First Day Declaration
Motion to Assume RSA
DIP Financing Motion
Bid Procedures Motion
First Day Hearing Agenda
EYP Group Holdings Inc.
|Debtors have entered into RSA with key creditors and litigation claimants that contemplates asset sale followed by plan of liquidation
|Debtors seek to run a sale process with Ault Alliance as stalking horse bidder providing an aggregate enterprise value of $67.7 million, including a credit bid
|Ault Alliance, which purchased the company’s secured debt prepetition, would also provide $5 million in DIP financing
, an Albany, N.Y.-based interdisciplinary design firm specializing in higher education, government, healthcare and science and technology, filed for chapter 11 protection yesterday, Sunday, April 24, in the Bankruptcy Court for the District of Delaware. The company filed to pursue a sale process with Ault Alliance Inc. (fka DPW Financial Group Inc.), a global private equity firm wholly owned by BitNile Holdings Inc. (fka Ault Global Holdings Inc.), a publicly traded company on the New York Stock Exchange “with particular investment and operational expertise in management-held businesses.” Ault is the debtors’ current senior secured lender as of October 2021 and has also agreed to provide up to $5 million in DIP financing.
Under the terms of the stalking horse agreement, Ault would purchase the assets of EYP for an aggregate enterprise value of $67.7 million, which includes a credit bid of up to $11.75 million, consisting of the $5 million DIP facility and the full amount of the obligations owed under the prepetition senior secured facility, with the remainder of the consideration consisting of cash and assumed liabilities subject to certain customary adjustments as provided in the agreement. The APA provides for a purchase price of $62.5 million to be adjusted, plus assumption of liabilities, and a credit bid of $11.75 million.
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The debtors have also entered into an RSA with certain “key creditor constituencies” that include former EYP CEO Tom Birdsey and his spouse, Karen Birdsey, David and Marilyn Watkins, certain New York state class-action plaintiffs, and certain Group I and Group II noteholders that include leadership and certain former employee Group II noteholders.
The debtors say the RSA represents the “culmination of nearly three years of good faith efforts” to restructure their debts and “reach a sustainable path forward” for their businesses.” According to the debtors, the RSA would be effectuated through a going-concern sale of the debtors’ assets and a prearranged chapter 11 plan of liquidation that would provide for a distribution to all creditors from sale proceeds and a process for litigation claims to be assigned to a litigation trust. According to the first day declaration, the debtors plan to file a chapter 11 plan of liquidation and related disclosure statement “shortly after the Petition Date.”
Under the RSA term sheet, the senior secured claim of Ault Finance would be paid in cash or satisfied through a credit-bid purchase of the debtors’ assets. Holders of Group I and Group II notes would receive distributions of remaining sale proceeds and all excess cash on the plan effective date, with 60% of such cash allocated to holders of Group I notes and 40% to holders of Group II notes.
Additionally, former CEO Tom Birdsey and his spouse, Karen Birdsey, in exchange for a $625,000 cash payment, would collectively agree to surrender their rights (to other holders of Group I and Group II notes claims) to any distribution or recovery on account of (i) up to $3.5 million of their Group I and Group II notes claims and (ii) their indemnification claims against EYP Inc. The RSA term sheet also contemplates approximately $200,000 to be distributed to general unsecured creditors on a pro rata basis. Trade claims would be paid in the ordinary course.
“While EYP has performed well through the COVID-19 pandemic and has continued to perform well through the current year,” EYP interim CEO Kefalari Mason says in the first day declaration, “its operational performance has been restricted and it has been unable to position itself for sustained long-term success due to its unsustainable capital structure and the related ongoing litigation that has given rise to mounting indemnification obligations (none of which stem from the Company’s actual provision of professional services).”
After “nearly three years” of failed out-of-court negotiations with its senior secured lenders, the debtors say that they have determined that preserving and maximizing the value of the company for the benefit of its employees, clients, vendors, noteholders and other stakeholders “would be best accomplished through a sale of all or substantially all of the Company’s assets free and clear of all liens and encumbrances under section 363 of the Bankruptcy Code and the distribution of the sale proceeds and potential litigation recoveries to the Company’s divergent stakeholders.”
