GAP Ad Hoc Objection

8/8/2019 GAP Ad Hoc Objection

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BROWN RUDNICK LLP

Edward S. Weisfelner, Esq.Daniel J. Saval, Esq.Seven Times SquareNew York, NY 10036

Telephone: (212) 209-4800Facsimile: (212) 209-4801

- and -

Andrew P. Strehle, Esq.One Financial CenterBoston, MA 02111Telephone: (617) 856-8200Facsimile: (617) 856-8201

Counsel to the Ad Hoc Consortium of Certain Holders ofA&P 11 3/8% Senior Secured Notes

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

__________________________________________)

In re: ) Chapter 11)

THE GREAT ATLANTIC & PACIFIC TEA ) Case No. 10-24549 (RDD)COMPANY, INC., et al. )

) (Jointly Administered)

Debtors. )_________________________________________)

LIMITED OBJECTION OF THE AD HOC CONSORTIUM OF CERTAIN HOLDERS

OF A&P 11 3/8% SENIOR SECURED NOTES TO THE DEBTORS MOTION FOR

ENTRY OF INTERIM AND FINAL ORDERS (I) AUTHORIZING THE DEBTORS (A)

TO OBTAIN POST-PETITION FINANCING PURSUANT TO 11 U.S.C. 105, 361, 362,

364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1) AND 364(e) AND (B) TO UTILIZE CASH

COLLATERAL PURSUANT TO 11 U.S.C. 361, 362, 363, AND 364;

AND (II) SCHEDULING A FINAL HEARING PURSUANT TOBANKRUPTCY RULES 4001(b) AND (c)

1024549110104000000000001

Docket #0308 Date Filed: 1/4/20


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The ad hoc consortium (the Secured Noteholder Consortium)1 of holders of

approximately 44% of the outstanding 11 3/8% senior secured notes (the Secured Notes)

issued by The Great Atlantic & Pacific Tea Company, Inc. (A&P), by and through its

undersigned counsel, Brown Rudnick LLP, hereby submits this limited objection (the Limited

Objection) to the Debtors Motion for Entry of Interim and Final Orders (I) Authorizing the

Debtors (A) to Obtain Post-Petition Financing Pursuant to 11 U.S.C. 105, 361, 362, 364(c)(1),

364(c)(2), 364(c)(3), 364(d)(1) and 364(e) and (B) to Utilize Cash Collateral Pursuant to 11

U.S.C. 361, 362, 363, and 364 and (II) Scheduling a Final Hearing Pursuant to Bankruptcy

Rules 4001(b) and (c) (the DIP Motion).

2

In support of its Limited Objection, the Secured

Noteholder Consortium respectfully represents as follows:

PRELIMINARY STATEMENT

1. As of the Petition Date, the Secured Noteholders (as defined below) had a valid

and perfected lien which was junior to only $331.7 million of first lien priority debt that has

now been fully repaid on substantially all of the Debtors assets save a number of leasehold

interests and Principal Properties (as defined in the Pre-Petition Credit Agreement). The Debtors

seek to prime the Secured Noteholders collateral position at the outset of these chapter 11 cases

by entering into the $800 million priming DIP Financing. Given the terms of the DIP

Documents and the DIP Orders, the Secured Noteholders instead of being junior to only $331.7

1 The members of the Secured Noteholder Consortium are those entities listed on Exhibit A to theVerified Statement of Brown Rudnick LLP Pursuant to Bankruptcy Rule 2019(a), filedcontemporaneously herewith. As of the date hereof, the Secured Noteholder Consortium iscomprised of institutions holding $113,816,000 million of the outstanding Secured Notes, or43.8% of the outstanding issue.

2 Capitalized terms used hereunder and not defined herein shall have the meanings ascribed to themin the DIP Orders, DIP Motion, or as otherwise provided herein.


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million3 of debt secured by senior liens will now be junior to as much as $950.5 million4 of debt

secured by senior liens. Separate and apart from this priming, the Debtors seek, through the DIP

Documents and DIP Orders, to (i) impair the rights of Secured Noteholders to participate in these

chapter 11 cases and (ii) restrict the rights and remedies held by Secured Noteholders. In light of

the potential for material diminution in the value of their secured interest, the Secured

Noteholders are entitled to adequate protection capable of compensating them for this loss.

Otherwise, the priming lien and restrictions on the exercise of their rights and remedies will

violate the Secured Noteholders constitutionally protected property interests.

2. The Debtors have failed to carry their heavy burden of demonstrating that the

protection they propose in connection with the priming DIP Financing provides adequate

assurance that the Secured Noteholders will be compensated for the diminution in the value of

their secured interest. The proposed adequate protection consists only of (i) a junior lien on the

Unencumbered Collateral (which the Debtors represent consists of almost exclusively a number

of previously unencumbered leaseholds,5

and as to which the Debtors fail to provide any

indication of value); (ii) junior replacement liens on the Pre-Petition Collateral (to which the

Secured Noteholders would already be entitled under Bankruptcy Code Section 552(b) without

its inclusion in the DIP Orders); and (iii) a junior Bankruptcy Code Section 507(b) superpriority

claim (to which the Secured Noteholders would already be entitled without its inclusion in the

3 The figure $331.7 million is equal to the sum of $38 million under the ABL facility, $97.5 million

under the term facility, and $196.2 million in letters of credit, as described in the Declaration OfFrederic F. Brace (A) In Support Of Chapter 11 Petitions and First Day Pleadings and (B)Pursuant To Local Rule 1007-2, at 27-28.

4 The figure $950.5 million is equal to the sum of $331.7 million (described in the footnote above), plus the $800 million DIP Financing, plus the $15 million Carve Out, less $196.2 million inletters of credit (to avoid double-counting them as they would otherwise arguably be includedin both the $331.7 million figure as well as the $800 million figure).

5 See Declaration of Stephen Goldstein In Support of DIP Financing, at 21.


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DIP Orders).

