Court filing
Transcript of Disclosure Statement Hearing — In re KServicing
Filed January 20, 2023 in Kservicing Bankruptcy; one of 140 filings from this case.
Record facts
| Court | U.S. Bankruptcy Court for the District of Delaware |
|---|---|
| Filed | 2023-01-20 |
U.S. Bankruptcy Court for the District of Delaware · No. 22-10951 · Doc. 472 · 2023-01-20 · Docket on CourtListener
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
IN RE:
. Chapter 11
. Case No. 22-10951 (CTG)
KABBAGE, INC. d/b/a
.
KSERVICING, et al.,
. (Jointly Administered)
.
. Courtroom No. 7
. 824 Market Street
Debtors.
. Wilmington, Delaware 19801
.
. Thursday, January 19, 2023
. . . . . . . . . . . . . . . 10:00 a.m.
TRANSCRIPT OF HEARING
BEFORE THE HONORABLE CRAIG T. GOLDBLATT
UNITED STATES BANKRUPTCY JUDGE
APPEARANCES:
For the Debtor:
Zachary Shapiro, Esquire
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
920 North King Street
Wilmington, Delaware 19801
Natasha Hwangpo, Esquire
Candace Arthur, Esquire
WEIL GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
(APPEARANCES CONTINUED)
Audio Operator: Theresa Mistretta
Transcription Company: Reliable
The Nemours Building
1007 N. Orange Street, Suite 110
Wilmington, Delaware 19801
Telephone: (302)654-8080
Email: gmatthews@reliable-co.com
Proceedings recorded by electronic sound recording,
transcript produced by transcription service.
Case 22-10951-CTG Doc 472 Filed 01/20/23 Page 1 of 44
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APPEARANCES (CONTINUED):
For the U.S. Trustee:
Rosa Sierra-Fox, Esquire
OFFICE OF THE UNITED STATES TRUSTEE
844 King Street, Suite 2207
Lockbox 35
Wilmington, Delaware 19801
For Customers Bank:
William Sullivan, Esquire
SULLIVAN HAZELTINE ALLINSON LLC
919 North Market Street
Wilmington, Delaware 19801
For Federal Reserve
Bank:
Lisa Schweitzer, Esquire
CLEARY GOTTLIEB STEEN & HAMILTON LLP
One Liberty Plaza
New York, New York 10006
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INDEX
MOTIONS:
PAGE
Agenda
Item 4: Motion of Debtors for Entry of Order (I)
8
Approving the Disclosure Statement of the
Debtors, (II) Establishing Solicitation,
Voting, and Related Procedures, (III)
Scheduling Confirmation Hearing, (IV)
Establishing Notice and Objection Procedures
For Confirmation of Plan, (V) Approving
Special Electronic Noticing Procedures, (VI)
Approving Debtors’ Proposed Cure Procedures
for Unexpired Leases and Executory Contracts,
and (VII) Granting Related Relief
[Docket No. 176 – filed October 31, 2022]
Court’s Ruling:
37
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(Proceedings commence at 10:00 a.m.)
(Call to order of the Court)
THE COURT: Please be seated. Good morning.
MS. HWANGPO: Good morning, Your Honor.
THE COURT: So, we are on the record in In Re
Kabbage which is Case No. 22-10951.
You can proceed.
MS. HWANGPO: Your Honor, Natasha Hwangpo, Weil
Gotshal & Manges, counsel for the debtors.
We’re here today with a short agenda in what we
hope to be a quick procession of events. The only remaining
matter for this morning is the approval of the debtor’s
disclosure statement and solicitation procedures.
We are glad to report that we have resolved two of
the three remaining objections. With additional language in
the plan and disclosure statement we were able to resolve the
United States and Cross River Bank’s objections. The only
outstanding objection is that of the U.S. Trustee.
THE COURT: Okay.
MS. HWANGPO: Before we dive into the substance, as
an initial housekeeping matter the debtor’s filed the motion
for leave to file a reply at Docket No. 450. I believe that
order has been uploaded. Unless Your Honor has any
questions, we respectfully request that that be entered.
THE COURT: Well, I have read the reply, so if
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someone wants to object, I think that concern has been
mooted. So, we will go ahead and enter that order.
MS. HWANGPO: Great. Thank you, Your Honor.
With respect to the United States we worked
productively with counsel prior to the filing of the limited
objection and reservation of rights and have continued to
work together since.
Among other things the debtors have reflected
additional disclosures regarding the debtor’s work plan for
the transfer of its loan servicing obligations and the work
plan for post-effective date servicing to the extent that
that becomes necessary.
In particular, with respect to the transfer of the
pledged PPLF loans –- and as a quick refresher for the Court
those are the loans that are pledged to the Reserve Bank SPPL
collateral. The debtors are working together with the
Reserve Bank to transfer the outstanding loans and with the
SBA to transfer the forgiven or the guarantee purchase loans.
We imagine that this transfer process is going to
be complex and require the tight coordination of all parties,
but we’re hopeful and we haven’t thus far run into any
issues. To the extent that we do, of course, Your Honor, we
will be back here seeking the Court’s guidance.
THE COURT: That’s what I’m here for.
MS. HWANGPO: With respect to Cross River Bank the
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parties similarly have been able to work together to
consensually resolve the objection. In particular the
debtors, Reserve Bank and CRB have agreed to language
regarding CRB’s consent rights to certain material decisions
over causes of actions relating to the American Express
transactions or any causes of actions regarding former
officers, directors and shareholders.
Similarly, we have agreed to consultation rights
regarding the wind-down agreement. As we work together to
transfer the CRB loans we are optimistic that we are going to
be able to, likewise, resolve their issues at confirmation
before the hearing.
Similarly, with respect to the Reserve Bank we’re
working through issues in advance of confirmation including
with respect to releases, but, again, we’re hopeful in that
respect.
