Case 11-35926 Document 889 Filed in TXSB on 01/07/13 Page 1 of 9 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re: BAYTOWN NAVIGATION INC., et al., 1 Debtors. Case No. 11-35926 Jointly Administered Chapter 11 CONDITIONAL OBJECTION OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO DEBTORS MOTION PURSUANT TO BANKRUPTCY RULE 9019 TO APPROVE INSIDER SETTLEMENT [Relates to Docket No. 879] To The Honorable Karen K. Brown, U.S. Bankruptcy Judge: The Official Committee of Unsecured Creditors (the Committee ) of Omega Navigation Enterprises, Inc. and its affiliated debtors (collectively, the Debtors ) hereby files a conditional objection (the Conditional Objection ) 2 to Debtors Motion Pursuant To Bankruptcy Rule 9019 To Approve Insider Settlement (the Motion ) [Docket No. 879]. 3 By their Motion, Debtors seek an order of this Court approving a proposed settlement (the Insider Settlement ), in the form attached to their Motion, with Mr. Kassiotis, an insider of the Debtors, purportedly compromising claims through (i) the withdrawal of the OII Note claim of $5.5 million; (ii) the release of ONAV s pledge of the Omnicrom equity interests securing the OII Note; and (iii) the withdrawal of the Kassiotis Claim of $299,841.63 for unpaid prepetition wages, together, in 1 The Debtors in these chapter 11 cases are Omega Navigation Enterprises, Inc.; Galveston Navigation Inc.; Beaumont Navigation Inc.; Carrolton Navigation Inc.; Decatur Navigation Inc.; Elgin Navigation Inc.; Fulton Navigation Inc.; Orange Navigation Inc.; Baytown Navigation Inc.; and Omega Navigation (USA) LLC. 2 Debtors have made representations that the various settlements and transactions would result in a 20% to 25% dividend to unsecured creditors. See e.g. Motion, 33 ($500,000 shared amongst $2.2 million claims pool results in 23% dividend). The Committee objects to the Insider Settlement (defined herein) to the extent that the Debtors are unable to provide the promised 20% to 25% dividend whether due to the inability to obtain the waiver of the ONAV guarantees, to extinguish the Junior Lenders $36 million claim, or otherwise. 3 Terms not otherwise defined herein shall have the meaning ascribed to them in the Motion. 1
Case 11-35926 Document 889 Filed in TXSB on 01/07/13 Page 2 of 9 exchange for the Debtors transfer[ing] the equity interests in OMAN, Omnicrom and OMIN to an entity ( NewCo ) affiliated with Kassiotis, free and clear of any interest in such property of an entity other than the estate within the meaning of Bankruptcy Code 363. See Motion, 22. As discussed herein, the Committee files this Conditional Objection because the Insider Settlement does not satisfy the requirements of Federal Rule of Bankruptcy Procedure 9019 ( Rule 9019 ). I. Background and Procedural History 1. On July 8, 2011 ( the Petition Date ), each of the Debtors filed a voluntary petition for relief in this Court under chapter 11 of Title 11 of the United States Code (the Bankruptcy Code ). The Debtors continue in the possession of their property and the management of their businesses as debtors-in-possession pursuant to Bankruptcy Code 1107 and 1108. 2. On August 11, 2011, the Office of the United States Trustee appointed the Committee pursuant to Bankruptcy Code 1102. 3. On December 19, 2012, Debtors filed the Motion seeking approval of the Insider Settlement. 4. The Committee hereby files its Conditional Objection to the Motion. II. The Insider Settlement Does Not Satisfy The Requirements Of Rule 9019 5. The Insider Settlement does not satisfy the requirements of Rule 9019 for each of the reasons discussed below. Approval of a settlement in bankruptcy requires the informed, independent judgment of the bankruptcy court. Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) (citing National Surety Co. v. Coriell, 289 U.S. 426, 436 (1933)). There can be no informed and independent judgment as to whether a proposed compromise is fair and equitable until the bankruptcy judge has 2
