Solyndra Bankruptcy case

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Chapter 11
)
SOLYNDRA LLC, et al., ) Case No. 11-12799 (MFW)
) (Jointly Administered)
Debtors. )
) Hearing Date: October 17, 2012 at 11:30 a.m.
) Objection Deadline: October 10, 2012 at 4:00 p.m.
) Related Docket No. 1059
OBJECTION OF THE UNITED STATES OF AMERICA, ON BEHALF OF THE
INTERNAL REVENUE SERVICE, TO CONFIRMATION OF
DEBTORS’ AMENDED JOINT CHAPTER 11 PLAN
KATHRYN KENEALLY
Assistant Attorney General
CHARLES M. OBERLY, III
United States Attorney
ELLEN W. SLIGHTS
Assistant U.S. Attorney
STUART D. GIBSON
Stuart.D.Gibson@usdoj.gov
ANNE E. OLIVER
Anne.E.Oliver@usdoj.gov
Attorneys, Tax Division
U.S. Department of Justice
P.O. Box 403
Ben Franklin Station
Washington, D.C. 20044
(202) 307-6586 (o)
(202) 307-2504 (f)
ii
TABLE OF CONTENTS
Page
Introduction - Issue for Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Background - Facts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
A. December 2010. Solyndra begins to Fail; Owners Work to Preserve
NOLs in Case of Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
B. December 2010 - March 2011. The Plan to Preserve the NOLs
Takes Shape. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
C. February - September 2011. Working to Preserve the NOLs in
Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
D. Post-Petition - Planning to Enable Argonaut and Madrone to
Access the NOLs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
E. The NOLs Have Considerable Value to Argonaut and Madrone. . . . . . . . . . . . .15
ARGUMENTS
A. The Court May Not Confirm a Plan Whose Principal Purpose is
Tax Avoidance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
B. Courts Have Refused to Confirm Plans Designed to Enable
Owners of “Shell” Corporations to Emerge From Bankruptcy With
Sizeable Tax Attributes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
C. The Principal Purpose of This Plan IS Tax Avoidance. . . . . . . . . . . . . . . . . . . . .25
Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
iii
TABLE OF AUTHORITIES
Page
CASES
Citicorp Business Credit, Inc. v. Blazon Flexible Flyer,
407 F. Supp. 861 (N.D.Ohio 1976).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
In re International Horizons, Inc., 15 B.R. 798 (Bankr. N.D.Ga.1981). . . . . . . . . . . . . . . . . . . .23
In re Maxim Industries, 22 B.R. 611 (Bankr. D. Mass. 1985).. . . . . . . . . . . . . . . . . . . . . 22, 24, 28
In re Rath Packing Company, 55 B.R. 528 (Bankr. N.D. Iowa 1985).. . . . . . . . . . . . . . . . . . . . .25
In re Scott Cable Communications, 227 B.R. 596 (Bankr. D. Conn. 1998). . . . . . . . 20, 24, 25, 28
In re South Beach Securities, 376 B.R. 881 (Bankr. N.D. Ill. 2007)
aff’d 421 B.R. 456 (N.D. Ill. 2009);
aff’d 606 F.3d 366 (7th Cir. 2010).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 21, 22, 27
In re Washington Mutual, Inc., 461 B.R. 200 (Bankr. D. Del. 2011) . . . . . . . . . . . . . . . . .1
STATUTES
11 U.S.C. § 727. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
11 U.S.C. § 1129. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 20-25
Fed.R.Evid. 803(6).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
House Report No. 95-595, 95th Cong., 1st Sess. 384-385 (1977).. . . . . . . . . . . . . . . . . . . . . . . .24
Internal Revenue Code, 26 U.S.C., § 382. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 8, 15
Senate Report No. 95-989, 95th Cong., 2d Sess. 98-99 (1978),
U.S. Code Cong. & Admin. News 1978. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
MISCELLANEOUS
7 Collier on Bankruptcy ¶ 1129.07 (16th ed. 2012). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
The Disclosure Statement says that th 1 e tax attributes consist of $875 - $975 million in
Net Operating Losses (NOLs), and $12 million in tax credits. The NOLs may potentially be used
to offset future taxable income. The tax credits may be used to offset future tax liabilities. This
Court is familiar with NOLs, having addressed them in In re Washington Mutual, Inc., 461 B.R.
200 (Bankr. D. Del. 2011).
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Chapter 11
)
SOLYNDRA LLC, et al., ) Case No. 11-12799 (MFW)
) (Jointly Administered)
Debtors. )
) Hearing Date: October 17, 2012 at 11:30 a.m.
) Objection Deadline: October 10, 2012 at 4:00 p.m.
) Related Docket No. 1059
OBJECTION OF THE UNITED STATES OF AMERICA, ON BEHALF OF THE
INTERNAL REVENUE SERVICE, TO CONFIRMATION OF
DEBTORS’ AMENDED JOINT CHAPTER 11 PLAN
The United States of America, on behalf of the Internal Revenue Service, a governmental
unit and party in interest, objects to the Debtors’ Amended Joint Chapter 11 Plan (the Plan)
(Docket No. 1059) dated September 7, 2012. The Court should refuse to confirm the Plan under
11 U.S.C. § 1129(d), because its principal purpose is tax avoidance. As discussed in detail below,
the Plan follows a design developed in December 2010 to enable the owners of an empty shell
corporation with nearly $1 billion in “tax attributes”1 to exit bankruptcy with their ownership –
and future ability to use the tax attributes – unimpaired. The only reason for the shell corporation
to exist post-confirmation is to enable its owners to exploit those tax attributes, which would be
lost in liquidation. Earlier this year, one owner valued those tax attributes at $150 million. That
value dwarfs the $7 - $8 million which the Plan proposes to pay to pre-petition unsecured
creditors of both debtors.
2 360 Degree Solar Holdings, Inc. was formerly named Solyndra, Inc.
3 Neilson Dep., 16:20-17:6, 23:12-25:12.
4 Argonaut and Madrone hold the rights to acquire warrants which would give them,
collectively, control of nearly 100% of Holdings. Argonaut plans to exercise that right, but only
after Holdings exits bankruptcy. (Ex. 56) This information is not disclosed in the Plan or the
Disclosure Statement.
5 Argonaut expects to pay about $4.5 million, net, into the Plan. Mitchell Dep., 29:18-
31:10. Madrone expects to pay $3 million. McJunkin Dep., 25:3-13.
