Case Doc 5 Filed 02/13/14 Page 1 of 25 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE. Chapter 11

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1 Case Doc 5 Filed 02/13/14 Page 1 of 25 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re Event Rentals, Inc., et al., 1 Debtors. Chapter 11 Case No ( ) Joint Administration Requested MOTION OF EVENT RENTALS, INC. AND ITS AFFILIATED DEBTORS FOR ORDER GRANTING AUTHORITY TO PAY PREPETITION WAGES, COMPENSATION, EMPLOYEE BENEFITS, AND RELATED OBLIGATIONS Event Rentals, Inc. ( Event Rentals ) and its affiliated debtors and debtors in possession (collectively, the Debtors ) in the above-captioned chapter 11 cases (the Chapter 11 Cases ), hereby file this motion (the Motion ) for an order granting authority to pay prepetition wages, compensation, employee benefits, and related obligations. In support of the Motion, the Debtors refer to the Declaration of Jeffrey M. Black in Support of First Day Motions and Applications (the CEO Declaration ), filed contemporaneously herewith, and respectfully represent: A. General Background I. BACKGROUND 1. On February 13, 2014 (the Petition Date ), each of the Debtors filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the 1 The Debtors and the last four digits of their respective taxpayer identification numbers are: Classic Midwest, Inc. (9934); Classic Northeast, Inc. (9871); Classic Panache, Inc. (1237); Classic Party Rentals, Inc. (3911); Classic Party Rentals LP (0583); Classic/Prime, Inc. (7149); Classic Southeast, Inc. (0700); DBO Acquisition Corp. (1923); DUBO Acquisition Corp. (8795); Event Rentals, Inc. (9443); Grand Events & Party Rentals, Inc. (7940); Special Event Holding, Inc. (5659); and Unique Tabletop Rentals, Inc. (4327). The list of the Debtors alternate names is located on the docket for Case No [D.I. 3] and is also available at

2 Case Doc 5 Filed 02/13/14 Page 2 of 25 Bankruptcy Code ), thereby commencing these Chapter 11 Cases. The Debtors continue to operate their businesses as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 2. To date, no committee has been appointed by the Office of the United States Trustee in these Chapter 11 Cases. 3. The Debtors are the nation s largest provider of event rental products and related services, with 39 locations across 22 markets. The Debtors have the largest offering of event equipment, value-added event services, and temporary structure assets, and provide services for over 145,000 events for approximately 55,000 customers annually. The Debtors employ approximately 2,500 employees throughout the year and have total annual revenues of approximately $235 million. 4. Additional background facts on the Debtors, including an overview of the Debtors businesses, information concerning the Debtors corporate structure, information concerning the Debtors debt structure, and information on the events leading up to the Chapter 11 Cases is contained in the CEO Declaration. 2 B. Background Facts Specific to the Motion i. Employees 5. The Debtors currently employ approximately 2,500 employees, of which approximately 2,000 employees are paid on an hourly basis (the Hourly Employees ) and approximately 500 employees are paid a salary (the Salary Employees ). Among the Hourly Employees, approximately 150 are union employees, employed pursuant to the terms of a 2 Where the context requires, each capitalized term used but not otherwise defined herein shall have the meaning ascribed to such term in the CEO Declaration. 2

3 Case Doc 5 Filed 02/13/14 Page 3 of 25 collective bargaining agreement. The Debtors also use the services of ten (10) independent contractors (the Contract Employees, collectively with the Hourly Employees and Salary Employees, the Employees ). The Employees are employed centrally by Classic Party Rentals, Inc. 6. The Employees consist of: (a) senior management, which includes the chief executive officer, chief financial officer, chief information officer, and vice presidents (collectively, the Senior Executives, each a Senior Executive ); 3 (b) middle management, which includes the Debtors general managers and directors (collectively, the Middle Managers ); and (c) rank and file Employees, made up of outside sales, project/event managers, sales managers, sales consultants, and sales, project, and event support (collectively, the Rank and File Employees ). The Rank and File Employees report to the Middle Managers, who then report to a Senior Executive. Approximately 4.9% of the Debtors payroll costs represent compensation paid to the Senior Executives, approximately 5.8% represents compensation to the Middle Managers, and the remaining approximately 89.3% represents compensation to the Rank and File Employees. 7. Among other things, the Employees (a) manage and monitor the delivery, set-up, and pick-up of the Debtors inventory of tables, chairs, fine china, high-end flatware, specialty linens, centerpieces, tents, and canopies; (b) consult on events and recommend locations; and (c) play a significant role in working with event planners, caterers, venues, and other third parties to provide the client with all necessary rentals for events, ranging from high- 3 For the purposes of this Motion, a Senior Executive is a member of the senior executive team that is responsible for management and strategic direction of the Debtors on an operational and corporate level. In addition to employees with the title of Chief Executive Officer, Chief Financial Officer, Chief Information Officer, or Vice President, the Debtors consider Chip Brown, Director of Strategic Planning, to be a Senior Executive. As of the Petition Date, there are eighteen (18) Senior Executives. 3