3. To be clear, the Secured Noteholder Consortium is not objecting to the need for

post-petition financing for the Debtors continued business operations during these chapter 11

cases. The Secured Noteholder Consortium submits this Limited Objection to ensure adequate

protection of their secured interest and to prevent the restriction of rights and remedies in these

chapter 11 cases such adequate protection and rights indeed do not conflict with the proposed

DIP Financing, they merely ensure the Secured Noteholders will retain their secured interest and

rights as measured on the Petition Date and as they are entitled under the Bankruptcy Code. The

Debtors will be unable to carry their burden to establish that the proposed Junior Adequate

Protection Package (as defined below) will adequately protect the Secured Noteholders interest

in the Pre-Petition Collateral and the rights and remedies they would enjoy in the absence of the

priming DIP Financing.

4. Finally, the Intercreditor Agreement provides no support for the notion that the

Secured Noteholders have consented to the proposed Junior Adequate Protection Package and

the stripping of their rights and remedies. As discussed herein, the Intercreditor Agreement is

not enforceable by either the Debtors or the DIP Lenders, and the Pre-Petition Secured Lenders

(the parties that may otherwise have standing to invoke the provisions of the Intercreditor

Agreement) have already been fully repaid from the proceeds of the DIP Financing. Moreover,

even if it was enforceable, by its own terms, the Intercreditor Agreement does not bar the

Secured Noteholders from objecting to the proposed Junior Adequate Protection Package and the

stripping of the Secured Noteholders rights under the circumstances. In addition, the Debtors

attempts to ensure that the Intercreditor Agreement will be grandfathered into and presumably

become law of these chapter 11 cases through the DIP Orders without any adjudication of its


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terms or applicability herein should be denied as a transparent and unjustified limitation of the

Secured Noteholders rights. See Final Order, at 16 (finding that the adequate protection is

reasonable and sufficient under the circumstances including the provisions of the Intercreditor

Agreement) and 21 (finding that the relative priorities and rights of the Pre-Petition Secured

Lenders will be governed by the Existing Agreements whose definition in the DIP Motion

arguably includes the Intercreditor Agreement as documentation executed in connection with

the Pre-Petition Credit Agreement).

BACKGROUND

5. On December 12, 2010 (the Petition Date), each of the Debtors filed a

voluntary petition for relief under chapter 11 of the Bankruptcy Code. On December 13, 2010,

the Court entered an order approving joint administration of the chapter 11 cases for procedural

purposes only. As of the date of this filing, the Debtors remain in possession of their assets and

manage their business as debtors-in-possession pursuant to Bankruptcy Code Sections 1107(a)

and 1108. On December 21, 2010, the United States Trustee appointed an official committee of

unsecured creditors pursuant to Bankruptcy Code Section 1102 (the Committee) to serve in the

chapter 11 cases.

6. As of the Petition Date, the Debtors have approximately $1.4 billion in debt

consisting of (a) $331.7 million under the Prepetition Credit Facilities, (b) $260 million of

Secured Notes, (c) $632.8 million of unsecured notes, (d) a $10 million unsecured promissory

note, and (e) 175,000 shares of convertible preferred stock issued and outstanding, with a $1,000

per share liquidation preference.

7. On the Petition Date, the obligations arising under the Prepetition Credit Facilities

(collectively, the First Lien Debt) were secured by first-priority liens on all of the Debtors


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personal property, including inventory and receivables, as well as certain of the Debtors

leaseholds and owned real property.

8. The Debtors issued the Secured Notes (the holders of which are, collectively, the

Secured Noteholders) pursuant to that certain indenture dated as of August 4, 2009 (the

Secured Notes Indenture) by and between the Debtors and Wilmington Trust Company in its

capacity as indenture trustee and collateral agent (WTC or the Trustee). The obligations

arising under the Secured Notes (collectively, the Secured Note Debt) are secured by liens on

substantially all of the Debtors personal property, including inventory and receivables, as well

as certain of the Debtors leaseholds and owned real property other than the Principal Properties

(as defined in the Pre-Petition Credit Agreement).

9. On August 4, 2009, the collateral agent under the Prepetition Credit Facilities and

the Trustee, in its capacity as collateral agent under the Secured Notes Indenture, entered into an

agreement governing certain relative contractual rights of the Pre-Petition Secured Lenders and

the Secured Noteholders and, among other things, assigning relative priorities to certain liens

securing the First Lien Debt and the Secured Note Debt (the Intercreditor Agreement).

10. On the Petition Date, the Debtors filed the DIP Motion seeking entry of an interim

and final order (together, the DIP Orders)6

authorizing the Debtors to enter into a credit

agreement (the DIP Agreement) to obtain an $800 million debtor-in-possession financing

facility (the DIP Financing), to be composed of a $350 million term loan facility and a $450

million revolving facility, including access to a $250 million letter of credit subfacility. A

portion of the $350 million term loan facility was used to refinance the First Lien Debt.

6 On December 13, 2010, the Court entered an interim order (the Interim Order) authorizing theDebtors to obtain the $350 million term loan portion of the DIP Financing and providing foradequate protection to the Secured Noteholders on an interim basis. On December 30, 2010, theDebtors filed a proposed final order in connection with the DIP Motion (the Final Order).


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Accordingly, since the entry of the Interim Order, the First Lien Debt has been fully repaid. The

DIP Motion seeks authority to grant a first-priority, priming lien on all assets of the Debtors that

serve as collateral for the Secured Notes (the Pre-Petition Collateral), a first-priority lien on all

unencumbered assets (the Unencumbered Collateral), and a junior lien on all property subject

to other pre-existing liens (collectively, the DIP Liens). The DIP Motion also seeks authority

to use the Secured Noteholders cash collateral. The DIP Motion proposes to provide adequate

protection to the Secured Noteholders in the form of (a) junior replacement liens on the Pre-

Petition Collateral, (b) junior liens on the Unencumbered Collateral, and (c) a junior Bankruptcy

Code Section 507(b) superpriority claim (the Junior Adequate Protection Package). See Final

Order, at 15(e). The DIP Motion and DIP Orders also include a $15 million carve out (the

Carve Out) from the DIP Liens to secure payment of the fees of the Debtors and Committees

professionals (as well as fees required to be paid to the Clerk of the Bankruptcy Court and the

United States Trustee). See Final Order, at 9(b). The Carve Out is senior to the proposed

Junior Adequate Protection Package granted to the Secured Noteholders. See Final Order, at

15(e).

