Official Comm. of Unsecured Creditors of HDR Holdings, Inc. v. Gennx360 Capital Partners, L.P. (In re HDR Holdings, Inc.)

IN RE: HDR HOLDINGS, INC., et al., Debtors.

OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF HDR HOLDINGS, INC., DNOW L.P., Appellants, v. GENNX360 CAPITAL PARTNERS, L.P.,SCHRAMM, INC., HARK CAPITAL I, L.P., Appellees.

Bankr. Case No. 19-11396 (MFW)

C.A. No. 19-1825 (MN)

C.A. No. 19-1946 (MN)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

November 9, 2020

Chapter 11

MEMORANDUM OPINION

Pauline K. Morgan, Sean T. Greecher, Joseph M. Mulvihill, Jared W. Kochenash, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, DE - Attorneys for HDR Holdings, Inc. and Schramm, Inc.

Donald J. Detweiler, John H. Schanne, II, PEPPER HAMILTON LLP, Wilmington, DE - Attorneys for Official Committee of Unsecured Creditors of HRD Holding, Inc., et al.

Michael D. DeBaecke, ASHBY & GEDDES P.A., Wilmington, DE - Attorneys for DNOW L.P.

Jamie L. Edmonson, ROBINSON & COLE LLP, Wilmington, DE; Carey D. Schreiber, WINSTON & STRAWN LLP, New York, NY - Attorneys for GenNx360 Capital Partners, L.P. and Schramm II Inc.

November 9, 2020

Wilmington, DE

NOREIKA, U.S. DISTRICT JUDGE

Presently before the Court are two appeals from a September 17, 2019 Bankruptcy Court order (Bankr. D.I. 208)¹ ("Sale Order"), entered in the Chapter 11 cases of HDR Holdings, Inc. ("HDR") and Schramm, Inc. (together, "Debtors"). The Sale Order authorized the sale of substantially all of the Debtors' assets pursuant to 11 U.S.C. § 363. The first appeal was filed by the Official Committee of Unsecured Creditors ("Committee"), and the second appeal was filed by DNOW, L.P. (together, "Appellants"). The Debtors, GenNx360 Capital Partners, L.P., and Schramm II Inc. (together, "Appellees") have moved to dismiss the appeals ("Motion to Dismiss")² as statutorily moot pursuant to 11 U.S.C. § 363(m). For the reasons set forth herein, the Court will GRANT the motion and dismiss the appeals.

I. BACKGROUND

A. Chapter 11 Cases and Sale Motion

On June 24, 2019, the Debtors filed voluntary petitions under chapter 11 of the Bankruptcy Code. Prior to the filing, Appellee GenNx360 financially supported the Debtors. Following the filing, Appellee Schramm II, as the debtor-in-possession (or "DIP") lender, provided $6 million in new-money DIP financing to help the Debtors transition into chapter 11 and fund a sale process. Schramm II also agreed to act as the initial "stalking horse" bidder to purchase all of the Debtors' assets (with certain specific exceptions), setting the low-end bidding bar from which alternative bidders would have an opportunity to make higher or otherwise better bids.

The Debtors moved to sell substantially all of their assets to Schramm II, including avoidance actions (Bankr. D.I. 18 ¶ 23) ("Sale Motion") but excluding the "Excluded Assets" (id., Exh. 4 at §§ 2.1-2.2). The Stalking Horse Purchase Agreement ("APA"), as approved by the bid procedures order (Bankr. D.I. 163-2) ("Bid Procedures Order"), does not define avoidance actions. Generally speaking, avoidance actions are asserted on behalf of a bankruptcy estate to recover assets transferred out of the estate before the bankruptcy began. (See Bankr. D.I. 164 ("Final DIP Financing Order") ¶ 10(c) (defining avoidance actions as "any claims and causes of action relating to or arising under chapter 5 of the Bankruptcy Code, including §§ 544, 545, 547, 548 and 550 or any other similar state or federal law and any and all products, rents, offspring, profits, and proceeds of same."). The definition of Excluded Assets set forth in the APA does not exclude avoidance actions from the proposed sale. (Bankr. D.I. 163-2 at 4; id. at §§ 2.2).

B. Bid Procedures Order and APA

Appellants - the Committee and DNOW (an unsecured creditor and chair of the Committee) - objected to the Debtors' initial bidding procedures and DIP financing. On August 2, 2019, the Bankruptcy Court held a hearing on the proposed bid procedures, Final DIP financing Order, and APA with Schramm II as the stalking horse bidder. At that hearing, the parties negotiated and agreed to significant modifications to the terms of the proposed sale. The parties agreed that (1) Debtors would solicit and accept piecemeal bids for all assets, rather than selling them as a package; (2) Schramm II's baseline bid would be lowered by $5 million to lower the threshold for potential overbids; (3) the bidding process would be extended by more than three weeks, at the expense of Appellees, to give potential bidders a chance to consider their options; and (4) Debtors would appoint an independent director to oversee the sale process and to ensure that all potential bidders had a full and fair opportunity to consider their purchase and make anybid. The parties subsequently agreed to modifications of the terms of the proposed sale. Appellants advised the Bankruptcy Court that the modifications resolved their objections, and consented to the APA's terms, as well as to the Bankruptcy Court's entry of an "Order Establishing Bidding Procedures and Granting Related Relief" ("the Bid Procedures Order") and approval of the APA with Schramm II (subject only to "higher or otherwise better" offers). The assets to be acquired by Schramm II under the APA were approved by the Bankruptcy Court as part of the agreed Bid Procedures Order. (Bankr. D.I. 151, Transcript of 8/2/19 Bid Procedures Hearing ("Bid Procedures Hr'g Tr.") at 128:20-23, 129:8-9, 131:24-25, 132:1-9; Bankr. D.I. 163-2).

