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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE
In re: Chapter 11
LUCKY’S MARKET PARENT COMPANY, Case No. 20-10166 (JTD) LLC, et al.,1 (Jointly Administered) Debtors. Re: Docket No. 1397
DEBTORS’ MEMORANDUM OF LAW IN SUPPORT OF ENTRY OF AN ORDER CONFIRMING THE SECOND AMENDED JOINT CHAPTER 11 PLAN OF LIQUIDATION OF LUCKY’S MARKET PARENT COMPANY, LLC AND ITS DEBTOR AFFILIATES
Dated: December 22, 2020 POLSINELLI PC Wilmington, Delaware Christopher A. Ward (Del. Bar No. 3877) 222 Delaware Avenue, Suite 1101 Wilmington, Delaware 19801 Telephone: (302) 252-0920 Facsimile: (302) 252-0921 [email protected]
-and-
Liz Boydston (Admitted Pro Hac Vice) 2950 N. Harwood, Suite 2100 Dallas, Texas 75201 Telephone: (214) 661-5557 [email protected]
Counsel to the Debtors and Debtors in Possession
1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, are Lucky’s Market Parent Company, LLC (2055), Lucky’s Farmers Market Holding Company, LLC (5480), Lucky’s Market Operating Company, LLC (7064), LFM Stores LLC (3114), Lucky’s Farmers Market, LP (0828), Lucky’s Farmers Market Resource Center, LLC (7711), Lucky’s Market Holding Company 2, LLC (0607), Lucky’s Market GP 2, LLC (9335), Lucky’s Market 2, LP (8384), Lucky’s Market of Longmont, LLC (9789), Lucky’s Farmers Market of Billings, LLC (8088), Lucky’s Farmers Markets of Columbus, LLC (3379), Lucky’s Farmers Market of Rock Hill, LLC (3386), LFM Jackson, LLC (8300), Lucky’s Farmers Market of Ann Arbor, LLC (4067), Lucky’s Market of Gainesville, LLC (7877), Lucky’s Market of Bloomington, LLC (3944), Lucky’s Market of Plantation, LLC (4356), Lucky’s Market of Savannah, GA, LLC (1097), Lucky’s Market of Traverse, City, LLC (2033), Lucky’s Market of Naples, FL, LLC (8700), Sinoc, Inc. (0723), Lucky’s Farmers Market of Ellisville, LLC (2875), and Lucky’s Farmers Market of Lexington, KY, LLC (3446).
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TABLE OF CONTENTS
Preliminary Statement ...... 2 Background ...... 2 A. General Background ...... 2 (i) Section 363 Sales ...... 5 (ii) Claim Reconciliation ...... 6 (iii) WARN Act Class Action Adversary Proceeding ...... 7 (iv) ATA Litigation...... 8 (v) Winn-Dixie Adversary Proceeding ...... 8 (vi) Executory Contracts and Leases ...... 9 (vii) Exclusivity Period Extensions ...... Error! Bookmark not defined. B. The Plan and Disclosure Statement Process ...... 10 Argument ...... 13 A. The Plan Meets the Bankruptcy Code’s Requirements and Should be Approved ...... 13 (i) Section 1129(a)(1): The Plan Complies With the Applicable Provisions of the Bankruptcy Code ...... 14 (ii) Section 1122: The Classifications Are Appropriate ...... 14 (iii) Section 1123(a): The Plan’s Content is Appropriate ...... 18 (iv) Section 1123(b): The Plan Contains Certain Permissible Provisions ...... 19 (a) The Global Settlement is an Integral Component of the Plan and Should be Approved Pursuant to Bankruptcy Rule 9019 ...... 20 (1) Applicable Legal Standard ...... 22 (2) Balancing the Possibility of Success in Litigation and Future Benefits of the Global Settlement Favors the Global Settlement . 25 (3) Difficulty in Collection ...... 26 (4) Complexity of Litigation...... 27 (5) The Global Settlement is in the Paramount Interests of Creditors 28 (b) The Plan Releases are Appropriate and Should be Approved ...... 28 (1) Debtor Releases ...... 29 (2) Third Party Releases ...... 36 (c) The Plan’s Injunction and Exculpation Provisions are Appropriate and Should be Approved ...... 38 (v) Section 1129(a)(2): The Plan Complies With the Bankruptcy Code ...... 41 (vi) Section 1129(a)(3): The Plan Has Been Proposed in Good Faith ...... 43
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(vii) Section 1129(a)(4): The Plan Provides for Approval of Certain Administrative Expenses ...... 45 (viii) Section 1129(a)(5): The Plan Contains Proper Disclosures ...... 46 (ix) Section 1129(a)(6): No Governmental Regulatory Commission Has Jurisdiction Over the Debtors ...... 46 (x) Section 1129(a)(7): The Plan is in the Best Interest of All Creditors ...... 47 (xi) Section 1129(a)(8): The Plan Has Been Accepted by Impaired Voting Classes ...... 49 (xii) Section 1129(a)(9): The Plan Provides for Payment in Full of Allowed Priority, Administrative, and Tax Claims ...... 50 (xiii) Section 1129(a)(10): At Least One Class of Impaired Classes Has Accepted the Plan...... 50 (xiv) Section 1129(a)(11): The Plan is Feasible ...... 50 (xv) Section 1129(a)(12): All Fees Have Been or Will be Paid ...... 52 (xvi) Section 1129(a)(13) Through Section 1129(a)(16) Do Not Apply to the Plan52 (xvii) Section 1129(b): The Plan Satisfies the “Cram Down Requirements”...... 53 (xviii) Section 1129(c) Through Section 1129(e) Have Been Satisfied ...... 56 B. Substantive Consolidation...... 56 (i) Prepetition Disregard of Separateness ...... 59 (ii) Postpetition Commingling ...... 60 C. Objections ...... 61 D. A Waiver of Any Stay of Confirmation is Appropriate ...... 61 Conclusion ...... 62
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TABLE OF AUTHORITIES
Page(s)
Cases
In re 203 N. LaSalle St. Ltd. P’ship., 190 B.R. 567 (Bankr. N.D. Ill. 1995), rev’d on other grounds, 526 U.S. 434 (1999) ...... 53
In re Abeinsa Holding, Inc., 562 B.R. 265 (Bankr. D. Del. 2016) ...... 58
In re Adelphia Commc’ns, Corp., 368 B.R. 140 (Bankr. S.D.N.Y. 2007) ...... 47
In re Armstrong World Indus., 320 B.R. 523 (D. Del. 2005) ...... 54
In re Armstrong World Indus., Inc., 348 B.R. 111 (Bankr. D. Del. 2006) ...... 14
In re Avia Energy Dev., LLC, Case No. 05-39339 (BJH), 2007 WL 2238039 (Bankr. N.D. Tex. Aug. 2, 2007) ...... 15
Bank of Am. Nat’l Trust & Savings Assoc. v. 203 N. LaSalle St. Partnership, 526 U.S. 434 (1999) ...... 47
In re Bowles, 48 B.R. 502 (Bankr. E.D. Va. 1985) ...... 54
In re Briscoe Enters, Ltd., 994 F.2d 1160 (5th Cir. 1993) ...... 51
In re Brotby, 303 B.R. 177 (B.A.P. 9th Cir. 2003)...... 51
In re Coram Healthcare Corp., 271 B.R. 228 (Bankr. D. Del. 2001) ...... 44
In re Coram Healthcare Corp., 315 B.R. 321 (Bankr. D. Del. 2004) ...... 23, 24, 37, 54
In re Credentia Corp., Case No. 10-10926, 2010 WL 3313383 (Bankr. D. Del. May 26, 2010) ...... 51
In re Crowthers McCall Pattern, Inc., 120 B.R. 279 (Bankr. S.D.N.Y. 1990) ...... 47
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In re Drexel Burnham Lambert Grp., Inc., 138 B.R. 723 (Bankr. S.D.N.Y. 1992) ...... 42
In re EBH TopCo, LLC, 18-11212 (BLS), Docket No. 765 ...... 40
In re Freymiller Trucking, Inc., 190 B.R. 913 (Bankr. W.D. Okla. 1996) ...... 54
Genesis Health Ventures, Inc. v. Stapleton (In re Genesis Health Ventures, Inc.), 402 F.3d 416 (3d Cir. 2005)...... 56, 57
Gillman v. Cont’l Airlines (In re Cont’l Airlines), 203 F.3d 203 (3d Cir. 2000)...... 40
In re Hercules Offshore, Inc., 565 B.R. 732 (Bankr. D. Del. 2016) ...... 31
In re Indianapolis Downs, LLC, 486 B.R. 286 (Bankr. D. Del. 2013) ...... 31, 40
In re John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154 (3d Cir. 1993)...... 15
In re Johns-Manville Corp., 68 B.R. 618 (Bankr. S.D.N.Y. 1987) ...... 42
Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir. 1988)...... 51, 53
In re Lakeside Global II, Ltd., 116 B.R. 499 (Bankr. S.D. Tex. 1989) ...... 51
In re Lason, Inc., 300 B.R. 227 (Bankr. D. Del. 2003) ...... 47
In re Lernout & Hauspie Speech Prods. N.V., 308 B.R. 672 (D. Del. 2004) ...... 43
In re Lisanti Foods, 329 B.R. 491 (D.N.J. 2005) ...... 46
In re Master Mortgage Invest. Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994)...... 31, 32, 35, 36
Mercury Capital Corp. v. Milford Conn. Assocs., L.P., 354 B.R. 1 (D. Conn. 2006) ...... 51
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In re Millennium Lab Holdings II, LLC, 575 B.R. 252 (Bankr. D. Del. 2017), aff’d 591 B.R. 559 (D. Del. 2018) ...... 36
In re Nassau Broadcasting Partners, L.P., 11-12934 (KG), Docket No. 990 ...... 41
In re NII Holdings, Inc., 288 B.R. 356 (Bankr. D. Del. 2002) ...... 43
In re Nortel Networks, Inc., 09-10138 (KG) Docket No. 17807 ...... 41
In re Nutritional Sourcing Corp., 398 B.R. 816 (Bankr. D. Del. 2008) ...... 14
In re Okoreeh-Bahm, 836 F.2d 1030 (6th Cir. 1988) ...... 43
Olympia & York Fla. Equity Corp. v. Bank of N.Y. (In re Holywell Corp.), 913 F.2d 873 (11th Cir. 1990) ...... 15
In re Orlando Investors LP, 103 B.R. 593 (Bankr. E.D.Pa. 1989) ...... 51
In re Owens Corning, 419 F.3d 195 (3d Cir. 2005)...... 56, 57
In re PPI Enterprises, Inc., 228 B.R. 339 (Bankr. D. Del. 1998) ...... 43
In re PPI Enters. (U.S.), 324 F.3d 197 (3d Cir. 2003)...... 44
In re PWS Holding Corp., 228 F.3d 224 (3d Cir. 2000)...... 40, 43
In re Resorts Int’l, Inc., 145 B.R. 412 (Bankr. D.N.J. 1990) ...... 46
In re Revco, 131 B.R. 615 (Bankr. N.D. Ohio 1990) ...... 51
In re Toy & Sports Warehouse, Inc., 37 B.R. 141 (Bankr. S.D.N.Y. 1984) ...... 42
In re Tribune Co., 464 B.R. 126 (Bankr. D. Del. 2011) ...... 32, 51
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In re Tribune Co., 476 B.R. 843 (Bankr. D. Del. 2012) ...... 14
U.S. Bank Nat’l Ass’n v. Wilmington Trust Co. (In re Spansion), 426 B.R. 114 (Bankr. D. Del. 2010) ...... 30
In re W.R. Grace & Co., 446 B.R. 96 (Bankr. D. Del. 2011) ...... 40
In re W.R. Grace & Co., 475 B.R. 34 (D. Del. 2012) ...... 14
In re Wash. Mut., Inc., 442 B.R. 314 (Bankr. D. Del. 2011) ...... 31, 32, 40
In re Wash. Mut., Inc., 461 B.R. 200 (Bankr. D. Del. 2011) ...... 47
In re Wash. Mut. Inc., 2011 WL 4090757 (Bankr. D. Del. Sept. 13, 2011) ...... 51
In re Zenith Elecs. Corp., 241 B.R. 92 (Bankr. D. Del. 1999) ...... 31, 35, 43
Statutes
11 U.S.C. Ch. 7 ...... 35, 47, 48
11 U.S.C. Ch. 11 ...... 1, 11, 28, 29, 32, 33, 35, 42, 44, 45, 46, 47, 48, 54, 56
11 U.S.C. § 507 ...... 52
11 U.S.C. § 507(a)(2) ...... 52
11 U.S.C. § 1122 ...... 14, 17, 18
11 U.S.C. §§ 1123, 1125, and 1129 ...... 13
11 U.S.C. § 1123(a) ...... 18
11 U.S.C. § 1123(a)(1) ...... 18
11 U.S.C. §§ 1123(a)(2) and (a)(3) ...... 18
11 U.S.C. § 1123(a)(4) ...... 18
11 U.S.C. § 1123(a)(6) ...... 18
11 U.S.C. § 1123(a)(7) ...... 18
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11 U.S.C. § 1123(b) ...... 19, 28
11 U.S.C. § 1123(b)(3)(A) ...... 30
11 U.S.C. § 1125 ...... 42
11 U.S.C. §§ 1125 and 1126 ...... 41, 42, 43
11 U.S.C. § 1126(g) ...... 54
11 U.S.C. § 1129 ...... 14
11 U.S.C. § 1129(a) ...... 42, 53
11 U.S.C. § 1129(a)(1) ...... 14
11 U.S.C. § 1129(a)(2) ...... 41, 43
11 U.S.C. § 1129(a)(3) ...... 43
11 U.S.C. § 1129(a)(4) ...... 45, 46
11 U.S.C. § 1129(a)(5) ...... 46
11 U.S.C. § 1129(a)(5)(A)(i) ...... 46
11 U.S.C. § 1129(a)(6) ...... 46
11 U.S.C. § 1129(a)(7) ...... 47
11 U.S.C. § 1129(a)(7)(A) ...... 47
11 U.S.C. § 1129(a)(8) ...... 49, 53
11 U.S.C. § 1129(a)(9) ...... 50
11 U.S.C. § 1129(a)(10) ...... 50
11 U.S.C. § 1129(a)(11) ...... 50, 51
11 U.S.C. § 1129(a)(12) ...... 52
11 U.S.C. § 1129(a)(13) ...... 52
11 U.S.C. § 1129(a)(14) ...... 53
11 U.S.C. § 1129(a)(15) ...... 53
11 U.S.C. § 1129(a)(16) ...... 53
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11 U.S.C. § 1129(b) ...... 49, 53, 56
11 U.S.C. § 1129(b)(1) ...... 53
11 U.S.C. § 1129(b)(2)(B)(ii) and (C)(ii) ...... 54
11 U.S.C. § 1129(c) ...... 56
11 U.S.C. § 1129(e) ...... 56
11 U.S.C. § 11239(a)(3) ...... 45
28 U.S.C. § 1930 ...... 52
Other Authorities
FED. R. BANKR. P. 3020 ...... 61
FED. R. BANKR. P. 3020(e) ...... 61, 62
FED. R. BANKR. P. 3020(e), Notes, 1999 Amend...... 61
H.R. Rep. No. 95-595, at 412 (1977) ...... 42
S. Rep. No. 95-989, at 126 (1978) ...... 42
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The above-captioned debtors and debtors in possession (the “Debtors”) hereby submit this memorandum of law (this “Memorandum”) in support of confirmation of the Second
Amended Joint Chapter 11 Plan of Liquidation of Lucky’s Market Parent Company, LLC and its
Debtor Affiliates (as may be modified, amended or supplemented from time to time, the “Plan”).
The Debtors respectfully request confirmation of the Plan pursuant to the proposed form of order filed contemporaneously herewith (the “Confirmation Order”). In support of the Plan, the
Debtors rely upon and incorporate by reference (a) the Amended Declaration of Andrew T.
