Case BLS Doc 39 Filed 05/30/13 Page 1 of 32 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 Case BLS Doc 39 Filed 05/30/13 Page 1 of 32 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: CPI CORP., et al., 1 Debtors. : : Chapter 7 : (Jointly Administered) : : Case No (BLS) : : Hearing Date: TBD : Objection Deadline: TBD MOTION OF CHAPTER 7 TRUSTEE PURSUANT TO BANKRUPTCY CODE SECTIONS 105, 363 AND RULES 2002, 6004, 6006 AND 9014 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE FOR (I) AN ORDER (A) APPROVING THE STALKING HORSE ASSET PURCHASE AGREEMENT AND BREAK-UP FEE RELATING TO THE SALE OF CERTAIN ASSETS OF THE DEBTORS, SUBJECT TO HIGHER AND BETTER OFFERS, FREE AND CLEAR OF LIENS, CLAIMS AND ENCUMBRANCES, (B) APPROVING THE NOTICE AND SALE PROCEDURES RELATED THERETO, AND (C) SETTING AUCTION AND HEARING DATES; AND (II) AN ORDER (A) APPROVING THE SALE OF CERTAIN ASSETS OF THE DEBTORS, AND (B) GRANTING RELATED RELIEF Charles A. Stanziale, Jr., in his capacity as the Chapter 7 Trustee (the Trustee ) in the above-captioned cases, by and through his counsel McCarter & English, LLP, hereby moves (the Motion ) the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court ) pursuant to sections 105(a) and 363 of Title 11 of the United States Code, (as amended, the Bankruptcy Code ), Rules 2002, 6004 and 9014 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ) and Rule and of the Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Court for 1 The jointly administered debtors in these cases are CPI Corp., Bella Pictures Holdings, LLC, Centrics Technology, Inc., Consumer Programs, Inc., Consumer Programs Partner, Inc., CPI Canadian Holdings, Inc., CPI Images, LLC, CPI International Holdings, Inc., CPI Prints Plus, Inc., CPI Research & Development, Inc., CPI Technology Corp., Image Source, Inc., Myportraits.com, Inc., Ridgedale Prints Plus, Inc., Sandy Realty Holdings, LLC, and Texas Portraits, L.P. (collectively, the Debtors and each, separately, a Debtor ). The Debtors estates shall collectively be referred to as the CPI Bankruptcy Estates. ME v.4

2 Case BLS Doc 39 Filed 05/30/13 Page 2 of 32 the District of Delaware (respectively, Local Rule and Local Rule ), for entry of (i) an order, substantially in the form attached hereto as Exhibit A (a) approving the terms of the stalking horse asset purchase agreement and the break-up fee relating to the sale of certain Assets (defined herein) of the Debtors, subject to higher and better offers, free and clear of liens, claims, encumbrances and interests, (b) approving the notice and sale procedures related thereto, and (c) setting auction and hearing dates; and (ii) an order (a) approving the sale of certain Assets of the Debtors, and (b) granting related relief. In support of this Motion, the Trustee respectfully represents as follows: I. JURISDICTION, VENUE AND PREDICATES FOR RELIEF 1. The Court has jurisdiction over this Motion under 28 U.S.C This matter is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(A). Venue of this Motion and the Debtors cases is proper in this District pursuant to 28 U.S.C and The predicates for the relief requested herein are sections 105(a) and 363(b), (f), (m) and (n) of the Bankruptcy Code, Bankruptcy Rules 2002, 6004 and 9014, and Local Rule and Local Rule (or collectively, the Local Rules ). II. INTRODUCTION 2. Faced with assets of the Debtors located in over eighteen hundred locations inside various Sears, Wal-Mart and Toys R Us stores and various warehouses located across the United States of America, the Chapter 7 Trustee has aggressively sought to locate a stalking horse bidder to immediately commence the sale process, the culmination of such efforts are set forth herein. ME v.4 2

3 Case BLS Doc 39 Filed 05/30/13 Page 3 of 32 III. SUMMARY OF RELIEF REQUESTED 3. This Motion seeks relief in two stages and the entry of two Orders related to the sale of the Assets. First, the Trustee hereby requests an initial hearing on the Motion (the "Preliminary Hearing") for the Court to consider entry of an order substantially in the form attached hereto as Exhibit A (the Bidding Procedures Order ): (i) approving the Purchase Agreement as the form of the asset purchase agreement to be used in conjunction with the sale procedure and the sale and approving the break-up fee, (ii) establishing and approving the form of notice and bidding procedures (the "Bidding Procedures") for the sale hearing (the "Sale Hearing") with respect to the sale free and clear of liens, claims, encumbrances and interests; and (iii) setting auction and hearing dates to consider higher and better offers, if any, and to approve the sale. 4. The Trustee also requests the entry of a further order granting substantive relief at the conclusion of the Sale Hearing. Specifically, the Trustee will seek an order (the Sale Order ) approving the sale of the Assets pursuant to an asset purchase agreement entered into between the Trustee and Lifetouch Portrait Studios Inc. ( Lifetouch or the Stalking Horse Bidder ), dated May, 2013 (as may be amended, the Purchase Agreement, a copy of which is annexed hereto as Exhibit C) or such other purchase agreement entered into between the Trustee and any alternate bidder selected pursuant to the Bidding Procedures. 5. The proposed Sale Order will (i) approve the sale of the Assets on the terms and conditions set forth in the Purchase Agreement or an asset purchase agreement similar thereto selected by the Trustee pursuant to sections 105(a) and 363(b) of the Bankruptcy Code, authorizing the Trustee to proceed with the transaction contemplated by the selected asset purchase agreement, (ii) include a specific finding pursuant to section 363(m) of the Bankruptcy Code that the purchaser is a good faith buyer, (iii) order that pursuant to section ME v.4 3

