UPDATE 1: 6:10 a.m. ET 3/24/2020: On Monday evening, March 23, the Zohar debtors filed a
certification of counsel attaching a proposed further interim cash collateral order providing for a one-month extension of authority to use cash collateral through April 30. Under the court’s Feb. 24 order, the debtors currently are authorized to use cash collateral through March 31.
According to the certification, MBIA, the Zohar III controlling class, the indenture trustee and the Patriarch stakeholders have agreed to the proposed further interim cash collateral order.
Original Story 8:19 p.m. UTC on Feb. 24, 2020In Zohar Cases, Judge Owens Authorizes Interim Cash Collateral Use, Approves Houlihan Retention, Schedules Briefing on Monetization ProcessRelevant Documents:Hearing AgendaInterim Cash Collateral Order
As indicated at the
Feb. 20 hearing, Judge Karen Owens heard oral argument today on competing
proposals for
monetization of the Zohar debtors’ portfolio companies,
interim cash collateral use and retention of
Houlihan Lokey as investment banker.
After denying the
motion of the Patriarch stakeholders and Lynn Tilton to adjourn today’s hearing on the Houlihan retention, and hearing the parties’ arguments, Judge Owens approved the debtors’ retention of Houlihan as an appropriate exercise of business judgment. Despite Patriarch’s arguments to the contrary, the court concluded that the retention was “not inconsistent” with the parties’
settlement agreement. The court also held that Houlihan’s prior representation of MBIA did not “per se disqualif[y]” Houlihan at this time, noting that the court could address the matter in the future if the relationship were ultimately to “rise to a conflict.”
Regarding the potential for duplication of services, Judge Owens indicated that she gave “great weight” to the CRO’s testimony that he would monitor the professionals’ roles to avoid duplication, adding that the court could address any duplication issues in the context of Houlihan’s final fee application or otherwise. Judge Owens reserved judgment on the nature of Houlihan’s role in the monetization process, which she expects to address in the context of her future ruling on the monetization timeline and process. The court instructed the debtors to clarify the Houlihan engagement agreement to reflect that no fees other than the $150,000 monthly fee and $5 million success fee would be sought.
The court also authorized the debtors’ further use of
cash collateral on an interim basis, over the objection of Patriarch and Tilton. Judge Owens emphasized that U.S. Bank consented to the “short extension” of cash collateral use in exchange for “reasonable” adequate protection.
Before concluding the hearing, Judge Owens instructed the parties to file within two weeks one “closing” brief per side, with no replies permitted, along with a proposed form of final order. The court indicated its willingness to consider extending the briefing deadline if the parties are “getting close” to a resolution on the interest issue, which she described as a “critical’ threshold issue to her resolution of the monetization processes.
The court explained that, in ruling on the monetization process, it would need to understand whether interest would be paid or not if the debt maturities are extended. Judge Owens “strongly suggest[ed]” that, before submitting the applicable briefing, the parties consider attempting to reach a resolution of the interest issue before the mediator, Judge Christopher Sontchi.
Although the court had
contemplated additional briefing on the monetization process, it spent a significant portion of today’s hearing listening to the parties’ arguments on the monetization timing and process, with the parties’ highlighting various aspects of last week’s trial. At various times, the court pressed the parties on how it “can thread the needle” in terms of balancing the need for sufficient time to pursue the monetization process with the debtors’ liquidity constraints. Judge Owens emphasized the need for some resolution under the circumstances, remarking that “we’re constantly in a state of being the hamster on the wheel.”
During argument, the debtors argued that the court ultimately may have to resolve what it means for a transaction to be in the estates’ “best interests” and how to address a potential scenario where Patriarch and Tilton perceive a particular bid to be too low. The debtors noted that the court could face conflicts-of-interest issues if, for example, Tilton turns out to be a potential bidder for a portfolio after having personally participated in the monetization process. The court indicated that it would have to address “all these percolating issues” at the appropriate times.
At today’s hearing, Michael Nestor, Andrew Magaziner and Ryan Bartley of Young Conaway appeared on behalf of the debtors, Monica Loseman and Robert Klyman of Gibson Dunn appeared on behalf of Tilton and Patriarch, Chris Shore of White & Case appeared on behalf of the independent director Joseph Farnan and John Weiss of Alston & Bird appeared for indenture trustee U.S. Bank.