In re Spansion, Inc.

• Decision Date: 01 April 2010
• Docket Number: Adversary No. 09-52274.,Bankruptcy No. 09-10690(KJC).
• Citation: 426 B.R. 114
• Parties: In re SPANSION, INC., et al. Debtors. U.S. Bank National Association, as trustee, Plaintiff, v. Wilmington Trust Company, Spansion, Inc., Spansion Technology LLC, Spansion LLC, Cerium Laboratories LLC and Spansion International, Inc., Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

426 B.R. 114

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

U.S. Bank National Association, as trustee, Plaintiff, v. Wilmington Trust Company, Spansion, Inc., Spansion Technology LLC, Spansion LLC, Cerium Laboratories LLC and Spansion International, Inc., Defendants.

Bankruptcy No. 09-10690(KJC). Adversary No. 09-52274.

United States Bankruptcy Court, D. Delaware.

April 1, 2010.

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Eric Lopez Schnabel, Robert W. Mallard, Dorsey & Whitney (Delaware) LLP, Wilmington, DE, for Plaintiff.

Mark E. Felger, Cozen O'Connor, Michael R. Lastowski, Duane Morris LLP, Wilmington, DE, for Defendants.

OPINION ON CONFIRMATION.²

KEVIN J. CAREY, Bankruptcy Judge.

At a hearing held before this Court on February 24, 25, and 26, 2010, and March 1 and 2, 2010 (the "Confirmation Hearing"), a combined record was made for the following matters:

(i) The request for confirmation of the Debtors' Second Amended Joint Plan of Reorganization (as amended);³

(ii) The Ad Hoc Committee of Convertible Noteholders' Emergency Motion for Order (a) Vacating Order Approving Debtors' Disclosure Statement Pursuant to Fed.R.Bankr.P. 9024 and Adjourning Confirmation Hearing and (b) Directing Appointment of Trustee or Examiner Pursuant to 11 U.S.C. §§ 1104(a)(1) and (2) and 1104(c)(2) (D.I. 2391) (the "Motion to Vacate"); and

(iii) The Plaintiffs Motion for Summary Judgment in U.S. Bank National Association, as Trustee v. Wilmington Trust Company et al. (Adv. No. 09-52274)(D.I. 14) (the "Summary Judgment Motion").

A number of parties filed objections to confirmation of the Plan. Some objections were resolved prior to the Confirmation Hearing, but the objections that remained were filed by: (1) the Ad Hoc Committee of Convertible Noteholders (the "Convert Committee")(D.I. 2479 and 2715), (2) the Ad Hoc Committee of Equity Security Holders ("AHEC")(D.I. 2476), (3) Joseph Rubino⁴ (D.I. 2522), (4) Tessera, Inc. ("Tessera") (D.I. 2469), (5) The John Gorman 401(k) ("Gorman") (D.I. 2474), (6) U.S. Bank, National Association, as trustee to the Senior Noteholders ("US Bank") (D.I. 2468), (7) the United States Trustee (the "UST") (D.I. 2493), and (8) the Wilmington Trust Company, as indenture trustee for the 2.25% Exchangeable Debentures due 2016 ("Wilmington Trust") (D.I. 2493).⁵

The parties filed post-hearing submissions on March 8, 2010. For the reasons set forth below, I conclude that (i) the Debtors' Plan cannot be confirmed in its present form, (ii) the Convert Committee's Motion to Vacate will be denied, and (ii) the Summary Judgment Motion will be granted and judgment entered in favor of U.S. Bank.

BACKGROUND

(1) Overview of the Debtors' Business.

The Debtors are semiconductor device companies which design, develop, manufacture, market and sell Flash memory products and solutions. Spansion's products are integrated into a broad range of electronic products, including mobile phones, consumer electronics, automotive electronics, networking and telecommunications equipment, servers and computer peripherals. (Ex. D-5, Second Amended Disclosure Statement For Debtors' Second Amended Joint Plan of Reorganization dated December 16, 2009 (the "Disclosure Statement") at 15.)

Flash memory is a "non-volatile" memory solution, meaning that it retains its contents even after the power is shut off, allowing memory contents be retrieved at a later time. (Id. at 17.) There are two main types of Flash memory: NOR and NAND.⁶ (Id. at 18.) Spansion designs, develops, manufactures, markets and sells NOR Flash memory products and solutions, and in 2008, together with Numonyx, accounted for 64% of the NOR Flash memory market. (Ex. C-1 at 7.)

In fiscal year 2008, the net sales of wireless applications (such as mobile phones) and embedded applications (such as gaming, set top boxes, DVD Players and automotive and industrial electronics) each represented about 50% of the Debtors' total net sales. (Disclosure Statement at 20.) The Debtors are currently restructuring their business to focus their energies on the embedded market, while winding down their participation in the less profitable wireless market. (Tr. 2/24/2010 at 24:1-5 (Devost).)

