EXHIBIT 99.2
William B. Finkelstein
State Bar No. 07016300
HUGHES & LUCE, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
(214) 939-5500
Telecopy (214) 939-6100
COUNSEL FOR THE OFFICIAL
COMMITTEE OF UNSECURED
CREDITORS OF ERLY INDUSTRIES, INC.
UNITED STATES BANKRUPTCY COURT
FOR THE SOUTH DISTRICT OF TEXAS
CORPUS CHRISTI DIVISION
In re: (S)
(S)
ERLY Industries, Inc., (S) Case No. 98-21515-C-11
(S)
Debtor (S) (Chapter 11)
EXPEDITED MOTION OF THE OFFICIAL COMMITTEE OF UNSECURED
CREDITORS FOR CONVERSION OF THE CASE TO ONE UNDER CHAPTER 7
AND POINTS AND AUTHORITIES IN SUPPORT THEREOF
---------------------------------------------
IF YOU WANT A HEARING, YOU MUST REQUEST ONE IN WRITING, AND YOU MUST RESPOND
SPECIFICALLY TO EACH PARAGRAPH OF THIS PLEADING. YOU MUST FILE YOUR RESPONSE
WITH THE CLERK OF THE BANKRUPTCY COURT WITHIN TWENTY DAYS FROM THE DATE YOU WERE
SERVED AND GIVE A COPY TO THE PERSON WHO SENT YOU THE NOTICE; OTHERWISE, THE
COURT MAY TREAT THE PLEADING AS UNOPPOSED AND GRANT THE RELIEF.
IF A PARTY REQUESTS EMERGENCY CONSIDERATION, THE COURT MAY ACT EXPEDITIOUSLY ON
THE MATTER. IF THE COURT ALLOWS A SHORTER RESPONSE TIME THAN TWENTY DAYS, YOU
MUST RESPOND WITHIN THAT TIME. IF THE COURT SETS AN EMERGENCY HEARING BEFORE
THE RESPONSE TIME WILL EXPIRE, ONLY ATTENDANCE AT THE HEARING IS NECESSARY TO
PRESERVE YOUR RIGHTS. IF AN EMERGENCY HEARING IS NOT SET, YOU MUST RESPOND
BEFORE THE RESPONSE TIME EXPIRES.
TO THE UNITED STATES BANKRUPTCY JUDGE:
The Official Committee of Unsecured Creditors (the "Committee") of
---------
ERLY Industries, Inc. ("ERLY" or the "Debtor"), for its Expedited Motion for
Conversion of the Case to One Under Chapter 7 (this "Motion to Convert") states
-----------------
as follows:
I. JURISDICTION
------------
1. This is a proceeding for conversion of the case to one under
chapter 7 of the Bankruptcy Code, filed pursuant to 11 U.S.C. (S) 1112 and
Federal Rules of Bankruptcy Procedure 1017 and 9014. This Court has jurisdiction
of this contested matter pursuant to 28 U.S.C. (S) 1334. This is a core matter
pursuant to 28 U.S.C. (S) 157(b)(2)(A) and (O).
II. PRELIMINARY STATEMENT
---------------------
2. This is not a typical chapter 11 case. ERLY has no ongoing
business to reorganize, no operational assets, and no current income. ERLY's
creditors - as well as this Court - should be spared any further expenses in
connection with a non-reorganizational Chapter 11 case. This case should be
converted to chapter 7, and a trustee should be appointed to liquidate the
remainder of ERLY's bankruptcy estate.
III. BACKGROUND
----------
3. On September 28, 1998 (the "Petition Date"), ERLY filed its
-------------
voluntary petition under chapter 11 of the Bankruptcy Code. Since that date,
the Debtor has retained possession of its properties and has been operating its
affairs pursuant to 11 U.S.C. (S)(S) 1107 and 1108.
4. The U. S. Trustee has appointed five creditors to act as the
Committee in this case.
