Good morning, this is judge Lopez. I'm gonna
call 25 906 for to clear Petro Finko I Will take
appearances in the courtroom if anyone's on the
line, please hit five star and I will unmute
your line For the US trustee I'm standing in
for my colleague Andrew Jimenez. Okay. Good morning.
Mr. Luz good morning And I will unmute a few
lines here. 312 number. Yep. Good morning, Your
Honor. Jack Lewis from Kirkland Alice on behalf
of the debtors. I believe my colleague Dave Gremling
will be on as well. All right. Here's a 312 number.
Another 312 number. I just unmuted. And here's
a 212 number. Your honor Michael Cohen Okay,
I just unmuted two more lines if you're on the
line For Cleopatra, please make an appearance.
Mr. Scott. Good morning Good morning. Your honor
Sean Scott of Mayor Brown LOP on behalf of co
-foss finance GmbH one of the factors. Alrighty
Okay, good morning mr. Higgins All right, 6 -3
-2 number. Good morning, Your Honor. Dave Gremling
of Kirkland and Allen is also on behalf of the
debtors. All righty, good morning. And Bob Richards
on behalf of Facto France on the 6 -3 -0 number.
Good morning. Okay. Mr. Luz, maybe I can turn
it to you. I know, I guess I'll set the table.
Debtors start at this chapter 11. case on November
the fourth we held first day hearings on November
the fifth and It was a related Among the first
day relief There was a motion Seeking interim
relief to allow the debtors to continue participating
in Selling receivables under certain factoring
program and modifying the automatic stay and
granting additional relief, I ask to the parties,
and they were kind enough to continue a portion
of the relief requested till today. I granted
interim relief on that basis, but we were going
to have a second hearing just to give folks a
little bit more notice. And with that said, I
will turn things over to you, Mr. Luz. Your Honor,
I would note that we filed a brief supplemental
declaration from Mr. Hickman. I hope Your Honor
had a chance to see that. I did. I did. Just
providing some supplemental context and evidence.
For the argument, Your Honor, I was going to
turn it over to my colleague, Mr. Gremling. We
might be having camera issues. Let me just ask.
I mean, I think I'm. Is there anyone who opposes
the relief requested? My understanding your honor
is that the office of the US trustee is raising
the same point that they raised at the first
day hearing. Understood. Otherwise we would not
receive formal or informal opposition. Awesome.
Thank you. Ms. Whitmer. That is correct your
honor. The US trustee does not agree with the
relief that's provided in paragraph 8, that super
priority lien, for several reasons. Obviously
Mr. Jimenez brought that up at the first day
hearing just to reiterate that This they're trying
to solve a problem. That's not before the court
at this time. It's a it's not a ripe issue that
the Order itself has findings that the sale of
those receivables are not part of the estate
and so and also the issue of the challenge period,
this super priority moots the ability to challenge
the purpose of the challenge period is mooted
when the super priority kicks in because any
ability to go after those other assets is gone.
Thank you. Okay, let me hear from The debtors.
Your Honor, this is Dave Gumbling of Kirkland
and Ellis. I am in the Goda meeting. I'm having
trouble, I think, getting my camera on, and I
can't see anybody else's screen. But if you can
hear me, I can proceed by the audio, if that
works for Your Honor. Yeah. That's how we used
to do it back in the day, and it works just fine.
Thank you. Please continue. Okay, well, first
I'll do the housekeeping on the evidence. First,
we have two declarations that are relevant to
the relief requested today. First, there's the
declaration of Mark Rotella, the company's chief
financial officer. That's at docket number four.
Mr. Rotella is on the line and available for
cross -examination to the extent necessary. And
if nobody has an objection, I'd request that
Your Honor take the declaration of Mr. Rotella
into evidence. Okay, any objection? Okay, it's
admitted. Thank you, your honor. We also have
the declaration from Jonathan Hickman of Alvarez
and Marcel, the debtor's proposed financial advisor
that Mr. Luz referred to a moment ago. That's
available at docket number 126. Mr. Hickman is
on the line as well, available for cross -examination,
and I request that your honor admit his declaration
into evidence. Any objection? Okay, it's admitted.
