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Case 8:10-bk-16743-TA
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RON BENDER (SBN 143364) TODD M. ARNOLD (SBN 221868) ANTHONY A. FRIEDMAN (SBN 201955) LEVENE, NEALE, BENDER, YOO & BRILL L.L.P. 10250 Constellation Boulevard, Suite 1700 Los Angeles, California 90067 Telephone: (310) 229-1234 Facsimile: (310) 229-1244 Email: rb@lnbyb.com; tma@lnbyb.com; aaf@lnbyb.com Attorneys for Chapter 11 Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA (SANTA ANA DIVISION) In re: WESTCLIFF MEDICAL LABORATORIES, INC., Debtor. _________________________________ BIOLABS, INC., Debtor. _________________________________ Affects Both Debtors Affects WESTCLIFF MEDICAL LABORATORIES, INC. only Affects BIOLABS, INC. only Lead Case No. 8:10-bk-16743-TA Jointly Administered with Case No. 8:10-bk-16746-TA Chapter 11 Cases NOTICE OF DEBTORS MOTION AND DEBTORS' MOTION TO APPROVE SETTLEMENT AGREEMENT BETWEEN WESTCLIFF MEDICAL LABORATORIES, INC., BIOLABS, INC., ROBERT WHALEN, KIP VERNAGLIA, GREG CLARK, MICHAEL SKINNER AND GE BUSINESS FINANCIAL SERVICES, INC. MEMORANDUM OF POINTS AND AUTHORITIES DECLARATION OF MATTHEW PAKKALA IN SUPPORT THEREOF
[No hearing required unless requested pursuant to Local Bankruptcy Rule 9013-1(o)]
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TO
THE
HONORABLE
THEODOR
C.
ALBERT,
UNITED
STATES
BANKRUPTCY JUDGE, AND TO ALL INTERESTED PARTIES: PLEASE TAKE NOTICE that Westcliff Medical Laboratories, Inc. (Westcliff) and BioLabs, Inc. (BioLabs), the Chapter 11 debtors and debtors in possession herein (collectively, the Debtors), hereby move, by way of this motion (the Motion), for an Order pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure and Local Bankruptcy Rule 9013-1(o)(1), approving the Agreement (the Agreement) entered into between (1) the Debtors; (2) Robert Whalen, Kip Vernaglia, Greg Clark, and Michael Skinner (collectively, the Managers and singularly a "Manager"); and (3) GE Business Financial Services, Inc. a Delaware corporation, in its capacity as administrative agent under the Credit Agreement referred to below (in such capacity, Agent). On or about May 20, 2010, the Debtors filed an emergency motion to sell substantially all of their assets (other than cash and accounts receivable) under Section 363 of the Bankruptcy Code (the Asset Sale). On or about June 9, 2010, the Bankruptcy Court entered an Order approving the Asset Sale (the Sale Order) and the Asset Sale was subsequently consummated. The assets sold by the Debtors pursuant to the Asset Sale were subject to a lien and security interest in favor of the Agent arising under that certain Credit Agreement dated as of June 30, 2006. On or about June 17, 2010, the Debtors, the Agent, and the Official Committee of Unsecured Creditors (the Committee) entered into a Stipulation Allocating Distribution of Sale Proceeds and Other Assets of the Estates; Allowing Claim of GE Business Financial Services, Inc.; Providing for Treatment of such Claim under a Chapter 11 Plan; and Granting Releases of Liability (the Stipulation). Pursuant to the Stipulation, all accounts, accounts receivable, general intangibles, and other rights to payment held by the Debtors on the closing of the Asset Sale, whether arising before or after the Petition Date (collectively, the Accounts), are to be collected by the Debtors in the ordinary course. After collection, the Debtors are required, on or before the fifth business day of each month (or on a more frequent basis at Debtors discretion), to disburse 25% of the
