Former Orchard Supply wins approval of committee, lenders settlement

By Jim Witters

Wilmington, Del., Sept. 4 - OSH 1 Liquidating Corp., formerly Orchard Supply Hardware Stores Corp., won approval of a settlement reached with its official committee of unsecured creditors and senior secured term lenders that "paves the way for a consensual wind down of what could have been a very contentious case," said debtors attorney Chun I. Jang.

The approval came without objection during a Sept. 4 hearing in the U.S. Bankruptcy Court for the District of Delaware.

Jang also told the court that the debtors' sale of 72 Orchard stores for about $205 million in cash, plus the assumption of payables owed to nearly all of Orchard's supplier partners closed on Aug. 30.

Judge Christopher S. Sontchi said evidence and testimony presented at the Aug. 20 sale hearing demonstrated the need for a settlement.

The creditors committee had "a number of potentially time-consuming and costly litigation options at its disposal" following the closing of Orchard Supply's asset sale, including potential challenges to transfers made to the pre-bankruptcy term secured parties by OSH Properties LLC, challenges to the use of the proceeds from various sale-leaseback transactions as potentially fraudulent transfers and challenges to the term debtor-in-possession financing order related to liens.

Orchard Supply said the senior secured term lenders would have disputed each of these claims on multiple grounds.

In addition, the company said the lender had a number of unresolved issues related to the sale, including their argument that the sale proceeds should be used to satisfy their secured claim.

Settlement terms

Under the settlement approved during the hearing:

• The lenders will receive all sale proceeds that are not used to pay off the company's DIP financing, minus $25 million, which will be left in Orchard's estates;

• Any additional distributions will be made to the lenders from amounts remaining in the company's estates, any specified going-out-of-business sale proceeds and designation rights sale proceeds.

The term lenders' recovery cannot exceed 100%;

• On the effective date of Orchard's plan of reorganization, $500,000 will be paid from the debtors' estates to a trust for the benefit of unsecured creditors whose pre-bankruptcy debts are not being assumed by the purchaser.

The first $250,000 of any proceeds from the sale of designation rights of any leases not assumed and assigned to the purchaser will be paid to the trust, and any proceeds from the sale of designation rights in excess of $250,000 will be distributed to the senior secured term lenders;

• If the lenders receive a total cash distribution providing a net recovery of 90% of their pre-bankruptcy claims, the next $1.5 million of proceeds will be paid to the trust. The lenders will receive all sale proceeds in excess of that $1.5 million, any proceeds of GOB sales started before the closing date and all proceeds of the sale of designation rights in excess of $250,000 until they have a net recovery of 100%; and

• From the period beginning Aug. 21, counsel for the committee will cap its fees and expenses to $150,000 that will be payable from the debtors' estates, and any amounts in excess of $150,000 shall be payable from the rest of the GUC trust.

Orchard Supply, a San Jose, Calif.-based hardware retailer, filed for bankruptcy on June 17. Its Chapter 11 case number is 13-11565.

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