Solid Landings_DIPmoiton by WSJ.com

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DAVID L. NEALE (SBN 141225) JULIET Y. OH (SBN 211414) LEVENE, NEALE, BENDER, YOO & BRILL L.L.P. 10250 Constellation Boulevard, Suite 1700 Los Angeles, California 90067 Telephone: (310) 229-1234; Facsimile: (310) 229-1244 Email: DLN@LNBYB.com, JYO@LNBYB.com Proposed Attorneys for Chapter 11 Debtors and Debtors in Possession

UNITED STATES BANKRUPTCY COURT

88 CENTRAL DISTRICT OF CALIFORNIA

SANTA ANA DIVISION

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In re

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SOLID LANDINGS BEHAVIORAL HEALTH, INC., et al.,

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Debtors and Debtors in Possession. __________________________________ Affects Cedar Creek Recovery, Inc. Only Affects EMS Toxicology Only Affects Silver Rock Recovery Only Affects Solid Landings Behavioral Health, Inc. Only Affects Sure Haven, Inc. Only X Affects All Debtors

Case No. 8:17-bk-12213-CB

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Joint Administration Proposed With: Case No. 8:17-bk-12218-CB Case No. 8:17-bk-12221-CB Case No. 8:17-bk-12222-CB Case No. 8:17-bk-12223-CB Chapter 11 DEBTORS’ EMERGENCY MOTION FOR ENTRY OF AN INTERIM ORDER: (I) AUTHORIZING THE DEBTORS TO (A) OBTAIN POSTPETITION FINANCING FROM CAPSTAR BANK PURSUANT TO 11 U.S.C. §§ 105, 361, 362 AND 364, AND (B) UTILIZE CASH COLLATERAL OF PREPETITION SECURED PARTIES PURSUANT TO 11 U.S.C. §§ 361, 362, 363 AND 364; (II) GRANTING ADEQUATE PROTECTION TO PREPETITION SECURED PARTIES PURSUANT TO 11 U.S.C. §§ 361, 362, 363 AND 364; (III) SCHEDULING A FINAL HEARING PURSUANT TO BANKRUPTCY RULES 4001(b) AND 4001(c); AND (IV) GRANTING RELATED RELIEF;

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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF [Omnibus Declaration of Katie S. Goodman Filed Concurrently Herewith] DATE: TIME: PLACE:

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June 5, 2017 2:00 p.m. Courtroom “5D” 411 West Fourth Street Santa Ana, California

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TABLE OF CONTENTS BACKGROUND INFORMATION ....................................................................................... 6 REQUEST TO USE CASH COLLATERAL ........................................................................ 10 REQUEST TO OBTAIN PROPOSED POST-PETITION SECURED FINANCING AND THE SALIENT TERMS THEREOF ........................................................................... 11 MEMORANDUM OF POINTS AND AUTHORITIES....................................................... 14 I.

STATEMENT OF FACTS .......................................................................................... 14

88 A.

Background ............................................................................................................14

Events Leading To Bankruptcy Filings .............................................................16

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The Debtors’ Primary Assets And Secured Debts.............................................19

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The Need For Use Of Cash Collateral And Post-Petition Financing ..............21

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Summary Of The Salient Terms Of the Proposed DIP Loan .........................23

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II.

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THE DEBTORS SHOULD BE AUTHORIZED TO USE CASH COLLATERAL............................................................................................................ 32

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The Debtors Must Be Authorized To Use Cash Collateral To Operate, Maintain And Preserve Their Assets In Accordance With The Initial Approved Budget ............................................................................................. 32

The Debtors Believe That The Prepetition Secured Parties All Consent To The Debtors’ Use Of Cash Collateral And Are Adequately Protected By The Continued Operation Of The Debtors’ Businesses And Other Forms Of Adequate Protection .................................................... 33

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THE DEBTORS SHOULD BE AUTHORIZED TO OBTAIN THE PROPOSED POST-PETITION FINANCING ......................................................... 36

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III.

The Debtors Should Be Authorized To Obtain The Proposed Post-Petition Financing From CapStar To Operate The Debtors’ Businesses And To Maintain And Preserve The Value Of The Debtors’ Assets ................................................................................................. 36 1.

The Debtors Are Unable To Obtain Unsecured Credit Or Secured Credit On A Junior Lien Basis ............................................ 39

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The Terms Of The Proposed Post-Petition Financing From CapStar Are Fair, Reasonable and Adequate ................................... 40

The Liens Being “Primed” Are Adequately Protected And Are Already Primarily Junior In Priority To The Liens Held By CapStar ................................................................................................. 41

The Proposed Financing From CapStar Is Necessary And Proper.................................................................................................... 43

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IV.

PROCEDURAL REQUIREMENTS REGARDING APPROVAL OF THE MOTION HAVE BEEN SATISFIED ........................................................................ 44

THE WAIVER OF ANY APPLICABLE STAY IS APPROPRIATE .................... 45

VI.

CONCLUSION ............................................................................................................ 45

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TABLE OF AUTHORITIES

Page(s)

FEDERAL CASES

In re 495 Cent. Park Ave. Corp. 136 B.R. 626 (Bankr. S.D.N.Y. 1992) .....................................................................................42

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In re Ames Dept. Stores 115 B.R. 34 (Bankr. S.D.N.Y. 1990) ...........................................................................37, 39, 43 In re Aqua Assoc. 123 B.R. 192 (Bankr. E.D.Pa. 1991) ...........................................................................39, 41, 42 In re Beker Ind. Corp. 58 B.R. 725 (Bankr. S.D.N.Y. 1986) .......................................................................................41 In re C.B.G. Ltd. 150 B.R. 570 (Bankr. M.D.Pa. 1992) ......................................................................................39 In re Crouse Group, Inc. 71 B.R. 544 (Bankr. E.D.Pa. 1987) .........................................................................................39 In re Defender Drug Stores 126 B.R. 76 (Bankr. D. Ariz. 1991), affâ&#x20AC;&#x2122;d 145 B.R. 312 (Bankr. 9th Cir. 1992) ....................38 In re Dynaco Corporation 162 B.R. 389 (Bankr. D.N.H. 1993) ..................................................................................33, 35 In re Ellingsen MacLean Oil Co. 834 F.2d 599 (6th Cir. 1987) ...................................................................................................38 In re Hubbard Power & Light 202 B.R. 680 (Bankr. E.D.N.Y. 1996).....................................................................................41 In re Immenhausen Corp. 164 B.R. 347 (Bankr. M.D. Fla. 1994) ....................................................................................35 In re McCombs Properties VI, Ltd. 88 B.R. 261 (Bankr. C.D. Cal. l988)............................................................................33, 34, 42 In re Mellor 734 F.2d 1396 (9th Cir. 1984) .................................................................................................33 In re Newark Airport/Hotel Ltd. Partnership 156 B.R. 444 (Bankr. D.N.J. 1993) .........................................................................................34

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In re O'Connor 808 F.2d 1393 (10th Cir. 1987) .........................................................................................33, 35 In re Oak Glen R-Vee 8 B.R. 213 (Bankr. C.D. Cal. 1981) .........................................................................................32 In re Photo Promotion Associates, Inc. 87 B.R. 835 (Bankr. S.D.N.Y. 1988), aff’d, 881 F.2d 6 (2d. Cir. 1989) ...........................37, 38 In re Planned System, Inc. 78 B.R. 852 (Bankr. S.D. Ohio 1987)......................................................................................41 In re Simasko Production Co. 47 B.R. 444 (D. Colo.1985) .....................................................................................................36 In re Snowshoe Co. 789 F.2d 1085 (4th Cir. 1986) .................................................................................................39 In re Stein 19 B.R. 458. (Bankr. E.D. Pa. 1982) .................................................................................34, 42 In re T.M. Sweeney & Sons LTL Services, Inc. 131 B.R. 984 (Bankr.N.D.Ill.1991) .........................................................................................38 In re Triplett 87 B.R. 25 (Bankr. W.D.Tex. 1988) ..................................................................................34, 42 In re Tucson Industrial Partners 129 B.R. 614 (9th Cir. BAP 1991)...........................................................................................32 Matter of Pursuit Athletic Footwear, Inc. 193 B.R. 713 (Bankr. D. Del. 1996) ........................................................................................34 Richmond Leasing Co. v. Capital Bank N.A. 762 F.2d 1303 (5th Cir. 1985) .................................................................................................43 United Savings Association v. Timbers of Inwood Forest Associates 108 S.Ct. 626 (1988) ................................................................................................................34 FEDERAL STATUTES 11 U.S.C. § 105 ..............................................................................................................3, 24, 27, 29 11 U.S.C. § 326 ..............................................................................................................................24

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11 U.S.C. § 327 ..............................................................................................................................24

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11 U.S.C. § 328 ..............................................................................................................................24

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11 U.S.C. § 330 ..............................................................................................................................24

11 U.S.C. § 331 ..............................................................................................................................24

11 U.S.C. § 361 ..............................................................................................................3, 24, 34, 41

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11 U.S.C. § 362 ......................................................................................................................3, 6, 24 11 U.S.C. § 363 ...................................................................................................................... passim 11 U.S.C. § 363(a) ...........................................................................................................4, 5, 21, 32 11 U.S.C. § 363(c) .......................................................................................................32, 33, 34, 36

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11 U.S.C. § 364 ...................................................................................................................... passim

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11 U.S.C. § 364(a) .........................................................................................................................39

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11 U.S.C. § 364(b) .........................................................................................................................39

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11 U.S.C. § 364(c) .............................................................................................................36, 37, 38

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11 U.S.C. § 364(c)(1)...........................................................................................................9, 22, 24

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11 U.S.C. § 364(c)(2).................................................................................................4, 9, 22, 25, 26

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11 U.S.C. § 364(c)(3).......................................................................................................4, 9, 22, 25

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11 U.S.C. § 364(d) ...............................................................................................................4, 25, 38

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11 U.S.C. § 364(d)(1) ....................................................................................................................37 11 U.S.C. § 364(d)(1)(B) ...............................................................................................................41 11 U.S.C. § 364(e) ...................................................................................................................10, 41 11 U.S.C. § 365 ..............................................................................................................................24 11 U.S.C. § 503 ....................................................................................................................9, 22, 24 11 U.S.C. § 506 ..............................................................................................................6, 24, 29, 34

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11 U.S.C. § 507 ..............................................................................................................................24

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11 U.S.C. § 510 ..............................................................................................................................27

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11 U.S.C. § 544 ..............................................................................................................................27

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11 U.S.C. § 546 ..............................................................................................................................24

11 U.S.C. § 547 ........................................................................................................................25, 27

11 U.S.C. § 548 ........................................................................................................................25, 27

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11 U.S.C. § 549 ..............................................................................................................................27 11 U.S.C. § 550 ..............................................................................................................................27 11 U.S.C. § 552 ..........................................................................................................................5, 24 11 U.S.C. § 726 ..............................................................................................................................24 11 U.S.C. § 1107 ......................................................................................................................14, 32 11 U.S.C. § 1108 ............................................................................................................................14

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11 U.S.C. § 1113 ............................................................................................................................24

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11 U.S.C. § 1114 ............................................................................................................................24

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28 U.S.C. § 1930(a) .......................................................................................................................26

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FEDERAL RULES

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Fed.R.Bankr.P. 2081-1.....................................................................................................................3

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Fed.R.Bankr.P. 4001 ......................................................................................................6, 10, 12, 44

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Fed.R.Bankr.P. 6004 ............................................................................................................6, 13, 45

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OTHER AUTHORITIES Fair Housing Amendments Act, the Americans with Disabilities Act ..........................................15 Fourteenth Amendment .................................................................................................................15 Patient Protection and Affordable Care Act ..............................................................................8, 16 United States Constitution .............................................................................................................15

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Pursuant to Local Bankruptcy Rule 2081-1, and 11 U.S.C. §§ 105(a), 361, 362, 363, and

364, Solid Landings Behavioral Health, Inc. (“Solid Landings”), Cedar Creek Recovery, Inc.

(“Cedar Creek”), EMS Toxicology (“EMS Toxicology”), Silver Rock Recovery (“Silver Rock”),

and Sure Haven, Inc. (“Sure Haven,” and collectively with Solid Landings, Cedar Creek, EMS

Toxicology, and Silver Rock, the “Debtors”), the debtors and debtor-in-possession in the above-

captioned Chapter 11 bankruptcy cases1, hereby file this motion (the “Motion”), on an

emergency basis, for the entry of an interim order (“Interim Order”) in substantially the form

attached as Exhibit “7” to the Omnibus Declaration of Katie S. Goodman filed concurrently

herewith (the “Goodman Declaration”), and for the entry of a final order (“Final Order”)

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following a final hearing on the Motion, which provide for, among other things:

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(1)

approval of that certain Stipulation Re: Debtor In Possession Financing And Use

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Of Cash Collateral (the “Stipulation”) by and among the Debtors and CapStar Bank, a

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Tennessee state-chartered banking corporation (“CapStar” or “Lender”), a true and correct copy

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of which Stipulation is attached as Exhibit “6” to the Goodman Declaration;

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(2)

authorization for the Debtors to obtain post-petition financing in the form of

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delayed draw term loans drawn under a revolving credit facility in the aggregate principal

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amount not to exceed $2,000,000 (the “DIP Loan”), pursuant to the terms of the Interim Order

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and subject to the terms and conditions of the DIP Financing Documents (as defined below);

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(3)

approval of the terms thereof, and authorization for the Debtors to execute and

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enter into, that certain Debtor-In-Possession Loan And Security Agreement in substantially the

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form attached as Exhibit “A” to the Stipulation (as the same may be amended, restated,

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supplemented or otherwise modified from time to time pursuant to the terms thereof, the “DIP

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Credit Agreement”) and that certain Promissory Note related thereto (together with the DIP

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Credit Agreement and any related documents and instruments delivered pursuant to or in

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Concurrently herewith, the Debtors have filed a motion seeking to have their bankruptcy cases jointly administered.

