In re Inc.

• Decision Date: 18 July 2011
• Docket Number: No. 10–14653 (AJG).,10–14653 (AJG).
• Citation: 453 B.R. 132,55 Bankr.Ct.Dec. 62
• Parties: In re GSC, INC., et al., Debtors.1
• Court: U.S. Bankruptcy Court — Southern District of New York

453 B.R. 132

55 Bankr.Ct.Dec. 62

In re GSC, INC., et al., Debtors.1

No. 10–14653 (AJG).

United States Bankruptcy Court, S.D. New York.

July 18, 2011.

Shearman & Sterling LLP, By: Andrew V. Tenzer, Esq., William J.F. Roll, III, Esq., Susan A. Fennessey, Esq., Randall L. Martin, Esq., New York, NY, for Chapter 11 Trustee, James L. Garrity, Jr.White & Case LLP, By: J. Christopher Shore, Esq., Evan C. Hollander, Esq., Abraham L. Zylberberg, Esq., New York, NY, for the Non–Controlling Lenders.

Winston & Strawn LLP, By: Daniel J. McGuire, Esq., Carey D. Schreiber, Esq., Gregory M. Gartland, Esq., New York, NY, for Black Diamond Commercial Finance, L.L.C.Latham & Watkins LLP, By: Douglas Bacon, Esq., David S. Heller, Esq., Adam J. Goldberg, Esq., New York, NY, for Black Diamond Capital Management, L.L.C.United States Department of Justice, By: Andrea B. Schwartz, Esq., New York, NY, United States Trustee.

OPINION AUTHORIZING HEARING ON THE SALE OF ASSETS, ADJOURNING CONSIDERATION OF DISCLOSURE STATEMENT, AND APPROVING SALE OF ASSETS

ARTHUR J. GONZALEZ, Chief Judge.

Before the Court was: (i) the request by the chapter 11 Trustee for the estates of the above-captioned debtors (the “Debtors”) for approval of the Motion for Entry of an Order (A) Authorizing (I) Sale of Assets and Assignment of Executory Contracts Pursuant to Certain Asset Purchase Agreements and a Side Letter Agreement, (II) Tax Indemnification Agreement, (III) Services Agreement, and (IV) Transition Services Agreement, (B) Authorizing the Payment of De Minimis Prepetition Franchise Taxes, and (C) Granting Related Relief (the “Sale Motion”); and (ii) the request by the minority lenders to the Prepetition Credit Agreement (as defined, infra ) (the “Non–Controlling Lenders”) for approval of their Motion for Entry of an Order (I) Approving Disclosure Statement, (II) Approving Form of Solicitation and Notice Materials, (III) Approving Form of Ballot, (IV) Establishing Solicitation and Voting Procedures, (V) Allowing and Estimating Certain Claims for Voting Purposes, (VI) Approving Third Party Consent Materials, (VII) Scheduling a Confirmation Hearing, and (VIII) Establishing Notice and Objection Procedures (the “Disclosure Statement Motion”). Further, the Trustee sought adjournment of the Disclosure Statement Motion and approval of the Sale Motion.

JURISDICTION & VENUE

This Court has subject matter jurisdiction over this proceeding under sections 1334 and 157 of title 28 of the United States Code. This is a core proceeding within the meaning of section 157(b) of title 28 of the United States Code. Venue is proper before this Court pursuant to sections 1408 and 1409 of title 28 of the United States Code.

BACKGROUND

A. Business of the Debtors

GSC was founded in 1994 as a subsidiary of Travelers Group, Inc. to invest in private equity transactions. In 1998, GSC became an independent alternative asset manager, providing debt-focused investment management of alternative assets with a full spectrum of complementary investment product offerings. (Decl. of Peter R. Frank in Support of First Day Motions and Applications and in Compliance with Local Rule 1007–2, ECF No. 9, ¶ 9 [“Frank Decl.”].) GSC offers such investment and advisory services through its principal subsidiary, GSCP (NJ), L.P. (“NJLP”). NJLP has been a registered investment advisor with the Securities and Exchange Commission since March 2001. Through GSCP (NJ) Holdings, L.P. (“Holdings L.P.”), and GSC Secondary Interest Fund, LLC (“SIF”), the Debtors hold investments in certain affiliated investment funds. ²

The Debtors focus their business and funds along the following product lines: (i) distressed debt, (ii) U.S. Corporate Debt, (iii) European corporate debt, (iv) European mezzanine lending, and (v) U.S. ABS CDOs. The Debtors generate revenue through management fees, transaction and portfolio monitoring fees, incentive fees, and returns on investments.³ The Debtors also co-invest in their funds, and are entitled to returns on such investments in accordance with the provisions of the applicable fund documents. Id. at ¶ 17.

GSC is privately owned and has approximately thirty-one (31) full-time employees. At its peak, GSC had $28 billion of assets under management. As of March 31, 2010, GSC had approximately $8.4 billion of assets under management in approximately twenty-eight (28) separately managed investment funds. Id. at ¶ 9.

