Court Approves Harvest Sherwood Replacement DIP From Stalking Horse Atlas Grove Over Objection from Litigation Funder Burford Capital

Legal Analysis: David Zubkis

Relevant Documents:
Proposed Replacement DIP Order
Proposed Bid Procedures Order

Judge Stacey G.C. Jernigan approved today the Harvest Sherwood debtors’ replacement DIP financing from third party Atlas Grove Management, overruling an objection from Burford Capital-affiliated Milwaukee Investments and Blakemore Investments. Judge Jernigan also approved today bid procedures for plan sponsorship rights. The bid procedures were unopposed.

Judge Jernigan also denied an oral request from Burford to stay the effectiveness of her order approving the replacement DIP through June 19.

Existing DIP lender JPMorgan resolved its objection to the replacement DIP ahead of the hearing through the negotiation of a letter of credit that would backstop any antitrust settlement proceeds paid to JPMorgan that could potentially be subject to disgorgement.

Atlas Grove is the stalking horse plan sponsor with a bid that includes the $150 million replacement DIP (to pay off $76.9 million in JPMorgan DIP loans) and a $180 million exit facility. Judge Jernigan approved stalking horse bid protections for Atlas Grove on June 2, including a $5.4 million exit commitment fee and $1.35 million expense reimbursement.

The winning bidder of plan sponsorship rights would receive a share of the value generated from antitrust litigation assets. The debtors have asserted more than $1 billion in claims against several pork, chicken, turkey and beef producers in various antitrust and price-fixing proceedings. The official committee of unsecured creditors supports the Atlas bid.

At today’s hearing, Jason Hufendick of Sidley Austin, counsel to the debtors, told the court multiple parties had commented to the debtors the Atlas Grove plan proposal was the “cheapest litigation financing” they had seen in the course of their careers.

Both the Atlas replacement DIP and exit facility include $40 million of availability to address potential clawbacks of approximately $36 million in antitrust litigation settlements received by JPMorgan during the case. Burford has asserted a priority interest in the antitrust litigation settlement proceeds and has also appealed Judge Jernigan’s dismissal of its related adversary complaint.

Judge Jernigan found the debtors had exercised reasonable business justification in entering into the Atlas replacement DIP, noting the Atlas DIP addressed issues of plan feasibility and bolstered the chances of confirming a plan. The court said the replacement DIP reduced the risk of administrative insolvency, noting the existing JPMorgan DIP matured in October. The proposed Atlas plan is currently slated for a confirmation hearing in late July.

The court added that having the replacement DIP as a “bird in the hand” was a “wonderful thing” given there would be an opportunity under the bid procedures for competitors to potentially top the Atlas bid. Addressing Burford’s contention that the replacement DIP served to surreptitiously effect a third-party release of its claims, the court said it found no “sleight of hand” on the part of the debtors seeking to adversely affect Burford’s rights. The court also noted the official committee of unsecured creditors supported entry into the Atlas DIP.

Adam Silverstein of Otterbourg, counsel for Burford, argued the DIP functioned as a sub rosa plan that would effectively lock the debtors into the Atlas exit financing and related plan. Silverstein also said the Atlas DIP prejudices unsecured creditors because, while the JPMorgan DIP only provided for a $26 million credit bid right on the new money portion of the JPMorgan DIP, the Atlas DIP allowed for a credit bid of the full amount of DIP claims (between $90 million and $150 million) and in a downside scenario, the amount of litigation proceeds available to unsecured creditors could be reduced by up to approximately $124 million.

Silverstein also argued the Atlas DIP order would impose a non-consensual third-party release of Burford’s claims against JPMorgan with respect to its contingent “claw-back” claims against JPMorgan if it were successful on appeal. According to Silverstein, a provision in the Atlas DIP order that reserves Burford’s rights against JPMorgan in the case that Burford holds direct claims against JPMorgan not derivative of the debtors’ rights in the litigation proceeds is illusory because of ambiguity around the direct/derivative nature of Burford’s claims. Silverstein also argued the replacement DIP’s channeling of Burford claims against JPMorgan toward the replacement DIP lender would also be prejudicial as there would be complications in asserting its rights against a “stranger” to the underlying transaction.

Ryan Fink of Sidley Austin, for the debtors, argued the DIP satisfied the business judgment standard, noting it strengthened the integrity of the plan sponsorship rights marketing process by preserving the Atlas exit financing bid, which would otherwise terminate without court approval of the Atlas DIP. Fink also noted the DIP provided “modestly” better terms than the JPMorgan DIP, including a 2% interest rate reduction, PIK-only interest and an incremental $5 million in liquidity.

Fink also countered Burford’s contention that the DIP prejudiced unsecured creditors. Fink argued that in addition to the $26 million credit bid right under the JPMorgan DIP, the rolled-up DIP claims and professional fee claims hold administrative priority over general unsecured creditors, and therefore the ultimate effect on returns to general unsecured creditors would be the same under the JPMorgan DIP and the replacement DIP.

Fink reiterated the debtors’ position that the Atlas DIP order is “crystal clear” that it is only releasing the debtors’ claims and related derivative claims against JPMorgan with respect to any contingent claw-back claims. To the extent Burford was successful on appeal, the DIP order would not prevent it from asserting direct claims against JPMorgan, Fink said.