Mr Cooper Group Inc (COOP)

[XOM]

Fish and All: Enjoy our fortunate situation...
In an earlier post, I mentioned the Spansion bankruptcy, where Delaware Judge Kevin Carey denied a motion of an ad hoc equity committee "official" standing in the proceedings, citing uncertainties in the group's valuation, and that appointment of an official group is not the norm:

Citing a decision in the Edison Bros. bankruptcy, the Court noted that the ad hoc committee, as the party seeking the formation of a formal committee, has the burden of proving that an additional committee is needed for adequate representation. Victor v. Edison Bros. Stores (In re Edison Bros. Stores, Inc.), 1996 WL 534853, *4 (D.Del. Sept. 17, 1996). The Bankruptcy Code does not define "adequate representation." Id. at *3. Instead, the decision whether to appoint an additional committee falls within the discretion of the court based upon the facts of the case. Opinion at *5, citing In re Dana Corp., 344 B.R. 35, 38 (Bankr.S.D.N.Y. 2006). Finally, whether to grant a request and appoint an additional committee is considered extraordinary relief that is the exception, not the rule. [1]

This approach was echoed by Third Circuit Judge Kevin Gross in re TLC Vision Corp:

In his order, Judge Gross noted that the legal standard for appointment of an equity committee is a showing by a preponderance of the evidence that (i) "[color=blue]there is a substantial likelihood that [equity holders] will receive [a] meaningful distribution in the case under a strict application of the absolute priority rule[/color], and (ii) [equity holders] are unable to represent their interests without an official committee." (citing Exide Tech. v. State of Wisconsin Investment Board, 2002 WL 32332000 (D. Del. Dec 23, 2002)). He further noted that equity holders seeking an official committee bear a "heavy" burden of proof because appointment of an equity committee is "'extraordinary relief' that should be the 'rare exception.'" (citing In re Spansion, Inc., 2009 Bankr. LEXIS 3958 (Bankr. D. Del. Dec. 18, 2009)).

Applying those standards to the TLC Vision equity holders' request, Judge Gross held that the movants had failed to meet the burden, stating that the movants "provided no evidence to support their claim" and, further, that "mere speculation without evidence as to the enterprise value of the Debtors' ongoing operations fails to carry the burden of proof." He further held that the interests of equity holders "are adequately represented in these cases" and that the Official Committee of Unsecured Creditors "has proven to be a particularly capable and effective advocate." Finally, Judge Gross described the cost to TLC Vision's bankruptcy estates of appointing an official equity committee now as "enormous" because the equity holders "waited approximately two months before raising the matter with the Court . . . and [the bankruptcy cases] have now reached the stage that adding an equity committee to the negotiations would be counter-productive." [2]

Given the cases above - both in Walrath's Third Circuit - what can we infer regarding our own situation? First, we had a STRONG ADVOCATE IN THE US TRUSTEE. We did not exist as an ad hoc group prior to ascension to "official status." Next, we were TIMELY (thanks to our long-suffering Joyce) in petitioning the UST for the EC's formation (which miraculously happened in the eleventh hour of WMI's appalling negotiations. Last, our interests were decidedly NOT adequately represented by other groups, such as the Unsecured Creditors.

So, we must ask "why are WE the rare exception, such that Spansion's and TLC Vision's shareholders were not so fortunate? Of course, WE ALL KNOW THE ANSWER!

For friends who have endured this post so far, review the following excerpts from a memorandum by Judge Carey in the Spansion case, where he had to determine if a patent litigation settlement between the chip maker and Samsung Electronics was in the best interest of the estate. He used four factors (the "Martin Factors") to weigh his decision, which did not find the proposed settlement in the Debtor's best interest. This framework is relevant in Judge Walrath's impending opinion on the POS (sic) submitted by Rosen's stooges on March 26... good bedtime reading lol


SPANSION MEMORANDUM RE. SETTLEMENT WITH SAMSUNG........

