University of Tennessee, Knoxville TRACE: Tennessee Research and Creative Exchange
Chapter 11 Bankruptcy Case Studies College of Law Student Work
Spring 2010
Tragedy on the Descent: The Ascent and Fall of Eddie Bauer
Austin Fleming
Bryan C. Hathorn
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Recommended Citation Fleming, Austin and Hathorn, Bryan C., "Tragedy on the Descent: The Ascent and Fall of Eddie Bauer" (2010). Chapter 11 Bankruptcy Case Studies. https://trace.tennessee.edu/utk_studlawbankruptcy/1
This Article is brought to you for free and open access by the College of Law Student Work at TRACE: Tennessee Research and Creative Exchange. It has been accepted for inclusion in Chapter 11 Bankruptcy Case Studies by an authorized administrator of TRACE: Tennessee Research and Creative Exchange. For more information, please contact [email protected]. Tragedy on the Descent: The Ascent and Fall of Eddie Bauer
Austin Fleming1 and Bryan C. Hathorn2
1 B.A. University of Memphis; J.D. University of Tennessee College of Law (expected).
2 B.A. Haverford College; Ph.D. California Institute of Technology; J.D. University of Tennessee College of Law (expected).
1 Contents I. Introduction ...... 4 II. Corporate History ...... 5 III. The Pre-Petition Economic Storm ...... 14 IV. The Bankruptcy Filing ...... 19 a. The Court ...... 19 b. Bankruptcy Players ...... 19 i. Judge ...... 20 ii. Official Committee of Unsecured Creditors ...... 21 iii. Debtor’s Attorneys ...... 21 c. First Day Orders ...... 22 i. Joint Administration Motion ...... 24 ii. Cross-Border Protocol Motion ...... 25 iii. Cash Management Motion ...... 26 iv. Critical Vendors Motion ...... 28 v. Wages and Benefits Motion ...... 30 vi. Taxes Motion ...... 32 vii. Ordinary Course Professionals Motion ...... 33 viii. KCC Motion...... 34 ix. Utilities Motion ...... 34 x. Customer Programs Motion ...... 36 xi. DIP Motion and Adequate Protection for Secured Creditors ...... 38 xii. Bid Procedures/Sales Motion ...... 53 V. Executory Contracts ...... 80 a. Overview ...... 80 b. Treatment of Executory Contracts ...... 81 i. Assumption ...... 82 ii. Assignment ...... 83 c. Specific Objections Raised by Creditors Relevant to Rejection ...... 85 d. Objections Raised by Creditors to Assumption and Assignment ...... 87 i. Specific Unexpired Leases ...... 94
2 ii. Non Lease Executory Contracts...... 95 VI. Administration of the Estate ...... 99 a. Administrative expenses ...... 99 i. Peter J. Solomon Company ...... 100 ii. Pension Benefit Guaranty Corporation ...... 103 iii. Incentive Plans ...... 106 VII. Claims ...... 109 a. Claim Bar Date ...... 109 b. Objections to Claims ...... 110 i. Nonsubstantive Objections ...... 110 ii. Substantive Objections...... 112 VIII. Liquidation Plan ...... 113 a. Plan Confirmation, in General ...... 113 b. Extensions of the Exclusive Period ...... 115 c. The Liquidation Plan...... 116 i. Classification of Claims ...... 117 iii. Order Approving Voting on the Plan ...... 121 iv. Objections ...... 121 v. Confirmation ...... 122 vi. Order Approving the Plan ...... 123 IX. Conclusion ...... 123
3 I. Introduction
For many entrepreneurs, bankruptcy is the unfortunate end of what began as a business dream. The birth of a business is an exciting time for the entrepreneur, but its death is often a painful process—both for the company's owners and its creditors. Those businesses that choose not to reorganize close their doors forever. However, reorganization can often salvage a business enterprise that is a good one but is impaired by debt, crisis, or simple bad luck.3
The goals of the reorganization process are clear—the idea is to produce a viable business enterprise but one not necessarily owned by the original owners. In the process of preserving the business as a going concern, the creditors are typically paid off—at least in part—frequently converting debts owed to the creditors into an ownership stake in the company or its successor.
In principle, the idea behind the restructuring is to treat similarly situated unsecured creditors equally. Treating all similarly situation creditors equally prevents one creditor acting as a holdout to get a better deal or rushing to the courthouse to get liens on any unsecured assets. The bankruptcy court acts as the strong arm to force creditors to act in an organized fashion toward a goal which is supposedly in their best interest because it maximizes the value of the debtor’s estate.4
3 Frequently, these circumstances include events such as lawsuits or overexpansion of the enterprise beyond what the market can support. Often a recession will hit a business in the midst of a major expansion. Other causes could be bad business decisions, or taking on an unsupportable level of debt. In the principle case investigated here, the bankruptcy resulted from unsupportable debt, overexpansion, a loss of business focus, and a global recession. See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) (June 17, 2009).
4 The theory behind this is that frequently the business is more valuable as a going concern than it would be if it was sold off as individual assets.
4 The Eddie Bauer5 case represents a case of a failed reorganization, where a company,
Spiegel Catalog, filed for protection under chapter 11 of the Bankruptcy Code and underwent reorganization.6 Spiegel sold off some businesses for cash, and transferred the remaining businesses, which included Eddie Bauer, to a holding company.7 The new holding company was saddled with an unsustainable level of debt given a change in economic circumstances, and ultimately it failed.8 Eddie Bauer had its roots in the world of mountaineering, but in Spiegel's reorganization, the management failed to take account the most fundamental rule of the mountain: the most dangerous part of the climb is the descent.9
Eddie Bauer’s bankruptcy is an example of where the bankruptcy court departed from the principle of treating the creditors equally in order to salvage the going concern. While the business was ultimately preserved in a Bankruptcy Code Section 363 sale,10 many of the creditors were treated unequally, through “roll up” debtor in possession financing and administrative priority given to "critical vendor" creditors. The other creditors, some of them secured creditors, were left behind with few assets to fund payment of their claims.
II. Corporate History
5 Eddie Bauer, used herein, sometimes refers to the person, and sometimes to the business founded by Eddie Bauer. At different stages in its history, the business was a sole proprietorship, a partnership, a corporation, a subsidiary of a conglomerate, and ultimately a holding company.
6 Tracie Rozhan, Big Credit Default Rate Forces Spiegel Bankruptcy, N.Y. TIMES, Mar. 18, 2003.
7 See In re Spiegel, Inc., 2005 WL 1278094, *14 (Bankr. S.D.N.Y 2005) (not reported).
8 Greg Lamm, Eddie Bauer Declares Bankruptcy, PORTLAND BUS. J., June, 17, 2009.
9 See, e.g., JON KRAKAUER, Into Thin Air: A Personal Account of the Mount Everest Disaster (1996).
10 11 U.S.C. § 363(b). Hereinafter, we will refer to this as a “Section 363 sale.”
5 The Eddie Bauer Company traces its history back to 1920, when Eddie Bauer (the person) opened a shop to sell sporting goods in Seattle, Washington.11 When it opened, the store sold sporting goods such as hunting goods, fishing tackle, and tennis rackets.12 It was not until fifteen years after the store opened, when Eddie Bauer nearly succumbed to hypothermia on a winter fishing trip in Washington, that he developed an interest in improved outerwear for sportsmen.13 In 1940, he patented the design for the first quilted down jacket.14 The quilted down jacket, which Eddie Bauer marketed as the “Skyliner,” had all of the thermal benefits of an ordinary down jacket, but the quilting reduced its bulkiness.15 The Skyliner jacket was a major innovation over the wool outerwear favored by outdoorsmen at the time,16 and was soon adopted by sportsmen everywhere.17
In addition to the Skyliner, Eddie Bauer developed and patented over 20 major innovations in sporting gear between 1934 and 1937.18 However, during World War II, the
11 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 3 (June 17, 2009). 12 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 3 (June 17, 2009). 13 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 3 (June 17, 2009). 14 See United States Design Patent 119.112. 15 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 3 (June 17, 2009).
16 See James R. Warren, Bauer, Eddie (1899-1986), HISTORYLINK, Sept. 16, 1999, http://www.historylink.org/ index.cfm?DisplayPage=output.cfm&File_Id=1671. 17 For instance, Jim Whittaker wore a Skyliner down jacket on his ascent of Mount Everest in 1963. James R. Warren, Bauer, Eddie (1899-1986), HISTORYLINK, Sept. 16, 1999, http://www.historylink.org/index.cfm? DisplayPage=output.cfm&File_Id=1671. See also In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 4 (June 17, 2009).
18 James R. Warren, Bauer, Eddie (1899-1986), HISTORYLINK, Sept. 16, 1999, http://www.historylink.org/ index.cfm?DisplayPage=output.cfm&File_Id=1671. For example in 1934, he filed a
6 Eddie Bauer Company shifted its focus to the war effort and produced such gear as “Eddie Bauer
B-9 Flight Parkas” and down sleeping bags.19 By the end of the war, Eddie Bauer had sold over
250,000 sleeping bags and 50,000 flight parkas to the army.20 In addition to the profits from the volume business with the government, Eddie Bauer was the sole supplier permitted by the Army to label its products with its brand.21 Because of Eddie Bauer’s successful marketing strategy the brand became well known with both servicemen and the public at large.22 Soon after the war, in
1945, Eddie Bauer started a mail order catalog business.23 Among the names on the original mailing list were 14,000 former soldiers who had used Eddie Bauer products during the war.24
The mail order catalog was successful, and by 1953 William Niemi joined Eddie Bauer as a 50 percent owner in the business.25 The business closed its retail operations, with the
patent for the Bauer Shuttlecock, United States Patent 2025325, which helped popularize the sport of badminton in the United States. The Bauer Shuttlecock is still the standard used in the sport.
19 James R. Warren, Bauer, Eddie (1899-1986), HISTORYLINK, Sept. 16, 1999, http://www.historylink.org/ index.cfm?DisplayPage=output.cfm&File_Id=1671. 20 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 4 (June 17, 2009).
21 James R. Warren, Bauer, Eddie (1899-1986), HISTORYLINK, Sept. 16, 1999, http://www.historylink.org/ index.cfm?DisplayPage=output.cfm&File_Id=1671. 22 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 4 (June 17, 2009). 23 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). 24 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). 25 At this point in its history, the business was actually held by a corporation. Eddie Bauer contributed his stock in the corporation to a partnership with Niemi. Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http:// www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010).
7 exception of showroom sales at its factory in Seattle, to focus on catalog sales.26 The catalog sales in 1953 reached $50,000.27
While expanding its catalog sales, Eddie Bauer continued to develop name recognition, particularly in the field of mountaineering. Eddie Bauer developed a reputation in the mountaineering community for producing reliable, rugged outdoor wear and for sponsoring numerous mountaineering exhibitions. In a period where mountaineering exploits reached great prominence in the popular press28—but before mountaineering became a commercial enterprise29—Eddie Bauer equipped dozens of first ascents and important climbs,30 including an
26 James R. Warren, Bauer, Eddie (1899-1986), HISTORYLINK, Sept. 16, 1999, http://www.historylink.org/ index.cfm?DisplayPage=output.cfm&File_Id=1671. 27 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). 28 Of the popularity of mountaineering stories, Walt Unsworth has said, “Had Mount Everest been climbed at the first attempt, the achievement would have been hailed as notable and then quickly forgotten. It was, ironically, repeated failures which gave the mountain real stature.” Michael Klesius, Everest: 50 Years and Counting, NAT’L GEOGRAPHIC, May 2003. Many of these failures, and some of the successes, have been widely reported in the media. See, e.g., JON KRAKAUER, Into Thin Air: A Personal Account of the Mount Everest Disaster (1996). 29 Edmund Hillary and Tenzing Norgay climbed Mount Everest in 1953. Michael Klesius, Everest: 50 Years and Counting, NAT’L GEOGRAPHIC, May 2003. Mountaineering is now more of a commercial enterprise than it was in the early days. Every year, dozens of expeditions attempt to summit Mount Everest, the world’s highest peak. The members of these expeditions pay tens of thousands of dollars for the privilege of having a team of sherpas and guides take them to the top. One of the premier tour companies, Alpine Ascents International, charges $65,000 for a guided expedition to the top of the world. http://www.alpineascents.com. The adventurers are often ill prepared and inexperienced, sometimes with deadly consequences. For instance, in 1996, a disaster on the descent from the summit of Everest led to the deaths of 15 guides, sherpas, and mountaineering tourists. See, e.g., JON KRAKAUER, Into Thin Air: A Personal Account of the Mount Everest Disaster (1996). 30 Eddie Bauer: Our First Ascents, http://www.eddiebauer.com/FIRST-ASCENT/Expeditions/Heritage/index.cat (last visited Apr. 19, 2010). In the world of mountaineering, a “first ascent” is considered one of the greatest accomplishments. See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at n.3 (June 17, 2009). Typically, it includes summiting a new peak that has never been ascended before, or pioneering a new route to a summit on a mountain that has previously been climbed. Other notable first ascents are those where the climber is the first from a particular country to accomplish the feat, the oldest, youngest, or first woman to make the summit. On the highest peaks, such as Mount Everest, climbers are frequently noted as the first to climb without supplemental oxygen.
8 attempt on K2,31 Gasherbrum I,32 Masherbrum,33 Everest,34 Kennedy,35 Vinson Massif,36
Daulagiri,37 Lenin Peak,38 Nanda Devi,39 Great Trango Tower,40 and Makalu.41
31 The 1953 K2 expedition never reached the summit, but the expedition is legendary in the annals of mountaineering for the drama and heroism of the climbers. The team was driven back by a storm which trapped them for 10 days at nearly 26,000 feet. During the descent, nearly the entire team was saved from a fall by Pete Schoening. The team leader Art Gilkey died during the descent—reportedly sacrificing himself for the good of the team. His body was not located until 1993—when he was found still wearing his Eddie Bauer parka. Wikipedia, K2, http://en.wikipedia.org/wiki/K2 (last visited Apr. 19, 2010). 32 Gasherbrum I is the world’s eleventh highest peak. The first ascent was accomplished in 1958 by a team including Pete Schoening, the hero of the failed 1953 K2 expedition. Wikipedia, Gasherbrum I, http:// en.wikipedia.org/wiki/Gasherbrum_I (last visited Apr. 19, 2010). 33 First Ascent in 1958 by George Irwin Bell and Willi Unsold. Although not as high as some of the other peaks in the Karokoram mountains of Pakistan, such as K2, Masherbraum, also known as K1, has only been successfully climbed four times. Wikipedia, Masherbraum, http://en.wikipedia.org/wiki/Masherbrum (last visited Apr. 19, 2010). 34 The 1963 expedition featured the first ascent of an American climber, Jim Whittaker, by the south col route followed by Edmund Hillary and Tenzing Norgay in their first ascent in 1953. However, other members of the team pioneered a new route up the west ridge. Jim Whittaker actually reached the summit without supplemental oxygen because he ran out on the way up, but used it for much of the climb. Wikipedia, Jim Whittaker, http:// en.wikipedia.org/wiki/Jim_Whittaker (last visited Apr. 19, 2010). The first climb using no supplemental oxygen was accomplished by Reinhold Messner in 1978. Michael Klesius, Everest: 50 Years and Counting, NAT’L GEOGRAPHIC, May 2003. 35 Mount Kennedy was the tallest mountain in North America that had not yet been climbed at the time of the assassination of John F. Kennedy, and the mountain was named in his honor. In 1965, the first ascent included his brother Robert as part of the climbing party. Robert left a copy of his brother’s inaugural address on the top of the mountain, along with a John F. Kennedy medallion. Wikipedia, Mount Kennedy, http://en.wikipedia.org/wiki/ Mount_Kennedy (last visited Apr. 19, 2010). 36 Vinson Massif is the highest peak in Antarctica. While the route pioneered in 1966 is not considered technically difficult, because of adverse environmental conditions in Antarctica, Vinson Massif is the least climbed of the “seven summits”—the highest peaks on each of the continents. Wikipedia, Vinson Massif, http://en.wikipedia.org/ wiki/Vinson_Massif (last visited Apr. 19, 2010). There is presently only one commercial company, Alpine Ascents International, which currently guides summit attempts. http://www.alpineascents.com/vinson-price-date.asp. 37 Eddie Bauer sponsored the first American ascent in 1973. Dhaulagiri remains one of the world’s most dangerous mountains. Nearly 40% of the climbers who have attempted the summit have died. Wikipedia, Dhaulagiri, http:// en.wikipedia.org/wiki/Dhaulagiri (last visited Apr. 19, 2010). 38 Lenin peak is the second highest peak in Kyrgystan. There had been numerous ascents of the mountain dating to 1928, but the first American ascent was not accomplished until 1974 because of political differences between the Soviet Union and the United States. The first American Ascent was accomplished by a team led by Pete Schoening, the hero of the failed 1953 K2 expedition. Wikipedia, Lenin peak, http://en.wikipedia.org/wiki/ Lenin_Peak (last visited Apr. 19, 2010). 39 Nanda Devi is the tallest mountain entirely within India. Nanda Devi was first climbed in 1936. After a failed attempt in the 1960s by the CIA to place a plutonium powered listening device on the mountain to observe the
9 In 1960, perhaps recognizing the need for younger blood at the company Eddie Bauer and William Niemi took on their sons, Eddie C. Bauer and William Niemi, Jr., as partners.42
However, in 1968, with the elder Eddie Bauer suffering from a back injury dating back to the
1950s, the Bauers exited the business and sold their stake in the company to the Niemis for
$1,500,000.43 For the first time in its history, Eddie Bauer was not at the helm of his namesake company.
With the Niemis in control, the company shifted its focus back to retailing.44 In 1968, the first store outside Seattle opened in San Francisco, California.45 While expanding its retail base,
Eddie Bauer expanded its product line as well, shifting away from Eddie Bauer’s traditional
Chinese, the mountain was closed to expeditions until the 1970s. The 1976 climb sponsored by Eddie Bauer pioneered a new route up the northwest buttress. Among the summit team was Nanda Devi Unsold, whose father Willi was one of the team leaders and had named her after the mountain. She died during the descent. Wikipedia, Nanda Devi, http://en.wikipedia.org/wiki/Nanda_Devi (last visited Apr. 19, 2010). 40 The Great Trango Tower is not as high as a number of the other mountains on this list, but it is distinguished because it has some of the largest rock faces in the world. The climbing is at high altitude and highly technical. Eddie Bauer sponsored the first ascent in 1977. Wikipedia, Trango Towers, http://en.wikipedia.org/wiki/ Great_Trango_Tower (last visited Apr. 19, 2010). 41 Malaku is the world’s fifth highest peak. While Malaku had been previously climbed on at least three occasions, the 1980 ascent of a team led by John Roskelley is notable because it was done with no bottled oxygen or Sherpa support. Wikipedia, Makalu, http://en.wikipedia.org/wiki/Makalu (last visited Apr. 19, 2010). 42 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). 43 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010).
44 James R. Warren, Bauer, Eddie (1899-1986), HISTORYLINK, Sept. 16, 1999, http://www.historylink.org/ index.cfm?DisplayPage=output.cfm&File_Id=1671. 45 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010).
10 outdoor expedition wear toward casual wear and women’s apparel and accessories.46 In 1971, in an era of corporate conglomeration, the Niemis sold the business to General Mills.47
General Mills used its corporate resources to massively expand of the company.
Seventeen years later, the company had 81 stores and $250 million in annual sales.48 In a further departure from its outdoor expedition roots, the company abandoned its “Expedition Outfitter” tagline and introduced the “All Week Long” tagline, selling everyday clothes that could be worn for the whole week, not just clothes for the weekend adventurer.49 In an attempt to broaden its appeal to a wider audience, Eddie Bauer licensed the use of its name to Ford for the production of a series of Eddie Bauer Limited Edition vehicles in 1983.50
In 1988, General Mills sold Eddie Bauer to Spiegel, which was a major player in the mail order catalog marketing business.51 Spiegel also began a program of aggressive expansion, and in the following decade, the number of Eddie Bauer retail locations grew to over 600, with stores
46 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). 47 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). 48 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). 49 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). 50 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). Royalties from products featuring the Eddie Bauer name continue to be a major source of revenue for the company. In 2008, royalty revenue was $12.8 million. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 11 (June 17, 2009). 51 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 11 (June 17, 2009).
11 in Canada, Japan, and Germany.52 In addition, in a further divergence from its “expedition outfitter” roots, the company expanded its products to include the “Eddie Bauer Home
Collection,” a line of home furnishings, including furniture, tableware, decor items, linens, and rugs.53
During the late 1990s Eddie Bauer added of a third distribution stream to its marketing portfolio. In addition to the retail store and catalog business, Eddie Bauer launched a website to take advantage of the growth of the internet.54 Even though Eddie Bauer had largely abandoned its expedition heritage, the company continued to sponsor environmental themed events, including planting 2.5 million trees with donations from customers.55 Additional ventures included an endorsement as the official retailer of Safeco Field, the launch of the eddiebauerkids.com website, and opening a store in Honolulu, Hawaii in 2000—the last of the
50 states to have an Eddie Bauer retail location.56
The rapid growth that characterized the Spiegel Era of Eddie Bauer’s history, however, proved unsustainable. In 2003, Spiegel filed for protection under chapter 11 of the Bankruptcy
52 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 9-10 (June 17, 2009). 53 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). 54 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). In 2008, Eddie Bauer’s direct merchandising sales made up 28.2% of its overall sales. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 6 (June 17, 2009). 55 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010). One of us (BCH) has been a long time customer of Eddie Bauer stores (predating the Spiegel era) and participated in the “Add a dollar, plant a tree” program. 56 Jeffrey L. Covell, Company History: Eddie Bauer, Inc., http://www.answers.com/topic/eddie-bauer-inc (last visited Apr. 19, 2010).
12 Code.57 Its bankruptcy was caused, in part, by poor management of its credit card business.
Spiegel owned a private label credit card business, and the default rate on its credit cards climbed to nearly twenty percent.58 Since over forty percent of purchases were made on these private label cards, Spiegel was not being paid for nearly ten percent of the sales.59 In addition to its credit card woes, annual sales at Spiegel had fallen from more than a billion dollars to only $552 million.60
In the ensuing bankruptcy, the Spiegel Catalog business was sold in a Section 363 sale61 to Golden Gate Capital Management Partners,62 and the Eddie Bauer unit emerged from the bankruptcy as an independent holding company.63 The stock of the holding company, EBHI,
Inc.,64 was distributed to the creditors of Spiegel.65 The structure of the reorganization had a devastating effect for Eddie Bauer—it remained liable for much of Spiegel’s pension and
57 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 11 (June 17, 2009).
58 Tracie Rozhan, Big Credit Default Rate Forces Spiegel Bankruptcy, N.Y. TIMES, Mar. 18, 2003.
59 Tracie Rozhan, Big Credit Default Rate Forces Spiegel Bankruptcy, N.Y. TIMES, Mar. 18, 2003.
60 Tracie Rozhan, Big Credit Default Rate Forces Spiegel Bankruptcy, N.Y. TIMES, Mar. 18, 2003. 61 The successful 363 sale was negotiated by Gould & Ratner. See Gould & Ratner, Creditors’ Rights and Bankruptcy, http://www.gouldratner.com/areas-5.html (last visited Apr. 19, 2010). 62 Golden Gate Capital Management is a private equity firm which specializes in corporate acquisitions, including bankruptcy acquisitions. Golden Gate Capital, Overview, http://goldengatecap.com/about.shtml. On September 19, 2008, after four years of management, Golden Gate completed its turnaround of Spiegel by selling its interest in the company for an undisclosed sum. See Dianna Dilworth, Catalog Holding Sells Spiegel Brands, DMNNEWS (Sept.19, 2008), available at http://www.dmnews.com/catalog-holdings-sells-spiegel-brands/article/118217/. 63 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 12-13 (June 17, 2009). 64 For convenience, we will refer to EBHI, Inc., the company at the heart of the bankruptcy case in this paper, as “Eddie Bauer.” 65 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 12-13 (June 17, 2009).
13 retirement benefits.66 In addition, it took on $300 million in new post bankruptcy debt.67 This left Eddie Bauer with an unsustainable debt burden.68
After the Spiegel restructuring, Eddie Bauer attempted to return to its roots of “expedition outfitting.” In 2008, Eddie Bauer collaborated with a group of well-known mountain climbers, the “First Ascent Contractors”69 to launch a new line of mountaineering outerwear.70 The First
Ascent partnership was formed in an effort to refocus on “an area of strength that originally established the brand’s acclaim.”71 The brand was said to represent the Eddie Bauer vision going forward, a return to its roots as a company catering to the outdoor adventurer.72
III. The Pre-Petition Economic Storm
66 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 12-13 (June 17, 2009). 67 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 12-13 (June 17, 2009). 68 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 18-19 (June 17, 2009). 69 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 4 (June 17, 2009). The First Ascent Contractors include Peter Whittaker, Ed Viesturs, and Dave Hahn. Ed Viesturs has summited Everest seven times, and is one of only 18 people to have summited all 14 peaks over 8,000 meters (the “Eight Thousanders”). Wikipedia, Ed Viesturs, http:// en.wikipedia.org/wiki/Ed_Viesturs (last visited Apr. 19, 2010). Peter Whittaker is the nephew of Jim Whittaker, the first American to summit Everest on an expedition sponsored by Eddie Bauer. Through the First Ascent Team, Eddie Bauer sponsored a climb of Cotopaxi in 2008, Eddie Bauer, Expedition Cotopaxi, http:// www.eddiebauer.com/FIRST-ASCENT/Expeditions/Cotopaxi/index.cat (last visited Apr. 19, 2010). In 2009, Eddie Bauer sponsored a summit of Aconcagua. Eddie Bauer, Expedition Aconcagua, http://www.eddiebauer.com/FIRST- ASCENT/Expeditions/Aconcagua/index.cat (last visited Apr. 19, 2010). 70 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 5 (June 17, 2009). 71 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 5 (June 17, 2009). In a nod to its expedition roots, one of the First Ascent Contractors is Peter Whittaker, whose uncle Jim Whittaker was the first American to summit Mount Everest on an expedition sponsored by Eddie Bauer. 72 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 21-22 (June 17, 2009).
