Case 20-33353 Document 667 Filed in TXSB on 09/22/20 Page 1 of 24

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

In re: Chapter 11

NPC INTERNATIONAL, INC. Case No. 20-33353 (DRJ)

et al.,
(Jointly Administered)
1
Debtors.

REPLY OF THE AD HOC PRIORITY/1L GROUP

IN SUPPORT OF THE MOTION OF DEBTORS FOR ENTRY
OF ORDERS (I)(A) APPROVING BID PROCEDURES FOR SALE
OF DEBTORS’ ASSETS, (B) SCHEDULING AUCTION FOR AND HEARING
TO APPROVE SALE OF DEBTORS’ ASSETS, (C) APPROVING FORM AND
MANNER OF NOTICE OF SALE, AUCTION, AND SALE HEARING,
(D) APPROVING ASSUMPTION AND ASSIGNMENT PROCEDURES, AND
(E) GRANTING RELATED RELIEF AND (II)(A) APPROVING SALE OF DEBTORS’
ASSETS, (B) AUTHORIZING ASSUMPTION AND ASSIGNMENT OF EXECUTORY
CONTRACTS AND UNEXPIRED LEASES, AND (C) GRANTING RELATED RELIEF

The ad hoc group of Priority First Lien Lenders and First Lien Lenders (as

constituted from time to time, the “Ad Hoc Priority/1L Group”) hereby files this reply

(the “Reply”) in support of the Motion2 and in response to the limited objection to the Motion filed

by Pizza Hut, LLC (“Pizza Hut”) [D.I. 641] (the “PH Objection”). The Ad Hoc Priority/1L Group

also joins in the Debtors’ reply in support of the Motion [D.I. 665] (the “Debtors’ Reply”).

1
The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax
identification number, are NPC International, Inc. (7298); NPC Restaurant Holdings I LLC (0595); NPC Restaurant
Holdings II LLC (0595); NPC Holdings, Inc. (6451); NPC International Holdings, LLC (8234); NPC Restaurant
Holdings, LLC (9045); NPC Operating Company B, Inc. (6498); and NPC Quality Burgers, Inc. (6457). The Debtors’
corporate headquarters and service address is 4200 W. 115th Street, Suite 200, Leawood, KS 66211.
2
The “Motion” is the Motion of Debtors for Entry of Orders (I)(A) Approving Bid Procedures for
Sale of Debtors’ Assets, (B) Scheduling Auction for and Hearing to Approve Sale of Debtors’ Assets, (C) Approving
Form and Manner of Notice of Sale, Auction, and Sale Hearing, (D) Approving Assumption and Assignment
Procedures, and (E) Granting Related Relief and (II)(A) Approving Sale of Debtors’ Assets, (B) Authorizing
Assumption and Assignment of Executory Contracts and Unexpired Leases, and (C) Granting Related Relief
[D.I. 510]. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the
Motion or the Disclosure Statement (as defined below), as applicable.
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In support of the Reply, the Ad Hoc Priority/1L Group relies upon (i) the Declaration of Jay S.

Weinberger in Support of Reply of the Ad Hoc Priority/1L Group in Support of the Debtors’ Motion

for Entry of the Bid Procedures Order (the “Weinberger Declaration”) and (ii) the Declaration of

Michael J. Cohen in Support of Reply of the Ad Hoc Priority/1L Group in Support of the Debtors’

Motion for Entry of the Bid Procedures Order (the “Cohen Declaration”), each of which is being

filed contemporaneously herewith, and respectfully represents as follows:

PRELIMINARY STATEMENT

1. The goal of any chapter 11 sale process is the maximization of estate value.

As the stewards of this process, the Debtors are duty-bound to design and control bid procedures

that garner and facilitate the submission of the highest and best bids for their assets. Any measures

– such as those proposed by Pizza Hut – that engender a process designed to chill bidding, increase

the risk of collusion and solely advance the parochial interests of any one party over the interests

of the Debtors and all creditors are anathema to section 363 sale processes and should be outright

rejected. To ensure that these pitfalls are avoided and that the value of their assets are maximized,

the Debtors must be afforded the flexibility to fashion the Bid Procedures in their business

reasonable judgment, as they have done here.

2. Pizza Hut has made known that it will not consent to the Lenders’3

ownership of the Pizza Hut Assets, whether through a credit bid as part of the sale processes or

through a potential reorganization contemplated under the Plan (as defined below). Pizza Hut’s

attack on the Lenders is unwarranted, unsubstantiated, and reflects Pizza Hut’s misunderstanding

of the Lenders’ rights and interests. Section 363(k) of the Bankruptcy Code permits a secured

3
The PH Objection defines the “Lenders” as the PTL Required Lenders and the 1L Required Lenders.
See PH Obj., at 5 n.5.

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lender to credit bid its secured debt, subject to limitation or denial “for cause.” To be sure, neither

Pizza Hut nor any other party in these chapter 11 cases have satisfied this “for cause” standard,

and as such, the Lenders’ fundamental and protective right to credit bid cannot be denied simply

because Pizza Hut states that it does not consent to the Lenders’ potential ownership of the

reorganized Debtors. Any issues pertaining to assumption and assignment of the Pizza Hut

franchise agreements will be borne out at the sale hearing (and, in the case of a reorganization, at

the confirmation hearing), and it is simply premature to address this issue at this time.

3. More to the point, there is no reason why the Debtors’ portfolio of

approximately 900 Pizza Hut restaurants must be operated as Pizza Hut restaurants, and the narrow

predetermination of such use, as Pizza Hut seeks to dictate, does nothing but limit the potential

pool of bidders. Indeed, as part of their postpetition marketing process, the Debtors must explore

whether there are bidders in the market – including competitive brand owners – interested in

operating these assets under an alternative brand. Such a transaction would require no consultation

with, or purported consent of, the franchisors and may be preferable for that reason alone.

