Foundations of a Successful Homebuilder Reorganization

Beginning in 2006, Orleans, along with the entire U.S. homebuilding industry, experienced a significant and sustained downturn, characterized by decreased demand for new homes, an oversupply of both new and resale home inventories (including homes under foreclosure), a decline in average selling prices, and aggressive competition among homebuilders. The decrease in demand for new homes was exacerbated by the global credit crisis, which made traditional mortgages more difficult to obtain, and their terms and pricing more onerous.

Although Orleans' net debt decreased by $164 million, and it significantly reduced homes built on speculation, total lots owned and controlled, and employee head count from fiscal year 2006 to 2009, its revenue dropped from $987 million to $330 million, and its pre-tax income declined from $65 million to negative $160 million, during that period.

These internal challenges, combined with continued turmoil in the credit markets throughout fiscal year 2009, adversely affected Orleans' continued access to needed financing. Despite obtaining several amendments and extensions of its original $650 million secured credit facility to address various financial covenant defaults and related matters, the loan matured on Feb. 12, 2010, and Orleans was unable to obtain the 100% consent of the 17-member lender group necessary for a maturity extension. At that point, Orleans did not have sufficient liquidity to continue normal operations. Among other problems, the company struggled to pay suppliers to complete homes and release lien and other claims, so its business essentially ground to a halt. Ultimately, Orleans' lenders indicated that they would provide continuing financing only in the context of a bankruptcy filing culminating in a prompt sale of substantially all of its assets.

Chapter 11

After negotiating debtor-in-possession (DIP) financing with a group of its existing lenders to provide Orleans with the liquidity necessary to market and sell its business, on March 1, 2010, Orleans (59 affiliated entities) commenced Chapter 11 bankruptcy cases in the United States Bankruptcy Court for the District of Delaware, and the cases were assigned to the Honorable Peter J. Walsh and docketed as In re Orleans Homebuilders, Inc., Chapter 11 Case No. 10-10684 (PJW) Jointly Administered (Bankr. D. Del.). Pleadings and other information regarding the bankruptcy cases can be accessed at www.orleanshomesreorg.com.

As of the commencement of the bankruptcy cases, Orleans had approximately $311 million of borrowings outstanding under its credit facility, excluding letters of credit, approximately $120 million of trust preferred secured and related debt outstanding, and approximately $45 million of unpaid trade debt, including numerous mechanics' lien claims.

The DIP Facility

Orleans' $120 million DIP facility permitted it to use cash collateral and provided $40 million of incremental availability in the form of a revolving loan facility, including letters of credit, and $80 million of “roll up” term loans of portions of the indebtedness under the pre-petition credit facility (one tranche for participants in the DIP loan and another for the lenders that did not oppose court approval of the DIP loan). All of the obligations under the DIP facility were granted super-priority administrative expense status and were secured by first-priority liens upon substantially all of Orleans' assets (other than avoidance actions). However, the DIP liens were subject to valid and unavoidable liens that were entitled to priority under applicable state law (e.g., certain mechanics' liens).

In addition to the usual restrictive bells and whistles, the DIP imposed various milestones on Orleans, such as requiring completion of a sale of substantially all of its assets by July 5, 2010, or confirming a plan of reorganization by July 30, 2010, and required the appointment of a Chief Restructuring Officer. The DIP also required Orleans to procure warranty insurance for all homes sold post-petition and prohibited new construction except on properties where the foundation and footing were already completed. In short, the DIP enabled Orleans to maintain and operate its business in the short-run on a relatively tight leash to give it a chance to effectuate a prompt sale transaction.

Summary of Challenges Faced by Orleans

The early focus of the bankruptcy cases was on dealing with challenging issues required to restore operations and to minimize continuing disruption to the business to enable Orleans to maintain (and enhance) its enterprise value until a sale transaction could be completed. In addition to the transition and related matters confronted in most bankruptcy cases, such as paying pre-petition employee wages, salaries, and benefits, paying pre-petition taxes, and maintaining its cash management system, as a homebuilder, Orleans had some unique issues that needed to be addressed immediately upon filing.

Most importantly, and as the result of significant pre-petition liabilities, including mechanics' liens, Orleans faced some serious impediments to closing on the sales of homes, the primary source of the company's revenues. For example:

• Would Orleans be able to sell homes free and clear of liens, claims, encumbrances, and other interests?
• Would title insurers continue to issue title insurance?
• Would home warranty providers continue to provide warranties?
• Would vendors and subcontractors return to building sites and provide reasonable terms?

