04/11/2008 422 Motion to Sell Property under Section 363(b), filed by Stephen Barnes. Hearing scheduled for 4/17/2008 at 02:00 PM at Lexington Courtroom, 3rd Floor. (Attachments: # 1 Proposed Order) (Barnes, Stephen) (Entered: 04/11/2008)
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Doc 422
In re:
Case No. 07-50934
Chapter 11
Judge William S. Howard
PLASTICON INTERNATIONAL, INC.
Debtor
CHAPTER 7 TRUSTEE JAMES D. LYON’S MOTION FOR AN ORDER (A) AUTHORIZING THE TRUSTEE TO CONSUMMATE A PATENT ASSIGNMENT AND BILL OF SALE WITH DCA CONSTRUCTION PRODUCTS, LLC FOR THE ASSIGNMENT OF PATENTS AND SALE OF CERTAIN TOOLING AND INVENTORY, (B) AUTHORIZING THE SALE FREE AND CLEAR OF LIENS, CLAIMS, INTERESTS, AND ENCUMBRANCES, (C) EXEMPTING THE SALE FROM TRANSFER TAXES, (D) WAIVING THE RULE 6004(G) 10 DAY STAY; (E) REQUEST FOR AN EXPEDITED HEARING, AND (F) ALTERNATIVELY, AUTHORIZING PAYMENT OF A BREAKUP FEE
The Chapter 7 Trustee, James D. Lyon (the “Trustee”), moves the Court for entry of an order, pursuant to section 363 of title 11 of the United States Code, (the “Bankruptcy Code”) (a) authorizing the Trustee to consummate a Patent Assignment and Bill of Sale (the “Agreement”) with DCA Construction Products, LLC (“Buyer”) for the assignment (the “Assignment”) of certain patents (the “Patents”) and the sale (collectively, with the Assignment, the “Sale”) of certain tooling and inventory (collectively, with the Patents, the “Assets”) of the above-captioned debtor (the “Debtor”), (b) authorizing the sale of the Assets free and clear of liens, claims, interests, and encumbrances, (c) exempting the Sale from transfer taxes, (d) waiving the 10-day stay of Rule 6004(g) of the Federal Rules of Bankruptcy Procedure (collectively, the “Bankruptcy Rules”), (e) requesting an expedited hearing, and (f) alternatively, authorizing payment of a break-up fee and approving the auction procedures set forth herein. In support of the foregoing, the Trustee respectfully represents as follows:
Jurisdiction and Venue
1. This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2) and venue is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409.
Relevant Facts
2. On May 16, 2007 (the “Petition Date”), the Debtor commenced this proceeding by filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
3. The Debtor operated its business as a debtor-in-possession from the Petition Date through October 2007.
4. On October 10, 2007, the Court entered an order, Docket No. 271, granting the U.S. Trustee’s motion seeking appointment of Stephen Palmer as Chapter 11 Trustee. On January 31, 2008, Mr. Palmer resigned, (Docket No. 366), and on February 8, 2008, the Court entered an order, (Docket No. 371), appointing James D. Lyon as successor Chapter 11 Trustee.
5. On April 11, 2008, this Court entered an Order (Docket No. 417) converting the case from Chapter 11 to Chapter 7.
Requested Relief
6. The Trustee seeks authority to sell the assets of the Debtor pursuant to Section 363 of the Bankruptcy Code pursuant to an agreement (the “Agreement”) with Buyer.
