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Plaintiff,
v.
CITIBANK, N.A., et al.,
Defendants.
•
•
Adversary Proceeding •. No. 09-01375 (REG)
Hearing Date: February 16, 2010 at 9:00 a.m.
Edward S. Weisfelner Sigmund S. Wissner-Gross May Orenstein BROWN RUDNICK LLP Seven Times Square New York, NY 10036 (212) 209-4800
Steven D. Pohl BROWN RUDNICK LLP One Financial Center Boston, MA 02111 (617) 856-8200
Counsel for the Official Committee of Unsecured Creditors
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x In re: •
▪ Chapter 11 LYONDELL CHEMICAL COMPANY, et al., Case No. 09-10023 (REG)
Jointly Administered Debtors.
OFFICIAL COMMITTEE OF UNSECURED : CREDITORS, on behalf of the Debtors' Estates, :
CORRECTED OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO DEBTORS' MOTION TO APPROVE SETTLEMENT AGREEMENT
WITH FINANCING PARTY DEFENDANTS IN COMMITTEE LITIGATION
Hearing Date: February 16, 2010 at 9:00 a.m.
TABLE OF CONTENTS
TABLE OF AUTHORITIES iv
PRELIMINARY STATEMENT 1
FACTS 4
I. The Pre-Petition Lenders Gained Control Over Potential Claims Against Them Through the DIP Financing And The Debtors' Agreement To Waive Causes Of Action Against The FPDs 5
II. The Debtors Were Never Capable of Independently Assessing Estate Claims Against Financing Party Defendants and Access Party Defendants 10
A. CWT Was Prohibited From Being Adverse to Certain FPDs 13
B. Key Members of CWT's Litigation Team Presently Represent Merrill Lynch in Other Significant Matters 14
C. Cooper Was Conflicted 19
III. The Debtors Propose a Bifurcated Trial Ostensibly to Promote Settlement 20
IV. CWT Used its Involvement in and Monitoring of the Negotiations of the Intercreditor Issues As a Vehicle to Press for a Low-Ball Settlement of the Committee's Claims Against the FPDs 26
V. Instead of Exploring Alternatives Consistent with its Conflicting Needs to Resolve the Committee Litigation and to Exit Promptly from Bankrupcty, the Debtors Resolved to Unilaterally Settle the UCC Litigation 27
VI. Settlement Negotiations with the Ad Hoc Lenders, the First Mediation Session and, the Ensuing Negotiations with the Bridge Lenders 32
VII. The Second So-Called Mediation and the "Settlement Negotiations" After the Mediation Terminated 40
ARGUMENT 46
I. The Court Should Not Withdraw the Standing Previously Granted to the Committee to Pursue the UCC Litigation 46
A. The Application of Rule 9019 Standards to the Withdrawal of Derivative Standard Is Not Consistent with Relevant Precedent or Practice 46
TABLE OF CONTENTS (Con't)
Pa2e(s)
B. STN Authority Was Properly Conferred on The Committee to Preserve Valuable Estate Claims That Would Otherwise Have Been Abandoned 53
C. The Debtors Have Failed to Demonstrate That The Withdrawal of the Committee's STN Authority is in the Best Interest of the Debtors' estates 56
1. The circumstances warranting STN authority have not changed: the Debtors remain incapable of discharging their duties to preserve, protect and maximize the value of the UCC Litigation for the benefit of the estates 58
2. The Debtors' conduct throughout the pendency of these cases and the UCC Litigation requires the denial of the Debtors' attempt to assert standing to control and to settle the UCC Litigation against the FPDs 59
3. The conflicts of interest of the Debtors' representatives and fiduciaries should preclude them from settling the Committee's claims against the FPDs 61
4. The UCC Litigation does not threaten the Debtors' Reorganization 63
II. The Proposed Settlement Should Not Be Approved 65
A. The Legal Standard 65
B. The Settlement Was Not The Product Of Arms-Length Bargaining 67
1. The History Of Negotiations 70
2. The Interests Of The Debtors And The FPDs Are Aligned 74
C. Likelihood Of Success On The Merits As Compared To Potential Benefits of Settlement 79
1. Range of Recovery Upon Prevailing On Fraudulent Transfer Claims 83
a) Issue One: Section 546(e) Safe Harbor 87
b) Issue Two: Collapsing 88
c) Issue Three: Financial Condition 89
d) Issues Four and Five: Factors Limiting Remedies 93
(1) Entity Level Recoveries 94
iii
TABLE OF CONTENTS (Con't)
Page(s)
(2) Impact on the Unavoidability of Reinstatement Of Debt to the Extent Used by the Debtors to Refinance Pre-Merger Obligations 101
e) Issue Six: Priority of Liens Preserved for the Estate 107
f) Issue Seven: Equitable Subordination or Disallowance 108
g) Issue Eight: Additional Factors Relevant To Potential Recoveries 108
(1) Avoidability of Primary Obligations 108
h) Factors Missing from the Debtors' Recovery Analysis 110
(1) Upstreaming of Value to Satisfy Unsecured Creditors of Parent 111
(2) Recoverability of Merger Fees and Interest 116
(3) The Millennium Bonds 118
(4) The 2015 Notes 121
D. The Debtors Have Failed to Meet Their Burden of Demonstrating that the Committee is Unlikely to Prevail 122
E. The Remaining Texaco Factors Do Not Weigh In Favor Of The Approval Of The Settlement 127
1. The Prospect Of Complex And Protracted Litigation 127
2. The Degree To Which The Settlement Is Supported By Parties-in-
Interest 128
CONCLUSION 130
iv
TABLE OF AUTHORITIES
Federal Cases
AboveNet, Inc. v. Lucent Techs., Inc. (In re Metromedia Fiber Networks), 2005 Bankr. LEXIS 3168 (Bankr. S.D.N.Y. Dec. 20, 2005) 113
ACC Bondholder Grp. v. Adelphia Commc'ns Corp. (In re Adelphia Commc'ns Corp.), 361 B.R. 337 (S.D.N.Y. 2007) 47
ALFA, S.A.B. de C. V. v. Enron Creditors Recovery Corp. (In re Enron Creditors' Recovery Corp.),
F. Supp. 2d No. 01-16034, 2009 WL 5174119 (S.D.N.Y. Nov. 20, 2009) 88
Adelphia Commc'ns Corp. v. Bank ofAm., N.A. (In re Adelphia Commc'ns Corp.), 330 B.R. 364 (Bankr. S.D.N.Y. 2005) 47, 54, 55, 75
Adelphia Recovery Trust v. Bank ofAm., 390 B.R. 80 (S.D.N.Y. 2008) 113, 114
Allstate Fabricators Corp. v. Flagstaff Foodservice Corp. (In re Flagstaff Foodservice Corp.), 56 B.R. 899 (Bankr. S.D.N.Y. 1986)
Anstine v. Carl Zeiss Meditec AG (In re U.S. Medical, Inc.), 531 F.3d 1272 (10th Cir. 2008)
Athey v. Farmers Ins. Exch., 234 F.3d 357 (8th Cir. 2000)
Berry v. School Dist. of Benton Harbor, 184 F.R.D. 93 (W.D. Mich. 1998)
Bildirici v. Kittay (In re East 44th Realty, LLC), Nos. 05-16167, 07-8799, 2008 WL 217103 (S.D.N.Y. 2008)
Boyer v. Crown Stock Distribution, Inc.,
95, 96
79
32
74
71
Nos. 09-1600, 09-1861, F.3d , 2009 WL 3837312 (7th Cir. Nov. 18, 2009) 110
Bright v. Tishman Constr. Corp. of N.Y., No. 95-Civ.-8793, 1998 WL 63403 (S.D.N.Y. Feb. 17, 1998) 100
Brodie v. Schmutz (In re Venture Mortgage Fund L.P.), 282 F.3d 185 (2d Cir. 2002) 100
Buncher Co. v. Official Comm. of Unsecured Creditors of GenFarm L.P. IV, 229 F.3d 245 (3d Cir. 2000) 49
iv
Bus. Sys. Eng'g, Inc. v. IBM, 547 F.3d 882 (7th Cir. 2008) 98
Lames v. Joiner (In re Joiner), 319 B.R. 903 (Bankr. M.D. Ga. 2004) 82
Cohen v. Nat'l Union Fire Ins. Co. (In re County Seat Stores, Inc.), 280 B.R. 319 (Bankr. S.D.N.Y. 2002) 74
Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343 (1985) 53, 72
Commodore Int'l Ltd. v. Gould (In re Commodore Int'l Ltd.), 262 F.3d 96 (2d Cir. 2001) 55
Continental Cas. Co. v. Westerfield, 961 F. Supp. 1502 (D.N.M. 1997) 68, 69
Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599 (2d Cir. 1983) 79, 82
Covey v. Commercial Nat'l Bank of Peoria, 960 F.2d 657 (7th Cir. 1992) 108
Dacotah Marketing and Research LLC v. Versatility, 21 F. Supp. 2d 570 (E.D. Va. 1998) 53, 68, 69
Dobin v. Hill (In re Hill), 342 B.R. 183 (Bankr. D.N.J. 2006) 104
Eisen v. Allied Bancshares Mortgage Corp., LLC (In re Priest), 268 B.R. 135 (Bankr. N.D. Ohio 2000) 118
Enron Corp. v. Avenue Special Situations Fund II, LP (In re Enron), 340 B.R. 180 (Bankr. S.D.N.Y. 2006) 118
Glenn v. Sutton (In re Sutton), 324 B.R. 624 (Bankr. W.D. Ky. 2005) 97
Glinka v. Murad (In re Housecraft Indus. USA, Inc.), 310 F.3d 64 (2d Cir. 2002) 54
Gould v. Levin (In re Credit Indus. Corp.), 366 F.2d 402 (2d Cir. 1966) 98
Hansen, Jones & Leta, P.C. v. Segal, 220 B.R. 434 (D. Utah 1998) 112
HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995) 102
Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc., 555 F.3d 231 (6th Cir. 2009) 54, 55
In re Adelphia Commc'ns Corp., 327 B.R. 143 (Bankr. S.D.N.Y. 2005) passim
In re Adelphia Commc'ns Corp., 336 B.R. 610 (Bankr. S.D.N.Y. 2007) 48, 53
In re Adelphia Commc'ns Corp., 368 B.R. 140 (S.D.N.Y. 2007) passim
In re Allegheny Ina, Inc., 118 B.R. 282 (Bankr. W.D. Pa. 1990) 76
In re Best Prods. Co., 168 B.R. 35 (Bankr. S.D.N.Y. 1994) 82, 109
In re CF Holding Corp., 164 B.R. 799 (Bankr. D. Conn. 1994) 22
In re Congoleum Corp., No. 03-51524, 2007 WL 1428477 (Bankr. D.N.J. May 11, 2007) 68, 129
In re Consolidated Capital Equities Corp., 157 B.R. 280 (Bankr. N.D. Tex. 1993) 108
In re Consupak, Inc., 87 B.R. 529 (Bankr. N.D. Ill. 1988) 59
Simes v. Demaskey (In re Demasky), Case Nos. 04-43238, A04-4123, 2007 WL 2848179 (Bankr. W.D. Wash., April 24, 2007 32
In re Del Grosso, 106 B.R. 165 (Bankr. N.D. Ill. 1989) 68
In re Doctors Hosp. of Hyde Park Inc. 474 F.3d 421 (7th Cir. 2007) 82
In re Doors and More Inc., 126 B.R. 43 (Bankr. E.D. Mich. 1991) 112
In re Dunes Hotel Assocs., No. CA94-75715, 1997 WL 33344253 (Bankr. D.S.C. 1997) 60
vi
In re Ear, Nose and Throat Surgeons, Inc. v. Guaranty Bank and Trust Co. (In re Ear, Nose and Throat Surgeons, Inc), 49 B.R. 316 (Bankr. D. Mass. 1985) 108
In re Exide Techs., 303 B.R. 48 (Bankr. D. Del. 2003) passim
In re Foxmeyer Corp., 286 B.R. 546, 573 (Bankr. D. Del. 2002) 105
In re Global Crossing Sec. & ERISA Litig., 225 F.R.D. 436 (S.D.N.Y. 2004) 69
In re Hampton Hotel Investors, L.P., 270 B.R. 346 (Bankr. S.D.N.Y. 2001) 78
In re Herberman, 122 B.R. 273 (Bankr. W.D. Tex. 1990) 61
In re Hibbard Brown & Co., 217 B.R. 41 (Bankr. S.D.N.Y. 1998) 53, 69
In re Investors & Lenders, Ltd., 156 B.R. 145 (Bankr. D.N.J. 1993) 106
In re Kobra Properties, 406 B.R. 396 (Bankr. E.D. Cal. 2009) 62
In re Liggett, 118 B.R. 219 (Bankr. S.D.N.Y. 1990) 114
In re Lion Capital Group, 49 B.R. 163 (Bankr. S.D.N.Y. 1985) 73, 123
In re Matco Elecs. Group, Inc., 287 B.R. 68 (Bankr. N.D.N.Y. 2002) 66, 68, 73, 78, 128
In re Nicole Energy Servs., Inc., 385 B.R. 201 (Bankr. S.D. Ohio 2008) 70
In re Painewebber L.P. Litig., 171 F.R.D. 104 (S.D.N.Y. 1997) 67, 70, 80
In re Perdido Bay Country Club Estates, Inc., 23 B.R. 36 (Bankr. S.D. Fla. 1982) 105
In re Portnoy, 201 B.R. 685 (Bankr. S.D.N.Y. 1996) 32
vii
In re Revelle, 256 B.R. 905 (Bankr. W.D. Mo. 2001) 82
In re Rusty Jones, Inc., 134 B.R. 321 (Bankr. N.D. I11.1991) 59
In re SemCrude, L.P., 399 B.R. 388 (Bankr. D. Del. 2009) 97
In re Telesphere Commc'ns, Inc., 179 B.R. 544 (Bankr. N.D. Ill. 1994) 109
In re Texaco Inc., 84 B.R. 893 (Bankr. S.D.N.Y. 1988) 66
In re Walnut Equipment Leasing Co., Nos. 97-19699DWS, 97-19700DWS, 1999 WL 288651 (Bankr. E.D. Pa. May 4, 1999) 49
In re Water's Edge Ltd. P'ship, 251 B.R. 1 (Bankr. D. Mass. 2000) 60
In re Whitney Place Partners, 147 B.R. 619 (N.D. Ga.1992) 58
In re WorldCom, Inc., 401 B.R. 637 (Bankr. S.D.N.Y. 2009) 106
Itri Brick & Concrete Corp. v. Aetna Cas. & Sur. Co., 680 N.E.2d 1200 (N.Y. 1997) 100
Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.), 263 B.R. 406 (S.D.N.Y. 2001) 88
JPMorgan Chase Bank, N.A. v. Charter Commcn's Operating, LLC (In re Charter Commc 'ns), 419 B.R. 221 (Bankr. S.D.N.Y. 2009) 71, 78
Key3 Media Group, Inc. v. Pulver.com, Inc. (In re Key3 Media Group, Inc.), 336 B.R. 87 (Bankr. D. Del. 2005) 76
Kupetz v. Wolf 845 F.2d 842 (9th Cir. 1988) 83
LaSalle National Bank v. Holland (In re Am. Reserve Corp.), 841 F.2d 159 (7th Cir. 1987) 123
Leibowitz v. Parkway Bank & Trust Co. (In re Image Worldwide, Ltd.), 139 F.3d 574 (7th Cir. 1998) 108
viii
Lippi v. City Bank, 955 F.2d 599 (9th Cir. 1992) 83
Manufacturers and Traders Trust Co. v. Goldman (In re Ollag Const. Equip. Corp.), 578 F.2d 904 (2d Cir. 1978) 95
Maurice Sporting Goods, Inc. v. Maxway Corp. (In re Maxway Corp.), 27 F.3d 980 (4th Cir. 1994) 49
McClelland v. Grubb & Ellis Consulting Servs. Co. (In re McClelland), 418 B.R. 61 (Bankr. S.D.N.Y. 2009) 60
McDonald v. Chicago Milwaukee Corp., 565 F.2d 416 (7th Cir. 1977) 79
Mellon Bank, N.A. v. Metro Commc'ns Inc., 945 F.2d 635 (3d Cir. 1991) 105
Mellon Bank N.A. v. Official Comm. of Unsecured Creditors of R.ML., Inc. (In re R.ML., Inc.), 92 F.3d 139 (3d Cir. 1996) 49, 105
MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Servs. Co., Nos. 91 Civ. 3451, 92 Civ. 1470, 1994 WL 560978 (S.D.N.Y. Oct. 12, 1994) 83
Morris v. St. John Nat'l Bank (In re Haberman), 516 F.3d 1207 (10th Cir. 2008) 106
Motorola v. Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007) 48
Murphy v. Meritor Savings Bank (In re O'Day Corp.), 126 B.R. 370 (Bankr. D. Mass. 1991) 80
Myers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996) 123
Nellis v. Shugrue, 165 B.R. 115 (S.D.N.Y. 1993) 69
Nextwave Personal Commc'ns, Inc. v. Federal Commc'ns Comm'n (In re Nextwave Personal Commc'ns, Inc.), 235 B.R. 305 (Bankr. S.D.N.Y. 1999) 108
Official Comm. of Equity Sec. Holders v.. Adelphia Commc 'ns. Corp. (In re Adelphia Comm 'cns. Corp.), 371 B.R. 660 (S.D.N.Y. 2007) 51, 52, 56, 57
ix
Official Comm. of Equity Sec. Holders of Adelphia Commc'ns. Corp. v. Official Comm. Of Unsecured Creditors of Adelphia Commc'ns Corp. (In re Adelphia Commc'ns. Corp.), 544 F.3d 420 (2d Cir. 2008) passim
Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003) 54
Official Comm. of Unsecured Creditors of Int'l Distrib. Ctrs., Inc. v. James Talcott, Inc. (In re Int'l Distrib. Ctrs., Inc.), 103 B.R. 420 (S.D.N.Y. 1989) 122
Official Comm. of Unsecured Creditors v. Pardee (In re Stanwich Fin. Servs. Corp.), 288 B.R. 24 (Bankr. D. Conn. 2002) 54
Official Comm. of Unsecured Creditors of TOUSA, Inc. v. Citicorp North America, Inc. (In re TOUSA, Inc.), Nos. 08-10928-JKO, 08-1435-JKO, 2009 WL 3519403 (Bankr. S.D. Fla. Oct. 30, 2009) passim
Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999) 69
Pepper v. Litton, 308 U.S. 295 (1939) 111, 114
Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968) 57, 65, 66, 81, 125, 128
Rafool v. Goldfarb Corp. (In re Fleming Packing Corp.), Nos. 03-82408, 04-8166, 2007 WL 4556981 (Bankr. C.D. Ill. Dec. 20, 2007) 72
Rodriquez v. Whatcott (In re Walker), 389 B.R. 746 (Bankr. D. Colo. 2008) 106
Roosevelt v. Ray (In re Roosevelt), 220 F.3d 1032 (9th Cir. 2000) 104
Ross v. Penny (In re Villa Roel), 57 B.R. 879 (Bankr. D.D.C. 1986). 118
Shapiro v. Art Leather, Inc. (In re Connolly N. Am., LLC), 340 B.R. 829 (Bankr. E.D. Mich. 2006) 118
Smart World Techs., LLC v. Juno Online Services, Inc. (In re Smart World Techns., LLC), 423 F.3d 166 (2d Cir. 2005) 50, 51, 53, 72
Smith v. American Founders Financial Corp., 365 B.R. 647 (S.D. Tex. 2007) 108
Staats v. Barry (In re Barry), 31 B.R. 683 (S.D. Ohio 1983) 106
Stark v. Sandberg, Phoenix & von Gotard, P.C., 381 F.3d 793 (8th Cir. 2004) 100
Susman v. Lincoln American Corp., 561 F.2d 86 (7th Cir. 1977) 79
The Retail Clerks Welfare Trust v. McCarty (In re Van de Kamp's Dutch Bakeries), 908 F.2d 517 (9th Cir. 1990) 106
Tornabene v. General Dev. Corp., 88 F.R.D. 53 (D.C.N.Y. 1980) 70
U.S. v. A WECO, Inc. (In re AWECO, Inc.), 725 F.2d 293 (5th Cir. 1984) 123
U.S. v. Glens Falls Newspapers, Inc., 160 F.3d 853 (2d Cir.1998) 48
Unofficial Comm. of Equity Holders Of Penick Pharm., Inc. (In re Penick Pharm., Inc.), 227 B.R. 229 (Bankr. S.D.N.Y. 1998) 60
Unsecured Creditors' Committee v. Noyes (In re STN Enterprises), 779 F.2d 901 (2d Cir. 1985) 54, 76
Vintero Corp v. Corporacion Venezolana de Fomento (In re Vintero Corp.), 735 F.2d 740 (2d Cir. 1984) 115
Wells Fargo Bank, N.A. v. Guy F. Atkinson Co. (In re Guy F. Atkinson Co. of Cal.), 242 B.R. 497 (9th Cir. B.A.P. 1999) 48
Wessinger v. Spivey (In re Galbreath), 286 B.R. 185 (Bankr. S.D. Ga. 2002) 108
Whiteford Plastics Co. v. Chase National Bank of New York, 179 F.2d 582 (2d Cir. 1950) 115
State Cases
Coastal Cement Sand, Inc. v. First Interstate Credit Alliance, Inc., 956 S.W.2d 562 (Tex. App. 1997) 100
Mattco Forge, Inc. v. Arthur Young & Co., 38 Cal. App. 4th 1337 (Cal. App. 2d Dist. 1995) 124
xi
Powell v. Waters, 8 Cow. 669 (N.Y. Sup. Ct. 1826) 100
Federal Statutes
11 U.S.C. § 327(a) 78
11 U.S.C. § 502(e) 99
11 U.S.C. § 541(c)(1)(B) 96, 97
11 U.S.C. § 544 83
11 U.S.C. § 544(b)(1) 112
11 U.S.C. § 546(e) 87, 88
11 U.S.C. § 548(a)(1)(A) 83, 108
11 U.S.0 § 548(a)(1)(B) 80, 83, 97, 100, 105
11 U.S.C. § 548(a)(1)(B)(i) 105
11 U.S.C. § 548(a)(1)(B)(ii) 89
11 U.S.C. § 548(c) 97, 101, 102, 103, 104, 110, 118
11 U.S.C. § 548(d)(2)(A) 105
11 U.S.C. § 550 108
11 U.S.C. § 550(a) 118
11 U.S.C. § 550(b) 117, 118
11 U.S.C. § 551 106, 107, 112
11 U.S.C. § 1103(c)(5) 54
11 U.S.C. § 1109(b) 54
11 U.S.C. § 1123(b)(3)(A) 61
State Statutes
California Civil Code § 3439.07 109
xii
Federal Rules
Fed. R. Evid. 408 32
Other Authorities
44B Am. Jur. 2d Interest and Usury § 134 (2009) 110
5 COLLIER ON BANKRUPTCY 551.02 (Alan H. Resnick & Henry J. Sommer eds., 15 ed. rev.) 106
G. GLENN, FRAUDULENT CONVEYANCES AND PREFERENCES, § 260a at 446-47 (1940) 109
NY Lawyer's Code of Professional Responsibility, EC 5-146 62
The Official Committee of Unsecured Creditors (the "Committee") appointed in the
chapter 11 cases (the "Cases") of the above-captioned debtors and debtors-in-possession (the
"Debtors"), by and through its undersigned counsel, hereby submits this objection (the
"Objection") of the Official Committee of Unsecured Creditors to Debtors' Motion to Approve
Settlement Agreement with Financing Party Defendants In Committee Litigation (the
"Settlement Motion") [Docket No. 3486]. In support of this Objection, the Committee
respectfully represents as follows:
PRELIMINARY STATEMENT
On the eve of the commencement of the Phase I Trial, the Debtors executed a maneuver
that they had, in concert with the Financing Party Defendants (the "FPDs"), contemplated since
well before the Committee was granted STN authority — the settlement of the claims asserted
against the FPDs in the adversary proceeding commenced by the Committee against the FPDs
and certain other defendants (the "UCC Litigation"), unilaterally, without consultation with the
Committee and for an amount, not arrived by arms-length negotiations, but by cynical
calculation of what they hoped might pass muster with the Court as above the "lowest point in
the range of reasonableness."
The proposed settlement reflects the domination of the Debtors by the FPDs, who purport
to "own" the Debtors, and who have since the outset of these cases held the prospect of
withholding financing over the Debtors' heads in order to defeat the claims against them that are
the subject of the UCC Litigation. More troubling, the settlement is tainted by conflicts of
interest on the part of the Debtors' counsel who, based on their relationships with the FPDs,
should have recused themselves from involvement in the UCC Litigation, and in particular from
advising the Debtors on the proposed settlement. The circumstances of the proposed settlement,
1
including the pretextual use of an impasse in Court-ordered mediation, the complete exclusion of
the Committee (the Court-appointed STN representative of the estates) from the settlement
negotiations, the concealment (from the Committee) of the Debtors' intentions, including by
nondisclosure of consultants hired to create the semblance of disinterestedness, and the farcical
"take-it-or leave it" low-ball offer made by the Debtors and accepted readily by the FPDs, all
undertaken without notice to or approval by the Court of the Debtors' intention to take control of
the UCC Litigation, strongly implicates core concerns for due process, fairness and the integrity
of the bankruptcy process and should preclude consideration of the proposed settlement by the
Court.
The Debtors, moreover, have adduced absolutely no basis for this Court to predicate a
finding that the withdrawal of STN standing from the Committee is in the best interests of the
estates. An expedited trial schedule was imposed on the UCC Litigation to balance the
objectives of facilitating a quick emergence from bankruptcy with a resolution of the UCC
Litigation consistent with due process and fairness. The Debtors' contention that by December
3, with an expedited trial on the merits only days away, their underhanded conduct and disregard
for the interests of the unsecured creditors of the estates was somehow necessary to "save the
patient from dying on the table" is preposterous. If the Court approves this settlement under the
circumstances of this case it will have a profoundly negative effect on the use of STN standing in
future cases. If committees granted STN authority can so easily be brushed aside, future
creditors' committees will be discouraged from pursuing the investigation and prosecution of
meritorious claims. As those claims often include claims against pre-petition lenders that the
debtors have been forced to waive as a condition to obtaining DIP financing from those lenders,
the delicate balance now existing under the bankruptcy laws between the rights of pre-petition
secured creditors and unsecured creditors will be threatened.
As discussed in Part II of the Argument below, even if, arguendo, the Court concludes
that standing should be removed from the Committee and returned to the conflicted Debtors to
seek to settle the claims against the FPDs, the proposed $300 million settlement represents a
foregone upside potential of almost $3 billion from the full recovery to which the estates would
be entitled were they were to prevail, as the Committee believes would likely have occurred at
trial, on all contested issues. While the Debtors claim that the "unsecured creditors face the
substantial likelihood of no recovery whatsoever" (Debtors' Memorandum of Law in Support of
Settlement Motion ("Settlement Memorandum") at 5), the reality is that, after the Court has
canvassed the legal and factual record submitted in connection with the Phase I trial, it should be
evident that on each of the key legal issues cited by the Debtors and the FPDs (e.g., FPDs'
motion to dismiss under Section 546(e), collapsing, etc.) the Committee has demonstrated
compelling (if not conclusive) legal arguments. The Committee believes, based on the evidence
adduced, that it would prevail on the financial condition issues to be tried at the Phase I trial (and
would have secured a prompt Phase I-A victory as well), and that a full recovery would have
been obtained. But, even if one assumes, arguendo, that the Committee's likelihood of success
on such financial condition issues is no better than a "toss up," the proposed settlement remains
very far below the "lowest point in the range of reasonableness."
3
FACTS1
As the Court is aware, the Committee has had an opportunity to take only limited
discovery bearing on the Rule 9019 issues since late December 2009. 2 In an effort to provide
context for some of the factual record developed during such discovery, the Committee sets forth
below certain basic facts germane, inter alia, to (i) the Debtors' conflicts, (ii) the conflicts of
Cadwalader, Wickersham & Taft LLP ("CWT"), and several of the CWT attorneys leading the
engagement for the Debtors and deeply involved in "facilitating" the proposed settlement, which
purports to settle claims against significant CWT clients (such as Merrill Lynch) actively
represented by CWT and these very attorneys; (iii) conflicts of Stephen F. Cooper, a purportedly
independent Supervisory Board member on the Debtors' Litigation Committee; (iv) the collusive
discussions of the Debtors and CWT with certain of the FPDs leading up to the announcement of
the proposed settlement; (v) the Debtors' lack of awareness, understanding, or interest in the
status of the Committee's efforts to negotiate a settlement with certain of the FPDs at the time
the Debtors made their move to settle claims on December 3, including efforts initiated by
certain of the Bridge Lenders beginning on November 23, 2009 to reach a separate settlement
with the Committee, and (vi) the undisputed lack of any arm's length negotiation that occurred
on December 3 and early December 4, 2009, when the proposed settlement was reached.
1 The Committee sets forth herein facts pertinent to the Debtors' Settlement Motion, derived largely from discovery taken since the filing of Debtors' Settlement Motion. 2 For example, the Court did not permit the Committee to explore negotiations between the Senior and Bridge Lenders of their inter-creditor disputes, a subject of importance since, inter alia, it is undisputed that the Debtors made the resolution of such inter-creditor disputes an "express condition precedent" to his proposed settlement. (Ex. 1 - Golden Depo. Tr. at 136:14-19).
4
The Committee respectfully refers the Court to its Contentions of Fact in the Joint Pre-
Trial Order for a fulsome presentation of the relevant facts pertinent to the claims in the
Adversary Proceeding that the Debtors seek to settle.3
I. The Pre-Petition Lenders Gained Control Over Potential Claims Against Them Through the DIP Financing And The Debtors' Agreement To Waive Causes Of Action Against The FPDs.
By late December 2008, less than a year after LyondellBasell Industries AF S.C.A.
("LBI") had acquired Lyondell Chemical Company ("Lyondell") in a highly-leveraged
transaction (the "Transaction"), taking on over $20 billion of funded debt and radically
transforming the balance sheets of the two constituent legacy companies, the management of
LBI was forced to confront the reality that without an immediate infusion of cash from its sole
shareholder, Leonard Blavatnik (acting through Access), LBI would imminently default under its
credit facilities. With no such shareholder support being provided, management began its careful
planning for bankruptcy. Steps in preparation for a bankruptcy filing by LBI and certain of its
subsidiaries and affiliates (the "Debtors") included the selection of CWT as bankruptcy counsel
for all such Debtors.
Long before the Committee was appointed or even began its claims investigation under
Rule 2004, the Debtors and the FPDs were on notice of the existence of potential fraudulent
transfer claims assertable against the FPDs. Notably, the first day affidavit of the Debtors' then
chief financial officer, Alan S. Bigman, filed with the Court on January 6, 2009, lays out the
factual predicate for a "busted LBO" claim, acknowledging that the bankruptcy filing had been
3 The Debtors' characterization of the factual record in the Adversary Proceeding in its Settlement Memorandum misstates much of the factual record, as noted infra. In addition, the Court is respectfully referred to an Appendix to this Memorandum for a summary of the basic factual and legal errors in the FPDs' lengthy "Joinder" insofar as they misstate the underlying factual record developed in the Adversary Proceeding bearing on an evaluation of the likely outcome at the Phase I trial, and continue to misstate operative legal principles already addressed in the Committee's Pre-Trial Legal Brief.
5
preceded by months of attempted retrenchments and restructuring, attributing the cause of the
Debtors' bankruptcy filing to "a lack of liquidity" and acknowledging that the Debtors' "future
business prospects" and "access to additional capital" had been limited by the leverage taken on
through the LBO. (Ex. 2 - First Day Affidavit of Alan S. Bigman, dated January 6, 2009 at 16-
18). The Debtors, having literally run out of cash one year following the highly-leveraged
Transaction, put the FPDs and the company's insiders, who are represented by sophisticated
counsel, on clear notice of the existence of potential claims assertible against them for, inter
alia, the avoidance of their liens and the Debtors' LBO obligations to them.
By late December 2008, planning for bankruptcy was in full swing and LBI management,
represented by CWT, engaged in negotiations with its Senior Lenders 4 and Bridge Lenders,5
concerning a potential debtor-in-possession financing facility. These negotiations were still
ongoing after certain subsidiaries of LBI filed petitions for relief under Chapter 11 of title 11 of
the United States Code, et seq. (the "Bankruptcy Code") on January 6, 2009 (the "Petition
Date"). (Ex. 3 - Transcript of February 25-27, 2009 Hearing ("DIP Hearing Tr.") at 237:15-20).
The negotiations concluded with fourteen of the FPDs (collectively, the "DIP Lenders") agreeing
to provide debtor-in-possession financing (the "DIP Financing"). Court approval of the DIP
Financing was obtained on an interim basis pursuant to an interim order (the "Interim DIP
4 Established pursuant to that certain credit agreement (the "Senior Credit Agreement"), dated as of December 20, 2007, as amended and restated on April 30, 2008, among Citibank, N.A., as administrative agent, Citibank International plc, as European administrative agent, the lenders party thereto from time to time (the "Senior Lenders"), and Citigroup Global Markets Inc., Goldman Sachs Credit Partners L.P., Merrill Lynch, Pierce, Fenner & Smith Inc., ABN AMR() Inc., and UBS Securities LLC as joint lead arrangers, Lyondell, Basell Holdings B.V., Basell Finance Company B.V., and Basell Germany Holdings GmbH, as borrowers, and certain direct and indirect subsidiaries of the borrowers as guarantors.
5 Established pursuant to that certain bridge loan agreement (the "Bridge Loan Agreement"), dated as of December 20, 2007, as amended and restated on April 30, 2008, and as further amended and restated on October 17, 2008, among Merrill Lynch Capital Corporation, as administrative agent; Citibank, N.A., as collateral agent; the lenders party thereto from time to time (the "Bridge Lenders"); and Merrill Lynch, Pierce, Fenner & Smith Inc.; Goldman Sachs Credit Partners L.P.; Citigroup Global Markets Inc.; ABN AMRO Inc.; and UBS Securities LLC as joint lead arrangers, LyondellBasell Finance Company, as borrower; and the Subsidiary Guarantors that guaranteed the obligations under the Senior Credit Agreement, as guarantors.
6
Order") [Docket No. 79] on January 8, 2009. Following a lengthy final hearing on the proposed
DIP Financing (the "Final DIP Hearing") on February 25-27, 2009, during which the Committee
objected to the proposed DIP Financing, the Court entered a final order (the "Final DIP Order")
[Docket No. 1002], and the proposed agreements 6 were approved on March 1, 2009.
The negotiated financing arrangement conferred upon the DIP Lenders a range of means
to exercise near total influence over the management of these bankruptcy cases. Most
significantly, the truncated time frame imposed by the financing and the foreseeable likelihood
of requiring extensions of the DIP Financing maturity date provided the DIP Lenders significant
leverage over the Debtors. (Ex. 4 - DIP Term Loan Agreement at § 2.05 (providing for
December 15, 2009 maturity date); id. at § 6.18 (providing for December 1, 2009 plan
confirmation)). 7 Case milestones included in the DIP Financing required that the Debtors
present the DIP Lenders with a draft disclosure statement and plan of reorganization by August
15, 2009 and file a plan and disclosure statement by September 15, 2009. Id
The DIP Financing afforded the DIP Lenders explicit control over the Debtors through
certain financial performance and management covenants and restrictions. (Id. at § 6.19 (DIP
6 Collectively, (A) The debtor-in-possession credit agreement (the "DIP Term Loan Agreement"), dated as of March 3, 2009, as amended from time to time, among, LBI, as the company, Lyondell Chemical Company, Basell USA, Inc., Equistar Chemicals, LP, Houston Refining LP, Millennium Chemicals Inc., and Millennium Petrochemicals Inc., as borrowers, UBS AG, Stamford Branch, as administrative agent and collateral agent, the lenders party thereto from time to time, UBS Securities LLC, as lead arranger, and Citigroup Global Markets Inc., Goldman Sachs Credit Partners L.P., Merrill Lynch, Pierce, Fenner & Smith Inc., and ABN AMR() Inc., as arrangers, that provided $3.25 billion of new money term loans and $3.25 billion of roll-up term loans; and (B) the debtor-in-possession credit agreement, dated as of March 3, 2009, as amended from time to time, among, LBI, as the company, Lyondell, Basell USA, Inc., Equistar Chemicals, LP, Houston Refining LP, Millennium Chemicals Inc., and Millennium Petrochemicals Inc., as borrowers, Citibank, N.A., as administrative agent and collateral agent, the lenders party thereto from time to time, and Citigroup Global Markets Inc., Goldman Sachs Credit Partners L.P., Merrill Lynch, Pierce, Fenner & Smith Inc., ABN AMRO Inc., and UBS Securities LLC, as arrangers, that provided an inventory-based revolving credit facility of up to approximately $1.7 billion.
