In re Telesphere Communications, Inc., Bankruptcy No. 91 B 17581
| Decision Date | 22 December 1994 |
| Docket Number | Bankruptcy No. 91 B 17581,91 B 19188 and 91 B 19189. |
| Citation | 179 BR 544 |
| Parties | In re TELESPHERE COMMUNICATIONS, INC., Telesphere Network, Inc., Telesphere Limited, Inc., Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
COPYRIGHT MATERIAL OMITTED
Robert Fishman, Ross & Hardies, Chicago, IL, for debtors.
Larry Wolfson, Jay Geller, Jenner & Block, Chicago, IL, for Official Committee of Unsecured Creditors.
E. King Poor, Winston & Strawn, Chicago, IL, for Williams Telecommunications Group, Inc.
Marcia L. Goldstein, Sharon Youdelman, Sean McKenna, Weil, Gotshal & Manges, New York City, John Collen, Douglas B. Rosner, Sonnenschein, Nath & Rosenthal, Chicago, IL, Lawrence F. Flick, II, Blank, Rome, Comiskey & McCauley, Philadelphia, PA, for Chase Manhattan Bank, Citibank, N.A. and Bell Atlantic Tricon Leasing Corp.
These administratively consolidated Chapter 11 cases have come before the court on the debtors' motion to approve a settlement of certain claims arising from a failed leveraged buyout. The settlement is supported by the debtors' major secured creditors and the unsecured creditors' committee. It is opposed by Tamona Enterprises, Inc., and fifty-five other general unsecured creditors, all of whom are parties in an action disputing the ownership of property claimed by the debtors' estates. After a hearing on the merits of the settlement and a review of the parties' submissions, the court gave an oral opinion and then took the matter under advisement in order to prepare this memorandum. For the reasons set forth below, the court finds that the settlement is in the best interest of the estates and accordingly grants the pending motion.
As discussed below, the pending motion to approve settlement is essentially a motion to dispose of property of the estate. This proceeding is therefore within the jurisdiction of the district court pursuant to 28 U.S.C. § 1334(b) and (d), and may be referred to a bankruptcy judge pursuant to 28 U.S.C. § 157(a). The matter has been so referred pursuant to General Rule 2.33 of the United States District Court for the Northern District of Illinois. It is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (N), and (O), and so a bankruptcy judge may enter final judgment pursuant to 28 U.S.C. § 157(b)(1).
General background. Telesphere Communications, Inc. ("TCI"), and its two subsidiaries, Telesphere Network, Inc. ("TNI"), and Telesphere Limited, Inc. ("TLI"), formerly known as National Telephone Services, Inc. ("NTS"), are related entities that were engaged in the telecommunications industry. On August 19, 1991, an involuntary petition for relief under Chapter 7 of the Bankruptcy Code (Title 11, U.S.C.) was filed against TCI. TM ¶ 1; TS ¶ A.1 On September 11, 1991, TCI consented to the petition for relief and converted the case to one under Chapter 11 of the Bankruptcy Code; at the same time, TNI and TLI filed their own voluntary petitions for relief under Chapter 11. Id. The three Chapter 11 cases have been administratively consolidated, and the three debtors are referred to, collectively, as "Telesphere."
Shortly after the orders for relief, Telesphere ceased doing business as an operating entity, and the bankruptcy cases have focused on the liquidation of Telesphere's assets. Among these assets are a number of avoidance claims. See TM ¶¶ 22, 23(R)(1)(c) & 23(R)(3); TS ¶¶ P, 3 & 10(d)(1 & 3). The proposed settlement deals with one group of such claims, arising out of TCI's 1990-91 leveraged buyout of NTS. See generally TM ¶¶ 1, 5-10, 18-20; TS ¶¶ N-P; TS ¶¶ A, E & F.
The NTS transactions. TCI decided to acquire the operator-service business of NTS in 1990, TM ¶ 5; TS ¶ E, and entered into an agreement, dated May 31, 1990, to purchase all of the capital stock of NTS from its shareholders, TM ¶ 5; Geller Ex. 1; Geller Trans. 28, 43. The largest of these shareholders, owning some 85% of the outstanding stock of NTS, was Ronald Haan, who was also NTS's president. TM ¶ 5.
