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` Pg 1 of 66
`Hearing Date and Time: August 8, 2019 at 10:00 a.m. (EDT)
`Objection Deadline: August 1, 2019 at 4:00 p.m. (EDT)
`
`CHAPMAN AND CUTLER LLP
`Steven Wilamowsky
`1270 Avenue of the Americas
`30th Floor
`New York, NY 10020-1708
`Telephone: 212.655.6000
`
`-and-
`
`Aaron M. Krieger (admitted pro hac vice)
`111 West Monroe Street
`Chicago, IL 60603-4080
`Telephone: 312.845.3000
`
`Proposed Counsel for the Debtor and
`Debtor in Possession
`
`UNITED STATES BANKRUPTCY COURT
`SOUTHERN DISTRICT OF NEW YORK
`----------------------------------------------------------x
`In re
`
`: Chapter 11
`:
`: Case No. 19-23185 (RDD)
`
`:
`
`:
`
`Debtor.
`----------------------------------------------------------x
`
`Retrieval-Masters Creditors Bureau, Inc.,1
`
`
`NOTICE OF DEBTOR’S MOTION FOR ENTRY OF AN ORDER
`PURSUANT TO 11 U.S.C. §§ 105, 361, 362, 363, 364, 503, AND 507:
`(I) AUTHORIZING THE DEBTOR TO OBTAIN SECURED
`SUPERPRIORITY POSTPETITION FINANCING; (II) GRANTING
`LIENS AND SUPERPRIORITY ADMINISTRATIVE EXPENSE
`CLAIMS; (III) AUTHORIZING USE OF CASH COLLATERAL;
`(IV) GRANTING ADEQUATE PROTECTION; (V) MODIFYING THE
`AUTOMATIC STAY; AND (VII) GRANTING RELATED RELIEF
`
`PLEASE TAKE NOTICE that on July 22, 2019, the debtor and debtor in possession
`
`(the “Debtor”) in the above-captioned case filed the Motion of Debtor for Entry of an Order
`
`Pursuant to 11 U.S.C. §§ 105, 361, 362, 363, 364, 503, and 507 (I) Authorizing the Debtor to
`
`
`1
`The last four digits of the Debtor’s taxpayer identification number is 9495. The location of the Debtor’s
`service address for purposes of this chapter 11 case is 4 Westchester Plaza, Suite 110, Elmsford, NY 10523.
`The Debtor also does business as American Medical Collection Agency.
`
`

`

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`
`Obtain Secured Superpriority Postpetition Financing, (II) Granting Liens and Superpriority
`
`Administrative Expense Claims, (III) Authorizing Use of Cash Collateral, (IV) Granting
`
`Adequate Protection, (V) Modifying the Automatic Stay, and (VII) Granting Related Relief (the
`
`“Motion,” a copy of which is attached hereto). A hearing (the “Hearing”) on the Motion will be
`
`held before the Honorable Robert D. Drain of the United States Bankruptcy Court for the
`
`Southern District of New York (the “Court”), in Room 248, 300 Quarropas Street, White Plains,
`
`New York 10601, on August 8, 2019, at 10:00 a.m. (EDT).
`
`PLEASE TAKE FURTHER NOTICE that any responses or objections (each, an
`
`“Objection”) to the Motion and the relief requested therein shall be in writing, shall conform to
`
`the Federal Rules of Bankruptcy Procedure, the Local Bankruptcy Rules for the Southern District
`
`of New York, and the Order Granting Debtor’s Motion for Order Authorizing the Establishment
`
`of Certain Notice, Case Management, and Administrative Procedures [Doc. No. 31] (the “Case
`
`Management Order”), shall set forth the basis for the Objection and the specific grounds
`
`therefore, and shall be filed with the Court electronically in accordance with General Order M-
`
`399 by registered users of the Court’s case filing system (the User’s Manual for the Electronic
`
`Case Filing System can be found at http://www.nysb.uscourts.gov, the official website for the
`
`Court), with a hard copy delivered directly to chambers pursuant to Local Bankruptcy Rule
`
`9070-1 and served so as to be actually received no later than August 1, 2019, at 4:00 p.m. (EDT)
`
`(the “Objection Deadline”), upon the parties on the Service List (as defined in the Case
`
`Management Order).
`
`- 2 -
`
`

