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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE
In re:
) Chapter 11
Rent-A-Wreck of America, Inc., et al., 1
)
Debtors.
Case No. 17-11592 (
)
) Joint Administration Pending
DECLARATION OF GREGG STEINBARTH IN SUPPORT OF CHAPTER 11 PETITIONS AND REQUESTS FOR FIRST-DAY RELIEF Pursuant to 28 U.S.C. ยง1746, I, Gregg Steinbarth, do hereby declare, under penalty of perjury, the following, to the best of my knowledge and belief: 1.
I am a Director and Assistant Secretary of Debtor Rent-A-Wreck of America, Inc.
("RAWA"), a Delaware corporation. RAWA is the sole member of Debtor Bundy American, LLC, a Maryland limited liability company ("Bundy" and, with RAWA, each, a "Debtor" and, collectively, the "Debtors"). The sole shareholder of RAWA is J.J.F. Management Services, Inc. ("JJFMS"); JJFMS is not a debtor in these cases. I also serve as general counsel to JJFMS. 2.
I have served as a director of RAWA since February 2006.
3.
This declaration ("Declaration") is submitted (a) to provide (i) a brief overview
of the history and nature of the Debtors; (ii) information regarding the Debtors' debt and equity structure, and (iii) the reasons the Debtors filed these chapter 11 cases (the "Chapter 11 Cases"), and (b) in support of the Debtors' chapter 11 petitions and "first-day" motions (each a "First-Day
Motion" and, collectively, the "First-Day Motions"), which have been filed with the purpose of helping transition the Debtors' business operations into chapter 11 with a minimum of
The Debtors in the above-captioned chapter 11 cases, along with the last four digits of the Debtors' federal tax identification numbers are: Rent-A-Wreck of America, Inc. (6056) and Bundy American, LLC (5071). The principal place of business for each Debtor is 11411 Rockville Pike, Rockville, MD 20852.
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operational disruption, in order to preserve the value of the Debtors' estates. I believe the relief sought by the First-Day Motions will further that purpose and is, therefore, in the best interests of the Debtors' estates and their creditors. 4.
If called as a witness, I could and would competently testify to the matters set
forth herein based on my personal knowledge. In my official capacity described above, I have seen Debtors' day-to-day operations, business affairs, financial condition, and books and records and other relevant documents, and I have also reviewed and relied upon information compiled and communicated to me by other employees of Debtors and Debtors' professional advisors. 5.
Prior to the commencement of the Chapter 11 Cases, among other things, I
reviewed (a) Debtors' strategy regarding the decision to file these Chapter 11 Cases and consulted with the other members of Debtors' senior management and Debtors' outside advisors with respect to that strategy; (b) each Debtor's voluntary petition for relief; (c) the list of creditors holding the twenty (20) largest unsecured claims against the Debtors on a consolidated basis, (d) the resolutions adopted by each Debtor to authorize (i) the filing of the Chapter 11 Cases and (ii) other actions related thereto, and (e) the content of each of the First-Day Motions described herein, including any schedules or exhibits thereto. 6.
Section I of this Declaration provides brief background regarding the Debtors'
business history, organizational structure, and prepetition indebtedness. Section II describes the circumstances surrounding the filing of the Chapter 11 Cases and Debtors' objectives in so doing. Section III sets forth relevant facts in support of the First-Day Motions and summarizes the relief requested thereby.
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I.
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Background A.
Brief Overview of Debtors' Business, History, and Organizational Structure
7.
RAWA is principally a holding company for its operating subsidiary, Bundy, and
derives most of its income from the payment of fees by Bundy for certain management services provided by RAWA to Bundy, including financial, accounting, payroll, customer reservation, and information systems services. 8.
