Case 20-42492 Doc 248 Filed 04/19/21 Entered 04/19/21 08 ...

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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS

2 SHERMAN DIVISION

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4 IN RE: ) BK. NO: 20-42492-BTR

5 )

6 SPHERATURE INVESTMENTS, )

7 LLC )

8 D E B T O R. )

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12 TRANSCRIPT OF PROCEEDINGS

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20 BE IT REMEMBERED, that on the 30th day of December,

21 2020, before the HONORABLE BRENDA T. RHOADES, United States

22 Bankruptcy Judge at Plano, Texas, the above styled and

23 numbered cause came on for hearing, and the following

24 constitutes the transcript of such proceedings as hereinafter

25 set forth:

Case 20-42492 Doc 248 Filed 04/19/21 Entered 04/19/21 08:20:49 Desc MainDocument Page 1 of 93

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1 P R O C E E D I N G S

2 COURTROOM DEPUTY: Spherature Investments,

3 LLC, case 20-42492; along with Rovia, LLC, case 20-42493;

4 World Ventures Marketing, LLC, case 20-42494; World Ventures

5 Marketing Holdings, LLC, case 20-42495; World Venture

6 Marketplace, LLC, case 20-42496; World Venture Services,

7 20-42497, in each of these cases, motions for joint

8 administration. And in the lead case, first day motions.

9 THE COURT: Appearances.

10 MR. HELT: Good morning, Your Honor. Marcus

11 Helt and Tom Scannell from the law firm of Foley Lardner,

12 proposed counsel for the debtors. Also representing the

13 debtors on the phone this morning is Mr. Erik Toth of Larx

14 Advisors, the proposed chief restructuring officer for the

15 debtors.

16 Thank you.

17 THE COURT: Okay.

18 MR. RUDD: Good morning, Your Honor. This is

19 Jason Rudd with Wick Phillips, also on the line is Scott

20 Lawrence with Wick Phillips, on behalf of Montgomery Capital

21 Partners, the agent for the senior secured lenders.

22 MR. LAMBERSON: Good morning, Your Honor.

23 This is Phillip Lamberson of Winstead PC appearing on behalf

24 of Seacret Direct, LLC.

25 MR. BINFORD: Good morning, Your Honor. Jason


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1 Binford with the Office of the Attorney General of Texas

2 representing the AG's Consumer Protection Division.

3 MS. SIMS: This is Kimberly Sims representing

4 creditor Dan Stamen.

5 MR. LINDEMANN: Good morning, Your Honor.

6 This is Blake Lindemann representing Melody Yiru on behalf of

7 herself and all other similarly situated.

8 MR. EASTLAKE: Good morning, Your Honor. This

9 is David Eastlake of Greenberg Traurig on behalf of SSP

10 Legacy Tennyson Center, LLC.

11 MS. HAWKINS: Good morning, Your Honor. This

12 is Tabitha Hawkins, pro se, creditor.

13 MR. SHELBY: Good morning, Your Honor. This

14 is Rick Shelby on behalf of Phelps Dunbar, a creditor.

15 MR. BERGER: Good morning, Your Honor. This

16 is Evan Berger from Becker & Poliakoff on behalf of creditor

17 Aviva (indecipherable word), LLC.

18 THE COURT: Okay. All right. Any other

19 appearances?

20 All right. Mr. Helt, it's your hearing. You may

21 proceed.

22 MR. HELT: Thank you, Your Honor. First and

23 foremost, thank you so much for making time to accommodate

24 our request for emergency consideration of first day motions.

25 Given the holiday season, we're especially grateful to


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1 Ms. Rasco and the rest of her staff for working really hard

2 for us. So thank you again for that.

3 Pursuant to the agenda we filed on December 23rd at

4 docket number 24 in the lead case number, 20-42492, styled In

5 re Spherature Investments, LLC, there are currently a lot of

6 matters set for today's hearing. Those matters are motion

7 for joint administration, docket number 3; notice of complex

8 case designation, docket number 7; a motion to extend the

9 deadline to file schedules and statements of financial

10 affairs, docket number 8; motion for an interim -- to

11 establish interim notice procedures, docket number 9;

12 insurance motion, docket number 10; motion to honor customer

13 incentive programs, docket number 13; a wage motion, docket

14 number 16; tax motion, docket number 17; cash collateral,

15 docket number 18; utilities motion, docket number 19; and

16 cash management, docket number 21. For reference, I simply

17 just listed these in numerical order as they're filed on the

18 docket.

19 Before we get started on the specific motions, Your

20 Honor, I thought it might be helpful for me to give you a

21 brief background of the debtors and their business.

22 World Ventures was founded in 2005 and sells travel and

23 lifestyle memberships known as DreamTrips. There are four

24 membership levels. There's a silver, gold -- there's a

25 silver, there's a gold, there's platinum, and there's


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1 titanium with different price levels and different benefits.

2 Members utilize the website www.dreamtrips.com to book

3 curated group travel packages, also known as DreamTrips.

4 World Ventures uses a multi-level marketing strategy to

5 market its memberships to the general public through a sales

6 force of independent contractors, sales representatives.

7 World Ventures sales representatives sell the DreamTrips'

8 memberships to family, friends, and contacts to earn

9 commissions on the recurring monthly membership purchases.

10 Sales reps also have the opportunity to recruit other sales

11 reps into the World Ventures -- into World Ventures and earn

12 commissions on membership sales made by the sales reps in

13 what we call their down lines.

14 At this time, the plan for this bankruptcy case is to

15 continue a marketing and sale process culminating in a

16 transaction approved by this Court that maximizes the value

17 for all stakeholders, including sales reps and other

18 creditors. We currently have 21 parties, at least 21 parties

19 under NDA and active in the data room. We're also trying to

20 finalize a stalking horse agreement soon to get before Your

21 Honor for approval.

22 Now onto the service and the notice of today and the

23 relief sought today, Your Honor. Each voluntary petition in

24 the 11 first day motions were served by first-class mail on

25 December 22nd and December 23rd on the United States Trustee,


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1 Internal Revenue Service, counsel for the secured lender, the

2 top 40 non-insider creditors in each case, and all of the

3 parties that have requested notice in the case. The

4 insurance providers were served the voluntary petitions and

5 insurance motion, docket number 10, on December 23rd, 2020 by

6 first-class mail. The State taxing authorities were served

7 voluntary petitions and requests for emergency first day

8 hearing and the tax motion on December 23rd by first-class

9 mail. The proposed (indecipherable word) providers were

10 served the voluntary petitions, the request for emergency

11 hearing, and the utility motion on December 23rd, also by

12 first-class mail. We served this Court's order setting

13 today's hearing, docket number 22, and the notice of today's

14 hearing, docket number 23, we served those on December 23rd

15 on the entire matrix by first-class mail. And this matrix

16 includes the United States Trustee, Internal Revenue Service,

17 the secured lender, the top 40 non-insider creditors, and all

18 parties that have requested notice. Further, we've served

19 copies of the first day pleadings on December 23rd -- 22nd

20 and 23rd via electronic mail to every email address in our

21 possession for the parties potentially interested in the

22 first day relief.

23 The certificates of service representing the service

24 that I just mentioned are filed with the docket numbers 27,

25 28, 29, and 38. And they were filed by the debtors' proposed


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1 noticing agent confirming the parties served, the methods of

2 service, and the dates of service.

3 Since filing the motion, we've been in open and ongoing

4 negotiations with the secured lender, the United States

5 Trustee, and other parties regarding the first day matters.

6 We believe with this extensive service provided by the claims

7 agent, limited interim relief we're requesting today, and

8 with all right reserved for final relief, the notice provided

9 to the parties with interest in this case is good and

10 sufficient for today's purposes.

11 In support of the 11 motions set for today, the debtors

12 filed the declaration, the first day declaration of Erik

13 Toth. He's on the phone. That declaration was filed on

14 December 23rd and it's found on the docket at docket 20 in

15 the lead case. The declaration contains a detailed

16 description of the debtors, their operations, the nature of

17 the current financial distress, the need to file these cases,

18 and the specific support for each of the 11 first day

19 motions. Mr. Toth is also here today. He's present. He's

20 on the phone. He's able to be sworn in and can affirm that

21 the testimony that he put in the declaration is true and

22 correct.

23 Accordingly at this time, Your Honor, we'd ask the

24 Court to accept Mr. Toth's declaration testimony as his

25 proffer and then we'll move into the specific motions.


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1 THE COURT: All right. Docket number 20,

2 which constitutes the declaration will be admitted as the

3 debtors' -- as Mr. Toth's direct testimony.

4 Does anyone wish to cross-examine the witness?

5 MR. LINDEMANN: Your Honor, this is Blake

6 Lindemann. Ms. Yiru Would like to cross-examine the witness

7 as to certain issues on the first day motions.

8 THE COURT: Okay. We'll get there -- to that

9 point in just a moment. So you may cross-examine in just a

10 little bit, okay, after I take opening statements from

11 everybody.

12 Okay. Was there any other opening statements to be

13 made by you, Mr. Helt?

14 MR. HELT: Only -- the only other opening

15 statement is, if it pleases the Court, Mr. Scannell and I are

16 going to share the presentation of the first day matters,

17 given the number of the matters on the docket today. Unless

18 you have specific preference of order, I would propose that

19 we take up the cash collateral first and then move on to the

20 less substantive and sort of more administrative motions from

21 there.

22 THE COURT: I mean that's fine. I think I'd

23 like to handle the joint administration motion first so that

24 once we get that taken care of, everything from that point on

25 will be in the lead case.


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1 MR. HELT: Great. Thank you, Your Honor.

2 THE COURT: Okay.

3 MR. HELT: Mr. Scannell will handle joint

4 administration and then I'll come back to handle cash

5 collateral.

6 THE COURT: Thank you.

7 MR. HELT: Thank you.

8 MR. BINFORD: Your Honor, this is Jason

9 Binford. If I could just make a short opening statement on

10 behalf of the Attorney General's Office.

11 THE COURT: I'll hear you now. Thank you.

12 MR. BINFORD: Thank you, Your Honor.

13 I will have a few specific comments to the customer

14 program motion, but I think I'll just take those up when the

15 debtor takes that up. But I have more general comments that

16 I suppose qualify more as sort of opening statements.

17 I am appearing this morning on behalf of the Consumer

18 Protection Division of the Attorney General's Office. And

19 the Consumer Protection Division has had a fairly long

20 history with these debtors regarding customer complaints that

21 they have received not only directly to the AG's Office, but

22 through other channels, such as the Better Business Bureau.

23 The history of that has been, I would describe it as spotty

24 regarding the debtors' willingness to respond to those

25 customer complaints and cooperate with the Attorney General's


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1 role in that process.

2 The only thing I'll say is that I look forward to

3 working with debtors' counsel on this. As Your Honor

4 probably knows, they're my former colleagues. And I think

5 that level of familiarity will hopefully bear fruit in

6 having some open discussions. But the main point that the

7 AG's Office wants to make is that the debtors do look to

8 enjoy the awesome powers of the Bankruptcy Code, whether

9 that's 363 or 1129. And we're going to -- we're hopeful that

10 they understand the responsibilities to act as a good

11 corporate citizen during that process, including, but

12 certainly not limited to dealing with their ongoing

13 obligation to address customer issues.

14 So that's really going to be our role in this case on

15 those issues. And, again, I do have just a couple of small

16 comments regarding the customer program motion. But I'll

17 reserve when that gets taken up.

18 THE COURT: Okay. Does anyone else wish to

19 make an opening statement?

20 All right. Then let's start with the --

21 MR. LAMBERSON: Your Honor, I'm sorry, this is

22 Phillip Lamberson on behalf of Seacret Direct. I'll be very

23 brief.

24 I just wanted to mention that Seacret is actually a

25 multi-level marketing business that sells beauty, health, and


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1 wellness products. As indicated in Mr. Toth's affidavit, the

2 debtors have entered into an agreement with Seacret in the

3 summer, actually, of 2020 to sell -- to allow their agents to

4 sell Seacret products. That agreement was reconstituted

5 shortly before the filing in November of 2020 to basically

6 allow the World Ventures agents to join Seacret, if they

7 chose, to sell Seacret products while they also sold World

8 Venture products and obtained commissions. It was, frankly,

9 an attempt to give the debtors an ability to help retain some

10 of their agents, considering the pandemic effect on the

11 travel services, which was not similar to Seacret's products,

12 which again are health and beauty products. So I just wanted

13 to give you a little bit of background as to what Seacret's

14 participation is here.

15 We also -- we also have a term sheet with the debtors.

16 We're trying to put together an APA. Mr. Helt had mentioned

17 a stalking horse buyer. I think he probably was referring to

18 us. We know there are a couple of other buyers in the mix.

19 But I just wanted to give the Court a little bit of

20 background as to Seacret's participation here, which is

21 actually not as a creditor, but as an interested party and a

22 potential purchaser.

23 THE COURT: Okay. All right. Thank you.

24 All right. Let's then turn to the joint administration

25 motion.


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1 MR. SCANNELL: Thank you, Your Honor. For the

2 record, this is Tom Scannell, Foley & Lardner, proposed

3 counsel to the debtors.

