First Brands judge denies injunction against founder Patrick James, US Supreme Court deals blow to Serta’s participating lenders – Court Spotlight
First Brands topped the headlines again this week, beginning with a joint statement filed by the debtors, their ad hoc group of lenders, unsecured creditors committee (UCC), and unsecured creditor Raistone Capital announcing that the parties had agreed that an examiner should be appointed in the Chapter 11 cases. Before the statement was filed, multiple parties including Raistone, the US Trustee’s Office, First Brands’ founder Patrick James and Evolution, a lender to the debtors’ special purpose vehicles, had requested that an examiner be appointed to investigate billions in allegedly missing funds.
Also this week, First Brands’ bankruptcy court judge denied the debtors’ request for a preliminary injunction freezing the assets of James and several affiliated entities. The debtors have accused James of scamming lenders by re-pledging committed collateral to get loans, altering or outright faking invoices, and more improper behavior, to the tune of potentially billions, as well as self-enrichment at the expense of First Brands’ estate. However, the bankruptcy court ruled that the debtors failed to show that they would suffer irreparable harm without an injunction being issued, despite the fact that “there are red flags everywhere in the cash management system.” The judge found that the threat of James continuing to dissipate estate assets is “speculative and not imminent,” especially because he is no longer the CEO.
Serta Simmons Bedding was back in the news this week after the US Supreme Court denied a petition from Serta’s “participating lenders” to review an appellate court’s decision to remove an indemnity provision from Serta’s Chapter plan that covered the lenders who participated in a hotly contested uptier transaction. By way of background, the mattress company has been embroiled in litigation with a group of its lenders over the propriety of an uptier transaction, which resulted in a ruling by the US Court of Appeals for the Fifth Circuit that the uptier transaction was not permitted under the credit agreement because it was not conducted on the open market, as the court construed the term under New York state law.
In the same ruling, which was handed down after Serta’s Chapter 11 plan was confirmed, the court also ruled that the Bankruptcy Code prohibited Serta from agreeing to indemnify lenders holding debt issued as part of the uptier transaction – i.e., the participating lenders – and that the plan’s provision that these lenders would be indemnified must be stricken from the plan. As a result of the appellate court’s ruling, the participating lenders could be on the hook for any damages awarded against them to the excluded lenders who challenged the propriety of the uptier transaction.
One participating lender – Barings – petitioned the US Supreme Court, asking it to review the ruling that the indemnity provision could be stricken from the plan without resoliciting the plan. Barings noted that there was a split in the circuits on this issue, which is often a compelling reason for the Supreme Court to grant a petition to consider issues on appeal. However, the Supreme Court denied the petition without explanation.
In other federal court rulings, the US District Court for the Southern District of Texas denied Jackson Walker’s jury trial demand and established an independent judicial investigation into its fees and disclosures. The fee investigation arises from the US Trustee’s probe into Jackson Walker’s conduct and compensation in bankruptcy cases presided over by former Judge David R Jones, who maintained an undisclosed romantic relationship with then–Jackson Walker attorney Elizabeth Freeman. The District Court also held that the firm’s fee-related proceedings would be in abeyance pending completion of the court’s independent investigation. This means that all active motions, objections, and discovery efforts concerning Jackson Walker’s fees or retentions will be paused until the investigation concludes and the court reviews the findings.
The Debtwire team profiled two new Chapter 11 cases this week. Gaming and sportsbook operator Out the Gate commenced a Chapter 11 case citing an ongoing business deterioration. The company proposes to fund its case with USD 6.5m in DIP financing provided by a prepetition lender and stated that it aims to pursue either a restructuring or an asset sale. Printing company Las Vegas Color Graphics (LCVG) also entered Chapter 11 after lender Aequum Capital Financial II obtained a state court order appointing a receiver over the company. According to court documents, the lender alleged that LCVG had defaulted under a loan and was involved in a scheme to overstate collateral value. According to LCVG, however, Aequum failed to comply with its obligations to provide funding, which caused LCVG to face a liquidity crisis that jeopardized payroll, vendor relationships, and customer obligations. LCVG stated that it commenced its case to preserve operations and collateral. Aequum has moved for the appointment of a Chapter 11 trustee and accused the company of filing for Chapter 11 in bad faith.
In this week’s Chapter 11 plan news, the judge overseeing trucking company Yellow Corp’s Chapter 11 case took under advisement its decision on whether to confirm Yellow’s plan in light of opposition from shareholder MFN Partners, who argued, among other things, that Yellow’s plan was based on an unreasonable set of assumptions and does not satisfy best interests. The judge expects to issue a ruling by Monday (17 November). Purdue Pharma’s confirmation hearing has spanned three days this week, with the opioid manufacturer’s counsel reporting that the debtor has broad creditor support for its Chapter 11 plan and faced only limited objections, including from several insurers.
Also this week, Sunnova Energy International obtained confirmation of its plan of liquidation after the bankruptcy court overruled an objection from the US Trustee, who argued that the plan’s non-debtor releases were not consensual, and accessories retailer Claire’s Holdings announced that its Chapter 11 plan went effective, roughly two weeks after it obtained confirmation on an uncontested basis.
In sale news, RunItOneTime received court approval to proceed with two asset sales totaling USD 27m, including the USD 25.5m cash sale of Z Casino in Colorado to 101 Gregory Street, an affiliate of Sasquatch Casino, and four Washington card rooms—Crazy Moose Casino, two Silver Dollar locations, and the Macau Casino—for USD 1.5m in cash to Norwest Gaming Group, an affiliate of Argus Capital. Also, Village Roadshow Entertainment won final approval to sell its derivative film rights to Alcon Media for USD 18.5m, overcoming objections from competing bidder, Warner Brothers, who had argued that the derivative rights included contracts requiring its consent for any transfer.
Next week, Debtwire subscribers can look forward to our coverage of the ruling on Yellow Corp’s contested confirmation, discussed above, the confirmation hearing for Prospect Medical Holdings, and much more.
New Cases
Six Month Lookback
The following table illustrates the number of Chapter 11 cases profiled by the Debtwire team during the last six-month period. Debtwire profiles cases for debtors that have at least USD 10m in funded debt or are otherwise significant.
The Week Ahead
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