11. Shortly after the Petition Date, WTC indicated its intention to resign from its

position as Trustee for the Secured Notes, on account of the fact that it serves as indenture trustee

for several unsecured bond issuances of the Debtors (and WTC now is a member of the

Committee in those capacities). Upon information and belief, WTC is in the process of

transitioning its role as Trustee to another institution, but that transition has yet to be completed.

Given the state of flux, there is no party (at least as of the objection deadline) representing the

interests of any Secured Noteholders other than the Secured Noteholder Consortium.7

7 Moreover, it has been reported that Yucaipa Cos. (Yucaipa), which the Debtors indicate hold amajority of their preferred stock (and control 2 board seats as a result), have recently acquired


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LIMITED OBJECTION

I. The Junior Adequate Protection Package is Inadequate

12. Adequate protection protects a secured creditors Fifth Amendment property

rights. U.S. v. Whiting Pools, Inc., 462 U.S. 198, 207 (1983); see also In re N.J. Affordable

Homes Corp., 2006 Bankr. LEXIS 4498, *52 (D.N.J. June 29, 2006) (The concept of adequate

protection finds its basis in the Fifth Amendments protection of property interests.). As

discussed below, the Debtors have not carried their burden to establish, nor can they establish,

that the Junior Adequate Protection Package protects the property rights of the Secured

Noteholders, who are now (because the Prepetition Credit Facilities have been fully repaid) the

only remaining pre-petition secured creditors with an actual stake in these chapter 11 cases.

Accordingly, the DIP Financing will unconstitutionally diminish the collateral rights of the

Secured Noteholders and therefore cannot be approved.

A. The Secured Noteholders Are Entitled to Adequate Protection

13. A debtor cannot use cash collateral unless the secured creditor first consents or is

provided with adequate protection of its interest. 11 U.S.C. 363(c)(2), 363(e).8 Additionally,

a secured creditor cannot be primed unless such secured creditor is provided adequate protection.

11 U.S.C. 364(d)(1)(B). The Final Order allows for use of the Secured Noteholders cash

collateral while providing for the DIP Lenders to hold priming liens on the assets securing the

certain debt of the Debtors, including Secured Notes. Yucaipa has a history with the Debtors

operations, having sold the Pathmark chain to the Debtors in December 2007 for $1.4 billion.Counsel to the Secured Noteholder Consortium has made a request of Yucaipas counsel (Latham& Watkins LLP) to disclose the amount of Yucaipas holdings of other Debtor debt issuances,including any Secured Notes, but as of the date hereof Yucaipa has not provided suchinformation. The Secured Noteholder Consortium submits that Yucaipa should disclose theamount of its debt holdings (including holdings of Secured Notes) forthwith.

8 As discussed below, the Secured Noteholders have not consented to the use of their cashcollateral under the terms of the Intercreditor Agreement or otherwise.


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Secured Note Debt. See Final Order, at 10(b).

14. The Debtors acknowledge the Secured Noteholders are being primed to the

extent the [DIP Financing] facilities are drawn in excess of the funded debt currently senior to

the liens held by the [Secured Noteholders]. See DIP Motion, at p. 6, n. 5. Indeed, the priming

arises under a pair of inter-related mechanisms.

15. First, and as a result of the Interim Order, the funding of the $350 million term

loan facility and the creation of the $15 million Carve Out, the Secured Noteholders are already

junior to an additional $229.5 million of obligations ($229.5 million is equal to the $350 million

term loan facility, less the $135.5 million paid to the Pre-Petition Secured Lenders, plus the $15

million Carve Out). Moreover, if the DIP Motion is approved on a final basis, the Debtors will

have the ability to draw on another $450 million of funds that would come ahead of the Secured

Noteholders. The Debtors are silent as to whether the additional $450 million will be needed.

16. Second, the DIP Financing can potentially prime the Secured Noteholders liens

beyond just the difference between the amount of drawn DIP Financing and the amount of the

funded debt senior to the liens held by the Secured Noteholders as of the Petition Date. The DIP

Orders contain a mechanism for liens to revert back to the Pre-Petition Secured Lenders in the

event that any amount they receive from the DIP Lenders is subsequently disgorged or otherwise

reinstated after repayment and the liens securing the First Lien Debt shall have not been avoided.

See Interim Order, at 3(d); Final Order, at 6(e). The Debtors make no effort to explain any

justification for how this lien could possibly be permitted to be senior to the liens held by the

Secured Noteholders, but the resulting so-called Contingent Adequate Protection Liens granted

to the Pre-Petition Secured Lenders are senior to the adequate protection liens granted to the

Secured Noteholders. See Interim Order, at 12(e); Final Order, at 15(e). Thus, in the event


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that payments to the Pre-Petition Secured Lenders are disgorged without a concomitant

avoidance of their liens, the Secured Noteholders interest in the collateral would be further

primed. As a result, the potential exists for the Secured Noteholders to become third-lien

creditors shoved behind up to $950.5 million of debt. The Debtors would like this Court to

overlook that feature of the DIP Financing, making no effort to explain how that type of

subordination is permitted under the Bankruptcy Code or the terms of the Intercreditor

Agreement. In such an event, the replacement liens and additional liens proposed by the Debtors

would be woefully inadequate to protect the Secured Noteholders secured claim.

17. In light of the foregoing discussion of the diminution of the Secured Noteholders

interest in the Pre-Petition Collateral, the Debtors are required to provide the Secured

Noteholders with adequate protection. See Metromedia Fiber Network Servs. v. Lexent, Inc. (In

re Metromedia Fiber Network, Inc.), 290 B.R. 487, 491 (Bankr. S.D.N.Y 2003) (holding that

adequate protection is not permissive or discretionary). The Junior Adequate Protection Package

contained in the DIP Orders, however, fails to protect the Secured Noteholders against the

impairment to their collateral position suffered as a result of the terms of the DIP Financing and

the DIP Orders, as well as the Debtors use of the Secured Noteholders collateral (including

cash collateral). Furthermore, given the Debtors recent historical performance, there is a

reasonable basis for the Secured Noteholders to be concerned about impairment of the value of

their collateral. At this time, the Debtors are operating on narrow profit margins and a declining

adjusted EBITDA and EBITDA margin. See Declaration of Frederic F. Brace (A) In Support of

Debtors Chapter 11 Petitions and First Day Pleadings and (B) Pursuant to Local Rule 1007-2, at

6-8.


