D-A-M Liquidating Corp., et al.

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Case 1-09-41966-jbr Doc 238 Filed 06/24/09 Entered 06/25/09 09:38:26

UNITED STATES BANKRUPTCY COURT
FASTERN DISTRICT OF NEW Y ORK

Inte re ° Case No.: 1-09-41966-dem

DIAL-A-MATTRESS OPERATING CORP., Chapter 11
Debtor. (Jointly Administered)

wenn eee eee eee nee X

1-800-MATTRESS CORP., Case No.: 1-09-42201-dem
Debtor.

wenn eee eee eee nee X

DIAL-A-MATTRESS INTERNATIONAL LTD., Case No.: 1-09-42203-dem
Debtor.

wenn eee eee eee nee X

DECISION ON DEBTORS’ MOTION TO SELL
SUBSTANTIALLY ALL OF ITS ASSETS UNDER 11 U.S.C. § 363

Appearances:

Marc L. Hamwoff, Esq.

Theresa A. Driscoll, Esq

Montt Hock Hamroff & Horowitz, LLP
Attomeys for Debtors and Debtors-in- Possession
400 Garden City Plaza

Garden City, New Y ork 11530

Thomas Draghi, Esq

Westerman Ball Ederer Miller & Sharfstein, LLP
Attomeys for Official Committee of Unsecured Creditors
1700 Old Country Road

Mineola, New Y ork 11530

Gerard S. Catalanello, Esq.
James J. Vincequerra, Esq
Duane Moms LLP

Counsel to Newco Trading LLC
1540 Broadway

New Y ork, NY 10036-40861

Steven Wilamowsky, Esq.

