HomeMy WebLinkAbout27-City Attorney
CITY OF SAN BERNARDINO - REQUEST FOR COUNCIL ACTION
From: JAMES F. PENMAN
City Attorney
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Subject: Discuss and Take Possible Action
Re: Choosing Between Two Competing
Reorganization Plans in the Bankruptcy of
Montgomery Wards
Dept: CITY ATTORNEY
Date: June 4, 2002
Synopsis of Previous Council Action:
None.
Recommended motion:
None.
Contact person: James F. Penman
Phone:
5255
Supporting data attached:
Staff Report
Ward:
All
FUNDING REQUIREMENTS:
Amount:
Source:
Finance:
Council Notes:
Agenda Item No. 27
f# In/Dr
STAFF REPORT
Council Meeting Date: June 4. 2002
TO: Mayor and Common Council
FROM: James F. Penman, City Attorney
DATE: June 10, 2002
AGENDA ITEM: Discuss and Take Possible Action Re: Choosing Between Two
Competing Reorganization Plans in the Bankruptcy of Montgomery
Ward
Wards has been in and out of bankruptcy several times through the years. In 1999, Wards
emerged from bankruptcy as a wholly owned subsidiary of General Electric Capital Corporation
(GECC). It soon became obvious that Wards was a weak company and would not survive in the
marketplace. Wards then filed bankruptcy again.
In bankruptcy court, a committee of creditors is appointed to help safeguard the interests of
unsecured creditors. In the Wards bankruptcy, the committee is made up of the seven largest
unsecured creditors. The committee determined that GECC had misled the creditors of Wards to
protect its interests prior to the most recent bankruptcy filing. In short, the committee feels Wards
had information that Wards was a failing company. In addition, GECC chose the management of
Wards. The committee filed suit against GECC seeking $500 million in restitution and an additional
$500 million in damages. This plan claims up to 100% of the amount of unsecured claims will be
paid if the lawsuit is successful. If unsuccessful, claimants will receive approximately 4% of their
claims.
GECC has submitted its own plan of reorganization to the bankruptcy court. This plan offers
unsecured creditors 20% of the amount of the claims within 6 weeks of approval of the plan.
Each group has hired a public relations firm to solicit support for its respective plan.
The City has filed two claims as follows:
I. Business Registration fees of $5,298.00
2. Refuse fees of$I,073.50
Total Claim: $6.371.50
Under GECC's plan the City will receive $1,274.30. Under the committee's plan, the City
will receive from $254.86 up to payment in full. However, the committee plan requires several years
I
oflitigation and all of the uncertainties oflitigation.
Without being an actual party to the litigation, it is virtually impossible to fully weigh the
merits of each plan. For every claim made by the Committee, GECC has a plausible defense.
Attached are several backup documents: (1) a flow chart showing the two competing plans,
(2) pertinent portions of the creditors' committee plan; and, (3) pertinent portions ofGECC's plan.
The City Attorney's office is not making a recommendation as to which the City should
choose. The City Attorney's office seeks authority to endorse and return the ballot of the Common
Council's choosing.
2
MONTGOMERY WARD COMPETING PLANS
Pursue the CUlTCnt creditor
lawsuit against GE s=king
S500 million damages and
equitable subordination of
GE Claims
CreditorsYote
Creditors' Comrninee
conducted e,.;tensive
investigation, discovered
substantial grounds for lawsuit.
20% recovery for general unsecured
claims, plus pouible additional
distribution if proceeds of
preferences e,.;ceed S25MM
Creditors
recover
100%
Creditors recover
20 -100%
depending on
settlement terms
Partial victory
(prevail on
some but not
all claims in
laWluit)
GE settles with
Creditors'
Committee
Creditors recover only
Debtors' cuh on hand,
plus net preference
recoveries IlDd other
avoidance actions and
OS sbarea pari paaau
with other ereditors
(recovery 4%+)
Creditors
recover 4 -
18%andGE
may share
pari pauu
with other
creditors
The .mouat creditors would recover frolD tile 1._lllt ....... Clt, _d the tlm"l of the recovery, cannot be predlcled willi. certainty.
However, .tter a. exteaalve Inv.stlpUon Ib.e Committee fOIlDd subst.ntlallrou"ds for Ibe la""ult and possible addltlollaJ 1...1
.etlons. The: Committee IIle:refon JIroDII)' beUc:veslD Ib.e merits of the clalml a..lnll CE.
Etlimated Allowed
Oenenal Unsccured
Claims
S4JS million
Recovery
f~m
unecumbe:rcd GE Plans:
~~.
+-Rislt.
Recovery from lawsuit v. OE _____ POI.nti,J!
4%
20"/0
100%
(Forecus[ed pc:n::en[agc recoveries will be hisher iftatal administrative, priority, and seneral unsecured claims are lower Ihan projecled and
lower if total claims are higher than projecled.
3
CREDITORS' COMMITTEE PLAN
~
Commencement Date sales ifmade or given by War or resulting
from a Wards' error, thereby allowing Monogr WCC to
mitigate its pre-Commencement Date losses wit post-
Commencement Date Sales.
. Monogram/MWCC were permitted to duct a discount amount of
2% from their daily settlement paym ts to Wards for use ofthe
Wards private label credit card duri the GOB Sales.
. Monogram/MWCC were pe 'tted to establish a reserve of up to
$5 million for charge-back, adjustments and other credits, plus in-
store payments, from th . settlement payments to Wards.
Approximately $3.6 Illion was returned to the Estates on April 3,
2001, leaving $1. illion used for pre-petition items. MWCC
Filed an Admi 'strative Expense Claim for additional chargebacks,
adjustment nd other credits.
(d) Tra er of Credit Card Accounts to Wal-Mart. Under the
terms of the credit card stipulati ,Monogram/MWCC issued Wal-Mart private label credit
cards as replacement cards t olders of approximately 2.1 million Wards' private label credit
cards. The aggregate e . mg balances on accounts covered by the new Wal-Mart cards were
approximately $1.6 billion.
11. Committee Litigation against GE Capital.
In discharging its obligations under the Bankruptcy Code as a fiduciary for
unsecured creditors of the Debtors in these Chapter 11 Cases, the Committee undertook an
extensive investigation under Rule 2004 of the Federal Rules of Bankruptcy Procedure (the
"2004 Investigation"). The Committee was authorized to conduct such an investigation by
section 11 03( c) of the Bankruptcy Code and pursuant to consensual stipulations between the
Debtors, the Committee, and GE Capital. The Committee's professionals reviewed voluminous
quantities of documents produced by GE Capital, the Debtors and others, and conducted
numerous sworn oral examinations of witnesses provided by the Debtors and GE Capital, and a
number of unsworn interviews as part of the 2004 Investigation.
