Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 1 of 12

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1 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 1 of 12 Aaron M. Kaufman TX Bar No COX SMITH MATTHEWS INCORPORATED 1201 Elm Street, Suite 3300 Dallas, Texas (214) (214) (Fax) akaufman@coxsmith.com Judith Greenstone Miller MI Bar No. P29208 JAFFE RAITT HEUER & WEISS, P.C Franklin Road Suite 2500 Southfield, MI Telephone: Facsimile: jmiller@jaffelaw.com ATTORNEYS FOR ALEX TOYS LLC IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION In re: ALCO STORES, INC., ET AL., Debtors. CHAPTER 11 CASE NO SGJ-11 (JOINTLY ADMINISTERED) ALEX TOYS, LLC S RESPONSE TO DEBTORS OMNIBUS OBJECTION TO RECLAMATION CLAIMS Alex Toys, LLC ( Alex Toys ) hereby files this Response to Debtors Omnibus Objection to Reclamation Claims (the Response ), and in support thereof states as follows: SUMMARY OF ARGUMENT 1. Alex Toys timely pursued reclamation of the goods that it shipped to the Debtors within forty-five (45) days of the commencement of these chapter 11 cases, consistent with the statutory rights and remedies set forth in Section 546(c) of the Bankruptcy Code and applicable state law, and this Court s Reclamation Procedures Order (defined below, Doc. No. 347). Despite such efforts, at every turn, the Debtors failed and refused to grant Alex Toys the right to inspect, identify and segregate their goods. Now, by the Debtors Omnibus Objection to Reclamation Claims [Doc. No. 787] (the Omnibus Objection ), the Debtors seek to extinguish all reclamation claims, in their entirety, under circumstances where admittedly there are excess Page 1

2 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 2 of 12 proceeds above and beyond the secured debt owed to the prepetition lender to pay the claims of reclaiming creditors, such as Alex Toys. As other courts, including other judges in this District, have held, the superior liens of pre-petition lenders do not extinguish reclaiming creditors potential administrative claims. 1 In this case, Alex Toys goods were used during the course of the bankruptcy case to pay for the Debtors post-petition operations, including inter alia the obligations owed to the pre-petition lender. Under these circumstances, the Court should not permit the Debtors to deny administrative expense treatment to Alex Toys by classifying its reclamation claim as a general unsecured claim. BACKGROUND FACTS 2. On October 12, 2014 (the Petition Date ), each of the Debtors filed with this Court a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 3. After the Petition Date, Alex Toys made several requests to the Debtors to review and segregate goods that Alex Toys had shipped to the Debtors within forty-five (45) days of the Petition Date (collectively, the Goods ). 4. Despite such multiple demands by Alex Toys for access to view and/or segregate the Goods, the Debtors failed, refused and neglected to allow Alex Toys to take such action and, instead, simply contended that there was no value in the Goods based on, among other things, the 1 See In re Pilgrim s Pride Corp., 2009 Bankr. LEXIS 3635 at *6-7 (Bankr. N.D. Tex. Nov. 12, 2009) (Lynn, J.). Other than complying with the Reclamation Procedures Order, Alex Toys has not yet filed a stand-alone application for allowance of an administrative claim under section 503(b)(1) of the Bankruptcy Code for all or any portion of the Goods delivered to the Debtors or sold post-petition. Alex Toys expressly reserves the right to file an application for allowance of an administrative expense claim at a later point in time. Page 2