2
5. ERLY is a holding company with two operating subsidiaries: Watch-
Edge International, Inc., f/k/a Chemonics Industries, Inc. ("WEI") and American
Rice, Inc. ("ARI")./1/ Both WEI and ARI are debtors-in-possession in separate
cases pending before the Court. WEI, in turn, owns 100% of the common stock of
Chemonics International, Inc. ("Chemonics"), a nondebtor. ERLY and WEI have no
employees, other than those professionals retained in connection with their
bankruptcy cases and those necessary to administer the minimal affairs of two
holding companies. Neither company has a function outside of that of a holding
company, nor do they have any substantial assets other than cash (currently at
the WEI level) and potential litigation recoveries against ARI, insurers,
officers, directors, and other third parties.
6. To date, the Debtor and the Committee have focused much of their
efforts on preserving the value of WEI and Chemonics because these two
subsidiaries represented the most likely source of immediate payment for ERLY's
creditors. At the time of the filing of ERLY's bankruptcy, Chemonics and WEI's
loan/2/ with NationsBank was due and in default, efforts to refinance the
company had been unsuccessful, and were complicated by a lawsuit brought by a
former Ed Marzac, former counsel to ERLY and an unsuccessful purchaser of
Chemonics. WEI and Chemonics' financial condition were further impaired because
FIA purchased the NationsBank loan and was keeping Chemonics on a budget which
was insufficient to meet Chemonics' ongoing financial needs. The Debtor,
together with the Committee and WEI,
- ------------------
/1/ Upon information and belief, ERLY owns 81% of the common stock of ARI and
100% of the stock of WEI.
/2/ ERLY is also purportedly a guarantor of the Chemonics/WEI facility.
3
succeeded in staving off FIA's forced acquisition of Chemonics long enough to
allow Chemonics' assets to be sold for $8.25 million through a court-approved
sale that involved competitive bidding. Now that the sale of the assets
Chemonics has concluded, ERLY, WEI and Chemonics have no operating assets.
7. As stated above, ERLY's other subsidiary, ARI, is a debtor-in-
possession in a separate case pending before this Court. ARI has significant
ongoing operations. However, upon information and belief, ERLY's stock in ARI is
fully encumbered by liens and security interests granted to holders of certain
indebtedness owed by ARI. ERLY' s ownership interest in ARI is likely to be
greatly diminished, or possibly eliminated, in the process of ARI's
reorganization.
8. In short, the Debtor has completed the task of liquidating its
tangible assets. Current management's liquidation of the Debtor's remaining
assets and prosecution of litigation recoveries against officers, directors,
former professionals and third-parties, however, is not in the interest of the
estate because of the costs and conflicts of interests associated with such
efforts.
9. The Debtor apparently disagrees, since it has continued to move
forward on its request for an extension of the plan exclusivity period and has
stated that it intends to file a Disclosure Statement and Plan which provide
that the Debtor, through existing management, shall continue in its role as
management and shall reinvest substantially all of the proceeds of the Chemonics
sale and litigation recoveries in a new business venture.
IV. ARGUMENT
--------
10. Congress did not intend for cases to remain in chapter 11 if there
is no realistic chance for reorganization. For this reason, bankruptcy courts
have "wide discretion" to convert
4
cases to Chapter 7 provided sufficient cause exists under 11 U.S.C. (S) 1112(b).
See In re RCM Global Long Term Capital Appreciation Fund, 200 B.R. 514, 519
(Bankr. S.D.N.Y. 1996); 7 COLLIER ON BANKRUPTCY (P) 1112.04[2] (Lawrence P. King
ed., 15th ed. 1998) (stating "section 1112(b) was designed to provide the court
with a powerful tool to weed out inappropriate chapter 11 cases at the earliest
possible stage"); see also United States Sav. Ass'n of Texas v. Timbers of
Inwood Forest Assocs Ltd., 484 U.S. 365, 376 (1988) (stating there "must be a
reasonable possibility of a successful reorganization within a reasonable time")
(citations omitted).