Bingham McCuthchen LLP
399 Park Avenue
New York, NY 100222-4689
-and-
John R. Skelton, Esq.
Bingham McCutchen LLP
One Federal Street
Boston, Massachusetts 02110
Attorneys for Consolidated Mattress Company, Inc.
and Amalgamated Mattress Co., Inc.
William Curtin, Esq.
Office of the United States Trustee
271 Cadman Plaza East
Brooklyn, New York 11201
DENNIS E. MILTON
United States Bankruptcy Judge
I. INTRODUCTION
Dial-A-Mattress Operating Corp. d/b/a 1800Mattress.com and d/b/a
1800Mattress, (“Dial” and “debtors”) seek the Court’s granting approval of its Motion for an
Order (i) approving the sale of substantially all of the debtors’ assets free and clear of liens,
claims, encumbrances and other interests; (ii) authorizing the assumption and assignment and/or
rejection of certain executory contracts and unexpired leases; and (iii) granting related relief (the
“Sale Motion”). The Court hereby grants the approval of debtors’ Sale Motion to Newco Trading
LLC (“Newco”) as the highest and best offer. The Court directs counsel for the debtors to
submit an Order consistent with this Decision and providing for the applicable stay under
Bankruptcy Rules 6004(h) and 6006(d).
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II. JURISDICTION
This Court has jurisdiction over this core proceeding under 28 U.S.C. §§ 1334(b)
and 157(b)(2) and the Eastern District of New York standing order of reference dated August 28,
1986. This Decision and Order constitutes the Court’s findings of fact and conclusions of law to
the extent required by Fed. R. Bankr. P. 7052.
III. FACTUAL BACKGROUND
On March 17, 2009, Blue Bell Mattress Co. d/b/a King Koil Northeast/Comfort
Solutions, Sealy, Inc. and 6225 Jericho Turnpike, LLC filed for relief under Chapter 7 of the
Bankruptcy Code placing Dial into an involuntary Chapter 7 proceeding pursuant to 11 U.S.C.
§§ 303(a) and (b). On March 23, 2009, Dial consented to the entry of an order of relief and filed
a separate motion to convert the Chapter 7 case to a case under Chapter 11 pursuant to 11 U.S.C.
§ 707(b) (the “Voluntary Petition Date”). Dial-A-Mattress International Ltd., (“Dial
International”) and 1-800-Mattress Corporation (“1-800”) each filed voluntary petitions for relief
under Chapter 11 of Bankruptcy Code. On March 30, 2009, the Office of the United States
Trustee appointed an Official Committee of Unsecured Creditors in these cases (the
“Committee”).
Dial is a New York Corporation that sells and delivers beds, mattresses and
bedding related products via telemarketing, Internet and brick-and-mortar traditional retail. The
company began as Dial-A-Mattress Franchise Corporation in 1983 and changed names in 1990.
Dial currently maintains and operates various showrooms in New York, New Jersey,
Connecticut, Virginia, Maryland, and California. In the months prior to the debtors’ filing, they
had begun to streamline their operations, closing approximately nineteen showrooms and related
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warehouses. As of the Voluntary Petition Date, the debtors maintained and operated twenty-two
showrooms and three warehouses.
In 1991, Dial-A-Mattress International Ltd., (“Dial International”), a Delaware
corporation, was formed for the purpose of serving as a tenant in some of the retail stores for
Dial as well as facilitating the franchising of the brand. In December 2004, Dial International
expanded its operations by acquiring, through merger, 1-(888) Mattress Franchise Corp. Dial
International is also the franchisor under certain Franchise Agreements with Consolidated
Mattress Co., Inc. (“Consolidated”) and Amalgamated Mattress Co. Inc. (“Amalgamated”).
Consolidated and Amalgamated (collectively the “Consolidated Group”) operate
the telemarketing business for the debtors in specific territories. Consolidated operates the
telemarketing business and fulfills the internet sales in the following exclusive territories: (i)
Massachusetts: (Essex, Middlesex, Suffolk, Norfolk, Plymouth, Bristol, Barnstable, Worcester,
Dukes, Nantucket, Worcester, Franklin, Hampshire, Hampden and Berkshire; (ii) New
Hampshire (Hillsborough, Rockingham, Stafford); (iii) Vermont (Windham, Bennington,
Windsor, Rutland, Addison, Orange, Chittenden, and Washington); (iv) Rhode Island (all
counties); (v) New Jersey: (Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester,
Mercer, Salem, Somerset, Hunterdon and Ocean); (vi) Pennsylvania (Berks, Bucks, Chester,
Delaware, Lehigh, Montgomery, Northhampton, Philadelphia); and (vii) Delaware (Kent, New
Castle). Amalgamated operates the telemarketing and internet businesses in Florida in Charlotte,
Collier, Desoto, Glades, Hendry, Lee, Monroe, Dade, Broward, Palm Beach, Martin, St. Lucie,
Okeechobee, Indian River, Brevard, Hardee, Flagler, Hernando, Lake, Highlands, Marion,
Hillborough, Osceola, Manatee, Orange, Pasco, Seminole, Pinellas, Sumter, Polk, Volusia,
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Sarasota, Citrus, Alachua, Baker, Bradford, Clay, Columbia, Duval, Levy, Nassau, Putnam, St.
Johns, and Union.
In November 2003, 1-800-Mattress Corporation (“1-800"), a Delaware
Corporation was formed, and is the current franchisor entity which sells 1800mattress.com
