All right, we're back on the record in case number
90103. The agreements of the debtors, the appraisal
we've been speaking about, and then the late
-to -walk -ins letter, the Amazon letter we've
been speaking about. Right, any objection to
Exhibits 5 through 9? Your Honor, we do object
to Exhibit 8, as you say. That's the appraisal.
Your Honor, it's clearly a business record. It
was commissioned by JLL and the Ordinary Course
of Business on its base. It's also admissible
for the impact on the reader, as the debtors
indicated that the debtors used this in conducting
their analyses and determining what to do in
the bankruptcy and the dip financing. So both
admissible are business records, and it's also
admissible for a non -here state purpose. I'm
not sure it's admissible as a business record
to prove the truth of the matter. I think it
might be admissible as a business record to prove
that they received it or things like that. I
think the testimony with respect to what the
company did has come in. So I'm going to exclude
the appraisal as hearsay. I will admit exhibits
five through seven and exhibit number nine, obviously.
But the testimony with respect to the exhibit
came in. That still stays in the record. Thank
you, Your Honor. Todd Warren will be playing
Gallagher on behalf of the debtors. Does it make
sense to get directly into the argument now on
the debt fair? Yeah, but let me, there are other
people. Mr. Sparacino had popped up. Is there
anyone else who has any? Before we get into argument,
anyone else? Has anything to say? Yes, Your Honor,
this is John Sparsino. Can you hear me? Yes,
I can hear you. Great. Thank you. I'd like to
make just a brief statement regarding the dip,
if I may. Sure. And again, for the record, John
Sparsino, appearing for Westford Capital. My
client holds a substantial face amount of the
SGUS notes. We didn't file any papers in connection
with today's hearing. Frankly, I was engaged
about 30 minutes before they began. That said,
I do want to identify several concerns that Wexford
has with the ad hoc gift proposal. Wexford is
not a part of the ad hoc club, and thus Wexford
faces substantial harm vis -a -vis ad hoc holders,
given that Wexford is outside of the favored
treatment group. As several attorneys have noted,
this is a very complex dip proposal, and so I
want to be clear that the concerns I note now
are by no means intended to be comprehensive
or all -inclusive. That said, Wexford is concerned
that the ad hoc dip and the roll -up are unnecessarily
large and that the fees and the other bells and
whistles that appear to be granted in favor of
the ad hoc group will result in an outsized recovery
to the ad hoc holders to the detriment of the
holders that are not in the ad hoc group. This
concern is true even with the participation right
as described by debtors council. Over the next
few weeks my client intends to aggressively dig
into a number of these issues including the legality
of the pre -petition doc under the pre -petition
documents of the favored ad hoc structure. The
need for an ad hoc dip at the level that's sought
by the company. The appropriateness of the fees
and the other bells and whistles and fables,
the ad hoc group that are apparently not available
to the other SQS note holders, even those that
may ultimately participate in the dip as it's
been described. And finally, whether this really
is the best or only dip available. We've already
heard testimony that... There has been at least
one other actionable proposal, although we haven't
heard any of the details on that dip and we intend
to dig into that a little bit. So we look forward
to pursuing and addressing these issues and potentially
other matters at any final hearing that Your
Honor sets for the dip motion. I have nothing
else, Your Honor. Thank you. All right, go ahead,
Mr. Gordon. Okay, thank you, Your Honor. I missed
a little bit of just general argument and then
I'll get into Amazon's objection and then Exxonix
and to the extent there are others can take those
as well. I think the testimony today very clearly
established that the debtor in possession financing
facilities offered today are valid exercises
of the debtor's business judgment. It is hard
to overstate the importance of the approval of
both of these deficits. Sachs is an iconic friend
in this. country, and absent this financing,
it is likely to face the threat of an imminent
liquidation. The debtors, as described by Mr.
Vance's testimony, the debtors were unable to
obtain credit other than the terms we've described
today. There is no other executable financing
on the table. The other proposals received by
the debtors were not actionable for a number
of reasons. Most importantly, because the primary
other alternative would have required a contentious
priming fight that the debtors were not certain
they could have succeeded on in the face of an
alternative proposal supported by over 70 % of
the... One point is important in context to the
objections I've heard Amazon make, which is that
the global debtors that we firmly believe here,
there is a unity of interest among all of the
global debtors, including Old Code 2 and its
subsidiaries. The testimony you heard today make
clear what's would likely lead to no recovery
based on Mr. Weinstein's testimony for hold code
two. So there is a complete unity of interest,
the idea that there needs to be separate independent
fiduciary at every single entity. It's not the
reality of bankruptcy. Amazon makes five arguments.
I'll take them each in turn. I'll try to go briefly.
I'll cover a couple of them together probably.
But the first argument they make in their objection
is one of corporate authority. And you heard
a couple of questions on that today. This is
wrong, as a matter of fact, and a matter of law.
As a matter of fact, Amazon's alleged consent
rights, it's at HBCGP LLC. That's near the very
top of the capital structure. But as Mr. Weinstein's
testimony, he covered that there is an intervening
cold. levels above Hold Code 2, that is the entity
that authorized Hold Code 2 to incur the DIP
facility. So, SACS's consent right and any above
that had nothing to do with what Hold Code 2
and SFD holdings are entitled to do. Even if
you found that that consent right applied, it
doesn't make what happened here in Ultraviors
Act. Moreover, we believe that. the value of
hold code two's primary assets, the equity in
the flagship. It is abundantly clear that the
highest and best use of that asset is as an operating
SACS entity, and the only way to do that is via
the proposed financing, which allows SACS to
continue to meet its obligations, make vendor
payments, and importantly, fund the rent to 12
East 49th Street, which is what funds the debt
service on the CNBS. Amazon's argument is also
premised on the flawed hold code 2 would be solvent
X in the dip. As Mr. Weinstein made clear, this
is very likely not the case and that if SACs
were to cease operating, hold code 2 would, the
value of the flagship would be very unlikely
to exceed the value of the CMBS and other costs
of liquidation to provide a recovery for any
hold code 2 creditors. Ultimately, Your Honor,
we don't think there's anything unusual here.
