Case 13-32527 Document 159 Filed in TXSB on 11/18/13 Page 1 of 11 UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re: TimeGate Studios, Inc., Debtor. § § § § § § Case No. 13-32527(JB) (Chapter 7) OBJECTION TO TRUSTEE’S MOTION TO SELL MINIMUM IP AND SECTION 8 IP ASSETS PURSUANT TO SECTION 363(f)[Dkt. No. 156]; AND EMERGENCY MOTION TO MODIFY BIDDING PROCEDURES (This relates to Docket Nos. 145, 152, and 156) THIS MOTION SEEKS AN ORDER THAT MAY ADVERSELY AFFECT YOU. IF YOU OPPOSE THE MOTION, YOU SHOULD IMMEDIATELY CONTACT THE MOVING PARTY TO RESOLVE THE DISPUTE. IF YOU AND THE MOVING PARTY CANNOT AGREE, YOU MUST FILE A RESPONSE AND SEND A COPY TO THE MOVING PARTY. YOU MUST FILE AND SERVE YOUR RESPONSE WITHIN 21 DAYS OF THE DATE THIS WAS SERVED ON YOU. YOUR RESPONSE MUST STATE WHY THE MOTION SHOULD NOT BE GRANTED. IF YOU DO NOT FILE A TIMELY RESPONSE, THE RELIEF MAY BE GRANTED WITHOUT FURTHER NOTICE TO YOU. IF YOU OPPOSE THE MOTION AND HAVE NOT REACHED AN AGREEMENT, YOU MUST ATTEND THE HEARING. UNLESS THE PARTIES AGREE OTHERWISE, THE COURT MAY CONSIDER EVIDENCE AT THE HEARING AND MAY DECIDE THE MOTION AT THE HEARING. REPRESENTED PARTIES SHOULD ACT THROUGH THEIR ATTORNEY. EMERGENCY RELIEF HAS BEEN REQUESTED. IF THE COURT CONSIDERS THE MOTION ON AN EMERGENCY BASIS, THEN YOU WILL HAVE LESS THAN 21 DAYS TO ANSWER. IF YOU OBJECT TO THE REQUESTED RELIEF OR IF YOU BELIEVE THAT THE EMERGENCY CONSIDERATION IS NOT WARRANTED, YOU SHOULD FILE AN IMMEDIATE RESPONSE. TO THE HONORABLE JEFF BOHM, UNITED STATES CHIEF BANKRUPTCY JUDGE: CNH Partners LLC and AQR Capital Management LLC (together “CNH”), parties-ininterest in the above-captioned case, file this Objection to the Trustee’s Motion to Sell Minimum Case 13-32527 Document 159 Filed in TXSB on 11/18/13 Page 2 of 11 IP and Section 8 IP Assets Free and Clear of All Liens, Claims, Interests and Encumbrances Pursuant to 11 U.S.C. § 363(f) [Dkt. No. 156] (“Sale Motion”), and Emergency Motion to Modify Bidding Procedures (“Emergency Motion”), and respectfully state as follows: PRELIMINARY STATEMENT 1. The Trustee’s Sale Motion (Docket No. 156) must be denied because there is a higher and better offer on the table for the Minimum IP and Section 8 IP assets. The Trustee has a duty to maximize value to the Debtor’s estate, but was unable to properly consider a bid jointly submitted by Digital Tribe Games and CNH (the “Digital/CNH Bid”) within the constraints imposed by the Order Setting Deadlines Regarding Bidding Procedures (Docket No. 152). The bidding procedures should be modified to allow the Trustee to conduct an auction in open Court. For the avoidance of doubt, CNH does not object the Trustee’s motion to sell the Kohan IP and Miscellaneous IP assets, as outlined in the Trustee’s motion at Docket No. 155. BACKGROUND 2. Prior to bankruptcy, the Debtor was in the business of developing and marketing video games. The Debtor’s assets included intellectual property rights to games, some of which are completed games and others of which are still in development. The assets include the Minimum IP, the Section 8 IP, and other assets, as defined in the Trustee’s Sale Motion. 3. In November 2011, SouthPeak Interactive Corporation (“SouthPeak”) obtained an arbitration award against the Debtor for fraud and breach of contract. On April 9, 2013, the United States Court of Appeals for the Fifth Circuit issued an opinion upholding SouthPeak’s award against the Debtor. TimeGate Studios, Inc. v. SouthPeak Interactive LLC, 713 F.3d 797 (5th Cir. 2013), pet. rehr’g denied, Case No. 12-20256 (5th Cir. Aug. 20, 2013). 4. The Debtor filed a voluntary petition under chapter 11 of the Bankruptcy Code on May 1, 2013. The Court converted the case to a case under chapter 7 upon a finding that the 2 Case 13-32527 Document 159 Filed in TXSB on 11/18/13 Page 3 of 11 Debtor filed the chapter 11 case “in bad faith.” May 8, 2013, Tr. 172:14-16 [Dkt. No. 51]. On May 14, 2013, Rodney Tow was appointed chapter 7 trustee (“Trustee”). 