4 At docket number 3 in the lead case, number 20-42492,

5 styled In re Spherature Investments, LLC, the debtors filed a

6 motion for joint administration of the six affiliated cases

7 pending before Your Honor. We have also filed identical

8 conforming motions for joint administration in each of the

9 affiliate cases pending before the Court and called onto the

10 record of today's hearing.

11 The proposed lead debtor, Spherature Investments,

12 formerly known as World Ventures Holdings, is the sole parent

13 of the affiliated debtors Rovia, LLC; World Marketing -- or

14 World Ventures Marketing, LLC; and World Venture Marketing

15 Holdings, LLC. Likewise, World Ventures Marketing Holdings,

16 LLC is the sole parent of World Ventures Marketplace and

17 World Ventures Services. Accordingly, all six debtors are

18 parents, subsidiary, affiliates of one another.

19 Under Bankruptcy Rule 1015(b) and local Bankruptcy Rule

20 1015-1, Your Honor has the discretion to order the

21 administration of the estates among the debtor affiliates.

22 We are seeking today the entry of an order, proposed as an

23 exhibit to the motions, jointly administering the six cases

24 under the lead case number 20-42492 styled as In re

25 Spherature Investments, LLC. Under the proposed order


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1 schedules, monthly operating reports, statements of financial

2 affairs, and proofs of claim will be filed separately in each

3 of the cases. Other than that, all matters filed in either

4 of the six cases should be filed in the lead case under a

5 consolidated docket for administrative purposes only. We

6 believe these cases are appropriate for joint administration.

7 We have not received any objections to this motion. I'm

8 happy to answer any questions the Court has at this time.

9 THE COURT: Okay. Does anyone wish to be

10 heard with respect to the joint administration motion?

11 All right. Based on the evidence before the Court, the

12 Court will grant the motion for joint administration. I

13 think I understood from Mr. Helt, he wanted to address the

14 cash collateral motion next?

15 MR. HELT: Yes, ma'am.

16 THE COURT: Okay.

17 MR. HELT: Thank you, Your Honor.

18 The debtors' cash collateral motion is found on the

19 docket at docket number 18. I'm happy to report to the Court

20 that we've reached an agreement with the pre-petition lender,

21 Montgomery Capital Advisors, on the debtors' use of cash

22 collateral at least through an interim period, which covers

23 the petition date through January 22nd.

24 Attached to the cash collateral motion was a proposed

25 order. The agreed order -- the order that has been agreed


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1 modifies that proposed order. This morning at docket number

2 44 -- and for the Court's convenience, we filed a red-line

3 comparing the proposed order to the agreed order. This

4 red-line shows the changes made to the proposed order. The

5 changes reflect the concessions made by the debtor in

6 response to the informal objection raised by the lender.

7 I'm happy to let the Court go through that and talk

8 about it. The intention of the order was to preserve most of

9 the rights, if not all of the rights of the debtor, and grant

10 the lender some adequate protection in the form of an

11 interest payment on a per month basis and some reporting

12 requirements.

13 If the Court or the parties on the phone were to look

14 at docket number 44-2, you would see the red-line and some of

15 the changes in paragraphs H and paragraphs B, C, D, and E.

16 Most of those changes reflect adequate protection concessions

17 given by the debtor to the lender.

18 So unless the Court has a specific question, I would

19 ask the Court to enter the agreed order that's been entered,

20 that's been uploaded.

21 THE COURT: Okay. I have not had a chance yet

22 to review in detail the order that was uploaded today, the

23 red-line. So if you would go through on the record the

24 specific details --

25 MR. HELT: Sure.


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1 THE COURT: -- of your agreement and the

2 proposed cash collateral order, please.

3 MR. HELT: Sure. Thank you, Your Honor.

4 If the Court would turn to docket number 44-2 at the

5 top, it's page 3 of 10. You'll see recital H where the

6 lender just asserts that its owned in principal amount a

7 number not to exceed approximately $5.5 million. And they

8 claim, or they assert a lien in substantially all of the

9 debtors' assets, including the cash that's being held on hand

10 and it's held at, what we call the credit card companies or

11 the merchants. We call it merchant reserves. That's what

12 that paragraph intended to address.

13 And, Your Honor, if you go to paragraph 2-A, page 4 of

14 10 at the top, the very last sentence. The next material

15 change is the lender reserves the right to assert interest at

16 the default rate and payment of reasonable fees and expenses

17 and such other amounts, in addition to the adequate

18 protection payments that we are paying currently. Subject,

19 of course, to further order of this Court.

20 If you go to paragraph 2-B, Your Honor, just below

21 that. There's a sentence midway through, other than as set

22 forth here in the replacement liens shall not be made subject

23 to or pari passu with any lien, or with any lien or security

24 interest previously or hereafter granted in any of the cases.

25 And then there's a standard sentence, the replacement lien


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1 shall be valid, binding, and enforceable against any Trustee

2 or the estate representative appointed in the case.

3 THE COURT: Okay. And what is the

4 investment -- or what is the replacement lien for?

5 MR. HELT: To the extent of diminution in

6 value, Your Honor. Adequate protection, to the extent of

7 diminution in value.

8 THE COURT: Value of the collateral, right?

9 MR. HELT: Correct.

10 THE COURT: Okay.

11 MR. HELT: On an aggregate basis. If you --

12 if you go to the sentence that I just referred to that says,

13 other than as set forth herein, the immediately preceding

14 sentence says, the replacement lien is in the same nature,

15 extent, priority and such liens, if any existed on the

16 petition date, subject to and strictly limited only to the

17 extent of the amount equal to the aggregate diminution in

18 value of the pre-petition collateral.

19 THE COURT: Okay. All right.

20 The adequate protection payments that you're suggesting

21 as part of the agreement, what is the amount of those

22 payments and when would it be paid?

23 MR. HELT: Sure. Sure, Your Honor.

24 There's a budget, revised budget that was part of the

25 packet that was filed. It's 44-1. It says --


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1 THE COURT: Hold on. Hold on. Let me find

2 it. 44-1?


4 THE COURT: My computer is a little slow. You

5 have to work with me here.

6 MR. HELT: No problem. Mine -- I have a hard

7 copy and it's really small print, so I have to work with

8 myself on that.

9 MR. RUDD: And, Your Honor, this is Jason Rudd

10 for the lenders.

11 The amount is also referenced in the order itself, if

12 you look at paragraph 2 on page 4 of the red-line, sub A.

13 There is a specific narrative related to the payment of the

14 monthly interest at the non-default rate. And the amount is

15 set forth there in --

16 THE COURT: Okay. How much is the amount?

17 MR. RUDD: It's $73,334.68, which is the

18 contractual rate, non-default rate under the loan documents,

19 given the pre-petition debt amount.

20 THE COURT: That's a monthly rate?

21 MR. RUDD: That is the monthly amount of a

22 payment on an annual rate of 60 percent, which is the

23 non-default rate of these loans.

24 THE COURT: Okay. When is the proposed first

25 adequate protection payment?


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1 MR. RUDD: January 4th, 2021, which is also

2 included in lines Sub A of the paragraph of the adequate

3 protection payments in the order.

4 MR. HELT: It's also, Your Honor, in week 3 of

5 the budget, of the revised budget found at 44-1.

6 THE COURT: Okay. 44-1?

7 MR. HELT: At the top, Exhibit A.

8 THE COURT: By itself? Oh, okay, you want me

9 to look at Exhibit A?

10 MR. HELT: Yeah. I think it's Exhibit A to

11 44, which was the clean version.

12 THE COURT: Is there a budget attached to it?

13 Hold on. It takes a few minutes to work through all of those

14 different documents and get to the point that you all are

15 talking about. So if you would bear with me for just a

16 minute.

17 Okay. I see the budget. And the funds -- and the

18 payment is included in this?

19 MR. HELT: Yes, ma'am. If you look at, it

20 looks like week 3 is the first payment.

21 THE COURT: Okay. Any other form of adequate

22 protection being proposed?

23 MR. HELT: Yes, ma'am. There is, in paragraph

24 2-C at the top of page 6 of 10 on the red-line, docket 44-2,

25 there's an adequate protection, super-priority claim equal to


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1 the diminution in value that we discussed consistent with 503

2 and 507-B.

3 THE COURT: That's only if adequate -- the

4 other adequate protection measures fail?


6 THE COURT: Does it say that in the order?

7 MR. HELT: Let's see. Yes, proves -- to the

8 extent that adequate protection provided herein proves

9 inadequate to cover diminution in value beyond the equity

10 cushion. That's in paragraph -- the previous page, page 5 of

11 10, paragraph C.

12 THE COURT: Okay. What does diminution in

13 value beyond the equity cushion mean?

14 MR. HELT: I think, actually, Your Honor, it

15 should have just said -- it should just say, to cover

16 diminution in value, period. There was a delineation above

17 that out that equity cushion. But we don't think there will

18 be diminution in value because there's an equity cushion.

19 But to the extent there is diminution in value, then there is

20 a super-priority claim granted.

21 THE COURT: So this -- again, I'm not quite

22 sure I understand what it means to be beyond the equity

23 cushion. So diminution in value beyond the equity cushion

24 meaning at a point at which a secured claim becomes an

25 unsecured claim?


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1 MR. HELT: I think actually, Your Honor, the

2 words beyond the equity cushion should be eliminated.

3 MR. RUDD: And, Your Honor, this is Jason Rudd

4 for the lenders. That's correct. In the revisions to the

5 order that were exchanged late last night and this morning,

6 the language not already covered by the equity cushion was

7 removed from other provisions in this order. It was intended

8 to be removed from that provision, as well. And I apparently

9 didn't make it to the final draft that was uploaded. So that

10 language in the final interim order that is submitted for

11 signing that, in value beyond the equity cushion, can be

12 removed. And hopefully that addresses Your Honor's concern

13 about the meaning of that provision.

14 THE COURT: Okay. But what we're talking

15 about is the diminution in value of the creditor's

16 collateral, right?

17 MR. RUDD: Yes, Your Honor.

18 THE COURT: Okay. Let's say that, of the

19 collateral. Is collateral defined as a cap C collateral? I

20 don't think it is.

21 MR. RUDD: It is, Your Honor, is Sub B of the

22 preamble.

23 THE COURT: If you will correct that. Okay?

24 MR. RUDD: Yes, Your Honor. Thank you.



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1 And what is the evidence of immediate and irreparable

2 harm?

3 MR. HELT: Mr. Toth's declaration, Your Honor,

4 that without the use of cash collateral, we can't pay our

5 expenses in the ordinary course of business.

6 THE COURT: And how is that immediate and

7 irreparable harm?

8 MR. HELT: If we don't pay the expenses, then

9 we can't operate our business. If we can't operate our

10 business, we call into jeopardy our ability to close the

11 transactions that we're contemplating that will return what

12 we hope to be a dividend to the creditors.



15 I just wanted to point out, Your Honor, a couple of

16 more -- you had asked is there additional adequate

17 protection. There's some reporting requirements further in

18 the order.

19 THE COURT: Okay.

20 MR. HELT: And the agreement to make -- which

21 I think is probably unwritten, at least in all cases in which

22 I'm the debtor's counsel, but we put it in here any way that

23 the debtors' counsel and the professionals will be made

24 available at reasonable times and upon reasonable notice to

25 answer questions for the lender. So that's also adequate


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1 protection.

2 And then, finally, there's an adequate protection

3 requirement to maintain insurance coverage. Which, again, I

4 think goes without saying, given the U.S. Trustee guidelines

5 and requirements. But it's in here, as well.

6 THE COURT: Okay.

7 MR. HELT: And then finally, the termination

8 date, it's called the interim termination date. It's on page

9 8 of 10. This consent -- this -- the provisions of this

10 order, this order terminates on January 22nd. So the

11 contemplation is is that the week of -- that week, we come

12 and have a second, either a second interim or a final

13 hearing, depending on the constitution of any sort of

14 Creditor's Committee that week, at some time that's

15 convenient for the Court's calendar.

16 THE COURT: Okay.

17 MR. HELT: The 22nd is a Friday, Your Honor,

18 just for your own clarification, understanding.

19 Other than that, unless the Court has specific

20 questions, I would ask the Court to enter the proposed agreed

21 order as modified on the record. And we will make that

22 change, Your Honor, and we can send to chambers a red-line

23 showing that change. And then if you can enter it, that

24 would be great.

25 THE COURT: Okay. So I have -- first of all,


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1 does anyone else wish to be heard with respect to the cash

2 collateral motion?

3 MR. LINDEMANN: This is Blake Lindemann, Your

4 Honor. I would request to be heard.

5 THE COURT: All right. You may proceed.

6 MR. LINDEMANN: Thank you.

7 So first with the changes that were made to the most

8 recent cash collateral order. It's uncertain whether the

9 proposed lien will attach to avoidance power actions.

10 Docket --

11 THE COURT: No. I can tell you right now, in

12 17 years I've never signed order that does that, an interim

13 order. So I won't be signing that order, if it does. Okay?

