IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ---------------------------------------------------------------x : Chapter 11 In re: : : Case No.

11-11795 (KG) PERKINS & MARIE CALLENDERS INC., et al.,1: : Jointly Administered : Debtors. : Ref. Docket Nos. 1131 and 1221 ---------------------------------------------------------------x JOINT RESPONSE OF THE DEBTORS, THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS AND THE RESTRUCTURING SUPPORT PARTIES TO THE OBJECTION OF TRI-STATE HOUSE OF PANCAKES, INC. TO CONFIRMATION OF THE DEBTORS SECOND AMENDED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE Perkins & Marie Callenders Inc. (f/k/a The Restaurant Company) (PMCI) and its above-captioned affiliated debtor entities (collectively, with PMCI, the Debtors), the Official Committee of Unsecured Creditors of the Debtors (the Creditors Committee) and the noteholder counterparties (the Restructuring Support Parties and, together with the Debtors and the Creditors Committee, the Plan Supporters) to that certain Restructuring Support Agreement, dated as of June 6, 2011, as amended from time to time (the RSA), by and through their respective undersigned counsel, hereby submit this joint response (the Response) to the objection (the Objection) to confirmation of the Debtors Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (including all exhibits thereto and as may be amended, modified or supplemented from time to time, the Plan) filed by Tri-State

The Debtors, together with the last four digits of each Debtors federal tax identification number, are: Perkins & Marie Callenders Inc. (4388); Perkins & Marie Callenders Holding Inc. (3999); Perkins & Marie Callenders Realty LLC (N/A); Perkins Finance Corp. (0081); Wilshire Restaurant Group LLC (0938); PMCI Promotions LLC (7308); Marie Callender Pie Shops, Inc. (7414); Marie Callender Wholesalers, Inc. (1978); MACAL Investors, Inc. (4225); MCID, Inc. (2015); Wilshire Beverage, Inc. (5887); and FIV Corp. (3448). The mailing address for the Debtors is 6075 Poplar Avenue, Suite 800, Memphis, TN 38119.

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070242.1001

House of Pancakes, Inc. (Tri-State) [Docket No. 1131]. In support of this Response, the Plan Supporters respectfully submit as follows: PRELIMINARY STATEMENT The sole remaining objection to confirmation of the Plan2 has been filed by Tri-State, counterparty to a 1976 agreement whereby the Debtors predecessor repurchased exclusive area franchise rights previously sold to Tri-States principal shareholder, Alvin P. Kuper (Kuper) in exchange for ongoing monthly distributions which currently total approximately $500,000 per year. While Tri-State/Kuper has received millions of dollars over the past 35 years from the Debtors and their corporate predecessors, the Debtors ceased making distributions under the 1976 Agreement (defined below) on or shortly before commencement of these chapter 11 cases and do not intend on resuming distributions upon emergence from chapter 11 because the Debtors do not need Tri-States consent or permission to conduct Perkins franchise operations in North Dakota, South Dakota and Nebraska. Nor will the exclusive territorial rights Tri-State sold back to the Debtors predecessor in interest in 1976 revert back to Tri-State as a consequence of the Debtors rejection of the Tri-State Agreements (defined below). Bankruptcy law is clear that Tri-States remedy is limited to asserting an unsecured claim for damages. The Debtors are permitted to use the chapter 11 process to shed burdensome long-term contractual obligations and have decided, in the sound exercise of their business judgment, to do that with respect to the Tri-State Agreements and other area development agreements. Disappointed in its status as, at best, a general unsecured creditor or, at worst, an equity interest

Each of the objections received to the Plan has been resolved, or is anticipated to be resolved, through the insertion of certain agreed-upon language in the proposed order confirming the Plan.

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holder in these cases,3 Tri-State has filed a groundless objection in an effort to hold up confirmation of a plan overwhelmingly supported by all creditor constituencies and key stakeholder groups. As described more fully below, the Objection is premised upon gross mischaracterizations of Tri-States alleged contractual rights and misleading descriptions of the Plan and, therefore, should be overruled. BACKGROUND I. General Background 1. On June 13, 2011 (the Petition Date), each of the Debtors filed a voluntary

petition for relief with this Court under chapter 11 of the Bankruptcy Code. 2. Since the Petition Date, the Debtors have retained possession of their properties

and continue to operate and manage their businesses as debtors in possession pursuant to Bankruptcy Code sections 1107(a) and 1108. 3. Committee. II. Tri-State Agreements Background 4. On December 20, 1973, Kuper and OCASH, the Debtors predecessor in interest, On June 24, 2011, the Office of the United States Trustee appointed the Creditors

entered into that certain agreement (the 1973 Agreement) whereby OCASH sold to Kuper the exclusive rights to franchise Smittys Pancake House restaurants in South Dakota, North Dakota and Nebraska (the Tri-State Territory) in exchange for a payment of $75,000 and certain additional franchise fees. A copy of the 1973 Agreement is attached hereto as Exhibit A. Tri-