7 In mid-October 2009, the Debtors obtained a six-week extension of the maturity date of the DIP Financing. The maturity of the DIP Financing was further extended in mid-December 2009 from February 3, 2010 to April 6, 2010, and the Debtors obtained an option to further extend the maturity date to June 3, 2010 upon payment of an additional fee. Moreover, the Debtors received similar extensions to the case milestones, ultimately pushing the required date for approval of a disclosure statement to April 6, 2010 and for confirmation of a plan to May 20, 2010.
7
Lenders may assess any recommendations of the Restructuring Committee of the Debtors
concerning the results of the internal review and the ensuing actions of the Supervisory Board)).
Failure to reasonably satisfy the DIP Lenders in connection with (A) the recommendations made
to, or (B) the ensuing actions taken by, the Supervisory Board would result in an event of default
under the DIP Financing. (Id.).
Most pertinent to the current proceeding, the DIP Financing included the Debtors' waiver
and relinquishment of their rights to bring claims or causes of action challenging the validity or
enforceability of the obligations and liens in favor of the FPDs incurred in connection with the
financing for the failed LBO. (Ex. 5 - Interim DIP Order, at 4, 22; Ex. 6 - Final DIP Order, at
4, 24). The Final DIP Order, however, did allow any party-in-interest, including the
Committee, to assert claims against the FPDs ("Lender Claims") pursuant to a timely and
properly filed motion for standing to pursue such Lender Claims. (Ex. 6 - Final DIP Order, at ¶
24). Notably, however, the DIP Financing limited the Debtors' ability to reimburse the
Committee for any investigation and prosecution of the estates' claims against the FPDs to a
meager $250,000. (Id. at 23).
Finally, but perhaps most important to their efforts to insure that no claims would be
pursued effectively against the FPDs, the FPDs required the Debtors to make adequate protection
payments to the FPDs holding pre-petition first priority liens in an amount equal to post-petition
interest and fees. (Id. at 17(c)). This requirement not only insured that the lead representatives
of the FPDs defending against estate claims would be reimbursed for their fees, but the cash flow
burden of these payments caused the Debtors to urge the Court to require that the litigation of
such claims, at least with respect to Phase I issues, be expedited given what the Debtors
represented was the crushing economic burden of these payments. (Ex. 7 - Transcript of July 21,
8
2009 Hearing ("STN Hearing Tr.") at 41:3-6 at which Deryck Palmer stated that "time is of the
essence for us, because it's costing us $3 million a day, that is the driving factor in deciding what
the debtor thinks is in the best interest of this estate.")
On July 21, 2009, the Court conferred standing on the Committee to pursue Lender
Claims as well as claims against the Access Defendants and the Director and Officer Defendants.
Committee counsel thereafter commenced the prosecution of those claims in the UCC Litigation.
Then, on December 4, 2009, on the eve of the December 10, 2009 Phase I trial of the UCC
Litigation, without prior notice to or consultation with the Committee, whose professionals had
worked non-stop (and largely uncompensated as a result of the Final DIP Order) since July 21,
2009 preparing for such trial as a result of court deadlines largely dictated by the pressure of
Debtors' counsel (CWT) for an early December 2009 trial and assurance by Debtors' counsel
(CWT) that the outcome of the Phase I trial would surely facilitate a resolution or disposition of
the Committee's fraudulent transfer claims, the Debtors sought to block the Phase I trial by
cutting a sweetheart deal with the FPDs. The Debtors announced that through the auspices of its
purported Litigation Committee (which had been formed in late June 2009 after the filing of the
Committee's STN motion), acting under the advice of CWT as Litigation Committee counsel,
that they had reached a settlement with the defendants against whom Lender Claims had been
asserted (the "Proposed Settlement") and would be proposing such settlement for Court approval
pursuant to Rule 9019. Set forth below are basic facts relating to the conflicts, inter alia, of both
CWT as Litigation Committee counsel and of Cooper, the dominant member of the Litigation
Committee, that should preclude this Court from even considering the approval of the Proposed
Settlement.
9
II. The Debtors Were Never Capable of Independently Assessing Estate Claims Against the FPDs and Other Defendants.
Even if the Debtors had been inclined to assert Lender Claims and had not been
contractually disabled from suing certain of the FPDs, its chosen reorganization counsel, CWT,
admittedly could never have represented the Debtors in litigation against the FPDs challenging
their obligations and liens. This is because CWT has maintained significant financial and
professional relationships with many of the FPDs including, without limitation, three of the five
lead arrangers: UBS, Merrill Lynch, and Goldman Sachs. (Ex. 8 - Affidavit of Deryck A.
Palmer in support of Application for Retention of CWT ("Palmer Decl.") at ¶ 13 [Docket No.
620]); Ex. 9 - Davis Depo. Tr. at 86:11-22 (Davis agreed that CWT would not have brought the
UCC Litigation against Merrill Lynch and Goldman Sachs)). Indeed, CWT's application for
approval for retention in these chapter 11 cases implicitly acknowledges this conflict by stating
that CWT's relationships with such parties preclude CWT from representing the Debtors in any
"bankruptcy-related litigation against" UBS, Merrill Lynch, and Goldman Sachs. (Ex. 8 -
Palmer Decl. at ¶ 13).8
The deadlines set out in the Final DIP Order for the assertion of Lender Claims put the
Committee in the unenviable position of having to investigate and file a proposed Complaint in
one of the largest failed LBOs in history in a matter of months, and subject to the grossly
8 Notwithstanding the fact that these three FPDs are substantial and current CWT clients and CWT cannot sue then, Palmer indicated in his Declaration, submitted prior to late February 2009 (prior to the Rule 2004 investigation) that he did not believe that "negotiating with [UBS and Merrill Lynch]" -- as opposed to Goldman Sachs -- presented a conflict. (Id.). In Schedule 2 of Palmer's Declaration, he noted further that his firm currently represented virtually every other institution that, it turns out, has been named as a defendant in the Adversary Proceeding among the FPDs, including Citibank and ABN Amro. Due to the volume of work CWT does for Merrill Lynch and UBS, according to Palmer, each represented during any of the prior three years 1.14% to 5.90% of CWT's annual gross revenues. According to recent published reports, CWT's 2009 gross revenue were $456.5 million (slightly down from 2008); thus, fees received by these two CWT clients alone during each of the proceeding years constituted many millions of dollars of revenue to CWT. (Ex. 10 — The Am Law Daily, Jan. 21, 2010 ("Cadwalader Posts Higher Profits, Lower Revenue")). While UBS's counsel may contend that UBS AG was not an initial named defendant in the Adversary Proceeding, (but instead one of its affiliates was), that is a meaningless distinction. UBS AG is a member of the Ad Hoc Group, and is an intervening defendant in the Adversary Proceeding.
-10-
inadequate cap of $250,000 imposed by the Final DIP Order. 9 During the period from April to
early June 2009, the Committee diligently conducted a Rule 2004 investigation of all Lender
Claims and other potential claims and causes of action arising out of the 2007 LBO and related
transactions. 10 During April and May 2009, the Committee secured production of and reviewed
over one million pages of documents and took the depositions of multiple witnesses, to fully
investigate, during this limited period, potential estate claims. CWT, in its role as counsel to the
Debtors, defended the depositions of Alan Bigman, at the time still the Debtors' chief fmancial
officer, and of Volker Trautz, the-then chief executive of LBI. The Committee's work was made
more difficult by CWT's hostility to the objectives of the Committee, which was apparent from
the conduct of its attorneys at depositions, who huddled with defendants' counsel during breaks
and offered defendants' witnesses softball questions at the conclusion of the Committee's
questioning. At the deposition of Bigman, vigorous speaking objections were made by Joshua
Weiss of CWT to questions by Committee counsel and Bigman was instructed by Weiss not to
answer questions regarding his equity interests in a Blavatnik controlled company, by which he
had been employed prior to his becoming an officer of the Debtors. (Ex. 11 — Bigman Depo. Tr.
at 24:4-21, 26:6-22, 27:12-19). Acting on the instruction of Weiss, Bigman refused to answer
the question. (Id. at 27:16-19).
In mid-May 2009, as the Committee was concluding Rule 2004 discovery, Weiss
informed Michael Simes, counsel to Merrill Lynch, that CWT was analyzing the same potential
claims that the Committee was investigating to determine if such claims had merit" and
9 The parties subsequently agreed, due to delay in production of documents and corresponding delay in completing depositions, to extend the deadline for filing of a proposed Complaint by the Committee to June 15, 2009.
10 The Committee's motion for authority to conduct Rule 2004 examinations was approved by order of this Court dated April 3, 2009. [Docket No. 1394].
11 Given its contractual prohibitions on pursuing these claims, it remains unclear why the Debtors were expending substantial estate resources "investigating" these claims and why the $250,000 cap on expenses the estate's
privately assured Simes that "there wasn't anything to" the Committee's anticipated claims. (Ex.
12 - Simes Depo. Tr. at 198:22-23; 199:17-23). 12 As discussed below, Weiss, one of the primary
CWT attorneys "monitoring" and assessing the Committee's litigation, thereafter would actively
attempt to undermine the Committee's presentation of its claims, providing covert -- and
regrettably overt -- assistance to the FPDs in their defense on numerous occasions.
In early June 2009, prior to the deadline under the Final DIP Order to assert claims
against the FPDs relating to the failed LBO and in an effort to gain the Debtors' consent for the
Committee to commence the UCC Litigation, the Committee provided CWT and Cooper, the
Vice-Chairman of the Supervisory Board of LBI as well as chairman of the Restructuring
Committee of the Supervisory Board with a redacted copy of a draft complaint. (Ex. 13 — LBI
Restructuring Committee Meeting Minutes, dated June 12, 2009). On or about June 11, 2009,
Committee counsel and CWT (including CWT attorneys Howard Hawkins, the senior CWT
litigator on this matter, and Weiss) engaged in a discussion of the draft complaint, during which
Hawkins and Weiss expressed CWT's already firmly fixed and dismissive view regarding the
merits of the Lender Claims, including relevant legal issues and contested issues of fact
involving the management projections that were a predicate of the 2007 LBO.
The very next day, LBI' s Restructuring Committee was informed by Cooper
representatives could expend on such investigation was never applied against the Debtors. Presumably, the FPDs had no problem with the Debtors, through CWT, conducting a shadow investigation, given that CWT had signaled to the FPDs the outcome of CWT's purported analysis.
12 The Debtors' representation that they had not communicated their views on the Committee's claims to any of the FPDs (Ex. 9 - Davis Depo. Tr. at 176:11-18), based on Simes testimony alone, is false. Similarly disingenuous is Mr. Cooper's statement in his December 23, 2009 Declaration, submitted in support of the Settlement Motion (the "Cooper Decl.") that prior to making a settlement proposed on December 3, neither Cooper nor any other members of Debtors' Litigation Committee "had any discussions with any Financing Party Defendant or its counsel...regarding our assessment of the case...." (Ex. 14 - Cooper Decl. at 4). CWT had already had such communications.
(Ex. 13 — LBI Restructuring Committee Meeting Minutes, dated June 12,
2009).
(Id.).
however, the Debtors rejected the Committee's request for consent to assert claims on behalf of
the estates. (Id.).
On June 15, 2009, the Committee filed a motion (the "STN Motion") [Docket No. 2018]
seeking Court authority to pursue claims on behalf of the Debtors' estates against the FPDs, as
well as present and former officers of the Debtors and Blavatnik-owned affiliates of the Debtors
on behalf of the Debtors' estates as set forth in the draft complaint attached to the STN Motion
(the "Complaint").
(Ex. 15 — LBI Restructuring Committee
Meeting Minutes, dated June 17, 2009). On June 24, 2009, the Supervisory Board formed a
special Litigation Committee consisting of Cooper, James L. Gallogly, and Kevin McShea,
(Ex. 16 — Meeting Minutes of Joint Meeting of LBI Supervisory Board and
Board of Managers, dated June 24, 2009).13
A. CWT Was Prohibited From Being Adverse to Certain FPDs.
13 In issuing his report, dated November 30, 2009, the Examiner was operating under the mistaken impression that as of that date, the Litigation Committee had "newly retained . . . legal counsel" in connection with the UCC Litigation. (Examiner's Report [Docket No. 3469] at 11). As discussed herein, the Litigation Committee has always been represented solely by CWT. At no time, to the Committee's understanding, has CWT corrected this error, although obligated to do so.
- 13 -
Since the formation of the Litigation Committee, CWT, which is under a clear ethical
prohibition from being adverse to several key FPD defendants named in the UCC Complaint, has
served as its sole legal counsel with respect to the Litigation Committee's direction of "the
estate's response and strategy with respect to the [STN] motion and litigation." (Ex. 15 - LBI
Restructuring Committee Meeting Minutes, dated June 17, 2009; Ex. 9 - Davis Depo. Tr. at
29:21-30:5; 36:13-37:6 (emphasis added); Ex. 17 - January Cooper Depo. Tr. at 32:17-24; 34:13-
17; 38:4-7). Notwithstanding the importance that the Litigation Committee be independent, at a
minimum, both Cooper and CWT both had substantial relationships with the FPDs. Cooper's
relationships were neither disclosed to the Court, the Committee, nor it appears even to the
Litigation Committee itself CWT's client relationships were initially disclosed to the Court but
then CWT proceeded to do what those relationships precluded: namely, act on behalf of the
Debtors in connection with the disposition of critical estate litigation against significant CWT
clients.
The conflict between the estates' interests and those of CWT clients Merrill Lynch,
Goldman Sachs, and UBS became acute once the Committee determined to pursue claims
against them. CWT should have turned over issues relating to the UCC Litigation to conflicts
counsel.
As discussed below, Hawkins and other key CWT lawyers representing the Debtors here,
including George Davis, were actively representing a Merrill Lynch entity in other significant
bankruptcy matters at the same time, and it appears, Davis (and possibly other CWT attorneys on
this matter) had regular contacts with the same Merrill Lynch in-house officer who actively
supervised the defense of the claims against Merrill Lynch in the UCC Litigation.14
14 Although the Debtors had retained the law firm of Susman Godfrey LLP ("Susman Godfrey") as conflicts counsel by February 2009 to handle matters when CWT had an actual or potential conflict, for reasons that remain
- 14 -
In the Debtors' application for the retention of Sussman Godfrey in April 2009, the
Debtors indicated that Susman Godfrey would represent the Debtors where CWT had actual or
potential conflicts of interest. (Susman Godfrey LLP Retention Application at ¶ 4 (noting that
Sussman Godfrey "will handle matters that the Debtors may encounter for which CWT cannot
represent them due to a potential conflict of interest ....") [Docket No. 1375]). Yet, despite
CWT's conflict of interest in connection with the UCC Litigation, the Litigation Committee
never used conflicts counsel (or any other outside law firm) to advise it regarding the UCC
Litigation as it pertained to the investigation, prosecution, or settlement of claims against the
FPDs. (Ex. 9 - Davis Depo. Tr. at 26:13-37:6). CWT, moreover, according to Cooper, did not
bring these conflicts to the Litigation Committee's attention nor, according to credible evidence,
did the Litigation Committee actually review possible conflicts of interest. (Ex. 17 - January
Cooper Depo. Tr. at 73:14-74:19; 76:19-77:8, 79:9-15); Ex. 9 - Davis Depo. Tr. at 228:18-
231:15). Davis stated that CWT considered the potential conflicts when the Litigation
Committee was formed, but was "not even remotely" concerned about them, and accordingly,
the CWT attorneys involved in the bankruptcy proceeding rejected them. (Id. at 75:18; 81:9-
22). 15 When pressed as to whether he obtained the consent of the Litigation Committee, he said
that he believed he may have been asked by Gallogly if CWT would be able to represent the
Litigation Committee, conceding that the Litigation Committee may not have been told about the
client conflicts of CWT. (Id. at 231:3-15). When further pressed, he conceded that he did not
even know if Gallogly was aware that CWT represented various of the FPDs. (Id at 233:18-24).
unclear to this day, the Debtors at no time explored bringing in Susman Godfrey as conflicts counsel with respect to any claims being considered or asserted against significant CWT clients such as Merrill Lynch, Goldman Sachs, or UB S.
15 Davis, who was deposed after Cooper, and was aware of Cooper's testimony, claimed that another Litigation Committee member, Gallogly, had asked Davis if CWT was able to handle the representation of the Litigation Committee. (Ex. 9 — Davis Depo. Tr. at 230:3-231:15).
- 15 -
For his part, Cooper testified not recalling CWT even reviewing its conflicts situation with the
Litigation Committee. (Ex. 17 - Cooper Depo. Tr. at 74:12-19; 79:9-15).16
The absence of CWT's use of Susman Godfrey in connection with the UCC Litigation is
in stark contrast to its role in the representation of the Debtors at the February 6, 2009 hearing on
the Debtors' Section 105 Motion [Docket No. 648] and representation of the Debtors in an
adversary proceeding [Adv. Pro. 09-01459] against Wilmington Trust Company, as trustee of
notes issued under the 2015 Notes Indenture. 17 (Ex. 9 - Davis Depo. Tr. at 32:6-24).
B. Key Members of CWT's Litigation Team Presently Represent Merrill Lynch in Other Significant Matters.
Merrill Lynch has significant, multi-billion dollar exposure in the UCC Litigation. It
defies all notions of fundamental fairness that the Debtors relied on CWT's advice with regard to
estate claims against one of CWT's most significant clients. Remarkably, not only has CWT
failed to turn over its role in advising the Litigation Committee with regard to the merit of claims
against Merrill Lynch to conflicts counsel, but CWT apparently failed to implement any
mechanisms to attempt to ameliorate the conflict or even reduce the appearance of impropriety,
such as the use of an ethical wall. Instead, key lawyers on the CWT team in this case, including
those actively involved in purporting to assist the Litigation Committee in a "disinterested"
assessment of the UCC Litigation, and in prosecuting the Settlement Motion, have actively
16 According to Cooper, he thought that Brown Rudnick, counsel to the Committee, was Debtors' "conflict counsel" with respect to the UCC Litigation. (Ex. 17 - January Cooper Depo. Tr. at 306:17-25 to 307:1-4).
17 The Indenture, dated as of August 10, 2005, among LyondellBasell Industries AF S.C.A. (formerly Nell AF S.a.r.1.), as the Company, the guarantor parties thereto, The Bank of New York Mellon Trust Company, N.A., as indenture trustee, Registrar, Paying Agent, Transfer Agent and Listing Agent; ABN Amro Bank N.V., as Security Agent; and AIB/BNY Fund Management, as Irish Paying Agent; pursuant to which the 2015 Notes were issued, and all of the ancillary documents and Instruments relating thereto, as amended, supplemented, modified or restated as of the Petition Date.
-16-
represented Merrill Lynch's interest in recent material litigation. I8 Two prominent recent
examples of this are the bankruptcy cases of In re Fred Leighton Holding Inc., et al., Case No.
08-11363 (Bankr. S.D.N.Y.) (RDD), and In re UTGR, Inc. d/b/a Twin River, et al., Case No. 09-
12418 (Bankr. D.R.I.), where CWT represents Merrill Lynch Capital Corp. CWT attorneys
George Davis (one of the lead CWT bankruptcy attorneys in this case) and Howard Hawkins (the
senior CWT litigator in this case) who, at all relevant times, have advised the Litigation
Committee concerning the UCC Litigation and its proposed settlement have also been actively
representing Merrill Lynch in these two other cases. (Ex. 9 - Davis Depo. Tr. at 48:19-49:8). In
a pro hac vice motion filed on behalf of Davis in the UTGR, Inc. matter [UTGR Docket No. 20]
(where Davis sought to represent Merrill Lynch Capital Corp., as first lien agent under a $435
million credit facility) on June 23, 2009 (shortly after the Committee filed its STN motion), it
was represented that CWT had a "longstanding representation of the client [i.e., Merrill Lynch
Capital Corp.] and its affiliates since at least 1973," and had been advising Merrill Lynch on this
matter since 2008. (Ex. 18 - Davis Pro Hac Vice Application). In the Fred Leighton bankruptcy
case (pending in this District), where Merrill Lynch Mortgage Capital Inc. is the sole lender
under two secured credit facilities with total outstanding debt as of the petition date of $185
million (Ex. 19 - Interim Cash Collateral Order, Fred Leighton [Docket No. 24]), Hawkins as
recently as November 6, 2009 (just prior to CWT's series of meetings with the Litigation
Committee in late November 2009 to purportedly review the merits of the Committee's claims
against the FPDs, including Merrill Lynch), filed reply papers on behalf of Merrill Lynch
advancing Merrill Lynch's arguments in support of plan confirmation and, quite remarkably,
18 The Committee has only been accorded limited discovery on this issue, and uncovered much of such information based on its own investigation of public court records. It remains to be determined whether the conflicts of CWT attorneys actively handling matters concerning the Adversary Proceeding are even more extensive than the known disabling conflicts of the lead CWT attorneys, such as Davis and Hawkins.
- 17 -
equitable subordination. (Ex. 20 — Fred Leighton [Docket No. 766]). Hawkins, it appears had
been defending Merrill Lynch against claims that it engaged in misconduct or had acted
inequitably. (/d.).19
For his part, Davis states in his CWT biography that he "is currently or has recently
played a leading role" on behalf of (i) Merrill Lynch, (ii) Citigroup, and (iii) Goldman Sachs.
(Ex. 21 - Davis CWT Biography). At his deposition, Davis tried to play down the significance of
his personal role in several of these engagements, but conceded that he has represented Merrill
Lynch on a number of occasions, including throughout the period of his representation of the
Debtors.
While the foregoing is more than sufficient grounds for precluding CWT from playing
any role in connection with the Committee's claims against Merrill Lynch, Goldman or UBS, the
story gets worse. Compounding CWT's conflicts, Stephen Quine, who is CWT's contact at
Merrill Lynch concerning the Fred Leighton matter is also involved in overseeing Merrill
Lynch's interests in the Lyondell bankruptcy. 20 (Ex. 9 - Davis Depo. Tr. at 61:25-62:5; 68:21-
70:13; 73:9-12). Quine, a Merrill Lynch Director, was personally in attendance at the December
3, 2009 mediation session where the proposed settlement agreement was reached and was the
sole Merrill Lynch contact Simes spoke to in preparation for his deposition, when Simes
appeared on behalf of Merrill Lynch as its Rule 30(b)(6) witness. (Ex. 12 - Simes Depo. Tr. at
19 Other lead CWT attorneys in this matter actively involved in assessing the Committee's claims and advising the Litigation Committee also have a history of representing various of the FPDs. For example, Israel Dahan of CWT, a lead CWT litigation partner in this matter, represented over a period of several years, inter alia, Merrill Lynch, Citibank and Goldman Sachs in the defense of a securities class action, In re Williams Securities Litig., Case No. 02-CV-72 (H) (10th Cir.), a representation which Dahan prominently features on CWT's website. (Ex. 22 — Dahan CWT Biography).
20 At his deposition, where Davis appeared as CWT's Rule 30(b)(6) designee, he was represented by Hawkins. Given Hawkins' active involvement in the Fred Leighton matter, it stands to reason that Hawkins as well likely has had recent communication with Quine in his capacity representing Quine and Merrill Lynch, but since Hawkins was not testifying, the Committee did not have an opportunity to develop the record in that regard. It also should be noted that Mayer Brown LLP, counsel to Merrill Lynch, sends invoices for payment of its fees for the Lyondell bankruptcy to Quine. (Ex. 23 - Mayer Brown LLP Invoice, dated January 13, 2010).
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13:9-14:10). Moreover, Davis testified that he had numerous meetings with, among others,
Quine, in connection with Lyondell. (Ex. 9 - Davis Depo. Tr. at 73:19-74:2). Thus, as CWT
advised the Debtors in "negotiating" the Proposed Settlement, they did so, in effect, looking
across the table from their own client with whom they had substantial dealings and against whom
they could not pursue litigation.
CWT's rejoinder to its blatant disregard of its ethical duties is the contention that, if it
could not be adverse to current significant clients in its representation of a large debtor, "no firm
in this country could represent Debtors like Lyondell." (Ex. 9 - Davis Depo. Tr. at 76:6-12). Of
course, the defense that "everyone does it" is not available. 21 While it may well be the case that
CWT was able to represent the Debtors as reorganization counsel and to negotiate across the
table from its clients in limited non-litigation business contexts, this does not mean that it could
represent the estates' interests in or concerning an action brought on behalf of the estates to the
extent they were in direct conflict with those of its clients — as they clearly are in the context of
the UCC Litigation. Under such circumstances, CWT was required to use conflicts counsel or
perhaps, with appropriate court approval (after a hearing on notice to the Committee) could have
implemented an ethical wal1. 22 What it was not entitled to do, was to have the very attorneys
who represent the Debtors negotiate against current CWT clients to arrive at the Proposed
21 It is anticipated that Debtors or CWT also will argue that the Committee did not challenge CWT's involvement after the filing of Palmer's retention application. However, it should be underscored that neither Davis nor Hawkins ever disclosed to the Committee or to the Court their active work for a Merrill Lynch entity while simultaneously purportedly evaluating claims asserted here against Merrill Lynch, and trying to settle them for no payment by Merrill Lynch, nor that Davis at least had regular communications with the Merrill Lynch director on Debtor matters who served as his client contact when Davis was wearing his hat as bankruptcy counsel to Merrill Lynch. Moreover, until December 4, the Committee was unaware of the role CWT had played with the Litigation Committee, and the Examiner's report inaccurately indicated that Litigation Committee had retained its own independent counsel. It remains to be determined who misled or confused the Examiner on this issue.
22 In fact, CWT is familiar with the concept of an ethical wall, as it utilized one in its representation of the debtors in In re Saint Vincents Catholic Medical Centers of New York, Case No. 05-14945 (Bankr S D N Y) (CGM), to "wall[ ]-off" "attorneys at CWT who represent the Debtors in these cases" from CWT attorneys who were handling matters that posed conflicts. (Ex. 24 - Retention Application dated April 19, 2007 [Saint Vincents' Docket No. 3030]). CWT also recently employed similar measures in the Twin Rivers Casino bankruptcy matter. (Ex. 25 - Supp. Disclosure of Merrill Lynch Capital Corp. [UTGR Docket No. 309]).
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Settlement, which, as it turned out, was a sweet-heart deal for the FPDs, and particularly so for
CWT clients Merrill Lynch, Goldman and UBS as out-of-the-money Bridge Lenders.
C. Cooper Was Conflicted
While the Litigation Committee was purportedly comprised of three members, Cooper,
Gallogly, and McShea (Ex. 16 — Minutes of Joint Meeting of LBI Supervisory Board and Board
of Managers, dated June 24, 2009), as explained by the Examiner appointed in these
proceedings:
[I]n this very large complex business reorganization under Chapter 11, there is a Supervisory Board of one board member (Cooper) and only one board member (Cooper) who has the fiduciary duty to resolve the fundamental tension between what is in the best interests of the reorganized debtors (represented by an expedited exit from Chapter 11 to preserve value, jobs, etc.) and what may be in the best interest of the estate (represented by which constituency will own the value of the reorganized debtor).
(Examiner's Report [Docket No. 3469] at 51).
Even if CWT had been ethically able to counsel the Litigation Committee of the Debtors
with regard to a settlement of the claims against the FPDs in the UCC Litigation, Cooper, a
purported disinterested Supervisory Board member on the Litigation Committee was also
disabled by actual or potential conflicts of interest. Cooper is not, as his affidavit dated March 6,
2009 purports, "independent." (Ex. 27 - Affidavit of Stephen F. Cooper dated March 6, 2009
("Cooper Retention Aff.") at 2). Cooper, who is paid $150,000 per month by the Debtors and
stands to receive a multi-million dollar bonus upon an early exit from bankruptcy, did not even
seek or receive Court approval for any of the positions he has held with Debtors. 23 At his
deposition in January 2010, Cooper disclosed, for the first time, that he had material business
23 While Debtors will surely contend that at the time of Cooper's appointment to the Supervisory Board of LBI, LBI was not in bankruptcy and therefore there was no legal requirement for him to make such disclosure, the key role he has played since LBI filed for bankruptcy suggests that Cooper should have sought Court approval after LBI's filing, or at a minimum, been more forthright about his conflicts to the Court.
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relationships with at least four of the Bridge Lenders: Goldman Sachs (where 40% of his assets
are invested),24 UBS (where he also has assets invested), Merrill Lynch (his private banker for
his personal and business accounts), and Citibank (which had invested in one of his funds,
Catalyst, for approximately 10 years prior to 2007 and with whom he maintains a business
relationship). Cooper admitted that Goldman Sachs has been his personal investment advisor for
the past ten years, typically meeting with Goldman Sachs financial advisors at Cooper's office,
and that he spoke to them as recently as December 2009. (January Cooper Depo. Tr. at 42:14-
23, 44:19-25 to 45:1-18, 46:4-13, 46:21-25, 47:1-25, 48:1-2, 48:14-16 and 21-24).25
Unfortunately, Cooper did not disclose to the Litigation Committee his relationships with the
FPDs even after they became defendants in the UCC Litigation. (Ex. 17 - January Cooper Depo.
Tr. at 70:11-71:11). In July 2009, prior to the Court's approval of the Committee's STN motion,
the Litigation Committee members, according to Litigation Committee minutes, each apparently
certified that they had no prior business relationship with Blavatnik or Access sufficient to put in
question their ability to provide independent and non-conflicted advice concerning the proposed
Complaint sought to be filed by the Committee, but were silent on any conflicts with respect to
other proposed defendants.26
24 Although the Committee is unaware of how much Cooper has invested specifically with Goldman Sachs and Merrill Lynch, Cooper did testify that he has "a lot of money" and "a lot of toys." (Ex. 17 - January Cooper Dep. Tr. at 183:7-8).
25 Cooper in the past has touted his business relationship with all five of the Bridge Lenders. In his August 2007 Affidavit seeking approval of the retention of Kroll Zolfo Cooper LLC in the American Home Mortgage Holdings, Inc. bankruptcy proceeding (where, according to paragraph 6 of his December 23, 2009 Declaration, he "recently served as ... Chief Restructuring Officer"), he indicated (under other "client engagements") that he would be pleased to provide references from, inter alia, ABN AMRO, Citibank, Goldman Sachs, Merrill Lynch and UBS. (Ex. 62 -Cooper Dep., Exh. 3).
26 It appears that McShea's firm, Alix Partners, according to its retention application in this bankruptcy proceeding, currently works for all of the Bridge Lenders and several of the other defendants. Application for Order Authorizing the Debtors to Employ and Retain AP Services, LLC and Designate Kevin McShea as Chief Restructuring Officer of the Debtors [Docket No. 813]. It appears that Gallogly may have had prior business relationships with one or more of the director or officer defendants, although perhaps not with any of the FPDs.
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Cooper's failures to disclose conflicting interests are not surprising given similar prior
conduct. In several previous bankruptcy cases in which Cooper was involved, see, e.g., In re
Enron Corp. (Case No. 01-16034) (Bankr. S.D.N.Y.), In re Malden Mills Industries Inc. (Case
No. 01-47214) (Bankr. D. Mass. 2001), and In re CF Holding Corp. (Case Nos. 2-92-01038 and
2-92-01039) (Bankr. D. Conn. 1992), Cooper's relationships with creditors (including some of
the FPDs) were determined to be problematic. For example, in Enron, Cooper's relationships
with certain lenders caused the implementation of restrictions on Cooper's ability to negotiate
with those lenders during that case. (Ex. 17 - January Cooper Depo. Tr. at 32:21-33:4).
Interestingly, when Cooper's retention was revised to allow him to negotiate with those lenders,
his actions required the oversight and approval of a joint task force, which included the official
committee of unsecured creditors. (Ex. 26 - In re Enron Corp., Case No. 01-16034, Docket No.
10942). In In re CF Holding Corp., Cooper was sanctioned (via disallowance of part of his fee
application) for failing to make timely and proper disclosure of an investment in the approximate
amount of $2 million in a potential acquirer of the estate, thereby rendering his personal business
interests adverse to the debtor estate (where he was retained as financial advisor and bankruptcy
consultant). See In re CF Holding Corp., 164 B.R. 799, 806-807 (Bankr. D. Conn. 1994).
In this case, Cooper has testified that he is entitled to receive a success fee that is at the
sole discretion of the Supervisory Board. Although Cooper testified that the possibility of a
success fee at the end of the case did not influence his decisions with respect to the UCC
Litigation (Ex. 27 - Cooper Retention Aff., at ¶ 4; Ex. 17 - January Cooper Depo. Tr. at 182:3-
184:2), the magnitude of his bonus in Enron ($12.5 million) 27 and Cooper's own linkage of
settlement to a successful reorganization suggest a personal financial interest in settling the
27 In Enron, Cooper originally sought a $25 million bonus, but agreed to cut his request in half after the U.S. Trustee raised questions concerning Cooper's billing practices. (Ex. 28 - In re Enron Corp., Case No. 01-16034, Docket No. 29183).
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Committee's claims against the FPDs. As in In re CF Holding Corp., where the Court rejected
Cooper's contention that his personal investment would not impact his judgment on behalf of the
Debtors, so too here any assurance by Cooper that he is so wealthy and has too many "toys" to
be concerned about his likely success fee here should be rejected by the Court. (Ex. 17 - January
Cooper Depo. Tr. at 183:8).
Although being paid $150,000 per month, Cooper since August 2009 has also been
actively engaged as a member of the office of the CEO for MGM, which has occupied a
substantial amount of his time, requiring him to devote time to matters other than Debtors. As he
acknowledges in his December 23, 2009 Declaration, he has relied extensively on CWT. (Ex. 14
— Cooper Decl. at ¶ 18) ("Attorneys from [CWT] attended every meeting of the Litigation
Committee, either in person or by phone."). At four of these meetings, just prior to the
December 3, 2009 mediation, CWT attorneys made presentations to the Litigation Committee,
and it was CWT that provided the Litigation Committee, including Cooper, with an analysis of
the likely outcomes on the core legal issues. Indeed, the Committee is prepared to demonstrate
at the Rule 9019 hearing, if permitted to do so in accordance with the Court's prior rulings on
December 11 as to the proper use of the consultants retained by the Litigation Committee or
CWT, that CWT was the source of a series of obvious legal errors in the "decision-tree" that was
used by Cooper to concoct a supposed mathematical range of potential recoveries by the
Committee against the FPDs. 28 Cooper acknowledged that it was the CWT attorneys, including
28 The Committee will await the Debtors' response to the points made in Point II of the Argument, infra, before pressing further on this issue. It is the Committee's position, as the Committee will set forth at the hearing scheduled to begin on February 11, if necessary, that CWT made several basic legal errors in instructing the "decision-tree" "consultant," which in turn infected Cooper's selection of his proposed range of recoveries (he testified his settlement range was $200 to $400 million). For his part, Davis conceded that CWT provided Cooper with legal guidance on the various motions and legal issues in the case identified in paragraph 20 of Cooper's December 23 Declaration. (Ex. 9 — Davis Depo. Tr. at 95:8-25; 96:1-25; 97:1-12).
While Davis acknowledges that Section 548 of the Bankruptcy Code provides as a remedy the avoidance of obligations, (Ex. 9 — Davis Depo. Tr. at 97:9-12), the Committee believes and will demonstrate, if necessary, that
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Davis, Hawkins and Dahan, who provided the "probabilities" in the "decision tree" to Cooper.
(Ex. 17- January Cooper Depo. Tr. at 312:3-12). Thus, this case presents conflicts within
conflicts: a conflicted CWT guided a conflicted Cooper, who appears to have dominated the
Litigation Committee and was the sole Litigation Committee member present on December 3
when the Debtors settled with the FPDs.29
The existing and material conflicts that impair both CWT and Cooper taint their current
purported representation of the estates in settling litigation against various of the proposed
settling defendants. Such taint, as discussed below, infected the entire process, which resulted in
the Proposed Settlement.
