Case 10-44748-KCF

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UNITED STATES DEPARTMENT OF JUSTICE OFFICE OF THE UNITED STATES TRUSTEE ROBERTA A. DeANGELIS UNITED STATES TRUSTEE, REGION 3 Mitchell Hausman, Esquire (MH 1464) One Newark Center, Suite 2100 Newark, NJ 07102 Telephone: (973) 645-3014 Fax: (973) 645-5993 UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY ______________________________ : In re: : : Chapter 11 Visual Management Systems, Inc., : Case No. 10-44748 (KCF) et. al., : Jointly Administered : Debtor(s) : Hearing Date: September 26, 2011 at 11:00 a.m. ______________________________: OBJECTION OF THE UNITED STATES TRUSTEE TO THE MOTION OF THE DEBTORS FOR ENTRY OF AN ORDER AUTHORIZING THE DEBTORS TO SELL PROPERTY FREE AND CLEAR OF ALL LIENS, CLAIMS AND INTERESTS TO ADAPTIVE VISUAL APPLICATIONS CORPORTATION PURSUANT TO 11 U.S.C. 363 AND FOR A WAIVER OF THE TEN DAY REQUIREMENT PURSUANT TO FEDERAL RULE OF BANKRUPTCY PROCEDURE 6004(h) The United States Trustee (UST), by and through her counsel, and in furtherance of her duties pursuant to 28 U.S.C. 586(a)(3) and (5), respectfully submits this objection (the Objection) to the Motion For Entry Of An Order Approving The Sale Of Substantially All The Debtors Assets Free And Clear Of Liens, Claims, And Encumbrances (Sale Motion), filed by the Debtors, and respectfully states as follows:

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BACKGROUND 1. On November 8, 2010, the Debtors1 each filed voluntary petitions for relief under

chapter 11 of title 11 of the United States Code. The president of the Debtors is Jason Gonzalez. See Docket Entry 1. 2. 3. The UST has not appointed an official committee of unsecured creditors. Through the Sale Motion, the Debtors seeks to sell substantially all of the

Debtors assets, including customer lists and client histories, free and clear of encumbrances, claims and interests to Visual Mobility Security, Inc., o/b/o Adaptive Visual Applications, Corp. (Buyer) for $180,000 in installments plus 7.5% of the Buyers common stock issued directly to the secured creditor Enable.2 See Letter Agreement for Sale of Assets (Letter Agreement), Exhibit B to Proposed Order Approving Sale, Docket Entry 109-3. 4. The Sale Motion seeks authority to pay all of the sale proceeds to its secured

creditor Enable, less approved Chapter 11 administrative claims, $15,000 to Jason Gonzalez, $20,000 to Debtors Counsel and $7,500 to Jonathan Bergman. See Letter Agreement, Docket Entry 109-3. 5. The sale of the assets is a private sale and the only proof of the value of the assets

is based on a certification of Jason Gonzalez, president of the Debtor, which states his efforts to sell the company. See Certification of Jason Gonzalez, Docket Entry 109-2. 6. The Sale Motion states that the Debtors do not have a privacy policy in place, and

that a privacy policy has never been provided to any of the Debtors customers. See Sale Motion, para., 21, Docket Entry 109-1.
The Debtors are Visual Management Systems, Inc., Visual Management Systems Holdings, Inc., Visual Management Systems, LLC, and Intelligent Product Development Group, LLC.
2 1

The only assets excluded from the sale are any cash on hand and any and all causes of action. 2

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7.

The Sale Motion does not discuss how the Debtors hope to emerge from chapter

11. There does not appear to be sufficient funds in the estate for the Debtors to confirm a plan of liquidation.3 OBJECTION A. THE SALE CANNOT BE APPROVED AS THE DEBTORS HAVE NOT SHOWN THAT THE SALE IS PROPOSED IN GOOD FAITH AND FOR FAIR VALUE 8. Within the Third Circuit, sales of assets outside of the ordinary course of business

pursuant to 11 U.S.C. 363(b) are governed by In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143 (3d Cir. 1986). The Abbotts Dairies decision provides that when a bankruptcy court authorizes a sale of assets pursuant to section 363(b)(1), it is required to make a finding with respect to the good faith of the purchaser. See id. at 149-50. The Motion, however, provides little to no information that would assist this Court in making an explicit finding of good faith. 9. The Third Circuit has stated that a good faith purchaser is one who purchases

in good faith and for value. See id. at 147. A purchasers good faith status can be destroyed if it is found to have been in collusion with the debtor or to have attempt[ed] to take grossly unfair advantage of other bidders. See id. at 148. In Abbotts Dairies, the Third Circuit rejected the argument that a lack of good faith was not evident where the debtor and the purchaser had orchestrated the emergency justifying the need for an expedited sale. See id. The Third Circuit noted that the timing of the bankruptcy was manipulated so that the bankruptcy court had no choice but to approve the Interim Agreement on August 10, the terms of which were designed to preclude any truly competitive bidding for the assets on September 12. See id.

