Hostess to Liquidate


[authors: Jeffrey H. Taub]

After a final mediation session between Hostess and its unions failed to put Hostess’s reorganization back on track, Bankruptcy Judge Robert Drain authorized the orderly wind down of Hostess’s operations. As a result, Hostess will prepare to sell its assets and shut down its factories. However, a purchaser may seek to restart the production of the beloved baked goods such as Twinkies, Ho-Hos and Donettes.

At the outset of hearing held just before Thanksgiving, Hostess informed the court that it had reached an agreement to pay an additional $1 million to its current employees, regardless of whether they had participated in the strike that preceded liquidation. Additionally, Hostess substantially altered its request to make unilateral interim modifications to its Collective Bargaining Agreements. Specifically, Hostess requested permission to (i) disregard certain work rules and seniority rules, and (ii) engage temporary workers only when necessary. The modifications would stay in effect for two months from the date of the order unless the parties consensually amended the CBAs earlier.

The court held that Hostess’s decision to sell groups of assets in a manner designed to preserve going concern value was a proper exercise of its business judgment and fiduciary duties. The court credited the testimony of several witnesses for Hostess who testified that alternatives to the proposed winddown – such as converting the case to chapter 7 – would result in the diminution of the estate’s value. The court also approved:

  • Hostess’s plan to pay retention bonuses to non-senior employees that remained at Hostess through the wind down process.
  • Hostess’s request to establish a $5 million trust (funded by its lenders’ collateral) that could be used by senior management to defend against certain causes of action.
  • Hostess’s revised temporary modifications to its CBAs.

The court did not approve Hostess plan to pay performance bonuses to senior management. Additionally, the court narrowed the scope of the Hostess’s proposed exculpation of its senior management to actions taken as approved by the court or in furtherance of a court order. The court also refused to permanently enjoin parties from bringing claims against Hostess for actions taken in connection with the wind down. Instead, the court agreed to enter an order channeling such claims to the court for adjudication. With the Court’s ruling, Hostess will begin the winddown of its assets, presumably by a sale of key brands and assets such as the well-known, Twinkie and Wonder Bread brands among others. It is unclear whether purchasers will need to assume the CBAs that were the subject of much of the difficulty in Hostess’s bankruptcy.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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