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connection therewith, the “DIP Financing Documents”)2, and to perform such other and further

acts as may be required in connection with the DIP Financing Documents;

(4)

authorization for the Debtors’ use of proceeds of the DIP Loan and cash

collateral, as such term is defined in 11 U.S.C. § 363(a), and the collection and application of

cash collateral, in accordance with the Debtors’ ten (10) week cash flow forecast setting forth all

projected cash receipts and cash disbursements following the Petition Date (the “Initial

Approved Budget”), a true and correct copy of which is attached as Exhibit “5” to the Goodman

Declaration, and in accordance with the terms and conditions set forth in the Interim Order, the

Stipulation, and the DIP Financing Documents, as applicable;

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(5)

the grant of (i) valid, enforceable, non-avoidable and fully perfected first priority

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priming liens on and senior security interests in (including liens pursuant to sections 364(c)(2)

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and 364(c)(3) of the Bankruptcy Code and priming liens pursuant to section 364(d) of the

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Bankruptcy Code) all DIP Collateral (as defined in the Stipulation) to CapStar (such liens and

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security interests, the “DIP Liens”), which liens and security interests are senior to any and all

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other liens and security interests (other than such pre-petition liens and security interests as may

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have been duly-perfected and which were senior to the pre-petition lien and security interest of

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CapStar), to secure all obligations of the Debtors under and with respect to the DIP Loan

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(collectively, the “DIP Obligations”), subject and subordinate only to the Carve-Out (as that term

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is defined in the Stipulation); and (ii) super-priority administrative expense priority claims

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against the Debtors to CapStar (collectively, the “DIP Super-Priority Claim”), with priority over

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any and all administrative expenses and claims asserted against any Debtor or its respective

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bankruptcy estate, subject and subordinate only to the Carve-Out;

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(6)

the grant of adequate protection to CapStar under that certain Loan and Security

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Agreement dated as of November 20, 2015 (as amended, restated, supplemented or otherwise

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modified from time to time and in effect on the date hereof, the “Loan Agreement,” and together

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All capitalized terms not specifically defined herein shall have the same meanings ascribed to them in the Interim Order or, if the terms are not defined in the Interim Order, the meanings ascribed to them in the DIP Credit Agreement.

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with all security agreements, pledge agreements, and other security and ancillary documents

executed by the Debtors, their non-debtor affiliates and/or any guarantor in favor of CapStar, the

“Pre-Petition Loan Documents”),3 entered into by and among CapStar, the Debtors, certain non-

debtor affiliates of the Debtors, and certain guarantors, on account of (i) the Debtors’ use of cash

collateral as defined in 11 U.S.C. § 363(a), and (ii) the priming of the liens and security interests

held by CapStar under the Prepetition Loan Documents, as more fully set forth in the Stipulation,

which adequate protection shall be granted to CapStar in the form of (x) valid, enforceable, non-

avoidable and fully perfected replacement liens on, and security interests in, the DIP Collateral

(the “Adequate Protection Liens”), to the extent of any diminution in value in CapStar’s interest

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in the Debtors’ pre-petition collateral, and subject and subordinate only to the Carve-Out, DIP

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Liens, and certain permitted liens as set forth in the DIP Credit Agreement, including purchase

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money security interests granted to, and liens properly perfected by, secured creditors of the

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Debtors prior to the date of the filing of the Debtors’ bankruptcy cases (the “Petition Date”); and

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(y) super-priority administrative expense priority claims against the Debtors (collectively, the

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“First Lien Super-Priority Claim”), with priority over any and all administrative expenses and

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claims asserted against any Debtor or its respective bankruptcy estate, subject and subordinate

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only to the Carve-Out and the DIP Super-Priority Claim;

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(7)

the grant of adequate protection to any other party holding a valid, properly

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perfected security interest in and lien against the Debtors’ assets (a “Pre-Petition Secured Party,”

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and collectively, the “Pre-Petition Secured Parties”), on account of the Debtors’ use of cash

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collateral, in the form of a valid, binding, enforceable and perfected second-priority Adequate

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Protection Lien in and to the DIP Collateral, to the extent of any diminution in value in such Pre-

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Petition Secured Party’s interest in the Debtors’ pre-petition collateral;

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(8)

the grant of rights under section 552(b) of the Bankruptcy Code, including a

determination that the “equities of the case” exception under section 552(b) shall not apply;

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Copies of the Pre-Petition Loan Documents are included in an Appendix Of Supplemental Exhibits filed concurrently herewith in support of this Motion.

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the waiver by the Debtors of any right to surcharge the Pre-Petition Collateral (as

defined in the Stipulation) or the DIP Collateral pursuant to section 506(c) of the Bankruptcy

Code or other applicable law;

(10)

pursuant to Rule 4001 of the Federal Rules of Bankruptcy Procedure

(“Bankruptcy Rules”), the scheduling of an interim hearing (the “Interim Hearing”) on the

Motion for this Court to consider entry of the Interim Order, which, among other things,

(i) authorizes the Debtors to obtain from CapStar the DIP Loan in the aggregate principal amount

not to exceed $2,000,000, on an interim basis, (ii) authorizes the Debtors’ use of the cash

collateral; and (iii) grants the liens and claims provided for in the Stipulation and the Interim

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Order; (11)

the scheduling of a final hearing (the “Final Hearing”) on the Motion no later than

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the twenty-first (21st) day following the entry of the Interim Order to consider entry of a Final

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Order granting the relief requested in the Motion on a final basis;

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(12)

modification of the automatic stay imposed under section 362 of the Bankruptcy

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Code to the extent necessary to permit the Debtors and CapStar to implement the terms of the

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Interim Order; and

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(13)

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waiver of any applicable stay (including under Bankruptcy Rule 6004) and

provision for immediate effectiveness of the Interim Order. BACKGROUND INFORMATION

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Each of the Debtors, other than Sure Haven, is owned in equal proportions by three (3)

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shareholders, Stephen Fennelly, Elizabeth Perry, and Mark Shandrow. Sure Haven is also

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owned by a fourth shareholder, John Case, so that its ownership is as follows: (i) Stephen

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Fennelly – 33.33%; (ii) Elizabeth Perry – 33.33%; (iii) Mark Shandrow – 32.33%; and (iv) John

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Case – 1.0%. Based upon, among other things, the commonality of ownership among the

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Debtors, the Debtors are seeking to have their Chapter 11 bankruptcy cases jointly administered.

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The Debtors are providers of individualized 12-Step and alternative treatment programs

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for people suffering from substance abuse and mental health disorders, with facilities located in

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California, Nevada, and Texas. The “Solid Landings” brand was created in 2009, when the

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Debtors’ shareholders opened their first sober living residence in Costa Mesa, California, which

residence was operated by Sure Haven.

Currently, Solid Landings serves as the corporate arm of the Debtors’ enterprise, is the

employer for all of the employees who provide services to the Debtors, and operates the

corporate office located in Costa Mesa, California.

laboratory facility located in Las Vegas, Nevada. The remaining three Debtors (i.e., Cedar

Creek, Silver Rock, and Sure Haven) operate a total of ten (10) residential, inpatient, outpatient,

and sober living facilities – specifically, Cedar Creek operates a residential treatment facility

located in Manor, Texas; Silver Rock operates one outpatient treatment facility and one inpatient

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treatment facility, both located in Las Vegas, Nevada; and Sure Haven operates five residential

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treatment facilities, one outpatient treatment facility, and one sober living facility.

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EMS Toxicology operates a clinical

The Debtors and certain of their non-debtor affiliates are borrowers under the Pre-Petition

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Loan Documents with CapStar.

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Fennelly, Elizabeth Perry, and Mark Shandrow – guaranteed the obligations of the Debtors under

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the Pre-Petition Loan Documents. CapStar filed UCC-1 financing statements against each of the

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Debtors asserting liens against all of the Debtors’ assets, including the Debtors’ cash.

The Debtors’ three primary shareholders – i.e., Stephen

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The Debtors’ decentralized model (utilizing outpatient treatment centers and multiple

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residential houses for detox and residential treatment services) presented operational

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inefficiencies with, among other things, staffing and patient transportation. In addition, the

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Debtors’ programs attracted the attention of the City of Costa Mesa (the “City”), which in

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October 2014 enacted a city ordinance severely restricting the ability of the Debtors (and other

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similarly-situated operators) to operate their programs, which resulted in protracted and costly

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litigation with the City over the next two years. In April 2016, Solid Landings made a business-

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driven decision to withdraw its pending legal proceedings against the City in exchange for an

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agreement by the City to suspend enforcement of the ordinance against Solid Landings and its

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affiliates. As part of its settlement with the City, Solid Landings and its affiliates agreed to cease

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operating many of their facilities located in the City of Costa Mesa.

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Notwithstanding the challenges faced by the Debtors in connection with their California-

based programs, the Debtors continued to grow throughout 2015, and expanded their operations

to Nevada and Texas using more centralized, single-facility models. With the implementation of

the Patient Protection and Affordable Care Act and with more individuals having access to

behavioral health insurance benefits, by 2015, approximately 95% of the Debtors’ revenue came

from reimbursements from commercial insurance companies. Calendar year 2016 brought a

marked decrease in reimbursement rates and slowdown in the timing of reimbursements from the

insurance companies, with certain companies such as Cigna and Health Net ceasing payments

altogether. While the Debtors’ revenues stagnated in 2015 and 2016, the Debtors’ liabilities

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increased due to, among other things, the filing of multiple lawsuits against the Debtors in 2015

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and 2016. As a result of the Debtors’ financial difficulties and resulting cash flow problems, the

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Debtors were unable to keep current on their payment obligations to vendors and landlords.

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Due to the Debtors’ continuing financial difficulties, shortly before the Petition Date, the

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Debtors retained a financial advisor, GGG Partners, LLC (“GGG”), to provide financial

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consulting services, including to, among other things, explore and pursue a potential going-

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concern sale of the Debtors’ businesses and guide the Debtors through Chapter 11 bankruptcy

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proceedings. With the assistance of GGG, the Debtors undertook efforts to market the Debtors’

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businesses and assets for sale, which efforts were ultimately successful and resulted in the

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execution of a letter of interest (the “Letter of Interest”) on April 12, 2017 by Alpine Pacific

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Capital, LLC (“Alpine”), pursuant to which Alpine expressed its interest in acquiring

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substantially all of the assets of the Debtors for aggregate consideration of approximately

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$9,050,000, free and clear of any interests, liens and liabilities except those expressly set forth in

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the Letter of Interest, through a sale conducted under 11 U.S.C. § 363. Thereafter, the Debtors

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and Alpine, with the input of CapStar, negotiated the terms of and finalized a written asset

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purchase agreement which the Debtors and Alpine (or its designees, the “Purchaser”) ultimately

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executed on June 1, 2017 (the “APA”).

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Through their bankruptcy cases, the Debtors intend to pursue and consummate the sale of

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their businesses and/or assets, free and clear of any interests, liens and liabilities, to the Purchaser

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(or a successful overbidder) in the most expeditious and cost-effective manner possible, in order

to preserve and maximize the value of the Debtors’ assets for the benefit of all creditors.

Due to the Debtors’ current financial condition, the use of the Debtors’ cash collateral

alone will be insufficient to meet the Debtors’ immediate post-petition liquidity needs. The

Debtors require new post-petition funding to maintain their businesses and preserve the value of

their assets while the Debtors pursue an expedited sale process which will allow the Debtors to

sell their businesses and/or assets as a going concern or, if appropriate, liquidate the assets of the

Debtors in an orderly and efficient manner.

Fortunately, CapStar has agreed to provide the Debtors with the DIP Loan in an

10 10

aggregate principal amount not to exceed $2,000,000, pursuant to the terms and conditions set

11 11

forth in the Stipulation, the DIP Credit Agreement, and other DIP Financing Documents. Based

12 12

on the Debtors’ Initial Approved Budget (a true and correct copy of which is attached as Exhibit

13 13

“5” to the Goodman Declaration), the Debtors believe that the proposed DIP Loan will provide

14 14

the Debtors with sufficient funds to maintain the Debtors’ business operations and successfully

15 15

consummate a sale of the Debtors’ businesses and/or assets.

16 16

The Debtors are unable to obtain sufficient interim and/or long-term financing from

17 17

sources other than CapStar on terms and subject to conditions more favorable than under the DIP

18 18

Financing Documents, and are not able to obtain unsecured credit allowable as an administrative

19 19

expense under section 503(b)(1) of the Bankruptcy Code. The Debtors are also unable to obtain

20 20

secured credit allowable under Sections 364(c)(1), 364(c)(2) and 364(c)(3) of the Bankruptcy

21 21

Code for the purposes set forth in the DIP Financing Documents without the Debtors’ (i)

22 22

granting to CapStar, subject to the Carve-Out (as defined in the Stipulation), (x) the DIP Super-

23 23

Priority Claim and (y) the DIP Liens in the DIP Collateral, as provided in the Stipulation and the

24 24

DIP Financing Documents; and (ii) providing CapStar and any other Pre-Petition Secured Party

25 25

the adequate protection provided for in the Stipulation and the Interim Order.

