Horsehead Holdings: Equity Committee's Objection to Confirmation (redacted)

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

) Chapter 11 In re: ) ) Case No. 16-10287 (CSS) HORSEHEAD HOLDING CORP., et al.,

) )

(Jointly Administered)

Debtors. )

) Re: D.I. 1309

OBJECTION OF OFFICIAL

COMMITTEE OF EQUITY SECURITY HOLDERS TO CONFIRMATION OF DEBTORS’ PLAN

Mark D. Collins (No. 2981) Robert J. Stearn, Jr. (No. 2915) Russell C. Silberglied (No. 3462) Amanda R. Steele (No. 5530) RICHARDS, LAYTON & FINGER, P.A. One Rodney Square 920 North King Street Wilmington, Delaware 19801 Telephone: (302) 651-7700 Email: [email protected] [email protected] [email protected] [email protected]

Dated: August 22, 2016 Counsel to The Official Committee of Wilmington, Delaware Equity Security Holders

Case 16-10287-CSS Doc 1570 Filed 08/26/16 Page 1 of 66

Table of Contents

Page

i

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INTRODUCTION ...........................................................................................................................1

BACKGROUND .............................................................................................................................6

A. The Debtors ..................................................................................................6

B. Prepetition Operations and Activities ..........................................................7

C. Public Equity ..............................................................................................12

D. The Debtors File For Bankruptcy Intent On Turning the Keys Over to the Ad Hoc Committee ....................................................................................15

E. Appointment of the Equity Committee ......................................................20

F. The Debtors’ Failure to Engage in a Postpetition Market Test .................21

G. Disclosure Statement Hearing ....................................................................23

i. Adjournment of Initial Disclosure Statement Hearing ..................23

ii. Debtors’ Exclusivity Motion and Calls for a Market Test .............24

iii. Postpetition Indications of Interest and Supplemental Exclusivity Objection…………………………………………………………26

H. The Plan and Second Amended Disclosure Statement ..............................29

.29

.31

ARGUMENT .................................................................................................................................34

I. THE PLAN CANNOT BE CONFIRMED BECAUSE THE DEBTORS DID NOT SATISFY THEIR DUTY TO MAXIMIZE THE VALUE OF THEIR ESTATES ..............................................................................................................35

A. A Debtor-In-Possession Owes a Fiduciary Duty to Maximize the Value of the Estate ....................................................................................................36

B. Under Delaware Law, Fiduciary Duties are Heightened in the Context of a Change of Corporate Control Transaction .................................................37


ii

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C. The Debtors Chose a Plan that Satisfied their Secured Lenders and Provided an Expeditious Exit from Chapter 11—and Stopped There .......39

D. By Refusing to Canvass the Market, the Debtors Failed to Act with the “Scrupulous Concern” Required for Corporate Control Transactions ......41

.43

F. The Debtors’ Failure to Satisfy their Fiduciary Duties Renders the Plan Unconfirmable Under Bankruptcy Code Section 1129(a)(3) ....................44

II. THE PLAN SHOULD NOT BE CONFIRMED BECAUSE ITS ALLOCATION OF EQUITY HOLDER VALUE TO THE NOTEHOLDERS IS NOT FAIR AND EQUITABLE .........................................................................................................44

A. ..46

i. .47

ii. ..48

iii. .50

iv.

v. .52

B.

53

C. The Plan— —Violates the Absolute Priority Rule and Therefore Is Not Fair and Equitable ..............55

III. THE PLAN VIOLATES SECTION 1129(A)(3) OF THE BANKRUPTCY CODE BECAUSE IT CONTAINS INACCURATE DISCLOSURES ABOUT VALUATION ........................................................................................................56

CONCLUSION ..............................................................................................................................59


TABLE OF AUTHORITIES

Page

CASES

iv

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In re Am. Apparel, No. 15-12055 (BLS) (Bankr. D. Del. Jan. 25, 2016) ...............................................................43

In re Appraisal of DFC Global Corp., No. CIV.A. 10107-CB, 2016 WL 3753123 (Del. Ch. July 8, 2016) .......................................50

In re Armstrong World Indus., 348 B.R. 111 (D. Del. 2006) ....................................................................................................45

Barkan v. Amsted Indus., Inc., 567 A.2d 1279 (Del. 1989) .............................................................................................. passim

In re Bidermann Indus. U.S.A., Inc., 203 B.R. 547 (Bankr. S.D.N.Y. 1997) .....................................................................................36

In re Big Rivers Elec. Corp., 233 B.R. 726 (Bankr. W.D. Ky. 1998) ....................................................................................36

Bomarko, Inc. v. Int’l Telecharge, Inc., No. CIV.A. 13052, 1994 WL 198726 (Del. Ch. May 16, 1994) .............................................54

In re Boomerang Tube, LLC, No. 15-11247-MFW (Bankr. D. Del. Nov. 9, 2015) ...............................................................50

Cede & Co. v. Technicolor, Inc., 1990 WL 161084 (Del. Ch. Oct. 19, 1990), rev’d on irrelevant grounds, 634 A.2d 345 (Del. 1993), decision modified on reargument, 636 A.2d 956 (Del. 1994) ...............................................................................................................................53

Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) ..................................................................................................37, 53

Century Glove, Inc. v. First Am. Bank of N.Y., 860 F.2d 94 (3d Cir. 1988).......................................................................................................57

Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (1985) .................................................................................................................36

In re Coram Healthcare Corp., 271 B.R. 228 (Bankr. D. Del. 2001) ..................................................................................35, 44

In re Crowthers McCall Pattern, Inc., 120 B.R. 279 (Bankr. S.D.N.Y. 1990) .....................................................................................58


v

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Everett v. Perez (In re Perez), 30 F.3d 1209 (9th Cir. 1994) ...................................................................................................34

In re Exide Techs., 303 B.R. 48 (Bankr. D. Del. 2003) .................................................................................. passim

In re Fort Howard Corp. S’holders Litig., No. CIV.A 9991, 1988 WL 83147 (Del. Ch. Aug. 8, 1988) ....................................................42

In re Genesis Health Ventures, Inc., 266 B.R. 591 (Bankr. D. Del. 2011) ..................................................................................45, 56

Global GT LP v. Golden Telecom, Inc., 993 A.2d 497 (Del. Ch. 2010), aff’d 11 A.3d 214 (Del. 2010) ..........................................49, 50

In re Greate Bay Hotel & Casino, Inc., 251 B.R. 213 (Bankr. D.N.J. 2000) ...................................................................................34, 35

In re ISN Software Corp. Appraisal Litig., No. CIV.A. 83388-VCG, 2016 WL 4275388 (Del. Ch. Aug. 11, 2016) .................................53

In re Johns-Manville Corp., 68 B.R. 618 (Bankr. S.D.N.Y. 1986) .......................................................................................46

In re Keisler, No. 08-34321, 2009 WL 1851413 (Bankr. E.D. Tenn. June 29, 2009) ...................................58

Koehler v. NetSpend Holdings Inc., No. CIV.A. 8373-VCG, 2013 WL 2181518 (Del. Ch. May 21, 2013) .............................38, 43

Lippe v. Bairnco Corp., 288 B.R. 678 (S.D.N.Y. 2003), aff’d, 99 F. App’x 274 (2d Cir. 2004). ..................................53

In re Los Angeles Dodgers LLC, 468 B.R. 652 (Bankr. D. Del. 2011) ........................................................................................36

In re MCorp. Fin., Inc., 137 B.R. 219 (Bankr. S.D. Tex. 1992) ....................................................................................56

Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261 (Del. 1989) ......................................................................................................38

N. Am. Catholic Educ. Progr. Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007) ......................................................................................................... 38

Nagy v. Bistricer, 770 A.2d 43 (Del. Ch. 2000)....................................................................................................55


vi

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Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003).....................................................................................................36

Oliver v. Boston Univ., No. CIV.A. 16570-NC, 2006 WL 1064169 (Del. Ch. Apr. 14, 2006) ....................................55

ONTI, Inc. v. Integra Bank, 751 A.2d 904 (Del. Ch. 1999)..................................................................................................55

Paramount Commc’ns Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994) ..............................................................................................37, 38, 41

In re Phoenix Petroleum Co., 278 B.R. 385 (Bankr. E.D. Pa. 2001) ......................................................................................57

In re PNB Holding Co. S’holders Litig., No. CIV.A. 28-N, 2006 WL 2403999 (Del. Ch. Aug. 18, 2006) ......................................48, 52

In re Prudential Energy Co., 59 B.R. 765 (Bankr. S.D.N.Y. 1986) .................................................................................57, 58

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) ........................................................................................................38

In re Scioto Valley Mortg. Co., 88 B.R. 168 (Bankr. S.D. Ohio 1988) ......................................................................................58

In re Smurfit-Stone Container Corp. S’holder Litig., No. CIV.A. 6164-VCP, 2011 WL 2028076 (Del. Ch. May 20, 2011), as revised (May 24, 2011) ......................................................................................................42, 43

Tronox Inc. v. Kerr McGee Corp. (In re Tronox Inc.), 503 B.R. 239 (Bankr. S.D.N.Y. 2013) .....................................................................................48

In re Vita Corp., 380 B.R. 525 (C.D. Ill. 2008) ..................................................................................................34

In re W.R. Grace & Co., 475 B.R. 34 (D. Del. 2012) ......................................................................................................37

In re Zenith Elecs. Corp., 241 B.R. 92 (Bankr. D. Del. 1999) ....................................................................................35, 37

Zutrau v. Jansing, No. CIV.A. 7457-VCP, 2014 WL 3772859 (Del. Ch. July 31, 2014) .....................................54


vii

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STATUTES & RULES

11 U.S.C. § 1125 .................................................................................................................... passim

11 U.S.C. § 1129(a) ............................................................................................................... passim

11 U.S.C. § 1129(b) ............................................................................................................... passim

OTHER AUTHORITIES

Peter Lattman, Buyer All-Stars Stumble, The Wall Street Journal (Mar. 10, 2008) ........................6

Shannon P. Pratt, Valuing a Business: The Analyses and Appraisal of Closely Held Companies (5th ed.) ........................................................................................................51

Widen, R. Scott, Practitioner Note: Delaware Law, Financial Theory and Investment Banking Valuation Practice, 4 N.Y.U. J.L. & Bus. 579 (2008) ......................49, 51


RLF1 15057724v.1

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

) Chapter 11 In re: ) ) Case No. 16-10287 (CSS) HORSEHEAD HOLDING CORP., et al.,1

) )

(Jointly Administered)

Debtors. )

) Re: D.I. 1309

OBJECTION OF OFFICIAL

COMMITTEE OF EQUITY SECURITY HOLDERS TO CONFIRMATION OF DEBTORS’ PLAN

The Official Committee of Equity Security Holders (the “Equity Committee”) in the

above-captioned chapter 11 cases of Horsehead Holding Corp., et al. (collectively, the

“Debtors”) respectfully submits this objection (the “Objection”) to confirmation of the Debtors’

Second Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code

[D.I. 1309] (as may be amended or modified, the “Plan”).2

INTRODUCTION

1. In September 2015, the Debtors told investors their assets were worth over $1

billion. From October 23, 2015 through December 2, 2015, the Debtors went (once again) to the

public equity market and raised another $9.1 million of public equity funding (this was in

addition to the almost $73 million they raised from their public shareholders earlier in 2015).

