Edward E. Neiger
Edward E. Neiger ()

Today’s column updates readers on major events that transpired in the high-profile bankruptcy cases of the City of Detroit, the Girls Gone Wild franchise, Houston Regional Sports Network, Dewey & LeBoeuf and Dreier. It discusses Detroit’s historic win in its Chapter 9 eligibility battle and next steps in its proceeding; the proposed sale of Girls Gone Wild and the Astros’ failed attempt to dismiss Houston Regional Sports Network’s bankruptcy case; and litigation and other developments in the Dewey & LeBoeuf and Dreier bankruptcy proceedings.

City of Detroit and Chapter 9

The City of Detroit filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code on July 18, 2013. It made history as the largest municipality to seek bankruptcy protection to date listing $18 billion in debt, including $11.9 billion of unsecured obligations owed to lenders and retirees.

As discussed in prior columns, Chapter 9 of the Bankruptcy Code establishes a procedure for voluntary bankruptcy proceedings by municipalities. While similar to Chapter 11 proceedings, Chapter 9 imposes a requirement that the municipality negotiate with creditors prior to the commencement of a Chapter 9 proceeding. Chapter 9 also limits bankruptcy court powers to affect the governance of the municipality.

As previously discussed, the City of Detroit’s bankruptcy filing was immediately followed by significant litigation with various creditor groups, including the city’s employees and retirees who unsuccessfully sought to enjoin the bankruptcy in state court on state constitutional grounds. The city halted this litigation arguing that it violated the “automatic stay.” The bankruptcy automatic stay is invoked as soon as a debtor files a bankruptcy petition and acts as a stay of all actions against a debtor or property of a debtor’s estate.

Next, Detroit faced vehement opposition to its eligibility to commence a Chapter 9 bankruptcy case from more than 100 parties in interest, including unions and retirees. As discussed in our last column, in order to be eligible for protection under Chapter 9 of the Bankruptcy Code, a debtor must (i) be a municipality, (ii) be authorized by state law to be a debtor, (iii) be insolvent, (iv) desire to effect a plan to adjust its debts and (v) (a) have either reached a deal with the majority (in dollar amount) of its creditors, (b) negotiated with its creditors in good faith but failed to reach agreement, (c) be unable to negotiate with its creditors because negotiation would be impracticable, or (d) reasonably believe that a creditor may attempt to obtain an avoidable transfer from the municipality.

Detroit argued that it satisfied the criteria for obtaining Chapter 9 relief. Among other things, Detroit argued that while Chapter 9 requires a debtor municipality to negotiate with creditors prior to commencing a case, such negotiations could not be meaningful in this case because of the large number of creditors involved.

On Dec. 3, 2013, the bankruptcy court ruled that Detroit is eligible for Chapter 9 relief, despite vehement opposition from city workers and retirees who anticipated that they will be forced to make the largest concessions in the bankruptcy proceeding. While the court noted that the city did not negotiate in good faith, it nevertheless reasoned that engaging in good faith negotiations prior to filing was not feasible in light of the multitude of creditors involved.

In early February, Detroit shared its plan of debt adjustment with various creditor constituencies. The city also indicated that it will file the plan before March 1, 2014 (the deadline set for filing the plan by the court).

City of Detroit, Mich. (Bankr. E.D. Mich. Case No. 13-53846)

Girls Gone Wild Franchise

GGW Brands LLC, better known as the Girls Gone Wild franchise, sought bankruptcy protection under Chapter 11 on Feb. 25, 2013. The bankruptcy filing was precipitated by mounting judgments of approximately $16 million from several lawsuits including by (i) Wynn Las Vegas LLC alleging GGW Brands principal, Joe Francis, defamed Wynn Resorts Ltd. CEO Steve Wynn by claiming that Wynn threatened to murder Francis and bury his body in the desert and (ii) a woman alleging her likeness was used in the famed soft core porn videos without permission.

As mentioned in a prior column, Wynn Las Vegas moved in the bankruptcy court for the appointment of a Chapter 11 trustee. A Chapter 11 trustee is usually appointed if prior management engaged in fraudulent or otherwise improper activities. Wynn Las Vegas argued that a Chapter 11 trustee is necessary because Francis was effectively looting the company and using the bankruptcy process to evade his personal creditors. Even though Francis stepped down from his management position, Wynn Las Vegas alleged that he installed a puppet manager who allowed him to continue diverting company assets for personal use.

Following the filing of the motion to appoint a Chapter 11 trustee, agents from the U.S. Trustee Program (which is an arm of the Department of Justice tasked with monitoring bankruptcy proceedings) visited GGW’s Los Angeles offices and found evidence corroborating Wynn Las Vegas’ allegations. As a result, the U.S. Trustee also moved for the appointment of a Chapter 11 trustee. The court granted the request for appointment of a Chapter 11 trustee and appointed R. Todd Neilson, a forensic accountant and former FBI agent who previously led the internal investigation into Solyndra LLC’s bankruptcy.

Recently, the trustee filed a motion seeking permission to sell the company’s assets pursuant to section 363 of the Bankruptcy Code. The trustee represented that he solicited bids for the debtors’ assets (primarily litigation rights, trademarks and other intellectual property) from 16 potential purchasers. While some prospective buyers had moral concerns about entering the adult entertainment industry, the trustee successfully secured a “stalking horse bidder” willing to purchase the assets for $1.825 million.1 Under the proposed sale procedures, bids will be due by April 8, 2014, with an auction taking place on April 11, 2014.

GGW Brands LLC, (Bankr. C.D. Cal. Case No. 13-15130)

Sports Network

Affiliates of Houston Regional Sports Network LP, filed an involuntary petition for Chapter 11 bankruptcy against the network on Sept. 27, 2013. The network is jointly owned by Comcast, the Houston Astros and the Houston Rockets.