franchises. As of the Voluntary Petition Date, 1-800 had one franchisee, Rectangle Corporation
(“Rectangle”), which operated in Connecticut. Rectangle conducts business via telemarketing,
the internet and showrooms.
Since the Voluntary Petition Date the debtors have been in possession of their
assets and continue to manage their business as debtors and debtors-in-possession pursuant to 11
U.S.C. §§ 1107 and 1108. 	On March 13, 2009, the debtors executed an Asset Purchase
Agreement (the “Purchase Agreement”) with Newco, a subsidiary of Sleepy’s Holdings, LLC,
pursuant to which the Purchaser agreed to purchase substantially all of the assets relating to the
debtors' business operations. The consideration to be paid by Newco under the Purchase
Agreement was $2.1 million, subject to certain adjustments. By the Order dated March 31, 2009
(the “Sale Procedure Order”) the Court approved certain sale and auction procedures including
the Purchase Agreement. The Sale Procedures provided in relevant parts:
1. Sale Procedure Motion
....The sale of the Acquired Assets is subject to approval of the
Bankruptcy Court and is subject to higher and better offers...
2. Right to Negotiate Offers and Determine Highest and Best
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Bid
The Debtors shall have the sole and exclusive right to negotiate
any offer (in consultation with the official committee of unsecured
creditors appointed in these cases, the “Committee”) made for the
purchase of the Acquired Assets and to determine the highest and
best offer. In evaluating whether a bidder has submitted the highest
and best offer, the Debtors may consider, among other things (i)
the purchase price proposed in the offer; (ii) the bidder’s financial
condition and ability to close; (iii) any proposed modification to
the terms set forth in the Purchase Agreement; and (iv) the
probability that a prompt closing will occur...
6. Auction Sale
In the event the Debtors receive one or more Qualified Bids (in
addition to the bid of the Purchaser), the Debtors will conduct an
auction sale... at which the Purchaser and other parties that have
submitted Qualified Bids may participate. Prior to the Auction the
Debtors intend to retain an independent professional to facilitate
the Auction process...
...The Auction will commence with the announcement of the
highest Qualified Bid, and bidding will proceed in such manner
and on such terms as are announced by the Debtors at the time of
the Auction. The minimum bidding increment at the Auction shall
be $50,000 (above the Initial Overbid and for all further bids). At
the conclusion of the Auction, the Debtors will announce the
highest bid... The Debtors and the Committee, may conduct the
auction in any manner they believe will be in the best interests of
the estate.
Court Order Approving procedures for sale of substantially all of the Debtors' assets;
Establishing dates and deadlines for sale process; Approving break-up fee; Approving
procedures for resolution of objections to the assumption and assignment of executory contracts
and unexpired leases; Approving form and manner of notice and Granting related relief (“Sale
Procedures Order”), Exhibit 1 (emphasis in original). 	In connection with the sale, the debtors
also established a Virtual Data Room which enabled interested bidders to review online key data,
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contracts, financials and other pertinent information regarding to the Debtors’ assets and
business operations.
On March 28, 2009, the debtors filed the Sale Motion. Twelve objections were
filed in connection to the Sale Motion, including the objection of the Consolidated Group and
Rectangle. Rectangle filed a Response and Joinder to the Consolidated Group’s Objection.
On May 19, 2009, this Court conducted an evidentiary hearing regarding the
estimation of the proposed rejection damages claim of the Consolidated Group and Rectangle
(collectively the “Franchisees”) should the Franchise Agreements be rejected under the terms of
the Sale Motion. Pursuant to the Stipulation between the debtors, the Committee, and the
Franchisees, the parties agreed that the rejection damages estimation process was not intended to
be an adjudication of: (i) any claims or disputes related to the Franchise Agreements; (ii) the
debtor’s ability to assume and assign or reject those agreements; or (iii) any rights and claims
concerning the post-rejection rights of the Franchisees, the debtors, and other relevant parties.
The Consolidated Group and the Committee each submitted an expert report. Counsel for the
Consolidated Group made proffers. The Court heard the arguments of counsel. The Court found
that for the purposes of providing an estimate of the rejection damages of the Franchisees, the
Franchisees had a direct claim against Dial Operating and an intercompany claim against Dial
International. The Court set the estimated rejection damages claim of the Franchisees in the
aggregate amount of $11.4 million.
On May 26, 2009, the debtors, with the assistance of their Court-retained
investment banking firm, Trenwith Group LLC (“Trenwith”), conducted an auction of
substantially all of the debtors’ assets (the “Auction”). Prior to the Auction, Trenwith published
