Judge sustains SEC objection; FriendFinder revamped plan confirmed

By Jim Witters

Wilmington, Del., Dec. 16 - FriendFinder Networks Inc. hastily reworked its plan of reorganization and received confirmation after the judge sustained an objection from the Securities and Exchange Commission during a Dec. 16 hearing in the U.S. Bankruptcy Court for the District of Delaware.

Judge Christopher S. Sontchi agreed with the SEC that releases granted by FriendFinder shareholders to company directors and officers under the original Chapter 11 plan were unacceptable, because the shareholders received no value for their releases and no evidence supported the debtors' position that the releases were essential for the confirmation of a plan.

SEC attorney Susan Sherrill-Beard argued that Congress' intent in crafting the bankruptcy code was to help ensure that directors and officers be held accountable for stock fraud and other illegal actions.

The requested releases would have negated a pending Florida court case in which several FriendFinder directors and officers are accused of securities fraud.

The debtors and their directors and officers were attempting "an end run around public policy," Sherrill-Beard told the court.

Under the proposed plan, FriendFinder's shareholders were not permitted to vote and had to opt out of a provision to grant releases.

The SEC argued that shareholder consent should have been sought through an affirmative action, not the absence of an opt-out selection.

FriendFinder attorney David D. Cleary said the notices, solicitation packages and opt-out provisions in the plan provided ample opportunity for informed consent by shareholders.

About 20 shareholders of more than 200 opted out of the releases, according statements made in court.

Sherrill-Beard said shareholders learned on page 5 of the solicitation packages that they would receive nothing under the proposed plan.

The disclosure left them no reason to read the remainder of the packet, she said.

Judge Sontchi agreed.

The non-debtor third party granting the releases - the shareholders - must receive a material, significant consideration from the non-debtor third parties receiving the releases - the director and officers, the judge said.

The debtors' proposed plan contained no such consideration, he determined.

In addition, the law requires a showing by the debtors that no plan could be confirmed in the absence of the releases.

Sontchi ruled that no evidence was presented demonstrating that no plan could be confirmed.

Cleary conferred with his clients, then requested a two-hour recess to modify the Chapter 11 plan to comply with the judge's ruling.

Following a two-hour break, the debtors submitted a plan that omitted the third-party releases.

David L. Buchbinder, representing the U.S. Trustee's Office, told the court he and Sherrill-Beard had reviewed the revised plan and found it acceptable. Sherrill-Beard did not attend the last session of the hearing.

Creditor treatment

Under the confirmed plan, treatment of creditors includes:

• Holders of allowed first-lien noteholder claims will receive a combination of new first-lien notes and cash;

• Holders of allowed second-lien noteholder claims will receive a share of 100% of the new common stock of FriendFinders Network and, in certain circumstances, an additional cash distribution;

• Holders of allowed administrative claims, allowed priority tax claims, allowed priority claims and other secured claims will be paid in full;

• Holders of allowed general unsecured claims will receive payment in full in cash on the plan effective date or have their claims reinstated by the reorganized debtors and paid in the ordinary course of business;

• Intercompany interests will be reinstated, in full or in part, and treated in the ordinary course of business or canceled and discharged; and

• The plan does not provide for any recovery to securities litigation claims or to existing FFN equity interests.

Cleary said the debtor expects the plan to become effective on Dec. 31.

FriendFinder, a Boca Raton, Fla.-based internet-based social networking and multimedia entertainment company, filed for bankruptcy on Sept. 17.The Chapter 11 case number is 13-12404.

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