This Response is without prejudice to the Plan Supporters right to pursue any and all causes of action against Tri-State, including the recharacterization of any asserted claim that Tri-State may have as an equity interest. For the purposes of this Response, the Plan Supporters will assume that any interest Tri-State may have with respect to the Tri-State Agreements is a general unsecured claim.

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State, a South Dakota corporation of which Kuper serves as the president, is assignee of Kupers rights under the 1973 Agreement. 5. On March 31, 1976, OCASH and Tri-State entered into that certain Area

Franchise Agreement (the Area Franchise Agreement), which amended and modified the 1973 agreement, but preserved the material terms of the 1973 Agreement, including Tri-States exclusive right to franchise Smittys Pancake House and Perkins Cake and Steak House restaurants in the Tri-State Territory. A copy of the Area Franchise Agreement is attached hereto as Exhibit B. 6. On May 4, 1976, OCASH and Tri-State entered into that certain agreement

whereby Tri-State assigned to OCASH all of its rights, title and interest in the Area Franchise Agreement as well as its respective interests in franchise agreements covered with respect to Smittys Pancake House restaurants within the Tri-State Territory (the 1976 Agreement and, together with the 1973 Agreement and the Area Franchise Agreement, the Tri-State Agreements). See 1976 Agreement, 1.A. A copy of the 1976 Agreement is attached hereto as Exhibit C. 7. In exchange for the immediate assignment of Tri-States rights under the 1976

Agreement, the 1976 Agreement provides Tri-State the right to certain monthly distributions equal to the greater of (i) one percent of gross sales of franchised restaurants in the Tri-State Territory and (ii) $50,000 per year. 1976 Agreement, 2. Upon information and belief, Tri-State has received $2,533,479.95 in monthly distributions over the last five calendar years. See TriState House of Pancakes, Inc. Proof of Claim (Claim No. 2136). 8. As security for performance of all monetary obligations under the 1976

Agreement, a conditional assignment was executed by OCASH (the Conditional Assignment)

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whereby OCASH would assign its right, title and interest to the Area Franchise Agreement back to Tri-State upon certain events of default. See 1976 Agreement, 6. Pursuant to the 1976 Agreement, the Conditional Assignment shall come into full force and effect only in the event of a default by OCASH . . . and only upon the expiration of a notice and cure period as set forth in the Conditional Assignment. 1976 Agreement, 6, 8. III. Background Regarding the Plan 9. Prior to the Petition Date, the Debtors and the Restructuring Support Parties

entered into the RSA, which was designed to mutually and consensually develop and agree upon the parameters of a restructuring of the Debtors that would, among other things, delever the Debtors capital structure and establish the framework for an efficient and effective restructuring process. In connection with the RSA, the Debtors and the Restructuring Support Parties also negotiated the principal terms of a plan of reorganization for the Debtors. 10. On July 14-15, 2011, in accordance with the terms of the RSA, the Debtors filed

the Debtors Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the Initial Plan) [Docket No. 221] and the accompanying Disclosure Statement for the Initial Plan [Docket No. 222]. 11. On September 3, 2011, following extensive arms-length negotiations with the

Creditors Committee and certain other parties in interest, the Debtors, with the support of the Restructuring Support Parties, filed the Debtors First Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the First Amended Plan) [Docket No. 896] and the accompanying First Amended Disclosure Statement for the First Amended Plan [Docket No. 897].

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12.

