements, assignments, consents, or other instruments in order to effectuate,
consummate and implement the provisions of this Order.
12. On or before the Closing Date, the Debtors’ creditors are authorized and directed to
execute such documents and take all other actions as may be necessary and as the Debtors may
request to release any Liens, Claims, Encumbrances or Interests of any kind against the
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Purchased Assets, as such Liens, Claims, Encumbrances or Interests may have been recorded or
may otherwise exist. If any person or entity that has filed financing statements or other
documents or agreements evidencing any Liens, Claims, Encumbrances or Interests in or against
the Purchased Assets shall not have delivered to the Debtors prior to the Closing after request
therefor, in proper form for filing and executed by the appropriate parties, termination
statements, instruments of satisfaction, or releases of all such Liens, Claims, Encumbrances or
Interests that the person or entity has with respect to the Purchased Assets, the Debtors are
hereby authorized to execute and file such statements, instruments, releases and other documents
on behalf of the person or entity with respect to such Purchased Assets prior to the Closing, and
the Purchaser is authorized to file such documents after Closing.
13. To the greatest extent available under applicable law, the Purchaser shall be
authorized, as of the Closing Date, to operate under any license, permit, registration and
governmental authorization or approval of the Debtors with respect to the Purchased Assets, and
all such licenses, permits, registrations and governmental authorizations and approvals are
deemed to have been, and hereby are, directed to be transferred to the Purchaser as of the
Closing Date.
14. All of the Debtors’ interests in the Purchased Assets to be acquired by the Purchaser
under the Agreement shall be, as of the Closing Date and upon the occurrence of the Closing,
transferred to and vested in the Purchaser. Upon the occurrence of the Closing, this Order shall
be considered and constitute for any and all purposes a full and complete general assignment,
conveyance and transfer of the Purchased Assets acquired by the Purchaser under the Agreement
and/or a bill of sale or assignment transferring indefeasible title and interest in the Purchased
Assets to the Purchaser.
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15. Except as expressly provided in the Agreement, the Purchaser is not assuming nor
shall it or any affiliate of the Purchaser be in any way liable or responsible, as a successor or
otherwise, for any liabilities, debts, or obligations of the Debtors in any way whatsoever relating
to or arising from the Debtors’ ownership or use of the Purchased Assets prior to the
consummation of the transactions contemplated by the Agreement, or any liabilities calculable
by reference to the Debtors or their operations, or relating to conditions existing on or prior to
consummation of the transactions contemplated by the Agreement, which liabilities, debts, and
obligations are hereby extinguished insofar as they may give rise to liability, successor or
otherwise, against the Purchaser or any affiliate of the Purchaser.
16. Except as otherwise expressly provided in the Agreement, all persons or entities,
presently or on or after the Closing Date, in possession of some or all of the Purchased Assets are
directed to surrender possession of the Purchased Assets to the Purchaser on the Closing Date or
at such time thereafter as the Purchaser may request.
Assumed Contracts and Assumed Leases
17. For the avoidance of doubt, this Order shall not be construed to authorize the
assumption and assignment of any Assumed Contracts or Assumed Leases or to overrule or
otherwise affect any objections relating to Assumed Contracts or Assumed Leases that have been
timely filed. Further, entry of this Order shall not prevent or prejudice the rights of entities with
executory contracts or unexpired leases to object to the Debtors’ assumption and/or assignment
of such contracts or leases or make any determination with respect to the Debtors’ deadline to
assume or reject unexpired leases and executory contracts pursuant to 11 U.S.C. § 365(d)(4).
Assumption and assignment of any executory contract or unexpired lease may only be effected
by the Debtors’ compliance with the terms and conditions contained in the Bidding Procedures
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Order.5 A hearing to consider the assumption and assignment of certain of the Assumed
Contracts and Assumed Leases, notice of which was provided in accordance with the Bidding
Procedures Order, shall be held on March 11, 2009 at 11:00 a.m.
Additional Provisions
18. Each and every federal, state, and local governmental agency or department is hereby
authorized to accept any and all documents and instruments necessary and appropriate to
consummate the transactions contemplated by the Agreement and this Order.
19. To the extent provided by section 525 of the Bankruptcy Code, no governmental unit
may revoke or suspend any permit or license relating to the operation of the Purchased Assets
sold, transferred or conveyed to the Purchaser on account of the filing or pendency of this
chapter 11 cases or the consummation of the transaction contemplated by the Agreement.