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proceeds of Accounts (the Agents Account Proceeds) to Agent. The remaining 75% of the proceeds of Accounts are to be retained by the Debtors as unencumbered funds of their bankruptcy estates. Each Manager is party to a pre-petition Senior Management Agreement or similar employment agreement (each, a Management Agreement) with the Debtors. Each Management Agreement provides for certain incentive compensation (the Incentive Compensation) to be paid to the applicable Manager if a sale of the Debtors business generates a certain level of proceeds. The Asset Sale generated sufficient proceeds to entitle each Manager to Incentive Compensation under his Management Agreement and each Manager is entitled under his Management Agreement to receive Incentive Compensation in the following amounts: (a) Whalen -- $175,000; (b) Vernaglia -- $125,000; (c) Clark -- $100,000; and (d) Skinner -- $87,500. The Managers requested that the Debtors pay the Incentive Compensation to them. The Debtors informed the Managers that the Debtors did not intend to assume the Management Agreements as part of their bankruptcy cases. After discussion among the Debtors, the Agent, and the Managers, as resolution of the outstanding issues, the Debtors have agreed to pay each Manager a portion of his Incentive Compensation, with the balance constituting a general unsecured claim, and the Agent has agreed that the Debtors may reimburse themselves for such payment out of the Agents Account Proceeds. The result of this agreement is that the Agent is effectively funding that portion of the Incentive Compensation to the Managers, at no cost to the Debtors' estates, and thereby reducing the damage claim that each Manager would otherwise have against the Debtors' estates for unpaid Incentive Compensation. PLEASE TAKE FURTHER NOTICE that this Motion is brought pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure on the grounds that the Debtors, in the exercise of their business judgment, have determined that it is in the best interests of their estates to settle the estates issues with the Managers as set forth above. The Agreement is the product of the parties extensive negotiations and ultimate cooperative resolution. The Agreement is supported by the Debtors, the Agent, and the Managers and, more importantly, the payments under the Agreement
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will ultimately be paid with the Agents Account Proceeds, so there will be no net reduction in the Debtors estates from the payments. However, the payments will result in a reduction of the claims the Managers would otherwise have against the Debtors' estates for unpaid Incentive Compensation. The Debtors negotiated the Agreement taking into account, among other things, the administrative costs of resolving these claims of the Managers and the likelihood of succeeding should any objections to such claims be brought. Accordingly, the Debtors submit that the compromise is fair and reasonable and should, therefore, be approved by the Court. PLEASE TAKE FURTHER NOTICE that this Motion is based upon this Notice of Motion and Motion, the annexed Memorandum of Points and Authorities, the annexed Declaration of Matthew Pakkala, the entire record in these cases, and such further evidence as may be submitted to the Court. PLEASE TAKE FURTHER NOTICE that pursuant to Local Bankruptcy Rule 90131(o)(1), any response to this Motion and request for a hearing on this Motion must be filed with the Court and served on the Debtors' counsel and the Office of the United States Trustee within fourteen (14) days after the date of this Notice. PLEASE TAKE FURTHER NOTICE that pursuant to Local Bankruptcy Rule 90131(h), the failure to file and serve a timely response to this Motion may be deemed by the Court as consent to the granting of the relief requested in this Motion. WHEREFORE, the Debtors respectfully request that the Court enter an order, (1) (2) (3) granting thIS Motion in its entirety; approving the Agreement pursuant to Bankruptcy Rule 9019(a); authorizing the Debtors and all other parties to the Agreement to take all actions
necessary to effectuate the terms of the Agreement; and
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(4)
affording such further and other relief as the Court deems appropriate under the
circumstances of these cases. Dated: October 8, 2010 WESTCLIFF MEDICAL LABORATORIES, INC. -andBIOLABS, INC.