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B. The Debtors Have Not Established that the Junior Adequate Protection PackageSufficiently Protects the Secured Noteholders Interest

18. The Debtors have the burden of proving, by a preponderance of the evidence, that

a secured creditor is adequately protected. 11 U.S.C. 363(p)(1), 364(d)(2);see Resolution

Trust Corp. v. Swedeland Dev. Group (In re Swedeland Dev. Group), 16 F.3d 552, 564 (3d Cir.

1994) (A debtor has the burden to establish . . . adequate protection.); In re Grant Broad. of

Philadelphia, Inc., 71 B.R. 376, 386 (Bankr. E.D. Pa.), affd, 75 B.R. 819 (E.D. Pa. 1987)

(same);see also In re Barbara K Enters., 2008 Bankr. LEXIS 1917 (Bankr. S.D.N.Y. June 16,

2008). Here, the Debtors fail to carry this burden.

19. Courts have held, in the context of the use of cash collateral,9 that in order to

assess the sufficiency of a proposed adequate protection package, a court must: (1) establish

value of the secured creditors interest, (2) identify the risks to the secured creditors value

resulting from the debtors request for use of cash collateral, and (3) determine whether the

debtors adequate protection proposal protects value as nearly as possible against risks to that

value consistent with the concept of indubitable equivalence. In re Martin, 761 F.2d 472, 477

(8th Cir. 1985); see also In re G.P. Express Airlines; 192 B.R. 954, 961 (Bankr. D. Neb. 1996)

(same);In re Schierl, 176 B.R. 498, 506 (Bankr. D. Minn. 1995) (same);In re Whitney, Case No.

4-88-3885, 1988 WL 141523, *4 (Bankr. D. Minn. Dec. 20, 1988) (same);In re Krumm, 87 B.R.

76, 77 (Bankr. D. Neb. 1988) (same). The Debtors DIP Motion and accompanying affidavit do

not present the Court with sufficient information to adequately consider each of these factors.

20. The only information provided regarding the value of the Secured Noteholders

interest as of the Petition Date (i.e., the value of the Secured Noteholders collateral less the

9 The principle of adequate protection applies equally in the use of cash collateral and the grant of a priming lien. See Desert Fire Prot. v. Fontainebleau Las Vegas Holdings, LLC (In reFontainebleau Las Vegas Holdings, LLC), 434 B.R. 716, 753 (S.D. Fla. 2010).


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outstanding amounts owed to the Pre-Petition Secured Lenders on the Petition Date) are

statements that the Pre-Petition Collateral exceeds the value of the Secured Noteholders interest,

which statements are supported only by the contention that there was $96 million of availability

under the pre-petition revolver. See DIP Motion, at 40. This sort of characterization is not

sufficient to establish the adequacy of the protection the Debtors propose to provide on account

of the diminution in this collateral. Moreover, rather than identifying risks to the value of the

Secured Noteholders interest in the Pre-Petition Collateral, the Debtors simply dismiss the

possibility of any risks with an unsupported, conclusory statement that the [Secured

Noteholders] will suffer no diminution in the value of their interests as a result of obtaining the

DIP Financing. Id.; see In re Plabell Rubber Prods., Inc., 137 B.R. 897, 900 (Bankr. N.D. Ohio

1992) (rejecting the debtors asserted adequate protection because it did not present sufficient

evidence to place a value on the banks present interest in debtors property; nor did debtor

present sufficient evidence to place a value on the proposed second lien on net current assets)

(internal citations omitted); see also In re Pac. Lifestyle Homes, Inc., 2009 Bankr. LEXIS 711,

*34 (Bankr. W.D. Wash. Mar. 16, 2009) (debtors unfounded statements about future

profitability failed to serve as adequate protection). To the contrary, as discussed above, due to

the priming nature of the DIP Financing, the Secured Noteholders are at risk of suffering a

material loss in the value of their interest in the Pre-Petition Collateral.

21. Finally, without establishing the value of the Secured Noteholders interest,

identifying the risks to such interest, or providing evidence of the value of the additional liens

granted to the Secured Noteholders, the Court cannot determine whether the debtors adequate

protection package proposal protects value as nearly as possible against risks to that value

consistent with the concept of indubitable equivalence. Martin, 761 F.2d at 477;see Minn-Kota


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Farm Agency, Inc. v. Home Federal Sav. & Loan Ass'n, 1992 U.S. App. LEXIS 29605 (8th Cir.

Nov. 11, 1992) (affirming bankruptcy courts determination that that debtor failed to offer

adequate protection where debtor did not submit sufficient evidence indicating that it could

actually provide the asserted adequate protection);In re Jennings, 2010 BNH 10 (Bankr. D.N.H.

2010) (conducting a comprehensive trial regarding value and concluding that debtor had not met

burden of establishing adequate protection).

22. The Debtors represent that the Secured Noteholders will now be junior to the DIP

Lenders and the Pre-Petition Secured Lenders, as well as the Carve Out amount, but do not

provide any proposed budget or business plan as to the DIP Financing valuable information to

assess the risk of diminution of the Secured Noteholders interest. Based on the information that

is available, however, the sparse Junior Adequate Protection Package does not adequately protect

the Secured Noteholders interest against risks to that interest consistent with the concept of

indubitable equivalence but, again, it is the Debtors burden to establish adequate protection,

not the secured creditors burden to establish an absence of adequate protection. For instance,

and although not addressed by the Debtors, the Debtors may attempt to introduce evidence as to

a sufficient equity cushion in connection with the adequate protection inquiry. See, e.g., Kost v.

Interstate Bank of Greybill (In re Kost), 102 B.R. 829 (D. Wyo. 1989) (surveying cases

evaluating equity cushions as adequate protection and concluding that courts generally hold an

equity cushion of greater than 20% to be adequate while equity cushion of under 11% generally

held insufficient).10 The Debtors, however, have not provided any firm evidence to demonstrate

10 See In re Phoenix Steel Corp., 39 B.R. 218, 224 (D. Del. 1984); see also In re Dunes CasinoHotel, 69 B.R. 784, 794 (D.N.J. 1986). Equity cushion has been defined as the value of theproperty above the amount owed to the creditor with a secured claim . . . . In re Dunes CasinoHotel, 69 B.R. at 794. In order for the Debtors to assert that the Secured Noteholders areadequately protected by an equity cushion, they would be required to establish the value of theassets subject to the Secured Noteholders liens a very fact intensive inquiry. See, e.g., In re


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that the collateral value after taking into account the DIP Liens exceeds the amount owed the

Secured Noteholders by a sufficiently wide margin to serve as adequate protection.

