Specialty Retail Shops Holding Corp – McKesson Howls Objection to Plan “Reeking of Bad Faith,” Claims Wholesale, Last-Minute Revamp is Sleight of Hand Intended Solely to Gain Insider Releases

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May 24, 2019 – Creditor McKesson Corporation (“McKesson”) objected [Docket No. 1431] to the Debtors' Second Amended Joint Chapter 11 Plan; objecting vigorously to perceived attempts to slide the Plan past the Court at the last minute to benefit insiders (notably with the removal of an opt out provision relating to the release of those insiders) and (ii) urging the Court to "reject this transparent artifice."

The objection states, “Debtors filed the Amended Plan on May 21, 2019, just four business days before the confirmation hearing, and, more critically, long after ballots were submitted and the plan objection deadline for most creditors passed. Yet, the Amended Plan represents no mere minor tinkering to the previous versions. Instead, it is a wholesale re-vamping of the earlier plans. The sweeping breadth of the revisions are obvious upon even a cursory look at the cumulative redline Debtors filed along with the Amended Plan.  One revision is particularly egregious and constitutes a material modification to the plan that significantly and adversely affects creditors. While the previous plan versions contained a mechanism whereby creditors could opt out of releasing non-Debtor parties (specifically Debtors’ insiders), the Amended Plan eliminates the opt out provision. As a result, notwithstanding that creditors voted and based their objections (or lack thereof) on a plan containing an opt out provision, Debtors now seek to confirm, in a classic bait and switch, a plan that requires creditors to release all claims they may have against Debtors’ insiders, among others.

The sale of Debtor’s pharmacy assets came up $20 to $30 million short of expectations, and their much-touted equity sponsor never materialized. Debtors are now nearing the end of a full-chain liquidation and there no realistic possibility that non-priority unsecured creditors will see a dime. Worse, Debtors remain administratively insolvent, and the professional fees and other administrative costs are mounting despite the lack of any demonstrable benefit to Debtors’ estates that will result from confirmation of the Amended Plan. Why? The answer can only be that Debtors and their insiders are singularly focused on the improper releases and other exculpatory and insider protection provisions contained in the Amended Plan. Accordingly, the scheme and the Amended Plan reek of bad faith.

In addition, the Amended Plan violates section 1129(a)(9) because it does not provide for full payment of allowed administrative claims on the effective date. Debtors, of course, cannot meet this requirement because they are administratively insolvent, possibly in the tens of millions of dollars. To skirt the problem, Debtors resort to a procedurally inappropriate sleight of hand – they ask the Court to deem a failure to object to the Amended Plan to constitute affirmative consent for acceptance of less than payment in full. The Court (as have other courts) must reject this transparent artifice. Moreover, the Amended Plan violates section 1129(a)(3) because it is not proposed in good faith. Among other things, good faith requires a reasonable likelihood that the Amended Plan will achieve a result consistent with the standards prescribed under the Code. For all of the reasons described herein, if confirmed, the Amended Plan would achieve precisely the opposite.”

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