Solyndra plan confirmation hearing protracted by objection from IRS

By Jim Witters

Wilmington, Del., Oct. 17 - Solyndra LLC and 360 Degree Solar Holdings, Inc.'s plan of reorganization confirmation hearing was continued until Oct. 22 after a lengthy hearing on Oct. 17 left the bankruptcy judge with a stack of new evidence to consider before hearing closing arguments.

Attorneys for Solyndra, for the Internal Revenue Service and for Solyndra lender Argonaut Ventures I, LLC presented five-and-a-half hours of testimony in the U.S. Bankruptcy Court for the District of Delaware concerning the intent of the debtors' Chapter 11 plan.

The IRS contends that the bankruptcy proceeding and the drafting of the reorganization plan were intended to ensure the holding company would survive bankruptcy holding accumulated net operating losses (NOLs) of $750 million.

Testimony from Solyndra's chief restructuring officer, its investment banker and its financial adviser, as well as testimony by Argonaut managing director Stephen Mitchell, indicated that the NOLs were not the chief concern during the bankruptcy and creation of the reorganization plan.

Mitchell said the intent of Argonaut and lender Madrone Partners, LP throughout the process was to turn the company around, create positive cash flow and working capital and emerge as a stronger company.

The IRS says the net operating losses should be liquidated, with the proceeds going to repay creditors. The agency places a liquidating value of $75 million to $150 million on the NOLs.

Liquidation scenario

Mitchell and Solyndra chief restructuring officer R. Todd Neilson testified that liquidating the company instead of pursuing separate sales of its equipment and real estate through a Chapter 11 case would have resulted in zero value to creditors.

The lone offer Solyndra received for the company as a going concern was $11 million to $16 million, not enough to cover the cost of the environmental cleanup of the plants and equipment, Neilson said.

The subsequent sale of the equipment in five auctions brought $13 million to the estates. The $90 million sale of the real estate is pending and scheduled to close in late February, he said.

The expected net distributable assets available after the sale totals $71 million, he said.

That amount is not enough to cover the $77 million due to first-tranche lenders - Argonaut and Madrone.

Valuation of NOLs

A liquidation valuation of the NOLs completed by Argonaut in January 2011 placed their liquidating value at $18 million to $38 million, Mitchell testified.

The debtors contend that control of the net operating losses has remained with Argonaut and Madrone throughout Solyndra's prepetition financial turmoil and bankruptcy proceedings.

And, when a reorganized holding company emerges from bankruptcy under the proposed plan of reorganization, Argonaut and Madrone will retain control, they said.

Mitchell also testified that the proposed plan does not enhance the value of the NOLs for Argonaut and Madrone.

Intent of the plan

IRS attorney Stuart Gibson introduced emails and other documents during the hearing that he inferred were evidence that Argonaut was devising ways to protect the NOLs while effectively shutting down the company.

If Solyndra ceased to exist, the NOLs would disappear, Mitchell agreed under Gibson's questioning.

Gibson focused strongly on email exchanges and corporate memos that mentioned the NOLs in the weeks and days leading up to a term sheet, signed by the debtors, the lenders and the U.S. Department of Energy, that included a provision for a rights offering.

As a result of that offering, Argonaut and Madrone hold warrants that could give them 99% control over the reorganized company.

Argonaut and Madrone's intent post-bankruptcy is to inject enough capital into the reorganized holding company to start or buy a business that can utilize the net operating losses, Mitchell said.

Closing arguments

Judge Mary F. Walrath delayed closing arguments until 10 a.m. ET on Oct. 22.

She said she needs the intervening time to read through the new evidence the IRS and the debtors presented during the hearing.

She offered the attorneys the option of filing short closing briefs, but they opted to return to court.

Solyndra attorney Debra Grassgreen warned that the company's debtor-in-possession financing facility and cash collateral order expire on Oct. 27.

If the plan is not confirmed quickly, the company will run out of money during the first two weeks of November, she said.

Antitrust action

Intertwined with the testimony during the Oct. 17 hearing was discussion of a $1.5 billion anti-trust lawsuit that Solyndra filed in federal court in California against a group of Chinese companies.

Solyndra contends that the Chinese companies sought to manipulate the solar panel market by flooding it with underpriced products that competitors could not match.

The intent of the Chinese was to monopolize the industry, Neilson said.

Any proceeds from the anti-trust action will fund additional recoveries for creditors, he said.

Proposed plan details

The proposed plan incorporates multiple settlements among the Solyndra debtors, some pre-bankruptcy lenders, WARN Act plaintiffs, some creditors and interest holders and the company's official committee of unsecured creditors.

As a result of these settlements, there will be distributions to holders of general unsecured and priority claims.

Under the plan, the 360 Degree holding company will be reorganized, and the plan sponsors will provide a $3.5 million holdings settlement fund.

The assets of Solyndra, except trust avoidance claims, which will vest in a Solyndra settlement trust, will be vested in a Solyndra residual trust and liquidated for the benefit of creditors.

The plan sponsors - Argonaut and Madrone - will provide exit financing and a Solyndra settlement fund loan, the proceeds of which will be contributed to the Solyndra settlement trust to benefit holders of Solyndra general unsecured claims who agree to forego any claims against the 360 Degree holding company.

The plan calls for a 3% recovery to creditors of Solyndra LLC and to 360 Degree Solar Holdings.

Solyndra LLC will be dissolved upon the reorganized holding company's emergence from bankruptcy.

Creditor treatment

Treatment of creditors under the proposed amended joint plan includes:

• Administrative claims and priority non-tax claims will be paid in full in cash;

• Holders of miscellaneous secured claims will be paid in full, receive the collateral securing the claim or the right to the claim will remain unaltered;

• After payment of the tranche I exit facility and Solyndra settlement fund loan, holders of pre-bankruptcy tranche A claims will receive a share of Solyndra net lender distributable assets and, after payment of the tranche II exit facility, a share of Solyndra residual trust interests;

• After payment of the tranche A claims, each holder of a pre-bankruptcy tranche B claim will receive a share of the Solyndra net lender distributable assets and, after payment of the tranche II exit facility, a share of the Solyndra residual trust interests that were distributed or made available to the holders of pre-bankruptcy tranche A claims;

• After payment of the pre-bankruptcy tranche A and tranche B claims, each holder of a pre-bankruptcy tranche D claim and pre-bankruptcy tranche E claim will receive a share of the Solyndra net lender distributable assets and, after payment of the tranche II exit facility, a share of the Solyndra residual trust interests that were distributed or made available to holders of pre-bankruptcy tranche B claims;

• Holders of general unsecured claims against the holding company will receive a share of the holding company settlement fund and, after payment of the tranche II exit facility, a share of any proceeds of retained rights of action of the reorganized holding company up to the full allowed amount of the claim;

• Holders of general unsecured claims against Solyndra will receive a share of the Solyndra settlement trust interests, which entitles them to a share of the Solyndra settlement fund, a share of Solyndra residual trust interests after payment of the tranche II exit facility and a share of the proceeds from any residual net lender distributable claims assets after all pre-bankruptcy lender claims have been paid in full;

• The rights of holding company interest holders will be left unaltered; and

• Holders of Solyndra interests will receive no distribution.

Solyndra is a Fremont, Calif.-based manufacturer of cylindrical solar photovoltaic systems for large industrial and commercial rooftops. The company filed for bankruptcy on Sept. 6, 2011. Its Chapter 11 case number is 11-12799.

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