SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2015
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number 000-54945
SHENGDATECH LIQUIDATING TRUST
(Exact name of registrant as specified in its charter)
| Nevada | 30-6327638 | |||
| (State or Other Jurisdiction of | (I.R.S. Employer | |||
| Incorporation or Organization) | Identification Number) | |||
| c/o Alvarez & Marsal Holdings, LLC, 425 Market Street, 18th Floor , San Francisco, California 94105 | ||||
| (Address of principal executive offices) (Zip Code) | ||||
| N/A | ||||
| (Registrant’s telephone number, including area code) | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| ¨ | Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer (Do not check if smaller reporting company) |
x | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding as of August 1, 2015 | |
| Beneficial Interests in the Trust Established Under the Liquidating Trust Agreement | 16,300 |
SHENGDATECH LIQUIDATING TRUST
FORM 10-Q
INDEX
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning, among others, capital expenditures, litigation, regulatory matters, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, and other circumstances affecting our anticipated financial position.
As used in this Form 10-Q, “we,” “us,” and “our” refer to ShengdaTech Liquidating Trust which is also sometimes referred to as the “Trust.”
YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING
STATEMENTS
The forward-looking statements made in this report on Form 10-Q relate only to events or information as of the date on which the statements are made in this report on Form 10-Q. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents that we reference in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results may be materially different from what we expect or hope.
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PART I. FINANCIAL INFORMATION
SHENGDATECH LIQUIDATING TRUST
STATEMENT OF NET ASSETS AVAILABLE FOR LIQUIDATION
June 30, 2015 and December 31, 2014
(Liquidation Basis)
| June 30, 2015 (Unaudited) | December 31, 2014 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 542,970 | $ | 1,775,609 | ||||
| Professional retainers | 271,000 | 271,000 | ||||||
| Other Receivables | 2,759,535 | - | ||||||
| Total assets | 3,573,505 | 2,046,609 | ||||||
| Liabilities | ||||||||
| Payables and accrued liabilities | 648,771 | 743,023 | ||||||
| Estimated costs to complete liquidation | 1,875,503 | 922,566 | ||||||
| Total liabilities | 2,524,274 | 1,665,589 | ||||||
| Net assets in liquidation | $ | 1,049,231 | $ | 381,020 | ||||
See accompanying notes to financial statements
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SHENGDATECH LIQUIDATING TRUST
STATEMENT OF LIQUIDATING ACTIVITIES
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND JUNE 30, 2014
(Liquidation Basis)
| For the three months ended | For the six months ended | |||||||||||||||
| June 30, 2015 (Unaudited) | June 30, 2014 (Unaudited) | June 30, 2015 (Unaudited) | June 30, 2014 (Unaudited) | |||||||||||||
| (Decreases) Increases in net assets: | ||||||||||||||||
| Increase (decrease) in Other Trust Assets | 1,872,367 | (2,750,000 | ) | 2,759,535 | (2,750,000 | ) | ||||||||||
| Administrative expenses and professional fees paid, net of recoveries | (547,040 | ) | 1,631,431 | (1,232,639 | ) | 1,357,871 | ||||||||||
| Changes in accrued administrative expenses and professional fees | (7,277 | ) | (68,438 | ) | 94,252 | 111,501 | ||||||||||
| Changes in estimated costs to complete liquidation | (592,255 | ) | 1,187,007 | (952,937 | ) | 1,394,762 | ||||||||||
| Increase in net assets in liquidation | 725,795 | - | 668,211 | 114,134 | ||||||||||||
| Net assets in liquidation - Beginning of the period | 323,436 | 1,930,930 | 381,020 | 1,816,796 | ||||||||||||
| Net assets in liquidation – End of the period | $ | 1,049,231 | $ | 1,930,930 | $ | 1,049,231 | $ | 1,930,930 | ||||||||
See accompanying notes to financial statements
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SHENGDATECH LIQUIDATING TRUST
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The ShengdaTech Liquidating Trust (the “Trust”) was formed pursuant to the First Amended Chapter 11 Plan of Reorganization (the “Plan”) of ShendgaTech, Inc. (the “Debtor” or “Company”). The Plan was confirmed on October 2, 2012 and became effective on October 17, 2012 (the “Effective Date”).
On the Effective Date, the Company automatically transferred to the Trust all of its right, title, and interest in and to all of the Trust Assets (defined to include all assets of the Company, including, without limitation, (i) cash in the Company’s bank account on the Effective Date, (ii) the Company’s equity interests in Faith Bloom Limited (“Faith Bloom”), a company formed under the laws of the British Virgin Islands, (iii) all claims held by the Company against Faith Bloom and Faith Bloom’s subsidiaries (the “PRC Subsidiaries”), (iv) the Company’s interest in certain directors and officers insurance policies, if transferable, and the proceeds thereof, (v) all Claims and causes of action held by the Company and (vi) any other assets of the Company that are recovered by the Trust and the proceeds thereof). The Trust will distribute the proceeds that are obtained from the Trust Assets to the Trust Beneficiaries (defined to include holders of Claims and Equity Interests under the Plan), in accordance with the distribution procedures and priorities set forth in the Plan.
Unlike an operating company, the Trust has no officers, directors or employees. Rather, the Trust is administered by the Liquidating Trustee, with consultation from the Liquidating Trust Advisory Board from time to time. The Trust does not engage in the conduct of a trade or business and is restricted from doing so based upon provisions of the Internal Revenue Code. The Trust also has no shareholders. It does have holders of beneficial interests in the Trust. Such holders include all creditors and former shareholders of the Company.
In accordance with the Trust Agreement and the Plan, the Trust, in its discretion, will pursue the Company’s outstanding litigation in the People’s Republic of China (the “PRC”); pursue any other litigation (including against the Company’s former officers, directors and auditors); hold and sell, if possible, the Company’s shares in Faith Bloom; execute, process and facilitate available distributions to holders of claims (“Claims”) and equity interests (“Equity Interests”) under the Plan; and resolve disputed Claims and Equity Interests. The Trust remains subject to the jurisdiction of the Bankruptcy Court through the term of its existence.
BASIS OF PRESENTATION
The accompanying statement of net assets in liquidation at June 30, 2015, which has been derived from unaudited interim financial statements which have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for complete financial statements. The Trust believes all adjustments, normal and recurring in nature, considered necessary for a fair presentation have been included. The changes in net assets for the three and six months ended June 30, 2015 are not necessarily indicative of the changes in net assets that may be expected for the full year.
The Trust believes that, although the disclosures contained herein are adequate to prevent the information presented from being misleading, the accompanying interim financial statements should be read in conjunction with the Trust’s financial statements for the year ended December 31, 2014 included in Form 10-K filed on March 31, 2015.
These financial statements have been prepared based on the liquidation basis of accounting. Accordingly, the Trust is required to make estimates and assumptions that affect the reported amounts of assets at net realizable value and liabilities at anticipated settlement amounts, and the estimated costs of liquidating the assets and distributing the proceeds to holders of beneficial interests. These estimates are subject to change.
CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS
The Trust considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
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The Trust maintains one operating account with a balance in excess of federally insured limits. The balance at June 30, 2015 was entirely held in cash.
TRUST ASSETS
The net assets of the Trust are carried at estimated fair values. The primary assets of the Trust, which were transferred from the Debtor, are cash, shares in Faith Bloom, and contingent asset claims, such as claims against the former Directors and Officers of the Debtor, and claims against former accountants and other professionals. Because of the significant uncertainties associated with estimating the probability and timing of cash flows related to these claims, it is not practical to estimate their fair value until and unless actual settlements are reached. There can be no assurance that the Trust will realize any value of such contingent asset claims.
Faith Bloom, which is wholly owned, does not have operations and serves as a holding company and direct parent of the following entities formed under the laws of the PRC: Shandong Haize Nanomaterials Co., Ltd. (“Shandong Haize”), Shandong Bangsheng Chemical Co., Ltd. (“Shandong Bangsheng”), Shaanxi Haize Nanomaterials Co., Ltd. (“Shaanxi Haize”), Zibo Jiaze Nanomaterials Co., Ltd. (“Zibo Jiaze”) and Anhui Yuanzhong Nanomaterials Co., Ltd. (“Anhui Yuanzhong,” and together with Shandong Haize, Shandong Bangsheng, Shaanxi Haize, Zibo Jiaze, the “PRC Subsidiaries”). The Trust does not have control over the PRC Subsidiaries.
The Debtor’s and the Trust’s attempts to exercise control over the PRC Subsidiaries were previously thwarted by a deliberate and sustained pattern of conduct designed to limit the Trust’s legal and operational control over the PRC Subsidiaries. The Trust therefore commenced litigation in China to obtain legal control over the subsidiaries as well as to obtain possession of the books and records. The Trust has obtained judgments in each of the pending cases. The Trust has taken control of Shaanxi Haize, is in the process of completing a sale of Shaanxi Haize and is evaluating its options with counsel with respect to the enforcment of the other judgments. Because of the significant uncertainties associated with estimating the probability and timing of realizing value from the Faith Bloom equity (including the value generated through the sale of Shaanxi Haize and the value generated if any of the other factories are recovered), it is not practical to estimate its fair value.
The fair value of Trust assets is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known.
OTHER LIQUIDATION LIABILITEIS
Accounts payable and accrued liabilities are reflected at their estimated settlement amounts which, in the opinion of the Trust, approximate their fair value.
ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION
The estimated costs to complete liquidation and litigation represent the estimated cash costs of operating the Trust through March 31, 2016. These costs, which include litigation costs, professional fees, and other related costs, are estimated based on various assumptions. Given that there is inherent uncertainty in the estimation process, actual results could be materially different.
INCOME TAXES
The Trust is treated as a grantor trust and not a corporation. Accordingly, any income or loss of the Trust will not be taxable to the Trust but will be taxable to the holders of beneficial interests in the Trust, as if such holders had themselves realized the income or loss from their pro rata interest in the Trust assets.
USE OF ESTIMATES
Management of the Trust has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Under the liquidation basis of accounting, assets and liabilities have been recorded at their estimated fair values. Given there is inherent uncertainty in the valuation process, the amounts actually realized or settled could be materially different from those reflected in the accompanying Management of the Trust has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Under the liquidation basis of accounting, assets and liabilities have been recorded at their estimated fair values. Given there is inherent uncertainty in the valuation process, the amounts actually realized or settled could be materially different from those reflected in the accompanying consolidated financial statements.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
As of August 14, 2015, the Financial Accounting Standards Board (“FASB”) issued up to ASU 2015-06, which are not expected to have a material impact on the consolidated financial statements upon adoption.
2. CASH AND CASH EQUIVALENTS
The Trust maintains a majority of its cash balance in a single operating account in the United States in excess of federally insured limits. As of June 30, 2015, the cash balance was $542,970. Of this balance, $464,603 was generally available cash held in the United States and $78,367 was held by Faith Bloom in accounts in the PRC over which Faith Bloom and the Trust have control.
3. PROFESSIONAL RETAINERS
The Trust has retained a number of professional services firms to assist with its duties and obligations. As of June 30, 2015, three of these professional services firms kept retainers pursuant to their engagement letters totaling $271,000. These retainers will either be used to offset future professional fees and expenses or will be returned to the Trust.
4. OTHER TRUST ASSETS
The net assets of the Trust are carried at estimated fair values.
As of June 30, the Trust continues to hold 100% of the equity in Faith Bloom. Faith Bloom, which is wholly owned, does not have operations and serves as a holding company and direct parent of the PRC Subsidiaries. While all of the PRC Subsidiaries but Shandong Bangsheng are believed to be operating entities manufacturing a specialty additive known as nano-precipitated calcium carbonate, the Trust does not have control over the PRC Subsidiaries, with the exception of Shaanxi Haize.
The Debtor and the Trust’s attempts to exercise control over the PRC Subsidiaries were previously thwarted by a deliberate and sustained pattern of conduct designed to limit the Trust’s legal and operational control over the PRC Subsidiaries. The Trust therefore commenced litigation in China to obtain legal control over the subsidiaries as well as to obtain possession of the books and records. The Trust has obtained judgments in each of the pending cases. The Trust has taken control of Shaanxi Haize, is in the process of completing a sale of Shaanxi Haize and is in the process of working with counsel to evaluate its options with respect to the enforcement of the other judgments. Because of the significant uncertainties associated with estimating the probability and timing of realizing value from the Faith Bloom equity (including the value generated through the sale of Shaanxi Haize and the value generated if any of the other factories are recovered), it is not practical to estimate its fair value.
On November 3, 2014, Faith Bloom gained physical possession of the Shaanxi Haize plant as a result of the Xianyang Court’s enforcement action. On February 2, 2015, Faith Bloom executed an Equity Transfer Agreement with Mr. Wang Xiaohong pertaining to the transfer of 100% of the equity interest of Shaanxi Haize held by Faith Bloom (the “Transaction”). It is uncertain whether the Transaction will be consummated given ongoing judicial enforcement action against Shaanxi Haize assets. Related to the Transaction, the Trust’s counsel holds a sales proceeds of RMB11 million (the equivalent of USD$1,759,535) which is reflected in Other Receivables as of June 30, 2015.
In connection with a recent settlement reached with certain of the insurance carriers that provided officer and director insurance coverage to ShengdaTech, Inc., the Trust will receive a settlement payment of $1,000,000 from such insurance carriers to settle certain coverage disputed and to reimburse the Trust for defense costs. A significant portion of this $1,000,000 will be used to pay outstanding legal fees and expenses incurred by the Trust’s counsel in pursuing litigation and defending litigation covered by such insurance policies. The $1,000,000 is reflected in Other Receivables on the Statement of Net Assets Available for Liquidation and the estimates for the associated outstanding legal fees and expenses are included in the estimated cost to complete liquidation.
5. PAYABLES AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities of $648,771 at June 30, 2015 consist primarily of incurred but unpaid professional fees and expenses.
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6. ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION
As of June 30, 2015, the estimate of costs to complete the liquidation of the Trust Assets is $1,875,503 and such amount represents the estimated costs of operating the Trust through March 31, 2016. These costs, which include litigation costs, professional fees, and other related costs, are estimated based on various assumptions. Given that there is inherent uncertainty in the estimation process, actual results could be materially different.
7. DISTRIBUTIONS
The Trust has not made any distributions since its inception on October 17, 2012.
8. CASH RECEIPTS AND DISBURSEMENTS
On the Effective Date, the Trust received cash in the amount of $4,928,564 (which excludes the $78,367 held by Faith Bloom). Since then the Trust received $2,750,000 in proceeds from settling a claim against KPMG Hong Kong. Between October 17, 2012 (inception) and June 30, 2015, the Trust paid out $7,223,961 to various Trust creditors including, $6,173,483 for Trust operating expenses and $1,050,478 for final fee applications of professionals retained in the Debtor’s Chapter 11 case and other opening Trust liabilities.
9. RELATED PARTY TRANSACTIONS
Alvarez & Marsal North America LLC (“A&M”) serves as financial advisor to the Trust. Michael Kang, the Liquidating Trustee, is a Managing Director at A&M. From Inception through June 30, 2015, A&M has been paid $1,399,926 and has estimated unpaid fees and expenses of $75,000 which is included in payables and accrued liabilities.
10. SUBSEQUENT EVENTS
The Company has considered all events occurring through the date the financial statements have been issued, and has determined that there are no such events that are material to the financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this quarterly report. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements.
Overview of Trust
The Trust was established pursuant to the First Amended Chapter 11 Plan of Reorganization, as Modified (the “Plan”), dated as of August 30, 2012, of ShengdaTech, Inc. (“SDTH” or the “Debtor”), which was confirmed by order of the United States Bankruptcy Court for the District of Nevada. The Trust became effective on October 17, 2012, the Plan’s effective date (the “Effective Date”). Any capitalized terms used herein and not otherwise defined will have those meanings set forth in the Plan.
