Opinion ID: 659
Heading Depth: 2
Heading Rank: 2

Heading: Initial Skirmishes Relating to the Sale

Text: On March 9, 2005, the Debtor filed a motion with the Bankruptcy Court requesting authorization to sell substantially all of its assets free and clear of liens, claims, encumbrances, and other interests through an auction. The Debtor explained that it had attempted to reach a consensus among its creditors on the terms of a Chapter 11 plan of reorganization but that such efforts were blocked by either the Contrarians or Aretex. According to the Debtor, both [the Contrarians] and [Aretex] demand control of the restructured Company and they have been unable to reach a compromise, even with the assistance of the Debtor[ ]. The Debtor also stated that, in light of the impasse, both the Contrarians and Aretex had informed the Debtor that it should consider pursuing a sale pursuant to section 363(b) of the Bankruptcy Code. The Debtor asserted in its motion that, [a]fter an extensive review of the available options, a sale of its assets was the only viable option available to preserve [its] business operations and provide a meaningful recovery to [its] secured creditor constituencies. The Debtor informed the Bankruptcy Court that it had solicited bids to enter into a stalking horse contract in preparation for the auction. [3] Both Aretex and the Contrarians had competed to become the stalking horse, and the Debtor eventually selected the Contrarians as the winning bidder. Under the terms of the stalking horse contract, the Contrarians, as majority members of the First Lien Lenders group, would direct Beal Bank to make a credit bid to purchase the Debtor's assets free and clear of encumbrances. That is, the entire value of the First Liens, approximately $488 million, would be used as credit to purchase the Debtor's assets. Thereafter, the Contrarians would exchange securities in New Textile Co., a corporation the Contrarians created for purposes of acquiring the Debtor's business, for the assets purchased through Beal Bank. The securities of New Textile Co. would then be distributed to the First Lien Lenders as consideration. Of course, the stalking horse contract was not a binding contract of sale and only served to fix the minimum bid at the auction. The Debtor explained in its motion to proceed with the auction sale that the Contrarians' bid represented the most attractive alternative available ... at this time. The Contrarians filed a separate response, asserting that (1) its credit bid was equivalent to a cash bid, and (2) any competing bids therefore were required to offer a sufficient amount of cash to pay the First Lien Lenders in full. On April 7, 2005, following a hearing on the Debtor's motion, the Bankruptcy Court denied the Debtor's motion on several grounds, including the unreasonableness of the breakup fees. The Debtor filed a subsequent motion on April 15, 2005, purporting to address the Bankruptcy Court's concerns by removing references to the stalking horse contract and breakup fees. The Contrarians opposed the Debtor's modified motion to proceed with the sale because, among other reasons, the proposed timetable for the auction was insufficient for any potential third parties to obtain financing. The Contrarians asserted that, pursuant to 11 U.S.C. § 363(k) and the Intercreditor Agreement, only theyand not any other party, including, specifically, Aretexcould purchase the Debtor's assets with stock rather than cash without first satisfying the First Lien Lenders in cash. Notwithstanding the Contrarians' objections, the Bankruptcy Court, on April 22, 2005, granted the Debtor's motion and authorized the auction of the Debtor's assets to proceed. The Bankruptcy Court did not rule prior to the auction on the superiority of the Contrarians' credit bid or on the issue of whether any other bid must first satisfy the First Lien Lenders in cash. In response to the Bankruptcy Court's order approving the auction of the Debtor's assets to proceed, Wilmington Trust, as agent of the Second Lien Lenders, on May 10, 2005, filed a motion to release the adequate protection payments held in escrow pursuant to the Escrow Stipulation so that it could distribute the escrowed funds to the Second Lien Lenders. Aretex joined Wilmington Trust's motion to release the escrowed adequate protection payments to the Second Lien Lenders. Beal Bank, as collateral trustee of the First Lien Lenders, objected to Wilmington Trust's motion on the grounds that the motion was premature because the auction of the Debtor's assets had not yet even occurred. The Contrarians also objected to Wilmington Trust's motion, arguing that the Second Lien Lenders were not entitled to the escrowed funds because the funds were not adequate protection payments at all and therefore were subject to the subordination clauses of the Intercreditor Agreement. The ensuing reply and subsequent hearing in regard to that dispute occurred after the auction and the entry of the Bankruptcy Court's sale order.