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[T]he Committee requests that, pursuant to section 105 of the Bankruptcy Code, the Court (a) adjourn the Hearing with respect to the Disclosure Statement Motion by at least three (3) weeks (to a date that is not earlier than July 14, 2016) to afford the Committee and the Debtors an appropriate opportunity to engage in settlement discussions related to the Plan, and (b) extend the applicable objection deadline with respect to the Disclosure Statement Motion to a date that is not more than five (5) days prior to the date this Court sets for the adjourned hearing on such motion. The Committee submits that the foregoing limited extension will not unduly prejudice any party in interest, and may result in significant benefits to the Debtors and their estates, especially if this negotiation is fruitful and can redirect these chapter 11 cases toward a consensual, rather than litigated, resolution. [...]
Indeed, at the June 10, 2016 hearing on the Committee’s Motion to Compel, the Court expressed concerns regarding the disclosure of insider transactions and related releases and instructed the Debtors to make more fulsome disclosures. This request resulted in the Debtors filing an amended Plan and Disclosure Statement on June 14, 2016 [Docket Nos. 502 and 503].
While the Debtors’ amended Disclosure Statement now includes some discussion of certain potential causes of action that could be brought by the Debtors’ estates involving Mr. Schiller, Mr. Louie, and the board of directors generally related to the personal loans made to Mr. Schiller and various transactions between the Debtors and the parties making such loans (and takes the position that such claims do not have merit), the Committee submits that the disclosure is still missing material facts. [For instance, the Debtors should include: (a) (i) the timing, amount, maturities, and parties providing the
vendor loans, and (ii) whether and when the vendor loans were or will be repaid; (b) (i) when Mr. Louie’s appointment as a director of the Debtors was first discussed with the board, (ii) when Mr. Schiller received the loan from Mr. Louie (and the amount and terms thereof), (iii) when Mr. Louie was asked to join the board, and (iv) whether and when Mr. Schiller repaid the loan to Mr. Louie; and (c) (i) the date when the Debtors’ officers first considered entering into the acquisition of M21K, LLC (“M21K”), (ii) when the M21K acquisition was first discussed with the board, (iii) the amount of the obligations assumed in the M21K acquisition, and (iv), the valuation, if any, the Debtors made of the assets obtained at the time of the transaction.]
The Committee seeks the adjournment because these cases must now either change direction or become mired in expensive, time consuming litigation. The Committee submits that these cases should be placed, at least for a short time period, on a track of negotiation and asks the Court to adjourn the June 23rd hearing for three weeks to nudge the Debtors and the Second Lien Noteholders to engage with the Committee on serious negotiations for a consensual plan. As noted above, the Plan described in the Disclosure Statement cannot be crammed down and the changes necessary to make it potentially acceptable to unsecured creditors would be too fundamental to allow for modification rather than re-solicitation if the current Disclosure Statement were approved.
Moreover, the Committee is not alone in its view that even the amended disclosure is inadequate. At the recent June 15, 2016 Equity Committee Hearing, following testimony provided by, among others, a representative of PJT Partners (the Debtors’ investment banker and financial advisor), the Court expressed serious concerns regarding, among other things, (a) allegations of misrepresentations by the Debtors’ management, (b) the personal loans provided to the Debtors’ CEO, and (c) proposed distributions under the Plan to management pursuant to a management incentive plan contemplated by the Plan.
In furtherance of the exercise of its fiduciary duties, the Committee, through its professionals, has been diligently investigating the foregoing (and other) prepetition conduct and transactions. In the event the Court grants the adjournment sought in this Motion, the Committee intends to use the adjournment period to negotiate with the Debtors and the Second Lien Noteholders to arrive (hopefully) at a consensual resolution of their differences regarding the Plan. The Committee is hopeful that the parties will arrive at a Plan structure that will provide for treatment that is capable of consensual confirmation in place of the terms provided under the current Plan, specifically: (a) removal of the impermissible “death trap” structure; (b) appropriate allocation of the value of unencumbered estate assets among creditors, including unsecured creditors; and (c) tailored releases to avoid prejudice to creditors and interest holders.
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