Albaad USA, Inc. v. GPMI, Co. (In re GPMI, Co.), Bankr

This case involved an appeal by a creditor in a bankruptcy case that objected to the approval  by the Bankruptcy Court of the debtor’s (GPMI) Chapter 11 plan. Finding no error, the  Bankruptcy Appeals Panel (BAP) affirmed.

Facts.

GPMI had been manufacturing wet wipe cleaning products since 1989. Yarron Bendor was the founder and CEO of GPMI. In 2019, Albaad (the creditor) contracted with GPMI for GPMI to manufacture wet wipes for Albaad in the U.S. “Albaad committed to ordering $80 million in products the first year and over $100 million in the second year.” GPMI told Albaad it would need to expand its manufacturing facilities, add specialized  equipment, and increase its labor force to meet the terms of the contract. Albaad advanced  $3,750,000, and GPMI spent $7,500,000 of its own capital.

GPMI began shipping product to Albaad in February 2021. Albaad refused the product. Their end customer rejected the product and terminated its contract with Albaad. Albaad refused to pay the $800,000 for product already produced. “GPMI asserted that Albaad’s [*4] breach  caused GPMI to: (i) lose over $37,000,000 in 2021 budgeted revenue; (ii) incur storage expenses for the privately labeled Albaad products; (iii) fall behind on its regular customer obligations; and (iv) incur ongoing significant fees for equipment leases obtained solely to fulfill the Albaad Contract.”

Cost savings were insufficient to change GPMI’s dire financial position, so it engaged MCA Financial Group Ltd. to assist it with identification of potential financing sources, investors, and/or purchasers. MCA searched for buyers. One of the final buyers was Albaad. The negotiations progressed to the point of exchanging term sheets. Albaad suddenly terminated  discussions in November 2021.

Chapter 11 bankruptcy.

On Jan. 10, 2022, GPMI filed a Chapter 11 bankruptcy petition. It planned either to obtain capital investment or to sell the business as a going concern and  continue to operate as a debtor in possession (DIP). The Bankruptcy Court approved a DIP motion to obtain financing from a lender who had loaned to it in the past. It also approved continuing to engage MCA. A “terribly sophisticated” creditor’s committee was appointed, and it engaged an industry-experienced financial advisor.

Several months later, the committee reviewed a possible acquisition of GPMI by Envoy  Solutions LLC for $4.3 million plus the $400,000 already advanced in a DIP loan. The committee approved an acquisition by Envoy as the best opportunity for unsecured creditor recovery.

The Chapter 11 plan.

GPMI reached an agreement to sell to Envoy under a Chapter 11 plan of reorganization. The plan was filed within the extended period of exclusivity. The plan proposed a division of GPMI’s assets into two entities: “(1) a newly formed ‘Litigation Trust,’ tasked with prosecuting GPMI’s causes of action—including claims against Albaad and  Michelin —and distributing litigation proceeds to unsecured creditors; and (2) the ‘Reorganized Debtor,’ which would retain ownership of all of GPMI’s other assets and operate GPMI’s business operations as a going concern.”

The litigation trust.

This trust would be funded with $500,000 of the Envoy purchase price  and would pursue claims against Albaad and Michelin. Proceeds would be distributed to  unsecured creditors. The trustee, Bendor, would only receive compensation once the unsecureds received 25% of their claims. All creditors except Albaad approved appointing  Bendor as trustee and a “Trust Oversight Committee” was appointed.

Albaad was allowed a temporary claim of $3,800,000 for voting purposes. At the  confirmation hearing, Albaad raised objections to the plan, including that the plan violated  the priority rule because Bendor’s employment was an impermissible benefit to him as a former shareholder and GPMI failed to hire a broker to sell the business and provide a “professional valuation” as required in the Supreme Court decision in Bank of America v. LaSalle St. Partnership. 

Evidentiary hearing. 