3 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 3 of 12 Goods being subject to a first and prior all asset lien of the Debtors prepetition lender, Wells Fargo Bank, National Association ( Wells Fargo ) On October 17, 2014, Alex Toys timely served a reclamation demand on Alco Stores, Inc. and its affiliated debtors (collectively, the Debtors ), asserting a reclamation claim in the amount of $92, (the Alex Toys Reclamation Claim ). 6. On October 28, 2014, Alex Toys filed its Notice of Reclamation Demand and Administrative Expense Claim of Alex Toys LLC [Doc. No. 188] with the Court, providing notice of its reclamation demand. 7. On January 21, 2015, pursuant to the Reclamation Procedures Order, the Debtors filed their Notice of Statement of Reclamation Claims [Doc. No. 654] (the Notice ) which asserted that the reclamation claims of all parties who asserted such claims in these cases, including Alex Toys, was $0.00 because the prepetition lenders interests and the DIP Agent s interests are superior to any Reclamation Claims. See Notice, Exhibit 1, n.1. (citing In re Dana Corp., 367 B.R. 409, 419 (Bankr. S.D.N.Y. 2007)). 8. The Notice further provided that unless a written objection is filed and served within fourteen (14) days after the date of the Notice, the Debtors decision with regard to reclamation claims as set forth in the Notice shall control. 9. On February 2, 2015, Alex Toys filed a Limited Objection to Debtors Statement of Reclamation Claims [Doc. No. 701] (the Limited Objection ) and, as part of such Limited 2 In support of this contention, the Debtors will likely argue that this Court made a binding finding of fact to the same effect in prior DIP financing orders. However, the issue of relative priority in Alex Toys Goods, as between Wells Fargo and Alex Toys, was not presented to this Court in the context of the DIP financing motion. Thus, such a finding likely does not meet the standards to have preclusive effect on the present issue. Moreover, as discussed below, even if Wells Fargo s liens in the Goods take priority to Alex Toys reclamation rights, such a conclusion would not extinguish Alex Toys administrative priority reclamation claim. Page 3

4 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 4 of 12 Objection, recognized that the Debtors were required to file the Notice pursuant to the Reclamation Procedures Order in these cases. Nevertheless, Alex Toys argued that, even if the Debtors can presently show that the value of any goods subject to reclamation claims is less than the amount of the secured debt, there are, upon information and belief, other assets that secured the pre-petition lenders interests and DIP Agent s interest. Thus, Alex Toys contended that there simply is no reason to eliminate Alex Toys reclamation claim until it is shown that the prepetition lenders interests and DIP Agent s interest will not otherwise be paid in full. In other words, the Debtors request was premature. Accordingly, Alex Toys requested that the recommendation made by the Debtors in the Notice be deferred until an appropriate time in which the Debtors could prove that the pre-petition lenders interests and DIP Agent s interest will not otherwise be paid in full in these cases. 10. The Debtors recently filed their Omnibus Objection to Reclamation Claims [Doc. No.787] (the Omnibus Objection ), in which they objected to several claims (collectively, the Reclamation Claims ), including the Alex Toys Reclamation Claim, based on their contention that none of the Reclamation Claims have any value and, thus, they should be valued at zero dollars each. 3 The primary basis for this contention by the Debtors is that there is no value above and beyond the prepetition liens of Wells Fargo, which was granted liens on substantially all of the Debtor s prepetition collateral and that such interests are superior to any Reclamation Claims. See Omnibus Objection, The Debtors, instead of following the procedures established in the Order Establishing Procedures for Treatment of Reclamation Claims [Doc. No. 347] (the Reclamation Procedures Order ), simply ignored the procedures established therein and, filed the separate Omnibus Objection. 4 Such an argument flies in the face of the Debtors Disclosure Statement [Doc. No. 782], which indicates that Wells Fargo s pre-petition lien has been paid in full from various sales, including Page 4

5 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 5 of Alex Toys respectfully disagrees with the Debtors Omnibus Objection for the reasons set forth below. ARGUMENT 12. Section 546(c) of the Bankruptcy Code grants the seller of goods who has supplied goods to a debtor, in the ordinary course of such seller s business, to reclaim such goods if the debtor has received such goods while insolvent, within 45 days before the date of the commencement of the case.... The right to reclaim such goods is subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof.... Pre-2005, reclamation claimants rights were adequately protected under section 546(c) of the Bankruptcy Code by the granting of a junior lien or the allowance of an administrative expense. Post-BAPCPA, there is some confusion about what rights remain under section 546(c) of the Bankruptcy Code. 13. The Debtors and Committee take the position that reclamation claimants are only entitled to an administrative claim under section 503(b)(9) for goods delivered within the 20-day period before the petition date. While the statutory revisions to section 546(c) of the Bankruptcy Code automatically allow such an administrative claim for 20-day goods, the revisions do not foreclose reclamation claimants rights to an allowed administrative expense claim for the goods delivered within the days pre-petition in circumstances such as the present case where those goods were sold post-petition to pay off the pre-petition lender, and where the circumstances strongly indicate that there remains value sufficient to satisfy reclamation claims. 14. A seller s administrative expense priority with regard to its reclamation claim is not extinguished by the sale of the goods subject to reclamation, even when the proceeds of the sale are used to satisfy a secured creditor s superior claim. Collier on Bankruptcy (16 th rev. but not limited to the sale of Alex Toys Goods. See Disclosure Statement at (Assets Sales and Remaining Assets). Page 5

