De Facto Chapter 11 for the Unconsolidated 'Identity of Interest' Enterprise (Case Study)

By November 2010, restaurant operations had turned positive, the Loan balance had been reduced to approximately $5.8 million, the Co-borrowers were current in the payment of interest, and the enterprise was projected to be solidly profitable in 2011. Nonetheless, the Co-borrowers were unable to conclude a satisfactory Loan restructure agreement with the Lender.

On Nov. 10, 2010, the Lender declared the Loan to be in default, and on Nov. 15, 2010, GGI filed for Chapter 11 relief in the United States Bankruptcy Court for the Southern District of New York, Case No. 10-160991 (the “Court” and the “Case”). None of the individual Restaurants filed for Chapter 11 relief.

A Hijacked Process

In recent years, the Chapter 11 processes has tilted from rehabilitation toward a system firmly skewed in favor of balance-sheet fixes and quick asset transfers with megacases heralding Wall Street's hijack of what used to be the “peoples' courthouse.” The Bankruptcy Code's switch from the Bankruptcy Act's “economy of administration standard” to a “market standard” as the guiding metric for compensating professionals engaged in the process has resulted in an overly expensive rehabilitation system. Today, the only realistic options for small and mid-sized debtors, saddled with having to pay both debtor and creditor retained professionals, are to either tee up a going concern sale promptly after filing, or suffer liquidation. Small and mid-sized debtors almost always lack sufficient liquid unpledged assets necessary to attract rehabilitative “debtor-in-possession” financing, and, more often than not, their best Chapter 11 option is to suffer a consensually structured liquidation.

In the two-year-period preceding GGI's filing for Chapter 11, as the scale and expense of operations were rationalized, the enterprise remained in constant peril as the Co-borrowers struggled to keep the Lender at bay and work off the five closed units' debt overhang. In the pre-filing period, Glazier family members poured the entirety of their liquid assets into the business, and supplier bill payments were stretched. Suppliers were mollified with Glazier family assurances of payment. Key suppliers loosened payment terms, but made it crystal clear that in the event the Restaurants sought bankruptcy protection, they would offer no credit for operations in Chapter 11. In crafting a solution for the Co-borrowers' filing dilemma, counsel was mindful of the client's determination to not suffer a Lender orchestrated liquidation sale or similar structured liquidation. In forging a plan for success, counsel was guided by recent cases.

Cases

General Growth Properties, Inc.

General Growth Properties, Inc. (“GGP”), an overleveraged shopping mall developer and operator, filed for bankruptcy protection in 2009. GGP was a public holding company with about $7 billion of unsecured debt. Its mall properties were individually financed with mortgage debt, and title to the mall properties resided in wholly owned bankruptcy remote special purpose limited liability entities (each a “Mall SPE”). Default on a single tranche of GGP's funded debt would, in turn, cause cross defaults throughout the GGP corporate debt structure.

Immediately after GGP filed for Chapter 11, several mortgage lenders to the Mall SPE's brought actions seeking to dismiss the mall bankruptcy proceedings as having been filed in bad faith.

The bankruptcy judge disagreed, noting that directors have specific shifting duties ' when an enterprise is in trouble, the duty shifts from taking care of discrete interests to taking care of a much larger constituency. See In re Gen. Growth Props. Inc., 409 B.R. 43, 61 (Bankr. S.D.N.Y. 2009). The court held that the removal of the directors was not an act of bad faith, even though the assets of the company were pledged, so long as the loan was being serviced and the property was being maintained. Even though the Mall SPE subsidiaries were separate entities, with disparate secured lenders, the judge recognized that there was an “identity of interest” in place with regard to the entire GGP enterprise. Satisfied that the employment of separate bankruptcy counsel for GGP, and the Mall SPE entities would suffice to solve the representational conflict between the debtors, the court ignored the Mall SPE's structural framework and recognized an “identity of interest in the whole” as paramount (the “Identity of Interest Opinion”).

