A Bad DIP? Chesapeake Creditors Sue

Bankrupt paperboard company's unsecured creditors tell the court that the debtor-in-possession motion and bid procedures were stacked against them.
Stephen TaubMarch 3, 2009

A group of Chesapeake Corp. unsecured creditors is challenging the proposed sale of the bankrupt paperboard company, questioning whether the negotiations were conducted in good faith.

“The Committee believes that the [debtor-in-possession] motion and the bid procedures motion, each filed on the petition date, may have been commenced solely for the benefit of the debtors, the stalking horse purchasers and Wachovia at the expense of the unsecured creditors,” the group alleges in a motion filed in U.S. Bankruptcy Court in Virginia.

Chesapeake filed for Chapter 11 on Dec. 29, and at the same time said that it had agreed to sell all its operating businesses to a group of investors including affiliates of Irving Place Capital Management L.P. and Oaktree Capital Management L.P. – the stalking horse purchasers – who intended to continue operating these businesses as a going concern.

Under that deal, Chesapeake and its U.S. operating subsidiaries filed voluntary Chapter 11 petitions in the Eastern District of Virginia in Richmond. Said president and CEO Andrew J. Kohut at the time, after exploring alternatives to improve the balance sheet and maintain liquidity in hard times, the management and board had concluded that court-supervised sale of business operations was in the company’s best interest. He said that it would help it meet objectives “including allowing ongoing operation of all of our businesses without interruption to supplier and customer relationships, providing a permanent solution to the high leverage at the parent company level and constrained liquidity, providing the most rapid path to a new organization with a much healthier balance sheet, and providing a bright future for our operating companies and their employees, customers and suppliers.”

The company also sought approval for a new debtor-in-possession financing facility of up to $37 million provided by certain members of its revolving lender group.

The unsecured creditors assert that because the proposed sale offers little distribution to unsecured creditors, its committee had the obligation to conduct a thorough investigation. “Moreover, it is imperative that the Committee obtain information concerning the Debtors’ marketing efforts to ensure that the estates are truly obtaining the highest and best offer for its assets,” the creditors’ motion added.

The committee said it wanted to be certain that Wachovia, which is administrative gent for the debtors’ DIP facility, along with the stalking horse purchasers, had not coaxed the debtors into selling substantially all their assets “for their own benefit and at the peril of the unsecured creditors.” The unsecured creditors ask that the debtors, the stalking horse purchases and Wachovia be directed to produce all requested documents for examination.