`

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` Pg 3 of 66
`
`Dated: July 22, 2019
`New York, New York
`
`
`
`CHAPMAN AND CUTLER LLP
`Proposed Counsel for the Debtor and
`Debtor in Possession
`
`
`By: /s/ Steven Wilamowsky___
`Steven Wilamowsky
`1270 Avenue of the Americas
`30th Floor
`New York, NY 10020-1708
`Telephone: 212.655.6000
`
`-and-
`
`Aaron M. Krieger (admitted pro hac vice)
`111 West Monroe Street
`Chicago, IL 60603-4080
`Telephone: 312.845.3000
`
`- 3 -
`
`

`

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` Pg 4 of 66
`Hearing Date and Time: August 8, 2019 at 10:00 a.m. (EDT)
`Objection Deadline: August 1, 2019 at 4:00 p.m. (EDT)
`
`CHAPMAN AND CUTLER LLP
`Steven Wilamowsky
`1270 Avenue of the Americas
`30th Floor
`New York, NY 10020-1708
`Telephone: 212.655.6000
`
`-and-
`
`Aaron M. Krieger (admitted pro hac vice)
`111 West Monroe Street
`Chicago, IL 60603-4080
`Telephone: 312.845.3000
`
`Proposed Counsel for the Debtor and
`Debtor in Possession
`
`Retrieval-Masters Creditors Bureau, Inc.,1
`
`
`UNITED STATES BANKRUPTCY COURT
`SOUTHERN DISTRICT OF NEW YORK
`----------------------------------------------------------x
`In re
`
`: Chapter 11
`:
`: Case No. 19-23185 (RDD)
`
`:
`
`:
`
`Debtor.
`----------------------------------------------------------x
`MOTION OF DEBTOR FOR ENTRY OF AN ORDER PURSUANT TO
`11 U.S.C. §§ 105, 361, 362, 363, 364, 503, AND 507: (I) AUTHORIZING
`THE DEBTOR TO OBTAIN SECURED SUPERPRIORITY
`POSTPETITION FINANCING; (II) GRANTING LIENS AND
`SUPERPRIORITY ADMINISTRATIVE EXPENSE CLAIMS;
`(III)AUTHORIZING USE OF CASH COLLATERAL;
`(IV) GRANTING ADEQUATE PROTECTION; (V) MODIFYING THE
`AUTOMATIC STAY; AND (VII) GRANTING RELATED RELIEF
`
`Retrieval-Masters Creditors Bureau, Inc. (the “Debtor”) respectfully states the following
`
`in support of this motion (the “Motion”):2
`
`
`1
`
`The last four digits of the Debtor’s taxpayer identification number is 9495. The location of the Debtor’s
`
`
`service address for purposes of this chapter 11 case is 4 Westchester Plaza, Suite 110, Elmsford, NY 10523.
`
`
`The Debtor also does business as American Medical Collection Agency.
`
`
`
`Capitalized terms used but not otherwise defined herein shall have the meaning given to them elsewhere in
`(1) this Motion, (2) the Declaration of Russell H. Fuchs Pursuant to Local Bankruptcy Rule 1007-2 and in
`
` 2
`
`
`
`
`
`

`

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`
`
`Preliminary Statement
`
`1.
`
`To obtain liquidity critical to funding its chapter 11 case, the Debtor’s sole
`
`secured creditor and equity holder has agreed to provide a debtor-in-possession delayed draw
`
`loan facility in an amount not to exceed $1,000,000.00. The facility was negotiated on behalf of
`
`the Debtor by Mr. Bradley E. Scher, the Debtor’s independent director and Chief Oversight
`
`Officer who, under the Debtor’s corporate governance structure, has the sole right to authorize
`
`and approve any insider transaction involving the Debtor.
`
`2.
`
`The Debtor believes that approval of the debtor-in-possession loan, as detailed
`
`herein, is the only means by which the Debtor will be able to carry on its operations during the
`
`pendency of this chapter 11 case.
`
`Relief Requested
`
`3.
`
`The Debtor seeks entry of an order, substantially in the form annexed hereto as
`
`Exhibit A (the “Order”):
`
`a. authorizing the Debtor to obtain postpetition financing in the form of the delayed
`
`draw secured promissory note, a copy of which is attached to the Order as
`
`Exhibit 1, together with all agreements necessary to be entered into in connection
`
`therewith (as amended, supplemented or otherwise modified from time to time in
`
`accordance with the terms and conditions set forth herein, the “DIP Note”), by
`
`and among the Debtor and Russell H. Fuchs, as the lender party thereto (the “DIP
`
`Lender”), in the maximum aggregate principal amount of $1,000,000.00 (the
`
`“DIP Loan Facility”);
`
`
`Support of “First Day” Motions [Doc. No. 2] (the “First Day Declaration”), and (3) the “DIP Note” (as
`defined below), as applicable.
`
`- 2 -
`
`