Description of the Assets
7. The Assets that are the subject of the Agreement are: (a) approximately thirteen (13) tractor trailer loads of plastic inventory (the “Inventory”); (b) certain tooling, specifically molds (the “Tooling”); and (c) four (4) patents (the “Patents”). The Inventory is specifically made up of approximately 80 pounds of the following components: (i) PAC Chair III; (ii) X~Chair; (iii) X-Chair Miami; and (iv) X-Chair COI. The Tooling includes approximately 11 molds and accessories. The Patents include the following intellectual property:
(A) King & Schlekli Docket No.: 1295-001 D
Title: Rebar, Beam and Mesh Highchair
Patent No.: D500,243
Issue Date: Dec. 28, 2004
Inventor: James N. Turek
Owner: Plasticon International, Inc. by assignment from James N. Turek, Sr., James N. Turek II, Brandon D. Turek
Expiration Date: Dec. 28, 2018
(B) King & Schlekli Docket No.: 883-001 CTP
Title: Rebar and Beam Bolster, Slab and Beam Bolster Upper
Patent No.: Utility Patent No. 4,942,714
Issue Date: July 24, 1990
Inventor: Marshall E. Langley, Jr., Robert C. Sims, Richard M. Sims, James N. Turek
Owner: Plasticon International, Inc., successor to Promotional Containers, Inc.
Expiration Date: Final maintenance fee paid; expired Feb. 5, 2008
(C) King & Schlekli Docket No.: 883-001 CTP
Title: Rebar and Beam Bolster, Slab and Beam Bolster Upper
Patent No.: Utility Patent No. 1,317,474
Issue Date: May 11, 1993
Inventor: Marshall E. Langley, Jr., Robert C. Sims, Richard M. Sims, James N. Turek
Owner: N/A
Expiration Date: Lapsed; May 11, 2004
(D) King & Schlekli Docket No.: 883-004 D
Title: Rebar and Beam Highchair
Patent No.: Design Patent No. Des. 324,643
Issue Date: March 17, 1992
Inventor: James N. Turek, Robert C. Sims, Richard M. Sims
Owner: Plasticon International, Inc., successor to Promotional Containers, Inc.
Expiration Date: Expires March 17, 2006
Summary of Agreement Terms
8. Pursuant to the Agreement, the Buyer agrees to pay the Trustee $90,000 cash, in exchange for the following: (a) the Inventory; (b) the Tooling; (c) the Patents; and (d) full credit toward payment of a receivable owed by Durajoint USA in the amount of $19,971.91. The Agreement is subject to approval by this Court by April 20, 2008.
9. After lengthy discussions, the Trustee and the Buyer have agreed to terms for the sale of the Assets. If this Court authorizes the Debtors to consummate the Agreement, then the Debtor will be relieved of the burden of certain liabilities related to the Assets. The cost of storing the Assets is rapidly reducing the estate’s resources. The Compromise provides that Mr. Murphy will pay the Trustee $27,504.25. However, the Compromise further provides that Mr. Murphy may subtract:
[A]ny and all costs and expenses that have been paid in regard to the Plasticon proprietary product or molds since October 10, 2007 including the moving and storage of the Plasticon proprietary product or molds by Flexway Trucking, Inc.
Storage fees continue to accrue. As of February 29, 2008, the costs due to Mr. Murphy were estimated as approximately $6,500. Authorizing the Trustee to sell the Assets will eliminate all maintenance costs associated with the Assets.
Section 363(b) of the Bankruptcy Code Permits the Sale
10. Pursuant to section 363(b) of the Bankruptcy Code, the Trustee requests that the Court approve the Sale of the Assets free and clear of liens, claims, encumbrances, and interests. Section 363(b) specifically authorizes assets sales outside the ordinary course of business. In approving the sale of assets outside the ordinary course of business and outside of a chapter 11 plan pursuant to section 363(b), courts, including the Sixth Circuit, have adopted the “sound business reason” test established by the Second Circuit in In re Lionel Corp., 722 F.2d 1063 (2d Cir. 1983)(hereinafter “Lionel”). See Stephens Industries, Inc. v. McClung, 789 F.2d 386, 389 (6th Cir. 1986). The issue before the Lionel court was “to what extent chapter 11 permits a bankruptcy judge to authorize the sale of an important asset of the bankrupt’s estate, out of the ordinary course of business and prior to acceptance and outside of any plan of reorganization.” See id. at 1070-71; see also Stephens, 789 F.2d at 389; The Dai-Ichi Kangyo Bank, Ltd. v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 242 B.R. 147, 153 (D. Del. 1999); In re Delaware & Hudson Ry. Co., 124 B.R. 169, 178 (D. Del. 1991).
