Case MBK Doc 1082 Filed 12/05/17 Entered 12/05/17 00:07:44 Desc Main Document Page 1 of 24

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1 Document Page 1 of 24 UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY Caption in Compliance with D.N.J. LBR (c) LOWENSTEIN SANDLER LLP Kenneth A. Rosen, Esq. Mary E. Seymour, Esq. One Lowenstein Drive Roseland, New Jersey (973) (Telephone) (973) (Facsimile) Counsel to the Debtors and Debtors-in-Possession In re: Kid Brands, Inc., et al., 1 Debtors. Chapter 11 Case No (MBK) (Jointly Administered) DEBTORS (I) OBJECTION TO MOTION OF THE ACTING UNITED STATES TRUSTEE FOR AN ORDER CONVERTING THE CASES TO CHAPTER 7 OR, IN THE ALTERNATIVE, DISMISSING THE CASES PURSUANT TO 11 U.S.C. 1112(b) AND (II) CROSS-MOTION FOR AN ORDER AUTHORIZING DEBTORS TO DISTRIBUTE REMAINING CASH AND DISMISS CASES Kid Brands, Inc., and certain of its affiliates, the above-captioned debtors and debtors-in-possession (collectively, the Debtors or the Company ), by and through their counsel, (i) submits this objection (the Objection ) to the Motion of the Acting United States Trustee For an Order Converting the Cases to Chapter 7 Or, In the Alternative, Dismissing the Cases Pursuant to 11 U.S.C. 1112(b) (the Conversion Motion ) and (ii) cross-moves (the Cross-Motion ) for the entry of an order in the form submitted herewith (the Proposed Order ), pursuant to sections 105(a), 305(a), 349 and 1112(b) of title 11 of the United States 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtors tax identification number, are: Kid Brands, Inc. (5337); Kids Line, LLC (0448); Sassy, Inc. (9722); I&J Holdco, Inc. (1543); LaJobi, Inc. (1450); CoCaLo, Inc. (3844); and RB Trademark Holdco, LLC (0611). The Debtors corporate headquarters are located at 301 Route 17 North, 6th Floor, Rutherford, New Jersey R6497/17 12/05/

2 Document Page 2 of 24 Code (the Bankruptcy Code ) and rules 1017(a) and 2002(a)(4) of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), (a) authorizing the Debtors to distribute the remaining cash in the Debtors estates in accordance with the Final DIP Order; (b) dismissing the Debtors chapter 11 cases (the Chapter 11 Cases ) 2 and (c) granting related relief as set forth below. In support of the Objection and the Cross-Motion, the Debtors respectfully state as follows: PRELIMINARY STATEMENT 1. The Debtors have worked diligently throughout these Chapter 11 Cases to maximize the value of these estates through sales of substantially all of the Debtors assets and the pursuit of Avoidance Actions (defined herein). Among other things, the Debtors sold their soft goods business, consisting of Kidsline and CoCaLo, and their Sassy business pursuant to two separate Sale Motions (defined below); avoidance actions pursuant to Chapter 5 of the Bankruptcy Code (the Avoidance Actions ) have been pursued by the Official Committee of Unsecured Creditors (the Committee ); and all other assets have been liquidated. 2. The proceeds from the asset sales, various turnover actions and the proceeds from prosecution of various Avoidance Actions enabled the Debtors to partially satisfy the claims of the DIP Lenders (as defined below). However, the consideration ultimately received by the Debtors for their assets is insufficient to permit the Debtors to pay their secured debt, administrative claims, and estate professional fees in full or to provide for a distribution to pre-petition general unsecured creditors due to: (i) significantly less than anticipated funds 2 On March 22, 2017, the Supreme Court of the United States ruled that [a] distribution scheme ordered in connection with the dismissal of a Chapter 11 case cannot, without the consent of the affected parties, deviate from the basic priority rules that apply under the primary mechanisms the [Bankruptcy] Code establishes for final distributions of estate value in business bankruptcies. Czyzewski et al. v. Jevic Holding Corp. et al., 580 U.S. (2017). The particular settlement scheme in Jevic was deemed to have violated the Bankruptcy Code s priority rules because it skipped over priority creditors in favor of general unsecured creditors. Id. However, the Jevic decision does not preclude the relief requested in the Cross-Motion because the Debtors seek a non-structured dismissal of the Chapter 11 Cases under which there would be no violation of the Bankruptcy Code s priority scheme. -2-

3 Document Page 3 of 24 received from the Debtors asset sales and (ii) a significantly greater than anticipated claims pool. Further, the disposition of all remaining cash is subject to, and governed by, the terms of the Final DIP Order (defined below). 3. As a result, the Debtors do not have sufficient funds to propose and confirm a chapter 11 plan. The Debtors conferred with the Committee as to the most efficient way to resolve these Chapter 11 Cases, minimize administrative fees and ensure that the remaining funds are distributed expeditiously and efficiently pursuant to the terms of the Final DIP Order. After considering available alternatives, the Debtors and the Committee determined that a dismissal of these Chapter 11 Cases would be the most effective vehicle to achieve these goals. 4. Earlier this year, and prior to the filing of the Conversion Motion, the Debtors and the Committee approached the UST s Office to discuss the Debtors proposal for disbursement of the remaining cash on hand and dismissal of these cases and to solicit the UST s support for same. Although the Debtors and the Committee engaged in numerous discussions with the UST s Office, the Debtors were ultimately advised that the UST s Office would oppose a motion to dismiss these cases. 5. Although the UST asserts in the Conversion Motion that the Debtors have failed to present an exit strategy from bankruptcy and thus conversion of these cases would be in the best interest of creditors, the Debtors disagree. As the UST is well aware, there are insufficient funds available to prosecute and confirm a plan of liquidation in the Chapter 11 Cases. As the UST is also aware, all assets of these estates have already been administered and there are no other assets to be administered or liquidated. Conversion of the Chapter 11 Cases to chapter 7 would add an unnecessary layer of administrative costs. Other than the disbursement of -3-

