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June 22, 2020 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) (i) objected to the Debtors’ proposed Chapter 11 Plan of Liquidation and (ii) filed a cross-motion seeking to convert the Debtors' Chapter 11 cases to Chapter 7 cases [Docket No. 356]. Of course, the Committee doesn't want either a liquidation or conversion to Chapter 7 any more than the Debtors do, but assails the existing liquidation Plan, nominally filed in the Debtors' name, but driven throughout the Chapter 11 process by prepetition and DIP lender BNP Paribas as "an orchestrated ‘puppet-master’ regime with the Debtors and, at least by intention, the Committee, being treated as ‘puppets’ by the secured lenders." In what has been one of the most interesting bankruptcy cases of 2020, the plucky Alaskan airline has emerged as something of a corporate American hero with the French lenders playing the role of rapacious villain.
In a related move, presumably coordinated with the always-say-fly, never-say-die Debtors, the Committee ("on behalf of and as representative of the Debtors’ estates") has filed an adversary proceeding against BNP Paribas [Docket No. 361] which "seeks: (i) a declaratory judgement that certain property of the Debtors is not subject to liens or security interests asserted by the Defendants [BNP Paribas]; and (ii) orders avoiding certain improperly perfected or unperfected liens or security interests asserted by the Defendants against the Debtors under sections 544, 550, and 551 of the Bankruptcy Code and disallowing Defendants claims pending final resolution of the claims in this adversary proceeding."
The adversary action will at the very least be looking to buy some more time for the Debtors who face a June 25th deadline in the form of their June 25th Plan confirmation hearing (brought forward by 2 weeks at BNP Paribas' insistence).
The present Plan objection (plus conversion motion) states, “Throughout this case, the Committee has been consistently fighting for the Debtors to have a breathing chance to rehabilitate or otherwise continue as a going concern. The secured lenders, on the other hand, have persisted with their ‘foreclosure’ efforts at every step of the case, notwithstanding the fact that, but for the COVID-19 pandemic, Ravn Air Group (if re-started) would continue to serve a vital community function in Alaska, provide thousands of jobs and maintain its business purpose. The fact that several interested going concern bidders have emerged and the CARES Act funding was approved seems to make no difference to the secured lenders, who have predetermined that ‘[t]here is nothing [here] other than a liquidation that can be foreseen and is acceptable.’
General unsecured creditors would be better served and maintain more rights in chapter 7 than under the Plan. Notwithstanding the secured lenders’ imposed liquidation path, the Committee had remained cautiously optimistic that the Debtors would be willing to propose a plan that provided unsecured creditors with both fair value and a viable business partner for the future. Despite these efforts, the Plan fails to accomplish these Chapter 11 goals, and therefore, fails to satisfy the Bankruptcy Code’s requirements for confirmation.
The Debtors bear the burden of demonstrating that the value propositions set forth in the Plan with respect to all stakeholders are fair, appropriate and proposed in good faith. Satisfaction of the good faith requirement pursuant to Section 1129(a)(3) is one of the key requirements to the finality of the bankruptcy court’s order confirming a plan. The Plan, however, cannot satisfy this and other requirements of Section 1129 because the secured lenders have abused the provisions and goals of Chapter 11 in most fundamental ways.
One of the hallmarks of Chapter 11, and bankruptcy jurisprudence in general, is the fundamental right of a debtor, creditors and other stakeholders to have a meaningful voice in the case. Chapter 11 is, after all, supposed to be an adversary process. The Debtors’ case, however, has been nothing more but an orchestrated ‘puppet-master’ regime with the Debtors and, at least by intention, the Committee, being treated as ‘puppets’ by the secured lenders.
