Opinion ID: 659
Heading Depth: 2
Heading Rank: 4

Heading: The Bankruptcy Court's Sale Order and the Contrarians' Appeal to the District Court

Text: On July 8, 2005, the Bankruptcy Court entered its Order Authorizing Sale of Substantially All of the Sellers' Assets Free and Clear of Liens, Claims, Encumbrances and Interests, the Assumption of Certain Liabilities, Approval of Successful Bidder and Certain Related Matters (the Sale Order). The Sale Order confirmed that the winning bid presented the highest and best bid at the Auction and that the auction was conducted lawfully and in a noncollusive, fair, and good faith manner. The Sale Order approved the Asset Purchase Agreement, which provided a two-step process in the sale of the Debtor's assets. First, the Debtor's assets would be acquired by WestPoint Home, a wholly owned subsidiary of WestPoint International, free and clear of liens and encumbrances; however, replacement liens would be placed on WestPoint International's securities to account for the secured creditors' interests. Second, at closing, WestPoint International's securities would be directly distributed to the secured creditors, thereby extinguishing the replacement liens. This second step, in conjunction with Aretex's purchase of a 17.5% interest, worked to guarantee Aretex control of WestPoint International and, by extension, the Debtor's business. Because these steps would occur simultaneously at closing, however, although it might be a two step process, it can only be metaphysically a two step process. In re WestPoint Stevens, Inc., 333 B.R. at 51 (quoting the Bankruptcy Court). The securities to be distributed to the First Lien Lenders were parent shares and subscription rights to WestPoint International (the First Securities). The remaining subscription rights, the value of which were calculated at the time of closing and found to be worth approximately $95 million (the Second Securities), were to be distributed to the Second Lien Lenders. The Contrarians appealed the Sale Order to the District Court. [6] After filing the notice of appeal, the Contrarians moved to stay the Sale Order in the Bankruptcy Court. The Bankruptcy Court denied the stay motion, and the Contrarians, joined by Beal Bank, thereafter filed a stay motion with the District Court. The Contrarians submitted their brief arguing the merits of the appeal to the District Court, but the parties then agreed to a stipulation (the Stay Stipulation), which narrowed the issues on appeal. Specifically, the Stay Stipulation provided for the withdrawal of the Contrarians' stay motion, with prejudice, as to that portion of the [stay motion] seeking a stay of the closing of the sale by [the Debtor] to Purchasers approved by the [Sale Order]. The Contrarians also agreed that it would seek no other stay of the closing of the sale under the Sale Order or otherwise. The Stay Stipulation expressly provided, however, for a stay of the distribution of the [Second Securities] allocable to the Second Lien Lenders. In particular, the Stay Stipulation required that the Second Securities be distributed to the Second Lien Lenders but that such distribution be held in escrow until a subsequent court order resolved the proper allocation, if any, of the Second Securities to the First Lien Lenders. The Stay Stipulation provided that [i]n all other respects, the distribution of the Second Securities shall be in accordance with the Sale Order and terms of the Asset Purchase Agreement. The Stay Stipulation also provided that, except as set forth in the Stay Stipulation, the rights of all parties ... as to the appeal and all other disputes and matters... including without limitation rights under Paragraph R of the Sale Order, are expressly preserved and are not affected by this stipulation. Paragraph R of the Sale Order included the Bankruptcy Court's conclusion that the exceptions to the subordination clauses of the Intercreditor Agreement, i.e., the permitted mandatory prepayments and adequate protection, authorized the Second Lien Lenders to receive the Second Securities. [7] The Stay Stipulation recited that the minority members of the Second Lien Lenders group did not favor the stipulation and that it was being entered over their objection. Several days after the Stay Stipulation was so ordered by the District Court, on August 8, 2005, the Debtor and Aretex Group closed the sale. Accordingly, the Debtor's assets were transferred, free and clear of liens, to WestPoint International; the securities allocated to the First Lien Lenders were distributed to the First Lien Lenders in satisfaction of their liens; and the Second Securities allocated to the Second Lien Lenders were placed in escrow pursuant to the Stay Stipulation. Thereafter, Aretex purchased 17.5% of WestPoint International's shares for $187 million pursuant to its bid and also exercised the subscription rights distributed to it as a First Lien Lender, paying $32.8 million for additional common stock in WestPoint International. Thus, in addition to the stock distributed to it pursuant to the Asset Purchase Agreement and Sale Order, Aretex's purchase of stock and exercise of subscription rights rendered it the controlling shareholder of WestPoint International. As the controlling shareholder, Aretex elected WestPoint International's board of directors.