Case GLT Doc 679 Filed 07/11/17 Entered 07/11/17 17:15:21 Desc Main Document Page 1 of 15

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1 Document Page 1 of 15 IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA In re: Chapter 11 rue21, inc., et al., 1 Case No (GLT (Jointly Administered rue21, inc, et al., Movants. v. Objectors, Related to Document Nos. 314, 315, Respondents. 645, 647, 648, 650, 653, 654, 655, 657, 658, 660, 661, 671 DIP TERM LOAN PARTIES' REPLY TO UCC OBJECTION TO DISCLOSURE STATEMENT AND JOINDER TO DEBTORS' OMNIBUS REPLY TO OBJECTIONS TO THE DISCLOSURE STATEMENT 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor's federal tax identification number, include: rue21, inc. (1645, Rhodes Holdco, Inc. (6922, r services llc (9425, and rue services corporation (0396. The location of the Debtors' service address is: 800 Commonwealth Drive, Warrendale, Pennsylvania NAI v1

2 Document Page 2 of 15 TABLE OF CONTENTS Page PRELIMINARY STATEMENT... 1 ARGUMENT... 3 I. The Disclosure Statement Contains Adequate Information... 3 II. Confirmation Issues... 4 A. The Plan is Proposed in Good Faith and the Treatment of General Unsecured Claims is Permissible... 5 (1 The Plan Was Proposed in Good Faith... 5 (2 The Treatment of General Unsecured Creditors is Permissible and Does Not Evidence a Lack of Good Faith... 6 B. The Plan is Feasible and Ensures the Payment of Administrative Claims... 7 C. The Plan's Classification Structure is Appropriate... 9 D. The DIP Term Loan Parties Join the Debtors' Reply CONCLUSION NAI v1 -i-

3 Document Page 3 of 15 TABLE OF AUTHORITIES CASES Page In re Coram Healthcare Corp., 315 B.R. 321 (Bankr. D. Del In re Curtis Ctr. Ltd. P'ship, 195 B.R. 631 (Bankr. E.D. Pa In re Drexel Burnham Lambert Group, Inc., 140 B.R. 347 (S.D.N.Y In re Fairfield Exec. Assocs., 161 B.R. 595 (D.N.J In re Frascella Enterprises, Inc., 360 B.R. 435 (Bankr. E.D. Pa In re Genesis Health Ventures, Inc., 266 B.R. 591 (Bankr. D. Del In re W.R. Grace & Co., 475 B.R. 34 (D. Del In re W.R. Grace & Co., 729 F.3d 332 (3d Cir In re Zenith Elecs. Corp., 241 B.R. 92 (Bankr. D. Del John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154 (3d Cir STATUTES 11 U.S.C U.S.C U.S.C , 3 11 U.S.C , 6, 7 NAI v1 -ii-

