Creditor votes are due tomorrow on the Tower Records disclosure statement and the process plan. That plan calls for an impartial third party to be named as the sole administrator to decide disputes between the various creditor classes going forward in the chain’s Chapter 11 proceedings.
Both the company and the unofficial trade creditors committee comprised of major vendors are backing the plan because they say it will allow more money to be distributed to creditors instead of being paid out in fees to legal and financial advisors.
But the lawyer for the official unsecured creditors group, Lawrence Rifken of McGruireWoods LLP, has been urging his constituents to vote against the plan.
If the company’s process plan is voted down, then the Tower board will probably lose the exclusive window it had for filing the plan, and the unsecured creditors would probably file a motion for its own Chapter 11 process plan. In court, according to a transcript of a June hearing on the issue, Rifken advocated that instead of having sole discretion to decide matters, the appointed administrator should be subject to the supervision and oversight of a post-confirmation committee made up of a majority of the unsecured creditors, which are owed $110 million, and a minority of the unofficial major vendor trade creditors, which are owed $77 million. But the lawyer for the unofficial trade committee, Michael Bloom of Morgan Lewis & Bockius, LLP, said if the process plan is voted down he would considering filing a motion to convert the Chapter 11 liquidation process to an outright Chapter 7 liquidation.
What’s at stake is $33 million left to be divided up among creditors in a case that already appears to have eaten up $25 million in legal, financial, and administration fees and for salaries for the Tower employees who remained to manage the liquidation of the company.
An auction for Tower Records assets brought in $135 million, of which $77 million was already paid off to the chain’s bank, CIT which was secured by the inventory.
One of the sticking points that still needs to be resolved is whether the unofficial trade committee still has secured liens that should receive precedent payment ahead of the unsecured creditors. The debtors, i.e. Tower, assert that the major trade creditors forfeited their lien by objecting to the debtor-in-possession facility. The major vendors say their lien is still good and are claiming all the remaining cash.
The majors are willing to let the impartial administrator decide that because the plan advocated by Rifken would result in the issue being decided by costly litigation, which would further eat into the remaining $33 million in cash.
But Rifken says his trade group wants a seat at the table in deciding as to how the remaining funds are divided among the creditors. He points out that if the unofficial group loses then they become part of his constituency, which would get pro-rated shares of whatever remains of the $33 million in cash.
In addition Rifken questions whether the Tower board, officers and its investment bank Houlihan Lokey mismanaged the lease auction because that component of the asset sale only brought in $2 million, but the buyer sold the leases off a few weeks later for $10 million. He says this matter needs to be investigated to determine if the Tower board, officers and investment bank properly performed their fiduciary responsibility to maximize the value of the asset sales and thus the size of the dividend distribution to creditors. At the hearing, he suggested this issue would not get the proper attention by the debtor’s process plan.
