Opinion
Case No. 1-01-02609, (Jointly administered).
September 28, 2001
MEMORANDUM
Factual and Procedural History
On May 7, 2001, SGPA, Inc. (SGPA) and ten of its direct and indirect subsidiaries and affiliates filed petitions for relief under Chapter 11 of the United States Bankruptcy Code in this Court. The ten entities affiliated with SGPA are Grove Worldwide, LLC, Grove Holdings, LLC, Grove Investors Capital, Inc., Grove Holdings Capital, Inc., Grove Capital, Inc., Grove Finance, LLC, Grove U.S., LLC, Crane Acquisition Corp., Crane Holding, Inc., and National Crane Corp. (All eleven entities will be referred to hereinafter as "Debtors").
Debtors are manufacturers of heavy construction equipment, including mobile cranes and manlifts. Their business is a cyclical one, with intervals of approximately eight years between production peaks. In 1999, the heavy construction equipment industry took a downturn and industry sales have declined over the last three fiscal years. This decline made it difficult for the Debtors to satisfy their debt obligations. Recognizing that their debt was affecting the companies' ability to maintain trade credit, third-party trade financing and customer confidence in the Grove names, the Debtors sought to restructure their balance sheet.
Beginning in February, 2001, the Debtors met with members of their pre-petition secured credit facility (hereinafter the "Bank Group") and their counsel and financial advisors to discuss alternatives for a restructuring. Debtors encouraged the holders of their most senior unsecured debt — specifically the 9-1/4% Senior Subordinated Note Holders — to form a committee and hire financial and legal advisors to negotiate the restructuring. For several months prior to the filing of the instant Petition, Debtors, the Bank Group and Debtors' bondholders (hereinafter "the Subordinated Bondholders") negotiated to reach an agreement that would enable the Debtor to restructure its finances without the need of a contested bankruptcy filing. A number of restructuring alternatives were discussed with the Bank Group. The Debtor agreed to pay for each group to obtain legal and financial consultation. These negotiations were fruitful as between the Debtor and the Bank Group, but not the Debtor and the Subordinated Bondholders. Unable to reach an accord with the Subordinated Bondholders, the Debtors filed the instant Petitions.
The debt is structured into three tiers, 9 1/4% senior subordinated notes, 11 5/8% senior debentures, and 14 1/2% senior debentures. The Subordinated Bonds had been issued in leveraged buyouts in 1997 and 1998. An investment in these debentures would have been highly speculative at that time. Testimony at trial indicated that the standardized rating system for corporate bonds would have placed them in class "BB" or "CCC", the lowest rating of the system, also known as "junk bonds".
On May 7, 2001, in addition to filing their Petitions, the Debtors filed a Disclosure Statement and a Joint Plan of Reorganization. The Disclosure Statement and Plan were amended and, on June 25, 2001, the Court approved the Disclosure Statement. August 14 and 15, 2001 were fixed as the dates for a confirmation hearing regarding the Plan. The Disclosure Statement indicated that the Bank Group had agreed to refinance their claims by receiving an equity interest in the reorganized Debtors in exchange for substantial loan forgiveness. In addition, the Bank Group would receive a note from the reorganized operating company in the amount of $125,000,000.00 and "PIK notes" from the reorganized holding company in the face amount of $45,000,000.00. The Bank Group's claim is in the approximate amount of $230,000,000.00.
Under the Plan of Reorganization, three of the Debtors are merged into other entities and their stock is extinguished. Ultimately, a holding company, an operating company, and four North American subsidiaries would remain after reorganization is complete.
"PIK notes" are notes which may be "Paid in Kind". That is, the holder may, instead of cash, receive new notes upon maturity of the note.
The consensus of the experts at the hearing was that these notes could not be valued at par for purposes of the instant proceeding. The actual value of them, for instant purposes, is somewhere between $25,000,000.00 and $35,000,000.00. The Subordinated Bondholders did not provide evidence or testimony that these notes are of any higher value.
Through the accrual of interest, the amount of the Bank Group's claim would have increased by approximately $1,000,000.00 between the date of the Petition and the date of the hearing. However, as part of the restructuring deal, the Bank Group agreed to suspend the accrual of interest, conditioned on the approval of the Plan.
The Plan placed the claims of the Bank Group into Class 4, an impaired class. The Plan placed the claims of the Subordinated Bondholders into Class 5, also an impaired class. Ultimately, Class 4 voted to accept the Plan (85% in amount and 77% in number accepting), while Class 5 rejected the Plan (85% in amount and 70% in number rejecting).
Pre-petition, the firm of Cadwalader, Wickersham and Taft (Cadwalader) had been chosen as counsel for the "unofficial committee" of unsecured creditors. This committee was comprised of over 50% of the Subordinated Bondholders. On May 16, 2001, the United States Trustee appointed an Unsecured Creditors' Committee to represent all unsecured creditors, not just the Subordinated Bondholders. That Committee included four representatives of the Subordinated Bondholders and three representatives of other unsecured creditors. By Order dated July 9, 2001, I appointed Cadwalader as its counsel. A certain incongruity exists in the fact that the Plan to which the entire Unsecured Creditors' Committee apparently objects does not impair unsecured creditors other than the Subordinated Bondholders. This situation cannot pass without comment. For the Subordinated Bondholders to assert that they represent other unsecured creditors would be an argument "as thin as the homeopathic soup that was made by boiling the shadow of a pigeon that had starved to death." Lincoln-Douglas Debates, Sixth Joint Debate at Quincy, Mr. Lincoln's Rejoinder (October 13, 1858). The reality is that the only creditors truly represented by Cadwalader and truly opposing the Plan are the Subordinated Bondholders.
In Memoranda, it is not my habit to quote historical figures on subjects far flung from bankruptcy. However, since the Subordinated Bondholders quoted President Lincoln earlier in this proceeding, and his quip here seemed so apt, I feel entitled to indulge myself and the Subordinated Bondholders.
Under the Plan, claims against and interests in the Debtors are divided into 57 classes, exclusive of certain claims, including DIP Facility Claims, Professional Fee Claims, Administrative Claims, and Priority Tax Claims which, pursuant to 11 U.S.C.' 1123(a)(1), are not required to be classified.
