Pg 1 of 17 UNITED STATES BANKRUPTCY COURT Hearing Date: August 5, 2013 SOUTHERN DISTRICT OF NEW YORK Hearing Time: 11:00 a.m. ------------------------------------------------------x : In re : Chapter 11 : Case No. 12-10202 (ALG) EASTMAN KODAK COMPANY, et al., : : (Jointly Administered) Debtors. : : ------------------------------------------------------x OBJECTION OF THE UNITED STATES TRUSTEE TO SHAREHOLDERS MOTION FOR AN ORDER APPROVING THE APPOINTMENT OF AN OFFICIAL EQUITY COMMITTEE To: HONORABLE ALLAN L. GROPPER, UNITED STATES BANKRUPTCY JUDGE: Tracy Hope Davis, the United States Trustee for Region 2 (the United States Trustee ), hereby submits this objection to the Shareholders Motion for an Order Approving the Appointment of an Official Equity Committee (the Equity Committee Motion ). 1 ECF Doc. No. 4249. In support thereof, the United States Trustee respectfully states: I. INTRODUCTION The United States Trustee objects to the Equity Committee Motion because the Movant has failed to meet his burden of proof to show that: (i) (ii) there is a substantial likelihood that equity shareholders will receive a meaningful distribution in these cases, and that the interests of the equity shareholders are not adequately represented by the Official Committee of Unsecured Creditors (the Creditors Committee ). 1 As set forth below, pro se shareholder Ahsan Zia (the Movant ) filed the Equity Committee Motion on behalf of himself and other non-insider common shareholders of Eastman Kodak Company. ECF Doc. No. 4249 at p. 1. 1
Pg 2 of 17 For these reasons, the United States Trustee requests that the Court deny the Equity Committee Motion. II. BACKGROUND A. General Background 1. On January 19, 2012 (the Petition Date ), Eastman Kodak Company ( Kodak ) and certain of its direct and indirect subsidiaries (collectively, the Debtors ) each filed petitions for relief under Chapter 11 of the Bankruptcy Code. ECF Doc. No. 1. 2. On January 25, 2012, the United States Trustee appointed the Creditors Committee. ECF Doc. No. 115. 3. No trustee or examiner has been appointed in these cases. 4. The Debtors continue to operate their respective businesses and manage their properties as debtors in possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code. B. The Debtors Assets and Liabilities 5. Prepetition, the Debtors had significant legacy liabilities, including $1.2 billion in non-u.s. pension liabilities, $1.3 billion of other post-employment benefit liabilities and approximately $100 million in environmental liabilities. See Declaration of Antoinette P. McCorvey Pursuant to Rule 1007-2 of the Local Bankruptcy Rules for the Southern District of New York in Support of First Day Pleadings (the McCorvey Declaration ), ECF Doc. No. 2 at 19. 6. As of the Petition Date, the Debtors had outstanding funded debt in an aggregate amount of approximately $1.6 billion, consisting primarily of approximately: (a) $100 million outstanding under the first lien revolving credit facility plus an additional $96 million in face 2
Pg 3 of 17 amount of outstanding letters of credit; (b) $750 million in principal amount of second lien secured notes; (c) $400 million in principal amount of convertible notes; and (d) $283 million in principal amount of other senior unsecured debt. Id. at 20. 7. On June 28, 2013, the Debtors filed the monthly operating report for the period between May 1 to May 31, 2013 (the May 2013 Report ), which shows a monthly net loss of $47.8 million. ECF Doc. No. 4184 at p. 12. 8. The May 2013 Report contains an unaudited combined balance sheet showing total assets of $3.41 billion and total liabilities of $4.85 billion. Id. B. Kodak s Equity Interests as of the Petition Date 9. As of December 31, 2011, Kodak had 950 million authorized shares of common stock, of which over 271 million were outstanding. ECF Doc. 4097 at p. 13. 10. Prior to the Petition Date, the common stock was listed on the New York Stock Exchange. Id. 11. On the Petition Date, the New York Stock Exchange announced the suspension of the trading of Kodak s common stock. Id. 12. The Debtors common stock is currently traded on the Over The Counter Bulletin Board under the symbol EKDKQ. Id. C. The Disclosure Statement and Chapter 11 Plan 13. On April 30, 2013, the Debtors filed a Disclosure Statement and a Joint Chapter 11 Plan of Reorganization. ECF Doc. Nos. 3650, 3651. 14. On May 23, 2013, the Debtors filed the Motion for an Order (i) Approving the Disclosure Statement; (ii) Establishing a Voting Record Date for the Plan; (iii) Approving 3
