3 Transcripts From New Century Mortgage Bankruptcy Hearings From 2007 Includes Holly Etlin and Missal

UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE IN RE: . . . NEW CENTURY TRS HOLDINGS, . INC., et al., . . Debtors. . . . . . . . . . . . . . . . . . .
Case No. 07-10416-KJC
824 Market Street Wilmington, DE 19801 April 19, 2007 3:09 p.m.
TRANSCRIPT OF HEARING BEFORE HONORABLE KEVIN J. CAREY UNITED STATES BANKRUPTCY COURT JUDGE APPEARANCES: For the Debtors: O'Melveny & Myers LLP By: SUZZANNE UHLAND, ESQ. Embarcadero Center West 275 Battery Street San Francisco, CA 94111-3305 O'Melveny & Myers LLP By: BRIAN METCALF, ESQ. 400 South Hope Street Los Angeles, CA 90071-2899 For Carrington Capital Management, LLC & Carrington Mortgage Services, LLC: Audio Operator: Mayer, Brown, Rowe & Maw LLP By: THOMAS S. KIRIAKOS, ESQ. SEAN SCOTT, ESQ. 71 S. Wacker Chicago, Illinois 60606-4637 Brandon McCarthy
Proceedings recorded by electronic sound recording, transcript produced by transcription service. _______________________________________________________________ J&J COURT TRANSCRIBERS, INC. 268 Evergreen Avenue Hamilton, New Jersey 08619 E-Mail: jjcourt@optonline.net (609) 586-2311 Fax No. (609) 587-3599
2 APPEARANCES (Cont'd.) For Carrington Capital Management, LLC & Carrington Mortgage Services, LLC: For the Unsecured Creditors Committee: Womble Carlyle Sandridge & Rice By: STEVEN K. KORTANEK, ESQ. 222 Delaware Avenue, 15th Floor Wilmington, DE 19801 Blank Rome, LLP By: BONNIE GLANTZ FATELL, ESQ. Chase Manhattan Centre 1201 Market Street Suite 800 Wilmington, DE 19801 Hahn & Hessen LLP By: MARK T. POWER, ESQ. 488 Madison Avenue 14th and 15th Floor New York, NY 10022 For the U.S. Trustee: Office of the U.S. Trustee By: JOSEPH McMAHON, ESQ. 844 King Street Suite 2313 Lockbox 35 Wilmington, DE 19801 Rosenthal, Monhait, Gross & Goddess, PA. By: NORMAN M. MONHAIT, ESQ. 919 Market Street Suite 1401 P.O. Box 1070 Wilmington, DE 19899 Weil, Gotshal & Manges LLP By: ROBERT JORDAN, ESQ. JACQUELINE MARCUS, ESQ. 767 Fifth Avenue New York, NY 10153 Hennigan, Bennett & Dorman, LLP By: BRUCE BENNETT, ESQ. JOSHUA D. MORSE, ESQ. BRENT TRUITT, ESQ. 601 South Figueroa Street Suite 3300 Los Angeles, CA 90017 J&J COURT TRANSCRIBERS, INC.
For Kochak:
For Lehman:
For the Debtors:
3 APPEARANCES (Cont'd.) Richards, Layton & Finger, P.A. By: MARCOS A. RAMOS, ESQ. MARK COLLINS, ESQ. CHRISTOPHER M. SAMIS, ESQ. One Rodney Square 920 N. King Street P.O. Box 551 Wilmington, DE 19899 For GECC: Gebhardt & Smith LLP By: MIKE GALLERIZZO, ESQ. 401 East Pratt Street Ninth Floor World Trade Center Baltimore, MD 21202 Kirkland & Ellis, LLP By: SHIRLEY CHO, ESQ. 777 South Figueroa Street Los Angeles, CA 90017 Munsch Hardt Kopf & Harr By: MARK RALSTON, ESQ. 3800 Lincoln Plaza 500 N. Akard Street Dallas, TX 75201-6659 Fox Rothschild By: ANTHONY M. SACCULLO, ESQ. Citizens Bank Center, Suite 1300 919 North Market Street Wilmington, DE For RBC: Monzack and Monaco, P.A. By: RACHEL B. MERSKY, ESQ. FRANK MONACO, ESQ. 1201 North Orange Street Suite 400 Wilmington, DE 19899 Nixon Peabody, LLP By: DENNIS J. DREBSKY, ESQ. 437 Madison Avenue New York, NY 10022
For Greenwich:
For Positive Software:
For Deutsche Bank National Trust Co.:
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4 APPEARANCES (Contd): Pepper Hamilton, LLP By: DAVID B. STRATTON, ESQ. Hercules Plaza Suite 5100 1313 Market Street P.O. Box 1709 Wilmington, DE 19899 Stevens & Lee By: JOSEPH GREY, ESQ. JOSEPH HUSTON, ESQ. 1105 North Market Street Wilmington, DE 19801 Bernstein & Shur By: ROBERT KEACH, ESQ. 100 Middle Street West Tower Portland, ME 04101 For Wells Fargo/C-Bass: Hunton & Williams By: J.R. SMITH, ESQ. Riverfront Plaza East Tower 951 East Byrd Street Richmond, VA 23219 Eckert Seamans By: MICHAEL BUSENKELL, ESQ. 300 Delaware Avenue Suite 1210 Wilmington, DE 19801 For UBS: Ashby & Geddes By: GREGORY ALAN TAYLOR, ESQ. 500 Delaware Avenue 8th Floor P.O. Box 1150 Wilmington, Delaware 19899 Potter, Anderson & Corroon, LLP By: LAURIE SELBER SILVERSTEIN, ESQ. Hercules Plaza 1313 North Market Street Wilmington, DE 19801
For Premier:
For Bank of America, N.A.:
5 APPEARANCES (Cont'd.): For Countrywide & GMAC CF: Edwards & Angell, Palmer & Dodge, LLP By: WILLIAM CHAPMAN, ESQ. 919 North Market Street Wilmington, DE 19801 Campbell & Levine, LLC By: MARK T. HURFORD, ESQ. 800 N. King Street Suite 300 Wilmington, DE 19801 Klehr, Harrison, Harvey, Branzburg & Ellers LLP By: MICHAEL YURKEWICZ, ESQ. 260 South Broad Street Philadelphia, PA 19102-5003 Morris, Nichols, Arsht & Tunnell LLP By: GREGORY W. WERKHEISER, ESQ. Chase Manhattan Centre, 18th Floor 1201 North Market Street Wilmington, DE 19899-1347 Squire, Sanders & Dempsey, L.L.P. By: JOSEPH RODGERS, ESQ. 4900 Key Tower 127 Public Square Cleveland, OH 44114 Bingham McCutchen, LLP By: RICHARD AGINS, ESQ. One State Street Hartford, CT 06103 Kaye Scholer LLP By: NICHOLAS CREMONA, ESQ. 425 Park Avenue New York, NY 10022 Murray Capital Management, Inc. By: MARTI MURRAY
For Citi Corp.:
For Alaska Seaboard Limited Partners:
For Morgan Stanley Company:
For Squire, Sanders & Dempsey:
For Deutsche Bank:
For Bank of America:
For Murray Capital Management, Inc.:
6 APPEARANCES (Cont'd.) For DB Structured Products: Young, Conaway, Stargatt & Taylor By: ROBERT BRADY, ESQ. 1000 West Street 17th Floor Wilmington, DE 19801 Connolly Bove Lodge & Hutz By: MARC PHILLIPS, ESQ. The Nemours Building 1007 North Orange Street Wilmington, DE 19899
For Washington Mutual:
7 INDEX WITNESSES DAVID S. KURTZ Cross Examination by Mr. Gallerizzo Cross Examination by Mr. Power ANTHONY MEOLA Cross Examination by the Court Redirect Examination by Ms. Uhland EXHIBIT UST-1 D-1 Privacy Policy New Century Mortgage Corporation bylaws I.D. 43 132 PAGE 77 79 134 135 EVD. 44 133
8 1 2 THE COURT: MR. RAMOS: Good morning. Marcos Ramos, Richards Layton & Finger on Your Honor, with your indulgence, we
3 behalf of the debtor.
4 would like to take one matter from the agenda out of order if 5 we could. Your Honor has scheduled a status conference in the
6 matter of Alaska Seaboard v. New Century. 7 8 THE COURT: MR. RAMOS: Yes. We thought that it might make some sense
9 to just try to address that matter first if Your Honor allows 10 that. 11 12 THE COURT: MR. RAMOS: All right. Your Honor, I believe our co-counsel, Mr.
13 Brent Truitt of the law firm of Hennigan Bennett might be on 14 the telephone. 15 Thats -Yes, Your Honor. This is Brent Truitt
MR. TRUITT:
16 of Hennigan Bennett & Dorman. 17 18 19 20 status. THE COURT: MR. TRUITT: MR. RAMOS: Good morning. Morning. Your Honor, I can give you just a brief There was an The parties
Last week the complaint was filed.
21 application made for temporary restraining order.
22 have been engaged in discussion since then and I think it would 23 be fair to characterize the discussions as positive. 24 Nonetheless, we understand that counsel for Alaska Seaboard 25 would like to have a hearing schedule, if Your Honors calendar J&J COURT TRANSCRIBERS, INC.
9 1 permits. And from our perspective, Your Honor, we would ask
2 that any hearing that might be scheduled be scheduled no 3 earlier than next Friday which would be April 27th. We think
4 that that date would accommodate several interests including 5 the parties continuing discussions as well as the travel 6 schedule for our co-counsel whos located on the west coast. 7 And obviously, also the need to file any responsive pleadings 8 to the application that was filed. 9 And, Your Honor, counsel for Alaska Seaboard is here
10 as well and Ill defer to him at this time. 11 12 THE COURT: Very well. Good morning, Your Honor. Michael
MR. YURKEWICZ:
13 Yurkewicz from Klehr, Harrison, Harvey, Branzburg & Ellers on 14 behalf of Alaska Seaboard Limited Partners. First of all Id
15 like to thank the Court for your indulgence of hearing this 16 this morning. And I also like to thank the debtors for their
17 indulgence of -- and cooperation in accommodating us in some of 18 our scheduling issues. 19 With that being said, wed also characterize the And
20 discussions in this matter towards resolution as positive. 21 were optimistic that a resolution can be had in this case.
22 However, we would like to have a hearing date scheduled in case 23 there is -- discussions do not come to fruition. 24 THE COURT: Well, rather than creating a new date on
25 the calendar for this case, is there some reason why we cant J&J COURT TRANSCRIBERS, INC.
10 1 add it to the April 24th omnibus hearing? 2 MR. YURKEWICZ: We would have -- that would be next
3 Tuesday, Your Honor? 4 to that date. 5 week.
We would have no opposition to adding it
We certainly would not want it to slip past next
The debtors have expressed to us some concern that -But from our perspective, the
6 their ability to meet that date. 7 24th would be fine. 8 9 going on. 10 MR. TRUITT: THE COURT: Okay.
I do understand theres a lot
Your Honor, this is Brent Truitt.
Is it
11 correct to say that Your Honor is proposing just to put another 12 status conference as opposed to a hearing on the merits for the 13 24th? And the reason I ask is, obviously, we would have to
14 focus on responding to the motion rather than focusing on these 15 efforts to settle at this point. 16 17 18 THE COURT: Well -Your Honor, if I may --
MR. YURKEWICZ: THE COURT:
-- I would be surprised if activities
19 werent going on on a parallel track, but I understand that 20 this case has been front loaded and theres a lot going on. 21 All right. Well, if I schedule it for the 27th, what
22 would the parties propose as a response date? 23 24 the 25th. 25 MR. TRUITT: Thats fine with the debtors. MR. YURKEWICZ: Your Honor, we would propose perhaps
11 1 2 1:30. 3 THE COURT: All right. Well make it April 27th at
Is that time suitable for the hearing? MR. YURKEWICZ: Yes, Your Honor. From our
4 perspective it is. 5 6 MR. TRUITT: THE COURT: Yes, Your Honor. Then the response date will be April 25th And with that,
7 at 4:00 well say.
Prevailing eastern time.
8 the order on the motion to shorten notice has been signed. 9 10 11 12 MR. YURKEWICZ: THE COURT: MR. TRUITT: Thank you, Your Honor.
Youre welcome. Thank you, Your Honor. Your Honor, thats the only matter I I ask to be excused from the hearing?
MR. YURKEWICZ:
13 have before this Court. 14 15 16 THE COURT:
Very well. Thank you, Your Honor. May I
MR. YURKEWICZ: MR. TRUITT:
Your Honor, this is Brent Truitt.
17 be excused? 18 19 20 THE COURT: MR. TRUITT: MR. RAMOS: You may. Thank you. Thank you very much, Your Honor. Thank you. Suzanne With the Ill
21 now defer the podium to Ms. Uhland. 22 MS. UHLAND:
Good morning, Your Honor.
23 Uhland of OMelveny Myers on behalf of New Century.
24 Courts further indulgence, wed like to do a little more of 25 rearranging of this mornings calendar. We would like to take
12 1 the -- the first matter we would like to take, Your Honor, is 2 the procedures motion with respect to the servicing -- the sale 3 of the servicing aspects. 4 5 THE COURT: MS. UHLAND: Number two on todays agenda. Number two on todays agenda. Then,
6 Your Honor, were -- pending discussions with the Creditors 7 Committee, at this time we expect to come back at the 8 conclusion of the hearing and request that the Court continue 9 the hearing with respect to the loan origination procedures 10 that the Creditors Committee request. 11 THE COURT: All right. What remains in the way of And the reason
12 objection to loan servicing bidding procedures?
13 I ask is, you know, ten minutes before the hearing today, I was 14 handed a stack of papers which I saw for the first time, both 15 in connection with servicing and origination transactions. And
16 it puts me really at an unacceptable disadvantage when it comes 17 to these things. 18 Im willing to accommodate the parties request for But
19 shortened notice and hearings and youve experience that.
20 Ill do it only under circumstances under which I can come to 21 the bench fully prepared for the matters that are scheduled. 22 And I cant do that on ten minutes notice. 23 MS. UHLAND: We appreciate that, Your Honor. I
24 believe that the deadline for the loan origination procedures 25 was the matter that should have been -- that had the objection J&J COURT TRANSCRIBERS, INC.
13 1 deadline of yesterday. 2 THE COURT: I was also handed some things in
3 connection with servicing today, too. 4 MS. UHLAND: Right. With respect to the servicing
5 matter, Your Honor, we believe that the lion share of those 6 objections are resolved. There are -- my understanding is the And that weve
7 United States Trustees objection is resolved.
8 been working to resolve the objection of Citi Group, Deutsche 9 Bank. 10 And weve been working -- there may be some remaining
11 issues with the Wells Fargo and C-Bass (phonetic) objections, 12 but we dont view them as -- theyre procedural matters that we 13 believe we can address with the Court today. 14 And then finally, the objections from General We can address
15 Electric Capital we believe can be deferred.
16 their bidding procedure and that the balance of their objection 17 is a matter for the sale hearing. 18 THE COURT: Well, let me ask this. Am I hearing that
19 if the parties had a little more time now, some of the 20 servicing objections could be resolved? 21 of them could be? 22 MS. UHLAND: Your Honor, I think that weve taken -Or some bigger portion
23 weve been working, particular the Creditors Committee and 24 Carrington have been working intensely over the last 36 hours, 25 36 to 48 hours, to reach an agreed order and that the balance J&J COURT TRANSCRIBERS, INC.
14 1 of the issues that have not been resolved, weve been working 2 to resolve with the parties and we just have some isolated 3 remaining open issues that I dont believe further discussion 4 will assist. I think well have to -- perhaps after the
5 presentations to the Court of those objections, at that point, 6 we may an opportunity for further discussion. 7 But weve been working very hard to resolve all the
8 objections and I think were at the point now where we should 9 proceed to see whats remaining. 10 11 today? 12 MS. UHLAND: Your Honor, what I would propose to do THE COURT: How would the debtors like to proceed
13 is to make an initial presentation on the motion and then 14 actually have the Creditors Committee counsel walk through the 15 blackline changes to the order since he was in large part the 16 author of those changes. 17 Thereafter, to the extent the objectors -- and we
18 believe -- and walked through hell, weve address the 19 objections in that order. 20 Thereafter, to the extent there are objections
21 remaining after the presentation of that order, wed like to 22 have those objectors come forward and then have the debtors 23 have an opportunity to respond. 24 25 THE COURT: MS. UHLAND: All right. Your Honor, this motion that were
15 1 setting forth is for the bid procedures for the proposed sell 2 of our servicing rights and servicing platforms. 3 The debtors loan servicing rights, which are
4 contractual rights, provide them the right to provide the 5 servicing for over 100,000 loans and an unpaid balance of 6 approximately 18 and a half billion dollars. This portfolio of
7 loans includes both first lien loans and second lien loans. 8 These loans are contained in securitization trusts, 12 of which 9 are controlled by the Carrington entities, they are the 10 proposed -- the bidders here. 11 securitization trusts. 12 The servicing platform in addition to these servicing And the balance are in separate
13 rights includes other contractor related to the servicing 14 business, a different real property leases, other equipment and 15 files as well as with respect to the proposal by Carrington, 16 the debtors servicing employees. Carrington has committed to
17 provide opportunities for employment for all the debtors 18 employees in the servicing business. 19 The key economic bids -- key economic features of the 50 basis points on the Carrington-related
20 bid are as follows:
21 -- the loans in the securitization pools controlled by 22 Carrington. Thats approximately, as of today, because those
23 principal balances vary as they get paid off, the price will 24 vary, is approximately 42.8 million. 25 With respect to the other, theres also 50 basis J&J COURT TRANSCRIBERS, INC.
16 1 points on the remaining approximately 10 billion of loans or 2 another approximately 50 million. 3 In addition, as part of the proposal, Carrington is
4 providing purchase price for -- which is effectively refinances 5 our servicing advance line thats been currently provided by 6 Citi Bank and may be refinanced by our DIP. So they are
7 providing $40 million for advances made a servicer on first 8 lien loans and thats approximately 90 percent -- or it is 90 9 percent of the 44.4 million outstanding today. And they also
10 are providing 90 percent on any second lien advance amounts 11 which is about 600,000. 12 This results to a net proceeds after the repayment of
13 the amounts financed on the servicing advances of approximately 14 100 and 1.8 million dollars. 15 Other material economic portions of this deal include
16 a provision for a hold-back of the cash purchase price of 10 17 percent related to certain indemnities. And, of course,
18 certain adjustments, in particular with respect to the floating 19 amount of the purchase price based on the principal amounts of 20 the loans, preimposed closing. 21 Because Carrington does not currently have the
22 necessary licenses to provide for servicing, the parties have 23 included in this -- their agreement with Carrington an ability 24 to have Carrington enter into lease transactions with the 25 debtors so that Carrington may operate under the debtors J&J COURT TRANSCRIBERS, INC.
17 1 licenses pending Carrington obtaining their own licenses, such 2 as those that are required for the servicing business. 3 There are, as we discussed at our first-day hearing,
4 certain states that require licenses similar to the loan, 5 origination licenses, even for loan servicing. A subset of
6 those that require -- states that require those licenses for 7 loan origination. 8 THE COURT: Excuse me, Im hearing noise from the Everyone on the phone should have their Go ahead.
9 telephone connection. 10 phone on mute. 11
Thank you.
MS. UHLAND:
The Carrington proposal and agreement
12 that was reached by the debtors and Carrington was the result 13 of a significant pre-petition marketing of these assets by the 14 debtors. The debtors contacted or had serious conversations
15 with eight parties with respect to these servicing assets and 16 received four offers. The Carrington offer was the best offer
17 received by the debtors, providing the highest purchase price 18 and was the only proposal that contemplated no diligence or 19 regulatory approval conditions. 20 Carrington provided the most detailed proposal and
21 was furthest along and most likely to move to a signed 22 agreement in the time frame required by the debtors. 23 Further, the Carrington proposal for these assets
24 indicated that Carrington to acquire the entire servicing 25 platform, not just the master servicing -- the mortgage J&J COURT TRANSCRIBERS, INC.
18 1 servicing rights, relieving the company of potential shut-down 2 liabilities and therefore providing a more beneficial proposal 3 for the debtors estates collectively. 4 The Carrington proposal included the provision of
5 certain bid protections as did the other proposals that were 6 obtained or bids that were obtained by the debtors from the 7 four bidders prior to the bankruptcy. 8 The debtors believe the bid perceptions pre-petition Nonetheless, since the entering into the --
9 were reasonable.
10 the debtors entering into this agreement, there have been 11 further modifications to those bid proposals. 12 Briefly, where those bid protections stand now and
13 these procedures can be described in more detail when we walk 14 through the order, is the current proposed break-up fee for 15 Carrington is $2 million, or approximately 1.5 percent, plus an 16 expense reimbursement which is upon some certain termination 17 conditions which is capped at $2 million. The prior -- thats The prior deal
18 a collective economic decrease, collectively.
19 was 3 percent and a $1.5 million expense reimbursement. 20 The minimum overbid which had been a 10 percent, or The
21 110 percent of the purchase price is reduced as follows.
22 minimum topping bid must equal $5 million if the party is not 23 bidding on the servicing platform. Im sorry, if the party is
24 bidding on the servicing platform, but it is required to be $10 25 million if a platform shut-down is contemplated by the other J&J COURT TRANSCRIBERS, INC.
19 1 bid. Im sorry, did I -- okay, well, let me -- to get the
2 record straight, if you can clarify that. 3 MR. POWER: Your Honor, Mark Power from Hahn & Your Honor, I apologize for
4 Hessen, counsel for the Committee.
5 the last minute -- literally at three a.m., we were still going 6 through this and thats why you got it today. 7 One of the last issues which counsel for the debtor
8 just mentioned was a last minute negotiation that occurred, I 9 guess, very early this morning. 10 line issue is this. There -- basically, the bottom
This Carrington bid provides for an
11 acquisition of the servicing platform including the people in 12 the office, potentially -- you know, a lot of the offices and 13 equipment. Other bidders may be interested in submitting a
14 non-conforming bid, possibly not wanting all the offices, you 15 know, or all the people. So basically weve agreed --
16 Carrington requested that we agree to a value of $5 million if 17 you dont take the servicing platform with the servicing rights 18 that would be served. 19 We have basically not agreed to that and the
20 mechanism currently provides and the bid procedures provide 21 that the debtor has the right to value any bid received based 22 on the increased or decreased liabilities as a result of that 23 non-conforming bid. And well basically advise the bidder
24 whether or not that bid be some minimal bid amount and whether 25 its a qualifying bid. And the Committee and Carrington have
20 1 reserved the right to object to that. 2 So basically, if the debtor says, well, you havent
3 assumed these contracts and we think that increases liability 4 by a million, but you hired these additional people and that 5 decreases the number, the debtor will come to a number working 6 with financial advisors, the Committee will work with them, and 7 the bidders will all know exactly how were pricing the various 8 bids. And basically, if somebody doesnt agree, particularly So there is no fixed
9 Carrington, they have a right to object. 10 number as -11 THE COURT:
Well, when you say object, you mean, at
12 the auction? 13 MR. POWER: At the sale hearing, Your Honor. If we
14 go to an auction and basically Carrington doesnt believe that 15 a bidder has submitted a minimum bid, they reserve the right to 16 come back to Your Honor and say, Your Honor, we think the 17 debtor and the -- its Committee -18 THE COURT: Yeah. Im assuming its going to go
19 something like this. 20 bidding -21 22 MR. POWER: THE COURT:
There will be -- assuming theres
Yes. -- there will be a round of bidding. The
23 bids will be evaluated.