Pillari, Chief Financial Officer of Debtors, in Support of Chapter 11 Petitions and First Day
Pleadings [Docket No. 47] (the “First Day Declaration”); (b) the First Amended Disclosure
Statement for Joint Chapter 11 Plan of Liquidation of Lucky’s Market Parent Company, LLC and its Debtor Affiliates [Docket No. 1261] (including all exhibits and schedules thereto, as may be modified, amended or supplemented from time to time, the “Disclosure Statement”); (c) the
Declaration of Catherine Nownes-Whitaker Regarding Tabulation of Ballots Cast on Joint
Chapter 11 Plan of Liquidation of Lucky’s Market Parent Company, LLC and Its Debtor
Affiliates (the “Balloting Declaration”) filed contemporaneously herewith; (d) the Declaration of Andrew T. Pillari, Chief Financial Officer of Debtors in Support of the Second Amended Joint
Chapter 11 Plan of Liquidation of Lucky’s Market Parent Company, LLC and its Debtor
Affiliates (the “Confirmation Declaration”) filed contemporaneously herewith; and (e) the
Declaration of Michael Leto in Support of Confirmation of the Second Amended Joint Chapter
11 Plan of Liquidation of Lucky’s Market Parent Company, LLC and its Debtor Affiliates (the
“Liquidation Declaration”) filed contemporaneously herewith. The Balloting Declaration,
Confirmation Declaration, and Liquidation Declaration are hereby incorporated by reference as if set forth in full herein.
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PRELIMINARY STATEMENT1
1. The Debtors respectfully request confirmation of the Plan, which is supported by the vast majority of creditors entitled to vote, and is affirmatively supported by the Committee
(as defined below) and the Prepetition Secured Lender (as defined below). The Plan is a liquidating chapter 11 plan. Most of the Debtors’ assets have been sold to third party buyers through approved lease and asset sales. As described more fully in the Plan and the Disclosure
Statement, following the successful marketing and liquidation of the Debtors’ store lease portfolio, as well as substantial, good faith, arm’s length negotiations among the Debtors, the
Committee, and the Prepetition Secured Lender (the “Parties”) negotiated the Global Settlement.
The Plan embodies a Global Settlement, as discussed more fully within the Disclosure Statement and Plan, which provides the only potential recovery for general unsecured creditors in these
Chapter 11 Cases (as defined below). No party has filed substantive objections to confirmation.
BACKGROUND
A. General Background
2. On January 27, 2020 (the “Petition Date”), each of the Debtors filed a voluntary petition in this Court commencing a case for relief under chapter 11 of title 11 of the United
States Code (the “Bankruptcy Code”) and on March 3, 2020, Lucky’s Farmers Market of
Ellisville, LLC and Lucky’s Farmers Market of Lexington, KY, LLC each filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code (the “Chapter 11 Cases”). The factual background regarding the Debtors, including their business operations, their capital and debt structures, and the events leading to the filing of the Chapter 11 Cases is set forth in detail within the First Day Declaration, which is fully incorporated herein by reference.
1 Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan.
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3. As described in greater detail within the First Day Declaration, The Kroger Co., an Ohio corporation (“Kroger” or the “Prepetition Secured Lender”) acquired a membership interest in the Debtors in April 2016, and beginning in September 2016, extended credit on secured basis to the Debtors. The Prepetition Secured Lender is owed over $300,000,000.00 in these Chapter 11 Cases.
4. The Debtors continued to manage and operate their business as debtors in possession pursuant to Bankruptcy Code sections 1107 and 1108. No trustee or examiner has been requested in the Chapter 11 Cases.
5. The Chapter 11 Cases are being jointly administered for procedural purposes pursuant to Bankruptcy Rule 1015(b). See Docket Nos. 38 and 386.
6. On February 4, 2020, the Office of the United States Trustee for the District of
Delaware (the “U.S. Trustee”) appointed the Official Committee of Unsecured Creditors (the
“Committee”) in the Chapter 11 Cases [Docket No. 94].
7. As set forth more fully in the First Day Declaration, Plan, and Disclosure
Statement, before the Petition Date, the Debtors operated small format grocery stores that offered affordable organic and locally-grown fruits and vegetables, top-quality, naturally raised meats and seafood, and fresh, daily prepared foods. The Debtors’ emphasized carrying the highest- quality products at the lowest prices, with the mission of providing “Organic for the 99%”. Their stores offered a broad range of grocery items through the Debtors’ “L” private label at great value, which had no artificial colors, flavors or preservatives.
8. By the end of 2019, the Debtors expanded to thirty-nine (39) stores across ten states (each, a “Store”, and collectively, the “Stores”). As of the Petition Date, the Debtors owned two (2) Stores and leased thirty-seven (37) Stores; of those, Kroger guaranteed the
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Debtors’ liabilities under thirty-one (31) store leases. In addition to operating thirty-nine (39)
Stores, as of the Petition Date, the Debtors (a) operated a warehouse in Orlando, Florida, which supplied nearly all produce for the Company’s Stores located in Florida and Georgia, and (b) had seventeen (17) additional property leases and owned one (1) property; the Debtors intended to open eighteen (18) additional stores.
9. In July 2019, the Debtors engaged PJ Solomon, as their investment banker, to conduct a prepetition marketing process for substantially all of the Debtors’ assets. Additionally, the Debtors retained A&M and Polsinelli on or about December 27, 2019 and September 4,
2019, respectively, to assist in evaluating all available restructuring options. The Debtors subsequently retained Great American Group (“Great American”) to assist with the liquidation of certain assets located in certain of the Stores. Specifically, Great American successfully liquidated all furniture, fixtures, and equipment at twenty-one (21) stores. In addition, the
Debtors ran a going out of business process to liquidate its existing inventory at thirty-three (33) of the Stores, leaving six (6) operating Stores to be sold through a separate process.
10. Recently, fiscal year-to-date through January 4, 2020, the Debtors experienced approximately $22 million in operating losses and a net loss of approximately $100 million.
Additionally, through the week ended January 18, 2020, the Debtors had a 10.6% reduction in comparable Store sales versus the prior year-to-date period. Based on performance of the
Debtors’ business, the Debtors’ management determined that it would require approximately
$100 million in incremental funding to continue operations until the Debtors would be cash flow positive. Management determined that it would be unable to secure new sources of funding outside of these Chapter 11 Cases.
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11. As set forth in the First Day Declaration, the Debtors’ goal was always to confirm a chapter 11 liquidating plan in these Chapter 11 Cases by the end of the calendar year. To accomplish this feat, after good faith, arms’ length negotiations, the Debtors entered into the
Global Settlement with the Prepetition Secured Lender and the Committee on a liquidating chapter 11 plan, which provides for a meaningful distribution to creditor constituencies.
(i) Section 363 Sales
12. Between January 30, 2020 and February 13, 2020, the Debtors filed seven (7) motions, requesting orders of the Court to, among other things, approve the bid procedures and schedule an auction and sale hearing with respect to six (6) stalking horse agreements and remaining assets not subject to a stalking horse agreement, including, without limitation, certain of the Debtors’ leases. See Docket No. 63 (the “Publix Sale Motion”); Docket No. 71 (the “Aldi
Sale Motion”); Docket No. 73 (the “LMAC Sale Motion”); Docket No. 72 (the “Seabra Sale
Motion”); Docket No. 97 (the “Winn-Dixie Sale Motion”); Docket No. 98 (the “Alvarez Sale
Motion,” together with the Publix Sale Motion, the Aldi Sale Motion, the LM Bidding
Procedures Motion, the Seabra Sale Motion, and the Winn-Dixie Sale Motion, the “Stalking
Horse Sale Motions”); and Docket No. 186 (the “Global Sale Motion”, together with the
Stalking Horse Sale Motions, the “Sale Motions”).
13. Between April 3, 2020 and May 11, 2020, the Court entered orders approving all of the transactions contemplated by the successful bids and approved by the special committee of the board of manager of the Debtors. See Docket No. 569 (the “Dave’s Supermarket Sale
Order”); Docket No. 574 (the “Schnuck Markets Sale Order”); Docket No. 589 (the “Oryana
Sale Order”); Docket No. 590 (the “LM Acquisitions Sale Order”); Docket No. 618 (the
“Seabra Sale Order”); Docket No. 619 (the “Dollar General Sale Order”); and Docket No.
629 (the “Winn-Dixie Sale Order”); Docket No. 659 (the “Publix Sale Order”); Docket No.
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673 (the “Aldi Sale Order”); Docket No. 702 (the “Alvarez Sale Order”); Docket Nos. 706 and
715 (the “Publix/Clermont Sale Order”). Although, most of the foregoing Court-approved sales have closed; the Neptune Beach store lease sale has not yet closed.2
14. On July 10, 2020, the Court entered the M.B.D. Bid Procedures Order [Docket
No. 864], which related to Panama City assets, and on August 11, 2020, the Debtors held a virtual auction [Docket No. 926]. On August 18, 2020, the Court entered the M.B.D. Sale Order.
[Docket No. 951] (the “M.B.D. Sale Order” together with Dave’s Supermarket Sale Order,
Schnuck Markets Sale Order, Oryana Sale Order, LM Acquisition Sale Order, Seabra Sale
Order, Dollar General Sale Order, Winn-Dixie Sale Order, Publix Sale Order, Alvarez Sale
Order, and Publix/Clermont Sale Order, the “Sale Orders”).
15. On August 24, 2020, the Debtors filed the Aldi Private Sale Motion [Docket No.
975].3 The Aldi Private Sale Motion as it relates to the Clearwater Lease was adjourned from the
December 23, 2020 hearing date to January 12, 2021, subject to further adjournment by agreement of the parties.
(ii) Claim Reconciliation
16. On March 25, 2020, the Court entered an Order (I) Establishing the Bar Dates for
Filing Proofs of Claim, Including Section 503(b)(9) Claims and (II) Approving Form and
Manner of Notice Thereof [Docket No. 507] (the “Bar Date Order”).
17. Between May 22, 2020 and December 11, 2020, the Debtors filed eleven (11) omnibus objections to claims. See Docket No. 752; Docket No. 753; Docket No. 835; Docket
2 The Neptune Beach store lease – Store NEP 0028, 580 Atlantic Blvd, Neptune Beach, FL – is subject to the Publix Sale Motion and Publix Sale Order. 3 The Aldi Private Sale Motion relates to a lease dated June 14, 2018, as amended, related to Store CLW 0062, 2150 Gulf to Bay Boulevard, Clearwater Florida 33765 (the “Clearwater Lease”) between the Debtors and Gulf to Bay LM, LLC, as successor in interest to Dixit Properties, LLC (the “Clearwater Landlord”).
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No. 836; Docket No. 904; Docket No. 905; Docket No. 1046; Docket No. 1140; Docket No.
1141); Docket No. 1214; and Docket No. 1350.
18. Between June 22, 2020 and December 9, 2020, the Court entered ten (10) orders on the omnibus objections to claims. See Docket No. 815; Docket No. 816; Docket No. 894;
Docket No. 895; Docket No. 969; Docket No. 970; Docket No. 1118; Docket No. 1235; Docket
No. 1243; Docket No. 1323.
19. The Debtors expect to file additional non-substantive and substantive omnibus claim objections to facilitate the orderly administration of the estates after transitioning the estates to the Liquidating Debtor. The Debtors and advisors have been moving the cases forward through an efficient and streamlined claims administration process.
(iii) WARN Act Class Action Adversary Proceeding
20. On February 3, 2020, Laura Forsyth, on behalf of herself and on behalf of all others similarly situated, filed a Class Action Adversary Proceeding Complaint against the
Debtors [Adv. Pro. 20-50449; Docket No. 1] (the “WARN Act Complaint” or “Class Action
Adversary Proceeding”). On April 27, 2020, the Debtors filed an Answer to the WARN Act
Complaint [Adv. Pro. 20-50449; Docket No. 6] (the “WARN Act Answer”, and together with the WARN Act Complaint, the “WARN Act Litigation”).
21. The Debtors have resolved the WARN Act Litigation and along with proposed class counsel in the Class Action Adversary Proceeding, will be filing a Joint Motion Pursuant to
11 U.S.C. § 105 and Fed. R. Bankr. P. 7023 and 9019 to (I) Approve a Settlement Pursuant to
Fed. R. Bankr. P. 9019, (II) Certify a Class of WARN Act Claimants for Settlement Purposes
Only, Appoint Class Counsel, and Class Representative, and Preliminarily Approve the
Settlement Pursuant to Fed. R. Bankr. P. 7023, (III) Approve the Form and Manner of Notice to
Class Members of the Class Certification and Settlement, (IV) Schedule a Fairness Hearing to
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Consider Final Approval of the Settlement, (V) Finally Approve the Settlement Pursuant to Fed.
R. Bankr. P. 7023 After the Fairness Hearing, and (VI) Grant Related Relief (the “Joint WARN
Act Settlement Motion”).
(iv) ATA Litigation
22. On April 24, 2020, ATA Forum Louisville, KY, LLC (“ATA”) filed A Motion for Allowance of Administrative Claims under 11 U.S.C. §§ 105, 503(b), and 365(d)(3) [Docket
No. 656] (the “ATA Administrative Claim Motion”). After robust discovery and briefing, the
Court commenced an evidentiary hearing on November 3, 2020, which was continued to
December 11, 2020, and further adjourned to January 8, 2021. The Debtors have every confidence they will ultimately prevail; however, the outcome of the ATA litigation does not impact confirmation or going effective.
(v) Winn-Dixie Adversary Proceeding
23. On June 30, 2020, the Debtors commenced an adversary proceeding by filing a
Complaint for Damages and Specific Performance against Winn-Dixie Stores, Inc. and
Southeastern Grocers, Inc. [Adv. Pro. 20-50631] (the “Bonita Springs Complaint”). On July
30, 2020, Winn-Dixie Stores, Inc. filed an Answer to the Bonita Springs Complaint [Adv. Pro.
20-50631; Docket No. 4] (the “Winn-Dixie Answer”) as well as a Motion to Dismiss Count I as to Both Defendants and to Dismiss Defendant Southeastern Grocers, Inc. in its Entirety for Lack of Privity of Contract [Adv. Pro. 20-50631; Docket No. 5] (the “Winn-Dixie Motion to
Dismiss” and “Southeastern Grocers, Inc. Motion to Dismiss”) and a Memorandum of Law in
Support of the Motion to Dismiss [Adv. Pro. 20-50631; Docket No. 6] (the “Defendant’s
Memorandum of Law”).4 On August 24, 2020, the Debtors filed an Answering Brief in
4 On August 20, 2020, the Debtors filed a Stipulation of Dismissal with Prejudice of Complaint Solely Against Southeastern Grocers, Inc. [Adv. Pro. 20-50631; Docket No. 15].
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response to the Winn-Dixie Motion to Dismiss (the “Answering Brief” and together with the
Bonita Springs Complaint, Winn-Dixie Answer, Winn-Dixie Motion to Dismiss, and
Defendant’s Memorandum of Law, the “Bonita Springs Litigation”). The Bonita Springs
Litigation is on-going and the Debtors and Defendant are actively engaged in discovery.
24. The eventual outcome of the Bonita Springs Litigation is largely dependent on this Court’s ruling on the Winn-Dixie Motion to Dismiss, which remains pending.
(vi) Executory Contracts and Leases
25. On February 25, 2020, the Court entered an Order Extending the Deadline to
Assume or Reject Executory Contracts, Unexpired Leases and Nonresidential Real Property
[Docket No. 264] (the “Assumption or Rejection Deadline Extension Order”), which extended the Debtors’ time to assume or reject any unexpired lease of nonresidential real property through and including the earlier of (i) August 24, 2020, and (ii) the date of entry of an order confirming a plan in these Chapter 11 Cases. Between February 25, 2020 and August 12,
2020, the Court entered six (6) omnibus rejection orders. See Docket No. 270; Docket No. 406;
Docket No. 587; Docket No. 766; Docket No. 865; and Docket No. 931. On June 16, 2020, the
Court entered the Headquarters Lease Rejection Order [Docket No. 803].
26. During the Chapter 11 Cases, as discussed above, the Debtors sold twelve (12)
Kroger guaranteed leases. See generally Docket Nos. 574, 590, 618, 629, 659, 673, and 755.