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a notice of sale in the Wall Street Journal on May 7, 2009 and sent approximately four thousand
emails to a database of prospective bidders for these kinds of assets. Manning Aff. ¶ 6.
Approximately two hundred parties, including financial buyers and strategic investors, were
contacted regarding the acquisition of the debtors’ assets. A total of sixteen financial investors,
twelve strategic investors, and five Carve Out Parties signed Non-Disclosure Agreements and
were given access to the debtors’ Virtual Data Room. Id.. at ¶ 5 - 7. There were six bids made
by the Bid Deadline of May 21, 2009, and five Qualified Bidders participated in the Auction. Id.
at ¶ 15.
At the Auction the debtors and the Committee identified four issues that they
considered to be especially important in evaluating the highest and best offer in addition to
consideration and other relevant components: (1) Providing replacement DIP financing as the
existing DIP financing matured on June 3, 2009, (2) Understanding Qualified Bidders intentions
surrounding the employees, to wit, whether the prospective bidders were prepared to offer
employment to substantially all the employees of the Debtor, (3) Clarifying the Qualified
Bidders intentions to assume or reject the lease for the Long Island City warehouse and
headquarters, and (4) Clarifying the Qualified Bidders intentions regarding certain AT&T
equipment. See id. at ¶ 18.
There were seven rounds of bidding. At the conclusion of the Auction, Trenwith
recommended the $25 million bid made by Newco (the “Newco Bid”) as the highest and best
offer for the debtors’ assets. Id. at ¶ 20. The debtors and the Committee supported this
recommendation. Id. On May 27, 2009, the debtors filed a Reply of Debtors to Objections to the
Sale Motion in which they supported the Newco Bid as the highest and best offer. The
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Committee also filed a statement in support of the Newco Bid and the debtors’ Sale Motion on
May 27, 2009.
On May 28, 2009, the Court held a hearing regarding the debtors’ Sale Motion.
The debtors argued that the only remaining objections to the Sale Motion were those of the
Franchisees. A representative of the debtors’ investment banker, Trenwith, testified to the
Auction results and its recommendation of the debtors’ Sale Motion. The Committee spoke in
support of the debtors’ Sale Motion and called a financial expert to testify as to the value of
officer loans used in the Auction. Both counsel for the Consolidated Group and Rectangle
opposed the Sale Motion. The Consolidated Group offered the testimony of one of its principals
about the potential consequences to the Franchisees under the Sale Motion.
IV. DISCUSSION
A. The Newco Bid is the highest and best offer
1. The Standard
The business judgment test is the standard for Section 363 asset sales in this
Circuit. See Comm. of Equity Holders v. Lionel Corp. (In re Lionel), 722 F.2d 1063 (2d Cir.
1983); In re WestPoint Stevens, Inc., 333 B.R. 30 (Bankr. S.D.N.Y. 2005); In re Chateaugay
Corp., 973 F.2d 141, 145 (2d Cir. 1992); In re Ionosphere Clubs, Inc., 184 B.R. 648, 653
(S.D.N.Y. 1995). The standard requires the directors of a corporation to act on an informed
basis, in good faith and in the honest belief that the action is in the best interest of the company.
In re Integrated Resources, Inc., 147 B.R. 650, 656 (Bankr. S.D.N.Y. 1992). In determining
whether the debtor has employed reasonable business discretion with regard to the rejection of
executory contracts, the court for the most part must only determine that the rejection benefit the
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estate and generally will defer to the business judgment of the debtor’s management. 	In re G.
Survivor Corp., 171 B.R. 755, 758 (Bankr. S.D.N.Y. 1994) citing In re Bildisco, 682 F.2d 72, 79
(3d Cir. 1982) aff’d sub nom N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 104 S.Ct. 1118,
79 L.Ed.2d 482 (1984).
Courts have both approved and objected to the rejection of Franchise Agreements
as part of a Section 363 Sale under the business judgment standard. See In Re G Survivor Corp.,
171 B.R. at 759 (Holding that debtor’s Section 363 sale which rejected a valuable trademark
license was a proper exercise of the business judgment rule); In Re Petur U.S.A. Instrument Co.,
35 B.R. 561, 563 (Bankr. W.D. Wash. 1983) (Refusing to authorize a rejection sale that
terminated a license agreement and forced the licensee out of business).
2. The Objections
At its core, the objection of the Consolidated Group to debtors’ Sale Motion is the
possibility of a rejection sale in which the buyer will get the full IP Assets (i.e., the Dial-A-
Mattress name, the “1-800-MATTRES” phone number, the “mattress.com” url and the “1-800
MATTRES® System”) but terminate previously issued intercompany licenses and the rights
licensed to Franchisees. The Newco Bid is a rejection sale. The Consolidated Group believes that
such a sale would counteract the fundamental purpose of the Bankruptcy Code because it would
not enable the debtors to preserve the business. Moreover, the Consolidated Group maintains
