Opinion
Case No. 05-16082-WHC.
September 11, 2006
Isaac M. Gabriel (AZ Bar #021780), pro hac vice application pending QUARLES BRADY STREICH LANG LLP Renaissance One Two North Central Avenue Phoenix, AZ, Attorneys for REWARDS NETWORK ESTABLISHMENT SERVICES INC.
This Objection is filed by REWARDS NETWORK ESTABLISHMENT SERVICES INC. ("Rewards Network"), a secured creditor and party-in-interest in the above-captioned Chapter 11 case of LINDY'S INC. dba Tom's Tavern (the "Debtor"). Rewards Network objects to the "Disclosure Statement Related To The Plan Of Reorganization Proposed By Debtor" (the "Disclosure Statement") filed by the Debtor, which relates to the "Plan of Reorganization Proposed By Debtor" (the "Plan"), because the Disclosure Statement does not provide the "adequate information" required pursuant to Bankruptcy Code § 1125(a) based on the following:
(i) the Disclosure Statement does not provide for the classification of Rewards Network as a secured creditor, despite the fact that Rewards Network has a first and prior lien and security interest in all of the Debtor's assets;
(ii) the Disclosure Statement provides for the payment in full of a purported secured claim of Strata Bank, even though Strata Bank appears to be unsecured due to the lapse, prior to the Petition Date, of its previously perfected security interest;
(iii) the Disclosure Statement does not adequately disclose the nature of the sale of the Debtor's business or the nature of the sale of the equity interests related to the Debtor;
(iv) the Disclosure Statement fails adequately explain what corporate form (if any) the Debtor will take following confirmation of the Plan;
(v) the Disclosure Statement does not explain the relationship (if any) between the alleged purchaser, Michael A. D'Andrea and the current owner of the Debtor relating to the Debtor's post-confirmation corporate form;
(vi) the Disclosure Statement does not describe any marketing efforts made by the Debtor to sell its business, nor does it provide any data indicating that the proposed cash purchase is for "fair market value"; and
(viii) the Disclosure Statement fails to provide a liquidation analysis, and thus there is no showing that the Plan is in the best interests of creditors.
In addition to the foregoing, the Disclosure Statement cannot be approved because it proposes a plan that is unconfirmable on its face.
This Objection is supported by (i) the attached memorandum of points and authorities, and (ii) the entire record in this case.
Respectfully submitted this 11th day of September, 2006.
MEMORANDUM OF POINTS AND AUTHORITIES
I. INTRODUCTION.
The Debtor's Disclosure Statement cannot be approved because it proposes a fundamentally flawed Plan that cannot be confirmed and lacks adequate information to allow creditors to make an informed voting decision with respect to the Plan.
Pursuant to various agreements entered into by and between the Debtor and Rewards Network, Rewards Network purchased food and beverage dining credits that could be redeemed at the Debtor's restaurant by Rewards Network's members. When the credits were redeemed by Rewards Network's members, the agreements required the Debtor to remit a certain portion of the diner's purchase to Rewards Network. To secure the Debtor's performance owing under the agreements, Rewards Network and the Debtor entered into the Security Agreements (defined below), whereby the Debtor granted Rewards Network a first position blanket lien and security interest in all of its assets. Rewards Network properly perfected its lien and security interest in the Debtor's assets.
In this case, despite Rewards Network's first position lien and security interest in all of the Debtor's assets, the Disclosure Statement and the Plan fail to provide proper treatment of Rewards Network's claim as a secured creditor. Through the Disclosure Statement and Plan, the Debtor attempts to treat Rewards Network's claim as unsecured. This is improper. Moreover, the Debtor, through the Disclosure Statement and Plan, proposes to pay an unsecured creditor (Strata Bank) in full, erroneously alleging that Strata Bank is fully secured. The Disclosure Statement does not disclose why it can pay an unsecured creditor in full while paying Rewards Network nothing on account of its secured claim.