14 As noted above, the Spiegel bankruptcy had dramatic effects on Eddie Bauer. As part of the Spiegel bankruptcy plan, a new company, Eddie Bauer Holdings, Inc.,73 was formed to take over assets of the former corporate parent.74 Originally, the Spiegel Corporation consisted of three merchant divisions, Newport News, Spiegel Catalog, and Eddie Bauer.75 In the bankruptcy, Golden Gate Capital Management Partners purchased Spiegel Catalog and Newport
News and the parent company’s stake in Eddie Bauer was transferred to a new holding company.76 The creditors received stock in the new company in exchange for their claims.77 As part of the exit financing, Eddie Bauer took on $300 million in debt to pay off the obligations that remained after the sale of the Spiegel Catalog and Newport News.78 In addition to the debt,
Eddie Bauer assumed Spiegel’s defined benefit healthcare plan and liabilities, life insurance obligations, and pension plan obligations.79 Eddie Bauer also took on the expenses of support facilities of the former parent, including a 50,000 square foot information technology support center in Illinois and a 2.2 million square foot distribution center in Ohio—neither of which was
73 Eddie Bauer Holdings is the company that filed for bankruptcy in the case studied herein. For convenience we will simply refer to it as “Eddie Bauer.” As will be seen herein, the Eddie Bauer name and other business assets are sold in a Section 363 sale, but for convenience we will continue to refer to the debtor as “Eddie Bauer” even after the name is sold. 74 See In re Spiegel, Inc., 2005 WL 1278094, *14 (Bankr. S.D.N.Y 2005) (not reported). See also Greg Lamm, This Bauer Bankruptcy Traces Back to Spiegel Events, PUGET SOUND BUS. J., June 17, 2009. 75 See In re Spiegel, Inc., 2005 WL 1278094, *1 (Bankr. S.D.N.Y 2005) (not reported).
76 Greg Lamm, This Bauer Bankruptcy Traces Back to Spiegel Events, PUGET SOUND BUS. J., June 17, 2009.
77 Greg Lamm, This Bauer Bankruptcy Traces Back to Spiegel Events, PUGET SOUND BUS. J., June 17, 2009. 78 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 17 (June 17, 2009). 79 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 17 (June 17, 2009).
15 useful to the operations of the new company.80 Saddled with these legacy costs, Eddie Bauer faced the challenge of carrying a high debt burden on the back of a downsized company.81
Two years after emerging from the Spiegel bankruptcy, Eddie Bauer was still focused on paying down the Spiegel legacy costs and diverted most of its revenue toward this goal.82
Unfortunately, paying off the Spiegel operating costs and preserving the existing Eddie Bauer business prevented the company from planning for growth.83 Beginning with the acquisition by
Spiegel in 1988, the Eddie Bauer brand had suffered by diluting its traditional strength as an outdoor outfitter and moving into women’s apparel.84 As a result, Eddie Bauer’s store sales had fallen from $440 per square foot to $230 per square foot.85 At the same time, many Eddie Bauer retail locations were in unprofitable long term leases.
Eddie Bauer hired new management to devise a plan to restore Eddie Bauer’s appeal and chart a path to growth.86 However, the combination of high post-Spiegel debt and a growing
80 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 17 (June 17, 2009).
81 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 17 (June 17, 2009).
82 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 17 (June 17, 2009).
83 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 17 (June 17, 2009).
84 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 19 (June 17, 2009).
85 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 19 (June 17, 2009).
86 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 17 (June 17, 2009).
16 worldwide recession became a steep slope that Eddie Bauer could not negotiate.87 During the recession in 2008, consumers shifted discretionary spending away from the retail apparel sector and, and in the latter half of 2008, the growth in the retail apparel sector was negative.88 The sales slump combined with annual interest payments of over $21 million on the accrued debt, and earnings before interest, taxes, depreciation and amortization of only $55 million,89 made the choice to reorganize all but inevitable.
In attempt to preserve the business, in December of 2008, the company retained Peter J.
Solomon Company to serve as its investment banker in a possible sale of the business.90 In the two months prior to June, 2009, the investment banker attempted to solicit bids for an asset sale of the business.91 In total, Peter J. Solomon identified fifty five possible purchasers, and twenty of them agreed to confidentiality agreements to examine Eddie Bauer’s books.92 Five of the suitors submitted letters of intent, and one suitor, Rainier Holdings, LLC, was selected as a
87 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 17-18 (June 17, 2009).
88 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 18 (June 17, 2009).
89 The earnings of $55 million in 2008 were actually $10 million higher than in 2007. However, they were insufficient to sustain the payments on the accrued debt. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 18 (June 17, 2009).
90 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 19 (June 17, 2009).
91 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 19 (June 17, 2009).
92 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 19 (June 17, 2009).
17 possible “stalking horse bidder” to buy substantially all of the assets of the company in a Section
363 sale.93
At the same time that the company engaged the investment bankers to arrange a possible sale of the business, Eddie Bauer also attempted to restructure its loan portfolio at more favorable terms.94 Because it was in danger of breaching financial covenants, the company had to enter into an amended loan agreement on its Senior Secured Term Loan.95 The Senior
Secured Term Lenders agreed to extend the loan, but only if the noteholders converted their notes to equity.96 Despite repeated negotiations, Eddie Bauer was unable to reach an agreement with the convertible noteholders.97 Facing a breach of the covenants on its Senior Secured Term
Loan, on June 17, 2009, Eddie Bauer filed for relief under chapter 11 of the Bankruptcy Code in
93 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 20 (June 17, 2009).
94 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 14 (June 17, 2009). The major outstanding loans of the company, were a Senior Secured Term loan, as amended, which was secured by real estate, equipment, general intangibles, capital stock, intellectual property, and a second lien on substantially all of the other assets of EBHI Holdings, Inc, and its subsidiaries. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 13-14 (June 17, 2009). The inventory was financed with a revolving loan secured by a first lien on the inventory. Finally, upon emergence from the Spiegel Catalog Chapter 11, EBHI issued a series of convertible unsecured notes at 5.25% which were guaranteed by all the subsidiaries of EBHI Holdings, Inc. In re EBHI Holdings, Inc., Case No. 09- 12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 15-16 (June 17, 2009).
95 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 14 (June 17, 2009).
96 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 14 (June 17, 2009). At the time of the petition, the stock was trading for less than a dollar, and the strike price for the conversion was over $13 per share. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 15-16 (June 17, 2009).
97 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 14 (June 17, 2009).
18 Delaware.98 Soon after the initial filing, the affiliates of the company, including Canadian affiliates, filed for bankruptcy protection.99
IV. The Bankruptcy Filing
As described above, when as Eddie Bauer got deeper into financial trouble and it became apparent that the company could not survive on its own, the company pursued a parallel strategy of seeking a buyer and refinancing its loans. When the plan to renegotiate the loans failed, the strategy of selling the business as a going concern appeared to be the best solution.100 Eddie
Bauer pursued a bankruptcy filing to facilitate the asset sale through the mechanisms of
Bankruptcy Code Section 363(b).
a. The Court
Eddie Bauer filed in the Delaware Bankruptcy Court—a court with a reputation for being liberal and debtor friendly. Debtors who want a liberal interpretation of the rules and a favorable, speedy resolution of their case will frequently file cases in the Delaware court. The stalking horse bidder made it clear that it wanted a short timeframe for the sale, so an efficient, debtor-friendly court was a good fit.101
b. Bankruptcy Players
98 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Voluntary Petition (Dkt. 1) (June 17, 2009).
99 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Pursuant to Rule 1015(B) of the Federal Rules of Bankruptcy Procedure Directing the Joint Administration of the Debtors’ Chapter 11 Cases (Dkt. 3) (June 17, 2009).
100 One might wonder if, once the rumor of a bankruptcy filing was out, whether any prospective buyer would purchase the company without requiring a bankruptcy filing, so that the valuable parts of the company could be purchased without assuming the liabilities.
101 Recall that the original Spiegel bankruptcy in 2004 was in the Southern District of New York, In re Spiegel, Inc., 2005 WL 1278094 (Bankr. S.D.N.Y 2005) (not reported), and here the debtor sought a different court. It is unclear from the record whether Eddie Bauer could have found a means for getting jurisdiction in that court.
19 In bankruptcy proceedings the personalities and parties involved are often noteworthy.
Sometimes judges have a reputation of being pro debtor or pro creditor, and some lawyers and
firms specialize as either debtor’s or creditor’s attorneys.
i. Judge
After the bankruptcy was filed, Judge Walrath was appointed to the case.102 Judge
Walrath was appointed U.S. Bankruptcy Judge for the District of Delaware in Wilmington and
was elevated to Chief Bankruptcy Judge on Sept. 9, 2003. Judge Walrath graduated with a
degree in history from Princeton University, where she was captain of the women’s basketball
team. She earned her J.D. cum laude from Villanova University, where she was a member of the
Villanova Law Review for two years and was awarded the Order of the Coif. Judge Walrath
began her career as an associate at Clark Ladner Fortenbaugh & Young in 1982 and made
partner in 1987. When the firm dissolved, she became a partner at Walrath & Coolidge in 1996
and later a shareholder of Jacoby Donner PC. As an attorney, Judge Walrath’s practice
concentrated on debtor/creditor rights and commercial litigation.103
As is typical in the world of internet judge rating, lawyers either love Judge Walrath or
hate her, the tenor of their review probably a result of whether she ruled for or against them.104
In addition to the Eddie Bauer case, Judge Walrath is presently involved in the Washington
102 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Voluntary Petition (Dkt. 1) (June 17, 2009). 103 Robeprobe.com, Mary Walrath, http://www.robeprobe.com/judge_detail.php? judge_id=2064&judge_Mary_F._Walrath (last visited Apr. 19, 2010). 104 Robeprobe.com, Mary Walrath, http://www.robeprobe.com/judge_detail.php? judge_id=2064&judge_Mary_F._Walrath (last visited Apr. 19, 2010).
20 Mutual case, where Washington Mutual claims that it was sold off to JP Morgan at an insufficient price.105
At times Judge Walrath has issued decisions with dramatic results, including granting a summary judgment motion against parties accused of deliberate spoliation of necessary evidence.106 In another case she supervised, she took the lawyers to task for what she deemed to be excessive bills. In the Fleming Companies, Inc.107 bankruptcy case, she reprimanded the attorneys for $25 million in attorneys’ fees which appeared to deplete the assets of the estate.108
ii. Official Committee of Unsecured Creditors
Bradford J. Sandler of Pachulski, Stang, Ziehl & Jones LLP represented the Official
Committee of Unsecured Creditors. Mr. Sandler focuses his practice on bankruptcy issues, and is an adjunct on the Temple College of Law faculty. The firm specializes in “insolvency practice” and has had some (in)famous clients, including “Iron” Mike Tyson, the former heavyweight boxer.109
iii. Debtor’s Attorneys
105 Randall Chase, Bankruptcy Judge Rejects WaMu Subpoena Request, THE SEATTLE TIMES, January 28, 2010.
106 Bensel v. Allied Pilots Assoc., 2009 U.S. Dist. LEXIS 118342 (D.N.J. Dec. 17, 2009). 107 The company has no relationship to one of the authors (AF).
108 See Celia Cohen, Billable Horrors, DELAWARE GRAPEVINE, Jan. 6, 2006 available at http:// www.delawaregrapevine.com/jan04stories/1-04%20walrath.htm. Of interest here is that one of the firms that had its bills questioned was the firm that represented the Official Committee of Unsecured Creditors, Pachulski, Stang, Ziehl & Jones. 109 Pachulski, Stang, Ziehl & Jones, Significant Cases, http://www.pszjlaw.com/cases-success.html (last visited Apr. 19, 2010).
21 Young, Conway, Stargatt & Taylor, LLP represented Eddie Bauer. The firm, located in
Delaware, has a large bankruptcy practice, and markets itself as having attorneys who are “co- counsel for some of the most significant bankruptcy and corporate law matters in the courts today.”110
c. First Day Orders
The pre-designed strategy in the bankruptcy proceedings was to sell the business as a going concern in a Section 363 sale. With this in mind, the company filed a series of “first day orders” which were designed to maximize the value of the business and to establish procedures for an auction. On the first day, Eddie Bauer’s attorneys filed twelve motions:111 a “Joint
Administration Motion,”112 a “Cross-Border Protocol Motion,”113 a “Cash Management
Motion,”114 a “Critical Vendors Motion,”115 a “Wages and Benefits Motion,”116 a “Utilities
110 Young, Conway, Stargatt & Taylor, About Us, http://www.youngconaway.com/firm_overview/ (last visited Apr. 19, 2010).
111 An additional motion, In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Application Pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code for an Order Authorizing the Debtors to Employ Peter J. Solomon Company as Investment Banker and Financial Advisor for the Debtors Nunc Pro Tunc to the Petition Date (Dkt. 28) (June 17, 2009), which concerns compensation of the investment bankers arranging the sale, will be discussed in the section on administration of the estate, Section VI, infra.
112 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Pursuant to Rule 1015(B) of the Federal Rules of Bankruptcy Procedure Directing the Joint Administration of the Debtors’ Chapter 11 Cases (Dkt. 3) (June 17, 2009).
113 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion for an Order Approving Cross- Border Insolvency Protocol (Dkt. 5) (June 17, 2009).
114 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors (A) Authorizing the Continued Use of Existing Cash Management System, Bank Accounts, Business Forms and Investment Guidelines; (B) Granting Postpetition Intercompany Claims Administrative Status and (C) Authorizing Continued Intercompany Arrangements and Historical Practices (Dkt. 6) (June 17, 2009).
115 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order (A) Authorizing Debtors to Pay Prepetition Claims of Certain (I) Critical Vendors, (II) Administrative Claimholders, (III) Customs Agents and Shippers, (B) Authorizing the Debtors to Pay for Postpetition Delivery of Outstanding Orders and (C) Granting Certain Related Relief (Dkt. 13) (June 17, 2009).
22 Motion,”117 a “Taxes Motion,”118 an “Ordinary Course Professionals Motion,”119 a “Customer
Programs Motion,”120 a “Bid Procedures/Sales Motion,”121 a “KCC Motion,”122 and a “DIP
Motion.”123
116 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Authorizing (A) the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (II) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 12) (June 17, 2009).
117 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Interim and a Final Order Pursuant to 11 U.S.C. §§ 105(A) and 366 (I) Prohibiting Utility Providers from Discontinuing, Altering or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured of Future Performance and (III) Establishing Procedures for Determining Adequate Assurance of Payment (Dkt. 9) (June 17, 2009).
118 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Pursuant to 11 U.S.C. §§ 105(a), 363(b), 507(a)(8), and 541(d), (I) Authorizing Payment of Certain Taxes and Fees and (II) Authorizing and Directing Banks and Financial Institutions to Honor and Process Related Checks and Transfers (Dkt. 8) (June 17, 2009).
119 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors Pursuant to Sections 105(a), 327, 328, and 330 of the Bankruptcy Code for Entry of an Order Authorizing the Debtors to Retain, Employ and Compensate Certain Professionals Utilized in the Ordinary Course of Business (Dkt. 71) (June 17, 2009).
120 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for a Bridge Order with Respect to Certain Customer Services Policies, Programs, and Practices (Dkt. 11) (June 17, 2009).
121 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) (June 17, 2009).
122 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Order Authorizing Debtors to Employ and Retain Kurtzman Carson Consultants LLC as Notice, Claims and Solicitation Agent Nunc Pro Tunc to the Petition Date (Dkt. 4) (June 17, 2009).
123 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) (June 17, 2009).
23 i. Joint Administration Motion
On the date of the filing, in a standard “first day order” Eddie Bauer moved to have joint administration of its bankruptcy with several of its affiliates.124 Specifically, the request was to jointly administer the cases of Eddie Bauer Services, LLC, Eddie Bauer International
Development, LLC, Eddie Bauer Information Technology, LLC, Financial Services Acceptance
Corporation, and Spiegel Acceptance Corporation.125 In addition, the joint administration motion would recognize the Canadian bankruptcy proceedings126 for the Canadian affiliates of the company, Eddie Bauer of Canada, Inc. and Eddie Bauer Customer Services, Inc. The
Canadian affiliates would seek recognition of the proceedings of the debtor’s chapter 11 proceedings as “foreign proceedings”127 allowing the Canadian Court to recognize orders of the
United States court as if they had been made by the Canadian Court.128
124 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Pursuant to Rule 1015(B) of the Federal Rules of Bankruptcy Procedure Directing the Joint Administration of the Debtors’ Chapter 11 Cases (Dkt. 3) (June 17, 2009).
125 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Pursuant to Rule 1015(B) of the Federal Rules of Bankruptcy Procedure Directing the Joint Administration of the Debtors’ Chapter 11 Cases (Dkt. 3) (June 17, 2009).
126 Filed pursuant to the Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended.
127 See the Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended.
128 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Pursuant to Rule 1015(B) of the Federal Rules of Bankruptcy Procedure Directing the Joint Administration of the Debtors’ Chapter 11 Cases (Dkt. 3) at 4 (June 17, 2009).
24 Joint administration of the debtors’ cases was permitted pursuant to Federal Rules of
Bankruptcy Procedure 1015(b). The motion was a standard first day motion, no objections were made, and the court granted the motion.129
ii. Cross-Border Protocol Motion
In addition to the motion for joint administration, Eddie Bauer sought to have a “Cross
Border Protocol” established.130 It was necessary to have a cross-border protocol because the
Canadian affiliates were controlled by their parents in the United States.131
The purpose of the protocol was to have a consistent treatment of the bankruptcy proceedings of the company’s Canadian affiliates, which filed for bankruptcy in Canada132 at the same time as the bankruptcies were filed in the United States.133 The goal of the protocol would be to have coordinated bankruptcy proceedings, notice to all parties of insolvency proceedings in both the Canadian and United States proceedings, protection of substantive rights of parties in interest in both jurisdictions, and protection of jurisdictional integrity of Canadian and United
States Courts.134
129 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant To Rule 1015(B) Of The Federal Rules Of Bankruptcy Procedure Directing Joint Administration Of The Debtors' Chapter 11 Cases. (Dkt. 56) (June 18, 2009).
130 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion for an Order Approving Cross- Border Insolvency Protocol (Dkt. 5) (June 17, 2009).
131 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion for an Order Approving Cross- Border Insolvency Protocol (Dkt. 5) (June 17, 2009).
132 Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended.
133 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion for an Order Approving Cross- Border Insolvency Protocol (Dkt. 5) (June 17, 2009).
134 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion for an Order Approving Cross- Border Insolvency Protocol (Dkt. 5) (June 17, 2009).
25 While recognizing the sovereignty and independence of the courts, the protocol
established that stays issued by United States135 and Canadian Courts136 were valid in both
jurisdictions.137 The protocol also provided for consultation between the courts, compensation of
professionals in both jurisdictions, and a mechanism for resolving disputes between the courts.138
Judge Walrath granted an interim order139 approving the protocol.140 On July 8, 2009
Judge Walrath issued a final order141 approving the protocol, which became effective when it
was approved by both courts in Canada and Delaware.142
iii. Cash Management Motion
Eddie Bauer and its affiliates engaged in sales through a number of different retail outlets
both in the United States and abroad. As a result, their finances were managed through a
complex cash management system.143 In the United States, funds collected by individual stores
135 Pursuant to 11 U.S.C. § 362. 136 Pursuant to the Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended. 137 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion for an Order Approving Cross- Border Insolvency Protocol (Dkt. 5) (June 17, 2009). 138 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion for an Order Approving Cross- Border Insolvency Protocol (Dkt. 5) (June 17, 2009). 139 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Interim Order Approving Cross-Border Insolvency Protocol (Dkt. 125) (June 24, 2009). 140 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Interim Order Approving Cross-Border Insolvency Protocol (Dkt. 125) Exhibit A (June 24, 2009). 141 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Final Order Approving Cross-Border Insolvency Protocol (Dkt. 308) (July 8, 2009). 142 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Final Order Approving Cross-Border Insolvency Protocol, (Dkt. 308) Exhibit A (July 8, 2009). 143 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 27 (June 17, 2009). See also In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors (A) Authorizing the Continued Use of Existing Cash Management System, Bank Accounts, Business Forms and Investment Guidelines; (B) Granting Postpetition
26 were concentrated and gathered in “store depository accounts” and then gathered into a “master concentration account.”144 In Canada, revenues were managed by a similar concentration account system.145
The intent of the Eddie Bauer in bankruptcy was to sell off the business as a going concern.146 To lessen disruption of the enterprise and to maximize the value of the company for possible sale, it was important to maintain established banking relationships and banking practices.147 As such, Eddie Bauer filed a first day motion to maintain existing cash management systems and existing banking practices.148 Specifically, Eddie Bauer sought court permission to use existing bank accounts, forms, and checks and customary wire transfer practices.149 In addition, Eddie Bauer sought to treat post-petition intercompany claims in the ordinary course of
Intercompany Claims Administrative Status and (C) Authorizing Continued Intercompany Arrangements and Historical Practices, Exhibit B (Dkt. 6) Exhibit B (June 17, 2009) (flowchart of United States and Canadian cash management systems).
144 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 27 (June 17, 2009).
145 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 28 (June 17, 2009).
146 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 20 (June 17, 2009).
147 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 26 (June 17, 2009).
148 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors (A) Authorizing the Continued Use of Existing Cash Management System, Bank Accounts, Business Forms and Investment Guidelines; (B) Granting Postpetition Intercompany Claims Administrative Status and (C) Authorizing Continued Intercompany Arrangements and Historical Practices (Dkt. 6) (June 17, 2009).
149 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors (A) Authorizing the Continued Use of Existing Cash Management System, Bank Accounts, Business Forms and Investment Guidelines; (B) Granting Postpetition Intercompany Claims Administrative Status and (C) Authorizing Continued Intercompany Arrangements and Historical Practices (Dkt. 6) at 13-17 (June 17, 2009).
27 business as administrative expenses.150 The motion was a typical first day order, no objection was interposed, and it was granted in due course.151
iv. Critical Vendors Motion
Eddie Bauer and its affiliates were in the retail business, and as such they resold goods obtained from other suppliers and vendors.152 In the context of selling the business as a going concern, Eddie Bauer asserted that it was essential to maintain good relationships with suppliers so as to preserve the flow of goods for resale to customers.153 Moreover, it asserted that after the sale of the business, suppliers who had been damaged by the debtor’s failure to pay prepetition claims might be reluctant to deal with the purchaser on favorable terms.154 As evidence that special treatment of certain critical vendors and suppliers was necessary, the company asserted
150 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors (A) Authorizing the Continued Use of Existing Cash Management System, Bank Accounts, Business Forms and Investment Guidelines; (B) Granting Postpetition Intercompany Claims Administrative Status and (C) Authorizing Continued Intercompany Arrangements and Historical Practices (Dkt. 6) at 20-24 (June 17, 2009).
151 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Granting Motion (A) Authorizing The Continued Use Of Existing Cash Management System, Bank Accounts, Business Forms And Investment Guidelines; (B) Granting Postpetition Intercompany Claims Administrative Status; And (C) Authorizing Continued Perfomance Under Intercompany Arrangements And Historical Practices (Dkt. 58) (June 18, 2009).
152 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 39 (June 17, 2009).
153 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 39 (June 17, 2009).
154 This is a common assertion made by many debtors in the bankruptcy process. The authors find this reasoning questionable at best. Using neoclassical economic reasoning, loss on a prepetition claims is a sunk cost, and failing to deal with the business after it has been successfully reorganized (or in the present case, sold off as a going concern) would simply be a loss of a new opportunity to make a profit. Payment on a past claim does nothing to enhance the prospects of a future business relationship. However, the addition of a judicially approved unequal negotiating position increases the value of the company in the proposed 363 Sale because it is a great benefit to the buyer.