It's a debtor pledging a debt arguments to the
contrary. All the global debtors here, including
HoldCo2, have an identity interest. Thank you,
Your Honor. Can you hear me? We're doing our
best with the technology. Yes, I can hear you
fine. Thank you, Your Honor, and good evening.
And I appreciate your patience and your indulgence.
Caroline Reckler of Latham & Watkins on behalf
of Amazon .com Services LLC and its affiliate.
Your Honor, by way of background, Amazon invested
$475 million of preferred equity just about a
year ago, December 2024, in HBCGP LLC, the ultimate
parent of facts. Since that equity investment,
HBCGP LLC's governing documents have expressly
provided with a consent right over the ability
of the debtors to incur and guarantee new indebtedness,
such as the financing today. As a condition of
that equity investment, which is presumptively
worthless, Amazon entered into a commercial agreement
with Fax, under which Fax pays Amazon certain
fees in exchange for selling Fax products from
a variety of luxury brands on Amazon's website.
A number of the debtors are obligors or guarantors
on the commercial agreement, including, most
notably, the debtor we've spoken most about today,
Debtor Fax Fideship Holdco 2. Through various
affiliates, Amazon is also party to another of
other business contracts with debtors Sachs &
Co, Sachs .com, Neiman Markets Group LLC, and
Neiman Markets Group LLC to cover services, excuse
me, such as cloud computing and storage services.
As you're aware, Amazon filed an objection to
the DIP, and to state the obvious, Amazon objects,
and Amazon has a consent right. There are three
DIP facilities. The ADL DIP facility, the ESCA
SIP facility and the OPCO DIP facility. For now,
we object only to the ESCA SIP facility because
that is the DIP where only HOCO 2 is an obligor.
Amazon objects to those ESCA SIP facility primarily
with respect to debtor SACS flagship HOCO 2,
which holds the equity in the entity that owns
the debtor's Fifth Avenue flagship property,
which is the debtor's admitted Crown Jewel asset.
That entity has guaranteed $475 million in claims
to Amazon under our commercial agreement. Amazon
has already filed a motion today to reject that
agreement and that will be heard in the coming
days. Amazon does not object to the rejection.
So that will give rise to a $475 million claim
against that entity, and at least a $900 million
claim against the other debtors. This dip will
severely impair Amazon's recovery, in particular
on the HoldCo2 claim. Our objection, in some
sense, is pretty straightforward. We do not believe
HoldCo2 needs this dip at all, and HoldCo2's
incurrence of the dip obligations shouldn't be
approved at all. and certainly shouldn't be assuming
the obligations of its affiliates on pre -petition
debt. But for today's purposes, we really just
want to preserve the status quo and protect our
rights given that this is an emergency hearing
for a debtor that crashed into bankruptcy. The
debtors are asking the court to do things in
the dip that are more extraordinary than the
roll -ups and cross -collateralization that this
court already considers extraordinary under the
complex case rules, specifically rules C8B and
C. There is no justification for these provisions
at all, let alone on emergency basis. As I noted,
the status quo should be preserved for the next
14 to 21 days so that a creditors committee can
be formed and any relief during the interim period
should only be granted to the extent necessary
to prevent immediate and irreparable harm. nothing
more. We have little to no confidence that the
debtors will emerge from bankruptcy as a going
concern business. Amazon and the brands put their
trust in fact and have since been harmed significantly
by the debtors' general mismanagement and failure
to pay and honor their obligations. Amazon values
the brand community, who are not just participants
in the industry, but its foundation and its leaders.
Unfortunately for Amazon and the Grants, we have
serious concerns that this case may not have
a successful ending, and we think that requires
extra scrutiny on what gets approved at a first
-day hearing. This is not a nice prepack, or
even a prearranged case with a restructuring
support agreement. This case may end in a liquidation.
And as I will discuss more, if a large interim
dip with a roll -up is approved today, And then
there is a liquidation that would have a devastating
impact on the claims Amazon and the brands have
at Code Code 2. It would all but eliminate a
recovery for those Code Code 2 creditors. And
even though they would likely be paid in full
today without this dip. We're asking your honor
to preserve that recovery at least until we have
a fair and full day to litigate our rights before
your honor. and to allow all other unsecured
creditors to do the same. This case cannot be
run for the sole benefit of the secured lenders,
and this starts us down that dangerous path.
And let me just start with a few critical facts.
First, post -crediting essentially controls the
flagship property and releases it to facts. That's
all it does. Second, it doesn't need this dick.
That was the testimony. It doesn't need any cats
at all today. It doesn't need any cash at all
in the next 21 days. The lease payments more
than cover its expenses. Good news, they've been
reduced. And to the extent it did need cash,
that's a much smaller dip than the one proposed
today. Third, just the interim dip would impose
$1 .3 billion of new debt on Code 2 for a dip
it does not need. And fourth, the full DIP would
impose $2 .3 billion of new debt on hold code
2 for a DIP again. It does not need. So with
that, Your Honor, I'll turn to the legal argument.
I have four main points. First, the debtor did
not obtain Amazon's consent to the DIP despite
the fact that it was expressly required by the
governing documents of HBCGPLC. Specifically,
Amazon has a consent rate under Section 4 .05B,
Roman at 6, of the operating agreement, excuse
me, of the LLC agreement, over the occurrence
of additional indebtedness and guarantees. I've
made it clear the debtors have disregarded that
consent, and Amazon will not provide it with
respect to this debt. Second is to get off collateralization
and lack of benefit to Hold Code 2. And Your
Honor, my colleagues and I have spent the better
part of the day talking about semantics. And
I think the titles and the semantics are important
here. We talk a lot about what a roll -up is,
and we talk a lot about what cross -collateralization
is. And Your Honor, when I read the debtor's
dip motion, I looked at the helpful chart at
the front, and I was very surprised to see that
they said they would know cross -collateralization.
I don't know how you can make that statement.