However, only two months after their last public equity raise, on February 2, 2016, the Debtors

filed these chapter 11 cases and declared they were hopelessly insolvent. Indeed, in April 2016,

1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, are: Horsehead Holding Corp. (7377); Horsehead Corporation (7346); Horsehead Metal Products, LLC (6504); The International Metals Reclamation Company, LLC (8892); and Zochem Inc. (4475). The Debtors’ principal offices are located at 4955 Steubenville Pike, Suite 405, Pittsburgh, Pennsylvania 15205.

2 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Plan.


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the Debtors’ financial advisors contended the Debtors were worth only about $280 million. With

this as the undisputed factual background of these cases, on May 2, 2016, the Court justifiably

appointed the Equity Committee to investigate what happened shortly before and after the

Petition Date to the Debtors’ value and to determine if the Debtors’ public shareholders were

truly out of the money as now declared by the Debtors.

2. The simple answer to the puzzling question of “what happened to all of the

Debtors’ value?” is “nothing”. Although zinc prices certainly fell dramatically at the end of

2015 (and have since substantially recovered), and the Debtors’ zinc processing facility in

Mooresboro, North Carolina (the “Mooresboro Facility”) continued to suffer delays in ramping

up to capacity, everyone knew that neither problem would last. The Debtors certainly said so.

On September 17, 2015, they told investors:

• “Increasing zinc prices expected as metal market remains in deficit.”

• Zinc prices were forecasted to be $1.05 in 2016 and $1.47 in 2017.

• “New facility is currently expected to expand annual EBITDA by approximately $90-110 million once fully operational.”

• “The ramp-up of zinc production at Mooresboro continues after some initial delays.”

September 17, 2015 Investor Presentation (App. A)3 at 5-7.

3. Unfortunately while the Debtors were dealing with these temporary effects, their

asset based lender, Macquarie Bank Limited (“Macquarie”), did the unthinkable—it turned a bad

situation into a perfect storm for the Debtors: because the Debtors were in a limited over-

advance position under the Macquarie Credit Facility, it called an event of default under that

credit facility, ceased providing liquidity and even froze all of the Debtors’ accounts (thereby

3 Documents cited herein are contained in the Appendix to the Objection of the Official Committee of Equity Security Holders to Confirmation of the Debtors’ Plan (“Appendix” or “App”). Documents contained in the exhibits to the Appendix will be cited as “App. __”.


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immediately removing virtually all liquidity from the Debtors overnight), and literally paralyzed

the Debtors’ operations.

4. All of the actions that the Debtors were otherwise taking to improve their liquidity

during the fourth quarter of 2015 and to assess other strategic options and alternatives completely

(and, unfortunately, forever) ceased overnight; the Debtors and their advisors shifted their entire

focus to locating an emergency DIP loan. From that point forward, the race was on to get the

Debtors in and out of bankruptcy as quickly as possible, and the price for doing so was to turn all

of the Debtors’ value over to certain holders of the Debtors’ secured notes and unsecured

notes—now also their DIP Lenders (collectively, the “Ad Hoc Committee”)—mostly led by

private equity firms that bought into the debt shortly before the deal was struck, in a loan-to-own

strategy. Unfortunately for the other stakeholders in these cases, the Debtors never did anything

to independently verify whether or not this transaction was in the best interests of all

stakeholders. They simply took the bird in the hand and never looked back or even sideways.

5. Notwithstanding the Debtors’ lack of sufficient and reliable information upon

which to assess the fairness of the proposed change in control transaction with members of the

Ad Hoc Committee, the Debtors did nothing postpetition to determine if they could do better.

The Debtors steadfastly refused to do a market check or even initiate an informal sale process

alongside the Plan. In response to the repeated requests made by the Equity Committee (and

later joined by the Creditors’ Committee) to perform a market test, the Debtors insisted that they

were not “legally required” to do so. Incredibly, the Debtors also believed that if they did do so

(i.e., affirmatively sought higher and better transactions for the benefit of the Debtors’ estates and

all of their stakeholders), they would be in breach of their DIP Facility with members of the Ad

Hoc Committee.


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6. Even though bidders existed prepetition, the Debtors did not call them, or almost

anyone else for that matter—instead believing that sitting back and “waiting for the phone to

ring” was enough to satisfy their affirmative obligation to maximize the value of their estates.

Not only did the Debtors not run a market test or even engage in an informal sale process, they

resisted engaging with potentially interested purchasers who contacted the Equity Committee.

The Debtors materially modified their stance after the hearing on their motion to extend their

exclusive periods (in fact, language was added to the exclusivity order affirmatively authorizing

and directing the Debtors to respond to, and engage with, any such in-bound indications of

interest). This newfound cooperation in responding to and engaging with potentially interested

purchasers, however, came far too late in these cases to make a difference.

7. As the Equity Committee will demonstrate at the confirmation hearing, the

inherent value of the Debtors remains as it was prepetition. Although the price of zinc certainly

was down at the end of last year and into the first quarter of 2016, it has quickly recovered, as

everyone expected. And the lack of liquidity, not the operational issues at the Mooresboro

Facility, is what caused the Debtors to shutter the Mooresboro Facility. Thus, the business

essentials of the Debtors, their operations and their inherent value remain unchanged from their

prepetition state. As a result, the Plan is structurally flawed and patently unfair because in

delivering control to members of the Ad Hoc Committee, it provides them with far more than

they are owed. The Equity Committee’s Financial Advisor, SSG Capital Advisors LLC

4


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(“SSG”), has opined that the Debtors’ enterprise value is between $780.6 million - $862.8

million, which is consistent with the Debtors’ own view of their value prepetition. Accordingly,

equity has an economic interest in these cases. Yet the Plan proposes to give equity holders

nothing. Thus, the Plan cannot be confirmed.

8.

9. Indeed, the Debtors have seen this movie before and the Ad Hoc Committee seeks

to star in the remake. Zinc prices were also at historic lows in 2002. That year, Horsehead

Industries, Inc. and its affiliates (“Old Horsehead”) filed for bankruptcy protection in the United


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States District Court for the Southern District of New York.5 In 2003, Sun Capital Partners, Inc.

(“Sun Capital”) purchased Old Horsehead for approximately $82 million in a section 363 sale.6

In 2006 and 2007, after zinc prices had rebounded, Sun Capital sold its interests in Old

Horsehead for $345 million, realizing a profit of approximately $263 million on an $82 million

investment.7 The Ad Hoc Committee has taken a page out of Sun Capital’s playbook by seeking

to acquire the Debtors on the cheap at a valuation deflated by historically low zinc prices,

converting their debt to equity through the private change in control transaction (i.e., not subject

to any market test or auction process during these chapter 11 cases) embedded in the Plan, and

turning their small investment into a large return at the expense of other creditors and equity

holders. However, because the Debtors have idly sat back and allowed this scene to unfold, the

Plan cannot be confirmed.

BACKGROUND

A. The Debtors

10. The Debtors and their predecessors have operated in the zinc industry for more

than 150 years and the nickel-bearing waste industry for more than 30 years. Dec. of James M.

Hensler in Support of First Day Motions ¶ 4 [D.I. 16] (the “First Day Dec.”). The Debtors

operate in three distinct, but related businesses:

• Horsehead Corporation (“Horsehead”). Horsehead processes electric arc furnace (“EAF”) dust, a zinc-containing waste generated by North American steel mini-mills, and produces specialty zinc and zinc-based products. The Debtors are North

5 See HH Liquidating Corp. and EisnerAmper, LLP, No. 02-14024 (Bankr. S.D.N.Y. Aug 19, 2002).

6 See Mot. Auth. Sale ¶ 28, HH Liquidating Corp. and EisnerAmper, LLP, No. 02-14024 (Bankr. S.D.N.Y. Nov. 13, 2003) [D.I. 571] (App. C); Order Approving Sale ¶ Q, HH Liquidating Corp. and EisnerAmper, LLP, No. 02-14024 (Bankr. S.D.N.Y. Dec. 15, 2003) [D.I. 634] (App. D) (describing additional consideration for the purchase as the result of a settlement).

7 See Horsehead Holding Corp. Form 10-K (for the fiscal year ended December 31, 2007) (App. E) at 4; see also Peter Lattman, Buyer All-Stars Stumble, The Wall Street Journal (Mar. 10, 2008) (App. F).


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America’s largest recyclers of EAF dust, with facilities located in Barnwell, South Carolina, Chicago, Illinois (Calumet), Palmerton, Pennsylvania and Rockwood, Tennessee. Zinc production operations (currently idled) are conducted from the Mooresboro Facility.

• Zochem Inc. (“Zochem”). Located in Ontario, Canada, Zochem produces and sells zinc oxide. Zochem is one of the largest single-site producers of zinc oxide in North America.

• The International Metals Reclamation Company, LLC (“INMETCO”). INMETCO recycles nickel-bearing waste and nickel-cadmium batteries, and produces nickel-based alloy for the stainless steel and specialty steel industries.

Id. ¶¶ 4, 13, 14; Debtors’ Second Amended Disclosure Statement for the Debtors’ Second

Amended Joint Plan of Reorg. Pursuant to Ch. 11 of the Bankruptcy Code at 13-16 [D.I. 1310]

(the “Disclosure Statement”).