4 Document Page 4 of 24 the remaining cash held by the Debtors and held in the GUC Trust Account (as defined in the Final DIP Order) that are proposed to be paid to the DIP Agent and certain Estate Professionals (defined below), there is nothing left to be done in these cases, as all viable Avoidance Actions have been prosecuted to conclusion and all of the Debtors other assets have already been liquidated. 6. Accordingly, the Debtors oppose conversion of these cases to Chapter 7 and cross-move for authority to disburse the remaining funds held by the Committee and the Debtors in accordance with the Final DIP Order and to dismiss the Chapter 11 Cases. As more fully explained below, the Debtors request authority to make a final distribution to the DIP Agent and certain Estate Professionals (defined below) as described herein, after payment of all statutory fees payable to the United States Trustee pursuant to 28 U.S.C. 1930(a)(6) through the date of dismissal of the Chapter 11 Cases, and to allow the Debtors to dismiss the Chapter 11 Cases. The Debtors also request final approval of certain exculpation provisions described below in connection with this Cross-Motion and the dismissal of the Chapter 11 Cases, as well as approval that all orders of this Court entered in the Chapter 11 Cases remain in full force and effect and survive the dismissal of the Chapter 11 Cases. JURISDICTION 7. This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. 157 and 1334 and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984, as amended September 18, Consideration of this Motion 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 The statutory predicates for the relief sought herein are sections 105(a), 305(a), 349, 554(a) and 1112(b) of the Bankruptcy Code, Bankruptcy Rules 1017(a) and -4-

5 Document Page 5 of (a)(4) and 2016, and Rule of the Local Bankruptcy Rules for the United States Bankruptcy Court for the District of New Jersey (the Local Rules ). BACKGROUND A. General Background 9. On June 18, 2014 (the Petition Date ), each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (the Court ). 10. The Debtors operated their businesses and managed their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee or examiner has been appointed in these Chapter 11 Cases. 11. On July 2, 2014, the Office of the United States Trustee appointed the Official Committee of Unsecured Creditors (the Committee ). See Docket No A more detailed description of the Debtors, their businesses, and the facts and circumstances that led the Debtors to initiate the Chapter 11 Cases is included in the Declaration in Support of Chapter 11 Petitions and First Day Pleadings, filed as part of the Debtors requests for first day relief [Docket No.2]. 13. The Debtors have sold all of their business assets, have ceased all business operations and have liquidated the remaining assets of their estates. B. The Debtors Prepetition Debt Structure (i) Prepetition Credit Agreement 14. The Company was party to that certain credit agreement (the Pre-Petition Credit Agreement ) dated as of December 21, 2012 with Salus Capital Partners, LLC ( Salus or the Pre-Petition Agent ), as Lender, Administrative Agent and Collateral Agent, and the other -5-

6 Document Page 6 of 24 lenders from time to time party thereto (together with the Pre-Petition Agent, collectively, the Pre-Petition Lenders ) consisting of a $60 million revolving credit facility composed of: (i) a revolving $44 million tranche (the Pre-Petition Tranche A Revolver ), with a $5 million sublimit for letters of credit; and (ii) a $16 million first-in last-out tranche (the Pre-Petition Tranche A-1 Revolver ). Notwithstanding the foregoing, the Company was permitted (upon irrevocable notice to the Pre-Petition Agent) to increase the maximum commitment under the Pre-Petition Tranche A Revolver to $48 million and maximum commitment under the Pre- Petition Tranche A-1 Revolver to $17 million, provided that, among other things, all applicable conditions to lending were satisfied. The obligations of the Company under the Pre-Petition Credit Agreement are joint and several. 15. In order to secure the Company s obligations under the Pre-Petition Credit Agreement, each of the Debtors pledged 100% of the equity interests of its domestic subsidiaries (other than inactive subsidiaries), including a pledge of the capital stock of each Debtor (other than Kid Brands, Inc.), as well as 65% of the equity interests of specified foreign subsidiaries, to the Pre-Petition Agent, and granted security interests in substantially all of its personal property to the Pre-Petition Agent, pursuant to a Security Agreement, dated as of December 21, As additional security for Sassy s obligations under the Pre-Petition Credit Agreement, Sassy granted a mortgage for the benefit of the Pre-Petition Agent and the Lenders on certain real property located at 2305 Breton Industrial Park Drive, S.E., Kentwood, Michigan; however, this mortgage was released by the Pre-Petition Agent upon the closing of the sale of such property in November The Pre-Petition Credit Agreement was amended on April 16, 2013, May 16, 2013, August 13, 2013, November 14, 2013, April 8, 2014, and May 14,