Bundy is in the business of selling and administering franchises (each, a "Rent-A-
Wreck Franchise", each operated by a "Franchisee") for the operation of vehicle rental, leasing, car sharing, and other mobility service, rent-to-purchase, rent-to-own, lease-to-own, and used vehicle sales businesses (collectively, the "Vehicle Rental Business") identified by various names and registered trademarks, including "Rent-A-Wreck"e and "The Smart Alternative"e (these and all other marks used by RAWA or Bundy, and by the Franchisees under their Franchise agreements, the "Rent-a-Wreck Trademarks"). As of the date of the commencement of the captioned cases, there were 76 "Rent-A-Wreck" franchises in 28 U.S. states and the country of St. Maarten; in addition, a master Franchisee located in Oslo, Norway, administers sub-franchises in Iceland, Norway, and Sweden (while the master Franchisee is a member of the Debtors' franchise system, the sub-franchises are not). 9.
Bundy's revenue derives from the sales of new franchises, continuing franchise
fees paid by existing Franchisees, and fees for certain services provided or offered by Bundy to the Franchisees, including access to reservations systems, vehicle acquisition for Franchisees, lease-to-own programs, and participation in a collision damage/loss damage waiver program administered by an affiliate of Debtors.
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David Schwartz ("Schwartz") originated the "Rent-A-Wreck" name and concept
and franchised them through Bundy's predecessor-in-interest, Bundy American Corporation ("BAC"), which was incorporated under California law in April 1977 and was then, and has continuously been, wholly-owned by RAWA, which has always been a Delaware corporation. In 1985, RAWA and BAC went public; in 1993, they acquired new management, and their principal place of business moved to Maryland (although Schwartz remained a shareholder and sat on the board of directors of RAWA). BAC became a Maryland corporation in 1996 and, in March 2004, underwent a merger, with the surviving company being current Debtor Bundy, a Maryland limited liability company. Bundy remained wholly-owned by RAWA. 11.
In January 2006 — after another party attempted an acquisition of RAWA and
Bundy that did not close — JJFMS took RAWA private, by acquiring all of the common and preferred stock of RAWA, rendering RAWA a wholly-owned subsidiary of JJFMS. 12.
In addition to Bundy, RAWA is the sole owner of non-debtor Consolidated
American Rental Insurance, Ltd., which provides insurance services to certain Rent-A-Wreck Franchisees. 13.
Bundy is the sole owner of the following active businesses: (a) Priceless Rent-A-
Car, LLC, located in Laurel, Maryland, offering vehicle rental franchises under the "Priceless" and "NextCar" marks and (b) MBRC, LLC, which currently operates a Rent-A-Wreck vehicle rental business in Baltimore, Maryland, and is the only non-franchised Vehicle Rental Business. Bundy also owns the following inactive companies: (x) EMBARC Chicago, LLC; (y) Priceless Rent-A-Car of Maryland, LLC, and (z) Rent-A-Wreck Leasing, LLC.
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Bundy formerly owned KFL, LLC, a Maryland limited liability company. In
order to obtain operating cash, Bundy sold KFL, LLC, in May of 2017 to JJFMS for $180,000, which sum exceeded the appraised value of KFL, LLC. B.
Debtors Prepetition Debt Structure
15.
RAWA, as borrower, is obligated to JJFMS, as lender, under that certain Loan
and Security Agreement (the "JJFMS Loan Agreement") dated as of March 31, 2006, and as evidenced by a Promissory Note made of even date therewith by RAWA in favor of JJFMS. The outstanding principal amount owed to JJFMS under the JJFMS Loan Agreement is $2,476,696.47, plus accrued interest; interest accrued through June 30, 2017 totaled $495,271. Under the JJFMS Loan Agreement, the obligations of RAWA to Bundy are secured by security interests in all of RAWA's personal property, tangible and intangible, whenever acquired, including, but not limited to, (a) RAWA's 100% ownership interest in Bundy and (b) the names "Rent-A-Wreck" and "Rent-A-Wreck of America." 16.
Bundy is a guarantor of all of RAWA's obligations to JJFMS, pursuant to the
following instruments, all dated as of March 31, 2006: (a) the Bundy Guaranty Agreement, (b) the Bundy Guaranty Security Agreement, and (c) the Bundy Trademark Collateral Assignment and Security Agreement (the "Bundy Guaranty Documents"). Bundy's obligations under the Bundy Guaranty Documents are secured by security interests in all of Bundy's personal property, tangible and intangible, whenever acquired, including, but not limited to, (a) Bundy's 100% ownership interest in Priceless Rent-A-Car, LLC; (b) Bundy's 100% ownership interest in RentA-Wreck Leasing, LLC, and (c) all rights in connection with certain trademarks owned by Bundy, including the "Rent-A-Wreck"e and "The Smart Alternative"t marks.