TCI did not immediately consummate the stock purchase agreement. Instead, it arranged for an initial payment to be made to Haan separate from the payment that Haan would receive for his stock. This payment was effectuated through a fairly complicated multiparty transaction. First, TCI obtained from Williams Telecommunications Group, Inc. ("WTG") a "bridge loan" in the amount of $26.8 million (the "WTG loan"), guaranteed by Francesco Galesi, an insider of TCI. Obj. 11; Geller Trans. 62-63. Second, TCI loaned the proceeds of the WTG loan to NTS (the "NTS loan"). TM ¶ 5; TS ¶ E; Geller Trans. 43, 63. Third, NTS distributed the proceeds of the NTS loan to Haan, in satisfaction of an asserted loan of approximately $23 million owed by NTS to Haan (the "Haan loan") and a $3 million prepayment penalty incorporated into the Haan loan. TM ¶ 5; TS ¶ E; Geller Trans. 43. Fourth, as collateral for the NTS loan, Haan pledged to TCI all of his stock in NTS and in another corporation. TM ¶ 6; see Geller Trans. 47. Finally, TCI provided as collateral for the WTG loan, among other things, assignments to WTG of the pledges of Haan's stock and the note evidencing the NTS loan. TM ¶ 6; TS ¶ E; see Geller Trans. 47.
On or about October 11, 1990, in order to complete the purchase of the NTS shares as well as to finance its own business operations, see Geller Trans. 43-44, 69-70, Telesphere entered into a financing arrangement with The Chase Manhattan Bank, N.A. ("Chase"), Citibank, N.A. ("Citibank"), and Bell Atlantic ("Bell Atlantic") (collectively, the "Lenders"). TM ¶ 8; TS ¶ E; Geller Ex. 2; Geller Trans. 28. Under this arrangement, TNI and NTS borrowed $94 million (the "Lenders' loan"), and TCI guaranteed the repayment. TM ¶ 8; TS ¶ E; Geller Ex. 2. As additional security, TCI, TNI, and NTS all granted the lenders security interests in their accounts, general intangibles, documents, instruments, and equipment, as well as the proceeds of this property (collectively, the "prepetition collateral"). TM ¶ 10; TS ¶ F; Geller Exs. 3-5; Geller Trans. 28-29.
On October 15, 1990, with its financing in place, TCI set aside $1.3 million of the Lenders' loan for working capital and then completed the purchase of the NTS stock. Geller Trans. 43-44 & 69-70. In that stock acquisition, TCI made the following payments (Geller Trans. 69-70):
Payment Recipient Payment's Purpose Approximate Amount
WTG Retirement of WTG loan $26,800,000
NTS shareholders Purchase of NTS stock 21,000,000
Lenders and others Payment of professional fees 6,000,000
NTS secured creditors Satisfaction of prior working capital
facilities 37,300,000
NTS lessor Prepayment of, or cure of arrearages
on, NTS lease 1,600,000
___________
$92,700,000
In January, 1991, shortly after consummating the NTS acquisition, Telesphere discovered that it had inadequate working capital. Geller Trans. 51-53. To address this problem, Telesphere periodically requested that the Lenders provide additional financing for its working capital needs. Geller Trans. 51-53. The Lenders agreed to do so, eventually providing Telesphere with $10.7 million in addition to the original $94 million loan. Geller Trans. 51-53 & 112; see Fishman Trans. at 175.
The Lenders' postpetition financing. The involuntary bankruptcy petition that led to the pending bankruptcy cases was filed on August 19, 1991, about ten months after the conclusion of the NTS transaction. Shortly thereafter, on September 13 and October 17, 1991, Telesphere and the Lenders agreed to Telesphere's use of the proceeds of the prepetition collateral pursuant to Section 363 of the Bankruptcy Code. TM ¶ 12; TS ¶ H. As adequate protection for this use of collateral, the Lenders received (1) continuing and replacement security interests in the prepetition collateral to the extent the collateral was subject to valid security interests of the Lenders prior to August 19, 1991 (the date of the commencement of the involuntary proceedings against TCI); and (2) security interests in (a) all accounts receivables of Telesphere generated after August 19, 1991; (b) all property of Telesphere acquired after August 19, 1991; and (c) all property of Telesphere not otherwise encumbered as of August 19, 1991 by valid, perfected, and enforceable liens and security interests (collectively, the "postpetition collateral"). TM ¶ 12; TS ¶ H.
The liquidation of Telesphere's assets. In October, 1991 Telesphere determined to liquidate its assets. TM ¶ 13; TS ¶ I. After a contested hearing, Telesphere was authorized to sell substantially all of the assets used in the operation of its business pursuant to Section 363. TM ¶¶ 13-16; TS ¶¶ I-L. As noted above, that sale closed on November 1, 1991. It realized proceeds of $17 million, of which $12 million (the "sales escrow") has been held in segregated accounts at Chase. TM ¶¶ 13-17; TS ¶¶ I-M.
After consummating the November 1, 1991 sale, Telesphere began to liquidate claims of the estates. As of the time of the hearing on the pending motion, that process had led to the collection of unencumbered cash in the amount of approximately $4 million ("Telesphere's general funds"). Compare Nemmers Trans. at 115 with Counsel Trans. at 5-6. It has also led to the commencement of numerous adversary proceedings which collectively name several hundred defendants in an effort to obtain recoveries of millions of dollars.
The investigation of the NTS transaction. In early November, 1991 the unsecured...
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