preliminary objection to debtor's motion for entry of …

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{00375671-6} 1 Douglas S. Draper, La. Bar No. 5073 [email protected] Leslie A. Collins, La. Bar No. 14891 [email protected] Michael E. Landis, La. Bar No. 36542 [email protected] Heller, Draper & Horn, L.L.C. 650 Poydras Street, Suite 2500 New Orleans, LA 70130 Telephone: (504) 299-3300 Fax: (504) 299-3399 Attorneys for The Dugaboy Investment Trust UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION IN RE: * Chapter 11 * * Case No. 19-34054sgj11 HIGHLAND CAPITAL MANAGEMENT, L.P. * * Debtor * PRELIMINARY OBJECTION TO DEBTOR'S MOTION FOR ENTRY OF AN ORDER (I) AUTHORIZING THE DEBTOR TO (A) ENTER INTO EXIT FINANCING AGREEMENT IN AID OF CONFIRMED CHAPTER 11 PLAN AND (B) INCUR AND PAY RELATED FEES AND EXPENSES, AND (II) GRANTING RELATED RELIEF Now into Court, through undersigned counsel, comes The Dugaboy Investment Trust (“Dugaboy”), who files this preliminary objection to the Debtor's Motion for Entry of an Order (I) Authorizing the Debtor to (A) Enter into Exit Financing Agreement in Aid of Confirmed Chapter 11 Plan and (B) Incur and Pay Related Fees and Expenses, and (II) Granting Related Relief (“Motion”) [Doc. #2229]. The basis of this preliminary objection is, firstly, that this Court does not have the authority to approve a loan whose proceeds will go to non-debtor entities, and secondly, that the loan is essentially binding a non-debtor (Trussway Industries, LLC) for the full amount of the loan but providing 40% of the benefits to another entity (the Reorganized Debtor) Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 1 of 12

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{00375671-6} 1

Douglas S. Draper, La. Bar No. 5073 [email protected] A. Collins, La. Bar No. 14891 [email protected] E. Landis, La. Bar No. 36542 [email protected], Draper & Horn, L.L.C. 650 Poydras Street, Suite 2500 New Orleans, LA 70130 Telephone: (504) 299-3300 Fax: (504) 299-3399 Attorneys for The Dugaboy Investment Trust

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

IN RE: * Chapter 11 * * Case No. 19-34054sgj11

HIGHLAND CAPITAL MANAGEMENT, L.P. * *

Debtor *

PRELIMINARY OBJECTION TO DEBTOR'S MOTION FOR ENTRY OF AN ORDER (I) AUTHORIZING THE DEBTOR TO (A) ENTER INTO EXIT FINANCING

AGREEMENT IN AID OF CONFIRMED CHAPTER 11 PLAN AND (B) INCUR AND PAY RELATED FEES AND EXPENSES, AND (II) GRANTING RELATED RELIEF

Now into Court, through undersigned counsel, comes The Dugaboy Investment Trust

(“Dugaboy”), who files this preliminary objection to the Debtor's Motion for Entry of an Order

(I) Authorizing the Debtor to (A) Enter into Exit Financing Agreement in Aid of Confirmed

Chapter 11 Plan and (B) Incur and Pay Related Fees and Expenses, and (II) Granting Related

Relief (“Motion”) [Doc. #2229]. The basis of this preliminary objection is, firstly, that this Court

does not have the authority to approve a loan whose proceeds will go to non-debtor entities, and

secondly, that the loan is essentially binding a non-debtor (Trussway Industries, LLC) for the full

amount of the loan but providing 40% of the benefits to another entity (the Reorganized Debtor)

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 1 of 12

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without any indication as to why (or even if) Trussway Industries would agree to the proposed

agreement. Dugaboy reserves the right to supplement this objection to the extent that additional

facts are made available to Dugaboy through discovery or otherwise. Dugaboy’s initial

objections are the following:

1. Any attempt to obtain Court approval to provide loan proceeds to a post-effective

date reorganized debtor is unlawful in that the Bankruptcy Code does not permit this

Court to approve the loan, the proceeds of which will go to a non-debtor and will

simultaneously be secured by property of an estate that will cease to exist. The

borrowers, other than Trussway Industries, LLC (“Trussway Industries”), will not

exist on the Effective Date or possess any assets to secure the loan prior to the

Effective Date of the Plan.