28 that the selected “stalking horse bidder” in the sale of the company insisted on critical vendor status for certain suppliers.155 In this context, the debtor asked the court to grant a “Critical
Vendors Motion” to treat prepetition claims of certain preferred vendors as administrative expenses and pay them in the ordinary course of its business.156
Converting prepetition claims (likely to be paid off at cents on the dollar in the ultimate resolution of the case) to administrative claims (likely to be paid in full157) is a both a great benefit to the preferred critical vendors, and an exception to the goal of the bankruptcy code to treat all similarly situated prepetition creditors equally, with pro rata payment of all claims that enjoy the same priority.
While the relief requested in the motion appears to benefit critical vendors by converting prepetition claims to administrative expenses, a careful reading of the motion158 shows that the proposed order contains language which severely restricts the business decisions of a creditor granted critical vendor status. While the critical vendor’s prepetition claims are converted to administrative expenses, failure of the critical vendor to deal with the debtor in possession afterwards could result—at the discretion of the debtor in possession—in the payments on
155 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 39 (June 17, 2009).
156 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order (A) Authorizing Debtors to Pay Prepetition Claims of Certain (I) Critical Vendors, (II) Administrative Claimholders, (III) Customs Agents and Shippers, (B) Authorizing the Debtors to Pay for Postpetition Delivery of Outstanding Orders and (C) Granting Certain Related Relief (Dkt. 13) (June 17, 2009).
157 So long as the bankruptcy estate is not administratively insolvent.
158 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order (A) Authorizing Debtors to Pay Prepetition Claims of Certain (I) Critical Vendors, (II) Administrative Claimholders, (III) Customs Agents and Shippers, (B) Authorizing the Debtors to Pay for Postpetition Delivery of Outstanding Orders and (C) Granting Certain Related Relief (Dkt. 13) (June 17, 2009).
29 account of these claims being deemed to be payments of antecedent debt,159 which would make the payments preferences payments160 subject to avoidance under Bankruptcy Code Section 547.
Thus, any creditor who had received critical vendor payments would enjoy substantially decreased leverage when negotiating with the debtor because of this threat.161
Even though the motion appears to violate the fundamental premise of treating creditors equally and has the practical effect of creating an unequal negotiating position between the debtor and the critical vendors, the motion is a standard one and was approved by the court.162
v. Wages and Benefits Motion
In another routine first day motion,163 Eddie Bauer proposed to pay the prepetition wages,164 benefits,165 and other obligations166 owed to employees.167 Eddie Bauer argued in its
159 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order (A) Authorizing Debtors to Pay Prepetition Claims of Certain (I) Critical Vendors, (II) Administrative Claimholders, (III) Customs Agents and Shippers, (B) Authorizing the Debtors to Pay for Postpetition Delivery of Outstanding Orders and (C) Granting Certain Related Relief (Dkt. 13) at 14 (June 17, 2009).
160 See U.S.C. § 547(b).
161 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order (A) Authorizing Debtors to Pay Prepetition Claims of Certain (I) Critical Vendors, (II) Administrative Claimholders, (III) Customs Agents and Shippers, (B) Authorizing the Debtors to Pay for Postpetition Delivery of Outstanding Orders and (C) Granting Certain Related Relief (Dkt. 13) at (June 17, 2009).
162 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Granting Motion for an Order (A) Authorizing Debtors to Pay Prepetition Claims of Certain (I) Critical Vendors, (II) Administrative Claimholders, (III) Customs Agents and Shippers, (B) Authorizing the Debtors to Pay for Postpetition Delivery of Outstanding Orders and (C) Granting Certain Related Relief (Dkt. 61) (June 18, 2009).
163 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Authorizing (A) the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (II) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 12) (June 17, 2009).
164 EBHI has payroll on a biweekly basis, and the previous pay period ended on June 5, 2009 and was paid on June 12, 2009. As such, there was approximately 2 weeks of accrued pay owed, in addition to any paychecks that may have been uncashed on the date of the petition. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Authorizing (A) the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other
30 motion that if any of the company's financial hardship were passed on to the employees, this might damage the company's going concern value and the ensuing attrition and losses to morale
Compensation; (II) Employee, Medical and Similar Benefits; (II) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 12) at 7 (June 17, 2009).
165 The major traditional “benefit” other than those described as “obligations” below, is healthcare benefits. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Authorizing (A) the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (II) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 12) at 6-16 (June 17, 2009).
166 Accrued obligations included 401(k) plan contributions, payroll withholdings, vacation pay, severance pay, and employee incentive plans, among other obligations. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Authorizing (A) the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (II) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 12) at 6-16 (June 17, 2009). Notably absent from this list is life insurance obligations of Spiegel which had been assumed in the Spiegel bankruptcy. These paid up life insurance policies became a source of claims litigation later. See Section VI infra.
167 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Authorizing (A) the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (II) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 12) (June 17, 2009). EBHI had approximately 7700 employees, 75% of which were part time, and 25% were full time. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Authorizing (A) the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (II) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 12) at 6 (June 17, 2009). EBHI also had a significant number of “independent contractors” who were owed compensation in addition to employees. See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Authorizing (A) the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (II) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 12) at 22-25 (June 17, 2009). The “independent contractors” include the “First Ascent” team, which represented the return to Eddie Bauer’s mountaineering roots. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Authorizing (A) the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (II) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 12) at 16-24 (June 17, 2009).
31 would prove difficult for any successor to reverse.168 This, in turn, might damage prospects for the Section 363 sale.169 Honoring all of the wage obligations to employees made sense, in light of the fact that the “stalking horse bidder” had made known to the debtor its intent to honor all of the obligations to the employees.170
The motion was a standard first day motion, and Judge Walrath approved an order granting the motion.171
vi. Taxes Motion
Eddie Bauer also filed a first day motion172 to pay certain taxes that were owed on two possible bases. First, some tax amounts might not be part of the bankruptcy estate because they
168 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 48 (June 17, 2009).
169 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Authorizing (A) the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (II) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 12) (June 17, 2009).
170 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Authorizing (A) the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (II) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 12) at 5 (June 17, 2009). However, the stalking horse bidder would not take on the obligations to former employees, such as pension obligations and life insurance policies. These became a source of claims litigation.
171 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order (A) Authorizing the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (III) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 65) at 5 (June 18, 2009).
172 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Pursuant to 11 U.S.C. §§ 105(a), 363(b), 507(a)(8), and 541(d), (I) Authorizing Payment of Certain Taxes and Fees and (II) Authorizing and Directing Banks and Financial Institutions to Honor and Process Related Checks and Transfers (Dkt. 8) (June 17, 2009).
32 might be amounts held in trust for the taxing authority.173 Second, other taxes might be amounts which would be granted priority status under 11 U.S.C. § 507(a)(8), and would thus be paid in full before any unsecured creditors would be satisfied. Eddie Bauer argued that prompt payment would change the timing of the payments to the taxing authority, not the ultimate amounts paid.174 In either case, failure to pay the taxes on time would make the debtor worse off than by not paying, because the taxing authorities would pursue action against the estate and divert attention from the timely sale as a going concern under Section 363, and would subject the debtor to statutory penalties and interest.175
The motion was a routine first day motion, and Judge Walrath granted an order approving the motion.176
vii. Ordinary Course Professionals Motion
Eddie Bauer filed a motion to allow compensation of professionals in the ordinary course of business.177 The debtors sought this approval under 11 U.S.C. Sections 327-31 as a comfort
173 See 11 U.S.C. § 541(d) (“[p]roperty in which the debtor holds . . . only legal title and not an equitable interest . . . .”). See also In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Pursuant to 11 U.S.C. §§ 105(a), 363(b), 507(a)(8), and 541(d), (I) Authorizing Payment of Certain Taxes and Fees and (II) Authorizing and Directing Banks and Financial Institutions to Honor and Process Related Checks and Transfers (Dkt. 8) at 8 (June 17, 2009).
174 See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Pursuant to 11 U.S.C. §§ 105(a), 363(b), 507(a)(8), and 541(d), (I) Authorizing Payment of Certain Taxes and Fees and (II) Authorizing and Directing Banks and Financial Institutions to Honor and Process Related Checks and Transfers (Dkt. 8) at 10 (June 17, 2009). Of course, one could always make an argument about the present value of the amounts paid. Money paid sooner is worth more than money paid later.
175 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order Pursuant to 11 U.S.C. §§ 105(a), 363(b), 507(a)(8), and 541(d), (I) Authorizing Payment of Certain Taxes and Fees and (II) Authorizing and Directing Banks and Financial Institutions to Honor and Process Related Checks and Transfers (Dkt. 8) at 10-12 (June 17, 2009).
176 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Granting Motion Pursuant to 11 U.S.C. §§ 105(a), 363(b), 507(a) and 541(d) (I) Authorizing Payment Of Certain Taxes And Fees And (II) Authorizing And Directing Banks And Financial Institutions To Honor And Process Related Checks And Transfers (Dkt. 59) (June 18, 2009).
33 order to continue to pay their attorneys, accountants, consultants and other professionals.
Normally, the DIP could continue these activities in the ordinary course of business without court approval,178 but sought the approval of the court out of an abundance of caution.179 This routine order was approved after the other first day motions, on July 7, 2009.180
viii. KCC Motion
An application to approve the claims, solicitation, and notice agent,181 was approved by
Judge Walrath with little fanfare.182 This was the last of the “routine” motions to be approved.
The remaining motions (Utilities Motion, Customer Programs Motion, Bid Procedures/Sales
Motion, and DIP Financing Motion) were all contested.
ix. Utilities Motion
177 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors Pursuant to Sections 105(a), 327, 328, and 330 of the Bankruptcy Code for Entry of an Order Authorizing the Debtors to Retain, Employ and Compensate Certain Professionals Utilized in the Ordinary Course of Business (Dkt. 71) (June 17, 2009). In an additional motion, the debtor in possession asked the court to approve compensation of professionals for activities outside the ordinary course of business. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Application Pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code for an Order Authorizing the Debtors to Employ Peter J. Solomon Company as Investment Banker and Financial Advisor for the Debtors Nunc Pro Tunc to the Petition Date (Dkt. 28) (June 17, 2009). The motion concerns compensation of the investment bankers arranging the sale, will be discussed in the section on administration of the estate infra.
178 See 11 U.S.C. § 363(c).
179 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors Pursuant to Sections 105(a), 327, 328, and 330 of the Bankruptcy Code for Entry of an Order Authorizing the Debtors to Retain, Employ and Compensate Certain Professionals Utilized in the Ordinary Course of Business (Dkt. 71) at 6 (June 17, 2009).
180 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to Sections 105(a), 327, 328 and 330 of the Bankruptcy Code Authorizing Debtors to Retain, Employ and Compensate Certain Professionals Utilized in the Ordinary Course of Business (Dkt. 288) (July 7, 2009).
181 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Order Authorizing Debtors to Employ and Retain Kurtzman Carson Consultants LLC as Notice, Claims and Solicitation Agent Nunc Pro Tunc to the Petition Date (Dkt. 4) (June 17, 2009).
182 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Authorizing Employment And Retention Of Kurtzman Carson Consultants LLC As Notice, Claims And Solicitation Agent For Debtors. (Dkt. 57) (June 18, 2009).
34 Another first day motion requested by Eddie Bauer was to prevent the cessation of utility service.183 The reason for the motion was to prevent utility companies from turning off the utilities for Eddie Bauer, including utility services at numerous retail locations.184 Without utility services in place, the operation of the company would shut down, and thus would be of little value to the stalking horse bidder as a going concern.185 The Bankruptcy Code provides that utilities cannot be discontinued so long as the utilities are provided adequate assurance of payment.186 In the present case, Eddie Bauer proposed providing adequate assurance by depositing an amount equivalent to half of the estimated monthly utility bills in a segregated account.187
The motion was a standard first day motion, and Judge Walrath granted relief on an interim basis,188 however notice was given for a hearing on the final order.189 A number of
183 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Interim and a Final Order Pursuant to 11 U.S.C. §§ 105(A) and 366 (I) Prohibiting Utility Providers from Discontinuing, Altering or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured of Future Performance and (III) Establishing Procedures for Determining Adequate Assurance of Payment (Dkt. 9) (June 17, 2009).
184 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Interim and a Final Order Pursuant to 11 U.S.C. §§ 105(A) and 366 (I) Prohibiting Utility Providers from Discontinuing, Altering or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured of Future Performance and (III) Establishing Procedures for Determining Adequate Assurance of Payment (Dkt. 9) at 4 (June 17, 2009).
185 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Interim and a Final Order Pursuant to 11 U.S.C. §§ 105(A) and 366 (I) Prohibiting Utility Providers from Discontinuing, Altering or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured of Future Performance and (III) Establishing Procedures for Determining Adequate Assurance of Payment (Dkt. 9) at 4 (June 17, 2009).
186 11 U.S.C. § 366.
187 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Interim and a Final Order Pursuant to 11 U.S.C. §§ 105(A) and 366 (I) Prohibiting Utility Providers from Discontinuing, Altering or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured of Future Performance and (III) Establishing Procedures for Determining Adequate Assurance of Payment (Dkt. 9) at 6 (June 17, 2009).
188 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Interim Order Pursuant to 11 U.S.C. §§ 105(A) and 366 (I) Prohibiting Utility Providers From Discontinuing, Altering, Or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured Of Future Performance And (III) Establishing Procedures For Determining Adequate Assurance Of Payment (Dkt. 60) (June 18, 2009).
35 utility companies objected,190 and others joined their objections.191 The basis for the objections was that the amount of the cash deposits for adequate assurance was insufficient.192 After a hearing, Judge Walrath granted a final order preventing utility companies from discontinuing service after the objecting providers were granted supplemental adequate assurance payments.193
x. Customer Programs Motion
Since Eddie Bauer's intent was to sell the business as a going concern in a Section 363 sale and the customer base was one of the most valuable parts of the business, keeping the
189 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Entry of Interim Order and Final Hearing (Dkt. 72) at 5 (June 18, 2009).
190 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Alabama Power Company To The Motion of The Debtors For Entry of An Interim And Final Order Pursuant To 11 U.S.C. §§ 105(A) and 366 (I) Prohibiting Utility Providers From Discontinuing, Altering or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured of Future Performance And (III) Establishing Procedures For Determining Adequate Assurance of Payment (Dkt. 160) (June 26, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Certain Utility Companies to the Motion of the Debtors for Entry of Interim and Final Order Pursuant to 11 U.S.C. §§ 105(A) and 366 (I) Prohibiting Utility Providers from Discontinuing, Altering or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured of Future Performance and (III) Establishing Procedures for Determining Adequate Assurance of Payment (Dkt. 214) (June 30, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of the Central Maine Power Company, Entergy, and Pepco Holdings to the Interim Order and Motion of the Debtors for Entry of an Interim Order and Final Order (I) Prohibiting Utility Providers From Discontinuing, Altering or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured of Future Performance And (III) Establishing Procedures For Determining Adequate Assurance of Payment (Dkt. 218) (June 30, 2009).
191 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Joinder of Florida Power Corporation d/b/a Progress Energy Florida, Pennsylvania Power Company, and Westar Energy, Inc. to the Objection of Certain Utility Companies to the Motion of the Debtors for Entry of Interim and Final Order Pursuant to 11 U.S.C. §§ 105(A) and 366 (I) Prohibiting Utility Providers from Discontinuing, Altering or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured of Future Performance and (III) Establishing Procedures for Determining Adequate Assurance of Payment (Dkt. 254) (July 6, 2009).
192 See, e.g., In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Alabama Power Company To The Motion of The Debtors For Entry of An Interim And Final Order Pursuant To 11 U.S.C. §§ 105(A) and 366 (I) Prohibiting Utility Providers From Discontinuing, Altering or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured of Future Performance And (III) Establishing Procedures For Determining Adequate Assurance of Payment (Dkt. 160) (June 26, 2009).
193 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Final Order Pursuant to 11 U.S.C. §§ 105(A) and 366 (I) Prohibiting Utility Providers from Discontinuing, Altering or Refusing Utility Services, (II) Deeming Utility Providers Adequately Assured of Future Performance and (III) Establishing Procedures for Determining Adequate Assurance of Payment (Dkt. 447) at 5 (July 20, 2009).
36 customer base was a one of its primary focuses. With this focus in mind, to retain its customer base, Eddie Bauer filed a motion to maintain certain customer programs.194 It filed its motion contemporaneously with a bridge order requesting the relief to cover the interim period until a permanent order was granted.195 The motions, if granted, would allow the debtor to continue to pay off prepetition obligations to customers, including guarantees, gift cards, awards and merchandise certificates, rewards programs, registered card programs, and stored value cards.196
While paying prepetition claims as administrative expenses would prejudice other creditors not given the same treatment, failing to do so would risk alienating the customer base.197 Moreover,
Eddie Bauer alleged that the costs of such payments would be insignificant compared to the benefits. 198 Judge Walrath granted the bridge order pending arguments on the motion in full.199
After a hearing Judge Walrath granted the final order.200
194 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Order Authorizing the Debtors to (A) Honor Certain Prepetition Obligations to Customers, (B) Maintain Certain Customer Service Policies, Programs and Practices in the Ordinary Course of Business and (C) Pay Certain Fees Associated with Credit Card Transactions and Gift Card Programs (Dkt. 10) at 5 (June 17, 2009).
195 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for a Bridge Order with Respect to Certain Customer Services Policies, Programs, and Practices (Dkt. 11) (June 17, 2009).
196 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Order Authorizing the Debtors to (A) Honor Certain Prepetition Obligations to Customers, (B) Maintain Certain Customer Service Policies, Programs and Practices in the Ordinary Course of Business and (C) Pay Certain Fees Associated with Credit Card Transactions and Gift Card Programs (Dkt. 10) at 4 (June 17, 2009).
197 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Order Authorizing the Debtors to (A) Honor Certain Prepetition Obligations to Customers, (B) Maintain Certain Customer Service Policies, Programs and Practices in the Ordinary Course of Business and (C) Pay Certain Fees Associated with Credit Card Transactions and Gift Card Programs (Dkt. 10) at 5 (June 17, 2009).
198 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Order Authorizing the Debtors to (A) Honor Certain Prepetition Obligations to Customers, (B) Maintain Certain Customer Service Policies, Programs and Practices in the Ordinary Course of Business and (C) Pay Certain Fees Associated with Credit Card Transactions and Gift Card Programs (Dkt. 10) (June 17, 2009).
199 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Bridge Order (A) [sic] Authorizing the Debtors to (A) Honor Certain Prepetition Obligations to Customers, (B) Maintain Certain Customer Service Policies, Programs, and Practices in the Ordinary Course of Business; and (C) Pay Certain Fees Associated with Credit Card Transactions and Gift Card Programs (Dkt. 23) (June 17, 2009).
37 xi. DIP Motion and Adequate Protection for Secured Creditors
In order to survive long enough for the valuable components of its business to be sold in a Section 363 sale, Eddie Bauer had to obtain post-petition financing.201 While lenders can make money in lending to bankrupt companies, to ensure they get paid, lenders demand priority over prepetition creditors. In the case of Eddie Bauer, there were numerous outstanding secured and unsecured loans.202
1. Pre Petition Capital Structure
At the time of the petition, the principal loans203 to the company were in excess of $328 million. Eddie Bauer owed in excess of $51 million on a Revolving Credit Facility secured by first liens on inventory and receivables, and the loan was secured by a junior lien on substantially
200 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Authorizing the Debtors to (A) Honor Certain Prepetition Obligations to Customers, (B) Maintain Certain Customer Service Policies, Programs, and Practices in the Ordinary Course of Business; and (C) Pay Certain Fees Associated with Credit Card Transactions and Gift Card Programs (Dkt. 62) (June 18, 2009).
201 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) (June 17, 2009).
202 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) (June 17, 2009).
203 There were numerous loans and other obligations of the company, we will focus on the main ones here.
38 all the other assets of the company.204 The Revolving Credit Facility had Bank of America as agent for a group of lenders.205
In addition to the Revolving Credit Facility, the debtor had a Senior Secured Term Loan with Wilmington Trust FSB as agent for a group of lenders.206 The Senior Secured Term Loan was secured by a first lien on substantially all of the assets of the company including real estate, equipment, general intangibles, intellectual property, and capital stock, and second priority liens on substantially all the other assets of the company, including the inventory.207 The total of the prepetition secured loans on the debt facility was in excess of $191 million.208
204 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 11 (June 17, 2009). The junior lien on substantially all assets did not cover the Groveport, Ohio distribution facility.
205 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 10 (June 17, 2009).
206 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 10 (June 17, 2009).
207 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 10 (June 17, 2009).
208 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to
39 In addition to these secured loans, Eddie Bauer had $75 million in outstanding unsecured convertible notes.209 The strike price of the conversion to stock was well above the price the stock was trading at on the date of the petition, which had hindered negotiations between the company and the noteholders to convert the notes to equity. 210 As a condition to lending any additional funds, the secured creditors had required the conversion of the notes to equity.211
At the time of the petition, Eddie Bauer had no unencumbered cash to operate the business and had no unencumbered collateral to offer as security for additional funds.212 In its
Bankruptcy Rule 4001 (Dkt. 14) at 10 (June 17, 2009). This number differs from the stated amount by the lender on that facility. The lender calculated the secured amount owed at over 200 million. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of the Official Committee of Unsecured Creditors to Debtors’ Motion for Final Order (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 259) at 3 (July 3, 2009).
209 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 14 (June 17, 2009).
210 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 14 (June 17, 2009).
211 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 14 (June 17, 2009). At the time of the petition, the stock was trading for less than a dollar, and the strike price for the conversion was over $13 per share. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 15-16 (June 17, 2009).
212 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 14 (June 17, 2009).
40 emergency motion, Eddie Bauer asserted that it needed to use the secured parties’ cash collateral and obtain financing through a secured Debtor In Possession (DIP) Facility.213
2. DIP Facility
The DIP Facility was funded by a syndicate led by Bank of America.214 The DIP Facility would allow Eddie Bauer to borrow $90 million on an interim basis, and up to $100 million upon final approval.215 The DIP Facility would be secured by priming first priority liens senior to all of the liens on the debtor’s property.216 The term of the loan would be until thirty days after the
213 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 15 (June 17, 2009).
214 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 2 (June 17, 2009).
215 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 2 (June 17, 2009).
216 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 2 (June 17, 2009). An exception to the senior priority of the liens was the “carve out” (discussed infra) to pay certain administrative costs of the bankruptcy.
41 entry of the interim order unless a final order on the motion was entered, or until the consummation of the anticipated Section 363 sale of the business as a going concern.217
3. Roll up loan
The proceeds of the DIP Facility would be used for several purposes, including a “Roll
Up” loan.218 The Roll Up provision was designed to pay off the prepetition Revolving Credit
Facility with Bank of America, but not the Senior Secured Term Loan with Wilmington Trust
FSB.219 Effectively the Roll Up provision converted a pre-petition claim of Bank of America (as agent for a syndicate) into a post petition administrative expense. Moreover, the lien securing the DIP Facility was senior to the (formerly) first priority lien of the Senior Secured Term
Loan.220 Arguably there was no prejudice to payment because the loans were secured and each of the secured creditors would receive the amount of their secured interest. However, if the
217 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 4 (June 17, 2009).
218 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 2 (June 17, 2009).
219 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 2 (June 17, 2009).
220 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 2 (June 17, 2009).
42 collateral was insufficient to pay off all of the loans, the DIP Facility would have priority over the Senior Secured Term Loan, and thus the grant of a senior interest would erode the value of the Senior Secured Term Loan.
The terms of the DIP Facility, which would pay off the Revolving Credit Facility, converted the prepetition secured Revolving Credit Facility into a postpetition loan payable as an administrative expense—with a superior security interest.221 As a practical matter, this was a very good deal for Bank of America, the leader of the loan syndicate. They kept the same senior security interest on the inventory and receivables that they had before the petition; they converted their junior security interest on the remaining property of the debtor into a senior security interest; they established that their loan could be paid off as an administrative expense; and they made several million dollars in origination fees and interest payments. The loan— which was expected to be a short term facility for approximately thirty days or until the sale of the company222—carried fees of approximately three percent in addition to the accrued interest.223
4. Carve Out
221 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) (June 17, 2009).
222 The sale of the company was expected to be consummated quickly, since there was already a stalking horse bidder in place.
223 See generally In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) (June 17, 2009).
43 The DIP Facility also provided for a “Carve Out” provision for administrative expenses.224 The provision effectively guaranteed the payment of administrative expenses including professional fees.225 While this provision appeared to set aside some money of the lender to be paid for administrative expenses, the total amount of money set aside was small compared to the total assets secured by the liens, and the DIP Facility was anticipated to be a short term loan. As such, the amount of risk to the lender was comparatively small.226
The carve out for administrative expenses had a predictable effect on the administration of the case. With a fixed amount set aside for payment of administrative fees, there were no objections lodged to applications for compensation and reimbursement of administrative expenses during the case.227
However, there was a serious risk to the Senior Secured Term Lender. The loan required that upon sale of the business in the anticipated Section 363 sale, the DIP Facility would be paid
224 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 2 (June 17, 2009).
225 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 2 (June 17, 2009).
226 An additional issue that arises by this scheme is that the DIP lender is effectively paying the lawyers of the debtor. The parties are potentially adverse. While we do not suggest that the lawyers would violate the rules of professional conduct in their adjudication of the case, the potential conflict cannot be ignored.