On September 9, 2011, following further negotiations with the Creditors

Committee and certain other parties in interest, the Debtors filed the Plan [Docket No. 922] and the Second Amended Disclosure Statement for the Plan (including all exhibits thereto, the Disclosure Statement) [Docket No. 923]. The Plan is supported by the Debtors, the Creditors Committee and the Restructuring Support Parties. 13. Also on September 9, 2011, the Court entered an order (the Disclosure Statement

Order) [Docket No. 935], among other things, approving the Disclosure Statement and establishing procedures for the solicitation of votes to accept or reject the Plan. 14. In accordance with the Disclosure Statement Order, the Debtors solicited votes to

accept or reject the Plan from holders of claims in Class 3 (Senior Secured Notes Claims), Class 4 (Senior Notes Claims) and Class 5 (General Unsecured Claims). As set forth in greater detail in the voting report filed by Omni Management Group, LLC, the Debtors claims, noticing and balloting agent, all three classes of claims voted overwhelmingly to accept the Plan. IV. The Tri-State Objection 15. Tri-State raises three objections to confirmation of the Plan. First, Tri-State

asserts that the Plan is not feasible if the Debtors cannot assume franchise agreements with Perkins franchisees in the Tri-State Territory.4 Second, Tri-State contends that the Plan fails to properly classify its claim against the Debtors estates in violation of Bankruptcy Code section 1122(a). Finally, Tri-State objects to confirmation of the Plan on the grounds that it purportedly unfairly discriminates against Tri-States claim in violation of Bankruptcy Code section 1129(b). As discussed below, each objection lacks merit and should be overruled.

4 On October 25, 2011, Tri-State filed the Limited Objection of Tri-State House of Pancakes, Inc. to Debtors Assumption of Executory Contracts [Docket No. 1221].

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RESPONSE I. Assumption of the 1976 Agreement Is Not Necessary to Establish Plan Feasibility or to Permit Assumption of the Franchise Agreements in the Tri-State Territory 16. The Debtors bear the burden to show by a preponderance of the evidence that the

Plan has a reasonable probability of success, and is more than a visionary scheme in order to satisfy the feasibility requirement of Bankruptcy Code section 1129(a)(11). In re TCI 2 Holdings, LLC, 428 B.R. 117, 148 (Bankr. D.N.J. 2010) (internal citations omitted); see also In re S. Canaan Cellular Invs., Inc., 427 B.R. 44, 61 (Bankr. E.D. Pa 2010) (same). Debtors have a relatively low threshold of proof in satisfying its burden of demonstrating feasibility. In re TCI 2 Holdings, LLC, 428 B.R. at 148 (quoting In re DBSD N.Am., Inc., 419 B.R. 179, 202 (Bankr. S.D.N.Y. 2009); see also In re GI Holdings Inc., 420 B.R. 216, 267 (D.N.J. 2009) (the key element of feasibility is whether there is a reasonable probability the provisions of the [p]lan can be performed . . . .). Once a debtor establishes that the plan of reorganization provides a reasonable assurance of commercial viability, it has satisfied its burden of demonstrating feasibility for the purposes of Bankruptcy Code section 1129(a)(11). See Heartland Fed. Savs. & Loan Assn v. Briscoe Enters., Ltd., II (In re Briscoe Enters., Ltd., II), 994 F.2d 1160, 1166 (5th Cir. 1993) (Only a reasonable assurance of commercial viability is required.) (internal quotation omitted). Here, the Debtors have clearly met this burden. See Declaration of Joseph H. Santarlasci, JR. in Support of Confirmation of Debtors Second Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (Docket No. 1239) 9. As explained below, Tri-State has failed to establish that assumption of the Tri-State Agreements is necessary for the Debtors to assume franchise agreements in North Dakota, South Dakota and Nebraska, nor have they established that the failure to assume the Perkins franchise agreements in the purported Tri-State Territory would undermine Plan feasibility.

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A.

Tri-State Does Not Hold Territorial Exclusivity Rights Because the Debtors Repurchased Such Rights Previously Granted to Tri-State/Kuper in Exchange for Ongoing Monthly Distributions and Assumption of Tri-States Obligations under the Area Franchise Agreement Tri-State contends that the Plan is not feasible because the reorganized Debtors

17.

will lose the right to operate 28 Perkins restaurants in the Tri-State Territory5 if the Debtors fail to assume the 1976 Agreement and the Area Franchise Agreement between Tri-State and the Debtors. See Objection 10. Tri-State, however, has no rights with respect to the operation of Perkins franchises within the Tri-State Territory it sold all such rights to OCASH, the Debtors predecessor in interest, over 35 years ago pursuant to the 1976 Agreement. See 1976 Agreement 1.A. Section 1.A of the 1976 Agreement provides, in relevant part, as follows: Tri-State does hereby assign, sell and set over unto OCASH all of its respective right, title and interest in and to that certain Area Franchise Agreement dated the 31st day of March, 1976, and further, Tri-State does hereby assign, sell and set over unto OCASH all of its respective interests in those Smittys Pancake House franchise contracts issued with respect to Smittys Pancake House restaurants operating within the Territory . . . 1976 Agreement, 1.A. 18. As a result, as of May 4, 1976, OCASH obtained all right, title and interest under

the Area Franchise Agreement (including, but not limited to, the exclusive territorial rights) and Tri-State was completely divested of any rights relating to the Debtors franchises in the Tri-State Territory except for the monthly distributions contemplated under the 1976 Agreement. Furthermore, OCASH assumed all of Tri-State/Kupers obligations under the Area Franchise Agreement as well as with respect to Smittys Pancake House franchise agreements. See 1976