The general purpose of the Plan is to enable the Debtors to restructure their liabilities in a way that will maximize recoveries of creditors while enabling the Reorganized Debtors to maintain their international corporate structure and certain tax benefits. The Plan contemplates the restructuring or elimination of all the Bank Group's secured debt obligations and Subordinated Bondholder obligations. Although the Plan has separated the claimants into 57 different classes, there are only three truly distinct levels of debt with which the Court must be concerned in the Plan confirmation process. The first level of debt, the Bank Group, is secured by essentially all of the assets of each one of the Debtors. The Bank Group, although impaired under the Plan, has agreed to take new debt in an amount and on terms more favorable to the Debtors, and to convert a portion of its secured debt to equity. The second level of debt is comprised of trade and other unsecured creditors who are unimpaired under the Plan. The third level, the Subordinated Bondholders, is impaired and will receive 20% of the stock of the Reorganized Debtors. Since the Subordinated Bondholders will not be paid in full, no equity will be given to the remaining groups who are junior bondholders or to the present equity holders.
More specifically, Article III, Section B of the Plan provides that on the effective date of the Plan, general unsecured creditors shall receive distributions in an amount equal to one hundred percent of their respective claims. It also provides that each Subordinated Bondholder shall receive, in full satisfaction of its claim, its pro-rata share of (i) twenty percent (20%) of the reorganized SGPA common stock, subject to dilution by certain warrants and management options, and (ii) warrants to purchase an additional ten percent of SGPA's stock. Additionally, Article III provides that each member of the Bank Group shall receive, in full satisfaction of its claim, its pro rata share of (i) up to $125 million of certain notes, (ii) PIK notes bearing a face value of $45,000,000.00, and (iii) seventy five percent of the outstanding SGPA common stock, also subject to dilution by the above-reference warrants and management options.
See, footnote 4, supra, as to actual valuation of these notes.
Article IV, Section D of the Plan provides that on the effective date of the Plan, certain members of management will enter into employment agreements which provide for, among other things, incentive compensation based upon attaining agreed-upon EBITDA levels. Section D also provides that certain members of management, as determined by the Board of Directors for Reorganized SGPA, will receive five percent of the Reorganized SGPA's common stock. This stock will have been gifted from the Bank Group, upon confirmation of the Plan, for the purpose of providing incentives to management.
Earnings Before Interest, Taxes, Depreciation and Amortization.
By its receipt of equity instruments in place of debt under the Plan, the Bank Group could, in theory, receive an amount greater than that of its current claim, depending on the value of the equity on the date of distribution. Under 11 U.S.C. '1129(b)(2), that date would be the confirmation of the Plan. As the parties have agreed, the value of the Debtors' equity instruments must be estimated based on projections of what Debtors' value as a going concern may be on the date of confirmation of the Plan.
The Subordinated Bondholders have filed objections to confirmation which have raised a number of issues, including the following:
(1) The instant Debtors' cases are being jointly administered, while but a single Plan has been proposed to reorganize all of them. The provision of the Bankruptcy Code at 11 U.S.C. '1129(a)(10) requires that if a Plan impairs a class or classes of claims, at least one of those classes must vote in favor of the Plan. The Subordinated Bondholders argue that the Debtors have in fact filed eleven plans and that each debtor must therefore have one impaired class of claims voting in favor of the Plan. The Subordinated Bondholders assert that the Bank Group does not hold a claim against each and every Debtor entity, and so the Plan for such entity would therefore not pass muster under '1129(a)(10).
(2) The Subordinated Bondholders argue that the Plan does not meet the feasibility standard set forth in '1129(a)(11). This argument is two fold: (A) Since a number of the Debtors cannot meet the requirements of '1129(a)(10), the mergers and tax benefits contemplated by the Plan cannot be effectuated and thus the Plan should not be confirmed; and (B) Since the Debtors have no legally binding exit financing, the Plan cannot be confirmed.
(3) The Subordinated Bondholders assert that in violation of '1123(a)(3) and '1129(a)(1), the Plan does not provide the specific terms of the warrants for 10% of the new common stock of the Reorganized SGPA which is to be issued to the Subordinated Bondholders.
(4) The Subordinated Bondholders argue that the absolute priority rule of '1129(b)(2)(B)(ii) is being violated by the Bank Group's "gifting" to management of 5% of the stock to which the Bank Group would be entitled.
(5) The Subordinated Bondholders raise the issue that the Bank Group votes should be invalidated for failure to comply with Fed.R.Bankr.P. 2019.
(6) The Subordinated Bondholders argue that the Bank Group is receiving more than 100% of its claim and thus that the Plan is not "fair and equitable" as required by '1129(b).
A hearing on these issues has been held, briefs have been filed and the case is ready for decision. The matter of confirmation of a Plan is core pursuant to 28 U.S.C. '157(b)(2)(L). I have jurisdiction over this case pursuant to 28 U.S.C." 157 and 1334. On September 14, 2001, I issued an Order Confirming the Plan. The instant Memorandum is issued in support of that Order.
On September 21, 2001, the Subordinated Bondholders filed a Motion to Amend Confirmation Order to Make Additional Findings of Fact and Conclusions of Law and to Extend Stay of Execution Pending Entry of Amended Confirmation Order. A conference was held on September 24, 2001 and argument was heard. On September 25, 2001, I issued an Order denying the Motion.
Discussion
ISSUE (1): Application of 11 U.S.C. '1129(a)(10) to a single Plan in a Jointly Administered Multi-debtor case.
The first objection of the Subordinated Bondholders is one to the effect that in the Joint Amended Plan each Debtor entity must have an impaired class of creditors that votes in favor of the Plan. This argument is based on the requirements of 11 U.S.C. '1129(a)(10), which provides as follows:
(a) the court shall confirm a plan only if all of the following requirements are met:
(10) if a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider.
