AOG Entertainment, Inc. and Core Litigation Trust

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------X
In re: 	:
:
AOG ENTERTAINMENT, INC., et al,1 	: 	Chapter 11
: 	Case No. 16-11090 (SMB)
Debtor. 	:
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MEMORANDUM DECISION DENYING SIMON ROBERT FULLER’S MOTION TO
EXTEND THE CHALLENGE DEADLINE AND EX PARTE APPLICATION FOR
AUTHORITY TO CONDUCT A RULE 2004 EXAMINATION
A P P E A R A N C E S:
MCDERMOTT WILL & EMERY LLP
Counsel for Simon Robert Fuller
340 Madison Avenue
New York, New York 10173
Timothy W. Walsh, Esq.
Darren Azman, Esq.
Of Counsel
WILLKIE FARR & GALLAGHER LLP
Counsel for the Debtors and Debtors in Possession
787 Seventh Avenue
New York, New York 10019
Matthew A. Feldman, Esq.
Paul V. Shalhoub, Esq.
Matthew Freimuth, Esq.
Andrew S. Mordkoff, Esq.
Of Counsel
KLEE, TUCHIN, BOGDANOFF & STERN LLP
Counsel for the Ad Hoc Group of First Lien Lenders
1999 Avenue of the Stars, 39th Floor
Los Angeles, California 90067
Lee R. Bogdanoff, Esq.
David A. Fidler, Esq.
Whitman L. Holt, Esq.
Of Counsel
1 	A list of the Debtors in these chapter 11 cases and the last four digits of each Debtor’s taxpayer
identification number is attached as Schedule 1 to the Declaration of Peter Hurwitz, President of Certain
Debtors, in Support of Chapter 11 Petitions and First Day Pleadings. (ECF Doc. # 3.)
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QUINN EMANUEL URQUHART & SULLIVAN, LLP
Counsel for Crestview Media Investors, L.P.
865 South Figueroa Street, 10th Floor
Los Angeles, California 90017
Eric D. Winston, Esq.
Of Counsel
--and--
51 Madison Avenue, 22nd Floor
New York, New York 10010
Scott C. Shelley, Esq.
Of Counsel
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
Counsel for the Official Committee of
Unsecured Creditors
30 Rockefeller Plaza
New York, New York 10112
Craig A. Wolfe, Esq.
Jason R. Alderson, Esq.
Of Counsel
STUART M. BERNSTEIN
United States Bankruptcy Judge:
Simon Robert Fuller (“Fuller”) is a former director and chief executive officer of debtor
19 Entertainment Limited (“19 Entertainment”). Contemplating a possible challenge to the
Debtors’ prepetition secured debt, he has filed two motions that are currently before the Court.
The first seeks to obtain discovery under Federal Rule of Bankruptcy Procedure 2004 (“Rule
2004”) from Debtor AOG Entertainment, Inc. (“AOG”) and certain of its debtor and non-debtor
affiliates (collectively, the “CORE Entities”) regarding the prepetition secured debt, a certain
United Kingdom audit described below, and other matters. (See Ex Parte Motion for Order
Authorizing Simon Robert Fuller to (A) Conduct a 2004 Examination of AOG Entertainment,
Inc. and its Debtor and Non-Debtor Affiliates, and (B) Seek Related Document Production, dated
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Aug. 2, 2016 (the “Rule 2004 Motion”) (ECF Doc. # 286).) The second seeks to extend the
deadline for Fuller to bring a challenge to the Debtors’ prepetition secured debt. (See Simon
Robert Fuller’s Motion to Extend Challenge Deadline, dated Aug. 12, 2016 (the “Extension
Motion”) (ECF Doc. # 308).) The Debtors oppose both motions, and the prepetition lenders
oppose the Extension Motion.
The Court denies the Extension Motion for the reasons explained below. Because the
challenge period has run and no party can attack the extent or validity of the prepetition secured
debt, the Rule 2004 Motion is moot. Alternatively, Fuller has failed to show cause for the relief
sought in the Rule 2004 Motion. Accordingly, both motions are denied.
BACKGROUND2
A. 	Relevant Parties and Entities
The Debtors and their non-debtor affiliates and subsidiaries (collectively, the “Debtors”
or the “Company”) are in the business of owning, producing, developing and monetizing
entertainment content. (Hurwitz Declaration ¶ 7.) The Company’s portfolio includes the
“IDOL” brand of shows, including American Idol and other similar franchises (collectively,
“IDOLS”), and So You Think You Can Dance (“SYTYCD”). (Id.)
Fuller is a former director and chief executive officer of 19 Entertainment and is the
creator of the IDOLS programs and SYTYCD. (Rule 2004 Motion at ¶ 2; Hurwitz Declaration
at ¶ 51.) In January 2010, Fuller left his director and officer positions and entered into certain
2 	The following conventions are used in citing to the record. Unless otherwise noted, all ECF document
numbers refer to case no. 16-11090. “Tr.” refers to the transcript of the hearing held in these chapter 11 cases on
August 22, 2016 (ECF Doc. # 388), and “Hurwitz Declaration” refers to the Declaration of Peter Hurwitz, President
of Certain Debtors, In Support of Chapter 11 Petitions and First Day Pleadings, dated April 28, 2016. (ECF Doc. #
3.)