By meeting these challenges and anticipating and addressing operational issues before they escalated, including by launching a communications program targeted at its major constituencies, Orleans was able to revive its business. Some of the other major obstacles overcome by Orleans during its bankruptcy cases included maintaining surety bonds posted to backstop community development obligations; providing appropriate incentives to its employees to maintain their dedication and support; and enforcing the automatic stay against parties that had utilized self-help to “reclaim” building material, among other things, but those issues are beyond the scope of this article. Orleans was able to generate significant value, which enabled it to negotiate a plan of reorganization that garnered the support of all major constituencies (the landscape shifted and a sale was no longer mandated).

Selling Homes in Bankruptcy

As mentioned above, the sale of homes by Orleans on a post-petition basis was critical to the success of any exit strategy. In most businesses, the sale of “inventory” in the ordinary course of business does not require any bankruptcy court involvement. However, for Orleans, given uncertainty of various parties involved in the home sales process, the potential lien rights of vendors and subcontractors, and other issues, the ability to obtain court relief was crucial.

Under the law of most states, construction vendors and subcontractors typically have the right to assert mechanics' liens or other statutory or common law liens (collectively referred to herein as “operational liens”) against the property on which they worked, and in certain states, such operational liens can prime prior secured debt. First, because the lenders' liens typically pre-dated construction, in six of the eight states in which Orleans operated, the purported operational liens generally did not prime the liens of the pre-petition lenders. However, in Virginia and Illinois, many such claims were senior to those of the lenders, at least partially, under state law. As discussed above, such rights were preserved under the DIP. Second, because the estimated value of Orleans' assets was less than the amount outstanding under the pre-petition credit facility, such priming liens were the only operational liens that constituted secured claims; all other operational liens constituted unsecured claims. See 11 U.S.C. ' 506(a)(1)
(“[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest ' is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ' and is an unsecured claim to the extent that the value of such creditor's interest ' is less than the amount of such allowed claim.”) Rather than presenting a valuation of Orleans' assets and an analysis of the relative priorities of each of the many claims against Orleans' properties at the outset of the bankruptcy cases, Orleans sought to establish procedures for the resolution of all claims that would preserve all parties' rights, while at the same time permitting home sales to close.

Thus, on the petition date, Orleans filed a motion to authorize it to contract for, and close on, sales of homes, to honor customer deposits (which were held in escrow accounts) and other contractual obligations, to sell homes free and clear of all liens, claims, encumbrances, and other interests, to establish procedures for the resolution of lien and other claims, and to use proceeds of home sales in accordance with certain lien procedures. Following the first-day hearings, the bankruptcy court entered an interim order permitting Orleans to close on sales of homes, to honor customer deposits, and to sell homes free and clear. Any operational liens the parties had (if any) would attach to the proceeds of the applicable sale (and could be paid out of any available funds) or would attach to the proceeds of the sale(s) of Orleans' remaining assets, in either case, with the same priority as such operational lien was entitled to under applicable state law. The issue of procedures for dealing with the resolution of operational liens was deferred until a later hearing.

While selling homes pursuant to the interim order, Orleans worked with title insurers, vendors and subcontractors, and other parties-in-interest to resolve their objections to these proposed procedures. Orleans faced significant resistance, largely from the holders of operational liens because, unlike many homebuilder bankruptcy cases where vendors' claims are paid in full, Orleans insisted on reserving the right under ' 363(f) of the Bankruptcy Code to strip the liens of under-secured operational lien holders.

Certain operational lien holders argued that the court should force Orleans to escrow home sale proceeds sufficient to satisfy outstanding claims, but such a requirement would have constrained liquidity and create unnecessary administrative burdens, particularly given the lenders' agreement that holders of valid, non-avoidable, priming liens would be paid out of the proceeds of a particular sale or, alternatively, out of the proceeds of any sale outside of the ordinary course of business (e.g., the contemplated sale of the business). After numerous discussions, the filing of competing orders by various parties, and no less than three contested hearings, a final order proposed by Orleans was entered by the court on April 15, 2010, establishing procedures requiring Orleans to provide notices of closings for each sale, which triggered a deadline for each purported operational lien holder to file a written demand for payment, including evidence that it was entitled to a valid and unavoidable lien with priority under applicable state law over the pre-petition and DIP lenders, and establishing procedures for the parties to resolve or litigate a resolution of such demand. All but a few of such claims were resolved without the need for any court intervention.