227 With the exception of the compensation of the investment banker arranging the sale. See Section VI infra.
44 off from the proceeds.228 After payment of the DIP Facility the proceeds could be insufficient to pay the Senior Secured Term Lender’s loan balance.
5. Use of Cash Collateral
The motion for the DIP Facility also contained a provision for use of cash collateral.
Normally, cash collateral may be used in the ordinary course of business.229 Moreover, cash collateral may be used outside of the ordinary course of business with court approval or consent of the holder of an interest in the cash collateral.230 In the present case, the prepetition creditors consented to use of their cash collateral provided the terms of the DIP Facility were granted.231
Moreover, without the ability to use the cash collateral, the business would likely fail before the consummation of a Section 363 sale for lack of liquidity.232 As a result, use of the cash collateral was in the best interests of the secured parties.
228 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) (June 17, 2009).
229 11 U.S.C. § 363(c)(1).
230 11 U.S.C. § 363(c)(2).
231 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 2 (June 17, 2009). Of course, as described above, the lenders were getting a very good deal, and that deal could have provided them sufficient incentive to consent.
232 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) (June 17, 2009).
45 6. Adequate Protection
Finally, the DIP Facility contained provisions for giving adequate protection233 to the secured parties.234 Specifically, the loan provided for “adequate assurance payments” to the secured creditors to ensure that the value of their security interest did not diminish.235 As a result, the DIP Facility terms satisfied the requirements of 11 U.S.C. §§ 361-64. The Senior
Secured Term Lenders would likely go along with such an arrangement, since their loans were no longer paying interest,236 and they could be reasonably certain to collect a large proportion of the value of the property at the conclusion of the sale.
7. Objections
233 See 11 U.S.C. § 361.
234 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) at 2 (June 17, 2009).
235 See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) Exhibit A at 17 (June 17, 2009).
236 See 11 U.S.C. § 502(b)(2).
46 The court approved an interim order approving the DIP financing, subject to a hearing on the final motion.237 However, several creditors filed objections to the proposed DIP Facility,238 and a number of other creditors joined their objections.239
a. Landlords
237 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Interim Order Pursuant to 11 U.S.C. Sections 105, 361, 362, 363 and 364 and Rules 2002, 4001, and 9014 of the Federal Rules of Bankruptcy Procedure (1) Authorizing Incurrence by the Debtors of Postpetition Secured Indebtedness With Priority Over Certain Secured Indebtedness and With Administrative Superpriority, (2) Granting Liens, (3) Authorizing Use of Cash Collateral by the Debtors Pursuant to 11 U.S.C. Section 363 and Providing for Adequate Protection, (4) Modifying the Automatic Stay and (5) Scheduling a Final Hearing (Dkt. 64) (June 18, 2009).
238 See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Prime Retail Landlords and Steamtown Mall Partners, LP to Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 187) (June 29, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection to Entry of Final Order Pursuant to 11 U.S.C. Sections 105, 361, 362, 363, and 364, and Rules 2002, 4001 and 9014 of the Federal Rules of Bankruptcy Procedure (1) Authorizing incurrence by the Debotrs [sic] of Post-petition secured indebtedness with Priority over Certain Secured Indebtedness and with Administrative Superpriority, (2) Granting Liens, (3) Authorizing Use of Cash Collateral by the Debtors Pursuant to 11 U.S.C. Section 363 and Providing for Adequate Protection, (4) Modifying the Automatic Stay and (5) Scheduling a Final Hearing (Dkt. 209) (June 30, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Wilmington Trust FSB, as Agent for Debtors’ Secured Term Lenders, to Debtors' DIP Financing Motion (Dkt. 253) (July 3, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of the Official Committee of Unsecured Creditors to Debtors’ Motion for Final Order (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 259) (July 3, 2009).
239 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Joinder of the Taubman Landlords in the Limited Objection of Prime Retail Landlords and Steamtown Mall Partners, L.P. to the Emergency Motion for Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363, and 364 (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 361, 362, 363 and 364; And (V) Scheduling Final Hearing on the Debtors Motion to Incur such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 213) (June 30, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Joinder of Bayer Retail Company, L.L.C. in the Limited Objection of the Prime Retail Landlords and Steamtown Mall Partners, L.P. to Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Post- petition Financing Pursuant to 11 U.S.C. Sections 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. Section 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Pre-petition Secured Parties Pursuant to 11 U.S.C. Sections 361, 362, 363 and 364; and (V) Scheduling Final Hearing on the Debtors Motion to Incur Such Financing on a Payment Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 219) (June 30, 2009).
47 Landlords contended that, in the event of a default, the provisions of the DIP Facility might grant the DIP Lenders a right to occupy the leased premises securing the loan.240 Tax authorities claimed that the senior liens would be superior to tax liens granted by state law.241
These objections were presented in limited form, and are not the basis for the greatest objections to the DIP Facility.
b. Official Committee of Unsecured Creditors
The Official Committee of Unsecured Creditors contended that the DIP Facility would not fund the company for a sufficient period to find a buyer willing to pay a price that would maximize the value of the company.242 Moreover, the Committee alleged that the purpose of the
240 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Prime Retail Landlords and Steamtown Mall Partners, LP to Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 187) (June 29, 2009), joined by In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Joinder of the Taubman Landlords in the Limited Objection of Prime Retail Landlords and Steamtown Mall Partners, L.P. to the Emergency Motion for Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363, and 364 (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 361, 362, 363 and 364; And (V) Scheduling Final Hearing on the Debtors Motion to Incur such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 213) (June 30, 2009) and In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Joinder of Bayer Retail Company, L.L.C. in the Limited Objection of the Prime Retail Landlords and Steamtown Mall Partners, L.P. to Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Post-petition Financing Pursuant to 11 U.S.C. Sections 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. Section 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Pre-petition Secured Parties Pursuant to 11 U.S.C. Sections 361, 362, 363 and 364; and (V) Scheduling Final Hearing on the Debtors Motion to Incur Such Financing on a Payment Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 219) (June 30, 2009).
241 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection to Entry of Final Order Pursuant to 11 U.S.C. Sections 105, 361, 362, 363, and 364, and Rules 2002, 4001 and 9014 of the Federal Rules of Bankruptcy Procedure (1) Authorizing incurrence by the Debotrs [sic] of Post-petition secured indebtedness with Priority over Certain Secured Indebtedness and with Administrative Superpriority, (2) Granting Liens, (3) Authorizing Use of Cash Collateral by the Debtors Pursuant to 11 U.S.C. Section 363 and Providing for Adequate Protection, (4) Modifying the Automatic Stay and (5) Scheduling a Final Hearing (Dkt. 209) (June 30, 2009).
242 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of the Official Committee of Unsecured Creditors to Debtors’ Motion for Final Order (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III)
48 DIP Facility was to secure the payment, as administrative expenses, of unwarranted fees that had been rolled into the Revolving Credit Facility in the months leading up to the petition.243 The
Committee asserted that, due to the short sales period, the secured lenders were adequately protected without any “adequate assurance payments” as permitted by the DIP Facility.244 In short, the unsecured creditors alleged that the secured creditors were getting “unwarranted benefits and protections” which “marginalize[d] the possibility of a recovery” by the unsecured creditors.245 This complaint should not be unexpected, because most of the creditors represented by the Official Committee of Unsecured Creditors were “out of the money” on the priority ladder. As a result, the Official Committee of Unsecured Creditors had nothing to lose and everything to gain by hoping to find a buyer who would pay more for the business in a Section
Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 259) at 2 (July 3, 2009).
243 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of the Official Committee of Unsecured Creditors to Debtors’ Motion for Final Order (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 259) at 3 (July 3, 2009). As noted above, the DIP facility enabled the Bank of America syndicate to turn its prepetition claim into a secured administrative expense. In a series of transactions in an attempt to refinance the revolving loan in the months leading up to the petition, the debtor incurred millions of dollars of additional fees which were rolled into the prepetition loans.
244 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of the Official Committee of Unsecured Creditors to Debtors’ Motion for Final Order (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 259) at 6 (July 3, 2009).
245 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of the Official Committee of Unsecured Creditors to Debtors’ Motion for Final Order (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 259) at 6 (July 3, 2009).
49 363 sale. They were more than willing to gamble that the value of the business would go up because they were gambling with the secured creditors’ collateral.
c. Senior Secured Term Lenders
The agent of the Senior Secured Term Lenders also objected to the proposed final order246 in that it eliminated some protections247 for the Senior Secured Term Lenders that were present in the interim order.248 The principal objections were that the order would require the
Senior Secured Term Lenders to seek emergency relief from the court if the debtor, with consent of the DIP Lender, unilaterally changed the budget, and that the proposed order removed the
506(c) waiver rights negotiated by the Senior Secured Term Lender.249
The Senior Secured Term Lender objected to removal of clauses in the interim DIP
Facility agreement that would prevent the Senior Secured Term Lender from priming its own loans and rolling them up250 without permission of the DIP Lender, should later funding for the
246 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Filing of Blacklined Version of Final Order Pursuant to 11 U.S.C. Sections 105, 361, 362, 363 and 364 and Rules 2002, 4001 and 9014 of the Federal Rules of Bankruptcy Procedure (1) Authorizing Incurrence by the Debtors of Postpetition Secured Indebtedness With Priority Over Certain Secured Indebtedness and With Administrative Superpriority, (2) Granting Liens, (3) Authorizing Use of Cash Collateral by the Debtors, and (4) Modifying the Automatic Stay (Dkt. 232) at 6 (July 1, 2009).
247 It is curious that these provisions were inserted. It is possible that the DIP lender inserted them at the last minute to try to “pull a fast one” on the senior secured term lender. Of course, it is also possible that the provisions may have been added by mistake. The record in the docket does not suggest what happened.
248 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Wilmington Trust FSB, as Agent for Debtors’ Secured Term Lenders, to Debtors' DIP Financing Motion (Dkt. 253) at 3 (July 3, 2009).
249 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Wilmington Trust FSB, as Agent for Debtors’ Secured Term Lenders, to Debtors' DIP Financing Motion (Dkt. 253) at 3 (July 3, 2009).
250 This is exactly what Bank of America had done to the senior secured term lenders in the roll up provision.
50 debtor become necessary.251 The original DIP Facility would have permitted priming of the DIP
Facility according to terms an Intercreditor Agreement, but the proposed final order removed all possibility of priming the DIP Facility without the DIP Lender’s consent252—consent that was unlikely to be given.
In addition, the Senior Secured Term Lender objected that in the interim order there was language which would forbid charging costs and administration of the bankruptcy against the
Senior Secured Term Lender’s collateral (a 506(c) waiver), but in a footnote added in the proposed final order,253 this right was waived if there was a Section 363 sale (the intended outcome of the bankruptcy process).254 The Senior Secured Term Lender claimed that the language in the proposed order vitiated the agreed upon 506(c) waiver.255
251 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Wilmington Trust FSB, as Agent for Debtors’ Secured Term Lenders, to Debtors' DIP Financing Motion (Dkt. 253) at 9 (July 3, 2009).
252 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Filing of Blacklined Version of Final Order Pursuant to 11 U.S.C. Sections 105, 361, 362, 363 and 364 and Rules 2002, 4001 and 9014 of the Federal Rules of Bankruptcy Procedure (1) Authorizing Incurrence by the Debtors of Postpetition Secured Indebtedness With Priority Over Certain Secured Indebtedness and With Administrative Superpriority, (2) Granting Liens, (3) Authorizing Use of Cash Collateral by the Debtors, and (4) Modifying the Automatic Stay (Dkt. 232) at section D (x) (July 1, 2009).
253 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Filing of Blacklined Version of Final Order Pursuant to 11 U.S.C. Sections 105, 361, 362, 363 and 364 and Rules 2002, 4001 and 9014 of the Federal Rules of Bankruptcy Procedure (1) Authorizing Incurrence by the Debtors of Postpetition Secured Indebtedness With Priority Over Certain Secured Indebtedness and With Administrative Superpriority, (2) Granting Liens, (3) Authorizing Use of Cash Collateral by the Debtors, and (4) Modifying the Automatic Stay (Dkt. 232) at n.5 (July 1, 2009).
254 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Wilmington Trust FSB, as Agent for Debtors’ Secured Term Lenders, to Debtors' DIP Financing Motion (Dkt. 253) at 12 (July 3, 2009).
255 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Wilmington Trust FSB, as Agent for Debtors’ Secured Term Lenders, to Debtors' DIP Financing Motion (Dkt. 253) at 9 (July 3, 2009).
51 As a result of the changes between the interim and proposed final order, the Senior
Secured Term Lender threatened to revoke consent to use its cash collateral, which would have scuttled the deal.256
8. The Final Order
In the final order approving the DIP Facility257 the court acceded to the demands of the
Senior Secured Term Lender, but largely ignored the complaints of the other creditors.258 The final order struck the footnote regarding the 506(c) waiver and replaced it with language that the waiver did not apply to the Senior Secured Term Lender.259 Similarly, the final order added back the language regarding priming of the DIP Facility of the Intercreditor Agreement.260
Presumably, the court found that these new terms were unfair to the Senior Secured Term
Lender, who was already giving up significant rights in the DIP facility. That the court ignored
256 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Wilmington Trust FSB, as Agent for Debtors’ Secured Term Lenders, to Debtors' DIP Financing Motion (Dkt. 253) at 9 (July 3, 2009).
257 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Final Order Pursuant to 11 U.S.C. Sections 105, 361, 362, 363 and 364, and Rules 2002, 4001 and 9014 of the Federal Rules of Bankruptcy Procedure (1) Authorizing Incurrence by the Debtors of Post-Petition Secured Indebtedness with Priority Over Certain Secured Indebtedness and with Administrative Superpriority, (2) Granting Liens, (3) Authorizing Use Of Cash Collateral by the Debtors Pursuant to 11 U.S.C. Section 363 and Providing for Adequate Protection, and (4) Modifying the Automatic Stay (Dkt. 313) (July 8, 2009).
258 The final order does not appear to contain revisions as to the timing and fee roll ups (the complaint of the creditors committee), the possible right of the DIP lender to occupy the premises on a default (landlord objections), or the priority of tax liens (taxing authority objections).
259 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Final Order Pursuant to 11 U.S.C. Sections 105, 361, 362, 363 and 364, and Rules 2002, 4001 and 9014 of the Federal Rules of Bankruptcy Procedure (1) Authorizing Incurrence by the Debtors of Post-Petition Secured Indebtedness with Priority Over Certain Secured Indebtedness and with Administrative Superpriority, (2) Granting Liens, (3) Authorizing Use Of Cash Collateral by the Debtors Pursuant to 11 U.S.C. Section 363 and Providing for Adequate Protection, and (4) Modifying the Automatic Stay (Dkt. 313) at 14 (July 8, 2009).
260 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Final Order Pursuant to 11 U.S.C. Sections 105, 361, 362, 363 and 364, and Rules 2002, 4001 and 9014 of the Federal Rules of Bankruptcy Procedure (1) Authorizing Incurrence by the Debtors of Post-Petition Secured Indebtedness with Priority Over Certain Secured Indebtedness and with Administrative Superpriority, (2) Granting Liens, (3) Authorizing Use Of Cash Collateral by the Debtors Pursuant to 11 U.S.C. Section 363 and Providing for Adequate Protection, and (4) Modifying the Automatic Stay (Dkt. 313) at 12 (July 8, 2009).
52 the complaints of the other unsecured creditors is not surprising, given that those creditors were out of the money and just wanted to gamble with “house money” to see if they could get more for their unsecured claims.
xii. Bid Procedures/Sales Motion
The heart of the case, beginning before the petition for bankruptcy was filed, was the anticipated sale of the business.261 Before the petition was filed, at the same time as Eddie Bauer attempted to renegotiate its debt, the company was seeking buyers.262 When it filed the petition, one of the first day motions was a motion to establish procedures to conduct a Section 363 sale of the company.263
The rule governing a sale of the business is Section 363(b) of the Bankruptcy Code, which governs use, sale, or lease of property of the estate “other than in the ordinary course of
261 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 20 (June 17, 2009).
262 One might wonder why anyone might consider buying a company on the verge of bankruptcy. While the business may actually be solid but for some extraordinary condition, such as an accumulation of debt from a former corporate parent, as was the case in the instant case, bankruptcy provides the buyer with the opportunity to take the best portions of the business, and leave the bad parts behind. In the case where there is a part of the business that would be profitable but for some bad contracts or above market leases, a bankruptcy filing grants the buyer considerable leverage in renegotiating those contracts and leases. The result is that once the “blood is in the water” and it is apparent that a company is “going under,” real bidders for fair market value are unlikely to surface.
263 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property (Dkt. 24) (June 17, 2009).
53 business.”264 A sale of property free and clear of any interest in such property of an entity other than the estate may be conducted if
(1) applicable non bankruptcy law permits sale of such property free and clear of such interest; (2) such entity consents; (3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) such interest is in bona fide dispute; or (5) such entity could be compelled, in light of a legal or equitable proceeding, to accept a money satisfaction of such interest.265 In the present case, Eddie Bauer believed that it could get the lien holders to consent to the sale of substantially all of the assets of the company.266 However, even without consent, the lender’s liens would attach to the proceeds of the sale, and they could be forced to accept a money judgment in exchange for their interest.267 As two of the conditions268 for sale of property free and clear of interests could be met, the Eddie Bauer argued that the sale should go
264 11 U.S.C. § 363(b).
265 11 U.S.C. § 363(f).
266 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 27 (June 17, 2009).
267 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 27 (June 17, 2009).
268 The conditions are disjunctive, so meeting any of the five conditions is sufficient.
54 forward and it asked the court to establish procedures to conduct an auction of the business as a going concern.269
1. Stalking Horse
Before the petition, Eddie Bauer had negotiated to have Rainier Holdings, LLC act as a
“stalking horse bidder.”270 Eddie Bauer executed a stalking horse agreement271 where Ranier
269 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 27 (June 17, 2009).
270 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 2 (June 17, 2009). CCMP Capital Advisors, LLC is the controlling shareholder of Rainier Holdings, LLC. CCMP is a private equity firm specializing in purchasing companies in the retail, healthcare, energy, and industrial areas. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 30 (June 17, 2009).
271 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain
55 agreed to place a minimum bid of $202 million (with a deposit in excess of $5 million) in an auction for the sale of substantially all of the assets of the company.272 The stalking horse would assume all of the liabilities to customers (such as gift cards and guarantees).273 The stalking horse further agreed to assume at least 250 leases and offer employment to the majority of company employees.274 In exchange for providing the opening bid in the auction, the stalking
Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) Exhibit B-1 (June 17, 2009).
272 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 5-6 (June 17, 2009). See also, Eddie Bauer Plans its Next Ascent, WALL ST. J. June 19, 2009.
273 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 6 (June 17, 2009).
274 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 6 (June 17, 2009).
56 horse was entitled to a $5 million “break up fee” in the event that another purchaser outbid it in the auction.275
2. Auction Procedures
The stalking horse desired a quick sale of the company in order to begin its turnaround efforts. As such, the proposed timeline for the auction was compressed to 45 days.276 Eddie
Bauer filed a first day motion to establish the procedures.277 The motion proposed that three days after the order approving the sale procedures was issued, all interested parties would be
275 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 6 (June 17, 2009).
276 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 5 (June 17, 2009).
277 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) (June 17, 2009).
57 given notice of the auction.278 The auction would occur on July 16, and the final consummation of the deal would happen on July 31.279 After the deal closed, Eddie Bauer and the buyer would negotiate as to which leases would be assumed and assigned to the buyer and which would remain with the debtor in possession and be rejected.280
3. Bidding Process
The proposed procedures for bidding were designed to maximize the value of the sale to the estate. Prepetition secured creditors would be permitted to “credit bid” their claims against
278 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 12 (June 17, 2009).
279 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 5 (June 17, 2009).
280 Based on this timeline, the motion proposed an extension of the usual time to either reject or assume the leases. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 13 (June 17, 2009).
58 the estate.281 Finally, Eddie Bauer argued that the protection of the bid of the stalking horse with a break-up fee and payment of expenses would enhance the value of the estate by encouraging more competitive bidding.282
4. Store closing guidelines
As previously described, as part of the sale, it was expected that the winning bidder would consult with Eddie Bauer to reject a number of leases and the corresponding stores would
281 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 12 (June 17, 2009). Credit bidding seems to one of us (BCH) to be a suspect practice at best. A creditor’s claim is worth pennies on the dollar, but in a credit bid, the creditor is allowed to bid the full amount of the claim. Essentially, this practice deprives the other creditors—those who are not the purchasers—of their fair share, even if it is only pennies on the dollar.
282 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 23-24 (June 17, 2009). Moreover, the breakup fee was only payable if the auction price exceeded the minimum price plus the amount of the break up fee, in which case there would be no harm to the estate. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 24 (June 17, 2009).
59 be closed.283 As part of this process, the buyer would have store closing sales, and in the motion
Eddie Bauer sought permission to conduct these sales according to a set of store closing guidelines.284
5. Assumption, Assignment and Rejection Procedures and Time
Extensions
Under the proposed terms of the asset sale, the successful bidder would have 210 days285 from the petition date to decide which leases would be assumed.286 Moreover, for other
283 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 20 (June 17, 2009).
284 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) Exhibit H (June 17, 2009).
285 The extension of the time to reject or assume the leases required beyond 120 days from the petition date requires an order of the court to extend the time. See 11 U.S.C. § 365(d)(4)(B)(i).
286 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 13 (June 17, 2009).
60 specified contracts, the successful bidder would have 120 days from the date of the petition.287
The time periods fixed from the date of the petition gave further support for the need to shorten the timeframe for the auction of the company, because a drawn out auction would leave the successful bidder with less time to decide which of the leases to assume.288 Upon consummation of the sale, the successful bidder would have the right to designate which of the leases would be rejected and which would be assumed and assigned, provided that a minimum of 250 domestic leases would be assumed and assigned.289
287 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 13 (June 17, 2009). The winning bidder would have 120 days from the petition date to evaluate Eddie Bauer's 2003 private label credit card agreement with World Financial Network Bank and a 2004 agreement for printing and electronic publishing services from R.R. Donnelly & Sons. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 29 (June 17, 2009).
288 See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 2 (June 17, 2009).
289 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets;
61 6. Objections
Notice of a hearing on the auction procedures was given to interested parties, with objections due by June 26, 2009.290 A number of parties filed objections to the procedures.
a. Landlords
Several landlords for the retail properties filed limited objections291 to the procedures for the sale, alleging the short timescale for the auction procedure was burdensome292 because the
(C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 14 (June 17, 2009).
290 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Motion (Dkt. 73) (June 18, 2009).
291 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) (June 25, 2009). Numerous other landlords filed limited objections with essentially the same claims or joined in the objections. See, e.g., In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of Steamtown Mall Partners to Motion Pursuant to 11 U.S.C. Sections 105(A), 363 and 365 of the Bankruptcy Code and Bankruptcy Rules 2002, 6004 and 6006 for (i) Entry of an Order(A) Establishing Bidding and Auction Procedures
62 Related to the Sale of All of the Debtors Assets; (B) Approving Bid Protection for the Sale of the Debtors Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. Section 365(d)(4) (Dkt. 145) (June 25, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of CLPF-600 NMA, L.P., a Delaware Limited Partnership, by and Through their Management Agent, Mid-America Asset Management, Inc., to the Debtors Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors Assets; (B) Approving Bid Protections for the Sale of the Debtors Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4) (Dkt. 147) (June 25, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection by Capital Augusta Properties Limited Partnership to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of all Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4)(Dkt. 149) (June 26, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Inland Southwest Management LLC, and Inland Commercial Property Management, Inc. to Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365 (D)(4) (Dkt. 150) (June 26, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Westfield LLC and Certain Affiliates to Motion Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 For (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections For the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts and Leases to Be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines For Conducting Store Closing Sales; and (D) Extending the Deadline To Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4)(Dkt. 156) (June 26, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Kravco Simon Company, Levin Management and GGP Limited Partnership to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D)
63 Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 157) (June 26, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Joinder of Gregory Greenfield & Associates Ltd. to the Limited Objection of the Macerich Company, The Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 158) (June 26, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Joinder of The Taubman Landlords to Objection of CLPF-600 NMA, L.P., to Debtors Motion For (1) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of all of the Debtors Assets; (B) Approving Bid Protections for the Sale of the Debtors Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (ii) Entry of an Order (A) Approving the Sale of the Debtors Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conduction Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 159) (June 26, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Joinder of Simon Property Group, Inc. to Objections of Cousins Properties, Inc., Southgate Mall Associates, The Forbes Company, And The Macerich Company to Motion Pursuant To 11 U.S.C. §§ 105(A), 363,365, And Bankruptcy Rules 2002,6004,6006 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors' Assets; (B) Approving Bid Protections For The Sale Of The Debtors' Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors' Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry of an Order (A) Approving The Sale Of The Debtors' Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 163) (June 26, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Joinder of Greater Lakeside Corporation, as Agent for Causeway Associates, to the Limited Objection of the Macerich Company, The Forbes Company, Cousins Properties, Inc., and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363,365, And Bankruptcy Rules 2002,6004,6006 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors' Assets; (B) Approving Bid Protections For The Sale Of The Debtors' Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors' Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry of an Order (A) Approving The Sale Of The Debtors' Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 164) (June 25, 2009).