26 26

CapStar has indicated that it is willing to provide the Debtors with the proposed secured

27 27

financing solely on the terms and conditions set forth in the Stipulation and the DIP Financing

28 28

Documents.

After considering all of their alternatives, the Debtors have concluded, in an

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exercise of their sound business judgment, that the DIP Loan to be provided by CapStar

combined with the consent to use cash collateral provided by CapStar, represents the best

financing presently available to the Debtors.

Accordingly, the Debtors represent that (i) the terms and conditions of the DIP Loan are

fair and reasonable, reflect the Debtors’ exercise of prudent business judgment consistent with

their fiduciary duty and are supported by reasonably equivalent value and fair consideration, (ii)

the DIP Loan has been negotiated in good faith and at arms’ length among the Debtors and

CapStar, and (iii) any credit extended, loans made and other financial accommodations extended

to the Debtors by CapStar has been extended, issued or made, as the case may be, in “good faith”

10 10

within the meaning of section 364(e) of the Bankruptcy Code. The Debtors are requesting entry

11 11

of the Interim Order pursuant to Bankruptcy Rules 4001(b)(2) and 4001(c)(2) and the Local

12 12

Bankruptcy Rules. Absent granting the relief sought by this Motion, the Debtors’ estates will be

13 13

immediately and irreparably harmed. Consummation of the DIP Loan and authorization of the

14 14

use of the Pre-Petition Collateral (including cash collateral) in accordance with the Interim Order

15 15

and the DIP Financing Documents are, therefore, in the best interests of the Debtors’ estates.

16 16

REQUEST TO USE CASH COLLATERAL

17 17

The Debtors seek an order of the Court authorizing the Debtors to use their cash

18 18

collateral to pay all of their projected expenses set forth in the Initial Approved Budget. The

19 19

Debtors further seek Court authority to deviate from the Initial Approved Budget, without the

20 20

need for any further Court order, as permitted under the terms of the DIP Credit Agreement

21 21

(which permits the Debtors’ cumulative net cash flow and/or liquidity for each week covered

22 22

under the Initial Approved Budget(s) to be no lower than eighty-five percent (85%) of the

23 23

amount of net cash flow and/or liquidity projected in the Initial Approved Budget(s) covering

24 24

such period (with such negative variance of fifteen percent (15%) or less being a “Permitted

25 25

Variance” thereunder)).

26 26

without the need for any further Court order, only if the Debtors obtain the prior written consent

27 27

of CapStar.

Any deviation beyond the Permitted Variance shall be permitted,

28 28

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As adequate protection for the Debtors’ use of cash collateral, the Debtors propose to

provide to CapStar, among other things, the Adequate Protection Liens in the DIP Collateral,

which shall be junior only to the Carve-Out, DIP Liens, and certain permitted liens as set forth in

the DIP Credit Agreement, including purchase money security interests granted to, and liens

properly perfected by, secured creditors of the Debtors prior to the Petition Date. Further,

CapStar shall be granted the First Lien Super-Priority Claim against the Debtors’ estates, which

shall have priority in payment over any and all administrative expenses and claims asserted

against any Debtor or its respective bankruptcy estate, subject and subordinate only to the Carve-

Out and the DIP Super-Priority Claim. In addition, CapStar shall be entitled to access to the

10 10

Debtors’ properties and books and records and to regular financial reporting from the Debtors, as

11 11

described in the Stipulation.

12 12

As adequate protection for the Debtors’ use of cash collateral, the Debtors propose to

13 13

provide second-priority Adequate Protection Liens in and to the DIP Collateral to any other Pre-

14 14

Petition Secured Party.

15 15

REQUEST TO OBTAIN PROPOSED POST-PETITION SECURED FINANCING

16 16

AND THE SALIENT TERMS THEREOF

17 17

The Debtors do not have sufficient available sources of working capital and financing to

18 18

carry on the operation of the Debtors’ business, fund the Debtors’ intended sale process, and

19 19

properly administer the Debtors’ bankruptcy estates without immediate post-petition financing.

20 20

In the absence of the proposed DIP Loan, the Debtors’ business and the Debtors’ estates would

21 21

suffer immediate and irreparable harm, including, without limitation, an immediate cessation of

22 22

the Debtors’ business operations, which, in turn, would eviscerate the ability of the Debtors to

23 23

pursue a transaction which provides for the sale of the Debtors’ assets as part of a going-concern

24 24

business. The preservation and maintenance of the Debtors’ business is critical to the successful

25 25

sale of the Debtors’ assets and emergence from these Chapter 11 bankruptcy cases. The Debtors

26 26

require the DIP Loan offered by CapStar to consummate a transaction which results in the sale of

27 27

the Debtors’ business and/or assets to the Purchaser (or a successful overbidder), for the benefit

28 28

of all creditors. The Debtors and CapStar have engaged in extensive negotiations over the terms

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of the DIP Loan. A copy of the Stipulation, which sets forth the terms and conditions under

which CapStar has agreed to provide the DIP Loan and consent to the Debtors’ use of cash

collateral, is attached as Exhibit “6” to the Goodman Declaration, and a copy of the DIP Credit

Agreement, which set forth the terms of the DIP Loan, is attached as Exhibit “A” to the

Stipulation.

The Debtors’ ability to maintain business relationships with their vendors, suppliers and

clients, pay their employees, and otherwise finance their operations post-petition is essential to

maintaining the going-concern value of the Debtors’ business and preserving the value of the

Debtors’ assets. However, the Debtors do not have sufficient available sources of working

10 10

capital and financing to carry on the operation of their businesses without the DIP Loan and

11 11

authorized use of cash collateral. In the absence of the DIP Loan and the authority of this Court

12 12

to use cash collateral, the Debtors’ businesses and estates would suffer immediate and irreparable

13 13

harm, including, without limitation, an immediate cessation of their business operations. Based

14 14

on the foregoing, it is critical and in the best interests of the Debtors’ estates for the Debtors to be

15 15

authorized to obtain the DIP Loan, and to use cash collateral, in accordance with the terms and

16 16

conditions set forth in the Stipulation, the DIP Financing Documents, and the Interim Order.

17 17

Pursuant to Bankruptcy Rule 4001, while the Court cannot conduct a final hearing on the

18 18

Motion earlier than 14 days after service of this Motion, the Court may conduct a preliminary

19 19

hearing before such 14-day period expires to enable the Debtors to use cash collateral and obtain

20 20

post-petition financing as is necessary to avoid immediate and irreparable harm to the Debtors’

21 21

estates pending a final hearing. For the reasons noted above, to avoid immediate and irreparable

22 22

harm to the Debtors’ business and their bankruptcy estates, the Debtors must be able to use their

23 23

cash collateral and obtain the DIP Loan to pay the expenses set forth in the Initial Approved

24 24

Budget pending a final hearing.

25 25

The relief sought in this Motion is based upon the Motion, the annexed Memorandum of

26 26

Points and Authorities, the Goodman Declaration filed concurrently herewith, the statements,

27 27

arguments and representations of counsel to be made at the hearing(s) on the Motion, and any

28 28

other evidence properly presented to the Court at or prior to the hearing(s) on the Motion.

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In order to provide maximum notice of this Motion, concurrently with the filing of this

Motion with the Court, the Debtors have served a copy of this Motion and all supportive papers

(including notice of the hearing on the Motion) upon the Office of the United States Trustee, all

secured creditors and their counsel (if known), the 20 largest unsecured creditors of each of the

Debtors and parties requesting special notice via overnight mail.

WHEREFORE, the Debtors respectfully request that this Court:

(1)

grant the relief requested in the Motion on an interim basis;

(2)

enter the proposed form of the Interim Order attached as Exhibit â&#x20AC;&#x153;7â&#x20AC;? to the

99 10 10 11 11 12 12

Goodman Declaration filed concurrently herewith; (3)

waive any applicable stay, including the stay provided under Bankruptcy Rule

6004, to allow the Interim Order to become immediately effective; (4)

schedule the Final Hearing on the Motion no later than the twenty-first (21st) day

13 13

following the entry of the Interim Order to consider entry of a Final Order granting the relief

14 14

requested in the Motion on a final basis; and

15 15 16 16 17 17

(5)

grant such further relief as the Court deems just and proper.

Dated: June 1, 2017

SOLID LANDINGS BEHAVIORAL HEALTH INC., et al.

18 18 19 19 20 20

By: DAVID L. NEALE JULIET Y. OH LEVENE, NEALE, BENDER, YOO & BRILL L.L.P. Proposed Attorneys for Debtors and Debtors in Possession

21 21 22 22 23 23 24 24 25 25 26 26 27 27 28 28

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MEMORANDUM OF POINTS AND AUTHORITIES

STATEMENT OF FACTS

44 55

Desc

Background. 1.

On June 1, 2017 (the “Petition Date”), Solid Landings Behavioral Health, Inc.

(“Solid Landings”), a California corporation and the debtor and debtor-in-possession herein,

filed a voluntary petition for relief under Chapter 11 of 11 U.S.C. §§ 101 et seq. (the

“Bankruptcy Code”). Solid Landings is continuing to operate its business, manage its financial

affairs and operate its bankruptcy estate as a debtor in possession pursuant to Sections 1107 and

10 10 11 11

1108 of the Bankruptcy Code. 2.

On the Petition Date, certain affiliates of Solid Landings, namely, Cedar Creek

12 12

Recovery, Inc. (“Cedar Creek”), EMS Toxicology (“EMS Toxicology”), Silver Rock Recovery

13 13

(“Silver Rock”) and Sure Haven, Inc. (“Sure Haven,” and collectively with Solid Landings,

14 14

Cedar Creek, EMS Toxicology, and Silver Rock, the “Debtors”), also filed voluntary petitions

15 15

for relief under Chapter 11 of the Bankruptcy Code and are therefore debtors and debtors-in-

16 16

possession in related Chapter 11 bankruptcy cases pending before this Court.

17 17

Each of the Debtors, other than Sure Haven, is owned in equal proportions by

18 18

three (3) shareholders, Stephen Fennelly, Elizabeth Perry, and Mark Shandrow. Sure Haven is

19 19

also owned by a fourth shareholder, John Case, so that its ownership is as follows: (i) Stephen

20 20

Fennelly – 33.34%; (ii) Elizabeth Perry – 33.33%; (iii) Mark Shandrow – 32.33%; and (iv) John

21 21

Case – 1.0%. Based upon, among other things, the commonality of ownership among the

22 22

Debtors, the Debtors have sought to have their Chapter 11 bankruptcy cases jointly administered.

23 23

The Debtors are providers of individualized 12-Step and alternative treatment

24 24

programs for people suffering from substance abuse and mental health disorders, with facilities

25 25

located in California, Nevada, and Texas. The “Solid Landings” brand was created in 2009,

26 26

when the Debtors’ shareholders opened their first sober living residence in Costa Mesa,

27 27

California, which residence was operated by Sure Haven.

28 28

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Currently, Solid Landings serves as the corporate arm of the Debtors’ enterprise,

is the employer for all of the employees who provide services to the Debtors, and operates the

corporate office located in Costa Mesa, California.

laboratory facility located in Las Vegas, Nevada. The remaining three Debtors (i.e., Cedar

Creek, Silver Rock, and Sure Haven) operate a total of ten (10) residential, inpatient, outpatient,

and sober living facilities – specifically, Cedar Creek operates a residential treatment facility

located in Manor, Texas; Silver Rock operates one outpatient treatment facility and one inpatient

treatment facility, both located in Las Vegas, Nevada; and Sure Haven operates five residential

treatment facilities, one outpatient treatment facility, and one sober living facility.

10 10

EMS Toxicology operates a clinical

By the end of 2014, Sure Haven’s program and its related California-based

11 11

program through an affiliate entity called Rock Solid Recovery had grown to become fully

12 12

licensed and accredited programs offering a full continuum of care – from detox services,

13 13

residential primary treatment, intensive outpatient treatment, and sober living services – offering

14 14

close to 100 client beds in the Costa Mesa, California area and employing approximately 700

15 15

employees.

16 16

The Debtors’ decentralized model (utilizing centralized outpatient treatment

17 17

centers and multiple residential houses for detox and residential treatment services) presented

18 18

operational inefficiencies with, among other things, staffing and patient transportation.

19 19

addition, the Debtors’ programs attracted the attention of the City of Costa Mesa (the “City”),

20 20

which in October 2014 enacted a city ordinance severely restricting the ability of the Debtors

21 21

(and other similarly-situated operators) to operate their programs. As a result, in November

22 22

2014, Solid Landings filed suit against the City asserting that its ordinance was preempted by

23 23

federal law and violated the Fair Housing Amendments Act, the Americans with Disabilities Act,

24 24

and the Fourteenth Amendment to the United States Constitution. In April 2016, after years of

25 25

costly litigation, Solid Landings made a business-driven decision to withdraw its pending legal

26 26

proceedings against the City in exchange for an agreement by the City to suspend enforcement of

27 27

the ordinance against Solid Landings and its affiliates. As part of its settlement with the City,

28 28

Solid Landings and its affiliates agreed to cease operating many of their facilities located in the

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City of Costa Mesa.

Notwithstanding the challenges faced by the Debtors in connection with their

California-based programs, the Debtors continued to grow throughout 2015, and expanded their

operations to Nevada and Texas using more centralized, single-facility models. The Debtors

opened a facility in the Austin Texas area in May 2015 (which was operated by Cedar Creek),

and opened a facility in Las Vegas, Nevada in June 2015 (which was operated by Silver Rock).