II. The Debtors Propose a Bifurcated Trial Ostensibly to Promote Settlement
At a hearing held on July 21, 2009 to consider the STN Motion (the "STN Hearing"), the
Debtors interposed a response to the STN Motion [Docket No. 2185] and requested the
bifurcation of litigation of the Lenders Claims to determine, on an expedited basis, the so-called
"Financial Condition" issue. (Id. at ¶ 10-13, 18). This request was intended to allow the Debtors
to avoid interference with "the Debtors' ability to propose and pursue a plan of reorganization
and to meet the various milestone covenants set forth in the [DIP Financing] ." (Id at ¶ 1 0). The
Debtors requested a "strong schedule, case management order that provides — that allows [the
Debtors] to not be impaired in [their] emergence from chapter 11" and allows the Debtors to
report to prospective investors 30 that the Debtors "have come up with a mechanism so that the
Cooper's mistaken personal view that this Court would not grant such relief in this case of avoiding obligations if the Committee prevailed at trial was influenced by other CWT "advice" and also improperly influenced Cooper's decision-making. (Id. at 143:6-25).
29 While Debtors may claim that Cooper "consulted" with other Litigation Committee members on December 3, the record indicates that it was CWT and Cooper (relying largely on CWT) that pushed Debtors to the low-ball settlement.
30 The Debtors recognized that the "targets of the fraudulent transfer claims are the most probable sources of the exit fmancing and capitalization that the Debtors will need to emerge as a viable entity." [Docket No. 2185 at ¶ 19].
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[UCC Litigation] does not impede" emergence from chapter 11. (Ex. 7 - STN Hearing Tr. at
46:21-23; 47:7-9). The Debtors, with the approval of their Litigation Committee, also claimed
that Committee success on the "Financial Condition" issue "would almost surely lead to prompt
settlement." (Debtors' Sur-Reply to STN Motion at ¶ 18 [Docket 2276]); Ex. 7 - STN Hearing
Tr. at 49:19-50:12).31
The Debtors at the STN Hearing withdrew their request that the Court determine their
right to settle the UCC Litigation. (Ex. 7 - STN Hearing Tr. at 35:8-36:1) (Palmer stating that the
Debtors reserved the issue of the right to settle the UCC Litigation for another day and
referencing the Debtors' Sur-Reply to STN Motion at 20, n.8). The Debtors reached this
tactical decision after conferring with counsel to Citibank who expressed the fear that he was
"VERY afraid you lose if you push [for the reservation of the right to settle]." (Ex. 29 — 7/14/09
email from Huebner to Davis). Nonetheless, the Debtors concluded that they would seek to
exploit their claimed right to settle by waiting to join the issue when the Debtors' "leverage
[was] greatest." (Id.). At the hearing, Palmer reassured the parties on timing issues stating he
would not be surprised if "some of these claims or many of them get settled." (Ex. 7 - STN
Hearing Tr. at 162:6-21).
The Committee's STN Motion was approved by the Court at the STN Hearing and by an
order dated July 27, 2009 (the "STN Order") [Docket No. 2345] and the Committee commenced
the UCC Litigation [Adv. Pro. 09-01375] on behalf of the Debtors' estates. On September 24,
2009, the Court entered a final case management order for the UCC Litigation setting an
31 At his deposition, Davis curiously tried to distance himself from these remarks, stating that he and others at CWT did not endorse this position, which CWT set forth in its Sur-Reply and Palmer publicly stated at the July 21 STN Hearing. (Ex. 9 - Davis Depo. Tr. at 248:14-250:2). At no time did any CWT attorney, including Palmer, advise the Court that CWT privately did not believe what it told the Court on July 21, 2009 to urge the Court to have an expedited Phase I trial on the financial condition issues.
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expedited discovery and motion practice schedule, and established December 1, 2009 as the date
of commencement for the Phase I trial. [Adv. Pro. Docket No. 124].
Following the July 21 STN Hearing, on August 12, 2009, the Restructuring Committee
revisited the issue of the Debtors' right to settle the UCC Litigation unilaterally. (Ex. 30 — LBI
Restructuring Committee Meeting Minutes, dated August 12, 2009).
III. CWT Used its Involvement in and Monitoring of the Negotiations of the Intercreditor Issues As a Vehicle to Press for a Low-Ball Settlement of the Committee's Claims Against the FPDs.
The conflicting desire of the Debtors to achieve a quick exit from bankruptcy and the
need to resolve the claims against the FPDs in the UCC Litigation, which the FPDs characterized
early on as a "mega-case," presented the Debtors with a number of alternatives, which, in their
capacities as fiduciaries for all the stakeholders, they were required to attempt to reconcile.
While the Committee advised the Debtors and the Court that the Committee was prepared to
prosecute and try the Phase I financial condition issues on any schedule the Court directed, from
the outset of the case, the Committee urged the Debtors that the most practical resolution of these
competing concerns was establishment of a plan litigation reserve.
In the course of negotiations concerning plan sponsorship and the resolution of inter-
creditor issues, one aspect of the FPDs' restructuring agenda was made abundantly clear to the
Debtors: that they would not approve a plan that included a litigation reserve as a means of
accommodating the UCC Litigation. Apollo and Ares, both of whom were effectively selected
in September 2009 as equity rights offering sponsors and are holders of large amounts of Senior
Lender debt, threatened to block any plan that included a reserve for the UCC Litigation. (Ex. 17
- January Cooper Depo. Tr. at 196:7-198:4) (Scott Kleinman from Apollo and the Ad Hoc Group
had informed Cooper that they would not support a plan with a reserve); (Ex. 31 — LBI Litigation
Committee Meeting Minutes, dated October 23, 2009) (CWT informed the Litigation Committee
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that it was "clear that certain of the senior lenders would not support a plan of reorganization that
contained a reserve or even the possibility of a reserve."). The Debtors, rather than pressing all
constituencies for creation of a litigation reserve, simply buckled under the threat of the FPDs,
and dropped the inclusion of a litigation reserve from the draft plan. To compound matters, the
Debtors declined to properly develop alternative equity rights offering sponsors or to put
pressure on the FPDs to deal realistically with settlement issues or face a public trial starting
December 10, 2009, thereby setting in motion the inevitable result that when the FPDs refused to
offer the Committee any serious settlement, the Debtors felt they needed to step in to rescue their
exit-financing patrons.
The rejection by the selected plan sponsors of a litigation reserve could have been
resolved by the Debtors, consistent with their duties to the unsecured creditors of the estates by
finding alternative plan sponsors and by refinancing the DIP. Instead, they embarked on a third
alternative, the unilateral settlement of the claims against the FPDs in the UCC Litigation,
without consultation with the Committee, or permission of the Court to withdraw the
Committee's STN standing.
IV. Instead of Exploring Alternatives Consistent with its Conflicting Needs to Resolve the Committee Litigation and to Exit Promptly from Bankruptcy, the Debtors Resolved to Unilaterally Settle the UCC Litigation.
Starting at the time of the Rule 2004 investigation, the Debtors (through counsel)
maintained close contact with the FPDs regarding the defense of the UCC Litigation. Although
Cooper conceded that it would be inappropriate for the Debtors' counsel "to [provide] legal
advice to defendants on a specific or one-off basis," (Ex. 17 - January Cooper Depo. Tr. at
227:12-14), this was the customary and routine behavior displayed by CWT both prior to and
during the UCC Litigation. As noted above, this attitude is demonstrated by Weiss, an attorney
at CWT, who assured Michael Simes, counsel for Merrill Lynch, that "there wasn't anything" to
the claims being pursued by the Committee. (Ex. 12 - Simes Depo. Tr. at 197:25-198:25).
These discussions continued in early September 2009 when the Debtors and the FPDs
revisited the notion that the Debtors retained settlement authority. (Ex. 32 — 9/4/09 email from
Debtors' counsel to various FPD counsel listing "Debtors' retention of settlement authority" on
agenda for conference call among the Debtors and certain FPDs). Ultimately a meeting among
the Debtors and an ad hoc group of Senior Lenders (the "Ad Hoc Group") 32 occurred on or about
September 8, 2009 "to discuss settlement of the fraudulent conveyance litigation." (Ex. 33 —
9/8/09 email from Palmer to Golden).
Daniel Golden, counsel to LeverageSource, who along with other counsel to the "Ad Hoc
Group" was actively engaged in negotiations with CWT over the equity rights offering and the
plan, also tried on several occasions to interest CWT in trying to settle the Committee's claims
against the FPDs as part of a plan — presumably to try to railroad any proposed settlement as part
of a plan of reorganization. (Ex. 34 - 10/15/09 email from Golden to Davis: "George, we need to
continue our conversations on whether to craft a settlement in the plan....").
Despite (or perhaps because of) these ongoing discussions, the Litigation Committee
became concerned in late October 2009, after the Committee had filed an Examiner motion,
about the possibility that one or more parties to the UCC Litigation might seek to postpone the
December 1, 2009 start of the Phase I trial. (Ex. 31 — Litigation Committee Meeting Minutes,
dated October 23, 2009). For its part, the Committee, committed to the assurance it gave the
Court on July 21 to try the case within existing DIP milestones, had made clear that it was
opposed to any adjournment. (Ex. 35 — December 4 Hearing Tr. at 56:4-57:16). To resolve the
32 The members of the Ad Hoc Group are: ABN AMRO Bank, N.V., Ares Management, Bank of Scotland plc, DZ Bank AG, Kohlberg, Kravis and Roberts (Fixed Income) LLC, LeverageSource III S.a.r.1., and UBS AG. (Ex. 59 —10/27/09 email from Dahan to Pohl).
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increasing tension between the UCC Litigation and the "no reserve" reorganization plans
demanded by the plan sponsors that had been accepted by the Debtors,
(Ex.31 — LBI Litigation
Committee Meeting Minutes, October 23, 2009).
Consequently, the Litigation Committee with the overhang of the
Examiner's investigation, decided it would be beneficial, in the event a settlement became
necessary, to immediately hire an "independent evaluator to assist in the process" to ensure that
the Litigation Committee "had weighed the pros and cons of the parties' respective positions so
that any settlement would withstand scrutiny." (Ex. 31 — LBI Litigation Committee Meeting
Minutes, dated October 23, 2009).
In October 2009, the Committee, aware that the rejection by the selected plan sponsors of
a reserve plan and the Debtors' refusal to refinance the DIP was creating tension between the
UCC Litigation and the Debtors' plans for a prompt reorganization, attempted to engage the
Debtors in discussions concerning the strengths and weaknesses of the UCC Litigation as an aid
to a coordinated strategy to address these issues. The Debtors, after initially agreeing to meet on
October 27, 2009, cancelled at the last minute, and the meeting was never rescheduled. (Ex. 9 -
Davis Depo. Tr. at 175:23-178:25). 33 It turns out, however, that the Debtors may have had such
discussions with Huebner. (Ex. 36 — Huebner Depo. Tr. at 235:6-23, 293:12-294:15).
Beginning in late October, the Litigation Committee authorized the retention by CWT of
several consultants supposedly for the purpose of assisting in their assessment of the merits of
the UCC Litigation. 34 These consultants ultimately included National Economic Research
Associates, Inc., Nexant, Inc., Litigation Risk Analysis, Inc., and former Judge Francis Conrad, a
retired bankruptcy judge from the District of Vermont. (Settlement Memorandum at ¶ 26) 35
While CWT now purports to not know if it informed the Committee of their retention (Ex. 9 -
Davis Depo. Tr. at 171:9-172:3), counsel to the Committee can represent that it first learned of
the consultants' retentions at the December 4 hearing, when the Court was informed of the
Proposed Settlement.
The claimed independence of the consultants retained by the Litigation Committee was
completely compromised by their having been handled and directed by CWT. Not only did the
consultants rely on CWT to supply critical information to be considered but they also received
33 On December 4, 2009, Davis inaccurately advised the Court that the purpose of the meeting was for CWT to educate Committee's counsel regarding the claims the Committee was pursing (Ex. 35 - December 4 Hearing Tr. at 99:23-25). At his deposition, Davis told a different story, maintaining that there was confusion over the purpose of the meeting. (Ex. 9 - Davis Depo. Tr. at 180:19-23). In fact, it cannot be disputed the CWT unilaterally cancelled the meeting, did not bother to explain to Committee's counsel the reason for the cancellation, and declined to reschedule such meeting.
34 These entities were purportedly hired as "consultants in the ordinary course" and did not file retention applications with the Court or disclose their retention to the Committee. The Debtors disclosed the retention of the consultants to the FPDs prior to the December 3 mediation in response to requests that the Debtors try to settle the UCC Litigation, but Debtors elected to not disclose their retention to the Committee. (Ex. 9 - Davis Depo. Tr. at 169:13-170:6). 35 Marshall Huebner noted that he had never seen a case in which the Debtors retained their own experts to evaluate claims to assist in settling a litigation. (Ex. 36 - Huebner Depo. Tr. at 142:15-142:23). Although Huebner testified that he viewed these retentions as helpful in giving the Court "comfort" (Id at 142:23-24), the fact that he had never seen it before in his "17 years" as an attorney (Id. at 49:22-25), raises more questions about the propriety of the Debtors' conduct than it answers.
CWT's legal analysis as the framework for their own analysis. 36 According to Cooper, NERA's
purpose was to provide an independent assessment of the litigation and to "call balls and strikes."
(Cooper Decl. at ¶ 21) However, as is clear from NERA's Joint Declaration, NERA only
evaluated materials that CWT provided to it and assumed critical and contested facts as dictated
by CWT. (NERA Joint Decl., Ex. 4).
Furthermore, one of the experts, former Judge Francis Conrad, did not even present his
views directly to the Litigation Committee due to a "scheduling issue." (Ex. 17 — January
Cooper Depo. Tr. at 310:7-14). Instead, Judge Conrad conveyed his thoughts to Mark Ellenberg,
a CWT attorney, and Ellenberg then relayed Judge Conrad's opinions to the Litigation
Committee. (Ex. 9 - Davis Depo. Tr. at 94:17-95:3).37 Moreover, CWT worked in conjunction
with Marc Victor, with CWT supplying the legal analysis or evaluation of the likely outcomes of
various issues which drove the weighted probabilities of Victor's decision tree software that, it
appears, ultimately provided the high-low range that the Litigation Committee utilized to make
its "take it or leave it" offer. (Ex. 14 - Cooper Decl. at 26).
The Litigation Committee and/or CWT's retention of "independent" consultants was
wholly insufficient. The consultants could only be considered independent if their evaluations
were not dependent on CWT's input and guidance, which they were. Accordingly, NERA,
Nextant, Marc Victor and former Judge Conrad all suffer from the same incurable conflicts
which plague CWT. CWT acted as the gatekeeper and sole legal counsel for the Litigation
36 Also of importance, none of these consultants' retentions were approved by the Court. (Ex. 9 — Davis Depo. Tr. at 169:22-24). Accordingly, their independence is presumed based on the assurances they provided to the Debtors.
37 It is anticipated that Debtors may submit, on Reply, a Declaration from former Judge Conrad claiming that he was provided with and reviewed certain documents in connection with the Adversary Proceeding. No written report was prepared by Judge Conrad. To the extent Debtors suggest that Judge Conrad's quick review of certain limited parts of the record can even serve as a proxy for this Court's "canvassing of the record" and the extensive involvement to date by this Court in this matter, it should be rejected. To the extent CWT submits a Declaration from Judge Conrad to somehow respond to CWT's serial conflicts, this is no answer at all. The Committee reserves the right to further respond on this point if a Declaration from Judge Conrad is submitted on Reply.
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Committee on UCC Litigation matters and the filter for consultant input. In any event, the use of
such consultants (to try to give a "process" bill of health to the low-ball settlement figure) cannot
obviate the fact that CWT engineered a low-ball proposed settlement, which directly benefited
the FPDs, including significant CWT clients.
Prior to the announcement of the Proposed Settlement, no disclosure was made to the
Committee that the Debtors were engaging supposed independent consultants to position
themselves to unilaterally settle the UCC Litigation without input from the Committee.
V. Settlement Negotiations with the Ad Hoc Lenders, the First Mediation Session and the Ensuing Negotiations with the Bridge Lenders.
Shortly after the Court granted the Committee's STN motion, the Committee repeatedly
sought to explore prompt settlement discussions with certain of the FPDs. 38 On or about August
12, 2009, The Ad Hoc Group presented the Committee with an opening proposal to settle the
claims against the FPDs set forth in the Committee's 137 page Complaint: all claims would be
dropped against the FPDs for no payment of any kind by the FPDs, with the Committee being
permitted to keep the first $250 million of recovery on claims against non-lender parties (other
than the Access preference claim), with a $10 million fund for the litigation against non-settling
defendants. Not surprisingly, this proposal was rejected by the Committee. (Ex. 37 - Summary
38 Such settlement negotiations are admissible and are not barred by Rule 408. Rule 408 only applies to the admission of settlement discussions as evidence of liability or the amount of damages. See Fed. R. Evid. 408. Where such communications are introduced as evidence for some other purpose, Rule 408 does not bar their admission. See, e.g., Athey v. Farmers Ins. Exch., 234 F.3d 357, 362 (8th Cir. 2000) (evidence of settlement negotiations properly admitted to show insurance company's bad faith); In re Portnoy, 201 B.R. 685, 692 (Bankr. S.D.N.Y. 1996) (statements introduced to demonstrate debtor's intent are not barred by Rule 408); see also Simes v. Demaskey (In re Demaskey), Case Nos. 04-43238, A04-4123, 2007 WL 2848179, at *2 (Bankr. W.D. Wash., April 24, 2007) (admitting settlement letter to show intent in the context of bankruptcy claim compromise). Here, the Committee does not seek to introduce settlement discussions with the FPDs, including the Bridge Lenders as evidence of liability or the amount of damages, but as evidence, inter alia, of the Debtors' lack of good faith in proposing the settlement, the lack of arm's length negotiation between the Debtors and the FPDs, and as evidence of the unreasonableness of the proposed settlement.
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of Original and Revised Settlement Terms Proposed by the Ad Hoc Group, dated October 6,
2009).
On September 25, the Ad Hoc Group modified its proposal but still insisted that the FPDs
pay nothing to settle the claims against them. They increased the level of first proceeds that the
Committee would be able to recover from non-lender defendants to $300 million (added the
Access preference claim), agreed to waive any "scoop" rights against the holders of notes under
the 2015 Notes Indenture (the "2015 Bondholders"), and increased the litigation fund to $15
million (to be funded, it appears, by the Bridge Lenders). Not surprisingly, this revised proposal
was also rejected by the Committee. (Ex. 37 - Summary of Original and Revised Settlement
Terms Proposed by the Ad Hoc Group, dated October 6, 2009).
Shortly thereafter, in an effort to cut through the process and try to achieve a realistic
settlement with the FPDs, the Committee's counsel (Ed Weisfelner), after repeated efforts to
engage LeverageSource's counsel in settlement discussions to resolve the claims against the
FPDs, advised LeverageSource's counsel that the claims likely could not be settled without an
upfront cash payment equal to approximately 50% of the estimated allowed amount of general
unsecured claims in this case.
On October 6, 2009, the Ad Hoc Group made its third and last settlement offer to the
Committee (prior to the November 17, 2009 mediation), increasing the Committee's entitlement
to first proceeds against non-lender defendants to $450 million, proposing 3-year warrants (at a
price of 150% of plan value) equal to 3% of the stock transferable to the Senior Lenders in the
reorganization, and including the same $15 million litigation fund and waiver of the 2015
Bondholders "scoop" rights. This proposal, a slight adjustment from the Ad Hocs Group's prior
settlement proposal, was likewise rejected.39
The Debtors admit that they were aware of the three proposals by the Ad Hocs, i.e., the
ones made on August 12, September 25 and October 6. It does not appear that the Debtors were
aware of the Committee's proposal made to LeverageSource's counsel.
In late October 2009, the Court ordered mediation with Myron Trepper of Willkie Farr &
Gallagher LLP serving as the mediator. [Adv. Pro. Docket No. 209]. At the first mediation
session on November 17, 2009, the FPDs and the Committee exchanged settlement proposals,
but again, these discussions did not result in a settlement. 4° It did, however, start a period of
increased pressure by the FPDs on the Debtors to step in and settle the claims against the FPDs
prior to the upcoming Phase I trial. (Ex. 17 - January Cooper Depo. Tr. at 210:11-24; Ex. 36 -
Huebner Depo. Tr. at 169:3-20). Although Cooper did not believe that the Debtors should
interject themselves at that time in light of the ongoing mediation (January Cooper Depo. Tr. at
213:3-14), the aggressive push by the FPDs for a debtor-imposed settlement began immediately
after the first round of mediation had concluded. (Ex. 9 - Davis Depo. Tr. at 266:19-267:19).
While the FPDs and the Debtors engaged in such discussions, they did not advise the Committee
that such discussions were occurring.
At that time, the Debtors also informed certain members and advisors to the Ad Hoc
Group -- but not the Committee -- that the "Litigation Committee is and has been having its
39 By this time, the Bridge Lenders' counsel and Committee's counsel agreed, that given the lack of progress in the non-starter proposals by the Ad Hocs, to begin direct Committee-Bridge Lender settlement discussions (Ex. 38 -10/4/09 email correspondence between Weisfelner and Trust), but such separate settlement discussions did not begin until November 25, 2009.
40 The Committee is prepared to advise the Court what its settlement position and that of the FPDs was at the mediation and believes it would be instructive for the Court to hear such positions to compare them to (i) the prior settlement proposals of the Ad Hoc Group and the Committee, and (ii) the non-negotiable demand made by Cooper on December 3, but due to the Mediation Order, cannot do so.
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advisors inform itself as to the strengths and weaknesses of the [Committee's] claims, and .. .
that [the Litigation Committee] had retained additional advisors . . . to help [it] analyze the
[Committee's] claims so that it could get as up to speed as it felt it needed to be to be in a
position to engage in settlement discussions." (Ex. 9 - Davis Depo. Tr. at 268:4-13; 168:4-15)
(the "Litigation Committee felt it was in no position to even formulate an appropriate settlement
proposal until it received all of the input from its advisors, which didn't happen — which didn't
conclude until December 2."). The Debtors selectively disclosed to counsel for Citibank the
retention of the Litigation Committee's consultants, hired by the Debtors to "review and assess"
the UCC Litigation (Ex. 39 — 11/18/09 email from Davis to Golden), which information was
promptly passed on to the other FPDs (but not to the Committee). Huebner testified that around
the last week of November, Davis informed him that the Debtors would be in a position to
become involved in direct settlement negotiations with the FPDs when the Debtors' newly
retained independent consultants concluded their evaluation, and indicated that they were
concluding their work shortly. (Ex. 36 - Huebner Depo. Tr. at 125:6-22). Davis also told
Huebner that if the Debtors engaged in direct settlement negotiations with the FPDs that the
Debtors would likely insist on a cash settlement (Id. at 256:4-21), giving Huebner (and other
FPDs with whom he shared this tip) and not the Committee, advance notice before December 3
of the basic terms for a potential settlement between the Debtors and the FPDs. 41 Given the
Debtors' signaled willingness to step in and negotiate a direct settlement without the
participation of the Committee, it is no wonder that the second mediation failed.
41
At no time prior to December 4, 2009, did anyone (CWT, the Debtors, Huebner, other FPDs) inform the Committee that the Debtors retained outside consultants to evaluate the UCC Litigation.
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After the first failed mediation session (November 17), the court-appointed mediator
apparently offered to mediate a settlement directly between the Debtors and the FPDs on the
condition that the Committee was included in the process, i.e., having the Debtors and
Committee reverse roles. (Ex. 39 — 11/18/09 email from Davis to Golden). In an e-mail on that
same date, Golden informed Davis that Citibank's counsel notified him that the mediator had
"proposed to mediate a settlement of the litigation as between the Company and the defendants."
(Id.). Counsel to the Ad Hoc Group went as far as saying to the Debtors: "Hopefully you guys
will take Myron [Trepper] up on his offer to mediate a resolution to the litigation." (Ex. 40 —
11/18/09 email correspondence between Barr and Davis).42
On November 19, 2009, two days after the conclusion of the first mediation session, the
FPDs, sensing that the time had come for the Debtors to save them from the impending Phase I
trial, provided the Debtors with a memorandum of law arguing that the Debtors had a right to
unilaterally settle the UCC Litigation notwithstanding the prior grant of standing to the
Committee and without the consent of the Committee. (Ex. 41 — 11/19/09 email from Huebner to
Davis with memorandum attached). The FPDs also provided the Debtors with quotes from
hearing transcripts that purportedly demonstrated the Court's position on the Debtors' right to
settle. (Ex. 36 - Huebner Depo Tr. at 91:15-92:3).43
42 The Committee does not believe discussion of such communications, which were outside the scope of the Mediation Order, are barred by the Mediation Order.
43 CWT's close coordination with the FPDs permeated discovery. For example, during the height of the UCC Litigation, on November 25, 2009, CWT e-mailed litigation counsel for LeverageSouce urging counsel to ask certain questions of one of the Committee witnesses at a fact deposition (presumably the deposition of David Witte, the Committee's expert from CMAI, which took place on November 30, 2009). (Ex. 43 — 11/25/09 email from CWT to Gerstein, counsel to LeverageSource). On November 30, 2009, counsel for Merrill Lynch e-mailed CWT to elicit from a former officer of the Debtors his opinion regarding one of the Committee's arguments. (Ex. 44 —11/30/09 email from Simes to Weiss). Moreover, in an effort to assist the FPDs at an impending deposition of a Committee witness, CWT provided to the FPDs a confidential CMAI document (of which the Debtors had a copy) without informing Committee's counsel that the Debtors were doing so. (Ex. 46 - email from Weiss to Berry, et al.). Other examples abound.
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Late on November 23, 2009, counsel to Citibank on an unsolicited basis contacted
Committee's counsel and requested a meeting to explore a separate settlement by the Bridge
Lenders with the Committee. An hour later, counsel to Merrill Lynch contacted Committee's
counsel, and indicated that Merrill Lynch had requested that he have a separate meeting (without
any other Bridge Lender present) to explore potential settlement of the Committee's Claims
against Merrill Lynch in the event a settlement was not reached with all or other Bridge Lenders.
(Ex. 45 — 11/23/09 email correspondence between Weisfelner and Wissner-Gross). On
November 24, Committee's counsel (Mr. Weisfelner) informed Huebner that the Committee was
looking for the same basic settlement (50% recovery) as Committee's counsel had advised
Golden in late September, and noted that as the case was nearing trial, the Committee felt even
more confident about its claims. As it turned out, the Bridge Lender representatives at the
meeting held the next day had a different and intriguing settlement approach in mind.
On November 25, 2009, a two hour meeting was held at Brown Rudnick's offices among
counsel to the Committee (Weisfelner), Merrill Lynch (Brian Trust and Michael Simes),
Citibank (Huebner) and UBS (Linda Martin). At the outset of the meeting, counsel for the
Bridge Lenders solicited Committee counsel's agreement that the settlement discussions were
very politically sensitive and that it was important that Committee counsel agree not to disclose
such to any other party, including the mediator. During the first hour, counsel to Merrill Lynch
and Citibank explained to Committee's counsel that the Bridge Lenders were interested in
exploring a settlement with the Committee whereby the Bridge Lenders would assign their
remaining interest in the Bridge Loans to the Committee in settlement of the Committee's claims
against the Bridge Lenders. The Bridge Lenders made clear that it was assumed in such
discussions that each Bridge Lender who settled with the Committee would assign all its rights
to any Bridge Loans it continued to hold. 44 Counsel to Merrill Lynch and Citibank further
indicated that they were prepared to provide the Committee with a "guide" to arguments that
they had advanced with the Senior Lenders on their inter-creditor disputes in the event a
settlement was reached with them. Counsel for Merrill Lynch and Citibank also expressed a
desire for these clients to avoid a public trial where disclosure of their loan structuring practices
would occur.
After the group meeting, counsel for Merrill Lynch met privately for another hour with
Committee's counsel, and bluntly told Committee's counsel that Merrill Lynch and Bank of
America had instructed him that his client wanted to negotiate a separate settlement with the
Committee. He indicated that Merrill Lynch recognized that it was a defendant in an aiding and
abetting claim not asserted against the other Bridge Lenders, and stated that he recognized that
Merrill Lynch would have to make a financial payment beyond assignment of its Bridge Loans
to the Committee to accomplish a settlement. He further indicated that he would work on a term
sheet for a proposed settlement and that the parties should stay in close contact over the
Thanksgiving weekend to continue to explore a potential settlement. On Thanksgiving,
Committee's counsel, who had been provided with all of Merrill Lynch's counsel's contact
information, communicated a proposal to Merrill Lynch's counsel.
The next day or on Monday, November 30, Committee's counsel and Merrill Lynch's
counsel spoke again to re-confirm the terms of the proposal, whereby the Committee would
settle with all five Bridge Lenders. On or about December 1, Citibank's counsel indicated that,
at least with respect to Citibank, it was unwilling to make a cash payment above and beyond the
44 Huebner inaccurately testified that he did not suggest to Weisfelner that each Bridge Lender would assign its entire interest in the Bridge Loans. Weisfelner, who is currently scheduled to be deposed on February 3, 2009, is expected to testify at his deposition that Huebner and Trust explicitly told him that they wanted their clients to assign their entire respective Bridge Loan holding to the Committee as part of a settlement with the Committee. For the present purposes, the Court need not resolve this issue.
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assignment of the Bridge Loans. Counsel to the Committee responded that he felt a settlement
with the Bridge Lenders could be accomplished with little or no cash payment from either
Citibank or Goldman Sachs, but that something more than an assignment of their Bridge Loans
would have to be forthcoming from the other three Bridge Lenders.
As the parties headed to the second day of mediation on December 3, it was the
Committee's view that the recent settlement negotiations with these Bridge Lenders were the
most promising settlement prospects to date because, inter alia, (i) the Bridge Lenders were out-
of-the-money and only stood to arguably gain in their inter-creditor dispute with the Senior
Lenders if the Senior Lenders and the Bridge Lenders lost at Phase I, (ii) three of the Bridge
Lenders (Merrill Lynch, Citibank and Goldman Sachs) held very little First Lien Debt, (iii)
several Bridge Lenders had approached the Committee, were pressing the Committee to do a
separate settlement and sounded much more realistic than the Ad Hoc Group about their
exposure at trial, and (iv) the Committee saw this as a practical path to a settlement with all the
FPDs, by first settling with the Bridge Lenders, thereby putting pressure on the other Bridge
Lenders and the Ad Hoc Group to settle before trial.
Moreover, the Committee was particularly interested in Merrill Lynch's separate
overtures to settle, since Merrill Lynch was a key Bridge Lender and would play the most active
role among the FPDs as a fact witness at trial given its role in advising Access and Blavatnik in
the period leading up to the July 16, 2007 Merger Agreement. In other words, the Committee,
which preferred reaching a negotiated settlement on the best possible terms, saw these Bridge
Lenders as primed and ready for realistic discussions, which the Committee expected to
immediately resume right after the second day of mediation.
The Litigation Committee apparently decided on December 2, 2009 that if the December
3, 2009 mediation did not result in a settlement, the Debtors were prepared to settle the litigation
on their own. The Litigation Committee did not so advise the Committee, however. On that
date, CWT conducted an extended meeting of the Litigation Committee during which internal
presentations were made to the Litigation Committee by most, but not all, of their consultants.
The Litigation Committee did not receive a presentation directly from former Judge Conrad.
(Ex. 9 - Davis Depo. Tr. at 94:11-95:3). Rather, former Judge Conrad spoke with CWT partner
Mark Ellenberg, who in turn relayed former Judge Conrad's views to the Litigation Committee.
(Id.). The Litigation Committee determined that the range of settlement values for the Lender
Claims should be between $200 million and $400 million and Cooper said he picked the
midpoint of $300 million; at the time, CWT believed the unsecured claims were approximately
$3 billion. (Ex. 17 - January Cooper Depo. Tr. at 252:7-19). A mathematical decision tree
analysis that the Litigation Committee or CWT commissioned relied on CWT's assessment of
the Committee's probability of success on a number of legal issues related to the claims against
the FPDs in the UCC Litigation. (Id. at 293:12-294:13). 45
VI. The Second So-Called Mediation and the "Settlement Negotiations" After the Mediation Terminated.
With the knowledge that either CWT or the Litigation Committee had previously hired a
team of consultants so that they could ensure that a settlement "would withstand scrutiny" (Ex.
31 — Litigation Committee Meeting Minutes, dated October 23, 2009), and that the Debtors
45 In accordance with the Court's rulings on December 11, 2009, the Debtors have provided only the Committee and counsel for BNY and WTC with copies of such consultant reports. It is the Committee's view that such consultant reports, although flawed and biased, need not be evaluated by the Court on this motion, since the Court is fully capable of canvassing the record in connection with the claims against the FPDs. Thus, while the Committee believes that NERA's claim of "calling balls and strikes" is false, that Nexant's report is biased and sophomoric, that the mathematical decision-tree simply attempts to reduce to mathematical terms CWT's views on relevant legal issues, and that former Judge Conrad wrote no report, the Court need not consider any of such reports or "advice", since they are not part of the record on the Debtors' Settlement Motion.
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would enter the settlement process directly at the appropriate time, the FPDs (as a group)
approached the second mediation with no reason to bargain with the Committee. The
Committee, unaware that the Debtors were lurking in the background intent to make a settlement
proposal when their "leverage [was] greatest," arrived at the second mediation session prepared
to continue negotiations with the FPDs, although the Committee was not optimistic about the
intentions of the Ad Hoc Group and looked forward to resuming direct negotiations outside the
mediation with the Bridge Lenders. Unfortunately, the Debtors had already put in place a
sequence of events that would cause the mediation to quickly reach an impasse, undermine any
incentive for the Bridge Lenders to continue negotiating with the Committee, and allow the
Debtors the opportunity to destroy any chance of the Committee to secure a settlement properly
within the range of reasonableness.
The second round of mediation, held at Willkie Farr, abruptly ended at mid-day without a
settlement between the Committee and the FPDs. The Committee's representatives left Willkie
Farr's offices, unaware that all the FPDs and the Debtors remained. The FPDs, knowing full
well that the Debtors were willing to negotiate settlement terms (Ex. 12 - Simes Depo. Tr. at
26:13-20) and anxious to avoid the commencement of the Phase I trial, remained at the
mediator's offices with the intention to speak to the Debtors about settling the claims against
them. Indeed, the FPDs had every reason to believe that the Debtors would be willing to enter
into direct negotiations since the Debtors had informed the FPDs only one week earlier that they
would be in a position to engage in settlement negotiations once the CWT consultants concluded
their "diligence." (Ex. 36 - Huebner Depo. Tr. at 125:6-22)
Unknown to the Committee, the Debtors initially approached the mediator about
mediating a negotiation between the FPDs and the Debtors; a request the mediator declined.
Thus, the Debtors, through CWT, after the mediation terminated, asked the Bridge Lenders for
the details of their last offer and then presented the FPDs with a "take it or leave it" offer. 46 (Ex.
12 - Simes Depo. Tr. at 27:18-28:5; Ex. 17 - January Cooper Depo. Tr. at 110:13-15; Cooper
Decl. at ¶ 4). Cooper's demand had two conditions: (i) that the $300 million offer was a non-
negotiable demand and (ii) that the FPDs had to settle their inter-creditor claims. 47 Golden aptly
testified that it was an "express condition precedent" to the $300 million settlement demand that
the Senior Lenders and the Bridge Lenders resolve their inter-creditor disputes. (Ex. 1 - Golden
Depo. Tr. at 136:14-19; Ex. 47 — Meeting Minutes of Joint Meeting of Supervisory Board and
Management Board, dated December 4, 2009; Ex. 35 - December 4 Hearing Tr. 10:16-11:5;
16:16-19; 22:2-8 (Statements by George Davis that the settlement is contingent upon the
resolution of all of the inter-creditor issues); Ex. 17 - January Cooper Depo. Tr. at 109:5-13;
114:13-116:14; 271:8-19; Ex. 9 - Davis Depo. Tr. at 188:15-22 (resolution of inter-creditor
disputes was an absolute condition of the settlement proposal); Ex. 48 - Serota Depo. Tr. at
69:22-70:1 (resolution of inter-creditor dispute permitted resolution of the settlement of the
Committee's claims against the FPDs as well)). The Debtors' other terms should have been
quite familiar to the FPDs, since they came right out of the FPDs' prior offers (i) a $15 million
litigation fund, and (ii) waiver of the "scoop" rights. Moreover, before Cooper made his non-
negotiable settlement demand, through CWT, he was advised what the terms of the FPDs last
offer at the December 3 mediation had been and CWT was advised that the FPDs valued it at
46 Huebner noted that he found the Debtors' "take it or leave it" approach to be "interesting." (Ex. 36 - Huebner Depo. Tr. at 183:2-12). Davis also agreed that a "take-it-or-leave-it" settlement demand is "probably rare," and could not recall a single occasion in his career when he proffered such a settlement demand. (Ex. 9 - Davis Depo. Tr. at 257:4-23).
