Case Doc 169 Filed 10/08/18 Page 1 of 19 UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF NORTH CAROLINA WINSTON-SALEM DIVISION

Transcription

1 Case Doc 169 Filed 10/08/18 Page 1 of 19 UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF NORTH CAROLINA WINSTON-SALEM DIVISION IN RE: PRODUCT QUEST MANUFACTURING, LLC, et al., 1 Chapter 11 Case No (Jointly Administered) Debtors. OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF PRODUCT QUEST MANUFACTURING, LLC TO DEBTORS MOTION FOR ENTRY OF INTERIM AND FINAL ORDERS (A) AUTHORIZING THE DEBTORS TO USE CASH COLLATERAL PURSUANT TO SECTION 363 OF THE BANKRUPTCY CODE, (B) GRANTING ADEQUATE PROTECTION PURSUANT TO SECTIONS 361 AND 363 OF THE BANKRUPTCY CODE, (C) MODIFYING THE AUTOMATIC STAY, AND (D) SCHEDULING A FINAL HEARING PURSUANT TO BANKRUPTCY RULE 4001(C) The Official Committee of Unsecured Creditors of Product Quest Manufacturing, LLC (the PQM Committee ), by and through its proposed undersigned counsel, hereby files this objection (the Objection ) to Debtors Motion for Entry of Interim and Final Orders (A) Authorizing the Debtors to Use Cash Collateral Pursuant to Section 363 of the Bankruptcy Code, (B) Granting Adequate Protection Pursuant to Sections 361 and 363 of the Bankruptcy Code, (C) Modifying the Automatic Stay, and (D) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(c) [D.I. 12] (the Cash Collateral Motion ). 2 In support of this Objection, the PQM Committee respectfully states as follows: 1 The Debtors in these cases, along with the associated case number, are: (i) Ei LLC ( ); (ii) Product Quest Manufacturing, LLC ( ); (iii) Scherer Labs International, LLC ( ); (iv) Product Quest Logistics, LLC ( ); (v) JBTRS, LLC ( ); and (vi) PQ Real Estate, LLC ( ). The Debtors' service address is: 2865 N. Cannon Blvd., Kannapolis, NC Capitalized terms used but not defined herein shall have the meaning given to such terms in the Cash Collateral Motion. 1

2 Case Doc 169 Filed 10/08/18 Page 2 of 19 PRELIMINARY STATEMENT The Debtors in this case are under the complete control of their secured lenders. For the year prior to the commencement of this case, the secured lenders have exercised voting control over the Debtors equity interests. In September, 2017, the secured lenders used that control to remove the Debtors prior Board of Managers and appoint an entirely new board. Almost immediately after they were appointed, the new board members caused the Debtors to hire the firm of Conway Mackenzie, who had previously been advising the secured lenders. The Debtors management is now exclusively comprised of Conway Mackenzie professionals. Apparently not content with their total takeover of the Debtors directors and officers, the secured lenders now seek through the Cash Collateral Motion to ensure that these bankruptcy cases benefit no one but themselves. The relief requested in the Cash Collateral Motion would allow the secured lenders to dictate how this case proceeds, prevent unsecured creditors from having any meaningful input in the cases, and cause the Debtors to forfeit valuable rights provided by the Bankruptcy Code. For these reasons, and as discussed in more detail below, the Cash Collateral Motion should be denied. BACKGROUND 1. On September 7, 2018 (the Petition Date ), Ei, LLC, JBTRS, L.L.C., PQ Real Estate LLC, Product Quest Logistics, LLC, Product Quest Manufacturing, LLC, and Scherer Labs International, LLC (the Debtors ) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. 2. The factual background relating to the Debtors commencement of these cases is set forth in detail in the Declaration of Michael J. Musso in Support of First Day Motions and Applications (the First Day Declaration ) filed on the Petition Date. 2

