Pegasus Home: U.S. trustee objects to expense reimbursement for stalking horse

By Sarah Lizee

Olympia, Wash., Sept. 22 – Pegasus Home Fashions, Inc.’s motion seeking approval of bid procedures for its assets drew an objection from Regions 3 and 9 U.S. trustee Andrew R. Vara, according to documents filed Tuesday with the U.S. Bankruptcy Court for the District of Delaware.

As previously reported, the company has lined up a stalking horse agreement with an affiliate of prepetition secured lender Blue Torch Finance, LLC. Webster and Blue Torch are prepetition secured lenders to the company.

The purchase price would include assumed liabilities, assumption of or payment in cash of all debt under a prepetition revolver, and a $64.1 million credit bid of prepetition term loan debt and debtor-in-possession term loan debt.

The agreement provides for an expense reimbursement of up to $1 million.

Vara said he objects to the expense reimbursement, which would force all other interested bidders to bid $1.2 million (when added to the initial overbid of $200,000) over the amount of the credit bid in order for their bid to be considered.

“Break-up fees and expense reimbursements are intended to be incentives for a party to invest time and money to do the due diligence necessary to make a stalking horse bid that would otherwise not be made, knowing it might be outbid at the auction and therefore out-of-pocket for its expenses,” Vara said in his objection.

“The term lenders, who made the term loan to the debtors approximately six months before the debtors filed for bankruptcy, did not need to undertake any additional due diligence to make a bid, did not need an incentive to make a bid, and will not need to be compensated if they are not the winning bidder at the auction.”

Under the proposed bid procedures, the bid deadline would be 5 p.m. ET on Oct. 24, an auction would take place on Oct. 27, and a sale hearing would occur on Nov. 2.

Elizabeth, N.J.-based Pegasus Home Fashions manufactures bedding and home products. The company filed bankruptcy on Aug. 24 under Chapter 11 case number 23-11235.

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