In addition, the Disclosure Statement is vague and ambiguous with respect to the sale of the Debtor's assets (or equity interest) and the Disclosure Statement fails to adequately explain the nature of the transaction, the emerging entity (or merging entities), and the current equity holder's continuing interest in the Debtor post-confirmation. Finally, the Disclosure Statement does not contain any liquidation analysis to demonstrate that the Plan is in the best interest of creditors. Based on the lack of sufficient information in the Disclosure Statement, it is virtually impossible for a creditor to make an informed voting decision on the Plan.
In sum, the Disclosure Statement is wholly insufficient, provides inadequate information, and proposes a plan that is misleading and unconfirmable on its face. For these reasons, and the additional reasons set forth herein, the Disclosure Statement cannot be approved.
II. FACTUAL BACKGROUND.
1. On July 5, 2005 (the "Petition Date"), the Debtor filed a bankruptcy petition for relief under Chapter 11 of the United States Bankruptcy Code, thereby commencing the above-captioned Chapter 11 case.
2. The Debtor operates a restaurant named Tom's Tavern located in Wrenthem, Massachusetts.
3. Rewards Network is a company that provides benefits to its various clients by contracting with restaurants to purchase food and beverage credits at a discount, which then may be redeemed at the participating restaurants. As part of this arrangement, Rewards Network also provides marketing and advertising on behalf of the restaurants.
4. On or about January 7, 2004, the Debtor executed and delivered an agreement (the "First Agreement") to Rewards Network whereby Rewards Network purchased $50,000 of food and beverage credits from the Debtor. A true and correct copy of the First Agreement is attached hereto as Exhibit "A".
Rewards Network previously did business as Idine Restaurant Group Inc. Accordingly, the First Agreement referenced herein was entered into under the Idine corporate name. Regardless, Rewards Network is the current holder of the First Agreement and is entitled to enforce it.
5. In addition to the First Agreement, the Debtor executed and delivered three additional "Dining Credits Purchase Agreement" (collectively with the First Agreement, the "Agreements") to Rewards Network whereby Rewards Network purchased dining credits from the Debtor, including:
(i) the "Dining Credits Purchase Agreement" dated September 2, 2004, a true and correct copy of which is attached hereto as Exhibit "B";
(ii) the "Dining Credits Purchase Agreement" dated October 12, 2004, a true and correct copy of which is attached hereto as Exhibit "C"; and
(iii) the "Dining Credits Purchase Agreement" dated June 8, 2005, a true and correct copy of which is attached hereto as Exhibit "D";
6. To secure the performance of Debtor's obligations owing under the Agreements, the Debtor executed and delivered to Rewards Network the following security agreements (collectively, the "Security Agreements"):
(i) the "Security Agreement" dated January 7, 2004, a true and correct copy of which is attached hereto as Exhibit "E";
(ii) the "Security Agreement" dated September 2, 2004, a true and correct copy of which is attached hereto as Exhibit "F";
(iii) the "Security Agreement" dated October 12, 2004, a true and correct copy of which is attached hereto as Exhibit "G"; and
(iv) the "Security Agreement" dated June 8, 2005, a true and correct copy of which is attached hereto as Exhibit "H".
7. Pursuant to the Security Agreements, the Debtor granted Rewards Network a security interest in all of the Debtor's property, tangible and intangible, including, but not limited to (as described in the Security Agreement, the "Collateral"):
All . . . equipment, inventory, instruments, investment property, documents, general intangibles, deposits, contract rights, tradenames, trademarks, patents, supporting obligations, payment intangibles, chattel paper, commercial tort claims, licenses, liquor licenses, permits, franchise agreements, payments due from credit card and bank companies or processors, fixtures, liquor inventory, wine inventory, furniture, accounts receivable, accounts, leases, paintings, other forms of artwork, chairs, tables, bars, glasses, dishes, silverware, ovens, stoves, microwave ovens, washing mechanisms, ice boxes, cooking utensils, all other types of kitchen equipment, computer systems, televisions, stereos, other electronic equipment, deposit accounts, refunds of bonds, monies due or to become due from the State Liquor Authority and/or State Division of Alcoholic Beverage Control and, to the extent not listed above as original collateral, all products and proceeds of all of the Collateral in whatever form. . . .