11. “Collectively, the Debtors hold a market leading position in zinc production in the

United States, zinc oxide production in North America, EAF dust recycling in North America,

and are a leading environmental service provider to the U.S. steel industry.” First Day Dec. ¶ 4.

B. Prepetition Operations and Activities

12. In the nine months ending September 30, 2015, the Debtors generated

consolidated revenues of more than $330 million. First Day Dec. ¶ 5. As of September 30,

2015, the Debtors reported assets in excess of $1 billion. See Horsehead Holding Corp. Form

10-Q (for the quarterly period ended September 30, 2015) (App. G) at 1.

13. In the second and third quarters of 2015, historically low commodity prices with

weaker near-term global demand negatively impacted the Debtors’ financial position. See First

Day Dec. ¶¶ 6, 7. At the same time, the Mooresboro Facility continued to incur operational

challenges and cost overruns, and operated at levels below capacity. See id. In addition,

decreased cash flow impacted the Debtors’ ability to complete the necessary repairs for the

Mooresboro Facility. See id. All of these factors negatively impacted the Debtors’ liquidity.


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14. Notwithstanding these reported challenges, the Debtors stated publicly that the

value of their assets totaled approximately $1.002 billion dollars, and that stockholders’ equity

was approximately $458 million. See Form 10-Q, Horsehead Holding Corp. (for the quarterly

period ended June 30, 2015) (App. H) at 1; Form 10-Q, Horsehead Holding Corp. (for the

quarterly period ended September 30, 2015) (App. G) at 1. The Debtors reported in their

September 17 Investor Presentation that they expected zinc prices to increase to $1.07/pound,

and the Mooresboro Facility to come on line soon and generate significant annual EBITDA. See

September 17, 2015 Investor Presentation (App. A) at 3.

15.

16. On October 23, 2015, less than four months prior to the Petition Date, the Debtors

engaged in another public equity offering for $50 million through an “At the Market”

program. First Day Dec. ¶ 37. The Debtors suspended this program only two months prior to

the Petition Date, on December 2, 2015. See Form 8-K, Horsehead Holding Corp. (May 31,


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2016) (App. L) Ex. 99.1 at 15. The Debtors raised approximately $9.1 million in additional

equity investment through this program. Id.

17.

18.

19.

20.

on January 5, 2016, Macquarie informed the Debtors of a default

8


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and froze all of their bank accounts.

21.

9


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22.


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Thus, the die was cast before the Debtors even filed for bankruptcy.

See Debtors’ Mot. Obtain Postpetition Secured Financing (Feb. 2, 2016) [D.I. 17] (the “DIP

Motion”) at Ex. A (“Summary of Principal Terms and Conditions). Shortly after negotiating the

term sheet with the Ad Hoc Committee, the Debtors filed for relief under chapter 11 of the

Bankruptcy Code.

C. Public Equity

23. On August 15, 2007, Horsehead Holding Corp. initiated its initial public offering

and began trading its common stock on NASDAQ, under the ticker ZINC. First Day Dec. ¶ 5.

24. On January 28, 2015 (approximately one year before the Petition Date (as defined

below)), the Debtors completed a supplemental public offering of 5,750,000 shares of common

stock at $12.75 per share (raising approximately $73 million in new equity investment). See

Horsehead Holding Corp. Form 8-K (January 22, 2015) (App. O) at 2. As noted above, in

October through December 2015, less than two months prior to the Petition Date, the Debtors

engaged in another public equity offering for $50 million through an “At the Market”

program. See Horsehead Holding Corp. Form 8-K (June 1, 2016) at Note C, Ex. 99.1. The

Debtors raised approximately $9.1 million in additional equity investment through this

program. Id. Thus, in the year prior to the bankruptcy filing, the Debtors raised over $80 million

in public equity financing.


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25. In their October 23, 2015 Prospectus, the Debtors touted to their investors and the

world their competitive strength and business strategy. See, e.g., Prospectus Supplement (to

Prospectus Dated Oct. 3, 2015), Horsehead Holding Corp (App. P) at S-6, S-10. Chief among

these were the Debtors’ expectations concerning the Mooresboro Facility:

Once operating at full capacity, we expect the new zinc facility to be capable of producing over 155,000 tons of zinc metal per year, and with certain modifications, capable of producing over 170,000 tons of zinc metal per year without significant additional investment. Our new zinc facility has experienced significant operational difficulties that have resulted in low production and several interruptions. We have made and continue to make numerous improvements to remediate these difficulties and improve the ramp-up rate . . . . Once we have resolved these issues and are operating at full capacity, we expect to achieve significant benefits from the new zinc facility, including lower energy cost, higher labor productivity, reduced operating maintenance costs and lower operating and logistics costs at our EAF dust recycling plants. [Additional benefits include production of high grade Zinc, recovery of additional valuable metals from EAF dust and expansion into new markets.] We believe that the foregoing benefits will result in annual incremental Adjusted EBITDA of approximately $90 million to $110 million . . . once the new zinc facility is operating at full capacity, independent of the market price of zinc, but subject to a number of assumptions. In addition, we believe we will be able to achieve a number of additional benefits from our new zinc facility, including lower capital expenditures for maintenance, lower state income taxes as a result of certain tax incentives available for the investment in the new zinc facility and lower cash costs associated with our hedging program.

Id. at S-7.

26. As of September 30, 2015, the Debtors reported stockholders’ equity of almost

$460 million, see Form 10-Q, Horsehead Holding Corp. (for the quarterly period ended

September 30, 2015) (App. G) at 1, and Horsehead Holding Corp.’s common stock was trading

at about $3.34, which was down from the prior quarter. See Historical Quote for ZINCQ (Sep.

30, 2015), MarketWatch (App. Q). With a weighted average of more than 56 million common

shares outstanding during Q3 2015, see Form 10-Q, Horsehead Holding Corp. (for the quarterly


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period ended September 30, 2015) (App. G) at 22, the market capitalization of Horsehead

Holding Corp.’s common equity was almost $200 million at the time. This was down

meaningfully from more than $14/share in the spring of 2015 (almost $800 million market cap

for common equity), when zinc prices hovered around $1/pound. Of course, the share price of

Horsehead Holding Corp.’s common stock always fluctuates (both up and down) with the price

of zinc.

27. As noted by the Debtors in their chart on page 23 of the Disclosure Statement, the

declines in the price of zinc had a corresponding impact on the prices of Horsehead Holding

Corp.’s common stock:

Disclosure Statement at 23. Note, however, following the Petition Date and the announcement

by the Debtors that they were hopelessly insolvent, the price of Horsehead’ Holding Corp.’s

common stock remained flat-lined (near zero) notwithstanding the remarkable recovery of zinc

prices since that date. If, however, one were to assume that these cases were not filed and such

announcements were not made, the Equity Committee prepared the following illustration


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reflecting what may have happened to Horsehead Holding Corp.’s stock prices in 2016 by using

a regression analysis of stock price movements versus zinc price movements in 2015 and the

effect that such correlation could have had on Horsehead Holding Corp.’s stock prices in 2016,

as reflected by the black dotted line:

D. The Debtors File For Bankruptcy Intent On Turning the Keys Over to the Ad Hoc Committee.

28. On February 2, 2016 (the “Petition Date”), each of the Debtors filed a chapter 11

case, thereby initiating these chapter 11 cases (the “Chapter 11 Cases”). The Debtors concede

that their bankruptcy filing was caused by a perfect storm of short term challenges: “historically

low commodity prices”; “weaker near-term global demand”; “operational challenges at the

[Mooresboro Facility]”; and because the Debtors’ secured lenders Macquarie and PNC Bank,


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N.A. (“PNC”) “froze certain of the Debtors’ bank accounts, including the Debtors’ main

operating account.” First Day Dec. ¶¶ 6-8.

29. As of the Petition Date, the Debtors’ alleged capital structure, excluding trade

debt, was as follows:

Indebtedness

Principal Outstanding ($ Millions)

Macquarie Credit Facility 27.2

10.5% Secured Notes (the “Secured Notes”) 205.0

Zochem Secured Credit Facility 16.9

9% Unsecured Notes (the “Unsecured Notes”) 40.0

3.8% Convertible Notes 100.0

Banco Bilbao Credit Facility 17.4

NMTC Loans 14.2

TOTAL $420.7

First Day Dec. ¶ 26.

30. The Debtors immediately filed the DIP Motion seeking, among other things, entry

of interim and final orders authorizing the Debtors to obtain $90 million in postpetition secured

financing (the “DIP Facility”). The DIP Facility was proposed by holders of more than 80% of

the Secured Notes, who also held approximately 80% of the Unsecured Notes (collectively, the

“DIP Lenders”). DIP Motion ¶ 1 n.6.

31. On February 4, 2016, the Court entered an order [D.I. 81] (the “Interim DIP

Order”) granting the relief requested in the DIP Motion on an interim basis. At the demand of

the DIP Lenders, the DIP Facility established certain “DIP Milestones” which, if not satisfied,

would constitute an event of default under the DIP Facility. Interim DIP Order ¶ 19(b). These

DIP Milestones required the Debtors to, among other things, (i) file a plan of reorganization

acceptable to those DIP Lenders and the members of the Ad Hoc Committee (an “Acceptable


RLF1 15057724v.1 17

Plan”) within 40 days of the Petition Date, id. ¶ 19(b)(v) and (ii) obtain confirmation of such

Acceptable Plan within 115 days of the Petition Date. Id. ¶ 19(b)(viii). Those DIP Lenders and

Ad Hoc Committee members did not intend to find “acceptable” any plan other than the one that

transferred ownership of the Debtors’ assets to them.

32.

Nonetheless, having demanded and obtained aggressive milestones and event of default

provisions that effectively precluded any sales or marketing process whatsoever in these cases,

the DIP Lenders/Ad Hoc Committee members euphemistically represented to the Court that “I

think the Court and the U.S. Trustee can take comfort in the fact that we’re not a third-party DIP

lender with ambitions to do anything but maximize value.” First Day Hr’g Tr. 75:5-75:8, Feb. 3,

2016 [D.I. 96].