4 Case BLS Doc 39 Filed 05/30/13 Page 4 of (f) of the Bankruptcy Code, the sale shall be on an AS IS WHERE IS basis and free and clear of all liens, claims, encumbrances and interests whatsoever, with such liens, claims, encumbrances and interests attaching to the net proceeds of the sale, and (iv) authorize the Trustee to consummate the sale and to arrange for the mutual execution of all necessary documents, agreements and contracts in conjunction therewith. IV. BACKGROUND A. The Debtors and the Bankruptcy Cases 6. On May 1, 2013 (the "Petition Date"), the Debtors filed their respective voluntary petitions for relief under chapter 7 of Title 11 of the United States Code, 11 U.S.C (as amended, the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware. 7. On May 1, 2013, the Office of the United States Trustee for the District of Delaware appointed Charles A. Stanziale, Jr. as the Chapter 7 Trustee for the Debtors. 8. Prior to the Petition Date, the Debtors retained Lazard, Ltd., who commenced an extensive marketing campaign to locate a buyer for its professional photographic business (the Business ). 9. The Debtors own certain items currently located in numerous studios across the United States, including, but not limited to, studio cameras, studio camera cables, studio camera lenses, passport cameras, passport printers, passport cables, passport background, portrait printers, printer cables, backgrounds and tubes; power packs and cables, computer CPUs, and camera room lights as well as certain production and technology systems and equipment, photographic equipment, information technology systems, software, inventory and supplies, fixtures, ME v.4 4

5 Case BLS Doc 39 Filed 05/30/13 Page 5 of 32 furniture and equipment located at three warehouses maintained by the Debtors as well as certain intangible assets (collectively, the Assets 2 ). 10. The Trustee is in the process of retaining Logistics International LLC ( Logistics ) as a professional logistical company to assist the Chapter 7 Trustee in retrieving, transporting and safeguarding the Assets so that he may conduct an organized sale process to maximize value for all creditors of the CPI Bankruptcy Estates. B. The Debtors Debt Structure 11. Prior to the Petition Date, (a) CPI Corp. entered into a certain Credit Agreement, dated as of August 30, 2010 (as amended, the Credit Agreement ), with Bank of America, N.A. ( Agent ), as administrative agent for the various financial institutions identified as Lenders therein (the Lenders ), and the Lenders (collectively with the Agent, the Lender Parties ), and (b) the Debtors entered into a certain Guaranty and Collateral Agreement, dated as of August 30, 2010 (as amended, the Guaranty/Security Agreement ), with Agent. 12. The Agent asserts that the Lender Parties hold valid, perfected, first-priority security interests in, and liens upon, the Assets. 3 2 A complete description of the Assets is referenced on Exhibit B to the Purchase Agreement. 3 The Lender Parties and the Trustee have agreed that the Trustee shall have sixty (60) days after the filing of the Chapter 7 Trustee s Motion For Entry Of (I) Order Authorizing The Employment Of Logistics International LLC As A Professional Logistical Company To Assist The Chapter 7 Trustee, Nunc Pro Tunc To May 29, 2013, Pursuant To 11 U.S.C. 363, And (II) Interim And Final Orders Authorizing Chapter 7 Trustee To Obtain Funding Needed To Compensate Logistics International, LLC Pursuant To 11 U.S.C. 105, 362, 363, And 364 And Rule 4001 Of The Federal Rules Of Bankruptcy Procedures to challenge the extent, validity and priority of the Lender Parties liens on the Assets. ME v.4 5

6 Case BLS Doc 39 Filed 05/30/13 Page 6 of 32 C. The Proposed Sale and the Assets 13. The Trustee (or the Seller ) has engaged in lengthy discussions and negotiated the terms of the Purchase Agreement with a stalking horse bidder identified as Lifetouch. 14. The Trustee believes that the sale of the Assets to Lifetouch would be in the best interests of the creditors of the CPI Bankruptcy Estates. 15. The Assets to be purchased under the Purchase Agreement consist of the various items referenced on Exhibit B to the Purchase Agreement, and do not include certain assets of the CPI Bankruptcy Estates which are referred to as Excluded Assets on Exhibit B to the Purchase Agreement (the Excluded Assets ). 16. The Purchase agreement is subject to several conditions, including entry of the Bidding Procedures Order and the Sale Order, approval of the Trustee s ability to enter into the Purchase Agreement, and approval of the Break-Up Fee (defined below). 17. The Trustee, in the exercise of his business judgment, has determined that the offer presented by the Stalking Horse Bidder represents the highest and best offer for the Assets. Pursuant to the Purchase Agreement, the Stalking Horse Bidder has, among other things 4, agreed to purchase the Assets free and clear of any liens, claims and interests for a payment of $3.3 Million less the Purchase Price Adjustment as reflected on Exhibit C to the Purchase Agreement. The Stalking Horse Bidder will tender a good faith deposit in the amount of $250,000 to Seller upon entry of the Bidding Procedures Order. 18. The Trustee proposes to sell the Assets to the Stalking Horse Bidder, subject to higher or better offers. The proposed sale will be on an "as is," "where is," basis. 4 The summary contained herein is qualified in its entirety by reference to the provisions of the Purchase Agreement. In the event of any inconsistencies between the provisions of the Purchase Agreement and the terms described herein, the terms of the Purchase Agreement shall govern. Unless otherwise defined in the summary set forth herein, capitalized terms shall have the meanings ascribed to them in the Purchase Agreement. ME v.4 6

