Case MFW Doc 120 Filed 08/29/18 Page 1 of 11 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE.

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1 Case MFW Doc 120 Filed 08/29/18 Page 1 of 11 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: RM Holdco LLC, et al., 1 Debtors. Chapter 11 Case No (MFW Jointly Administered Re: Docket No.: 13 and 53 Objection Deadline: August 29, 2018 at 4:00 p.m. (E.T. Hearing Date: September 5, 2018 at 10:30 a.m. (E.T. WESTCHESTER FIRE INSURANCE COMPANY S OBJECTION TO DEBTORS MOTION FOR ENTRY OF INTERIM AND FINAL ORDERS (I AUTHORIZING DEBTORS TO (A OBTAIN POSTPETITION FINANCING AND (B UTILIZE CASH COLLATERAL; (II GRANTING ADEQUATE PROTECTION TO PREPETITION SECURED LENDERS; (III PROVIDING SUPERPRIORITY ADMINISTRATIVE EXPENSE STATUS; (IV SCHEDULING FINAL HEARING; AND (V GRANTING RELATED RELIEF Westchester Fire Insurance Company, for itself and on behalf of its affiliated sureties (collectively, Surety, by and through its undersigned counsel, hereby submits this Objection (the Objection to the Debtors Motion for Entry of Interim and Final Orders (I Authorizing Debtors to (A Obtain Postpetition Financing and (B Utilize Cash Collateral; (II Granting Adequate Protection to Prepetition Secured Lenders; (III Providing Superpriority Administrative Expense Status; (IV Scheduling Final Hearing; and (V Granting Related Relief (Docket No. 1 (the Motion, and in support of its Objection, states as follows: JURISDICTION AND VENUE 1. This Court has jurisdiction over the Motion and this Objection pursuant to 28 U.S.C The Motion and the Objection are core proceedings pursuant to 28 U.S.C The Debtors in these chapter 11 cases, together with the last four digits of each Debtor s federal tax identification number, are as follows: RM Holdco LLC (6847; RM Opco LLC (7122; RM HQ LLC (8615; RM Chevys LLC (N/A; RM Acapulco LLC (N/A; and RM El Torito LLC (N/A. The Debtors headquarters and mailing address is 5660 Katella Avenue, Suite 200, Cypress, CA v1

2 Case MFW Doc 120 Filed 08/29/18 Page 2 of 11 Venue for the Motion and the Objection is proper in this Court pursuant to 28 U.S.C and BACKGROUND 2. On August 5, 2018, the Debtors filed petitions for relief under Chapter 11 of Title 11 of the Bankruptcy Code. 3. According to the Debtors, they are one of the largest full service Mexican casual dining restaurant chain operators in the United States in terms of number of restaurants. As of the Petition Date, the Debtors (a operated 69 restaurants, of which 61 are located in California and the remainder in six (6 other states and (b franchised eleven (11 restaurants in seven (7 other states. The Company owns and operates restaurants in the following states: California, Florida, Maryland, New York, Oregon, Virginia, and Washington. The Company franchises restaurants in the following states: Florida, Illinois, Maryland, Minnesota, Missouri, New Jersey, and South Dakota. All restaurant locations, in addition to the Debtors headquarters, are leased. 4. In order for the Debtors to operate their businesses, they are often required to provide surety bonds in favor of governmental and/or regulatory authorities. 5. Prior to the Petition Date, Surety issued certain surety bonds on behalf of certain of the Debtors and/or its affiliates in connection with Debtors business operations (collectively, the Bonds. 6. Upon information and belief, as of the Petition Date, the aggregate penal limit of the Bonds was $2,105, Among the Bonds are surety bonds which run in favor of utility providers. Generally, these bonds provide that the Surety may be responsible to pay utility providers those sums that the principal on the bond fails to pay to the utility providers. With respect to these 2