Creditors need not wait until a debtor proposes a plan or until the
debtor's exclusive right to file a plan has expired... Creditors,
likewise, need not incur the added time and expense of a confirmation
hearing on a plan they believe cannot be effectuated.... The very
purpose of (S) 1112(b) is to cut short this plan and confirmation
process where it is pointless.
In re Woodbrook Assocs., 19 F.3d 312, 317 (7th Cir. 1994).
11. Section 1112(b) contains a non-exhaustive list of factors that
constitute "cause" for converting a case from chapter 11 to chapter 7. E.g. In
re RCM Global Long Term Capital Appreciation Fund, 200 B.R. at 519; In re
Lizeric Realty Corp., 188 B.R. 499, 502 (Bankr. S.D.N.Y. 1995); In re Gucci, 174
B.R. 401, 409 (Bankr. S.D.N.Y. 1994). Two of these factors are directly
applicable here: (S) 1112(b)(2) - inability to effectuate a plan, and (S)
1112(b)(1) - continuing loss to or diminution of the estate and absence of a
reasonable likelihood of rehabilitation. Both of these factors weigh heavily in
favor of converting this case to chapter 7.
A. (S) 1112(b)(2): ERLY Lacks the Ability to Effectuate a Plan
------------------------------------------------------------
12. Section 1112(b)(2) provides that cause for conversion includes the
"inability to effectuate a plan." 11 U.S.C. (S) 1112(b)(2). The test under this
section is whether it is reasonable
5
to expect that a plan can be confirmed within a reasonable amount of time. E.g.
In re Woodbrook Assocs, 19 F.3d 312, 316 (7th Cir. 1994); see also A. Illum
Hansen, Inc. v. Tiana Queen Motel, Inc. (In re Tiana Queen Motel, Inc.), 749
F.2d 146, 151 (2d Cir. 1984) (upholding conversion where, after 15 months in
chapter 11, debtor's prospects for rehabilitation were based solely upon
"boundless confidence"). ERLY cannot satisfy this test because it cannot propose
a plan that meets the confirmation criteria set out in (S) 1129(a).
(1) (S) 1129(a) (11): ERLY Cannot Propose a Feasible Plan
13. Section 1129(a)(11) contains a feasibility test that prevents
confirmation of "visionary schemes which promise creditors and equity security
holders more under a proposed plan than the debtor can possibly attain after
confirmation." 5 COLLIER ON BANKRUPTCY, (P) l129.02[11] at 1129-59 (15th ed.
1993); In re Pizza of Hawaii, 761 F.2d 1374, 1382 (9th Cir. 1985); United
Properties, Inc. v. Emporium Department Stores, Inc., 379 F.2d 55, 64 (8th Cir.
1967).
14. ERLY cannot propose a plan that satisfies this feasibility
standard because it has no historical experience in any currently-ongoing
business. Thus, any proposed plan is, by definition, visionary for ERLY and
would force creditors of ERLY to invest their already-diminished return in a
speculative venture run by existing ERLY management simply because management
insists on this course of action rather than acceding to the wishes of
creditors. See 312 West 91st Street Co., Inc., 35 B.R. 346, 347 (Bankr. S.D.N.Y.
1983) (holding that "[w]ithout a feasibly operating business there is no logic
in continuing a Chapter 11.").
(2) (S) 1129(a)(10): ERLY Cannot Obtain the Requisite Acceptance of
a Plan
15. Similarly, the Bankruptcy Code requires, as a prerequisite to
confirmation, that at
6
least one class of impaired claims accept the plan. 11 U.S.C. (S) 1129(a)(10).
Based on the schedules and proofs of claims flied in this case, ERLY has four
types of creditors: (i) professionals employed under (S) 327, such as its
attorneys; (ii) priority tax creditors; (iii) secured creditors who hold ARI or
ERLY stock as collateral; and (iv) general unsecured creditors. The first two
types, professionals employed under (S) 327 and priority tax creditors, cannot
be placed into classes under a plan. 11 U.S.C. (S) 1123(a)(l) (providing that a
plan shall designate classes of claims except claims under (S) 507(a)( 1) and
(S) 5 07(a)(8)). Similarly, the collateral held by secured creditors would most
assuredly be forfeited by the Debtor as worthless pursuant to In re Sandy Ridge
Development, Corp, 881 F.2d 1346 (5th Cir. 1989). This leaves ERLY with only one
class of impaired creditors: those holding unsecured claims.