With GGP's “identity of interest” concept in mind, and loan interest current, the issue for GGI's counsel was how far the concept might be stretched. If GGI filed for bankruptcy protection, and the Restaurants did not, would the court embrace and expand the concept and extend automatic stay protection to the Restaurants and their equity owners? Typically, stay extension issues involve a corporate debtor borrower with an individual non-debtor guarantor of its indebtedness seeking protection from collection actions during the pendency of the borrower's Chapter 11 proceeding. In those cases, protection for the guarantor may sometimes be obtained, under 11 U.S.C.
' 105 by evidencing to the court that the individual guarantor is essential to the debtor's operation, and unless freed from creditor pressure during the Chapter 11, reorganization efforts will suffer. Unfortunately, the Restaurants, while Co-borrowers with GGI, had only a fragile management agreement in favor of GGI as their sole formal tie, and were thus poor candidates for a ' 105 injunction absent special circumstances.

In re Chemtura Corporation

Bankruptcy Code ' 1129(b)(1) requires that a plan be fair and equitable with respect to a class of impaired claims that reject a plan. Under ' 1129(b)(2) of the Bankruptcy Code, in order for a plan to be fair and equitable to a class of unsecured creditors that has rejected a plan, the creditors must either be paid in full or no junior class can receive or retain any property under the plan on account of its junior claim or interest. This principle is known as the “absolute priority rule.”

Cases dealing with ' 1129's fair and equitable requirement uniformly hold that as a “corollary of the absolute priority rule,” the “fair and equitable” requirement encompasses a rule that a senior class cannot receive more than full compensation for its claims (the “Corollary Rule”). In re Chemtura Corporation, 439 B.R. 561, 592 (Bankr. S.D.N.Y. 2010). See also In re Exide Tech., 303 B.R. 48, 61 (Bankr. D. Del. 2003).

The Corollary Rule and the hole in the Lender's collateral coverage (i.e., no leaseholds and no leasehold fixtures) were important in scoping out a worst-case bankruptcy scenario in the event that a lone GGI's filing should prove unsuccessful in protecting the Restaurants from filing and suffering a Lender orchestrated bankruptcy liquidation. Invoking the Corollary Rule in a filing by all of the Co-borrowers where an asset produced, insufficient proceeds to fully pay Co-borrower obligations could prove useful in sale/plan negotiations with the Lender. The Co-borrowers' owners, in turn, were mindful that in forced liquidation proceeds from the sale of collateral hole assets would offer some protection against their potential liability for tax, wage and other owner sensitive priority obligations. The collateral hole and the Corollary Rule also provided a modicum of short-term shark repellant against a Lender push for a non-consensual sale in which sale proceeds insufficient to pay Co-borrower creditors in full needed to be shared with first-in-line administration, and priority creditors.

The Solution to the GGI Dilemma

Two days prior to the issuance of the Loan default notice, GGI and its counsel were warned by Lender's counsel ” ' should your client(s) determine to file voluntary petition(s) under Chapter 11 of the Bankruptcy Code, my client does not expect to consent to the use of cash collateral and will prepare for a full evidentiary hearing on this and other issues early in the Chapter 11 case(s).”

GGI caught an immediate break upon filing when the case was randomly assigned to the Hon. Allan L. Gropper, the judge who had authored the “Identity of Interest Opinion” in the GGP case.

In connection with a mild objection by the United States Trustee regarding the continued pre-petition practice of cash flowing from the non-debtor Restaurants to the GGI debtor, and then back on an as-needed basis to pay restaurant expenses, the court, at the initial case hearing on Nov. 17, 2010, remarked:

' [If] we have six more filings and that certainly would result in higher U.S. trustee fees but I don't know that it would [do] anybody else any good. If anybody feels that the other companies need to be in a case, I'm sure I'll hear from them.

The court then invited other objections to the Case's structure, and hearing none, stated:

All right. Well, since its their cash collateral that is an important factor. And if they feel that there aren't sufficient controls in this case, I'm sure I'll hear from them.” [emphasis supplied]

The court's use of “their” in its comment, of course, meant the Lender, who remained silent on the issue, and did not then object to the Case's bifurcated filing structure. On Dec. 29, 2010, the Lender filed a motion to “Appoint Chapter 11 Trustee Or Examiner With Expanded Powers To Oversee Sale Of Debtor And Affiliates' Restaurants” (the “Trustee Motion”). The Trustee Motion was preliminarily heard by the court on Jan. 28, 2011. Following the hearing, a conference was held in the Judge's chambers. At the conference, the Judge made it crystal clear that he was very uncomfortable with the Case's structural dichotomy. Specifically, the court was troubled by the creation of a structural conflict between GGI as debtor and debtor in possession, the non-filer Restaurants, and the Glazier family owners. The Judge also made it clear that the court was receptive to the Lender's position that the unorthodox filing structure, with the Restaurants' assets not being in custodial legis, was unacceptable in its attendant increase of lender risk. The court was emphatic in stressing that if the structural filing/non-filing issue was not addressed, it would likely direct the appointment of a trustee for GGI.

