INFORMATION ABOUT THE WOODBRIDGE BANKRUPTCY CASES
ON JULY 9, 2018, THE WOODBRIDGE GROUP OF COMPANIES LLC AND ITS AFFILIATED DEBTORS FILED A JOINT CHAPTER 11 PLAN OF LIQUIDATION (THE “PLAN”) AND A DISCLOSURE STATEMENT REGARDING THE PLAN. YOU MAY ACCESS THE PLAN AND THE DISCLOSURE STATEMENT ON THE CLAIMS AGENT’S WEBSITE SET FORTH BELOW. SEE BELOW FOR MORE INFORMATION ON THE PLAN PROCESS.
The Woodbridge Bankruptcy Cases Generally
On December 4, 2017 (known as the “Petition Date”), over 270 Woodbridge-affiliated entities filed for bankruptcy protection in the United States Bankruptcy Court for the District of Delaware (the “Delaware Bankruptcy Court”). Subsequently, additional affiliated entities filed their own bankruptcy petitions with the Delaware Bankruptcy Court, and all of the Woodbridge bankruptcy cases are being jointly administered under one lead case, Case No. 17-12560. While you can access the Delaware Bankruptcy Court website for general information, to access the Woodbridge case docket, you must have a PACER account. Alternatively, you can view the case docket by visiting the claims agent’s website at www.gardencitygroup.com/cases/WGC.
The Woodbridge Group of Companies (the “Debtors”) continues to own its properties and operate its businesses while in chapter 11 as “debtors-in-possession” (literally, debtors who are in possession of their assets). Robert Shapiro, the former Chief Executive Officer of Woodbridge, is no longer involved in the operation of the companies, and management and day-to-day operations are being lead by a new Chief Restructuring Officer, a new Chief Executive Officer and a new 3-person, independent board of managers (See discussion below).
On December 14, 2017, the Office of the United States Trustee appointed a 3-person official unsecured creditors’ committee (the “Creditors’ Committee”) to represent the interests of general unsecured creditors in these cases. None of the members of the Creditors’ Committee are Unitholders, though two of them are Noteholders who have waived their rights to assert that they have perfected security interests in the Debtors’ property.
On March 27, 2018, the Debtors filed a Notice of Submission of Summary Plan Term Sheet (a copy of which is attached to this website as an Important Document). For a more detailed description of the Summary Plan Term Sheet and the process by which it might become a chapter 11 plan for these Debtors, please see the section of this page entitled PLAN TERM SHEET.
The Formation Order
The Formation Order (sometimes referred to as the Settlement Order) settled certain motions that were filed with the Bankruptcy Court by parties-in-interest in the Woodbridge cases. As part of that settlement, the Bankruptcy Court authorized (a) the formation of the Unitholders’ Group to act as fiduciaries to the Unitholders; (b) the formation of a Noteholders’ Group to act as fiduciaries to the Noteholders; and (c) the creation of a new 3-person independent board of managers (the “New Board”), made up of Messrs. Richard Nevins, Freddie Reiss and Michael Goldberg, to take control of and manage the Woodbridge Debtors’ businesses. The New Board has selected Mr. Bradley Sharp from Development Specialists, Inc. as the Debtors’ new Chief Restructuring Officer and Mr. Frederick Chin as the Debtors’ new Chief Executive Officer.
The current focus of the Debtors’ New Board, new officers and legal and financial advisors is to reach consensus on how best to maximize the value of the Debtors’ real property and other assets and how to structure distribution of that value through a plan of reorganization or liquidation with significant input from the Unitholders’ Group, the Noteholders’ Group and the Creditors’ Committee.