The bidders will be told, usually in
24 writing, how their bids have been evaluated and they may be 25 going to the next round, the next round, next round in similar J&J COURT TRANSCRIBERS, INC.
21 1 fashion. But at some point, the debtor will make a decision
2 and then come to the Court and at the sale hearing, well vent 3 whatever objections there are. 4 5 one thing. MR. POWER: Thats correct, Your Honor. Except for
Carrington is very concerned that -- obviously they
6 dont want an auction if they think the bid submitted is below 7 the minimum criteria. So the debtor has to make that And they will do that and So thank you.
8 assessment based on the initial bid. 9 parties will have a right to object. 10 MS. UHLAND:
So the more complicated formula is that
11 theres a $5 million incremental bid subject to the parties 12 reviewing it in the process just outlined to determine whether 13 it is a minimum bid that is -- satisfies the auction 14 requirement. And thereafter, the auction will proceed as the
15 Court just described. 16 17 THE COURT: MS. UHLAND: Very well. Another provision of the revised order
18 which counsel can walk through in detail, Id like to outline 19 briefly for the Court because it is something that we talked to 20 the Court about before, but not in this context. 21 As the Court may remember from the original -- the
22 initial first-day hearing in this matter, we described the fact 23 that one of the warehouse lenders, Morgan Stanley, had a pledge 24 of certain residual interests of the securitization trust. 25 That pledge or subject -- theyre subject to a repurchase J&J COURT TRANSCRIBERS, INC.
22 1 agreement as -- we wont get into the UCC nomenclature here, 2 but there are certain interests -- residual interests in the 3 securitization trust that are subject to a master purchase 4 agreement with Morgan Stanley that was entered into in the 5 weeks prior to the bankruptcy filing. 6 Morgan Stanley has publically noticed a proposed
7 foreclosure-type sale of those residual interests which is what 8 their repurchase agreement provides for the disposition of 9 those assets under the repurchase agreement. 10 Those residual interests are the residual interests
11 in a portion of the securitization trust for which we are 12 proposing to sell the master servicing rights in this sale. So
13 there is a, you know, parties that believe and sometimes that 14 it is -- there are transactions where parties transfer 15 servicing rights with the residual interest in the same trust 16 for which you have servicing rights. 17 Therefore, it was the desire to the extent it can be
18 accomplished, to make an effort to coordinate the Morgan 19 Stanley sale with the sale of the servicing rights. 20 Now, the parties are in discussion with Morgan
21 Stanley about having their proposed sale by Morgan Stanley, the 22 proposed auction of Morgan Stanley of those residual interests, 23 having a coordinated effort with the company. It is still a
24 Morgan Stanley sale, but having Morgan Stanley look to the 25 debtors or coordinating that sale with the proposed auction J&J COURT TRANSCRIBERS, INC.
23 1 process with these master servicing rights. 2 So the bidding proposal, the revised bid order and
3 the details can be walked through, provide that if such an 4 agreement can be reached with Morgan Stanley with respect to 5 the sell of those residual interests, we propose a certain -6 that they be coordinated in a certain order for the process of 7 those two sales that affect the debtors and the Creditors 8 Committees process, that theyll be -- will be monitoring or 9 will be managing for the sale of the different servicing 10 assets. 11 And then what were proposing is then thereafter, if
12 Ive got the proposed sequence right, proceeding with the -13 you know, hopefully the sale by Morgan Stanley with the 14 debtors input and assistance. 15 THE COURT: Okay. But the proposed form of order
16 would not purport to take it, and I havent seen the blackline, 17 would not propose to give the Courts informate to something 18 over which -- well, which had not been the subject of a motion. 19 20 21 MS. UHLAND: THE COURT: MS. UHLAND: Thats correct, Your Honor. All right. The sole matter in this procedure, in
22 this motion says that if Morgan Stanley reach an agreement and 23 obtain an appropriate court order at a later date, then with 24 respect to -- were sort of -- this is really saying what 25 Carrington will agree to with respect to their procedures and J&J COURT TRANSCRIBERS, INC.
24 1 that -- and those procedures with respect to Morgan Stanley. 2 3 THE COURT: All right. Good morning, Your Honor. Gregory
MR. WERKHEISER:
4 Werkheiser, Morris Nichols Arsht & Tunnell LLP on behalf of 5 Morgan Stanley Mortgage Capital, Inc. 6 Your Honor, were co-counsel in this matter with
7 Milbank Tweed and I unfortunately couldnt catch everything 8 that counsel was saying in respect to this matter from the back 9 of the room because of the sound from the forced air. But we
10 have had some preliminary discussions with the debtor and the 11 Committee on this matter and are amenable, at least, to 12 exploring this issue with them of tracking the sales together. 13 We have not specifically agreed to anything in that regard. 14 my knowledge, no one on our side has seen this specific 15 language before today, so Im not in a position to agree to the 16 specific language thats in paragraph 18 of the order, 17 blackline version, Your Honor. 18 But to the extent it is clear that what is contained To
19 in there is subject to the sole and absolute discretion of 20 Morgan Stanley, Im not per se objecting to the order, but I 21 just want the record to absolutely clear that we are simply at 22 the state of having preliminary discussions and that anything 23 that is contained in paragraph 18 is subject to our discussion 24 and our consent. 25 Thank you. That is consistent with the debtors
MS. UHLAND:
25 1 understanding. Your Honor, I think it would be helpful to go
2 ahead and have, at this point, counsel for the Creditors 3 Committee walk through the blackline with the Court of the 4 order and thereafter we can determine whether there remain any 5 pending objections to the order that were prepared to address. 6 7 8 9 THE COURT: MS. UHLAND: THE COURT: MR. POWER: Okay. Your Honor, may I approach? Yes. Thank you. Again, Mark
10 Power from Hahn Hessen, co-counsel to the Committee in this 11 case. First of all, Your Honor, again, thank you for your
12 indulgence for the rush nature of this. 13 This is, we think, in this case the largest asset The We
14 that currently is for sale and is a significant asset.
15 Committee is very excited about this sale as is the debtor. 16 think this is a terrific business. 17
The Committee agrees with the debtor that this sale
18 process should go forward and we agree with the debtor that it 19 should be done on a relatively expedited basis. However, we
20 are seeking to extend the dates and give bidders a little more 21 time to get up to speed. But within that time frame, we agree
22 with the debtor that this is a sale that should go forward and 23 we are very hopeful that we will have a robust auction. 24 Your Honor, when we last met last week, we adjourned
25 this motion and we have worked very hard with Carrington in J&J COURT TRANSCRIBERS, INC.
26 1 good faith to try to come out to a deal that we think is 2 acceptable to the Committee and resolves a lot of the other 3 objections in the case. 4 And our goal, basically, here is to come to a level
5 playing field, have an auction that we think is fair to 6 everybody who may bid. And we think we have succeeded in that
7 with the debtors assistance and Carrington. 8 As counsel to the debtor indicated, just in
9 economics, the original breakup fee and expense reimbursement 10 which, I personally view as the same component on the expense 11 fee estate was approximately 4.1 percent. Weve been able to
12 reduce it and that basically would, we think, be about 5.6 13 million for the breakup -- Im sorry, 4.1 million for the 14 breakup fee and 1.5 for the expenses which totals 5.6. 15 We now have an agreement to reduce that to $4 million And that new
16 and it may be less if the expenses are less.
17 percentage on a gross basis of about 2.8 percent, which we 18 think is right within or even slightly below the appropriate 19 procedures in this Court to approve breakup fee and expense 20 reimbursements. And we are happy to reach that deal and we
21 appreciate Carringtons cooperation on that. 22 The other big issue I think was raised by -- a
23 concern by the Committee and also some bidders was the topping 24 bid which was basically 110 percent of the gross purchase 25 price, although counsel indicated that some of that is really J&J COURT TRANSCRIBERS, INC.
27 1 to replace some servicer advances which is kind of close to 2 money in our view. 3 Carrington was cooperative on this and we very much
4 appreciate basically coming up with what we think is a very 5 reasonable topping bid which is, in essence, the breakup fee, 6 the expense reimbursement of its max and $1 million. So that,
7 in essence, reduces from what could have been and 11 to 14 8 million dollar topping bid down to a basically five million 9 dollar topping bid or roughly 4.5 percent. And we think that
10 was an extremely reasonable compromise that will help the 11 auction process. 12 The bid increments will stay at $500,000, Your Honor,
13 which is consistent with what the debtor and Carrington had 14 agreed. 15 In connection with deadlines, the -- originally the The parties have
16 proposed deadline for bids was April 26th. 17 agreed to move that to May 10th. 18 during the week of April 30th. 19 that to May 16. 20
The auction was originally
The parties have agreed to move
The third component, Your Honor, is really subject to
21 Your Honors discretion, but we would ask some flexibility, 22 assuming Your Honors calendar can move it. If Carrington is
23 the only bidder and there are no other bids and Carrington has 24 asked that the sale hearing be scheduled for the 18th of May, 25 which I think is a Friday. If there are bids, then wed ask to
28 1 move it to the first part of the next week, which is May 21 or 2 22, with the notion, Your Honor, that the parties would try to 3 close probably in early June and proceed in that manner. 4 We dont yet know, but were hopeful this auction is
5 a long auction with a lot of value, but we have tried to 6 include enough flexibility so we dont give Your Honor 7 basically something ten minutes before the hearing and we can 8 basically resolve a lot of the issues if they come up. And we
9 think this schedule works for everybodys benefit to do that. 10 So subject -- we can do that at the end of the
11 hearing, but, Your Honor, if Your Honor -- those are the time 12 frames that were proposing. 13 Your Honor, I will -- theres a couple other issues.
14 The Morgan Stanley piece, Ill just basically explain, that the 15 Committee felt that these -- there may be bidders who are 16 interested in buying the residuals which are significant, 17 several hundred million dollars, and also obtain the control 18 over the servicing rights. 19 So we fought very hard, and Carrington understandably
20 was somewhat concerned about basically different bids on 21 different assets, because any bidder was concerned about that, 22 but we fought hard to have the right. If anybodys interested
23 in buying the residuals and having the ability to buy the 24 servicing rights, that we provide that at the auction, 25 understanding that Morgan Stanley, under its repo, had J&J COURT TRANSCRIBERS, INC.
29 1 basically its its collateral or it basically owns those 2 residual rights and has to agree to the whole procedure. 3 So all we provided, a very simple mechanism, that if
4 we can agree with Morgan Stanley and they agree to share or 5 piggyback on our auction, we can give a lot which permits the 6 sale of those residuals, subject to Morgan Stanleys approval. 7 And that, at least, gives the bidders the ability to have -- go 8 to the auction knowing they have the ability to get both sets 9 of assets. 10 The one thing that Carrington agreed to which was
11 hard fought, is Carrington agreed that a bidder can condition 12 its bid on the residuals on also being the successful bidder on 13 the servicing assets, on these assets that are currently before 14 Your Honor. 15 So basically, at the end of the auction, we would
16 know if we have one bidder for both or we have basically two 17 different bidders. The Morgan Stanley piece may not even be It may
18 before this Court because it may be a separate sale. 19 also be, if we can work that out with Morgan Stanley. 20 21 THE COURT: MR. POWER: When will I know?
You -- the deadline is April 30th to
22 enter a bid procedures order to sell the Morgan Stanley piece 23 pursuant to what were describing to Your Honor. So one of the
24 things that I was going ask is a placeholder so that we can do 25 that. Its obviously an expedited motion. J&J COURT TRANSCRIBERS, INC.
30 1 We do not believe, given the circumstances, that
2 there should be any objections since Morgan Stanley, in 3 essence, holds these collaterals pursuant to its repo. And
4 under the current Bankruptcy Code provisions, has a lot of 5 rights to exercise. So, we are hopeful that if we can agree to
6 proceed with the debtor and Morgan Stanley, that it should be 7 not a contested hearing. 8 I think.
The -- so Carrington agreed, after a lot of
9 negotiations, to link the two bids provided, however, that in 10 no event shall the debtor or the Committee agree to accept any 11 bid on Carringtons lot that is less than the maximum price. 12 In other words, the successful bidder, the highest bidder wins. 13 So we have a situation where we try to take a lower bid because 14 we got more on the residuals. 15 concession. 16 In addition, Your Honor, weve agreed, late last And weve agreed to that
17 night, to -- the order for the bidding, as counsel said, you 18 bid first on the Carrington piece and close that auction so 19 that theres no further bidding on that piece. And then on the
20 -- then we go to the residuals and we bid second on the 21 residuals. 22 approval. 23 But basically, Your Honor, otherwise these procedures And, again, this is all subject to Morgan Stanleys
24 do not change the structure that the Carrington piece is going 25 to approve today and Morgan Stanley will go later on. J&J COURT TRANSCRIBERS, INC. So that
31 1 -- youre not asked to do anything with Morgan Stanley today. 2 Your Honor, Ive kind of -- and rather than go
3 through the order, Im just giving you the highlights because I 4 think thats really whats appropriate here. There were a
5 number of slight changes, I think to deal with, certain issues. 6 And maybe what Ill do is turn to those. Theres also two
7 slight issues which the Committee reserves on which Ill just 8 mention for the record. 9 But well do that at the end. Your
Let me just quickly go through the order.
10 Honor, I guess really the first material change is with respect 11 to Morgan Stanley and on the order, I think its paragraph 18. 12 That is the provision that provides for the possibility of 13 adding the Morgan Stanley residuals to the auction on a 14 parallel track. And thats new language that we really -But Carrington and
15 Morgan Stanleys counsel just saw today.
16 the Committee and the debtor are okay with those procedures. 17 18 Honor. Thats pretty much the only change to the order, Your In connection with the bid procedures which are
19 attached and were heavily negotiated, I think Ive mentioned 20 substantially all the terms. There are a number of changes
21 which basically, lets say, make the Committees participation 22 more robust while preserving the debtors business judgment 23 with respect to the auction. 24 agreed to that. 25 In terms of qualified bids, Your Honor, theres J&J COURT TRANSCRIBERS, INC. And I think the parties have
32 1 basically, in paragraph 7, theres procedures basically where a 2 party becomes a qualified prior to submitting a bid. 3 Carrington and the debtor have reserved -- and the Committee 4 have reserved the ability to basically have their input into 5 that decision. 6 Just going through to see if theres any sustenance In connection to paragraph
7 so we can streamline this somewhat.
8 9, Your Honor, of the procedures, as I understand it, I wasnt 9 a part of this negotiations, but obviously the trustee to the 10 servicing agreements in connection with these trusts have 11 independent obligations to make sure the loans are being 12 serviced properly. They want adequate assurance of future
13 performance from any bidder to make sure that bidder is 14 qualified and can perform properly. They have insisted
15 independent in exercise of their fiduciary duties to make sure 16 that those parties are financially qualified. 17 This new provision in paragraph 9 basically says that
18 if youre a bidder, you have to basically -- you will provide 19 information to the trustee to satisfy that issue prior to 20 coming before Your Honor to approve that party. Obviously, if
21 we cant agree, Your Honor, well have a hearing and well see 22 what happens. But thats basically the mechanism to deal with
23 that type of objection. 24 Theres nothing else, I believe, in this procedure
25 that is different than Your Honor sees frequently which is J&J COURT TRANSCRIBERS, INC.
33 1 providing for parties -- reservation of parties rights to 2 object at the sale hearing on terms of assumptions. There is a
3 mechanism that if you dont, obviously, file an objection to 4 the cure amounts, youre then deemed to waive it. But
5 otherwise, its the standard procedures Your Honor sees in 6 these sales. 7 Paragraph 11, Your Honor, provides the minimum bid The last sentence in
8 requirements that we just discussed.
9 paragraph 11, which is the redline, deals with the issue that 10 we had a colloquy on a little bit earlier which is basically 11 that the debtor has -- the debtor has agreed that it will do 12 what it always does in these situations, is non-conforming bids 13 will be valued. 14 to object to it. 15 And the Committee and Carrington have a right We think that satisfies that criteria.
Your Honor, the -- let me just first just look -- I
16 think in terms of anything else, the procedure is basically, 17 are consistent generally with what the Court -- what was filed 18 with the motion. 19 Your Honor. And those are really the material changes,
I will inform the Court that in addition to the
20 bid procedures, we have also, over the last several days and 21 really last week, negotiated hard with Carrington on the asset 22 purchase agreement to try to clarify -- or they would argue 23 retrade, but basically try to clarify a lot of provisions on 24 the asset purchase. 25 I will inform the Court that they have engaged in J&J COURT TRANSCRIBERS, INC.
34 1 those discussion in good faith and we are confident that we 2 will have an asset purchase agreement that we think is a very 3 good stocking horse agreement to submit for the sale of these 4 assets. 5 6 And I think that will be done today. THE COURT: MR. POWER: I was going to say when. Well, I think theres a conference call
7 in a half an hour to go through those -- I think a half an 8 hour, 11:30 to go through those changes. Its a moving target,
9 but I think the parties would say by this afternoon we will 10 have a final agreement. I think the debtor and Carrington are And
11 working on schedules and theyre trying to finalize those. 12 so, some -- later on today, we would like to submit on the 13 certification a final order with an APA and schedules. 14 15 16 THE COURT: MR. POWER: Okay. Let me just check.
MR. KIRIAKOS:
Your Honor, tom Kiriakos, Mayer Brown
17 Rowe and Maw LP on behalf of Carrington Capital Management, LLC 18 and Carrington Mortgage Services, LLC. 19 That is certainly as Mr. Power indicated. That is
20 certainly our -- not only our intent, but something weve been 21 insisting on in terms of this process with the APA and 22 certainly with respect to the schedules, has just gone on much 23 too long from our perspective. So yes, we have every intention
24 and every insistence that the APA be done today and the 25 schedules be done and an entire agreement be filed with the J&J COURT TRANSCRIBERS, INC.
35 1 Court. 2 The one caveat of which Im aware of with respect to
3 that is my understanding is the debtors view certain of the 4 material on certain of the schedules to be confidential or 5 proprietary. So in terms of whats filed with the public, But in terms of once a potential bidder
6 those may be redacted.
7 signs a confidentiality agreement, they would have access to 8 those redacted portions of the schedules. 9 confirm that. 10 11 THE COURT: MR. POWER: Thank you. Your Honor, Im about to sit down and be But yes, I can
12 quiet, but there are two issues I just want to alert the Court 13 to that the Committee still havent resolved just because if we 14 come back before Your Honor, I want to make sure Your Honors 15 aware of it. 16 Given the lightening speed in which weve been moving
17 in this case, we have been requesting from Carrington 18 financials to make them a qualified bidder. This order That issue is
19 provides that they are financially qualified. 20 just reserved.
Were going to, after this hearing, sit down
21 with them and go through that issue and hopefully resolve it. 22 We do reserve the right to raise that if we cant and well 23 inform the Court that we have a problem. We dont anticipate a
24 problem at all, but were -- we need to reserve that issue. 25 THE COURT: Well, for resolution before the entry of
36 1 an order? 2 MR. POWER: Yes, Your Honor. Because this sort of And the
3 provides that Carrington is financially qualified. 4 Committee really thinks that will happen.
We want to make Truthfully,
5 sure, so were asking for a little due diligence.
6 weve been so busy trying to get the deal done that we just 7 have to turn to that right now. We have set up a mechanism
8 with the Committee to get a sign-off and we will do that today 9 hopefully. 10 The second issue, just to make it clear I think,
11 there were intimations in some of the objections that this may 12 be an inside deal or an inside transaction. The Committee has
13 not seen any indication of that and its had assurances from 14 the debtor and from Carrington thats not the case. We have
15 requested information from Carrington to just confirm that, you 16 know, in disclosure issues if theres any relatedness. 17 18 faith. That issue is, to us, a sale issue in terms of good We dont think there will be any problem, but that
19 issue we reserve the right to raise later on at the sale 20 hearing. 21 22 THE COURT: MR. POWER: All right. Subject to those two reservations, Your
23 Honor, the Committee supports this proposal, thinks its fair 24 and reasonable. And we will have a, hopefully, a robust
25 auction in a few weeks. J&J COURT TRANSCRIBERS, INC.
37 1 2 THE COURT: All right. Thank you.
MR. KIRIAKOS:
Your Honor, Tom Kiriakos again for
3 Carrington.
If I would just make several points with respect
4 to that the Committee counsel has just gone through. 5 First I need to apologize. Carrington added to that We filed a response
6 stack of paper you have this morning.
7 which, in addition to laying out the resolution as we 8 understood it, and I believe accurately, and addressing the 9 objections to the extent they still remain, also lays out to 10 Mr. Powers last point, the insider question and the other 11 issues of good faith. And Carrington lays out much more --
12 lays out information regarding Carrington thats intended to, 13 not only provide that information, but also to clear up any 14 misconceptions or misinformation regarding Carrington that may 15 exist in this case. 16 So, one of the main purposes of what we filed this
17 morning was to do that and it does lay out that this is not an 18 insider deal, and in fact, this is a very honest deal in terms 19 of the negotiations and whats led to this point. 20 The additional points that I want to make very
21 quickly are that while the Committee may be hopeful that well 22 be under the $2 million expense reimbursement cap, this process 23 has been extremely expensive because of the debtors -- the 24 state of the debtors books and records. And our point in
25 agreeing to the entire package, our point specifically with J&J COURT TRANSCRIBERS, INC.
38 1 respect to the expense reimbursement is that we think that 2 well be right at 2 million or over 2 million. 3 very expensive process. Its been a
So I dont want to mislead anybody
4 into thinking that we think its going to be substantially 5 under 2 million because we dont. 6 Second, with respect to the shutdown of the platform,
7 Your Honor, as Committee counsel indicated, we think the fact 8 that we are taking the platform and taking the operations and 9 hiring the employees is an inherent value added part of our 10 bid. And conversely, to the extent that someones just looking
11 to take the servicing rights and use their own employees, that 12 would, in real economic terms, give the estate less because it 13 would create the administrative expenses relating to the 14 shutdown of the platform. 15 As Committee counsel said, we had hoped that we could We couldnt
16 agree as to what that inherent added value was.
17 reach that number and, in fact, one of the points that counsel 18 to the Committee made was that it may not be all or nothing in 19 terms of complete shutdown versus the Carrington deal. 20 be a 50 percent shutdown or whatever. 21 So weve agreed to the language in the bidding It may
22 procedures that provides that process for taking that into 23 account. Its a very important part of the process and we
24 consider it to be a very important part of our bid. 25 With respect to the Morgan Stanley procedures, I just J&J COURT TRANSCRIBERS, INC.
39 1 want to make sure this is clear on the record. As we say in
2 our response, we consider this to be a major concession and 3 agreement on Carringtons part. Among other things, it not
4 only takes our time frame out from what we originally 5 negotiated for and extends the time frame, but it also 6 complicates what were trying to do by definition in terms of 7 adding another very large moving part. 8 As Committee counsel indicated, we got to an But just so theres no confusion, one, our
9 agreement on that.
10 agreement and these bidding procedures are not dependent 11 whatsoever on the debtor and/or the Committee being able to 12 reach an agreement with Morgan Stanley. I mean, they become
13 operative if they do, but if they dont, the rest of the 14 bidding procedures are still enforceable. 15 Second, our willingness to do this is dependent upon
16 the conditions -- the other conditions laid out in paragraph 17 18, one of those being that the servicing platform auction, if 18 one, in fact -- if there is, in fact, a topping bid for our 19 assets and we go to auction which is an important point. 20 theres no topping bid, we dont go to auction. If
We come to you
21 and seek approval -- the debtor comes see you and seeks 22 approval of our deal. But if there is the auction, the auction I mean, that is a
23 for the servicing platform has to go first.
24 material part of our agreement to agree to this. 25 And so, while the order is clear that Morgan Stanley J&J COURT TRANSCRIBERS, INC.