(2) The Chapter 11 Case

The Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code on March 1, 2009. Throughout this case, the Debtors have made operational adjustments and negotiated with various creditor constituencies, some more than others, to attain a financial restructuring, as well. Early in this case, the Debtors' negotiations involved discussions primarily with the ad hoc consortium of certain Senior Secured Floating Rate Notes Due 2013 (the "FRNs")⁷ and the Official Committee of Unsecured Creditors, appointed by the United States Trustee (the "Creditors' Committee"). In September 2009, the FRNs, the Creditors' Committee and the Debtors agreed to proposed terms for a plan of reorganization, resulting in the Debtors' filing of the Debtors' Joint Plan of Reorganization dated October 26, 2009 (the "Initial Plan"), and accompanying disclosure statement.⁸ However, in November 2009, the Creditors' Committee withdrew its support for the Initial Plan. Negotiations continued and other creditor groups became more involved in the case, including an informal group of certain holders of the 11.25% Senior Notes due 2016 (the "Senior Noteholders"), the Convert Committee, and AHEC.⁹

The Debtors filed amended versions of their plan of reorganization, including the Debtors' Second Amended Joint Plan of Reorganization Dated December 16, 2009 (D.I. 2032) (the "December 16 Plan") and the Disclosure Statement (Ex. D-5).

By order dated December 18, 2009, over various objections, including a call to slow the confirmation process, the Court entered the Order (I) Approving Disclosure Statement, (II) Scheduling Confirmation Hearing, (III) Approving Solicitation and Other Procedures, Including Fixing the Voting Record Date and Establishing Deadlines for Voting on the Plan and Objecting to the Plan, and (IV) Approving the Solicitation Package and Forms of Notice (D.I. 2042) (the "Disclosure Statement Order"). Among other things, the Disclosure Statement Order established deadlines for plan voting and for filing plan objections, and scheduled a hearing, beginning February 11, 2010, to consider confirmation of the Plan (which was later adjourned to the dates of the Confirmation Hearing).¹⁰

In anticipation of confirmation, the Debtors continued to negotiate with creditors in an attempt to resolve disputes and objections to the Plan. The Debtors entered into settlements with Samsung Electronics Co., Ltd. ("Samsung") to establish a reserve for Samsung's general unsecured claim D.I. 2332 and 2519, and with Spansion Japan Limited ("Spansion Japan")¹¹ with respect to the significant administrative expense claim asserted by Spansion Japan D.I. 2340 and 2552. The Debtors and various parties participated in a judicial mediation (not with the undersigned) with respect to valuation issues on February 5 and 8, 2010, but no settlement resulted.

Also, in anticipation of confirmation, the Court held a hearing on January 29, 2010 to consider the Debtor's motion to estimate the maximum amount of Tessera's administrative claim, and issued a bench ruling on February 9, 2010, estimating Tessera's administrative claim in the amount of $4,232,986.13. On February 12, 2010, the Court heard the Debtors' motion to determine proper classification of Spansion Japan's rejection damages claim, and issued a bench ruling on February 19, 2010, determining that Spansion Japan's rejection damages claim must receive the same treatment as other unsecured claims.

As a result of the continued negotiations and court rulings, the Debtors filed a Plan Supplement to the December 16 Plan, which was amended numerous times.¹² To incorporate the various modifications, the Debtors filed amended plans, culminating with the Debtors' Second Amended Joint Plan of Reorganization (As Amended) dated February 23, 2010 (D.I. 2915)(the "Plan").

(3) Summary of Selected Plan Provisions¹³

A summary of the classification scheme in the Debtors' Plan and, as applicable, whether those classes eligible to vote accepted or rejected the Plan, follows:

                _______________________________________________________________________________________
                Class Designation Impairment Entitled Reject or
                to Vote Accept Plan
                ________________________________________________________________________________________
                1      Secured Credit Facility Claims     Impaired      Yes                  Accept
                2      UBS Credit Facility Claims         Unimpaired    No*
                3      FRN Claims                         Impaired      Yes                  Accept
                4      Other Secured Claims               Unimpaired    No*
                4A     Travis County, Texas Tax Claims    Unimpaired    No*
                5A     Senior Notes Claims                Impaired      Yes                  Accept
                5B     General Unsecured Claims           Impaired      Yes                  Accept
                5C     Exchangeable Debentures Claims     Impaired      Yes                  Reject
                6      Convenience Class claims           Unimpaired    No*
                7      Non-Compensatory Damages Claims    Impaired      No**
                8      Interdebtor Claims                 Impaired      No**
                9      Old Spansion Interests             Impaired      No**
                10     Other Old Equity                   Unimpaired    No*
                11     Other Old Equity Rights            Impaired      No**
                12     Securities Claims                  Impaired      No**
                13     Non-Debtor Intercompany Claims     Impaired      No**
                ________________________________________________________________________________________
                

(Plan, §§ 2.4, 2.5, 2.6.)

The Plan obligations to be paid on or, as soon as practicable, after the Effective Date include a cash distribution to the FRNs pursuant to a cash-out option under the Plan, payments to holders of allowed Administrative Expense, Priority...