Pg 4 of 17 Solicitation Packages and Procedures for the Distribution Thereof; (iv) Approving the Forms of Ballots; (v) Establishing Procedures for Voting on the Plan; (vi) Establishing Notice and Objection Procedures for the Confirmation of the Plan; and (vii) Establishing Procedures for the Assumption and/or Assignment of Executory Contracts and Unexpired Leases Under the Plan. ECF Doc. No. 3763. 15. On June 18, 2013, the Debtors filed the First Amended Joint Chapter 11 Plan of Reorganization (the First Amended Plan ). ECF Doc. No. 4073. 16. On June 21, 2013, the Debtors filed the First Amended Disclosure Statement For Debtors First Amended Joint Plan Of Reorganization Under Chapter 11 of the Bankruptcy Code (the First Amended Disclosure Statement ). ECF Doc. No. 4097. 17. According to the First Amended Plan, as depicted in the chart below, Classes 3 through 10 are impaired: Class Claims and Equity Interests Status Voting Rights 1 Other Priority Claims Unimpaired Deemed to Accept 2 Other Secured Claims Unimpaired Deemed to Accept 3 Second Lien Notes Claims Impaired Entitled to Vote 4 General Unsecured Claims Impaired Entitled to Vote 5 KPP Claims Impaired Entitled to Vote 6 Retiree Settlement Unsecured Impaired Entitled to Vote Claim 7 Convenience Claims Impaired Entitled to Vote 8 Subsidiary Convenience Claims Impaired Entitled to Vote 9 Equity Interests Impaired Deemed to Reject 10 Section 510(b) Claims Impaired Deemed to Reject ECF Doc. No. 4073 at 4.1.2. 18. Pursuant to the First Amended Disclosure Statement, unsecured claims in Classes 4, 6, and 7 as identified in the chart above, with estimated claims ranging from $2.245 billion to 4
Pg 5 of 17 $2.843 billion, will receive distributions between 4 5 percent of their allowed claims. ECF Doc. No. 4097 at pp. 6 7. 19. Under the First Amended Plan, with respect to the treatment of equity interests, Class 9, [n]o Holder of an Equity Interest in Kodak shall receive any Distributions on account of its Equity Interest. On and after the Effective Date, all Equity Interests in Kodak shall be cancelled and shall be of no further force and effect, whether surrendered for cancellation or otherwise. ECF Doc. No. 4073 at 4.2.9. 20. On June 26, 2013, the Court entered an order approving the Debtors First Amended Disclosure Statement. ECF Doc. No. 4167. The hearing on the First Amended Plan is scheduled for August 20, 2013. Id. at 4(k). D. Previous Requests for the Appointment of an Equity Committee 21. As specifically set forth below, prior to the filing of the Equity Committee Motion, the United States Trustee received requests in February 2012, January 2013, and May 2013 from various shareholders, including the Movant herein, requesting that she appoint an equity committee in these cases. Those requests were denied by the United States Trustee. (i) February 2012 Requests 22. On February 3 and 9, 2012, the two separate groups of shareholders, represented by Brown Rudnick LLP and Keefe Bartels, LLC, sent letters to the United States Trustee requesting the formation of an equity committee (the February 2012 Requests ). 23. In response to the February 2012 Requests, on February 17, 2012, the United States Trustee received letters from the Debtors and the Creditors Committee opposing the appointment of an equity committee. 5
Pg 6 of 17 24. On February 22, 2012, the United States Trustee received a letter from certain unaffiliated noteholders (the Second Lien Noteholders Committee ) also opposing the appointment of an equity committee. 25. The United States Trustee performed a full and fair analysis of the various requests to appoint an equity committee and decided, in light of the facts and circumstances within her knowledge, that an equity committee should not be appointed. 26. By letter dated February 28, 2012, the United States Trustee communicated her decision to not appoint an equity committee to each of the requesting shareholders. 2 27. On March 29, 2012, the requesting shareholders, represented by Brown Rudnick LLP and Keefe Bartels, LLC, filed the Joint Motion for Order Directing the Appointment of an Official Committee of Equity Security Holders Pursuant To 11 U.S.C. 1102(a) (the First Equity Motion ). ECF Doc. No. 545. 28. On June 28, 2012, following a full briefing and a hearing, the Court entered a Memorandum of Decision denying the First Equity Motion. ECF Doc. No. 1541. (ii) January 2013 Requests 29. On or about January 28, 2013, the United States Trustee received letters requesting the appointment of an equity committee from pro se shareholders Kenneth Heinlein and Matthew Glassman. Mr. Glassman s letter, written on behalf of pro se shareholders, included thirty additional letters to the United States Trustee, four letters to the Court, and one letter to Kodak s board of directors (together, with Mr. Heinlein s letter, the January 2013 Requests ). 30. In response to the January 2013 Requests, on February 6, 2013, the United States 2 The United States Trustee notes that her Office received a pro se request from the Movant for the appointment of equity committee on February 13, 2012. The Movant was a recipient of a February 28, 2012 letter sent by the United States Trustee declining the appointment of an equity committee. 6