Although Orleans had authorization from the court to sell homes free and clear, and recorded the final order of the court in each jurisdiction in which it was selling homes, the individual agents dealing with the issuance of title insurance (and the closing attorneys for many of the purchasers) were unfamiliar with such an order and the bankruptcy process in general. Thus, Orleans worked closely with the individual agents (and closing attorneys), largely by explaining the protections afforded by the order, and providing affidavits of service demonstrating that each holder of a lien listed on the title reports had been served with notice of the bankruptcy cases. In one instance, Orleans even filed a motion after the closing of a sale to compel the release of liens that had been filed in contravention of the order. Within a relatively short time, Orleans was able to alleviate title insurers' concerns and was able to close homes with minimal, if any, delay. The success of these efforts is evident by the fact that Orleans was able to close on sales of approximately 390 homes during the bankruptcy cases, generating related aggregate sale proceeds of approximately $150 million.

Orleans received, reviewed, and responded to several hundred demands for payment in accordance with these home sales procedures. To the extent that holders of valid, non-avoidable, priming operational liens complied with the procedures, they were paid in full. Orleans paid 36 claimants approximately $1.1 million pursuant to the home sales procedures, and 19 claimants approximately $0.2 million pursuant to its plan of reorganization on account of such secured claims.

Any other purported liens were deemed satisfied, discharged, null and void, and of no force and effect by Orleans' plan of reorganization. Orleans estimates that it resolved a total of approximately $40 million of purported operational lien claims. The holders of any such allowed claims will receive distributions as general unsecured creditors under the confirmed plan.

Continuing Warranties

Shortly after Orleans obtained interim approval to sell homes, one of its largest warranty providers refused to issue post-petition warranties because of uncertainty regarding its exposure going forward. Without access to warranties, Orleans would have been unable to sell homes because it was required in many jurisdictions to provide warranties to all homebuyers (without knowing it would be around to honor them), and the DIP financing facility required Orleans to obtain (and provide) warranty insurance for all homes sold after the petition date.

Orleans moved quickly to resolve the issues with its existing warranty provider and to seek out an alternative source for warranties to ensure that operations were not interrupted. Ultimately, Orleans was able to reach an agreement with the warranty provider, whereby a modest agreed-upon amount of money was placed in escrow for each post-petition closing, and Orleans reserved its right to assume or reject the related agreements.

Managing Vendors

Also integral to the continuity of Orleans' operations was access to reasonably priced goods and services (as discussed above, Orleans subcontracts all of the construction of its homes), necessitating the preservation of relationships with its vendors. Originally, Orleans obtained emergency authorization to pay up to $7.5 million of critical vendor pre-petition claims (later raised to $10 million).

Orleans negotiated for go-forward credit terms with a select group of vendors and ultimately paid $2.57 million to approximately 49 critical vendors on account of pre-petition obligations. On average, Orleans paid approximately 34% of each critical vendor's pre-petition claim. The structure of the critical vendor program allowed Orleans the leverage and flexibility to obtain the most favorable credit terms available at the lowest possible cost.

The Sale Process and the Change of Focus to a Stand-Alone Restructuring

Although Orleans had explored sale opportunities prior to bankruptcy and was in contact with various potential buyers, it had not yet reached an agreement with any particular buyer as of the petition date. Because of the expedited schedule required by its DIP facility, Orleans promptly negotiated the terms of a $170 million “stalking horse” asset purchase agreement, subject in all respects to Bankruptcy Court approval, and, on April 13, 2010, filed a motion to approve sale procedures and bid protections and scheduling an auction and hearing to consider approval of the sale.

Prior to any hearing on the motion, certain parties (that by such time had accumulated approximately 80% of the DIP and the pre-petition secured debt) expressed a willingness to pursue negotiations of a stand-alone plan of reorganization. After negotiating certain modifications of its DIP facility designed to give Orleans more flexibility in its operations (including allowing it to advance construction of lots that were in their initial stages, increasing the DIP revolver sub-limit, increasing the amount of permitted variances from the DIP budget, and extending various deadlines), Orleans was able to shift from a strategy of merely preserving value for a quick sale toward a longer-term, go-forward business plan and reorganization. On May 19, 2010, Orleans withdrew the sale motion to pursue a plan.

