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Bankruptcy Court Dismisses Unsecured Creditors Committee's Complaint Against Secured Creditor

On July 6, 2018, Bankruptcy Judge Kevin Carey issued an opinion in connection with the Katy Industries Inc. bankruptcies that dismissed claims against the sole bidder (and ultimately successful asset purchaser) and others seeking to recharacterize or subordinate, avoid and recover a portion of the bidder's credit bid used to purchase the debtors' assets.   There was no practical, useful remedy that resulted in any recovery to the estate.  Nether recharacterization nor subordination would enhance any potential distribution to creditors. A copy of the opinion may be found here.

At issue was a portion of a credit bid ($7.5 million) of the buyer's $45.7 million successful bid of the Debtors' assets.  “Given the lack of alternative qualified bidders, $55.5 million (i.e., subtracting $7.5 million in advances) would still have been the successful bid,” the opinion said (at p. 12). “Accordingly, reshaping the economics of the deal to reflect a hypothetical reduction of $7.5 million in § 363(k) currency would have no tangible, ameliorative effect for the committee.”  

Victory Park and Highview Capital LLC formed a joint venture called Jansan Acquisition LLC, which was the stalking horse and ultimately the sole bidder.  The committee argued that Jansan Acquisition’s bid as allowed was high enough to deter other bidders.  However, the Court concluded that this argument was not supported by the factual record in the case.  Op. at 13.  No evidence was offered to back up the theory that if the bid was reduced by $7.5 million, other bidders would have made offers.

Judge Carey did not decide an objection to the committee’s standing to bring the claims because neither recharacterizing nor subordinating the $7.5 million lending would create any distribution for creditors.  The committee had argued that its claims were challenges to the secured liens of Victory Park and that its rights to bring such a challenge were preserved in the sale order. Victory Park had argued that the committee’s complaint amounted to a claim objection and was barred by the terms of the sale order.

The court’s decision dismissed all six counts of the complaint with prejudice, saying that the claims for recharacterization and subordination failed adequately to state a claim, and that three subsequent counts for clawback of the $7.5 million failed because they did not meet the criteria of the relevant sections of the bankruptcy code relating to avoidance, here Bankruptcy Code sections 544 and 549. 

A sixth count was lodged against Katy's chairman, Charles Asfour, for allegedly breaching his duty of loyalty by negotiating prepetition with Highview, as a representative of Victory Park, to form Jansan and make a packaged offer to to provide debtor-in-possession funding and serve as a stalking horse bidder.  That claim was also dismissed stating that "while the Court finds that Count VI of the Complaint fails by nature of not alleging sufficiently a personal benefit to Asfour or harm to the Debtors, in the alternative, Count VI also fails to allege sufficiently a violation of the corporate opportunity doctrine or a failure
to disclose.