Tuesday Morning Corp’s (TMC) bankruptcy judge today confirmed the discount retailer’s Chapter 11 plan, which calls for a backstopped, USD 40m equity rights offering and a new USD 110m asset-based loan (ABL) to fund the company’s post-bankruptcy operations, among other features.
Judge Harlin Hale of the US Bankruptcy Court for the Northern District of Texas confirmed TMC’s Chapter 11 plan toward the end of a full-day hearing that featured witness testimony and legal arguments.
Most of today’s proceedings focused on a pair of unresolved issues in TMC’s bankruptcy case: an interest rate dispute with the company’s unsecured creditors committee (UCC), which otherwise supported TMC’s plan, and concerns raised by the US Trustee’s office regarding negotiations for TMC’s rights offering. The judge ultimately ruled in favor of TMC with respect to both issues.
The company’s plan incorporates several transactions and provides for recoveries to TMC’s creditors and the holders of prepetition equity interests, who will see their stock holdings reinstated, although somewhat diluted. The plan sets in motion a USD 40m rights offering, which Osmium Partners LP has agreed to backstop. In addition to having their existing shares reinstated, TMC equity holders will have the opportunity to purchase a pro rata portion of the new shares issued through the rights offering.
Under another provision of the plan, TMC would enter a new ABL facility with lenders JPMorgan Chase Bank, Wells Fargo Bank and Bank of America, who agreed to provide USD 110m for the retailer’s emergency from Chapter 11. TMC’s plan also provides for the full repayment in cash of an estimated USD 125m owed to general unsecured creditors (GUC), plus interest.
The amount of the interest payment on general unsecured claims, however, was a source of dispute and became a focus of today’s confirmation hearing. The UCC argued that for TMC to truly leave the GUC claims unimpaired, the retailer would need to provide interest at either a 5% rate mandated under Texas state law, or at the rate specified in contracts that TMC has with vendors that hold unsecured claims. TMC argued that it should be on the hook for interest of 0.16%, based on a federally established interest rate on court judgments.
Arguing for the higher rate today, UCC lawyer Edward Schnitzer, of Montgomery McCracken Walker & Rhoads, told Judge Hale, “Debtors have the ability to pay this interest, they just don’t want to.”
Judge Hale wasn’t persuaded by the UCC’s arguments however, finding that TMC’s application of the federal judgment rate was in line with the requirements for confirming the company’s plan.
The US Trustee’s objection, meanwhile, maintained that TMC had not met its burden to show that it proposed the plan in good faith. The US Trustee’s opposition focused largely on the role that Osmium played during TMC’s Chapter 11 case. Prior to submitting a proposal to backstop a rights offering through TMC’s plan, Osmium was one of the members of the official equity committee, which Judge Hale ordered to be appointed in early October.
Because it touched on a potential conflict of interest within the equity committee, the US Trustee’s objection prompted witness testimony from a somewhat unusual source—one of the equity committee’s lead attorneys, Bradford Sandler of Pachulski Stang Ziehl & Jones. Under questioning by Gregory Zipes of the US Trustee’s office, Sandler explained a series of actions the equity committee and its professional advisors took upon learning that Osmium had submitted a proposal to backstop TMC’s rights offering.
Namely, Sandler said that he and the other equity committee professionals learned that Osmium had proposed to back the rights offering, the investment firm was walled off from any participation in the committee’s deliberations of the proposal. Osmium also stepped down from the committee not long after the equity committee took steps to wall it off, Sandler said.
After hearing Sandler’s testimony and listening to arguments, Judge Hale found against the US Trustee’s objection, saying there was no indication that anyone involved in TMC’s plan process and Chapter 11 case acted in bad faith.
More generally, Judge Hale showered praise on TMC and others involved in its bankruptcy case for reaching such a positive economic result that would keep many of the company’s employees on staff, most of its stores open and provide a recovery to equity holders.
“However you measure a bankruptcy case, this case was extraordinary,” Judge Hale said after delivering his ruling. “The case has been wildly successful, surprisingly successful.”
TMC filed for Chapter 11 in May with plans to close at least 133 underperforming store locations in the wake of the coronavirus pandemic’s impact. TMC does not sell products online, leaving it especially vulnerable to stay-at-home orders that forced the temporary closure of stores during the pandemic.