First, Orleans negotiated a plan with its lenders providing for new money or restructured loans to address a portion of the lenders' claims and for the remainder of their claims to be provided equity in the reorganized company. Then, prior to the hearing on the disclosure statement relating to such plan, Orleans brokered a deal between the lenders and the unsecured creditors' committee, whereby unsecured creditors will share in a distribution pool that is meaningful in light of the minimal unencumbered assets that were otherwise available for distribution to unsecured creditors. All along the way, until the confirmation hearing was concluded, Orleans dealt with concerns raised by numerous of its creditors and consensually resolved (or at least deferred) all of them.

Conclusion

In sum, Orleans' ability to utilize the Chapter 11 process to jump-start the business and restore relationships with customers, vendors, and subcontractors, among others, created significant value that was clearly evident and likely one of the reasons that the company's lenders decided to support a stand-alone plan of reorganization. Because Orleans was able to address potential obstacles before they derailed the business, it was able to negotiate and confirm a plan of reorganization (at a virtually uncontested confirmation hearing) just nine months to the day after the commencement of the cases and to emerge from Chapter 11 shortly thereafter (Feb. 14, 2011) as a private company with stronger operations and a healthier balance sheet.

Joel H. Levitin is a partner and Maya Peleg is an associate at Cahill Gordon & Reindel LLP, which served as lead counsel to Orleans in the bankruptcy cases. They can be contacted at [email protected] and [email protected]. Mitchell B. Arden is a shareholder of Phoenix Management Services and served as Chief Restructuring Officer of Orleans during the bankruptcy cases; Michael P. Gaul is a Director at Phoenix. They can be contacted at [email protected] and [email protected].

Orleans Homebuilders, Inc. (together with its affiliates, “Orleans”), designs, markets, develops, and builds high-quality, single-family homes, townhomes, and condominiums to serve various types of homebuyers. Orleans has been in business since 1918 and currently operates in Southeastern Pennsylvania; Central and Southern New Jersey; Orange County, NY; Charlotte, Raleigh, and Greensboro, NC; Richmond and Tidewater, VA; and the Chicago suburbs. Florida-based operations were closed last year.

Orleans designs its homes with the assistance of unaffiliated architectural firms, and it supervises the development and building of its communities. Orleans acts as the general contractor for its homes, and employs subcontractors at specified prices for the installation of site improvements and construction. The company owns approximately 3,600 buildable lots in various stages of development.

The Downturn

Beginning in 2006, Orleans, along with the entire U.S. homebuilding industry, experienced a significant and sustained downturn, characterized by decreased demand for new homes, an oversupply of both new and resale home inventories (including homes under foreclosure), a decline in average selling prices, and aggressive competition among homebuilders. The decrease in demand for new homes was exacerbated by the global credit crisis, which made traditional mortgages more difficult to obtain, and their terms and pricing more onerous.

Although Orleans' net debt decreased by $164 million, and it significantly reduced homes built on speculation, total lots owned and controlled, and employee head count from fiscal year 2006 to 2009, its revenue dropped from $987 million to $330 million, and its pre-tax income declined from $65 million to negative $160 million, during that period.

These internal challenges, combined with continued turmoil in the credit markets throughout fiscal year 2009, adversely affected Orleans' continued access to needed financing. Despite obtaining several amendments and extensions of its original $650 million secured credit facility to address various financial covenant defaults and related matters, the loan matured on Feb. 12, 2010, and Orleans was unable to obtain the 100% consent of the 17-member lender group necessary for a maturity extension. At that point, Orleans did not have sufficient liquidity to continue normal operations. Among other problems, the company struggled to pay suppliers to complete homes and release lien and other claims, so its business essentially ground to a halt. Ultimately, Orleans' lenders indicated that they would provide continuing financing only in the context of a bankruptcy filing culminating in a prompt sale of substantially all of its assets.

Chapter 11

After negotiating debtor-in-possession (DIP) financing with a group of its existing lenders to provide Orleans with the liquidity necessary to market and sell its business, on March 1, 2010, Orleans (59 affiliated entities) commenced Chapter 11 bankruptcy cases in the United States Bankruptcy Court for the District of Delaware, and the cases were assigned to the Honorable Peter J. Walsh and docketed as In re Orleans Homebuilders, Inc., Chapter 11 Case No. 10-10684 (PJW) Jointly Administered (Bankr. D. Del.). Pleadings and other information regarding the bankruptcy cases can be accessed at www.orleanshomesreorg.com.