7 Case BLS Doc 39 Filed 05/30/13 Page 7 of 32 Disclosures Under Local Rule (b)(iv) 19. Pursuant to Local Rule (b)(iv), the Trustee sets forth the following disclosures relating to the proposed sale to Lifetouch: Sale to an Insider: The Stalking Horse Bidder is not an Insider of the Debtors. Agreements with Management: No agreements with management have been entered into in connection with the sale. Private Sale/No Competitive Bidding: The sale is being conducted pursuant to the competitive bidding process detailed in the Motion. Closing and Other Deadlines: The consummation of the transactions contemplated by the Purchase Agreement, unless otherwise agreed to by the parties, and satisfaction or waiver of each of the other conditions to closing (other than the conditions with respect to action the parties will take at the Closing itself) shall take place at a closing (the Closing ) to be held at the offices of the Trustee (McCarter & English, Four Gateway Center, 100 Mulberry Street, Newark, New Jersey 07102) (or at such other place as the Seller and Stalking Horse Bidder may designate) no later than July 15, Purchase Price: The purchase price offered by the Stalking Horse Bidder is $3.3 Million less the Purchase Price Adjustment as reflected on Exhibit C to the Purchase Agreement (the Purchase Price ), subject to higher or better offers as more fully described in the Motion. Good Faith Deposit: Immediately upon entry of the Bidding Procedures Order Lifetouch shall tender a deposit in the amount of Two Hundred and Fifty Thousand Dollars ($250,000) to the Trustee be held in trust. The entire Deposit shall be returned to Lifetouch (i) if Lifetouch is outbid at the auction (the Auction ) and the Trustee closes the transaction with an alternate purchaser, and (ii) as otherwise set forth in the Purchase Agreement. All other bidders will be required to post a cash earnest money deposit with the Trustee in an amount equal to no less than $250,000. Interim Arrangements with Proposed Stalking Horse Bidder: The Trustee has not entered into any interim arrangements with the Stalking Horse Bidder. Use of Proceeds: At Closing, the Trustee is authorized and directed to distribute the proceeds from the Sale to Bank of America, N.A., as administrative agent for certain lenders (the Post-Petition Agent ), in the amount necessary to repay all amounts owing under the Promissory Note executed by the Trustee pursuant to the [Interim] [Final] Order Authorizing Chapter 7 Trustee To Obtain Funding Needed To Compensate Logistics International, LLC Pursuant To 11 U.S.C. 105, 363, And 364 And Rule 4001 ME v.4 7

8 Case BLS Doc 39 Filed 05/30/13 Page 8 of 32 Of The Federal Rules Of Bankruptcy Procedures (the Funding Order ). Following Closing, and without further Court approval, the Trustee is authorized and directed to distribute the remaining proceeds from the Sale (a) first, for payment and/or reimbursement of those amounts set forth in the Stipulation Authorizing Surcharge, Pursuant To 11 U.S.C. 506(C), For The Chapter 7 Trustee s Commissions And Expenses And Compensation Of The Chapter 7 Trustee s Professionals, and (b) second, to the Pre-Petition Agent (as defined in the Funding Order) in partial repayment of the Pre-Petition Debt (as defined in the Funding Order), unless (i) a party has timely commenced an adversary proceeding or other contested matter challenging the Pre-Petition Debt or the Pre-Petition Lender Parties liens on the Pre-Petition Collateral (each as defined in the Funding Order) in accordance with the Funding Order, and (ii) a final order is entered in such timely-commenced adversary proceeding or contested matter sustaining such challenge. Requested Findings as to Successor Liability: The purchaser shall have no successor liability. Sale Free and Clear: The Trustee is seeking to sell the Assets free and clear of liens and other interests pursuant to Section 363(f) of the Bankruptcy Code. The Stalking Horse Bidder is not willing to enter into the Purchase Agreement or close on the sale if it does not receive the Assets free and clear of all liens, claims, encumbrances and interests. Relief from Bankruptcy Rule 6004(h): As noted in the Motion, the Trustee is requesting relief from the 14-day stay imposed by Bankruptcy Rule 6004(h). Costs and liabilities associated with storage and security for the Assets continue to accrue with the passage of time. Absent relief from the stay provisions of Bankruptcy Rule 6004(h), the delay in Closing will result in increased costs to the CPI Bankruptcy Estates. The Purchase Agreement 20. The Purchase Agreement sets forth additional terms and conditions under which the proposed sale transaction shall be consummated. A summary of the principal terms of the Purchase Agreement not referenced above is as follows: 5 5 The summary contained herein is qualified in its entirety by reference to provisions of the Purchase Agreement. In the event of any inconsistencies between the provisions of the Purchase Agreement and the terms herein, the terms of the Purchase Agreement shall govern. Unless otherwise defined in the summary contained in the accompanying text, capitalized terms shall have the meanings assigned to such terms in the Purchase Agreement. ME v.4 8

