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Ancela R. Nastasi Mark A. Worden Beret L. Flom Fulbright & Jaworski L.L.P. 666 Fifth Avenue New York, New York 10103-3198 Telephone: (212) 318-3000 Facsimile: (212) 318-3400 Jeffrey R. Freund Zoe L. Palitz Bredhoff & Kaiser, P.L.L.C. 805 15th St. NW Washington, D.C. 20005 Telephone: (202) 842-2600 Facsimile: (202) 842-1888 ATTORNEYS FOR BAKERY, CONFECTIONERY, TOBACCO WORKERS AND GRAIN MILLERS INTERNATIONAL UNION, AND BAKERY AND CONFECTIONERY UNION AND INDUSTRY INTERNATIONAL PENSION FUND UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------------------------------x In re: : : HOSTESS BRANDS, INC., et al., : : : : Debtors. 1 : ----------------------------------------------------------------x Chapter 11

Case No. 12-22052 (RDD)

(Jointly Administered)

JOINT MOTION OF BAKERY, CONFECTIONERY, TOBACCO WORKERS AND GRAIN MILLERS INTERNATIONAL UNION AND BAKERY AND CONFECTIONERY UNION AND INDUSTRY INTERNATIONAL PENSION FUND PURSUANT TO BANKRUPTCY CODE SECTIONS 105, 1104, AND 1112 AND BANKRUPTCY RULES 2007.1 AND 9014 FOR ENTRY OF AN ORDER APPOINTING A CHAPTER 11 TRUSTEE
In addition to Hostess Brands, Inc., the debtors include the following entities: IBC Sales Corporation, IBC Services, LLC, IBC Trucking, LLC, Interstate Brands Corporation and MCF Legacy, Inc (collectively, the Debtors).
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Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (the BCT) and Bakery and Confectionery Union and Industry International Pension Fund (the B&C Fund, and collectively, with the BCT, Movants) hereby submit this motion (the Motion) pursuant to sections 105, 1104 and 1112 of title 11 of the United States Code (the Bankruptcy Code) and Rules 2007.1 and 9014 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules), for entry of an order appointing a chapter 11 trustee substantially in the form annexed to this Motion as Exhibit A. In support of the Motion, Movants respectfully represent: PRELIMINARY STATEMENT 1. As described in the Debtors Wind-Down Motion,2 while continuing to incur

significant administrative and priority debt that cannot be paid by these estates, incumbent management has been woefully unsuccessful in its reorganization attempts attempts which include a failed sale process, leading to the proposal of a patently unconfirmable plan of reorganization (premised, inter alia, on a waiver of all administrative expense and priority claims held by the Debtors multi-employer pension plans (the MEPPs), followed by the cessation of operations, and ultimately ending with the request to remain in possession while these estates are liquidated. Given the administrative insolvency, which undoubtedly plagues these cases, the Wind-Down Motion and the concomitant assumption that the Debtors will remain in possession during the liquidation phase of these cases without the unanimous consent of their

Emergency Motion of Debtors and Debtors in Possession for Interim and Final Orders, Pursuant to Sections 105, 363, 365 and 503(c) of the Bankruptcy Code: (A) Approving (I) a Plan to Wind Down the Debtors' Businesses, (II) the Sale of Certain Assets, (III) Going Out-of-Business Sales at the Debtors' Retail Stores, (IV) the Debtors' NonConsensual Use of Cash Collateral and Modifications to Final DIP Order, (V) an Employee Retention Plan, (VI) a Management Incentive Plan, (VII) Protections for Certain Employees Implementing the Winddown of the Debtors' Businesses, (VIII) the Use of Certain Third Party Contractors and (IX) Procedures for the Expedited Rejection of Contracts and Leases; and (B) Authorizing the Debtors to Take Any and All Actions Necessary to Implement the Winddown, dated November 16, 2012,[Dkt. No. 1710] (the Wind-Down Motion).

