POST-PETITION FINANCING - GRANTING SECURED INTERESTS, SUPERPRIORITY CLAIMS, AND ADEQUATE PROTECTION, - AUTHORIZING THE DEBTORS' USE OF CASH COLLATERAL AND SCHEDULING A FINAL HEARING Doc 17

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Joseph A. Friedman (State Bar No. 07468280) Jason B. Binford (State Bar No. 24045499) KANE RUSSELL COLEMAN & LOGAN PC 3700 Thanksgiving Tower 1601 Elm Street Dallas, Texas 75201 Telephone - (214) 777-4200 Telecopier - (214) 777-4299 Email: ecf@krcl.com PROPOSED ATTORNEYS FOR DEBTORS ALL SMILES DENTAL CENTER, INC. AND AS PROPERTY HOLDINGS, LLC
THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION IN RE: ALL SMILES DENTAL CENTER, INC., and AS PROPERTY HOLDINGS, LLC DEBTORS.
CASE NO. 12-32924-SGJ-11 CASE NO. 12-32925-HDH-11 EXPEDITED HEARING REQUESTED Motion for Joint Administration Pending
MOTION FOR ORDER (I) (A) AUTHORIZING SECURED POST-PETITION FINANCING PURSUANT TO 11 U.S.C. 105, 362, AND 364(c) AND (d); (B) GRANTING SECURED INTERESTS, SUPERPRIORITY CLAIMS, AND ADEQUATE PROTECTION, AND (C) AUTHORIZING THE DEBTORS' USE OF CASH COLLATERAL; AND (II) SCHEDULING A FINAL HEARING PURSUANT TO BANKRUPTCY RULE 4001(c) The debtors and debtors-in-possession in the above-styled bankruptcy cases (the "Debtors"), file this Motion for Order (I) (A) Authorizing Secured Post-Petition Financing Pursuant to 11 U.S.C. 105, 362, and 364(c) and (d); (B) Granting Secured Interests, Superpriority Claims, and Adequate Protection, and (C) Authorizing the Debtors' Use of Cash Collateral; and (II) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(c) (the "Motion"); and in support thereof, respectfully state as follows:
_____________________________________________________________________________________________________________________ MOTION FOR ORDER (I) (A) AUTHORIZING Page 1 of 13 1757905 v2 (76740.00002.000) SECURED POST-PETITION FINANCING PURSUANT TO 11 U.S.C. 105, 362, AND 364(c) AND (d); (B) GRANTING SECURED INTEREST, SUPRIORITY CLAIMS, AND ADEQUATE PROTECTION, AND (C) AUTHORIZING THE DEBTORS' USE OF CASH COLLATERAL, AND (II) SCHEDULING A FINAL HEARING PURSUANT TO BANKRUPTCY RULE 4001(c)
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JURISDICTION AND VENUE 1. This Court has jurisdiction to hear and determine this Motion pursuant to 28
U.S.C. 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(A), (D), (K), and (M). 2. Venue of this proceeding and this Motion is proper in this district pursuant to
28 U.S.C. 1408 and 1409. BACKGROUND1 3. On May 2, 2012 (the "Petition Date") All Smiles Dental Center, Inc. ("Inc.") and
AS Property Management, LLC each filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). Since that time, the Debtors have continued to operate as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. 4. Inc. is a Delaware corporation formed on September 11, 2008. Inc. is
headquartered in Dallas, Texas and is a dental practice management service organization (an "MSO") supporting 33 dental and orthodontic practices within Texas. The practices are at 22 different physical locations spanning the Dallas, Fort Worth, and Houston metropolitan areas. All Smiles Dental Professionals, P.C. ("PC") employs the clinical staff and provides all dental and orthodontic services at these practices. 5. Richard J. Malouf, D.D.S. ("Dr. Malouf") founded Inc. in 2002 as All Smiles
Dental Center, P.A., which he converted to a Delaware corporation in 2008 to operate as an MSO, and then also formed the PC to provide clinical services. At that time, Dr. Malouf and
1
The complete factual background of these cases is described in the Declaration of Neil Minihane in Support of First Day Motions (the "Declaration") filed contemporaneously with this Motion.
