The reorganization deal Harry & David Holdings Inc. prearranged with its bondholders has encountered resistance heading into today's scheduled hearing before a U.S. Bankruptcy Court judge in Delaware.

The reorganization deal Harry & David Holdings Inc. prearranged with its bondholders has encountered resistance heading into today's scheduled hearing before a U.S. Bankruptcy Court judge in Delaware.

Many of the issues, ranging from mall leases, debtor-in-possession financing, Harry & David's pension fund and who would be allowed to participate in future equity rights, are now scheduled to be heard by Judge Mary Walrath on May 2.

That could mean a drawn-out tour through Chapter 11 court protection for the Wasserstein & Co.-controlled gourmet food and gift company headquartered in Medford. After successive years of declining revenue, one of Southern Oregon's major employers filed for bankruptcy on March 28.

"It looks like they are having discussions and they are probably working out an arrangement that will improve the position of unsecured creditors," said Richard Feferman, senior managing director of Corporate Recovery Associates in San Diego. "From the motions and objections that have been filed, it appears everyone is teed-up and ready to litigate and has the right to litigate. But I bet they will come into the courtroom and say, 'We've worked something out, your honor,' or are working something out. It's unlikely they are going to say, 'We're at a stalemate.' The court likes to see them come back seeking approval of a joint resolution."

The creditors committee last week objected to the $100 million debtor-in-possession loan from Wasserstein & Co., which already had been granted interim approval. The creditors asked Walrath to deny or change the loan structure.

Under the plan, Wasserstein would receive $7 million in new shares of the reorganized Harry & David, along with release from lawsuits. That, said the creditors, would give the New York private-equity firm an unfair advantage.

"Wasserstein will obtain a recovery well in excess of any new value provided during the cases on account of its control of the debtors," the committee's objection filing stated. Meanwhile, other creditors "will receive very little value under the plan."

The committee noted Wasserstein's $600,000 fee for supplying a bankruptcy loan, $2 million in new stock in return for (a later) rights offering, and $5 million in stock for future management services are "unconscionable benefits."

The creditors committee said in its filing that $4.1 million of fees paid during the debtor-in-possession loan period "are neither reasonable nor necessary."

"In certain circumstances, fees may be necessary to induce a disinterested post-petition lender to extend credit," the committee wrote. "Here, however, the DIP Lenders are not new, disinterested lenders and do not need inducement in the form of excessive fees."

Wasserstein is not a typical lender, the committee argued. Rather, Wasserstein owns 63 percent of the company's stock and was the largest holder of its bonds. As a result, the expected fees "are inappropriate because Wasserstein should not be entitled to pay itself sizable fees at the expense of unsecured creditors for lending money to the debtors solely to protect its own interests."

Responding to the objections, lawyers for Harry & David Holdings wrote that the creditors knew they couldn't legitimately refute the debtor's judgment and devoted "the lion's share of its objection targeting Wasserstein & Co."

"The committee spills much ink in a disingenuous attempt to paint Wasserstein as an entity that has controlled the debtors in order to effectuate transactions that benefit it to the detriment of unsecured creditors," attorneys from Jones Day and Richard Layton & Finger wrote.

After explaining the company's financial straits, and its need for additional cash to tie it over until the 2011 holiday season, the response noted the objection to rights offerings limited to "accredited investors" was off mark.

"They pretty much didn't pull any punches," said Harry & David bondholder Bill Golden, a former New York bankruptcy lawyer now with Princeton, N.J., hedge fund Polymathes Capital. "They really got into the substance in Wasserstein's involvement of the reorganization, trying to wear every hat, from creditor, to equity sponsor to controlling person."

If the judge rejects the debtor-in-possession agreement, Golden said, it could lead to a free-fall scenario "where the deal with the note holders blows up and you have to start over with a new plan and that takes time."

But judges prefer matters to be settled, he said. "They don't want the deal to blow up and there is room for compromise."

Reach reporter Greg Stiles at 541-776-4463 or email