Case LSS Doc 152 Filed 03/30/18 Page 1 of 23 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 Case LSS Doc 152 Filed 03/30/18 Page 1 of 23 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: THE WALKING COMPANY HOLDINGS, INC., et al., 1 Debtors. Chapter 11 Case No (LSS) (Jointly Administered) Re: Docket Nos. 15 and 81 Hearing Date: April 4, 2018 at 10:00 a.m. Objection Deadline: March 30, 2018 at 4:00 p.m. 2 OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO MOTION FOR FINAL ORDER: (I) APPROVING POSTPETITION FINANCING, (II) AUTHORIZING USE OF CASH COLLATERAL, (III) GRANTING LIENS AND PROVIDING SUPERPRIORITY ADMINISTRATIVE EXPENSE STATUS, (IV) GRANTING ADEQUATE PROTECTION; (V) MODIFYING THE AUTOMATIC STAY; AND (VI) GRANTING RELATED RELIEF The Official Committee of Unsecured Creditors (the Committee ) of The Walking Company Holdings, Inc., et al., the above-captioned debtors and debtors-in-possession (collectively, the Debtors ), by and through its proposed undersigned counsel, hereby files this objection (the Objection ) to Debtors Motion for Interim and Final Orders Pursuant to 11 U.S.C. 105, 361, 362, 363, 364 and 507 (I) Approving Postpetition Financing, (II) Authorizing Use of Cash Collateral, (III) Granting Liens and Providing Superpriority Administrative Expense Status, (IV) Granting Adequate Protection, (V) Modifying Automatic Stay, and (VI) Granting Related Relief (the Motion ). 3 In support of this Objection, the Committee respectfully states as follows: The Debtors in these cases are: The Walking Company Holdings, Inc.; The Walking Company; Big Dog USA, Inc.; and FootSmart, Inc. Extended as to the Committee with the consent of the Debtors. Docket No. 15. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Motion.

2 Case LSS Doc 152 Filed 03/30/18 Page 2 of 23 PRELIMINARY STATEMENT 1. The Debtors entered bankruptcy with a pre-negotiated Plan they intend to confirm in less than ninety days. While the Debtors champion the plan as a significant achievement that has the support of its major stakeholders, the Debtors neglect to mention that unsecured creditors did not have a seat at the negotiating table. Whereas the Debtors lenders and equity holders will maintain their stakes in the reorganized Debtors, unsecured creditors will receive an unquantified fractional recovery on their prepetition claims. Moreover, similar to the Debtors 2009 restructuring, such creditors are being asked to effectively fund the Debtors reorganization efforts through more than $8 million of annual concessions that will serve to benefit the Debtors insiders in connection with both their debt and equity positions. 2. Given this Court s experience with recent retail bankruptcy trends and the eroding retail market, the Court may be initially inclined to embrace the expedited restructuring proposed by the Debtors. However, given the lack of information currently available to the Committee, and the unjustified refusal of the Debtors to provide complete transparency, the Committee must be provided sufficient time and resources to sufficiently investigate and, if necessary, challenge the proposed Plan and DIP financing package to determine whether these cases can deliver what the Debtors have advertised and, if so, at what risk and cost to unsecured creditors. 3. While the Committee is supportive of a proper reorganization, the Committee must, among other things, ensure the plan is feasible, provides fair value to unsecured creditors, and preserves valuable recovery options, while protecting the rights of creditors in the event the Plan cannot be confirmed. In order to do so, the Committee immediately requested information regarding the Debtors financial history and projections, as well as historical transactions, including certain insider transactions since the Debtors prior 2

3 Case LSS Doc 152 Filed 03/30/18 Page 3 of 23 bankruptcy. While the production of documents is still ongoing, the Debtors have categorically refused to produce information that extends more than four years prior to the Petition Date. 4. The Debtors refusal to do so raises questions regarding the propriety of these insider transactions, the proposed distributable value for unsecured creditors, and the broad releases proposed both in the Final DIP Order and the Plan. The Committee intends to address these concerns separately and, to the extent of any meaningful delay, may request this Court adjourn the April 18 disclosure statement hearing to permit the Committee to conduct formal discovery to satisfy its statutory obligations. 5. At this early stage of these cases, however, the Committee s primary goal is to safeguard the rights of creditors and ensure the Committee has sufficient time and resources to fulfill its statutory mandate through the expedited process proposed by the Debtors. Since its formation on March 20, the Committee has diligently worked to begin addressing its concerns, including attempts to work with the Debtors and Senior Lenders to ensure the terms of the proposed DIP Facility are fair, will provide sufficient funding for the chapter 11 process, and will safeguard the rights of unsecured creditors. To date, the parties have been unable to resolve a number of critical issues. 6. The Debtors request for approval of the roll-up and the concomitant enhancement of the lenders prepetition collateral package are inappropriate and should be denied. While it may be appropriate to provide a lender blanket liens for incremental DIP financing, it is unclear from the Approved Budget whether the DIP Facility will do so. It is, however, inappropriate to cure potential prepetition gaps in the lenders collateral package and provide new liens on previously unencumbered assets, including avoidance actions, other than for a diminution in the prepetition lenders collateral. It is similarly inappropriate for the Debtors 3