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The Richard J. Malouf 2008 All-Smiles Grantor Retained Annuity Trust (the "2008 Trust", and, collectively with Dr. Malouf, the "Malouf Parties") held all Inc. stock and Dr. Malouf held all PC stock. 6. Pursuant to a Note and Stock Purchase Agreement (the "NSPA"), by and between
ASDC Holdings, LLC ("Holdings"), Holdings acquired approximately seventy percent (70%) of the outstanding equity interest of Inc. (the "Holdings Acquisition"). In connection with the Holdings Acquisition and in accordance with the NSPA, Inc. issued notes payable to Holdings in the total original principal amount of approximately $54,463,000.00 as more fully described below. PC is currently wholly owned by Adrian Codel, D.D.S. 7. Dr. Malouf remained on the board of Inc. after the Holdings Acquisition. He
resigned from the Inc. board as of April 19, 2012. NATURE OF THE SECURED CLAIMS ASSERTED AGAINST THE DEBTORS2 A. The Loan Documents 8. Holdings is owner and holder of a Secured Promissory Note in the original
principal amount of $53,963,278.49 dated June 30, 2010 (the "2010 Note"), made by Inc., as borrower, and Holdings, as lender. The maturity date of the 2010 Note is June 30, 2017. The 2010 Note is secured by substantially all of Inc.'s assets (the "Collateral"), as set forth in a Security Agreement, dated June 30, 2010, granted by Inc. for the benefit of Holdings (the "2010
Certain of the Debtors' vendors have asserted additional secured claims that, to the extent valid, are junior to the secured claims described in this Motion.
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Security Agreement") and the financing statement (the "2010 Financing Statement") recorded with the Delaware Secretary of State by Holdings on July 1, 2010 (File No. 20102313173).3 9. Holdings is also the owner and holder of a Secured Promissory Note in the
original principal amount of $1,000,000 dated January 9, 2012 (the "2012 Note"), made by Inc., as borrower and Holdings, as lender. The maturity date of the 2012 Note is April 6, 2012. The 2012 Note is secured by the Collateral, as set forth in a Security Agreement, dated January 9, 2012, granted by Inc. for the benefit of Holdings (the "2012 Security Agreement") and the financing statement (the "2012 Financing Statement") recorded with the Delaware Secretary of State by Holdings on January 9, 2012 (File No. 20120096380). 10. The 2010 Note, 2010 Security Agreement, 2010 Financing Statement, 2012 Note,
and 2012 Financing Statement shall collectively be referred to herein as the "Pre-Petition Loan Documents". 11. As of the Petition Date, Inc. owed Holdings $61,415,930.30 consisting of
$60,393,902.51 owed under the 2010 Note and $1,022,027.79 owing under the 2012 Note (the "Pre-Petition Indebtedness"). B. The Alleged Events of Default 12. During the time that the Malouf Parties owned Inc., Dr. Malouf entered into an
agreement (the "Brokerage Agreement") with Caymus Partners, LLC ("Caymus"), an investment banking firm, to represent and market Inc. for sale to potential buyers. It was Caymus that introduced Holdings to the Malouf Parties. After the close of the 2010 sale, a dispute arose
From and after June 30, 2010, Holdings sent Inc. a series of letters acknowledging a delayed schedule of required payments due by Inc. and stating that such unpaid payments did not constitute an "Event of Default" under the 2010 Note. This Forebearance expired March 31, 2012.