that a rejection sale would have a devastating effect on the business of the Franchisees, causing
them to shut operations and terminate employees.
The Consolidated Group further argued that the debtors’ decision making
authority with respect to the rejection of the Franchise Agreements is limited. Recognizing that
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the standard with which to judge a debtors’ decision whether to sell its assets, or to assume or
reject an executory contract, is the business judgment test, the Consolidated Group argues that
there is no plausible business justification for the rejection of the Franchise Agreements. The
Consolidated Group maintains that Franchisee’s operations have been profitable, and Dial
International is a financially viable company.
3. Application of the Standard
The Court’s independent review confirms that rejection of the Franchise
Agreements benefits the estate and that the decision to conduct the auction sale is a proper
exercise of business judgment. 	The Court rejects the argument that any Section 363 Sale that
includes a rejection of the Franchise Agreements is not in the best interests of the estate and in
violation of the fundamental principles of the Bankruptcy Code. Here, the Court finds that the
potential rejection damages claim of the Franchisees is an important factor to be considered in
the business judgment analysis. For this reason, the Court conducted a hearing on May 19, 2009
for the sole purpose of calculating estimated damages in a rejection sale scenario. The Court
reviewed expert reports which the Committee and the Consolidated Group submitted, and heard
the arguments and proffers of counsel. Recognizing that the rejection of the Franchise
Agreements could have devastating effects of the Franchisees and involve complicated litigation,
the Court estimated that the claims may be worth $11.4 million. This figure was incorporated
into the determinating factors at the auction as an indication the debtors valued the potential
rejection damages claim as well.
This case began as an involuntary Chapter 7 case against Dial, and the debtors do
not have the resources to continue operations and reorganize, but have converted the matter to a
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Chapter 11 case in order to preserve the value of the company. The Court finds that the debtors
have shown that the Newco Bid presents the greatest benefits to the estate. There was a spirited
auction with seven rounds of bidding that ended with the Newco Bid in the amount of $25
million. The Newco bid was $320,000 more than the second highest bidder, which was $270,000
more than the required minimum bidding increment. In addition to the estimated franchise
damages claim, the debtors took into consideration various factors in determining the highest and
best offer including DIP financing, assumption of leases, and employee contracts. The court-
approved investment bankers found that the Newco Bid was the highest and best offer creating
an 85% return to unsecured creditors. As such, the Court accepts the Newco Bid, supported by
the debtors and the Committee, as the highest and best offer, and finds that the decision to sell
substantially all of the debtors’ assets to Newco, while rejecting the Franchise Agreements,
would be an appropriate business judgment decision.
B. This Court has the Authority to Approve a Sale
In conjunction with their objection to the rejection sale, the Consolidated Group
contends that there are significant contractual, statutory and operational issues that need to be
adjudicated outside of the Section 363 sale process if the Franchise Agreements are to be
rejected. As shown below, these objections are without merit.
First, Consolidated Group argues that applicable non-bankruptcy law restricts the
debtors from terminating the Franchise Agreements. The Consolidated Group relies principally
on Section 959(b) of Title 28 of the United States Code which provides, in relevant part, as
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follows:
a trustee . . . in any case pending in any court of the United States,
including a debtor in possession, shall manage and operate the
property in his possession as such trustee . . . according to the
requirements of the valid laws if the State in which such property
is situated, in the same manner that the owner or possessor thereof
would be bound to do if in possession thereof.
28 U.S.C. §959(b). The Consolidated Group argues that under applicable Connecticut State
statutes Dial International cannot terminate the Franchise Agreements without good cause,
operate a competing sleep products business in their exclusive market, or sell its operating assets
to an entity unless the buyer commits in writing to comply with all of the company’s obligations.
See CONN. GEN. STAT. ANN. §42 -133f(a) (2000).
Many courts have taken the position that Section 959(b) has no application to a
debtor’s proposed sale of substantially all of their assets. See In re N.P. Mining Co., Inc., 963
F.2d 1449 (11th Cir. 1992); In re Globe Bldg. Materials Inc., 345 B.R. 619 (Bankr. N.D. Ind.
2006). However, even if Section 959(b) were applicable to a liquidating debtor, Section 365 of