4 Document Page 4 of 15 The DIP Term Loan Parties 2 hereby submit this reply (the "Reply" to the objection [Docket No. 671] (the "UCC Objection" of the Official Committee of Unsecured Creditors (the "UCC" to the DS Motion 3 and the Disclosure Statement 4 and joinder to the Debtors' omnibus reply (the "Debtors' Reply" to the UCC Objection and the objections of certain other parties (together with the UCC, the "Objectors" [Docket Nos. 645, 647, 648, 650, 653, 654, 655, 657, 658, 660, 661] (together with the UCC Objection, the "Objections". 5 In support of this Reply, the DIP Term Loan Parties respectfully state as follows: 6 PRELIMINARY STATEMENT 1. The Debtors and the DIP Term Loan Parties have worked cooperatively over the last several months on a comprehensive chapter 11 plan, with both parties sharing the common goal of ensuring the Debtors' business remains strong, vital and poised to succeed. 7 The DIP Term Loan Parties strongly believe in the Debtors' business and have backed that conviction with $50 million in new money financing to ensure the Debtors continue operating during these 2 "DIP Term Loan Parties" means, collectively, the DIP Term Loan Agent, the DIP Term Loan Lenders, the Prepetition Term Loan Agent and the Term Loan Steering Committee. 3 "DS Motion" means the Debtors' Motion for Entry of an Order (I Approving the Disclosure Statement for the Debtors' Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code, (II Approving Certain Dates Related to Plan Confirmation, (III Approving Procedures for Soliciting, Voting, and Tabulating Votes on, and for Filing Objections to, the Plan and Approving the Forms of Ballots and Notices, and (IV Granting Related Relief [Docket No. 314]. 4 "Disclosure Statement" means the Debtors' Disclosure Statement for the Debtors' Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 315], as amended by the Debtors prior to the hearing on the DS Motion. See Debtors' Reply at n.5. All references to the Disclosure Statement in this Reply refer to the Disclosure Statement as amended. 5 The objection of Janaf Shopping Center, LLC et al [Docket No. 655] was withdrawn. See Docket Nos. 675, Capitalized terms used herein but not otherwise defined shall have the meanings given to such terms in the Plan or the Disclosure Statement, as applicable. 7 The DIP Term Loan Parties, the Debtors and the UCC have been negotiating over the past few weeks on certain revisions to the Plan and the Disclosure Statement. The parties continue to negotiate in good faith over the terms of the Plan and the language in the Disclosure Statement. While the DIP Term Loan Parties anticipate a resolution before the hearing on the DS Motion, out of an abundance of caution, the DIP Term Loan Parties submit this Reply in the event that the parties fail to reach a final agreement. NAI v1-1-

5 Document Page 5 of 15 cases, thereby preserving the jobs of thousands of the Debtors' employees and relationships with a great many of their vendors and landlords. Further, under the Plan, the DIP Term Loan Parties have agreed to waive their substantial rights under section 1129 of the Bankruptcy Code to have these DIP loans repaid in full under the Plan and have also agreed to waive their pro rata recovery on their Prepetition Term Loan deficiency claim of upwards of $200 million for the benefit of other general unsecured creditors making them one of the largest unsecured creditors in this case. Before the appointment of the UCC, the Debtors, with the DIP Term Loan Parties' support, filed the Plan, which proposed a meaningful recovery to all unsecured creditors in the form of 4% of equity in the Reorganized Debtors. All of these major concessions are designed to enable the Debtors to swiftly exit chapter 11 in a manner that benefits all of the Debtors' stakeholders. 2. In the face of such a well-supported Plan, the UCC has asked this Court to deny approval of the DS Motion on the basis of several purported informational infirmities with the Disclosure Statement. While the initial Disclosure Statement contained a robust array of information and financial data clearly "adequate information" within the meaning of Bankruptcy Code section 1125 the Debtors have proposed further substantive revisions to the Disclosure Statement that allay the UCC's informational concerns. Therefore, there is no question the Disclosure Statement should be approved in order to commence the Plan solicitation process. 3. The UCC Objection does not raise any other meritorious arguments to the relief sought in the DS Motion, as much of it focuses on plan confirmation issues that are procedurally not before the Court today. Although these arguments will be reserved for another day (if not resolved prior to the Confirmation Hearing, there should be no doubt that the Plan is NAI v1-2-