`

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`
`
`b. authorizing the Debtor to execute, deliver and enter into the DIP Note and to
`
`perform all of its obligations thereunder and such other and further acts as may be
`
`required in connection with the DIP Note;
`
`c. authorizing the Debtor to pay all amounts, obligations and liabilities owing or
`
`payable to the DIP Lender under the DIP Loan Facility pursuant to the DIP Note;3
`
`d. authorizing the Debtor to grant superpriority administrative claim status, pursuant
`
`to section 364(c)(1) of the Bankruptcy Code, to the DIP Lender, for the benefit of
`
`the DIP Lender, in respect of all DIP Obligations (as defined in the Order),
`
`subject to the Carve Out (as defined in the Order);
`
`e. authorizing the Debtor, subject in all respects to the Carve Out, to provide
`
`adequate protection to the DIP Lender to the extent of the diminution in value due
`
`to the sale, use, or lease of the DIP Lender’s Prepetition Collateral, including
`
`Cash Collateral (as defined in the Order);
`
`f. authorizing the Debtor to use Cash Collateral and all other Prepetition Collateral
`
`in which the Prepetition Lender (as defined herein) has an interest, as consented to
`
`by the Prepetition Lender and in accordance with the Order; and
`
`g. modifying the automatic stay imposed by section 362 of the Bankruptcy Code (as
`
`defined herein) to the extent necessary to implement and effectuate the terms and
`
`provisions of this Order to the extent set forth herein.
`
`Jurisdiction and Venue
`
`4.
`
`The United States Bankruptcy Court for the Southern District of New York (the
`
`“Court”) has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the
`
`
`3
`Those obligations consist primarily of principal and interest. There are no commitment fees, facility fees,
`or other similar charges under the DIP Note.
`
`- 3 -
`
`

`

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` Pg 7 of 66
`
`
`Amended Standing Order of Reference from the United States District Court for the Southern
`
`District of New York, dated January 31, 2012. The Debtor confirms its consent, pursuant to rule
`
`7008 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), to the entry of an
`
`order by the Court in connection with this Motion to the extent that it is later determined that the
`
`Court, absent consent of the parties, cannot enter final orders or judgments in connection
`
`herewith consistent with Article III of the United States Constitution.
`
`5.
`
`6.
`
`Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
`
`The bases for the relief requested herein are sections 105(a) and 366 of chapter 11
`
`of title 11 of the United States Code, 11 U.S.C. §§ 101–1532 (the “Bankruptcy Code”),
`
`Bankruptcy Rules 6004, and rule 9013-1 of the Local Bankruptcy Rules for the Southern District
`
`of New York (the “Local Rules”).
`
`Concise Statements Pursuant to Bankruptcy Rule 4001(b) and Local Rule 4001-24
`
`I.
`
`Concise Statement Regarding the DIP Loan Facility
`
`7.
`
`The below chart contains a summary of the material terms of the proposed DIP
`
`Loan Facility, together with references to the applicable sections of the relevant source
`
`documents, as required by Bankruptcy Rules 4001(b)(1)(B) and 4001(c)(1)(B) and Local Rule
`
`4001-2.
`
`Bankruptcy Code / Local Rule Summary of Material Terms
`Borrower
`Debtor.
`Bankruptcy Rule 4001(c)(1)(B)
`Guarantors
`Bankruptcy Rule 4001(c)(1)(B)
`DIP Financing Lender
`Bankruptcy Rule 4001(c)(1)(B)
`
`Russell H. Fuchs.
`
`None.
`
`
`4
`The summaries contained in this Motion are qualified in their entirety by the provisions of the documents
`referenced, including the DIP Note and the Order. To the extent anything in this Motion is inconsistent
`with such documents, the terms of the applicable documents shall control. Capitalized terms used in this
`summary chart but not otherwise defined shall have the meanings ascribed to them in the DIP Note or the
`Order, as applicable.
`
`- 4 -
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`

