doc117 objection ids russ

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BARTON BARTON & PLOTKIN, LLP420 Lexington Avenue

New York, New York 10170212-687-6262 (Tel)212-687-3667 (Fax)Eric W. Sleeper, [email protected] for Intelligent Digital Systems, LLC, Russ and

Russ PC Defined Pension Plan, and Jay Edmond Russ

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF NEW JERSEY

In Re:

VISUAL MANAGEMENT SYSTEMS, INC., et al.,

Debtors.

Honorable Kathryn C

Chapter 11

Case No. 10-44748(Jointly Administere

Hearing Date: Septem11:00 a.m. (Oral ArgRequested)

VERIFIED OBJECTION OF INTELLIGENT DIGITAL SYSTEMS, LLC, R

RUSS PC DEFINED BENEFIT PENSION PLAN, AND JAY EDMOND R

DEBTORS MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE

TO SELL PROPERTY FREE AND CLEAR OF ALL LIENS, CLAIMS

INTERESTS TO ADAPTIVE VISUAL APPLICATIONS CORP. PURSUA

U.S.C. 363 AND FOR A WAIVER OF THE TEN DAY REQUIREMENT P

TO FEDERAL RULE OF BANKRUPTCY PROCEDURE 6004(h)

COMES NOW Intelligent Digital Systems, LLC (IDS), Russ and Russ

Benefit Pension Plan, and Jay Edmond Russ (collectively, the Objecting Creditor

Case 10-44748-KCF Doc 117 Filed 09/19/11 Entered 09/19/11 16:58:36Document Page 1 of 32
mailto:[email protected]:[email protected]:[email protected]


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Virtual Mobile Security, Inc.1 pursuant to 11 U.S.C. 363 and for a waiver o

requirement pursuant to Fed. R. Bankr. P. 6004(h) (the Motion), and respectfull

would show the Court as follows:

FACTUAL BACKGROUND

1. Almost a year ago, on November 8, 2010, the Debtors each filed bankrupunder Chapter 11 of Title 11 of the United States Bankruptcy Code.

2. On or about December 9, 2010, the Debtors filed their Schedules and Affairs (Schedules) (e.g., Docket No. 29, Case No. 10-44748).

3. The Objecting Creditors were scheduled with claims exceeding $2approximately, 43% of the Debtors scheduled collective unsecured debts. Pro

concerning the Objecting Creditors claims were further filed on April 1, 2011 (

Register, Claim Nos. 32-34, Case No. 10-44748). The indebtedness for the D

Objecting Creditors arises from the breached sale by the Objecting Creditor IDS t

of proprietary digital video recording technology and other assets - - assets which

the subject of the Debtors current Motion and that they seek to now sell free and cl

4. On January 3, 2011, the Debtors 341 meeting (the 341 Meeting) of crediattended by the undersigned and concluded. At the 341 Meeting the Debtors pr

Gonzalez, indicated that as of the commencement of the cases the Debtors were alle

to a Software Development and Technology License Agreement with Royal Service

Inc. (Royal License Agreement) and an Installation and Evaluation Contract w



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contemplated that the Royal License Agreement and Speedway Contract wou

backbone of the Debtors anticipated quick reorganization.

5. No plan of reorganization (Plan) was filed by the Debtors prior to termexclusive period in March, 2011. The Debtors were granted one extension of th

period by Order entered on March 8, 2011 (Doc. No. 55) to file their Plan by June

solicit acceptances thereof no later than August 5, 2011. No Plan, however, was fi

solicited therefore, by the extended dates and no further extensions thereof having

the Debtors exclusivity expired months back. No Plan has been filed since.

6. Other than minimal motion practice, and the filing of monthly operating repat best, limited business activity, the case dockets are bereft of any other real activit

or with these Debtors over the past ten months since the commencement of these ca

7. On the heels of this inactivity, the Debtors now propose to sell substantialoperational assets for the sum of $180,000 paid out over six (6) months to an e

identified as Virtual Mobile Security, Inc. o/b/o Adaptive Visual Application

Putative Buyer) whose principal is Lionel Sonntag (Sonntag). The propos

price amounts to, at best, approximately one percent (1%) of the Debtor

prepetition indebtedness.

8. The Debtors, further, by way of their Motion seek to direct the de minimus be used solely to pay (i) certain administrative claims, including post-petition p

Gonzalez himself ($15,000) and Mr. Bergman ($7,500), and fees of the United S



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While proposing such a distributive scheme, the Debtors provide nothing w

scheduled priority and unsecured claims exceeding $6,000,000.