I want to be very clear that our objection is
about the dip primarily at Whole Code 2. Whether
it is appropriate for Whole Code 2 to take on
the obligation and grant the liens contemplated
by this dip must be evaluated from the perspective
of that entity. There is no substantive consolidation
here. The joint administration order that your
honors signed earlier made that clear. There
are separate debtors with separate assets and
separate creditors. Each entity must be evaluated
separately. The debtor's argument that this dip
is all we got doesn't change that. The business
judgment standard does not apply here given the
absence of any decision maker who is looking
out solely for hold code two and the clear conflict.
The testimony was clear. There is nobody minding
the house for hold code two. There are a lot
of incredibly well -respected professionals involved
and incredibly well -respected independent directors,
but none of them wear one pack. But even if we
assume that the sound business judgment standard
applies, this doesn't get failed nonetheless.
It does not satisfy the sound business judgment
standard. Why? So let's look at the benefits
and the burdens. As any uncomplicated city sharing
for hold code 2 would do, and I'll start with
the benefits. This dip is not so far to hold
code 2 operations. Again, hold code 2 has little
of any operations or expenses. That was the testimony.
It's a holding company that owns the flagship
entity and the 12 East 49th Street entity. And
that flagship entity also has little of any operations
or expenses other than What we approximate to
be $4 .7 million in interest per month on account
of a CMF loan. The interest is more than covered
by the rent paid by its affiliate, 12 East. But
even if that rent stopped being paid and flashed
if a whole code two needed financing to pay that
monthly interest, we're talking about a dip that
is significantly smaller by orders of magnitude
and not what's being proposed today. So the benefit
to Hold Code 2 from this dip, if there is any
at all, is de minimis, at best. And turning to
the burdens, let's look at Hold Code 2's capital
structure, pre -dip, and post. Mr. Harris walked
through the chart with the first witness. Today,
the only secured obligation that we're aware
of at Hold Code 2 is a limited guarantee of certain
notes held by the DIP lenders and others in the
amount of $200 million. But that's it. It's $200
million. The DIP, however, would impose a billion
dollars of new money DIP claims and liens at
HoldCode2, and $1 .56 billion of purported Wolrock
loans, even though, to be very clear, HoldCode2
only owes $200 million of those notes right now.
Other than we risk back to the $200 million of
the roll -up, this isn't a roll -up at all and
the terminology is important. Roll -ups take
an entity's pre -petition debt and convert it
to post -petition debt. That's not what they're
doing. They're taking over a billion dollars
of pre -petition debt of other legal entities
on which Hold Code 2 is not even obligated and
making Hold Code 2 a guarantee on a secure basis.
It's not what clear what the statutory basis
for that relief would be. The debtors appear
to generically rely on sections 363 and 364.
But section 364 applies to extensions of credit
to a debtor. Nowhere does section 364 authorize
a debtor to grant liens to secure debt at another
debtor. And section 363 requires a showing of
business justification. There's no business justification
for Holco 2 to do this. we try to think about
how to fit this into a traditional role framework.
And the best we could come up with is that other
SACS entities are forcing Hold Code 2, which
may not need a DIP at all, to incur billions
of dollars of obligations, of DIP obligations,
to effectively pay off pre -petition funded debt
obligations of those other SACS entities. Why
would they do that? It makes no sense from Hold
Code 2's perspective. But it makes a lot of sense,
Your Honor, from the perspective of the other
debtors. The reality is that the other debtors,
which do have operations, they have employees,
they pay utilities, rents, all the other things
you've heard about, and which are liable on the
full amount of the pre -petition notes. They
want to use the value at the flagship and HOCO
2 to hope to salvage their operation and fund
their cases for the benefit of their creditors.
That's all at the expense of hold code 2 creditors
like Amazon and the trade creditors. You heard
the testimony $180 million of trade credit at
hold code 2 whose claims are guaranteed by hold
code 2 and who without the dip could possibly
recover in full. There was no analysis about
the recovery. There were some conclusory statements.
That's it. That's not enough your honor. This
will probably be a very complicated case and
the debtors certainly have a complicated organizational
structure. But this is actually quite simple.
The DIP lenders are using the financing needs
of affiliates of Whole Code 2 to transform $200
million of pre -petition claims at Whole Code
2 into billions of dollars of post -petition
claims with recourse to potentially significant
value in Whole Code 2. So I can understand why
facts as an enterprise might be willing to agree
to these terms. But why would hold code 2? I
can't think of a good answer. The debtor's best
argument was, it's all we got. You know what?
That's just not good enough on a legal entity
-by -entity analysis. And that takes me to my
third point, Your Honor. Governance and management.
Hold code 2 does not have an independent fiduciary
looking out for its estates and creditors. despite
the fact that Hold Code 2's interests are in
many ways not aligned with those of the debtors
as this bit makes clear. None of the professionals
were looking out only for Hold Code 2. None of
the management team and not a single director.
Hold Code 2 is member managed. There are no decision
makers there whatsoever. Decision making authority
sits at the ultimate parent, HBCGPLLC. So the
individuals making decisions for HOCO 2 are the
same individuals making decisions on behalf of
all of the other debtors. Try as they might,
these individuals can't serve all those masters.
The other debtors have every reason to use value
in HOCO 2 to raise financing they need for other
entities. Again, it's all they got. HOCO 2's
incentives are the polar opposite. They have
no reason to use that value as currency to obtain
financing that only benefits other entities.
And it's not just in the context of this dip
that those interests may conflict. It will be
persuasive throughout these cases. As another
example, it's very possible, if not likely, that
a liquidation of HOCO 2 and the flagship property
may actually be in the best interest of those
creditors. The other debtors, however, would
do everything in their power to avoid that outcome.
and we want to continue taking hold coaches'
values to subsidize a chance of recovery in their
own estates. And in addition to the flawed governance,
Amazon has serious concerns with and questions
about the debtors' management and operations.
