Zohar III Corp. v. Tilton (In re Zohar III, Corp.)

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IN RE ZOHAR III, CORP., et al., Debtors.

ZOHAR III CORP., et al., Appellants, v. LYNN TILTON, et al., Appellees.

Civ. No. 21-628-TLA

No. 18-10512-KBO

United States District Court, D. Delaware

October 19, 2022

Chapter 11

MEMORANDUM OPINION

AMBRO Circuit Judge, sitting by designation.

Zohar III, Corp., and its affiliated debtors and debtors in possession (collectively, the “Debtors”) appeal a Bankruptcy Court order approving the sale of certain assets. For the following reasons, I affirm.

I.

The Debtors are investment entities created by Lynn Tilton. They raised capital by issuing notes to investors and then used that capital to make debt and equity investments in distressed companies (the “Portfolio Companies”). On March 11, 2018, Tilton filed them for bankruptcy protection under Chapter 11.

Their bankruptcy petitions were hotly contested. Eventually, the key parties-the Debtors, Tilton along with her affiliates and the Debtors' most significant secured lenders-entered into a Settlement Agreement. It required the Debtors (through their Chief Restructuring Officer, or “CRO”) and Tilton to monetize jointly the Portfolio Companies. The parties “acknowledged that the CRO w[ould] act in the best interests of the [Debtors], and Tilton in the best interests of the . . . Portfolio Companies.” A-233-34 ¶ 10.

Global Automotive Systems, LLC (“Global”) was one of the Portfolio Companies to be monetized. It manufactured metal-formed assemblies for the automotive industry. Tilton was its manager and CEO. The Debtors owned 100% of its common membership interests, while Tilton indirectly owned 100% of its Class A membership interests. The Class A interests are entitled to distribution in full prior to the common membership interests.

Global had two secured credit facilities: (1) an asset-based lending facility (the “ABL Facility”) held by a Tilton affiliate; and (2) a term loan (the “Term Loan”) held by the Debtors and two Tilton affiliates. The ABL Facility was almost fully drawn at $24 million. The Term Loan was in default as of April 2019, with about $150 million owed to the Debtors and about $12 million owed to the Tilton affiliates. Substantially all of Global's assets secured the credit facilities. Under a 2007 intercreditor agreement, the ABL Facility had first priority over the majority of Global's operating assets, and the Term Loan had first priority over the remaining assets.

With the Debtors' and Tilton's agreement, Global hired investment banker Donnelly Penman & Partners Inc. (“Donnelly Penman”) in May 2020 to facilitate a sale of the company. The firm conducted due diligence throughout the summer and fall of 2020. After several extensions, Tilton and the Debtors agreed Global would go to market in December 2020. Donnelly Penman communicated with 298 interested parties (including the Debtors and Tilton), 80 of which agreed to sign non-disclosure agreements to explore a potential sale. At the same time, it was working with Tilton and Global's management to prepare a Confidential Information Memorandum for the bidders. It also drafted a bid process letter with information on how and when to submit bids. On December 19, Donnelly Penman sent the Memorandum and bid process letter to the prospective buyers.

Also in December 2020, Global hired Mark Berger of Portage Point Partners to serve as its Independent Sales Process Manager. The intent was to ensure a fair and transparent sale process given Tilton's interest in bidding on the company. The Debtors assert they were not consulted on his hiring. Concerned Berger was not sufficiently independent, they asked the Bankruptcy Court to replace him. The Court rejected that request.

By January 15, 2021, Global had 14 initial offers ranging from $26 to $80 million, including one from Tilton affiliate Advanced Vehicle Assemblies, LLC (“AVA”). The Debtors did not submit an offer. Nine of the bidders (counting Tilton's entity) received invitations to the next phase of the marketing process. Global's management presentations followed shortly after to the eight non-Tilton-affiliated bidders.

As those presentations were wrapping up, Donnelly Penman learned of an emerging liquidity crisis stemming from a global semiconductor shortage. Shortly thereafter, Global alerted the Debtors that it was going to sell a dormant plant in Saline, Michigan, for $1.1 million. Global asked to keep all the proceeds from the sale to fund its operations. The Debtors agreed. On March 4, Global gave the Debtors an updated cash flow forecast indicating it would need more than $4 million by March 12 to continue operations. It requested that the Debtors fund the liquidity shortage, but they could not.