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Non-debtors Priceless Rent-A-Car, LLC and Rent-A-Wreck Leasing, LLC are
also guarantors of all of the obligations of RAWA to JJFMS. 18. II.
Other than the secured debt to JJFMS, Debtors owe unsecured debt only.
Circumstances Leading to Filing of the Chapter 11 Cases 19.
As of its 2015 tax year, RAWA had net operating losses of almost $4.36 million.
Although some of those losses were accumulated prior to the time of the 2006 acquisition, Debtors faced challenges almost immediately thereafter. Shortly after the 2006 acquisition by JJFMS, Schwartz filed a lawsuits attacking the acquisition and, separately, sued certain former directors of RAWA in connection with that merger. Although Schwartz lost both suits, they were costly, and the uncertainty they created regarding the 2006 acquisition stalled Debtors business progress. During the economic recession that began in 2008, Debtors franchise network failed to grow as Debtors has anticipated, in part because would-be franchisees could not obtain funding for fleets. Today, although the recession has abated, Debtors operate in a highly-competitive and well-developed industry, and several underperforming Rent-A-Wreck Franchises have acted as a drag on overall revenue. Moreover, because the continuing franchise fees paid by Franchisees are calculated based on the size of each Franchisee's fleet of rental vehicles, maintaining certain Franchisees with unusually small fleets costs Debtors more than Debtors earn in fees from those Franchisees. 20.
In addition, the costs of defending the Schwartz Litigation (as defined below),
which has lasted almost a decade, have consumed funds that could have been reinvested in the business. In June 2007, Schwartz sued Debtors in the United States District Court for the District of Maryland (the "Maryland Court") (thereby commencing the "Schwartz Litigation"). In the Schwartz Litigation, Schwartz alleged, among other things, that Debtors had
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no right to use the "Rent-A-Wreck" name and marks and had wrongfully terminated a Rent-AWreck Franchise he owned (the "Schwartz Franchise"). The result of the Schwartz Litigation, after two trials in the Maryland Court and two appeals to the United States Court of Appeals for the Fourth Circuit, is that Schwartz has been determined to have an implied franchise agreement with one or both of the Debtors, under which Schwartz may operate, for the duration of his life, an exclusive, royalty- and fee-free Rent-A-Wreck Franchise in a territory contained within Los Angeles, California, including Los Angeles International Airport. Further pursuant to the findings of the Maryland Court, despite the high population density of the Schwartz Franchise territory, the Schwartz Franchise may maintain a fleet size significantly smaller than would be required of a franchisee entering into a franchise agreement for that territory today. The Schwartz Franchise also includes the right to use certain Rent-A-Wreck Trademarks and to receive services from Debtors, without payment therefor. However, the Court of Appeals did determine that Schwartz may not receive all of the same benefits as other Franchisees without also undertaking the same obligations. 21.
On September 30, 2016, upon the motion of Schwartz, the Maryland Court found
that Debtors had violated its March 4, 2011, order — the order that originally determined the existence of the implied Schwartz Franchise agreement — because, for a period of time, Debtors' call center informed callers that Debtors had no franchises within the territory that is exclusively covered by the Schwartz Franchise. Although Debtors defended vigorously against the assertion that any such non-compliance was intentional, the Maryland Court determined otherwise and found Debtors to be in contempt of that March 4, 2011 order. On June 29, 2017 the Maryland Court, as a sanction, entered a monetary judgment against Debtors, jointly and severally, in the sum of $83,620.80 (the "Schwartz Judgment"), and also issued injunctions requiring Debtors to
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make certain expressly delineated changes to their internet site and call center protocols. The Debtors have made those changes, but have not paid the Schwartz Judgment. 22.