Your Honor, I have redlines of the changes that we
have made to the drafts of the plan and disclosure statement
from the versions we filed on Tuesday. They were the same
versions that we sent to Chambers.
THE COURT: Okay. I have seen those, so we’re good
there.
MS. HWANGPO: Okay. Fantastic. So I think the
only thing outstanding, again, is the U.S. Trustees objection
and if you are okay to proceed in that manner I will turn the
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podium over to partner, Ms. Arthur.
THE COURT: Okay.
MR. SULLIVAN: Your Honor, good morning. Bill
Sullivan of Sullivan Hazeltine Allinson on behalf of
Customers Bank. My partner, Bill Hazeltine, is with me in
the Courtroom. And my co-counsel, John Monahan, is on the
phone.
Your Honor, I just wanted to stand-up because
Customers Bank did not have any objection to the adequacy of
the disclosure statement, but we did have an objection to the
characterization of the settlement agreement with Customers
Bank that was included in the amended disclosure statement
filed Tuesday evening. We had an exchange of emails on
revising that and there was an agreement by email this
morning that the debtors would include revised language at
page 40 of the amended disclosure statement.
I haven’t seen the redlines that are going to be
presented to the Court, but certainly to the extent that it
includes the revised language from this morning we’re
satisfied.
MS. HWANGPO: Your Honor, we can confirm that
language that we sent to Customers Bank is the same that we
sent to Chambers this morning.
THE COURT: Okay. Well, why don’t I give all a
chance to make sure that you have seen the language and that
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everyone is satisfied that the issue is resolved.
MR. SULLIVAN: Yes, Your Honor. That is the
language that was agreed to this morning.
THE COURT: Terrific. Very well.
MS. ARTHUR: Good morning, Your Honor.
THE COURT: Good morning.
MS. ARTHUR: For the record Candace Arthur, Weil
Gotshal & Manges, on behalf of the debtors.
As my partner, Ms. Hwangpo noted, the only
objection before the Court today in connection with the
debtor’s disclosure statement and solicitation procedures is
with the objection filed by the United States Trustee.
Your Honor, the objection is with respect to the
third-party releases and the solicitation procedures related
to such releases. The U.S. Trustee contends that the
debtor’s plan is patently unconfirmable because the third-
party releases should only be allowed if an opt-in feature is
used and, in the alternative, if an opt-out mechanism is used
within in every party regardless of treatment and other
affirmative actions such party may take should have the
ability to opt-out.
Your Honor, we are well-aware that the arguments
made by the U.S. Trustee has been made before this Court
before and we are also aware of the Court’s rulings. With
the Court’s indulgence though I would like to go through the
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three points as to the basis for which the debtor’s position
is that the objection should be overruled.
THE COURT: So, I’m absolutely prepared to allow
you and the U.S. Trustee to be fully heard, and I will, you
know, reserve judgment, but before you start let me just tell
you the target you’re shooting at just in the interest of –
MS. ARTHUR: Thank you, Your Honor.
THE COURT: Look, my –- I come into this with the
view that I have had since, I think, the first time this
question has come before me that while I have a lot of
respect for the views of several of my colleagues that
require opt-in, I am comfortable with an opt-out procedure.
So, I think I am on your side on that issue.
On the question of tying the vote on the plan to
the granting of a third-party release, obviously, that is
done whenever its non-consensual. My –- I will hear
everyone, but where I tentatively am, as you begin, is I
think that that mechanism, essentially, puts undo leverage or
pressure on the granting of the consent so that it takes it
out of the world of consensual, so that in a world in which
we’re saying it is consensual I am disinclined to permit them
to be tied, but I will hear you out as to the reasons why I
am wrong about that.
MS. ARTHUR: So, Your Honor, to focus on the
question you presented I think it’s from the debtor’s vantage
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point important for us to note that from the time you file
your petition we see it as an opportunity for the parties to
negotiate. That is what has occurred and what has continued
to occur. And we view the plan as one in which the parties
are coming to negotiate. We are presenting a best and final
offer here in connection with the approval.
To the extent a party is looking at the plan in its
totality and it has decided to affirmatively approve this
treatment we do believe that it can, in fact, be tied. That
being said, Your Honor –-
THE COURT: So let me ask this question: imagine
instead of saying your choices are to vote yes and grant the
third-party release or just vote no if you said here is what
you need to do. In order to vote yes you need to include a
check for $10 made out to the CEO of the debtor. If you
don’t want to do that you don’t have to, you can vote no
instead, but your yes vote won’t count unless its accompanied
by a check made out to the CEO of the debtor. Is that okay?
MS. ARTHUR: I think its okay for you to be able to
relinquish that if you don’t like the terms, Your Honor. I
think that with any contractual negotiations if one doesn’t
like the terms, they are completely able to say they do not
want to proceed with the –-
THE COURT: So if I had –- if your disclosure
statement said that instead of what it says I should still
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confirm it –- not confirm it, I should still approve the
disclosure statement and let that go out?
MS. ARTHUR: Well, thankfully, our disclosure
statement does not say that.
THE COURT: No, I understand. I’m trying to
understand the analytic principal under which its okay to tie
the creditor’s right to vote on the treatment of their claim
under the plan to these other things. It would surprise me
if it were generally viewed in the bankruptcy community that
it would be okay to tie it to you must cut a check to the
debtors, you know, principal and it seems to me that it’s not
–- this is not analytically different from that which is why
it gives me pause.
MS. ARTHUR: I think one thing to consider, Your
Honor, is when you tie the treatment to either the releases
or, to your example, the cutting of a check if the treatment
itself is, in fact, tied to leases, not in this particular
instance, but when you have someone putting in new money, for
example, or depending upon the consideration they give that
consideration is, in fact, the treatment.
I guess I would put back before the Court why
shouldn’t that, in fact, be tied. Why shouldn’t that, in
fact, coincide. And I do think that the reason why third-
party releases are seen more as an exception versus a general
rule is because you do have to look at the facts and
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circumstances each time.