2
INTRODUCTION – ISSUE FOR DECISION
The Debtors – 360 Degree Solar Holdings, Inc.2 (Holdings) and Solyndra LLC (LLC) –
have proposed a joint plan which liquidates the only operating business (LLC), while preserving
intact a shell corporation (Holdings) that has had no employees, no tangible assets, and no
business operation since February 2011.3 The Plan Sponsors, Argonaut Ventures I LLC
(Argonaut) and Madrone Partners LP (Madrone) – which are also the DIP and senior secured
lenders, as well as the putative holders of nearly 100% of the equity of Holdings4 – propose to
fund the Plan with the LLC’s assets, and an infusion of cash totaling about $7.5 million (net of
what they expect to recover under the Plan, in addition to their senior secured debt).5 The Plan
proposes to pay the administrative claims in full, and a fraction of the WARN Act claims, while
providing $3 million to the general unsecured creditors of LLC and $810,000 to the general
unsecured creditors of Holdings – enabling those creditors to recover a mere three cents on the
dollar.
Under the Plan, LLC will liquidate. Meanwhile, Holdings will emerge from bankruptcy
with no employees and no active business, but with the interests of its equity holders unimpaired.
While owning no tangible assets, Holdings will emerge from bankruptcy with control over “tax
6 The Disclosure Statement placed this maximum value on the NOLs, applying a 35% tax
rate to the estimated $875-$975 million in NOLs which Holdings plans to take out of bankruptcy
under the Plan. Those NOLs are likely worth less than that, because of the restrictions placed on
their use by § 382 of the Internal Revenue Code, and the time value of money. On information
and belief, Argonaut’s estimates of value seek to account for those factors.
7 Most, if not all, of the facts recited in the Introduction and in this section are undisputed.
They are drawn from documents filed in this case, documents produced by the Debtors and the
Plan Sponsors in discovery, and deposition testimony of representatives of the Debtors and the
Plan Sponsors. We are filing with this Objection an appendix containing the supporting
documentation for the facts recited in this section. To avoid confusion, except for two exhibits
attached to this Objection which were not used in the depositions (Ex. 73 and 74), the exhibits
bear the same numbers used in the depositions. Counsel for the United States, the Debtors, the
Plan Sponsors and the Committee of Unsecured Creditors all stipulated during the depositions
that all documents produced by the Debtors and the Plan Sponsors in response to discovery
requests were (1) authentic; and (2) business records for purposes of Fed.R.Evid. 803(6).
Neilson Dep., 7:15-8:14; McJunkin Dep., 8:7-22; Mitchell Dep., 8:1-14.
3
attributes.” The Disclosure Statement values those tax attributes at as much as $350 million – 46
times the amount of the Plan Sponsors’ net contributions to the Plan.6 This year, one of the Plan
Sponsors valued its 50% share of the NOLs for financial reporting purposes at $75 million – 17
times the amount of its $4.5 million contribution to the Plan, and ten times the total amount
of payments the Plan proposes to make to pre-petition unsecured creditors of both Debtors.
On the objection of a party in interest that is a governmental unit, the Court may not
confirm a plan of reorganization if the plan’s principal purpose is the avoidance of taxes. On the
facts and circumstances here, is the principal purpose of the Plan the avoidance of taxes?
BACKGROUND – FACTS7
This section discusses the facts relevant to the IRS’s objection, most of which are not in
dispute. The events giving rise to the objection have their genesis in events that occurred, and
decisions which Argonaut and Madrone made, beginning in December 2010. Accordingly the
fact narrative begins in late 2010.
Ex. 45. Madrone had asked Argonaut to r 8 epresent its interests in the negotiations with
DOE. Deposition of Madrone designated witness, Jamie McJunkin, 30:16-31:9.
9 Deposition of Argonaut designated witness, Steven Mitchell, 39:8-10, Ex. 46.
10 Ex. 46, Bates 4758-4760.
4
A. December 2010. Solyndra Begins to Fail; Its Owners Work to Preserve NOLs in
Case of Bankruptcy.
In the fall of 2010 – according to the report of the Chief Restructuring Officer – Solyndra
was facing a financial crisis. It was trying to build a new manufacturing plant, while at the same
time it was running out of cash. Beginning with a series of meetings in early October 2010,
Solyndra sought additional financial commitments from the U.S. Department of Energy (DOE),
as well as additional capital from the marketplace and its equity holders.
Those efforts culminated in a series of meetings with the DOE in Washington, DC during
the week beginning Monday, December 6, 2010. On that day, Solyndra and its principal owners –
Argonaut and Madrone – presented a proposal to the DOE under which the DOE would release
the remaining $95 million of its original $535 million loan commitment, and Argonaut and
Madrone would provide $25 million in additional capital.8 DOE, which sought a commitment of
$75 million in new money, rejected Solyndra’s proposal the same day.9 That evening, Argonaut
Managing Director Steven Mitchell (Mitchell) summed up the status of the discussions with
DOE in an e-mail to Argonaut owner George Kaiser (Kaiser). Mitchell took the position that if
DOE required a funding commitment from Argonaut and Madrone of more than $25 million, he
would not recommend going forward.10
Despite the position that Mitchell took in his negotiations with DOE, Solyndra’s principal
owners were intently focused on how to preserve the NOLs. Thus, the next morning (December
11 Ex. 8.
12 Mitchell Dep., 40:16 -42:6.
13 Ex. 46, Bates 4756 - 4757.
14 Ex. 15, 16, 17, 12.
5
7, 2010), Mitchell sent an e-mail to individuals at Argonaut, Gibson Dunn (Argonaut’s lawyers),
Madrone, and Solyndra.11 The email began, “There appears to be a decent likelihood that
Solyndra will file bankruptcy within the next 10 days,” and advised that the company had
retained bankruptcy counsel. Mitchell devoted the rest of the brief email to the need to preserve
an estimated $750 million of NOLs in Solyndra:
We need to discuss appropriate course of action in the event of
filing and trustee appointment. The company has a significant
NOL, potentially as high a (sic) $750 million, and George [Kaiser,
owner of Argonaut12] has a high interest in understanding any
manner in which we can preserve the NOLs.
Can we have a call to discuss appropriate next steps on the
bankruptcy? Don [Millican, Argonaut’s CFO] will lead on the
NOL process but we need you guys helping us make sure we don’t
do anything to lose these if we (sic) are salvageable so I want you
to be aware of that issue.