6 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 6 of 12 ed.), [2] at Recently, in Pilgrim s Pride, Judge Lynn explained that, even though reclamation claimants could not physically reclaim their goods because their rights were subordinate to the pre-petition lienholders interests, the pre-existing liens do not extinguish the reclamation claims. See In re Pilgrim s Pride Corp., 2009 Bankr. LEXIS 3635 at *6-7 (Bankr. N.D. Tex. Nov. 12, 2009) (emphasis added); accord Phar-Mor, Inc. v. McKesson Corp., 534 F.3d 502 (6th Cir. 2008), cert. denied, 2009 U.S. LEXIS 3134 (April 27, 2009). While the statute was amended under BAPCPA in 2005 to give reclamation claimants an automatic administrative claim under section 503(b)(9) of the Bankruptcy Code for goods delivered in the 20-day period before the petition date, the statute did not foreclose claimants rights to seek an administrative or priority claim under section 503(b)(1) for the goods delivered in the day period pre-petition. See e.g., In re Circuit City Stores, Inc., 441 B.R 496, 507 (Bankr. E.D. Va. 2010) (contemplating that reclamation claimants could be allowed an administrative claim if they can establish a benefit to the estate that would qualify as an administrative expense under 503(b)(1) or (b)(9) ) Alex Toys Reclamation Claim creates a prima facie Reclamation Claim under Section 546(c) of the Bankruptcy Code as (i) the subject goods were delivered to the Debtors within forty-five (45) days of the Petition Date; (ii) Alex Toys made timely demand for reclamation of the Goods; (iii) the Schedules and Statement of Financial Affairs filed by the Debtors clearly demonstrate that the Debtors were insolvent as of the Petition Date and, thus, were likely insolvent on the date that the Goods were received by the Debtors; just some three (3) weeks earlier. 5 Such an argument flies in the face of the Debtors Disclosure Statement [Doc. No. 782], which indicates that Wells Fargo s pre-petition lien has been paid in full from various sales, including but not limited to the sale of Alex Toys Goods. See Disclosure Statement at (Assets Sales and Remaining Assets). Page 6

7 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 7 of 12 A. The Reclamation Claims Have Value. 15. The Debtors recently filed their Disclosure Statement for Debtors Plan of Liquidation Pursuant to Chapter 11 of the Bankruptcy Code [Doc. No. 782] (the Disclosure Statement ) and the Debtors Plan of Liquidation Pursuant to Chapter 11 of the Bankruptcy Code [Doc No. 781] (the Plan ). 6 The Plan proposes, among other things, to treat the Reclamation Claims as general unsecured creditors Class 2 under the Plan. That will mean, if the Omnibus Objection is sustained by the Court, the Reclamation Claims would only share on a pro rata basis with the general unsecured claims of the Debtors estates, instead of being classified separately under the Plan and receiving payment on their claims. Such a ruling runs contrary to Judge Lynn s conclusion in Pilgrim s Pride. Wells Fargo s liens did not extinguish the Reclamation Claims. 16. The assertions made and relied upon by the Debtors as related to the value of the Reclamations Claims is inconsistent with their representations in the Disclosure Statement, wherein they state:... during the course of these Chapter 11 Case, the Debtors sought and obtained approval from the Bankruptcy Court, on a final basis, to obtain post-petition financing in the principal aggregate amount of up to $122,675,000 (the DIP Financing ) in substantially the form attached to the final order authorizing such post-petition financing (the DIP Financing Order ). On January 22, 2015, the Debtors satisfied in full all of their indebtedness and other obligations under the DIP Financing, 6 The Disclosure Statement has not yet been approved by the Court as containing adequate information for solicitation purposes pursuant to Section 1125 of the Bankruptcy Code; nor has the Plan yet been transmitted to creditors for voting on the Plan. Moreover, no dates have yet been set by the Court for (i) Approval of the Disclosure Statement, or (ii) confirmation of the Plan. However, the Debtors recently filed their Motion for Entry of An Order (I) Approving Disclosure Statement, (II) Establishing Procedures for the Solicitation and Tabulation of Votes to Accept or Reject the Debtors Chapter 11 Plan, (III) Scheduling a Confirmation Hearing, and (IV) Approving Related Notice Procedures [Doc. No. 837], which is scheduled to be heard before this Court on April 10, 2015 at 9:30 a.m. See e.g., Notice of Hearing [Doc. No. 838]. Page 7

