case 19-43090 doc 254 filed 03/06/20 entered 03/06/20 08
TRANSCRIPT
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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS
2 SHERMAN DIVISION
3
4 IN RE: ) BK. NO: 19-43090-BTR
5 )
6 NUVECTRA CORPORATION )
7 D E B T O R. )
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11 TRANSCRIPT OF PROCEEDINGS
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20 BE IT REMEMBERED, that on the 18th day of November,
21 2019, before the HONORABLE BRENDA T. RHOADES, United States
22 Bankruptcy Judge at Plano, Texas, the above styled and
23 numbered cause came on for hearing, and the following
24 constitutes the transcript of such proceedings as hereinafter
25 set forth:
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1 P R O C E E D I N G S
2 COURTROOM DEPUTY: First matter this morning
3 is Nuvectra Corporation. Case 19-43090. Thirteen first day
4 motions.
5 THE COURT: Okay. Appearances.
6 MR. MANNS: Good morning, Your Honor. Ryan
7 Manns, Toby Gerber, Laura Smith, and Shivani Shah on behalf
8 of the debtor.
9 THE COURT: Okay.
10 MS. HINES: Good morning, Your Honor. Sheri
11 Hines and David Eastlake of Greenberg Traurig on behalf of
12 Oxford Finance and Silicon Valley Bank.
13 THE COURT: All right.
14 MR. MANNS: Your Honor, if I may, I'd also
15 like to introduce the CEO of the debtor, Dr. Fred Parks,
16 along with the CFO of the debtor, Ms. Jennifer Gusari.
17 THE COURT: Okay.
18 MR. MANNS: We are also joined by Mr. John
19 Stewart, our declarant. He is with Alvarez & Marsal. And he
20 is a financial advisor to the debtor.
21 THE COURT: All right.
22 MR. MANNS: And last, but not least, Ms. Laura
23 Kalesnik, who is with Dorsey & Whitney. She is the outside
24 general counsel for the debtor and corporate and litigation
25 counsel.
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1 MR. SALITORE: Mark Salitore for the United
2 States Trustee.
3 THE COURT: Thank you. Okay. All right.
4 Where are we?
5 Do we have other telephonic appearances?
6 MR. JORDAN: Good morning. This is Rob Jordan
7 from KCC on the line.
8 THE COURT: Okay.
9 MR. VEGA: Good morning. This is Jason Ross
10 Vega. I'm from Jagoman & Company. We're an equity holder
11 and an interested party.
12 MS. JOHNSON: Carolyn Johnson on behalf of
13 Insight. We're an interested party.
14 THE COURT: We had one other appearance?
15 MR. WEISBERG: Yes. David -- can you hear me,
16 David Weisberg for interested party.
17 THE COURT: Okay. Which interested party?
18 MR. WEISBERG: Equity holder.
19 THE COURT: Which equity holder? I assume
20 there's more than one.
21 Sir?
22 MR. WEISBERG: Yes, hello.
23 THE COURT: So which equity holder are you
24 appearing for?
25 MR. WEISBERG: Oh, for myself.
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1 THE COURT: Oh, you are an equity holder.
2 Thank you.
3 MR. WEISBERG: Correct.
4 THE COURT: Thank you, sir.
5 All right. Mr. Manns.
6 MR. MANNS: Thank you, Your Honor. First of
7 all, thank you for allowing us to set these matters on an
8 expedited basis. And thank you at chambers for all of the
9 help with the logistics and preparing for this morning's
10 hearings.
11 Your Honor, if I may, I'd like to proceed by providing
12 a brief overview of the company before we present our first
13 day motions, if that works.
14 THE COURT: That would be just fine.
15 MR. MANNS: As a housekeeping matter, as I
16 mentioned, Mr. John Stewart, our first day declarant, is here
17 in the courtroom. He's available for examination by the
18 Court and also by parties in interest. We propose to move
19 forward and move for the admission of his declaration into
20 evidence. It can be found at docket number 27. And it is
21 also listed, or designated as Exhibit 1 on our witness and
22 exhibit list.
23 THE COURT: Any objection?
24 All right. Exhibit 1 is admitted, then.
25 MR. MANNS: Your Honor, in connection with our
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1 presentation this morning, we prepared a power point, which I
2 believe your Court has access to. We have hard copies, as
3 well.
4 THE COURT: It just came up on the screen.
5 Are you guys going to run it from the screen.
6 MR. MANNS: I can.
7 THE COURT: If you are I don't --
8 MR. MANNS: I have a hard copy, if you'd like
9 one.
10 THE COURT: I don't need a hard copy. I can
11 just work with your copy on the screen. That's fine. Thank
12 you.
13 MR. MANNS: Your Honor, the debtor is a
14 medical device company focused on the development and
15 commercialization of its technology platform for the
16 treatment of various disorders due to neurostimulation. It's
17 headquartered here in Plano, right off of Granite Parkway and
18 the Tollway.
19 The debtor was spun off in March of 2016 from its
20 parent, Integer Holdings. The Algovita Spinal Cord
21 Stimulation System is the debtor's first commercial offering
22 and treats chronic pain of the trunk and limbs. Algovita is
23 approved for sales in the European Union and the United
24 States. Over 4,000 individuals in the U.S. have been
25 implanted with the Algovita device.
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1 As of the petition date, the debtor has ceased all
2 product sales of Algovita, but has continued ongoing patient
3 clinical support. Since January 2017, the debtor has been
4 seeking approval from the FDA for the second application of
5 its technology platform, Virtis. Virtis is a medical device
6 for the treatment of chronic urinary retention and the
7 symptoms of overactive bladder. The debtor anticipates that
8 it will retain FDA approval of Virtis in the first half of
9 2020.
10 Your Honor, leading up to the filing of the case, the
11 debtor has been contending with a myriad of issues, including
12 significant operating losses, declining sales, loss of key
13 personnel, the delay of FDA approval of Virtis, and then
14 issues with the Algovita peripherals, as well as covenant
15 defaults under its credit facility.
16 In August of 2019, the company retained Piper Jaffray
17 to assist it with its pursuit of strategic options, including
18 a sale. For a number of reasons, the pre-petition sale
19 process did not result in a successful transaction. Having
20 exhausted its pursuit of strategic alternatives, the debtor
21 has ultimately concluded that commencing this bankruptcy
22 proceeding presented the best means to maximize value for
23 stakeholders, while continuing to emphasize ongoing patient
24 clinical support.
25 With respect to our proposed path forward in the case,
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1 as an extension of its pre-petition marketing process, the
2 debtor proposes to sell substantially all of its assets. The
3 debtor contends that a 363 sale will unlock value for its
4 assets in a way that hindered it outside of bankruptcy.
5 Multiple parties have already reached out to the debtor's
6 management team to express their interest in the debtor's
7 assets. In furtherance of the debtor's sale efforts, we plan
8 on filing retention papers for an investment banker within
9 the next week.
10 Although Piper Jaffray marketed the assets
11 pre-petition, they have declined to continue marketing the
12 assets post-petition. Retaining a separate firm is a
13 priority for the debtor going forward. And we've already
14 spoken to various parties in interest regarding this.
15 In the lead up to the filing, Your Honor, the debtor
16 concluded that it was in the best interest of all of its
17 stakeholders to cease all product sales of Algovita, as I
18 mentioned before, given its liquidity issues. And it started
19 to focus on maximizing its value of the estate in the
20 bankruptcy. And to focus on ongoing clinical patient
21 support.
22 Leading up to the filing, the debtor entered into
23 negotiations with its secured lender to discuss a pay down of
24 some of the term loan debt. And as a component of the
25 parties' overall agreement on the consent, we'll use cash
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1 collateral. As part of the debtor's agreement with the
2 Banks, the Banks have agreed to support the debtor's
3 post-petition marketing and sales process, subject to an
4 agreed-to budget, which is reflected as Exhibit A to the cash
5 collateral order.
6 Your Honor, this concludes my general overview of the
7 debtor. I'm happy to answer any questions that the Court
8 might have at this time.
9 THE COURT: I'll probably have some questions
10 in a little bit. Thank you.
11 MR. MANNS: Okay. As a housekeeping matter,
12 we'd like to note for the record that the debtor has filed a
13 certificate of service with respect to all of the first day
14 motions. That document can be found at docket number 28.
15 And at this time, I'll cede the podium to my colleague,
16 Shivani Shah, to handle the next matter on the agenda.
17 THE COURT: Ms. Shah.
18 MS. SHAH: Good morning, Your Honor. Shivani
19 Shah with Norton Rose Fulbright on behalf of the debtor.
20 Your Honor, we would like to present the motions today
21 in the order they're presented on the agenda. I will present
22 agenda items A through H. My colleague, Laura Smith, will
23 present agenda items I through L. And Mr. Manns will address
24 the final matter, agenda item N, the cash collateral motion,
25 if that's okay with Your Honor.
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1 THE COURT: All right.
2 MS. SHAH: The first matter on the agenda is
3 the notice of designation of a complex Chapter 11. That can
4 be found at docket number 2. The debtor believes this case
5 qualifies as a complex Chapter 11 case, because the total
6 debt exceeds $10 million, there are more than 50 parties in
7 interest, and it is a public company. For those reasons, the
8 debtor requests that the Court enter an order designating
9 this as a complex Chapter 11.
10 THE COURT: Does anyone wish to be heard with
11 respect to that matter?
12 Motion is granted. You'll upload the order.
13 MS. SHAH: We will. Thank you, Your Honor.
14 THE COURT: Thank you.
15 MS. SHAH: The next matter on the agenda is
16 the motion to waive the requirement to file an equity
17 security holder list. This can be found at docket number 6.
18 The debtor requests that the Court waive the requirement,
19 pursuant to Bankruptcy Rule 1007(a)(3), that a Chapter 11
20 debtor must file a list of its equity security holders.
21 Bankruptcy Rule 1007(a)(3) affords the Court the discretion
22 to waive this requirement. We think in this case that it's
23 appropriate to waive the requirement, because the debtor is
24 or was traded on the Nasdaq Global Market. And as of June
25 30th, 2019, there are approximately 18,000 shares of common
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1 stock that have been issued and are outstanding. Because
2 these shares were publicly traded, the list of equity
3 security holders is a cumbersome list to obtain. Given the
4 circumstances of this case, determining and filing such a
5 list would be burdensome and serve very little purpose.
6 We have not received any objections, nor have we
7 received any comments from the U.S. Trustee. Therefore, the
8 debtor requests the Court enter an order granting the motion.
9 If Your Honor has any questions, I'm happy to answer
10 those questions.
11 THE COURT: Okay. So how are we going to
12 provide notice to these equity holders of the existence of
13 the bankruptcy case, any specific issues that come up in the
14 case?
15 MS. SHAH: Well, as of now, we actually are --
16 we will also be requesting a motion to limit notice, because
17 there are a number of -- there's over 14,000 parties on the
18 creditor matrix. However, we will be serving a revised --
19 based on what happens today, we anticipate serving a revised
20 341 Meeting notice. And with that, we'll also include
21 information to direct people to the KCC website, so that all
22 parties in interest can receive notice through the KCC
23 website.
24 THE COURT: Well, okay, I understand that
25 part. But, you know, we have a due process issue. And if
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1 we're going to be affecting the rights of the equity holders,
2 whether you file the list or not, we need to provide some
3 type of notice, especially, for example, notice of the
4 bankruptcy filing and the key dates that are associated with
5 that.