292 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding
64 short timeframe would not allow the landlords sufficient time to determine if the buyer/assignee could provide adequate assurances on the leases and the landlords had insufficient time to prepare proper objections.293 The landlords demanded more information to give them a chance to determine whether assurances of payment were adequate.294 Moreover, the landlords asserted
And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 3 (June 25, 2009).
293 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 4 (June 25, 2009).
In particular, if the buyer was anyone other than the stalking horse bidder, under the proposed schedule the landlords would have one business day to investigate adequate assurances and file an objection. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Westfield LLC and Certain Affiliates to Motion Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 For (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections For the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts and Leases to Be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines For Conducting Store Closing Sales; and (D) Extending the Deadline To Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4) (Dkt. 156) at 3 (June 26, 2009);
294 The landlords, among other requests, wanted the full financials of the stalking horse bidder, and claimed that because it was newly formed for the purpose of buying the assets of the debtor, it had no financial history. With no financial history, any assurances would be inadequate. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain
65 that the proposed cure amounts were insufficient, and that cure amounts must include all charges due under the leases.295 Finally, the landlords asserted that the assumption and assignment provisions in the Section 363 sale plan must abide by the special rules for assignment of shopping center leases in Section 365(f)(1).296
For properties where the lease was rejected, the landlords wanted to set the effective date of the rejection as the date that the premises were turned over in “broom clean condition” with all property and signage removed.297 The landlords also wanted compensation for any costs
Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 8 (June 25, 2009).
295 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) 365(d)(4) (Dkt. 140) at 9 (June 25, 2009).
296 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 10 (June 25, 2009).
297 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors
66 associated with rehabilitation of a rejected property to rent it to a subsequent lessee.298 Finally, the landlords wanted to place restrictions on the manner of “going out of business sales” that were conducted.299 For instance, landlords wanted to limit the manner and type of
Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 14 (June 25, 2009).
298 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. § 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 14 (June 25, 2009). Among other costs, the landlords anticipated cleaning out abandoned property of the debtors. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. § 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 4 (June 25, 2009).
299 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 16-17 (June 25, 2009).
67 advertising,300 prevent the augmentation of inventory during the sales, and other behavior which landlords thought might injure tenants of other properties located in the same shopping center.
Objections to assumptions and assignments of leases will be discussed more completely in Section V infra.
b. Tax Authority Objections
Similar to the objections to the tax motion, described in Section IV.c.vi supra, tax authorities objected to the sale of property free and clear of tax liens.301 The Arapahoe county treasurer asserted that because of state law the property taxes owed were granted a lien of superior priority to the other liens on the debtor’s property.302 The Arapahoe county treasurer requested that either the taxes be paid out of proceeds of a Section 363 sale, or, in the alternative,
300 The landlords wanted to have the closing sales labeled as “store closing sales” rather than “going out of business sales.” Moreover, they wanted to control the types and sizes of signage and advertising for the sales. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 16-17 (June 25, 2009).
301 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Treasurer of Arapahoe County, Colorado to Debtors Motion to Sell Its Assets Free and Clear of Liens, Claims, Encumbrances and Interests (Dkt. 146) (June 25, 2009).
302 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Treasurer of Arapahoe County, Colorado to Debtors Motion to Sell Its Assets Free and Clear of Liens, Claims, Encumbrances and Interests (Dkt. 146) at 1 (June 25, 2009).
68 that a separate segregated account be funded with funds to pay the accumulated property taxes.303
c. Official Committee of Unsecured Creditors
The Official Committee of Unsecured Creditors filed an objection to the sales procedures with two principal objections.304 First they objected to the fact that the motion made no allowance for a sale of less than all of the debtors’ assets.305 The Committee asserted that there might be some bidders who would want only part of the debtor’s estate, and requiring them to buy the entire estate would chill the bidding process and diminish the amount of the estate.306
303 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Treasurer of Arapahoe County, Colorado to Debtors Motion to Sell Its Assets Free and Clear of Liens, Claims, Encumbrances and Interests (Dkt. 146) at 1-2 (June 25, 2009).
304 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 175) (June 28, 2009).
305 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 175) at 2-3 (June 28, 2009). This objection is quite surprising in the context of the history of the Spiegel bankruptcy. It was exactly the sale of less than all of the assets of the Spiegel corporation that allowed the formation of EBHI saddled with the debt of the parent in the prior reorganization. Ultimately, this led to the demise of EBHI. Apparently, the Official Committee of the Creditors thought it would be a good idea to do the same thing again.
306 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and
69 This objection is quite surprising in the context of the history of the Spiegel bankruptcy. It was exactly the sale of less than all of the assets of Spiegel that allowed the formation of Eddie Bauer saddled with the debt of the parent in the prior reorganization of Spiegel.307 Ultimately, this led to Eddie Bauer filing for bankruptcy protection.308 Apparently, the Official Committee of the
Unsecured Creditors thought it would be a good idea to do the same thing again.
Second, the Official Committee of Unsecured Creditors objected to the fact that the procedures allowed the secured creditors to credit bid the full face value of their secured claim.309 The unsecured creditors asserted that the minimum bid for the stalking horse bidder was less than the total secured claims310 and thus, at the proposed stalking horse purchase price, some of these claims would be unsecured.311 Moreover, the bid procedures would allow the
Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 175) at 4-6 (June 28, 2009).
307 See also Greg Lamm, This Bauer Bankruptcy Traces Back to Spiegel Events, PUGET SOUND BUS. J., June 17, 2009.
308 See also Greg Lamm, This Bauer Bankruptcy Traces Back to Spiegel Events, PUGET SOUND BUS. J., June 17, 2009.
309 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 175) at 6 (June 28, 2009).
310 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 175) at 3 (June 28, 2009).
311 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and
70 secured creditors to credit bid on assets that were not secured, effectively taking unsecured assets that could benefit the portion of the estate which would benefit the unsecured creditors.312 The
Committee asserted that the focus of the sales plan should be to minimize the administrative expenses and remaining priority claims and return the maximum value of the estate to unsecured creditors.313
d. Senior Secured Term Lenders
Wilmington Trust, FSB, on behalf of the Senior Secured Term Lenders, filed a limited objection to the bidding procedures.314 The objection was based on the premise that the bidding procedures would not maximize the value of the debtor’s estate.315 In particular, similar to the
Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 175) at 6 (June 28, 2009).
312 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 175) at 7-8 (June 28, 2009).
313 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 175) at 3 (June 28, 2009).
314 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of Wilmington Trust FSB, as Agents for Debtors’ Secured Term Lenders, to Debtors’ Motion (I) For Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To Sale Of Substantially All Of The Debtors' Assets; (B) Approving Bid Protections; (C) Scheduling An Auction And Sale Hearing; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief (Dkt. 176) (June 28, 2009).
315 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of Wilmington Trust FSB, as Agents for Debtors’ Secured Term Lenders, to Debtors’ Motion (I) For Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To Sale Of Substantially All Of The Debtors' Assets; (B) Approving Bid Protections; (C) Scheduling An Auction And Sale Hearing; (D) Establishing Certain Notice Procedures For
71 concerns of the Official Committee of Unsecured Creditors, the Senior Secured Term Lenders thought that a sale consisting of less than all of the debtor’s assets or sales of assets to multiple groups of bidders might yield more money.316 In addition, the Senior Secured Term Lenders wanted to have bids evaluated not on the “top line price” but rather on the “net economic value to the estate.”317
The Senior Secured Term Lenders also objected to the break up fee that could be paid to the stalking horse bidder. They asserted that the credit bid rights of the Senior Secured Term
Lenders were curtailed, because if they credit bid for the property and won, they would be forced to pay an overbid fee that included a break up fee to the stalking horse bidder.318 In addition, the stalking horse agreement included situations where the stalking horse bidder could terminate the purchase contract and still be entitled to the breakup fee.319
Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief (Dkt. 176) at 3 (June 28, 2009).
316 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of Wilmington Trust FSB, as Agents for Debtors’ Secured Term Lenders, to Debtors’ Motion (I) For Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To Sale Of Substantially All Of The Debtors' Assets; (B) Approving Bid Protections; (C) Scheduling An Auction And Sale Hearing; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief (Dkt. 176) at 3 (June 28, 2009).
317 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of Wilmington Trust FSB, as Agents for Debtors’ Secured Term Lenders, to Debtors’ Motion (I) For Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To Sale Of Substantially All Of The Debtors' Assets; (B) Approving Bid Protections; (C) Scheduling An Auction And Sale Hearing; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief (Dkt. 176) at 3 (June 28, 2009).
318 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of Wilmington Trust FSB, as Agents for Debtors’ Secured Term Lenders, to Debtors’ Motion (I) For Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To Sale Of Substantially All Of The Debtors' Assets; (B) Approving Bid Protections; (C) Scheduling An Auction And Sale Hearing; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief (Dkt. 176) at 10 (June 28, 2009).
319 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of Wilmington Trust FSB, as Agents for Debtors’ Secured Term Lenders, to Debtors’ Motion (I) For Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To Sale Of Substantially All Of The Debtors' Assets; (B) Approving Bid
72 7. Order establishing procedures
After the hearing the objections, Judge Walrath ruled and issued an order confirming the proposed bidding procedures.320 The court ruled against the objections on the merits,321 and found that the assets of the debtor should be sold off in one lot, as opposed to auctioning off the assets in smaller lots.322
8. The Auction Outcome
The auction was conducted according to the approved auction guidelines, and after the auction, Eddie Bauer filed an asset purchase agreement with the court.323 Although Ranier
Holdings, LLC had been selected as the stalking horse bidder with a minimum bid of $202
Protections; (C) Scheduling An Auction And Sale Hearing; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief (Dkt. 176) at 11 (June 28, 2009).
320 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of All of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of All of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 222) (June 30, 2009).
321 The authors agree, at least in part, with the Senior Secured Term Lender’s objection to some of the procedures, because the Senior Secured Term Lender’s right to foreclose the collateral did not originally entail a payment to a third party stalking horse. If, on the date of the petition, the Senior Secured Term Lender simply foreclosed on the secured property, it could have credit bid the value of its security without paying a penalty to the third party stalking horse.
322 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of All of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of All of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 222) at 5 (June 30, 2009).
323 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Filing Asset Purchase Agreement (Dkt. 425) (July 17, 2009).
73 million,324 the winning bidder was Everest Holdings, LLC, 325 a subsidiary of Golden Gate
Capital,326 for $286 million.327 Although many of the objections to the sales procedures appeared to be founded the premise that the auction would limit the number of bidders and not maximize the sales price,328 in the end, the final price after bidding in an auction involving several bidders329 was more than 40% higher than the opening bid by the stalking horse.
9. Objections to the Asset Sale
324 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 5-6 (June 17, 2009).
325 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Filing Asset Purchase Agreement (Dkt. 425) Exhibit A at 2 (July 17, 2009).
326 Golden Gate Capital Wins Eddie Bauer Auction, L.A. TIMES, July 18, 2009. It is ironic that the ultimate victor in the bidding process was the company that purchased Spiegel Catalog and Newport News in the bankruptcy of Spiegel. See In re Spiegel, Inc., 2005 WL 1278094, *1 (Bankr. S.D.N.Y 2005) (not reported). In the original case, Golden Gate Capital did not want the Eddie Bauer division which became the debtor in the second case.
327 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Filing Asset Purchase Agreement (Dkt. 425) Exhibit B at 36 (July 17, 2009).
328 See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 175) (June 28, 2009); see also In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of Wilmington Trust FSB, as Agents for Debtors’ Secured Term Lenders, to Debtors’ Motion (I) For Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To Sale Of Substantially All Of The Debtors' Assets; (B) Approving Bid Protections; (C) Scheduling An Auction And Sale Hearing; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief (Dkt. 176) (June 28, 2009).
329 The bidders included Great American Group, Hilco Consumer Capital, and Gordon Bros. Group, as well as Iconix Brand Group Inc. Golden Gate Capital Wins Eddie Bauer Auction, L.A. TIMES, July 18, 2009.
74 With the proposed sale of assets in place and scheduled for a close, creditors lined up to object.330 Landlords objected to the terms for assumption and assignment or rejection of their unexpired leases.331 Other interested parties objected (or supported) the sale, based on the distribution of funds after the sale.
a. Official Committee of the Unsecured Creditors
After the auction came out more favorably than they anticipated, 332 the Official
Committee of the Unsecured Creditors expressed their support of the sale,333 but still had concerns about the distribution of the bankruptcy estate. The Committee had originally objected to the sale because they thought it might not fully realize the value of the company.334 But when
330 There was also a spurious motion by one with limited contact to the case. An inmate at the Federal Medical Center in Lexington Kentucky, Jonathan Lee Riches filed a motion to intervene as plaintiff. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion to Object to Proposed Sale of Assets, Motion to Intervene as a Plaintiff and Creditor Under Rule 7024, and Under Rule 24(a) and 24(b) (Dkt. 354) (July 13, 2009). The motion to intervene is unusual, to say the least. It is a handwritten document where Mr. Riches claimed to be a hedge fund manager with interests in the case who needed more time to investigate the issues. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion to Object to Proposed Sale of Assets, Motion to Intervene as a Plaintiff and Creditor Under Rule 7024, and Under Rule 24(a) and 24(b) (Dkt. 354) at 2 (July 13, 2009). It seems that Mr. Riches has made a habit of filing spurious motions in cases around the country. See generally, Emil Steiner, Man of Many Suits, Jonathan Lee Riches Sues Everyone and Everything, WASH. POST, August 23, 2007. The court was frustrated with Mr. Riches frivolous motion and summarily dismissed his motion, coupled with an order requiring him to obtain leave of the court before submitting any more motions. See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order (I) Denying Jonathan Lee Riches' Motion to Intervene as a Plaintiff and Creditor Under Rule 7024, and Under Rule 24(a) and 24(b) (II) Requiring Jonathan Lee Riches to Obtain Leave of Court Before Filing Additional Pleadings in these Chapter 11 Cases (Dkt. 626) (August 18, 2009).
331 These concerns will be addressed in Section V infra.
332 See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 175) (June 28, 2009).
333 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., The Official Committee of Unsecured Creditors’ Statement in Support of Debtors' Sale Motion (Dkt. 472) (July 21, 2009).
334 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Official Committee of Unsecured Creditors to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002,
75 the sale brought more than the minimum stalking horse bid and they suspected there would be more money for unsecured creditors, they jumped on board.
The Committee feared the proceeds of the sale would be distributed prematurely.335
Specifically, they wanted to make sure that none of the proceeds from unencumbered assets would be turned over to the secured creditors.336 They also questioned the amount of the allowed secured claim of the Senior Secured Term Lenders because the amounts of the loan had increased by $24 million in the 90 days before the petition as a result of “fees” paid in renegotiating the loans.337
Finally, the Official Committee of Unsecured Creditors asserted that there would be no prejudice to the secured creditors by holding the proceeds until all of the issues had been resolved.338 The Committee asserted that there is no statutory requirement that proceeds be paid out before the confirmation of the plan, and doing so would be a great windfall to the Senior
Secured Term Lenders who had not provided any post petition financing.339
6004, 6006 for Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 175) (June 28, 2009).
335 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., The Official Committee of Unsecured Creditors’ Statement in Support of Debtors' Sale Motion (Dkt. 472) at 4(July 21, 2009).
336 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., The Official Committee of Unsecured Creditors’ Statement in Support of Debtors' Sale Motion (Dkt. 472) at 4 (July 21, 2009).
337 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., The Official Committee of Unsecured Creditors’ Statement in Support of Debtors' Sale Motion (Dkt. 472) at 4 (July 21, 2009).
338 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., The Official Committee of Unsecured Creditors’ Statement in Support of Debtors' Sale Motion (Dkt. 472) at 8 (July 21, 2009).
339 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., The Official Committee of Unsecured Creditors’ Statement in Support of Debtors' Sale Motion (Dkt. 472) at 8 (July 21, 2009).
76 b. Taxing Authorities
Taxing authorities renewed their objections to the payment of proceeds of the Section
363 sale to the secured creditors.340 Their objection was similar to the objection to selling the assets free and clear of liens, in that state law granted them first priority tax liens on the property of the debtor.341 As such, they agreed with the Official Committee of Unsecured Creditors that the proceeds from the sale should not be distributed immediately to the Senior Secured Term
Lenders.342
c. Senior Secured Term Lenders
The Senior Secured Term Lenders took a position directly opposed to the Taxing
Authorities and the Official Committee of Unsecured Creditors.343 They wanted the proceeds of the Section 363 sale distributed to the Senior Secured Term Lenders immediately.344 The
340 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection to Motion Pursuant to 11 U.S.C. Sections 105 (A), 363, 365 and Bankruptcy Rules 2002, 6004, 6006 for (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances, and Interests (Dkt. 426) (July 21, 2009).
341 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection to Motion Pursuant to 11 U.S.C. Sections 105 (A), 363, 365 and Bankruptcy Rules 2002, 6004, 6006 for (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances, and Interests (Dkt. 426) at 3 (July 21, 2009).
342 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection to Motion Pursuant to 11 U.S.C. Sections 105 (A), 363, 365 and Bankruptcy Rules 2002, 6004, 6006 for (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances, and Interests (Dkt. 426) at 3 (July 21, 2009).
343 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of Wilmington Bank FSB, as Agents of Debtors’ Secured Term Lenders, to Proposed Order Approving the Sale of Substantially all of the Debtors' Assets to Golden Gate Capital as Successful Bidder at Debtors' 363(b) Auction Sale (Dkt. 449) (July 20, 2009).
344 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of Wilmington Bank FSB, as Agents of Debtors’ Secured Term Lenders, to Proposed Order Approving the Sale of Substantially all of the Debtors' Assets to Golden Gate Capital as Successful Bidder at Debtors' 363(b) Auction Sale (Dkt. 449) at 2 (July 20, 2009).
77 position of the Senior Secured Term Lenders was that even if their liens were successfully challenged, they could return the money to the estate later, and that their request was, in essence, the same as the roll up loan, where the creditors with a lien on the inventory were paid immediately.345
d. Trustee’s Objection
Finally, the trustee objected not about money, but to the regulation of the post sale entity.346 The terms of the Section 363 sale included transferring all inventory of the debtor to
345 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of Wilmington Bank FSB, as Agents of Debtors’ Secured Term Lenders, to Proposed Order Approving the Sale of Substantially all of the Debtors' Assets to Golden Gate Capital as Successful Bidder at Debtors' 363(b) Auction Sale (Dkt. 449) at 2 (July 20, 2009).
346 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., United States Trustee’s Limited Objection to the Debtors Motion Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All the Debtors Assets, (B) Approving Bid Protections for the Sale of the Debtors Assets, (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to Be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors Assets Free and Clear of All Liens, Claims, Encumbrances and Interests, (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases, and (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4) (Dkt. 464) (July 20, 2009).
78 the buyer.347 The trustee asserted that because the buyer was not under the jurisdiction of the court, the court did not have authority to regulate the store closing sales.348
10. Final Order
A few days later, the court issued a final order approving the sale.349 The final order considered the objections and overruled them.350 With the sale of assets in place, the remaining
347 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., United States Trustee’s Limited Objection to the Debtors Motion Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All the Debtors Assets, (B) Approving Bid Protections for the Sale of the Debtors Assets, (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to Be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors Assets Free and Clear of All Liens, Claims, Encumbrances and Interests, (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases, and (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4) (Dkt. 464) at 3 (July 20, 2009).
348 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., United States Trustee’s Limited Objection to the Debtors Motion Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All the Debtors Assets, (B) Approving Bid Protections for the Sale of the Debtors Assets, (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to Be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors Assets Free and Clear of All Liens, Claims, Encumbrances and Interests, (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases, and (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4) (Dkt. 464) at 3 (July 20, 2009).
349 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims Encumbrances and Interests (B)Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4) (Dkt. 508) (July 23, 2009).
350 With the exception of certain objections relating to the executory contracts which are discussed in Section V. infra. See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims Encumbrances and Interests (B)Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and
79 part of the bankruptcy proceedings was to determine the amounts of the claims and administrative expenses and to fight over the distribution of money received from the Section
363 Sale.
V. Executory Contracts
a. Overview
Executory contracts raise a series of unique issues in a bankruptcy reorganization. The general rule is that the debtor in possession has until plan confirmation to decide how to treat the contracts.351 While it is often to the debtor's advantage to wait as long as possible to decide whether to assume or reject a contract, in some cases he must choose how to dispose of his obligations within a shorter, statutorily-proscribed time-frame.352
Give the importance of executory contracts within the reorganization context, a matter of crucial importance is determining what an executory contract is. Congress did not define the term in the bankruptcy code, but Professor Countryman's definition has become the standard test.353 Countryman defines executory contracts as those that have not yet been substantially performed.354 In simple terms, an executor contract is one "under which the obligations of both
Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4) (Dkt. 508) at 18 (July 23, 2009).
351 A Trustee or Debtor in Possession generally has until plan confirmation to decide what to do with respect to the estate's executory contracts. 11 U.S.C. § 365(d)(2).
352 With respect to non-residential leases of real property, the Trustee or Debtor in Possession must act within 120 days from the date of the order for relief to assume, assign, or reject an executory contract. 11 U.S.C. § 365(d)(4). The Debtor can obtain one 90 day extension for cause shown, but each subsequent extension will only be granted if the lessor has granted its "prior written consent." 11 U.S.C. § 365(d)(4)(B)(ii).
353 See, e.g., In Re Wireless Data, Inc., 547 F.3d 484, 488 n. 1 (2d Cir. 2008); Fed. Deposit Ins. Co. v. Malin, 802 F.2d 12, 17 (2d Cir. 1986).
354 Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN. L. REV. 439 (1973) and Vern Countryman, Executory Contracts in Bankruptcy: Part II, 58 MINN. L. REV. 479 (1974).
80 the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other."355
When a contract has been substantially performed by the debtor, the obligation of the other side to perform is a property right. That right becomes property of the bankruptcy estate.
On the other hand, where the counterparty to a contract has substantially performed and the debtor has yet to do so, all that remains is a liability and the contract gives rise to a claim against the estate.
b. Treatment of Executory Contracts
The debtor's options with respect to executory contracts are laid out in 11 U.S.C. §
365(a): "subject to court approval, the debtor may assume, assign, or reject any executory contract or unexpired lease." Assumption obliges the debtor in possession to perform under the contract, and the estate retains the benefit of the contract. However, the counterparty in the contract receives priority status as an administrative expense of the post-petition estate.
Similarly, the debtor can assume and then assign a contract.356 This allows the debtor in possession to realize value on the sale of the contract, while at the same time relieving itself of further liability on it.357 Finally,358 if the debtor in possession elects not to assume the contract, it
355 Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN. L. REV. 439, 460 (1973).
356 11 U.S.C. § 365(f).
357 11 U.S.C. § 365(k).
358 The debtor in possession can also “wait and see” and continue acting on the contract. Unless the counterparty forces the debtor to accept or reject, the debtor can continue to perform the contract and benefit from it. This arrangement can work against the counterparty, when a contract is initially favorable to the debtor, the debtor will continue to perform. But, if later events turn against the debtor, the debtor can reject the contract, with the rejection
81 may reject it.359 Such a rejection is treated as a pre-petition breach of the contract, and gives rise to an unsecured claim.360
Eddie Bauer’s main business was retail sales and because of the downturn in the economy it was saddled with a number of leases for unprofitable stores. Reducing the number of locations that were not performing was essential to the buyer of the business,361 and those leases would be rejected.362 For the locations the buyer wished to retain, Eddie Bauer would assume the leases and assign them to the buyer.
i. Assumption
deemed to have occurred at the date of the petition. See e.g., In re Enron Corp, 330 B.R. 387 (Bankr. S.D.N.Y. 2005) Opinion Sustaining Debtors’ Objection to Claim Filed by Taunton Municipal Lighting Plant (Claim No. 24494).
359 Cf. 11 U.S.C. § 365(g); 11 U.S.C. § 365(d)(4)(A).
360 See 11 U.S.C. § 365(g); See also In Re Enron Corp., 330 B.R. 387 (Bankr. S.D.N.Y. 2005) (finding damages arising from rejection of an executory contract which occurred post-petition but before plan confirmation were calculated as of the deemed pre-petition breach).
361 Recall, however, that there were other limitations on the decisions on whether to assume or reject a lease. In the asset purchase agreement, the stalking horse bidder had agreed to keep at least 250 retail locations open and assume the associated leases. See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion Pursuant to 11 U.S.C. §§ 105(A), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of All Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(D)(4) (Dkt. 24) at 6 (June 17, 2009).
362 Seattle landlords were concerned about the loss of lease-payment revenue from possible store closures. Greg Lamm, Landlords File Objections in Eddie Bauer Case, PUGET SOUND BUS. J., June 25, 2009, available at http://seattle.bizjournals.com/seattle/stories/2009/06/22/daily62.html. Similarly, Eddie Bauer reduced the amount of floor space it leased from Kemper Development Co. for its headquarters in Lincoln Square following a reduction in operational staff. Greg Lamm, Eddie Bauer Cuts Size of Kemper Lease, PUGET SOUND BUS. J., June 22, 2009, available at http://seattle.bizjournals.com/seattle/stories/2010/01/04/daily45.html.