As of the commencement of the bankruptcy cases, Orleans had approximately $311 million of borrowings outstanding under its credit facility, excluding letters of credit, approximately $120 million of trust preferred secured and related debt outstanding, and approximately $45 million of unpaid trade debt, including numerous mechanics' lien claims.

The DIP Facility

Orleans' $120 million DIP facility permitted it to use cash collateral and provided $40 million of incremental availability in the form of a revolving loan facility, including letters of credit, and $80 million of “roll up” term loans of portions of the indebtedness under the pre-petition credit facility (one tranche for participants in the DIP loan and another for the lenders that did not oppose court approval of the DIP loan). All of the obligations under the DIP facility were granted super-priority administrative expense status and were secured by first-priority liens upon substantially all of Orleans' assets (other than avoidance actions). However, the DIP liens were subject to valid and unavoidable liens that were entitled to priority under applicable state law (e.g., certain mechanics' liens).

In addition to the usual restrictive bells and whistles, the DIP imposed various milestones on Orleans, such as requiring completion of a sale of substantially all of its assets by July 5, 2010, or confirming a plan of reorganization by July 30, 2010, and required the appointment of a Chief Restructuring Officer. The DIP also required Orleans to procure warranty insurance for all homes sold post-petition and prohibited new construction except on properties where the foundation and footing were already completed. In short, the DIP enabled Orleans to maintain and operate its business in the short-run on a relatively tight leash to give it a chance to effectuate a prompt sale transaction.

Summary of Challenges Faced by Orleans

The early focus of the bankruptcy cases was on dealing with challenging issues required to restore operations and to minimize continuing disruption to the business to enable Orleans to maintain (and enhance) its enterprise value until a sale transaction could be completed. In addition to the transition and related matters confronted in most bankruptcy cases, such as paying pre-petition employee wages, salaries, and benefits, paying pre-petition taxes, and maintaining its cash management system, as a homebuilder, Orleans had some unique issues that needed to be addressed immediately upon filing.

Most importantly, and as the result of significant pre-petition liabilities, including mechanics' liens, Orleans faced some serious impediments to closing on the sales of homes, the primary source of the company's revenues. For example:

• Would Orleans be able to sell homes free and clear of liens, claims, encumbrances, and other interests?
• Would title insurers continue to issue title insurance?
• Would home warranty providers continue to provide warranties?
• Would vendors and subcontractors return to building sites and provide reasonable terms?

By meeting these challenges and anticipating and addressing operational issues before they escalated, including by launching a communications program targeted at its major constituencies, Orleans was able to revive its business. Some of the other major obstacles overcome by Orleans during its bankruptcy cases included maintaining surety bonds posted to backstop community development obligations; providing appropriate incentives to its employees to maintain their dedication and support; and enforcing the automatic stay against parties that had utilized self-help to “reclaim” building material, among other things, but those issues are beyond the scope of this article. Orleans was able to generate significant value, which enabled it to negotiate a plan of reorganization that garnered the support of all major constituencies (the landscape shifted and a sale was no longer mandated).

Selling Homes in Bankruptcy

As mentioned above, the sale of homes by Orleans on a post-petition basis was critical to the success of any exit strategy. In most businesses, the sale of “inventory” in the ordinary course of business does not require any bankruptcy court involvement. However, for Orleans, given uncertainty of various parties involved in the home sales process, the potential lien rights of vendors and subcontractors, and other issues, the ability to obtain court relief was crucial.

Under the law of most states, construction vendors and subcontractors typically have the right to assert mechanics' liens or other statutory or common law liens (collectively referred to herein as “operational liens”) against the property on which they worked, and in certain states, such operational liens can prime prior secured debt. First, because the lenders' liens typically pre-dated construction, in six of the eight states in which Orleans operated, the purported operational liens generally did not prime the liens of the pre-petition lenders. However, in Virginia and Illinois, many such claims were senior to those of the lenders, at least partially, under state law. As discussed above, such rights were preserved under the DIP. Second, because the estimated value of Orleans' assets was less than the amount outstanding under the pre-petition credit facility, such priming liens were the only operational liens that constituted secured claims; all other operational liens constituted unsecured claims. See 11 U.S.C. ' 506(a)(1)
(“[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest ' is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ' and is an unsecured claim to the extent that the value of such creditor's interest ' is less than the amount of such allowed claim.”) Rather than presenting a valuation of Orleans' assets and an analysis of the relative priorities of each of the many claims against Orleans' properties at the outset of the bankruptcy cases, Orleans sought to establish procedures for the resolution of all claims that would preserve all parties' rights, while at the same time permitting home sales to close.