4 Case Doc 5 Filed 02/13/14 Page 4 of 25 profile Hollywood awards shows, premiers, celebrity weddings, graduations, charity events, golf tournaments, and other similar events. 8. The Debtors believe that any disruption in Employee pay or benefits would have adverse consequences to the Debtors, including, without limitation, staff attrition and loss of Employee morale. Many of these Employees have strong relationships with the Debtors customer base and their separation from the Debtors could result in the loss of the customer relationship, which would be harmful to the Debtors ability to consummate a sale of their assets and successfully complete the chapter 11 process. 9. Because Employees have not been paid for all wages and salaries incurred through the Petition Date, and because certain related Employee benefit obligations likewise arose prior to the Petition Date but remain unpaid, the Debtors seek, by this Motion, authorization for the Debtors to pay Employee wages and benefits that have accrued but remained unpaid as of the Petition Date in an aggregate amount per Employee of not more than $12,475. The Debtors further request authorization, to the extent such authorization is necessary, to make certain other related payments. ii. Salary, Wages and Other Compensation a. Payroll Obligations 10. The Debtors request authority to honor all outstanding payroll obligations to their Employees. Such obligations include Employees salaries and wages; vacation, paid time off, and sick leave; car allowances; and commissions and bonuses. (1) Salaries and Wages 11. The Debtors pay the Employees bi-weekly in arrears, with a Sunday payroll close date and a Thursday pay date. On a bi-weekly basis, the Debtors payroll averages 4

5 Case Doc 5 Filed 02/13/14 Page 5 of 25 approximately $5.0 million in the aggregate. Employees are divided into three pay groups, two of which are paid on the same day: (i) Employees working in California (the First Pay Period Group ), (ii) Employees working outside of California (the Outside CA Group ), and (iii) certain corporate Employees (together with the Outside CA Group, the Second Pay Period Group ). Payroll is staggered; the First Pay Period Group is paid on Thursday one week and the Second Pay Period Group is paid on Thursday the following week. The Debtors have two payroll services that assist them with payroll, Ultimate Software Group, Inc. ( UltiPro ) and Kronos Incorporated ( Kronos ). In addition, ADP Payroll Services, Inc. ( ADP ) prints all of the Debtors payroll checks and administers direct deposit The Debtors respectfully request the authority to pay the accrued but unpaid obligations in respect of Employee wages and salaries (collectively, the Employee Payroll Obligations ) in the ordinary course of business without regard to the date that such obligations arose. The request to pay Employee Payroll Obligations relates solely to Employees who are employed as of the Petition Date. With the exception of one Employee, the Debtors estimate that no other single Employee is owed in excess of $12,475 on account of the Employee Payroll Obligations. 5 The Debtors estimate that the Employee Payroll Obligations will not exceed $2.1 million. 13. To the extent they may be construed as obligations arising prior to the Petition Date requiring Court authority to pay, the Debtors further request authority to pay 4 Under certain circumstances, the Debtors have the ability to manually pay Employees by check through the Bank of America, N.A. payroll account. 5 As of the Petition Date, only one Employee is owed more than $12,475 in Employee Payroll Obligations: Jeffrey Black ($12,980.77). 5

6 Case Doc 5 Filed 02/13/14 Page 6 of 25 applicable employer payroll taxes in connection with the payment of the Employee Payroll Obligations. These taxes (collectively, the Employer Payroll Obligations ) include (i) Social Security taxes (OASDI) in the amount of 6.20% of the gross wage of each Employee that has not yet paid the statutory aggregate annual maximum Social Security contribution; (ii) the Medicare portion (HI) in the amount of 1.45% of the Employees aggregate gross wages; (iii) the Medicare taxes in the amount of 0.90% for individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly); and (iv) applicable state and federal unemployment taxes. 14. Although the Debtors believe that most payroll checks issued prepetition have been presented to and honored by the applicable drawee banks, the Debtors recognize that certain Employees may fail to cash or deposit their paychecks in a timely manner. Accordingly, it is possible that some checks remain in float as of the Petition Date, which checks the banks may not honor. To the extent any payroll checks are dishonored, the Debtors will issue new checks upon entry of the order granting the relief requested in this Motion, if this Court enters such order. (2) Administrative Fees 15. As is customary for companies of their size, the Debtors use third parties to assist with processing payroll and administering employee benefit plans. Specifically, the Debtors payroll is processed in-house using UltiPro and Kronos. In addition, UltiPro prepares, deposits, and files the Debtors and Employees federal, state, and local payroll taxes, as well as prepares and deposits any garnishments. After UltiPro calculates all the necessary deductions from an Employee s gross pay, it generates a check file. The check file is then transmitted to ADP, which provides the Debtors with direct deposit services and issues the Debtors payroll 6

7 Case Doc 5 Filed 02/13/14 Page 7 of 25 checks. 6 UltiPro charges the Debtors an annual fee of $143,000 for its services (the UltiPro Processing Fee ), paid in 36 installments. In addition, UltiPro charges a subscription fee of $7/Employee, which is billed quarterly based on a fixed number of Employees. At the end of each quarter, UltiPro reconciles the fixed number of Employees with the actual number of Employees and bills the Debtors in arrears for the previous quarter for these adjustments (the UltiPro Subscription Fee, together with the UltiPro Processing Fee, the UltiPro Fees ). Kronos charges the Debtors a subscription fee per service per Employee, which is billed on a monthly basis totaling approximately $13,000 a month (the Kronos Fee ). ADP charges the Debtors a per Employee fee for printing checks and administering their direct deposit as well as a monthly fee of $450 to maintain the Debtors legacy time management system (the ADP Fees, collectively with the UltiPro Fees and the Kronos Fee, the Payroll Fees ). 16. Likewise, the Debtors 401(k) plan is processed and administered by ING Life Insurance and Annuity Company ( ING ). Each pay date, ING withdraws from the Debtors payroll bank account amounts requested by participating Employees to be withheld from their respective paychecks in order to fund their 401(k) retirement savings accounts. ING does not charge the Debtors an annual fee for administering the Debtors 401(k) plan. Rather, the ING administrative fees are paid by the Employees. 17. To the extent the Payroll Fees may be construed as obligations arising prior to the Petition Date requiring Court authority to pay, the Debtors request authorization for the Debtors to pay such fees. The Debtors submit that UltiPro, Kronos, and ADP may be entitled to decline to perform any payroll services for the Debtors for which they are not paid their 6 In the ordinary course of business, ADP also provides the Debtors with ALINE debit cards, which allow the Debtors to pre-fund a debit card with an Employee s per diem travel allowance. 7

