Case No. 01-72167-DHAUnited States Bankruptcy Court, E.D. Virginia
March 3, 2003
Peter G. Zemanian, WILLCOX SAVAGE, Norfolk, Virginia, Attorney for Congress Financial Corp.
Douglas M. Foley, McGUIRE WOODS LLP, Norfolk, Virginia, Attorney for Offical Unsecured Creditors’ Committee
STIPULATION AND ORDER REGARDING SETTLEMENT BETWEEN CONGRESS FINANCIAL CORPORATION (CENTRAL) AND THE CREDITORS’ COMMITTEE WITH RESPECT TO NET SALE PROCEEDS
DAVID H. ADAMS, United States Bankruptcy Court Judge
This Stipulation (the “Stipulation”) is made by and between Congress Financial Corporation (Central) (“Congress”), the primary secured lender of debtor Trak Auto Corporation (the “Debtor”), and the Official Unsecured Creditors’ Committee (the “Committee”), each acting through its undersigned attorneys. Unless otherwise specified, the capitalized terms used herein shall have the meanings ascribed to them in the Settlement Agreement (defined below).
Background
A. Prior to ceasing operations, the Debtor was engaged in the business of selling after — market automobile parts and accessories out of retail stores located primarily in the metropolitan Chicago and Washington, DC markets.
B. On or about November 9, 2001, the Court entered the Order (I) Authorizing Employment and Retention of Asset Disposition Agent and (II) Authorizing Store Closing Sales (the “Chicago GOB Order”). Pursuant to the Chicago GOB Order, the Debtor conducted store closing sales throughout the Chicago market to liquidate inventory and related assets located in such market (collectively, the “Chicago GOB Sales”). All inventory and related assets not sold during the Chicago GOB Sales (collectively, the “Remaining Chicago Inventory”) was shipped to the Debtor’s Chicago warehouse for subsequent disposition. Pursuant to a certain Asset Purchase Agreement, dated August 30, 2002, the Debtor sold the Remaining Chicago Inventory to CAM-ILG Partners for $1,185,000 (the “Chicago Sale”).
C. On July 22, 2002, the Court entered the Order Authorizing: (A) Sale of Assets Outside The Ordinary Course of Business, Free And Clear of Liens, Claims, Encumbrances and Interests; (B) Assumption And Assignment of Certain Executory Contracts And Unexpired Leases; (C) Procedures For Fixing Cure Amounts With Respect Thereto; And (D) Treatment of Other Executory Contracts And Unexpired Leases (the “Sale Order”). The Sale Order authorized and approved the consummation of a certain Asset Purchase Agreement, dated July 22, 2002 (the “Metro Purchase Agreement”), by and between the Debtor and Advance Stores Company, Inc. (“Advance”). Pursuant to the Metro Purchase Agreement, the Debtor agreed to, among other things: (i) sell to Advance inventory and related assets located in the metropolitan Washington, DC market (the “Metro Market”) and (ii) assume and assign to Advance certain Metro Market store leases (together, the “Metro Sale”).
D. On July 22, 2002, the Court also entered the Order Granting Motion To Compromise Controversy With Congress Financial Corporation (Central) Including Termination Of The Automatic Stay Pursuant To 11 U.S.C. § 362(d) And Further Modifying And Extending Debtor-In-Possession Financing Arrangements (the “Settlement Order”). The Settlement Order authorized and approved a comprehensive settlement among the Debtor, Congress and the Creditor’s Committee (“Committee Settlement”) as provided in a certain Settlement Agreement, dated July 22, 2002 (the “Settlement Agreement”), which is attached hereto as Exhibit 1. Pursuant to paragraph 9 of the Settlement Agreement, Congress agreed to pay to a creditors’ trust to be created under the Settlement Agreement (the “Creditors’ Trust”) an amount in cash equal to: (i) the greater of $500,000 and five percent (5%) of the Net Metro Sale Proceeds, plus (ii) twenty percent (20%) of the Net Chicago Sale Proceeds (as such terms are specifically defined in paragraph 7 of the Settlement Agreement), for distribution to Debtor’s unsecured creditors with Allowed Claims as defined in and in the manner specified in the Trust Agreement.
