In re Oneida Ltd.

• Decision Date: 30 August 2006
• Docket Number: No. 06-10489 (ALG).,06-10489 (ALG).
• Citation: 351 B.R. 79
• Parties: In re ONEIDA LTD., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

351 B.R. 79

In re ONEIDA LTD., et al., Debtors.

No. 06-10489 (ALG).

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

August 30, 2006.

COPYRIGHT MATERIAL OMITTED

Shearman & Sterling LLP, New York, NY, by Douglas P. Butner, William J.F. Roll, III, Michael H. Torkin, Bryan R. Kaplan, Esq., Lynette C. Kelly, Attorneys for Debtors.

Otterbourg, Steindler, Houston & Rosen, P.C., New York, NY, by Scott Hazan, Stanley L. Lane, Jr., Lorenzo Marinuzzi, Attorneys for the Official Committee of Unsecured Creditors.

Morgan, Lewis & Bockius LLP, New York, NY, by Richard S. Toder, Wendy Snowdon Walker, Jay Teitelbaum, Attorneys for JP Morgan Chase Bank, N.A., as Agent.

Pension Benefit Guaranty Corporation, by Lawrence F. Landgraff, Esq., Washington, D.C.

Brown Rudnick Berlack Israels LLP, New York, NY, by Robert J. Stark, Andrew Dash, Emilio A. Galvan, Attorneys for the Official Committee of Equity Security Holders.

Kasowitz, Benson, Torres & Friedman, LLP, New York, NY, by Andrew K. Glenn, Attorneys for Peter J. Solomon Company, L.P.

Bracewell & Guiliani, LLP, New York, NY, by Mark E. Palmer, David C. Albalah, Attorneys for D.E. Shaw Laminar Portfolios, L.L.C. and Xerion Capital Partners LLC.

Office of the United States Trustee by Richard C. Morrissey, Esq., New York, NY.

MEMORANDUM OF OFINI[ON ON PLAN CONFIRMATION APPEARANCES

ALLAN L. GROPPER, Bankruptcy Judge.

On March 19, 2006, Oneida Ltd. and certain of its direct and indirect domestic subsidiaries (collectively, the "Debtors") filed petitions for reorganization under Chapter 11 of the Bankruptcy Code.¹ On the same day, the Debtors filed a plan of reorganization. On July 7, 2006 they filed a first amended plan of reorganization (the "Plan") and have moved for its confirmation.

The Plan was the result of pre-filing negotiations between the Debtors and their secured lenders ("Lenders"), holders of two tranches of debt, Tranche A and Tranche B. Under the Plan, Tranche A, as the senior debt, is to be paid in full in cash from an exit facility to be provided by a group of lenders led by Credit Suisse, Cayman Islands Branch, as administrative agent. The junior Tranche B debt is to be converted into 100% of the outstanding common stock of the reorganized company. The Plan provides that any general unsecured debt will be paid in full.² The Debtors had also negotiated an agreement with the Pension Benefit Guaranty Corporation ("PBGC") on the treatment of its claim for Plan purposes. The Plan provides that the PBGC will receive an unsecured variable interest promissory note in the principal amount of $3 million for its $2.7 million secured claim and for any unsecured claim it would have arising out of the distress termination of certain of the Debtors' pension plans. For confirmation purposes, all interested parties stipulated that the PBGC's unsecured claim would be valued at $21,075,050, although the Debtors and the PBGC have asserted that the claim could be as high as $56,237,000.

Shortly after the Chapter 11 cases were filed, an ad hoc committee of shareholders appeared and, arguing that the Debtors are solvent, requested that the United States Trustee form an official committee of equity security holders.³ The U.S. Trustee denied the request, finding that the appointment of an equity committee should be "the rare exception" and that there was no "substantial likelihood" that there would be a "meaningful distribution" in the case to the equity under a strict application of the absolute priority rule. The ad hoc committee then moved this Court, by motion dated April 14, 2006, for the appointment of a committee pursuant to 11 U.S.C. § 1102(a)(2).⁴ A hearing was held on May 1, 2006, at which the Court heard valuation testimony from experts called by the Debtors and the ad hoc committee, and testimony from members of the Debtors' board of directors and management.⁵ The record included an objection to the appointment of an equity committee by a newly-formed official committee of unsecured creditors (the "Creditors Committee").