6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 /s/ Anthony A. Friedman RON BENDER TODD M. ARNOLD ANTHONY A. FRIEDMAN LEVENE, NEALE, BENDER, YOO & BRILL L.L.P. Attorneys for Chapter 11 Debtors and Debtors in Possession
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MEMORANDUM OF POINTS AND AUTHORITIES I. STATEMENT OF FACTS BACKGROUND. Westcliff and Biolabs commenced their bankruptcy cases by filing voluntary petitions under Chapter 11 of 11 U.S.C. 101 et seq. (the Bankruptcy Code) on May 19, 2010 (the Petition Date). The Debtors continue to manage their financial affairs and operate their
bankruptcy estates as debtors in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. BioLabs is the parent company to Westcliff, which is the operating company. Biolabs was organized for the purposes of acquiring 100% of the capital stock and other equity interests of Westcliff. The only material asset owned by BioLabs is its stock interest in Westcliff. Westcliff was founded in 1964 as a community-based laboratory and is headquartered in Santa Ana, California. Westcliff was the operator of approximately 170 branded, stand-alone, patient service center laboratories and STAT labs that provided various services, including clinical testing, pathology, reporting and support services for the benefit of thousands of outpatients throughout California. The Debtors had nearly 1,000 employees. Much of the Debtors growth prior to the Petition Date came from the acquisition of other labs, which caused the Debtors to incur a substantial amount of debt. As of the Petition Date, the Debtors owed approximately $56 million to GE Business Financial Services, Inc. ("GE"), which was secured by a senior priority lien against all or substantially all of the Debtors assets. B. THE NECESSITY FOR FILING BANKRUPTCY, THE SALE AND POST-SALE ACTIVITIES. While the Debtors revenue was significant, due to the small profit margins in the Debtors' business, despite significant and continuing cost cutting measures undertaken by the Debtors, the Debtors were simply not able to operate sufficiently profitably to enable the Debtors to repay their debts.
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The Debtors suffered a net loss of approximately $87 million in 2008 (including expenses and write offs of approximately $171 million) on net revenue of approximately $84 million. The Debtors suffered a net loss of approximately $13 million in 2009 (including expenses and write offs of approximately $110 million) on net revenue of approximately $97 million. While the Debtors instituted as many expense reductions as were reasonably possible, the Debtors losses continued. Since the beginning of 2009, the Debtors were unable to make any debt service payments to GE, and the Debtors were unable to remain current with their other debt obligations, including payments owing to former owners of companies the Debtors previously purchased as part of the Debtors' overall growth strategy. Indeed, the Debtors were only able to survive financially over the months leading up to bankruptcy because GE agreed to provide the Debtors with additional funding. The only way the Debtors could have survived as a stand-alone, going-concern business would have been for the Debtors to raise many millions of dollars of additional equity which was not possible given the Debtors' debt structure. It therefore became clear to the Debtors in early 2009 that the only viable option available to the Debtors to avoid a shut down of their business and the loss of employment by all of the Debtors employees would be for the Debtors to sell their business as a going concern to the highest bidder. Therefore, the Debtors determined that an expedited sale of substantially all of their assets was in the overwhelming best interests of the Debtors estates and their creditors. On or about May 20, 2010, the Debtors filed an emergency motion to sell substantially all of their assets (other than cash and accounts receivable) under Section 363 of the Bankruptcy Code (the Asset Sale). On or about June 9, 2010, the Bankruptcy Court entered an Order approving of the Asset Sale (the Sale Order), and the Asset Sale was subsequently consummated. The assets sold by the Debtors pursuant to the Asset Sale were subject to a lien and security interest in favor of GE, in its capacity as administrative agent (in such capacity, Agent) arising under that certain Credit Agreement dated as of June 30, 2006. On or about June 17,
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2010, the Debtors, the Agent, and the Official Committee of Unsecured Creditors (the Committee) entered into a Stipulation Allocating Distribution of Sale Proceeds and Other Assets of the estates; Allowing Claim of GE Business Financial Services, Inc.; Providing for Treatment of such Claim under a Chapter 11 Plan; and Granting Releases of Liability (the Stipulation). Pursuant to the Stipulation, all accounts, accounts receivable, general intangibles, and other rights to payment held by the Debtors on the closing of the Asset Sale, whether arising before or after the Petition Date (collectively, the Accounts) are to be collected by the Debtors in the ordinary course. After collection, the Debtors are required, on or before the fifth business day of each month (or on a more frequent basis at Debtors discretion), to disburse 25% of the proceeds of Accounts (the Agents Account Proceeds) to Agent. The remaining 75% of the proceeds of Accounts are to be retained by the Debtors as