9 Case BLS Doc 39 Filed 05/30/13 Page 9 of 32 Access. Prior to the Closing, Seller shall furnish the Stalking Horse Bidder and its representatives with all material, documents, records and other reasonably requested information pertaining to the Assets. Break-Up Fee: Pursuant to Section 11 of the Purchase Agreement, in the event that the Purchase Agreement is terminated (other than pursuant to Section 10(e) of the Purchase Agreement) Seller shall return the Deposit to the Stalking Horse Bidder. In the event the Purchase Agreement is terminated in accordance with Section 10(f) of the Purchase Agreement, then the Stalking Horse Bidder shall be entitled to immediate payment of the Break-Up Fee without further order of the Bankruptcy Court. As used in the Agreement, Break-Up Fee means $132,000. The Break-Up Fee shall constitute an administrative expense of the CPI Bankruptcy Estates of the kind specified in section 503(b) of the Bankruptcy Code. 21. The Stalking Horse Bidder, in making this offer, acknowledged and agreed that the sale of the Assets, pursuant to the terms of the Purchase Agreement, is subject to higher and better offers for the assets and this Court s approval. 22. The Purchase Agreement includes customary representations and warranties by the Stalking Horse Bidder and Seller relating to the Assets. 23. In making its offer, the Stalking Horse Bidder, proceeded in reliance that the Trustee would seek the Court s approval of Break-Up Fee and in reasonable expectation that this Court would enter an order providing such relief. 24. The Trustee, in the exercise of his business judgment, believes that the Break- Up Fee is a necessary inducement for the Stalking Horse Bidder and that such protections will both establish a floor for the liquidation of the Assets and ultimately encourage competitive bidding and realization of the highest value for these Assets. The offer of the Stalking Horse Bidder allows the Trustee to immediately commence the sale process and allows him to remove the Assets from their numerous locations and to avoid future claims against the CPI Bankruptcy Estates. ME v.4 9

10 Case BLS Doc 39 Filed 05/30/13 Page 10 of The Trustee proposes that if overbidding occurs at the Auction, the Stalking Horse Bidder shall have the right, but not the obligation, to participate in overbidding subject only to the limitations provided by the bidding and auction procedures. However, to compensate the Stalking Horse Bidder for allowing the auction process to commence and serving as a stalking horse, thereby subjecting its bid to higher or otherwise better offers, the Trustee seeks authority to pay to the Stalking Horse Bidder the Break-Up Fee in the event (a) the Trustee consummates a sale of the Assets to a Successful Bidder (defined herein) who is not the Stalking Horse Bidder, and (b) the Stalking Horse Bidder is not in default under the Purchase Agreement. 26. The Trustee believes that approval of the Break-Up Fee will enable the Trustee to assure a sale of the Assets to a contractually committed bidder at a price the Trustee believes is fair and reasonable, while providing the Trustee with the opportunity to obtain even greater benefits for the Debtors creditors through an auction process. Thus, approval of the Break-Up Fee may lead to an increase in the amount of proceeds of the sale and the establishment of a baseline against which higher or otherwise better offers will be measured. If an Auction ensues, the Break-Up Fee is reasonably calculated to encourage higher or otherwise better bids. If no Auction ensues, the Break-Up Fee will not be paid. 27. Moreover, the amount of the Break-Up Fee is reasonably calculated to compensate the Stalking Horse Bidder (a) for the time expended performing due diligence, (b) for lost opportunity in being bound to a transaction that could be topped in a competitive auction process, and (c) for serving as a stalking horse to encourage the submission of other bids. 28. Accordingly, the Trustee submits that the Break-Up Fee (a) represents a sound exercise of his business judgment, (b) is the product of extensive arm s-length negotiations ME v.4 10

11 Case BLS Doc 39 Filed 05/30/13 Page 11 of 32 with the Stalking Horse Bidder, (c) is fair and reasonable, given the benefits to the Debtors creditors of having a definitive Purchase Agreement weighed against the risk to the Stalking Horse Bidder that a third-party s competing offer may ultimately be accepted, and (d) is necessary to maximize the proceeds of the sale of the Assets. Avoidance and Successor Liability 29. The parties intend that the transfer of the Assets (i) will not constitute avoidable transfers under applicable bankruptcy or non-bankruptcy law; and (ii) will not subject the Stalking Horse Bidder or a Successful Bidder to any liability with respect to the operation of the Debtors Business prior to the closing by reason of such transfer under the laws of the United States, any state, territory, or possession thereof, of the District of Columbia, based in whole or in part, directly or indirectly, on any theory of law or equity, including, without limitation, any laws affecting successor, transferee or vicarious liability. The Bidding and Auction Procedures 30. The proposed sale of the Assets contemplated by the Purchase Agreement is subject to a competitive auction process that will assure that the maximum value for the Assets will be realized for the CPI Bankruptcy Estates and their creditors. 31. Pursuant to the procedures described below, among other things, within two (2) business days of entry of the Bidding Procedures Order, the Trustee will serve a notice referencing the bid deadline, the auction date and the Sale Hearing (the Notice of Bid Deadline, Auction, and Sale Hearing ) (which is annexed to the Bidding Procedures Order as Exhibit 1) together with a copy of the Bidding Procedures (which is annexed to the Notice of Bid Deadline, Auction and Sale Hearing as Exhibit A) on (collectively, the Auction Notice Parties ) (i) the Office of the United States Trustee for the District of Delaware; (ii) Lifetouch or its counsel; (iii) counsel for the Agent; (iv) any party having expressed an interest in the ME v.4 11