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`
`
`Bankruptcy Code / Local Rule Summary of Material Terms
`Reporting Information
`The Debtor has agreed to furnish to the DIP Lender
`Bankruptcy Rule 4001(c)(l)(B)
`promptly upon request such information concerning the
`Local Rule 4001-2(a)(ii)
`condition or operations, financial or otherwise, of the
`Debtor as the DIP Lender from time to time may
`reasonably request.
`Russell H. Fuchs, as Prepetition Lender.
`
`Entities with Interests in Cash
`Collateral Bankruptcy Rule
`4001(b)(l)(B)(i)
`Term Bankruptcy Rule
`4001(b)(l)(B)(iii), 4001(c)(1)(B)
`Local 4001-2(a)(ii)
`Adequate Protection
`Bankruptcy Rules
`4001(b)(l)(B)(iv),
`4001(c)(1)(B)(ii)
`Waiver/Modification of the
`Automatic Stay Bankruptcy
`Rule 4001(c)(1)(B)(iv)
`
`Carve Out Bankruptcy Rule
`4001(c)(1)(B) Local Rule 4001-
`2(a)(i)(f)
`
`506(c) Waiver Bankruptcy Rule
`4001(c)(l)(B)(x) Local Rule
`4001-2(a)(i)(C)
`
`Section 552(b) Bankruptcy Rule
`4001(c)(l)(B) Local Rule 4001-
`2(a(i)(h)
`
`Commitment Bankruptcy Rule
`4001(c)(1)(B) Local Rule 4001-
`2(a)(ii)
`Interest Rates Bankruptcy Rule
`4001(c)(1)(B) Local Rule 4001-
`2(a)(ii)
`
`The earlier of: (i) the first Business Day following the day
`that is (12) twelve months from the Closing Date; and (ii)
`the effective date of a chapter 11 plan for the Borrower.
`Valid and automatically perfected replacement liens and
`security interests in and upon the DIP Collateral; and
`superpriority administrative claims under section 507(b) of
`the Bankruptcy Code.
`The DIP Facility provides that upon the occurrence of an
`Event of Default and certain other events (each, a “DIP
`Termination Event”) and after three (3) business days
`from the date written notice of an Event of Default is
`delivered, the DIP Lender may proceed against and realize
`upon the DIP Collateral or any other assets or properties of
`Debtor’s estate upon which the DIP Lender has been or
`may hereafter be granted liens or security interests.
`The Order provides a “Carve-Out” of certain statutory fees,
`allowed professional fees of the Debtor, and the official
`committee of unsecured creditors appointed in the chapter
`11 case.
`The Order provides that no costs or expenses of
`administration incurred pursuant to section 506(c) of the
`Bankruptcy Code shall be charged against the DIP Lender,
`its claims, or the Collateral without the prior written
`consent of the DIP Lender.
`The Order provides that the Prepetition Lender is entitled
`to all of the rights and benefits of section 552(b) of the
`Bankruptcy Code, and upon entry of the Order, the
`“equities of the case” exception shall not apply to the
`Prepetition Lender or the Prepetition Secured Obligations.
`The Maximum Commitment (as defined in the DIP Note)
`is $1,000,000.00.
`
`The DIP Loan Facility will bear interest at the following
`rate: 6% per annum; provided that the Post-Default Rate
`(as defined in the DIP Note) shall be a rate of interest per
`annum equal to the rate of interest otherwise in effect from
`time to time pursuant to the terms of the DIP Note plus
`2.5%, or, if a rate of interest is not otherwise in effect,
`interest at the highest rate specified therein for the
`aggregate Loans (as defined in the DIP Note) then
`outstanding prior to an Event of Default (as defined in the
`
`- 5 -
`
`