That same morning, Mitchell and Kaiser were exchanging emails about how they might
be able to propose a greater infusion of capital to meet the DOE’s requirement of $75 million in
new money, keep Solyndra alive, and preserve the NOLs. Kaiser noted, “I would go a long way
to preserve the NOLs.”13 Beginning later that day, and continuing through Friday, December 10,
Argonaut and Solyndra, along with tax professionals at Gibson Dunn and PwC, worked to
determine the amount of NOLs potentially available to Solyndra.14 In furtherance of efforts to
15 Ex. 13, Mitchell Dep., pp 75-76.
16 George Kaiser owns Argonaut, which invests capital for GKFF. Mitchell Dep., 147:2-
3; 31:20-21.
17 Ex. 50, 14.
18 Ex. 51, Mitchell Dep., pp. 84-86.
6
identify, maximize and preserve available NOLs, Mitchell advised Solyndra CFO Bill Stover to
delay a particular transaction which would have reduced the available NOLs by $100 million.15
By Friday afternoon, December 10, at Mitchell’s request, an accountant at Argonaut had
prepared an estimate of the “Risk Adjusted Present Value” of the NOLs to the George Kaiser
Family Foundation (GKFF).16 According to that estimate, the NOLs were worth approximately
$40 million to GKFF. That amount exceeded by $2.5 million the $37.5 million which
represented Argonaut’s share of the $75 million in new capital the DOE sought for Solyndra.17
Later that same day, the Chief Investment Officer of GKFF sent an email to the trustees
of GKFF, which included a description of the proposed Restructuring, an analysis of the
proposed Tranche A loan, and the value of Argonaut’s share of Solyndra’s NOLs.18 That analysis
concluded that the Risk-Adjusted Present Value of the NOLs to GKFF was $40 million. On the
basis of the analysis presented in the email, one of the trustees then moved to approve Argonaut’s
investment of an additional $37.5 million in Solyndra.
In the meantime, Solyndra and Argonaut on the one side, and the DOE on the other side,
were working to finalize the outline of a complex series of transactions which has come to be
known as the “Restructuring.” As the parties were working to finalize that outline, Mitchell and
others focused on persuading officials at DOE that, should Solyndra file bankruptcy, its NOLs
19 See, e.g., Ex. 7, Bates 15496.
20 Ex. 5.
21 Ex. 9.
7
had no value to the DOE.19 Solyndra’s CFO Stover described the corporation’s ability to retain
the NOLs as a “fundamental non-negotiable point,” and “an unequivocal non-starter.”20
Ultimately, Solyndra and the DOE reached only one agreement about the future use of the
corporation’s NOLs, which they signed as part of the Restructuring. Under that agreement, the
corporation agreed to use its NOLs only to offset its own income. This would, in theory, benefit
the DOE, by improving cash flow and allowing Solyndra to repay the DOE’s loans more quickly.
But by its terms, that commitment ended after bankruptcy. The DOE never agreed, either
expressly or tacitly, to allow the owners of Holdings to carry the corporation’s NOLs beyond
bankruptcy, as the Debtors propose here.
By the afternoon of December 10, 2010, Solyndra, its key investors including Argonaut
and Madrone, and the DOE had agreed on the framework of the Restructuring. Mitchell outlined
the basic terms in an email that afternoon.21 As to matters pertinent to this objection, Argonaut
and Madrone would loan $75 million to Solyndra, which loan would be senior to all other debt,
including the DOE’s loans. Argonaut and Madrone would then offer participation in that loan to
then-current Solyndra investors. Those new lender-participants would, in turn, receive warrants
(reflecting an equity interest in Solyndra, Inc), in proportion to their participation, exercisable
into ownership of 99.9% - 100% of Solyndra, Inc. Those warrants would, however, revert to
Argonaut and Madrone in the event Solyndra liquidated or filed bankruptcy, giving them
virtually 100% control of the corporation.
22 Ex. 11.
23 Ex. 10, Mitchell Dep., 81:22-82:15.
8
The motive for Solyndra’s owners was clear. According to Mitchell, “. . . this is done to
clean up the ownership so Argonaut can control the process around the NOL utilization – beyond
that there will be no value to the warrants in a liquidation scenario.” Later in that email, Mitchell
noted, “We will start working immediately to have a liquidation plan if that is the ultimate
scenario.”
On December 13, 2010, the key parties signed a series of documents which reflected the
general terms of the Restructuring. One of those documents was a letter to the DOE from
Solyndra, to which was attached a Term Sheet containing the terms.22 The Term Sheet included
language in the section dealing with the Tranche A loans from Argonaut and Madrone. That
language – which served only to protect the Tranche A lenders – required Solyndra to take the
steps necessary to preserve the NOLs for Argonaut and Madrone in the event of a bankruptcy. It
did not relate to DOE, and DOE had no role in drafting or inserting it in the Term Sheet. In fact,
Argonaut’s attorneys drafted the language, and asked that it be included in the Term Sheet.23
B. December 2010 - March 2011. The Plan to Preserve the NOLs Takes Shape.
Soon after the parties had signed the Term Sheet, their lawyers began working to draft the
documents necessary to implement the Restructuring. To that end, on December 15, 2010,
Solyndra’s Deputy General Counsel circulated an agenda for a conference call to be held that day
to discuss the Restructuring. Item 2c, in an 8-item agenda, is labeled “Discussion of NOL
24 Ex. 18.
25 Ex. 52.
26 Ex. 73.
27 Ex. 20, p. 2. The rights offering and later side agreement that the warrants would revert
to Argonaut and Madrone in the event of a bankruptcy are not mentioned in either the Plan or the
Disclosure Statement. The March 2012 Report of the Chief Restructuring Officer devotes just
one sentence to them (p. 177). When asked in deposition about ownership issues concerning
Solyndra’s use of NOLs, the CRO answered, “And as the final author of the report, I said, I’m
not going to get into this. It’s just too much of a hassle, and I’m just not going to get into it. And
(continued...)