33. On February 16, 2016, the United States Trustee for the District of Delaware (the

“U.S. Trustee”) appointed the Official Committee of Unsecured Creditors (the “Creditors’

Committee”). [D.I. 129]. The Creditors’ Committee promptly filed an objection to the DIP


RLF1 15057724v.1 18

Motion [D.I. 209], raising a variety of objections to the DIP Facility. Among other things, the

Committee observed that “these Cases appear to be run with the goal of the DIP

Lenders/Prepetition Senior Secured Noteholders arrogating to themselves exclusively the

remaining value from the Debtors’ assets” and objected to the DIP Milestones because “[a]ll

parties-in-interest need time to understand the alternatives to maximize value.” D.I. 209 ¶¶ 8,

50.

34. On March 3, 2016, the Court entered an order [D.I. 252] (the “Final DIP Order”)

approving the DIP Facility on a final basis.10 Pursuant to the Final DIP Order, the DIP

Milestones were extended by an additional 15 days, pushing the deadlines for filing an

Acceptable Plan to March 28, 2016 and for entry of an order confirming an Acceptable Plan to

June 11, 2016. See Final DIP Order ¶ 20(b).

35. On March 29, 2016, the Creditors’ Committee filed a motion [D.I. 345] (the

“Milestone Motion”) seeking to extend the DIP Milestones by an additional 30 days.11

Milestone Motion ¶ 44. The Creditors’ Committee noted that Lazard had yet to even

“complete[] the necessary valuation analysis of the Debtors complex businesses/facilities.” Id.

¶ 5.

36. The Debtors and DIP Lenders objected to the Creditors’ Committee’s requested

30-day extension of the DIP Milestones. [D.I. 370 & 377]. In its reply [D.I. 419 Ex. A] (the

“Milestones Reply”) to those objections, the Creditors’ Committee argued that a marketing

process of the Debtors’ assets was warranted given the various pre- and postpetition third-party

10 As of July 30, 2016, $25.5 million of the DIP Facility remained outstanding.

11 The deadline to file an Acceptable Plan and related disclosure statement was extended to April 6, 2016 by the DIP Lenders. See Milestone Motion ¶ 4. The DIP Lenders again extended this milestone to April 11, 2016. Hr’g Tr. 10:18-24, Apr. 6, 2016.


RLF1 15057724v.1 19

expressions of interest in the Debtors’ assets. See Milestones Reply ¶¶ 4-7. The Creditors’

Committee further argued that the DIP Lenders’ aggressive DIP Milestones were forcing the

Debtors to engage in an “artificially expedited process to the detriment of all other creditor

constituencies” (id. ¶ 6) and that “without any testing of the marketplace” to determine what, if

any, alternatives existed to “maximize[] the value of all of the Debtors’ assets for the benefit of

all creditor constituencies, not simply the [DIP] Lenders.” Id. ¶ 16. At bottom, the Creditors’

Committee alleged that the hurried pace of the Chapter 11 Cases imposed by the DIP Lenders

“amount[ed] to a private sale, without a market test or sale process,” and that “[s]uch an effort

should be rejected.” Id. ¶ 5.12

37. On April 13 and 14, 2016, the Debtors filed their initial chapter 11 plan of

reorganization [D.I. 604] (the “Initial Plan”) and related disclosure statement [D.I. 605] (the

“Initial Disclosure Statement”). The Initial Plan called for the transfer of substantially all of the

Debtors’ value to the Ad Hoc Committee. See Initial Plan Art. III.B, Ex. A. It also provided the

Debtors’ non-Zochem general unsecured creditors with a de minimis recovery. See id.

38. Thereafter, on April 25, 2016, the Debtors filed exhibits [D.I. 744] to the Initial

Disclosure Statement, including an initial valuation analysis prepared by Lazard (the “Initial

Lazard Valuation”). See D.I. 744-3. Lazard’s publicly disclosed valuation pegged the Debtors’

total enterprise valuation (“TEV”) at $255-$305 million (with a midpoint value of $280 million),

assuming an effective date of June 30, 2016. See Initial Lazard Valuation at 1.

12 On April 6, 2016, the Court entered an order [D.I. 465] denying the Milestone Motion primarily on the grounds that the DIP Milestones were established by the Final DIP Order, “an order that was negotiated and agreed to by the [Creditors’ Committee],” and that nothing presented to the Court “indicate[s] there’s been a sufficient change in circumstances that would warrant allowing the [Creditors’ Committee] to change the terms of the deal it already negotiated.” Hr’g Tr. 25:22-26:4, Apr. 6, 2016 [D.I. 476].


RLF1 15057724v.1 20

E. Appointment of the Equity Committee

39. On March 23, 2016, Guy Spier, the chief executive officer of Aquamarine Capital

Management LLC, filed a pro se motion [D.I. 334] seeking appointment of the Equity

Committee. On March 29, 2016, Phillip Town, another of the Debtors’ equity holders, also filed

a pro se motion [D.I. 355] seeking appointment of the Equity Committee. Subsequently, nearly

300 of the Debtors’ equity holders filed motions and joinders seeking the appointment of the

Equity Committee.

40. On May 2, 2016, the Court, upon hearing the pro se motions of Messrs. Spier and

Town, as well as statements by numerous other shareholders, entered an order [D.I. 857]

appointing an official committee of equity security holders and directing the U.S. Trustee to

appoint such committee. Based on its “experience and . . . concern of the situation here”, the

Court noted that “something doesn’t smell right” given the unexplained precipitous decline in the

value of the Debtors’ businesses and operations in a very short period leading up to these

Chapter 11 Cases. Hr’g Tr. 100:12-101:7, May 2, 2016 [D.I. 862]. The Court also observed that

“appointing a committee to be able to contest a valuation thesis is appropriate, because the entire

plan rises or falls on that valuation thesis.” Id. 101:22-101:25.

41. On May 13, 2016, the U.S. Trustee appointed seven of the Debtors’ equity

holders to serve as members of the Equity Committee.13 Shortly after its formation, the Equity

Committee selected Nastasi Partners PLLC (“NP”)14 and Richards, Layton & Finger, P.A.

(“RL&F”) to serve as its co-counsel, and SSG Capital Advisors, LLC (“SSG”) to serve as its

financial advisor. 13 The Equity Committee is presently comprised of the following members: (i) Legoix Sil/Rolnick Capital Sil; (ii) Aquamarine Capital Management; (iii) Rule One Capital; (iv) Cinco Ventures; (v) Paul L. Lavergne; (vi) Samuel J. Burrow III; and (vii) Gense (George) Hu.

14 On August 2, 2016, NP withdrew as co-counsel to the Equity Committee [D.I. 1417].


RLF1 15057724v.1 21

42. Immediately thereafter, the Equity Committee began its investigation of what, if

anything, happened to the value of the Debtors’ businesses and operations in the period leading

up to these Chapter 11 Cases. The Equity Committee first focused on prepetition document

discovery from the Debtors, the Ad Hoc Committee and Macquarie.

43. The Equity Committee soon determined that, fundamentally, the inherent value of

the Debtors’ businesses and assets had not changed; rather, the Debtors’ bankruptcy filing was

caused by a sudden liquidity crisis due to unexpected actions by Macquarie, which exacerbated

temporary issues, such as low zinc pricing that was known to be reversing itself and a delay in

the Mooresboro Facility’s operation to capacity. None of those challenges reflected any

permanent change to the inherent value of the business. The Equity Committee also learned of

possible significant third party interest in some of the Debtors’ assets (the “Prepetition Offers”),

information which was not included in the Initial Disclosure Statement. Third parties also began

to contact the Equity Committee expressing interest in the Debtors’ assets.

F. The Debtors’ Failure to Engage in a Postpetition Market Test.

44.


RLF1 15057724v.1 22

45. The message in these cases is crystal clear: once the Debtors entered into the deal

with the Ad Hoc Committee for DIP financing and the debt for equity exchange at the very

outset of these cases, they stopped there and did nothing else to determine if there were any value

enhancing alternatives to the proposed debt for equity transaction embedded in the Plan.

Remarkably, the Debtors concluded that waiting passively by the phone for it to ring is an

adequate market test:


RLF1 15057724v.1 23

Thus, the Debtors have developed a novel new defense to the

assertion that they have failed to satisfy their duty to maximize the value of these estates: the

“phone hasn’t rung” defense.

G. Disclosure Statement Hearing

i. Adjournment of Initial Disclosure Statement Hearing

46. On April 29, 2016, the Debtors filed a motion [D.I. 828] (the “Disclosure

Statement Motion”) seeking, among other things, entry of an order approving (i) the adequacy of

the information contained in the Initial Disclosure Statement and (ii) the solicitation procedures

and packages related thereto. A hearing on the Disclosure Statement Motion was scheduled for

June 3, 2016 (the “Initial Disclosure Statement Hearing”). After its appointment, the Equity

Committee reached out to the Debtors to request a brief continuance of the Disclosure Statement

Hearing. After consulting with the Ad Hoc Committee, the Debtors denied this request. On

May 23, 2016, the Equity Committee filed a motion to continue the Initial Disclosure Statement

Hearing to the June 20, 2016 omnibus hearing and a motion to expedite consideration of the

motion to continue. [D.I. 959, 960] The Court denied the motion to expedite that day [D.I. 963],

thereby effectively mooting the motion to continue.

47. On May 27, 2016, the Equity Committee objected [D.I. 971] (the “Disclosure

Statement Objection”) to the Disclosure Statement Motion. The Equity Committee contended

that the Initial Disclosure Statement lacked adequate information for a number of reasons,

including:

• The Initial Disclosure Statement failed to disclose that in December 2015, the Debtors received expressions of interest to buy a portion of their assets for approximately $455 million—almost $175 million more than the midpoint value attributed to all of the Debtors’ assets in the Initial Disclosure Statement.


RLF1 15057724v.1 24

• The Initial Disclosure Statement failed to explain how the Debtors’ supposedly lost almost 70% of their total value in less than five months.

• The Initial Disclosure Statement failed to explain the Debtors’ methodology for valuing the Mooresboro Facility—an asset in which the Debtors invested more than $550 million prepetition. The Initial Disclosure Statement also failed to explain why the alleged cost to repair the Mooresboro Facility increased by more than 42% since February 2016.