12 Case BLS Doc 39 Filed 05/30/13 Page 12 of 32 Assets during the pendency of the bankruptcy proceedings; (v) parties who have requested notice in the Debtors cases pursuant to Bankruptcy Rule 2002; (vi) all parties who are known to possess or assert a lien, claim, encumbrance or interest in or upon any of the Assets; (vii) all applicable federal, state and local regulatory or taxing authorities or recording offices which are known by the Trustee to have an interest in the relief requested in the Motion; and (viii) all known creditors in the sixteen debtor cases. 32. The Notice of Bid Deadline, Auction, and Sale Hearing with the attached Bidding Procedures will give the Auction Notice Parties the ability to submit higher or better offers. In addition, the Auction Notice Parties will receive reasonable notice of the Sale Hearing to consider the proposed sale and have an opportunity to object thereto. 33. Pursuant to Bankruptcy Rule 2002(l), the Trustee proposes to publish a shortened summary version of Notice of Bid Deadline, Auction, and Sale Hearing (the Publication Notice ), in the national edition of The Wall Street Journal or any other national newspaper, publication or website the Trustee may choose to advertise, in his sole discretion, as soon as reasonably practicable after the entry of the Bidding Procedures Order. 34. The Trustee submits that the form and manner of the Publication Notice proposed herein constitutes good and sufficient notice of the Auction, the sale of the Assets, the Bidding Procedures, and the Sale Hearing because the Publication Notice is reasonably calculated to provide timely and adequate notice to the known and unknown creditors in the sixteen debtor cases, all parties that possess or allege a secured interest in any of the assets, those persons and entities that are likely to have an interest in submitting a Competing Bid, and to any interested parties who are unknown to the Trustee and the Trustee s professionals. Therefore, the Trustee submits that no other or further notice of the Auction, the sale of the Assets, the Bidding Procedures, and the Sale Hearing need be given. ME v.4 12

13 Case BLS Doc 39 Filed 05/30/13 Page 13 of The Trustee reserves the right, in his sole discretion, to amend the Bidding Procedures up to the time of the Auction. 36. The Preliminary Hearing to seek the entry of an order approving the Bidding Procedures is intended to, among other things, approve the Trustee s solicitation of qualified offers for the Assets, establish the form and manner of notice of the proposed sale and establish the Bidding Procedures by which parties may participate in the Auction. The proposed Bidding Procedures provide, in relevant part, as follows: Bidding Process: The Trustee will solicit higher and better offers from thirdparty bidders (each a Potential Bidder ) for the Assets. The Trustee shall have the sole right (i) to determine whether a Potential Bidder, in addition to the Stalking Horse Bidder, is a Qualified Bidder (defined below), (ii) to coordinate the efforts of Qualified Bidders in conducting their respective due diligence reviews, (iii) to receive offers from Qualified Bidders, (iv) to notice all parties with respect to the Bidding and Auction Procedures, and (v) to evaluate and negotiate any offers made to purchase the Assets (collectively, the Bidding Process ). Any person who wishes to participate in the Bidding Process must be deemed a Qualified Bidder by the Trustee. Neither the Trustee nor his professionals shall be obligated to furnish any information of any kind whatsoever to any person or entity that is not a Qualified Bidder. Bid Requirements: In order for a Potential Bidder to participate in the Auction its bid (unless such requirement is waived by the Trustee) must include the following (the Bid Requirements ): A cash purchase price in an amount not less than $3,500,000; ME v.4 A representation that (i) the Potential Bidder agrees to serve as the Back- Up Bidder in the event that its bid is the second highest or otherwise best Qualified Bid, (ii) the Potential Bidder is not an insider of the Debtors or provides a disclosure as to its relationship with the Debtors; and (iii) the Potential Bidder will complete all its due diligence by the Bid Deadline; An executed asset purchase agreement, subject to substantially the same or more favorable terms and conditions as are contained in, and marked to show changes from, the Purchase Agreement (as reasonably determined by the Trustee), except that such purchase and sale agreement shall (a) provide for a purchase price in cash of at least $3,500,000, (b) exclude any contingencies, conditions precedent or other terms excusing the performance of the Potential Bidder based upon it completing due diligence or obtaining financing for the sale, and including only such representations and warranties as may be approved 13

14 Case BLS Doc 39 Filed 05/30/13 Page 14 of 32 by the Trustee, which approval shall be granted or denied in Seller s sole and absolute discretion (provided, however, that under no circumstances shall Trustee and/or the Debtors have any liability for any breach of any representation and warranty; the Trustee is selling its right, title and interest in the Assets described in the Purchase Agreement AS IS and any Potential Bidder should conduct whatever diligence is necessary to satisfy such Potential Bidder that the representations and warranties are true and correct), (c) exclude any provision for any break-up fee, termination fee, expense reimbursement, or similar type of payment, and (d) provide that the Potential Bidder will be solely responsible for any broker fee; A good faith deposit in the amount of $250,000 that must be wired to an account maintained and specified by the Trustee by the Bid Deadline (the Good Faith Deposit ); provide evidence, in the form of bank or broker statements of the Potential Bidder, the most current audited and latest unaudited financial statements and financial references of the Potential Bidder, or other evidence satisfactory to the Trustee that the Potential Bidder is financially qualified to proceed to closing on an all-cash basis no later than July 15, 2013; and The identity of each entity that will be participating in such bid or otherwise participating in connection with such bid, including any proposed designee(s), and the complete terms of such participation. The Trustee shall have the sole discretion to determine whether a bid received from a Potential Bidder shall be deemed a Qualified Bid. A bid received from a Potential Bidder that satisfies all of the Bid Requirements shall be a Qualified Bid and each Potential Bidder submitting a Qualified Bid shall be deemed a Qualified Bidder. The Trustee reserves the right to determine the value of any Qualified Bid, which Qualified Bid constitutes the highest, best or otherwise financially superior offer and which Qualified Bid constitutes the second highest, best or otherwise financially superior offer. Bid Deadline: To be considered a timely bid, a Qualified Bidder shall deliver a bid that satisfies all of the Bid Requirements, on or before June 21, 2013, at 11:30 a.m. (prevailing Eastern Time) (the Bid Deadline ) to: McCarter & English, LLP, counsel to the Trustee, Four Gateway Center, 100 Mulberry Street, Newark, New Jersey (attn: Jeffrey Testa, Esq.). Stalking Horse Bidder is a Qualified Bidder/Purchase Agreement is a Qualified Bid: The Stalking Horse Bidder is a Qualified Bidder, and the Purchase Agreement is a Qualified Bid. ME v.4 14