40 1 has complete discretion over whether it agrees to anything with 2 the debtors and in connection with that agreement, has complete 3 discretion over its own auction procedures or whatever, it 4 doesnt have the right to reorder the order of the auction or 5 change the other terms that relate to Carrington. I just want
6 to make sure the record is crystal clear about that. 7 THE COURT: Well, the important thing is that the
8 order is crystal clear. 9 MR. KIRIAKOS: Yes, the order is crystal clear on
10 that, Your Honor. 11 12 THE COURT: All right. Committee counsel is right, the
MR. KIRIAKOS:
13 addition to, I believe, paragraph 9 of the bidding procedures 14 is intended to resolve Duetsche Banks objection. And my
15 understanding is the language is what I negotiated yesterday 16 with Duetsches counsel and does resolve the balance of their 17 objection. 18 And finally, Your Honor, we -- as Committee counsel
19 said, we have a structure in place to give the Committee the 20 requisite financial information that theyre asking for so 21 theres no question about our status as a qualified bidder. 22 But that issue, of course, needs to be resolved before the 23 order is entered. 24 Thank you very much, Your Honor. Youre welcome. All right. Let me
THE COURT:
25 canvass those who filed objections and ask where they stand J&J COURT TRANSCRIBERS, INC.
41 1 with them based on whats been described to the Court so far. 2 MR. MCMAHON: Your Honor, good morning. Joseph
3 McMahon for the United States Trustee. 4 followup, Your Honor.
A few points of
With respect to the objection which we
5 had filed to the bidding procedures, theres a few more items 6 that have not been described by counsel to the debtors or to 7 Carrington that wed like to make part of the record. 8 First, our objection referred to the Consumer Privacy And to be clear
9 issue which we broached at the last hearing.
10 about this, Your Honor, servicing rights are being transferred 11 pursuant to this sale. It has been represented to me and
12 consistent with the language in the asset purchase agreement 13 itself, actual interest in mortgage loans are not being 14 transferred. So we have the initial question here, Your Honor,
15 under 363(b)(1) whether personally identifiable information is 16 actually being sold. 17 But just so that the record is clear on this point,
18 Your Honor, we went through the privacy policy at the last 19 hearing under the Greenwich sale. That policy provides that --
20 and is communicated by New Century to the persons who it 21 engages in mortgage origination transactions with, that it does 22 not provide personally identifiable information about you to 23 third parties other than its lending parties unless it has the 24 consent of those parties or the disclosure is permitted or 25 required by law. J&J COURT TRANSCRIBERS, INC.
42 1 And, Your Honor, the relevant section of the Gramm-
2 Leach-Biley Act, which indicated that the Greenwich sale was 3 authorized by law, also references sales of servicing rights on 4 the secondary market. So we have satisfied ourselves, Your
5 Honor, that this particular transfer would actually be 6 consistent with the privacy policy to the extent that you could 7 -- the point would be that personally identifiable information 8 was being transferred. 9 And just so that the record is complete on that
10 point, Your Honor, I would like to make a copy of the privacy 11 policy a part of the record if we may do so as Exhibit U.S. 12 Trustee 1. 13 14 15 THE COURT: MS. UHLAND: THE COURT: Very well. Is there any objection?
No, Your Honor. All right. Well mark it UST-1 which is
16 admitted without objection. 17 MR. MCMAHON: Thank you, Your Honor. Consistent with
18 Your Honors ruling with respect to the 363(o) language, it 19 will be included in the sale order. I dont believe that the
20 debtors and Carrington have any objection on that point. 21 And the third point, with respect to the expense
22 reimbursement that has been referenced, Carrington has agreed 23 to provide our offices -- office with the invoices for review. 24 And with those three points, Your Honor, we are -- the revised 25 terms that have been represented to you on the record do J&J COURT TRANSCRIBERS, INC.
43 1 resolve the remaining points of our objection. 2 3 THE COURT: Very well, thank you. Good morning, Your Honor. Mark Hurford Thank you.
MR. HURFORD:
4 of Campbell Levine on behalf of Citi Group Global Markets 5 Realty Corporation. 6 I recognize Your Honor wasnt -- well, received these
7 filings late, in particular the filing that responds to 8 Carrington Capital Management, but from our point of view, it 9 was appreciated that it was filed. And at the very end of that
10 filing, theres a heading that reference Citi Group and 11 confirms that the debtors and Carrington have resolved the 12 limited objection filed by Citi Group. 13 Theres a short paragraph there thats kind of a high
14 level summary of the resolution, but with that resolution, 15 which was actually confirmed in email with specific language 16 that will be added to the asset purchase agreement, our limited 17 objection is resolved. Obviously, the only outstanding issue
18 is that we need to see the actual finalized asset purchase 19 agreement. But we dont have any concerns that the language we So
20 agreed to will make it into that asset purchase agreement. 21 with that, our objection is resolved. 22 23 24 THE COURT: Thank you. Thank you. Good morning, Your Honor.
MR. HURFORD:
MR. BUSENKELL:
Michael
25 Busenkell of Eckert Seamans here on behalf of C-Bass and Wells J&J COURT TRANSCRIBERS, INC.
44 1 Fargo. With me in the courtroom today is Mr. J.R. Smith from
2 the Hunton & Williams firm. 3 We did file pro hoc papers. Its my understanding
4 that those have been signed.
It doesnt appear that they have
5 been docketed yet and in an abundance of caution, Id ask that 6 hed be permitted to appear on a pro hoc basis. Hes admitted
7 in good standing in the courts of the Commonwealth of Virginia. 8 And with the Courts permission, Id ask that he be permitted 9 to appear on a pro hoc basis. 10 11 THE COURT: MR. SMITH: Very well. Good morning, Your Honor. J.R. Smith
12 from Hunton Williams here on behalf, first, of Wells Fargo 13 Bank. I would note for Your Honor that Mr. Bill Fay (phonetic)
14 from Wells Fargo Bank is here with me in the courtroom this 15 morning. 16 Wells Fargo Bank is the trustee for five of the
17 securitization trusts for which the debtor serve as servicer, 18 the servicing rights are among the assets the debtor is 19 proposing ultimately to sell. 20 Wells Fargo Bank has a fiduciary duty, Your Honor, to
21 insure that, among other things, that the servicer is a 22 qualified servicer as that qualifications are spelled out in 23 the pooling and servicing agreements that created the trust and 24 essentially control the way that its managed. 25 Wells Fargos objection stems largely from the fact J&J COURT TRANSCRIBERS, INC.
45 1 that the propose stocking horse bidder, in Wells Fargos 2 belief, is not currently a qualified servicer under those 3 pooling and servicing agreements. And from the fact that the
4 initially proposed bid protections afforded that stocking horse 5 bidder all but insured, in Wells Fargos belief, that the 6 stocking horse bidder had a significant advantage, given the 7 good faith negotiations between the Committee, Carrington, the 8 debtors and Wells Fargo Bank. 9 At this point, Wells Fargo Bank would like to
10 withdraw its objection without prejudice, reserving expressly 11 the right to object at the sale hearing including items as to 12 whether the proposed winning bidder is a qualified servicer 13 under the relevant pooling and servicing agreements and whether 14 that entity can provide adequate assurance to future 15 protection. 16 17 18 19 THE COURT: MR. SMITH: THE COURT: MR. SMITH: Very well. Thank you, Your Honor. What about C-Bass? In respect to C-Bass, Your Honor, C-Bass
20 is also withdrawing its objection given the good faith 21 negotiations that have occurred. It would only note, Your
22 Honor, that in connection with the asset purchase agreement 23 that has been proposed, the post-stocking horse bidders are 24 required to undertake an audit that would look at three things. 25 First, it would look at the whole loan balances, essentially, J&J COURT TRANSCRIBERS, INC.
46 1 on the loans that will essentially fix the portion of the 2 purchase price. It will look at the advance facility that has It also will look at the
3 been put in place by Citi Group.
4 actual advances that have been made by the servicer which 5 ultimately also will form, on a percentage basis, a portion of 6 the purchase price. 7 The results of that audit ultimately will not become
8 available, its our understanding, until after bids have been 9 submitted. That creates a little bit of a problem for Additional, presumably, a part of the
10 potential bidders.
11 expense reimbursement that Carrington would be entitled to as a 12 stocking horse bidder stems from the cost of undertaking such 13 an audit. 14 C-Bass merely would request that, if possible, that
15 audit be taken in a timely fashion and provide -- the results 16 provided to bidders. If that is not possible, at a minimum,
17 that audit result should be provided to the ultimate winning 18 bidder, whether thats Carrington or a third party. 19 Your Honor. 20 MR. KIRIAKOS: Your Honor, Tom Kiriakos on behalf of Thank you,
21 Carrington again.
I wont get into the C-Bass point on the But with respect
22 audit at this point unless youd like me to.
23 to Wells Fargo, I would like him -- a clarification. 24 My understanding of Wells Fargos reservation of its
25 objection goes to the issues of whether, under the pooling and J&J COURT TRANSCRIBERS, INC.
47 1 servicing agreements, we will be able to be a successor 2 servicer. And our view of those issues is that they are sale
3 hearing issues and based on my understanding of what Wells 4 Fargos counsel has just said, that is their view also and we 5 dont have a problem with that. They can, in connection with
6 the sale hearing, they can -- we think that long before that we 7 will -- we think we frankly have given them enough now to be 8 satisfied that well get there by the sale hearing. But we
9 certainly believe by the sale hearing we will have satisfied 10 them on that point. But thats a sale hearing issue. We
11 understand theyre reserving that. 12 13 reserving. But my understanding is thats the only thing theyre Theyre not reserving the right at the sale hearing
14 to come forward and suddenly raise that -- issues as to the 15 procedures of the bidding process in terms of the amount of the 16 breakup fee or the auction procedure that weve laid out. 17 mean, I would like clarification on that. 18 THE COURT: Well, I dont need clarification on that So I
19 because the objections been withdrawn. 20 21 MR. KIRIAKOS: THE COURT: Okay.
And I would certainly hope that once the
22 orders entered, unless theres some irregularity for some 23 reason, but I wouldnt have such objections. 24 25 MR. KIRIAKOS: THE COURT: Thank you, Your Honor.
So, sorry to answer for you, but --
48 1 2 3 think. 4 MR. SMITH: Actually, Your Honor did a very good job MR. KIRIAKOS: THE COURT: Thank you.
Were only going to do this once, I
5 answering for me. 6 7
Thank you. Thank you. Good morning, Your Honor. Mike
THE COURT:
MR. GALLERIZZO:
8 Gallerizzo on behalf of General Electric Capital Corporation. 9 General Electric has filed an objection to the
10 bidding procedures motion premised upon five grounds which fall 11 under four categories. The first deals with the breadth of the
12 motion and it may have just been a scribblers error, but when 13 reading the motion in its entirety, the caption, for example, 14 asked for an approval of an order approving the sale itself. 15 16 THE COURT: Yes. Move to the next one. Yeah, the next one, okay. In
MR. GALLERIZZO:
17 addition, there were -- the second objection is premised upon 18 the lack of some information. Theres no specificity in
19 regards to the specific assets that are going to be sold, the 20 least assets that are going to be assumed and assigned. Given
21 the fact that were moving so quickly, at a minimum, Your 22 Honor, theres no specific time frame within which at least the 23 list of the assets is going to be provided. Ive had We had
24 discussions with Mr. Ramos, counsel for the debtor.
25 hoped that a list would have been provided before todays J&J COURT TRANSCRIBERS, INC.
49 1 hearing. That is not the case. The same holds true with
2 respect to the list of least assets that would be assumed and 3 assigned. 4 At a minimum we would ask Your Honor require that
5 those lists be provided within a reasonable time frame, maybe 6 ten days after this hearing, so that secured creditors such as 7 GE, at least creditors such as GE have plenty of time to review 8 those lists. Some of those lists are massive, Your Honor.
9 Theyre very extensive and involve thousands of pieces of 10 equipment. 11 In addition, our objection was premised upon the fact
12 that there was no allocation contemplated, at least for the 13 moment, in the particular APA that was filed. There was Once again,
14 reference in the APA to an allocation schedule.
15 like the list of assets that are being sold and the list of 16 assets that are to be assumed and assigned, you will find that 17 that list is also missing. 18 Theres some additional language in the APA that says
19 that that allocation list must be mutually agreeable between 20 the parties and that mutual agreement must occur within 120 21 days after closing which is vague and ambiguous. I think this
22 debtor should be required to provide that allocation list 23 substantially prior to the hearing on the sale so that, once 24 again, creditors, such as GE, can make a determination as to 25 whether whats being allocated to their particular assets is J&J COURT TRANSCRIBERS, INC.
50 1 fair and reasonable. 2 3 one. THE COURT: Last -Well, let me -- you know, thats a tough
I mean, I dont know what the debtors prepared to say or
4 not say at this point, but, you know, theres allocation for 5 different purposes obviously. And the buyer and the seller,
6 the ultimate buyer and seller, are largely concerned, Im 7 assuming, in tax allocation. At this point, youre more And I -- I guess my
8 concerned about value, I understand.
9 thought is it might or might not be an issue at the sale 10 hearing. 11 Then, of course, identifying values prior to the
12 auction might not, from a strategic standpoint, be in the 13 estates best interest. But I just mentioned that and well
14 hear what the debtor has to say in response, but thats a -- I 15 think thats tougher than requiring, you know, lists of assets. 16 MR. GALLERIZZO: And I appreciate Your Honors
17 comments and with sales that move this quickly, they are tough 18 issues. Theyre very, very tough issues. But my clients left
19 in the dark in regards to whats going to happen and the -- I 20 guess the problem with not making that decision early on is it 21 becomes fraught with problems down the road because then there 22 needs to be a determination as to what, you know, the 23 allocation is, how thats going to be determined, you know, in 24 terms of value. The assets are already gone. You know,
25 theyve already been conveyed to a third party. J&J COURT TRANSCRIBERS, INC.
51 1 Ive been through this, done this before and its a And it just -- it brings
2 problem not doing it a head of time. 3 about a lot of litigation.
Im trying to avoid that and maybe
4 through discussions with the debtor we can do that without 5 impeding the estates ability to maximize value. 6 7 that out. 8 MR. GALLERIZZO: The last point we raise is the fact THE COURT: Youll have some time, perhaps, to work
9 that the way the credit bidding has been established pursuant 10 to the bidding procedures order or as is proposed in the 11 bidding procedures order effectively negates GEs right to 12 credit bid its specific assets. In this particular case, GE
13 has two leases of telephone systems and we have a number of 14 loans that are secured by thousands of computers. Under the
15 lease, leases, we are approximately owed about a million and a 16 half dollars whereas under the loans, we are approximately owed 17 somewhere in the vicinity of seven and a half million dollars. 18 We have no idea what portion of those loans, what
19 portion of those leases relate to the sale because we dont 20 have a list of whats being sold and whats being assumed and 21 assigned. But if we just take it in the abstract and presume
22 that half of the assets belong to this sale and half belong to 23 the loan origination sale, theres no -- by allowing a credit 24 -- by allowing bidding in the fashion that the debtors 25 proposed, theres no way for GE, for example, to bid its three J&J COURT TRANSCRIBERS, INC.
52 1 and a half million dollars or $3.75 million owed to it on its 2 assets at the sale because the sale contemplates the next bid 3 being a $5 million topping bid over $139 million. 4 As I read 363(k), and I think as the commentators
5 read 363(k), its specifically requires credit -- or allows 6 credit bidding as to specific assets that a creditor has. The
7 Third Circuit in Submicron recognized that a creditor such as 8 GE has the right to bid the full amount of its claim 9 irrespective of what the value of its asset is. And this
10 particular procedure that theyve created effectively negates 11 our credit bid rights. There has been no testimony, no proof
12 that cause justifies doing that. 13 And I suggest, Your Honor, that it doesnt because GE
14 could be left with its credit bid rights and this particular 15 purchaser could top our credit bid rights if theyd like to. 16 And they could overall bid for the sale and the debtor could 17 determine that that was the best bid. But by doing so, they
18 would effectively preserve our credit bid rights and have the 19 right to set the value of those assets at that point in time, 20 if we decided to go forward with credit bidding. 21 So, we ask -- I think that is a bidding procedures
22 question of serious issue and -23 THE COURT: And the debtor would agree with you. And
24 of course the argument in opposition to that is, but look, all 25 of what you say may be true. My words are not theirs
53 1 necessarily. But theres nothing in the Code which requires us
2 to style -- to structure our bidding process and sale process 3 to benefit you. 4 5 MR. GALLERIZZO: THE COURT: But how do you get around --
The sale process is designed to maximize And the debtors suggesting here, as are
6 value for the estate.
7 others, that this framework is best suited to maximizing value 8 for the estate. 9 MR. GALLERIZZO: But when you juxtapose 363, the sale
10 be in 363(k), 363(k), the language, the Legislature drafted it, 11 contemplates a single asset creditor having the right to bid. 12 It -- you know, it contemplates that. 13 THE COURT: It certainly does. But it doesnt say,
14 as is being argued, that that must -- well, that that must 15 dictate how every sale is to be structured. I mean, its kind
16 of like, my words, not the objectors, the tail wagging the dog. 17 Especially in a sale of this magnitude. 18 MR. GALLERIZZO: But its the only way to protect a And I think the Legislature, in
19 single asset secured creditor. 20 its wisdom, indicated such.
Now, if they can show a chilling
21 effect on the sale, I think maybe they would be able to show 22 cause. But I dont believe a small creditor such as my client
23 against 150 or 140 million dollar sale, that that is going to 24 chill this sale. 25 THE COURT: I understand your argument.
54 1 MR. GALLERIZZO: So, based upon these -- what were
2 asking for, Your Honor, as to the informational requests, were 3 just asking a time frame be set, a reasonable time frame to 4 provide the lists that are lacking. 5 allocation lists. And wed also ask for the
And on the credit bidding, that we be
6 permitted to credit bid to the extent of our debt against our 7 specific assets that we have liens against. 8 9 10 THE COURT: Very well. Thank you very much. Are
MR. GALLERIZZO: THE COURT:
Let me just ask for the record.
11 there any other objectors or parties who wish to be heard in 12 connection with the proposed bidding procedures? 13 MR. DREBSKY: Good morning, Your Honor. Dennis
14 Drebsky from Nixon Peabody on behalf of Georgia Bank National 15 Trust Company. 16 motion. I could brief vis-a-vis the bidding procedures
Our concerns have been addressed, of course, vis-a-vis We reserve all our rights. But we have resolved our
17 the sale. 18 objection. 19
THE COURT:
Very well, thank you.
Anyone else?
20 hear no response.
All right.
Would you indulge me for a five-
21 minute recess at this point? 22 23 24 minutes. 25 (Recess) J&J COURT TRANSCRIBERS, INC. MS. UHLAND: THE COURT: Certainly, Your Honor. All right. Thank you. Just five
55 1 MS. UHLAND: Your Honor, shall I proceed to address
2 the GECC objections? 3 4 THE COURT: MS. UHLAND: If you please. Your Honor, theres three objections
5 sort of remaining of the Courts dialogue that wed like to 6 address. The first one is a request that the schedules, I
7 heard, that the schedule of assets be filed within ten days. 8 And thats acceptable to us. 9 10 THE COURT: MS. UHLAND: All right. Well make that representation. We, in
11 fact, hope to file those later today as we indicated. 12 With respect to the allocation issue and the debtors
13 allocation issue between the debtors and Carrington, that is a 14 document thats going to have several purposes between the 15 debtors and Carrington and their tax allocations and other 16 matters. 17 We are not proposing by that allocation to value,
18 under 506, the claims of the secured creditor GE with respect 19 to their secured loans. And further, our proposed sale
20 provides that their liens, whatever they are to the extent of 21 their value and validity will attach to the proceeds. So we
22 believe that they -- providing an allocation in advance of when 23 its required by the APA is unnecessary and further, that they 24 are not prejudice by the failure to receive it ahead of time. 25 THE COURT: No, I would -- and I wouldnt consider
56 1 them bound by your agreement. 2 MS. UHLAND: And nor are they bound by our agreement.
3 We would agree with that, Your Honor. 4 5 THE COURT: MS. UHLAND: All right. And finally, with respect to the 363(k) Your Honor, we believe
6 matter and their rights to credit bid.
7 that there certainly is cause, at least cause to the extent 363 8 could be construed in anyway to rewrite a courts bid 9 procedures that provided the lot on which bids were going to be 10 accepted. 11 rights. 12 We do not believe 363(k) dictates that in every case There would be cause to limit those credit bid
13 where theres an individual secured creditor, that that 14 creditor is allowed to rewrite the parties in an agreed -- in a 15 courts ordered bid procedures to provide for a going concern 16 sale. 17 Were proposing that the bidding be on, you know, the
18 assets that are the subject, the purchased assets of the 19 Carrington sale and it would certainly damage the debtors and 20 the bid process if the proposed buyers believed that they could 21 end up with a business as a going concern that didnt have a 22 phone system or many of its computers. So we believe there is
23 cause to the extent 363(k) could be viewed as some kind of over 24 item bid procedures which we dont believe it is. 25 Further, Your Honor, we are not limiting their rights J&J COURT TRANSCRIBERS, INC.
57 1 to credit bid. To the extent GECC desires to bid on the bids -
2 - on the global assets that were setting forth, we do agree 3 that they have credit bid rights. If they want to become a
4 proposed bidder, we may need to work with them and with the 5 Committee to allocate the loan -- the loans on the different 6 assets to clarify which portion of their secured bids -- their 7 secured loans apply to the assets that were actually selling 8 in the servicing business because they knew -- maybe some of 9 the computers that were not trying to sell as part of this. 10 But we would engage in those discussions to allocate
11 that portion of their loans so they could credit bid in good 12 faith. But theyre -- that -- and they could credit bid a
13 portion of their proposal and were not proposing that they be 14 estopped from raising that. 15 THE COURT: And I think thats all, it seems to me, So --
16 theyre asking for really. 17 18 MS. UHLAND: THE COURT:
That --- wheres really the point of
19 disagreement? 20 MS. UHLAND: To the extent that is what theyre
21 asking for, we dont disagree, Your Honor. 22 23 THE COURT: Okay. No, Your Honor. What I was
MR. GALLERIZZO:
24 suggesting was that be left with our credit bid rights on our 25 specific assets separately. That we not be required to bid on
58 1 the entire gambit of assets because by doing that, that 2 effectively negates our credit bid rights. 3 THE COURT: Im sorry, I dont -- I didnt hear from
4 the debtor thats what -- I thought the debtor was suggesting 5 -- maybe Im just misunderstanding. 6 MR. GALLERIZZO: I think what shes suggested, and if
7 I may paraphrase, is that we would have to make a bid on the 8 entire assets of, I think the number would be 144 million. Of
9 that 144, lets say we were owed three and a half million on 10 the phone and the computer assets. That would -- we would be
11 able to credit bid that portion and then would have to pay cash 12 for the remaining amounts. 13 14 were you? 15 16 that. 17 THE COURT: And why in the world would you think that MS. UHLAND: Your Honor, actually I was suggesting THE COURT: Ms. Uhland, you werent suggesting that,
18 would be an appropriate resolution of this objection? 19 MS. UHLAND: Your Honor, they are preserving their
20 credit bid rights.
We have a bid procedure that provides for
21 the incremental first overbid of 144 or, you know, however its 22 calculated. And were any -- and in order to be a qualified
23 bid, you have to provide a minimum overbid on substantially -24 on the assets that are for sale. Not an overbid to be a
25 qualified bid to put us to auction on subset of the assets that J&J COURT TRANSCRIBERS, INC.