unencumbered funds of their bankruptcy estates. Each Manager is party to a Senior Management Agreement or similar employment agreement (each, a Management Agreement) with the Debtors. Each Management Agreement provides for certain incentive compensation (the Incentive Compensation) to be paid to the applicable Manager if a sale of the Debtors business generates a certain level of proceeds. The Asset Sale generated sufficient proceeds to entitle each Manager to Incentive Compensation under his Management Agreement, and each Manager is entitled under his Management Agreement to receive Incentive Compensation in the following amounts: (a) Whalen -- $175,000; (b) Vernaglia -- $125,000; (c) Clark -- $100,000; and (d) Skinner -- $87,500. The Managers requested that the Debtors pay the Incentive Compensation to them. The Debtors informed the Managers that the Debtors did not intend to assume the Management Agreements as part of their bankruptcy cases. After discussion among the Debtors, the Agent, and the Managers, as resolution of the outstanding issues, the Debtors have agreed to pay each Manager a portion of his Incentive Compensation, with the balance constituting a general unsecured claim, and the Agent has agreed that the Debtors may reimburse themselves for such
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payment out of the Agents Account Proceeds. The result of this agreement is that the Agent is effectively funding that portion of the Incentive Compensation to the Managers, at no cost to the Debtors' estates, and thereby reducing the damage claim that each Manager would otherwise have against the Debtors' estates for unpaid Incentive Compensation. C. THE PROPOSED SETTLEMENT. A true and correct copy of the Agreement is attached as Exhibit A to the Declaration of Matthew Pakkala (the Pakkala Declaration). The salient terms of the Agreement provide that the Incentive Compensation owed to each manager shall be divided into an A Portion and a B Portion as follows: Manager A Portion $73,500 $52,500 $42,000 $36,750 B Portion $ 101,500 $ 72,500 $ 58,000 $ 50,750
11 12 13 Vernaglia 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Clark Skinner Whalen
Promptly after Bankruptcy Court approval of the Agreement, the Debtors shall pay each Manager an amount equal to the A Portion of his Incentive Compensation. The Debtors are entitled to reimburse themselves from the Agents Account Proceeds for the amount of the A Portion of the Incentive Compensation paid to the Managers. This results in no net cost to the Debtors and no diminution in the money which will otherwise be available for distribution to the Debtors unsecured creditors because 100% of this expense is being funded by the Agent out of the Agents Account Proceeds. Moreover, payment of the A Portion results in a reduction of the unsecured claim that each Manager would otherwise have against the Debtors, thereby benefiting all other general unsecured creditors by reducing the total pool of general unsecured claims. Each Manager will have an allowed unsecured claim against the Debtors for the B Portion of such Managers Incentive Compensation.
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The Debtors further benefit by receiving a full release, including waiver of Section 1542 of the California Civil Code. The Debtors believe that the terms of the Agreement are fair and reasonable in light of the circumstances of these cases and should be approved by the Court. II. DISCUSSION THE COURT SHOULD APPROVE THE AGREEMENT PURSUANT TO FED.R.BANKR.P. 9019(a). 1. THE STANDARD FOR THE APPROVAL OF THE AGREEMENT.
Bankruptcy Rule 9019(a) provides that: On motion by the [debtor in possession] and after notice and hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor and indenture trustees as provided in [Bankruptcy Rule] 2002 and to any other entity as the court may direct. Fed.R.Bankr.P. 9019(a). The Court of Appeals for the Ninth Circuit has long recognized that "[t]he bankruptcy court has great latitude in approving compromise agreements." Woodson v. Fireman's Fund Ins. Co. (In re Woodson), 839 F.2d 610, 620 (9th Cir. 1988). "The purpose of a compromise agreement is to allow the [debtor in possession] and the creditors to avoid the expenses and burdens associated with litigating sharply contested and dubious claims." Martin v. Kane (In re A & C Properties), 784 F.2d 1377, 1380-81 (9th Cir. 1986), cert. denied 479 U.S. 854 (1986). Accordingly, in approving a compromise, the Court need not conduct an exhaustive investigation of the claims sought to be compromised. See United States v. Alaska National Bank (In re Walsh Constr., Inc.), 669 F.2d 1325, 1328 (9th Cir. 1982). Rather, it is sufficient that the Court find that the compromise was negotiated in good faith and is reasonable, fair, and equitable. See In re A & C Properties, 784 F.2d at 1381. The Court of Appeals for the Ninth Circuit has identified the following factors for consideration in determining whether a proposed compromise agreement is reasonable, fair, and equitable:
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1 2 3 4 (d) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 (a) (b) (c) the probability of success in the litigation; the difficulties, if any, to be encountered in the matter of collection; the complexity of the litigation involved, and the expense, inconvenience, and delay necessarily attending it; and the paramount interest of the creditors and a proper deference to their reasonable views in the premises.
