Highway Technologies creditors' settlement OK'd over trustee concerns

By Jim Witters

Wilmington, Del., Aug. 14 - Highway Technologies Inc.'s official committee of unsecured creditors received approval of a settlement reached with the company's pre-bankruptcy lender agent, pre-bankruptcy lenders, debtor-in-possession lenders and equity sponsors during an Aug. 14 hearing in the U.S. Bankruptcy Court for the District of Delaware.

The U.S. Trustee's Office objected to the agreement because it provides financial recovery to general unsecured creditors with no guarantee that administrative and priority claims will be paid in full.

Such a recovery runs counter to the bankruptcy codes' rule of absolute priority, which provides that senior creditors are paid in full before less senior creditors receive any money.

Judge Kevin J. Carey said he debates with himself each time a proposed settlement skips classes in delineating recoveries.

In this case, he said, the settlement avoids complex litigation that would have drained the debtor's estate of funding and forced an immediate conversion to Chapter 7 with no recoveries for any but the senior secured lenders.

The settlement is "a fair resolution of interests and claims in an inexpensive way," Carey said.

And he ruled that the recovery for the general unsecured creditors represented a "gift" from the secured lenders and was not part of the debtor's estate.

Carey also granted final approval for the $3 million debtor-in-possession financing facility, which Highway Technologies has paid in full.

Settlement terms

The settlement calls for the pre-bankruptcy lenders to contribute to a trust for the benefit of unsecured creditors, not including the pre-bankruptcy lenders that are holders of deficiency claims, until a specified threshold is reached.

Specifically, the lenders will contribute 80% of the net recoveries from the sale of the Highway Technologies debtor's rolling stock.

The settlement also includes a sharing arrangement related to recoveries from potential litigation, provides $500,000 of cash for distribution to creditors whose claims are not otherwise accounted for in the company's budget in exchange for a release to be granted to the equity sponsors, increases the budget for the committee's professional fees and expenses to $425,000 from $225,000 to allow for the investigation of possible causes of action and resolves a committee objection to the final DIP financing motion.

As part of the agreement, the committee also will withdraw is motion to convert the case to Chapter 7.

Exit strategy

Debtor attorney Debra Grassgreen told Carey that Highway Technologies is ahead of its budget projections, has paid off its $3 million DIP facility and has paid $400,000 toward a medical claims fund for its former employees.

She said new projections show a cash balance of $11.3 million on Sept. 13.

However, she said, the exit strategy for the debtor remains uncertain, though there is little likelihood a Chapter 11 plan can be confirmed.

Other options include a structured dismissal or a conversion to Chapter 7.

Grassgreen said the debtor's only remaining assets are the cash, accounts receivable and potential litigation claims. The litigation claims have not been investigated, and their value remains unknown.

Jane M. Leamy, representing the trustee, said that uncertainty leaves open the question of what happens to the "pot of money" should the court grant a structured dismissal.

Carey said that he recognizes that the absolute priority rule does not strictly apply in a structured dismissal, but he "will be mindful of it."

"If it does too much damage to absolute priority, I won't approve it," Carey said.

Highway Technologies is a Houston-based highway safety services and equipment provider. Its Chapter 11 case number is 13-11326.

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