8 Case Doc 5 Filed 02/13/14 Page 8 of 25 respective agreed fees, which would result in a costly disruption to the Debtors fulfillment of their payroll obligations. The Debtors estimate that the Payroll Fees in respect of the Employee Payroll Obligations and the Employer Payroll Obligations will not exceed $30,000. b. Vacation, Paid Time Off, and Sick Leave (1) Paid Time Off 18. In addition to wages and salary, the Employees are given paid time off ( PTO ) in the form of (i) sick leave, (ii) holidays, 7 and (iii) vacation time. Allocations for sick leave and holidays are uniform across all Employees and do not accrue. Under no circumstances may unused allocations be converted to a cash payment. Vacation time accrues to each full-time Hourly Employee 8 after such Employee has completed six months of service. Thereafter, vacation time accrues at the rate of 3.2 hours per bi-week. In order to accommodate the sick and personal time needs of their Employees an accommodation the Debtors view as essential to Employee well-being and morale the Debtors, by this Motion, respectfully request authorization for the Debtors to honor PTO obligations to the Employees during the Chapter 11 Cases without regard to the date of accrual of such obligations. 19. In addition, unused vacation time is payable for full-time Hourly Employees, pursuant to state law, upon the termination of an Employee s employment relationship with the Debtors (the Vacation Payouts ). As of the Petition Date, the Debtors estimate that the aggregate value of all potential Vacation Payouts does not exceed $650, For full-time, hourly Employees, holidays are paid unless the Employee, unapproved, takes the day preceding or following the holiday off, in which case the holiday is not paid. 8 Salary Employees do not accrue vacation time. 8

9 Case Doc 5 Filed 02/13/14 Page 9 of 25 By this Motion, the Debtors respectfully request authorization to pay the Vacation Payouts in the ordinary course of business to qualifying Employees. c. Car Allowances 20. Approximately 200 of the Debtors Employees that are required to travel frequently in the course of their employment are provided with a regular car allowance, ranging from approximately $70 to $450 per pay period (the Car Allowances ). The Car Allowances are designed to cover the costs of gas, wear and tear, maintenance, and insurance for the Employees personal vehicles, and are included in the Debtors regular payrolls. On a monthly basis, the Debtors pay approximately $150,000 in Car Allowance expenses. Such car allowances are standard in the industry and are included as part of each Employee s compensation package upon being hired or promoted into a qualifying position. The Debtors believe that it is critical to continue to pay the Car Allowances in the ordinary course in accordance with their prepetition policy. The Debtors, by this Motion, respectfully request authorization for the Debtors to pay the Car Allowances. d. Commissions and Bonuses 21. Prior to the Petition Date, the Debtors designed and implemented incentive policies pursuant to which sales consultants and sales support Employees are eligible to receive a certain percentage of the business they refer to the Debtors (each, a Commission and, collectively, the Commissions ). The Debtors employ approximately 270 sales vice presidents, sales managers, and sales rank and file employees, most of whom are eligible to earn Commissions. These Commissions are in addition to their annual salary or hourly compensation and are intended to reward employees who hit certain performance targets. Further, the amount of the Commissions increases as the Employee meets additional thresholds. For example, if an 9

10 Case Doc 5 Filed 02/13/14 Page 10 of 25 Employee has a goal of $500,000 worth of business on an annual basis, such Employee is entitled to a Commission only upon meeting such performance goal. The amount of any particular Commission paid to the Employee is based upon collected revenue and contingent upon such Employee meeting their performance goals. Because performance goals are based on collected revenue, the commission payments are in arrears. For this reason, the Debtors are unable to determine as of the Petition Date exactly which, if any, Employees will meet or exceed their performance goals. Historically, the aggregate average monthly Commissions paid to employees is approximately $300,000 - $350,000. As of the Petition Date, the aggregate amount of accrued but unpaid Commissions is estimated to be $350,000. The Debtors believe that no Commission will cause an Employee to be owed more than $12,475 when combined with the other Priority Amounts (as defined below). 22. In addition, the Debtors pay certain Employees discretionary, incentive bonuses for exceptional work (the Bonuses, and, each a Bonus ). For example, if an Employee attends a bridal show and books a $10,000 wedding, this may merit a Bonus. Bonuses may range from approximately $100 - $1,000 and are paid through payroll. 23. To award a Bonus, a general manager submits a proposal to a Regional Vice President describing the work meriting the Bonus and the amount of the Bonus for approval. Once approved, the Regional Vice President sends a request to the Debtors controller to pay the Bonus. All requests for Bonuses must be received by the controller no later than the Monday before payroll in order for such bonuses to be paid with payroll. While the Debtors cannot determine, as of the Petition Date, which, if any, Employees have been awarded discretionary bonuses, the Debtors estimate the aggregate amount of accrued but unpaid Bonuses 10