5. SouthPeak filed a claim against the Debtor’s estate for approximately $10 million based on the award against TimeGate. See Claim No. 5-2 (judgment for fraud). The SouthPeak claim represents over 98% of the unsecured claims filed in this case by value. CNH has a lien on the SouthPeak claim, and is therefore a party-in-interest. 6. On October 1, 2013, the Trustee filed his Emergency Motion to Establish Bidding Procedures and Bid Deadline (“Procedures Motion”) [Dkt. No. 143], for the purpose of selling certain intellectual property assets, including the Minimum IP, Section 8 IP, and others. The Court granted the Bidding Procedures Motion and entered its Order Establishing Bidding Procedures and Bid Deadline (“Procedures Order”) [Dkt. No. 145]. 7. The Procedures Order authorized the Trustee to accept bids and provided that: Potential bidder[s] must also provide the Trustee with sufficient and adequate information to demonstrate to the sole and absolute satisfaction of the Trustee, that such bidder has the ability to consummate the transaction or otherwise perform under the terms of any proposals. Offers containing this information and satisfying the Trustee as to other information requirements will be considered qualifying bids (“Qualified Bid”) and any entity submitting a Qualified Bid shall be a “Qualified Bidder.” Procedures Order ¶ b. 8. On October 25, 2013, the Trustee opened the auction and designated the bids of SouthPeak, Digital Tribe Games, and CNH as “qualified bids.” Sale Motion ¶ 15. 9. Digital Tribe Games is an established developer and marketer of video games. Digital Tribe Games has sales of $6 million on an online video game platform known as Steam, where end users can log in and play video games. The Steam platform is the primary sales platform for the Section 8 games, and is an anticipated primary platform for the Minimum Game. 3 Case 13-32527 Document 159 Filed in TXSB on 11/18/13 Page 4 of 11 10. CNH is an investment fund in a family of funds with over $1 billion under management. CNH is a major investor in the video game industry. 11. Following multiple rounds of bidding on October 25, the Trustee was unable to determine the highest and best bid and proposed to seek additional time from the Court. 12. On October 26, 2013, the Trustee filed his Emergency Motion to Modify Bidding Procedures and Deadlines (“Modified Procedures Motion”) [Dkt. No. 149]. On October 28, 2013, the Court granted the Modified Procedures Motion and entered its Order Setting Deadlines Regarding Bidding Procedures (“Modified Procedures Order”) [Dkt. No. 152]. 13. Under the Modified Procedures Order, the auction was set to resume on November 4, 2013, and the Trustee was required to file a motion to sell the IP assets by November 15, 2013. 14. The Trustee convened an auction on November 4, 2013. After multiple rounds of bidding, which yielded multiple bids for the Minimum IP and Section 8 IP, including: a. Atari SA: $30,000 cash, plus a 15% royalty for 24 months. b. SouthPeak: $40,000, plus a 50% royalty (no time limit). 15. The Trustee concluded that “based upon the information provided and available at the time . . . the cash ($30,000) and royalty interest (15%) offered by Atari exceeded the value of the cash ($40,000) plus royalty interest (50%) offered by SouthPeak.” Sale Motion at ¶ 24. 16. SouthPeak objected to the Trustee’s decision to close bidding on November 4. 17. On November 11, 2013, Digital Tribe and CNH submitted the Digital/CNH Bid, which offered $50,000 cash and a 25% royalty interest. 18. The Digital/CNH bid offers higher cash and royalty interests for the Minimum IP and Section 8 IP than the Atari bid endorsed by the Trustee’s Sale Motion. 