To date, the 10 years of litigation with Schwartz has cost Debtors approximately
$2,700,000 in attorney's fees and costs. The Schwartz Litigation is now closed in the Maryland Court. However, although Debtors intend to perform their obligations to Schwartz in keeping with their understanding of the orders of the Maryland Court and the Fourth Circuit, given the long and difficult history of the parties and that the Schwartz Franchise derives from an unwritten franchise agreement, Debtors believe that there remains a continuing risk of costly litigation with Schwartz. 23.
Notwithstanding the financial challenges described above, Debtors have recently
invested in a proprietary web-based reservations system as well as in establishing relationships with Global Distribution System entities — including Kayak, Expedia, and carrentals.com — in an effort to offer their Franchisees a tool to increase reservations and revenues. 24.
Debtors believe the greatest value of their businesses resides in the Rent-A-Wreck
Trademarks, whose value is realized only through their competent and careful use in the marketplace by Franchisees. Debtors therefore filed the Chapter 11 Cases to ease the strain on their cash flow — which has been exacerbated by the Schwartz Litigation and Schwartz Judgment — while they restructure and right-size the Rent-A-Wreck Franchise network and internal business operations, eliminating underperforming and non-performing Rent-A-Wreck Franchises, so as to focus on the healthier Rent-A-Wreck Franchises, thereby maximizing the inherent value of the Rent-A-Wreck Trademarks and emerging as profitable entities.
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First-Day Motions 2 25.
Concurrently with the filing of these chapter 11 cases, Debtors have filed certain
First-Day Motions, which are designed to (a) permit Debtors to transition to operations as debtors in possession with as little operational, day-to-day disruption as possible, (b) maintain the confidence of their employees and Franchisees by reducing or eliminating the immediate impact of transitioning to chapter 11, and (c) establish procedures for the smooth and efficient administration of the Chapter 11 Cases. 26.
I have reviewed the First-Day Motions filed contemporaneously herewith
(including any exhibits or schedules thereto) and, to the best of my knowledge and belief, the facts recited therein are true and correct and are hereby incorporated by reference.
I believe that
the First—Day Motions seek relief that is reasonable and necessary to the success of the Debtors' Chapter 11 Cases. A.
Debtors' Motion for Entry of Order Directing Joint Administration of Chapter 11 Cases ("Joint Administration Motion")
27.
The Debtors request that the Court grant the Joint Administration Motion to
permit joint administration of the Debtors' cases for procedural purposes only. The Debtors are not, at this time, seeking substantive consolidation of their estates. 28.
I believe that joint administration will promote efficiency and will ease the
administrative burden on the Court and all parties in interest in these cases. Debtors in these Chapter 11 Cases are affiliates of each other. They are co-debtors on the secured obligations owed to JJFMS, and otherwise share many creditors or parties in interest. Because of these relationships, many of the motions, hearings, and orders in these Chapter 11 Cases will affect
2
Capitalized terms used in this Section III but not defined therein shall have the meanings ascribed to them in the relevant First-Day Motion(s).
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both Debtors. Joint administration will reduce the volume of paper that otherwise would be filed with the Clerk of the Court, because it will avoid the preparation, replication, service, and filing, as applicable, of duplicative notices, applications, and orders. It is my opinion that joint administration will therefore render the completion of various administrative tasks less costly and will minimize the number of unnecessary delays. I believe that the relief requested by the Joint Administration Motion also will simplify supervision of the administrative aspects of these cases by the Office of the United States Trustee. B.
Debtors' Application for an Order Appointing Kurtzman Carson Consultants ("KCC") as Claims and Noticing Agent for the Debtors Pursuant to 28 U.S.C. §156(c), 11 U.S.C. §105(a) and LBR 2002-1(1) ("KCC Application")
29.
Debtors request that the Court grant the KCC Application by entering an order
appointing KCC to act as the claims and noticing agent for Debtors in these Chapter 11 Cases, permitting KCC to assume full responsibility for the distribution of notices and for the maintenance, processing and docketing of proofs of claims filed in these Chapter 11 Cases, and to perform the other services described in the KCC Application, including assistance with preparing Debtors' respective Schedules of Assets and Liabilities and Statements of Financial Affairs. 30.