48. After it made the Equity Committee spend time and money objecting, on June 2,

2016, the Debtors (without consulting the Equity Committee) filed a notice [D.I. 1017]

adjourning the Initial Disclosure Statement Hearing to the omnibus hearing scheduled for

June 20, 2016 (the “June 20th Hearing”)—the date originally requested by the Equity

Committee.

ii. Debtors’ Exclusivity Motion and Calls for a Market Test

49. On May 27, 2016, the Debtors filed a motion [D.I. 994] (the “Exclusivity

Motion”) seeking an order extending their exclusive right to file a chapter 11 plan through and

including October 29, 2016 and to solicit votes thereon through and including December 28,

2016. The reasons cited by the Debtors for this request included the continued ability “to engage

with the Equity Committee and seek consensus if at all reasonably possible.” Exclusivity

Motion ¶ 13. In addition, the Debtors asserted that an extension of exclusivity would “provide

the Debtors with adequate time to evaluate their options and complete their restructuring

initiatives while these cases are administered as efficiently as possible for the benefit of the

Debtors’ stakeholders and other parties-in-interest.” Id. (emphasis added).

50. Heeding the Debtors’ supposed willingness to “seek consensus,” the Equity

Committee contacted the Debtors. The Equity Committee advised the Debtors that it would

consider agreeing to the relief requested in the Exclusivity Motion if an acceptable market test


RLF1 15057724v.1 25

was conducted concurrently with the extended confirmation trajectory contemplated by the

Exclusivity Motion. The Debtors rejected this proposal.

51. On June 10, 2016, the Creditors’ Committee filed its objection [D.I. 1048] (the

“Creditors’ Committee Exclusivity Objection”) to the Exclusivity Motion. Among other things,

the Creditors’ Committee argued that the “Plan constitutes an attempt by the Lenders . . . with

the cooperation and consent of the Debtors, to (i) run roughshod over the rights of unsecured

creditors without any sale or marketing process of the Debtors’ valuable assets and businesses;

and (ii) extract the substantial inherent value in the Debtors’ estates (which value is grossly

understated in the Disclosure Statement and Plan) for themselves.” Creditors’ Committee

Exclusivity Objection ¶ 2. Repeating its call for a marketing process, the Creditors’ Committee

noted that “an extension of exclusivity would hinder the ability of the [Creditors’ Committee]

and other parties in interest to run a value maximizing section 363 marketing process, something

the Lenders have refused to allow given their apparent desire to arrogate for themselves nearly

all of the significant value and future upside in the Debtors’ assets.” Id. ¶ 3.

52. On June 13, 2016, on the heels of the Debtors’ rejection of its market-test

proposal, the Equity Committee filed its preliminary objection [D.I. 1055] (the “Preliminary

Exclusivity Objection”) to the Exclusivity Motion. Among other things, the Equity

Committee stated:

• Notwithstanding compelling evidence of potential purchasers interested in acquiring some or all of their assets for consideration significantly in excess of the Debtors’ Plan valuation, the Debtors refuse to market their assets or explore third party investment, instead proposing a private sale conferring almost all of the Debtors’ value on the Ad Hoc Prepetition Lenders and wiping out equity holders.

• A properly run sale process could take approximately 90 days, thus falling within the Debtors’ exclusivity request, and could be run simultaneously with the Debtors’ plan process.


RLF1 15057724v.1 26

• Given the apparent fact that the Debtors will hit a liquidity wall at some point in the early Fall, the sales process should begin immediately, in order to allow sufficient time for an adequate process; a shorter time frame could “severely depress the number and amounts of offers submitted.”

Preliminary Exclusivity Objection ¶¶ 1-4, 27-32. Accordingly, the Equity Committee requested

either that (a) exclusivity not be extended so that the Equity Committee could propose a plan that

included a sales process or (b) if exclusivity was extended, then such extension should be

conditional on the Debtors immediately commencing a robust, transparent sales process. Id. ¶¶

31-32. The Equity Committee also filed a Declaration of J. Scott Victor [D.I. 1101] in support

of the Preliminary Exclusivity Objection.

53. On June 16, 2016, the Debtors filed an omnibus reply [D.I. 1110] (the “First

Exclusivity Reply”) to the objections filed by the Creditors’ Committee and the Equity

Committee. The Debtors called the market-test proposal “an example of asymmetric risk” that

the Debtors are unwilling to “take . . . when a viable alternative [i.e., the Initial Plan supported by

the Ad Hoc Committee] is on the table.” First Exclusivity Reply ¶ 30. Notwithstanding their

supposed concerns that a market test would cause a “risky” delay of these Chapter 11 Cases, the

Debtors requested an adjournment of the hearing on the Exclusivity Motion. Id. ¶¶ 3, 27.

Ultimately, the Court rescheduled the hearing for July 7, 2016 (the “July 7th Hearing”).

iii. Postpetition Indications of Interest and Supplemental Exclusivity Objection

54. Given the Debtors’ continued refusal to explore any marketing process

whatsoever and mounting postpetition third-party interest (the “Postpetition IOIs”) in acquiring

some or all of the Debtors’ assets, the Equity Committee filed its supplemental objection [D.I.

1199] (the “Supplemental Exclusivity Objection”) to the Exclusivity Motion, together with a

Supplemental Declaration of Mr. Victor in support [D.I. 1200], in order to bring the Postpetition

IOIs to the Court’s attention and to raise its concern that the Debtors were failing to take


RLF1 15057724v.1 27

appropriate action to determine if the Plan maximized value. As set forth in the Supplemental

Exclusivity Objection, the Postpetition IOIs suggested a TEV for the Debtors far in excess of the

valuation on which the Initial Plan was based. Id. ¶¶ 1, 13-14. Yet, despite the considerable

prepetition and postpetition third-party interest in the Debtors’ assets for prices well above

Lazard’s original midpoint valuation of $280 million, the Debtors refused to explore a market

test for their assets or to reasonably pursue any alternatives to the Plan. Id. ¶¶ 2, 12; see also id.

¶ 1 (“All of these interests were expressed even though the public understands that the Debtors

do not wish to engage in a transaction other than the one contained in the Debtors’ Plan.”).

55. The Debtors never refuted the proposition that the Postpetition IOIs could yield a

value for the Debtors’ estates far in excess of the value contemplated in the Plan.

Moreover, the Debtors’

focus on discrediting specific indications of interest missed the point. The Equity Committee

was not demanding a sale to one of those specific entities, but rather suggested that if these

companies were interested, a full market test was likely to show that others were as well.

56. Despite their months-long insistence that their fiduciary duties do not compel

them to proactively pursue alternatives to the Plan, including active pursuit of the Prepetition

Offers, Postpetition IOIs or other potentially interested parties (also, apparently, because of their

concern that such activities would violate the DIP Facility), the Debtors shifted their stance at the


RLF1 15057724v.1 28

July 7th Hearing. The Debtors agreed to revise the proposed Exclusivity Order to make it

“crystal clear [that the] Debtors will be authorized . . . to vigorously engage” with third parties

who express an interest in purchasing the Debtors’ assets or in funding a plan of reorganization

“to try to develop potentially a higher or better value proposal than what’s currently on the table

with our plan sponsors.” July 7th Hr’g Tr. 22:18-22 [D.I. 1265]. At the same time, however, the

Debtors were not authorized and certainly did not agree to start a fulsome sale and marketing

process; they simply agreed to engage with potential buyers who contacted them, through the

Equity Committee or otherwise.

* * *

57. On July 11, 2016, the Court entered an order [D.I. 1273] (the “Exclusivity

Order”) extending the Debtors’ exclusive right to file a chapter 11 plan through and including

August 30, 2016, and to solicit votes thereon through and including October 29, 2016.15 The

Exclusivity Order also authorized and directed the Debtors:

to promptly respond to, and engage with, any party . . . that expresses or has expressed an indication of interest to acquire some, all, or substantially all of the Debtors’ assets and/or to fund a plan of reorganization . . . , including any such party directed to the Debtors by the Equity Committee or its professionals . . . .

Exclusivity Order ¶ 4 (emphasis added).

15 Prior to the July 7th Hearing, the Debtors’ shortened the Proposed Filing Exclusivity Period to August 30, 2016, and shortened the Proposed Solicitation Exclusivity Period to October 29, 2016. See First Exclusivity Reply ¶ 10 n.10.


RLF1 15057724v.1 29

58. In the approximately five weeks since the entry of the Exclusivity Order, the

Equity Committee has engaged with potential purchasers. However, it has become clear to the

Equity Committee and its financial advisor, SSG, that the combination of the short time frame,

the absence of an active and affirmative sales process, the restrictions contained in the Final DIP

Order and the unique posture of the Debtors being required to entertain interest against their

apparent will, has resulted in considerably less interest than there would have been if a robust

sale process or market test had been conducted.16

H. The Plan and Second Amended Disclosure Statement

59. On July 15, 2016, the Debtors filed the Plan and their Second Amended

Disclosure Statement with respect thereto [D.I. 1310] (the “Disclosure Statement”).

60. The Plan confers substantially all of the Debtors’ TEV on the Ad Hoc Committee.

Pursuant to the Plan, the purchaser of Macquarie’s claim will receive full payment on account of

its claim, the Senior Secured Noteholders will receive their pro rata share of 93.29% of the New

Common Equity (subject to dilution) and the Unsecured Noteholders will receive their pro rata

share of 6.71% of the New Common Equity (also subject to dilution). Plan Art. III.

16 More than 5 weeks after the July 7 hearing, the Debtors paid lip service to a marketing process by filing a process letter with the Court. [D.I. 1455]. At this point, barely two weeks remained before the confirmation hearing.


RLF1 15057724v.1 30

62.


RLF1 15057724v.1 31

63.

64.

17


RLF1 15057724v.1 32


RLF1 15057724v.1 33

65.


RLF1 15057724v.1 34

66. As of the filing of this objection, the Equity Committee has not yet taken the

depositions of the Debtors’ fact and expert witnesses, which will occur later this week.

Additionally, the Equity Committee only recently received the Debtors’ (and, remarkably, the

Creditors Committee’s) expert rebuttal reports, and the Debtors’ so-called “sale process” is

ongoing. Prior to the confirmation hearing, the Equity Committee expects to file a supplemental

objection to address these issues, and the Equity Committee reserves the right to have SSG

address them at the confirmation hearing.

