Case 1:12-bk Doc 261 Filed 03/07/13 Entered 03/07/13 17:19:21 Desc Main Document Page 1 of 10

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1 Document Page 1 of 10 UNITED STATES BANKRUPTCY COURT DISTRICT OF RHODE ISLAND ) Chapter 11 In re ) ) Case No (WCH) PAWTUCKET ASPHALT CORP. et al. ) ) Jointly Administered Debtors. ) ) OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO THE MOTION FOR AUTHORIZATION TO SELL ESTATE PROPERTY FREE AND CLEAR OF LIENS, AND REQUEST OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR AN EXTENSION OF THE DEADLINE FOR THE SUBMISSION OF HIGHER AND BETTER OFFERS The Official Committee of Unsecured Creditors (the Committee ) of Pawtucket Asphalt Corporation ( PAC ) and International Paving Corporation ( IPC and, together with PAC, the Debtors ) hereby objects (this Objection ) to the Motion for Authorization to Sell Estate Property Free and Clear of Liens [ECF No. 254] (the Motion ), as supplemented by the Supplement to Motion for Authorization to Sell Estate Property Free and Clear of Liens [ECF No. 256] (the Supplement and together with the Motion, the Sale Motion ). 1 As is discussed in detail below, the Committee objects to the Sale Motion because the transaction contemplated thereby (the Sale ) will benefit only Bank Rhode Island ( BankRI ) and the United States Small Business Administration (the SBA ), and because the Sale will leave the Debtors with insufficient funds to satisfy the priority unsecured claims and the 1 Capitalized terms used but not specifically defined in this Objection shall have the meanings ascribed to them in the Sale Motion or the Purchase and Sale Agreement (the Agreement ) submitted therewith. Objection to Motion to Sell

2 Document Page 2 of 10 administrative expenses incurred and to be incurred in these cases, as well as to pay a meaningful dividend for the unsecured creditors whose interests the Committee represents. The Committee also objects to the Sale Motion because the schedule that the Debtors have proposed for the Sale is too truncated and does not provide sufficient time for the solicitation and receipt of counteroffers. Accordingly, the Committee hereby requests that the Court enter an order extending that schedule to the extent consistent with the discussion below. The Committee further objects to the Sale Motion for the following reasons:» the Debtors have failed, and continue to fail, to market the equipment and related personal property of PAC that is to be sold (collectively, the Personalty ) in a manner designed to solicit higher and better offers;» the Personalty to be sold appears to include assets that are not subject to the security interests of BankRI and the SBA but that could be monetized for the benefit of the Debtors unsecured creditors, and with no allocation of PAC s share of the Purchase Price being made with respect to such assets;» the Debtors have failed to explain how this Court may authorize a sale of the real property upon which the Plant is located (the Real Estate ) free and clear of any and all liens, claims, encumbrances and interests pursuant to Section 363 of Title 11 of the United States Code, 11 U.S.C. 101 et seq. (the Bankruptcy Code ), when the owner thereof, 25 Concord Street, LLC (the LLC ), is not a debtor whose assets are subject to this Court s jurisdiction; and» the Debtors have failed to satisfy, and indeed cannot satisfy, the requirement of Rule (b) of the Local Bankruptcy Rules of the United States Bankruptcy Court for the District of Rhode Island (the Local Bankruptcy Rules ) that the Sale Motion affirmatively state that the Purchase Price is at least equal to or more than the value of the Personalty and the Real Estate. In further support of this Objection, the Committee states as follows: Pertinent Factual Background and Procedural History 1. On February 27, 2012 (the Petition Date ), PAC and IPC each filed a Voluntary Petition for relief under Chapter 11 of the Bankruptcy Code. Since the Petition Date, they have Objection to Motion to Sell 2