7 Document Page 7 of Additional information with respect to the Pre-Petition Credit Agreement and the amendments thereto can be found in the Company s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, which was filed with the United States Securities and Exchange Commission on May 22, C. Post-Petition Financing 18. On the Petition Date, the Debtors filed their Motion for Entry of Interim and Final Orders (A) Authorizing the Debtors to Obtain Postpetition Financing on a Senior Secured and Superpriority Basis, (B) Authorizing the Use of Cash Collateral, (C) Granting Adequate Protection, (D) Granting Related Relief, and (E) Scheduling Final Hearing Thereon [Docket No. 7]. 19. On June 20, 2014, the Court entered an Interim Order Approving (1)Post- Petition Financing (2) Authorizing Use of Cash Collateral, (3) Granting Liens and Providing Superpriority Administrative Expense Status, (4) Granting Adequate Protection, (5) Modifying Automatic Stay [Docket No. 57], as amended on June 24, 2104 [Docket No. 86] (the Interim DIP Order ). 20. Pursuant to the Interim DIP Order, Salus Capital Partners, LLC ( Salus ) as Administrative and Collateral Agent (the DIP Agent ) and lender, and Sterling National Bank (individually, a Secured Party and collectively with Salus, the DIP Lenders ) extended post-petition revolving credit facilities in the aggregate maximum amount of $49 million (the DIP Loans ). The DIP Loans are secured by liens on substantially all the Debtors assets and are entitled to superpriority administrative status under the Bankruptcy Code. 3 3 Pursuant to the Interim DIP Order, the Debtors pre-petition secured debt obligations were rolled into the DIP Loans upon entry of the Interim DIP Order. See Interim DIP Order at F(iv). Thus, the claims of the Debtors pre-petition secured lenders have been satisfied in full. -7-

8 Document Page 8 of On January 16, 2015, the Court entered the Final Order Pursuant to 11 U.S.C. 105, 361, 362, 363, 364 and 507 (1) Approving Post-Petition Financing (2) Authorizing Use of Cash Collateral, (3) Granting Liens and Providing Superpriority Administrative Expense Status and (4) Modifying Automatic Stay [Docket No. 537] (the Final DIP Order ) 4, thereby approving the DIP Loans on a final basis. 22. Among other things, the Final DIP Order incorporated a global settlement of the Committee s various objections to the Debtors proposed post-petition financing (the DIP Settlement ), under which, among other things, the Committee was granted standing to commence, prosecute, compromise or settle Avoidance Actions and D&O Claims on behalf of the Debtors and their estates. 23. Pursuant to the DIP Settlement, the Debtors, the Committee and the DIP Lenders, also agreed to share the net proceeds of Avoidance Actions and D&O Claims according to the percentages and terms set forth in the Final DIP Order. To facilitate the implementation and administration of the DIP Settlement, the Final DIP Order authorized the formation of the GUC Trust Account and appointment of the GUC Trustee (as defined in the Final DIP Order) to hold the net proceeds of Avoidance Actions and D&O Claim Assets (the GUC Trust Litigation Proceeds ) for the benefit of the Debtors general unsecured creditors. 24. To that end, on October 15, 2015, the Court entered an order granting the Committee s application to retain Province, Inc. as GUC Trustee [Docket No. 750]. In order to pursue the Avoidance Actions, the Committee retained two professionals. First, on May 18, 2015, the Court entered an order granting the Committee s application to retain ASK LLP ( ASK ) as special counsel to pursue the Avoidance Actions [Docket No. 668]. Then, on June 14, 2016, the Court entered an order granting the Committee s application to retain Gellert Scali 4 Capitalized terms used but not otherwise defined herein have the meanings ascribed to them in the Final DIP Order. -8-

9 Document Page 9 of 24 Busenkell & Brown, LLC ( Gellert ) as local special counsel to pursue the Avoidance Actions [Docket No. 862]. 25. As of December 4, 2017, there is approximately $678, in the GUC Trust Account (the Current GUC Trust Funds ) and the Debtors currently maintain approximately $ 21,000 in cash on hand that does not constitute GUC Trust Litigation Proceeds. The Debtors, after consultation with the Committee and the DIP Agent, propose to authorize and cause the GUC Trustee to distribute the Current GUC Trust Funds (net of the GUC Trustee s fees and expenses) to the DIP Agent and certain Estate Professionals (on a pro rata basis) pursuant to the terms and sharing percentages set forth in the Final DIP Order in connection with dismissal of the Chapter 11 Cases. D. Sale of the Debtors Businesses and Assets. 26. Prior to the Petition Date, the Debtors, in conjunction with their investment banking professionals, were extensively engaged in pursuing a sale of their assets. Although potential purchasers expressed interest in certain assets, the parties were ultimately unable to reach an agreement. As part of their robust post-petition marketing efforts, the Debtors continued discussions with certain parties in conjunction with the sale of all or substantially all of their assets pursuant to section 363 of the Bankruptcy Code. 27. On July 24, 2014, the Debtors filed the Motion of the Debtors for Entry of an Order (I) Authorizing the Sale of Certain Assets of Debtors Kids Line, LLC and CoCaLo, Inc. Free and Clear of Liens, Claims and Encumbrances, Subject to Higher and Better Offers and (II) Granting Related Relief [Docket No. 175] (the Soft Home Sale Motion ). 28. On July 28, 2014, the Debtors filed the Motion of the Debtors for Entry of an Order (I) Authorizing the Sale of Certain Assets of Debtor Sassy, Inc. and Transfer of Certain Assets of Certain Other Debtors Free and Clear of Liens, Claims and Encumbrances, Subject to -9-