During the prepetition marketing process, EYP was under “intense pressure” from its former senior secured lenders, led by KeyBank, because of the maturity of the senior loan facility on June 28, 2021. To alleviate these pressures, Ault purchased the matured senior secured debt at par from the prepetition secured lenders, allowing for the time to conduct the necessary diligence and negotiate the sale documents, “and to minimize the risks of adverse actions against the Company.” In addition, Ault has agreed to provide a DIP facility with $5 million of incremental liquidity to provide the debtors with sufficient liquidity to operate their business and fund the chapter 11 sale process as well as a rollup of $6.5 million of prepetition secured obligations.
The first day hearing has been scheduled for tomorrow, Tuesday, April 26, at 9 a.m. ET.
The company reports $50 million to $100 million in assets and $100 million to $500 million in liabilities. The debtors’ prepetition capital structure consists of aggregate outstanding debt of approximately $149 million, exclusive of any indemnification claims or trade debt, as follows:
The company is 100% employee owned by an ESOP with GreatBanc as trustee, with its ultimate parent, EYP Group Holdings Inc., a Delaware S-corp that was formed for the purpose of effectuating an ESOP transaction in 2016. EYP Group Holdings issued the Group I and Group II notes and is owned by the EYP Employee Stock Ownership Trust. EYP Group Holdings wholly owns EYP Holdings Inc., a Delaware S-corp that issued the redemption notes, and EYP Holdings wholly owns EYP Inc., the main operating entity within the EYP network. EYP Inc. wholly owns five direct subsidiaries that are not debtors. EYP Inc. also holds a 33% interest in EYP Architecture & Engineering of NJ Inc. with the remaining 67% held by the individual shareholders that hold requisite architecture licenses. The remaining six entities in the EYP network are stand-alone entities formed and closely held by individual architects.
The debtors are represented by DLA Piper as general bankruptcy counsel, Hollingsworth as special counsel, Carl Marks Advisory Group as investment banker, and Berkeley Research Group as financial advisor. Epic is the claims agent. The case has been assigned to Judge Mary F. Walrath (case No. 22-10367).
Events Leading to the Bankruptcy Filing
The debtors say that their “precarious debt position” has been “well known” since almost immediately following a 2016 ESOP transaction, which led to efforts to consensually restructure their balance sheet on terms acceptable to the company’s stakeholders “for over thirty-three months.” In large part due to “the number and various tranches of stakeholders as well as their divergent interests, not only from those of the Company but more importantly among the stakeholders themselves,” the company has not been able to identify a consensual solution and instead has found itself “entangled in a further deteriorating situation with its noteholders,” with mounting liabilities threatening EYP’s financial and operational position.
When Long Point Capital opted to exit its investment in EYP in 2016, Long Point, EYP’s management and EYP’s board chose to pursue an employee stock ownership path. On June 28, 2016, the ESOP Trust was created, which formed and implemented the ESOP. GreatBanc Trust Co. was appointed as the independent trustee of the newly formed EYP ESOP. Shortly after the ESOP transaction closed, in December 2016, the company breached certain covenants under the senior secured facility, triggering default and leading to entry into a forbearance agreement. Through Feb. 7, the company entered into five subsequent forbearance agreements. The continuous default under the senior secured facility restricted all payments on subordinated debt, resulting in a significant accumulation of unpaid interest (totaling $27.6 million) in addition to a “growing frustration” among the noteholder groups. Amid these ongoing defaults and nearing maturities, in mid-2019 the company proactively retained advisors to engage with its creditors and develop a comprehensive restructuring plan to address the capital structure.
In March 2020, the newly formed restructuring committee of the debtors’ board of directors rolled out a formal out-of-court restructuring proposal to its noteholders. However, several “highly divided” noteholder groups emerged (including the leadership group, employee Group 1 and Group 2, former employee Group 1 and Group 2, redemption noteholders and LPC, “to name a few”), each represented by its own counsel.