4. When viewed against this backdrop, the Ad Hoc Priority/1L Group has

serious questions about Pizza Hut’s true motivations and its opinions concerning other bidders. If

Pizza Hut is allowed to assert its influence in the sale processes now without appropriate

safeguards, such interference could be extremely detrimental to, and wreak havoc on, the sale

processes in their early stages. Indeed, in its objection, Pizza Hut openly displays a desire to

discourage bidding and reduce value by advancing its own interests over the interests of all

creditors and the Debtors’ estates. Given these views, which portend a potential obstruction and

commandeering of the sale process by Pizza Hut, the Debtors have wisely chosen to control any

communications between potential bidders and the franchisors, a protective measure of paramount

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importance that should serve as a stopgap against collusion, bidder discouragement,

misinformation, and other improprieties.

5. In contrast to the inflammatory and often misguided response filed by Pizza

Hut, The Wendy’s Company (“Wendy’s”) has taken a more productive approach in relaying its

concerns,4 recognizing the objectives of the Bankruptcy Code (and more specifically, section 363

of the Bankruptcy Code), and the flexibility and discretion afforded to the Debtors in conducting

a sale of their assets. In reaching a compromise with Wendy’s that resolved its objection to the

Bid Procedures, the Debtors and Wendy’s negotiated a reasonable protocol under which bidders

can communicate with the franchisors at the appropriate time, while ensuring that such

communications are properly controlled to prevent against bid suppression or collusion. It is the

Debtors’ duty to ensure that the franchisors do not act independently to discourage bidding or

adversely impact the Debtors’ handling of bidders. The Debtors’ approach strikes the right balance

and affords the Debtors the proper discretion to facilitate bidder-franchisor communications in a

manner that protects and preserves value in the estates and provides an avenue for franchisors to

inform bidders of their purported rights with respect to the sale processes.

6. Finally, to the extent that the Lenders exercise their right to credit bid their

secured claims, then Pizza Hut’s rights and objections with respect to the Lenders’ decision are

preserved for the sale hearing. On the other hand, if the Debtors ultimately decide to reorganize

around their remaining assets pursuant to the Plan, which contemplates the distribution of equity

in the reorganized Debtors to the Holders of First Lien Secured Claims (as defined in the Plan) –

as permitted by the Bankruptcy Code and applicable law – Pizza Hut’s rights and objections are

preserved in connection with Plan confirmation. As such, now is neither the time nor place to

4
On September 18, 2020, Wendy’s filed a response to the Motion [D.I. 642] (the “Wendy’s
Response”) to the Motion.

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entertain Pizza Hut’s pernicious attacks on the Lenders. Rather, the Court should be focusing on

the pending Motion and establishing a procedure that will ensure that the Debtors are able to

maximize value and to have the appropriate discretion to do so unfettered by the narrow interests

of individual contract counterparties.

7. In sum, Pizza Hut would have this Court rewrite the thoughtfully crafted

and heavily negotiated Bid Procedures to protect Pizza Hut’s interests alone. However, these are

the Debtors’ cases and it is their interests and the interests of their stakeholders that are paramount.

Pizza Hut – a party with substantially all of its prepetition claims paid in full – appears to have

questionable motives in asserting the objections it has raised, which are nonetheless premature at

this stage. Accordingly, the PH Objection must be overruled and the Motion granted in its entirety.

FACTUAL BACKGROUND

I. The Lenders Provided Considerable Prepetition Support to the Debtors.

8. In early January 2020, the Debtors’ Pizza Hut restaurants were performing

poorly and the Debtors ran into a liquidity shortfall that jeopardized their ability to meet their near

term obligations, including payroll. See Weinberger Decl., ¶ 9. In an effort to stave off a

chapter 11 filing, the Debtors approached the Ad Hoc Priority/1L Group to negotiate the terms of

a rescue financing package that would increase the Debtors’ liquidity. See FDD,5 ¶ 73.

9. The Ad Hoc Priority/1L Group mobilized immediately and, with limited

diligence, negotiated the terms of, and on January 21, 2020 executed, the Prepetition Priority

Credit Agreement (as defined in the FDD), pursuant to which the lenders thereunder extended

$35 million in financing to the Debtors. See FDD, ¶ 73. Without this liquidity injection, it is

unclear how the Debtors would have been able to meet their near-term obligations, which would

5
The “FDD” means the Declaration of Eric Koza in Support of Debtors’ Chapter 11 Petitions and
First Day Relief [D.I. 4].

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have had a significant impact on all of their stakeholders, including their employees and

franchisors. See Weinberger Decl., ¶ 9.

10. During the months that followed, the Ad Hoc Priority/1L Group worked

closely with the Debtors to develop a comprehensive path forward for their businesses, including

the Debtors’ Pizza Hut restaurant portfolio. See id. at ¶ 10. In that regard, the Ad Hoc Priority/1L

Group and its advisors (including Houlihan Lokey) conducted extensive due diligence and

undertook a deep and expansive analysis of the Debtors’ operations, as well of the overall health

of the Pizza Hut business. See id..

11. The Ad Hoc Priority/1L Group also engaged the services of Beyond

Development Group (“BDG”), a restaurant consulting firm led by Clare Nishikawa, formerly the

Director of Franchise Development (US) at Pizza Hut, where she helped oversee approximately

500 new restaurant openings and the remodeling of approximately 700 restaurants. See id. at ¶ 11.

BDG assisted the Ad Hoc Priority/1L Group by conducting a qualitative and quantitative store-

by-store analysis of the Debtors’ businesses and providing customized turnaround

recommendations. See id.

12. Contemporaneously therewith, a member of the Ad Hoc Priority/1L Group

— at its own expense — engaged the consultancy services of Clifford Hudson, formerly CEO and

chairman of the board of Sonic Corp., a nationally renowned quick service restaurant chain and

franchise, where he served in the capacity of CEO for 23 years. See id. at ¶ 12.6 All in all, the Ad

Hoc Priority/1L Group, with the goal of being fully prepared for an impending reorganization,

undertook a thorough analysis of the Debtors’ Pizza Hut portfolio in order to better understand the

6
In September 2018, Sonic Corp. was sold to Inspire Brands, Inc. for $2.3 billion. See id.

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restaurants’ historical financial performance and asset condition, assess the pro forma benefits of

any capital investment, and explore opportunities for operational improvement. See id.

