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September 21, 2022 – An ad hoc committee of unsecured creditors (the “Ad Hoc Committee”)* has objected to the Debtors’ requested debtor-in-possession (“DIP”) financing [Docket No. 91] arguing that the DIP arrangements are designed to "further the interests of Penta Mezzanine SBIC Fund I, L.P. (‘Penta’) in its multitude of conflicting capacities as prepetition secured and unsecured lender, postpetition lender, majority shareholder, and insider at the expense of the Debtors’ other creditors."
In highlighting Penta's allegedly improper levels of control over the Debtors and these cases, the Ad Hoc Committee also reminds the Court that the "Debtors’ Chief Executive Officer and President, chairman of the board of directors, and sole director (and sole decision maker) is also the managing partner of Penta."
Among specific concerns raise by the Ad Hoc Committee are, inter alia: (i) whether certain prepetition loans from Penta should be recharacterized as equity given Penta's insider status, (ii) the inclusion of otherwise unencumbered assets in the DIP collateral package (notably proceeds of Avoidance Actions and potential claims and causes of action against Penta or any of its affiliates) and (iii) proposed "stringent milestones ensuring the case is fast-tracked through bankruptcy to the detriment of all other creditors."
* The Ad Hoc Committee is comprised of the following creditors: Cascade Orthopedic Supply, LP, CPO Management Services, LLC, Orthomerica Products, Inc., and Otto Bock HealthCare LP.
On August 29, 2022, privately held Level Four Orthotics & Prosthetics, Inc. and five affiliated debtors (d/b/a Restore POC and together “Restore POC” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn. At filing, the Debtors, a North Carolina-centered provider of Custom prosthetics, orthotics, and cranial remolding products, cited an inability to scale operational growth after acquisitions, managment turnover/litigation, COVID-19 and the "Great Resignation" as compelling their need to seek bankruptcy shelter. The Debtors also announced that they would be looking for Court approval of stalking horse arrangement with Bionic Prosthetics and Orthotics Group LLC ($3.25mn opening bid).
On September 6th, the Court hearing the Level Four Orthotics & Prosthetics cases issued an interim order authorizing the Debtors to access $300k in new money, DIP financing from Penta Mezzanine SBIC Fund I L.P (“Penta” or the “DIP Lender,” also the Debtors’ prepetition lender and controlling shareholder) on an interim basis with access to the $700k balance of what is in total $1.0mn of requested new money DIP financing to be considered at a September 27th hearing.
The Ad Hoc Committee Objection
The objection notes, “By the DIP Motion, the Debtors seek various forms of relief that offer extraordinary protections and further the interests of Penta Mezzanine SBIC Fund I, L.P. (‘Penta’) in its multitude of conflicting capacities as prepetition secured and unsecured lender, postpetition lender, majority shareholder, and insider at the expense of the Debtors’ other creditors, particularly unsecured creditors. In fact, Penta singlehandedly occupies all of the most influential creditor roles in these cases. Not only does Penta hold the most influential creditor roles, but the Debtors’ Chief Executive Officer and President, chairman of the board of directors, and sole director (and sole decision maker) is also the managing partner of Penta.
Penta has extended various loans to the Debtors (the ‘Penta Prepetition Obligations’) since February 2014, some of which were perfected and some of which were not.
Given the insider nature of the Penta Prepetition Obligations, it is possible that these loans should be recharacterized as equity. To avoid these deficiencies (actual and potential), Penta structured the DIP Facility to extract as much advantage and control from these cases as possible, as well as absorb all of the Debtors’ unencumbered assets through the extension of minimal postpetition financing with stringent milestones ensuring the case is fast-tracked through bankruptcy to the detriment of all other creditors. entity obligated under the Penta prepetition loans. Penta further seeks superpriority claims (the ‘Adequate Protection Superpriority Claim’) payable from and with recourse to all Postpetition Collateral and the proceeds of Postpetition Collateral. The DIP Facility also establishes only a five-day notice period before most remedies may be exercised upon an event of default. However, certain remedies do not require any notice, including Penta’s ability to block or limit withdrawals from any bank account that is part of the Collateral upon the sole determination (by Penta) that there has been an event of default. Presumably, this would also include blocking the Debtors’ ability to use funds in its account to pay off the DIP Facility. However, if the DIP Facility is not paid off at the time of an Event of Default, again without further notice, the Debtor grants Penta an ‘irrevocable, non-exclusive, worldwide, fully assignable and sublicenseable, license, under all applicable Intellectual Property rights, to commercialize and exploit any Intellectual Property that is part of the Collateral.’ This is in addition to other available remedies, including the right to immediately seize the Collateral.
