FILED
JUN 21 2023
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. AZ-22-1231-CLB
GPMI, CO.,
Debtor. Bk. No. 2:22-bk-00150-EPB
ALBAAD USA, INC.,
Appellant,
v. MEMORANDUM*
GPMI, CO.; ENVOY SOLUTIONS, LLC;
NFS LEASING, INC.; OFFICIAL
UNSECURED CREDITORS
COMMITTEE; YDB CAPITAL, LLC;
YARRON BENDOR; SERENE
INVESTMENT MANAGEMENT, LLC;
FSW FUNDING,
Appellees.
Appeal from the United States Bankruptcy Court
for the District of Arizona
Eddward P. Ballinger Jr., Chief Bankruptcy Judge, Presiding
Before: CORBIT, LAFFERTY, and BRAND, Bankruptcy Judges.
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
INTRODUCTION
Appellant and unsecured creditor Albaad USA, Inc. (“Albaad”),
appeals the confirmation of debtor and appellee GPMI, Co.’s (“GPMI”)
chapter 111 plan. Because we find no error, we AFFIRM.
FACTS
A. GPMI
GPMI manufactures wet wipe cleaning products and supplies its
products to major wholesalers and retailers. Yarron Bendor, founder and
CEO of GPMI, opened GPMI in 1989. GPMI was successful for many years.
B. The Albaad Contract
In the fall of 2019, Albaad, 2 the third largest global wet wipe
manufacturer at the time, contracted with GPMI to have GPMI
manufacture wipes for Albaad in the United States (the “Contract”). The
Contract was far larger than any manufacturing contract previously
entered into by GPMI. Per the terms of the Contract, Albaad committed to
ordering $80 million in products the first year and over $100 million in the
second year.
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code,
11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure and all “Civil Rule” references are to the Federal Rules of Civil
Procedure.
2 Albaad is an Israeli company and Albaad Massuot Yitzhak Ltd is Albaad’s
parent company. At the time of the Contract, Albaad was a publicly traded company on
the Tel Aviv stock exchange with several locations in Europe and one American
subsidiary located in North Carolina.
2
During negotiations, GPMI informed Albaad that in order to
successfully perform under the terms of the Contract and fulfill Albaad’s
large orders, it would need to expand its manufacturing facilities, add
specialized equipment, and increase its workforce. Albaad agreed to
advance GPMI $3,750,000.00 for its expansion. In exchange, GPMI
promised to repay the funds as credits against Albaad’s future orders.
Additionally, GPMI spent approximately $7,500,000 of its own capital to
“ensure it was ready to meet the Albaad contract.”
In late February 2021, GPMI began fulfilling its contractual
obligations by shipping products to Albaad. However, Albaad refused to
take receipt and pay for much of the product. Albaad’s end customer
rejected the wipes and terminated its purchase agreement with Albaad
after Albaad failed to obtain the necessary EPA and state-level product
registrations. Because Albaad had no customer to sell the wipes to, Albaad
refused the GPMI product and refused to pay GPMI $800,000 for the wipes
already produced. Additionally, Albaad informed GPMI that it would not
honor any of its future contractual commitments to GPMI. Repeated
attempts to resolve the dispute failed.
GPMI asserted that Albaad’s breach caused GPMI to: (i) lose over
$37,000,000 in 2021 budgeted revenue; (ii) incur storage expenses for the
privately labeled Albaad products; 3 (iii) fall behind on its regular customer
3
Approximately $17,000 per month for storage.
3
obligations; and (iv) incur ongoing significant fees for equipment leases
obtained solely to fulfill the Albaad Contract.
After Albaad failed to perform under the Contract, GPMI was in
financial crisis and engaged in extensive efforts to reorganize its business
and cut costs. GPMI’s cost-cutting measures included laying off more than
half the employees, returning leased equipment, terminating the 45,000
square-foot warehouse lease, and reducing administrative expenses.
However, the cost savings were not enough to significantly change GPMI’s
financial condition. Therefore, GPMI decided to hire MCA Financial
Group, Ltd. (“MCA”)4 as a financial consultant to assist GPMI with
identification of potential financing sources, investors, and/or purchasers.