Pg 7 of 17 Trustee received responses from the Debtors and the Creditors Committee opposing the appointment of an equity committee. 31. On February 8, 2013, the United States Trustee received a letter from the Second Lien Noteholders Committee also opposing the appointment of an equity committee. 32. The United States Trustee performed a full and fair analysis of the pro se shareholders to appoint an equity committee and decided, in light of the facts and circumstances within her knowledge, that an equity committee should not be appointed. 33. By letter dated February 20, 2013, the United States Trustee communicated her decision to not appoint an equity committee to each of the pro se shareholders. (iii) May 2013 Requests 34. Throughout May 2013, the United States Trustee received numerous additional pro se requests for the appointment of an equity committee, including e-mails dated May 20, 23, and 24, 2013 from the Movant (collectively, the May 2013 Requests ). 35. In response to the May 2013 Requests, on May 28 and 29, 2013, the United States Trustee received letter responses from the Debtors and the Creditors Committee, respectively, opposing the appointment of an equity committee. 36. The United States Trustee performed a full and fair analysis of the various requests to appoint an equity committee and decided, in light of the facts and circumstances within her knowledge, that an equity committee should not be appointed. 37. By letter dated June 4, 2013, the United States Trustee communicated her decision to not appoint an equity committee to each of the requesting pro se shareholders, including the Movant. 7
Pg 8 of 17 E. The Equity Committee Motion 38. On July 9, 2013, the Movant filed the Equity Committee Motion on behalf of [himself] and other non-insider common shareholders of Eastman Kodak Company. ECF Doc. No. 4249 at p. 1. 39. Attached in support of the Equity Committee Motion were the following documents: (i) a document entitled, Objections of Kodak Shareholders Group to the 4/30/2013 Plan of Reorganization ; (ii) a copy of the United States Trustee s June 4, 2013 letter to the Movant denying the request for an appointment of an equity committee; (iii) an article entitled, Equity Committees: A Consequence of the Zone of Insolvency ; (iv) an article entitled, The New Wave of Equity Committees in Bankruptcy: What Are They and Are They Here to Stay? See id. at Ex. 1 4. 40. According to the Equity Committee Motion, the Movant argues that the appointment of an equity committee is required for the following reasons: Kodak is an asset rich company worth billions of dollars based on the value of its patents, real estate, brand name and its going concern value. The Debtors management violated its fiduciary duties to shareholders. The Debtors have not properly disclosed the liquidation value of the estates. See ECF Doc. No. 4249 at pp. 2 3. 8
Pg 9 of 17 III. ARGUMENT A. The United States Trustee Properly Exercised Her Discretion in Denying the Requests for the Appointment of an Equity Committee 41. Section 1102(a)(1) of the Bankruptcy Code provides: Except as provided in paragraph (3), as soon as practicable after the order for relief under chapter 11 of this title, the United States trustee shall appoint a committee of creditors holding unsecured claims and may appoint additional committees of creditors or of equity security holders as the United States Trustee deems appropriate. 11 U.S.C. 1102(a)(1) (emphasis added). The plain language of the statute indicates that the appointment of an equity committee is a discretionary act of the United States Trustee. 42. The Bankruptcy Code is silent as to the nature and degree of due diligence required of a United States Trustee in the analysis of a request to appoint an equity committee. Section 1102 of the Bankruptcy Code vests broad discretion in the United States Trustee with regard to the appointment of committees other than an unsecured creditors committee. See 11 U.S.C. 1102(a)(1); In re McLean Indus., Inc., 70 B.R. 852, 856 (Bankr. S.D.N.Y. 1987). 