47 In his declaration, Cooper tried to back off his actual demand by saying he advised the FPDs that they "should" resolve this inter-creditor dispute. (Ex. 14 - Cooper Decl. at ¶ 5). He conceded at his deposition, as did all other witnesses, that his demand was that resolution of the inter-creditor dispute was a mandatory pre-condition to the Debtors' willingness to settle the claims against the FPDs. (Ex. 17 — January Cooper Depo. Tr. at 109:5-13).
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$255 million. (Ex. 47 — Litigation Committee Meeting Minutes, dated December 4, 2009). In
essence, notwithstanding the Debtors' claim that they arrived at a proposed settlement range after
purported intensive analysis, the fact that Debtors' non-negotiable take-it-or-leave-it settlement
demand was slightly higher than the value of the FPDs' last offer and contained some identical
elements to prior FPDs demands (which also were known to the Debtors), further underscores
the sham nature of the settlement proposal.
This take-it-or-leave-it settlement proposal was made without the Committee's
knowledge, input or involvement. Nor did the Debtors seek prior Court permission to divest the
Committee of authority to negotiate a proposed settlement. Moreover, there is no evidence that
CWT, which could not, pursuant to its retention application, be involved with bankruptcy-related
litigation against Merrill Lynch, Goldman Sachs or UBS, sought or even considered seeking
permission of the Debtors or Merrill Lynch, Goldman Sachs or UBS, to waive any obvious
conflicts that CWT had, or permission of the Court to do so. Indeed, since CWT had, by its own
admission, been analyzing and evaluating the claims asserted by the Committee against CWT
clients since the Court granted STN standing on July 21, 2009, it is unclear how CWT could have
properly discharged its professional duties to both the estates and its clients who had been sued
in the UCC Litigation absent a Court-approved waiver of such conflict, which never occurred.
Before making the take-it-or-leave-it proposal, it appears that no one from CWT made an
attempt to determine what the Committee's last settlement position was, although Davis was
equivocal on this; indeed, Davis did not think it was important to know such information before
making a settlement offer to the FPDs. (Ex. 9 - Davis Depo. Tr. at 157:11-16). Moreover, Davis
was of the opinion that the Committee, as the litigant of the estates' claims, had a duty to inform
the Debtors of the Committee's negotiations with the FPDs, even though the Committee had
been given derivative standing to pursue such claims. (Id at 155:15-22). Equally alarming was
the fact that Cooper demonstrated a lack of interest or understanding in what the Committee's
prior negotiating history had been in the days leading up to the December 3 mediation. He
thought that he had been told that the Committee's last settlement demand was "$1 billion —
plus" (Ex. 17 - Cooper Depo. Tr. 256:15-25; 257:1-7), but was unsure if it included or excluded
the 2015 Bondholders, whose claims alone are approximately $1.3 billion.
This non-negotiable settlement demand was made with zero discussion of the merits by
CWT with the FPDs (i.e., the strengths and weaknesses) of the UCC Litigation. (Ex. 48 - Serota
Depo. Tr. at 51:20-52:17). The Debtors did not even attempt to tell the FPDs what their
exposure was. Had CWT asked the Committee whether it had any settlement discussions
pending outside of the mediation with any of the FPDs, the Committee would have informed
CWT that, in fact, material settlement discussions had begun with certain of the Bridge Lenders,
and upon obtaining consent from the Bridge Lenders, was prepared to advise the Debtors of the
status of such settlement discussions. Moreover, in light of the testimony of Huebner that the
Bridge Loans had a market value of nearly $1 billion at the time, as a practical matter, it would
have been far more advantageous to allow the Committee to try and cut a deal with Merrill
Lynch or one or more of the other Bridge Lenders, rather than, as occurred, for the Debtors to
enter into a proposed settlement whereby the Bridge Lenders pay nothing, and end up with
approximately 5% of the equity of the reorganized debtors. In any event, it was also made
without any inquiry of the Committee concerning the Debtors' intention to submit a competing
settlement offer to the FPDs. (Ex. 17 - January Cooper Depo. Tr. at 281:4-22 (Q: Why didn't
you tell the [Committee] that you were about to make a $300 million take-it-or-leave-it offer to
the [FPDs]? A: "I didn't feel any particular obligation to inform the Committee."); Ex. 9 - Davis
Depo. Tr. at 154:24-155:8; 152:13-153:4).
Although the FPDs made perfunctory unsuccessful counterproposals or inquiries to the
Debtors' settlement offer, including requesting that the $300 million cash payment be financed
from the Debtors' cash reserves or by the Debtors' incurrence of additional debt, the FPDs never
tried to bargain down the $300 million amount. (Ex. 17 - January Cooper Depo. Tr. at 112:7-22;
Ex. 9 - Davis Depo. Tr. at 214:21-216:2; 218:2-15). In short, Cooper's non-negotiable
settlement demand, which took him approximately ten minutes to present, was accepted without
any negotiation.
Over the course of the late afternoon and evening, after Cooper's non-negotiable
settlement demand was made, the Debtors and CWT sat in their own conference room while the
FPDs negotiated their inter-creditor issues (the "condition precedent" to the settlement of the
claims against the FPDs). Finally, after midnight, Cooper, Davis, and Craig Glidden, the
Debtors' general counsel, checked in with the FPDs, and Cooper encouraged the Senior Lenders
and Bridge Lenders with respect to the resolution of their own intercreditor issues, which were
still unresolved although the gap was reported to be narrowing. (Ex. 17 - January Cooper Depo.
Tr. at 268:22-269:6).
Ultimately, by approximately 1 a.m. on December 4, the FPDs concluded their
negotiation among themselves to resolve their inter-creditor issues, satisfying Cooper's second
condition and delivering to the Debtors a proposed resolution of not only the UCC Litigation
against the FPDs, but also global plan related issues and issues related to non-debtor obligors
(the "Proposed Settlement").
The Proposed Settlement was announced to the Court on December 4, 2009, over the
Committee's strenuous objection. The Debtors misleadingly portrayed the Proposed Settlement
to the Court as a monumental achievement that was the result of grueling negotiations among
worthy adversaries. Statements like that of Brian Trust (counsel to Merrill Lynch) on December
4 that his "client doesn't recall a more fierce negotiation on many issues" were apparently
intended to convince the Court of protracted arm's length negotiations between the Debtors and
the FPDs. (Ex. 35 - Dec. 4 Hearing Tr. at 86:11-14). In fact, there were no negotiations at all
between the Debtors and the FPDs. Through discovery, it has been revealed as nothing more
than conflicted Debtors resolving, with the active insistence of their equally conflicted outside
counsel, claims that the Debtors had already waived in connection with the DIP Financing
against significant clients of CWT and other FPDs. The Proposed Settlement is a sham and
should be rejected by the Court.
ARGUMENT
THE DEBTORS' MOTION FOR APPROVAL OF THE PROPOSED SETTLEMENT SHOULD BE DENIED.
I.
The Court Should Not Withdraw the Standing Previously Granted to the Committee to Pursue the UCC Litigation.
A.
The Application of Rule 9019 Standards to the Withdrawal of Derivative Standing Is Not Consistent with Relevant Precedent or Practice.
The Debtors urge that "there is no need to decide whether it is in the best interests of the
Debtors' estates to withdraw the Committee's standing, separately from deciding whether the
Proposed Settlement is in the best interests of the Debtors' estates." (Settlement Memorandum
at 51). Implicit in the Debtors' assertion is that the conferral of STN authority on a committee
should have no bearing on a debtor's role in the litigation or the settlement of the claims at issue.
This is an untenable proposition unsupported by the authorities upon which the Debtors rely.
The predicate for a bankruptcy court's conferral of STN authority in the first instance is that the
pursuit of claims by the committee is in the "best interests of the estate." Adelphia Commc'ns.
Corp. v. Bank of Am., N.A. (In re Adelphia Comm'cns Corp.), 330 B.R. 364, 369 (Bankr.
S.D.N.Y. 2005) (Gerber, J.) ("Adelphia I") ("Though the words used by the Second Circuit in
each of the cases in the STN Trilogy differ slightly, they share a common underpinning requiring
the bankruptcy court to satisfy itself that the prosecution of the proposed litigation by the
Committee concerned would be in the best interests of the estate.") (emphasis added.) Although
the Second Circuit instructs that the grant of derivative standing does not undermine the debtor's
"central role in handling the estate's legal affairs," Official Comm. of Equity Security Holders of
Adelphia Commc'ns. Corp. v. Official Comm. Of Unsecured Creditors of Adelphia Comms.
Corp. (In re Adelphia Commc 'ns. Corp.), 544 F.3d 420, 424 (2d Cir. 2008) ("Adelphia IV"),
such generalities, relied upon out of context by the Debtors, cannot bear the weight of the
Debtors' proposition -- that a debtor's role is identical both with respect to those claims that it
has pursued and those that, a result of its unjustifiable refusal, are being pursued by others.
Importantly, Adelphia IV also stresses the primacy of the court in oversight of the authority
pursuant to which the right to pursue claims is exercised. It is the court's role, not the debtor's or
the derivative plaintiff's, "to oversee the litigation and to check any potential abuse by the
parties." Adelphia IV, 544 F.3d at 424 (internal quotation marks omitted).
It should not be without consequence that at the time the Proposed Settlement was made,
the Committee was the only party authorized by the Court to prosecute valuable estate claims
against the FPDs in order to maximize the value of those claims for the benefit of the estates and
its unsecured creditors. See ACC Bondholder Grp. v. Adelphia Commc'ns. Corp. (In re Adelphia
Commc'ns. Corp.), 361 B.R. 337, 355 (S.D.N.Y. 2007) (holding that the consent of the
committee authorized to litigate inter-creditor disputes was necessary for their settlement).
Contrary to the premise of the Debtors' conduct in these cases and consistent with the value-
maximizing function of derivative standing, "it is beyond cavil that [the authority of a committee
to prosecute claims] includes the authority to settle those disputes." See id. ("There can be little
doubt that the right to litigate a cause of action must include the right to withdraw it, settle it or
try it-every case must be 'dropped, settled or tried.") (citing In re Adelphia Commc'ns Corp.,
336 B.R. 610, 618 (Bankr. S.D.N.Y.), a.ff'd, 342 B.R. 122 (S.D.N.Y. 2006), and quoting U.S. v.
Glens Falls Newspapers, Inc., 160 F.3d 853, 856 (2d Cir. 1998). Committees litigating claims
after having been conferred derivative authority can and do exercise their authority to settle such
claims and propose the settlements they have made for approval. See, e.g., Motorola, Inc. v.
Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 458-59
(2d Cir. 2007) (allowing a creditors' committee to seek to settle derivative claims against pre-
petition lenders pursuant to a rule 9019 settlement motion); In re TeeVee Tunes, Inc. d/b/a TV7'
Records, Case No. 08-10562 (Bankr. S.D.N.Y.), (Ex. 60 - Order Granting the Committee's
Motion for Leave to Prosecute and Settle Claims, dated July 10, 2008 [Docket No. 366]
(granting authority of committee to prosecute claims and to "bring on a motion to settle claims
pursuant to Federal Rule of Bankruptcy Procedure 9019.")); In re Musicland Holding Corp.,
Case No. 06-10064 (Bankr. S.D.N.Y.), (Ex. 61 - Order Approving Settlement Stipulation, dated
Sept. 27, 2007 [Docket No. 1739] (approving application of unsecured creditors committee
under Fed. R. Bankr. P. 9019 to settle claims brought in adversary proceeding)); Wells Fargo
Bank, N.A. v. Guy Atkinson Co. (In re Guy F. Atkinson Co., 242 B.R. 497, 501-02 (9th Cir.
B.A.P. 1999) (concluding that bonding companies had standing to negotiate and propose
settlements of bonded project claims to the debtor's estate over secured creditors' objections); In
re Walnut Equipment Leasing Co., 1999 WL 288651, *6 (Bankr. E.D. Pa., May 4, 1999)
(allowing Rule 9019 settlement motion by creditors committee permitting substantive
consolidation of the debtors' estates).
No less consistent with the purpose for which derivative standing is granted, committees
carrying the sword for the bankruptcy estate bring their claims to trial — and win. See, e.g.,
Official Comm. of Unsecured Creditors of TOUSA, Inc. v. Citicorp North Amer., Inc. (In re
TOUSA, Inc.), Nos. 08-10928-JKO, 08-1435-JKO, 2009 WL 3519403 (Bankr. S.D. Fla. Oct. 30,
2009) (ordering, after trial prosecuted by creditors' committee, avoidance of liens, claims and
obligations as fraudulent transfers and that funds paid to lenders be disgorged to debtors);
Buncher Co. v. Official Comm. of Unsecured Creditors of GenFarm Ltd. P 'ship IV, 229 F.3d
245 (3d Cir. 2000) (affmning judgment entered by bankruptcy court after trial prosecuted by
committee that sale to limited partners constituted a constructive fraudulent conveyance, and that
bankruptcy court properly voided the transaction); Mellon Bank N.A. v. Official Comm. of
Unsecured Creditors of R.ML., (In re R.ML., Inc.), 92 F.3d 139 (3d Cir. 1996) (affirming
judgment obtained by unsecured creditors' committee to recover fees which the bankruptcy court
held were fraudulent transfers); Maurice Sporting Goods, Inc. v. Maxway Corp. (In re Maxway
Corp.), 27 F.3d 980 (4th Cir. 1994) (affirming judgment obtained by committee prosecution of
estate claims granting recovery of payments made by debtors because they constituted
preferential transfers). The condescending assumption of the Debtors that they somehow are
saving the Committee from itself by trying to bar the Committee's trial of claims against the
FPDs, disregards this fact. Moreover, as any experienced litigation or bankruptcy practitioner
knows, the settlement value of many cases reaches the peak at or during trial, and, here, the
Debtors' interference with the Committee's meticulously prepared trial strategy saved the FPDs,
including several significant CWT clients, from a public trial exposing their lending practices
and the huge financial risks of the trial.
Contrary to the assertion of the Debtors, Smart World Technologies, LLC v. Juno Online
Svcs., Inc. (In re Smart World Technologies, LLC), 423 F.3d 166 (2d Cir. 2005), does not support
the untenable contention implicit in the Debtors' Settlement Motion that the grant of derivative
standing consists of nothing more than the right of a committee to commence suit and litigate
until the disabled and conflicted debtor who refused to bring the suit in the first instance (and
here, who was contractually barred from suing the parties with whom it seeks to settle)
unilaterally decides to settle the case out from under it. In Smart World, the Second Circuit was
not addressing what is ordinarily understood as derivative standing but rather its "converse"
which the Court somewhat confusingly referred to as "derivative standing in the Rule 9019
context." 423 F.3d at 177. By that phrase, the Court was describing a novel form of derivative
standing premised on a debtor's unjustifiable refusal to settle rather than to prosecute a claim.
Id. ("Appellees' position is, presumably, that derivative standing is appropriate in the Rule 9019
context where the debtor unjustifiably refuses to settle a claim, or unjustifiably insists on
pursuing a claim."). In explaining why derivative standing would not be granted to settle a claim
already being pursued except in "certain, rare cases," the Second Circuit pointed to the important
difference between pursuing an otherwise neglected claim and settling it. Id. The pursuit of
estate claims, the Second Circuit pointed out, "is precisely the role of the debtor-in-possession
envisioned by the Code." Id. Allowing creditors to seek standing based on an "unjustifiable
refusal to settle" would encourage defendants to delay and obstruct estate litigation in the hope
that some creditor, with little stake in the estate, would "eventually propose a settlement
disposing of the estate's valuable causes of action at a low price." Id. The Second Circuit, in
rejecting the new form of derivative standing being proposed, was upholding the prerogatives of
the only party in that case with authority to prosecute, settle or withdraw the claims at issue. Id.
at 177. Through this rejection, the Second Circuit anticipated it would avoid the "perverse
dynamics" of inviting interference, by parties with little economically at stake, into the
prosecution of valuable estate claims Id. Thus, Smart World supports the dual propositions (1)
that the prosecution of estate claims is presumptively consistent with the objectives of
maximizing estate value, and (2) that where an estate claim is already being prosecuted by a
court-authorized party (here, the Committee), a party with little economic interest in the claim
(here, the Debtors) should not be allowed to settle the claim while the prosecuting party is
engaging in precisely the function intended by the conferral of standing in the first instance. In
sum, rather than supporting the Debtors' contentions, Smart World supports the proposition that
court-authorized estate litigation should be protected from unwarranted interference with the
prosecuting party's efforts to maximize the value of its claims.
Decisions arising out of the Adelphia Communications bankruptcy, including Adelphia
In re Adelphia Commc'ns. Corp., 368 B.R. 140 (Bankr. S.D.N.Y. 2007) (Gerber, J.) ("Adelphia
II"), Official Comm. of Equity Sec. Holders v.. Adelphia Commc'ns. Corp. (In re Adelphia
Comm'cns. Corp.), 371 B.R. 660, 673 (S.D.N.Y. 2007) (Scheindlin, J.) ("Adelphia III")
(affirming Adelphia II) and Adelphia IV (affirming Adelphia II and Adelphia also do not
support the Debtors' presumptive entitlement to unilaterally settle the UCC Litigation.
Significantly, Adelphia II, although addressed to the withdrawal of standing did not involve a
settlement, but rather the transfer of claims from an equity committee to a litigation trust that
would pursue the claims on behalf of the creditors entitled to receive the proceeds under the
Bankruptcy Code's priority scheme. Adelphia II, 368 B.R. at 273-74; Adelphia III, 371 B.R. at
673. The withdrawal of standing from the equity security holders in Adelphia III was
appropriate since, among other reasons, the equity committee was "hopelessly out of the money"
(behind $6.5 billion of unsecured claims ahead of them) and accordingly, without a sufficiently
concrete interest in the claims to be litigated. Id. 371 B.R. at 672. Here, in contrast, the claims
are not being transferred, but extinguished for an amount that the Committee believes does not
reflect their settlement value. Moreover, unlike the Adelphia equity committee, if the Committee
succeeds on its avoidance claims against the FPDs, the Debtors' unsecured creditors are not only
"in the money," but likely would be paid in full.
Most importantly, the continued prosecution of the claims in Adelphia II was assured
through the role of the litigation trust. The Court thus found that it was no longer in the best
interests of the estate for the equity committee to separately prosecute such claims. Adelphia II,
368 B.R. at 271-72; see also Adelphia III, 371 B.R. at 673.
The Rule 9019 standards, discussed infra at Part II, are addressed specifically to
obtaining judicial review and approval of bona fide settlements of estate claims. It is reserved
for claim dispositions that, unlike the Proposed Settlement, can be presented to the Court, at least
prima facie, as the product of arm's length bargaining between the parties whose interests are at
stake. It is not available as a procedural vehicle, as the Debtors propose to use it here, to obtain
court approval of what is essentially a unilateral claim disposition proposed by a debtor disabled
by conflicts. Although the Rule 9019 requirement, discussed infra at Part II, that a settlement
"must fall within the reasonable range of litigation possibilities," In re Adelphia Commc 'ns
Corp., 327 B.R. 143, 159 (Bankr. S.D.N.Y. 2005) ("Adelphia V") (internal quotation marks
omitted), should certainly preclude approval of the Proposed Settlement as without basis and
facially unreasonable, the Rule 9019 standard is a deferential standard that courts have developed
for evaluation of an arm's length bargain which has been negotiated by a party, unhindered by
conflicts, seeking to maximize recovery. See In re Hibbard Brown & Co., 217 B.R. 41, 46
(Bankr. S.D.N.Y. 1998) ("As long as the integrity of the negotiation process is preserved, a
strong initial presumption of fairness attaches to the proposed settlement, and the
recommendation of counsels [sic] are accorded great weight."). This is because "[i]n arm's
length negotiations, plaintiffs attempt to obtain as much as possible and defendants seek to pay
as little as possible." Dacotah Marketing and Research LLC v. Versatility, 21 F. Supp. 2d 570,
577-78 (E.D. Va. 1998).
Deference is not appropriate to the Proposed Settlement which was driven solely by the
Debtors' desire to remove an obstacle to its reorganization and without due regard by the
Debtors for their duties as debtor-in-possessions to the general creditors whose claims they
compromised. "Where interdebtor issues exist and are material, they cannot, of course, be swept
under the rug ... some means, consistent with fairness, due process, and appropriate advocacy,
must be formulated to resolve them if those issues cannot be settled." Adelphia Commc'ns.
Corp., 336 B.R. at 678. As the means used by the Debtors in this case to resolve the claims of
the Debtors' unsecured creditors are not consistent with fairness, due process or appropriate
advocacy, the Proposes Settlement should not be considered for approval by the Court under the
standards of Rule 9019.
B. STN Authority Was Properly Conferred on The Committee To Preserve Valuable Estate Claims That Would Otherwise Have Been Abandoned.
As fiduciary, a debtor-in-possession bears the burden of "maximiz[ing] the value of the
estate[.]" Smart World, 423 F.3d 166, 175 (quoting Commodity Futures Trading Comm'n v.
Weintraub, 471 U.S. 343, 352 (1985)). In some instances, this fiduciary duty requires the pursuit
of causes of action. Id. Under well-established Second Circuit precedent, where a debtor-in-
possession is unwilling or unable to discharge this duty, a creditors' committee has an implied
right under Sections 1103(c)(5) and 1109(b) of the Bankruptcy Code to initiate a suit on estate
causes of action with the approval of the bankruptcy court. Unsecured Creditors' Comm. v.
Noyes (In re STN Enterprises), 779 F.2d 901, 904-05 (2d Cir. 1985).
Committee standing to bring suit plays, as here, an important role in assuring that
"potentially valuable (and sometimes critical) claims on behalf of the estate will be prosecuted."
Adelphia I, 330 B.R. at 373; see also Official Comm. of Unsecured Creditors of Cybergenics
Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 562 (3d Cir. 2003) (observing that
official committees play a "vibrant and central role in Chapter 11 adversarial proceedings.").
Derivative standing is frequently observed to be critical to the vindication of rights, as here,
arising from the fraudulent or constructively fraudulent transfer of estate assets since these
claims may be adverse to the insiders and stakeholders of the debtors-in-possession who exercise
control over the decisions regarding the prosecution of estate claim. See Official Comm. of
Unsecured Creditors v. Pardee (In re Stanwich Fin. Servs. Corp.), 288 B.R. 24, 27 (Bankr. D.
Conn. 2002) ("The core objectives of bankruptcy cannot be achieved if those who would
otherwise be exposed to transfer avoidance actions...are insulated by the reluctance of inability
of a debtor-in-possession to commence and prosecute such actions.") (citing Glinka v. Murad (In
re Housecraft Indus. USA, Inc.), 310 F.3d 64, 71 n.7 (2d Cir. 2002), and In re STN Enterprises,
779 F.2d at 904); see also Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc. (In re
Trailer Source, Inc.), 555 F.3d 231, 242-43 (6th Cir. 2009) (in granting derivative standing to a
committee, the bankruptcy court "effectuates Congress's intent that fraudulently transferred
property be recovered for the bankruptcy estate.").
The courts of this Circuit have observed that in certain cases, derivative standing may be
also conferred for reasons other than the "unjustifiable refusal" of a debtor to prosecute estate
claims. See Commodore Intl Ltd v. Gould (In re Commodore Intl Ltd), 262 F.3d 96 (2d Cir.
2001) (granting derivative standing where the division of labor justified the prosecution of
claims by a committee but where the debtor had the actual power to support and consent to
committee litigation); Housecraft, 310 F.3d at 71 (permitting secured creditor to serve as co-
plaintiff with trustee to pursue fraudulent conveyance claims); see also Adelphia I, 330 B.R. at
384 (granting derivative standing to equity committee to pursue additional fraudulent
conveyance claims not being already asserted by the creditors' committee). It is important to
acknowledge, however, that this is not a Commodore or Housecraft case.48 Here, the Debtors
had neither the power nor the inclination to pursue claims against either the Access Defendants
or the FPDs: nothing more is reqUired to fmd that the failure to pursue colorable claims is
"unjustifiable."'"
In view of the predicate for derivative standing in this case, the fact that the Debtors did
not formally object to Committee standing to pursue the estates' fraudulent conveyance claims
against the FPDs and other Defendants, should not be confused with the issue of the Debtors'
neutrality or ability to act as a fiduciary with regard to the UCC Litigation. In the absence of
48 In their Settlement Memorandum, the Debtors mistakenly cite Adelphia IV for the proposition that "a committee operating under STN standing 'serves with the approval of a bankruptcy court and shares the labor of litigation with the debtor-in-possession.'" (Settlement Memorandum at ¶ 38) (quoting Adelphia IV, 544 F.3d at 427). The Court in Adelphia IV was clearly referring to Commodore standing rather than STN standing, and the Debtors' contention is simply wrong. See Adelphia IV, 544 F.3d at 427 ("We do not mean to trivialize, but only to place in context, the role of the derivative plaintiff. It serves 'with the approval and supervision of a bankruptcy court' and shares the `labor' of litigation with the debtor-in-possession.") (quoting from Commodore, 262 F.3d at 100).
49 "The 'unjustifiable' failure of a debtor to bring the suit itself does not require an improper motive for the failure. Rather, a debtor's failure to bring a claim is deemed to be unjustifiable when the committee has presented a colorable claim that on appropriate proof would support recovery, and the action is likely to benefit the reorganization of the estate." Adelphia I, 330 B.R. at 374 n. 19. See STN Order. Here, where the Debtors neither consented to nor had the power to support or cooperate with the UCC Litigation, and where they did not join in its prosecution, standing was granted based on the "unjustifiable refusal" to prosecute claims likely to benefit the reorganization of the estate.
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formal objections to standing and the clear "colorability" of the claims, the Court was not called
upon to and did not make factual findings regarding the Debtors' conflicts or other
considerations relevant to conferring standing. It is clear on this record that the Debtors'
decision to refrain from formally objecting to the Committee's standing was purely strategic:
they could not prevail and their formal objection would only establish, as a matter of record, their
hostility to the Committee's claims. 50 Nonetheless, it is clear that the Debtors and CWT were
and remain strongly predisposed to view the UCC Litigation as contrary to their interests, and
their claim of being capable of a neutral, independent assessment must not merely be viewed
with skepticism, but rejected outright. The factors that were relevant to the Court's exercise of
granting STN standing to the Committee upon its STN Motion have not changed and accordingly,
there is no predicate for the withdrawal of the Committee's standing.
C. The Debtors Have Failed to Demonstrate That the Withdrawal of the Committee's STNAuthority is in the Best Interests of the Debtors' Estates.
Prior to withdrawal of a committee's standing based upon a settlement being proposed
over the objection of the committee, a court must inquire whether the considerations that first
justified the conferral of STN authority have changed so as to warrant withdrawal. Just as a
bankruptcy court may grant derivative standing only where such standing is in the interests of the
estates, a court may exercise its equitable power to withdraw derivative standing only if the court
concludes that the "maintenance of the litigation being pursued by a committee no longer meets
[the foregoing test for the grant of STN authority in the first instance] (i.e., that allowing the
litigation to continue would be detrimental to either the estate's best interest, or to the fair and
efficient resolution of the bankruptcy proceeding.)" Adelphia III, 371 B.R. at 667; see also
50 The Debtors initially objected to the Committee's standing to pursue claims against Access and certain other insiders.
-56-
Adelphia IV, 544 F.3d at 423 (The "court may withdraw a committee's derivative standing and
transfer the management of its claims, even in the absence of that committee's consent, if the
court concludes that such a transfer is in the best interests of the bankruptcy estate".). In
deciding to withdraw the equity committee's STN standing in Adelphia, "the [bankruptcy court]
engaged in another 'best interest test,' predicated on the changed factual circumstances."
Adelphia III, 371 B.R. at 673. "[A] a bankruptcy court's decision to withdraw derivative
standing is reviewed for an abuse of discretion." Id at 665-66. A bankruptcy court that fails to
make findings necessary to the proper exercise of its discretion or that relies on erroneous
conclusion of law abuses its discretion. Id.
Ignoring the need for a change in the circumstances relevant to the justification for
derivative standing to have been conferred in the first instance, the Debtors claim that all that
matters is the reasonableness of the terms of the Proposed Settlement. Concededly, the iteration
of the legal standard for withdrawal of STN authority uses the same words as the iteration of the
legal standard for the approval of a settlement of an estate claim. To be judicially approved, the
settlement must be "fair and equitable," see Protective Comm. for Indep. Stockholders of TMT
Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) ("TMT Trailer"), and in "the best
interests of the estate." Adelphia II, 368 B.R. at 225. It does not follow, however, that the
factual underpinnings of these two inquiries are also the same so that "there is no need to decide
whether it is in the best interests of the Debtors' estates to withdraw the Committee's standing,
separately from deciding whether the Proposed Settlement is the in the best interests of the
Debtors' estates." (Settlement Memorandum at ¶ 51). Moreover, if accepted, the elimination of
a discrete inquiry into grounds for the termination of derivative standing would seriously impair
the value of derivative standing as a value-maximizing tool. As illustrated by the record in these
cases, the presumptive entitlement of the debtor and its conflicted counsel to pursue their own
litigation strategy, independent from and undisclosed to the party actually acting with court
authority to prosecute claims, and then to offer up that settlement over the objection of the
authorized party, would invite the "perverse dynamics" that propelled the Second Circuit to
reject "derivative standing in the Rule 9019 context" in Smart World On this record, the Court
should not reach the issue of whether the Proposed Settlement meets the standards of Rule 9019
but should find that as a consequence of conduct totally inconsistent with the Court's grant of
STN authority to the Committee, that the Debtors are now without standing to seek approval of
the Proposed Settlement.
1. The circumstances warranting STN authority have not changed: the Debtors remain incapable of discharging their duties to preserve, protect and maximize the value of the UCC Litigation for the benefit of the estates.
The circumstances relevant to the Debtors' ability to maximize the value of the claims
underlying the UCC Litigation are no different than they were when the Court conferred STN
authority on the Committee. Just as before, the Debtors are incapable of pursuing claims against
the FPDs. What has transpired instead is that the Debtors, acting under the guidance of CWT as
their reorganization counsel, are insisting upon their right to effectuate a plan of reorganization
that does not allow for or permit the fair and equitable resolution of the UCC Litigation.
In utterly failing to successfully reconcile the conflicting roles of the Debtors as
representatives of the interests of the post-reorganization business and as fiduciaries to the
Debtors' estates and their unsecured creditors, the Debtors have acted under the advice of
counsel whose guidance is tainted by conflict of interests disabling such counsel from
discharging its duties to the estates with respect to the UCC Litigation. See, e.g., In re Whitney
Place Partners, 147 B.R. 619, 620-21 (Bankr. N.D. Ga. 1992) (debtor's attorney's duty as
fiduciary of the estate requires an active concern for the interests of the estate and its
beneficiaries); see also In re Consupalc Inc., 87 B.R. 529, 549 (Bankr. N.D. Ill. 1988) (counsel
to bankruptcy trustee is a fiduciary of the estate, and thus must do more than satisfy contractual
obligations to trustee, but also carry out broader fiduciary duty to the estate); In re Rusty Jones,
Inc., 134 B.R. 321, 343 (Bankr. N.D. Ill. 1991) ("[C]ounsel for the estate cannot close their eyes
when the debtor's principals are not acting in the best interests of the estate and its creditors, and
certainly cannot aid the adverse activity."). The record reveals that CWT has guided Debtors
and the Litigation Committee at every step, analyzing and interpreting legal issues for the
Litigation Committee and even guiding the decision-tree formulas, even though CWT was in
breach of its fiduciary duty to the estate by continuing to advise the Debtors in the Committee's
litigation, at a minimum, after the STN Motion was granted. In sum, the circumstances of these
Debtors remains such that derivative standing is both salutary and essential. To allow the
Debtors and their counsel, under these circumstances, to settle the claims out from under the
Court-appointed STN representative without first demonstrating, after notice and a hearing, that
STN authority should be withdrawn for cause, will undermine the perception of fair play
essential to the administration of the bankruptcy laws and would place in doubt the utility of STN
derivative standing in future cases.
2. The Debtors' conduct throughout the pendency of these cases and the UCC Litigation requires the denial of the Debtors' attempt to assert standing to control and to settle the UCC Litigation against the FPDs.
At the time the STN Motion was brought, the Debtors, in consultation with the FPDs,
strategically chose not to seek an explicit reservation of the right to settle the UCC Claims, but to
reserve that issue for future resolution in the context of a proposed settlement, when, they
calculated, their "leverage [would be] greatest." (Ex. 29 — 7/14/09 email Davis to Huebner).
Thereafter, the Debtors engaged in an ongoing course of conduct, detailed above, in fulfillment
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of the objective, which they shared with the FPDs, of undermining and devaluing the Committee
claims. The Proposed Settlement is the culmination of this long standing agenda, concealed until
the announcement of the Proposed Settlement on December 4, 2009, while expert depositions
were still underway.
A chapter 11 debtor-in-possession is required to "wear two hats," one as a non-fiduciary
proponent of the debtor's business matters and the other fiduciary to the bankruptcy estate. See
In re Water's Edge L.P., 251 B.R. 1, 7-8 (Bankr. D. Mass. 2000) (drawing a distinction between
a debtor-in-possession's fiduciary duties to its unsecured creditors, where it operates as a
"trustee," and its role in proposing and confirming a plan of reorganization, where it operates as
a "debtor" or plan "proponent"); McClelland v. Grubb & Ellis Consulting Servs. Co. (In re
McClelland), 418 B.R. 61, 67 (Bankr. S.D.N.Y. 2009) ("It is well settled that...the chapter 11
debtor is an entity different from the chapter 11 debtor-in-possession, with different interests in
property and different duties."). By their own implicit admission, the Debtors were wearing the
wrong hat when they settled the UCC Litigation. In carrying out its duties as the fiduciary to its
estate, which include those activities pertaining to the prosecution or settlement of estate claims,
a debtor in possession owes fiduciary obligations to the "prime beneficiaries of its estate": its
unsecured creditors. In re Water's Edge L.P., 251 B.R. at 7; see also Unofficial Comm. of Equity
Holders Of Penick Pharm., Inc. (In re Penick Pharm., Inc.), 227 B.R. 229, 232-33 (Bankr.
S.D.N.Y. 1998) (debtor in possession has duty to maximize value of the estate and is "burdened
to ensure that the resources that flow through the debtor in possession's hands are used to benefit
the unsecured creditors and other parties in interest"); In re Dunes Hotel Assocs., No. CA94-
75715, 1997 WL 33344253, at *15 n.27 (Bankr. D.S.C. 1997) ("A debtor-in-possession...is a
fiduciary of its unsecured creditors and must act in their interests and for their benefit."); In re
Herberman, 122 B.R. 273, 280 (Bankr. W.D. Tex. 1990) ("the estate enterprise has an operating
officer, a 'trustee' with a fiduciary obligation owed to the estate's beneficiaries, its unsecured
creditors."). It should be dispositive of the outcome of the Debtors' motion, that they do not
claim that their objective in settling the UCC Litigation was to "obtain as much as possible."
Instead, relying on their presumptive entitlement to settle, the deeply conflicted Debtors and their
equally conflicted counsel, CWT, deliberately sought to obtain as little as possible, with a
settlement amount calculated to approximate the smallest amount that could pass muster with the
Court. The Debtors' attempted strategic use of Rule 9019 to diminish the value of estate
property should not receive the imprimatur of the Court.