The Committee ultimately concluded, unanimously, that facts existed to support
allegations of complete dominion and control of the Debtors by GE Capital and pervasive
misconduct and exploitation ofthe Debtors and their unsecured creditors by GE Capital in
furtherance of its own economic interests and in derogation of its legal duties to creditors of the
Debtors, during a period when, the Committee believes, the Debtors were insolvent and
undercapitalized. (For additional information on the merits of the Committee Complaint
25
and the risks of litigation, see the introductory section above as well as Article IV, Section
A, of this Creditors' Disclosure Statement. The Committee Complaint may be reviewed in
its entirety and may be found at Exhibit B.) The Causes of Action the Committee asserts, on
behalf of the Debtors' Estates, against GE Capital include, without limitation, those for (i)
equitable subordination of the GE Entities' Secured and Unsecured Claims and avoidance ofGE
Capital's asserted Liens on the Debtors' assets; (ii) recharacterization of its Secured and
Unsecured Claims as equity investments, and (iii) recovery of fraudulent transfers of various
assets of the Debtors (particularly but not exclusively relating to benefits received by GE Capital
and Monogram/MWCC from the promotion and operation of the Wards' private label credit card
program, and their subsequent flip of the credit card portfolio after shutting down Wards'
operations) without reasonably equivalent value or fair consideration, and with intent to hinder,
delay, or defraud other creditors of the Debtors.
The Committee filed a Committee Complaint against GE Capital and certain of its
affiliates on January 18,2002. (See the Committee Complaint at Exhibit B.) Ifthe Creditors'
Plan is confirmed, the Committee will pursue the Committee Litigation vigorously for the benefit
of the Debtors' Estates. If successful in most respects, the lawsuit would result in a distribution
to general Unsecured Creditors of 100% of their allowed claims. Any litigation is inherently
unpredictable and therefore, difficult to quantify. Therefore, it is possible that the lawsuit
may generate less funds than may be required to pay unsecured creditors in full. See
Article IV, section A, oftbis Creditors' Disclosure Statement, below, for a description of the
claims asserted by the Committee on behalf of the Debtors' Estates against the GE Entities,
and a discussion of the merits and risks of the Committee Litigation. See Exhibit E for an
estimate of the ranges of recovery on General Unsecured Claims depending on the varying
outcomes of the Committee Litigation.
D. Claims and Bar Date
l. Schedules and Statements. On February 20, 2001, the Debtors Filed
their respective Schedules of assets and liabilities and statements of financial affairs with the
Bankruptcy Court.
2. Bar Date for Claims and Administrative Claims; Supplemental Bar
Date. Bankruptcy law provides for claims arising before the commencement of a bankruptcy
case to be asserted by either or both of two methods. First, a creditor may file a proof of claim
with the bankruptcy court on the official form to be provided to known creditors for that purpose.
Second, a creditor is excused from the requirement of filing a proof of claim if the creditor's
claim is listed in the schedules of liabilities and is not listed as disputed, unliquidated, or
contingent.
By order dated April 27, 2001, the Bankruptcy Court established July 3, 2001 (the
"Bar Date"), as the date by which, with certain specified exceptions, all creditors must file (a)
26
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELA WARE
-------------------------------------------------------------------------
In re:
MONTGOMERY WARD, LLC, et a!.,
CHAPTER 11
Debtors.
Case No. 00-4667 (RTL)
Jointly Administered
-------------------------------------------------------------------------
THE OFFICIAL COMMITTEE OF
UNSECURED CREDITORS OF
MONTGOMERY WARD, LLC, et a!.,
Plaintiff,
COMPLAINT
-against-
GENERAL ELECTRIC CAPITAL
CORPORATION, GE CARD SERVICES,
INC., MONOGRAM CREDIT CARD
BANK OF GEORGIA, MONTGOMERY
WARD CREDIT CORPORATION,
PARTNERSHIP MARKETING
GROUP alk/a SIGNATURE FINANCIAL
MARKETING, INC., a division of
GENERAL ELECTRIC FINANCIAL
ASSURANCE, UNION FIDELITY LIFE
INSURANCE COMPANY, COLONIAL
PENN-FRANKLIN INSURANCE
COMPANY, GE CAPITAL INTERNATIONAL
SERVICES, GE CAPITAL FINANCIAL INC.,
and GE CAPITAL COMMUNICATION
SERVICES CORPORATION, d/b/a GE EXCHANGE,
Adv. Pro. No. 0 Z. -0 1~b3
11
,
Defendants.
Plaintiff, the Official Committee of Unsecured Creditors (the "Committee" or "Plaintiff') of
Montgomery Ward, LLC ("Wards") and its subsidiaries (collectively, the "Debtors"), by its attorneys,
Kronish Lieb Weiner & Hellman LLP and Morris, Nichols, Arsht & Tunnell, as and for its complaint
against the Defendants General Electric Capital Corporation ("GECC"), GE Card Services, Inc. ("Card
Services"), Monogram Credit Card Bank of Georgia ("Monogram"), Montgomery Ward Credit
Corporation ("MWCC"), Partnership Marketing Group ("PMG") alk/a Signature Financial Marketing,
Inc. ("Signature"), a division of General Electric Financial Assurance ("GEF A"), Union Fidelity Life
Insurance Company ("Union Fidelity"), Colonial Penn-Franklin Insurance Company ("Colonial
Penn"), GE Capital International Services ("GEC International"), GE Capital Financial Inc. ("GEC
Financial"), and GE Capital Communication Services Corporation, d/b/a GE Exchange ("GEC
Communication"), respectfully alleges:
I. PRELIMINARY STATEMENT
I. In August 1999, Wards emerged from bankruptcy as a wholly owned subsidiary of
GECC, and as a very weak company. In the sixteen months that followed, fully aware of Wards'
insolvency, GECC and certain of its affiliates named herein (collectively, the "Defendants") leveraged
their influence, and utilized every imaginable method, to squeeze out of Wards all of the economic
benefits they could take for themselves, without regard to the consequences to Wards and its creditors.
Among other things, Defendants intentionally misled creditors and manipulated Wards' financial
structure and the timing of Wards' second bankruptcy filing to benefit their own credit card and
marketing businesses and to offset taxable gains on the sale of a major asset by General Electric
Corporation, GECC's ultimate parent.
2. The December 1999 holiday season -- the first one following Wards' emergence from
bankruptcy -- was a disaster. It soon became clear that GECC's silver bullet for Wards - a grandiose
store re-modeling program - would not nearly be sufficient to stem the tide of Wards' losses. In the
first six months of 2000, Wards lost hundreds of millions of dollars. By June, its capital structure was
decimated.
3. In the face of all of this, GECC's principal person in charge of the Wards' investment
accurately concluded in early June 2000 that Wards was a dying retailer whose only realistic option
was liquidation and that anything short of that was, in his words, like "rearranging the deck chairs on
the Titanic."
4. Unfortunately for Wards' creditors, that conclusion was shared with no one outside of
the Defendants' close circle of executives. With only GECC at the helm, and with the fatal iceberg
clear in its view for month after month, GECC slowed down the doomed ship until December 28,
2000, for the sole purpose of benefitting itself and its affiliates.
5. Thus GECC delayed Wards' inevitable demise by knowingly misleading creditors as to
the Debtors' financial condition and GECC's long-term support for Wards. For example, GECC never
disclosed that it had determined that Wards needed $400 to $550 million in equity to survive in 2001,
an amount GECC knew neither it, nor anyone else, would ever invest. Indeed, GECC caused Wards to
tell the creditors just the opposite: that GECC would be a stalwart supporter of Wards. Relying on
such disinformation, Wards' creditors were duped into extending hundreds of millions of dollars in
unsecured credit to the Debtors, while GECC stood by knowing that the creditors would never be paid
in full.
