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Summarizing by Bradley Pearce

Albaad USA, Inc. v. GPMI, Co. (In re: GPMI, Co.)

Case Type:
Case Status:
BAP No. AZ-22-1231-CLB (9th Circuit, Jun 21,2023) Not Published
The U.S. Bankruptcy Appellate Panel of the Ninth Circuit affirmed a bankruptcy court's order confirming a debtor/appellee's chapter 11 plan over objections by an appellant/unsecured creditor. The BAP held the bankruptcy court did not abuse its discretion in confirming the plan as it did not (1) violate the absolute priority rule, or (2) fail to satisfy the best interests of creditors, notwithstanding a continuation in management of the reorganized debtor and the appointment of the debtor's former owner as the trustee of a litigation trust established under the plan.
Procedural context:
Appellant Albaad USA,, Inc. raised three issues on appeal: (1) "Did the bankruptcy court abuse its discretion when it confirmed the Plan?"; (2) "Did the bankruptcy court commit clear error when it found that the Plan did not violate the absolute priority rule?; and (3) "Did the bankruptcy court commit clear error when it found that the Plan complied with the applicable requirements of § 1129(a)(5)?" The appellees contended the appeal was equitably moot. The BAP exercised its discretion to address the appeal on the merits and did not rule on the equitable mootness argument.
GPMI Co. manufactured cleaning products for major wholesalers and retailers. Its founder and CEO, Yarron Bendor, opened GPMI in 1989 and it was successful for many years. GPMI contracted to supply products to Albaad USA, Inc. in 2019, and the contract would have generated significant revenue for GPMI. GPMI grew its production capacity to fulfill the contract. But Albaad terminated the contract in 2021 because of deficiencies with GPMI's products, leading GPMI to financial crisis. GPMI implemented cost-cutting measures and hired a financial consultant to pursue additional financing, investment, customers, or an equity or asset sale, but was unsuccessful in its efforts. In early 2022, GPMI filed a voluntary chapter 11 petition in the U.S. Bankruptcy Court for the District of Arizona and an active and experienced creditor's committee was formed. Continued efforts were made to find investors or purchasers for GPMI in bankruptcy, ultimately leading to a proposed purchase of GPMI by Envoy Solutions, LLC for $4.3M; the committee approved of the marketing efforts and believed the sale to Envoy "represented the best potential for recovery to allowed unsecured creditors." GPMI thus proposed a plan of reorganization that provided for the sale of 100% of the equity to Envoy. The plan "proposed a division of GPMI’s assets into two separate entities: (1) a newly formed 'Litigation Trust,' tasked with prosecuting GPMI’s causes of action—including claims against Albaad . . . —and distributing litigation proceeds to unsecured creditors; and (2) the 'Reorganized Debtor,' which would retain ownership of all of GPMI’s other assets and operate GPMI’s business operations as a going concern." The Litigation Trust would receive funds from the purchase to finance the litigation, and the plan proposed Bendor would serve as the initial trustee subject to oversight by a coterie of creditors. The plan also stated Envoy would hire Bendor as an at-will employee of the Reorganized Debtor via a separately negotiated agreement under which Bendor would have no equity interest. Albaad did not vote in favor of the plan and objected to confirmation. The bankruptcy court held an evidentiary hearing on Albaad's objections that (a) "the Plan violated § 1129(b)(2), the absolute priority rule, because (1) Bendor’s employment was an impermissible benefit bestowed upon him based on his former equity interest; and (2) GPMI failed to hire a broker to sell the business and provide a professional valuation as required by the United States Supreme Court’s holding in Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. P'ship"; and (b) "the Plan violated § 1129(a)(5) because Bendor’s appointment as Trustee of the Litigation Trust was inconsistent with the interests of creditors and public policy" insofar as Bendor, a material witness in the Albaad litigation, had a conflict of interest. The bankruptcy court overruled Albaad's objections and entered an order approving the disclosure statement and confirming GPMI's plan. Albaad timely appealed and filed unsuccessful motions for a stay pending appeal with both the bankruptcy court and the BAP.

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