Robertshaw Credit-Bid Sale Approved, Subject to Confirmation of Liquidating Plan; Debtors Warn Allowance of Invesco’s $40M in Secured Damages Claims Could ‘Blow Up’ Plan

Relevant Documents:
Agenda
DS Approval Order

Today Judge Christopher Lopez approved a credit-bid sale of the Robertshaw debtors’ assets to the ad hoc group of first-out lenders (Bain, Canyon and Eaton Vance) and equity sponsor One Rock while preserving former controlling lender Invesco’s right to assert potentially plan-critical secured claims for more than $40 million in indemnification and reimbursement. Judge Lopez also approved the amended disclosure statement and solicitation materials for the debtors’ liquidating plan on an uncontested basis and set a confirmation hearing for Aug. 2 at 10 a.m. ET.

The debtors, ad hoc group and the official committee of unsecured creditors stipulated at the hearing that the sale would not close until after confirmation of the plan, preserving Invesco’s right to assert its claims and avoiding the need for Invesco to seek an emergency stay of the sale order pending appeal. The stipulation effectively resolved Invesco’s objection to entry of the sale order and set up further litigation with Invesco over the validity and priority of its claims.

Judge Lopez’s June 20 decision rejecting Invesco’s request to restore its “Required Lender” status and right to credit-bid allowed the debtors to proceed with approval of the credit bid from the ad hoc group and One Rock. However, the judge did not grant a total victory to the December 2023 payoff transaction participants – he also concluded that the debtors breached the superpriority credit agreement, or SPCA, opening the door for Invesco to assert secured damages claims.

Judge Lopez’s comments at today’s hearing suggest that he did not expect Invesco to assert large secured breach claims as a result of his decision. Before Invesco counsel Andrew Glenn of Glenn Agre provided the $40 million figure, the judge suggested an arbitrary, hypothetical value of $3 million for Invesco’s claims, apparently reflecting a belief that the claims were small enough not to threaten confirmation.

When Glenn indicated the Invesco claims could dramatically exceed the $21 million set aside for distributions under the plan, Judge Lopez seemed surprised. Debtors’ counsel, George Klidonas of Latham & Watkins, admitted that allowance of Invesco’s claims as secured obligations that must be paid in full could “blow up the plan.”

Judge Lopez agreed that if the Invesco claims are allowed as senior secured obligations under the SPCA, the debtors will have to prove they can pay the claims in full to satisfy the feasibility requirement for confirmation. However, the judge said he felt compelled to give Invesco time to file a proof of claim and fully litigate the merits rather than ruling on the claims before entering the sale order, and the post-confirmation closing stipulation provided the necessary respite.

Glenn and Shai Schmidt of Glenn Agre walked Judge Lopez through the merits of Invesco’s damages claims, using a demonstrative that details the relevant SPCA provisions. In the “Required Lenders” decision, the judge found that a $218 million loan to RS Funding, a subsidiary of the debtors’ parent, violated a covenant in the SPCA prohibiting the incurrence of additional indebtedness. Judge Lopez also found that the remedy for this breach is not restoration of Invesco’s “Required Lender” status but mandatory prepayment of the SPCA loans, starting with the first-out tranche, using all of the proceeds of the RS Funding loan.

Only $148.3 million of the $218 million RS Funding loan proceeds was used to pay off the first-out loans and eliminate Invesco’s “Required Lender” status in December 2023 – as Glenn explained, the rest was used to pay off a preexisting ABL and went to the debtors’ balance sheet. According to Glenn, under the SPCA’s mandatory prepayment provisions the debtors must pay the difference – $69.7 million – to repay the remaining first-out loans, with the remainder used to pay second-out loans and, if those are paid in full, the third-out loans.

Glenn estimated that Invesco’s pro rata share of the $69.7 million plus the more than $10 million in attorneys fees and other costs for which Invesco claims indemnification would equal more than $40 million – almost twice the amount contemplated for distribution under the plan. According to Schmidt, these claims are secured under the indemnification provisions of the SPCA and have higher priority than the first-out obligations under the SPCA waterfall, meaning they must be paid in full to consummate the credit-bid sale.

Klidonas said the debtors dispute the merits of the claims asserted by Invesco and that the claims qualify as senior secured obligations that must be paid in full. The debtors’ amended plan would classify Invesco’s damages claims under the SPCA as a “Funded Debt Deficiency Claim” entitled to a recovery of no more than 3%, according to the disclosure statement.