They have blown budget after budget and blew
through hundreds of millions of dollars in just
a few months since the August liability management
financing. which has led to crashing into bankruptcy
with no game plan and no exit in sight. And you
know what, Your Honor, the $500 million of purported
exit financing is illusory. It's an option. It's
completely conditional on an acceptable business
plan, among other things. There are director
and officer issues that need to be investigated,
and I'm speaking... Our system will end this
conference in five minutes. To extend this call
for one hour, please enter the moderator pin
now. Your conference has been extended for 60
minutes. And whether that would be Chapter 5
calls of action, breach of duty, cheery duty
claims, or otherwise. And the same for the proceeds
of any D &O policy. And that takes me to my final
and most important point. Preserving the status
quo for creditors. for the creditors committee
and other unsecured creditors like the brands
to have an opportunity to be heard and to have
a full and fair day before your honor to protect
their interests, before their recoveries take
it from them by the secured lenders. And I want
to point to something in the DIP Order, and I'm
speaking to paragraph seven, it's page 16. And
I'm going to quote from the DIP Order itself.
The consummation of the pre -petition off -goal
second out notes participants. shall be final
and irrevocable as to the debtors upon entry
of this interim order. That's $721 million. It's
not subject to challenge. It's not subject to
reconsideration. Nothing. That is value that
goes out the door tonight if it is approved.
The debtors filed these cases last night at 11th
Central and the dip motion was filed this morning
around 1030, just five and a half hours before
the hearing. And now the debtors want to jam
through a dip financing package that would put
$2 .6 billion of claims at HoldCo2 for the benefit
of the dip lenders, even though HoldCo2 does
not need financing and is only liable for $200
million as pre -petition notes. Your Honor, we're
talking about cross -debtor, cross -collateralization.
We are not talking about a routine... Roll up,
we are not talking about a more simplified capital
structure where the pre -petition lender is properly
perfected on all of the debtors pre -filing.
I get it, I've been there, and I've asked Your
Honor to do the same. This is not that. The debtors
have not shown that there would be an immediate
and irreparable harm if the DIP is not approved
at Polco 2. And again, we do not care if the
DIP is not approved at the other debtors. Have
at it. Approve all of it. Just leave Hold Code
2 out of it. There is no emergency that requires
Hold Code 2 to incur these dip obligations. Hold
Code 2 does not need any cash in the next 21
days, and Hold Code 2 would not suffer any injury
in the next 21 days. That is the standard, Your
Honor. And it's certainly no emergency great
enough to deprive Amazon and other unsecured
creditors of their due process rights. And on
the flip side, if this interim dip is approved
tonight, it will be immediately devastating to
Hold Code 2 and its creditors. It will impose
significant new debt on Hold Code 2's secured
and senior to all of the pre -existing creditors.
It will likely mean that those creditors will
go from getting a significant recovery to no
recovery. That is just from the interim dip.
And on the substance, there are serious concerns
with the terms of a dip, especially but not limited
to the cross -collateralization that it contemplates.
There are serious concerns with the debtor's
management. There are serious concerns with the
debtor's governance. The bondholders must also
agree, which is why presumably most of the debtor's
pre -positioned executives have been terminated
and they're requiring their own independent director.
There are serious concerns that Amazon and other
insecure creditors, including the brands, may
have been induced to provide services to the
debtors under false pretenses. Time will tell
if that's indeed true. And all of that impacts
the GIF, and parties should be given the proper
time under rules 6003 and 400 so that we can
do discovery and depositions and analyze whether
a liquidation may actually be better for the
whole Code 2 estate. Or perhaps there'll be a
negotiated resolution between now and the final
hearing. But until then we need to preserve the
status quo and I personally know that in this
court all constituents are given due process.
Whether Amazon wins or not that has yet to be
decided but I know that in this court your honor
will give me the chance to put on my best case
after discovery and afford my client the due
process to which it is entitled. Only once your
honor has all the facts before him is it appropriate
for you to call balls and strikes when the outcome
could be so consequential to those like Amazon
and the brands. We cannot change the rights of
creditors at Whole Pro 2 and effectively eliminate
any chance of their recovery in this manner on
such short notice. There is too much uncertainty
in this case to make significant, drastic rulings
that would effectively eliminate creditor recoveries
on the first day of a case. To be clear, we think
the release should be denied at a final hearing
too, but at the very least, it needs to be adjourned
until then for due process. If the debtors need
financing to survive for 21 days, then they can
incur it at the other debtors. At the minimum
level, they need it, where the debtors actually
have operations and an actual need for financing.
But no disclaims should be opposed at HOCO 2
today with respect, with all rights reserved
for all parties, a creditors committee in particular,
until a final hearing. And Your Honor, unless
you have any questions, I'll leave it today,
given that the hour is so late. All right. Thank
you very much. Your honor, may I be heard? Yes,
sir. Your honor, I'm going to be very brief,
but I'm going to start with a statement that
Better's counsel made and the theory that he
put. He said, I understand why people are objecting
this financing could have been done outside bankruptcy.
So why can't it be done inside of bankruptcy?
And I think that's exactly the point. This could
not be done outside of bankruptcy. It would be
a classic fraudulent conveyance. What you are
actually asking for, whether this company is
solvent or insolvent, is to put on a separate
subsidiary over $1 .5 billion of debt, and what
is it getting in exchange? It doesn't need the
cash. It doesn't need money. It's not getting
reasonably equivalent value. That's what they're
asking you to do, and they're asking for you
to approve that. So in this instance, While my
clients, both vendors, agree that they do believe
a dip is necessary, they do think if money is
necessary for hold code 2, a dip would be appropriate.
The question is, what's the proper balance which
your court should strike here? In this instance,
some dip may be necessary, but they should only
have to give away the assets necessary to make
sure that that dip that they need is to be repaid.
So our objection really is they haven't carried
their burden to show immediate and irreparable
harm, and that the benefits of this debt to this
entity, which is for the benefit of other affiliates,
you kept hearing it's a unified company, it's
a unified company, we won't do it without that,
that this company is not getting the benefit
for which it's giving up $1 .5 billion in secure
debt. You couldn't do that outside of bankruptcy.