E. As of February 21, 2003, Congress has received $12,781,416.52 in Net Metro Sale Proceeds and $695,816.25 in Net Chicago Sale Proceeds. An accounting of the Net Metro Sale Proceeds and Net Chicago Sales Proceeds received by Congress as of the date hereof is attached hereto as Exhibit 2. The parties each acknowledge that Congress may receive up to an additional $647,000 in Metro Sale Proceeds from Advance (the “Withheld Amounts”) once all disputes concerning the disposition of a $500,000 holdback and certain other purchase price adjustments are adjudicated or otherwise resolved.
NOW, THEREFORE, in consideration of the mutual covenants contained herein and subject to the approval of the Court, the parties hereby stipulate, consent and agree to the following:
1. Closing Date. For purposes of paragraph 8 of the Settlement Agreement, the parties agree that the Closing of the Metro Sale shall occur on March 5, 2003 (the “Closing Date”).
2. Initial Payment Based on Net Proceeds Received to Date. In accordance with paragraph 9 of the Settlement Agreement, Congress shall pay to the Creditors’ Trust $778,234.08 in cash (representing twenty percent (20%) of the Net Chicago Sale Proceeds and five percent (5%) of the Net Metro Sale Proceeds received by Congress as of the date hereof) no later than seven (7) business days following the Closing Date (the “Initial Payment”).
3. Reconciliation Payment Based on Receipt of Additional Net Proceeds. In addition to making the Initial Payment as provided in paragraph 2 hereof, Congress hereby agrees to pay to the Creditors’ Trust five percent (5%) of any Withheld Amounts that it ultimately receives from Advance (net of all expenses described in paragraph 7 of the Settlement Agreement) in cash no later than seven (7) business days after Congress has exhausted all reasonable efforts to collect the Withheld Amounts (the “Reconciliation Payment,” and together with the Initial Payment, the “Settlement Payments”).
4. Full Satisfaction of Congress Payment Obligations.
The Committee acknowledges that Congress’ remittance of the Settlement Payments to the Creditors’ Trust in accordance with this Stipulation shall fully satisfy Congress’ payment obligations to the Committee under the Settlement Agreement.
5. Conversion. The Committee shall seek entry of an Order convening the case to chapter 7 five (5) days after the later to occur of: (1) Congress’s remittance of the Initial Payment to the Creditor Trust; (2) the Trust Agreement is signed by all necessary parties; or (3) the Committee’s professionals receipt of payment on account of their respective final fee applications now pending with the Court.
6. Court Approval. This Stipulation is subject to approval by the Court. The effective date of this Stipulation shall be the date of entry of such Court approval. If the Court fails to authorize and approve the Stipulation in its entirety, the Stipulation shall be null and void and will have no further force and effect.
7. Authority to Execute the Stipulation. Each of the undersigned attorneys represents and warrants that he or she has all necessary authority to execute the Stipulation on behalf of the party indicated below.
EXHIBIT 1 SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT is entered into as of the date set forth below by and among Trak Automotive Corp. (“Trak” or “the Debtor”), Congress Financial Corporation (Central) (“Congress”) and the Official Committee of Unsecured Creditors of Trak Automotive Corp. (the “Committee”).
RECITALS
A. Trak filed its voluntary petition under Chapter 11 of Title 11 of the United States Code on July 5, 2001 (the “Petition Date”) and currently remains in possession and control of its business and assets pursuant to Bankruptcy Code section 1107(a).
B. On or about July 16, 2001, the Office of the United States Trustee for the Eastern District of Virginia appointed the members of the Committee pursuant to section 1102 of the Bankruptcy Code.
C. Prior to the Petition Date, Congress was Trak’s primary lender. Congress is currently the Debtor’s largest secured creditor.
D. On or about June 3, 2002, the Debtor filed its Motion and Notice of the Debtors for and order under Section 365(a) of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 6006 Authorizing and Approving the Assumption of Certain Nonresidential Real Property Lease and the Rejection of one Nonresidential Real Property Lease.
E. On or about June 26, 2002, the Committee filed a Motion to Convert the Debtor’s Chapter 11 Case to a Case under Chapter 7. The Debtor and Congress oppose that motion.
F. On or about June 28, 2002, the Debtor filed its Motion for Entry of an Order Under Section 365 of the Bankruptcy Code Authorizing and Approving the Assumption and Assignment of certain Non-residential Real Property Lease and Under Section 363 of the Bankruptcy Code to Sell Assets Outside the Ordinary Course of Business, Free and Clear of Liens and Notice thereof (“Debtor’s Sale Motion”).