59 1 are being -- that were proposing to sell. 2 So the issue isnt whether theres a portion of debt It is, you know, that were not
3 that can be credit bid.
4 willing to rewrite our bid procedures to parse out the separate 5 assets that the debtors are proposing to sell as part of the 6 auction. 7 THE COURT: But it seems to me, and youve already
8 agreed, to identify those assets which are to be -- proposed to 9 be sold, okay. So it seems to me that, at least from a
10 practical standpoint, GECC could make a bid individually on its 11 assets. And I guess my question is, what would be the harm in
12 permitting that? 13 MS. UHLAND: Your Honor, we would permit that and
14 then we could, of course, consider that and they could make the 15 bid and we would consider it the way that the debtors and the 16 Committee are considering it in determining whether that would 17 be a bid that we would consider sufficient to go forward with 18 the auction or consider as part of the auction process. 19 MR. POWER: Your Honor, no, the Committee does not GE
20 agree with that and the harm is very specific, Your Honor.
21 -- there are no -- Your Honor has not approved procedures for 22 the sale of those assets separately. There is no notice.
23 There is no ability for other parties to bid on those assets. 24 So GECC is proposing to the Court that we set the floor, and we 25 unilaterally got to pick the value, the fair market value of J&J COURT TRANSCRIBERS, INC.
60 1 those assets, so we come later to this Court and argue what the 2 value of its collateral is, they say we bad and that sets the 3 price. 4 Your Honor, what we are saying to the Court is simply GECC is adequately protected in this They can
5 overrule the objection. 6 situation.
The sale proceeds will be escrowed.
7 reserve their rights and they will reserve -- theyll have lien 8 on those sale proceeds to the extent we sell their collateral. 9 Later on, after the sale, we will have a hearing, if we cant 10 resolve it, as to what the fair market value of that collateral 11 is. GECC can come before your court and say, Your Honor, I
12 would have bid $5 million for that stuff and well say, Your 13 Honor, the stuff is worth 3 million and well resolve it. 14 THE COURT: Well, the other thing they might say is We have users
15 that, you know what, we do this all the time.
16 for that stuff that in the end is going to provide much more 17 economic benefit than that value which the Court or you or 18 anybody ascribes to it. Now, I dont mean to put words in your
19 mouth, but it strikes me thats a possibility. 20 MR. POWER: Your Honor, we dont disagree with that.
21 And I think -22 THE COURT: And it seems to me that might be one of
23 the reasons that bidding, credit bidding, is generally 24 permitted. 25 MR. POWER: Your Honor, no. I would submit to you
61 1 that that is the reason why GECC will take the view that the 2 value of the collateral is worth more. And they can
3 demonstrate and they have not -- were not asking for waiver of 4 any right -- to convince this Court that, in fact, those assets 5 are worth more. But the notion that they can basically set up
6 a bid separately to basically somehow prejudice the estate in 7 creating kind of a somewhat false premise. 8 9 THE COURT: MR. POWER: Well -I mean, those assets arent permitted. Anybody whos interested in those
10 Were not noticing those.
11 assets doesnt have the ability -- the auctions not set up 12 that way. 13 right. And all were saying, Your Honor, they have that
If they think the assets are worth more because they They reserve
14 have a unique buyer, were not prejudicing that. 15 all rights to argue valuation at a later date.
And theyre not
16 -- theyre adequately protected because the money is sitting 17 there to protect them in the full amount of their claim. 18 So we would ask that the procedures not be modified.
19 And then -- and Your Honor, quite frankly, when you think about 20 it, it really wouldnt work. I mean, quite frankly, from
21 Carringtons perspective, theyre buying a whole business and 22 all the equipment. GEs bid is obviously the high one. No one
23 else is bidding on that piece, but we have 150-40 some million 24 dollar bid thats going to win. Its somewhat of a -- to me And I dont
25 anyway, it doesnt work in this auction procedure. J&J COURT TRANSCRIBERS, INC.
62 1 -- GE is protected. 2 worth more. 3 4 They can simply argue those assets are
And if we cant resolve it, well litigate it. Thank you. Your Honor, Tom Kiriakos again for
THE COURT:
MR. KIRIAKOS:
5 Carrington.
One of the major process of the Bankruptcy Code is And if 363(k) worked the
6 to maximize the value of the estate.
7 way that counsels suggesting, it would really undermine the 8 ability ever to have a going concern sale and attain going 9 concern value for a business as a business because various 10 individual secured creditors could unilaterally take their 11 assets and go home, destroying the overall -- the going concern 12 value of the overall whole. And Congress, in fact, addressed And that is
13 and limited 363(k) offset rights for cause shown. 14 cause shown. 15
Clearly the whole supposition of this sale is that
16 the whole is worth more to the estate and worth more to any 17 potential purchaser than a sum of its parts. 18 statutory argument. 19 In addition, Your Honor, the deal in front of you in So that is the
20 terms of what youre being asked to approve with respect to the 21 bidding procedures is for all of these assets. Carrington has
22 not agreed and its clear that it hasnt agreed, that the 23 debtor could stand up at the auction and say, while 24 Carringtons agreement is for all these assets, we are now 25 going to offer individual lots for the servicing rights with J&J COURT TRANSCRIBERS, INC.
63 1 respect to the Carrington securitization separately and then 2 were going to offer the servicing rights with respect to the 3 Carrington trust separately. 4 5 agreement. I mean, that -- the debtor cant do it under the Its not what we bargained for. Its not what
6 were asking you to approve. 7 variant of that.
And so this would just be another
And as debtors counsel pointed out, its
8 hard to run the servicing business without phones and 9 computers. So it really would have the effect and the
10 potential, not only in this -- not only with respect to this 11 sale, but all going concern sales of taking it off the table. 12 THE COURT: Well, although, in todays world, phones I mean, I havent heard
13 and computers, pretty easy to replace.
14 anything that tells me theres anything unique about this 15 collateral. 16 MR. KIRIAKOS: Well, but theyre pretty easy to
17 replace, but what does that do to -- as we now bidding -- do we 18 have to know pay less than were paying because we have to do 19 -- is it just an allocation of the purchase price were paying? 20 Or is it something else? I mean, it clearly cant result in
21 our incurring more expense than what were bargained to incur. 22 THE COURT: I understand. All right. Before we go
23 back to those Ive heard from, let me ask if anyone else cares 24 to be heard on this issue. 25 MR. CHAPMAN: Good morning, Your Honor. For the
64 1 record William Chapman, Edwards Angell Palmer and Dodge and I 2 rise merely -- we represent -- merely to get some guidance from 3 Your Honor. 4 We represent GMAC Commercial Finance, LLC,
5 Countrywide Home Loans, Inc., Countrywide Financial Corp., 6 Countrywide Warehouse Lending, Countrywide Bank and Countrywide 7 Securities Corporation. Ill collectively refer those to those
8 creditors as Countrywide. 9 10 motion. Your Honor, we did not object to this particular We did object, however, to the loan origination And we raised almost identical issues that
11 platform motion.
12 were raised by GECC. 13 I just want to make sure that my silence on this
14 motion will not preclude my arguing the same issues -15 16 17 18 THE COURT: Well, you are a careful guy, counsel. -- on the next motion, Your Honor.
MR. CHAPMAN: THE COURT:
I wouldnt worry about it. And we do support GECCs position here,
MR. CHAPMAN:
19 Your Honor.
And how this is normally dealt with, and Your
20 Honors seen this numerous times, is you allow parties to come 21 in and if they want to bid on a portion, they do. And then if
22 theres an aggregate bid greater than the bid for the entire 23 organization, the debtor can consider it. 24 have to consider it. The debtor doesnt
But it should allow for the ability for
25 secured creditors to credit bid under 363(k). J&J COURT TRANSCRIBERS, INC.
65 1 THE COURT: Well, I see youve drawn me into the next Then what? I mean,
2 question, so.
Lets say I permit it.
3 hasnt the buyer bought the excess?
Unless I make some
4 determination that in the context of the overall larger bid, 5 that bid is greater than the credit bid. And then, see, then
6 youre opening yet another door of perhaps, you know, some 7 problems. 8 MR. CHAPMAN: I dont think that thats how it The debtors always, with the
9 normally happens, Your Honor.
10 Committee, have the right to determine what the highest and 11 best bid is. So if we submitted a bid for $10 million for our
12 assets, hypothetically, and thats the only bid and we credit 13 bid, and they compare that bid to the bid of Carrington for the 14 entire organization, obviously were not going to win. But at
15 least we preserved our right to credit bid under 363(k). 16 Thats all Im saying, Your Honor. 17 18 way. THE COURT: But you know -- well, lets put it this
Anything can happen, I suppose, at an auction and in a But the number is always going to be And, I mean, I -- well, okay,
19 way, we all hope it does.
20 bigger than what GECC proposes. 21 thank you. 22 MR. CHAPMAN:
We dont know that until the auctions Thank you.
23 over, Your Honor, is my point. 24 25 THE COURT:
Its bigger now overall. But there may be bidders who want to
MR. CHAPMAN:
66 1 bid on other portions of the business and combined altogether, 2 thats -3 THE COURT: And see, and thats -- thats the evil And
4 against which the debtor and Carrington here are arguing.
5 defeats, really, probably mostly the purpose behind setting 6 bidding procedures. 7 you the last work. 8 MR. GALLERIZZO: Thank you. I just wanted to join in All right. Let me hear GECC. Ill give
9 counsels comments because my suggestion was going to be that 10 we see many sales where the parts are sold, the whole is sold, 11 and then theres an ultimate highest bid thats taken. 12 This bidding procedures could have been set up that
13 way and preserved our credit bidding rights, preserved the 14 right to Carrington to bid for the whole and we wouldnt be 15 arguing this objection. 16 way, Your Honor. I dont know why is wasnt done that
Thats the way you preserve credit bidding
17 without prejudicing GE or the purchaser in this particular 18 case. 19 Leaving our credit bid right in place, I dont see
20 any prejudice to this particular debtor or to the purchaser 21 because we bid whatever amount we bid, theyre going to over 22 bid us and thats the end of it. But weve sat and we Thats --
23 protected our credit bid for later on down the road.
24 the Submicron case says we can kind of set what the value of 25 that collateral is by our bid rights, okay. We can go in and
67 1 bid right up to the amount of our debt and I want to protect 2 that right. 3 THE COURT: Well, but see, wouldnt you still be able
4 to protect that as a result of objecting to the sale ultimately 5 when the auction is completed. You can still come in and
6 argue, wait a minute, I -- you know, for my portion of the 7 assets, the bid isnt high enough. And then it would be
8 incumbent upon the debtor to demonstrate that the price was 9 adequate, wouldnt it? 10 MR. GALLERIZZO: Well, except that if Submicron says
11 I can bid the full amount of my debt irrespective of what the 12 value of the equipment is, that sets the price for those 13 assets. And by taking away those credit bid rights, youve Were a small creditor,
14 taken away that essential right. 15 thats why its there. 16 THE COURT:
But see, then you make the argument that
17 the debtor makes, really, that if that were the case here, 18 cause does exist to deny the relief that youre requesting 19 because otherwise, again, has the tail wagging the dog. And
20 that cant be whats intended when the ultimate overriding goal 21 is to maximize the value of the sale of these assets for the 22 estate. 23 MR. GALLERIZZO: But by allowing us to credit bid,
24 thats -- were not going to preclude that from happening, Your 25 Honor. Your Honor has indicated that the offer thats here is J&J COURT TRANSCRIBERS, INC.
68 1 going to beat us. 2 3 it will. THE COURT: Well, put it this way, its likely that
But, you know, Ive tested -- Im trying to test both
4 positions here and come to what I think is the appropriate 5 solution. 6 7 MR. GALLERIZZO: THE COURT: Sure. Anything further in support
All right.
8 of your objection? 9 10 11 12 13 MR. GALLERIZZO: THE COURT: No, Your Honor.
Thank you. Thank you very much.
MR. GALLERIZZO: THE COURT: MS. UHLAND:
Youre welcome. Your Honor, we would stand by and
14 perhaps I didnt understand the Courts objection before which 15 caused the -- or proposal before. As I said before, if they --
16 as part of a bid thats consistent with our bid procedures, 17 credit bid a portion -18 19 THE COURT: MS. UHLAND: No, I understood. -- alternatively, if they can combine
20 with other bidders to prepare a qualified bid, if its on all 21 assets, they can credit bid their portion. Basically what
22 these parties were talking about happening sometimes at an 23 auction, if theyre able to come up with that part of the 24 auction -25 THE COURT: Thoses alternatives under these
69 1 circumstances strike me as being just as unpractical as 2 permitting what GECC has requested frankly. 3 appreciate your effort. 4 MS. UHLAND: Then, thereafter, Your Honor, again, to Not that I dont
5 the extent that 363(k) can be viewed as a constraint on the 6 bidding -- the procedures, we do believe that cause does exist 7 to prohibit the credit bid on a portion of the assets 8 inconsistent with our bidding procedures and that, you know, 9 simply a -- the rights under Submicron we realize, you know, 10 that statutory or that case law derived right to establish 11 value is overridden, in effect, by our bidding procedures 12 orders and the cause shown to maximize value in our estate. 13 We believe they still have their full rights under And therefore,
14 506 to establish the value of their collateral.
15 there is cause and that theres not substantial prejudice to 16 those creditors because of that preservation. So we would ask
17 the Court to overrule the objection with the commitment on the 18 record, with the ten days, we will insure that the asset 19 schedules are provided. 20 THE COURT: All right. Now, let me ask this. Is it
21 the debtors position that on the credit bidding issue, that 22 thats a strictly legal matter and that there are no facts 23 which need to offered in support of that? 24 25 MS. UHLAND: THE COURT: Your Honor -I dont have an answer in mind, but
70 1 thats why Im asking the question. 2 MS. UHLAND: Your Honor, I believe that on the for
3 cause matter that the facts set forth in the debtors motion 4 with respect to the necessity to adopt these bidding procedures 5 in order to obtain -- including the breakup fees and the total 6 package of bid procedures was necessary for the debtors to 7 secure the stocking horse bid of Carrington, and in their 8 totality, are in the best interest of the estate. 9 Were prepared to provide evidence of the -- to the
10 extent further evidence is required as a factual matter on the 11 overall necessity for this entire package of bid procedures to 12 be approved in their entirety, if the Court views that cause 13 matter is a factual matter. 14 THE COURT: Well, let me ask GECCs counsel whether
15 he has a view. 16 17 question. 18 THE COURT: The question was whether -- I asked the MR. GALLERIZZO: Your Honor, I didnt hear the
19 debtor whether the debtor thought that the objection could be 20 resolved strictly on legal grounds or whether there were 21 factual disputes in connection with having to resolve that 22 issue. 23 MR. GALLERIZZO: I think there is in the necessity,
24 if the Court is going to entertain the issue of cause, for 25 there to be a factual hearing on that issue. J&J COURT TRANSCRIBERS, INC.
71 1 2 THE COURT: Oh, Im going to entertain it. Yeah. I think there is the
MR. GALLERIZZO:
3 necessity, Your Honor, for factual evidence to be placed before 4 this Court to show the harm that has been argued today. 5 THE COURT: All right. Well, Ill ask at least for a
6 proffer and well se whether GECC wishes to cross examine. 7 8 MS. UHLAND: (Pause) Your Honor, I would like to proffer the
9 testimony of David Kurtz who is the co-head of global 10 restructuring for Lazard Frres and a managing director. 11 Kurtz is present in the courtroom. 12 If called to testify, Mr. Kurtz would describe his Mr. Kurtz is a managing Mr.
13 background and position as follows:
14 director in the restructuring group of Lazard and is leading 15 the engagement of Lazard in connection with New Century. 16 Mr. Kurtz joined Lazard from the Chicago office of
17 Skadden Arps Slate Meagher & Flom where he was a senior 18 partner. And his restructuring assignments at Lazard have
19 included the representation of Adelphia Communications Group, 20 Northwestern Corporation, Excel Energy Corporation, Safety 21 Clean Corp., American National Power, the Creditors Committee 22 of Calpine Corporation, the Creditors Committee of Northwest 23 Airline, United States Air Transportation and Stabilization 24 Board in connection with the U.S. Airways and ATA Airlines. 25 Prior to joining Lazard, while he was at Skadden J&J COURT TRANSCRIBERS, INC.
722 7 1 Arps, he served as lead counsel on several large corporate 2 restructuring including Polaroid Corporation, Washington Group 3 International, Montgomery Ward, Transworld Airlines in their 4 initial Chapter 11, Morrison Knudsen, ICG Communications and 5 Phillips Services. Mr. Kurtz has over 24 years of
6 restructuring experience. 7 Mr. Kurtz would further testify that he was, in
8 connection with his role as lead -- leading the engagement of 9 Lazard with respect to New Century, intimately involved in the 10 negotiations with Carrington with respect to the -- their 11 purchase agreement and bid protections that are the subject of 12 the debtors motion today. 13 Mr. Kurtz would further testify that the bid
14 protections contained in the debtors -- Im sorry, in 15 connection with the Carrington proposal which included detailed 16 -- a detailed bid procedures order including both the topping 17 fees -- or breakup fees, termination fees, but also the 18 detailed procedures for the bid process including the bidding, 19 qualifications for bidding and the assets subject to bid were 20 part of the negotiations with Carrington and necessary to 21 induce Carrington to provide its overall asset purchase 22 agreement in stocking horse proposal. 23 He would further testify that the negotiation of all
24 aspects of the bid protections were the subject of arms length 25 negotiations by Carrington and New Century and that J&J COURT TRANSCRIBERS, INC.
733 7 1 negotiations were led by professionals at Lazard and outside 2 counsel on behalf of New Century as well as outside 3 representatives of the -- of Carrington and evidence of 4 substantial give and take by both parties. These negotiations
5 included negotiations with respect to the various bid 6 procedures. 7 He would further testify that the ultimate procedures
8 and breakup fees were both designed to enhance bidding and 9 maximize value to the estate, that the current proposed 10 procedures that were attached to the notice has evidenced that 11 it did not show any bidding, that over 25 parties have emerged 12 as potential bidders since the debtors filed their motions and 13 proposed procedures motions. And that the -- further, that the
14 filing with the stocking horse bid on these assets made them 15 more marketable and beyond that, had a stabilizing influence on 16 preserving the ongoing enterprise serving as an important 17 employee retention tool. 18 He would further indicate that the debtors, the
19 Creditors Committee and Carrington have had extensive 20 negotiations and discussions over the past several days with 21 respect to the bidding process and the proposed auction process 22 and the current bid procedures set forth to the Court as a 23 result of the involvement of the professionals of Carrington, 24 but more importantly, of the debtor and the Creditors Committee 25 and that each proposal was concurred by the professionals for J&J COURT TRANSCRIBERS, INC.
744 7 1 the debtors and the Creditors Committee and protection for the 2 investment bankers for the Creditors Committee to structure 3 those -- Im sorry, the investment bankers for the debtors and 4 the financial advisors for the Creditors Committee to structure 5 those as a method to both best maximize value for the debtors 6 estate and run an auction that is designed to maximize the 7 value for the debtors estate. 8 He would further testify that the bidding procedures
9 and others -- the bidding procedures as well as the breakup fee 10 and other expense reimbursement, other provisions, are 11 reasonable. They are now supported by the Creditors Committee,
12 that they induced the buyer to continue to do work and 13 diligence that it would not have otherwise done, and therefore 14 would satisfy the OBrien factor set forth in that courts 15 decision. 16 17 18 right. 19 20 21 MR. GALLERIZZO: THE COURT: THE CLERK: Just here, Your Honor? Your Honor, that would conclude proffer of Mr. Kurtz. THE COURT: Anyone care to examine Mr. Kurtz? All
Okay. Please raise your right hand, place your
22 left hand on the Bible. 23 24 DAVID KURTZ, DEBTORS WITNESS, SWORN THE CLERK: Would you please state for the record
25 your entire name and spell your last. J&J COURT TRANSCRIBERS, INC.
Kurtz - Cross/Gallerizzo 1 2 3 4 5 BY MR. GALLERIZZO: 6 Q 7 A 8 Q Good morning, Mr. Kurtz. Good morning. Can you tell the Court what discussions were had between THE WITNESS: THE CLERK: David Steven, K-u-r-t-z.
75
You may be seated. Thank you. CROSS EXAMINATION
THE WITNESS:
9 you, representatives of the debtor and the Carrington Group 10 regarding GEs collateral which would consist of primarily the 11 computer equipment thats at issue in this particular matter? 12 A I dont recall -- excuse me -- I dont recall
13 participating in any such discussions. 14 Q Okay. Do you believe that the Carrington Group would walk
15 away from the offer that theyve placed on the table for all 16 the assets if GE were allowed to credit bid just the computer 17 equipment? 18 A I have no way of knowing what Carrington would either do
19 or not do. 20 Q Okay. Do you know why all the assets of this particular
21 loan servicing portfolio were not offered separately and then 22 together as a group? And then a determination would be made
23 where the highest bid came from? 24 A Yes. That would make for a very disorganized, messy sale
25 that, in my view, could ultimately reduce the overall value of J&J COURT TRANSCRIBERS, INC.
Kurtz - Cross/Gallerizzo 1 the process.
76
And if we literally had to offer in separate lots
2 this -- the assets securing the claims of every secured 3 creditor, those assets are subject to the sale, Ive never seen 4 it done that way in my entire career and if -5 Q 6 A 7 Q 8 A Well -- okay. Can I finish my answer. Sure. And I think it would make things needlessly complicated
9 when there is another alternative, another process that Im 10 personally familiar with in my experience which is everybodys 11 rights attached to the proceeds and those rights are dealt with 12 after weve created a pot of cash, maximized the creation of 13 that cash by conducting the cleanest possible sale and the 14 Judge will determine whos entitled to what and all arguments 15 are preserved. 16 Q Okay. Let me just backtrack a little bit on what you just Basically, what I suggested was you have an And you have separate bidding on
17 commented on.
18 overall sell of the assets. 19 specific assets.
And its your believe that that would cause
20 the overall bid to be less than what Carrington offered? 21 A 22 Q 23 A It absolutely could do that. And why is that again? Complexity of having to offer, and I dont know how many
24 different lots we would have to offer as part of this sale, but 25 the more complexity one introduces into the sale, the greater J&J COURT TRANSCRIBERS, INC.
Kurtz - Cross/Power 1 risk that one does not maximize value. 2 Q 3 lot? 4 A How about if you just had one additional lot? That wouldnt be complex, would it? Just GEs
77
I -- if we had only one, we could probably manage our way
5 through that. 6 Q 7 8 Honor. 9 10 Mr. Kurtz? 11 MR. POWER: Yes, Your Honor. Mark Power from Hahn THE COURT: Does anyone else care to cross examine Okay. MR. GALLERIZZO: I have no further questions, Your
12 Hessen, counsel for the Committee 13 14 BY MR. POWER: 15 Q Mr. Kurtz, during your negotiations with Carrington in CROSS EXAMINATION
16 this deal, was it your understanding that Carrington was 17 looking to buy the entire servicing platform as an operating 18 business? 19 A 20 Q Correct. In your experience, if the bidder -- a very successful
21 bidder, do you think they would be able to close within the 22 time period set forth in the asset purchase agreement and also 23 be able to replace all of the thousands of pieces of equipment 24 that GE has subject to its lien? 25 MR. GALLERIZZO: Objection, Your Honor.
Kurtz - Cross/Power 1 2 THE COURT: Basis? Basis.
78
MR. GALLERIZZO:
Basis for the answer?
I dont know
3 that he has the basis to answer that. 4 5 6 7 THE COURT: Foundation is the objection. Foundation.