3 Case Doc 169 Filed 10/08/18 Page 3 of The Debtors are parties to a Credit Agreement dated as of September 9, 2015 (as amended from time to time, the Credit Agreement ) with Madison Capital Funding LLC ( Madison Capital or Agent ), as administrative agent and other lenders party thereto (collectively, the Lenders ). The Lenders claim that the amount owed under the Credit Agreement as of the Petition Date is $153,652, The obligations under the Credit Agreement are purportedly secured by liens on substantially all of the Debtors assets. The PQM Committee s investigation of the Lenders claims and liens has just begun. 4. As explained in the First Day Declaration, the Debtors financial problems began to mount in the fall of (First Day Declaration, 16). In August, 2017, the Lenders retained the firm of Conway Mackenzie to represent them in connection with matters related to the Debtors According to the First Day Declaration, on September 13, 2017, the Lenders exercised their right (arising as a result of events of default asserted by the Lenders) to immediately remove the Debtors Board of Managers (the Board ) and replace them with individuals designated by the Agent (the New Board ). (First Day Declaration, 16). 6. Just four days later on September 17, 2017, the New Board (recently appointed by the Lenders) caused the Debtors to hire Conway Mackenzie. (Conway Application, 10). 7. The timeline of the Lenders takeover of the Debtors can be summarized as follows: August 8, 2017: the Lenders retain Conway Mackenzie to represent the Lenders in matters related to the Debtors. September 13, 2017: the Lenders remove the Debtors existing Board of Managers and appoint the New Board. 3 See Emergency Application Pursuant to Bankruptcy Code Sections 105(a) And 363(b) Authorizing the Debtors to Continue the Retention of Conway MacKenzie Management Services, LLC to (I) Provide Michael J. Musso as the Interim Chief Executive Officer of Product Quest Management, LLC and EI LLC and (II) Provide, As Necessary, Other Temporary Staff Nunc Pro Tunc to the Petition Date [Docket No. 70] (the Conway Application ), at 10. 3

4 Case Doc 169 Filed 10/08/18 Page 4 of 19 September 17, 2017: the New Board (appointed by the Lenders just 4 days prior) causes the Debtors to retain Conway Mackenzie, who had previously been representing the Lenders in matters adverse to the Debtors. 8. As demonstrated by this timeline, for the year prior to the Petition Date, the Debtors have been under complete control by the Lenders and the officers and directors appointed by the Lenders. 9. On September 7, 2018, the Debtors filed their Cash Collateral Motion. 10. On September 18, 2018, the Court entered an interim order granting authority to use cash collateral ( First Interim Order ). On September 28, 2018, the Court entered a second interim order granting authority to use cash collateral and scheduling a Final Hearing on the Cash Collateral Motion for October 11, 2018 ( Second Interim Order and together with the First Interim Order, the Interim Orders ). 11. On September 24, 2018, the Office of the United States Bankruptcy Administrator appointed the PQM Committee. That same day a separate creditors committee was appointed in the case of Ei, LLC (the Ei Committee and together with the PQM Committee, the Committees ). On October 2, 2018, the PQM Committee selected the firm of Hull & Chandler as its proposed attorneys in this case. OBJECTION A. The Lenders Have No Basis To Argue That They Lack Adequate Protection. 12. As noted above, the Lenders assumed control of the Debtors in September, 2017 when they exercised their rights to assume voting control over the Debtors equity interests. Indeed, by assuming voting control over the Debtors equity interests, the Lenders are deemed to be affiliates of the Debtors as defined in Section 101(2) of the Bankruptcy Code and, in turn, insiders pursuant to Section 101(31)(E). 4

5 Case Doc 169 Filed 10/08/18 Page 5 of As insiders with complete voting control over the Debtors, the Lenders have no legitimate basis to argue that their interests are not adequately protected. Because the Lenders are in complete control of the Debtors, the only conclusion that can be reached is that the Debtors filed for bankruptcy only because the Lenders determined that it was in the Lenders best interests for the Debtors to do so. In other words, the Lenders had a choice. Because they had ultimate voting control over the Debtors actions, they could have caused the Debtors to liquidate through state law dissolution procedures without any court proceedings at all. Alternatively, they could have pursued state court remedies such as foreclosure or receivership. The Lenders rejected those options and elected for the Debtors to commence these bankruptcy cases. 14. Having made the determination that they are better off having the Debtors in bankruptcy rather than pursue state law options, the Lenders have no basis to contend that they lack adequate protection. They have already made a determination that their interests are better protected in bankruptcy than they are outside of bankruptcy. Stated differently, the Lenders cannot elect to pursue a course of action (in this case bankruptcy) and then contend that their rights are harmed by the action they chose to take. 15. For this reason, by allowing the Debtors to file for bankruptcy, the Lenders have arguably already consented to the use of cash collateral pursuant to Section 363(c)(2). In any event, there is no basis for the Lenders to be provided any adequate protection beyond the minimum required by the Bankruptcy Code. Thus, at most, the Lenders should be provided with a simple order granting them replacement liens to the extent that the value of their collateral diminishes during the case. Nothing more is needed. The relief requested in the Cash Collateral Motion, however, goes far beyond that. For that reason, the Cash Collateral Motion should be denied. 5