"When considering the best interest of the estate, the Court must "assess and balance the value of the claim that is being compromised against the value to the estate of the acceptance of the compromise proposal." Myers v. Martin (In re Martin), 91 F.3d 389,393 (3d Cir. 1996) citing Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414,424-25, 88 S.Ct. 1157,20 L.Ed.2d 1 91968). In striking this balance, the court should consider: (1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience, and delay necessarily attending it; and (4) the paramount interest of creditors. Martin, 91 F.3d at 393. See also Nutraquest, 434 F.3d at 644." (7, 8)

"In the final analysis, the court does not have to be convinced that the settlement is the best possible compromise. Rather, the court must conclude that the settlement is within the reasonable range of litigation possibilities." In re World Health Alternatives, Inc., 344 B.R. 291, 296 (Bankr.D.Del.2006) (internal quotations and citations omitted). The Debtors carry the burden of persuading the court that the compromise falls within the reasonable range of litigation possibilities. Key3Media Group, 336 B.R. at 93. "While a court generally gives deference to the Debtors' business judgment in deciding whether to settle a matter, the Debtors have the burden of persuading the bankruptcy court that the compromise is fair and equitable and should be approved." (8)

Re Confidentiality and Privilege

Because the Eitan Deposition was labeled as "confidential," the Ad Hoc Consortium filed a motion to file the Eitan Deposition under seal pursuant to Bankruptcy Code §107(c) (see docket no. 477), which was not opposed by the Debtors. The Court granted that request by Order dated May 18, 2009 (docket no. 504). The Ad Hoc Consortium also filed a motion in limine to prevent the Debtor from presenting certain evidence at trial that, the Ad Hoc Consortium argues, was withheld from them on the basis of privilege. (See docket no. 476). At the May 18,2009 hearing the Debtors advised that they did not intend to rely on any information considered privileged and the Court entered an unopposed Order granting the motion in limine. (See docket no. 503). Post-hearing, the Ad Hoc Committee designated certain portions of Dr. Eitan's Deposition which it argued should not be considered in light of the Order granting the motion in limine. The Debtor responded to the designation. Because the testimony included information provided by counsel, I will not consider the designated portions of Dr. Eitan's deposition in making my decision.

THE MARTIN FACTORS

Obviously, the cash infusion that the settlement would provide to the Debtors is significant. However, to determine whether the Settlement Agreement in its entirety is fair and in the best interest of the estate, I must view the evidence provided in light of the Martin factors.

Factor 1: Probability of Litigation Success

The first factor to consider is the Debtors' probability of success in the outstanding litigation. "In evaluating this aspect of the proposed settlement, the Court's task is not to 'decide issues of law or fact raised by the [objections] but rather to canvass the issues to see whether the settlement fall[s] below the lowest point in the range of reasonableness. " In re Exide Technologies, 303 B.R. 48,68 (Bankr.D.Del.2003) quoting In re Neshaminy Ofice Bldg. Assoc., 62 B.R. 798,803 (E.D.Pa. 1986). See also In re Cellular Information Systems, Inc., 171 B.R. 926,950 (Bankr.S.D.N.Y. 1994) (The purpose in addressing the first Martin factor is "not to make findings of fact and conclusions of law, but to canvass the issues to assess the risks associated with prosecuting the [litigation].")

There are three actions that will be settled as a result of this settlement. However, the Debtors have provided little information as to the specifics of the Actions to provide a basis for evaluating the strengths and weaknesses of the litigation. Dr. Eitan testified that, in his opinion, the counterclaims and action asserted by Samsung against the Debtors in response to the litigation were "marginal." (Ex. 9, at 73-76). He also testified that the initial evaluation of the potential damages that could be recovered in this litigation was significantly higher than the payment amount contained in the Settlement Agreement. (Ex. 9, at 36,65-66). However, shortly after the Debtors filed the ITC Action and the Delaware Action, they attempted to negotiate with Samsung. (Ex. 9, at 12-13, 37). It appears from the record made that the Debtors' motivation for entering into the Settlement Agreement was based less on an evaluation of the merits of the Actions, than due to a desire to negotiate a quick settlement because of the then-rapid deterioration of the Debtors' financial condition.

Factor 2: Difficulties in Collection

…It seems unlikely that a reasonable evaluation of the merits of litigation of this nature and extent could have been made without taking into account the advice of patent litigation counsel. The second factor to consider in the Martin analysis is the likely difficulties in collection. There is no evidence to suggest that collection of a judgment against Samsung would be a problem.