6 Document Page 6 of 15 confirmable in all respects. The Plan will allow the Debtors to (a quickly emerge from chapter 11, thus ending the substantial cash burn associated with administering these estates; (b strengthen their capital structure by dramatically reducing their debt load by over $700 million; and (c improve operations post-emergence by assuming most leases and closing unprofitable locations, thus saving thousands of jobs and leaving the vast majority of landlords satisfied in full. The Plan not only provides fair and equitable treatment to all of the Debtors' creditors, as stated above, it also provides general unsecured creditors a substantial recovery on the order of $10 to $12 million in value based on the Debtors' valuation. 8 That same valuation makes clear the generosity and fairness of this treatment, given that it shows that general unsecured creditors are far out of the money and not entitled under the Bankruptcy Code to receive any recovery under the Plan. Moreover, the Debtors' revised projections show that the Plan is feasible and that the Debtors have more than sufficient liquidity to pay administrative expense and priority claims on an Effective Date in the late August/early September timeframe. With this amount of support from its creditor constituencies and a pathway to exiting these chapter 11 cases expeditiously, the DS Motion should be approved and the Debtors given the opportunity to confirm this Plan. ARGUMENT I. The Disclosure Statement Contains Adequate Information 4. Contrary to the UCC's assertions (UCC Obj. 8 19, the Disclosure Statement contains adequate information necessary to enable a reasonable creditor to make an informed judgment about the Plan. See 11 U.S.C. 1125(a(1 (defining "adequate information" as "information of a kind, and in sufficient detail... that would enable a hypothetical reasonable 8 Debtors' Disclosure Statement for the Debtors' Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 315] (the "Disclosure Statement", Ex. D. NAI v1-3-

7 Document Page 7 of 15 investor typical of holders of claims or interests... to make an informed judgment about the plan.". The Disclosure Statement provides comprehensive disclosure of a wide array of information relevant to Holders of Claims and Interests, as set forth in the DS Motion. DS Motion, at Moreover, as demonstrated in the Debtors' Reply to the Objections and in the Disclosure Statement, the Debtors have already addressed (or will soon address many purported informational deficits alleged by the UCC and the other objecting parties. See Debtors' Reply at & Ex. A. Specifically, the Disclosure Statement: Adequately describes the Debtors' preliminary assessment and ongoing investigation of any potential claims resulting from the Take-Private Transaction, including any potential claims against Apax (see Debtors' Reply at 20; Disclosure Statement at Art. IV.A.1; Already addressed the risk factors associated with the potential lack of vendor or factor support (Disclosure Statement at Art. VIII.A.4 & Art. VIII.B.3.d, despite the UCC's contentions to the contrary (UCC Obj. at 14; Sufficiently discloses the terms regarding the distribution and treatment of New Equity (see Disclosure Statement Art. II; Art. VI.E.5(c; Art. VIII.C.1; Art. VI.A.5; Art. VI.B.1(a(iv-(v; Art. VI.C.5, & 21.; Art. VI.E.1; and Properly allows for more fulsome terms of, among other things, the Management Equity Incentive Plan (the "MIP" and the New Organizational Documents, as well as the identity of the New Board, to be provided in Plan Supplement documents that will be filed before the confirmation objection deadline, which is a customary process in complex cases such as this one. See Debtors' Reply at 11. Indeed, it would be improper for the current board to now determine certain terms, such as those of the MIP, which would bind the New Board, in whose discretion these decisions are properly left. II. Confirmation Issues 5. The Objections also raise a variety of premature objections to confirmation of the Plan. See UCC Obj. 21. These Objections are not relevant to approval of the DS Motion, and the UCC does not cite any applicable Third Circuit case law stating otherwise. See UCC Obj. 20. Notwithstanding the lack of merit in the UCC's argument, the DIP Term Loan Parties NAI v1-4-