I think in this instance it is unique –- the facts
before the Court are unique enough that it wouldn’t warrant a
decision and it would make the Court feel comfortable, and
other parties in interest feel comfortable that an approval
in this instance, which is tied to a limited third-party
release, is acceptable and okay.
I am not saying that third-party releases should
always be tied, but do I believe that it can be tied and it
can be tied appropriately I do think so, Your Honor.
THE COURT: So, I think so under existing law if
you meet the Continental standard, right. There you don’t
have the ability to say no, I want out of this, because the
debtor has made a showing that meets – that shows it’s an
extraordinary case.
It seems to me that we’ve got two different
categories; consensual and non-consensual. At least the way
I think about it if its consensual I don’t need you to meet
the Continental standard, but it really needs to be
consensual. That is where I’m struggling.
Let me –- can I ask –- I’ve got –- just while we’re
on the topic I think that I agree with you and not the U.S.
Trustee with respect to non-voting classes. I think as to
those who are unimpaired or, otherwise, not entitled to vote
under the code their welcome to object to the plan if they
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take issue with the releases, but I don’t think you have to
go out of your way to send them a piece of paper to solicit
their rejection of their opt-out. They can object and say
that the third-party releases renders the plan unconfirmable
and if their right about that we’ll deal with that at
confirmation, but I don’t have a problem with your procedure
–- your proposed procedure in which you don’t send,
essentially, a ballot to someone who doesn’t vote.
As to the scope of the releases –- so my usual view
is that the scope of the releases is a confirmation issue and
doesn’t get addressed at the disclosure statement. The U.S.
Trustees point did give me some pause. Take –- particularly
in a world in which we’re going to require a non-voting party
to actually file a plan confirmation.
So, the example that the U.S. Trustee gives of the
taxing authority here, I guess, the language of the releases,
you know, any liability that relates to the debtor. So the
argument they make is, well, imagine you have an employee of
the debtor who received income from the debtor, and if that
employee is a released party then the taxing authority runs
the risk that the ordinary income tax that the employee would
owe on the income they obtained from the debtor would
literally fall within the language of the release and,
therefore, unless the taxing authority, which after all is
presumably a priority claimant and, therefore, not a voting
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class is deemed to have released its right to recover taxes.
I guess while I normally wouldn’t address issues of
the scope of the release until confirmation it seems like I
would be more comfortable not requiring you to send a ballot,
a form to those parties if, at least, that category of issue
would be cleaned up. Now I take it you don’t intend to
relieve the employee of the debtor its obligation to pay
income taxes, right?
MS. ARTHUR: Correct, Your Honor.
THE COURT: And you can explain to my why I’m
wrong, but I think the U.S. Trustee makes a fair argument
that the language of the release, at least as written when it
was filed, if that’s been cleaned up since –-
MS. ARTHUR: One moment.
THE COURT: Certainly.
MS. ARTHUR: So, I think two points, Your Honor.
THE COURT: Certainly.
MS. ARTHUR: One, I do think it’s telling that in
terms of timing that an entity such as the taxing authority
has the ability to object to the scope of the release at the
same time that if I did provide the ballot would have that
issue.
In terms of the scope and the language itself I do
think its important to also note that they’re only being
released in the capacity as –- in the actual specific
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capacity. So, when one says the hypothetical the U.S.
Trustee posited it would not be an issue.
THE COURT: Well that’s –- look, its often the case
that in the –- I generally believe that for many of the
problems about the breadth of the release that the language,
like in the capacity as such, usually solves the problem. I
am not sure it does here, right, because it’s about liability
related to the debtor and its income they obtained in their
capacity as employee.
So, I am not sure limiting the release in the
capacity as such –- I mean I am happy to hear from you as to
why, but it’s not obvious to me that that language solves
this problem.
MS. ARTHUR: Your Honor, I do think that it would
solve it that an employee who obtains, you know, such benefit
that the taxing authority or whoever else is a capable party
in order to raise any of these similar objections at the
right time at confirmation would, in fact, be able to push
back and would, in fact, not have that release being too
broad.
I would also note for Your Honor the practical how
it works practically. If the taxing authority is raising its
hand and coming to the debtors and saying this is the issue
that we have in the release we would treat it in the same way
that we treat other such objections at that time as well.
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So, I don’t think that they’re prejudiced by the actual scope
that we currently have contemplated under the document.
THE COURT: Okay. So, can I ask you another
question? So I read just what’s in your brief, and I haven’t
read more, about the decision that Judge Walrath made. Just
snippets from a transcript, but are you in a position to
explain to me what was going on there?
MS. ARTHUR: Yes, Your Honor. In RCS Capital
Corporation similarly the question came up as to whether or
not voting on the plan itself would be sufficient. It was a
contested –- it was contested in that case and the Judge
found that the affirmative action of voting for approval of a
plan was sufficient in order for it to be considered a
consensual release.
Importantly, I do think that it was contested and
very similar arguments were raised that the U.S. Trustee is
now being raised today. In that instance Judge Walrath did
find that it was appropriate to tie the releases to the
treatment. She didn’t find that problematic. This is the
same Judge as in WAMU and other ones that people have put
forward for a different contention.
In that instance in RCS Capital Corporation, which
is very similar to our situation here, the Judge highlighted
a couple of facts. She wanted to know was the ballot
sufficiently clear. In our case we believe its crystal clear
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as to what the options are that are available. She said when
its clear when the parties are able to –- there is no
confusion and there’s no specter of, you know, impropriety in
that that it would be appropriate for a vote in favor of the
plan to be viewed as a consensual release.
THE COURT: Okay. I take it if you guys found that
transcript that wasn’t associated with the published opinion,
I take it there isn’t more in terms of general practice in
this Court beyond that that is out there that you haven’t
shared.