With enterprise operations firmly on the road to profitability, counsel once again had to face the dilemma of either filing the Restaurants for Chapter 11, or suffering a trustee appointment. Fortunately, the very structural weakness that was moving the court toward appointing a trustee for GGI then worked in favor of a compromise after the debtor demonstrated that the appointment of a trustee would not, ipso facto, allow the trustee to file the Restaurants for Chapter 11 protection. In compromise, GGI counsel offered a tri-parte agreement to be entered into between the GGI debtor, the Restaurants and the Glazier family owners for the employment of a Court-appointed chief restructuring officer (“CRO”) for the Co-borrowers.

The provisions for the appointment, and duties of a trustee and/or examiner are governed by Bankruptcy Code ” 1104 and 1106. There is no specific Bankruptcy Code section for the appointment of a CRO as such, and the CRO is essentially the creation of inventive insolvency counsel seeking to avoid the appointment of a trustee. Retention of a CRO requires court approval, and is made pursuant to Section 327 of the Bankruptcy Code which provides:

' with the court's approval [the Debtor] may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.

The agreement for the employment of a CRO by GGI (“CRO Agreement”) was approved by order of the Court on Feb. 11, 2011. The CRO Agreement vested the CRO with exclusive authority, inter alia, in ” ' structuring, negotiating, implementing and managing the restructuring of [GGI], and/or the sale or disposition of the [Co-borrowers] and/or their respective assets.”

Attendant to the CRO's appointment, the Lender withdrew the Trustee Motion. There then followed a period of semi-peaceful coexistence between the Co-borrowers and the Lender until March, 2011, when GGI announced that it had obtained a funding commitment of $3 million to fund a plan of reorganization whose key component would be the Loan's reinstatement.

The Lender once again turned hostile, and announced that it would neither consider nor agree to the reinstatement of the Loan. The Lender further announced its intention to no longer abide by its previous informal agreement to not foreclose on the Loan collateral, and to once again press for the Restaurants' sale in or outside of GGI's bankruptcy proceeding.

The Lender served formal notice on the Co-borrowers and their equity owners of its intention to conduct a secured creditor foreclosure sale of Co-borrower equity interests and Restaurants collateral on April 15, 2011. At an April 1, 2011 hearing before the court, GGI sought to enjoin the threatened foreclosure arguing that the Lender in connection with the CRO appointment, and its earlier acquiescence to the case's split structure, had with the passage of time fully acquiesced and approved by omission the de facto extension of the automatic stay to the Restaurants and their equity owners. Counsel further argued that the Lender should not belatedly be permitted to unilaterally change the playing field to the detriment of the enterprise stakeholder creditors which now included a new host of post-petition Restaurant creditor claimants. The debtor requested the court to treat the Lender's notice of intent to conduct a UCC Sale as a request for relief from the automatic stay. Alternatively, citing the special circumstances of available funding for a plan, and potential harm to innocent post-petition creditors, the debtor requested the court to enjoin the threatened sales pursuant to Bankruptcy Code ' 105.

The court, while clearly skeptical with regard to endorsing the debtor's injunction request, did not rule out the request as it adjourned the matter to April 13 for further hearing and stated:

If the debtors wish to go forward with an injunction to prevent [Lender] from foreclosing on any of its collateral against nondebtors, the debtors may do so on the present papers, supplemented very briefly. And they can do so before the April 15th target date. I'm not endorsing it. And I already expressed some skepticism as to that motion, at least as it pertains to the equity interests of the so-called affiliates. [emphasis supplied]

The Co-borrowers could not abide the sale of their equity interests at foreclosure, and once again the dilemma of the Restaurants needing to file had to be addressed. This time, the dilemma was solved when the group that previously had agreed to lend the debtor $3 million to exit Chapter 11 agreed instead to buy two of the Restaurants (the “Sale”). Specifically, the Sale offer was to purchase those restaurants as going concerns for cash with a sale price metric reflective of their combined brand value, and prior economic performance.