Thank you. Okay, Your Honor, I'll turn to the
only item on the agenda today, which is the factoring
motion and the second interim factoring order.
I'll give a little background, but I'll address
what I believe is the U .S. Trustee's concern.
And so, as Your Honor is aware, through both
the papers that the debtors have filed and the
conversation at the first day hearing, Prior
to filing these cases, the debtors had factoring
relationships with two factors. That's COFAS
and FACO France, represented by Mayor Brown and
Dentons in this case. As is common, these transactions
were structured as true sales of receivables
with a fallback in the event that the true sale
is recharacterized as a financing to a secure
financing transaction. The debtors would like
to be able to force the factors to continue the
factoring arrangement on a post petition basis.
So we believe that the contracts are at least
arguably contracts to make a financial accommodation.
And so it was important that we negotiated the
post petition continuation of the factoring program
on terms that the factors would accept. And Your
Honor, we thought that this was a serious need
for the debtors. because the dip was sized, the
dip that Your Honor approved on an interim basis
last week was sized with the assumption that
the debtors would have continued access to the
factoring program to meet their capital needs
over the next 60 days, which should carry us
to and through confirmation. And Your Honor,
to give it some context, the debtors sell a little
over $5 million of receivables every day. which
would provide over the next 60 days approximately
$280 million of liquidity on a rolling basis.
As of today, the debtors do not have a committed
alternative to fill the liquidity hole that would
result from the factoring program being terminated.
And as set forth in the Hickman Declaration,
even if the debtors were able to quickly source
incremental financing to fill the hole left by
termination of the factoring program, It is likely
that an alternative financing would include all
of the following. A higher cost of capital in
the way of fees and interest. It's not a secret
that financing tends to be relatively inexpensive
capital where the factoring program is relatively
inexpensive capital. And it would also likely
include senior liens over the receivables, which
is part of what we propose as our conditional
relief for the factoring program. And it would
also likely include super priority claims similar
to the conditional release that we're requesting
here. So recognizing the need to continue the
factoring program rather than, for example, increasing
the size of the DIP facility, the others negotiated
with the factors and the DIP lenders were part
of that conversation. to continue the pre -petition
factoring program on a post -petition basis on
terms acceptable to the factors. The terms are,
by and large, consistent with the pre -petition
terms, and they continue to represent a cost
-effective source of liquidity. And like in the
pre -petition transactions, the post -petition
transactions are structured as true sales with
a fallback to a secure post -petition financing
type transaction in the event that a post -petition
receivables transaction is recharacterized. I
want to pause and emphasize two points in there.
The first one is that the liens and the super
priority claims only come into effect in the
event that a factoring transaction is recharacterized.
If the true sale nature is not disturbed, then
they never come into play. And this conditional
relief is only applicable to post -petition factoring
transactions. It is not relevant to the pre -petition
financing transactions that have already happened.
The U .S. trustee argues, I think, that the grant
of a super priority claim undercuts the ability
of parties of interest to challenge the pre -petition
financing transactions. This is inconsistent
with how the order is set up. The order provides
a stipulation that de -factoring transactions
are true sales in paragraph 3, but this stipulation
is subject to a challenge period set forth in
paragraph 22, which provides a challenge period
for – until the earlier of confirmation, or 60
days. And as your Honor is aware, our confirmation
hearing is scheduled for December 16th, so currently
that would be the earlier date. Instead, the
super priority claim is a necessary component
to secure the beneficial liquidity that the factoring
program represents, and we think it's an integral
protection for the factors' reasonable expectations
in the context of these Chapter 11 cases. And
just a note on that, Your Honor, what we're talking
about, and I think Mr. Scott aptly characterized
as a corner case last week, is the unlikely scenario
where a court I think we're specifically concerned
about foreign courts. Recharacterize the factoring
transactions from sales to financing transactions.