C. Priming Liens Merit Particular Scrutiny of the Accompanying Adequate

Protection Provided to a Pre-Petition Secured Creditor

23. Because a priming lien by its very nature diminishes the rights of a pre-petition

secured creditor, the Court must acutely scrutinize the protections offered to a pre-petition

secured creditor to determine if they are indeed adequate.11 When formulating adequate

protection in connection with post-petition financing on a priming basis, the proposed

protections must be viewed side-by-side with the decrease in value of a creditors interest in the

property caused by the priming lien. Desert Fire Prot. v. Fontainebleau Las Vegas Holdings,

LLC (In re Fontainebleau Las Vegas Holdings, LLC), 434 B.R. 716, 754 (S.D. Fla. 2010).12

24. Significantly, the use of a debtor-in-possession loan to keep a company afloat as a

going concern is not of itself adequate protection of a secured creditors interest in the

companys collateral when that interest is being primed by such loan. See id. at 749-52 (finding

the fact that the debtor-in-possession financing was necessary to preserve, and possibly enhance,

the value of the debtors assets beside the point in determining whether a secured creditor

Snowshoe Co., 789 F.2d 1085, 1088 (4th Cir. 1986) (holding that determination of adequateprotection is rooted in measurements of value and the credibility of witnesses).

11 See In re First S. Sav. Assn, 820 F.2d 700, 710 (5th Cir. 1987) (Given the fact that superpriority financing displaces liens on which creditors have relied in extending credit, a court that isasked to authorize such financing must be particularly cautious when assessing whether thecreditors so displaced are adequately protected.); 3 Collier on Bankruptcy 364.05, at 364-24(15th ed. rev. 2004) (The ability to prime an existing lien is extraordinary, and in addition to therequirement that the trustee be unable to otherwise obtain the credit, the trustee must provide

adequate protection for the interest of the holder of the existing lien.).12 See also In re Swedeland Dev. Grp., 16 F.3d at 564 (holding that not accounting for the decrease

caused by the priming lien was fundamentally at odds with the principle of adequate protection,which must as nearly as possible under the circumstances of the case provide the creditor withthe value of his bargained for rights);In re Windsor Hotel, LLC, 295 B.R. 307, 314 (Bankr. C.D.Ill. 2003) (The authorization to prime an existing lien should not be read as authorization toincrease substantially the risk of the existing lender in order to provide security for the new, post-petition lender.).


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being primed by a priming debtor-in-possession facility was adequately protected, and that the

inquiry ought to have focused on compensating the [secured lender] for the loss of value of their

interests in the [collateral] caused by the priming lien).

25. Here, when the junior replacement liens and junior additional liens on

Unencumbered Collateral intended to serve as adequate protection are viewed side-by-side with

the $800 million priming DIP Financing (and the potential for the reversion of the Pre-Petition

Secured Lenders liens), it is clear that the diminution in the value of the Secured Noteholders

interest in the Pre-Petition Collateral is not being adequately compensated or protected (or, at the

very least, the Debtors fail to establish such adequate compensation).

D. Comparable Adequate Protection Measures

26. Further, the DIP Motion fails to provide the Secured Noteholders with the same

types of adequate protection that are provided to the DIP Lenders and the Pre-Petition Secured

Lenders, including: (1) payment of reasonable expenses, including professional fees and

expenses, of the Secured Noteholder Consortium;13

(2) the current payment of the semi-annual

coupon amount as provided for in the Secured Notes Indenture as an adequate protection

payment provided for in Bankruptcy Code Section 361(1);14 and (3) access to information on the

13 If it is determined that the Secured Noteholders are over-secured as the Debtors suggest thenthey will be entitled to receive payment of fees incurred throughout the chapter 11 cases,including professional fees, pursuant to Bankruptcy Code Section 506(b). Indeed, section 7.07 ofthe Secured Notes Indenture specifically provides for the payment of expenses, includingattorneys fees and related expenses, incurred by the Trustee thereunder in the course of a

bankruptcy case. Moreover, the Final Order provides for the payment of the Pre-Petition SecuredLenders attorneys fees, even though they have already been fully repaid. See Final Order, at 15(d).

14 Notably, the Final Order provides for the current payment of all accrued and unpaid interest onthe First Lien Debt. See Final Order, at 15(d). Such interest on the Secured Notes is mandatedby section 1 of the Secured Notes and section 4.01 of the Secured Notes Indenture. See SecuredNote, at 1 (mandating 11.375% interest per annum to be paid semi-annually on February 1 andAugust 1 of each year). Without limitation to the foregoing, the Secured Noteholder Consortiumexpressly reserves its right to seek default interest, post-petition interest, or any other amounts


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same terms as provided to the DIP Lenders, including, without limitation, notice of any offer to

purchase any material assets of the Debtors, including any offer to purchase the Debtors as a

going concern, or any retail banner owned by the Debtors as of the Petition Date, and notice of

any intention to reject any material unexpired leases or executory contracts.

II. Other Rights-Limiting Provisions Detrimental to the Secured Noteholders Despite

Their Status as Sole Remaining Pre-Petition Secured Creditors

27. The Secured Noteholders will become the only pre-petition secured parties-in-

interest under the terms of the proposed DIP Financing the Pre-Petition Secured Lenders have

been fully repaid. In that regard, the Secured Noteholder Consortium, without limitation to

anything above, should be provided with consent, information, and notice rights15 comparable

with such rights granted to the DIP Lenders, including, but not limited to, the following: (i)

receipt of both notices pursuant to paragraph 11(b) of the Final Order and paragraph 14 of the

Final Order; (ii) consent rights pursuant to paragraph 12 of the Final Order; (iii) consent rights

pursuant to paragraph 18(b)(i) of the Final Order with regards to modification or extension of

such order; and (iv) notice rights pursuant to paragraph 18(b)(iii) of the Final Order with regards

to termination of leases.