14 MR. LINDEMANN: Thank you for that, Your

15 Honor.

16 The second concern we had is the structure and history

17 of this loan transaction. Typically, as Your Honor knows,

18 when there's a loan that's given by a legitimate lender like

19 Wells Fargo with the security at the time of lending, it's

20 common that these requests would be made. The issue we here

21 is we have a twisted history. We have a securitization of a

22 loan in December of 2019. I saw some documents that were

23 filed late last evening. I didn't see any UCC-1s that would

24 reflect an actual security. I didn't see any evidence that

25 these loans were actually funded two years before that. And


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1 the concern we have is that there were never actually any

2 loans. And the second concern we have is that this loan may

3 be subject to avoidance, because it seems -- seemingly the

4 security was perfected within one year. And the third issue

5 we have, Your Honor, is there's no disclosure as to whether

6 any of these secured parties, or the representatives, or

7 shareholders are insiders. And given the claims that will be

8 made in this case, it appears there's going to be significant

9 avoidance power actions. We don't know the extent that there

10 are avoidance power actions against these very parties.

11 So from our perspective, it's premature to be issuing

12 any adequate protection payments to various parties that may

13 be subject to avoidance power actions. It's premature to be

14 giving any money out to a party that hasn't demonstrated a

15 loan was funded or that they have a valid security interest

16 in the assets and UCC-1.

17 And for those reasons, we would object to the use of

18 cash collateral, to the extent either super priority is

19 given, or adequate protection payments are offered until

20 further proof is given.

21 THE COURT: All right. Does anyone else wish

22 to be heard with respect to the cash collateral motion?

23 MR. RUDD: Your Honor, this is Jason Rudd for

24 the lenders.

25 Your Honor, first, I would say that we -- the lenders,


25

1 we submitted a witness and exhibit list with a copy of our

2 exhibits at docket number 36, which includes the general loan

3 documents, as well as the UCC-1 supporting the perfection of

4 the liens that are referenced in the cash collateral order.

5 And I would move for admission of MCA Exhibits A through I.

6 THE COURT: And that's docket number what?

7 MR. RUDD: Docket number 36, Your Honor.

8 THE COURT: All right. Any objections?

9 All right. Exhibit A through Exhibit I, MCA Exhibits A

10 through I which has been reflected on the Court's docket as

11 docket number 36 is admitted, or are admitted.

12 All right. Anything further on the cash collateral

13 motion?

14 MR. RUDD: And, Your Honor, even further

15 response to the arguments that were just made, the

16 declaration that was filed by the debtors walks through the

17 balance of the loan used to fund the debtors, as well as the

18 secured nature of the debtors. But more importantly, as an

19 interim order, this order is not seeking affirmation by the

20 debtors or this Court of the validity, extent, and priority

21 of these liens. It is merely providing us adequate

22 protection, to the extent there is a diminution in value and

23 collateral in which we actually have a lien. So the rights

24 and concerns that were raised by counsel are just not at

25 issue in an interim hearing for purposes of this order.


26

1 Those issues can be addressed at a final hearing. And we

2 would anticipate addressing them at the hearing that

3 Mr. Helt requested for the week of January 18th.

4 MR. LINDEMANN: Your Honor, this is -- go

5 ahead, I'm sorry.

6 MR. EASTLAKE: Your Honor, this is David

7 Eastlake of Greenberg Traurig on behalf of SSP Legacy

8 Tennyson Center, LLC, which I'll just refer to at this

9 hearing as SSP. SSP is a landlord on two commercial office

10 spaces leased by the debtors.

11 We filed an objection, a limited objection and

12 reservation of rights last night to the debtors' motion for

13 interim use of cash collateral. And I'd just like to start

14 by saying, Your Honor, at the outset, we don't have an

15 objection to the debtors' use of cash collateral generally.

16 We understand that. But what we do object to is the budget.

17 And specifically the fact that the budget fails to include

18 sufficient budgeted amounts for payment of post-petition

19 lease obligations, which payments are required under Section

20 365(b)(3).

21 And if you look at the budget filed as recently as this

22 morning at docket number 44-1, there is a line item for rent.

23 And if you look at that line item over the 13-week budget

24 period, only $3,000 in rent is budgeted for that period, with

25 essentially $1,000 being budgeted the first week of January,


27

1 the first week of February, and the first week of March.

2 The rental obligations that will become due to SSP

3 under the leases far exceeds this amount. We're talking a

4 six figure difference here. And I reached out yesterday, I

5 had some discussions with Mr. Scannell. It's my

6 understanding in talking to him that the post-petition rent

7 payable to SSP is not included anywhere in the proposed

8 budget, notwithstanding the fact that the Bankruptcy Code

9 requires the debtors to timely perform and pay all

10 post-petition commercial lease obligations as they become due

11 under the leases, until those leases are assumed or rejected.

12 And I'll posit here, Your Honor, there is not even a motion

13 to reject currently on file with respect to these two leases

14 in which SSP is the landlord.

15 I spoke -- as part of my discussions with Mr. Scannell

16 yesterday, we were surprised late in the afternoon that the

17 debtor is taking the position that, you know, the premises

18 were formerly surrendered prior to the petition date and that

19 they would soon be filing a motion to reject. Your Honor, we

20 dispute that the lease premises were ever formally

21 surrendered. It is our assertion that the debtors remain in

22 possession and are responsible for timely payment of

23 post-petition rent under Section 365(b)(3). As I said, Your

24 Honor, we just found out about this late afternoon. SSP is

25 in the process of reviewing its records and gathering


28

1 additional facts. But here's what I can tell the Court

2 preliminarily about this issue.

3 First, I'm informed that SSP has not been able to

4 locate, at least thus far, any formal written notification

5 from the debtors of their intent to vacate and surrender the

6 premises prior to the petition date. I asked Mr. Scannell if

7 he could provide any prior written correspondence to -- that

8 would evidence the debtors' intent to formally surrender

9 prior to the petition date and I've received no response.

10 Second, Your Honor, it doesn't appear the debtor has

11 ever attempted, even attempted to schedule a walk through of

12 the premises which, of course, is commonly done upon

13 surrender. Nor have the debtors, it appears, ever returned

14 their access key cards to the building and lease spaces. The

15 debtors have subtenants at each of the office buildings that

16 are subleasing a portion of each of the premises. And it is

17 my understanding that those subtenants are still there. They

18 have not surrendered and vacated the premises.

19 And, Your Honor, I found out -- I was informed right

20 before the hearing this morning that the building lead

21 engineer was actually onsite at the 5100 Tennyson Parkway

22 building to conduct routine maintenance and to check the

23 building management system for proper operation. This is

24 routine for the building lead engineer to do this. He was in

25 there this morning at approximately just shortly after 9 a.m.


29

1 to insure that the system is working properly and that there

2 were no alarms in the system that would require any

3 maintenance or repairs. This is particularly important right

4 now, Your Honor, with COVID and office spaces being largely

5 vacant.

6 The building management system is located in the

7 electrical room on the fourth floor of the building. And we

8 are told that -- by the building lead engineer that while he

9 was on his way to this room, he did observe that World

10 Ventures had furniture, computers, marketing apparel, office

11 supplies, and other items present on the first and fourth

12 floors of the building.

13 Your Honor, as we uncover additional facts and

14 information, we're confident that we will be able to present

15 sufficient evidence the debtors' lack of surrender at the

16 appropriate time. As I said, Mr. Scannell indicated

17 yesterday the debtors would soon be filing a motion to reject

18 the leases nunc pro tunc to the petition date, which we will

19 obviously contest. We do not believe and we dispute the fact

20 that the leases were ever -- the lease spaces were ever

21 surrendered prior to the petition date.

22 And what we're asking for simply today, Your Honor, is

23 that until such time as this dispute is teed up and

24 adjudicated, presumably again in connection with the debtors'

25 forthcoming motion to reject the leases nunc pro tunc to the


30

1 petition date, that the budget should include all

2 post-petition lease obligations that will become due and

3 payable to SSP, including January rent that will become due

4 as early as this Friday.

5 Your Honor, SSP, part of our limited objection was our

6 rights we're reserving and preserving all of our rights and

7 remedies under the leases available to it at law

8 (indecipherable word) equity. And, Your Honor, for these

9 reasons, we believe the cash collateral motion should not be

10 granted, absent modification of the debtors' budget to

11 include all post-petition lease obligations that will become

12 due and owing and payable to SSP under the leases until those

13 leases are formally assumed or rejected by the Court.

14 THE COURT: Okay. Does anyone else wish to be

15 heard with respect to cash collateral?

16 MR. HELT: Your Honor, this is Marcus Helt.

17 Just a couple of brief follow-up.

18 THE COURT: Hold on. Let me make sure there's

19 no one other than the debtor that wants to be heard on the

20 cash collateral matter.


22 THE COURT: Does anyone else wish to be heard

23 with respect to cash collateral?

24 MS. HAWKINS: Yes. My name is Tabitha Hawkins

25 pro se as a creditor.


31

1 In regards to the severance payments, I would like to

2 see those broken out as to how those severance payments would

3 be remitted and to whom they would be remitted to.

4 THE COURT: Okay. Are you one of the people

5 that would be receiving a severance payment?

6 MS. HAWKINS: Yes, ma'am. Yes.

7 THE COURT: Okay. All right. Let me hear

8 from the debtor.

9 MR. HELT: Sure, Your Honor.

10 With respect to severance, I know severance payments

11 are being made during this interim period. We have it in the

12 budget in a future time for a placeholder, subject to further

13 order of this Court, because those severance payments are

14 pre-petition claims, pre-petition unsecured claims.

15 With respect to the landlord, I think there's a

16 dispute, as you heard from the landlord. That issue, that

17 dispute is not for today. It's for a later period. If, in

18 fact, there's an administrative claim that Mr. Eastlake can

19 show there was benefit to the estate, then we'll deal with it

20 at that time. But as you probably heard, there is a dispute.

21 We believe we surrendered the premises. We believe we

22 haven't used the premises. There is a subtenant that is

23 scheduled to vacate tomorrow. That subtenant has already

24 paid rent directly to the landlord. There is or was some

25 FF&E abandoned by the debtors there. So that issue will come


32

1 up in due course under a motion to direct performance under

2 365(d)(3) or stay relief to terminate the lease. So that's

3 not an issue for today.

4 MR. EASTLAKE: Your Honor --

5 MR. HELT: The follow-up to Mr. Rudd,

6 there's -- he's right. There is no stipulation to the claim,

7 the validity of the claim, the amount of the claim. There's

8 no release in this order. There's not even a challenge

9 period. So all rights were reserved for the estates directly

10 and derivatively. So I think that solves that objection.

11 MR. EASTLAKE: And, Your Honor, this is David

12 Eastlake, again, on behalf of SSP.

13 Mr. Helt mentioned, you know, we would have an admin

14 claim showing whatever benefits the estate has. Your Honor,

15 it's more than that. It's a Section 365(d)(3) Code mandate

16 that post-petition lease obligations be timely paid when they

17 become due under the lease. That is not subject to any kind

18 of benefit conferred to the estate. The Code is very clear

19 about that. So that's what we're talking about. Right now,

20 January 1st, lease -- rent becomes due and it's not budgeted.

21 It's not anywhere in the budget. And that's the issue we

22 have. Yes, there's a dispute --

23 THE COURT: I understood your issue. I

24 understood it when you argued it. And you're not to

25 interrupt someone else's argument again. Okay?


33

1 MR. EASTLAKE: Understood, Your Honor.


3 Mr. Helt, you may continue.


5 And with that, with those statements and those

6 responses, Your Honor, I think we'd ask you to overrule the

7 objections, enter the agreed order as modified on the record,

8 and we can move on to the next first day motions.

9 THE COURT: Okay. Well, the one area where

10 there is some problems, Mr. Helt, is the notion of making a

11 payment under an interim order without -- when there are

12 potential challenges, or somebody asserts that there are

13 potential challenges to the liens and what happens to that

14 payment that is made. As a typical matter, I usually don't

15 allow adequate protection payments to be made on the interim

16 order, because there's so little notice provided to anybody.

17 But here where there is an assertion that there may be some

18 challenge to the liens, and I don't know if there will be or

19 will not be, I'm fairly reticent to authorize a payment to be

20 made at the interim stage. Of course, we regularly authorize

21 payments, adequate protection payments at the final hearing

22 stage, but not at an interim hearing state. And given the

23 issues in this case, I'm not inclined to authorize a payment

24 during the interim phase, until we get to final order.

25 MR. HELT: Okay, Your Honor.


34


2 the lenders. May I address that issue?

3 THE COURT: You may.

4 MR. RUDD: Thank you, Your Honor.

5 Just in response to, I think it's typically in orders,

6 particularly interim orders where any payment has been made,

7 I have also included language that, should the Court rule

8 later that either the adequate protection or the liens or the

9 claims are otherwise invalid such that the payment should not

10 have been made, that there will include a claw-back provision

11 such that the payment is made, but subject to further order

12 of the Court.

13 THE COURT: Well, that sounds really good.

14 That sounds really good. And if it was an entity that had

15 excellent credit rating and we had evidence that they had the

16 financial ability to provide for the claw-back that's one

17 thing. Here we don't have anything like that.

18 MR. RUDD: Understood. Thank you, Your Honor.

19 THE COURT: Okay. All right. So based on the

20 arguments and the evidence before the Court, the Court will

21 authorize the use of cash collateral substantially the terms

22 agreed to between the parties with the exception of the

23 adequate protection payment being made during the interim

24 order. The Court will consider adequate protection payments

25 in the context of the final order after notice is provided to


35

1 all creditors of the proposed adequate protection payments.