Like Sure Haven in California, Cedar Creek and Silver Rock offered a full continuum of licensed

and accredited detox, residential, and intensive outpatient substance abuse treatment services.

The Debtors also added toxicology testing services to their organization with the

10 10

development of three (3) clinical laboratories, including a clinical laboratory located in Las

11 11

Vegas, Nevada, which is operated by EMS Toxicology. Prior to the Petition Date, two of the

12 12

laboratories were sold by the Debtors, leaving one open clinical laboratory (located in Las Vegas

13 13

and operated by EMS Toxicology) as of the Petition Date.

14 14

10.

As a result of the Debtors’ expansion efforts, by September 2015, the Debtors’

15 15

operations in California, Nevada and Texas offered more than 550 beds, serving more than 3,000

16 16

clients annually, and employed approximately 1,200 employees.

17 17

11.

In the spring of 2015, the Debtors engaged an investment banking firm,

18 18

Brentwood Capital Advisors (“Brentwood”), to seek either a sale or equity recapitalization of

19 19

their businesses. Brentwood directed a full marketing process and received approximately 50

20 20

signed nondisclosure agreements and 6 letters of interest to acquire either a minority or majority

21 21

position in the Debtors. Ultimately, however, Brentwood and the Debtors halted marketing

22 22

efforts in December 2015 following challenges to complete a quality of earnings analysis.

23 23

12.

In approximately November 2015, the Debtors obtained secured financing in the

24 24

original principal sum of $7,500,000 from a third-party lender, CapStar Bank (“CapStar”).

25 25

26 26

Events Leading To Bankruptcy Filings 13.

When the Debtors first began operating in 2009, client payments were primarily

27 27

self/cash-pay. However, with the implementation of the Patient Protection and Affordable Care

28 28

Act and with more individuals having access to behavioral health insurance benefits, by 2015,

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approximately 95% of the Debtors’ revenue came from reimbursements from commercial

insurance companies. Calendar year 2016 brought a marked decrease in reimbursement rates and

slowdown in the timing of reimbursements from the insurance companies, with certain companies

such as Cigna and Health Net ceasing payments altogether.

14.

While the Debtors’ revenues stagnated in 2015 and 2016, the Debtors’ liabilities

increased. In 2015 and 2016, multiple lawsuits were filed against the Debtors, including at least

five (5) employee wage and hour lawsuits and a number of collection actions based upon, among

other things, defaults by Sure Haven under a multi-million dollar lease agreement in the City of

Long Beach and a multi-million dollar development project in Santa Ana, California (both of

10 10

which were pursued to replace the facilities in Costa Mesa that were surrendered as part of Solid

11 11

Landings’ settlement with the City of Costa Mesa). As a result of the Debtors’ financial

12 12

difficulties and resulting cash flow problems, the Debtors were unable to keep current on their

13 13

payment obligations to vendors and landlords.

14 14

15.

Beginning in early 2016, in an effort to resolve the growing financial liabilities of

15 15

the Debtors and stabilize their business operations, the Debtors took a number of proactive steps

16 16

to streamline operations, significantly reduce expenses, increase revenues, and improve the rate

17 17

and timing of collection of accounts receivables. During such period, Solid Landings brought in

18 18

new senior management to implement the foregoing steps, recruiting Gerik Degner of Alpine

19 19

Pacific Capital, LLC (“Alpine”) to act as the President of Solid Landings and appointing an

20 20

interim replacement financial executive.

21 21

16.

Despite all of the Debtors’ efforts, in June 2016, the Debtors defaulted on its loan

22 22

obligations to CapStar. Subsequently, the Debtors and CapStar entered into a forbearance

23 23

agreement to allow the Debtors an opportunity to pursue and consummate a sale of the Debtors’

24 24

businesses. Solid Landings again engaged Brentwood to assist in the marketing and sale of the

25 25

Debtors’ businesses, particularly those facilities operated by the Debtors in Texas and Las

26 26

Vegas, Nevada. Although Brentwood reached out to 25 prospective buyers/investors throughout

27 27

the month of August 2016 and received two letters of intent, the letters of intent were ultimately

28 28

rejected as the sale terms proposed therein provided for deferred payment of the purchase price

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11 22

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such that minimal proceeds would be immediately available to pay CapStar. 17.

As a result of the Debtors efforts to “downsize” and streamline their business

operations, by early 2017, the Debtors’ operations in California, Nevada and Texas were reduced

to 133 licensed beds in a total of ten (10) inpatient treatment, outpatient treatment, residential

treatment, and sober living facilities, with a vastly decreased client census.

generated by the Debtors’ streamlined operations were insufficient to meet the debt obligations

created by a much larger business enterprise, and the Debtors continued to fall behind on their

obligations to their vendors and landlords.

18.

The revenues

As a result of the Debtors’ continuing financial difficulties, shortly before the

10 10

Petition Date, the Debtors retained a financial advisor, GGG Partners, LLC (“GGG”), to provide

11 11

financial consulting services, including to, among other things, explore and pursue a potential

12 12

going-concern sale of the Debtors’ businesses and guide the Debtors through Chapter 11

13 13

bankruptcy proceedings.

14 14

Debtors, Katie S. Goodman of GGG was brought in to act as Chief Restructuring Officer of the

15 15

Debtors.

16 16

19.

In conjunction with GGG’s retention as financial advisor to the

With the assistance of GGG, the Debtors undertook efforts to market the Debtors’

17 17

businesses and assets for sale prior to the Petition Date. In connection with such efforts, the

18 18

Debtors received, and ultimately executed on April 12, 2017, a letter of intent (the “Letter of

19 19

Interest”) from Alpine, pursuant to which Alpine expressed its interest in acquiring substantially

20 20

all of the assets of the Debtors for aggregate consideration of approximately $9,050,000, free and

21 21

clear of any interests, liens and liabilities except those expressly set forth in the Letter of Interest,

22 22

through a sale conducted under 11 U.S.C. § 363.

23 23

20.

Thereafter, the Debtors and Alpine, with the input of CapStar, negotiated the

24 24

terms of and finalized a written asset purchase agreement which the Debtors, CapStar, and

25 25

Alpine (and/or its designees, the “Purchaser”) ultimately executed on June 1, 2017 (the “APA”).

26 26

Accordingly, concurrently herewith, the Debtors have filed a motion seeking Court approval of

27 27

the bidding procedures described in the APA, and intend to file a motion shortly seeking Court

28 28

approval of the proposed sale of the Debtors’ assets to the Purchaser, subject to overbid, pursuant

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to 11 U.S.C. § 363.

21.

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Through their bankruptcy cases, the Debtors intend to pursue and consummate the

sale of their businesses and/or assets, free and clear of any interests, liens and liabilities, to the

Purchaser (or a successful overbidder) in the most expeditious and cost-effective manner

possible, in order to preserve and maximize the value of the Debtors’ assets for the benefit of all

creditors.

88 99

The Debtors’ Primary Assets And Secured Debts. 22.

The Debtors’ primary assets are as follows: a.

Security Deposits.

As of the Petition Date, the Debtors had security

10 10

deposits with public utilities, landlords, equipment lessors and others in the total sum of

11 11

approximately $366,852.31, as follows:

12 12 13 13 14 14 15 15

Debtor Cedar Creek Recovery, Inc. EMS Toxicology Silver Rock Recovery Sure Haven, Inc. Total:

16 16 17 17

Security Deposits $80,300.00 $99,423.21 $64,379.10 $122,750.00 $366,852.31

Accounts Receivable. As of the Petition Date, the Debtors had accounts

18 18

receivable with an aggregate face value in excess of $68,000,000, which accounts

19 19

receivable are estimated by the Debtors to have an aggregate current value of

20 20

approximately $4,324,693.00, as follows:

21 21 22 22 23 23 24 24 25 25

Debtor Cedar Creek Recovery, Inc. EMS Toxicology Silver Rock Recovery Sure Haven, Inc. Total:

26 26 27 27 28 28

Accounts Receivable $696,634.00 $673,420.00 $655,527.00 $2,299,112.00 $4,324,693.00

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Vehicles, Office Furniture and Equipment. As of the Petition Date, the

Debtors owned vehicles, office furniture and equipment valued at approximately

$2,353,694.29 (value based on net book value), as follows:

44 Debtor Cedar Creek Recovery, Inc. EMS Toxicology Silver Rock Recovery Sure Haven, Inc.

55 66 77 88

Furniture/Equipment $200,625.76 $209,558.98 $267,359.08 $1,387,943.02

Total Furniture/Equipment: Total Vehicles: Total:

99 10 10 11 11

23.

Vehicles $288,207.45

$2,065,486.84 $288,207.45 $2,353,694.29

The Debtors’ senior secured lender is CapStar. The Debtors and certain of their

12 12

non-debtor affiliates are borrowers under that certain Loan and Security Agreement dated as of

13 13

November 20, 2015 with CapStar (the “Loan Agreement,” and together with all security

14 14

agreements, pledge agreements, and other security and ancillary documents executed by the

15 15

Debtors, their non-debtor affiliates and/or any guarantor in favor of CapStar, the “Pre-Petition

16 16

Loan Documents”).4 In order to ensure repayment of their obligations to CapStar, the Debtors

17 17

granted CapStar first-priority perfected security interests and liens (the “Pre-Petition Liens”) in

18 18

substantially all of Debtors’ assets (the “Pre-Petition Collateral”), as documented in the Loan

19 19

Agreement and other Pre-Petition Loan Documents. The obligations and duties owed by the

20 20

Debtors under the Pre-Petition Loan Documents are referred to herein and in the Stipulation as

21 21

the “Pre-Petition Obligations.” The Debtors are currently indebted to CapStar in an amount of

22 22

no less than $10,296,266.99.

23 23

24.

The Debtors’ shareholders, Stephen Fennelly, Elizabeth Perry, and Mark

24 24

Shandrow (collectively, the “Guarantors”), executed written guaranties dated November 20,

25 25

2015 guaranteeing the Debtors’ obligations under the Pre-Petition Loan Documents.

26 26 27 27 4

28 28

Copies of the Pre-Petition Loan Documents are included in an Appendix Of Supplemental Exhibits filed concurrently herewith in support of this Motion.

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25.

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CapStar filed UCC-1 financing statements against each of the Debtors asserting

liens against all of the Debtors’ assets. A summary of the financing statements recorded against

the Debtors by CapStar is set forth in the Declaration of Juliet Y. Oh (the “Oh Declaration”) filed

concurrently herewith, with copies of the financing statements attached thereto.

26.

In addition to the financing statements filed by CapStar against the Debtors, there

are a number of financing statements that have been filed against EMS Toxicology and Sure

Haven by an equipment lessor, QA Group LLC (“QA Group”). The financing statements filed by

QA Group purport to cover only the equipment identified in the respective financing statements. A

summary of the financing statements recorded against EMS Toxicology and Sure Haven by QA

10 10

Group is set forth in the Oh Declaration filed concurrently herewith, with copies of the individual

11 11

financing statements attached thereto.

12 12

27.

In addition to the financing statements filed by CapStar and QA Group against one

13 13

or more of the Debtors, there is a notice of judgment lien that was recorded against Sure Haven on

14 14

December 1, 2016 by CPF Airway Associates LLC (“CPF”), based upon a judgment obtained by

15 15

CPF against Sure Haven on November 18, 2016, in the amount of $132,935.71 (as of December 1,

16 16

2016). A true and correct copy of the foregoing notice of judgment lien is attached to the Oh

17 17

Declaration filed concurrently herewith.

18 18

28.

Based on the foregoing, the Debtors believe that the only parties who may

19 19

potentially have security interests in the Debtors’ cash are CapStar and CPF.

20 20

21 21

The Need For Use Of Cash Collateral And Post-Petition Financing. 29.

Due to the Debtors’ current financial condition, the use of the Debtors’ cash

22 22

collateral (as such term is defined in 11 U.S.C. § 363(a)) alone will be insufficient to meet the

23 23

Debtors’ immediate post-petition liquidity needs. The Debtors require new post-petition funding

24 24

to maintain their businesses and preserve the value of their assets while the Debtors pursue and

25 25

expedited sale process which will allow the Debtors to sell their businesses and/or assets as a going

26 26

concern or, if appropriate, liquidate the assets of the Debtors in an orderly and efficient manner.

27 27 28 28

30.

Fortunately, the Debtors’ current secured lender, CapStar, has agreed to provide the

Debtors with post-petition financing in the form of delayed draw term loans drawn under a

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revolving credit facility in the aggregate principal amount not to exceed $2,000,000 (the “DIP

Loan”), pursuant to the terms and conditions set forth in that certain Stipulation Re: Debtor In

Possession Financing And Use Of Cash Collateral (the “Stipulation”), a true and correct copy of

which Stipulation is attached as Exhibit “6” to the Omnibus Declaration of Katie S. Goodman

filed concurrently herewith (the “Goodman Declaration”), that certain Debtor-In-Possession Loan

And Security Agreement in substantially the form attached as Exhibit “A” to the Stipulation (as the

same may be amended, restated, supplemented or otherwise modified from time to time pursuant

to the terms thereof, the “DIP Credit Agreement”), and that certain Promissory Note related thereto

(together with the DIP Credit Agreement and any related documents and instruments delivered

10 10

pursuant to or in connection therewith, the “DIP Financing Documents”)5.

11 11

31.