4 Case LSS Doc 152 Filed 03/30/18 Page 4 of 23 to provide a superpriority claims with recourse against previously unencumbered assets in connection with financing that is nothing more than a roll-up of prepetition debt. 7. The Committee further objects to the Debtors failure to properly budget for the payment of certain known administrative costs, including stub rent and 503(b)(9) claims, while simultaneously agreeing to a full 506(c) waiver. The Debtors should not be permitted to curtail the rights of the very creditors from whom they will seek substantial concessions as a condition to confirming a plan. Indeed, the Debtors own counsel have repeatedly fought for these protections in their role as counsel for unsecured creditors committees in countless cases and have provided no justification as to why these cases are different. 8. The Debtors attempts to limit the Committee s role in these cases through the DIP budget should similarly be denied. The budget fails to provide the Committee a sufficient carve-out or investigation budget to fulfill its statutory duty to unsecured creditors. The DIP similarly seeks to restrict the Committee s role in these cases through overbroad limitations on the use of cash and heavy handed investigation limitations into the prepetition conduct and activities of the Debtors and their prepetition lenders, including insiders. 9. The Committee further objects to the litany of protections afforded the Subordinated Noteholders, several of whom are insiders of the Debtors. The Subordinated Noteholders are not providing any financing under the DIP. While they may be entitled to some form of adequate protection, there is no basis to for the Debtors broad stipulations and limitations on the Committee s challenge rights with respect to the Subordinated Noteholders. To the extent such holders desire releases, the proper place to seek such releases is through the Plan process. The Final DIP Order, therefore, should be narrowly tailored to provide only those 4

5 Case LSS Doc 152 Filed 03/30/18 Page 5 of 23 protections that are necessary to safeguard the interests of the Subordinated Noteholders, and in each case subject to the challenge rights of the Committee. 10. While the Committee intends to continue to work with the Debtors to resolve these issues in advance of the April 4 hearing, the Committee is extremely disappointed by the Debtors refusal to actively seek to protect the interests of the very creditors they need concessions from to implement their plan. Such refusal and the overall lack of transparency has created significant concerns regarding the Debtors overall case strategy. BACKGROUND I. General Case Background 11. On March 6, 2018 (the Petition Date ), each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code with this Court. Since the Petition Date, the Debtors have remained in possession of their assets and have continued to operate and manage their businesses as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 12. On March 20, 2018, the Office of the United States Trustee for Region 3 appointed a seven-member Committee consisting of: (i) Simon Property Group, Inc.; (ii) GGP Limited Partnership; (iii) Dansko, LLC; (iv) Hoan Cau Hoa Binh J.S.C.; (v) Lexin NY 551 LLC; (vi) Power Link Int l Corp.; and (vii) Shoes West Inc., DBA Taos Footwear. 4 The Committee selected Kelley Drye & Warren LLP as its lead counsel and Klehr Harrison Harvey Branzburg LLP as Delaware counsel. The Committee also selected Province, Inc. to serve as its financial advisor. 4 Docket No

6 Case LSS Doc 152 Filed 03/30/18 Page 6 of The Debtors maintain two distinct business operations: (i) the design, manufacture and sale of comfort footwear, which business the Debtors conduct through two subsidiaries, The Walking Company and FootSmart, Inc.; and (ii) the design, manufacture and sale of casual sportswear and accessories under the Big Dog brand. 5 As of the Petition Date, the company operated approximately 200 retail stores under The Walking Company and ABEO names. 6 The Debtors are obligated to pay annual royalties to certain insiders, including their CEO Mr. Feshbach, in connection with the sale of Big Dog and ABEO products. 7 II. The Prepetition Debt 14. Between 2005 and 2008, the Debtors significantly expanded, opening approximately 140 stores and more than doubling their retail footprint. 8 To finance this expansion, among other things, in 2007 the Debtors issued $18.5 million of 8.375% Convertible Notes due Notwithstanding this rapid expansion, by 2008, the Debtors began to experience significant losses, leading to the filing of the Debtors prior bankruptcy in December 2009 (the 2009 Bankruptcy ). 10 In the months preceding the 2009 Bankruptcy, the Debtors developed and implemented a portion of their turnaround plan, including an agreement reached in April 2009 to grant the Subordinated Noteholders a subordinated security interest in See Declaration of Andrew D. Feshbach in Support of First Day Motions (the Feshbach Declaration ), 4. Docket No. 3. Id. Id. 14. See Second Amended Disclosure Statement for Debtors Second Amended Joint Chapter 11 Plan (the 2009 Disclosure Statement ), at 10, The Walking Company, Big Dog USA, Inc. and The Walking Company Holdings, Inc., Case No (Docket No. 325). Feshbach Declaration, 8. Id