In re A & C Properties, 784 F.2d at 1381 (the A & C Factors). Consideration of these factors does not require the Court to determine whether a compromise presented is the best one that could possibly have been achieved. Rather, the Court need only canvass the issues to determine whether the compromise falls "below the lowest point in the zone of reasonableness." Newman v. Stein, 464 F.2d 689, 698 (2d Cir. 1972) (emphasis added), cert. denied sub nom. Benson v. Newman, 409 U.S. 1039 (1972); see also AnacondaEricsson Inc. v. Hessen (In re Teltronics Services, Inc.), 762 F.2d 185, 189 (2d Cir. 1985); Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608 (2d Cir. 1983), cert. denied 464 U.S. 822 (1983). Finally, although the Court should give deference to the reasonable views of creditors, "objections do not rule. It is well established that compromises are favored in bankruptcy." In re Lee Way Holding Co., 120 B.R. 881, 891 (Bankr. S.D. Ohio 1990). 2. THE AGREEMENT IS FAIR AND REASONABLE AND IN THE BEST INTERESTS OF THE DEBTORS ESTATES. The Debtors believe that the Agreement is in the best interests of their estates and should be approved by the Court. The Agreement results in reducing the amount of the Managers Incentive Compensation claims by more than 50% at no cost to the Debtors estates as the balance of their Incentive Compensation claims are being paid from the Agents Account Proceeds. By reducing the total pool of general unsecured claims, the result will be to increase the distribution that will be paid to the Debtors other general unsecured creditors. The Agreement therefore benefits all of the Debtors other creditors at no cost to the Debtors estates. In consideration of the foregoing, the Debtors, in an exercise of their business judgment, have determined that the Agreement is fair, reasonable, and in the best interests of Debtors
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estates and should be approved by the Court pursuant to Fed.R.Bankr.P. 9019(a). III. CONCLUSION WHEREFORE, the Debtors respectfully request that the Court enter an order: 1. 2. granting the Motion in its entirety; approving the Agreement pursuant to Bankruptcy Rule 9019(a);
3. authorizing the Debtors and all other parties to the Agreement to take all actions necessary to effectuate the terms of the Agreement; and 4. affording such other and further relief as the Court deems proper under the
circumstances of these cases. Dated: October 11, 2010 WESTCLIFF MEDICAL LABORATORIES, INC. -andBIOLABS, INC.
14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 /s/ Anthony A. Friedman RON BENDER TODD M. ARNOLD ANTHONY A. FRIEDMAN LEVENE, NEALE, BENDER, YOO & BRILL L.L.P. Attorneys for Chapter 11 Debtors and Debtors in Possession
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DECLARATION OF_MATTHEW PAKKALA I, MATTHEW PAKKALA, HEREBY DECLARE AS FOLLOWS: 1. I have personal knowledge of the facts set forth below and, if called to testify,
would and could competently testify thereto. 5 6 7 8 9 10 11 12 4. 13 14 15 16 17 18 19 Date). The Debtors continue to manage their financial affairs and operate their bankruptcy 20 21 22 23 24 25 26 27 laboratory and is headquartered in Santa Ana, California. 28 Westcliff was the operator of estates as debtors in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. 6. BioLabs is the parent company to Westcliff, which is the operating company. I attached. To the extent necessary to make this Declaration, I have reviewed the Debtors books and records, created and maintained in the ordinary course of their business. Unless otherwise stated, all capitalized terms herein have the same meanings as in the Motion. 5. The Debtors commenced their bankruptcy cases by filing voluntary petitions under I make this Declaration in support of the Motion to which this Declaration is 2. I am a Managing Director of FTI Consulting, Inc. (FTI), which maintains its
main offices at 500 E. Pratt Street Suite 1400 Baltimore, MD 21202. My business office is located at 633 West 5th Street, 16th Floor, Los Angeles, California, 90071. 3. Effective on or about April 1, 2010, I became the Chief Restructuring Officer for
Westcliff Medical Laboratories, Inc. (Westcliff) and its parent corporation, BioLabs, Inc. (BioLabs), Chapter 11 Debtors and Debtors in Possession (collectively, the Debtors).
