Below is our initial take on recent bankruptcy-related developments:
The case will proceed as a Chapter 7 liquidation after a U.S. bankruptcy judge rejected McGraw’s bid to keep it in Chapter 11.
S&K Take: We have spilled a lot of ink in these hallowed pages discussing the Dr. Phil-centric Merit Street bankruptcy cases. Those days sadly seem to be at an end. Judge Everett issued his ruling on Trinity Broadcasting’s motion to convert the case (and Professional Bull Rider’s related motion to dismiss/convert) and it seems as though the UST needs to get to work (unfortunately still without pay) finding a chapter 7 trustee. Judge Everett took five days of evidence in September and took the matter under advisement. He ruled from the bench on Tuesday, and while I wouldn’t call it a “scorcher,” Judge Everett didn’t hold back. The Judge found “clear cause” to convert the case, pointing to the “conflicted” CRO (and his lack of candor with the court), the loss of estate value, and Dr. Phil’s destruction of evidence. For those that might not recall, Dr. Phil allegedly deleted text messages with Jamie Ribman (who’s affiliated with a UCC member) where he essentially guaranteed payment of Ribman’s claim. That text was gone from Dr. Phil’s phone, but not from Ribman’s. The Judge decided on conversion rather than dismissal, noting that if the case was dismissed Dr. Phil could pay whichever creditors he preferred and potentially seek to file again elsewhere. Sounds like an appeal of the decision may be forthcoming.
In a transcript of this “Behind the Money” podcast episode, the hosts examine how the founder of First Brands enlisted billions of dollars from lenders, exposing the broader financial market to unprecedented risk.
S&K Take: Last we visited First Brands, we were discussing the potential appointment of an examiner as requested by Raistone and the UST. This week has seen more notable activity, including a pair of motions seeking the appointment of a chapter 11 trustee (although the Carnaby secured lenders would prefer dismissal of their cases in the first instance). We will start with the Committee, which filed an emergency motion to compel the production of documents from the ad hoc group providing the DIP loan. According to the Committee, the Committee has requested documents and got the full Heisman from the AHG. The Committee is seeking documents related to the DIP, including whether the DIP provides the Debtors with sufficient liquidity or provides the AHG with outsized benefits and case control. The Committee has requested a decision by November 2, ahead of the November 6 second day hearing. Separately, last night Evolution and the Carnaby secured lenders each filed motions related to their SPV entities. Both had provided financing to certain SPVs, which financing was secured by inventory held by those SPVs, which, according to the lenders, was ringfenced from the rest of the First Brands enterprise. Evolution has alleged that the FBG Debtors surreptitiously moved that inventory from the SPVs to the other Debtors entities, robbing them of value. Evolution has requested the appointment of a chapter 11 trustee at the SPV entities, arguing that the FBG Debtors will act only in their own self-interest (and that the special committee itself is hopelessly conflicted). The Carnaby lenders are seeking the dismissal of their SPV cases, arguing that the FBG Debtors did not have the authority under the relevant LLC agreements to file the cases. The Carnaby lenders allege that the FBG Debtors replaced true independent directors at the SPVs on the eve of bankruptcy with directors that would agree to the filing, and the cases should thus be dismissed. They also argue that the cases are essentially two-party disputes (there are no other creditors at the SPV level). Alternatively, the Carnaby lenders seek the appointment of a chapter 11 trustee for the SPVs. The second day hearing is scheduled for November 6, so I imagine we will be reporting back next week.