11 Case Doc 5 Filed 02/13/14 Page 11 of 25 is $30,000. In addition, the Debtors believe that no Bonus will cause an Employee to be owed more than $12,475 when combined with the other Priority Amounts (as defined below). 24. The Debtors believe that it is critical to continue to pay Commissions and Bonuses in the ordinary course in accordance with prepetition policies. The Commissions and Bonuses are part and parcel of an Employee s compensation and the failure to pay such Commissions and Bonuses would destroy employee morale and remove critical sales incentives. The Debtors respectfully request authority to pay any accrued but unpaid prepetition Commissions and Bonuses and to continue paying Commissions and Bonuses in the ordinary course of their business. e. 401(k) Contribution 25. The Debtors offer all eligible employees an opportunity to participate in a 401(k) plan (the 401(k) Plan ). Under the 401(k) Plan, Employees, subject to certain limitations, may contribute up to 100% of their pre-tax earnings annually, up to $17,500. An Employee is eligible to enroll in the 401(k) Plan, depending on the date of hire, annually on January 1 or July 1, whichever is sooner, so long as they have completed three (3) months of service. The Debtors 401(k) Plan is administered by ING. The Debtors do not match Employees 401(k) contributions. 26. The Debtors submit that it is essential for the morale and maintenance of trust of the Employees that necessary steps are taken to protect the Employees 401(k) Plan. As the Debtors make no payments under the 401(k) Plan, the Court should approve the 401(k) Plan s uninterrupted continuation postpetition. 11

12 Case Doc 5 Filed 02/13/14 Page 12 of 25 iii. Reimbursable Business Expenses 27. In the ordinary course of business, for the convenience of the Employees and the Debtors alike, Employees make purchases on behalf of the Debtors with their own funds. 9 Upon submission of proof of such purchases in accordance with the Debtors protocols, the Debtors, in turn, reimburse the Employees, by direct deposit or check, for such purchases (each such reimbursement, an Employee Reimbursement ). At any given time, one or more Employees may (a) be holding a reimbursable receipt for a business expense that it has not yet submitted for reimbursement; or (b) have submitted a reimbursement request to the Debtors but not yet received payment on account of such request. The Debtors assume that each of these circumstances existed as of the Petition Date. Employees that make purchases on behalf of the Debtors in furtherance of the Debtors businesses do so with the reasonable expectation of receiving prompt reimbursement on account of such purchases. Based upon historical averages, approximately 60 employees incur expenses bi-weekly, aggregating, on average, $400,000, relating to, among other things, business related travel expenses, business meals, car rentals, goods and services essential to completing a rental invoice, and a variety of miscellaneous expenses (collectively, the Reimbursable Expenses ). The Debtors estimate that, as of the Petition Date, the total amount of Reimbursable Expenses owed is no more than $400, The Debtors believe that the failure to promptly process and pay in full each valid Employee Reimbursement would be detrimental to Employee morale. By this Motion, the Debtors request authorization to pay Employee Reimbursements in the ordinary 9 In some cases, such as travel per diems, Employees may use ALINE cards or corporate credit cards. 12

13 Case Doc 5 Filed 02/13/14 Page 13 of 25 course of their businesses, without regard to the date on which the purchases underlying such Employee Reimbursements occurred. iv. Employee Benefits 29. In the ordinary course of their businesses, and as is customary for most large companies, the Debtors have established various employee benefit plans and policies that provide Employees with medical, dental, prescription, disability and life insurance, employee savings, and other similar benefits (collectively, the Employee Benefits ). The Employee Benefits are generally described below. (1) Employee Insurance Benefits 30. The Debtors pay certain amounts to certain third-party insurance providers that, in turn, provide insurance benefits to Employees (the Insurance Benefits ). The Insurance Benefits are provided by (i), for health insurance, Anthem Blue Cross Life and Health Insurance Company ( Anthem ) (approximately $200-$300 per Employee 10 per month depending on the plan elected and the number of family members covered); 11 (ii) for dental insurance, Cigna (approximately, $10.00 per Employee per month); (iii) for life insurance and accidental death and dismemberment insurance, Anthem (covered 100% for qualifying Employees at approximately $20 per Employee per year); (iv) for long-term disability insurance, Lincoln 10 For certain Employees, the Debtors supplement the Employee s earnings in an amount equal to 100% of the cost of their elected medical and dental insurance benefits (approximately $140-$2,600 per Employee per month depending on the plan elected and the number of family members covered). 11 While almost 90% of the Debtors Employees are insured by Anthem, the remaining 10% of Employees are either insured by Kaiser Permanente (Northern California Region) ( Kaiser ) (approximately 20 Employees working in Northern California locations), which costs the Debtors between $ $ per Employee per month depending on the plan elected and the family members covered; or SRC, an Aetna Company ( Aetna ) (approximately 25 Employees who have worked for the Debtors for less than one (1) year), which costs the Debtors between $0-$50.00 per Employee per month depending on the plan elected and the family members covered, but coverage is capped at $10,

14 Case Doc 5 Filed 02/13/14 Page 14 of 25 National Life Insurance Company (approximately $50 per Employee per month); 12 and (v) to administer Flex Spending Accounts as may be elected by an Employee, ADP (approximately $9 per month per electing Employee). The providers of Insurance Benefits (collectively, the Insurance Benefits Providers ) bill the Debtors monthly. 31. Each Employee is responsible to pay a certain percentage (depending on which plan each employee elects and how many family members are covered by such plan) of the actual cost to the Debtors of the Insurance Benefits provided to such Employee during each pay period, which is deducted from the Employee s paycheck each pay period. If an employee has separated from the Debtors but elected to continue their health insurance coverage through COBRA, the employee pays 102% of the costs relating to or arising from COBRA. 32. The Debtors submit that the Insurance Benefits Providers may be entitled to discontinue provision of Insurance Benefits to the Employees if the Debtors fail to pay their obligations to such providers on account of the Insurance Benefits in the ordinary course of business. The Debtors believe that the Insurance Benefits constitute a valuable and important component of the compensation payable to the Employees, and that any disruption in the provision of such benefits would adversely affect Employee morale. Accordingly, the Debtors request authorization for the Debtors to pay ordinary course obligations in respect of the Insurance Benefits in the ordinary course of business, without regard to when such obligations were incurred. The Debtors believe that they are current on all payments to the Insurance Benefits Providers. They further estimate that accrued, but not invoiced, obligations in respect of the Insurance Benefits as of the Petition Date stood at not more than $100,000, in the 12 Long-term disability insurance amounts are only paid on behalf of former Employees of Regal Rents, Inc. 14