8. On January 27, 2004, Rewards Network filed a UCC Financing Statement perfecting its interest in the Collateral. A true and correct copy of the UCC Financing Statement is attached hereto as Exhibit "I". Accordingly, Rewards Network has a first and prior lien and security interest in the Collateral.
9. In this case, Strata Bank has alleged a lien and security interest in the Debtor's Collateral. However, a search of the records of the Massachusetts Secretary of State's Office does not reveal any valid and continuing UCC Financing Statement filed by Strata Bank, or any other bank for that matter. In fact, the only other valid financing statement filed by any entity was filed by IGT Services Inc. on September 7, 2004, after Rewards Network perfected its lien and security interest in the Collateral. All other financing statements relating to the Debtor were filed more than five (5) years prior to the Petition Date, and thus have expired. See UCC Public Search Results printout, attached hereto as Exhibit "J." Accordingly, it cannot be disputed in this case that Rewards Network has a first position security interest in the Collateral.
10. The Agreements provide that in the event of a breach by the Debtor, Rewards Network is entitled to, as damages for the breach, seventy-five percent (75%) of the dollar value of outstanding credits purchased by Rewards Network.
11. The Debtor is in breach of the Agreements for, among other things, failing to pay the credits owed under the Agreements.
12. As of the Petition Date, the amount of Rewards Network's claim pursuant to the Agreement (i.e., 75% of the outstanding credits) was equal to $39,956.48.
13. Since the Petition Date, the Debtor has failed to make a single payment to Rewards Network or provide any adequate protection on account of Rewards Network's secured claim.
The Cash Collateral Order
14. On July 15, 2005, the "Stipulation Of Lindy's Inc. And Strata Bank As To The Use Of Cash Collateral" (the "Cash Collateral Order") was entered in this case, purportedly authorizing the Debtor's use of cash collateral. The Cash Collateral Order and related motion alleged that Strata Bank had a lien and security interest in the Debtor's cash collateral.
15. Despite Rewards Network's first priority lien and security interest in all of the Debtor's property, including all cash collateral, Rewards Network was not contacted by the Debtor regarding any proposal to use its cash collateral. Instead, the Debtor circumvented Rewards Network and entered the Cash Collateral Order with Strata Bank, an unperfected lienholder in the Collateral.
16. Rewards Network does not consent (and has not consented) to the use of its cash collateral. To the extent that Rewards Network's cash collateral has been used, Rewards Network reserves the right to seek payment of a superpriority claim under Bankruptcy Code § 507(b). Repayment of such a claim will be a condition precedent to confirmation of any plan.
17. Moreover, while the Cash Collateral Order purports to grant Strata Bank replacement liens in the Collateral, the Cash Collateral Order expressly states, "Strata Bank would be entitled to a replacement lien on all prepetition collateral as held by Strata Bank to the same priority and to the extent of diminution of Value as maintained Pre-Petition." See Cash Collateral Order. Because Strata Bank had no perfected prepetition lien on any of the Debtor's assets, such liens cannot be deemed valid and should be set aside as null and void.
The Debtor's Plan And Disclosure Statement
18. On July 19, 2006, the Debtor filed the Disclosure Statement and Plan.
19. The Plan proposes to pay only one secured claim — the purported secured claim of Strata Bank. See Plan, p. 5; Disclosure Statement pp. 5, 7. Rewards Network is not afforded any treatment on account of its secured claim under the Plan and Disclosure Statement.
20. Because Rewards Network has a blanket senior lien and security interest in the Collateral, any collateral claimed by Strata Bank is subject to Reward Network's senior lien and security interest. Indeed, based on the documents filed with the Massachusetts Secretary of State's office, Strata Bank appears to be wholly unsecured as its lien and security interest in the Collateral lapsed in 2003.
21. In the Disclosure Statement, the Debtor does not provide any information relating to the value of its assets. However, the Debtor's Schedules and Statements filed with the Court indicate that the Debtor had assets valued at $54,500.00 as of the Petition Date. Moreover, the Disclosure Statement provides that there will be a cash infusion of at least $125,000 into the Debtor. Presumably, the Debtor has sufficient assets to pay Rewards Network's secured claim in full.