ARGUMENT

67. Plan proponents bear the burden of proving to the Court that a proposed plan

satisfies all applicable confirmation requirements under sections 1129(a) and (b) of the

Bankruptcy Code. See In re Exide Techs., 303 B.R. 48, 58 (Bankr. D. Del. 2003); In re Greate

Bay Hotel & Casino, Inc., 251 B.R. 213, 221 (Bankr. D.N.J. 2000). This burden is a heavy one,

and requires careful consideration of each of the relevant inquiries articulated by section 1129 of

the Bankruptcy Code. See In re Vita Corp., 380 B.R. 525, 528 (C.D. Ill. 2008) (citation

omitted). This is especially so where, as here, a debtor acts as the plan proponent. See, e.g.,

Everett v. Perez (In re Perez), 30 F.3d 1209, 1214 n.5 (9th Cir. 1994) (“The burden of proposing

a plan that satisfies the requirements of the Code always falls on the party proposing it, but it

falls particularly heavily on the debtor-in-possession or trustee since they stand in the fiduciary

relationship to the estate’s creditors.”).

68. In a case such as this one, in which impaired classes (Classes 9 (for each Debtor),

10 (for each Debtor), 11 (for each Debtor other than Horsehead Holding) and 12 (for each


RLF1 15057724v.1 35

Debtor)) have rejected the Plan, “[t]he plan proponent must also show that the plan meets the

additional requirements of § 1129(b), including the requirements that the plan does not unfairly

discriminate against dissenting classes and the treatment of dissenting classes is fair and

equitable.” See Exide Techs., 303 B.R. at 58; Greate Bay Hotel, 251 B.R. at 221 (“A

nonconsensual plan requires the proponent to prove all but one of the thirteen elements [of

Bankruptcy Code Section 1129(a)], that all classes consent or are unimpaired, 11 U.S.C.

§ 1129(a)(8), plus the additional requirements of section 1129(b), that the plan does not unfairly

discriminate against dissenting classes and that treatment of such dissenting classes is fair and

equitable.”).

69. As discussed herein, the Debtors cannot meet this burden. Accordingly, the Court

should not approve the Plan.

I. THE PLAN CANNOT BE CONFIRMED BECAUSE THE DEBTORS DID NOT SATISFY THEIR DUTY TO MAXIMIZE THE VALUE OF THEIR ESTATES.

70. To be confirmed, a plan of reorganization must be “proposed in good faith and

not by any means forbidden by law.” 11 U.S.C. § 1129(a)(3). “The good faith standard requires

that the plan be ‘proposed with honesty, good intentions and [with] a basis for expecting that a

reorganization can be effected with results consistent with the objectives and purposes of the

Bankruptcy Code.’” In re Coram Healthcare Corp., 271 B.R. 228, 234 (Bankr. D. Del. 2001)

(quoting In re Zenith Elecs. Corp., 241 B.R. 92, 107 (Bankr. D. Del. 1999)). Courts consider the

totality of circumstances in assessing good faith, “‘with the most important feature being an

inquiry into the fundamental fairness of the plan.’” Coram, 271 B.R. at 234 (quoting In re Am.

Family Enters., 256 B.R. 377, 401 (D.N.J. 2000)).


RLF1 15057724v.1 36

A. A Debtor-In-Possession Owes a Fiduciary Duty to Maximize the Value of the Estate.

71. Bankruptcy law imposes on a debtor-in-possession a fiduciary duty to maximize

the value of the estate for the benefit of its creditors and shareholders. See Commodity Futures

Trading Comm’n v. Weintraub, 471 U.S. 343, 352-55 (1985) (observing that “[t]he trustee . . .

has the duty to maximize the value of the estate” and that “if a debtor remains in possession . . .

the debtor’s directors bear essentially the same fiduciary obligation to creditors and shareholders

as would the trustee”); Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery,

330 F.3d 548, 573 (3d Cir. 2003) (“[T]he debtor-in-possession, i.e., the debtor’s management,

enjoys the powers that would otherwise vest in the bankruptcy trustee. Along with those powers,

of course, comes the trustee’s fiduciary duty to maximize the value of the bankruptcy estate.”).

72. As a long line of no shop and “window shop” cases illustrates, a debtor-in-

possession’s decision to close itself off to competing offers for its business violates the fiduciary

duty to maximize the value of the estate. See, e.g., In re Los Angeles Dodgers LLC, 468 B.R.

652, 660 (Bankr. D. Del. 2011) (declining to enforce “no-shop” provision because it inhibited an

active marketing process for the debtor’s assets and would therefore “prevent the exercise of the

fiduciary duty to maximize value”); In re Big Rivers Elec. Corp., 233 B.R. 726, 735 (Bankr.

W.D. Ky. 1998) (same); In re Bidermann Indus. U.S.A., Inc., 203 B.R. 547, 552 (Bankr.

S.D.N.Y. 1997) (referring to “window shop” provision as “window-dressing” and finding it to be

insufficient to allow the debtors to seek to obtain the best price).

73. Here, the UPA initially contained a “window shop” restriction. See Debtors’

Reply Supp. Obj. Equity Comm. Mot. Extend. Exclusive Periods ¶ 15, 18 (Bankr. D. Del. July 5,

2016) [D.I. 1216] (“The Debtors have built consensus ‘from the top down’ in their capital

structure, locking in support first from their secured creditors . . . . That draft UPA, in turn,


RLF1 15057724v.1 37

currently provides for a ‘window shop’ provision that precludes the Debtors from independently

soliciting third party interest . . .”). While it ultimately was removed as a technical matter

following the July 7, 2016 hearing on their exclusivity motion, nothing actually changed because

the Debtors continued to act in conformity with such restrictions throughout these cases. This

reduced the likelihood of any competing higher and better offers coming in to challenge the debt

for equity transaction embedded in the Plan. The Debtors have remained steadfast in their

unwillingness to competitively shop this transaction to third parties investors or buyers.

B. Under Delaware Law, Fiduciary Duties are Heightened in the Context of a Change of Corporate Control Transaction.

74. Where the debtor-in-possession is a Delaware corporation, those who control it

must also satisfy Delaware fiduciary duties in order to obtain confirmation of the plan of

reorganization. See Zenith, 241 B.R. at 108 (“[T]he Equity Committee . . . argue[s] . . . that the

Plan . . . must meet the standards for approval of such a transaction under Delaware corporate

law. We agree that section 1129(a)(3) does incorporate Delaware law (as well as any other

applicable nonbankruptcy law.”), declined to follow in irrelevant part by In re W.R. Grace &

Co., 475 B.R. 34 (D. Del. 2012)). A plan lacks good faith, and cannot be confirmed, if the

debtor-in-possession’s board has not satisfied its fiduciary obligations in formulating plan

transactions. Id..

75. The duties of care and loyalty are the fundamental duties of the board of directors

of a Delaware corporation. See, e.g., Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del.

1993). To satisfy the duty of care, it is incumbent on the board to take affirmative steps to elicit

sufficient facts to make an informed business decision about the matter at hand. Paramount

Commc’ns Inc. v. QVC Network, Inc., 637 A.2d 34, 48 (Del. 1994) (“[T]he directors had the

obligation . . . to obtain and act with due care on, all material information reasonably available,


RLF1 15057724v.1 38

including information necessary to compare the two offers to determine which of these

transactions, or an alternative course of action, would provide the best value reasonably available

to the stockholders.”). Directors owe these duties to stockholders and to the corporation. See N.

Am. Catholic Educ. Progr. Found., Inc. v. Gheewalla, 930 A.2d 92, 99 (Del. 2007). Even upon

insolvency, such duties do not “shift”; they continue to be owed to the stockholders and to the

company. Id. at 99-100.

76. Directors must be especially vigilant in agreeing to a “corporate control

transaction”—i.e., a transaction where control of the corporation changes hands, such as the one

put forth in the Plan. In such a situation, the board must “act with scrupulous concern for

fairness to shareholders.” Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989). The

board’s fiduciary duties upon a change of control will have a singular focus: to maximize value.

See, e.g., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986)

(board of directors’ duty is “the maximization of the company’s value at a sale for the

stockholders’ benefit”); Paramount Commuc’ns, 637 A.2d at 44 (in change of control

transaction, “directors must focus on one primary objective—to secure the transaction offering

the best value reasonably available for the stockholders—and they must exercise their fiduciary

duties to further that end”); Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1288 (Del.

1989) (in a change of control transaction, “the responsibility of the directors is to get the highest

value reasonably attainable for the shareholders”). In attempting to reach this goal, the board

must “act in a fully informed manner, and in good faith, to obtain the best deal available.”

Koehler v. NetSpend Holdings Inc., No. CIV.A. 8373-VCG, 2013 WL 2181518, at *10 (Del. Ch.

May 21, 2013).


RLF1 15057724v.1 39

77. Because directors must act in a fully informed manner to obtain the best deal

reasonably available, Delaware law requires them to be proactive, rather than passive, in

assessing the adequacy of a transaction involving a change in control of the company. Barkan,

567 A.2d at 1288 (“The situations in which a completely passive approach to acquiring such

knowledge is appropriate are limited.”). In most cases, this requires directors to test the market

for better offers. See id. (noting that where there is a single bidder and no reliable grounds to

gauge adequacy, the “concern for fairness demands a canvas of the market to determine if higher

bids may be elicited”).

C. The Debtors Chose a Plan that Satisfied their Secured Lenders and Provided an Expeditious Exit from Chapter 11—and Stopped There.

78. Despite the affirmative duties imposed under bankruptcy law and Delaware law,

the Debtors never attempted postpetition to better the transaction that was offered to them by the

Ad Hoc Committee. It certainly is true that at the time the Ad Hoc Committee’s offer to provide

postpetition financing was accepted by the Debtors, the Debtors were in a liquidity crisis, unsure

of how they were going to make payroll and struggling to keep going concern values alive.

However, this offer of postpetition financing went further than just providing a lifeline to this

struggling company—it was a loan-to own strategy. It was inextricably linked to a debt for

equity exchange transaction that confers the lion’s share of the Debtors’ value (and almost all of

the upside potential) on members of the Ad Hoc Committee (the majority of whom just recently

bought the debt), and to assure that the Debtors could not change course, it even provided that it

would go into default if the Debtors attempted to pursue a value-maximizing alternative

transaction. From and after the Petition Date, the Debtors adopted a passive posture and refused

to market their assets or seek third party investment. Indeed, while deadlines were extended, the

Plan has remained essentially unchanged through the life of these Chapter 11 Cases, other than


RLF1 15057724v.1 40

the settlement providing an increased distribution to unsecured creditors. See Second

Exclusivity Reply ¶ 15 (explaining that after first “locking in” support for the Plan from the Ad

Hoc Committee, the Debtors’ only further step was to negotiate an increase to unsecured

creditors).