The Debtors' disregard for the Committee and failure to even consult with the Committee
prior to settling with the FPDs is similar to the facts cited by the bankruptcy court in In re Exide
Techs. 303 B.R. 48, 67 (Bankr. D. Del. 2003). In Exide, the court denied confirmation of a plan
of reorganization that provided for the settlement of claims that were subject to an adversary
proceeding initiated by the creditors' committee after the receipt of court authority to file
derivative claims. The bankruptcy court held that although a debtor could "propose a settlement
of the [committee's] Adversary Proceeding in its plan" pursuant to Code Section 1123(b)(3)(A),
the proposed compromise was not "fair and equitable." Id. at 67. The court found that the
proposed settlement, like here, was not the result of arm's length bargaining with the unsecured
creditors, but was the result of discussions solely between the lenders and the debtor and was
proposed without the support of Exide's unsecured creditors. Id at 71. Thus, Exide warns
against permitting debtors to impose a settlement on their unsecured creditors, contrary to the
Debtors' suggestion that Exide is "virtually identical" to the posture here. (Settlement
Memorandum at ¶ 41).
3. The conflicts of interest of the Debtors' representatives and fiduciaries should preclude them from settling the Committee's claims against the FPDs.
It is undisputed that CWT derives significant revenues from representation of certain of
the FPDs. There can be no dispute that the Debtors' estates' interests were legally adverse to the
parties against whom the UCC Litigation is being prosecuted and that the estates have not, nor
did they have the capacity to, waive CWT's conflicts. Any notion that CWT could advise the
Debtors regarding the negotiation and settlement of the UCC Litigation disregards this blatant
conflict which should have resulted in the engagement of conflicts counsel to represent the
Litigation Committee, inter alia, in any negotiations with the FPDs. See, e.g., In re Kobra
Properties, 406 B.R. 396, 406 (Bankr. E.D. Cal. 2009) (conflicts counsel necessary in action
against creditors committee where counsel to trustee formerly represented creditors committee);
see also NY Lawyer's Code of Professional Responsibility, EC 5-14 ("Maintaining the
independence of professional judgment required of a lawyer precludes acceptance or
continuation of employment that will adversely affect the lawyer's judgment on behalf of or
dilute the lawyer's loyalty to a client. This problem arises whenever a lawyer is asked to
represent two or more clients who may have differing interests, whether such interests be
conflicting, inconsistent, diverse, or otherwise discordant.").
Notwithstanding its inability to represent interests of the estates adverse to its clients,
CWT was the Litigation Committee's source of legal analysis of the UCC Litigation and
provided the risk assessments and issue identifications that informed the weighted probability
decision tree of the Debtors' consultant, Marc B. Victor, Esq., from Litigation Risk Analysis,
Inc., and CWT was also the sole conduit between former Judge Francis Conrad and the
Litigation Committee.
As an additional source of CWT's relationships with the FPDs, it is also conflicted due to
its relationship to the Blavatnik-controlled Supervisory Board and the Blavatnik-controlled
Debtors, who can terminate CWT from its role as reorganization counsel to the Debtors in these
cases at his whim. (Ex. 17 - January Cooper Depo. Tr. at 32:17-24; 34:13-17; 38:4-7).51
4. The UCC Litigation does not threaten the Debtors' reorganization.
This Court has expressed its commitment not to allow delay in the bankruptcy process
result in the failure of the Debtors' to successfully reorganize. (Ex. 58 December 11, 2009
Hearing Tr. at 135:4-5 (the Court stating that "our highest responsibility is to ensure that our
patient doesn't die on the operating table.")). Notwithstanding this goal, a debtor cannot ride
roughshod over its creditors to make it so. The reality is, however, that continued prosecution of
the UCC Litigation, until such time as it is resolved consistently with fairness and due process,
does not threaten the Debtors' successful emergence from these chapter 11 cases. The real threat
to the Debtors is posed by adequate protection payments which are used by the FPDs to hedge
their bets on a successful reorganization by continuing to drain the Debtors. (Id. (Court: "the
thing that's killing you is the adequate protection payments, which seemingly are about eighty
percent of the — you know, of your bleed and I didn't hear you say that the incremental expense
of the litigation was doing that.")). It is unfair and illogical to attribute the burden of ongoing
adequate protection payments to the Committee. The FPDs are in a position to waive adequate
protection which, if their presumption is correct, i.e., that they "own" the company, simply
results in their taking money out of one of their own pockets and putting it in another.52
51 Pursuant to the Debtors' proposed plan, the Debtors will create a litigation trust to pursue the remaining, non-settling claims under the UCC Litigation including claims against Blavatnik-controlled entities arising from the Transaction and related transfers to Blavatnik and affiliates. Under the proposed plan, it is the Debtors, not the Committee that selects the litigation trustee charged with pursuing the remaining, non-settling claims. 52 Based on the Debtors' concession at the January 19, 2010 hearing on the Committee's motion to terminate the adequate protection payments it appears such payments are now not jeopardizing the reorganization. (Ex. 49 —1/19/10 Hearing Tr. at 75:6-12). Moreover, there is now serious question as to the propriety of continuing them at
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To the extent the UCC Litigation has been made to appear as an obstacle to
reorganization, this is due to the Debtors' failure to provide for the fair resolution of estate
claims as part of their reorganization strategy. While the Debtors' first proposed plan of
reorganization dated September 11, 2009 [Docket No. 2741] included such a mechanism, Apollo
and Ares, holders of a lion's share of the pre-petition senior debt and DIP Roll-Up debt, took the
position that they would seek to block any plan that included a reserve for the UCC Litigation.
(Ex. 17 January Cooper Depo. Tr. at 197:4-11; Ex. 31 — LBI Litigation Committee Meeting
Minutes, dated October 23, 2009 (the Debtors' Litigation Committee was informed on October
23, 2009 that "certain of the senior lenders would not support a plan of reorganization that
contained a reserve or even the possibility of a reserve.")). The Debtors' acquiescence to the
threats of certain FPDs was inconsistent with their obligations, as debtors-in-possession to the
interests of unsecured creditors. One only need to review the Examiner's Report to recognize
that the Debtors could have pursued other avenues both to refinance the DIP Financing and for
exit financing (if only to reduce reliance on the FPDs or as a prudent back-up plan). (Examiner
Report at 64).
The Debtors' assertions that the approval of the Proposed Settlement is necessary for a
quick resolution that would allow the Debtors to emerge from chapter 11 and that the future of
the Debtors would be at risk without settlement are self-serving and untrue. It is clear on this
record that the Debtors intervened to foreclose the case from being tried, not to avoid
reorganization delay, but to preclude the possibility of a UCC victory. In advancing the
argument that a pre-trial settlement was somehow necessary, the Debtors disregard that the Phase
I trial would likely have been concluded by now and would, as strenuously argued to the Court
all now that it appears the recipients are under-secured. (Id. at 80:5-7) Indeed, the Debtors' decision to force a settlement on the eve of the Phase I trial is inexplicably at odds with the Debtors' position at the STN hearing that getting through the Phase I trial was the best way to effect a settlement. (Ex. 7 — STN Hearing Tr. at 50:10-12).
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by the Debtors themselves, have likely facilitated the resolution, consistent with considerations
of due process, of any remaining UCC Litigation against the FPDs. Now, by urging that the
Proposed Settlement was somehow a prerequisite to plan confirmation, the Debtors conveniently
forget their own central role in imposing an expedited trial schedule specifically tailored to result
in a prompt resolution of the UCC Litigation. If there was an urgency to settling the UCC
Litigation, it was to accelerate the process so that the FPDs participating in the backstop rights
offering would be able to get the benefit of doing that deal before a better offer, whether from
Reliance, or another third party precluded that result.
Moreover, the Debtors' current financial performance refutes any notion that there is a
risk that these Debtors will not be successfully reorganized for the benefit of future stakeholders.
James Gallogly reported that LBI's 11-month EBITDAR 53 of $2.1 billion in November 2009 was
close to budget for entire year, and was $200 million more that forecast. (Ex. 50 - November
2009 Performance Update (dated January 12, 2010)).
In short, the Court, for a myriad of reasons, should deny the Debtors' request to remove
standing from the Committee and as a result deny the Debtors' Settlement Motion without the
necessity of reaching the arguments set forth below in Part II.
II. The Proposed Settlement Should Not Be Approved.
A. The Legal Standard.
In the event the Court rules that the Debtors have standing to present the Proposed
Settlement for approval by the Court, it will then become the duty of the Court to determine
under Rule 9019 standards whether the Proposed Settlement is "fair and equitable," see TMT
Trailer, 390 U.S. at 424, and in "the best interests of the estate." Adelphia II, 368 B.R. at 225
53 Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring costs.
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(approving settlement of inter-debtor and inter-creditor issues within a plan of reorganization);
accord Adelphia V, 327 B.R. at 158 (approving four-way Rule 9019 settlement between the
debtors, the U.S. Department of Justice, the U.S. Securities and Exchange Commission, and the
Rigas family). The proponents of a proposed settlement bear the burden of persuading the court
that a settlement should be approved. In re Matco Elec. Group, Inc., 287 B.R. 68, 76 (Bankr.
N.D.N.Y. 2002) ("the burden of persuading the Court that the settlement should be approved
rests with the proponents of the settlement").
The Court's determination is to be based on "the probabilities of ultimate success should
the claim be litigated," and:
[A]n educated estimate of the complexity, expense, and likely duration of ... litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise. Basic to this process in every instance, of course, is the need to compare the terms of the compromise with the likely rewards of litigation.
TMT Trailer, 390 U.S. at 424-25. Eight factors have been identified by this Court as relevant to
considering the reasonableness of a settlement. These factors, first enumerated in In re Texaco
Inc., 84 B.R. 893 (Bankr. S.D.N.Y. 1988) ("Texaco"), in the context of the proposed settlement
by the debtor of a class action claim, are:
(1) The balance between the likelihood of plaintiff's or defendants' success should the case go to trial vis a vis the concrete present and future benefits held forth by the settlement without the expense and delay of a trial and subsequent appellate procedures;
(2) The prospect of complex and protracted litigation if the settlement is not approved;
(3) The proportion of the class members who do not object or who affirmatively support the proposed settlement;
(4) The competency and experience of counsel who support the settlement;
(5) The relative benefits to be received by individuals or groups within the class;
(6) The nature and breadth of releases to be obtained by the directors and officers as a result of the settlement; and
(7) The extent to which the settlement is truly the product of arms-length bargaining, and not of fraud or collusion.
Id. at 902 (quoted by Adelphia II, 368 B.R. at 226).
Where a settlement is the product of arm's length bargaining, the first of the Texaco
factors — weighing the concrete benefits of a settlement against the likelihood of success at trial —
is the most important. See Adelphia II, 368 B.R. at 238 ("the first and most fundamental of the
factors relevant to an assessment of the wisdom of a compromise is each side's likelihood of
success"); Adelphia V, 327 B.R. at 160 (benefits of settlement versus likely rewards of litigation
is "the most important factor" and Court will "weigh it accordingly"). However, where, as here,
a settlement does not come to the court for approval having been forged in the fires of an
authentic adversarial interaction, the process by which the terms of the release of estate claims
have been arrived assumes a much greater significance. See In re Painewebber L.P. Litig., 171
F.R.D. 104, 132 (S.D.N.Y. 1997) (in class action context, "[i]f proven . . . collusion might
prevent the approval of the Settlement, and at the very least would raise the Court's scrutiny and
rebut the presumption of deference to the recommendations of counsel"); see also Adelphia II,
368 B.R. at 246 (giving consideration of whether the settlement was the result of arms-length
bargaining a "moderate weight" but noting it would have "much greater weight if [the Court]
ever thought it had not been satisfied"); Adelphia V, 327 B.R. at 165 (same). Because the
absence of arm's length negotiations should heavily weigh upon any consideration of the
Proposed Settlement, the Committee will begin with a discussion of the circumstances
surrounding the formation of the Proposed Settlement before addressing the other Texaco
factors.
B. The Settlement Was Not The Product Of Arm's-Length Bargaining.
The burden lies upon the settlement proponents to establish that the settlement was a
result of arm's length bargaining and occurred without collusion. See In re Matco Elecs. Group,
Inc., 287 B.R. at 76 ("The parties proposing the settlement must show that it is reasonable and
that . . . [among other factors] 'the settlement was not collusive . . .'") (quoting In re Del Grosso,
106 B.R. 165, 168 (Bankr. N.D. Ill. 1989)). 54 Perhaps the most compelling evidence of a bargain
arrived at arm's length is a history of adversarial interactions between the parties. See, e.g.,
Adelphia V, 327 B.R. at 165 (arm's length bargaining where, as to one party, Debtors were
engaged with negotiations with one party for nearly a year, had met more than 10 times, and
repeatedly tried to negotiate a more favorable settlement and, as to other party, Debtors fought
with "extraordinary vigor", met on numerous occasions, and tried to resolve issues through
negotiation and litigation); Adelphia II, 368 B.R. at 243 (settlement was "plainly" result of arm's
length bargaining process where was "the result of weeks of effort to bring seemingly intractable
disagreements to a consensual conclusion", and where counsel participated "with incredible
tenacity and skill, and had a knowledge of the MIA record, and the strengths and weaknesses of
every party's position, second to none."). Such a history, in which "plaintiffs attempt to obtain
as much as possible and defendants seek to pay as little as possible," Dacotah Marketing, 21 F.
Supp. 2d at 577-78, assures the Court that "the settlement is the result of hard bargaining," see
Continental Cas. Co. v. Westerfield, 961 F. Supp. 1502, 1506 (D.N.M. 1997), and such
54 Although the Debtors have argued that the burden is on the objectors to establish absence of arm's length bargaining, they have mistakenly relied upon law involving asset sales under Section 363(b), which need pass muster only under a business judgment standard and which are additionally protected by the procedural requirements governing auctions. See In re Congoleum Corp., No. 03-51524, 2007 WL 1428477, at *2 (Bankr D.N.J. May 11, 2007) (discussing "good faith" requirement of business judgment standard).
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settlements will enjoy a presumption of fairness. 55 See In re Hibbard Brown & Co., Inc., 217
B.R. at 46 ("As long as the integrity of the negotiation process is preserved, a strong initial
presumption of fairness attaches to the proposed settlement, and the recommendation of counsels
are accorded great weight."); In re Global Crossing Sec. & ERISA Litig., 225 F.R.D. 436, 461
(S.D.N.Y. 2004) (in class action context, settlement entitled to "strong initial presumption of
fairness" where it is "the result of arm's length negotiations conducted by experienced counsel
after adequate discovery and the settlement provokes only minimal objections").
However, a settlement proponent cannot meet its burden of establishing arm's length
bargaining where "the plaintiff no longer seeks to gain as much as possible through settlement,
but is otherwise motivated." Dacotah Marketing, 21 F. Supp. 2d at 578; see also Continental
Cas. Co., 961 F. Supp. at 1505 (although lalny negotiated settlement involves cooperation to a
degree," "[i]t becomes collusive when the purpose is to injure the interests of an absent or
nonparticipating party").
The circumstances that resulted in the Proposed Settlement do not bear any semblance to
the process identified by courts as evidence of an arm's length bargain. Rather, the Proposed
Settlement was the result of an internal deliberative process by the Debtors, whose admitted
objective in concluding a settlement was to eliminate the "only thing," (Settlement Memorandum
at 2), standing in the way of confirmation of the Debtors' plan of reorganization. Consistent
with that goal, instead of attempting to maximize recoveries, the Debtors impermissibly
formulated an unreasonably low settlement offer that they knew would be accepted by the FPDs
and hoped would withstand scrutiny by the Court. See Ortiz v. Fibreboard Corp., 527 U.S. 815,
55 Notably, although the Debtors have cited a number of cases for the proposition that courts generally favor settlement (Settlement Memorandum at ¶ 56), in each of those cases it was clear that the settlement had been the result of arm's length negotiation. See Heals v. Shugrue, 165 B.R. 115, 126 (S.D.N.Y. 1994) (approving settlement where the result of arm's length negotiations); In re Hibbard Brown, 217 B.R. at 46 (same).
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852 (1999) (in class action case, concluding that negotiation of global settlement by class action
counsel was not arm's length where "[c]lass counsel . . . had great incentive to reach any
agreement in the global settlement negotiations that they thought might survive a Rule 23(e)
fairness hearing, rather than the best possible arrangement for the substantially unidentified
global settlement class"); Tornabene v. General Develop. Corp., 88 F.R.D. 53, 60 (E.D.N.Y.
1980) (in the context of class action, "defendants' desire to settle coupled with the temptation of
plaintiff's counsel to avoid the risk of trial can lead to a conflict of interest that breeds unethical
collusion between attorneys"). The acceptance of the offer by the FPDs was a mere formality.
Here, where the Proposed Settlement was not the result of vigorous negotiations between
truly adverse parties, let alone any true negotiations, the Debtors have failed to meet their
burden, and the Court cannot presume that it is fair, nor can the Court give deference to the
recommendations of counsel. See In re Painewebber Limited Partnerships Litigation, 171
F.R.D. at 132 (collusion "at the very least would . . . rebut the presumption of deference to the
recommendations of counsel") (citations omitted).56
1. The History Of Negotiations.
The Debtors' very first foray into negotiating a settlement with the FPDs was to lob a
$300 million offer (less than 10 cents on the dollar to the $3.2 billion in claims arising from the
56 As the authorities cited herein demonstrate, the FPDs misstate the inquiry when they propose that this Court could find that "arm's length negotiations" justify the Proposed Settlement, merely because the Debtors and the FPDs are purportedly "not related or not on close terms" and may be "presumed to have roughly equal bargaining power." In re Nicole Energy Servs., Inc., 385 B.R. 201, 235 (Bankr S D Ohio 2008) (internal quotations and citations omitted). (Financing Party Defendants' Memorandum of Law Joining the Debtors' Motion for Approval of the Proposed Settlement Under Rule 9019 (the "FPD Joinder") at 88). Contrary to the bald assertions of the FPDs, the Debtors cannot be presumed to be capable of bargaining on equal terms with the FPDs. As explained infra, the DIP Financing affords a variety of means by which the FPDs may exercise control over the Debtors. The Debtors gave up their claims against the FPDs to obtain DIP Financing and they are attempting to settle the UCC Litigation on terms favorable to the FPDs in order to lock in exit financing. The Debtors are taking the easy way out, even though they are no longer in jeopardy of being driven under by the burden of adequate protection payments and even though other sources of financing have emerged in recent months. (Examiner Report at 64). Moreover, the suggestion that the Debtors and the FPDs are not "on close terms" is also inaccurate. The lawyers advising the Debtors on the Proposed Settlement represent principal FPDs in other matters and are so close that they are not in a position to sue them on behalf of the estates.
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UCC Litigation, as described below), representing, in relation to total claims, almost an
immaterial increase over the FPDs' most recent offer to the Committee. (Ex. 47 - Joint Board
Minutes for December 4, 2009 Supervisory Board Meeting) (describing previous offer's value of
$255 million).57 These "negotiations" between the Debtors and the FPDs were over in a matter
of minutes, with the FPDs never questioning the $300 million figure. After Cooper delivered his
proposal, the remaining twelve hours of "negotiations" were taken up by inter-creditor issues, the
resolution of which, although unrelated to the UCC Litigation, remained a condition of Cooper's
offer.
These events do not support the conclusion that the Proposed Settlement was the product
of arm's length negotiations. Proposals and true counterproposals were not exchanged. Rather,
an offer too good to refuse was accepted. Cf. Bildirici v. Kittay (In re East 44th Realty, LLC),
Nos. 05-16167, 07-8799, 2008 WL 217103, *12 (S.D.N.Y. 2008) (approving settlement that
represented "carefully negotiated bargain" where each party in tripartite negotiations agreed to
give up portion of their claims); JPMorgan Chase Bank N.A. v. Charter Commc 'ns Operating,
LLC (In re Charter Commc'ns), 419 B.R. 221, 256, 231 (Bankr. S.D.N.Y. 2009) (approving
settlement where it was the "product of vigorous and hard-fought three-way negotiations" and
contained many 'gives' and 'gets"); Adelphia V, 327 B.R. at 150-56 (describing series of offers
and counter-offers comprising negotiations). Indeed it is undisputed that neither Cooper, nor
anyone from CWT, discussed any aspect of the merits of the claims against the FPDs with the
57 The Debtors have argued that the $255 million offer was really only worth half of that because, in that offer, the FPDs did not give up their subordination or turnover rights against the 2015 Noteholders, so "half of that value [the $255 million offer] reverted back" to the FPDs. (Ex. 9 - Davis Depo. Tr. at 161:16-162:10). However, although the FPDs purport to assign their subordination rights to the Debtors under the Proposed Plan, the Debtors will only waive those subordination rights if the 2015 Noteholders vote for the Proposed Plan. Thus, if the $255 million offer was really only worth "half of that," then, if the 2015 Noteholders vote against the Proposed Plan, the $300 million offer is likewise only worth "half of that." Moreover, the Debtors have also assumed that the subordination rights against the 2015 Noteholders are enforceable, although that is the subject of open dispute. See [Adv. Pro. 09-01038].
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FPDs during such so-called negotiations. (Ex. 48 - Serota Depo. Tr. at 51:20-52:10). Although
the Debtors argue that a proposed settlement need not be the best that a debtor could have
obtained, where the Debtors have not made any effort to seek the best deal available, and have
indeed sought to obtain as little as possible, they have acted in direct dereliction of their fiduciary
duties to maximize the value of the UCC Litigation. See Smart World, 423 F.3d at 175 ("As
fiduciary, the debtor bears the burden of 'maximizing the value of the estate' . . . including the
value of any legal claims.") (quoting Commodity Futures Trading Comm'n, 471 U.S. at 352).
In exchange for the release of all claims, certain of the FPDs, who were at risk of having
their obligations avoided and/or having to disgorge fees up to the amount necessary to satisfy
over $3 billion of claims of unsecured creditors in full will instead be slightly diluted by the sale
of the incremental equity required to fund payment to the Committee. The Bridge Lenders,
including Merrill Lynch, who had significant exposure as a result of its central role and the
substantial payments made to it in the form of fees, will, if the Proposed Settlement is
approved, be better off (due to the resolution of the inter-creditor disputes which the
Debtors made a condition of their offer) based on the Proposed Settlement than they would
if the UCC Litigation was tried and the FPDs prevailed on all issues. These Bridge Lenders
are now to acquire a 5% equity interest in the Reorganized Debtors, and are estimated by the
Debtors to recover in total 6.3% (or approximately $523 million) on their claims. (Second
Amended Disclosure Statement Accompanying Second Amended Joint Chapter 11 Plan of
Reorganization for the LyondellBasell Debtors at p. 7). Such one-sided bargains are routinely
suspect as the product of arm's length negotiations. See Rafool v. Goldfarb Corp. (In re Fleming
Packaging Corp.), Nos. 03-82408, 04-8166, 2007 WL 4556981, at *4 (Bankr. C.D. Ill. Dec. 20,
2007) (court rejected settlement where it appeared no true compromise was reached where "the
benefits are all one-sided"); In re Matco Elecs. Group, Inc., 287 B.R. at 76. (arm's length nature
of the negotiations questioned where releases were given without apparent consideration).
Indeed, to accommodate the FPDs' desire to avoid directly funding the settlement, the Debtors
have agreed to allow a corresponding increase in the rights offering to fund the settlement.58
(Ex. 17 — January Cooper Depo. Tr. at 268:12-21). The "cost" of the settlement to the FPDs is
only the "dilution" of their ownership in the reorganized Debtors from the incremental rights
offering needed to fund the settlement.
Notably, the Debtors also have given up the claim, asserted against CWT client Merrill
Lynch as Count XII of the Complaint, for aiding and abetting the breach of duty by the
fiduciaries of LBI. From a review of the Debtors' Settlement Memorandum, it would appear this
claim was forfeited by the Debtors without conscious awareness of its existence, much less a
consideration of its value. The Debtors do not list Count XII in their description of the
Committee's claims (Settlement Memorandum at 13), nor do they analyze it or describe any
discovery that has been taken as to the claim (Id. at TT 20-25). However, the Debtors propose to
release Merrill Lynch from "any and all claims" arising from the UCC Litigation (including
claims that were asserted in the Complaint). (Proposed Settlement at § 4.1). The treatment of
Count XII, considered in light of the blatant conflicts permeating CWT's relationship with
Merrill Lynch, is a sufficient basis alone for rejection of the Proposed Settlement. See In re Lion
Capital Group, 49 B.R. 163, 189 (Bankr. S.D.N.Y. 1985) ("court can not find that a settlement
by a trustee fits within the lowest bounds of reasonableness where a facially significant cause of
action is glossed over and key facts relevant to others are not presented even in summary
fashion.").
58 In the absence of a settlement, the out-of-the money Bridge Lenders, were at risk for disgorgement of $988 million in transaction fees and pre-petition interest.
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The Debtors' attempt to rely on the duration and intensity of the UCC Litigation and the
limited and unproductive negotiations between the Committee counsel and the FPD counsel as
indicative of the arm's length nature of the Proposed Settlement defies reason. Certainly, if the
Committee had successfully negotiated a resolution with the FPDs, this history would support an
inference that those negotiations were at arm's length. The reality however is that, not only did
the Committee not play a role in the negotiations leading to the Proposed Settlement, but the
very existence of those negotiations was kept secret from the Committee. Thus, the Committee's
efforts, including its separate negotiations with certain of the Bridge Lenders, which were
squandered by the Debtors' unilateral actions, cannot support an inference that the Proposed
Settlement was the product of arm's length bargaining.
2. The Interests Of The Debtors And The FPDs Are Aligned.
With respect to the resolution of the UCC Litigation, the Debtors and the FPDs shared a
common purpose, had a common economic interest, and, as a consequence, were incapable of
engaging in arm's length negotiations. See Berry v. School Dist. of Benton Harbor, 184 F.R.D.
93, 105 (W.D. Mich. 1998) ("Two types of collusive conduct have been identified by the courts.
The first is where counsel or a named representative has benefited at the expense of the class as a
whole. The second is where the parties have failed to approach the settlement as true
adversaries."); cf. Cohen v. Nat'l Union Fire Ins. Co. (In re County Seat Stores, Inc.), 280 B.R.
319, 327 (Bankr. S.D.N.Y. 2002) ("a truly adverse party does not (or should not) invoke fears of
collusion."). From the very beginning of the case, the Debtors have been beholden to the FPDs,
and have worked closely with the FPDs. The FPDs provided DIP financing to the Debtors and,
as a condition to such financing, the Debtors agreed to refrain from bringing any action against
any of the FPDs. The Debtors have also viewed the FPDs as the presumptive source for any exit
financing. Consistent with this view, certain of the FPD counsel have even professed that "we
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[the FPDs] own this company," when explaining why an expedited trial on the UCC Litigation
was necessary. (Ex. 7 - STN Hearing Tr. at 63:6). The Debtors and the FPDs have been in
discussions for months with respect to both the Debtors' proposed plan of reorganization and the
rights offering, and shared the common goal of ridding the estate of the UCC Litigation,
regularly discussing when the most appropriate time to do so would be. Even in the context of
the Settlement Memorandum, where the Debtors purport to be acting in their fiduciary capacity
as debtor-in-possession, the Debtors depict the UCC Litigation as the fly in the ointment of their
common plan for the reorganization of the Debtors and its settlement as the "trigger" for
successful reorganization. So eager are they to emerge from reorganization, that, in a seeming
attempt to force this Court's decision on the Settlement Motion, they initially agreed to an equity
commitment agreement with an approval deadline prior to the hearing date on the Settlement
Motion. 59 The Debtors' arguments regarding their fiduciary duties confuse the duties imposed
with conduct consistent with discharging those duties. The Debtors' conduct throughout these
chapter 11 cases was calculated to, and if the Proposed Settlement is approved, will have been
successful in minimizing the value of the UCC Litigation.
Such an alignment of interests between a debtor and its pre-petition lenders is common
and, due to the inherent conflict this creates, bankruptcy courts will often designate another party
to prosecute any claims against the pre-petition lenders. See Adelphia I, 330 B.R. at 373 (noting
that debtors "sometimes have a practical need to avoid confrontation with entities like their
secured lenders, because they need those entities' continuing cooperation — as, for example, in
connection with exit financing" and "sometimes are limited by DIP financing orders that
foreclose or impair their ability to bring claims against certain entities (such as prepetition
59 The Committee was advised today that Debtors have agreed to adjourn the hearing date on the ECA until after the Rule 9019 hearing is concluded.
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secured lenders), so that such claims must be brought by creditors or not at all."); see also In re
STN Enterprises, 779 F.2d at 905. This inherent conflict does not disappear when the debtor
wishes to settle the claims without the knowledge or approval of the party that has been granted
standing. It is unsurprising then that neither the Debtors nor the FPDs cite a single case in which
a court has approved the wholesale settlement of claims against pre-petition lenders brought on
the debtor's behalf by a creditors' committee, over the objection of that creditors' committee.6°
Cf. Adelphia IV, 544 F.3d at 423 (approving transfer of claims previously prosecuted by equity
committee into a litigation trust); In re Allegheny Intern., Inc., 118 B.R. 282, 313 (Bankr. W.D.
Pa. 1990) (confirming plan containing approving settlement of claims brought by creditors'
committee along with equity committee as intervenor, over objection of equity committee, where
creditors' committee negotiated settlement and where majority of equity holders voted for plan).
Indeed, in the only published decision in which a court has addressed such a settlement, the
Bankruptcy Court for the District of Delaware placed "substantial weight" on the rejection of the
settlement by unsecured creditors, and further noted that the proposed settlement "was not the
result of arms-length bargaining with the unsecured creditors, who are the plaintiffs in the action
and are directly affected by it," but rather was "the result of discussions between the Prepetition
Lenders and the Debtor only." See In re Exide Techs., 303 B.R. at 70-71 (rejecting proposed
settlement of claims against pre-petition lenders).
In addition to their common interests, since the initiation of the UCC Litigation, the
Debtors and the FPDs have actually behaved like parties on the same side of the negotiating
6° The FPDs cite to two cases in which settlements have been approved over the objection of "major" parties. See FPD Joinder at 89 n.361 (citing Adelphia V, 327 B.R. at 165; In re Key3 Media Group, Inc., 336 B.R. 87 (Bankr. D. Del. 2005), aff'd Nos. 03-19323, 05-828-SLR, 2006 WL 2842462 (D. Del. Oct. 2, 2006). However, both cases are inapposite, as neither involved the settlement of claims over the objection of the party granted standing to bring the claim. Cf. Adelphia V, 327 B.R. at 148-50 (describing claims asserted by SEC and DOJ against Debtors, and against third parties); In re Key3 Media Group, Inc., 336 B.R. at 91 (affirming settlement over major creditor's objection, in action by Debtor to avoid fraudulent transfer, the settlement of which was negotiated with the creditor representative appointed pursuant to the plan).
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table, sharing strategies, legal theories, and assessments of the Committee's case. (Ex. 29 —
7/14/09 email Huebner to Davis) (stating "I made the same point earlier about reserving the right
to settle and waiting join the issue when our leverage is greatest.") (emphasis added); Ex. 43 —
11/25/09 email Gerstein to Weiss) (suggesting questions that Akin Gump should ask the
Committee's witness in a deposition). At depositions, CWT attorneys routinely huddled with
counsel to the FPDs, conferring during breaks or offering Defendants' witnesses softball
questions; at no point during Rule 2004 discovery or during discovery in the Adversary
Proceeding did CWT ever provide any assistance to Committee's counsel. CWT routinely
behaved as if it was one of the attorneys for the Defendants. 61 Although the FPDs have asserted
that the Debtors never communicated their view of the merits and value of the litigation to the
FPDs, (Settlement Memorandum at ¶ 29; FPD Joinder at 89), the record reveals numerous
occasions in which the Debtors did just that. (Ex. 51 — 10/23/09 email from Weiss to Berry)
(stating that an important Committee witness was "bought and paid for" and providing
suggestions for attacking the credibility of that witness).
Before the Committee even filed its Complaint, Debtors' counsel told Merrill's counsel
that "there wasn't anything to" the Committee's claims. (Ex. 12 - Simes Depo. Tr. at 198:16-
25). In short, the FPDs always had reason to be confident that the Debtors, guided by CWT,
intended to step in with a settlement offer in order to save the FPDs from the risk and publicity
of the Phase I trial, and further knew that the Debtors perceived themselves to have no economic
stake in the outcome of the UCC Litigation. Under these circumstances, it is no surprise that the
Proposed Settlement is well below the range of reasonable litigation outcomes, because it was
61 That Debtors or the FPDs may cite some isolated emails indicating that CWT would not be representing a former LBI employee, or similar emails, do not detract from the overwhelming record that CWT sought to undermine the Committee's presentation of its claims, and was quite open about its disagreement of the Committee's presentation of claims against CWT's own clients.
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not tested by the give and take process of a typical arm's length negotiation. Cf. In re Charter
Communications, 419 B.R. at 256 ("Because [the negotiations] involved parties with clearly
divergent economic interests, the negotiations were well suited to develop a practical and fair
result.").
Unlike the only party truly adverse to the FPDs in the UCC Litigation, i.e., the
Committee, the Debtors simply have no interest in maximizing recovery in the UCC Litigation.
The Committee, the only party with a real incentive to maximize recoveries to unsecured
creditors, was purposefully excluded from the perfunctory so-called negotiations that occurred
between the Debtors and the FPDs on December 3, 2009, and was not even informed that such
negotiations were to occur, further supporting an inference that they were not truly at arm's
length. See In re Matco Elecs. Group, Inc., 287 B.R. at 78 ("[p]erhaps most telling is the fact
that the Committee had no part in negotiating the Settlement Agreement, yet it is the claims it
has asserted on behalf of the Debtors in its adversary proceeding against AMS, Davis and
Hargreaves, that are being released."); Exide, 303 B.R. at 71 (rejecting settlement of unsecured
creditors' derivative claims where settlement "was not the result of arms-length bargaining with
the unsecured creditors, who are the plaintiffs in the action and are directly affected by it . . . [but
rather] the result of discussions between the Prepetition Lenders and the Debtor only.").
The alignment of the interests of the Debtors and the FPDs was further strengthened by
the pervasive conflicts of interests of the Debtors' professionals, in violation of their
responsibilities under the Code, see 11 U.S.C. § 327(a), as well as of their fiduciary duties of
loyalty. See In re Hampton Hotel Investors, L.P., 270 B.R. 346, 361-62 (Bankr. S.D.N.Y. 2001)
("debtor in possession, like a chapter 11 trustee, owes the estate and its creditors a general duty
of loyalty," which includes "an obligation to refrain from self-dealing, to avoid conflicts of
interests and the appearance of impropriety, to treat all parties to the case fairly, and to maximize
the value of the estate") (quotations omitted); cf. Cosoff v. Rodman (In re W.T. Grant Co.), 699
F.2d 599, 612-13 (2d Cir. 1983) (approving settlement after concluding that Trustee's counsel
had no conflict, despite previous representation of defendant banks). As detailed supra, both
CWT and Cooper (fiduciaries purportedly acting for the benefit of the Debtors' estates in the
preparation of the settlement offer and its delivery) have documented conflicts of interest in
matters involving certain of the FPDs. Particularly where counsel has not fully disclosed such
conflicts, and where the course of conduct does not otherwise negate the inference of collusion,
there is no support for a finding that the Proposed Settlement was the result of arm's length
negotiation. See Susman v. Lincoln Am. Corp., 561 F.2d 86, 88 (7th Cir. 1977) (affirming denial
of class certifications based upon undisclosed conflicts, emphasizing that "it is the spectre of
conflict of interest which moves the court to deny class certification here and not the actuality of
such a conflict."); cf. McDonald v. Chicago Milwaukee Corp., 565 F.2d 416, 419, 422 (7th Cir.
1977) (thoroughly discussing "non-frivolous allegations of fraud and collusion" arising out of
undisclosed conflicts of interest, but ultimately affirming where negotiations were "extended and
serious"); Anstine v. Carl Zeiss Meditec AG (In re U.S. Medical, Inc.), 531 F.3d 1272, 1280-81
(10th Cir. 2008) (approving settlement where settling party was "sensitive to potential conflicts
of interests and operated at arm's length with Debtor") (quotation omitted). 62
62 While the Debtors may assert that the Committee's objections to CWT conflicts are untimely, until the Proposed Settlement was announced, CWT's role in unilaterally pursuing a settlement of the UCC Litigation was concealed from the Committee. The Committee certainly was not aware that CWT was serving as the Litigation Committee's counsel and providing substantive advice as to the propriety of the UCC Litigation. Moreover, the Committee was led to believe, albeit falsely, that the Litigation Committee had retained separate counsel, when that in fact never occurred. See Examiner Report at 34 ("it appears that the Litigation Committee has recently retained separate legal and financial advisory professionals to provide advice on the Committee Adversary."). The Debtors have never explained who made this representation to the Examiner, nor have they corrected this error in the Examiner's Report. The record is clear that CWT was sole counsel to the Litigation Committee, was present at every meeting of the Litigation Committee, and was the central party advising the Litigation Committee on all aspects of the Adversary Proceeding.