Factor 3: Complexity of Litigation

The third Martin factor to consider is the complexity of the litigation involved, and the expense, inconvenience, and delay necessarily attending it. The Debtors argue, generally, as to the significant cost, complexity, and inconvenience of the patent litigation. The Nutraquest Court noted that '[it is axiomatic that settlement will almost always reduce the complexity and inconvenience of litigation. . . . The balancing of the complexity and delay of litigation with the benefits of settlement is related to the likelihood of success in that litigation." Nutraquest, 434 F.3d at 646. There is insufficient information upon which to make a reasoned decision as to the likelihood of success of the Actions. This likewise makes it difficult to conclude that the settlement is preferable to the expense, inconvenience and delay of litigation.

Factor 4: The Interest of Creditors

The final Martin factor to consider is the paramount interest of creditors. The Ad Hoc Consortium has vigorously opposed the Settlement Agreement, and has done so since it was first presented with an outline of the proposed settlement at a meeting in April 2009. In addition to the lack of information needed to make a determination as to the reasonableness of the settlement payment amount, the Ad Hoc Consortium's witnesses testified convincingly about the Settlement Agreement's risks which could negatively impact the estate. Of particular concern is the effect of the broad, perpetual license to Samsung of the Debtors' future patents and the "change in control" provision that could ham the Debtors' ability to reorganize. Samsung's vague covenant not to assert any patent or patent applications owned or controlled by its "Semiconductor Division" and the lack of mutuality of the releases raise additional concerns as to the fairness of the settlement.

At the hearing, the Committee advised that it no longer opposes the proposed settlement. However, its "support" of the settlement appears based primarily upon an unwillingness to let go of a "bird in the hand" (Tr. 511 8/09 at 166): that accepting the payment of a $70 million settlement now is better than taking the risk of the patent litigation. However, because this record does not allow a proper evaluation of the strengths and weaknesses of the Actions or the appropriateness of the proposed settlement payment, I cannot weigh heavily the Committee's position.

The Supreme Court Weighs In

In the TMT Trailer decision, the Supreme Court wrote:
It is essential, however, that a reviewing court have some basis for distinguishing between well-reasoned conclusions arrived at after a comprehensive consideration of all relevant factors, and mere boilerplate approval phrased in appropriate language but unsupported by evaluation of the facts or analysis of the law. Here there is no explanation of how the strengths and weaknesses of the debtors' causes of action were evaluated or upon what grounds it was concluded that a settlement which allowed the creditor's claims in major part was 'fair and equitable.' Although we are told that the alternative to settlement was 'extensive litigation at heavy expense' and 'unnecessary delay,' there is no evidence that this conclusion was based upon an educated estimate of the complexity, expense, and likely duration of the litigation. Litigation and delay are always the alternative to settlement, and whether that alternative is worth pursuing necessarily depends upon a reasoned judgment as to the probable outcome of litigation.

TMT Trailer, 390 U.S. at 434.

Unconvinced

In summary, given the above reasons and the largely conclusory record with which I am presented to evaluate likelihood of success of the Actions, there is not enough evidence before me to conclude whether the proposed settlement amount is within the "range of reasonableness." I am unconvinced that, taken as a whole, the process undertaken involved the sound exercise of the Debtors' business judgment. Therefore, I cannot conclude, on the basis of the record before me, that the Settlement Agreement is fair, reasonable and in the best interest of the estate.

1. "Decision in Spansion Bankruptcy Addresses When Court Should Appoint a Special Committee of Creditors or Equity Holders"
Posted on March 2, 2010 by Jason Cornell, Esq.
http://delawarebankruptcy.foxrothschild.com/2010/03/articles/recent-developments-in-bankrup/decision-in-spansion-bankruptcy-addresses-when-court-should-appoint-a-special-committee-of-creditors-or-equity-holders/

2. "Court Refuses to Appoint Equity Committee in TLC Vision Bankruptcy"
Wednesday, March 24, 2010
http://www.netdocketsblog.com/2010/03/court-refuses-to-appoint-equity.html

3. Memorandum of Judge Kevin J. Carey Re. Proposed Settlement
http://delawarebankruptcy.foxrothschild.com/stats/pepper/orderedlist/downloads/download.php?file=http%3A//delawarebankruptcy.foxrothschild.com/uploads/file/Spansion%2520Decision%281%29.pdf