79. When the Equity Committee asked the Debtors why they had not pursued other

offers, the Debtors explained that their “telephones had not rung”—i.e., no interested parties had

called their professionals. That passivity is rarely permitted, Barkan, 567 A.2d at 1286, and this

case certainly is not one for an exception. The Debtors’ failure to look beyond members of the

Ad Hoc Committee is insufficient given known third-party interest in purchasing their assets. In

April 2016, the Debtors estimated their total enterprise value to be approximately $280 million.

See D.I. 744-3 at 1. Yet just five months earlier, when zinc prices were at historic lows (from

which they have now recovered), third parties made preliminary offers and/or expressions of

interest to purchase some of the Debtors’ assets for more than $450 million—a sum 1-1/2 times

greater than the Debtors’ initial valuation of all of their assets.

80. Third-party expressions of interest continued after the Petition Date. Indeed, the

Equity Committee became aware of, and informed the Debtors of,

of interest in purchasing some or all of the Debtors assets. See Supplemental Exclusivity

Objection ¶ 13.

81. Rather than proactively exploring these third party expressions of interest and

searching for other interested parties, the Debtors all but dismissed them outright,

The Debtors’ message was clear—because

the secured lenders were satisfied, they would not bother to affirmatively explore alternatives (as


RLF1 15057724v.1 41

doing so would also violate the DIP Facility with the Ad Hoc Committee), even though those

alternatives could substantially improve recoveries to the bankruptcy estates.

D. By Refusing to Canvass the Market, the Debtors Failed to Act with the “Scrupulous Concern” Required for Corporate Control Transactions.

82. By failing to canvass the market both before and after agreeing to transfer control

of the Debtors through the Plan, the Debtors failed to act with the “scrupulous concern” required

of Delaware corporations, and failed to gather all reasonable facts necessary to make such a

fundamental business decision. At the very outset of these cases, the Debtors decided to pursue

exclusively the transaction with the Ad Hoc Committee members (as required by the DIP

Facility). That decision, made in January or February, was made well before the Debtors

received Lazard’s full valuation report in April.

83. The subsequent receipt of the Lazard Valuation does nothing to remedy the

problem here because the Debtors wholly ignored strong evidence, including substantial letters

of interest, indicating that the market may be willing to offer a significantly higher price than

would be achieved by transferring control of the company to Ad Hoc Committee members. See,

e.g., Paramount Commc’ns, 637 A.2d at 48-49 (observing that the board breaches its fiduciary

duty in approving change of control transaction while failing to critically evaluate competing

offers, and noting that once the directors had decided to sell control “they had an obligation to

continue their search for the best value reasonably available to the stockholders”).

84. Although a board sometimes may rely on the advice of a financial advisor in

approving a corporate control transaction, “the circumstances in which this passive approach is

acceptable are limited.” Barkan, 567 A.2d at 1287. As the Delaware Supreme Court has noted,

a “decent respect for reality forces one to admit that . . . advice of an investment banker is

frequently a pale substitute for the dependable information that a canvas of the relevant market


RLF1 15057724v.1 42

can provide.” Id. (internal marks omitted). For the most part, singular reliance on financial

advice is only sufficient where the board has clear evidence that no rival bids are likely to

emerge. Id. at 1287-88; see also In re Smurfit-Stone Container Corp. S’holder Litig., No.

CIV.A. 6164-VCP, 2011 WL 2028076, at *18 (Del. Ch. May 20, 2011), as revised (May 24,

2011) (board’s failure to conduct market check excused by the fact that after a year and a half in

bankruptcy, concrete alternatives had not materialized).

85. Here, since the Debtors have declined to perform a market check, presumably

they are relying exclusively on the valuation advice provided by Lazard. But unlike in Barkan

and Smurfit-Stone, the evidence is that the Ad Hoc Committee would not have been the sole

bidder interested in purchasing the companies had a fulsome process been run. The Debtors

received numerous unsolicited expressions of interest for their assets immediately before filing

their bankruptcy petitions, and evidence of more unsolicited expressions of interest

after filing their bankruptcy petitions.

86. A simple market test would have provided the Debtors with the information

needed to act on an informed basis in obtaining the best offer reasonably available. See In re

Fort Howard Corp. S’holders Litig., No. CIV.A 9991, 1988 WL 83147 at *13 (Del. Ch. Aug. 8,

1988); see also Loral Space, 2008 WL 4293781 at *23 (failing to perform market check and

remaining passive insufficient). Yet despite the Equity Committee’s consistent prompting, see

Docket Nos. 971, 1055, 1201, the Debtors steadfastly refused to perform a simple canvass of the


RLF1 15057724v.1 43

market.18 As a result, the Debtors have failed to “act in a fully informed manner, and in good

faith, to obtain the best deal available” in approving the Plan’s proposed change of control

transaction. Koehler, 2013 WL 2181518 at *10.

E. Recently Talking With Bidders Brought to the Table By the Equity Committee Does Not Solve the Problem.

87. Undoubtedly, the Debtors will argue that all of this is now moot because, at the

exclusivity hearing, the Debtors ultimately changed gears and agreed to engage actively with

parties brought to the table by the Equity Committee. Depending on how the facts play out over

the next week, the Debtors also may argue that no party made a binding offer. Any such

arguments would be misplaced. The Equity Committee will show at the confirmation hearing,

through expert testimony of J. Scott Victor of SSG, that bids were impaired because bidders

were not given a reasonable framework and time period in which to bid. No bid procedures were

entered, so bidders did not know a timetable or any rules other than that this “process” was

rushed and that the Debtors were unwilling participants in it.

Simply put, the Debtors’ belated and begrudging agreement to engage

18 The Debtors may argue that this Court’s rulings in American Apparel and the Smurfit-Stone Delaware Court of Chancery case (the “Smurfit Chancery Case”) excuse their refusal to engage in a marketing process. See Second Exclusivity Reply ¶ 9. However, these cases are easily distinguishable.

Unlike here, in In re Am. Apparel, No. 15-12055 (BLS) (Bankr. D. Del. Jan. 25, 2016) [D.I. 686] the bankruptcy court determined that the debtors’ failure to engage in a marketing test was irrelevant because the valuation report showing equity holders as “out of the money, and . . . not entitled to receive any distribution under the plan” was “admitted without objection.” See id. at 9:1-9. In other words, by failing to rebut the valuation report, equity holders assented to the debtors’ failure to market their assets.

In the Smurfit Chancery Case, the court held that the company’s board of directors “had a sufficient body of reliable information” upon which to assess the bona fides of a change of control transaction before entering into it precisely because the board ran a full marketing process prior to—and during—the earlier bankruptcy case. Smurfit-Stone S’holder Litig., No. CIV.A. 6164-VCP, 2011 WL 2028076, at *18-19 (noting that the board attempted to persuade the acquiring entity to improve its offer, that a special committee was previously formed to evaluate earlier offers from another entity and that no concrete bid materialized during the nearly 18-months-long bankruptcy case).


RLF1 15057724v.1 44

fully with unsolicited bidders—i.e., to answer their phone call—is not an adequate substitute for

an affirmative and active market test.

F. The Debtors’ Failure to Satisfy their Fiduciary Duties Renders the Plan Unconfirmable Under Bankruptcy Code Section 1129(a)(3).

88. As described more fully above, a plan of reorganization must be “proposed in

good faith and not by any means forbidden by law.” 11 U.S.C. § 1129(a)(3). A debtor’s failure

to satisfy its fiduciary duties precludes confirmation under Section 1129(a)(3). Coram, 271 B.R.

at 234. The Debtors’ failure to satisfy their fiduciary duties is two-fold. First, by settling on the

first “offer” for the enterprise, one that undervalues the companies by at least half and precludes

active development and consideration of competing proposals, the Debtors failed in their

obligation as estate fiduciaries to maximize value for all stakeholders. Second, by approving a

corporate control transaction here without canvassing the market (either prepetition or

postpetition), the Debtors breached their heightened fiduciary obligations under Delaware law.

Accordingly, the Equity Committee respectfully submits that section 1129(a)(3) precludes

confirmation of the Plan.

II. THE PLAN SHOULD NOT BE CONFIRMED BECAUSE ITS ALLOCATION OF EQUITY HOLDER VALUE TO THE NOTEHOLDERS IS NOT FAIR AND EQUITABLE

89. Because equity is being cancelled under the Plan for no consideration, equity is

deemed to reject the Plan. In a non-consensual case such as this one, section 1129(b)(1) of the

Bankruptcy Code provides that if all confirmation requirements of section 1129(a) other than

section 1129(a)(8) are met, then the court “shall confirm the plan notwithstanding . . . if the plan

does not discriminate unfairly, and is fair and equitable” with respect to each non-accepting,

impaired class of claims. 11 U.S.C. § 1129(b)(1). Section 1129(b)(2)(C), in turn, describes how

a plan may be “fair and equitable” to a class of impaired, non-accepting equity interests. 11


RLF1 15057724v.1 45

U.S.C. § 1129(b)(2)(C). The “fair and equitable” standard “can be seen to have at least two key

components: the absolute priority rule; and the rule that no creditor be paid more than it is

owed.” 7 Collier on Bankruptcy ¶ 1129.03[4][a].

90. The second foundational component of the “fair and equitable” requirement—that

no creditor may be paid more than it is owed—may be briefly summarized: “[o]nce the

participant receives or retains property equal to its claim, it may receive no more.” 7 Collier on

Bankruptcy ¶ 1129.03[4][a][ii]. Put differently, no claim or interest holder may be paid a

“premium” in excess of the allowed amount of its claim. Id. For this reason, a plan that

proposes to pay senior creditors value in excess of their allowed claim amounts is not “fair and

equitable” under section 1129(b)(2)(C) and may not be confirmed. See Exide Techs., 303 B.R.

38 at 61 (denying confirmation of plan that afforded secured lenders value in excess of the

amount of their claims); In re Genesis Health Ventures, Inc., 266 B.R. 591, 612 (Bankr. D. Del.

2011) (“A corollary of the absolute priority rule is that a senior class cannot receive more than

100 percent of the amount of its claims.”)