Starting in the late summer of 2021, MCA solicited offers to purchase
equity in GPMI or to purchase GPMI’s assets from 32 qualified parties,
including at least 20 financial buyers and 12 strategic buyers in related
industries. Due diligence materials were provided to 15 prospective
purchasers who executed non-disclosure agreements. Ultimately,
negotiations progressed to formal letters of intent with two potential
buyers.
One of the final potential buyers was Albaad. As part of the due
diligence process, Albaad obtained GPMI’s confidential financial
4
MCA’s founder and primary consultant to GPMI, Morris Aaron, is a nationally
recognized expert in the business advisory industry with over thirty years of experience
in mergers and acquisitions, business valuation, and restructuring.
4
information. By late 2021, the parties were engaged in substantive
negotiations regarding the terms of a potential full acquisition by Albaad,
to the point that the parties were circulating draft term sheets. However, on
November 11, 2021, Albaad suddenly halted all negotiations with GPMI,
informing GPMI that it would be taking a “$10 million write-off” in its U.S.
operations and would no longer be pursuing “M&A activity in the U.S.” 5
C. Chapter 11 bankruptcy
On January 10, 2022, out of other options, GPMI filed a voluntary
chapter 11 petition. GPMI planned to either reorganize by securing capital
investment or by selling the business as a going concern. GPMI’s goal was
to continue operating as a debtor-in-possession (“DIP”).
Due to GPMI’s severe cash flow issues, the bankruptcy court
approved GPMI’s DIP motion to obtain emergency post-petition financing
from a third-party lender who had granted previous loans to GPMI. 6 The
bankruptcy court also approved GPMI’s request to retain MCA to allow
MCA to continue pursuing investors and/or purchasers.
The bankruptcy court appointed an official unsecured creditors’
committee, comprised of five trade creditors and material suppliers with
5 Albaad subsequently liquidated and sold its North America wipes
manufacturing business to Guy & O’Neill. Guy & O’Neill was also one of GPMI’s
prospective buyers and signed a Non-Disclosure Agreement.
6 The bankruptcy court authorized DIP financing up to $2.5 million from an
accounts receivable factoring credit facility, up to $2 million from an inventory credit
facility, and up to $500,000, secured by liens on GPMI’s real and personal property. In
March 2022, GPMI obtained replacement DIP financing.
5
total claims exceeding $2 million (“Committee”). The Committee was
described as “terrifically sophisticated” with “people in the industry that
are actually working in this industry every day,” who “know what
businesses are worth, what equipment is worth.” The Committee hired a
financial advisor with extensive experience and knowledge in the field of
complex business reorganization.
The Committee actively participated in marketing GPMI. The
Committee reported that, as of April 26, 2022, GPMI was “left with no
active interested parties, and GPMI's prospects for any reorganization or
sale appeared very grim and liquidation of the estate appeared imminent.”
Nonetheless, GPMI and MCA continued efforts to find investors
and/or purchasers. Several months later, the Committee was asked to
review a possible acquisition of GPMI by Envoy Solutions, LLC (“Envoy”)
for a purchase price of $4.3 million. The Committee approved of the
proposed purchase by Envoy. The Committee had “absolute confidence in
the marketing process,” and believed “that the marketing efforts were
thorough and persistent in the face of a difficult market, and that the Envoy
proposal represented the best potential for recovery to allowed unsecured
creditors.”
D. The chapter 11 plan
With the Committee’s approval and after more than a year of
marketing, GPMI reached an agreement to sell to Envoy pursuant to a plan
of reorganization. GPMI filed a chapter 11 plan on October 14, 2022, a first
6
amended plan on October 24th, and a second amended plan (“Plan”) on
October 31st. The Plan was filed within the extended period of exclusivity
provided by § 1121.7
Envoy proposed to fund the Plan by paying $4.3 million, in addition
to its previous payment of $400,000 in the form of a DIP loan. In return,
Envoy would receive 100 percent of the equity in the reorganized debtor.
In general, the Plan proposed a division of GPMI’s assets into two
separate entities: (1) a newly formed “Litigation Trust,” tasked with
prosecuting GPMI’s causes of action—including claims against Albaad8
and Michelin 9—and distributing litigation proceeds to unsecured
creditors; 10 and (2) the “Reorganized Debtor,” which would retain
7
The bankruptcy court approved GPMI’s unopposed motions to extend
exclusivity under § 1121(b) and § 1121(c)(3) to October 14, 2022 and then December 14,
2022.
