The U.S. Trustee assigned to the Appvion case filed with the U.S. Bankruptcy Court an objection to the Company’s proposed bidding procedures and stalking horse protections.
The Trustee asserts, “The Debtors seek pre-approval of a Break-Up Fee of 1.5% of the aggregate purchase price, together with an Expense Reimbursement of up to $500,000 (collectively, the ‘Stalking Horse Protections’), payable to the Stalking Horse upon the sale of the assets to a competing bidder or the Debtors’ filing of a plan of reorganization that does not contemplate sale of the Debtors’ assets to the Stalking Horse. While break-up fees serve as ‘protections’ to a stalking horse purchaser, they concomitantly serve as ‘discouragements’ to potential bidders who would only be permitted to transact business on a playing field that is tilted in favor of the stalking horse. Break-up fees are permitted, if at all, only when the Court has determined that they were an actual and necessary cost and expense of preserving the estate.”
In addition, “The Debtors commit a logical fallacy by asserting that the proposed Stalking Horse Protections induced the Stalking Horse – in this case, the DIP Lenders, collectively – to make an initial bid and establish a floor price for the Debtors’ assets. The DIP Lenders were already induced to bid on all of the Debtors’ assets by their own need to liquidate their collateral at the lowest possible cost….The Debtors commit a second logical fallacy by asserting that the proposed Stalking Horse Protections are appropriate because the DIP Lenders’ bid establishes a ‘floor’ on the sale price of the Debtors’ assets, enabling the Debtors to seek better offers without losing the DIP Lenders’ purchase commitment. The DIP Lenders hold a first lien on substantially all of the Debtors’ assets. Their stalking hose bid merely establishes the lowest price that the DIP Lenders will accept to release their liens on the subject assets. At any lesser price, the DIP Lenders can simply reject all purchase offers and foreclose on their collateral. At any greater price up to the full amount of their collective claim, the DIP Lenders benefit from repayment of their claim, receiving the full benefit of their bargain as lenders.”
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