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September 27, 2021 – The Court hearing the TECT Aerospace Group Holdings cases issued a further amended final debtor-in-possession ("DIP") order which extends the “Maturity Date” in respect of the Debtors' DIP credit agreement until December 31, 2021 [Docket No. 513].
This is the third time that the Maturity Date has been extended in respect of DIP financing being provided by prepetition lender The Boeing Company (“Boeing”), with earlier extensions taking the Debtors through August 27th and then September 24th. For the Debtors' Official Committee of Unsecured Creditors (the “Committee”), these extensions ave been far from benign, with the Committee accusing Boeing of deliberately putting these cases into a stall so that the Debtors (and it unsecured creditors) continue to "pay Boeing's freight" in respect of assets that Boeing has already purchased (see further below).
Arguing that the Debtors' cases are being unnecessarily prolonged and "administered for the sole benefit of Boeing" (with Boeing, and not the Debtors, doing the administering), the Committee has asked the Court to convert the Debtors' cases to Chapter 7.
In a scheduling change that may be indicative of an improving relationships/dialogue amongst the Committee, the Debtors and Boeing, the hearing to consider the Committee's motion to convert has been postponed from October 7th until October 19th.
In a related DIP development, on September 17th, the Court issued an order [Docket No. 495] approving a stipulation extending the period during which the Committee maintains a right to challenge certain liens in favor of prepetition lender Boeing (which are otherwise concretized in the final DIP order). With the Committee having conducted an investigation, the pool of liens still subject to a challenge and further investigation has now shrunk with the stipulation aloso hinting that perhaps some of the animosity directed at Boeing by the Committee has abated, with the stipulation noting that "to avoid the cost of litigation to the Debtors’ estates, the Committee and the Agent wish to engage in good faith discussions regarding a consensual resolution of the Committee’s Challenges…"
Committee Motion to Convert
On September 10th, the Committee filed a motion seeking conversion of the Debtors’ Chapter 11 Cases to cases under Chapter 7; arguing that the cases are "being administered for the sole benefit of Boeing," with Boeing, and not the Debtors, doing the administering [Docket No. 476].
So with asset sales completed, why have the Debtors "not made any meaningful progress towards proposing a chapter 11 plan"? The answer according to the Committee is that Boeing is taking its time feeding on the carcass, taking the parts that it needs in respect of its own supply chain and having the Debtors "reject various equipment leases related to the Kansas operations that were used to produce airplane parts for customers other than Boeing…"
Getting what it needs from the Debtors while they are still in bankruptcy suits the commercial needs of Boeing just fine, the Committee argues, given that the Debtors are effectively underwriting costs that would fall to Boeing (as purchaser of the Debtors' Kansas assets) if the sale in respect of those assets was already completed. As it is, the Debtors, who under the direction of Boeing have refused to meet DIP milestones or engage in discussion with the Committee as to a possible Plan, will "pay Boeing's freight."
Noting that (i) Boeing as DIP lender refuses to commit to a budget that would see the Debtors through confirmation of a Plan and (ii) that "non-operational assets, including potential avoidance actions and commercial tort claims against insiders, continue to be further encumbered by continued draws on Boeing’s self-serving DIP Facility, the Committee argues that conversion is now the only appropriate remedy: "With no prospect of getting a consensual plan of liquidation on file, let alone any confirmable plan if the estates are administratively insolvent, and with limited assets to administer (which may be administered by a chapter 7 trustee), it is time to convert these cases to chapter 7."
The Committee's motion states, “In the five months that these chapter 11 cases have been pending, the Debtors have sold substantially all of their assets (the Debtors’ second and final asset sale closed over a month ago), yet these cases are no closer to the filing, solicitation, and confirmation of a plan than they were on the Petition Date. With no operations, few employees, and very limited assets, the Committee would anticipate that the Debtors’ chapter 11 plan of liquidation would be relatively straightforward. To date, however, the Debtors have not made any meaningful progress towards proposing a chapter 11 plan. In fact, despite the Debtors’ supposed obligation to file a plan pursuant to the DIP milestones, the Committee has not seen even a draft of a chapter 11 plan, let alone a plan term sheet.