15 Case Doc 5 Filed 02/13/14 Page 15 of 25 aggregate. The Debtors believe that no Insurance Benefits will cause an Employee to be owed more than $12,475 when combined with the other Priority Amounts (as defined below). 33. The Anthem, 13 Kaiser, and Aetna health insurance policies are selfinsured. As such, the Debtors are liable for claims made under such policies. To protect themselves from large health insurance claims, the Debtors have an Excess Risk and Aggregate Excess Risk policy, which covers medical and prescription drug benefits exceeding $200,000 per Employee per policy period, through Reliastar Life Insurance Company, coverage period from May 1, 2013 April 30, 2014 (the Stop Loss Coverage ). 14 The Stop Loss Coverage does not apply to the Aetna policy, which is capped at $10,000, nor does it cover Employees who elected the Anthem EPO2 policy, which is capped at $100, If the Debtors fail to pay prepetition claims arising under any of the selfinsured policies, such insurance benefits providers may be entitled to discontinue insurance coverage under their policies. Accordingly, the Debtors seek authority to pay prepetition claims arising under their self-insured policies as required thereunder as part of the Insurance Benefits. 13 On the Petition Date, all the COBRA participants are insured with Anthem through COBRA. 14 Filed concurrently herewith is the Motion of Event Rentals, Inc. and its Affiliated Debtors for Order (i) Authorizing Debtors to (a) Maintain Insurance Program, (b) Maintain Insurance Premium Financing Program, (c) Pay Insurance Premiums in the Ordinary Course, and (d) Pay All Obligations Associated Therewith; and (ii) Preventing Insurance Companies from Giving any Notice of Termination or Otherwise Modifying any Insurance Policy Without Obtaining Relief from the Automatic Stay (the Insurance Motion ), which seeks approval to (i) maintain the Stop Loss Coverage policy, and (ii) pay any premium in the ordinary course related thereto, among other relief. 15 Approximately 650 Employees elected the Anthem EPO2 policy. 15

16 Case Doc 5 Filed 02/13/14 Page 16 of 25 (2) Workers Compensation 35. The Debtors maintain workers compensation coverage through Old Republic Insurance Company (the Workers Compensation Policy ). 16 The annual premium of the Workers Compensation Policy is $4,524,011, with a $0 deductible. The Debtors made a down payment on the premium in the amount of $1,037,387 in June, Thereafter, the Debtors are required to make eight monthly installments of $435,828 to Old Republic Insurance Company due on the 7th of each month. (3) Employee Rental Discounts 36. The Debtors offer discounted costs on equipment rentals to active employees in good standing. Discounted employee rentals are subject to availability and at the sole discretion of the Debtors. v. Withholdings from Employee Paychecks 37. The Debtors deduct certain amounts from their Employees paychecks for the payment of the Employee portion of health, dental and welfare insurance premiums; voluntary life insurance; flexible benefit plans that provide for withholdings on a pre-tax basis of certain medical and dental premiums; flexible benefit plans that provide for pre-tax deductions of certain dependent care and certain reimbursable medical expenses; 401(k) deductions; and other miscellaneous amounts (collectively, the Employee Deductions ). The Employee Deductions comprise property of the Debtors Employees and are forwarded by the Debtors to appropriate third-party recipients at varying times. 16 Filed concurrently herewith is the Insurance Motion, which seeks approval to (i) maintain the Workers Compensation Policy, and (ii) pay any premium in the ordinary course related thereto, among other relief. 16

17 Case Doc 5 Filed 02/13/14 Page 17 of The Debtors may also be in possession of various withholdings, such as payroll taxes, social security, garnishments, child support payments, etc. (together with the Employee Deductions, the Deductions ). It is likely that funds have been deducted from employee wages but have not yet been forwarded to the appropriate third-party recipients. Without authority to forward the Deductions to the appropriate parties, the Debtors expose their officers and directors to personal liability. 17 vi. Collective Bargaining Agreements 39. As noted above, the Debtors are party to two collective bargaining agreements (collectively, the CBAs ): (i) the first with the United Food and Commercial Workers Local 135 in San Diego, California, and (ii) the second with the Teamsters, Local Union No. 710 in Chicago, Illinois. The CBAs set forth the terms and conditions of the Debtors employment relationship with each union member. The CBAs generally provide the same benefits available to the Debtors non-union Employees, as well as certain additional benefits. By this Motion, the Debtors seek to honor all of their obligations pursuant to the CBAs in the ordinary course of their business. vii. Limitations on Payments 40. For the avoidance of doubt, the aggregate amount paid to any individual employee of the Debtors on account of Employee Payroll Obligations, Vacation Payouts, PTO, 17 Filed concurrently herewith is the Motion of Event Rentals, Inc. and its Affiliated Debtors for Order Authorizing Payment of Prepetition Trust Fund Taxes and Sales and Use Taxes, which seeks, among other things, authority to pay prepetition obligations owing on account of trust fund taxes. 17

