Pg 1 of 15 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------------------------x : In re : : EASTMAN KODAK COMPANY, et al., : : Debtors. : : ----------------------------------------------------------x HEARING DATE: April 18, 2012 HEARING TIME: 10:00 a.m. Case No. 12-10202 (ALG) (Chapter 11) OBJECTION OF THE UNITED STATES TRUSTEE TO KODAK SHAREHOLDERS JOINT MOTION FOR ORDER DIRECTING THE APPOINTMENT OF AN OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERS PURSUANT TO 11 U.S.C. 1102(a) 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 Kodak Shareholders Joint Motion for Order Directing the Appointment of an Official Committee of Equity Security Holders Pursuant to 11 U.S.C. 1102(a) (the Motion ). ECF Doc. No. 545. In support thereof, the United States Trustee respectfully states: A. The Debtors appear to be insolvent at this time; and B. The Kodak Shareholders have failed to demonstrate that the appointment of an official equity committee is necessary to adequately represent equity security holders' interests, particularly in light of the circumstance that the interests of the equity security holders appear to be aligned with the interests of the unsecured creditors, as represented by the Official Committee of Unsecured Creditors. For these reasons, the United States Trustee objects to the appointment of an official equity committee in these cases.
Pg 2 of 15 I. BACKGROUND General Background 1. On January 19, 2012 (the Petition Date ), Eastman Kodak Company ( Kodak ) and certain of its direct and indirect subsidiaries (each a Debtor and collectively, the Debtors ) filed petitions for relief under chapter 11, title 11, United States Code (the Bankruptcy Code ). Doc. No. 1. 2. Kodak was once the world s leading producer of film and cameras. Over the past several years, however, the company has been working to transform itself from a business primarily based on film and consumer photography to a smaller business with a digital growth strategy focused on the commercialization of proprietary digital imaging and printing technologies. 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 ), 4-6. ECF Doc. No. 2. 3. The Debtors currently are operating their business and managing their affairs pursuant to Sections 1107 and 1108 of the Bankruptcy Code. 4. No trustee or examiner has been appointed in these cases. 5. On January 25, 2012, the United States Trustee appointed the Official Committee of Unsecured Creditors (the Creditors Committee ). ECF Doc. No. 115. 6. 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. McCorvey Declaration, 19. 2
Pg 3 of 15 7. 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 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 (footnotes omitted). The Debtors also have approximately $425 million in outstanding trade debt. Id. 8. The estimated value of a portion of the prepetition secured creditors collateral is in the range of $3.4 billion to $4.3 billion. See Declaration of Matthew J. Hart in support of Debtors motion for DIP financing and use of cash collateral (the Hart Declaration ) at 23; ECF Doc. No. 16. While the estimate included the digital imaging patent portfolio, it did not include the Debtor s name brand, stock in foreign subsidiaries, other patents, and the Debtors going concern value. Id. at 24. 9. On February 16, 2012, the Court entered a Final Order authorizing the Debtors to obtain DIP Financing in the amount of $950 million. ECF Doc. No. 375. 10. On March 30, 2012, the Debtors filed a Monthly Operating Report for the period January 1, 2012 through January 30, 2012 showing a net loss of ($100.3 million). ECF Doc. No. 744, p. 11. 11. On March 30, 2012, the Debtors filed a Monthly Operating Report for the period ended February 29, 2012 (the February 2012 Report ) showing a net loss of ($97.3 million). ECF Doc. No. 745, p. 12. The February 2012 Report contained an unaudited combined balance 3
Pg 4 of 15 sheet showing total assets of $6.6 billion and total liabilities of $7.5 billion. Id. at p. 13. The Request for an Equity Committee 1 12. On February 3, 2012, Keefe Bartels LLC, on behalf of nine shareholders, sent a letter (the Keefe Bartels Letter ) to the United States Trustee requesting the formation of an Official Committee of Equity Security Holders (an Equity Committee ). A copy of the Keefe Bartels Letter is attached to the Motion as Exhibit A, pp. 2-5 and is incorporated herein by reference. 13. On February 9, 2012, Brown Rudnick LLP, on behalf of five shareholders 2 (together, the shareholders represented by Keefe Bartels and by Brown Rudnick, are the Kodak Shareholders ) sent a letter to the United States Trustee also requesting the formation of an Equity Committee (the Brown Rudnick Letter ). A copy of the Brown Rudnick Letter is attached to the Motion as Exhibit A, pp. 6-90 and is incorporated herein by reference. 