6. Rather than risk the equity investments it believed were required to save Wards, to
provide Wards with the cash it needed to operate so that the Defendants could effect their scheme,
2
GECC made millions of dollars of "loans" to Wards secured by Wards' real estate, thereby creating
the fiction that GECC was supporting Wards. The effect of these "loans" was to delay Wards'
inevitable bankruptcy while at the same time to diminish-- by tens of millions of dollars __ the value of
the Debtors' estates.
7. The delays thus created by the Defendants permitted GECC the time it needed to
increase its private label credit card business and then "flip" Wards' credit card customers to a solvent
retailer in GECC's credit card portfolio. But for the needs of General Electric Company, GECC's
ultimate parent, the bait and flip scheme might have continued into 200 I. GECC finally caused Wards
to file in the last week of December in time for General Electric Company to offset a $1.3 billion gain
it had realized from its sale of common stock in Paine Webber Group, Inc. in 2000.
8. The Committee brings this action on behalf of the Debtors' estates to recover damages,
and obtain other remedies, arising from the Defendants' self-dealing and inequitable conduct,
including:
a. subordinating Defendants' secured and unsecured claims asserted against the
Debtors and declaring that any liens or security interests asserted by the Defendants as security for their
claims are void and of no force and effect;
b. finding and declaring that the amounts funded on Tranche B of the BT Loan (as
defined below) and the amounts funded pursuant to the Real Estate Facility (as defined below) in
excess of $300 constituted contributions of equity capital and the purported liens and security interests
securing their repayment are void and of no effect;
c. avoiding the transfers of interests in property or obligations incurred by the
Debtors, and determining the amount thereof, and directing that Defendants return an amount equal
thereto to the Debtors' estates or, in the alternative, awarding the Debtors' estates the full value thereof;
3
d. awarding the Plaintiff, for the benefit of the Debtors' estates, restitution in the
amount of $500 million, the exact amount to be determined at trial; and
e. awarding the Plaintiff, for the benefit of the Debtors' estates, damages in the
amount of $500 million, the exact amount to be determined at trial.
r-
/
9. This adversary proceeding arises under the B ptcy Code and arises in, and relates
to, the chapter 11 cases of the Debtors pending in this District
10. This Court has jurisdiction over this advers proceeding, pursuant to 28 D.S.C. ~~
1334,151 and 157, 11 D.S.C. ~~ 105,510,544,547,54 ,550, Bankruptcy Rules 7001(1), (7), (8) and
(9) and ~ 740 ILCS 160/1-12.
11. This is a core proceeding as provid din 28 D.S.C. ~ 157(b)(2).
12. Venue is proper in this District
III. ALLEGATIONS COMM N TO MULTIPLE CAUSES OF ACTION
A. Backl!round and Parties
13. grew to become one of this country's largest retailers of name
brand apparel, home furnishings, ele tronics, appliances, jewelry, and automotive parts and services.
14. On or about July 7 1997, certain of the Debtors' predecessors in interest, together with
certain of their then-existing lliates, filed voluntary petitions for relief under chapter 11 of the
Bankruptcy Code in this D' trict ("Wards I").
15. The War s I bankruptcy cases were jointly administered under Case No. 97-1409
(PJW).
16. T e Wards I debtors continued in the possession of their property and operation of their
businesses
4
ARTICLE IV
MEANS FOR IMPLEMENTATION AND EXECUTION
OF THE CREDITORS' PLAN
In addition to the provisions set forth elsewhere in the Creditors' Plan, the following shall
constitute the means of execution and implementation of the Creditors' Plan.
A. $500 Million Lawsuit Against GE Capital And the GE Entities.
I. The Committee Comolaint. After an extensive Bankruptcy Rule 2004
investigation, reviewing in excess of 150,000 pages of documents, and
interviewing and formally examining under oath numerous witnesses, on January
18, 2002, the Committee filed in the Bankruptcy Court a complaint against GE
Capital and certain of the other GE Entities. The Committee Complaint asserts,
among other things, that (i) the claims ofGE Capital and the GE Entities against
the Debtors in the aggregate amount of approximately $1 billion should be (x)
equitably subordinated, or (y) in the alternative, recharacterized or otherwise
avoided, and (ii) GE Capital and the GE Entities were unjustly enriched and (iii)
GE Capital breached its corporate fiduciary duty to the Debtors' Estates. The
Committee intends to vigorously prosecute this action on behalf of the Debtors'
Estates to recover damages, and obtain other remedies, arising from the self-
dealing and inequitable conduct of GE Capital and the other GE Entities.
Although the outcome of any litigation is uncertain, the Committee believes
in the strength of the Causes of Action asserted against GE Capital and the
other GE Entities in the Committee Complaint. If successful, in most
respects, the lawsuit would result in a distribution to General Unsecured
Creditors of 100% of their Allowed Claims. If less than successful, however,
the lawsuit could result in a distribution to General Unsecured Creditors of
substantially less than 100% of their Allowed Claims. See Exhibit E for a
range of recoveries.
2. Basis of the Committee Comolaint. The Manioulation of Wards for the
Benefit of GE Capital and the GE Entities. The introduction to the Committee
Complaint summarizes the basis for the Committee's lawsuit against the GE
Entities as follows:
In August 1999, Wards emerged from bankruptcy as an
undercapitalized, wholly owned subsidiary ofGE Capital. In the
sixteen months that followed, fully aware of Wards' insolvency,
GE Capital and certain of the GE Entities (collectively, the
40
"Defendants") leveraged their influence, and utilized every
imaginable method, to squeeze out of Wards all of the economic
benefits they could take for themselves, without regard to the
consequences to Wards and its creditors. Among other things,
Defendants intentionally misled creditors and manipulated Wards'
financial structure and the timing of Wards' second bankruptcy
filing to benefit their own credit card and marketing businesses and
to offset taxable gains on the sale of a major asset by General
Electric Company, GE Capital's ultimate parent.
The December 1999 holiday season -- the first one following
Wards' emergence from bankruptcy -- was a disaster. It soon
became clear that GE Capital's silver bullet for Wards - a store
remodeling program - would not be sufficient to stem the tide of
Wards' losses. In the first six months of2000, Wards lost
hundreds of millions of dollars. By June, its capital structure was
decimated. In the face of all of this, GE Capital's principal person
in charge of the Wards' investment accurately concluded in early
June 2000 that Wards was a dying retailer whose only realistic
option was liquidation and that anything short ofthat was, in his
words, like "rearranging the deck chairs on the Titanic."
Unfortunately for Wards' creditors, that conclusion was shared
with no one outside ofthe Defendants' close circle of executives.
With only GE Capital at the helm, and with the fatal iceberg clear
in its view for month after month, GE Capital slowed down the
doomed ship until December 28, 2000, for the sole purpose of
benefitting itself and its affiliates.
Thus, GE Capital delayed Wards' inevitable demise by knowingly
misleading creditors as to the Debtors' financial condition and
misrepresenting GE Capital's long-term support for Wards. For
example, GE Capital never disclosed that it had determined that
Wards needed $400 to $550 million in equity to survive in 2001,
an amount GE Capital knew neither it, nor anyone else, would ever
invest. Indeed, GE Capital caused Wards to advise the creditors,
pursuant to vendor letters, of just the opposite: that GE Capital
would be a stalwart supporter of Wards. Relying on such
disinformation, Wards' creditors were convinced to extend
hundreds of millions of dollars in unsecured credit to the Debtors,
41
while GE Capital stood by knowing that the creditors would never
be paid in full.