11. The Lionel test requires a trustee to establish, as a threshold matter, a “sound business reason” justifying the pre-confirmation sale of assets. See Lionel, 722 F.2d at 1070-71. The Lionel court held that, when addressing a motion pursuant to Bankruptcy Code section 363(b), a bankruptcy judge should consider all salient factors and the business justification for a debtor to sell assets pursuant to section 363(b). See Id. To demonstrate a sound justification warranting a sale, courts within the Sixth Circuit have developed a four-part test requiring a trustee to demonstrate: (1) a sound business reason for the sale; (2) good faith; (3) an adequate sale price; and (4) accurate and reasonable notice of the sale. See In re Country Manor of Kenton, Inc., 172 B.R. 217, 220-21 (Bankr. N.D. Ohio 1994).
12. The Sale proposed herein satisfies the Sixth Circuit’s test for approving a section 363 sale. The Trustee participated in intense negotiations with the Buyer. In addition, the Trustee and the Buyer participated in arms’ length negotiations in good faith, which yielded the Agreement currently at issue.
13. The cash price of $90,000, offered by the Buyer, is adequate and reasonable based upon the circumstances. The price takes into account significant cost that will be incurred by the Buyer. For example, the Buyer will transport the Tooling and Inventory from Missouri to Ohio and will store such assets. The Buyer estimates that transporting the Assets will cost approximately $15,000.
14. Sound business reasons support selling the Assets to the Buyer. If the Sale is not approved, then the estate will remain burdened by the daily maintenance and storage costs associated with the Assets. The Trustee believes that the immediate sale of the Assets will maximize the estate’s resources. Accordingly, the Trustee believes that authorizing the Sale is in the best interest of all of the estate’s creditors.
Section 363(f) of the Bankruptcy Code Permits Sale of the Asset Free and Clear
15. Section 363(f) of the Bankruptcy Code provides that a trustee may sell property of the estate free and clear of any interest in such property of an entity other than the estate. In this case, any interests in the Assets will attach to the net proceeds of the sale. Accordingly, it is appropriate for the Court to authorize the Sale.
16. Counsel for the First National Bank of Barnesville, Georgia (“Bank”), which has filed a secured proof of claim (Claim No. 6), has indicated that, depending on the sale price, it will support this sale free and clear of its alleged lien, so that Bank’s lien (if any) will attach to the proceeds of Sale. Because Bank has indicated that it will likely consent to the sale, this Court may approve the sale pursuant to 11 U.S.C. §363(f)(2).
17. Creditor Henry Kaelin, who has filed a secured proof of claim (Claim No. 12), has failed to provide any supporting documentation as required by Federal Rule of Bankruptcy Procedure No. 3001(c) and (d), and has failed to supply even the most rudimentary description of the basis for his alleged claim. Because the Kaelin claim is facially deficient, it is subject to a bona fide dispute and the Court may approve the sale under 11 U.S.C. §363(f)(4). Additionally, the face amount of the Kaelin claim is $81,901.58, which is less than the purchase price of $90,000, so Kaelin could be compelled to accept a money satisfaction of its interest. Thus, the Court may also approve the sale pursuant to §363(f)(5).
Waiver of Bankruptcy Rule 6004(g)
18. The Trustee seeks waiver of Rule 6004(g). Rule 6004(g) of the Bankruptcy Rules provides that an order authorizing the sale of property of the estate is stayed until the expiration of 10 days after entry of the order, unless otherwise ordered by the court. Based upon the current posture of this case and the necessity for finalizing the Sale by April 20th, the Trustee requests that any order approving the Sale be effective immediately by providing that the 10-day stay is inapplicable. The Committee Notes on Rule 6004(g) provides that “The court may, in its discretion, order that Rule 6004(g) is not applicable so that the property may be . . . sold . . . immediately in accordance with the order entered by the court.” The Trustee asks the Court to exercise its power to waive the stay.