15 Case BLS Doc 39 Filed 05/30/13 Page 15 of 32 As Is, Where Is: The sale of the Assets shall be on an as is, where is basis and without representations or warranties of any kind, nature, or description by the Trustee or his representatives except for the express representations contained in the Purchase Agreement. Each Qualified Bidder shall be deemed to acknowledge and represent that it has had an opportunity to conduct any and all due diligence regarding the assets prior to making its offer, that it has relied solely upon its own independent review, investigation and/or inspection of any documents and/or the Assets in making its bid, and that it did not rely upon any written or oral statements, representations, promises, warranties or guaranties whatsoever, whether express, implied, by operation of law or otherwise, regarding the Assets, or the completeness of any information provided in connection therewith, or the Auction, except as expressly stated in the Purchase Agreement. Assets to be Sold Free of Any And All Claims: All of the Trustee s right, title and interest in and to the Assets shall be sold free and clear of all claims, which claims shall attach to the proceeds of the sale. Auction: If more than one Qualified Bid has been received for the Assets (i.e., at least one Qualified Bid in addition to the Purchase Agreement), the Trustee shall conduct an open Auction on the record. The Auction shall commence on June 24, 2013, at 11:00 a.m. (prevailing Eastern Time) at the offices of McCarter & English, LLP in Newark, New Jersey. If no Qualified Bid (other than the bid of the Stalking Horse Bidder) is received by the Trustee prior to the expiration of the Bid Deadline, the Trustee shall not hold an Auction, and shall proceed with the hearing to approve the sale of the Assets to the Stalking Horse Bidder. For avoidance of doubt, if no Qualified Bid (other than the bid of the Stalking Horse Bidder) is received, no party other than the Stalking Horse Bidder shall be given an opportunity to present at the Sale Hearing or otherwise, any bid for the Assets, and the Seller shall proceed to seek approval to close the sale to the Stalking Horse Bidder pursuant to the terms of the Purchase Agreement. The Auction shall be governed by the following procedures: ME v.4 only a Qualified Bidder that has submitted a Qualified Bid is eligible to participate at the Auction. During the Auction, bidding shall begin initially with the highest Qualified Bid and subsequently continue in minimum increments of at least $50,000. only Qualified Bidders shall be entitled to make any subsequent bids at the Auction and only Qualified Bidders and their respective authorized representatives are entitled to attend/and or participate at the Auction, except that the Lender Parties, and their respective representatives, and creditors are entitled to attend the Auction; each Qualified Bidder shall appear in person at the Auction or via telephonic conference or through a duly authorized representative who appears in person at the Auction; 15

16 Case BLS Doc 39 Filed 05/30/13 Page 16 of 32 each of the Qualified Bidders may make additional modifications to their respective asset purchase agreements at the Auction, but only to the extent that such modifications satisfy the Bid Requirements and do not disqualify the Qualified Bidders; the Auction will be conducted openly and each Qualified Bidder will be informed of the terms of the previous bids; each Qualified Bidder shall confirm at the Auction that it has not engaged in any collusion with respect to the bidding or the proposed sale of the Assets; and the bidding at the Auction will be transcribed. Upon conclusion of the bidding, the Auction shall be closed, and the Trustee shall, in consultation with the Agent, (a) immediately review each Qualified Bid on the basis of financial and contractual terms and the factors relevant to the sale process, including those factors affecting the speed and certainty of consummating the proposed sale of the Assets, and (b) as soon as reasonably practicable thereafter (i) identify, in his discretion and in consultation with the Agent, the highest, best or otherwise financially superior offer for the Assets (the Successful Bid ) and the entity or entities submitting such Successful Bid (the Successful Bidder ), which highest, best or otherwise financially superior offer will provide the greatest amount of net value to the Trustee and the Debtors creditors, (ii) identify, in his discretion and in consultation with the Agent, the second highest, best or otherwise financially superior offer for the Assets (the Back-Up Bid ) and the entity or entities submitting such Back-Up Bid (the Back-Up Bidder ), and (iii) advise the Qualified Bidders of the identities of the Successful Bidder and the Back-Up Bidder. Acceptance of Qualified Bids: The Trustee shall sell the Assets to the Successful Bidder upon the approval of the Successful Bid by the Court after a hearing (the Sale Hearing ). The Trustee s presentation of a particular Qualified Bid to the Court for approval does not constitute the Trustee s acceptance of the bid. While the Successful Bid is binding on the Qualified Bidder who submitted such bid, the Trustee will be deemed to have accepted a bid only when the acceptance of the Successful Bid has been approved by the Court at the Sale Hearing. All interested parties reserve their right to object to the Trustee s selection of the Successful Bidder and the Successful Bid; provided however that unsuccessful bidders shall not have the right to object to the Trustee s selection of the Successful Bidder and the Successful Bid or the Back-up Bidder and the Back-up Bid. Sale Hearing: A final hearing to consider approval of the Successful Bidder and sale will take place before the Honorable Brendan L. Shannon, United States Bankruptcy Judge, in the Bankruptcy Court, 824 N. Market Street, 6th Floor, Courtroom #1, Wilmington, Delaware 19801, on June 26, 2013, at 9:30 ME v.4 16

