The opinion of the court was delivered by: LAURA SWAIN, District Judge
Contrarian Funds, LLC, Satellite Senior Secured Income Fund,
LLC, CP Capital Investments, LLC, Wayland Distressed
Opportunities Fund I-B, LLC and Wayland Distressed Opportunities
Fund 1-C, LLC (collectively, the "Steering Committee") and Beal
Bank, S.S.B., in its capacity as First Lien Administrative Agent
and Collateral Trustee ("Beal Bank" and, together with the
Steering Committee, "Appellants") appeal from certain provisions
of the Order Authorizing Sale of Substantially All of the
Sellers' Assets Free and Clear of Liens, Claims, Encumbrances and
Interests, the Assumption of Certain Liabilities, Approval of
Successful Bidder and Certain Related Matters, entered by the
United States Bankruptcy Court for the Southern District of New
York (Drain, B.J.) on July 8, 2005, as amended by Errata Orders
dated July 11, 2005, in the jointly administered Chapter 11
bankruptcy proceedings of WestPoint Stevens Inc. and certain of
its affiliates*fn1 (the "Sale Order").*fn2 The Sale
Order, as its title suggests, authorized the sale under section
363(b) of the Bankruptcy Code, free and clear of liens and other
interests, of substantially all of the assets of
Debtors-Appellees WestPoint Stevens Inc., WestPoint Stevens Inc.
I and WestPoint Stevens Stores, Inc., and of certain trademarks
of J.P. Stevens Enterprises, Inc. (these entities are
collectively referred to herein as "Debtors" or
"Sellers")*fn3 to Appellees WestPoint International, Inc.,
and WestPoint Home, Inc. (together, "Purchaser" or "Purchasers")
in return for unregistered equity securities ("Parent Shares")
and related unregistered subscription rights to acquire such
securities of a corporate parent of the Purchaser ("Subscription
Rights" and, together with the Parent Shares, the "Securities"),
certain cash payments in respect of outstanding financing and
expenses of the Debtors, and the assumption of certain of the Debtors' assets and liabilities. The Sale Order
also provided that certain of the Debtors' secured creditors
(including Appellants here) would receive replacement liens in
the Securities and other proceeds of the purchase and sale
transaction, determined the value of the Securities and the
secured creditors' claims as of the closing date of the sale
transaction, directed the distribution to constituents of the
senior secured creditor group of which the Steering Committee
member entities are part (the "First Lien Lenders") of a portion
of the Securities upon the closing of the sale transaction in
full satisfaction of the First Lien Lenders' secured claims, and
further directed the distribution of the remainder of the
Securities to members of the Debtors' junior secured creditor
group (the "Second Lien Lenders") in partial satisfaction of
those lenders' claims.
In connection with these distributions, the Sale Order provides
for the termination of the secured lenders' liens on the
distributed sale proceeds. No Chapter 11 plan of reorganization
or liquidation was confirmed before, or after, the entry of the
Sale Order, which authorized and directed the consummation of all
of the foregoing transactions without the necessity of prior
confirmation of a Chapter 11 plan. The Steering Committee and its
members, the other First Lien Lenders excluding Appellee Aretex,
LLC ("Aretex") and Beal Bank in its representative capacities are
referred to collectively in this Opinion as the "Objecting First
Lien Lenders."
The Appellant Steering Committee members hold a majority of the
First Lien obligations. The Purchaser entities and their parent
are affiliates of Aretex and of the investor Carl Icahn. (The
Purchasers, their parent, Aretex and Icahn are sometimes referred
to herein as the "Aretex/Icahn Group.") Appellee Aretex holds a
minority of the First Lien obligations and a majority of the
Second Lien obligations. As of the time the Sale Order was
entered, the First Lien Lenders had a perfected lien on
substantially all of the Debtors' assets, and the Second Lien
Lenders had a perfected junior lien on those assets. Pursuant to
the Bankruptcy Court's valuation of the transaction consideration and its analysis of the outstanding liabilities to
these two creditor groups, the Sale Order calls for the
proportionate distribution of a total of approximately $489
million of Parent Shares and/or Subscription Rights among the
First Lien Lenders and such a distribution of approximately $95
million of Subscription Rights among the Second Lien Lenders,
whose aggregate secured claim is approximately $167 million.
Appellants challenge principally the in-kind distribution,
claim satisfaction and lien release provisions of the Sale Order,
which effectively convert the Objecting First Lien Lenders' more
than $240 million of secured monetary claims against the Debtors
into an illiquid minority equity interest in the parent of
successor entities controlled by Mr. Icahn and his affiliates. In
the auction that preceded entry of the Sale Order, the Steering
Committee, in collaboration with the investor Wilbur Ross, had
been the only other bidder for acquisition of the Debtors' assets
and control of the successor business.