Sale Conflict and Reorganization Plan

From Case inception, the potential for conflict between the Restaurants, their equity owners, and GGI was a constant irritant for the court. Addressed initially by the CRO appointment, the conflict irritant percolated malevolently below the surface as the Case progressed, and then reasserted itself when the CRO entered into a binding letter of intent for the restaurant Sale. The chief element of the conflict was GGI's interests as a creditor of one of the Restaurants being sold, an overall significant debtor to all of the other Restaurants, and a holder of none of the equity of any of the Restaurants. Borrowing a page from the GGP playbook the CRO addressed the conflict issue by engaging independent counsel to effect the Sale, and in concert with GGI counsel, formulate a joint plan of reorganization for GGI and the Restaurants (the “Plan”).

Bankruptcy Code ' 1123(a)(5) provides that a plan shall provide adequate means for its implementation, such as “merger or consolidation of the debtor with one or more persons.” Code ' 1123(a)(5) evolved from the Supreme Court decision in Sampsell v. Imperial Paper, 313 U.S. 215 (1941). In Sampsell, the Court held the consolidation of debtor and non-debtor entities to be appropriate and necessary where a streamlined structure of the debtor's corporate enterprise would consolidate assets with the debtor, while maintaining existing business operations and preserving asset values. The Code section, while used sparingly in bankruptcy plan formulations, was recently invoked with success in the case of In re Fremont General Corp., 2010 WL 4739439 at *16, No. 8:08-bk-13421 (Bankr. C.D. Cal. June 9, 2010). The Code section proved useful in formulating the GGI Plan.

The Sale was consummated on Dec. 6, 2011, and its proceeds were sufficient to fully discharge the Loan, and substantially all of the other Co-borrowers' vintage debt obligations of the Co-borrowers. The Sale fully funded GGI's Plan, which was confirmed by order of the court on Dec. 12, 2011. Consistent with ' 1123(a)(5) the Plan's basic structure provided for the merger of the Restaurants into GGI upon its consummation. Mechanically, the merger was accomplished by the Plan's cancellation of existing GGI equity interests, and the issuance at confirmation of 100% of the equity of reorganized GGI to the restaurant equity owners in consideration for their transfer of the Restaurants equity interests to reorganized GGI. The Plan further provided for the re-instatement of Co-borrower intercompany claims on confirmation, but curtailed Co-borrowers' right to receive any payment on account thereof for three years.

Conclusion

There is clearly a limit to the extent which the bankruptcy professional can rely on and employ “identity of interest” when crafting a bankruptcy survival strategy for enterprise co-borrowers. In the 13-month period between the Nov. 15, 2010, Petition Date and the Dec. 6, 2011, sale date, the Restaurants were able to continue normal operations, and in so doing produced strong operating results, which attracted several would-be acquirers other than the bottom fishers initially trolling in the Lender's waters. To counsel's mind, the GGI case demonstrates that the “Identity of Interest” concept does have legs, and its further development bears watching as the eternal battle between debtors and creditors inexorably plods along to no conclusion.

Joshua J. Angel is senior counsel in Herrick, Feinstein LLP's Restructuring and Bankruptcy Group. Mr. Angel earned his B.S. from New York University '56, and his L.L.B. from Columbia Law School '59.

The experienced bankruptcy professional is sometimes faced with the dilemma of a business client with financial issues ideally solvable in Chapter 11, but for the certainty that a lethal combination of the proceeding's cost and deleterious operational effect will surely result in forced liquidation rather than restructure. Such was the dilemma faced by Herrick, Feinstein LLP when it was consulted by the economically troubled Glazier Group, Inc. (“GGI”) in June 2010.