The company conducted numerous meetings with its constituencies, including noteholder groups and their advisors, the company’s leadership team, Long Point, Tom Birdsey, David Watkins and their respective advisors. “Due to the complexities of the Company’s capital structure,” however, “the number of stakeholders and their divergent views as well as certain legal restrictions stemming from the ESOP Transaction, coupled with the operational disruption and unprecedented uncertainty associated with navigating the COVID-19 pandemic, the negotiations were not progressing.”
On May 5, 2020, now-former directors Tom Birdsey, Ira Starr and David Watkins filed a complaint against EYP as well as then-serving directors Sherman Edmiston III, Jill Frizzley, Kefalari Mason and Scott Butler. The complaint sought (i) to obtain the company’s books and records allegedly necessary to exercise their fiduciary duties as members of the board of directors of the 2020 EYP board, (ii) to invalidate the company’s Nov. 6, 2020, resolution that created a restructuring committee consisting of Frizzley and Edmiston as independent directors “but that was allegedly not approved by the 2020 Board” and all actions taken thereunder, and (iii) to invalidate the ratifying resolution that approved the 2020 resolution and to enjoin Delaware defendants from taking actions to pursue a restructuring.
The remaining issues surrounding the 2020 resolution and actions by the restructuring committee are now moot, the debtors say. Defendants Edmiston and Frizzley were dismissed on Nov. 12, 2020, after they resigned as independent directors. Watkins, one of the Delaware plaintiffs, voluntarily withdrew and was dismissed from the case by the court. There are currently no upcoming deadlines pending in the case.
“The Delaware Action and the continued lack of progress toward addressing the debt maturities underscored the need to restructure the Company’s debt promptly and efficiently,” the debtors say. “[T]herefore, the Company engaged in discussions with its key stakeholders regarding a potential mediation with the assistance of retired Judge Robert Gerber to achieve a consensual, global and value-maximizing out-of-court transaction.”
The company has also been involved in “more litigation that has given rise to mounting indemnification claims against the Company, which further strained the Company’s balance sheet.” One of these actions was a class-action lawsuit
filed in 2020 in the U.S. District Court for the Southern District of New York on behalf of a class of holders of notes issued by EYP Group Holdings Inc. or EYP Holdings Inc. in connection with the employee stock ownership plan. The court dismissed the action on March 31, 2022, dismissing the federal securities fraud claim with prejudice, and refusing to exercise supplemental jurisdiction over the nine state causes of action.
This month, the plaintiffs refiled the class action in New York state court, alleging that the defendants fraudulently created and implemented a scheme to conceal material information and induce employees who owned equity to sell their stock to the EYP ESOP. The plaintiffs also allege that certain defendants “used an intentionally inflated valuation and projections to incur unsustainable debt and, ultimately, to make the NY Plaintiffs’ interest in the Company worthless.”
Another class action was filed by participants in the EYP ESOP against GreatBank as trustee as well as LPC Inc., LPC investors and LPC noteholders in the U.S. District Court for the Northern District of Illinois, which was transferred to the Southern District of New York. This lawsuit focuses on ERISA-related claims based on substantially the same operative facts alleged in the New York class action. GreatBanc answered the complaint, denying each claim, and the LPC defendants filed a motion to dismiss.
In opposition to the LPC defendants’ motion to dismiss, the plaintiff withdrew claims against the LPC investors. On March 31, the U.S. District Court for the Southern District of New York determined that the plaintiff failed to plead sufficient facts to support the allegations against the remaining LPC defendants and dismissed the claims against LPC Inc. and the LPC noteholders. The action will continue with respect to the counts asserted against GreatBanc, namely that GreatBanc failed to fulfill its duties under ERISA as the EYP ESOP fiduciary in connection with the ESOP transaction, and relatedly that this allowed the LPC defendants to sell their interest to the ESOP at an inflated price.
Though the debtors say that they “have little, if any, active role in the pending litigation as it is chiefly among their creditors, these matters have triggered significant indemnification obligations of the Debtors, which continue to mount.”
The company worked toward a mediation to negotiate an out-of-court global restructuring of the company’s obligations under the LPC note, redemption notes Group I and Group II notes, warrants and equity and to “compromise and fully resolve with prejudice all pending litigation, including the related indemnification issues arising as a result of the litigation.” The company initially attempted to schedule mediation for August 2020, but “despite the Company’s willingness and readiness to mediate the issues,” the mediation was repeatedly delayed because of “myriad demands” of the restructuring parties, which in turn led to further litigation.