3 Case MFW Doc 120 Filed 08/29/18 Page 3 of 11 bonds, we understand that certain pre-petition deposits have been provided to certain utility providers. 8. Also among the Bonds is a surety bond that provides that the Surety may be responsible to satisfy certain of the Debtors unpaid obligations to employees under a benefitsrelated plan to which employees contribute ( Plan. 9. In connection with the Surety s execution of Bonds, including but not limited to those generally described above, certain of the Debtors and/or their affiliate(s executed and delivered indemnity and indemnity-related agreements in favor of the Surety. 10. Also among the Bonds are tax bonds and a permit bond. 11. Included among these agreements are an Agreement of Indemnity executed on or about April 10, 2012, by debtor, RM HQ LLC, as indemnitor, in favor of the Surety, as indemnitee (the RM HQ Indemnity Agreement ; and, an Agreement of Indemnity executed on or about September 24, 2013, by debtor, RM Holdco, LLC, as indemnitor, in favor of the Surety (the RM Holdco Indemnity Agreement, and together with the RM HQ Indemnity Agreement, the Indemnity Agreements. Under paragraph two (2 of both of the Indemnity Agreements, RM HQ LLC and RM Holdco LLC are obligated to: indemnify and save harmless the SURETY from and against any and all liability, claim, demand, loss, damages, expense, cost, attorney's fees and expenses,..., which SURETY shall at any time incur by reason of its execution of any Bond or its payment of or its liability to pay any claim, irrespective of whether the claim is made against the SURETY as a joint or several obligor and whether the INDEMNITOR is then liable to make such payment, and to place the SURETY in funds to meet all of its liability under any Bond, promptly upon request and before the SURETY may be required to make any payment thereunder; and copy of the claim, demand, voucher or other evidence of the payment by the SURETY of any liability, claim, demand, loss, damage, expense, cost and attorney's fees, shall be prima facie evidence of the fact and amount of INDEMNITOR'S liability to the SURETY under this Agreement. Any demand upon the SURETY by the Obligee shall be sufficient to conclude that a liability exists and the INDEMNITOR shall then place the SURETY with sufficient funds in a form and 3

4 Case MFW Doc 120 Filed 08/29/18 Page 4 of 11 amount deemed acceptable in the SURETY'S sole discretion, as collateral security to cover the liability. Therefore, the Indemnity Agreements create, among other rights, contractual rights of indemnification and exoneration in favor of the Surety. 12. Further, the Indemnity Agreements provide the following: The INDEMNITORS shall pay or cause to be paid to the SURETY both the agreed premium and, upon written request by the SURETY at any time, collateral security for its suretyship until the INDEMNITOR shall furnish to the SURETY competent written evidence, satisfactory to the SURETY, of the termination of any past, present and future liability under any Bond. The INDEMNITOR expressly waives any right to interest which may be earned on the collateral security and further consent that the collateral security provided in consideration of suretyship may be held by the SURETY in any investment or depository that the SURETY in its sole discretion deems advisable and prudent. The SURETY's election not to demand collateral at the inception of the suretyship obligation shall not operate as a waiver of the right to demand and receive such collateral at any time before liability has terminated under any Bond. 13. In connection with, among other things, the Bonds and the Indemnity Agreements, on or about October 17, 2013, RM Opco LLC and the Surety executed a Collateral Agreement whereby RM Opco LLC agreed to provide the Surety cash collateral to serve as collateral security in favor of the Surety and in connection with obligations relating to the Bonds and the Indemnity Agreements, among other things ( Cash Collateral Agreement. 14. Upon information and belief, as of the petition date, the amount of cash collateral held by the Surety was in the amount of $535, ( Cash Collateral. 15. As part of their first day motions, the Debtors filed their Motion seeking approval of a debtor-in-possession facility (the DIP Facility whereby Wells Fargo Bank N.A. ( Wells Fargo, in its separate capacities as administrative and collateral agent (in such capacities, together with its successors in such capacities, the DIP Agent and as a lender, and certain other financial institutions (together with Wells Fargo and their respective successors and 4

5 Case MFW Doc 120 Filed 08/29/18 Page 5 of 11 assigns, the DIP Lenders are to provide a revolving credit facility in the principal amount of up to $5.5 million in exchange for, inter alia, certain priming liens on property of the estate. 16. On August 7, 2018, the Motion was granted on an interim basis by way of this Court s entry of the proposed Interim Order (Docket No. 53 (the Interim Order, and a final hearing on the Motion is scheduled for September 5, ARGUMENT 17. The Surety objects to final approval of the Motion and approval of the DIP Facility to the extent that, among other things: (a the DIP facility purports to prime potential setoff and/or recoupment rights of governmental entities or other third parties; (b the representation in the DIP financing documents that certain liens will still be permitted is contradicted by parts of the Interim Order, which contains a finding that the DIP Facility has first priority over all other liens; and/or (c the DIP facility contravenes the Surety s rights of equitable subrogation and/or provides priming liens on assets of the Debtors or any non-debtors, including without limitation, assets that may be subject to any liens or claims that may be asserted by beneficiaries of Bonds, to which the Surety may be subrogated, or the Surety s Cash Collateral Parts of the Interim Order and presumably the proposed final order relating to the Motion are inconsistent as to who may prime the liens acknowledged in or granted by said orders. The Interim Order and the proposed final order operate to improperly: (a prime certain of the Surety s and its subrogees pre-petition and post-petition rights in assets that may not constitute property of the estate; and/or (b fail to grant the Surety and its subrogrees adequate protection. 2 The problems with the DIP facility and order approving the facility also exist in many instances with regard to the liens and rights being granted lenders for the use of cash collateral. 5