43. The United States Trustee performed a full and fair due diligence analysis of the Movant s requests that the United States Trustee appoint an equity committee and decided that an equity committee should not be appointed in these cases in light of the facts, circumstances and information available to her, including but not limited to, the Debtors capital structure, the organizational structure and financial posture of the Debtors as reported by them in their verified bankruptcy petitions, affidavits, exhibits, the Debtors Securities and Exchange Commission ( SEC ) filings publically available on the SEC s website and the Debtors monthly operating reports, the Debtors disclosure statement and plan of reorganization and their respective amendments, the documentation from the February 2012 Requests, the January 2013 Requests, the 9
Pg 10 of 17 May 2013 Requests, the Equity Committee Motion, and the various responses from the Debtors, the Creditors Committee and the Second Lien Noteholders Committee. 44. The United States Trustee also solicited comments and opinions from other stakeholders to assess and evaluate the desirability of appointing an equity committee. The Debtors, the Creditors Committee and the Second Lien Noteholders, which each in separate letters to the United States Trustee expressly opposed the appointment of an equity committee. Since each party in interest can be expected to have its own bias, no one entity s opinion was overwhelmingly persuasive. Yet, when considered together, she determined that the collective comments and opinions provided a balanced view of the cases. As set forth above, the United States Trustee also investigated and studied the various requests for the appointment of an equity committee prior to making a well-founded decision. B. There Is No Substantial Likelihood of a Distribution to Equity Holders Because the Debtors Are Insolvent and, Therefore, No Equity Interest Exists to Be Protected by an Equity Committee 45. The Court in In re Williams Communications Group, Inc., 281 B.R. 216 (Bankr. S.D.N.Y. 2002) set forth the standard for the appointment of an equity committee, emphasizing that such appointment should be the rare exception. Id. at 223. The Court determined that an equity committee should not be appointed unless the equity holders establish that: (i) (ii) there is a substantial likelihood that they will receive a meaningful distribution in the case under a strict application of the absolute priority rule, and they are unable to represent their interests in the bankruptcy case without an official committee. Id. 10
Pg 11 of 17 46. Where, as here, the Debtors are insolvent, the absolute priority rule precludes equity from receiving any distribution under a plan of reorganization. Id. at 220. Where a debtor appears to be hopelessly insolvent, so that equity will receive nothing under a Chapter 11 plan, the appointment of an equity committee is inappropriate. Id. at 221. Thus, Courts will not appoint an official equity committee where they Ahave no economic interest to protect.... Id. at 220. 47. Since the appointment of an equity committee should be the rare exception, the burden of proof to demonstrate that they will receive a meaningful distribution is on the equity holders. Id. at 223. 48. In determining the likelihood that equity holders will receive a meaningful distribution, the solvency of the debtor is examined. According to the Bankruptcy Code, the term insolvency is defined as, with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity=s debts is greater than all of such entity s property, at a fair valuation.... 11 U.S.C. 101(32)(A). 49. Section 101(32) requires a balance sheet test to determine insolvency. In re Nirvana Rest., Inc., 337 B.R 505, 506 (Bankr. S.D.N.Y. 2006). If the debtor is a going concern, fair valuation means the fair market value of the debtor=s assets that could be obtained if sold in a prudent manner within a reasonable period of time to pay the debtor s debts. Id. (quoting Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30, 35 (2d Cir. 1996)). 50. The analysis starts with a review of the balance sheet, with the recognition that book value does not always provide a fair estimate of market value. See Nirvana Rest., 337 B.R. at 506. Nevertheless, book values may still support a court s inference of an entity s insolvency 11