8 In October 2022, GPMI filed an adversary complaint against Albaad, (the
“Albaad Lawsuit”) asserting claims for breach of contract, breach of the covenant of
good faith and fair dealing, and promissory estoppel. The Complaint alleged damages
in excess of $19 million. The action is pending.
9 GPMI filed a Complaint against Michelin Lifestyle Ltd. and Michelin North
America, Inc. (collectively “Michelin”), asserting claims that Michelin breached an
agreement to jointly develop and market consumer products under the Michelin name.
GPMI developed the product over the course of a year, began manufacturing, and
entered into a contract with Walmart to sell the product, but within weeks of fulfilling
Walmart’s initial order, Michelin took actions to stop the manufacture and sale of the
product. GPMI’s Complaint sought over $2 million in damages. The Complaint was
dismissed by the Arizona District Court for lack of jurisdiction. GPMI filed a second
complaint against Michelin North America, Inc., in London. The action is pending.
10 The Litigation Trust assumed all of Debtor’s liability to creditors holding
Allowed Claims and Allowed Administrative Expense Claims not otherwise satisfied
by the Plan or assumed by Envoy.
7
ownership of all of GPMI’s other assets and operate GPMI’s business
operations as a going concern.
1. The Litigation Trust
The Plan proposed that the newly formed Litigation Trust would
initially be funded with $500,000 of Envoy’s $4.3 million purchase
payment. The money would allow the trustee of the Litigation Trust
(“Trustee”) to prosecute GPMI’s causes of actions against Michelin and
Albaad. Under the terms of the Litigation Trust, if the litigation was
successful, the Trustee would distribute proceeds to the claimants holding
allowed unsecured claims. Additionally, the Trustee would receive no
compensation until the unsecured creditors received payments equal to at
least 25% of their allowed claims. The Plan proposed that Bendor would
serve as the initial Trustee.
All creditors except Albaad supported Bendor serving as the initial
Trustee. Indeed, during negotiations, the Committee acknowledged that
unless the Trustee was successful in prosecuting the claims, there would be
no proceeds for payment on unsecured allowed claims. The Committee
agreed that Bendor was the best choice to serve as Trustee because of his
experience and knowledge. Notwithstanding the Committee’s agreement,
the Committee also wanted to ensure that the creditors would have some
on-going voice. Therefore, the Committee insisted on a “Trust Oversight
Committee” that would oversee and monitor the activities of the Trustee.
8
2. The Reorganized Debtor.
The Plan further proposed that the newly created Reorganized
Debtor would continue GPMI’s business operations as a manufacturer of
packaged wet wipes for the cleaning and automotive industries. The
Reorganized Debtor would be vested with GPMI’s operating assets free
and clear of all liens, claims, and encumbrances except the obligations
explicitly assumed in the Plan. The Plan terminated all GPMI shareholder
interests with respect to the Reorganized Debtor. However, the Plan
indicated that Envoy would seek to retain Bendor as an employee of the
Reorganized Debtor subject to a separately negotiated employment
contract.11
3. Classification of claims and voting
The Plan initially provided for eight classes.12 Relevant here is Class
6, which was solely comprised of all claims of Albaad, including the
Albaad proof of claim filed with the bankruptcy court. GPMI disputed
Albaad’s proof of claim which listed the debt as $13,069,027.20. However,
the court “temporarily allowed Albaad an unsecured claim of $3,800,000
11
On November 18, 2022, GPMI filed the employment agreements outlining the
terms of Bendor’s employment with the Reorganized Debtor.
12 As confirmed, the Plan provided for nine classifications of claims. The classes,
as well as descriptions of their treatment, and resulting impairment, are set forth in the
court's order confirming GPMI’s Plan.
9
for voting purposes.” Class 6 (Albaad)13 was impaired and rejected by the
Plan.14
E. First confirmation hearing
At the initial hearing on confirmation on November 18, 2022, the
bankruptcy court approved GPMI’s second amended disclosure statement,
conditionally approved GPMI’s settlement with creditor NFS Leasing, Inc.
regarding the purchase of some of the leased equipment, overruled class
2C’s objection to the Plan, and set an evidentiary hearing on Albaad’s
objections to the Plan.