27. On August 24, 2020, the Debtors filed the Kroger LM Lease Assignment Motion.
[Docket No. 977]. The Debtors seek to assign unequivocally ten (10) Kroger guaranteed leases to
Kroger LM Real Estate Holdings, LLC, an Ohio limited liability company, which is a wholly
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owned subsidiary of The Kroger Co. (“Kroger LM”).5 The Kroger LM Lease Assignment
Motion has been adjourned with the affirmative agreement of all affected landlords to the hearing scheduled on December 23, 2020. The Debtors anticipate presenting a consensual proposed form of order to the Court.
B. The Plan and Disclosure Statement Process
28. The Plan and Global Settlement represent the only source of recovery for General
Unsecured Creditors. The Plan is a liquidating plan and provides for the transfer of the assets to a
Liquidating Debtor, followed, if necessary, by the creation of a Liquidating Trust. Following the
Effective Date, the assets will be transferred to the Liquidating Debtor. Throughout the Chapter
11 Cases, the Prepetition Secured Lender permitted the on-going and extensive use of its cash collateral. As part of the Plan and Global Settlement, the Prepetition Secured Lender has agreed to release and forego any liens it may have with regard to the Assets, and has agreed to share the recoveries generated from the Assets as set forth in the Plan, which will allow for distributions to occur to General Unsecured Creditors. The general unsecured creditors will receive a larger recovery via the mechanisms contained in the Plan and Global Settlement than they would receive without the concessions from the Prepetition Secured Lender. Similarly, the Prepetition
Secured Lender agreed to allow other General Unsecured Creditors to receive recoveries ahead of its significant deficiency claim, subrogation claim, and other claims.
29. The Prepetition Secured Lender also agreed to fund the Wind-Down Budget. This is in addition to the agreed mechanism in the Plan for the Prepetition Secured Lender paying
Post-Deadline Rents described in the Kroger Rent Reimbursement Obligation. The Prepetition
Secured Lender agreed to payment in full of all Secured Claims, other than its own, PACA
5 The Gateway Shoppes/Bonita Spring store lease – Store BSP 0039, 13583 Tamiami Trail, North Naples, FL – subject to the Winn-Dixie Sale Motion, Winn-Dixie Sale Order, and Bonita Springs Litigation – is one of the leases to be assumed and assigned to Kroger LM.
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Claims, Priority Claims, including section 503(b)(9) Claims, Administrative Claims, and
Professional Fee Claims; in addition, to funding recoveries for Holders of Class 4, which allows
Holders of Class 4 to receive a higher percentage recovery than members of Class 5 and Class 6.
Importantly, the Prepetition Secured Lender agreed to segregate its general unsecured claims in
Class 6, including the Prepetition Secured Lender’s significant deficiency and subrogation claims in an amount no less than $300 Million. These concessions will allow for a greater potential recovery for Holders of General Unsecured Claims, which General Unsecured Creditors would likely not otherwise be entitled to receive. In the absence of the Plan and Global Settlement,
General Unsecured Creditors would not receive any recovery.
30. After extensive discussions exchanged between the Debtors, the Prepetition
Secured Lender, and the Committee, which resulted in certain concessions by all parties involved, the Debtors filed a Joint Chapter 11 Plan of Liquidation and Disclosure Statement on
October 29, 2020.6
31. The Debtors received informal comments from the U.S. Trustee regarding the
Disclosure Statement. On November 20, 2020, Patrick Gilliland, Michael Gilliland, and Lucky’s
Founders Holdings, LLC (collectively, the “Founders”) filed an Objection to (I) the Debtors’
Disclosure Statement for Joint Chapter 11 Plan of Liquidation of Lucky’s Market Parent
Company, LLC and its Debtor Affiliates and (II) The Debtors’ Solicitation Procedures Motion
[Docket No. 1244] (the “Founders’ Disclosure Statement Objection”).
32. After a hearing held on November 24, 2020, the Court overruled the Founders’
Disclosure Statement Objection and entered an Order (A) Approving Disclosure Statement; (B)
6 See Docket Nos. 1154 and 1155. Following comments from the U.S. Trustee, Committee, and the Prepetition Secured Lender, a First Amended Joint Plan of Liquidation and a First Amended Disclosure Statement were filed on November 24, 2020. See Docket Nos. 1260 and 1261. Then, contemporaneously herewith, a Second Amended Joint Plan of Liquidation was filed on December 22, 2020.
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Establishing Voting Record Date, Voting Deadline, and Other Dates; (C) Approving Procedures for Soliciting, Receiving, and Tabulating Votes on Plan and for Filing Objections to Plan; (D)
Approving Manner and Forms of Notice and Other Related Documents; and (E) Granting
Related Relief [Docket No. 1272] (the “Disclosure Statement Order”). The Disclosure
Statement Order, among other things, approved the adequacy of the information contained in the
Disclosure Statement, approved various solicitation procedures (the “Solicitation Procedures”), and set dates related to approval of the Plan, including the Confirmation Hearing to consider confirmation and approved various solicitation procedures. The deadline for receipt of votes and opt-outs was on December 18, 2020 (the “Voting Deadline and Opt-Out Deadline”).
33. Following entry of the Disclosure Statement Order, the Debtors’ claims and balloting agent, Omni Agent Solutions (“Omni”) commenced solicitation of the Plan by sending copies of the Disclosure Statement, the Plan, the Disclosure Statement Order, Confirmation
Hearing Notice, the letter in support of the Plan from the Committee, and form of ballot with voting instructions (the “Ballot” and, collectively, the “Solicitation Packages”) to each holder of a claim or interest in Class 1 (Prepetition Secured Claims), Class 4 (General Unsecured
Claims Class A), Class 5 (General Unsecured Claims Class B), Class 6 (General Unsecured
Claims Class C), and Class 9 (EB-5 Investors) (collectively, the “Voting Classes”). Omni sent the Confirmation Hearing Notice to each holder of a PACA and PASA Claim, Administrative
Expense Claim, Priority Tax Claim, Professional Fee Claim, and Statutory Fee Claim
(collectively, the “Unclassified Claims”). Furthermore, the Debtors caused Omni to publish the
Confirmation Hearing Notice in the national edition of the New York Times on November 30,
2020. See Publication Affidavit, Docket No. 1289.
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34. After the Disclosure Statement hearing, the Debtors, the Prepetition Secured
Lender, and Founders engaged in good faith, arm’s length settlement discussions regarding the issues raised in the Founders’ Disclosure Statement Objection. As a result of these discussions, the Debtors, Founders, and Kroger entered into a global settlement between such parties, which accounts for a complete walk away from any potential litigation and global mutual releases between the Debtors, the Founders, and the Prepetition Secured Lender (the “Founders
Settlement”). Approval of the Founders Settlement is subject to a separate Rule 9019 motion, but is directly tied to approval of the Plan.
35. On December 11, 2020, the Debtors filed a Notice of Filing of Plan Supplement
[Docket No. 1349] (as may be modified, amended, or supplemented, the “Plan Supplement”).
The Plan Supplement included the Liquidating Trust Agreement, the List of Executory Contracts and Leases to be Assumed, and the Claims Reserve. Contemporaneously herewith, the Debtors filed a Notice of Filing of Amended Plan Supplement, which updated certain portions of the original Plan Supplement.
36. The deadline to vote on the Plan was December 18, 2020 at 4:00 p.m. prevailing
Eastern Time. As set forth in the Balloting Declaration, the Holders of Claims in Classes 1, 4, 5,
6, and 9 voted to accept the Plan.
37. Contemporaneously herewith, on December 22, 2020, the Debtors filed a Second
Amended Joint Chapter 11 Plan of Liquidation of Lucky’s Market Parent Company, LLC and Its
Debtor Affiliates (as may be modified, amended or supplemented from time to time, the “Plan”).
ARGUMENT
A. The Plan Meets the Bankruptcy Code’s Requirements and Should be Approved
38. By this Memorandum, the Debtors submit that confirmation of the Plan is appropriate as it satisfies Bankruptcy Code sections 1123 and 1129.
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(i) Section 1129(a)(1): The Plan Complies With the Applicable Provisions of the Bankruptcy Code
39. To achieve confirmation of the Plan, the Debtors must demonstrate, by a preponderance of the evidence, that it complies with the application provisions of the Bankruptcy
Code. 11 U.S.C. § 1129(a)(1). See In re Armstrong World Indus., Inc., 348 B.R. 111, 120
(Bankr. D. Del. 2006); In re Nutritional Sourcing Corp., 398 B.R. 816, 824 (Bankr. D. Del.
2008). As set forth in this Memorandum, the Plan satisfies all provisions of Bankruptcy Code section 1129 and complies with all other applicable Bankruptcy Code sections, the Bankruptcy
Rules, the Local Rules, and applicable nonbankruptcy law. See In re W.R. Grace & Co., 475
B.R. 34, 173 (D. Del. 2012) aff’d 729 F.3d 311 (3d Cir. 2013). The Plan fully complies with the requirements of the Bankruptcy Code, including, but not limited to sections 1122 and 1123. Not only does the Plan fully comply with the strictures of the Bankruptcy Code but it also is the singular means for providing any distribution to General Unsecured Creditors.
(ii) Section 1122: The Classifications Are Appropriate
40. Bankruptcy Code section 1122 provides, in pertinent part:
(a) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.
(b) A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.
11 U.S.C. § 1122. Bankruptcy Code section 1122 affords the proponent of a plan with significant flexibility in the classification of claims and interests, so long as there is a reasonable basis for such classification. See In re Tribune Co., 476 B.R. 843, 854 (Bankr. D. Del. 2012) (finding that
“Section 1122(a) is permissive,” in that “it does not provide that all similar claims must be
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placed in the same class”). See also In re John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park
Assocs., 987 F.2d 154, 158-59 (3d Cir. 1993); Olympia & York Fla. Equity Corp. v. Bank of N.Y.
(In re Holywell Corp.), 913 F.2d 873, 880 (11th Cir. 1990); In re Avia Energy Dev., LLC, Case
No. 05-39339 (BJH), 2007 WL 2238039, at *2 (Bankr. N.D. Tex. Aug. 2, 2007).
41. A plan may provide for multiple classes of claims or interests as long as each claim or interest within a class is substantially similar to the other claims or interests in that class.
To determine whether claims are “substantially similar”, courts have held the proper focus is on
“the legal character of the claim as it relates to the assets of the debtor.” In re AOV Indus., Inc.,
792 F.2d 1140, 1150-51 (D.C. Cir. 1986) (emphasis in the original); see also Tribune Co., 476
B.R. at 855 (concluding the phrase “substantially similar” reflects “the legal attributes of the claims, not who holds them” (internal quotation marks omitted)), aff’d as modified, Case No. 12-
CV-1072 GMS, 2014 WL 2797042 (D. Del. June 18, 2014), aff’d in part, rev’d in part, 799 F.3d
272 (3d Cir. 2015). Congress affords bankruptcy judges broad discretion to decide the propriety of plans and their classification of claims in light of the facts of each case. Jersey City Med. Ctr.,
817 F.2d 1055, 1060-61 (3d Cir. 1987). The Third Circuit has held separate classification of similar claims is impermissible where the sole purpose of the classification scheme is to gerrymander votes and create an artificial impaired consenting class. See John Hancock Mut.
Life Ins. v. Route 37 Bus. Park Assocs., 987 F.2d 154, 159 (3d Cir. 1993).
42. Here, the Plan designates the following Classes:
a. Class 1 includes Prepetition Secured Claims, which are any and all Secured Claims held by Kroger arising under or related to the Prepetition Secured Loan in its capacity as Prepetition Secured Lender.
b. Class 2 includes Other Secured Claims, which are any Secured Claim other than Prepetition Secured Claims and Tax Claims.
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c. Class 3 includes Priority Claims, which are any Claim entitled to priority pursuant to Bankruptcy Code section 507(a) other than Administrative Expense Claims and Priority Tax Claims.
d. Class 4 (General Unsecured Claims Class A) includes Allowed General Unsecured Claims. Class 4 Claims does not include unconventional general unsecured claims. It excludes General Unsecured Claims related to a Kroger Guaranteed Lease, Claims arising out of or relating to any Kroger Guaranteed Lease(s), any Kroger General Unsecured Claim, the Prepetition Secured Lender Deficiency Claim, the Prepetition Secured Lender Subrogation Claim, any Claim asserted by any EB-5 Investors, any Intercompany Claim, and any Claim or Subrogation Claim asserted by any EB-5 Guarantors or Insiders of the Debtors. Class 4 Claims include any Mechanics Lien Claims timely filed, properly asserted, and Allowed with respect to a non-Kroger Guaranteed Lease(s). Class 4 Claims are general unsecured claims, which do not involve a Kroger guarantee and are not general unsecured claims of Kroger.
e. Class 5 (General Unsecured Claims Class B) includes Allowed General Unsecured Claims not included in Class 4 Claims (General Unsecured Claims Class A) and not included in Class 6 (General Unsecured Claims Class C). Class 5 includes Allowed General Unsecured Claim of any kind arising under or relating to any Kroger Guaranteed Lease, such as cure amounts or rejection damages claims and related Mechanics Lien Claims to the extent timely filed, properly asserted, and Allowed on a Kroger Guaranteed Lease(s), and other General Unsecured Claim guaranteed by Kroger, any Claims held by BBIF Subsidiary CDE 3, LLC arising from the Prepetition NMTC Loan, but only to the extend they are subject to the June 12, 2012 Payment and Completion Guaranty issued by Kroger, and any Claim or Subrogation Claim asserted by any EB-5 Guarantors. Class 5 Claims are general unsecured claims which involve a Kroger guarantee.
f. Class 6 (General Unsecured Claims Class C) includes Kroger General Unsecured Claims, the Prepetition Secured Lender Deficiency Claim, and the Prepetition Secured Lender Subrogation Claim. Class 6 includes all Kroger general unsecured claims in an amount not less than $300 Million.
g. Class 7 includes Intercompany Claims, any Claim held by a Debtor against another Debtor or an Affiliate of a Debtor, any Claim held by an Affiliate of a Debtor against a Debtor, any Claim held by a non-Debtor Affiliate against a Debtor, or any Claim held by a Debtor against a non- Debtor Affiliate, including any loans from one Debtor to another Debtor.
h. Class 8 includes Equity Interests, all equity interests in the Debtors, including, but not limited to, all issued, unissued, authorized, or outstanding shares, membership, or partnership interests together with any
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warrants, options, or contract rights to purchase or acquire such interests at any time, but does not include any equity interests in the EB-5 Debtors.
i. Class 9 includes EB-5 Investors, those Persons and/or Entities who invested in Lucky’s Farmers Market, LP and Lucky’s Market 2, LP by or on behalf of a limited number of potential non-American investors under the Employment Based Immigration Preference Program beginning in 2013 and ending in June 2014.
43. Such classifications comply with Bankruptcy Code section 1122. All Claims and
Interests within each Class are substantially similar. The classification scheme described above is rational and complies with the Bankruptcy Code. Additionally, each Claim and Interest differ from Claims and Interests in other Classes based upon such Claim or Interest’s legal or factual nature. The Plan incorporates a “waterfall” classification and distribution scheme, which not only follows the statutory priorities prescribed within the Bankruptcy Code but also comports with the
Global Settlement. The Plan distinguishes between types of general unsecured claims and members of the three classes – Class 4, Class 5 and Class 6 – enjoy divergent legal rights and remedies against the Debtors. Class 4 members hold claims which do not involve a Kroger guarantee and which are not claims of Kroger. Class 5 claims involve general unsecured claims with a Kroger guarantee. Kroger’s general unsecured claims are classified in Class 6 because
Kroger’s relationship with the Debtors bears no similarity with any other general unsecured creditor.
44. The Claims and Interests within a Class have the same or similar rights against the
Debtors. The Plan provides for the separate classification of Claims against and Interests in each
Debtor based upon the differences in legal nature and/or priority of such Claims and Interests.
Furthermore, the classification of claims in the Plan poses no risk of gerrymandering votes or manufacturing artificial support for the plan. There are empirical objective differences between the Claims and Interests, which justify their separate classification. Therefore, the Debtors
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submit that the classification scheme within the Plan is consistent with Bankruptcy Code section
1122. Furthermore, the classification scheme, which enjoys the full support of the Prepetition
Secured Lender and the Committee, allows General Unsecured Creditors to receive distributions.