2. Dugaboy is a $2 million creditor of Trussway Holdings, LLC (“Trussway

Holdings”), the majority owner of Trussway Industries and an $18 million creditor of

Highland Select Equity Fund L.P., whose value includes its ultimate equity interest in

Trussway Industries. Highland Select and Trussways Holdings’ value will be

reduced by the $20 million used to pay the administrative expenses and claims of

Highland Management L.P. Under the proposed Exit Loan forty percent of the loan

proceeds are unrelated to and are not being used for the benefit of either entity. The

debtor, acting as Investment Manager for Highland Select, cannot justify under any

set of circumstances how Highland Select benefits from having the value of its

investment in Trussway Holdings reduced by $20 million. This is but another

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 2 of 12

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instance of the Debtor wearing two hats and owing a fiduciary duty to both and

benefitting the Debtor to the detriment of the other owners of Highland Select.1

3. While the Debtor blindly relies upon the business judgment rule to justify the loan, it

must provide at least some basis for entering into this particular loan. Specifically,

while the Debtor asserts that the structure of the loan will benefit Trussway Industries

(and consequently the Debtor) by restructuring its current loan obligations, there is no

indication that Trussway Industries could not otherwise restructure its obligations

outside of the Debtor’s bankruptcy case without having 40% of the new loan go to

another entity (i.e. the Reorganized Debtor). What is in the best interests of the

Highland Management and its creditors is not necessarily in the best interests of

Highland Select and Trussway Industries. The business judgment rule cannot be

viewed on a global level but rather the business judgment rule requires the evaluation

of the judgment on an entity by entity approach. Significantly, the Motion does not

state that the Board of Directors of Trussway Industries has even approved the loan or

that Trussway Industries could not obtain a loan from an entity on its own without

being a maker for $20 million of additional debt. The Motion is devoid of any

contention that Trussway Industries cannot obtain a loan on its own. Even if the rate

for Trussway Industries was higher than the so-called Exit Loan the additional $20

million of debt on its balance sheet is a far greater problem than a term loan rate 200

basis points higher than the rate of the Exit Loan.

1 Both Mark Okada and PCMG Management Trading Partner XXIII L.P. own minimal interest in Highland Select and Dugaboy has a claim against Highland Select in excess of $17 million. The Investment Advisors Act was enacted to protect the small investor and the fiduciary duty owed to investors in Highland Select is not measured by the size of one’s ownership but rather whether someone or an entity is an investor.

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 3 of 12

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4. The Motion fails to identify whether the loan is in the best interests of Trussway

Industries and its ultimate owners and their creditors. Under the terms of the facility,

Trussway Industries is incurring a liability for the difference between its debt and the

facility under the Exit Loan. The Motion states that the loan proceeds will be used to

a) refinance the Trussway Industries debt (a benefit to Trussway); and b) pay the

administrative costs of the Debtor and creditors of the Debtor (no benefit to

Trussway). The Motion is devoid of any disclosure as to how Trussway Industries

will be repaid if it or any of its assets repay the Exit Loan in an amount in excess of

the proceeds of the Loan used to repay the existing Trussway Industries debt.

I. THE BANKRUPTCY CODE DOES NOT AUTHORIZE POST-EFFECTIVE DATE LOANS TO A REORGANIZED DEBTOR

While the Debtor asserts its Motion as authorized under 11 U.S.C. § 363(b)(1), in reality

it is asking for the Court to approve a loan under section 364. Regardless of which section of the

Bankruptcy Code upon which the Debtor relies, neither section authorizes the Court to approve a

loan to a non-debtor entity—let alone one that does not yet exist and will not exist until after the

Effective Date.