Albaad’s objections to the Plan included an allegation that the Plan
violated § 1129(b)(2), the absolute priority rule, because (1) Bendor’s
employment was an impermissible benefit bestowed upon him based on
his former equity interest; and (2) GPMI failed to hire a broker to sell the
business and provide a professional valuation as required by the United
States Supreme Court’s holding in Bank of Am. Nat'l Trust & Sav. Ass'n v.
203 N. LaSalle St. P'ship,
526 U.S. 434 (1999). Albaad also argued that the
Plan violated § 1129(a)(5) because Bendor’s appointment as Trustee of the
Litigation Trust was inconsistent with the interests of creditors and public
policy.
13 GPMI separated Albaad's claim from the class of other unsecured claims (Class
8) because Albaad’s claims were disputed and were subject to counterclaims and
affirmative defenses that were actively being addressed in the Albaad Litigation.
14 Only one other class rejected the Plan; Class 2C – Eastern Shipping Worldwide.
10
F. Evidentiary Hearing
1. Alleged violations of § 1129(b) and the absolute priority rule.
Albaad argued that the Plan violated the absolute priority rule based
on Bendor’s post-confirmation employment with the Reorganized Debtor.
Specifically, Albaad asserted that because Bendor was a GPMI shareholder,
his post-confirmation employment bestowed a benefit that triggered the
open marketing testing required by LaSalle. Albaad argued that when old
equity continues to have an interest and influence in the new equity, LaSalle
required that GPMI adhere to specific marketing procedures. According to
Albaad, “203 North LaSalle triggers, basically, a separate inquiry, was this
actually a competitive process, or is this equity just handpicking 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. Despite declarations
stating that there was no prior relationship between GPMI and Envoy,
Albaad also posited that an undisclosed arrangement must have existed
between GPMI and Envoy, otherwise, Albaad questioned, “how [did]
Envoy become the cherry-picked buyer[?]”
GPMI disputed Albaad’s allegations. GPMI argued that Albaad’s
assertions were both without merit and belied by the overwhelming
evidence provided through the Plan confirmation process, such as the
disclosure documents, declarations, and witness testimony. According to
11
GPMI, Albaad’s meritless claims were simply an attempt to derail the
confirmation process in an effort to forestall the continuation of GPMI’s
lawsuit against Albaad.
GPMI presented evidence that its marketing process was extensive
and thorough and began before GPMI filed for chapter 11 relief. GPMI
presented declarations from Bendor, MCA, and the Committee describing
GPMI’s thorough and persistent marketing efforts to find an investor or
buyer for GPMI. Additionally, a representative of MCA specifically
disputed Albaad’s allegations that GPMI’s failure to hire a separate broker
demonstrated deficient marketing. Based on MCA’s substantial chapter 11
experience, the representative testified that the job of marketing a debtor
for sale had always been performed by an experienced financial advisor,
and the representative was unaware “of any instance in which a broker had
also been retained.” Additionally, because the Plan did not preclude
competitive bidding and allowed for the possibility of a topping bid, there
was no need for a formal valuation of GPMI. A representative of the
Committee also testified that the Committee was very involved, “knew
what was going on,” and had “absolute confidence in the marketing
process.”
GPMI also argued that Albaad had provided no evidence beyond
unsupported supposition that GPMI chose Envoy as the buyer because of a
personal benefit to Bendor or because Bendor somehow manipulated the
12
plan confirmation process to benefit himself. GPMI argued the evidence
demonstrated the contrary for several reasons.
First, GPMI presented evidence15 demonstrating that the Reorganized
Debtor’s decision to hire Bendor in a managerial role after Plan
confirmation was based on Bendor’s expertise, experience in the field, his
years of successfully managing GPMI, and his intimate knowledge of
GPMI’s business and was not based on Bendor’s manipulation of the
process to benefit himself. Second, GPMI presented evidence
demonstrating that Bendor’s employment was not a condition of Envoy’s
agreement to purchase the equity interests in GPMI. Rather, Bendor’s
employment agreement was a completely separate negotiation that was not
finalized until after the Plan was filed. Third, GPMI presented evidence
that pursuant to the terms of the Plan and Bendor’s proposed employment
contract, Bendor would be hired by the Reorganized Debtor as an at-will
employee who would have no interest, ownership interest, or stock options
with regard to, or because of, his employment with the Reorganized
Debtor.