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agreements with the Debtors, including a Consultancy Deed with 19 Entertainment. (Rule 2004
Motion at ¶ 2; Hurwitz Declaration at ¶ 51.) Under the Consultancy Deed, Fuller agreed to
provide the Debtors with creative services. (Rule 2004 Motion at ¶ 2; Hurwitz Declaration at ¶
51.) In exchange, he was entitled to receive a share of the profits generated by the IDOLS and
SYTYCD business lines for as long as he provided services for the programs. (Rule 2004
Motion at ¶ 2; Hurwitz Declaration at ¶ 51.) The Debtors have rejected the Consultancy Deed
pursuant to 11 U.S.C. § 365. (See Order Under Section 365(a) of the Bankruptcy Code,
Bankruptcy Rule 6006 and Local Bankruptcy Rule 6006-1 Authorizing Rejection of Certain
Agreements with Simon Robert Fuller Nunc Pro Tunc to the Petition Date, dated Aug. 23, 2016
(ECF Doc. # 342).)
Fuller is a creditor of 19 Entertainment, one of the CORE Entities. The ultimate parent of
the CORE Entities is the nondebtor CORE Entertainment Holdings, Inc. (“CORE Holdings”).
(Hurwitz Declaration, Sched. 2, at 1.) CORE Holdings owns 100% of the stock of the Debtor
CORE Entertainment Inc. (“CORE Entertainment”). (Id.) CORE Entertainment, in turn, owns
directly or indirectly all of the enterprise value of the operating CORE Entities through its stock
ownership. (Id.)
B. 	The 2011 Transactions
1. 	Apollo Tender Offer
The basic facts underlying the transactions at issue are not in dispute. CKX, Inc.
(collectively with its subsidiaries, “CKX”), the predecessor to the CORE Entities, was founded
in 2005 and was a publicly traded company. (Hurwitz Declaration at ¶ 18.) On June 21, 2011,
affiliates of Apollo Global Management, LLC (collectively, “Apollo”) consummated a tender
offer and merger of CKX (the “Acquisition”), by which they acquired control of the entities that
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now comprise the CORE Entities. (Id. at ¶ 19.) Apollo paid a purchase price of $5.50 for each
share of CKX, representing an enterprise value of approximately $572 million. (CKX, Inc.,
Current Report (Form 8-K) (June 16, 2011), Ex. 99.1 (Disclosures Regarding CKX, Inc.) (“SEC
Disclosure”) at 8.)
CKX financed the Acquisition, in part, through the issuance of $360 million of senior
secured notes (the “Acquisition Notes”). (Id. at 11, 13; Hurwitz Declaration at ¶ 29.) Several
CKX affiliates, including 19 Entertainment, guaranteed the Acquisition Notes and pledged their
assets as security for their guarantees. (SEC Disclosure at 4, 13.)
2. 	Delaware Appraisal Litigation
A group of CKX shareholders opted out of the $5.50 per share cash-out price and brought
an action in the Delaware Chancery Court to assert their appraisal rights. See Huff Fund Inv.
P’ship v. CKx, Inc., No. CIV 6844-VCG, 2013 WL 5878807, at *1 (Del. Ch. Nov. 1, 2013),
adhered to, No. CIV 6844-VCG, 2014 WL 2042797 (Del. Ch. May 19, 2014), judgment entered
sub nom. Huff Fund Inv. P’ship v. CKX, Inc., No. CIV 6844-VCG, 2014 WL 2763756 (Del. Ch.
June 17, 2014), and aff'd sub nom. Huff Fund Inv. P’ship v. CKx, Inc., No. 348, 2014, 2015 WL
631586 (Del. Feb. 12, 2015). Following a trial, the Chancery Court ruled that the merger price
of $5.50 per share represented “the best and most reliable indication of CKX’s value.” Id. at
*11. It found that the marketing and sale process resulting in the Acquisition was “thorough,
effective, and free from any spectre of self-interest or disloyalty,” multiple entities had made
“unsolicited, credible bids” and the Board of Directors and its advisors had successfully
instigated a “bidding war.” Id. at *13. The Delaware Supreme Court affirmed the Chancery
Court’s findings “on the basis of and for the reasons assigned by” the Chancery Court. Huff,
2015 WL 631586, at *1.
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3. 	Acquisition Note Refinancing
In December of 2011, CORE Entertainment, as borrower, entered into a first lien term
loan agreement (the “First Loan”) and a second lien term loan agreement (the “Second Loan,”
and together with the First Loan, the “Prepetition Loans”), in the respective amounts of $200
million and $160 million. (Hurwitz Declaration at ¶¶ 28, 32.) The Prepetition Loans were
guaranteed by certain CORE Entities (collectively, with the borrower, the “Loan Parties”),
including 19 Entertainment. The proceeds of the Prepetition Loans were used to refinance the
Acquisition Notes, (id. at ¶¶ 29, 33), and as of the Petition Date, the Loan Parties owed the
aggregate amount of $398 million on the Prepetition Loans. (Id. at ¶¶ 31, 34).
