Zohar: Tilton, Patriarch denied stay related to monetization ruling

By Caroline Salls

Pittsburgh, Dec. 20 – Lynn Tilton and the Patriarch stakeholders’ motion for stay of an order that allows Zohar III, Corp.’s asset monetization efforts to continue was denied Thursday by the U.S. District Court for the District of Delaware.

According to the district court’s ruling, in November 2016, Zohar II and Zohar III filed a special proceeding in the Delaware Chancery Court. They sought a ruling that the Zohar Funds own the equity of three portfolio companies and have the power to name those companies’ boards of directors, despite “irrevocable” proxies that Tilton granted herself shortly before exiting as collateral manager of the Zohar Funds.

In November 2017, the Chancery Court ruled that the Zohar Funds were the legal and beneficial owners of the disputed shares “and that Tilton’s self-dealing proxies were invalid,” the stay order said.

Tilton appealed the Chancery Court ruling and remained a director of the portfolio companies throughout the appeal.

The stay order said Tilton also filed the bankruptcy cases on behalf of Zohar and testified to the U.S. Bankruptcy Court for the District of Delaware that she was seeking “a mechanism to maximize value for all of the Zohar funds’ stakeholders and to protect the portfolio company constituents and monetize their considerable value.”

Following mediation, a settlement reached by the Zohar debtors, Tilton, Patriarch and its affiliates, MBIA and the Zohar III controlling class was approved by the bankruptcy court in May 2018. In addition, Tilton was replaced as Zohar’s sole director.

The district court said a key component of the settlement was the establishment of a monetization process to unlock the value of the Zohar debtors’ interests in the portfolio companies.

The settlement also provided for a 15-month armistice that would have been extended if proceeds in the monetization process were generated to pay 50% of the amounts owed to the Zohar Funds’ noteholders, but the proceeds did not exceed that amount, and the armistice period expired on Sept. 30.

Tilton subsequently contended that the monetization process should end with the expiration of the armistice, while the company argued that the settlement allowed the monetization process to continue beyond the expiration date.

However, the stay order said the bankruptcy court ruled that “[t]he plain terms and the clear limits that are set forth in the settlement agreement demonstrate to the court that the parties did not intend for the monetization process to end at the conclusion of the 15-month window.”

Tilton and Patriarch appealed that ruling and requested the stay that was denied in Thursday’s order.

In the district court’s ruling, judge Maryellen Noreika said, “The Bankruptcy Court’s ruling is consistent with Delaware’s principles of contract interpretation, as the language at issue in the settlement agreement conveys an unmistakable meaning, and appellants have failed to cite language that would contradict the plain language of ... the settlement.”

Zohar is a Grand Cayman, Cayman Islands-based collateralized debt obligation. The company filed bankruptcy on March 11, 2018 under Chapter 11 case number 18-10512.

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