16. Of the non-insider unsecured claims scheduled by ERLY, the
Committee represents approximately 50% of the amount of such claims. The
Committee's members have determined that they will not vote to accept a plan
which forces creditors to reinvest their distribution in a completely new
business venture run by existing ERLY management. ERLY can thus not obtain the
requisite "two-thirds in amount" approval required by 11 U.S.C. (S) 1126. See In
re Rundlett, 136 B.R. 376, 381 (Bankr. S.D.N.Y. 1992) (converting case to
chapter 7 where debtor could not obtain the necessary approvals under (S) 1126).
(3) (S) 1129(a)(3): ERLY Cannot Propose a Plan in Good Faith
17. The Bankruptcy Code prohibits confirmation of a plan unless it is
proposed in "good faith." 11 U.S.C. (S) 1129(a)(3). In this context, good faith
means there is a "reasonable likelihood that the plan will achieve a result
consistent with the objectives and purposes of the Bankruptcy Code." In re
Madison Hotel Assocs., 749 F.2d 410, 425 (7th Cir. 1984); accord In
7
re Toy & Sports Warehouse, Inc., 37 B.R. 141, 149 (Bankr. S.D.N.Y. 1984). One
litmus test of good faith adopted by courts tests whether debtor seeks to use
the bankruptcy provisions "to create and organize a new business, not to
reorganize or rehabilitate an existing enterprise or to preserve going concern
values of a viable or existing business." In re Natural Land Corp., 825 F.2d 296
(11th Cir. 1987). No description could more accurately and succinctly describe
ERLY's future plans. As stated above, ERLY has no existing business, and can
only propose a plan which would coerce creditors to provide funding necessary to
allow ERLY to acquire a new line of business in which neither the creditor body
nor ERLY management has any base of experience. This is not a permissible use of
the Bankruptcy Code protections, and thus immediate conversion of the case is
warranted.
B. (S) 1112(B)(l): ERLY's Estate is Suffering Continuing Losses and There
----------------------------------------------------------------------
is No Likelihood of Rehabilitation
----------------------------------
19. In addition to the inability to effectuate a plan, section
1112(b)(l) provides that "continuing loss to or diminution of the estate and
absence of a reasonable likelihood of rehabilitation" constitutes cause for
converting a chapter 11 case to chapter 7. 11 U.S.C. (S) 1112(b)(l). This
necessarily entails a two-step inquiry. E.g. In re Denrose Diamond, 49 B.R. 754,
756 (Bankr. S.D.N.Y. 1985). Has ERLY's estate suffered continuing losses and
diminution in value? And if so, is there a reasonable likelihood of
rehabilitation? The answers to both of these questions strongly suggest that
ERLYs case should be converted.
(1) Continuing Loss to or Diminution of the Estate
20. Under the first prong of 11 U.S.C. (S) 1112(b)(1), the bankruptcy
court must determine whether the debtor's estate has suffered continuing losses
or whether estate assets have diminished in value. If the debtor is operating
post-petition with sustained negative cash flow,
8
this fact is sufficient to support a finding of "continuing loss to . . . the
estate." In re Schriock Const., lnc., 167 B.R 569, 575 (Bankr. D.N.D. 1994).
21. ERLY has operated throughout the last five months at a cost well
in excess of $300,000 when one considers the fees being paid to administrative
employees, management and directors (which alone exceeded to $150,000 through
January 1999) and professional fees of the Debtor's four attorneys and the
Committee. There is no sign that, absent conversion of this case, these expenses
will decrease. A chapter 7 trustee is a much more appropriate party to prosecute
the causes of action remaining in the estate and would be compensated at the far
lower commission specified in 11 U.S.C. (S) 326, thus maximizing the eventual
return to unsecured creditors.