The Unitholders’ Group
Under the Formation Order, the Unitholders’ Group was charged with three primary tasks:
- Analyzing, litigating and/or negotiating how the Units should be characterized as a matter of law (i.e., debt, equity or something else) and how the Units should be treated vis-à-vis the Notes and other general unsecured claims in a plan of reorganization.In bankruptcy, there is a rule setting out the priority of payments among creditors and equity holders. Generally, secured creditors get paid ahead of unsecured creditors and unsecured creditors get paid ahead of equity holders.The Unitholders’ Group has raised the question of whether, during the first 5 years after their purchase, the Units are more like debt than they are like equity and should be treated as giving rise to unsecured claims rather than equity interests in these cases. If the Unitholders’ Group is correct, then the Unitholders will be deemed creditors, and they will receive a more favorable recovery under a reorganization plan than if they were to be treated as equity holders.In addition, there is a significant dispute in these cases regarding whether the Notes are secured or unsecured. Resolution of the issue turns on both a legal and factual analysis, but if the Notes are deemed unsecured and the Units are deemed debt, then both the Unitholders and the Noteholders may be considered unsecured creditors with the same payment priority rights.
- Analyzing, litigating and/or negotiating how the Units should be treated if there were to be an adjudication that Woodbridge was operated as a Ponzi scheme.The SEC has filed a complaint in the Southern District of Florida against the Debtors, Robert Shapiro and others alleging that the Woodbridge Group of Companies was operated as a Ponzi scheme. Though the SEC has alleged facts strongly suggesting that a Ponzi scheme existed, Mr. Shapiro is actively disputing these allegations and no court has determined the issue yet. Resolution of this issue may have a significant impact on how Unitholders and Noteholders are treated under a plan.
- Analyzing, litigating and/or negotiating whether the Unitholders would be best served by substantively consolidating some of the Woodbridge Debtors.“Substantive consolidation,” as opposed to joint administration, is a legal concept in bankruptcy where two or more separate legal entities are combined and treated as a single entity. Assets and liabilities of the combined entities are pooled, and creditors of the combined entities get recoveries out of the pooled assets. To substantively consolidate separate legal entities, the Bankruptcy Court must be convinced that, among other things, the entities were never actually treated separately, the entities’ books, records and finances were so intertwined that it would be impossible to untangle them, and all creditors would benefit from the pooling of assets. The Unitholders’ Group (as well the Noteholders’ Group) are in the early stages of reviewing the Debtors’ books and records to determine whether substantive consolidation is appropriate in these cases.
Negotiations among the Debtors, the Official Creditors’ Committee, the Unitholders’ Group and the Noteholders’ Group are ongoing in connection with efforts to resolve, on a consensual basis, the above issues without the cost and delay attendant to litigating these issues. Such negotiations currently remain confidential.
Trading Restrictions Notice
The agreements governing most of the Units and Notes require the Funds’ manager to consent to any sale or transfer of such Units or Notes before the Unit or Note may be sold.
As a result, on March 21, 2018, the Debtors filed a Notice Regarding Transfers of Units or Notes (a copy of which is attached to this website) informing all Unitholders and Noteholders that (i) they may not trade, sell or transfer their Units or Notes without first obtaining the consent of the New Board (the current manager) and (ii) the New Board will be imposing a 90-day moratorium on providing its consent to any such transfers. Any sale or transfer of a Unit or Note that violates the moratorium will be deemed null and void. In other words, Unitholders may not sell or assign their Units to any third party for the next 90 days.
The Debtors are currently negotiating to sell some of their properties. Before the Debtors can sell any of their properties, however, they must first disclose the terms of the sale to the Bankruptcy Court and to all creditors and obtain Bankruptcy Court approval of the transaction. As of March 19, 2018, three motions are pending before the Bankruptcy Court to sell three properties an estimated gross sales price equal to $42,400,000.