the Bankruptcy Code preempts state franchise laws. State or local laws are preempted where
compliance with those laws would frustrate a liquidation. See e.g., In re Baker & Drake, 35 F.3d
1348, 1353-54 (9th Cir.); In re Ray, 355 B.R. 253, 257-58 (Bankr. D. Ore. 2006); In re Shenango
Group, Inc., 186 B.R. 623, 628 (Bankr. W.D. Pa. 1995). 	Pursuant to Section 365(a) of the
Bankruptcy Code, a debtor can maximize the value of its estate by accepting contracts that are
beneficial to it and rejecting those that are not. See In re Bethlehem Steel Corp., 291 B.R. 260,
264 (Bankr. S.D.N.Y. 2003). The state franchise laws that the Consolidated Group cite cannot
impair the bankruptcy rights that the debtors possess under Section 365. See In re City of
Vallejo, 403 B.R. 72, 77 (Bankr. E.D. Cal. 2009) (“Congress enacted section 365 to provide
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debtors the authority to reject contracts . . . [t]his authority preempts state law by virtue of the
Bankruptcy Clause [and] the Supremacy Clause.”); In re Tom Stimus Chrysler-Plymouth, Inc.,
134 B.R. 676, 679 (Bankr. M.D. Fla. 1991) (Holding that Section 365 of the Bankruptcy Code
governs the assumption or rejection of a contract, even if the agreement otherwise would have
been terminated under Florida dealer laws). The Court finds that the debtors have the right to
terminate the Franchise Agreements under Section 365 of the Bankruptcy Code.
Second, the Consolidated Group asserts that certain intellectual property issues
should prohibit the Court’s approval of the debtors’ Sale Motion. The Consolidated Group
maintains that the Franchise Agreements are protected under 11 U.S.C. 365(n), and as such, that
the Consolidated Group has exclusive rights to use the IP Assets and to operate Dial-A-Mattress
business in its assigned territories that will not be terminated with the rejection of the
intercompany licenses. Under this theory, the Franchisees, as licensees of Intellectual Property,
can elect to retain their rights. See 11 U.S.C. 365(n)(1). In addition, Consolidated Group raises
issues over the ownership and use of the 1-800-Mattress jingle, alleging that Dial Operating and
Dial International do not own all of the assets used to operate the Dial-A-Mattress business.
In response, the debtors maintain that Section 365(n) is not applicable to trademarks,
and that trademark licensees cannot use Section 365(n) to elect to retain their rights to use a
mark after rejection. See In re Exide Technologies, 340 B.R. 222, 250-251 (Bankr. D. Del.
2006).
The Court finds that the issues of copyright ownership and use of the debtors’
trademark are not relevant at this time to the approval of debtors’ Sale Motion. The Court
accepted that there would be substantial damages arising from the rejection of the Franchise
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Agreements and provided an estimate of potential damages to be used at the Auction under this
reasoning. Any decision regarding these issues should be deferred to such time as there is a
genuine conflict over the property.
C. Newco is a Good Faith Purchaser under Section 363(m)
The Consolidated Group alleges that Newco is not a good faith purchaser under
11 U.S.C. § 363(m). The Consolidated Group views the proposed sale as an attempt by the
owner and key management of debtors to favor a purchase by Newco. In particular, the
Consolidated Group alleges that the debtor favored Newco in selecting it as the Stalking Horse
Bidder, and that the estimated value of officer loans used at the Auction were undervalued in
favor of Newco.
The Consolidated Group also objects to the debtors’ Sale Motion on the grounds
that a sale to Newco would violate Section 7 of the Clayton Act, codified at 15 U.S.C. §§ 18 and
18A, prohibiting transactions where the effect may substantially lessen competition. The
Consolidated Group alleges that the sale would be anti-competitive and harmful to consumers
because it would significantly increase Newco/Sleepy’s market share in the New York
metropolitan market.
The Court rejects these allegations. While the Bankruptcy Code does not define
“good faith purchaser” under Section 363(m), courts have adopted an equitable definition: “ ‘one
who purchases the assets for value, in good faith and without notice of adverse claims.’ ”
Licensing by Paolo v. Sinatra (In re Gucci), 126 F.3d 380, 384 (2d Cir. N.Y. 1997) (internal
citations omitted). The debtors have shown that they conducted an open and fair auction process.
The debtors established a Virtual Data Room so that all potential bidders would have access to
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the same information. The Trenwith Scorecard with which the investment bank evaluated the
bids to create a predicted return to unsecured creditors was dispersed prior to the Auction. There
were five Qualified Bidders at the time of the Auction and seven rounds of spirited bidding.
After each round the Trenwith Scorecards were distributed to Qualified Bidders so that they may
review the results. In addition, the debtors’ assets have been purchased for considerable value.
The Newco Bid of $25 million was $320,000 higher than the second highest bid, and
substantially greater than the original Stalking Horse bid of $2.1 million. The Court finds that