6 Case MFW Doc 120 Filed 08/29/18 Page 6 of In particular: Paragraphs D(iii and E(iii of the Interim Order acknowledge Prepetition First Lien Lenders and Prepetition Second Lien Lenders first and second priority liens, respectively, on substantially all of the Debtors assets. Paragraph H(ii provides that the Debtors shall not in any way prime or seek to prime the various lenders that Debtors seek to protect (except with respect to certain prepetition liens and carve-outs, notwithstanding that the Debtors, in other filings, propose to set aside funds for the payment of post-petition utility use, and, under the Plan, employee contributions are set aside by the Debtors to satisfy obligations under the Plan. Paragraphs H(v and H(vi provide that the Prepetition Indebetedness and Prepetition Liens are not subject to, among other things, any set-off or offset. This runs contrary to the concept that the Surety and the beneficiaries of the Bonds, including the utility providers and the government relating to the Plan, are holding funds (or may in the future hold funds for which there may be an off-set (including a recoupment claim or set-off. Paragraph 9(a provides that DIP Lenders are granted a perfected first-priority lien on the DIP Collateral, but this, once again, ignores that certain funds may become available post-petition which would have superior lien rights to the DIP lenders. Paragraph 10 provides that the DIP Lenders are granted an allowed superiorprity administrative expense claim that is over and above any such claims against the Debtors, without exception. Paragraph 12(a provides that the Replacement Liens granted are superior to all claims (except the DIP Lien and certain permitted prepetition liens, fees and carve-outs. Paragraph 13(a provides that the DIP Liens, the DIP Superpriority Claim, the Replacements Liens, the Adequate Protection Superpriority Claims and the Prepetition Liens shall be subject and subordinate only to prior payment of fees to the U.S. Trustee, fees payable to the Clerk of the Court, and other certain professional fees. Paragraph H(vi provides that the Debtors shall not in any way prime or seek to prime the various lenders that Debtors seek to protect (except with respect to certain prepetition liens and carve-outs, notwithstanding that the Debtors, in other filings, propose to set aside funds for the payments of post-petition utility obligations and employees will continue to make payments into the Plan for benefits. 6

7 Case MFW Doc 120 Filed 08/29/18 Page 7 of The Cash Collateral held by the Surety and funds deposited by employees of the Debtor(s in connection with the Plan may not be property of the estate. follows: (d of the Bankruptcy Code permits the DIP Lender to prime existing liens as 11 U.S.C. 364(d. The Court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a lien only if (A the trustee is unable to obtain such credit otherwise; and (B there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted. 22. Lien rights of the Surety and the lien rights of the Surety s potential subrogrees should not be primed because adequate protection is not being provided for any priming of said rights. 23. In addition, section 364(d does not permit the DIP facility to prime the potential setoff and/or recoupment rights of other creditors. First, the Third Circuit has distinguished a setoff from a lien. See Folger Adam Sec. Inc. v. DeMatteis/MacGregor JV, 209 F.3d 252, 259 (3d Cir Thus, the ability of the DIP Lender to prime liens under Section 364(d does not extend to setoff and/or recoupment rights. Second, Section 553(a of the Bankruptcy Code expressly preserves a creditor s common law setoff rights. See 11 U.S.C. 553(a. Finally, the Debtors have not provided adequate protection to such counterparties as required by Section 364(d(d(1(B. 24. Thus, appropriate language should be added to the Final Order (as set forth below to clarify that the lien, setoff and/or recoupment rights of the Surety and the beneficiaries/obligees of the Bonds are unaffected by the DIP facility and any financing/cash 7