SUMMARY STATEMENT

9. The Debtors propose to sell substantially all (if not all) of their operational a(i) the ordinary course of business and (ii) a plan and pursuant to a sub rosa plan ag

10.As such, the proposed sale requires even closer scrutiny. That scrutinyinvolve consideration of such factors as (i) business justification for the sale, (ii

price offered represents fair value, and (iii) the bona fides or good faith associ

sale. On all accounts, the Debtors proposed sale falls woefully short on e

considerations. Additionally, the sale would benefit, albeit negligibly, a single

Enable, with an unproven alleged secured claim.

11.The proposed purchase price amounts to no more than 1% of the Debtprepetition indebtedness. The proceeds thereof disenfranchise 99% of the Debt

prepetition creditor claims. Business justification? To pay the Debtors principals

salary, allowed fees of the Debtors counsel, and less than 1% of a single cr

Enables) indebtedness and meager shares in a minimally capitalized company, purs

rosa plan. Clearly, this is unsupportable under the Bankruptcy Code.

12.Fair value? There are no appraisals. There are no third-party valuations. Thno public sale. The proposed private sale effectively eliminates any real competitiv

process to establish an objective fair value analysis. No broker or investment banker



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Motion provides almost no information at all about the Putative Buyer and its prin

their financial wherewithal to satisfy the six-month payout of the purchase price. A

hereto show, the limited public information about the Putative Buyer and its pri

speaks to theirbona fides.

14.Additionally, nothing in the Motion addresses what personal benefit(s) thDebtors principal, any of their Board members, or their other employees in

proposed sale - - a sale of virtually no value to almost 99% of the Debtorsprepeti

Indeed, even the motivation of Enable in not opposing the sale is questionab

negligible financial value of this sale.

OBJECTIONS

I. The Proposed Sale Requires Strict Scrutiny.15.Because the Debtors seek to sell substantially all of their assets in an exped

pursuant to Bankruptcy Code 363, and thereby avoid the safeguards afford

confirmation process under the Bankruptcy Code, the transaction undeniably re

scrutiny than a typical proposed sale of assets outside the ordinary course of bu

President Casinos, Inc., 314 B.R. 784, 785 (Bankr. E.D. Mo. 2004) (stating that a

substantially all, of the assets of a Chapter 11 estate in the absence of a confirmed p

forbidden, is subject to close scrutiny by creditors and the court); Mission Iowa

Enron Corp., 291 B.R. 39, 43 (S.D.N.Y. 2003).

16.The general criteria for approving the sale of assets outside the ordina



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17.The proposed purchase price of $180,000 falls far short of the amount of theparties against the Debtors and their estates. At the proposed price, the sale will yiel

benefit to the vast majority (if not virtually all) of the Debtors creditors. Wheth

proposed sale price represents fair value cannot be determined based on the comple

any appraisal or objective valuation information. Additionally, while the sale p

subject to higher and better offers, there are no Court-approved procedures for the

evidence of any public advertising for the sale thereby effectively eliminating any

public sale to determine whether any purchase price would constitute fair value.

II. The Sale Letter Agreement is an Improper Sub Rosa Plan.18.The Letter Agreement annexed as Exhibit A to the Motion is an impermiss

plan, which is itself sufficient reason to deny the relief sought in the Motion.

19.A transaction is an impermissiblesub rosaplan if it disposes of all or substthe debtors assets without following the Bankruptcy Codes procedural

connection with the development and approval of a plan of reorganization, such

itself is a de facto plan. The procedural protections provided in the Bankruptcy C

among other things, the right to receive a detailed disclosure statement from a d

right to vote on the proposed plan.

20.Because of the importance of these protections to ensuring that creditorfairly, courts have rejected proposed post petition agreements between debtor

creditors that have the effect of dictating material terms of a plan of reorganiz



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also In re Decora Industries , Case No. 00-4459-JJF, 2002 WL 3232749 at *8 (D.

2002) (the focus of sub rosaplan analysis is oriented toward those situations in w

proposes to sell all of its assets without the benefit of a confirmed plan or a co

disclosure statement.); In re Swallens Inc., 269 B.R. 634, 638 (BAP 6th Cir. 20

when a party in interest objects, a bankruptcy court cannot issue orders tha

requirements of Chapter 11, such as disclosure statements, voting, and a confirm

proceed to a direct reorganization on the terms the court thinks best, no matter h

that might be.)

21.It is also a fundamental policy of bankruptcy law that a debtor-in-possesaffirmative, overarching duty to reorganize and maximize estate assets for the

creditors, not just a select few or, as in this case, just a singular creditor.In re R.H.

