IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In Re: Collins &

Aikman Corporation, et al., Debtors. Chapter 11 Case No. 05-55927 (SWR) (Jointly Administered) Honorable Steven S. Rhodes

OBJECTION OF RLI INSURANCE COMPANY TO DISCLOSURE STATEMENT FOR THE FIRST AMENDED JOINT PLAN OF COLLINS & AIKMAN CORPORATION AND ITS DEBTOR SUBSIDIARIES

TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE: Comes now, RLI Insurance Company (RLI) and files this its objection to the Disclosure Statement for the First Amended Joint Plan of Collins & Aikman Corporation and its Debtor Subsidiaries (Disclosure Statement) and respectfully represents and would show unto the Court: I. STANDARD FOR ADEQUACY OF DISCLOSURE STATEMENT 1. Pursuant to 11 U.S.C. 1125, a party-in-interest under Chapter 11 of the

Bankruptcy Code may not solicit acceptances or rejection of a plan prior to the approval of the court of a written disclosure statement which the court finds to contain adequate information. Adequate information is defined in Section 1125 as follows: Adequate information means information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtors books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan, but adequate information need not include such information about any other possible or proposed plan.

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The primary purpose of a disclosure statement is to provide all material information which creditors and equity security holders affected by a plan need in order to make an intelligent decision whether to vote for or against the plan. In re U.S. Brass Corp., 194 B.R. 420, 423 (Bankr. E.D. Tex. 1996); In re Ligon, 50 B.R. 127 (Bankr. M.D. Tenn. 1985); In re Malek, 35 B.R. 443 (Bankr. E.D. Mich. 1983). 2. As detailed below, RLI maintains that the Disclosure Statement does not provide

adequate information and should not be approved by this Court. II. BACKGROUND AND OBJECTIONS 3. RLI has issued three outstanding bonds (in an approximate principal amount of

$2.8 million) on behalf of Collins & Aikman Corporation and/or Collins & Aikman Products Company (collectively Debtors) that, upon information and belief, were necessary or appropriate for the respective Debtors to conduct their business (the Bonds). The Bonds were issued primarily to cover obligations arising from self-insurance programs covering workers compensation liabilities. The State of North Carolina and the State of Rhode Island are

beneficiaries under two of the Bonds. The face amount of the Bonds for workers compensation obligations are $2,454,000 for North Carolina and $360,000 for Rhode Island. The third bond has been issued in the face amount of $5,000. in favor of the Commonwealth of Massachusetts and covers C&As obligations for use of toll roads in Massachusetts. Through the issuance of a letter of credit (the Letter of Credit), Chase Manhattan USA, N.A. (now known as JPMorgan Chase Bank (JPMorgan) has obligated itself to pay any obligations owed to RLI arising under or related to the Bonds. The Letter of Credit issued by JPMorgan fully covers the principal amount of the Bonds and represents an independent obligation of JPMorgan owed to RLI. In

addition to the Letter of Credit, RLI has direct claims against the Debtors (through commercial indemnity agreements) and subrogation rights through the beneficiaries of the Bonds. The Bonds and the Letter of Credit have been renewed during the pendency of these bankruptcy cases. 4. Upon information and belief, the various Debtors, in general, and the specific

Debtors bonded by RLI, have significant workers compensation obligations. RLI alone has issued approximately $2.8 million in bonds to cover certain of these obligations. 5. Despite what is potentially a significant obligation of the Debtors, the Disclosure

Statement hardly mentions (much less discusses) workers compensation obligations. Indeed, the only disclosure regarding workers compensation obligations appears to be a statement that neither the Debtors nor the Trusts will continue to pay workers compensation benefits in accordance with the Workers Compensation Order. Disclosure Statement, Means for

Implementation of the Plan, p. 52. There is no information provided as to the amount of the workers compensation liability or how such claims will be treated under the plan. Likewise, as to RLI, there is no information regarding how the Bonds and the Letter of Credit will be treated or otherwise dealt with under the proposed plan. 6. As to the Letter of Credit, the plan has broad release provisions by non-debtor

third parties in favor of the Released Parties, which include the issuer of the Letter of Credit, JPMorgan. While the release language does not specifically list claims arising under letters of credit as obligations to be released, the language is potentially broad enough to include such claims. However, RLI is unable to ascertain the Debtors intent.1 To the extent it is the intent of the Debtors to effect a release of the independent obligations represented by letters of credit, any
1

If it is the Debtors intent to force a release of claims under letters of credit, RLI maintains this is inappropriate and an impermissible and renders the plan unconfirmable. RLI realizes this is a confirmation issue and reserves all rights to raise such issue and any confirmation issues.

beneficiary of a letter of credit should be advised of such intent in a specific, precise manner. To the extent it is not the intent of the Debtors to provide such a release, the Disclosure Statement and plan should clearly provide as such. Indeed, as noted by one court: The burden of deciphering the meaning of the treatment of a claim should not be placed upon a creditor . . . it is important for these average investors/general unsecured creditors that the Disclosure Statement contain . . . language delineating the consequences of the proposed plan on their claims and the possible [Bankruptcy] Code alternatives so that they can intelligently accept or reject the Plan. In re Ferretti, 128 B.R. 16, 19 (D.N.H. 1991). In this instance, the Disclosure Statement fails to provide adequate information regarding RLIs claim because it fails to provide even the most rudimentary information regarding the disposition of the Debtors obligations for workers compensation, including obligations under the Bonds. Additionally, the Disclosure Statement should clearly advise RLI about the ultimate disposition of the Bonds and whether the releases effected under the plan are intended to deprive RLI of its rights under the Letter of Credit. 7. Representatives of RLI have raised these issues with representatives of the

Debtors. However, as of the filing of this objection, these issues remains unresolved. WHEREFORE, PREMISES CONSIDERED, RLI respectfully requests the Court to not approve the Disclosure Statement unless it is amended to address the objections raised herein and for such other relief as it may justly be entitled to receive.

Respectfully submitted, PEPPER HAMILTON LLP By: /s/ Kay Standridge Kress Kay Standridge Kress (P39339) Suite 3600 100 Renaissance Center Detroit, MI 48243-1157 Telephone: (313) 393-7365 Telecopier: (313) 259-7926 and John E. West Texas Bar No. 21202500 D. Bobbitt Noel, Jr. Texas Bar No. 15056500 VINSON & ELKINS L.L.P. 1001 Fannin Street Houston, Texas 77002-6760 Telephone: (713) 758-4534 Telecopier: (713) 615-5841

ATTORNEYS FOR RLI INSURANCE COMPANY

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