(iii) Section 1123(a): The Plan’s Content is Appropriate
45. Bankruptcy Code section 1123(a) elucidates seven (7) requirements, which a plan must contain. 11 U.S.C. § 1123(a). Here, each such requirement has been met:
a. As set forth above, the Plan designates Classes of Claims and Interests as required by Bankruptcy Code section 1123(a)(1). See Article IV.
b. The Plan sets forth the Classes of Claims that are impaired or unimpaired as required by Bankruptcy Code sections 1123(a)(2) and (a)(3). See Article IV.
c. The Plan provides for equal treatment within each Class as required by Bankruptcy Code section 1123(a)(4). See Article IV; Article V; Article VII.
d. The Plan provides for adequate means for implementation including: (i) the Global Settlement, see Article VIII.A.; (ii) the establishment of the Liquidating Debtor, see Article V.B.; (iii) the transfer of the Assets to the Liquidating Debtor; (iv) the establishment of the Liquidating Trust and appointment of the Liquidating Trustee; (v) the transfer of the Liquidating Trust Assets to the Liquidating Trust, at the appropriate time; (vi) the appointment of a Creditor Representative; (vii) mechanism to resolve all outstanding claims and litigation; and (viii) the procedures for distributions to Holders of Allowed Claims. Together with the Plan Supplement, the Plan contains adequate means for implementation as required by Bankruptcy Code section 1123(a)(5). See Article IX; Article X; Plan Supplement.
e. The Plan provides for the liquidation and dissolution of the Debtors. As such, Bankruptcy Code section 1123(a)(6) is not applicable.
f. The Plan and Plan Supplement provide for the appointment of the Andrew T. Pillari to serve as the sole officer and director of the Liquidating Debtor, the successor-in-interest to the Debtors, and then, at the appropriate time, for Mr. Pillari to serve as the Liquidating Trustee, who shall establish the “Liquidating Trust”. The Liquidating Trust will be administered and controlled by the Liquidating Trustee for the benefit of the Liquidating Trust Beneficiaries. Thus, the Debtors submit that Bankruptcy Code section 1123(a)(7) has been met as selection of the
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Liquidating Trustee is consistent with the interests of creditors, holders of equity interests, and public policy as Mr. Pillari served as the Chief Financial Officer of the Debtors and was the individual primarily responsible for the operations of the Debtors during the Chapter 11 Cases.
(iv) Section 1123(b): the Plan Contains Certain Permissible Provisions
46. Bankruptcy Code section 1123(b) sets forth permissive provisions which may be incorporated into a chapter 11 plan. A plan may: impair or unimpair any class of claims; provide for the assumption or rejection of executory contracts and unexpired leases; provide for the settlement or retention of a debtor’s claims; modify or leave unaffected the rights of holders of claims; and include any provision not inconsistent with the Bankruptcy Code. 11 U.S.C. §
1123(b).
47. The Plan provides for the classification and impairment or unimpairment of certain Classes and describes the treatment for the impaired and unimpaired Classes. See Article
IV; Article V. The Plan contains procedures for distributions and the allowance or disallowance of Claims. See Article V.D. The Plan contains provisions governing the further assumption or rejection of executory contracts and unexpired leases. See Article VI. As permitted by section
1123(b)(3)(A) of the Bankruptcy Code and explained in greater detail below, the Global
Settlement embodied in Article VIII.A represents a fair compromise and settlement of claims among the Debtors, the Committee, and the Prepetition Secured Lender. As permitted by section
1123(b)(6) of the Bankruptcy Code, the Plan contains certain release and exculpation provisions consistent with applicable provisions of the Bankruptcy Code and Third Circuit law, provides for the substantive consolidation of the Debtors’ estates, as described in greater detail below, and provides the Court will retain jurisdiction over all matters arising in and related to these chapter
11 cases. See Article XIII; Article XI. The Plan provides for a release of Claims and Causes of
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Action owned by the Debtors’ estates. See Article VIII.A.; Article VIII.D. The Plan does all these things, while also ensuring General Unsecured Creditors will receive a distribution.
(a) The Global Settlement is an Integral Component of the Plan and Should be Approved Pursuant to Bankruptcy Rule 9019
48. The Plan incorporates the Global Settlement among the Debtors, the Committee, and Kroger, which represents an efficient means of resolving the Chapter 11 Cases and allows for a higher recovery to general unsecured creditors than would otherwise be achieved if the
Chapter 11 Cases were converted to a chapter 7 liquidation. Without the Global Settlement,
General Unsecured Creditors would not receive any distribution. Approval of the Global
Settlement is a condition precedent to the Effective Date of the Plan. The approval of the Global
Settlement and confirmation of the Plan will maximize and expedite recoveries to creditors and provide certainty and finality to the Debtors and all parties in interest. The Plan and Global
Settlement are the result of intense, good-faith, arm’s-length negotiations with parties in interest and economic stakeholders. The Global Settlement is the cornerstone of the Plan. It is overwhelmingly supported by the Debtors’ economic stakeholders and should be approved.
49. The Special Committee determined the Debtors’ Estates did not have any valuable claims or causes of action that warranted pursuing, and to the extent that such claims or cause of action did exist, the Debtors’ Estates were receiving adequate consideration in the
Global Settlement.
50. The Committee conducted its own separate investigation into potential claims and causes of action belonging to the Debtors’ Estates arising from, related to, or in connection with any transactions between Kroger and the Debtors and their affiliates, including, without limitation, Kroger’s purported loans to the Debtors, Kroger’s guarantees of any of the Debtors’ liabilities, and Kroger’s role in the Debtors’ financial affairs. Before the Petition Date, the
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Debtors and Kroger had a complicated financial and operational relationship, where, among other things, Kroger was the Debtors’ largest creditor and principal equity holder, and guaranteed certain significant liabilities of the Debtors. After its review and investigation concluded, the Committee opted to engage in vigorous negotiations with the Debtors and Kroger, which ultimately led to the Global Settlement pursuant to which the Estates and their creditors will receive considerable consideration in exchange for a release of the Estates’ claims against
Kroger without the risk and expense associated with litigation.
51. The Global Settlement is in the best interests of the Debtors and their Estates.
Similarly, it represents the most efficient and value maximizing mechanism for compensating general unsecured creditors.
52. The Global Settlement includes the following key terms:7
a. the payment in full of Administrative Expense Claims, PACA Claims, PASA Claims, Professional Fee Claims, Secured Tax Claims, Tax Claims, and Priority Claims;
b. the creation of the Wind-Down Reserve, which shall be allocated for post- wind-down costs;
c. the separate classification of the Kroger General Unsecured Claims, the Prepetition Secured Lender Deficiency Claim, and the Prepetition Secured Lender Subrogation in Class 6 (General Unsecured Class C Recovery Pool);
d. the extinguishment of Intercompany Claims;
e. the waiver of the Debtors’ rights with respect to any Causes of Action, including Avoidance Actions;
f. the Release by Debtors of the Released Parties and the Third Party Releases;
g. the payment of all rent obligations, including all rent on any Kroger Guaranteed Lease, through the conclusion of the outside date under
7 The overview of the Global Settlement provided herein is qualified in its entirety by reference to the Plan.
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section 365(d)(4) of the Bankruptcy Code, subject to the Third Interim Cash Collateral Order and Kroger’s Rent Reimbursement Obligation;
h. the comprehensive settlement of all issues relating to the Debtors’ use of cash collateral securing the claims of the Prepetition Secured Lender;
i. the settlement of all litigation against the Debtors, Kroger, or other insiders by such parties and the holding in abeyance of discovery requests and prohibition of future propounding of discovery requests;
j. the release of the Settlement Released Claims, including, but not limited to, the equitable subordination claims; Causes of Action, including Avoidance Actions, against Kroger; and Claims related to Kroger’s and directors’ and members’ that are affiliated with Kroger, and the Debtors related to fulfillment of their fiduciary duties; and
k. the waiver of any distribution to EB-5 Investors and agreement to refrain from asserting any claims they may have against the Debtors, who have negotiated with the Debtors on the proposed treatment provided under Class 9.
53. Each aspect of the Global Settlement is interdependent and relied upon by the
Debtors, the Committee, and Kroger who each made material concessions to their respective positions to enable the expeditious confirmation of the Plan. Modification to any aspect of the
Global Settlement or the failure to approve the Global Settlement in toto will almost certainly result in the disintegration of the Global Settlement and the Plan. General Unsecured Creditors are the constituency who stand the most to lose in the event the Global Settlement and Plan are not approved because these are the only means of ensuring funds are available for distribution to
General Unsecured Creditors.
(1) Applicable Legal Standard
54. Section 1123(b)(3) of the Bankruptcy Code provides a “plan may provide for the settlement or adjustment of any claim or interest belonging to the debtor or to the estate.” 11
U.S.C. § 1123(b)(3)(A). Bankruptcy Code section 105(a) provides that “[t]he court may issue any order . . . that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C.
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§ 105(a). Bankruptcy Rule 9019 provides: on motion of the trustee, after notice and a hearing, the court may approve a compromise or settlement. As part of the restructuring process, the
Court “may approve a compromise or settlement” under Bankruptcy Rule 9019(a), and “[t]he standards for approval of a settlement under section 1123 are generally the same as those under
Rule 9019[.]” In re Coram Healthcare Corp., 315 B.R. 321, 334-35 (Bankr. D. Del. 2004). To be approved, a settlement need only be “fair and equitable.” In re Capmark Fin. Grp. Inc., 438 B.R.
471, 514 (Bankr. D. Del. 2010) (citing Protective Comm. for Indep. Stockholders of TMT Trailer
Ferry, Inc. v. Anderson (TMT Trailer Ferry), 390 U.S. 414, 424 (1968)); see also In re Marvel
Ent. Grp., Inc., 222 B.R. 243, 249 (D. Del. 1998) (“[T]he ultimate inquiry [is] whether ‘the compromise is fair, reasonable, and in the interest of the estate.”) (quoting In re Louise’s, Inc.,
211 B.R. 798, 801 (D. Del. 1997)). Namely, a settlement must be “fair and equitable.” TMT
Trailer Ferry, 390 U.S. at 424.
55. In making this determination, it is not necessary for a court to conduct a
“mini-trial” of the facts or the merits of the underlying disputes to be settled or “decide the numerous questions of law or fact raised by litigation.” Capmark, 438 B.R. at 515 (“[T]he Court is not required to conduct a full evidentiary hearing as a prerequisite to approving a compromise.”); see also In re Penn Cent. Transp. Co., 596 F.2d 1127, 1146 (3d Cir. 1979)
(explaining that a court need only consider those facts that are necessary to enable it to evaluate the settlement and to make an informed and independent judgment about the settlement).
Instead, the court “should canvas the issues to determine whether the settlement falls above the lowest point in the range of reasonableness.” Capmark, 438 B.R. at 515; see also In re Adelphia
Commc’ns Corp., 368 B.R. 140, 242 (Bankr. S.D.N.Y. 2007) (“[A] bankruptcy court need not be aware of or decide the particulars of each individual claim resolved by the settlement agreement,
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or assess the minutia of each and every claim; rather, the court need only canvass the issues and see whether the settlement falls below the lowest point in the range of reasonableness.”) (internal quotation marks omitted), appeal dismissed, 371 B.R. 660 (S.D.N.Y. 2007), aff’d, 544 F.3d 420
(2d Cir. 2008).
56. In the Third Circuit, when evaluating whether the settlement is fair and equitable and above the lowest point in the range of reasonableness, courts consider the following four factors: (1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors. See Capmark, 438 B.R. at 515
(quoting Myers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir. 1996)).
57. In addition to the Martin factors, a court should defer to the debtor’s business judgment “so long as there is a legitimate business justification for [its] action.” Coram
Healthcare, 315 B.R. at 330 (citing Martin, 91 F.3d at 395); see also JPMorgan Chase Bank,
N.A. v. Charter Commc’ns Operating, LLC (In re Charter Commc‘ns), 419 B.R. 221, 252
(Bankr. S.D.N.Y. 2009) (explaining that while the “approval of a settlement rests in the Court’s sound discretion, the debtor’s business judgment should not be ignored”), appeal dismissed sub nom. R2 Invs. LDC v. Charter Commc‘ns, Inc. (In re Charter Commc‘ns, Inc.), 449 B.R. 14
(S.D.N.Y. 2011), aff’d, 691 F.3d 476 (2d Cir. 2012); see e.g., In re Glob. Indus. Techs., Inc., No.
02-21626-JKF, 2013 WL 587366, at *11 (Bankr. W.D. Pa. Feb. 13, 2013) (“The Settlements are fair and equitable and a proper exercise of the Debtors’ business judgment because they enable the Debtors to consummate the [plan] and to reorganize their business operations, while at the same time avoiding complex, expensive and protracted litigation with uncertain outcomes that could cripple the Debtors’ ability to reorganize.”). In considering whether to approve a
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settlement, courts should exercise their discretion “in light of the general public policy favoring settlements.” Capmark, 438 B.R. at 515 (quoting In re Hibbard Brown & Co., 217 B.R. 41, 46
(Bankr. S.D.N.Y. 1998); see also Will v. Nw. Univ. (In re Nutraquest, Inc.), 434 F.3d 639, 644
(3d Cir. 2006) (“Settlements are favored, but the unique nature of the bankruptcy process means that judges must carefully examine settlements before approving them.”). When evaluating the settlement, courts look to “whether the settlement as a whole is reasonable.” In re Wash. Mut.,
Inc., 442 B.R. 314, 329 (Bankr. D. Del. 2011).
58. For the reasons stated below, the Global Settlement is fair and equitable and falls above the lowest point in the range of reasonableness. Furthermore, it provides for an equitable outcome and will allow General Unsecured Creditors to receive distributions.
(2) Balancing the Possibility of Success in Litigation and Future Benefits of the Global Settlement Favors the Global Settlement
59. Here, the probability of success in litigation is low. The Debtors’ Independent
Director conducted an exhaustive investigation into any potential claims and causes of action that could be asserted against the LMPC Board, the LMPC Officers and LMOC Officers who were serving in such capacity as of the Petition Date, Founders, and the Prepetition Secured
Lender. The Independent Director investigation found that there were no viable claims or causes of action against the Released Parties or to the extent there were such claims the value of such claims was far less than any potential recovery. Similarly, the Committee and its professionals conducted a fulsome investigation into potential claims. The Global Settlement is the result of extensive analysis by the Debtors, the Independent Director, and the Debtors’ advisors. It is entered into on a fully informed basis by the Debtors, the Committee and Kroger.
60. Accordingly, the Debtors concluded the value and benefits offered by the Global
Settlement—e.g., full payment of administrative and priority claims, allocation of the Wind-
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Down Reserve, and mechanism for making distributions on General Unsecured Claims,—far outweighed the alternative of extended and expensive litigation with no certainty of recovery, let alone the recovery and benefits offered by the Global Settlement. See, e.g., In re Woodbridge
Grp. of Cos., LLC, 592 B.R. 761, 774 (Bankr. D. Del. 2018) (finding factor favored approval of settlement because “lengthy and expensive litigation on a variety of fronts . . . would eat up the successful litigants’ ability to recover on their claims”).
(3) Difficulty in Collection
61. Here, the difficulty in collection is high. To the extent there were any potential claims or causes of action against the Prepetition Secured Lender, the Prepetition Secured Lender has allowed material amounts of its collateral to be used since the Petition Date to administer the
Chapter 11 Cases and provide for the recoveries contemplated by the Global Settlement, which for all intents and purposes allows the Debtors to use all of the proceeds of the liquidation of the
Prepetition Secured Lender’s collateral for the administration of the Chapter 11 Cases and distribution to creditors. Moreover, any recovery to creditors, which is highly speculative, would take years to achieve.
62. Were the Debtors to litigate any of the claims or causes of action subject to the
Global Settlement, they would face difficulty in collecting and distributing the proceeds of such claims or causes of action to creditors. As set forth herein, the claims and causes of action are complex and would likely take substantial time to resolve. Litigating these claims would involve lengthy discovery, trials, and appeals, all at the expense and delay of creditor recoveries. The
Committee and its professionals, similarly, conclude the risk and expense associated with pursuing litigation are outweighed by the considerable consideration Kroger will provide to the
Estates and their creditors in exchange for a release of the Estates’ claims against Kroger. The
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Global Settlement represents a source of funds, available on the Effective Date, and includes distributions to General Unsecured Creditors.