MS. ARTHUR: No, Your Honor. In terms of it being
a contested issue we have not found that.
THE COURT: Okay.
MS. ARTHUR: We do think that when you look
Indianapolis Downs and some of the other cases that when it
comes to being able to tie an approval to the treatment that
the Courts have found that that has been accepted. That
being said as you have noted the issue has not been contested
to the point that it could really pressure test whether or
not the Courts would be aligned or view differently.
I think what is important is that in each instance
it seems the facts of the case, even when looking at what
occurred in WAMU and looking at what occurred in TPC and
whether it be a death trap. In WAMU it would be a situation
where the opt-out really wasn’t an opt-out.
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I think when there’s facts such as that the Courts
have rightly ruled including Your Honor. But that being said
I think in this case, and given the population that we’re
talking about, given the class structures, and who is
impaired and unimpaired, given who is giving a release and
who’s not, and really given the limited universe of the non-
debtor parties who are involved in the third-party release we
do believe that the facts and circumstances in this case do
support the debtor’s position that third-party releases
should be granted to the extent that a party who’s, eyes wide
open, votes in favor of the plan they vote to approve it. If
they don’t, we will take that risk as well, Your Honor.
THE COURT: When you say it’s a limited universe, I
mean, isn’t the universe of –- what is the universe –- how
many creditors do you think you have?
MS. ARTHUR: Well, Your Honor, if I look at Class
IV, in terms of my voting creditors, I have about 265. Then
from there, and I look at the breakdown, I take out the SBA,
the DOJ, Cross River, Partner Banks, and then I look at the
owners of small businesses they are about 170 of that 265.
Those are the general unsecured population that would be
providing a release.
Then I thought to myself, Your Honor, well then let
me look at the actual non-debtors who are being released.
There is the debtors and the debtor related parties. The
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debtor related parties are approximately 30 people or 30
individuals. Then there’s the wind-down estate which hasn’t
been formed yet, and the wind-down estates related parties.
Then there is the reserve bank. I think it’s important
knowing the reserve bank and the reserve bank’s related
parties. It’s important to know as well.
The looking at that I think what’s important is
when I considered what Your Honor was facing in TPC in that
situation you had pending litigation against the very parties
that were going to be subject to the release. We are not
aware of any such situation. In fact, in our pending
lawsuits parties have not named any individuals in the
capacities as debtors. It’s just been Kabbage as an entity.
I think that is important to note.
So, I do think, in fact, Your Honor, the releases
here have been limited. I think in negotiating with the
reserve bank as well they have done a really good to ensure
that we have limited it even further to post-petition
parties, post-petition entities, individuals. We have carved
out, you know, American Express transaction and things
related thereto in connection with it.
So, of course, I’m comfortable, Your Honor, with
the terms of it, but I do think that in this case, you know,
the Court could also get comfortable with the facts before it
and the record before it.
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THE COURT: Okay. I appreciate that.
Anything else that I should know before I hear from
the U.S. Trustee?
MS. ARTHUR: Your Honor, I think that the only
other point is the clarity of the ballots. I think that it is
very clear and I do think that given the population of the
general unsecured creditors that I noted, given that the
Class III is only the reserve bank, and thinking of whose
implicated, how to implicate it and could they actually make
an informed decision on this such that if it wasn’t a plan
context, but instead just a stipulation between two parties
would they be able to make an informed decision I do think
the answer is yes, Your Honor.
So with that I will cede the podium to the U.S.
Trustee at this time.
THE COURT: Okay. Ms. Sierra-Fox.
MS. SIERRA-FOX: Good morning, Your Honor. Rosa
Sierra-Fox on behalf of the U.S. Trustee.
So, Your Honor, to begin on the opt-in point I
think we raised that point to preserve our rights and make
the record the clear that that is our –-
THE COURT: I understand your position.
MS. SIERRA-FOX: -- position, but we are
comfortable for purpose of today’s hearing and given Your
Honor’s prior rulings and indications on the issue to step
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into the realm of opt-out world. So, I think the question
really is for us, accepting that an opt-out mechanism can be
a manifestation of consent for purposes of this case before
Your Honor, let’s make the opt-out truly –- I think what Your
Honor said when you were speaking to counsel for the debtor
really needs to be consensual.
So, I think that is the first point that we are
picking up on from Your Honor’s prior rulings and I think
there’s nothing unique about this case. Given your prior
reasoning in TPC and other cases as to why not to give the
accepting creditors the ability to opt-out of the third-party
release, Your Honor. And the logic being that treatment
under the plan is separate and distinct from, as Your Honor
has said before, accepting every single provision of the
plan.
With respect to the – so I think the debtors
presented the RCS transcript in response to the question that
you posed in question that you posed in TPC and, Your Honor,
I would say that that transcript does not answer the question
at all. And as Your Honor, I think, was suggesting in your
questioning to debtor’s counsel we don’t know the facts of
the case, we don’t have the benefit of a published or written
decision to really know what factors when into Judge
Walrath’s reasoning for ruling that way in that case.
So, I don’t really think that is persuasive at all.
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To the extent that it stands for anything I think, Your
Honor, it is clear that there is diversity of opinion on this
Court on this issue. I think prior to Your Honor coming on
this bench and maybe even one of your colleagues coming on
this bench, Judge Stickles, who also seems to be of the same
mind as you on this issue, the accepting –- I think Judges
and even parties were taking for granted that accepting the
plan was actually a true manifestation of consent and consent
to a third-party release at that.
Your Honor, I think that it doesn’t necessarily
mean there is any sort of well-reasoned analytical decision
for –-
THE COURT: So let me back-up. Look, I have no
problem with the proposition that one can –- let me ask this,
is it your view that this sort of tying is, otherwise, common
in this jurisdiction? I am just trying to understand what
you just said.
MS. SIERRA-FOX: Yeah. In terms of ballots that go
out and say accept and do not provide the option to opt-out
of a third-party release I think it is clear.