82 Assumption is a prerequisite to assignment.363 The primary effect of assumption is that the bankruptcy estate becomes a party to the executory contract. Thus, it receives the benefit of the other party's performance under the contract and promises to fully perform all of the debtors’ obligations under it as well.
The debtor in possession must fulfill several requirements to assume an executory contract. It must either cure any defaults under the contract or provide adequate assurance that a cure will be promptly made.364 In addition, the debtor in possession must compensate the counterparty for any loss caused by a default or provide adequate assurance of compensation.365
Lastly, the estate must provide adequate assurance of future performance on the contract.366
Leases of real property in shopping centers receive yet another layer of protection—the bankruptcy code specifically lists types of “adequate assurance” which the debtor in possession must provide to the counterparty lessor.367 As a final protection for counterparties to executory contracts, Congress decided that should the debtor in possession subsequently default on the assumed contract, the counterparty's claims for breach will be elevated to priority administrative expense claims status,368 subject to limitations on the amount of a claim for a breached lease.369
ii. Assignment
363 11 U.S.C. § 365(f)(2).
364 11 U.S.C. § 365(b)(1)(A).
365 11 U.S.C. § 365(b)(1)(B).
366 11 U.S.C. § 365(b)(1)(C).
367 11 U.S.C. § 365(b)(3).
368 11 U.S.C. § 365(g)(2).
369 See 11 U.S.C. § 502(b)(6) (limiting the amount of a claim for a breached lease). But see 11 U.S.C. § 503(b)(7) (limiting the amount of administrative expense claims for a lease that has been assumed and breached).
83 While assumption obligates the debtor in possession on the executory contract, the contract can be transferred to a third party by assignment. In order to assign an executory contract, the debtor in possession must first assume the contract370 and the assignee must provide
"adequate assurance of future performance."371 As with assumption, defaults on the contract must be cured372 and the counterparty must be compensated for damages resulting from default.373 However, the major difference between assumption and assignment is codified in 11
U.S.C. § 365(k), which provides that assignment "relieves the trustee and the estate from any liability for any breach of such contract or lease occurring after such assignment." Thus, assignment differs from assumption in this respect: once assignment occurs, the debtor in possession is relieved of further obligations under the contract, and the counterparty must look solely to the assignee for satisfaction of the contract.
These two concepts assume374 special prominence in a case such as Eddie Bauer's. Eddie
Bauer's strategy was to sell itself to a buyer. The buyer becomes the "new" Eddie Bauer, and the
"old" Eddie Bauer simply ceases to exist upon liquidation of whatever assets remain in the old corporate shell. The salient detail here is that the "new" Eddie Bauer will have only what it acquires from the "old" Eddie Bauer in the Section 363 sale. Thus, if the buyer wants to keep an
Eddie Bauer store at an old location, "old" Eddie Bauer must assign the lease of the old location to the “new” Eddie Bauer. Likewise, if "new" Eddie Bauer wants out of other leases, "old"
370 11 U.S.C. § 365(f)(2)(A).
371 11 U.S.C. § 365(f)(2)(B).
372 11 U.S.C. § 365(b)(1)(A).
373 11 U.S.C. § 365(b)(1)(B).
374 Pun intended.
84 Eddie Bauer will retain the lease and reject it. Since the bankruptcy code endows only the trustee or the debtor in possession with powers to assume, assign, or reject these leases, the buyer must negotiate with the debtor in possession to assign the desired leases.
c. Specific Objections Raised by Creditors Relevant to Rejection
A search of the docket report in this case shows that very few counterparties to executory contracts filed an objection to any of Eddie Bauer's proposed rejections of the contracts. The explanation is probably that a counterparty is unlikely to prevail in a dispute over whether the debtor may reject an executory contract, because the standard that governs the debtor's election is extremely permissive. Courts have held that it is unnecessary for a debtor to show that the contract in question is "burdensome" in order to reject it.375 The debtor can reject a contract so long as the contract prevents the estate from accruing as much value as it could if the contract was rejected.376
Another explanation as to why so few rejection-related objections appear on the docket is that the bankruptcy code is a set of default rules, and the parties can contract around them by agreement. If the debtor can reach an agreement with a counterparty to a contract about how to treat a matter, then recourse to the respective "stick" or "carrot" provided in the bankruptcy code is unnecessary. For example, Eddie Bauer sought to reduce the amount of floor space it occupied at its corporate headquarters. Under its old lease, Eddie Bauer took up ten floors of the
375 See Group of Inst. Inv. v. Chicago, Milwaukee, St. Paul & Pac. R.R., 318 U.S. 523, 549-50 (1943) (considering whether rejection was appropriate when a contract would not affirmatively benefit the estate, or whether rejection should be allowed only in cases where contract was burdensome in the context of a railroad reorganization). Compare In Re Minges, 602 F.2d 38, 43 (2d Cir. 1979) (holding that the principles of St. Paul & Pac. R.R. applied to all types of reorganization cases).
376 In Re Minges, 602 F.2d 38, 43 (2d Cir. 1979).
85 Bellevue Tower in Lincoln Square,377 but negotiated a new lease in which it only occupied seven.378
Had Eddie Bauer rejected the lease at that location, both parties would have sustained losses. The landlord would have lost rent payments (which would be extra valuable in a depressed market for corporate real estate) and would have had to find a new tenant. Eddie
Bauer would have had to search for a suitable headquarters, bear the expense of moving, and sustain the lost time and productivity of a move. Thus, while rejection was something of a
"nuclear option" in the debtor's arsenal, actually exercising that option would be akin to mutually assured destruction.
If the landlord and Eddie Bauer agreed to modification of the agreement, then both parties would fare better. Each party would give something up, but would be hedged against a greater loss if the statutory remedies applied. The landlord would accept less rent, but would avoid losing nearly the entire sum to which it was entitled under the old contract.379 Likewise,
Eddie Bauer would benefit by reducing its overhead and would avoid having to relocate its headquarters. This type of compromise could be accomplished in at least two ways: the debtor could reject the contract, and draw up a new contract embodying the parties' compromise;380 or
377 Greg Lamm, Eddie Bauer Cuts Size of Kemper Lease, PUGET SOUND BUS. J. June 22, 2009, available at http://seattle.bizjournals.com/seattle/stories/2010/01/04/daily45.html (10 floors occupied about 220,000 square feet, or almost half of Lincoln Square's 540,000 foot tower).
378 Greg Lamm, Eddie Bauer Cuts Size of Kemper Lease, PUGET SOUND BUS. J. June 22, 2009, available at http://seattle.bizjournals.com/seattle/stories/2010/01/04/daily45.html.
379 If Eddie Bauer rejected the lease outright, that action would give the landlord a pre-petition unsecured claim against it. 11 U.S.C. § 365(g). However, that claim would almost certainly be worthless as a practical matter, as any remaining unsecured creditor of the estate would likely recoup mere pennies on the dollar after the Section 363 sale.
380 In which case the landlord would get both a new lease with the tenant and a claim against the bankruptcy estate arising from the rejection.
86 the debtor could assume the contract subject to modification. Eddie Bauer and Kemper chose the first of those options.381
The rejection process followed a pattern. The debtor would serve notice that it planned to reject a contract or lease.382 The counterparty would register no objection and the court would summarily approve the debtor's action.383 As a rejection gives rise to a claim, the counterparty was obliged to file a proof of claim within thirty days of the rejection or the deadline for proofs of claim set by the court, whichever happened to be later, in order to preserve the claim.384
d. Objections Raised by Creditors to Assumption and Assignment
Most of the creditors’ objections to Eddie Bauer's proposed treatment of executory contracts revolved around rights to adequate assurance of future performance; their rights to cure and compensation for pecuniary loss; their rights to keep various terms of the leases from being treated as unenforceable anti-assignment clauses; and their rights to have post-petition obligations on unexpired leases of real property fulfilled until the buyer reached a decision about whether or not to assume the un-expired leases.
First, creditors raised procedural objections to adequate assurance of performance. The essence of their procedural argument was that the proposed schedule provided them with
381 Greg Lamm, Eddie Bauer Cuts Size of Kemper Lease, PUGET SOUND BUS. J. June 22, 2009, available at http://seattle.bizjournals.com/seattle/stories/2010/01/04/daily45.html.
382 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Rejection of Unexpired Executory Contract (Dkt. 556) (August 4, 2009).
383 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to Sections 105, 363, and 365 of the Bankruptcy Code and Bankruptcy Rules 2002, 6004, and 6006, Approving the Rejection of Unexpired Executory Contracts (Dkt. 633) at 2 (August 19, 2009).
384 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to Sections 105, 363, and 365 of the Bankruptcy Code and Bankruptcy Rules 2002, 6004, and 6006, Approving the Rejection of Unexpired Executory Contracts (Dkt. 633) at 2 (August 19, 2009).
87 insufficient time to evaluate the adequacy of any assurances that might be tendered to them.
Thus, they objected to the proposed schedule of the Section 363 sale on the basis that the expedited time table made it very difficult to evaluate whether any of the potential assignees
(whoever won the auction) would be able to adequately perform under the terms of the leases.385
Under Eddie Bauer’s proposed schedule, the auction would take place a month after the petition.386 The landlords argued that they would require additional time to determine if the assurances offered were adequate.
The creditors also raised a substantive objection to the proposal on the basis that they had not actually received adequate assurance of performance. In order to properly investigate a potential buyer, they needed to be able to evaluate each potential buyer's ability to perform.387
385 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection by Capital Augusta Properties Limited Partnership to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of all Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4) (Dkt. 149) at 5 (June 25, 2009).
386 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 3 (June 25, 2009).
387 This position raises a interesting problem for the creditors. It seems that they assume that the executor contract would be assigned to the buyer. There is no such requirement in the code. If the buyer wanted to assume 250 leases, the asset purchase agreement would have those leases assigned to the buyer. But, the remaining leases would remain with the debtor to be rejected. But, those leases could theoretically be assumed and assigned to a different
88 The creditors wanted to know, at a minimum, the name of each proposed bidder, the potential assignee's intended use for the space, the potential assignee's audited financials for the past three years, the assignee’s cash flow analyses, the assignee's retail experience, and the contact information for a person within the potential assignee's organization who could serve as an effective liaison with the creditors in evaluating whether the assignee could provide adequate assurance.388 As of the date the creditors filed their objection, they had yet to receive adequate assurance. Thus, in the creditors' view, the debtor had not met the basic requirements of the bankruptcy code—much less the heightened protections specifically afforded shopping center lessors.389
party. The position of the creditors took would only protect them from the buyer not being able to perform—it would not protect them from some other assignee being unable to perform.
388 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 5 (June 25, 2009).
389 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 7 (June 25, 2009).
89 Second, counterparties objected to the proposed schedule because it impinged upon their rights to cure and compensation for pecuniary loss.390 One problem was that the debtor's proposed schedule allowed the creditors only 14 days from receipt of the bidding procedure notice to raise objections to cure or compensation. Since the winner of the auction might not make a choice about which leases to reject and which to have assigned to it until well after the 14 days,391 there was potential that the creditors would be held to cure amounts which did not reflect the circumstances at the time the rejection was made.392 Thus, the creditors urged that the debtor needed to provide a mechanism whereby the creditors could amend the amounts required for cure and compensation if the ones they previously calculated proved inadequate later.393
390 11 U.S.C. § 365(b)(1)(A), (B). 391 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 9 (June 25, 2009). 392 This should be distinguished from the claim from a rejection of an executory contract. The claim amount for a rejected contract is calculated from the time immediately preceding the petition. 11 U.S.C. § 502(g). See e.g., In re Enron Corp, 330 B.R. 387 (Bankr. S.D.N.Y. 2005) Opinion Sustaining Debtors’ Objection to Claim Filed by Taunton Municipal Lighting Plant (Claim No. 24494). 393 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 9 (June 25, 2009).
90 Furthermore, the bankruptcy code requires that cure and compensation be given the counterparty as a prerequisite to assumption or assignment. Thus, the counterparties objected both to the absence of any framework for dealing with disputed cure amounts, and the absence of adequate provision for the immediate cure of defaults upon assumption and assignment.394
Ultimately, the non-debtors' objections in these three areas (procedural and substantive objections to inadequate assurances, and objections to the cure structure) were largely overruled.395 The Court approved the assumption and assignment procedures and approved the cure procedures with respect to all parties other than landlords of unexpired non-residential real property leases.396 The debtors had two days from entry of the bidding procedure order to notify interested parties of what it believed were the correct cure amounts for those executory contracts that were in default, and of the possibility that the auction winner might assume or assign the
394 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection of the Macerich Company, the Forbes Company, Cousins Properties Incorporated, and Southgate Mall Associates to Motion Pursuant To 11 U.S.C. §§ 105(A), 363, 365, And Bankruptcy Rules 2002, 6004, 6004 For (I) Entry Of An Order (A) Establishing Bidding And Auction Procedures Related To The Sale Of All Of The Debtors Assets; (B) Approving Bid Protections For The Sale Of The Debtors Assets; (C) Scheduling An Auction And Sale Hearing For The Sale Of The Debtors Assets; (D) Establishing Certain Notice Procedures For Determining Cure Amounts For Executory Contracts And Leases To Be Assigned; And (E) Granting Certain Related Relief; And (II) Entry Of An Order (A) Approving The Sale Of The Debtors Assets Free And Clear Of All Liens, Claims, Encumbrances And Interests; (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases; (C) Establishing Rejection Procedures And Guidelines For Conducting Store Closing Sales; And (D) Extending The Deadline To Assume Or Reject Unexpired Leases Of Nonresidential Real Property Pursuant To 11 U.S.C. § 365(d)(4) (Dkt. 140) at 6 (June 25, 2009).
395 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of All of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of All of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 222) at 5 (June 30, 2009).
396 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of All of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of All of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 222) at 9, 10 (June 30, 2009).
91 executory contracts in question.397 The notice would also contain a June 16, 2009 deadline by which the recipient had to file any objection it might have to the proposed cure amount or assignment. Any objections to cure or assignment raised after that deadline were barred. The debtor was ordered to post notice of the auction winner and of the executory contracts it sought to assume or assign as soon as practicable.398 However, the court noted that its ruling on these matters did not apply to landlords with unexpired leases of real property.
The court's posture towards lessors of unexpired, non-residential real property leases was far more favorable. First, the court ordered the stalking horse to provide the lessors with materials demonstrating adequate assurance almost immediately, provided they promised not to disclose the stalking horse's confidential information.399 Furthermore, the court required potential bidders to submit material providing adequate assurance with any bid they submitted to
397 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of All of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of All of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 222) at 9, 10 (June 30, 2009).
398 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of All of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of All of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 222) at 11 (June 30, 2009).
399 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of All of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of All of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 222) at 12 (June 30, 2009) (The deadline for providing adequate assurance was July 3, a mere four days from the date the order was entered).
92 Eddie Bauer.400 If one of those bidders won the auction, Eddie Bauer was required to transfer that material to the interested lessors as soon as possible after the bid deadline.401
The court's order regarding cure amounts and sufficient notice for unexpired leases tracked its treatment of non-debtor parties to general executory contracts. However, no hearing would be held or final determination made regarding cure, assumption, or assignment until a particular lease was proposed to be assumed or assigned.402 At such time, the debtor in possession would serve a notice of the proposed disposition of the lease to the landlords, stating a final cure amount and a deadline by which the lessor had to express its objection.403 This procedure addressed the landlords’ concern of being locked into cure amounts that were no longer valid. The court granted significant protection to landlords to Eddie Bauer's unexpired
400 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of All of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of All of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 222) at 12 (June 30, 2009).
401 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of All of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of All of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 222) at 12 (June 30, 2009).
402 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of All of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of All of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 222) at 13 (June 30, 2009).
403 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of All of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of All of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief (Dkt. 222) at 13 (June 30, 2009).
93 leases, but afforded Eddie Bauer wider latitude to dispose of its other executory contracts consistent with what it believed were in the debtors’ best interests.
i. Specific Unexpired Leases
Most kinds of unexpired leases can be assigned even if there is an anti-assignment clause in the lease,404 but the assignee of a lease in a shopping center must comply with the various restrictions detailed in Bankruptcy Code Section 365(b)(3) to the extent they appear in the contract. Specific clauses restricting the tenant's use of the premises or restricting tenant mix, or containing radius restrictions cannot be excised piece-meal from the contract on the basis that they are anti-assignment provisions. To the extent the contract is assumed or assigned, these types of restrictions remain with it.
Because of this, at least one landlord wanted adequate assurances that these various terms in their original lease agreements with the debtor would be honored by the eventual assignees of the contracts.405 Because no objection or order referencing this matter appears on the docket, one can only assume either that the matter was dealt with in a hearing, or that Eddie Bauer or the court took for granted that the debtor was correct. However, as the case law in the landlord's
404 11 U.S.C. § 365(f)(1).
405 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection by Capital Augusta Properties Limited Partnership to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of all Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4) (Dkt. 149) at 5-6 (June 26, 2009).
94 objection appears fairly strong, it is difficult to imagine that the various use restrictions mentioned in its leases would be construed as anti-assignment provisions.
The same landlord sought an order from the Court expressly requiring the debtor to perform its obligations under its lease during the period between the time the petition was filed and the moment the debtor reached a decision to either assume or reject it.406 The bankruptcy code requires the debtor to do so, but the landlord probably sought the additional comfort that a court order would provide.407 Again, no order relevant to this point appears on the docket, and it appears that the court would address this point if and when the lease was rejected.
ii. Non Lease Executory Contracts
In an objection that did not deal with an unexpired lease, Distribution Management
Group, Inc. ("DMG") objected to what it contended was a violation of the principles of cum onere.408 DMG provided logistics consulting services to Eddie Bauer. DMG analyzed Eddie
Bauer's shipping needs and implemented a strategy to reduce its costs. Most significant, DMG negotiated with various carriers, such as FedEx and UPS, on Eddie Bauer's behalf. DMG argued
406 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection by Capital Augusta Properties Limited Partnership to Debtors' Motion Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 for (I) Entry of an Order (A) Establishing Bidding and Auction Procedures Related to the Sale of All of the Debtors' Assets; (B) Approving Bid Protections for the Sale of the Debtors' Assets; (C) Scheduling an Auction and Sale Hearing for the Sale of the Debtors' Assets; (D) Establishing Certain Notice Procedures for Determining Cure Amounts for Executory Contracts and Leases to be Assigned; and (E) Granting Certain Related Relief; and (II) Entry of an Order (A) Approving the Sale of the Debtors' Assets Free and Clear of all Liens, Claims, Encumbrances and Interests; (B) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases; (C) Establishing Rejection Procedures and Guidelines for Conducting Store Closing Sales; and (D) Extending the Deadline to Assume or Reject Unexpired Leases of Nonresidential Real Property Pursuant to 11 U.S.C. § 365(d)(4) (Dkt. 149) at 6 (June 26, 2009). 407 11 U.S.C. § 365(d)(3). 408 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 603) at 6 (August 13, 2009).
95 that, without its services, Eddie Bauer would not have been able to secure FedEx's shipping services at such attractive rates.409 By DMG's estimates, Eddie Bauer stood to reap approximately 15 million dollars in cost savings through the favorable agreements it had negotiated with FedEx.410 Under the terms of DMG's agreement with Eddie Bauer, DMG was entitled to receive a portion of that cost-savings as its fee for performing the underlying consulting services. The amount Eddie Bauer owed to DMG under that contract was roughly 2.7 million dollars.
In its objection, DMG contended that Eddie Bauer was trying to assign the favorable
FedEx contract to another company without also assuming the obligations to pay DMG its commission on the cost savings.411 DMG argued that the two agreements, the one between
Eddie Bauer and FedEx, and the other between Eddie Bauer and DMG, were really one contract.412 The argument was that DGM provided Eddie Bauer the benefit of securing FedEx's services to Eddie Bauer—this was the consideration that Eddie Bauer bargained for. Likewise, the consideration that DMG bargained for was in the first contract—payment for crafting a favorable and functional logistics strategy on Eddie Bauer's behalf. Thus, DMG argued when
409 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 603) at 3 (August 13, 2009). 410 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 603) at 4 (August 13, 2009). 411 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 603) at 6 (August 13, 2009). 412 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 603) at 7,8 (August 13, 2009).
96 Eddie Bauer sought to assign the FedEx contract and reject the contract with DMG it was dividing what DMG viewed as one agreement.
The debtors disagreed with DMG's characterization of the issue. They argued that the two agreements were in fact two separate contracts and that either could be rejected independently of the other.413 Not only did Eddie Bauer counter DMG's objection on the merits, but it also argued that DMG was procedurally barred from asserting what it believed was an untimely objection.414
The debtor noted that it had given DMG notice that the contracts were among those that might be assumed or assigned to the winning bidder at the Section 363 sale.415 Furthermore, that notice stated that an objection to a possible assumption and assignment had to be filed by July
16, 2009.416 The court entered the sale order upon completion of the auction on July 23, 2009, approving the sale of substantially all of the debtor's assets to Everest Holdings, LLC.417 The sale order ratified the assumption or rejection of the executory contracts referenced in the initial
413 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor's Response to Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 861) at 9 (June 26, 2009). 414 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor's Response to Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 861) at 7 (June 26, 2009). 415 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor's Response to Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 861) at 5 (October 16, 2009). 416 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor's Response to Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 861) at 5 (October 16, 2009). 417 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor's Response to Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 861) at 7 (October 16, 2009).
97 notice, and became a final order.418 Thus, despite being served with both a notice of the sale, and a notice of the objection deadline, DMG waited until almost four weeks after the July 16, 2009 deadline—eleven days after the court entered the sale order—to file an objection.419
The Bankruptcy Rules permit a sale order to be altered or amended in either of two situations. First, if the movant seeks to alter or amend the order within ten days from its entry, the order may be changed.420 This avenue was not open to DMG because they waited until eleven days after the court entered the order. Second, if the movant establishes exceptional circumstances that merit relief from the order, it may be granted.421 This second option, however, is not liberally granted.422 Thus, Eddie Bauer argued that DMG had waived its objection by failing to raise it in timely fashion. Ultimately, the Court agreed with Eddie Bauer and overruled DMG's objections.423
e. Conclusion
418 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor's Response to Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 861) at 7 (October 16, 2009). 419 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor's Response to Objection of Distribution Management Group to Partial Assumption and Assignment of DMG-FedEx Contracts and DMG Confidentiality Agreement to Everest Holdings LLC (Dkt. 861) at 6 (October 16, 2009).
420 FED. R. CIV. P. 59(e) incorporated by reference in FED. R. BANKR. P. 9023.
421 FED. R. CIV. P. 60(b) incorporated by reference in FED. R. BANKR. P. 9024. 422 Mendel v. Gollust, 909 F.2d 724, 731 (2d Cir. 1990). 423 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to 11 U.S.C. §§ 105(a), 363, 365, and Bankruptcy Rules 2002, 6004, 6006 Approving Rejection of Unexpired Real Property Lease and Overruling Objections of Distribution Management Group, Inc. (Dkt. 908) at 3 (October 22, 2009).
98 Deference to the debtor appears to be the norm, rather than the exception, in a chapter 11
case. The overwhelming majority of issues presented by executory contracts in this case were
resolved with deference to the debtor.
VI. Administration of the Estate
a. Administrative Expenses
Administrative expenses of the estate were paid by two methods. First, a number of
claims paid as administrative expenses that were approved in the first day orders.424 In practice,
these administrative expenses were transferred to the buyer in the Section 363 sale through a
discount in the price, because the buyer was buying fewer assets. In addition, the buyer agreed
to assume a number of the expenses, such as customer claims, incurred in running the
business.425 Eddie Bauer paid other expenses related to business operations before the sale
without permission of the court because the expenses were in the ordinary course of business.426
424 See, e.g., In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Granting Motion for an Order (A) Authorizing Debtors to Pay Prepetition Claims of Certain (I) Critical Vendors, (II) Administrative Claimholders, (III) Customs Agents and Shippers, (B) Authorizing the Debtors to Pay for Postpetition Delivery of Outstanding Orders and (C) Granting Certain Related Relief (Dkt. 61) (June 18, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order (A) Order (A) Authorizing the Debtors to Pay Certain Prepetition: (I) Wages, Salaries, and Other Compensation; (II) Employee, Medical and Similar Benefits; (III) Reimbursable Employee Expenses; (IV) Other Miscellaneous Employee Expenses and Benefits; and (V) Independent Contractor Fees and Expenses and (B) Directing Bank to Receive, Process, Honor and Pay All Checks Presented for Payment and Electronic Payment Requests Relating to the Foregoing (Dkt. 65) (June 18, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Granting Motion Pursuant to 11 U.S.C. §§ 105(a), 363(b), 507(a) and 541(d) (I) Authorizing Payment Of Certain Taxes And Fees And (II) Authorizing And Directing Banks And Financial Institutions To Honor And Process Related Checks And Transfers (Dkt. 59) (June 18, 2009).