Thus, on the petition date, Orleans filed a motion to authorize it to contract for, and close on, sales of homes, to honor customer deposits (which were held in escrow accounts) and other contractual obligations, to sell homes free and clear of all liens, claims, encumbrances, and other interests, to establish procedures for the resolution of lien and other claims, and to use proceeds of home sales in accordance with certain lien procedures. Following the first-day hearings, the bankruptcy court entered an interim order permitting Orleans to close on sales of homes, to honor customer deposits, and to sell homes free and clear. Any operational liens the parties had (if any) would attach to the proceeds of the applicable sale (and could be paid out of any available funds) or would attach to the proceeds of the sale(s) of Orleans' remaining assets, in either case, with the same priority as such operational lien was entitled to under applicable state law. The issue of procedures for dealing with the resolution of operational liens was deferred until a later hearing.

While selling homes pursuant to the interim order, Orleans worked with title insurers, vendors and subcontractors, and other parties-in-interest to resolve their objections to these proposed procedures. Orleans faced significant resistance, largely from the holders of operational liens because, unlike many homebuilder bankruptcy cases where vendors' claims are paid in full, Orleans insisted on reserving the right under ' 363(f) of the Bankruptcy Code to strip the liens of under-secured operational lien holders.

Certain operational lien holders argued that the court should force Orleans to escrow home sale proceeds sufficient to satisfy outstanding claims, but such a requirement would have constrained liquidity and create unnecessary administrative burdens, particularly given the lenders' agreement that holders of valid, non-avoidable, priming liens would be paid out of the proceeds of a particular sale or, alternatively, out of the proceeds of any sale outside of the ordinary course of business (e.g., the contemplated sale of the business). After numerous discussions, the filing of competing orders by various parties, and no less than three contested hearings, a final order proposed by Orleans was entered by the court on April 15, 2010, establishing procedures requiring Orleans to provide notices of closings for each sale, which triggered a deadline for each purported operational lien holder to file a written demand for payment, including evidence that it was entitled to a valid and unavoidable lien with priority under applicable state law over the pre-petition and DIP lenders, and establishing procedures for the parties to resolve or litigate a resolution of such demand. All but a few of such claims were resolved without the need for any court intervention.

Although Orleans had authorization from the court to sell homes free and clear, and recorded the final order of the court in each jurisdiction in which it was selling homes, the individual agents dealing with the issuance of title insurance (and the closing attorneys for many of the purchasers) were unfamiliar with such an order and the bankruptcy process in general. Thus, Orleans worked closely with the individual agents (and closing attorneys), largely by explaining the protections afforded by the order, and providing affidavits of service demonstrating that each holder of a lien listed on the title reports had been served with notice of the bankruptcy cases. In one instance, Orleans even filed a motion after the closing of a sale to compel the release of liens that had been filed in contravention of the order. Within a relatively short time, Orleans was able to alleviate title insurers' concerns and was able to close homes with minimal, if any, delay. The success of these efforts is evident by the fact that Orleans was able to close on sales of approximately 390 homes during the bankruptcy cases, generating related aggregate sale proceeds of approximately $150 million.

Orleans received, reviewed, and responded to several hundred demands for payment in accordance with these home sales procedures. To the extent that holders of valid, non-avoidable, priming operational liens complied with the procedures, they were paid in full. Orleans paid 36 claimants approximately $1.1 million pursuant to the home sales procedures, and 19 claimants approximately $0.2 million pursuant to its plan of reorganization on account of such secured claims.

Any other purported liens were deemed satisfied, discharged, null and void, and of no force and effect by Orleans' plan of reorganization. Orleans estimates that it resolved a total of approximately $40 million of purported operational lien claims. The holders of any such allowed claims will receive distributions as general unsecured creditors under the confirmed plan.

