Cdex, Inc. (fka CDEX)

[Crow3]

First..GEMINI filed the below. Then altough few if any of the objections were met..GEMINI says OK WHAT THE HECK. GO FOR IT..(paraphrased)..NOTHING TO LOSE NOT ALREADY LOST...

One South Church Avenue Suite 700
Tucson, Arizona 85701-1611
Telephone: [phone]


Robert M. Charles, Jr., State Bar No. 007359
Direct Dial: [phone]
Direct Fax: [phone]
EMail: [e-mail]
Jeffrey L. Sklar
Email: [e-mail]


Attorneys for Gemini Master Fund, Ltd.

UNITED STATES BANKRUPTCY COURT
DISTRICT OF ARIZONA


In re:

Case No. 4:12-BK-02402-JMM

CDEX INC.,

Chapter: 11

Debtor.

Response to Debtor’s Emergency Motion
for Authority to Obtain Interim and
Long-Term Debtor in Possession
Financing

Date: March 22, 2012
Time: 1:30 p.m.

Creditor Gemini Master Fund, Ltd. (“Gemini”) opposes Debtor’s Emergency

Motion for Authority to Obtain Interim and Long-Term Debtor in Possession Financing

(“Motion”) (Dkt. #26).

Introduction

On just two days notice, Debtor is seeking the Court’s approval to encumber all of

its assets with a post-petition senior lien for up to $1 million.1 The Motion offers no

explanation of its failure to comply with Rule 4001(c)(3), which requires a debtor to

provide 14 days notice before obtaining credit, except in emergency situations. Nor has it

explained why this case presents an emergency.

1 An affidavit from Debtor’s CEO filed late on March 21 suggests that the lien may
actually be for $1.5 million. See Dkt. #31, ¶ 6.a. Of course, whether the lien is for $1
million or $1.5 million is a question that should be answered prior to the day before the
hearing.

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More importantly, the Motion leaves numerous questions unanswered about the use
of the funds that are being requested, the structure of the financing, Debtor’s profitability,
and whether Debtor has complied with the applicable securities laws. Given that the
proposed senior lien could eviscerate any recovery by unsecured creditors if the
reorganization is unsuccessful, Debtor’s failure to provide this information is especially
prejudicial to the creditors.

To be clear, Gemini is not categorically opposed to Debtor obtaining financing.
But before it can determine whether to support or oppose this particular financing request,
Debtor should be required to provide more information about how the financing will be
used. At a minimum, the Court should reset the hearing for sometime after the 14-day
notice period in Rule 4001.

Facts


Debtor filed its Chapter 11 petition more than a month ago, on February 10, 2012.
Its schedules indicate that it has about $425,000 in assets and more than $2.8 million in
liabilities. Dkt. #1 at 8. The assets are primarily in the form of intellectual property,
equipment, and inventory. Id. at 13. The liabilities are all unsecured, and Gemini is the
largest creditor, with a claim Debtor has valued at about $927,000. Id. at 22. Until now,
Debtor has not asked the Court to approve any interim or long-term financing. Debtor has
not yet filed an operating report. Nevertheless, without warning, Debtor filed this Motion
on March 20 and asked for a hearing just two days later.

The Motion provides virtually no detail about the financing. It simply claims that
unnamed “qualified investors may loan debtor monies in a series of transactions totaling
up to one million dollars.” Motion at 4. It also states that the investors — whoever they
are — will “require that they be granted a senior lien against the assets owned by Debtor,”
which would be capped at $1 million. Id. Because Debtor has claimed that its assets total
only about $425,000, this would be a lien against every asset currently held by Debtor for

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more than double their value. The Motion fails to acknowledge this, let alone explain why
it is necessary.

In fact, the Motion fails to explain how the financing will be used. It simply asserts
that it will help prepare Debtor’s product, and it makes the unsupported claim that Debtor
has received a large number of requests for that product. Id. at 3. But it provides no detail
about precisely how the product will be prepared, how many requests have been received,
and how much money is necessary to bring the product to market. Moreover, although an
affidavit from Debtor’s CEO filed late on March 21 suggests that the funds will be used to
pay routine expenses such as payroll, it does not explain how much money is actually
necessary to keep Debtor functioning. Dkt. #31 ¶ 11.