The Trust is created on behalf of, and for the benefit of, the Liquidating Trust Beneficiaries, with an initial term of three years, subject to extension with approval of the Bankruptcy Court, and is intended to qualify as a “liquidating trust” for federal income tax purposes. The Liquidating Trust Beneficiaries are the holders of claims and equity interests under the Plan. The beneficial interests in the Trust (the “Trust Interests”) are not transferable except by will, intestate succession or operation of law.
The Plan provides that the Trust will wind-down the Debtor’s affairs and make periodic and final distributions of the proceeds of the Liquidating Trust Assets in accordance with the terms of the Plan. As set forth in the Plan, the Liquidating Trust Assets include all of the assets of the Debtor, including, without limitation, (i) cash in the Debtor’s bank account on the Effective Date, (ii) the Debtor’s equity interests in its wholly-owned subsidiary, Faith Bloom Limited (“Faith Bloom”), (iii) all claims held by the Debtor against Faith Bloom and Faith Bloom’s subsidiaries, Shandong Haize Nanomaterials Co., Ltd., Shandong Bangsheng Chemical Co., Ltd., Shaanxi Haize Nanomaterials Co., Ltd., Zibo Jiaze Nanomaterials Co., Ltd. and Anhui Yuanzhong Nanomaterials Co., Ltd (the “PRC Subsidiaries”), (iv) the Debtor’s interest in certain directors and officers insurance policies, if transferable, and the proceeds thereof, (v) all claims and causes of action held by the Debtor, and (vi) any other assets of the Debtor that are recovered by the Trust and the proceeds thereof.
On November 3, 2014, Faith Bloom gained physical possession of the Shaanxi Haize plant as a result of the Xianyang Court’s enforcement action. On February 2, 2015, Faith Bloom executed an Equity Transfer Agreement with Mr. Wang Xiaohong pertaining to the transfer of 100% of the equity interest of Shaanxi Haize held by Faith Bloom (the “Transaction”). It is uncertain whether the Transaction will be consummated given ongoing judicial enforcement action against Shaanxi Haize assets. See Part II, Item 1 – “Legal Proceedings” for a full description of this matter.
On July 17, 2015, the U.S. Bankruptcy Court for the District of Nevada approved the Trust’s motion to approve the settlement agreement (the “D&O Settlement”) related to the “Oaktree Capital Management L.P. et al. v. Ironshore Indemnity, Inc., et al.” matter. Pursuant to the D&O Settlement, Federal and Ironshore (the “Insurance Carriers”) will pay a total of $7.9 million for the following (a) $1 million to the Liquidating Trust for payment of litigation costs (“Defense Costs”) incurred by the Liquidating Trust and to the extent any monies remain after payment of Defense Costs to fund the ongoing administration of the Trust or to the holders of Allowed Class 4 Claim; (b) $2.4 million to the Miller Trust Plaintiffs, and (c) $4.5 million to the Oaktree Plaintiffs. In exchange for the Payments, the Insurance Carriers, the Trust and the defendants in the Miller Trust and Oaktree litigations receive complete releases. See Part II, Item 1 – “Legal Proceedings” for a full description of this matter.
The Plan establishes, among other things, that the Trust will pursue litigation against the PRC Subsidiaries and prosecute certain other causes of action, hold and ultimately sell Faith Bloom’s shares in the PRC Subsidiaries, pursue any objections to claims or equity interests, execute the provisions governing distributions to holders of allowed claims or allowed equity interests and facilitate the process for resolving disputed claims or disputed equity interests filed against the Debtor.
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Discussion and Analysis
Reference is made to the Financial Statements of the Trust as of June 30, 2015 and for the three and six month periods ending June 30, 2015 and June 30, 2014 and the related notes thereto (the “Trust Financial Statements”), which are attached to this Quarterly Report on Form 10-Q. The following information concerning the Trust’s financial performance and condition should be read in conjunction with the Trust Financial Statements.
This discussion and analysis of the Trust’s net assets in liquidation and changes in net assets in liquidation are based upon the Trust Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America and in accordance with the liquidation basis of accounting. During preparation of these consolidated financial statements, the Trust is required to make estimates and assumptions that affect the reported amounts of assets at estimated fair value, the reported liquidation liabilities, the estimated liquidating costs, the resolution of current and potential litigation and the fair value of and related disclosure of contingent assets and liabilities. On an on-going basis, the Trust evaluates and updates its estimates and assumptions. The Trust bases its estimates and assumptions on historical experience and on various other assumptions that the Trust believes are reasonable under the circumstances. The basis for making judgments about the fair value of assets and liquidation liabilities is not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Comparison of three months ended June 30, 2015 and 2014
For the three months ended June 30, 2015, the Trust incurred costs of $547,040 versus net cash received of $1,631,431 during the three months ended June 30, 2014. The increase in overall costs incurred is due primarily to the payment of fees related to on going work to recover Trust Assets. For the three months ended June 30, 2015, net assets in liquidation increased by $725,795 and ended the period at $1,049,231, compared to the three months ended June 30, 2014 when net assets in liquidation remained unchanged and ended the period at $1,930,930.
During the three month periods ended June 30, 2015 and June 30, 2014, the Trust made payments on costs to complete the liquidation and did not make any distributions to holders of Trust Interests.
Comparison of six months ended June 30, 2015 and 2014
For the six months ended June 30, 2015, the Trust incurred costs of $1,232,639 versus net cash received of $1,357,871 during the six months ended June 30, 2014. The increase in overall costs incurred is due primarily to the payment of fees related to on going work to recover Trust Assets. For the six months ended June 30, 2015, net assets in liquidation increased by $668,211 and ended the period at $1,049,231, compared to the six months ended June 30, 2014 when net assets in liquidation increased $114,134 and ended the period at $1,930,930.
During the six month period ended June 30, 2015 and June 30, 2014, the Trust made payments on costs to complete the liquidation and did not make any distributions to holders of Trust Interests.
As of June 30, 2015, the Trust’s cash and cash equivalents totaled $542,970, it held retainers paid to professionals of $271,000 and had other receivables valued at $2,759,535. At the same date, the Trust had accrued liabilities of $648,771 and estimated costs to complete the liquidation of $1,875,503.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to its shares and classified as shareholder’s equity or that are not reflected in its consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to it or engages in leasing, hedging or research and development services with it.
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Critical Accounting Estimates
Management has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Under the liquidation basis of accounting, assets and liabilities have been recorded at their estimated fair values. Given that there is inherent uncertainty in the valuation process, the amounts actually realized or settled could be materially different from those reflected in the accompanying consolidated financial statements.
Recently Issued Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting standards if currently adopted could have a material effect on the accompanying financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Trustee (who is our Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer), of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of June 30, 2015, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2015 in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms. This conclusion is based on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.
In performing the above-referenced assessment, our management identified the following material weaknesses:
| i) | We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud-related risks and the risks related to non-routine transactions, if any, on our internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness. |
| ii) | We have not achieved the optimal level of segregation of duties relative to key financial reporting functions. |
Our management feels the weaknesses identified above have not had any material effect on our financial results.
Our management team will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
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Changes in Internal Controls Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the quarterly period ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.
PART II. OTHER INFORMATION
| 1. | Shaanxi Haize Nanomaterials Co., Ltd. (“Shaanxi Haize”) |
On December 22, 2011, Faith Bloom, through its Chinese counsel, the Jun He Law Offices (“Jun He”), filed a Statement of Claims with the Intermediate People’s Court of Xianyang, Shaanxi Province (the “Xianyang Court”). Defendants listed in the Statement of Claims include Li Fu, the former general manager and former legal representative of Shaanxi Haize, Ma Zhaowei, a former director of Shaanxi Haize, Chen Xukui, a former director of Shaanxi Haize and Li Shujin, a former director of Shaanxi Haize (Li Fu, Ma Zhaowei, Chen Xukui, and Li Shujin collectively, the “Shaanxi Haize Defendants”).
The Statement of Claims’ demands for relief are: (i) the immediate cessation of the Shaanxi Haize Defendants’ infringement of Shaanxi Haize’s interests; (ii) transfer of all Shaanxi Haize’s seals, licenses (including business license), financial records, lists of assets, certificates of ownership, employment records, and other records to Faith Bloom; (iii) the Shaanxi Haize Defendants’ assistance in amending records maintained at the applicable Administrations of Industry and Commerce (the “AIC”), including assistance in the registration of a new general manager and legal representative appointed by Faith Bloom; and (iv) litigation costs.
The hearing before the Xianyang Court took place on January 24, 2013 and a verdict was issued on April 24, 2013. The verdict held in favor of Faith Bloom on demands (i), (ii) and (iii), referenced above. In early June 2013, Jun He was notified by the Xianyang Court of Li Fu’s appeal of the Xianyang Court’s verdict. The appellate hearing took place before the Shaanxi Province Highest People’s Court on October 9, 2013. As a result of Li Fu’s failure to appear, however, the appellate hearing was held on December 10, 2013. Subsequent to the December 10, 2013 appellate hearing, Li Fu withdrew his appeal, making the Xianyang Court’s verdict enforceable. On November 3, 2014, Faith Bloom gained physical possession of the Shaanxi Haize plant as a result of the Xianyang Court’s enforcement action. On February 2, 2015, Faith Bloom executed an Equity Transfer Agreement with Mr. Wang Xiaohong pertaining to the transfer of 100% of the equity interest of Shaanxi Haize held by Faith Bloom (the “Transaction”). It is uncertain whether the Transaction will be consummated given ongoing judicial enforcement action against Shaanxi Haize assets.
| 2. | Shandong Haize Nanomaterials Co., Ltd. (“Shandong Haize”) |
On March 19, 2012, Faith Bloom, through Jun He, filed a Statement of Claims against Du Lei, the former general manager and former legal representative of Shandong Haize, with the Intermediate People’s Court of Tai’an, Shandong Province (the “Tai’an Court”).
The Statement of Claims’ demands for relief are: (i) the immediate cessation of Du Lei’s illegal possession and control of Shandong Haize’s chops, licenses and certificates; (ii) the return of Shandong Haize’s chops, certificates, and licenses to Faith Bloom; (iii) Du Lei’s assistance in amending records maintained at the applicable AIC, including assistance in the registration of a new general manager and legal representative appointed by Faith Bloom; and (iv) litigation costs.
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On May 22, 2013, Du Lei filed a petition in the Tai’an Court challenging the Tai’an Court’s jurisdiction over the matter. Du Lei’s petition was rejected by the Tai’an Court on June 27, 2013. In August 2013, Jun He received notice of Du Lei’s appeal of the Tai’an Intermediate People’s Court’s finding that it has proper jurisdiction over the case to the Shandong Province Highest People’s Court. On March 24, 2014, the Shandong Province Highest People’s Court found that the Tai’an Court has original jurisdiction over the matter. The hearing before the Tai’an Court took place on May 23, 2014 and a verdict was issued on June 16, 2014. The verdict held in favor of Faith Bloom on demands (ii) and (iii) referenced above. Du Lei appealed the Tai’an Court’s verdict. An appellate hearing before the Shandong Province Highest People’s Court took place on December 22, 2014, which resulted in the Shandong Province Highest People’s Court affirming the Tai’an Court’s verdict. Faith Bloom is working through its Chinese counsel to enforce the verdict.
| 3. | Shandong Bangsheng Chemical Co., Ltd. (“Shandong Bangsheng”) |
On March 19, 2012, Faith Bloom, through Jun He, filed a Statement of Claims against Chen Xukui, the former general manager and former legal representative of Shandong Bangsheng, with the Tai’an Court.
The Statement of Claims’ demands for relief are: (i) the immediate cessation of Chen Xukui’s illegal possession and control of Shandong Bangsheng’s chops, licenses and certificates; (ii) the return of Shandong Bangsheng’s chops, certificates, and licenses to Faith Bloom; (iii) Chen Xukui’s assistance in amending records maintained at the applicable AIC, including assistance in the registration of a new general manager and legal representative appointed by Faith Bloom; and (iv) litigation costs.
On May 22, 2013, Chen Xukui filed a petition in the Tai’an Court challenging the Tai’an Court’s jurisdiction over the matter. Chen Xukui’s petition was rejected by the Tai’an Court on June 27, 2013. In August 2013, Jun He received notice of Chen Xukui’s appeal of the Tai’an Court’s finding that it has proper jurisdiction over the case to the Shandong Province Highest People’s Court. On March 24, 2014, the Shandong Province Highest People’s Court found that the Tai’an Court has original jurisdiction over the matter. The hearing before the Tai’an Court took place on May 23, 2014 and a verdict was issued on June 16, 2014. The verdict held in favor of Faith Bloom on demands (ii) and (iii) referenced above. Chen Xukui appealed the Tai’an Court’s verdict. An appellate hearing before the Shandong Province Highest People’s Court took place on December 22, 2014, which resulted in the Shandong Province Highest People’s Court affirming the Tai’an Court’s verdict. Faith Bloom is working through its Chinese counsel to enforce the verdict.
| 4. | Zibo Jiaze Nanomaterials Co., Ltd. (“Zibo Jiaze”) |
On July 27, 2012, Faith Bloom, through Jun He, filed a Statement of Claims with the Zibo New and High Tech Zone Court, Shandong Province (the “Zibo Court”). Defendants listed in the Statement of Claims include Xu Xiqing, the former executive director of Zibo Jiaze, Chi Fei, the former general manager and legal representative of Zibo Jiaze, and Zhao Tonglei, the former supervisor of Zibo Jiaze (Xu Xiqing, Chi Fei, and Zhao Tonglei collectively, the “Zibo Jiaze Defendants”).
The Statement of Claims’ demands for relief are: (i) the return of all Zibo Jiaze’s seals, licenses (including business license), and records to Faith Bloom; (ii) the Zibo Jiaze Defendants’ assistance in amending records maintained at the applicable AIC, including assistance in the registration of a new general manager, legal representative, and supervisor appointed by Faith Bloom; and (iii) litigation costs.
The hearing before the Zibo Court took place on May 24, 2013 and a verdict was issued on August 10, 2013. The verdict held in favor of Faith Bloom on demands (i) and (ii) referenced above. The Zibo Jiaze Defendants appealed the Zibo Court verdict. A hearing before the Zibo Intermediate People’s Court, the appellate court, took place on March 10, 2014. The Zibo Intermediate People’s Court affirmed the Zibo Court’s verdict on June 3, 2014. Faith Bloom is working through its Chinese counsel to evaluate its options to enforce the verdict.
| 5. | Anhui Yuanzhong Nanomaterials Co., Ltd.(“Anhui Yuanzhong”) |
On December 23, 2011, Faith Bloom, through Jun He, filed a Statement of Claims against Chen Bo, the former general manager and legal representative of Anhui Yuanzhong, with the Hefei New and High Tech Zone Court, Anhui Province (the “Hefei Court”).
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The Statement of Claims’ demands for relief are: (i) the immediate cessation of Chen Bo’s infringement of Anhui Yuanzhong’s interests; (ii) transfer of all Anhui Yuanzhong’s seals, licenses (including business license), financial records, lists of assets, certificates of ownership, employment records, and other records to Faith Bloom; (iii) Chen Bo’s assistance in amending records maintained at the applicable AIC, including assistance in the registration of a new general manager, legal representative, and executive director appointed by Faith Bloom; (iv) transferring control of all the assets of Anhui Yuanzhong, including but not limited to bank deposits, cash, machinery, equipment, raw materials, spare parts, products, vehicles, buildings, and other relevant assets to Faith Bloom; and (v) litigation costs.