Debtors estimate that there will be at least 200 parties in interest entitled to
receive notice of various matters in these cases. In view of the number of anticipated parties in interest — including Franchisees in the United States and abroad — and the complexity of the Debtors' business, I believe that the appointment of a claims and noticing agent is both necessary and in the best interests of both Debtors' estates and their creditors. 31.
Debtors' selection of KCC to act as the claims and noticing agent has satisfied the
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that Debtors have obtained and reviewed engagement proposals from at least two (2) other courtapproved claims and noticing agents to ensure selection through a competitive process. Moreover, based on all engagement proposals obtained and upon consultation with counsel, I believe that KCC's rates are competitive and reasonable given KCC's quality of services and expertise. 32.
Upon information and belief, including my review of the proposal provided by
KCC, KCC has acted as the claims and noticing agent in numerous cases of comparable or larger size, including cases currently pending in the United States Bankruptcy Court for this District. 33.
Upon information and belief, by appointing KCC as the claims and noticing agent
in these Chapter 11 Cases, the distribution of notices and the processing of claims will be expedited and the office of the Clerk of this Court will be relieved of a potentially significant administrative burden. C.
Motion of the Debtors for an Order Authorizing Debtors to (I) File a Consolidated List of Creditors, (II) File a Consolidated List of Debtors' Twenty Creditors Holding Largest Unsecured Claims and (III) Mail Initial Notices ("Creditor List Motion")
34.
In the Creditor List Motion, Debtors request that the Court authorize Debtors to:
(i) maintain and file a consolidated list of creditors; (ii) file a consolidated list of the Debtors' twenty (20) creditors holding the largest unsecured claims in lieu of filing lists for each Debtor; and (iii) mail initial notices in these Chapter 11 Cases. 35.
The Debtors have identified in excess of 200 entities to which notice of certain
proceedings in the Debtors' Chapter 11 Cases must be provided. The Debtors expect such notices to include, without limitation, notice of: (a) the filing of the Debtors' voluntary petitions pursuant to section 342 of the Bankruptcy Code; (b) the initial meeting of the Debtors' creditors pursuant to section 341 of the Bankruptcy Code; (c) bar dates for the filing of proofs of claim;
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(d) the hearing on the adequacy of a disclosure statement in respect of a plan of reorganization and (e) the hearing to consider confirmation of a plan of reorganization (collectively, the "Notices"). 36.
The Debtors currently keep and update various lists of the names and addresses of
each of their respective creditors, who will be entitled to receive certain notices and other pleadings filed in the Chapter 11 Cases. The Debtors believe that the information contained in these computer files can be consolidated and used in an efficient manner to provide Notices and other pleadings to parties in interest as required by Local Rule 1007-2. 37.
Because the Debtors are affiliates, with RAWA being primarily a holding
company and central service provider for Bundy for other non-debtor affiliates of the Debtors, Debtors share many creditors and parties in interest and have a limited number of creditors overall. The Debtors submit that a single consolidated list of their combined twenty (20) largest unsecured creditors in these cases (the "Consolidated Top 20 List") would be more reflective of the body of unsecured creditors that have the greatest stake in the Chapter 11 Cases than separate lists for each of the Debtors. 38.
I believe that a Consolidated Top 20 List would promote the efficient and orderly
administration of the Debtors' estates and is in the best interests of the Debtors' estates. 39.
The Debtors have filed the KCC Application (described above)
contemporaneously with the Creditor List Motion. If this Court grants the KCC Application, I understand that KCC will, among other things: (a) assist with the consolidation of the Debtors' records into a creditor and security holder database and (b) complete the mailing of Notices to the parties in these databases. Upon consultation with KCC and the Debtors' Professionals, I believe that (a) filing the lists in the formats currently maintained in the Debtors' ordinary course
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of business will be sufficient to allow KCC to promptly notify all applicable parties in compliance with Local Rule 1007-2 and (b) allowing the Debtors or KCC to effect service of the Debtors' own mailings will save significant cost, time and expense in the Chapter 11 Cases. D.