9
Preservation.”24 In a December 20, 2010 email to Solyndra’s Controller discussing § 382 (the
section of the Internal Revenue Code that limits a taxpayer’s ability to use NOLs) a Gibson Dunn
attorney referred to “the importance of NOL preservation.” In his response, the Controller
mentioned “the critical nature of this topic.”25
On February 20, 2011, as they were finalizing the documents to implement the
Restructuring, attorneys at Morrison & Foerster (representing DOE) and attorneys at Gibson
Dunn (representing the Solyndra team), exchanged a series of emails. While the email subject
line did not mention NOLs, the Gibson Dunn attorney who wrote one of the emails in the chain
made it very clear why NOLs were important: “It has been the deal from the beginning that
Solyndra’s NOLs are protected for Argonaut and Madrone.”26
On February 16, 2011, as foreshadowed in earlier documents, Solyndra, Inc. circulated a
rights offering to its investors. The rights offering explained that if current investors in Solyndra
did not choose to participate in the offering, the effect of the warrants to be issued in the offering
would result in their equity interests being reduced to “virtually no equity ownership.” Thus the
rights offering provided powerful incentive for Solyndra’s investors to participate.27
27(...continued)
I’m not sure what benefit there would be to it.” Neilson Dep., 120:6-18.
28 Ex. 22, p. 5.
29 Ex. 25, p. 2 (emphasis added).
10
The solicitation to participate in the rights offering explained to the potential participants
that Argonaut and Madrone were asking investors who chose to participate in the offering to
agree voluntarily that their warrants would revert to Argonaut and Madrone in the event Solyndra
filed bankruptcy. In a power-point presentation for potential investors, Solyndra explained, “Lead
underwriters [Argonaut and Madrone] request to retain warrants in event of liquidation to
preserve opportunity to utilize NOLs.”28
In an email to potential investors, an attorney for Solyndra explained,
Argonaut Ventures I, LLC and Madrone Capital Partners, L.P.,
have requested that, as consideration for underwriting the Tranche
A Financing and placing significant funds in escrow since January
2011 at the request of the Department of Energy, that each lender
participating in the Tranche A Financing enter into a letter
agreement with Argonaut and Madrone whereby, upon the
occurrence of a bankruptcy, liquidation or dissolution or similar
events involving the Company, all warrants issued to you in
connection with the Tranche A Financing will be transferred to
Argonaut and Madrone. The purpose of this letter agreement is
to allow Argonaut and Madrone to, under certain conditions
and subject to certain limitations, utilize the net operating
losses accrued by the Company.29
During the offering period, a number of questions were raised about the request that the
warrants revert to Argonaut and Madrone in bankruptcy. In each case, it was explained to the
potential investor that the reversion would allow the NOLs to revert back to Argonaut and
Madrone in a bankruptcy scenario.
30 Mitchell Dep., 85:8-11.
31 Ex. 23. As an aside, one investor accused Solyndra of trying to “sneak by everybody”
the reversion of the warrants in bankruptcy. In a candid exchange between with Madrone’s
McJunkin, Mitchell admitted, “it does look like” it. Ex. 24.
32 Ex. 57.
33 Ex. 59. On information and belief, the reference to “Walton” in that email is to one or
more people affiliated with Madrone.
34 Ex. 60.
35 Ex. 41. Mitchell Dep., 80:21-81:9; McJunkin Dep. 50:4-17.
11
One investor, Phil Frohlich, is also a member of the GKFF Board of Trustees.30 On
March 8, 2011, he asked how the NOL value would affect him if he continued to participate.
Mitchell answered, “All NOL value reverts back to us and madrone (sic). the basis is that we
underwrote the whole deal. . . . we can use the warrants to slowly take over control in a manner
that preserves the NOLs.”31 Frohlich responded that same day, “So . . . bottom line is that you are
giving yourself a liquidation preference over friends and family.”32 Two days later, Frohlich
summed up in rather blunt terms his understanding of the warrant reversion feature: “My math
says that GKFF/Walton puts up 49M of the 75M and gets an extra 35-50M in NOL that no one
else gets.”33 On March 12, 2011, Mitchell summarized for Kaiser the status of the rights issuance,
confirming that this structure, “also preserves the NOLs in the downside case and facilitates
Argonaut and Madrone’s path to controlling the entity in hopes of utilizing the NOLs.”34
At the end of the offering, all but a handful of investors signed the Side Letter Agreement,
under which the warrants revert to Argonaut and Madrone in bankruptcy.35 As a result,
notwithstanding the listing of equity holders filed with the bankruptcy schedules in September
McJunkin testified that if the NOLs were 36 “unnecessarily destroyed [he] would need to
understand the reason why that is appropriate.” McJunkin Dep., 59:5-15. Mitchell observed,
“why would we gratuitously liquidate it when we could, for no additional cost, preserve an asset
of Holdings, which is the NOL.” Mitchell Dep., 18:2-4. He then admitted, albeit reluctantly, that
preserving the NOLs of Holdings was an outcome that Argonaut intended. 19:10-20:10.
37 Ex. 26.
38 Ex. 74.
12
2011, Argonaut and Madrone do, in fact, have the authority to control nearly 100% of Holdings
post-bankruptcy. And they intend to exercise that authority, so they can use the NOLs.36 As noted
above, this fact is missing entirely from the Plan and Disclosure Statement.
C. February - September 2011. Working to Preserve the NOLs in Bankruptcy.
Between February 23, 2011, when it signed the Restructuring documents, and September
6, 2011, when it filed for bankruptcy, Solyndra worked to stay afloat and become profitable – all
the while making sure to safeguard the NOLs. In March 2011 the company was considering
something called an “equity refresh.” In an email to Mitchell at Argonaut and McJunkin at
Madrone, Solyndra’s Deputy General Counsel explained the steps the company was taking to
make sure that this “equity refresh” did not cause a change in control for purposes of the NOLs.37
During this period, Solyndra was continually aware of the need to preserve the NOLs for
Argonaut. In a Solyndra email that had nothing to do with the Restructuring, a question was
asked about whether Solyndra LLC was a “disregarded entity” for tax purposes. In response,
Solyndra’s Controller wrote, “It’s important that our NOL (being generated by LLC activity now)
rolls up to Inc. because that is what Argonaut is interested.”38
39 Ex. 62.
40 Ex. 63.
41 Ex. 28.
42 Ex. 30 (bold in original).
13
By August 2011, Solyndra required a significant infusion of additional capital to stay in
business. To that end, the company explored a number of financing options, both private and
public. Solyndra was discussing one such option with officials at DOE, under which Solyndra,
Inc. would issue warrants to DOE. Officials at Argonaut and Solyndra resisted that idea.