Based on the Debtors’ ten (10) week cash flow forecast setting forth all projected

12 12

cash receipts and cash disbursements following the Petition Date (the “Initial Approved Budget”),

13 13

the Debtors believe that the proposed DIP Loan will provide the Debtors with sufficient funds to

14 14

maintain the Debtors’ business operations and successfully consummate a sale of the Debtors’

15 15

businesses and/or assets. A true and correct copy of the Initial Approved Budget is attached as

16 16

Exhibit “5” to the Goodman Declaration.

17 17

32.

The Debtors are unable to obtain sufficient interim and/or long-term financing from

18 18

sources other than CapStar on terms and subject to conditions more favorable than under the DIP

19 19

Loan and the DIP Financing Documents, and are not able to obtain unsecured credit allowable as

20 20

an administrative expense under section 503(b)(1) of the Bankruptcy Code. The Debtors are also

21 21

unable to obtain secured credit allowable under Sections 364(c)(1), 364(c)(2) and 364(c)(3) of the

22 22

Bankruptcy Code for the purposes set forth in the DIP Credit Agreement without the Debtors’ (i)

23 23

granting to CapStar, subject to the Carve-Out, (x) the DIP Super-Priority Claim and (y) the DIP

24 24

Liens in the DIP Collateral, as provided in the Stipulation and the DIP Financing Documents; and

25 25 26 26 5

27 27 28 28

All capitalized terms not specifically defined herein shall have the same meanings ascribed to them in the proposed interim order granting this Motion in substantially the form attached as Exhibit “7” to the Goodman Declaration filed concurrently herewith (the “Interim Order”) or, if the terms are not defined in the Interim Order, the meanings ascribed to them in the DIP Credit Agreement.

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(ii) providing CapStar the adequate protection as provided in the Stipulation and the DIP Financing

Documents.

33.

CapStar has indicated that it is willing to provide the Debtors with the proposed

post-petition financing solely on the terms and conditions set forth in the Stipulation and the DIP

Financing Documents. After considering all of their alternatives, the Debtors have concluded, in

an exercise of their sound business judgment, that the DIP Loan to be provided by CapStar,

combined with the consent to use cash collateral provided by CapStar, represents the best financing

presently available to the Debtors.

Summary Of The Salient Terms Of the Proposed DIP Loan.

10 10

34.

Although the Stipulation (a copy of which is attached as Exhibit “6” to the

11 11

Goodman Declaration) and the DIP Credit Agreement (a copy of which is attached to the

12 12

Stipulation) set forth in detail the terms and conditions under which CapStar has agreed to provide

13 13

the DIP Loan, the following is a summary of some of the principal terms of the DIP Loan6:

14 14

DIP Loan:

The Debtors shall be authorized to obtain advances of the

15 15

DIP Loan in an aggregate principal amount not to exceed $2,000,000, to enable the Debtors

16 16

to pay those expenses set forth in the Initial Approved Budget, which may be modified or

17 17

supplemented from time to time by additional budgets (covering any time period covered

18 18

by a prior budget or covering additional time periods) prepared by the Debtors and

19 19

approved by CapStar and the Purchaser, without subsequent notice to or order of the Court

20 20

(each such additional budget, a “Proposed Budget,” and together with the Initial Approved

21 21

Budget, the “Approved Budget”).

22 22

Approved Budget: The proceeds of the DIP Loan may not be used for any

23 23

purpose other than for paying expenses in accordance with the Initial Approved Budget,

24 24

which depicts on a weekly basis cash revenue, receipts, expenses and disbursements and

25 25

other information for the 10-week period following the Petition Date, and any

26 26

Supplemental Approved Budget, which shall be in form and substance acceptable to

27 27 6

28 28

The following is a summary of certain principal terms of the DIP Loan. To the extent this summary is inconsistent with the terms of the DIP Credit Agreement, the terms of the DIP Credit Agreement shall govern.

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CapStar and Purchaser. In accordance with the DIP Credit Agreement, the Debtors shall be

required to provide to CapStar and the Purchaser, among other things, a weekly report

containing a comparison of actual to budgeted results of operations for the preceding three

(3) loan weeks and a report of all income and expense variance on a line-item basis for

such three-week period.

Approved Budget, without the need for any further Court order, up to the permitted

variance provided for in the DIP Credit Agreement (i.e., the Debtorsâ&#x20AC;&#x2122; cumulative net cash

flow and/or liquidity for each week covered under the Initial Approved Budget(s) shall be

no lower than eighty-five percent (85%) of the amount of net cash flow and/or liquidity

10 10

projected in the Initial Approved Budget(s) covering such period). Any deviation beyond

11 11

the foregoing shall be permitted, without the need for any further Court order, only if the

12 12

Debtors obtain the prior written consent of CapStar.

13 13

The Debtors shall be permitted to deviate from the Initial

Interest on DIP Loan: The rate of interest to be charged for the DIP Loan

14 14

shall be six percent (6%) per annum, calculated on the basis of a 360-day year for actual

15 15

days elapsed. Upon and during the occurrence of an Event of Default, outstanding principal

16 16

amount of the DIP Loans (including any overdue interest) shall bear interest at a default rate

17 17

equal to the maximum rate of interest allowed to be charged by applicable law. Accrued

18 18

interest on the DIP Loan shall be payable to CapStar commencing on August 1, 2017, and

19 19

on the first day of each calendar month thereafter.

20 20

DIP Super-Priority Claim: In accordance with Bankruptcy Code section

21 21

364(c)(1), CapStar shall be granted the DIP Super-Priority Claim as security for the DIP

22 22

Obligations, which DIP Super-Priority Claim shall have priority over and above any and all

23 23

administrative expenses and claims asserted against any Debtor or its respective

24 24

bankruptcy estate, at any time existing or hereafter arising, of any kind or nature

25 25

whatsoever, including, but not limited to the administrative expenses of the kinds specified

26 26

in or ordered pursuant to Bankruptcy Code sections 105, 326, 327, 328, 330, 331, 361, 362,

27 27

363, 364, 365, 503, 506, 507(a), 507(b), 546, 552, 726, 1113, and 1114, and any other

28 28

provision of the Bankruptcy Code, whether or not such expenses or claims may become

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secured by a judgment lien or other non-consensual lien, levy, or attachment, subject and

subordinate only to the Carve-Out.

DIP Liens: As security for the DIP Obligations, CapStar shall be granted

valid, enforceable, non-avoidable and fully perfected first priority priming liens and senior

security interests (including liens pursuant to sections 364(c)(2) and 364(c)(3) of the

Bankruptcy Code and priming liens pursuant to section 364(d) of the Bankruptcy Code)

(referred to herein as the “DIP Liens”) on all property, whether now owned or hereafter

acquired or existing and wherever located, of each Debtor and each Debtor’s estate, of any

kind or nature, whatsoever, whether the property is real, personal, tangible, intangible, or

10 10

mixed, whether now existing or hereafter acquired or created, including without limitation,

11 11

all cash, accounts, inventory, goods, contract rights, mineral rights, instruments,

12 12

documents, chattel paper, patents, trademarks, copyrights, and licenses therefor, accounts

13 13

receivable, receivables and receivables records, general intangibles, payment intangibles,

14 14

tax or other refunds, insurance proceeds, letters of credit, contracts, owned real estate, real

15 15

property leaseholds, fixtures, deposit accounts, commercial tort claims, securities accounts,

16 16

instruments, investment property, letter-of-credit rights, supporting obligations, machinery

17 17

and equipment, real property, leases (and proceeds from the disposition thereof), all of the

18 18

issued and outstanding capital stock of each Debtor, other equity or ownership interests

19 19

held by any Debtor, including equity interests in subsidiaries and non-wholly-owned

20 20

subsidiaries, money, investment property, choses in action, causes of action (but excluding

21 21

any pre-petition avoidance causes of action under 11 U.S.C. §§ 547 and 548, collectively

22 22

referred to herein as “Avoidance Actions”), CapStar’s pre-petition collateral, including

23 23

cash collateral, and all cash and non-cash proceeds, rents, products, substitutions,

24 24

accessions, and profits of any of the collateral described above, documents, vehicles,

25 25

intellectual property, securities, partnership or membership interests in limited liability

26 26

companies and capital stock, including, but not limited to, the products, proceeds and

27 27

supporting obligations thereof, whether in existence on or before the Petition Date or

28 28

thereafter created, acquired, or arising and wherever located, pursuant to 11 U.S.C. §

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364(c)(2), all unencumbered pre-petition and post-petition property of each Debtor, and all

present and after-acquired property of each Debtor that is subject to a lien granted or

recorded on or after the Petition Date, wherever located, and all other Collateral, all of the

foregoing now owned or in which any Debtor has any interest (and without regard to

whether acquired prior or subsequent to the Petition Date) or hereafter acquired or in which

any Debtor obtain an interest, and the products and proceeds thereof (all such property, the

“DIP Collateral”), with such DIP Liens to be senior to any and all other liens and security

interests (other than such liens and security interests as may have been duly-perfected and

which were senior to the lien and security interest of CapStar prior to the Petition Date),

10 10

subject and subordinate only to the Carve-Out, without the necessity of the execution by

11 11

the Debtors or the filing or recordation of mortgages, security agreements, lock box or

12 12

control agreements, mortgages, financing statements, or any other instruments or

13 13

otherwise.

14 14

Carve-Out: CapStar has agreed to a professional fee carve-out from the

15 15

DIP Collateral and the Pre-Petition Collateral (the “Carve-Out”), for the sum of: (A) fees

16 16

required to be paid to the Clerk of the Bankruptcy Court and to the United States Trustee

17 17

under section 1930(a) of title 28 of the United States Code; (B) to the extent allowed,

18 18

whether by interim order, procedural order, or otherwise, reasonable fees and expenses of

19 19

the Debtors’ professionals in an amount not exceeding $150,000.00; (C) reasonable fees

20 20

and expenses of any professionals of any

21 21

appointed in the Debtors’ cases (the “Creditors’ Committee”) in an amount not to exceed

22 22

$50,000.00. Notwithstanding the foregoing, the Carve-Out does not include, does not

23 23

apply to, and is not available for any fees or expenses incurred by any party in connection

24 24

with (1) the investigation, preparation, initiation, or prosecution of any claims, causes of

25 25

action, proceeding, adversary proceeding, or other litigation against CapStar, including

26 26

challenging the amount, validity, perfection, priority or enforceability of or asserting any

27 27

defense, counterclaim or offset to, the obligations, liens and security interests granted under

28 28

the Pre-Petition Loan Documents, in favor of CapStar, the DIP Financing Documents, or

official committee of unsecured creditors

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under the Stipulation, including, without limitation, for lender liability or pursuant to

Bankruptcy Code section 105, 510, 544, 547, 548, 549, 550 or 552, applicable non-

bankruptcy law, or otherwise; (2) attempts to modify any of the rights granted to CapStar

under the Stipulation, including any order related thereto, or other cash collateral order; (3)

any attempt to prevent, hinder, or otherwise delay CapStar’s enforcement or realization

upon any collateral in accordance with the Pre-Petition Loan Documents, the DIP

Financing Documents, the Stipulation, or any other document or order in connection

therewith; or (4) paying any amount on account of any claims arising before the Petition

Date unless such payments are approved by an order of the Court, or otherwise included in

10 10 11 11

the Approved Budget. g.

Debtors’ Stipulation With Respect to Pre-Petition Loan Documents and

12 12

Obligations Thereunder: Pursuant to the Stipulation and the Interim Order, the Debtors

13 13

ratifies and reaffirms their obligations under the Pre-Petition Loan Documents, and agrees

14 14

and covenants that the obligations thereunder are valid, legal, binding, and enforceable

15 15

against the Debtors without defense, counterclaim, or offset of any kind. Upon the entry of

16 16

the Interim Order, the Pre-Petition Loan Documents and all liens and security interests

17 17

granted thereby in the Pre-Petition Collateral shall continue in full force and effect, and the

18 18

Debtors shall perform all of the provisions, including payment obligations, of the Pre-

19 19

Petition Loan Documents.