6 So are you going to do some kind of notice with --
7 MS. SHAH: May I have one moment, Your Honor?
8 THE COURT: You can.
9 MS. SHAH: Your Honor, since it's a public
10 company, we will still be filing an 8-K. So they will still
11 receive notice through the public filings with the SEC.
12 THE COURT: But the 8-Ks are only filed
13 quarterly, right?
14 MS. SHAH: No, Your Honor.
15 THE COURT: Oh, you're going to file it
16 immediately?
17 So here's my question. Okay? Let's say you're going
18 to do a sale that will effectively wipe out equity. Equity
19 holders are entitled to know that and they're entitled to
20 show up and object. How are you going to notice them?
21 MR. GERBER: Your Honor, Toby Gerber for
22 Norton Rose and the debtor.
23 We've just been consulting. As Ms. Shah indicated, the
24 company is a public company. 8-Ks are regular and immediate
25 reporting on material events that happen. They're not the
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1 quarterly reports.
2 THE COURT: Right. But they occur after the
3 event has happened.
4 MR. GERBER: Well, we've been -- as things
5 happen, for example, a motion for the sale process --
6 THE COURT: You're going to file an 8-K every
7 time you file a motion with this Court?
8 MR. GERBER: Not every time we file a motion.
9 But for material information, the kind of thing that would
10 affect equity holders, we'd be obligated to file that we're
11 going to -- just as we filed in August of 2019 that the
12 company was going to undertake a process to sell the company.
13 So as to those material information that might affect
14 shareholders, we would be filing an 8-K to let them know what
15 was about to happen.
16 THE COURT: What I have seen in the past with
17 respect to the matters in bankruptcy, what I see in lieu of
18 specific notice to all of the equity holders, particularly
19 since equity can be traded and some of the interests are held
20 in street names, so you don't even know who those equity
21 holders are, typically what I see is some form of notice,
22 publication notice or otherwise with respect to matters that
23 specifically affect the rights of particular parties in
24 interest.
25 So the Court agrees the Court has the right to -- or
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1 has the ability to waive the requirement that you file the
2 list, okay. But I want to make sure you all understand that
3 does not get you around the notice issues associated with
4 each pleading that you file. If there are pleadings that are
5 filed that affect the rights of particular parties, they will
6 have to be noticed some how. And we'll get to those issues
7 with respect to the limitation of notice motion. But even
8 under that, you have to serve -- there's a limited notice,
9 limited list, and then you have to serve anybody who is
10 specifically affected by that motion, right? Like, if you
11 have -- if you file a motion to sell an interest free and
12 clear, you have to make sure anybody asserting a right, even
13 if they're not on your limited notice, that they get notice.
14 Right?
15 MR. GERBER: Yes.
16 THE COURT: Okay. So I want to make sure you
17 all understand it's the position of the Court that
18 notwithstanding the issues with respect to actually filing
19 the list of equity holders, which is what the motion is we're
20 dealing with now, that does not alter the notice obligations.
21 And somebody is going to have to be paying some attention to
22 who needs to be -- at what point in time does equity need to
23 be noticed and how are you going to do it.
24 MR. GERBER: Okay. I apologize.
25 THE COURT: And I don't believe filing 8-Ks
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1 after the fact will get there. But you all can convince me
2 otherwise. But I just want you all to be aware of the issue.
3 Okay?
4 MR. GERBER: I think we may have misunderstood
5 your question, Your Honor. We thought the question was, how
6 are you going to get them notice of things going on in the --
7 THE COURT: Well, that's what I'm talking
8 about. You all talk about doing a 363 sale. I'm going to
9 take a wild guess, without knowing, that it may affect the
10 rights of equity holders. And equity holders will be
11 entitled to notice. And I don't want to have a huge flub,
12 because those parties were not noticed and somebody shows up
13 later and says, gee whiz, it doesn't affect us, because we
14 didn't get notice.
15 MR. GERBER: Yes, Your Honor.
16 THE COURT: Right?
17 MR. GERBER: We couldn't agree more.
18 THE COURT: Exactly.
19 MR. GERBER: I think we misunderstood the
20 question. The question was how are we going to get notice to
21 them of things that might affect them. Our proposal is to,
22 among other things, give them notice in advance under 8-K, if
23 the company is going to go through a sale procedure. If
24 that's not sufficient, we'll seek permission from the Court
25 separately for that. But if that's not sufficient for the
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1 Court, that's fine. We'll do whatever the Court directs us
2 to do. Just misunderstood the question. We were here on --
3 the motion was what the motion was.
4 THE COURT: Understood.
5 MR. GERBER: We slipped to something else.
6 THE COURT: I just want to make sure -- the
7 Court will approve the motion to waive the requirement of the
8 filing of the list of equity holders, under the circumstances
9 of this case. I just want to make sure everybody has a heads
10 up, that doesn't mean I'm approving ahead of time some sort
11 of failure of notice that rises to the level of failure of
12 due process, right?
13 MS. SHAH: No, of course no, Your Honor. We
14 understand. Thank you for that.
15 THE COURT: Okay.
16 MS. SHAH: The next motion on the agenda is
17 the motion to extend the deadlines to file schedules and
18 statements. This case be found at docket number 3.
19 Currently the deadline for the debtor to file schedules and
20 statements is November 26th. Pursuant to Rule 1007(c), the
21 debtor requests an additional 14 days to extend that deadline
22 to December 10th. While the debtor has started their process
23 and completing schedules and statements and gathering the
24 requisite information with the aid of Alvarez & Marsal, due
25 to the nature of the debtor's business, the debtor needs some
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1 additional time to close its pre-petition books and records.
2 With that, Your Honor, I will note that the U.S.
3 Trustee has schedules the 341 Meeting for December 6th, which
4 is before the requested deadline to file schedules and
5 statements. However, we've been in communications with the
6 U.S. Trustee and believe they're amenable to re-scheduling
7 that 341 Meeting. Assuming that, if this motion is granted
8 and that the new deadline is December 10th, I believe the
9 U.S. Trustee said that the 341 would be re-scheduled to
10 December 20th. But that hasn't been locked down yet. But we
11 have been in communication with the U.S. Trustee.
12 With that, we've not received any other comments or
13 objections and request the Court enter an order.
14 THE COURT: Okay. Mr. Salitore.
15 MR. SALITORE: Yes, Your Honor. We have been
16 in communications with the debtor. And to back out a little
17 more broadly. There is some tension with the currently set
18 Creditor Meeting date of December 6th. And both were
19 requested to extend the schedules until after that point in
20 time, which will necessitate re-schedule -- moving the
21 meeting to December 20th. But, as well, and I imagine
22 debtors will get to this, with some of the dates for the
23 interim cash collateral usage period and/or the requirements
24 for a final order on cash collateral, there's -- just to
25 alert Your Honor, there is some tension between how fast
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1 those folks will move and the December 20th -- what appears
2 to be a December 20th reset.
3 MS. SHAH: Your Honor, we did speak with the
4 U.S. Trustee with regard to his concerns. And we've been in
5 communication with the lenders and their counsel, as well,
6 with regard to some of those overlapping dates and some
7 conflicts that there might be. We're still working with the
8 lender to make sure that whatever those dates that we have
9 for the lenders and milestones work with the U.S. Trustee.
10 And when schedules are filed and when the 341 are filed,
11 those are conversations that are ongoing. But we're aware of
12 the U.S. Trustee's concerns and we're working to address
13 them. We can also address some of those concerns in the
14 context of the cash collateral motion and the interim order
15 that we're proposing.
16 THE COURT: Okay. Are you addressing the cash
17 collateral matter?
18 MS. SHAH: I am not, Your Honor. It would be
19 Mr. Manns.
20 THE COURT: Oh, okay. Let's talk about that.
21 Mr. Manns, why don't we move ahead to the cash
22 collateral motion.
23 MR. MANNS: Okay.
24 THE COURT: And then we can address this issue
25 of the filing deadline when we address the cash collateral
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1 motion.
2 MR. MANNS: The cash collateral motion can be
3 found at docket number 19 on the -- I'm sorry, at docket
4 number 19.
5 The notice of the attorney check list and the proposed
6 form of order can be found at docket number 30. The
7 evidentiary predicate for the motion can be found at
8 paragraphs 104 and 105 of the Stewart declaration.
9 THE COURT: Okay.
10 MR. MANNS: Your Honor, without the use of
11 cash collateral, the debtor lacks sufficient liquidity to
12 meet ongoing obligations during the case. And the debtor
13 will be irreparably harmed, absent approval of its use of
14 cash collateral.
15 We have been in discussions over the last few days with
16 Mr. Salitore on a handful of items in connection with the
17 proposed form of order. I think we have largely narrowed
18 that list down to really two items. One is this
19 quote/unquote tension that he alluded to regarding the
20 December 2nd date that is proposed in the cash collateral
21 order for the termination of cash collateral on an interim
22 basis.
23 I think the parties are -- I don't want to speak for
24 Mr. Salitore and the lenders, but I think the parties agree
25 that we should probably move that date a little down the
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1 road. We haven't landed on a specific date that works. The
2 debtors, as Ms. Shah mentioned, are in the process of working
3 through schedules of assets and liabilities -- I'm sorry,
4 schedules of financial affairs and statement -- statements of
5 financial affairs and schedules of assets and liabilities.
6 It's a heavy lift and we have some staffing issues we're
7 working through, as well, to get those prepared as quickly as
8 possible. But I don't think that we'll be in a position to
9 get those on file before December 10th. And so as Ms. Shah
10 alluded to, we're working through Mr. Salitore's concerns
11 regarding getting those on file as quickly as possible,
12 setting up a 341 Meeting, and then also working through
13 deadlines associated with the termination of use of cash
14 collateral on an interim basis.
15 One thing that we proposed to Mr. Salitore is
16 potentially moving the proposed continued 341 Meeting up from
17 December 20th to possibly December 13th or December 14th and
18 then trying to schedule our final hearing somewhere in that
19 time frame, if the Court has availability. And so that was
20 at least one potential solve for the issues that Mr. Salitore
21 highlighted.
22 THE COURT: Okay. And what's the position of
23 the lenders, with respect to that issue?
24 MR. EASTLAKE: David Eastlake on behalf of the
25 lenders.
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1 We had a chance to talk to Mr. Salitore this morning.
2 We understand that there is, you know, he's asking to push
3 the final hearing. I believe our client is willing to do
4 that a short time. And in the meantime between now and
5 final, the agreement with the parties is we will work
6 together to set reasonable case milestones that will give the
7 debtor the runway it needs to complete its sale and plan
8 processes. There's some moving parts right now and that's
9 why they have not been set yet. But in the final, we would
10 come back and ask to establish those milestones.
11 THE COURT: Okay. So for purposes of today, I
12 just need to know how long the interim can extend and when we
13 need to set the final, because you all are consenting to the
14 use of the cash collateral. Those are the two issues. So my
15 question is, how long can the interim extend by agreement, I
16 guess. So where is the Bank on that issue?
17 MR. EASTLAKE: Your Honor, and to the extent
18 that the 341 Meeting can be moved up and accomplished
19 earlier --
20 THE COURT: Moved up and accomplished earlier
21 than what?
22 MR. EASTLAKE: I believe the December 20th
23 date that Mr. Salitore had in mind.