6 Case Doc 169 Filed 10/08/18 Page 6 of 19 B. The Relief Requested in the Cash Collateral Motion is Overreaching and Improper. 16. Courts routinely hold that it is improper for cash collateral or financing arrangements to transform the bankruptcy process from one that benefits all stakeholders to a process benefitting only the secured creditor. As stated by one court: While certain favorable terms may be permitted as a reasonable exercise of the debtor s business judgment, bankruptcy courts do not allow terms in financing arrangements that convert the bankruptcy process from one designed to benefit all creditors to one designed for the unwarranted benefit of the postpetition lender. Thus, courts look to whether the proposed terms would prejudice the powers and rights that the Code confers for the benefit of all creditors and leverage the Chapter 11 process by granting the lender excessive control over the debtor or its assets as to unduly prejudice the rights of other parties in interest. In re Defender Drug Stores, Inc., 145 B.R. 312, 317 (B.A.P. 9 th Cir. 1992); see also In re Tenney Village Co., Inc., 104 B.R. 562, 568 (Bankr. D.N.H. 1989) ( Under the guise of financing a reorganization, the Bank would disarm the Debtor of all weapons usable against it for the bankruptcy estate s benefit, place the Debtor in bondage working for the Bank, seize control of the reigns of reorganization, and steal a march on other creditors in numerous ways ). 17. In addition, while adequate protection functions to preserve a secured creditor s position post-petition, it is not intended to enhance their position. See In re Pine Lake Village Apartment Co., 19 B.R. 819, 824 (Bankr. S.D.N.Y. 1982) ( Neither the legislative history nor the [Bankruptcy] Code indicate that Congress intended the concept of adequate protection to go beyond the scope of protecting the secured claim holder from a diminution in the value of the collateral securing the debt. ). 18. The proposed cash collateral order violates these fundamental principles in numerous ways. The relief requested would require the Debtors to waive valuable rights afforded them under the Bankruptcy Code, prevent unsecured creditors from having any meaningful 6

7 Case Doc 169 Filed 10/08/18 Page 7 of 19 participation in these cases, and ensure that these cases are managed for the sole benefit of the Lenders. 1. The Debtors Should Not Be Required to Waive Protections Provided by the Bankruptcy Code 19. Under the proposed cash collateral order, the Debtors would be required to waive certain rights. The following is a list of the waivers included in the proposed order: Paragraph 7 of the proposed order requires the Debtors to waive the right to surcharge under section 506(c) and the enhancement of collateral provisions of section 552. Paragraph 12 requires the Debtors to waive their rights to (i) return any collateral pursuant to section 546(h), (ii) to consent to any order permitting claims pursuant to section 503(b)(9), or (iii) consent to setoff pursuant to section All of these waivers are designed to either insulate the Lenders from the impact of certain code provisions or otherwise limit the Debtors discretion. However, having elected to take advantage of the Bankruptcy Code by causing the Debtors to commence these cases, the Lenders should not be allowed to pick and choose which provisions of the Bankruptcy Code apply in this case. 21. Section 506(c) allows a debtor to charge the costs of preserving or disposing of a secured lender s collateral to the collateral itself. This provision ensures that the cost of liquidating a secured lender s collateral is not paid from unsecured creditor recoveries. See, e.g., Precision Steel Shearing v. Fremont Fin. Corp. (In re Visual Indus., Inc.), 57 F.3d 321, 325 (3d Cir. 1995) ( section 506(c) is designed to prevent a windfall to the secured creditor ); Kivitz v. CIT Group/Sales Fin., Inc., 272 B.R. 332, 334 (D. Md. 2000) ( the reason for [section 506(c)] is that unsecured creditors should not be required to bear the cost of protecting property that is not theirs ). 22. Similarly, the equities of the case exception in section 552(b) allows a debtor, committee or other party-in-interest to exclude postpetition proceeds from prepetition collateral 7

