Zohar Chapter 11 plan draws objection from Patriarch shareholders

By Sarah Lizee

Olympia, Wash., May 13 – Zohar III, Corp.’s Chapter 11 plan drew an objection on Friday from the Patriarch shareholders, according to a filing with the U.S. Bankruptcy Court for the District of Delaware.

“The Patriarch stakeholders do not wish to stand in the way of confirmation,” the group said in its objection. “The current version of the plan, however, is no benign attempt to exit bankruptcy for the noble goal of reducing costs.

“Instead, the plan is a blunt instrument intended to demolish the Patriarch stakeholders’ right to defend themselves against litigation claims brought by the debtors and MBIA seeking hundreds of millions of dollars in damages.”

The plan seeks to transfer remaining assets and litigation claims free and clear of the Patriarch stakeholders’ equitable subordination claims.

The group said that permitting the debtors to “wipe out” third-party equitable subordination claims through the free and clear provisions of sections 363(b) or 1141(c) of the bankruptcy code would sanction an “impermissibly broad” definition of claims, liens or interests, and it would constitute an unauthorized non-consensual third-party release by shielding the estates’ assets from equitable subordination claims on appeal.

“The plan also improperly seeks to transform the debtors’ adversary proceeding into a one-sided affair by assigning the litigation assets ‘free and clear’ of the Patriarch stakeholders’ setoff rights,” the group said in its objection.

“To accomplish this objective, the debtors attempt to cloak the transfer of these litigation assets with § 363 sale protections for the sole purpose of using § 363(f) as a sword to extinguish any applicable setoff rights.”

The group said that for the plan to be confirmed, the confirmation order must be revised to provide that the remaining assets and litigation assets are being transferred subject to the Patriarch stakeholders’ equitable subordination claims, setoff rights and defenses; and the plan does not release or enjoin any of the Patriarch stakeholders’ claims, rights or defenses against non-debtors.

The plan confirmation hearing is scheduled for June 1.

Zohar is a Grand Cayman, Cayman Islands-based collateralized debt obligation. The company filed bankruptcy on March 11, 2018 under Chapter 11 case number 18-10512.

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