Newco is a good faith purchaser under Section 363(m).
The Court also declines to entertain the Consolidated Group’s Clayton Act
allegations. Both parties acknowledge that a sale of the debtors’ assets to Newco does not require
approval of the Federal Trade Commission pursuant to 15 U.S.C. §18A. Consolidated Group
has not submitted any substantial evidence to the Court that a sale to Newco would create an
anti-competitive marketplace.
D. The 10 Day Stay required by Bankruptcy Rules 6004 and 6006 Applies
Bankruptcy Rule 6004(h) provides “An order authorizing the use, sale, or lease of
property other than cash collateral is stayed until the expiration of 10 days after entry of the order,
unless the court orders otherwise.” Similarly, Bankruptcy Rule 6006(d) states that “[a]n order
authorizing the trustee to assign an executory contract or unexpired lease under §365(f) is stayed
until the expiration of 10 days after the entry of the order, unless the court orders otherwise.”
Debtors maintain that a quick consummation of the sale directly benefits substantially all of the
debtors’ creditors as the costs of continuing operations will no longer be bourne by the estate.
Therefore, the debtors’ request a waiver of the 10 day stay required by Bankruptcy Rules 6004
and 6006. The Consolidated Group asserts that there is no basis for a waiver of the 10 day stay
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under Rules 6004 and 6006, and requests that the Court deny debtors’ request for a waive of the
10 day stay.
The debtors have failed to establish any exigent circumstances which would
support a waiver of the 10 day stay. The Court denies that portion of the Motion which seeks
waiver of the 10 day stay required by Bankruptcy Rule 6004 and 6006.
E. The Post Hearing Submission - Denial of the Motion to Correct the Record
On June 2, 2009, counsel for the Consolidated Group filed a motion to correct the
evidentiary record on the debtors’ motion to sell substantially all of their assets. In this motion,
the Consolidated Group sought to correct the amount of the so-called officer loans, and in so
doing claimed that the value of the officer loans bore on the issue of which was the highest and
best bid. The Consolidated Group claimed that the increased value of the loans enhanced the
value of its bid.
Counsel for the debtors argued that the officer loans, to which this Motion refers,
were not valued for purposes of the Auction. In addition, counsel for the debtor noted that due to
the elasticity in the claims estimates, the final allowance of any single line item would affect the
bids depending upon the facts involved. An ultimate change in valuation of any line item was
factored into the ultimate analysis of the highest and best offer before Trenwith made a
recommendation.
The Consolidated Group’s motion to correct the evidentiary record was neither
solicited nor authorized under this Court’s Local Rules or the Federal Rules of Bankruptcy
Procedure. Other factors strongly suggested that the Court disregard this untimely submission.
Each party had a full and fair opportunity to submit or make such a statement at the Sale
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Hearing. No party made a request to file a post hearing submission. Under those circumstances,
the Court considered the hearing closed. Nonetheless, the Court has considered the Consolidated
Group’s Motion. The Court finds that all the parties have had a full and fair opportunity to
present their positions and evidence on the Debtors’ Motion to Approve the Sale and at the May
28, 2009 hearing. As stated above, the Court accepts the Newco Bid as the highest and best
offer. The Post-Hearing Motion of the Consolidated Group to correct the evidentiary record at
this stage is denied.
V. CONCLUSION
The Court accepts the Newco Bid, supported by the debtors and the Committee,
as the highest and best offer, and finds that the decision to sell substantially all of the debtors’
assets to Newco, while rejecting the Franchise Agreements, would be an appropriate business
judgment decision. As such, the Court grants debtors’ Motion (i) approving the sale of
substantially all of the debtors’ assets free and clear of liens, claims, encumbrances and other
interests; and (ii) authorizing the assumption and assignment and/or rejection of certain
executory contracts and unexpired leases. The Court denies that portion of the Motion which
seeks waiver of the 10 day stay under Bankruptcy Rules 6004 and 6006. The Post-Hearing
Motion of the Consolidated Group to correct the evidentiary record at this stage is denied. All
Objections, if any, to the Sale Motion or the relief requested therein that have not been
withdrawn, waived or settled as announced to the Court at the Sale Hearing or by stipulation
filed with the Court are hereby overruled, except as expressly provided herein and in the final
order.
Counsel for the debtors is directed to submit an Order consistent with this
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Decision.
Dated: Brooklyn, New York
June 24, 2009
S/ Dennis E. Milton
DENNIS E. MILTON
United States Bankruptcy Judge
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