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March 18, 2019 – Certain holders (the “Noteholders”) of the Debtors' 11½%/13½% PIK Toggle Second Priority Secured Subordinated Notes due 2020, Series II (the “Second Lien Notes”) objected [Docket No. 690] to the Debtors' modified second amended joint Chapter 11 Plan of reorganization [Docket No. 621]. The Noteholders accuse the Debtors and the Debtors' first lien noteholder (HPS Investment Partners LLC, or "HPS") of working together to "cook" the Plan with a fraudulent conveyance in order to benefit HPS at the expense of the their own second lien claims.
The objection states, “The Plan should not be confirmed because it is the culmination of a series of transactions pursuant to which LBI seeks to deny the Noteholders their economic rights and interest in LBI. Most critically, through this Plan, LBI asks the Court to bless a fraudulent conveyance, which LBI seeks to characterize as a ‘refinancing’ of the Company’s First Lien Notes (the ‘HPS Transaction’). The HPS Transaction, which occurred just a few months before these cases were commenced and long after LBI was insolvent, added substantial additional debt to the company, paid unnecessary and unjustified fees to HPS, and provided LBI with virtually nothing in return. The HPS Transaction is at the core of LBI’s proposed Plan and, unless stopped, will prevent the Noteholders from receiving the recovery on the Second Lien Notes to which they are entitled. The Noteholders respectfully contend that a Plan based on a fraudulent conveyance cannot be confirmed consistent with Section 1129, the governing debt indentures, and applicable law. Among other things:
- The Plan pays HPS more than the legitimate value of its claim, including amounts that should be disallowed, such as an $87 million ‘make-whole’ and millions of dollars of related fees;
- The Plan unfairly discriminates against the Second Lien Noteholders and violates the absolute priority rule. The Plan overcompensates HPS (the sole first lien holder) and proposes to distribute almost 100% to the general and unsecured creditors, while the Second Lien Noteholders get nothing;
- The Plan gives broad and improper releases to Lenard Liberman, the directors, and HPS in order to immunize them against claims of fraud, breach of fiduciary duty, and other misconduct. The Debtors’ disclosure statement states that the proposed releases are ‘for good and valuable consideration,’ (56-57), but LBI’s 30(b)(6) witness on this precise question testified that he was unaware of any consideration supporting the proposed releases of Liberman or the directors."
The objection continues, “In these proceedings the Noteholders have been provided with additional discovery that they did not have access to in state court, much of which relates to the conduct that occurred in connection with the HPS Transaction—the centerpiece of the proposed Plan presently before this Court.
That discovery has revealed the following facts, all of which paint a picture of the other parties to these cases working in harmony to squeeze the Noteholders and deny them any recovery, while dividing the Company amongst themselves.
First, discovery has confirmed that the Company was insolvent and that bankruptcy was inevitable at the time of the HPS Transaction, and the Company’s protests to the contrary are wholly unbelievable. Indeed, LBI—which was insolvent under any solvency test at the time it approved the HPS Transaction—reached out to two different financial advisors in the weeks before the transaction to discuss “cramming down” the Second Lien Noteholders. LBI attempted to enter into a restructuring support agreement with HPS prior to the transaction, and LBI’s general counsel was seeking advice from LBI’s financial advisors on what would happen with HPS in a bankruptcy. LBI’s June 30, 2018 Quarterly Report included a “going concern” statement, which its CFO testified was necessary because the Company could not likely make its fall interest payments. He was right.
Second, despite the fact that LBI was insolvent, the LBI board approved the HPS Transaction with virtually no understanding of its material terms, any consideration of its impact on the Noteholders, and essentially abdicated its oversight role by deferring to Mr. Liberman. LBI’s board members voted to approve the HPS Transaction based on outdated financial projections even its own CFO was unwilling to rely on, without knowing that the make whole already was (or certainly would be) triggered by default, without considering the $87 million make whole’s effects on LBI’s other creditors, and without discussing the make whole at a board meeting. There is almost no reference in any board materials to the make whole until the April 11 board call, unattended by LBI’s CFO, which lasted 25-minutes and during which the transaction was approved. In those materials, which were circulated 7 minutes into the meeting and which there is no indication were discussed, there is a single slide explaining the mechanics of the make whole and its size.
Third, Mr. Liberman understood at the time he entered into the HPS Transaction that if the Company proceeded with the Noteholders as owners, he stood to lose his job and economic upside in a restructured LBI. In HPS, he found a new partner who he felt he could work with—a consideration he valued over the Noteholders’ economic rights and over the best interests of the Company in dereliction of his fiduciary duties.
Fourth, HPS was a willing participant in shifting value from the Second Lien Noteholders to themselves. HPS discussed internally that the make whole was the most important piece of the transaction, and discussed with LBI’s financial advisor that it allowed them to control the terms of a restructuring. Without a doubt, HPS’s investment strategy assumed a potential restructuring. In an internal investment memorandum, HPS identified five possible outcomes for LBI: only one did not involve a Chapter 11 filing, and that one assumed the Second Lien Noteholders would receive 90-95% of LBI’s equity. LBI had already rejected a similar proposal on those terms from the Second Lien Noteholders, and had no intention to consummate such a transaction.
Fifth, the Plan was “cooked” from the outset. LBI hired Neil Goldman, a purportedly independent director, to “investigate” the issues relating to the HPS Transaction and he, in turn, commissioned a report on the issues. The report does not lie. It outlines its flaws clearly. The parameters of the investigation and documents for review were selected by LBI’s conflicted litigation and bankruptcy counsel. Goldman did not independently consult any materials, and signed off on releases to HPS many months before counsel ever even evaluated potential claims against HPS…
Sixth, the sham marketing process run by the Restructuring Committee as part of these chapter 11 cases was fatally flawed and designed to validate a low-ball valuation, rather than to obtain a value-maximizing purchase offer. The process was run in secret without court-approved bid procedures. When the Noteholders sought non-public documents made available to others in the course of the marketing process, LBI refused to give them access. The Noteholders made an offer regardless, which was rejected by LBI. By inducing low bids, the Company hopes to establish that its value has nearly halved since April 2018.
Seventh, the Official Committee of Unsecured Creditors (the “Committee”) has provided no check on the Debtors’ conduct. Despite the fact that the Noteholders are by far its largest constituent, the Committee has steadfastly opposed the Noteholders’ efforts to pursue their claims, arguing that the Noteholders lack standing and their claims belong to the Committee. Yet the Committee settled with the Debtors and HPS in the middle of discovery on these very claims, without asking a single question at any deposition, and without asking for any recovery for the holders of Second Lien Notes, who are holders of approximately $278 million in unsecured claims compared to the approximately $3 million of general unsecured claims the Committee is focused on. The Committee’s support was paid for and drafted by LBI and HPS, and should be disregarded entirely.”
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