19. The Trustee also requests the Court to find and conclude that this sale was conducted in good faith and that, pursuant to Section 363(m) of the Bankruptcy Code the reversal or modification on appeal of the Order authorizing the sale of the Property will not affect the validity of the sale to Purchaser or any other purchaser unless the Order approving these Motions and the actual sale of the Property is stayed pending any such appeal.
Expedited Hearing
20. The Trustee further respectfully requests that this Court enter an order hearing this matter on an expedited basis.
21. Time is of the Essence. The Trustee must remove the Assets from where they are currently stored. Pursuant to the terms of the Compromise, and its subsequent amendments, if the Trustee fails to remove the Assets by 11:59 pm on April 21, 2008, then the Assets may be considered abandoned by the Trustee and John P. Murphy, III and his related entities may take possession of the Assets. In addition, the Buyer has made its offer contingent upon the Court’s approval of the Sale on or prior to April 21, 2008. Accordingly, the estate may lose the liquidation value of the Assets if this Sale is not authorized on an expedited basis.
22. At the hearing on April 10, 2008, the Chapter 11 Trustee informed this Court that a motion requesting approval of this sale would be filed upon conversion, and the Court provided a hearing date of Thursday, April 17, 2008 at 2:00 pm.
Break-up fee and Competing Bids
23. During the course of this Motion, the Buyer’s participation in this sale process is contingent upon the Buyer being named the “stalking horse bidder” and payment of a break up fee if the Buyer is not the successful bidder. If a competing bidder participates in this process and the Buyer is not the successful bidder, the Buyer requires that the Trustee seek authority to pay the Buyer a break up fee of $10,000 (the “Break Up Fee”). The Break Up Fee constitutes a fair and reasonable exercise of the Trustee’s business judgment and is fair, reasonable, and is a good faith estimate of the Buyer’s internal and out of pocket costs. Payment of such costs is in the best interests of the estate. The Buyer has expended significant time, energy, and money in the acquisition of the Assets. It is reasonable that any subsequent bidder bid at least $100,000.00 (the amount of the Buyer’s bid plus $10,000).
27. Courts have approved the payment of break-up fees to stalking horse bidders. See In re EWI, Inc., 208 B.R. 885, 888 (Bankr. N.D. Ohio 1997); In re Hupp Indus., Inc., 140 B.R. 191, 195 (Bankr. N.D. Ohio 1992). In Hupp Industries, the Court set forth seven factors that it considered significant in determining whether certain bid protections, including a break-up fee, were appropriate, including but not limited to: (a) whether the fee requested correlates with a maximization of the value to the debtor’s estate; (b) whether the underlying negotiated agreement is an arms-length transaction between the debtor’s estate and the negotiating acquirer; (c) whether the break-up fee constitutes a fair and reasonable percentage of the proposed purchase prices; (d) whether the dollar amount of the break-up fee is so substantial that it provides a “chilling effect” on other potential bidders; and (e) the existence of available safeguards to the debtor’s estate. See Hupp Indus., 140 B.R. at 194.
28. The Break-Up Fee satisfies the Hupp Industries factors. In the Trustee’s judgment, the Break Up Fee is fair and reasonable in light of the circumstances and proposed transaction and are designed to assist the bidding process. The Break Up Fee will only be paid if another bidder successfully offers more than the Buyer’s bid. Accordingly, payment of the Break Up Fee correlates with maximization of the value of the estate. In addition, the Trustee and the Buyer negotiated the Agreement at arms length.