C. 	The Chapter 11 Cases
Each of the Debtors filed a voluntary petition for relief under chapter 11 of the
Bankruptcy Code on April 28, 2016. Two business days later, on May 3, 2016, counsel for
Fuller entered an appearance in these cases. (Notice of Appearance and Request for Service of
Papers, dated May 3, 2016 (ECF Doc. # 48).). The United States Trustee appointed the Official
Committee of Unsecured Creditors (the “Committee”) (Appointment of Official Committee of
Unsecured Creditors, dated May 17, 2016 (ECF Doc. # 70)), and the Committee retained
Sheppard, Mullin, Richter & Hampton LLP (“Sheppard Mullin”) as its counsel, (Order
Authorizing the Official Committee of Unsecured Creditors to Retain and Employ Sheppard
Mullin Richter & Hampton, LLP as its Counsel Nunc Pro Tunc to May 20, 2016, dated Aug. 2,
2016 (ECF Doc. # 285)), and Zolfo Cooper, LLC (“Zolfo Cooper”) as its financial advisors and
bankruptcy consultants. (Order Authorizing the Official Committee of Unsecured Creditors of
AOG Entertainment, Inc., et al., to Employ and Retain Zolfo Cooper, LLC as its Financial
Advisors and Bankruptcy Consultants, Nunc Pro Tunc to June 16, 2016, dated Aug. 2, 2016
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(ECF Doc. #282).) Fuller sought membership on the Committee. (Debtors’ Objection to Ex
Parte Motion for Order Authorizing Simon Robert Fuller to (A) Conduct a 2004 Examination of
AOG Entertainment, Inc. and its Debtor and Non-Debtor Affiliates, and (B) Seek Related
Document Production, dated Aug. 8, 2016 (the “Rule 2004 Motion Objection”), at ¶ 15 (ECF
Doc. # 301).) The United States Trustee did not appoint Fuller to the Committee, and Fuller
never asked the Court to direct the United States Trustee to change the composition and appoint
him to the Committee. See 11 U.S.C. § 1102(a)(4).
1. 	Interim and Final DIP Order and Challenge Deadline
On May 16, 2016, the Debtors filed their motion to use cash collateral and obtain debtor
in possession financing. (Motion for an Order Under 11 U.S.C. §§ 105, 361, 362, 363(c),
364(c), 364(d), 364(e) and 507 and Fed. R. Bankr. P. 2002, 4001 and 9014: (I) Authorizing
Debtors to Obtain Postpetition Financing; (II) Authorizing Debtors to Continue to Use Cash
and/or Cash Collateral; (III) Granting Adequate Protection to Prepetition Secured Parties; and
(IV) Granting Related Relief (the “DIP Motion”) (ECF Doc. # 67).) Pursuant to the common
practice in this Court, the proposed interim financing order included several stipulations by
which the Debtors acknowledged the extent and validity of the Prepetition Loans, guarantees and
related security interests. (DIP Motion, Ex. A, at ¶ 4.) As directed by the Court’s debtor in
possession financing guidelines, see BANKR. S.D.N.Y.R. 4001-2(f), the proposed order included
a carve-out from the Debtors’ stipulations that allowed any party in interest to challenge any of
the stipulated facts within sixty days of the entry of the proposed interim order. (DIP Motion,
Ex. A, at ¶ 19.) If no challenge was filed by the time the deadline expired, the stipulated facts
were deemed established for all purposes.
On June 29, 2016, the Court entered the Second Interim Order Under 11 U.S.C. §§ 105,
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361, 362, 363(c), 364(c), 364(d), 364(e) and 507 and Bankruptcy Rules 2002, 4001 and 9014 (I)
Authorizing the Debtors to Obtain Postpetition Financing, (II) Authorizing the Debtors to
Continue to Use Cash and/or Cash Collateral, (III) Granting Adequate Protection to Prepetition
Secured Parties and (IV) Granting Related Relief (the “Second Interim DIP Order”) (ECF Doc.
# 185). The Second Interim DIP Order set August 27, 2016 as the new challenge deadline
(hereinafter, the “Challenge Deadline”). The Court could extend the Challenge Deadline “for
cause shown.” (Second Interim DIP Order at ¶ 20.)
On July 27, 2016, the Court entered the Final Order Under 11 U.S.C. §§ 105, 361, 362,
363(c), 364(c), 364(d), 364(e) and 507 and Bankruptcy Rules 2002, 4001 and 9014 (I)
Authorizing the Debtors to Obtain Postpetition Financing, (II) Authorizing the Debtors to
Continue to Use Cash and/or Cash Collateral, (III) Granting Adequate Protection to Prepetition
Secured Parties and (IV) Granting Related Relief (the “Final DIP Order”) (ECF Doc. # 271).