G. On or about July 12, 2002, the Committee filed a Complaint against Congress alleging, among other things, that a guaranty issued by the Debtor in favor of its affiliate, Forest City Auto Parts Company, was an avoidable transfer under applicable law. Congress denies such allegations.
H. The Debtor, the Committee and Congress desire to resolve the various claims and disputes asserted among themselves. Accordingly, the Committee has filed its Motion to Compromise Controversy with Congress Financial Corporation (Central) including Termination of the Automatic Stay Pursuant to 11 U.S.C. § 362(d), seeking approval of this Settlement Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises contained herein and other consideration given by the parties, the adequacy and sufficiency of which is hereby acknowledged by the parties, it is agreed as follows:
AGREEMENTEffectiveness Subject to Bankruptcy Court Approval
1. This Agreement shall take effect only upon entry of an order of the Bankruptcy Court approving the Committee’s Motion to Compromise Controversy wish Congress Financial Corporation (Central) Including Termination of the Automatic Stay (the “Compromise Motion”). If the Compromise Motion is not approved by the Bankruptcy Court in its entirety, this Agreement shall terminate, become null and void, and have no further force and effect.
Sale of Metro Assets and Assignment of Leases.
2. Contemporaneously with approval by the Bankruptcy Court of the Compromise Motion, the Debtor shall seek approval of the sale of substantially all collateral of Congress located in Washington, D.C.; Virginia; Maryland and the related area (the “Metro Area”), assumption and assignment of certain Metro Area leases and executory contracts, the rejection of all other leases and executory contracts, and announce to the Bankruptcy Court its intention to conduct going out of business sales (“GOB Sales”) in Metro Area location in connection with a transaction with: (i) Advance Auto Parts or (ii) another buyer (should one appear at the hearing), all on terms acceptable to Congress (hereinafter, the “Metro Sale”) pursuant to the Debtor’s Sale Motion.
3. The Debtor shall also request authority for the Debtor to pay all proceeds from the Metro Sale (the “Metro Sales Proceeds”) directly to Congress as and when received, subject to: (i) Congress authorizing the Debtor to use an agreed upon amount of such proceeds pursuant to existing or modified cash collateral and Debtor-in-Possession financing agreements and orders in the Debtors case and (ii) Congress’ agreement to pay and authorize use of its cash collateral to pay specific administrative expenses of the Estate, including but not limited to professional fee carve-outs and administrative rent due after July 22, 2002.
4. In conjunction with the GOB Sales, the Debtor and/or Congress shall be entitled to request individual committee members to supply “A moving” products (as that term is commonly understood, in the retail auto parts industry) to aid the Debtor in the GOB Sales. Any decision by a particular Committee member to supply such A moving products, and the specific terms under which such products will be provided, shall be at the sole discretion of the individual Committee member, and shall not involve the Committee. The Committee’s role in this matter shall be limited to facilitating communications among Congress, the Debtor, and the individual Committee member.
Liquidation of Chicago Inventory.
5. Following the Court’s approval this Settlement Agreement and the Metro Sale, the Debtor shall act as expeditiously as possible to liquidate to cash the inventory and related collateral of Congress now remaining from the prior closure of Trak’s Midwest Stores (the “Chicago Inventory”). Pending the sale of the Chicago Inventory, Congress shall retain all of its liens and claims relating to the Chicago Inventory. The proceeds from such sales (the “Chicago Sales Proceeds”) shall be paid directly to Congress.
6. Congress shall have no duty to consult with or obtain permission from the Committee or the Trak Auto Corporation Creditors’ Trust (as more fully described on Exhibit “1” hereto “Creditors’ Trust”) regarding Congress’ disposition of the Metro Area assets or Chicago Inventory. his understood and agreed that the Committee shall retain the right to appear and be heard in the Bankruptcy Court in connection with the approval of Metro Sale and matters involving the Chicago Inventory, however, part of the consideration for this Agreement is the Committee’s and the Creditors’ Trust’s agreement not to interfere with Congress’ exercise of its rights as a secured creditor and/or any actions taken by the Debtor (with Congress’ support) with respect to the disposition of Congress’ collateral.
Distribution of Proceeds.