18 Case Doc 5 Filed 02/13/14 Page 18 of 25 Car Allowances, Commissions, Bonuses, and Insurance Benefits (collectively, the Priority Amounts ) shall not exceed $12, II. JURISDICTION 41. The Court has jurisdiction to consider this matter pursuant to 28 U.S.C 157 and This is a core proceeding pursuant to 28 U.S.C. 157(b). Venue is proper before this Court pursuant to 28 U.S.C and III. RELIEF REQUESTED 42. By the Motion, pursuant to sections 105(a) and 363(b) of the Bankruptcy Code and Bankruptcy Rules 6003 and 6004(h), the Debtors request entry of an order, substantially in the form attached hereto as Exhibit A, authorizing, but not directing, the Debtors, in the ordinary course of their businesses, to: (i) pay the Employee Payroll Obligations; (ii) pay the Employer Payroll Obligations; (iii) pay the Payroll Fees in respect of the Employee Payroll Obligations and the Employer Payroll Obligations (as applicable); (iv) honor Employee PTO requests; (v) pay the Vacation Payouts; (vi) pay the Car Allowances; (vii) pay any portion of the Commissions and Bonuses that may be considered prepetition claims; (viii) pay ordinary course obligations in respect of the Insurance Benefits without regard to when such obligations arose; (ix) process and pay Employee Reimbursements without regard to when the underlying purchases on behalf of the Debtors were made; (x) honor ordinary course Workers Compensation Obligations without regard to the date of accrual of such obligations; (xi) honor the obligations under the CBAs; and (xii) honor all ordinary course obligations to Employees arising after the Petition Date in the ordinary course of business; provided, however, that, for the 18 Only one Employee is owed in excess of $12,475 for the Priority Amounts, Jeffrey Black, who is owed $14,

19 Case Doc 5 Filed 02/13/14 Page 19 of 25 avoidance of doubt, the aggregate amount paid to any individual employee on account of the Priority Amounts shall not exceed $12,475, except for one Employee who is owed $14, IV. BASIS FOR RELIEF 43. The Debtors submit that the relief requested herein is appropriate pursuant to sections 105(a) and 363(b) of the Bankruptcy Code, as well as the necessity of payment doctrine. Section 363 of the Bankruptcy Code provides that [t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate. 11 U.S.C. 363(b)(1). Under this section, a court may authorize a debtor to pay certain prepetition claims. See, e.g., In re Ionosphere Clubs, Inc., 98 B.R. 174, 175 (Bankr. S.D.N.Y. 1989). In order to do so, the debtor must articulate some business justification, other than the mere appeasement of major creditors[.] Id. As set forth below, the Debtors can easily articulate a sound business justification for the relief requested herein. 44. Pursuant to section 105(a) of the Bankruptcy Code, [t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. 11 U.S.C. 105(a). Under the doctrine of necessity, a bankruptcy court may exercise its equity powers under section 105(a) to authorize a debtor to pay certain critical prepetition claims, even though such payment is not explicitly authorized under the Bankruptcy Code. See, e.g., In re Just for Feet, Inc., 242 B.R. 821, 824 (D. Del. 1999) (bankruptcy courts may exercise equity powers to authorize payment of prepetition debt where such payment is necessary to preserve the going concern value of a debtor s business); Ionosphere Clubs, 98 B.R. at 175 (section 105 empowers bankruptcy courts to authorize payment of prepetition debt when such payment is needed to facilitate the rehabilitation of the debtor ). 19

20 Case Doc 5 Filed 02/13/14 Page 20 of To the extent there has been reluctance to rely solely on section 105(a) or the doctrine of necessity, several courts have authorized payment of critical prepetition claims, or implied that such authority could be granted, by relying on section 105(a) in conjunction with other sections of the Bankruptcy Code. See, e.g., In re Tropical Sportswear Int l Corp., 320 B.R. 15, (Bankr. M.D. Fla. 2005) (acknowledging that in certain circumstances 363(b)(1) might authorize payment of prepetition claims if it was shown that such payment would enable a successful reorganization and make even the disfavored creditors better off); In re CoServ, LLC, 273 B.R. 487, 497 (Bankr. N.D. Tex. 2002) (noting that the preplan satisfaction of prepetition claims may be necessary to satisfy a debtor s fiduciary duties under sections 1106 and 1107 of the Bankruptcy Code). 46. As debtors in possession under sections 1107(a) and 1108 of the Bankruptcy Code, the Debtors are fiduciaries with a duty to maximize the value of the bankruptcy estate. Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 573 (3d Cir. 2003). The debtor-in-possession s fiduciary duty to maximize includes the duty to protect and conserve property in its possession for the benefit of creditors. In re Mushroom Transp. Co., 382 F.3d 325, 339 (3d Cir. 2004) (citing In re Marvel Entm t Group, Inc., 140 F.3d 463, 474 (3d Cir. 1998)). Some courts have noted that there are instances in which a debtor can fulfill this fiduciary duty only... by the preplan satisfaction of a prepetition claim. CoServ, 273 B.R. at 497. The CoServ court specifically noted that the preplan satisfaction of prepetition claims would be a valid exercise of the debtor s fiduciary duty when the payment is the only means to effect a substantial enhancement of the estate.... Id. 20