Debtors Motion for Entry of Interim and Final Orders (I) Authorizing, But Not Directing, (A) Continued Use of Debtors' Cash Management System, (B) Honoring Certain Prepetition Obligations Related Thereto, (C) Maintenance of Debtors' Existing Bank Accounts, and (D) Continued Use of Existing Business Forms, and (II) Granting Related Relief ("Cash Management Motion")
40.
Debtors request that the Court grant the Cash Management Motion by
(a) authorizing, but not directing, the Debtors to (i) maintain their bank Accounts and Cash Management System and honor certain prepetition obligations related thereto and (ii) continue using existing Business Forms; (b) waiving certain of the operating guidelines promulgated for the District of Delaware by the Office of the United States Trustee (the "Guidelines"), and (c) granting related relief. 41.
As described in more detail in the Cash Management Motion, in the ordinary
course of their businesses, Debtors maintain the Cash Management System to fund their operations and manage their cash flow. Using the Cash Management System, the Debtors are able to efficiently collect funds generated by their operations and distribute them, as necessary, to pay their obligations. 42.
The Cash Management System comprises two (2) FDIC-insured Accounts, each
maintained at Wells Fargo Bank, N.A., one in the name of Rent-A-Wreck of America, Inc. and one in the name of Bundy American, LLC. The estimated balances in the Accounts as of the Petition Date were: RAWA Account: $61,347; Bundy Account: $209,643. 43.
As described in more detail in the Cash Management Motion, Debtors use the
Accounts (a) to receive revenue from Franchisees by check, wire transfer, automated clearing
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house (ACH) debits, and credit card payments; (b) act as centralized paymasters for Debtors and certain of their affiliated entities for payroll and certain other shared expenses; (c) pass through, to the entities entitled to them, funds generated from certain services made available to the Franchisees, including premiums for the collision damage waiver/loss damage waiver program administered by Consolidated American Rental Insurance, Ltd., a non-debtor affiliate of Debtors; (d) pay third-party vendors; and (e) reconcile intercompany obligations through intercompany transfers. 44.
The Credit Card Processing System, described in more detail in the Cash
Management Motion, is an integral part of Debtors' Cash Management System, because Bundy receives payments by credit card from Franchisees who chose to pay their monthly fees in that manner, and customer reservations through the GDS Companies and through Debtors' proprietary reservation system can also be made using credit cards. 45.
As an integral part of the Credit Card Processing System, each of Sigma, Vantiv,
and American Express directly debit the Bundy Account each month to pay themselves the accumulated Credit Card Processing Fees. I understand that the Credit Card Processing Fees owed for prepetition processing of credit card payments total approximately $1,700 in the aggregate for Vantiv, Sigma, and American Express. 46.
I believe that the payment of Credit Card Processing Fees in arrears, including the
prepetition amounts described above, through direct debiting of the Debtors' Accounts by Sigma Payment Solutions, Vantiv, and American Express is necessary to maintaining the integrity of the Credit Card Processing System postpetition and without interruption and that so doing is essential to avoid irreparable harm to Debtors. Interrupting the debiting of the Credit Card
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Processing Fees would risk disrupting the credit-card revenue received by Debtors and the smooth running of the on-line reservation systems. 47.
In the ordinary course of business, Debtors maintain records of the items and
transactions involved in the Cash Management System and can account for the movement of funds into, out of, and between the Accounts. 48.
I believe that permitting Debtors to maintain their existing Accounts and Cash
Management System and manage their cash in accordance with their prepetition practices is in the best interests of the Debtors' estates and their creditors. Through the Cash Management System, the Debtors are able to collect and disburse funds, as well as monitor and control the movement of cash. The cost and delay associated with opening new accounts and establishing modified cash management practices and policies would disrupt the Debtors' transition into chapter 11 and the maintenance of their businesses. Conversely, maintenance of the Cash Management System will help avoid the inconvenience, cost, and delay associated with transferring cash management operations to new accounts. 49.
I believe that a waiver of the Guidelines is appropriate to the extent that they
require Debtors to maintain a separate bank account for the deposit of cash to pay payroll tax and other tax obligations, because withholding and payment of payroll taxes is handled by Debtors' third-party payroll processor and because Debtors have little or no liability for sales and use taxes, and any sales or use taxes that Debtors do owe are remitted and accounted for efficiently through the existing Cash Management System. 50.