8 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 8 of 12 except for certain continuing indemnification obligations set forth in a letter agreement between the Debtors and Wells Fargo. Disclosure Statement, Section E, pg. 10. Moreover, as noted on Page 12 of the Disclosure Statement, the Debtors personal property, including Alex Toys Goods, were sold for $3 million during the course of the bankruptcy cases. The Debtors have provided no information to Alex Toys regarding the dates and amounts of the sales of Alex Toys other Goods, or how any such proceeds may have been used. Thus, to date, the Debtors have not demonstrated how Alex Toys Reclamation Claim has no value that is, the Debtors have not shown whether all proceeds from the Goods were used to pay Wells Fargo, or whether the Goods remained after Wells Fargo was paid in full such that Alex Toys could have reclaimed its Goods at some point post-petition. 17. Alex Toys suspects, however, that the Debtors, nevertheless, will argue that the proceeds of the Goods, where were subject to the Reclamation Claims, were utilized in full to pay the secured claims of Wells Fargo and that, after such payment, all proceeds of such Goods were otherwise used. However, the Debtors have not only failed to prove when and how the senior liens were paid in full, but this argument further fails to take into consideration that substantial assets of the Debtors still remain to be liquidated for distribution to creditors under the Plan. Id. at A seller s administrative expense priority with regard to is reclamation claim its not extinguished by the sale of the goods subject to reclamation, even when the proceeds of the sale are used to satisfy a secured creditor s superior claim. Collier on Bankruptcy (16 th rev. ed.), [2] at See also, Phar-Mor, Inc. v. McKesson Corp., 534 F.3d 502 (6 th Cir. 208), cert. denied, 2009 U.S. LEXIS 3134 (April 27, 2009). Here, the Goods were sold postpetition and the proceeds were used to pay Wells Fargo or other administrative expenses. Either Page 8

9 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 9 of 12 way, the Debtors benefited from the post-petition sale of Alex Toys Goods, and under such circumstances, either section 546(c) and 503(b) of the Bankruptcy Code entitles Alex Toys to an administrative claim for the benefit conferred on the estates from the use or sale of its Goods. B. The Issues Raised in the Omnibus Objection Should Be Deferred to Confirmation. 19. Treatment and classification of claims of creditors under a plan are issues to be considered as part of determining whether certain claims have been properly classified and treated under a plan in order to confirm a plan under chapter 11. See e.g., 11 U.S.C. 1122, 1123, 1124 and Under the Debtors Plan, the Reclamation Claims have not been separately classified, but rather, have been treated solely as unsecured claims under Class 2 of the Plan. 21. The Debtors are attempting to do an end-run around the confirmation process and, in essence, deprive the Reclamation Claimants from objecting to their treatment and classification under the Plan through the Omnibus Objection i.e., for the Court to determine that the Reclamation Claims should not be separately classified or treated as administrative priority claims, instead of lumped together with the claims of general unsecured creditors. 22. There is no reason for the Court to address such issues at this time. Instead, this Court should either overrule the Omnibus Objections on the merits or defer such consideration of the treatment and classification to be accorded to the Reclamation Claimants, such as Alex Toys, until the hearing on confirmation of the Plan. C. The Debtors Should Be Precluded From Contesting the Validity and Amount of the Alex Toys Reclamation Claim. 23. As part of the Omnibus Objection, the Debtors have reserved their right to object to Alex Toys Reclamation Claim. They did object twice but have raised no objection to the amount or validity of Alex Toys Reclamation Claim. To date, the Debtors have only contested Page 9