8 Document Page 8 of 15 will briefly respond to clarify the record for the Court. A. The Plan is Proposed in Good Faith and the Treatment of General Unsecured Claims is Permissible (1 The Plan Was Proposed in Good Faith 6. To determine whether a plan is proposed in good faith, a court should look to "whether such a plan will fairly achieve a result consistent with the objectives of the Bankruptcy Code." In re W.R. Grace & Co., 729 F.3d 332, 346 (3d Cir (quoting In re Am. Capital Equip., LLC, 668 F.3d 145, 156 (3d Cir The Plan must also have been "proposed with honesty and good intentions and with a basis for expecting that reorganization can be effected." In re Genesis Health Ventures, Inc., 266 B.R. 591, 609 (Bankr. D. Del (citations omitted. These objectives include "'preserving going concerns and maximizing property available to satisfy creditors,' 'giving debtors a fresh start in life,' 'discourag[ing] debtor misconduct,' 'the expeditious liquidation and distribution of the bankruptcy estate to its creditors,' and 'achieving fundamental fairness and justice.'" Id. (citations omitted As reflected by the liquidation analysis and the Disclosure Statement, the Plan preserves the going concern value of the Debtors business, thus preventing a value-destructive liquidation and maximizing the return to creditors. 7. The Plan has been negotiated and proposed in good faith and with good intentions. The Third Circuit has noted that "a creditor's disagreement about the handling of its claim does not necessarily evince bad faith by the Plan's proponents." W.R. Grace, 729 F.3d at 347. The Debtors, with the support of the DIP Term Loan Parties and the Ad Hoc Cross-Holder Group have proposed a plan that provides a meaningful recovery for general unsecured creditors significantly exceeding what they would receive in a liquidation. Moreover, the Debtors and the DIP Term Loan Parties have negotiated intensely and in good faith with the UCC. The UCC's disagreement regarding the handling of certain claims, without more, is not NAI v1-5-

9 Document Page 9 of 15 evidence of bad faith, especially when the proposed Plan provides unsecured creditors with a recovery above what they would receive in a liquidation. (2 The Treatment of General Unsecured Creditors is Permissible and Does Not Evidence a Lack of Good faith 8. The UCC argues that the treatment of holders of General Unsecured Claims, who may only receive a recovery if they vote in favor of the Plan (which it labels as a "death trap", renders the Plan unconfirmable and demonstrates a lack of good faith. See UCC Obj. at 21. All holders of General Unsecured Claims will receive the same treatment regardless of the outcome of their vote. This proposed treatment of General Unsecured Claims has long been permissible in the Third Circuit and in other districts. See In re Zenith Elecs. Corp., 241 B.R. 92, 105 (Bankr. D. Del ("There is no prohibition in the Code against a Plan proponent offering different treatment to a class depending on whether it votes to accept or reject the Plan"; see also In re Drexel Burnham Lambert Group, Inc., 140 B.R. 347, 350 (S.D.N.Y (plan which provided warrants to accepting classes but not to rejecting class was not unfairly discriminatory and could be confirmed. 9. As explained in Zenith, one justification for this "treatment is that, if the class accepts, the Plan proponent is saved the expense and uncertainty of a cramdown fight. This is in keeping with the Bankruptcy Code's overall policy of fostering consensual plans of reorganization and does not violate the fair and equitable requirement of section 1129(b." Zenith, 241 B.R. at 92. That is exactly what is occurring here. The proposed recovery for General Unsecured Claims, assuming the class votes in favor of the Plan, is far in excess of what they would receive in a liquidation according to the Liquidation Analysis nothing. The Debtors and other parties supporting the Plan have offered a generous inducement to general unsecured creditors to vote in favor of the Plan. If they do not, they forego a recovery they are NAI v1-6-

10 Document Page 10 of 15 otherwise not legally entitled to, and Third Circuit law supports such an approach. 10. Based on the above and the reasons set forth in the Debtors' reply (Debtors' Reply at 23 25, the DIP Term Loan Parties question how the UCC's advisors can doubt the Debtors' good faith in proposing a nearly consensual and fully confirmable Plan. See UCC Obj. at 4, 21. The alleged "coercive provisions" of the Plan are far from that; rather, they are well-reasoned and typical provisions, often contained in chapter 11 plans that bear no indicia of bad faith and are commonly employed in large complex chapter 11 cases like this one. B. The Plan is Feasible and Ensures the Payment of Administrative Claims 11. The proposed Plan is feasible, as evidenced by the Debtors' projections and the substantial commitments of the Debtors' largest stakeholders. First, the Prepetition Term Loan Lenders have agreed to provide DIP financing to provide liquidity covering a substantial portion of the costs of these cases and to then convert those claims into debt under the Exit Term Loan Facility in lieu of payment in full as required under section 1129 of the Bankruptcy Code. Moreover, they will also be receiving equity in the Reorganized Debtors on account of their approximately $520 million of DIP Roll-Up Claims and Prepetition Term Loan Claims. This is a vote of confidence from the Debtors' existing capital structure that a successful turnaround of the Debtors' business will be effected by the implementation of the Plan. Permitting the Debtors to avoid repaying the DIP Term Loans in full, in cash immediately upon emergence is further evidence of the feasibility of the Plan, as it ensures that the Debtors will be able to direct that liquidity towards trade vendors and employees in the ongoing operation of their business. 12. The UCC specifically asserts that the Debtors have insufficient liquidity to pay Administrative Claims on the Effective Date and thus the plan as proposed is not confirmable. See Obj., 21. Based on the revised liquidity forecast of the Debtors, attached as Exhibit B to NAI v1-7-