The proposed financing agreement lists as the borrowers Trussway Industries, the

Reorganized Debtor, and the Claimant Trust. [Dkt. No. 2229, ¶ 10]. Article IV of the Debtor’s

confirmed Fifth Amended Plan of Reorganization of Highland Capital Management, L.P. (as

Modified) [Dkt. No. 1943] (the “Plan”) provides that “[o]n the Effective Date, the Debtor or the

Reorganized Debtor, as applicable, will issue new Class A Limited Partnership Interests to (i) the

Claimant Trust, as limited partner, and (ii) New GP LLC, as general partner, and will admit (a)

the Claimant Trust as the limited partner of the Reorganized Debtor, and (b) New GP LLC as the

general partner of the Reorganized Debtor.” Id. at IV.C.3. The Plan further provides that “on or

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 4 of 12

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after the Effective Date, all Reorganized Debtor Assets will vest in the Reorganized Debtor.” Id.

at Art. IV § C.5. In other words, the Reorganized Debtor has no members, no assets, and

effectively does not exist until the Effective Date.

Further, the Plan defines “Reorganized Debtor” as “the Debtor, as reorganized pursuant

to this Plan on and after the Effective Date.” Id. at I.B.114 (emphasis added). The Plan also

defines the “Claimant Trust” as “the trust established for the benefit of the Claimant Trust

Beneficiaries on the Effective Date…” Id. at I.B.24 (emphasis added). As defined in the Plan,

neither the Reorganized Debtor nor the Claimant Trust exists until the Effective Date. It must

also be noted that neither the Claimant Trust nor Trussway Industries is a debtor in this case.

In GPIF Aspen Club LLC v. Aspen Club & Spa, LLC (In re Aspen Club & Spa, LLC), the

BAP for the Tenth Circuit encountered a similar situation as the current case. No. BAP CO-19-

043, 2020 WL 4251761, (10th Cir. BAP (Colo.) July 24, 2020). In Aspen Club & Spa, GPIF

Aspen Club, LLC (“GPIF”) purchased a note from the debtor’s prepetition lender. Id. at *1.

During the bankruptcy case, the debtor obtained a DIP loan from EFO Financial Group, LLC

(“EFO”). Id. at *2. Under the debtor’s proposed Plan, EFO was also to provide an exit

financing facility which “will be advanced to the Reorganized Debtors, [and] will be secured by

a lien against all property of the estate, . . .” Id. As is the case here, the plan in Aspen Club &

Spa also stated that “property of the estate vests in the Reorganized Debtors on the Plan effective

date.” Id.

The issue presented to the BAP was whether section 364 of the Bankruptcy Code

permitted the exit financing to be provided to the reorganized debtor as opposed to the debtor-in-

possession. GPIF, who stood to be subordinated under the exit financing facility, argued against

the financing for the same reasons presented in this Preliminary Objection and the BAP agreed.

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 5 of 12

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GPIF argues that the exit financing cannot be approved under § 364 as a matter of law because (a) Aspen Club as reorganized debtor, not as debtor-in-possession, will obtain the credit, and (b) the liens will not attach to property of the estate. If Aspen Club as Reorganized Debtor will execute the loan documents and the liens will be recorded after the collateral no longer is property of the estate, we agree that the exit financing cannot be approved under § 364 as a matter of law for the reasons GPIF argues.

In re Aspen Club & Spa, LLC, No. BAP CO-19-043, 2020 WL 4251761, at *9.