GGI in Distress

In September 2007, an institutional lender (“Lender”) made a $7 million secured loan (the “Loan”) to GGI and nine separately owned affiliate restaurant companies (the “Restaurants” and collectively with GGI the “Co-borrowers”). The Loan was joint and several to the Co-borrowers, and was secured by substantially all of the Co-borrowers' assets other than leasehold interests and fixtures. GGI and each of the Restaurants were individually owned by members of the Glazier family, and despite the absence of a formal holding company structure, the Co-borrowers operated as a single economic enterprise with GGI serving as manager. Receipts from the Restaurants were automatically swept, or directly deposited into a central GGI bank account, and GGI returned cash to the Restaurants on an as-needed basis to pay individual rent, food, labor and other expenses. GGI's shares, and the Restaurants' membership equity interests were pledged by the Glazier owners as additional collateral for the Loan. While the Loan was not personally guaranteed by any of the Co-borrowers' owners, the owners could be exposed to liability for unpaid taxes, and wages if the enterprise were to fail. An unfortunate victim of the recession, the Co-borrowers between 2008 and 2010 opened and closed five new restaurants. The restaurant closures left the group economically challenged, and unable to make the principal payments mandated by the Loan documents.

By November 2010, restaurant operations had turned positive, the Loan balance had been reduced to approximately $5.8 million, the Co-borrowers were current in the payment of interest, and the enterprise was projected to be solidly profitable in 2011. Nonetheless, the Co-borrowers were unable to conclude a satisfactory Loan restructure agreement with the Lender.

On Nov. 10, 2010, the Lender declared the Loan to be in default, and on Nov. 15, 2010, GGI filed for Chapter 11 relief in the United States Bankruptcy Court for the Southern District of New York, Case No. 10-160991 (the “Court” and the “Case”). None of the individual Restaurants filed for Chapter 11 relief.

A Hijacked Process

In recent years, the Chapter 11 processes has tilted from rehabilitation toward a system firmly skewed in favor of balance-sheet fixes and quick asset transfers with megacases heralding Wall Street's hijack of what used to be the “peoples' courthouse.” The Bankruptcy Code's switch from the Bankruptcy Act's “economy of administration standard” to a “market standard” as the guiding metric for compensating professionals engaged in the process has resulted in an overly expensive rehabilitation system. Today, the only realistic options for small and mid-sized debtors, saddled with having to pay both debtor and creditor retained professionals, are to either tee up a going concern sale promptly after filing, or suffer liquidation. Small and mid-sized debtors almost always lack sufficient liquid unpledged assets necessary to attract rehabilitative “debtor-in-possession” financing, and, more often than not, their best Chapter 11 option is to suffer a consensually structured liquidation.

In the two-year-period preceding GGI's filing for Chapter 11, as the scale and expense of operations were rationalized, the enterprise remained in constant peril as the Co-borrowers struggled to keep the Lender at bay and work off the five closed units' debt overhang. In the pre-filing period, Glazier family members poured the entirety of their liquid assets into the business, and supplier bill payments were stretched. Suppliers were mollified with Glazier family assurances of payment. Key suppliers loosened payment terms, but made it crystal clear that in the event the Restaurants sought bankruptcy protection, they would offer no credit for operations in Chapter 11. In crafting a solution for the Co-borrowers' filing dilemma, counsel was mindful of the client's determination to not suffer a Lender orchestrated liquidation sale or similar structured liquidation. In forging a plan for success, counsel was guided by recent cases.

Cases

General Growth Properties, Inc.

General Growth Properties, Inc. (“GGP”), an overleveraged shopping mall developer and operator, filed for bankruptcy protection in 2009. GGP was a public holding company with about $7 billion of unsecured debt. Its mall properties were individually financed with mortgage debt, and title to the mall properties resided in wholly owned bankruptcy remote special purpose limited liability entities (each a “Mall SPE”). Default on a single tranche of GGP's funded debt would, in turn, cause cross defaults throughout the GGP corporate debt structure.

Immediately after GGP filed for Chapter 11, several mortgage lenders to the Mall SPE's brought actions seeking to dismiss the mall bankruptcy proceedings as having been filed in bad faith.