11 Document Page 11 of 15 the Disclosure Statement, the Debtors are more than able to pay these claims on the Effective Date, which is anticipated to occur in late August or early September following the occurrence of the Confirmation Hearing. As demonstrated by the revised forecast, at their low point of liquidity in their forecast, the Debtors will have $16 million of liquidity after paying Administrative Claims (including section 503(b(9 claims, which will leave the Debtors with more than ample liquidity to continue their business. Moreover, the Debtors' forecasted liquidity is premised on several conservative assumptions. For example, the revised liquidity forecast: Although based on existing terms with vendors, does not reflect that vendors are giving the Debtors discounts on certain purchases, which provides for an additional $1 to $2 million of incremental liquidity; Does not account for the already-demonstrated fact that, as these cases progress and greater certainty is achieved, terms with vendors and factors (which terms, on the aggregate, have already improved over the course of these cases will continue to improve, thus increasing the Debtors' currently forecasted liquidity; Assumes payment of the maximum forecasted amount of cure costs pursuant to section 365(b(1 of the Bankruptcy Code and "stub rent" (i.e., rent due for the period between the Petition Date and the first postpetition rent payment; Excludes the Debtors' increasing liquidity estimate for the month of October, which is due in part to a build-up of borrowing base in advance of the holiday season; and Excludes potential sources of additional liquidity currently under consideration by the Debtors. 13. The DIP Term Loan Parties and the Debtors, together with their respective advisors, are aligned in their desire for the Debtors to thrive post-emergence. As such, their belief that the Debtors' forecasted liquidity profile (despite the above conservative assumptions allows for (a the payment of all forecasted Administrative Claims upon emergence, (b ample operating liquidity to continue running the business, and (c a significant liquidity cushion to required liquidity levels under the Reorganized Debtors' anticipated post-emergence financing NAI v1-8-

12 Document Page 12 of 15 agreements, should be granted considerable weight in the Court's determination of whether the Plan is feasible (although, again, that is not a decision for today, as should the fact that the Debtors have outperformed their budget with higher sales, better than expected vendor terms and lower than expected selling, general and administrative expenses. 14. Given the above, it is clear that the UCC is only attacking the feasibility of the Plan to gain leverage over the plan process by imposing delay in order to potentially extract additional concessions to which its constituency is not entitled under the circumstances. Such tactics should not be supported or encouraged. C. The Plan's Classification Structure is Appropriate 15. The UCC asserts that "Prepetition Term Loan Deficiency Claims are not substantially similar to General Unsecured Claims" because Prepetition Term Loan Deficiency Claims will receive no recovery under the Plan while holders of General Unsecured Claims are positioned to receive equity in the Reorganized Debtors. (UCC Obj. at 21. Notably, the UCC does not (because it cannot cite one case in support of this proposition, as case law on this point is contrary to their allegations. Rather, it is well-established in the Third Circuit that secured creditor deficiency claims and general unsecured claims are substantially similar and should be classified together. In re W.R. Grace & Co., 475 B.R. 34, 113 (D. Del ("It has... been observed that unsecured claims will, generally speaking, comprise one class, whether trade, tort, publicly held debt or a deficiency of a secured creditor." (quoting In re 266 Wash. Assocs., 141 B.R. 275, 282 (Bankr. E.D.N.Y (emphasis added; In re Coram Healthcare Corp., 315 B.R. 321, 348 (Bankr. D. Del (same; In re Curtis Ctr. Ltd. P'ship, 195 B.R. 631, 642 (Bankr. E.D. Pa ("[T]here is no difference between the legal characteristics of [the] unsecured deficiency claim and the claims of the Debtor's other unsecured creditors, simply NAI v1-9-