20 20

Limitation on Use of the DIP Loan, the DIP Collateral, and the Pre-

21 21

Petition Collateral (including Cash Collateral): Upon entry of the Interim Order and a

22 22

final order approving the Stipulation (the “Final Order”), the Debtors may only use the DIP

23 23

Loan, the DIP Collateral, and the Pre-Petition Collateral (including cash collateral), solely

24 24

as provided in the Stipulation, the Approved Budget (subject to permitted variances), and

25 25

the DIP Financing Documents. Notwithstanding anything in the Stipulation or in any other

26 26

order of this Court to the contrary, the Debtors are not authorized to use the DIP Loan, the

27 27

DIP Collateral, or the Pre-Petition Collateral, including cash collateral, to (i) investigate,

28 28

object, contest, or raise any defense to the validity, perfection, priority, extent, or

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enforceability of the DIP Obligations, the Pre-Petition Obligations or the liens, claims or

rights granted under the Stipulation, or order related thereto, the DIP Financing Documents,

or the Pre-Petition Loan Documents, or take any action purporting to do any of the

foregoing; (ii) investigate, assert, or prosecute any claims and defenses against CapStar or

any of its predecessors-in-interest, agents, affiliates, representatives, attorneys, or advisors

or take any action purporting to do the foregoing in respect of the DIP Loan, the Pre-

Petition Obligations, the DIP Liens, the DIP Super-Priority Claim, the Pre-Petition Liens,

the Adequate Protection Obligations, Adequate Protection Liens, and/or the First Lien

Super-Priority Claim granted to CapStar under this Stipulation, or order related thereto; (iii)

10 10

prevent, hinder, or otherwise delay CapStar from enforcement, or realization on the DIP

11 11

Obligations, DIP Collateral, Pre-Petition Obligations, Pre-Petition Collateral, and the liens,

12 12

claims, and rights granted to such parties under the Stipulation (including any order related

13 13

thereto), in accordance with the DIP Financing Documents, the Pre-Petition Loan

14 14

Documents, the Stipulation, or any other cash collateral order or other order related thereto,

15 15

as applicable; (iv) seek to modify any of the rights granted to CapStar under the Stipulation

16 16

(other than with the consents contemplated thereunder), or as provided in the DIP

17 17

Financing Documents or the Pre-Petition Loan Documents; (v) apply to the Court for

18 18

authority to approve super-priority claims or grant liens or security interests in the DIP

19 19

Collateral or any portion thereof that are senior to, or pari passu with, the DIP Liens, the

20 20

DIP Super-Priority Claim, Pre-Petition Liens, Adequate Protection Liens or First Lien

21 21

Super-Priority Claim, unless all DIP Obligations, Pre-Petition Obligations, Adequate

22 22

Protection Obligations, and claims granted to CapStar have been refinanced or paid in full

23 23

in cash (including the cash collateralization of any letters of credit) or otherwise agreed to

24 24

in writing by CapStar in its sole discretion, which can be withheld for any reason

25 25

whatsoever; or (vi) seek to pay any amount on account of any claims arising prior to the

26 26

Petition Date unless such payments are approved in writing by CapStar, in its sole

27 27

discretion, which can be withheld for any reason whatsoever), or are otherwise included in

28 28

the Approved Budget.

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Effect of Stipulation on Third Parties: Upon entry of the Interim Order

and the Final Order, the stipulations, releases, and admissions contained in the Stipulation,

will be deemed binding upon: (1) each of the Debtors and any successor thereto; and (2) all

other parties in interest, including any Creditors’ Committee or any Chapter 7 or Chapter

11 trustee appointed or elected for any of the Debtors (a “Trustee”). Notwithstanding the

foregoing, the binding effect of the Stipulation, the Interim Order, and the Final Order will

not be held against any Creditors’ Committee, if within thirty (30) days from the Petition

Date, any Creditors’ Committee has duly filed an adversary proceeding challenging the

validity, enforceability, priority, or extent of the Pre-Petition Obligations or the liens on the

10 10

Pre-Petition Collateral against CapStar in connection with any matter related to the Pre-

11 11

Petition Obligations, or the Pre-Petition Collateral, or the Pre-Petition Liens. Nothing in

12 12

the Stipulation vests or confers on any party-in-interest, including the Creditors’ Committee

13 13

or Trustee, standing or authority to pursue any cause of action belonging to any of the

14 14

Debtors or its respective estate.

15 15

Section 506(c) Waiver; No Marshaling: Upon entry of the Interim Order

16 16

and Final Order approving the Stipulation, except to the extent of the Carve-Out, no costs

17 17

or expenses of administration of any of the Debtors’ Chapter 11 case or any successor

18 18

cases, including any Chapter 7 cases, that may result therefrom, including liquidation in

19 19

bankruptcy or other proceedings under the Bankruptcy Code, may be charged against or

20 20

recovered from CapStar, the Pre-Petition Collateral, the DIP Obligations, and/or the DIP

21 21

Collateral pursuant to Bankruptcy Code sections 105(a) or 506(c), or otherwise, without the

22 22

prior written consent of CapStar, which such consent may be withheld in CapStar’s sole

23 23

discretion and for any reason whatsoever, and no such consent may be implied from any

24 24

other action, inaction, or acquiescence by CapStar or its representatives. In no event shall

25 25

CapStar be subject to the equitable doctrine of “marshaling” or any other similar doctrine

26 26

with respect to the DIP Collateral or the Prepetition Collateral (as applicable).

27 27 28 28

Events of Default and Remedies: Upon entry of the Interim Order and the

Final Order, and without any further order of this Court, upon the occurrence of any Event

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of Default (as set forth in the Stipulation and the DIP Credit Agreement), the automatic stay

is deemed modified and lifted as to the DIP Collateral and Pre-Petition Collateral to permit

CapStar to pursue any and all remedies to which it may be entitled, including the right to

demand immediate possession of the DIP Collateral and Pre-Petition Collateral and to

liquidate the same in the manner provided by applicable law, all without further order of or

application to the Bankruptcy Court. Upon the occurrence of any Event of Default,

CapStar shall be entitled to the exercise of any and all rights and remedies available to it

under the DIP Financing Documents and the Pre-Petition Loan Documents, at law or in

equity. All such rights and remedies may be exercised successively or concurrently in such

10 10

order and manner as CapStar may in its sole discretion elect, and no such election shall

11 11

constitute a waiver by CapStar of any other right or remedy.

12 12

Release: Upon the entry of the Interim Order, each of the Debtors and its

13 13

bankruptcy estate, on its own behalf and on behalf of its past, present and future

14 14

predecessors, successors, heirs, subsidiaries, and assigns (collectively, the “Releasors”), to

15 15

the maximum extent permitted by applicable law, unconditionally, irrevocably, fully and

16 16

forever release, remise, acquit, relinquish, irrevocably waive, and discharge CapStar and its

17 17

former, current, or future officers, employees, directors, agents, representatives, owners,

18 18

members, partners, financial advisors, legal advisors, shareholders, managers, consultants,

19 19

accountants, attorneys, affiliates, and predecessors in interest (collectively, the

20 20

“Releasees”), of and from any and all claims, demands, liabilities, responsibilities, disputes,

21 21

remedies, causes of action, indebtedness, obligations, rights, assertions, allegations, actions,

22 22

suits, controversies, proceedings, losses, damages, injuries, attorneys’ fees, costs, expenses,

23 23

or judgments of every type, whether known, unknown, asserted, unasserted, suspected,

24 24

unsuspected, accrued, unaccrued, fixed, contingent, pending, or threatened including, but

25 25

not limited to, all legal and equitable theories of recovery, arising under common law,

26 26

statute or regulation or by contract, of every nature and description that existed as of the

27 27

date that any order confirming the Stipulation becomes final, relating to any of the Pre-

28 28

Petition Loan Documents, the DIP Financing Documents, or the transactions contemplated

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under such documents, or the Debtors’ Chapter 11 cases, as applicable, including, but not

limited to, (i) any so-called “lender liability,” equitable subordination, equitable

disallowance, or recharacterization claims or defenses, (ii) any and all claims and causes of

action arising under the Bankruptcy Code, and (iii) any and all claims and causes of action

regarding the validity, priority, perfection or non-avoidability of CapStar’s liens or claims.

Milestones: As set forth in the DIP Credit Agreement, the Debtors are

required to achieve the following milestones, any of which, if not achieved, shall constitute

an Event of Default under the DIP Credit Agreement:

on or before June 9, 2017 (or such later date as may be agreed to in

10 10

writing by CapStar in its sole discretion), the Debtors shall file a motion seeking

11 11

Court approval to sell substantially all of the Debtors’ assets to Purchaser, or a

12 12

successful bidder following an auction (“Auction”), free and clear of all liens,

13 13

claims and encumbrances (the “Sale”), under Section 363 of the Bankruptcy Code

14 14

(the “Sale Motion”);

15 15

ii.

on or before June 9, 2017 (or such later date as may be agreed to in

16 16

writing by CapStar in its sole discretion), and subject to the Court’s availability, the

17 17

Debtors shall have obtained Court approval of the Debtors’ motion to approve

18 18

certain bidding procedures in connection with the Sale, pursuant to an order in form

19 19

and substance reasonably acceptable to CapStar (the “Sale Procedures Order”);

20 20

iii.

on or before July 7, 2017, the Debtors shall have conducted, subject

21 21

to the Sale Procedures Order, the Auction for the sale of all or substantially all of

22 22

the Debtors’ assets, free and clear of all liens and claims;

23 23

iv.

on or before July 14, 2017 (or such later date as may be agreed to in

24 24

writing by CapStar in its sole discretion), the Debtors shall have obtained Court

25 25

approval of the Sale Motion, pursuant to an order in form and substance reasonably

26 26

acceptable to CapStar (the “Sale Order”); and

27 27

on or before July 28, 2017, the Debtors shall have closed the Sale.

28 28

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II.

THE DEBTORS SHOULD BE AUTHORIZED TO USE CASH COLLATERAL

The Debtors Must Be Authorized To Use Cash Collateral To Operate, Maintain

And Preserve Their Assets In Accordance With The Initial Approved Budget.

The Debtors’ use of property of the estates is governed by section 363 of the Bankruptcy

66 77 88 99 10 10

Code. Section 363(c)(1) provides in pertinent part: If the business of the debtor is authorized to be operated under section. . .1108. . . of this title and unless the court orders otherwise, the trustee may enter into transactions, including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing, and may use property of the estate in the ordinary course of business without notice or a hearing.

11 11

11 U.S.C. § 363(c)(1). A debtor in possession has all of the rights and powers of a trustee with

12 12

respect to property of the estate, including the right to use property of the estate in compliance

13 13

with section 363. 11 U.S.C. § 1107(a).

14 14

“Cash collateral” is defined as “cash, negotiable instruments, documents of title,

15 15

securities, deposit accounts or other cash equivalents in which the estate and an entity other than

16 16

the estate have an interest [.]” 11 U.S.C. § 363(a). Section 363(c)(2) establishes a special

17 17

requirement with respect to “cash collateral,” providing that the trustee or debtor in possession

18 18

may use “cash collateral” under subsection (c)(1) if:

19 19 20 20 21 21 22 22

(A) each entity that has an interest in such cash collateral consents; or (B) the court, after notice and a hearing, authorizes such use, sale or lease in accordance with the provisions of this section. 11 U. S.C. §363(c)(2)(A) and (B).

23 23

It is well settled that it is appropriate for a Chapter 11 debtor to use cash collateral for the

24 24

purpose of maintaining and operating its property. 11 U.S.C. § 363(c)(2)(B); In re Oak Glen R-

25 25

Vee, 8 B.R. 213, 216 (Bankr. C.D. Cal. 1981); In re Tucson Industrial Partners, 129 B.R. 614

26 26

(9th Cir. BAP 1991). In addition, where the debtor is operating a business, it is extremely

27 27

important that the access to cash collateral be allowed in order to facilitate the goal of

28 28

reorganization: “the purpose of Chapter 11 is to rehabilitate debtors and generally access to cash

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collateral is necessary to operate a business.” In re Dynaco Corporation, 162 B.R. 389 (Bankr.

D.N.H. 1993), quoting In re Stein, 19 B.R. 458, 459. (Bankr. E.D. Pa. 1982).

For the reasons discussed herein, the Debtors have no ability to maintain their business

operations or to preserve the going-concern value of their assets unless the Debtors have the

ability to use cash collateral to pay their projected expenses in accordance with the Initial

Approved Budget. The Debtors’ inability to pay such expenses would cause immediate and

irreparable harm to the Debtors’ bankruptcy estates. Indeed, the Debtors’ inability to pay the

expenses set forth in the Initial Approved Budget, which include payroll, utilities, and other

critical operating expenses, would result in the immediate shutdown of the Debtors’ businesses

10 10

and the decimation of the going-concern value of the Debtors’ businesses and assets. The

11 11

preservation and maintenance of the value of the Debtors’ businesses and assets are of the utmost

12 12

significance and importance to a successful sale of substantially all of the Debtors’ assets and the

13 13

Debtors’ emergence from these Chapter 11 cases.

14 14

The Debtors Believe That The Prepetition Secured Parties All Consent To The

15 15

Debtors’ Use Of Cash Collateral And Are Adequately Protected By The Continued

16 16

Operation Of The Debtors’ Businesses And Other Forms Of Adequate Protection.

17 17

As noted above, the Debtors believe that the only parties who may potentially have a

18 18

valid interest in the Debtors’ cash are CapStar and CPF.

19 19

Pursuant to section 363(c)(2) of the Bankruptcy Code, the Court may authorize a debtor

20 20

in possession to use a secured creditor’s cash collateral if the secured creditor consents to the use

21 21

of cash collateral or is adequately protected. In re Mellor, 734 F.2d 1396, 1400 (9th Cir. 1984).

22 22

See also In re O'Connor, 808 F.2d 1393, 1398 (10th Cir. 1987); In re McCombs Properties VI,

23 23

Ltd., 88 B.R. 261, 265 (Bankr. C.D. Cal. l988) (“McCombs”).

24 24

Here, CapStar has consented to the Debtors’ use of cash collateral to pay the expenses set

25 25

forth in the Initial Approved Budget in accordance with the provisions of the Stipulation. In

26 26

addition, the Debtors believe that CPF (together with CapStar, the “Pre-Petition Secured

27 27

Parties,” and individually, a “Pre-Petition Secured Party”) consents to the Debtors’ use of cash

28 28

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collateral to pay the expenses set forth in the Initial Approved Budget. Accordingly, the Debtors

should be authorized to use cash collateral pursuant to section 363(c)(2) of the Bankruptcy Code.

Furthermore, the Debtors submit that the value of the Prepetition Secured Parties’ interest

in the Debtors’ cash collateral will be adequately protected by, among other things, the continued

operation and maintenance of the Debtors’ businesses.