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between holdings and the Malouf Parties as to whether the Malouf Parties owed a transaction commission fee to Caymus under the Brokerage Agreement. When the claimed fee went unpaid, Caymus pursued Inc. (as the counter-party to the Brokerage Agreement) for settlement while Inc. pursued the Malouf Parties for resolution. 13. Before Holdings and the Malouf Parties' dispute could be resolved, Caymus
obtained a $3.4 million arbitration judgment against Inc. and began collection efforts on February 27, 2012. On March 12, 2012, the Dallas County Constable showed up at Inc.'s corporate headquarters to execute a writ of judgment. Inc. and Caymus have been in discussions since March 12, 2012 on how to resolve this judgment with little progress. 14. On March 20, 2012, counsel for Holdings sent Inc. two letters alleging that events
of default has occurred under both the 2010 Note and the 2012 Note relating to: (1) the judgment obtained by Caymus; and (2) Inc. allegedly allowing its EBIDTA to fall below a certain point. Holdings further alleged in the March 20, 2012 letters that any applicable cure period had expired, that the entire debt due under the 2010 Note and the 2012 Note was immediately due and payment, and that Holdings intended to exercise its rights against the Collateral. On April 28, 2012, counsel for Holdings sent Inc. a similar letter alleging that an event of default had occurred relating to Inc.'s failure to pay amounts due under the 2010 Note, that any applicable cure period had expired, that the entire debt due under the 2010 Note was immediately due, and that Holdings intended to exercise its rights against the Collateral. 15. As of the Petition Date, Inc. has been unable to negotiate a further forbearance
with Holdings or otherwise to refinance the 2010 Note or the 2012 Note. Based on, among other
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things, the defaults under the 2010 and 2012 Notes, the Debtors therefore filed these cases to preserve value of the Debtors' estates for the benefit of creditors and equity holders. RELIEF REQUESTED AND BASIS THEREFOR 16. By this Motion, the Debtors request entry of an order authorizing the Debtors
pursuant to sections 363(c), 364(c), and 364(d) of the Bankruptcy Code and Rules 2002, 4001(c) and 9014 of the Bankruptcy Rules (i) to obtain post-petition financing (the "Post-Petition Financing") pursuant to the terms of certain DIP Loan Documents (as defined below) between Holdings and Inc.; (ii) granting Holdings, pursuant to Bankruptcy Code 364(c) and 364(d), first priority security interests in all of the Debtors' currently owned and after-acquired property to secure the Debtors' obligations under the Post-Petition Financing; and (iii) granting Holdings priority in payment, subject to limited exceptions set forth herein, with respect to the obligations incurred in connection with the Post-Petition Financing over any and all administrative expense of the kinds specified in Bankruptcy Code sections 503(b) and 507(b). 17. The Debtors also seek authorization to use Holdings' Cash Collateral (as defined
below) pursuant to Bankruptcy Code section 363(c), and to provide adequate protection, pursuant to Bankruptcy Code sections 361, 363(c) and 364(d) to Holdings. The Debtors further seek a preliminary hearing (the "Preliminary Hearing") on the Motion to consider entry of an interim order pursuant to Bankruptcy Rule 4001 (the "Interim Order") authorizing the Debtors to borrow under the Post-Petition Financing upon the terms and conditions set forth in the Interim Order pending a final hearing (the "Final Hearing") to be scheduled by this Court to consider entry of a final order (the "Final Order") authorizing on a final basis, inter alia, the Post-Petition Financing and the use of cash collateral.
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THE PROPOSED FINANCING 18. Prior to the Petition Date, the Debtors were unable to obtain post-petition
financing from any source due to the payment holds imposed on PC by the State of Texas and the resulting impact on Inc.'s cash flows all as described in the Minihane Declaration. The Debtors have been in extensive negotiations with the State of Texas in the days leading up to the filing and based on the progress of those negotiations, Holdings is now willing to advance funds on an interim basis, both to see if the Debtor can conclude those negotiations and to permit the Debtor to search for alternative sources of funding and if no other source becomes available, fund on a final basis a post-petition loan facility. Based on the funding hold, the Debtors have concluded that Holdings post-petition term loan (the "DIP Loan") constituting the Post-Petition Financing (collectively, the "DIP Facility") is the only viable financing available to the Debtors at this point in time. A. The DIP Facility 19. The DIP Facility consists of a $3,000,000 loan from Holdings to Inc., with the
conditions set forth in the Term Sheet attached as Exhibit A. The $3,000,000 loan is to be evidenced by a note made by Inc., as borrower and Holdings, as lender (the "DIP Note"). Pursuant to the terms of the DIP Facility, Inc. shall be entitled to draw down $1,000,000 to finance the Debtors' operations from the period from the Petition Date to the Court's entry of the Final Order. The remaining $2,000,000 will be available for the Debtors to finance their
operations for the entire funding period from the Petition Date through and include the "Maturity Date," defined as the first business day that is 125 days after the Petition Date (i.e., September 4, 2012) (the "DIP Financing Term").
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20.