7. The term “net recovery” shall mean those funds indefeasibly paid to Congress after July 12, 2002, for application to its claims against the Debtor, minus the sum of all advances made by Congress to the Debtor after July 12, 2002, plus all costs and expenses incurred by Congress after July 12, 2002, with respect to a disposition of any of the Debtor’s assets or leases described in this Settlement Agreement For purposes of calculating net recovery, Congress shall be entitled to deduct all of the direct and indirect costs and expenses it incurs in its efforts to recover the outstanding obligations owed by Debtor to Congress as of July 12, 2002; those deductions will include Congress’ direct expenses (including professional fees and expenses) and any use of collateral proceeds to pay expenditures of or relating to the Debtor, including professional fees, carve-outs, and any collateral proceeds or advances used to pay administrative expenses of the Debtor or to fund a retention plan for the Debtor'[s] employees. Such deductions will also include any amounts paid by Congress to acquire any administrative or other claims relating to the Debtor’s bankruptcy; provided that any recoveries by Congress on purchased administrative claims of third parties shall be added to the net recovery. The terms “Net Metro Sale Proceeds” and “Net Chicago Sale Proceeds” shall refer, respectively, to Congress’ net recovery from the Metro Sale Proceeds and the Chicago Sale Proceeds.
8. The Term “Closing” means the later of completion of the Metro Sale, including an GOB Sales, or Congress’ actual receipt of all Metro Sale Proceeds and Chicago Sale Proceeds to which it is entitled. Alternatively, “Closing” shall mean the date mutually agreed to by Congress and the Trustee of the Creditor Trust.
9. No later than seven (7) business days following the Closing, Congress shall pay to the Creditors’ Trust in exchange for the numerous benefits set faith herein, an amount equal to: (i) five percent (5%) of the Net Metro Sales Proceeds (provided, however, the amount paid by Congress to the Creditors’ Trust on account of the Metro Sale shall be no less than $500,000.00, regardless of the actual amount of the Metro Sales Proceeds). plus (ii) twenty percent (20%) the Net Chicago Sales Proceeds (collectively. the “Congress Payment”). As settlor of the Creditors’ Trust, Congress’ sole obligation wider the Creditor Trust Agreement shall be to make the Congress Payment and the Creditor Trust Agreement shall so provided.
10. The Congress Payment shall be paid solely from Congress’ property and not from any property of the Debtor. The parties agree that the Metro Sales Proceeds and the Chicago Sale Proceeds (i) constitute Congress’s collateral and (ii) when paid to Congress by the Debtor in accordance with this Settlement Agreement, shall constitute Congress’ property.
11. Congress shall provide the Committee (until the Debtor’s Bankruptcy Case is converted to Chapter 7) and to the Creditors Trust, an accounting by the 20th day of the month showing for the proceeding calendar month (i) all Metro Sale Proceeds and Chicago Sale Proceeds received by Congress; (ii) all amounts deducted by Congress for purposes of calculating Net Metro Sale Proceeds or Net Chicago Sale Proceeds; and (iii) such other information reasonably necessary for the Committee and/or the Creditor Trust to calculate the net recovery of the Metro Sale Proceeds and the Chicago Sale Proceeds. If and to the extent that as of the date on which payment is due to the Creditors’ Trust pursuant to this Agreement, Congress has outstanding or, has a reasonable expectation of incurring, expenses that are properly deductible to determine net recovery, Congress shall be entitled to establish a reasonable reserve for any expenses, subject to the parties reaching an appropriate agreement to provide for subsequent amounts to be paid to the Creditors’ Trust
Establishment of the Creditors’ Trust
12. The Creditors’ Trust shall be funded by the Congress Payment for the benefit of the Debtor’s general unsecured creditors (expressly excluding any deficiency claim of Congress), as opposed to administrative or priority creditors, pursuant to the Trust Agreement attached hereto as Exhibit 1. The funds in the Creditors’ Trust shall come from Congress’ property and shall be distributed by the trustee of the Creditors’ Trust No funds or other assets transferred to the Creditor Trust shall be paid or transferred from the Debtor, the Debtor’s property or any subsequently — appointed Chapter 7 Trustee.
13. The Committee shall have the exclusive authority to appoint the Trustee of the Creditors’ Trust and shall have no duty to consult with or obtain permission from Congress or the Debtor in doing so and the Order approving the Compromise Motion shall expressly provide for same.