`

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`
`
`Bankruptcy Code / Local Rule Summary of Material Terms
`DIP Note) plus 2.5%; and provided further that all interest
`payable under the DIP Note shall be payable in kind.
`None.
`
`Milestones Bankruptcy Rule
`4001(c)(1)(B) Local Rule 4001-
`2(a)(ii)
`Challenge Period Bankruptcy
`Rule 4001(c)(l)(B) Local Rule
`4001-2(a)(i)(B)
`Use of DIP Financing Facility
`and Cash Collateral
`Bankruptcy Rule
`4001(b)(l)(B)(ii) Local Rule
`4001-2(a)(ii)
`Stipulations to Prepetition
`Liens and Claims Bankruptcy
`Rule 4001(c)(1)(B)(iii) Local
`Rule 4001-2(a)(i)(B)
`
`Waiver/Modification of
`Applicability of
`Nonbankruptcy Law Relating
`to Perfection or Enforceability
`of Liens Bankruptcy Rule
`4001(c)(1)(B)(vii)
`Repayment Features Local
`Rule 4001-2(a)(i)(E)
`
`Fees Bankruptcy Rule
`4001(c)(1)(B) Local Rule 4001-
`2(a)(ii)
`Budget Bankruptcy Rule 4001
`(c)(1)(B) Local Rule 4001-
`2(a)(ii)
`Liens and Priorities
`Bankruptcy Rule
`4001(c)(l)(B)(i) Local Rule
`4001-2(a)(i)(D) and (G), 4001-
`2(a)(ii)
`
`Liens on Avoidance Actions
`Local Rule 4001-2(a)(i)(D)
`
`Events of Default Bankruptcy
`Rule 4001(c)(l)(B) Local Rule
`4001-2(a)(ii)
`Indemnification Bankruptcy
`Rule 4001(c)(1)(B)(ix)
`
`N/A: Neither the Debtor nor DIP Lender seek any
`stipulations as to prepetition liens or claims.
`
`Subject to the terms and conditions contained in the Order
`and the DIP DIP Note, Borrower shall use the proceeds of
`the DIP Facility in accordance with the Budget (as defined
`in the DIP Note).
`
`None.
`
`The Debtor promises to pay all Loans (as defined in the
`DIP Note), together with all other amounts owed under the
`DIP Facility with on the day that is six (6) months from the
`Closing Date (as defined in the DIP Note).
`None.
`
`As defined in the DIP Note.
`
`In order to secure the DIP Obligations, effective
`immediately upon entry of the Order, the DIP Lender is
`granted continuing, valid, binding, enforceable, non-
`avoidable, and automatically and properly perfected
`security interests in and liens, in and upon all DIP
`Collateral.
`All proceeds of any property recovered as a result of
`transfers or obligations avoided or actions maintained or
`taken chapter 5 of the Bankruptcy Code.
`Usual and customary for financings of this type.
`
`The DIP Note contains indemnification provisions ordinary
`and customary for debtor-in-possession financings of this
`type by the Debtor.
`
`- 6 -
`
`

`

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`
`
`Bankruptcy Code / Local Rule Summary of Material Terms
`Conditions of Borrowing
`The DIP Note includes conditions to borrowings that are
`Bankruptcy Rule 4001(c)(1)(B)
`customary and appropriate for similar debtor-in-possession
`Local Rule 4001-2(a)(ii)
`financings of this type.
`
`Background
`
`8.
`
`The Debtor is a debt and medical receivables collection agency that was founded
`
`in 1977 in New York City. Over time, the business grew into a thriving agency and, in 1995,
`
`relocated to Elmsford, New York, where it is currently domiciled.
`
`9.
`
`Russell H. Fuchs is the founder and Chief Executive Officer of the Debtor, and
`
`owns 100% of the equity interests in the Debtor.
`
`10.
`
`The Debtor had two basic business segments. The first principally involved
`
`collections from retail consumer debtors of direct mail marketers, among others. The second
`
`involved the collection of receivables on behalf of clinical diagnostic laboratories, and did
`
`business under the name American Medical Collection Agency
`
`11.
`
`In March 2019, the Debtor became aware of a significant IT security breach
`
`involving its servers. That led to a cascade of events that ultimately necessitated the
`
`commencement of the instant chapter 11 case.
`
`12.
`
`On June 17, 2019 (the “Petition Date”), the Debtor filed a voluntary petition for
`
`relief under the Bankruptcy Code. The Debtor is administering its business and managing its
`
`properties as a debtor in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy
`
`Code.
`
`13.
`
`On July 2, 2019, the Office of the United States Trustee appointed the Official
`
`Committee of Unsecured Creditors (the “Committee”) in this Chapter 11 Case. See Notice
`
`Appointing Creditors Committee [Doc. No. 44].
`
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`