Advances under the DIP Facility shall be made on a periodic basis during the DIP
Financing Term to fund the disbursements set forth in the Budget (as defined below) and in amounts of not less than $250,000. Amounts advanced and repaid under the DIP Facility may be re-borrowed during the term of the DIP Facility. 21. The interest rate on the DIP Loan shall be 15%. In addition, the Debtors will not
be required to pay current interest on the outstanding balance of the Pre-Petition Indebtedness as part of, or during the term of, the DIP Facility. 22. The DIP Loan entitles Holdings to reimbursement of its reasonable out-of-pocket
expenses (including fees) incurred in connection with the DIP Facility. 23. A further condition of the DIP Facility is that Holdings be granted a superpriority
claim under the provisions of section 364(c)(1) of the Bankruptcy Code over all administrative expenses incurred in these bankruptcy cases. B. The Budget 24. As a condition precedent to the DIP Facility, the Debtors were required to
establish a budget for disbursements (the "Budget"). A copy of the First Interim Budget is attached hereto as Exhibit B. The Debtors are only permitted to use collateral proceeds under the Pre-Petition Loan Documents constituting cash collateral within the meaning of Section 363(a) of the Bankruptcy Code (the "Cash Collateral"), proceeds of the DIP Loan, and proceeds of the Collateral for the purposes and in the amounts set forth in the Budget. The aggregate
expenditures under the Budget will be tested weekly by Holdings on a cumulative basis [(i.e., the sum of all actual amounts expended by the Debtors for the current week and all previous weeks in the Budget cannot exceed the sum of all budgeted disbursements for such cumulative period).]
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On or prior to noon central time each Tuesday during the DIP Financing Term, the Debtors are required to prepare and deliver to Holdings a written reconciliation (by line item and on a cumulative basis) of the actual collections and disbursements for the immediately preceding week with the budgeted collection and disbursements for such week in the Budget. 25. The Debtors are also seeking authority in the Interim Order and Final Order to
amend and/or extend the Budget from time to time without further order of the Court upon prior written agreement of the Debtors and Holdings. D. The Carve Out 26. Holdings will agree to a carve-out of its Collateral for: (a) court-approved
administrative expense claims of (i) professionals retained by the Debtors (the DIP Professionals) for fees, expenses and other costs incurred from the Petition Date through the Carve-Out Termination Date (as defined below), as outlined and approved in the Budget; and (ii) an amount to be negotiated for fees and expenses of professionals retained by any Official Committee of Unsecured Creditors appointed in these cases (the Committee Professionals); (b) unpaid fees payable pursuant to 28 U.S.C. 1930; and (c) unpaid fees payable to the Clerk of the Bankruptcy Court or the United States Trustee (all such carve-outs referenced above, collectively, the Carve Outs). After the Carve-Out Termination Date, proceeds of DIP Loan and the Collateral shall only be used to pay Committee Professionals and DIP Professionals for fees and expenses that (i) were incurred during the post-petition period ending on the Carve-Out Termination Date; and (ii) did not exceed the applicable Carve-Out amount set forth above. The aforementioned carve-out amounts shall be reduced dollar for dollar by the amount of any retainer balance held by such professionals as of the Petition Date.
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27.
The Carve-Out Termination Date means the earliest of: (i) the occurrence of
any "Event of Default" under the DIP Loan, the Post-Petition Credit Documents (as defined in the DIP Loan) or any Interim Order or Final Order, and the delivery of written notice thereof to the Debtors; (ii) the end of the DIP Financing Term; or (iii) such later date to which Holdings shall have agreed in writing in its sole discretion. E. Other Conditions to the DIP Facility 28. (i) (ii) In addition to the DIP Facility terms listed above, Holdings requires that: the Debtors retain Neil Minihane as Chief Restructuring Officer with day-to-day operations at all times while the DIP Facility is outstanding; upon entry of a Final Order, and subject to a 60-day review and objection period, the Debtors execute a standard release releasing Holdings from any and all claims and causes of action whether such claims and causes of action arise against Holdings pre-petition or post-petition, and the Debtors' stipulate that the PrePetition Indebtedness is valid, existing and property perfected, with such stipulation binding on all creditors and parties; upon entry of a Final Order, no costs or expenses of administration shall be imposed against Holdings' pre-petition or post-petition collateral under section 506(c) of the Bankruptcy Code; and upon entry of a Final Order, the Debtors agree to indemnify Holdings and its officers, directors, employees, affiliates, agents, attorneys, financial advisors, and controlling persons and hold them harmless from and against all costs, expenses (including fees, disbursements and other charges of counsel) and liabilities of any such indemnified person arising out of or relating to any claim arising out of or relating to any claim or litigation or other proceedings (regardless of whether any such indemnified person is a party thereto), that relate to the DIP Loan; provided that no indemnified party will be indemnified for its gross negligence or willful misconduct. The scope of such indemnification will be at least as broad as that provided in the documentation for the Pre-Petition Indebtedness. As set forth in the Term Sheet, the Debtor shall be permitted to "shop" the DIP
(iii)
(iv)
29.
Loan and Facility prior to a final hearing to determine if alternative sources of funding exists.