7 Case LSS Doc 152 Filed 03/30/18 Page 7 of 23 substantially all of their assets. 11 The Debtors emerged from the 2009 Bankruptcy having obtained: (i) substantial rent concessions from its landlord community; (ii) a $30 million exit facility from the Senior Creditors; and (iii) a $10 million investment from Kayne Anderson Capital Advisors, LP (the KA Investors ), whose members own a majority of the Subordinated Notes, in exchange for preferred stock in the reorganized company. 12 The preferred stock was subsequently redeemed in 2011 in part through the sale of the Debtors Big Dog IP rights to certain insiders. 16. On or about June 5, 2014, the Debtors and the Senior Creditors entered into that certain Third Amended and Restated Loan and Security Agreement, providing for: (i) an increase of the Prepetition Revolving Credit Loans to $50 million; and (ii) a new $12 million Prepetition Term Loan. The Prepetition Revolving Credit Loans and Prepetition Term Loan are each purportedly secured by substantially all of the Debtors assets As of the Petition Date, approximately $33 million was purportedly due under the Prepetition Revolving Credit Loans, with $7.25 million due under the Prepetition Term Loan. 14 Approximately $11.7 million was purportedly due under the Subordinated Notes. 15 III. The Debtors Restructuring Efforts And Proposed Plan 18. Although the Debtors maintain the company s operations significantly improved following the 2009 Bankruptcy through 2012, beginning in 2013, the Debtors purportedly began to experience the increasing impact of online retailers and the overall See 2009 Disclosure Statement, at The Committee have requested the documentation in connection with the Prepetition Subordinated Notes, but such information has not yet been received. See Feshbach Declaration, 12. Id. 17. Id. Id

8 Case LSS Doc 152 Filed 03/30/18 Page 8 of 23 reductions in mall traffic. 16 In late 2016, the Debtors most significant retailer terminated its relationship with the Debtors, prohibiting the Debtors from selling Uggs products. 17 Finally, in the Spring of 2017 and again in December 2017, the Senior Creditors reduced the availability under the Prepetition Revolving Credit Loans following a yet to be explained reduction in the appraised value of the Debtors inventory The Debtors promptly engaged the Senior Lenders, Subordinated Noteholders, and KA Investors, their majority equity owners, in negotiations on a pre-negotiated plan (the Plan ) strikingly similar to the 2009 Bankruptcy. The Debtors propose a ninety day process to confirm a Plan that will: (i) convert the rolled up DIP Facility to a $55 million Exit Facility; 19 (ii) provide KA Investors with common and preferred equity in exchange for a $10 million contribution; (iii) reinstate to Subordinated Notes with an extended maturity and provide the holders warrants to purchase up to 7.5% of new common stock; and (iv) provide broad releases to the Senior Creditors, the Subordinated Noteholders, including KA Investors, and other insiders of the Debtors. 20. Notwithstanding the fact that the Approved Budget proposed in connection with the DIP Facility does not include stub rent and 503(b)(9) administrative claims, support for the Plan by the Senior Creditors, KA Investors and the Subordinated Noteholders is premised on obtaining at least $8 million in annual concessions from the Debtors landlords and other vendors Id. 22. Id. Id. 23. See Motion for Entry of an Order Authorizing the Debtors to (I) Assume Exit Facility Commitment Letter, (II) Pay and Reimburse Related Fees and Expenses, and (III) Indemnify the Parties Thereto. Docket No. 27. Feshbach Declaration, 24. 8

9 Case LSS Doc 152 Filed 03/30/18 Page 9 of However, unlike the 2009 Bankruptcy, the Debtors do not intend to pay unsecured creditors in full. Instead, the Plan proposes a $2.2 million pool on account of more than $30 million in claims identified just in the Debtors schedules, excluding rejection damages claims, and before the May 22 bar date, which the Debtors have asserted, without any supporting analysis, will result in a 20% distribution. 21 IV. The Proposed DIP Financing 22. In order to implement the Plan, the Debtors negotiated a DIP financing package with the Senior Creditors which will roll-up the Prepetition Revolving Credit Loans and Prepetition Term Loan (the Roll-Up ) with little to no new money, secured by postpetition superpriority liens against all of the Debtors assets, including previously unencumbered property In exchange: the Debtors will stipulate that the Prepetition Senior Obligations and the Prepetition Subordinated Obligations constitute legal, valid and binding obligations of the Debtors, each of which are nonavoidable, against Prepetition Collateral of the Debtors, notwithstanding the fact that the Subordinated Noteholders are not lenders under the DIP Facility; 23 the DIP Liens, Adequate Protection Liens and superpriority claims will encumber previously unencumbered assets, including the proceeds of leases, chapter 5 avoidance actions (the Avoidance Actions ) and the Debtors rights under section 506(c) of the Bankruptcy Code; The Committee has requested additional information regarding the assumptions underlying the proposed 20% recovery to unsecured creditors in these cases, but such information has not yet been received. Id. See Final DIP Order, E(i)-E(xi). See Id. 6, 8,