And then we think that the super priority claims
are appropriate protection for the factors in
that context, because the foreign court wouldn't
necessarily stop at recharacterizing the factors
as a senior secured financing transaction. the
automatic grant of a lien in that context may
not comply with local laws requirements for perfecting
a lien. Additionally, that same foreign court
might order that the lien is invalidated, the
lien that the factors hold, or grant a senior
lien to another party. So what the super priority
claims are designed to protect is not only a
recharacterization of the transactions, but what
is essentially an erosion of the factors' ability
to get recourse against the receivable that they
thought that they had and make sure that they
are made whole, notwithstanding the conflicting
order of a foreign court. And because it came
up at the last hearing, I also want to address
the release in paragraph four, which relates
solely to the pre -petition status of the factors.
It has no effect on the post -petition transactions.
We think that the release is a valid use of the
debtor's business judgment in light of the serious
need that the debtors have for the liquidity
provided by the factoring program. But I also
want to point out that the release itself is
just a debtor release, not a third -party release,
and remains subject to the challenge period set
forth in Paragraph 22. So simply put, the super
-priority claims that we believe the U .S. trustee
is focused on. are granted only to the extent
that the receivables transactions are later deemed
to constitute a financing, in which case we think
it's entirely appropriate to view them through
the lens of 364 and grant them liens and super
priority claims, which we think are par for the
course in the event that we are examining these
transactions as post -petition financing transactions.
The vast majority of dip orders to every single
dip order, including the dip order in this case,
grant super priority claims to parties providing
post -petition financing. The only difference
here is that granting such claims may be, and
we're hopeful that it will be an academic exercise
because such claims are granted only if a party
successfully recharacterizes a post -petition
factoring sale as a financing. And the debtors
– I'll just note for the record, Your Honor,
the debtors have received no objections to this
release from any – this relief from any economic
stakeholder. In fact, the vast majority of those
affected – and I'm talking about the dip lenders
in the parties to the RSA, who are over 90 percent
of the first lien lenders and over 80 percent
of the second lien lenders, which are the only
classes of creditors that would be impaired under
our proposed plan. have affirmatively contended
to this release. In light of that, the debtors
respectfully request that the court overrule
the U .S. Trustee's objection to not enter a
further interim order permitting the debtors
to continue their factoring arrangements. Unless
your honor has any questions, I would request
that you enter the order that we submitted at
docket number 124. Okay, so I'm gonna just note
for the record the court Granted interim relief
on this point And we had a second hearing I want
to make sure that we had a little bit more notice
out to parties who may be affected by this and
to think about it The the concern raised by the
debtors and the factoring parties is that they
are purchasing foreign Receivables and and subject
to exposure Potentially by a foreign court and
there's nothing improper. It's just there's a
There's always an inherent risk and some here
this case is Set for playing confirmation next
month to a lot of Whether someone can successfully
challenge something in a month and a foreign
jurisdiction is outside of my Realm of expertise,
but we're talking really academic Stuff but to
someone who was buying receivables it is important
and so This is a factor with kind of a fallback
that they can convert essentially into kind of
a debt form of financing And I I understand that
I'm an overall the trustee's objection. I think
it's permissible I think I think this is a ship
that will never reach shore, but yet still it's
important for foreign entities to have some comfort
that if the receivables are there that this would
convert into a dip. I think this is kind of really
unique in this case and I don't see these happening
too often. And so I think this is a unique solution
to a unique problem and I'm comforted that we
took a little bit more time. I think the trustee
was right to bring the objection. I'm just comfortable
with where we are and I'll sign the order. and
we'll see what we are and Sounds like next month.
So right We're seeing each other next month All
right folks well sounds great you'll have a good
day. Thank you very much. I've signed the order
Thank you. Thank you. All right. Thank you