“As the mediation efforts failed to even reach the stage where a first mediation session could occur, the Company has become embroiled in more litigation that has given rise to mounting indemnification claims against the Company, which further strained the Company’s balance sheet,” the debtors say.
“Fully committed to re-engaging in mediation in an effort to efficiently forge an out-of-court global restructuring of the company’s obligations under the LPC note, redemption notes, Group I and Group II notes, warrants and equity and to compromise and fully resolve with prejudice all pending litigation,” the debtors retained new counsel, DLA Piper, and resumed their mediation efforts. From the outset of the renewed negotiations, the company was clear that if the parties could not reach a global resolution, the company would need to pivot to a sale of its assets and that owing to the company’s unsustainable capital structure, the pending litigation and the need for urgency, any sale would almost certainly have to be completed through a filing under chapter 11.
As the discussions ensued, the efforts were quickly met with “many of the same - and now new - obstacles” with its key stakeholders, including the maturity of the prepetition senior secured obligations on June 28, 2021, with no forbearance in place from. Most stakeholders “failed to understand the company’s liquidity situation within the overall capital structure or to recognize the palpable risk of loss of key employees and leadership because of the protracted restructuring negotiations and pending litigation, ultimately leading to no meaningful progress,” the debtors say. After months of mediating to no avail, the company was forced to commence a parallel path of exploring other alternatives to protect its enterprise for the benefit of all of its stakeholders.
The debtors describe themselves in the first day declaration as “a people-first, integrated design firm specializing in higher education, healthcare, government and science & technology.” The firm’s integrated design teams offer planning and design, high-performance engineering, environmental graphics, preservation and modernization, interiors, and workplace and sustainable landscapes to create “memorable” designs “that enhance people’s lives and communities.” This work has been recognized with more than 90 design awards in the past five years alone, the debtors say.
Over its 50-year history, the company has grown steadily, with more than 470 employees working on more than 400 active projects across the United States “and around the world.”
EYP’s disciplines span seven major categories: architecture, engineering, energy, experiential graphic design, interior design, landscape architecture and master planning. These disciplines are inclusive of numerous ancillary specialties, including programming, planning, workplace strategy, historic preservation and modernization, as well as electrical, fire protection, mechanical, plumbing, security, structural and telecommunications engineering. These interdisciplinary design services are offered to clients across the firm’s four segments: education, government, healthcare, and science and technology.
The company recently ranked as the sixth top university sector architecture firm by Building Design + Construction and has worked on over 300 campuses across the United States. With clients primarily from the federal government, EYP’s government segment is ranked as the fifth top federal sector giant category by Building Design + Construction. The company has worked with nearly every federal executive agency, including the Departments of Defense, State, the Interior, Justice and Veterans Affairs.
EYP is ranked as the 10th top healthcare design firm by Building Design + Construction. The firm has advanced expertise in academic medical centers, acute care, ambulatory care, behavioral health, children’s health and specialty care. The science and technology business segment focuses on academic medical centers, academic research, advanced technology, innovation hubs and life sciences, both drawing on expertise from other segments and driving growth in other sectors as technology, innovation and research demands grow across all clients.
In addition to its seven major disciplines, EYP says it has certain unique design resources that it asserts generate additional benefits to clients, such as the Green Lab, an in-house team of engineers, architects and analysts dedicated to understanding how building systems, operation and design are interconnected and using that data - and real-world implications - to make smarter decisions from the very beginning of a project.
A significant number of the firm’s projects come from repeat clients, with the company’s top 10 clients having, on average, a 10-year relationship with the debtors. “While the company has many repeat clients, it regularly acquires new clients and has many large-scale projects that diversify the firm from being dependent on an ‘ancho’ client,” the debtors say.
The firm’s four segments provide additional diversification, the debtors say as the segments are not tied to interdependent economic or social factors and are generally stable markets.
