Claire’s Stores – Oaktree Capital Management Objects to RSA Plan, “Step in the Right Direction” is Not Enough

September 14, 2018 – Oaktree Capital Management filed with the Court an objection [Docket No. 989] to the confirmation of the Debtors’ Modified Second Amended Joint Chapter 11 Plan of Reorganization [Docket No. 939]. Oaktree asserts, “On September 10, 2018, the Debtors filed the Current RSA Plan to make purportedly “technical modifications” to the Initially Solicited RSA Plan….Far from technical though, these modifications are substantive and material insofar as the Debtors’ chapter 11 plan now provides that: – if Class 9 (Second Lien Notes Claims) votes to accept, then holders of Second Lien Notes Claims would receive $33.986 million (an approximately 14.6% recovery), rather than $8.034 million (an approximately 3.5% recovery) under the Initially Solicited RSA Plan; and – if Class 7 (First Lien Debt Deficiency Claims) votes to accept, then holders of First Lien Debt Deficiency Claims would receive $18 million (an approximately 6.2% recovery), rather than $9.966 million (an approximately 3.5% recovery) under the Initially Solicited RSA Plan…Current RSA Plan, arts. III.B.7, III.B.9 with Initially Solicited RSA Plan, arts. III.B.7, III.B. 9. Should either Class 7 or Class 9 vote to reject the Current RSA Plan, creditors in such class will receive the same treatment contemplated in the Initially Solicited RSA Plan. 

On information and belief, the Debtors have not given notice of the Current RSA Plan to all holders of Second Lien Notes Claims and First Lien Debt Deficiency Claims. The Current RSA Plan’s “technical modifications” were likely made to mitigate Oaktree’s objection that the Initially Solicited RSA Plan unfairly discriminated against holders of Second Lien Notes Claims…The Debtors knew of that confirmation objection long ago…(counsel to Oaktree noting that the Initially Solicited RSA Plan “utilizes a classification scheme that is questionable at best” and provides “$20 million to the senior unsecured notes”), but they chose to ignore it and sought authority to solicit the Initially Solicited RSA Plan. Now, trying to avoid the likely consequence of that mistake (i.e., denial of confirmation) while maintaining their September confirmation timeline, the Debtors have filed the Current RSA Plan, solicited votes thereon, and disregarded applicable disclosure, notice and due process requirements….The Debtors have not complied with sections 1125(b) and 1127(c) of the Bankruptcy Code with respect to the Current RSA Plan. The Debtors are soliciting votes on the Current RSA Plan, even though the Court-approved Disclosure Statement does not provide ‘adequate information’ related thereto insofar as the Disclosure Statement describes the Initially Solicited RSA Plan, which varies materially from the Current RSA Plan. Solicitation of the Current RSA Plan without providing creditors Court-approved adequate information is prohibited….

The modifications included in the Current RSA Plan—which could increase recoveries for holders of Second Lien Notes by approximately 323% and for holders of First Lien Deficiency Claims by approximately 81%—are not the type of non-substantive changes that the Debtors were pre-authorized to make. They instead are so substantive that the Court should have been given prior notice and resolicitation should have been required….The improved treatment of the Second Lien Notes Claims is a step in the right direction. However, as described in greater detail in the Initial Objection and as will be proven at trial, Oaktree is entitled to more value on its Second Lien Notes Claims than just 15¢ on the dollar. And while Oaktree is supportive of improvements in its treatment, the Debtors can only modify their chapter 11 plan in a manner that complies with the Bankruptcy Code and that respects the franchise of affected claimants. To do that here, while maintaining the September confirmation timeline without having to resolicit the holders of Second Lien Notes Claims, the Debtors should modify the Current RSA Plan after the Voting Deadline to eliminate Class 9’s deathtrap and to provide the enhanced treatment to holders of Second Lien Notes Claims regardless of the voting results.”