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C. Likelihood Of Success On The Merits As Compared To Potential Benefits of Settlement.
Since the Debtors seek the Court's approval of a settlement that cannot be treated by the
Court as presumptively fair and equitable, the Court must subject the Proposed Settlement to a
higher degree of scrutiny before determining that it reasonably reflects the likelihood of a
success on the merits. See In re Painewebber L.P. Litig., 171 F.R.D. at 122. A settlement, to be
fair and equitable, "must fall within the reasonable range of litigation possibilities." Adelphia V,
327 B.R. at 159 (internal quotation marks omitted). The Committee submits that the Proposed
Settlement falls far below the range of reasonable settlement values for the UCC Litigation and,
furthermore, that the Debtors have utterly failed to satisfy their burden of providing the Court
with a basis upon which it could make such a determination.
The Proposed Settlement would settle all of the claims asserted or capable of assertion
against the FPDs on behalf of the Debtors for $300 million. 63 To make an informed judgment
regarding whether a settlement falls within this range, courts will engage in a multi-step
evaluative process. They first consider the full range of litigation outcomes and, with this as a
starting point, canvass the record to evaluate the likely impact on full recovery of contested
63 On behalf of the Debtors, the Committee has asserted two types of claims against the FPDs arising from the Transaction, i.e., for constructive fraud and for equitable subordination. Pursuant to Counts I, II, II, V, VI, VII, XIX, XX, and XXI (the "Avoidance Counts") of the Complaint and the Committee's Proposed Amended Complaint (the "PAC"), the Committee, on behalf of all Debtors, seeks judgments against the FPDs avoiding, as constructively fraudulent under Section 548(a)(1)(B) of the Bankruptcy Code and applicable state law, (i) $20.7 billion of obligations (the "Obligations") incurred by the Debtors, either as primary obligors or guarantors for the repayment of obligations incurred under financing facilities enter into by the Debtors in connection with the financing of the Transaction; (ii) liens granted in favor of the FPDs to secure the Obligations (the "Liens"); (iii) certain transfers to the FPDs in connection with the Transaction and the Obligations, including certain transaction fees, commitment and other fees and interest on the Obligations, paid both pre- and post Petition ("Transactional Fees and Interest"). Pursuant to Section 550 of the Code, the Committee seeks recovery, for the benefit of the estates of the Debtors, of Transactional Fees and Interest. Additionally, pursuant to Claims VI and VII, the Committee seeks to equitably subordinate, as provided by Section 510 of the Code, the claims of the FPDs to those of unsecured creditors. See Murphy v. Meritor Savings Bank (In re O'Day Corp.), 126 B.R. 370, 411 (Bankr D Mass. 1991). Finally, pursuant to Count XII, the Committee seeks a judgment against Merrill Lynch to recover damages resulting from aiding and abetting a breach of fiduciary duty.
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issues of fact and law. See, e.g., Adelphia II, 368 B.R. at 235-41. As the final step in the
process, courts balance the value of such probable recovery against the benefits of the proposed
settlement. See TMT Trailer, 390 U.S. at 424-25 ("Basic to this process in every instance, of
course, is the need to compare the terms of the compromise with the likely rewards of
litigation."). As explained below, were the Committee to prevail on its claims, the potential
recovery for the benefit of its constituency would be $3.2 billion.64
The Proposed Settlement thus represents a less than 10% recovery on the $3.2 billion
achievable upon successful litigation by the unsecured creditors. The only conceivable rationale
for such a low ratio of settlement value to potential recovery would be the existence of legal or
factual issues that strongly compelled the conclusion that the Committee would be highly
unlikely to succeed on its claims at trial. Rather than presenting any basis that could justify the
level of discounting embodied in the settlement, the Debtors assert that the "essential points ...
for purposes of considering the settlement proposed by the Debtors are that neither side is a
clear winner." (Settlement Memorandum at 86) (emphasis added). This statement implies a
profound misapprehension of the Debtors' burden, especially in light of the non-arm's length
quality of the Proposed Settlement. Where, by the Debtors' own admission, the UCC Litigation
is a toss-up (Settlement Memorandum at 86) (noting that "neither side is a clear winner" on
financial condition), and where successful prosecution of the UCC Litigation would result in a
100% percent payout of the unsecured creditors' claims, settling the case for less than a 10%
recovery, over the objection of the Committee (the party representing the constituency that
64 Even this number accepts, for the purpose of argument, the Debtors' claims estimates. The amount of filed claims that are in dispute or otherwise unresolved is several billion dollars more. Based on the Debtors' most recent analysis, provided to the Committee's professionals, the total amount of current asserted (but not yet disallowed by Court order or otherwise) unsecured claims is approximately $6.9 billion. Because the claims resolution process is ongoing, the actual allowed claims could be much higher. If so, the unsecured creditors bear the full risk of dilution in their settlement recoveries. Indeed, even the difference between the "high" and "low" estimates is nearly $500 million Although the Committee does not accept the Debtors' estimates, it assumes the high estimate will apply for the purposes of its recovery analysis.
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would benefit), cannot by definition be reasonable. 65 See Cames v. Joiner (In re Joiner), 319
B.R. 903, 909 (Bankr. M.D. Ga. 2004) ("[W]hen there is a probable chance of success [50%] in a
case that will result in a 100 percent payout [of creditors' claims], settling the case for what
amounts to less than a 40 percent dividend over the objection of the parties with the most to lose
is not reasonable."); see also Exide, 303 B.R. at 70-71 (offer of $8.5 million on claims ranging
from $78 6 million to $500 million falls below lowest range of reasonableness). Indeed, the
Committee's willingness to walk away from the Proposed Settlement, even where unsecured
creditors would receive nothing under a plan of reorganization upon a loss of the UCC
Litigation, indicates that the Proposed Settlement is below the lowest range of reasonableness.
See In re Revelle, 256 B.R. 905, 913 (Bankr. W.D. Mo. 2001) (where creditors representing
majority of claims were prepared to walk away from as much as 69 percent payout, "[g]iven that
their position appears to have a substantial basis, they should be allowed their day in court."). As
65 The Debtors cite to a handful of cases in which courts have approved settlements in what they argue were similar circumstances. (Settlement Memorandum at TT 58-60). However, each of the cases only underscores the reasons why the Debtors' Settlement Motion should be denied. In In re Best Products Co., Inc., 168 B.R. 35 (Bankr S.D.N.Y. 1994), the approved plan which resolved the LBO litigation was "the product of extended negotiations among Best, the banks who participated in the LBO and hold its senior debt . . . , the creditors' committee (on which the subordinated creditors are represented), two of the three Objectants and purchasers of a substantial amount of trade claims." Id. at 39. Here, not only were the negotiations of the basic proposed terms essentially non-existent, but as opposed to the five or more different parties involved in negotiating the settlement in Best (which included the creditors' committee), the FPDs and Debtors were the only two parties making decisions. Further, the court in Best noted the "hard negotiating," and "meatier" efforts exhausted by the debtors' representative and specifically found the representative "sought to achieve the greatest recovery that he could for the benefit of the other creditor constituencies." Id. at 62. No comparable findings could be made on the record in this case. The Debtors also cite In re W.T. Grant, Co., 699 F.2d at 614 (2d Cir. 1983), in which the court approved a settlement paying 19 cents on the dollar when continued litigation may have yielded 43 cents on the dollar (nearly a 50% recovery) as an example of the "range of reasonableness" in which settlements must fall. Id. at 614. However, where the current settlement would result in less than 10% of that total value of the UCC Litigation, the case does little to support the Debtors' point. In In re Doctors Hosp. of Hyde Park, Inc. 474 F.3d 421 (7th Cir. 2007), the court approved the settlement as in the best interest of the estate over only one creditor's objections where the debtor, trustee, defendant, and creditors' committee all supported the settlement. Significantly, the court noted that the creditor conceded "some $23 million of the [debtor's] claims against [the defendant] are out, leaving claims for only $10 to $11 million." Id. at 429. The court found further that the "lowest possible outcome for the Hospital was a recovery of $1 8 million," and that, where the proposed settlement of $6.1 million guaranteed an immediate recovery of $1.7 million to the unsecured creditors, the difference of $100,000 did not serve to justify continued litigation. Id. at 431. Again, both the facts and the numbers are inapposite to the present facts.
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explained below, the Debtors have failed to meet their burden, and the FPD Joinder does not
assist them in this regard.
1. Range Of Recovery Upon Prevailing On Fraudulent Transfer Claims.
As cases arising in this context illustrate, the logical starting point in the process of
comparing a settlement to the likely rewards of litigation is a determination of the full range of
recovery. The Debtors skew this initial inquiry by understating the aggregate amount of general
unsecured claims at $1.6 billion (rather than $3.2 billion, the full amount of claims for which
recovery is sought through the UCC Litigation), because the Debtors assume (incorrectly) that
residual subsidiary value may not be upstreamed to the parent for the benefit of the parent's
creditors. 66 Further, the Debtors have failed to consider:
(i) $1.352 of principal and interest due to holders of notes issued prior to the Merger by
LBI, maturing in 2015 and issued under the 2015 Notes Indenture (the "2015 Notes," and claims
there on, the "2015 Claims"), and guaranteed by the same entities that are obligated on the
66 The FPDs' suggestion that Section 548(a)(1)(B) does not permit post-LBO creditors to benefit from the avoidance of liens and obligations mis-reads the statute and relies solely on California and Hawaii fraudulent transfer state law for support. The FPDs' assertion relies on the fact that Section 548(a)(1)(A) refers to creditors then existing or thereafter arising and Section 548(a)(1)(B) does not. The FPDs' reading, however, ignores the inherent differences between intentional fraud and constructive fraud. Intentional fraud is directed at specific creditors and the language of Section 548(a)(1)(A) makes clear that an actual intent to defraud them is actionable. In comparison, Section 548(a)(1)(B), which deals with constructive fraud, requires no intent to defraud creditors (existing or not), and is established by objective financial conditions and value tests. Unlike intentional fraud in Section 548(a)(1)(A), there is no need to describe the target of the constructive fraud because, by definition, Section 548(a)(1)(B) constructive fraud is achieved regardless of any intent towards targeted creditors. The FPDs' only case law supporting their assertion arises from Ninth Circuit cases applying California and Hawaii fraudulent transfer law, authorities which might have relevance if the Committee's claims were brought under Section 544 and relying on either of those state laws. Clearly this is not the case. See Lippi v. City Bank, 955 F.2d 599, 606-07 (9th Cir. 1992); Kupetz v. Wolf, 845 F.2d 842, 849-50 (9th Cir. 1988). Further, the FPDs' citation to MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Servs. Co., Nos. 91 Civ. 3451, 92 Civ. 1470, 1994 WL 560978 (S.D.N.Y. Oct. 12, 1994), is misleading in implying that the court there agreed with the Ninth Circuit's interpretation in Lippi and Kupetz. The court in MFS/Sun Life Trust held that the language of the relevant statute controlled, just as it does here. Id at *9 n.10 (rejecting the defendants' argument that 'public policy and common sense must override statutory language' .. . [and] should usurp the clear intentions of the state legislatures in deciding whether fraudulent conveyance laws apply to LBOs").
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Merger Financing, including Basell USA, Inc., which executed its guarantee pre-Merger, 67 and
(ii) $244 million of principal and interest due to holders of bonds (the "Millennium Bonds")
issued by Millennium America, Inc. pursuant to an indenture dated November 27, 1996 (the
"Millennium Indenture").
The total claims of the unsecured creditors, once the 2015 Notes and Millennium Bonds
are included, are $3.2 billion. If the Committee prevails in its litigation, these claims will be
paid in full. The following chart compares the recoveries upon successful prosecution of the
UCC Litigation to those offered in the Proposed Settlement:68
67 The issues bearing upon the inclusion of the 2015 Notes and the Millennium Bonds are addressed infra. Even if the 2015 Noteholders must turn over any funds they receive to the FPDs, as the FPDs argue is required pursuant to the controlling inter-creditor agreements, the 2015 Noteholder claims against Basell USA, Inc. should still be included for purposes of determining the pro rata share of unsecured creditors. See, e.g., In re Best Prods. Co., 168 at 71 (rejecting subordinated creditor's argument that it was receiving a lower distribution than other unsecured creditors, noting that it was being treated the same as other unsecured creditors but that "by virtue of an enforceable subordination agreement, the distribution on [the subordinated creditor's] claim is being redistributed to senior creditors.").
68 The figures in Charts A through D are taken from calculations performed by Mesirow Financial Consulting, LLC ("MFC"). As explained by Ben Pickering of MFC in his declaration attached as Exhibit 52 (the "Pickering Decl."), in preparing the calculations, Mesirow has made assumptions provided by the Committee, which include the following: (a) (i) the Total Distributable Value ("TDV") that is potentially available to holders of general unsecured claims that are expected to benefit from the proposed 9019 settlement is $7.656 billion and (ii) general unsecured creditor claims total $3.216 billion, in accordance with the Debtors' estimate of claims dated as of October 21, 2009, which the Committee understands formed the basis for the analysis included in the Settlement Memorandum; (b) The TDV is allocated to six Debtor entities proportionately consistent with the Debtors' allocation noted in the Debtors' Settlement Memorandum and, in order to accurately reflect the impact of Subsidiary Residual Value Upstreaming, MFC added three additional Debtor entities to its analysis, LBI, Millennium America Inc., and Millennium US Op Co LLC.; (c) In the scenarios in which the FPD's refmanced debt ($7.1 billion in the aggregate) is not avoided or is reinstated, MFC allocated the original FPD lien of $20.6 billion between the FPD's and general unsecured creditors at certain Debtor entities as follows: (i) For the FPDs, only to those Debtor entities where the FPDs have refinanced debt claims and in an amount based on the Debtors' allocation of refmanced debt in accordance with paragraph 108 of Settlement Memorandum; and (ii) for the general unsecured creditors, to the same Debtors where the FPDs have Refinanced Debt claims and with an amount equal to the total FPD claim ($20.6 billion), less the Debtor specific FPD Refinanced Debt claims from (c)(i) above; and (d) That the combined contractual limitation of the guarantees that could be issued (for example, to the FPDs or the 2015 Noteholders pursuant to the Merger) by Millennium US Op Co LLC, Millennium Petrochemicals Inc. and Millennium Specialty Chemicals Inc., under the Millenium Indenture is limited to $110 million based on 15% of the consolidated net tangible assets of certain Debtor entities, as shown on page 8 of Exhibit B to the Pickering Declaration. In addition, MFC was asked to allocate the guarantee equally between the Millennium US Op Co LLC, Millennium Petrochemicals Inc. and Millennium Specialty Chemicals Inc. specifically $37 million per each guarantor.
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Chart A — Recoveries Upon Successful Prosecution of UCC Litigation69
Claims Held Recoveries Available Upon Successful
Prosecution of UCC Litigation
(in millions)
Pro Rata Recoveries Available Pursuant to Proposed Settlement
(in millions)
Ratio of UCC Litigation Recovery to Proposed Settlement
Recovery
Unsecured Creditor $1, 620 $151 9.4% Claims (Excluding (100%) 2015 Notes and Millennium Bonds) 2015 Notes7° $1,352 $0 to $126 0% to 9.3%
(100%) Millennium Bonds $244 $23 9.4%
(100%) Total General $3,216 $174 to $300 6% to 9.3% Unsecured Claims (100%)
The above recoveries assume the resolution of all contested issues of law and fact in
favor of the Committee and further assume that the allowed aggregate unsecured claims are $3.2
billion.71
To assess the reasonableness of the Proposed Settlement, it is necessary to identify
contested issues of fact and law that bear upon the likelihood that the Committee will achieve the
full range of recovery, to evaluate the probability of either side prevailing on these issues and to
assess the impact of these outcomes on recovery. The Debtors' Settlement Memorandum
identifies eight contested issues (which comprise various sub-issues, both of law and fact), which
the Debtors assert that they considered in arriving at their assessment of the range of reasonable
litigation outcomes and which, they assert without further explanation, "are reasonably reflected
in the Settlement." With respect to all but one of the issues identified, the Debtors do not
69 See Scenario 1A (Ex. 52 - Pickering Decl.).
7° The low end of the recovery range for the 2015 Notes reflects the result if holders of the 2015 Notes do not vote for the Proposed Plan.
71 Even if allowed unsecured claims were considerably higher than $3.2 billion they would still be paid in full upon successful prosecution of the UCC Litigation. (Ex. 52 — Pickering Decl.)
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explicitly express specific views as to outcome probability. However, by the Debtors'
identification of a settlement value of less than 10% of potential recoveries, the Debtors have
apparently adopted the positions of the FPDs, who have joined the Debtors' Settlement
Memorandum and submitted a 97-page brief setting forth their legal and factual arguments in
support of their views that the UCC Litigation lacks merit and could result in only very limited
recoveries. (Ex. 48 - Serota Depo. Tr. at 73:7-75:4 (discussing spreadsheet analysis, which was
shared with Apollo, that allowed Ares to accept $300 million demand)). Beyond the minimal
value (relative to the potential recovery) that the Debtors attributed to the UCC Litigation, with a
few exceptions noted below, the Debtors' simplistic and implausible views of probable outcomes
are couched in the following generalities:
Any honest assessment of the legal issues and facts inexorably leads to the following conclusion...: the Committee faces very serious obstacles to prevailing, the failure of the committee to prevail on any number of key issues would result in either zero or seriously limited recoveries for general unsecured creditors of the Obligor Debtors, and even if the Committee were to prevail, the available remedies would be substantially limited.
(Settlement Memorandum ¶ 66). The Committee rejects as disingenuous the Debtors' purported
capacity for making an "honest assessment" of the record. The Committee rejects as well the
Debtors' characterization of the record as including anything remotely constituting "obstacles,"
serious or otherwise, to the Committee's ability to prevail on its claims for fraudulent
conveyance. As demonstrated by the Committee's Pre-Trial Factual Contentions, which are
derived from and thoroughly supported by the record, after many months of extensive effort, the
Committee has marshaled a compelling evidentiary record from which it would be able to sustain
its burden of proof to satisfy each of the elements of its fraudulent transfer claims. Moreover, far
from being bald assertions, the material contentions of the Committee, as set forth in the UCC
Pre-Trial Factual Contentions, are derived from and refer to an extensive record of indisputably
authentic documentary evidence. The Committee also rejects the assertion that there are any
number of "key issues" that would result in seriously limiting recovery. As demonstrated infra,
only the inability of the Committee to prevail on the fmancial condition issue with respect to key
Debtor entities, an outcome that the Committee assesses as extremely unlikely, would have a
material impact on recovery. With respect to other issues identified by either the Debtors or the
FPDs as being contested, as explained below, the reality is that these issues either have only a
moderate impact on the Committee's range of recovery or are very likely to be resolved in favor
of the Committee.
The Committee's views on these contested issues are summarized below. The
Committee's views on the Debtors' unstated assumptions are also set forth below. As an aid to
the Court in comparing the views of the Committee to those of the Debtors and the FPDs, the
Committee adopts, to the extent practical, the Debtors' identification of the contested issues and
presents its arguments in the order the Debtors set forth in their Settlement Memorandum.
a) Issue One: Section 546(e) Safe Harbor.
The first contested issue identified by the Debtors is the FPDs' contention, expressed in
their still pending motion to dismiss,72 that all of the fraudulent conveyance claims asserted by
the Committee against the FPDs are precluded by Section 546(e) of the Code, which sets forth
certain limits to trustees' avoidance powers. (Settlement Memorandum at 31; FPD Joinder at 58-
60). This motion is a frivolous motion and the Court has already advised the parties that it likely
was prepared to issue a tentative ruling on the motion to dismiss had the Court not stayed these
proceedings on December 4. The Committee is confident the Court would have denied the
FPDs' frivolous motion to dismiss. The FPD Motion to Dismiss, which the Debtors
72 See The Financing Party Defendants' Joint Motion to Dismiss Counts I, II, XX and XXI of the Complaint of the Official Committee of Unsecured Creditors [Docket No. 80] (the "FPD Motion to Dismiss").
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disingenuously characterize as raising an issue of "first impression," asks this Court to adopt an
uninformed, erroneously expansive, and absurd interpretation of the Code, and would require the
Court to completely disregard both the specific words used in Section 546(e) and the legislative
framework within which Section 546(e) functions. The FPD Motion to Dismiss is fully briefed
and, in the view of the Committee, the Court should summarily reject it for the purposes of the
Debtors' Settlement Motion. It should be given no weight in calculating the likelihood of the
Committee attaining full recovery at trial and should not be reflected in any proposed settlement.
The Committee respectfully refers the Court to the arguments and authorities contained in the
Official Committee of Unsecured Creditors' Memorandum of Law in Opposition to the
Financing Party Defendants' Joint Motion to Dismiss Counts I, II, XX and XXII of the
Complaint."
b) Issue Two: Collapsing.
The second issue the Debtors identify is the FPDs' contention that "collapsing" is
inapplicable to the transactions funded by the FPDs. Although the FPDs have claimed that the
Transaction cannot be collapsed absent intentional fraud, they are simply wrong on the law.
This contention should be summarily rejected by the Court based on well-established and
uniform precedent. (UCC Pre-Trial Legal Brief at 9-16). This is yet another frivolous argument
by the FPDs. Accordingly, this issue should be given no weight in calculating the likelihood of
73 The FPDs have asserted that ALFA, S.A.B. de C. V. v. Enron Creditors Recovery Corp. (In re Enron Creditors' Recovery Corp.), F. Supp. 2d , No. 01-16034, 2009 WL 5174119 (S.D.N.Y. Nov. 20, 2009), supports the applicability of Section 546(e) to the Committee's claims against them. See Letter from Marshall S. Huebner to The Honorable Robert E. Gerber, dated Nov. 27, 2009. Enron deals with a single issue which is irrelevant to the FPD's Motion to Dismiss: whether redemptions of commercial paper by the issuer prior to maturity are protected under Section 546(e) of the Code as "settlement payments". If anything, the Enron decision undercuts an already weak argument by inviting the adoption of the five-factor test articulated in Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.), 263 B.R. 406 (S.D.N.Y. 2001) for use in the identification of a "settlement payment." Should the Court find that the test is likewise useful in interpreting the separate prong of Section 546(e) upon which the FPDs Motion to Dismiss relies, i.e., a "transfer... in connection with a securities contract," application of that test will further underscore the lack of merit in the Financing Party Defendants' position. The transfer of liens to the FPDs in connection with the Merger does not fulfill any of the criteria of the Jackson test. See id. at 479-80.
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the Committee attaining full recovery at trial and should not be reflected in any proposed
settlement.
c) Issue Three: Financial Condition.
Most material, by far, to the likelihood of the Committee's success is its ability to
establish the satisfaction of at least one of the three financial condition tests with respect to the
Debtors on behalf of whom the Committee has asserted claims for avoidance. See 11 U.S.C. §
548(a)(1)(B)(ii). Remarkably, even though obviously straining mightily to give the semblance of
a "fair and balanced" assessment of the issues (while at the same time trashing the Committee's
case), the Debtors fail miserably. Purporting to merely identify the "uncertainties and hurdles"
that the Committee needs to overcome, the Debtors cannot resist implicitly resolving hotly
debated factual issues in favor of the FPDs. Thus, for example, although neither CMAI nor
Turner Mason, described by the Debtors as "leading independent industry experts" opined that
the "combined management projections" were "fair and reasonable," the Debtors identify the
"fact" that they did so as one of the "hurdles" the Committee must "overcome." 74 (Settlement
Memorandum at 85.) And, although the Debtors present a laundry list of "matters that would
have to be considered in establishing a qualifying fmancial condition resulting from the Merger,"
none of the "matters" identified includes or refers to any of the compelling evidence supporting
74 The actual scope of the CMAI Report referenced by the FPDs is most extensively addressed in the Expert Rebuttal Report of Chemical Market Associates, Inc. & Purvin & Gertz, Inc., dated November 20, 2009 (the "CMAI Expert Rebuttal Report"), and in the Declaration of David Witte, submitted in connection with the Opposition of the Official Committee of Unsecured Creditors to the In Limine Motions of the Access Defendants and the Financing Party Defendants to Exclude the Expert Testimony of Mr. David H Witte, both of which the Committee respectfully incorporates by reference. (UCC Pre-Trial Factual Contentions at ¶ 110). The Debtors' skewed perspective with respect to inferences that can be drawn from the Turner Mason Report is most readily revealed by reference to page 55 of said report, showing a comparison of Turner Mason's independent forecast for the Houston refinery compared to management's forecast. (UCC Pre-Trial Factual Contentions at ¶11104-107). Turner Mason projected aggregate EBITDA for the five year projection period that was $1.829 billion lower than management's projections for the same period. (UCC Pre-Trial Factual Contentions at ¶ 106). Notably, the Debtors' Settlement Memorandum does not identify this disparity between the Management Projections and the Turner Mason Report, nor does it identify other compelling evidence that management manipulated the projected earnings of the refinery to inflate the Management Projections.
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the Committee's case. The Debtors "balance" their assessment only by conceding that "the
Committee could marshal substantial evidence in support of its avoidance claims." (Settlement
Memorandum at ¶ 86). Indeed, it could and would at trial. (UCC Pre-trial Factual Contentions,
passim). While there are many complexities involved in the application of the financial
condition tests in this case, there are also several simple, compelling facts that point to the high
likelihood that the Committee would prevail. As stated by Ralph S. Tuliano, President and
Executive Managing Director of Mesirow Financial Consulting, LLC, retained by the Committee
to analyze the financial condition of the Debtors at the time of the transaction: "What is really
important here, is the fact that not only was the company bankrupt in 12 to 13 months, but it was
out of capital within 12 weeks of the transaction. And that is extraordinarily disconcerting and, in
fact, in my professional career, I have never seen a case as inadequately capitalized as this one."
(Ex. 53 - Deposition of Ralph S. Tuliano, dated December 3, 2009 at 28:25, 29:2-8.)
Ultimately, the Court may well find that the satisfaction of one or more of the financial
condition tests will turn on hotly-disputed technical issues, with respect to which, in preparation
for trial, the parties have retained both fmancial and industry experts that have presented sharply
conflicting views on a variety of highly complex industry and fmancial issues. Issues
specifically addressed by the parties' experts in their reports and at their depositions include, but
are not limited to:
(i) the prevailing industry and macroeconomic outlook at the times that the various iterations of the earnings projections by the management of Basell and Lyondell were prepared;
(ii) whether the prevailing analyst forecasts for a supply driven downturn in the petrochemicals industry and deteriorating economic conditions were reasonably reflected in projections by management for 2008 that the combined companies would achieve earnings before interest taxes depreciation and amortization (EBITDA) in excess of $800 million more than they had achieved, on a combined basis, in any prior year.
(iii) whether the prevailing forecasts for a supply driven downturn in the petrochemicals industry and deteriorating economic conditions were reasonably reflected in projections by management for the outer years of the four year projection period where EBITDA during the "trough" years (2010-2011) was projected to be only approximately 10% less than EBITDA achieved during 2007.
(iv) whether Lyondell's management forecasts that EBITDA from the operations of its Houston Refinery were reasonable and prudent where they projected that refining margins in 2008 would exceed the unprecedented margins achieved in the record years of 2005 — 2007 by 20% despite the fact that margins for refining operations, such as the Houston Refining, were forecasted by all credible industry analysts to decline.
(v) whether management's forecast of 2008 operating rate increases for major petrochemical products were reasonable when all credible industry analysts projected 2008 operating rates (and the rates for the years immediately following) to decline.
(vi) the appropriate methodology of applying industry forecasts to estimate the projected EBITDA from specific operating assets taking into account the specific cost structure, historical performance and competitive position of such assets and whether such methodologies were properly applied by the Debtors in developing management projections and by CMAI in the preparation of its operational modeling of the Debtors.
(vii) the appropriate methodology of enterprise valuation where management projections are unreliable and asserted to overstate the EBITDA that can reasonably be anticipated from the entities to be valued.
(viii) the historical and anticipated cyclicality of earnings from petrochemical operations and refining operations and the impact of such factors, and the volatility of oil prices, on liquidity needs and capital adequacy planning
(ix) whether LBI's levels of leverage were excessive as compared to comparable companies operating in the petrochemical and refining industries in view of the fact that as measured by all commonly used leverage ratio, LBI placed at the extreme high risk end of the industry spectrum.
(x) the sufficiency of the Debtors' working capital facilities as a source of reserve liquidity in view of the fact that the Debtors' opening liquidity after the Transaction was considerably less than half of the combined historical liquidity of the legacy companies.
(xi) the foreseeability of various adverse contingencies such as accidents and weather and whether the Debtors capital structure and liquidity levels were reasonable in view of the foreseeable impact of such contingencies.
In addition to technical issues, the analysis of which will be greatly informed by hearing
expert testimony and having the Court's questions to the experts answered, the resolution of
contested issues bearing on financial condition will also turn on the credibility of the present and
former members of management of the Debtors, as well as the analysts and other personnel of
the FPDs. The Committee has developed a rich documentary record of the contemporaneous
communications among these witnesses, which record contrasts sharply with their carefully
coached deposition testimony and lawyer-prepared witness affidavits. For their part, the FPDs
have submitted direct testimony affidavits of the fact witnesses they intend to proffer at the
Phase I trial. The Committee submits that since the Court has not had an opportunity to assess
the credibility of these fact witnesses, nor seen how they fare under cross-examination, it would
be inappropriate for the Court to accord any deference to their self-serving statements. As
reflected in deposition testimony of those affiants who were deposed, their efforts to explain
away problematic emails or damaging facts can only be properly evaluated when the Court is
able to measure the credibility - or more aptly, lack of credibility - of such witnesses (each is
either a defendant or aligned with defendants) at trial.
As stated, the Committee has amassed a compelling record supporting its claims that the
Transaction was a fraudulent transfer that left the Debtors financially impaired as measured by
the statutory financial condition tests. With respect to contested factual issues that, in the view
of the Court, cannot be resolved on the record before it, the Court can only assume, as it did in
Adelphia II, that each side will "deliver on the proof to which its pretrial briefing referred," and
that "both sides could offer factual and legal support for their positions at trial." Adelphia II, 368
B.R. at 215. As this Court has observed, "there are dangers in trying to fix probabilities with too
much precision as if the litigation recoveries were subject to a mathematical model. We are
much more likely to be talking about win or lose scenarios with huge swings in outcome, as
contrasted to spectrums of recoveries." See id. at 23. On this record, the Committee submits that
it would be improper for the Court to find that the Committee is unlikely to prevail on the
financial conditions issues or to arrive at a too precise a mathematical estimate of the probability
of a successful or unsuccessful outcome. Yet that is precisely what is being asked of the Court
by the Debtors in seeking approval of the Proposed Settlement.
As mentioned, the FPDs have presented a lengthy brief, highlighting what their counsel
views as the most compelling factual and legal issues in their favor. Generally, these issues are
fully addressed in the Committee's pre-trial submissions including the UCC Pre-trial Factual
Contentions, the UCC Pre-Trial Legal Brief, and the initial and rebuttal expert reports prepared
(i) by Ralph Tuliano of Mesirow Financial on the issues of capital adequacy and ability to pay
debts; (ii) by P.J. Solomon, Inc. on issues of valuation, i.e., "balance sheet insolvency"; and (iii)
by Chemical Markets Associates, Inc. ("CMAI") and Purvin & Gertz ("P&G") on outlooks for
petrochemical industry and refining industries and the reasonableness of management
projections. Rather than burdening the Court with a reiteration of the Committee's factual and
legal contentions on the financial condition tests, set forth as an Appendix a succinct rejoinder to
the FPDs' brief consisting of a summary of the Committee's contentions and cross references to
the pre-trial materials in which these issues are more fully addressed.
d) Issues Four and Five: Factors Limiting Remedies.
Beyond their assertion that the Committee is not a "clear winner" on the financial
condition issue, the Debtors offer two key rationales to support the low value of the Proposed
Settlement. First, the Debtors appear to erroneously assume that if the Committee is unable to
prevail on the financial condition issue with respect to the Debtors on a consolidated basis (the
Phase I issue), the UCC Litigation would result in a "zero" recovery in that it will be unable to
make such a showing on an entity-by-entity basis in Phase I-A. (Ex. 17 - January Cooper Depo.
Tr. at 272:3-22). Second, the Debtors maintain, without so much as an attempt to quantify the
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impact, that even if the Committee were to prevail on the financial condition issue, its inability to
prevail on "any number" of other issues would result in "seriously" or "substantially" limited
recoveries. (Settlement Memorandum at 37). As explained below, neither of these misguided
rationales withstand scrutiny nor can justify the Proposed Settlement.
(1) Entity Level Recoveries. Prior to the announcement of the
Proposed Settlement, in accordance with the Case Management Order and the Court's strict
instructions in this regard, all parties focused their discovery efforts and analysis upon whether
the Debtors, on a consolidated basis, were financially impaired by the Transaction under one of
the three financial conditions tests. The Committee believes that ample evidence warrants such a
finding, for the reasons stated in its pre-trial pleadings and expert reports. (UCC Pre-Trial Legal
Brief at 21-44; UCC Contentions of Fact at 146-269). Moreover, the Committee believes that,
upon establishing that the Debtors had insufficient capital on a consolidated basis, there would
remain no genuine issue as to whether each of the Debtors was also insufficiently capitalized,
where (among other factors) the Debtors' cash flows from operations and other sources of
working capital were managed on a consolidated basis using a centralized, unitary cash
management system. Thus, a win for the Committee on the unreasonably small capital test on a
consolidated basis would necessarily and almost by definition translate into a win against all the
individual Debtors, eliminating the need for a Phase I-A trial. See In re TOUSA, Inc., 2009 WL
3519403, at *42 ("because of the consolidated enterprise's shared cash structure, the lack of
adequate capital on a consolidated basis necessarily shows that the individual Conveying
Subsidiaries had unreasonably small capital as well").
Additionally, and contrary to the implicit but unstated assumption of the Debtors'
Settlement Memorandum, even if the Committee cannot establish financial condition on a
consolidated basis, the Committee is extremely likely to prevail in establishing the impaired
financial condition of the relevant individual Debtors whose assets will be distributable in
satisfaction of general unsecured creditor claims. On the face of it, each of these Debtors was
almost certainly insolvent as a consequence of taking on $20.7 billion of joint and several
liability which, when combined with other liabilities of the individual Debtors, is considerably
more than the fair value of their assets.
It is anticipated that the FPDs would attempt to counter this analysis by asserting that, in
assessing the solvency of individual Debtors the Court must count contribution rights conferred
on Lyondell Guarantors in the Transaction against Basell Guarantors, pursuant to the Senior
Credit Agreement, and the Bridge Loan Agreement. First, contribution rights are available only
to guarantors under the Senior Credit Agreement and the Bridge Loan Agreement. (Ex. 54 —
Senior Credit Agreement, § 11.10; Ex. 55 — Bridge Loan Agreement, § 9.10). Accordingly, for
example, Lyondell Chemical Company, which is a borrower under approximately $10 billion of
Senior Lender debt, would have no contribution rights with respect to such debt. Second, any
effort to significantly diminish the amount of any guarantor's debt would be unlikely to prevail
since such contribution rights are of no value except to the extent of the unencumbered assets of
the entity against whom they are enforceable. See, e.g., Manufacturers and Traders Trust Co. v.
Goldman (In re 011ag Constr. Equip. Corp.), 578 F.2d 904, 908 n.13 (2d Cir. 1978) (affirming
determination that subrogation and contribution rights "would be worth little" because co-
obligors were all insolvent); Allstate Fabricators Corp. v. Flagstaff Foodservice Corp. (In re
Flagstaff Foodservice Corp.), 56 B.R. 899, 906 (Bankr. S.D.N.Y. 1986) ("However, when the
co-guarantors themselves are insolvent, the value of this right [to contribution] is questionable at
best"). Most of the Basell Guarantors appear to have very little in the way of tangible assets, as
many are holding companies. The real value of the Basell entities appears to be held at the
operating subsidiaries which are not Guarantors.'
