Gibbons, as Committee Counsel, Successfully Proposes and Confirms Chapter 11 Plan of Liquidation


The Busines Advisor

Spring/Summer 2021

Gibbons represented the Official Committee of Unsecured Creditors (the “Committee”) appointed in the chapter 11 case of CTE 1, LLC (d/b/a Lexus of Englewood) (the “Dealership”), pending in the U.S. Bankruptcy Court for the District of New Jersey. Prior to seeking chapter 11 relief in October 2019, the Dealership experienced severe financial difficulties, resulting in the incurrence of losses and defaults under its prepetition loan facility with Toyota Motor Credit Corporation (TMCC), causing TMCC to commence litigation against it in the U.S. District Court for the District of New Jersey. Shortly thereafter, the Dealership retained a chief restructuring officer (CRO) to shepherd it through a bankruptcy sale process. As of the chapter 11 filing, the debt to TMCC was approximately $60.6 million, of which $11.4 million represented amounts past due for vehicles and parts sold without remittance of appropriate repayment to TMCC, i.e., “sold out of trust.” The Dealership’s assets were worth tens of millions less than the TMCC debt at the time of filing.

On November 8, 2019, the U.S. Trustee’s Office appointed the Committee, which retained Gibbons as its counsel. Gibbons immediately objected to the terms of the Dealership’s proposed debtor-in-possession (DIP) financing order to preserve and protect the rights of unsecured creditors; ultimately, we were able to negotiate consensual DIP financing terms, including the preservation of valuable causes of action against TMCC for the benefit of unsecured creditors, which allowed the case to proceed towards a sale of substantially all of the Dealership’s assets.

The Committee also raised questions concerning the Dealership’s corporate governance – specifically with respect to the legal authority to direct and control the company in light of the fraud allegations and insider interest in bidding on Dealership – and, on January 2, 2020, the members agreed to a consent order appointing Charles M. Forman as the Dealership’s Independent Manager.

Thereafter, the Committee worked closely with the Independent Manager to monitor the CRO’s efforts to sell the Dealership and to investigate claims against TMCC. In early February 2020, following weeks of intense, multiparty negotiations, the Committee, the Dealership, and TMCC reached a global settlement, thereby paving the way forward to a consensual chapter 11 plan and avoiding costly and protracted litigation. Under the terms of the TMCC settlement, TMCC agreed, inter alia, to (i) payment of $1 million in settlement of the claims raised by the Committee (including lien challenges and lender liability); (ii) payment of an additional $1.352 million to satisfy certain administrative claims against the estate; and (iii) waiver of TMCC’s $19+ million deficiency claim. Later that week, the court approved a sale of the Dealership to DARCARS, Inc., which closed on February 28, 2020. As a result of the sale, the bankruptcy estate realized gross proceeds of approximately $28.1 million, of which $24.2 million was transferred to TMCC as a pay down of the Dealership’s DIP financing and prepetition loan facility. The $2.352 million in settlement funds was held in escrow pending confirmation of a chapter 11 plan.

Following the sale, the Committee discovered serious misconduct by the Dealership’s bankruptcy lawyers and the CRO. As a result, the Independent Manager terminated both sets of professionals, which catapulted the Committee into the role of lead estate fiduciary. The Committee proceeded to propose a chapter 11 plan of liquidation on May 1, 2020. Absent the Committee’s settlement with TMCC, there would have been no funds available for a distribution to unsecured creditors; under the Committee’s plan, those creditors stand to receive an estimated 9-15 percent distribution. The Committee solicited acceptances of the plan in June 2020 from more than 800 creditors, who collectively voted overwhelmingly to accept the Committee’s plan (88.89 percent of claims accounting for 99.52 percent of the claim amounts voting in favor of the plan). On November 24, 2020, following a contested hearing, the Bankruptcy Court overruled all remaining objections to the plan filed by certain of the Dealership’s insiders and entered an order confirming the Committee’s plan of liquidation. The Plan went effective on March 31, 2021, and Gibbons continues to represent the estate’s interests as counsel to Charles M. Forman, as Plan Administrator for CTE 1 LLC.

Contemporaneously with the confirmation process, the Committee prosecuted its objections to fee applications filed by the Dealership’s bankruptcy attorneys and the CRO’s firm. The Committee had been investigating possible affirmative claims held by the bankruptcy estate against the Dealership’s former professionals related to conduct that occurred both prior to and during the chapter 11 case. The Committee had also been investigating allegations regarding (i) the professionals’ lack of “disinterestedness” as required by 11 U.S.C. § 327, including possibly disqualifying conflicts of interest; and (ii) failures to comply with the disclosure requirements under Federal Rules of Bankruptcy Procedure 2014 and/or 2016. Following mediation of the attorneys’ fee dispute before Hon. Donald H. Steckroth, U.S.B.J. (Ret.), Gibbons negotiated a settlement that resulted in a 70 percent reduction of attorneys’ fees (a savings of approximately $700,000 to the estate). The CRO/FA fee dispute is ongoing.

The Committee was represented in this matter by Robert K. Malone, Brett S. Theisen, and Howard A. Cohen.