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December 29, 2020 – Further to objections from the U.S. Trustee assigned to the Debtors' cases and Lion Capital Americas, Inc. ("Lion Capital") and after discussions with the IRS over a potential tax liability relating to the Debtors' sale of their assets to Taiwanese fishing giant FCF Co., Ltd. ("FCF"), the Debtors have filed a motion to convert their Chapter 11 cases to cases under Chapter 7 [Docket No. 782].
The Debtors had previously requested dismissal of their cases with their dismissal motion detailing what had obviously not been fully contemplated previously, that the Debtors might owe the IRS a lot of money; with that sum, sitting as an administrative claim, swamping any and all creditors below it in the claims waterfall.
The then dismissal motion stated: "As part of the prepetition negotiations that resulted in the FCF APA and the Debtors’ debtor-in-possession financing, the Debtors obtained sufficient funding and other assurances of payment to satisfy the amounts incurred by the Debtors in the operation of their businesses through the closing of the Sale, plus a wind-down budget to administer these Chapter 11 Cases for a period of time following the Sale.
Well…not quite, the next sentence continues: "The Debtors, however, believe that the Sale may have resulted in a taxable gain attributable to the Debtors’ assets and further, that the resulting tax on that gain would be substantial. While the Internal Revenue Service has been regularly noticed throughout these Chapter 11 Cases, including with respect to the Global Settlement Motion described below, it has not yet asserted any claims against the Debtors or otherwise opposed any of the relief requested in these Chapter 11 Cases."
Potentially worse still for the the cases' professionals, is that in denying the Debtors' dismissal motion it also withheld approval of a nominally "Global Settlement," the Court has also failed to approve $1.4mn of funding (it will sit in escrow for now) for counsel to the Debtors' official committee of unsecured creditors (the “Committee,” a signatory to the Global Settlement).
A hearing on the conversion motion is scheduled for January 25, 2021, with objections due by January 13, 2021.
The present conversion motion notes, “Conversion of the Chapter 11 Cases to cases under chapter 7 at this time is in the best interests of the Debtors’ estates, creditors, and other interested parties. The Debtors believe that confirmation of a chapter 11 plan of liquidation is not feasible because they cannot establish that any potential taxes on the gain arising from the Sale, which would be entitled to administrative expense status, can be satisfied from the minimal proceeds of the remaining unencumbered assets available to administrative expense claimants.”
The motion continues: "The Debtors were able to consummate the Sale without delay and minimizing expense in large part due to the global settlement reached among the key parties in the Chapter 11 Cases…and ultimately memorialized in…the “Global Settlement Stipulation.” The Global Settlement Stipulation contemplated, among other things, that a trust would be established for the benefit of the Debtors’ creditors.The settlement term sheet also provided that $1.4 million (referred to as the 'Trust Funding') would be funded into the trust account for Committee Counsel pending approval of the settlement and further provided that '[i]n the event the Settlement is not approved by a final, non-appealable order of the Bankruptcy Court, the Trust Funding shall remain in escrow pending further order of the Bankruptcy Court.
The Debtors subsequently sought to dismiss the Chapter 11 Cases by motion dated August 20, 2020 (the ‘Dismissal Motion’), intending to effectuate a structured dismissal of these Chapter 11 Cases following implementation of the Global Settlement Stipulation. Both motions were opposed by the U.S. Trustee and Lion Capital (Americas), Inc. (‘Lion Americas,’ and together with the U.S. Trustee, the ‘Objectors’).
The Objectors alleged, in sum, that the structured dismissal was not in the best interests of the Debtors’ creditors. Instead, the Objectors argued that the Debtors should either file a liquidating plan, dismiss their cases without the Debtors’ proposed structure, or convert the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. The Court considered the Global Settlement Motion and the Dismissal Motion at a hearing on September 10, 2020. The Court denied the motions without prejudice and encouraged the Debtors to engage in discussions with the Internal Revenue Service (‘IRS’) in light of the potential substantial tax claim the IRS may hold. Up until that point, while the IRS had been provided notice of all proceedings in these Chapter 11 Cases, including the Sale, the Global Settlement Motion and Dismissal Motion, the IRS had not asserted any tax claim or objected to any of the relief sought in the Chapter 11 Cases.