11 U.S.C. '1129(a)(10).
In their Objections to Confirmation, the Subordinated Bondholders articulated their position as follows:
Section 1129(a)(10) of the Code requires that if a plan contains an impaired class of claims, the plan have at least one impaired class that accepts the plan (without counting the votes of insiders.) Section 1129(a)(10) is a "statutory gatekeeper", barring access to the cram down provision of section 1129(b) where a plan cannot garner the support of at least one impaired class. In re 266 Washington Assocs, 141 B.R. 275, 287 (Bankr.E.D.N.Y. 1992). Where a joint plan is proposed, each debtor must independently satisfy the section 1129(a)(10) test. A single impaired accepting class can support multiple debtors only where a substantive consolidation is requested and ordered. In re Global Ocean Carriers, Ltd., 251 B.R. 31 (Bankr.D.Del. 2000) (joint plan lacked accepting impaired classes for each debtor, debtors moved for substantive consolidation).
Here, ten of the 11 debtors cannot satisfy section 1129(a)(10). Each debtor covered by the joint plan has one or more impaired classes. However, for each debtor other than Grove Worldwide LLC, the impaired classes are to receive no distribution. Each of these classes is deemed to reject the plan, without the need for a vote. See, 11 U.S.C. '1126(g). The deemed rejections eliminate the possibility of a consenting impaired class for these ten debtors on a stand-alone basis. Nor can these debtors use the consenting impaired class in Grove Worldwide, LLC. The debtors requested only an administrative consolidation of their cases. They affirmatively rejected the notion of a substantive consolidation, and the plan, on its face, treats each debtor as a separate entity.
Subordinated Bondholders' Objection to Confirmation, p. 6. Neither the Subordinated Bondholders nor the Bank Group nor the Debtors cite, in their respective briefs, any case containing a thorough discussion of the issue of whether, in Chapter 11 cases consolidated for joint administration, the Plan must have an impaired class of creditors for each debtor voting in favor of the Plan. The Subordinated Bondholders do cite certain cases in which the language of the court implied that it would be necessary for each debtor in any jointly administered case to separately comply with '1129(a)(10). However, none of these cases explain a reason for such a requirement. Rather, they simply state that, in their respective plans, such compliance occurred. See, e.g. In re Drexel Burnham Lambert Group, Inc., 138 B.R. 723 (Bankr.S.D. N.Y. 1992).
As to the Subordinated Bondholders' reliance on Global Ocean Carriers, supra, ( Global) to support their argument re '1129(a)(10), I believe such reliance is misplaced. Global was an interesting case. In it, debtor Global and fifteen of its affiliates filed Chapter 11 petitions, and a joint plan of reorganization. When the plan was rejected by the majority of the noteholders, who were the only impaired class, the debtors filed a modified plan creating an impaired class. An objecting noteholder filed numerous objections, including one asserting that no impaired class had voted for the plan as required by '1129(a)(10).
Interestingly though, the objector did not raise the argument that the Subordinated Bondholders raise in this case. Rather, the objector contended that the vote was not timely, that the creditor was not impaired and that even if he had been impaired, it was an artificial impairment to obtain a class to vote for the Plan to meet the requirements of '1129(a)(10). The court overruled the objections and allowed the creditor to vote. Nowhere in the opinion did I see the court discuss the necessity of all sixteen debtors having an impaired class that had to vote for the plan. The Court refused to confirm the plan because it violated a number of the requirements of '1129, including '1129(a)(7) and (11), and the absolute priority rule contained in '1129(b)(2)(B)(ii).
As additional support for their argument, the Subordinated Bondholders quote from a colloquy between the Court and counsel in the case of In re MEDIQ, Inc., Case No. 01-252(MFW) (Bankr.D.Del.), wherein the Court, sua sponte, commented on the need for an impaired class voting in support of a plan for each affiliated debtor in a jointly administered case. In pertinent part, that colloquy went as follows:
The Subordinated Bondholders also attached to their brief a copy of the opinion in In re Wireless Communications Holdings Inc., Case No. 98-2007(MFW) (jointly administered) for the proposition that each Debtor must have an impaired class voting to affirm the plan. However, as the Subordinated Bondholders concede, this was an observation by the court and not a ruling that confirmation depended on it.
THE COURT: how can you — how can I confirm the plan if there is not class of [Parent] creditors who have voted to accept it?
MR. LEVITAN [Debtors' counsel]: I think that's always the case where you have multiple Debtors.
THE COURT: No, it isn't. If you're not substantively consolidating you have to have an accepting class for each Debtor.
MR LEVITAN: I think the part of being a joint plan is I think you need classes to vote in favor of the joint plan. I don't think you need to have a separate plan for every entity that's not in a substantively consolidated group. I don't think —
THE COURT: This has not been substantively consolidated.
MR. LEVITAN: But if you're not substantively consolidated I don't think there is any rule that says you must have a separate plan for each separate entity. . . .
* * * *
MR. LEVITAN: I mean, it does say, section 1129(a)(10) does say that at least one class of claims under the plan have to vote in favor. It doesn't say that there has to be a separate plan for each entity. It doesn't say —
* * * *
THE COURT: If that were the rule then any joint plan would be — could be filed with respect to any affiliated Debtors where it is not a consolidated entity, but you're suggesting that if the creditors of one of the Debtors vote in favor of the plan then you have met 1129(a)(10). I can't believe that's the case.
* * * *
THE COURT: Jointly administered means nothing. It means it's a procedural tool only and it cannot affect substantive rights.
In re MEDIQ, Inc., Case No. 01-252(MFW) (Bankr.D.Del.) Transcript of May 16, 2001, at 122-123, 124, 128.
At the end of this colloquy the Court requested briefs on the issue, and such briefs were filed. I note, however, that the court did not ultimately make a ruling on that issue as it was made moot by an amendment to the plan. Thus, I must find the colloquy to have been little more than an intellectual exercise, unpersuasive as precedent in the matter before me.
Moreover, I note generally that a court's comments from the bench, even on an ultimate issue of a case, are of no precedential value as to that issue in another case. See, King v. Order of United Commercial Travelers of America, 333 U.S. 153, 68 S.Ct. 488 (1948).
The Debtor's Reply Brief, with some degree of glee, points out that the Cadwalader firm also represented the ad hoc Committee in MEDIQ, and filed a brief urging the result opposite the one it now advocates. Thus, parroting Cadwalader's MEDIQ Brief, Debtors' Brief states as follows:
Cadwalader stated in MEDIQ that "[n]either the plain language of [Bankruptcy Code section 1129(a)(10)) nor its underlying purpose requires acceptance by separate impaired classes representing creditors of every debtor covered by a joint plan." Cadwalader, like the Debtors in these cases, also relied upon the Supreme Court's holding in United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242 (1989) in arguing:
The Court's analysis [of the section 1129(a)(10) question] should begin and end with the plain language of the Code, which requires a plan proponent to demonstrate only acceptance by a class of claims impaired under the plan. 11 U.S.C. '1129(a)(10). This language does not on its face require an accepting impaired class with respect to each debtor covered by a plan — only a single class under the plan as a whole.