20. The Purchaser has not assumed or is otherwise not obligated for any of the Debtors’
liabilities other than the Assumed Liabilities and as otherwise set forth in the Agreement, and the
Purchaser has not purchased any of the Excluded Assets. Consequently, all persons,
Governmental Units (as defined in sections 101(27) and 101(41) of the Bankruptcy Code) and all
holders of Liens, Claims, Interests or Encumbrances based upon or arising out of liabilities
retained by the Debtors are hereby enjoined from taking any action against the Purchaser or the
Purchased Assets, including asserting any setoff, right of subrogation or recoupment of any kind,
to recover any Liens, Claims, Interests or Encumbrances or on account of any liabilities of the 5 Notwithstanding anything to the contrary in this Order or in the Agreement, (i) none of the agreements between one of more of the Debtors and Oracle USA, Inc. ("Oracle") relating to the licensing of Oracle software and related services ("Oracle Agreements") shall be assumed and/or assigned and/or otherwise transferred to the Purchaser, without a further order of the Bankruptcy Court pursuant to the procedures set forth in Bidding Procedures Order relating to the assumption and/or assignment of executory contracts and unexpired leases; and (ii) to the extent that any computers, hard drives, servers or the likes (the "Computer Equipment") are transferred to the Purchaser prior to the assumption and/or assignment of the Oracle Agreements or without further Bankruptcy Court order, then any and all Oracle software and/or licenses shall be removed or scrubbed or eliminated from such Computer Equipment prior to the transfer of such Computer Equipment.
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Debtors other than Assumed Liabilities pursuant to the Agreement. All persons holding or
asserting any Interest in the Excluded Assets are hereby enjoined from asserting or prosecuting
such Liens, Claims, Interests or Encumbrances or cause of action against the Purchaser or the
Purchased Assets for any liability associated with the Excluded Assets.
21. The Purchaser is not and shall not be deemed a “successor” to the Debtors or their
estates as a result of the consummation of the transactions contemplated by the Agreement or
any other event occurring in the chapter 11 cases under any theory of law or equity, and the
Purchaser shall not assume, nor be deemed to assume, or in any way be responsible for any
liability or obligation of any of the Debtors and/or their estates including, but not limited to, any
bulk sales law, successor liability, liability or responsibility for any claim against the Debtors or
against an insider of the Debtors, or similar liability except as otherwise expressly provided in
the Agreement, and the Sale Motion contains sufficient notice of such limitation in accordance
with Local Rule 6004-1. Except to the extent the Purchaser assumes the Assumed Liabilities
pursuant to the Agreement, the purchase of the Purchased Assets by the Purchaser or its
affiliates, and the transactions approved hereby, will not cause the Purchaser or any of its
affiliates to be deemed a successor in any respect to the Debtors’ businesses.
22. Except to the extent expressly included in the Assumed Liabilities, pursuant to
sections 105 and 363 of the Bankruptcy Code, all persons and entities, including, but not limited
to, the Debtors, the Committee, all debt security holders, equity security holders, the Debtors’
employees or former employees, governmental, tax and regulatory authorities, lenders, parties to
or beneficiaries under any benefit plan, trade and other creditors asserting or holding a Lien,
Claim, Encumbrance or Interest of any kind or nature whatsoever against, in or with respect to
any of the Debtors or the Purchased Assets (whether legal or equitable, secured or unsecured,
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matured or unmatured, contingent or non-contingent, senior or subordinated), arising under or
out of, in connection with, or in any way relating to the Purchased Assets, the operation of the
Debtors’ business prior to the Closing Date or the transfer of the Purchased Assets to the
Purchaser, shall be forever barred and estopped from asserting, prosecuting or otherwise
pursuing such Lien, Claim, Encumbrance or Interest, whether by payment, setoff, or otherwise,
directly or indirectly, against the Purchaser or any affiliates, successors or assigns thereof and
each of their respective current and former members, officers, directors, managed funds,
investment advisors, attorneys, employees, partners, affiliates, financial advisors and
representatives (each of the foregoing in its individual capacity), or the Purchased Assets. For
the avoidance of doubt, the foregoing shall not prevent the Debtors, their estates, successors or
permitted assigns from pursuing claims, if any, against the Purchaser and/or its successors and
assigns in accordance with the terms of the Agreement or any rights the Committee has to pursue
a Challenge (as defined in the Final DIP Order (as defined below)).
23. Other than the Assumed Liabilities or as otherwise provided for in the Agreement, the
Purchaser shall have no obligations with respect to any liabilities of the Debtors, including,
without limitation, the Excluded Liabilities, and the Debtors and the Committee are deemed to
release and forever discharge the Purchaser and any of its affiliates, successors and assigns from
any and all claims, causes of action, obligations, liabilities, demands, losses, costs and expenses
of any kind, character or nature whatsoever, known or unknown, fixed or contingent, relating to
the sale, except for liabilities and obligations under the Agreement.