Tri-State also references the reorganized Debtors loss of the right to operate franchises in the states of Iowa and Wisconsin in support of its argument that the Plan is not feasible; however, the Debtors, the Restructuring Support Parties, the Creditors Committee and Omega Trust reached a settlement whereby, among other things, Omega Trust will waive any and all claims related to territorial exclusivity in the states of Iowa and Wisconsin. Therefore, the inclusion of the reorganized Debtors purported loss of the ability to operate franchises in Iowa and Wisconsin in support of Tri-States argument that the Plan is not feasible is without merit.

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Agreement, 1.B. The end result of this transaction was that in exchange for the Debtors agreement to (i) make certain distributions, including ongoing monthly distributions, to TriState/Kuper, and (ii) to assume and perform all of Tri-State/Kupers obligations under the Area Franchise Agreement and under the Smittys Pancake House franchise agreements, the Debtors repurchased the territorial exclusivity rights previously granted to Tri-State/Kuper under the Area Franchise Agreement. Accordingly, Tri-State/Kuper was completely divested of all right, title and interest with respect to territorial exclusivity upon entry into the 1976 Agreement. B. Tri-State Did Not Have a Properly Perfected Security Interest in the Conditional Assignment on the Petition Date and Cannot Enforce the Conditional Assignment Against the Debtors Estates Section 6 of the 1976 Agreement which is titled Security for Performance of

19.

Obligations Undertaken by OCASH, provides as follows: In order to secure the prompt and faithful performance of all of the terms and conditions undertaken by OCASH, OCASH agrees to enter into a conditional assignment assigning and setting over unto Tri-State all of its right, title and interest in and to that certain Area Franchise Agreement dated the 31st day of March, 1976 . . . It is the intent of the parties hereto that the assignment more fully set forth in Exhibit C shall come into full force and effect only in the event of a default by OCASH in the payment of sums more fully set forth at Paragraphs 2, 3 and 4 of this agreement. 1976 Agreement, 6. 20. By its very terms, the Conditional Assignment, which is attached as Exhibit C to

the 1976 Agreement, was not operative as of the Petition Date because the conditions necessary for the Conditional Assignment to come into full force and effect had not occurred. Furthermore, Tri-State would not be entitled to enforce the Conditional Assignment given its failure to take any action prior to the Petition Date to properly record or perfect its purported security interest in the contractual rights acquired by the Debtors in the 1976 Agreement. Because Tri-State did not perfect its security interest in the Conditional Assignment, the Debtors, by virtue of their status

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as a hypothetical judicial lien creditor as of the Petition Date under section 544(a)(1) of the Bankruptcy Code, have a senior interest in the contractual rights which are the subject of the Conditional Assignment. Accordingly, Tri-State lacks any basis for obtaining relief from the automatic stay in order to enforce the Conditional Assignment, and the contractual rights at issue are preserved for the benefit of the Debtors estates. 21. Tri-States claim to territorial exclusivity is neither supported by the Agreements

nor the Bankruptcy Code. Tri-State agreed to allow the Debtors to repurchase all territorial exclusivity rights in exchange for the significant cash distributions it has received for more than 30 years. Tri-States remedy is limited, at best, to a general unsecured claim for damages against the Debtors estates. C. The Area Franchise Agreement and 1976 Agreement Cannot Be Assumed Because They Are Not Executory Contracts and Merely Give Rise to General Unsecured Claims The Agreements are not executory contracts because only the Debtors have

22.

material obligations under the prepetition agreements with Tri-State. The Third Circuit Court of Appeals has adopted the familiar Countryman definition of an executory contract. See In re Exide Techs., 607 F.3d 957, 962 (3d Cir. 2010) (An executory contract is a contract under which the obligation of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.) (quoting Enter. Energy Corp. v. United States (In re Columbia Gas), 50 F.3d 233, 239 (3d Cir. 1995)). Elaborating, the Third Circuit Court of Appeals in Exide Technologies stated that unless both parties have unperformed obligations that would constitute a material breach if not performed, the contract is not executory under [Bankruptcy Code section] 365. Id. (quoting In re Columbia Gas, 50 F.3d at 239). Further, the Court held that