(4) Complexity of Litigation
63. The litigation in question is very complex. In general, settlements are favored in bankruptcy. In re Filene’s Basement, LLC, Case No. 11-13511 (KJC), 2014 WL 1713416, at *5
(Bankr. D. Del. Apr. 29, 2014). This policy preference reflects the reality: delays, complexity, and cost associated with litigation can erode and potentially eliminate stakeholder recoveries— separate and apart from the risk generally inherent in litigation. See Nellis v. Shugrue, 165 B.R.
115, 124 (S.D.N.Y. 1994). In this context, the Third Circuit has recognized that compromises are favored precisely to “minimize litigation and expedite the administration of a bankruptcy estate.”
Myers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir. 1996).
64. This convention is particularly relevant in the Chapter 11 Cases, not only because of the limited resources available to the Debtors’ Estates but also in large part due to the expansive set of disputes being resolved by the Global Settlement and the complexity of the issues at play. In the absence of the comprehensive and efficient resolution achieved by the
Global Settlement, the Committee could seek to assert Claims, which would require extensive, costly, and complicated litigation. The Committee and its professionals recognize the potential risk of adopting a full litigation posture and potentially exhausting limited Estates’ resources during an ill fated attempt to pursue claims against Kroger, as the Debtors’ largest creditor, principal equity holder, and guarantor of significant liabilities of the Debtors. Lengthy litigation would delay recoveries to the Debtors’ creditors, without any assurance of generating eventual collection on the potential claims. See Woodbridge, 592 B.R. at 774 (noting, the benefit of plan settlement “heavily outweighs the lengthy and costly litigation that lies in wait if the settlements are not approved).
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(5) The Global Settlement is in the Paramount Interests of Creditors
65. The Global Settlement is in the best interests of the Debtors’ creditors because it maximizes creditors’ recoveries under the Plan and resolves significant issues without litigation, which would otherwise prolong these Chapter 11 Cases. General Unsecured Creditors will not receive any distribution unless the Global Settlement and Plan are approved.
66. The Debtors, Independent Director, Kroger, and the Committee—participated in the Global Settlement negotiations and ultimately decided the method, as implemented by Global
Settlement contained in the Plan, fairly addressed respective claims and was in their best interests and in the best interests of the Debtors’ Estates, creditors and parties in interest.
67. In addition, the Committee undertook an independent analysis with respect to the potential claims and causes of action by the Debtors and based on such diligence, ultimately determined the value derived from entering the Global Settlement outweighed the risk associated with litigating any potential claims. The Debtors submit the Global Settlement represents the culmination of arm’s length and good faith negotiations and represents the best path forward to avoid protracted and costly litigation to the detriment of all creditors and parties in interest.
Accordingly, the Global Settlement falls well within the range of reasonableness, is fair and equitable under the Martin factors, and should be approved.
(b) The Plan Releases are Appropriate and Should be Approved
68. Consistent with Bankruptcy Code section 1123(b), the Plan contains releases by the Debtors and their estates and third party releases. See Article VIII.D.; Article VIII.E. As above and set forth in more detail below, the aforementioned provisions are proper under the circumstances of these Chapter 11 Cases because they are fair and equitable, given for reasonable consideration, and an integral part of the Plan. The releases are being provided in exchange for fair consideration.
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a. The Plan provides for releases of claims held by the Debtors and their Estates, including derivative claims, asserted or assertable against the Released Parties and their Related Parties, (the “Debtor Releases”), see Article XIII.D.
b. The Plan provides for releases of the Released Parties by (a) each Holder of a Claim or Equity Interest that (i) votes to accept the Plan, (ii) is deemed to have accepted the Plan or is otherwise unimpaired, (iii) is entitled to vote to accept or reject the Plan but either (x) abstains from voting on the Plan, or (y) votes to reject the Plan and, in the case of (x) or (y) does not opt out of the voluntary releases contained in the Plan by checking the opt out box on the ballot, or (iv) is deemed to have rejected the Plan and does not opt out of the releases contained in the Plan (the “Third Party Releases”, and together with the Debtor Releases, the “Plan Releases”). See Article XIII.E.
69. Given the considerable concessions by the Prepetition Secured Lender, granting the Plan Releases is wholly appropriate in these Chapter 11 Cases and consistent with applicable law and, as set forth below, the Plan Releases should be approved. The Plan Releases constitute a significant inducement for the Prepetition Secured Lender to agree to the Global Settlement, which provides for distributions to General Unsecured Creditors.
(1) Debtor Releases
70. Article VIII.D. of the Plan contains the Debtor Releases. It provides on the
Effective Date, the Debtors and the Estates will release claims and causes of action against the
Released Parties, including the Debtors, Prepetition Secured Lender, the Committee, and Related
Parties. The Debtor Releases are an integral component of the Plan and comply with the
Bankruptcy Code and applicable law. Further, the support for the Plan, including the Debtor
Releases, by the Committee is compelling evidence the Debtor Releases should be approved. All creditors received notice of the Plan Releases and their right to opt-out of or object to such releases. This significant endorsement of the Debtor Releases reinforces the Debtors’ determination that the Debtor Releases are in the best interest of the Debtors’ estates. See In re
Master Mortg. Inv. Fund, Inc., 168 B.R. 930, 938 (Bankr. W.D. Mo. 1994) (stating creditor
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approval of a release is “the single most important factor” to determine whether a release is appropriate). For these reasons and for those set forth below, the Debtor Releases should be approved.
71. Pursuant to Bankruptcy Code section 1123(b)(3)(A), debtors may release claims
“if the release is a valid exercise of the debtor’s business judgment, is fair, reasonable and in the best interests of the estate.” U.S. Bank Nat’l Ass’n v. Wilmington Trust Co. (In re Spansion), 426
B.R. 114, 143 (Bankr. D. Del. 2010) appeal dismissed, 2011 WL 3420441 (D. Del. Aug. 4,
2011); see also In re Aleris Int’l, Inc., Case No. 09-10478 (BLS), 2010 WL 3492664, at *20
(Bankr. D. Del. May 13, 2010) (finding that where a debtor release is “an active part of the plan negotiation and formulation process, it is a valid exercise of the debtor’s business judgment to include a settlement of any claims a debtor might own against third parties as a discretionary provision of a plan”).
72. As an exercise of its business judgment, a debtor’s decision to release claims against third parties under a plan is afforded deference. See, e.g., Spansion, 426 B.R. at 140 (“It is not appropriate to substitute the judgment of the objecting creditors over the business judgment of the Debtors . . . .”); In re Marvel Ent. Grp., Inc., 273 B.R. 58, 78 (D. Del. 2002)
(“[U]nder the business judgment rule . . . a court will not interfere with the judgment of a board of directors unless there is a showing of gross and palpable overreaching. Thus, under the business judgment rule, a board’s decisions will not be disturbed if they can be attributed to any rational purpose and a court will not substitute its own notions of what is or is not sound business judgment.”) (internal quotation marks and citations omitted). Additionally, under Third Circuit precedent, a release by a debtor is appropriate if, in the debtor’s judgment, any claims of the estate being released are of only marginal viability. See In re PWS Holding Corp., 228 F.3d 224,
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242 (3d Cir. 2000) (approving release by debtor of potential avoidance claims in connection with a prepetition leveraged recapitalization because the claims were “of only marginal viability” and not worth pursuing).
73. When determining whether such debtor releases are appropriate, a court considers the “specific facts and equities of each case,” which typically involves consideration of the factors set forth in In re Zenith Elecs. Corp., 241 B.R. 92, 110 (Bankr. D. Del. 1999). These factors (hereinafter the “Master Mortgage Factors”) look to: (i) an identity of interest between the debtor and the third party, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete assets of the estate; (ii) substantial contribution by the non-debtor of assets to the reorganization; (iii) the essential nature of the injunction to the reorganization to the extent that, without the injunction, there is little likelihood of success; (iv) an agreement by a substantial majority of creditors to support the injunction, specifically if the impaired class of classes “overwhelmingly” votes to accept the plan; and (v) a provision in the plan for payment of all or substantially all of the claims of the class or classes affected by the injunction. In re
Indianapolis Downs, LLC, 486 B.R. 286, 303 (Bankr. D. Del. 2013). See also In re Master
Mortgage Invest. Fund, Inc., 168 B.R. 930, 935 (Bankr. W.D. Mo. 1994). The court need not find all factors apply in a particular case. In re Wash. Mut., Inc., 442 B.R. 314, 346 (Bankr. D.
Del. 2011). Instead, these factors are “helpful in weighing the equities of the particular case after a fact-specific review.” In re Indianapolis Downs, 486 B.R. at 303. They “provide guidance in the Court’s determination of fairness” and “form the foundation for such an analysis, with due consideration of the factors that may be relevant to [the] case” but are not “exclusive nor conjunctive requirements”. In re Hercules Offshore, Inc., 565 B.R. 732, 756 (Bankr. D. Del.
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2016) (quoting In re Wash. Mut., 442 B.R. at 346-47). See also Master Mortgage Inv. Fund, Inc.,
168 B.R. at 935.
74. Here, the Court should approve the Debtor Releases because they represent a valid exercise of the Debtors’ business judgment. The Debtor Releases play an important role in the overall Plan and Global Settlement, which provide for distributions to be made to General
Unsecured Creditors. Further, the Debtor Releases are fair, reasonable, and in the best interests of the Debtors and the estates. The Special Committee approved the Debtor Releases in conjunction with the Global Settlement after an extensive and thorough investigation conducted by the Independent Director. The Committee, also conducted a thorough investigation and concurred, albeit separately, with the conclusion of the Special Committee.
75. Similarly, the Court should approve the Debtor Releases because they are appropriate under the Master Mortgage Factors. First, there is an identity of interest between the
Debtors and the Released Parties because each shares the common goal of confirming the Plan.
See, e.g., Zenith, 241 B.R. at 110 (finding an identity of interest with debtor where certain released parties who “were instrumental in formulating the Plan” shared an identity of interest with debtor “in seeing that the Plan succeed and the company reorganize”). The Released Parties were instrumental in formulating the Plan. See, e.g., In re Tribune Co., 464 B.R. 126, 187
(Bankr. D. Del. 2011) (finding that the debtors and their secured lenders “share[d] the common goal of confirming the [] Plan” and implementing the consummation thereof, thus, giving rise to an identity of interest between the parties). The Prepetition Secured Lender’s concessions and funding of the Wind-Down Reserve allow recoveries to flow to the General Unsecured Creditors.
76. Second, each Released Party made substantial contributions and provided significant value to the Chapter 11 Cases. The Debtors, the Committee, and Kroger are all parties
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to the Global Settlement embodied in the Plan, which resulted in a consensual outcome in the
Chapter 11 Cases, which avoids protracted litigation and provides for the prompt distribution to creditors. The Prepetition Secured Lender consented to the use of its cash collateral throughout the Chapter 11 Cases and funded multiple sale processes and orderly value maximizing liquidation of the Debtors’ estates. Similarly, the consensual use of the cash collateral permitted the Special Committee and the Committee to investigate claims against the Prepetition Secured
Lender. The successful liquidation of substantially all of the Debtors’ store lease portfolio, combined with the waiver of the deficiency and subrogation claims will permit general unsecured creditors to receive a recovery under the Plan. The contributions of the Prepetition
Secured Lender were essential to administering these Chapter 11 Cases and preserving the value for the Debtors’ creditors. In addition, without the consideration being offered by the Prepetition
Secured Lender, general unsecured creditors would likely receive no distribution in these
Chapter 11 Cases or a far less distribution given that the Prepetition Secured Lender has a deficiency claim in an amount not less than $300 Million. The contribution of the Prepetition
Secured Lender to these Chapter 11 Cases include, but are not limited to, (i) the consensual use of a considerable amount of cash collateral to fund the administration of the Chapter 11 Cases,
(ii) the payment in full of Administrative Expense Claims, PACA Claims, PASA Claims,
Professional Fee Claims, Secured Tax Claims, Tax Claims, and Priority Claims, (iii) the funding of the Wind-Down Reserve, and (iv) the vesting of Assets in the Liquidating Debtor and/or
Liquidating Trust. Accordingly, the tremendous concessions and contributions of the Released
Parties justifies the Debtor Releases.
77. Third, the Debtor Releases contemplated by the Plan were an essential component of the Plan process. The Debtors, the Committee, and the Prepetition Secured Lender reached the
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Global Settlement with regard to the Plan. The Debtor Releases were fundamental to the Global
Settlement and the Global Settlement would not have occurred without such Debtor Releases.
Additionally, without the Debtor Releases, the Prepetition Secured Lender would not have contributed to the Plan nor to the process of formulating and negotiating the same. Similarly, in the absence of the sought after Debtor Releases, no funds would be available for distribution to
General Unsecured Creditors. The Debtor Releases served as a crucial inducement for the
Prepetition Secured Lender to participate in the plan process and to agree to the Global
Settlement. Removal of the Debtor Releases would destroy the ability of the Debtors to obtain the valuable consideration provided for under the Global Settlement and Plan, which would ultimately only harm General Unsecured Creditors.
78. Fourth, the Debtors’ creditors support the Plan and the Debtor Releases. As set forth in the Balloting Declaration, all of the voting Holders of Claims in Class 1 (Prepetition
Secured Claims), a majority of voting Holders of Claims in Class 4 (General Unsecured Claims
Class A), a majority of voting Holders of Claims in Class 5 (General Unsecured Claims Class B), all of the voting Holders of Claims in Class 6 (General Unsecured Claims Class C), and a majority of voting Holders of Claims in Class 9 (EB-5 Investors) support confirmation of the
Plan:
ACCEPT REJECT IMPAIRED
CLASS AND VOTES VOTES AMOUNT AMOUNT DESCRIPTION COUNTED COUNTED
Class 1 – Prepetition 0 $0.00 0 $0.00 Secured Claims 0.00% 0% 0.00% 0% Class 4 – General 120 $18,222,386.05 3 $30,603.74 Unsecured Claims Class A 97.56% 99.83% 2.44% 0.17% Class 5 – General 5 $31,575,158.97 1 $1,760,383.28 Unsecured Claims Class B 83.33% 94.72% 16.67% 5.28% Class 6 – General 0 $0.00 0 0 0.00% 0.00% 0.00% $0.00
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Unsecured Claims Class C Class 9 – EB-5 Investors 12 $6,000,000.00 0 $0.00 100.00% 100.00% 0.00% 0.00%
When a debtor’s creditors (who are most affected by a debtor’s release of claims or causes of action) support a chapter 11 plan, that provides strong evidence the release at issue is appropriate. See Master Mortg., 168 B.R. at 938 (expounding creditor approval of a release is
“the single most important factor” to determine whether a release is appropriate); see also In re
Key3Media Grp., 336 B.R. 87, 97-98 (Bankr. D. Del. 2005) (granting a settlement of estate causes of action over a creditor’s objection because, among other things, a majority of creditors approved of the settlement), aff’d, 2006 WL 2842462 (D. Del. Oct. 2, 2006).
79. Fifth, the Debtors believe the transfer of Assets to the Liquidating Debtor, and potential creation of the Liquidating Trust and the transfer of the Liquidating Trust Assets for the benefit of Liquidation Trust Beneficiaries presents the best possible chance for maximum recovery for creditors in these Chapter 11 Cases. The consideration for the Debtor Releases provides the only avenue of recovery for general unsecured creditors in these Chapter 11 Cases.
Without the Prepetition Secured Lender’s concessions and funding, there would be nothing available to distribute to General Unsecured Creditors. As set forth below, creditors would receive less if these Chapter 11 Cases were converted to cases under chapter 7 of the Bankruptcy
Code. See, e.g., In re Zenith, 241 B.R. at 111 (explaining that the fifth factor was met because
“the Plan does provide a distribution to creditors in exchange for the releases” and supporting that conclusion by explaining that creditors received more under the plan than they would have in a liquidation).