[Cadwalader's MEDIQ brief]. at 9-10.
Moreover, Cadwalader explained to the MEDIQ court the impropriety and inherent unfairness of interpreting Bankruptcy Code section 1129(a)(10) in the manner they would have this Court do in this case:
[Bankruptcy Code] section 1129(a)(10) is not an all-purpose creditor protection mechanism. A plan satisfying that section must still meet all other confirmation requirements, including the "best interests" test embodied in [Bankruptcy Code section] 1129(a)(7) and, in the "cramdown" context, establishing that the plan "does not discriminate unfairly" and "is fair and equitable." 11 U.S.C. '1129(b)(1). At least one court has observed that section 1129(a)(10) "is a technical requirement for confirmation" rather than a "substantive right of objecting creditors." In re Rhead, 179 B.R. 169, 177 (Bankr.D.Ariz. 1995).
[Cadwalader's MEDIQ Brief]. at 11.
Since the Plan otherwise satisfies section 1129, the treatment of MEDIQ's creditors should not be disapproved based simply on an expansive interpretation of section 1129(a)(10). An overly broad reading of that section — arguably barred and certainly not supported by its plain language — would inappropriately complicate multi-debtor cases by exalting form over substance and would, in some cases, potentially make a negotiated plan unworkable.
The present case exemplifies this problem: with no assets of value residing at the parent company level, and no demonstration of unfairness or violation of any other confirmation requirement, to require the formality of a separate accepting impaired class for each corporate entity here would undermine a finely wrought plan solution aimed at preserving maximum value at the operating subsidiary level where all meaningful assets reside. The result might well be failure of the Plan, which would harm the creditors of PRN without benefitting the creditors of MEDIQ. The Bankruptcy Code does not mandate such an unjust result.
[Cadwalader's MEDIQ Brief]. at 13 (emphasis added).
As so urgently argued by Cadwalader in MEDIQ, to entertain the form over substance argument urged by the Subordinated Bondholders here would jeopardize a fair and equitable Plan.
Debtors' Post Hearing Brief, at pp. 9-10 (emphasis in original).
I agree with Debtors' position that in a joint plan of reorganization it is not necessary to have an impaired class of creditors of each Debtor vote to accept the Plan. While I do not pretend to fully understand the corporate structure of these Debtors before or after the reorganization, it is clear that the purpose of these filings was a financial restructuring of the Debtors. The Debtors were carrying too much debt on their balance sheets. It was necessary to convert debt to equity. All creditors were to be paid in full except the Bank Group and the Subordinated Bondholders. The Debtors made concerted efforts to conduct business as usual and the evidence indicated that the Chapter 11 filings did not have the adverse impact feared by Debtors. There is one plan of reorganization. While it is true that various corporations are affected by the Plan, the business of the Debtors remains the same. Whether these Debtors were substantively consolidated or jointly administered would have no adverse affect on the Subordinated Bondholders. The only truly substantive issue in this case is whether the Bank Group is getting more than 100%.
For all of the above-discussed reasons, I reject the Subordinated Bondholders' argument and conclude that the instant Plan complies with '1129(a)(10) because at least one class of impaired creditors — the Bank Group — has accepted the Plan.
ISSUE (2): Feasibility standards under 11 U.S.C. '1129(a)(11).
The Subordinated Bondholders object that the Plan does not meet the feasibility test required by '1129(a)(11). This objection was based in part on the Subordinated Bondholders' position in regard to '1129(a)(10), which I overruled in addressing Issue (1). Thus, the concomitant part of Issue (2) also fails.
The Subordinated Bondholders assert that the Debtors cannot demonstrate feasibility without a "legally binding commitment" for exit financing. I do not think it is necessary for the Debtors to have a binding commitment at the time of the confirmation hearing as long as it is likely that such financing can be obtained. The testimony clearly established the likelihood that the Debtors would obtain the exit financing. The Debtors introduced a commitment letter and term sheet from Deutsche Bank (Debtors' Exhibit 3), and a commitment letter and term sheet from some members of the Bank Group (Debtors' Exhibit 4). In this regard, Mr. Cripe testified as follows:
Q: And if this Plan is confirmed, what's the intention of the debtors with respect to those commitments?
A: Within the next week we would pick one of these exit facilities and proceed forward with an actual revolving credit facility documentation.
Q: And either one will provide you with sufficient liquidity to make the plan feasible?
A: Yes.
Q: Do you believe that after confirmation of the plan there will be a need for any further financial reorganization or liquidation of the debtors?
A: I don't believe so, no.
(Notes of Testimony, Vol. I, pp. 94-95.)
The Subordinated Bondholders point out that both these commitments would have, by their own terms, expired on August 15, 2001 unless they were signed and a commitment fee was paid. The Subordinated Bondholders were advised by Debtors' counsel that neither was the commitment letter signed on the fifteenth nor was a fee paid. However, the Debtors' Brief relates that they had a number of discussions in regard to exit financing with certain lenders. Attached to Debtors' Brief is a commitment for exit financing in the amount of $35,000,000.00 from a syndicate of lenders led by JP Morgan. Under these circumstances, I find Section 1129(a)(11) to have been satisfied.
ISSUE (3): 11 U.S.C. '1123(a)(3) and 1129(a)(1) Disclosure Requirements for Terms of Certain Warrants.
The Subordinated Bondholders cite Section 1123(a)(3), which provides that "notwithstanding any otherwise applicable nonbankruptcy law, a plan shall . . ." specify the treatment of any class of claims or interests that is impaired under the Plan." The Subordinated Bondholders use this section to point out that the Plan does not set forth the specific terms of the warrants for 10% of the new common stock of the reorganized SPGA. The Debtors respond that this was an inadvertent error and that the Subordinated Bondholders were fully aware of the specific terms of the warrants as they were set forth in the Disclosure Statement. In addition, the Debtors filed a Plan Supplement (Docket entry #326) which, inter alia, incorporated the missing warrant language to set forth the terms as they were set forth in the Disclosure Statement. Thus, I conclude that the argument made by the Subordinated Bondholders was rendered ineffectual by the fact that the terms were contained in the Disclosure Statement, and was further rendered moot by the Plan Supplement.