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the time for testing whether there are material unperformed obligations on both sides is when the bankruptcy petition is filed. Id. (quoting In re Columbia Gas, 50 F.3d at 240). 23. Under this definition, the 1976 Agreement is not an executory contract. Tri-

States only material obligation under the 1976 Agreement was fully performed more than 30 years ago when Tri-State transferred certain assets to the Debtors upon execution of the 1976 Agreement. 1976 Agreement 1.A. Therefore, the 1976 Agreement is not an executory contract. 24. Similarly, the Area Franchise Agreement is not an executory contract. All of Tri-

States rights and obligations under the Area Franchise Agreement were assigned to the Debtors predecessors pursuant to the 1976 Agreement. At the time, the Area Franchise Agreement ceased to be a contract under which both parties had unperformed material obligations. There are no remaining material obligations of Tri-State under the Area Franchise Agreement, and, therefore, the Area Franchise Agreement is not an executory contract. 25. For both the 1976 Agreement and the Area Franchise Agreement, there is no

benefit to the Debtors to be derived from assumption or rejection of these non-executory contracts, and, therefore, there is no requirement to formally reject the Tri-State Agreements. Tri-State is left with only a prepetition unsecured claim against the Debtors estates. See In re Columbia Gas, 50 F.3d at 239 (In cases where the nonbankrupt party has fully performed, it makes no sense to talk about assumption or rejection. At that point only a liability exists for the debtora simple claim held by the nonbankrupt against the estate . . . and [t]he estate has whatever benefit it can obtain from the other partys performance and the trustees rejection would neither add to nor detract from the creditors claim or the estates liability.) (quoting

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Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 450 (1973)). 26. Furthermore, under the Bankruptcy Codes broad definition of claim, Tri-State

is limited to a prepetition unsecured claim for monetary damages. The Bankruptcy Code requires that any claim against a debtor that can be reduced to damages be classified as a claim for bankruptcy purposes. See, e.g., Air Line Pilots Assn v. Continental Airlines (In re Continental Airlines), 125 F.3d 120, 136 (3d Cir. 1997) (finding that employee rights to reinstatement under a collective bargaining agreement could be reduced to monetary damages and, therefore, were claims); 2 COLLIER ON BANKRUPTCY, 101.05[5] (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2010) (The definition of claim also includes breach of an equitable right to performance which gives rise to a right of payment. The intended result is that a liquidation or estimation of a contingent right of payment for which there may be an alternative remedy makes the equitable claim dischargeable in bankruptcy.). To the extent that Tri-State seeks revival of the Area Franchise Agreement as an equitable remedy for the Debtors asserted payment default, such an equitable remedy could be reduced to damages and, as a result, falls within the Bankruptcy Codes definition of claim and is subject to discharge under the Plan. See 11 U.S.C. 101(5)(B) (defining claim as including an equitable remedy for breach of performance if such breach gives rise to a right of payment). In short, Tri-State is entitled, at best, to a general unsecured claim against the Debtors estates on account of the Agreements. D. 27. To the Extent that the Area Franchise Agreement and 1976 Agreement are Executory Contracts, They Will be Rejected as of the Effective Date of the Plan While Tri-State argues, erroneously, that the 1976 Agreement is an executory

contract, even if Tri-States argument were correct, the Objection fails because it focuses solely on the 1976 Agreement and relies on the flawed assumption that the Debtors would reject only

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the 1976 Agreement and keep in place the original purported license of territorial exclusivity contained in the Area Franchise Agreement. This is not the case. 28. Section VIII.A. of the Plan provides that all executory contracts and unexpired

leases governed by section 365 of the Bankruptcy Code to which any of the Debtors are parties are hereby assumed except for any executory contract or unexpired lease that . . . is specifically identified on the Schedule of Rejected Contracts and Leases. Plan VIII.A. On October 21, 2011, the Debtors filed the Plan Supplement for Debtors Second Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code [Docket No. 1204] (the Plan Supplement). Included in the Plan Supplement as Exhibit 10 is a schedule of contracts and leases to be rejected as of the Effective Date of the Plan. Both the Area Franchise Agreement and 1976 Agreement, along with any amendments or agreements related thereto, are included as contracts to be rejected as the Effective Date.6 E. 29. The Debtors Will Be Relieved of All Obligations under the Area Franchise Agreement and 1976 Agreement as of the Effective Date Whether or not the Tri-State Agreements are executory contracts, as of the