24 MR. SALITORE: If it's informative to the
25 parties, since our conversations this morning, I have
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1 checked. We are unable to move the meeting earlier than the
2 December 20th setting.
3 THE COURT: Part of the issue is, just so you
4 all know, it's not just, you know, scheduling it in terms of
5 the U.S. Trustee's timetable, if you will. Part of the
6 problem is, they need to have time to analyze the schedules
7 and statements that are filed in advance of the 341 Meeting.
8 So the window that they're looking at right now, given what
9 the debtor has asked for for time to file the schedules and
10 statements, that's only two days. And so as a typical
11 matter, we give the Trustee seven days, in ordinary cases.
12 And you all have told me this is not the ordinary case. So
13 ten days doesn't seem to be at all outside the norm. Okay.
14 So that's where we are right now.
15 So you all want a final hearing some time in December;
16 is that right?
17 MR. MANNS: That's correct, Your Honor.
18 THE COURT: In late December? Let me see
19 here. What have we got?
20 Probably December 30th is what we're looking at as a
21 final hearing date, if you want to go past the 20th. Can you
22 get there on your interim?
23 MR. MANNS: Your Honor, that works for the
24 debtor.
25 MR. EASTLAKE: And, Your Honor, that works for
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1 the lenders. Assuming, of course, that we can get an interim
2 order entered, as agreed to by the parties today. We're
3 talking about extending the final, you know, to the end of
4 December. And so I think if we can get our interim order in
5 place and agreed to by the lenders and the debtor with the
6 adequate protection provisions, then, you now, we'll
7 accommodate the U.S. Trustee and will be okay with the
8 hearing December 30th.
9 THE COURT: Okay. So what are the bells and
10 whistles here for the lender? What kind of adequate
11 protection are we talking about for the interim period?
12 MR. EASTLAKE: Your Honor, fairly standard.
13 What you might expect. Replacement liens. There would also
14 be --
15 THE COURT: Replacement liens for what
16 purpose?
17 MR. EASTLAKE: To continue those liens
18 post-petition. Replacement liens on the pre-petition
19 collateral.
20 THE COURT: Okay. So you're going to have
21 replacement liens on like kind collateral, right, that's what
22 you're talking about?
23 MR. EASTLAKE: Right.
24 THE COURT: Okay. But that secures only the
25 value of the diminution in value of the collateral, right?
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1 MR. EASTLAKE: Right. It would only be --
2 THE COURT: Okay. I just wanted to make sure
3 we're all clear.
4 MR. EASTLAKE: Right.
5 THE COURT: Okay. So you're going to have a
6 replacement lien, to the extent of the diminution in value of
7 the collateral?
8 MR. EASTLAKE: That's correct.
9 THE COURT: What else are you going to take?
10 MR. EASTLAKE: We would also have a lien on
11 unencumbered assets.
12 THE COURT: For what purpose?
13 MR. EASTLAKE: To -- again, as adequate
14 protection. I mean, it's the --
15 THE COURT: Adequate protection, to the extent
16 of the diminution in value of your collateral, right?
17 MR. EASTLAKE: Yes, Your Honor. That applies
18 to --
19 THE COURT: Okay. Are you expecting that the
20 collateral is going to be diminished, the collateral position
21 will be diminished because you're using up the collateral?
22 MR. MANNS: Yes.
23 THE COURT: Okay. So you're going to have to
24 give up unencumbered assets. How much unencumbered assets
25 have you all got?
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1 MR. MANNS: Well, it depends. I mean, right
2 now we're -- the goal is to market the IP portfolio. So
3 going --
4 THE COURT: Well, I'm just trying to
5 understand what are they taking and what's the value of that.
6 So what's the value of the unencumbered assets that they want
7 a lien on?
8 MR. MANNS: Well, as far as the IP is
9 concerned, that's the million dollar question in this case.
10 We're not sure exactly what that's going to bring at market.
11 And so that's going to be market tested in connection with
12 the post-petition marketing sales process.
13 THE COURT: Okay. So how much are you asking
14 for it?
15 MR. MANNS: You know, it's really difficult to
16 ascribe a value to it at this moment. And I know we have
17 some interested parties who actually have bowed in who are
18 going to be bidding on those assets. And so I'd prefer not
19 to speculate. But we have received some offers on those
20 assets and the assets as a whole, to this point. And we are
21 already entering into non-disclosure agreements with other
22 parties who have expressed interest in those same assets.
23 And so --
24 THE COURT: Okay. So how much money are you
25 going to be using between now and December 30th?
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1 MR. MANNS: May I consult with our financial
2 advisor?
3 THE COURT: Sure.
4 MR. MANNS: Thank you.
5 Your Honor, less than 6 million. And if it would be
6 helpful, we could walk you through those numbers. But in
7 talking with Mr. Stewart, we believe it will be less than 6
8 million.
9 THE COURT: So you're looking for authority to
10 use a little bit less than $6 million between now and the end
11 of December, right?
12 MR. MANNS: That's correct.
13 THE COURT: Okay. So potentially that's the
14 diminution in value of your collateral is that $6 million?
15 MR. EASTLAKE: That is correct, Your Honor.
16 And it would only be to the extent of diminution in value.
17 THE COURT: Right. Okay. I don't recall your
18 declaration saying this. So point me to it -- if it doesn't,
19 maybe we need a little evidence on that issue. But are you
20 expecting -- I'm not talking about, you know, whenever we
21 have to look into the crystal ball, there's kind of a science
22 to it, or art to it, rather than science to it. But I want
23 to understand, is the debtor expecting that by spending this
24 $6 million to continue to operate in the sale process, that
25 there's going to be some amount of value to the debtor and to
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1 the unsecured creditors who now have access to be paid from
2 these unencumbered assets?
3 MR. MANNS: We do, Your Honor. It all hinges
4 on the sale process. But we do think that is a very real
5 possibility.
6 THE COURT: Okay. Is that in the affidavit,
7 or do I need evidence of that?
8 MR. MANNS: We're happy to put on evidence of
9 that. I don't believe we've articulated that specifically in
10 the affidavit.
11 THE COURT: Okay. So in the situation where a
12 lender is taking, or asking for liens on unencumbered assets,
13 which would otherwise be available to other creditors, to
14 your general unsecured creditors and priority creditors,
15 because it's unencumbered, I want to -- expect to have some
16 evidence about how that doesn't harm them. So that's what
17 I'm looking for.
18 Yes, sir.
19 MR. EASTLAKE: And, Your Honor, I was just
20 going to point out one clarification is any liens on proceeds
21 of avoidance actions, we're not seeking to encumber those on
22 an interim basis. We're reserving our right to obviously
23 take them up on a final basis. But there is some carved out
24 portion of the unencumbered assets.
25 THE COURT: Okay. Well, that's good to know,
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1 too. Because I don't grant them on an interim basis, unless
2 there's something really extraordinary going on, usually
3 involving debtor's counsel having investigated for a good
4 deal of time and representing to the Court they're not aware
5 of any. So I'll let Mr. Manns call his witness to put on the
6 evidence that we've discussed and we'll go from there.
7 You may proceed, Mr. Manns.
8 MR. MANNS: Your Honor, would now be a good
9 time for me to put on evidence of Mr. Stewart?
10 THE COURT: You may.
11 MR. MANNS: Thank you.
12 Your Honor, the debtors call Mr. John Stewart to the
13 stand.
14 THE COURT: If you'll step forward and be
15 sworn, sir.
16 (The witness was sworn by the courtroom deputy.)
17 JOHN STEWART
18 The witness, having been duly sworn to tell the truth,
19 testified on his oath as follows:
20 DIRECT EXAMINATION
21 BY MR. MANNS:
22 Q. Could you please state your name for the record.
23 A. John Stewart.
24 Q. And, Mr. Stewart, who are you employed by?
25 A. Alvarez & Marsal.
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1 Q. And what position do you hold with Alvarez?
2 A. Managing director.
3 Q. And what is your specialty?
4 A. Working with distressed companies restructuring.
5 Q. And just ball park wise, how many distressed
6 companies have you worked with over the course of your
7 career?
8 A. Probably somewhere in the neighborhood of 40 to 50.
9 Q. And how long have you been working with the debtor
10 in this case?
11 A. Not long. Approximately three weeks.
12 Q. Have you been generally involved in the day-to-day
13 decisions of the debtor over the course of those three weeks?
14 A. I have.
15 Q. Are you familiar with the debtor's finances and
16 budget?
17 A. I'm generally familiar, yes.
18 Q. Did you help prepare the budget that's attached as
19 Exhibit A to the cash collateral motion?
20 A. I did.
21 Q. Have you been generally involved in the
22 negotiations regarding the cash collateral order?
23 A. I have.
24 Q. Are you familiar with the adequate protection that
25 has been proposed in the cash collateral order to the secured
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1 lenders?
2 A. Yes.
3 Q. And you're aware that part of that adequate
4 protection package includes a lien on unencumbered assets?
5 A. That's my understanding.
6 Q. And how much do you think the debtor will spend
7 between now and the end of December?
8 A. I was eyeballing the budget. But as discussion
9 ensued, I believe it's somewhere in the neighborhood of 5 to
10 6 million.
11 Q. Are you aware that the debtors are pursuing a sales
12 process? Are you generally familiar with the sale process?
13 A. Yes, I am.
14 Q. Is it your opinion that the sale process could
15 (inaudible word) to the benefit of general unsecured
16 creditors?
17 A. Yes, I believe it could.
18 Q. Do you believe that the proposed (inaudible two
19 words), given the adequate protection package and the
20 proposed sale process is in the best interest of the estate?
21 A. I believe it is, yes.
22 MR. MANNS: Your Honor, I'll pass the witness.
23 THE COURT: Okay. Any cross?
24 MR. EASTLAKE: No, Your Honor.
25 THE COURT: Okay. If the company were to
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1 liquidate today -- and don't get nervous, I just want to
2 understand it -- what would unsecured creditors get from the
3 liquidation?
4 THE WITNESS: Today I have the assumption that
5 we'd have cash on hand. We'd have the ability to liquidate
6 accounts receivable. We would have recovery from some real
7 property located in Minnesota. Beyond that, I'm not aware of
8 additional assets that we would have that would garner
9 valuing that type of liquidation. So I don't believe that
10 with priority claims and other claims, that general unsecured
11 creditors would receive anything, under that scenario.
12 THE COURT: Okay. So Eastern District, you
13 know, we have our own vernacular for a few things. So
14 they're out of the money?
15 THE WITNESS: They're out of the money.
16 THE COURT: Gotcha. Okay.
17 Anything further for this witness from anybody else?
18 MR. MANNS: Nothing further from the debtor.
19 THE COURT: All right. You may step down.
20 All right. Any other bells and whistles you need to
21 bring to my attention for the adequate protection for the
22 lenders that's not the norm?
23 MR. MANNS: Your Honor, I think it might be
24 helpful to highlight that in talking with the U.S. Trustee,
25 we've narrowed down his issues just to one remaining issue
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1 and that is the granting of a super priority admin claim.
2 The debtor views this deal point as part of the overall
3 deal. And the order, as a whole, has been negotiated
4 extensively between the debtor and the lender's counsel over
5 the last several days. And so from our perspective, we
6 believe that the total package of adequate protection that's
7 being afforded to the lenders is part of the quid pro quo in
8 the case. And it's in the best interest of the estate.
9 THE COURT: Okay. You're talking about the
10 super priority administrative priority claim?
11 MR. MANNS: Yes.
12 THE COURT: Okay. Mr. Salitore, tell me about
13 what your concerns are, please.