80. Significantly, the five Master Mortgage Factors require the Court to “examine the terms of the plan of [liquidation], the outcome of the solicitation of the plan and the necessity of
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the injunction to the success of the plan.” In re Millennium Lab Holdings II, LLC, 575 B.R. 252,
272 (Bankr. D. Del. 2017), aff’d 591 B.R. 559 (D. Del. 2018) (note, in this opinion, the Court addressed third-party releases, which are subject to a more stringent review than debtor releases, however the Court’s reasoning articulated there applies with equal force here). In its examination of the permissibility of releases the Master Mortgage Factors “do not ask the bankruptcy judge to examine or make rulings with respect to the many claims that may be released by virtue of the third party releases.” Id. A confirmation order of “a plan with releases, therefore, does not rule on the merits of the state law claims being released.” Id. at 273. Releases are creatures of federal bankruptcy law and a determination that a plan comports with federal requirements of plan confirmation is all that is required for the approval of releases. Id.
81. The Debtor Releases are an integral part of the Plan and are appropriate under applicable law. They are essential to providing General Unsecured Creditors with a recovery under the Plan. Accordingly, the Debtors submit that the Debtor Releases should be approved.
(2) Third Party Releases
82. Article VIII.E. contains the Third Party Releases, which are essential components of the Plan and Global Settlement and should be approved. The removal of the Third Party
Releases from the Plan and Global Settlement would result in the collapse of the mechanism contained therein to ensure funds are available for distributions to General Unsecured Creditors.
Section 105(a) of the Bankruptcy Code authorizes this Court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. §
105(a). The authority granted under section 105(a) is “consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships.” United States v. Energy Res. Co., 495 U.S. 545, 549 (1990). This
Circuit has utilized section 105(a) to extend the protections of the Bankruptcy Code to non-
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debtors in the third party release context. See, e.g., In re W.R. Grace & Co., 475 B.R. 34, 107 (D.
Del. 2012), aff’d sub nom. In re WR Grace & Co., 729 F.3d 332 (3d Cir. 2013) (“In order for a reorganization plan that includes an injunction barring third-party claims against non-debtors to be approved, the injunction must be ‘both necessary to the reorganization and fair’ under 11
U.S.C. § 105(a)”) (citing In re Global Indus. Techs., Inc., 645 F.3d 201, 206 (3d Cir. 2011)).
83. In the District of Delaware, a release is consensual where, as here, the parties have consented to the release because they either voted to accept the plan (or were deemed to accept the plan as a result of their unimpaired treatment) or were given notice of the opportunity to opt-out of or object to the releases but did not do so. See In re Indianapolis Downs, 486 B.R.
286, 286 (Bankr. D. Del. 2013) (collecting cases); In re Coram Healthcare Corp., 315 B.R. 321,
336 (Bankr. D. Del. 2004) (finding that voting in favor of a plan with third-party releases binds the voting party thereto); In re Exide Techs., 303 B.R. 48, 74 (Bankr. D. Del. 2003) (same); In re
Spansion, Inc., 426 B.R. 114, 144 (Bankr. D. Del. 2010) (finding unimpaired creditors deemed to accept the plan could be bound to third-party release therein because such creditors had not objected to the release, were being paid in full, and received adequate consideration for the release); In re Insys Therapeutics, Inc., Case No.19-11292 (JTD) (Bankr. D. Del. Jan. 16, 2020)
[Docket No. 1115] (confirming plan and binding creditors who were deemed to reject and did not opt-out of third-party releases).
84. Here, the Solicitation Package provided clear notice of, among other things, the
Third Party Releases and provided release opt-out instructions for those holders of Claims that were entitled to vote on the Plan. Furthermore, as set forth in detail above, the Released Parties have provided important and substantial contributions to the Chapter 11 Cases and confirmation of the Plan. Not only do the Third Party Releases comport with procedural requirements, but
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substantively they safeguard the better treatment and higher recovery afforded to General
Unsecured Creditors. Accordingly, the Debtors submit that the Third Party Releases discussed above should be approved.
(c) The Plan’s Injunction and Exculpation Provisions are Appropriate and Should be Approved
85. Consistent with Bankruptcy Code Section 1123(b), the Plan contains provisions related to injunction and exculpation. See Article VIII.B.; Article VIII.C. As detailed below, the aforementioned provisions are proper under the circumstances of these Chapter 11 Cases because they are fair and equitable, given for reasonable consideration, and an integral part of the Plan.
These provisions also served as an inducement for the Prepetition Secured Lender to fund the
Wind-Down Reserve and allow General Unsecured Creditors to receive distributions ahead of its
Claims.
86. Injunction Provisions. Article VIII.B of the Plan contains certain injunction provisions related to the parties who have held, hold, or may hold Claims against the Debtors.
The injunction provisions are necessary to effectuate the Plan. Without the injunction provisions, the Debtors, Liquidating Debtor, and Liquidating Trust would not be able to fulfill their respective responsibilities under the Plan. The injunction provisions in the Plan are narrowly tailored and should be approved; they are customary and merely seek to assure parties do not interfere with the consummation and implementation of the Plan and all transactions contemplated thereby.
87. The injunction provisions are necessary to effectuate the Plan. They implement the Debtor Releases, Third Party Release, and the exculpation provision embodied in the Plan, in part, by enjoining permanently all persons and entities from, among other things, commencing or continuing in any manner any claim that was released or exculpated pursuant to such provisions.
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Akin to a delicately calibrated ecosystem, these terms are interconnected and intertwined in a financial arrangement, whose ultimate goal is providing recoveries to General Unsecured
Creditors; the removal of any provision, would lead to the unwinding of the Plan and Global
Settlement to the detriment of General Unsecured Creditors. Without the injunction provisions, the structure of the Plan and Global Settlement would collapse and the purpose of each thwarted.
Further, the injunction provisions are necessary to the distribution scheme in the Plan. The Plan, a liquidating plan, must be protected against an attempt by a creditor to obtain more than its entitlement under the Plan in order for assets to be distributed pursuant to the Plan. Such prohibited actions would disrupt the Global Settlement and proposed distribution structure incorporated in the Plan. The injunction provisions in the Plan are narrowly tailored, critical to accomplishing the Plan’s overall objectives, are consistent with section 1123(b)(6) of the
Bankruptcy Code and should be approved.
88. Exculpation Provisions. Article VIII.C of the Plan contains the following exculpation provision:
Except as otherwise specifically provided in the Plan, none of the Exculpated Parties shall have or incur any liability to any Holder of a Claim or Interest (including Estate Claims) for any act or omission in connection with, related to, or arising out of the Chapter 11 Cases, the Plan, the pursuit of confirmation, the consummation of the Plan, the administration of the Plan, the property to be liquidated and/or distributed under the Plan or any prepetition or post petition act taken or omitted to be taken in connection with or in contemplation of the liquidation of the Debtors, except for their willful or gross negligence as determined by a Final Order of a Court of competent jurisdiction, and in all respects shall be entitled to rely reasonably upon the advice of counsel with respect to their duties and responsibilities under the Plan.
The foregoing paragraph shall apply to attorneys to the greatest extent permissible under applicable bar rules and case law.
89. Further, “Exculpated Parties” means:
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individually and collectively, in each case solely in their capacity as such, each and all of: (a) the Debtors; (b) the Committee and members of the Committee in their capacity as members of the Committee; (c) the Prepetition Secured Lender to the extent (x) permitted by section 1125(e) of the Bankruptcy Code and/or (y) the Prepetition Secured Lender is subsequently found to have acted as, or otherwise determined to have been, a fiduciary of the Estates by a court of competent jurisdiction; and (d) the Related Parties of the foregoing. See Article II.
90. The exculpation provision is limited to the Exculpated Parties for claims arising out of or related to, among other things, the administration of these Chapter 11 Cases, the negotiation, formulation, preparation, and pursuit of the Disclosure Statement, the Plan, solicitation of votes for, or confirmation of the Plan. Importantly, following receipt of informal comments from the U.S. Trustee, the Plan has been modified to limit the Exculpated Parties to estate fiduciaries. The exculpation provision is limited in temporal scope to actions taken or omissions made between the Petition Date and Effective Date. Exculpation provisions in a plan are appropriate when the protection is necessary and given exchange for fair consideration.
Gillman v. Cont’l Airlines (In re Cont’l Airlines), 203 F.3d 203, 211-14 (3d Cir. 2000). See also
In re PWS Holding Corp., 228 F.3d 224, 246-47 (3d Cir. 2000) (holding that an exculpation provision “does not affect the liability of third parties, but rather sets forth the appropriate standard of liability.”). Estate fiduciaries, lenders, and other parties participating in the plan process are frequently the subject of exculpation provisions. See, e.g., In re W.R. Grace & Co.,
446 B.R. 96, 132-33 (Bankr. D. Del. 2011); In re Wash Mut. Inc., 442 B.R. at 350-51; In re
Indianapolis Downs, LLC, 486 B.R. at 306. Exculpation of a lender is appropriate where the lender is subsequently found (i) to have acted as, or otherwise determined to have been, a fiduciary of the bankruptcy estates by a court of competent jurisdiction, (ii) to have acted on behalf of or for the benefit of the Debtors, or (iii) to have made representations on behalf of or for the benefit of the Debtors. In re EBH TopCo, LLC, 18-11212 (BLS), Docket No. 765, ¶ 17
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(Bankr. D. Del. Feb. 13, 2019). Without protection for these parties, key constituents would not participate in the plan process.
91. Each Exculpated Party has participated in the Chapter 11 Cases in good faith and without the support of the Exculpated Parties, the Debtors would not have been able to execute their chapter 11 strategy, commence the Chapter 11 Cases, and propose a plan supported by virtually all creditors. Exculpation of the Prepetition Secured Lender is appropriate here. See e.g.
In re Nassau Broadcasting Partners, L.P., 11-12934 (KG), Docket No. 990, ¶ 44 (Bankr. D. Del.
July 31, 2013) and Docket No. 1000, pp. 50-55; In re Nortel Networks, Inc., 09-10138 (KG)
Docket No. 17807, pp. 150-55, 182-83 (Bankr. D. Del. Jan. 24, 2017). The exculpation provision is necessary to protect fiduciaries of the Debtors’ Estates who have made substantial contributions to the Chapter 11 Cases from collateral attacks related to good faith acts or omission related to the Debtors’ Chapter 11 Cases. The scope of the exculpation provision is appropriately tailored to cover only actions taken in connection with the administration of the
Chapter 11 Cases and negotiation of the Plan and will not affect any liability that arises from fraud, gross negligence, or willful misconduct, as determined by final order.
92. For these reasons, the Debtors submit that the exculpation provisions in the Plan should be approved. The Plan complies fully with the requirements of Bankruptcy Code sections
1122 and 1123. Therefore, the Plan satisfies the requirements contained in Bankruptcy Code section 1129(a)(1).
(v) Section 1129(a)(2): The Plan Complies With the Bankruptcy Code
93. Bankruptcy Code section 1129(a)(2) requires that the plan proponent “comp[y] with the allocable provisions of [the Bankruptcy Code].” 11 U.S.C. § 1129(a)(2). The legislative history of Bankruptcy Code section 1129(a)(2) reflects that this provision is intended to encompass the disclosure and solicitation requirements under Bankruptcy Code sections 1125
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and 1126. See H.R. Rep. No. 95-595, at 412 (1977); S. Rep. No. 95-989, at 126 (1978)
(“Paragraph (2) [of § 1129(a)] requires that the proponent of the plan comply with the applicable provisions of chapter 11, such as section 1125 regarding disclosure.”); In re Johns-Manville
Corp., 68 B.R. 618, 630 (Bankr. S.D.N.Y. 1987). See also In re Toy & Sports Warehouse, Inc.,
37 B.R. 141, 149 (Bankr. S.D.N.Y. 1984); In re Drexel Burnham Lambert Grp., Inc., 138 B.R.
723, 759 (Bankr. S.D.N.Y. 1992). As set forth below, the Debtors have complied with the applicable provisions of the Bankruptcy Code, including the provisions of Bankruptcy Code sections 1125 and 1126 regarding disclosure and plan solicitation.
94. As discussed herein and in the Voting Report, the Plan and Disclosure Statement meets the requirements of Bankruptcy Code sections 1125 and 1126. The Debtors have complied with applicable Bankruptcy Code provisions, the Bankruptcy Rules, the Local Rules, and other applicable law in the transmission of the Plan, Disclosure Statement, Solicitation Packages, the
Ballots, and related documents and notices.
95. Section 1126 of the Bankruptcy Code specifies the requirements for acceptance of the Plan. Under Bankruptcy Code section 1126, only holders of Allowed Claims in Impaired
Classes of Claims and Interests who will receive or retain property under the Plan on account of such Claims or Interests may vote to accept or reject the Plan. See 11 U.S.C. § 1126. Consistent with the requirements of section 1126 of the Bankruptcy Code, the Debtors solicited acceptances of the Plan from Holders of Claims or Interests in Class 1 (Prepetition Secured Claims), Class 4
(General Unsecured Claims Class A), Class 5 (General Unsecured Claims Class B), Class 6
(General Unsecured Claims Class C), and Class 9 (EB-5 Investors), who are entitled to vote to accept or reject the Plan. The Debtors did not solicit acceptances from the Holders of Claims or
Interests in Class 2 (Other Secured Claims), Class 3 (Priority Claims), as these holders are not
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impaired under the Plan and, therefore, are presumed to accept the Plan, or Class 7
(Intercompany Claims) and Class 8 (Equity Interests), as these holders will not receive any distribution or property on account of their Claims and Interests and, therefore, are deemed to reject the Plan.
96. Accordingly, the Debtors have complied with the provisions of Bankruptcy Code sections 1125 and 1126, thus fulfilling the requirements of Bankruptcy Code section 1129(a)(2).
(vi) Section 1129(a)(3): The Plan Has Been Proposed in Good Faith
97. As required by Bankruptcy Code section 1129(a)(3), the Plan has been proposed
“proposed in good faith and not by any means forbidden by law.” The determination of good faith should simply be left to the Court’s common sense and judgment. In re Okoreeh-Bahm, 836
F.2d 1030, 1033 (6th Cir. 1988). Not only have the Debtors proposed the Plan in good faith but, together, the Plan proponents seek confirmation of the Plan and approval of the Global
Settlement to achieve an equitable outcome and provide for distributions to General Unsecured
Creditors.
98. The Third Circuit has addressed the good faith standard under Bankruptcy Code section 1129(a)(3), stating “[f]or purposes of determining good faith under section 1129(a)(3) . . . the important point of inquiry is the plan itself and whether such a plan will fairly achieve a result consistent with the objectives of the Bankruptcy Code.” In re PWS Holding Corp., 228
F.3d at 242; In re Lernout & Hauspie Speech Prods. N.V., 308 B.R. 672, 675 (D. Del. 2004)
(finding that good faith requires “that (1) the plan be consistent with the objectives of the
Bankruptcy Code; (2) the plan be proposed with honesty and good intentions and with a basis for expecting that reorganization can be achieved; or (3) there was fundamental fairness in dealing with the creditors.”). See also In re NII Holdings, Inc., 288 B.R. 356, 362 (Bankr. D. Del. 2002);
In re Zenith Elecs. Corp., 241 B.R. 92, 107 (Bankr. D. Del. 1999); In re PPI Enterprises, Inc.,
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228 B.R. 339, 347 (Bankr. D. Del. 1998). Generally, bankruptcy courts examine the totality of the circumstances when determining whether a plan has been proposed in good faith. In re PPI
Enters. (U.S.), 324 F.3d 197, 211 (3d Cir. 2003). The court is given “considerable discretion in finding good faith.” W.R. Grace, 475 B.R. at 87 (quoting In re Coram Healthcare Corp., 271
B.R. 228, 234 (Bankr. D. Del. 2001)).
99. The Plan is the result of extensive arm’s-length negotiations among the Debtors, the Committee, and Prepetition Secured Lender. Throughout the process, all three stakeholders were active and engaged participants in the drafting of the Plan and all parties made concessions in order to provide for a consensual Plan to be filed. Furthermore, the Debtors, the Committee, and the Prepetition Secured Lender worked actively with the U.S. Trustee and the Founders to reach common ground and resolve differences amicably. The Plan and Global Settlement provide for distributions to General Unsecured Creditors, and, therefore, achieve the goals of the
Bankruptcy Code and demonstrate fundamental fairness in dealing with creditors.