You shouldn't be able to do it in bankruptcy.
certainly not in an interim hearing. So for that
reason, we would ask your honor to simply tailor
the relief, let people come back on the final
hearing and actually weigh the benefits and burdens
of the dip to this company and the benefits versus
the burdens. So your honor, we would ask that
it be modified and given an opportunity to reconsider
this and at a full evidentiary hearing at the
final dip. All right. Thank you. Who else wishes
to be heard? Your Honor, I'm going to board you.
I'm Sidley Austin on behalf of Axonic. Thank
you, Your Honor. I just want to organize my closing
in three main questions. Who are we? What's our
issue? And what are we asking for? And I think
the answer is simple. And I thank Mr. Goran for
confirming two points, which makes our presentation
even simpler. Thank you for confirming that.
our equity at SFH, at HoldCo2 is not itself subject
to, and the senior in all respects, to the dip
loan and to the part of. So who are we? Exonic
is a holder of some of the CNBS bonds down at
the HBSJVs. These were the ones that you heard
earlier on in the presentation that Ms. Sinclair
noted are not debtors in the bankruptcy. In addition
and most relevant here, Exonic is a secured creditor.
with respect to debtor hold code two. Hold code
two granted a lien and its equity interests in
12 East 49th Street. And then just an additional
point of context, who are we? We have been a
constructive partner to SACS for several years
and especially for the past several months. We've
been working with them to try to restructure
their obligations. And unfortunately, conversations
completely and communication completely has broken
down. We had no notice of these filings. We had
no notice of what they were planning to do. And
we join in Amazon's objection that we just need
some more time to be able to adequately make
our case. So what is our issue? Our issue is
that Exonic, as a secured creditor, has a cognizable
interest in property of the debtors, and its
rights are being trampled on pursuant to this
dip. First of all, we do think that the actions
that were taken were ultra -viris. I know Mr.
Gorin said that that's maybe an issue for another
day. It's not. It's an issue for today. And if
your honor can't rule on it today, which we don't
think you can, you can't rule on it to the other
direction either, and you should delay ruling
on it until you have all the facts in front of
you. But just to give you a preview, as Mr. Weinstein
testified, apparently in the dead of night, perhaps
even in the hours before the bankruptcy, the
debtors purport to have amended the LLCA for
12 East 49th Street to allow the actions that
precipitated this objection, i .e. to allow it
to file for bankruptcy and to take on the debt
of its affiliates. It had not been permitted
to do that for 10 years, and frankly, it was
not permitted to do that at the time that it
did that. The entity Sachs & Co. as well as 12th
and East 49th Street also purported to adjust
the terms of the operating lease without the
requisite consent that they needed. So again,
these actions were not allowed at the time. We
don't think that's just a breach of contract
claim, and we think that that is one of the main
reasons it's not appropriate for the dip to be
entered with respect to this entity today. Separately,
the debtors have not shown that the factors of
Section 361 have been met for 12 East 49th Street.
Amazon has made this point quite strongly over
the past several hours. 12 East 49th Street has
no employees, no vendors, no need for operating
liquidity, but its value is being used to support
other debtors' operations. Mr. Weinstein said
over and over, there are indirect benefits to
the entity, there is overall value to the entity,
but there has not been the required analysis
for a prime and mean on a per debtor basis. And
I just want to highlight that, you know, the...
The conversation has been over and over by the
declarants. There's an overall benefit, and everybody
is gaining value from this. Well, then why wasn't
the sister entity to 12 East 49th Street, the
flagship entity itself, put into bankruptcy?
There's some selective choice going on here that
we need to have a chance to look into. And respectfully
to Mr. Boren, he's wrong that there's not a recognizable
interest in that uh... axonic is not entitled
to be protected uh... axonic is being primed
and the debtors have the burden to show axonic
is adequately protected they have not done so
uh... we probably a couple of key cases in paragraph
twenty eight of our objection to direct your
honor to but essentially that the punchline is
courts and congress say that the value of equity
what is being protected by the bankruptcy code
for a secured creditor is the value of their
collateral. For a secured claim where the collateral
is equity interests, the value of the subsidiary
is what is being protected. A debtor cannot come
in and destroy the value of a subsidiary, which
destroys the value of the equity, and say that
secured creditor is just fine. That's not what
the law says. That's not fair. And that is not
an issue for another day. So with that all said,
what are we asking for? We think it's simple
and easily grantable. Delay approval of the dip
borrowing from 12 East 49th Street until the
final hearing. They haven't shown a cash need
for that entity in the interim period. There
are serious questions to be answered and we need
time to review and hopefully discuss. This is
not an unprecedented ask. courts often grant
almost all of what a dip lender wants but delays
some part of it to the final hearing. The debtors
always say the dip lenders won't fund and the
dip lenders do. I'm not sitting here saying deny
the whole dip and don't pay employees tomorrow.
Of course I'm not saying that. What I'm saying
is preserve the status quo with respect to one
purported debtor until a properly perfected secured
creditor can properly make its case. I submit
that we have a light switch here. If the debtors
don't get the lien on this entity, they will
be fine. If they do get the lien on this entity,
we will be irrevocably harmed. In the absence
of that, we join with Amazon on their at a minimum
remedies is what I'm calling it, including limitation
of the liens on those entities to be what is
strictly necessary to operate those entities
in the interim period, which is probably zero.
marshaling of the liens away from that collateral,
at least during the interim period, and the ability
to fully unwind the transaction, including the
granting of the dip liens and the filing of the
entity at the final hearing. I just have one
closing statement. We just don't really understand
why they're picking this fight with us. Exonic
has been a partner to SACS for years and has
been working collaboratively for months to avoid
this situation. Instead of focusing on the vendors,
on their business, SACS is trying to take something
from Exonic that shouldn't be taken. We hope
that we can return to the consensual conversations
we've been having and at least put this issue
to bed for the debtors. Thank you, Your Honor.
Thank you. All right. Mr. Hawkins. Yes, briefly,
Your Honor. For Dolce & Gabbana, we're one of
the vendors who has seen HostCo 2 become a co
-op. That was presented to us as a way to make
sure we had a solvent entity who could support
the amount owed to us. And that is rapidly going
to become untrue, it would seem, if this financing
is allowed to burden this particular debtor.