Pg 12 of 17 in some circumstances. In re Flutie N.Y. Co., 310 B.R. 31, 52 (Bankr. S.D.N.Y. 2004) (quoting Roblin Indus., 78 F.3d at 36). 51. Other evidence of insolvency can be found in SEC filings and accompanying financial statements, including (1) reports of negative net worth, (2) statements or figures that show sustained losses; (3) facts that show that the debtor is operating in a depressed market, and (4) reports of failure to pay bank debt. Roblin Indus., 78 F.3d at 37. However, whenever possible, a determination of insolvency should be based on seasonable appraisals or expert testimony. Id. at 38. 52. In the Equity Committee Motion, the Movant argues that the Debtors are not insolvent because: Kodak is an asset rich company with 7000 plus patents (worth ~$2 billon: docket 4163, 4164) and billions of dollars in real estate plus Kodak brand alone has potential value of $3.3 billion. Kodak's future business is worth billions of dollars. In addition, Kodak has $1 billion in cash and has also secured a financing deal for $895 million upon bankruptcy exit. ECF Doc. No. 4249 at p. 2. 53. However, the Movant s optimism as to the Debtors solvency is not reflected in the Debtors own public filings. For example, the most recent monthly operating report, the May 2013 Report, shows that the Debtors suffered a net loss of $47.8 million in May 2013. ECF Doc. No. 4184 at p. 12. In this same report, the Debtors disclosed an unaudited combined balance sheet showing total assets of $3.41 billion and total liabilities of $4.85 billion. Id. Consequently, the Movant has not met his burden of demonstrating that the potential assets available to the Debtors exceed the liabilities of $4.85 billion. 54. Regarding the Movant s estimate of the value of the Debtors remaining patents, it 12
Pg 13 of 17 should be noted that the Debtors estimated value range of $2.2 billion to $2.6 billion, see ECF Doc. No. 16 at 58, for their digital imaging patent portfolio at the commencement of these cases resulted in a sale price for those patents of a much lower figure of $527 million. See ECF Doc. Nos. 2847, 2612. 55. In opposing the First Equity Motion over a year ago, the United States Trustee noted then that unsecured debt was trading between $.25 and $.30 on the dollar. See ECF Doc. No. 788, 44, p. 13. At present, as of July 22, 2013, the Debtors 7 percent bonds with an April 1, 2017 maturity date are trading at $.05 on the dollar. See Daily Bankr. Rev., July 22, 2013 at p. 13. 56. Information contained in the Debtors First Amended Disclosure Statement and First Amended Plan also supports the inference that the Debtors are insolvent. Classes 4, 6, and 7, comprising the general unsecured creditors, retiree creditors, and convenience creditors (together holding unsecured claims that are estimated to range from $2.24 billion to $2.84 billion), will only receive distributions between 4 5 percent of their claims. See First Amended Disclosure Statement, ECF Doc. No. 4097 at pp. 16 17. Because the Debtors cannot pay these claims in full, the Debtors correctly do not propose to provide distributions to equity interests, Class 9. To do otherwise would be a violation of the strictures of the absolute priority rule. See Williams Commc ns, 281 B.R. at 220 (noting that where a debtor is insolvent, the absolute priority rule precludes equity from receiving any distribution under a plan of reorganization). 57. In the final analysis, given the apparent insolvency of the Debtors, the United States Trustee declined to appoint an equity committee as there appears to be no equity interests to be protected. These facts should be sufficient for the Court to make a similar finding. 13
Pg 14 of 17 C. The Appointment of an Equity Committee Is Not Necessary Because the Creditors Committee Adequately Represents Shareholder Interests in Maximizing Value to the Debtors Estates 58. Section 1102(a)(2) of the Bankruptcy Code provides, [o]n request of a party in interest, the court may order the appointment of additional committees of... equity security holders if necessary to assure adequate representation of... equity security holders. The United States trustee shall appoint any such committee. 11 U.S.C. 1102(a)(2). 59. This section grants the Court discretion to order the appointment of an equity committee if necessary to assure adequate representation of equity security holders. In re Johns-Manville Corp., 68 B.R. 155, 159 (S.D.N.Y. 1986). However, Section 1102(a)(2) does not set forth a test of adequate representation, so the Court must examine the facts of each case. Id.; see also In re Beker Indus. Corp., 55 B.R. 945, 948 (Bankr. S.D.N.Y. 1985) (noting that adequate representation is not defined in the statute, but requires interpretation by the Court). The focus of the statute is not whether the shareholders are exclusively represented, but whether they are adequately represented. In re Leap Wireless Int l., Inc., 295 B.R. 135, 140 (Bankr. S.D. Cal. 2003) (quoting Williams Commc ns, 281 B.R. at 222). 