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April 30, 2021 – The Court hearing the Meade Instruments cases confirmed the First Amended Plan of Reorganization filed by the Debtors' Official Committee of Unsecured Creditors (the “Committee” or “Plan Proponent”) [Docket No. 392].
The confirmed Plan includes significant amendments which reflect a partial settlement with Plan objectors Sheppard, Mullin, Richter & Hampton LLP ("SMRH"). SMRH had served as counsel to the Debtors in a long-running antitrust litigation with Optronic Technologies, Inc. (dba Orion Telescopes & Binoculars or "Orion"). In the course of that litigation, won by Orion (the stakeholder now at the center of the Debtors' Plan), the Debtors incurred $2.7mn of fees that are still owed to SMRH and which sit in the Plan's Class 2 ("General Unsecured Claims"). SMRH's scathing, multi-pronged objection reminds that hell has no fury like a counsel scorned and its first few paragraphs [Docket No. 376] are certainly worth the time invested.
In its findings of fact and law in support of the confirmation order, the Court states: "The SMRH Objection is the only objection to confirmation of the Plan. The Committee and SMRH reported at the Confirmation Hearing that SMRH and the Committee resolved SMRH objections to confirmation of the Plan, in part. Specifically, in consideration of the Committee agreeing to add requested language to the Plan and Confirmation Order, SMRH withdrew its objections to confirmation, except its argument that the Plan treatment of the SMRH Malpractice Action (as defined in the Plan) constituted a de facto assignment of a legal malpractice action prohibited under California law."
Changes now incorporated into the plan by the Court's Plan confirmation order include:
- Revised Definition of GUC Fund Amount. The term “GUC Fund Amount” shall now mean the amount that is equal $50,000, plus 30% of the current filed and/or scheduled general Unsecured Claims1, plus any Allowed Rejection Claim of the Irvine Company, but not including the Class 1 Claim, the Disputed SMRH Claim or any other insider Claims (the “Initial GUC Fund Amount”). The Initial GUC Fund Amount will be paid on the Effective Date from available Cash on Hand. In the event that after litigation of the SMRH Malpractice Action and/or an objection to the SMRH Claim, SMRH is ruled to have an Allowed Claim, the GUC Fund Amount will be recalculated to $50,000, plus 15% of the current filed and/or scheduled general unsecured claims plus any Allowed Rejection Claim of the Irvine Company, plus the Allowed SMRH Claim, but not including the Class 1 Claim, or any other insider Claims (the “Increased GUC Fund Amount”).The difference between the Initial GUC Fund Amount and the Increased GUC Fund Amount shall be paid by NewCo within thirty (30) days of the entry of a final order Allowing the SMRH Claim.
- Revision to Class 1’s Claim Amount for Purposes of Pro-Rata Sharing in Litigation Proceeds. The amount of Orion’s Claim for purposes of determining its pro-rata share of the recovery on the Estate Litigation Claims shall now be governed by the following: For purposes of determining Orion’s pro- rated share of the proceeds of the Estate Litigation Claims, Orion’s claim shall be fixed at $16.8 million less the value of the Transferred Assets. Likewise, for purposes of determining Class 2 Creditors’ share, the Class 2 Claims shall be reduced by the distributions made to them from the GUC Fund Amount.
- Elimination of Requirement that Plan Agent Consult with Orion Re Handling of SMRH Malpractice Action/Funding of Costs. The requirement that the Plan Agent consult with Orion before making any material decisions regarding the prosecution or settlement of the SMRH Malpractice Action are deleted. Further, NewCo’s obligation to fund the cost retainer to the Debtor’s malpractice lawyers is eliminated. Instead, the balance of the cost retainer called for in the engagement agreement with malpractice counsel will be paid by the Debtor prior to the Effective Date.