91. As Plan proponent, it is the Debtors’ burden to prove that the Plan does not afford

any Class value in excess of the amount of its claim. See, e.g., In re Armstrong World Indus.,

348 B.R. 111, 120 & n. 14 (D. Del. 2006) (plan proponent must establish by preponderance of

the evidence the satisfaction of requirements of both Bankruptcy Code sections 1129(a) and

1129(b)); 7 Collier on Bankruptcy ¶ 1129.02[4] (“If nonconsensual confirmation is sought, the

proponent of such a plan will have to satisfy the court that the requirements of section 1129(b)

are also met. In either situation, the plan proponent bears the burden of proof by a

preponderance of the evidence.”). “A valuation of the debtor’s business is, by virtue of the

statutory language, almost a prerequisite to a determination that a plan satisfies the fair and


RLF1 15057724v.1 46

equitable test of § 1129(b).” In re Johns-Manville Corp., 68 B.R. 618, 636 (Bankr. S.D.N.Y.

1986); see also Exide Techs., 303 B.R. at 60-61 (“A determination of [a] Debtor’s value directly

impacts the issues of whether the proposed plan is ‘fair and equitable,’ as required by 11 U.S.C.

§ 1129(b).”);

92. As discussed more fully below, the Debtors cannot carry their burden of proof. In

effect, the Plan transfers nearly all of the equity of the Reorganized Debtors—with an enterprise

value potentially upwards of $850 million—to the Ad Hoc Committee members, even though

their claims have an allowed amount of only $335 million (the total of the DIP Facility, Secured

Notes Claims and Unsecured Notes Claims). In so doing, the Plan overcompensates the Ad Hoc

Committee members and deprives the equity holders of their rightful allocation of estate value.

Such treatment is antithetical to the Bankruptcy Code’s “fair and equitable” requirement. The

Plan therefore cannot be confirmed.

93. The Plan violates the absolute priority rule by over-paying the Ad Hoc Committee

members.


RLF1 15057724v.1 47

94.


RLF1 15057724v.1 48

95. It is a fundamental principle of valuation theory that reliance on stale projections

renders a valuation unreliable. See, e.g., Tronox Inc. v. Kerr McGee Corp. (In re Tronox Inc.),

503 B.R. 239, 316-17 (Bankr. S.D.N.Y. 2013) (rejecting use of projections based on outdated

data and management projections that had not been subjected to reasonable analyses); see also In

re PNB Holding Co. S’holders Litig., CIV.A. 28-N, 2006 WL 2403999, at *16 (Del. Ch. Aug.

18, 2006) (“I conclude that the Criswell Projections were stale by 2003 and no longer provided

reliable information bearing on the future prospects of PNB.”).

96.


RLF1 15057724v.1 49

97.


RLF1 15057724v.1 50

98.


RLF1 15057724v.1 51

99.

100.


RLF1 15057724v.1 52

101.

102.


RLF1 15057724v.1 53

103.

104.


RLF1 15057724v.1 54

* * *

105.


RLF1 15057724v.1 55

C. The Plan— Violates the Absolute Priority Rule and Therefore Is Not Fair and Equitable.

106. In view of the foregoing, the Plan provides value to the Ad Hoc Committee well

in excess of their $335 million Allowed Claims. This lopsided value transfer violates the

“absolute priority rule” and therefore renders the Plan not “fair and equitable” under Section

1129(b)(1) of the Bankruptcy Code.

107. The Plan, in fact, does exactly what the corollary of the absolute priority rule

proscribes: it pays senior classes (Class 4 Secured Notes Claims) more than full compensation

for their claims. See Exide Techs., 303 B.R. at 61. In effect, the Plan hands an enterprise (the

Reorganized Debtors) with a midpoint TEV of $821.7 million to the Ad Hoc Committee on

account of $335 million of Allowed Claims. In other words, the Ad Hoc Committee members

are paid a $486.7 million premium over their Allowed Claims.20 In this respect, these Cases are

analogous to In re Exide Techs., in which this Court denied confirmation of a plan that similarly

20 The excess value provided to the Ad Hoc Committee under the Plan equals the difference between (i) the Reorganized Debtors’ midpoint TEV of $821.7 million and (ii) the Estimated Allowed Claims of the DIP Facility, Secured Notes Claims and the Unsecured Notes Claims.


RLF1 15057724v.1 56

sought to transfer all of the debtor’s reorganized equity to its prepetition lenders. See 303 B.R. at

80. In Exide, the debtor’s investment banker argued that the debtor’s TEV was between $950.0

million and $1.050 billion. Id. at 59. Because the debtor’s funded debt hurdle was $1.285

billion, the debtor argued that its unsecured creditors were out of the money and proposed to

hand the lion’s share of the company’s reorganized equity to its prepetition lenders and secured

noteholders. Id. at 55. Unsecured creditors were stuck with a de minimis cash pool

corresponding to a projected recovery of 1.4%. Id.

108. However, after identifying several flaws in the debtors’ valuation analysis, the

creditors’ committee argued successfully that the accurate TEV for the company was closer to

$1.5 billion-1.7 billion. Id. at 66. The Court agreed with the committee that “the Plan

undervalue[d] the Debtors; therefore, there may be sufficient value to pay the Prepetition

Lenders’ claims in full.” Id. at 77. Accordingly, the Court found that the plan was not fair and

equitable to the debtor’s unsecured creditors, and therefore could not be confirmed. Id.

109. The facts of this case demand a result similar to Exide. See 303 B.R. at 61. By

lining the pockets of the Ad Hoc Committee at the expense of equity holders (and general

unsecured creditors), the Plan violates the corollary to the absolute priority rule. See Genesis

Health, 266 B.R. at 621; In re MCorp. Fin., Inc., 137 B.R. 219, 234-35 (Bankr. S.D. Tex. 1992).

Plan confirmation must therefore be denied. See In re Exide Techs., 303 B.R. at 61.

III. THE PLAN VIOLATES SECTION 1129(A)(3) OF THE BANKRUPTCY CODE BECAUSE IT CONTAINS INACCURATE DISCLOSURES ABOUT VALUATION

110. The Plan fails to satisfy section 1129(a)(3) because the Debtors have put forth an

inaccurate and deficient Disclosure Statement, thereby neglecting their duty to provide all the

relevant information to their constituents before voting on the Plan. Indeed, had the disclosures

about valuation been accurate, it is difficult to imagine that unsecured creditors would have


RLF1 15057724v.1 57

voted for the Plan, since it does not provide them with sufficient value. The Equity Committee

urged the Debtors to address this issue at the time of the Disclosure Statement Hearing. The

Debtors declined even to produce the Lazard Valuation at the time and argued that this is only a

confirmation issue. Having punted at that time, they now are in a position of having solicited

votes on the premise that the Debtors are worth half of their real value. Those votes thus are

tainted. “Where . . . information is uncovered that reveals that the disclosure statement was

materially inadequate, it cannot be found that § 1125 was complied with or that the good faith

requirement [under § 1129(a)(3)] was satisfied. In re Prudential Energy Co., 59 B.R. 765, 768

(Bankr. S.D.N.Y. 1986).

111. Section 1125(a)(1) of the Bankruptcy Code defines “adequate information” as:

information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor’s books and records, including a discussion of the potential material Federal tax consequences of the plan to the debtor, any successor to the debtor, and a hypothetical investor typical of the holders of claims or interests in the case, that would enable such a hypothetical investor of the relevant class to make an informed judgment about the plan.

11 U.S.C. § 1125(a)(1).

112. Accordingly, a debtor’s disclosure statement must provide sufficient information

to permit an informed judgment by impaired creditors entitled to vote on the plan. See, e.g.,

Century Glove, Inc. v. First Am. Bank of N.Y., 860 F.2d 94, 100 (3d Cir. 1988) (“[Section] 1125

seeks to guarantee a minimum amount of information to the creditor asked for its vote.”); In re

Phoenix Petroleum Co., 278 B.R. 385, 392 (Bankr. E.D. Pa. 2001) (“[T]he general purpose of

the disclosure statement is to . . . enable ‘impaired’ classes of creditors and interest holders to

make an informed judgment about the proposed plan and determine whether to vote in favor of

or against that plan.”). The essential requirement of a disclosure statement is that it “clearly and


RLF1 15057724v.1 58

succinctly inform the average unsecured creditor what it is going to get, when it is going to get it,

and what contingencies there are to getting its distribution.” In re Keisler, No. 08-34321, 2009

WL 1851413, at *4 (Bankr. E.D. Tenn. June 29, 2009) (quoting In re Ferretti, 128 B.R. 16, 19

(Bankr. D.N.H. 1991)).

113. In determining whether a disclosure statement contains adequate information, one

of the factors that a court should examine includes financial information, valuation or pro forma

projections that would be relevant to a creditors’ determination of whether to accept or reject the

plan. See, e.g., In re Scioto Valley Mortg. Co., 88 B.R. 168, 170-71 (Bankr. S.D. Ohio 1988).

As set forth above, the Debtors’ valuation, the basis for the recoveries provided to creditors

under the Plan, is fundamentally flawed. The valuation contains a number of material errors that

severely understates the value of the Reorganized Debtors. In understating such value, the

Debtors attempt to justify the transfer of nearly 100% of equity value of the Reorganized Debtors

to the Ad Hoc Committee members, in excess of their Allowed Claims. Accordingly, because

the valuation contained in the Disclosure Statement contains such material errors, creditors and

other stakeholders were not provided adequate information to make an informed determination

of whether to accept or reject the Plan. As a result of the failure to provide accurate information

in the Disclosure Statement, confirmation must be denied.21 See In re Prudential Energy Co., 59

B.R. at 768; In re Crowthers McCall Pattern, Inc., 120 B.R. 279, 299-301 (Bankr. S.D.N.Y.

1990) (finding that the plan must be re-solicited because the disclosure statement contained

inadequate information in the liquidation analysis).

21 Because the Disclosure Statement does not contain “adequate information” pursuant to Section 1125 of the Bankruptcy Code, the Debtors have further failed to satisfy Section 1129(a)(1) of the Bankruptcy Code, which requires that “[t]the plan compl[y] with the applicable provisions of this title,” and Section 1129(a) of the Bankruptcy Code, which requires that “[t]he proponent of the plan compl[y] with the applicable provisions of this title.” 11 U.S.C. §§ 1125, 1129(a)(1), 1129(a)(2).

