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PES Holdings, LLC – Department of Justice Objects to Debtors’ Amended Plan on Numerous Grounds; Further Complicating Proposed $240mn Hilco Sale

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February 5, 2020 – Having been granted special dispensation by the Court for two extra days to file an objection to the Debtors' recently amended Plan, the United States Attorney General (the "DOJ"), nominally on behalf of the Internal Revenue Service (“IRS”), the Bureau of Customs and Border Protection (“CBP”), and the Federal Communications Commission (“FCC”), has emphatically weighed in against the Debtors' amended Plan; the core of which is the Debtors' intended $240.0mn sale of substantially all of their assets to a subsidiary of Hilco Global ("Hilco") [Docket No. 915]. While the objection makes no specific reference to the Hilco sale, there will be considerable speculation that the (beyond) last minute objection is largely in response to that sale and the stated intention of Hilco to shut down refining operations at the Debtors' fire-damaged and environmentally compromised Philadelphia refinery. 

What remains unclear about the unsusual intervention of the DOJ is what it is intended to achieve. Is it indicative of a genuine attempt to stop the Hilco sale, either on substantive grounds or by simply making it too unpleasant to close; or is it political posturing that will evaporate (selfie taken) if and when a serious Court drops the asset sale gavel and confirms the Debtors' Plan?

There is little in the extra time objection that could not have been lodged (or at least prepared) by the DOJ months ago in respect of the Debtors' first December Plan, that Plan clearly contemplating a possible asset sale, albeit not necessarily one to a purchaser looking to repurpose the 1,300 acre Philadelphia site. Several of the objections are in respect of language in the amended Plan language that is completely unchanged from the earlier Plan [blackline at Docket No. 828-1] and several more changes seem to do nothing more than immaterially modify the Plan with the replacement of "Reorganized Debtors" (which will not exist) with the logical substitution of "Liquidating Trust." Presumably equally inconsequential amongst reasonable negotiating parties would be the objection to transferring the FCC's site-based radio licenses or clarifying that the IRS, administrative claims holders, etc will continue to have rights that they indisputably have regardless of the Plan's drafting. The DOJ does not ask, however, for necessary amendments to be made (ie on its surface this does not appear to be about negotiating seemingly resolvable points); the DOJ wants nothing less than "the Court [to] deny confirmation of the Plan."

On January 29th Peter Navarro, director of the White House Office of Trade and Manufacturing Policy, went on record as also objecting to the Hilco sale, stating: “Without putting a finger on any scale we will be available to help [keep the site as a refinery] in any way we can.” Clearly the DOJ has now put a very large finger on that scale. It is not, however, the only finger on the scale; nor is it alone in objecting to how quickly and suddenly the Hilco sale evolved. In response to numerous objections, in addition to imminent filing of the present DOJ objection, the Court had already delayed the Debtors scheduled February 6th confirmation hearing until February 12; that latter date itself now looking quite optimistic.

Background of Key Objections

Objection of the U.S. Trustee

On January 31st, the U.S. Trustee assigned to the Debtors’ cases objected to the Debtors’ Second Amended Plan as recently materially amended by a Plan Supplement, arguing that, as amended, the Plan (i) failed to adequately disclose potential insurance recoveries, (ii) included discharges to which the Debtors are not entitled and (iii) included release provisions “that are inconsistent with the Bankruptcy Code” [Docket No. 851]. The U.S. Trustee stopped just short (but only just) of accusing the Debtors of underhanded tactics, stating that the Debtors are attempting to get material changes otherwise “buried in the exhibits to the Plan Supplement filed two weeks prior to the voting deadline” past impacted creditors.