13. Notwithstanding the uncertainty caused by the ongoing global COVID-19

pandemic, in May 2020, the Ad Hoc Priority/1L Group’s commitment to the Debtors and their

businesses did not waver. Among other things, the Ad Hoc Priority/1L Group supported the

Debtors’ negotiation of a forbearance agreement with Pizza Hut – including multiple extensions

and amendments thereto – as well as the Debtors’ use of certain of its Priority Term Loan proceeds

to keep current with its Pizza Hut advertising contribution obligations. See id. at ¶ 13.

14. Further, at the height of the uncertainties raised by the COVID-19

pandemic, the Debtors requested that the Lenders increase their capital commitments to fulfill a

demand made by Pizza Hut, who otherwise offered no permanent economic relief to the Debtors.

See FDD, ¶ 77; see also Weinberger Decl., ¶ 14. The Ad Hoc Priority/1L Group reviewed this

request and agreed to upsize its commitments under the Prepetition Priority Facility to $80 million,

on May 20, 2020. See Weinberger Decl., ¶ 14. On top of these funding commitments, the

Prepetition First Lien Lenders agreed to forego approximately $24.5 million in cash interest

payments during a period of over five months leading to the Petition Date in order to maximize

the Debtors’ runway before the commencement of these cases. See Weinberger Decl., ¶ 14.

II. The Ad Hoc Priority/1L Group Engaged Pizza Hut in Prepetition Negotiations
Concerning the Debtors’ Pizza Hut Business.

15. On May 29, 2020, the Debtors, with the support of the Ad Hoc Priority/1L

Group, presented Pizza Hut with an overview of the review methodology and a preliminary

business plan for the Debtors Pizza Hut business. See Weinberger Decl., ¶ 15. Underpinning this

framework for a comprehensive solution to the Debtors’ Pizza Hut business was the Lenders’

proposed investment of at least $80 million of capital into the reorganized Debtors solely for Pizza

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Hut capital expenditures. See id. The Debtors presented their business plan to Pizza Hut’s senior

leadership and development team on June 6, 2020, providing transparency into the data-driven

methodologies and reasoning behind the proposed restaurant closures, renovations, capital

investment thesis, and relocation initiatives set forth therein. See id.

16. The following week, on June 12, 2020, the Debtors and the Ad Hoc

Priority/1L Group presented a comprehensive plan for shared investment to Yum! and Pizza Hut’s

executives, which plan was formulated to, among other things, accomplish Pizza Hut’s stated goals

of keeping as many restaurants open as possible, immediately putting capital to work, and serving

as a basis for a long-term partnership that would revitalize the Pizza Hut brand and lead the broader

Pizza Hut system into the future. See id. at ¶ 16. Pizza Hut thereafter relayed to the Debtors that

it would not engage on this framework, and, shortly after receiving this communication, the

Debtors were left with no choice but to prepare to commence these cases given the pending

expiration of the Pizza Hut forbearance agreement on June 30, 2020. See FDD, ¶ 12. At that time,

there were no impending defaults under the Priority or First Lien Credit Agreements or other

enforcement actions threatened by the Lenders to necessitate the commencement of these cases.

See Weinberger Decl., ¶ 16.

III. The Lenders Continued Their Support of the Debtors Postpetition.

17. On July 1, 2020, the Debtors entered into that certain Restructuring Support

Agreement (the “RSA”), which currently has the support of holders of approximately (a) 92% of

the aggregate principal amount of the Priority Term Loans, (b) 88% of the aggregate outstanding

principal amount of the First Lien Indebtedness and (c) 53% of the aggregate outstanding principal

amount of the Second Lien Indebtedness (collectively, the “Consenting Creditors”). See

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Disclosure Statement, § I.A.7 Under the RSA, the Consenting Creditors (which include the

members of the Ad Hoc Priority/1L Group) agreed to support the restructuring transactions

contemplated thereunder, to be implemented pursuant to a plan of reorganization, subject to the

terms and conditions set forth in the RSA. See id.

18. The RSA also reflected the Lenders’ agreement to the use of their cash

collateral, subject to the terms and conditions set forth in the Final Order (I) Authorizing the

Debtors to Use Cash Collateral, (II) Granting Adequate Protection to the Prepetition Secured

Parties, (III) Modifying the Automatic Stay, and (IV) Granting Related Relief [D.I. 373]

(the “Cash Collateral Order”). As set forth in the FDD, the use of this cash collateral is critical,

as the Debtors do not have “sufficient sources of working capital and financing to operate their

businesses in the ordinary course of business without authorized use of [c]ash [c]ollateral.” FDD,

¶ 90. Indeed, “continued access to this [c]ash [c]ollateral is necessary to maintain operations in

the ordinary course, ensure the viability of the Company, and maintain the going concern value

without significant deterioration to the detriment of all stakeholders.” Id. at ¶ 91.

19. As is relevant to this Reply, the RSA contemplates dual-tracked sale

processes for the sale (each, a “Sale Transaction”) of all, or substantially all, the Debtors’ Wendy’s

business (referred to in the Motion as the “Wendy Assets” and any sale of the Wendy’s Assets, a

“Wendy’s Sale Transaction”), the Debtors’ Pizza Hut business (referred to in the Motion as the

“Pizza Hut Assets” and any sale of the Pizza Hut Assets, a “Pizza Hut Sale Transaction”) or the

Wendy’s Assets and Pizza Hut Assets together as part of a sale of substantially all of the Debtors’

assets (any such transaction, a “WholeCo Sale Transaction”). See Disclosure Statement, § I.C.