3 Document Page 3 of 10 continued in the possession of their assets and in the management of their businesses as debtorsin-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code On March 26, 2012, the United States Trustee for the District of Rhode Island appointed the Committee to represent the interests of all of the Debtors unsecured creditors. 3. On February 15, 2013, the Debtors filed the Motion, which was accompanied by a copy of the Agreement. As is set forth in the Motion and the Agreement, the Debtors seek the entry of an order, pursuant to Section 363 of the Bankruptcy Code, authorizing PAC s sale of the Personalty to the Buyer. The Agreement provides that if such an order is entered, and if PAC and the LLC can obtain consensual discharges of the liens that BankRI and the SBA have upon the Real Estate, the LLC will convey the Real Estate to the Buyer as well. If BankRI and the SBA decline to discharge their liens voluntarily there is no way the Court can compel them to do so and to look to the portion of the Purchase Price being allocated to the Real Estate to satisfy the Debtors and the LLC s obligations to them the Buyer may terminate the Agreement, after which PAC must return the Deposit to the Buyer. 4. On February 19, 2013, the Committee contacted the Debtors and requested information concerning the Motion and the Agreement, as such information was not contained in the Motion despite the requirements of Local Bankruptcy Rule Also on February 19, 2013, the Debtors responded to certain of the Committee s enquiries. 6. On February 28, 2013, presumably in response to the Committee s enquiries, the Debtors filed the Supplement. 2 As is noted above, the LLC is not a debtor, even though its assets and liabilities are inextricably tied to those of the Debtors, and even though the Debtors have been funding certain obligations relating to the Real Estate during the course of these cases. The Sale Motion is silent as to how this Court can authorize the sale of the Real Estate under Section 363 of the Bankruptcy Code, though the Agreement does appear to contemplate the failure of the transaction that will result if BankRI and the SBA decline to accede to the LLC s request to discharge their liens. Objection to Motion to Sell 3

4 Document Page 4 of 10 The Committee s Objection to the Sale Motion and Request for an Extension of the Deadline for the Submission of Higher and Better Offers 7. As is set forth above, the Committee objects to the Sale Motion for several reasons, any one of which provides sufficient justification for the Court to deny the Sale Motion, and all of which taken together demonstrate that the Debtors efforts in seeking the Court s approval of the Agreement were poorly conceived. 8. The Committee first objects to the Sale Motion because the steps that the Debtors have undertaken to identify a party that will submit an offer to purchase the Personalty and the Real Estate for an amount exceeding the Purchase Price were and are wholly insufficient. The Motion simply states that the Debtors will entertain any higher bids for the purchase of the assets as the same are identified in the Agreement, and that an auction will be held if one or more such bids are received by March 11, 2013 (the Bid Deadline ), which date the Debtors unilaterally selected without seeking approval thereof (or of any other aspect of the limited bid procedures). Motion at Only after the Committee raised an issue concerning the adequacy of the Debtors marketing efforts did the Debtors file the Supplement, which merely states that the Debtors have entertained discussions with a number of potential purchasers and investors for the Personalty, that such unidentified parties have been provided with notice of the Sale Motion, and that the transaction will be the subject of two newspaper advertisements. Supplement at 1. Despite filing the Supplement almost two weeks after filing the Motion, the Debtors did not take steps to extend the Bid Deadline. 10. The Debtors efforts to generate interest in the Personalty and to solicit higher and better offers therefor were and are woefully inadequate, and the Bid Deadline is patently unreasonable. Unlike the typical sale of substantially all assets under Section 363 of the Objection to Motion to Sell 4

5 Document Page 5 of 10 Bankruptcy Code, the Debtors did not seek prior Court approval of the Bid Deadline, nor have they marketed the Personalty (or, for that matter, the Real Estate) to as wide an audience as possible, either themselves, with the assistance of their professionals or by retaining a business broker or an investment banker with experience in the Debtors industry, nor have they described the few efforts they have undertaken in the kind of detail ordinarily seen in these circumstances, such that the Court can determine that those efforts are sufficient. 11. So, too, the Debtors have failed to include the Committee in their efforts to determine the Bid Deadline or market the assets, despite the fact that the Committee and its professionals could have been valuable resources to the Debtors in this regard. These failures relate directly to the Debtors failure to discharge their duty to exercise sound business judgment in pursuing the transaction that has been presented to the Court. 12. Nevertheless, on March 7, 2013, the Committee was contacted by a company in the Debtors industry that is interested in conducting a due diligence review with respect to the Sale and, if warranted depending upon the results of that review, submitting a higher and better offer for the Personalty and the Real Estate, which offer will not be subject to a financing contingency. The Committee is informed, and therefore believes, that such company will be able to conduct its due diligence review and obtain the necessary corporate authority to submit a higher and better offer no later than April 5, If the Bid Deadline is extended to that date, which the Committee hereby requests, it will have no adverse impact upon the schedule set forth in Section 6.01 of the Agreement. The Committee therefore requests that the Court extend the Bid Deadline to April 5, The Committee is informed, and therefore believes, that once it learned of the Sale, this company contacted the Debtors and requested that they extend the Bid Deadline, but the Debtors declined to do so and instructed this company to file a motion seeking such relief, despite the fact that it is not an interested party in this case and thus lacks standing to do so. Objection to Motion to Sell 5