14 MR. SALITORE: Yes, Your Honor.
15 We were concerned about the necessity of super priority
16 administrative claims, at least at this stage. In addition
17 to that, those are provided for in at least the last copy of
18 the order that I saw at paragraph 7. We were also concerned
19 about adequate protection, including the payment of interest
20 on the loans contained in paragraph --
21 THE COURT: Okay. Are there payments? Let's
22 talk about that. How much are the payments?
23 MR. MANNS: Your Honor, approximately 400,000.
24 There are two payments due between now and December 30th.
25 THE COURT: So $800,000?
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1 MR. MANNS: No. 400,000 total.
2 THE COURT: Oh, total. Okay.
3 All right. What else do you have, Mr. Salitore?
4 MR. SALITORE: We were also concerned about
5 the proposed adequate protection, including payment of lender
6 fees. And that's contained in paragraph 12. More ancillary,
7 related to adequate protection in the carve out, has to do
8 with paragraphs 16, 17, and 18. The Committee appears to be
9 limited to $25,000 for the investigation or pursuit of
10 pre-petition claims or Chapter 5s. We were concerned that
11 that amount was too low. And we were concerned that
12 paragraphs 17 and 18 restricted, to too great a degree the
13 Committee's ability to pursue those claims, once it found
14 them.
15 Those are our concerns, as it relates to adequate
16 protection. We have a couple of other issues. But as to
17 adequate protection, that's it.
18 THE COURT: Okay. Let me -- let's take a
19 brief recess. I want to review this real quick in a little
20 more detail. Let's take a 15 minute recess.
21 (Brief recess ensued.)
22 COURTROOM DEPUTY: We're back on the record in
23 the Nuvectra Corporation case, 19-43090.
24 THE COURT: Okay. In the -- during the
25 recess, I got the order you all are working from, because
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1 that's not the order that was in your notebook. So it gave
2 me a little bit more information than I had.
3 Okay. So I do have some questions about the order.
4 And I'm not sure if the order I'm working from is necessarily
5 your final, because I know it's been the subject of more
6 negotiations. So you all will have to let me know. Okay?
7 MR. MANNS: Your Honor, may I just speak to
8 that for a moment?
9 THE COURT: Yes, sir.
10 MR. MANNS: So we filed the proposed form of
11 order at docket number 30. And I believe that's what you're
12 referring to. And so that's the one that we've been
13 discussing this morning.
14 THE COURT: Right. Yeah. That was filed last
15 night; is that right?
16 MR. MANNS: That's correct, yeah.
17 THE COURT: Well, I don't want to shock you
18 all, or anything, but I want to tell you that at 6:13 at
19 night on a Sunday night, I was not sitting at my computer
20 waiting for you all to upload the document. So I hadn't seen
21 it before.
22 MR. MANNS: We appreciate that.
23 THE COURT: Okay. So -- but, again, I was
24 looking at the order in your notebook, which was, I guess, a
25 copy of the order that was filed with the motion. So it
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1 didn't match any of the paragraph numbers you all were
2 referring to on the record. So now I think I have a better
3 handle on it.
4 So, I do have some questions and concerns that we can
5 talk about and you all can walk me through it.
6 Okay. I don't understand this concept of paying
7 interest payments, when I thought you all were telling me
8 that it's -- there's some question, yet, about whether this
9 lender is under secured or over secured. Am I wrong about
10 that?
11 MR. MANNS: Well, there hasn't been a
12 determination made, you're right. But I think that just
13 based on we've got 5.6 million, or so, in AR to collect.
14 We've got about 9.6 million in cash today.
15 THE COURT: Okay. And does the lender have
16 security interest in both?
17 MR. MANNS: They do.
18 THE COURT: Okay. So -- okay.
19 MR. MANNS: So I think just based on that,
20 there's a very good argument they've over secured.
21 THE COURT: Well, that assumes you're going to
22 collect 100 percent of the ARs. And they're pretty close,
23 right?
24 MR. MANNS: Correct.
25 THE COURT: Because I thought the total amount
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1 of the debt was in excess of 15 million, but under 16
2 million. Is that not correct?
3 MR. MANNS: That's correct.
4 THE COURT: Okay. And then is it going to go
5 up by 6 million over the course of the next two months?
6 MR. MANNS: The debtor -- is the -- I'm sorry.
7 THE COURT: Well, I guess it just depends on
8 if there's a diminution in value of the collateral, right?
9 MR. MANNS: Correct. Correct.
10 THE COURT: Okay. But you said that you
11 thought there would be, because you're using it. You're not
12 creating any more ARs or --
13 MR. MANNS: That's correct. Well, there's 10
14 million in principal owed on the debt, on the loans right
15 now. And then other, call it 5 point probably 7 or 8 in fees
16 associated with that. And, again, the debtor has about 9.6
17 million in cash at the moment. About 5.6 in AR to collect.
18 And then --
19 THE COURT: So the debtor has almost 10
20 million in cash?
21 MR. MANNS: Correct.
22 THE COURT: All of which are encumbered by the
23 lender?
24 MR. MANNS: That's correct.
25 THE COURT: Okay. And then you also have 5 or
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1 6 -- a little bit more than 5 million in ARs?
2 MR. MANNS: Correct.
3 THE COURT: Okay. Okay. And you have done
4 some level of investigation into the validity of the liens
5 and --
6 MR. MANNS: We believe they are properly
7 perfected, Your Honor. We have --
8 THE COURT: Okay. That's one question.
9 Second question. I'm not sure we're going to be working from
10 the same documents, so let me try to do it by paragraph
11 numbers, like you suggested.
12 Paragraph 6, line 1, 2, 3, 4, 5, 6, 7. So the sentence
13 that starts on line 6 that says, except as provided herein --
14 MR. MANNS: Yes, Your Honor.
15 THE COURT: Okay. The adequate protection
16 lien shall not be made subject to or pari passu with any lien
17 or security interest by any Court order heretofore or
18 hereafter entered.
19 Question, are you -- is anybody interpreting this to
20 somehow be a priming lien? You all are not priming anybody,
21 right?
22 MR. EASTLAKE: No, Your Honor.
23 THE COURT: Okay. I just want to make sure
24 that nobody was trying to use this heretofore or hereafter
25 language as somehow being priming somebody else out there.
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1 MR. EASTLAKE: And to the extent -- just to
2 clarify, Your Honor -- there are any encumbered assets with
3 existing liens, we would take a junior position on that.
4 THE COURT: Understood. That's the reason I
5 just want to make sure. Because right here, it says you're
6 going to take -- you're not going to be subject to or pari
7 passu with any lien. And so that suggests you're not going
8 to take a junior lien. Just so you all know, right. So
9 that's inconsistent with what you just told me.
10 MR. EASTLAKE: Right. In terms of anything
11 that's already encumbered in existing liens, it would be a
12 junior.
13 THE COURT: Okay. So maybe you all need to
14 clarify that a little. But I just want to make sure --
15 because the way I read this, is you're not taking a junior on
16 anybody and there may be some argument about whether this is
17 priming or not. But I understand from the parties' position
18 that it's not intended to be interpreted as priming, right?
19 Adequate protection obligation. Is that defined
20 somewhere?
21 MR. MANNS: Your Honor, it's on page 7 right
22 above paragraph G.
23 THE COURT: Okay. Okay. Perfect. That works
24 then.
25 Okay. This business about fees and expenses on
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1 paragraph 12. Why would the Court authorize interim
2 application to pay all, quote, all reasonable and documented
3 fees and expenses of the collateral agent?
4 MR. MANNS: Your Honor, on that point, we
5 think it's reasonable and it's the market term. And I will
6 note that the parties have seven days to object to whatever
7 they notice out with respect to their fees. And we look at
8 this as just one deal point after many deal points when
9 negotiating these terms with the lenders. And from our
10 perspective, they are appropriate.
11 THE COURT: Okay. I'm talking about -- just
12 so you all understand. I'm talking about it in the context
13 of an interim application, right? An interim application on
14 very limited notice. The Court's questions would be
15 different in a final application where the stuff has been
16 vetted a little more, when people have had an opportunity to
17 look at it and see what they want to do about it. Right?
18 And so the concern is this notion of approving a pig
19 and a poke, as long as it's reasonable. And I don't know
20 what that is. I don't know if there are challenges. There
21 may not be. I don't know. But on an interim basis, the
22 Court's very leery about providing this type of authorization
23 up front, especially when you are suggesting that the loan
24 itself is 10 million principal and the balance is some kind
25 of fees and expenses and such. And I think the application
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1 said the amount of the lender's claim was a little bit north
2 of 15 million. So, again, that just makes me more leery.
3 Why does this need to be an interim, as opposed to in
4 the final?
5 MR. EASTLAKE: Well, Your Honor, I think I can
6 point out what I believe has already been stated before. And
7 that is, any cash coming in the door is simply collections on
8 pre-petition accounts receivable. There are no receivables
9 being generated post-petition. And we're dealing here with a
10 company that has already told the market it's looking to
11 liquidate and sale process. So, you know, in that scenario,
12 there's a concern and a risk that people just don't pay.
13 That it may be hard to actually collect on those receivables.
14 THE COURT: Well, it's going to be a lot
15 harder if they shut down and you have to go collect them.
16 So -- and these fees and expenses, whatever they are, they're
17 not even itemized fees of certain kinds of fees. They're not
18 associated with anything. It's just whatever they are. So I
19 don't -- again, I don't understand why that needs to be done
20 on an interim -- in an interim application. If there's more
21 definition and there's a -- and we get to a final
22 application -- a final hearing so that people have had
23 chances to ask questions about these kinds of thing, that may
24 be different. But right now, the seven days doesn't even get
25 you anywhere close to the final hearing at all. And there's
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1 been limited notice on this. So, again, what's the -- what's
2 the hurry and what are these expenses?
3 MR. EASTLAKE: So a couple of points, Your
4 Honor, in terms of the fees. You brought up the seven days.
5 This is not a blank check. There's a built-in review
6 process, a process to object. In terms of the fees on an
7 interim basis --
8 THE COURT: Well, isn't that the seven days?
9 MR. EASTLAKE: I'm sorry, Your Honor. Could
10 you repeat that?
11 THE COURT: The seven days is the time to
12 object.
13 MR. EASTLAKE: That's what's in the order,
14 yes.
15 THE COURT: Okay.
16 MR. EASTLAKE: So there will be multiple
17 parties scrutinizing these fees and determining whether they
18 believe it's reasonable or not. And if they don't, there's
19 an opportunity to object. And if there's an objection, we
20 don't get paid on the portion of the fees objected to
21 until --
22 THE COURT: Okay. Doesn't the Court get an
23 opportunity to look at this, or are you suggesting that I'm
24 supposed just advocate the Court's obligations and just say,
25 you all go do what you think is reasonable?
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1 MR. EASTLAKE: Your Honor, I think the Court
2 would look to at it, to the extent there's an objection. I
3 mean, the U.S. Trustee. If there's going to be a Committee.
4 If the debtor's think --
5 THE COURT: Yeah. But of all of those people,
6 the person who's the most experience with fees is this Court.
7 But, again, why does this need to be done on an interim -- is
8 there some reason, there's some sort of expense that needs to
9 be paid, or some reason why this stuff needs to be done in an
10 interim application? That's the Court's concern.