In addition, the Subordinated Bondholders now raise the argument, for the first time, that the Debtors failed to produce evidence to meet the requirements of Section 1129(a)(7), which provides as follows:
(a) The court shall confirm a plan only if all of the following requirements are met:
(7) With respect to each impaired class of claims or interest —
(A) each holder of a claim or interest of such class —
(ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date;
11 U.S.C. '1129(a)(7) (italics added).
The Subordinated Bondholder's argument is that the "liquidation analysis" required by '1129(a)(7) must be made as of September 30, 2001, but that the Debtors' analysis was made as of March 31, 2001. This argument was effectively addressed at the hearing when, concerning the Disclosure Statement, Mr. Cripe testified as follows:
Q: Does the disclosure statement contain a liquidation analysis?
A: Yes, it does.
Q: And who prepared that?
A: Management.
Q: Did you participate in the process?
A: Yes, I did.
Q: Who else helped in preparing it?
A: The CIBC helped us.
Q: What assumptions did you make in preparing that liquidation analysis?
A: Well, essentially, what we assumed was that within Chapter 11, if Chapter 11 wouldn't be successful, we would flip over to Chapter 7 and beging an orderly liquidation of the company.
Q: And did you take into account the values that you think you would get in such liquidation?
A: Yes. We took into account the orderly liquidation value of our assets as well as estimates for administrative claims and fees, et cetera.
Q: Did you also consider what would happen to your receivables?
A: Yes.
Q: And did you have an assumption with respect to that?
A: With receivables, we looked at potential collectability (sic) of them and cents on the dollar we would expect to get.
Q: As a result of that liquidation analysis, do you have a conclusion as to whether the creditors and equity holders in this case are receiving at least as much under the plan as they would in a Chapter 7 liquidation?
A: Our general conclusion is that the creditors will receive significantly more than they would under a liquidation.
Q: So for example, the bondholders, what would they receive under your proposed liquidation?
A: Zero.
Q: And the banks, what would they receive?
A: After fees I think we came up with slightly less than 50 cents on the dollar.
Notes of Testimony, Vol. I, pp. 91-92.
This testimony gives me some difficulty with the substance of the Subordinated Bondholders' argument at this late juncture. The liquidation analysis was, in fact, readily available to them in the Disclosure Statement. If the Subordinated Bondholders had wanted to make a procedural objection to the Plan based on the absence of a liquidation analysis, they could have done so by means of another Objection to the Plan.
Moreover, as pointed out in Debtors' Reply Brief, under the liquidation analysis the Bank Group was only receiving 49% of its claim of about $227 million. While a liquidation analysis might be somewhat different between March 31, 2001 and September 30, 2001, it could not have been well over $100 million different.
ISSUE (4): Gifting of 5% of New Stock to Management, and the Absolute Priority Rule of 11 U.S.C. '1129(b)(2)(B)(ii).
The Subordinated Bondholders contend that the Debtors' Plan is in violation of the absolute priority rule that is embodied in Section 1129(b)(1) and (b)(2)(B)(ii). That rule is stated as follows:
(b)(1) Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interest that is impaired under, and has not accepted, the plan.
(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements;
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.
11 U.S.C. '1129(b)(1) and (b)(2)(B)(ii).
The Subordinated Bondholders aver that these provisions will be violated because the Plan calls for the Bank Group to "gift" 5% of its stock to the reorganized Debtors' management group. They argue that because some members of management own stock in the Debtors, the gift of stock in the reorganized Debtors will actually be "on account of" this prior ownership. They argue that the testimony of Stephen Cripe, Debtors' CFO, to the effect that management included a "demand" for equity in their first term sheet to the banks "eliminates any doubt" on the subject. The portion of the transcript on which the Subordinated Bondholders rely reads as follows:
Q: Am I not correct, Mr. Cripe, that there was a meeting with the bank group on February 28th of 2001?
A: I believe that's the date, yes.
Q: And that was a special date because that was a deadline by which Grove had to present a restructuring plan to the banks?
A: Had to present our thoughts on how we were going to deal with an over-leveraged company, yes.
Q: And am I not correct that at that meeting, management told the banks that in order to have management continue with the company they had to receive a portion of the equity in the new company?
A: No. I believe how it worked is we added a footnote to the presentation to the bank group that footnoted our expectation was that management would share in some form of equity. It was not brought up as a point. In fact, we had discussions prior to the presentation about purposely not bringing it up as a forced issue. It wasn't the proper time and place.
Q: But it was requested in a footnote?
A: It's in a footnote, I believe, yes.
Notes of Testimony, Vol. I, pp. 120-22.
Mr. Cripe's testimony refutes the notion that management made a "demand" for anything. More to the point, his testimony provides no support whatsoever for the argument that stock is being given "on account of" prior stockholder status. Additionally, the Plan does not identify who will get the stock, but does provide the procedures for making that determination. The Board of Directors will ultimately decide who is to get the stock. The Board is to be comprised of five members. Three are to be chosen by the Bank Group, one by Management and one by the Subordinated Bondholders.
On this point, Mr. Cripe's testimony is informative:
Q: Can you tell me what members of the management team prior to the commencement of this case owned stock in Grove?
A: There are five members of the management team who purchased stock: Jeff Bust, our CEO, myself, John Wheeler, who is our COO, Keith Simmons, our general counsel, and Ted Radecki, who is senior vice president of product support.
Q: Are those the same individuals who are going to share the 5 percent of new common stock being distributed to the management team under the plan?
A: I don't think that's been decided yet.
Q: So you don't know which members of management are going to receive the 5 percent?
A: I would have expectation that I would share in it, as an example, but that has not been discussed in any manner.
Q: Could it go beyond those five individuals?
A: Yes. In fact, I think it probably will.
Q: Could it be fewer than those five individuals?
A: I would doubt that, but potentially, yeah.
Notes of Testimony, Vol. I, p. 122.