60. Courts consider a number of non-exclusive factors in determining whether there is adequate representation, including the debtor s insolvency, the number of shareholders, the complexity of the case, and whether the cost of the committee would significantly outweigh the concern for adequate representation. Johns-Manville, 68 B.R. at 159 60. 61. Moreover, courts have identified sources of adequate representation for shareholders other than official equity committees. See id. at 163; In re Hills Stores Co., 137 B.R. 4 (Bankr. S.D.N.Y. 1992). A company s board of directors acts for the shareholders and the 14
Pg 15 of 17 insolvency of a company does not absolve a board of its fiduciary duty to the shareholders. See Commodities Futures Trading Comm=n. v. Weintraub, 471 U.S. 343, 355 (1985). Here, the factors relevant to the determination of adequate representation militate against the Court ordering appointment of an equity committee. 62. The size and complexity of a case is also a factor to be considered in the appointment of an equity committee. However, not every large and complex case with widely held shares warrants the appointment of an equity committee. See Williams Commc ns, 281 B.R. at 223 ( [W]hile there are a large number of shareholders, not every case with such a large number will require an official equity committee. ). In the present matter, the Equity Committee Motion has failed to establish that these cases are so large and complex as to mandate the formation of an equity committee. 63. It is undisputed that Debtors have a large number of shareholders. As noted above, as of December 31, 2011, Kodak had over 271 million common stock shares outstanding. ECF Doc. 4097 at p. 13. However, the sizes of the Debtors business operations do not reflect the complexity of the reorganization process. The Court s discretion should be guided by the official committee s envisioned role in the reorganization. Johns-Manville, 68 B.R. at 160. 64. While an equity committee has many duties, see 11 U.S.C. 1103(c), its most important role is to negotiate the terms of a plan of reorganization. Id. at 160 61. Thus, the potential effectiveness of an official committee depends upon the stage the proceeding has reached. Id. at 161; McLean Indus., 70 B.R. at 862 63 ( Committees should generally be formed at an early stage so that adequate representation can be afforded before significant bridges are crossed ) (citing Johns-Manville, 801 F.2d 60, 62 (2d Cir. 1986)). 15
Pg 16 of 17 65. In the present matter, the Creditors Committee adequately represents the interests of Kodak s shareholders. See Williams Commc ns, 281 B.R. at 223 24 (finding that the Creditors Committee had sufficiently aligned or parallel interests with the shareholders to preclude the need for an additional committee). Indeed, the Creditors Committee is a fiduciary to the unsecured creditors and has every incentive to maximize value to the estate to ensure the highest distribution to the unsecured classes. In re Eastman Kodak Co., Case No. 12-10202 (ALG), 2012 WL 2501071, at *3 ( Kodak s unsecured creditors committee has a duty to maximize the value of the Kodak estates which would inhere to the benefit of shareholders. ). 66. Further, the opportunity for an equity committee to meaningfully participate in this reorganization does not exist because several classes of unsecured creditors will receive only 4 to 5 percent of their claims. Due to these facts and circumstances, as discussed above, it appears that any level of participation by an equity committee in the Debtors reorganization process will not yield any further recovery to equity and any associated costs of such a committee would only result in lower distributions to unsecured creditors. 67. Based upon the foregoing, the Equity Committee Motion has not demonstrated that appointment of an equity committee is appropriate. 16
Pg 17 of 17 IV. CONCLUSION For the foregoing reasons, the United States Trustee requests that the Court exercise its discretion and deny the Equity Committee Motion, sustain the United States Trustee s objection, and grant other relief as is just. Dated: New York, New York July 29, 2013 TRACY HOPE DAVIS UNITED STATES TRUSTEE By: /s/ Brian S. Masumoto Brian S. Masumoto Michael T. Driscoll Trial Attorneys Office of the United States Trustee U.S. Federal Office Building 201 Varick Street, Suite 1006 New York, NY 10014 17