22. While the Disclosure Statement provides that the Debtor is engaging in some type of sale to Michael A. D'Andrea, the Disclosure Statement does not adequately disclose the nature of the sale of the Debtor's business, the nature of the sale of the equity interests related to the Debtor, or what corporate form the reorganized debtor will take. For example, the Disclosure Statement provides that the Plan "contemplates that a new entity (a reorganized Lindy's known as Michael A. D'Andrea) will be established and will continue the Debtor's business." See Disclosure Statement, p. 2. This makes little sense, as an individual is not an entity. The Disclosure Statement also provides that Mr. D'Andrea will "receive 100% of the stock of Reorganized Lindy's on the `Effective Date'" in exchange for a $125,000 contribution to the estate. Id. However, the letter attached to the Disclosure Statement as Exhibit "C" provides that Mr. D'Andrea's "intention is to partner with Thomas J. Gianfrancesco. . . ." Thus, it is unclear whether a sale of all equity interests is occurring or whether Mr. Gianfrancesco will continue to have an interest in the reorganized Debtor. The Disclosure Statement also provides for the "merger" of the Debtor into the new entity Michael A. D'Andrea. Again, this alleged "merger" is confusing and does not appear possible given that Mr. D'Andrea is an individual and the Debtor is a corporation.
23. The Disclosure Statement also references the "Magtg, Inc. Plan Contribution", which is an undefined term, and provides that all of the Debtor's property (Rewards Network's Collateral) will vest free and clear to Magtg, Inc. on the Effective Date. See Disclosure Statement, p. 9. There is no discussion of whether Magtg., Inc. is related to Mr. D'Andrea or the Debtor, or what (if any) consideration is being provided for the transfer of the Debtor's assets, other than the reference to the undefined "Magtg, Inc. Plan Contribution". Moreover, the Disclosure Statement does not provide that any proceeds of any sale or contribution will be remitted to Rewards Network on account of its prior perfected lien and security interest.
24. The Disclosure Statement does not describe any marketing efforts made by the Debtor to sell its business, nor does it provide any data indicating that the proposed cash purchase is for "fair market value".
25. The Disclosure Statement also references pending litigation in which the Debtor and its principal are Plaintiffs. See Disclosure Statement, p. 15. However, the Disclosure Statement does not attribute any value to the claims brought by the Debtor in such litigation, or the potential likelihood of recovery in such litigation.
26. The Disclosure Statement also fails to contain a liquidation analysis. III. THE DISCLOSURE STATEMENT IS INADEQUATE.
Several of the objections raised by Rewards Network herein are also raised in the "Objection By Massachusetts Department Of Revenue To Debtor's Disclosure Statement" filed by the MDOR on August 9, 2006. See Docket #82. To the extent not covered in this Objection, Rewards Network hereby incorporates the MDOR's Objection herein.
For the Disclosure Statement to be approved, the Debtor must present, and the Court must find, that the Disclosure Statement contains "adequate information" sufficient to enable a hypothetical reasonable investor typical of holders of claims or interests to make an informed judgment on the reorganization proposal contained in the Plan. See 11 U.S.C. § 1125(a). This is not an empty standard, but rather requires a testing of the amount and quality of the information presented in the Disclosure Statement to ensure that the statement not only says what the Plan does, but give creditors sufficient information to decide whether the proposal is fair, feasible, and confirmable. See, e.g., In re Scioto Valley Mortgage Co., 88 B.R. 168, 172 (Bankr. S.D. Ohio 1988); In re Malek, 35 B.R. 443, 443 (Bankr. E.D. Mich. 1983); In re Metrocraft Publ'g Servicing, Inc., 39 B.R. 567, 568 (Bankr. N.D. Ga. 1984); In re A.C. Williams Co., 25 B.R. 173, 175 (Bankr. N.D. Ohio 1982).
