The AAR Bankruptcy Should Be Investigated

On February 8th I wrote about the pending sale of AAR. In that post, Air America Radio Sold For $4.25 Million: When figures Lie and Liars Figure at http://www.huffingtonpost.com/sheldon-drobny/air-america-radio-sold-fo_b_40738.html I described how 3 former directors who provided the post bankruptcy financing were using the bankruptcy provisions to effectively screw the unsecured creditors and former investors. Today, in a filing by the attorneys representing the unsecured creditors, the creditors committee filed an objection to the proposed sale of the assets of AAR to Mark Green and his billionaire brother. Below are some of the points raised in this objection which validate my assumption that the 3 former directors and the Green group are in an unholy alliance to take over AAR on the cheap. They are not the least bit concerned about who they screw in the process despite the fact that they are supposed to be liberals and fair minded. If the judge in this case grants permission for this sham sale, it will confirm again the fact that the Bankruptcy Court is the worst example of crony capitalism.

Selected Portions of the Credtiors Objections

THE SALE AGREEMENT AND THE COMMITTEE'S OBJECTION

A. The Proposed Sale Is Not In The Best Interests of Creditors Or The Estate

14. The Motion seeks approval of a Sale Agreement that provides the insider DIP Lender with payment in full but reneges on representations that the secured lender would provide non-insider unsecured creditors with a guaranteed amount for distribution. The salient payment terms of the proposed sale are as follows:

15. In exchange for this consideration, the Purchaser will receive substantially all of the assets of the Debtor, including cash, personal property, intellectual property, accounts receivable, books and records, customer lists, rights to tax refunds, rights under any employee plans, and causes of action relating to the assets. In addition, Mr. Glaser and certain other members of the DIP Lender will acquire minority ownership interests in the Purchaser through a reinvestment of certain of the sale proceeds.

16. This Sale Agreement, for all effective purposes, is a transaction between the insider DIP Lender and the Purchaser, to which the Debtor and pre-petition, non-insider creditors are superfluous. The end result is a sale process that uses the benefits of chapter 11 sale while offering unsecured creditors no likelihood of a real distribution. This process is not in the best interests of all creditors, and hence, not in the best interests of the Debtor's estate as a whole. While the parties making up the DIP Lender are repaid in full and have a potential upside through an ownership position in the new entity, a classic loan to own DIP facility that was not disclosed to anyone, the unsecured creditors in this case are left out of the equation entirely.

17. It is axiomatic that a sale of substantially all of the assets cannot be run for the sole benefit of secured creditors, much less those that are insiders. See United States Trustee v. Messer (In re Pink Cadillac Assocs.), 1997 WL 164282 at *4 (S.D.N.Y. Apr. 8, 1997) ("the trustee as representative of the estate should not (under usual circumstances) be engaging in activities such as the sale of fully secured property where there is no potential for equity for general unsecured creditors") (chapter 11 case), citing In re Lambert Implement Co., 44 B.R. 860, 862 (Bankr. W.D.

18. Moreover, sales of substantially all of the Debtor's property outside of the plan process are subject to high scrutiny and must not unfairly benefit insiders, the purchaser, or a particular creditor or class of creditors. In re Channel Communications, 117 B.R. 493, 494-97 (Bankr. Mo. 1990). Courts have disapproved of proposed section 363(b) sales in part on the basis that the transaction offered nothing to the unsecured creditors. See In re Fremont Battery Co., 73 B.R. 277, 279 (Bankr. N.D. Ohio 1987) (Debtor's motion to approve section 363(b) sale of its business denied in part because "the proceeds from the proposed sale would, at most, benefit one creditor only . . . [and] [t]he sale would not create proceeds that would inure to the benefit of the unsecured creditors").

19. Section 506(c) of the Bankruptcy Code explicitly provides that if assets are preserved and/or sold for the benefit of secured creditors, it is properly the responsibility of those secured creditors to pay the costs and expenses associated with the process. A DIP Facility that is to be repaid in full and an equity participation in the new owner of the business for the DIP Lender does not qualify as "paying" the costs and expenses of the process, and even less so when the insiders have used the Bankruptcy Courts to eliminate creditors and minority investors. status of certain of the so-called secured creditors/DIP Lender is considered.4 Here the Debtor's pre?
petition investors/secured creditors have converted themselves into the DIP Lender and used the chapter 11 process to market and sell the Debtor's assets, while making sure that they are taken care of, not only through repayment of the DIP Facility, but through the acquisition of an equity interest in the new entity. The participants in the DIP Facility cannot be said to have truly financed the sale process, as they are being paid in full for any amounts advanced post-petition, while the unsecured creditors have no guaranty of a meaningful distribution and certainly no potential upside going forward. As was the case in Fremont, the proposed sale is simply not in the best interests of the estate because there is no real benefit to general unsecured creditors.

20. The Debtor argues that the proposed deal offers value to the unsecured creditors because $500,000 is being paid into the estate. As stated above, this "benefit" is wholly illusory. As the Debtor well knows, the proposed $500,000 to the estate may be needed to pay significant and yet unknown priority tax claims or other unanticipated and anticipated administrative expenses - all of which of course are paid before a cent comes to the unsecured creditors. Further, although avoidance actions are available to the unsecured creditors, those potential recoveries would always be there, irrespective of whether the Debtor's business is sold. Thus, the avoidance actions should
not factor into an assessment of the propriety of the sale.

21. The most glaring inequity here is that this sale primarily serves the interests of the insiders, and to a limited extent, those related to the insiders. This blatant manipulation of the bankruptcy process for the benefit of insiders and entities related to the insiders is simply not the intended or proper use of chapter 11. The ultimate beneficiaries of this tainted transaction do not merit and should not be given the benefits and rights that a section 363 sale order confers.

The whole system is patently unfair to the investors and creditors. The recent change in the Bankruptcy Law for individuals supported by the credit card companies and Congress includiing the likes of Joe Biden and Joe Lieberman made it much more difficult for individuals to go bankrupt but did not change the abuse I have described above as to rich entrepreneurs who use and abuse the Bankruptcy Court unfairly. And the AAR directors that are doing this are collectively worth at least a billion dollars. And the shame of them doing this in the name of progressive talk radio is hypocritical. The Greens and the "3 amigos" will be joined together to try to give AAR a new life. Should anyone trust these people again given their recent behavior?

The abuse of the Bankruptcy Laws by the 3 former AAR directors should be the basis of Congressional hearings to change the current Bankruptcy laws that abuse the general creditors and investors. And it would be poetic justice for these investigations to be prompted by the insolvency of what was supposed to be a liberal media company