11 MR. EASTLAKE: Right, Your Honor. And again,
12 we go back to the first part of the hearing on cash
13 collateral. We're now looking at pushing a final hearing to
14 December 30th. That's a long time.
15 THE COURT: Uh-huh.
16 MR. EASTLAKE: This case was filed November
17 12th. So we're in a languish in bankruptcy six to seven
18 weeks hoping we collect on receivables. And like I said,
19 it's not intended to be a blank check by any means. It can
20 be scrutinized. There can be objections, if someone doesn't
21 think they're reasonable. But the lenders would like to
22 have --
23 THE COURT: What are these fees for?
24 MR. EASTLAKE: Professionals.
25 THE COURT: For what? Doing what work?
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1 MR. EASTLAKE: Well, cash collateral.
2 THE COURT: So your attorney's fees?
3 MR. EASTLAKE: Correct. They would include
4 attorney's fees, yes. And going back to that. We would
5 obviously be circulating our invoices and subjecting it to
6 scrutiny.
7 THE COURT: So what you're looking for in this
8 paragraph is just a process for getting that paid; is that
9 right?
10 MR. EASTLAKE: That's correct.
11 THE COURT: Okay. Well, then you need to
12 change it. Because I'm not authorize the debtor to make the
13 payments. We'll a put a provision in there for the process.
14 And if the process happens, occurs and there's no objections,
15 then the debtor would be authorized. So that paragraph needs
16 to be revised to provide that the lender -- the collateral
17 agent will provide copies of all fees and expenses to the
18 Court, the debtor, the U.S. Trustee, and -- the Creditor's
19 Committee, if one is appointed, it's not going to be -- I
20 don't know when and if one would be appointed. And anyone
21 else who requests a copy, okay, of those invoices. That
22 should be done -- okay. And then when you've filed the
23 documents and such, you can contact my courtroom deputy to
24 get a default setting date, so that we'll have a hearing date
25 which will be on a minimum of -- will be approximately 14
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1 days from the date of the filing of your documents. Okay?
2 So you can get a hearing date. That way, if there's an
3 objection, we'll already have a hearing date that we can take
4 care of it on. If there is no objection, then we'll have the
5 hearing. And if the Court has questions, we'll have
6 questions.
7 MR. EASTLAKE: And just some clarification,
8 Your Honor. When you say filing, do you mean filing like
9 with the Court on the docket? Because I don't think that was
10 intended. Rather, circulating copies to all of the various
11 notice parties that Your Honor just mentioned. We're happy
12 to do that.
13 THE COURT: Okay. How is the Court going to
14 know what your fees are and such?
15 MR. EASTLAKE: Because we would be sending the
16 Court -- I --
17 THE COURT: How would you send the Court,
18 except to file? See, normally, the way -- but for these
19 issues, the standard way is the creditor would file a proof
20 of claim. That proof of claim would say, you owe me X
21 dollars, Y dollars. You know, X dollars for principal, Y
22 dollars for interest. And here are all of our fees and such.
23 Right? That's kind of the -- so the Court would see that.
24 Okay. Here, you're talking about circulating something among
25 yourselves. The Court wouldn't see it at all. You all would
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1 do whatever you're going to do on this limited notice right
2 now. And I'm very uncomfortable with it.
3 If there's appropriate notice, people get to see it and
4 the Court gets to see it. We may not have any questions.
5 Okay? But we need to have -- I think we've talked and I
6 think you've probably heard me say this before, Mr. Manns,
7 but in bankruptcy it's about open kimono. That applies to
8 creditors' claims too, right? So if you all want a default
9 process for getting these things done so that they get paid
10 in the ordinary course, we can put into the order a default
11 process. But that process had to include the Court. Okay?
12 And, this stuff sounds like you're paying pre-petition
13 stuff too. Is that what's intended? And, frankly, that's
14 what drew my attention to this to start with. It sounded
15 like there's a bunch of pre-petition attorney's fees,
16 financial advisors, accounting fees and professional fees
17 which based on what you all told me earlier, could amount to
18 something like $5 million. And you want to just pay it after
19 you've provided some documents saying, this is what you need
20 to pay.
21 MR. MANNS: No, Your Honor. Just to clarify,
22 that's not what we were referencing with respect to the 5 or
23 $6 million. That spend is contemplated in the debtor's
24 budget for really just the limited or streamline operations
25 between now and December 30th. So that doesn't include -- I
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1 guess a small component of that might be professional fees
2 for some of the estate professionals. And then we've also
3 included the lender's professionals and that budget. But I
4 think that piece of it is only approximately $600,000 or so.
5 And so out of the 5 to 6 million that we quoted, perhaps
6 600,000 for all of the case professionals is included in
7 that.
8 THE COURT: Okay. All of that is pre-petition
9 claims, right?
10 MR. MANNS: No.
11 THE COURT: What part of that is
12 post-petition?
13 MR. MANNS: All of it.
14 THE COURT: 600,000 since -- so the creditor
15 has spent more than $600,000 since November 11th, is it, when
16 the case was filed?
17 MR. MANNS: No, Your Honor. I'm sorry. That
18 would be for all estate professionals. And so in our budget
19 we've only -- we haven't broken down the various
20 professionals and what has been allocated for them in the
21 budget. And so the lump sum for estate professionals and
22 also for lender professionals is 600,000. And that does not
23 include pre-petition.
24 THE COURT: Okay. What are the fees and
25 expenses that you all are trying to get approved on a default
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1 basis in paragraph 12?
2 MR. MANNS: Post-petition fees that the lender
3 incurs on account of its professionals. And so primarily for
4 its attorneys.
5 MR. EASTLAKE: That's correct, Your Honor.
6 It's really intended to cover the lender's professionals.
7 And we hear the Court and we're happy to provide the Court,
8 or to make -- put a process in place, as Your Honor spelled
9 out.
10 THE COURT: Okay. So you all can spell out
11 the process. But this paragraph doesn't say anything about
12 post-petition fees and expenses. This paragraph says you're
13 authorized to pay all reasonable fees and expenses. So I
14 think the first change needs to be the post-petition
15 expenses.
16 MR. EASTLAKE: And, Your Honor, that's a
17 little over 15 million number, in terms of the outstanding
18 obligations. That's where it would be included in terms of
19 fees and expenses up until the filing of the case. This is a
20 go forward, getting the lender's professionals paid, subject
21 to a process while the case plays out.
22 THE COURT: Okay. So if this is limited --
23 paragraph 12 is limited to post-petition fees and expenses of
24 the collateral agent and it's done on -- I think in the
25 interim period, 7 days is going to be way too short, during
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1 the interim until we get to a final. So I want you to do it
2 on 14 day's notice. I think if you just revise paragraph 12
3 to provide that this is only for post-petition fees and
4 expenses and do it on 14 day's notice to object. If there's
5 an objection, you'll have to contact the Court to get a
6 hearing date. Okay? It will be incumbent on the collateral
7 agent to contact the Court to get a hearing date. Otherwise,
8 I think that paragraph will work. Okay?
9 MR. EASTLAKE: Thank you, Your Honor.
10 Okay. In the carve out, how much has been set aside in
11 the budget for the carve out? Like, as long as there's no
12 default, what's the normal fees that can be paid, the amount?
13 MR. MANNS: 600,000 for all estate
14 professionals and --
15 THE COURT: For the entire --
16 MR. MANNS: Per month.
17 THE COURT: 600 per month?
18 MR. MANNS: Per month, correct.
19 THE COURT: For all estate professionals, not
20 just Committee -- not just debtor's counsel, right?
21 MR. MANNS: That's correct.
22 THE COURT: Because I think in your synopsis
23 in the motion, I think it said debtor's counsel. I don't
24 remember it saying all professionals. So that's why I wanted
25 to confirm.
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1 MR. MANNS: Right.
2 THE COURT: Okay. All right. And then
3 post-default, if there is a default or a termination, it's --
4 the carve out is the 350, right?
5 MR. MANNS: That's correct.
6 THE COURT: Okay. The lien review period
7 needs to run from the final order, not from the interim
8 order. The payment of interest -- the paragraph on the
9 payment of interest needs to provide that that can be clawed
10 back, if there is an objection timely filed and there's
11 some -- and that objection is sustained. Objection to the
12 claim, the lien -- I'm sorry, an objection or a claim -- or
13 an adversary filed as a result of the lien review period. So
14 it's that there's some determination that the lien is not
15 valid, for whatever reason, or the lien is actually under
16 secured, for example, then the interest payments could be
17 clawed back. So I just wanted to make sure you all are clear
18 about that. Because I'm accepting the debtor's
19 representation and evidence today. But, again, it's on
20 limited notice. So I'm going to be -- you're asking the
21 Court to authorize the payments, but if there's a problem
22 later discovered with respect to the lender's position, then
23 you'll have to pay it back. Right?
24 Okay. The super priority admin claim is just --
25 it's -- that's if there's a failure of adequate protection
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1 from the replacement liens and the additional lien, right?
2 MR. EASTLAKE: Just one second, Your Honor.
3 I think the way it's set up, Your Honor, in the order
4 right now is it would not be, to the extent the other
5 adequate protection is not sufficient.
6 THE COURT: Right. That's what it should be.
7 MR. EASTLAKE: It would be a super priority
8 admin claim.
9 THE COURT: Right. So to the extent that
10 the -- in other words, to the extent the other adequate
11 protection, meaning the interest payments, the super -- I'm
12 sorry, the replacement liens and the liens on unencumbered
13 property are insufficient to protect you, then you have a
14 super priority claim, right?
15 MR. EASTLAKE: Again, I don't know that the
16 order reads that way. It was just a super priority adequate
17 protection claim. But we hear Your Honor. I think that's a
18 reasonable approach. And that just may be another paragraph
19 to clarify.
20 THE COURT: Okay. You all will clarify that.
21 And then, again, no liens on Chapter 5 causes of action
22 or avoidance causes of action yet, right? You'll be granted
23 that in a final order.
24 MR. EASTLAKE: That's correct, Your Honor.
25 And also I'll just point out for the super priority admin
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1 claim, there is a carve out for payment of that from proceeds
2 of avoidance actions during the interim period. So we've
3 tabled that issue to final.
4 THE COURT: Okay. All right. Is there any
5 other open issues with respect to the cash collateral motion?
6 MR. MANNS: Not from the debtor's perspective,
7 Your Honor.
8 MR. EASTLAKE: Nor from the lenders.
9 THE COURT: All right. Mr. Salitore?
10 MR. SALITORE: I'm sorry, Your Honor. The
11 only -- and these are very minor points, compared to the
12 others.
13 In paragraph 14 that addresses events of default, in
14 sub J, restricts the debtor for a sale outside of the
15 ordinary course without lender consent. It also in sub K
16 talks about a cutoff of December 9th for being (inaudible few
17 words). That will be inconsistent with kind of what has been
18 discussed today. In sub M, would the -- whatever investment
19 banker apparently requires lender approval. And in paragraph
20 13, it requires lender consent for disposition of assets.
21 The U.S. Trustee's only concern here is that on this interim
22 basis, that may be too much of a restriction on the debtor's
23 ability to effectively use Chapter 11 for the benefit of all
24 of the creditors. That would be it for the U.S. Trustee's
25 concerns.
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1 THE COURT: Okay. The disposition of assets.
2 Which paragraph was that you're referring to?
3 MR. SALITORE: Paragraph 13, as well as
4 paragraph 14, event of default, sub J and perhaps sub M, as
5 in Michael.
6 It's clear the parties are headed towards a sale of the
7 assets. We're just -- we would want to be concerned about
8 the debtor's ability to maximize value in that sale process.