14. The United States Trustee forwarded the requests for an Equity Committee (the Requests ) to the counsel to the Debtors and counsel to the Creditors Committee for comment. On February 17, 2012, the United States Trustee received their responses. Copies of the Responses are attached to the Motion as Exhibit A, pp. 92-135 and are incorporated herein by reference. 15. On February 22, 2012, the United States Trustee received a letter from certain unaffiliated noteholders (the Second Lien Noteholders Committee ) (together with the 1 The requesting shareholders are Frank E. Williams, Jr.; Andrew Gregor for Putnam Capital Services; George Karfunkel; William Stern; Lance Laifer for Wapiti Partners, L.P.; Eric Wagoner for Source Capital Group; Roman Stockhammer; Luis Diaz; and Chris DePierro. 2 The requesting shareholders are Greywolf Capital Partners II; Greywolf Capital Overseas Master Fund; Richard Katz; Kenneth S. Grossman; and Paul Martin. 4
Pg 5 of 15 responses from the Debtors and the Creditors Committee, the Responses ). A copy of the Second Lien Noteholders Committee letter is attached to the Motion as Exhibit A, pp. 136-138 and is incorporated herein by reference. 16. On February 23, 2012, the Kodak Shareholders, through Brown Rudnick and Keefe Bartels, filed their replies (the Replies ). Copies of the Replies are attached to the Motion as Exhibit A, pp. 139-167 and 168-172, respectively, and are incorporated herein by reference. 17. By letters dated February 28, 2012, the United States Trustee declined to appoint an Equity Committee. See UST Letter to Brown Rudnick, a copy of which is attached to the 3 Motion as Exhibit A, p. 173 and is incorporated herein by reference. II. ARGUMENT A. The United States Trustee Properly Exercised Her Discretion in Denying the Kodak Shareholders Request 18. Section 1102(a)(1) of the Bankruptcy Code provides that: 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. 3 An identical letter, with the exception of one addressee, was sent to Keefe Bartels. 5
Pg 6 of 15 19. The United States Trustee performed a full and fair analysis of the request to appoint an equity committee and decided, in light of all the facts and circumstances then within her knowledge, that a committee should not be appointed at this juncture. 20. The United States Trustee took the following actions to evaluate the request: a. Examined the capital structure, organizational structure and financial posture of the Debtors as reported by them in their verified bankruptcy petitions, affidavits and exhibits; bc. Solicited input from the Debtors and the Creditors Committee with regard to the desirability of appointing an equity committee; and c. Reviewed written documentation regarding the Debtors' financial position from concerned equity holders, counsel to the moving parties, and counsel to the Second Lien Noteholders Committee. 21. 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 Code vests broad discretion in the United States Trustee with regard to the appointment of committees other than an unsecured creditors' committee. 22. The steps taken, as set forth above, are a reasonable, balanced method of determining the wisdom of appointing an equity committee. The method adhered to by the United States Trustee in these cases took into consideration financial data reported and verified by the Debtors. It is appropriate and reasonable to rely upon the verified financial data filed in a bankruptcy case in making decisions related to that case. 23. In conducting her review, the United States Trustee also solicited the comments and opinions of the Debtors and the Creditors Committee. Since each party in interest can be expected to have its own bias, no one entity's opinion is overwhelmingly persuasive. Yet, when considered together, the collective comments and opinions may provide a balanced view of the 6
Pg 7 of 15 cases. In these particular cases, the Debtors, the Creditors Committee and the Second Lien Noteholders Committee opposed the appointment of an Equity Committee. 24. As set forth above, the United States Trustee also investigated and studied the requests by the Kodak Shareholders to appoint a 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 Official Committee Of Equity Security Holders. 25. 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 established 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. 26. Where, as here, the debtor is 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 have no economic interest to protect.... Id. at 220. 7