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`
`
`14.
`
`A more detailed description of the Debtor’s businesses and its reasons for
`
`commencing its chapter 11 case are set forth in the First Day Declaration, which First Day
`
`Declaration is incorporated herein by reference
`
`15.
`
`As referenced in the First Day Declaration, ¶ 19, pursuant to that certain secured
`
`promissory note dated May 31, 2019, Mr. Fuchs (the “Prepetition Lender”) provided the
`
`Debtor with a secured loan in the amount of $2.5 million (the “Prepetition Note”) secured by
`
`substantially all of the Debtor’s assets (the “Prepetition Collateral” and, such facility, the
`
`“Prepetition Loan Facility”), including all of the Debtor’s cash, wherever located, which
`
`constitutes “cash collateral” of the Prepetition Lender within the meaning of Section 363(a) of
`
`the Bankruptcy Code (the “Cash Collateral”).
`
`16.
`
`The Debtor has an immediate need to use cash collateral and access financing in
`
`order to, among other things, pay its employees, respond to regulatory demands and wind up the
`
`company.
`
`17.
`
`The Debtor has analyzed its projected cash needs and has determined that it will
`
`require not less than an additional $1,000,000.00 in order to operate its business during the
`
`pendency of this chapter 11 case.
`
`18.
`
`The only lender available to the Debtor is Mr. Fuchs, who has expressed his
`
`desire to see the Debtor liquidate in an orderly manner and in a way that is reasonably responsive
`
`to the numerous regulatory and contractual demands that have been made upon the Debtor, and
`
`that allows the Debtor to realize value from certain non-cash assets, including outstanding
`
`receivables and litigation assets. Access to new capital under the DIP Loan Facility throughout
`
`this chapter 11 case will ensure the Debtor has sufficient funds to preserve its estate and
`
`responsibly administer this chapter 11 case.
`
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`
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`