10 Document Page 10 of 24 Higher and Better Offers, (II) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases and/or Transfer of Designation Rights, (III) Extending the Deadline to Assume or Reject Unexpired Leases of Non-Residential Real Property and (IV) Granting Related Relief [Docket No. 185] (the Sassy Sale Motion and together with the Soft Home Sale Motion, the Sale Motions ). 29. On August 19, 2014, the Court entered the Corrected Amended Order (I) Authorizing the Sale of Certain Assets of Debtor Sassy, Inc. and Transfer of Certain Assets of Certain Other Debtors Free and Clear of Liens, Claims and Encumbrances, Subject to Higher and Better Offers, (II) Authorizing the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases and/or Transfer of Designation Rights, (III) Extending the Deadline to Assume or Reject Unexpired Leases of Non-Residential Real Property and (IV) Granting Related Relief [Docket No. 275] (the Sassy Sale Order ), pursuant to which Debtor Sassy, Inc. sold substantially all of its assets to Sassy 14, LLC ( Sassy 14 ). In connection with the Sassy Sale Order, Sassy 14 paid approximately $14 million in cash to the Debtors to be held in an account controlled by the DIP Agent, thereby reducing the DIP Agent s secured claim by that amount. 30. On September 8, 2014, the Court entered the Order (I) Authorizing the Sale of Certain Assets of Debtors Kids Line, LLC, CoCaLo, Inc. and LaJobi, Inc. Free and Clear of Liens, Claims and Encumbrances, (II) Authorizing the Assumption and Assignment of Certain Executory Contracts and (III) Granting Related Relief [Docket No. 333] (the Soft Home Sale Order and together with the Sassy Sale Order, the Sale Orders ), pursuant to which Debtors Kids Line, LLC, CoCaLo, Inc. and LaJobi, Esq. sold certain of their assets to TG Valentine, LLC ( TG Valentine ). In connection with the Soft Home Sale Order, TG Valentine paid $8 million -10-

11 Document Page 11 of 24 in cash directly to the DIP Agent, thereby further reducing the DIP Lenders secured claims by that amount. 31. The Sassy sale and the Soft Home sale have both closed. E. Payment of DIP Loan Facility 32. Following the closing of the Sassy sale and the Soft Home sale, the first proceeds of each sale were used to partially satisfy obligations owing to the DIP Lenders pursuant to the DIP Loan Facility. F. Prosecution of Avoidance Actions 33. ASK, along with Gellert, has led the Committee s prosecution of the Avoidance Actions pursuant to the Final DIP Order. In August 2015, ASK sent demand letters to approximately 140 targets. Prior to suit, 33 cases settled and 30 were dismissed or otherwise closed. 34. Starting in June 2016, ASK filed 64 suits of those, 29 settled, five were dismissed, and 30 remain open. Of the 30 remaining actions, 18 were foreign cases for which service of process had not been completed and for which service of process would be time consuming and expensive, particularly relative to the amounts of those cases and the collectability of any judgment entered thereon. Of the remaining 12 actions, the Debtor believe they are either in default or a settlement has been reached. As of the date of this Motion, the Debtors believe that all 30 remaining actions have been resolved or dismissed. 35. The Debtors understand that ASK has collected $720, in proceeds of Avoidance Actions net of ASK s contingency fee. This recovery, however, combined with the Sassy and Soft Home sales, resulted in significantly less than anticipated funds received by the Debtors in these Chapter 11 Cases. -11-

12 Document Page 12 of 24 G. The Bar Date and Claims 29. On July 3, 2014, the Debtors filed Debtors Motion For An order (A) Establishing Deadlines to File Proofs of Claim Against the Debtors, (B) Approving the Form and Manner of Notice of the Bar Dates, (C) Authorizing Publication of the Bar Dates and (D) Granting Related Relief [Docket No. 118] seeking to establish a deadline by which all holders of claims against the Debtors that arose prior to the Petition Date, including creditors asserting claims pursuant to section 503(b)(9) of the Bankruptcy Code, must file proofs of claim. By Order dated July 24, 2014 [Docket No. 179], the Court established September 30, 2014 at 5:00 p.m. as the general bar date (the General Bar Date ) and December 15, 2014 at 5:00 p.m. as the date by which governmental entities must file proofs of claim. 30. Approximately 395 claims were filed against the Debtors on and after the General Bar Date, totaling approximately $109 million. This total is significantly greater than was anticipated at the outset of these Chapter 11 Cases. H. Professional Fees 31. Since the Petition Date, the Debtors professionals have billed the estates for fees and expenses incurred as follows: 5 Lowenstein Sandler LLP: $1,632, through November 20, GRL Capital Advisors LLC: $1,786, through December 31, PricewaterhouseCoopers LLP: $927, through February 28, Vogel Bach & Horn: $89, through November 15, The claims agent, Rust Omni, is owed approximately $92,919 in fees and expenses through August 31, Invoices for fees and expenses incurred by GRL in 2017 will be submitted prior to the hearing on the Conversion Motion and Cross-Motion. 7 PricewaterhouseCoopers filed its Application in Support of the Final Fee Application For Payment of Fees and Reimbursement of Expenses To PricewaterhouseCoopers LLP, Financial Advisors to the Debtors, for the Period of June 18, 2014 Through February 28, 2015 on May 6, 2015 [Docket No. 660] and was awarded a final allowance of compensation and reimbursement of expenses in the aggregate amount of $927, pursuant to this Court s Order Granting Allowances, entered on June 16, 2015 [Docket No. 697]. 8 On November 21, 2017, Vogel Bach filed a final fee application seeking final allowance of fees and expenses that were previously paid pursuant to its contingent fee arrangement. [Docket no. 1066]. -12-