17 Case BLS Doc 39 Filed 05/30/13 Page 17 of 32 a.m. (prevailing Eastern Time), or as such other time thereafter as the court directs. At or before the Sale Hearing, the Sale Hearing may be adjourned or rescheduled without prior notice. No party will be permitted to bid at the Sale Hearing. Return of Good Faith Deposits: The Good Faith Deposits shall be held in a segregated escrow account and shall be returned to the depositing party within five (5) business days following the Sale Hearing, unless the depositing party is the Successful Bidder or the Back-up Bidder. The Good Faith Deposit of the Successful Bidder shall be applied to the purchase price. If the Successful Bidder fails to proceed to Closing of the sale, the Good Faith Deposit of the Successful Bidder shall become property of the CPI Bankruptcy Estates The Good Faith Deposit of the Back-up Bidder shall be returned to the Back-up Bidder within five (5) business days following the Closing of a sale to the Successful Bidder. In the event of a sale to the Back-up Bidder, the Good Faith Deposit of the Back-up Bidder shall be applied to the purchase price. In the event the Successful Bidder and the Back-up Bidder fail to proceed to Closing of the sale, the Good Faith Deposit of the Back-up Bidder shall become property of the CPI Bankruptcy Estates. Closing of the Sale: Closing to occur at a time mutually agreeable to the Trustee and the Successful Bidder, but no later than July 15, 2013, unless mutually agreed upon by the Trustee and the Successful Bidder. In the event that the sale fails to close during such time period, then the Seller shall be authorized, but not required, to consummate the sale with the Back-Up Bidder. Modifications: The Trustee reserves the right to modify, adjourn, or extend any of the deadlines established herein in consultation with the Agent. Notice of any such modification, adjournment, or extension shall be provided only to the Qualified Bidders and the Agent. The Trustee also reserves the right to modify any of the Bidding Procedures in any manner that, in his judgment, will better promote the goals of the Auction, so long as such modifications are not materially inconsistent with any of the provisions of the Bidding Procedures outlined herein or any Bankruptcy Court order, including the Bidding Procedures Order, and are made after consultation with the Agent. 31. The Trustee submits that the Bidding Procedures are fair and reasonable, and through the vehicle of the Auction, provide the best means of ensuring that the Trustee obtains the highest and best offer for the Assets. As such, the sale of the Assets pursuant to the Bidding Procedures will be in the best interests of the Debtors creditors. 32. The Bidding Procedures provide that any Qualified Bidder interested in submitting a competing bid shall be afforded reasonable due diligence opportunities prior to ME v.4 17

18 Case BLS Doc 39 Filed 05/30/13 Page 18 of 32 the Auction in an effort to compose a competing bid (a Competing Bid ). Further, the Bidding Procedures contain a time frame that permits a prospective purchaser to review its Competing Bid and, if interested, formulate a revised, increased bid. Additionally, such a time frame will allow the Trustee to consider and evaluate any Competing Bid to ensure that such a Competing Bid is a Qualified Bid and that the potential bidder satisfies the requirements for participation in the Auction. The Sale Hearing 37. The Trustee respectfully requests that the Sale Hearing take place on June 26, 2013, at 9:30 a.m. (prevailing Eastern Time). The Trustee submits that the fixing of such date and time will facilitate the sale process and enable the Trustee to provide interested parties with sufficient Notice of the Auction, the Bidding and Auction Procedures, the sale of the Assets and the Sale Hearing, while at the same time, permitting the Trustee to achieve his goals of maximizing the value of the assets and consummating the bid of the Successful Bidder as expeditiously as practicable. Additional Provisions of the Proposed Sale Order 38. As additional aid to the Court, the Trustee highlights these additional provisions provided in the proposed Sale Order: (a) Relief From Bankruptcy Rule 6004(h): The proposed form of Sale Order contains a waiver of the stay imposed by Bankruptcy Rule 6004(h). The Trustee respectfully submits that such relief is appropriate under the circumstances. (b) Successor Liability: The proposed form of Sale Order contains findings and provisions limiting the purchaser s successor liability. The Trustee believes that a finding that the sale can be made free and clear of successor liability complies with applicable principles of sales free and clear of successor liability claims pursuant to section 363(f) of the Bankruptcy Code and applicable non-bankruptcy law. ME v.4 18

19 Case BLS Doc 39 Filed 05/30/13 Page 19 of 32 V. BASIS FOR RELIEF REQUESTED A. There is Sound Business Justification for the Sale of the Assets to Lifetouch 39. The Trustee submits that ample authority exists for the approval of the sale of the Assets to Lifetouch pursuant to the Purchase Agreement. Section 363(b) of the Bankruptcy Code permits a trustee to sell assets outside of the ordinary course of business. Section 363(b) of the Bankruptcy Code provides, in pertinent part, that [t]he trustee, after notice and a hearing, may use, sell or lease, other than in the ordinary course of business, property of the estate. 11 U.S.C. 363(b). Section 105(a) of the Bankruptcy Code further provides that [t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. 11 U.S.C. 105(a). In pertinent part, Bankruptcy Rule 6004 states that [a]ll sales not in the ordinary course of business may be by private sale or by public auction. Fed. R. Bankr. P. 6004(f)(1). 40. Courts interpreting section 363(b)(1) of the Bankruptcy Code have held that transactions should be approved when they are supported by the sound business judgment of the trustee. See, e.g., In re Abbotts Dairies of Pa., Inc., 788 F.2d 143, (3d Cir. 1986) (implicitly adopting the articulated business justification and good faith tests of Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1070 (2d Cir. 1983)); In re Delaware & Hudson R.R. Co., 124 B.R. 169, 176 (D. Del. 1991) (concluding that the Third Circuit had adopted a sound business purpose test in Abbotts Dairies); Dai-Ichi Kangyo Bank, Ltd. v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 242 B.R. 147, 153 (D. Del. 1999) ( In determining whether to authorize the use, sale or lease of property of the estate... courts require the debtor to show that a sound business purpose justifies such actions ). ME v.4 19