Effective Date, Tri-State will have no continuing interest under any of the Tri-State Agreements. If the Tri-State Agreements are not executory contracts, the Bankruptcy Codes broad definition of claim reduces any equitable remedy for non-payment, such as a conditional assignment of franchise rights, to an unsecured, prepetition claim. Similarly, if the Tri-State Agreements are executory contracts, on rejection, Tri-States remedy is limited to a prepetition general unsecured

Although the Tri-State Agreements are included in the Plan Supplement as executory contracts to be rejected under Bankruptcy Code section 365 as of the Effective Date, the Debtors, Restructuring Support Parties, and the Creditors Committee each reserves the right to argue that these contracts are not executory contracts. If the Tri-State Agreements are not executory contracts, Tri-State would hold, at best, a prepetition general unsecured claim against the Debtors estates, and there would be no need for the Debtors to formally reject either of the Tri-State Agreements. See In re Waste Sys. Intl, Inc., 280 B.R. 824 827 (Bankr. D. Del. 2002) (Since the [agreement] is a pre-petition non-executory contract, any claims arising from it are general unsecured claims.).

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claim. See In re Spectrum Info. Techs., Inc., 190 B.R. 741, 746 (Bankr. E.D.N.Y. 1996) (The significance of rejection of an unassumed executory contract is that it . . . relieves the estate of onerous and burdensome future obligations . . .) (citations omitted). 30. Furthermore, even if Tri-State retained some enforceable equitable remedy

triggered by a payment default to receive a reassignment of the Area Franchise Agreement, TriState will not retain any enforceable reversionary interest in the Area Franchise Agreement as that contract will be rejected by the Debtors and all obligations thereunder will be eliminated as of the Effective Date. See In re HQ Global Holdings, Inc., 290 B.R. 507, 512 (Bankr. D. Del. 2003) (In the event of rejection of an executory contract, the holder of such contract is left with a claim for rejection damages unless section 365 provides additional protection.); see also In re Powermate Holding Corp., 394 B.R. 765, 773 (Bankr. D. Del. 2008) ([a]ny pre-petition unsecured claim that does not receive priority status . . . is a general unsecured claim . . . [such as] claims for damages arising out of the post-petition rejection of pre-petition executory contracts.). 31. Tri-State has not and cannot assert that it has any right to territorial exclusivity

under the Area Franchise Agreementit holds, at best, a general unsecured claim. The Area Franchise Agreement, therefore, does not present any impediment to the Debtors assuming their existing franchise agreements in the Tri-State Territory, as Tri-State suggests in the Objection. As a result, Tri-States argument that the Plan is not feasible due to the reorganized Debtors inability to operate in the Tri-State Territory is without merit and the Objection should be overruled.

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F. 32.

Even if Tri-State Held Territorial Exclusivity Rights, the Debtors Plan is Feasible Here, the Debtors have clearly demonstrated feasibility pursuant to Bankruptcy

Code section 1129(a)(11). Based on the Debtors projections, the reorganized Debtors will have the capacity to make all distributions provided for under the Plan and emerge from these cases as a healthy enterprise. Moreover, although the Debtors contend that Tri-State has no remaining territorial rights with respect to operating Perkins restaurants within the Tri-State Territory, the Plan would be feasible even if Tri-State maintained exclusive territorial rights to operate Perkins restaurants within the Tri-State Territory. Of the 442 Perkins restaurants expected to be in operation upon emergence, only 28, or 6.3%, are operating within the Tri-State Territory. The loss of such a small percentage of royalties from the franchised restaurants would not have a material impact on the reorganized Debtors business operations or their ability to effectuate the Plan successfully. Alternatively, if there were any issue as to territorial exclusivity, the Debtors would also have the option of assuming the 1976 Agreement, which would have no impact on feasibility because the cure amount is less than $500,000 and the Debtors projections, to be conservative, assumed ongoing distributions under the territorial development agreements. II. The Plan Properly Classifies Tri-States Claim 33. Tri-States contention that the Plan fails to properly classify its claim against the

Debtors estates in violation of Bankruptcy Code section 1122(a) is without merit and should be rejected. To the extent that Tri-States claim against the Debtors estates is not recharacterized as an equity interest, the Plan properly classifies such claim as a Class 5 General Unsecured Claim in accordance with Bankruptcy Code section 1122(a).7

As noted in the Tri-State Objection, the Creditors Committee has indicated that it intends to seek recharacterization of claims arising out of the franchise development agreements, including the Tri-State Agreements. See Motion of the Official Committee

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34.

