A noteholder in envelope maker Cenveo Inc. on Monday asked a New York bankruptcy court to appoint an examiner to look at what it called insider dealing at the company, saying its restructuring plan hands out bonuses to management and shortchanges junior creditors.
Brigade Capital Management LP accused Cenveo’s controlling shareholders of engaging in insider dealings that culminated in a restructuring support agreement that undervalued the company and shortchanged second-tier noteholders while handing out “substantial” equity grants to the current management.
“The RSA thus essentially guarantees management’s receipt of additional significant value and benefits to the detriment of junior creditors,” it said.
The 99-year-old company — one of the largest U.S. printing and envelope companies — declared bankruptcy Feb. 2, saying it hopes to shed $700 million in debt. It said the holders of more than half its first-lien debt had signed off on the restructuring plan.
Brigade, however, said the plan was based on a business plan that was “unreasonably pessimistic at best,” arguing that many of the challenges cited in the plan “do not appear to be long-term or permanent issues.”
It said while the plan includes “no meaningful recovery” for second-tier lienholders or unsecured creditors, it would end with the company’s current management released from estate claims and owning a 12 percent stake in the reorganized company.
“Especially troubling is that the management equity grants would benefit from the overly pessimistic business plan created by management which was used to justify lower debt capacity and thus increase equity value,” it said.
Brigade cited a pair of transactions between Cenveo and an entity it said is controlled by the Burton family — which occupies two board seats and three senior management positions with the company — as well as what it alleged were ties between the Burtons and two other board members as reasons to appoint an examiner.
Brigade also alleged that the day before the bankruptcy petition was filed, the Cenveo board appointed an individual to investigate potential causes of action against company officers, directors and other insiders over pre-bankruptcy conduct, which it said raised a “red flag.”
“Regrettably, however, the appointment of this new director appears to be an attempt by the debtors to control the investigation, and the new director was an individual handpicked by Cenveo’s board of directors, which is controlled by the Burton family — the very individuals whose prepetition conduct would be at issue in the investigation,” it said..
In a phone interview Tuesday, Cenveo counsel Jonathan Henes said an examiner is not needed and called the filing “irresponsible.”
“The facts in the motion are publicly available and have been disclosed in regulatory findings since 2006,” he said.
Counsel for Brigade did not immediately respond to requests for comment Tuesday.
Cenveo is represented by Jonathan S. Henes, Joshua A. Sussberg, George Klidonas, Natasha Hwangpo, James H.M. Sprayregen, Melissa N. Koss, Gregory F. Pesce and Christina L. Briesacher of Kirkland & Ellis LLP.
Brigade is represented by Michael S. Stamer, David M. Zensky, Stephanie Lindemuth, James Savin and Kevin Eide of Akin Gump Strauss Hauer & Feld LLP.
The case is In re: Cenveo CEM Inc., case number 18-22189, in the United States Bankruptcy Court for the Southern District of New York.
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