I don't have much more to say than the points
that already have been made. Therefore, I'll
join with the points made by Amazon, Mr. Velarde.
and exotic to say that it just doesn't seem to
be necessary, and we would suggest and ask that
this at a minimum be adjourned until the final
hearing so we can find out if there's a reason
to justify putting this much debt on this entity
that frankly not only doesn't seem to need this
debt applied to it for its own needs, but may
not even be justifiable as a bankruptcy debtor.
So for all those reasons, it affected the other
three. Thank you, Your Honor. All right. Thank
you, Your Honor. Bob Britton, Paul Weiss, on
behalf of the IHAC group of volunteers and defenders.
Let me have Mr. Lehane and Ms. Heimann, and then
I'll come back to you. Thank you, Your Honor.
Thank you, Your Honor. Robert Lee Hain, Kelly
Jordan, Warren again on behalf of numerous landlords,
including Brookfield office, bank quarters, landlord,
Brookfield retail, landlord at 18 locations.
Your honor, we believe the debtors absolutely
need this dip, but we also have problems that
it is not truly an interim dip as it's styled.
Specifically with respect to the very narrow
issue of the waivers suggested in paragraph 19
of the 506C waivers, the 552B, and the marshaling
in paragraph 20. A very simple fix here. Make
that those waivers being subject to the entry
of the final order apply also to the dip lenders.
Move it from the middle of the paragraph up to
the beginning of Section A and Section B. Your
Honor, this is the typical maintenance of the
status quo as argued at length by Amazon and
others. So what we would expect in an interim
order is that nothing is final and certainly
a 506C waiver isn't granted until the creditors
committee has an opportunity to weigh in and
be formed and look at these issues. 506C specifically
was designed and intended to prevent a windfall
to the secured creditors and forcing the unsecured
creditors to have to pay for the expenses of
liquidating a collateral. So it's not market
and it's not interim for the dip lenders to get
a final waiver of the 506C on entry of the interim
order. That's the main issue. That's still open.
We certainly appreciate that we made certain
requests early today as soon as we could, and
we made some headway, but that open issue is
still there. We'd also ask that any material
amendment of the DIP documents, that the discussions
about those and notice of those be made available
to parties seeking request of those, not just
to the creditors' committee or the DIP lenders.
And if there's a material event of default or
a discussion about that, that also significant
parties will request notice of that be able to
participate. So, Your Honor, with that, we think
this is a typical, simple maintenance of the
status quo. There's no good reason why that 506C
waiver can't wait until the final order so the
parties have an opportunity and the creditors
committee can be formed and weigh in and look
at these issues. All right. Thank you, Ms. Heinlein.
Good evening, Your Honor. Leslie Heinlein, Ballard
Spar on behalf of a number of the debtors, landlords.
I join in all of the statements that Mr. Laheen
conveyed. Your Honor, we do believe the DIP lender's
request for a first -day marshaling 506C and
552 waivers are not customary DIP terms that
we usually see on a first day. And it is extraordinary
relief. It is not market, as Mr. Laheen indicated.
and duly prejudices the rights of the creditors,
many of whom we don't even know that they are
creditors yet, and they're the ones that are
going to be ultimately harmed if this case ends
in a liquidation. I will conclude that these
waivers are typical components of dip financing.
but usually they are not granted until approval
of a final order. On a first day, on an expedited
interim basis, the standard is to maintain the
status quo. We've heard that a lot today. It's
to preserve the rights and interests of all parties
to the maximum extent possible and avoid irreparable
harm until the parties have actual notice, representation,
and an opportunity to review and evaluate the
financing documents, the budget, and what expenses
are actually captured or not captured in the
budget. Important, as Your Honor heard from the
testimony by Mr. Weinstein today, and through
our discussions with the getters in advance of
this hearing, we did learn that the unpaid sub
rents estimated to be approximately $16 to $19
million are not in the 13 -week budget, and instead
are to be paid out at the end of the cases with
other administrative claims. We do not know how
many locations are impacted by the non -payment
of those rents. The sub rent is certainly a cost
of these estates that is being incurred before
the entry of the final order and is an administrative
expense that likely will not be recoverable by
way of a surcharge if these waivers are granted
today. But yet the debtors find themselves administratively
insolvent before the end of the case. which is
a not uncommon path we have seen in many, many
retail cases in recent years. So while this may
be a standard relief on full notice at a final
hearing, it's simply that too early in these
cases to make this decision today, and there
has been no justification for such extraordinary
relief being asked on the first day. The landlords
do not have access to the credit agreements.
They have not had an opportunity to evaluate
and conduct the diligence on the budget in the
order which has been filed in a summarily fashion,
or to assess that it includes sufficient amounts
for all post -petition payments, including that
the debtors will have sufficient liquidity upon
exit of these cases to pay the still breath.
Well, Your Honor, as we sit here today, the evidence...
There is no evidence that our rights are adequately
protected as required by 363E with respect to
the use of their premises from the petition date
to the end of January or with respect to the
subsequent post -petition rent. We do think it's
very curious from the debtors, the funders insistence
on this waiver on the first day because they're
the ones who know better what the sufficiency
or insufficiency of the budget is to cover expenses.
Are they so concerned that there will be a default
before we can get to a final order, triggering
a potential surcharge of their collateral? That
frankly increases our concerns here. If there
is a risk of surcharging the interim period,
that is all the more reason not to grant those
waivers today. And as presently drafted, if something
unexpected happens, which if history is to prove
us right, We don't get to a final dip order,
but the lenders will have had the benefit of
the 506C immediately, and there will be no ability
to surcharge or pay the administrative freight
of these cases. Your Honor, it's not locked on
anybody. This is a retail business. And substantially,
all of the collateral is sold in the land -wide
premises. And the debtors are open and operating
in those premises today. And there's been many,
many statements today that This case and this
debt is needed to keep that inventory flowing
into the stores. Surcharge is not about the debt.