2. Alleged violation of § 1129(a)(5)
At the hearing, Albaad also objected to the Plan on the grounds that
the Plan violated § 1129(a)(5) because Bendor’s role as the Trustee of the
Litigation Trust was contrary to the best interest of the creditors. Albaad
15
Evidence included declarations, live testimony, documents, and copies of
relevant communications.
13
asserted that because Bendor would be a material witness in the Trust’s
litigation, Bendor’s interest was adverse to Albaad, and thus Bendor could
not be a neutral trustee as required by § 1129(a)(5).
The bankruptcy court acknowledged Bendor’s potential conflict of
interest but questioned Albaad’s premise given no other creditors nor the
U.S. Trustee had objected to Bendor’s appointment.
GPMI disputed Albaad’s claims, arguing that Bendor’s appointment
as Trustee was in the best interest of creditors and that GPMI and the
Committee specifically selected Bendor only after careful consideration.
Because the Litigation Trust’s assets consisted primarily of claims against
Albaad and Michelin, GPMI argued that Bendor was ideally suited to serve
as Trustee in light of his personal experience, knowledge of GPMI, and
knowledge of the factual basis of the litigation claims.
Additionally, GPMI presented evidence that Bendor’s role would be
subject to significant control by a “Trust Oversight Committee” with “very
sophisticated participants.” Pursuant to the terms of the Litigation Trust,
the Trustee would have an ongoing obligation to keep the Oversight
Committee informed of the continuing efforts on behalf of the Litigation
Trust to collect, liquidate, and distribute any Trust assets.
G. Confirmation order
At the close of the evidentiary hearing, the bankruptcy court
confirmed the Plan with minor changes agreed to by the parties at the
14
hearing.16 The bankruptcy court entered GPMI’s proposed order approving
the disclosure statement and confirming the Plan.
Albaad timely appealed. Albaad also filed an emergency motion for a
stay pending appeal with both the bankruptcy court and the BAP. Both
motions were denied.
JURISDICTION
The bankruptcy court had jurisdiction under
28 U.S.C. §§ 1334 and
157(b)(2)(L). We have jurisdiction under
28 U.S.C. § 158.
ISSUES
Did the bankruptcy court abuse its discretion when it confirmed the
Plan?
Did the bankruptcy court commit clear error when it found that the
Plan did not violate the absolute priority rule?
Did the bankruptcy court commit clear error when it found that the
Plan complied with the applicable requirements of § 1129(a)(5)?
STANDARDS OF REVIEW
We review the bankruptcy court's decision to confirm a chapter 11
plan for an abuse of discretion. Marshall v. Marshall (In re Marshall),
721 F.3d
1032,1045 (9th Cir. 2013) (citation omitted). Abuse of discretion occurs
when a court applies the wrong legal standard, misapplies the correct legal
Albaad’s only objection to the proposed form of the confirmation order was to
16
paragraph 76, Reversal or Modification. Albaad was concerned the provision would be
interpreted to moot any appeal. The bankruptcy court disagreed, finding that the clause
would not adversely impact any appeal of Plan confirmation.
15
standard, or makes factual findings that are illogical, implausible, or
without support in the record. United States v. Hinkson,
585 F.3d 1247, 1261-
62 (9th Cir. 2009) (en banc). Factual findings regarding whether a plan
satisfies the confirmation requirements are reviewed for clear error. See
Comput. Task Grp., Inc. v. Brotby (In re Brotby),
303 B.R. 177, 184 (9th Cir.
BAP 2003). Clear error exists when the reviewing court has a definite and
firm conviction that a mistake has been made.
Id.
DISCUSSION
Confirmation of a proposed chapter 11 reorganization plan is
governed by § 1129.
A. The Plan complies with § 1129(b)
1. The absolute priority rule
If the plan is not consensual, meaning that if § 1129(a)(8) is not
satisfied (and there is no unanimous acceptance of the plan by all the
impaired classes), the plan may still be confirmed if the court finds that
“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.” § 1129(b)(1); see also Liberty Nat'l Enters. v. Ambanc
La Mesa Ltd. P'ship (In re Ambanc La Mesa Ltd. P'ship),
115 F.3d 650, 653-54.
(9th Cir. 1997).
For a plan to be fair and equitable as to impaired unsecured claims, it
must, at a minimum, comply with the absolute priority rule, which
requires that a dissenting class of unsecured creditors is provided for in full
16
before any junior class (including old equity holders) receives or retains
any property under the plan on account of their junior claim or interest.