13 Document Page 13 of Since the Petition Date, the Committee s professionals (except for ASK and Gellert) (together with the Debtors professionals listed above, the Estate Professionals ) have billed the estates for fees and expenses incurred as follows: Kelley Drye & Warren LLP: $686, through October 31, Emerald Capital Advisors Corp.: $185, through November 15, Province: $15, through November 22, ASK LLP: $240, through August 31, The Debtors believe that that all of the Estate Professionals have or will file their final fee applications so they may be considered by the Court within a short period of time after the hearing on the Conversion Motion and the Cross-Motion. I. Distributions to Post-Petition Creditors and Estate Professionals 34. Pursuant to the DIP Settlement, the Debtors calculate that approximately $371, of the funds on deposit in the GUC Trust Account would be payable to the DIP Agent, and approximately $273, would be available for distribution to the Estate Professionals. 35. The Debtors have paid the following approximate amounts to Estate Professionals, inclusive of pre-petition retainers held as of the Petition Date, which, unless noted otherwise, is less than one hundred (100%) percent of each Estate Professional s fees and expenses from the Petition Date through November 20, 2017: Lowenstein Sandler LLP: $1,417, GRL Capital Advisors LLC: $1,117, Neither ASK nor Gellert billed the estates for payment of their fees and expenses during the pendency of these cases. ASK s retention was on a contingency fee basis, and Gellert s fees and expenses were paid by ASK, not the Debtors estates. On November 20, 2017, ASK filed a final fee application seeking final allowance and approval of its fees and expenses which were previously paid from the proceeds of Avoidance Actions. -13-

14 Document Page 14 of 24 PricewaterhouseCoopers LLP: $927, Vogel, Bach & Horn PC: $89, (100%) Kelley Drye & Warren LLP: $500, Emerald Capital Advisors Corp.: $141, ASK LLP: $240, (100%) J. Final Distributions to Professionals 36. In recognition of the substantial reductions being taken by the Estate Professionals, the Debtors and the Estate Professionals propose to distribute the estate side GUC Trust Litigation Proceeds held in the GUC Trust Account to the Estate Professionals as a final payment of Estate Professional fees that are allowed by the Court ( Allowed Professional Fees ) as described below. 37. Specifically, and subject to the Court s approval of the final fee applications filed by each Estate Professional, the Debtors propose to pay an additional amount of Allowed Professional Fees to the Estate Professionals, on a pro rata basis (giving effect to Emerald Capital Advisors Corp. s agreement to limit the payment of its fees and expenses to $150,000). The Debtors goal is to provide for an equivalent total average distribution or percentage on account of Allowed Professional Fees. K. Final Distribution to the DIP Agent 38. In addition to the final distribution to certain Estate Professionals described above, the Debtors also propose to make a final distribution to the DIP Agent of the balance in the GUC Trust Account that is allocable to the DIP Agent under the DIP Settlement in the Final DIP Order. 10 Pursuant to its agreement with the Committee, Emerald Capital Advisors Corp. agreed to limit the payment of its allowed fees and expenses to no more than $150,

15 Document Page 15 of 24 RELIEF REQUESTED 39. By this Objection and Cross-Motion, the Debtors request entry of an order (i) denying the Conversion Motion, (ii) granting the Cross-Motion, (iii) authorizing the Debtors to use the remaining GUC Trust Litigation Proceeds and other cash on hand to make a final distribution to the DIP Agent and certain Estate Professionals as described herein, after payment of all statutory fees payable to the United States Trustee pursuant to 28 U.S.C. 1930(a)(6) through the date of dismissal of the Chapter 11 Cases, (iv) approving dismissal of the Chapter 11 Cases pursuant to sections 105(a), 305(a) and 1112(b) of the Bankruptcy Code, (v) approving certain exculpation provisions and (iii) granting the related relief requested herein. The Debtors submit that cause does not exist to convert these Chapter 11 Cases. Rather, there is ample authority under the Bankruptcy Code and case law to grant the Cross-Motion and the requested relief is justified and warranted under the circumstances of these Chapter 11 Cases. BASIS FOR RELIEF A. The Cross-Motion Should be granted and these Chapter 11 Cases Should Be Dismissed for Cause Because the Debtors Have Ceased Business Operations, Have Minimal Assets Available for Distribution and are Unable to Confirm a Liquidating Plan. 40. Section 1112(b) of the Bankruptcy Code requires a court to dismiss (or convert) a case if a party in interest establishes cause, absent unusual circumstances specifically identified by the Court that establish that the requested dismissal (or conversion) is not in the best interests of the creditors and the estate. See 11 U.S.C. 1112(b)(l) and (2). pertinent part, as follows: 41. Specifically, section 1112(b) of the Bankruptcy Code provides, in (1) Except as provided in paragraph (2) and subsection (c), on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter -15-