The Debtors currently owe $5,857.44 in United States Trustee quarterly fees. 3

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10.

Here, the Debtors have not offered any evidence concerning the good faith of the

transaction other than the Debtors presidents certification reciting the Debtors past marketing efforts. There is no information as to how the Buyer was found, if the Debtors have any connection to the Buyer, and whether there are any side agreements such as employment agreements with the Buyer. 11. As for the fair value portion of this Courts good faith determination, the

Debtors have not presented an appraisal or other evidence of the value of the Debtors assets that is subject of the instant Sale Motion. As the Third Circuit noted in Abbotts Dairies, courts have held that [f]air and valuable consideration is given in a bankruptcy sale when the purchaser pays 75% of the appraised value of the assets. See Abbotts Dairies of Pennsylvania, Inc., 788 F.2d at 149. Clearly, some evidence of the value of the assets subject to the sale must be provided before this Court can approve the sale under Abbotts Dairies. Here, there is not an appraisal, the assets were not exposed to the market and the sale is not subject to higher and better offers. The only evidence offered is the Certification of Jason Gonzalez, which by itself does not provide adequate information to establish value. 12. Moreover, part of showing the necessity of a Sec. 363 transaction includes

showing appropriate marketing of the assets, as part of the exercise of the debtor-in-possession's fiduciary duties to creditors. Marketing efforts must be designed to maximize the returns to the estate. See In re WPRV-TV, Inc., 983 F.2d 336, 342 (1st Cir. 1983). Here, the only person that marketed the property was Jason Gonzalez. Based on the information provided in the Sale Motion the Debtor has failed to establish that the sale is in good faith and for value. B. THE SALE IS AN IMPROPER SUB ROSA PLAN

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13.

A transaction is an impermissible sub rosa plan if it disposes of all or

substantially all of a debtors assets without following the Bankruptcy Codes procedural protections in connection with the development and approval of a plan of reorganization, such that the sale itself is a de facto plan. The procedural protections provided in the Bankruptcy Code include, among other things, the right to receive a detailed disclosure statement from a debtor and the right to vote on the proposed plan. 14. Because of the importance of these protections to ensure that creditors are treated

fairly, courts have rejected proposed post-petition agreements between debtors and select creditors that have the effect of dictating material terms of a plan of reorganization without complying with the Bankruptcy Codes procedural requirements for plan confirmation. See, In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983) (The debtor and the bankruptcy court should not be able to short circuit the requirements of Chapter 11 for confirmation of a reorganization plan by establishing the terms of the plan sub rosa in connection with a sale of assets); See also, In re Decora Industries, Case No. 00-4459-JJF, 2002 WL 32332749 at *8 (D. Del. May 20, 2002) ("the focus of 'sub rosa' plan analysis is oriented toward those situations in which a debtor proposes to sell 'all' or 'substantially all' of its assets without the benefit of a confirmed plan or a court-approved disclosure statement."); In re Swallens, Inc., 269 B.R. 634, 638 (BAP 6th Cir. 2001) (At least when a party in interest objects, a bankruptcy court cannot issue orders that bypass the requirements of Chapter 11, such as disclosure statements, voting, and a confirmed plan, and proceed to a direct reorganization on the terms the court thinks best, no matter how expedient that might be.) 15. Where there is a proposed sale in Chapter 11 of substantially all of a debtor's

property in exchange for retirement of secured debt, without the protections of the disclosure
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statement and plan process, as here, the transaction must be closely scrutinized and the transaction proponent bears a heightened burden. See, In re Channel One Communications, Inc., 117 B.R. 493, 496 (Bankr. E.D. Mo. 1990) (citing In re Industrial Valley Refrigeration & Air Conditioning Supplies, Inc., 11 B.R. 15, 17 (Bankr. E.D. Pa. 1987)); see also, In re CGE Shattuck, LLC, 254 B.R. 5, 12 (Bankr. D.N.H. 2000); In re Wilde Horse Enterprises, Inc., 136 B.R. 830, 841 (Bankr. C.D. Cal. 1991). 16. Sec. 363 asset sales should not be used to circumvent the protections for creditors