The Court has jurisdiction of this appeal pursuant to
28 U.S.C. § 158(a)(1), and has considered carefully all of the parties'
papers and arguments in connection with these proceedings. For
the following reasons, the Bankruptcy Court's determination that
the Objecting First Lien Lenders' claims can be satisfied through
the in-kind distribution of Securities in the context of the sale
of the Debtors' assets pursuant to section 363(b) of the
Bankruptcy Code and certain related determinations are reversed,
certain aspects of the Sale Order are vacated, and this matter is
remanded to the Bankruptcy Court for further proceedings
consistent with this Opinion.
FURTHER BACKGROUND AND PROCEDURAL HISTORY
The Sale Order, which was entered following an auction of
substantially all of the Debtors' assets pursuant to a bidding
procedure put in place by the Bankruptcy Court several months earlier, was the culmination of a contest for control of what
could, for lack of a better term, be characterized as an
informally reorganized debtor. The Debtors had entered Chapter 11
approximately two years beforehand and, in that time, had been
unable to negotiate arrangements with their creditors that would
permit them to confirm a Chapter 11 reorganization or liquidation
plan consensually.*fn4 As of the time of the approval of the
Sale Order, the Debtors were in a very precarious financial
condition. Indeed, the Bankruptcy Court noted in its June 29,
2005, oral ruling approving the Aretex/Icahn Group's bid and the
transaction terms here at issue that the Debtors lacked
sufficient cash, or the ability to generate such cash, to retire
their debtor-in-possession financing and the secured claims of
the First Lien Lenders. (Tr. of June 29, 2005 Bankruptcy Ct.
Hr'g, JA item A72 ("6/29 Tr."), at 200.)
Earlier in the year, the Steering Committee, in collaboration
with Mr. Ross (this grouping will sometimes be referred to in
this opinion as the "Steering Committee/Ross Group"), negotiated
a proposed transaction with the Debtors, similar in structure to
the transaction approved by the Sale Order, under which
substantially all of the Debtors' assets would have been
transferred pursuant to Bankruptcy Code section 363(b) free and
clear of liens and interests to a Steering Committee/Ross Group
affiliate and the Debtors would have received equity in the
affiliate in return. Those equity securities would have been
distributed in satisfaction of, inter alia, the First Lien
Lenders' secured debt. By virtue of the Steering Committee's
majority holding of the First Lien Debt and/or provisions of a certain collateral trust
agreement*fn5 that the Steering Committee contends give it
the right to act on behalf of the First Lien Lenders as a group,
the Steering Committee would have controlled the new company,
which would have carried on the Debtors' business. This Steering
Committee/Ross Group transaction was proposed by the Debtors in a
motion to the Bankruptcy Court.*fn6
The Bankruptcy Court denied the motion for approval of the
Steering Committee/Ross Group transaction,*fn7 but
ultimately approved and set in motion an auction procedure in
which a similarly-structured Steering Committee/Ross Group bid
was the stalking horse.*fn8
The Sale Order was entered, over strenuous objections by the
Steering Committee and objections by Beal Bank, following a
two-month effort to solicit bids for acquisition of the Debtors'
assets, an auction in which there were only two bidders the
Steering Committee/Ross Group and the Aretex/Icahn Group , and a
four-day hearing. The Bankruptcy Court found, based on bids
tendered at the auction and the evidence presented at the
hearing, that the overall value of the Aretex/Icahn Group transaction was $703.5 million, that the value of the
Parent Shares and Subscription Rights available for distribution
to First and Second Lien Lenders was $575.8 million, that the
amount of the First Lien Holders' collective allowed secured
claim as of June 30, 2005 was $488,371,841.20, and that the value
of the sale consideration flowing to the Debtors in the
transaction exceeded the First Lien Lenders' aggregate claim by
$95 million, warranting distribution of the Subscription Rights
remaining after satisfaction of the First Lien Lenders' claims
through the in-kind distribution, to the Second Lien Lenders.
(See, e.g., Sale Order ¶¶ Q, S-T.) The Bankruptcy Court further
found that such direct, in-kind distributions were permissible
under an Intercreditor Agreement among the Debtors and the First
and Second Lien Lenders,*fn9 and that a distribution to the
Second Lien Lenders was necessary by way of adequate protection
of their interests. (Sale Order ¶ R; 6/29 Tr. at 221-22.)