THE COURT: You think it is?
MS. SIERRA-FOX: Yeah.
THE COURT: All right.
MS. SIERRA-FOX: I think it is common because what
I believe the reason it’s become common is because the -- I
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guess the case law and the reasoning has focused more on well
if you are rejecting the plan why do you also have to opt-
out, right, or --
THE COURT: No, I understand. Is it common -- let
me say it this way, I believed when I saw this issue in TPC
that what was being asked of me there, which was a plan that
would deny accepting creditors the opportunity to opt-out of
the plan was unusual. Are you saying I was wrong about that
and that it is actually common? Don’t be shy about telling
me that I’m wrong. If I am I want to know.
MS. SIERRA-FOX: Your Honor, I think -- I do think
it is common. And I hope that doesn’t detract from the point
that --
THE COURT: No. Has your office raised this issue
in front of --
MS. SIERRA-FOX: So, my office did raise it in
front of Judge Walrath in RCS.
THE COURT: Okay.
MS. SIERRA-FOX: Based off my reading of the ten lines of the
transcript, yes.
THE COURT: But in the time since -- let me lay
out where I am philosophically.
MS. SIERRA-FOX: Yeah.
THE COURT: I do -- I have this concern with this
issue, but I also want to be respectful of existing practices
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in this Court, both sort of formal and informal. And so it
isn't my intention to create a rule in which what I'm doing
is profoundly different from how my colleagues are doing it.
And I'm not saying I would never do something different, but
I wouldn't do it lightly because I do think that part of what
we're here to do is to provide clarity, uniformity, and
consistency. And so hearing that this procedure is common, I
guess, surprises me.
Okay. Well, why don't I let you continue?
MS. SIERRA-FOX: Your Honor, I mean, just to back
up on that point, I think --
THE COURT: And I appreciate your candor --
MS. SIERRA-FOX: Yeah, yeah, yeah.
THE COURT: -- so --
MS. SIERRA-FOX: I think they -- to the extent
it's common, I think -- I agree that other than the RCS that
I'm aware of, I'm not sure how many times a judge has
confronted this issue squarely.
THE COURT: Okay.
MS. SIERRA-FOX: But, other than that, I think the
reason, to the extent it's become common and, analytically,
why it has is because no one has really looked at in the way
that we're looking today and that Your Honor did in TPC as at
the issue of they're taking for granted that accepting the
plan means you accept, you know, every other part of the
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plan, right? And that acceptance there being -- that active
saying, yes, I vote to accept my treatment under the plan, I
think the common view is like, well, that's enough to show my
manifestation to consent to this third party release.
Your Honor, but I -- our role and part of our --
what we're trying to do as the U.S. Trustee program is really
make these procedures clear, better, and really not raise
issues where we think that unsuspecting creditors or
creditors that are not as sophisticated, or whatever it might
be, have fair procedures so they can truly show that they're
really consenting to the third party release.
THE COURT: Okay.
MS. SIERRA-FOX: So I guess that's the first
point, Your Honor. And with respect to, I guess, the
uniqueness of this case, I think toward the end debtors'
counsel in response to your question was discussing why this
is different from TPC and why this might even be unique with
respect to, you know, differentiating it from other cases.
Your Honor, the point about whether there's 30
people in the related parties and, you know, 265 creditors, I
mean, I see that as a factual question. I mean, there's not
-- we can understand that debtors' counsel probably has
looked into this, but I guess that is -- I think we're here
on a legal issue and like if we're going to start delving
into making a decision based off there's only 30 related
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parties and -- I think that makes this more complicated and
perhaps that's a better discussion at confirmation when
there's declarations and actual evidence on that point.
THE COURT: Okay.
MS. SIERRA-FOX: Your Honor, so we talked about
RCS. Your Honor, I think the other point about TPC and why I
think your reasoning in TPC is equally applicable here,
again, one of the things that was egregious about that case
was the death trap component, understanding that is not at
issue here. Nonetheless, I think the first question that you
posed in that case about whether conditioning the voting --
accepting the plan on giving the releases is proper I think
is -- would be at issue in any case that proposes this sort
of structure.
Your Honor, and, importantly, in here the Class 4
general unsecured creditors, per the disclosure statement,
they're getting their pro rata share of the Class B
interests, which are -- no one knows what that is right now
and their projected recovery is to be determined. So, I
mean, they might be accepting to vote this plan, maybe on the
hope that one day in the future they'll get something, while
at the same time being forced to provide a third party
release on what ultimately may end up being nothing in the
future.
Your Honor, then with respect to the point about,
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I guess, the unimpaired creditors. So one thing that I think
it's important to note, if Your Honor had it, is that the
debtors did accept that of the third party release through
their most recent revisions, they did except out the interest
holders. So Class 8, which would be -- is deemed to reject,
is no longer giving -- per their structure, giving this third
party release. So it's really unimpaired creditors deemed to
accept.
And, Your Honor, I guess -- I argued the same
issue in TPC and Your Honor said it -- and the issue being we
think they should be able to opt out as well because the
release that they're giving, the release that they're giving
is not only about the claim that they're going to get paid in
full on --
THE COURT: Right. And they can by filing an
objection to confirmation and the question is are they
entitled to sort of more than that as a way to enforce their
legal rights.
MS. SIERRA-FOX: Yes. And, Your Honor, I think
what's concerning to the U.S. Trustee is the hesitance from
not only this debtors' counsel, but that we encounter in
other cases. Even if it's not sending the opt-out form to
the unimpaired class, why can't that issue be clarified now?
Or why can't the debtors do a better job of just making that
point clear because if you read --
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THE COURT: Making what point clear?
MS. SIERRA-FOX: The point clear that their intent
is not to have the taxing authority release the claims
against the related employee.