Nor does the Motion explain whether the financing will be sufficient to make
Debtor profitable, which is the only way the unsecured creditors’ interests could be
protected against a senior lien on all Debtor’s assets. It simply makes the bald assertion
that if the Motion is granted, “the interests of all unsecured creditors would remain more
than adequately protected by the development of its products.” Motion at 5.

The motion leaves numerous other basic questions unanswered as well. For
example, while it claims that the financing would be in the form of debt that would be
convertible to equity, it provides virtually no detail about this transaction. It simply
attaches a promissory note with numerous blanks remaining, along with a similarly blank
financing agreement, subscription agreement, and other documents. The promissory note
states that if Debtor exits bankruptcy, the debt will be convertible to equity at $0.05 per
share. The Motion fails to explain whether or how this offering would comply with the
federal and state securities laws.

Argument


As Debtor’s Motion acknowledges, the Court cannot authorize lending in exchange
for a superpriority lien under Section 364(d) unless the debtor has proven that no other
financing was available and has demonstrated the existence of adequate protection. In re

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Plabell Rubber Products, Inc., 137 B.R. 897, 901 (Bankr. N.D. Ohio 1992). Debtor has
failed to prove anything, let alone meet these requirements. Debtor simply asserts that it
could not obtain financing without providing a senior lien. And the CEO’s affidavit states
that Debtor unsuccessfully sought financing from lending institutions and private
individuals. Dkt. #31 ¶¶ 13-14. But his say-so is no substitute for actual evidence. See In
re 495 Cent. Park Ave. Corp., 136 B.R. 626, 630-31 (Bankr. S.D.N.Y. 1992) (“[T]he
debtor must make an effort to obtain credit without priming a senior lien.”).

Before the Court can find that either of Section 364(d)’s requirements have been
satisfied, it should require Debtor to demonstrate at least: (1) who the investors are and
their ability to provide the financing; (2) other efforts Debtor made to secure financing;

(3) Debtor’s current profitability; (4) Debtor’s expected profitability after obtaining the
financing; (5) who has expressed interest in Debtor’s product; (6) how the creditors will be
adequately protected; (7) what the funds will be used for; (8) what the terms of the
financing are; and (9) whether the financing arrangement complies with the applicable
securities laws. Such evidence is especially important because the senior lien Debtor
seeks would cover all its assets and could wipe out the unsecured creditors if Debtor’s
reorganization efforts are unsuccessful.
At a minimum, Debtor should be required to provide the 14-day notice required
under Fed. R. Bankr. P. 4001(c)(3) to obtain credit. This is especially true because
nothing in Debtor’s Motion demonstrates that the estate will suffer “immediate and
irreparable harm” if the financing is not authorized sooner. See Fed. R. Bankr. P.
4001(c)(3).

Conclusion


To be clear, Gemini is not categorically opposed to Debtor obtaining financing.
But this request fails to include a great deal of important information. The Court should
require that this information be provided. At a minimum, it should require that the hearing
be reset for sometime after the 14-day notice period set forth in Rule 4001.

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DATED this 21st day of March, 2012.

LEWIS AND ROCA LLP

By /s/ Jeffrey L. SklarRobert M. Charles, Jr.
Jeffrey L. Sklar

Gemini Master Fund, Ltd.

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Proof of Service

COPY of the foregoing served via the Court’s ECF system and by email on March 21,
2012 to each of the parties listed below, and via first class mail, postage prepaid, addressed
as follows where no email address is listed:

Eric Slocum Sparks
[e-mail]
Law Offices of Eric Slocum Sparks, P.C.
110 South Church Avenue, #2270
Tucson, AZ 85701


Attorney for Debtor

Elizabeth C. Amorosi
[e-mail]
Assistant United States Trustee
230 North First Avenue, Suite 204
Phoenix, AZ 85003-1706


Brian A. Laird
Heurlin Sherlock Laird
1636 North Swan Road, Suite 200
Tucson, AZ 85712-4096
[e-mail]


/s/ Renee L. Creswell
Renee L. Creswell
Lewis and Roca LLP


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