Pg 8 of 15 27. Moreover, since the appointment of an official equity committee should be the rare exception, the burden of proof is on the equity holders. Id. at 223. 28. In determining the likelihood that equity holders will receive a meaningful distribution, the solvency of the debtor is examined. In analyzing the solvency of a debtor in the equity committee context, the United States Trustee looks to the definition of the term insolvent in the Bankruptcy Code. Section 101(32) provides in part: 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). Section 101(32) requires a balance sheet test to determine insolvency. In re Nirvana Restaurant, 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)). 29. 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 Restaurant, 337 B.R. at 506. Nevertheless, book values may still support a court's inference of an entity's insolvency in some circumstances. In re Flutie New York Company, 310 B.R. 31, 52 (Bankr. S.D.N.Y. 2004) (quoting Roblin Industries, 78 F.3d at 36.) 30. 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 8
Pg 9 of 15 (4) reports of failure to pay bank debt. Roblin Industries, Inc., 78 F.3d at 37. However, whenever possible, a determination of insolvency should be based on seasonable appraisals or expert testimony. Id. at 38. 31. The evidence currently available to the United States Trustee supports an inference that the Debtors are insolvent. In their respective Responses to the United States Trustee, the Debtors and the Creditors Committee posit that the only manner in which the Kodak Shareholders can argue that Kodak is solvent is by ignoring and discounting the Debtors $2.5 billion in pension and retiree liabilities. Motion, Exhibit A, pp. 95-96 and 104, respectively. 32. Moreover, as further evidence of its enterprise value, the Debtors, the Creditors Committee, and the Second Lien Noteholders Committee all point out that Kodak s unsecured notes are trading at approximately 25 to 31 cents on the dollar. Motion, Exhibit A, pp. 95, 104, and 137, respectively. Using that figure as a benchmark, the Creditors Committee argues that based on a hypothetical unsecured claim pool of $3 billion, the market believes that the value of the Debtors assets will fall short of the face amount of its unsecured claims by $2.1 billion. Motion, Exhibit A, p. 95. 33. Unlike the Kodak Shareholders vision of a rosy future for Kodak, the Debtors financial burdens and operating challenges are not conjectural. The filed monthly operating reports for the months of January and February 2012 show losses of approximately ($100 million) per month. ECF Doc. Nos. 744 and 745. The Creditors Committee also stresses that the Debtors have projected the need to obtain DIP Financing sufficient to cover an additional $364 million in cash during the first thirteen weeks of the Chapter 11 cases. Motion, Exhibit A, p. 95. 9
Pg 10 of 15 34. The facts available to the United States Trustee as to the Debtors current financial posture caused her to determine that the Debtors are insolvent. 35. The United States Trustee has inferred that, were the Debtors to liquidate at this time, the common shareholders would receive nothing, and were it necessary to cram down a plan of reorganization on a class other than the common shareholders, the common shareholders would take nothing, as they are the most junior class of claims and interests. Based upon the financial data provided by the Debtors, at the present time, the United States Trustee believes that the value of the equity interest in Kodak is zero. 36. The equity holders at this time have nothing to protect or to be adequately represented by an official committee. Any distribution they would receive under a hypothetical plan of reorganization would be tantamount to a gratuity. In the final analysis, given the apparent insolvency of the Debtors, the United States Trustee declined to appoint an equity committee since there appears to be no equity to be protected at this time. These facts should be sufficient for the Court to make a similar finding. C. The Kodak Shareholders Have Failed to Demonstrate That the Appointment of an Equity Committee Is Necessary to Adequately Represent Equity Security Holders' Interests. (1) Adequate Representation 37. Section 1102(a)(2) of the Bankruptcy Code provides that: On 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). See generally Fed. R. Bankr. P. 2020. 10
Pg 11 of 15 38. The statute gives 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, 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) (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, quoting Williams Commc n, 281 B.R. at 222. 39. 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. 40. 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 insolvency of a company does not absolve the board of its fiduciary duty to the shareholders. See Commodities Futures Trading Comm n. v. Weintraub, 471 U.S. 343, 355 (1985). In these cases, the factors relevant to the determination of adequate representation militate against the Court ordering appointment of an equity committee. 11