10 Case LSS Doc 152 Filed 03/30/18 Page 10 of 23 The DIP Lenders will receive $646,000 in financing fees over a three-month period, excluding the payment of any interest; 25 the Debtors estates will waive all rights under sections 506(c) and 552(b) of the Bankrutpcy Code; 26 the Senior Creditors and Subordinated Noteholders will receive allowed 507(b) claims with superpriority administrative expense priority, subordinate only to the Carve-Out and Super-Priority Claims; 27 the Senior Creditors and Subordinated Noteholders will receive adequate protection payments in the form of postpetition default rate interest and professional fees and expenses, regardless of whether such lenders are fully secured; 28 the Committee will be given only sixty days from formation (May 19) and only $25,000 to investigate both the Senior Creditors and the Subordinated Noteholders; 29 and the Committee s carve-out will be limited to $360,000, as compared to more than $1 million allocated to the Debtors professionals (excluding more than $600,000 of fees incurred by the Debtors professionals prior to the Petition Date) and $720,000 allocated to the professionals of the Senior Creditors and Subordinated Noteholders Motion, at 25; Interim DIP Order, Ex. B Approved Budget. See Final DIP Order, 37, 39. Id. 13. Id Id. 32, 34. See Interim DIP Order, Ex. B Approved Budget. 10

11 Case LSS Doc 152 Filed 03/30/18 Page 11 of 23 (the Milestones ): In addition, the DIP Facility imposes the following deadlines DATE April 10, 2018 April 25, 2018 June 4, 2018 June 14, 2018 MILESTONE Final DIP Order Disclosure Statement Order Confirmation Order Plan Effective Date 25. The failure to meet any Milestone is an Event of Default under the DIP Facility. 32 Additionally, in the event of a Specified Sales Process Default, the DIP Lenders may direct the Debtors to commence an expedited liquidation process for all or any portion of their assets. 33 OBJECTION I. Unless The DIP Facility Is Rationalized, The Motion Should Not Be Approved 26. To obtain postpetition financing under section 364(d) of the Bankruptcy Code, a debtor must prove: (i) it is unable to obtain unsecured credit; (ii) the proposed credit is necessary to preserve the assets of the estate; and (iii) the terms of the financing are fair, reasonable and adequate. 34 The Court should only approve postpetition financing to the extent it is in the best interests of the general creditor body. 35 Without appropriate modifications, the DIP Facility is not in the best interests of the general creditor body and should be denied See Motion, Ex. A DIP Financing Agreement, Id. Final DIP Order, 25(b). In re Ames Dept. Stores, Inc., 115 B.R. 34, 37 (Bankr. S.D.N.Y. 1990). In re Roblin Indus., 52 B.R. 241, 244 (Bankr. W.D.N.Y. 1985). 11

12 Case LSS Doc 152 Filed 03/30/18 Page 12 of 23 A. The Roll-Up Should Not Be Approved 27. Courts generally are reluctant to approve postpetition financing that converts prepetition debt into postpetition obligations, as it is viewed as a form of crosscollateralization that circumvents the Bankruptcy Code s priority scheme. 36 Here, the Roll-Up proposed under the DIP Facility will significantly improve the position of the DIP Lenders without a concomitant benefit to the Debtors estates. Accordingly, the Roll-Up in its current form should not be authorized. 28. The DIP Facility will convert $40 million of Prepetition Senior Obligations, including $7.25 million due under the Prepetition Term Loan, into postpetition secured debt allowed on a superpriority basis. On its face a $57.25 million DIP facility that would seemingly provide the Debtors meaningful liquidity to address a number of the concerns raised in this Objection, the Approved Budget demonstrates minimal, if any, incremental funding use by the Debtors. 29. The minimum threshold for a roll-up, if necessary at all, should be one dollar of new credit to fund ongoing operations and administrative expenses for every dollar of old credit to be rolled up into the DIP facility. 37 In cases such as these where there is minimal, if See, e.g., Official Comm. of Unsecured Creditors of New World Pasta Co. v. New World Pasta Co., 322 B.R. 560, 569 n.4 (M.D. Pa. 2005) (noting that roll-up provisions have the effect of improving the priority of a prepetition creditor ); In re Tenney Vill. Co., 104 B.R. 562, 570 (Bankr. D.N.H. 1989) (holding that Bankruptcy Code section 364 does not authorize the granting of administrative expense priority for prepetition debt); see also Transcript of Hearing at 32:20-25, In re Verasun, No (BLS), (Bankr. D. Del. Dec. 3, 2008) [Dkt. No. 316] (Judge Shannon noting that the Bankruptcy Court of the District of Delaware, the Southern District of New York, and other courts have found that roll-ups are not favored. They are strongly discouraged on day one, and the bottom line is that for approval a substantial showing [of need for the financing] has to be made ). Judge Shannon further noted seeing cases where you ve had $15 million of pre petition liability being rolled up and another million and a half of new money coming in. That s, I think, the kind of circumstance that the proposed rules speak to and that I find to be an abuse of the system... Id. at 34:4-8. Excerpts from the transcript are attached hereto as Exhibit A. See COLLIER ON BANKRUPTCY [2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (stating that, when permitted, the portion of prepetition rolled up should be one dollar of roll-up for each dollar of postpetition financing); see also DIP Motion, Final Order at 2-3, In re Lyondell Chem. Co., No , (Bankr. S.D.N.Y. Mar. 1, 2009) [Docket No. 1002]). 12