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`
`
`19.
`
`The Debtor’s determination to move forward with the DIP Loan Facility is an
`
`exercise of its sound business judgment following an arm’s-length process. Specifically, while
`
`the DIP Loan Facility is being extended to the Debtor by Mr. Fuchs, who is an insider of the
`
`Debtor, the terms of the DIP Loan Facility and DIP Note have been fully negotiated and
`
`approved by the Debtor’s independent director and Chief Oversight Officer, Mr. Bradley E.
`
`Scher. Under the Debtor’s corporate governance provisions, Mr. Scher, who holds no equity or
`
`other interest in the Debtor or to any entity affiliated with Mr. Fuchs, is the only person
`
`authorized to approve an insider transaction involving the Debtor.
`
`20.
`
`The DIP Loan Facility represents the best and only financing option available to
`
`ensure the Debtor has sufficient funds to preserve and maximize the value of its estate and
`
`responsibly administer this chapter 11 case.
`
`Basis for Relief
`
`I.
`
`
`
`
`
`The Debtor Should Be Authorized to Obtain Postpetition Financing Through the
`DIP Note
`
`A.
`
`Entry into the DIP Note Is an Exercise of the Debtor’s Sound Business
`Judgment
`
`21.
`
`The Court should authorize the Debtor, as an exercise of its sound business
`
`judgment, to execute the DIP Note, obtain access to the DIP Loan Facility, and continue using
`
`the Cash Collateral, as has been consented to by the Prepetition Lender. Section 364 of the
`
`Bankruptcy Code authorizes a debtor to obtain secured or superpriority financing under certain
`
`circumstances such as those discussed in detail below. Courts grant a debtor-in-possession
`
`considerable deference in acting in accordance with its business judgment in obtaining
`
`postpetition secured credit, so long as the agreement to obtain such credit does not run afoul of
`
`the provisions of, and policies underlying, the Bankruptcy Code. See In re Barbara K. Enters.,
`
`Inc., Case No. 08-11474, 2008 WL 2439649, at *14 (Bankr. S.D.N.Y. June 16, 2008)
`
`- 9 -
`
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`
`
`(explaining that courts defer to a debtor’s business judgment “so long as a request for financing
`
`does not ‘leverage the bankruptcy process’ and unfairly cede control of the reorganization to one
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`party in interest”); In re Ames Dep’t Stores, Inc., 115 B.R. 34, 40 (Bankr. S.D.N.Y. 1990)
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`(“cases consistently reflect that the court’s discretion under section 364 [of the Bankruptcy
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`Code] is to utilized on the grounds that permit [a debtor’s] reasonable business judgment to be
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`exercised so long as the financing agreement does not contain terms that leverage the bankruptcy
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`process and powers or its purpose is not so much to benefit the estate as it is to benefit a party-in-
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`interest.”); accord In re Farmland Indus., Inc., 294 B.R. 855, 881 (Bankr. W.D. Mo. 2003) (“the
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`applicable factors can be synthesized as follows: (1) That the proposed financing is an exercise
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`of sound and reasonable business judgment ….”).
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`22.
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`Specifically, to determine whether the business judgment standard is met, a court
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`need only “examine whether a reasonable business person would make a similar decision under
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`similar circumstances.” In re Exide Techs., 340 B.R. 222, 239 (Bankr. D. Del. 2006); see also In
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`re Curlew Valley Assocs., 14 B.R. 506, 513–14 (Bankr. D. Utah 1981) (noting that courts should
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`not second guess a debtor’s business decision when that decision involves “a business judgment
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`made in good faith, upon a reasonable basis, and within the scope of [the debtor’s] authority
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`under the [Bankruptcy] Code”).
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`23.
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`Furthermore, in considering whether the terms of postpetition financing are
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`reasonable, courts consider the terms in light of the relative circumstances of both the debtor and
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`the potential lender. In re Farmland Indus. 294 B.R. at 886; see also Unsecured Creditors’
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`Comm. Mobil Oil Corp. v. First Nat’l Bank & Trust Co. (In re Elingsen McLean Oil Co., Inc.),
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`65 B.R. 358, 365 n.7 (W.D. Mich. 1986) (recognizing a debtor may have to enter into “hard
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`bargains” to acquire funds for its reorganization). The Court may also appropriately take into
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`consideration the non-economic benefits to the Debtor offered by a proposed postpetition
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`facility. For example, in In re ION Media Networks. Inc., the bankruptcy court for the Southern
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`District of New York held that:
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`Although all parties, including the Debtors and the Committee, are
`naturally motivated to obtain financing on the best possible terms,
`a business decision to obtain credit from a particular lender is
`almost never based purely on economic terms. Relevant features of
`the financing must be evaluated, including non-economic elements
`such as the timing and certainty of closing, the impact on creditor
`constituencies and the likelihood of a successful reorganization.
`This is particularly true in a bankruptcy setting where cooperation
`and establishing alliances with creditor groups can be a vital part
`of building support for a restructuring that ultimately may lead to a
`confirmable reorganization plan. That which helps foster
`consensus may be preferable to a notionally better transaction that
`carries the risk of promoting unwanted conflict.
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`Case No. 09-13125, 2009 WL 2902568, at *4 (Bankr. S.D.N.Y. July 6, 2009) (emphasis added).
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`24.
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`The Debtor’s determination to move forward with the DIP Loan Facility is an
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`exercise of its sound business judgment following an arm’s-length process. As stated above, the
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`terms of the DIP Loan Facility and DIP Note have been fully negotiated and approved by the
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`Debtor’s independent director Mr. Scher, who has determined that postpetition financing will