170 B.R. 69, 74 (Bankr. S.D.N.Y 1994) (citingNLRB v. Bildisco & Bildisco, 465

(1984)).

22.Where there is a proposed sale in Chapter 11 of substantially all of a debtorexchange for retirement of some or all of alleged secured debt, without the prote

disclosure statement and plan process, as here, the transaction must be closely scrut

transaction proponent bears a heightened burden. See In re Channel One Commun

117 B.R. 493, 496 (Bankr. E.D. Mo. 1990) (citing In re Industrial Valley Refrige

Conditioning Supplies, Inc., 11 B.R. 15, 17 (Bankr. E.D. Pa. 1987)); see als

Shattuck, LLC, 254 B.R. 5, 12 (Bankr. D.N.H. 2000); In re Wilde Horse Enterpr



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means of avoiding Chapter 11s plan confirmation procedures, citing In re Th

Wilcox Co., 250 F.3d 955, 960 (5th

Cir. 2001) ([T]he provisions of 363 d

debtor to gut the bankruptcy estate before reorganization or to change the fundame

the estates assets in such a way that limits a future reorganization plan.)). The

Court of Appeals for the Third Circuit expressed that Section 363 sales should n

short circuit the plan confirmation process and Section 1129 of the Bankruptcy C

Dairies, 788 F.2d 143,supra. In Abbotts Dairies, the court held that the good faith

of a Section 363 sale is to be used to assure that by means of an asset sale, a de

abrogate the protections afforded to creditors under section 1129 and the plan

process.Id. at 150.

24.Any sale transaction that dictates essential terms and seeks to short circrights should go through a plan approval process, which includes disclosure requir

section 1125 of the Bankruptcy Code, voting requirements under section 1126 of th

Code, the best interest of creditors test under section 1129(a)(7) of the Bankruptcy

absolute priority rule of section 1129(b)(2)(B) of the Bankruptcy Code.

25.Moreover, part of showing the necessity of a Section 363 transaction incluappropriate marketing of the assets, as part of the exercise of the debtor-in-possessi

duties to creditors. Marketing efforts must be designed to maximize the returns to

re WPRV-TV, Inc., 983 F.2d 336, 342 (1st Cir. 1983).

26.The Letter Agreement is effectively a sub rosa plan because it constitut



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27.Such an attempt to short circuit the plan confirmation process is finconsistent with the Bankruptcy Code and is itself sufficient reason to deny

Motion.

III. The Proposed Sale is Fraught with Issues Requiring Denial of the Relief Sou

28.As already pointed out, while the Debtors seek to sell the core assets of thMotion contains no objective valuation information whatsoever. There are no app

are no valuation analyses by any outside source. The Debtors listed the value of t

assets in their Schedules as largely unknown and the Debtors Motion does nothin

an objective value for those assets now some nine (9) months later.

29.The lack of any credible valuations is only exacerbated by the Debtors creasale. As such, the sale allegedly subject to higher and better offers has involved no

(other than a docket entry) or advertising to put other potentially interested parties

a result, there is no public competitive auction/sale process that itself could be lo

establishing an objective fair value analysis.

30.The Certification (oddly, not an Affidavit) of Mr. Gonzalaez submitted witdoes little to rectify the absence of any reliable valuation information. The ma

Certification addresses alleged (albeit unsuccessful) pre-petition attempts to locate

and capital to maintain the Debtors then existing operation and not an asset sale mar

Indeed, there is nothing in the Certification to establish any particular skill set or ex



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Enable, was not impressed with the offer. To the extent it could, the Certification

real evidence as to the specifics of any appropriate marketing efforts undertaken b

or the extent thereof.

31.There is also elements of good faith and business justification, or thewhich the Court should also consider with respect to the Motion.

32.As to good faith there are several considerations. First, the Motion containformation about the Putative Buyer, its principal or even their financial wherewi

the purchase price over a six month period. Similarly, there is no information ho

came to be identified, the negotiation of the proposed sale thereto, or the bona

Additionally, the limited publicly available information the Objecting Creditors

hardly encouraging as set forth under tab 1 hereto. The Putative Buyer itself also ap

been incorporated in Nevada only slightly before execution of the Letter Agre

reported capitalization of $210,000. Leaving one commentator (Investorshub)

respect to the Debtors attempted sale: What is this setup for? See Tab 2 annexe

same commentator went on to note, [i]snt this weird? A ONE-MAN company

Debtors] what is going on behind the scenes what we dont understand as of yet.