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creditor body is simply untenable. Rather, the current posture of these cases provides ample cause to appoint a chapter 11 trustee. 2. To establish such cause, the Court need look no further than filings and

representations made by the Debtors themselves. In fact, the Debtors have admitted (or at minimum, alluded) to three distinct and independent grounds that require the Motion to be granted. First, the Debtors have filed pleadings which substantiate the continuing and

substantial diminution to these estates alongside their inability to rehabilitate (i.e., continue as a going concern). Second, as evidenced by the plan they filed in October, 2012 a plan premised on the unachievable condition that certain administrative and priority creditors agree to waive their claims at this juncture, it is impossible for the Debtors to propose any confirmable plan. And third, while the Debtors admit that they are on the precipice of administrative insolvency, the evidence adduced at the final hearing on the Wind-Down Motion will show that to the contrary, these cases are currently administratively insolvent.3 3. In addition to meeting the statutory requirements for appointing a chapter 11

trustee, the Debtors have a practical problem: after the wind-down and sale process is complete, in the absence of unanimous creditor consent, there is no viable exit strategy from these administratively insolvent cases. In fact, if the cases proceed as the Debtors have proposed, the Debtors will ultimately be left with three untenable choices: (a) obtain a structured dismissal in the absence of unanimous creditor consent; (b) propose an unconfirmable plan that fails to pay the claims of non-consenting administrative and priority creditors in full; or (c) seek voluntary conversion of their cases, and thereby incur two sets of professional overhead i.e., the cost of chapter 11 professionals retained during the wind-down and sale process and the cost of
Notwithstanding the recent testimony of Joshua Scherer at the interim hearing on the Wind-Down Motion held on November 21, 2012, at the final hearing, Movants intend to present evidence that the estates are currently administratively insolvent.
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compensating a chapter 7 trustee. None of these choices are permissible under the Bankruptcy Code as in the best interest of creditors. 4. Under these circumstances, cases such as Caldor and Blockbuster in which courts

allowed administratively insolvent debtors to remain in chapter 11 during the liquidation process are inapt. The hallmark and unifying theme of such cases was the widespread agreement by creditors to remain in chapter 11 and the implementation of a process which maximized value for all parties in interest. The facts presented herein bear no resemblance. 5. Movants submit that the appointment of a chapter 11 trustee is the required and

most advantageous mechanism for orderly liquidation of these estates and conclusion of these bankruptcy cases. For the reasons set forth herein, the Movants respectfully request that the Court grant the Motion.4 JURISDICTION 6. This Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C.

1334. This is a core proceeding pursuant to 28 U.S.C. 157(b). Venue is proper under 28 U.S.C. 1408 and 1409. ARGUMENT 7. The Bankruptcy Code provides for the mandatory appointment of an independent

fiduciary to manage the estate if certain criterion are met. Specifically, section 1112(b) of the Bankruptcy Code provides: [O]n request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the
In conjunction with this Motion, on November 26, 2012, Movants filed (a) the Joint Objection to Final Approval of Debtors Wind-Down Motion and Response to Evidence Adduced at Interim Hearing Thereon (the Wind-Down Objection), (b) the Declaration of Ancela R. Nastasi in Support of the Wind-Down Objection, dated November 26, 2012, and (c) the Declaration of Gerard A. McHale, Jr. in Support of the Wind-Down Objection, dated November 26, 2012 (the McHale Declaration).
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court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate. 11 U.S.C. 1112(b)(1) (emphasis supplied). 8. Under section 1112(b)(1), moving to appoint a chapter 11 trustee is a two-step

process: first, cause must be shown to convert or dismiss the case, and second, movant must show that rather than conversion or dismissal, the appointment of a chapter 11 trustee is in the best interest of creditors and the estate. As to the fist prong, movant can meet its burden by showing one or more of the examples of cause set forth in section 1112(b)(4). In re Reagan, 403 B.R. 614, 621 (B.A.P. 8th Cir. 2009), affd, 374 F. Appx 683 (8th Cir. 2010). 9. As set forth below, under the instant facts, cause exists to convert these cases to

chapter 7 on at least three grounds. Given the Debtors current state of affairs as well as the extent and nature of its businesses and assets, Movants submit that the appointment of a chapter 11 trustee is in the creditors and estates best interest. Having satisfied the requirements for appointing an independent fiduciary to manage these estates, Movants submit that the Motion must be granted. A. Cause Exists to Convert the Debtors Cases to Chapter 7 or Dismiss Them (i) The Estates are Suffering Continuing and Substantial Losses and Cannot Be Rehabilitated

10.

Pursuant to section 1112(b)(4)(A), cause includes substantial loss or

continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.5 Cause to convert or dismiss exists in these cases because there are substantial and continuing losses to the estates, and there is no chance of rehabilitation.

Rehabilitation under section 1112(b)(4)(A) is not as broad as the notion of reorganization under the Bankruptcy Code. See Loop Corp. v. U.S. Tr. (In re Loop Corp.), 379 F.3d 511, 516 (8th Cir. 2004) (distinguishing rehabilitation and reorganization). Unlike a reorganization, rehabilitation means to put back in good condition and

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11.