14. Congress is not a party to the Trust Agreement except as a settlor and has had no involvement with the preparation of such agreement. Congress shall have no duties or obligations whatsoever to the beneficiaries of Creditors Trust. Congress sole obligation is to make the Congress Payment to the Creditors’ Trust as provided for herein.
Representations by the Committee.
15. Upon Bankruptcy Court approval of the entirety of the relief requested in the Compromise Motion, the Committee, until the Debtor’s bankruptcy case is converted to Chapter 7, agrees to and shall support: (i) the various sales of assets and assumption and assignment of leases described above; (ii) delay of a conversion of the Debtor’s case to Chapter 7 until all sales described above have been completed, (iii) if necessary, the election of a Chapter 7 trustee mutually acceptable to the Committee and Congress, and (iv) all reasonable efforts to maximize the proceeds derived from Congress’s disposition of the Chicago Inventory, the Metro Area assets and the GOB Sales.
16. In addition, upon entry of an order approving the Compromise Motion, the Committee shall (i) take immediate steps to dismiss the Committee’s Complaint against Congress in Adversary Proceeding No. 02-7083, with prejudice, and (ii) execute, with the Debtor, a release of claims against Congress in a form mutually acceptable to the parties and intended to be binding upon any successors to the Debtor, including a Chapter 7 trustee. In exchange for the consideration set forth herein, Congress hereby releases, waives and discharges any and all claims, causes of action and rights against the Committee, each Committee Members and their respective agents, advisors and attorneys now exchange or hereafter accruing relating, directly or indirectly, to the Debtor’s bankruptcy case.
Third Party Benefit.
17. No provision of this Agreement is intended, nor shall this Agreement be construed, so as to impede, inhibit or prevent MEMA Financial Services Group, inc. (“MEMA”), as agent for certain vendors, from drawing on that certain letter of credit issued on or about July 1, 2002, by Wachovia Bank, N.A.
18. Nothing in this Agreement shall modify or affect the rights of Congress, the Debtor, MEMA or any vendor with respect to the proceeds of such letter of credit.
Supplemental Financing.
19. Congress, the Debtor and the Committee agree to support the modification and extension beyond July 22, 2002 of debtor-in-possession financing provided by Congress under the Court’s Final Order (1) Authorizing Trak Auto Corporation, as Debtor-in-Possession, to Incur Post-Petition Secured Indebtedness, (2) Granting Security Interests and Priority Pursuant to 11 U.S.C. § 364, and (3) Modifing Automatic Stay (the “DIP Financing Order”), in order to (i) facilitate the sales described herein, (ii) finance the remainder of the Debtor’s Chapter 11 case within parameters to be agreed upon and (iii) facilitate the implementation of the terms of this Agreement.
20. Any order approving such extension shall provide that the Debtor shall pay any and all obligations incurred by the Debtor in the ordinary course of business after July 15, 2002 (including rental payments pertaining to non-residential real property leases) within parameters to be agreed upon.
21. Congress, in consultation with the Committee, shall undertake to make $20,000 inunencumbered funds available after completion of the Metro Area Sale to a Chapter 7 trustee m order to enable the Chapter 7 trustee to retain counsel to undertake a preliminary review of the status of Debtor’s estate. Congress also agrees to fund an Administrative Claim carve — out pursuant to a stipulation filed with the Court at the hearing to approve this settlement; Congress further agrees to waive its liens on, or claim to, proceeds of causes of action including avoidance actions, but not liens, claims or causes of action relating to the respective sales contemplated under this Agreement, in exchange for a release by the Chapter 7 trustee.
22. Upon Court approval of this Settlement Agreement, the DIP Financing Order shall also be deemed modified to provide an additional carve — out in the amount of $10,000 for the period July 22, 2002 through July 31, 2002, and an additional $30,000 through October 31, 2002, plus any unused amounts of any previously granted carve-outs in the DIP Financing Order, as amended, for the payment of fees and expenses incurred by counsel for the Committee.
Captions.
23. The headings or captions in this Agreement are for convenience and reference only, and do not control or effect the meaning or construction of any of the provisions herein.
Representation of Authority.
24. Each of the undersigned parties hereby represents it is fully authorized to execute and deliver this Agreement and that all formalities and requirements attendant to the delivery of this Agreement have been satisfied.
25. The terms of this Agreement are contractual and not mere recitals.
EXHIBIT 2