December 5, 2019 – An ad hoc group of holders of the Debtors unsecured notes (the “Ad Hoc Group”) and the Debtors' Official Committee of Unsecured Creditors (the “Committee”) have each objected to the Debtors’ motion to appoint Mohsin Y. Meghji as the Debtors' Chief Restructuring Officer [Docket Nos. 668 and 672, respectively]. Mr. Meghji is a Managing Partner at M-III Advisory Partners, LP and has served in numerous restructuring roles, most recently as the CRO in the Sears Holdings Corporation cases.
The objections take no issue with Mr Meghji personally or his credentials (personal enmity saved for the Debtors' CEO, Anthony Sanchez III), but rather point at the "tainted" or "sham" process by which he has been appointed and the role…and reporting lines…which the Debtors are asking the Court to approve. The objections argue that regardless of Mr Meghji's qualifications he is "damaged goods" and that his selection, coming after the Debtors' rejection of a CRO unanimously supported by key stakeholder groups, "is the latest attempt to protect the Sanchezes and frustrate the Debtors’ creditors."
The Ad Hoc Group's objection also suggests an ominous alternative for the Debtors, noting that "Only an examiner or trustee, selected by the U.S. Trustee, could provide the independent oversight contemplated by Congress and the Bankruptcy Code—not by the Sanchez family."
Ad Hoc Group’s Objection
The objection [Docket No. 668] states, “The Debtors’ Motion to appoint a Chief Restructuring Officer (‘CRO’) is the latest attempt to protect the Sanchezes and frustrate the Debtors’ creditors. Although the Debtors contend that they are responding to ‘stakeholder’ concerns, the Debtors in fact disregarded the unanimous choice of secured and unsecured creditors, who was not acceptable to Anthony Sanchez III (‘Sanchez III’) or his handpicked Special Committee. Instead, the Debtors fell back into a now-familiar practice, handpicking their own CRO (to deal with affiliates), just as they previously handpicked their own ‘Special Committee’ (to deal with affiliates).
Rather than resolving the Debtors’ conflicts, the proposed CRO will perpetuate them….In response to the Examiner Motion and to concerns voiced by the Court, the Debtors have amended the requested relief so that the CRO will only be directed by the Special Committee. That does not solve the problem. The Special Committee was handpicked by the Sanchezes and ran a tainted process selecting the CRO. Moreover, as detailed in the Examiner Motion and herein, the Special Committee has not done anything to alleviate the conflicts since its inception more than a year ago. Indeed, if the Special Committee were effective, the Debtors would not need a new CRO to supposedly do what has been the Special Committee’s job for more than a year. The CRO, at best, would duplicate and be subservient to the Special Committee. The CRO will not provide the independence that this case demands and that creditors deserve. Only an examiner or trustee, selected by the U.S. Trustee, could provide the independent oversight contemplated by Congress and the Bankruptcy Code—not by the Sanchez family.
Conflicts abound in this case. The Sanchez family controls the Debtors (and their affiliates SOG and SNMP), they handpicked each member of the Special Committee, and now their handpicked Special Committee is proposing to pick a CRO against creditors’ wishes pursuant to a tainted process in which the Special Committee invited the input of Sanchez III, was advised by conflicted counsel, and disregarded the creditors’ unanimous choice. Thus, if the CRO is supposed to somehow alleviate the conflicts, he will not, particularly since he will be reporting to either the existing conflicted board or the Special Committee it picked. And if the CRO is supposed to help develop a plan or negotiate with creditors, the Debtors utterly fail to explain why their existing financial and legal professionals are not capable of doing so. The Motion should be denied.”
Creditors Committee’s Objection
The objection [Docket No. 672] states, “The key groups representing creditors in these cases—the Committee, the ad hoc group of unsecured noteholders (the ‘Unsecured Group’), and the ad hoc group of secured noteholders (the ‘Secured Group’ and, together with the Committee and the Unsecured Group, the ‘Creditor Groups’)—unanimously believe that only oversight by an independent Chief Restructuring Officer (a ‘CRO’) can give confidence to the non-insider stakeholders that the Debtors are responsibly managing their relationships with the Sanchez family. In fact, the Creditor Groups unanimously agreed in mid-October on a qualified, credible candidate to fill that role.
Instead of taking this opportunity to bring all the Creditor Groups together (who themselves have divergent interests with respect to many issues) and to advance toward a comprehensive restructuring, the Debtors and the ostensibly independent Special Committee of SN’s board decided to reject the Creditor Groups’ unanimous choice. The Special Committee clearly prejudged the Creditor Groups’ consensus candidate, improperly allowed the Sanchez family to influence the selection, and then refused to provide any credible or cogent explanation for its decision. It is therefore difficult to conclude that the selection process was anything other than a sham.
In an ordinary case, it may be acceptable for a debtor to select its own candidate for the role of a CRO over an equally qualified candidate preferred by its creditors. But the facts here are extraordinary. Because the primary purpose of the CRO in this case is to oversee the Debtors’ relationships with the Sanchez family and its non-Debtor businesses, it is inappropriate for the Debtors to defer to their conflicted managers instead of relying heavily on the judgment of their economic stakeholders and the only non-conflicted fiduciary in these cases.
These cases require the appointment of a CRO not only with the skills to run these cases and oversee the Debtors’ restructuring, but also with the independence to be trusted by the major creditor groups. That kind of CRO could have been a catalyst for the Debtors’ successful reorganization in a way that an examiner cannot. Unfortunately, as the result of the Debtors’ approach to selecting Mr. Meghji, his appointment will mitigate none of the problems that a credible process could have solved. Unfortunately, no matter how impressive his résumé may be, Mr. Meghji—the preferred candidate of the same conflicted governance structure that the CRO is intended to check— is damaged goods, and the Committee does not have confidence that he will be in the position to adequately address the creditor concerns that gave rise to his appointment.”
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