- SMRH Reservation of Rights. Pursuant to an agreement reached between SMRH and the Committee, the following reservation of rights shall govern: Notwithstanding anything in the Plan, the Plan Documents, the Findings of Fact and Conclusions of Law, or this Confirmation Order to the contrary, (i) any Causes of Action related to SMRH, including the SMRH Malpractice Claims, shall only be revested with the Debtor and/or revested or transferred to the Reorganized Debtor subject to any and all claims, causes of action, rights, remedies, interests and defenses of SMRH and (ii) other than as limited by paragraphs (A) and (B) below, in no event shall anything in Plan, the Plan Documents, the Findings of Fact and Conclusions of Law, or this Confirmation Order enjoin, limit, impair, alter, change or otherwise modify or affect any claims, causes of action, rights, remedies, interests and defenses of SMRH, including, without limitation, claims or defenses of and for recoupment, offset or setoff, in defense of or in response to any cause of action or claim asserted by the Debtor/Reorganized Debtor (including, without limitation, by the Plan Agent or anyone acting by on or behalf of the Debtor/ Reorganized Debtor) against SMRH , provided, however: (A) the Debtor/Reorganized Debtor reserves all arguments that any claims/counterclaims by SMRH for offset, set off, recoupment, or the like, are limited by the value of the treatment of such claims under the Plan, and under applicable non-bankruptcy law; and (B)the arguments, claims and defenses reserved by SMRH that the Plan constitutes an improper de facto assignment of the SMRH Malpractice Action are addressed and are subject to the reservations and limitations of Paragraph I(1)(c)(3) of the Findings of Fact and Conclusions of Law.
On December 4, 2019, Meade Instruments Corp. and one affiliated Debtor, Sunny Optics Inc. (together, “Meade” or the “Debtors”), filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Central District of California, lead case number 19-14714. At filing, the Irvine, California-based Debtors, which manufacture, import and distribute optical instruments for the consumer market, noted estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn.
For the Debtors, bought by Ningbo Sunny Electronic Co. Ltd. (“Ningbo”) in 2013, the filings came a week after a California federal jury found that Ningbo, through Meade, was guilty of price fixing in the U.S. consumer telescope market. That jury also awarded Orion $16.8mn, which may be subject to trebling under the Clayton Antitrust Act.
On April 7, 2021, the Committee filed a memorandum of law in support of the Plan confirmation [Docket No. 379], stating, “The Plan is the product of negotiations between and among the Debtor, the Committee, and Optronic Technologies, Inc. dba Orion Telescopes (‘Orion’). Aside from the SMRH Objection and SMRH’s vote against the Plan, the Plan received unanimous support from the estate’s general unsecured creditors, with every vote cast (except that of SMRH) accepting the Plan. However, because SMRH’s vote against the Plan resulted in Class 2 rejecting the Plan, and because Class 3 and 4 are deemed to have rejected the Plan, the Committee seeks confirmation under the ‘cram down’ rules set forth in section 1129(b). As set forth below, the Plan satisfies all applicable requirements of section 1129 of the Code, and notwithstanding SMRH’s ‘no’ vote, the Court can and should confirm the Plan.” (See detailed voting results below)….
Only one creditor in Class 2 voted to reject the Plan – SMRH with a Disputed Claim of $2.68 million. As discussed in the Committee Reply, in the event that SMRH is ultimately determined to have an Allowed Claim, the GUC Fund Amount will be increased such that the Creditors in Class 2 will be projected to receive 15% of their Allowed Claims. If SMRH’s claim is Disallowed, the remaining Class 2 Creditors are projected to receive 30% of their Allowed Claims. On the other hand, in chapter 7, after liquidation of the Debtor’s assets, payment of allowed priority and administrative claims, including the increased costs of winding down the Debtor’s operations, general unsecured creditors are projected to receive 10.8%, if the SMRH Claim is Allowed."
The Disclosure Statement [Docket No. 364] notes, “The exclusive period for the Debtor to file a plan has expired, and as such the Committee, in consultation with the Debtor, has filed its Plan. A plan of reorganization may provide for a debtor to reorganize by continuing to operate while it restructures its financial affairs, to obtain post-petition financing or capital infusions or to liquidate by selling assets of the estate or a combination thereof. The Committee is the party proposing the Plan, with the support and financial contributions of the Debtor’s largest creditor, Optronic Technologies, Inc. dba Orion Telescopes & Binoculars (‘Orion’). The Disclosure Statement and Plan were prepared in coordination and consultation with the Debtor. Based on discussions between the Debtor and the Committee, the Committee believes, and anticipates, that the Debtor will have no objections to, and will support, approval of the Disclosure Statement and confirmation of the Plan.”