8 Case MFW Doc 120 Filed 08/29/18 Page 8 of 11 collateral order. Furthermore, to the extent that the Debtors fail to comply with any of the obligations that are bonded by the Surety, the beneficiaries of the Bonds should be permitted to exercise its rights of setoff and/or recoupment, and, the Surety, to the extent it steps into the shoes of such obligee, should be permitted to assert such rights, by virtue of subrogation. 25. Indeed, the Surety has an equitable subrogation right that arises by common law to the extent that the Surety pays any claim under any of the bonds it has issued, including the Bonds. Courts have recognized that a surety, upon payment of bond claims, is subrogated to the rights of the principal on the bond and/or a beneficiary or obligee on the bond. See Pearlman v. Reliance Ins. Co., 371 U.S. 132, (1962; Henningsen v. United States Fid. & Guar. Co., 208 U.S. 404, 410 (1908; Prairie State Nat l Bank v. United States, 164 U.S. 227, (1896; Ky. Cent. Ins. Co. v. Brown (In re Larbar Corp., 177 F.3d 439, 443 (6th Cir. 1999; Nat l Shawmut Bank of Boston v. New Amsterdam Cas. Co., 411 F.2d 843, (1st Cir. 1969; Mendelsohn v. The Dormitory Authority of N.Y. (In re QC Piping Installations, Inc., 225 B.R. 553, 562 (Bankr. E.D.N.Y. 1998; John s Insulation, Inc. v. Hartford Accident & Indem. Co. (In re John's Insulation, Inc., 221 B.R. 683, 688 (Bankr. E.D.N.Y In other words, the surety may step into the shoes of these entities and enforce the claims they may have against each other, or other third parties. 26. The Surety s equitable subrogation rights are independently enforceable irrespective of the DIP lenders liens and associated pre-petition debt documents. The Motion, the DIP facility and the Interim Order all contemplate the DIP Lenders priming their own prepetition liens. Yet, the Motion, the DIP and the Interim Order all appear to contemplate that only certain pre-petition liens will not be primed. Notwithstanding the composition of the applicable Prepetition Loan Documents, the Surety s equitable subrogation rights and the lien rights of of 8

9 Case MFW Doc 120 Filed 08/29/18 Page 9 of 11 the Bonds exist independent of such documents and should remain superior to the rights of the DIP lenders. 27. Based upon the foregoing, the Final Order relating to this Motoin should be modified to include the following language, or substantially similar language, which has been entered in other cases in this jurisdiction to protect a surety and its potential subrogrees: Nothing in this Order or any prior DIP Financing/Cash Collateral Orders (the Orders shall in any way prime or affect the rights, if any, of Westchester Fire Insurance Company or its past, present or future parents, subsidiaries or affiliates (the Surety as to: (a any funds it is holding and/or being held for it presently or in the future, whether in trust, as security, or otherwise, (b any substitutions or replacements of said funds including accretions to and interest earned on said funds, and (c any letter of credit related to any indemnity, collateral trust, bond or agreements between or involving the Surety and any of the Debtors or any of the Debtors non-debtor affiliates (collectively (a to (c, the Surety Assets. Nothing in the Orders shall affect the rights of the Surety under any indemnity, collateral trust, or related agreements between or involving the Surety and the Debtors or any of the Debtors non-debtor affiliates as to the Surety Assets. In addition, nothing in the Orders shall prime the setoff and/or recoupment rights, if any, or the lien rights of the Surety, if any, or of any party to whose rights the Surety, has or may become subrogated therein, if any, (including but not limited to any governmental entity, taxing authority, utility provider or beneficiary of the plan and/or any subrogation or other common law rights of the Surety, if any. To the extent that any Surety Assets are being held by the Debtor and are used by the Debtor as part of cash collateral, a concomitant replacement trust claim or replacement lien shall be granted to the Surety equal to the amount of the use of those funds with any replacement trust fund claim to be equal to the amount of trust funds used, and any replacement lien to have the same priority, amount, extent and validity as existed as of the Petition Date. In addition, notwithstanding anything in the Orders to the contrary, the rights, claims and defenses of the Debtors and of the Surety, including, but not limited to, the Surety s rights under any properly perfected liens and claims and/or claim for equitable rights of subrogation, and rights of the Debtors and of any successors in interest to any of the Debtors, and any creditors, to object to any such liens, claims and/or equitable subordination and other rights, are fully 9

