In re Latex Foam Int'l

In re: LATEX FOAM INTERNATIONAL, LLC, LATEX FOAM INTERNATIONAL HOLDINGS, INC., LATEX FOAM ASSETS ACQUISITION, LLC, PURELATEX BLISS, LLC, and PLB HOLDINGS, LLC, Debtors.

Case No. 19-51064

Case No. 19-51065

Case No. 19-51066

Case No. 19-51067

Case No. 19-51068

UNITED STATES BANKRUPTCY COURT DISTRICT OF CONNECTICUT

May 4, 2020

Chapter 11

(Jointly Administered Under Case No. 19-51064)

MEMORANDUM OF DECISION AND ORDER ON MOTION FOR AUTHORITY FOR CONTINUED USE OF CASH COLLATERAL AND TO PROVIDE ADEQUATE PROTECTION

Julie A. Manning, Chief United States Bankruptcy Judge

I. INTRODUCTION

On August 8, 2019, Latex Foam International, LLC, Latex Foam International Holdings, Inc., PLB Holdings, LLC, PureLatex Bliss, LLC, and Latex Foam Assets Acquisition, LLC (the "Debtors") filed voluntary petitions for the relief under Chapter 11 of the Bankruptcy Code. On that same date, the Debtors filed a Motion to Use Cash Collateral and To Provide Adequate Protection (the "Motion" ECF No. 4). On August 14, 2019, a preliminary order entered authorizing the Debtors' use of cash collateral and providing adequate protection. Additional interim orders entered authorizing the Debtors' use of cash collateral and providing adequate protection for a specific period of time. Before the specific period of time authorizing the continued use of cash collateral expired, the Debtors were required to file a subsequent proposed order authorizing the continued use of cash collateral for a future period of time to allow parties an opportunity to file an objection to the proposed order.

The operative interim order is the Eighth Interim Order Authorizing the Use of Cash Collateral and Providing Adequate Protection, which entered on March 26, 2020 (the "Eighth Interim Order," ECF No. 498). The Eighth Interim Order authorized the use of cash collateral through May 2, 2020. In accordance with the provisions of the Eighth Interim Order, on April 22, 2020, the Debtors filed a proposed Ninth Interim Order authorizing the use of cash collateral through May 30, 2020 (the "Ninth Interim Order," ECF No. 510). On April 27, 2020, Entrepreneur Growth Capital, LLC ("EGC"), a secured creditor and party-in-interest, filed an Objection to the Ninth Interim Order (the "Objection"). ECF No. 516. The Official Committee of Unsecured Creditors (the "Committee") filed a Response to the Ninth Interim Order on April 27, 2020 (the "Response"). ECF No. 517.

An evidentiary hearing on the Motion and the Ninth Interim Order was held on May 1, 2020. The parties agreed to the full admission of nine exhibits and the Debtor called one witness in support of the Motion and the Ninth Interim Order. At the conclusion of the hearing, the matter was taken under advisement. For the reasons that follow, the Motion is granted and the Debtors are authorized to continue to use cash collateral through May 30, 2020, and to provide adequate protection to EGC in accordance with the provisions of the Ninth Interim Order.

II. JURISDICTION

The United States District Court for the District of Connecticut has jurisdiction over the instant proceedings pursuant to 28 U.S.C. § 1334(b), and the Bankruptcy Court derives its authority to hear and determine this matter pursuant to 28 U.S.C. §§ 157(b)(1), (b)(2)(A) and (b)(3) and the District Court's General Order of Reference dated September 21, 1984.

III. FACTS¹

1. The Debtors filed the instant Chapter 11 cases on August 8, 2019.

2. In accordance with 11 U.S.C. §§ 1107 and 1108, the Debtors continue in possession of their properties and continue to operate and manage their businesses as debtors-in-possession.

3. As of the Petition Date, EGC has asserted a first priority secured claim of $9,342,934.33 against all of the Debtors' assets, including the Debtors' cash, inventory, and accounts receivable. See Exhibit EGC-1.

4. The Debtors have acknowledged the extent, validity, and priority of the liens of ECG, and have waived any defenses, challenges, disputes, or counterclaims to the same. See, e.g., Eighth Interim Order.

5. At the time the Debtors filed the Chapter 11 cases, the aggregate amount of cash, accounts receivable, and inventory exceeded the amount of EGC's claim. EGC had a lien on machinery and equipment owned by the Debtors. See Exhibits EGC-1 and ECG-2.

6. The Court entered a Preliminary Order Authorizing Use of Cash Collateral and Providing Adequate Protection on August 14, 2019, authorizing the Debtors to use cash collateral through and including August 27, 2019. On March 26, 2020, the Eighth Interim Order entered authorizing the Debtors to use cash collateral through and including May 2, 2020. The interim orders authorizing the use of cash collateral and providing adequate protection, ECF Nos. 48, 79, 175, 235, 272,404, 455, 498, are hereafter referred to as the "Interim Cash Collateral Orders."

