Background on the Antioch/Creative Memories Bankruptcy Hearing Tomorrow

The confirmation hearing for The Antioch Company's proposed pre-packaged bankruptcy plan is scheduled for tomorrow morning in Southern District of Ohio Bankruptcy Court. The company seems to believe that swift confirmation of their plan is imperative to their survival. Court filings from the past few weeks indicate that they are meeting resistance to it from several quarters, however.

Objections to the confirmation of the plan were filed with the Court before the deadline on the 7th by five different parties. The objectors include a company battling with Creative Memories over unexpired leases, the US Bankruptcy Trustee, the Creditor Committee, and attorneys for two different groups of the company's former employees who are owed money as ESOP noteholders (money the company promised to pay them to buy back their company stock from them when they left or were laid off).

The objections to the plan's confirmation have to be made on legal grounds, not just because payment for a debt is not going to be received, and several key grounds for objection came up repeatedly in the various parties' filings.

Feasibility:

To be approved, a bankruptcy plan must meet a feasibility test. The court must believe that the company can continue to operate in financial health once the plan is executed, without the need for further assistance or liquidation.

Several of the objections cite concerns about this, most notably the US Bankruptcy Trustee's. The Trustee's filing points out that the bankruptcy plan calls for a balloon debt payment of $19.2 million to be made 3 years after the plan's effective date - at a time when the (probably optimistic) financial forecasts of the company call for it to have only $7.3 million in available cash.

Discrimination:

Bankruptcy law calls for equal treatment of similar types of creditors. The US Bankruptcy Trustee and the Creditor Committee are objecting to the Antioch bankruptcy plan on the grounds that they say it discriminates among the unsecured creditors.  The plan creates two classes out of the unsecured creditors. One of those classes will be paid in full in cash, and the other class (containing the ESOP noteholders) will receive an equity interest in a new holding company being created as part of the bankruptcy plan. The value of the holding company is unknown, but it is widely believed that those creditors will be receiving in value a fraction of what is owed them. The objections have been filed on the grounds that arbitrarily dividing similar creditors into two classes that are then compensated at different levels and in different manners is discriminatory, and thus not allowed under bankruptcy code.

Good Faith:

Confirmation of the plan requires that the court find that it was submitted to the court in a "good faith" effort to do the best thing for both the business and the company's debtors under the spirit of bankruptcy code. The Creditor Committee was quite blunt in their objection filing that they firmly believe that Antioch has not proposed the plan to the court in "good faith":

The Committee’s investigation suggests that the Insiders may have played a substantial role in crafting this Plan for their own benefit and not to further the objectives of the Bankruptcy Code.

The filing objects to overlapping roles and conflicts of interests among the company's leadership who are proposing the bankruptcy.

The objection then goes on to criticize tactics it says were used were used by the company in the bankruptcy proceedings that demonstrate a lack of good faith. The Committee claims that the rushed proceedings were a deliberate attempt to limit opposition to the plan. They also say they believe that the company hoped the Creditors Committee would fight with each other over the plan, limiting the committee's effectiveness as a creditor advocate, since the plan was beneficial to some of the creditors and not to others. The Committee also complained about the company's lack of cooperation with turning over court-ordered documents to them - making 65,000 pages of documents available to them for review at the very last minute, and not making witnesses available for interview until the day before a court filing deadline.

Hearing Friday Morning:

The hearing is set for Friday morning and based on the objections and other filings, it will not be the 10 minute rubber-stamp of the plan that Antioch would like. Antioch and the Creditor's Committee have both filed lengthy witness and exhibit lists with the court for the hearing. It looks like it will be a lengthy, heated hearing to decide what to do about the future of Antioch.

Based on the weight that an objection from the Trustee usually carries, it would surprise me if the plan gets approved tomorrow. This looks likely to continue for some time.

I will post updates regarding the outcome of the hearing on Scrapbook Update when information is available from the court.

November 2008 Financials Filed:

Antioch has filed their November 2008 financial statement with the court. Despite being in bankruptcy protection and being protected from having to make ESOP debt payments and payments on unexpired leases - what they say are the cause of their financial problems - they still racked up huge losses for the month. Despite gross revenue for the month of just over $7 million, they ended the month with a loss of $4 million after expenses.