2 And to allow parties an opportunity to consider or assert

3 whatever objections they have to the lien to the secured

4 creditor. But for now, all I'm inclined to do is basically

5 preserve status quo until we get to final hearing with the

6 use of cash collateral that's necessary to get to the final

7 hearing.

8 With respect to the issue of the rent, rental payments.

9 I think just because something is included in a budget,

10 doesn't mean you're getting paid. It just means that it's

11 included in the budget. If the debtor has an objection to

12 the claim, or objections, they will be asserted and not paid.

13 So I don't think the inclusion of an item in a budget alters

14 the fact that there seems to be some dispute between the

15 parties about what is owed that they're leasing, whether the

16 lease has been terminated or otherwise pre-petition. So

17 under those circumstances, I don't see any reason to add

18 payments to the budget -- payments for rent to the budget.

19 Having said that, the landlord/creditor can certainly assert

20 whatever rights they have and we'll have those hearings in

21 fairly short order, if we need to. Okay?

22 With respect to the issue of severance payments. I

23 think this is not the motion to consider severance payment

24 issues. This is simply about whether the debtor is

25 authorized to use cash collateral. And it seems to me if you


36

1 want cash -- if the debtor needs to use cash collateral to

2 make severance payments, they will have to be taken up

3 separately because we're not at that stage just yet. So I'm

4 overruling that objection.

5 So with that, the Court will approve the use of cash

6 collateral. Mr. Helt, you'll upload the form of order along

7 with the -- any exhibits to the order as one single document.

8 And you'll upload that through E-Orders upload. Do not email

9 it. Do not file it in the CMECF system. Upload it through

10 E-Orders uploads. Okay?




14 I'll yield the podium to --

15 THE COURT: Okay. And I need to give you a

16 final hearing date.


18 THE COURT: Let's see. I think Ms. Rasco --

19 how about -- do you expect we're going to have a lengthy

20 hearing at the final hearing, or do you think it's going to

21 be a shorter hearing?

22 MR. HELT: I expect it to be a shorter

23 hearing, Your Honor.

24 THE COURT: Okay. In that event, let's have

25 the hearing on January 19th at 2:30 p.m.


37

1 MR. HELT: Thank you, Your Honor. We'll

2 insert that date and that time in the order that we upload.

3 Thank you.



6 the lenders.

7 I would also ask if Your Honor would set deadlines for

8 filing of proposed adequate protection, as well as objections

9 to those --

10 THE COURT: Notice of any adequate protection

11 to be provided needs to be sent out to all creditors at least

12 seven days before the hearing.

13 MR. RUDD: Thank you, Your Honor. And for

14 formal objections to proposed final relief for that hearing,

15 is there a deadline Your Honor would like, as well?

16 THE COURT: A formal objection to the adequate

17 protection payment? Is that what you're saying?

18 MR. RUDD: Yes, Your Honor.

19 THE COURT: Three days prior to the hearing.

20 MR. RUDD: Thank you, Your Honor.


22 MR. HELT: Thank you, Your Honor. I'll yield

23 the podium to my colleague, Tom Scannell. Thank you.

24 MR. SCANNELL: For the record, Your Honor, Tom

25 Scannell, Foley & Lardner, proposed counsel to the debtors.


38

1 Unless the Court prefers otherwise, I would suggest

2 taking the motions in the numerical order filed on the

3 docket. We have nine matters left. I will do my best to

4 move as swiftly through these as possible and answer any

5 questions the Court has.

6 Next on the docket is the notice of complex case

7 designation filed at docket number 7 in the lead case. The

8 debtors have more than $10 million in debt. The debtors also

9 have more than 50 parties in interest. In fact, more than

10 18,000 parties in interest and creditors were served with the

11 petitions and notice of this hearing. Accordingly, we

12 believe given the assets, the liabilities, and the number of

13 parties that are involved in these cases, the six

14 consolidated jointly administered cases are ripe and

15 appropriate for complex case designation.

16 We are seeking entry of the order that was attached, or

17 the proposed order, rather, that was attached to the motion.

18 And the relief sought and set forth in the proposed order

19 filed on the docket conforms to the standard complex case

20 procedures ordered in this District and previously ordered by

21 Your Honor setting forth the requirements for the debtors to

22 file the service list of exactly which parties have to

23 receive notice of which matters, the setting of omnibus

24 hearings, the specific negative notice language and 23-day

25 objection period for complex cases, and the procedures and


39

1 detailed instructions for requests to participate

2 telephonically. Now I'm aware, given that we're all on the

3 phone today, that the COVID restrictions have limited almost

4 all, if not all, of the proceedings before Your Honor to

5 telephonic procedures. So if the Court prefers specific

6 instructions to be inserted into paragraph 3 of the proposed

7 order with the dial-in, then we can do that now, or we can

8 handle that on a per hearing basis with Ms. Rasco, or

9 Ms. Marzett for the specific dial-in instructions.

10 We have not received any objections to this motion.

11 And I'm happy to answer any questions the Court may have at

12 this time.

13 THE COURT: All right. Does anyone wish to be

14 heard with respect ot this matter?

15 All right. I think we'll hand the issues on a

16 per-hearing basis where you all can contact Ms. Marzett.

17 Okay?

18 MR. SCANNELL: Very well.

19 THE COURT: And they don't put the security

20 code in the order, because the security code can change from

21 time to time and it does update from time to time. So we

22 need to do that on a per-hearing basis. Okay?

23 MR. SCANNELL: Yes, Your Honor. Thank you

24 very much.

25 THE COURT: Okay.


40

1 MR. SCANNELL: The last matter -- oh, I'm

2 sorry, Your Honor.

3 THE COURT: No, go ahead. You may proceed.

4 MR. SCANNELL: I apologize, Your Honor.

5 The last matter on the proposed form of order in

6 paragraph 2, we left highlighted, bracketed, open items for

7 the setting of omnibus hearings. We can reach out to

8 Ms. Marzett and Ms. Rasco after hearing before this order is

9 entered to obtain those dates and times. I don't think we

10 need to do that on the record right now. I just wanted to

11 make that note for the record.

12 THE COURT: Okay. I think if you can just

13 leave a blank for some hearings, for your initial hearing

14 dates, we can fill that in for your initial hearing dates.

15 And then once you have those hearings, you will contact the

16 Court from time to time to obtain further hearing dates.

17 MR. SCANNELL: Yes, ma'am.

18 THE COURT: Okay. All right. Anything else

19 on this matter?

20 MR. SCANNELL: No, Your Honor.

21 THE COURT: Thank you. The motion's approved

22 and you'll upload the order through E-Orders upload. Okay?

23 MR. SCANNELL: Yes, ma'am.


25 MR. SCANNELL: Next on the docket, Your Honor,


41

1 filed at docket number 8 in the lead case is the motion to

2 extend time to file schedules and statements of financial

3 affairs. As mentioned during the presentation on the motion

4 for joint administration, the schedules and SOFAs in this

5 case, or in these cases will be filed separately on each of

6 the six dockets by the six debtors. The current deadline to

7 file schedules and statements is January 4th, 2021, which is

8 14 days after the petition date. In the motion that's

9 present before the Court, we initially requested a 30-day

10 extension to file the schedules and statements, which would

11 push that current deadline out to February 3rd, 2021. Given

12 the complexity, the number of parties involved, the number of

13 assets, the number of liabilities, the type of business

14 operations that are involved, it's going to take a little bit

15 of time to make sure we get this right. However, just

16 yesterday on the docket the 341 Meeting of Creditors was set

17 in these cases for January 29th, 2021 at 10 a.m. So I

18 normally -- you can't really have a meaningful 341 Meeting

19 without the schedules and SOFAs being on file for some period

20 of time before the meeting. So we're trying to balance the

21 interest and keep the case on track and get the necessary

22 disclosures filed prior to the 341 Meeting. I would now ask

23 the Court if we could file the schedules and statements in

24 each of the six cases prior to the 341 Meeting on January

25 22nd, 2021, that's a full week ahead of the 341 Meeting. And


42

1 that's an 18-day extension of the current deadline. This is

2 the debtors' first request to extend this deadline. We

3 believe it's a fair compromise. And respectfully request

4 that the Court enter an order in the format proposed as

5 attached as an exhibit to the motion with the modification of

6 the January 22nd, 2021 date as a compromise.


8 heard with respect to that matter?

9 MR. LINDEMANN: Yes, Your Honor, this is Blake

10 Lindemann. May I be heard on that?


12 MR. LINDEMANN: Your Honor, based on counsel's

13 alteration of that order, our objection is withdrawn on that

14 motion.



17 THE COURT: Anyone else wish to be heard?

18 All right. The motion's approved with the modification

19 stated on the record today.

20 MR. SCANNELL: Thank you, Your Honor.

21 Next is the motion to establish complex case notice

22 procedures filed at docket number 9 in the lead case. With

23 these jointly administered cases designated as complex, we

24 are seeking an order from the Court pursuant to Bankruptcy

25 Rule 2002 to streamline the distribution of notices and


43

1 reduce the cost to the estate, while nonetheless balancing

2 the interest and ensuring that due process is -- due process

3 notice is provided to all of the necessary parties in this

4 case based on the relief requested or the papers filed. As I

5 mentioned, the debtors have more than 18,000 parties in

6 interest on the master consolidated matrices for the six

7 debtors. The cost of providing notice of every filing in

8 this case to every one of those 18,000 parties would be so

9 time consuming, cost prohibitive, and burdensome to the

10 estate, I'm not sure how we would ever get through the cases.

11 However, balancing that practicality, we have to insure

12 that due process is provided to the necessary parties. So

13 with this motion, what we're asking the Court to do is

14 balance these interests and propose certain equitable

15 limitations on the notice provided in these cases.

16 Similarly, we are requesting -- I'm sorry, specifically. So

17 the notice of Meeting of Creditors, the notice of claims bar

18 date, and the disclosure statement, plan, balance and

19 objections, basically the entire plan process, would be

20 served on all 18,000 plus in the creditor matrix to insure

21 that those critical dates and deadlines that apply to every

22 party, every party in interest are adequately delivered and

23 adequate notice is provided. On every other matter filed in

24 the case, we've proposed to serve by first-class mail, ECF,

25 and any other special notice that a party specifically


44

1 reaches out and lets us know, they can even send me an email

2 that says, I would like to get notice in this case by email,

3 we would add them to the list for everything else filed in

4 the case. And that -- but other than that, it would be --

5 the papers filed in this case, service would be limited to

6 the U.S. Trustee, the 40 largest unsecured creditors in each

7 of the six cases, the Committee counsel, if one is appointed,

8 the secured lender's counsel, any party that files a request

9 or serves our office with a request for special notice, any

10 party that files a notice of appearance in the cases, the

11 United States Internal Revenue Service, and any party whose

12 direct relief is sought in the subject motion or the papers

13 filed in the case. So an example of that last category, Your

14 Honor, would be a claimant in the claim objection, or a

15 landlord in a motion to reject a lease, or some of the

16 motions that are already before the Court today. The

17 insurance motion, all of the insurance providers were

18 specifically sent and served notice of that motion. Same

19 with the utilities. Same with the taxing authorities.

20 With these constituents served with those papers, we

21 believe due process will be served on these parties, while

22 creating a cost effective service system for the estates. We

23 believe that the relief requested is standard for similar

24 complex cases. We believe the relief is appropriate, under

25 the circumstances in this case and in the best interest of


45

1 the estate and all parties in interest.

2 We respectfully request that the Court enter the order

3 attached as an exhibit to the motion. And I'm happy to

4 answer any questions the Court may have.

5 THE COURT: All right. Can you explain to me,

6 because I'm not quite -- obviously this is a new case, so I'm

7 trying to get some perspective here. Explain to me the

8 business model of the debtor, what kinds of revenue it has

9 coming in, and then what kind of expenses it has going out.

10 And that's all in the context of what are the different

11 categories or buckets of unsecured creditor interests in the

12 case.

13 MR. SCANNELL: Your Honor, I can do my best

14 impersonation of Mr. Toth to do that at a high level.

15 However, Mr. Toth is intimately involved with that

16 description. And I believe he could provide the Court with a

17 more detailed answer to that question. Mr. Toth, I believe

18 is sworn in. If he's not, Mr. Toth is available to be sworn

19 in and I believe would be the best person to provide a

20 detailed answer to the Court for that question.

21 THE COURT: All right. Mr. Toth, are you

22 present?

23 MR. TOTH: Yes, ma'am.

24 THE COURT: All right. Let's swear the

25 witness in.


46

1 (The witness was sworn by the courtroom deputy.)

2 THE COURT: Okay. Did you understand the

3 question the Court has posed?

4 THE WITNESS: Yes, Your Honor.

5 THE COURT: Okay. If you have a response, I'd

6 like to hear it.