28. Furthermore, the following provisions unfairly disadvantage the Secured

Noteholders without justification:16

that may be due and owing pursuant to the Secured Notes Indenture and related agreements, theBankruptcy Code, or otherwise.

15 The Secured Noteholder Consortium further objects to the fees to be paid to the DIP Lenders inexchange for their providing the DIP Financing to the extent, at this time, that such fees have notbeen disclosed and indeed expressly request that the Secured Noteholder Consortium be provideda copy of the confidential side letter as provided for in paragraph 8 of the DIP Motion.Notwithstanding the above, the Secured Noteholder Consortium expressly reserves its rights toobject to such fees in their entirety.

16 The DIP Agreement, pursuant to paragraph 8(b) and 8(b)(iv) of the Final Order proposed by theDebtors, is to be granted force of law, because the Debtors are not simply authorized to complywith its terms, but in fact are directed to do so.


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x Sections 2.10(a), (i) and (j) of the DIP Agreement allowing net proceedsreceived in respect to collateral disposition to be retained by the Debtors withoutany provision as to the remittance of any part of such proceeds to the SecuredNoteholders.

x

Section 6.08(b) of the DIP Agreement prohibiting payment of obligations owingunder the Secured Notes Indenture under any circumstances.

x Section 7.01(i) of the DIP Agreement prohibiting payments to the SecuredNoteholders as adequate protection or otherwise.

x Despite the heading of paragraph 11 of the Final Order (and as related toparagraphs 15 and 17 of the Final Order), Protection of DIP Lenders Rights,such section, in reality, strips certain rights of the Secured Noteholders:

o Paragraph 11(a)(i) limiting the Secured Noteholdersenforcement rights.

o Paragraph 11(a)(ii) instituting a deemed consent of any release ofcollateral securing the obligations owed to the SecuredNoteholders.

o Paragraph 11(a)(iii) preventing the Secured Noteholders fromtaking any action to perfect their security interests.

o Paragraph 11(a)(iv) requiring the Secured Noteholders to delivertermination statements, releases, and/or assignments in favor of theDIP Lenders related to the disposition of any collateral approved or

arranged by the DIP Lenders, such that the Secured Noteholdershave no consent rights to such disposition.

o Paragraph 11(c) purportedly limiting the arguments that can bemade by Secured Noteholders including, but not limited to,prohibiting use of Bankruptcy Code Section 105.

x Paragraph 12 of the Final Order giving the DIP Agent and the Pre-PetitionAgent, each independently, the power to grant consent to the Debtors imposing acharge against the Secured Noteholders collateral under Section 506(c) of theBankruptcy Code.

x Paragraphs 13 and 14 of the Final Order referring to the Cash Collateral asbeing collateral only of the Pre-Petition Secured Lenders, when it is also collateralof the Secured Noteholders, who should be provided adequate protection withrespect to the Debtors use of cash collateral.

x Paragraph 15(b) of the Final Order purportedly releasing and terminating allexisting liens related to the Pre-Petition Collateral without confirming payments


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to be made to the Secured Noteholders as lienholders in such collateral.

x Paragraph 15(e) of the Final Order clarification needed that the JuniorAdequate Protection Obligations should also arise in connection any diminutionof the Secured Noteholders interest in collateral that arises from the imposition of

the Carve Out or in favor of the Pre-Petition Secured Lenders on account of theContingent Adequate Protection Liens.

x Paragraph 15(e) of the Final Order clarification needed as the Secured Noteholders should be hereby granted adequate protection liens as a present,non-contingent grant and under the same conditions as granted to the Pre-PetitionSecured Lenders in paragraph 15(a) of the Final Order i.e., effective andperfected upon date of entry of the Interim Order and without the necessity of theexecution by the Debtors of mortgages, security agreements, pledge agreements,financing statements or other agreements.

x Paragraph 15(e)(v) of the Final Order this provision provides for deemedconsent by the Secured Noteholders of any sale or disposition of collateral with asimultaneous termination of the Secured Noteholders liens and security interestson such collateral, without providing for the release of any related DIP Liens asprovided for in paragraph 15(a) of the Final Order in relation to the Pre-PetitionSecured Lenders adequate protection liens.

x Paragraphs 16 and 21 of the Final Order these provisions unjustifiably andprematurely give effect to the Intercreditor Agreement as such agreement has not been adjudicated and its enforceability is at best arguable under thecircumstances. The Intercreditor Agreement should be carved out from paragraph21 as its terms have not been adjudicated and it cannot be deemed applicable only

because it qualifies under the definition of Existing Agreements.

x Paragraph 17(a) and 17(b) of the Final Order the Secured Noteholders should beable to utilize the Final Order in the same manner to evidence their liens.

x Paragraphs 18(b), (d) and (e) of the Final Order the Secured Noteholders should be granted the benefit of the Final Order, much like the DIP Lenders and Pre-Petition Secured Lenders, if these chapter 11 cases are dismissed or converted orif the Final Order is reversed, modified, vacated, or stayed.

x Paragraph 19 of the Final Order the Secured Noteholders should be granted the

same protections as the Pre-Petition Secured Lenders in connection with their pre-petition liens and the related challenge period afforded to the Committee.

x Paragraph 22 of the Final Order the Secured Noteholders should be listedthird in relation to distributions of any proceeds recovered or received under theDebtors insurance policies.

29. Without limitation of anything herein, the above provisions should be modified or


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deleted as appropriate so as to not further prejudice the Secured Noteholders fundamental rights

and shove the Secured Noteholders beyond the bounds of the Intercreditor Agreement (to the

extent it is even enforceable) a negotiated document to which the Trustee and Secured

Noteholders are a party as compared to the DIP Agreement and the DIP Orders where the

Trustee and Secured Noteholders were not at the negotiating table.

