Entertainment Publications bid procedure set; trustee interim operator

By Jim Witters

Wilmington, Del., March 25 - The Chapter 7 trustee for Entertainment Publications, LLC won approval of bid procedures and the authority to operate the coupon-book publishing company until a sale occurs or a final hearing is conducted.

However, during a March 25 hearing in the U.S. Bankruptcy Court for the District of Delaware, Judge Christopher S. Sontchi lengthened the proposed sale process and denied a provision for a breakup fee for stalking-horse bidder HSP-EPI Acquisition, LLC.

As previously reported, HSP-EPI - formed by Lowell Potiker, the son of company founders Hughes and Sheila Potiker - has tendered an $11.8 million offer for the company.

Trustee Charles M. Forman had sought an expedited sale process that would have resulted in an April 4 auction and an April 5 sale hearing.

SaveAround, Inc. - a competitor of Entertainment Publications - objected to the quick sale process, saying it needed more time to conduct due diligence and prepare a bid.

Kim R. Lynch, representing the trustee, argued that many of the debtor's 400 employees idled by the March 12 closing of the business are under pressure to accept job offers from other companies.

Any delay in completing a sale of the company as a going concern jeopardizes the possibility of bringing back those former employees, who have strong relationships with the debtor's customers.

Should the sales staff accept other jobs, they likely will take with them a portion of the debtor's customers, diluting the value of the estate, Lynch said.

Judge Sontchi said he was aware of the "melting ice cube" nature of the debtor's assets. But the court must balance those concerns with the requirements for due process and the goal of obtaining maximum value for the debtor's estate.

With at least one more eager bidder hoping to make an offer, additional time before the auction is prudent, he said.

Sontchi said the original proposal from the trustee "was not something this court would ever really consider." And the approved procedures represent a very rapid process.

Restarting the business

Forman told the court that he plans to get the business running as quickly as possible, rehiring about 300 workers.

Lynch said quick action is necessary to get the company back up to speed in time to order supplies, negotiate customer and merchant contracts, line up printers and handle other tasks as the charities, schools and other clients prepare for their fall fundraisers.

Forman plans to fund operations with lenders' cash collateral.

Sontchi granted interim access to those funds through the sale process. He also said approval of Forman to operate the business would expire on the date of the sale closing or on the date of a final hearing.

Stalking horse bid

The HSP-EPI purchase price consists of $6.332 million in cash and a promissory note issued by the purchaser to the trustee for $5.5 million.

The note would then be assigned to secured creditor Fontella, LLC.

Fontella also would receive warrants to buy 10% of the capital stock of the purchaser upon a liquidation event.

Fontella has agreed to accept that arrangement rather than demand payment in full at closing.

Bid procedures

Under the bid procedures approved during the hearing,

• The bid deadline is April 17;

• The auction, if needed, is April 19;

• The sale hearing is at noon ET on April 22;

• The initial overbid at the auction is $450,000 more than the stalking-horse bid;

• Subsequent bids will be in $150,000 increments; and

• If HSP-EPI fails to emerge as the successful bidder, it may receive as much as $250,000 in expense reimbursement.

Other concerns

Addressing concerns raised during the hearing, Sontchi said

• The stalking-horse bidder and other prospective bidders may not contact former employees.

The direction came in response to an assertion by an attorney for SaveAround that HSP-EPI was trying to reassure the workers that the company would be revived.

All contact with former employees must be handled by the trustee;

• Non-compete provisions for former employees remain in place during the bankruptcy proceeding unless specifically waived by the trustee.

Rachel Mersky, the attorney for 16 former employees, wanted non-compete nullified so her clients could accept other job offers.

She said they had offers to start new jobs "tomorrow" and should not be "held captive" by the sale process.

Mersky also argued that since Entertainment Publications closed its business, there is no going concern to enforce the provision.

Sontchi said the non-compete provisions were designed as protections for the debtor in situations such as this;

• The Fontella note is an agreement between Fontella and the trustee, and the court cannot force Fontella to transfer that agreement to any other bidder.

SaveAround had requested the ability to "step into the shoes" of HSP-EPI and use the Fontella agreement in lieu of cash in its bid.

Fontella's attorney said his client "agreed to the deal that is on the table" and reserved the right to object if another bidder attempted to enter the deal.

The judge denied the SaveAround request.

Sontchi said he is concerned about the possibility of collusion that could create an advantage for one bidder over others. But he affirmed that the trustee has the discretion to require all-cash bids; and

• The rights of potential Worker Adjustment and Retraining Notification Act claimant Lisa M. Czarniak and other former employees are reserved.

Entertainment Publications, a Troy, Mich.-based coupon book publisher, filed for bankruptcy on March 12. Its Chapter 7 case number is 13-10496.

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