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December 16, 2020 – The U.S. Trustee assigned to the Debtors' cases objected to the proposed confirmation of the Debtors’ Plan of Reorganization [Docket No. 1842], arguing, among other things, that the Debtors should be required to provide more details on former Equity Committee member Osmium Capital's role in the Plan process and a related backstop agreement before the Court can confirm that the Plan was filed in good faith.
The U.S. Trustee also questions the proposed distribution to equity holders and exclusion of late-filed claims from Plan recoveries.
The objection states, “The Debtors have not demonstrated that the Plan complies with the good faith requirement of 11 U.S.C. § 1129(a)(3). The backstop agreement is sponsored by Osmium Capital (‘Osmium’), a former member of the Equity Committee. Osmium did not resign — or recuse itself — from the Equity Committee before making an offer to increase its equity stake in the reorganized debtors. Only after the United States Trustee learned of Osmium’s involvement in the Plan in publicly filed documents, and inquired about its role on the Equity Committee, did Osmium resign from the Equity Committee. The Debtors, the Equity Committee and the Equity Committee professionals must explain the process for securing this backstop agreement. The standard for an equity committee member’s activity should be objective to avoid harm to the bankruptcy system, but the parties should disclose whether outside equity holders and others had access to the same financial information as insider Equity Committee information enjoyed by Osmium so the Court can assess the actual facts.
The Debtors have not shown that the Plan meets the absolute priority rule or the best interest of creditors test under 11 U.S.C. § 1129(a)(7). In this regard, the Debtors must clarify two points at the time of confirmation. First, the Debtors will have to demonstrate that timely filed unsecured claimants have unanimously accepted the plan, as they are impaired, and yet equity is receiving a distribution. Second, in the context of unsecured creditors receiving interest, the Debtors will have to explain why they have excluded late filed claimants from a distribution. Under the section 726 waterfall, in a Chapter 7 case late filed claimants receive payment before interest and equity.
The Plan has other problematic provisions, including non-consensual third-party releases and overly broad exculpations, described infra. Further, in the Plan Supplement, the Debtors revealed details of a management incentive plan (‘MIP’), which may not comply with Bankruptcy Code requirements. Unless these provisions are amended to comply with decisions of Courts in the Fifth Circuit, confirmation should be denied.”
The Plan confirmation hearing is scheduled for December 22, 2020.
About the Debtors
Tuesday Morning Corporation (NASDAQ: TUES) is one of the original off-price retailers specializing in name-brand, high-quality products for the home, including upscale home textiles, home furnishings, housewares, gourmet food, toys and seasonal décor, at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers. Based in Dallas, Texas, the Company opened its first store in 1974 and currently operates 687 stores in 39 states.
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