The Statement of Claims was accepted by the Hefei Court on the filing date, formally commencing the litigation process. Around the same time, defendant Chen Bo filed an appeal challenging the Hefei Court’s jurisdiction over the action. On May 24, 2012, the Intermediate People’s Court of Hefei, Anhui Province, affirmed the Hefei Court’s finding that the Hefei Court had jurisdiction over the action.
The hearing before the Hefei Court took place on November 12, 2012 and a verdict was issued on December 13, 2012. The verdict held in favor of Faith Bloom on demands (i) and (v), referenced above, and held partially in favor of Faith Bloom on demands (ii) and (iii), referenced above. On April 3, 2013, Jun He was notified by the Hefei Court of Chen Bo’s appeal of the Hefei Court’s verdict. The hearing before the Intermediate People’s Court of Hefei took place on September 4, 2013. The Intermediate People’s Court of Hefei has yet to issue a verdict on the appeal. The Intermediate People’s Court of Hefei, the appellate court, affirmed the Hefei Court’s verdict on December 16, 2013. Faith Bloom is working through its Chinese counsel to evaluate its options to enforce the verdict.
| 6. | ShengdaTech Liquidating Trust v. Hansen, Barnett & Maxwell, P.C. (“Hansen”), Baker Tilly International Limited (“Baker Tilly”), KPMG International Cooperative (“KPMG Int’l”), and KPMG LLP (“KPMG”) (collectively, the “Auditor Defendants”). |
On August 15, 2013, the Trust, through its counsel Grant & Eisenhofer P.A., filed a complaint (the “Complaint”) against the Auditor Defendants as an adversary proceeding in the United States Bankruptcy Court for the District of Nevada arising out of the Auditor Defendants’ audits and reviews of the Company’s financial statements from 2007 through 2010. In its Complaint, the Trust asserts claims for professional negligence and malpractice against all of the Auditor Defendants and breach of contract and fraudulent transfer against Hansen. The Complaint seeks a judgment awarding (i) compensatory damages in an amount to be proven at trial, (ii) prejudgment interest at the maximum allowable rate, (iii) disgorgement of all fees the Auditor Defendants received in connection with the subject audit and reviews, and (iv) costs of the suit including reasonable attorneys’ and experts’ fees and disbursements. Since filing the complaint, Baker Tilly has been dismissed as a defendant.
On September 18, 2013, Defendants KPMG Int’l and KPMG filed a joint motion for withdrawal of the reference (“Motion to Withdraw”) on the grounds, among others, that this case purportedly invokes non-core claims. On November 25, 2013, the Court granted the motion to withdraw and the case was transferred to the Nevada district court (the “Nevada District Court”).
On October 22, 2013, the Auditor Defendants filed separate motions to dismiss the Complaint claiming that it is deficient as a matter of law.
On January 7, 2014, the Trust and KPMG HK, KPMG and KPMG Int’l (collectively, the “KPMG Parties”) engaged in mediation proceedings which resulted in a settlement in principle (the “Settlement”) between the Trust and the KPMG Parties. As of February 28, 2014, the Trust and the KPMG Parties entered into a “Settlement Agreement and Release Agreement” (the “Settlement Agreement”) documenting the terms of the Settlement. Under the provision of the Settlement Agreement, KPMG HK will pay the Trust $2,750,000 in exchange for a release of the Trust’s claims against the KPMG Parties. The Settlement Agreement was subject to approval of the Nevada District Court under Rule 9019 of the Bankruptcy Code and the entry of a bar order (“Bar Order”) consistent with the Nevada state bar order provisions. On or around March 15, 2014, the parties filed a joint motion (the “Joint Motion”) to approve the Settlement Agreement and enter the Bar Order. On May 22, 2014, the Court entered an order granting the Joint Motion, approving the settlement, entering the Bar Order and dismissing the KPMG Parties. Pursuant to the terms of the Settlement, on or around June 9, 2014, KPMG HK paid the Liquidating Trust $2.75 million.
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On May 28, 2014, the Trust filed an Amended Complaint substantively identical to the Complaint. On June 16, 2014, Hansen filed a motion to dismiss the Amended Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Hansen’s motion to dismiss asserts that the Trust’s claims are barred by the doctrine of in pari delicto, statutes of limitation and Nevada’s comparative negligence statute. On July 3, 2014, the Trust filed an opposition to the motion to dismiss and on July 14, 2014, Hansen filed its reply in support. On September 9, 2014, the Court granted Hansen’s motion to dismiss the Amended Motion without prejudice as to the Trust’s claims for professional negligence, malpractice and breach of contract. In so doing, the Court rejected Hansen’s arguments that the claims were barred by statutes of limitation or the doctrine of in pari delicto, but found that the Trust had failed to plead sufficient facts to adequately state a claim for relief. The Court also dismissed with prejudice the Trust’s claim of fraudulent transfer against Hansen.
The Trust intends to amend its Complaint and continue pursuing its claims against Hansen.
| 7. | ShengdaTech Liquidating Trust v. KPMG Hong Kong (“KPMG HK”) |
On August 15, 2013, the Trust, through its counsel Grant & Eisenhofer P.A., made a demand against KPMG HK for non-binding mediation of its claims that KPMG HK committed (i) professional negligence, (ii) malpractice and (iii) breached its contractual obligations to the Company pursuant to engagement letters between the Company and KPMG HK for audit and other services.
On January 7, 2014, the Trust and KPMG HK, KPMG and KPMG Int’l (collectively, the “KPMG Parties”) engaged in mediation proceedings which resulted in a settlement in principle (the “Settlement”) between the Trust and the KPMG Parties. As of February 28, 2014, the Trust and the KPMG Parties entered into a “Settlement Agreement and Release Agreement” (the “Settlement Agreement”) documenting the terms of the Settlement. Under the terms of the Settlement Agreement, KPMG HK will pay the Trust $2,750,000 in exchange for a release of the Trust’s claims against the KPMG Parties. The Settlement Agreement was subject to approval of the Nevada District Court under Rule 9019 of the Bankruptcy Code and the entry of a bar order (“Bar Order”) consistent with the Nevada state bar order provisions.
On or around March 15, 2014, the parties filed a joint motion (the “Joint Motion”) to approve the Settlement Agreement and enter the Bar Order. On May 22, 2014, the Court entered an order granting the Joint Motion, approving the settlement, entering the Bar Order and dismissing the KPMG Parties. Pursuant to the terms of the Settlement, on or around June 9, 2014, KPMG HK paid the Liquidating Trust $2.75 million.
| 8. | ShengdaTech Liquidating Trust v. Chen, et al. |
On August 20, 2013, the Trust, through its counsel Maupin, Cox & LeGoy, filed a complaint (the “Complaint”) against Andrew Chen, Xiangzhi Chen and Anhui Guo (collectively, the “Officer Defendants”) arising from certain actions or non-actions they took to the detriment of the Company while serving as executive officers of the Company. In the Complaint, the Trust asserts claims against the Officer Defendants for (i) breaches of their fiduciary duty, (ii) waste of corporate assets, (iii) conversion and (iv) unjust enrichment and seeks judgment for compensatory, general and special damages in an amount to be determined at trial and litigation costs, including attorneys’ fees. Counsel for the Trust has been unable to serve the Complaint on the Officer Defendants.
| 9. | In re ShengdaTech, Inc. Securities Litigation |
On October 28, 2013, Plaintiffs Schaul and Yaw, through lead counsel Robbins Geller Rudman & Dowd L.L.P., filed their third amended putative class action complaint (the “Third Amended Complaint”) in the United States District Court for the Southern District of New York on behalf of all purchasers of the common stock of ShengdaTech between May 6, 2008 and March 15, 2010, against (i) the Company, (ii) certain of the Company’s former officers and directors including Messrs. Mudd and Saidman (the “Independent Directors”), and (iii) the Company’s former auditor, KPMG HK. The Third Amended Complaint arises out of alleged misrepresentations in the Company’s SEC filings and other public statements made during the class period and asserts a claim against the Company for the alleged violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereon. While Plaintiffs claim damages against the defendants in an amount to be determined at trial, Plaintiffs’ concede that any recovery against the Company under the Plan is limited to available insurance coverage and proceeds.
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On November 25, 2013, the Independent Directors and KPMG HK moved to dismiss (“Motions to Dismiss”) the Third Amended Complaint on the grounds, among others, that it failed to state cognizable claims against them. The Motions to Dismiss the Third Amended Complaint were fully briefed as of January 13, 2014. On July 1, 2014, the Court denied KPMG HK’s Motion to Dismiss without prejudice to renewal. On August 12, 2014, the Court granted the Independent Directors’ motion to dismiss the Third Amended and Consolidated Complaint. On October 24, 2014, Plaintiffs moved (“Plaintiffs’ Rule 60(b) Motion”) for relief from judgment under Rule 60(b)(1) and (2) and for leave to amend their complaint under Rule 15(a) and (d) against the Independent Directors. On May 28, 2015, the Court denied Plaintiffs’ Rule 60(b) Motion and motion for leave to file an amended complaint.
On January 8, 2014, the Company filed its Answer to the allegations raised against it in the Third Amended Complaint. In its Answer, the Company denied all material allegations of wrongdoing against it and raised certain affirmative defenses.
On March 27, 2015, Plaintiffs and KPMG HK executed a Stipulation and Agreement of Settlement (the “Stipulation”) to resolve all claims between them that were or could have been raised in the litigation. On April 22, 2015, Plaintiffs filed a Motion for Preliminary Approval of Partial Class Action Settlement (the “Motion for Preliminary Approval of Partial Settlement”) and related papers including a memorandum in support, a form of notice and the Stipulation. On June 8, 2015, the Court preliminarily approved the Stipulation and the settlement set forth therein and set the settlement hearing to determine, among other things, whether the Stipulation will be finally approved and a judgment entered thereon for September 17, 2015. The Stipulation does not resolve Plaintiffs’ complaint against the Company or its former officers or directors.
On July 10, 2015, the Company and Plaintiffs informed the Court that the parties anticipated filing a notice of dismissal of this action as against the Company once there was a final order finally adjudicating the Class 5 Proof of Claim, which was filed on behalf of the Plaintiffs and the putative class in the bankruptcy proceedings. As a result, on July 13, 2015, the Court entered an order dismissing the Company without prejudice, provided any application to restore the Company as a plaintiff be made within thirty days, which date may be extended for good cause. On July 17, 2015, the Bankruptcy Court entered an order approving the Class 5 settlement, and, on July 21, 2015, the Court entered the notice of entry of order approving the Class 5 settlement. The order approving the Class 5 settlement has not been appealed.
| 10. | Oaktree Capital Management L.P. et al. v. Ironshore Indemnity, Inc., et al. |
Beginning in 2012, bondholders of the Company initiated various individual lawsuits against former directors and officers of the Company relating to the ShengdaTech bankruptcy proceedings. In October, 2014, Miller Investment Trust, plaintiffs in one such lawsuit, reached a settlement in principal with certain of the former directors and officers of the Company which would have potentially impacted proceeds payable pursuant to (a) an insurance policy issued by Ironshore Indemnity, Inc. (the “Ironshore Policy”), and (b) an insurance policy issued by Federal Insurance Company (the “Federal Policy”).
On October 14, 2014, Oaktree Capital Management, L.P., on behalf of certain of its managed accounts; Oaktree (Lux.) Funds – Oaktree Convertible Bond Fund; Oaktree High Income Convertible Fund, L.P.; Oaktree High Income Convertible Fund II, L.P.; Oaktree Non-U.S. Convertible Fund, L.P.; Oaktree TT Multi-Strategy Fund, L.P.; OCM Global Convertible Securities Fund; OCM International Convertible Trust; OCM Non-U.S. Convertible Securities Fund; Lazard Asset Management LLC, on behalf of its managed accounts; HFR CA Lazard Rathmore Master Trust; AG OFCON LTD.; Zazove Associates LLC, on behalf of certain of its managed funds and accounts; CNH CA Master Account, L.P.; CNH Diversified Opportunities Master Account, L.P.; Advent Claymore Convertible Securities and Income Fund II; AQR Capital Management, LLC; AQR Convertible Opportunities Bond UCITS Fund; AQR Delta Master Account, L.P.; AQR Opportunistic Premium Offshore Fund L.P.; AQR Diversified Arbitrage Fund; and Delaware Public Employees’ Retirement System (collectively, the “Plaintiffs”) filed a declaratory judgment action as an adversary action in the ShengdaTech bankruptcy proceedings in the U.S. Bankruptcy Court for the District of Nevada against Ironshore Indemnity, Inc.; Federal Insurance Company, A. Carl Mudd, Sheldon B. Saidman, Miller Investment Trust, Jura Limited, and The Randi and Clifford Lane Foundation (the “Defendants”). Plaintiffs were among the bondholders who had previously initiated individual lawsuits against the Company’s directors and officers relating to ShengdaTech.
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In their Complaint, Plaintiffs seek declaratory judgments that (a) the Ironshore Policy and its proceeds are property of the Trust (Count I); (b) the Federal Policy and its proceeds are property of the Trust (Count II); and (c) the implementation of a settlement reached in connection with a separate action (the “Miller Action”) would violate Section 11.2(b) of the Plan or the post-confirmation injunction (Count III). The Complaint further seeks an injunction preventing the disbursement of proceeds from either the Ironshore Policy or Federal Policy (collectively, the “Insurance Policies”) pursuant to the settlement reached in the Miller Action (Count IV).
Plaintiffs filed a Motion for Preliminary Injunction (“Injunction Motion”) in the case on October 15, 2014. Defendants responded to the Injunction Motion on October 22, 2014. Plaintiffs replied in support of the Injunction Motion on October 24, 2014. On November 4, 2014, Defendants sought leave to file a joint sur-reply to Plaintiffs’ reply in support of the Injunction Motion, which request was granted on November 12, 2014.
On November 12, 2014, the Trust filed a motion to intervene in the adversary action as a plaintiff and a joinder to the Injunction Motion. The Court granted the Trust’s motion to intervene and determined that the Trust had standing and was the proper party to pursue the adversary action.
On December 2, 2014, the Court entered a preliminary injunction order enjoining disbursements under the Federal or Ironshore Policies, which expired on February 12, 2015. In doing so, the Court found that the Trust had met the standards for a preliminary injunction including that the Trust had a likely chance to succeed on the merits of the claim that the insurance proceeds were property of the Trust. Thereafter, the Court extended the preliminary injunction to and including March 16, 2015. By agreement of the parties, the Court thereafter extended the preliminary injunction to and including June 17, 2015.
In May, 2015, the parties entered into a settlement agreement (the “D&O Settlement”) related to the Insurance Policies and certain litigation that was potentially covered by the Insurance Policies. Under the D&O Settlement, Federal and Ironshore will pay a total of $7.9 million for the following (a) $1 million to the Liquidating Trust for payment of Defense Costs incurred by the Liquidating Trust and to the extent any monies remain after payment of Defense Costs to fund the ongoing administration of the Trust or to the holders of Allowed Class 4 Claim; (b) $2.4 million to the Miller Trust Plaintiffs and (c) $4.5 million to the Oaktree Plaintiffs. In exchange for the Payments, the Insurance Carriers, the Trust and the defendants in the Miller Trust and Oaktree litigations receive complete releases. For a more complete description of the terms of the settlement, the Trust refers to the D&O Settlement itself which is being filed herewith and whose terms are incorporated herein.