Rather than risk the equity investment it believed was required to
save Wards, GE Capital provided Wards with just enough cash to
operate so that the Defendants could implement their scheme. GE
Capital made millions of dollars of "loans" to Wards secured by
Wards' real estate, thereby creating the fiction that GE Capital, the
parent, was financially supporting Wards. The effect of these
purported loans was to delay Wards' inevitable bankruptcy while
at the same time diminishing the value of the Debtors' Estates by a
sum in excess of$140 million.
The delays thus created by the Defendants permitted GE Capital
the time it needed to first, increase its private label credit card
business, and then second, "flip" Wards' credit card customers to a
solvent retailer in the GE Capital credit card portfolio. But for the
needs of General Electric Company, GE Capital's ultimate parent,
the bait and flip scheme might have continued into 2001. GE
Capital finally caused Wards to file for bankruptcy in the last week
of December 2000, in time for General Electric Company to offset
a $1.3 billion gain it had realized from its sale of common stock in
Paine Webber Group, Inc.
3. Prosecution and Risks of the Committee Comnlaint. On January 18,2002, the
Committee Complaint was filed with the Bankruptcy Court and served on the
defendants, who subsequently filed and served an answer. On April 4, 2002, the
Bankruptcy Court issued a case management order with respect to, among other
things, pre-trial procedures such as production and exchange of relevant
documents, depositions of parties with knowledge of relevant facts, and service of
interrogatories concerning the issues in the lawsuit, conferences among the parties
and with the Bankruptcy Court, substantive, procedural, and evidentiary motions,
and other procedures permitted under the Federal Rules of Bankruptcy Procedure.
Unless there is a settlement (which would be subject to the Bankruptcy Court's
approval), trial of the lawsuit is to occur on June 24,2003.
The Committee understands that the lawsuit commenced by filing of the
Committee Complaint, and any other legal actions the Committee chooses to file,
may be relatively complex and, unless settled, may not be resolved before trial.
The cost to the Debtors' Estates to conclude the litigation cannot now be
accurately quantified. This is especially so in light of the massive economic and
42
other resources ofthe GE Entities, who have pledged to vigorously contest the
Committee's allegations. Ultimate recoveries to General Unsecured Creditors
will be highly dependent on the outcome of the litigation against the GE
Entities. If the allegations of the Committee Complaint are not sustained, the
recoveries of Class 3B (General Unsecured Claims) will be substantially
diluted by the Claims of the GE Entities, which would then represent more
than half of estimated Allowed General Unsecured Claims.
Recoveries to General Unsecured Creditors may range from a low of
approximately four percent (4%) if the Committee Litigation were completely
unsuccessful and the Estates' recoveries of preferential transfers from potential
Avoidance Actions against parties other than the GE Entities did not exceed $20
million, to a high of full (100%) payment to General Unsecured Creditors if the
Committee Litigation were entirely successful. The Committee Complaint may
be sustained on some of the grounds asserted but not others, or the Committee
may recover some but not all of the damages demanded. For example, the
Committee could obtain an order subordinating the Claims of the GE Entities to
General Unsecured Claims, or the Bankruptcy Court could find that some or all of
the Secured Claims asserted by the GE Entities were in reality General Unsecured
Claims or contributions of equity capital to the Debtors, and should be
recharacterized as such for Distribution purposes. Yet, at the same time the
Bankruptcy Court may award some (or none), but not all of the monetary damages
sought. As of the date of this Creditors' Disclosure Statement, when the total
amount of Allowed Claims is not yet known, the effect of such rulings, or others,
on Distributions on account of General Unsecured Claims cannot be accurately
quantified. The Bankruptcy Court is a court of equity and many variations in the
relief granted are possible, depending on the facts proven at trial and the
Bankruptcy Court's views ofan equitable result. Therefore, the Creditors' Plan
cannot guarantee Creditors, in advance, a recovery of any particular amount.
Creditors should consult the chart annexed as Exhibit E for an illustrative
summary of some possible outcomes.
The Committee and its professionals thoroughly studied the factual and legal basis
for the Committee Complaint before the Committee Complaint was filed. Their
review included extensive inspection of voluminous documents that the GE
Entities and the Debtors were required to produce to the Committee as part of the
2004 Investigation, which provided clear documentary evidence with respect to
the GE Entities' pre-bankruptcy relationship and transactions with the Debtors. In
connection with their documentary review, counsel for the Committee also
conducted numerous sworn and unsworn oral examinations of personnel
associated with the GE Entities and the Debtors. The fees incurred by the
43
Committee for their legal, financial and forensic professionals for the 2004
Investigation which began in March 2001, the preparation of the Committee
Complaint, the preparation of the Bankruptcy Court approved mediation and the
preparation for the litigation thereafter were approximately three million dollars
through March 31, 2002. As a result of the 2004 Investigation and extensive
review and discussion, and despite the substantial resources of the GE Entities and
the inherent uncertainty of litigation, the Committee is convinced of the merits of
the allegations contained in the Committee Complaint and strongly believes that
prosecution ofthe Committee Complaint will maximize General Unsecured
Creditors' ultimate recoveries. The Committee's decision to file and prosecute
the Committee Complaint was unanimous.
To reduce the continued expense of pursuing litigation against the GE Entities,
and to partially link the legal expenses to be incurred in pursuing the Committee
Litigation to the ultimate success of the litigation, on April 19, 2002, the
Committee filed with the Bankruptcy Court an application to modify the hourly
fee-based compensation arrangement of its lead counsel, Kronish Lieb Weiner &
Hellman LLP ("Kronish"). Solely for purposes of future services rendered in
prosecuting the Committee Complaint and any related legal actions, and subject to
the approval of the Bankruptcy Court, lead counsel would be paid 75% of its
hourly fees, plus a contingency fee approved by the Bankruptcy Court in lieu of
the remaining 25% of its hourly fees. The contingent fee portion of counsel's
prospective compensation would depend on the success of the Committee
Litigation. It provides for reduced compensation to counsel unless the
Committee Litigation is successful and would, if approved, reduce the hourly
litigation expense to the Debtors' Estates from prosecuting the Committee
Complaint. The purpose of the contingent fee arrangement is to vest Kronish in
the outcome of the Committee Litigation. If the Committee Litigation is
unsuccessful, Kronish would receive only 75% of its hourly fees relating to these
future services and no contingent fee. If the Committee Litigation is successful,
Kronish would receive a contingent fee based on a sliding scale of no more than
five percent of the additional cash collected by the Estates in excess of the $26.5
million settlement offer made by GE Capital in its plan, capped at a premium over
Kronish's lodestar fees and subject to the Bankruptcy Court's review and
approval. GE Capital objects to this proposed arrangement on numerous grounds.
B. Succession by Plan Administrat .
Ian Administrator shall be appointed by the Committee and
ould have been applicable to the Debtors' officers, directors
ithout limitation, the authority to execute on behalf of each of the
As of the Effective Date,
shall succeed to such powers
and shareholders, includin
44
GECC'S PLAN
C. GE Capital's Response to the Committee's Complaint
I. Introduction
GE Capital believes that the Complaint's allegations have no merit
whatsoever. The Committee's core allegations - that Wards was insolvent at all times
after Emergence and that GE Capital acted solely for its benefit and to the detriment of
Wards, its estate and its creditors - are debunked by six critical facts:
First, GE Capital did not benefit from its relationship with Wards.