10 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 10 of 12 the priority of the Reclamation Claim, arguing that it was subject to the senior liens of Wells Fargo and, thus, not entitled to administrative priority. 24. Generally, the seller of goods seeking to preserve its reclamation rights must establish that the goods to be reclaimed (i) were in the debtor s possession and (ii) were identifiable. 25. In this case, Alex Toys diligently and timely pursued the Debtors in order to identify and segregate the Goods, but despite such attempts to do so, the Debtors thwarted such efforts by Alex Toys and, ultimately, failed and refused to provide Alex Toys with access to the Debtors premises (consisting of stores and warehouses) to undertake such action. 7 Thus, Alex Toys took all steps necessary to be able to document with certainty what Goods were on hand at the Debtors as of the Petition Date, but were prevented from doing so by the Debtors. Furthermore, the Reclamation Procedures Order explicitly stayed and precluded the Reclamation Claimants from taking any protective action against the Debtors or their goods. 26. Alex Toys even requested, in the alternative to having an opportunity to inspect its Goods at the Debtors warehouse, a detailed accounting from the Debtors of the Goods on hand as of the Petition Date. The Debtors failed to provide such an accounting. Such failure to provide access to Alex Toys, to identify the Goods or, even to provide an accounting about the Goods, is without justification or good cause. As a result, any attempts to penalize Alex Toys for action or inaction beyond their control is unwarranted. Accordingly, the Debtors should be precluded from contesting the validity and/or the amount of Alex Toys Reclamation Claim. To do otherwise, under the circumstances, would be inequitable and unfair to Alex Toys. 7 All of the Goods were shipped to and received by the Debtors on September 20, 2014 and, upon information and belief, were located at the Debtors primary warehouse as of the Petition Date. Page 10

11 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 11 of 12 CONCLUSION WHEREFORE, Alex Toys respectively requests that the Court (A) (i) overrule the Omnibus Objection because the circumstances demonstrate that the Reclamation Claims have value over and above the senior secured claims of Wells Fargo and, thus, should be paid ahead of general unsecured claims of the Debtors estates, or (ii) in the alternative, sustain the objection without prejudice to Alex Toys rights to file an application for an administrative expense claim under section 503(b)(1) of the Bankruptcy Code at a later time; (B) find and hold that the Debtors should be precluded from contesting the validity or amount of Alex Toys Reclamation Claim based on their failure to allow Alex Toys the right to identify, inspect and segregate their goods subject to their reclamation claim; and (C) grant such other and further relief as it deems appropriate. Dated: March 26, 2015 Respectfully submitted by, COX SMITH MATTHEWS INCORPORATED 1201 Elm Street, Suite 3300 Dallas, Texas (214) (214) (Fax) By: /s/ Aaron M. Kaufman Aaron M. Kaufman TX Bar No akaufman@coxsmith.com and Judith Greenstone Miller MI Bar No. P29208 JAFFE RAITT HEUER & WEISS, P.C Franklin Road Suite 2500 Southfield, MI Telephone: Facsimile: jmiller@jaffelaw.com Counsel for Alex Toys, LLC Page 11

12 Case sgj11 Doc 910 Filed 03/26/15 Entered 03/26/15 16:49:11 Page 12 of 12 CERTIFICATE OF SERVICE This is to certify that a true and correct copy of the foregoing Response to Debtors Omnibus Objection to Reclamation Claims has been served this 26 th day of March, 2015, electronically by the Court s PACER system and to those parties registered to receive electronic notice, and/or via transmission or U.S. Mail, postage prepaid, as indicated, to the parties listed below. Counsel Debtor: Daniel G. Egan Thomas R. Califano DLA Piper, LLP 1251 Avenue of the Americas New York, NY VIA ECF and Thomas.califano@dlapiper.com Jeffrey M. Wolf Greenberg Traurig, LLP One International Place Boston, MA VIA and mail: wolfje@gtlaw.com Counsel to Debtors: Vincent P. Slusher Andrew Zollinger DLA Piper, LLP 1717 Main St., #4600 Dallas, TX VIA ECF and vince.slusher@dlapiper.com andrew.zollinger@dlapiper.com Albert Loftus Erin Marie Schmidt Office of the United States Trustee 1100 Commerce St., Rm. 976 Dallas, TX VIA ECF and albert.loftus@usdoj.gov Ustpregion06.da.ecf@usdoj.gov Kevin J. Simard Choate Hall & Stewart, LLP Two International Place Boston, MA VIA and mail: ksimard@choate.com Counsel to Creditors Committee c/o Jeffrey Cohen Jay Indyke Cooley LLP 1114 Avenue of the Americas New York, NY VIA ECF and jcohen@cooley.com jindyke@cooley.com /s/ Aaron M. Kaufman Aaron M. Kaufman Page 12

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