13 Case LSS Doc 152 Filed 03/30/18 Page 13 of 23 any, incremental new money there is no basis for the cross-collateralization of the prepetition liens and claims. 30. In addition to the grant of postpetition superpriority claims on prepetition collateral, the Final DIP Order will also grant a DIP lien on, and a superpriority claim against, previously unencumbered assets, including Avoidance Actions. 38 Such liens and claims are similarly inappropriate and contrary to the interests of the Debtors estates and their creditors. 31. Avoidance powers are intended to allow a debtor-in-possession or a trustee to recover certain payments for the benefit of unsecured creditors. 39 Avoidance Actions should not be pursued for the exclusive benefit of a secured creditor. 40 Moreover, Avoidance Actions belong to the Debtors creditors, not the Debtors. 41 Thus, the Debtors should not be authorized to grant a lien on Avoidance Actions or their proceeds. 32. Taken together, the Roll-Up amounts to the very protections courts routinely ward against cross collateralization that circumvents the Bankruptcy Code s priority schemes. The Final DIP Order, therefore, should be modified to: (i) limit the DIP liens and superpriority claims solely with respect to any incremental financing under the DIP Facility, if any; and (ii) exclude any previously unencumbered assets, including Avoidance Actions, from the Roll-Up. If the Court is inclined to approve the Roll-Up, the Final Order should be modified Final DIP Order, 6. See Buncher Co. v. Official Comm. of Unsecured Creditors of GenFarm Ltd. Partnership IV, 229 F.3d 245, 250 (3d Cir. 2000) (stating, when recovery is sought under section 544(b) of the Bankruptcy Code, any recovery is for the benefit of all unsecured creditors ); Mellon Bank, N.A. v. Glick (In re Integrated Testing Prods. Corp.), 69 B.R. 901, 904 (D.N.J. 1987) (finding that only the trustee, acting on behalf of all creditors, has a right to recover payments made as preferences); See Id. (recognizing that avoidance actions should be pursued for the benefit of all unsecured creditors). See Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery (In re Cybergenics Corp.), 226 F.3d 237, (3d Cir. 2000) (holding that a fraudulent transfer claim belongs to creditors and not to a chapter 11 debtor-in-possession); Official Comm. of Unsecured Creditors v. Gold Electronics Corp. (In re Gold Electronics Corp.), 1993 WL , *3-4 (N.D. Ill. Sept. 22, 1993) (vacating lien on preference actions granted under financing order). 13

14 Case LSS Doc 152 Filed 03/30/18 Page 14 of 23 to preserve the rights of the Committee and other parties in interest to further challenge the Roll- Up to the extent of a successful challenge against the Senior Creditors. B. The 506(c) And 552(b) Waivers Are Inappropriate 33. Absent a consensual budget that ensures the payment of all administrative claims to ensure the administrative solvency of these estates, including the timely payment of stub rent and 503(b)(9) claims, the advance waivers under sections 506(c) and 552(b) of the Bankruptcy Code are inappropriate and must be denied. 42 Section 506(c) of the Bankruptcy Code allows a debtor to charge the costs of preserving or disposing of a secured lender s collateral to the collateral itself. 43 This provision ensures that the cost of liquidating a secured lender s collateral is not paid from unsecured creditor recoveries. 44 Courts have widely recognized that section 506(c) waivers are not to be granted lightly. 45 Indeed, in this jurisdiction, courts have explicitly provided that the waiver is not permitted without the consent of the committee. 46 Similarly, the equities of the case exception in section 552(b) of the Bankruptcy Code allows a debtor, committee or other party-in-interest to exclude postpetition proceeds from prepetition collateral on equitable grounds, including to avoid having unencumbered assets fund the cost of a secured lender s foreclosure Id. 37, 39. See 11 U.S.C. 506(c). 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 ). See, e.g., Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 12 (2000) (finding that section 506(c) is a rule of fundamental fairness for all parties in interest and authorizing the surcharge of a secured lender s collateral where reasonable and appropriate). See In re Mortgage Lenders Network USA, Inc., Case No (PJW), Hr g Tr. (Docket No. 346) at 21 (Bankr. D. Del. March 20, 2007) (noting that without the committee s prior approval, the 506(c) waiver may not be approved). Excerpts from the transcript are attached hereto as Exhibit B. See 11 U.S.C. 552(b). 14