I believe that a waiver of the Guidelines is appropriate to the extent that they
require Debtors to establish a specific debtor-in-possession bank account for cash collateral. Debtors' only secured creditor is their direct or indirect parent, J.J.F. Management Services, Inc.,
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which is aware of the Chapter 11 Cases, has consented to the use of cash collateral (subject to entry of an appropriate order, including an approved budget), and is capable of tracking the use of its cash collateral by its own subsidiaries. I believe that establishing a separate cash collateral account will not provide significant benefits or protections to J.J.F. Management Services, Inc. 51.
I believe that a modification of the Guidelines is appropriate to require Debtors to
place only the legend "D.I.P." on their electronically-printed checks to reflect their status as debtors in possession. I believe that Debtors' financial success depends upon the commitment and confidence of their Franchisees and the willingness of their vendors to continue doing business with Debtors and am concerned that placing on their checks the phrase "Debtor in possession," along with a bankruptcy court case number, will alarm Franchisees and vendors and endanger that confidence. 52.
The intercompany transactions involved in the Cash Management System are
ordinary course transactions that are in furtherance of ensuring that the Debtors and their nondebtor affiliates pay and account for their own obligations and should be continued in the ordinary course operation of the Cash Management System. 53.
In their ordinary course of business, the Debtors use numerous Business Forms,
including check stock, letterhead, invoices, business cards, envelopes, marketing materials, and franchise agreements. Debtors' check stock does not include preprinted information specific to the Debtors; that information is printed on the checks by Debtors' accounting software when checks are written. 54.
I believe that authorization to use the Business Forms will minimize disruption to
the Debtors' businesses and save the unnecessary expense and delay of ordering entirely new forms.
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E.
Debtors' Motion for Entry of an Order (I) Authorizing, But Not Directing, Debtors to (A) Pay and Honor Prepetition Wages, Salaries, Other Compensation, Reimbursable Business Expenses, and Employee Benefit Obligations, and (B) Maintain and Continue Certain Compensation and Benefit Programs Postpetition; and (B) Granting Related Relief (the "Wage Motion")
55.
In the Wage Motion, Debtors request that the Court enter an Order authorizing,
but not directing, the Debtors, in accordance with their past and current policies and practices, to: (a) pay unpaid prepetition wages, salaries, and accrued compensation including incentive compensation, health and welfare benefit obligations, retirement plan obligations, and reimbursable business expenses, as applicable to the Workforce (as defined herein), and all costs related thereto (collectively, the "Workforce Obligations"); (b) maintain and continue to honor the Workforce Obligations as they were in effect as of the Petition Date and as such may be modified, amended or supplemented from time to time in the ordinary course. In addition, the Debtors request that the Court authorize and direct banks and other financial institutions (collectively, the "Banks") to honor and process checks and electronic transfer requests related to all of the foregoing. 56.
As described in more detail in the Wage Motion, to minimize disruption to the
Debtors' business, the Debtors request authority, but not direction, to make payments related to the prepetition Workforce Obligations in an estimated amount of at least $20,222.04. 57.
The Debtors' employees are paid bi-weekly. The Debtors' last payroll was paid to
employees on July 20, 2017, on account of the period from July 3, 2017 through July 16, 2017. The next payroll should be paid on August 3, 3017 for the period of July 17, 2017 through July 30, 2017. This pay period will capture 7 prepetition days (the "Prepetition Pay Period") for which, I believe, employees should be paid in the payroll to be issued on August 3, 3017.
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I believe that no single individual will be paid over the statutory cap of $12,850
on account of any prepetition claim for wages, benefits, or other compensation. 59.
The Debtors employ 13 employees, all of whom are full-time employees
("Workforce"). I believe that any delay in paying the Workforce Obligations will adversely impact the Debtors' relationships with their Workforce and could irreparably harm the Workforce's morale, dedication, confidence, and cooperation. I do not think that the Debtors can risk the substantial damage to their business that would certainly occur if such delay or failure were to happen. 60.