Depending on what property is sold (i.e., property securing the DIP loan, Noteholder collateral or any other real property), certain of the gross proceeds will be paid to the Debtors’ DIP lender (see the DIP Financing discussion below) or reserved for possible distribution to certain Noteholders. The balance of the net sale proceeds will be available to the Debtors to pay for the cost of these bankruptcy cases (e.g., CRO and CEO compensation, New Board members’ compensation and the professionals’ fees of the Debtors, the Creditors’ Committee, the Unitholders’ Group and the Noteholders’ Group) as well as expenses incurred by the Debtors to maintain and maximize the value of their real property assets.
As of the Petition Date, the Debtors did not have sufficient cash to operate their businesses and pay bankruptcy case expenses. The Bankruptcy Court entered three interim orders authorizing the Debtors to incur small amounts of post-bankruptcy financing (known as post-petition financing or DIP financing) as a stop-gap measure until parties-in-interest could agree on the terms of a more permanent solution. On March 8, 2018, after consensus was reached, the Bankruptcy Court authorized the Debtors to obtain, on a final basis, a post-petition secured loan from Hankey Capital LLC (the “DIP Loan”) up to the aggregate amount of $100,000,000 at an interest rate equal to at least 9.5% (subject to adjustment) plus certain fees. The loan proceeds are to be used to fund the continued, orderly operation of the Debtors’ businesses in order to maximize the value of the assets of these bankruptcy estates.
In addition to authorizing the Debtors to incur a post-petition secured loan, the Debtors were authorized to use the sale proceeds of real property assets against which certain Noteholders may assert a security interest. Such cash proceeds are called “cash collateral” and the Debtors need Bankruptcy Court approval to use cash collateral absent the express consent of the Noteholders.
In exchange for the right to use proceeds that might be the Noteholders’ cash collateral, the Debtors have agreed to establish certain reserves in escrow with respect to certain real property sales. Any reserved funds released to Noteholders will be treated as an advance against any distributions to which such Noteholders will be entitled under a chapter 11 plan. The Debtors’ use of cash collateral is effectively interest-free, so using cash collateral to fund operations is less costly than drawing down on the DIP Loan.
To date, there have been 6 different “putative” class actions filed in connection with the Woodbridge Group of Companies financial demise. A “putative” class action is one in which the class has not yet been certified by any court and the plaintiffs are a handful of allegedly injured parties that would like to represent all similarly injured parties in a law suit against a particular defendant.
There are four putative class actions that have been filed in federal courts in California against Comerica Bank (where the Woodbridge bank accounts are located) and against former employees of Woodbridge, and four putative class actions filed in Florida against Comerica. The lawsuits allege that the defendants aided and abetted Mr. Shapiro’s fraudulent scheme and the breach of his fiduciary duties to investors, and that their actions were negligent and violated California laws of unfair competition. The four California actions were recently consolidated into a single action. If the classes are ultimately certified by the California and/or Florida courts, the classes may include all current Unitholders who bought Units (and Noteholders who bought Notes) since 2012.
plan term sheet
On March 27, 2018, the Debtors filed a Notice of Submission of Summary Plan Term Sheet. The Term Sheet is not a chapter 11 plan. Rather, it is an outline of the material terms of a chapter 11 liquidation plan (the “Plan”) to which the Debtors, the Unsecured Creditors’ Committee, the Noteholders’ Group and the Unitholders’ Group have agreed after weeks of discussion and negotiation. The Term Sheet contemplates that definitive documentation, including a Plan (consistent with the Term Sheet) will be negotiated that will contemplate, among other things, the following:
- Prior to December 31, 2018, it is anticipated that Unitholders and Noteholders will receive
- an initial, ratable, partial cash payout from approximately $85.0 million of sale proceeds that the Debtors anticipate receiving from certain property sales plus
- potentially tradeable interests in a liquidation trust (which will own the unsold real estate assets and certain litigation claims) that will distribute, in 2019, 2020 and 2021, cash proceeds from future property sales and other revenue sources, such as litigation against third parties
- To determine how much of these cash proceeds (both initial and future) will be paid to Unitholders versus Noteholders, the following calculations will be made:
- each Unitholder and Noteholder claim will be reduced by the total interest payments that were made to them before the chapter 11 cases were commenced (resulting in “net claims”);
- for every dollar of available funds that are distributed to the class of net claims held by Noteholders, the class of net claims held by Unitholders will be entitled to receive $0.725 until Noteholders have been paid their net principal claims in full;
- thereafter, the class of net claims held by Unitholders will be entitled to receive all of the remaining cash until the class of Unitholders have been paid their net principal claims in full;
- to the extent there are additional cash proceeds after the net principal claims of both Noteholders and Unitholders have been paid in full, both Noteholders and Unitholders will be paid interest on their net claims calculated at a rate of 10% per annum.