Rather, it lost over $1.2 billion and is Wards' largest creditor, by far.
Second, GE Capital did not somehow mitigate its losses by passing
them to Wards' creditors as the Committee claims. The evidence shows
that GE Capital's exposure grew while the other creditors' exposure
actually contracted.
Third, GE Capital did not operate Wards. Wards' management
maintained full control of its operations.
Fourth, GE Capital did not manipulate the timing of Wards'
bankruptcy for its benefit. Like any prudent retailer, Wards waited until
after the holiday season - when it makes most of its annual sales - before
filing. This benefited, not hurt, all of Wards' creditors, including GE
Capital.
Fifth, Wards was not insolvent at all times post-Emergence. The
Bankruptcy Court and Wards' creditors approved Wards' capital structure
and business plan upon Emergence. This means that in the Court's
judgment, Wards had a feasible plan.
In the post-Emergence period, GE Capital consistently supported
Wards' business and liquidity needs. On top of the substantial exit
financing, GE Capital contributed more than 5350 million to the Debtors
in the form of (a) the real estate loans (5144 million), (b) an increase in the
bank guarantee ($100 million), and (c) equity infusions ($120 million).
These contributions were intended to, and did, enable Wards to operate as
a solvent and ongoing business, and supported Wards' emergence business
strategy.
Sixth, Wards' demise was not the result of anything GE Capital did
or did not do. Wards failed because - despite the best efforts of its
management and ample support from GE Capital - its business plan could
not overcome the poor macroeconomic conditions in 1999 and 2000,
which drove such famous comparable retailers as Ames, Bradlees, Kmart,
and Stroud's to file for bankruptcy as well.
6
In view of the foregoing, the Committee's alJegations are a misguided
attempt to pressure GE Capital to fund the creditors' losses. GE Capital has responded to
the Committee's Complaint by making a reasonable settlement proposal and failing to
reach a settlement, is prepared to litigate. In this connection, GE Capital rejects the
Committee's alJegations and affirmatively asserts:
(a) Wards and its subsidiaries were adequately capitalized.
(b) The relationships between Wards and GE Capital were fair
and reasonable and benefited the operating companies and their creditors;
(c) Far more money is now available to creditors because GE
Capital financed Wards' operations prior to Wards' bankruptcy.
(d) Equitable subordination of the GE Capital Claims would
discourage many other companies in their attempts to do business because
the precedent would discourage parent companies from providing their
financialJy troubled subsidiaries with financing and give windfalJ
recoveries to creditors.
Such a windfalJ would be particularly inappropriate in this case because
many creditors were fulJy aware of the risk that Wards might file for bankruptcy and
actively mitigated this risk by tightening the credit terms they imposed in doing business
with Wards, thus raising Wards' costs. These creditors also purchased credit insurance
and passed the cost along to cash-strapped Wards. In effect, GE Capital's losses
increased in direct proportion to decreases in trade creditors' exposure because trade
creditors were paid by Wards' bankers, whose loans in turn were guaranteed by GE
Capital.
2. GE Capital's Post-Emergence Support of Wards
The totality of GE Capital's financial support extended welJ beyond the
5350 milJion provided by GBCapital to the Debtors post-Emergence, as folJows:
a. Prepetition Support:
. Exit financing package:
5300 milJion real estate loan
$300 milJion bank guarantee (increased to $400 milJion in
February 2000), that was largely used to pay vendors prior to the
J:'etition Date, and which was paid by GE Capital in the amount of
$343 milJion in May 2001
$25 milJion financing line, and
$327 million in equity.
7
I
· $25 million advance In December 1999 by Signature
FinanciallMarketing, Inc. and its subsidiaries (now part of The
Partnership Marketing Group of GE Financial Assurance)
(collectively, "Signature"), which advance has since been paid in full.
· $65 million deferral of amounts due to GE Capital in February 2000
under the loss-sharing arrangements in Wards' private label credit card
program, which remains unpaid.
· $144 million in new real estate financing in April and October 2000.
· $120 million in equity contributions in July - August 2000.
· Assistance in Wards' efforts to improve its inventory management and
budgeting and planning.
Petition Date:
GE Capital also provided substantial support to the Debtors after the
b. Post-Petition Support:
· $71 million to fund a key employee retention program out of GE
Capital's cash collateral.
· $10 million retiree fund to be established by GE Capital and General
Electric Company for Wards' retired employees and their dependents.
· $5 million in supplemental retirement arrangements for certain of
Wards' former employees and their spouses.
Sound.
3. The Committee's Recharacterization Argument Is Not Legally
The Committee claims that GE Capital should not keep the money from
the sale of collateral securing loans made before the bankruptcy petitions were filed on
the grounds that these loans were in fact equity contributions.
GE Capital points out that bankruptcy courts have used a number of
factors to determine whether a loan or a financial accommodation should be
recharacterized as equity. These factors include: (a) the intent of the parties when the
loans were negotiated; (b) how the debt was treated on the books and records of the
debtor and the creditor; (c) the adequacy of the collateral; and (d) the ability to borrow
similar amounts of money from other sources.
8
By any and all of these factors, GE Capital's loans were valid loans. They
were fully disclosed on Wards' books and in public recordings of mortgage instruments,
and they were documented as such. Wards and GE Capital observed all of the terms of
the documents, and treated them on their respective books and records as debt. There is
literally nothing to indicate that they were considered equity contributions.
The real estate used as collateral provided more than ample coverage at
the time the loans were made, as shown by appraisals made at the time and later on.
Thus, GE Capital was fully justified in making these loans - as any reasonable third-party
lender have been. Furthermore, all appraised values were confirmed by actual property
sales. Accordingly, GE Capital had - as any third-party lender would have had - a
reasonable expectation of repayment at the time these loans were made. In fact, GE
Capital anticipates that these loans will be repaid when all of the remaining mortgaged
properties are sold.
GE Capital's expectation ofrepayment of its real estate loans to the Wards
was based on the sale value of the collateral and did not depend upon the company's
retail success. GE Capital relied on due diligence investigations of Wards' real estate in
connection with its prior real estate loan. This prior due diligence allowed GE Capital to
make the loans on favorable terms, at a pricing consistent with the terms of the court-
approved exit-financing package, and in a timeframe that met Wards' needs. Moreover,
GE Capital did not take available leases as collateral for its real estate loans. Any third-
party lender would have taken those leases, which would have taken money off the table
and, as things have turned out, would have hurt unsecured creditors' chances of
recovering their claims now.
4. The Committee's Equitable Subordiuation Claims Lack Merit.
The Complaint seeks to "equitably subordinate" GE Capital's secured and
unsecured claims below the claims of general unsecured creditors - effectively placing
them at the end of the line to be paid - and to declare the underlying liens void. The law
creates a high standard for equitable subordination, and GE Capital believes that the
Complaint does not come close to meeting that standard.
Before ordering equitable subordination, the law requires a showing
involving three elements: (a) the claimant must have engaged in some type of inequitable
conduct, (b) the misconduct must have resulted in injury to the creditors or conferred an
unfair advantage on the claimant, and (c) equitable subordination of the claim must not
be inconsistent with bankruptcy law.