8 Case Doc 169 Filed 10/08/18 Page 8 of 19 on equitable grounds, including to avoid having unencumbered assets fund the cost of a secured lender s foreclosure. See 11 U.S.C. 552(b). 23. The effect of the waivers contained in the proposed order would be to transform the Debtors from fiduciaries with a responsibility to all stakeholders to a mere functionary of the Lenders. Those waivers are unwarranted and should not be allowed. 2. The Scope of the Proposed Adequate Protection Is Too Broad. 24. As noted above, the purpose of adequate protection is to protect a lender against the diminution in value of its collateral. The proposed replacement liens go far beyond that. Under paragraph 4(b) of the proposed order the Lenders would be granted replacement liens as security for payment of the Prepetition Debt. (emphasis added). This is the type of provision that enhances the Lenders position rather than merely protecting against diminution in value. 25. Similarly, while the definition of Postpetition Collateral does exclude certain chapter 5 causes of action, there is no similar exception to the scope of the section 507(b) claim that the order would provide the Lenders. Under paragraph 4(c) of the proposed order, the Lenders are to be provided a claim under section 507(b) with priority over any other administrative expense claims. 26. Because there is no exclusion for proceeds of chapter 5 avoidance actions, this means that proceeds of any avoidance actions would go first to the Lenders to satisfy any 507(b) claim that they may have pursuant to the order. This renders the exclusion of avoidance actions from the scope of post-petition liens completely illusory. Although they would not have liens on avoidance actions, the Lenders would still stand first in line to recover proceeds of avoidance actions pursuant to their 507(b) claim. 8

9 Case Doc 169 Filed 10/08/18 Page 9 of Any order allowing the use of cash collateral should clearly provide that any 507(b) claim of the Lenders cannot be satisfied with any proceeds of chapter 5 avoidance actions. In addition, any 507(b) claim of the Lenders should exclude any proceeds of litigation against the Lenders (based upon their excessive control of the Debtors or otherwise) or against any of their designated officers and directors. 3. The Proposed Termination and Enforcement Provisions Are Inappropriate. (a) The Debtors and the Committees Must Have The Ability to Challenge Whether an Event of Default Has Occurred. 28. Under paragraph 5(a) of the proposed order, the Debtors ability to use cash collateral will terminate immediately on the Termination Date. The Termination Date is defined to include, among other things, the date that the Lenders provide notice to the Debtors of the existence of an event of default. Thus, the Lenders have the ability to terminate the Debtors use of cash collateral immediately upon the declaration of an event of default without affording the Debtors or the Committees the ability to challenge whether an event of default has actually occurred. The order does provide that the Debtors may seek an order after termination to determine whether an event of default occurred. But the order does not provide either the Debtors or the Committees the ability to challenge the existence of an event of default before the Lenders unilaterally declare that a Termination Date has occurred. 29. The ability of the Debtors to challenge the existence of an event of default only after the occurrence of the Termination Date is especially problematic given the nature of the carve-out for professionals in this case. Under the defined term Professionals Carveout, after the occurrence of the Termination Date, there is a carve-out only for Debtors professionals (and not any professionals for the Committees) and only in the amount of $25,000. Thus, only the Debtors are afforded any funds to challenge the existence of an event of default declared by the Lenders. 9

10 Case Doc 169 Filed 10/08/18 Page 10 of 19 And given that the Lenders control the Debtors, it is highly unlikely that they would do so. For this reason, the ability to challenge the existence of an event of default after the Termination Date is completely illusory. 30. The Lenders should not be able to unilaterally declare the existence of a Termination Date without affording both the Debtors and the Committee a reasonable opportunity to evaluate and determine whether an event of default has actually occurred. (b) The Proposed Events of Default Give the Lenders Excessive Control. 31. The Events of Default provided under the Interim Orders are not designed to protect against a diminution in value of the Lenders collateral. Instead, they are designed to allow the Lenders to dictate the course of these proceedings. 32. For instance, under the Interim Orders, an Event of Default would exist if (i) any party seeks the use of cash collateral on terms other than those provided in the Interim Order, (ii) the Debtors pursue a 363 sale or chapter 11 plan that is unacceptable to the Agent, (iii) the Debtors seek to obtain post-petition financing, (iv) a trustee or examiner is appointed, (v) the Debtors file any document relating to the Cash Collateral Motion or Prepetition Documents that is unacceptable to the Lenders, or (vi) any Debtor seeks to surcharge the Lenders collateral. 33. These Events of Default ignore the fact that the Debtors are fiduciaries for all stakeholders in the estate. For instance, if the Debtors, in an exercise of their fiduciary duties, determine that it is appropriate to obtain post-petition financing, then they should be allow to pursue that opportunity. The Lenders would have the right to oppose any such financing request, but the Lenders should not be entitled to declare an Event of Default and terminate the use of cash collateral simply because the Debtors take an action that they believe is a necessary exercise of their fiduciary duties. 10