§ 1129(b)(2)(B); Norwest Bank Worthington v. Ahlers,
485 U.S. 197, 202 (1988).
The rule was a response to “concern . . . [regarding] the ability of a few
insiders, whether representatives of management or major creditors, to use
the reorganization process to gain an unfair advantage.” LaSalle,
526 U.S. at
444 (cleaned up).
Importantly, § 1129(b)(2)(B)(ii) only prohibits junior equity from
receiving or retaining property “on account of” an interest that is junior to
other unsecured creditor claims. Consequently, § 1129(b)(2)(B)(ii) is not
implicated when old equity “receive[s] or retain[s]” property “under the
plan [not] on account of [a] junior claim or interest.” § 1129(b)(2)(B)(ii)
(emphasis added); see Bonner Mall P'ship v. U.S. Bancorp Mort. Co. (In re
Bonner Mall P'ship),
2 F.3d 899, 908-14 (9th Cir.1993), dismissed on other
grounds,
513 U.S. 18 (1994).
2. New value corollary to the absolute priority rule
An exception or corollary to the absolute priority rule in
§ 1129(b)(2)(B)(ii) allows old equity to retain an interest in the reorganized
debtor notwithstanding the objection of an unsecured class that is not paid
in full, if they give “value” to the reorganized debtor that is: (1) new; (2)
substantial; (3) money or money's worth; (4) necessary for a successful
reorganization; and (5) reasonably equivalent to the value or interest
received. In re Bonner Mall P'ship,
2 F.3d at 909. Under the “new value
17
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,
526 U.S. at 435, 442-43.
3. Albaad either misunderstands or misapplies the holding of
LaSalle
Before the bankruptcy court, and again on appeal, Albaad asserts that
the Plan violates the absolute priority rule because the Plan was proposed
during the exclusivity period and Bendor used his position as an old equity
holder to select a buyer and craft terms of the Plan that were personally
beneficial to him. Albaad’s argument relies heavily on its interpretation of
the holding in LaSalle, i.e. that LaSalle required “market testing of [Envoy’s]
offer,” but GPMI’s “going-concern was not market-tested.” Therefore,
according to Albaad, the Plan violates the absolute priority rule.
Albaad either misunderstands or misapplies the holding of LaSalle
and contrary to Albaad’s assertions, the Plan does not violate the absolute
priority rule.
First, unlike the facts in this case, the court in LaSalle was concerned
about a plan that allowed old equity the exclusive opportunity to retain
ownership in a reorganized debtor. In LaSalle, it was the “exclusiveness of
the opportunity, with its protection against the market's scrutiny of the
purchase price by means of competing bids or even competing plan
proposals,” that rendered the opportunity “on account of” the old equity
18
position and therefore a violation of the absolute priority rule. LaSalle,
526
U.S. at 455-57.
The Supreme Court in LaSalle explained that there was no way for the
bankruptcy court to “test the adequacy [and fairness] of an old equity
holder's proposed contribution,” and whether it satisfied the new value
corollary, when the debtor could not provide the bankruptcy court with
any information as to what “someone else would have paid.” LaSalle,
526
U.S. at 453. This is because in LaSalle there was no market testing of the
offer made in the plan of reorganization because the old equity holders
were the only party given the exclusive right to invest in the reorganized
debtor.
Id. at 453-58.
In this case, the new value corollary is not applicable because Albaad
offered no evidence that the Plan provided Bendor “exclusive
opportunities free from competition” to acquire an interest in the
Reorganized Debtor “on account of” his old equity position. Rather, under
the Plan, all existing equity was cancelled 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. Albaad provides no
evidence that Bendor’s post-confirmation employment with the
Reorganized Debtor is an equity interest that Bendor is receiving under the
Plan or that his employment is “on account of” his former equity
ownership in GPMI. Rather, the record demonstrates that Bendor, along
19
with all other old equity lost all equity interest in GPMI upon the
confirmation of the Plan. Additionally, the plain language of Bendor’s
employment agreement states that he is an at-will employee and that he
will not receive any equity interest in the Reorganized Debtor.