The other faulty assumption upon which the Debtors have apparently relied in concluding
that the Committee cannot prevail on Phase I-A entity determinations of financial is the Debtors'
apparent adoption of the FPDs' view that "savings clauses" contained in each Debtor's guarantee
of the Obligations (the "Savings Clauses") are effective to preclude a finding of insolvency of
each Guarantor Debtor. (FPD Joinder at 60). As an initial matter, the Savings Clauses apply
only to guarantee obligations, and on their face do not even purport to affect the Borrowers'
primary obligations due under the Senior Credit Facility and Bridge Loan Facility. (Ex. 54 -
Senior Credit Agreement § 11.01; Ex. 55 - Bridge Loan Agreement at § 9.01). For example,
Lyondell Chemical Company is a borrower, and not a guarantor, with respect to approximately
$10 billion of Senior Lender debt, as noted above, and the Savings Clause would be inapplicable
to that portion. Moreover, the only court to have addressed the issue of whether a guarantee
saving clause precludes a finding of insolvency and bars avoidance rejected the argument for
reasons that should also compel rejection of the FPDs' argument. See In re TOUSA, 2009 WL
3519403, at *76. The court in TOUSA reasoned that the guarantee savings clauses were
unenforceable for at least three reasons.
First, due to the operation of section 541(c)(1)(B) of the Code, any interest in the debtor's
property, including causes of action for fraudulent transfers, becomes property of the estate,
75 Furthermore, the contribution rights against the Basell entities will be limited to the "proportionate share" of loan proceeds that those entities received. See, e.g., In re Flagstaff Foodservice Corp., 56 B.R. at 906 (noting that debtor-guarantor "would be entitled to contribution from the other [guarantors] for amounts paid back to [the lender] which exceed the amount of the loan that the [debtor-guarantor] received" but, in the absence of evidence of loan proceeds allocation, discussing other methods of determining the extent of contribution). Here, of the $20.7 billion in loan proceeds, Lyondell Guarantors received $18.5 billion (which was used primarily to refinance approximately $7.1 billion in pre-existing debt, and pay $12.5 billion in merger consideration to shareholders), while Basell entities received, at most, $2.5 billion ($523 million of which was used to purchase the toehold shares, and provided no value). Thus, contribution rights against Basell entities should be limited to, at most, $2.5 billion.
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"notwithstanding any 'provision in an agreement' that is 'conditioned on the insolvency or
financial condition of the debtor' that 'effects or gives an option to effect a forfeiture,
modification, or termination of the debtor's interest in property." Id. at *75 (quoting 11 U.S.C. §
541(c)(1)(B)). The Savings Clauses are thus rendered inoperative by section 541(c)(1)(B), to the
extent they could extinguish the Debtors' interest in the fraudulent transfer actions — a type of
estate property. The FPDs argue that TOUSA is distinguishable because, there, the relevant
entities were insolvent at the time of the challenged transaction. This argument ignores the
express language of the TOUSA decision, in which the court stated that even "[i]f the Conveying
Subsidiaries became insolvent only after [the challenged transaction], the savings clauses are
unenforceable under 11 U.S.C. § 541(c)(1)(B)." Id. (emphasis added). Regardless, here, the
Subsidiary Guarantors became insolvent after issuing their fraudulently conveyed guarantees,
and where the Debtors' cause of action for such fraudulent transfers is "unquestionably property
of the debtor," section 541(c)(1)(B) is wholly applicable and renders these savings clauses null.
Id. at *75.
Second, efforts, such as the Savings Clauses, to contract around the core provisions of the
Code are generally invalid. See id. at *76 ("The savings clauses, if enforced, would nullify the
protection provided by § 548(a)(1)(B) and the limits that § 548(c) places on the ability of
transferees to retain property."); see also In re SemCrude, LP., 399 B.R. 388, 399 (Bankr. D.
Del. 2009) ("By allowing parties to contract around the mutuality requirement of section 553,
one creditor or a handful of creditors could unfairly obtain payment from a debtor at the expense
of the debtor's other creditors, thereby upsetting the priority scheme of the Code and reducing
the amount available for distribution to all creditors."); Glenn v. Sutton (In re Sutton), 324 B.R.
624, 627 (Bankr. W.D. Ky. 2005) ("The Debtor cannot contract the prohibition on ipso facto
clauses away, nor can a Creditor enforce such a provision even if the Debtor agrees to it.
Therefore, despite the Creditor's attempt to contract around the jurisdiction of the Bankruptcy
Court, this Court has jurisdiction over the dischargeability of the debt owed to the Creditor by
the Debtor."). In an effort to undermine the TOUSA court's reliance on this fundamental policy,
the FPDs point to two examples in which parties are permitted to modify otherwise applicable
provisions of the Code, Section 362 (automatic stay) and Section 726 (distribution priority).
Both are inapposite, as there is thus no need, in the case of either Section 362 or Section 726 to
"contract around" the Code, as the Code expressly permits the relief contemplated. In re
TOUSA, 2009 WL 3519403, at *76 (emphasis added); see Gould v. Levin (In re Credit Indus.
Corp.), 366 F.2d 402, 408 (2d. Cir. 1966) ("The enforcement of lawful subordination agreements
by bankruptcy courts does not offend the policy of equal distribution of the bankrupt's estate.").
The FPDs' attempt to refute the TOUSA court's equitable conclusion that "savings clauses are a
frontal assault on the protections that section 548 provides to other creditors," is specious as it
ignores the fundamental purpose of fraudulent transfer law. In re TOUSA, 2009 WL 3519403, at
*76 ("Section 548 was meant to ensure that those who saddle insolvent businesses with new
obligations or liens must provide reasonably equivalent value in return, or face the avoidance of
the transaction.").
Third, under the facts of TOUSA, the savings clauses were too indefinite to be enforced;
"[b]ecause of the existence of multiple savings clauses, each of which purports to reduce
obligations after accounting for all other obligations, it is utterly impossible to determine the
obligations that result from the operation of any particular savings clause." Id. at *76; see also
Bus. Sys. Eng'g, Inc. v. IBM, 547 F.3d 882, 890 (7th Cir. 2008) ("The terms of a contract are
reasonably certain only if 'they provide a basis for determining the existence of a breach and for
giving an appropriate remedy.") (quoting RESTATEMENT (SECOND) OF CONTRACTS § 33(2)).
The same situation presents itself here. Identical to the facts in TOUSA, there are two loan
agreements, both subject to savings clauses, and both purporting to limit the liabilities of the
same Subsidiary Guarantors in accordance with their respective terms. In order to effectuate the
guaranty savings clauses, a court would first have to determine the amount to be "automatically
limited and reduced to the highest amount . . . that is valid and enforceable and not subordinated
to the claims of other creditors." (Ex. 54 - Senior Credit Agreement at § 11.08; Ex. 55 - Bridge
Loan Agreement at § 9.08). To do so, a court would need to determine the net worth of each
individual guarantor (taking into account all other contingent liabilities) and each individual
guarantor's contribution rights — which would, in turn, require determining the net worth of all
other guarantors. Moreover, the Savings Clauses purport to reduce each guarantor's obligations
after accounting for the other obligations of every other guarantor — (again, including all
contingent obligations). So, in order to adjudicate the liabilities and assets of any individual
guarantor, a court would need to determine the guarantee obligations of each other guarantor, an
inquiry which itself depends on the amount of liabilities and assets of the individual guarantor
and every other guarantor. This predicament is further complicated by Section 502(e) of the
Code. See 11 U.S.C. §502(e). Section 502(e) limits contribution claims to the extent a claim for
the primary obligation is disallowed. The Savings Clause, on the other hand, says that
contribution rights must be taken into account before the amount of the primary obligation is
determined. Thus, the Savings Clause is circular, as the contribution right depends on the
primary claim and the primary claim depends on the contribution right. Accordingly, the amount
owed under the Savings Clause is not susceptible to mathematical calculation. The TOUSA court
aptly expressed the circularity of determining how to apply such agreements: "[i]t is turtles all
the way down." In re TOUSA, 2009 WL 3519403, at * 76. While the FPDs argue that
commercial expediency compels the enforceability of the Savings Clauses, they offer no answer
to the quandary identified by the TOUSA court. The TOUSA court correctly found that the
indefinite terms of such provisions rendered the savings clauses unenforceable. Id. It is also
worth noting that the FPDs offer no compelling logic as to why "commercial expediency" has
any connection whatsoever to the enforceability of such savings clauses. Indeed, if there is
neither established statutory or case law support for such savings clauses, why would it be
commercially reasonable for any lender to rely on them?
Finally, the FPDs' discussion of the treatment of savings clauses outside of the fraudulent
transfer context is irrelevant. 76 Once again the FPDs ignore the specific purpose of fraudulent
76 The FPDs cite to courts enforcing savings clauses in connection with interest payments, arbitration agreements, and indemnification agreements. Each of these types of savings clauses are inapposite. Interest savings clauses only work because they prevent a finding, required to establish usury, that the lender "intend[ed] to take and receive a rate of interest in excess of that allowed by law." See Brodie v. Schmutz (In re Venture Mortgage Fund L.P.), 282 F.3d 185, 188 (2d. Cir. 2002) (emphasis); contrast Coastal Cement Sand, Inc. v. First Interstate Credit Alliance, Inc., 956 S.W.2d 562, 572 (Tex. Ct. App. 1997) (where a purported savings clause does not "expressly disclaim an intention to collect usurious interest" the savings clause does not "save" the agreement). As intent is irrelevant under 548(a)(1)(B)--the statute from which the FPDs attempt to save themselves--the treatment of savings clauses in the usury context offers no guidance. Moreover, where a party actually receives usurious interest, the language of a savings clause cannot demonstrate an absence of intent. See Powell v. Waters, 8 Cow. 669 (N.Y. Sup. Ct. 1826) (recognizing as settled rule in the law of usury that giving and receiving, designedly, more than legal interest, though without any express corrupt agreement, is usury); see also 44B Am. Jur. 2d Interest and Usury § 134 (2009) ("A lender may not exact from a borrower a contract that is usurious under its terms and then relieve itself of the penalties imposed by law upon such an act by merely writing into the contract a disclaimer of an intention to do that which, under the contract, the lender has plainly done.")
Similarly, purported savings clauses within an arbitration agreement do not, as the FPDs assert, "reduce to [a] permissible limit[ ] [an] otherwise impermissible obligation[ ]," (FPD Joinder at 62 n.273), but rather function to "expressly states [that] the parties intended to waive punitive damages only to the extent permitted by [relevant] law." Stark v. Sandberg, Phoenix & von Gontard, P.C., 381 F.3d 793, 801 (8th Cir. 2004); FPD Joinder at 62. As recognized by the Eighth Circuit, the Federal Arbitration Act (the statute governing the agreement) "allows parties to incorporate terms into arbitration agreements that are contrary to state law." Id at 800. So where the parties expressly agreed to be limited by, in that case, Missouri state law, the purported savings clause, rather than "saving" the agreement from an unenforceable provision, outlined the scope of the controlling law.
Even enforcement of savings clauses in indemnification agreements is not uniform. See, e.g. Bright v. Tishman Constr. Corp. of N. Y, No. 95-Civ.-8793, 1998 WL 63403, *4 (S.D.N.Y. Feb. 17, 1998) (holding that "the phrase 'to the fullest extent permitted by law' is an insufficient limitation on the indemnification provision to remove the contract from the proscriptive scope of Section 5-322.1. To be effective, the saving language must indicate with sufficient clarity that the indemnification does not run to the negligent conduct of the indemnitee."). Moreover, the specific statute prohibiting indemnification encapsulates New York state public policy, and courts have developed a nuanced approach to the enforcement of indemnification agreements based on the express language and intention found within the specific agreement at issue. See Itri Brick & Concrete Corp. v. Aetna Cas.
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transfer law to protect against such efforts to saddle debtors with obligations without providing
reasonably equivalent value. Moreover, the FPDs encourage this Court to ignore the only
authority to date that has ruled on the issue of the enforceability of savings clauses within the
context of fraudulent transfer law, on facts parallel to those at issue here. See In re TOUSA,
2009 WL 3519403, at *76.
Moreover, to enforce the Savings Clause would be the equivalent of allowing the FPDs a
"do-over" and would cast a blind eye on the reality that, whatever debt limitation the Savings
Clause might theoretically otherwise be read to imply, it has been ignored by the FPDs who,
prior to the commencement of these cases, were collecting interest on the full $20.7 billion of
Merger Financing.
(2) Impact on the Unavoidability or Reinstatement of Debt to the Extent Used by the Debtors to Refinance Pre-Merger Obligations.
The Debtors have identified two related contested issues that they assert will impact the
range of recovery if resolved against the Committee: (i) the absolute unavoidability, pursuant to
548(c), of Liens and Obligations incurred by the Debtors to the extent the proceeds were used to
refinance pre-Merger obligations of the Debtors, (Settlement Memorandum at 107, n.21), and
(ii) assuming that such liens and obligations are prima facie avoidable, the potential
reinstatement of such liens and obligations by the successful assertion of the FPDs of the good
faith defense of afforded by Section 548(c). (Settlement Memorandum at TT 93-96).
The Committee does not contest that the Debtors applied $7.1 billion of the Merger
Financing proceeds towards the repayment of pre-Merger obligations of the Debtors. The
Committee's initial Complaint, in its current form, could be read to assume that the obligations
& Sur. Co., 680 N.E.2d 1200 (N.Y. 1997). As such, any broad generalization regarding enforceability of savings clauses is unhelpful unless limited to the relevant context and specific language of the clause at issue.
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and liens challenged as fraudulent transfers are subject to avoidance only to the extent of the
excess of the amount of such obligations and liens over the amount undertaken to refinance such
pre-Merger obligations of the Debtors. However, under prevailing authority, as identified in the
Committee's Motion for the Official Committee for an Order Authorizing the Filing of an
Amended Complaint (the "Motion to Amend"), and consistent with the plain language of Section
548 (and of applicable state fraudulent conveyance law), upon proper proof, a plaintiff may be
entitled, in the first instance, to avoid the entire amount of liens and obligations, notwithstanding
that the debtor was given some value in the exchange (here, the proceeds used to refinance pre-
Merger obligations). Under such circumstances, only if the transferee-defendant is able to
establish its "good faith," is it entitled to protection from entire avoidance, and then only "to the
extent" of value given. 77 See 11 U.S.C. § 548(c).
Subsequent to the filing of the initial Complaint, the Committee filed a motion to amend
accompanied by a Proposed Amended Complaint (the "PAC"). The PAC clarifies that the
Committee seeks avoidance of the entire amount of Obligations (approximately $21 billion) and
entire avoidance of the liens securing those Obligations. The Committee believes that the PAC
is consistent with current law. The Committee's Motion to Amend has been fully briefed and the
Committee believes that the Court has available to it on the current record a sufficient basis upon
which to determine whether the Committee's Motion to Amend should be granted.
The range of recoveries set forth in Chart A assumes, as the Committee has previously
argued, that the FPDs are not entitled to reinstatement of their liens or obligations, because,
regardless of whether the FPDs took for value, they did not take in good faith. Section 548(c)
77 Indeed, the case cited by the Debtors, HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995), supports this proposition (holding that only portion of mortgage of which proceeds had not been used for "legitimate corporate expenditures" could be avoided). See id at 637.
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provides an affirmative defense only to those transferees who "take{ ] for value and in good
faith." 11 U.S.C. § 548(c). (See Motion to Amend); (UCC Pre-Trial Legal Brief at 49-53).
For the reasons stated in its Motion to Amend, the Committee believes that if it prevails
on the other elements of its fraudulent conveyance claim, it is entitled to the avoidance of the
Obligations to the full extent necessary to afford full recovery. See Motion to Amend at 10-15.
The Committee is also of the view that in the event it is able to establish that one of the three
financial condition tests are met, the FPDs will be unable to establish a good faith defense with
respect to any portion of the Obligations. (See UCC Pre-Trial Legal Brief at 49-53).
Chart A, supra, reflects the Committee's recovery assuming that the entire $20.7 billion
of debt is avoided and none is reinstated through assertion by the FPDs of a good faith defense.
For the sake of argument and comparison, Chart B, set forth below, reflects the Committee's
recovery assuming $7.1 billion of the Merger Financing used to refinance pre-Merger obligations
is not avoided, or, if avoided, is ultimately reinstated pursuant to Section 548(c).
Chart B — Recoveries Upon Successful Prosecution of UCC Litigation, if Obligations to the Extent Incurred To Refinance Pre-Merger Debt Is Not Prima Facie Avoidable or Is Successfully Reinstated Pursuant to Section 548(c)7°
Claims Held Recoveries Available Upon Successful
Prosecution of UCC Litigation
Pro. Rata. Recoveries Available Pursuant to Proposed Settlement
Ratio of. UCC Litigation Recovery to Proposed Settlement
Recovery Unsecured Creditor $1, 620 $151 9.4% Claims (Excluding (100%) 2015 Notes) 2015 Notes" $1,352 $0 to $126 0% to 9.3%
(100%) Millennium Bonds $244 $23 9.4%
(100%) Total General $3,216 $174 to $300 6% to 9.3% Unsecured Claims (100%)
78 See Scenario 2A (Ex. 52 - Pickering Decl.)
79 The low end of the recovery range for the 2015 Notes reflects the result if the noteholders do not vote for the Plan.
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As shown by the above chart, general unsecured recoveries would remain at 100% even
if though $7.1 billion of the Merger Financing obligations and liens remain intact.
The FPDs additionally argue that they are entitled to reinstatement of their liens to the
extent that the Debtors received intangible benefits as a result of the business combination
between Lyondell and Basell. (FPD Joinder at 70; Settlement Memorandum at ¶ 93 n.20).
Under this argument, successful assertion of the good faith defense would entitle the FPDs to
reinstate obligations and liens, not only to the extent proceeds were applied to refinance pre-
Merger debt, but also in additional amounts equal to the value of synergies, good will, and other
intangible benefits the Debtors obtained through the Merger. The range of recovery set forth in
Chart B does not include the reinstatement of liens and obligations based upon this theory,
which, as discussed below, is unsupported by the plain language of Section 548(c), or apposite
authority.
Section 548(c) provides for reinstatement only "to the extent that such transferee or
obligee gave value to the debtor in exchange for such transfer or obligation." 11 U.S.C. § 548(c)
(emphasis). "[I]in connection with § 548(c), the relevant inquiry is the value given by the
transferee, rather than the value received by the debtor as would be examined under §
548(a)(1)(B)(1)." Dobin v. Hill (In re Hill), 342 B.R. 183, 203 (Bankr. D.N.J. 2006) (emphasis
added); see Roosevelt v. Ray (In re Roosevelt), 220 F.3d 1032, 1036 (9th Cir. 2000) (concluding
that transferee "may only retain her interest . . . to the extent that she herself gave something of
value").
Thus, even if the FPDs did take their Liens and fund the Obligations in good faith and for
value to the extent the proceeds were used for refinancing purposes, they can only enforce the
Liens and Obligations in the total amount of $7.1 billion, which constitutes the amount of value
they "gave" to the Debtors in the form of funds used to repay pre-Merger debt. See 11 U.S.C. §
548(d)(2)(A) (defining value as including satisfaction of an antecedent debt). The authority cited
by the FPDs support their proposition that obligations may be reinstated to the extent of the value
of intangible benefits resulting from a business combination is inapposite as it relates to the
proposition that such intangible benefits may be considered when determining whether the
debtor "received less than a reasonably equivalent value." 80 11 U.S.C. § 548(a)(1)(B)(i)
(emphasis added.) None of the cases cited by the FPDs holds that intangible benefits produced
through a merger are value that the lenders gave to the merging parties. 81 Cf. In re R.M.L., Inc.,
92 F.3d at 148-50 (discussing whether debtors received value in the form of intangible benefits
for the purpose of reasonably equivalent value analysis); Mellon Bank N.A. v. Metro Commc'ns
Inc., 945 F.2d 635, 647-48 (3d Cir. 1991) (same). Accordingly, only the $7.1 billion used to
refinance pre-Merger obligations would arguably be subject to reinstatement (or non-avoidance.)
8° Generally, the "reasonably equivalent value" analysis is undertaken on a debtor-by-debtor basis, as the focus of a reasonably equivalent value analysis in the LBO context is usually on the target entity, rather than the entire corporate family or consolidated group. See, e.g., In re Foxmeyer Corp., 286 B.R. 546, 573 (Bankr. D. Del. 2002) (under Section 548, reasonably equivalent value is to be determined on a debtor-by-debtor basis, unless debtors can be "combined such that they constituted but one entity"); In re Perdido Bay Country Club Estates, Inc., 23 B.R. 36, 39 (Bankr S D Fla. 1982) (court's analysis under Section 548 focused on whether "each debtor received reasonably equivalent value). Thus, in TOUSA, the court determined that "reasonably equivalent value must be received by the `debtor' itself — that is, by the same 'debtor' that incurred the relevant obligation or made the relevant transfer." In re TOUSA, Inc., 2009 WL 3519403, at *79; see also 11 U.S.C. § 548(a)(1)(B) (refusing to consider benefits received by non-debtor parent). However, because the CMO also directs that in Phase I the financial condition tests will only be determined on a consolidated basis, the Committee presents its reasonably equivalent value analysis for the post-Transaction consolidated group.
81 Indeed, as the Committee has argued, that the defmition of "value" was actually intended to include "intangible benefits" is highly unlikely. (UCC Pre-Trial Legal Brief at 19-20). Moreover, even if some intangible benefits do constitute "value," these asserted "benefits" are not concrete enough to be considered. First, although all defenses to the Committee's Avoidance Counts were issues for Phase I, the FPDs have not provided any factual support for their contention that these "intangible benefits" were created, referring only to the FPD Pre-Trial Legal Brief. The projected synergies are prospective and, at best, constitute guesses of future savings. The asserted goodwill is simply an accounting entry to account for a purchase price that exceeds tangible asset values. (UCC Pre-Trial Factual Contentions at ¶ 167.) The asserted "additional liquidity" gained "as a result of the Merger" is illusory. The amounts paid out to Lyondell to shareholders and as transaction expenses impaired LBI's liquidity by over $14 billion. The $1.35 billion of "additional liquidity" alleged by the FPDs (presumably consisting of the $600 million "accordion" feature of the LBI's ABL Inventory Facility and the $750 million revolver issued by Access) were neither in place nor committed until well after the Merger. (UCC Pre-Trial Factual Contentions at IT 302, 309.)
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As Chart B, supra, shows, the reinstatement or non-avoidance of the $7.1 billion would
have no effect on unsecured creditor recoveries. This result is due to the operation of Section
551 of the Code, pursuant to which the avoided liens are preserved for the benefit of the estate.
Pursuant to Section 551, unsecured creditors would step into the priority position of the FPDs
and would share pro rata with the FPDs to the extent of the preserved liens. See The Retail
Clerks Welfare Trust v. McCarty (In re Van de Kamp's Dutch Bakeries), 908 F.2d 517, 519 (9th
Cir. 1990) (upon avoidance of liens, liens are automatically preserved for the benefit of the estate
under Section 551 and the trustee "succeeds to the priority that interest enjoyed over competing
interests."). 82 The Debtors' estates step into the shoes of the holders of the avoided liens and the
priority gained for the estate from such liens "remains the same as it was with respect to other
liens prior to the avoidance." 5 COLLIER ON BANKRUPTCY ¶ 551.02 (Alan H. Resnick & Henry J.
Sommer eds., 15 ed. rev.); In re Investors & Lenders, Ltd., 156 B.R. 145, 147-48 (Bankr. D.N.J.
1993) ("Code section 551 provides that any liens avoided under Code section 544 are preserved
for the benefit of the estate, which means that the estate succeeds to the rights of the holder of the
avoided liens, and junior lienholders do not move up in priority as a result of such avoidance.");
see also Staats v. Barry (In re Barry), 31 B.R. 683, 686 (Bankr. S.D. Ohio 1983) ("The purpose
82 The FPDs cite to Morris v. St. John Nat'l Bank (In re Haberman), 516 F.3d 1207 (10th Cir. 2008) for the proposition, not contained within the text of Section 551, that any liens retained by the FPDs should rank senior to liens preserved for the benefit of the estate pursuant to Section 551. Nowhere does Morris contain this proposition. Morris holds only that Section 551, while preserving liens, does not also preserve contractual rights ancillary to the liens. See id. at 1210-12. In passing, the Morris court stated that "the trustee, on behalf of the entire estate, assumes the original lienholder's position in the line of secured creditors; in this way, Congress sought to assure that the avoidance of a lien doesn't simply benefit junior lienholders who would otherwise gain an improved security position and might, when the estate is limited, prove the only beneficiaries of the trustee's actions." Id at 1210. However, as the plain language of the statute makes clear, and as recognized by case law, Section 551 holds a dual purpose, both to ensure equity among lienholders as well as to benefit the unsecured creditors. See Rodriquez v. Whatcott (In re Walker), 389 B.R. 746, 750 (Bankr D Colo. 2008) ("The purpose of § 551 is to preserve the value of the avoided transfer for the benefit of the bankruptcy estate's unsecured creditors and to prevent lienholders junior to the avoided lien from improving their position at the expense of the estate."); see also In re WorldCom, Inc., 401 B.R. 637, 645 (Bankr. S.D.N.Y. 2009) (recognizing the function of Section 551 in conjunction with avoidance actions, noting "any recovery obtained from an avoided transfer is not preserved for the debtor but rather for the benefit of the estate and, consequently, the estate's creditors").
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of § 551 is to allow a trustee in bankruptcy, upon avoidance of certain preferential or fraudulent
transfers, to increase the assets of the bankruptcy estate.").
e) Issue Six: Priority Of Liens Preserved For The Estate.
The Debtors suggest there is an issue as to whether any surviving or reinstated liens of
the FPDs would be senior to or pan passu with the liens preserved for the benefit of the estate
pursuant to Section 551. As discussed above, the only approach consistent with the language of
Section 551 (and the purpose of fraudulent transfer law) is to treat the FPDs' surviving/reinstated
lien and the estate's preserved lien as equal priority.
f) Issue Seven: Equitable Subordination Or Disallowance.
The Debtors assert that TN the committee were to succeed in avoiding the Financing
Party Defendants' liens but fail on the issue of equitable subordination," general unsecured
creditors will share pan passu with the claims of the FPDs, thereby "eliminating any chance of
significant recovery by general creditors." Underpinning this assertion is a complete misreading
of Section 548 and the case law interpreting it. This assertion reveals that the Debtors' analysis
assumes that if the Committee were to establish its fraudulent conveyance claims, its remedies
would be limited to the avoidance of the FPDs' liens, leaving the underlying obligations to the
FPDs outstanding and pall passu with those of unsecured creditors. (Settlement Motion at
101-105). As pointed out below (at "(g) Issue Eight"), this is simply a misstatement of basic
fraudulent conveyance law pursuant to which the remedy for fraudulently incurred obligations
(of both the constructively fraudulent and actually fraudulent kind) is avoidance of those
obligations.
g) Issue Eight: Additional Factors Relevant To Potential Recoveries.
(1) Avoidability Of Primary Obligations.
Another variation on the issue discussed immediately above is expressed by the Debtors
only in a footnote; namely, the supposed unavoidability, of primary (as opposed to guaranty)
obligations as constructively fraudulent. 83 (Settlement Memorandum at ¶ 107, n.21). Cooper
also expressed his view that obligations are unavoidable, complete with an idiosyncratic view of
a hierarchy of remedies available in fraudulent transfer cases, which has no support in the case
law. (Ex. 17 — January Cooper Depo. Tr. at 155:17-156:6) ("You know, you had your avoidance
liens and you had subordination and finally expungement, and I frankly just could never see,
particularly when I looked at the financing environment from the early 2000s through late '07 or
early '08, I just couldn't see a court voiding obligations and, you know, kind of rendering useless
[TARP and] all of the other measures the government's put in over the last couple years. I just
didn't believe it would ever happen."). The Debtors (and Cooper) are simply wrong on the law.
On its face, Section 548 contemplates obligation avoidance, in addition to lien avoidance. See 11
U.S.C. § 548(a)(l)(A) (providing that trustee "may avoid any transfer . . . or any obligation"
upon the applicable showing). Courts uniformly recognize that Section 548 provides for
avoidance of obligations. See, e.g., Nextwave Personal Commc'ns, Inc. v. Federal Commc'ns
Comm'n (In re Nextwave Personal Commc'ns, Inc.), 235 B.R. 305, 307-09 (Bankr. S.D.N.Y.
1999) ("The literal terms of Section 544 as well as 548 and California Civil Code § 3439.07
83 The Debtors also "factored in" the "possibility" that upstream guarantees may be avoided. In fact, this "possibility" is quite well-recognized in the case law, and upstream guarantees are routinely avoided as fraudulently incurred obligations. See, e.g., Leibowitz v. Parkway Bank & Trust Co. (In re Image Worldwide, Ltd), 139 F.3d 574, 580-82 (7th Cir. 1998) (affirming avoidance of guarantee obligation, and holding that the "shift of risk from the creditors of the debtor to the creditors of the guarantor is exactly the situation that fraudulent transfer law seeks to avoid when applied to guarantees."); Covey v. Commercial Nat'l Bank, 960 F.2d 657, 662 (7th Cir. 1992) (avoiding upstream guarantee); In re TOUSA, Inc., 2009 WL 3519403 at *91, 97 (same); Wessinger v. Spivey (In re Galbreath), 286 B.R. 185, 215 (Bankr. S.D. Ga. 2002) (same); In re Ear, Nose and Throat Surgeons, Inc. v. Guaranty Bank and Trust Co. (In re Ear, Nose and Throat Surgeons, Inc), 49 B.R. 316, 321 (Bankr. Mass. 1985) (same); see also Smith v. American Founders Fin., Corp., 365 B.R. 647, 670 (S.D. Tex. 2007) (same); In re Consolidated Capital Equities Corp., 157 B.R. 280, 290 (Bankr. N.D. Tex. 1993) (same).
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appear to call for avoidance of the entire obligation where the statutory criteria for avoidance are
met" and holding the appropriate remedy is "avoidance of the entire obligation and reinstatement
of the obligation to the extent of value given"), rev'd on other grounds, 200 F.3d 43 (2d. Cir.
1999). (UCC Pre-Trial Legal Brief at 46-47). The FPDs themselves have inadvertently cited
such a case involving an LBO, which they characterize as concluding that "the liens and
obligations were likely avoidable as constructively fraudulent conveyances." (FPD Joinder at 71
(citing In re Telesphere Commc'ns, Inc., 179 B.R. 544 (Bankr. N.D. Ill. 1994) (concluding that,
if fraudulent transfer action against LBO lenders was successful, lenders could have retained
their liens and claims, but only to the extent they gave value in good faith)).
Although the Debtors correctly point out that resolution of this question would have
"substantial economic impact" on Committee recoveries, their extra-statutory views of
fraudulent conveyance law are made in reliance on misinterpreting dicta from a single case.
(Settlement Mem. at ¶ 107, n.21 (citing In re Best Prods. Co., 168 B.R. at 59). Moreover, the
discussion in Best Products was directed to the equities of avoiding obligations to the extent that
such avoidance would benefit those who received the benefits of the fraudulently incurred
obligations. Beyond such equitable concerns, Best Products recognizes the availability of the
remedy of obligation avoidance, noting that "it could be argued fairly persuasively that so much
of the obligation which the debtor incurred as was not supported by consideration to the debtor,
ought be avoidable." In re Best Products Co., 168 B.R. at 59 (emphasis added)." To hold that
84 The FPDs do not aid the Debtors' argument, also relying significantly upon Best Products. (FPD Joinder at 64-66). The FPDs also cite to a "leading treatise," which they cite for the principle that "No deprive the erstwhile grantee of the rights that belong to his present position as a creditor, would not be just." See FPD Joinder at 65, quoting G. GLENN, FRAUDULENT CONVEYANCES AND PREFERENCES, § 260a at 446-47 (1940). However, Professor Glenn was clearly referring to a transferee's rights upon returning a fraudulent transfer to the estate. Under such circumstances, the transferee presumably still has a claim for the underlying debt upon which the fraudulent transfer was made. Id. at 446 ("When that happens, and the grantee has to surrender security or refund a payment, he is left where he began, with a debt."). Professor Glenn says nothing of what happens where, as here, the debt itself was fraudulently incurred.
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loans cannot be avoided as fraudulent transfers in the LBO context would mean that creditors
would be entitled to no relief whatsoever from lenders who fund fraudulent LBOs by making
unsecured loans. While the avoidability of obligations, whether primary obligations or guaranty
obligations and whether based on constructive or actual fraud, is too fundamental to even require
case law support, a notable recent example of its application by the Seventh Circuit illuminates
the baseless of the Debtors' and FPDs position on the issue. See Boyer v. Crown Stock
Distribution, Inc., Nos. 09-1600, 09-1861, F.3d , 2009 WL 3837312, at *9 (7th Cir. Nov.
18, 2009) (Posner, J.) (affirming rulings by the trial court avoiding the entire obligation due
under a promissory note and avoiding both a security interest and the underlying obligation in a
constructively fraudulent LBO transaction).
Furthermore, if the rule were that guaranty obligations are avoidable but primary
obligations are not, enormous consequences would hang on whether the parties chose to call a
debtor a "borrower" or a "guarantor," and such a rule would elevate form over substance. Here,
for example, Lyondell is a borrower for approximately half of the FPD obligations being
challenged and a guarantor for the balance. More like a guarantor than a borrower, however,
Lyondell directly benefited from only a fraction of the proceeds of the loans it agreed, as
borrower and guarantor, to repay. Most of the proceeds were used to finance payments to
Lyondell shareholders and for transaction expenses relating thereto that provided no benefit to
Lyondell. Should the amount of obligations avoided (and not subject to reinstatement under
Section 548(c)) turn on the borrower/guarantor designations or the question of how much value
did Lyondell get in the transaction? Both the language and purpose of Section 548 make clear
that it is value, not names, that controls.
h) Factors Missing From The Debtors' Recovery Analysis.
(1) Upstreaming Of Value To Satisfy Unsecured Creditors Of Parent.
In their analysis of the possible recovery on the UCC Litigation, the Debtors have
assumed that the recovery of the unsecured creditors will be limited to the distributable value at
each debtor entity, and that any value remaining at each entity (after subtracting unsecured
claims) will then be paid to the FPDs on account of their avoided obligations and liens, and have
neglected to consider the possibility that their assumption is incorrect. (Settlement
Memorandum at TT 113-117). Instead, the Debtors summarily conclude that their analysis is
"dictated by settled law." (Settlement Memorandum at ¶ 113). However, the cases cited by the
Debtors are inapposite and contrary to both the Code and the purpose of fraudulent transfer law.
The Debtors' assumption would permit the FPDs to recover on their claims at the
expense of the unsecured creditors who are the beneficiaries of the UCC Litigation. Indeed,
what the Debtors assume is that where a court avoids a lender's loans to both a parent and its
subsidiary as fraudulent transfers, the residual value of the subsidiary (after full payment of all
defrauded unsecured creditors of the subsidiary) must be paid to the defrauding lender ahead of
the defrauded creditors of the parent. This result is neither mandated by "settled law" nor is it
consistent with the equitable nature of bankruptcy proceedings. See Pepper v. Litton, 308 U.S.
295, 308 (1939).
Instead, any residual subsidiary value should be available to the parent for the benefit of
its defrauded unsecured creditors. This Court need look only to the plain language of Section
548(a)(1) of the Code to satisfy itself that this relief is permissible. Section 548(a)(1) of the
Code provides a debtor with the ability to avoid fraudulent obligations, but is silent as to the
apportionment of recovery upon avoidance of the fraudulent obligation. It states, in relevant
part:
The trustee may avoid any transfer . . . of an interest of the debtor in property, or any obligation . . . incurred by the debtor,[ 85] that was made or incurred on or within 2 years before the date of the filing of a petition, if the debtor voluntarily or involuntarily —
(A) made such a transfer or incurred such an obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engage in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur debts that would be beyond the debtor's ability to pay as such debts matured; ...
11 U.S.C. § 548 (emphasis added).
Section 551 of the Bankruptcy Code also is illustrative. It automatically preserves
avoided liens for the "benefit of the estate", as opposed to the sole benefit of creditors. See 11
U.S.C. § 551. Indeed, the bankruptcy estate is generally understood to include the interests of
both creditors and shareholders. See Hansen, Jones & Leta, P.C. v. Segal, 220 B.R. 434, 450 (D.
Utah 1998); see also In Re Doors and More Inc., 126 B.R. 43, 44 (Bankr. E.D. Mich. 1991).