The Final DIP Order retained the August 27, 2016 Challenge Deadline and the proviso that the
Court could extend the Challenge Deadline for cause. (Final DIP Order at ¶ 20.)
2. 	The Committee’s Investigation
Following its appointment, the Committee, through its attorneys and advisers, conducted
an investigation of the liens securing the Debtors’ obligations and potential causes of action that
the Committee might bring. (Tr. at 45:20-24.) The Committee sought to determine the validity
of liens on intellectual property and other business assets as well as of liens on equity interests in
affiliates, particularly non-debtor, cash-holding affiliates. (Id. at 46:23-47:13.) Its professionals
conducted diligence regarding the Acquisition, including a factual and legal review of subsidiary
guarantor solvency. (Id. at 65:12-66:15.) With respect to potential causes of action, the
Committee focused on potential tort claims and facts that might support equitable subordination
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of senior creditors. (Id. at 47:14-18.) It also examined valuation issues and, in the course of its
valuation inquiry, sought to determine the actual value of lien avoidance and other potential
causes of action to the creditor body given the value of the secured lenders’ deficiency claims in
these cases. (Id. at 47:23-48:6.)
In conducting its investigation, the Committee reviewed documents relating to the
Prepetition Loans, including perfection documents and UCC statements, (Tr. at 51:18-52:2), as
well as “guarantee documents” relating to subsidiary guarantees. (Id. at 58:6-15). The
Committee also reviewed documents provided by Committee members and by the Debtors’
lenders. (Id. at 72:7-14.) Additionally, Zolfo Cooper directly engaged with the Debtors’
advisers in order to develop a deeper understanding of issues related to the Debtors’ valuation.
(Id. at 52:3-8.) Sheppard Mullin had “extensive” contact with Fuller’s counsel during this
investigation, including a telephone call during which Fuller and his counsel explained Fuller’s
theories regarding various causes of action to the Committee and its advisors. (Id. at 33:4-23.)
The Committee’s counsel testified that the Committee “very carefully” considered the
merits of seeking to avoid subsidiary obligations with respect to the Prepetition Loans and
related guarantees. (Id. at 58:6-15.) Following its investigation, the Committee concluded that it
“had an uphill battle” and faced “numerous obstacles” with respect to any potential litigation, (id.
at 52:24-53:4; 55:19-21), including the expiration of the statute of limitations on fraudulent
transfer claims depending on which jurisdiction’s law (Delaware, California or New York)
governed the claims, (id. at 38:12-39:16, 53:12-20), and the conclusion that the enterprise was
worth in 2011 the roughly $500 million Apollo paid for it. (Id. at 65:12-66:15.)
Simultaneously with its investigation, the Committee engaged the Debtors and their
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prepetition secured creditors in settlement discussions aimed at securing a “pot” of funds “that
would be available for general unsecured creditors.” (Id. at 46:16-22.) The Committee’s
investigation and these negotiations resulted in a “settlement” pursuant to which the plan
consideration for general unsecured creditors was increased from a pro rata share of $850,000 to
a pro rata share of $2.375 million and conditions and restrictions on that consideration were
removed. (Letter from Craig A. Wolfe, Esq., to the Court, dated Aug. 8, 2016, at 2 (ECF Doc. #
300); see also Tr. at 56:11-17 (referring to settlement).) Given the Committee’s views that
potential litigation would face significant hurdles, the Committee decided that the interests of all
general unsecured creditors would be best served by agreeing to this “settlement” with the
Debtors. (Tr. at 56:11-57:8.) On August 4, 2016, the Debtors filed the Second Amended Joint
Chapter 11 Plan of Reorganization for AOG Entertainment, Inc. and its Affiliated Debtors (the
“Second Amended Plan”) (ECF Doc. # 294), reflecting the aforementioned “settlement.” (See
Second Amended Plan §§ 1.78, 5.3(b)(ii), 5.4(b)(ii), 5.5(a) (setting forth distribution to general
unsecured creditors).)
3. 	Fuller’s Involvement
In addition to assisting the Committee in its investigation, Fuller undertook his own
investigation into potential causes of action related to the Prepetition Loans and a 2015 audit of
certain of the Debtors’ finances in the United Kingdom (the “UK Audit”). (Tr. at 10:3-21.)
Fuller’s counsel sent the Debtors “an informal document request in the form of a [motion to
authorize a Rule 2004 examination]” on June 9, 2016. (See id. at 10:17-21 (describing document
request and approximate timing); see also Rule 2004 Motion Objection at ¶ 16 (noting date of
Fuller’s document request).) In response to Fuller’s request, the Debtors compiled and produced
over 2,000 pages of publicly available information. (Rule 2004 Motion Objection at ¶ 16; Tr. at
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11:2-7.) According to Fuller, the production did not satisfy the request. (Letter from Darren
Azman, Esq., to the Court, dated Aug. 3, 2016 (the “Azman Letter”), at 1 (ECF Doc. # 291) (“In
an effort to obtain the required discovery without this Court’s intervention, Mr. Fuller delayed
the filing of the 2004 Motion and sent a copy of it to the Debtors on June 9, 2016. The Debtors
have refused to provide Mr. Fuller with the requested documents.”).)