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement; also see Liquidation Analysis):
NB: The below precedes the Court ordered Plan amendments and should be read in light of those amendments listed above.
- Class 1 (“Orion Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $53,660,743.46. The estimated recovery is 11.84%, with the estimated recovery under Chapter 7 14.4%. On the Effective Date, in exchange for the Plan Consideration, a new company formed by Orion (“NewCo”) will receive title to all of the assets of the Debtor (the “Transferred Assets”), not including the Estate Litigation Claims, free and clear of all liens, claims and encumbrances. The Transferred Assets will include, without limitation, all cash on hand on the Effective Date after the payment of Administrative and Priority Claims, all cash equivalents, all accounts receivable, intellectual property, inventory (including finished goods and work in process), rights under executory contracts and leases that NewCo elects to assume (“Assumed Contracts”), all existing purchase orders, trade names, knowhow, customer lists, furniture, fixtures and equipment, websites and domain names, books and records, stock in Meade Mexico, motor vehicles and all deposits. The Estate Litigation Claims are not Transferred Assets and will vest in the Reorganized Debtor on the Effective Date.
- On or before the Effective Date, NewCo and/or Orion will provide the following consideration in exchange for the Transferred Assets:
- Payment of all Administrative Expenses;
- Payment of all Section 503(b)(9) Claims, provided however, that any Section 503(b)(9) claim in favor of Ningbo Sunny will be paid to Orion;
- Payment of all Priority Unsecured Claims (estimated at $45,000);
- The first installment of the GUC Fund Amount. The GUC Fund Amount equals $50,000 plus 30% of the current filed and/or scheduled general unsecured claims, not including the Class 1 Claim, claim of SMRH, any claim scheduled as disputed, contingent or unliquidated and any insider claims. The GUC Fund Amount will be paid to the Reorganized Debtor to create the GUC Fund. The GUC Fund Amount will be paid equally in three annual installments, with the first being due on the Effective Date, the second being due on the First Anniversary of the Effective Date and the third being due on the Second Anniversary of the Effective Date. The second and third installments will be reduced on a dollar-for-dollar basis to the extent that 5% of the gross revenues from the sale of Meade products by NewCo is less than the amount of the installment due.
- Assumption of all obligations under any Assumed Contracts.
- Assumption of the obligation to pay any costs associated with the SMRH Malpractice Action under the retention agreement with Sall Spencer and Parker Mills.
- Orion will not share in any distributions from the GUC Fund. However, Orion will share on a pro-rated basis in any recoveries not included in the GUC Fund, including proceeds of any Estate Litigation Claims. For purposes of determining the amount of Orion’s pro-rated share of said recoveries, Orion’s Claim will be fixed at $16.8 million, and Ningbo Sunny’s claim will be fixed at $11,092,577.
- With respect to the consideration listed in items 1-4 above, it is anticipated that said payments will be funded from the available cash on hand in the Debtor’s accounts on the Effective Date.
- Class 2 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The estimated recovery is 30%, with the estimated recovery under Chapter 7 14.4%. Each Holder will receive a Pro Rata Distribution of the cash available in the GUC Fund, after payment of fees and expenses of the Plan Agent (the “Net Funds”). Interim Payments will be made out of the Net Funds by the Plan Agent as soon as there are sufficient Net Funds to make a distribution of at least $50,000 in the aggregate and, thereafter, further interim distributions will be made at the discretion of the Plan Agent as Net Funds become available, provided, however, that once all of the assets of the Estate have been fully liquidated, the Plan Agent will make a final distribution of the Net Funds to holders of creditors in the class. The source of payment to the holders of General Unsecured Claims in this Class will be the GUC Fund and the recoveries from Estate Litigation Claims, after payment of the Class 1 creditor’s pro rata share.