7 THE WITNESS: Absolutely.

8 So the business, itself, is primarily driven by the

9 sale of memberships through sales representatives who, in

10 turn, will turn around and engage in the sale and

11 participation of travel sales. Membership sales allow the

12 purchaser access to exclusive travel opportunities at

13 discounted rates. And as Mr. Helt described in the early

14 opening argument, there are various tiers of access. And

15 each tier comes with a higher degree of membership dues, as

16 well as travel amenities and benefits. Membership dues are

17 billed to the purchaser monthly and on a -- generally on a

18 recurring basis via credit card. And travel sales are

19 conducted using two different types of business models; one

20 under a merchant model and one under an agent model. And

21 these are offered as standalones or packages primarily to

22 individuals, as well as other (indecipherable word), other

23 parties.

24 Under the merchant model, the debtor facilitates the

25 booking of a hotel or an airline or any kind of activity that


47

1 might be desired. And a majority of those travel

2 transactions relate to the sale of package vacations. And

3 then under the merchant model, the debtor acts as an agent in

4 the transaction tracking the reservations that are booked

5 through the purchaser or by the purchaser to the relevant

6 travel provider and/or amenity provider. And they receive

7 commissions and ticketing fees. Under the merchant model,

8 those are booked and the customer will pay directly to the

9 debtor a deposit and then future travel will commence

10 accordingly.

11 They also provide as part of the membership

12 subscriptions, there's access to a back-office software

13 application which they call the representative business

14 system. And there's a fee associated with accessing that

15 gives the individual representative access to a computer base

16 system that allows them to replicate a website. It also

17 allows them to track and monitor their associated down line,

18 as well as any training materials, presentations, any

19 (indecipherable word) documentation, and any upcoming trips

20 that are being preassembled.

21 And then finally, they receive other revenue in the

22 form of marketing and promotion sales. So if a sale

23 representative needs any kind of documentation, any kind of

24 merchandising materials, that can be purchased through the

25 debtor. And that constitutes a fairly small portion of the


48

1 revenue. On order of magnitude, obviously membership sales

2 and travel sales constitute a bulk of the revenue generated

3 by the debtor.

4 From a cost perspective, obviously there is a cost

5 associated with the execution of those trips that are going

6 to be traveled in the form of paying for the hotel, paying

7 for the airline tickets, paying for the rental cars and

8 activities, as well as the bundling and planning associated

9 with those trips. There's also general and administrative

10 expenses for the management of the business, as well as the

11 infrastructure that takes place, which is predominantly an

12 on-line administered business model where you have sales

13 representatives that receive commissions for their

14 transactions associated with memberships only. But to

15 administer the entire business, there's a fairly robust

16 technology (inaudible word) that is maintained and paid for

17 by the debtor on a recurring basis. And then going back to

18 the commissions. That is also a fairly substantial cost

19 associated with administering the estate.

20 Does the Court have any questions or needs further

21 clarification on how the business, itself, runs?

22 THE COURT: I think I understand that concept.

23 Thank you.

24 All right. Does anyone else wish to be heard with

25 respect to this matter?


49


2 Lindemann. I wish to be heard.


4 MR. LINDEMANN: Your Honor, the first

5 objection that we have to this motion is we do agree with the

6 debtors that serving everything via first-class mail on such

7 a robust group of parties would be prohibitive. The issue we

8 have is we've already gotten several calls from

9 representatives who did not -- whose email was not included

10 as part of the service. And what we would request -- I know

11 counsel had said that there are 18,000 persons on the service

12 list. We would request that all representatives be given

13 email notice pursuant to Federal Rule of Bankruptcy Procedure

14 7005, Rule 5 of the Federal Rules of Civil Procedure. And

15 the reason we ask that is because there are several people

16 who have lost money in this enterprise who assert claims.

17 And I just want to make sure that every single representative

18 that has signed up with this company is at least given the

19 basic documents under Federal Rule of Bankruptcy Procedure

20 2002. And I can already, in reading the list that's provided

21 by Stretto the claims administrator, I can already tell that

22 there are names that were not included.

23 THE COURT: Okay. Responses?

24 MR. SCANNELL: Yes, Your Honor.

25 I'm not certain the exact persons to which


50

1 Mr. Lindemann is referring. My presumption would be if they

2 were left off the list, they could possibly be a former

3 salesperson or former sales representative that the debtor is

4 not -- does not consider to be a current creditor or current

5 party in interest in the case. If there are specific persons

6 that were inadvertently omitted from that service list, we

7 will certainly add them upon notice. I mean, this is the

8 first time I'm hearing that. I've not received any request

9 from any specific person for supplemental notice, however,

10 saying it's filing a notice of appearance in the case. Any

11 party that wishes to receive notice via email will certainly

12 receive notice of any and all filings in the case via email

13 from our -- from the debtors' proposed claims and noticing

14 agent. And that contingency is accounted for in the proposed

15 order attached to this motion.

16 I would note for the record that the rule cited, 7005

17 and Federal Rule of Civil Procedure 5, that's only applicable

18 in adversary cases. Looking at 9014(c), 7005 isn't even

19 applicable to contested matters, much less simple notice

20 procedures. So I would argue that 7005 is inapplicable to

21 the scope of this motion as being limited to notice provided

22 and service in adversary proceedings. But the bottom line

23 is, if there's someone that wants notice, we're not going to

24 keep it from them. If they file a notice of appearance or

25 send me an email requesting notice via email, then we will


51

1 certainly provide it to them.

2 THE COURT: Okay.

3 MR. LINDEMANN: Your Honor, could I briefly

4 respond?


6 MR. LINDEMANN: So I would agree with counsel,

7 7005 would be for the adversary proceeding. But 2002 would

8 apply to all creditors. And something counsel said concerned

9 me. He said, former representatives were not included. And

10 there's no basis for that, because many of those persons are

11 folks that lost money in this scheme. So those people need

12 to be noticed. I think that at minimum, all of the main

13 documents under Federal Rule of Bankruptcy Procedure 2002

14 should be noticed on all of the representatives of the debtor

15 via email, if it saves cost. And I haven't heard anything

16 that doing so would be prohibitive or expensive. And my

17 request is limited to service by email. I'm not even

18 requesting that the entire representatives or former

19 representatives be served by first-class mail.

20 THE COURT: Well, it seems to me anyone who

21 wants notice can simply file a request for notice or send an

22 email for notice to the debtors' counsel. So -- and they can

23 ask for email via mail or by email and they need to provide

24 that information. There's nothing about the proposed

25 procedure that would limit that. I think the issue,


52

1 candidly, is that they're not contacting the debtors' lawyer

2 with the information, they're contacting you. So it seems to

3 me that I'm prepared to approve the motion, but the order

4 will also provide that anyone who requests notice in writing,

5 whether by email or otherwise, should be added to the

6 creditor matrix. So anyone who wishes to be notice of

7 anything beyond the general matters that were already

8 excepted out at the beginning of the hearing, like claims bar

9 dates and such, notice can be limited. And anyone who wants

10 notice beyond that can certainly request it. That request

11 must be in writing. Email counts as writing.

12 MR. LINDEMANN: Your Honor --

13 THE COURT: And that request must be sent to

14 counsel for the debtor, or filed with this Court.

15 MR. LINDEMANN: I'm sorry to interrupt you.

16 This is Blake Lindemann.

17 The concern I had, I didn't state it very specifically.

18 Many people aren't even getting notice of these petitions.

19 So I understand if we limit notice. But my concern is that

20 there are several victims who are just not getting notice of

21 these proceedings, period, and should be done by email. And

22 that's my only point. Thank you.

23 THE COURT: Okay. Well, I don't think that

24 adding the stuff will do anything. If they're not getting

25 notice, they're not getting notice and the debtor has some


53

1 significant consequences with that.

2 MR. LINDEMANN: Very well. Thank you.

3 THE COURT: Okay. So it's important for the

4 debtor to make sure they add anybody who holds a claim, may

5 hold a claim against this estate and any other parties in

6 interest. It's -- if you believe there are people who

7 haven't gotten notice, you're certainly welcome to let them

8 know. And the debtor does need to be proactive in making

9 sure that everyone who is entitled to notice gets notice.

10 And as we're sitting here today, I certainly could not tell

11 you whether former colleagues, et cetera, are entitled to

12 notice. We just don't have enough information. But I think

13 the debtor understands that the debtor runs the risk if

14 someone is not properly noticed.


16 THE COURT: Okay. All right. So let's see.

17 And then Stretto was going to be the noticing agent; is that

18 right?

19 MR. SCANNELL: Tom Scannell for the debtors,

20 yes, Your Honor.

21 THE COURT: All right. So you may upload the

22 order with respect to this matter.

23 MR. SCANNELL: Thank you, Your Honor. We

24 certainly will.

25 THE COURT: Okay. All right. What's the next


54

1 matter?

2 MR. SCANNELL: The next matter is the

3 insurance motion filed at docket number 10 in the lead case.

4 THE COURT: Okay.

5 MR. SCANNELL: Your Honor, the debtor is

6 seeking authority to continue paying the insurance premiums

7 for the policies that were obtained pre-petition. We are

8 seeking its authority on an interim basis to continue paying

9 premiums in the ordinary course to maintain the current

10 coverage over the debtors' assets and operations. In the

11 ordinary course of business, the debtors maintain 13

12 insurance policies providing coverage for liability,

13 casualty, white collar, Worker's Comp, accident, cyber, data,

14 umbrella, and director and officer liability. A detailed

15 list of the 13 specific policies interiors is attached as

16 Exhibit A to the motion. And the aggregate annual premium

17 for the 13 policies is $360,409.02. This total aggregate

18 number is itemized by policy and carrier in Exhibit A to the

19 motion. 12 of the 13 policies are financed through AFCO

20 Credit Corporation, just an insurance premium financier.

21 With just a single policy that is financed directly by the

22 debtors to the carrier, which is Zurich for the blanket

23 casualty coverage. A true and correct copy of the AFCO

24 premium insurance agreement is attached as Exhibit B to the

25 motion for purposes of disclosure. The total monthly


55

1 premiums owed for the 13 policies, which is just the $360,000

2 total number divided by the monthly payments that are due by

3 the debtors is $29,459.47. $29,139.47 of that, which covers

4 12 of the 13 policies, is payable to AFCO and $320, which

5 makes up the residual balance is due direct to Zurich.

6 These expenditures that we're asking for are covered by

7 the cash collateral budget pursuant to Section 1112(b)(4)(C)

8 of the Bankruptcy Code. And the United States Trustee

9 guidelines for Region 6, the debtors are actually required to

10 maintain their insurance coverage in the ordinary course of

11 business. The Toth declaration provides additional support

12 for why this relief is necessary in the ordinary course of

13 business. We are asking that this order be entered on an

14 interim basis with all rights reserved for a final hearing.

15 This relief is standard for similar complex cases. We

16 believe this relief is appropriate under the circumstances

17 and in the best interest of the estate.

18 Your Honor, we have not received any objections to this

19 motion. At this time, we respectfully request that the Court

20 enter the order attached as an exhibit to the motion. And I

21 am happy to answer any questions the Court may have.


23 heard with respect to this matter?

24 All right. The Court will approve the motion.



56

1 THE COURT: And you will upload the order

2 through E-Orders upload. Okay?

3 MR. SCANNELL: Yes, Your Honor. We will not

4 file it and we will not email it. We will send it only

5 through E-Orders upload.

6 THE COURT: There you go.

7 MR. SCANNELL: Next, Your Honor, at docket

8 number 13 in the lead case, the debtors filed a motion to

9 continue honoring customer incentive programs. With this

10 motion, the debtors are requesting permission to continue

11 honoring certain pre-petition incentives that were earned by

12 the customers and sales reps of the debtor that accrued

13 pre-petition, but as we're in the post-petition period now

14 have not yet been redeemed. So if any of those incentives

15 are redeemed post-petition now, the debtors will be required

16 to honor those incentives earned pre-petition. So

17 technically, they are pre-petition obligations that the

18 debtors would be asked to honor post-petition. That's why

19 we're seeking this relief.

20 It's helpful to get a little background on where we're

21 coming from here. Naturally as with any business that has

22 ongoing operations and obligations with their customers,

23 there's generally going to be some overlap with obligations

24 that were accrued and entered into prior to the bankruptcy

25 that the debtors need to perform post-bankruptcy. And while


57

1 they are debtors in possession, to continue doing business in

2 the ordinary course to maintain the relationship with

3 customers, vendors, and sales representatives.

4 And the incentives we're talking about here, there's

5 three main types that were outlined and described in

6 paragraphs 12, 13, and 14 on page 5 of the motion. There are

7 what are called DreamTrip points. There's travel dollars.

8 And then there are Rovia bucks. The DreamTrip points accrue

9 when the customer opts into the DreamTrip's rewards program

10 and by signing up for monthly-based travel memberships. And

11 they can earn additional points based on their fees for

12 travel memberships. These -- think of these like frequent

13 flyer miles. The travel dollars are incentives that the

14 debtors use to reward their sales representatives for

15 successful sales efforts. The travel dollar equates to the

16 value of 1 dollar in U.S. currency to be used by sales reps

17 to help offset the purchase of various travel experiences.

18 Lastly, the Rovia bucks are acquired by sales

19 representatives when they opt to convert their travel dollars

20 to Rovia bucks. So the travel dollars and the Rovia bucks

21 are tied hand in hand. Think of those as travel vouchers.