Meanwhile, Global shared its liquidity concerns with the bidders, and extended to March 5, 2021 the deadline for them to submit letters of intent. Three parties (including Tilton's AVA) submitted letters. AVA offered to purchase Global's equity for $44 million, conditioned on a portion of the purchase price being credit bid to pay the balance of the ABL Facility.

Between March 5 and March 11, Donnelly Penman and Berger met with the three bidders and analyzed their bids. At the same time, Donnelly Penman was communicating with the Debtors and Tilton to work out a mutually acceptable rescue financing deal. Tilton told Global to defer certain non-critical payments, resulting in a revised need of $2 million to fund five weeks of its operations. She offered to loan the funds on a super-priority basis if the Debtors would agree not to challenge the validity and priority of the Tilton affiliates' ABL Facility and Term Loan liens. The Debtors objected to the Term Loan priority condition, and Tilton offered to remove it if the Debtors would support AVA's $44 million bid.

The Debtors objected again, noting that the working capital adjustment could reduce their projected recovery. In response, Tilton agreed to give up any working capital adjustment, which would have left the Debtors with approximately $6 to $8 million after the sale. But they still found the terms unacceptable. It was the afternoon of March 11, and Global needed the $2 million financing the next day. Without a commitment from the Debtors, Tilton offered to provide the funds through the existing ABL Facility if Berger agreed to sign a revised letter of intent, giving AVA an exclusivity period and reducing its bid to $36 million. Berger signed the letter, and Global received its rescue financing. After further negotiations, Tilton reduced AVA's bid to $32 million-a purchase price that would likely provide the Debtors no consideration for their loans and equity.

Before accepting AVA's offer, Donnelly Penman analyzed the two other pending bids as well as a potential liquidation scenario. It concluded that the proposed purchase price of $32 million remained the “highest and best offer for [Global's] assets.” A-1739. The result was that Global and AVA signed an Asset Purchase Agreement on March 23, 2021. Global then filed with the Bankruptcy Court a motion seeking approval of the sale per the Settlement Agreement.

When the Debtors again objected, the Court held a three-day trial, admitted exhibits into evidence, and, after taking the matter under advisement, entered an order approving the sale. It explained that if it could not “compel a non-consensual sale and release of liens and claims,” then “the entire premise of the monetization process would be undermined.” A-2098. While acknowledging the Debtors' contention that the sale process was imperfect, the Court found “the overwhelming weight of the evidence indicates that the . . . process was fair and designed to be value-maximizing[,] that Ms. Tilton's contributions to the process on behalf of [Global] were beneficial[,] and that the processes established by [the] Court, as well as Mr. Berger, were followed in all material respects.” A-2098-99. The Court also considered the “unforeseen events that required [Global] to secure financial support from Ms. Tilton and pursue her bid in short order to preserve ongoing operations.” A-2099. It concluded that the Debtors had an opportunity to “ameliorate or avoid these facts and circumstances, but declined,” and that there was “no meaningful alternative to the proposed transaction that will likely yield a better result for these estates.” A-2099.

II.^[1]

The Debtors submit several issues for review. First, while they acknowledge that the parties' Settlement Agreement gives the Bankruptcy Court authority to compel a nonconsensual sale of estate assets, they argue it can only do so if it first determines that the sale is in the Debtors' best interest. But the Agreement contains no express language to that effect. All the Debtors do is point to the CRO's duty under the Agreement to “act in the best interests of the [Debtors].” A-234. But this provision implies at most, that the Debtors “cannot obstruct a sale that would be in their best interest.” Appellant Br. 37. It doesn't require the Court to find affirmatively that a sale is in the Debtors' best interest before compelling it.

As the Court recognized, the parties agreed that a joint monetization process would best serve the interests of the Debtors' stakeholders and the Portfolio Companies. But their Agreement-which, again, requires Tilton to act in the Portfolio Companies' best interest and the CRO to act in the Debtors' best interest-acknowledges that interests may diverge during that process. The Court evaluated the evidence relevant to the Global sale and determined it was “fair and designed to be value-maximizing.” Moreover, there was “no meaningful alternative” likely to yield a better result for the Debtors. A-2099. They fail to show that anything more was required.^[2] The Debtors...