21 Case Doc 5 Filed 02/13/14 Page 21 of The Debtors submit that, as illustrated below, payment of the amounts for which authorization is requested by this Motion is warranted. In fact, this Court has routinely authorized payment of prepetition employee compensation, benefits, and related obligations as appropriate under section 105(a) of the Bankruptcy Code. See, e.g., In re Global Aviation Holdings Inc., et al., No (MFW) (Bankr. D. Del. Nov. 14, 2013); In re Rural/Metro Corp., No (KJC) (Bankr. D. Del. Aug 6, 2013); In re Penson Worldwide, Inc., No (PJW) (Bankr. D. Del. Jan. 15, 2013); In re A123 Sys., Inc., No (KJC) (Bankr. D. Del. Nov. 8, 2012); In re Graceway Pharms., LLC, No (PJW) (Bankr. D. Del. Oct. 19, 2011); In re DSI Holdings, Inc., No (KJC) (Bank. D. Del. July 19, 2011); In re Freedom Commc ns Holdings, Inc., No (BLS) (Bankr. D. Del. Sept. 2, 2009); In re WCI Cmtys., Inc., No (KJC) (Bankr. D. Del. Aug. 6, 2008). 48. In addition, section 507 of the Bankruptcy Code provides that the majority of the prepetition obligations sought to be paid by this Motion is entitled to priority status and would therefore, even absent the relief requested in this Motion, likely be paid in full in these Chapter 11 Cases. The non-tax component of the Employee Payroll Obligations, the Vacation Payouts, if any, and the prepetition obligations in respect of the Insurance Benefits, the Car Allowance, and the Commissions and Bonuses, subject to certain conditions, are afforded priority status up to and aggregate of $12,475 per Employee. See 11 U.S.C. 507(a)(4), (a)(5). Moreover, the Employer Payroll Obligations and the tax component of the Employee Payroll Obligations are entitled to priority in an unlimited amount. See id. at 507(a)(8)(C), (a)(8)(d). Importantly, these priority claims would be entitled to payment in full under any chapter 11 plan confirmed in these Chapter 11 Cases. See 11 U.S.C. 1129(a)(9)(B). Accordingly, because the majority of the prepetition obligations sought to be paid by this Motion is entitled to priority 21

22 Case Doc 5 Filed 02/13/14 Page 22 of 25 status under the Bankruptcy Code, the relief requested herein should primarily affect the timing of payments rather than treatment for distribution purposes and should therefore neither prejudice general unsecured creditors nor materially affect the Debtors estates. 49. Besides the Debtors requests to pay limited prepetition obligations, they additionally request authority for the Debtors to meet ordinary course postpetition Employee obligations in the ordinary course of business. Though the Debtors are expressly authorized to operate their businesses pursuant to sections 1107 and 1108 of the Bankruptcy Code, and are therefore entitled to use property of the estate in the ordinary course of business without notice or a hearing pursuant to section 363(c)(1) of the Bankruptcy Code, the Debtors seek an order specifically authorizing them to meet ordinary course Employee obligations in the ordinary course of business as set forth herein to provide comfort an reassurance to the Employees that their services to the Debtors following the Petition Date will be compensated in substantially the same manner as they were prior to the Petition Date. 50. It is axiomatic that the continued loyalty of a debtor s employees is a necessary component to any successful reorganization. Under the best of circumstances, the filing of a chapter 11 petition is a stressful and uncertain event for a debtor s employees. Such stress and uncertainty may adversely affect employee morale at a time when a debtor is particularly vulnerable to business disruptions. Low morale may be compounded further if certain employees perceive themselves as receiving less favorable treatment than others. Moreover, unlike commercial actors that typically budget allowances for collection risk, employees do not ordinarily take into consideration the possibility of non-payment of a paycheck in their personal budgeting and could suffer adverse consequences if they fail to receive their full compensation in a timely manner. 22

23 Case Doc 5 Filed 02/13/14 Page 23 of The relief requested in this Motion is intended to encourage the Employees to remain with the Debtors by averting the hardship that Employees would endure if payroll or benefits were interrupted and provide the comfort of a reasonable expectation that compensation for services rendered will be met. The Debtors submit that, absent the relief requested in this Motion, the Debtors could suffer considerable disruption in their efforts to bring about an orderly sale of the Debtors assets for the benefit of their creditors. Employees that go unpaid or are denied benefits to which they are accustomed could seek alternate employment opportunities with a more certain future or, even if they remain with the Debtors, may be disinclined to provide the level of effort and commitment to assist the Debtors in carrying out their Chapter 11 Cases. Given the Employees relationships with current repeat customers and their knowledge of the Debtors businesses, the loss of Employees will not only result in a decrease in efficacy but also a possible decrease in customer rental agreements. Thus, in order to assist the Debtors in operating while the subject of the Chapter 11 Cases and meeting the objectives thereof, the Debtors submit that the relief requested in the motion is necessary and appropriate. 52. The Debtors Employees are an essential component of a successful reorganization. Any deterioration in employee morale and welfare at this critical time undoubtedly would have a devastating impact on the Debtors, the value of their assets and businesses, and ultimately, the Debtors ability to reorganize. Accordingly, the relief sought herein is in the best interests of the Debtors estates and creditors and will allow the Debtors to continue to operate their businesses with minimal disruption and proceed with the important task of stabilizing their operations. 23