It's actually about the collateral. And that
collateral is being commingled in the stores
as soon after you enter this order. So it just
makes no difference if we're granting a surcharge
waiver or waivers on the first day. solely to
the dip lenders, but reserving the pre -petition
lenders because it's the collateral that matters,
and the harm will be already done if it's granted
today. The rights that the debtors are asking
this court to waive today are precisely the rights
designed and put into the bankruptcy code specifically
to protect the interests of creditors providing
post -petition goods and services to these debtors.
Those rights should not be waived on an expedited
basis on the first day. prior to the formation
of the creditors committee to evaluate these
issues, to evaluate the budget, and certainly
not before a final hearing on notice and due
process. And again, I think we all said this,
the simple solution here is one that has been
reached and frankly agreed to only virtually
every retail case in recent history. Those provisions
should be subject to the final order and everybody
should have notice of those provisions. Thank
you, Your Honor. All right, Mr. Britton. Thank
you, Your Honor. I'll be brief. It's late, and
I just want to clarify a few points. I think
that enclosing argument, various counsel models,
facts, and evidence have been presented to Your
Honor today. So I just want to make four very
brief points. First, to be very clear, no World
Code II creditor is being primed by our dip,
other than ourselves. We are consensually priming
our own lien. None of the other liens being taken
by any creditor, Ms. Porty's client, or any other
secured client within Old Co. II. Second, what
the DIP loaner says in respect to the landlord's
argument, Your Honor, is that with respect to
the DIP loans, 506C and 552 don't apply the way
it does on the first day to the extent they would
apply. What they do not grant us is what we have
not asked for. is a 506C waiver, 552B waiver,
with respect to any pre -petition debt on an
interim basis. So to the extent that the landlords
are concerned about those issues, we're not asking
for it. Third, Your Honor, there was some dialogue
in cross -examination about, well, if you made
up a hypothetical valuation for OCO -2 for the
flagship stores, and some made up unrealistic
hypothetical valuation, might there be a recovery
to creditors, even in liquidation? And yeah,
sure, if you want to make up numbers, at some
number, you're going to get to a recovery. But
the uncontroverted evidence and testimony from
the debtor's CRO was that he believes, and he
believes that his other fiduciaries who made
decisions here around incurrence of the dip financing
and the filing of these bankruptcy cases believe,
that without a growing concern business, at the
opto, Without continued rent payments to less,
to less, uh, flagship entities, that those creditors
won't be a zero. And liquidation, which is what
that would be, they would get no recovery. The
debt preserves their ability to fight for another
day, your honor. Third, uh, uh, fourth, I guess,
and this is the most important, just one simple
point. There's been a lot of argument, a lot
of statement, a lot of supposition. along the
way, by Miss Sporty, by others. Well, dip lenders
always say they will fund, but they always do.
And what we should do is just maintain the status
quo for 30 days. And inherent in that statement,
Your Honor, is that we're willing to fund the
status quo for 30 days. I just want to be abundantly
clear. Without the value of flagship two, this
loan is not financeable. This is not a loan that
we can underwrite or we can carry to a second
day hearing. Do we try it again? Without the
value of the non -priming means that the debtors
have proposed a place on flagship two, there
is no dip load to get us to a second day hearing
and maintain the status quo. Thank you. All right.
Any further response? Your Honor, if I may? Yes,
sir. Again, for the record, Dan Piero from Otterberg,
co -counsel to the B of A, Bank of America, the
administrative agent for the ABL bank group.
Your Honor, I'll be brief as well. I just want
to respond to a few points, and I'll try not
to repeat what's already been said. The dip financing
facilities of both the ABL and the node holders
are actually... Sorry, I didn't echo. They're
basically constructed to work in tandem. What
I mean by that is the ADL dip, which is going
to provide approximately $240 million of incremental
liquidity that the company did not have prior
to the bankruptcy as a result of the bank group
releasing various reserves against the collateral,
is a substantial contribution to the company's
cash flow and liquidity needs. That money will
be released when the note holders dip tranches,
three tranches, the first of which is 400 million,
and then the next two will be 300 million and
300 million. Those monies are all being funded
at the same time, in accordance with the budget,
which is intended to get this company through
a restructuring process. These dips are not.
And I repeat, not structured to liquidate the
collateral through some store -wide closing sales.
That is not the goal. That is not the way these
dips are designed. And to hear the landlords
say, this is just another retail case, and the
likelihood is we're not going to get to the final
order without the fault in liquidating these
stores is completely contrary to the negotiations
that we've all had over the last week, every
night, all night, weekends, not getting sleep.
We are doing this to give the company the best
shot. to restructure and reorganize the businesses
and maintain and go into certain value. And,
Your Honor, the waivers that we've asked for,
as counsel for the note holders noted, is only
regarding the DIP loan status, with regard to
the pre -petition loan status of both the ABL
and the note holders' secured claims. The 506C
waiver, the 552Equities of the Case waiver, the
Marshalling waiver, Those will be final order
issues. What we're asking for, however, is in
consideration for the $550 million of first day
liquidity that will be provided between the ABL
and the note holder dip facilities, we do want
those waivers in effect with respect to those
post -petition loans that we're making to effectively
give this case the best jump start we can to
successfully navigate through the Chapter 11.
And your honor, I would make one more point with
regard to the consigning vendors and the concession
vendors. We are not priming their interests.
This interim order does not affect their interests.
All rights are reserved. We fully anticipate
engaging with council for those vendors in an
attempt to get language that many of us have
seen in other tip orders in Chapter 11 cases
such as this to get a consensual resolution.
And obviously, between the interim hearing and
the final hearing, all those rights will be reserved
while we negotiate. Thank you, Your Honor. Thank
you. All right. Anything further? Your Honor,
I just had two minutes in response, if that's
OK? Yes. Yes, absolutely. OK. Just a few points
I want to hit based on the various arguments
the parties made. I'll be very brief. $175 million
claim against told go to You know that cream
is claim isn't even crystallized yet. Yes. We
filed a motion to reject their contract. It hasn't
been rejected yet Even once it's rejected the
actual size of that claim is still to be determined
So at the moment all they have is a contingent
claim little to no confidence will emerge, no
game plan. That is belied by the facts here.