Under the APA, Schramm II was authorized to pay $16.3 million for Schramm's assets. (APA § 2.5, sched. 2.5; Bankr. D.I. 164 ¶ 32). The purchase price consisted of: (1) a "credit bid" of the $6 million Schramm II was owed under the DIP loan; (2) assumption of approximately $5.3 million of debt owed to an entity called Hark I, under a term loan Hark provided the Debtors prepetition ("Term Loan A"), and the application of that amount towards the purchase price; and (3) the ability to assume or "credit bid" $5 million owed to GenNx360 under a term loan GenNx360 had given the Debtors ("Term Loan B"), provided that if Schramm II wanted to use the Term Loan B debt as currency at an auction, it would cash collateralize those amounts dollar for dollar. (Id.; Bid Procedures Hr'g Tr. at 129:23-25, 130:1-19). The Committee and DNOW agreed to all of the terms as part of their consent to the Bid Procedures Order and APA. (See Bid Procedures Hr'g Tr. at 129:17-132:9; Bankr. D.I. 163, Schedule 2).

C. The Avoidance Actions

Schramm II is wholly owned by GenNx360, the Debtors' controlling majority shareholder. On September 11, 2019, well after execution of the APA (June 24, 2019) and entry of the Final DIP Financing Order and the Bidding Procedures Order (both entered on August 7, 2019), theCommittee commenced an adversary action against GenNx360 (Bankr. D.I. 198) ("the Committee Adversary Action"). GenNx360, along with its affiliates and certain directors and officers, are the primary targets of the claims set forth in the Committee Adversary Action ("Avoidance Actions").

D. Sale Order

No other bids were received and, thus, no auction was held. As a result, Schramm II did not exercise its right to "credit bid" the $5 million owed to GenNx360 under the Term Loan B. Notwithstanding having satisfied the purchase price of $11.3 million that had been agreed with Appellants, Schramm II also assumed $5 million in Term Loan B debt - as it was permitted to do under the APA and Bid Procedures Order - which benefitted the estates by eliminating a $5 million liability. (Bankr. D.I. 164 ¶ 32; Bankr. D.I. 209, 9/16/2019 Transcript of Sale Hearing ("Sale Hr'g Tr.") at 101:5-11 ("So, let's turn to the value that this sale actually does provide . . . . First, this satisfies the DIP, plus the Term Loan A obligations, plus the assumption of $5 million dollars of Term Loan B obligations. So, at the outset, the sale wipes off over $16.3 million dollars, plus interest and fees, from the Estate's books."). The proposed Sale Order included language that would capture and eliminate the Avoidance Actions set forth in the Committee Adversary Action. The Committee filed a preliminary objection on September 6, 2019, asserting that the Third Circuit had not "definitively addressed whether avoidance actions are property of a debtor's estate, or whether such claims or a trustee's right to pursue avoidance actions can be sold," and that there was uncertainty regarding whether those assets were being acquired under the APA. (Bankr. D.I. 194 at 9-11).³

The pendency of the Committee Adversary Action and the proposed sale of the Avoidance Actions were discussed during the Sale Hearing. (Sale Hr'g Tr. at 80:24-81:4; 124:23-126:10; 144:6-145:15 (counsel for GenNx and Schramm II acknowledging that "challenge" claims against GenNx were among the "assets" being purchased). Following argument, the Bankruptcy Court overruled Appellants' objections to the sale, "agree[d], given the totality of the circumstances, that the sale process was fair" and expressed the belief that the "the market has spoken," noting "[t]here were no other bidders for any of the assets." (Id. at 147:24-148:10). The Bankruptcy Court noted that:

the process post-bankruptcy did try to solicit numerous financial and strategic buyers, did allow extended due diligence for parties. It appears that several parties were actively doing due diligence and kicking the tires in considering whether to buy the assets. And notwithstanding that, no bid for the assets was received.

(Id. at 148:18-24). The Bankruptcy Court found that the "insider relationship" cited by Appellants "was not hidden." (Id. at 147:24-148:4). And with respect to the sale of the Avoidance Actions, found that "all the parties were aware that the avoidance actions were included in the price." (Id. at 151:9-10). The Bankruptcy Court further determined that "the asset purchase agreement does include the avoidance actions," and also determined "there is not any law that precludes the sale of avoidance actions." (Id. at 151:15-17).

The Bankruptcy Court...