7
The “Disclosure Statement” means the Disclosure Statement for Joint Chapter 11 Plan of NPC
International, Inc. and Its Affiliated Debtors [D.I. 628].

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The RSA also provides the Debtors with the flexibility to shift to a restructuring transaction (as

further defined therein and in the Disclosure Statement, a “Restructuring Transaction”) under

certain circumstances. Specifically, the Bid Procedures (as defined below) provide that the

minimum purchase price for (x) the Pizza Hut Assets is $325 million (the “Pizza Hut Minimum

Reserve Price”) and (y) the Wendy’s Assets is $400 million (the “Wendy’s Minimum Reserve

Price”). See Motion, ¶ 10.

20. Consistent with the RSA, on August 25, 2020, the Debtors filed the Motion,

seeking approval of the bid procedures, attached as Exhibit 1 to the proposed form of order

approving the Motion (the “Bid Procedures”). The Bid Procedures were formulated after

extensive negotiations with the Ad Hoc Priority/1L Group and the official committee of unsecured

creditors, among other stakeholders.

21. The Bid Procedures permit the Debtors to consider sales of divisional bids

of the Pizza Hut Assets, but only if (i) the Debtors receive Qualified Bids for all three Pizza Hut

divisions and (ii) the aggregate value of binding bids for any such division is an amount equal to

or greater than the Pizza Hut Minimum Reserve Price. There are similar procedures that apply

with respect to the sale of the Pizza Hut Assets on a regional basis, given the Debtors’ preference

to sell the Pizza Hut Assets to one single buyer, or on a divisional basis. See Motion, ¶ 10. Similar

procedures also apply to the Wendy’s Assets. See id. In the event that these conditions – including

the Minimum Reserve Price conditions – are not satisfied, then the Debtors have the flexibility to

pivot from the sale processes and reorganize under the robust framework attendant to a chapter 11

reorganization plan process. See id. at ¶ 12.

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22. On September 16, 2020, the Debtors filed the Joint Chapter 11 Plan of NPC

International, Inc. and Its Affiliated Debtors [D.I. 627] (the “Plan”) and the Disclosure Statement.8

Consistent with the RSA, the Plan contemplates either the consummation of a Sale Transaction

(subject to the conditions discussed herein, the RSA, the Plan and the Bid Procedures) or a toggle

to a Restructuring Transaction (in the event that these conditions are not met). In the case of a

Restructuring Transaction, the Debtors will restructure around their remaining assets, including by

conducting the Rights Offering (as defined and further described in section I.D of the Disclosure

Statement) that will inject between $100 and $200 million of new equity capital into the

reorganized Debtors, and, to the extent the Debtors’ Wendy’s business is retained, the Debtors will

enter into the New QB First Lien Term Loan Facility (each as defined and further described in

section I.E of the Disclosure Statement). The Rights Offering is backstopped by the members of

the Ad Hoc Priority/1L Group and other Consenting Creditors. A hearing to consider approval of

the Disclosure Statement is currently scheduled for October 20, 2020 at 9:30 am (prevailing

Central Time).

23. In the event that the Debtors pivot from the sale processes to reorganize

around one or both of their businesses under the Plan, the Ad Hoc Priority/1L Group is prepared

to commit between $100 and $200 million in post-emergence new capital as part of a Restructuring

Transaction. See Weinberger Decl., ¶ 17. As such, in addition to their experience with consumer

facing companies, general industry sophistication, and investment know-how, the Lenders would

8
The RSA contains a number of milestones related to the Disclosure Statement and Plan, including
that (i) the Court enter an order approving the Disclosure Statement by October 20, 2020, (ii) the Debtors commence
solicitation of the Plan by no later than October 26, 2020, (iii) the Court enter the Confirmation Order (as defined in
the RSA) by no later than December 4, 2020 and (iv) the effective date of the Plan occur by no later than
December 15, 2020. See Disclosure Statement, § I.B.

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bring a wealth of financial and operational resources to the Pizza Hut brand. In this regard, the

Lenders are ready, willing, and able to own and operate the Pizza Hut Assets. See id.

REPLY

I. Pizza Hut’s Amendments to the Bidding Procedures Will Result in Bidder

Suppression.

24. Rather than work constructively with the Debtors to address their concerns,

Pizza Hut has proposed a number of amendments and revisions that re-write the Bid Procedures

and fashion them to Pizza Hut’s liking and benefit. For example, Pizza Hut asserts that the Bid

Procedures must be revised to: (i) extend the Pizza Hut Sale Transaction and WholeCo Sale

Transaction timelines to accommodate Pizza Hut’s candidate review process schedule and to

permit Pizza Hut to communicate directly with bidders in respect of this process; (ii) mandate

market-level, piece-meal bids, and eliminate the requirement to conduct a sale for the Pizza Hut

Assets to a single buyer or on a divisional basis in order to retain the Debtors’ highly valuable

back-office infrastructure and proprietary technology; (iii) eliminate the Minimum Reserve Price

condition and the Debtors’ right to reorganize under the Plan in respect of the Pizza Hut Assets if

such price condition is not satisfied; (iv) add additional diligence requirements in respect of the

Pizza Hut Assets and require bidders to submit additional financial information as part of the Pizza

Hut candidate review process; (v) designate Pizza Hut as a Consultation Party; and (vi) specifically

acknowledge Pizza Hut’s purported contractual consent rights over any sale of the Pizza Hut

Assets. See PH Obj., ¶ 61.

25. The Ad Hoc Priority/1L Group joins in the Debtors’ Reply to these

objections, and further observes that, these conditions are not only burdensome, unnecessary and

may chill bidding, but also impermissibly ignore the Debtors’ business judgment in determining

qualified bids and the highest or otherwise best bids for their assets. Indeed, Pizza Hut asks this

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Court to approve a process in which Pizza Hut, and not the Debtors, would select the best bidder

for the Pizza Hut Assets based on Pizza Hut’s interests. That is not how sale processes in

chapter 11 cases work.