425 See, e.g. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Filing Asset Purchase Agreement (Dkt. 425) Appendix A (July 17, 2009).
426 See 11 U.S.C. § 363(c).
99 The DIP Facility had a carve out provision to pay a number of post petition professional expenses, and as a result, no objections were lodged to these expenses.427
However, several creditors sought to have several expenses paid as administrative expenses that were not in the ordinary course of business and as a result they required approval of the court. Among them were fees for the investment banking company who arranged the sale, deficiencies in the pension plan claimed by the Pension Benefit Guaranty Corporation, and payments for an Executive Incentive Plan.
i. Peter J. Solomon Company
Eddie Bauer employed Peter J. Solomon Company (“PJSC”) as an investment banker in
December of 2008 to investigate strategic alternatives for the company—including a possible sale of the business.428 Before the petition, PJSC tried to find a buyer for the business.429 No sale was consummated before the petition was filed, but PJSC had identified a stalking horse bidder for a post petition auction of the business in a Section 363 sale.430 Before the petition, in conjunction with the possible sale of the business, Eddie Bauer signed an engagement letter
427 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Emergency Motion for Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363 and 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Liens and Superpriority Claims; (IV) Granting Adequate Protection to Prepetition Secured Parties Pursuant to 11 U.S.C. §§ 362, 362, 363, and 364; and (V) Scheduling Final Hearing on the Debtors' Motion to Incur Such Financing on a Permanent Basis Pursuant to Bankruptcy Rule 4001 (Dkt. 14) (June 17, 2009).
428 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Application Pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code for an Order Authorizing the Debtors to Employ Peter J. Solomon Company as Investment Banker and Financial Advisor for the Debtors Nunc Pro Tunc to the Petition Date (Dkt. 28) at 4 (June 17, 2009).
429 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 19 (June 17, 2009).
430 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc. in Support of First Day Motions (Dkt. 2) at 20 (June 17, 2009).
100 which entitled PJSC to costs and fees associated with the sale of the company,431 not to exceed
$3.75 million.432 In a motion to the court, Eddie Bauer requested that PJSC be compensated on terms substantially similar to the engagement letter as an administrative expense under
Bankruptcy Code Sections 328 and 327(a).433 To demonstrate that it was sufficiently disinterested, PJSC affirmed that, even though PJSC had acted as an advisor to the Spiegel
Official Committee of Unsecured Creditors it had no business relationship with the Spiegel liquidating trust, and that acting in the capacity of advisor to the Spiegel Official Committee of
Unsecured Creditors would not compromise its proposed retention by the debtors.434
With millions of dollars at stake, it is completely understandable that the Eddie Bauer
Official Committee of Unsecured Creditors objected to treating the proposed fees to be paid to
PJSC as an administrative expense.435 Those fees would be paid out of the unsecured creditors’
431 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Application Pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code for an Order Authorizing the Debtors to Employ Peter J. Solomon Company as Investment Banker and Financial Advisor for the Debtors Nunc Pro Tunc to the Petition Date (Dkt. 28) at 5 (June 17, 2009). The fees would be 50% a cash financing fee through a DIP loan, $2.25 million for the sale, and a monthly fee of $200,000. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Application Pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code for an Order Authorizing the Debtors to Employ Peter J. Solomon Company as Investment Banker and Financial Advisor for the Debtors Nunc Pro Tunc to the Petition Date (Dkt. 28) at 7 (June 17, 2009).
432 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Application Pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code for an Order Authorizing the Debtors to Employ Peter J. Solomon Company as Investment Banker and Financial Advisor for the Debtors Nunc Pro Tunc to the Petition Date (Dkt. 28) at 8 (June 17, 2009).
433 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Application Pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code for an Order Authorizing the Debtors to Employ Peter J. Solomon Company as Investment Banker and Financial Advisor for the Debtors Nunc Pro Tunc to the Petition Date (Dkt. 28) at 9 (June 17, 2009).
434 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Supplemental Declaration of Bradley I. Dietz in Support of Debtors’ Application Pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code for an Order Authorizing the Debtors to Employ Peter J. Solomon Company as Investment Banker and Financial Advisor for the Debtors Nunc Pro Tunc to the Petition Date (Dkt. 101) at 3 (June 22, 2009).
435 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection By The Official Committee Of Unsecured Creditors To Application For Order Authorizing The Retention And Employment Of Peter J. Solomon
101 share of the Section 363 sale proceeds, if any. The Committee argued that the fees were too large for what would amount to 30 days of work, and that PJSC had performed much of the work prior to the petition.436 Moreover, they alleged that PJSC was doing little to increase the value of the estate with the stalking horse already in place, and that the structure of the compensation package for PJSC did not include any incentives to maximize the auction price of the company or encourage bidding at the auction.437
After a hearing, the court approved the engagement of PJSC nunc pro tunc to the petition date with the fees subject to court review.438 Shortly after the Section 363 sale, PJSC filed an application for compensation.439 The compensation requested was $2.95 million plus $66,000 for expenses incurred in the transaction.440 The fees were approved by the court.441
Company As Investment Banker And Financial Advisor To The Debtors Under 11 U.S.C. §327(a), 328(a) (Dkt. 265) at 1 (July 6, 2009).
436 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection By The Official Committee Of Unsecured Creditors To Application For Order Authorizing The Retention And Employment Of Peter J. Solomon Company As Investment Banker And Financial Advisor To The Debtors Under 11 U.S.C. §327(a), 328(a) (Dkt. 265) at 4 (July 6, 2009).
437 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Limited Objection By The Official Committee Of Unsecured Creditors To Application For Order Authorizing The Retention And Employment Of Peter J. Solomon Company As Investment Banker And Financial Advisor To The Debtors Under 11 U.S.C. §327(a), 328(a) (Dkt. 265) at 4 (July 6, 2009).
438 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code Authorizing the Debtors to Retain and Employ Peter J. Solomon Company as Investment Banker and Financial Advisor for the Debtors Nunc Pro Tunc to the Petition Date (Dkt. 310) at 4 (July 8, 2009).
439 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., First and Final Application of Peter J. Solomon Company as Investment Banker and Financial Advisor to the Debtors for Interim and Final Allowance of Compensation and Reimbursement of Expenses for the Period from June 17, 2009 through July 31, 2009 (Dkt. 677) (August 28, 2009).
440 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., First and Final Application of Peter J. Solomon Company as Investment Banker and Financial Advisor to the Debtors for Interim and Final Allowance of Compensation and Reimbursement of Expenses for the Period from June 17, 2009 through July 31, 2009 (Dkt. 677) (August 28, 2009). The fee was broken down into 1 month of services ($200,000), 50% of the million dollar cash financing fee ($500,000) and the $2.25 million sale transaction fee. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., First Supplemental Declaration of Bradley I. Dietz in Support of First and Final Application of Peter J. Solomon Company as Investment Banker and Financial Advisor to the Debtors for Interim and Final Allowance of
102 Although the investment banker did do some work after the sale, as evidenced by the petition for payment,442 the compensation was paid for work that was already done before the petition. The stalking horse bidder was already in place at the time of the petition and had agreed to a minimum bid for the assets of the company. According to the terms of the engagement letter, PJSC would be paid substantial fees even if it did no additional work. These circumstances suggest that the sale transaction fee should have been classified as a prepetition claim, at least to the extent that PJSC would be paid with no additional work. In the alternative, the fee could have been structured in a way that encouraged PJSC to maximize the price of the company by finding other bidders, such as a flat fee plus a percentage of the amount above the minimum stalking horse bid.
ii. Pension Benefit Guaranty Corporation
The Pension Benefit Guaranty Corporation443 (“PBGC”) filed claims444 which alleged that it was owed minimum funding contributions445 to retirement plans446 which Eddie Bauer
Compensation and Reimbursement of Expenses for the Period from June 17, 2009 through July 31, 2009 (Dkt. 725) at 4 (September 10, 2009).
441 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Granting First and Final Application of Peter J. Solomon Company as Investment Banker and Financial Advisor to the Debtors for Interim and Final Allowance of Compensation and Reimbursement of Expenses for the Period from June 17, 2009 through July 31, 2009. (Dkt. 764) (September 21, 2009).
442 The total time allocated to the project was 694 hours, which means that the hourly rate for the time billed to the project was nearly $4300/hour. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., First and Final Application of Peter J. Solomon Company as Investment Banker and Financial Advisor to the Debtors for Interim and Final Allowance of Compensation and Reimbursement of Expenses for the Period from June 17, 2009 through July 31, 2009 (Dkt. 677) at 3 (August 28, 2009). Nice work if you can get it.
443 The PBGC is a wholly owned United States government corporation created the Employee Retirement Income Security Act, 29 U.S.C. § 1302. It works in a similar fashion as the FDIC does for banks, insuring defined pension benefits that have been promised by corporations. See 29 U.S.C. §§ 1321-22, 1342, 1361.
444 The PBGC filed a large number of claims against EGHI and its subsidiaries. There were three types of claims at issue. The first was claims for unpaid minimum funding contributions. In re EBHI Holdings, Inc., Case No. 09- 12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 890, 891, 892, 893, 956, 966, 968, 969 and 1031 Filed by the Pension Benefit Guaranty Corporation for Unpaid Minimum Funding Contributions (Dkt. 1129)
103 voluntarily terminated in the bankruptcy proceedings.447 The PBGC asserted that the shortfall in the minimum payments should be granted administrative priority under Bankruptcy Code
Sections 503(b) and 507.448 Eddie Bauer asserted that the payments did nothing to enhance the value of the debtors’ estate and were not payments in the ordinary course of business.449
The PBGC also claimed that it was entitled to administrative priority for unfunded benefit liabilities.450 Eddie Bauer responded that similar to the claims for unpaid minimum
(December 23, 2009). The second was claims for unfunded benefit liabilities. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 902, 903, 904, 905, 1054, 1055, 1056, 1057 and 1058 Filed by the Pension Benefit Guaranty Corporation for Unfunded Benefit Liabilities (Dkt. 1130) (December 23, 2009). The third was for termination and other premium liabilities. In re EBHI Holdings, Inc., Case No. 09- 12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 950, 951, 953, 955, 957, 1000, 1001, 1002 and 1003 filed by the Pension Benefit Guranty Corporation for Termination and Other Premium Liabilities (Dkt. 1131) (December 23, 2009). The second two types of claims will be discussed infra.
445 The minimum funding contributions amounted to 1,590,720. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 890, 891, 892, 893, 956, 966, 968, 969 and 1031 Filed by the Pension Benefit Guaranty Corporation for Unpaid Minimum Funding Contributions (Dkt. 1129) at 1 (December 23, 2009).
446 The liability on these plans was actually assumed liability from the Spiegel bankruptcy several years earlier, and benefit accruals had been frozen since February of 2005. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 890, 891, 892, 893, 956, 966, 968, 969 and 1031 Filed by the Pension Benefit Guaranty Corporation for Unpaid Minimum Funding Contributions (Dkt. 1129) at 4 (December 23, 2009).
447 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 890, 891, 892, 893, 956, 966, 968, 969 and 1031 Filed by the Pension Benefit Guaranty Corporation for Unpaid Minimum Funding Contributions (Dkt. 1129) at 7 (December 23, 2009).
448 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 890, 891, 892, 893, 956, 966, 968, 969 and 1031 Filed by the Pension Benefit Guaranty Corporation for Unpaid Minimum Funding Contributions (Dkt. 1129) at 8 (December 23, 2009).
449 The payments were legacy costs associated to participants in Spiegel’s pension plan. These costs were (perhaps foolishly) assumed by EBHI in the Spiegel reorganization. No Eddie Bauer employees were accruing benefits under the plan. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 890, 891, 892, 893, 956, 966, 968, 969 and 1031 Filed by the Pension Benefit Guaranty Corporation for Unpaid Minimum Funding Contributions (Dkt. 1129) at 4 (December 23, 2009).
450 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 902, 903, 904, 905, 1054, 1055, 1056, 1057 and 1058 Filed by the Pension Benefit Guaranty Corporation for Unfunded Benefit Liabilities (Dkt. 1130) (December 23, 2009). The unfunded benefit liabilities asserted by the PBGC totaled $21.6 million. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 902, 903, 904, 905, 1054, 1055, 1056, 1057 and
104 funding contributions these claims should be treated as general unsecured claims.451 Moreover,
Eddie Bauer contended that the claims were duplicative of the unpaid minimum funding contributions.452
Finally, The PBGC claimed that it was entitled to administrative priority for premiums for the pension plan.453 The premiums in question were for the insurance that pension plans are required to pay to the PBGC. The insurance pays benefits in the event that the pension plan has insufficient resources to pay.454 In addition, the PBGC asserted that plan termination fees amounting to $1,250 per plan participant for three years should be given administrative priority.455 Eddie Bauer contended that the termination fees did not apply to plans sponsored by companies that were liquidating.456 Moreover, Eddie Bauer asserted that the insurance premium
1058 Filed by the Pension Benefit Guaranty Corporation for Unfunded Benefit Liabilities (Dkt. 1130) at 1 (December 23, 2009).
451 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 902, 903, 904, 905, 1054, 1055, 1056, 1057 and 1058 Filed by the Pension Benefit Guaranty Corporation for Unfunded Benefit Liabilities (Dkt. 1130) at 2 (December 23, 2009).
452 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 902, 903, 904, 905, 1054, 1055, 1056, 1057 and 1058 Filed by the Pension Benefit Guaranty Corporation for Unfunded Benefit Liabilities (Dkt. 1130) at 2 (December 23, 2009).
453 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 950, 951, 953, 955, 957, 1000, 1001, 1002 and 1003 filed by the Pension Benefit Guranty Corporation for Termination and Other Premium Liabilities (Dkt. 1131) (December 23, 2009).
454 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 950, 951, 953, 955, 957, 1000, 1001, 1002 and 1003 filed by the Pension Benefit Guranty Corporation for Termination and Other Premium Liabilities (Dkt. 1131) at 6 (December 23, 2009). The premiums were $34 per person enrolled in the plan plus $9 for each $1000 that the plan was underfunded. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 950, 951, 953, 955, 957, 1000, 1001, 1002 and 1003 filed by the Pension Benefit Guranty Corporation for Termination and Other Premium Liabilities (Dkt. 1131) at 8 (December 23, 2009).
455 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 950, 951, 953, 955, 957, 1000, 1001, 1002 and 1003 filed by the Pension Benefit Guranty Corporation for Termination and Other Premium Liabilities (Dkt. 1131) at 8 (December 23, 2009).
456 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 950, 951, 953, 955, 957, 1000, 1001, 1002 and 1003 filed by the Pension Benefit Guranty Corporation for Termination and Other Premium Liabilities (Dkt. 1131) at 9 (December 23, 2009).
105 fees were not entitled to administrative priority because they were not tax payments or payments in the ordinary course of business and any such payments did not benefit the estate.457
After a negotiation between the debtor and the PBGC, the parties stipulated that the amount of the liability was a $21 million general unsecured claim.458 The record does not speak to why the PBGC folded its hand. Their case was certainly not strong, and arguing that the premiums were “taxes” was probably an unsustainable position. Moreover, Eddie Bauer’s assertion that the expenses did nothing to increase the value of the estate supported the fact that the payments should not be treated as administrative expenses. We presume that the PBGC asserted the claims before the claims bar date to preserve them, but when they discovered that there was going to be very little left of the estate after paying off the secured creditors they realized that it was not worth the time and effort to pursue an amount that would be pennies on the dollar.
iii. Incentive Plans
Eddie Bauer filed a motion to approve a plan to give incentives to certain executives to encourage them to remain with the business through the anticipated Section 363 sale and to
457 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Objection to Proof of Claim Nos. 950, 951, 953, 955, 957, 1000, 1001, 1002 and 1003 filed by the Pension Benefit Guranty Corporation for Termination and Other Premium Liabilities (Dkt. 1131) at 9 (December 23, 2009).
458 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Approving Stipulation for Resolution and Settlement of All Claims Filed by the Pension Benefit Guaranty Corporation Against the Debtors (Dkt. 1302) (January 21, 2010). The general unsecured claim agreed to was slightly less than the PBGC asserted it should be paid just for the unfunded benefit liabilities.
106 maximize the value of the business.459 The Key Executive Incentive Plan (“KEI Plan”) applied to eight executives,460 and replaced plans in place before the petition entitling executives to compensation under conditions including a change in control of the corporation.461 The replacement KEI Plan allowed the key executives, in pro rata proportion to their salaries, to share in 5% of the proceeds of the sale of the business in excess of the minimum stalking horse bid
(capped at $50 million).462 Similarly, the Key Manager Incentive Plan (“KMI Plan”) would allow 39 managers463 to share in 2.5% of the proceeds of the sale in excess of the minimum stalking horse bid (capped at $50 million).464 Eddie Bauer contended the plans were justified by
“sound business judgment,” 465 and payments would only be due if the price obtained for the company was in excess of the minimum stalking horse bid.
The proposed plan had both positive and negative aspects. The positive aspect was that, unlike the payment scheme for the investment bankers,466 this proposed incentive plan paid
459 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Order Approving Key Executive Incentive Plan and Key Manager Incentive Plan (Dkt. 197) (June 29, 2009). 460 Eddie Bauer filed names of the executives and their salaries under seal. In re EBHI Holdings, Inc., Case No. 09- 12099, Bankr. Del., Motion of the Debtors for Entry of an Order Approving Key Executive Incentive Plan and Key Manager Incentive Plan (Dkt. 197) at 5 (June 29, 2009). 461 Such plans would be prepetition unsecured claims. Given the expected outcome of the bankruptcy, these claims would likely be paid at pennies on the dollar, if at all. 462 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Order Approving Key Executive Incentive Plan and Key Manager Incentive Plan (Dkt. 197) at 5 (June 29, 2009). 463 The names of the managers were filed under seal. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Order Approving Key Executive Incentive Plan and Key Manager Incentive Plan (Dkt. 197) at 6 (June 29, 2009). 464 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Order Approving Key Executive Incentive Plan and Key Manager Incentive Plan (Dkt. 197) at 6 (June 29, 2009). 465 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for Entry of an Order Approving Key Executive Incentive Plan and Key Manager Incentive Plan (Dkt. 197) at 7 (June 29, 2009). 466 Recall that the investment bankers would be paid their fee even if there was no bid in excess of the minimum stalking horse bid.
107 nothing unless the final bid at auction exceeded the minimum stalking horse bid.467 On the other hand, the plan paid compensation to executives and managers who oversaw the failure of the company. In essence, the executives were being rewarded for running the business into the ground.468
In an effort to speed up the approval of the plans, Eddie Bauer also filed a motion to shorten the time for hearings on the issue.469 The court denied this motion in order to give all interested parties sufficient time to consider the matter and be heard.470
Ultimately, the court approved the plans after no objections were raised.471 The plans are a reward for the executives who ran the company into the ground, but the plans appear to be fair in the sense that, unlike the payment plan for the investment bankers, the executives only benefitted from improving the sale price and benefitting the estate. Moreover, the executives
467 The plan raises another conflict of interest issue. The executives, who presumably were working on the details of the incentive plans while they were negotiating the stalking horse bid, would have an incentive to make the agreed upon minimum stalking horse bid as low as possible so as to inflate their incentive plan payments. There is no evidence that this kind of breach of fiduciary duty occurred.
468 This statement may be a bit unfair to the executives. The executives in place at the time of the petition were not the ones who arranged for Eddie Bauer to exit the Spiegel bankruptcy with an unsustainable level of debt. They came on board after the many of the circumstances leading to the bankruptcy were already in place. See Timeline of Eddie Bauer Events, PUGET SOUND BUS. J., JUNE 17, 2009 available at http://seattle.bizjournals.com/seattle/ stories/2009/06/15/daily40.html. Nonetheless, the blame must be apportioned to someone, and the executives at the helm at the time of the petition are the best candidates.
469 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion Pursuant to U.S.C. 105, Fed. R. Bankr. Proc. 2002(a)(2) and L.R. 9006-1(e) for an Order Approving the Time For Notice of the Hearing to Consider (I) the Motion of the Debtors Approving Key Executive Incentive Plan and Key Manager Incentive Plan; and (II) a Related Motion to File Exhibits Under Seal (Dkt. 199) (June 29, 2009).
470 It appears that Judge Walrath was in a hurry the day the order was filed. The title and the text of the order, which is the proposed order of the debtors, indicates that the motion was accepted. However, in the last line “granted” has been stricken and replaced with “denied.” In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Approving [sic] the Time for Notice of the Hearing to Consider (I) the Motion of the Debtors for Entry of an Order Approving Key Executive Incentive Plan and Key Manager Incentive Plan; and (II) a Related Motion to File Exhibits Under Seal (Dkt. 246) (June 29, 2009).
471 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Approving Key Executive Incentive Program and Key Manager Incentive Program (Dkt. 493) (July 22, 2009).
108 came on board late in the game,472 after the collapse of Eddie Bauer under the burden of
Spiegel’s debt was all but assured.
VII. Claims473
a. Claim Bar Date
In order to determine how much each of the creditors is due in a distribution of the assets of the estate, it is necessary to determine how much of each creditor’s claim is allowed.474 For this purpose, creditors are required to file a proof of claim.475 The proof of claim is also required to determine voting rights with respect to the plan.476 Eddie Bauer requested a claim bar date of
September 4, 2009 for individuals to file a proof of claim and a date of December 4, 2009 for governmental units to file a proof of claim.477 Eddie Bauer also requested procedures for actual and constructive notice to creditors.478
472 Neil Fiske came on board in 2007, several years after the emergence from the Spiegel bankruptcy. See Timeline of Eddie Bauer Events, PUGET SOUND BUS. J., JUNE 17, 2009 available at http://seattle.bizjournals.com/seattle/stories/2009/06/15/daily40.html.
473 The claims administration process for the Canadian cases was a separate process than that in the United States Courts. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order, Pursuant to Bankruptcy Rule 3003(c)(3) and Local Rule 2002-1(e), Establishing Bar Dates for Filing Proofs of Claim and Approving the Form and Manner of Notice Thereof (Dkt. 276) at 4 (July 6, 2009). The discussion here is limited to the United States Courts.
474 11 U.S.C. § 502.
475 11 U.S.C. § 501. But see 11 U.S.C. § 1111(a) (proof of claim is deemed filed if listed in the bankruptcy schedules, unless the claim is disputed, contingent, or unliquidated).
476 11 U.S.C. § 1129(c). See also In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order, Pursuant to Bankruptcy Rule 3003(c)(3) and Local Rule 2002-1(e), Establishing Bar Dates for Filing Proofs of Claim and Approving the Form and Manner of Notice Thereof (Dkt. 276) (July 6, 2009).
477 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order, Pursuant to Bankruptcy Rule 3003(c)(3) and Local Rule 2002-1(e), Establishing Bar Dates for Filing Proofs of Claim and Approving the Form and Manner of Notice Thereof (Dkt. 276) at 4-5 (July 6, 2009).
109 The court issued an order approving a claim bar date and notification procedures.479
However, the court modified the bar date, changing it to September 21, 2009 for individual claims and December 14, 2009 for governmental unit claims.480 After claims were received, the
Eddie Bauer filed objections to the claims.
b. Objections to Claims
i. Nonsubstantive Objections
Eddie Bauer filed six omnibus nonsubstantive objections to claims, generally with the same grounds: duplicate claims, amended claims, late filed claims, and claims with no supporting documentation.481 In four of these objections, no creditors responded and the
478 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Motion of the Debtors for an Order, Pursuant to Bankruptcy Rule 3003(c)(3) and Local Rule 2002-1(e), Establishing Bar Dates for Filing Proofs of Claim and Approving the Form and Manner of Notice Thereof (Dkt. 276) at 12 (July 6, 2009).
479 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to Bankruptcy Rule 3003(c)(3) and Local Rule 2002-1(e), Establishing Bar Dates for Filing Proofs of Claim and Approving the Form and Manner of Notice Thereof (Dkt. 470) (July 21, 2009).
480 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to Bankruptcy Rule 3003(c)(3) and Local Rule 2002-1(e), Establishing Bar Dates for Filing Proofs of Claim and Approving the Form and Manner of Notice Thereof (Dkt. 470) (July 21, 2009).
481 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ First Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 996) (November 20, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Second Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 997) (November 20, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Fourth Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1304) (January 29, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Seventh Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1378) (February 26, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Ninth Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1403) (March 5, 2010). An eleventh omnibus objection has only recently been filed and there have been no responses. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Eleventh Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1503) (April 9, 2010).
110 objections were granted.482 However, numerous creditors responded to the second omnibus objection to claims. The responses fell into two categories. First were responses that creditors mailed the proofs of claim well before the claims bar date but the claims were not received before the bar date, through no fault of the creditor. 483 The second class of responses was that the company had promised “paid up” life insurance policies to former employees, and the policies should be honored as priority claims and not characterized as unsecured claims.484
The court dismissed the responses of the life insurance policy holders,485 but allowed the objections to the late claims (where creditors submitted proof of mailing) to be withdrawn without prejudice.486
482 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Sustaining Debtors’ First Omnibus (Non- Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1098) (December 17, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Sustaining Debtors’ Fourth Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1384) (March 2, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Sustaining Debtors’ Seventh Omnibus (Non- Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1491) (April 5, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Sustaining Debtors’ Ninth Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1490) (April 5, 2010).