4 Case 13-32527 Document 159 Filed in TXSB on 11/18/13 Page 5 of 11 19. The Trustee stated that, although he has considered the Digital/CNH Bid, he “is not in a position to accept or reject the bid in light of the existing bid procedures without further authority from the Court.” Sale Motion at ¶ 26 (emphasis added). RELIEF REQUESTED 20. The Court should deny the Trustee’s Sale Motion because there is a higher and better offer on the table. 21. The Court should modify the bidding procedures to allow the Trustee to finish evaluating the bidders and to conduct an auction in open Court. BASIS FOR RELIEF A. Trustee’s Sale Motion Should Be Denied Because There is a Better Offer. 22. The Trustee has a “duty to maximize the value of the estate [and] must demonstrate that the proposed sale is the highest and best offer.” The Cadle Company v. Mims (In re Moore), 608 F.3d 253, 263 (5th Cir. 2010). 23. In Moore, the estate’s largest creditor submitted an “overbid” in response to the trustee’s proposed sale of a cause of action to a third party. Id. at 255-56. The Trustee wanted to sell the cause of action for $37,500. The majority creditor responded by offering to pay $50,000. The Bankruptcy Court approved the trustee’s proposed sale, reasoning that it was a settlement within the Trustee’s discretion under Rule 9019. 24. The creditor appealed and argued that the trustee “had a duty to maximize the value of claims . . . [and] the trustee could not push through a settlement for a lesser amount than the major creditor was willing to pay.” Id. at 255. 25. The Fifth Circuit agreed with the creditor, holding that “[o]n remand, the bankruptcy court should compare the value to the estate of the release of that claim, if any, against the value of [the major creditor’s] higher bid.” Id. The Fifth Circuit further instructed 5 Case 13-32527 Document 159 Filed in TXSB on 11/18/13 Page 6 of 11 that “[o]n remand, the bankruptcy court must afford proper deference to the view of Cadle, as the estate’s majority creditor and the only creditor to take an interest in the claims. Our caselaw recognizes the paramount interest of creditors and requires deference to their reasonable views concerning proposed settlements.” Id.   Finally, with respect to the frustrated expectations of the runner up bidder, the Fifth Circuit noted that “[e]veryone who deals with a bankruptcy trustee in a transaction that is not in the ordinary course of business is charged with the knowledge that the law may require court approval.” Id. at 266. 26. Here, the Trustee proposes to sell the Minimum IP and the Section 8 IP for $30,000 cash and a 15% royalty interest for 24 months. Sale Motion at 6. The Digital/CNH Bid is a higher and better offer of $50,000 cash and a 25% royalty (without a time limit). Id. The Trustee’s proposed sale must be rejected because it does not maximize value to the estate. B. Trustee Articulates No Sound Justification to Reject the Higher and Better Bid. 27. “A sale of assets under § 363 . . . must be supported by an articulated business justification, good business judgment, or sound business reasons.” Moore, 608 F.3d at 263. Although the Trustee must generally sell at the highest price, “a bankruptcy court may accept a lower bid in the presence of sound business reasons, such as substantial doubt that the higher bidder can raise the cash necessary to complete the deal.” Id.; see also In re Gulf Coast Oil Corp., 404 B.R. 407, 422 (Bankr. S.D. Tex. 2009) (“The movant must establish a business justification for the transaction and the bankruptcy court must conclude, from the evidence, that the movant satisfied its fiduciary obligations and established a valid business justification.”). 28. Here, the Trustee articulates no valid basis for selling on terms less favorable than the Digital/CNH Bid. The only explanation provided is that the Trustee was not “in a position to accept or reject the bid in light of the existing bidding procedures.” Sale Motion at ¶ 26. That is not a justification, much less a business justification, for selling assets to a lower bidder. 