The developments in the Chapter 11 Cases thus far have only solidified that these cases have been, and are continuing to be, administered for the sole benefit of Boeing, the Debtors’ prepetition lender, DIP lender, former largest customer, and purchaser of the Kansas Assets. For example, the Kansas Assets were sold to Boeing (through a credit bid) to ensure continued production of the airplane parts that Boeing needed for its supply chain. Indeed, immediately prior to Boeing’s acquisition of the Kansas Assets, Boeing caused the Debtors to reject various equipment leases related to the Kansas operations that were used to produce airplane parts for customers other than Boeing, but were not needed for the production of Boeing’s parts.
It is now in Boeing’s interest to stall the Chapter 11 Cases while it completes production of its airplane parts at the Kansas facilities. Pursuant to the terms of the Kansas sale order, through 120 days after the closing of the Kansas Sale, i.e., early December 2021, Boeing may benefit from continued performance of the Debtors’ executory contracts and unexpired leases that have not yet been assumed or rejected, without having to fund the costs of the Debtors assuming those agreements. Rather, Boeing must pay only the cost of maintaining the contracts and leases for the limited time between the closing of the Kansas Sale through the date of rejection. Simply put, absent a conversion to chapter 7, Boeing will be the main beneficiary of the Debtors remaining in chapter 11, and Boeing will reap those benefits without having to ‘pay the freight’ that is necessary to confirm a chapter 11 plan.
The Committee has tried in various ways to engage the Debtors and Boeing in discussions on advancing these cases, but to no avail. For example, the Committee prepared a settlement term sheet that would form the bases for a potential consensual plan of liquidation and sent it to the Debtors and Boeing over two and a half months ago. Despite the Committee’s repeated requests, however, neither the Debtors nor Boeing have meaningfully engaged the Committee in any settlement discussions. In an effort to finally push these cases towards a conclusion, the Committee proposed a settlement to resolve its objection to the Debtors’ motion seeking an extension of the exclusive periods to file and solicit a plan (the ‘Exclusivity Agreement’). The Debtors, Boeing, and the Committee agreed to the proposed Exclusivity Agreement, under which (i) the Committee would not prosecute its objection to the Debtors’ exclusivity motion, (ii) the Debtors would reduce the requested extension of the exclusive periods from 90 days to 60 days, and (iii) Boeing would substantively respond to the Committee’s settlement term sheet by September 8, 2021. The Committee and the Debtors have performed their obligations under the settlement, but Boeing has not. Even when obligated to substantively respond to the Committee’s settlement term sheet, Boeing has failed to do so.
Nothing demonstrates Boeing’s self-interested control of these cases more than its refusal to agree to a long term DIP budget that ensures the administrative solvency of the estates through confirmation of a plan despite having asked the Debtors to prepare such budget several weeks ago. Just prior to the original August 6, 2021 maturity date set forth in the Final DIP Order, the Debtors’ advisors delivered a draft budget to Boeing that (i) extended the DIP Facility through the end of the year in order to allow the estates to prepare and confirm a plan, (ii) kept the total DIP financing commitment within the $60.2 million maximum commitment approved in the Final DIP Order (and even projected that the total DIP draw would be several million dollars less than the maximum commitment amount), and (iii) was generally acceptable to the Committee. However, Boeing refused to approve the budget. Rather, Boeing has since approved two interim DIP budgets lasting only three to four weeks each, which do not adequately address the administrative costs required to confirm a chapter 11 plan. These short term measures leave the estates on the brink of administrative insolvency and provide Boeing, the ‘lender in possession’, with even greater leverage to dictate the Debtors’ every action or, in this case, inaction.
Meanwhile, the Debtors’ estates are losing value every day as they accrue the administrative costs of running the chapter 11 cases (for Boeing’s benefit). The Debtors’ remaining, non-operational assets, including potential avoidance actions and commercial tort claims against insiders, continue to be further encumbered by continued draws on Boeing’s self-serving DIP Facility, stripping what value could be available for unsecured creditors. The Committee refuses to sit idle while the Debtors and Boeing deplete the estates’ remaining limited assets without any progress towards confirmation of a chapter 11 plan.
With no prospect of getting a consensual plan of liquidation on file, let alone any confirmable plan if the estates are administratively insolvent, and with limited assets to administer (which may be administered by a chapter 7 trustee), it is time to convert these cases to chapter 7. Such relief will preserve what little value may remain in these estates by promptly appointing a chapter 7 trustee to liquidate the remaining assets and pursue potentially valuable estate claims and causes of action for the benefit of all stakeholders (not just Boeing).”
A hearing on the motion is scheduled for October 7, 2021, with objections due by September 24, 2021.
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