The debtors' largest unsecured creditors are listed below:
|10 Largest Unsecured Creditors
||Unsecured Note (Group I)
|Thomas G. McDougall Trust
||Unsecured Note (Group I)
||Unsecured Note (Group I)
||Unsecured Note (Group I)
||Unsecured Note (Group I)
||Unsecured Note (Group I)
||Unsecured Note (Group II)
|Estate of Ed Kohlberg
||Unsecured Note (Redemption)
||Unsecured Note (Group II)
||Unsecured Note (Group II)
The case representatives are as follows:
Motion to Assume RSA
||R. Craig Martin
|Aaron S. Applebaum
|Richard A. Chesley
|Oksana Koltko Rosaluk
|Debtors' Claims Agent
||Mintz Levin Cohn
|Timothy J. Mckeon
|Dallas G. Taylor
|Robert J. Dehney
Arsht & Tunnell
|Matthew B. Harvey
|S. Christopher Cundra IV
||Benjamin A. Hackman
||Office of U.S.
The RSA includes a restructuring term sheet that contains the following key terms to be integrated into chapter 11 plans of liquidation regarding each of debtors EYP Inc., EYP Holdings Inc. and EYP Group Holdings Inc.
With respect to debtor EYP Inc., the RSA term sheet provides as follows:
- The senior secured claim of Ault Finance would be paid in cash or satisfied through a credit-bid purchase of the debtors’ assets;
- The debtors would reserve $3 million for the benefit of Long Point Capital on account of its unsecured notes claims;
- $100,000 would be distributed to general unsecured creditors on a pro rata basis;
- Trade claims would be assumed in the ordinary course of business; and
- $1 million would be distributed to holders of indemnification claims on a pro rata basis.
With respect to debtor EYP Group Holdings Inc., the RSA term sheet provides as follows:
- Holders of Group I and Group II notes would receive distributions of remaining sale proceeds and all excess cash on the plan effective date, with 60% of such cash allocated to holders of Group I notes and 40% to holders of Group II notes. Holders of Group I and Group II notes would also share the proceeds of recoveries or benefits obtained with respect to any retained causes of action or other claims (including avoidance actions) assigned to the litigation trust on a pro rata basis;
- In exchange for a $625,000 cash payment, former CEO Tom Birdsey and his spouse, Karen Birdsey, would collectively agree to surrender their rights (to other holders of Group I and Group II notes claims) to any distribution or recovery on account of (i) up to $3.5 million in their Group I and Group II notes claims and (ii) their indemnification claims against EYP Inc.;
- The debtors would waive any claims relating to a $171,000 promissory note dated Aug. 27, 2018;
- Tom Birdsey would dismiss with prejudice certain litigation filed against EYP Group Holdings and certain of its independent directors;
- Trade claims assumed in the ordinary course of business;
- Certain equity owners of Stanley Beaman and Sears Inc. would receive a cash payment of $226,000;
- $100,000 would be distributed to general unsecured creditors on a pro rata basis; and
- Payment of up to $1.3 million on account of the RSA parties’ professional fees.
The RSA term sheet also provides that if the aggregate recovery to holders of Group I and Group II notes claims is less than $22.9 million, at their election any Group I or Group II noteholder party to the RSA may terminate their support of the plan.
With respect to debtor EYP Holdings Inc., holders of unsecured redemption notes claims would receive a cash payment of $5.4 million on the plan effective date.
Bid Procedures Motion
The debtors seek approval of bid procedures in order to continue their prepetition marketing process led by Carl Marks Advisory Group. Through contacting more than 180 potential bidders, of which 42 executed confidentiality agreements, the debtors “generated significant interest” and a “number” of indications of interest. The debtors received two letters of intent from financial buyers and three bids (one from a strategic buyer and two financial buyers).
Under the terms of the stalking horse agreement with Ault, Ault would purchase the assets of EYP for an aggregate enterprise value of $67.7 million, which includes a credit bid of up to $11.75 million, consisting of the amount under the DIP facility and the full amount of the obligations owed under the prepetition senior secured facility, with the remainder of the consideration consisting of cash and assumed liabilities subject to certain customary adjustments as provided in the agreement.
The APA provides for a purchase price of $62.5 million to be adjusted, plus assumption of liabilities, and a credit bid of $11.75 million.