In seeking to demonstrate GE Capital's inequitable conduct or unfair
advantage, the Committee primarily argues that (a) Wards was undercapitalized;
(b) Wards was effectively insolvent from the time of its emergence from bankruptcy; and
(c) that GE Capital allegedly delayed Wards' bankruptcy filing to benefit GE Capital in
connection with (i) continuing to obtain revenue from the Wards credit card program;
(ii) putting in place the mechanisms necessary to enable GE Capital to transfer the Wards
9
credit card holders to another retailer (Wal-Mart) in the event of a Wards liquidation; and
(iii) attempting to offset the effects of booking gains from the sale of the stock of a
former GE Capital subsidiary PaineWebber in the fourth quarter of2000.
None of the above can form a basis for equitably subordinating GE
Capital's claims. Indeed, the facts of the relationship demonstrate an unwavering
commitment and support by GE Capital to give Wards and Wards' management their
best chance to succeed in the store-remodel strategy, which was central to the Wards I
Plan for emerging from the earlier bankruptcy. This support culminated in a $1.2 billion
loss by GE Capital as Wards was forced to liquidate.
Equitable subordination of GE Capital's claims would give a wind-fall
recovery to trade creditors who would end up at the front of the line despite the fact that
they were aware of the risks when they extended credit to Wards. The fact that, as
mentioned above, some of Wards' creditors actively sought to limit their risks by
tightening credit terms imposed on Wards, by purchasing credit insurance, and passing
the costs along to Wards, indicates that they are trying to play it both ways. Indeed,
Wards' CEO, Roger V. Goddu, has testified that these self-help efforts by vendors and
other creditors contributed to the deterioration in Wards' overall operating performance
in 2000.
a. Wards Was Not Undercapitalized in 2000
The Committee's primary basis for equitable subordination of GE
Capital's claims is that GE Capital allegedly "manipulated" Wards' capital structure,
presumably meaning Wards was left with too little capital to finance its operations. The
question of whether a company is undercapitalized may vary substantially with the
industry, company, size of its debt, accounting methods employed, and like factors. No
single formula determines undercapitalization. The basic test is whether a reasonably
prudent person with basic knowledge of the particular type of enterprise would consider
the amount of capital adequate or inadequate for the company's operations.
Wards' initial capitalization (at its emergence from its first chapter II
case) is beyond reproach - it was specifically approved by the bankruptcy court in its
confirmation of the Wards I Plan and overwhelmingly approved by Wards' vendors and
other creditors. In addition, GE Capital provided Wards with an additional $120 million
in equity in the Summer of2000. GE Capital's substantial capital contributions to Wards
of approximately $440 million, coupled with a minimum availability of $75 million
under the banks' revolving credit facility to Wards, were more than adequate to fund
Wards' operations. In fact, one indication that Wards had sufficient capital is that the
company was able to pay its debts as they became due until the bankruptcy filing and to
carry out its business plan through the 2000 holiday season.
10
b. GE Capital Did 'lot Delay Wards' Chapter 11 Filing
The Complaint also contends that GE Capital delayed Wards' chapter II
filing to limit GE Capital's own losses. This theory is so frivolous that the Committee
does not even try to offer an opinion about ,,"hen Wards should have filed. It is one thing
to second-guess but the Committee does not even state what should have been done under
the circumstances.
Wards prudently sought bankruptcy protection after the Thanksgiving-
Christmas holiday season so as to achieve maximum sales. Numerous retailers have done
that - Kmart is the latest example. It is plain common sense. Wards' financial experts
(Conway, Del Genio) retained in November 2000 also concluded that the timing of
Wards' bankruptcy filing in late December was optimal to provide the maximum returns
to unsecured creditors generally.
Likewise, there is absolutely no merit to the allegations that GE Capital's
credit card operations profited unduly from the timing of the bankruptcy filing. GE
Capital appropriately investigated options that would minimize its losses on the Wards'
credit card in the event of Wards' store closings. This contingency planning was the
same thing any finance company would do when any credit card program was at risk.
The primary effort gave Wards credit card holders an opportunity to continue to use their
Wards cards at a comparable retailer (Wal-Mart) if the Wards stores in the area were
closed. This is basic customer service.
Even assuming that GE Capital could have delayed Wards' filing, the
Committee never explains why GE Capital would have delayed the bankruptcy to plan
for this transition. IfGE Capital thought Wards should file for chapter I I earlier in 2000,
common sense says that it would have simply begun its planning earlier, not delay the
filing and pile up greater obligations. By pinning its hopes on a successful holiday
shopping season, Wards had its last best chance of surviving, and GE Capital provided
the normal commercial support for this effort.
Nor can the Committee explain why. if GE Capital sought to mitigate
losses at the expense of Wards and Wards' creditors, it:
(a) did not reduce the $25 million credit line extended by GE
Capital's factoring business, First Factors, when all other significant
factoring firms were reducing credit;
(b) provided a S50 million loan in the Spring of2000;
(c) deferred receipt of $65 million due to GE Capital from
Wards pursuant to the pre-emergence loss-sharing arrangements under the
credit card program;
(d) provided S120 million in cash as equity to Wards in the
Summer of 2000 that inevitably would be lost in a bankruptcy;
11
J
(e) provided another $94 million loan in the Fall of 2000 that
was used by Wards primarily to pay vendors; and
(f) financed Wards' payments to vendors through the bank
facility up until the date of the bankruptcy filing.
GE Capital's actions are entirely inconsistent with the Committee's over-arching theme
that GE Capital acted improperly. On the contrary, they show evidence of a relationship
in which the finance company wants very much for its client to succeed.
Equally important, the Complaint fails to allege a single fact - as is
required - that creditors were actually and quantifiably harmed by the filing of
bankruptcy after the end of the 2000 holiday season. There is very simple reason for this:
creditors were not harmed. Company-wide account payables at Wards show that it owed
less money at the time of its bankruptcy filing than it had during late October and early
November when GE Capital advanced additional amounts under the $100 million real
estate loan. Creditors actually would have been worse off if Wards had filed for
bankruptcy at any other time in the second half of 2000. During OctoberlNovember 2000
when Wards was accumulating holiday season merchandise, it paid hundreds of millions
of dollars to trade creditors, utilizing the bank facility that GE Capital guaranteed. These
vendor payments included approximately $680 million in the 90 days preceding
bankruptcy. Significantly, the Committee does not, and cannot, allege that GE Capital
sought to block payments to the trade, which would have helped GE Capital as the largest
creditor of Wards, and hurt the trade creditors.
GE Capital did offset its losses from Wards' failure against its gains on the
PaineWebber transaction. GE Capital believes, however, that there was nothing unusual
or improper in doing so. In fact, similar write-offs occur routinely throughout every
sector of the economy. It is not a reason to equitably subordinate GE Capital's claims,
particularly since Wards' filing at year-end was motivated, as shown above, by valid
business considerations, supported by expert advice, and beneficial to creditors.
Contrary to the Committee's allegations in support of its demand for
equitable subordination, GE Capital has a valid and compelling defense. GE Capital's
financial support gave Wards the best possible chance to succeed with the business
strategy approved by its creditors and the Bankruptcy Court in the Wards 1 Plan. GE
Capital lost substantially more money than all other creditors. When it became clear that
poor economic conditions were crippling the entire retail industry, as evidenced by
bankruptcy filings and liquidations of other unprofitable retailers, including Ames,
Bradlees, Lechter's, Stroud's, and Pergament, and that GE Capital's net losses (51.2
billion) would only continue to mount, then and only then did GE Capital take
appropriate corporate action to protect its own investment and curtail further financial
support for Wards. This is one of those times in economic history when whole industries
are forced to change. Consumers would rather shop at newer; bigger stores and boutiques
or over the Internet than go to older malls to shop at traditional department stores. A
whole range of names have now slipped into history. In short, Wards did not fail because
of anything GE Capital did or did not do.