11 Case Doc 169 Filed 10/08/18 Page 11 of For the same reason, the Lenders should not be entitled to declare an Event of Default and terminate the use of cash collateral simply because the Debtors pursue a 363 sale or chapter 11 plan that is not acceptable to the Lenders. Indeed, the inclusion of this Event of Default reveals the true purpose of the Cash Collateral Motion -- it is a motion designed to give the Lenders a stranglehold over the entire bankruptcy process to the detriment of all other stakeholders. The Debtors must be allowed to exercise their fiduciary duties without being at risk of an Event of Default that would terminate their use of cash collateral. 35. Similarly, there should be no immediate Event of Default upon the appointment of a chapter 11 trustee or examiner. The only effect of the appointment of a chapter 11 trustee or examiner would be that the Lenders would lose their current control over the Debtors. But that is not what adequate protection is designed to protect. Adequate protection is designed to protect against the diminution of collateral. And in this case, where the Debtors business is no longer operating, there is no reason to presume in advance that the appointment of a chapter 11 trustee or examiner would necessarily result in a diminution of the Lenders collateral. 36. In sum, the Debtors must be allowed to properly exercise their fiduciary duties, and it should not be an Event of Default if the Debtors simply pursue a course of action that the Lenders disagree with. 37. The Additional Covenants attached as Exhibit C to the First Interim Order are also unduly restrictive. For instance, under Additional Covenant I.A., disbursements cannot exceed budgeted amounts by more than 10% on a line item basis. However, compliance with the Budget should be measured on an aggregate basis rather than a line item basis. If the Debtors exceed budgeted expenditures on a single line item by more than 10%, there should not be an Event of Default if that variance is more than offset by savings in other line items. 11

12 Case Doc 169 Filed 10/08/18 Page 12 of Additional Covenant XII also gives the Lenders too much control over the Debtors. The covenant requires the Debtors to maintain a restructuring officer acceptable to the Agent. The covenant further requires the restructuring officer to cooperate with the Lenders on all matters they may request concerning the Debtors. These provisions serve no purpose other than strengthening the Lenders control over the Debtors. For that reason, the provisions should be deleted. 39. Finally, the Events of Default are all immediate, and they provide no opportunity for the Debtors to cure any claimed Event of Default. The Debtors must be given written notice, and an opportunity to cure, any Event of Default claimed by the Lenders. (c) The Proposed Enforcement Remedies Are Excessive. 40. The enforcement remedies provided to the Lenders under the proposed order are also improper. Among other things, the proposed order provides that upon the occurrence of the Termination Date, the Lenders may: (a) (b) (c) (d) apply any cash collateral in its possession to the Prepetition Debt (First Interim Order, 5(a)(3)); obtain an expedited hearing for immediate relief from the automatic stay (First Interim Order, 5(b)(1)); require the Debtors to immediately surrender collateral and cooperate with the Lenders in the exercise of their rights and remedies (First Interim Order, 5(b)(2)); and, enter any leased premises to recover collateral without interference from any landlord (First Interim Order, 5(c)). 41. These provisions are improper in several respects. There is no basis to prejudge at this stage whether the Lenders should be allowed to apply funds to the Prepetition Debt upon the occurrence of a Termination Date. Similarly, there is no basis at this stage to prejudge whether the Lenders are entitled to expedited stay relief. The Lenders can always file a stay relief motion upon the occurrence of a Termination Date, and the merits of that motion (and whether it should 12