100. Here, the Plan is consistent with the objectives of the Bankruptcy Code. It facilitates the transfer of Assets to the Liquidating Debtor, and potentially a Liquidating Trust, to be administered by a Liquidating Trustee for the benefit of the Liquidating Trust Beneficiaries.
As stated above, the Prepetition Secured Lender allowed the use of its cash collateral, waived its deficiency and subrogation claims, funded the investigations of the Special Committee and the
Committee, and funded the Wind-Down Reserve. Additionally, the Prepetition Secured Lender funded the administrative expenses and professional fees of the Chapter 11 Cases, which allowed the Debtors to: sell substantially all of their assets, enter settlement agreements, reconcile claims, liquidate inventory, and negotiate the Plan. Throughout the Chapter 11 Cases, the Debtors, the
Committee, and the Prepetition Secured Lender demonstrated a firm commitment to maximizing
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value of the Debtors’ Estates for the benefit of all of creditor constituencies. The Debtors, the
Committee, and the Prepetition Secured Lender consistently acted in good faith, during these
Chapter 11 Cases and have proposed the Plan honestly and with good intentions. No funds would be available for distribution to General Unsecured Creditors, in the absence of major concessions from the Prepetition Secured Lender.
101. The terms contained within the Plan demonstrate fundamental fairness in dealing with creditors. In the absence of the Plan, which incorporates the Global Settlement, General
Unsecured Creditors would receive no recovery because the Prepetition Secured Lender is undersecured. The value of the Debtors Estates is far less than the remaining amount of the secured claim held by the Prepetition Secured Lender. The Prepetition Secured Lender agreed to waive its subrogation claims. It will also fund the Wind-Down Reserve and allow junior creditors to receive distributions ahead of its secured claims. As a result of substantial negotiations, the Debtors, the Committee, and the Prepetition Secured Lender developed the Plan and Global Settlement, which provide funding to administer and monetize the assets of the estates, then oversee distributions to General Unsecured Creditors.
102. The overwhelming almost unanimous, voting support demonstrates the fairness of the Plan. The goal of the Plan is to maximize distributions to creditors, a legitimate and honest purpose. Further, the Plan has been proposed in compliance with all applicable laws, rules, and regulations. As such, the Plan complies with Bankruptcy Code section 11239(a)(3).
(vii) Section 1129(a)(4): The Plan Provides for Approval of Certain Administrative Expenses
103. Bankruptcy Code section 1129(a)(4) requires that payments by a debtor “for services or for costs and expenses in connection with the case, or in connection with the plan and incident to the case,” either be approved by the Court as reasonable or subject to approval of the
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Court as reasonable. 11 U.S.C. § 1129(a)(4). See also In re Resorts Int’l, Inc., 145 B.R. 412, 475-
76 (Bankr. D.N.J. 1990); In re Lisanti Foods, 329 B.R. 491, 503 (D.N.J. 2005).
104. Article III.C. of the Plan provides that any payments made or promised by the
Debtors for services rendered in connection with the Chapter 11 Cases will be subject to review by the Court and other parties in interest. Furthermore, the estates will be able to pay all allowed administrative expenses. See Article III.B. These procedures satisfy Bankruptcy Code section
1129(a)(4).
(viii) Section 1129(a)(5): The Plan Contains Proper Disclosures
105. Bankruptcy Code section 1129(a)(5) requires a plan proponent disclose “the identity and affiliations of any individual proposed to serve, after confirmation of the plan, as a director, officer, or voting trustee of the debtor . . . or a successor of the debtor under the plan.”
11 U.S.C. § 1129(a)(5)(A)(i).
106. The Plan complies with Bankruptcy Code section 1129(a)(5) by identifying the
Liquidating Trustee, Andrew T. Pillari. The selection of the Liquidating Trustee is consistent with the best interests of Holders of Claims and Interests in the Debtors and public policy.
Accordingly, Bankruptcy Code section 1129(a)(5) has been met.
(ix) Section 1129(a)(6): No Governmental Regulatory Commission Has Jurisdiction Over the Debtors
107. Bankruptcy Code section 1129(a)(6) provides that “[a]ny governmental regulatory commission with jurisdiction, after confirmation of the plan, over the rates of the debtor has approved any rate change provided for in the plan, or such rate change is expressly conditioned on such approval.” 11 U.S.C. § 1129(a)(6). The Plan does not provide for any rate changes over which a governmental regulatory commission has jurisdiction. The Debtors submit that this provision of the Bankruptcy Code is not applicable to the Plan.
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(x) Section 1129(a)(7): The Plan is in the Best Interest of All Creditors
108. The Plan and Global Settlement serve the best interests of all creditors.
Bankruptcy Code section 1129(a)(7) requires that a plan be in the best interests of creditors and equity holders, commonly referred to as the “best interests” test. The best interests test requires that holders of impaired claims
(i) has accepted the plan; or
(ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date.
11 U.S.C. § 1129(a)(7)(A). The best interests test focuses on dissenting impaired holders of claims and interests as individuals, rather than on entire classes of claims or interests. See Bank of Am. Nat’l Trust & Savings Assoc. v. 203 N. LaSalle St. Partnership, 526 U.S. 434, 441 n.13
(1999) (“The ‘best interests’ test applies to individual creditors holding impaired claims, even if the class as a whole votes to accept the plan.”). See also In re Adelphia Commc’ns, Corp., 368
B.R. 140, 251 (Bankr. S.D.N.Y. 2007) (section 1129(a)(7) is satisfied when an impaired holder of claims would receive “no less than such holder would receive in a hypothetical chapter 7 liquidation.”). A plan may satisfy this requirement if the Court finds that each such nonconsenting member of an impaired class of claims would receive at least as much under the plan as it would under a chapter 7 liquidation. See In re Wash. Mut., Inc., 461 B.R. 200, 241
(Bankr. D. Del. 2011); In re Lason, Inc., 300 B.R. 227, 232 (Bankr. D. Del. 2003) (“Section
1129(a)(7)(A) requires a determination whether a prompt chapter 7 liquidation would provide a better return to particular creditors or interest holders than a chapter 11 reorganization.”). See, e.g., In re Crowthers McCall Pattern, Inc., 120 B.R. 279, 297 (Bankr. S.D.N.Y. 1990).
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109. The best interests test does not apply to holders of Claims in Class 2 (Other
Secured Claims) and Class 3 (Priority Claims) because each Holder in these Classes is unimpaired under the Plan, presumed to accept the Plan, and will receive payment in full, in
Cash. Accordingly, the holders of such Claims and Interests are receiving the maximum recovery to which they are entitled under the Plan, and as a result, could not receive greater recovery under chapter 7.
110. The Debtors submit, if the Chapter 11 Cases were converted to cases under chapter 7 of the Bankruptcy Code, the value of distributions to each impaired class of Claims or
Interests would be less than the value of distributions under the Plan. As detailed in the liquidation analysis attached to the Disclosure Statement as Exhibit A (the “Liquidation
Analysis”) and Liquidation Declaration, the best interest test is satisfied as to every holder of a
Claim in Class 1, Class 4, Class 5, Class 6, Class 7, Class 8, and Class 9. All Classes of Claims or Interests will recover value equal to or in excess of what such Claims or Interests would receive in a hypothetical chapter 7 liquidation.
111. The Holders of Claims in Class 4, Class 5, and Class 9 have voted to accept the
Plan. The Holder of Claims in Class 1, the Prepetition Secured Lender, did not vote to accept or reject the Plan; however, as set forth at length herein, the Prepetition Secured Lender consents to junior creditors receiving distributions ahead of its Prepetition Secured Claims. Similarly, the
Holder of Claims in Class 6, also the Prepetition Secured Lender, did not vote to accept or reject the Plan; but, the Prepetition Secured Lender agrees to allow members of Class 9 to receive distributions on account of their Interests. There would be fewer assets available for distribution under chapter 7 than there are available to distribute under the Plan. Several factors contribute to smaller distributions: (a) the Debtors would incur additional administrative expenses, such as
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commissions and professional fees, in winding up chapter 7 cases, including the additional costs of a chapter 7 trustee to administer the chapter 7 cases; (b) the chapter 7 process would take substantially longer, whereby under the Plan, the Assets will be transferred on the Effective Date to the Liquidating Debtor; and (c) the Prepetition Secured Lender would not agree to fund the
Wind-Down Reserve or waive its deficiency claim or subrogation claim in chapter 7.
112. The estimates regarding the Debtors’ assets and liabilities incorporated into the
Liquidation Analysis are based upon the knowledge and familiarity of the Debtors’ advisors with the Debtors’ business and their relevant experience in chapter 11 proceedings. The Debtors’
Liquidation Analysis should be afforded deference. See Charter Commc’ns, 419 B.R. at 261-62
(discrediting creditors’ objection to liquidation analysis because it consisted of a “largely speculative exercise of listing possible incremental recoveries and offered no reliable opinions as to the likelihood that any of these identified sources of possible extra value would ever materialize”). The Plan and Global Settlement provide for distributions to General Unsecured
Creditors; no other avenue is available to achieve this outcome. Only the concessions of the
Prepetition Secured Lender Recovery allow for any recovery to this constituency. For these reasons, the Debtors believe the Plan is in the best interests of creditors.
(xi) Section 1129(a)(8): The Plan Has Been Accepted by Impaired Voting Classes
113. Bankruptcy Code section 1129(a)(8) requires each class of claims either vote to accept a plan or are not impaired under a plan. 11 U.S.C. § 1129(a)(8). As detailed in the
Balloting Declaration: (a) Holders of Claims in Class 1 did not vote to accept or reject the Plan;
(b) Holders of Claims in Class 2 and Class 3 are unimpaired and deemed to accept the Plan; (c)
Holders of Claims in Class 4 voted to accept the Plan; (d) Holders of Claims in Class 5 voted to accept the Plan; (e) Holders of Claims in Class 6 did not vote to accept or reject the Plan; (f)
Holders of Claims in Class 7 are deemed to reject the Plan; (f) Holders of Claims in Class 8 are
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deemed to reject the Plan; and (g) Holders of Claims or Interests in Class 9 voted to accept the
Plan. However, as set forth below, the Plan may nevertheless be confirmed pursuant to
Bankruptcy Code section 1129(b).
(xii) Section 1129(a)(9): The Plan Provides for Payment in Full of Allowed Priority, Administrative, and Tax Claims
114. Bankruptcy Code section 1129(a)(9) requires that certain types of priority claims receive specific treatment, unless the holders of such claims agree to different treatment. 11
U.S.C. § 1129(a)(9). The Plan provides for the payment of Administrative Expense Claims,
PACA Claims, PASA Claims, Professional Fee Claims, Secured Tax Claims, Tax Claims, and
Priority Claims. See Article III; Article IV.A., C.; Article VIII.A. Therefore, the Plan meets the requirements of Bankruptcy Code section 1129(a)(9). The concessions of and funding from the
Prepetition Secured Lender allows the Plan to pay these priority and administrative claims in full.
(xiii) Section 1129(a)(10): At Least One Class of Impaired Classes Has Accepted the Plan
115. Bankruptcy Code section 1129(a)(10) requires affirmative acceptance of a plan by at least one class of impaired claims “determined without including any acceptance of the plan by any insider” if a class of claims is impaired by such plan. 11 U.S.C. § 1129(a)(10). The Plan was accepted by Class 4, Class 5, and Class 9 each of which is impaired under the Plan and is not composed of insiders. Thus, Bankruptcy Code section 1129(a)(10) has been met.
(xiv) Section 1129(a)(11): The Plan is Feasible
116. Bankruptcy Code section 1129(a)(11) requires that the Court find that
Confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.
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11 U.S.C. § 1129(a)(11). This is referred to as the “feasibility” standard and requires two determinations: (a) the debtor’s ability to consummate the provisions of the plan, and (b) the debtor’s ability to reorganize as viable entity. See Kane v. Johns-Manville Corp., 843 F.2d 636,
649 (2d Cir. 1988) (“[T]he feasibility standard is whether the plan offers a reasonable assurance of success. Success need not be guaranteed.”); Mercury Capital Corp. v. Milford Conn. Assocs.,
L.P., 354 B.R. 1, 9 (D. Conn. 2006) (“A ‘relatively low threshold of proof’ will satisfy the feasibility requirement.”) (quoting In re Brotby, 303 B.R. 177, 191 (B.A.P. 9th Cir. 2003)); In re
Lakeside Global II, Ltd., 116 B.R. 499, 506 (Bankr. S.D. Tex. 1989) (stating that the definition of feasibility “has been slightly broadened and contemplates whether [a] debtor can realistically carry out its Plan . . . and [b] whether the Plan offers a reasonable prospect of success and is workable”). Again, feasibility does not require that success be guaranteed, it only requires a reasonable assurance of compliance with plan terms. In re Tribune Co., 464 B.R. at 185 (citing
In re Wash. Mut. Inc., 2011 WL 4090757, *41 (Bankr. D. Del. Sept. 13, 2011) (quoting In re
Orlando Investors LP, 103 B.R. 593, 600 (Bankr. E.D.Pa. 1989))). There is a relatively low threshold of proof necessary to satisfy the feasibility requirement. Id. (quoting In re Briscoe
Enters, Ltd., 994 F.2d 1160, 1166 (5th Cir. 1993)).
117. The Plan contemplates the liquidation of the Debtors’ assets, thus minimizing or eliminating the need to demonstrate feasibility. In re Credentia Corp., Case No. 10-10926, 2010
WL 3313383, at *9 (Bankr. D. Del. May 26, 2010) (“The Plan provides for a workable scheme of liquidation and, therefore, satisfies section 1129(a)(11) of the Bankruptcy Code.”); In re
Revco, 131 B.R. 615, 622 (Bankr. N.D. Ohio 1990) (holding that “Section 1129(a)(11) is satisfied as the plan provides that the property of [the] Debtors shall be liquidated”). The Debtors have demonstrated there is a reasonable probability they will have sufficient funds to meet post-
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Confirmation Date obligations to pay for the ongoing costs of administering and consummating the Plan and ultimately closing the Chapter 11 Cases. On the Effective Date, the Assets will be transferred to the Liquidating Debtor and will be liquidated. On the Effective Date, all Executory
Contracts not assumed before the Confirmation Date will be deemed rejected as set forth in the
Plan.
118. Because the Debtors will be liquidated and all payments required under the Plan will be made, the feasibility standard of section 1129(a)(11) of the Bankruptcy Code has been satisfied. Notably, without the cooperation of the Prepetition Secured Lender, including, but not limited to its many concessions and provision of funding, the Debtors may not have been able to propose a confirmable feasible plan.
(xv) Section 1129(a)(12): All Fees Have Been or Will be Paid
119. Bankruptcy Code section 1129(a)(12) requires a plan provide for the payment of fees payable under 28 U.S.C. § 1930. 11 U.S.C. § 1129(a)(12). Bankruptcy Code section 507 provides that such fees are afforded priority as administrative expenses. 11 U.S.C. § 507(a)(2).
120. The Plan provides that all statutory fees incurred prior to the Effective Date shall be paid by the Debtors on the Effective Date. After the Effective Date, the Liquidating Debtor and/or Liquidating Trustee shall pay any and all such fees when due and payable from the Assets and/or Liquidating Trust Assets. See Article III.F. Therefore, Bankruptcy Code section
1129(a)(12) has been met.
(xvi) Section 1129(a)(13) Through Section 1129(a)(16) Do Not Apply to the Plan
121. Bankruptcy Code section 1129(a)(13) requires a plan provide for the continuation of all retiree benefits as defined by Bankruptcy Code section 1114. 11 U.S.C. 1129(a)(13). The
Debtors do not provide retiree benefits, therefore, Bankruptcy Code section 1129(a)(13) is not applicable.
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122. Bankruptcy Code section 1129(a)(14) relates to the payment of domestic support obligations. 11 U.S.C. § 1129(a)(14). The Debtors are not subject to any domestic support obligations; therefore, this provision is not applicable.
123. Bankruptcy Code section 1129(a)(15) applies only to cases where the debtor is an individual. 11 U.S.C. § 1129(a)(15). Therefore, this provision does not apply to the Plan and
Disclosure Statement.