Following that hearing, the Debtors and the Committee engaged with the IRS, and the IRS indicated that it was not supportive of the Global Settlement Stipulation and the Dismissal Motion but, rather was aligned with the Objectors in seeking a conversion of the Chapter 11 Cases. In light of the observations of the Court at the September 10 hearing and the position of the Objectors and the IRS, the Debtors determined, in consultation with the Committee and the Debtors’ term loan lenders, that conversion is in the best interests of creditors and the estates."
U.S. Trustee and Lion Capital Objections
On September 3, 2020, the U.S. Trustee objected to the Debtors’ motion requesting dismissal of those Chapter 11 cases and urged the Court to instead convert the cases to Chapter 7 [Docket No. 682]. A similar objection was filed by (Lion Capital and together with the U.S. Trustee, the “Objectors”) [Docket No. 683]. Closing the cases now, the Objectors argued, would improperly lock in a status quo created by the Debtors' proposed global settlement agreement, allowing unsecured clams holders to recover while a "significant administrative tax liability" would go unpaid.
The U.S. Trustee objection states: "the Motion admits [what] could be a significant administrative tax liability…Approval of the Settlement Motion would assign the remaining estate assets to the Creditors’ Trust and to the extent there is a large administrative tax claim, payment of any portion thereof would be avoided in favor of prepetition unsecured claims…"
The U.S. Trustee continues, in its argument that the Debtors are trying to have their cake and eat it too (or to have a Plan…and not have a Plan), "The present Motion admits that the estate cannot propose a confirmable plan but nevertheless asks the Court to approve the Global Settlement. Granting the Motion as prayed will dispose of the remaining estate assets while removing any ability of the estate to pay what the Motion admits could be a significant administrative tax liability. The Motion should be denied without prejudice. Instead of dismissal, this estate should be converted to one under Chapter 7.
The Debtors’ exclusivity to file a plan expired on March 25, 2020. No plan or disclosure statement has been filed. The Debtor admits that no confirmable plan can be filed. According to the most recently filed Monthly Operating Report, the estate is administratively insolvent. The only remaining assets consist of potential litigation assets.
In the present case, cause exists for conversion rather than dismissal. Conversion will result in the appointment of a Chapter 7 trustee to independently administer the remaining estate assets subject to oversight and accounting lacking in the proposed Creditors’ Trust. Creditor claims will be resolved pursuant to the procedures of the Bankruptcy Code and rules. To the extent that assets exist, they will be distributed in accordance with the provisions of Bankruptcy Code Section 726. Approval of the Settlement Motion would assign the remaining estate assets to the Creditors’ Trust and to the extent there is a large administrative tax claim, payment of any portion thereof would be avoided in favor of prepetition unsecured claims. The avoidance of payment of a known potentially large administrative tax claim, particularly when there may exist assets to pay some or all of the claim is neither cause nor good reason to approve the Motion and Settlement Motion. The best interest of creditors compels conversion of this estate to one under Chapter 7. This will be the least expensive and most appropriate way to complete administration of this case.”
Debtors' Motion to Dismiss
On August 20, the Debtors requested dismissal of their Chapter 11 cases [Docket No. 672].
The dismissal motion states, “Having now successfully consummated the Sale and reached a global settlement with all Settling Parties, the Debtors are positioned for an orderly wind-down of their remaining business activities and these Chapter 11 Cases. The Debtors have determined that dismissal of the Chapter 11 Cases is the most efficient and cost-effective method of concluding these Chapter 11 Cases. The Debtors believe that confirmation of a chapter 11 plan of liquidation is not feasible because they cannot establish that any potential taxes on the gain arising from the Sale, which would be entitled to administrative expense status, can be paid from the assets available to administrative expense claimants. Further, the Debtors do not have the funding for a chapter 11 plan process (including plan formulation and preparation, disclosure and solicitation, and plan confirmation) and to continue to administer their estates while that process plays out.
Conversion to chapter 7 is also not warranted. The Debtors have already successfully monetized their operating assets, and they have negotiated the transfer of certain estate-held claims and causes of action that the Committee has identified as potentially meritorious to a Creditors’ Trust. As a result, there are no remaining material assets for a chapter 7 trustee to liquidate and distribute. Assuming that the Global Settlement Motion (being heard concurrently herewith) is granted, conversion to a case under chapter 7 of the Bankruptcy Code will merely add another layer of administrative costs with minimal attendant benefits. The few remaining corporate actions that need to be done—filing final tax returns and dissolving the Debtors’ corporate existence (or analogous limited liability company actions)—do not require this Court’s or a chapter 7 trustee’s oversight.