The Board will undoubtably enter into employment contracts with management and the new corporation and make a decision on the distribution of the new stock. Again, the fact that the Board will, in the future, make a decision about stock distributions (if any) and that such a decision will be based on the expectation of future performance amply demonstrates that the distributions will not be made "on account of" prior stock ownership. ISSUE (5): Compliance of Bank Group Votes to Fed.R.Bankr.P. 2019.
Gifts of stock ownership from secured creditors to management are by no means a novel invention by the instant Debtors. In In re Leslie Fay Companies, Inc., 207 B.R. 764 (Bankr.S.D.N.Y. 1997) the Court confirmed a reorganization plan in which the debtors proposed to provide stock options to pre-petition stockholders in management, even though creditors of lesser priority were to receive no distributions. The Court specifically recognized the ability of a reorganized debtor to provide such incentives through such options.
The Subordinated Bondholders argue that the Debtors have not met their obligations under Fed.R.Bankr.P. 2019. That Rule (too lengthy to recite for my limited purposes here) generally requires certain formalities to be set forth in a "verified statement" by any committee representing more than one secured creditor. This statement is intended to promote full disclosure amongst all participating parties as to their potential interests or motivations. As an enforcement tool, the Rule further permits a court discretion to effectively bar the committee from being heard if it does not disclose all of its affiliations. I find no reason to exercise such discretion in this instance. The testimony of the witnesses, as well as the arguments of counsel at the hearing, amply demonstrated that the Subordinated Bondholders were fully aware of the identity of those lenders or parties who comprised the Bank Group. In fact, among the many oblique accusations tossed into the confirmation hearing by the parties was one by the Subordinated Bondholders to the effect that some certain member of the Bank Group was in fact an affiliate of the Debtors. The Subordinated Bondholders did not further pursue this accusation but, the point is, the Subordinated Bondholders must have been well informed of the identities of the Bank Groups members in order to have made such accusation in the first place.
ISSUE (6): The Value of the Debtor Companies in light of the "Fair and Equitable" Requirements of 11 U.S.C. '1129(b).
The Debtor's final contention is the heart of the matter before me. That contention is that the Debtors' value is too great to allow the Bank Group to receive 80% of its equity without effectively giving the Bank Group more than 100 cents on the dollar on the date that the plan would be confirmed.
While the Plan calls for the Bank Group to receive 75% of the Debtors' equity, they are entitled to 80%, but are gifting 5% to management as incentive.
Each respective litigant called an expert to testify about the estimated value of Debtors' equity. CIBC World Markets Corp. (CIBC) was hired by the Debtors as of January 16, 2001 to assist it in analyzing potential restructuring or recapitalization alternatives. CIBC assisted the Debtor in assembling a financial model of the Debtors, estimated Debtors' financial needs, and valued Debtors' business under varying market circumstances. CIBC's Managing Director of Financial Restructuring, Mr. Joseph Radecki (Mr. Radecki), testified regarding CIBC's work in this case and his opinion of the proper method of valuation to be employed in determining the worth of a distressed enterprise.
The Bank Group also presented expert testimony as to the value of the Debtors and the proper formulae to be employed to estimate that value. The Bank Group's chosen experts were the firm of Houlihan, Lokey, Howard Zukin Capital, Investment Bankers (Houlihan), and Mr. Hardie testified on their behalf. Houlihan obtained the Debtors' financial data through the Debtors themselves or through CIBC, and relied on the same cost and income projections that CIBC used.
Likewise, the Subordinated Bondholders employed investment bankers, Chanin Capital Partners (Chanin), as their experts. Mr. Lambert testified as Chanin's representative. In making its calculations, Chanin also relied on the Debtors' own income and cost projections during the reorganization period.
The Witnesses from all three firms were qualified to provide opinion evidence and expert testimony. All three acknowledged from the outset that the matter of valuation of an ongoing business in economic distress is far from an exact science. All three presented intricate, highly nuanced testimony regarding theories of financial analysis of reorganization value.
While Mr. Hardie, Mr. Lambert and Mr. Radecki were the actual witnesses, they each stated that the work about which they testified was a team effort within their respective organizations.
The experts agreed that there are three main methodologies used to determine such value: (1)the market multiple approach; (2) the comparable transaction approach; and (3) the discounted cash flow analysis. The goal of all methods is the same: to determine the "present worth of future anticipated earnings" of the debtor corporation. Peter Pantaleo Barry Ridings, Reorganization Value, 51 Bus.Law. 419, 420 (Feb. 1996); citing, Protective Communications v. Anderson, 390 U.S. 414 (1968). Unfortunately, the term "earnings" in the context of reorganization in bankruptcy has not been defined by either the Supreme Court or the Third Circuit Court of Appeals. Given the inexact, somewhat speculative, and highly case-specific nature of the valuations necessary to determine "earnings", the Bankruptcy Courts have been given broad discretion to determine the "extent and method of inquiry necessary for a valuation based on earning capacity . . . dependent on the facts of each case." Consolidated Rock Prod. Co. v. DuBois, 312 U.S. 510, 527 (1941).
Generally speaking, the Market Multiple Approach (MMA) determines value by extrapolating figures from the value of equity securities of other companies in the same industry as, or a similar industry to, the debtor. The MMA "requires a comparison of the enterprise value of selected public companies to their performance level to arrive at a benchmark multiple that is then applied to the company that one is valuing". Bank Group's Post-Confirmation Hearing Brief, at p. 12. The Comparable Transaction Approach (CTA) determines value by analyzing figures from recent merger and acquisition data in the debtor's industry. These figures are used "to derive a benchmark multiple that is then applied to the company that one is valuing." Bank Group's Post-Confirmation Hearing Brief, at p. 12.
The phrase AMarket Multiple "approach" is apparently not uniformly used in the financial community. CIBC referred to it as the "Comparable Company Trading Methodology", while Houlihan used the term "Comparable Company Analysis Method".
The Discounted Cash Flow Analysis (DCFA) is a well-known and generally accepted valuation technique used to determine the value of a company. It is based on the premise that the value of an ownership interest in a company today (such as its stock price) is equal to the net present value of the future benefits of ownership.