III. The Intercreditor Agreement Does Not Prohibit the Secured Noteholders from

Objecting to the Provisions of the DIP Financing and DIP Orders

30. Contrary to the Debtors oft-repeated contentions in the DIP Motion regarding

consent to post-petition financing,17 the Secured Noteholders have not provided their consent to

the terms of the DIP Orders. Indeed, the Intercreditor Agreement to the extent it is even

enforceable does notprohibit the Secured Noteholders from objecting to the provisions of the

DIP Financing and DIP Orders described above. Furthermore, and in the alternative, neither the

Debtors nor the DIP Lenders can enforce the terms of the Intercreditor Agreement against the

Secured Noteholders.

A. The Intercreditor Agreement is Not Enforceable

31. As a threshold matter, neither the Debtors nor the DIP Lenders can enforce the

Intercreditor Agreement against the Secured Noteholders or the Trustee, and the Pre-Petition

Secured Lenders (the parties that may otherwise have standing to invoke the provisions of the

Intercreditor Agreement) have already been fully repaid from the proceeds of the DIP Financing.

32. The Debtors are not party to the Intercreditor Agreement and are also not intended

or third party beneficiaries to such agreement. See Intercreditor Agreement, at Preamble, 8.11

17 See DIP Motion, at 5, 17 and 43 ([The Secured Noteholders] have effectively consented tothe Debtors access to any postpetition financing, including the DIP Financing, and the Debtorsuse of cash collateral subject to their junior liens . . . .). And specifically to the proposed JuniorAdequate Protection Package. See DIP Motion, at 5 and 39 ([The Secured Noteholders] haveconsented to the . . . Adequate Protection Package to be provided in connection with the financingpursuant to the applicable provisions of the Intercreditor Agreement . . . .).


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and Acknowledgment. Thus, the Debtors may not and indeed cannot enforce the Intercreditor

Agreement against the Secured Noteholders.

33. In addition, the DIP Lenders, at least as of this time (and perhaps at any time), are

unable to enforce the Intercreditor Agreement against the Secured Noteholders. First, the DIP

Lenders are not intended or third party beneficiaries to the Intercreditor Agreement. See

Intercreditor Agreement, at 8.11. Furthermore and pursuant to section 5.2(c) of the

Intercreditor Agreement, the Revolving Debt (as defined therein) can be refinanced without

notice or consent and without affecting the terms of that agreement, provided, however, that the

holders of such refinancing Indebtedness (or an authorized agent . . . on their behalf) bind

themselves in writing to the terms of this [Intercreditor] Agreement pursuant to such documents

or agreements (including amendments or supplements to this [Intercreditor] Agreement) as the . .

. Note Collateral Agent . . . shall reasonably request and in form and substance reasonably

acceptable to the . . . Note Collateral Agent . . . . See Intercreditor Agreement, at 5.2(c).18

Upon information and belief, neither the Secured Noteholders nor the Trustee has received a

written commitment from the DIP Lenders in accordance with section 5.2(c) of the Intercreditor

Agreement. Thus, the DIP Lenders cannot enforce the Intercreditor Agreement against the

Secured Noteholders or the Trustee.

18 The DIP Financing qualifies as Revolving Debt under the terms of the Intercreditor Agreementand the DIP Agreement is a Revolving Credit Agreement as defined thereunder. Revolving

Debt is defined as any and all Obligations (as defined in the Revolving Credit Agreement andthe Revolving Security Documents), including, without limitation, on account of Bank Productsand Cash Management Services and on account of any DIP Financing. See IntercreditorAgreement, 1.2(kk). In turn, Revolving Credit Agreement is defined in the IntercreditorAgreement as the agreement governing the Prepetition Credit Facilities as the same may be . . .refinanced, or replaced. Notwithstanding the foregoing, the Secured Noteholder Consortiumexpressly reserves the right to assert that the rights afforded to holders of Revolving Debt underthe Intercreditor Agreement do not inure to the benefit of the DIP Lenders, even if the conditionsin section 5.2(c) thereof are satisfied.


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B. The Intercreditor Agreement Does Not Prohibit the Secured Noteholders fromObjecting to the DIP Financing and the DIP Orders

34. Even if, arguendo, the DIP Lenders were able to enforce the provisions of the

Intercreditor Agreement against the Secured Noteholders, the provisions still do not bar the

Secured Noteholders from objecting to the proposed Junior Adequate Protection Package or any

other terms of the DIP Financing, DIP Motion, or DIP Orders. Under the terms of the

Intercreditor Agreement, the DIP Financing must comply with four requirements in exchange for

the Secured Noteholders agreement to raise no objection and to not support any objection to the

DIP Financing. See Intercreditor Agreement, at 6.1(a). As currently proposed, the DIP

Financing, at best, complies with only one of these requirements (arguably, it complies with the

requirement in Section 6.1(a)(ii) that the DIP Financing does not compel the Debtors to file a

pre-negotiated specific plan of reorganization acceptable to the DIP Lenders) and thus, even if

enforceable, would not silence the Secured Noteholder Consortium. The three remaining

provisions are discussed below.

35. The DIP Financing must allow the Secured Noteholders to retain their lien on the

Shared Collateral19 subject only to the liens securing the DIP Financing, the Revolving Debt, and

other liens having priority under applicable law. See Intercreditor Agreement, at 6.1(a)(i).

Significantly, the Secured Noteholders did not agree to subject their lien on the Shared Collateral

to the Carve Out. See Final Order, at 15(e) ([T]he Junior Adequate Protection Liens . . . shall

be junior and subordinate in all respects to . . . the Carve Out . . . .); Interim Order, at 12(e)

(same); DIP Motion, at 39 (To account for any potential diminution in value, the Debtors will

provide adequate protection to the [Secured Noteholders] in the form of (a) replacement liens on

the Prepetition Collateral . . . subject to the Carve Out.). The Carve Out or any amounts

19 Shared Collateral and Pre-Petition Collateral are used interchangeably herein.


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thereunder do not represent liens having priority under applicable law. Thus, section 6.1(a)(i) of

the Intercreditor Agreement has not been satisfied by the express terms of the DIP Financing.