Chapter 11 of 11 U.S.C. 101 et seq. (the Bankruptcy Code) on May 19, 2010 (the Petition
understand that Biolabs was organized for the purposes of acquiring 100% of the capital stock and other equity interests of Westcliff. The only material asset owned by BioLabs is its stock interest in Westcliff. 7. I am informed that Westcliff was founded in 1964 as a community-based
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approximately 170 branded, stand-alone, patient service center laboratories and STAT labs that provided various services, including clinical testing, pathology, reporting and support services for the benefit of thousands of out-patients throughout California. The Debtors had nearly 1,000 employees.
5 6 7 8 9 10 11 12 Debtors' business, despite significant and continuing cost cutting measures undertaken by the 13 14 15 16 17 18 19 $13 million in 2009 (including expenses and write offs of approximately $110 million) on net 20 21 22 23 24 25 26 27 28 revenue of approximately $97 million. 11. I understand that while the Debtors instituted as many expense reductions as were Debtors, the Debtors were simply not able to operate sufficiently profitably to enable the Debtors to repay their debts. 10. I understand that the Debtors suffered a net loss of approximately $87 million in 8. Much of the Debtors growth prior to the Petition Date came from the acquisition
of other labs, which caused the Debtors to incur a substantial amount of debt. As of the Petition Date, the Debtors owed approximately $56 million to GE Business Financial Services, Inc. ("GE"), which was secured by a senior priority lien against all or substantially all of the Debtors assets. 9. While the Debtors revenue was significant, due to the small profit margins in the
2008 (including expenses and write offs of approximately $171 million) on net revenue of approximately $84 million. I understand that the Debtors suffered a net loss of approximately
reasonably possible, the Debtors losses continued. Since the beginning of 2009, the Debtors were unable to make any debt service payments to GE, and the Debtors were unable to remain current with their other debt obligations, including payments owing to former owners of companies the Debtors previously purchased as part of the Debtors' overall growth strategy.
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Indeed, I understand that the Debtors were only able to survive financially over the months leading up to bankruptcy because GE agreed to provide the Debtors with additional funding. 12. The only way the Debtors could have survived as a stand-alone, going-concern
business would have been for the Debtors to raise many millions of dollars of additional equity 5 6 7 8 9 10 11 12 14. 13 14 15 16 17 18 19 security interest in favor of GE, in its capacity as administrative agent (in such capacity, Agent) 20 21 22 23 24 25 26 27 16. 28 Pursuant to the Stipulation, all accounts, accounts receivable, general intangibles, arising under that certain Credit Agreement dated as of June 30, 2006. On or about June 17, 2010, the Debtors, the Agent, and the Official Committee of Unsecured Creditors (the Committee) entered into a Stipulation Allocating Distribution of Sale Proceeds and Other Assets of the estates; Allowing Claim of GE Business Financial Services, Inc.; Providing for Treatment of such Claim under a Chapter 11 Plan; and Granting Releases of Liability (the Stipulation). substantially all of their assets (other than cash and accounts receivable) under Section 363 of the Bankruptcy Code (the Asset Sale). On or about June 9, 2010, the Bankruptcy Court entered an Order approving of the Asset Sale (the Sale Order), and the Asset Sale was subsequently consummated. 15. The assets sold by the Debtors pursuant to the Asset Sale were subject to a lien and On or about May 20, 2010, the Debtors filed an emergency motion to sell which was not possible given the Debtors' debt structure. 13. It therefore became clear to the Debtors in early 2009 that the only viable option
available to the Debtors to avoid a shut down of their business and the loss of employment by all of the Debtors employees would be for the Debtors to sell their business as a going concern to the highest bidder. Therefore, the Debtors determined that an expedited sale of substantially all of their assets was in the overwhelming best interests of the Debtors estates and their creditors.