6 Document Page 6 of Setting aside these procedural shortcomings, the Sale Motion should not be granted because it is devoid of any references to the standard governing the sale of substantially all of PAC s assets under Section 363 of the Bankruptcy Code, as well as to any facts that the Debtors believe demonstrate that such standard is satisfied in these circumstances. 14. It is, of course, well settled that PAC may, after notice and a hearing, sell property of the estate other than in the ordinary course of its business. See 11 U.S.C. 363(b). Sales of substantially all of a debtor s assets prior to the confirmation of a plan of reorganization are, however, only permitted when they are supported by a sound business purpose. Stephens Industries, Inc. v. McClung, 789 F.2d 386, 390 (6th Cir. 1986); accord In re Boston Generating, LLC, 440 B.R. 302, 329 (Bankr. S.D.N.Y. 2010). Under the sound business purpose test, a debtor must demonstrate that (1) a sound business reason or emergency justifies a preconfirmation sale; (2) the sale has been proposed in good faith; (3) adequate and reasonable notice of the sale has been provided to interested parties; and (4) the purchase price is fair and reasonable. In re WBQ Partnership, 189 B.R. 97, 102 (Bankr. E.D. Va. 1995) (citing In re Delaware & Hudson Railway Co., 124 B.R. 169, 176 (D. Del. 1991)); accord In re Montgomery Ward Holding Corp., 242 B.R. 147, 153 (Bankr. D. Del. 1999); see also In re Charlesbank Laundry Co., Inc., 37 B.R. 20, 22 (Bankr. D. Mass. 1983) (sale of substantially all assets considered appropriate if the bid is fair and reasonable and the sale is in the best interests of the estate and creditors ). 15. The Committee objects to the Sale Motion because there has been no showing that the proposed consideration for the Personalty is fair and reasonable. 4 The Debtors should be held to their burden of proof on this issue, and therefore should be required to make the 4 As is noted above, the Committee also objects to the fact that PAC fails to satisfy the obligation imposed by Local Bankruptcy Rule (b) that the Sale Motion affirmatively state that the Purchase Price is at least equal to or more than the value of the Personalty and the Real Estate. The reason for this failure is obvious. Objection to Motion to Sell 6

7 Document Page 7 of 10 necessary record upon which the Court can make the requisite findings to approve the Sale. If they cannot make such a showing, the Court can only conclude that the Sale Motion is manifestly unreasonable, In re Aerovox, Inc., 269 B.R. 74, 80 (Bankr. D. Mass. 2001), such that it cannot be granted. 16. The Committee is also concerned with the fact that the Sale Motion is silent as to how the Debtors intend to cover all costs associated with developing and seeking confirmation of a Chapter 11 Plan after the Personalty is sold. See Sale Motion at 7 (proposed transaction will allow [PAC] to propose a liquidating plan under Chapter 11 ). This is of particular concern given that the Personalty is vital to the Debtors business operations, which operations will necessarily cease upon the closing of the Sale. By all accounts, granting the Sale Motion and approving the Agreement will leave the Debtors with insufficient funds to pay the administrative expenses incurred and to be incurred in these cases, as well as the priority unsecured claims that are estimated to be $50,000.00, not to mention to pay a meaningful dividend for the unsecured creditors, whose claims totaling approximately $1,500, will be joined by the SBA s significant deficiency claim. The Committee submits that the filing of the Sale Motion without taking the foregoing into consideration demonstrates that the Debtors have not properly exercised their business judgment in pursuing the transaction with the Buyer. 17. Lastly, the Committee takes issue with the Sale Motion because the Personalty to be sold to the Buyer appears to include unencumbered assets that should be retained and utilized for the benefit of the Debtors unsecured creditors. Although the Debtors would probably be content to have such assets conveyed to the Buyer and then allowed to expire, such a result would be patently unfair to the Debtors estates and their unsecured creditors, not to mention inconsistent with the sound exercise of the Debtors business judgment. Objection to Motion to Sell 7

8 Document Page 8 of Specifically, the Personalty is described in Exhibit B to the Agreement. It includes, in addition to the equipment that is used at PAC s plant, the following: [s]uch other assets, including but not limited to miscellaneous equipment, tradenames [sic], goodwill, customer lists, sales data, supplier information, going concern value, licenses, permits and approvals, production data, copies of all correspondence from and to and filings with any federal, state or local governmental or regulatory agency, department or bureau and all other assets relating to the Debtor s business. Agreement at Ex. B (emphases added). 19. The Agreement does provide that certain assets are not included amongst the Personalty. Section 1.05 of the Agreement identifies such Excluded Assets as including chosesin-action not customarily available in the trade or industry in connection with the continued business operations of PAC and the LLC. Agreement at Notwithstanding this language, it is not clear that the Personalty excludes either causes of action belonging to PAC under Chapter 5 of the Bankruptcy Code, which are not subject to the security interests of BankRI or the SBA, or commercial tort claims in favor of PAC, which are similarly free from any such security interests. See R.I. GEN. LAWS 6A-9-108(e)(1); R.I. GEN. LAWS 6A-9-204(b)(2). Absent an express statement in the Agreement that the Buyer is not purchasing such unencumbered assets, or absent an allocation of the portion of the Purchase Price representing the consideration being paid for the Personalty for such assets, the Sale Motion unfairly prejudices the rights of the Debtors unsecured creditors. Conclusion 20. In In re On-Site Sourcing, Inc., 412 B.R. 817 (Bankr. E.D. Va. 2009), the Court observed that Chapter 11 is a community action. It is hoped that through the analysis and action of the creditor body both collectively and individually that the best result for the most creditors within the confines of the Bankruptcy Code will be achieved. On-Site Sourcing, 412 B.R. at Objection to Motion to Sell 8