12
c. The Complaint Is Replete with Factual Inaccuracies
The Complaint is replete with unsupported assertions that are inconsistent
with the factual record. A few examples of these misleading and inaccurate allegations
are:
The Timinr: of Wards' Ban/..Tuvtcv Filin'l Benefited (Rather Than Hurt!
Creditors. A principal premise of the Complaint is that GE Capital delayed Wards'
bankruptcy filing because the credit card program was "important" and "extremely
profitable" to GE Capital. To this end, the Complaint alleges that GE Capital's earned
income from the Wards credit card program in 1999 and 2000 totaled over $1 billion.
This statement is a fabrication. The $1 billion figure refers to gross revenue, not profit or
income. GE Capital's adjusted income, after expenses (primarily its cost of funds,
processing costs and receivable write-offs), from the Wards credit card program in 1999
and 2000 was actually $38.3 million. Thus, according to the Committee's theory, GE
Capital continued to incur net losses of S; 1.2 billion on its investment in Wards, all so it
could preserve a 538 million stream of income from its credit card division.
The Complaint also misleadingly and disingenuously alleges that GE
Capital's Signature business projected approximately $156.3 million in revenue from the
Wards credit card program in 2000. The Complaint fails to mention that, after expenses,
GE Capital actually lost approximately SI8 million in connection with these Wards-
related Signature operations. Thus, far from being "extremely profitable," the net credit
card program and Signature income to GE Capital amounted to approximately
$20 million for the period from Wards' emergence through the end of 2000. It is
ridiculous to suggest that GE Capital would have put at risk an additional nearly
$400 million in 2000 (including at least S120 million in equity) for only $20 million of
profits.
The Amendments to the Wards Credit Card Agreement Were Mutual/v
Beneficial. The Complaint further alleges that amendments to the credit card agreement
executed in 2000 favored GE Capital and included various "key terms which were
advantageous to GECC and Monogram [GE Capital's credit card banking affiliate)." The
Complaint fails to mention that these amendments were negotiated at arms' length by
separate attorneys representing Wards and GE Capital. Every witness at the Committee's
examinations, when asked about the credit card amendments, confirmed that the amended
contract terms, taken as a whole, were intended to, and did, benefit Wards, including the
elimination of Wards' obligations to share the credit card write-offs with GE Capital, an
obligation that cost Wards tens of millions of dollars in past years.
Similarly, the Complaint alleges that GE Capital acted improperly by
allowing Wards to pay various commissions and fees to Wards employees to encourage
them to enroll customers for the Wards credit card program. Yet the Complaint does not
disclose that approximately half of these payments were reimbursed by GE Capital to
Wards, nor that additional credit card customers were good for Wards' business:
historically their credit card customers had shown more loyalty and spent more at their
13
~
stores than non-credit card customers. In fact, approximately 50% of Wards' sales were
made on the Wards credit card program. No wonder it made sense to support and build
the credit card business.
D. GE Capital's Settlement Offer
GE Capital believes that its settlement proposal, which is incorporated into
this Plan, provides the only prospect for an early resolution of these Chapter I I Cases.
GE Capital believes that the Plan contains a fair and reasonable settlement offer to
compromise the Committee Litigation and numerous related disputes.
E. Questions and Answers Concerning the Committee Litigation
Question:
Answer:
Question:
Answer:
How long will a litigation against GE Capital take?
Although it is not possible to predict with certainty, the Committee
Litigation should last until at least mid-2003 and possibly longer.
Committee counsel has indicated that it intends to take 15-20
additional depositions. GE Capital counsel intends to take
depositions of more than 20-25 individuals and to seek extensive
document discovery. The litigation will also involve motion
practice, trial, and possible appeals.
How much will this litigation cost the Debtors' estates?
The costs of the Committee Litigation against GE Capital are
likely to be substantial. The Committee has estimated them to be
$2.5 million to start, although in a recent application Committee
counsel has indicated its desire to litigate based on a partial
contingency fee, the ultimate cost of which Committee counsel has
not offered to disclose to creditors or GE Capital. Creditors will
have to pay these costs without any guarantee that they will be
ultimately recovered. To put these costs in perspective, Committee
counsel - Kronish, Lieb, Weiner & Hellman LLP - has incurred
fees and expenses of approximately $4 million for the period from
January 12, 2001 through January 31, 2002 (the last month
available). A substantial majority of these fees were charged for
the Committee's investigation of the claims and the preparation of
a complaint against GE Capital. This amount does not include the
Committee's additional professionals which assisted its
investigation, such as PricewaterhouseCoopers, LLP and Margolin,
Winer & Evens LLP. GE Capital believes that the Committee's
litigation will extend well beyond the next year and may cost the
Debtors' estates much more than the initial amount of $2.5 million
as estimated by Committee counsel.
14
Question:
Answer:
Question:
Answer:
Question:
Answer:
Question:
Answer:
Will unsecured creditors become involved in the Committee
Litigation?
It is likely that many creditors will need to be actively involved in
the litigation. Many of the claims require the Committee to present
information about and by creditors. GE Capital intends to take
discovery of creditors, which would require them to turn over
documents and testify at depositions, in the event the Plan is not
approved. GE Capital counsel intends to take 20-25 depositions of
the Debtors' factors, suppliers, competitors, former employees, and
certain professionals.
Did GE Capital make a lot of money from keeping Wards out
of bankruptcy at the same time creditors were losing money?
GE Capital's post-emergence support of Wards resulted in a
$1.2 billion net loss suffered by GE Capital - making GE Capital
by far the largest creditor of the Debtors' estates. The
Committee's principal allegation is that GE Capital reaped
substantial profits from its ownership of the Wards private label
credit card program. Between the Emergence and the Petition
Date, GE Capital had a $20 million net income on the Wards
program.
Since GE Capital owned a 100% interest in Wards,
why isn't GE Capital responsible for Wards' debts?
Stock ownership does not make a parent company responsible for
the debts of its subsidiary. Although GE Capital maintained
majority representation on Wards' Board of Directors and
supported Wards in various respects, Wards' management
maintained full operational control of Wards.
Do GE Capital's real estate loans constitute bona-fide debt?
The loans were, in form and substance, valid loans, fully disclosed
in the ordinary course on the Debtors' books and in public
recordings of mortgage instruments, and were validly documented
as such. Wards and GE Capital observed all of the terms of the
documents evidencing the loans. Wards treated these obligations
as debt in its business records. Likewise, GE Capital treated the
loans as Wards' obligations in its business records. Proceeds of
sales of the mortgaged properties were used to repay the loans.
Notonly are such loans permissible as a matter of law, they are
encouraged. A shareholder may lcnd money to a corporation in
15
Question:
Answer:
which it is the principal owner and become a secured creditor.
Otherwise, owners would be discouraged from aiding a troubled
business. The two real estate loans made by GE Capital to Wards,
at its request, in 2000 were made on terms favorable to Wards.
Wards' real estate properties provided more than ample collateral
coverage at the time these loans were made. The collateral
coverage fully justified GE Capital- and should have justified any
reasonable third-party lender - in making these loans.