MR. GALLERIZZO: THE COURT: MR. POWER:
Any response? Well, Your Honor, I believe its clear in
8 the proffer that this gentleman is extremely experience both in 9 terms of sales as a counsel for Skadden Arps and also as an 10 investment banker. Hes certainly familiar with the
11 negotiations with Carrington and he understands what it is to 12 sell an operating business and what it would involve to remove 13 pieces of equipment from hundreds of locations across the 14 country. 15 So I think hes qualified for that issue. THE COURT: Well, why dont you lay just a little bit
16 of foundation. 17 Q Mr. Kurtz, in connection with your -- well, let me do it Are you familiar with the debtors operations?
18 this way. 19 Generally? 20 A 21 Q
Yes, I am. Could you briefly describe for the Court exactly how many
22 offices are located in connection with this business and how 23 many pieces of equipment are involved in the sale of the 24 servicing business generally. 25 A There are two main bases of operation with regard to the J&J COURT TRANSCRIBERS, INC.
Kurtz - Cross/Power 1 servicing business. The majority, the vast majority of the
79
2 employees associated with that business are located in Santa 3 Ana, California. Then there are also a smaller group of As to how many computer
4 employees that are located in Indiana.
5 terminals they have, I dont know the answer to that question. 6 Q Well, let me ask this question. Is it -- you understand
7 the service business? 8 business generally? 9 A 10 Q 11 A 12 Q Yes.
Youre familiar with the service
Is that a technology-based business? Yes, very much so. To your knowledge, do those hundreds of employees all
13 utilize computers as part of their performing their -14 A 15 Q I believe most if not all. And is the computers and the telephone system a crucial --
16 in your experience in this business, a crucial element of the 17 sale of that business and the way it operates? 18 A Yeah, exactly. It goes to the heart of what these
19 employees do.
I mean, their job is to collect, to process
20 payments that come into the door with respect to the mortgage 21 loans that theyre servicing. And most importantly, to very
22 quickly reach out to delinquent debtors with respect to 23 mortgage loans that have fallen into default. Experience has
24 proven that the sooner one reaches out to those delinquent 25 debtors, the greater likelihood that one can restore them to J&J COURT TRANSCRIBERS, INC.
Kurtz - Cross/Power 1 good standing. And so theyre -- these employees are highly
80
2 dependent upon the technology associated with their computers 3 and with their telephones. 4 jobs without it. 5 Q Now, in connection with the debtors operations and the They literally couldnt do their
6 debtors computer systems, are you aware that the debtor has 7 certain software on those computers that is important for the 8 servicing of those mortgage loans? 9 A 10 Q Yes. And now, lets do the scenario which is being proposed to
11 the Court, where basically you would permit a lot which would 12 permit the bulk of that equipment to be sold separately. Do
13 you think -- and understanding this debtors business and the 14 bid that Carrington made -- that wed be able -- the debtor 15 would be able to close on this sale within the time frame of a 16 little -- were at a month approximately, and also replace all 17 the equipment that GECC would be bidding on? 18 A I think that would be virtually, if not impossible, if not I mean, if we couldnt control those
19 literally impossible.
20 assets, it would be extremely harmful to our ability to realize 21 value and close this sale. When I gave my earlier answer as to
22 whether it could be managed or not, I was assuming that a -- as 23 long as the total bid exceeded the amount of the credit bid for 24 that equipment, we could continue to control those assets. If
25 this creates and opportunity to lose control of those assets, J&J COURT TRANSCRIBERS, INC.
Kurtz - Cross/Power 1 then we are literally jeopardizing the entire transaction. 2 Q Now, lets look to the separate lot for GECC.
81
Has the --
3 is the debtor in position today to notice -- let me -4 5 Q MR. POWER: Strike that, Your Honor.
Has the debtor made an inventory, to your knowledge, of
6 all of its assets that are subject to this sale and is in a 7 position within the next few days to notice separate sales of 8 all that equipment that may be subject to a lien? 9 A 10 Q I dont know if we could do that or not. Is your office, which would be running this auction, in a
11 position where it could notice all potential purchasers of all 12 those individual assets that are subject to GECCs lien in 13 order to insure the Court and the creditors that were getting 14 the maximum bids on that lot? 15 A 16 Q Sorry, I dont think I followed. Let me -- under the following scenario where a lot is set
17 up for the GECC collateral involving hundreds of pieces of 18 equipment and telephone systems is sold separately, is your 19 office prepared in the next few days to create a list of all 20 the potential purchasers of those type of assets such that you 21 can insure this Court and creditors that the bids received on 22 that lot at the auction are maximum value for this estate? 23 A 24 Q I wouldnt even know how to go about doing that. But its fair to say that you couldnt do that within the
25 procedures and keeping the Carrington deal in place and also do J&J COURT TRANSCRIBERS, INC.
Kurtz - Cross/Power 1 that within this time frame? 2 A 3 Q In a credible way it seems virtually impossible. So in your judgment, based on your experience, GECCs
82
4 credit bid is not designed to show fair market value for those 5 assets in a open noticed auction? 6 view? 7 8 9 MR. GALLERIZZO: THE COURT: Objection, Your Honor. Was that your opinion, your
Basis? Basis is hes asking him for a legal
MR. GALLERIZZO:
10 conclusion. 11 12 A THE COURT: Overruled. You may answer, sir.
This doesnt strike me as having anything to do with fair It seems to me this is all about tactics and
13 market value. 14 leverage. 15 Q
And you said previously in your testimony in response to
16 GECCs counsel that in your view GECCs protected as to the 17 fair market value of its collateral because its liens will be 18 attached to the proceeds, will succeed the entire debt and the 19 valuation issue can be reserved, isnt that right? 20 A I actually went one step further than that. What I said
21 was all of their rights can be protected with regard to those 22 proceeds and ultimately determined by the Bankruptcy Court. 23 Q So in your view, does the fact that GECC may credit bid in
24 an auction it really hasnt been noticed properly and hasnt 25 been vetted for the best possible values, does that have any J&J COURT TRANSCRIBERS, INC.
83 1 reflection on what the fair market value of that collateral may 2 actually be at the end of the day? 3 A 4 5 No. MR. POWER: THE COURT: Your Honor, no further questions. Anyone else like to examine this witness?
6 Is there any redirect? 7 8 9 10 MS. UHLAND: THE COURT: No, Your Honor. Thank you, sir. Thank you. Your Honor, with that, we would again You may step down.
THE WITNESS: MS. UHLAND:
11 request the Court overrule the objection and argue that cause 12 is certainly set forth with respect to 363(k) to not permit the 13 credit bidding except as previously described as part of an 14 overall qualified bid. 15 THE COURT: All right. Is there anyone who I have
16 not yet heard from who wishes to be heard in connection with 17 this motion? 18 I hear no response. All right.
This is a circumstance under which permitting the
19 relief that GECC here requests in connection with credit bid I 20 think creates more problems than it solves. 21 Kurtz. I agree with Mr.
It has the strong potential to create a disorganized
22 sale and potentially to reduce the overall value of the going 23 concern that the debtor here is attempting to capture. Not
24 only that, but it would make for a destructive transition based 25 upon the testimony of Mr. Kurtz which I find credible. J&J COURT TRANSCRIBERS, INC. Yet, on
84 1 the other hand, GECC is fully protected with respect to the 2 value of its liens which will attach to proceeds. 3 Under these circumstances, I do find that cause Neither will I
4 exists and will not permit the credit bid.
5 require an allocation prior to the sale as requested by GECC. 6 The debtor has agreed already to provide the list of assets. 7 So that part of the objection has become moot and therefore 8 what remains of the objection is overruled for those reasons. 9 I find otherwise that with respect to the proposed
10 bidding procedures, especially in light of support of the 11 Committee and the resolution of the objection of the U.S. 12 Trustee and of others that they provide an appropriate basis to 13 frame the auction. I conclude that the breakup fee and expense
14 reimbursements specifically are of value to the estate and meet 15 the administrative expense priority required by OBrien and in 16 part help frame the bidding and auction procedures, all to the 17 value and benefit of the estate. So Im prepared, upon
18 submission of the appropriate order under certification 19 accompanied by a final form of APA, to approve the bidding 20 procedures. 21 22 right. 23 Are there any questions about that ruling? I hear none. Im sorry. Yes, Your Honor. On the allocation All
MR. GALLERIZZO:
24 issue, we do plan to come back in response to the sale motion 25 and raise that issue again. Can I ask the Court to indulge us
85 1 to raise it once again if I could? 2 THE COURT: I dont think you need my indulgence.
3 Todays ruling was with respect to bidding procedures only -4 5 MR. GALLERIZZO: THE COURT: Okay.
-- and was not intended to be with
6 prejudice to any ground for objection you might have with 7 respect to the sale. 8 9 10 MR. GALLERIZZO: THE COURT: MS. UHLAND: Yes, Your Honor.
All right. Your Honor, I think the only remaining
11 matter is one of setting two dates for possible sale hearings. 12 One is if there is an auction and one if theres not. 13 THE COURT: Okay. If Carrington is the only bidder,
14 youre requested a hearing of May 21st or 22nd. 15 MS. UHLAND: No, if there is -- if theyre the only
16 bidder, we ask for May 18th. 17 18 19 THE COURT: MS. UHLAND: THE COURT: Eighteenth. Which I believe is a Friday. Its Friday. May 18th at 10:00. By the Does
20 way, I did not ask, but Ill do so for the record now.
21 anyone have an objection to structuring the sale hearings in 22 that matter? I hear no response. Okay. I didnt mean to
23 foreclose anyone from commenting on that. 24 MS. UHLAND: And then weve requested the 21st which
25 should be a Tuesday. J&J COURT TRANSCRIBERS, INC.
86 1 2 3 4 5 THE COURT: MS. UHLAND: THE COURT: MS. UHLAND: THE COURT: No, thats a Monday. Its a Monday? Yeah. Okay. Yes.
And Tuesday the 22nd is booked.
Is Monday the 21st available? Well, the answers yes, but I need to be I need
6 out of here -- I would set the hearing for the morning. 7 to be out of here by 1:00 in the afternoon. 8 MS. UHLAND:
And then if it were -- if we didnt
9 finish then, for some reason, it would be continued to 10 Wednesday or is the -11 THE COURT: No, I have four trial days, full trial I guess -- well,
12 days scheduled the 22nd through the 25th. 13 well do one of two things.
Well either come back later in
14 the day on the 21st or somehow squeeze you in, you know, within 15 the next couple of days after that. 16 17 18 MS. UHLAND: THE COURT: MS. UHLAND: Thank you, Your Honor. So at 10:00 Monday, May 21st. All right. Well fill those dates in in
19 the order that were submitting. 20 21 THE COURT: MS. UHLAND: All right. Other -- oh, Your Honor may need to Double
22 track back the proposed objection deadlines as well. 23 check. 24 25 We had May 15th as the proposed objection -THE COURT: MS. UHLAND:
Well, the auction was going to be -Oh, sorry.
87 1 THE COURT: -- April, now its going to be May 16th.
2 Do I have that correct? 3 4 5 MS. UHLAND: THE COURT: MS. UHLAND: Yes, Your Honor. And you propose as an objection -Objections to the sale would be due the
6 day before the auction. 7 8 9 10 11 MS. UHLAND: THE COURT: MS. UHLAND: MR. POWER: Does that make sense? What? Oh, you want to do it earlier?
Your Honor, could we have one second? (Pause) All right, Your Honor, wed like to
12 revise and have -- and well again conform the order, to 13 provide that objections other than those to adequate assurance 14 be due May 14, so its a little bit earlier. And that adequate
15 assurance objections due May 17th which would be after the 16 auction. 17 18 19 THE COURT: MS. UHLAND: THE COURT: Yeah. 4:00. Now, I want to have all the papers in Say by 4:00?
20 hand prior to the hearing on the 18th, say by 8:30. 21 MS. UHLAND: We will have that completed, Your Honor. If theres
22 Well, at least from the -- all the papers we can.
23 no auction and then the hearing is on the 18th, theres a -- at 24 4 p.m. the day before we would still be getting the adequate 25 assurance objections. So anything other than that we could
88 1 have to the Court by 8:30. 2 3 hearing. 4 5 MS. UHLAND: THE COURT: Oh, okay. I need more than 10 minutes, thats all THE COURT: No, I meant 8:30 on the morning of the
6 Im saying. 7 MS. UHLAND: Well make sure that happens. I think Again,
8 thats it on this matter on the calendar, Your Honor.
9 were going to work to submit -- before I speak too quickly, 10 let me make sure that Ive covered everything. 11 12 THE COURT: Okay. Your Honor, Tom Kiriakos again on
MR. KIRIAKOS:
13 behalf of Carrington. 14 have.
If I can point out an issue that we
The APAs going to have a drop dead date which is pegged
15 in terms of at least clearing a number of days from the entry 16 of the sale order to the expiration of the appeal period. And
17 if, on May 21st, which is really the hearing date -- May 18th, 18 while hopefully will be perfunctory because well be prevailing 19 bidder and there wouldnt have been a topping bid, so there 20 arent going to be the number of objections, et cetera, you 21 would assume, is probably a workable date and time. 22 If there are -- if there is an auction and competing
23 bids and everything else, May 21 has a much more likely 24 situation for a hearing that goes beyond those days. So if we
25 could ask that what those additional days might be so we can J&J COURT TRANSCRIBERS, INC.
89 1 then look at the date we have for the termination date and at 2 least move it out so going in we havent structured something 3 that doesnt work, Id be appreciative. I dont know if Im
4 making our problem clear enough on the record or not. 5 THE COURT: Well, no. Is what I had initially
6 thought was that we squeeze it in sometime before, during, 7 after the trial sessions -8 9 10 MR. POWER: THE COURT: MR. POWER: Right. -- in the remainder of the week. I understand. I know thats the goal. But just in the event
11 And we appreciate the accommodation. 12 that we dont get there. 13 THE COURT:
Are you asking me what day the following Or are you telling me something
14 week I might carry it over to? 15 else? 16 17 18 19 20 21 22 23 MR. POWER: THE COURT: MR. POWER: THE COURT: MR. POWER: THE COURT: MR. POWER: MS. UHLAND: No --
Dont be shy. No, Im asking you that, Judge. Well, it wouldnt be Monday, the 28th. Right. We could do 10:00 on the 29th. Thank you, Your Honor. Thank you, Your Honor. Very much. So our proposal
24 would be to bring the agreed order today back to the Court and 25 it will be available to sign that. We do have an issue of
90 1 getting our noticing out for this. 2 THE COURT: Yeah, I have an internal meeting sometime I have the hearing at three. Ill be
3 between now and three.
4 here, Im guessing, at least until four. 5 6 MS. UHLAND: THE COURT: All right. And if youre -- you know, but if youre I might stay. Your
7 going to have something in at 4:05, let me know. 8 MS. UHLAND: All right.
Thank you, Your Honor.
9 Honor, with the balance of the agenda, what we propose to do is 10 continue the hearing on the loan origination platform to next 11 Tuesday at 10 a.m., which is Item 3. 12 THE COURT: All right. All right. And then the remaining matter for today, The 24th at 10. No, it will
13 be the 24th at 2:30. 14 MS. UHLAND:
15 Your Honor, is a portion of the employee matter that remains 16 from -- our employee motion that remains from last week with 17 respect to participants in our pre-petition commission, bonus 18 replacement plan with titles of senior vice-president and 19 above. 20 21 22 THE COURT: MS. UHLAND: THE COURT: Whats left? That is left. Also, Your Honor --
Well, what of that -- what of the relief
23 requested remains? 24 MS. UHLAND: Theres two items, one of which wed Or one of them wed like to proceed
25 like to continue today.
91 1 with as soon as the Court is available. I dont know whether
2 we want to take a lunch break and go forward, but what remains 3 is with respect to the pre-petition portion thats payable 4 post-petition of what we refer to as our wholesale retention 5 plan for six employees who are paid compensation on a quarterly 6 basis; five with the senior vice-president title and one with 7 an executive vice-president title that were parties to that 8 plan. 9 The debtors would like to come today. We have a
10 witness here today and more detailed factual basis to walk 11 through two elements; one -- two reasons that they do not fall 12 under 503. One is the ordinary course basis of their And second, the absence of
13 compensation pursuant to this plan.
14 insider status by these six individuals notwithstanding their 15 titles. So we have a further factual showing to make to
16 address the Trustees objection to our wage motion to require 17 us -- or to object to those payments to the extent prohibited 18 by 503. The Committee had already agreed to those payments.
19 So thats the balance of that issue. 20 Wed also agreed to put off a second part of our
21 production, that same adoption of that plan, which is the post22 petition portion of that plan. The plan is also in effect for We are --
23 April for those employees for payment in May.
24 reserve our right with respect to whether Court approval is 25 required for those, what we believe are ordinary course J&J COURT TRANSCRIBERS, INC.
92 1 compensation. But were hoping to continue to work with the
2 Committee so we dont need to litigate that issue and we can 3 just have it pursuant to an agreed order. 4 As of 12/20, my understanding is the Committees not Oh, Your Honor, may have one
5 yet ready to have a resolution? 6 moment on that issue.
Oh, and Im sorry, Your Honor, perhaps
7 we can take a -- we could take a brief break during -- while I 8 confer with Committee counsel. I understand that the Court
9 requested a scheduling on the motion for the Committee with the 10 deferred compensation claimants and theyve asked to be heard 11 ahead, if thats okay with Your Honor. 12 13 THE COURT: MR. HUSTON: Thats fine. Good morning, Your Honor. May it please
14 the Court, Joseph Huston of Stevens Lee on behalf of the 15 movants in Docket Item 307 which is an emergency motion for an 16 order directing the U.S. Trustee to appoint a separate 17 committee for certain deferred compensation claimants. 18 moved -- also move the Court to expedite that limit in 19 shortened notice. Our requested dates were to try to hook it And we
20 onto the omnibus date of next -- of April the 24th and chambers 21 called and asked if we would show up today to discuss that. 22 Our co-counsel, Robert Keach, whom I believe Your
23 Honor knows and has granted pro hoc status is on the telephone 24 and I think its appropriate for him to take the lead assuming, 25 of course, that Your Honor doesnt have -- first have questions J&J COURT TRANSCRIBERS, INC.
93 1 for us to address. 2 3 4 5 THE COURT: MR. HUSTON: THE COURT: MR. HUSTON: Not first. Youre first. I said I do not have questions first. Oh, okay, fine. Did you have an idea
6 about -- in terms of scheduling, sir? 7 THE COURT: Well, let me first ask whether the U.S.
8 Trustee cares to be heard on this request. 9 MR. HUSTON: And, Your Honor, so its clear, I think
10 it was in our motion, but we have been talking with the United 11 States Trustee and we wish to continue to talk with the U.S. 12 Trustee and other parties-in-interest. But just because of the
13 trajectory of this case, were concerned that if we didnt get 14 something teed up, ready to be moving on now, that we would end 15 up having completely missed the train down the line. 16 17 18 Shur. 19 20 THE COURT: MR. KEACH: All right. And, Your Honor, Robert Keach, Bernstein
I am on the phone for the named beneficiaries. THE COURT: All right. Your Honor, good afternoon. Jim
MR. MCMAHON:
21 McMahon for the U.S. Trustee.
Your Honor, we do not oppose We just ask that the
22 expedited consideration of the motion.
23 objection deadline be set at a time, I believe the requested 24 date was the 24th. To the extent that it will be heard on the
25 24th, wed like the objection deadlines set perhaps on the 23rd J&J COURT TRANSCRIBERS, INC.
94 1 at 4 p.m. I dont know whether the debtors or other parties
2 here have a position with respect to scheduling. 3 MR. HUSTON: And, Your Honor, that was also our
4 proposed objection deadline, 4:00 on the 23rd. 5 6 heard? 7 8 Committee. MR. POWER: Yes, Your Honor. Mark Power for the THE COURT: All right. Does anyone else care to be
Your Honor, we do object to the expedited hearing Quite frankly, weve gotten some documents in
9 on this matter.
10 the last couple of days which set forth what we think is the 11 claim or position of the -- in essence, the trustee for this 12 group. This motion requires some discovery because as far as
13 we can tell, this is really simply one creditor arguing its 14 position in this case as opposed to a group of creditors which 15 need representation as a group. 16 But that issue needs to be vetted factually before we So we would ask that the
17 can basically hear by this Court.
18 Court not set the hearing for Tuesday because, quite frankly, 19 were not going to get it done. But simply set a hearing a
20 little further out, give us some time to have discovery on that 21 issue and well try to do that expeditiously. And quite
22 frankly, the movant here can -- it has the right to be heard 23 and anything that comes up in the next four days, well, the 24 next -- until the hearing is set, that movant can be heard as a 25 creditor of the estate. J&J COURT TRANSCRIBERS, INC.
95 1 But at this stage, Your Honor, were just telling you
2 that Tuesday is really productive given the factual issues that 3 are involved in this motion. 4 THE COURT: What would you suggest in the way of a
5 time frame? 6 MR. POWER: Well, we were thinking something in the
7 two week range to get documents and basically understand 8 further the parties claimants -- claims and then schedule the 9 hearing in that range. There is a date of May 7, going off Theres also May 15
10 memory, Your Honor, that is in this case. 11 although that may have to be adjourned.
But something in that
12 range I think would be a fair compromise to give us a chance to 13 look at the facts and at the same time, make sure that this 14 party is not waiting for a long time for the motion to be 15 heard. 16 17 THE COURT: MR. KEACH: Does anyone else care to be heard? Your Honor, Mr. Keach for the
18 beneficiaries.
We have laid out our position in the motion.
19 We do think that, as a number of parties have commented today, 20 this case is proceeding at lightening speed and the 21 beneficiaries do feel as if they will be left at the station on 22 a number of issues if we cant proceed quickly. 23 24 Committee. Were certainly willing to cooperate with the Ive had one conversation with Committee counsel
25 and supplied any information they wanted about the beneficiary J&J COURT TRANSCRIBERS, INC.
96 1 group and the statistics relating thereto. And we certainly
2 would authorize the debtor to provide information in this 3 respect as well. But waiting until May 7th on this issue seems
4 longer than is necessary to resolve the factual issues that the 5 Committee raises. 6 7 THE COURT: MS. UHLAND: Debtor care to be heard? Your Honor, on this matter were going
8 to be deferring to the Creditors Committee both as to timing 9 and substance. 10 11 THE COURT: MR. HUSTON: All right. Your Honor, on the one point about that In the footnote 3 to our -- to
12 this is only a single creditor.
13 the substantive motion, it recites that as of April the 9th, if 14 you will, the primary movant, Mr. Schroeder, had been contacted 15 by over 70 former employees. There are 570 people potentially
16 going to be affected by this, all under one of two plans that 17 are virtually the same. So this is not just a one-off issue. So I dont want to
18 Its going to affect a number of people.
19 minimize the -- minimize or maximize where we are today on 20 this. 21 THE COURT: Well, how would you describe I guess the
22 overall interest of your clients in connection with the speed 23 with which youd like the matter to be heard? I mean, what
24 between now and May 7th would your clients suffer in the way of 25 prejudice if -J&J COURT TRANSCRIBERS, INC.
97 1 MR. HUSTON: I can answer that, but I think Id defer
2 to Mr. Keach to do that. 3 4 THE COURT: MR. KEACH: All right. Mr. Keach. Robert Keach Bernstein
Yes, Your Honor.
5 Shur for the beneficiaries.
First, let me just contribute a The -- this has
6 couple of facts to what Mr. Huston just said.