26. Debtors enjoy wide discretion in fashioning bidding procedures in a manner

that maximizes value for their estates. See, e.g., In re Bos. Generating, LLC, 440 B.R. 302 (Bankr.

S.D.N.Y. 2010) (approving bid procedures upon finding that debtors had exercised their business

judgment in moving forward with a sale process that the debtors believed maximized the value of

their estates). Any other construct would be unworkable, and necessarily advance parochial

interests of one contractual counterparty ahead of measures that are designed to maximize value.

Courts ordinarily “defer to management’s views in applying the business judgment test,” (In re

Mirant Corp., 348 B.R. 725, 744 (Bankr. N.D. Tex. 2006), aff’d sub nom. Objecting Class 3

Claimholders v. New Mirant Entities, 2006 WL 3780884 (N.D. Tex. Dec. 26, 2006) (citations

omitted)), and hold that that “[i]t is not appropriate to substitute the judgment of . . . objecting

creditors over the business judgment of the Debtors” (In re Spansion, Inc., 426 B.R. 114, 140

(Bankr. D. Del. 2010)).

27. Further, certain of Pizza Hut’s proposed amendments – mainly the

requirement that bidders commence discussions with Pizza Hut concerning their bids at the onset

of the process and without the Debtors’ participation – are untenable because such amendments

could have the effect of excluding the Debtors from their own sale process and also risk the specter

of potential bid discouragement or, worse, collusion. In its objection, Pizza Hut is critical of one

potential bidder (namely, the Lenders) without any factual support indicating that it has undertaken

any diligence process with respect to the Lenders (notably, the Short Declaration does not speak

to any such process). Such bid-suppressing views create a real risk to a legitimate and value-

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maximizing sale process. Pizza Hut’s direct engagement with potential bidders without the

Debtors’ and their advisors’ participation could result in suppressed bids, trafficking in

misinformation and other improprieties.

28. Moreover, in attempting to eliminate the Pizza Hut Minimum Reserve Price

condition and remove references to the Debtors’ predisposition to consummate a sale for all of the

Pizza Hut Assets (either to one buyer or on a divisional basis), Pizza Hut does not seek to maximize

value, but rather to further complicate the sale process and impose administrative costs and burdens

on the Debtors’ estates. Given the size of the Debtors’ Pizza Hut restaurant portfolio and the

limited time in these cases within which to prosecute a successful sale process, it makes little sense

to require the Debtors to engage in a large number of smaller and/or individual restaurant sales

given the attendant transactional costs, especially where the Debtors have the flexibility to shift to

a reorganization around their remaining assets through the Plan. Moreover, such a dismemberment

of estate assets threatens to leave the estate with the poorest performing restaurants, fails to

monetize the Debtors’ valuable back office infrastructure and technology, and will likely result in

the loss of thousands of jobs.

29. Apparently none of those risks are of any concern to Pizza Hut, however,

as it solely seeks to splinter the Debtors’ Pizza Hut restaurant portfolio into the greatest number of

smaller owners. Pizza Hut knows that by eliminating its largest franchisee, Pizza Hut will have

the ability to exert a much more substantial degree of control over a community of smaller

franchisees, who lack the resources and voice (like NPC) to serve as a counterweight to Pizza Hut.

In addition, the Ad Hoc Priority/1L Group has serious concerns over prolonging the sale processes

any further, given the near-term expiration of the section 365(d)(4) deadline by which the Debtors’

unexpired real estate leases will be deemed rejected unless assumed. See 11 U.S.C. § 365(d)(4).

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30. Finally, Pizza Hut has proposed certain amendments that expand both its

contractual rights and its rights under the Bankruptcy Code. For example, Pizza Hut requests that

the Bid Procedures be revised to grant Pizza Hut consent rights with respect to the qualification of

bidders, the criteria for selecting and designating qualified bids, the form of documentation of any

sale, and the selection of any winning bidder. See PH Obj., ¶ 61. Through these measures, Pizza

Hut attempts to expand its influence over these cases and potentially block any sale that it views

as undesirable, without limitation. Pizza Hut’s effort to disrupt the legitimate sale processes

designed by the Debtors should be rejected by this Court.9 To the extent that Pizza Hut has an

objection to any sale of the Pizza Hut Assets, the sale hearing is the proper forum, and it is wholly

inappropriate to hardwire any purported consent rights it may have.

II. The Lenders Have a Fundamental Right to Credit Bid and Pizza Hut Has
Failed to Show Cause Sufficient to Limit that Right.

31. In its objection, Pizza Hut makes a number of unfounded attacks against the

Lenders as the basis upon which this Court should deny their right to credit bid. Specifically, Pizza

Hut asserts that “the Bid Procedures chill bidding to such a degree that they are seemingly a lay-

up for the Lenders to attempt to take the Debtors’ assets through a credit bid or through a chapter 11

plan” and that the “lender-controlled process is destined to fail and is merely in place to show that

some superficial marketing process was undertaken before the Lenders attempt to seize the

Debtors’ assets through an unverified credit bid . . .” PH Obj., ¶ 53.10 Both assertions are false

9
Pizza Hut also argues that the proposed Assumption and Assignment Procedures are problematic,
inasmuch as the Debtors are apparently “ignoring the complicated nuances . . . inherent in a franchisor-franchisee
arrangement” and “presume that Pizza Hut will waive” purported defaults under the relevant agreements in connection
with assumption and assignment to one or more purchasers. PH Obj., ¶¶ 58-59. As acknowledged by Wendy’s (see
Wendy’s Resp., ¶ 27), this objection is premature and only ripe for consideration at any hearing on assumption and
assignment of any executory contract, as the identity of any such purchaser, their ability to demonstrate adequate
assurance of future performance and whether such a purchaser would seek to assume any franchisor agreements in the
first instance, is presently unknown.
10
See also id. at ¶ 6 (the “Debtors (and the Lenders) are effectively locking in the Lenders’ credit bid
and attempt to purchase the Pizza Hut Assets, thereby relegating the Bid Procedures to mere window dressing.”).