On May 15, 2015, the Trust filed a motion to approve the D&O Settlement. On June 2, 2014, the Plaintiffs in the In re Securities Litigation discussed in paragraph 9 above, filed an objection. On June 16, 2015, the Bankruptcy Court held a hearing on the approval of the D&O Settlement motion and the objection thereto. On July 17, 2015, the Court entered an order granting the Trust’s motion to approve the D&O Settlement and findings of fact and conclusions of law in connection therewith. In approving the settlement, the Bankruptcy Court, among other things, found that the D&O settlement was within a range of reasonableness, is fair, reasonable, in the best interests of the Trust’s Beneficiaries, and satisfied the requirements for approval set forth in applicable case law. The order granting the motion to approve the D&O settlement has not been appealed.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosure.
Not applicable.
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In May, 2015, the parties to the “Oaktree Capital Management L.P. et al. v. Ironshore Indemnity, Inc., et al.” matter entered into a settlement agreement (the “D&O Settlement”) related to the Insurance Policies and certain litigation that was potentially covered by the Insurance Policies. Under the D&O Settlement, Federal and Ironshore will pay a total of $7.9 million for the following (a) $1 million to the Liquidating Trust for payment of Defense Costs incurred by the Liquidating Trust and to the extent any monies remain after payment of Defense Costs to fund the ongoing administration of the Trust or to the holders of Allowed Class 4 Claim; (b) $2.4 million to the Miller Trust Plaintiffs and (c) $4.5 million to the Oaktree Plaintiffs. In exchange for the Payments, the Insurance Carriers, the Trust and the defendants in the Miller Trust and Oaktree litigations receive complete releases. For a more complete description of the terms of the settlement, the Trust refers to the D&O Settlement itself which is being filed herewith and whose terms are incorporated herein.
| Exhibit No. | Description | |
| 2.1 | First Amended Chapter 11 Plan of Reorganization (incorporated by reference to our Registration Statement on Form 10 filed on April 30, 2013). | |
| 2.2 | First Amended Disclosure Statement for the First Amended Chapter 11 Plan of Reorganization (incorporated by reference to our Registration Statement on Form 10 filed on April 30, 2013). | |
| 4.1 | Liquidating Trust Agreement, dated as of October 17, 2012 (incorporated by reference to our Registration Statement on Form 10 filed on April 30, 2013). | |
| 10.1 |
Settlement Agreement and Release, dated May 2015 by and among the ShengdaTech Liquidating Trust (the “Liquidating Trust”), A. Carl Mudd (“Mudd”), Sheldon B. Saidman (“Saidman” and together with Mudd, the “Independent Directors”), Federal Insurance Company, (“Federal”), Ironshore Indemnity, Inc. (“Ironshore”), the Miller Investment Trust, Jura Limited (“Jura”), the Randi and Clifford Lane Foundation (the “Lane Foundation” and collectively with the Miller Investment Trust and Jura, the “Miller Trust Plaintiffs”) and Oaktree Capital Management, L.P., on behalf of certain of its managed accounts; Oaktree (Lux.) Funds – Oaktree Convertible Bond Fund; Oaktree High Income Convertible Fund, L.P.; Oaktree High Income Convertible Fund II, L.P.; Oaktree Non-U.S. Convertible Fund, L.P.; Oaktree TT Multi-Strategy Fund, L.P.; OCM Global Convertible Securities Fund; OCM International Convertible Trust; OCM Non-U.S. Convertible Securities Fund; Lazard Asset Management LLC, on behalf of its managed accounts; HFR CA Lazard Rathmore Master Trust; AG OFCON LTD.; Zazove Associates LLC, on behalf of certain of its managed funds and accounts; CNH CA Master Account, L.P.; CNH Diversified Opportunities Master Account, L.P.; Advent Claymore Convertible Securities and Income Fund II; AQR Capital Management, LLC; AQR Convertible Opportunities Bond UCITS Fund; AQR Delta Master Account, L.P.; AQR Opportunistic Premium Offshore Fund L.P.; AQR Diversified Arbitrage Fund; and Delaware Public Employees’ Retirement System (the “Oaktree Plaintiffs”) | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act* | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act* | |
| 32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.* | |
| 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.* | |
| 101.1 | Interactive Data File* |
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SHENGDATECH LIQUIDATING TRUST | |
| Dated: August 13, 2015 | /s/ Michael Kang |
| By: Michael Kang | |
| Its: Trustee (Principal Financial Officer and Principal Accounting Officer) |
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Exhibit 10.1
SETTLEMENT AGREEMENT AND RELEASE
This Settlement Agreement (the “Agreement”) is entered into as of May __, 2015 by and among the ShengdaTech Liquidating Trust (the “Liquidating Trust”), A. Carl Mudd (“Mudd”), Sheldon B. Saidman (“Saidman” and together with Mudd, the “Independent Directors”), Federal Insurance Company, (“Federal”), Ironshore Indemnity, Inc. (“Ironshore”), the Miller Investment Trust, Jura Limited (“Jura”), the Randi and Clifford Lane Foundation (the “Lane Foundation” and collectively with the Miller Investment Trust and Jura, the “Miller Trust Plaintiffs”) and Oaktree Capital Management, L.P., on behalf of certain of its managed accounts; Oaktree (Lux.) Funds – Oaktree Convertible Bond Fund; Oaktree High Income Convertible Fund, L.P.; Oaktree High Income Convertible Fund II, L.P.; Oaktree Non-U.S. Convertible Fund, L.P.; Oaktree TT Multi-Strategy Fund, L.P.; OCM Global Convertible Securities Fund; OCM International Convertible Trust; OCM Non-U.S. Convertible Securities Fund; Lazard Asset Management LLC, on behalf of its managed accounts; HFR CA Lazard Rathmore Master Trust; AG OFCON LTD.; Zazove Associates LLC, on behalf of certain of its managed funds and accounts; CNH CA Master Account, L.P.; CNH Diversified Opportunities Master Account, L.P.; Advent Claymore Convertible Securities and Income Fund II; AQR Capital Management, LLC; AQR Convertible Opportunities Bond UCITS Fund; AQR Delta Master Account, L.P.; AQR Opportunistic Premium Offshore Fund L.P.; AQR Diversified Arbitrage Fund; and Delaware Public Employees’ Retirement System (the “Oaktree Plaintiffs”). Each of the foregoing persons and entities are sometimes referred to as a “Party” and collectively as the “Parties.” All capitalized terms used herein will have the meanings set forth in paragraph 1 of this Agreement.
BANKRUPTCY CASE
WHEREAS, ShengdaTech filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on August 19, 2011 in the Bankruptcy Court, Case No. 11-52649 (BTB) (the “Bankruptcy Case”);
WHEREAS, on October 1, 2012, the Debtor filed the First Amended Chapter 11 Plan of Reorganization, as Modified [Docket No. 652] (the “Plan”);
WHEREAS, on October 2, 2012, the Bankruptcy Court entered the Order Confirming the First Amended Chapter 11 Plan of Reorganization, as Modified [Docket No. 655] (the “Confirmation Order”); and
WHEREAS, the Plan created the Liquidating Trust and the Liquidating Trust Agreement was approved pursuant to the Confirmation Order.
OFFICER AND DIRECTOR INSURANCE POLICIES
WHEREAS, prior to the commencement of the Bankruptcy Case, Zurich American Insurance Company (“Zurich”) issued to ShengdaTech a $5,000,000 Directors & Officers Liability Insurance Policy – Zurich D&O Select Policy No. DOC 5965716-02 for the period March 13, 2010 through March 13, 2012 (the “Zurich Policy”);
WHEREAS, prior to the commencement of the Bankruptcy Case, Federal issued Excess Policy No. 8211-5057 (the “Federal Policy”) to ShengdaTech for the Policy Period March 13, 2010 to March 13, 2012;
WHEREAS, prior to the commencement of the Bankruptcy Case, Ironshore issued Excess Policy No. 000176501 (the “Ironshore Policy”) to ShengdaTech for the Policy Period March 13, 2010 to March 13, 2012;
WHEREAS, on August 14, 2012, the Bankruptcy Court entered the Order Pursuant to Bankruptcy Rule 9019 Approving Settlement Related to Debtor’s Directors & Officers Insurance Policy [Docket No. 607] (the “Zurich Settlement”) whereby Zurich paid approximately $3.75 million to ShengdaTech’s estate to settle matters relating to the Zurich Policy and the Zurich Policy was deemed exhausted;
WHEREAS, Federal subsequently advanced certain payments under the Federal Policy subject to a reservation of its rights; and
WHEREAS, the parties have actual or potential disputes concerning the availability of coverage under the Federal Policy and the Ironshore Policy (collectively, the “Remaining D&O Insurance Policies”).
LITIGATION
WHEREAS, on June 26, 2012, the Miller Trust Plaintiffs filed the Miller Trust Lawsuit in which the Miller Trust Plaintiffs assert claims against the Independent Directors for violations of the Massachusetts Uniform Securities Act, negligent misrepresentation, common law fraud, and violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), which claims are disputed by the Independent Directors;
WHEREAS, the Miller Trust Plaintiffs and the Independent Directors have reached an agreement in principle to settle the Miller Trust Lawsuit, the payment of which from the Remaining D&O Insurance Policies was enjoined by the Bankruptcy Court in connection with the Declaratory Judgment Action;
WHEREAS, on March 15, 2013, the Oaktree Plaintiffs filed the Oaktree Lawsuit in which the Oaktree Plaintiffs originally asserted claims against the Independent Directors for, among other things, negligent misrepresentation, which claims were disputed by the Independent Directors;
WHEREAS, on May 14, 2014, the Bankruptcy Court entered an order granting the Independent Directors’ Motion to Enforce [Docket No. 823; Bankruptcy Case] and awarded fees and costs against the Oaktree Plaintiffs, which fees and costs have not yet been liquidated, and which order is now on appeal before the United States District Court for the District of Nevada, Case No. 3:14-CV-00279-RCJ (the “Appeal”) and set for oral argument on May 18, 2015 [Docket No. 27; Appeal] [Docket No. 944; Bankruptcy Case];
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WHEREAS, after entry of the order granting the Independent Directors’ Motion to Enforce, the Oaktree Plaintiffs amended the Oaktree Lawsuit to assert claims against the Independent Directors for gross negligence, which claims are disputed by the Independent Directors;
WHEREAS, on August 19, 2013, the Liquidating Trust filed the Inside Director Lawsuit against the Inside Directors alleging various claims, including breach of fiduciary duties, in the Bankruptcy Court;
WHEREAS, on October 10, 2014, the Oaktree Plaintiffs filed the Declaratory Judgment Action against Federal, Ironshore, the Miller Trust Plaintiffs and the Independent Directors seeking certain declaratory relief, including a declaratory judgment that the Federal Policy and Ironshore Policy and their respective proceeds were property of ShengdaTech’s estate and seeking to enjoin the use of the proceeds of the Remaining D&O Insurance Policies, which claims are disputed by the defendants in the Declaratory Judgment Action;
WHEREAS, the Liquidating Trust filed a motion to intervene in the Declaratory Judgment Action as a plaintiff, which motion was granted on December 5, 2014; and
WHEREAS, the Bankruptcy Court has issued an injunction in connection with the Declaration Judgment Action to and including June 17, 2015 [Docket No. 161; Declaratory Judgment Action].
CLASS 4 PROOF OF CLAIM
WHEREAS, on December 19, 2011, ShengdaTech and the Official Committee of Unsecured Creditors of the Debtor (the “Committee”) entered into the Stipulation by and Among the Debtor and the Official Committee of Unsecured Creditors Regarding Proofs of Claim to be Filed by Bar Date [Docket No. 283], that subject to approval by the Bankruptcy Court, provisionally allowed a class proof of claim on behalf of certain purchasers of the 6.0% Notes due 2018 and 6.5% Notes due 2015 offered for sale by ShengdaTech on May 22, 2008 and December 10, 2012, respectively (collectively, the “Notes”), for any and all claims that they held against ShengdaTech’s estate, under securities or other laws related to the offer, sale and purchase of such Notes (the “Class 4 Proof of Claim”);
WHEREAS, on February 26, 2013, the Liquidating Trust filed the Objection of the ShengdaTech Liquidating Trust Seeking Entry of an Order Pursuant to 11 U.S.C. §§ 105(A) and 502, Fed. R. Bankr. P. 3007 and Local Rule 3007 Disallowing and Expunging Contingent, Unliquidated and/or Disputed Claims of Certain Noteholders [Docket No. 750] whereby the Liquidating Trust deferred liquidation of the Class 4 Proof of Claim until a later date;
WHEREAS, on October 15, 2014, certain holders of the Class 4 Proof of Claim filed the Note Purchaser’s Request for Allowance of Claims and Response to Objection of the ShengdaTech Liquidating Trustee to the Allowance of such Claims [Docket No. 878];
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WHEREAS, on December 2, 2014, the Bankruptcy Court entered the Order Approving Settlement Allowing Class 4 Proof of Claim Pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure [Docket No. 913] (the “Class 4 Claim Settlement Order”); and
WHEREAS, pursuant to the Class 4 Claim Settlement Order, the Class 4 Proof of Claim was deemed allowed in the amount of $50 million (the “Allowed Class 4 Claim”).
