Opinion ID: 659
Heading Depth: 1
Heading Rank: 3

Heading: The Bankruptcy Court's Orders on Remand

Text: On remand from the District Court, the Bankruptcy Court issued two orders, one implementing the District Court's decision, and one releasing the adequate protection payments held in escrow pursuant to the Escrow Stipulation to the Second Lien Lenders. Both orders were entered on April 13, 2006. 1. Order Implementing Decision After submission of briefs and oral argument, the Bankruptcy Court issued its Order on Remand implementing the District Court's decision. The Bankruptcy Court ordered that the Securities, i.e., the First Securities and the Second Securities, including those securities and subscription rights already distributed to Aretex, be distributed instead to the collateral trustee of the First Lien Lenders, Beal Bank. The Bankruptcy Court noted, however, that the 17.5% of WestPoint International's securities purchased by Aretex do not constitute Replacement Collateral [(the Securities)] and are not subject to any liens of the First Lien Lenders or the Second Lien Lenders. The Bankruptcy Court further ordered, inter alia, that Aretex, inasmuch as it was a First Lien Lender, would share in the proceeds realized from the disposition of the Securities with the Objecting First Lien Lenders on a pro rata basis. Likewise, Aretex, inasmuch as it was also a Second Lien Lender, would share in the proceeds realized from the disposition of the Securities with the Second Lien Lenders on a pro rata basis. The Bankruptcy Court denied Aretex Group's request to supervise the sale of the Securities. In a separate order entered the same day, the Bankruptcy Court granted Aretex Group's motion to stay the court's Order on Remand. 2. Order Releasing Adequate Protection Payments In its Release Order, the Bankruptcy Court granted Wilmington Trust's motion to release the adequate protection payments, in the amount of approximately $29 million, held pursuant to the Escrow Stipulation. The Bankruptcy Court found that the First Lien Lenders had received their adequate protection payments but that the Second Lien Lenders, on account of the Escrow Stipulation, had been deprived of adequate protection payments to which they were entitled. The Bankruptcy Court observed that the Adequate Protection Order was entered in light of uncontested evidence that there was sufficient value in the Debtor's assets to secure both the First and Second Lien Lenders. In addition, the Bankruptcy Court noted that the Adequate Protection Order reserved the right of the First Lien Lenders to file an adversary proceeding to alter the Second Lien Lenders' right to adequate protection payments and, further, reserved the right of all secured creditors to seek additional adequate protection, but that the Objecting First Lien Lenders had not filed any action to challenge the Second Lien Lenders' right to receive adequate protection payments. Even if the Objecting First Lien Lenders had successfully challenged the Second Lien Lenders' right to adequate protection, the Bankruptcy Court noted that any such challenge would only have resulted in the accumulated adequate protection payments being allocated to satisfy the principal, rather than the interest, on the Second Lien debt. Insofar as the Objecting First Lien Lenders argued for additional adequate protection by terminating the adequate protection afforded to the Second Lien Lenders, the Bankruptcy Court rejected this argument as inconsistent with the law and the Adequate Protection Order. The Bankruptcy Court also rejected the Objecting First Lien Lenders' argument that the funds held pursuant to the Escrow Stipulation were subject to the subordination clauses of the Intercreditor Agreement. The Bankruptcy Court stated that the Escrow Stipulation did not terminate the Second Lien Lenders' rights to adequate protection payments; rather, the Escrow Stipulation simply deferred and conditioned the delivery of the [adequate protection payments] on the entry of a further Court order. The Bankruptcy Court also stated that the Intercreditor Agreement, which it concluded remained binding, expressly provided for the Second Lien Lenders' right to receive adequate protection payments and that the entry of this Order suffices to qualify the [adequate protection payments held in escrow] for the exception in the Intercreditor Agreement. Accordingly, finding no merit to the objections made to Wilmington Trust's motion, the Bankruptcy Court entered the Release Order permitting Wilmington Trust to receive the adequate protection payments held in escrow.