In determining whether a disclosure statement contains adequate information, Courts usually consider a number of factors, including: (a) whether the debtor's business is sufficiently described in the disclosure statement; (b) whether the disclosure statement contains a detailed discussion of the historical events which led up to the filing of the bankruptcy case; (c) whether sufficient financial information about the debtor is given; (d) whether the disclosure statement describes the plan proposed in the case; (e) whether an explanation of how the plan will be executed is presented; (f) whether the disclosure statement contains a liquidation analysis so holders of claims and interests can assess if their best interests are served by the plan; (g) whether the plan outlines specifically the retention of management for the debtor; (h) whether any projections made in the disclosure statement are based upon factually supported expectations; (i) whether the debtor is involved in any pending or contemplated litigation; (j) whether the debtor is or has been involved in transactions with insiders; (k) whether the probable tax consequences of the plan are revealed; (l) an estimate of administrative expense claims; and (m) actual or projected value of possible avoidance actions. See e.g., Malek, 35 B.R. at 443-45; Metrocraft, 39 B.R. at 568; A.C. Williams, 25 B.R. at 176; Sciotta, 88 B.R. at 170-71. In this case, the Disclosure Statement falls short of providing the adequate information required under Bankruptcy Code § 1125(a).
A. The Disclosure Statement Lacks Essential Information Necessary For Creditors To Make An Informed Voting Decision.
The Disclosure Statement fails to provide adequate information to creditors so that they can make an informed voting decision with respect to the Plan. At a minimum, the Debtor must supply or correct the following information in accordance with Bankruptcy Code § 1125(a):
(i) the Disclosure Statement erroneously classifies Rewards Network as unsecured. Not only is Rewards Network a secured creditor in this matter, but Rewards Network is the senior secured lienholder with a blanket lien on all of the Debtor's assets. In fact, the only alleged secured claim that the Disclosure Statement acknowledges (and proposes to pay) is the claim of Strata Bank, despite the fact that Strata Bank's lien and security interest has lapsed due to its failure to file a continuation statement;
(ii) the Disclosure Statement must be amended to clarify the corporate form (if any) the reorganized Debtor will take;
(iii) the Disclosure Statement must be amended to clarify the sale of the Debtor's equity interest to Mr. D'Andrea and/or the sale of the Debtor's assets to Magtg., Inc.;
(iv) the Disclosure Statement must be amended to explain how the Debtor's assets will be transferred to Magtg., Inc. without remitting any proceeds to Rewards Network, the secured creditor with a perfected lien in such assets;
(v) the Disclosure Statement must be amended to clarify whether Mr. Gianfrancesco will be a "partner" in any new entity operating the Debtor, and whether Mr. Gianfrancesco will retain any interest in the Debtor;
(vi) the Disclosure Statement must be amended to explain what marketing efforts, if any, the Debtor took in connection with the sale of its assets and/or equity;
(vii) the Disclosure Statement must be amended to include information justifying any purchase price for the Debtor's equity and/or assets and to show how such purchase price is for "fair market value" of the Debtor;
(viii) the Disclosure Statement must be amended to provide a valuation for the Debtor's assets, and to provide a liquidation analysis; and
(ix) the Disclosure Statement must be amended to provide the amount of damages alleged in the pending litigation, the likelihood of recovery in such litigation, and how such amounts will be distributed to creditors if recovered.
Until the disclosures stated above are made, the Disclosure Statement cannot be approved pursuant to Bankruptcy Code § 1125(a) because it lacks adequate information upon which creditors can make an informed voting decision.
B. The Plan Is Unconfirmable Because It Purports To Treat Rewards Network As Unsecured And Fails to Properly Treat Rewards Network's Secured Claim — Thus, The Disclosure Statement Cannot Be Approved Because It Proposes A Plan That Cannot Be Confirmed On Its Face.
A disclosure statement describing an unconfirmable plan is objectionable and should not be approved. In re Pecht, 53 B.R. 768, 772 (Bankr. E.D. Va. 1985); see also In re Main Street AC, Inc., 234 B.R. 771, 775 (Bankr. N.D. Cal. 1999) (citations omitted). As "`serious violations of the Bankruptcy Code by a [plan proponent] can and should result in denial of confirmation of a plan . . .'" a disclosure statement pertaining to an unconfirmable plan is a futile undertaking and an improvident expenditure of judicial resources. In re Greate Bay Hotel Casino, Inc., 251 B.R. 213, 237 (Bankr. D.N.J. 2000), quoting In re Landing Assocs., Ltd., 157 B.R. 791, 810 (Bankr. W.D. Tex. 1993), citing 11 U.S.C. § 1129(a)(2) (conditioning plan confirmability on its proponent's compliance with all applicable provisions of the Bankruptcy Code). As described in detail below, the Plan is facially unconfirmable as a matter of law. Accordingly, the Disclosure Statement should not be approved.