9 MR. MANNS: Your Honor, we wouldn't be able to
10 dispose of any collateral without their consent any ways.
11 And so I'm not sure that that's really inconsistent with
12 what's in K, as it stands. On M, it only requires that the
13 investment banker is reasonably acceptable to a collateral
14 agent. And so we've qualified it. And I don't think that it
15 really restricts the debtor from going out and selecting an
16 investment banker. We will consult with the lenders on that
17 point.
18 THE COURT: Okay. So you're saying you can't
19 sell it without their consent, because they have liens on
20 everything?
21 MR. MANNS: They do.
22 THE COURT: Okay. All right. What about the
23 cutoff date? What is that going to be? We discussed at the
24 beginning that that was going to have to be pushed out
25 because of the final hearing date, right?
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1 MR. MANNS: I think that will need to reflect
2 December 30th now.
3 MR. EASTLAKE: Agreed, Your Honor.
4 THE COURT: That's December 30th for interim
5 order and then the final order it will be something else,
6 assuming you get to a final order, or that's going to be it?
7 MR. MANNS: Well, I think it just provides
8 that the final order needs to be entered by December 30th.
9 THE COURT: Okay. You all are going to get --
10 we're going to have a hearing on the 30th. Are you going to
11 get me that order by the 30th?
12 MR. MANNS: That will be the intention.
13 THE COURT: Okay. Because I can enter my own
14 order, you know, three paragraphs long. But I'm pretty sure
15 that's not what you all want me to do.
16 MR. EASTLAKE: No. We will definitely make
17 sure it's before the Court with sufficient --
18 THE COURT: Why don't we make it the 31st.
19 MR. MANNS: Okay.
20 THE COURT: That will give you all time to
21 conclude the hearing, conclude your negotiations on the
22 documents, dot your Is, cross your Ts, so you can upload it
23 after that. Is that workable for everybody?
24 MR. EASTLAKE: Your Honor, I'm sorry, I missed
25 the date.
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1 THE COURT: The 31st, the day after the
2 hearing.
3 MR. EASTLAKE: Okay.
4 THE COURT: So that gives you that -- you can
5 work all night because, you know, that's what you all do.
6 MR. EASTLAKE: Right.
7 THE COURT: And get us the final document.
8 Okay? Is that fair? Let's do that.
9 And then -- okay. I do request that with respect to
10 the paragraph on the disposition of assets, you're saying you
11 can't sell any assets because they're subject to -- or you
12 can't -- yeah, you can't sell outside the ordinary course of
13 business without the prior written consent. I would like
14 to -- I'm assuming, based on what you all have told me, that
15 they have liens on everything. But I would like that
16 paragraph to provide that to the extent they have a lien on
17 assets, you can't sell any of their collateral without their
18 prior written consent. Okay? That way if, you know,
19 magically you find something that everybody forgot about, or
20 there's something that is unencumbered, you may be able to
21 sell it without their consent. I don't know what that is.
22 But since we're sitting here with very limited notice, I
23 think that's fair. Any problems with that?
24 MR. EASTLAKE: No, Your Honor.
25 THE COURT: Okay. Thank you.
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1 All right. With all of the changes we've discussed on
2 the record, the Court will approve the sale -- I'm sorry,
3 will approve the cash collateral motion as negotiated by the
4 parties and as discussed -- with the modifications we've
5 discussed on the record today.
6 MR. MANNS: Thank you, Your Honor.
7 MR. EASTLAKE: Thank you.
8 THE COURT: All right. And you have your
9 final hearing date, right?
10 MR. MANNS: Would it be best -- should we
11 contact chambers regarding a time, Your Honor, or would you
12 like to --
13 THE COURT: No. Let's do that right now.
14 Let's make it 10:00; is that good?
15 Okay. We'll make it 10:00. That gives you all the
16 morning to try and knock out whatever you all need to knock
17 out. And then --
18 MR. EASTLAKE: That would be on the 30th,
19 correct?
20 THE COURT: On the 30th, right. Okay?
21 MR. MANNS: Thank you, Your Honor.
22 MR. EASTLAKE: Thank you.
23 THE COURT: All right. Okay. So let's then
24 return to the motion to extend the time for filing schedules
25 and statement of financial affairs.
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1 Does anyone wish to be heard any further with respect
2 to that matter?
3 All right. Based on the arguments before the Court and
4 the Court having approved the use of cash collateral on an
5 interim basis and set a final hearing, the Court will approve
6 the extension of time to December 10th. Okay? I want you
7 all to -- I know that with a bankruptcy filing, there's all
8 kinds of things coming at everybody, the debtor's pretty
9 quickly and things. But this is a very important issue for
10 the Court. We really can't get much running, until we see
11 those documents, those papers. And so I would encourage you
12 all to look at our local rules about any further extensions
13 beyond the 10th, beyond the initial 15 days. They're very
14 difficult to obtain. And there's a reason for that. And if
15 we can't get a 341 Meeting conducted, your case is going to
16 really be moored. Okay? So I like to move your case along
17 fairly quickly, so that you all can get to the results that
18 you all are looking for. But we can't go there without your
19 schedules and statements. So this is not just a check the
20 box issue. This is an issue with -- for making sure that you
21 can get your case moving along smoothly. Okay?
22 MS. SHAH: For the record, again, Your Honor,
23 Shivani Shah on behalf of the debtors. We appreciate that
24 and understand the importance. And so we will diligently
25 work to get those done.
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1 THE COURT: Okay. And then I'm understanding
2 that we will need to amend the -- because of the extension,
3 there will have to be a new notice sent out to creditors and
4 you're going to work with your -- the noticing agent to send
5 out the revised bankruptcy filing 341 Meeting notice?
6 MS. SHAH: Yes, Your Honor. Once we've
7 confirmed that there's a new 341 that's scheduled, we will
8 serve out that notice.
9 THE COURT: Perfect. Okay.
10 MR. SALITORE: Just very briefly. We would
11 schedule that meeting for December 20th at 10:30 at the Plano
12 Center. And we would ask that that notice also include a
13 reference or notification about the, or at least publish the
14 website that I understand the claims administer is going to
15 be preparing or putting up.
16 MS. SHAH: We will do that, Your Honor.
17 THE COURT: Okay.
18 MS. SHAH: And the website is up and live.
19 THE COURT: Okay. So you're going to file
20 that notice with the Court, right, and then serve it?
21 MS. SHAH: Yes.
22 THE COURT: Okay. Thank you.
23 All right. Are we ready to move on to the next item?
24 MS. SHAH: Yes, Your Honor.
25 The next item on the docket -- the agenda is the motion
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1 to limit notice. And I know we've briefly touched on this
2 and we're in agreement with Your Honor that notice and due
3 process are incredibly important.
4 Due to the nature of the debtor's creditor matrix and
5 the fact that there are a number of equity holders, we're
6 requesting that we limit notice with regard to motions so
7 that they're not served on all of the equity holders and like
8 vendor creditors. However, when issues are directly relevant
9 to equity holders, prior to an event happening, we will file
10 8-Ks, as well as issue press releases. So, for example,
11 prior to filing -- as soon as we are able to retain an
12 investment banker, or when we determine the sales process,
13 we'll make sure that those documents and notices go out prior
14 to anything being finalized so that everyone has the ability
15 to be in the know and to have an opportunity to attend or
16 speak, if there's an issue.
17 THE COURT: Okay. Does anyone else wish to be
18 heard with respect to this matter?
19 MR. SALITORE: Your Honor, the U.S. Trustee
20 initially had concerns with the publication of the website
21 going out to the creditor body. With the re-issue of the
22 Creditor Meeting, we no longer have any issue.
23 THE COURT: Okay. All right. I think that
24 the motion, then, should be approved. You'll upload that
25 order, with the modification that we just discussed on the
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1 record, right?
2 MS. SHAH: Yes. Thank you, Your Honor.
3 THE COURT: Thank you.
4 MS. SHAH: The next item on the agenda is the
5 application to retain Kurtzman Carson Consultants, LLC as a
6 claims and noticing agent. That can be found at docket
7 number 4.
8 The debtor selected KCC due to their extensive
9 experience and their competitive, yet, reasonable rates.
10 Also, because they have familiarity with Your Honor and have
11 previously worked with cases in this District. Given the
12 types of service that KCC will be providing in these cases,
13 in this case, particularly, give the number of parties on the
14 creditor matrix, the claims and noticing agent is crucial to
15 the debtor's ability to properly serve and notice all parties
16 in interest.
17 On the line telephonically appearing, we have Robert
18 Jordan, who is a declarant in support of KCC's application,
19 if Your Honor has any questions.
20 THE COURT: Do you have the declaration, or
21 are you offering the declaration as evidence?
22 MS. SHAH: Yes. And I believe it should be in
23 the -- it's in the exhibit notebook.
24 THE COURT: Uh-huh.
25 MS. SHAH: Number 2.
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1 THE COURT: Okay. So Exhibit 2, declaration
2 of Robert Jordan is being offered as evidence. Any
3 objections?
4 MR. EASTLAKE: No objection.
5 THE COURT: Okay. Exhibit 2 is admitted.
6 Okay. As the noticing agent, they'll be noticing out
7 all of the Court's orders, all of the scheduled hearings and
8 such, right?
9 MS. SHAH: Yes, Your Honor.
10 THE COURT: Okay.
11 MS. SHAH: And I'd also like to add, just as a
12 housekeeping matter to make sure we have a complete record,
13 Exhibit Number 3 is their engagement letter.
14 THE COURT: Okay. Do you want to offer that?
15 MS. SHAH: Yes, Your Honor. We'd like to
16 offer Exhibit 3, Kurtzman Carson Consultants, LLC's agreement
17 for services. This is also attached as Exhibit C to their
18 application.
19 THE COURT: Okay. Any objections to Exhibit
20 3?
21 MR. EASTLAKE: No objection, Your Honor.
22 THE COURT: Exhibit 3 is admitted.
23 MS. SHAH: Thank you, Your Honor.
24 To answer your question, Your Honor, KCC will be
25 noticing and serving -- they will be serving all notices,
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1 orders, and motions to everything that is filed.
2 THE COURT: Okay. How are they going --
3 mechanically, how are they going to know about the orders and
4 motions that they need to serve? Is KCC going to just simply
5 pick it up off the docket, or are they going to -- are you
6 all sending it over to them? Or how does that work?
7 MS. SHAH: Yes, Your Honor. So every time
8 something is filed, we're in constant communication with KCC.
9 So every time we file something, we email KCC and let them
10 know that this needs to be served. And we also provide them
11 instructions on who it needs to be served on.
12 THE COURT: Okay.
13 MS. SHAH: So that all appropriate parties are
14 receiving notice and service.
15 THE COURT: Okay. How about orders entered?
16 MS. SHAH: We will also do that with orders.
17 THE COURT: Okay. So you'll be sending them
18 on to KCC?
19 MS. SHAH: Yes. They will also be monitoring
20 the docket. And, I believe, are also in the process of
21 gaining ECF, so that they can also file certificates of
22 service and are able to monitor the docket, as well.
23 THE COURT: Okay. That's in the works. I
24 think we discussed that the other day.
25 All right. We've done that with them in the CFO case,
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1 as well. So I think they kind of know how things work here.
2 All right. Does anyone wish to be heard with respect
3 to the appointment of Kurtzman Carson Consultants as the
4 claims and noticing agent?
5 Okay. All right. The Court will approve the
6 application.