Mitchell rejected it outright because, he said, preserving the NOLs would require coordinated
exercise of the warrants between Argonaut and DOE. Don Millican, GKFF’s CFO noted that,
“spelling out the need for orchestrated warrant exercise would put emphasis on the NOLs.”39
In mid-August 2011, officials at Argonaut were particularly focused on making sure to
preserve the NOLs in any event. In a particularly candid exchange, Kaiser and Millican
exchanged emails in which they both referred to the NOLs as the “consolation prize.”40
On August 29, 2011 a series of term sheets were exchanged concerning another financing
option. In an email about one term sheet, Solyndra’s CFO Stover noted, “We have to work
through the particulars to ensure the NOL’s are protected.”41 In another email exchange, Stover
asked Mitchell at Argonaut, “Are we attempting to structure the new deal so as to protect the
NOL (?), or are we abandoning that cause??” Mitchell replied, “Maintaining the NOL is an
absolute requirement. So all equity will be issued as warrants that retract to Argonaut and
Madrone.”42
Ex. 40. Argonaut redacted all but the heading an 43 d two sentences of this 2-page
document, on claim of privilege.
44 In discovery, Argonaut produced a number of documents reflecting its efforts to place a
value on its presumed 50% share of the NOLs of Holdings. Madrone did not produce any
analogous documents. In depositions on October 3 and 4, 2012, representatives of Argonaut and
Madrone testified that, while they have not reached any agreement on how to apportion the costs
of implementing the plan, or the NOLs of Holdings post-confirmation, those costs (and
presumably the NOLs) would likely be apportioned either 50-50 or pro-rata to their respective
investments in the Tranche A debt. In the latter case, Argonaut’s share would be 45/70 (approx.
64.3%), and Madrone’s 25/70 (35.7%). McJunkin Dep., 21:9-18; Mitchell Dep., 25:14-26:14.
45 Ex. 32, 33.
14
D. Post-Petition – Planning to Enable Argonaut and Madrone to Access the NOLs.
By late August 2011, bankruptcy was imminent. On Thursday August 25, 2011,
McJunkin of Madrone wrote to Mitchell at Argonaut and asked for time to discuss with him “the
bankruptcy impact on NOL (in the event that’s where we are on Monday.)”43 That theme has
continued since last August.
As the bankruptcy progressed, Solyndra worked with Argonaut and PwC to quantify the
amount of NOLs available to Holdings, and determine their value to Argonaut.44 On February 1,
2012, Solyndra’s Controller shared with an Argonaut accountant some work that PwC had done
earlier on issues relating to the availability of NOLs.45 On February 2, 2012, two Argonaut
accountants exchanged emails concerning the valuation of Argonaut’s interest in Solyndra for
financial reporting purposes. They divided Argonaut’s share of Solyndra into two separate
components. One component – $35.31 million – reflected the value of Argonaut’s share of the
46 Ex. 44.
47 Ex. 34.
48 Ex. 38, 35, 36.
15
Tranche A debt. The other component – $75 million – reflected Argonaut’s share of the “NOL
realization.”46
On February 21, 2012, Solyndra’s Controller wrote to PwC in order to introduce PwC’s
people to Argonaut’s accounting people. In that email, the Controller noted that, in the past,
Solyndra had done quite a bit of § 382 analysis, “mainly because our largest shareholder,
Argonaut, was interested in utilizing our NOL on their tax return.” He continued, “Now that we
have gone bankrupt, the utilization of available NOL has become extremely critical for Argonaut,
. . .”47
Finally, as the Plan was being developed, Solyndra exchanged more information with
Argonaut about the amount of Holdings’ NOLs and their potential for future use.48
E. The NOLs Have Considerable Value to Argonaut and Madrone.
Ever since December 10, 2010 – when Argonaut and Madrone decided to loan an
additional $75 million to Solyndra, instead of having Solyndra file bankruptcy – Argonaut and
Solyndra have tried to quantify the amount of NOLs available for the corporation in a bankruptcy
situation, identify limitations which § 382 of the Internal Revenue Code might place on their use,
and determine the net present value of that use to Argonaut and Madrone. This section
summarizes those efforts over the past two years.
49 Ex. 16, 17, 31, 32, 33
50 They updated their calculation of the NOLs at stake as recently as June. Ex. 35 - 38.
51 Ex. 50.
52 Ex. 51.
53 Ex. 69.
16
In 2009 Solyndra, Inc. engaged PwC to conduct a study of the § 382 issues, and their
impact on the use of the NOLs. The Debtors and Plan Sponsors have reviewed that study and its
conclusion as part of their work pre- and post-petition.49 They have also regularly updated the
calculations of the amount of NOLs which Holdings incurred over the years.50
At various times between December 2010 and June 2012, Argonaut attempted to place a
value on what it assumed was its 50% share of the Solyndra NOLs. As noted above, on
December 10, 2010, Argonaut determined that its presumed 50% share of the Solyndra NOLs
through that date had a “Risk Adjusted Present Value” to GKFF of $40 million.51 It was partly on
the basis of that value that on December 10, 2010 the GKFF Board of Trustees approved loaning
Solyndra, Inc. an additional $37.5 million.52
In February 2011, an analyst at GKFF attempted to calculate the Net Present Value of
Argonaut’s presumed 50% share, based on Solyndra’s having $800 million of NOLs, and
applying varying assumptions. Depending on the discount rate he used to reflect the time value of
money, the analyst determined a net present value of Argonaut’s share of NOLs at between $18
million (using a 12% discount rate) and $38.5 million (at 8%). He shared that analysis with
another GKFF person earlier this year, on May 31, 2012.53
54 Ex. 55, Bates AVI-IRS 006640.
55 Ex. 44.
17
On March 3, 2011 a meeting was held to review the GKFF portfolio. At that meeting, it
was reported that GKFF had reduced its “carrying value” for Solyndra to $75 million. This was
based upon a combination of factors, one component of which was the $38 million value placed
upon the use of Solyndra’s NOLs in liquidation.54 While we do not know the origin of that value,
it does correspond to the estimated net present value of Argonaut’s 50% share of Solyndra’s
NOLs, at an 8% discount rate, as determined just one month earlier. (Ex. 69)
After Solyndra filed bankruptcy, at the same time that the Debtors and Plan Sponsors
were working to formulate a plan of reorganization, GKFF personnel again visited the subject of
how much the NOLs were worth to Argonaut. On February 2, 2012, GKFF accountants looked at
the GKFF year-end 2011 alternative valuation report, and tried to break down the determination
of the value of Argonaut’s 50% presumed share of Solyndra. In an email exchange on that day,
the accountants recommended that Argonaut’s Solyndra shares be valued at $110.31 million.