24. The proposed Break Up Fee of $10,000.00, which is slightly more than 10% of the Buyer’s proposed cash purchase price, constitutes a fair and reasonable percentage of the proposed purchase price and is consistent with break-up fees approved in other chapter 11 cases. See e.g., In re Republic Engineered Products Holdings LLC, No. 03-55118, (Bankr. Nov. 7, 2003) (approving a break-up fee of $4 million and cost reimbursement to the buyer of up to $1 million on a sale with cash consideration of $40 million). Because there are fixed, unavoidable costs in every sale, regardless of size, a larger percentage breakup fee will be appropriate in smaller size sales. This Break Up fee is particularly appropriate because it represents no more than the actual costs of Buyer in pursuing the sale. Such fee is not so substantial that it will provide a chilling effect on potential bidders. There is no substantial adverse impact upon the creditors of these cases.
25. The Trustee has received a competing bid from at least one other bidder in this matter. In order to allow competing bidders an opportunity to participate, the Trustee proposes the following bidding procedures:
a. Any individual or entity wishing to tender a competing bid must be present in the Courtroom immediately prior to the hearing scheduled for Thursday, April 17, 2008 at 2:00 pm with a check in the full amount of the competing bid. At that time such competing bidder shall provide written evidence in a form acceptable to the Trustee in his sole and absolute discretion, that the competing bid check can be honored in its full amount, and of the competing bidder’s financial ability to comply with the terms of the raised bid and to consummate the sale. This financial evidence shall include financial information of the competing bidder, along with that of any propose guarantors and/or equity holders.
b. In the event that Buyer wishes to bid against any competing bidder, or in the event that competing bidders wish to bid against each other, the Trustee shall conduct an auction immediately prior to the commencement of the hearing on Thursday, April 17, 2008 at 2:00 pm. Only bidders who have tendered the above-referenced check and financial evidence may participate in the auction, and Buyer is not exempt from this financial evidence requirement. The auction will begin with an opening overbid at least equal to the competing bidder’s bid plus an incremental overbid of $10,000. Subsequent overbids shall be in an amount of not less than $10,000 in excess of the immediately prior overbid. The final highest and best overbid at the end of the auction, as determined by the Trustee in his sole and absolute discretion, shall be presented to the Court for consideration and approval at the hearing on Thursday, April 17, 2008 at 2:00 pm.
c. At any time prior to or during the auction, the Trustee may, in his sole and absolute discretion, modify the bidding procedures and requirements set forth herein, in order to obtain the highest and best offer for the benefit of the bankruptcy estate.
Notice of this Motion
26. The Bankruptcy Court’s electronic filing system will provide notice of this Motion to all parties that have registered for email notification of documents filed in these proceedings. Additionally, paper copies of this motion shall be served upon the individuals and entities listed on a certificate of service to be contemporaneously filed herewith. In light of the nature of the relief requested herein, the Trustee submits that no other or further notice is required.
Conclusion
27. WHEREFORE, for the reasons stated more fully above, the Trustee requests that the Court enter an order (a) authorizing the Trustee to consummate the Agreement with the Buyer for the Assignment of the Patents and the sale of the Tooling and Inventory of the Debtor, (b) authorizing the sale of the Assets free and clear of liens, claims, interests, and encumbrances, (c) exempting the Sale from transfer taxes, (d) waiving the 10-day stay of Rule 6004(g) of the Bankruptcy Rules, (e) hearing this matter on an expedited basis, and (f) alternatively, authorizing payment of a break-up fee and approving the auction procedures set forth herein.
Notice
Please take Notice that a hearing on this matter shall be heard on Thursday, April 17, 2008 at the hour of 2:00 pm, before the U.S. Bankruptcy Court for the Eastern District of Kentucky, Lexington Division, 100 E. Vine Street, 3rd Floor Courtroom, Community Trust Building, Lexington, KY 40507.
Dated: April 11, 2008
Respectfully submitted,
_/s/ Stephen Barnes_________
Jonathan L. Gay, Attorney
Stephen Barnes, Attorney
Walther, Roark & Gay, PLC
163 E. Main Street, Suite 200
P.O. Box 1598
Lexington, KY 40588-1598
(859)225-4714 (tel)
(859)225-1493 (fax)
jgay@wrgfirm.com
sbarnes@wrgfirm.com
COUNSEL FOR THE TRUSTEE |