Although the Sale Order contemplated the possibility that the
transactions it authorized could be accomplished in connection
with a plan of reorganization, it provided that no plan or
further order of the Court was required to effect the
transactions. (Sale Order ¶ F.) The Sale Order thus by its terms
permitted consummation of the transactions, including the
transfer of substantially all of the Debtors' assets to the
Aretex/Icahn affiliates free and clear of liens, the grant of
replacement liens to the First and Second Lien Lenders in the
Securities to be issued by the Aretex/Icahn affiliated holding
company and other sale consideration, and the issuance of
illiquid Securities*fn10 to the Objecting First Lien
Lenders, in a quantity valued by the Bankruptcy Court as of the
closing date to equal the accrued amount of those lenders' secured claims as of the transaction
closing date, in complete satisfaction of their claims, and
termination of the Objecting First Lien Lenders' liens in the
replacement collateral, all without the confirmation of any
Chapter 11 plan or any other action of the Court. The Objecting
First Lien Lenders' secured monetary claims against the Debtors
would thus be converted into equity in a new company operating
with the Debtors' former assets and controlled by the Steering
Committee's auction rival.
The Steering Committee moved before the Bankruptcy Court for a
stay of the Sale Order pending appeal. Judge Drain denied that
application in an oral decision rendered on July 22, 2005, but
agreed to stay the order for a brief period pending a stay
application to this Court. (Tr. of July 22, 2005 Bankruptcy Ct.
Hr'g re: Second Lien Agent's Mot. for an Order Dissolving
Adequate Protection Escrow, Objection of Bank of America, N.A.,
. . . Mot. for Stay Pending Appeal, JA item A91 ("7/22 Tr."), at
130-31.) The Objecting First Lien Lenders then filed motions in
this Court for expedited consideration of their appeal of the
Sale Order and for a stay of the Sale Order pending appeal. Those
matters came on before the undersigned on August 5, 2005. After
hearing arguments of counsel concerning a stipulation resolving
the stay application, proposed by the Steering Committee, Beal
Bank, the Purchaser, Aretex and the Debtors, the Court overruled
objections by Second Lien Lenders other than Aretex and the
Second Lien Agent (collectively, the "Second Lien Appellees") to
entry of the stipulation, granted a stay consistent with the
terms of the stipulation, and granted the expedited appeal
application to the extent of setting a briefing schedule
therefor.
This Stipulation Between Steering Committee of First Lien
Lenders, Debtors, Aretex and Purchasers Regarding Steering
Committee's and Beal Bank's Motion for Stay, entered by this
Court on August 5, 2005 in miscellaneous matter No. M47 (the
"Stay Order") provided, inter alia, that the Objecting First
Lien Lenders withdrew their application to stay the closing of
the sale to Purchaser of the Debtors' assets and that the distribution of the
Subscription Rights allocable to the Second Lien Lenders under
the Sale Order was stayed on the following terms:*fn11
3 . . . a. The Second Lien Distribution [of
Subscription Rights] to the Second Lien Lenders shall
be made at the closing, but shall be held in escrow . . .
pursuant to an escrow agreement. . . . (Until
placed in escrow, the Second Lien Distribution shall
be held in escrow by WestPoint International, Inc.).
b. The escrow agreement will provide that the Second
Lien Distribution shall be disbursed to the Second
Lien Lenders as provided in the Sale Order on the
earlier of (i) October 31, 2005 or (ii) two business
days after the District Court issues an order
regarding its decision on the appeal of the Sale
Order (the `Escrow Release Date') . . .; provided,
however, that if the District Court in its order on
the appeal provides that some or all of the
subscription rights should be distributed to the
First Lien Lenders under the Intercreditor Agreement
or otherwise, or remands to the Bankruptcy Court to
determine the allocation of Subscription Rights held
in escrow, then the Subscription Rights being held in
escrow shall be disbursed or further held in escrow
in accordance with such order unless such order is
stayed by further order of the appropriate Court on
application by a party other than the Steering
Committee, its members or Beal Bank, in which case
the Distribution shall remain in escrow pending
further order. If the registration statement [for the
Securities] goes effective prior to the Escrow
Release Date, the exercise period shall be extended
as necessary to provide a full thirty-day exercise
period after the Escrow Release Date, but in no event
beyond November 30, 2005.
* * *
e. In all other respects, the distributions noted
above shall be in accordance with the Sale Order and
the terms of the Asset Purchase Agreement, including
Section 3.3(b) thereof.