24. Pursuant to that certain Final Order entered on December 16, 2008 authorizing the
Debtors’ postpetition financing [Docket No. 129] (the “Final DIP Order”) and the terms of the
DIP Credit Agreement (as defined in the Final Order), upon the Closing Date: (a) the Purchaser
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shall pay in full in cash all Obligations (as defined in the DIP Credit Agreement), including cash
collateralization of all letters of credit not replaced and cancelled on or prior to Closing, in
accordance with the terms of the DIP Credit Agreement, to the DIP Facility Agent (or applicable
Issuing Bank (as defined in the DIP Credit Agreement) with respect to any letters of credit), for
the benefit of itself, the Issuing Bank and the DIP Lenders to be paid by the DIP Agent to the
DIP Lenders in accordance with the DIP Credit Agreement or held as cash collateral by the
Issuing Bank for outstanding letters of credit under a separate cash collateral agreement with the
Purchaser; and (b) other than obligations that specifically survive termination as provided in the
DIP Credit Agreement, such as any indemnification obligations, the DIP Credit Agreement, the
DIP Lenders’ commitments thereunder, and any of the DIP Agent’s or DIP Lenders’ obligations
or liabilities under the Final Order shall be deemed terminated after such payment in full.
25. Subject to the terms of the Agreement, the Agreement and any related agreements
may be waived, modified, amended, or supplemented by agreement of the Debtors and the
Purchaser, without further action or order of the Bankruptcy Court; provided, however, that any
such waiver, modification, amendment, or supplement is not material and substantially conforms
to, and effectuates, the Agreement and any related agreements and provided, further, that any
such waiver, modification, amendment or supplement is filed with the Bankruptcy Court. Any
material modification, amendment, or supplement to the Agreement must be approved by Order
of the Bankruptcy Court following a motion on notice to all interested parties.
26. The failure specifically to include any particular provisions of the Agreement or any
related agreements in this Order shall not diminish or impair the effectiveness of such provision,
it being the intent of the Bankruptcy Court, the Debtors and the Purchaser that the Agreement
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and any related agreements are authorized and approved in their entirety with such amendments
thereto as may be made by the parties in accordance with this Order prior to Closing.
27. To the extent any provisions of this Order conflict with the terms and conditions of
the Agreement, this Order shall govern and control.
28. This Order and Agreement shall be binding upon and govern the acts of all persons
and entities, including without limitation, the Debtors and the Purchaser, their respective
successors and permitted assigns, including, without limitation, any Chapter 11 trustee
hereinafter appointed for the Debtors’ estates or any trustee appointed in a Chapter 7 case if this
case is converted from Chapter 11, all creditors of any Debtor (whether known or unknown),
filing agents, filing officers, title agents, recording agencies, secretaries of state, and all other
persons and entities who may be required by operation of law, the duties of their office or
contract, to accept, file, register, or otherwise record or release any documents or instruments or
who may be required to report or insure any title in or to the Purchased Assets.
29. The provisions of this Order are non-severable and mutually dependent without
written consent of Purchaser.
30. Nothing in any order of this Bankruptcy Court or contained in any plan of
reorganization or liquidation confirmed in the chapter 11 cases, or in any subsequent or
converted cases of the Debtors under chapter 7 or chapter 11 of the Bankruptcy Code, shall
conflict with or derogate from the provisions of the Agreement or the terms of this Order.
31. Notwithstanding Bankruptcy Rules 6004, 6006 and 7062, this Order shall be effective
and enforceable immediately upon entry and its provisions shall be self-executing, and the Sale
Motion shall be deemed to provide sufficient notice of the Debtors’ request for relief from stay.
In the absence of any person or entity obtaining a stay pending appeal, the Debtors and the
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Purchaser are free to close under the Agreement at any time, subject to the terms of the
Agreement. In the absence of any person or entity obtaining a stay pending appeal, if the
Debtors and the Purchaser close under the Agreement, the Purchaser shall be deemed to be
acting in “good faith” and shall be entitled to the protections of section 363(m) of the Bankruptcy
Code as to all aspects of the transactions under and pursuant to the Agreement if this Order or
any authorization contained herein is reversed or modified on appeal.
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32. This Bankruptcy Court shall retain exclusive jurisdiction to enforce the terms and
provisions of this Order, the Bidding Procedures Order, and the Agreement in all respects and to
decide any disputes concerning this Order and the Agreement, or the rights and duties of the
parties hereunder or thereunder or any issues relating to the Agreement and this Order including,
but not limited to, the interpretation of the terms, conditions and provisions hereof and thereof,
the status, nature and extent of the Purchased Assets and any Assumed Contracts and Assumed
Leases and all issues and disputes arising in connection with the relief authorized herein,
inclusive of those concerning the transfer of the assets free and clear of all Liens, Claims,
Interests and Encumbrances.
Dated: New York, New York March 4, 2009
/s/ Allan L. Gropper UNITED STATES BANKRUPTCY JUDGE
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