Alleged violations of the absolute priority rule. Albaad asserted that, because of Bendor’s post-petition employment and employment with Envoy, the decision in LaSalle was triggered. Was this a competitive process, or is “this equity” just hand-picking what happens  to the assets? “Albaad pointed to several alleged deficiencies in GPMI’s marketing such as  GPMI’s failure to issue a valuation report, hire a broker, provide bidding procedures, or allow  for competitive bidding.” GPMI disputed Albaad’s allegations. The evidence regarding the  process was overwhelming, and GPMI was attempting to forestall the continuation of GPMI’s lawsuit against Albaad. GPMI presented detailed arguments as to the efficacy of the  process. Hiring Bendor as an executive had to do with his knowledge and experience in the business and not as any favor to him. Hiring Bendor was not a condition of Envoy’s purchase. Bendor would be an at-will employee with no ownership interest or stock options  with the reorganized debtor.

Alleged violation of § 1129(a)(5). Albaad alleged the plan violated Sec. 1129(a)(5) because Bendor was the trustee of the litigation trust. Since he would be a material witness in the Albaad litigation, he cannot be a neutral trustee. The Bankruptcy Court questioned this premise as no other creditor nor the U.S. trustee had objected. GPMI argued Bendor’s appointment was in the best interest of the creditors. Additionally, the Trust Oversight Committee will be watching over the proceedings.

Confirmation order. The Bankruptcy Court confirmed the plan with minor changes agreed to by the parties. Albaad timely appealed. Motions to delay by Albaad were denied.

Discussion. 

The plan complies with Sec. 1129(b). 

The absolute priority rule. The Bankruptcy Court may still confirm the plan even if a class  did not accept the plan if the court found “the plan does not discriminate unfairly, and is fair  and equitable, with respect to each class of claims or interests that is impaired under, and  has not accepted, the plan.” A plan must meet the absolute priority rule to be fair and  equitable.

New value corollary to the absolute priority rule. An exception to the rule was that old equity  was allowed to retain an interest in the reorganized debtor under certain circumstances. “Under the ‘new value exception’ when old equity makes a new, substantial, necessary and  fair infusion of capital it may retain its interest notwithstanding the absolute priority rule.”  (LaSalle)  

Albaad either misunderstood or misapplied the holding of LaSalle. The plaintiff asserted that  GPMI’s going concern was not market-tested. Thus, the absolute priority rule was violated under LaSalle. Albaad either misunderstood or misapplied LaSalle. The plan did not violate  the absolute priority rule.

Here, the new value corollary was not applicable because all existing equity was canceled without compensation. “Albaad’s attempts to liken Bendor’s post-confirmation employment  to LaSalle’s old equity holders’ exclusive opportunity to obtain an equity interest in the  Reorganized Debtor are without merit.” There was no evidence that Bendor’s post reorganization employment was in any way an equity interest or that his employment was “on account of” his former equity interest in GPMI. His employment agreement made it clear  that he will not receive any equity interest in the reorganized company.

Further, “Albaad provided no evidence to support its argument that Envoy was a ‘cherry  picked buyer.’” The Bankruptcy Court found that there was no prior relationship with Envoy and the Plan was negotiated at an arm’s length. Bendor’s prior experience was what made him valuable to Envoy. Contrary to Albaad’s assertions, LaSalle did not require certain valuation or marketing methods of GPMI’s going concern. The Bankruptcy Court did not clearly err in finding that GPMI engaged in significant activity to market GPMI to investors and buyers. The absolute priority rule was not implicated, and the plan qualified under Sec. 1129(b).

The plan complied with § 1129(a)(5). Continued service by prior management might be  inconsistent with the interests of creditors and public policy. (Linda Vista Cinemas, L.L.C. v.  Bank of Ariz.) Albaad contended that Bendor should not serve as trustee of the litigation  trust because he was not independent. Albaad’s assertions were without merit. “Although Albaad is correct in its assessment that Bendor is not disinterested, Albaad has not demonstrated that this causes Bendor’s appointment as Trustee to be inconsistent with the  interest of creditors or public policy in violation of § 1129(a)(5).”

Conclusion.

“Because the bankruptcy court did not clearly err in finding that the Plan satisfied the confirmation requirements, the bankruptcy court did not abuse its discretion in confirming the Plan. We AFFIRM.”