16 Document Page 16 of 24 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate. (2) The court may not convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter if the court finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate, and the Debtors or any other party in interest establishes that (A) there is a reasonable likelihood that a plan will be confirmed within the timeframes established in sections 112l(e) and 1129(e) of this title, or if such sections do not apply, within a reasonable period of time; and (B) the grounds for converting or dismissing the case include an act or omission of the Debtors other than under paragraph (4)(A)- (i) for which there exists a reasonable justification for the act or omission; and (ii) that will be cured within a reasonable period of time fixed by the court. 11 U.S.C 1112(b)(1) and (2). 42. Accordingly, where a movant establishes cause under section 1112(b)(4)(A), a court must dismiss (or convert) the case even if there are unusual circumstances that might otherwise weigh against dismissal (or conversion). See 11 U.S.C. 1112(b)(l) and (2)(B). Section 1112(b)(4)(A) provides that cause exists for dismissal where a debtor incurs substantial or continuing loss to or diminution of the estate and there is an absence of a reasonable likelihood of rehabilitation. See 11 U.S.C. 1112(b)(4)(A). 43. Here, there is no question that cause for dismissal exists under the twofold inquiry of section 1112(b)(4)(A). First, the Debtors have sold virtually all of their assets through the sale transactions described above. The Debtors no longer conduct any business, -16-

17 Document Page 17 of 24 have no income, and have no remaining assets other than dwindling remaining cash on hand and the GUC Trust Litigation Proceeds in the GUC Trust Account. The Debtors have no ability to propose, much less confirm, a plan of liquidation, as there are insufficient funds available to pay post-petition administrative expense claims in full, let alone make a distribution to unsecured creditors. Continued administration of the Debtors Chapter 11 Cases or conversion to chapter 7 will only lead to additional unnecessary administrative expenses and further diminution of the Debtors estates. See, e.g., In re AdBrite Corp., 290 B.R. 209, 215 (Bankr. S.D.N.Y. 2003) ( Courts have held that a negative cash flow postpetition and an inability to pay current expenses satisfy the elements of 11l2(b)(1) [now 1112(b)(4)(A)]); In re Route 202 Corp., 37 B.R. 367, 374 (Bankr. E.D. Pa. 1984) ( Obviously, if the Debtor has a negative cash flow after the entry of the order for relief in the chapter 11 case, the first of two elements of [former] section 1112(b)(1) is satisfied ) (quoting In re Tolco Properties, Inc., 6 B.R. 482, 487 (Bankr. E.D. Va. 1980)). 44. Second, dismissal, rather than conversion is appropriate here as it is simply impossible for the Debtors to rehabilitate their businesses because they have no business to rehabilitate. It is well-settled that the reference in section 1112 to rehabilitation means something different than reorganization, which includes liquidation. Courts consistently hold that rehabilitation, as distinguished from reorganization, denotes a restoration of a viable business and does not include liquidation. Loop Corp. v. US Trustee, 379 F. 3d 511, 516 (8th Cir. 2004) ( Courts have consistently understood rehabilitation to refer to the Debtors ability to restore the viability of its business. ); In re Gonic Realty Trust, 909 F.2d 624, 627 (1st Cir. 1990) ( [W]ith no business left to reorganize, Chapter 11 proceedings were not serving the purpose of rehabilitating the Debtors' business. ). -17-

18 Document Page 18 of Moreover, the list of grounds for dismissal of a chapter 11 case in section 1112(b) of the Bankruptcy Code is non-exhaustive. See, e.g., Frieouf v. US, 938 F.2d 1099, 1102 (10th Cir. 1991); In re Camden Ordinance Mfg. Co. of Arkansas, Inc., 245 B.R. 794, 799 (E.D. Pa. 2000). While no longer listed as an example of cause for dismissal under section 1112(b), dismissal of a chapter 11 case is nevertheless appropriate where the court finds that a feasible plan is not possible. In re 3 Ram, Inc., 343 B.R. 113, (Bankr. E.D. Pa. 2006) (citations omitted). Here, the Debtors cannot confirm a plan of liquidation because the Debtors are administratively insolvent, have insufficient funds to make all payments that would be required to be made under a plan, and there is no prospect of distributions to unsecured creditors. 46. Accordingly, the Debtors have met their burden of proof to show that cause exists to dismiss the Chapter 11 Cases under section 1112(b) of the Bankruptcy Code due to the substantial or continuing loss to or diminution of the Debtors estates, the absence of a reasonable likelihood of rehabilitation, and the Debtors inability to propose, much less effectuate, a plan. B. Dismissal is in the Best Interests of the Debtors Creditors and Estates. 47. Once a court determines that cause exists to dismiss a Debtor s chapter 11 case under section 1112(b), the court must evaluate whether dismissal is in the best interests of the Debtors creditors and its estates. See, e.g., Rollex Corp. v. Associated Materials (In re Superior Siding & Window), 14 F.3d 240, 242 (4th Cir. 1994) ( Once cause is established, a court is required to consider this second question of whether to dismiss or convert ). Here, a variety of factors demonstrate that it is in the best interest of the Debtors creditors and their estates to dismiss the Chapter 11 Cases In addition to cause under section 1112(b) of the Bankruptcy Code, section 305(a) permits dismissal of a case if the interests of creditors and the Debtors would be better served by such dismissal 11 U.S.C. 305(a)(1). See, e.g., In re -18-