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and misinformed. Pizza Hut’s claim that the Lenders are controlling the sale process for their

benefit alone (see, e.g., PH Obj., ¶¶ 53-57) is without merit. As described more fully below, Pizza

Hut’s opposition to the Lenders taking ownership to the Pizza Hut Assets (see id. at ¶ 6) is not a

reason for this Court to take the draconian measure of limiting the Lenders’ credit bidding rights.

32. Section 363(k) of the Bankruptcy Code provides that:

At a sale under subsection (b) of this section of property that

is subject to a lien that secures an allowed claim, unless the
court for cause orders otherwise, the holder of such claim
may bid at such sale, and, if the holder of such claim
purchases such property, such holder may offset such claim
against the purchase price of such property.

11 U.S.C. § 363(k). Credit bidding thus provides a safeguard for secured creditors, by protecting

against the undervaluation of their collateral. RadLAX Gateway Hotel, LLC v. Amalgamated Bank,

566 U.S. 639, 644 n. 2 (2012) (“The ability to credit-bid helps to protect a creditor against the risk

that its collateral will be sold at a depressed price. It enables the creditor to purchase the collateral

for what it considers the fair market price (up to the amount of its security interest) without

committing additional cash to protect the loan.”).

33. Credit bidding may be limited for “cause”; however, that term is not defined

in the Bankruptcy Code and it is typically left to the discretion of the Court to determine whether

cause exists on a case-by-case basis. See In re Aéropostale, Inc., 555 B.R. 369, 414 (Bankr.

S.D.N.Y. 2016) (citing In re Olde Prairie Block Owner, LLC, 464 B.R. 337, 348 (Bankr. N.D. Ill.

2011) (other citations omitted)). However, “this ‘discretion does not give the bankruptcy court the

authority to act arbitrarily or to be freewheeling.’” Aéropostale, 555 B.R. at 415 (quoting In re

RML Dev., Inc., 528 B.R. 150, 155 (Bankr. W.D. Tenn. 2014) (other citations omitted)). Instead,

Courts typically look to “balance the interests of the debtor, its creditors, and other parties of

interest in order to achieve the maximization of the estate and an equitable distribution to all

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creditors.” In re RML, 528 B.R. at 155 (citations omitted). At bottom, the “modification or denial

of credit bid rights should be the extraordinary exception and not the norm.” Aéropostale, 555

B.R. at 415 (quoting In re RML, 528 B.R. at 155).

34. Pizza Hut asserts that, as any precondition to a credit bid, the extent and

value of the Lenders’ liens must be determined. PH Obj., ¶ 55. However, the revised proposed

Bid Procedures address this concern and qualify the Lenders’ right to credit bid by the challenge

rights set forth in the Cash Collateral Order.

35. In any event, bald and unsubstantiated assertions that a secured creditor’s

credit bidding rights will chill other potential bidding are not alone sufficient justification to limit

the credit bidding right afforded by the Bankruptcy Code. Aéropostale, 555 B.R. at 416. For

example, in In re Fisker Auto Holdings, Inc., the court limited credit bidding for cause because

permitting the secured creditor to credit bid would freeze, not just chill, bidding. 510 B.R. 55, 61

(Bankr. D. Del. 2014) (noting that without a cap on credit bidding, “bidding will not only be chilled

. . . ; bidding will be frozen”).11 Here, there is no showing that by respecting the rights of the

Lenders, bidding would be chilled, much less “frozen”.

36. As set forth above, the Bid Procedures are an integral part of the RSA, the

Plan and the Ad Hoc Priority/1L Group’s agreement to permit the Debtors to use its cash collateral,

11
Courts may disallow a secured creditor’s credit bid rights for cause where the creditor engaged in
inequitable conduct with respect to the sale of the debtor’s assets. See, e.g., In re Phila. Newspapers, LLC, 599 F.3d
298, 316 n.14 (3d Cir. 2010) (“A court may deny a lender the right to credit bid in the interest of any policy advanced
by the [Bankruptcy] Code, such as to ensure the success of the reorganization or to foster a competitive bidding
environment.”) (citation omitted); In re Free Lance-Star Publ’g Co. of Fredericksburg, VA, 512 B.R. 798, 806 (Bankr.
E.D. Va. 2014) (limiting right to credit bid because creditor made the “unilateral decision to expand the scope of its
security interest” by filing financing statements on certain of the debtor’s assets where the creditor “knew it did not
have a valid lien on the [assets]” and where the secured creditor “tried to depress the sale price of the Debtors’ assets,
not to maximize the value of those assets.”); In re Aloha Airlines, 2009 WL 1371950, at *9 (Bankr. D. Haw. May 14,
2009) (denying a secured creditor the right to credit bid due to misconduct where secured creditor (i) misused
confidential information for purposes of driving the debtor out of business, (ii) submitted sworn misstatements to
cover up the truth regarding its dishonesty and (iii) destroyed records). No such inequitable conduct is present here.

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and were extensively negotiated between the Debtors, the Ad Hoc Priority/1L Group and the

official committee of unsecured creditors. The Bid Procedures have been designed to provide the

Debtors with the flexibility to maximize the value of their estates, by permitting the Debtors to

toggle to a Restructuring Transaction in the event that the Minimum Reserve Price condition is not

satisfied. The ability to toggle from a Sale Transaction to a Restructuring Transaction around some

or all of the Debtors remaining assets under these circumstances ensures that the Debtors’ assets

are not sold for an unreasonably low amount, a result which would hurt all stakeholders. As it is

simply too soon to tell whether there will be sufficient interest in the Pizza Hut Assets, the

flexibility to shift to a Restructuring Transaction under the robust protections attendant to a

chapter 11 plan process will ensure that the best result is achieved for the Debtors’ estates while

preserving all parties’ rights and interests. Under Pizza Hut’s construct, the Debtors would be

forced to conduct a number of smaller “fire” sales and liquidate their businesses, potentially at a

lower value given the restrictions imposed by Pizza Hut, simply because Pizza Hut prefers that

outcome for its own benefit and to the detriment of the Debtors and all of their other stakeholders.

