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U.S. Trustee delays OK of Dolan Chapter 11 plan

The Dolan Company, a service provider for the legal industry, intended to wrap up last week a prepackaged Chapter 11 reorganization that it began on March 23.

Instead, an official shareholders’ committee formed by the U.S. Trustee blocked plan approval, at least until May 27.

Before bankruptcy, secured lenders including Bayside Capital Inc. voted on the plan, designed to reduce debt by about $100 million to some $50 million, by giving lenders all the new stock and at least $50 million in new debt.

The plan would extinguish existing preferred and common stock. Unsecured creditors didn’t vote on the plan because they are to be paid in full in the company’s judgment.

An official shareholders’ committee appointed by the U.S. Trustee on April 23 filed a preliminary objection to the plan and asked for a delay in the approval hearing. Dolan, the parent company of The Daily Record, asked the judge to disband the committee, saying the group will cause “significant harm” and “needless expenditures of the debtors’ very limited liquidity.” Bayside, as agent for secured lenders, is an affiliate of H.I.G. Capital LLC.

The equity committee responded May 1 with its side of the story. According to the committee, Bayside bought the secured debt and proceeded to limit borrowing ability under the loan, tighten covenants, collect “egregious fees” and raise interest rates.

In last week’s filing, the shareholders formally objected to Bayside’s secured claim, which they say is about $150 million. From the total, they want the judge to toss out $15 million, representing what they call “outrageous fees” and “exorbitant rates.”

The remainder of the claim should be equitably subordinated, or paid after other creditors, according to the shareholders’ theory.

The U.S. Trustee, the Justice Department’s bankruptcy watchdog, sided with the shareholders, contending that pre- bankruptcy disclosure materials were inadequate and confirmation should be refused. The U.S. Trustee also said the disclosure statement didn’t explain a $50 million decline in the Minneapolis-based company’s value over a space of six weeks just before bankruptcy.

With regard to technical aspects of the plan, the U.S. Trustee and a creditor said that it cuts off unsecured creditors’ rights of setoff and recoupment. For that reason, those creditors with rights of setoff were adversely affected by the plan and should have been given the right to vote.

Dolan listed assets of $236.3 million against debt totaling $185.9 million.

Secured debt of $153.5 million includes a $116.5 million term loan and a $37 million revolving credit.

Dolan’s businesses also include legal printer Counsel Press and DiscoveryReady LLC, a provider of electronic document-discovery services for law firms.

The company went public in 2007 and its shares reached an all-time of $30.84 on Dec. 26 of that year.

The case is In re The Dolan Co., 14-bk-10614, U.S. Bankruptcy Court, District of Delaware (Wilmington).