Through a re-opening process in fall 2021, Ault conducted additional financial diligence, but by that time, the prepetition senior secured facility was past maturity, “creating substantial risk for the Debtors and jeopardizing the entire process.”
“Recognizing that the Company lacked any runway and experienced tremendous pressure (including financial through steep cash sweeps) from its prior Secured Lenders, Ault swiftly conducted financial diligence on the Debtors and engaged in negotiations with the Secured Lenders in an effort to acquire the secured debt from the Secured Lenders to provide the Company with the much-needed time to negotiate the Stalking Horse APA.”
In October 2021, Ault and administrative agent KeyBank and the secured lenders entered into an assignment agreement through which Ault, as administrative agent and sole lender, purchased the secured notes at par value and “stepped into the shoes” of KeyBank and the secured lenders.
Thereafter, Ault and the debtors entered into forbearance agreements to provide time for Ault to negotiate a letter of intent. The marketing process continued, and with “stronger than expected” financial results for the year ending Dec. 31, 2021, the company asked Ault to increase its purchase price, and Ault responded by “materially” increasing its offer to the current stalking horse bid.
The proposed sale timeline is as follows:
The debtors propose a breakup fee of $2 million and expense reimbursement of up to $900,000. Initial overbids must exceed the stalking horse bid, and the bid protections, by $500,000, with subsequent overbids at $250,000.
DIP Financing Motion
The debtors are requesting a DIP facility from stalking horse bidder Ault for $11.5 million, including $5 million of new money (with an initial draw of $2.5 million upon entry of the interim DIP order) and a rollup of $6.5 million of prepetition secured obligations under which Ault became the debtors’ primary secured creditor in October 2021. Half the rollup is sought on an interim basis.
The DIP financing bears interest at 12%, with an additional 2% for the default interest rate, and matures on the earliest of June 30, the closing date following entry of one or more final orders approving the sale of all or substantially all of the assets and other customary events. The DIP proceeds and cash collateral would be used to sustain operations, fund the chapter 11 proceedings and sale process, pay professional fees and roll up the prepetition secured obligations.
To secure the DIP financing, the debtors propose to grant first-priority DIP liens on all of the debtors’ assets, including priming liens on the all prepetition collateral, and DIP superpriority claims. The DIP liens would extend to the proceeds of avoidance actions upon entry of the final DIP order.
The facility includes various fees, including 2% commitment and exit fees.
In support of the proposed DIP financing, the debtors filed the declaration
of Scott Webb of Carl Marks Advisory Group, who states that while the debtors anticipate having a certain amount of cash on hand and continued income from customer payments during the chapter 11 cases, the commencement of these cases may create delays and uncertainty with respect to cash receipts. The DIP facility would ensure any such delays do not interfere with the debtors’ ability to make the numerous and time-sensitive payments necessary to continue to operate in the ordinary course of business.
“The DIP facility is necessary to provide a positive message to the market that these chapter 11 cases are sufficiently funded, which is critical to address any concerns raised by the Debtors’ clients, employees and vendors,” Webb says, adding that as part of its marketing efforts for the company’s assets, Carl Marks will “continue to determine if alternative lenders can provide a more competitive DIP Facility.”
The company proposes the following adequate protection to Ault, as prepetition secured lender and prepetition secured agent: (i) replacement liens, (ii) superpriority claims, (iii) cash payments of interest on the prepetition secured obligations, (iv) payment of fees of the professionals of Ault and (v) financial reporting. Since the replacement liens would be granted upon all DIP collateral, they would extend to the proceeds of avoidance actions upon entry of the final DIP order.
In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b), in either instance subject to entry of the final DIP order.
The carve-out for professional fees is $150,000 for the debtors and $25,000 for the UCC.
The proposed budget for the use of the DIP facility is HERE
The DIP financing is subject to the following milestones:
- Bid procedures order: Entered by May 10;
- Auction: By June 8;
- Sale order: By June 16; and
- Sale closing: By June 30.
The lien challenge deadline is no later than the earlier of (i) the sale order objection deadline and (ii) 75 days following entry of the interim order. The UCC lien investigation budget is $25,000.
The debtors also filed various standard first day motions, including the following: