It Ain't Easy Being Green – Status of the Solyndra Bankruptcy Case, Contributed by Cynthia W. Cole, Bell Nunnally & Martin LLP
On September 6, 2011, Solyndra LLC and related entity 360 Degree Solar Holdings, Inc. filed for Chapter 11 bankruptcy protection amidst an investigation related to Solyndra’s acquisition of $538 million in government guaranteed loans. More than 60 days later, Solyndra continues to exist under the safeguard of the Bankruptcy Code as it sheds non-core assets and prepares for the sale of its business under the leadership of a new chief restructuring officer.
Sale of Non-Core Assets
During the week of November 1, Solyndra conducted an auction, both at its California headquarters and online, to sell its non-core and surplus assets. Specifically, the company eliminated excess supplies, fixtures and equipment that would not be necessary for continued operations by a future purchaser of Solyndra’s business. Almost 4,000 bidders registered to participate in the two-day auction, which according to court filings generated more than $6.2 million in proceeds―an amount that exceeds pre-sale estimates by $1.2 million. Because of the success of the November auction, Solyndra has requested permission from the court to conduct a supplemental auction of non-core assets on December 7. By scheduling another auction immediately, Solyndra hopes to build on the momentum generated from the success of the November auction in an effort to maximize attendance and sales. The December auction will be conducted by Heritage Global Partners under a retention agreement that provides for the reimbursement of up to $40,000 in out-of-pocket expenses and advertising costs along with a five percent commission and 15 percent buyer’s premium. Unlike the November auction, the December auction will be conducted exclusively via the internet and will only be accessible to qualified bidders who have submitted a good faith deposit. In court filings, Solyndra has stated that the assets that will be available in the December auction have no value to any purchaser of Solyndra’s business in a turnkey sale and are a drain on the company’s limited resources. The assets sold at the November auction and to be sold at the December auction are to be sold free and clear of all liens and encumbrances.
Potential Turnkey Sale of Business Operations
On September 16, Solyndra filed a motion seeking approval of sale procedures related to its active marketing of its business to potential turnkey buyers who could acquire all or substantially all of its core assets. Those assets include Solyndra’s manufacturing plant and land, all associated fixtures and equipment, intellectual property, executory contract rights, leases, and all other business assets necessary for a turnkey sale of Solyndra’s business enterprise. Solyndra has proposed to sell these assets to the highest and best bidder at auction. The sell will be on an “as is,” “where is,” and “with all faults” basis.
Solyndra has retained Imperial Capital, LLC as its financial advisor and investment banker to manage the marketing of its assets for a turnkey sale. Imperial has contacted more than 100 prospective buyers, has prepared marketing materials, has maintained an online data room for due diligence purposes and has executed more than 20 non-disclosure agreements with prospective buyers. Although the initial cash collateral budgets and debtor-in-possession financing orders approved and entered in the case provide for a four week marketing period, the sale procedures motion contemplates a longer timeframe to allow Imperial sufficient time to fully search the market for potential turnkey purchasers. Solyndra is hopeful that a turnkey sale will maximize the value of the assets for the benefit of creditor constituencies, maintain the Solyndra brand as a going concern and increase the likelihood of re-employment of the laid off Solyndra workforce.
On September 28, the bankruptcy court entered an order approving the proposed sale procedures and scheduled the sale of core assets on October 27. However, when the October sale date approached, Solyndra gained court approval to postpone the sale to late November. Imperial has reported that although there is no stalking horse buyer in place to date, there may be as many as 25 bidders participating in the auction, including both strategic and financial buyers.
Under an order of the court, all potential purchasers were required to submit their bids by 4:00 p.m. on November 16. The auction commenced for qualified bidders on November 18 at 10:00 a.m. Any objections to the sale were required to be filed by 12:00 p.m. on November 21 and the hearing to approve the sale was scheduled to take place on November 22 at 4:00 p.m.
On November 22, 2011, counsel to Solyndra informed the court that no qualified bidders were interested in purchasing the company’s assets as a whole. With the possibility of a turnkey sale diminished, Solyndra is now exploring the option of selling its assets separately in individual auctions for equipment, real estate and intellectual property.
If the auction of Solyndra’s core assets is successful and is ultimately approved by the court, the proceeds of the sale will be distributed first to satisfy Solyndra’s post-petition financing obligations of approximately $4 million. Any proceeds in excess of the post-petition financing obligation will be held by Solyndra pending an order of the court related to distribution and most likely in connection with confirmation of a liquidating Chapter 11 plan.
Employment of Neilson as Chief Restructuring Officer
On September 8, without prior notice, armed FBI agents working with the Inspector General for the Department of Energy executed search warrants for Solyndra’s headquarters and seized computers, electronic files and documents. On September 20, Solyndra President Brian Harrison notified the U.S. House Committee on Energy and Commerce that on the advice of his personal counsel, he would be invoking the privilege of the Fifth Amendment of the U.S. Constitution and declining to testify at a Congressional hearing scheduled for September 23. Upon learning that Harrison would not be responding to the questions of the House committee, the U.S. Trustee contacted counsel for Solyndra and requested that the company identify the party who would be testifying at the 341 meeting on all matters but especially related to Solyndra’s contracts with customers. Despite several conversations between Solyndra’s counsel and the U.S. Trustee in late September, the U.S. Trustee took the position that no witness had been identified and on September 30 filed a motion seeking the appointment of a Chapter 11 trustee or alternatively, conversion of the case to a proceeding under Chapter 7 citing both Solyndra’s refusal to answer certain questions at the Initial Debtor Interview with the U.S. Trustee and Harrison’s refusal to answer the questions of the House Committee. In response to the motion to appoint a trustee, Solyndra’s counsel informed the U.S. Trustee of the company’s intention to hire R. Todd Neilson to serve as chief restructuring officer (CRO) and offered to respond to written questions related to customer contracts. The U.S. Trustee declined to accept the offer to respond to written questions and advised that the questions would be most appropriately answered orally where the company’s responses could be fully explored.
On October 7, Harrison resigned his position as Solyndra’s president and four days later, the company filed its motion seeking to employ Neilson as CRO. At the hearing on the trustee’s motion, the Official Committee of Unsecured Creditors argued against appointment of a trustee stating that removal of existing Solyndra executives would instigate “the already highly charged negative atmosphere” present at Solyndra during a time when it is trying to attract purchasers. Moreover, appointment of a trustee would likely act as a default under the terms of Solyndra’s post-petition financing creating a path for the Department of Energy to foreclose on the government guaranteed loan to the company. Judge Mary Walrath expressed concern when she was informed of the FBI raid on Solyndra headquarters stating that she thought in this country “people were innocent until proven guilty.” On October 24, the bankruptcy court entered an order denying the U.S. Trustee’s motion to appoint a Chapter 11 trustee finding no evidence of fraud, dishonesty incompetence or gross mismanagement. One week later, Judge Walrath approved the employment of Nielson to serve as CRO to guide Solyndra through the sale of its core and non-core assets, the confirmation of its liquidating plan and its emergence from bankruptcy protection.
With schedules filed and Nielson in place as CRO, the U.S. Trustee scheduled the 341 meeting to be held on November 22 at 9:30 a.m. in Wilmington, Delaware. At that meeting, representatives of Solyndra were called upon to testify on standard creditor meeting matters and also to respond to the trustee’s specific questions related to the customer contracts that account for Solyndra’s reported $250 million in cumulative sales.
Cynthia W. Cole is senior counsel with Dallas-based Bell Nunnally & Martin LLP and concentrates her practice in the area of corporate reorganization. She can be reached at firstname.lastname@example.org, or via the firm’s website: http://www.bellnunnally.com.
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