Pursuant to the Supreme Court case of United Savings Association v. Timbers of Inwood

Forest Associates, 108 S.Ct. 626, 629 (1988) (“Timbers”) and subsequent case law, the property

interest that a debtor must adequately protect pursuant to Sections 361(1) and (2) of the

Bankruptcy Code is only the value of the lien that secures the creditor’s claim. 108 S.Ct. at 630.

10 10

See also, McCombs, 88 B.R. at 266. Section 506(a) “limit[s] the secured status of a creditor (i.e.,

11 11

the secured creditor’s claim) to the lesser of the [allowed amount of the] claim or the value of the

12 12

collateral.” McCombs, 88 B.R. at 266. The law is clear that the preservation of the value of a

13 13

secured creditor’s lien is sufficient to provide adequate protection to a secured creditor when a

14 14

debtor seeks to use cash collateral. In re Triplett, 87 B.R. 25 (Bankr. W.D.Tex. 1988). See also

15 15

In re Stein, 19 B.R. 458 (Bankr. E.D.Pa. 1982). The Stein Court determined that the use of cash

16 16

collateral was necessary to the continued operations of the debtor, and that the creditor’s secured

17 17

position could only be enhanced by the continued operation of the debtor’s business. See also, In

18 18

re McCombs, supra, where the court determined that the debtor’s use of cash collateral for

19 19

needed repairs, renovations and operating expenses eliminated the risk of diminution in the

20 20

creditor’s interest in the cash collateral and such use would more likely increase cash collateral.

21 21

As reflected in the Initial Approved Budget, the payment of the expenses necessary for

22 22

the Debtors to continue operating their businesses will adequately protect the Prepetition Secured

23 23

Parties because by doing so, the Debtors will continue to generate revenue and will be able to

24 24

preserve the going-concern value of the Debtors’ assets while the Debtors pursue the sale of

25 25

substantially all of the Debtors’ assets to the Purchaser (or a successful overbidder). Other

26 26

Courts have determined that a debtor’s continued business operations can constitute the adequate

27 27

protection of a secured creditor. See Matter of Pursuit Athletic Footwear, Inc., 193 B.R. 713

28 28

(Bankr. D. Del. 1996); In re Newark Airport/Hotel Ltd. Partnership, 156 B.R. 444, 450 (Bankr.

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D.N.J. 1993); In re Dynaco, 162 B.R. 389, 394-5 (Bankr. D.N.H. 1993); In re Immenhausen

Corp., 164 B.R. 347, 352 (Bankr. M.D. Fla. 1994).

33 44 55 66 77 88 99 10 10 11 11 12 12

Additionally, in determining adequate protection, Courts have stressed the importance of promoting a debtor’s reorganization. In In re O’Connor, supra, the Tenth Circuit stated: “In this case, Debtors, in the midst of a Chapter 11 proceeding, have proposed to deal with cash collateral for the purpose of enhancing the prospects of reorganization. This quest is the ultimate goal of Chapter 11. Hence, the Debtor’s efforts are not only to be encouraged, but also their efforts during the administration of the proceeding are to be measured in light of that quest. Because the ultimate benefit to be achieved by a successful reorganization inures to all the creditors of the estate, a fair opportunity must be given to the Debtors to achieve that end. Thus, while interests of the secured creditor whose property rights are of concern to the court, the interests of all other creditors also have bearing upon the question of whether use of cash collateral shall be permitted during the early stages of administration.” 808 F.2d at 1937.

13 13

The use of cash collateral is critical to the Debtors’ ability to maintain their business

14 14

operations and preserve the value of their assets while the Debtors pursue a sale of the Debtors’

15 15

assets, for the benefit of the Debtors’ creditors. As discussed above, the Debtors will be seeking

16 16

Court approval of, and will be seeking to expeditiously close, the sale of substantially all of the

17 17

Debtors’ assets to the Purchaser (or a successful overbidder). If the Debtors are not permitted to

18 18

use cash collateral to maintain the Debtors’ business operations and preserve the going-concern

19 19

value of the Debtors’ assets, the chances of successfully selling the Debtors’ assets will

20 20

evaporate and the Debtors will be forced to immediately liquidate their assets, which in turn will

21 21

dramatically and negative impact the value of the Debtors’ assets. On the other hand, if the

22 22

Debtors are authorized to use their cash collateral, the Debtors will be able to maintain their

23 23

business operations and preserve the value of the Debtors’ assets while the Debtors pursue the

24 24

successful consummation of a sale transaction which ultimately provides the basis for a recovery

25 25

to the Debtors’ creditors. Clearly, the use of cash collateral will only enhance the prospect of the

26 26

Debtors’ reorganization.

27 27

The Debtors believe that CapStar and CPF, the only other creditor who may have a

28 28

security interest in and lien against the Debtors’ assets including cash collateral, are further

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adequately protected by the Adequate Protection Liens in the DIP Collateral proposed to be

provided to them (to the same extent, validity and priority as their respective pre-petition liens

against the Debtors’ assets), which liens shall be subject and subordinate only to the Carve-Out,

DIP Liens, and certain permitted liens as set forth in the DIP Credit Agreement, including

purchase money security interests granted to, and liens properly perfected by, secured creditors

of the Debtors prior to the Petition Date. Additionally, CapStar, which holds a first-priority

security interest and lien against all of the Debtors’ assets, is adequately protected by the First

Lien Super-Priority Claim against the Debtors’ estates, which shall have priority in payment over

any and all administrative expenses and claims asserted against any Debtor or its respective

10 10

bankruptcy estate, subject and subordinate only to the Carve-Out and the DIP Super-Priority

11 11

Claim. Finally, CapStar is further adequately protected as it is entitled to access to the Debtors’

12 12

properties and books and records and to regular financial reporting from the Debtors in

13 13

accordance with the terms of the Stipulation.

14 14

Since the Debtors believe that the Pre-Petition Secured Parties have consented or will

15 15

consent to the Debtors’ use of cash collateral and, separately, given the adequate protection being

16 16

provided to the Pre-Petition Secured Parties for the Debtors’ use of cash collateral, the Debtors

17 17

submit that the requirements of section 363(c)(2) have been satisfied and that the Debtors should

18 18

be authorized to use cash collateral in accordance with the terms and conditions set forth in the

19 19

Stipulation and in the Interim Order.

20 20

III.

21 21

THE DEBTORS SHOULD BE AUTHORIZED TO OBTAIN THE PROPOSED

22 22

POST-PETITION FINANCING

23 23

The Debtors Should Be Authorized To Obtain The Proposed Post-Petition

24 24

Financing From CapStar To Operate The Debtors’ Businesses And To Maintain

25 25

And Preserve The Value Of The Debtors’ Assets.

26 26

Pursuant to Bankruptcy Code § 364(c), a debtor may, in the exercise of its business

27 27

judgment, incur secured debt if the debtor has been unable to obtain unsecured credit and the

28 28

borrowing is in the best interest of the estate. See, e.g., In re Simasko Production Co., 47 B.R.

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444, 448-9 (D. Colo.1985) (authorizing interim financing agreement where Debtors’ best

business judgment indicated financing was necessary and reasonable for benefit of estate); In re

Ames Dept. Stores, 115 B.R. 34, 38 (Bankr. S.D.N.Y. 1990) (“Ames”) (with respect to post-

petition credit, courts “permit debtors-in-possession to exercise their basic business judgment

consistent with their fiduciary duties”). Section 364(c) provides, in pertinent part, that:

allowable-under section 503(b)(1) of this title as an administrative expense, the

court, after notice and a hearing, may authorize the obtaining of credit or the

incurring of debt –

10 10

(1) with priority over any and all administrative expenses of the kind

11 11

specified in section 503(b) or 507(b) of this title:

12 12

(2) secured by a lien on property of the estate that is not otherwise

13 13

subject to a lien; or

14 14

(3) secured by a junior lien on property of the estate that is subject to a

15 15

lien. 11 U.S.C. § 364(c).

16 16

Section 364(d)(1) of the Bankruptcy Code governs the incurrence of senior secured debt

17 17

or “priming” loans. Pursuant to Section 364(d)(1), the Court may, after notice and a hearing,

18 18

authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien

19 19

only if –

20 20

(1)

the trustee is unable to obtain such credit otherwise; and

21 21

(2)

there is adequate protection of the interest of the holder of the lien on the

22 22

property of the estate on which such senior or equal lien is proposed to be granted.

23 23

11 U.S.C. § 364 (d)(1).

24 24

Section 364 of the Bankruptcy Code is structured with an escalating series of

25 25

inducements which a debtor in possession may offer to attract credit during the post-petition

26 26

period. In re Photo Promotion Associates, Inc., 87 B.R. 835, 839 (Bankr. S.D.N.Y. 1988), aff’d,

27 27

881 F.2d 6 (2d. Cir. 1989). Where a trustee or debtor in possession cannot otherwise obtain

28 28

unsecured post-petition credit, such credit may be obtained under certain carefully proscribed

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conditions.

(Bankr.N.D.Ill.1991). For example, if creditors are unwilling to extend unsecured credit to a

debtor in possession, further inducements are offered, with court approval after notice and a

hearing, including, without limitation, liens equal to or senior to existing liens on encumbered

property in accordance with 11 U.S.C. § 364(d). In re Photo Promotion Associates, Inc., 87 B.R.

at 839.

In re T.M. Sweeney & Sons LTL Services, Inc., 131 B.R. 984, 989

Section 364(c) of the Bankruptcy Code also enumerates certain incentives that a court

may grant to post-petition lenders.

exhaustive. Courts have frequently authorized the use of inducements not specified in the

10 10

statute. See, e.g., In re Ellingsen MacLean Oil Co., 834 F.2d 599 (6th Cir. 1987) (affirming

11 11

financing order which prohibited any challenges to the validity of already existing liens); In re

12 12

Defender Drug Stores, 126 B.R. 76 (Bankr. D. Ariz. 1991) (authorizing enhancement fee to post-

13 13

petition lender), aff’d 145 B.R. 312, 316 (Bankr. 9th Cir. 1992) (“[b]ankruptcy courts . . . have

14 14

regularly authorized postpetition financial arrangements containing lender incentives beyond the

15 15

explicit priorities and liens specified in section 364”).

However, the list set forth in Section 364(c) is not

16 16

Subject to the approval of the Court, the Debtors have agreed to grant to CapStar the DIP

17 17

Liens, which are fully perfected first priority priming liens on and senior security interests

18 18

against the DIP Collateral, which DIP Liens shall be senior to any and all other liens and security

19 19

interests (other than such liens and security interests as may have been duly-perfected and which

20 20

were senior to the lien and security interest of CapStar), to secure the DIP Obligations, subject

21 21

and subordinate only to the Carve-Out. The Debtors have also agreed to provide CapStar with

22 22

the DIP Super-Priority Claim, which claim shall have priority in payment over any and all

23 23

administrative expenses and claims asserted against any Debtor or its respective bankruptcy

24 24

estate, subject and subordinate only to the Carve-Out. For all of the reasons explained herein,

25 25

the Debtors believe that granting these protections to CapStar are warranted, appropriate and

26 26

necessary given the circumstances of these cases where CapStar has agreed to provide the

27 27

Debtors with critically necessary emergency financing, without which the Debtors will be forced

28 28

to immediately shut down and liquidate.

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Two factors courts consider in determining whether to authorize post-petition financing

which contemplates the granting of a security interest in favor of the lender are (1) whether the

debtor is unable to obtain unsecured credit per 11 U.S.C. § 364(b), i.e., by allowing a lender only

an administrative claim per 11 U.S.C. § 364(b)(1)(A); and (2) whether the terms of the

transaction are fair, reasonable and adequate, given the circumstances of the debtor-borrower and

the proposed lender. In re Crouse Group, Inc., 71 B.R. 544, 549 (Bankr. E.D.Pa. 1987); see also

In re Aqua Assoc., 123 B.R. 192, 195 (Bankr. E.D.Pa. 1991).

In addition to the foregoing, a debtor in possession seeking subordination of liens to new

financing must establish adequate protection of the liens to be subordinated to the new financing.

10 10

In re C.B.G. Ltd., 150 B.R. 570, 571 (Bankr. M.D.Pa. 1992).

11 11

The Debtors submit that all of these standards have been satisfied in these cases.

12 12

13 13

The Debtors Are Unable To Obtain Unsecured Credit Or Secured Credit On A Junior Lien Basis.

14 14

In satisfying the standards of Section 364, a debtor need not seek credit from every

15 15

available source, but should make a reasonable effort to seek other sources of credit available

16 16

under § 364(a) and (b). See, e.g., In re Snowshoe Co., 789 F.2d 1085, 1088 (4th Cir. 1986)

17 17

(trustee had demonstrated by good faith effort that credit was not available without senior lien by

18 18

unsuccessfully contacting other financial institutions in immediate geographic area; “the statute

19 19

imposes no duty to seek credit from every possible lender before concluding that such credit is

20 20

unavailable”); Ames, supra, 115 B.R. at 40 (finding that debtors demonstrated the unavailability

21 21

of unsecured financing where debtors approached four lending institutions).

