March 14, 2019 – The U.S. Bank National Association (“USBNA”), in its capacity as trustee in respect of certain of the Debtors' notes included in classes 4 and 5 of the Debtors’ Plan, filed a pair of objections to the Debtors' Modified Second Amended Plan [Docket Nos. 654 and 655].
USBNA is the indenture trustee (the “HoldCo Notes Trustee”) in respect of the 11% Senior Notes due 2017 issued by LBI Media Holdings, Inc. (the “HoldCo Unsecured Notes”). In its capacity as the HoldCo Notes Trustee, USBNA argues that the Plan unfairly treats claims in Class 5 (“HoldCo Unsecured Notes Claims”), possibly in a deliberate attempt to punish a creditor also holding a significant Class 4 (“Second Lien Notes Claims”) claim, while improperly according the Plan friendly Class 6 (“Intermediate HoldCo Unsecured Notes Claims”) a disproportionate share of what is already a meager pie.
USBNA explains [Docket No. 654], “The HoldCo portion of the Plan presents a discreet window into the bankruptcy gamesmanship of a Plan that generally cannot be squared with the good faith requirements of section 1129(a)(3) or the fair and equitable requirements of section 1129(b)(2)(B). There is only $800,000 of HoldCo cash at stake to be distributed by a holding company that does not have operations, but even this corner of the Plan contains illusory promises and grossly unfair terms directed against the Class 5 creditors, presumably because one of them is a prominent member of the Ad Hoc Group of Noteholders.
Assuming that there really will be $800,000 of HoldCo Cash to distribute to HoldCo’s creditors, the Plan then sets up an indefensible division of the HoldCo Cash for the benefit of the friendly Class 6 holders of Intermediate HoldCo Unsecured Notes Claims because Class 6 entered into a Restructuring Support Agreement and agreed to vote for the Plan. Essentially the Plan gives Class 6 nearly twice as much on a percentage basis as the Class 5 holders of HoldCo Unsecured Notes (estimated by the Debtors as 2.6% versus 1.4%) by manufacturing extra claims for their benefit. Class 6 would receive pro rata shares of the HoldCo Cash both for HoldCo’s guaranty of the $24 million of Intermediate HoldCo Unsecured Notes issued in the HoldCo Exchange plus the corresponding $24 million of HoldCo Notes which Intermediate HoldCo now claims to hold.”
USBNA is also the indenture trustee (the “Trustee”) in respect of LBI Media, Inc.’s (i) 11½%/13½% PIK Toggle Second Priority Secured Subordinated Notes due 2020 (the “Series I Second Lien Notes”) and (ii) 11½%/13½% PIK Toggle Second Priority Secured Subordinated Notes due 2020, Series II (the “Series II Second Lien Notes”). These notes sit in the Plan’s Class 5. USBNA’s combined objection, joinder and reservation of rights [Docket No. 655] states, “The Ad Hoc Group of Noteholders collectively hold the vast majority of the Class 4 Second Lien Notes Claims and will file an objection to confirmation based upon extensive discovery into the prepetition and post-petition conduct of the Debtors and related parties pertaining to the Plan. The Trustee believes that the evidence to be presented at the confirmation hearing by the Ad Hoc Group of Noteholders in conjunction with the legal arguments in their objection and at the confirmation hearing will demonstrate that the Plan fails to meet the standards for confirmation under sections 1129(a) and 1129(b). The Trustee supports the request by the Ad Hoc Group of Noteholders for an order denying confirmation of the Plan and reserves the right to participate fully in the confirmation hearing with respect to all objections raised by the Ad Hoc Group of Noteholders.”
As we covered separately [Docket No. 633]. on March 13, 2019 the Debtors' claims agent reported that Class 4 had voted overwhelmingly to reject the Debtors' Plan:
Class 4 (“Second Liens Notes Claims”): 13 claim holders, representing $365,197.00 (or 0.24%) in amount and 37.14% in number, accepted the Plan. 22 claim holders, representing $150,822,292.00 (or 99.36%) in amount and 62.86% in number, rejected the Plan.