Accordingly, GE Capital had - as any third-party lender would
have had - a reasonable expectation of repayment at the time these
loans were provided, In fact, GE Capital anticipates that these
loans will be repaid when all of the remaining mortgaged
properties are sold.
If, as the Committee's complaint alleges, senior management
at GE Capital viewed Wards in June 2000 as akin to the
"Titanic," why did Wards delay the filing of its bankruptcy
for six months - until December 2000?
Although some GE Capital executives were not optimistic about
Wards' financial condition, they continued to support Wards and
its management, including by investing $120 million in equity in
the summer of2000, The Complaint is, in large part, based on the
allegation that Wards should have filed its second chapter II in
December 1999, four months after the Emergence. In the
Committee's view, filing four months after the Emergence from its
first bankruptcy would have made substantially more funds
available for distribution to unsecured creditors. However, that
allegation fails to recognize, among other things, that a second
filing within so short a period of time after Emergence would have
deprived Wards of a valuable opportunity to implement its
business plan and preserve the business of a distinguished
company. Both GE Capital's and Wards' management hoped the
company could survive and gave it its best chance to do so.
Apart from the hopes of executives both at GE Capital and Wards,
the Committee's second-guessing is not supported by the facts.
Notably, Wards owed significantly less money to its vendors in
trade payables on the Petition Date than it did during late October
and early November 2000. Company-wide accounts payable at
Wards indicate that creditors would have been worse off if vVards
had filed for bankruptcy at any other time in the second half of
2000, Moreover, during OctoberfNovember 2000 when Wards
was accumulating holiday season merchandise, it paid hundreds of
millions of dollars to trade creditors, utilizing bank financing that
16
GE Capital guaranteed. These vendor payments included
approximately $680 million in the 90 days preceding bankruptcy.
GE Capital's liability on its bank guaranty correspondingly.
increased. Finally, financial experts hired by Wards in November
2000 - Conway, Del Genio, Gries & Co. - advised that a post-
Christmas bankruptcy filing was optimal to provide the maximum
returns to unsecured creditors.
GE Capital expressly denies any liability in the Committee Litigation
and will vigorously defend against it if the Plan is not confirmed.
NOTHING CONTAINED IN THE PLAN AND DISCLOSURE STATEMENT
CONSTITUTES AN ADMISSION OF LIABILITY OR RESPONSIBILITY FOR ANY
DAMAGES OR OTHER RELIEF AS TO ANY OF THE CLAIMS WHICH ARE
ASSERTED IN THE COMMITTEE LITIGATION OR ANY ADDITIONAL
LITIGATION THREATENED OR PENDING BY THE COMMITTEE OR OTHERS.
IV. SUMMARY OF DISTRIBUTIONS UNDER THIS PLAN
A. Debtors' Remaining Assets
1. Unencumbered Assets
As of April 19, 2002, the Debtors' significant unencumbered assets are
(all dollar amounts are approximate):
. Unencumbered cash of$61.7 million;
. A wind-down fund of$4.8 million;
. A retention fund of$6.8 million;
. Certain unencumbered leased properties; and
. Potential net recoveries from preference and other avoidance actions.
2. Encumbered Assets
As of April 19,2002, the Debtors' significant encumbered assets are (all
dollar amounts are approximate):
. 17 unsold real estate properties that are subject to the liens of GE
Capital;
. Excess pension plan assets in an estimated amount of $25 million to
$40 million, subject to the lien of GE Capital;
17
. A tax refund of$2 million to $3 million, subject to the lien ofGE
Capital;
. Cash collateral ofGE Capital in an amount of$49.6 million (excluding
certain cash collateral, which will be distributed to GE Capital as the
letter-of-credit disputes are resolved); and
. Reserves for taxes and other encumbrances, including mechanics'
liens, with respect to sold properties.
B. Projected Distributions
I. Estimated Amounts of Allowed Claims (in Millions):
Administrative claims (exclusive ofrec1amation claims)
Priority tax claims and non-tax priority claims
Secured claims (for which no escrows have been established)
Estimated collateral value of GE Capital's secured claims
General unsecured claims
Com"enience Claims
$15.6
15.0
0.0
534.0
$390.0
$1.0-2.0
The estimates of allowed claims are based upon information provided by
the Debtors. The estimate of allowed general unsecured claims represents the mid-point
in the range of projected allowed general unsecured claims between $360 million and
$420 million. The preparation of such estimates is inherently uncertain. Accordingly,
there is no assurance that such estimates will accurately predict the actual amount of
allowed claims in these Chapter II Cases. As a result, the actual amount of allowed
general unsecured claims may differ significantly from the estimates of claims contained
here.
2. Approximate Projected Distributions Under Plan to General
Unsecured Creditors (in Millions):
Projected Amounts Available to Pay the Premium:
Projected Cash Balance (net of reserves) on the Effective Date.........
$61.0
Plus: Projected Cash Available for Distribution Under
Plan on and After Effective Date from Liquidation of
Remaming Unencumbered Assets ...........................................................
$ 3.0
Subtotal:
$ 64.0
Premium Due to the Insurer:
$115.5
Shortfall:
($51.5)
18
Sources of Funding the Shortfall in Payment of Premium:
GE Capital's Settlement Payment....... .............................................
$ 26.5
GE Capital's Premium Advance....... ..............................................
$ 25.0
Total:
$51.5
3. Effective Date Payments. On the Effective Date or as soon thereafter
as practicable, the Insurer will make payments to holders of allowed claims. GE Capital
will retain, on account of its secured claims, the net proceeds of the liquidation of its
collateral prior to, on and after the Effective Date. GE Capital will not receive payment
of on account of its general unsecured claims, other than the claims (a) for unreimbursed
Premium Advance, (b) for payments made to GE Capital under its Reclamation Claims
Guarantee, and (c) assigned to GE Capital. GE Company and its subsidiaries (other than
GE Capital and its subsidiaries) will receive payment on account of their allowed general
unsecured claims in accordance with the treatment afforded other General Unsecured
Creditors.
4. Distributions After the Effective Date. To the extent the liquidation
of the Debtors' assets (including the prosecution and enforcement of avoidance actions,
except the Committee Litigation), and the sale of the Debtors' remaining properties
generates cash after the Effective Date, such cash will be distributed on a pro rata basis
on or about August 20, November 20, February 20, and May 20 of every year to general
unsecured creditors. GE Capital will be repaid its Premium Advance, which it will make
to enable the Debtors to purchase the insurance with which to fund payments of allowed
claims under the Plan.
V. SUMMARY OF CLASSIFICATION AND TREATMENT
OF CLAIMS AND INTERESTS UNDER THE PLAN
The following table divides the claims against. and equity interests in, the
Debtors into separate classes and summarizes the treatment for each class. The
recoveries described in this table represent the best estimates of those \.alues given the
infomlation available at this time. The amount shown as the "Estimated Percentage
Recovery" is the quotient of cash to be distributed to creditors with allowed claims in the
applicable class divided by the estimated aggregate amount of allowed claims in such
class. There is no assurance that the actual amounts of allowed claims in each class will
not materially exceed the estimated aggregate amounts set forth in this table, and no
representation can be or is being made with respect to whether each estimated percentage
recovery shown will actually be realized by the holder of an allowed claim in any
particular class.
19