13 Case Doc 169 Filed 10/08/18 Page 13 of 19 be granted on an expedited basis) can be determined at that time. That is a determination that necessarily will depend on the facts that exist in the future, and these matters should not be predetermined through the cash collateral order. 42. In addition, the enforcement provisions would grant the Lenders rights against landlords that they may not otherwise have. The proposed order would allow the Lender to access any leased premises without interference from any landlord regardless of whether the landlord has any landlord liens on the collateral and regardless of the terms of any subordination or other agreement that may already exist between the parties. 43. In sum, the only effect of the occurrence of a Termination Date should be just that the Debtors right to use cash collateral should terminate. At that point, the Lenders will then be able to seek any further remedies to which they believe they are entitled under applicable law. But it is inappropriate for the cash collateral order to pre-determine those issues in any respect. 4. The Cash Collateral Order Should Not Pre-Determine Any Sale Issues. 44. In the Cash Collateral Motion, the Lenders also seek to inappropriately influence subsequent sale proceedings. For instance, paragraph 9 provides that the Lenders will have the right to credit bid pursuant to section 363(k) in connection with any sale of collateral. However, section 363(k) provides that a secured creditor s right to credit bid may be limited by the court for cause. In this case, given the control that the Lenders have over the Debtors, the PQM Committee believes that cause exists to limit the Lenders ability to credit bid in connection with any sale. But that is a determination that is to be made in connection with a sale motion and cannot be predetermined as part of the cash collateral order. 45. Any determination of whether cause exists will necessarily depend upon the circumstances of any sale that may be proposed. It is not an issue that can be decided in a vacuum 13

14 Case Doc 169 Filed 10/08/18 Page 14 of 19 as part of the cash collateral order. Accordingly, a cash collateral order should not include a provision authorizing a credit bid pursuant to section 363(k) in connection with any sale that may occur in the future. 46. The cash collateral order should likewise not pre-determine the allocation of any proceeds of a sale. Under paragraph 11 of the proposed order, all sales proceeds must be remitted to the Lenders for application to the Prepetition Debt. Again, this is an issue that cannot be decided at this stage of the case. The issue of whether it is appropriate for any sales proceeds to be remitted to the Lenders is any issue that can only be decided in connection with plan confirmation. 5. The Carve-Out for Committee Professionals Is Insufficient 47. Courts have long recognized the need to provide reasonable carve-outs for payments of professional fees to ensure that the bankruptcy process is not abused. See, e.g., In re Ames Dep t Stores, Inc., 115 B.R. 34, 38 (Bankr. S.D.N.Y. 1990) (noting the standard practice to require professional fee carve-outs in reasonable amounts from a super-priority status and postpetition lien to preserve the adversary system and protect the rights and expectations of all parties-in-interest ). 48. In this case, the carve-out proposed for committee professionals is woefully insufficient. Pursuant to the budget attached to the Second Interim Order, the total amount of the carve-out for all professionals for fees incurred during the week ending October 12 is $156,600. Of that amount, only $5,000 (or approximately 3%) is allocated for the Committees professionals. The amount allocated for the Committees professionals is even less than what is allocated for the Debtors noticing agent. 49. The amount of the proposed carve-out for Committee professionals would be insufficient in any case, but it is especially insufficient in this case given that the Committees 14

15 Case Doc 169 Filed 10/08/18 Page 15 of 19 represent the only truly independent voice in these proceedings. As discussed above, the Debtors have been operating under the complete control of the Lenders for more than a year. The firm that is currently managing the Debtors, Conway Mackenzie, was originally retained by the Lenders to represent their interests adverse to the Debtors. 50. Given these circumstances, it is imperative that the Committees have a meaningful voice in these proceedings, and the carve-out for Committee professionals should be no less than that provided for the Debtors professionals. 51. In addition, as noted previously, the post-termination Date carve-out is not sufficient in this case. It excludes Committee professionals and is limited to only $25,000. A post- Termination Date carve-out in a reasonable amount must be provided, and some allowance should be made for Committee professionals. 6. The Challenge Provisions Are Too Restrictive. 52. Under the proposed order, the Committees would only have a period of sixty days to investigate and commence any challenge to the validity of the Lenders claims or liens or assert any other cause of action against the Lenders. While a 60-day investigation period is not uncommon in other cases, this is not the typical case. 53. Here, the Debtors have been operating under the control of the Lenders for more than a year. Thus, the Committees investigation will require much more than simply confirming that liens were properly perfected. Under the circumstances of this case, the PQM Committee believes that it would be inappropriate to place a time limit of less than 180 days on the ability of the Committees to assert any claim or challenge that may exist. 54. In addition, the terms of the professional fee carve-out limits the amount of fees that can be incurred in connection with an investigation to only $25,000. Under the circumstances 15

