District Court: Papaya Gaming's proposed debt settlement must be improved
With a $719 million compensation hanging over the company, Judge Iris Lushi-Abudi granted Papaya Gaming's request to appoint a special manager, but ordered the debt settlement to be improved. The judge also sent a message to the plaintiff, Skillz, noting that it cannot categorically oppose any settlement, and announced that she expects to issue a 45-day stay of proceedings, subject to Skillz's consent.
The clash between Papaya Gaming and Skillz is escalating. Judge Iris Lushi-Abudi of the Tel Aviv District Court sent a sharp message today (Tuesday) that the debt settlement proposed by Papaya Gaming must be amended, and a combined model must be adopted that includes various tools such as owner contributions, exploring the possibility of finding an investor, and increasing the amounts, at least in the initial stages of the settlement. This comes after Skillz expressed strong opposition to the proposed settlement, claiming it could harm its ability to be repaid.
After four candidates for the appointment of a special manager were submitted on behalf of the Commissioner, the judge explained that she intends to appoint a settlement manager and issue a temporary stay of proceedings for 45 days, so that the settlement manager can formulate a debt settlement and present it to the creditors' meetings — subject to Skillz's consent, which is expected to be given by tomorrow (Wednesday) morning.
The judge also sent a message to Skillz, stating that it cannot categorically oppose any settlement, and requested its cooperation. Skillz's request to appoint a trustee was rejected at this stage.
"There is room to find a combined model"
As recalled, the affair crossed the borders of the State of Israel when the verdict given in the dispute between the two determined that Papaya Gaming Israel and Papaya Gaming USA (a subsidiary owned by Papaya Gaming) must pay Skillz, their business competitor, an astronomical sum of $719 million due to misleading advertising regarding the use of bots in games.
Given the exceptional scope of the verdict, and in light of the fact that the compensation amount awarded exceeds the companies' cash balances, the applicants approached the court with a request to freeze the American verdict, in order to offer a debt settlement that guarantees full repayment to all creditors.
"Aggressive enforcement of the Skillz verdict could lead to insolvency and liquidation of the applicants, and its practical and economic meaning is the destruction of value in the hundreds of millions," wrote Papaya Gaming to the Tel Aviv court. The Papaya Gaming companies are not petitioning the Israeli court against the decision of the US court; they respect the decision and will act in the accepted ways to file an appeal. At the same time, they are asking to stagger the payments so that they transfer 140 million shekels each year to the Israeli court's coffers until the decision in the US court.
Judge Lushi-Abudi determined that Papaya Gaming is an insolvent company in terms of cash flow, which requires the application of the principle of collectivity. She expressed her opinion on the proposed settlement plan, which is based solely on the companies' operating revenues for six and a half years ahead, and explained that there is a certain difficulty in this plan and passed the ball back to Papaya Gaming to submit a better proposal that would include a combined model. "There is room to find a combined model that will include owner contributions, a way of finding an investor. Such a settlement will be formulated based on the comments of the parties, the Commissioner, the court, and the supervision of the settlement manager," said the judge.
The verdict in the US
The judge insisted that there is a verdict in the US that is subject to appeal, but the starting point from which she proceeds is that there is a reasonable chance that the verdict will stand. Regarding the settlement proposal she is asking to amend, she told Papaya Gaming: "You will have to take something else into account, a settlement proposal based only on activity is not good. Perhaps the shareholders will inject a high amount that can be worked with and then build the plan on it. Someone needs to check this. They (shareholders) need to put their hand in their pocket and do things and the appropriate model needs to be found, which takes into account that they continue to operate the company and bring in money. We don't want them to give up, they are capable of bringing the money, it's important, and it will be under supervision." Alongside this, she explained that legal liability should not be imposed, certainly not right now, on the managers and shareholders because then their incentive might be harmed.
These things were said regarding comments also made by Adv. Pini Yaniv from the Meitar firm, representing Papaya Gaming, who explained that this is a company that has a successful product, customers, and dozens of suppliers who receive money on time, and that the company is very profitable. From the pleadings, it appears that the revenue model based on entry fees that it operates generates high gross profit margins over the years, with gross profit margins exceeding 90% in all recent years.
No attempt to eliminate the competitor company
On behalf of Skillz, Adv. Yaron Alkawi from the Gornitzky & Co. firm expressed great concerns and opposition to the proposed settlement, among other things because, in their view, Papaya Gaming presents an approach of "it will be fine and nothing will happen along the way." They also addressed the fact that their interest is only in receiving the money and not in an attempt to eliminate the competitor company Papaya Gaming. Skillz explained that eliminating the competitor company would not yield them profits as some think and could even harm the debt's repayment capacity.
Judge Lushi-Abudi also addressed the difficulty of finding an investor for Papaya Gaming. "I find it difficult to see an investor who comes and puts in $300 million to get 20%-30% according to the forecasts for a company against which a $700 million verdict is hanging. The company will have to bring an expensive expert opinion, or the company's legal counsel will have to declare that there is no problem with its activity in accordance with the American verdict."