Pg 12 of 15 41. As discussed more fully above, the Kodak Shareholders have failed to demonstrate the solvency of the Debtors. Accordingly, if the Debtors are insolvent, the appointment of an equity committee is unwarranted. (2) The Complexity Of The Cases Does Not Warrant the Appointment Of An Equity Committee And The Appointment Of An Equity Committee Is Not Appropriate At This Time 42. 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 n, 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. ). Accordingly, the Motion has failed to establish that these cases are so large and complex as to mandate the formation of an equity committee. It is true that the Debtors have a large number of shareholders. 43. The size 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. 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 reorganization. Id. at 160-61. Thus, the potential effectiveness of an official committee depends upon the stage the proceeding has reached. Id. at 161; In re McLean Indus., Inc., 70 B.R. 852, 862-63 (Bankr. S.D.N.Y. 1987) ("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)). 12
Pg 13 of 15 44. With unsecured debt trading between 25 and 30 cents on the dollar, the Creditors Committee has every interest in maximizing the value of the Debtors estate. Thus, in that regard, the interests of the Creditors Committee are aligned with those of the equity holders. See Williams Commc n, 281 B.R. at 223-4 (the Court found that the Creditors Committee had sufficiently aligned or parallel interests with the shareholders to preclude the need for an additional committee). 45. The opportunity for an equity committee to meaningfully participate in this reorganization does not exist at this time due to the facts and circumstances of these cases. Due to the Debtors insolvency, as discussed above, it appears that any level of participation by equity holders in the Debtors' reorganization process will not yield any further recovery to equity. 46. The size and complexity of these cases, the status of the reorganization process, and the lack of any potential role of an equity committee at this stage of the reorganization process, lead to the conclusion that an official equity committee should not be formed. Accordingly, the Motion should be denied. See Johns-Manville, 68 B.R. at 164 (where the court expressed concern that equity was diluted at a negotiating session where equity was not represented, but noted that the remedy for this "past impropriety" would be an objection at the time of confirmation of the plan effectuating such dilution); Johns-Manville, 801 F.2d 60, 65 n.1 (2d Cir. 1986) (dicta) ("We note that if Manville were determined to be insolvent, so that the shareholders lacked equity in the corporation, denial of the right to call a meeting would likely be proper, because the shareholders would no longer be real parties in interest."). 13
Pg 14 of 15 (3) The Benefit of an Equity Committee is Outweighed by the Cost 47. The benefit of appointing an equity committee is outweighed by the cost. The Kodak Shareholders argument that the Debtors are solvent and that there will be an eventual surplus to current equity holders is speculative. Moreover, if the actions of committees in other large Chapter 11 cases are any indication, an equity committee would likely seek to retain general counsel, a financial advisor, an investment banker, and various other professionals. This cost, when the prospect of a return to equity is mere conjecture, outweighs any concern for adequate representation. 48. The shareholders in the Kodak Cases are not disenfranchised from the chapter 11 process. Equity holders have standing to be heard pursuant to 11 U.S.C. 1109(b) on the adequacy of the disclosure statement and the confirmation of the proposed plan. 49. In addition, certain of the shareholders have banded together and are represented by two separate counsel, Brown Rudnick and Keefe Bartels. If the efforts of the Kodak Shareholders confer a benefit on the estate, the committee may seek an award of expenses under 11 U.S.C. 503(b) at the successful conclusion of the Kodak Cases. 50. Based upon the foregoing, the Kodak Shareholders have not shown that appointment of an official equity committee is required to assure shareholders adequate representation at this time. 14
Pg 15 of 15 IV. CONCLUSION For the foregoing reasons, the United States Trustee requests that the Court exercise its discretion and deny the Motion, sustain the United States Trustee s objections, and grant other relief as is just. Dated: New York, New York April 5, 2012 TRACY HOPE DAVIS UNITED STATES TRUSTEE By: /s/ Brian S. Masumoto Brian S. Masumoto Trial Attorney 33 Whitehall Street 21st Floor New York, New York 10004-2112 Tel. No. (212) 510-0500 Fax. No. (212) 668-2255 15