(2) Likelihood of Rehabilitation
23. The second prong of (S) 1112(b)(l) requires the bankruptcy court
to determine whether there is a reasonable likelihood of rehabilitation. See,
e.g. In re Schriock Const., Inc., 167 B.R. at 575 (holding that movant on
conversion motion must show both continuing loss or diminution in value and no
reasonable likelihood of rehabilitation) ERLY's financial performance since the
petition date demonstrates that "rehabilitation" is not a possible goal in this
case since there is no ongoing business in ERLY or any of its subsidiaries.
Since there is no reasonable likelihood of rehabilitation in this case, it
should be converted to chapter 7.
C. Current Management has an Inherent Conflict of Interest Prosecuting
-------------------------------------------------------------------
the Estate's Most Valuable Litigation Claims
--------------------------------------------
24. As ERLY is a publicly-held corporation which was severely
insolvent as of the Petition Date, the estate has significant causes of action
against professionals, officers and directors who were charged with managing the
company's affairs pre-petition. Certain of those
9
directors, specifically Ms. Nanette Kelly and Mr. Eugene Cafiero still hold
positions as directors of ERLY. In Ms. Kelly's case, she is also the president
of ERLY. Clearly, neither Ms. Kelly nor Mr Cafiero are in an appropriate
position to objectively investigate and evaluate the merits of causes of action
held by ERLY against themselves or their fellow former directors. Nor are they
able to be entrusted with prosecuting officer-director litigation to recover the
proceeds of insurance policies which may provide coverage for the errors,
omissions or malfeasance of ERLY's officers and directors. The Committee
believes that recoveries from these particular causes of action may form the
basis of a large portion of the ERLY estate, and as such, the case should be
converted to a Chapter 7 proceeding so that an independent trustee can
objectively assess the value of ERLY's potential litigation.
V. REQUEST FOR EXPEDITED HEARING
-----------------------------
24. By separate pleading, the Committee has requested an expedited
hearing on this Motion. Several reasons underlie the Committee's request:
. The Committee wishes to effectuate a dividend to creditors
quickly;
. The Committee wishes to conserve the costs associated with
preparation and solicitation of a facially unconfirmable plan;
. The estate faces other deadlines, especially July and October
deadlines associated with the discounted buy-out of an allowed $5
million claim pursuant to a settlement agreement approved by the
Court last month. In order to allow the estate's representatives
to make an economically-informed decision on this buy-out out
option, the estate must quickly move to a liquidating mode so that
the very large claims of ARI and Sandberg Financial Corporation
can be resolved; and
. The estate should assess its causes of action before they become
stale.
Accordingly, the Committee requests that the status of this case be addressed on
an expedited basis.
VI. CONCLUSION
----------
10
25. For the reasons set out above, the Committee respectfully requests
that ERLY's chapter 11 bankruptcy case be converted to chapter 7, that upon
conversion a trustee be appointed to liquidate ERLY's bankruptcy estate, and
that the Court grant the Committee any further and additional relief to which it
may be entitled.
Dated: March 1, 1999.
Respectfully submitted,
HUGHES & LUCE, L.L.P.
By: /s/ WILLIAM B. FINKELSTEIN
---------------------------
William B. Finkelstein
State Bar No. 07016300
S.D. Tex. No. 13910
HUGHES & LUCE, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
(214) 939-5500
(214) 939-6100 Telecopy
ATTORNEYS FOR THE OFFICIAL
COMMITTEE OF UNSECURED CREDITORS
CERTIFICATE OF SERVICE
----------------------
This is to certify that on this the 1st day of March, 1999, a true and
correct copy of the foregoing was served via first class mail, postage prepaid
on all parties on the attached Master Service List and on Matthew Rosenstein,
counsel for ERLY, via hand-delivery.
/s/ WILLIAM B. FINKELSTEIN
--------------------------
William B. Finkelstein
11