37. Finally, Pizza Hut’s animus toward the Lenders’ potential ownership of the

Pizza Hut Assets, and the fact that it has not, as of today, consented to such a transaction, is not a

basis on which to deny the Lenders’ fundamental right to credit bid. In making this assertion, not

only does Pizza Hut presume that any potential purchaser desires to operate the Debtors’ assets as

a Pizza Hut franchise, but it also assumes that the Debtors’ assets are worth less if not operated in

such a manner. See PH Obj., ¶ 56.12 Potential bidders may desire to put the current Pizza Hut

12
The Ad Hoc Priority/1L Group reserves all its rights with respect to valuation, including, but not
limited to, whether any increase in the Debtors’ cash position postpetition is attributable to the use of the Pizza Hut
marks. See, e.g., PH Obj., ¶ 5 (“Without Pizza Hut’s consent to a change of control, the Debtors will not be selling
an operating Pizza Hut franchise, but brand-less leasehold interests and personal property, resulting in lower sale
proceeds and diminished returns to the Debtors’ creditors.”).

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restaurant portfolio to a different use,13 and the Bid Procedures should not be amended to foreclose

this possibility. Ultimately, nothing is restricting Pizza Hut from participating in the process as a

bidder, and if Pizza Hut is concerned with the Lenders’ potential ownership of the Pizza Hut Assets

– either through a credit bid or as part of a Restructuring Transaction – then it is fully capable of

submitting a standalone or (with the appropriate consents) joint bid with other bidders. To the

extent that it does not, and there are no other bidders for the Pizza Hut Assets, then Pizza Hut’s

rights are protected by the Plan process.14

III. Pizza Hut’s Attacks on the Lenders Lack Evidentiary Support.

38. Through a number of attacks in the PH Objection, Pizza Hut has made clear

that it will do everything in its power to oppose the Lenders’ ownership of the Pizza Hut Assets.

These attacks are, however, unsubstantiated by the record of these chapter 11 cases, and Pizza Hut

has made no attempt – in either the PH Objection or the Short Declaration filed in support thereof

– to provide evidentiary support for its claims. These unsubstantiated allegations include:

13
For example, in November 2012, 14 locations that were branded by KFC, a sister brand to Pizza
Hut, were sold and rebranded as Popeyes restaurants, in the chapter 11 cases of Wagstaff Minnesota, Inc. See Cohen
Decl., Ex. A (Wagstaff Transcript, as defined below) & Ex. B (“Judge Clears Sale of 14 KFC Outlets to Popeyes
Chain” published in the Star Tribune on November 12, 2012). Notwithstanding that KFC backed a higher bid for
these assets, the court in the Wagstaff bankruptcy case noted the following in response to counsel to KFC’s
commitment to close on its bid : “there’s a rule in bankruptcy, and that is from the get go, from the first hearing in any
chapter 11 case you make your mark and establish your credibility. And over the last several months of this case I
have seen nothing but – its not obstreperous conduct but its conduct that does not appear to be, shall we say, in the
spirit of negotiating. And that’s the only way we get anything done in chapter 11. So the court comes to this hearing
with some real concern about your good faith.” See Tr. of Proc., at 168:21 – 169:8, In re Wagstaff Minnesota, Inc.,
Ch. 11 Case No. 11-43073 (Bankr. D. Minn. Nov. 7, 2012) (the “Wagstaff Transcript”). The court in Wagstaff also
observed that, another factor in the court approving the sale was the fact that “the deal gets worse for [the debtor’s
lender] GE every day. It has a strong interest in taking the bird in hand and it has no trust of KFC . . .” Id. at 172:21-
25. A copy of the relevant excerpts of the Wagstaff Transcript is attached to the Cohen Declaration as Exhibit A.
Further, although not in the bankruptcy context, earlier this year, the Rohan Group purchased and began converting
former Pizza Hut locations in the Philadelphia area into HNT Chicken branded restaurants. See Cohen Decl., Ex. C
(“Philly-Area Businessman Buys Boston Market Restaurant Chain” published in the Philadelphia Inquirer on April
30, 2020).
14
Pizza Hut also asserts that the Lenders should be required to submit a credit bid by a date certain.
See PH Obj., ¶ 56. There is no reason why the Lenders should be required to notify parties of their intention to credit
bid before the bid deadline. Senior secured lenders – whose cash collateral is being used to operate the sale process
and whose liens secure assets subject to sale – are routinely consultation parties in chapter 11 sale processes while
retaining their credit bidding rights.

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 “The Bid Procedures chill bidding to such a degree that they are seemingly
a lay-up for the Lenders to attempt to take the Debtors’ assets through a
credit bid or through a chapter 11 plan . . . [and] shows a clear path for the
Lenders to attempt to obtain ownership the Pizza Hut Assets.” (PH Obj.,
¶ 53);
 “The lender-controlled process is destined to fail and is merely in place to
show that some superficial marketing process was undertaken before the
Lenders attempt to seize the Debtors’ assets through an unverified credit bid
that incorrectly implies that Pizza Hut consents” (id.);
 The lack of any specific deadline by which the Lenders must credit bid
“taints the process as the Lenders will have their hands in every aspect of
the process and can then decide when to derail the proposed process without
warning and attempt to take the assets for themselves” (id. at ¶ 54);
 “The Lenders, who are merely providing access to cash collateral and whose
liens likely may not clear the Minimum Reserve Price” should not be able
to “exert this level of control” over the sale process, and as a condition to
any credit bid, the value and extent of their liens must be determined. Doing
otherwise would “do violence” to the sale process and permit the Lenders
to “skew” the process in their favor (id. at ¶ 55);
 On the basis of “many discussions with the Lenders,” Pizza Hut has
concluded that “their intentions do not currently line up with Pizza Hut’s
expectations of an appropriate franchisee” (id. at ¶ 56);
 It is “unclear what value the Lenders bring to this process or these
cases . . . .” (id. at ¶ 57); and
 The “level of control the Lenders are attempting to exert over this process
(and these cases generally) is unjustified and unfairly prejudices Pizza Hut
and other parties in interest” (Id.).