As the BAP pointed out, section 364 permits the trustee or the debtor-in-possession to

obtain credit and to permit liens on property of the estate. It does not allow the reorganized

debtor (a separate entity) to obtain credit and if the property of the estate vests in the reorganized

debtor, it thereby ceases to be “property of the estate.” Id. at *9 (“But post-confirmation, after

the property of the estate has vested in the reorganized debtor, the debtor-in-possession no longer

exists and there no longer is any property of the estate. If the credit is obtained by the

reorganized debtor and the liens attach to property of the reorganized debtor, then neither the §

364(d)(1) requirement that the ‘trustee’ obtain the credit nor the § 364(d)(1) requirement that the

liens are ‘on property of the estate,’ can be satisfied.”).

The same scenario is present here. The proposed exit financing facility provides that

Trussway Industries, the Reorganized Debtor, and the Claimant Trust will be borrowers. None is

a debtor-in-possession in this case. The proposed facility further offers to secure the loan with

first priority liens on the “Debtor’s ownership interests” in various entities. [Dkt. No. 2229 at

¶10(d)]. After the Effective Date of the Plan, the Debtor will have no ownership interests in any

of the entities as all of the Debtor’s assets will be vested in the Reorganized Debtor.

While the Debtor attempts to couch its Motion under section 363, the analysis is the

same. Section 363 provides that “[t]he trustee, after notice and a hearing, may use, sell, or lease,

other than in the ordinary course of business, property of the estate…” 11 U.S.C. § 363(b)(1)

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 6 of 12

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(emphasis added). By its plain terms, section 363, like section 364, allows the trustee/debtor-in-

possession to use, sell, or lease property of the estate. In this case, the proposed exit financing

would permit the Reorganized Debtor to use property of the Reorganized Debtor and/or the

Claimant Trust. It is simply untenable.

II. EVEN IF THE EXIT LOAN WERE PRE-EFFECTIVE DATE, TRUSSWAY INVESTMENTS IS A NON-DEBTOR AND HAS NOT APPROVED THE LOAN.

The Motion states clearly that “[t]he proceeds will be used to, among other things, repay

Trussway Industries’ term loan obligations in the approximate amount of $31,342,343.” [Dkt.

No. 2229 at ¶ 10]. By the Debtor’s own admission, the loan proceeds do not even go to the

Debtor. In effect (and ignoring the fact that the Debtor and Reorganized Debtor are separate

entities), the proceeds go to Trussway Investments, and then a portion of those are funneled up to

the Debtor through the Debtor’s ownership interest in Highland Select, which holds a 90%

interest in Trussway Holdings, which owns Trussway Industries. There is no indication in the

Motion that the managers/officers of Trussway Industries (or Trussway Holdings) have given

authorization for Trussway Industries to enter into the proposed loan.

III. THE DEBTOR HAS FAILED TO SHOW THAT TRUSSWAY INDUSTRIES COULD NOT OTHERWISE RESTRUCTURE ITS DEBTS

While the Debtor states that this is in the best interest of the estate by, among other

things, reducing the interest expenses currently being born by Trussway Industries, which, in

turn, are directly born by the Debtor,2 it fails to provide any analysis as to whether Trussway

could have otherwise restructured its debt without incurring a $50 million obligation to pay off a

$31 million obligation (an excess of $19 million).

In fact, the Debtor boasts about Trussway Industries’ “strong performance in currently

difficult markets” as justification for delaying its sale. [Dkt. No. 2229 at ¶ 9]. If Trussway

2 See Dkt. No. 2229, p. 7 n. 10.

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 7 of 12

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Industries is doing so well, surely it could secure better financing options without incurring an

extra $19 million in debt.

IV. TRUSSWAY INDUSTRIES IS INCURRING AN EXTRA $19 MILLION IN DEBT FOR THE BENEFIT OF THE DEBTOR WITHOUT ADEQUATE PROTECTION IN THE EVENT IT IS LIABLE FOR THE EXTRA

As mentioned above, Trussway Industries is obligating itself as a borrower to a $50

million loan facility when it is only receiving approximately $31 million to its benefit. The

remaining $19 million goes to the Reorganized Debtor and the Claimant Trust. Yet, there is no

protection offered to Trussway Industries for the added risk it is assuming. In conjunction with

the fact that there is no indication as to why Trussway Industries could not obtain a refinancing

of its obligations without going through the exit facility, this omission raises serious questions as

to whom this proposed loan is actually benefiting. Trussway Industries should receive protection

to the extent that it is ultimately required to pay the Exit Loan in excess of its benefit.