Fuller also shared his draft Rule 2004 motion with the Committee. The Committee told
Fuller that it did not see a need to file the motion but that it would not seek to dissuade Fuller
from filing his own motion. (Tr. at 34:4-17.)
In addition, Fuller discussed the settlement of his personal claims and the continuation of
his consulting arrangement with the Committee, (Reply of Simon Robert Fuller to Debtors’
Objection to Ex Parte Motion for Order Authorizing Simon Robert Fuller to (A) Conduct a 2004
Examination of AOG Entertainment, Inc. and its Debtor and Non-Debtor Affiliates, and (B) Seek
Related Document Production, dated Aug. 10, 2016 (the “Rule 2004 Motion Reply”), at ¶ 17
(ECF Doc. # 304)), but not with the Debtors. (Tr. at 15:18-25). The negotiations led nowhere,
and according to Committee counsel, “at no time did we ever indicate that we were there, or
were almost there, or we were getting there.” (Id. at 35:5-12.)
Fuller eventually filed the Rule 2004 Motion on August 2, 2016, two days prior to the
date on which the Debtors filed the Second Amended Plan and filed the Extension Motion on
August 12, 2016.
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D. 	Parties’ Contentions
1. 	The Rule 2004 Motion
Fuller contends that a Rule 2004 examination is warranted because it would permit him
to “determine, inter alia, (a) the effect that the Prepetition Loans had on 19 Entertainment, and
(b) the merits of potential causes of action arising from the Prepetition Loans and the UK Audit,”
(Rule 2004 Motion at ¶ 14), the Debtors have refused to comply with Fuller’s informal discovery
requests, (id. at ¶ 16), and the chapter 11 cases are proceeding on an “expedited track,” which
necessitates an immediate Rule 2004 examination. (Id. at ¶ 15.) Further, this “expedited track”
gives rise to an obligation on the part of the Debtors to provide “complete and expeditious access
to documents and information necessary to evaluate claims and causes of action that may
significantly impede the Debtors’ ability to confirm a plan.” (Id. at ¶ 17.) Fuller does not
believe that the Committee’s investigation was “comprehensive,” (Azman Letter at 1), and
contends that in any event, the Committee did not investigate the UK Audit, (Rule 2004 Motion
Reply at ¶ 13), and its investigation should not preclude his own investigation. (See Rule 2004
Motion Reply at ¶ 5 (disputing Debtors’ contention that duplicative discovery is improper).)
Additionally, Fuller excuses his delay in filing the Rule 2004 Motion asserting his belief
that he was engaged in good-faith negotiations regarding a settlement of his claims and a
potential continuation of his consulting relationship, (Rule 2004 Motion Reply at ¶¶ 17-18), and
he wanted to defer to the Committee’s investigation while it was ongoing. (Tr. at 13:10-15.)
Accordingly, his delay cannot be taken as evidence of intent to harass. (See Rule 2004 Motion
Reply at ¶ 23.)
The Debtors oppose the Rule 2004 Motion. They contend that Fuller bears the burden of
establishing “good cause,” and in making its determination, the Court must consider the relative
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benefits and burdens of a Rule 2004 examination on the parties, the necessity of the examination
to establish Fuller’s claims and the potential undue hardship or injustice that denial of the Rule
2004 Motion would cause Fuller. (Rule 2004 Motion Objection at ¶¶ 19-20.) 	The Debtors
assert that Fuller cannot demonstrate good cause because his proposed investigation is
duplicative of the Committee’s investigation, (id. at ¶ 23), the discovery that Fuller seeks is
overly broad, burdensome and “tangential” in nature, (id. at ¶¶ 29-31), and Fuller’s requests are
harassing in nature as evidenced by their breadth. (Id. at ¶ 35.) Fuller also cannot demonstrate
prejudice given the Committee’s investigation and the resulting “settlement,” (id. at ¶ 39-41),
and any time pressure to conduct an examination at this juncture is purely the result of Fuller’s
delay in filing the Rule 2004 Motion. (Id. at ¶ 42.) According to the Debtors, Fuller’s purpose in
pursuing the Rule 2004 Motion is to “derail the Debtors’ reorganization process and harass the
Debtors in order to cut a better deal for himself” rather than to vindicate any legitimate claim the
Debtors’ estates might have against the prepetition lenders. (Id. at ¶ 31.)
The Committee has not formally opposed the Rule 2004 Motion, but has expressed its
view that a Rule 2004 examination would be “a waste of time” because it believes the claims that
Fuller seeks to investigate “were fully vetted.” (Tr. at 66:16-67:3.) It does not, therefore, make
sense to expend further resources and delay the plan confirmation process to investigate such
claims. (Id.) The Committee has also expressed its view that the size of the deficiency claims
arising from the Prepetition Loans significantly attenuates the potential value of any lien
avoidance actions in these cases. (Tr. at 47:19-48:16.)