7 been somewhat of a moving target as the beneficiaries get 8 further information about the case, Your Honor. But we have
9 actually had email contact with now over 125 potential 10 beneficiaries. We think that there are approximately 575
11 beneficiaries with total contributions into the deferred comp 12 plans in excess of $40 million. 13 We also understand but have not been able to confirm
14 that the amount of those contributions affect the funds 15 respecting those contributions are in a separate account being 16 managed by the designated trustee under the deferred comp plan, 17 but we dont know that. 18 We also, Your Honor, dont know whether or not the
19 notice contemplated by the Rabbi Trust arrangement which would 20 direct that trustee to hold those claims for others than the 21 beneficiaries has or has not been sent. 22 So one of the things we want to be able to do
23 immediately is move Your Honor for an order either continuing 24 or causing the segregation of those funds so that they cannot 25 be accessed by the debtor or by anyone else during the J&J COURT TRANSCRIBERS, INC.
98 1 litigation over these matters. 2 The interest of these beneficiaries is in asserting,
3 Your Honor, that those funds belong to the beneficiaries and 4 theyre not available for anyone else. If we are not able to
5 prevail on that issue, then the beneficiaries as a whole 6 constitute one of the larger creditor groups, at least one of 7 the larger creditor groups with a known non-contingent claim. 8 And we therefore have an interest in maximizing the value of 9 this estate for the benefit of unsecured creditors. And
10 particularly, maximizing the liquidity of the estate for the 11 benefit of unsecured creditors. 12 And as Your Honor already knows, a lot is happening
13 with respect to the sale of these assets and otherwise during 14 the time frame that were discussing -15 THE COURT: And Im trying in my mind to connect the
16 necessity to have the hearing on April 24th with whats 17 transpiring. 18 And I cant make the connection. Well, I think, Your Honor, we have in
MR. KEACH:
19 many respects the same interests as the Committee -- as the 20 Official Committee does, in seeing that the various matters go 21 forward towards the direction of maximizing the estates for the 22 benefit of the unsecureds. And its certainly possible that
23 provided that we are informed and can weigh in on an individual 24 basis that we could push this matter beyond the 24th. And then
25 perhaps, if the Committees willing to share information with J&J COURT TRANSCRIBERS, INC.
99 1 us with respect -- and I think the indications early on were 2 they were -- that we can accommodate their needs to get 3 additional information. 4 And if the 7th is the first day we can get to that,
5 Im sure, with some accommodations to keep this group in the 6 loop and permit us to have an affective voice, we can probably 7 accommodate that request. 8 THE COURT: Im going to set it for May 7th.
9 Frankly, I -- before taking the bench, I had contemplated 10 setting it even later date since there was nothing that told me 11 that -- I havent heard anything today to say theres something 12 on the verge a bad thing happening that needs to you to be 13 formulated if thats what I ultimately ordered before then. 14 But, you know, I remember when everyone started to use FedEx. 15 All of a sudden we forgot regular mail. 16 technologys advanced beyond that. 17 case is moving quickly. Of course,
And I acknowledge that the
But that doesnt mean everything has And I think May 7th will
18 to move with breakneck speed.
19 probably give everyone enough time to sort through some of 20 those issues and maybe come to the necessary accommodations. 21 In any event, I can either mark up the order thats
22 been submitted or you can give me a new one if you like. 23 24 25 order? J&J COURT TRANSCRIBERS, INC. MR. HUSTON: MR. POWER: At your pleasure, sir. Your Honor, may I have one just for the
100 1 2 THE COURT: MR. POWER: Yes. We actually agree with movants on one
3 issue which is that I think may -- in order to avoid litigation 4 and coming back, why dont we consent to a freezing of the 5 status quo with respect to these funds basically until that 6 hearing date. Were okay with that arrangement assuming
7 movants -- the last thing I want to do is have some kind of a 8 TRO in the pending period. And we understand that just as long
9 we freeze things where they are today, that well basically 10 come to the Court on the 7th and then see what we do with the 11 motion. 12 THE COURT: All right. Does the debtor have any
13 problem with that? 14 15 MS. UHLAND: MR. HUSTON: No, Your Honor. Well, Your Honor, do you want us to
16 massage the order a little bit and put that in? 17 18 THE COURT: MR. HUSTON: I think so. And an objection date? Is that
May the 7th, I cant remember.
19 a 10:00 hearing? 20 21 22 me. 23
I know its on only one item, I believe. Its a 10:00 hearing, 10:00 hearing. And I dont have my little Gameboy with It would be -Its going to make
THE COURT: MR. HUSTON:
What day of the week is that, sir? THE COURT:
Seventh is a Monday.
24 April 30th the response date? 25 MR. HUSTON: Very good, sir. And I would like to
101 1 thank the Court and all the parties here for letting us hop in 2 and get this disposed of. 3 4 5 Honor. 6 7 8 9 10 11 12 briefly? THE COURT: MR. KEACH: And with that, may we be --
Always good to see you, Mr. Huston. Mr. Keach for the beneficiaries, Your
I pass along similar thanks for the indulgences. THE COURT: MR. HUSTON: THE COURT: MR. HUSTON: MR. KEACH: Youre welcome. And may we be excused until -Yes. Thank you. Thank you, Your Honor. Your Honor, may I address the Court
MR. RALSTON:
Mark Ralston of Munsch Hardt Kopf and Harr on behalf
13 of one of the objecting parties to the motion to approve bid 14 procedures as to the loan origination platform. We filed a
15 substantial objection yesterday afternoon, was not aware that 16 this was going to be continued today. 17 18 THE COURT: Me neither. Yes. And thats part of my problem, I understand that now --
MR. RALSTON:
19 Your Honor.
The cost and expense to my client having me fly up
20 here for the evening and then just to find out that theres 21 nothing going on substantively is rather upsetting, will be 22 upsetting to my client. 23 We would request that -- I dont know what the I understand Tuesday at 10:00 is
24 Courts agenda is on Tuesday. 25 the reset hearing date.
Wed just request that the Court
102 1 consider whether there is sufficient time to have this matter 2 heard and if not, maybe suggest an additional date. 3 4 THE COURT: Its 2:30. Its on at 2:30. And because we have a
MR. RALSTON:
5 substantial objection to this and its going to take some time 6 and I wanted to make sure that the Court was apprized of that 7 for its purposes and to try to limit costs to my client. 8 THE COURT: Well, I can tell you the courtroom will
9 be in use beginning at its either 5 or 5:30. 10 MR. RALSTON: Okay, Your Honor. Well, thats -- we Also, if I
11 have three hours.
I think we can get a lot done.
12 would -- I would request that if theres -- if maybe not, Your 13 Honor, maybe well work a resolution between now and then, that 14 if there is going to be an additional continuance request so 15 that the hearing doesnt go forward, I would appreciate the 16 courtesy that someone with the debtor or other party contact me 17 before I take the trip up. 18 THE COURT: Im certain that every effort will be
19 made to accommodate your situation. 20 MR. RALSTON: Thank you, sir. Appreciate it. May I
21 be excused? 22 23 THE COURT: MS. MERSKY: Yes. Your Honor, Rachel Mersky of Monzack and
24 Monaco on behalf of RBC, also in connection with the loan 25 platform business. While were here today and didnt know J&J COURT TRANSCRIBERS, INC.
103 1 definitively until that would be -- that that would continued 2 until Tuesday, that is not as much our concern as on Tuesday, 3 we understand now that the extent of the assets being sold may 4 be substantially limited such that it might not apply at all to 5 the issues raised by my client. And we just want to make sure
6 that there is adequate notice if, in fact, the platform 7 business is reduced and will no longer include whole portions 8 of the business, that that be formally noticed with enough time 9 so the parties do not have to unnecessarily appear or have co10 counsel appear. 11 MS. UHLAND: Two things, Your Honor. First, I do
12 apologize on the timing on the continuance.
The debtors and
13 the Creditors Committee were in discussions until late 14 yesterday on this matter and still trying to resolve those 15 issues. 16 With respect to both of the prior objections, they
17 may be rendered moot to the extent the debtors scaled back what 18 theyre proposing to sell. We will endeavor by, say, 9 a.m.
19 eastern time Monday morning to identify if theres a reduction 20 in the assets for sale, to possibly avoid both of those 21 objections. 22 THE COURT: All right. I am going to take a break Any notion in terms of timing
23 before we begin the next matter. 24 what you anticipate? 25 MS. UHLAND:
How many witnesses do you have and -One witness and argument and then the
104 1 United States Trustee objection. I would like to put on the
2 record the results of my conversations with the Creditors 3 Committee so we can provide the Court with an update on that 4 before we break. And then I dont know -- I would assume that
5 a half an hour would be adequate for that portion of the 6 hearing. 7 MR. MCMAHON: Your Honor, Id be surprised if any
8 cross examination that we would have would take more than three 9 to five minutes. 10 11 THE COURT: MS. UHLAND: All right. Thank you.
Your Honor, with respect to the prior --
12 we sort have sort of a temporal issue with the Creditors 13 Committee and a ranking issue with the United States Trustee 14 with respect to this matter. And our prior entered order
15 indicated an order with respect to the payments in April for 16 the pre-petition period. We believe we have an agreement with
17 the Creditors Committee with respect to the April payments, the 18 payments for the April period to be paid in May under certain 19 conditions similar to those that we agreed to with respect to 20 the March payments paid in April. 21 That is part of a global agreement that were -- or
22 settlement that were working on them with respect to both the 23 sell of the loan origination platform and with respect to that 24 compensation matter. We would hope to submit -- we had hoped
25 to submit both agreed orders on the loan origination and J&J COURT TRANSCRIBERS, INC.
105 1 employee matter, but if theres pending objections to the loan 2 origination, you know, well be submitting, you know, a 3 proposed order and hopefully an agreed order on the employee 4 matter, submitting that probably before the hearing on next 5 Tuesday. 6 7 8 THE COURT: MS. UHLAND: MS. FATELL: Okay. Is that accurate? Good afternoon, Your Honor. Bonnie
9 Fatell for the Creditors Committee. 10 out a little bit.
Just wanted to round that
The piece that is being asked to be paid to
11 the employees goes to the employees who otherwise would have 12 been earning commissions if they could originate loans during 13 this time period. And we appreciate that its important to
14 keep those people in place so that we can try and maximize the 15 value for the loan origination platform. Were also balancing
16 that with the -- all of the costs to run that platform or keep 17 it in place in the event -- until the sale process, but also 18 trying to determine if, in fact, the sale process will be 19 successful and maximize value. 20 21 together. So, were balancing those. Were trying to tie that
Preliminarily the Committee has agreed to the
22 payment subject to our final agreement on all of the bid 23 procedures. 24 25 THE COURT: MS. UHLAND: All right. Anything else before break?
Thats it, Your Honor, for now.
106 1 2 at 1:15? 3 4 5 recess. 6 7 MS. UHLAND: (Recess) Good afternoon, Your Honor. To MS. UHLAND: THE COURT: That sounds appropriate, Your Honor. All right. The court will stand in THE COURT: Okay. Im thinking we should reconvene
8 reiterate the matter were addressing today with respect to the 9 employee motion is the following. The debtors had filed a
10 motion at the commencement of the case with respect to their 11 pre-petition wages and in that regard, requested that certain 12 pre-petition wages be paid in accordance with the debtors 13 adopted policy to address the commission replacements program. 14 At the conclusion of the hearing, the Court left open
15 to address at a later date, which we will address today, the 16 payments of those pre-petition wages with respect to, as it 17 turns out, six individuals. In essence, the Court ruled that
18 those were the title of senior vice-president or higher should 19 be -- we want to -- you know, a further factual showing with 20 respect to the compliance of the debtors proposal with Section 21 503 of the Bankruptcy Code. 22 THE COURT: Well, strictly speaking, there were two And I dont -- I think what I
23 individuals identified before.
24 said was I deny without prejudice, at least the request with 25 respect to those individuals. So its not six not two.
107 1 2 3 MS. UHLAND: THE COURT: MS. UHLAND: Yes. Okay. There was the -- we knew for certain
4 that the, quote, unquote, highest ranking were one senior vice5 president who is in charge -- the senior vice-president for the 6 debtors consumer direct business and the executive vice7 president in charge of the wholesale production. In addition,
8 there are four senior vice-presidents who report to the 9 executive vice-president. So there are a total of six as the
10 total number of senior -- so five senior vice-presidents, one 11 executive vice-president in the program. 12 13 THE COURT: MS. UHLAND: Okay. Your Honor, what we would like to do
14 today is first to discuss the nature of those parties 15 participation of the effect of the current plan, as I said, who 16 named a wholesale retention plan by the debtors pre-petition, 17 although we do not believe that it is a retention plan. And to
18 walk through the mechanics as to who those plans apply to the 19 compensation for these six individuals who have paid on a 20 quarterly basis with respect to the payments covered by -- that 21 we are discussing here. 22 And second, walk through the factual showing with
23 respect to what those employees, in fact -- their legal or 24 their assigned duties in the corporation and contract those 25 with the assigned duties and responsibilities of others who we J&J COURT TRANSCRIBERS, INC.
108 1 admit are officers and insiders of the corporation. 2 THE COURT: Okay. Before you do that, let me just
3 reconfirm with the U.S. Trustee the extent of her objection. 4 If I recall correctly, was this a Ill put the debtor to its 5 proofs objection or is it more specific than that, Mr. 6 McMahon? 7 MR. MCMAHON: Your Honor, Joseph McMahon. Consistent
8 with the position that we talked at the last hearing, we 9 believe that these payments fall within the ambient of 503(c) 10 meaning that they do have primarily a retentive purpose. 11 12 THE COURT: So (c)(1)? Thats correct. And also, again,
MR. MCMAHON:
13 consistent with the position that we took at the last hearing, 14 these persons constitute officers and by extension, insiders as 15 such that they would not be eligible to be paid under that 16 subsection. 17 THE COURT: All right. Thank you. All right. Am I
18 to understand that its the debtors position that these are 19 not 503(c)(1) payments? 20 MS. UHLAND: Yes, our position is they are neither
21 insiders -- the effected individuals are neither insiders nor 22 are they retention payments. 23 THE COURT: And if I were to find that the payments
24 were subject to the 503(c)(1) standards, is it the debtors 25 position -- well, Ill say it another way. I take it its the
109 1 debtors position that it could not been those standard? 2 havent said that, but Im supposing that to be the case. 3 am I wrong about that? 4 MS. UHLAND: Your Honor, I do not believe we can meet You Or
5 the standards, particularly with respect to all the individuals 6 with respect (c)(1)(A). 7 8 THE COURT: MS. UHLAND: Okay. Proceed.
Your Honor, prior to my proffer, Id
9 like to walk through, just because I think it helps to frame 10 it, the -- revisit the terms of these plans and then Ill 11 support that in the proffer. 12 The six individuals at issue, as we discussed in
13 prior hearings on this, receive substantial portion of their 14 payment in discretionary or bonus compensation. Partly, their
15 -- these bonus or quarterly payments that they receive are 4 to 16 500 percent of the base salary that theyre paid. 17 With respect to these individuals, their quarterly
18 payment is targeted each quarter and they are paid in recent 19 months, or recent years, have received 90 to approximately 120 20 percent of their target bonus based on discreet performance 21 criteria. 22 In prior quarters, the way that this performance They were
23 criteria payment was calculated was as follows.
24 established, as I said, fixed criteria based on quantifiable 25 factors prior to the quarter. And after the close of the
110 1 fiscal quarter, the debtors would finish their financial 2 reconciliations and pay the appropriate amount with a time lag 3 as appropriate for the performance of the prior quarter. 4 When the debtors ceased loan origination in -- on
5 March 10th, they were 10 weeks into their 13 week fiscal 6 quarter. And the debtors determined with respect to these six
7 individuals, in lieu of a proposal to have the percentage 8 determined after the close of the quarter, since many of the 9 performance criteria were no long applicable, that in 10 accordance with their -- they made a policy determination to 11 fix, for those -- these six individuals, their compensation at 12 75 percent of their target bonus. This was in effect the
13 temporal proration of the time period where the debtors were 14 originating loans during the fiscal quarter. 15 The payment, timing of the payment based on prior In other words, the payment
16 experience was to be consistent.
17 was not going to be received for the quarter until after the 18 close of the fiscal quarter. This has created the issue, and
19 why it was included in our pre-petition motion, is that we were 20 seeking post-petition to pay for wages earned pre-petition. 21 But in essence, again, with respect to these
22 employees, the sole impact of the, quote, unquote, retention 23 plan was an incorporated sentence in there that stated with 24 respect to these quarterly employees -- or the quarterly 25 bonused employees are that they would get this determination of J&J COURT TRANSCRIBERS, INC.
111 1 the 75 percent in advance of the close of the fiscal quarter. 2 Based on that understanding and factual underpinning
3 of what this policy decision was, we do not believe that this 4 short-term -- if it could be called an incentive plan or policy 5 decision is something that falls within the retention programs 6 that are covered by Section 503. And we think that Judges --
7 Judge Grosss decision in Global Home Products, which drew a 8 distinction between 503 plans and ordinary incentive plans or 9 compensation plans that went into the debtors -- by the debtors 10 pre-petition provides guidance here. 11 THE COURT: But isnt -- I mean, havent you just
12 described an adjustment that was made out of the ordinary 13 course of business while -- even if everyone were to concede 14 that -- Im not asking the U.S. Trustee to acknowledge this, 15 but even if we were to concede that such plans could exist in 16 the ordinary course and would not be subject to 503(c) scrutiny 17 or standards, havent you just described a situation in which 18 its absolutely outside the ordinary course? 19 MS. UHLAND: I think setting compensation policy to
20 address performance is not outside the ordinary course of the 21 debtors business. 22 THE COURT: Not generically. Thats -- well concede But even given
23 that point for purposes of this discussion. 24 that, thats not what happened here. 25 MS. UHLAND:
Well, and then I suppose further, Your
112 1 Honor, what I would state is if the policies had an existing 2 provision that expressed -- that addressed the proration issue 3 prior to the decision to adopt such a proration -- you know, if 4 the debtors had thought ahead, that that could have been 5 incorporated. But the plan was silent with respect to what to
6 do if there was an appropriate determination under certain 7 circumstances that, you know, perhaps because of what was going 8 on in the companys business, you should prorate. 9 THE COURT: Well, lets talk about that for a minute.
10 And I know -- Im pretty sure at the last hearing we went 11 through this time line and Im sure its in the first day 12 affidavits. But among the pre-petition events, like the
13 company acknowledging it needed to restate earnings and a 14 commencement of an FCC investigation and subpoenaed by the U.S. 15 Attorneys office and the commencement of class actions, give 16 me just the general time frames during which they occurred. 17 MS. UHLAND: Your Honor, so the compensation were The debtors
18 talking about is for January, February and March.
19 announced the restatement on February 7th and that had, you 20 know, some disruption. That caused civil litigation. On March
21 2nd, the debtors announced the FCC investigation and the 22 further restatement. And the debtors, on -- trying to think it
23 was -- I believe it was March 12th is when the debtors ceased 24 originating loans and thereafter again, so 10 weeks into this 25 13-week cycle, it as at that point that the debtors adopted the J&J COURT TRANSCRIBERS, INC.
113 1 plan with respect to the commission-based account executives 2 that we talked about before, constructing a commission 3 replacement. But with respect to these employees, again, it
4 was simply a -- in fact, a reduction in fixing other 5 performance targets for the balance of the fiscal quarter. 6 THE COURT: Now, the restatement was announced on
7 February 7th.
And theyre -- understand the question Im about
8 -- the answer to the question Im about to ask may have other 9 ramifications. And if you choose, at least today, not to But when did the company become
10 answer it, I will understand.
11 aware that it was going to have to restate earnings for those 12 three quarters? 13 MS. UHLAND: Unfortunately I dont know the answer to
14 that question, so. 15 16 7th. THE COURT: It had to be sometime prior to February
Maybe it was a day, maybe it was a month, maybe it was I dont know. But I guess my point is, it seems
17 longer.
18 likely to me that during virtually the entire period that this 19 compensation right would have accrued, nothing was in the 20 ordinary course. 21 22 MS. UHLAND: THE COURT: Well, Your Honor -Maybe thats an overstatement, but you
23 understand what I mean by that. 24 MS. UHLAND: I think that if -- if the debtors
25 restatement was at the financial level which had to do with J&J COURT TRANSCRIBERS, INC.
114 1 the, what Ill call the capital markets side of the business, 2 what were talking about here was a plan to keep the loan 3 origination platform operating and then were talking about now 4 with these six individuals are the managers of the account 5 executives that deal with the wholesale loan origination 6 platform. 7 So that, you know, one, I mean, these individuals
8 certainly would have had no knowledge of anything with respect 9 to the restatement before February 2nd. And their -- what
10 their performance criteria was in the loan origination aspect 11 of this with respect to the individual borrowers and brokers 12 with whom theyre working are not connected to their 13 performance criteria. 14 15 16 THE COURT: MS. UHLAND: THE COURT: Well -To the -- in the restatement issues. Thats a factor that might be important
17 to me, but I agree its different from the issue that I was 18 raising. And lets assume for the moment its true. It
19 doesnt mean the company was operating in the ordinary course. 20 I mean, things developed rapidly as they continue to do. And I
21 just wonder whether an adjustment thats made or a plan thats 22 adopted, while the things that were going on here were going 23 on, could under these circumstances and maybe not ever under 24 any circumstances be considered ordinary course. 25 point. J&J COURT TRANSCRIBERS, INC. Thats my
115 1 MS. UHLAND: Well, Your Honor, we -- I think that I dont think its any I think the question
2 theres two criteria in 503(c).
3 transaction outside the ordinary course.
4 is in the -- again, in the Global Home Products case, the 5 question is was the compensation, even if different than pre6 extraordinary circumstances compensation, was it primarily for 7 retention. And one of the factors considered, I mean, was it
8 a, quote, unquote, pay to se (phonetic). 9 And I think in this case, even though, as weve
10 discussed, not paying people at all certainly has the opposite 11 of retention effect, a dispelling effect, perhaps, on 12 employees. That if it is a plan or a policy that is, you know,
13 substantially identical to the plan previously used and adopted 14 and that it was not purely to induce the individuals to remain 15 through the emergence from bankruptcy, or in our situation, 16 through the emergence of their, you know, then -- at the time 17 they didnt think theyd be going into bankruptcy, I mean, just 18 a difficult period -- that it is not one that is within the 19 scope of 503(c). And that, therefore, because it was simply a
20 modification of their compensation system to address the 21 circumstances they were in, to be fair to the employees in 22 light of the changed business, that that does not propel it 23 into a retention plan. 24 THE COURT: Well, let me be as precise as I can. I
25 guess initially what I want to do is press the debtor, well, so J&J COURT TRANSCRIBERS, INC.
116 1 that I can focus in on what standard Im suppose to apply. 2 that follows from what section provides the basis for the 3 relief thats being requested. And I guess what Im, at least And
4 preliminarily thinking is that 363 just doesnt get you there 5 because its outside of the ordinary course. 6 Now, that doesnt mean that it limits you to relief I dont know, but
7 under 503(c)(1) and maybe its 503(c)(3).
8 thats -- to be clear, that seems to be the widest path for me 9 right now. 10 MS. UHLAND: Well, the payments, I mean, I believe
11 that in our initial motion is really made under 105. 12 THE COURT: Well, it was and I think I expressed some
13 scepticism at the time about that as a basis even given Maurama 14 (phonetic) and what the Supreme Court says 105 can be used for, 15 at least in that context. 16 MS. UHLAND: Well, I suppose, Your Honor, if 503
17 doesnt apply and Section 363 does apply and it is out of the 18 ordinary course of business, then we would submit that it does 19 meet the standards of 363 because its within the debtors 20 business judgment in the -- and weve conferred with the 21 Creditors Committee to make these payments and have their 22 support for making the payments, that its in the best interest 23 of the estate in order to do so. 24 THE COURT: Well, its outside the ordinary course. Now, you may argue that, well,
25 It doesnt fall into 503(c)(3).
117 1 okay, it doesnt matter because its business judgment standard 2 at least in your view in any event. 3 something different. I think maybe it means
Havent yet come to a view of how much
4 different because in terms of those plans which Ive been asked 5 to approve so far under this new provision, you know, I found, 6 at least what I think, was necessary on 503(c)(3) plans to get 7 the relief there. 8 Or not, as the case may be. I understand your position and Im
But, okay.