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THE DEBTORS' IMMEDIATE NEED TO USE CASH COLLATERAL 30. Section 363(a) of the Bankruptcy Code defines "cash collateral" to mean cash,
negotiable instruments, documents of title, securities, deposit accounts or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property subject to a security interest as provided in Section 552(b) of the Bankruptcy Code, whether existing before or after the commencement of a case under the Bankruptcy Code. See 11 U.S.C. 363(a). 31. Section 363(c)(2) of the Bankruptcy Code provides that a debtor may not use,
sell, or lease cash collateral unless (i) each entity that has an interest in such cash collateral consents; or (ii) the court, after notice and hearing, authorizes the use of the cash collateral. See 11 U.S.C. 363(c)(2). 32. At the present time, the Debtors do not have a financing source other than the
Cash Collateral with which to finance their working capital needs, including their utility, operational and other obligations during these cases. The Debtors' ability to maintain their operations in these cases thus depends upon the ability to use the Cash Collateral. As set forth above, Holdings has agreed to authorize the Debtors' use of the Cash Collateral as part of the DIP Facility. As such, the Debtors are seeking approval of the DIP Facility, including use of the Cash Collateral, in the Interim Order, subject to final entry in the Final Order. THE PROPOSED INTERIM ORDER 33. The specific terms of the DIP Facility and the Debtors' use of the Cash Collateral
are contained in the proposed First Interim Order (I) (A) Authorizing Secured Post-Petition Financing Pursuant to 11 U.S.C. 105, 362, and 364(c) and (d); (B) Granting Secured
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Interests, Superpriority Claims, and Adequate Protection, and (C) Authorizing the Debtors' Use of Cash Collateral; and (II) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(c) (the "Proposed Interim Order") attached as Exhibit C. IMMEDIATE RELIEF IS NEEDED IN ORDER TO AVOID IMMEDIATE AND IRREPARABLE HARM TO THE DEBTOR'S ESTATES 34. Bankruptcy Rule 4001(b)(2) provides that a final hearing on a cash collateral
motion cannot be commenced earlier than fourteen (14) days after service of the motion, but that the Court may authorize the Debtors' use of Cash Collateral on a preliminary basis limited to amounts necessary to avoid immediate and irreparable harm to the Debtors' estates. 35. In this case, without any source of working capital, and any ability to pay
operating expenses in this case, the Debtors' estates will suffer immediate and irreparable harm if it is not authorized to use the Cash Collateral during the interim period requested herein. It is necessary to pay all amounts listed on the Budget during the period of time until a final hearing is held on this Motion to avoid immediate and irreparable harm to the Debtors. 36. The Debtors thus request that the Court approve the Proposed Interim Order on an
interim basis pending a final hearing on this Motion. REQUEST FOR FINAL HEARING 37. The Debtors request that this Court set a final hearing on this Motion for May 17,
2012, or as soon thereafter as the Court's calendar permits. PRAYER WHEREFORE, the Debtors pray that the Court (i) grant the relief requested herein on an interim basis pending a final hearing; (ii) set a final hearing on the relief requested herein on May 17, 2012, or as soon thereafter as the Court's calendar permits; and (iii) enter the Proposed
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Interim Order. The Debtors further request the Court grant such other and further relief as is just. Dated: May 2, 2012. Respectfully submitted, KANE RUSSELL COLEMAN & LOGAN PC By:/s/Joseph A. Friedman Joseph A. Friedman Texas State Bar No. 07468280 Jason B. Binford Texas State Bar No. 24045499 3700 Thanksgiving Tower 1601 Elm Street Dallas, Texas 75201 Ph: (214) 777-4200 Fax: (214) 777-4299 Email: jfriedman@krcl.com PROPOSED COUNSEL FOR THE DEBTORS CERTIFICATE OF SERVICE This is to certify that service of the foregoing document was effected through Electronic Notice for Registered Participants, and unless an alternative means of service is set forth below, has been sent to all other parties in interest and creditors shown on the attached Official Service List by email (if an e-mail address is indicated), or otherwise by United States Mail, first class postage prepaid, on the 2nd day of May 2012. /s/Joseph A. Friedman Joseph A. Friedman

POST-PETITION FINANCING - GRANTING SECURED INTERESTS, SUPERPRIORITY CLAIMS, AND ADEQUATE PROTECTION, - AUTHORIZING THE DEBTORS' USE OF CASH COLLATERAL AND SCHEDULING A FINAL HEARING Doc 17

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