The bankruptcy judge disagreed, noting that directors have specific shifting duties ' when an enterprise is in trouble, the duty shifts from taking care of discrete interests to taking care of a much larger constituency. See In re Gen. Growth Props. Inc., 409 B.R. 43, 61 (Bankr. S.D.N.Y. 2009). The court held that the removal of the directors was not an act of bad faith, even though the assets of the company were pledged, so long as the loan was being serviced and the property was being maintained. Even though the Mall SPE subsidiaries were separate entities, with disparate secured lenders, the judge recognized that there was an “identity of interest” in place with regard to the entire GGP enterprise. Satisfied that the employment of separate bankruptcy counsel for GGP, and the Mall SPE entities would suffice to solve the representational conflict between the debtors, the court ignored the Mall SPE's structural framework and recognized an “identity of interest in the whole” as paramount (the “Identity of Interest Opinion”).

With GGP's “identity of interest” concept in mind, and loan interest current, the issue for GGI's counsel was how far the concept might be stretched. If GGI filed for bankruptcy protection, and the Restaurants did not, would the court embrace and expand the concept and extend automatic stay protection to the Restaurants and their equity owners? Typically, stay extension issues involve a corporate debtor borrower with an individual non-debtor guarantor of its indebtedness seeking protection from collection actions during the pendency of the borrower's Chapter 11 proceeding. In those cases, protection for the guarantor may sometimes be obtained, under 11 U.S.C.
' 105 by evidencing to the court that the individual guarantor is essential to the debtor's operation, and unless freed from creditor pressure during the Chapter 11, reorganization efforts will suffer. Unfortunately, the Restaurants, while Co-borrowers with GGI, had only a fragile management agreement in favor of GGI as their sole formal tie, and were thus poor candidates for a ' 105 injunction absent special circumstances.

In re Chemtura Corporation

Bankruptcy Code ' 1129(b)(1) requires that a plan be fair and equitable with respect to a class of impaired claims that reject a plan. Under ' 1129(b)(2) of the Bankruptcy Code, in order for a plan to be fair and equitable to a class of unsecured creditors that has rejected a plan, the creditors must either be paid in full or no junior class can receive or retain any property under the plan on account of its junior claim or interest. This principle is known as the “absolute priority rule.”

Cases dealing with ' 1129's fair and equitable requirement uniformly hold that as a “corollary of the absolute priority rule,” the “fair and equitable” requirement encompasses a rule that a senior class cannot receive more than full compensation for its claims (the “Corollary Rule”). In re Chemtura Corporation, 439 B.R. 561, 592 (Bankr. S.D.N.Y. 2010). See also In re Exide Tech., 303 B.R. 48, 61 (Bankr. D. Del. 2003).

The Corollary Rule and the hole in the Lender's collateral coverage (i.e., no leaseholds and no leasehold fixtures) were important in scoping out a worst-case bankruptcy scenario in the event that a lone GGI's filing should prove unsuccessful in protecting the Restaurants from filing and suffering a Lender orchestrated bankruptcy liquidation. Invoking the Corollary Rule in a filing by all of the Co-borrowers where an asset produced, insufficient proceeds to fully pay Co-borrower obligations could prove useful in sale/plan negotiations with the Lender. The Co-borrowers' owners, in turn, were mindful that in forced liquidation proceeds from the sale of collateral hole assets would offer some protection against their potential liability for tax, wage and other owner sensitive priority obligations. The collateral hole and the Corollary Rule also provided a modicum of short-term shark repellant against a Lender push for a non-consensual sale in which sale proceeds insufficient to pay Co-borrower creditors in full needed to be shared with first-in-line administration, and priority creditors.

The Solution to the GGI Dilemma

Two days prior to the issuance of the Loan default notice, GGI and its counsel were warned by Lender's counsel ” ' should your client(s) determine to file voluntary petition(s) under Chapter 11 of the Bankruptcy Code, my client does not expect to consent to the use of cash collateral and will prepare for a full evidentiary hearing on this and other issues early in the Chapter 11 case(s).”

GGI caught an immediate break upon filing when the case was randomly assigned to the Hon. Allan L. Gropper, the judge who had authored the “Identity of Interest Opinion” in the GGP case.

In connection with a mild objection by the United States Trustee regarding the continued pre-petition practice of cash flowing from the non-debtor Restaurants to the GGI debtor, and then back on an as-needed basis to pay restaurant expenses, the court, at the initial case hearing on Nov. 17, 2010, remarked:

' [If] we have six more filings and that certainly would result in higher U.S. trustee fees but I don't know that it would [do] anybody else any good. If anybody feels that the other companies need to be in a case, I'm sure I'll hear from them.