THE COURT: So where I am at the moment is that --
I think I may have talked myself back into the view that
that's an issue that's more appropriately addressed at
confirmation. Look, I have sympathy for the view that that
release is too broad. If I recall, we had exactly this issue
in TPC and in that case your office at confirmation said we
have no objection.
MS. SIERRA-FOX: Right.
THE COURT: So, without an objection, I'm not --
MS. SIERRA-FOX: Right.
THE COURT: -- line editing it myself. And, you
know, if we have an objection on the scope of the release, I
think that can be appropriately addressed. I think I've
talked myself out of my coming-in position and that I do
think that the scope of the release can be appropriately
addressed at confirmation. And I do think, as a general
matter, the procedure of allowing one to opt in or opt out as
part of voting is just a convenience mechanism and not an
entitlement that the Code creates.
So I don't -- I'm not inclined to impose on the
debtor the obligation to provide this when they're not
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otherwise sending a piece of paper giving someone the chance
to check a box.
MS. SIERRA-FOX: Yeah.
THE COURT: So that's, I think, where I am there.
MS. SIERRA-FOX: Yes, Your Honor. It's a
convenience mechanism that, as Your Honor pointed out
earlier, allows them at confirmation to step into the
territory of saying this is a consensual -- or this was a
consensual release, therefore, you know, we don't need to
prove the Continental factors, if that's at issue.
Your Honor, I guess the other point I would raise
with respect to this unimpaired creditors point is -- and we
raised this in our papers -- is to put out there for Your
Honor's consideration whether the same logic that applies to
-- that appeared to have applied based on Your Honor's
reasoning in TPC about giving the accepting creditors the
ability to opt out of providing a third party release because
that's you're analytically separating treatment under the
plan versus whether I love every part of the plan. Whether
that also extends to -- or it could also extend to the
unimpaired creditors, that being -- the logic there I think
is they're unimpaired because they're getting paid in full
and instead of them deciding whether they accept the plan or
whether the code says they accept the plan and what -- so
whether -- if the debtors are putting opt-out on the table at
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this stage, whether they should do that for their other
classes.
THE COURT: Yeah, I -- my view that -- my
overarching view, as I tried to explain, I'm sure quite
inartfully, just -- I've never written on this topic, just to
muse from the bench -- but my overarching view is that a
third party -- that under existing law in the Third Circuit a
third party release is a plan provision, like any other plan
provision, and in some circumstances it's a lawful provision
and in other circumstances it's an unlawful provision, and
that it depends on the facts and circumstances in evidence
and that, if one is included, there's no reason,
analytically, to treat it differently from any other
contestable plan provision, which may or may not be
permissible.
And the way we normally do that is that we don't
ask everyone separately do you like it. If they've got a
problem with it, you know, this is a legal process. They get
served with a plan and disclosure statement and it tells them
what their objection deadline is and, if they have a problem
with a provision, they think it's inconsistent with the Code,
they come in and they file an objection, and then the debtor
either proves that it's lawful or, you know, as is commonly
the case in third party releases, carves out the objecting
party. And I think that mechanism comports with the law.
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And so I have no problem, I think it's a good
thing to give voting creditors the opportunity as part of the
ballot to make this decision and save them the trouble of
filing a confirmation objection, but I view that as something
that's just a convenience, not a strict legal necessity, and
I'm not inclined to extend it to those who aren't otherwise
getting a piece of paper asking them how they vote.
So I respect your argument and I'm not saying it
wouldn't be a nice thing to do, but it's the debtors' motion
and they filed it the way they did and I don't see a legal
reason why they should be required to do it differently.
MS. SIERRA-FOX: Understood, Your Honor. Well,
unless you have any other questions for me on the other
points, then, Your Honor --
THE COURT: I don't.
MS. SIERRA-FOX: -- we have no further comments.
THE COURT: I want to bother Ms. Arthur further,
though.
So, all right, here's where I'm still stuck.
Imagine I approve your solicitation procedures and there's a
creditor who votes yes on the plan. And then that creditor
comes in at confirmation and they file an objection and they
say, Judge, this plan is un-confirmable because it includes a
third party release. And this is not an exceptional case
that meets the Continental standards and the debtor hasn't
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and can't prove that it is. So, therefore, you shouldn't
confirm the plan.
So what do I do in that case? Imagine I think
that they're right about the satisfaction of Continental.
(Pause)
MS. ARTHUR: Okay, Your Honor.
THE COURT: And, just to be clear, I'm not one who
stands on ceremony. So, to the extent you want to consult
with your colleagues and you want to have more than one
person, like we're good here.
MS. ARTHUR: Thank you, Your Honor. We're trying
to get to the right answer, of course, Your Honor.
You know, Your Honor, I think what's important in
this instance is the fact that we do have the multiple
options available for a creditor in that situation, in that
scenario. So, to the extent that they look at the plan in
its entirety and then they come up and say we have an
objection, Your Honor, now to the plan, then that objection
will be heard, the scope of it will be heard. Even between
now and voting, we do suspect that there may even be some
more changes in terms like the release. So that's --
THE COURT: So isn't that --
MS. ARTHUR: -- one thing.
THE COURT: -- then misleading to tell them that
by -- I see you want to stand up and you're welcome to --
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(Laughter)
MS. ARTHUR: He's itching to do it. Go ahead.
THE COURT: -- because that answer feels like a
better answer than the alternative, but it seems different
from what you're telling that creditor in the ballot you're
sending them.
MR. SHAPIRO: So -- sorry, for the record, Zach
Shapiro -- this is my -- we talked about this, so I'm going
to take credit for this bad idea.
(Laughter)
MR. SHAPIRO: So I think there's three choices if
somebody does that, right? Option one, we could decide to
let them out of the release, in which case then it's done,
right? We have that ability to resolve any confirmation
objection and that's what we could do. We could decide to do
that, right?
THE COURT: Mm-hmm.
MR. SHAPIRO: Option two, I could say you gave up
that right when you voted yes, and I could try to enforce
that. Then you could decide at that time whether that's
something that you feel comfortable enforcing.