15 Case LSS Doc 152 Filed 03/30/18 Page 15 of The Approved Budget does not sufficiently cover all of the administrative costs associated with these cases, including the timely payment of stub rent and inclusion of claims under 503(b)(9) of the Bankruptcy Code. This omission is particularly troubling in light of the fact that the Debtors vendors and landlords are the ones being asked to effectively finance the Plan through $8 million of annual concessions. To the extent the Senior Creditors and Subordinated Noteholders wish to receive the benefits of a chapter 11 process undertaken for their benefit, they must agree to payment of the associated costs. 35. Courts in this district and others have routinely determined a debtor must assure that administrative expenses will be paid prior to DIP financing approval. As Judge Sontchi stated in In re Townsends, Inc. where the debtors sought the approval of DIP financing that would not pay 503(b)(9) claims, if it appears that the case is administratively insolvent, I would be inclined to either convert or dismiss the case. 48 As a result, the ultimate DIP financing approved by the Court contained a revised budget that included sufficient funds to pay 503(b)(9) claims. 36. Similarly, the Debtors 200 store locations have been and will continue to be operated for the benefit of the Senior Creditors and the Subordinated Noteholders. Given the uncertainty surrounding any chapter 11 case, particularly in light of the fact that support for the Plan here is premised on obtaining at least $8 million in annual concessions, the Debtors creditors should not bear the risk of administrative insolvency, including any delay in the payment of stub rent. Such payments are directly associated with protecting the value of the 48 In re Townsends, Inc., et al., Case No (Bankr. D. Del. January 21, 2011); Tr. at 25:8-11, an excerpt of which is attached hereto as Exhibit C; see also In re NEC Holdings Corp., et al., Case No (Bankr. D. Del. July 13, 2010); Tr. at 108:1-108:4, an excerpt of which is attached hereto as Exhibit D (Judge Sontchi, sitting for Judge Walsh, stated that he need[s] some evidence that there s a probability that admin claims are going to get paid in full, including 503(b)(9) claims or [he] won t approve the financing. ). 15

16 Case LSS Doc 152 Filed 03/30/18 Page 16 of 23 Prepetition Collateral and the going concern value of the Debtors assets, and are required to be paid under the Bankruptcy Code. 49 The amount allocated for stub rent, therefore, should either be carved-out of the Prepetition Collateral or the rights of such parties to surcharge the collateral fully preserved. 37. The advance 506(c) and 552(b) waivers are additionally improper given the limited proposed budget for the Committee s professionals. 50 As discussed more-fully above, the Debtors are pursuing an expedited process, requiring the Committee to spend the first six weeks of these cases, which are normally spent getting up-to-speed: (i) analyzing the DIP Facility; (ii) investigating the liens and claims of the Senior Creditors and Subordinated Noteholders; and (iii) assessing the viability of the company s long-term business plan, with a Disclosure Statement hearing already scheduled for April 18, just three weeks after the Committee s formation. The Committee is allocated $360,000 for the entirety of the case, approximately one-third of the more than $1 million allocated for the Debtors professionals, and one-half the $740,000 allocated for the professionals retained by the Secured Creditors and Subordinated Noteholders. This excludes the more than $600,000 of fees paid to Debtors atorneys in preparation for these chapter 11 cases. The allocation is not only inequitable, but prevents the Committee from fulfilling its fidudicary duty to unsecured creditors. 51 The See 11 U.S.C. 503(b)(1); In re Goody s Family Clothing, Inc., 610 F.3d 812, (3d Cir. 2010) (finding that retaining possession of the premises, thereby inducing post-petition services from the landlords, is sufficient to be a transaction justifying administrative priority); In re ZB Co., 302 B.R. 316, 319 (Bankr. D. Del. 2003) ("It is beyond dispute that all of the Debtors' landlords whose properties are occupied and used post-petition have valid administrative claims"). See Interim DIP Order, Ex. B Approved Budget. See Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 466 (2d Cir. 2007) (unsecured creditors committees have a fiduciary duty to maximize unsecured creditor recoveries for the debtor s estate); Value Prop. Trust v. Zim Co. (In re Mortg. & Realty Trust), 212 B.R. 649, 653 (Bankr. C.D. Cal. 1997) (noting that the committee s has many functions it investigates, it appears, it negotiates, it may litigate, and it is at all times intimately involved in the reorganized ). 16

17 Case LSS Doc 152 Filed 03/30/18 Page 17 of 23 Committee s budget, therefore, must be increased, or all of the professionals should be required to share pro rata. 52 C. The Debtors Stipulations Are Overly Broad And Must Be Narrowed 38. The Final DIP Order stipulates to the validity of the prepetition liens and claims of not only the Senior Creditors but inexplicably the Subordinated Noteholders, while at the same time limiting the Committee s use of cash collateral in connection with investigating and commencing a Challenge with respect to such liens and claims, and grants a broad release if the Committee does not commence a Challenge within 60 days. 53 The nature and extent of such stipulations are entirely improper and must be denied. 39. As an initial matter, the Subordinated Noteholders should be excluded from a number of protections, including the Debtors Stipulations, the proposed limitations on the use of cash collateral, and the accompanying release. The Subordinated Noteholders are not lenders under the DIP Facility or otherwise providing financing to the Debtors. Moreover, the Subordinated Noteholders are already receiving the only protections they are entitled to under the Final DIP Order adequate protection to the extent of any diminution in the value of their Prepetition Collateral. No further protections are authorized or required. 40. The Committee is currently undertaking an investigation into the circumstances that led the Debtors to file bankruptcy and the various transactions entered into by the Debtors prior to the Petition Date. To the extent the Subordinated Noteholders are seeking a release in connection with these cases, the only appropriate place to do so is in the Plan. Indeed, the currently proposed Plan includes such a release not only on behalf of the Debtors estates, but See In re Evergreen Solar, Inc., Case No (MFW), Hr g Tr. (Docket No. 189) at (Bankr. D. Del. Sept. 6, 2011) (declining to apply the debtor s proposed caps and instead, substituted a general pool for all professionals from which debtor and committee professionals could recover fees on a pro rata basis). Excerpts from the transcript are attached hereto as Exhibit E. See Final DIP Order, 32,