1. Contrary To The Classification Proposed By The Debtor, Rewards Network's Claim Secured By All Of The Debtor's Assets.
Bankruptcy Code § 1129(a)(1) provides that a plan must comply with the applicable provisions of the Bankruptcy Code. This provision requires compliance with Bankruptcy Code §§ 1122 and 1123 governing classification of claims and contents of a plan.See In re Barakat, 99 F.3d 1520, 1527 (9th Cir. 1996); In re Apex Oil, Inc., 118 B.R. 683 (Bankr. E.D. Mo. 1990); In re Johns Manville Corp., 68 B.R. 618, 629 (Bankr. S.D.N.Y. 1986),aff'd in part, rev'd in part on other grounds, 78 B.R. 407 (S.D.N.Y. 1987), aff'd sub nom. Kane v. Johns Manville Corp., 843 F.2d 636 (2d Cir. 1988). The Plan is not in compliance with Sections 1122 and 1129.
Bankruptcy Code § 1122(a) requires that all claims in each class must be substantially similar. See Bankruptcy Code § 1122(a). In the present case, the Plan's classification scheme is not reasonable to implement the Plan. The Plan and Disclosure Statement do not classify Rewards Network's claim as secured and instead attempt to lump it with the unsecured class. The Debtor has not offered any reason for classifying Rewards Network's claim as anything other than secured, and it appears that the Debtor is simply discriminating against Rewards Network. Under these circumstances the Plan's classification scheme is improper, particularly when Rewards Network's security interest is ahead of the only purported secured creditor who is receiving treatment under the Plan — Strata Bank — whose claim is actually unsecured. The Debtor's failure to include Rewards Network's claim in the secured class is a prima facie basis to deny the confirmation of the Plan. 2. The Plan Is Also Facially Defective Because It Does Not Provide Rewards Network With the Value of Its Secured Claim, As Required by Bankruptcy Code § 1129(b)(2)(A)(i), And Therefore Is Not Fair And Equitable.
A Chapter 11 plan may be confirmed only if it is fair and equitable with respect to impaired classes that have not accepted the plan. See Bankruptcy Code § 1129(b). The requirement that a plan be fair and equitable in relation to secured claims is set forth in Bankruptcy Code § 1129(b)(2), which provides that the holders of secured claims must (i) retain all of their liens securing such claims, (ii) receive deferred cash payments at a market rate of interest, and (iii) receive the total value of its secured claim, as of the effective date of the plan, over a reasonable period of time under the circumstances. See 11 U.S.C. § 1129(b)(2)(A)(i).
In this case, the Plan cannot be confirmed because it provides no treatment whatsoever for Rewards Network's secured claim. Rewards Network has a first position blanket security interest in the Collateral, yet the Plan does not propose to pay Rewards Network anything on account of its secured claim. Moreover, Rewards Network's security interest is not preserved under the Plan. Instead, the only secured claim that is treated under the Plan is that of the Strata Bank, who no longer has a perfected lien in the Debtor's Collateral. Further, the Debtor's Plan proposes to transfer all of the Debtor's assets to Magtg, Inc., free and clear of Rewards Network's lien and security interest, without paying Rewards Network's claim or otherwise remitting any proceeds in connection with such transfer. Clearly, this violates the fair and equitable requirement of the Bankruptcy Code and causes the Plan to discriminate unfairly against Rewards Network. It would be a waste of judicial resources to approve the Disclosure Statement at this time when the underlying plan is facially unconfirmable.
IV. CONCLUSION.
Based on the forgoing, Rewards Network hereby requests that the Court issue an
Order:
1. Denying approval of the Disclosure Statement;
2. Ordering the Debtor to disclose the additional information requested herein;
3. Granting such other and further relief as is just and proper under the circumstances.
EXHIBIT
EXHIBIT A TO J