V. CONCLUSION

The proposed exit facility is simply untenable under the law as no section of the

Bankruptcy Code permits this Court to grant a loan to a reorganized debtor as opposed to a

debtor-in-possession; nor does it permit the Court to authorize a loan to a non-debtor entity.

Aside from that insurmountable legal hurdle, the necessity of Trussway Industries’ role in the

proposed exit facility is entirely unclear. For these reasons, the Dugaboy Investment Trust

respectfully requests that this Court deny the Debtor’s Motion in its current form.

June 4, 2021

Respectfully submitted,

/s/Douglas S. Draper. Douglas S. Draper, La. Bar No. 5073 [email protected]

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 8 of 12

{00375671-6} 9

Leslie A. Collins, La. Bar No. 14891 [email protected] E. Landis, La. Bar No. 36542 [email protected]

Heller, Draper & Horn, L.L.C. 650 Poydras Street, Suite 2500 New Orleans, LA 70130 Telephone: (504) 299-3300 Fax: (504) 299-3399 Attorneys for The Dugaboy Investment Trust

CERTIFICATE OF SERVICE

I do hereby certify that on June 4, 2021, a copy of the above and foregoing Preliminary Objection to Debtor's Motion for Entry of an Order (I) Authorizing the Debtor to (A) Enter into Exit Financing Agreement in Aid of Confirmed Chapter 11 Plan and (B) Incur and Pay Related Fees and Expenses, and (II) Granting Related Relief has been served electronically to all parties entitled to receive electronic notice in this matter through the Court’s ECF system as follows:

David G. Adams [email protected], [email protected];[email protected]

Amy K. Anderson [email protected], [email protected];[email protected]

Zachery Z. Annable [email protected] Bryan C. Assink [email protected] Asif Attarwala [email protected] Joseph E. Bain [email protected], [email protected];joseph-bain-

[email protected];[email protected] Michael I. Baird [email protected], [email protected] Sean M. Beach [email protected], [email protected] Paul Richard Bessette [email protected],

[email protected];[email protected];[email protected];[email protected];[email protected]

John Y. Bonds [email protected] Larry R. Boyd [email protected], [email protected] Jason S. Brookner [email protected],

[email protected];[email protected];[email protected] Greta M. Brouphy [email protected],

[email protected];[email protected] M. David Bryant [email protected], [email protected] Candice Marie Carson [email protected] Annmarie Antoniette Chiarello [email protected] Shawn M. Christianson [email protected], [email protected] James Robertson Clarke [email protected]

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 9 of 12

{00375671-6} 10

Matthew A. Clemente [email protected], [email protected];[email protected];[email protected];[email protected];[email protected]

Megan F. Clontz [email protected], [email protected] Andrew Clubok [email protected], [email protected],ny-

[email protected] Leslie A. Collins [email protected] David Grant Crooks [email protected],

[email protected],[email protected],[email protected],[email protected]

Deborah Rose Deitsch-Perez [email protected], [email protected];[email protected]

Gregory V. Demo [email protected], jo'[email protected];[email protected];[email protected];[email protected];[email protected];[email protected];[email protected];[email protected];[email protected]

Casey William Doherty [email protected], [email protected];[email protected];[email protected]

Douglas S. Draper [email protected], [email protected];[email protected]

Lauren Kessler Drawhorn [email protected], [email protected]

Vickie L. Driver [email protected], [email protected];[email protected];[email protected];[email protected]