18 Case LSS Doc 152 Filed 03/30/18 Page 18 of 23 any derivative claims that could be asserted. 54 Accordingly, no further release is appropriate or necessary. 41. Additionally, the limitations on the use of cash collateral and proposed releases are themselves overly broad with respect to the Senior Creditors. As currently drafted, the Committee and other parties in interest may not use Cash Collateral (other than a mere $25,000) to prosecute, contest or otherwise object to any other rights or interests of the DIP Secured Parties, the Senior Creditors or the Subordinated Noteholders. 55 Further, following the expiration of the Challenge Date without the commencement of Challenge, any and all claims or causes of action against any of the Debtors, the Senior Creditors or the Subordinated Noteholders, related in any way to the Debtors, the Prepetition Senior Loan Documents or the Prepetition Subordinated Note Documents shall be forever waiver and released. 56 Such limitations on the use of cash collateral and proposed release exceed the appropriate scope of a financing order and should not be approved. The releases must be narrowly tailored and any release should be limited to the Senior Creditors, solely in their capacity as lenders. D. The Adequate Protection Payments Are Improper 42. The proposed Adequate Protection payments similarly enhance the position of the Senior Creditors and Subordinated Noteholders at the estates' expense without any basis in law or fact. Until such parties prove they are entitled to such Adequate Protection, it should not be approved. 43. Section 363(e) of the Bankruptcy Code entitles a secured party to adequate protection to "safeguard [against] diminution in the value of its interest during [a] Chapter See Debtors Joint Plan of Reorganization, Art. X. Docket No. 17. Final DIP Order, 32. Id

19 Case LSS Doc 152 Filed 03/30/18 Page 19 of 23 reorganization." While adequate protection functions to preserve a secured creditor's position postpetition, it is not intended to enhance a secured creditor's position. To receive adequate protection, a secured creditor must "prove this decline in value or the threat of a decline in order to establish a prima facie case." 44. In addition to the requested adequate protection liens and superpriority claims, both the Senior Creditors and the Subordinated Noteholders shall continue to receive postpetition interest on their loans at the default rate, as well as professional fees and expenses. 57 The Debtors, however, present no evidence that these payments are necessary to protect the Senior Creditors or the Subordinated Noteholders from a potential diminution in value of their collateral. Accordingly, the Debtors should be required to prove any claim for diminution in value, including based upon the use of Cash Collateral. Rather than impairing the value of the collateral, these chapter 11 cases will preserve and maximize the collateral s going concern value, thereby undermining the Debtors case for adequate protection payments. 45. The Debtors have yet to submit any evidence that the Senior Creditors or Subordinated Noteholders are over-secured and entitled to adequate protection on that basis. Pursuant to section 506(b), a secured creditor is only entitled to the payment of post-petition interest and fees to the extent the value of the collateral exceeds the amount of the secured creditor's claim. Unless the Debtors prove the Senior Creditors and Subordinated Noteholders are oversecured, such adequate protection payments must be denied. At a minimum, the payments must be subject to recharacterization or disgorgement if it is determined that either or both of the Senior Creditors and the Subordinated Noteholders are undersecured. 57 See Interim DIP Order, Ex. B Approved Budget. 19

20 Case LSS Doc 152 Filed 03/30/18 Page 20 of 23 E. The Order Provides Inadequate Investigation and Challenge Rights 46. The Debtors also seek to improperly curtail the Committee s ability to investigate and challenge the prepetition liens and claims of the Senior Creditors (and Subordinated Noteholders, to the extent authorized by the Final DIP Order) through an insufficient $25,000 investigation budget and the imposition of unnecessary hurdles for the Committee to commence a challenge Since its formation just over one week ago, the Committee has been focused on getting up-to-speed in these cases, including the numerous issues raised by the Motion and the Debtors other first-day motions, as well as an analysis and assessment of the Debtors contemplated restructuring. In short order, the Committee will need to quickly turn to the Debtors Plan and Disclosure Statement, which Disclosure Statement hearing is already scheduled for April The Committee already has questions regarding the viability of the Plan and the value being provided to unsecured creditors, which will need to be addressed in the coming weeks. Although the Plan currently allocates $2.2 million to unsecured creditors, the Committee must still assess the value being provided to unsecured creditors, including whether the Debtors 20% distribution estimate is reasonable, in relation to the treatment afforded KA Investors, the Debtors other insiders, and the Subordinated Noteholders. The Committee will further need to analyze the long-term viability of the reorganized Debtors given the heavy reliance on concessions from the Debtors landlords and other vendors, rather than a reduction in leverage, and limited proposed operational improvements. The Debtors have already resisted the 58 Final DIP Order, 32,

