May 11, 2020 – The Court hearing the Pace Industries cases denied a motion filed by minority investor Macquarie Septa (US) I, LLC ("Macquarie") seeking a dismissal of several of the Debtors’ Chapter 11 cases [Docket No. 173]. Macquarie had argued that, absent its consent, the Debtors did not have the requisite corporate authority to file for Chapter 11 protection in respect of a majority of the Debtors' Chapter 11 cases. The Debtors responded, apparently convincingly, that out-of-the-money equity holders should not be able to hold the Debtors, or their lenders, to ransom; that whatever the corporate niceties of a contractual requirement to obtain consent from these equity holders might be; public policy arguments in favor of bankruptcy shelter for companies in need should trump them.
The Debtors argue: "This Court and other bankruptcy courts have recognized that a right to consent to a voluntary bankruptcy filing may be disregarded if, under the circumstances, enforcing the right would conflict with the important public policy of assuring companies can seek federal bankruptcy relief."
In its Motion, Macquarie Septa asks this Court to allow it to unilaterally block Debtor KPI Intermediate Holdings, Inc. and its subsidiaries (collectively, the “KPI Intermediate Debtors”) from seeking much-needed relief under the United States Bankruptcy Code (the “Bankruptcy Code”), without regard to the best interests of the Debtors or their stakeholders. Even assuming Macquarie Septa has such a “blocking right” under state law, that right is invalid as contrary to federal public policy and equity under the particular circumstances of this case. 2.This Court and other bankruptcy courts have recognized that a right to consent to a voluntary bankruptcy filing may be disregarded if, under the circumstances, enforcing the right would conflict with the important public policy of assuring companies can seek federal bankruptcy relief when needed or where it would be inequitable. Such circumstances are present in these chapter 11 cases.
Here, Macquarie Septa is an out-of-the-money minority equity holder in a company that is faced with two realistic options: (i) restructure under chapter 11 of the Bankruptcy Code, pay its trade creditors in full and exit bankruptcy as a going concern, saving thousands of jobs across the United States amid a global health and economic crisis; or (ii) face foreclosure, which it has no realistic basis to contest. What Macquarie Septa is doing by seeking dismissal, then, is threatening to force a foreclosure in the hopes that it can extract for itself some benefit in an out-of-court agreement with the Debtors’ lenders.
The order states, “The Motion is DENIED for the reasons stated by the Court on the record at the hearing held on May 5, 2020.”
Curiously, the order is issued as drafted by Macquarie's counsel; who apparently preferred (or otherwise agreed) not to have the Court's reasoning reflected in the order. In addition to arguments raised in its motion to dismiss, Macquarie details its position in a reply to the Debtors' objection to the motion [see Docket Nos. 128 and 115, respectively].
On April 17, 2020, Macquarie filed a motion seeking dismissal of a majority of the Debtors' Chapter 11 cases (ie those of KPI Intermediate Holdings, Inc. and the Debtors sitting structurally below, the "KPI Intermediate Debtors," see structure chart below), arguing that the directors of KPI Intermediate Holdings lacked the corporate authority to file the Chapter 11 petitions of the KPI Intermediate Debtors [Docket No. 88].
The dismissal motion stated: "The Court must dismiss the Chapter 11 Cases of the KPI Intermediate Debtors because the directors (the “Directors”) of KPI Intermediate lacked corporate authority to file the voluntary petitions for the KPI Intermediate Debtors. The absence of authority is jurisdictional."
The dismissal motion continued, “In January of 2018, Macquarie Septa and its affiliate, Macquarie Sierra Investment Holdings Inc. ('Macquarie Sierra'), entered into an Investment and Subscription Agreement with KPI Intermediate and KPI Holdings, LLC. (the 'Investment Agreement'). Pursuant to the Investment Agreement, Macquarie Septa and Macquarie Sierra purchased 250 shares and 150 shares, respectively, of Series A Preferred Stock issued by KPI Intermediate (the 'Series A Preferred Stock') for an aggregate purchase price of $37,150,000. To induce Macquarie Septa and Macquarie Sierra to pay KPI Intermediate $37,150,000 for the Series A Preferred Stock, KPI Intermediate adopted and filed with the Delaware Secretary of State the KPI Intermediate Holdings, Inc. Amended and Restated Certificate of Incorporation (the 'Certificate').
When purchasing the Series A Preferred Stock, Macquarie Septa relied upon these protections in the Certificate, which include without limitation, the following provisions:
6.1 So long as any share of Series A Preferred Stock remains outstanding, the following actions of the Corporation or any of its Subsidiaries (whether undertaken directly or indirectly, by amendment, merger, consolidation or otherwise) shall require the written consent or affirmative vote of the holders of a majority in interest of the Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, and any such action taken without such consent or vote shall be null and void ab initio, and of no force or effect: . . .
6.1.3 directing, adopting or approving any plan of liquidation, dissolution or winding-up of any Pace Company and any voluntary bankruptcy or similar filing by any Pace Company. . . .[emphasis in motion]
On April 12, 2020 (the ‘Petition Date’), the Directors caused the KPI Intermediate Debtors to file unauthorized voluntary bankruptcy petitions (collectively, the ‘Petitions’) with this Court. None of the Petitions include any written consent or affirmative vote of Macquarie Septa, the holder of 62.5% of the Series A Preferred Stock because neither its written consent nor affirmative vote was obtained. Macquarie Septa did not consent to the filing of the Petitions.”
The Court scheduled a hearing to consider the motion for May 5, 2020, with objections due by April 28, 2020.
The KPI Intermediate Debtors: KPI Intermediate Holdings, Inc., a Delaware corporation (“KPI Intermediate”), and each of its direct and indirect subsidiaries, Pace Industries, LLC, Pace Industries, Inc., Pace FQE, LLC, Port City Group, Inc., Muskegon Castings, LLC, Alloy Resources, LLC and Pace Industries of Mexico, L.L.C."
Debtors' Objection to Macquarie Motion
In their objection, the Debtors state: "In its Motion, Macquarie Septa asks this Court to allow it to unilaterally block Debtor KPI Intermediate Holdings, Inc. and its subsidiaries (collectively, the “KPI Intermediate Debtors”) from seeking much-needed relief under the United States Bankruptcy Code (the “Bankruptcy Code”), without regard to the best interests of the Debtors or their stakeholders. Even assuming Macquarie Septa has such a “blocking right” under state law, that right is invalid as contrary to federal public policy and equity under the particular circumstances of this case.
This Court and other bankruptcy courts have recognized that a right to consent to a voluntary bankruptcy filing may be disregarded if, under the circumstances, enforcing the right would conflict with the important public policy of assuring companies can seek federal bankruptcy relief when needed or where it would be inequitable. Such circumstances are present in these chapter 11 cases.
Here, Macquarie Septa is an out-of-the-money minority equity holder in a company that is faced with two realistic options: (i) restructure under chapter 11 of the Bankruptcy Code, pay its trade creditors in full and exit bankruptcy as a going concern, saving thousands of jobs across the United States amid a global health and economic crisis; or (ii) face foreclosure, which it has no realistic basis to contest. What Macquarie Septa is doing by seeking dismissal, then, is threatening to force a foreclosure in the hopes that it can extract for itself some benefit in an out-of-court agreement with the Debtors’ lenders."
Corporate Structure Chart
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