6 Case 13-32527 Document 159 Filed in TXSB on 11/18/13 Page 7 of 11 29. In Moore, the Fifth Circuit commented that a trustee might have a valid basis for rejecting a lower bid if there were “substantial doubt that the higher bidder can raise the cash necessary to complete the deal.” 608 F.3d at 263. The Trustee has alleged nothing like that here. In fact, Digital Tribe Games is a proven leader in the video game industry, with sales of over $6 million on the Steam platform (which is the same platform on which the Section 8 games are sold, and the platform on which sales of Minimum is expected). CNH has over $1 billion in assets under management and is a major investor in the video game industry. 30. Further, the Trustee cannot simply rely on the bidding procedures. First, the procedures obviously failed to generate the highest and best bid. Second, the Trustee himself ignored the bidding procedures by allowing several of bids in increments other than $25,000. See Procedures Order at ¶ e (“To the extent that the bidding involves cash consideration, the minimum bid increments will be $25,000 at the Auction.”). Indeed, the “winning” bidder designated by the Trustee in his Sale Motion opened its bidding at “$1 cash plus 10% royalty” and concluded by bidding “$30,000 cash plus 15% royalty.” Sale Motion at 5-6. 31. Finally, the Trustee himself designated Digital Tribe Games and CNH as “Qualified Bidders” under the Procedures Order when he invited their participation in the first round of bidding. Sale Motion ¶ 15. Under the plain terms of the Procedures Order, a “Qualified Bidder” are those who demonstrated the ability to consummate the transaction “to the sole and absolute satisfaction of the Trustee.” Procedures Order ¶ b. The Trustee already determined that Digital Tribe Games and CNH are capable of consummating the proposed transaction. Therefore, there simply is no valid business justification for ignoring the Digital/CNH Bid. 7 Case 13-32527 Document 159 Filed in TXSB on 11/18/13 Page 8 of 11 C. Bidding Procedures Should Be Modified to Give the Trustee Time to Evaluate Bids. 32. The Trustee’s duty is to maximize value to the estate. That is not possible if the Trustee does not have sufficient time to review all bids for the assets he intends to sell. A reasonable extension of time for the Trustee to review bids is in the best interest of the estate. 33. Finally, the Trustee should be permitted to conduct an auction in open Court for the assets. This would be in the best interest of the estate because it would be efficient. The Trustee will have to demonstrate to the Court’s satisfaction a valid basis for any proposed sale following the auction. A contemporaneous presentation of that evidence is appropriate and will allow the Court to make an informed judgment about the propriety of any sale. Basis for Expedited Relief 34. Emergency relief is necessary so that CNH’s motion to modify the bidding procedures may be heard at the same time as the Sale Motion. Under the Modified Procedures Order, the hearing on the Trustee’s Sale Motion is set for November 21, 2013, at 10:00 am. The Trustee filed his Sale Motion less than an hour before midnight on Friday, November 15, 2013. 35. Undersigned counsel conferred with counsel to the Trustee, who does not oppose expedited consideration of CNH’s motion to modify the bidding procedures. CONCLUSION WHEREFORE, CNH respectfully requests that this Court (i) deny the Sale Motion; (ii) modify the bidding procedures to schedule a live auction before the Court; and (iii) grant such relief on an interim basis and carry all objections pending a final hearing. 