Therefore, the trustee's remedies should be exercised for the benefit of a debtor's parent — not
85 Unlike Section 544, Section 548 is not a creditor-specific remedial statute and, on its face, does not require the existence of an actual creditor. Compare 11 U.S.C. § 544(b)(1) ("Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim.").
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just its creditors, particularly where the benefit is flowing not to a party for whom such benefit
would constitute a windfall, but to the parent's creditors defrauded by the same lender in the
same transaction as the subsidiary's creditors.
The FPDs also rely on the recent decision in Adelphia Recovery Trust v. Bank of
America, 390 B.R. 80 (S.D.N.Y. 2008) ("Adelphia VI"). There, the court held that the plaintiffs,
asserting claims on behalf of creditors at parent debtors that had made no fraudulent transfers,
did not have standing to assert fraudulent transfer claims against the debtor subsidiaries that had
made the fraudulent transfers, where the unsecured creditors of the debtor subsidiaries were to be
paid in full with interest pursuant to a confirmed Joint Plan. Adelphia VI, 390 B.R. at 83 n. 3.
The analysis in Adelphia VI is simply inapplicable where, as here, the subsidiaries have
guaranteed the same obligations that are sought to be avoided at the parent level. Lyondell is the
named borrower on $10 billion of the $20.7 billion obligation and, in turn, induced its
subsidiaries to guarantee both its debts and its parents' debts. In other words, all of the Debtor
obligor entities, at every level, are subject to the same $20.7 billion claim. The creditors of a
parent debtor (who have been defrauded by the integrated transaction just as surely as the
creditors of the subsidiary debtor) must be entitled to undo the transaction by turning to the
assets of the debtor subsidiaries. Indeed, where a parent holding company causes its wholly
owned subsidiaries to guarantee its debts, the parent, in effect, may thereby have fraudulently
transferred the property of its own estate. See AboveNet, Inc. v. Lucent Techs., Inc. (In re
Metromedia Fiber Networks), 2005 Bankr. LEXIS 3168, at *28 (Bankr. S.D.N.Y. Dec. 20, 2005)
(noting that "if a parent corporation were to prefer a particular creditor over other creditors by
causing a solvent subsidiary to guarantee the parent's debt to the preferred creditor within three
months of the parent's bankruptcy filing to the potential prejudice of other creditors, there might
be a basis to argue that such a guarantee constituted a transfer within the ambit of Section
547(b)").
Yet, the FPDs propose that proceeds of the estate should be funneled to the FPDs before
payment of all of the defrauded unsecured creditors of the Debtors' estates. In other words, the
Debtors would have this Court ignore the reality that the unsecured creditors of the parent and
each subsidiary-guarantor are beholden on the same obligation. This Court is not constrained to
such a result. See Pepper v. Litton, 308 U.S. at 308 ("the bankruptcy court has the power to sift
the circumstances surrounding any claim to see that injustice or unfairness is not done in
administration of the bankrupt estate"). Allowing the parent's creditors to benefit from the
subsidiaries' residual value ahead of the holders of the fraudulent loans is the manifestly
equitable result. In short, the Adelphia VI decision did not foreclose this Court from
apportioning any excess value after avoidance of the $20.7 billion debt in each subsidiary to that
subsidiary's parent company for the benefit of its unsecured creditors.86
The FPDs argue that the avoidance of the entire $20.7 billion obligation would benefit
the debtors and not the creditors and cite In re Liggett, 118 B.R. 219 (Bankr. S.D.N.Y. 1990) for
the proposition that avoiding powers may not be exercised for the benefit of the debtor itself. Id.
at 222. The FPDs argue that avoidance is precluded where it would cause a "windfall" to the
debtor. For instance, in Liggett, the debtor sought to avoid a foreclosure sale of real property,
but was denied this relief because the sale would solely benefit the debtor and not any creditors.
Indeed, the court noted that the debtor was not the owner of record for the property, and that the
86 The court in Adelphia VI also rejected the plaintiff's separate equitable subordination claim under Section 510(c) of the Bankruptcy Code because the "creditors of the Obligor Defendants had been paid in full under the terms of the Joint Plan, rendering irrelevant any possible concern with the relevant amounts of recovery, the primary concern in equitable subordination law." Adelphia VI, 390 B.R. at 99. As discussed above, the decision in Adelphia VI did not address fraudulent conveyance claims at the parent level (or at the level of direct parent of an operating company) and, therefore, the court's analysis of equitable subordination under those circumstances should not apply here.
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debtor sought to avoid a foreclosure sale "for the primary purpose of preventing her eviction
from the ... Premises." See Id Similarly in Vintero Corp., the debtor sought to avoid any
potential claim by a creditor with a security interest over a ship owned by the debtor. See
Vintero Corp v. Corporacion Venezolana de Fomento (In re Vintero Corp.), 735 F.2d 740, 741
(2d Cir. 1984). The court noted that the debtor had exceeded its rights to the extent the secured
interest did not adversely affect other creditors. See id. at 742. In rejecting the debtor's attempt
to avoid the obligation, the court noted that "Vintero was given the right to avoid CVF's security
interest in order to protect such third parties, not to create a windfall for Vintero itself." See id.
And in Whiteford Plastics Co., the debtor sought to avoid a bank's security interest, but was
denied by the court because the debtor had already submitted its plan of reorganization, which
did not distribute the value of the interest to creditors. See Whiteford Plastics Co. v. Chase Nat'l
Bank, 179 F.2d 582, 584 (2d Cir. 1950). Instead, the debtor intended to avoid the obligation
solely for its own benefit. See id And to the extent that these cases represent a limitation of the
power of a debtor to avoid an obligation, they do not prohibit the relief sought by the Committee
here.
The circumstances here are easily distinguishable from the facts of those cases. The
relief sought by the Committee will not benefit the subsidiary debtors themselves or their direct
or indirect parents, for that matter, but only creditors of those entities who have fraudulently
undertaken obligations to the FPDs.
Moreover, even if, arguendo, the FPDs are correct that residual subsidiary value may not
flow upstream to benefit the parent's defrauded creditors, this limitation would only minimally
affect unsecured creditor recoveries. When Chart A (which reflects recoveries upon avoidance
of all Liens and Obligations) and Chart B (which reflects recoveries upon avoidance of all Liens
and Obligations, except to the extent proceeds were used to refinanced pre-Merger obligations)
are altered to reflect this limitation on the upstreaming of residual subsidiary value, the recovery
to unsecured creditors is still between $3.036 billion (94%) and $3.091 billion (96%).
Chart C — Recoveries Upon Successful Prosecution of UCC Litigation, if Residual Subsidiary Value Is Not Upstreamed and Refinanced Pre-Merger Debt Is Not Reinstated87
Claims Held Recoveries Available Upon Successful
Prosecution of UCC Litigation
Pro Rata Recoveries Available Pursuant to Proposed Settlement
(in millions)
Ratio of UCC Litigation Recovery to Proposed Settlement
Recovery Unsecured Creditor $1, 610 $151 9.4% Claims (Excluding (99%) 2015 Notes) 2015 Notes88 $1,352 $0 to $126 0% to 9.3%
(100%) Millennium Bonds $129 $23 18%
(53%) Total General $3,091 $174 to $300 5.6% to 9.7% Unsecured Claims (96%)
Chart D — Recoveries Upon Successful Prosecution of UCC Litigation, if Residual Subsidiary Value Is Not Upstreamed and Refinanced Pre-Merger Debt Is Reinstated89
Claims Held Recoveries Available Upon Successful
Prosecution of UCC Litigation
Pro Rata Recoveries Available Pursuant to Proposed Settlement
(in millions)
Ratio of UCC Litigation Recovery to Proposed Settlement
Recovery Unsecured Creditor $1, 609 $151 9.4% Claims (Excluding (99%)
2015 Notes) 2015 Notes" $1,352 $0 to $126 0% to 9.3%
(100%) Millennium Bonds $75 $23 30.6%
(31%) Total General $3,036 $174 to $300 5.7% to 9.9% Unsecured Claims (94%)
87 See Scenario 3A (Ex. 52 - Pickering Decl.).
88 The low end of the recovery range for the 2015 Notes reflects the result if the noteholders do not vote for the plan.
89 See Scenario 4A (Ex. 52 - Pickering Decl.).
90 The low end of the recovery range for the 2015 Notes reflects the result if the noteholders do not vote for the plan.
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(2) Recoverability of Merger Fees and Interest.
Although the Debtors indicate that they have assumed that the FPDs "will be required to
return in whole or part adequate protection payments made during these chapter 11 cases,
interest paid before the commencement of these cases, or financing fees paid in connection with
the Merger," it is unclear whether the Debtors incorporated these disgorged payments into their
calculation of distributable value (nor have the Debtors even provided a calculation of the
amount of interest and fees). (Settlement Memorandum at 110.) However, neither the Debtors
nor the FPDs have provided any legal or factual authority to contest the Committee's claim that
the Merger Fees and Interest must be disgorged upon successful prosecution of the Committee
Claims (Settlement Memorandum at 110 (citing cases providing that interest and fees are
recoverable, although stating with no authority that courts are "reluctant" to so provide, and
noting that Debtors' $1.6 billion high claims estimate assumes payment of "in whole or in part
adequate protection payments made during these chapter 11 cases, interest paid before the
commencement of these cases, or financing fees paid connection with the Merger"); FPD Joinder
at 74-75 (arguing only that interest and fees not recoverable from subsequent purchasers); UCC
Pre-Trial Legal Brief at 47).
Indeed, it is clear that, upon avoidance of the fraudulent obligations, the FPDs will be
required to disgorge the Merger Fees and Interest, totaling approximately $3.1 billion, which
includes merger fees, post-Merger interest payments, adequate protection payments, and DIP
Roll-up Fees and interest received by the FPDs. 91 (UCC Pre-Trial Legal Brief at 47; UCC
Contentions of Fact at r 136-140)
91 The Debtors contend that, if disgorgement were unavailable, "the $1.6 billion maximum potential recovery for the unsecured creditors would be reduced by $700 million." (Settlement Memorandum at 112). However, if the FPDs did not have to disgorge the funds, it would only affect the distributable value of the Debtors, and would have
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The Debtors also note the FPDs' argument that Subsequent Purchasers of claims have a
defense to disgorgement under Section 550(b) because they gave value to the Arrangers when
they purchased and paid for the syndicated interests in the Merger Financing. 92 (Settlement
Memorandum at ¶ 111, n.23). However, Section 550(b) also requires a showing that any interest
and fees were received not only for value, but also in good faith and without knowledge of the
voidability of the transfer avoided. (UCC Pre-Trial Legal Brief at 54-56). Here, the Subsequent
Purchasers will be unable to make that showing, as they were well aware of the avoidability of
the underlying obligations at the time they made the relevant transfers.
(3) The Millennium Bonds.
One of the most telling and egregious oversights by the Debtors is their failure to take
into account the contractual limitations in the Millennium Indenture and the guarantee provisions
of the Senior Credit Agreement and Bridge Loan Agreement. As a result, the Debtors have
ignored the fact that approximately $149 million in unsecured claims against the subsidiaries of
absolutely no effect upon the aggregate amount of general unsecured claims against the six Debtors with distributable value. (Settlement Memorandum at ¶11108, 110).
92 To the extent the Debtors and FPDs argue that Section 550(b) also provides the Subsequent Purchasers a defense against the avoidance of liens and obligations, they are clearly mistaken. By its terms, Section 550(b) is no defense to avoidance, but provides only a good faith defense to the recovery of a fraudulent transfer that has already been avoided. See 11 U.S.C. § 550(b) ("the trustee may not recover under section (a)(2) of this section from [a good faith subsequent transferee]") (emphasis added); Enron Corp. v. Avenue Special Situations Fund II, LP (In re Enron), 340 B.R. 180, 184 (Bankr. S.D.N.Y. 2006) (vacated on other grounds) (the exemption under section 550(b) only applies to a transferee who received a transfer from an initial transferee."). Only Section 548(c) provides a good faith defense to avoidance of fraudulent transfers made or fraudulent obligations incurred. See, e.g., Shapiro v. Art Leather, Inc. (In re Connolly N. Am., LLC), 340 B.R. 829, 839 (Bankr E D Mich. 2006) (good faith defense to avoidance of preferences is only a defense "to avoidance, rather than to recovery under § 550(a)") (emphasis added)); Eisen v. Allied Bancshares Mortgage Corp., LLC (In re Priest), 268 B.R. 135, 138 (Bankr. N.D. Ohio 2000) ("A straightforward reading of the statutory language leads to the conclusion that avoidance and §550 recovery are independent statutory remedies . . . "); Ross v. Penny (In re Villa Roe!), 57 B.R. 879, 883 (Bankr. D. D. C. 1986) (Section 550(b) only "prevents recovery from good faith secondary or subsequent transferees who take such transfer in exchange for giving value and without knowledge of the voidability of the transfer ... initial transferees ... are not eligible to assert the protection that section 550(b) provides to subsequent transferees."). Accordingly, the Merger Financing obligations and liens may be avoided irrespective of whether and to what extent Subsequent Purchasers, such as Leverage Source III S.a.r.1., gave value or acted in good faith when purchasing their claims.
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Millennium America, Inc. — Millennium US Op Co LLC,93 Millennium Petrochemicals, Inc. and
Millennium Specialty Chemicals, Inc. (together, the "Millennium Excluded Entities") — are
entitled to be paid nearly in full regardless of whether the UCC Litigation succeeds, and under
any plan of reorganization. The Millennium Indenture, in conjunction with the Senior Credit
Agreement and the Bridge Loan Agreement, provides that the aggregate amount of indebtedness
incurred by the Millennium Excluded Entities cannot, in the aggregate, exceed 15% of the
"Consolidated Net Tangible Assets" 94 of Millennium America Inc. and its subsidiaries. (Ex. 54 -
Senior Credit Agreement, § 11.13 95 ; Ex. 55 - Bridge Loan Agreement, § 9.13;96 Ex. 56 -
Millennium Indenture § 1009).97 As a result, the aggregate amount of the obligations incurred
by the Millennium Excluded Entities (and other Restricted Subsidiaries) with respect to their
guaranty of the Senior Loans and Bridge Loans can be no more than approximately $110
93 Additionally, due to their refusal to recognize the upstreaming of residual subsidiary value, the Debtors have ignored the $32 million in unsecured claims against Millennium US Op Co LLC.
94 Defined in the Millennium Indenture as (i) the aggregate value of all assets of Millennium America Inc. and its subsidiaries, minus (ii) the sum of (a) the current liabilities (excluding current maturities of long-term debt) of all such entities and (b) the value of all goodwill, intellectual property, unamortized debt discount, and all other like intangible assets owned by all such entities).
95 Section 11.3 of the Senior Credit Agreement provides: Any amount that may be guaranteed by Millennium Chemicals Inc. or any of its Subsidiaries, shall not exceed the amount permitted to be Incurred (as defined in the Millennium Indenture) as Funded Debt (as defined in the Millennium Indenture) as more fully set forth in Section 1009 of the Millennium Indenture; provided, however, that upon the refinancing in full of the Millennium Notes, this Section 11.13 shall cease to operate and have any force and effect as of the date of such refinancing." (Emphasis added).
96 Section 9.13 of the Bridge Loan Agreement is identical to Section 11.3 of the Senior Credit Agreement.
97 Section 1009 of the Millennium Indenture provides, in relevant part: In addition, a Restricted Subsidiary may Incur Funded Debt in an aggregate principal amount which. together with (without duplication) (a) the aggregate principal amount of all other Funded Debt of the Restricted Subsidiaries (other than Funded Debt permitted to be Incurred under the provisions described in clauses (1) through (7) inclusive above), (b) the aggregate principal amount of all Secured Debt of the Issuer and the Restricted Subsidiaries (other than Debt permitted to be secured under the provisions described in clauses (1) through (9) inclusive under Section 1007), and (c) the aggregate Value of Sale and Lease-Back Transactions (other than Sale and Lease-Back Transactions described in clauses (I) and (2) under Section 1008), does not at the time of such Incurrence exceed 15% of Consolidated Net Tangible Assets. (Emphasis added).
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million.98 However, the Debtors' Second Amended Joint Chapter 11 Plan of Reorganization (the
"Proposed Plan") [Docket No. 3489] allows the FPDs to assert unsecured claims against the
Millennium Excluded Entities in the amount of $17.8 billion, diluting the recovery of general
unsecured creditors of the Millennium Excluded Entities. 99 (Second Amended Disclosure
Statement Accompanying Second Amended Joint Chapter 11 Plan of Reorganization for the
LyondellBasell Debtors at pp. 6-7).
According to the Debtors, the Millennium Excluded Entities have combined distributable
value of approximately $232 million. In compliance with the restrictions of the Millennium
Indenture, the Millennium Excluded Entities did not grant security interests to secure their
guaranty of the Senior Secured Facility Claims and the Bridge Loan Claims. As a result, any
general unsecured claims against such entities will share pro rata with any guaranty obligations
of such entities. Because the total guaranty obligations of the Millennium Excluded Entities are
capped at approximately $110 million, approximately $122 million of the value at the
Millennium Excluded Entities is available to satisfy the approximately $149 million of unsecured
claims at such entities (allowing for a near full recovery), even assuming that no liens or
obligations are avoided pursuant to the UCC Litigation. Further, because the stock of the
Millennium Excluded Entities was not pledged as security for Millennium America's guaranty of
98 As of December 31, 2007 (i.e., approximately 10 days after the Millennium Guaranty was incurred by the Millennium Excluded Entities), Millennium America, Inc. and its subsidiaries had assets of $874 million, current liabilities (excluding current maturities) of $66 million, and goodwill valued at $76 million resulting in "Consolidated Net Tangible Assets" totaling $732 million as of such date (i.e., $874 million less ($66 million + $76 million). (Ex. 57 - Millennium Chemicals, Inc. 2007 Form 10-K, at 79, 102) Fifteen percent of $732 million equals approximately $110 million. Accordingly, the aggregate amount of the obligations incurred by the Millennium Excluded Entities with respect to their guaranty of the Senior Secured Facility Claims and the Bridge Loan Claims can be no more than approximately $110 million, which amount could be reduced by any guaranty obligations with respect to the 2015 Notes undertaken by the Millennium Excluded Entities on such date, and may, in fact, be even less if the Millennium Excluded Entities had other debt at the time they incurred the Millennium Guaranty that would have been included within the $110 million cap.
99 Although the Debtors have argued that confirmation of their Proposed Plan is not a condition of the Proposed Settlement, the fact remains that no other plan has been proposed and the FPDs are unlikely to support any plan that does not allow them to sponsor a rights offering.
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the Senior Secured Facility Claims and Bridge Loan Claims, any value remaining after all
obligations of the Excluded Millennium Entities have been paid in full will flow up to their
parent, Millennium America, Inc., where it would be available to satisfy the claims of the holders
of the Millennium Notes on a pro rata basis with any other remaining unsecured claims upon the
successful prosecution of the UCC Litigation.
(4) The 2015 Notes.
The Debtors would have this Court compare the $300 million cash recovery payable
under the Proposed Settlement (payable to all unsecured creditors, including the 2015
Noteholders) to the $1.6 billion in claims held by unsecured creditors (excluding the $1.3 billion
in claims held by 2015 Noteholders) against those Debtors with significant distributable value.
The Debtors provide no explanation for including the 2015 Notes in one figure but not in the
other. The Debtors assert that, pursuant to an intercreditor agreement between the 2015
Noteholders and the FPDs, the 2015 Noteholders must turn over any recovery they receive.
However, the turnover provision (even if enforceable) affects only what happens to the 2015
Noteholders' pro rata share of the $300 million. If the 2015 Noteholders vote for the plan, they
will receive their pro rata share of the $300 million; if they vote against the plan, their share is
"deemed turned over to the Reorganized Debtors." 1°° (Proposed Plan, § 4.10(b)). Thus, the
$300 million cash recovery to general unsecured creditors may end up being far less than that, if
the 2015 Noteholders' recovery is "turned over" to the Reorganized Debtors.
When this Court compares the $300 million cash recovery under the Proposed Settlement
to the available recoveries upon successful prosecution of the UCC Litigation, it must consider
100 Under the Proposed Settlement, the 2015 Notes Claims may receive a distribution on the $300 million cash payment only "upon satisfaction of the conditions set forth in the Plan." See Proposed Settlement, § 2.2. Under the Proposed Plan, unless the class of 2015 Noteholders votes to accept the plan, and the 2015 Notes Trustee does not object to either the Proposed Settlement or confirmation of the Proposed Plan, the 2015 Noteholders will not receive any distribution and "the recovery of the holders of 2015 Notes Claims . . . shall be deemed turned over to the Reorganized Debtors." Proposed Plan at § 4.10(b).
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both the claims against the Millennium Excluded Entities as well as the claims of the 2015
Noteholders. It must also consider the possibility that the $300 million cash recovery could be
reduced significantly if the 2015 Noteholders vote against the Plan. When these adjustments are
made, it becomes clear that the Proposed Settlement would settle claims totaling $3.2 billion
dollars, for either $300 million (representing a recovery of less than 10%) or $163.5 million
(representing a recovery of only 5%). As discussed supra, such a paltry settlement reflects a
discounting of the UCC Litigation that is wholly unsupported by the record.
Moreover, in their Settlement Memorandum, the Debtors fail to take into account the pre-
Merger guarantee that the holders of 2015 Notes have at Basell USA, Inc. ("Basell USA").
Since Basell USA would have excess value available after satisfaction of its general unsecured
claims upon successful prosecution of the UCC litigation, that excess value should not be "lost"
to the FPDs, as the Debtors' presentation reflects, but instead should be available to the holders
of the 2015 Notes, which would increase the overall recoveries of the general unsecured
creditors. The holders of 2015 Notes also have guarantees from non-Debtor LBI subsidiaries
that were given prior to the Merger. Again, to the extent that the holders of 2015 Notes are able
to achieve some recoveries on account of their non-Debtor guarantees, the overall recoveries of
the Debtors' general unsecured creditors will be enhanced.
D. The Debtors Have Failed to Meet Their Burden of Demonstrating that the Committee is Unlikely to Prevail.
The determination of whether a settlement is fair and equitable requires exercise of
"informed, independent judgment" by the Court, and the Court cannot merely rely upon the
unsupported conclusions of the Debtors. See Official Comm. of Unsecured Creditors of Int'l
Distrib. Ctrs., Inc. v. James Talcott, Inc. (In re Int'l Distrib. Ctrs., Inc.), 103 B.R. 420, 422
(S.D.N.Y. 1989) (determination as to whether proposed compromise is fair and equitable
requires exercise of informed, independent judgment by court). A proposed settlement that, in
the informed and independent judgment of the court, falls below the reasonable range of
litigation possibilities, is not fair and equitable, in the best interests of the debtors, and cannot be
approved. Approval of a settlement without a sufficient factual foundation will inherently
constitute an abuse of discretion. U.S. v. AWECO, Inc. (In re AWECO, Inc.), 725 F.2d 293, 299
(5th Cir. 1984). To be informed, the bankruptcy court "must be apprised of all relevant
information that will enable it to determine what course of action will be in the best interest of
the estate." See Myers v. Martin (In re Martin), 91 F.3d 389, 394 (3d Cir. 1996). Here, beyond a
list of open issues, the Debtors have provided absolutely no information or evidence to justify
their willingness to discount the Committee's claims to a mere 10% of their recoverable value.
See In re Lion Capital Group, 49 B.R. at 176 ("The settling parties must set forth the facts in
sufficient detail that a reviewing court could distinguish it from mere boilerplate approval of the
trustee's [or debtor-in-possession's] suggestions.") (citations and quotations omitted).
The Committee believes that it has a winning, indeed compelling, case on each of the
elements of its avoidance claims against the FPDs, for the reasons discussed in its Pre-Trial
Legal Brief, contentions of fact and other pre-trial submissions, and supra, and stands to allow
unsecured creditors to be paid in full. By making several unwarranted and suspect legal and
factual assumptions, as discussed above, the Debtors have severely and improperly
underestimated the range of recovery to unsecured creditors that could result from prosecution of
the UCC Litigation.
Moreover, by failing to provide any support for their "range of reasonableness"
calculations, the Debtors are asking the Court to simply trust that their calculations are valid.
The Court "may not simply accept [a party's] word that the settlement is reasonable, nor may he
merely 'rubber-stamp' the [party's] proposal." LaSalle Nat'l Bank v. Holland (In re Am. Reserve
Corp.), 841 F.2d 159, 162 (7th Cir. 1987). The FPDs' guesswork, supported only by their
counsels' self-serving and predictable subjective opinions of the merits of the Committees'
claims, is legally insufficient to support a finding of reasonableness. 101 See Mattco Forge, Inc. v.
Arthur Young & Co., 38 Cal. App. 4th 1337, 1350-51 (Cal. Ct. App. 1995) (disapproving
settlement, in which proponent's reasoning in support was as follows: "Mattco's total recovery in
the underlying action would have been $39 million. Assuming Mattco had only a 50/50 chance
of prevailing against G.E., its damages would have been about $ 20 million. Assuming Mattco
were 50 percent at fault for the events giving rise to the dismissal of the underlying action, its
damages would have been $10 million. Further assuming Helmer & Neff s share of fault in the
production of the noncontemporaneous documents was not more than 5 or 10 percent, the
settling attorneys' share of the damages should not exceed $500,000 to $1 million. Therefore, the
settlement was within the reasonable range or 'ballpark' of their share of liability for Mattco's
injuries.")
The Debtors have also disingenuously overestimated the benefits of the Proposed
Settlement to the estate. The Debtors not only claim that the Proposed Settlement will result in
cost savings as a result of the cession of litigation against the FPDs but that the settlement will
clear a path for a confirmable plan free of intercreditor disputes arising among the Senior
Lenders and the Bridge Lenders. 102 Each of these effects needs to be briefly addressed.
101 In those cases in which the Committee has successfully inquired into assumptions underlying the decision-making process, those assumptions often appeared unfounded. For example, although Cooper stated that he believed CMAI, in its November 2007 CMAI Report, had approved the reasonableness of Lyondell's projections, he had never even looked at the deposition of the author of that report, nor had he read the entire report, and admitted that he was unfamiliar with the undulying facts bearing on the key issues concerning such Report. (Ex. 17 — January Cooper Depo. Tr. at 157:4-22).
102 The FPDs also claim that the Proposed Settlement also reserves for the sole benefit of unsecured creditors all of the Debtors' non-settled causes of action, and asserts that this Court can assign a value to those causes of action of $1 billion. Despite the Committee's belief in the value of its additional claims, no evidence on such claims is before
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First, the Debtors argue that approval of the Proposed Settlement will prevent the estate
and the FPDs from having to shoulder the burden of the expense of a trial. However, most of the
costs associated with such a trial have already been expended, as the settlement occurred on the
eve of trial, after the completion of virtually all discovery, and since December 4, the Pre-Trial
Order and Pre-Trial Briefs have been filed. Indeed, in stark contrast to the typical settlement,
which brings disputes to an end, this Settlement Proposal was only bound to create further
disputes and Debtors' counsel admitted on December 4, 2009, to the Court that he expected a
vigorous opposition from the Committee to the Proposed Settlement. In this case, the additional
expense of Phase I trial would have been less significant than the cost of litigating this
settlement. Instead of a ten day trial (which would have been completed by now, with a ruling
likely issued by the Court) the Debtors, FPDs, and the Committee are engaged in a settlement
battle, complete with new document requests, depositions, and potential appeals. Further, should
the Court deny approval of the Proposed Settlement, the Debtors and the FPDs are back to where
they were before the Debtors seized the opportunity to try and settle the UCC Litigation out from
under the Committee. It is without question that, had the Debtors not obstructed the
Committee's litigation strategy and not circumvented the Committee to settle this litigation six
days prior to the start of the December 10, 2009 trial, at a price that would not even be in the
bargain basement, the estates would have saved the cost of this unnecessary settlement litigation,
including the most significant cost of remaining in chapter 11 — the continuation of the adequate
protection payments (as to which the Court has recognized significant questions exist). In any
event, the elements of expense and delay "are present in most litigation," and cannot alone
this Court, and the Court cannot make any informed determination as to their value. Moreover, the FPDs are simply wrong that unsecured creditors will receive the "sole benefit" of such claims. If the 2015 Noteholders vote against the Proposed Plan (among other disqualifying actions), their portion of any recovery will be turned over to the Reorganized Debtors. See Proposed Plan at § 4.10(b).
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justify a settlement. In re Exide Techs., 303 B.R. at 71; See TMT Trailer, 390 U.S. at 434
("Litigation and delay are always the alternative to settlement, and whether that alternative is
worth pursuing necessarily depends upon a reasoned judgment as to the probable outcome of
litigation.").
Second, as this court is aware, the Debtors have championed, as a justification for the
Proposed Settlement, their resolution of inter-creditor issues by and among the Senior Lenders
and the Bridge Lenders that will result in a consensual plan (among these parties). (Settlement
Memorandum at ¶ 137). The priority scheme between the Senior Lenders and the Bridge
Lenders is affected by the outcome of the UCC Litigation; indeed, if the UCC Litigation were to
succeed and the liens avoided, the position of the Bridge Lenders (who are hopelessly out of the
money) would presumably improve, as they believe they, according to their view of the world,
would be permitted to share pro rata with the stripped Senior Lenders as unsecured creditors (the
Senior Lenders, for their part, dispute this position by the Bridge Lenders). However, the
Proposed Settlement fails to pass muster where the Debtors have misappropriated benefits from
the UCC Litigation (i.e., the value of the resolution of inter-creditor issues) to justify the low-ball
settlement to the Committee. Such a short-changing of the Committee's claims is not
appropriate. Moreover, the Debtors have provided the Court with absolutely no evidence from
which to assess whether the settlement of the inter-creditor issues, which was purportedly a
condition precedent to the Proposed Settlement, is in the best interests of the estate.103
As the Debtors repeatedly emphasized to the Court as justification for bifurcating the
trial, the expectation was that after the completion of the Phase I trial, settlement would occur
quickly. Indeed, it had been the Debtors' public position with the Court, right up until the
103 The same can be said as to the purported resolution of the dispute between the 2015 Noteholders and the Pre-Petition Lenders, which the Debtors also offer as justification for the Proposed Settlement. (Settlement Memorandum at 137).
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announcement of the Proposed Settlement, that a Phase I trial was likely to lead to prompt
settling of the case, allowing the Debtors to emerge from bankruptcy with no impediments. (Ex.
7 - STN Hearing Tr. at 49:19-23) (Debtors' counsel stated that if FPDs won on fmancial
condition in Phase I it would "compel a settlement fairly quickly if they were to win on that
point"); (Debtors' Sur-Reply to STN Motion, ¶18 ("Given the relatively small amount of
unsecured claims, compared to the Lender claims, success by the Committee would almost
surely lead to prompt settlement."). Had this settlement not occurred, the Committee would have
had the opportunity to make its case to the Court, the case might have settled during the Phase I
trial (which would have avoided the present battle over the Debtors' unilateral settlement
efforts), and all parties would have been in a better position to assess the value of the litigation
based on developments during or even after trial, while the parties awaited the Court's ruling.
To approve the Proposed Settlement without having had any live testimony heard or the Phase I
trial completed deprives the Court of this valuable information and dramatically devalues months
of costly discovery and briefing. If the Debtors were determined to take the settlement initiative
they have offered no explanation as to why it would have not been more prudent to wait until
after the Phase I trial. The timing of the settlement can only be explained as an effort to rescue
the FPDs from the risk and exposure to them inherent in that trial.
The Debtors have grossly underestimated the lowest range of value to the estate of the
UCC Litigation and have overestimated the cost to the estate of continuing the UCC Litigation.
Thus, the Debtors cannot meet their burden to show that the proposed settlement is justified after
balancing the likelihood of success of the action and the benefits of the proposed settlement.
E. The Remaining Texaco Factors Do Not Weigh In Favor Of The Approval Of The Settlement.
Not much need be said about the remaining Texaco factors.
1. The Prospect Of Complex And Protracted Litigation.
"Litigation and delay are always the alternative to settlement, and whether that alternative
is worth pursuing necessarily depends upon a reasoned judgment as to the probable outcome of
litigation." TMT Trailer, 390 U.S. at 434. Notably, the proposed settlement agreement attempts
to settle only a portion of the adversary proceeding, leaving open claims against the non-settling
defendants, failing to eliminate the prospect of complex and protracted litigation. See In re
Matco Elecs. Group, Inc., 287 B.R. at 78 (rejecting settlement where it attempted to settle only
portion of adversary proceeding "so that it certainly is not going to eliminate the prospect of
complex and protracted litigation"). Moreover, in contrast to the typical case, in which complex
and protracted litigation comes to end through a settlement, here the settlement gave rise (as the
Debtors and FPDs knew it would) to a settlement objection process as complex and lengthy as
the trial itself would have been. Pre-trial briefing (and, effectively, post-trial briefing in the form
of the FPD Joinder) continued even after announcement of the Proposed Settlement,
notwithstanding that the trial itself was postponed. Discovery on Rule 9019 issues commenced
shortly after the announcement and has continued to this date. The hearing (which the
Committee submits must be an evidentiary hearing) will span over at least a few days. Under
these circumstances, where the Proposed Settlement spared the Debtors and the Court only a
minimal trial burden, but gave rise to significant additional burdens in connection with the
Proposed Settlement, this factor weighs against approval of the Proposed Settlement.
2. The Degree To Which The Settlement Is Supported By Parties-in-Interest.
Where a proposed settlement of claims has been negotiated without the involvement of
the opposing party, the support of the Creditors Committee, or lack thereof, becomes an
important element. See In re Exide Techs., 303 B.R. at 70 (Where a plan "had not been
negotiated with the opposing party," the Creditors' Committee's lack of support was "entitled to
substantial weight."). Here, the settlement of the UCC Litigation is supported by only one party
actually involved in the litigation — the defendant FPDs. The Committee was not consulted
about the potential settlement, but rather was excluded from any and all negotiations regarding
the Proposed Settlement between the Debtors and the FPDs. The Committee is the party that has
been pursuing the UCC Litigation from the beginning, and the party with the most knowledge
about the facts as they relate to the Adversary Proceeding. Moreover, the Committee's
constituency is the only party who truly stands to lose anything from the Proposed Settlement,
and its objection under these circumstances (and exclusion from any settlement discussions) is
quite telling. See In re Congoleum Corp., 2007 WL 1428477, at *3 (rejecting settlement where it
had no active support from any creditor constituency, and where the debtors themselves had "no
direct pecuniary interest in the amount of the . . . settlements"). The Committee strongly opposes
the proposed settlement of the litigation and submits that this Court should not approve such
settlement.
As this Court stated in Adelphia V, "the approval of a settlement cannot be regarded as a
counting exercise. Rather, it must be considered in light of the reasons for any opposition and
the more fundamental factors — such as benefits of the settlement, likely rewards of litigation,
costs of litigation and downside risk . . .". 327 B.R. at 165. The Debtors here can be contrasted
to the debtors in Adeiphia V, who entered into a settlement to avoid serious downside risks to the
entire estate (including criminal prosecution of the Debtors themselves), while still preserving
significant value for the entire estate (including unsecured creditors). Id. Here, although the
Debtors are purportedly acting as a fiduciary for all parties in interest, they have everything to
gain and nothing to lose by settling this action.
Nor have the Debtors proffered any reason to support their choice of "proceeding with
such a significant decision without directly updating and discussing the issues with [the
Committee] in advance." Cf. Adelphia V, 327 B.R. at 156 (approving settlement of Debtors'
claims reached without approval of creditors' committee, where Government told Debtors that, if
Committee was informed of latest offer, settlement would be taken off the table, and where
Debtors faced severe downside risks, including criminal charges).
CONCLUSION
Based on the foregoing, and for the reasons set forth in the Objection, the Committee
respectfully requests that the Court (i) deny the Debtors' Motion; and (ii) grant to the Committee
such other and further relief as the Court deems appropriate.
Dated: New York, New York
January 29, 2010
Respectfully submitted,
BROWN RUDNICK LLP
By: /s/ Sigmund S. Wissner-Gross Edward S. Weisfelner Sigmund S. Wissner-Gross May Orenstein Seven Times Square New York, NY 10036 Telephone: (212) 209-4800 Facsimile: (212) 209-4801
— and —
Steven D. Pohl One Financial Center Boston, MA 02111 Telephone: (617) 856-8200 Facsimile: (617) 856-8201
Counsel for the Official Committee of Unsecured Creditors
# 8235853
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