The Plan fails to provide general unsecured creditors with any value or at a minimum, show that the unsecured creditors’ recoveries under the Plan would satisfy the ‘best interests’ test and would not be less than in a chapter 7 liquidation. In an extraordinary departure from well-accepted bankruptcy practice, the Debtors’ advisors have not presented any analysis of value of their assets under the Plan or the total enterprise value of the Debtors, which renders the Plan unconfirmable. The ‘paper valuation’ prepared at the request of the secured lenders, which the Debtors are relying upon, but which is untested by any formal marketing or sale process, cannot serve as a credible proxy for an independent analysis conducted by the estates’ fiduciaries. In addition, given the current bifurcation of the Plan and sale process, the Debtors are not even allowing a true ‘market test’ to unfold in order to determine value on a going concern basis.
The Plan fails the ‘best interests’ test by allocating less value to unsecured creditors than they would receive in Chapter 7. Through its investigation, the Committee has identified a number of significant assets that are not encumbered by either the Prepetition Secured Parties’ or the DIP Lenders’ liens. Most critically, the Debtors’ long-term ground leases with the State of Alaska—assets that have been determined to have substantial value—are wholly unencumbered. Even at a fraction of their prepetition value, these unencumbered assets would provide greater returns to unsecured creditors than the $250,000 (or approximately 0.5% of the unsecured claim) nuisance distribution currently proposed under the Plan for the unsecured creditors. A proper liquidation analysis, taking into account valuable assets like Avoidance Actions and properly accounting for the unencumbered assets, establishes that unsecured creditors will do far better in chapter 7—with projected recoveries ranging from approximately 2 to 6 percent—than under the Plan. Rather than provide unsecured creditors fair value, the Plan shifts this value to the Debtors’ secured lenders.
In a further attempt to disenfranchise unsecured creditors, the Plan proposes to transfer all Avoidance Actions and Causes of Action held by the Debtors or their Estates (along with all unencumbered assets) to the Liquidation Trust for the sole benefit of the secured lenders. Avoidance Actions are not assets of the Estates that a plan can allocate to their secured lenders. Such actions have largely remained unencumbered throughout these Chapter 11 cases and are considered to belong to unsecured creditors, not the Debtors’ secured lenders. The Avoidance Actions and Causes of Action could result in significant additional value to satisfy unsecured claims. The Debtors cannot justify the adequacy of these transfers, which are inappropriate, inequitable and not proposed in good faith.
Further depriving unsecured creditors of fair value, the Plan gives total control over to the secured lenders by providing impermissibly broad and vastly overreaching releases, exculpation and injunction that inure largely to the benefit of the secured lenders and the equity sponsors, without the benefit of reciprocal consideration being offered to the Debtors’ Estates in exchange. The Debtors also cannot meet their burden for proposed substantive consolidation of the Debtors’ Estates and, as such, the Plan cannot be confirmed.
Chapter 11 was not intended as a self-serving vehicle for secured lenders to divert value to themselves from the unsecured creditors in violation of the Bankruptcy Code’s priority scheme. ‘The purpose of Chapter 11 reorganization is to assist financially distressed business enterprises by providing them with breathing space in which to return to a viable state….[I]f there is not a potentially viable business in place worthy of protection and rehabilitation, Chapter 11 has lost its raison d’ĕtre.’ This entire Chapter 11 case has been a Chapter 7 case in disguise, where secured lenders are using the DIP and now the Plan process as a means to control the assets and recovery. This is contrary to how a Chapter 11 process should work. The Debtors are supposed to be an adversary in a Chapter 11 case and in Chapter 7, the trustee may be selected with input from general unsecured creditors. The secured lenders have attempted to justify their use of Chapter 11 by offering to pay the administrative and priority claims. However, such claims are not significant (as compared to the unencumbered value of the Estates) and are largely attributable to expenses of the Debtors’ liquidation process—a Section 506(c) surcharge expense. The secured lenders are, in reality, only paying for control of this case. The Court should not countenance a chapter 11 process that provides no value to any parties other than the Debtors’ professionals and secured lenders. Accordingly, Chapter 7 conversion is the outcome demanded by the facts of the case.”
A hearing on the objection is scheduled for June 25, 2020.
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