This consisted of $35.31 million for Argonaut’s share of the recovery of the Tranche A debt, and
$75 million for Argonaut’s 50% share of Solyndra’s NOLs.55
On February 13, 2012, the GKFF accountants raised the valuation issue with Mitchell,
Argonaut’s Managing Partner, and asked him if he had any opinion on the value they were
showing. They specifically asked Mitchell about the value of the NOLs:
The bigger question is the 75M we’re currently valuing the NOLs
at. That analysis was from last February or so and assumed 800M
of NOLs shared 50/50 with Madrone and being utilized starting in
2014. I believe the NOL is more like 950M, but I think we’re less
56 Ex. 65. During his deposition on October 4, 2012, Mitchell characterized as “flawed”
the $75 million value that Argonaut and GKFF – with his agreement – had placed on its 50%
share of the NOLs. Mitchell Dep. 155:3 - 158:4. Mitchell also claimed that he had just
discovered the “flawed analysis” in preparing for his deposition. Whether or not the analysis is
flawed, Argonaut did, in fact, value its 50% share of the NOLs at $75 million when the Plan was
filed.
57 Ex. 67, 68.
18
optimistic on utilizing them and the timing of that utilization that
we assumed in the original analysis.
Mitchell responded, “I think it stays the same really.”56 Argonaut and GKFF continued to value
their 50% share of Solyndra’s NOLs at $75 million into April and May 2012.57
Finally, there is no doubt that Argonaut intends to realize that value as part of the Plan.
Just three weeks after GKFF had confirmed that Argonaut’s share of Solyndra’s NOLs would be
valued at $75 million – consistent with Mitchell’s February 2012 comments – Mitchell
exchanged emails with an Argonaut investor about the plan to use Solyndra’s NOLs under a
proposed plan of reorganization, which was being developed and circulated in draft form. In
response to the investor’s question about the proposed plan, Mitchell wrote:
Tranche A and DIP loans will get repaid in full. Upon sale of the
building and the upcoming auction #4 there will be no more assets
to sell, so no more proceeds. The government is in line of the next
$375 million but there will be very little recovery unfortunately.
Argonaut and Madrone will file a Chapter 11 plan of
reorganization and bring the company out of bankruptcy.
58Ex. 68.
59 Mitchell Dep., 166:2 - 168:7.
60 In 2011 Argonaut determined the PV of 50% the NOLs at $38 million. In 2012
Argonaut valued 50% of the NOLs at $75 million. Accordingly, the present value of 100% of the
NOLs – according to Argonaut – lies between $76 million and $150 million. This is the value
that Argonaut and Madrone expect to take out of these bankruptcy cases.
19
The investor then asked, “I assume the NOLs stay with the company after bankruptcy which will
go to Argonaut and Madrone?” to which Mitchell replied “let’s discuss.”58 In his deposition,
Mitchell confirmed that the answer to the investor’s question was “yes.”59
To summarize, from December 2010 to this date, the two principal investors in Holdings,
Argonaut and Madrone saw that the NOLs had value to them post-bankruptcy. Since December
2010, Argonaut and Madrone went to extraordinary lengths to maximize their value, and to
improve the chances that they would some day realize it. According to the Disclosure Statement,
those NOLs total between $875 and $975 million, and have the potential to reduce the future
income tax liabilities of Reorganized Holdings by as much as $350 million. According to
Argonaut, they have a net present value somewhere between $76 million and $150 million.60
Whatever value the Court accepts – $350 million in the Disclosure Statement, $40
million for half of the NOLs that Argonaut determined in December 2010, $38 million for half of
the NOLs that Argonaut determined in February 2011, or $75 million for half of the NOLs that
Argonaut determined in March 2011 and reaffirmed earlier this year – the NOLs’ value dwarfs
the payments to unsecured creditors. Put simply, the Plan proposes that Holdings will emerge
from bankruptcy as a no-asset, no-business entity, whose only purpose is to provide future tax
61 11 U.S.C. § 1129(d); In re South Beach Securities, 606 F.3d 366 (7th Cir. 2010). The
IRS submits that in this case the burden of proof is irrelevant, as the evidence is not in equipoise.
6 2 See, 7 Collier on Bankruptcy ¶ 1129.07 (16th ed. 2012).
63 See, In re Scott Cable Communications, 227 B.R. 596, 603 (Bankr. D. Conn. 1998).
20
benefits to its owners, the Plan Sponsors. The undeniable conclusion is that tax benefits drive
this Plan.
ARGUMENT
A. The Court May Not Confirm a Plan Whose Principal Purpose is Tax Avoidance.
The Bankruptcy Code provides that, on the request of a party in interest that is a
government unit, the Court may not confirm a plan if the principal purpose of the plan is the
avoidance of taxes. The governmental unit that raises the objection bears the burden of proof on
whether tax avoidance is the principal purpose.61 In the context of § 1129(d), the “principal
purpose” means the most important purpose.62 In determining whether tax avoidance is the
principal purpose of the plan, the Court should examine the surrounding circumstances, including
all relevant facts and negotiations.63 On the undisputed facts in this record, in the context of all
the relevant facts (outlined above), and for the reasons discussed below, the Court should refuse
to confirm this Plan because its principal purpose is the avoidance of future income tax liabilities
for the Plan Sponsors.
B. Courts Have Refused to Confirm Plans Designed to Enable Owners of “Shell”
Corporations to Emerge From Bankruptcy With Sizeable Tax Attributes.
There are few reported cases which apply § 1129(d). But in decisions spanning the last 27
years the courts have refused to confirm plans which would enable corporate debtors that were
64 606 F.3d 366 at 372 (7th Cir. 2010).
65 Id. at 373.
6 6 Id. at 374. The interrelationships among the debtor, its “manager,” its sole creditor, and
its sole equity holder were so convoluted that the bankruptcy court attached a chart to its opinion
in order to illustrate them. In re South Beach Securities, Inc., 376 B.R. 881, 897 (Bankr. N.D. Ill.
2007).
21
no more than an empty shell to exit bankruptcy with significant tax attributes. This Court should
follow that lead.