2. 	The Extension Motion
Fuller argues that if this Court grants the Rule 2004 Motion, he will lack sufficient time to
conduct his own investigation and commence an adversary proceeding given that the Challenge
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Deadline expired on August 27, 2016, (Extension Motion at ¶¶ 5, 11), after he made the
Extension Motion.
The Debtors respond that Fuller’s decision not to commence an investigation of the
collateral securing the Prepetition Loans does not constitute cause because Fuller had ample time
to bring a challenge. 	The Debtors filed and properly served the DIP Motion on May 16, 2016,
and the proposed interim order included a challenge deadline. (Debtors’ Objection to Simon
Robert Fuller’s Motion to Extend Challenge Deadline, dated Aug. 22, 2016 (the “Extension
Motion Objection”), at ¶ 16 (ECF Doc. # 332).) Indeed, the deadline is required under the
Court’s financing guidelines incorporated into its Local Rules. The August 27, 2016 Challenge
Deadline was initially set in the Second Interim DIP Order, which was entered on June 29, 2016,
and the Challenge Deadline was fixed under the terms of the Final DIP Order, which was
entered on July 27, 2016. (Extension Motion Objection, at ¶¶ 8, 16.)
The Debtors also argue that Fuller has not alleged that any aspects of the transactions and
financings he wishes to investigate are “unusually complicated” so as to warrant an extension of
the Challenge Deadline, (id. at ¶ 17), and the discovery Fuller seeks goes far beyond the scope of
the stipulations contained in the Final DIP Order, including by veering into an investigation of
the unrelated UK Audit. (Id. at ¶ 19.) In addition, the Debtors reiterate their contention that
Fuller’s litigation strategy is to “harass the Debtors in order to cut a better deal for himself,” and
that “[s]uch efforts do not constitute ‘cause shown’ for extending the Challenge Deadline.” (Id.
at ¶ 21.)
The ad hoc group of lenders under the First Loan (the “Ad Hoc Group”) and Crestview
Media Investors, L.P., a lender under both Prepetition Loans (together with the Ad Hoc Group,
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the “Objecting Creditors”) also object to the Extension Motion. In addition to reiterating certain
of the Debtors’ arguments, the Objecting Creditors emphasize that the Challenge Deadline
“exists to prompt all parties in interest to timely pursue an investigation, formulate their theories,
and articulate proposed derivative claims within the specified timeline.” (Joint Opposition of (i)
Ad Hoc Group of First Lien Lenders and (ii) Crestview Media Investors, L.P. to Simon Robert
Fuller’s Motion to Extend Challenge Deadline, dated Aug. 22, 2016, at ¶ 5 (ECF Doc. # 330).)
Fuller failed to act for a period of months and the “interests of finality” embedded in the
Challenge Deadline ought to prevail over the interests Fuller asserts. (Id.)
Additionally, counsel to the Ad Hoc Group points out that the transaction documents
expressly grant indemnity and contribution rights to each guarantor. The CORE Entities were
worth over $500 million and solvent when the Debtors entered into the Prepetition Loans, and to
the extent any guarantor pays on its guarantee it could look to that enterprise value for
reimbursement. (Tr. at 78:25-79:8) Accordingly, the guarantees could not have rendered any
guarantor insolvent. (Id.)
DISCUSSION
A. 	The Extension Motion
Fuller has failed to demonstrate cause to extend the Challenge Deadline. First, he sat on
his rights, making the tactical choice not to pursue a Rule 2004 examination earlier in these
cases. In June 2016, he asked for and received documents from the Debtors. Although he now
complains that the production was inadequate, he did not pursue further discovery at that time.
He also shared his proposed Rule 2004 request with the Committee. The Committee
declined to file the motion but told him he should feel free to do so. Fuller then waited almost
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two full months before filing the Rule 2004 Motion. He attempts to excuse the delay stating he
wanted to await the results of the Committee’s investigation and he believed that he would be
able to settle his personal claim. Both of these rationales, however, highlight Fuller’s tactical
decision not to follow through on his investigation earlier.
Second, the Challenge Deadline exists for the benefit of the prepetition secured lenders
and is part of a larger bargain struck by the parties and approved by the Court. To establish
cause, the challenging party must show that someone prevented or interfered with its
investigation. The paradigm for cause is the prepetition lenders’ delay in producing requested
discovery or obstructing that discovery. No one other than Fuller delayed the discovery process
in this case. No one, including the prepetition lenders, led Fuller to believe that an investigation
was unnecessary and/or his claim would be settled. Absent a third party’s efforts to prevent,
frustrate or delay an investigation that is being pursued diligently, there is no reason to deprive
the prepetition lenders of the benefit of the bargain embodied in the Final DIP Order that
induced them to consent to the use of their cash collateral.
Accordingly, the Extension Motion is denied.