39. The general theme of these uncorroborated assertions is that the Lenders are

controlling the Debtors, the sale processes and these chapter 11 cases, for their benefit alone and

to the detriment of all other parties. As set forth above, this could not be farther from the truth.

40. Prior to the Petition Date, the Lenders provided the Debtors with substantial

support – both financial and operational. At a time when the Debtors faced a liquidity shortfall

that jeopardized their ability to meet their near term obligations, including payroll, the Priority

Term Lenders extended the Debtors $35 million in financing, which such lenders later agreed to

upsize into an $80 million facility, in May 2020. The Prepetition First Lien Lenders also agreed

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to forego approximately $24.5 million in interest payments in order to provide the Debtors with

the runway required to commence these cases. These measures alone provided the Debtors with

over $100 million of financial support before the commencement of these cases. Therefore, Pizza

Hut’s suggestion that the Lenders have merely provided access to cash collateral is incorrect.

41. Further, in an effort to better understand the Pizza Hut restaurants’ historical

financial performance and asset condition, assess the pro forma benefits of any capital investment,

and explore opportunities for operational improvement, the Lenders conducted extensive due

diligence and undertook numerous analyses regarding the Debtors’ Pizza Hut business. These

efforts included the retention of BDG, which is among very few firms nationwide that has

substantial expertise and deep experience with the development of Pizza Hut restaurants, as well

as a qualitative and quantitative store-by-store analysis of the Debtors’ businesses. The Ad Hoc

Priority/1L Group also participated in negotiations with Pizza Hut concerning the terms of the

Pizza Hut forbearance agreement, and later supported the Debtors in their formulation of a viable

operational plan for the Pizza Hut Assets on a go-forward basis. Were they to become the owners

of the Pizza Hut Assets, the Lenders would bring considerable financial and operational resources,

sophistication, investment experience and experience with consumer-facing companies, to the

Pizza Hut brand: indeed, they would be ideal candidates to revitalize this brand and make the

necessary investment in the business. For Pizza Hut arbitrarily to conclude that the Lenders “do

not currently line up with Pizza Hut’s expectations of an appropriate franchisee” is thus

questionable and casts serious doubts as to Pizza Hut’s true intentions.

42. Moreover, the Lenders’ support continued as the Debtors commenced these

cases. The Lenders provided consent to use cash collateral to (i) pay all rent due from July onward

such that there is no “stub” rent due in these cases, (ii) make over $95 million of first day payments,

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(iii) pay section 503(b)(9) claims and other vendor obligations in the ordinary course, in the amount

of $40 million, (iv) fund the KERP and KEIP programs approved by the Court last week, and

(v) fund over $250 million in other ordinary course expenditures on a postpetition basis.15 All told,

the Lenders have provided, and continue to provide, substantial benefits to the Debtors and all of

their constituents through these concessions.

43. The Lenders also agreed to the dual-tracked sale processes reflected in the

RSA, the Bid Procedures and the Plan. Although it is the Lenders’ strong desire to engage in a

robust sale process for the Pizza Hut Assets, they are fully cognizant of the challenges that the

brand faces and have formulated a viable restructuring proposal around such assets. Setting a floor

for the purchase price of the Pizza Hut Assets and further creating a “backstop” in the form of a

restructuring around such assets with the upfront committed capital necessary to operate them

benefits all creditors, including Pizza Hut, not just the Lenders. As such, Pizza Hut is wrong to

conclude that the Lenders are “doing violence to” or “skewing” the sale process and requiring a

“superficial marketing process” that ensures that the Lenders take control of such assets, without

warning through a credit bid.

44. Finally, Pizza Hut’s conclusion that the Debtors’ cash position continues to

grow due to the use of Pizza Hut’s marks for the benefit of the Lenders is conclusory and lacks

any basis in the evidence submitted by Pizza Hut. The value of the Debtors’ assets remains subject

to determination, pending conclusion of the sale processes, or, if necessary, in connection with

confirmation. For these reasons, the Court should disregard and accord no weight to Pizza Hut’s

15
See Declaration of Eric Koza in Support of the Debtors’ Reply to Objection of McLane to
Emergency Motion of Debtors to (I) Use Cash Collateral, (II) Granting Adequate Protection to Prepetition Secured
Parties, (III) Modifying the Automatic Stay, (IV) Scheduling a Final Hearing, and (V) Granting Related Relief [D.I.
363], ¶ 6; see also Monthly Operating Report for Filing Period Ending 8/4/2020 [D.I. 538] and the Debtors’ Monthly
Operating Report for the Reporting Period of August 5, 2020 Through September 1, 2020 [D.I. 659].

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attacks on the Lenders and the numerous unsupported factual statements proffered by Pizza Hut

in its objection.

[Remainder of page intentionally omitted]

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WHEREFORE, the Ad Hoc Priority/1L Group requests that the Court enter an order

approving the Bid Procedures and grant such other relief as is just and proper.

Dated: September 22, 2020 Respectfully submitted,

Houston, Texas
/s/ Bruce J. Ruzinsky
Bruce J. Ruzinsky (SBN 17469425)
JACKSON WALKER L.L.P.
1401 McKinney Street, Suite 1900
Houston, Texas 77010
Telephone: (713) 752-4204
Facsimile: (212) 308-4155

-and-

Scott J. Greenberg (admitted pro hac vice)

Michael J. Cohen (admitted pro hac vice)
GIBSON, DUNN & CRUTCHER LLP
200 Park Avenue
New York, New York 10166
Telephone: (212) 351-4000
Facsimile: (212) 351-4035

Attorneys for the Ad Hoc Priority/1L Group

24