Penta’s attempt to use its extension of minimal postpetition credit to cleanse defects in its perfection of collateral and to extend its collateral to post-petition, previously unencumbered asset—including claims that could provide a valuable source of recovery for the Debtors’ other creditors who are owed millions of dollars—is wholly inappropriate and inequitable to the other parties in interest. The liens securing the DIP Facility obligations would encumber absolutely all of the Debtors’ property, including all previously unencumbered property, like (a) proceeds of Avoidance Actions (the ‘Avoidance Action Proceeds’); (b) the estates’ potential (and as yet uninvestigated) claims and causes of action against Penta or any of its affiliates (collectively, the ‘Penta Claims’) and any proceeds thereof (the ‘Penta Claim Proceeds’); (c) any claims and causes of action that the estates may have against the Debtors’ current and former directors and officers (the ‘D&O Claims’) and any proceeds or property derived from the D&O Claims (the ‘D&O Claim Proceeds’); and (d) the assets of any subsidiaries for which liens were not properly perfected, if any (‘Unencumbered Subsidiary Assets’).
The proposed DIP Liens and Adequate Protection Liens should not encumber, and the superpriority claims should not have recourse to, the proceeds from chapter 5 actions, Penta Claims, Penta Claim Proceeds, D&O Claims, D&O Claim Proceeds, and Unencumbered Subsidiary Assets (collectively, the ‘Excluded Assets’). These assets should be preserved for the benefit of all creditors of the Debtors’ estates. Further, the Adequate Protection Liens and Adequate Protection Superpriority Claim should not improve Penta’s prepetition secured position by granting recourse to the Excluded Assets because Penta voluntarily subordinated itself to protect its own interests, particularly when doing so strips unsecured creditors of their remaining sources of recovery.
In addition to all of these protections in favor of Penta in its various and often conflicting capacities, Penta also will, among other things, lock these cases into overly restrictive milestones and obtain section 506(c) and marshaling waivers. Unless the Proposed Final DIP Order, whose one-sided terms unreasonably benefit Penta at the expense of other parties in interest, is modified to address the issues and objections raised herein, entry of any order approving the DIP Motion (the ‘Final DIP Order’) may deprive unsecured creditors of substantial value and effectively cede control of these cases to Penta approximately only one month after the Petition Date.”
As of the Petition date, the approximate principal and interest outstanding under the Debtors credit facilities was as follows:
In addition, the Debtors have unsecured debts totaling approximately $3.6mn (mostly inter-company debt owed to lead Debtor L4) and an unforgiven loan (NB: forgiveness expected by the end of August) that the Debtors obtained pursuant to the federal Paycheck Protection Program ("PPP”) in the amount of $1,777,452.
78.6% of the fully diluted stock of the lead debtor is owned by Level Four SBIC Holdings, LLC, which in turn is a wholly owned subsidiary of Penta. The Debtors' CEO Rebecca Irish also serves as Managing Partner of Penta.
Each respective shareholder and percentage of ownership is as follows:
About the Debtors
According to the Debtors: "For over 15 years, we have been working directly with patients, providers, and physicians to ensure that our patients have the best prosthetics, orthotics and cranial remolding experience."
The Irish declaration adds: "Restore POC is a provider of custom prosthetics, orthotics, and cranial remolding products with a mission to provide affordable, quality products and limb loss solutions to patients in need. Many of Restore POC’s customers are U.S. veterans, the elderly, the underserved, and infants. L4, the parent of the Debtor Subsidiaries, operates seven clinic locations in North Carolina and one location in South Carolina, with company support services in a separate facility in North Carolina and executive offices in Winter Park, Florida. L4 serves as the operational and financial hub of Restore POC. All of Restore POC’s raw materials and inventory are purchased by and through the Debtor Parent for its own behalf and on behalf of the Debtor Subsidiaries. All payments on accounts receivable are swept daily from the Debtor Subsidiaries deposit accounts into the Debtor parent’s deposit account. Payments of all Restore POC’s operational expenses are similarly funded through the Debtor Parent’s disbursement account on its own behalf and on behalf of the Debtor Subsidiaries. L4 is also responsible for the administration of Restore POC’s shared services functions including billing and collections, administering payroll, human resources support, contracting, credentialing, legal, marketing and purchasing on its own behalf and on behalf of the Debtor Subsidiaries."
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