In Re On-Site Sourcing, Inc.
2009 Bankr. LEXIS 1698, 412 B.R. 817, 51 Bankr. Ct. Dec. (CRR) 218 (2009)
Rule of Law:
A debtor in possession may not use a § 363(b) sale of substantially all assets as a 'sub rosa' Chapter 11 plan to bypass the comprehensive protections and confirmation requirements of Chapter 11, particularly when the sale includes provisions that predetermine the structure of a reorganization plan or unfairly prioritize certain creditors over others without a sound business justification.
Facts:
- By 2008, On-Site Sourcing, Inc. (the debtor) could no longer service its secured debt and entered into several forbearance agreements and amended credit facilities.
- Facing liquidation, On-Site Sourcing, Inc. and its advisors solicited potential purchasers for the business, engaging in discussions with six interested parties.
- Integreon Managed Solutions, Inc. (Integreon), a competitor, acquired On-Site Sourcing, Inc.'s secured debt of approximately $35 million in early 2009.
- Integreon Discovery Solutions (DC), Inc., a wholly-owned subsidiary of Integreon Managed Solutions, Inc., became the debtor's sole pre-petition secured creditor.
- Integreon also acquired On-Site Sourcing, Inc.'s subordinated debt.
- On-Site Sourcing, Inc. and Integreon negotiated an asset purchase agreement for substantially all of On-Site Sourcing, Inc.'s assets.
- Integreon agreed to fund a general unsecured creditors trust with a lump sum payment of $132,500 and provide for releases for three key employees as part of the proposed sale agreement modifications, which were insisted upon by the Unsecured Creditors Committee.
Procedural Posture:
- On-Site Sourcing, Inc. filed a voluntary petition in bankruptcy pursuant to Chapter 11 of the United States Bankruptcy Code.
- The debtor filed a motion to approve auction procedures and the sale of substantially all of its assets (the 'Sale Motion').
- The debtor filed a debtor-in-possession (DIP) financing motion.
- The court granted the debtor's motion for an expedited hearing on its first day motions, including the Sale Motion and DIP financing motion, setting the hearing for February 6, 2009.
- An Unsecured Creditors Committee was formed and became involved in negotiations regarding the proposed sale.
- The Unsecured Creditors Committee ultimately supported the sale on modified terms, including forgiveness of Integreon's deficiency claim, exclusion of certain assets from the sale, an increase in the budget for the Committee’s attorneys, and the establishment of a general unsecured creditors trust funded by Integreon.
- The United States Trustee objected to some of the proposed modifications, specifically the general unsecured creditors trust and releases for key employees.
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Issue:
Does a Chapter 11 debtor’s motion to approve a § 363(b) sale of substantially all assets, which includes provisions for an unsecured creditors trust and employee releases, constitute an impermissible 'sub rosa' Chapter 11 plan that evades the Code's confirmation requirements?
Opinions:
Majority - Robert G. Mayer
Yes, a Chapter 11 debtor's motion to approve a § 363(b) sale of substantially all assets can constitute an impermissible 'sub rosa' Chapter 11 plan if it includes provisions that evade the Code's confirmation requirements. The court found that while the overall sale was beneficial and had a sound business justification, the proposed unsecured creditors trust and the releases for three key employees were impermissible aspects of a 'sub rosa' plan of reorganization that lacked a good business reason. The court reasoned that § 363(b) sales are distinct from Chapter 11 plans, with different procedures and creditor protections. Citing Committee of Equity Security Holders v. The Lionel Corp. (In re Lionel Corp.), the court emphasized that there must be an articulated 'good business reason' for a § 363(b) sale, other than merely appeasing major creditors. The court also adopted the principles from In re Gulf Coast Oil Corp., which scrutinizes § 363(b) sales that purport to sell all or virtually all of the estate's property and effectively evade the 'carefully crafted scheme' of Chapter 11 plan confirmation. The proposed general unsecured creditors trust and the employee releases were excised because they effectively predetermined the structure of a future Chapter 11 plan and violated fundamental distribution schemes. The unsecured creditors trust, for example, would have paid general unsecured creditors ahead of administrative and priority claims, thereby violating §§ 1129(a)(7) and (a)(9) without the necessary consent, disclosure, and voting process required for plan confirmation. The court noted that this provision was inserted at the insistence of the Unsecured Creditors Committee primarily to resolve disputes and expedite the sale, rather than for a legitimate business reason benefiting the entire estate. Furthermore, the court gave little deference to the debtor's business judgment regarding these specific provisions due to the debtor's conflicted position and the lack of clear articulation of what claims were being released or their value, concluding that these provisions distorted the Chapter 11 process and compromised the debtor's fiduciary duties to all creditors.
Analysis:
This case reinforces the critical distinction between a § 363(b) asset sale and a Chapter 11 plan of reorganization, emphasizing that the former cannot be used as a 'sub rosa' plan to circumvent the detailed disclosure, voting, and confirmation requirements designed to protect all creditor classes. It highlights the judiciary's role in scrutinizing such sales to ensure they serve a genuine business purpose for the estate rather than acting as an end-run around statutory creditor protections. The ruling ensures that distributions to creditors, especially those that alter the Bankruptcy Code's established priority scheme, occur within the transparent framework of a confirmed plan, safeguarding fairness and due process for all stakeholders. This precedent discourages strategic maneuvers by debtors and favored creditors that might disadvantage other, less powerful creditor groups.