GENERAL STATEMENTS
WHEREAS, the Parties have engaged in extensive efforts to reach a global resolution with those Parties to this Agreement with potential demands for coverage from the Remaining D&O Insurance Policies, or whose losses could be covered by the Remaining D&O Insurance Policies, or who have brought or could potentially bring actions against Federal or Ironshore with respect to certain coverage disputes;
WHEREAS, the Parties desire to resolve amicably their disputes as set forth in this Agreement and avoid the costs, risks and uncertainty of the underlying litigation and coverage litigation by entering into this Agreement;
WHEREAS, this Agreement affords significant benefits to all Parties;
WHEREAS, achieving a resolution expressly depends upon obtaining appropriate orders from the Bankruptcy Court to carry out the purposes of, and approving all of the terms contained in, this Agreement;
WHEREAS, the Parties acknowledge that the amounts paid pursuant to this Agreement and its terms and conditions, including, without limitation, the releases incorporated into this Agreement, are part of a global resolution of complex legal and factual issues, the outcomes of which are uncertain, and constitute good and valuable consideration for this Agreement; and
NOW THEREFORE, in consideration of the mutual covenants and promises contained in this Agreement, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties, intending to be legally bound, agree as follows:
1. Defined Terms. For the purposes of this Agreement, the following terms have the following meanings:
| a. | “Agreement” means this Settlement Agreement and Release by and between the Liquidating Trust, the Independent Directors, Federal, Ironshore, the Miller Trust Plaintiffs, and the Oaktree Plaintiffs. |
| b. | “Allowed Class 4 Claim” has the meaning ascribed to such term in the recitals of this Agreement. |
| c. | “Appeal” has the meaning ascribed to such term in the recitals of this Agreement. |
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| d. | “Approval Order” means that certain final order approving, among other things, this Agreement and entered by the Bankruptcy Court in a form reasonably acceptable to all Parties, which order will include releases and injunctions in favor of all Parties. |
| e. | “Bankruptcy Case” has the meaning ascribed to such term in the recitals of this Agreement. |
| f. | “Bankruptcy Court” means the United States Bankruptcy Court for the District of Nevada presiding over the Chapter 11 case of ShengdaTech. |
| g. | “Claim(s)” means any past, present or future, known or unknown, suspected or unsuspected, asserted or unasserted, foreseen or unforeseen, direct or indirect, fixed or contingent, matured or inchoate, in law or equity, civil or criminal, claims, liabilities, obligations, damages, debts, cross-claims, counterclaims, complaints, rights, demands, lawsuits, actions, causes of action, directives, orders, administrative proceedings, arbitrations, requests for information, notice of partial or total responsibility or governmental actions made, asserted or filed, which seek compensatory damages, punitive damages, interest, statutory damages, fines, or injunctive or other equitable relief, including the Class 4 Proof of Claim, the Miller Trust Lawsuit, the Oaktree Lawsuit, the Inside Directors Lawsuit, the Declaratory Judgment Action, Defense Costs incurred by the Liquidating Trust, the Federal Released Claims, the Ironshore Released Claims, the Liquidating Trust Released Claims, the Miller Trust Released Claims, the Oaktree Released Claims, the fee and sanction award relating to the Motion to Enforce and any other claims specifically identified in the recitals of this Agreement. |
| h. | “Class 4 Proof of Claim” has the meaning ascribed to such term in the recitals of this Agreement. |
| i. | “Class 4 Claim Settlement Order” has the meaning ascribed to such term in the recitals of this Agreement. |
| j. | “Class 5 Claim” means (i) proof of claim number 9, which was filed by the lead plaintiffs, Donald P. Yaw and Edward J. Schaul, individually and on behalf of all others similarly situated in the Securities Class Action in an unliquidated amount, (ii) proof of claim number 10, which was filed by Yaw in the amount of $2,262,701.62 and (iii) proof of claim number 11, which was filed by Schaul in the amount of $675,864.47. |
| k. | “Committee” has the meaning ascribed to such term in the recitals of this Agreement. |
| l. | “Confirmation Order” has the meaning ascribed to such term in the recitals of this Agreement. |
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| m. | “Declaratory Judgment Action” means that certain lawsuit filed in the United States Bankruptcy Court for the District of Nevada and captioned Oaktree Capital Management, L.P., et al. vs. Ironshore indemnity, Inc., et al., Case No. 14-05054. |
| n. | “Defense Costs” has the meaning ascribed to such term in each of the Remaining D&O Insurance Policies, except that for purposes of paragraph 5.g., Defense Costs has the meaning set forth in paragraph 5.g. |
| o. | “Effective Date” means that date on which all of the conditions set forth in this Agreement have been satisfied or waived and this Agreement becomes effective. |
| p. | “Exchange Act” has the meaning ascribed to such term in the recitals of this Agreement. |
| q. | “Federal” has the meaning ascribed to such term in the recitals of this Agreement. |
| r. | “Federal Policy” has the meaning ascribed to such term in the recitals of this Agreement. |
| s. | “Federal Released Claims” means those Claims released by Federal pursuant to this Agreement. |
| t. | “Federal Released Parties” means Federal, its past, present and future parents, affiliates, subsidiaries, departments, divisions, predecessors, successors, assigns, employees, directors, officers, stockholders, underwriters, insurers, reinsurers, claims managers, principals, agents, attorneys and representatives. |
| u. | “Independent Directors” has the meaning ascribed to such term in the recitals of this Agreement. |
| v. | “Independent Director Released Claims” means those Claims released by the Independent Directors pursuant to this Agreement. |
| w. | “Independent Director Released Parties” means A. Carl Mudd, Sheldon B. Saidman and their respective agents, assigns, attorneys, estates, heirs, and representatives. |
| x. | “Insured Claim(s)” means any Claim that has been, or could be, asserted against any entity or individual that has been or could be the subject of a demand for coverage under either or both of the Remaining D&O Insurance Policies. |
| y. | “Ironshore” has the meaning ascribed to such term in the recitals of this Agreement. |
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| z. | “Ironshore Policy” has the meaning ascribed to such term in the recitals of this Agreement. |
| aa. | “Ironshore Released Claims” means those Claims released by Ironshore pursuant to this Agreement. |
| bb. | “Ironshore Released Parties” means Ironshore, its past, present and future parents, affiliates, subsidiaries, departments, divisions, predecessors, successors, assigns, employees, directors, officers, stockholders, underwriters, insurers, reinsurers, claims managers, principals, agents, attorneys and representatives. |
| cc. | “Jura” has the meaning ascribed to such term in the recitals of this Agreement. |
| dd. | “Lane Foundation” has the meaning ascribed to such term in the recitals of this Agreement. |
| ee. | “Liquidating Trust” has the meaning ascribed to such term in the recitals of this Agreement. |
| ff. | “Liquidating Trust Agreement” has the meaning ascribed to such term in the Plan. |
| gg. | “Liquidating Trust Released Claims” means those claims released by the Liquidating Trust pursuant to this Agreement. |
| hh. | “Liquidating Trust Released Parties” means the Liquidating Trust, any trustee of the Liquidating Trust, any advisory board of the Liquidating Trust, and their respective members, affiliates, employees, directors, officers, principals, representatives, agents, attorneys, successors, assigns and heirs. |
| ii. | “Loss” has the meaning ascribed to such term in each of the Remaining D&O Insurance Policies. |
| jj. | “Miller Trust Lawsuit” means that certain lawsuit filed in the United States District Court for the Southern District of New York and captioned Miller Investment Trust et al. v. Chen et al., Case No. 1:12-cv-04997-LGS (S.D.N.Y.). |
| kk. | “Miller Trust Plaintiffs” has the meaning ascribed to such term in the recitals of this Agreement. |
| ll. | “Miller Trust Released Claims” means those claims released by the Miller Trust Plaintiffs pursuant to this Agreement. |
| mm. | “Miller Trust Released Parties” means each of the Miller Trust Plaintiffs, and each of its past, present and future parents, affiliates, subsidiaries, departments, divisions, predecessors, successors, assigns, employees, directors, officers, stockholders, underwriters, insurers, reinsurers, claims managers, principals, agents, attorneys and representatives. |
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| nn. | “Motion to Enforce” means that certain motion to enforce the Plan injunction filed by the Independent Directors on February 11, 2014 in the Bankruptcy Court [Docket No. 796]. |
| oo. | “Mudd” has the meaning ascribed to such term in the recitals of this Agreement. |
| pp. | “Notes” has the meaning ascribed to such term in the recitals of this Agreement. |
| qq. | “Oaktree Lawsuit” means that certain lawsuit against the Independent Directors by the Oaktree Plaintiffs filed in the District Court of Clark County, Nevada and previously captioned Oaktree Capital Management LP, et al. v. Xiangzhi Chen, et al., and currently captioned Oaktree Capital Management LP, et al. v.A. Carl Mudd, et al., Case No. A-13-678471-B (District Court, Clark County, Nevada). |
| rr. | “Oaktree Plaintiffs” has the meaning ascribed to such term in the recitals of this Agreement. |
| ss. | “Oaktree Released Claims” means those claims released by the Oaktree Plaintiffs pursuant to this Agreement |
| tt. | “Oaktree Released Parties” means each of the Oaktree Plaintiffs, and each of their respective past, present and future parents, affiliates, subsidiaries, departments, divisions, predecessors, successors, assigns, employees, directors, officers, stockholders, underwriters, insurers, reinsurers, claims managers, principals, agents, attorneys and representatives. |
| uu. | “Inside Directors” means Xiangzhi Chen, Anhui Guo and Andrew Chen. |
| vv. | “Inside Directors Lawsuit” means that certain lawsuit filed by the Liquidating Trust against Inside Directors in the United States Bankruptcy Court for the District of Nevada and captioned ShengdaTech Liquidating Trust v. Xiangzhi Chen, et al., Case No. 13-05047-gwz (Bankr. D. Nev.). |
| ww. | “Party” or “Parties” has the meaning ascribed to such term in the recitals of this Agreement. |
| xx. | “Person” means any natural person, class or group of natural persons, corporation, partnership, association, trust, or any other entity or organization, including, without limitation, any federal, provincial, state, county, city or municipal governmental or quasi-governmental body or political subdivision, department, agency or instrumentality thereof. |
| yy. | “Plan” has the meaning ascribed to such term in the recitals of this Agreement. |
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| zz. | “Remaining D&O Insurance Policies” has the meaning ascribed to such term in the recitals of this Agreement. |
| aaa. | “Saidman” has the meaning ascribed to such term in the recitals of this Agreement. |
| bbb. | “Settlement Amount” has the meaning set forth in paragraph 2 of this Agreement. |
| ccc. | “Securities Class Action” means that certain class action case filed on May 6, 2011 in the United States District Court for the Southern District of New York and captioned In re ShengdaTech, Inc. Securities Litigation, Case No. 1:11-cv001918-LGS (S.D.N.Y.) for alleged violations of Sections 10(b) and 20(a) of the Exchange Act. |
| ddd. | “Securities Plaintiffs” means the plaintiffs in the Securities Class Action. |
| eee. | “ShengdaTech” means ShengdaTech, Inc. |
| fff. | “ShengdaTech Released Parties” means ShengdaTech, Inc., its past, present and future parents, affiliates, subsidiaries, departments, divisions, predecessors, successors, assigns, employees, directors, officers, stockholders, principals, agents, attorneys and representatives. The term “ShengdaTech Released Parties” does not include, and is not intended to include, any of ShengdaTech’s outside auditors or any underwriter of any ShengdaTech security. |
| ggg. | “Zurich” has the meaning ascribed to such term in the recitals of this Agreement. |
| hhh. | “Zurich Policy” has the meaning ascribed to such term in the recitals of this Agreement. |
| iii. | “Zurich Settlement” has the meaning ascribed to such term in the recitals of this Agreement. |
2. Payment of Settlement Amount. Within fourteen (14) business days after the Approval Order has become a final, binding and non-appealable order, in full and final settlement of all Claims, Federal and Ironshore will pay a total of $7,900,000 (the “Settlement Amount”) for the following: (a) $1,000,000 to the Liquidating Trust for payment of Defense Costs incurred by the Liquidating Trust (or as directed by the Liquidating Trust to its counsel, Greenberg Traurig, LLP) and to the extent any monies remain after payment of Defense Costs, such monies shall be used to fund the ongoing administration of the Liquidating Trust or distributed to the holders of the Allowed Class 4 Claim, net of costs and fees associated with any such distribution; (b) $2,400,000 to the Miller Trust Plaintiffs; and (c) the balance of $4,500,000 to the Oaktree Plaintiffs. Each of the Liquidating Trust, the Miller Trust Plaintiffs and the Oaktree Plaintiffs specifically acknowledges that the Settlement Amount constitutes payment of Loss for the Insured Claims and constitutes fair and adequate consideration for undertaking to perform the obligations provided for by this Agreement. Federal and Ironshore each further acknowledge that ShengdaTech and/or the Liquidating Trust has satisfied any and all retention obligations under the Federal Policy and the Ironshore Policy as applicable. Each of the Miller Trust Plaintiffs, the Oaktree Plaintiffs and the Liquidating Trust will provide to Federal and Ironshore wire instructions and tax identification numbers for their portions of the Settlement Amount.
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3. Holders of Allowed Class 4 Claim. The Miller Trust Plaintiffs and the Oaktree Plaintiffs shall not be considered holders of the Allowed Class 4 Claim and, therefore, will not be entitled to a distribution under paragraph 2(a) of this Agreement should there be funds available for a distribution to holders of the Allowed Class 4 Claim.
4. Full Release by Parties.
a. Federal. For and in consideration of Federal’s payment towards the Settlement Amount, the agreements and covenants contained in this Agreement, and for other good and valuable consideration, the adequacy of which is expressly acknowledged, upon the Effective Date, except as otherwise provided for herein, (i) the Liquidating Trust, on behalf of itself and, to the fullest extent legally permissible, the Liquidating Trust Released Parties and the ShengdaTech Released Parties; (ii) the Independent Directors on behalf of the Independent Director Released Parties; (iii) the Miller Trust Plaintiffs on behalf of the Miller Trust Released Parties; (iv) the Oaktree Plaintiffs on behalf of the Oaktree Released Parties; and (v) Ironshore on behalf of the Ironshore Released Parties, each on behalf of itself and to the fullest extent legally permissible, fully and forever release and discharge the Federal Released Parties from any and all actual or potential Claims, actions, causes of action, suits, claims for sums of money, contracts, controversies, agreements, costs, attorneys’ fees, expenses, damages, judgments and demands whatsoever in law or in equity, known or unknown, now existing or hereafter arising, whether contractual, extra-contractual, in tort or otherwise, which the Liquidating Trust Released Parties, the ShengdaTech Released Parties, the Independent Director Released Parties, the Miller Trust Released Parties, the Oaktree Released Parties, and the Ironshore Released Parties had, have, or may have in the future against the Federal Released Parties with respect to the Claims; any of the allegations alleged or that could have been alleged in the Claims; the Federal Policy; ShengdaTech; the Liquidating Trust and any loss incurred in connection with the Claims, including but not limited to any action, proceeding or claim arising from any investigation, evaluation or handling of the Claims or alleging any “bad faith” or breach of any promise, oral or written, or breach of any duty grounded in law or in contract relating thereto. Furthermore, in exchange for Federal’s payment towards the Settlement Amount and disbursement of the monies as set forth in paragraph 2 of this Agreement, upon the Effective Date, each of the Releasors set forth in this paragraph 5.a. will be deemed to have waived any Claim or Insured Claim or claim for insurance coverage under the Federal Policy. Each of the Parties recognizes and acknowledges that on the Effective Date, neither Federal nor any of the Federal Released Parties will have any further obligations to any of the other Parties under or in connection with the Federal Policy or for any Claim that has or may be the subject of notice under the Federal Policy. Each of the Parties recognizes and acknowledges that on the Effective Date, the Federal Policy will be exhausted.
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b. Ironshore. For and in consideration of Ironshore’s payment towards the Settlement Amount, the agreements and covenants contained in this Agreement, and for other good and valuable consideration, the adequacy of which is expressly acknowledged, upon the Effective Date, except as otherwise provided for herein, (i) the Liquidating Trust, on behalf of itself and, to the fullest extent legally permissible, the Liquidating Trust Released Parties and the ShengdaTech Released Parties; (ii) the Miller Trust on behalf of the Miller Trust Released Parties; (iii) the Oaktree Plaintiffs on behalf of the Oaktree Released Parties; and (iv) Federal on behalf of the Federal Released Parties, each on behalf of itself and to the fullest extent legally permissible, fully and forever release and discharge the Ironshore Released Parties from any and all actual or potential Claims, actions, causes of action, suits, claims for sums of money, contracts, controversies, agreements, costs, attorneys’ fees, expenses, damages, judgments and demands whatsoever in law or in equity, known or unknown, now existing or hereafter arising, whether contractual, extra-contractual, in tort or otherwise, which the Liquidating Trust Released Parties, the ShengdaTech Released Parties, the Miller Trust Released Parties, the Oaktree Released Parties, and the Federal Released Parties had, have, or may have in the future against the Ironshore Released Parties with respect to the Claims; any of the allegations alleged or that could have been alleged in the Claims; the Ironshore Policy; ShengdaTech, the Liquidating Trust; and any loss incurred in connection with the Claims, including but not limited to any action, proceeding or claim arising from any investigation, evaluation or handling of the Claims or alleging any “bad faith” or breach of any promise, oral or written, or breach of any duty grounded in law or in contract relating thereto. Furthermore, in exchange for Ironshore’s payment towards the Settlement Amount and disbursement of the monies as set forth in paragraph 2 of this Agreement, upon the Effective Date, each of the Releasors set forth in this paragraph 5.b will be deemed to have waived any Claim or Insured Claim or claim for insurance coverage under the Ironshore Policy, except as otherwise provided for herein. Each of the Parties recognizes and acknowledges that on the Effective Date, neither Ironshore nor any of the Ironshore Released Parties will have any further obligations to any of the other Parties under or in connection with the Ironshore Policy or for any Claim that has or may be the subject of notice under the Ironshore Policy, except the Independent Directors expressly retain any and all rights to seek Defense Costs and other coverage from the Ironshore Policy as set forth in paragraph 5.g.
c. Liquidating Trust. For and in consideration of the agreements and covenants contained in this Agreement, and for other good and valuable consideration, the adequacy of which is expressly acknowledged, on the Effective Date, except as otherwise provided for herein, (i) the Independent Directors on behalf of the Independent Director Released Parties, (ii) the Miller Trust Plaintiffs on behalf of the Miller Trust Released Parties, (iii) the Oaktree Plaintiffs on behalf of the Oaktree Released Parties, (iv) Federal on behalf of the Federal Released Parties, and (v) Ironshore on behalf of the Ironshore Released Parties, each on behalf of itself and to the fullest extent legally permissible, will fully and forever release and discharge the Liquidating Trust Released Parties and the ShengdaTech Released Parties from any and all actual or potential Claims, Insured Claims, actions, causes of action, suits, claims for sums of money, contracts, controversies, agreements, costs, attorneys’ fees, expenses, damages, judgments and demands whatsoever in law or in equity, known or unknown, now existing or hereafter arising, whether contractual, extra-contractual, in tort or otherwise, which any of the respective Releasors set forth in this pargraph 5.c had, have, or may have in the future against the Liquidating Trust Released Parties and the ShengdaTech Released Parties with respect to the Claims or Insured Claims, any of the allegations alleged or that could have been alleged in the Claims or Insured Claims; the Federal Policy; the Ironshore Policy; and any loss incurred in connection with the Claims or Insured Claims.