The Debtors admit to substantial and ongoing losses, explain that their cash

position is steadily weakening, and caution that cash may soon run out completely. (Wind-Down Motion, 69) (disclosing that losses are estimated to be $7.5 to $9.5 million between November 9 and November 19, 2012, and noting that the strike and other factors, including increased vendor payment terms contraction, have resulted in a significant weakening of the Debtors cash position and, if continued, would soon result in the Debtors completely running out of cash). 12. Similarly, because operations have ceased completely, the Debtors admit that

reorganization is no longer a viable option. (Wind-Down Motion, 13). Because there will be no preservation of the Debtors as a going concern and the only thing left to do is to liquidate, there can be no rehabilitation of Hostess. (Wind-Down Motion, 23) (Generally, the

Winddown Plan is designed to maximize the value of the Debtors now-liquidating chapter 11 estates . . . . (emphasis added)). 13. The Debtors, however, are not filing a liquidating chapter 11 plan or volunteering

to dismiss or convert their cases. Rather, they unjustifiably seek to remain in possession under chapter 11 to manage their immediate liquidation. As explained more fully below, the Debtors simply cannot proceed down this path without broad creditor consent and Movants do not so consent. As aptly stated by the Natural Plants & Lands Management Co. Court, it defies logic for the court to permit a debtor which is suffering continuous monthly losses to conduct a liquidation in Chapter 11 without the supervision of an independent trustee. In re Natural Plants & Lands Mgmt. Co., 68 B.R 394, 395 (Bankr. S.D.N.Y. 1986). 14. Where, as here, there is no reasonable likelihood of rehabilitation and the

bankruptcy estates continue to suffer substantial loss, conversion, dismissal, or appointment of a

reestablish on a sound basis and does not include the liquidation of assets. In re Adbrite Corp., 290 B.R. 209, 216 (Bankr. S.D.N.Y. 2003); see also In re Loop, 379 F.3d at 516 (Courts have consistently understood rehabilitation to refer to the debtors ability to restore the viability of its business.).

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fiduciary pursuant to section 1104(a) is mandatory and thus should be ordered. See In re BH S&B Holdings, LLC, 439 B.R. 342, 347 (Bankr. S.D.N.Y. 2010). (ii) 15. The Debtors Cannot Confirm a Plan

The list of factors constituting cause in section 1112 is non-exhaustive and

courts may consider other equitable factors in deciding whether cause exists to convert a case. In re Hampton Hotel Investors, L.P., 270 B.R. 346, 358 (Bankr. S.D.N.Y. 2001). Courts agree that the Debtors inability to effectuate a plan, is a non-enumerated form of cause. See DCNC N.C. I, L.L.C. v. Wachovia Bank, N.A., Nos. 09-3775, 09-3776, 2009 U.S. Dist. LEXIS 93046, at *14 (E.D. Penn. Oct. 6, 2009) (Following the 2005 BAPCPA amendments, section 1112(b) no longer expressly lists inability to effectuate a plan as an example of cause. Inability to effectuate a plan remains a viable basis for dismissal because the listed examples of cause are not exhaustive.). In a Chapter 11 case, inability to effectuate a plan tests whether it is reasonable to expect that a plan could be confirmed within a reasonable amount of time. DCNC N.C. I, L.L.C., 2009 U.S. Dist. LEXIS 93046, at *16. When a plan has been filed but there are no prospects of confirmation, then there is no point in permitting the Chapter 11 case to continue and cause exists to convert or dismiss the case. Id. 16. In October of 2012, before ceasing to operate, the Debtors filed a plan of

reorganization. That plan was premised on each of the MEPPs waiving their administrative and priority claims in toto. As was made clear to the Debtors, however, unanimous consent amongst the MEPPs was unattainable making the plan they put forth patently unconfirmable. 17. At this stage, the Debtors have rejected the notion of pursuing any plan of

reorganization in favor of simply wrapping up their affairs as set forth in the Wind-Down Motion a process they advise could take up to one year. Assuming administrative insolvency of these

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estates, and in the absence of unanimous consent by creditors, the Debtors will never be able to confirm a plan. Cause therefore exists pursuant to section 1112(b) to convert these cases to chapter 7 or dismiss them. (iii) 18. The Debtors are Administratively Insolvent