Case 11-35926 Document 889 Filed in TXSB on 01/07/13 Page 3 of 9 apprised himself of all facts necessary for an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated. Id. (emphasis added). Further, the judge should form an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise. Id. (emphasis added). 6. The Fifth Circuit has held that the following five factors must be considered to decide whether to approve a settlement: (i) (ii) (iii) (iv) (v) the probability of success in the litigation, with due consideration for the uncertainty in fact and law ; the complexity and likely duration of the litigation and any attendant expense, inconvenience and delay ; the paramount interest of creditors with proper deference to their reasonable views ; the extent to which the settlement is truly the product of arms-length bargaining, and not of fraud or collusion ; and all other factors bearing on the wisdom of the compromise. See In re Foster Mortgage Co., 68 F.3d 914, 917-18 (5th Cir. 1995) (emphasis added). 7. The third factor the paramount interest of creditors recognizes that in the bankruptcy context, the interests of the creditors not the debtors are paramount. Id. at 917 (citing In re Texas Extrusion Corp., 844 F.2d 1142, 1159 (5th Cir.), cert. denied, 488 U.S. 926 (1988)). Thus, the bankruptcy court should consider the amount of creditor support for a compromise settlement as a factor bearing on the wisdom of the compromise, as a way to show deference to the reasonable views of the creditors. Id. at 918. [A] bankruptcy court may not ignore 3
Case 11-35926 Document 889 Filed in TXSB on 01/07/13 Page 4 of 9 creditors overwhelming opposition to a settlement. Id. (emphasis added). Deference to the views of creditors is even more imperative when the settlement was reached with an insider. Id. [T]he courts below gave no consideration to issues we find dispositive: that nearly all creditors in interest opposed this settlement and that the settlement was reached between insiders without the participation of creditors. In our estimation, the court abused its discretion by not showing proper deference to the views of the creditors. Id. 8. Furthermore, the Debtors belief alone that the Insider Settlement is in the best interests of the estates is insufficient to support entry of an order approving the Insider Settlement under Rule 9019. See In re Texas Extrusion Corp., the 844 F.2d at 1158-59 (upholding bankruptcy court decision after finding that the bankruptcy court did not rely solely upon the opinion of the bankruptcy trustee in approving the settlement). 4 9. Here, the Debtors have put forth no credible valuation of the OMAN, Omnicrom and OMIN equity interests that are proposed to be transferred to Mr. Kassiotis. The Debtors have not asked their financial advisors to express a view as to their value, nor have they obtained independent appraisals of the vessels in which Onicrom and OMIN have indirect interests. See Motion, 24. The only market view provided is that of the Debtors Chief Operating Officer who assigns no value with respect to Omnicrom and OMIN and substantial[] negative net worth to OMAN. See id., 24-27. Such valuations are implausible given the interest in the assets of both Mr. Kassiotis and the Third Party. 10. The Committee believes that the equity interests have significant value based on recent conversations it has had with the Third Party who remains extremely interested in acquiring the 4 In the Texas Extrusion Corp. case, the Fifth Circuit found that the bankruptcy court heard from several experts and attorneys on the value of the corporate lawsuit, [t]he bankruptcy judge heard from these witnesses a range of numbers for the settlement value of the corporate lawsuit and its probability of success, and [t]he bankruptcy judge had discretion in determining the credibility of these witnesses and their ability to derive realistic figures for the settlement value of the lawsuit. Id. at 1158. Thus, the Fifth Circuit found that the bankruptcy court appear[ed] to have reached an intelligent, objective and educated evaluation of the settlement value of the corporate lawsuit against a sufficient factual background. Id. at 1158-59. 4