483 The creditors also proved that they sent the proof of claims by providing proof of mailing. In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Response to Debtors’ Second Omnibus Objection to Claims (Non- Substantive) (Dkt. 1066) (December 7, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Response to Debtors’ Second Omnibus Objection to Claims (Non-Substantive). (Dkt. 1070) (December 9, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Response of Carmen's Distribution Systems to Debtors’ Second Omnibus (Non-Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1081) (December 14, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Response of Carmen's Distribution Systems to Debtors’ Second Omnibus (Non- Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1089) (December 14, 2009).
484 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Response to Debtors’ Second Omnibus Objection to Claims (Non-Substantive) (Dkt. 1090) (December 14, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection to Debtors’ Second Omnibus Objection to Claims (Non-Substantive) (Dkt. 1092) (December 14, 2009).
485 This story should serve as caution to employees not to leave money or assets in the hands of their employer and to insist that the funds are held in trust beyond the reach of creditors.
111 ii. Substantive Objections
Eddie Bauer filed five omnibus substantive objections to claims.487 The grounds for the objections488 were that the claims should be reclassified;489 modified490 and allowed; deemed satisfied;491 deemed no to have liability for the debtor;492 modified and reclassified; liquidated493 and allowed; or liquidated and reclassified. Four of the objections to claims received no responses and the court issued orders granting the objections.494
486 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Sustaining Debtor’s Second Omnibus (Non- Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1164) (January 4, 2010).
487 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor’s Third Omnibus (Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 998) (November 20, 2009); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor’s Fifth Omnibus (Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1305) (January 29, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor’s Sixth Omnibus (Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1306) (January 29, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor’s Eighth Omnibus (Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1379) (February 26, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor’s Tenth Omnibus (Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1404) (March 5, 2010).
488 See, e.g., In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtor’s Third Omnibus (Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 998) (November 20, 2009).
489 A reclassification is a lowering of the priority of the claim.
490 Modified claims are those that are allowed, but that the debtor claimed that the creditor claimed an amount that was too high, so the allowed claim should be reduced to the amount that the debtor had on its books.
491 These were claims that the debtor alleged had been paid in full.
492 Claims where, even though they appeared on the books of the debtor, the debtor alleged no liability for the amount.
493 Liquidated claims are those where the claimant alleged no amount of liability of the debtor because it was not established. In response, the debtor assigned a value to the claim.
494 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Sustaining Debtor’s Sixth Omnibus (Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1412) (March 9, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Sustaining Debtor’s Fifth Omnibus (Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1413) (March 9, 2010); In re EBHI Holdings,
112 One creditor responded to the Third Omnibus objection to claims filed by the debtor.495
The response was similar to the response to the non-substantive objections above, and related to a $10,000 paid up life insurance policy that the debtor had promised to the claimant.496 Similar to the responses to the non-substantive claim objections, the court issued an order497 which granted the objections and reclassified the claim on the life insurance policy as a general unsecured claim.
VIII. Liquidation Plan
After the sale of the business and rejection of the remaining executory contracts, what remained of Eddie Bauer498 was claims, administrative expenses, and a limited amount of cash to distribute. Eddie Bauer proposed a plan to account for the estate and to distribute the remaining assets to the creditors.499
a. Plan Confirmation, in General
Inc., Case No. 09-12099, Bankr. Del., Order Sustaining Debtor’s Tenth Omnibus (Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1492) (April 5, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Sustaining Debtor’s Eighth Omnibus (Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1493) (April 5, 2010).
495 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Response to Third Omnibus Objection to Claims (Substantive) (Dkt. 1068) (December 8, 2009).
496 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Response to Third Omnibus Objection to Claims (Substantive) (Dkt. 1068) (December 8, 2009).
497 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Sustaining Debtors' Third Omnibus (Substantive) Objection to Claims Pursuant to § 502(b) of the Bankruptcy Code, Bankruptcy Rules 3003 and 3007, and Local Rule 3007-1 (Dkt. 1307) (January 29, 2010).
498 Of course, this is the “old” Eddie Bauer. Everest Holdings LLC purchased the Eddie Bauer business in the Section 363 sale.
499 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1222) (December 22, 2009).
113 The debtor must satisfy a number of statutory requirements to confirm a plan in bankruptcy.500 First, the debtor has the right to propose a plan for the first 120 days after the petition.501 The exclusive period can be extended for up to 18 months by the court after notice and hearing.502 After the period of exclusivity ends, other interested parties may propose a plan.503
In a plan, the claims are designated into classes504 which determine plan voting.505 The plan must specify which classes of claims are impaired and unimpaired,506 and all claims within a class must be treated equally.507 The plan must also provide a means of its implementation.508
The plan may impair classes of claims, and impaired claims have a right to vote on the confirmation of the plan.509
In the vote to approve a plan, the unimpaired classes are presumed to vote for it and the classes that get nothing are deemed to reject it. However, the plan may still be confirmed over the objection of some classes (“crammed down”) if at least one class that is impaired votes for
500 A complete treatment of Chapter 11 plan confirmation is well beyond the scope of this paper. The treatment here is only of the highlights of the process.
501 11 U.S.C. § 1121(b).
502 11 U.S.C. § 1121(d).
503 11 U.S.C. § 1121(c).
504 11 U.S.C. § 1123. The classes are required to be “substantially similar” as provided in 11 U.S.C. § 1122.
505 11 U.S.C. § 1129.
506 11 U.S.C. § 1123(a)(2), (3). The plan must also specify the treatment of an impaired class. 11 U.S.C. § 1123(a)(3).
507 11 U.S.C. § 1123(a)(4). However, a claim may be treated differently if the holder of the claim consents. See 11 U.S.C. § 1123(a)(4).
508 11 U.S.C. § 1123(a)(5).
509 11 U.S.C. § 1123(b)(1). See also 11 U.S.C. § 1124.
114 the confirmation.510 Even if the plan is confirmed using the “cram down” provisions, it must still meet all of the other plan requirements in 11 U.S.C. § 1129(a).
b. Extensions of the Exclusive Period
On October 13, 2009, shortly before the exclusive 120 day period expired, Eddie Bauer filed a motion to extend the exclusive period to file a plan.511 Eddie Bauer asserted that it had made significant accomplishments in the first four months of the case including obtaining relief from first day orders, auctioning off the business in a Section 363 sale as a going concern, and evaluating and rejecting numerous executory contracts.512 The request was a standard one, and the court issued an order granting the motion.513
510 11 U.S.C. § 1129(a)(10). A class is found to vote for a plan if a majority in number of creditors in the class and holders of two thirds of the value of claims in the class vote for it. See 11 U.S.C. § 1126.
511 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion for an Order Pursuant to Section 1121(d) of the Bankruptcy Code Extending Debtors’ Exclusive Period within which to File a Chapter 11 Plan and Solicit Acceptances Thereto (Dkt. 849) (October 10, 2009).
512 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion for an Order Pursuant to Section 1121(d) of the Bankruptcy Code Extending Debtors’ Exclusive Period within which to File a Chapter 11 Plan and Solicit Acceptances Thereto (Dkt. 849) at 8 (October 10, 2009).
513 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to Section 1121(d) of the Bankruptcy Code Extending Debtors’ Exclusive Period within which to File a Chapter 11 Plan and Solicit Acceptances Thereto (Dkt. 983) (November 18, 2009). The date of the order was after the expiration of the exclusive period, but local rule granted an automatic extension of the exclusive period with the filing of the motion until the court ruled. See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion for an Order Pursuant to Section 1121(d) of the Bankruptcy Code Extending Debtors’ Exclusive Period within which to File a Chapter 11 Plan and Solicit Acceptances Thereto (Dkt. 849) at n.3 (October 10, 2009).
115 On January 13, 2010, shortly before the first extension was to expire, Eddie Bauer filed a second request for an extension of the exclusive period for filing a plan.514 This motion was rendered necessary by the fact that the liquidation plan, which had been filed on December 22,
2009,515 would not be confirmed before the expiration of the exclusive period. This motion was also a standard one, and the court approved the extension.516
c. The Liquidation Plan
As described above, on December 22, 2009, during the first extension of the exclusive period for filing a plan, Eddie Bauer filed a liquidation plan to distribute the remaining assets of the debtor. 517 Eddie Bauer also filed the disclosure statement required by statute which detailed the specifics of the plan.518 The plan519 and disclosure statement520 were subsequently amended.521
514 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Debtors’ Motion for an Order Pursuant to Section 1121(d) of the Bankruptcy Code Further Extending Debtors’ Exclusive Period within which to File a Chapter 11 Plan and Solicit Acceptances Thereto (Dkt. 1203) (January 13, 2010).
515 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1221) (December 22, 2009).
516 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order Pursuant to Section 1121(d) of the Bankruptcy Code Further Extending Debtors’ Exclusive Period within which to File a Chapter 11 Plan and Solicit Acceptances Thereto (Dkt. 1274) (January 27, 2010).
517 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1221) (December 22, 2009).
518 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1222) (December 22, 2009).
519 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1269) (January 26, 2009).
520 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) (January 26, 2009).
521 The plan and the amended plan are substantively equivalent, with the exception of the addition of a few dates which were left blank in the first plan. The only substantive amendments were in the Exhibits to the plan, including the list of assumed executor contracts and claim objections. See In re EBHI Holdings, Inc., Case No. 09-12099,
116 i. Classification of Claims
The plan contained four types of unclassified claims, Administrative Expense Claims,
Statutory Fees, Professional Fees, and Priority Tax Claims.522 In addition, the plan classified claims and interests as Class 1 Other Priority Claims, Class 2 General Secured Claims, Class 3
Term Lender Secured Claims, Class 4 General Unsecured Claims, Class 5 Noteholder Securities
Claims, Class 6 Intercompany Claims, Class 7A Interests and Class 7B Interests and Securities
Claims.523 According to the plan, it was anticipated that all of the unclassified claims would be paid in full, however there would be insufficient funds to pay off all of the classified claims, and some of the classified claims were impaired.524
1. Class 1 Other Priority Claims
Class 1 Other Priority Claims were small both in the size of the claims and in total amount. The total amount of claims asserted in this class was expected to be less than $270,000, and the amount of allowed claims was expected to be under $50,000.525 Eddie Bauer expected to
Bankr. Del., Notice of Filing of Exhibit 3 to the First Amended Joint Plan of Liquidation for EBHI Holdings, Inc., et al. and Exhibit B to Disclosure Statement for the First Amended Joint Plan of Liquidation for EBHI Holdings, Inc., et al. (Dkt. 1272) (January 26, 2009). For the purposes of the discussion here, we will only treat the amended plan.
522 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 4 (January 26, 2009).
523 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 4-5 (January 26, 2009).
524 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 4-5 (January 26, 2009).
525 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 11 (January 26, 2009).
117 pay these claims in full, and as a result, the claims were unimpaired and the claimholders were deemed to accept the plan.526
2. Class 2 General Secured Claims
Class 2 General Secured Claims included possessory lienholder claims.527 The debtor expected to pay Class 2 Claims in full, and in return the claimholders would release any security interest they held in the property of the debtor.528 Any undersecured portion of their claims would be treated as a Class 4 General Unsecured Claim.529 The asserted claims in this class totaled $1.2 million, of which less than $900,000 was expected to be allowed.530 These claims would be paid in full, and as a result the claims were unimpaired and the claimholders were deemed to accept the plan.531
3. Class 3 Term Lender Secured Claims
Class 3 consisted of the claims of the Senior Secured Term Lenders.532 Negotiations between Eddie Bauer and the Senior Secured Term Lenders established the amount of these
526 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 4 (January 26, 2009).
527 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 4-5 (January 26, 2009).
528 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 5 (January 26, 2009).
529 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 5 (January 26, 2009).
530 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 11 (January 26, 2009).
531 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 5 (January 26, 2009).
532 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 5 (January 26, 2009).
118 claims to be slightly less than $203 million.533 In the negotiation, the secured creditors gave up their adequate protection claims and deficiency claims.534 The claims would be paid as a beneficial interest in a Liquidating Trust,535 and a recovery of between 85% and 95% was expected.536 These claims were impaired and holders of these claims were entitled to vote on the plan.
4. Class 4 General Unsecured Claims
Class 4 consisted of other general unsecured claims, including the unsecured 5.25% noteholders.537 The claims totaled approximately $165 million, of which approximately $105 million to $144 million would be allowed.538 The claims would be paid pro rata from the
Liquidating Trust, and the expected recovery would be in the range of 2% to 17%.539 This class of claims was impaired and holders of these claims were entitled to vote on the plan.
5. Class 5 Noteholder Securities Claims
533 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 11 (January 26, 2009).
534 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 5 (January 26, 2009).
535 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 5 (January 26, 2009).
536 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 11 (January 26, 2009).
537 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 5 (January 26, 2009).
538 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 11 (January 26, 2009).
539 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 11 (January 26, 2009).
119 The Noteholders had rights to convert their notes into stock.540 These rights were put into
Class 5 claims. At the plan confirmation, these rights would be cancelled, and no payment would be due to the claimants.541 As a result, holders of these claims were deemed to reject the plan.
6. Class 6 Intercompany Claims
Class 6 claims are intercompany claims, and holders of these claims would receive no distribution under the plan.542 As a result, holders of these claims were deemed to reject the plan.
7. Class 7A Interests and Class 7B Interests and Securities
Claims.
Class 7A and 7B consisted of the interests of the debtors and interests securities claims.543 As is typical in a liquidation plan, the shareholders get wiped out and deemed to reject the plan.
ii. Distribution under Chapter 7
To confirm a plan, the creditors must receive at least as much under the plan as they would under a chapter 7 plan.544 Under the proposed plan, which mirrored the priorities of a
540 See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Declaration of Marvin Edward Toland of Eddie Bauer Holdings, Inc., in Support of First Day Motions (Dkt. 2) at 14 (June 17, 2009).
541 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 11 (January 26, 2009).
542 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 5 (January 26, 2009).
543 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Disclosure Statement for the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1270) at 5-6 (January 26, 2009).
120 chapter 7 liquidation, the creditors would receive at least as much as they would in chapter 7 liquidation.
iii. Order Approving Voting on the Plan
The court approved545 the disclosure statement, submission of the plan to the creditors for a vote, and tabulation of the votes according to 11 U.S.C. § 1129.
iv. Objections
A number of creditors objected to the plan.546 The Internal Revenue Service547 and
Customs and Border Protection548 objected549 to provisions in the plan which would provide for
544 11 U.S.C. § 1129(a)(7)(A)(ii).
545 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Order (A) Approving the Disclosure Statement, (B) Establishing the Voting Record Date, Voting Deadline and Other Dates, (C) Approving Procedures for Soliciting, Receiving and Tabulating Votes on the Plan and for Filing Objections to the Plan and (D) Approving the Manner and Forms of Notice and Other Related Documents (Dkt. 1289) at 11 (January 29, 2010).
546 We do not discuss objections to the plan by a number of parties in interest. Several creditors objected to the provisions of the plan because the plan did not pay the state law mandated statutory interest rate on claims by taxing authorities. See, e.g., In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Texas Comptroller of Public Accounts Objection to First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1328) at 11 (February 10, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection to Confirmation of Amended Plan by Katy Independent School District (Dkt. 1399) (March 4, 2010). However, these claims were later withdrawn. See In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Withdrawal of Texas Comptroller of Public Accounts Objection to First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1433) (March 15, 2010); In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Withdrawal of Objection of Katy Independent School District to Debtors' First Amended Joint Plan of Liquidation (Dkt. 1415) (March 11, 2010).
547 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection by the Internal Revenue Service to the Debtors' Joint Plan of Liquidation (Dkt. 1246) (January 21, 2010).
548 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection by Customs and Border Protection to the Debtors' Joint Plan of Liquidation (Dkt. 1400) (March 4, 2010).
121 third party exculpation, limitation of liability, injunction and release.550 They claimed that these provisions were in violation of the Anti-Injunction Act, and that “discharge of the debtor does not affect the liability of any other entity on . . . such debt.”551 Ultimately, these objections were resolved in the final order granting plan confirmation, where the court limited the exculpation explicitly to the debtors and the creditors committee “solely with respect to its conduct as a committee, and not with respect to the actions of its members as individual creditors.”552
v. Confirmation
After approval of the voting procedures, the creditors cast their votes.553 The Class 3 and
Class 4 claims were entitled to vote, the unimpaired classes were deemed to accept the plan, and the classes receiving nothing were deemed to reject the plan.554 The Class 3 Secured Term
Lender claimholders voted unanimously to approve the plan.555 Of the Class 4 unsecured claimholders, 95% of the claimholders representing 88% of the value of claims voted to approve
549 The two sets of objections appear to be identical, suggesting that they are standard objections that the government makes to these provisions in liquidation plans.
550 re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Objection by the Internal Revenue Service to the Debtors' Joint Plan of Liquidation (Dkt. 1246) at 2 (January 21, 2010).
551 11 U.S.C. § 524(e).
552 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Findings of Fact, Conclusions of Law and Order Confirming First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. (Dkt. 1450) at 38 (March 18, 2010).
553 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Certification of Michael J. Paque with Respect to the Tabulation of Votes on the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc. et al. (Dkt. 1435) (March 15, 2010).
554 As described supra, the Class 1 and Class 2 claims, being unimpaired were deemed to accept the plan. The Class 5, Class 6, and Class 7 claims were deemed to reject the plan.
555 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Certification of Michael J. Paque with Respect to the Tabulation of Votes on the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc. et al. (Dkt. 1435) Exhibit A (March 15, 2010).
122 the plan.556 The votes met the statutory requirement to approve the plan,557 and Eddie Bauer submitted a memorandum of law558 in support of the motion and a proposed order with findings of fact and conclusions of law.559
vi. Order Approving the Plan
On March 18, 2010, the court issued an order confirming the plan.560 To cure the objections by the government, the order limited the exculpation of the Official Committee of
Unsecured Creditors to their actions as members of the committee.561
IX. Conclusion
Eddie Bauer filed bankruptcy in June, 2009, but the case really began with Eddie Bauer’s emergence from the Spiegel bankruptcy. The Spiegel plan transferred the Eddie Bauer business to a holding company, and in exchange for their claims the Spiegel creditors took cash and stock
556 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Certification of Michael J. Paque with Respect to the Tabulation of Votes on the First Amended Joint Plan of Liquidation of EBHI Holdings, Inc. et al. (Dkt. 1435) Exhibit A (March 15, 2010). The approval of the unsecured Senior Notes Claims was somewhat less than that of general unsecured creditors. Only 86% of the noteholders representing 88% of the value voted to approve, the plan, whereas 96% of the general unsecured claimholders representing 99% of the value approved. This discrepancy is likely because the approval of the plan forfeited the securities interests of the noteholders, and this interest, being a Class 5 claim, was not entitled to vote. Thus, despite the fact that they were classified in the same class, the interests of the Noteholders and the general unsecured creditors were not really identical.
557 11 U.S.C. § 1129.
558 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Memorandum of Law in Support of Confirmation of the Debtors' First Amended Joint Plan of Liquidation of EBHI Holdings, Inc., et al. Under Chapter 11 of the Bankruptcy Code (Dkt. 1437) (March 16, 2010).
559 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Notice of Filing of Proposed Findings of Fact, Conclusions of Law and Order Confirming First Amended Joint Plan of Liquidation of EBHI Holdigns, Inc., et al. (Dkt. 1436) (March 15, 2010).
560 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Findings of Fact, Conclusions of Law and Order Confirming First Amended Joint Plan of Liquidation of EBHI Holdigns, Inc., et al. (Dkt. 1450) (March 18, 2010).
561 In re EBHI Holdings, Inc., Case No. 09-12099, Bankr. Del., Findings of Fact, Conclusions of Law and Order Confirming First Amended Joint Plan of Liquidation of EBHI Holdigns, Inc., et al. (Dkt. 1450) at 38 (March 18, 2010).
123 in the holding company.562 But, the reorganization of Spiegel was doomed from the start because the downsized company which emerged from the bankruptcy was saddled with too much debt. Nonetheless, it cannot be said that the creditors did not receive value for their claims. The Spiegel creditors received cash and a pro rata share of the new holding company worth 91 cents on the dollar563 for their claims, even if those shares later turned out to be worthless.
The same cannot be said of the bankruptcy of Eddie Bauer. The “Roll Up” in the DIP
Facility treated the two sets of secured creditors differently and transferred value from one set of secured creditors to the other. There were two sets of secured lenders: the Senior Secured Term creditors who had a first lien on the majority of the assets and a second lien on the inventory, and the Revolving Credit Lenders, who had a first lien on the inventory and a second lien on the rest of the assets. The latter group financed the DIP Facility, and as a reward for the DIP financing, their claims were paid in full from the DIP Facility proceeds. Because the DIP Facility was treated as an administrative expense, the DIP Facility was also the first to be paid upon the
Section 363 sale.
The Senior Secured Term Lenders did not fare as well. Although their interests were secured by the assets which were sold in the Section 363 sale, they did not receive the value of the assets. The DIP Facility was paid in full from the sale proceeds, and the Senior Secured
Term Lenders paid for the administrative expenses out of their share. In addition, in the liquidation plan a portion of the Senior Secured Term Loans were treated as unsecured claims.
562 See In re Spiegel, Inc., 2005 WL 1278094, *14 (Bankr. S.D.N.Y 2005) (not reported). See also Greg Lamm, This Bauer Bankruptcy Traces Back to Spiegel Events, PUGET SOUND BUS. J., June 17, 2009.
563 See Monica Soto Ouchi, Judge OKs Spiegel Plan; Eddie Bauer Back in NW, THE SEATTLE TIMES, May 26, 2005 available at http://seattletimes.nwsource.com/html/businesstechnology/2002288887_eddiebauer26.html.
124 These claims were paid a pro rata share of the limited pool of money available for unsecured claims.
In addition to the disparate treatment of secured creditors, the bankruptcy proceedings treated unsecured creditors differently. Some unsecured creditors had their claims paid as administrative expenses. The “critical vendors” and customers had their claims converted to administrative expenses. However, since the business was sold as a going concern and the buyers honored the customer claims, the purchase price of the business was naturally decreased for the value of these claims, in essence taking the value from the Senior Secured Term
Lenders.564 These unsecured claims were paid in full and the resulting decrease in the sales price came out of the share of the secured lenders and other unsecured creditors who were paid a pro rata share of pennies on the dollar in the liquidation plan. So the ultimate goals of following the priority ladder and of treating similarly situated unsecured creditors the same were not met.
As in most cases, there are winners and losers. In the Eddie Bauer case, the employees came out as winners, because they got to keep their jobs. The executives and managers got paid565 with incentive plans—despite the fact that they presided over the demise of the company.
Customers won, in that the “new” Eddie Bauer, assumed liabilities to customers and continued customer service programs—all of which were unsecured claims. The critical vendors were double winners—not only did their pre-petition claims get paid off as administrative expenses,
564 Admittedly, most consumers will hardly complain that holders of prepaid gift cards were not wiped out in the bankruptcy, and those consumers were a valuable asset to the business that Golden Gate Capital purchased, but, according to the principles of equal treatment of unsecured creditors, this class should be treated the same as any other.
565 Because the Section 363 sale yielded more than $50 million more than the minimum bid, the incentive plans yielded the maximum amount of proceeds to be distributed to the plan beneficiaries.
125 but they continued to do business with the “new” Eddie Bauer.566 The investment bankers got paid as administrative expenses and the lawyers had a “carve out” from the DIP Facility to pay their fees.
The losers in the case were the landlords who had Eddie Bauer locked into long term leases at above market rates. Their long term leases were terminated and they received unsecured claims paid at a few cents on the dollar. The Pension Benefit Guaranty Corporation567 stipulated to an unsecured claim worth $21 million—which was less than the total amount sought. In addition, even that $21 million claim would be paid off at cents on the dollar in the liquidation plan. Those who held “paid up” life insurance plans that Spiegel had promised them and Eddie Bauer had assumed discovered that “paid up” doesn’t really mean “paid up” when you are an unsecured creditor of the insurer. As is almost always the case, the shareholders were wiped out, and the unsecured noteholders only got back pennies on the dollar.
In assessing the case, the message at the end is clear: even though it was a separate proceeding, the case was really a continuation of the failed Spiegel bankruptcy plan. Many of the debts which forced Eddie Bauer into bankruptcy were debts that Eddie Bauer had assumed in the Spiegel bankruptcy and exit financing. Had Eddie Bauer exited the Spiegel bankruptcy with less debt, the company might have survived. Looking forward, one can hope that the “new”
Eddie Bauer, stripped of the crippling debt of Spiegel, can survive and begin a new ascent to the top of the retailing world.
566 Often, in a bankruptcy proceeding, the future business conducted with the company might be more valuable than the amount of outstanding claims due at the time of the bankruptcy.
567 Since the PBGC is a government owned entity, the real losers in this are the taxpayers who are ultimately responsible for paying the pensions. Although, in principle, the insurance that companies pay in to PBGC is supposed to pay for the risk of pension defaults. Presumably the retirees who were collecting pensions would have their benefits paid because the PBGC would pay them.
126