Jonathan T. Edwards [email protected] Jason Alexander Enright [email protected] Robert Joel Feinstein [email protected] Matthew Gold [email protected] Bojan Guzina [email protected] Margaret Michelle Hartmann [email protected] Thomas G. Haskins [email protected] Melissa S. Hayward [email protected], [email protected] Michael Scott Held [email protected], [email protected] Gregory Getty Hesse [email protected],

[email protected];[email protected];[email protected] Juliana Hoffman [email protected], [email protected];julianna-

[email protected] A. Lee Hogewood [email protected],

[email protected];[email protected];[email protected];[email protected];[email protected];[email protected]

Warren Horn [email protected], [email protected];[email protected]

John J. Kane [email protected], [email protected];[email protected]

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 10 of 12

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Jason Patrick Kathman [email protected], [email protected];[email protected];[email protected]

Edwin Paul Keiffer [email protected], [email protected] Jeffrey Kurtzman [email protected] Phillip L. Lamberson [email protected] Lisa L. Lambert [email protected] Michael Justin Lang [email protected],

[email protected];[email protected];[email protected];[email protected] Edward J. Leen [email protected] Paul M. Lopez [email protected] Faheem A. Mahmooth [email protected], [email protected] Ryan E. Manns [email protected] Brant C. Martin [email protected], [email protected] Brent Ryan McIlwain [email protected],

[email protected];[email protected] Thomas M. Melsheimer [email protected], tom-melsheimer-

[email protected] Paige Holden Montgomery [email protected],

[email protected];[email protected];[email protected];[email protected];[email protected]

J. Seth Moore [email protected], [email protected] John A. Morris [email protected] Edmon L. Morton [email protected] Holland N. O'Neil [email protected],

[email protected];[email protected];[email protected] Rakhee V. Patel [email protected],

[email protected];[email protected] Charles Martin Persons [email protected] Louis M. Phillips [email protected], [email protected] Mark A. Platt [email protected], [email protected] Jeffrey Nathan Pomerantz [email protected] Kimberly A. Posin [email protected], [email protected] Jeff P. Prostok [email protected],

[email protected];[email protected];[email protected];[email protected]

Linda D. Reece [email protected] Penny Packard Reid [email protected], [email protected];penny-reid-

[email protected];[email protected] Suzanne K. Rosen [email protected],

[email protected];[email protected];[email protected];[email protected]

Davor Rukavina [email protected] Amanda Melanie Rush [email protected] Alyssa Russell [email protected] Mazin Ahmad Sbaiti [email protected], [email protected];[email protected]

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 11 of 12

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Douglas J. Schneller [email protected] Michelle E. Shriro [email protected],

[email protected];[email protected] Nicole Skolnekovich [email protected],

[email protected];[email protected] Jared M. Slade [email protected] Frances Anne Smith [email protected],

[email protected] Eric A. Soderlund [email protected] Martin A. Sosland [email protected],

[email protected],[email protected] Laurie A. Spindler [email protected], Dora.Casiano-

[email protected];[email protected] Jonathan D. Sundheimer [email protected] Kesha Tanabe [email protected] Clay M. Taylor [email protected], [email protected] Chad D. Timmons [email protected] Dennis M. Twomey [email protected] Basil A. Umari [email protected], [email protected] United States Trustee [email protected] Artoush Varshosaz [email protected], [email protected] Julian Preston Vasek [email protected] Donna K. Webb [email protected],

[email protected];[email protected];[email protected] Jaclyn C. Weissgerber [email protected], [email protected] Elizabeth Weller [email protected], dora.casiano-

[email protected];[email protected] Daniel P. Winikka [email protected],

[email protected],[email protected],[email protected] Hayley R. Winograd [email protected] Megan Young-John [email protected]

/s/Douglas S. Draper. Douglas S. Draper, La. Bar No. 5073

Case 19-34054-sgj11 Doc 2403 Filed 06/04/21 Entered 06/04/21 10:12:15 Page 12 of 12