7 MS. SHAH: Thank you, Your Honor. We'll
8 upload that order.
9 THE COURT: Thank you.
10 MS. SHAH: The next item on the agenda is the
11 motion for an order authorizing implementation of procedures
12 to protect confidential patient information.
13 THE COURT: Uh-huh.
14 MS. SHAH: This can be found at docket number
15 12.
16 Since the debtor sells implants and services medical --
17 used to sell implant and service medical devices used by
18 patients, the debtor maintains confidential patient
19 information. Pursuant to the Health Insurance Portability
20 and Accountability Act, also known at HIPPA, healthcare
21 providers are required to meet stringent confidentiality
22 standards with regard to the use and disclosure of certain
23 patient information.
24 While the debtor isn't a healthcare provider, the
25 debtor is still subject to HIPPA regulations, because it is a
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1 business associate of a healthcare provider. In the case,
2 doctors and hospitals. The unauthorized disclosure of
3 protected health information, including the identification of
4 a patient or any identifiable information can lead to
5 significant monetary penalties. Oftentimes penalties include
6 $50,000 fines for each violation. And this can add up to
7 over $1.5 million a year. The Bankruptcy Code requires the
8 debtor to file a list of all creditors and to disclose all
9 assets and liabilities. This inevitably would include this
10 kind of -- this protected patient information.
11 The debtor proposes that patients be excluded from the
12 creditor matrix and that their names and addresses are
13 excluded. However, what will be done, instead, is each
14 patient will be replaced with patient 1, patient 2, patient
15 3. KCC will then maintain a patient list that stays
16 confidential. And it will be made available to parties in
17 interest only after an order from this Court is entered.
18 The debtor has not received any objections or any
19 comments on this motion. Pursuant to Bankruptcy Rule 9018,
20 the debtor requests the Court approve the proposed privacy
21 procedures to maintain confidential patient information, as
22 required by HIPPA.
23 THE COURT: Okay. Does anyone else wish to be
24 heard with respect to this matter?
25 All right. The Court will approve the motion.
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1 MS. SHAH: Thank you, Your Honor.
2 The next motion on the agenda is the motion to pay
3 wages. This is docket number 17. Just a little bit of
4 background for Your Honor.
5 The debtor employs, currently employs, or as of the
6 petition date employs about 137 employees. About 134 of
7 those are full time. They also have 33 independent
8 contractors, about 11 sales agents, and 5 temps. These
9 personnel provide a variety of critical functions, which
10 include, but are not limited to, patient clinical support,
11 physician support, regulatory compliance, product support,
12 intellectual property development and maintenance, and then a
13 number of different services that maintain the business on a
14 going basis.
15 Due to the fact that the debtor is a medical device
16 company, these personnel possess specialized knowledge,
17 skill, and understanding of these products' technology. And
18 most importantly, the relationships with doctors, patients,
19 and these vendors. And all of this is essential to the
20 debtor's business.
21 For a little bit more procedural background. The
22 debtor makes payroll about every two weeks. The most recent
23 payroll was on November 8th. And the next payroll is this
24 Friday, November 22nd. In order for the debtor to make this
25 payroll, they need to fund the account by tomorrow. So it's
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1 crucial that we are able to enter an order today. Part of
2 the next payroll includes commissions earned for the month of
3 October. As of the petition date, the debtor estimates that
4 approximately $830,000, among other compensation and unpaid
5 salary, wages, and commissions are owed on account of
6 pre-petition services to employees. Approximately $475,000
7 is owed to contractors and agents. Specifically between
8 October 1st and the petition date, November 12th, the debtor
9 estimates that employees and agents are owed about $800,000
10 in commission.
11 Furthermore, in the ordinary course of business, the
12 debtor also reimburses employees and sales agents for
13 expenses incurred in the scope of their employment. And this
14 generally includes travel reimbursements, including airfare,
15 meals, and lodging. As of the petition date, the debtor
16 estimates that approximately $100,000 is owed to employees
17 and agents. This is an approximation, because reimbursed
18 expenses are often submitted at the will of an employee.
19 It's a little bit difficult, sometimes, to predict who has
20 submitted all of their reimbursements. But to the best of
21 the debtor's knowledge, this is the estimate that we've been
22 able to put together.
23 With all of these requests, the debtor requests the
24 authority to honor and pay outstanding wages, salaries,
25 commissions, and reimburseable expenses up to but not
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1 exceeding the priority cap of $13,650. In addition to wages,
2 salaries, commissions, and expenses, the debtor provides a
3 number of benefits to its full-time employees. This
4 includes, but is not limited to paid time off; health,
5 dental, and vision insurance; life, accident, and disability
6 insurance; as well as 401K.
7 The debtor has not received any objections. We did
8 receive a few informal comments from the U.S. Trustee. And
9 believe with our revised order that we will upload, we have
10 resolved the U.S. Trustee's comments. And with that, the
11 debtor requests that the Court grant the order -- grant the
12 motion and enter the order.
13 THE COURT: All right. Does anyone else wish
14 to be heard?
15 MR. SALITORE: Mark Salitore for the U.S.
16 Trustee.
17 I wanted to say that's correct, Your Honor. Thank you.
18 THE COURT: All right. So you're seeking
19 authority to pay a little over -- so 475,000, approximately,
20 for pre-petition wages and reimbursable expenses, plus an
21 additional 797,000 in commission; is that correct?
22 MS. SHAH: That is correct. Those are the
23 estimated and outstanding. However, these will be subject to
24 the priority limit.
25 THE COURT: Well, if the numbers are --
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1 MS. SHAH: So it should be a little bit less
2 than these numbers, is what should actually be paid. But as
3 of the petition date, and we're still trying to work through
4 the numbers on where things line up and which employees are
5 above and below. These are the whole numbers that the debtor
6 has outstanding.
7 THE COURT: Okay. All right. Are any of
8 these individuals insiders, who are being paid?
9 MS. SHAH: Can I have a moment, Your Honor?
10 THE COURT: You can.
11 MS. SHAH: This does include payments to
12 officers and directors, but not to any majority shareholders.
13 THE COURT: Okay. But they are being paid
14 what they have been paid customarily, or historically; is
15 that correct?
16 MS. SHAH: Yes.
17 THE COURT: Okay. So we didn't get any, like,
18 nice little bonuses or step up in pay right before bankruptcy
19 was filed?
20 MS. SHAH: No. Not to my knowledge.
21 None of these numbers include bonuses. So bonuses are
22 not even --
23 THE COURT: Well, okay. There are bonuses and
24 then there are raises, right? So my question is -- I just
25 want to make sure we're clear. It's not as if somebody was
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1 normally paid X dollars and some time during the
2 restructuring prior to bankruptcy they get, we're going to
3 give you a raise of X plus Y dollars. We're not doing
4 anything like that, right?
5 MS. SHAH: Can we have a moment, Your Honor?
6 THE COURT: Sure.
7 MS. SHAH: Thank you.
8 No, Your Honor, there are no special payments that were
9 made, or changes or increase in wages, or anything like that.
10 THE COURT: Perfect. Thank you.
11 Okay. Does anyone else wish to be heard with respect
12 to this matter?
13 All right. Based on the evidence before the Court and
14 having heard the arguments of counsel, the Court will grant
15 the motion to pay the pre-petition wages and salaries and
16 compensation, subject to the priority cap. Okay?
17 If there's any other payments to be made, you'll have
18 to file a separate motion and we'll take it up in that
19 manner. But you can pay up to the cap. Okay?
20 MS. SHAH: Understood. Thank you, Your Honor.
21 THE COURT: Thank you.
22 MS. SHAH: The final motion that I'll be
23 addressing, Your Honor, is the utilities motion. That can be
24 found at docket number 15.
25 The debtor uses traditional utility services, such as
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1 telephone, electricity, water, security lease management for
2 its various offices. The debtor has made an extensive and
3 good-faith effort to identify all of the utility providers.
4 A list identifying the various utility providers is attached
5 to the motion as Exhibit B and is in the exhibit binder at
6 Tab 4. I will note that at a first glance, this list may
7 seem incomplete, especially for the Plano location. However,
8 a number of those utilities are included in the debtor's rent
9 and, therefore, are not separate utilities.
10 Pursuant to Section 366 of the Bankruptcy Code, the
11 debtor seeks an order from the Court prohibiting these
12 providers from discontinuing services on account of
13 pre-petition invoices. Because without these basic
14 utilities, the debtor cannot operate its business.
15 Additionally, the debtor seeks approval of a proposed
16 one month utility deposit. These deposits will be held in a
17 segregated account. And the motion also sets forth a number
18 of proposed procedures, if a utility provider seeks
19 additional adequate assurance.
20 With that, Your Honor, we've received no objections and
21 no comments from the U.S. Trustee. And request that the
22 Court grant the motion and enter the proposed interim order.
23 THE COURT: Okay. Does anyone wish to be
24 heard with respect to this matter?
25 The motion is approved.
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1 MS. SHAH: Thank you, Your Honor.
2 THE COURT: Thank you, ma'am.
3 MS. SHAH: At this time I'll cede the podium
4 to my colleague, Ms. Laura Smith.
5 THE COURT: Okay.
6 MS. SMITH: Good afternoon, Your Honor. Laura
7 Smith, Norton Rose Fulbright, on behalf of the debtor. I'll
8 be addressing agenda items I through L.
9 The first motion I'll be addressing is the insurance
10 motion. It was filed on November 13th, 2019 and can be found
11 at docket entry number 9.
12 By this motion, the debtor, pursuant to Sections
13 105(a), 363, 364, and 1107 of the Bankruptcy Code seeks entry
14 of an interim order authorizing, but not directing the debtor
15 to maintain its insurance programs to satisfy the payment of
16 any pre-petition obligations relating to these insurance
17 programs in the ordinary course of its business and to renew,
18 supplement, amend, or enter into new programs in the ordinary
19 course.
20 The debtor maintains numerous insurance policies with
21 multiple insurers and includes business automobile liability,
22 products liability, Worker's Comp., general commercial
23 liability, directors and officer liability, as well as excess
24 liability, employment practices liability, kidnap and ransom
25 liability, fiduciary liability, flood, cyber, and multiple
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1 excess products liability policies.
2 I'd refer the Court to Exhibit 5 in the debtor's
3 witness and exhibit list, which lists the debtor's various
4 insurance programs. And this list was also attached to the
5 insurance motion as Exhibit A.
6 THE COURT: Okay.
7 MS. SMITH: With regard to each of these
8 policies, the debtor pays premiums to the carriers in full
9 with the commencement of the respective policy period or on a
10 prorated basis. Some policies may expire following the
11 petition date. And the debtor may be required to pay such
12 premiums in connection with the renewal of such policies.
13 And requests authority to do so as part of this motion.
14 There are no objections filed. And we did not receive
15 any additional comments on the motion of proposed form of
16 order from the U.S. Trustee. Unless the Court has any
17 additional questions or concerns, we'd ask the Court to grant
18 the relief requested therein.
19 THE COURT: Okay. Does anyone wish to be
20 heard with respect to this matter?
21 All right. The motion is approved.
22 MS. SMITH: Thank you, Your Honor.
23 Moving on to the next agenda item is the cash
24 management motion. This motion was filed on November 13th,
25 2019 and can be found at docket entry number 18.
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1 By this motion the debtor seeks, pursuant to Sections
2 105(a), 363(b), and 345 of the Bankruptcy Code for entry of
3 an interim order authorizing the debtor's continued use of
4 its existing cash management system, the maintenance of its
5 existing bank accounts, use of any existing business forms,
6 and maintenance of its existing investment practices.