In the most recent case, South Beach Securities, the Seventh Circuit affirmed the
bankruptcy court’s decision to deny confirmation of the debtor’s Chapter 11 plan under §
1129(d), because the plan’s principal purpose was tax avoidance. When it filed its bankruptcy
petition, South Beach Securities (a former registered securities broker), like Holdings here, was a
shell with significant net operating losses and no employees or business activities.64 The debtor’s
disclosure statement indicated that the purpose of the bankruptcy was to monetize its net
operating losses. The debtor’s plan provided that all of its stock would be turned over to its sole
creditor, Scattered Corporation, which was, in turn, “managed” by the individual who controlled
the debtor.65 If the plan had been approved, Scattered would have transferred capital into South
Beach to enable the company to generate income against which to offset the NOLs. The result
would have been to shield from tax the income to be earned in the future by Scattered – which
would inure to the individual who controlled the debtor.66
The bankruptcy court refused to confirm the plan, finding that its principal purpose was
tax avoidance under § 1129(d). The court emphasized that the debtor was a shell corporation,
with no business, employees or assets (apart from the NOLs). It observed, “ there is nothing here
67 376 B.R. at 895.
68 421 B.R. 456 (N.D. Ill. 2009); aff’d 606 F.3d 366 (7th Cir. 2010).
69 In re Maxim Industries, 22 B.R. 611 (Bankr. D. Mass. 1985)
22
to reorganize, no business to resuscitate, no going concern to keep going.” The whole point of the
bankruptcy, the court noted, was to make use of the debtor’s NOLs.67
In affirming the bankruptcy court, the district court and the Seventh Circuit Court of
Appeals focused on the intent of the plan to use the NOLs to offset future income tax liabilities.
Whether the debtor might ultimately succeed in that plan was irrelevant. Because the debtor
proposed the plan intending to use the NOLs – and not to reorganize a business – § 1129(d)
barred confirmation.68 The Plan before this Court, as it relates to Holdings, suffers the same
infirmities.
In 1985, a bankruptcy court in Massachusetts refused to confirm a plan of reorganization
which would have enabled a shell corporation to emerge from bankruptcy with control over
significant tax attributes. Although it based its decision on § 1129(a)(3) – and not § 1129(d) --
the court in In re Maxim Industries refused *to confirm a plan which was designed to reorganize
an empty shell corporation in order to preserve and enable its owners to use its considerable net
operating losses (NOLs).69 The tale of Maxim bears a striking similarity to this case:
By the time it filed Chapter 11, Maxim Industries (a former manufacturer of fire fighting
equipment) was a shell corporation with no business activity, employees or tangible assets – it
had even lost the right to manufacture firefighting equipment under its own name. This is
70 The owners of these Debtors might also have residual liability for the WARN Act
claims and the claims of the landlords and possibly other creditors.
23
because Maxim’s secured creditor had taken possession of and sold all of the debtor’s assets
before Maxim had filed Chapter 11. Its only potentially valuable asset was its significant NOLs.
The debtor proposed a plan which would have accomplished a number of goals. It
proposed to pay $86,000 in wage claims, $108,000 in unfunded pension claims, and $725,000 in
tax claims – all items for which its owners might have some personal liability.70 At the same
time, the debtor proposed to acquire the stock of a profitable corporation in a leveraged buyout. It
would then use its NOLs to offset a portion of the profits earned by the newly-acquired
corporation, and use the tax savings to pay general unsecured creditors dividends of at least 6.5%
and possibly up to 10%. Because the creditors stood to recover more under the plan than in a
liquidation, they did not object – to no one’s surprise.
On its own motion, the court refused to confirm the plan, finding that the plan was not
proposed in good faith, but was instead motivated by tax avoidance. The court’s observations and
reasoning are particularly apt here:
Who benefits from this game of mirrors? Certainly neither the
debtor nor the creditors. To allow this plan would be to subvert
Congressional intent in a manner that even the best of the
perfumer's art could not disguise.
This plan does not comply with 11 U.S.C. s 1129(a)(3) in that it
was not proposed in good faith. The purpose of a Chapter 11
reorganization proceeding is to enable a business to rehabilitate
itself and become a profitable going concern. In re International
Horizons, Inc., 15 B.R. 798, 800 (Bkrtcy. N.D.Ga.1981); Citicorp
Business Credit, Inc. v. Blazon Flexible Flyer, 407 F.Supp. 861
(N.D.Ohio 1976). Chapter 11 was not designed to permit the use of
71 22 B.R. at 612-613.
24
shell corporations for the personal benefit of the officers of the
corporation. In fact, under the new Bankruptcy Code, a corporation
or partnership is not entitled to a discharge in Chapter 7. 11 U.S.C.
s 727. This change in policy from the old law was specifically
aimed at avoiding trafficking in corporate shells and bankrupt
partnerships. House Report No. 95-595, 95th Cong., 1st Sess. 384-
385 (1977); Senate Report No. 95-989, 95th Cong., 2d Sess. 98-99
(1978), U.S.Code Cong. & Admin.News 1978, p. 5787.
Bankruptcy is perceived as a haven for wistfulness and the
optimist's valhalla where the atmosphere is conducive to fantasy
and miraculous dreams of the phoenix rising from the ruins.
Unfortunately, this Court is not held during the full moon, and
while the rays of sunshine sometimes bring the warming rays of the
sun, they more often also bring the bright light that makes
transparent and evaporates the elaborate financial fantasies
constructed of nothing more than the gossamer wings and of
sophisticated tax legerdemain.
I find that this plan which has a shell debtor purchasing a solvent
corporation is such a gossamer wing and has not been proposed in
good faith. Confirmation is denied pursuant to 11 U.S.C. s
1129(a)(1) and (3).71
Maxim Industries may have been the first case where a court refused to confirm a plan
because of its tax avoidance features, even though creditors got paid under the plan. But it was
not the last. At least one other court found that a plan may have tax avoidance as its principal
purpose, even where it proposes to make distributions to creditors. In In re Scott Cable
Communications, the debtor proposed a plan to sell its assets and distribute the proceeds to nongovernment
creditors. In the meantime, the debtor would not pay federal and state taxes
attributable to the sale, and the IRS would be restrained from attempting to collect those taxes.
72 In re Scott Cable Communications, 227 B.R. 596, 604 (Bankr. D. Conn. 1998).
73 In re Rath Packing Company, 55 B.R. 528 (Bankr. N.D. Iowa 1985).
7 4 Id. at 537.