mandated in the Bankruptcy Code. See In re Westpoint Stevens, Inc., 330 B.R. 30, 52 (S.D.N.Y. 2005) (stating that "it is well established that section 363(b) is not to be utilized as a means of avoiding Chapter 11's plan confirmation procedures", citing In re The Babcock & Wilcox Co., 250 F.3d 955, 960 (5th Cir. 2001) ("[T]he provisions of 363 ... do not allow a debtor to gut the bankruptcy estate before reorganization or to change the fundamental nature of the estate's assets in such a way that limits a future reorganization plan.")). The United States Court of Appeals for the Third Circuit expressed that Section 363 sales should not be used to short circuit the plan confirmation process and Section 1129 of the Bankruptcy Code. See Abbotts Dairies, 788 F.2d 143, supra. In Abbotts Dairies, the court held that the "good faith" requirement of a Section 363 sale is to be used to assure that by means of an asset sale, a debtor does not abrogate the protections afforded to creditors under Section 1129 and the plan confirmation process. See id. at 150. 17. The seminal case prohibiting sales as sub rosa plans is Braniff Airways: The debtor and the Bankruptcy Court should not be able to short circuit the requirements of Chapter 11 for confirmation of a reorganization plan by establishing the terms of the plan sub rosa in connection with a sale of assets.
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700 F.2d at 940. In Braniff, the debtor sought approval of a settlement with certain of its secured and unsecured creditors that called for the debtor to sell aircraft, equipment, landing slots and airport terminal leases to a buyer in exchange for travel scrip, secured notes and a profit participation in the buyers future operation. 700 F.2d at 939. The travel scrip could only be used by employees, shareholders and designated unsecured creditors. See id. Moreover, certain secured creditors would be required to vote their deficiency claims in favor of any future plan of reorganization. See id. at 940. The Fifth Circuit determined that the provision requiring the secured creditors to vote a portion of their deficiency claim to support any plan approved by a majority of the unsecured creditors committee thwarts the Codes carefully crafted scheme for creditor enfranchisement where plans of reorganization are concerned. See id. The Fifth Circuit held that such a sale could not be approved under section 363(b) because it would dictate the terms of any future plan of reorganization and without providing creditors with the procedural protections of a plan. See id. 18. Those courts that recognize sales outside of a plan process require the debtors

(sellers) to come forward and demonstrate a "sound business purpose" for such transaction. See Committee of Equity Security Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1070 (2d Cir. 1983) (a debtor should not sell substantially all of its assets outside the ordinary course of business under Section 363(b) absent "some articulated business justification"); see also Stephens Industries, Inc., v. McClung, 789 F.2d 386, 390 (6th Cir. 1986); In re Montgomery Ward Holding Corp., 242 B.R. 147, 153 (D. Del. 1991). 19. Any sale transaction that dictates essential terms of a future reorganization plan

and seeks to short circuit creditors rights must go through a plan approval process, which includes disclosure requirements under Sec. 1125 of the Bankruptcy Code, voting requirements
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under Sec. 1126 of the Bankruptcy Code, the best interest of creditors test under Sec. 1129(a)(7) of the Bankruptcy Code, and the absolute priority rule of Sec. 1129(b)(2)(B) of the Bankruptcy Code. 20. The Sale Motion is a sub rosa plan because it constitutes an almost complete

disposition of all of the Debtors' valuable assets, provides for the distribution of the sale proceeds, and no discussion as to how the Debtors will exit chapter 11. 21. Such an attempt to short circuit the plan confirmation process is fundamentally

inconsistent with the Bankruptcy Code and is itself sufficient reason to deny the Sale Motion. C. A CONSUMER PRIVACY OMBUDSMAN MAY BE NECESSARY 22. We do not know if the sale includes information that may include personally

identifiable information. The Sale Motion states that the Debtors do not have a privacy policy in place, and that a privacy policy has never been provided to any of the Debtors customers. The Debtors should provide testimony or other evidence at the sale hearing, that no privacy policy was in place on the date of the filing, or it may be necessary to appoint a consumer privacy ombudsman pursuant to Secs. 332 and 363(b)(1). WHEREFORE, in light of the foregoing, the United States Trustee respectfully requests that the Sale Motion not be approved, and that this Court grant such further relief as is just and equitable. Respectfully submitted, ROBERTA A. DeANGELIS UNITED STATES TRUSTEE By: /s/ Mitchell Hausman Mitchell Hausman Trial Attorney

Dated: September 20, 2011

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