In an effort to manufacture a basis for objecting to the classification of its claim,

Tri-State alleges that its claim is not substantially similar to other Class 5 claims because the Creditors Committee intends to seek recharacterization of the Tri-State claim as an equity interest. See Objection, at 14-16. Nevertheless, a dispute over the validity of a creditors claim does not provide a basis for finding that such claim is not properly classified under Bankruptcy Code section 1122(a). See In re Resorts Intl, Inc., 145 B.R. 412, 448 (Bankr. D.N.J. 1990) (It is also clear that even though some class members may have stronger claims, or stronger defenses than others, they may be classified together so long as their claims are substantially similar and their treatment is approximately equal.); In re AOV Indus., Inc., 792 F.2d 1140, 1154 (D.C. Cir. 1986) (Nothing in this opinion restricts the bankruptcy courts broad discretion to approve classification and distribution plans, even though some class members may have disputed claims, or a stronger defense than others.). Thus, the dispute regarding the Tri-State claim does not warrant its separate classification, and unless and until the Court enters an order recharacterizing the Tri-State claim, the classification of such claim as a Class 5 General Unsecured Claim is appropriate. 35. A debtor has broad discretion to classify claims and interests as it deems

appropriate. See In re Greate Bay Hotel & Casino, Inc., 251 B.R. 213, 224 (Bankr. D.N.J. 2000) (the proponent [of a plan of reorganization] has considerable discretion to classify claims and interests according to the facts and circumstances of the case) (quoting Olympia & York Fla. Equity Corp. v. Bank of N.Y. (In re Holywell Corp.), 913 F.2d 873, 880 (11th Cir. Fla. 1990)). Tri-State has not established a basis for classifying the Tri-State claim separately from other

of Unsecured Creditors for Authority to Commence Certain Actions on Behalf of and for the Benefit of the Debtors Estates [Docket No. 996]. On September 28, 2011, the Court entered an order granting the Creditors Committee standing to, among other things, pursue recharacterization of Tri-States claim. See Order Granting the Motion of the Official Committee of

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Class 5 General Unsecured Claims. In the event that it is determined that the Tri-State claim is valid, enforceable and allowed, such claim would be a general unsecured claim. Substantially similar claims should be classified together unless there is a voting interest that is sufficiently distinct and weighty to merit a separate voice. John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154, 159 (3d Cir. 1993). 36. The Debtors have determined that, to the extent that it holds a claim, Tri-State is a

general unsecured creditor, and thus, Tri-States interests are aligned with other general unsecured claimants. Tri-State has provided no legitimate basis to object to the classification of claims contained in the Plan or to delay confirmation of the Plan. Accordingly, the Plans classification scheme, which is supported by all key parties in interest, should be preserved and the Objection should be overruled. III. The Plan Does Not Discriminate Unfairly Against Tri-State or Other Holders of Claims Based on Franchise Development Agreements The classification of the Tri-State claim as a Class 5 General Unsecured Claim

37.

does not constitute unfair discrimination under Bankruptcy Code section 1129(b). Tri-State asserts, without any basis, that the Plan unfairly discriminates against Tri-State because it does not provide a specific classification for the holders of claims based on franchise development agreements, including Tri-State. First, as discussed above, to the extent that Tri-State holds a claim against the Debtors estates, its claim is properly classified as a Class 5 General Unsecured Claim under the Plan. Moreover, courts have generally held that a plan of reorganization unfairly discriminates against a class of claims for purposes of Bankruptcy Code section 1129(b) only where three factors are met:

Unsecured Creditors for Authority to Commence Certain Actions on Behalf of and for the Benefit of the Debtors Estates [Docket No. 1057].

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(i) (ii) (iii)

a dissenting class [exists]; there is another class of the same priority as the dissenting class; and there is a difference in the plans treatment of the two classes that results in either (1) a materially lower percentage recovery for the dissenting class (measured in terms of the net present value of all payments), or (2) regardless of percentage recovery, an allocation under the plan of materially greater risk to the dissenting class in connection with its proposed distribution.