19 Document Page 19 of First, as explained above, other than the cash remaining in the GUC Trust Account, whose application and payment is determined under the Final DIP Order, and a modest amount of cash that is subject to the DIP Agent s lien, the Debtors no longer have any assets that require administration. Moreover, all Avoidance Actions and other chapter 5 causes of action of the estates have already been prosecuted and/or waived pursuant to the DIP Settlement. Thus, there would be no purpose or benefit to creditors whatsoever if the Chapter 11 Cases were converted to chapter 7 as proposed by the UST in the Conversion Motion. 49. Second, dismissal of the Chapter 11 Cases is warranted and will maximize the value of the Debtors estates because the alternative conversion to a chapter 7 and appointment of a chapter 7 trustee would impose significant additional and unnecessary administrative expenses upon the estates with no corresponding benefit. One element of the best interests test focuses upon whether the economic value of the estate is greater inside or outside of bankruptcy. In re Clark, 1995 WL , at *5 (N.D. Ill. Aug. 17, 1995); In re Staff Inv. Co., 146 B.R. 256, 261 (Bankr. E.D. Cal. 1993). The prime criterion for assessing the best interests of the estate is the maximization of value as an economic enterprise. See id. Here, a chapter 7 trustee would have the same limited assets with which to pay any post-petition administrative expenses. If the Chapter 11 Cases were converted, as the UST seeks in the Conversion Motion, the estates would only incur additional administrative expenses that they would be unable to pay, further diminishing their ability to partially satisfy the DIP claims or allowed post-petition administrative expense claims. Monitor Single Lift I Ltd., 381 B.R. 455, 462 (Bankr. S.D.N.Y. 2008) ( The courts that have construed 305(a)(1) are in general agreement that dismissal is appropriate under 305(a)(1) only in the situation where the court finds that both creditors and the Debtors would be better served by a dismissal. ) (quoting In re Eastman, 188 B.R. 621, 624 (9th Cir. BAP 1995)). The Debtors submit that dismissal of the Chapter 11 Cases are warranted under section 305(a) of the Bankruptcy Code for the same reasons that cause exists to dismiss the Chapter 11 Cases pursuant to section 1112(b). -19-

20 Document Page 20 of Third, although not dispositive, the Debtors believe that both the DIP Agent and the Committee are supportive of the Debtors proposed plan for distribution of the remaining cash in the estates in accordance with the Final DIP Order and decision to dismiss the Chapter 11 Cases on the terms outlined herein. The preference of creditors, in particular a Committee representing the interest of all general unsecured creditors, is a factor that should be given weight by the Court in determining whether dismissal or conversion is appropriate. See, e.g., In re Camden Ordnance Mfg. Co. of Arkansas, Inc., 245 B.R. 794, (E.D. Pa. 2000). The Debtors opinion that dismissal is appropriate may also be considered by the Court. See, e.g., In re Mazzocone, 183 B.R. 402, 414 (Bankr. E.D. Pa. 1995) (considering Debtors preference for dismissal of chapter 11 case rather than conversion to chapter 7). 51. Courts in this and other districts have dismissed cases pursuant to section 1112(b) under similar circumstances, where the Debtors lacked sufficient funds to confirm a chapter 11 plan and/or where the costs associated with plan confirmation would eliminate the possibility of a meaningful creditor recovery. See, e.g., In re Dots, LLC, Case No (MLK) (Bankr. D.N.J. September 29, 2017)[Docket No. 1345]; In re Big M, Case No (MLK)(Bankr. D.N.J. June 2015); In re In re 155 Route 10 Assocs., Inc. (Strauss Discount Auto), Case No (NLW) (Bankr. D.N.J. July 2, 2013) [Docket No. 627]; In re Princeton Ski Shop, Case No (MS) (Bankr. D.N.J. Dec. 23, 2008) [Docket No. 546]; In re Blades Board and Skate, LLC, Case No (Bankr. D.N.J. June 29, 2004) [Docket No. 126]; In re LHUC Wind Down Corp. f/k/a Life Uniform Holding Corp., Case No (KJC) (Bankr. D. Del. April 1, 2015 [Docket No. 596]; In re Ascendia Brands, Inc., Case No (BLS) (Bankr. D. Del. July 18, 2012) [Docket No. 1230]; In re G.I. Joe s Holding Corp., Case No (KG) (Bankr. D. Del. Mar. 10, 2011) [Docket Nos. 753, 773, 804]; In re -20-

21 Document Page 21 of 24 Thompson Prods., Ins., Case No (PJW) (Bankr. D. Del. Dec. 28, 2010) [Docket Nos. 512, 542]; In re CFM U.S. Corp., Case No (KJC) (Bankr. D. Del. Feb. 1, 2010) [Docket No. 1282]; In re Foamex Int l Inc., Case No (KJC) (Bankr. D. Del. Jan. 20, 2010) [Docket No. 761]. 52. In sum, dismissal of the Chapter 11 Cases as proposed by the Debtors, rather than conversion, will further the Bankruptcy Code s goal of efficient administration of the Debtors estates, eliminate the accrual of additional administrative expense obligations that cannot be paid, and is in the best interests of creditors and the estates. C. The Proposed Distributions Are Warranted. 53. This Cross-Motion represents the Debtors best efforts at reaching a fair result in an administratively insolvent case. It is well-settled that determinations concerning the payment of administrative expenses outside of a plan of reorganization are matters within the sound discretion of the bankruptcy court. See, e.g., In re HQ Global Holdings, Inc., 282 B.R. 169, 173 (Bankr. D. Del. 2002); In re Colortex Indus., Inc., 19 F.3d 1371, 1384 (11th Cir. 1994); In re Verco Indus., 20 B.R. 664, 665 (B.A.P. 9th Cir. 1982); In re Baptist Med. Ctr. of N. Y, Inc., 52 B.R. 417, 421 (E.D.N.Y. 1985). One of the chief factors courts consider in making this determination is bankruptcy s goal of an orderly distribution among creditors and the need to prevent a race to the Debtors assets. HQ Global Holdings, 282 B.R. at The Debtors submit that authorization to make the proposed final distributions to the DIP Agent and the Estate Professionals outside of a plan is justified and warranted under the circumstances of these Chapter 11 Cases. Given that the Debtors are unable to confirm a plan, implementation of the proposed final distributions is the most efficient means of distributing the remaining assets of the Debtors estates in an equitable manner. Importantly, the Debtors note that no holders of post-petition administrative expense claims, other than Estate -21-