8 Case 13-32527 Document 159 Filed in TXSB on 11/18/13 Page 9 of 11 Respectfully submitted November 18, 2013. DIAMOND McCARTHY LLP By: /s/ Christopher R. Murray . Christopher R. Murray (TBN 24081057) 909 Fannin, 15th Floor Houston, TX 77010 Telephone: 713-333-5100 Facsimile: 713-333-5199 cmurray@diamondmccarthy.com COUNSEL TO CNH PARTNERS, INC. AND AQR CAPITAL MANAGEMENT CERTIFICATE OF CONFERENCE I certify that on multiple occasions, including on November 18, 2013, I conferred with Erin Jones, counsel to the Trustee, regarding the basis for the foregoing objection and the motion to modify the bidding procedures. The Trustee did not agree to the relief sought, except that the Trustee does not oppose expedited consideration of the motion to modify bidding procedures so that it may be heard along with the Trustee’s own sale motion, which is set for hearing on November 21, 2013. /s/ Christopher R. Murray CERTIFICATE OF SERVICE I certify that on November 18, 2013 a copy of the foregoing document was served by the Electronic Case Filing System for the United States Bankruptcy Court for the Southern District of Texas to all parties registered to receive such service. /s/ Christopher R. Murray 9 Case 13-32527 Document 159 Filed in TXSB on 11/18/13 Page 10 of 11 LIMITED SERVICE LIST Debtor Debtor’s Counsel Trustee TimeGate Studios, Inc. 14140 Southwest Freeway, Suite 200 Sugar Land, TX 77478 Karl Daniel Burrer Haynes & Boone 1221 McKinney Ste 2100 Houston, TX 77010 Rodney D Tow Tow and Koenig PLLC 26219 Oak Ridge Drive The Woodlands, TX 77380 U.S. Trustee Internal Revenue Service Internal Revenue Service P.O. Box 7346 Philadelphia, PA 191017346 Nancy Lynne Holley Christine A. March U S Trustee 515 Rusk St Ste 3516 Houston, TX 77002 20 Largest Unsecured Creditors Agora Games, Inc. 359 Broadway Third Floor Troy, NY 12180 Ahmad, Zavitsanos & Anaipakos 1221 McKinney Street Suite 3460 Houston, TX 77010-2009 Birthplace Management Group 1 818-602 West Hastings St. Vancouver, BC V6B 1P2 Clanservers LLC 2400 Main Street Extension Ste 12 Sayreville, NJ 08872 Epic Games, Inc. 620 Crossroad Blvd Cary, NC 27518 DJ2 Entertainment 612 Santa Monica Blvd Santa Monica, CA 90401 Dugan, Bruce 584 Henry Street Apt. #4 Brooklyn, NY 11231 Euflora Interscaping, Inc. 220 W. Cowan Houston, TX 77007-5031 Healix, Inc. 14140 Southwest Freeway Suite 400 Sugar Land, TX 77478 Jason’s Deli (T00355) Department #271 P.O. Box 4869 Houston, TX 77210-4869 Hypernia 1221 Brickell Avenue Suite 900 Miami, FL 33131 NY Pizzeria 403 Highway 6 Sugar Land, TX 77478 Gringo’s Mexican Kitchen No. 5 12330 Southwest Fwy Stafford, TX 77477 Iron Mountain P.O. Box 915004 Dallas, TX 75391-5004 Snowed In Studios, Inc. 700 Industrial Avenue Ste 200 Ottawa, ON K1G 0Y9 Case 13-32527 Document 159 Filed in TXSB on 11/18/13 Page 11 of 11 SouthPeak Interactive Corp. Staples Advantage c/o N. West Short P.O. Box 83689 Chicago, IL 60696-3689 West Short & Associates, PC 313 W. 10th Street Georgetown, TX 78626 Warner Robison, LLC 2537 Southwest Kristin Dr. Lee’s Summit, MO 64082 Secured Creditors Alan B. Chaveleh 18 Windsor Place Sugar Land, TX 77478 Healix Place, Inc. 14140 Southwest Freeway Ste 400 Sugar Land, TX 77478 Morteza Baharloo 3032 San Felipe Houston, TX 77019 Notices of Appearance Joshua W. Wolfshohl Aaron J. Powers Porter Hedges LLP 1000 Main Street, 36th Floor Houston, TX 77002 Kyung S. Lee Christopher R. Murray Diamond McCarthy LLP 989 Fannin St., 15th Floor Houston, Texas 77010 Fort Bend I.S.D. c/o Yolanda Humphries Perdue, Brandon, Fielder, Collins & Mott, LLP 1235 North Loop West Ste 600 Houston, TX 77008   Ahmad, Zavitsanos & Anaipakos John Zavitsanos 1221 McKinney Street Suite 3460 Houston, TX 77010-2009 Jesse Moore Hunton & Williams, LLP 111 Congress Ave, Ste 510 Austin, Texas 78701 Fort Bend I.S.D. c/o Owen M. Sonik Perdue, Brandon, Fielder, Collins & Mott, LLP 1235 North Loop West Ste 600 Houston, TX 77008 Ahmad, Zavitsanos & Anaipakos Ariadne S. Montare 1221 McKinney Street Suite 3460 Houston, TX 77010-2009 Jason W. Harbour Hunton & Williams, LLP Riverfront Plaza, East Tower 951 E. Byrd St. Richmond, VA 23219-4074 Shawn M. Christianson Buchalter Nemer, P.C. 55 Second St., 17th Floor San Francisco, CA 941053493