7. Pursuant to the terms of the Interim Cash Collateral Orders, in exchange for the interim use of cash collateral by the Debtors and as adequate protection for EGC's interests therein, EGC was granted replacement and/or substitute liens (subject only to certain carve-outs) as provided by 11 U.S.C. § 361(2) in all post-petition assets of the Debtors and proceeds thereof, excluding any bankruptcy avoidance causes of action. The Interim Cash Collateral Orders further provided that the "replacement liens shall have the same validity, extent, and priority that EGC possessed as to said liens on the Petition Date; provided, however, that such replacement liens shall only be for the amount of any diminution of value in EGC's cash collateral."

8. The Interim Cash Collateral Orders also: (i) allowed "the Debtors to use accounts receivable which constitute cash collateral of EGC on a revolving basis and to provide EGC with replacement liens upon post-petition assets to the extent that EGC held valid liens as of the Petition Date, so that its interests therein will not be diminished during the interim period covered by the term of this Order;" and (ii) provided that EGC "is entitled to the benefits of §507(b) of the Code (subject only to the carve-outs in paragraphs 5k and 5l of this Order)."

9. On April 22, 2020, the Debtors filed the Ninth Interim Order.

10. On April 27, 2020, EGC filed its Objection, seeking to have the Motion and the Ninth Interim Order denied in its entirety. In support of its Objection, EGC asserts the following:

a. The Debtors are no longer in operation.

b. The Debtors' financial position is declining. They generated a negative cash flow in April 2020.

c. Despite over five months of searching for a buyer of the Debtors' business, a buyer has not been located willing to pay sums sufficient to satisfy EGC's claim.d. Administrative expenses continue to accrue.

e. The Debtors cannot provide adequate protection of EGC's lien.

11. The Committee filed its Response on April 27, 2020. The response sets forth the following:

a. While the Committee has concerns about the Debtors' failure to propose a plan, or complete a sale process yet, it believes the Debtors are close to entering into a stalking horse agreement for the sale of the Debtors' business.

b. Denying use of cash collateral will eliminate any chance of recovery for unsecured creditors.

12. During the evidentiary hearing on the Motion and the Ninth Interim Order held on May 1, 2020, the Debtors' Chief Financial Officer, Mr. Steve Turner, testified to the following:

a. He graduated from the University of Kent with an accounting degree and has over 30 years of experience as an accountant.

b. He began working for the Debtors as Vice President of Finance in 2014 and became the Chief Financial Officer within one year.

c. As the Debtors' Chief Financial Officer, his responsibilities include financial reporting, auditing, management reporting, financial evaluations, and risk management.

d. He has direct knowledge of financial reports produced by the Debtors, including information in reports provided to insurance companies to obtain to insurance coverage for the Debtors' assets.

e. The Debtors' borrowing base Collateral Calculation Report dated as of August 23, 2019, two weeks after the Debtors' Chapter 11 cases were filed (the "August 23,2019 Collateral Calculation Report") lists, among other things, Cash on Hand as $3,610,156.30, Eligible Inventory as $1, 976,791.26, and Eligible Accounts Receivable as $4,111,764.69, when added together equals $9,698,712.25. See Exhibit EGC-4.

f. The Debtors' borrowing base Collateral Calculation Report dated as of April 24, 2020 (the "April 24, 2020 Collateral Calculation Report"), lists, among other things, Cash on Hand as $3,517,049.53, Eligible Inventory as $2,565,012.54, and Eligible Accounts Receivable as $2,979,429.08, when added together equals $9,061,491.15. See Exhibit ECG-7.

g. Approximately $200,000.00 in rebates to customers should be subtracted from the Cash on Hand figure in the April 24, 2020 Collateral Calculation Report.

h. A comparison of the August 23, 2019 Collateral Calculation Report and the April 24, 2020 Collateral Calculation Report show that, during the pendency of the Debtor's bankruptcy case, the decline in value of assets was approximately $400,000.00.

i. During the pendency of the case, the Debtors made approximately $800,000.00 in adequate protection payments to EGC.

j. The Debtors have not ceased their operations, but have been operating with a reduced staff for several weeks.

k. Based on the history of the business, he expects that the Debtors will actually collect $3,400,000.00 of the gross accounts receivable as long as the Debtors remain operational.l. Approximately 80% of the Debtor's gross inventory is finished goods to be sold to customers. Based on his experience and knowledge, the inventory of finished goods would realize more value than the inventory value, and that the total value of gross inventory is $2,500,000.00.

m. Since 2018, the Debtors have spent between $1,500,000.00 and $1,800,000.00 on the purchase of new machinery and equipment.

n. Based

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