Dolan Co.'s prepackaged reorganization drew opposition from the U.S. trustee as shareholders sought postponement of a May 1 hearing on approval of the plan, negotiated before the Minneapolis legal-services company filed for Chapter 11 bankruptcy on March 23.
Before bankruptcy, secured lenders including Bayside Capital Inc. voted on the plan, designed to reduce debt by about $100 million to some $50 million by giving them all the new stock and at least $50 million in new debt. Unsecured creditors didn't vote on the plan because they will be paid in full, the company said.
The plan would also extinguish existing preferred and common stock.
An official shareholders' committee appointed by the U.S. trustee on Wednesday filed a preliminary objection to the plan last week and asked for the delay of the approval hearing.
Dolan responded by asking the judge to disband the committee, saying the group will cause "significant harm" and "needless expenditures."
The U.S. trustee, the Justice Department's bankruptcy watchdog, sided with the shareholders, saying pre-bankruptcy disclosure materials were inadequate and confirmation should be refused. The disclosure statement didn't explain a $50 million decline in the Minneapolis-based company's value over six weeks, the U.S. trustee said.
The balance sheet attached to the Chapter 11 petition showed equity of $50 million, according to the U.S. Trustee. The disclosure statement, on the other hand, showed the equity as wiped out because the company will be worth only $110 million to $127 million when the plan is implemented.
The disclosure statement didn't say how the value could drop so much so fast, the U.S. trustee said, adding that because of the inadequate discussion of valuation, the plan can't be confirmed and creditors must vote again.
If the plan goes through, Bayside will have a majority position in the new stock.