25
The court found that the principal purpose of the plan was to sell the debtor’s assets without
paying capital gains taxes, and refused to confirm the plan, relying on § 1129(d).72
The existence of tax benefits is not necessarily the death knell for a proposed plan. Courts
sometimes will confirm a plan that preserves tax benefits, but only where the tax benefits support
the rehabilitative purposes of the plan and the Code. In a case easily distinguished from this one,
in 1985 the U.S. Bankruptcy Court for the Northern District of Iowa overruled the government’s
objection under § 1129(d) to confirmation of a modified plan.73 Rath Packing Company, a meat
processing and packaging business founded in 1891, was a publicly held corporation with 5,100
shares of record. Under the proposed modified plan, the debtor would form a consolidated
subsidiary and acquire businesses through the subsidiary. The court found that principal purpose
of the proposed plan modification was not tax avoidance, because the debtor’s publicly held
status would provide a viable source of funds for future corporate purchases, and was as
important to the reorganization as the net operating loss carryovers.74
C. The Principal Purpose of This Plan IS Tax Avoidance.
This case involves two debtors: an operating company (LLC) and a corporate holding
company (Holdings). Since February 23, 2011, when the Restructuring was completed, LLC
owned all the assets, had all the employees, and conducted all the business for both debtors. At
the same time, Holdings was a mere shell, with no employees, no business activity, and no
75 The debtors and the Plan Sponsors insist that the NOLs are an asset of Holdings. But
that simply begs the question, because the NOLs of Holdings do not survive liquidation.
76 While the Plan Sponsors propose to “contribute” a net of $7.5 million to the Plan, that
amount is divided between LLC and Holdings, with $810,000 going to Holdings.
77 The Plan does not propose to pay the superpriority administrative claim of the DOE.
The DOE is filing a separate objection raising this issue.
26
tangible assets.75 And the relevant circumstances, facts and negotiations, detailed above, prove
that the principal purpose of this Plan is to enable the owners of the shell corporation to emerge
from bankruptcy with tax attributes worth to them a large multiple of the total amount of all the
payments which the Plan proposes to make to unsecured creditors.
The Debtors and Plan Sponsors have proposed a plan which is, in essence, two plans –
one for each debtor. In the first plan, they propose to liquidate the operating company, LLC, and
distribute the proceeds to creditors. Because the proceeds of liquidation are inadequate to provide
any distribution to unsecured creditors, the Plan Sponsors propose to “contribute” a net $6.7
million to LLC for the benefit of certain selected creditors.76 This is enough to pay nearly all of
the administrative claims,77 a percentage of the WARN Act claims, about three cents on the
dollar for the general unsecured claims, and virtually all of the secured Tranche A loans – which,
not coincidentally – are owed to the Plan Sponsors, who are – also not coincidentally – the
putative equity holders of Holdings.
The other plan, for Holdings, proposes to pay four unsecured creditors of Holdings a total
of $810,000 – three cents on the dollar – just like the creditors of LLC. Yet rather than liquidate
the shell corporation which is Holdings, the Plan provides that Holdings will emerge from
bankruptcy with the interests of its equity holders unimpaired. Nonetheless, as is the case now
27
and was the case in South Beach, “there is nothing here to reorganize, no business to resuscitate,
no going concern to keep going.” Holdings will have no employees, no business, and no present
plans to start a business. If the Plan is confirmed, what Holdings will have, however, are $12
million in tax credits and nearly $1 billion in NOLs generated from the operation of Solyndra.
And earlier this year one of the two Plan Sponsors placed a net present value on the NOLs
between $76 million and $150 million.
When viewed as two plans – which is, in fact, how they are designed to operate – the sole
purpose for the Holdings plan is tax avoidance. In exchange for a mere $810,000, the Plan
Sponsors (and putative owners) will emerge from bankruptcy owning a shell corporation with
nearly $1 billion in NOLs, which they may use to offset future taxable income, and $12 million
in credits, which they may use to offset future income taxes. The credits alone total 15 times
what the general unsecured creditors will receive under the plan. And earlier this year one of the
Plan Sponsors determined the net present value of half of the NOLs to be $75 million. There can
be little doubt that the principal purpose of the Plan is tax avoidance when the Plan Sponsors and
equity holders stand to reap future tax benefits which dwarf the small payment to creditors.
When viewed as a single plan – taking all the facts and negotiations into account – the
answer is the same. The preservation, maximization, and use of NOLs by Argonaut and Madrone
is the single most important factor which drives this plan. Beginning in December 2010, the
record paints a picture of a corporation’s owners that planned meticulously to be able to use
NOLs in bankruptcy – whether that bankruptcy came in December 2010 as Mitchell first
predicted, or in September 2011, as actually happened. They viewed the preservation of the
28
NOLs in bankruptcy as of “critical importance.” They described NOL preservation as “nonnegotiable,”
and labeled any attempt to negotiate away their value in bankruptcy as a “deal
breaker.” A week before they filed Chapter 11 , they viewed preserving the NOLs as an “absolute
requirement.”
The Debtors and Plan Sponsors worked assiduously over the past two years to preserve
the NOLs. The Plan Sponsors engaged in a rights offering in 2011 which was designed to
consolidate ownership in the event of liquidation so that they alone could control the use of the
NOLs in bankruptcy. They did not disclose here their rights or plans to take control of Holdings,
preferring to wait until after bankruptcy to take control over the “asset” which they worked so
hard to save. The Debtors even went so far as to delay a proposed transaction in order to avoid
reducing the NOLs by $100 million.
Thus whether viewed as one plan or as two, the most important purpose of this Plan is tax
avoidance. There are certainly some marginal benefits which some creditors will receive under
this plan – just like the benefits which the creditors would have received under the plans rejected
by the courts in Maxim Industries and Scott Cable, both supra. And yet there can be no doubt
about the most important priority of the Debtors and the Plan Sponsors – preserve a shell
corporation to be able to reduce future tax liabilities by hundreds of millions of dollars.
As Judge Lavine astutely observed more than 25 years ago, “The purpose of a Chapter 11
reorganization proceeding is to enable a business to rehabilitate itself and become a profitable
going concern. . . Chapter 11 was not designed to permit the use of shell corporations for the
7 8 Maxim Industries, supra, 22 B.R. at 613.
29
personal benefit of the officers of the corporation.”78 Nor, do we submit, was Chapter 11
designed to permit the use of shell corporations for the benefit of the owners. Because the
principal purpose of this Plan is tax avoidance, the Court should refuse to confirm the Plan.
CONCLUSION
For all the reasons discussed above, the Court should refuse to confirm the Plan.
This 10th day of October 2012.
Respectfully submitted,
KATHRYN KENEALLY
Assistant Attorney General
CHARLES M. OBERLY, III
United States Attorney
ELLEN W. SLIGHTS
Assistant U.S. Attorney
/s/ Stuart D. Gibson
STUART D. GIBSON
Stuart.D.Gibson



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