In an unpublished decision, the Court first found that § 1102(a)(2) of the Bankruptcy Code requires the Court to find that the appointment of an equity committee is "necessary," a high standard, and that it should give due consideration to the views of the United States Trustee. In re Oneida Ltd., 2006 WL 1288576, *1, 2006 Bankr.LEXIS 780, at *3 (Bankr.S.D.N.Y. May 4, 2006). However, it concluded that an official committee of equity security holders should be appointed because (i) the issue of solvency was seriously disputed by the parties;⁶ and (ii) the ad hoc committee had demonstrated that an equity committee was "necessary" within the meaning of § 1102(a)(2) of the Bankruptcy Code because of the circumstances of a 2004 restructuring of the Debtors, which had converted some of the Tranche B debt into 62% of the Debtors' equity, and had given these Lenders the ability to control the election of six of the Debtors' nine directors. The Court found that the filing lacked the checks and balances present in most cases, where the Board is elected by the shareholders and there is usually no concern that it will fail to give due regard to the interests of that constituency. In reaching this conclusion, the Court made no finding that the Debtors or the Lenders had acted in bad faith but determined that

a due regard for appearances also warrants the appointment of an equity committee, if only to dispel any implication that, here, a group of creditors took control of the Board of Directors in the first stage of a two-stage restructuring, neutralized the general unsecured creditors and then took for itself the value of the remaining equity.

Id., 2006 WL 1288576, *3, 2006 Bankr.LEXIS 780, at **10-11.

The United States Trustee appointed an official committee of equity security holders (the "Equity Committee") on May 18, 2006. Subsequently, the Equity Committee took very extensive discovery in preparation for a contested confirmation hearing. On the eve of that hearing, the Court was informed of a potential transaction by which D.E. Shaw Laminar Portfolios, L.L.C. ("D.E.Shaw") and Xerion Capital Partners LLC ("Xerion" and together with D.E. Shaw, the "Purchasers") proposed to purchase the Debtors subject to their completion of due diligence.⁷ The Purchasers thereafter entered into a letter agreement with the Debtors, approved by the Court, under which the Purchasers would have the week they requested to complete their due diligence and thereafter, if the diligence was positive, would make a proposal to purchase the Debtor's controlling equity for a sum that was described as "at least $222.5 million" or "an amount sufficient to pay, in full, in cash" the Tranche A and Tranche B claims plus the other debt, both fixed and unliquidated. (See Proposal to Acquire Reorganized Oneida Ltd., dated July 11, 2006, Ex. 95, Docket No. 351.) The proposal also stated that it would provide the Debtors' current equity holders with "an element of consideration" and would be subject to higher and better offers. The Debtors acknowledged receipt of the proposal and agreed that if they received a an offer from the Purchasers but later entered into a "competing proposal" with another buyer, and the Purchasers' proposal was superceded, they would reimburse the Purchasers for up to $250,000 in due diligence expenses.

After considerable discussion among all of the parties, it was agreed that the case would proceed along a dual track, with the confirmation hearing to continue while the Purchasers continued with their due diligence. The Court thereupon had six days of hearings on confirmation of the Plan. When the record of the confirmation hearing was closed on July 25, 2006, the period for the Purchasers' due diligence had passed without their having made a firm offer.⁸ It is therefore necessary to determine, based on the facts of record, whether the objections to the Plan should be overruled and the Plan should be confirmed.

The following are the Court's findings of fact and conclusions of law with respect to the issues that have been contested on confirmation of the Debtors' Plan. As set forth in a confirmation order that accompanies this decision, the other requirements of the Bankruptcy Code for confirmation of a plan of reorganization have also been met.

DISCUSSION

Section 1129 of the Bankruptcy Code sets forth numerous requirements for confirmation of a plan of reorganization. The Equity Committee has challenged the Debtors' Plan principally on two grounds: (i) that the good faith requirement of 11 U.S.C. § 1129(a)(3) has not been satisfied and (ii) that there is value for equity holders and therefore that the absolute priority rule as set forth in 11 U.S.C. § 1129(b)(2) has been violated.⁹ Peter J. Solomon Co. ("PJSC"), the Debtors' prior investment bankers, also filed an objection to the Plan, claiming that under 11 U.S.C. §§ 1129(a)(11) and (b)(1), the Plan is not feasible and that it unfairly discriminates against PJSC. PJSC's limited objection is dealt with below.¹⁰

II. Good Faith

11 U.S.C. § 1129(a)(3) provides that a court shall confirm a plan when, among other things, "[t]he plan has been proposed in good faith and not by any means forbidden by law." The Second Circuit has construed the good faith standard in the bankruptcy context as "requiring a showing that the plan was proposed with honesty and good intentions and with a basis for expecting that a reorganization can be effected." Kane v. Johns — Manville Corp. (In re Johns-Manville Corp.) 843 F.2d 636, 649 (2d Cir.1988); see also Manati Sugar Co. v. Mock, 75 F.2d 284, 285 (2d Cir.1935). Good faith should be evaluated "in light of the totality of the circumstances surrounding confirmation." In re Cellular Info Sys., Inc., 171 B.R. 926, 945 (Bankr.S.D.N.Y.1994) (citing cases). Good faith has been found to be lacking where a plan is proposed for ulterior purposes. Koelbl v. Glessing (In re Koelbl), 751...