While administrative insolvency is not enumerated in section 1112(b), it is

nonetheless considered cause to convert a case. See In re BH S&B Holdings, LLC, 439 B.R. at 349 ([T]he Debtors administrative insolvency constitutes cause to convert these cases . . . . Although section 1112(b)(4) does not list administrative insolvency as cause to convert or dismiss a chapter 11 case, a court may still consider this factor.); In re Desmond, 331 B.R. 42, 44 (Bankr. D.N.H. 2005) ([C]ause exists to convert the case under 11 U.S.C. 1112(b) . . . since the estate is apparently administratively insolvent.); see also In re Ionosphere Clubs, Inc., 134 B.R. 515, 525 (Bankr. S.D.N.Y. 1991) (Administrative insolvency is but one of the bases for conversion to Chapter 7 under 1112(b).). 19. Most recently, the Debtors admitted that administratively insolvency is possible,

if not likely. (Wind-Down Motion, 46) (It is possible, however, that these estates will prove to be administratively insolvent.). Further, the Debtors proposed plan premised on the waiver of the MEPPs administrative and priority claims is a tacit admission of administrative insolvency. As set forth in the Wind-Down Objection, in connection with the upcoming hearing on final approval of the Wind-Down Motion, Movants intend to present evidence that these estates are administratively insolvent. 20. In the event the Court finds that the Debtors are administratively insolvent, the

Debtors cannot remain at the helm of their liquidation process without the unanimous consent of creditors. See, e.g., In re LTV Steel Co., 299 B.R. 863, 872 (Bankr. N.D. Ohio 2003) (noting that

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the wind-down in an administratively insolvent Chapter 11 was allowed because all parties agreed that it was the best option). In the absence of unanimous creditor consent, the court must order the involvement of a third party (i.e., a chapter 7 or chapter 11 trustee or an examiner) or convert/dismiss the case. See, e.g., In re Ashley Oaks Dev. Corp., 458 B.R. 280, 284 (Bankr. D.S.C. 2011). 21. Like LTV, other courts have bifurcated administrative claims while the debtors

remained in possession of an administratively insolvent liquidating estate but only where creditor consent was obtained. This simple proposition is true because unlike chapter 7, chapter 11 provides no statutory mechanism to bifurcate administrative claims as the Debtors have proposed in their Wind-Down Motion. For example, in Blockbuster, a conversion motion was made after the debtors had sold substantially all of their assets, leaving a distribution to creditors as the last purpose to be served in bankruptcy. See Transcript of Hearing on U.S. Trustees Motion to Convert, In re BB Liquidating, Inc., No. 10-14997 (BRL) (Bankr. S.D.N.Y. 2012), at 4 [Dkt. No. 2790]. With the wide-spread support of its creditors, this administratively insolvent debtor was allowed to remain in possession under chapter 11 in order to avoid an expensive and redundant trip to chapter 7. Id. 22. Similarly, in Caldor, No. 95-B-44080 (JLG) (Bankr. S.D.N.Y.), even though

administratively insolvent, the debtors were allowed to remain in possession in chapter 11 to conduct their wind-down and liquidation. The courts decision was premised on obtaining overwhelming creditor support for the notion that leaving the debtors in possession was the best way to maximize value for the estates because the business was still operating. 23. The instant cases are entirely unlike Blockbuster and Caldor. Importantly,

Movants do not consent to allowing the Debtors to remain in possession while conducting the

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liquidation process. Moreover, unlike Blockbuster, the Debtors are not at the end of their liquidation they are at the very beginning. And unlike Caldor, the Debtors businesses are no longer operating, thereby minimizing the adverse impact of having a third party oversee their estates. Under these circumstances, the Movants submit that section 1112(b)(1) requires

conversion, dismissal, or appointment of a trustee or examiner without exception. B. As Compared to Conversion or Dismissal, Appointment of a Chapter 11 Trustee is in the Best Interests of Creditors and These Estates Once cause to convert or dismiss has been established, the court must then

24.

determine whether it is in the creditors and estates best interest to dismiss, convert, or appoint a fiduciary pursuant to section 1104(a). In re Hampton Hotel Investors, 270 B.R. at 358-59. In evaluating this decision, the court must consider the interests of all of the creditors. Rollex Corp. v. Associated Materials (In re Superior Siding & Window), 14 F.3d 240, 243 (4th Cir. 1994). 25. Movants submit that under the weight of the circumstances, appointment of a

chapter 11 trustee is in the creditors and estates best interests. The Debtors are complex entities with extensive and diverse assets. If the selected trustee is knowledgeable in the industry and specifically knowledgeable of the Debtors businesses and has experience in undertaking a robust liquidation that nets maximum value to the estates, Movants submit that displacement of the Debtors with an independent third party fiduciary would redound to the benefit of the creditors and these estates.