21 Case LSS Doc 152 Filed 03/30/18 Page 21 of 23 Committee s timely efforts to quickly obtain information necessary to assess these issues, likely precipitating the need for the Committee to engage in formal discovery. 49. Given the broad analysis the Committee will need to undertake, the compressed plan timeline, and the Debtors initial refusal to provide complete transparency, the Committee should not be required to jump through the hoop of obtaining standing. Additionally, given the scope of the investigation mandated by the circumstances of these cases, a $25,000 investigation budget is insufficient and designed to prevent the Committee from undertaking a thorough investigation The Final DIP Order, therefore, should: (i) provide the Committee a $150,000 budget to investigate and commence a Challenge; (ii) grant the Committee standing to pursue a Challenge; and (iii) exclude from the Challenge Deadline any requests by the Committee to recharacterize adequate protection payments as principal as a result of a party being undersecured. II. Additional Objectionable Provisions 51. In addition to the foregoing, the following provisions of the Final DIP Order are objectionable to the Committee for the reasons stated below: Liens on Proceeds of Leases: The Final DIP Order authorizes DIP Liens, Adequate Protection Liens and superpriority claims against the proceeds of leases. The proceeds of leases are unencumbered assets and should inure to the benefit of unsecured creditors See In re Tenney Village Co., Inc., 104 B.R. 562, (Bankr. D. N.H. 1989) (refusing to approve postpetition financing because a fee cap unacceptably limited the right of debtor s counsel to payment for bringing actions against the prepetition lenders, creating an economic incentive for the debtor to avoid brining such actions in disregard of its fiduciary duties to the estate). Final DIP Order, 7(b). 21

22 Case LSS Doc 152 Filed 03/30/18 Page 22 of 23 Sale Process: The proposed Final DIP Order requires the Debtors to commence a liquidation sale process of their assets in connection with certain Events of Default. 61 The Committee s rights to contest any such relief must be fully preserved. Termination Rights: The proposed Final DIP Order must allow the Committee to independently contest an Event of Default during the Remedies Notice Period. [Remaining Page Intentionally Left Blank] 61 Id. 25(b). 22

23 Case LSS Doc 152 Filed 03/30/18 Page 23 of 23 CONCLUSION WHEREFORE, the Committee respectfully requests that the Court (i) deny the Motion unless modified as set forth herein; and (ii) grant such other and further relief as the Court deems just and proper. Dated: Wilmington, Delaware March 30, 2018 KLEHR HARRISON HARVEY BRANZBURG LLP By: /s/ Sally E. Veghte Domenic E. Pacitti (DE Bar No. 3989) Sally E. Veghte (DE Bar No. 4762) 919 North Market Street, Suite 1000 Wilmington, Delaware Tel: (302) Fax: (302) and KELLEY DRYE & WARREN LLP Robert LeHane (admitted pro hac vice) Jason R. Adams (admitted pro hac vice) Lauren S. Schlussel (admitted pro hac vice) 101 Park Avenue New York, New York Tel: (212) Fax: (212) Proposed Counsel to the Official Committee of Unsecured Creditors of The Walking Company Holdings, Inc., et al. 23

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68 Case LSS Doc Filed 03/30/18 Page 1 of 2 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) In re: ) Chapter 11 ) The Walking Company Holdings, Inc., et al., ) Case No (LSS) ) Debtors. ) (Jointly Administered) ) CERTIFICATE OF SERVICE I, Sally E. Veghte, Esq. of Klehr Harrison Harvey Branzburg LLP, hereby certify that on the 30th day of March 2018, I served a copy of the Objection of the Official Committee of Unsecured Creditors to the Debtors Motion for Final Order: (I) Approving Postpetition Financing, (II) Authorizing Use of Cash Collateral, (III) Granting Liens and Providing Superpriority Administrative Expense Status, (IV) Granting Adequate Protection, (V) Modifying Automatic Stay, and (VI) Granting Related Relief on the attached service list via first class mail. /s/ Sally E. Veghte Sally E. Veghte, Esq. (DE Bar No. 4762) PHIL v.1

69 Case LSS Doc Filed 03/30/18 Page 2 of 2 SERVICE LIST Jeffrey N. Pomerantz, Esquire James E. O Neill, Esquire Pachulski Stang Ziehl & Jones LLP 919 N. Market Street, 17th Floor Wilmington, DE Office of the United States Trustee Mark S. Kenney, Esquire 844 King Street, Suite 2207 Wilmington, DE Matthew P. Ward, Esquire Womble Bond Dickinson (US) LLP 222 Delaware Avenue, Suite 1501 Wilmington, DE Kevin J. Simard, Esquire Choate Hall & Stewart LLP Two International Place Boston, MA Jeffrey M. Reisner, Esquire Kerri A. Lyman, Esquire Irell & Manella LLP 840 Newport Center Drive, Suite 400 Newport, Beach, CA Kurt F. Gwynne, Esquire Emily K. Devan, Esquire Reed Smith LLP 1201 N. Market St., Ste Wilmington, DE PHIL v.1