33.Beyond the limited, unflattering, information about the principal of the Puthe Motion also fails to address what the sale contemplates for the Debtors and its p

Gonzalez.

34.Mr. Gonzalez Certification suggests that absent the proposed sale, the



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employee of the Debtors would continue to provide any services to the Putative Bu

pursuant to what terms. That is, nothing addresses what personal benefit(s), if any th

Debtors principal, any of their Board members, or other employees in seeking to

this proposed sale transaction of almost no value to almost 99% of the Debtors cred

35.The sale also seeks to set a definitive distribution scheme for any sale pincludes payments to Mr. Gonzalez, to Debtors counsel, with remaining amounts

creditor, Enable. It also proposes to provide Enable a minority interest in t

capitalized Putative Buyer and yet no continuing revenue stream to the Debtors e

instance, licensing the Debtors technology) of potential benefit to many more of

creditors. As to Enable, the Motion simply says it appears to be a secured cr

Debtors. Thus, even the Debtors seem to harbor some question about that alleg

status of Enable. While Enable filed proofs of claim against the Debtors (see Cla

Claim Nos. 15-17; Case No. 10-44748), they simply attach copies of vario

agreements executed by a singular Debtor and no other documentation or security f

intents and purposes, the validity and perfection of Enables claims have simply g

before this Court to date. At the same time, even assuming arguendo that Enable

secured, one is left wondering what its motivation is here when the expressed return

is less than one percent (1%).

IV. The Sale Proceeds Dont Even Appear Sufficient to Pay AdministrativExpenses Related to Confirmation of a Plan



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estates and pay all administrative expenses and priority claims in cash on the effe

any plan.

37.It is well-settled that a plan cannot be confirmed unless all administrative exare paid in full, in cash, on the plans effective date. See 11 U.S.C. 1129(a)

Hechinger Inv. Co. of Delaware, 298 F.3d 219, 224 (3d Cir. 2002). The same is g

for other priority claims or to confirm a plan after any sale closes. The inability to c

generally constitutes cause to dismiss a chapter 11 case - - not to prolong it. 11 U.S.

B. Wind-Down Budget38.The Debtors estates would also likely require cash in order to fund a bud

that a Chapter 11 plan, even if just a liquidating one, can be finalized, co

implemented. To that end, any successful bid should as part of the purchase pric

adequate amount of cash to fund a wind-down budget as agreed upon by the Deb

creditors for the administration of the Debtors remaining assets and the wind

Debtors estates (the Wind-Down Budget).

39.The Putative Buyers bid does nothing of the sort.V. The Proposed Sale Appears to Leave the Debtors Estates Adm

Insolvent and Trigger Substantial Unsecured Liabilities

40.The proposed sale to the Putative Buyer appears to leave little, if any, cash f

to cover administrative expenses of the Debtors Chapter 11 proceedings, let alon

source of recovery for the Debtors general unsecured creditors. A Section


C 10 44748 KCF D 117 Fil d 09/19/11 E t d 09/19/11 16 58 36


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things, must be adequate to pay all administrative and priority claims in full, in

plans effective date and to cover ongoing expenses. See 11 U.S.C. 1129(a)(9).

41.Courts have declined to allow Section 363 sales of substantially all of a dwhere such sales would leave the debtors estate with such scant value as

reorganization. InPBGCv.Braniff Airways Inc. (In re Braniff Airways, Inc.), 700

Cir. 1983), rehg denied, 705 F.2d 450 (5th

Cir. 1983), for example, the court rea

this transaction approved, and considering the properties proposed to be transferred

remain save fixed based equipment and little prospect or occasion for further reo

700 F.2d at 940. See also In re Feinstein Family Pship, 247 B.R. 502 (Bankr. M.

(denying trustees motion to sell fully encumbered property to a credit bidder and h

trustee should not act as the lenders liquidating agent).

42. Acquirers in section 363 must also be prepared to provide some basic conunsecured creditors. As the Supreme Court has affirmed, [a] principal goal of the r

provisions of the Bankruptcy Code is to benefit the creditors of the Chapter

preserving going-concern values and thereby enhancing the amounts recovered by

In re Timbers of Inwood Forest Associates, Ltd., 808 F.2d 363, 373 (5th Cir. 198

U.S. 365 (1988) (emphasis added). Were the Debtors and any successful bidder to

a sale that benefits an alleged secured creditor to the exclusion of unsecured c

would violate good-faith requirements inherent in all Chapter 11 cases. See, e.g.,

951 F.2d 564 (3d Cir. 1991).



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