16 Case Doc 169 Filed 10/08/18 Page 16 of 19 of this case, it is inappropriate to place any limitation on the Committees investigation budget at the outset of the case. If the Lenders believe that any fees incurred are unreasonable, they can always object to any fee applications that may be filed by Committee professionals. 55. Finally, the challenge procedures unnecessarily require that a party must first make a demand on the Debtors to assert a challenge. If the Debtors fail to assert the claim within five days, then the party would have a period of only 10 days to seek standing to initiate the action. In this case, where the Debtors are under the control of the Lenders, there is no reason for this process. Any demand made on the Debtors would be futile because the Lenders would never authorize the Debtors to pursue a claim against them. For the same reason, it should not be necessary for the Committees to file a motion to obtain standing prior to commencing any action against the Lenders. Instead, the order should expressly grant the Committees the standing to pursue any claim that may exist. If the Committees subsequently file a claim against the Lenders which the Lenders believe is unwarranted, then they can always file a motion to dismiss at that time. 7. Additional Objections. 56. In addition to the foregoing, the following provisions of the proposed cash collateral order are objectionable for the reasons stated below: (a) (b) (c) Recital G states that the terms of the order have been negotiated at arm s length. There is no basis for that factual finding in this case. The provision in paragraph 3(c) which requires that any cash collateral in excess of budgeted amounts be applied to Prepetition Debt should be deleted. The Lenders interests in any cash collateral are adequately protected by the Budget, and payments on pre-petition claims should not be authorized as part of a cash collateral order. Paragraph 14 of the proposed order states that the Prepetition Documents shall remain in full force and effect with respect to the Prepetition Debt. This language should either be removed or revised to clarify that any default under the Prepetition Documents shall not constitute an event of default under the cash collateral order. Any events that would create an event of 16

17 Case Doc 169 Filed 10/08/18 Page 17 of 19 default under the cash collateral order must be clearly specified in the order itself. (d) (e) (f) (g) (h) Paragraph 17 of the proposed order states that the Lenders shall not be deemed to be in control of the operations or liquidation of the Debtors by taking any action pursuant to the cash collateral order. This provision should be deleted. Not only is it factually incorrect given the Lenders actual control of the Debtors, it constitutes an improper advisory and hypothetical opinion. The effect of any future actions that the Lenders may take must be evaluated after they occur, and there is no basis to give the Lenders blanket immunity for any action they may take in the future. The Committees must be given advance notice, and an opportunity to object, to any amendments that may be proposed pursuant to paragraph 18 of the order. The language in paragraph 20 is too broad. The provision should be limited to simply provide that if the order does not become a final, non-appealable order, then the Lenders shall have replacement liens in the amount of any diminution in value that occurred during the period that the order was in effect. The Committees should be provided with a copy of any variance report or other report provided to the Lenders. Any future Budget must be subject to prior review by the Committee. 57. The PQM Committee reserves the right to assert additional objections to specific provisions of any proposed order with respect to the Cash Collateral Motion. CONCLUSION WHEREFORE, the PQM Committee respectfully requests that the Court (a) deny the Cash Collateral Motion unless the proposed order is appropriately modified to address the objections raised herein; and (b) grant such other and further relief as the Court deems just and proper. [Signatures on Following Page] 17

18 Case Doc 169 Filed 10/08/18 Page 18 of 19 Dated: October 8, 2018 /s/ Felton E. Parrish Felton E. Parrish Hull & Chandler, P.A Morehead Square Drive Suite 450 Charlotte, NC Tel: (704) Fax: (302) Proposed Counsel to the Official Committee of Unsecured Creditors of Product Quest Manufacturing, LLC 18

19 Case Doc 169 Filed 10/08/18 Page 19 of 19 UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA WINSTON-SALEM DIVISION IN RE: PRODUCT QUEST MANUFACTURING, LLC, et al., 1 Chapter 11 Case No (Jointly Administered) Debtors. CERTIFICATE OF SERVICE I hereby certify that on October 8, 2018, an electronic copy of the foregoing was filed using the Court s ECF system which caused electronic notification of filing to be served on all registered users of the ECF system that have requested such notification in this case. /s/ Felton E. Parrish Felton E. Parrish N.C. State Bar #25448 HULL & CHANDLER, P.A Morehead Square Drive, Suite 450 Charlotte, North Carolina Telephone: (704) Facsimile: (704) fparrish@lawyercarolina.com 19