Second, although GPMI proposed the Plan during the exclusivity
period, there are no facts demonstrating that Bendor purposely used the
exclusivity period to craft and propose a personally beneficial plan as
happened in LaSalle. Similarly, there are no facts demonstrating that
Bendor used the exclusivity period to game the system and propose a plan
that was “too good a deal” for Bendor. LaSalle,
526 U.S. at 444. Albaad
provided no evidence to support its argument that Envoy was a “cherry
picked buyer.”
To the contrary, the bankruptcy court found that GPMI and its
principals (including Bendor) “had no preexisting relationship” with
Envoy and the “Plan was negotiated as an arms-length transaction subject
to the scrutiny of, among others, the Committee, the U.S. Trustee and the
Court.” Albaad has not met its appellate burden of demonstrating the
findings are clear error.
Although Bendor’s post-confirmation employment with the
Reorganized Debtor is undoubtedly a benefit for Bendor, the evidence
demonstrated that Envoy hired Bendor because of Bendor’s experience and
expertise, not because of his old equity interest in GPMI. Furthermore, the
bankruptcy court found that the employment agreement was negotiated
20
independent of the terms of the Plan and that Envoy’s agreement to
purchase GPMI was not dependent on Bendor’s employment with the
Reorgainzed Debtor.
Third, contrary to Albaad’s assertions, the holding in LaSalle did not
require certain valuation or marketing methods of GPMI’s going concern.
LaSalle merely stated that “the best way to determine value [and test the
adequacy of an old equity holder's proposed contribution] is exposure to a
market.” LaSalle,
526 U.S. at 457 (citations omitted). However, LaSalle
specifically stated it was not deciding what a debtor must do to “market
test” the interest17 although it identified some alternatives, such as the right
to bid for the same interest or the right to file a competing plan.
Id. at 458.
Thus, even if LaSalle and the new value corollary applied, GPMI was
not obligated to hire a broker to sell the business or provide a professional
valuation as asserted by Albaad. Rather, GPMI’s marketing efforts satisfied
the market testing requirement.
A review of the record demonstrates that the bankruptcy court did
not clearly err in finding that GPMI engaged in significant, active efforts to
market GPMI to both investors and buyers. The evidence established that
GPMI marketed its business for over a year, with the assistance of a
respected business advisor targeting over 30 qualified parties, including
17 The LaSalle Court noted that “[w]hether a market test would require an
opportunity to offer competing plans or would be satisfied by a right to bid for the
same interest sought by old equity is a question we do not decide here.” LaSalle,
526
U.S. at 458 (emphasis added).
21
Albaad. Negotiations progressed with several prospective buyers to the
point of exchanging due diligence materials. However, with the exclusion
of Envoy, all prospective financial buyers eventually declined to pursue an
acquisition. Thus, unlike LaSalle, there was sufficient evidence for the
bankruptcy court to find that the price paid by Envoy was the “greatest
possible addition to the bankruptcy estate, . . . [and not] less than someone
else would have paid.”
Id. at 453.
The bankruptcy court also did not err in rejecting Albaad’s assertions
that the alleged accelerated timeline for confirmation somehow evidenced
a lack of marketing by GPMI. The bankruptcy court found that GPMI was
in dire financial need and without the accelerated timeline, GPMI would
not have been able to continue to make payroll or rent payments which
would have resulted in liquidation rather than reorganization continuation
as a going concern.
Based on the foregoing, the absolute priority rule is not implicated,
and the bankruptcy court did not commit clear error in finding that the
Plan complies with § 1129(b).
B. The Plan complies with § 1129(a)(5)
A chapter 11 plan may not be confirmed if the continuation in
management of the persons proposed to serve as officers or managers of
debtor is not in the interests of creditors and public policy.
§ 1129(a)(5)(A)(ii). Continued service by prior management may be
inconsistent with the interests of creditors and public policy if it directly or
22
indirectly perpetuates incompetence, lack of discretion, inexperience or
affiliations with groups inimical to the best interests of the debtor. Linda
Vista Cinemas, L.L.C. v. Bank of Ariz. (In re Linda Vista Cinemas, L.L.C.),
442
B.R. 724, 735-36 (Bankr. D. Ariz. 2010) (citing In re Beyond.com Corp.,
289
B.R. 138, 145 (Bankr. N.D. Cal. 2003)).