THE COURT: Right.
MR. SHAPIRO: And then option three, which I don't
think we're going to do --
THE COURT: And assume that I -- so here's -- this
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is why I -- you've put your sort of finger on what's
troubling me about this mechanism, which is it feels to me
like I shouldn't send this out saying, by voting yes, you are
irrevocably granting the third party release, unless I'm
actually prepared to confirm a plan that doesn't meet
Continental in the face of an objection by that creditor.
And I don't think I am, which is why I'm not comfortable
sending this out in this form.
MR. SHAPIRO: But I -- see, I don't think -- I
don't think that's something you need to decide today, right?
We don't have any evidence in front of you that would give
you -- that would lead you to believe one way or the other --
THE COURT: No, I understand.
MR. SHAPIRO: -- whether we're going to approve --
THE COURT: This exercise necessarily involves,
you know, sort of -- we're telling the creditors something,
right? And we don't know what the future will hold. It may
well be everyone votes -- look, it could well be the case
that everyone votes no and the plan fails. There are lots of
different things that could happen, but before I say these
procedures are appropriate, I've got to at least do a little
bit of thinking about how this plays out.
MS. ARTHUR: We did a tag team, Your Honor, so I'm
tagging myself back in.
THE COURT: That's totally fine.
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MS. ARTHUR: For the record, Candace Arthur.
Your Honor, I think it's important to note that
what we are saying to the creditor, in your instance of
you're irrevocably saying that you're consenting to this
release, is make sure you understand this plan, know what
you're giving up. And, if you know what you're giving up and
you check this box, then that is the situation.
If an objection then is made to Your Honor and
Your Honor is going to change the release in some way, isn't
that better? Like --
THE COURT: See --
MS. ARTHUR: -- if anything happens, you provide
this like an upside now versus making the release worse than
what they have consciously said that they are agreeing to.
If the plan was, you know, two pages instead of like 60,
would we still have the same type of consent issue? You've
read it, you've understood it, do not check this box if you
do not feel comfortable with the claims that you are being
released. That's the baseline, right?
And I think, Your Honor, the reason why this
hasn't come up in other instances and other cases is because
the baseline is we are agreeing that this person read the
document and understands what they're giving up.
THE COURT: Yeah. I'll tell you, the reason that
this issue -- I mean, perhaps why -- I mean, I think in TPC
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when it came up it was in response to an objection by a
party, but perhaps they just -- no, the committee actually
raised that objection and, you know, here there isn't a
committee, which has to bear in the analysis a bit, but
before -- I had a case before in which I think I had approved
without knowing it a procedure like this. And then the
creditor came in and raised an objection and the debtor,
unsurprisingly, did exactly what Mr. Shapiro suggested one
might do, which is came back and said, no, just kidding,
we'll carve you out of the release.
And that did lead me to raise the question, should
I be approving solicitation procedures that essentially could
be read to suggest that you're irrevocably granting the
release when you vote on the plan, and I remain concerned by
it.
MS. ARTHUR: Your Honor, I think parties,
including the debtors, do deserve some type of certainty as
well and we do provide the terms of the plan. And, to your
point, perhaps a creditor comes in later, which is what
happened with you, and then they raise the issues to the
release.
I think, Your Honor, it's important to not prevent
people from forfeiting what they would like to forfeit at
whatever time that that question is posed before them. I
also think, Your Honor, otherwise, you run into the situation
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where you say, yes, do you approve this plan, but really tell
me again, do you really, really, really approve this plan.
And I don't think that people need to have multiple chances
and multiple options beyond what the Court and the Bankruptcy
Court are already providing to do so.
I think that, you know, we're giving parties a lot
of different options and a lot of different time and
sufficient time, sufficient information, to make that
informed decision and, to the extent that they don't and, as
Mr. Shapiro said, they come forward, then, Your Honor, they
are getting that second bite. And I think that that is
enough precautions, enough procedural safeguards, if you
will, to provide comfort.
THE COURT: Okay. So, look, here's where I am.
And I really appreciate this argument and, frankly, the
candor from all parties all around, it's very helpful to me,
and I think this is tricky.
I think, for the sake of bringing some clarity to
the universe, it probably makes sense for me to actually
sketch out and write some thoughts on this, but that,
obviously, this case can't wait for that to happen. So let
me tell you where I am and I reserve the right to flesh it
out a bit further in writing. It would surprise me if anyone
planned on bringing an immediate appeal from an order
approving the disclosure statement, so I don't think there's,
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you know, immediate urgency to getting that written, but I'm
not prepared to approve solicitation procedures that are in
this form, I think I'll only approve it as revised.
Obviously, if that's an issue you want to take up,
I'll allow you to do that, but if you don't, I'd be more than
happy -- I have no issues with the disclosures, you've solved
everyone's problem. I think that -- I've read the disclosure
statement, I think it fairly apprises creditors of the
information that a reasonable creditor would need to have in
order to make an informed decision on how to vote. I've got
no problem at all approving the disclosure statement and I'd
be happy with just a revision to the solicitation procedures
that would allow a creditor who votes yes to opt out, to then
enter an order permitting it, and I'm happy to explain in
writing my reasons why I'm not comfortable approving it in
its current form.
So, unless that causes anyone undue havoc, I'm
happy to -- I'll give you the chance to revise it, unless you
want to take this issue up, which I can't imagine -- well,
that's your right, so it's up to you.
MS. ARTHUR: Thank you, Your Honor, and I
appreciate the ruling that you've made. Just for
clarification, in terms of updating our procedures and the
ballots that are associated with respect thereto, it would be
the Class 4 general unsecured ballot and not Class 3;
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correct?
THE COURT: So Class -- so walk me through this
again.