20 Case BLS Doc 39 Filed 05/30/13 Page 20 of There is sound business justification for the Trustee s decision to sell the Assets to Lifetouch. Lifetouch, as the proposed purchaser of the Assets, has a more vested interest in the Assets than any other potential purchaser because Lifetouch has represented to the Trustee that it has extensive experience in the Debtors industry and is prepared to close the transaction. In addition, the Trustee, in his business judgment, believes an Auction of the Assets on a piece-meal basis would not obtain the same recovery for the CPI Bankruptcy Estates or their creditors. Thus, the Trustee has negotiated with Lifetouch the terms of the Purchase Agreement, which terms are superior to those the Trustee anticipates would be obtained from a third-party buyer. 42. The bidding procedures provide that in order to be considered a qualified bid, any third-party bidder must bid Three Million Five Hundred Thousand Dollars ($3,500,000). 43. As a result of the Lifetouch s interest in the Assets, and Lifetouch s willingness to provide significant consideration based on its interest, the Trustee believes that the CPI Bankruptcy Estates would benefit from the approval of the sale of the Assets to Lifetouch. In addition, the Purchase Agreement provides strong assurance that Lifetouch is motivated to close the contemplated transaction in a timely manner. B. The Sale of the Assets Should be Approved Free and Clear of All Encumbrances 44. Section 363(f) of the Bankruptcy Code permits a trustee to sell property free and clear of another party s interest in the property if: (1) applicable nonbankruptcy law permits sale of such property free and clear of such interest; (2) such entity consents; (3) such interest is a lien and the price at which such property is sold is greater than the aggregate value of all liens on such property; ME v.4 20

21 Case BLS Doc 39 Filed 05/30/13 Page 21 of 32 (4) such interest is in bona fide dispute; or (5) such entity could be compelled in a legal or equitable proceeding to accept a monetary satisfaction of its interest. 11 U.S.C. 363(f). Because section 363(f) of the Bankruptcy Code is drafted in the disjunctive, satisfaction of any one of its five requirements will be sufficient to permit the sale of the Assets free and clear of all liens, claims and encumbrances that may be asserted herein. See Citicorp Homeowners Servs., Inc. v. Elliot (In re Elliot), 94 B.R. 343, 345 (E.D. Pa. 1988) (sale free and clear may be approved provided the requirements of at least one subsection are met); see also In re Dundee Equity Corp., 1992 Bankr. LEXIS 436, * 12 (Bankr. S.D.N.Y. Mar. 6, 1992) (a sale free of the interest concerned may occur if any one of the conditions of 363(f) have been met ). 45. At the Sale Hearing the Trustee will demonstrate that, to the extent any valid lienholders exist, one or more of the tests of section 363(f) will be satisfied with respect to the transfer of the Assets pursuant to the Purchase Agreement (or by the terms of an asset purchase agreement submitted by the Successful Bidder). In particular, any valid lienholders that exist will be adequately protected by having their liens, if any, in each instance against the Debtors or its estate, attach to any net cash proceeds of the Assets, after costs of sale, in the same order of priority, and with the same validity, force and effect that such creditor had prior to the sale, subject to any claims and defenses that the Debtors and the CPI Bankruptcy Estates may possess with respect thereto. Accordingly, section 363(f) authorizes the transfer and conveyance of the Assets free and clear of any such claims, interests, encumbrances and liens. ME v.4 21

22 Case BLS Doc 39 Filed 05/30/13 Page 22 of The Trustee proposes that absence of an objection to the relief sought in this Motion be deemed consent within the meaning of section 363(f)(2) of the Bankruptcy Code. See Hargrave v. Township of Pemberton (In re Tabone, Inc.), 175 B.R. 855, 858 (Bankr. D. N.J. 1994) (by not objecting to the sale motion, the secured creditor was deemed to consent under section 363(f)(2) of the Bankruptcy Code); see also Pelican Homestead & Sav. A ssn v. Wooten (In re Gabel), 61 B.R. 661, 667 (Bankr. W.D. La. 1985) (same). Accordingly, the Trustee requests that the sale of the Assets to Lifetouch be free and clear of all liens, claims, and encumbrances, with such liens, claims, and encumbrances, if any, attaching to the proceeds of the sale of the Assets. C. Lifetouch is a Good Faith Buyer Within the Meaning of Section 363(m) of the Bankruptcy Code 47. Section 363(m) of the Bankruptcy Code provides that a purchaser of property of a debtor s estate is protected from the effects of reversal on appeal of authorization to the debtor to sell such property as long as the purchaser acted in good faith and the appellant failed to obtain a stay of the sale order. 6 Section 363(m) of the Bankruptcy Code affords finality to judgments by protecting good faith purchasers, the innocent third parties who rely on the finality of bankruptcy judgments in making their offers and bids. In re Chateaugay Corp., 1993 U.S. Dist. LEXIS 6130, * 9 (S.D.N.Y. May 10, 1993) (internal quotation marks and citation omitted); see also Allstate Ins. Co. v. Hughes, 174 B.R. 884, 888 (S.D.N.Y. 1994) ( Section 363(m)... provides that good transfers of property will not be affected by the 6 Section 363(m) of the Bankruptcy Code provides that: The reversal or modification on appeal of an authorization under subsection (b) or subsection (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease was stayed pending appeal. 11 U.S.C. 363(m). ME v.4 22