4. Except as specifically set forth herein, the
rights of all parties to this appeal, including
Aretex, Purchasers, the Second Lien Lenders, the
Second Lien Agent, the Debtors, the First Lien Agent,
the Collateral Trustee and the Steering Committee, as
to the appeal and all other disputes and matters
between them, including without limitation rights
under paragraph R of the Sale Order, are expressly
preserved and are not affected by this stipulation. (Stay Order ¶¶ 3-4.)*fn12 The
Aretex/Icahn/WestPoint asset purchase transaction
closed on August 8, 2005, following entry of the Stay
Order. The Subscription Rights designated by the Sale
Order for distribution to the Second Lien Lenders
have been held in escrow since that time pursuant to
the Stay Order. In accordance with the Sale Order and
as permitted by the Stay Order, Securities have been
distributed to the First Lien Lenders in proportion
to their holdings of First Lien debt.
The undersigned accepted the instant appeal as related to the
stay application; the appeal was argued on September 20, 2005,
and ancillary briefing was completed shortly thereafter. The
Court heard further arguments on November 9, 2005.
In addition to the Objecting First Lien Lenders' appeal of the
distribution, claim satisfaction and lien termination provisions
of the Sale Order, Aretex has cross-appealed on issues relevant
to the selection of the winning bid. As Aretex acknowledges in
its cross-appeal papers, the Court need not reach those issues if
it does not invalidate the sale of the Debtors' assets to Aretex.
This Opinion and its accompanying Order do not invalidate the
sale; Aretex's cross-appeal is therefore dismissed.
The Second Lien Appellees have moved to strike Beal Bank's
appeal as well as portions of the Steering Committee's papers
that proffer information postdating the documents in the Joint
Appendix and certain arguments the Second Lien Appellees contend
have been waived. The motion to strike Beal Bank's appeal is
denied because, as explained below, Beal Bank adequately
preserved its issues for appeal. The remainder of the motion to
strike is also denied. As explained below, the Court finds that
the relevant challenged arguments have not been waived.
Furthermore, the factual information sought to be stricken is not
pertinent to the grounds upon which the Court has determined this appeal.
In its opening brief, which was filed prior to entry of the
Stay Order and prior to the closing of the Aretex/Icahn/WestPoint
transaction, the Steering Committee characterized the issues
presented on appeal as:
1. Whether the Bankruptcy Court erred in concluding
that the transfer to the First Lien Lenders of only a
portion of the noncash replacement collateral
securing the First Lien Indebtedness constitutes full
satisfaction and/or adequate protection of the First
Lien Indebtedness[;]
2. Whether the Bankruptcy Court erred in concluding
that, contrary to the explicit and unambiguous terms
of the Intercreditor Agreement, the Second Lien
Lenders can nonetheless receive any payment or
transfer of collateral even though the First Lien
Lenders are not receiving full payment in cash[;]
3. Whether the Bankruptcy Court erred in concluding
that the Debtors can, pursuant to sections 363(f)(3)
or 363(f)(5) of the Bankruptcy Code, sell the
Purchased Assets free and clear of the Interests of
the First Lien Collateral Trustee and/or the First
Lien Lenders[;]
4. Whether the Bankruptcy Court erred in concluding
that the Successful Bid by Icahn was authorized, and
higher and better, than the competing credit bids
directed by the Steering Committee, even though the
Successful Bid did not provide for payment in full
and in cash of the First Lien Lenders[; and]
5. Whether the Bankruptcy Court erred in concluding
that the Debtors are authorized to transfer the
collateral directly to First Lien Lenders, rather
than to the First Lien Collateral Trustee in its
capacity as the lienholder under the First Lien
Collateral Trust Agreement.
(Steering Committee Appellants' Opening Br. at 1-2.)
In the following Discussion the Court will address the
standards governing its review of the Bankruptcy Court's
determinations, the extent to which certain of the issues
designated for appeal have been mooted by the closing of the
Aretex/Icahn/WestPoint transaction, whether any of the arguments that have not been mooted have been waived and, as to
the merits of the remaining appellate issues, whether the
distribution of Securities in-kind to Objecting First Lien
Creditors in satisfaction of their claims and the follow-on
distribution called for by the Sale Order are authorized by the
relevant contracts among the parties, and whether Sections 363
and/or 105 of the Bankruptcy Code supplied the Bankruptcy Court
with the requisite authority to approve the challenged aspects of
the transaction. The Discussion will thereafter address the
question of available remedies.
On appeal, the legal determinations of the bankruptcy court are
reviewed de novo and its findings of fact are reviewed under a
clearly erroneous standard. See Consumer News and Bus. Channel
P'ship v. Fin. News Network Inc. (In re Fin. News Network Inc.),
980 F.2d 165, 169 (2d Cir. 1992); Able v. Shugrue (In ...