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d. Independent Directors. For and in consideration of the agreements and covenants contained in this Agreement, and for other good and valuable consideration, the adequacy of which is expressly acknowledged, on the Effective Date, except as otherwise provided for herein, (i) the Liquidating Trust, on behalf of itself and, to the fullest extent legally permissible, the Liquidating Trust Released Parties and the ShengdaTech Released Parties; (ii) the Miller Trust Plaintiffs on behalf of the Miller Trust Released Parties; (iii) the Oaktree Plaintiffs on behalf of the Oaktree Released Parties; (iv) Federal on behalf of the Federal Released Parties; and (v) Ironshore on behalf of the Ironshore Released Parties, each on behalf of itself and to the fullest extent legally permissible will fully and forever release and discharge the Independent Director Released Parties from any and all actual or potential Claims, Insured Claims, actions, causes of action, suits, claims for sums of money, contracts, controversies, agreements, costs, attorneys’ fees, expenses, damages, judgments and demands whatsoever in law or in equity, known or unknown, now existing or hereafter arising, whether contractual, extra-contractual, in tort or otherwise, which any of the respective Releasors set forth in this paragraph 5.d had, have, or may have in the future against the Independent Director Released Parties with respect to the Claims or Insured Claims; any of the allegations alleged or that could have been alleged in the Claims or Insured Claims; the Federal Policy; the Ironshore Policy; and any loss incurred in connection with the Claims or Insured Claims.
e. Miller Trust. For and in consideration of the agreements and covenants contained in this Agreement, and for other good and valuable consideration, the adequacy of which is expressly acknowledged, on the Effective Date, except as otherwise provided for herein, the (i) Liquidating Trust, on behalf of itself and, to the fullest extent legally permissible, the Liquidating Trust Released Parties and the ShengdaTech Released Parties; (ii) the Independent Directors on behalf of the Independent Director Released Parties; (iii) the Oaktree Plaintiffs on behalf of the Oaktree Released Parties; (iv) Federal on behalf of the Federal Released Parties; and (v) Ironshore on behalf of the Ironshore Released Parties, each on behalf of itself and to the fullest extent legally permissible, will fully and forever release and discharge the Miller Trust Released Parties from any and all actual or potential Claims, Insured Claims, actions, causes of action, suits, claims for sums of money, contracts, controversies, agreements, costs, attorneys’ fees, expenses, damages, judgments and demands whatsoever in law or in equity, known or unknown, now existing or hereafter arising, whether contractual, extra-contractual, in tort or otherwise, which any of the respective Releasors set forth in this paragraph 5.e had, have, or may have in the future have against the Miller Trust Released Parties with respect to the Claims or Insured Claims, any of the allegations alleged or that could have been alleged in the Claims or Insured Claims; the Federal Policy; the Ironshore Policy; and loss incurred in connection with the Claims or Insured Claims.
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f. Oaktree. For and in consideration of the agreements and covenants contained in this Agreement, and for other good and valuable consideration, the adequacy of which is expressly acknowledged, on the Effective Date, except as otherwise provided for herein, (i) the Liquidating Trust, on behalf of itself and, to the fullest extent legally permissible, the Liquidating Trust Released Parties and the ShengdaTech Released Parties; (ii) the Independent Directors on behalf of the Independent Director Released Parties; (iii) the Miller Trust Plaintiffs on behalf of the Miller Trust Released Parties; (iv) Federal on behalf of the Federal Released Parties; and (v) Ironshore on behalf of the Ironshore Released Parties, each on behalf of itself and to the fullest extent legally permissible, will fully and forever release and discharge the Oaktree Released Parties from any and all actual or potential Claims, Insured Claims, actions, causes of action, suits, claims for sums of money, contracts, controversies, agreements, costs, attorneys’ fees, expenses, damages, judgments and demands whatsoever in law or in equity, known or unknown, now existing or hereafter arising, whether contractual, extra-contractual, in tort or otherwise, which any of the respective Releasors set forth in this paragraph 5.f had, have, or may have in the future have against the Oaktree Released Parties with respect to the Claims or Insured Claims; any of the allegations alleged or that could have been alleged in the Claims or Insured Claims; the Federal Policy; the Ironshore Policy; and the loss incurred in connection with the Claims or Insured Claims.
g. Independent Directors’ Defense Costs. Upon the Effective Date, the Independent Directors on behalf of the Independent Director Released Parties fully and forever release and discharge the Ironshore Released Parties from any Claims or Insured Claims which the Independent Director Released Parties had, have, or may have in the future against the Ironshore Released Parties for monies (including payment of settlements or Defense Costs) paid by Zurich, the Federal Released Parties, or the Ironshore Released Parties to the Independent Director Released Parties, and received by the Independent Directors prior to the Effective Date of this Agreement, in connection with the Class 4 Proof of Claim, the Miller Trust Lawsuit, the Oaktree Lawsuit, the Inside Directors Lawsuit, the Declaratory Judgment Action, the Federal Released Claims, the Ironshore Released Claims, the Liquidating Trust Released Claims, the Miller Trust Released Claims, or the Oaktree Released Claims. Notwithstanding this Agreement, including the foregoing releases, the Independent Director Released Parties expressly retain any and all rights to seek Defense Costs and other coverage from the Ironshore Policy in connection with: (1) the Securities Class Action, including but not limited to any settlement or judgment in connection therewith; and (2) any claim, including but not limited to any third-party discovery request or any other action, that has been the subject of notice under the Ironshore Policy. For purposes of this paragraph 5.g, Defense Costs means reasonable and necessary legal fees, costs and expenses incurred in the investigation, defense, or appeal of any Claim or Insured Claim that has or may be the subject of notice under the Ironshore Policy, including the costs of an appeal bond, attachment bond, or similar bond.
h. Securities Class Action and Class 5 Claim. Notwithstanding the foregoing releases, nothing in this Agreement settles the Securities Class Action or the Class 5 Claim or provides any distributions on account of the Securities Class Action or the Class 5 Claim. This Agreement shall, however, resolve the Remaining D&O Insurance Policies to the extent set forth in this Agreement. For purposes of clarification, given that the various Releasors will waive all claims against the Federal Policy and the Ironshore Policy and given that the Federal Policy will be deemed exhausted, there will be no available insurance coverage for the Class 5 Claim.
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i. Agreement Requirements. Notwithstanding the foregoing releases, all Parties to this Agreement are bound to perform the terms of this Agreement and meet their obligations under this Agreement.
5. Withdrawal of Claims. After payment of the Settlement Amount and entry of the Approval Order, the Liquidating Trust, the Independent Directors, the Miller Trust Plaintiffs, and the Oaktree Plaintiffs will withdraw any demands for coverage from the Federal Policy or the Ironshore Policy and further agree that they will not institute any actions, litigation or claim in connection with the Remaining D&O Insurance Policies; except that the Independent Director Released Parties expressly retain any and all rights to seek Defense Costs and other coverage from the Ironshore Policy as set forth in paragraph 5.g.
6. Dismissal of Litigation. After payment of the Settlement Amount and entry of the Approval Order, the Parties agree that the following lawsuits will be dismissed with prejudice: (a) the Oaktree Lawsuit, (b) the Miller Trust Lawsuit, (c) the Declaratory Judgment Action, and (d) the Inside Directors Lawsuit. In addition, the Independent Directors will withdraw any and all requests for fees and costs against the Oaktree Plaintiffs.
7. California Civil Code Section 1542. The Parties acknowledge that they have been advised by their respective attorneys concerning, and are familiar with California Civil Code Section 1542, which reads as follows:
A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his settlement with the debtor.
Each of the Parties expressly waives any and all rights under California Civil Code Section 1542 and under any other federal or state statute or law of similar effect with respect to the Claims.
8. Further Discovery and Prosecution of Litigation. Each of the Parties represents and warrants that each of the Parties will refrain from serving or causing any discovery requests to be served on the Liquidating Trust with respect to any Claim; provided, that a Party may request the Liquidating Trust to consent to any additional discovery requests or, in the event the Liquidating Trust does not consent, seek relief from the Bankruptcy Court. Should the Liquidating Trust consent or otherwise become obligated to respond to additional discovery requests by a Party, the requesting Party will be responsible to pay any costs or fees reasonably incurred by the Liquidating Trust in responding to the requests.
| 14 |
9. Injunction. The Liquidating Trust will file a motion for entry of an order by the Bankruptcy Court (a) approving this Agreement and (b) precluding any and all of the Liquidating Trust’s beneficiaries and any and all of ShengdaTech’s creditors, shareholders, officers, directors, insurers or other parties in interest, who are not signatories to this Agreement from directly or indirectly bringing, commencing, initiating, instituting, maintaining, prosecuting or otherwise aiding in any action or other proceeding of any kind or nature, whether for the benefit of the Liquidating Trust, the ShengdaTech Chapter 11 estate, the beneficiaries of the Liquidating Trust or the creditors of ShengdaTech or for the benefit of any third party, against any of ShengdaTech, the Liquidating Trust, the Liquidating Trust Released Parties, the ShengdaTech Released Parties, the Independent Directors, the Independent Director Released Parties, the Miller Trust Plaintiffs, the Miller Trust Released Parties, the Oaktree Plaintiffs, the Oaktree Released Parties, Federal, the Federal Released Parties, Ironshore or the Ironshore Released Parties for any act committed by such parties with respect to the Federal Policy, the Ironshore Policy, the settlement herein, this Agreement, or any other action or proceeding relating to the conduct of Federal or Ironshore. The motion will further seek an order by the Bankruptcy Court precluding any interested party, who is not a signatory to this Agreement from directly or indirectly bringing, commencing, initiating, instituting, maintaining, prosecuting or otherwise aiding any Claim, action or other proceeding against the Liquidating Trust, the Liquidating Trust Released Parties, ShengdaTech, the ShengdaTech Released Parties, the Independent Directors, the Independent Director Released Parties, the Miller Trust Plaintiffs, the Miller Trust Released Parties, the Oaktree Plaintiffs, the Oaktree Released Parties, Federal, the Federal Released Parties, Ironshore or the Ironshore Released Parties in connection with the Federal Policy or the Ironshore Policy. Notwithstanding the foregoing, the Securities Plaintiffs shall maintain the right to pursue their pending action against the Independent Directors, and the Independent Director Released Parties expressly retain any and all rights to seek Defense Costs and other coverage from the Ironshore Policy as set forth in paragraph 5.g. Further notwithstanding anything to the contrary herein, KPMG’s and Morgan Stanley’s rights will be subject to the terms of the Plan and Confirmation Order and any agreements that might exist between either or both of KPMG and Morgan Stanley, on the one hand, and the Liquidating Trust Released Parties or the ShengdaTech Released Parties, on the other hand.
10. Contribution Bar Order. The Liquidating Trust will file a motion for entry of an order by the Bankruptcy Court precluding any and all of the Liquidating Trust's beneficiaries and any and all of ShengdaTech's creditors, shareholders, officers, directors, insurers or other parties in interest who are not signatories to this Agreement from bringing or maintaining any claims in any jurisdiction for contribution or indemnification of any kind against the Independent Director Released Parties that arise out of or in any way relate to the Claims.
11. Court Approval. As soon as practicable after the execution of this Agreement by all Parties, the Liquidating Trust will file a motion with the Bankruptcy Court seeking approval of this Agreement in its entirety and will serve the motion and schedule a hearing in accordance with the Federal Rules of Bankruptcy Procedure. Any order obtained from the Bankruptcy Court approving this Agreement will be in a form acceptable to all Parties.
12. Agreement Not an Admission. This Agreement and the payments referred to in it are for the negotiated compromise of disputed Claims and will not be construed as an admission of coverage by Federal or Ironshore, or an admission of liability by ShengdaTech or the Independent Directors. Neither this Agreement nor the allocation of the Settlement Amount will constitute a determination or evidence that the Federal Policy or the Ironshore Policy does or does not provide coverage for Insured Claims against ShengdaTech or the Independent Directors. The definitions or terms used in this Agreement will not be construed as an admission of any kind by any of the Parties.
| 15 |
13. Notices. Any notice which the Parties wish to give, or are required to give, under this Agreement will be given in writing, unless the urgency of a situation would render written notice impracticable, in which case oral notice will be given. Any oral notice or communication will be confirmed in writing as soon as reasonably possible after such oral notice or communication is given. All written notices or communications, including confirmations of oral notices or communications, will be made by hand, by overnight courier, by email (with hard copy sent by hand, overnight delivery or facsimile) or by facsimile (with an original sent by U.S. Mail), to the Parties, as set forth below, or to such other representative(s) or addresses as each of the Parties, respectively, may designate in writing in accordance with the notice provisions of this paragraph 13. Notice to fewer than the following representatives of the Parties, or as subsequently designated, will not constitute notice under this Agreement.
For the Liquidating Trust:
Michael D. Kang
Alvarez & Marsal North America LLC
100 Pine Street, Suite 900
San Francisco, CA 94111
Telephone: (415) 490-2308
Facsimile: (415) 358-5835
Email: mkang@alvarezandmarsal.com
and
Nancy A. Peterman, Esq.
Greenberg Traurig, LLP
77 West Wacker Drive, Suite 3100
Chicago, IL 60601
Telephone: (312) 456-8410
Facsimile: (312) 456-8435
Email: petermann@gtlaw.com
For the Independent Directors:
A. Carl Mudd
5318 Royal Crest Dr.
Dallas, TX 75229
Telephone: (214) 361-1721
Facsimile: (509) 757-9211
Email: acmudd@aol.com
| 16 |
Sheldon B. Saidman
Saidman & Associates, Inc.
5912 Via Verona View
Colorado Springs, CO 80919
Telephone: (719) 548-9963
Facsimile:
Email: Saidmaninc@aol.com
and
Stephen Mark Dollar, Esq.