The court then invited other objections to the Case's structure, and hearing none, stated:

All right. Well, since its their cash collateral that is an important factor. And if they feel that there aren't sufficient controls in this case, I'm sure I'll hear from them.” [emphasis supplied]

The court's use of “their” in its comment, of course, meant the Lender, who remained silent on the issue, and did not then object to the Case's bifurcated filing structure. On Dec. 29, 2010, the Lender filed a motion to “Appoint Chapter 11 Trustee Or Examiner With Expanded Powers To Oversee Sale Of Debtor And Affiliates' Restaurants” (the “Trustee Motion”). The Trustee Motion was preliminarily heard by the court on Jan. 28, 2011. Following the hearing, a conference was held in the Judge's chambers. At the conference, the Judge made it crystal clear that he was very uncomfortable with the Case's structural dichotomy. Specifically, the court was troubled by the creation of a structural conflict between GGI as debtor and debtor in possession, the non-filer Restaurants, and the Glazier family owners. The Judge also made it clear that the court was receptive to the Lender's position that the unorthodox filing structure, with the Restaurants' assets not being in custodial legis, was unacceptable in its attendant increase of lender risk. The court was emphatic in stressing that if the structural filing/non-filing issue was not addressed, it would likely direct the appointment of a trustee for GGI.

With enterprise operations firmly on the road to profitability, counsel once again had to face the dilemma of either filing the Restaurants for Chapter 11, or suffering a trustee appointment. Fortunately, the very structural weakness that was moving the court toward appointing a trustee for GGI then worked in favor of a compromise after the debtor demonstrated that the appointment of a trustee would not, ipso facto, allow the trustee to file the Restaurants for Chapter 11 protection. In compromise, GGI counsel offered a tri-parte agreement to be entered into between the GGI debtor, the Restaurants and the Glazier family owners for the employment of a Court-appointed chief restructuring officer (“CRO”) for the Co-borrowers.

The provisions for the appointment, and duties of a trustee and/or examiner are governed by Bankruptcy Code ” 1104 and 1106. There is no specific Bankruptcy Code section for the appointment of a CRO as such, and the CRO is essentially the creation of inventive insolvency counsel seeking to avoid the appointment of a trustee. Retention of a CRO requires court approval, and is made pursuant to Section 327 of the Bankruptcy Code which provides:

' with the court's approval [the Debtor] may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.

The agreement for the employment of a CRO by GGI (“CRO Agreement”) was approved by order of the Court on Feb. 11, 2011. The CRO Agreement vested the CRO with exclusive authority, inter alia, in ” ' structuring, negotiating, implementing and managing the restructuring of [GGI], and/or the sale or disposition of the [Co-borrowers] and/or their respective assets.”

Attendant to the CRO's appointment, the Lender withdrew the Trustee Motion. There then followed a period of semi-peaceful coexistence between the Co-borrowers and the Lender until March, 2011, when GGI announced that it had obtained a funding commitment of $3 million to fund a plan of reorganization whose key component would be the Loan's reinstatement.

The Lender once again turned hostile, and announced that it would neither consider nor agree to the reinstatement of the Loan. The Lender further announced its intention to no longer abide by its previous informal agreement to not foreclose on the Loan collateral, and to once again press for the Restaurants' sale in or outside of GGI's bankruptcy proceeding.

The Lender served formal notice on the Co-borrowers and their equity owners of its intention to conduct a secured creditor foreclosure sale of Co-borrower equity interests and Restaurants collateral on April 15, 2011. At an April 1, 2011 hearing before the court, GGI sought to enjoin the threatened foreclosure arguing that the Lender in connection with the CRO appointment, and its earlier acquiescence to the case's split structure, had with the passage of time fully acquiesced and approved by omission the de facto extension of the automatic stay to the Restaurants and their equity owners. Counsel further argued that the Lender should not belatedly be permitted to unilaterally change the playing field to the detriment of the enterprise stakeholder creditors which now included a new host of post-petition Restaurant creditor claimants. The debtor requested the court to treat the Lender's notice of intent to conduct a UCC Sale as a request for relief from the automatic stay. Alternatively, citing the special circumstances of available funding for a plan, and potential harm to innocent post-petition creditors, the debtor requested the court to enjoin the threatened sales pursuant to Bankruptcy Code ' 105.