- The Unsecured Creditors’ Committee has publicly announced that, based on the Debtors’ business plan, it is anticipated that the class of Noteholders will receive between 62 and 76% of their net claims and the class of Unitholders will receive between 45 and 55% of their net claims.
- The Plan will determine that Woodbridge operated a Ponzi scheme that was discovered in December 2017. This assumption may trigger certain beneficial tax treatment for the Unitholders and Noteholders which we encourage you to discuss with your accountant or tax adviser.
The Term Sheet itself is not a liquidation plan but merely an agreement in principle among certain key parties in these cases. The next step in the process will be for the parties to negotiate the Plan consistent with the provisions of the Term Sheet and prepare other definitive documentation, including a court-approved disclosure document that will be distributed to creditors. Based on this disclosure statement, the Debtors will solicit creditors’ votes to accept the Plan and will, thereafter, seek Bankruptcy Court approval of the Plan.
In chapter 11, a plan must (i) be approved by a vote of two-thirds in amount and one-half in number of each class of claims against a debtor’s estate or otherwise meet certain “cramdown” standards (meaning the plan may be crammed down on creditors despite their rejection of the plan) and (ii) confirmed by the Bankruptcy Court according to certain statutory requirements.
In these cases, the Term Sheet contemplates that all of the seven (7) Fund Debtors will be substantively consolidated for voting purposes (as if they were one Debtor) and all of the Mezzanine Debtors and Property-owning Debtors will be substantively consolidated for voting purposes (as if they were one Debtor). Voting will take place over a period of several weeks via ballots delivered by mail to creditors. If the Plan is accepted by the required number of creditors or otherwise meets the cramdown requirements, a confirmation hearing will be scheduled before the Bankruptcy Court, at which time the Bankruptcy Court will determine whether to approve the Plan. If the Plan is approved (or “confirmed”), the Debtors will begin putting the Plan provisions into effect. This entire process will take several months to complete, but we anticipate seeing drafts of the Plan shortly.
DEBTORS’ JOINT CHAPTER 11 plan OF LIQUIDATION
On July 9, 2018, the Debtors filed the Plan and a Disclosure Statement in connection with the Plan. The Disclosure Statement is a required document that must be approved by the Bankruptcy Court as providing adequate information for a hypothetical investor to make an informed judgment about the Plan. The hearing for the Court to consider approval of the Debtors’ Disclosure Statement is currently scheduled for August 21 2018 at 1:00 p.m. Until the Disclosure Statement is approved, acceptance of the Plan may not be solicited by any party. Moreover, there may be changes to the Plan required by the Bankruptcy Court before the Bankruptcy Court will approve the Disclosure Statement.
Once the Disclosure Statement is approved, and assuming the changes to the Plan (if any) are acceptable to the Unitholders’ Group, the Unitholders’ Group will make a formal statement in respect of the Plan. It is anticipated that the Noteholders’ Group and the Unsecured Creditors’ Committee will do the same. The Debtors will then send to all creditors a copy of the Disclosure Statement, the Plan, all letters of support and (for those creditors entitled to vote) voting ballots with instructions on how to vote.
We will keep you updated on the Plan solicitation process and let you know when the solicitation packages are expected to be mailed to creditors.