- Class 3 (“Insider Claims”) is impaired and entitled to vote on the Plan. The estimated recovery is 0%, with the estimated recovery under Chapter 7 14.4%. Claimants: Ningbo Sunny (scheduled). The Holders of Claims in this Class will receive no distribution of any kind, and such claims will be extinguished on the Effective Date, except that, for limited purposes of determining Class 1’s pro rata distribution from the Estate Litigation Action recoveries, Ningbo Sunny’s general unsecured claim will be Allowed in the amount of $11,092,577 as scheduled.
- Class 4 (“Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
On April 7, 2021, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 380], which were as follows.
- Class 1 (“Orion Claims”): 1 claim holder, representing $53,666,743.06 (100%) in amount and 100% in number, voted in favor of the Plan.
- Class 2 (“General Unsecured Claims”): 9 claim holders, representing $118,898.01 (4.24%) in amount and 90% in number, voted in favor of the Plan. 1 claim holder, representing $2,686,410 in amount, rejected the Plan.
- Class 3 (“Insider Claims”): No votes received.
- Class 4 (“Equity Interests”): No votes received.
FN: Class 4 consists of Equity Interests in the Debtor. No member of either Class 3 or Class 4 cast a vote.
The objection filed by Class 2 creditor Sheppard, Mullin, Richter & Hampton LLP [Docket No. 376] states, "As demonstrated by the undisputed facts discussed below, the Unsecured Creditors Committee’s Plan contains several unlawful or unsupportable provisions in violation of the confirmation requirements of 11 U.S.C. 1129 and other Code sections. More specifically, the Plan cannot be confirmed because:
- The unsecured claim of Orion, the entity that chairs the Unsecured Creditors Committee, is misclassified under 11 U.S.C. § 1122 – Orion’s claim has been 'gerrymandered' into a separate class;
- The Plan discriminates unfairly under 11 U.S.C. § 1123(a)(4) by way of its disparate and more favorable treatment of Orion’s unsecured claim;
- The Plan essentially prevents Sheppard from voting its as-of-yet unchallenged $2.7 million Class 2 claim by valuing it as 'zero,' which would (if properly counted) prevent acceptance of the Plan by Class 2;
- The liquidation analysis underlying the Plan was prepared by Broadway Advisors, an entity that has an obvious conflict of interest here;
- The Plan proponents fail to carry their burden of proof under the Best Interests of Creditors Test; and
- The Plan is premised upon the unlawful and improper assignment of a malpractice claim to the Debtor’s former litigation adversary."
The Disclosure Statement [Docket No. 364] attached the following exhibits:
- Exhibit 1: Liquidation Analysis
- Exhibit 2: 90 Day Transfers
- Exhibit 3: 1 Year Insider Transfers
- Exhibit 4: Schedule of 503(b)(9) Claims
- Exhibit 5: Schedule of Priority Claims
- Exhibit 6: Schedule of Class 2 Claims
- Exhibit 7: Schedule of Rejected Contracts
Liquidation Analysis (see Exhibit 1 of Disclosure Statement [Docket No. 364] for notes)
About the Debtors
The Debtors state: “Meade Instruments is acknowledged as one of the most innovative and dynamic companies in the telescope market. Known for its groundbreaking telescopic designs, Meade has introduced dozens of improvements over the years that have made amateur astronomy easier and more enjoyable than ever.
Meade Instruments was founded in 1972 by John Diebel. It was started as a one man mail order business, supplying small refracting telescopes. In the decades after, Meade introduced countless innovations and firsts in the world of amateur astronomy. In 2004, Meade Instruments acquired the Coronado brand of solar telescopes. These highly specialized hydrogen alpha telescopes produces detailed images of solar prominences and flares, and continues to be unmatched in the marketplace.
Meade Instruments has built its reputation and its products through ground-breaking, industry-leading innovation and precision optics, the hallmark of Meade superiority. You’ll find that on every product we make. Meade Instruments is adding technology to all of our products to make them easier and more fun to use. At Meade, we believe in providing a remarkable experience, using technology to make astronomy accessible and enjoyable to everyone, regardless of your experience level.”
In October 2013, Meade Instruments merged with Ningbo Sunny Electronic, a Chinese manufacturer, and Joseph Lupica became CEO of Meade.
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