22 So instead of having to pay cash for a vacation, they can

23 submit the voucher to the vendor. And then when the vendor

24 honors that voucher, the company, the debtors pay ut of

25 pocket.


58

1 So the incentives that we're talking about here are

2 redeemable travel awards like any other credit card points

3 that accumulate for usage. Frequent flyer miles. Hotel

4 vouchers. As I mentioned, when the customer or sales rep

5 goes to pay for travel directly through a third-party vendor,

6 they can, instead of paying cash, use these incentives that

7 have accrued as currency to offset the cost of the trip.

8 When the vendor honors that virtual currency, the debtors pay

9 the vendor cash directly for the cost of the voucher.

10 It's important to note that the costs that we have

11 projected that may be incurred that were accrued pre-petition

12 but may be redeemed by customers and sales reps

13 post-petition, it's only in the ordinary course of business,

14 consistent with pre-petition course of dealing. And it's

15 covered by the budget in line item product costs on the first

16 page of the budget, i.e. cog. The amount that we've set

17 forth here is consistent with our prior course of dealing and

18 looking at the months past and in the weeks past of typical

19 incentives that have been redeemed by customers and sales

20 reps. That's what we're projecting to go forward with.

21 What we're seeking for really, to preserve the

22 relationships with our customers and sales reps and not

23 disrupt the debtors' business. This is more of a

24 reputational preservation of the going concern value. So the

25 first three weeks on an interim basis, we're asking for


59

1 permission to continue honoring these incentives. At the

2 early stage of these cases if the debtors fail to redeem the

3 travel incentives earned by customers and sales reps, that

4 could do irreparable damage to the debtors' reputation and

5 our going concern value. I mean, imagine a scenario where a

6 customer or multiple customers or sales reps decide to take

7 trips. They submit their payments that they think they've

8 earned and those payments are rejected, I don't think it

9 would take long for consumers and sales reps in this industry

10 to spread that news about a service provider in bankruptcy

11 that no longer follows through on its promises. That could

12 cause irreparable damage to not only our operations going

13 forward, but the revenue generated forward in our industry.

14 No one is going to want to come forward and purchase the

15 going concern value of the debtors, if the entire industry

16 thinks that, well, they don't honor what they said they were

17 going to do any way.

18 So we're just asking for a little bit of flexibility in

19 these first three weeks of the case to assess and perform and

20 continue honoring these incentives really tapered by the

21 exercise of two things. Number one, it has to be an exercise

22 of sound business judgment in the best interest of creditors

23 and in the ordinary course of business. And it has to be

24 within the limits of the budget. We really have to maintain

25 confidence in our customers and sales reps right now, and


60

1 continuing to honor these obligations are a huge part of

2 achieving that goal.

3 I can imagine that there could be a scenario where an

4 incentive is not performed. So you have to be a current

5 sales rep or a current customer of the debtor to redeem these

6 incentives. If you leave the company or if you're no longer

7 a sales rep for the debtors, those points go away. So if

8 there were any incentives that tried to be honored after a

9 sales rep left, then those would be rejected. It's a bit of

10 a peculiar request. It's an ordinary course request. It's

11 an operational request. And I will rest now to answer any

12 questions the Court or any other party may have.


14 to be heard with respect to this matter?

15 MR. BINFORD: Your Honor, this is Jason

16 Binford with the Texas Attorney General's Office. I'd like

17 to be heard on it.


19 MR. BINFORD: Your Honor, I do have some

20 concerns and I did voice them briefly with debtors' counsel

21 prior to the hearing, but did not have a chance to get a

22 written objection on file. So I apologize if some of this is

23 being thrown on the debtors' counsel. I did chat with them

24 briefly.

25 What the concern is is the Attorney General's Office


61

1 has been appearing in many, many retail cases recently

2 regarding some of the powers that folks like the debtors in

3 this case are asking for and the potential for them being

4 read too broadly from our consumer protection standpoint.

5 And what I'll refer to in this case is the order granting

6 this customer program motion provides the debtors, in their

7 business judgment, are authorized but not required to honor

8 certain obligations under the debtors' customer programs.

9 Authorized, but not required, I think could be read that they

10 don't have to honor the debtors' customer programs if they

11 determine in their business judgment that that's what's best

12 for their company.

13 And I appreciate the debtors' counsel's discussions and

14 intentions to continue honoring them from a reputational

15 standpoint. But we all understand that sometimes Chapter 11

16 doesn't go as planned. What I'm concerned about is the

17 scenario, for example, if the debtor just determines to --

18 I'll pluck an example out of the sky. They determine to

19 terminate their travel dollar program. As the order is

20 currently written, there's no requirement for them to provide

21 any notice or opportunity to be heard before Your Honor on

22 what would probably be pretty substantial customer --

23 consumer protection implications for terminating a program on

24 no notice. Now, I know debtors' counsel is going to say,

25 look, we would never do that. But, again, it's nice to have


62

1 the belt and suspenders of language in an order.

2 Again, I haven't filed an objection or even sent

3 proposed language to debtors' counsel, as is my normal

4 practice, just because I ran out of time. But I think an

5 easy fix to this may be since the debtors' have a relatively

6 soon final hearing coming up on January 19th, I think we'll

7 all blink and it will be January 19th, that it may make sense

8 for this order to be entered on the interim basis and allow

9 me to chat a little further with debtors' counsel on perhaps

10 baking in simply notice provisions, if they do determine to

11 terminate one of these significant programs. We're not

12 looking to flyspeck how they run their business. But on one

13 of these larger programs if they are terminated, again, I do

14 believe it would have consumer protection implications that

15 we might want a chance to get in front of Your Honor to

16 discuss.

17 THE COURT: So do I understand that to mean

18 that you don't object to an interim order for now, but you

19 want to continue a dialogue to see if you could resolve this

20 issue by the final; is that what I'm understanding?

21 MR. BINFORD: That's correct, Your Honor.

22 It's not currently set up to be an interim order, so I guess

23 that would be my request. It needs to say that we -- that

24 Your Honor grants this on an interim basis, as opposed to a

25 final basis. And give me a little bit more runway to chat


63

1 with debtors' counsel about some of these issues.

2 THE COURT: So I guess why isn't that already

3 baked into this, because they provide for -- they're not

4 obligated to, so they have the authority to do it, if they

5 want to, which they must get the authority because of the

6 pre-petition nature of the obligation or program -- not

7 obligation. And so once they have the authority, you all can

8 talk about it and resolve it however you think it should be

9 resolved.

10 Is there something different that you're suggesting

11 that the Court do?

12 MR. BINFORD: Well, Your Honor, ideally what I

13 would like to see in a final order is that if the debtors in

14 their business judgment determine to terminate one of these

15 programs, the debtors shall provide notice to parties,

16 including the Attorney General's Office a short notice period

17 for 10 days, it can be that or even shorter. Just an

18 opportunity to understand that that is being terminated and

19 the opportunity to get in front of Your Honor. That is not

20 currently how the order reads. My read of this order, as it

21 stands, is that the debtors would be permitted to terminate

22 one of these programs on no notice. And that there would not

23 be an opportunity prior to the effective -- the occurrence of

24 the termination to get in front of Your Honor and talk about

25 the implications of such a termination. And I do understand


64

1 the pre-petition nature of it. But I do believe that

2 Mr. Scannell talked about there does seem to be a pretty

3 significant straddle of pre-petition/post-petition issues

4 regarding these customer programs. So if I'd had the ability

5 to get a written objection on file what it would have said

6 would be that we would like to see some short notice period

7 if the debtor, in their business judgment, does make the

8 determination to terminate one of these customer programs.

9 THE COURT: Okay. Let me hear from the

10 debtor.

11 MR. SCANNELL: Your Honor, Tom Scannell for

12 the debtor.

13 We are happy to convert this to an interim order and

14 work with Mr. Binford and the AG's Office to fashion language

15 that addresses those concerns. I think that's appropriate.

16 THE COURT: All right. The motion is approved

17 on an interim basis.

18 MR. LINDEMANN: Your Honor, I'm sorry, this is

19 Blake Lindemann, I would like to be heard, as well, if I

20 could.

21 THE COURT: Oh, I'm sorry, I didn't realize

22 you were -- okay, you may proceed.

23 MR. LINDEMANN: Okay. So based on counsel's

24 clarifications that the items referred to are products,

25 costs, and cogs, that being the DreamTrip, travel dollars,


65

1 and Rovia, so long as this is not cash out the door directly

2 to representatives, we'd be okay with it on an interim basis.

3 But we would reserve the right on a final basis. Our real

4 concern, though, is that these non-monetary financial

5 consideration forms are being paid to persons who are -- have

6 claims under 502(d) against them. And so we don't think that

7 these amounts are appropriate. It's a lot of money early in

8 the case. It's over a million and a half before the next

9 hearing. Nonetheless, if there are some of these folks that

10 are real customers and not representatives, we would agree

11 that that should be paid at this time. And we don't object

12 to that.

13 THE COURT: Mr. Scannell.

14 MR. SCANNELL: Well, as I clarified, Your

15 Honor, there is no cash being paid directly from the debtors

16 to any customers or any sales reps. These are already

17 liability that have occurred or have been incurred and

18 accrued pre-petition and that sit on the debtors' balance

19 sheet. The only -- the cash out of the estate would be to

20 pay the vendors upon a valid incentive being redeemed. And,

21 again, those amounts are completely covered by the budget,

22 agreed to by the secured lender. And, again, all rights

23 reserved for a final hearings. It's just to preserve the

24 status quo on the first three weeks of the case.

25 THE COURT: Okay. All right. I think we will


66

1 simply approve this motion on an interim basis, based on the

2 representations of counsel and having reviewed the motions

3 and the evidence that was provided in the original

4 declaration. The final hearing will be held on January 19th

5 at 2:30 p.m.

6 MR. SCANNELL: Thank you, Judge. We will

7 convert the proposed order to an interim and upload it

8 through the E-Orders upload.

9 THE COURT: Perfect. Thank you.

10 MR. SCANNELL: Next, Your Honor, is the wages

11 motion filed at docket number 16 in the lead case. The

12 debtors have 85 active employees as of the petition date.

13 The debtors have decided that these are the key employees

14 that they need to retain to preserve the status quo of the

15 debtors' operation. At this time, we are seeking authority

16 to pay pre-petition wages, salaries, and benefits amounts

17 owed pre-petition for health care, amounts owed pre-petition

18 for 401(k) accounts, and to pay the withholding taxes

19 incurred in the ordinary course of business.

20 Attached, Your Honor, as Exhibits A and B to the motion

21 set forth the itemized amounts of wages and benefits that

22 accrued pre-petition. And those have been itemized both by

23 category of compensation in Exhibit and then per employee

24 with the accruals in Exhibit B. The names of the employees

25 have been redacted to protect the privacy of the debtors'


67

1 employees. We are seeking at this time to pay an aggregate

2 total of $274,147.98 to the 85 W-2 employees for wages and

3 benefits that accrued prior to the petition date in each and

4 every case qualifying for priority under 507(a)(4) and in

5 compliance with the under the priority cap. The

6 post-declaration explains the need for this relief. For the

7 sake of absolute clarity on the record, we are seeking only

8 to pay W-2 employees of the debtor for the wages and benefits

9 earned within the 180 days prior to the petition in the

10 ordinary course of business at the standard rates subject to

11 the priority cap under 507(a)(4). There are no sales reps

12 and no independent contractors being paid for pre-petition

13 amounts by this motion.

14 And by making these payments, all rights are reserved

15 to object to any claims asserted by the employees. Just

16 because we're making these payments doesn't mean that any

17 502(d) objections, claw-backs, claims objections, or Chapter

18 5 causes of actions are somehow (inaudible word) by the

19 estate. This is just to pay the pre-petition priority cap

20 amounts that would have to be paid any way before we ever get

21 to a distribution to unsecureds. And, by the way, these are

22 folks that we need to keep to insure the operations are not

23 interrupted, Your Honor.

24 So with that, I would submit that the relief requested

25 is very similar and standard for complex cases of this type.


68

1 All payments proposed under this motion conform to and are

2 included in the cash collateral budget. I'm happy to answer

3 any questions the Court may have at this time. And we would

4 respectfully request that the Court enter the order attached

5 as an exhibit to the motion.


7 heard?

8 MR. LINDEMANN: This is Blake Lindemann, Your

9 Honor. I'd like to be heard.


11 MR. LINDEMANN: Your Honor, we had two

12 objections to this motion. One was that no independent

13 representatives or sales representatives be paid. Hearing

14 counsel's clarification, I think that objection is withdrawn

15 that no monies will be used to pay representatives at this

16 time. Second, though, we do have an objection that remains

17 paying insiders significant amounts of money out the door in

18 the early stages of this case before any Committee has been

19 formed. I think there will be -- it will come to pass that

20 there will be significant 502(d) claims, 548, and 547 claims

21 against several of these insiders that the debtors propose to

22 pay. I think the CRO can manage the wind down or sale of

23 this business without paying those monies. And I think it's

24 inappropriate to pay insiders on an interim basis at this

25 time. I agree that the employees who are caught up in this


69

1 mess should be paid. But we would object to payment to

2 insiders on an interim basis, subject to making objections at

3 the final hearing.