7 The debtor maintains four accounts at Silicon Valley
8 Bank, which is an authorized depository on the United States
9 Trustee's guidelines for Chapter 11 cases in the Eastern
10 District. A list of these various bank accounts is set forth
11 on Exhibit 6 of our witness and exhibit list. And was also
12 attached to the motion as Exhibit C.
13 THE COURT: Okay.
14 MS. SMITH: These various accounts include a
15 lock box cash collateral account, a checking account, a sweep
16 account, and an asset management account.
17 In the ordinary course of business, customers will send
18 payments to the debtor's lock box cash collateral account.
19 At the end of each day, the lock box cash collateral account
20 funds are actually sent to the debtor's checking account.
21 When the debtor's vendors receive payments that have been
22 sent by the debtor, the payment amounts are deducted from the
23 checking account. The checking account is either swept or
24 funded respectively nightly with the debtor's sweep account.
25 So in that scenario, if the debtor has received more from its
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1 customers than has been paid to vendors, the excess is sent
2 to the sweep account. On the other hand, if the debtor has
3 paid more to its vendors than it has received from customers,
4 the shortfall is funded from the sweep account to offset the
5 negative amount owing.
6 Cash is also held by the debtor in an asset management
7 account. And that's account number 1350. When transferring
8 money out of the asset management account, the debtor can
9 only send such funds to the debtor's checking account. And
10 approximately every two weeks, typically on Friday mornings,
11 the debtor transfers an amount between 3 to 5 million out of
12 the asset management account and into the checking account.
13 And the debtor maintains approximately $5 million in its
14 checking account at all times.
15 In addition to the cash management system in the
16 existing bank accounts, the debtor uses in the ordinary
17 course of its business numerous forms, but mostly checks.
18 The debtor requests authority to use its existing check
19 stock, but would include a debtor in possession stamp on any
20 existing checks that go out the door.
21 We did not receive any objections to the cash
22 management motion, but we did receive several informal
23 comments from the U.S. Trustee on the proposed form of order.
24 Specifically, the U.S. Trustee asked that we take out
25 language in paragraph 6 of the proposed order, which had a
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1 blanket waiver of Section 345. In his comment, the U.S.
2 Trustee had indicated to us that he was already in contact
3 with the Bank. And they had already agreed to post the bond
4 required under Section 345(b). So we now have removed that
5 blanket waiver language from paragraph 6, as indicated in the
6 red line we handed up earlier. The U.S. Trustee also
7 requested that we designate existing accounts as debtor in
8 possession accounts. And we revised Section 2.1 of the
9 proposed order to reflect that change, as well.
10 Unless the Court has any additional questions, we'd ask
11 that the Court enter the proposed interim order.
12 THE COURT: Okay. Does anyone else wish to be
13 heard with respect to this matter?
14 MR. SALITORE: Mark Salitore for the U.S.
15 Trustee.
16 That is correct, Your Honor. Thank you.
17 THE COURT: All right. Well, you caught my
18 niche. Based on the changes as announced on the record
19 today, the Court will approve the motion.
20 MS. SMITH: Thank you, Your Honor.
21 Moving along. We are at the taxes motion, which was
22 filed on November 13th, 2019. It can be found at docket
23 entry number 8.
24 By this motion, the debtor requests entry of an interim
25 order pursuant to Sections 105(a), 363(b), 507(a)(8), 541,
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1 and 1107 of the Bankruptcy Code authorizing the debtor to
2 remit and pay certain pre-petition taxes and fees that will
3 become payable during the pendency of the case.
4 In the ordinary course of its business, the debtor
5 collects, withholds, and incurs sales, use, excise, income
6 withholding; franchise OPT; commercial activity severance,
7 commerce, and property taxes; as well as other business
8 environmental and regulatory fees, which I'll collectively
9 refer to today as the taxes and fees.
10 The debtor remits these taxes and fees to various
11 federal, state, and local governments, including taxing and
12 licensing authorities. A schedule identifying these various
13 authorities, along with the amount of taxes and fees known or
14 really estimated is set forth in Exhibit 7 of the witness and
15 exhibit list and was attached to the motion as Exhibit A.
16 The debtor pays the taxes and fees on a periodic basis,
17 submitting them monthly, quarterly, semi-annually, or
18 annually, depending on the nature and incurrence of these
19 taxes and fees.
20 The debtor believes that it's substantially current
21 with its taxes and fees. But seeks authority, pursuant to
22 this motion, to make any payments where taxes and fees
23 accrued or incurred post-petition; taxes and fees accrued or
24 incurred pre-petition, but were not paid pre-petition, or
25 were paid in an amount less than actually owed; and finally
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1 where taxes and fees were paid pre-petition by the debtor,
2 but were lost or otherwise not received in full.
3 There are no objections filed to the motion. And we
4 did not receive any comments from the United States Trustee.
5 So unless the Court has any additional questions or concerns,
6 we'd ask that the interim order be entered.
7 THE COURT: All right. Does anyone else wish
8 to be heard with respect to this matter?
9 All right. Based on the Court's review of the motion
10 and having heard the arguments of counsel, the Court will
11 approve the motion.
12 MS. SMITH: Thank you, Your Honor.
13 The final motion is the warranty motion. This was
14 filed on November 13th, 2019. It can be found at docket
15 entry number 14.
16 The debtor seeks authority pursuant to Sections 105(a)
17 and 363(b) of the Bankruptcy Code to maintain and honor its
18 existing warranty program and the obligations there under.
19 As part of the debtor's business, the debtor offers a
20 limited warranty on its Algovita System. The specific terms
21 and conditions of the warranty are set forth in a limited
22 warranty, a copy of which was included as Exhibit 8 on the
23 debtor's witness and exhibit list and which was attached as
24 Exhibit C to the warranty motion.
25 In 2018, there was approximately $1.5 million in claims
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1 made under the debtor's warranty program. In conjunction
2 with the warranty program and as a component of its current
3 liability, the debtor maintains a warranty reserve on its
4 financial books and records for any potential claims that
5 customers may have. The debtor estimates its warranty
6 reserve, based upon an analysis of all identified or expected
7 claims in an estimate of the cost to resolve such claims.
8 Factors that affect the debtor's warranty liability include
9 the number of units sold, historical and anticipated rates of
10 warranty claims, and the differences between actual and
11 expected warranty cost per claim. The debtor periodically
12 assesses the adequacy of its warranty liability and adjusts
13 them out, as necessary. The reserve amount on the debtor's
14 financial books and records as of the petition date was
15 approximately $282,000. As of the petition date, the debtor
16 does not have any open warranty claims. But claims may arise
17 under the program after the petition date, because
18 approximately 2,000 patients have been implanted with the
19 device in the last 12 months.
20 Additionally as part of its warranty program, the
21 debtor also has a financial assistance policy pursuant to
22 which it gives replacements for certain items that may
23 otherwise be out of warranty, such as adhesive patches. And
24 the debtor provides for such replacements out of its existing
25 inventory that it has on hand. From a pure cost perspective,
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1 the debtor estimates that such replacements are roughly
2 100,000 per month.
3 It's customary and expected in the debtor's industry
4 that customers obtain a warranty to assure the value and
5 quality of the debtor's products. The damage to the debtor's
6 reputation, in the event it's unable to honor its warranty
7 program would be significant. Moreover, there is exigency in
8 improving this requested relief, because the warranty program
9 covers medical devices. It's, therefore, critical to the
10 ongoing success of the debtor's operations that the debtor
11 honor and maintain its existing warranty program.
12 There were no objections filed to the motion. And we
13 did not receive any comments from the United States Trustee.
14 Unless the Court has any additional concerns, we'd ask that
15 the interim order be entered.
16 THE COURT: All right. Does anyone wish to be
17 heard with respect to this matter?
18 All right. The motion's approved.
19 MS. SMITH: Thank you, Your Honor.
20 And just as a housekeeping matter. To the extent that
21 we did not formally offer our exhibits today, I would
22 formally offer the Debtor's Exhibits 1 through 9.
23 THE COURT: Okay. Any objections to -- I
24 think we've already gotten 1 through 3. So any objections to
25 any of the Exhibits 1 through 9?
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1 All right. The exhibits are admitted. Thank you.
2 Okay. And one other housekeeping matter. All of the interim
3 motions, final hearing is the same date as the final hearing
4 on your cash collateral motion. Okay?
5 MS. SMITH: Thank you, Your Honor.
6 THE COURT: Yes, sir.
7 MR. MANNS: Your Honor, I just have one more
8 clarifying comment. I just want to make sure we're
9 completely responsive to the Court's question with respect to
10 the wages motion.
11 So to answer your question, it includes only
12 pre-petition unpaid wages and commissions, et cetera. And
13 only to the amount of the priority cap. Pre-petition, the
14 debtor did make some payments to certain employees. Under
15 agreement for retention, these payments will be disclosed in
16 the statement of financial affairs. And they will be
17 available for review by creditors and the United States
18 Trustee.
19 THE COURT: Perfect. I just wanted to make
20 sure that with respect to the motion to pay the pre-petition
21 claims that was on for hearing today, that if there were
22 insider payments, particularly where they've gotten, you
23 know, raises recently, that the Court was aware of that and
24 aware of what the magnitude of that is before the Court
25 approves it. But given the representations that there
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1 weren't anything like that, that the Court has approved the
2 motion.
3 And then with respect to any other wage issues,
4 particularly with respect to insiders or those in control,
5 we'll take that up when it needs to be and you all will file
6 your motions, I'm sure, if you need to. Okay?
7 MR. MANNS: Thank you, Your Honor.
8 THE COURT: All right. Is there anything else
9 we need to take up for today's hearing?
10 MR. MANNS: No, Your Honor. That's it on the
11 debtor's agenda.
12 THE COURT: All right. Thank you. Parties
13 are excused.
14 Oh, yes. If you haven't been here a lot before, you
15 all should know that you should email Ms. Rasco when the
16 orders are uploaded, so she knows to go look for them.
17 Especially things that need to be signed today. We have
18 another hearing after your's. We're hoping to take a brief
19 recess before we call the next hearing. But that's the most
20 effective way to contact the courtroom deputy to let her know
21 when the orders are uploaded, okay, is through email. Email
22 it to the CRD email. You know what that is? That's our
23 generic courtroom deputy email address so that other staff
24 members can go look for that, if Ms. Rasco is otherwise
25 occupied or unavailable. Okay?
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1 So email it to that email address. I'm not talking
2 about emailing the document. You're going to upload the
3 document through eOrders upload. You just email Ms. Rasco to
4 tell her it's there, so she can go look for it so we can get
5 it signed for you today. Okay?
6 MS. SHAH: We'll do that, Your Honor. Thank
7 you.
8 THE COURT: Thank you. Parties are excused.
9 (End of Proceedings.)
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1 C E R T I F I C A T E
2 I, CINDY SUMNER, do hereby certify that the
3 foregoing constitutes a full, true, and complete
4 transcription of the proceedings as heretofore set forth in
5 the above-captioned and numbered cause in typewriting before
6 me.
7
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14 /s/Cindy Sumner
15 ______________________________
16 CINDY SUMNER, CSR #5832 Expires 12-31-19
17 Cindy Sumner, CSR 5001 Vineyard Lane
18 McKinney, Texas 75070 214 802-7196
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