Norton Rose Fulbright US LLP
666 Fifth Avenue
New York, NY 10103-3198
Telephone: (212) 318-3211
Facsimile: (212) 318-3400
Email: Steve.Dollar@nortonrosefulbright.com
For Federal
Kenneth West
Assistant Vice President
Chubb Group of Insurance Companies
82 Hopmeadow Street
Post Office Box 2002
Simsbury, CT 06070-7683
kwest@chubb.com
and
Merril Hirsh
Troutman Sanders, LLP
401 – 9th St., N.W., Suite 1000
Washington, D.C. 20004
merril.hirsh@troutmansanders.com
For Ironshore
Michael Adler
Senior Vice President
Claims
IRONSHORE
One State Street Plaza, 7th Floor
New York, NY 10004
michael.adler@ironshore.com
| 17 |
and
Mary Jo Barry
D'Amato & Lynch, LLP
Two World Financial Center
New York, NY 10281
MJBarry@Damato-Lynch.com
For the Miller Trust Plaintiffs
Laurence M. Rosen
The Rosen Law Firm
275 Madison Avenue, 34th Floor
New York, NY 10016
For the Oaktree Plaintiffs
Stuart Grant
Grant & Eisenhofer, P.A.
485 Lexington Avenue
New York, NY 10017
14. Miscellaneous Provisions.
a. Recitals. This Agreement has been entered into upon reliance on the recitals set forth above and are incorporated into this Agreement as though fully set forth herein.
b. Entire Agreement. This Agreement comprises the entire understanding of the Parties with respect to the subject matter of the Agreement. All prior communications, including correspondence and drafts of this Agreement, are merged into this Agreement, and only this Agreement contains the actual and final agreement of the Parties.
c. Agreement is Freely Entered. This Agreement is the product of informed, arm’s-length negotiations with each Party having the advice of counsel, and involves compromises of the Parties’ previously-stated legal positions. Each of the Parties acknowledges that it or they know all of its or their rights in connection with this Agreement, and that it or they have not been improperly influenced, coerced, or induced to make this compromise settlement by any action on the part of any employee, agent, attorney, or representative of any Party to this Agreement.
d. Representations and Warranties.
| i. | Subject to entry of the Approval Order, each Party to this Agreement represents and warrants that it (or he) has the authority to enter into this Agreement and to perform the duties and obligations to which it or they have agreed herein. |
| 18 |
| ii. | The Liquidating Trust and the Independent Director Released Parties warrant that they have not sold, assigned, or otherwise transferred any interest in the matters, demands, rights, or insurance policies that are the subject of the releases herein, and that they are the only Persons entitled to recover under the Remaining D&O Insurance Policies for such released matters. |
| iii. | Each of the Parties further represents and warrants that to the extent necessary, it or they have taken all necessary corporate and internal legal actions to duly approve of the making and performance of this Agreement and that no further corporate or other internal approval is necessary. |
e. Rules of Interpretation. This Agreement is the product of arm’s-length negotiation between the Parties, and the Parties have entered into this Agreement freely and voluntarily and with the advice of legal counsel. This Agreement is not a contract of insurance and no special rules of construction or interpretation of insurance policies will apply. Instead, only the rules of interpretation or construction of contracts in general will apply. None of the Parties will be deemed the drafter of this Agreement. In the event that a dispute arises over the meaning or application of any term of this Agreement, such term will not be construed by reference to any doctrine calling for ambiguities to be construed against an insurer or against the drafter of a document.
f. Agreement Not to Confer Rights on Third Parties. This Agreement is intended to confer rights and benefits only on the Parties to it and only with respect to the matters described in it. No Person other than the Parties will have any legally enforceable rights under this Agreement. This Agreement will not be assigned without the written consent of each of the Parties.
g. Execution in Counterparts. To facilitate execution, this Agreement may be executed in several counterparts by one or more of the undersigned Parties and all such counterparts when so executed will together be deemed to constitute a single agreement as if one document had been signed by all Parties. Facsimile or electronic (pdf) signatures will be deemed original, valid and binding signatures to this Agreement.
h. Governing Law. This Agreement will be governed by the laws of the State of Nevada and will be construed and interpreted in accordance with its laws, notwithstanding its conflict of law principles or any other rule, regulation or principle that would result in the application of any other state’s law.
i. Bankruptcy Court Jurisdiction. The Bankruptcy Court will retain jurisdiction to resolve any disputes or controversies arising from or related to this Agreement. All Parties agree and consent to the jurisdiction of the Bankruptcy Court to resolve any disputes or controversies between the Parties hereto arising from or related to this Agreement. Any motion, application or other action or proceeding brought before the Bankruptcy Court to resolve a dispute arising from or related to this Agreement will be brought on proper notice in accordance with the Federal Rules of Bankruptcy Procedure and the Local Rules of the Bankruptcy Court. In the event the Bankruptcy Court is deemed to lack jurisdiction over this matter, the Parties consent to jurisdiction in the United States District Court for the District of Nevada to the extent that it is otherwise lawfully available.
| 19 |
j. Attorneys’ Fees. Each Party will bear its or their own attorneys’ fees, costs and expenses incurred in negotiating and drafting this Agreement.
k. Severability. To the extent that any provision of this Agreement may be held to be invalid or legally unenforceable by a court of competent jurisdiction, such provision may be severed from the remainder of this Agreement only if and to the extent agreed upon by the Parties.
l. Effective Date of Agreement; Conditions Precedent. The effectiveness of this Agreement is subject to the following conditions precedent, which if not satisfied, will render this Agreement null and void; provided, however, that (a) the negotiations among the Parties will remain confidential and (b) this Agreement, the terms of this Agreement and the negotiations among the Parties with respect thereto will not be admissible in any case or proceeding:
| i. | This Agreement will have been executed and delivered by all Parties; |
| ii. | The Bankruptcy Court will have entered the Approval Order in a form acceptable to all Parties, which Approval Order will contain agreed upon releases and injunctions, and such Approval Order will have become a final, binding and non-appealable order that has not been stayed, reversed or modified in any respect; and |
| iii. | The Liquidating Trust, the Miller Trust Plaintiffs, and the Oaktree Plaintiffs will have received the Settlement Amount as set forth in paragraph 2 of this Agreement. |
m. Waiver of Conditions. To the extent that they are not otherwise required by law, any or all of the conditions for making this Agreement effective may be waived by written agreement of each of the Parties to this Agreement. However, the agreement to waive any condition or to waive a condition in any particular instance will not be construed as an agreement to waive any other condition in any other instance.
n. Amendments. This Agreement may not be amended, modified or otherwise altered in any respect other than in a writing signed by all Parties.
| 20 |
o. Divisions and Headings. The divisions of this Agreement into paragraphs and subparagraphs and the use of captions or headings in connection therewith are solely for convenience and will have no legal effect in construing this Agreement.
[Signature page to follow - Remainder of this page left intentionally blank]
| 21 |
IN WITNESS WHEREOF, the undersigned, by their respective duly authorized representatives, affix their signatures hereto.
| LIQUIDATING TRUST | ||
| By: | ||
| Name: | ||
| Title: | ||
| FEDERAL | ||
| By: | ||
| Name: | ||
| Title: | ||
| IRONSHORE | ||
| By: | ||
| Name: | ||
| Title: | ||
| MILLER TRUST PLAINTIFFS | ||
| By: | ||
| Name: | ||
| Title: | ||
| OAKTREE PLAINTIFFS | ||
| By: | ||
| Name: | ||
| Title: | ||
| A. CARL MUDD and SHELDON SAIDMAN | ||
| By: | ||
| Name: | ||
| Title: | ||
| NORTON ROSE FULBRIGHT US, LLP | ||
| By: | ||
| Name: | ||
| Title: | ||
| 22 |
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 USC, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Kang, certify that:
1. I have reviewed this report on Form 10-Q of ShengdaTech Liquidating Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 13, 2015
| /s/ Michael Kang |
| Michael Kang |
| Trustee |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 USC, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Kang, certify that:
1. I have reviewed this report on Form 10-Q of ShengdaTech Liquidating Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 13, 2015
| /s/ Michael Kang |
| Michael Kang |
| Trustee |
| (Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of ShengdaTech Liquidating Trust (the “Company”) for the period ended June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
| Date: August 13, 2015 | |
| By: | /s/ Michael Kang |
| Name: Michael Kang | |
| Title: Trustee (Principal Executive Officer) | |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of ShengdaTech Liquidating Trust (the “Company”) for the period ended June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
| Date: August 13, 2015 | |
| By: | /s/ Michael Kang |
| Name: Michael Kang | |
| Title: Trustee (Principal Financial Officer and Principal Accounting Officer) | |
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M=$13*)07W<&NZQSOSF4X,S0[N
ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION |
6 Months Ended |
|---|---|
Jun. 30, 2015 | |
| ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION [Abstract] | |
| ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION | 6. ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION
As of June 30, 2015, the estimate of costs to complete the liquidation of the Trust Assets is $1,875,503 and such amount represents the estimated costs of operating the Trust through March 31, 2016. These costs, which include litigation costs, professional fees, and other related costs, are estimated based on various assumptions. Given that there is inherent uncertainty in the estimation process, actual results could be materially different. |
PAYABLES AND ACCRUED LIABILITIES |
6 Months Ended |
|---|---|
Jun. 30, 2015 | |
| PAYABLES AND ACCRUED LIABILITIES [Abstract] | |
| PAYABLES AND ACCRUED LIABILITIES | 5. PAYABLES AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities of $648,771 at June 30, 2015 consist primarily of incurred but unpaid professional fees and expenses. |
STATEMENTS OF NET ASSETS AVAILABLE FOR LIQUIDATION - USD ($) |
Jun. 30, 2015 |
Dec. 31, 2014 |
|---|---|---|
| Assets | ||
| Cash and cash equivalents | $ 542,970 | $ 1,775,609 |
| Professional retainers | 271,000 | $ 271,000 |
| Other Receivables | 2,759,535 | |
| Total assets | 3,573,505 | $ 2,046,609 |
| Liabilities | ||
| Payables and accrued liabilities | 648,771 | 743,023 |
| Estimated costs to complete liquidation | 1,875,503 | 922,566 |
| Total liabilities | 2,524,274 | 1,665,589 |
| Net assets in liquidation | $ 1,049,231 | $ 381,020 |
PROFESSIONAL RETAINERS |
6 Months Ended |
|---|---|
Jun. 30, 2015 | |
| PROFESSIONAL RETAINERS [Abstract] | |
| PROFESSIONAL RETAINERS | 3. PROFESSIONAL RETAINERS
The Trust has retained a number of professional services firms to assist with its duties and obligations. As of June 30, 2015, three of these professional services firms kept retainers pursuant to their engagement letters totaling $271,000. These retainers will either be used to offset future professional fees and expenses or will be returned to the Trust. |
OTHER TRUST ASSETS |
6 Months Ended |
|---|---|
Jun. 30, 2015 | |
| OTHER TRUST ASSETS [Abstract] | |
| OTHER TRUST ASSETS | 4. OTHER TRUST ASSETS
The net assets of the Trust are carried at estimated fair values.
As of June 30, the Trust continues to hold 100% of the equity in Faith Bloom. Faith Bloom, which is wholly owned, does not have operations and serves as a holding company and direct parent of the PRC Subsidiaries. While all of the PRC Subsidiaries but Shandong Bangsheng are believed to be operating entities manufacturing a specialty additive known as nano-precipitated calcium carbonate, the Trust does not have control over the PRC Subsidiaries, with the exception of Shaanxi Haize.
The Debtor and the Trust's attempts to exercise control over the PRC Subsidiaries were previously thwarted by a deliberate and sustained pattern of conduct designed to limit the Trust's legal and operational control over the PRC Subsidiaries. The Trust therefore commenced litigation in China to obtain legal control over the subsidiaries as well as to obtain possession of the books and records. The Trust has obtained judgments in each of the pending cases. The Trust has taken control of Shaanxi Haize, is in the process of completing a sale of Shaanxi Haize and is in the process of working with counsel to evaluate its options with respect to the enforcement of the other judgments. Because of the significant uncertainties associated with estimating the probability and timing of realizing value from the Faith Bloom equity (including the value generated through the sale of Shaanxi Haize and the value generated if any of the other factories are recovered), it is not practical to estimate its fair value.
In connection with a recent settlement reached with certain of the insurance carriers that provided officer and director insurance coverage to ShengdaTech, Inc., the Trust will receive a settlement payment of $1,000,000 from such insurance carriers to settle certain coverage disputed and to reimburse the Trust for defense costs. A significant portion of this $1,000,000 will be used to pay outstanding legal fees and expenses incurred by the Trust's counsel in pursuing litigation and defending litigation covered by such insurance policies. The $1,000,000 is reflected in Other Receivables on the Statement of Net Assets Available for Liquidation and the estimates for the associated outstanding legal fees and expenses are included in the estimated cost to complete liquidation. |
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATING - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2015 |
Jun. 30, 2014 |
Jun. 30, 2015 |
Jun. 30, 2014 |
|
| (Decreases) Increases in net assets: | ||||
| Increase (decrease) in Other Trust Assets | $ 1,872,367 | $ (2,750,000) | $ 2,759,535 | $ (2,750,000) |
| Administrative expenses and professional fees paid, net of recoveries | (547,040) | 1,631,431 | (1,232,639) | 1,357,871 |
| Changes in accrued administrative expenses and professional fees | (7,277) | (68,438) | 94,252 | 111,501 |
| Changes in estimated costs to complete liquidation | (592,255) | 1,187,007 | (952,937) | 1,394,762 |
| Increase in net assets in liquidation | 725,795 | 668,211 | 114,134 | |
| Net assets in liquidation - Beginning of the period | 323,436 | 1,930,930 | 381,020 | 1,816,796 |
| Net assets in liquidation - End of the period | $ 1,049,231 | $ 1,930,930 | $ 1,049,231 | $ 1,930,930 |
OTHER TRUST ASSETS (Details) - Jun. 30, 2015 ¥ in Millions |
USD ($) |
CNY (¥) |
|---|---|---|
| OTHER TRUST ASSETS [Abstract] | ||
| Sales proceeds held by Trust's counsel | $ 1,759,535 | ¥ 11 |
| Insurance settlement receivable | $ 1,000,000 |
Document and Entity Information - shares |
6 Months Ended | |
|---|---|---|
Jun. 30, 2015 |
Aug. 01, 2015 |
|
| Document And Entity Information [Abstract] | ||
| Document Type | 10-Q | |
| Amendment Flag | false | |
| Document Period End Date | Jun. 30, 2015 | |
| Entity Registrant Name | SHENGDATECH LIQUIDATING TRUST | |
| Entity Central Index Key | 0001575574 | |
| Current Fiscal Year End Date | --12-31 | |
| Document Fiscal Period Focus | Q2 | |
| Document Fiscal Year Focus | 2015 | |
| Entity Filer Category | Smaller Reporting Company | |
| Entity Units Outstanding | 16,300 |
PAYABLES AND ACCRUED LIABILITIES (Details) - USD ($) |
Jun. 30, 2015 |
Dec. 31, 2014 |
|---|---|---|
| PAYABLES AND ACCRUED LIABILITIES [Abstract] | ||
| Accounts payable and accrued liabilities | $ 648,771 | $ 743,023 |
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
6 Months Ended |
|---|---|
Jun. 30, 2015 | |
| NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract] | |
| NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The ShengdaTech Liquidating Trust (the “Trust”) was formed pursuant to the First Amended Chapter 11 Plan of Reorganization (the “Plan”) of ShendgaTech, Inc. (the “Debtor” or “Company”). The Plan was confirmed on October 2, 2012 and became effective on October 17, 2012 (the “Effective Date”).
On the Effective Date, the Company automatically transferred to the Trust all of its right, title, and interest in and to all of the Trust Assets (defined to include all assets of the Company, including, without limitation, (i) cash in the Company's bank account on the Effective Date, (ii) the Company's equity interests in Faith Bloom Limited (“Faith Bloom”), a company formed under the laws of the British Virgin Islands, (iii) all claims held by the Company against Faith Bloom and Faith Bloom's subsidiaries (the “PRC Subsidiaries”), (iv) the Company's interest in certain directors and officers insurance policies, if transferable, and the proceeds thereof, (v) all Claims and causes of action held by the Company and (vi) any other assets of the Company that are recovered by the Trust and the proceeds thereof). The Trust will distribute the proceeds that are obtained from the Trust Assets to the Trust Beneficiaries (defined to include holders of Claims and Equity Interests under the Plan), in accordance with the distribution procedures and priorities set forth in the Plan.