9 prepared to hear whatever else youd like submit in support of 10 the relief. 11 MS. UHLAND: Again, Your Honor, I mean, we believe
12 since the 75 percent would be effectively a temporal proration 13 of the amount of time that would be provided by the plan, it 14 was, in effect, with respect to these individuals that -- a 15 policy modification rather than adoption of a plan that were 16 out of 503(c) and that it -- you know, as a pre-petition plan, 17 would be exempt from 363 if we call it an assumption of a -- or 18 confirmation post-petition of a pre-petition transaction, that 19 we would submit we address also 363. 20 THE COURT: But see, even if you wanted to, as you
21 said initially when we talked about this, even if you wanted me 22 to use a critical vendor type of analysis, isnt that analysis 23 geared to keep vendors selling to the company? 24 that retention? 25 503(c)(1)? I mean, isnt
And if it is, arent you dragged back into
Im not -J&J COURT TRANSCRIBERS, INC.
118 1 2 MS. UHLAND: THE COURT: I mean, I -Im not trying to figure out ways not to
3 grant the relief. 4 5 MS. UHLAND: THE COURT: It -Im trying to be true to what Congress
6 wanted us to do. 7 MS. UHLAND: It is a -- I think that if we were
8 trying to say that true insiders -- and, like I say, Im going 9 to go forward and discuss the insider issue -- that, you know, 10 I think that there could be, if someone was trying to piece 11 together 105 and 363 to circumvent with respect to true 12 insiders, I could see, you know, that those -- that 13 intersection of things could be seen as a circumvention. But
14 here, and it may be primarily in reliance on the second point 15 here, I dont think there is a circumvention. 16 So, like I said, our primary -- and I think this is We want -- we raise this issue on the
17 sort of a -- the focus.
18 503 last time and again, I think one of our challenges has been 19 the nomenclature associated with the plan that raises the 20 question on the purpose. But, you know, our primary issue that
21 we wanted to discuss here today was the fact that we do not 22 believe that notwithstanding these titles, that these 23 individuals fall within the definition of insiders with respect 24 to 503(c). 25 We do understand that within the definition of J&J COURT TRANSCRIBERS, INC.
119 1 insider, it includes a quote, unquote, officer of the debtor. 2 But in the Courts construing that definition, initially with 3 respect to the preference litigation and more recently in the 4 CEP Holdings, LLC case that was cited, its out of the Northern 5 District of Ohio. 6 LEXUS 3305. I have a Lexus cite for you. Its 2006
The court adopted a similar rubric for determining
7 insider status with respect to 503. 8 9 10 11 MS. UHLAND: THE COURT: MS. UHLAND: Who was the judge, do you know? Its a three-named judge. (Pause) Thanks. Its Marilyn Shea-Stonum. In
12 connection with the preference analysis which was the primary 13 focus of the insider statute before the amendments, the courts 14 considered the closeness between the transferee and the debtor 15 and the degree of controller influence that, in that case, the 16 transferee would have exerted over the debtor and whether the 17 transaction was at arms length. 18 In connection with the analysis under 503, and
19 applying that similar rubric, the court in the CEP Holdings 20 matters indicated that to determine whether a person is a 21 person in control of the debtor or an insider should again 22 focus on the specific transaction at issue. In other words, it
23 should be, at least in part, considered whether the person is 24 in control over this -- the proposed plan, the compensation or 25 the formulation or control or input of the proposed J&J COURT TRANSCRIBERS, INC.
120 1 compensation or plan thats at issue here. And then employees
2 who do not exert such control should not be considered insiders 3 of the debtor. 4 THE COURT: Sounds like a very limited definition of Dont you agree?
5 insider for this purpose. 6 MS. UHLAND:
I would agree that is limited and I
7 think there are additional factors that should be considered. 8 Clearly, one of the factors that the courts are considered is 9 the title and the bylaws. But I think in addition to sort of
10 the narrow question of whether they had control of their 11 compensation, or the particular compensation and transaction at 12 issue, is the general control that these individuals have with 13 respect to the overall enterprise. 14 And we have prepared our proffer today to discuss the
15 roles of these individuals which are really focused on 16 managerial roles with respect to the loan origination platform 17 individuals, that they do not have ability to set corporate 18 policy with respect to New Century Mortgage, they do not 19 control the financial decisions of New Century Mortgage, nor do 20 they control their own compensation decisions. 21 So the -- I -- you know, our position is consistent
22 with this -- the CEP Holdings case which were citing for this 23 sort of more comprehensive view of assessing whether a named 24 officer is an insider, citing the NNI Systems case from the 25 District of Columbia, that the considerations include not only J&J COURT TRANSCRIBERS, INC.
121 1 the bylaws, but the function and responsibility of the 2 individuals with a focus on whether the individual, in 3 addition, had any control over the transaction at issue. 4 So we would propose, in the testimony were about to
5 proffer, to explain that the individuals that we are seeking 6 the approval for today are not insiders because, 7 notwithstanding their title, and notwithstanding the 8 possibility, although not the certainty, that they were, in 9 effect, board-appointed because we dont have the specific 10 resolutions for them, that we acknowledge it is a possibility 11 that there exists a board resolution appointing them to their 12 title, that they are not insiders by virtue of the limited 13 scope and focus of their job responsibilities in contrast with 14 the individuals that we do put forth as the insiders of 15 Mortgage and are not seeking to have these type of payments or 16 any other type of 503 payments made with respect to in this 17 case. 18 19 THE COURT: MS. UHLAND: You may proceed. Your Honor, I would like to proffer the Mr. Meolas here in the courtroom.
20 testimony of Anthony Meola. 21
Anthony Meola joined -- if called to testify, would Hed testify with respect to his current That he joined New Century
22 testify as follows.
23 position and background as follows.
24 in May 2006 as executive vice-president for production and he 25 serves in that capacity at New Century Financial Corporation J&J COURT TRANSCRIBERS, INC.
122 1 and New Century Mortgage Corporation. That he is responsible
2 for managing and expanding the companys national production 3 franchise, increasing productivity to enhance competitions, and 4 that his job responsibilities include setting policies with 5 respect to pricing, deployment of capital resources and 6 developing marketing strategies. 7 Mr. Meola would further testify that he is an active
8 participant of the executive management committee of NCF, the 9 parent company, which consists of the officers of NCF 10 implementing board policy and managing operating of 11 subsidiaries. He also sits on the financial committee, the
12 asset liability committee and the pricing committee and is a 13 voting member setting policy and governing. 14 He is the EVP of wholesale production and the six
15 individuals that were going to be discussing, the executive 16 vice-president in charge of wholesale production reports to Mr. 17 Meola. The senior vice-president in charge of consumer direct And the remaining four division managers
18 reports to Mr. Meola.
19 that have the senior vice-president title report to the 20 executive vice-president of wholesale. 21 Prior to joining New Century, Mr. Meola was executive
22 vice-president of Mortgage Banking Production for Washington 23 Mutual where he was responsible for directing retail, wholesale 24 and lending operations in the U.S. Mr. Meola has more than 19
25 years experience at the senior management level in the mortgage J&J COURT TRANSCRIBERS, INC.
123 1 industry. 2 He joined Washington Mutual in 2000 as the head of
3 loan servicing for the home loans, insurance and services 4 group. Previously, Mr. Meola was the chief operations officer
5 at PMC Mortgage responsible for all customer acquisitions, in 6 addition to marketing and service for all customer acquisition 7 channels. 8 Prior to joining PMC, he spent seven years at Citi
9 Corp Mortgage as a senior vice-president of mortgage 10 operations. 11 Mr. Meola is a member of the Mortgage Banker
12 Association, Residential Board of Governors, Chicago Public 13 Education Fund and has a Bachelor of Science degree from 14 Rutgers University. 15 Mr. Meola testified as follows with respect to the New Century
16 management of New Century Mortgage Corporation.
17 Mortgage Corporation is a wholly-owned subsidiary of NCF; that 18 it is managed by the executive management committee of NCF 19 which ultimately reports to the Board of Directors. 20 With respect to the compensation of all officers or
21 all individuals with titles of vice-president and above, both 22 at national New Century Mortgage Corporation and NCF, their 23 compensation is ultimately set by the compensation committee of 24 the Board of Directors of NCF. 25 Further, with respect to the loan origination J&J COURT TRANSCRIBERS, INC.
124 1 business of New Century Mortgage Corporation, which is one of 2 the businesses of New Century Mortgage Corporation which also 3 includes the servicing business which is not at issue today, he 4 would testify that the following individuals exert primary 5 operating control over the loan origination business: Brad
6 Morrice who is vice-president of NCF, he is CEO and president 7 of both NCF and New Century Mortgage Corp; Taj Bindra who is 8 executive vice-president and chief financial officer of both 9 New Century Mortgage Corporation and New Century Financial; 10 Robert Lambert who is the senior vice-president of leadership 11 and organizational development, effectively in charge of all 12 human resources matters at both New Century Mortgage 13 Corporation and New Century Financial; Joseph Eckroth, 14 executive vice-president, chief operating officer and chief 15 information officer of both New Century Mortgage Corporation 16 and New Century Financial; as well as himself, Anthony Meula 17 who holds the positions of executive vice-president of 18 production at both New Century Financial and New Century 19 Mortgage Corporation. 20 With respect to the production business, he would
21 note that he is primarily responsible for in addition to -- in 22 essence managing the national franchise, that he is responsible 23 for setting the pricing and policy and deploying the capital 24 and making the expenditure decisions for the wholesale 25 division; and that he is responsible for recommending J&J COURT TRANSCRIBERS, INC.
125 1 compensation commissions decisions to the compensation 2 committee of the Board with respect to the individuals, the 3 subject of this plan. 4 With respect to the six individuals that were
5 discussing today -6 THE COURT: And who are they? Forgive me for the
7 interruption. 8 MS. UHLAND: They are Steven Lemon, executive vice-
9 president, wholesale production; Ralph Melbourne (phonetic), 10 senior vice-president, consumer direct division; and Rick 11 Gordano (phonetic), Phil Garcia, Steven Holland and John 12 Warnock (phonetic) who hold the titles senior vice-presidents, 13 wholesale, common division managers. 14 He would testify with respect to this group of six
15 individuals that they are paid with a quarterly bonus based on 16 performance that is 4-500 percent of their base salary; that in 17 recent periods, these individuals earned in a range of 95-100 18 percent of the target bonus based on the specific performance 19 matrix and that these performance calculations are typically 20 done and the bonuses paid after the close of the fiscal 21 quarters. 22 Specifically, with respect to the responsibilities of With respect
23 these individuals, he would testify as follows.
24 to Mr. Steven Lemon, the executive vice-president of wholesale 25 production, that his job would include hiring, evaluating and J&J COURT TRANSCRIBERS, INC.
126 1 managing employees in his sales force; that he is responsible 2 for recommending pricing strategies to Mr. Meola and executing 3 marketing other programs as well as their evaluation and 4 measurement and the reporting of the same to senior management 5 through Mr. Meola. 6 He would indicate that prior to the cessation of the
7 loan originations, that the lions share of the compensation was 8 earned through his quarterly bonus and that the amounts earned 9 or weighted 80 percent based on the performance of the 10 wholesale division and a portion based on the performance of 11 New Century Mortgage Corporation as a whole; and that a minimum 12 performance threshold was required to receive and earn the 13 payout. 14 He would further indicate that since the second week
15 of March when the debtor ceased funding loans, that the minimum 16 threshold necessary to calculate the amount for the quarter 17 could not be determined. The debtors did not have a policy of
18 prorating this compensation and, instead, instituted the 19 formula of the 75 percent for the first quarter to ensure that 20 Mr. Lemon would be paid for the amount he otherwise earned, but 21 for the cessation of the loan origination. 22 He would further indicate that Mr. Lemon does not
23 exercise overall authority with respect to any corporate 24 decision of New Century Mortgage Corporation; that he is not in 25 a position to exert undue influence over the debtors corporate J&J COURT TRANSCRIBERS, INC.
127 1 decision regarding payment of claims or payment of 2 compensation; and that he had no input in or negotiation of the 3 retention plan of the amount of compensation that he would be 4 paid pursuant to the revised policy. 5 With respect to Mr. Ralph Melbourne, the senior vice-
6 president of consumer direct, he would testify that his 7 responsibilities are as follows. That Mr. Melbourne was in --
8 retained to improve and increase New Centurys direct to 9 consumer telephone and internet lending segments; that his 10 responsibilities including preparing business plans to be 11 submitted to Mr. Meola and thereafter the executive committee 12 to increase -- with the goal of increasing market share and 13 loan origination volume through the consumer direct business; 14 that he is responsible for hiring and firing employees in the 15 telephone operation centers as well as executing marketing 16 business development plans. 17 That Mr. Melbourne -- he would further testify that
18 Mr. Melbourne reports directly to Mr. Meola and that he does 19 not have authority to implement strategic directions with 20 respect to business plans, but can make recommendations to the 21 executive management committee through Mr. Meola. 22 He would testify that prior to the second week of
23 March, that the compensation for the bonus component -- or the 24 quarterly component of Mr. Melbournes compensation, it was 25 rated 70 percent based on the performance of the consumer J&J COURT TRANSCRIBERS, INC.
128 1 direct division and 30 percent based on the performance of 2 Mortgage as a whole. 3 He would further testify that when the loan
4 origination ceased in the second week of March, that there was 5 not a way to determine the minimum performance threshold for 6 that quarter and since the debtors did not have a policy for 7 prorating plans, they instituted the policy to set the bonus at 8 75 percent of targets to ensure that employees would be paid 9 the amounts they otherwise would have earned but for the 10 cessation of platform. 11 He would testify that Mr. Melbourne does not have
12 authority to set overall corporate policy -- that he does not 13 exercise overall authority for any corporate decisions; that he 14 does not -- is not in a position to execute -- to exert undue 15 influence over the corporate decision regarding claims; and had 16 no input in the negotiation or the amount of compensation that 17 he would receive in accordance with the changed debtors 18 policy. 19 With respect to Rick Gordano, Phil Garcia, Steven
20 Holland and John Warnock, they hold the titles of senior vice21 president, division managers; their responsibilities are as 22 follows. The division manage, recommend market prices and
23 strategies and recommend credit exceptions to Mr. Lemon, 24 executive vice-president of the wholesale production. These
25 individuals report directly to Mr. Lemon, executive viceJ&J COURT TRANSCRIBERS, INC.
129 1 president of wholesale production. 2 Each of the division manager is located -- is
3 assigned a territory and in their position, they are located 4 within a field typically operating in the largest operating 5 center in their assigned geographic territory. 6 The division managers do not have final decision
7 making authority with respect to policy changes, but again, can 8 make recommendations to Mr. Lemon who can, in turn, make 9 recommendations to Mr. Meola. 10 The quarterly compensation for these individuals was
11 based on a quantified program that is weighed on -- that 12 weighed a number of factors and tended to measure performance 13 of the wholesale business including volumes of loans, rate 14 sheet deviation, loans funded through operations, payment 15 defaults and pretext profit. 16 When the debtors stopped funding loans at the
17 beginning of March 2007, these minimum performance thresholds 18 necessary to calculate the amounts for the entire quarter, 19 while they could potentially be prorated, the plan did not 20 provide for this, so the amounts could not be determined. 21 At that time, the debtors adopted the policy of
22 prorating those payments to provide for 75 percent of payment 23 of the target for the 10 weeks of the quarter prior to the 24 shutdown of the loan origination platform to ensure that those 25 employees would be paid the amounts they otherwise earned but J&J COURT TRANSCRIBERS, INC.
130 1 for the cessation of the platform. 2 With respect to these individuals, Mr. Meola would
3 testify that their compensation is nearly identical to the 4 compensation they would have received had the incentive plans 5 been, or the prior plans with respect to their bonuses been in 6 effect, that the compensation awarded to them is reasonable, 7 typical and common industry and that these division managers 8 are not active in setting overall corporate policy; that these 9 division managers do not exercise overall authority with 10 respect to the debtors corporate decisions; that these division 11 managers are not in a position to exert undue influence over 12 the debtors corporate decision-making regarding payment of 13 claims and that they had no input on the negotiation of the 14 revised policy with respect to their payment or the amount of 15 compensation that they would receive. 16 With respect to all the amounts sought to be paid in
17 connection with the request today, Mr. Meola would testify that 18 the compensation that were describing for the first quarter 19 combined with the other compensation thats previously been 20 paid to these individuals is reasonable, typical and common in 21 the industry. And that all payments under the proposed to be And that that assessment of
22 made are within market norms.
23 market compensation is based on his extensive experience with 24 the mortgage industry. 25 Your Honor, that would conclude my proffer of Mr. J&J COURT TRANSCRIBERS, INC.
131 1 Meola. 2 3 THE COURT: Anyone care to examine Mr. Meola? Your Honor, can I confer with debtors
MR. MCMAHON:
4 counsel for a minute? 5 6 7 MS. UHLAND: THE COURT: Yeah. (Pause) Your Honor, in -- at the prior hearing, We
8 we did not -- we had only the New Century Financial bylaws. 9 now have the New Century Mortgage Corporation bylaws and the 10 U.S. Trustees asked that we submit those to -- into the 11 record. 12 13 MR. MCMAHON: MS. UHLAND: That is correct. And we are willing to do that.
They --
14 slightly different wording, but a similar provision with 15 respect to officers as the New Century Financial bylaws. 16 These bylaws provide that the corporation may We were not able
17 designate officers pursuant to resolutions.
18 to locate the resolutions appointing these individuals as 19 officers. We believe it is corporate policy to periodically
20 provide cleanup annual resolutions that are submitted to the 21 Board of New Century Mortgage Corporation, all of whom are 22 officers of New Century Financial Corporation to submit a 23 cleanup resolution with respect to officer appointments. 24 There are two recent hires, or those -- one about a
25 year and one less than a year, within the individuals J&J COURT TRANSCRIBERS, INC.
132 1 described. We think it is -- we will stipulate, based on our
2 understanding of corporate practice, that there were 3 resolutions appointing the four. The two recent hires, we were
4 -- we dont know that any resolutions have yet been adopted by 5 the Board of Mortgage to appoint them as officers. 6 7 8 9 10 MS. UHLAND: THE COURT: THE COURT: MS. UHLAND: And so which four are we talking about? Let me confirm with Mr. Meola. (Pause) Ralph Melbourne and Rick Gordano. And theyre the ones that dont have
11 resolutions? 12 13 14
Or you dont know where their resolutions are? Thats correct. Okay. We will stipulate even though we have
MS. UHLAND: THE COURT: MS. UHLAND:
15 not identified that resolutions were likely adopted, or were 16 adopted -- for the purpose of the record today, were adopted 17 for the other four. 18 19 20 THE COURT: MS. UHLAND: THE COURT: Okay. Should I hand up the -Well mark it D-1 which will be admitted
21 without objection. 22 23
Thank you. (Pause)
MR. MCMAHON:
Your Honor, with that addition to Mr.
24 Meolas proffer, we do not wish to cross examine. 25 THE COURT: Does anyone else wish to examine Mr.
Meola - Cross/Court 1 Meola? 2 Well, I do. THE CLERK: If you would come forward, sir.
133
Would you raise your right hand, please
3 your left on the Bible. 4 5 ANTHONY MEOLA, DEBTORS WITNESS, SWORN THE CLERK: For the record, please state your full
6 name and spell your last. 7 8 9 10 11 BY THE COURT: 12 Q Mr. Meola, to the extent you know, how is it determined And by THE WITNESS: THE CLERK: Anthony Thomas, M-e-o-l-a.
You may be seated. Thank you. CROSS EXAMINATION
THE WITNESS:
13 who is called what in the way of title at the company? 14 that, I mean the combined companies. 15 A
Your Honor, there be two ways that we establish title.
16 One is one that Your Honor is most familiar with in 17 corporations, Section 16, insiders, those types of folks which 18 I would call, you know, executives, director types. 19 In the sales organization, in the field sales
20 organization, there are titles of SVP, senior vice-president, 21 executive vice-president, vice-president that are what are 22 commonly referred to in the business as business card titles so 23 that when they represent the company to clients, theyre 24 represented at a fairly high level in the clients eyes and 25 presented well for the organization. J&J COURT TRANSCRIBERS, INC.
Meola - Redirect/Uhland 1 So there are two basic ways. Theres our sales
134
2 organization that has a set of titles and then the remainder of 3 the organization that has the more familiar corporate titles. 4 5 6 7 BY MS. UHLAND: 8 Q Would you describe the six individuals weve discussed THE COURT: MS. UHLAND: Anyone like to follow up? Just briefly, Your Honor. REDIRECT EXAMINATION
9 today as members of the sales organization? 10 A 11 Q Yes. And therefore -- and what was the purpose for assigning
12 them the titles that they have? 13 A As I told the Judge, the purpose there is in the field and The leaders of those organizations
14 for recruiting purposes.
15 carry those titles in order to attract the top producers, to 16 meet with clients and the like. 17 18 19 20 21 22 23 THE COURT: MS. UHLAND: THE COURT: Your Honor, I have no further. All right. Mr. McMahon, any questions?
MR. MCMAHON: THE COURT:
No, Your Honor.
Thank you, sir, you may step down. Thank you. (Witness excused) All right. Anything further in support
THE WITNESS:
24 of the motion? 25 MS. UHLAND: No, Your Honor.
135 1 2 THE COURT: All right. Mr. McMahon. Talk to me.
MR. MCMAHON:
I will, Your Honor, as best as I can.
3 Your Honor, I guess I should top at the -- start at the top 4 which is this issue of whether even under Section 503(c)(1), 5 which is a point the debtors counsel raised and you discussed 6 with debtors counsel, the ordinary course label appears no one 7 -- nowhere in the explicit text of Section 503(c)(1). And,
8 Your Honor, the distinction between Section 363 and 503(c) is 9 somehow -- one would cover ordinary course things and not 10 ordinary course things isnt always so clear. 11 When you look at 503(b), wages, salaries and
12 commissions for services rendered after the commencement of the 13 case, 503(b)(1)(A)(1), now thats a thing thats typically paid 14 by the debtor in the ordinary course without a court order. 15 Really what we need to focus on here is the plain language in 16 Section 503(c) and the fact that it deals with, broadly, 17 transfers made to or obligations incurred for the benefit of an 18 insider. 19 Now, going back to a topic that we discussed at the
20 last hearing which is how we defined insider. 21 22 23 24 25 THE COURT: Well, for the purpose of retention. Im sorry?
For the purpose of retention. Correct.
Okay.
136 1 MR. MCMAHON: And, Your Honor, Your Honor denied the
2 payments for these individuals without prejudice at the last 3 hearing. And I appreciate the fact that in argument, debtors
4 counsel have, I guess, argued that they were incentive payments 5 as opposed to retention payments. 6 In paragraph 22 of the motion, the plans were labeled And, under the circumstances here, Your
7 retention plans.