22 22

To date, the only financing commitment that has been provided to the Debtors is the one

23 23

offered by CapStar. In order to avoid a complete shutdown of the Debtors’ business and

24 24

liquidation of the Debtors’ assets, the Debtors diligently sought additional financing before the

25 25

Debtors’ bankruptcy filings. However, given the amount of the Debtors’ secured debt and the

26 26

Debtors’ current cash flow situation, it is not realistic for any lender to be willing to provide the

27 27

Debtors with unsecured financing or even secured financing on a junior lien basis. Fortunately,

28 28

CapStar, who is also the Debtors’ pre-petition senior secured lender, has offered to provide the

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Debtors with post-petition secured financing but solely on the terms and conditions set forth in

the Stipulation and the DIP Financing Documents. CapStar has presumably agreed to provide

financing to the Debtors, when no other lender has expressed a willingness to do so, in the hopes

of maximizing the recovery on the pre-petition secured debt owed to CapStar. The Debtors have

little doubt that, even if there was another lender who was willing to provide the Debtors with the

necessary post-petition financing (recognizing that the Debtors are not aware of any such lender

at this time), such lender would require that its financing be secured by a senior priming lien

against the Debtors’ assets, upon terms that would very likely be less favorable than those

currently offered by CapStar. The terms and conditions set forth in the Stipulation and the DIP

10 10

Financing Documents have been negotiated extensively, in good faith and at arms’ length, by the

11 11

parties.

12 12

After considering all of their alternatives, the Debtors have concluded, in an exercise of

13 13

their sound business judgment, that the DIP Loan to be provided by CapStar (particularly, in

14 14

conjunction with the consent to use cash collateral to be provided by CapStar) represents the best

15 15

financing presently available to the Debtors.

16 16 17 17

The Terms Of The Proposed Post-Petition Financing From CapStar Are Fair, Reasonable and Adequate.

18 18

The Debtors submit that terms of the proposed DIP Loan from CapStar are fair,

19 19

reasonable and adequate. As noted above, the terms and conditions set forth in the Stipulation

20 20

and the DIP Financing Documents were negotiated extensively, in good faith and at arms’

21 21

length, by the parties. CapStar is well aware of the fact that the Debtors would have very little

22 22

chance of avoiding an immediate shutdown of the Debtors’ business if not for the DIP Loan that

23 23

CapStar has offered. CapStar has agreed to make the DIP Loan to the Debtors in an effort to

24 24

assist the Debtors in preserving the going concern value of the Debtors’ business and to facilitate

25 25

the successful consummation of the sale of the Debtors’ assets to the Purchaser (or a successful

26 26

overbidder). The amount of financing being offered to the Debtors is for an aggregate principal

27 27

amount of up to $2,000,000 and is certainly not insignificant. The Debtors submit that the

28 28

benefits afforded to the Debtors by the DIP Loan justify the protections being afforded to

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CapStar under the terms of the Stipulation and the DIP Financing Documents. The DIP Loan

offers the Debtors their best and, likely, only opportunity to maintain and preserve the going

concern value of their assets while pursuing a transaction which ultimately results in the

successful sale of the Debtors’ business and assets, which will benefit all creditors and parties in

interest.

Based on the foregoing, the Debtors represent that (i) the terms and conditions of the DIP

Loan are fair and reasonable, reflect the Debtors’ exercise of prudent business judgment

consistent with their fiduciary duty and are supported by reasonably equivalent value and fair

consideration, (ii) the DIP Loan has been negotiated in good faith and at arms’ length among the

10 10

Debtors and CapStar, and (iii) any credit extended, loans made and other financial

11 11

accommodations extended to the Debtors by CapStar have been extended, issued or made, as the

12 12

case may be, in “good faith” within the meaning of section 364(e) of the Bankruptcy Code.

13 13 14 14 15 15

The Liens Being “Primed” Are Adequately Protected And Are Already Primarily Junior In Priority To The Liens Held By CapStar.

The proposed priming liens are authorized by the Bankruptcy Code, even absent consent

16 16

of other existing lien holders.

17 17

furnishing of adequate protection in favor of lien holders which assert an interest in collateral.

18 18

Although section 364 does not specifically define the term “adequate protection,” section 361 of

19 19

the Bankruptcy Code requires that adequate protection be furnished to the extent Debtors’ “use,

20 20

sale, lease or grant results in a decrease in the value of such entity’s interest in such property.”

21 21

11 U.S.C. §§ 361(1), (2), (3) (emphasis added). Stated succinctly, adequate protection protects a

22 22

secured creditor against a decrease in the value of its collateral. See e.g., In re Planned System,

23 23

Inc., 78 B.R. 852, 861-62 (Bankr. S.D. Ohio 1987). This standard applies equally with respect to

24 24

“priming” financing under section 364(d)(1)(B). See, e.g., In re Hubbard Power & Light, 202

25 25

B.R. 680, 685 (Bankr. E.D.N.Y. 1996) (“The goal of adequate protection for purposes of the

26 26

provision entitling a debtor to obtain financing secured by liens senior to all other interests is to

27 27

safeguard the secured creditor from diminution in the value of its interests.”); In re Aqua Assoc.,

28 28

123 B.R. 192, 196 (Bankr. E.D. Pa. 1991); In re Beker Ind. Corp., 58 B.R. 725, 741-42 (Bankr.

Section 364(d)(1)(B) of the Bankruptcy Code requires the

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S.D.N.Y. 1986).

The Court has broad discretion to determine whether adequate protection is furnished.

See e.g., In re 495 Cent. Park Ave. Corp., 136 B.R. 626, 631 (Bankr. S.D.N.Y. 1992). Whether

the party entitled to such protection is over or undersecured is not dispositive of whether

adequate protection is furnished. As the court in Aqua Assoc., 123 B.R. 192, noted:

10 10

Therefore, we believe that, while the presence of an equity cushion should be a relevant factor, it should not be a determinative factor in any ‘adequate protection’ analysis, and particularly one relating to § 364(d)(1)(B). The important question, in determination of whether the protection to a creditor’s secured interest is adequate, is whether that interest, whatever it is, is being unjustifiably jeopardized.

11 11

Id. at 196 (emphasis added; approving priming financing where interest rate was 5% over prime

12 12

and loan likely would enhance value of estate).

77 88 99

13 13

The preservation of the value of a secured creditor’s lien is sufficient to provide adequate

14 14

protection to a secured creditor when a debtor seeks to use cash collateral. In re Triplett, 87 B.R.

15 15

25 (Bankr. W.D.Tex. 1988). See also In re Stein, 19 B.R. 458 (Bankr. E.D.Pa. 1982). In Stein,

16 16

the Court found that, as a general rule, a debtor may use cash collateral where such use would

17 17

enhance or preserve the value of the collateral, and allowed the debtor therein to use cash

18 18

collateral even though the secured party had no equity cushion for protection. The Stein Court

19 19

determined that the use of cash collateral was necessary to the continued operations of the

20 20

debtor, and that the creditor’s secured position could only be enhanced by the continued

21 21

operation of the debtor’s business. See also In re McCombs, supra, where the court determined

22 22

that the debtor’s use of cash collateral for needed repairs, renovations and operating expenses

23 23

eliminated the risk of diminution in the creditor’s interest in the cash collateral and such use

24 24

would more likely increase cash collateral.

25 25

CapStar holds secured claims totaling more than $10 million which are secured by first

26 26

priority liens against virtually all of the Debtors’ assets. The only potentially secured creditor

27 27

whose lien will effectively be “primed” by the DIP Liens, is CPF, who holds a judgment lien

28 28

against one of the Debtors, Sure Haven, in the amount of approximately $133,000. The lien

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recorded by CPF against Sure Haven (in the sum of approximately $133,000) is junior in priority

to more than $10 million of secured debt already existing in favor of CapStar. However, if the

DIP Loan is not made available to the Debtors, the Debtors will be forced to immediately shut

down and liquidate, which would likely trigger a foreclosure of the Debtors’ assets by CapStar.

In such event, the Debtors’ other creditors, including CPF, are unlikely to receive any recovery

whatsoever.

It is by virtue of the DIP Loan that the Debtors will have the ability to maintain the

Debtors’ business operations and preserve the going-concern value of the Debtors’ assets while

the Debtors pursue a transaction which provides for the sale of substantially all of the Debtors’

10 10

assets, maximizing value for all creditors. The Debtors therefore submit that any creditor which

11 11

holds a lien against the Debtors’ assets, including CPF, is adequately protected as a result of (and

12 12

indeed will substantially benefit from) the DIP Loan.

13 13

14 14

While in determining whether to approve such a transaction, a Court is authorized to act

15 15

in its informed discretion, In re Ames Department Stores, Inc., 115 B.R. 34, 37 (Bankr. S.D.N.Y.

16 16

1990), the Court should give broad deference to the business decision of a Chapter 11 debtor,

17 17

particularly with respect to a Debtors’ business judgment regarding the need for and proposed

18 18

use of funds. Richmond Leasing Co. v. Capital Bank N.A., 762 F.2d 1303, 1311 (5th Cir. 1985).

19 19

As the Court noted in In re Ames Dept. Stores Inc., supra, “the court’s discretion under section

20 20

364 is to be utilized on the grounds that permit the reasonable business judgment [of the Debtor]

21 21

to be exercised . . .” In re Ames Department Stores, Inc., 115 B.R. at 40.

The Proposed Financing From CapStar Is Necessary And Proper.

22 22

There is little dispute that, without substantial post-petition financing, the Debtors will be

23 23

forced to immediately cease business operations and the Debtors will be forced into liquidation

24 24

mode. There can also be no question that such a result would cause the Debtors, their estates and

25 25

their creditors immediate and irreparable harm. In contrast, the DIP Loan affords the Debtors the

26 26

ability to maintain the Debtors’ business operations and provides the Debtors with the time

27 27

necessary to pursue and successfully close a sale of the Debtors’ assets that will ultimately

28 28

maximize the value of such assets. The Debtors have therefore concluded that obtaining the DIP

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Loan from CapStar is critically important to the success of the Debtors’ cases and is therefore in

the best interests of the Debtors’ estates.

IV.

PROCEDURAL REQUIREMENTS REGARDING APPROVAL OF

THE MOTION HAVE BEEN SATISFIED

Rule 4001(b) of the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rules”) sets

forth the procedural requirements for obtaining authority to use cash collateral, and Bankruptcy

Rules 4001(c) and (d) set forth procedural requirements for obtaining post-petition credit. The

Debtors submit that they have complied with these procedural requirements. First, the Motion

10 10

must contain a copy of the proposed form of order granting the Motion, which has been done by

11 11

attaching the proposed Interim Order as Exhibit “7” to the Goodman Declaration concurrently

12 12

filed herewith. Second, the Motion must provide a concise statement of the relief requested,

13 13

which was done above. Third, the Motion is required to be served on any entity with an interest

14 14

in the Debtors’ cash collateral, any committee appointed or the twenty largest unsecured

15 15

creditors if there is no committee, and on such other parties as the Court directs. Here, the

16 16

Debtors have served the Motion and all supportive papers upon the Office of the United States

17 17

Trustee, all known secured creditors and their counsel (if known), the twenty largest unsecured

18 18

creditors of each of the Debtors (as no committee yet exists), the Office of the United States

19 19

Trustee, and all parties who have requested special notice via overnight mail. Accordingly, the

20 20

Motion complies with the procedural requirements of Bankruptcy Rules 4001 (b)-(d).

21 21

In addition, in compliance with Bankruptcy Rule 4001(b)(1)(B) and 4001(c)(1)(B) and

22 22

Local Bankruptcy Rule 4001-2, the Debtors have filed concurrently herewith the mandatory

23 23

Court-approved Form F4001-2 (Statement Regarding Cash Collateral Or Debtor In Possession

24 24

Financing) which discloses whether the proposed Interim Order authorizing the DIP Loan and

25 25

Debtors’ use of cash collateral on an interim basis, pending a final hearing, contains certain

26 26

provisions of findings of fact.

27 27

requirements of Local Bankruptcy Rule 4001-2.

Accordingly, the Motion complies with the procedural

28 28

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THE WAIVER OF ANY APPLICABLE STAY IS APPROPRIATE

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For the reasons noted in the Motion, the Debtors will suffer immediate and irreparable

harm if the Debtors are not able to pay the expenses set forth in the Initial Approved Budget,

pending a final hearing on the Motion. The Debtors require the terms of the Stipulation and DIP

Financing Documents to become immediately effective to ensure that the Debtors will be able to

use their cash collateral and obtain the proposed DIP Loan from CapStar to pay such critical and

immediate expenses. Based on the foregoing, the Debtors request that any applicable stay,

including the stay provided under Bankruptcy Rule 6004, be waived to allow the Interim Order

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to become immediately effective.

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VI.

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CONCLUSION

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Based upon all of the foregoing, the Debtors respectfully request that this Court:

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(1)

grant the relief requested in the Motion on an interim basis;

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(2)

enter the proposed form of the Interim Order attached as Exhibit â&#x20AC;&#x153;7â&#x20AC;? to the

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Goodman Declaration filed concurrently herewith;

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(3)

waive any applicable stay, including the stay provided under Bankruptcy Rule

6004, to allow the Interim Order to become immediately effective;

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(4)

schedule the Final Hearing on the Motion no later than the twenty-first (21st) day

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following the entry of the Interim Order to consider entry of a Final Order granting the relief

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requested in the Motion on a final basis; and

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Case 8:17-bk-12218-CB

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(5)

Doc 5 Filed 06/01/17 Entered 06/01/17 15:55:22 Main Document Page 52 of 52

grant such further relief as the Court deems just and proper.

Dated: June 1, 2017

SOLID LANDINGS BEHAVIORAL HEALTH INC., et al.

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By: DAVID L. NEALE JULIET Y. OH LEVENE, NEALE, BENDER, YOO & BRILL L.L.P. Proposed Attorneys for Debtors and Debtors in Possession

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