Unlike an operating company, the Trust has no officers, directors or employees. Rather, the Trust is administered by the Liquidating Trustee, with consultation from the Liquidating Trust Advisory Board from time to time. The Trust does not engage in the conduct of a trade or business and is restricted from doing so based upon provisions of the Internal Revenue Code. The Trust also has no shareholders. It does have holders of beneficial interests in the Trust. Such holders include all creditors and former shareholders of the Company.
In accordance with the Trust Agreement and the Plan, the Trust, in its discretion, will pursue the Company's outstanding litigation in the People's Republic of China (the “PRC”); pursue any other litigation (including against the Company's former officers, directors and auditors); hold and sell, if possible, the Company's shares in Faith Bloom; execute, process and facilitate available distributions to holders of claims (“Claims”) and equity interests (“Equity Interests”) under the Plan; and resolve disputed Claims and Equity Interests. The Trust remains subject to the jurisdiction of the Bankruptcy Court through the term of its existence. BASIS OF PRESENTATION
The accompanying statement of net assets in liquidation at June 30, 2015, which has been derived from unaudited interim financial statements which have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for complete financial statements. The Trust believes all adjustments, normal and recurring in nature, considered necessary for a fair presentation have been included. The changes in net assets for the three and six months ended June 30, 2015 are not necessarily indicative of the changes in net assets that may be expected for the full year.
The Trust believes that, although the disclosures contained herein are adequate to prevent the information presented from being misleading, the accompanying interim financial statements should be read in conjunction with the Trust's financial statements for the year ended December 31, 2014 included in Form 10-K filed on March 31, 2015.
These financial statements have been prepared based on the liquidation basis of accounting. Accordingly, the Trust is required to make estimates and assumptions that affect the reported amounts of assets at net realizable value and liabilities at anticipated settlement amounts, and the estimated costs of liquidating the assets and distributing the proceeds to holders of beneficial interests. These estimates are subject to change. CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS
The Trust considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Trust maintains one operating account with a balance in excess of federally insured limits. The balance at June 30, 2015 was entirely held in cash. TRUST ASSETS
The net assets of the Trust are carried at estimated fair values. The primary assets of the Trust, which were transferred from the Debtor, are cash, shares in Faith Bloom, and contingent asset claims, such as claims against the former Directors and Officers of the Debtor, and claims against former accountants and other professionals. Because of the significant uncertainties associated with estimating the probability and timing of cash flows related to these claims, it is not practical to estimate their fair value until and unless actual settlements are reached. There can be no assurance that the Trust will realize any value of such contingent asset claims.
Faith Bloom, which is wholly owned, does not have operations and serves as a holding company and direct parent of the following entities formed under the laws of the PRC: Shandong Haize Nanomaterials Co., Ltd. (“Shandong Haize”), Shandong Bangsheng Chemical Co., Ltd. (“Shandong Bangsheng”), Shaanxi Haize Nanomaterials Co., Ltd. (“Shaanxi Haize”), Zibo Jiaze Nanomaterials Co., Ltd. (“Zibo Jiaze”) and Anhui Yuanzhong Nanomaterials Co., Ltd. (“Anhui Yuanzhong,” and together with Shandong Haize, Shandong Bangsheng, Shaanxi Haize, Zibo Jiaze, the “PRC Subsidiaries”). The Trust does not have control over the PRC Subsidiaries.
The Debtor's and the Trust's attempts to exercise control over the PRC Subsidiaries were previously thwarted by a deliberate and sustained pattern of conduct designed to limit the Trust's legal and operational control over the PRC Subsidiaries. The Trust therefore commenced litigation in China to obtain legal control over the subsidiaries as well as to obtain possession of the books and records. The Trust has obtained judgments in each of the pending cases. The Trust has taken control of Shaanxi Haize, is in the process of completing a sale of Shaanxi Haize and is evaluating its options with counsel with respect to the enforcment of the other judgments. Because of the significant uncertainties associated with estimating the probability and timing of realizing value from the Faith Bloom equity (including the value generated through the sale of Shaanxi Haize and the value generated if any of the other factories are recovered), it is not practical to estimate its fair value.
The fair value of Trust assets is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. OTHER LIQUIDATION LIABILITEIS
Accounts payable and accrued liabilities are reflected at their estimated settlement amounts which in the opinion of the Trust approximate their fair value. ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION
The estimated costs to complete liquidation and litigation represent the estimated cash costs of operating the Trust through March 31, 2016. These costs, which include litigation costs, professional fees, and other related costs, are estimated based on various assumptions. Given that there is inherent uncertainty in the estimation process, actual results could be materially different. INCOME TAXES
The Trust is treated as a grantor trust and not a corporation. Accordingly, any income or loss of the Trust will not be taxable to the Trust but will be taxable to the holders of beneficial interests in the Trust, as if such holders had themselves realized the income or loss from their pro rata interest in the Trust assets. USE OF ESTIMATES
Management of the Trust has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Under the liquidation basis of accounting, assets and liabilities have been recorded at their estimated fair values. Given there is inherent uncertainty in the valuation process, the amounts actually realized or settled could be materially different from those reflected in the accompanying Management of the Trust has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Under the liquidation basis of accounting, assets and liabilities have been recorded at their estimated fair values. Given there is inherent uncertainty in the valuation process, the amounts actually realized or settled could be materially different from those reflected in the accompanying consolidated financial statements. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS As of August 14, 2015, the Financial Accounting Standards Board (“FASB”) issued up to ASU 2015-06, which are not expected to have a material impact on the consolidated financial statements upon adoption. |
RELATED PARTY TRANSACTIONS |
6 Months Ended |
|---|---|
Jun. 30, 2015 | |
| RELATED PARTY TRANSACTIONS [Abstract] | |
| RELATED PARTY TRANSACTIONS | 9. RELATED PARTY TRANSACTIONS
Alvarez & Marsal North America LLC (“A&M”) serves as financial advisor to the Trust. Michael Kang, the Liquidating Trustee, is a Managing Director at A&M. From Inception through June 30, 2015, A&M has been paid $1,399,926 and has estimated unpaid fees and expenses of $75,000, which is included in payables and accrued liabilities. |
CASH RECEIPTS AND DISBURSEMENTS |
6 Months Ended |
|---|---|
Jun. 30, 2015 | |
| CASH RECEIPTS AND DISBURSEMENTS [Abstract] | |
| CASH RECEIPTS AND DISBURSEMENTS | 8. CASH RECEIPTS AND DISBURSEMENTS
On the Effective Date, the Trust received cash in the amount of $4,928,564 (which excludes the $78,367 held by Faith Bloom). Since then the Trust received $2,750,000 in proceeds from settling a claim against KPMG Hong Kong. Between October 17, 2012 (inception) and June 30, 2015, the Trust paid out $7,223,961 to various Trust creditors including, $6,173,483 for Trust operating expenses and $1,050,478 for final fee applications of professionals retained in the Debtor's Chapter 11 case and other opening Trust liabilities. |
ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION (Details) - USD ($) |
Jun. 30, 2015 |
Dec. 31, 2014 |
|---|---|---|
| ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION [Abstract] | ||
| Estimated costs to complete liquidation | $ 1,875,503 | $ 922,566 |
CASH AND CASH EQUIVALENTS (Details) - USD ($) |
Jun. 30, 2015 |
Dec. 31, 2014 |
Oct. 17, 2012 |
|---|---|---|---|
| Cash and Cash Equivalents [Line Items] | |||
| Cash and cash equivalents | $ 542,970 | $ 1,775,609 | $ 4,928,564 |
| Cash held in the United States [Member] | |||
| Cash and Cash Equivalents [Line Items] | |||
| Cash and cash equivalents | 464,603 | ||
| Cash held in the PRC [Member] | |||
| Cash and Cash Equivalents [Line Items] | |||
| Cash and cash equivalents | $ 78,367 | $ 78,367 |
SUBSEQUENT EVENTS |
6 Months Ended |
|---|---|
Jun. 30, 2015 | |
| SUBSEQUENT EVENTS [Abstract] | |
| SUBSEQUENT EVENTS | 10. SUBSEQUENT EVENTS The Company has considered all events occurring through the date the financial statements have been issued, and has determined that there are no such events that are material to the financial statements. |
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
6 Months Ended |
|---|---|
Jun. 30, 2015 | |
| NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract] | |
| BASIS OF PRESENTATION | BASIS OF PRESENTATION
The accompanying statement of net assets in liquidation at June 30, 2015, which has been derived from unaudited interim financial statements which have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for complete financial statements. The Trust believes all adjustments, normal and recurring in nature, considered necessary for a fair presentation have been included. The changes in net assets for the three and six months ended June 30, 2015 are not necessarily indicative of the changes in net assets that may be expected for the full year.
The Trust believes that, although the disclosures contained herein are adequate to prevent the information presented from being misleading, the accompanying interim financial statements should be read in conjunction with the Trust's financial statements for the year ended December 31, 2014 included in Form 10-K filed on March 31, 2015.
These financial statements have been prepared based on the liquidation basis of accounting. Accordingly, the Trust is required to make estimates and assumptions that affect the reported amounts of assets at net realizable value and liabilities at anticipated settlement amounts, and the estimated costs of liquidating the assets and distributing the proceeds to holders of beneficial interests. These estimates are subject to change. |
| CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS | CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS
The Trust considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Trust maintains one operating account with a balance in excess of federally insured limits. The balance at June 30, 2015 was entirely held in cash. |
| TRUST ASSETS | TRUST ASSETS
The net assets of the Trust are carried at estimated fair values. The primary assets of the Trust, which were transferred from the Debtor, are cash, shares in Faith Bloom, and contingent asset claims, such as claims against the former Directors and Officers of the Debtor, and claims against former accountants and other professionals. Because of the significant uncertainties associated with estimating the probability and timing of cash flows related to these claims, it is not practical to estimate their fair value until and unless actual settlements are reached. There can be no assurance that the Trust will realize any value of such contingent asset claims.
Faith Bloom, which is wholly owned, does not have operations and serves as a holding company and direct parent of the following entities formed under the laws of the PRC: Shandong Haize Nanomaterials Co., Ltd. (“Shandong Haize”), Shandong Bangsheng Chemical Co., Ltd. (“Shandong Bangsheng”), Shaanxi Haize Nanomaterials Co., Ltd. (“Shaanxi Haize”), Zibo Jiaze Nanomaterials Co., Ltd. (“Zibo Jiaze”) and Anhui Yuanzhong Nanomaterials Co., Ltd. (“Anhui Yuanzhong,” and together with Shandong Haize, Shandong Bangsheng, Shaanxi Haize, Zibo Jiaze, the “PRC Subsidiaries”). The Trust does not have control over the PRC Subsidiaries.
The Debtor's and the Trust's attempts to exercise control over the PRC Subsidiaries were previously thwarted by a deliberate and sustained pattern of conduct designed to limit the Trust's legal and operational control over the PRC Subsidiaries. The Trust therefore commenced litigation in China to obtain legal control over the subsidiaries as well as to obtain possession of the books and records. The Trust has obtained judgments in each of the pending cases. The Trust has taken control of Shaanxi Haize, is in the process of completing a sale of Shaanxi Haize and is evaluating its options with counsel with respect to the enforcment of the other judgments. Because of the significant uncertainties associated with estimating the probability and timing of realizing value from the Faith Bloom equity (including the value generated through the sale of Shaanxi Haize and the value generated if any of the other factories are recovered), it is not practical to estimate its fair value.
The fair value of Trust assets is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. |
| OTHER LIQUIDATION LIABILITEIS | OTHER LIQUIDATION LIABILITEIS
Accounts payable and accrued liabilities are reflected at their estimated settlement amounts which in the opinion of the Trust approximate their fair value. |
| ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION | ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION
The estimated costs to complete liquidation and litigation represent the estimated cash costs of operating the Trust through March 31, 2016. These costs, which include litigation costs, professional fees, and other related costs, are estimated based on various assumptions. Given that there is inherent uncertainty in the estimation process, actual results could be materially different. |
| INCOME TAXES | INCOME TAXES
The Trust is treated as a grantor trust and not a corporation. Accordingly, any income or loss of the Trust will not be taxable to the Trust but will be taxable to the holders of beneficial interests in the Trust, as if such holders had themselves realized the income or loss from their pro rata interest in the Trust assets. |
| USE OF ESTIMATES | USE OF ESTIMATES
Management of the Trust has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Under the liquidation basis of accounting, assets and liabilities have been recorded at their estimated fair values. Given there is inherent uncertainty in the valuation process, the amounts actually realized or settled could be materially different from those reflected in the accompanying Management of the Trust has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Under the liquidation basis of accounting, assets and liabilities have been recorded at their estimated fair values. Given there is inherent uncertainty in the valuation process, the amounts actually realized or settled could be materially different from those reflected in the accompanying consolidated financial statements. |
| RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS As of August 14, 2015, the Financial Accounting Standards Board (“FASB”) issued up to ASU 2015-06, which are not expected to have a material impact on the consolidated financial statements upon adoption. |
PROFESSIONAL RETAINERS (Details) - USD ($) |
Jun. 30, 2015 |
Dec. 31, 2014 |
|---|---|---|
| PROFESSIONAL RETAINERS [Abstract] | ||
| Professional retainers | $ 271,000 | $ 271,000 |
RELATED PARTY TRANSACTIONS (Details) - Jun. 30, 2015 - USD ($) |
Total |
|---|---|
| RELATED PARTY TRANSACTIONS [Abstract] | |
| Fees incurred with related parties | $ 1,399,926 |
| Estimated unpaid fees and expenses due to related party | $ 75,000 |
CASH AND CASH EQUIVALENTS |
6 Months Ended |
|---|---|
Jun. 30, 2015 | |
| CASH AND CASH EQUIVALENTS [Abstract] | |
| CASH AND CASH EQUIVALENTS | 2. CASH AND CASH EQUIVALENTS
The Trust maintains a majority of its cash balance in a single operating account in the United States in excess of federally insured limits. As of June 30, 2015, the cash balance was $542,970. Of this balance, $464,603 was generally available cash held in the United States and $78,367 was held by Faith Bloom in accounts in the PRC over which Faith Bloom and the Trust have control. |
DISTRIBUTIONS |
6 Months Ended |
|---|---|
Jun. 30, 2015 | |
| DISTRIBUTIONS [Abstract] | |
| DISTRIBUTIONS | 7. DISTRIBUTIONS
The Trust has not made any distributions since its inception on October 17, 2012. |
CASH RECEIPTS AND DISBURSEMENTS (Details) - USD ($) |
32 Months Ended | ||
|---|---|---|---|
Jun. 30, 2015 |
Dec. 31, 2014 |
Oct. 17, 2012 |
|
| Cash and Cash Equivalents [Line Items] | |||
| Proceeds from settling a claim | $ 2,750,000 | ||
| Payments to various Trust creditors | 7,223,961 | ||
| Payments for Trust operating expenses | 6,173,483 | ||
| Payments for final fee applications of professionals retained | 1,050,478 | ||
| Cash and cash equivalents | 542,970 | $ 1,775,609 | $ 4,928,564 |
| Held by Faith Bloom in the PRC [Member] | |||
| Cash and Cash Equivalents [Line Items] | |||
| Cash and cash equivalents | $ 78,367 | $ 78,367 |