10 Case MFW Doc 120 Filed 08/29/18 Page 10 of 11 preserved. Nothing herein is an admission by the Surety or the Debtors, or a determination by the Bankruptcy Court, regarding any claims under any bonds, and the Surety and the Debtors reserve any and all rights and defenses in connection therewith. RESERVATION OF RIGHTS 28. The submission of this Objection by the Surety is not intended as, and shall not be construed as: (a the Surety s admission of any liability or waiver of any defenses or limitation of any rights of the Surety with respect to any claims against any one or more of the Bonds or under the Indemnity Agreement; (b the Surety s waiver or release of any right to exoneration it may have against anyone with respect to its obligations pursuant to the Bonds; (c the Surety s waiver or release of its right to be subrogated to the rights of one or more of the parties paid pursuant to the Bonds; (d an election of remedy; or (e consent to the determination of the Debtors liability to the Surety by any particular court, including, without limitation, the Bankruptcy Court. 29. The Surety reserves the right to raise any arguments raised by any other party in their pleadings at the Final Hearing on the Motion. 30. The Surety expressly reserves, and does not waive, any and all of its rights, claims, defenses, limitations, and/or exclusions in connection with its and the Debtors rights and obligations under the Bonds, applicable law, or otherwise. The Surety further reserves all rights to assert any and all such rights, claims, defenses, limitations and/or exclusions in any appropriate manner or forum whatsoever (including, without limitation, any of its rights to have any non-core matter relating to the interpretation of its contractual rights and Debtors contractual obligations adjudicated by the United States District Court. 31. The Surety further reserves all of its rights to raise any issues contained in this Objection and any other related issues in any procedurally-appropriate contested matter and/or adversary proceeding, including, without limitation, (i objections to confirmation of any plan; 10

11 Case MFW Doc 120 Filed 08/29/18 Page 11 of 11 (ii a separate adversary proceeding requesting any appropriate declaratory and/or injunctive relief; (iii or an objection to any subsequent motion seeking approval of an asset sale to any prospective asset purchaser with respect to any contractual rights that may be adversely affected by a sale motion or the confirmation of any plan. CONCLUSION WHEREFORE, for the reasons set forth herein, the Surety respectfully requests that, absent the inclusion of the proposed language set forth herein or substantially similar language, the Court deny the Motion in its entirety. DATED this 29 th day of August Respectfully submitted, MCELROY, DEUTSCH, MULVANEY & CARPENTER, LLP /s/ Gary D. Bressler Gary D. Bressler, Esq. (No Delaware Avenue, Suite 770 Wilmington, DE Telephone: ( Facsimile: ( gbressler@mdmc-law.com -and- Louis A. Modugno, Esq. Michael R. Morano, Esq Mt. Kemble Avenue P.O. Box 2075 Morristown, NJ Telephone: ( Facsimile: ( lmodugno@mdmc-law.com mmorano@mdmc-law.com Counsel to Westchester Fire Insurance Company 11

12 Case MFW Doc Filed 08/29/18 Page 1 of 2 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: RM Holdco LLC, et al., 1 Debtors. Chapter 11 Case No (MFW Jointly Administered CERTIFICATE OF SERVICE I, Gary D. Bressler, Esquire certify that on August 29, 2018, I caused to be served, true and correct copies of foregoing document upon all parties receiving notice via CM/ECF upon all parties receiving such notice and additionally via First Class Mail upon the parties on the attached list. McELROY, DEUTSCH, MULVANEY & CARPENTER, LLP Dated: August 29, 2018 /s/ Gary D. Bressler Gary D. Bressler, Esq. (No Delaware Avenue, Suite 770 Wilmington, DE Telephone: Facsimile: gbressler@mdmc-law.com 1 The Debtors in these chapter 11 cases, together with the last four digits of each Debtor s federal tax identification number, are as follows: RM Holdco LLC (6847; RM Opco LLC (7122; RM HQ LLC (8615; RM Chevys LLC (N/A; RM Acapulco LLC (N/A; and RM El Torito LLC (N/A. The Debtors headquarters and mailing address is 5660 Katella Avenue, Suite 200, Cypress, CA v1

13 Case MFW Doc Filed 08/29/18 Page 2 of 2 (i the Debtors, 5660 Katella Avenue, Suite 200, Cypress, California 90630, Attn: Jonathan Tibus; (ii proposed co-counsel for the Debtors, Sidley Austin LLP, 555 West 5th Street, Suite 4000, Los Angeles, California, 90013, Attn: Christina M. Craige; (iii counsel for Wells Fargo Bank, National Association as agent to the proposed DIP Lenders and Prepetition Secured Lenders, Thompson Hine LLP, 335 Madison Avenue, 12th Floor, New York, New York , Attn: Yesenia D. Batista and Curtis L. Tuggle; (iv counsel to Tennenbaum Capital Partners, LLC, (a Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022, Attn: David M. Hillman and Kelly V. Knight; 2