124. Bankruptcy Code section 1129(a)(16) applies to transfers of property by a corporation or trust that is not money, business, or commercial corporation or trust. 11 U.S.C. §
1129(a)(16). The Debtors were moneyed, business, or commercial corporations, therefore
Bankruptcy Code section 1129(a)(16) does not apply.
(xvii) Section 1129(b): The Plan Satisfies the “Cram Down Requirements”
125. Bankruptcy Code section 1129(b) provides a mechanism to confirm a plan when not all of the requirements of Bankruptcy Code section 1129(a) have been met. This mechanism is commonly referred to as the “cram down.”
126. In relevant part, Bankruptcy Code section 1129(b) provides:
[I]f all of the applicable requirements of [Bankruptcy Code section 1129(a)] other than [Bankruptcy Code section 1129(a)(8)] are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
11 U.S.C. § 1129(b)(1). Therefore, a court may “cram down” a plan over rejection by impaired classes of claims or equity interests as long as the plan does not “discriminate unfairly” and is
“fair and equitable” with respect to such classes. Kane v. Johns-Manville Corp., 843 F.2d at 650.
127. To determine whether “unfair discrimination exists,” courts look to the facts and circumstances of the particular case. In re 203 N. LaSalle St. Ltd. P’ship., 190 B.R. 567, 585
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(Bankr. N.D. Ill. 1995), rev’d on other grounds, 526 U.S. 434 (1999) (noting “the lack of any clear standard for determining the fairness of a discrimination in the treatment of classes under a
Chapter 11 plan” and that “the limits of fairness in this context have not been established.”); In re Bowles, 48 B.R. 502, 507 (Bankr. E.D. Va. 1985) (“[W]hether or not a particular plan does so
[unfairly] discriminate is to be determined on a case-by-case basis.”). See also In re Freymiller
Trucking, Inc., 190 B.R. 913, 916 (Bankr. W.D. Okla. 1996) (holding that a determination of unfair discrimination requires a court to “consider all aspects of the case and the totality of all the circumstances”). A plan unfairly discriminates when it treats similarly-situated classes materially different without a compelling justification. In re Coram Healthcare Corp., 315 B.R. 321, 349
(Bankr. D. Del. 2004) (collecting cases). A plan is fair and equitable with respect to an impaired class of unsecured claims or interests that rejects a plan if it follows the absolute priority rule. 11
U.S.C. § 1129(b)(2)(B)(ii) and (C)(ii). See In re Armstrong World Indus., 320 B.R. 523, 532 (D.
Del. 2005) (finding the fair and equitable requirement to be rooted in the absolute priority rule).
128. The Plan does not discriminate unfairly. Holders of Claims in Class 2 (Other
Secured Claims) and Class 3 (Priority Claims) are unimpaired, and thus, deemed to accept the
Plan. The only classes entitled to vote on the Plan—Class 4 (General Unsecured Claims Class
A), Class 5 (General Unsecured Claims Class B), and Class 9 (EB-5 Investors)—voted to accept the Plan, therefore “cram down” is only relevant to Classes of Claims and Interests who are deemed to reject the Plan (i.e. Class 7 (Intercompany Claims) and Class 8 (Equity Interests)).8
8 The Holder of Claims in Class 1 (Prepetition Secured Claims) and the Holder of Claims in Class 6 (General Unsecured Claims Class C), were entitled to vote, but did not vote to accept or reject the Plan. The Prepetition Secured Lender fully supports the Plan and Global Settlement as set forth at length herein, including the cram-down provision. Its support is the bedrock of the Plan and Global Settlement.
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129. Holders of Claims in Class 7 (Intercompany Claims) and holders of Interests in
Class 8 (Equity Interests) are not receiving any distribution. Both Classes 7 and 8 are deemed to reject the Plan pursuant to Bankruptcy Code section 1126(g).
130. The Plan is fair and equitable. To be “fair and equitable” as to holders of unsecured claims, section 1129(b)(2)(B) of the Bankruptcy Code requires a plan to provide either
(i) that each holder of the nonaccepting class will receive or retain on account of such claim property of a value equal to the allowed amount of such claim, or (ii) that a holder of a claim or interest that is junior to the claims of the nonaccepting class will not receive or retain any property under the plan. See 11 U.S.C. § 1129(b)(2)(B). The “fair and equitable” rule is satisfied as to the holders of Claims in Classes 4, 5, and 6, and Claims or Interests in Class 9, as no
Claims or Interests junior to each such class, as applicable, will receive or retain any property under the Plan on account of such junior Claims or Interests. As part of the Plan and Global
Settlement, the Holder of the Claims in Class 1, the Prepetition Secured Lender, agreed to allow
Claims or Interest junior to it to receive or retain property under the Plan.
131. The treatment of Class 4, Class 5, and Class 6 is appropriate. The Claims in these classes are generally similar—the three classes are unsecured—however, they are rightfully separately classified. Holders of Claims in Class 4 are general unsecured creditors. Holders of
Claims in Class 5 are general unsecured creditors whose claims are guaranteed by Kroger. The
Holder of Claims in Class 6 is Kroger who not only holds general unsecured claims related to its deficiency and subrogation claims against the Debtors but who is also the Prepetition Secured
Lender and who holds priority claims against the Debtors. The waterfall concept embodied in
Global Settlement and the Plan with respect to distributions to be made to Class 4, Class 5, and
Class 6 is based on critical distinctions between the class members.
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132. The Plan satisfies the absolute priority rule as no junior Holder of a Claim or
Interest will receive any distribution unless the Holders of higher priority Claims receive the full value of their Claims or the Holders of such higher priority Claims have consented to such treatment. Here, Kroger, as Prepetition Secured Lender and member of Class 1 (Prepetition
Secured Claims) consented to junior Holders of Claims or Interest receiving distributions even though it will not receive the full value of its Prepetition Secured Claims.
133. The Debtors, therefore, submit that the cram down requirements of Bankruptcy
Code section 1129(b) have been satisfied as the Plan is fair and equitable and does not unfairly discriminate.
(xviii) Section 1129(c) Through Section 1129(e) Have Been Satisfied
134. Bankruptcy Code section 1129(c) requires the Court confirm only one plan. 11
U.S.C. § 1129(c). The Plan is the only plan being proposed and/or confirmed in these Chapter 11
Cases, thus satisfying Bankruptcy Code section 1129(c).
135. The principal purpose of the Plan is not the avoidance of taxes or the application of section 5 of the Security Act of 1933. Therefore, Bankruptcy Code section 1129(d) is satisfied.
136. Bankruptcy Code section 1129(e) is not applicable as none of these Chapter 11
Cases are “small business cases.”
B. Substantive Consolidation.
137. Significantly, Holders of Claims and Interests in Classes 4, 5, 6 and 9, overwhelmingly voted for acceptance of the Plan. Substantive consolidation is a construct of federal common law and it emanates from equity. In re Owens Corning, 419 F.3d 195, 205 (3d
Cir. 2005). The doctrine “treats separate legal entities as if they were merged into a single survivor left with all the cumulative assets and liabilities (save for inter-entity liabilities, which
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are erased).” Id. (quoting Genesis Health Ventures, Inc. v. Stapleton (In re Genesis Health
Ventures, Inc.), 402 F.3d 416, 423 (3d Cir. 2005)). As a result, consolidation restructures and revalues rights of creditors, which may result in a significantly less recovery for certain creditors.
Id. When triggered, the doctrine brings all of the assets of a group of entities into a single survivor and merges all of the liabilities as well. Id. at 206. The end result “is that claims of creditors against separate debtors morph to claims against the consolidated survivor.” Id.
(quoting In re Genesis Health Ventures, Inc., 402 F.3d at 423).
138. In the Third Circuit, absent consent, “what must be proven [] concerning the entities for whom substantive consolidation is sought is that (i) prepetition they disregarded separateness so significantly their creditors relied on the breakdown of entity borders and treated them as one legal entity, or (ii) postpetition their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors.” Id. at 211. The proponent of substantive consolidation bears the burden of showing one or the other rationale. Id. at 212. The Debtors can meet their burden with respect to each rationale.
139. With respect to the first rationale, “a prima face case for it typically exists when, based on the parties’ prepetition dealings, a proponent proves corporate disregard creating contractual expectations of creditors that they were dealing with debtors as one indistinguishable entity. Proponents who are creditors must also show that, in their prepetition course of dealing, they actually and reasonably relied on debtors’ supposed unity.” Id. (internal citations omitted).
A creditor opponent of substantive consolidation “can nonetheless defeat a prima facie showing under the first rationale if they can prove they are adversely affected and actually relied on the debtors’ separate existence.” Id.
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140. With respect to the second rationale, the commingling of assets and liabilities
“justifies consolidation only when separately accounting for the assets and liabilities of the distinct entities will reduce the recovery of every creditor – that is, when every creditor will benefit from the consolidation.” Id. at 214. The doctrine aims to benefit creditors via cost savings that make assets available rather than shift assets to benefit one group of creditors at the expense of another. Id. Importantly, “[m]ere benefit to some creditors, or administrative benefit to the
Court, falls short.” Id. Where the factual record “reflects that no more precise remedy is available” and there is no evidence that “the Debtors are employing substantive consolidation to disadvantage a group of creditors… or alter their rights” a proposed partial substantive consolidation is appropriate. In re Abeinsa Holding, Inc., 562 B.R. 265, 281 (Bankr. D. Del.
2016). Courts are keen to order substantive consolidation where every class of creditors entitled to vote on the plan, voted to accept the plan and accepted the partial substantive consolidation.
Id. at 281-82.
141. Here, the Founders, who are insiders and affiliates of the Debtors, are the only constituents that objected to substantive consolidation. However, since the Court entered the
Disclosure Statement Order, no formal objection based on substantive consolidation has been filed and the Debtors believe that this issue has been resolved through informal discovery with the Founders. In any event, even if the Founders maintained their objection to the Plan based on substantive consolidation, they are not only insiders but potential targets of future litigation and, more importantly, at least partly responsible for the Debtors’ inability to unscramble their commingled financial data and, thus, could not seriously contend that they relied on the Debtors’ separateness in their decisions – if any – to extend creditor to the Debtors.
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142. Of the ballots cast by Holders of Claims in Class 4, Holder cast 120 ballots
(97.56%) to accept and 3 ballots (2.44%) to reject the Plan. Holders of Claims in Class 5 cast 5 ballots (83.33%) to accept and 1 ballot (16.67%) to reject the Plan. Thus, substantially all creditors consent to the substantive consolidation described in the Plan.
(i) Prepetition Disregard of Separateness
143. Again, as set forth in detail within the Prepetition Secured Loan Documents, the motion to approve the use of cash collateral, and the various orders approving the use of cash collateral, the Prepetition Secured Lender has a lien on substantially all of the Debtors’ Assets.
The Prepetition Secured Lender also has substantial deficiency claims, subrogation claims, and other claims against the Debtors. The Debtors owe the Prepetition Secured Lender approximately
$300 Million. Before the Petition Date, the Prepetition Secured Lender received combined financial reports from the Debtors and calculated covenant compliance based on the assets and liabilities of all the Debtor entities. The Plan proponents demonstrate corporate disregard of separateness, which created contractual expectations of creditors they were dealing with the
Debtors as a single entity. Furthermore, the Prepetition Secured Lender actually and reasonably relied on the collective identity of the Debtors when extending credit.
144. Financial and mathematical reality dictate that regardless of whether one liquidating plan is confirmed or whether the Chapter 11 Cases convert to chapter 7 liquidations, the distribution waterfall begins and ends with the tranche of debt owed to the Prepetition
Secured Lender, unless the Prepetition Secured Lender agrees to a less favorable outcome, which it has in the Plan. None of the Debtors’ creditors face distribution diminution as a result of the substantive consolidation because they must now look to share in the recovery against the assets of the consolidated survivor, rather than the assets of a solvent subsidiary with whom they transacted business. Cf. In re Owens Corning, 419 F.3d at 206. The Global Settlement and Plan
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contain the only mechanism available to provide any measure of recovery to general unsecured creditors.
(ii) Postpetition Commingling
145. Here every creditor, except the Prepetition Secured Lender, benefits from the consolidation of the Debtors’ estates. Tens of millions of dollars were generated as a result of the
Debtors’ liquidation efforts after the consolidation and commingling of the Debtors’ assets and proceeds derived therefrom. Although the affiliated Debtors are separate legal entities, they are being liquidated as a single entity and are now fully intertwined (with the exception of Lucky’s
Farmers Market, LP and Lucky’s Market 2, LP). The Debtors have not allocated professional fees and the cost of administering the Chapter 11 Cases amongst all of the Debtors; these costs have been booked on a consolidated basis.
146. It is not possible to timely and cost-effectively recreate the records for a person to review. It would require a significant amount of time and effort to unscramble the egg and the
Debtors would have to incur substantial fees, both to vendors and professionals, to try to recreate the financial records, to review those records, and then try to distinguish between proceeds by the Debtor. Any attempt to disentangle the Debtors’ assets would be a fruitless, expensive and risky project that by definition would cost more than any potential recovery that could be gained by the process. In addition to the expense related to the project itself, the Debtors would incur additional operating and professional fees, incur additional expense in connection with the re- solicitation of a plan, and believe any plan could be impossible as the Debtors have not received a commitment from the Prepetition Secured Lender to fund this process. All the while disentanglement would likely prove impossible. Similarly, as the Debtors continue their efforts to collect outstanding accounts receivable, such receivables will also require untangling.
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147. Philosophically, substantive consolidation is meant to “be used defensively to remedy identifiable harms, not offensively to achieve advantage over one group in the plan negotiation process.” Id. at 215. At its core it is an equitable remedy and its application “must lead to an equitable result.” Id at 216. Here, there is no evidence the Debtors are using substantive consolidation disadvantage any group of creditors. The Debtors’ Assets are fully encumbered by the Prepetition Secured Lender’s liens. Any effort to recreate records, so they may be unscrambled or disentangled would also be an exercise in futility. Creditors would receive less under chapter 7 liquidations or under separate plans than they stand to receive under the Plan, because consistent with the Global Settlement, the Plan provides for a recovery on account of General Unsecured Claims that Holders of such Claims would not otherwise receive.
C. Objections
148. The Debtors did not receive any formal objections.9
D. A Waiver of Any Stay of Confirmation is Appropriate
149. The Debtors request that the Court cause the Confirmation Order to become effective immediately upon its entry, notwithstanding the 14-day stay imposed by Bankruptcy
Rule 3020. The purpose of Bankruptcy Rule 3020(e) is to allow parties in interest with time to appeal a confirmation order before such appeal is moot. FED. R. BANKR. P. 3020(e), Adv. Comm.
Notes, 1999 Amend.
150. Here, such waiver is appropriate in these circumstances. No party has substantively objected to confirmation or to the waiver of the stay. Moreover, allowing a waiver of any stay will allow the Plan to go effective on December 31, 2020, which is a substantial benefit to the Debtors’ estates. Immediate consummation of the Plan will also not prejudice any
9 The Debtors reserve all rights to amend and supplement this document in response to any pleadings, objections or responses received subsequent to this filing.
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party in interest. All creditors and parties-in-interest will benefit from the immediate transfer of the Assets to the Liquidating Debtor, which will lead to more expeditious recoveries and distributions to creditors. Therefore, the Debtors submit that good cause exists to waiver the requirements of Bankruptcy Rule 3020(e).
CONCLUSION
For all of the foregoing reasons, the Debtors respectfully submit that the Court should confirm the Plan because it fully satisfies all applicable requirements under the Bankruptcy
Code.
Dated: December 22, 2020 Respectfully submitted, Wilmington, Delaware POLSINELLI PC
/s/ Christopher A. Ward Christopher A. Ward (Del. Bar No. 3877) 222 Delaware Avenue, Suite 1101 Wilmington, Delaware 19801 Telephone: (302) 252-0920 Facsimile: (302) 252-0921 [email protected]
-and-
Liz Boydston (Admitted Pro Hac Vice) 2950 N. Harwood, Suite 2100 Dallas, Texas 75201 Telephone: (214) 661-5557 [email protected]
Counsel to the Debtors and Debtors in Possession
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