The objection reserved particular wrath for what the U.S. Trustee saw as an attempt to sneak “illusory” mutual releases past more than 200 impacted entities with a written opt out requirement: “For the more than 200 entities identified in Exhibit B of the Plan Supplement against whom the Debtors or Liquidating Trust may assert claims, the effect of the Plan Supplement language identified in paragraph 16 above is to exclude the listed entity as a Released Party while remaining a Releasing Party unless the entity opts out of the releases. Thus, notwithstanding the language of the Plan the proposed mutual releases are illusory as to any claimant listed in Exhibit B of the Plan Supplement. This is a material change to the Plan buried in the exhibits to the Plan Supplement filed two weeks prior to the voting deadline and was made without the Debtors having complied with the provisions of 11 U.S.C. §1127, this language should be stricken from the Plan Supplement. This amendment, along with the omission of 16 potential insurance recoveries from the financial analyses contained in the Plan Supplement also raise a question as to whether the Debtors provided adequate information in the Plan Supplement.”

The Creditors' Committee Objection

On January 23rd, and within hours of the Supplement's filing, counsel for the Committee (Brown Rudnick) fired off a notice/recommendation to general unsecured creditors imploring them to reject the Debtors' Plan [Docket No. 785]. The Committee's arguments against the Plan are multiple and include, inter alia, that the auction's back-up bid is actually marginally higher, that the Debtors' proposed KEIP is objectionable and that the Debtors' approach vis-a-vis the pursuit of insurance proceeds is inadequately robust; but the real issue for the Committee is that it does not involve a continuation of the Debtors' refinery business. 

The recommendation states: "Hilco contemplates an alternative use for the Debtors’ assets that would permanently shut down the Refining Complex. The contemplated use provides little to no potential value, absent cash consideration, for Holders of Class 5 General Unsecured Claims…" 

Sunoco Objection

ETC Sunoco Holdings LLC (f/k/a Sunoco, Inc., “Sunoco”) filed a limited objection and reservation of rights to the Hilco sale, citing "substantial economic interest' it continues to have following its 2012 sale of the Philadelphia refinery to the Debtors.

The objection [Docket No. 868] states: "Sunoco and the Debtors were parties to at least thirty pre-petition contracts relating to the Debtors’ operation of an oil refinery in Philadelphia (the 'Refinery'), as well as to numerous and other agreements related to Sunoco’s 2012 sale of the Refinery to the Debtors. Sunoco has a vested, substantial economic interest in the outcome of these Chapter 11 Cases. Following discussions with the Debtors and Hilco, and based upon the Debtors’ representations in the First Amended Plan Supplement [ECF No. 819], Sunoco has determined, for now, not to object to the confirmation of the Debtors’ Chapter 11 Plan and the underlying proposed sale to Hilco. However, in an abundance of caution, and to protect its rights and interests, Sunoco files this Objection and Reservation of Rights.

As set forth in the Plan and the Sale Motion, the Debtors propose to sell the equity interests of the Debtors, which include ownership of the Refinery, to Hilco. Hilco indicated to Sunoco that it intends to redevelop the land where the Refinery is located for a use or uses unrelated to the Refinery, which Sunoco contends may not be permitted by the covenants and restrictions contained in the Deeds.

Pursuant to Paragraph 5, PESRM must '[u]se the Property only for commercial or industrial activity…PESRM must further avoid disturbing subsurface strata and soils, except as may be necessary with respect to (i) constructing and developing improvements to the Refinery and (ii) installing new operations, businesses or processes at the Refinery that are related to the Refinery Business, the energy industry generally and the chemical industry.”

Summary of the Hilco Purchase Agreement

  • Seller: PES Ultimate Holdings, LLC, a Delaware limited liability company (“PES Ultimate Holdings”), PES Intermediate, LLC, a Delaware limited liability company.
  • Buyer: HRP Philadelphia Holdings, LLC, a Delaware limited liability company.
  • Purchase Price: The aggregate cash purchase price payable at the Closing for the Interests shall be an amount equal to $240,000,000.00 (the “Base Purchase Price”), plus (1) the Transferred Cash (if any) and (ii) (x) if the Sellers Pre-Closing Tax Amount is positive, plus the Sellers Pre-Closing Tax Amount or (y) if the Sellers Pre-Closing Tax Amount is negative, minus the absolute value of the Sellers Pre-Closing Tax Amount (the “Purchase Price”).

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The post PES Holdings, LLC – Department of Justice Objects to Debtors’ Amended Plan on Numerous Grounds; Further Complicating Proposed $240mn Hilco Sale appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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