MS. ARTHUR: So Class 3 is the Reserve Bank and
the Reserve Bank is a releasing party, as well as -- so just
in terms of having to -- I think, actually, that would be
confusion now to have this opt-out feature that we were
discussing as well. So I just want --
THE COURT: So Class 3 is just the Reserve Bank?
MS. ARTHUR: It's just the Reserve Bank, Your
Honor.
THE COURT: Does the Reserve Bank seek the right
to opt out of the release?
MS. SCHWEITZER: I don't have -- to the extent
that Your Honor -- sorry, Lisa Schweitzer from Cleary
Gottlieb for the Reserve Bank of San Francisco. I don't have
the authority to say on their behalf that they're waiving a
right that Your Honor --
THE COURT: All right, but --
MS. SCHWEITZER: -- is saying is available to all
creditors --
THE COURT: -- but you're also a released party
under the plan?
MS. SCHWEITZER: Yes, we are.
THE COURT: Okay. So I'm not going to give them
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the same right. If you want to file an objection to the
third party release, they can treat you like the unimpaired
creditors in that respect.
MS. SCHWEITZER: Okay.
THE COURT: If the Federal Reserve wants to file
an objection, it knows how to do it, and I don't think that
it's critical that the -- and you could, of course, vote no.
MS. SCHWEITZER: Right.
THE COURT: So I think I'm fine with that in that
context.
MS. SCHWEITZER: Thank you, Your Honor. That was
the only clarifying question that the debtors personally had.
THE COURT: Okay. Does that give everyone enough
guidance to move the case forward in a way that addresses the
estate's immediate needs?
MS. ARTHUR: I believe so, Your Honor, it does.
THE COURT: Okay. While we're here -- I think
that takes us through the agenda, but while we're here, is
there any other matter on which the Court can be helpful to
the parties?
MS. ARTHUR: Oh, a scary question, Your Honor.
(Laughter)
MS. ARTHUR: No, Your Honor, I think that's it for
this morning. Thank you.
THE COURT: Okay. So thank you all for this, this
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has been very helpful and, with that, we're adjourned. Thank
you.
COUNSEL: Thank you, Your Honor.
MS. SCHWEITZER: Your Honor?
THE COURT: Yes?
MS. SCHWEITZER: May we just be heard with respect
to a couple comments that they made?
THE COURT: You may be heard, yes. I take it
back, we're not adjourned.
(Laughter)
MS. SCHWEITZER: Lisa Schweitzer from Cleary
Gottlieb for the Reserve Bank again. I don't want to take
your time, that was the only contested matter on for today, I
just thought, given where we're at, we just wanted to -- Ms.
Arthur had previewed -- I'm trying to remember which one
previewed -- the debtors' counsel had previewed is just there
are some issues remaining as we head into the plan process,
and so we just wanted to let Your Honor know the scope and I
wanted to address one comment that was made in light of the
last discussion.
THE COURT: Okay.
MS. SCHWEITZER: As Your Honor knows that we
represent the Federal Reserve Bank of San Francisco, which
has extended this PPPLF facility to the debtors, and that
there was a substantial balance outstanding, defaults prior
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to the bankruptcy, we've been working with the debtors. And,
as Your Honor sees, there's a lot of provisions in the plan
that show the effort of that work.
For the Reserve Bank, obviously, the emphasis has
been the continued servicing of the loans and orderly
transfer of servicing, to the extent needed under the plan,
and the preservation of litigation against necessary parties
to the extent creditor recoveries can't be paid in full.
We're continuing to work with the debtors on these
issues. As Your Honor sees, there's a bunch of plan
supplements that are needing to be done that -- just so
you're aware that there's wind-down agreements, wind-down
budgets, different -- I don't want to call them secondary
because they almost are the heart of the plan that we've been
working very constructively together, but there's still some
wood to chop before we get to our voting deadline and
including, as the debtors' counsel had indicated, on some of
the margins of the releases.
So we hope to come back before you in a month with
all of this resolved, and we feel it's been very
constructive, but just so you understand the bigger lay of
the land.
The only other point I wanted to make -- and,
again, this isn't the hearing on the releases, but Ms. Arthur
had mentioned that the Reserve Bank and related parties are
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giving releases. The Reserve Bank isn't a corporation the
way other people have like subsidiaries and all that, so I'm
not -- I don't believe actually that there are related
parties legally capable of -- they can deliver releases on
behalf of, but we're not before you today on this, it's not
meant to be a prolonged discussion, but just because it was
set out there, I just want the record to be clear of where
we're at and we'll obviously be working with them on all of
these issues. It's not something necessarily that we were
fighting over yesterday, but I just want to make sure that,
since it was said, that there's no confusion or
misapprehension on that point.
So, again, I didn't mean to steal you away from
ending the hearing, but I just wanted to make clear given
that we haven't been before you in these different hearings
that you understand where we're all working towards.
THE COURT: Okay. Thank you very much for that.
Ms. Arthur, is there anything by way of response?
MS. ARTHUR: We're fine.
THE COURT: Okay. Let me ask this again, is there
any other party in interest that would like the opportunity
to be heard while we're here?
(No verbal response)
THE COURT: Okay. If not, again, thanks to
everyone. I think this has been helpful and I understand
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more about what's going on every time that you all come in
and explain it to me. So very much appreciated and, with
that, we are adjourned.
Thank you.
COUNSEL: Thank you, Your Honor.
(Proceedings concluded at 10:54 a.m.)
CERTIFICATION
We certify that the foregoing is a correct
transcript from the electronic sound recording of the
proceedings in the above-entitled matter to the best of our
knowledge and ability.
/s/ Tracey J. Williams January 19, 2023
Tracey J. Williams, CET-914
Certified Court Transcriptionist
For Reliable
/s/ Mary Zajaczkowski January 19, 2023
Mary Zajaczkowski, CET-531
Certified Court Transcriptionist
For Reliable
Case 22-10951-CTG Doc 472 Filed 01/20/23 Page 44 of 44File and source
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