22 Document Page 22 of 24 Professionals, have contacted the Debtors for payment of such claims and no requests for payment of administrative expense claims pursuant to section 503 of the Bankruptcy Code have been filed with this Court. 12 D. The Proposed Releases and Exculpation Are Warranted 55. In connection with the dismissal of the Chapter 11 Cases, the Debtors also request that the dismissal order provide that (i) from and after the date of entry of such order, none of the Estate Professionals, the Debtors, the Debtors current and former officers and directors, the Committee, or its members (in their capacity as such) (collectively, the Exculpated Parties ) shall have or incur any liability to any person for any act taken or omitted to be taken in connection with or related to the Chapter 11 Cases, the formation, preparation, implementation, or filing of this Cross-Motion or the order ultimately entered with respect to this Cross-Motion (other than an action taken in contravention of this Cross-Motion or the implementation of such order), or any contract, instrument, release or agreement or document created or entered into in connection with this Cross-Motion or the order ultimately entered with respect to this Cross-Motion, and (ii) all orders of this Court entered in the Chapter 11 Cases remain in full force and effect and survive the dismissal of the Chapter 11 Cases. RELATED RELIEF 56. In connection with the Cross-Motion and request for dismissal of the Chapter 11 Cases, the Debtors also request that the dismissal order provide that (i) from and after the date of entry of such order, none of the Debtors and their respective professionals, the Debtors officers and directors, the Claims Agent, the Committee, and its members (in their capacity as such) and the Committee s professionals (collectively, the Exculpated Parties ) shall 12 The Debtors note that the distributions proposed in this Cross-Motion do not violate the priority scheme of the Bankruptcy Code and, therefore, the requested dismissal is appropriate notwithstanding the United States Supreme Court s recent decision in Czyzewski v. Jevic Holding Corp., 580 U.S. (2017). -22-

23 Document Page 23 of 24 have or incur any liability to any person for any act taken or omitted to be taken in connection with or related to the Chapter 11 Cases, the formation, preparation, implementation, or filing of this Cross-Motion or the order ultimately entered with respect to this Cross-Motion (other than an action taken in contravention of this Cross-Motion or the implementation of such order), or any contract, instrument, release or agreement or document created or entered into in connection with this Cross-Motion or the order ultimately entered with respect to this Cross-Motion, and (ii) all orders of this Court entered in the Chapter 11 Cases remain in full force and effect and survive the dismissal of the Chapter 11 Cases. 57. Although section 349 of the Bankruptcy Code contemplates dismissal will typically reinstate the pre-petition state of affairs by revesting property in the debtor and vacating orders and judgments of the bankruptcy court, a bankruptcy court is also authorized to alter the effect of dismissal for cause. See In re Jevic Holding Corp., 787 F.3d 173, 181 (3 rd. Cir. 2015), rev d sub nom. on other grounds, Czyzewski v. Jevic Holding Corp., 580 U.S. (2017); In re Naartjie Custom Kids, Inc., 534 B.R. 416, 426 (stating that a bankruptcy court may alter the effect of dismissal under section 349(b) of the Bankruptcy Code). 58. The Debtors also request that the Court approve the proposed exculpation of the Exculpation Parties as noted above. 59. Based upon the foregoing, the Debtors believe that the relief requested in the Cross-Motion is authorized by the Bankruptcy Code and precedent and is in the best interests of the Debtors and their estates. WAIVER OF MEMORANDUM OF LAW 60. As the legal basis upon which the Debtors rely is incorporated herein and neither the Objection nor the Cross-Motion raises any novel issues of law, the Debtors -23-

24 Document Page 24 of 24 respectfully request that the Court waive the requirement to file a separate memorandum of law pursuant to D.N.J. LBR (a)(3). NOTICE 61. A copy of this Objection and Cross-Motion has been given to (i) the Office of the United States Trustee for the District of New Jersey; (ii) counsel to the Committee; (iii) counsel to the DIP Agent and DIP Lenders; and (iv) all parties that have requested notice in the Chapter 11 Cases pursuant to Bankruptcy Rule In light of the nature of the relief requested herein, the Debtors submit that no other or further notice is required. WHEREFORE, the Debtors respectfully request entry of an order, substantially in the form submitted herewith, (i) denying the Conversion Motion; (ii) granting the Cross- Motion and all of the relief requested herein and such other and further relief as this Court deems just and proper. Dated: December 4, 2017 Respectfully submitted, LOWENSTEIN SANDLER LLP By: /s/ Mary E. Seymour Kenneth A. Rosen, Esq. Mary E. Seymour, Esq. 65 Livingston Avenue Roseland, New Jersey Tel: (973) Fax: (973) Counsel to the Debtors and Debtors-in-Possession -24-