[Because] a dollar to be received a year from now is not equivalent in value to a dollar received today, the element of each stream of future returns cannot simply be added. Each payment must be weighted according to when it will be received. . . . [The] discounted cash flow analysis provides the framework for accomplishing this.
A discounted cash flow analysis attempts to measure value by forecasting a firm's ability to generate cash. Unlike a comparable company analysis, which generally relies on historical information to determine value indirectly by valuing comparable firms, the discounted cash flow analysis is a forward-looking technique that requires detailed cash projections and assumptions about growth rates that are specific to the target firm.
Pantaleo Ridings, at 427.
In performing their respective evaluation, Houlihan and Chanin used all three methodologies, while CIBC determined to use only the DCFA methodology.
None of the above-described theories will produce an accurate valuation without the valuating expert or firm having first obtained complete and accurate information regarding the debtor company's finances. The search for such information, known as "due diligence", is absolutely essential to obtaining a useful valuation of a multi-tiered, diversified organization such as the instant Debtors. The less information that the expert or firm has regarding the operations of the whole organization, its financial history and its business plan, the less reliable the figure that is churned from the MMA, the CTA or the DCFA.
The evidence showed that the due diligence performed by CIBC and Houlihan was most thorough and complete. Having been called upon by the Debtors to devise a plan to extricate the Debtors from their debt, CIBC's people had extensive interaction with Debtors' management team for months prior to the filing of the Bankruptcy Petitions. CIBC made numerous visits to Debtors' main facility in Shady Grove, Pennsylvania. During January and February, 2001, CIBC assisted the Debtors in analyzing the business and exploring restructuring alternatives.
Houlihan's due diligence was similar in quality to CIBC's. A group of Houlihan's people spent a work day at the Debtors' facility in Shady Grove, inspecting the facility and meeting with key members of management. A Houlihan associate visited Debtors' facility in Waverly, Nebraska, where National Crane's operations are conducted. He met with National Crane's senior management group, and inspected the facility. Two members of Houlihan's team traveled to Wilhilmshaven, Germany, where they spent two days meeting with management, reviewing financial records, and inspecting the physical plant. Thereafter, in the course of developing its valuation, Houlihan had numerous contacts with either Debtors' management team, or with CIBC.
In sharp contrast, the Subordinated Bondholders' expert, Chanin, spent no time whatsoever at any of Debtors' physical facilities. Chanin's expert witness had but two telephone calls with Debtors' management, and participated in only one face-to-face meeting with Debtors' senior management. In short, the amount of information that Chanin possessed for use in any method of valuation was not of the same quality or quantity as that possessed by CIBC and by Houlihan. For that reason alone, Chanin's evaluation is weakened.
In preparing its analysis, CIBC relied on the Debtors' projections through 2005. CIBC arrived at a Total Enterprise Value (TEV) for the Debtors in a range of $278,000,000.00 to $292,000,000.00 (with a midpoint of $285,000,000.00) and an equity value of between $75,000,000.00 and $89,000,000.00 (with a midpoint of $82,000,000.00). In deriving these figures, CIBC relied primarily, if not exclusively, on DCFA methodology, having made a considered decision to that effect.
In performing its analysis, Chanin also relied on the Debtors' projections through 2005. Chanin applied all three of the above-described methodologies in arriving at its final valuation figures. Chanin's was the only valuation that accepted Debtors' management's financial projections without any change. Subordinated Bondholders' Brief, p. 14.
Based on testimony received from Mr. Cripe on the first day of hearings, however, Chanin did adjust its valuation to a lower figure.
The following chart reflects the Chanin figures. Low value ($ Base value ($ High value ($ Methodology in Millions) in Millions) in Millions)
DCFA $314 $351 $392 MMA $290 $316 $342 CTA $352 $394 $436 Average $319 $354 $390 Less Secured $265 $265 $265 Debt Value above $64 $99 $135 secured debt The following chart reflects the Houlihan figures. Methodology Low value ($ Base value ($ High value ($ in Millions) in Millions) in Millions) DCFA $240 — $265 MMA $190 — $210 CTA $230 — $270 Average $220 $248 Less Secured $265 $265 Debt Value above ($45) ($17) secured debt The testimony by Houlihan's expert, as supported by CIBC's expert, was clearest and most persuasive. Houlihan valued the shares of common stock to be received by the Bank Group at approximately $25,600,000.00. Added to the notes valued at $125,000,000.00 and debentures valued at $25,940,000.00, this will result in a total payment of $176,540,000.00 on account of the Bank Group's claims. This would amount to only a 76% recovery on such claims. While I realize that Houlihan's calculations are not totally immune from attack, I am generally comfortable that they are a realistic portrayal of Debtors' future value. Again, the enterprise valuation process is universally recognized as inexact at best.The Bank Group's Brief fairly portrayed the factors that impaired Chanin's valuation:
The most serious deficiency in the Chanin analysis was not just the use, but the absolute reliance, in its comparable company and comparable transaction methodologies, of a multiple of sales in addition to a multiple of earnings. . . . [T]he use of a sales multiple is particularly inappropriate for companies like the Debtors. First, while a sales multiple might be more appropriate to consider in valuing a dot-com or start-up company, it is not commonly used in valuing a manufacturer of heavy machinery with an established record of earnings.
* * * *
Second, a sales multiple may be appropriately used in the context of a valuation if it is used to confirm the results of an earnings multiple approach when a company's earnings margin or potential is closely compatible to the group of comparable companies from which such multiples are derived. Even then, the sales multiple would not be given equal weight with an EBITDA multiple. In this case, the debtors are far less profitable than their "comparable" companies.
* * * *
Most importantly, the use of a sales multiple defies common sense in that it presupposes that investors would pay for a relatively unprofitable company based on the size of its revenues rather than earnings. The absurdity of this is highlighted by the testimony of Mr. Cripe that several of the Debtors' lines of business are not profitable. . . . Both Mr. Cripe and Mr. Radecki testified convincingly that investors would not pay for unprofitable revenues.
* * * *
Another error in the Chanin valuation was the choice of a "terminal value" for its discounted cash flow methodology. . . . Chanin used 2005(the last year of the Debtors' projections), a "peak" year . . . in what all parties agree is a highly cyclical business. However, by using such peak earnings when applying a current multiple [of earnings to project future income], there is a substantial risk of overvaluation error because such earnings do not necessarily reflect the normalized earnings expected in the future.