Case 11-35926 Document 889 Filed in TXSB on 01/07/13 Page 5 of 9 equity interests. The Committee believes that the best way to realize the fair market value of the equity interests, given these circumstances, is to hold an auction. 11. Though styled as a settlement and approval is sought under Rule 9019 by the Debtors, the transaction at issue is more akin to a sale of the Debtors assets to an old equity holder and insider. In fact, under the Debtors view, there is no controversy to settle as the Debtors do not believe there is any credible basis to challenge the extent, validity or priority of the claims. See Motion, 16, 19, 40. The Supreme Court has held that it violates the absolute priority rule embodied in Bankruptcy Code Section 1129(b)(2)(B)(ii) to give an old equity holder, such as Mr. Kassiotis, an exclusive opportunity to purchase the debtor s assets on account of his interests, protected against the market s scrutiny of the purchase price by means of competing bids or even competing plan proposals, above the objection of an unpaid senior creditor class s objection. See Bank of Am. Nat l Tr. & Sav. Ass n v. 203 N. LaSalle St. P ship, 526 U.S. 434, 456-58 (1999). As the Supreme Court explained: If the price to be paid for the equity interest is the best obtainable, old equity does not need the protection of exclusiveness (unless to trump an equal offer from someone else); if it is not the best, there is no apparent reason for giving old equity a bargain. There is no reason, that is, unless the very purpose of the whole transaction is, at least in part, to do old equity a favor. Id. at 456. Therefore, Mr. Kassiotis should not be provided an exclusive opportunity to purchase the equity interests and an auction should be held to obtain their fair market value. 12. Questions also exist as to how Mr. Kassiotis has been able to secure each of the Non- Debtor Lender Consents from Lloyds, Glencore, BoS and Bremer (together, the Non-Debtor Lenders ) which Debtors allege that the Third Party or anyone else would be unable to obtain. See Motion, 28-30. The Court should not enter an order approving the Insider Settlement if Mr. Kassiotis used his relationships to influence the Non-Debtor Lenders to chill the bidding 5
Case 11-35926 Document 889 Filed in TXSB on 01/07/13 Page 6 of 9 process, particularly as the Debtors concede that the equity interests would have positive value if the Non-Debtor Lender Consents are obtained. See Motion, 30. The Debtors also fail to adequately explain why the change of control provisions at issue, that ostensibly prohibit ONAV from transferring its indirect JV interests to any third party, would remain enforceable under Bankruptcy Code Section 365(f) s rule that a debtor may assign any such contract notwithstanding a provision that prohibits, restricts, or conditions the assignment of such contract. 11 U.S.C. 365(f); see also In re IT Group, Inc., Co., 302 B.R. 483, 488 (D. Del. 2003) (distinguishing right of first refusal provision from explicit anti-assignment provision which is unenforceable under Section 365(f) in the context of debtors transferring their membership rights in a joint venture limited liability company). 13. Additionally, no consideration should be given to Debtors contention that the Non- Debtor Lenders may also waive the ONAV guarantees because the Insider Settlement is not contingent on such waivers and even the Debtors concede that such waivers are not assured. See Motion, 33-34. 14. With respect to the OII Note (including the pledge of the Omnicrom equity interests and the Omnicrom guaranty) and the Kassiotis Claim, serious questions remain concerning their validity and priority including, amongst others, whether such claims should be recharacterized as equity or equitably subordinated. The Debtors do not address these issues in the Motion. The Committee has reserved its right to challenge the claims on any basis and should be permitted time to investigate. 15. The Fifth Circuit Court of Appeals has recently recognized that recharacertization of debt to equity is part of the bankruptcy courts authority to allow and disallow claims under 11 U.S.C. 502. In re Lothian Oil Inc., 650 F.3d 539, 542 (5th Cir. 2011), cert denied, 132 S.Ct. 6
Case 11-35926 Document 889 Filed in TXSB on 01/07/13 Page 7 of 9 1573 (2012). 5 The OII Note has many of the characteristics supporting recharacterization, including that: (i) the $5.25 million was funded by an insider Mr. Kassiotis is the president, a director and the indirect owner of equity interests in OII, as well as the CEO, a Director, and a direct or indirect owner of approximately 20% of the equity interests in ONAV, see Motion, 18; (ii) no maturity date is set (rather the amounts are payable on demand at any time after the first anniversary); (iii) no interest is payable until maturity; (iv) the unpaid amounts may be converted at the election of OII into Class A shares of ONAV at any time after the earlier of the first anniversary or an Event of Default; (v) the $5.25 million was funded less than one year prior to the bankruptcy filing; (vi) questions exist as to the Debtors adequacy of capital at that time; and (vii) questions exist as to whether the corporation was able to obtain funds from outside third party sources at that time under the same terms. See Proof of Claim #11 (attaching Secured Demand Convertible Promissory Note, dated July 16, 2010). 