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B. 	The Rule 2004 Motion
1. 	The Rule 2004 Motion is Moot
The Challenge Deadline in these cases expired on August 27, 2016. Because the
Extension Motion is denied for the reasons set forth above, Fuller can no longer challenge the
stipulations contained in the Final DIP Order, and as such, cannot demonstrate any cause to
conduct the Rule 2004 examination he seeks.3 The Rule 2004 Motion is therefore moot.
2. 	Fuller Has Failed to Show Good Cause
Rule 2004 provides in relevant part, that the Court may authorize the examination of any
entity relating “to the acts, conduct, or property or to the liabilities and financial condition of the
debtor, or to any matter which may affect the administration of the debtor’s estate.” FED. R.
BANKR. P. 2004(b). In chapter 11 cases, the examination may extend to matters relating “to the
operation of any business and the desirability of its continuance, the source of any money or
property acquired or to be acquired by the debtor for purposes of consummating a plan and the
consideration given or offered therefor, and any other matter relevant to the case or to the
formulation of a plan.” Id. The party seeking Rule 2004 discovery has the burden to show good
cause for the examination it seeks, and relief lies within the sound discretion of the Bankruptcy
Court. Picard v. Marshall (In re Bernard L. Madoff Inv. Secs. LLC), Adv. Pro. No. 08-01789,
2014 WL 5486279, at *2 (Bankr. S.D.N.Y. Oct. 30, 2014); see In re Bd. of Dirs. of Hopewell
3 	Fuller also seeks to investigate a statement in the UK Audit that CORE Entertainment had provided a letter,
sometime prior to September 2015, stating its intention to provide the necessary financial support to ensure that the
Company continued as a going concern for the next twelve months. (Tr. at 7:15-24). Fuller implies that the letter
speaks as of the date that the auditors signed off on the UK Audit rather than on the undisclosed date it was written,
and questions why the Debtors had to file chapter 11 before the year was up. (Id. at 7:15-8:4.) The Debtors have
attributed their financial problems primarily to the cancellation of “American Idol” in May 2015. (Hurwitz
Declaration at ¶15.) In any event, Fuller has not pointed to any relationship between CORE Entertainment’s
representation of support in 2015 and the issues surrounding the 2011 financing.
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Int’l Ins. Ltd., 258 B.R. 580, 587 (Bankr. S.D.N.Y. 2001) (Rule 2004 gives the Court
“significant” discretion).
A party seeking to conduct a Rule 2004 examination typically shows good cause by
establishing that the proposed examination “‘is necessary to establish the claim of the party
seeking the examination, or . . . denial of such request would cause the examiner undue hardship
or injustice.’” In re Metiom, Inc., 318 B.R. 263, 268 (S.D.N.Y. 2004) (quoting In re Dinubilo,
177 B.R. 932, 943 (E.D. Cal. 1993)); accord In re Drexel Burnham Lambert Grp., Inc., 123 B.R.
702, 712 (Bankr. S.D.N.Y. 1991). In evaluating a request to conduct a Rule 2004 examination,
the Court must “balance the competing interests of the parties, weighing the relevance of and
necessity of the information sought by examination. That documents meet the requirement of
relevance does not alone demonstrate that there is good cause for requiring their production.”
Drexel Burnham, 123 B.R. at 712.
Even if the Rule 2004 Motion were not moot, Fuller has not demonstrated good cause to
grant it. First, Fuller does not contend that his proposed investigation is needed to establish his
claim. He has already filed a claim.
Second, he has not shown that the denial of his application will result in undue hardship
or injustice. The CORE Entities have been the subject of at least two investigations that
examined the events relevant to the transactions that Fuller now seeks to investigate. The first
investigation occurred in the context of the Huff shareholder litigation in the Delaware state
courts. Although Fuller is not bound by the decisions of the Delaware courts, the outcome of the
Huff litigation demonstrated that the CORE Entities had, as a group, an enterprise value of over
$500 million in June 2011, when they issued the Acquisition Notes and 19 Entertainment
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executed its guarantee and pledge, and by extension in December 2011, when the Loan Parties
entered into the Prepetition Loans. Fuller, who has touted his “intimate knowledge of the
Debtors’ operations obtained during [his] employment with 19 Entertainment and during the
more recent consultancy period,” (Rule 2004 Motion at ¶ 4), has not suggested otherwise.
The CORE Entities’ enterprise value in 2011 is the key to any fraudulent transfer claim.