4 Thank you.

5 THE COURT: Okay. Anyone else wish to be


7 MR. PAVERMAN: Yes, Your Honor. This is Peter

8 Paverman, UK. May I say something?

9 THE COURT: And are you a creditor, sir?

10 MR. PAVERMAN: Yes, I am, Your Honor. I'm a

11 creditor and I'm a contractor representative for World

12 Ventures and have been for the last 11 years.

13 THE COURT: Okay.

14 MR. PAVERMAN: Your Honor --

15 THE COURT: Are you, yourself, a creditor?

16 MR. PAVERMAN: I am, myself, a creditor. I'm

17 listed --

18 THE COURT: Perfect. You may proceed.

19 MR. PAVERMAN: I'm listed number 6 on the

20 list.

21 As a contractor representative and independent

22 contractor and having been obviously significantly involved

23 in the revenue for World Ventures over the last 10 years, my

24 question would be this. From a layperson's point of view,

25 which is all I can be on this call, over the last 3 years I


70

1 am owed over $574,000 in unpaid commissions, 574,617.36.

2 It's commissions owed to me that I have never been paid for

3 work that I did and business I brought this company. I'd

4 like to know why none of that will be paid to me with

5 reference to the (indecipherable word) of this motion. While

6 I appreciate that the staff and employees of World Ventures

7 who are also significantly important and need to be paid, why

8 the money is not being used to reimburse me for 3 years work

9 I have not been paid for, Your Honor.

10 THE COURT: Okay. And you're looking for an

11 answer from whom?

12 MR. PAVERMAN: Your Honor, I'm not sure of the

13 procedures. Obviously I'm not -- I'm not qualified in this

14 process. This is my first experience at this. I just need

15 to know the debtor, obviously in this case, what are their

16 intentions, are there any intentions to reimburse me for

17 money that's outstanding to me.

18 THE COURT: All right. Well, I think you can

19 have that discussion with the debtor outside of this Court.

20 This is a court proceeding, sir. While it may seem somewhat

21 informal because of the COVID need for hearings using

22 electronic forums, this is nevertheless a hearing. And, you

23 know, I'm not your lawyer. I can't give you legal advice.

24 And I certainly couldn't tell you what the debtors',

25 quote/unquote, intention is. But today we're here to take


71

1 care of the first day motions. And pre-petition wage motions

2 are typical. And that's what we're hearing right now. As to

3 any other issues that you have with the debtor, those should

4 be addressed with the debtor. And if you don't like their

5 answers, you can take whatever appropriate steps that you may

6 choose to take, which may require, among other things, legal

7 representation might be helpful to you. But we won't be

8 responding to that question in particular. But you may

9 certainly contact the debtors' representatives to talk to

10 them after this hearing. Okay?

11 MR. PAVERMAN: Thank you, Your Honor. I

12 apologize for my lack of knowledge on the procedure. I

13 obviously appreciate your comments.


15 All right. So does anyone else wish to be heard with

16 respect to this motion?

17 All right. I'd like confirmation that no one is being

18 paid more than the statutory -- the statutory priority amount

19 and that the payment -- and that the wage payments --


21 the debtor.

22 I'm sorry -- I'm sorry, Judge.

23 THE COURT: And that the wage payments are

24 consistent with the amounts that would have been paid

25 pre-petition.


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2 the record for the debtors.

3 Looking at Exhibit B attached to the motion, I can

4 confirm that, as well. I would ask that Mr. Toth, who is

5 still sworn under oath, also confirm that it's his

6 understanding that that is accurate, that the only amounts

7 being paid pursuant to this motion will be those allowed as

8 priority and subject to the cap under 507(a)(4).


10 THE WITNESS: Your Honor, this is Erik Toth,

11 CRO for the debtor.

12 I can confirm that we have done the calculations to

13 determine that we are not exceeding any caps.


15 All right. The Court will approve the wage motion.

16 All right. Do we have another matter we need to take up?

17 MR. SCANNELL: Yes, Your Honor. Three more

18 matters left. I apologize, four matters left. Let's see

19 here. Three matters left.

20 Next is the -- let's see here. Next is the taxes

21 motion filed at docket 7 -- docket number 17 in the lead

22 case. The debtors are asking to pay certain pre-petition

23 taxes that were incurred in the ordinary course of business

24 and that are entitled to priority under 507(a)(8) that

25 remain unpaid. Attached as Exhibit A to the motion is a


73

1 complete list of the sales and use taxes that have accrued to

2 various domestic taxing authorities prior to the petition.

3 The total amount of sales and use taxes accrued and

4 outstanding as of the petition date is $539,866.47.

5 Since these sales and use taxes qualify for priority

6 under 507(a)(8), these are taxes much like the wages that are

7 entitled to priority and must be paid before any distribution

8 to unsecured creditors is ripe. Likewise, by nature of these

9 sales -- the nature of these sales and use taxes are

10 considered trust fund taxes. And as such, they are not

11 property of the estate. Instead, the debtors are holding

12 these funds accrued for sales and use taxes in trust for the

13 taxing authorities.

14 Accordingly, we believe these taxes are ripe and ready

15 to be paid in the ordinary course of business in order to

16 avoid any disruption of operations or accrual of any

17 additional unnecessary fees. It's a standard first day

18 motion for payment of priority pre-petition taxes, Your

19 Honor. I'm happy to answer any questions you may have. We

20 have not received any objections to this motion.



23 All right. Based on the Court's review of the motion

24 and the Court being advised that these are, in fact, trust

25 fund taxes, sales and use taxes, the Court will approve the


74

1 payments. If you'll upload the order.

2 MR. SCANNELL: Certainly, Your Honor.

3 Two motions left, Your Honor. The next is at docket

4 number 19 in the lead case, the debtors' utility motion. The

5 debtors seek an interim order to approve a $300,000 adequate

6 assurance deposit for the utilities, which is approximately

7 one month's worth of the ordinary course expenses incurred to

8 the utilities to deem the utilities adequately assured by

9 that deposit, prevent the utilities from discontinuing

10 service based on any pre-petition arrears, and approve the

11 notice and objection process if any utilities wish to seek

12 additional adequate assurance.

13 As is typical with any first day utility motion under

14 366, Your Honor, this is being requested only on an interim

15 basis with all rights reserved. The interim order will be

16 served immediately -- if granted, Your Honor. I don't want

17 to be too presumptuous. If the order is granted, it will be

18 served immediately on all nine of the utilities included as

19 Exhibit A to the motion. Immediately upon entry of the

20 docket, we would request that the Court set a final hearing

21 on this matter within, or as close to 30 days after the entry

22 of the order. And any objections by the utilities to the

23 adequate assurance deposit made pursuant to the order would

24 be due seven days prior to the hearing. And we would work

25 with any utilities to try to resolve any objection. If any


75

1 are outstanding, they would be taken up at the final hearing.

2 And with that, Your Honor, all rights reserved for a

3 final hearing. This is, like I said, typical first day

4 utilities motion conforming to the typical first day

5 utilities relief awarded. I'm happy to answer any questions

6 Your Honor has. We have not received any objections to this

7 motion.



10 All right. The Court will approve the motion on an

11 interim basis and set the final hearing on January 19th. I

12 think that gets you right just inside the 30 days.


14 The last motion set on the docket today is the cash

15 management motion at docket 21 in the lead case. Based on

16 the demonstrative aid attached as Exhibit C to the motion,

17 the debtors' current treasury and cash flow systems are

18 admittedly complex. That's why we do have Mr. Toth on the

19 line to walk through any issues that the parties may have or

20 any follow-up questions. I will note at the outset that we

21 have been in touch with Mr. Vardeman, Mr. Salitore, and

22 Mr. O'Neal with the United States Trustee's Office concerning

23 the cash management and treasury motion.

24 Our goal here really is simply to preserve the status

25 quo in the ordinary course. Keep the operations and cash


76

1 flow exactly as it is while we work very quickly and in good

2 faith with the United States Trustee's Office to get

3 comfortable with the cash management system, or make any

4 changes that need to be done to bring it within compliance of

5 Section 345 of the Bankruptcy Code. I will note that

6 pursuant to the United States Trustee's request, we have

7 already requested from every Bank to restyle every account as

8 a debtor-in-possession account. And we will provide any and

9 all reporting requested by the United States Trustee's Office

10 on these accounts.

11 I will say that generally the complexity of the

12 treasury system really stems from the nature of the debtors'

13 international marketing component. As Mr. Toth explained,

14 the debtors are in the business of marketing travel packages,

15 so that naturally that's going to involve some international

16 travel component. In order to insure that the customers'

17 international travel bookings are actually performed and

18 delivered, the debtors are required to use affiliated

19 (indecipherable word) that are formed under local

20 sovereignty. It's my understanding that some of the foreign

21 sovereignties would not allow a purely American company to

22 operate or do business in that country. So there has to be a

23 foreign affiliate that is formed under the local sovereignty

24 to conduct business in that foreign jurisdiction. And what

25 goes along with that is that some or all of those foreign


77

1 affiliates are required to maintain a foreign bank account to

2 deal in that currency.

3 It's important here to maintain this current cash

4 management system in the very first two or three weeks of the

5 case, because the debtor generates a relatively substantial

6 amount of revenue from the foreign affiliates. So the net

7 operating revenue that is generated by the foreign operations

8 that's initially held by the foreign affiliates is funneled

9 back to the bankruptcy estate under the current bank accounts

10 held by the domestic debtors. So these funds are used to

11 generate revenue and they should be maintained in the very

12 interim period.

13 And it's also important to note that as of the petition

14 date, the debtors were already in the process of

15 consolidating and restructuring these accounts. So this is

16 something we're already doing. We just happened to file

17 bankruptcy in the middle of a restructuring of our bank

18 account system and treasury management. So we're only asking

19 for a very brief interim relief period so that we can

20 maintain the current status quo and preserve the work that's

21 being done in coordination with the Trustee's Office in good

22 faith. And complete this process and make sure that we're

23 not only exercising sound business judgment in the best

24 interest of the estates to preserve operations, maximize cash

25 flow, get as much revenue generated for the creditors as


78

1 possible during the sale process of debtors' in possession.

2 But also that it's in compliance with the Bankruptcy Code and

3 we can get the United States Trustee comfortable with where

4 things are and what they're doing.

5 As I said, we have provided the Trustee -- the

6 Trustee's Office with a copy of the motion and a proposed

7 first interim order. We have already been engaged in

8 discussions with the Trustee's Office regarding this motion.

9 And our goal here is merely to preserve the status quo of the

10 enterprises' cash flow and treasury management system while

11 we work with the Trustee's Office.

12 I do not -- Mr. Vardeman is on the phone. But I do not

13 believe we've had any objection from the Trustee's Office to

14 this first interim order. And I would note that all parties'

15 rights are fully reserved, pending a final hearing. But

16 looking to keep in place what we have currently, Your Honor,

17 so we don't disrupt any cash flow or revenue generated while

18 we work very quickly with the Trustee's Office and any

19 parties in interest that have standing to insure that Section

20 345 of the Bankruptcy Code is either in compliance --

21 substantially -- being substantially complied with, or are

22 waived to the extent it's not. And with that, I will yield

23 the podium and respond to any questions the Court may have.




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1 MR. LINDEMANN: Yes, Your Honor. This is

2 Blake Lindemann. May I be heard?


4 MR. LINDEMANN: Your Honor, we had three

5 objections to this motion. The first, I think, is being

6 dealt with based on counsel's representations that the

7 accounts will be noted as debtor-in-possession accounts and

8 that they'll work with various depositories to include the

9 right amount of money on hand and the right bonding.

10 The second issue we had was a reference in the motion

11 and order to making intercompany transfers with non-debtor

12 parties. There's still no evidence as to how much those

13 transfers are, what those transfers are for, who those

14 transfers are to. We'd like better information on that. And

15 we don't think that should be approved based on the current

16 record.

17 The third issue we had with the motion was we don't

18 think this is an appropriate case to maintain existing forms.

19 We think that representatives and those who are dealing with

20 the debtor should be notified of the bankruptcy and it's not

21 appropriate to use existing forms. When people are investing

22 a lot of money in an enterprise, they should know about a

23 bankruptcy case. So we do believe that that part of the

24 relief either should be deferred for consideration, or should

25 be denied on an interim basis. Thank you.


80

1 THE COURT: All right. Anyone else wish to be


3 All right. Response from the debtor?


5 As far as a record, set forth in Exhibit D to the

6 motion is a detailed description of exactly which

7 intercompany transfers -- the only non-debtor affiliates are

8 the foreign -- foreign entities, foreign affiliates.

9 Mr. Toth and the CRO's office have spent a considerable

10 amount of time putting forth the detail -- if you turn to

11 Exhibit D, I mean, down to the penney it's exactly the

12 snapshot of the intercompany transfers that are requesting to

13 be made. The reason why some intercompany transfers are

14 required, there's a -- from time to time some of the -- some

15 funds from the debtors' domestic accounts are used to pay

16 expenses of the foreign affiliates to float them until they

17 can generate the net revenue, the net gross revenue, the

18 positive cash flow that comes back into the estate. It's not

19 as though the debtors' estate assets are going to be funneled

20 and thrown down a black hole to which there's no return.