In re TCI 2 Holdings, LLC, 428 B.R. at 157 (quoting In re Armstrong World Indus., Inc., 348 B.R. 111, 121 (D. Del. 2006)); see also In re Lernout & Hauspie Speech Prods., N.V., 301 B.R. 651, 661 (Bankr. D. Del. 2003), affd, 308 B.R. 672 (D. Del. 2004) (same). 38. Here, Tri-States assertion that the Plan unfairly discriminates against holders of

claims based on franchise development agreements fails on its face because Tri-State cannot demonstrate that any of the factors identified in the preceding paragraph are satisfied. Indeed, Tri-State does not even address the factors that are generally considered in determining whether a plan unfairly discriminates under Bankruptcy Code section 1129(b). As a threshold matter, Class 5 the class of claims in which Tri-States claim is classified, assuming that its claim is not recharacterized has overwhelmingly (over 96.3% in number and 91.31% in amount) voted to accept the Plan. As such, Class 5 is not a dissenting class and the cram-down requirements under Bankruptcy Code section 1129(b) are not triggered with respect to this class. Thus, further analysis of whether the Plan unfairly discriminates vis-a-vis holders of claims in Class 5 is unwarranted and inappropriate. 39. In addition, even if holders of claims in Class 5 had voted to reject the Plan, Tri-

States unfair discrimination argument would still fail. As discussed above, any claim that TriState may hold is properly classified as a Class 5 General Unsecured Claim. Although Plan Classes 4 and 5 are of the same priority, holders of claims in each of these classes have the 18
01: 11552628.1 070242.1001

option to receive either cash (subject to certain thresholds) or equity interests in the reorganized Debtors. Furthermore, to the extent that there is any difference in the percentage of recovery obtained by holders of claims that receive cash as compared to equity, such difference is reasonable and appropriate given (i) the certainty that a cash recovery provides to holders of claims and (ii) the risks associated with holding equity interests. Finally, while Class 6 is also of the same priority as Classes 4 and 5, the creation of a convenience class is appropriate as a means of addressing small general unsecured claims and commonly approved by Courts in this jurisdiction. See In re Armstrong World Indus., Inc., 348 B.R. at 160 ([S]ection 1122(b) of the Bankruptcy Code provides that a plan may designate a separate class of claims consisting of unsecured claims that are less than or reduced to an amount the court approves as reasonable and necessary for administrative convenience.). 40. For all of the above reasons, the Plan does not unfairly discriminate against Tri-

State and the Objection should be overruled. Remainder of page intentionally left blank

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CONCLUSION WHEREFORE, the Plan Supporters request that the Court: (a) deny the Objection to confirmation of the Plan; (b) enter an order confirming the Plan; and (c) grant such other relief as the Court finds just, proper and equitable. Dated: October 27, 2011 Wilmington, Delaware By: /s/ Robert F. Poppiti, Jr. Robert S. Brady (No. 2847) Robert F. Poppiti, Jr. (No. 5052) Young Conaway Stargatt & Taylor, LLP The Brandywine Building 1000 West Street, 17th Floor Wilmington, DE 19801 Telephone: (302) 571-6600 Facsimile: (302) 571-1253 - and Mitchel H. Perkiel Hollace T. Cohen Brett D. Goodman The Chrysler Building 405 Lexington Avenue New York, NY 10174 Telephone: (212) 704-6000 Facsimile: (212) 704-6288 Counsel for the Debtors and Debtors-inPossession Respectfully Submitted,

By: /s/ William E. Chipman, Jr. William E. Chipman, Jr. (No. 3818) Mark D. Olivere (No. 4291) Landis Roth & Cobb LLP 919 Market Street, Suite 1800 Wilmington, DE 19801 Telephone: (302) 467-4400 Facsimile: (302) 467-4450 - and Mark R. Somerstein, Esq. Benjamin L. Schneider, Esq. Ropes & Gray LLP 1211 Avenue of the Americas New York, NY 10036-8704 Telephone: (212) 596-9000 Facsimile: (212) 596-9090 Counsel for the Creditors Committee

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By: /s/ Stanley B. Tarr David W. Carickhoff, Esq. Stanley B. Tarr, Esq. Blank Rome LLP 1201 Market Street, Suite 800 Wilmington, DE 19801 Telephone: (302) 425-6400 Facsimile: (302) 425-6464 - and Scott L. Alberino, Esq. Joanna F. Newdeck, Esq. Akin Gump Strauss Hauer & Feld LLP Robert S. Strauss Building 1333 New Hampshire Avenue, N.W. Washington, DC 20036-1564 Telephone: (202) 887-4000 Facsimile: (202) 887-4288 Counsel for the Restructuring Support Parties

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Exhibit A 1973 Agreement

Exhibit B Area Franchise Agreement

Exhibit C 1976 Agreement