13 Document Page 13 of 15 because [the] unsecured deficiency claim is the subject of pending litigation. Unsecured claims are basically all alike...."; In re Fairfield Exec. Assocs., 161 B.R. 595, 603 (D.N.J (holding that deficiency claim should be classified with other unsecured creditors and rejecting argument that the size of the claim was a proper justification for classifying it separately. 16. The UCC's argument turns the case law on its head. The Third Circuit has clearly explained that "the classification of the claims or interests must be reasonable," (John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154, 158 (3d Cir (quoting Matter of Jersey City Med. Ctr., 817 F.2d 1055, 1061 (3d Cir. 1987, and that it is not the treatment of claims that is relevant, but the legal status of such claims in relation to the assets of the debtors. See e.g., In re Frascella Enterprises, Inc., 360 B.R. 435, 442 (Bankr. E.D. Pa ("[T]he question [of classifying claims] is whether the claims in a class have the same or similar legal status in relation to the assets of the debtor.". The UCC incorrectly focuses on the proposed recovery on the Prepetition Term Loan Deficiency Claims, rather than whether it is reasonable to classify the deficiency claim with other unsecured claims. This puts the cart before the horse and is irrelevant to the section 1122(a analysis. The Prepetition Term Loan Deficiency Claims have the same priority to the Debtors' assets as other unsecured claims, and thus are properly classified together with such claims. 17. Having established that such claims are appropriately classified together, the fact that certain claimants receive less favorable treatment from other claimants in the same class is neither an indication of improper classification of claims or lack of good faith. The Bankruptcy Code is clear that individual members of a class may agree to a "less favorable treatment." 11 U.S.C. 1123(a(4 (providing that "a plan shall... provide the same treatment for each claim or interest in a particular class, unless the holder of a particular claim or interest agrees to less NAI v1-10-

14 Document Page 14 of 15 favorable treatment of such particular claim or interest.". Ironically, here the UCC is arguing that the Prepetition Term Loan Deficiency Claim should be separately classified because it voluntarily agreed to waive its recovery, a concession that directly benefits the UCC and its constituency. Not only does such an argument defy logic, but it is also inconsistent with the weight of case law in this jurisdiction. D. The DIP Term Loan Parties Join the Debtors' Reply 18. With respect to any objections raised by the UCC or the other Objectors that are not specifically addressed herein, including the UCC's objection to the Plan's releases and its assertion that general unsecured creditors stand to fare better under a chapter 7 liquidation (see UCC Obj. at 21, the DIP Term Loan Parties fully agree with and join in the responses set forth in the Debtors' Reply. [Remainder of Page Intentionally Left Blank] NAI v1-11-

15 Document Page 15 of 15 CONCLUSION For the foregoing reasons, the DIP Term Loan Parties request that the Court overrule the Objection and approve the proposed Disclosure Statement. Dated: July 11, 2017 Pittsburgh, Pennsylvania Respectfully submitted, /s/ Jeffrey J. Bresch Jeffrey J. Bresch (Pennsylvania Bar I.D. No JONES DAY 500 Grant Street, Suite 4500 Pittsburgh, Pennsylvania Telephone: ( Facsimile: ( and JONES DAY Scott J. Greenberg (admitted pro hac vice Michael J. Cohen (admitted pro hac vice 250 Vesey Street New York, NY Telephone: ( Facsimile: ( mcohen@jonesday.com Attorneys for DIP Term Loan Parties NAI v1