As part of the prepetition negotiations that resulted in the FCF APA and the Debtors’ debtor-in-possession financing, the Debtors obtained sufficient funding and other assurances of payment to satisfy the amounts incurred by the Debtors in the operation of their businesses through the closing of the Sale, plus a wind-down budget to administer these Chapter 11 Cases for a period of time following the Sale.
The Debtors, however, believe that the Sale may have resulted in a taxable gain attributable to the Debtors’ assets and further, that the resulting tax on that gain would be substantial. While the Internal Revenue Service has been regularly noticed throughout these Chapter 11 Cases, including with respect to the Global Settlement Motion described below, it has not yet asserted any claims against the Debtors or otherwise opposed any of the relief requested in these Chapter 11 Cases.”
On January 24, 2020, the Court hearing the Bumble Bee Parent, Inc. cases approved the Debtors’ $930.0mn sale of its U.S. and Canadian Assets to Tonos US LLC, as U.S. Buyer, Tonos 1 Operating Corp., as Canadian Buyer and Melissi 4 INC. as Equity Buyer (each affiliates of FCF Co., Ltd. ("FCF") and together, the “Purchaser”) [Docket No. 326]. The purchase price includes the Purchaser's assumption of liability in respect of $17.0mn still owed by the Debtors to the U.S. Department of Justice ("DOJ") under the Debtors' price-fixing settlement. See below for more on the DOJ's limited objection to the sale and the Court order's inclusion of clarifying language requested by the DOJ in respect of liability.
The Debtors' bidding procedures motion [Docket No. 31, which attached the APA, now approved] provided the following background, “The Company requests authority to enter into a stalking horse purchase agreement for the going concern sale of substantially all of its assets to affiliates of FCF Co., Ltd. (‘FCF’), one of the world’s largest seafood suppliers and the Debtors’ long-time tuna supplier. The stalking horse agreement with FCF provides for a purchase price of up to $930.6 million, preserves the Company’s business as a going concern, contemplates the employment of nearly all of the Company’s employees, and maintains a business partner to scores of vendors and customers who have done business with the Company worldwide for decades. As described below, the stalking horse agreement results from an extensive marketing process for a sale of the Company that started during the summer of 2019. To ensure the highest or otherwise best offer for the Company, the Debtors request this Court’s authority to continue the marketing process in these Chapter 11 Cases according to bidding procedures that provide for an auction and sale process of the Company in coordinated U.S. and Canadian restructuring proceedings.”
About the Debtors
The Debtors are headquartered in San Diego, California and conduct operations in various other domestic and international locations. The Debtors, together with their non-Debtor affiliates based in Canada, comprise one of North America’s largest branded shelf-stable seafood providers. The Debtors, together with their non-Debtor affiliates (collectively, the “Company”), offer a full line of canned and pouched tuna, salmon, sardines, and specialty seafood products marketed in the United States under leading brands including Bumble Bee, Brunswick, Sweet Sue, Snow’s, Beach Cliff, and Wild Selections and marketed in Canada primarily under the Clover Leaf brand. Due to the quality, nutritional value, and affordability of the Company’s products, this diverse product line-up is sold by virtually every major United States and Canadian food retailer and in all major food channels, including supermarkets, mass merchandisers, drug stores, warehouse clubs, and dollar stores. Over the last century, the Debtors, their affiliates, and their predecessor companies have been leaders in the shelf-stable seafood industry, and their brands enjoy nearly 90% consumer awareness levels in the United States and Canada.
According to the Debtors, "Bumble Bee’s full line of high-quality seafood and specialty protein products are marketed in the U.S. under leading brands including Bumble Bee®, Brunswick®, Snow’s®, Wild Selections®?and Beach Cliff®, and in Canada under the Clover Leaf®?brand. For more information on Bumble Bee, visit?www.BumbleBee.com. Join fans of Bumble Bee and healthy living at? www.facebook.com/BumbleBeeSeafoods?and follow us on Twitter?@BumbleBeeFoods, on Pinterest?www.pinterest.com/BumbleBeeFoods?and Instagram?@BumbleBeeFoods."
The Debtors's parent company is Clover Leaf Seafoods Company, a leading marketer of canned seafood in Canada. Headquartered in Markham, Ontario, it sells canned, shelf-stable, and frozen goods under the Clover Leaf and Brunswick brands. The company's products include tuna, salmon, oysters, mussels, clams, shrimp, crab, lobster and sardines. Clover Leaf Seafoods is in turn owned owned by British private-equity firm Lion Capital LLP.
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