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`create certainty with respect to cash flows necessary for the administration of this chapter 11
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`case. Mr. Scher, on behalf of the Debtor, believes that the Debtor has obtained the best financing
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`available because, among other reasons, third-party lenders would be unwilling to provide the
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`necessary debtor-in-possession financing, as well as the fact that the proposed terms of the DIP
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`Note are objectively reasonable, insofar as it simply bears a low fixed rate of interest and does
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`not contain any of the fees and charges that often are features of financing arrangements in and
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`outside of bankruptcy. Accordingly, the Court should authorize the Debtor’s entry into the DIP
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`Note and the DIP Facility, as it is a reasonable exercise of Debtor’s business judgment.
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`B.
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`25.
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`The Debtor Should Be Authorized to Grant Liens and Superpriority Claims
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`The Debtor proposes to obtain financing under the DIP Loan Facility by
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`providing security interests and liens as set forth in the DIP Note pursuant to section 364(c) of
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`the Bankruptcy Code. Specifically, the Debtor proposes to provide to the DIP Lender
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`continuing, valid, binding, enforceable, non-avoidable, and automatically and properly perfected
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`postpetition security interests and liens in the Collateral, as defined in the DIP Note, which
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`includes substantially all of the Debtor’s assets, subject to the Carve Out.
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`26.
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`The statutory requirement for obtaining postpetition credit under section 364(c) is
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`a finding, made after notice and hearing, that a debtor is “unable to obtain unsecured credit
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`allowable under Section 503(b)(1) of [the Bankruptcy Code].” 11 U.S.C. § 364(c); see In re
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`Crouse Grp., Inc., 71 B.R. 544, 549 (Bankr. E.D. Pa. 1987) (secured credit under section 364(c)
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`of the Bankruptcy Code is authorized, after notice and hearing, upon showing that unsecured
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`credit cannot be obtained). Courts have articulated a three-part test to determine whether a
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`debtor is entitled to financing under section 364(c) of the Bankruptcy Code. Specifically, courts
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`look to whether:
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`a. the debtor is unable to obtain unsecured credit under section 364(b) of the Bankruptcy
`Code, i.e., by allowing a lender only an administrative claim;
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`b. the credit transaction is necessary to preserve the assets of the estate; and
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`c. the terms of the transaction are fair, reasonable, and adequate, given the circumstances
`of the debtor-borrower and proposed lenders.
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`See In re Ames Dep’t Stores, 115 B.R. at 37–40; see also In re St. Mary Hosp., 86 B.R. 393, 401-
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`02 (Bankr. E.D. Pa. 1988); Crouse Grp., 71 B.R. at 549.
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`27.
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`The Debtor meets each part of this test. As described herein, due to, among other
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`things, the loss of its largest clients and the high degree of negative publicity as a result of the
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`data breach,5 other third-party lenders would certainly be unwilling to provide postpetition
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`financing to the Debtor.
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`28.
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`Therefore, the Debtor, in consultation with its advisors, has concluded that any
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`workable financing likely would require the support of, or be provided by, the Debtor’s sole
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`shareholder and existing prepetition lender, Mr. Fuchs. Absent the DIP Loan Facility, without
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`which the Debtor lacks sufficient liquidity to administer this chapter 11 case, the value of the
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`Debtor’s estate would be significantly impaired to the detriment of all stakeholders and
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`individuals affected by the data breach. Given the Debtor’s circumstances, the Debtor believes
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`that the terms of the DIP Loan Facility, as set forth in the DIP Note, are fair, reasonable, and
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`adequate, all as more fully set forth below. For all these reasons, the Debtor submits that it has
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`met the standard for obtaining postpetition financing.
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`29.
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`In the event that a debtor is unable to obtain unsecured credit allowable as an
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`administrative expense under section 503(b)(1) of the Bankruptcy Code, section 364(c) provides
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`that a court “may authorize the obtaining of credit or the incurring of debt (1) with priority over
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`any or all administrative expenses of the kind specified in section 503(b) or 507(b) of [the
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`Bankruptcy Code]; (2) secured by a lien on property of the estate that is not otherwise subject to
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`a lien; or (3) secured by a junior lien on property of the estate that is subject to a lien.” As
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`described above, the Debtor is unable to obtain unsecured credit. Therefore, approving a
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`superpriority claim in favor of the DIP Lender is reasonable and appropriate.
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`C.
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`30.
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`No Compar