Before the Petition Date,⁴ the Debtors' executive management and GSC's board consisted of only two individuals—Alfred C. Eckert III (“Eckert”) and Peter R. Frank (“Frank”). Eckert served as the Chairman and Chief Executive Officer of GSC. (Ex. A to Notice of Filing of Disc. Stmt. for the Joint Chapter 11 Plan for GSC and its Affiliated Debtors Proposed by the Non–Controlling Lenders, ECF No. 612, 10 § II [“Modified Disc. Stmt.”].) Eckert owns or controls, directly or indirectly, a substantial number of the shares in several series of common stock issued by GSC. Frank is the Senior Managing Director and President of GSC. Id. at 11 § II.

B. Circumstances Leading to Chapter 11 Filing

As a financial advisory firm, the success of GSC is heavily influenced by both the financial markets and worldwide economic conditions. (Frank Decl. ¶ 23.) During 2008 and continuing through the first half of 2009, GSC operated in an extremely unfavorable global business environment, which included, among other things, a lack of liquidity in the credit markets and declining asset values. Id. These factors resulted in a substantial decline in the Debtors' revenues. In order to address these financial concerns and liquidity issues, starting in 2009, GSC began meeting with certain of its creditors and revealed that it would be unable to repay its debts. Id. at ¶ 26.

On or about February 28, 2007, NJLP, as borrower, and certain affiliate guarantors ⁵ (collectively, the “Guarantors”) entered into the Fourth Amended and Restated Credit Agreement (as amended or supplemented, the “Prepetition Credit Agreement”) with UBS AG, Stamford Branch, the Issuing Bank, and other lending institutions. (Ex. A to Decl. of Hugo H. Gravenhorst in Support of Debtors' Sale Motion, ECF No. 306.) Pursuant to the Prepetition Credit Agreement, NJLP borrowed $193.5 million in term loans and gained access to $56.5 million (subsequently reduced to $38 million ⁶) in revolving credit commitments. In the Prepetition Credit Agreement, pursuant to Section 12.1, all the lenders designated and appointed an administrative agent (the “Administrative Agent”) to take action on their behalf and perform duties outlined in the Prepetition Credit Agreement. Id. at § 12.1. UBS AG, Stamford Branch, was appointed Agent. Id.

Additionally, NJLP entered into a $97 million notional principle and interest rate hedge contract (the “Swap”) with Calyon New York Branch (“CALNY”) that would have matured on February 15, 2012. However, on April 7, 2009, CALNY presented NJLP with a notice of early termination, indicating a termination date of April 14, 2009. The termination payment due from NJLP on April 14, 2009 in the amount of $10,192,828 remains unpaid.

The Prepetition Credit Agreement and the Swap (collectively, the “Prepetition Secured Debt”) are secured by liens in substantially all of the Debtors' assets pursuant to the Second Amended and Restated Pledge and Security Agreement (the “Security Agreement”), dated as of February 15, 2006. (State Court Answer, Ex. B.) Under Section 1.1 of the Security Agreement, the Guarantors granted security interests to the collateral agent (the “Collateral Agent”), who acts on behalf of all the lenders of the Prepetition Secured Debt. ⁷ In the event of default by the Guarantors, Section 6.1 gives the Collateral Agent the right to exercise any form of relief to protect or obtain the Collateral for the benefit of the lending institutions.⁸

As of the Petition Date, the Debtors were in default under the terms of the Prepetition Secured Debt and owed approximately $209.6 million under the Prepetition Credit Agreement and $10.2 million on account of the Swap. (Frank Decl. ¶ 20.)

The “Prepetition Lenders,” ⁹ led by Guggenheim Corporate Funding, LLC (“Guggenheim”), then the Administrative Agent under the Prepetition Credit Agreement and Collateral Agent under the Security Agreement, and a steering committee (the “Steering Committee”) consisting of a sub-group of the Prepetition Lenders, began to negotiate a restructuring with the Debtors pursuant to which the Prepetition Lenders would have canceled their claims against the Debtors in exchange for approximately 35% of the Debtors' future revenue, ownership of certain fund interests, and a less than 35% share in revenue from new management contracts. (Modified Disc. Stmt. 12 § II.)

They never reached a deal, and in early 2010, Black Diamond Capital Management, LLC (“BDCM”) purchased a small portion of the loans under the Prepetition Credit Agreement and proposed a transaction that would restructure the Debtors in a manner similar to the revenue-sharing proposal negotiated by Guggenheim and the Steering Committee. This proposal also ultimately was rejected.

In the spring of 2010, Guggenheim, the Steering Committee, and the Debtors were in discussions about the Debtors' filing for bankruptcy under chapter 11 of the Bankruptcy Code and thereafter selling the Debtors' assets in a section 363(b) sale. (Modified Disc. Stmt. 13 § II.) While negotiations for this proposal were still in place, BDCM bought a controlling stake in the Prepetition Credit Agreement and terminated these discussions. Id. Upon obtaining a controlling stake in the Prepetition Credit Agreement, BDCM appointed Black Diamond Commercial Finance, LLC (“BDCF” or the “Agent” and, with BDCM and its affiliates, “Black Diamond”), a related entity, as Administrative Agent under the Prepetition Credit Agreement and Collateral Agent under the Security Agreement. (Original Disclosure Statement, ECF No. 479, ¶...