Brief of Bank Group, pp. 16-17, 23.
Mr. Hardie testified as to why both CIBC and Chanin's choice of terminal value was in error.
The methodology that CIBC and Chanin used by simply taking the final year's cash flows and multiplying it by a multiple has the arithmetic effect of assuming that that number continues for perpetuity. That's flawed. This is a cyclical business — it's going to come back down. We all know it, everybody does. And so if you simply multiply the last year by a multiple, mathematically you're assuming that that's going to continue forever. That's flawed. So what we did was we said, okay, assume that the margins in a cycle go down as the business goes down, which is typically the case and is represented by our current experience, and they're going to go up as the cycle goals (sic) up. We took the average of the margin to be achieved by this company at the bottom of the cycle and the top of the cycle, as reflected in the forecast, which gives you a 7.7% average margin. We multiplied that by the last year's forecasted revenues, and we came up with a terminal value that we believe more accurately reflects what the cash flows will be in perpetuity, which is on average they're going to do about the same EBITDA margin as they're going to do within a cycle.
Notes of Testimony, Vol. II pp. 298-299.
Both Houlihan and CIBC agreed that sales figures are generally not used when conducting valuations of manufacturing concerns like the Debtors. Chanin's expert himself conceded that, in contrast to Chanin's simply averaging the multiples it reached based on EBITDA and based on total sales, an investor would look more toward cash flow than a sales multiple in determining whether to invest in or purchase the company. Again, this comports with earlier testimony, as well as common sense, that a company that is making money is going to be more attractive to investors than one that is not. And gross sales figures for an industrial manufacturer are simply not a reliable indicator of profitability. Indeed, as Mr. Cripe testified, several of the Debtors' operations (e.g., its resale of used cranes, and its entire manlift business) produce significant gross sale figures, but in fact operate at a loss to the company. (Notes of Testimony, Vol. II, pp. 410-411.)
Despite these factors militating against the use of sales figures, it was only by incorporating a multiple of sales into its analysis that Chanin's valuation reached the levels reflected in the chart above — levels that would indicate that the Bank Group would be paid more than 100% of its claims. The Subordinated Bondholders' witness, Mr. Lambert (of Chanin) agreed that, had Chanin not relied on a multiple of sales, its valuation based on MMA methodology would be significantly reduced. As the Bank Group pointed out in its Brief, when one removes from the equation the figures that Chanin derived from its use of a sales multiple, Chanin's valuations are quite similar to those of Houlihan, as the chart below illustrates.
MARKET MULTIPLE AND COMPARABLE TRANSACTION VALUATIONS WITHOUT SALES MULTIPLE (dollars in millions)
MMA CTA
CHANIN $203 — $244 $265 — $305
HOULIHAN $214 — $232 $232 — $268
As stated in the Bank Group's Brief:
The overall effect on Chanin's valuation of removing the use of a sales multiple was calculated by Mr. Hardie and presented at the hearing. [Notes of Testimony, Vol. II, pp. 444-445.] Taking into account all three methodologies, the effect of removing the sales multiple is to reduce Chanin's calculation of the total enterprise value of the Debtors from a base case of $354,229,000.00 to $287,212,000.00, a number roughly the same as CIBC's valuation and not high enough to result in the Senior Lenders receiving more than one hundred percent (100%) of the amount of their claims (even if the $11.2 million estimated proceeds from the sale of Delta were to be taken into account). [Notes of Testimony, Vol. II, pp. 444-445]. It should be noted that, (sic) Mr. Lambert did not take issue with Mr. Hardie's calculations. [Notes of Testimony, Vol. II, pp. 384-385].
Brief of Bank Group, p. 37.
In performing its evaluative work, CIBC used only the DCFA method. It did not rely on the MMA or CTA to confirm the figures it had reached. It did not take into account the inherent degree of unreliability in forecasted figures. Thus, while its calculations within the DCFA are sound and its use of the Debtors' earnings projections was appropriate, I do not find that CIBC's ultimate figures are the most reasonable ones to use in this case.
The Subordinated Bondholders have also argued that the proceeds from a sale of Debtors' subsidiary, Delta (a "manlift" manufacturer in France) should be added to Debtors' value. The difficulty with doing so is the degree of speculation involved. The fact of the matter is that past attempts to sell Delta have failed, and the company is not currently "on the market". Appropriately, the Subordinated Bondholders then point to Mr. Cripe's testimony that Delta produces positive cash flow, and they argue that Delta's contributions to EBITDA should be included in the calculation of Debtors' value. However, as Mr. Hardie testified, the Debtors' financial records showed that Delta produces no "meaningful cash flow". Thus, the inclusion of Delta's contributions to EBITDA would make no material difference to the value that the Bank Group will receive in obtaining 80% of Debtors' stock.
He obtained this information from his trip to Germany which again illustrates the importance of a thorough due diligence.
For all of the above-discussed reasons, I conclude that the value of the Debtors is somewhere within the range estimated by Houlihan. Thus, as indicated above, the exchange of some of the current debt to the Bank Group for 80% of the Debtors' equity will not provide the Bank Group with a recovery of greater than 100% of their claims. Therefore, the Subordinated Bondholders' objection to the Plan on that basis has no merit.
An order confirming the Plan as amended, supplemented and technically modified was issued on September 14, 2001. I should briefly address the matters of the amendment, supplement and technical modifications. Fed.R.Bankr.P. 3019 provides that in a chapter 11 case, after a plan has been accepted but before its confirmation, a debtor may modify the plan, if the modification does not adversely change the treatment of any creditor who has not accepted in writing the modification. In the instant matter, the only creditors who did not accept the Plan and who now object to the modifications are the Subordinated Bondholders. The Plan as amended, supplemented, and modified did not adversely change the treatment the Subordinated Bondholders were to get. Through all the changes, they still were to receive 20% of the equity. The changes were made essentially to address certain technical concerns that the Subordinated Bondholders had raised. There is no basis to deny confirmation simply because changes were made to the plan as originally drafted.
This Memorandum, which constitutes the Court's Findings of Fact and Conclusions of Law supporting the September 14, 2001 Order of confirmation, shall be included in the docket.