The court, while clearly skeptical with regard to endorsing the debtor's injunction request, did not rule out the request as it adjourned the matter to April 13 for further hearing and stated:

If the debtors wish to go forward with an injunction to prevent [Lender] from foreclosing on any of its collateral against nondebtors, the debtors may do so on the present papers, supplemented very briefly. And they can do so before the April 15th target date. I'm not endorsing it. And I already expressed some skepticism as to that motion, at least as it pertains to the equity interests of the so-called affiliates. [emphasis supplied]

The Co-borrowers could not abide the sale of their equity interests at foreclosure, and once again the dilemma of the Restaurants needing to file had to be addressed. This time, the dilemma was solved when the group that previously had agreed to lend the debtor $3 million to exit Chapter 11 agreed instead to buy two of the Restaurants (the “Sale”). Specifically, the Sale offer was to purchase those restaurants as going concerns for cash with a sale price metric reflective of their combined brand value, and prior economic performance.

Sale Conflict and Reorganization Plan

From Case inception, the potential for conflict between the Restaurants, their equity owners, and GGI was a constant irritant for the court. Addressed initially by the CRO appointment, the conflict irritant percolated malevolently below the surface as the Case progressed, and then reasserted itself when the CRO entered into a binding letter of intent for the restaurant Sale. The chief element of the conflict was GGI's interests as a creditor of one of the Restaurants being sold, an overall significant debtor to all of the other Restaurants, and a holder of none of the equity of any of the Restaurants. Borrowing a page from the GGP playbook the CRO addressed the conflict issue by engaging independent counsel to effect the Sale, and in concert with GGI counsel, formulate a joint plan of reorganization for GGI and the Restaurants (the “Plan”).

Bankruptcy Code ' 1123(a)(5) provides that a plan shall provide adequate means for its implementation, such as “merger or consolidation of the debtor with one or more persons.” Code ' 1123(a)(5) evolved from the Supreme Court decision in Sampsell v. Imperial Paper, 313 U.S. 215 (1941). In Sampsell, the Court held the consolidation of debtor and non-debtor entities to be appropriate and necessary where a streamlined structure of the debtor's corporate enterprise would consolidate assets with the debtor, while maintaining existing business operations and preserving asset values. The Code section, while used sparingly in bankruptcy plan formulations, was recently invoked with success in the case of In re Fremont General Corp., 2010 WL 4739439 at *16, No. 8:08-bk-13421 (Bankr. C.D. Cal. June 9, 2010). The Code section proved useful in formulating the GGI Plan.

The Sale was consummated on Dec. 6, 2011, and its proceeds were sufficient to fully discharge the Loan, and substantially all of the other Co-borrowers' vintage debt obligations of the Co-borrowers. The Sale fully funded GGI's Plan, which was confirmed by order of the court on Dec. 12, 2011. Consistent with ' 1123(a)(5) the Plan's basic structure provided for the merger of the Restaurants into GGI upon its consummation. Mechanically, the merger was accomplished by the Plan's cancellation of existing GGI equity interests, and the issuance at confirmation of 100% of the equity of reorganized GGI to the restaurant equity owners in consideration for their transfer of the Restaurants equity interests to reorganized GGI. The Plan further provided for the re-instatement of Co-borrower intercompany claims on confirmation, but curtailed Co-borrowers' right to receive any payment on account thereof for three years.

Conclusion

There is clearly a limit to the extent which the bankruptcy professional can rely on and employ “identity of interest” when crafting a bankruptcy survival strategy for enterprise co-borrowers. In the 13-month period between the Nov. 15, 2010, Petition Date and the Dec. 6, 2011, sale date, the Restaurants were able to continue normal operations, and in so doing produced strong operating results, which attracted several would-be acquirers other than the bottom fishers initially trolling in the Lender's waters. To counsel's mind, the GGI case demonstrates that the “Identity of Interest” concept does have legs, and its further development bears watching as the eternal battle between debtors and creditors inexorably plods along to no conclusion.

Joshua J. Angel is senior counsel in Herrick, Feinstein LLP's Restructuring and Bankruptcy Group. Mr. Angel earned his B.S. from New York University '56, and his L.L.B. from Columbia Law School '59.