Albaad argues that the bankruptcy court erred in confirming the Plan
because the Plan violates § 1129(a)(5) by allowing Bendor to serve as “post
confirmation management of the Litigation Trust [which] is not consistent
with the interest of creditors or public policy.” Because Bendor is an
interested party and a material witness in the potential litigation (asset of
the Litigation Trust), Albaad asserts that he should not serve as Trustee
because a “trustee should have some sense of independence to fairly
manage the trust and disburse assets in a fair manner.” Albaad further
asserts that the Trust Oversight Committee is not sufficient protection
because Bendor retains too much discretion and “has unbridled discretion
to choose when to pay out a creditor’s claim, if at all.”
Albaad’s assertions are 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).
First, Albaad’s assertions that because Bendor has an interest adverse
to Albaad in the Albaad Litigation, he would not treat Albaad fairly and
23
would “essentially ensure that Albaad will never receive a pay-out even if
its claims are successful” are mere supposition and belied by the plain
language of the terms of the Litigation Trust. According to the terms of the
Litigation Trust, Bendor must distribute proceeds from the Litigation Trust
to creditors with allowed claims in accordance with the priorities of § 507
and the classification of claims set forth in the Plan. Thus, Bendor has the
duty to distribute litigation proceeds on a pro rata basis pursuant to
applicable law and the priority of the claims.
Second, Bendor’s compensation as Trustee does not cause his
appointment as Trustee to be contrary to the interest of creditors or public
policy as argued by Albaad. The bankruptcy court found that the terms of
the Litigation Trust were “negotiated at arms-length” between GPMI and
the Committee and that the Committee was very involved in the process of
drafting the terms of the Litigation Trust. Although Bendor will receive
compensation for serving as Trustee, he does not receive compensation
until creditors receive at least 25% of their allowable claims. After that,
Bendor’s compensation increases as a percentage of the amount paid to
creditors. Thus, Bendor’s interest aligns with the unsecured creditors.
Bendor receives more compensation only if the unsecured creditors receive
more on their allowed claims.
Finally, Bendor’s appointment as Trustee is not contrary to the
interest of creditors as is evidenced by the wide support of other unsecured
creditors who, through the Committee, had substantial input in the final
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version of the Litigation Trust. Indeed, all impaired, unsecured creditors
except Albaad supported the Plan and Bendor’s appointment as Trustee. A
Committee member testified that the terms of the Litigation Trust as
presented in the Plan were “decidedly different” than in the first proposal
because of the Committee’s edits. “There was a complete redline and
rewrite that was undertaken.” The Committee reviewed various provisions
that they had concerns about, “making sure that there was an oversight
board that actually controls,” not simply consults.
Based on the record, the bankruptcy court did not clearly err in
finding that the terms of the Litigation Trust “including, but not limited to,
the management and compensation provisions contained therein are in the
best interests of all stakeholders and reasonable and appropriate under the
circumstances” and that the Plan complied with § 1129(a)(5).
C. Equitable Mootness
Equitable mootness is “a judge-made abstention doctrine unrelated to
the constitutional prohibition against hearing moot appeals.” Rev Op Grp. v.
ML Manager LLC (In re Mortgs. Ltd.),
771 F.3d 1211, 1214 (9th Cir. 2014). The
doctrine holds that even where effective relief is theoretically possible, and
the appeal is therefore not constitutionally moot, courts may “dismiss
appeals of bankruptcy matters when there has been a ‘comprehensive
change of circumstances . . . so as to render it inequitable for [the] court to
consider the merits of the appeal.’”
Id. (quoting Motor Vehicle Cas. Co. v.
Thorpe Insulation Co. (In re Thorpe Insulation Co.),
677 F.3d, 869, 880 (9th Cir.
25
2012). The “party moving for dismissal on mootness grounds bears a heavy
burden.” In re Thorpe Insulation Co.,
677 F.3d at 880 (citation omitted).
Substantial consummation does not, by itself, render an appeal moot. In re
Mortgs. Ltd.,
771 F.3d at 629.
Appellees argue that this appeal is equitably moot. The Panel has
judicial discretion to determine the merits of this case despite claims of
equitable mootness. Because we are ruling on the merits, the Panel need
not render a ruling on the appellee’s claim of equitable mootness. See e.g.
Co Petro Mktg. Grp., Inc., v. Commodity Futures Trading Comm’n (In re Co
Petro Mktg. Grp., Inc.),
680 F.2d 566, 569 n.1 (9th Cir. 1982).
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.
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