At the same time, I understand that the vast majority of the Workforce relies
exclusively on their compensation and benefits to pay their daily living expenses and to support their families. Thus, I believe that the members of the Workforce will be exposed to significant financial constraints if the Debtors are not permitted to continue paying wages and salaries, providing employee benefits, and maintaining certain programs in the ordinary course of business. 61.
In the ordinary course of business, the Debtors incur Workforce Obligations for:
base wages and salaries, including paid vacation, and sick leave pay ("Wages and Salaries"), incentive based compensation ("Incentive Compensation"), reimbursement for approved, reasonable expenses incurred in the scope of certain employees' employment ("Reimbursable Business Expenses"), employer contributions to employee benefit programs, such as medical insurance, dental insurance, vision insurance, disability insurance, and life insurance ("Benefit Programs"), and matching contributions to the 401(k) plan equal to 1% of the employee's salary ("Retirement Plan").
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The anticipated amount accrued but unpaid for each of these Workforce
Obligations 3 , as of the Petition Date is as follows:
63.
•
Wages & Salaries - $17,619.00
•
Incentive Compensation - $445.00 4
•
Reimbursable Business Expenses- $35.00 5
•
Benefit Programs - $1,946.85
•
Retirement Plan - $176.19
The Debtors use Payroll Network to administer their payroll and time
management systems. The Debtors pay Payroll Network approximately $100 per payroll period for these administrative services; these amounts are automatically deducted from payroll funds. As of the Petition Date, the Debtors were current with their obligations to Payroll Network. 64.
The Debtors routinely deduct certain amounts from employees' compensation that
represent various Withholding Obligations that the Debtors are required to remit to third parties, including, for example, various federal, state and local income, and Federal Insurance Contribution Act and other taxes and that such amounts are held in trust for the benefit of the payees. As of the Petition Date, all applicable Employee Withholdings were remitted to the applicable third parties. 65.
Should any prepetition amounts become due and owing in connection with the
Employee Withholdings, the Debtors believe that these amounts, which are held for payment to a 3
Al! Workforce Obligations are initially paid by the Debtors, Certain Workforce Obligations may be reimbursed to the Debtors by subsidiaries or affiliated entities as set forth in the motion regarding cash management systems.
4
The amount of Incentive Compensation is determined on a monthly basis; the estimated pre-petition amount is based on the amount of June, 2017 Incentive Compensation for the corresponding pre-petition period in July, 2017.
5
The amount of Reimbursable Business Expenses cannot be determined until the end of the pay period; the $35.00 amount relates to a fixed Reimbursable Business Expense for a cellphone reimbursement.
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third party (e.g., the taxing and regulatory authorities) and are properly deemed to be held in trust, do not constitute property of the Debtors' estates. Further, although the Debtors believe that they have the authority to direct such funds to the appropriate parties in the ordinary course of business, out of an abundance of caution, in the Wage Motion, the Debtors request authority to remit all Employee Withholdings to the appropriate parties and to continue to direct such actions post-petition in the ordinary course of the Debtors' business as necessary. 66.
In the Wage Motion, the Debtors also seek an order authorizing the Banks to
receive, process, honor, and pay all of the Debtors' prepetition checks and fund transfers on account of any prepetition Workforce Obligations, including all checks issued with regard to Employee Benefits, and prohibiting the Banks from placing any holds on, or attempting to reverse, any automatic transfers to any account of an employee or other party for prepetition Workforce Obligations. The Debtors also seek an order authorizing them to issue new postpetition checks or effect new post-petition fund transfers on account of the prepetition Workforce Obligations to replace any prepetition checks or fund transfer requests that may be dishonored or rejected, and to reimburse, at their sole discretion, employees for any fees or expenses incurred in connection with any rejected checks as a result of the Debtors' bankruptcy filing. 67.
I believe that the Debtors payments on account of the Workforce Obligations, and
the continuance of certain programs in the ordinary course of business and on a post-petition basis, are necessary to preserve and protect the Debtors' assets and estates.
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Pursuant to 28 U.S.C. ยง 1746, I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge and belief. Dated: July 24, 2017
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Gregg 'Pr. ! h Director and Assistant Secretary of Rent-AWreck of America, Inc.