24 Case Doc 5 Filed 02/13/14 Page 24 of 25 V. EMERGENCY RELIEF AND WAIVER OF STAY 53. Pursuant to Rule 6003 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), the Court may grant relief within twenty-one (21) days after the filing of the petition regarding a motion to pay all or part of a prepetition claim only if such relief is necessary to avoid immediate and irreparable harm. For the reasons set forth above, the relief requested herein is necessary to avoid immediate and irreparable harm to the Debtors estates. Accordingly, the relief requested herein may be granted within the twenty-one days following the Petition Date. 54. The Debtors further request a waiver of any stay of the effectiveness of the order approving this Motion to the extent such an order is entered. Pursuant to Bankruptcy Rule 6004(h), [a]n order authorizing the use, sale, or lease of property other than cash collateral is stayed until the expiration of 14 days after entry of the order, unless the court orders otherwise. Fed. R. Bankr. P. 6004(h). As set forth above, the relief requested herein is critically important to prevent irreparable damage to the Debtors operations. Accordingly, the Debtors submit that ample cause exists to justify a waiver of the fourteen-day stay imposed by Bankruptcy Rule 6004(h), to the extent it applies. VI. NOTICE 55. Notice of this Motion has been provided to the Office of the United States Trustee for the District of Delaware, counsel to the Prepetition Secured Lenders, the Debtors 20 largest unsecured creditors on a consolidated basis (including counsel, if known), and all parties requesting notices pursuant to Bankruptcy Rule The Debtors submit that no other or further notice need be provided. 24

25 Case Doc 5 Filed 02/13/14 Page 25 of No previous motion for the relief sought herein has been made to this or any other court. WHEREFORE, the Debtors respectfully request that the Court (i) enter an order substantially in the form attached hereto as Exhibit A; and (ii) grant such additional relief as the Court deems just and proper. Dated: February 13, 2014 Wilmington, Delaware FOX ROTHSCHILD LLP By: /s/ L. John Bird Jeffrey M. Schlerf (No. 3047) John H. Strock (No. 4965) L. John Bird (No. 5310) 919 North Market Street Suite 1600 Wilmington, Delaware Telephone: (302) and John K. Cunningham (pro hac vice pending) WHITE & CASE LLP Southeast Financial Center 200 South Biscayne Boulevard 49th Floor Miami, Florida Telephone: (305) and Craig H. Averch (pro hac vice pending) WHITE & CASE LLP 633 West Fifth Street Suite 1900 Los Angeles, California Telephone: (213) Proposed Attorneys for the Debtors and Debtors in Possession 25

26 Case Doc 5-1 Filed 02/13/14 Page 1 of 5 EXHIBIT A Proposed Order

27 Case Doc 5-1 Filed 02/13/14 Page 2 of 5 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re Event Rentals, Inc., et al., 1 Debtors. Chapter 11 Case No ( ) Joint Administration Requested Re Docket No. ORDER GRANTING AUTHORITY TO PAY PREPETITION WAGES, COMPENSATION, EMPLOYEE BENEFITS, AND RELATED OBLIGATIONS Upon consideration of the motion (the Motion ), 2 of Event Rentals, Inc. ( Event Rentals ) and its affiliated debtors and debtors in possession (collectively, the Debtors ) for an order granting authority to pay prepetition wages, compensation, employee benefits and related obligations; and upon consideration of the Declaration of Jeffrey M. Black in Support of First Day Motions and Applications; and it appearing that the Court has jurisdiction over this matter, and it appearing that notice of the Motion is sufficient, and that no other or further notice need be provided; and it appearing that the relief requested in the Motion is in the best interests of the Debtors and their estates and creditors; and upon all of the proceedings had before the Court; and after due deliberation and sufficient cause appearing therefor, it is hereby ORDERED that the Motion is GRANTED; and it is further 1 The Debtors and the last four digits of their respective taxpayer identification numbers are: Classic Midwest, Inc. (9934); Classic Northeast, Inc. (9871); Classic Panache, Inc. (1237); Classic Party Rentals, Inc. (3911); Classic Party Rentals LP (0583); Classic/Prime, Inc. (7149); Classic Southeast, Inc. (0700); DBO Acquisition Corp. (1923); DUBO Acquisition Corp. (8795); Event Rentals, Inc. (9443); Grand Events & Party Rentals, Inc. (7940); Special Event Holding, Inc. (5659); and Unique Tabletop Rentals, Inc. (4327). The list of the Debtors alternate names is located on the docket for Case No [D.I. 2] and is also available at 2 Where the context requires, each capitalized term used but not otherwise defined herein shall have the meaning ascribed to such term in the Motion.

28 Case Doc 5-1 Filed 02/13/14 Page 3 of 5 ORDERED that the Debtors authorized, but not directed, to pay the Employee Payroll Obligations in the ordinary course of their business; and it is further ORDERED that the Debtors are authorized, but not directed, to pay the Employer Payroll Obligations in the ordinary course of their business; and it is further ORDERED that the Debtors are authorized, but not directed, to pay the applicable Payroll Fees in respect of the Employee Payroll Obligations and the Employer Payroll Obligations (as applicable); and it is further ORDERED that the Debtors are authorized, but not directed, to honor Employee PTO requests in the ordinary course of business for the duration of the Chapter 11 Cases absent further order of the Court; and it is further ORDERED that the Debtors are authorized, but not directed, to pay a Vacation Payout to any Employee otherwise qualifying therefor in accordance with the Debtors policies and state law; and it is further ORDERED that the Debtors are authorized, but not directed, to pay the Car Allowances to any Employee otherwise qualifying therefor in accordance with the Debtors policies; and it is further ORDERED that the Debtors are authorized, but not directed, to pay the Commissions and Bonuses to any Employee otherwise qualifying therefor in accordance with the Debtors policies; and it is further ORDERED that the Debtors are authorized, but not directed, to pay ordinary course obligations in respect of the Insurance Benefits in the ordinary course of their businesses without regard to when such obligations arose; and it is further 2