16. An investigation is also necessary to determine whether such claims should be equitably subordinated pursuant to Bankruptcy Code Section 510(c), particularly whether Mr. Kassiotis used his influence over the Non-Debtor Lenders to chill interest in the equity interests. 17. Doubt also exists as to whether the Insider Settlement was negotiated at arms-length and in good faith. Mr. Kassiotis is unquestionably an insider of the Debtors. In light of the serious 5 Courts consider the following factors to determine whether purported debt should be converted to equity: (1) the intent of the parties; (2) the identity between creditors and shareholders; (3) the extent of participation in management by the holder of the instrument; (4) the ability of the corporation to obtain funds from outside sources; (5) the thinness of the capital structure in relation to debt; (6) the risk involved; (7) the formal indicia of the arrangement; (8) the relative position of the obligees as to other creditors regarding the payment of interest and principal; (9) the voting power of the holder of the instrument; (10) the provision of a fixed rate of interest; (11) a contingency on the obligation to repay; (12) the source of the interest payments; (13) the presence or absence of a fixed maturity date; (14) a provision for redemption by the corporation; (15) a provision for redemption at the option of the holder; and (16) the timing of the advance with reference to the organization of the corporation. In re Mangia Pizza Inv., LP, 480 B.R. 669, 707 (Bankr. W.D. Tex. 2012) (citation omitted). 7
Case 11-35926 Document 889 Filed in TXSB on 01/07/13 Page 8 of 9 issues raised above, it is necessary to examine whether Mr. Kassiotis influenced the Debtors to enter into the Insider Settlement. 18. Finally, taking into account all of these concerns, the Committee, on behalf of all unsecured creditors, does not support approval of the Insider Settlement under the circumstances. The Committee has been frozen out of the negotiation process between the Debtors and Mr. Kassiotis. The Committee does not believe that the Insider Settlement obtains full market value for the equity interests and believes that the Kassiotis-controlled claims should be investigated. The Court should not ignore such opposition to the Insider Settlement, especially considering that Mr. Kassiotis is an insider of the Debtors. III. Conclusion 15. As set forth above, the Debtors have failed to establish that the Insider Settlement is entitled to approval under Rule 9019, and the Court should deny the Motion in its entirety. 6 WHEREFORE, the Committee respectfully requests that this Court enter an order: (i) denying the Motion; and (ii) granting to the Committee such other and further relief as this Court may deem proper and just. 6 Even though Debtors do not appear to ask for releases for their insider, Mr. Kassiotis, and his affiliate, OII, under the Settlement, the Committee objects to any effort to obtain such releases due to lack of consideration. 8
Case 11-35926 Document 889 Filed in TXSB on 01/07/13 Page 9 of 9 Dated: January 7, 2012 THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF OMEGA NAVIGATION ENTERPRISES, INC., et al. By its attorneys, /s/ Sarah L. Trum James Donnell (Texas Bar No. 05981300) Sarah L. Trum (Texas Bar No. 24079990) WINSTON & STRAWN LLP 1111 Louisiana, 25 th Floor Houston, Texas 77002 telephone: (713) 651-2600 facsimile: (713) 651-2700 email: strum@winston.com Local Counsel to the Official Committee of Unsecured Creditors and JAGER SMITH P.C. Bruce F. Smith (admitted pro hac vice) Michael J. Fencer (admitted pro hac vice) One Financial Center Boston, Massachusetts 02111 telephone: (617) 951-0500 facsimile: (617) 951-2414 email: bsmith@jagersmith.com mfencer@jagersmith.com Counsel to the Official Committee of Unsecured Creditors 9