CONCLUSION 26. The practical realities of these cases have been made abundantly clear by the

Wind-Down Motion the Debtors are liquidating and propose to remain at the helm of that
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process despite the specter of administrative insolvency and the failure to obtain creditor consent. Based on these facts, Movants believe and the Bankruptcy Code provides for the Debtors to be replaced by an independent third party fiduciary to oversee the liquidation process. To be clear, Movants support an orderly and timely wind-down of the Debtors business. However, Movants specifically object to that process being carried out by incumbent management, who has brokered a failed reorganization. Because the statutory requirements have been satisfied, a chapter 11 trustee must be appointed to oversee the Debtors orderly liquidation and protect the best interests of creditors. NOTICE 27. Pursuant to the Case Management Order, notice of this Motion has been given to

the parties identified on the Special Service List and the General Service List (as such terms are defined in the Case Management Order) by email (where available) or first class United States Mail. The Movants submit that no other or further notice need be provided and requests the Court to find that the notice provided was sufficient under the circumstances. NO PRIOR REQUEST 28. other court. No prior request for the relief sought in this Motion has been made to this or any

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WHEREFORE, the Movants respectfully request that the Court (i) enter an order appointing a chapter 11 trustee substantially in the form annexed hereto as Exhibit A; and (ii) grant such other and further relief as the Court deems just, proper and equitable. Dated: November 27, 2012 New York, New York FULBRIGHT & JAWORSKI L.L.P.

/s/ Ancela R Nastasi Ancela R. Nastasi Mark A. Worden Beret L. Flom 666 Fifth Avenue New York, New York 10103-3198 Telephone: (212) 318-3000 Facsimile: (212) 318-3400

Jeffrey R. Freund Zoe L. Palitz Bredhoff & Kaiser, P.L.L.C. 805 15th St. NW Washington, D.C. 20005 Telephone: (202) 842-2600 Facsimile: (202) 842-1888 ATTORNEYS FOR BAKERY, CONFECTIONERY, TOBACCO WORKERS AND GRAIN MILLERS INTERNATIONAL UNION, AND BAKERY AND CONFECTIONERY UNION AND INDUSTRY INTERNATIONAL PENSION FUND

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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK --------------------------------------------------------------x In re: : : HOSTESS BRANDS, INC., et al.,1 : : : Debtors. : : --------------------------------------------------------------x Chapter 11

Case No. 12-22052 (RDD)

(Jointly Administered)

ORDER APPOINTING CHAPTER 11 TRUSTEE This matter coming before the Court on the motion of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (the BCT) and Bakery and Confectionery Union and Industry International Pension Fund (the B&C Fund, and together with the BCT, the Movants) pursuant to sections 105, 1104 and 1112 of title 11 of the United States Code (the Bankruptcy Code), and Rules 2007.1 and 9014 of the Federal Rules of Bankruptcy Procedure, for entry of an order appointing a chapter 11 trustee (the Trustee Motion); and the Court having reviewed the Trustee Motion and finding that the Court has jurisdiction over this matter pursuant to 28 U.S.C. 1334 and 157, and that this is a core proceeding pursuant to 28 U.S.C. 157(b); and due notice of the Trustee Motion having been given, and that no further notice need be given; and upon the hearing of the Trustee Motion held before this Court on [___________ ___, 2012], and upon consideration of the arguments of counsel in support of the Trustee Motion and in opposition thereto; and the Court being satisfied, based on the facts in the record, that cause to appoint a chapter 11 trustee exists under Bankruptcy Code sections 1112(b)(1) and 1112(b)(4), and for the reasons stated on the record at
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The Debtors in these chapter 11 cases, along with the last four digits of each Debtors federal taxpayer identification number are as follows: (i) Hostess Brands, Inc. (0322); (ii) IBC Sales Corporation (3634); (iii) IBC Services, LLC (3639); (iv) IBC Trucking, LLC (8328); (v) Interstate Brands Corporation (6705); and (vi) MCF Legacy, Inc. (0599).

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the hearing on the Trustee Motion; and the Court having determined that appointment of a chapter 11 trustee is in the best interests of the estates and the Debtors creditors; and for good cause shown, it is hereby: ORDERED, that the Trustee Motion is granted; and it is further ORDERED, that the United States Trustee shall expeditiously, after consultation with parties in interest, appoint, subject to the Courts approval, one disinterested person to serve as chapter 11 trustee in these cases; and it is further ORDERED, that the Court shall retain jurisdiction to hear and determine all matters arising from the implementation of this Order. Dated: White Plains, New York _______________ ____, 2012

HONORABLE ROBERT D. DRAIN UNITED STATES BANKRUPTCY JUDGE

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