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and other rights to payment held by the Debtors on the closing of the Asset Sale, whether arising before or after the Petition Date (collectively, the Accounts) are to be collected by the Debtors in the ordinary course. After collection, the Debtors are required, on or before the fifth business day of each month (or on a more frequent basis at Debtors discretion), to disburse 25% of the
5 6 7 8 9 10 11 12 Debtors. 13 14 15 16 17 18 19 $87,500. 20 21 22 23 24 25 26 27 payment out of the Agents Account Proceeds. The result of this agreement (the Agreement) is 28 18. The Managers requested that the Debtors pay the Incentive Compensation to them. Incentive Compensation) to be paid to the applicable Manager if a sale of the Debtors business generates a certain level of proceeds. The Asset Sale generated sufficient proceeds to entitle each Manager to Incentive Compensation under his Management Agreement, entitling each Manager to receive Incentive Compensation under his Management Agreement in the following amounts: (a) Whalen -- $175,000; (b) Vernaglia -- $125,000; (c) Clark -- $100,000; and (d) Skinner -Each Management Agreement provides for certain incentive compensation (the proceeds of Accounts (the Agents Account Proceeds) to Agent. The remaining 75% of the proceeds of Accounts are to be retained by the Debtors as unencumbered funds of their bankruptcy estates. 17. Each of Robert Whalen, Kip Vernaglia, Greg Clark, and Michael Skinner
(collectively, the Managers and singularly a "Manager") is party to a Senior Management Agreement or similar employment agreement (each, a Management Agreement) with the
The Debtors informed the Managers that the Debtors did not intend to assume the Management Agreements as part of their bankruptcy cases. After discussion among the Debtors, the Agent, and the Managers, as resolution of the outstanding issues, the Debtors have agreed to pay each Manager a portion of his Incentive Compensation, with the balance constituting a general unsecured claim, and the Agent has agreed that the Debtors may reimburse themselves for such
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that the Agent is effectively funding that portion of the Incentive Compensation to the Managers, at no cost to the Debtors' estates, and thereby reducing the damage claim that each Manager would otherwise have against the Debtors' estates for unpaid Incentive Compensation. 19. A true and correct copy of the Agreement is attached hereto as Exhibit A. The
5 6 7 8 Manager 9 10 11 12 13 14 Skinner 15 16 17 18 19 20 21 Debtors unsecured creditors because 100% of this expense is being funded by the Agent out of 22 23 24 25 26 27 28 the Agents Account Proceeds. Moreover, payment of the A Portion results in a reduction of the unsecured claim that each Manager would otherwise have against the Debtors, thereby benefiting all other general unsecured creditors by reducing the total pool of general unsecured claims. Each Manager will have an allowed unsecured claim against the Debtors for the B Portion of such 20. Promptly after Bankruptcy Court approval of the Agreement, the Debtors shall pay $36,750 $ 50,750 Vernaglia Clark $52,500 $42,000 $ 72,500 $ 58,000 Whalen $73,500 $ 101,500 A Portion B Portion salient terms of the Agreement provide that the Incentive Compensation owed to each manager shall be divided into an A Portion and a B Portion as follows:
each Manager an amount equal to the A Portion of his Incentive Compensation. The Debtors are entitled to reimburse themselves from the Agents Account Proceeds for the amount of the A Portion of the Incentive Compensation paid to the Managers. This results in no net cost to the Debtors and no diminution in the money which will otherwise be available for distribution to the
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Managers Incentive Compensation. The Debtors further benefit by receiving a full release, including waiver of Section 1542 of the California Civil Code. 21. I believe that the terms of the Agreement are fair and reasonable in light of the
circumstances of these cases, in the best interests of the Debtors estates and should be approved 5 6 7 8 9 10 11 12 I declare and verify under penalty of perjury that the foregoing is true and correct to the 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 best of my knowledge, information and belief. Executed on this 11th day of September 2010, at Los Angeles, California. /s/ Matthew Pakkala MATTHEW PAKKALA by the Court. The Agreement results in reducing the amount of the Managers Incentive
Compensation claims by more than 50% at no cost to the Debtors estates as the balance of their Incentive Compensation claims are being paid from the Agents Account Proceeds. By reducing the total pool of general unsecured claims, the result will be to increase the distribution that will be paid to the Debtors other general unsecured creditors. The Agreement therefore benefits all of the Debtors other creditors at no cost to the Debtors estates.
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Case 8:10-bk-16743-TA
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Case 8:10-bk-16743-TA
Desc
Case 8:10-bk-16743-TA
Desc
Case 8:10-bk-16743-TA
Desc
Case 8:10-bk-16743-TA
Desc

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Case 8:10-bk-16743-TA

necessary to effectuate the terms of the Agreement; and

11 12 13 Vernaglia 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Clark Skinner Whalen

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