Continuing Warranties

Shortly after Orleans obtained interim approval to sell homes, one of its largest warranty providers refused to issue post-petition warranties because of uncertainty regarding its exposure going forward. Without access to warranties, Orleans would have been unable to sell homes because it was required in many jurisdictions to provide warranties to all homebuyers (without knowing it would be around to honor them), and the DIP financing facility required Orleans to obtain (and provide) warranty insurance for all homes sold after the petition date.

Orleans moved quickly to resolve the issues with its existing warranty provider and to seek out an alternative source for warranties to ensure that operations were not interrupted. Ultimately, Orleans was able to reach an agreement with the warranty provider, whereby a modest agreed-upon amount of money was placed in escrow for each post-petition closing, and Orleans reserved its right to assume or reject the related agreements.

Managing Vendors

Also integral to the continuity of Orleans' operations was access to reasonably priced goods and services (as discussed above, Orleans subcontracts all of the construction of its homes), necessitating the preservation of relationships with its vendors. Originally, Orleans obtained emergency authorization to pay up to $7.5 million of critical vendor pre-petition claims (later raised to $10 million).

Orleans negotiated for go-forward credit terms with a select group of vendors and ultimately paid $2.57 million to approximately 49 critical vendors on account of pre-petition obligations. On average, Orleans paid approximately 34% of each critical vendor's pre-petition claim. The structure of the critical vendor program allowed Orleans the leverage and flexibility to obtain the most favorable credit terms available at the lowest possible cost.

The Sale Process and the Change of Focus to a Stand-Alone Restructuring

Although Orleans had explored sale opportunities prior to bankruptcy and was in contact with various potential buyers, it had not yet reached an agreement with any particular buyer as of the petition date. Because of the expedited schedule required by its DIP facility, Orleans promptly negotiated the terms of a $170 million “stalking horse” asset purchase agreement, subject in all respects to Bankruptcy Court approval, and, on April 13, 2010, filed a motion to approve sale procedures and bid protections and scheduling an auction and hearing to consider approval of the sale.

Prior to any hearing on the motion, certain parties (that by such time had accumulated approximately 80% of the DIP and the pre-petition secured debt) expressed a willingness to pursue negotiations of a stand-alone plan of reorganization. After negotiating certain modifications of its DIP facility designed to give Orleans more flexibility in its operations (including allowing it to advance construction of lots that were in their initial stages, increasing the DIP revolver sub-limit, increasing the amount of permitted variances from the DIP budget, and extending various deadlines), Orleans was able to shift from a strategy of merely preserving value for a quick sale toward a longer-term, go-forward business plan and reorganization. On May 19, 2010, Orleans withdrew the sale motion to pursue a plan.

First, Orleans negotiated a plan with its lenders providing for new money or restructured loans to address a portion of the lenders' claims and for the remainder of their claims to be provided equity in the reorganized company. Then, prior to the hearing on the disclosure statement relating to such plan, Orleans brokered a deal between the lenders and the unsecured creditors' committee, whereby unsecured creditors will share in a distribution pool that is meaningful in light of the minimal unencumbered assets that were otherwise available for distribution to unsecured creditors. All along the way, until the confirmation hearing was concluded, Orleans dealt with concerns raised by numerous of its creditors and consensually resolved (or at least deferred) all of them.

Conclusion

In sum, Orleans' ability to utilize the Chapter 11 process to jump-start the business and restore relationships with customers, vendors, and subcontractors, among others, created significant value that was clearly evident and likely one of the reasons that the company's lenders decided to support a stand-alone plan of reorganization. Because Orleans was able to address potential obstacles before they derailed the business, it was able to negotiate and confirm a plan of reorganization (at a virtually uncontested confirmation hearing) just nine months to the day after the commencement of the cases and to emerge from Chapter 11 shortly thereafter (Feb. 14, 2011) as a private company with stronger operations and a healthier balance sheet.

Joel H. Levitin is a partner and Maya Peleg is an associate at Cahill Gordon & Reindel LLP, which served as lead counsel to Orleans in the bankruptcy cases. They can be contacted at [email protected] and [email protected]. Mitchell B. Arden is a shareholder of Phoenix Management Services and served as Chief Restructuring Officer of Orleans during the bankruptcy cases; Michael P. Gaul is a Director at Phoenix. They can be contacted at [email protected] and [email protected].