The DIP lenders are putting over a billion dollars
into this company. I don't believe they would
do that. on the debtor's other assets, you heard
from Mr. Britton, that's not financeable. And
Mr. Baird, nobody was willing to fund without
Holdcode 2 as collateral. The only world we live
in now is the world where we're in, which is
the only diff financing that will fund this company
is the one that requires a lien at Holdcode 2.
Your Honor, may I just respond very briefly?
Yes. Mr. Cohen says we point to nothing. We do
point to things. We point to things in our objection.
I've stated things on the record, and that's
why we need the time to be able to develop the
record for Your Honor. So I sort of say the other
side, which is it can't be the case that the
debtors can just say, you know, we can come in
here and impair a secure creditor's rights, and
they don't get an opportunity to protect those
rights because it's the first day. All right.
Thank you. All right, anything further from anyone?
All right, so, you know, we've been here for
almost five and a half hours, no, six, five and
a half, no, seven and a half hours. Seven and
a half hours. And I think a significant factual
record has been developed. And so, A lot of what
was discussed today really doesn't go to the
debtor's burden under 364 to get or under 363
and 364 to obtain the financing. The arguments
about, you know, management and all of those
things, I mean, those can be addressed at other
places. I think they were highlighted in the
motion. So I'm going to focus on, you know, number
one, the evidence, and number two, the requirements
of Section 364. Based on the evidence, I find
that the testimony has been that this is the
only actionable dip, that it was well marketed
and well developed, and that the premise that
anyone could finance this company without the
flagship debtors is just simply not borne out
by the facts. So then the question becomes, is
that a proper exercise of the debtor's business
judgment? And when the evidence clearly indicates
that the alternative is liquidation, I believe
that that is properly a proper exercise of the
debtor's business judgment. I also think that
it's a false narrative to say that the H2 debtors
are going to have a billion five in additional
debt. I mean, they will incur that amount, but
they will also have contribution rights from
all the other subsidiaries. There are significant
assets in the other subsidiaries, so we're not
really talking about the contribution rights
with respect to that. I agree with counsel that
this isn't a priming lien. This is not a situation
where the only priming here is consensual. To
the extent these acts were ultra virus, again,
I'm not deciding that today. To the extent they
were ultra virus and the debtor didn't have the
ability to do that, I think that that's That's
a risk that the debtor is running, because I'm
not making any determination as to whether it
was ultraviolet. So as it relates to the business
justification, I think that there is a business
justification. I think the evidence compels the
business justification. And I think the narrative
that that you can in essence pull out H2 and
not look at it in the context of the money that
is being funded for the flagship store to operate,
to pay the CNBS, to do all of those things that
you need in order to maintain in the ordinary
course of business. I think that that is just
a false premise and it doesn't. go to the debtor's
business justification with respect to that.
I had, you know, three major concerns about the
proposed form of order. I think these are all
technical. One was the 506c waiver. I think that's
properly, and I understand that you've limited
it to the new money, but again, I think that
that you're getting the liens on the asset. So
I think that's properly subject to a final order.
Second, there was only a $50 ,000 budget for
the unsecured creditors committee. I think we
need to increase that budget to at least $250
,000. And then third, there was, in your paragraph,
in your paragraph 16 with respect to the remedies
at 16A sub little 6 in the hole and little 7
in the hole. With respect to those two remedies,
I think the way you have it is that There's a
remedies notice period. I think you really, the
way that we've structured these here is that
you need to come back to court to get it. But
I think that, you know, similar to the one that,
the cash collateral order that was signed before,
I think it's the same effect, but I think it's
all as a result of, I don't know what happened
there. There we go. I think it's just, procedurally,
I want before you can actually foreclose on the
collateral, I think you need to get a court order
and we can do that on, you know, 48 hours notice,
have the hearing on that on 48 hours notice.
So with those three, what I consider cosmetic
changes, I'm prepared to grant the dip and with
that, and also I want to make sure that The challenge
period is the challenge period. And to the extent
that there is a challenge, it's subject to the
challenge period. And nothing that is other than
the new money that's being put in, nothing in
this order affects the ability to challenge it.
And, you know, I think 60 days after the creditors'
committee is appointed, We'll do it, but I'm
prepared to approve the dip with those three
minor changes. Your Honor, may I ask a clarifying
question? Yes. This is Ominay Borty on behalf
of Exonic. If at the final hearing, if we're
able to convince Your Honor that the filings
were ultraviruses or that this is a priming lien,
which we respectfully continue to believe that
it is, Would the liens then be able to be sort
of come off of our subsidy area? Yeah, I think
we'd have to consider that at the time. I would
need some briefing on that, but I think we would
need to consider that at the time. I'm not going
to give an advisory opinion today on what the
effect of that would be. So we would ask for
a stay of the order with respect to that entity
so that we could take an appeal of that issue.
All right, the stay is denied. Yeah, Mr. Britton.
Thank you. Thank you, Your Honor. Just quickly
on behalf of the diplomats, I just wanted to
confirm that we'll work with the lenders, sorry,
we'll work with the debtors, Your Honor, to make
the changes that you've requested of the U .S.
That's no problem. All right. Thank you. All
right. So, Mr. Gorin, get that, you know, try
to get that order to me as quickly as possible.
There's a whole day seminar tomorrow. So, you
know, Mr. Laws is gonna have to get me. It's
downstairs in the building and Mr. Laws will
get me out to sign the order. consignment concession
folks as well as the landlords. So that language
has already all been inputted in the order. That
should be ready to go. We'll input these three
changes and get it over to your chambers ASAP.
All right. Thank you. And you can look at the
language in the cash collateral order, which
I think tracked what the way I'd like to see
the remedies period. Just with respect to the,
you know, sub 6 and sub 7, not, I mean, they
can obviously terminate the commitments, stop
funding, et cetera, all of those things without,
it's just foreclosing on the collateral. All
right, so we'll be in recess. Thank you all.