36. The Intercreditor Agreement also expressly protects the Secured Noteholders

interests with the concept of anti-layering where a junior creditor subordinates its liens only to

senior liens that are on parity with each other. See Intercreditor Agreement, at 6.1(a)(iii). The

DIP Financing, DIP Motion, and the DIP Orders create a carve-out for a Junior DIP Facility

that does not abide by such anti-layering provisions. See, e.g., DIP Agreement, at 6.01(a)(xii)

(allowing for the incurrence of a Junior DIP Facility subject to the maximum debt caps of the

Intercreditor Agreement). Pursuant to the DIP Agreement, and more specifically, the definition

of Junior DIP Facility, the creation of this sub-class of indebtedness under the DIP Agreement

must only be satisfactory to the DIP Lenders and to the administrative agent under the DIP

Agreement. Although subject to the maximum debt caps of the Intercreditor Agreement, such a

junior facility would inherently conflict with section 6.1(a)(iii) of the Intercreditor Agreement

because any related lien would create a new layer that is senior to the Secured Noteholders and

junior to the DIP Financing. Essentially, section 6.01(a)(xii) of the DIP Agreement serves as an

agreement between the DIP Lenders and the Debtors that a junior facility may be layered in that

is senior to the Secured Noteholders without input from this Court or the Secured Noteholders.

The risk and uncertainty of such a priming junior facility further lends support to the Secured

Noteholders attempts herein to protect their rights.

37. Finally, section 6.1(a)(iv) of the Intercreditor Agreement, which requires that the

maximum principal amount of the DIP Financing not exceed the Maximum Revolving Debt

Amount, has not been satisfied. The term DIP Financing in the Intercreditor Agreement is

defined to include not just the amount of new monies extended, but also the sum of consented-to


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cash collateral usage i.e., the DIP Financing, as so defined, is the $950.5 million figure

referenced above. Maximum Revolving Debt Amount is defined in the Intercreditor

Agreement, in relevant part, as $850,000,000 less, without duplication, the amount of any

permanent repayments of the Revolving Debt, and the Debtors have represented that it is now

$815 million. See Intercreditor Agreement, at 1.2(c)(c); DIP Motion, at p. 5, n. 4. Because

$950.5 million exceeds $815 million, this clause of Section 6.1(a) has not been satisfied.

38. Even if the DIP Lenders could enforce the Intercreditor Agreement, courts have

held that intercreditor agreements cannot be enforced in a manner to limit fundamental

bankruptcy rights, including a secured creditors right to adequate protection of its collateral

interest. See In re Hart Ski Mfg. Co., 5 B.R. 734, 736 (Bankr. D. Minn. 1980) (declining to

enforce a provision limiting a junior creditors right to adequate protection); see also Bank of

America, N.A. v. N. LaSalle St. Ltd. Pship (In re 203 N. LaSalle St. Pship), 246 B.R. 325, 331

(Bankr. N.D. Ill. 2000) (declining to enforce an intercreditor agreement permitting a senior

lender to vote a junior lenders claim);In re Hinderliter Indus., Inc., 228 B.R. 848, 850 (Bankr.

E.D. Tex. 1999) (Subsequent case law does not significantly diverge from the [ Hart Ski]

holdings.). Specifically, the Hart Ski court held that [t]he Bankruptcy Code guarantees each

secured creditor certain rights, regardless of subordination. These rights include the right to

assert and prove its claim, the right to seek court-ordered protection for its security, the right to

have a stay lifted under proper circumstances, the right to participate in the voting for

confirmation or rejection of any plan of reorganization, the right to object to confirmation, and

the right to file a plan where applicable. The above rights and others not related to contract

priority of distribution pursuant to Section 510(a) cannot be affected by the actions of the parties

prior to the commencement of a bankruptcy case when such rights did not even exist. Hart Ski,


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5 B.R. at 736 (emphasis added).

39. Thus, by its terms, the Intercreditor Agreement allows the Secured Noteholders to

submit this Limited Objection. Even if the Court were to decide the provisions of the

Intercreditor Agreement are enforceable in the instant context, such provisions should not be

enforced in a manner denying the Secured Noteholders adequate protection of their secured

interest and stripping the Secured Noteholders of their participatory and fundamental rights in

these chapter 11 cases under the Bankruptcy Code.

SUMMARY AND RESERVATION OF RIGHTS

40. The Debtors in these cases propose to prime the liens held by the Secured

Noteholders without providing truly adequate protection of the rights and interests of the Secured

Noteholders. In so doing, the Debtors also ask this Court to impose on the Secured Noteholders

un-negotiated subordination provisions, standstill provisions and other intercreditor restrictions

to which the Secured Noteholders have never consented. The evidence that the Secured

Noteholders are oversecured is no less compelling than the evidence that the Pre-Petition

Secured Lenders (who have now been fully repaid, with interest and fees) were oversecured, and

the Secured Noteholders should likewise be entitled to payment of current interest and fees

during the pendency of these chapter 11 cases.

41. In addition, the Secured Noteholder Consortium requests that any approval of the

DIP Financing be made subject to the following:

a. Requiring the adequate protection payments and notice and consent rightsdescribed in paragraph 26 above;

b. Requiring the Final Order and DIP Agreement to be modified as described inparagraphs 27 and 28 above;

c. Disclosure of the fees being paid to the DIP Agent and DIP Lenders, as discussedin footnote 15 above; and


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d. Disclosure of Yucaipas debt holdings, as discussed in footnote 7 above.

42. The Secured Noteholder Consortium expressly reserves all of its rights with

respect to the DIP Motion, DIP Documents, and DIP Orders including, but not limited to, the

right to assert additional objections thereto either at or prior to the final hearing.

[Remainder of page intentionally left blank.]


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CONCLUSION

43. The Secured Noteholder Consortium respectfully requests that this Court (a)

sustain this Limited Objection, (b) modify any relief granted with respect to the DIP Motion in

accordance with this Limited Objection, and (c) grant such other or further relief as it deems

appropriate.

Dated: New York, New YorkJanuary 4, 2011

Respectfully submitted,

BROWN RUDNICK LLP

By: _/s/_Edward S. Weisfelner____________Edward S. Weisfelner, Esq.Daniel J. Saval, Esq.Seven Times SquareNew York, NY 10036Telephone: (212) 2094800Facsimile: (212) 2094801

- and -

Andrew P. Strehle, Esq.

One Financial CenterBoston, MA 02111Telephone: (617) 856-8200Facsimile: (617) 856-8201

Counsel to the Ad Hoc Consortium of CertainHolders of A&P 11 3/8% Senior Secured Notes

# 8283145