21 There is some need from time to time for the debtors to

22 use their domestic accounts to pay a foreign affiliate

23 expense as a part of the global cash flow treasury management

24 system that ultimately generates a substantial amount of

25 revenue. I'm looking at the top of D. Just last month


81

1 alone, the net revenue -- I'm sorry. The total revenue

2 generated only from the international affiliates that flow

3 back to the estate, the most recent reporting month at the

4 top, $4,882,480.39. If some or all of that cash flow system

5 is disrupted, we risk losing that revenue on a monthly basis.

6 So under the U.S. Trustee's watchful eye and working

7 with them every day, if required, we will insure that no

8 funds are being put to purposes not in the best interest of

9 the creditors and the estates. And the evidence in the

10 record that Your Honor has before the Court is the Toth

11 declaration explains the need to maintain this in the first

12 three weeks of the case, along with the detail described in

13 Exhibit D. I would humbly request that -- and based on the

14 negotiations and ongoing good-faith discussions with the

15 United States Trustee Office, the detailed record before the

16 Court, and the very short interim basis to preserve the

17 status quo, this motion is ripe for entry by Your Honor.

18 THE COURT: Okay. Detail for me any cash

19 that's going out from the debtor to a non-debtor affiliate,

20 in the context of these, quote/unquote, intercompany

21 transfers, in the next three weeks. How much will we --

22 MR. SCANNELL: Your Honor, can I ask Mr. Toth

23 to answer that question under sworn testimony?

24 THE COURT: Well, let's swear him in.

25 THE WITNESS: Your Honor --


82

1 THE COURT: Hold on. We're going to swear you

2 in.

3 (The witness was sworn by the courtroom deputy.)

4 THE COURT: All right. You may proceed.

5 THE WITNESS: Your Honor, just to put into

6 perspective and then I'll get into the specific question.

7 There are 131 different bank institution accounts

8 across the globe, of which 35 accounts are constituted

9 underneath the six entities in the petition. As of Monday,

10 December 28th, 2020, the balance of those accounts that are

11 underneath the six debtor entities that are in the petition,

12 $3.6 million was the outstanding balance. And those that

13 were international entities outside of the petition

14 represented $1.27 million.

15 What the debtor attempts to do is be totally

16 self-sustaining in each of the different countries that it

17 operates. And based on the timing of the revenue receipts,

18 cash receipts and ultimately expenditures associated with

19 travel expenses related to customers, if there is a local

20 employee, employee expenses, whether it's payroll or utility

21 costs for a facility that might be there, or any other

22 insurance divisions associated with maintaining a legal

23 entity, those funds from cash receipts from sales generated

24 in that local country are attempted to cover those operating

25 expenses.


83

1 In the Exhibit D in the docket number filed, you can

2 see at the very last page there is a section where we start

3 to look at funds that are available to make those payments

4 versus funds that are in excess. Meaning that there are

5 excess funds at the local bank accounts that can completely

6 cover any obligations that are due. For those foreign

7 entities that do not have sufficient cash receipts or no cash

8 receipts in their bank, funds in their bank account, in order

9 to maintain operations in those country, there is an

10 obligation from the parent to provide additional funding for

11 it to continue the normal course of business operation.

12 In totality, as we start to think about what the

13 obligation is there, there's roughly $70,000 of intercompany

14 transfers that will have to happen at any given point in time

15 in a monthly period, depending on the timing of cash

16 receipts. And the snapshot that we gave you was for the

17 month of October, the latest closed financial statements.

18 And it showed, essentially, that there some countries would

19 need more, some countries would need less. But in totality,

20 the obligation due was about $70,000 that needed to be

21 transferred.

22 At this time, are there any other questions that I can

23 answer for the Court?

24 THE COURT: What are the benefits to the

25 debtor entity from transferring these funds?


84

1 THE WITNESS: So I'll give a specific example.

2 And I can go into any other details.

3 The benefits are, because this is a global operation,

4 sales that are generated internationally do require -- in

5 some countries do require local entities to be maintained and

6 do require the operations to be executed locally. Without

7 those local operations, there is a potential that future

8 sales would not occur and, therefore, cash receipts into the

9 debtor back to the accounts that are designated underneath

10 the petition legal entities would not occur. Very specific

11 example would be Hong Kong sales represent almost one-third

12 of the total sales of the consolidated organization. And

13 without a legal entity there present to be able to maintain

14 operations, the business is in jeopardy of reducing total

15 sales by one-third.

16 THE COURT: Okay. All right. Thank you.

17 Does anyone wish to cross-examine this witness?


19 Lindemann. I would like to ask a few questions.

20 THE COURT: You may proceed.

21

22

23

24 (no omission)

25 ERIK TOTH


85

1 The witness, having been previously sworn to tell the truth,

2 testified on his oath as follows:

3 CROSS-EXAMINATION

4 BY MR. LINDEMANN:

5 Q. Good afternoon, Mr. Toth. I have a question.

6 You mentioned that one-third of the income is from the

7 Hong Kong entity; is that correct, World Ventures?

8 A. One-third of the receipts.

9 Q. Is that one-third of the total revenues of the

10 collective enterprise?

11 A. That's correct.

12 Q. And do any of those sales representatives that the

13 revenues derive from, are they in China?

14 A. It's hard to say exactly where they all originate

15 from, because sales to that local entity for travel to that

16 specific country can come from many different locations, but

17 are operated and managed and ultimately the revenue

18 recognized at that location where the trip travels.

19 Q. And World Ventures, are they licensed to do

20 business in China under the Chinese statutes?

21 A. To my knowledge, I believe so. I don't have a

22 document in front of me that can confirm that.

23 Q. And you understand you're under oath when you said

24 that?

25 A. I do. I've been engaged by the debtor since


86

1 November 17th. I'm doing as -- the best I can without a

2 legal document in front of me that can confirm that that

3 actually is the case. I can't answer your question in an

4 affirmative.

5 Q. What percentage of total revenues of the enterprise

6 are derived from representatives or travel packages purchases

7 by representatives?

8 A. Can you restate your question? Are you trying to

9 ascertain if you look at total revenues for the business, how

10 much comes from membership sales versus travel sales?

11 Q. How much come from membership sales and travel

12 sales that are purchased through memberships?

13 A. Well, travel sales are only available to people

14 that have memberships. And membership sales are required in

15 order to participate in the program. I will tell you on a

16 consolidated basis there is for the month of October roughly

17 60 percent of the total revenues, which accounted for $12

18 million in October, $7 million came from membership sales, $3

19 million came from travel sales, and roughly $1.5 million came

20 from the business system sales. The fees that

21 representatives paid active to the back office systems

22 access.

23 Q. To confirm, zero percent of sales come from persons

24 who are not representatives, correct?

25 A. No, that's not correct. The sales come from


87

1 membership dues. Sales come from travel that is performed.

2 And then sales come from back office systems access, as well

3 as -- and I talked about this earlier in the hearing, that

4 there are some other training events, as well as marketing

5 materials, but those are, I would constitute, as immaterial.

6 That is $31,000 in October and training and event sales about

7 $395,000.

8 Q. In operating this enterprise, are you familiar with

9 the FTC 70 percent rule?

10 MR. SCANNELL: Your Honor, I'm going to object

11 to relevance. I don't think this has anything to do with the

12 $70,000 that we're talking about for intercompany transfers

13 during the interim period for cash management purposes.

14 THE COURT: Objection sustained.

15 Q. The $70,000, is that the amount you intend to send

16 to the foreign entities before the final hearing? Is that

17 the total amount?

18 A. That's the total estimated amount, plus or minus, I

19 would say a reasonable variation, yes.

20 Q. And what's the estimated variation you're

21 requesting?

22 A. I'd say plus or minus 10 percent. Which is

23 consistent with the order for cash collateral.

24 MR. LINDEMANN: No further questions at this

25 time, Your Honor.


88


2 Does anyone else have any examination for this witness?

3 Any redirect?

4 MR. SCANNELL: No, Your Honor.

5 THE COURT: All right. The witness is

6 excused.

7 Anything further?


9 Lindemann. Just one further point, if I may.

10 Counsel hasn't addressed whether the forms are going to

11 include the notice of bankruptcy. And we objected on that

12 ground and I didn't hear a response as to whether

13 representatives are going to be notified that they're dealing

14 with a company in bankruptcy. I think it's appropriate from

15 a consumer protection standpoint, as well as just good

16 practice. And they noted that they have a certain inventory

17 of forms. It's unclear when that inventory is going to run

18 out. So we didn't hear a response to that objection.

19 THE COURT: Okay. I guess I don't understand

20 what you mean, includes a notice of bankruptcy. A notice of

21 bankruptcy is going out to all creditors. I think the matrix

22 has 17 to 18,000 people on it. And there is a notice of

23 bankruptcy that's going out. So I don't really understand

24 what you mean about forms and notices of bankruptcy.

25 MR. LINDEMANN: So there are -- by the


89

1 declaration of Mr. Toth, there are 60,000 representatives,

2 two-thirds of which who don't have notice of this case.

3 There's another 200,000 people who lost money who don't have

4 notice of this case. And our point is not that they be given

5 formal bankruptcy notice. That was part of a different

6 motion and the Court said it's not ruling on that issue. My

7 comment is the forms the debtor uses. Part of the motion

8 requests to continue to use the same forms in business,

9 including their agreement with the representatives. I don't

10 think that's appropriate, especially in interim relief. I

11 think they need to include in those forms that they have

12 filed for bankruptcy.

13 And the reason that's relevant, Your Honor, is because

14 part of what they do is they tell all of the representatives,

15 you're going to make a fortune. This is a great company.

16 And part of their sales and promotion package is that they're

17 a viable great business earning billions. There's videos on

18 YouTube. There are several witnesses who could come forward

19 who say that they were drawn into this scheme based on those

20 representations. So it's not appropriate that those people

21 and future representatives, they should be made aware of the

22 current status of this enterprise.


24 Where's the U.S. Trustee on this matter?

25 MR. VARDEMAN: Your Honor, this is John


90

1 Vardeman for the United States Trustee.

2 Typically the only thing that we require the debtor to

3 put on a form would be on the debtor-in-possession account

4 check and the bank account. So as far as other documents

5 that we would require notices, I don't believe that we

6 require that.

7 THE COURT: Okay. Thank you.

8 What is the position of the U.S. Trustee with respect

9 to the motion, itself?

10 MR. VARDEMAN: Your Honor, I think the only

11 concerns that we have is that the debtor comply with Section

12 345 of the Code, that they put money in depositories that are

13 authorized by us. I know that they're using Prosperity for

14 some of them. We have suggested some other depositories. As

15 far as the foreign entities, you know, they don't have the

16 same FDIC protections up to $250,000. I have not been

17 involved in the discussions in this and I know that they have

18 been working with Mr. O'Neal and Mr. Baker and Mr. Salitore.

19 I was kind of thrown into this at the last minute. But I

20 suppose that would be a concern that I might have is that,

21 you know, if they get money that's in a depository or a bank

22 that does not have those FDIC protections, that could be an

23 issue. They have suggested that they would be willing to

24 sweep accounts daily into an FDIC protected or an authorized

25 depository on a daily basis. And that's really all I have to


91

1 say, Your Honor.


3 All right. Does anyone else wish to be heard with

4 respect to this matter?

5 All right. Having heard the arguments and the

6 evidence, the Court will approve the cash management system

7 with the modifications discussed on the record today,

8 including the designation of checking accounts as

9 debtor-in-possession accounts.

10 Mr. Scannell, you'll upload the order.



13 MR. SCANNELL: Your Honor, I believe that

14 concludes the matters set for first day hearings on the

15 docket today.


17 MR. SCANNELL: Unless the Court has any

18 further announcements or business, I believe that concludes

19 the debtors' business today.

20 THE COURT: Oh, hold on just one second.

21 On the cash management system, I want that to be an

22 interim order. I want ot see a final order at the final

23 hearing on January 19th. Okay?

24 MR. SCANNELL: Yes, Your Honor, we're happy to

25 do that.


92

1 And, lastly, thank Your Honor, again, for making time

2 for the debtors during the holidays. I really appreciate the

3 accommodation. Mr. Helt wanted me to thank you for him, as

4 well. So from all of us over here, thank you.

5 THE COURT: That's why we are here. We exist

6 to serve. Let me make sure you all understand, tomorrow is a

7 holiday. So I need you to get your orders in today so that

8 we can get them reviewed, signed, and docketed today.

9 Because otherwise, there's not going to be anybody around

10 tomorrow to be able to enter orders. Okay?

11 MR. SCANNELL: Yes, Your Honor, we'll do it

12 right now.


14 Anything further from anybody else?

15 Thank you. Parties are excused and we're adjourned.

16 (End of Proceedings.)

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1 C E R T I F I C A T E

2 I, CINDY SUMNER, do hereby certify that the

3 foregoing constitutes a full, true, and complete

4 transcription of the proceedings as heretofore set forth in

5 the above-captioned and numbered cause in typewriting before

6 me.

7

8

9

10

11

12

13

14 /s/Cindy Sumner

15 ______________________________

16 CINDY SUMNER, CSR #5832 Expires 10-31-2022

17 Cindy Sumner, CSR 5001 Vineyard Lane

18 McKinney, Texas 75070 214 802-7196

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