The involuntary petition and supporting pleadings alleged the network was unable to pay its bills, raise capital or make key business decisions. Creditors of an insolvent company may file an involuntary bankruptcy case provided they meet certain threshold claim and amount requirements and can establish that the debtor is unable to satisfy its obligations as they become due. If the foregoing requirements are met, the court will enter an “order for relief” adjudging the insolvent company a debtor under Chapter 11 (reorganization) or Chapter 7 (liquidation).

The petitioners submitted that the parties tried to reach a resolution to avoid bankruptcy but were unable to agree on a course of action. The petitioners said that their objective in commencing the involuntary proceeding was to protect the network’s assets, including the right to telecast Astros and Rockets games.

The Astros moved to dismiss the involuntary petition alleging that the involuntary bankruptcy was filed in an effort to, among other things, strip the Astros of their 46 percent stake in the network. The Astros argued that the agreement between the Astros and the network included a disclaimer of the Astros’ fiduciary obligations. The Astros further argued that this disclaimer would make any reorganization attempts futile because the Astros were not contractually obligated to and may be unwilling to further negotiate with parties in interest in the bankruptcy case. On Feb. 4, 2014, the bankruptcy court granted an order for relief on the involuntary petition (approving the bankruptcy) reasoning that the involuntary bankruptcy was commenced in an effort to protect the network’s assets and the debtor could successfully reorganize. The Astros sought a stay of the order. The court denied the request for a stay as the Astros appeal the ruling because it found the Astros’ futility argument to be meritless and concluded that they were, therefore, unlikely to succeed on appeal.

Houston Regional Sports Network (Bankr. S.D. Tex. Case No. 13-35998)

Dewey Bankruptcy

International law firm Dewey & LeBoeuf LLP filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code on May 29, 2012, after suffering debilitating revenue decreases and partner defections.

As discussed in prior columns, following the bankruptcy filing, the firm reached a $71 million settlement of potential “clawback” claims with approximately 400 former partners and won approval of a “liquidation plan” which established a liquidation trust for the benefit of Dewey’s creditors. The trust was empowered to pursue certain litigation for the benefit of the firm’s creditors.

As previously discussed, the liquidating trustee commenced “preference actions” under Bankruptcy Code section 547 against many of Dewey’s former vendors. Bankruptcy Code section 547 allows a trustee or debtor in possession to avoid a transfer made by a debtor while insolvent to or for the benefit of a creditor on account of an antecedent debt within 90 days (or one year in the case of an “insider”) of the petition date, where such transfer enables the creditor to receive more than it would have received in a Chapter 7 liquidation. The rationale for the statute is that the company was likely insolvent 90 days before the bankruptcy filing, and it is unfair that some creditors were “preferred” and paid in full while others were not. The monies recovered in a preference action are evenly redistributed among the unsecured creditors.

The liquidation trust recently sued 23 former partners who opted out of the $71 million settlement reached earlier in the case. The actions seek to recover compensation the attorneys received prior to their departures while the firm was insolvent. The liquidating trustee posited that Dewey was insolvent on or before Jan. 1, 2009, and remained insolvent through its bankruptcy filing on May 28, 2012. The former partners indicated they may join forces and coordinate discovery efforts on common issues such as timing of the defunct firm’s insolvency. The court appeared open to consolidating the discovery efforts to the extent possible. A status conference on the 23 cases is set for March 20, 2014.

Dewey & LeBoeuf (Bankr. S.D.N.Y. Case No. 12-12321)

Dreier Law Firm

Dreier LLP, once a successful Park Avenue law firm, filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code in December 2008 following the arrest of its founder and sole equity holder, Marc Dreier. Dreier eventually pleaded guilty to charges of securities and wire fraud arising out of a $400 million Ponzi scheme and is now serving a 20-year prison sentence. Shortly after the commencement of the Chapter 11 proceeding, the bankruptcy court appointed Sheila Gowan as Chapter 11 trustee to oversee the debtor’s bankruptcy proceeding.

The trustee commenced numerous adversary complaints seeking to recover approximately $275 million that Dreier allegedly fraudulently transferred to family members and investors. The Bankruptcy Code allows a trustee to avoid fraudulent transfers (which include transfers made with actual intent to defraud creditors as well as constructively fraudulent transfers made for insufficient consideration). According to court filings, the trustee recovered over $25 million through settlements of adversary proceedings to date.

This month, the trustee won approval of the amended “disclosure statement” in connection with the proposed plan of liquidation. A disclosure statement provides creditors entitled to vote on a plan with information about the debtor and a description of the proposed plan, and is intended to allow such creditors to make informed decisions when voting. Bankruptcy court approval of a disclosure statement is a prerequisite to soliciting votes on a plan of reorganization or liquidation.

The proposed liquidation plan provides for distributions to creditors from litigation recoveries and sale of the firm’s assets. If the plan is confirmed, secured claims totaling approximately $9 million will be paid in full while holders of general unsecured claims (totaling approximately $375 million) will receive between 4.9 and 12.6 percent in distributions. Objections to the plan are due April 7, 2014, and a hearing on confirmation of the plan is scheduled for April 24, 2014.

Dreier LLP (Bankr. S.D.N.Y. Case No. 08-15051)

Edward E. Neiger is a co-managing partner at ASK LLP, a national law firm, and can be reached at eneiger@askllp.com. Marianna Udem, counsel at the firm, assisted in the preparation of this column.

Endnote:

1. A stalking horse bidder is an initial bidder who makes a commitment to purchase the assets for a set price and sets the auction floor in return for certain protections (such as reimbursement of expenses in the event it is not the successful bidder at auction and overbid requirements).