In order to successfully pursue a constructive fraudulent transfer claim on behalf of 19
Entertainment, Fuller must show that 19 Entertainment was insolvent at the time it gave the
guarantee or was rendered insolvent by giving the guarantee.4 At the time of the Prepetition
Loans, 19 Entertainment undertook a contingent guarantee liability of $360 million. However, a
guarantor has a right of indemnity against the principal obligor. RESTATEMENT (THIRD ) OF
SURETYSHIP & GUARANTY § 22 (1996); see Varsames v. Palazzolo, 96 F.Supp.2d 361, 368
(S.D.N.Y. 2000) (noting that if a guarantee is enforced, a guarantor may pursue remedies against
the primary obligor for the amount to be paid); Fredericks v. Shapiro, 160 F.R.D. 26, 28
(S.D.N.Y. 1995) (“If a guarantee is enforced, the original obligor is liable to the guarantor for the
amounts required to be paid.”); J.T. Moran Fin. Corp. v. Phonetel Techs., Inc. (In re J.T. Moran
Fin. Corp.), 124 B.R. 926, 930 (Bankr. S.D.N.Y. 1991) (“Even though not expressly provided
for in the guaranty, a promise to indemnify the surety is implied by law when a party agrees to
become a guarantor at the behest of the principal obligor.”). The guarantor who pays also has a
right of contribution from any co-guarantors. De Paris v. Wilmington Trust Co., 104 A. 691, 695
(Del. 1918) (“[T]he duty of one guarantor to reimburse his co-guarantor” is “an equitable
principle based on natural justice and was originally enforcible in equity only, but is now
4 	The constructive fraudulent transfer laws include alternative financial tests other than insolvency, but they
were not mentioned by the parties.
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enforcible at law.” (internal citations omitted)); Hard v. Mingle, 99 N.E. 542, 543-44 (N.Y. App.
Div. 1912) (“[S]o long as [one] is legally liable upon his guaranty, he may pay the claim, and
may then seek contribution from his coguarantors.”).)
When 19 Entertainment incurred a contingent obligation under its guarantee of the
Prepetition Loans it simultaneously obtained a contingent right to indemnity from CORE
Entertainment, the primary obligor, as well as contingent rights to contribution from its co-
guarantors. As noted, CORE Entertainment is the direct or indirect parent of all the operating
CORE Entities, and directly or indirectly owns all of the operating CORE Entities’ enterprise
value. In June 2011, Apollo paid approximately $500 million for that enterprise value and the
Delaware courts confirmed that the price was fair. Thus, 19 Entertainment had a contingent right
of indemnity against a primary obligor ultimately worth in excess of $500 million, and as the Ad
Hoc Group argues, the transaction had no apparent effect on 19 Entertainment’s solvency.
The second investigation was undertaken by the Committee in these cases. The
testimony from the Committee’s counsel regarding the Committee’s investigation indicates that
the Committee was able to gain a clear picture of the condition of the Debtors’ estates, including
the viability of potential avoidance actions relating to the Prepetition Loans. The investigation
weighed the merits of a challenge to the Prepetition Loans and guarantees, including issues
relating to the statute of limitations, solvency and the ultimate benefits of a successful challenge.
The Committee concluded that the Debtors’ Second Amended Plan represents a superior
opportunity for unsecured creditors to realize value when compared to potential litigation. (Tr. at
56:11-17.)
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It is true that Fuller and the Committee have different perspectives. The Committee
considered the interests of the Debtors’ general creditors as a whole whereas Fuller’s concern is
solely himself as a creditor of 19 Entertainment. But if Fuller believed that the Committee’s
approach did not adequately take into account the interests of the creditors of 19 Entertainment,
he could have asked the United States Trustee to appoint a separate committee for 19
Entertainment, and if United States Trustee refused, sought that relief from the Court. See 11
U.S.C. §§ 1102(a)(2). He never did.
Given the speculative nature of the claim to avoid 19 Entertainment’s guarantee and
pledge and the posture of the chapter 11 cases, countervailing considerations of cost and delay
weigh against granting the Rule 2004 Motion. Chapter 11 is an expensive process. The
Committee’s counsel has estimated that Sheppard Mullin is incurring fees at the approximate
rate of $300,000 per month. (Tr. at 68:7-18). Debtors’ counsel has incurred fees and expenses
between $500,000 and $1 million in each of the first three months of these cases. (See Statement
of Services Rendered and Expenses Incurred by Willkie Farr & Gallagher LLP, Counsel for
AOG Entertainment, Inc., et al., for the Period April 28, 2016 Through May 31, 2016, dated June
20, 2016 (ECF Doc. # 151) (April and May fees and expenses); Statement of Services Rendered
and Expenses Incurred by Willkie Farr & Gallagher LLP, Counsel for AOG Entertainment, Inc.,
et al., for the Period June 1, 2016 Through June 30, 2016, dated July 20, 2016 (ECF Doc. # 238)
(June fees and expenses); Statement of Services Rendered and Expenses Incurred by Willkie Farr
& Gallagher LLP, Counsel for AOG Entertainment, Inc., et al., for the Period July 1, 2016
Through July 31, 2016, dated Aug. 19, 2016 (ECF Doc. #328) (July fees and expenses).) In
addition, the Final DIP Order requires the Debtors to pay the professional fees of the prepetition
lenders and their agents. (Final DIP Order ¶¶ 13(c), 16(c).) A confirmation hearing is
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scheduled for September 22, 2016, and extending these chapter 11 cases to allow an
investigation of speculative claims may add significant costs that the Debtors’ estates and their
creditors will have to bear. Accordingly, Fuller has failed to demonstrate cause to conduct a
Rule 2004 investigation, and the Rule 2004 Motion is denied.
Settle separate orders for each motion on notice.
Dated: New York, New York
September 16, 2016
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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