9 Document Page 9 of Similarly, in In re Gulf Coast Oil Corp., 404 B.R. 407, 426 (Bankr. S.D. Tex. 2009), the Court noted that bankruptcy is, at its essence, a collective remedy intended to benefit all creditors, not just the secured lender. Gulf Coast Oil, 404 B.R. at 426. The Committee believes that in seeking approval of the Agreement, the Debtors have declined to honor the sentiments behind these observations. 21. The Committee is of the view that the Debtors are pursuing the transaction contemplated by the Sale Motion primarily, if not solely, for the benefit of BankRI, their primary secured creditor. The Committee strongly objects to the use of the Bankruptcy Code to accomplish such a result, and to the Debtors failure to heed the admonition that [w]here all equity in a debtor s assets belongs to the secured creditor, with no appreciable expectation of a remainder for unsecured creditors, the liquidation of the assets serves no bankruptcy purpose and should not be permitted to occur in bankruptcy. In re Duro Industries, Inc., No CJK, 2002 WL , at *5 (Bankr. D. Mass. Oct. 7, 2002); see also In re Cloverleaf Enterprises, Inc., No , 2010 WL , at *3 (Bank. D. Md. Apr. 2, 2010) (declining to approve Section 363 motion for several reasons, including because unsecured creditors would not benefit from proposed transaction); In re Encore Healthcare Associates, 312 B.R. 52, 57 (Bankr. E.D. Pa. 2004) (Section 363 motion denied because proposed sale would generate funds only for secured creditor and would not advance any bankruptcy purpose). The desire on the part of BankRI to have the transaction conducted under the Court s auspices is not, in and of itself, a sufficient justification for granting the relief that the Debtors seek. See Gulf Coast Oil, 404 B.R. at 426 (if Section 363 sale will benefit only one party, movant must explain why sale should take place in bankruptcy); see generally In re Global Crossing Ltd., 295 B.R. 726, 745 (Bankr. Objection to Motion to Sell 9

10 Document Page 10 of 10 S.D.N.Y. 2003) ( debtor should not take an action simply because a particular constituency, even an important one, wants it ). 22. For all of the foregoing reasons, and for any other reasons the Committee may state on the record during any hearing held in respect of the Sale Motion, the Committee submits that the Court should enter an order extending the Bid Deadline to April 5, 2013, failing which the Court should enter an order denying the Sale Motion in its entirety, and granting to the Committee such other and further relief as the Court deems just and proper. Dated: March 7, 2013 OFFICIAL COMMITTEE OF UNSECURED CREDITORS By its counsel, /s/ Steven C. Reingold Bruce F. Smith (admitted pro hac vice) Steven C. Reingold (admitted pro hac vice) JAGER SMITH P.C. One Financial Center Boston, Massachusetts telephone: (617) facsimile: (617) bsmith@jagersmith.com sreingold@jagersmith.com - and - /s/ Richard J. Land Richard J. Land Andre S. Digou CHACE, RUTTENBERG & FREEDMAN, LLP One Park Row, Suite 300 Providence, Rhode Island telephone: (401) facsimile: (401) rland@crfllp.com adigou@crfllp.com Objection to Motion to Sell 10

Case 1:12-bk Doc 304 Filed 09/06/13 Entered 09/06/13 12:04:47 Desc Main Document Page 1 of 7

Case 1:12-bk Doc 304 Filed 09/06/13 Entered 09/06/13 12:04:47 Desc Main Document Page 1 of 7 Case 1:12-bk-10602 Doc 304 Filed 09/06/13 Entered 09/06/13 12:04:47 Desc Main Document Page 1 of 7 UNITED STATES BANKRUPTCY COURT DISTRICT OF RHODE ISLAND ) Chapter 11 In re ) ) Case No. 12-10602 (WCH)