8 Honor, they are a salary substitute. 9 Now, I dont think that its a inference that a -- is
10 an inference that you need to hear evidence about for Your 11 Honor to infer that without this plan in place, these people 12 walk. 13 14 that. Thats clear -- were not here if thats not the case. THE COURT: Well, heres a question I have about
If, in fact, these payments or proposed payments are
15 salary substitutes, one question in my mind is, well, if there 16 had been no bankruptcy and they were paid when they were due, 17 ordinarily quarterly, they wouldnt have been considered 18 retention. I mean, at least no more than any other salary
19 would be considered retention if, in fact, theyre really 20 salary substitutes. 21 So the question -- one question in my mind is, now
22 that we have the bankruptcy, and because of that the payments 23 need to be made now, why would you make them for other than 24 retention purposes? 25 I mean, I tend to agree with you and I -And, Your Honor, to follow up on that
MR. MCMAHON:
137 1 point, we agree fully. I mean, the reason why the plan was put
2 in place was because were not dealing with the ordinary 3 course. I mean, in fact, it was the shutdown of the
4 origination business, certainly not an ordinary course event, 5 that put us in the position where -- that put the debtors in a 6 position where they needed to implement this plan. 7 Again, I think we need to get away from the words I think they cause a level of confusion here But to
8 ordinary course.
9 insofar as how to address the relief thats requested.
10 the extent that it is informative in terms of understanding the 11 reason -- or at least the reason why this is not just the 12 regular incentive payment that goes to an executive when the 13 company is operating, then certainly its relevant to 14 understand that. 15 16 a moment. THE COURT: Lets talk about the insiders status for
And the issue for the Court is -- well, its At the last hearing,
17 statutory construction and line drawing.
18 I said, okay, you have a number of individuals who hold the 19 office of vice-president. They have -- and it was conceded,
20 and I based my decision in part upon the debtors apparently 21 undisputed representation that some may have had some 22 management responsibility with respect to the various stores. 23 But theyre officers. And under the definitions in But I permitted those
24 the Bankruptcy Code, theyre insiders. 25 payments.
And the theory was that whatever Congress intended J&J COURT TRANSCRIBERS, INC.
138 1 to implement the language to exclude anyone with an office like 2 that in an organization like this would lead to a result that 3 didnt make sense to me. 4 The problem is Ive crossed a bridge. Id like to
5 cross another one on the same theory.
And I dont know -- Im
6 not sure why, I shouldnt, if the same proofs I find have been 7 offered in support of others who hold different titles. But in
8 terms of corporate management, no greater responsibilities than 9 those to whom payments were permitted. 10 MR. MCMAHON: Yeah. Well, Your Honor, I think I can First, our offices
11 understand that and respond to it clearly.
12 position was that if you are an officer under the bylaws, you 13 shouldnt be getting the payments, period. And I appreciate
14 the question that Your Honor asked me at the last hearing 15 regarding that, leading to absurd results. But really from our
16 perspective, its not, you know, an absurdity in terms of -17 question in terms of statutory construction. 18 consistency point. 19 Your Honor is clearly familiar with the cases Its a
20 construing the term under Section 327 when we deal with the 21 definition of officer. And one Id like to reference
22 specifically is Judge Walrath in the Essential Therapeutic 23 case. In that case, Your Honor, there is a law firm that
24 came forward and they had a partner of the law firm that 25 served as an officer pre-petition. And, you know, our
139 1 office objected and argued that that officers status and such 2 should be imputed to the entire law firm, the law firm should 3 be disqualified from being employed under Section 327(a). 4 And so the argument went, the partner was less of an
5 officer, he held the title of corporate secretary, appointed an 6 officer under the bylaws. He was less of an officer because he
7 just showed up at the Board of Directors meetings and took 8 notes. In other words, his tasks were merely administerial,
9 perfunctory. 10 And Judge Walrath rejected that argument out of hand. The words of
11 And she used these words to address the point. 12 Section 101.14 are not ambiguous.
They preclude retention if
13 the professional served as an officer of the debtors within two 14 years of the petition date. Congress did not state that
15 disqualification is mandated only if the officer was an 16 executive or had more than an administerial role. Therefore,
17 we conclude that we should not inquire into what role the 18 officer had, may have played, but need determine only whether 19 the professional was, in fact, an officer within the prescribed 20 time. In this case, the debtors concede this fact. The
21 debtors bylaws do provide that the secretary is an officer of 22 the debtors. 23 In other words, for this Court, in the 327(a) And on this
24 context, Your Honor, the bylaws were enough. 25 record, were clearly in that zone.
And Your Honors
140 1 specifically referring to the quotation from the Ohio case, CEP 2 Holdings. We were dealing there with just a straight title
3 case, meaning clearly your -- were going to give someone a 4 label for the purpose of having -- them having a title. 5 were not dealing in that situation with a bylaw officer. 6 7 opinion. Let me read you from that -- a portion from that This is on page -- star 4, close quote -- open quote. We
8 The debtors statement of financial affairs lists only one 9 officer, Mr. Malack (phonetic). In response to questioning by
10 the Court, debtors counsel confirmed that only Mr. Malack had 11 been the subject of a directors or managing members resolution 12 of election of an officer. 13 This leads to question whether the inclusion of
14 officer title such as, executive vice-president, 15 customers/sales and VP Purchasing on the plan schedules 16 automatically confers officer status for the purpose of Section 17 503(c). 18 Thats not the question, Your Honor, that were Its clearly these people are within
19 dealing with here today.
20 the bylaw ambit and this Court has held in the Section 327(a) 21 context that those people are officers. End of discussion. It
22 doesnt matter whether they -- all they had on their desk was a 23 pencil and pen, they turned off their computer once a week. 24 Certainly, Your Honor, on this record some of the
25 individuals were talking about had more responsibility than J&J COURT TRANSCRIBERS, INC.
141 1 that. The ability to hire and manage employees. Certainly an
2 important responsibility.
But I think we need to come back to
3 the essential point that once were talking about corporate 4 officers, end of discussion. We dont need to get into an And that is
5 argument about whos more important than the next. 6 the -7 8 9 THE COURT:
Well, so what youre saying --- gravamen of our position. So what youre saying is I
All right.
10 was in error when I made the last decision with respect to 11 those titled vice-president and I would be in error to award 12 the relief thats requested with respect to these six 13 individuals? 14 MR. MCMAHON: Your Honor, our position is fairly
15 clear on this point.
Yes, we believe that to extend this
16 further opens up, say, a lot of side consequences that frankly 17 become -- would be even problematic in a Section 327(a) 18 context. I mean, does that meet -- does this ruling -- if a
19 ruling of granting these people relief today, Your Honor, would 20 that mean that, for example, the executive vice-president or 21 senior vice-president could have a consulting company that did 22 business with the debtor. 23 under Section 327(a). 24 These are not minor questions from our offices Theyre important ones. So I think that the And that firm could be employed
25 perspective.
142 1 bright line rule -- the definition of insiders under Section 2 101.31 includes officer. And under this -- other rulings of
3 this Court, officer means -- if youre an officer under the 4 bylaws, youre an officer. And the individuals were talking
5 about today clearly have that status. 6 Thats the core of our position, Your Honor. I dont
7 know how much further I can put it.
But were definitely
8 concerned about narrowing these definition of insider down to 9 the point where it includes no one, in fact, contradicts the 10 debtors own corporate actions. 11 THE COURT: What about the fact that -- well, Im not Okay. Anything further, Mr.
12 going to ask that question. 13 McMahon? 14 15 16 MR. MCMAHON: THE COURT: MS. UHLAND:
I dont, Your Honor, thank you.
All right. With respect to this officer insider
17 issue, I do think there is a difference and the Court has and 18 the Court should continue to draw a distinction, for what 19 transaction were considering someone to be a corporate 20 officer, an inside, more appropriately of the debtor. And the
21 327(a) context is different than the type of situation that we 22 have today. Im not saying that we wouldnt meet that standard But I do not believe that
23 with these individuals as insiders.
24 the Courts ruling today with respect to this issue is a 25 construction under 327(a). J&J COURT TRANSCRIBERS, INC.
143 1 THE COURT: See, heres the rub for me. You know,
2 Congress said, for example, you know, evaluations for different 3 purposes can come out differently. But theres no distinction You
4 in the Code with respect to an insider or an officer.
5 know, to the extent there are differences, its been developed 6 by decisional law. 7 language itself. 8 MS. UHLAND: Well, applying -- again, looking at the But it doesnt come from the statutory
9 construction of officer for the rubric that were suggesting is 10 the one thats been applied to preference statutes and, you 11 know, basically backing into what is an insider and then 12 theres an enumerated officer for that purpose. And its the So I
13 same sort of definition of insider that 503 looks to. 14 dont think by proposing that the insider standard -15 16 statute? THE COURT:
But how do I divine that from the That
Where is it in the statute that tells me this?
17 there ought to be a distinction? 18 19 officer. 20 THE COURT: Or in 503? I mean, we know generally MS. UHLAND: In the definition of insider for
21 that this section came about because of what were perceived as 22 excesses which occurred in the corporate and bankruptcy world 23 with respect to payments to insiders. 24 MS. UHLAND: Your Honor, nor does the statute say
25 that the CEO and anyone with a vice-president title is deemed J&J COURT TRANSCRIBERS, INC.
144 1 an insider. It says an officer of the debtor. And I think the
2 definition of officer is what were talking today, is what is 3 an officer of the debtor. Is anyone holding a title, even if
4 the corporation, which Id like to talk about in a minute, has 5 the bylaws that we have, is the -- is having a title the 6 definition of officer of the debtor as intended by Congress. 7 And it is that that I think is ambiguous and that we -- is 8 subject to statutory construction. 9 Because what is an officer of the debtor. Is an
10 officer of the debtor a senior vice-president-divisional 11 manager. Is -- you know, I would posit that the officers of
12 the debtor are the aforementioned chief executive officer of 13 the corporations -- the president of the corporation, the CEO 14 of the corporation. 15 So I think that that is where consistent with the
16 statute and were not just thwarting the statutory reading, but 17 instead interpreting what it means when we go to the more 18 functional analysis of what is an officer of the debtor. 19 Further, Your Honor, we passed up the bylaws of New The bylaws provide permissive It
20 Century Mortgage Corporation.
21 appointment of different titles by the Board of Directors. 22 provides that the Board of Directors can appoint a vice23 chairman of the Board. And then it goes on to say, one or
24 more vice-presidents, a treasurer, one or more assistant 25 secretaries, one or more assistant treasurers, and it says, J&J COURT TRANSCRIBERS, INC.
145 1 such other officers may be appointed in accordance with 2 Section 3 of this article and one person may hold one or more 3 officers. 4 It then goes on to Section 3 of the article to And
5 describe what they call subordinate officers, et cetera.
6 says that the Board of Directors may appoint by resolution and 7 may empower the chairman of the Board, if there is to be such 8 an officer, or the president to appoint such other officers as 9 the business or the corporation may required. Each of them
10 shall office for such period, have such authority and perform 11 such duties as determined by time to time by resolution of the 12 Board. 13 The provision of these permissive articles that allow
14 a Board of Directors to affect, act on the parties who were 15 given titles for different purposes should not be dispositive 16 that those parties are, in effect, officers of the debtor with 17 the executive authority and functional control of the debtor. 18 Again, we believe that the company at issue here, consistent 19 with these detailed bylaws may have had corporate cleanup 20 resolutions to confirm the appointed, nomenclature for the 21 different individuals in their sales organization. 22 happened with the lag. Mostly this
It wasnt a Board authorized issue in
23 each effect, but it was probably an after-the-fact confirmation 24 of the title by the Board to be consistent with their own 25 policies set into place. J&J COURT TRANSCRIBERS, INC.
146 1 But the fact that they have these provisions in their
2 bylaws should not be dispositive of what creates -- the fact 3 that the Board had the authority to designate the different 4 titles before or after the fact should not be dispositive in 5 determining who is, in effect, an officer of the corporation. 6 In that instance, what is happening is a more
7 elaborate corporate process and a more formal corporate process 8 is causing sort of a proliferation of potential corporate 9 officers which wasnt the -- for the purposes of what the 10 bankruptcy Code was trying to address here certainly not the 11 intent of the business people who formed their own bylaws and 12 designated this own method to govern their own disposition of 13 titles. 14 So for that reason, while yes, the courts do consider
15 the -- the courts have considered in the corporate officer 16 issue what the debtors bylaws say, where you have permissive 17 bylaws here, I do not believe that that is dispositive nor have 18 the courts who have looked at it view that as a dispositive 19 fact. 20 Now, accordingly, you know, we believe that
21 determining whether someone is an officer of the debtor, we 22 should look to the factors the courts have looked to determine 23 that position in prior transactions which is while -- were 24 saying while the titles and bylaws are certainly matters to -25 that can be weighed in that, we take the position that given J&J COURT TRANSCRIBERS, INC.
147 1 the facts here, as testified by Mr. Meola, that, one, the large 2 purpose for deriving the titles in this situation was the 3 external factor of providing a sales organization common with 4 the industry of providing those individuals titles both to 5 recruit those individuals into those positions and to insure 6 their ability to recruit other individuals. 7 And further, that the business purpose served with
8 those titles was a client driven purpose, that that factor 9 should also be weighed. 10 And perhaps most importantly, that while these
11 individuals have certain hiring and firing authority, their 12 inability to set corporate policy, including pricing, and their 13 inability to set or influence their own compensation and the 14 compensation plan before the Court is dispositive that with 15 respect to these individuals in these sales -- in the wholesale 16 production plan, that they should not be considered officers of 17 the debtor in accordance with the statute. 18 should not be considered insiders. 19 THE COURT: Is there any thing in the record which And therefore, they
20 reflects their annual compensation? 21 MS. UHLAND: I dont believe theres anything in the
22 record except that its -- we could probably take a break and 23 obtain that information. But right now, the compensation
24 information thats in the record is that its consistent with 25 the additional -- with the payments were discussing here, that J&J COURT TRANSCRIBERS, INC.
148 1 its consistent with industry norms, consistent with their 2 prior period pay and reasonable as Mr. Meola has proffered. 3 THE COURT: Whats the aggregate amount proposed to
4 be paid to these individuals for this quarter thats the 5 subject of request for relief? 6 MS. UHLAND: I have -- if I may break, I can total
7 that amount up. 8 9 MS. UHLAND: (Pause) The aggregate for the six individuals is
10 approximately $560,000. 11 THE COURT: I would like to know what the annual, you
12 know, either average or within a range compensation of these 13 individuals are. 14 you need -15 16 17 MS. UHLAND: THE COURT: MS. UHLAND: No, I can provide that, Your Honor. Thank you. The high end of the range is Mr. Lemon And the division managers of And I would take a break for that purpose if
18 at approximately $1.2 million. 19 825,000.
That represents based salary plus 4-500 percent of So the base salaries
20 the balances set forth in a target bonus. 21 range from 200,000 to 150,000. 22 THE COURT:
See, I -- when you start looking behind
23 the expressed language, you know, its -- theres always a 24 danger in that, especially given the absolute overwhelming push 25 by the Supreme Court and in the Circuit for plain language J&J COURT TRANSCRIBERS, INC.
149 1 interpretation, along the lines of what the U.S. Trustees 2 arguing here. 3 But, the debtor convinced me I should look beyond But if
4 that with respect to the earlier relief that I granted.
5 you take the titles of the six involved here and you take the 6 salary level, compensation level, it seems to me Congress, you 7 know, if you want to try to divine an intent, always a risky 8 enterprise, they would think those compensation levels are a 9 lot of money. 10 I just, on this record and because of the language of
11 the statute, I just cant be pushed over that second bridge. 12 And I said this before, its not because those involved arent 13 important to the debtors business. Its not because theyre Its simply a
14 not deserving of those compensation levels.
15 matter of trying to be true to implementation of the statute 16 that the Congress -- that I am subject to and that Congress has 17 passed. 18 And under these circumstances, I cant say theyre
19 not insiders and I cant say these payments at this stage 20 arent primarily for the purpose of retention. I cant say Im not
21 that theyre in any sense in the ordinary course. 22 going to grant this relief for those reasons.
And I understand
23 that it may cause some anguish, not just for the individuals 24 involved, but for the debtor. 25 anything else for today? J&J COURT TRANSCRIBERS, INC. But thats my ruling. Is there
150 1 2 MS. UHLAND: THE COURT: No, Your Honor. You know, we may --
Im not saying there might not be some
3 other way to give value to these individuals. 4 MS. UHLAND: And I was going to mention, we may be
5 back and may be saying again its one more emergency, but if we 6 are able to structure something with the Creditors Committee to 7 enable us to come with a proposal with Your Honor, we would 8 probably want to have that heard -9 10 way. 11 12 13 MS. UHLAND: THE COURT: Okay. Thank you, Your Honor. THE COURT: Im not foreclosing that there may be a
Mr. McMahon. A couple of things, Your Honor. With
MR. MCMAHON:
14 respect to whatever proposal the debtors and the Committee may 15 come back to -- with on that point, I just ask that our office 16 get noticed, say, a week before the scheduled hearing such that 17 we would have an opportunity to take a look at whatevers being 18 proposed. 19 20 Is that acceptable? MS. UHLAND: MR. MCMAHON: Yes, Your Honor. And then second, Your Honor, and this The
21 just a housekeeping matter from our offices perspective. 22 list of items on for the 24th is rather extensive.
And we have
23 provided the debtors informal comments with about -- I want to 24 say about eight items, relating to eight items on the agenda. 25 I have a personal commitment to attend a funeral J&J COURT TRANSCRIBERS, INC.
151 1 tomorrow morning and making the agenda deadline, having 2 objections filed by noon tomorrow was probably going to be a 3 bit difficult. Id just ask the Courts indulgence to the To the
4 extent that we get them filed by midnight tomorrow.
5 extent that the matters going forward on the 24th, that the 6 Court would entertain those responses or objections. 7 8 9 10 McMahon. THE COURT: MS. UHLAND: THE COURT: Is there any objection? No, Your Honor. Very well. Thats fine with me, Mr.
Lets see, let me look through my list and make sure
11 that I didnt have any housekeeping matters. 12 MS. FATELL: Your Honor, excuse me, Bonnie Fatell for I dont have the agenda for the 24th
13 the Creditors Committee.
14 in front of me, but we have been working with the debtor on a 15 number of issues and we would request the same extension from 16 the Court. 17 18 19 20 for today? 21 hearing. 22 23 24 25 J&J COURT TRANSCRIBERS, INC. THE COURT: MS. UHLAND: THE COURT: All right. Any objection? No, Your Honor. All right. Thank you. Very well. Anything further
That concludes this
The Court will stand in recess until 3:00. * * * * *
152 1 2 3 4 I, Susan Holcomb, court approved transcriber, certify C E R T I F I C A T I O N
5 that the foregoing is a correct transcript from the official 6 electronic sound recording of the proceedings in the above7 entitled matter. 8 9 /s/ Susan Holcomb 10 Susan Holcomb AAERT CET **00273 Date: April 30, 2007
11 J&J COURT TRANSCRIBERS, INC. 12 13 14 15 16 17 18 19 20 21 22 23 24 25 J&J COURT TRANSCRIBERS, INC.
UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE . . Chapter 11 . New Century TRS Holdings, . Inc., et al., . . Debtor(s). . Bankruptcy #07-10416 (KJC) ............................................................. IN RE: Wilmington, DE May 7, 2007 10:00 a.m. TRANSCRIPT OF MOTIONS HEARING BEFORE THE HONORABLE KEVIN J. CAREY UNITED STATES BANKRUPTCY JUDGE APPEARANCES: For The Debtor(s): Suzzanne S. Uhland, Esq. O'Melveny & Myers, LLP 275 Battery Street San Francisco, CA 94111 Ben H. Logan, Esq. O'Melveny & Myers, LLP 275 Battery Street San Francisco, CA 94111 Robert J. Stern, Jr., Esq. Richards Layton & Finger, PA One Rodney Square Wilmington, DE 19801 Michael J. Merchant, Esq. Richards Layton & Finger, PA One Rodney Square Wilmington, DE 19801 Marcos A. Ramos, Esq. Richards Layton & Finger, PA One Rodney Square Wilmington, DE 19801
2 Christopher M. Samis, Esq. Richards Layton & Finger, PA One Rodney Square Wilmington, DE 19801 For The Official Committee: of Unsecured Creditors Mark Indelicato, Esq. Hahn & Hessen, LLP 488 Madison Ave. New York, NY 10022 Mark Power, Esq. Hahn & Hessen, LLP 488 Madison Ave. New York, NY 10022 Janine M. Cerbone, Esq. Hahn & Hessen, LLP 488 Madison Ave. New York, NY 10022 Bonnie Glantz Fatell, Esq. Blank Rome, LLP One Logan Sq. 130 N. 18th St. Philadelphia, PA 19103 Regina S. Kelbon, Esq. Blank Rome, LLP One Logan Sq. 130 N. 18th St. Philadelphia, PA 19103 For UBS: Keith W. Miller, Esq. Paul Hastings Park Ave. Tower 75 E. 55th St-1st Fl. New York, NY 10022 Richard Chesley, Esq. Paul Hastings 191 N. Wacker Drive Chicago, IL 60606 Gregory A. Taylor, Esq. Ashby & Geddes 500 Delaware Ave.-8th Fl. Wilmington, DE 19899
3 Bruce Bennett, Esq. Hennigan Bennett 865 S. Figueroa St-Ste. 2900 Los Angeles, CA 90017 For Bank of America: Laurie S. Silverstein, Esq. Potter Anderson & Corroon, LLP Hercules Plaza 1313 N. Market Street Wilmington, DE 19899 Rachel B. Mersky, Esq. Monzack & Monaco, PA 1201 N. Orange Street Wilmington, DE 19899
For RBC:
For Deferred Comp. Claimants: Robert Keach, Esq. Bernstein Shur 100 Middle Street Portland, ME 04104 Joseph H. Huston, Esq. Stevens & Lee, PC 1105 N. Market St., 7th Fl. Wilmington, DE 19801 For Kodiak Funding: Matthew Botica, Esq. Winston & Strawn, LLP 35 W. Wacker Drive Chicago, IL 60601 David W. Wirt, Esq. Winston & Strawn, LLP 35 W. Wacker Drive Chicago, IL 60601 Norman Monhait, Esq. Rosenthal Monhait & Goddess, PA 919 Market St.-Ste. 1401 Wilmington, DE 19899 For Deutsche Bank Structured: Robert Brady, Esq. Products Young Conaway Stargatt & Taylor, LLP 1000 West Street-17th Fl. Wilmington, DE 19899
4 For Ellington Management: Group Van Durrer, Esq. Skadden Arps Slate Meagher & Flom, LLP 300 S. Grand Ave.-Ste. 3400 Los Angeles, CA 90071 Laura Davis Jones, Esq. Pachulski Stang Ziehl Young Jones & Weintraub, LLP 919 N. Market Street-17th Fl. Wilmington, DE 19899 Bennett Spiegel, Esq. Kirkland & Ellis, LLP 777 S. Figueroa Street Los Angeles, CA 90017 For Goldman Sachs Mortgage: Co. Lisa M. Schweitzer, Esq. Cleary Gottlieb Steen & Hamilton, LLP One Liberty Plaza New York, NY 10006
For Greenwich Capital: Financial Products
(Via Telephone) For Deutsche Bank Sructured: Products Andrew J. Gallo, Esq. Bingham McCutchen, LLP 150 Federal Street Boston, MA 02110 Richard Agins, Esq. Bingham McCutchen, LLP 150 Federal Street Boston, MA 02110 For Bank of America: Nicholas J. Cremona, Esq. Kaye Scholer, LLP 425 Park Ave. New York, NY 10022 Shirley Cho, Esq. Kirkland & Ellis, LLP 777 S. Figueroa Street Los Angeles, CA 90017 Christy Rivera, Esq. Chadbourne & Parke 30 Rockefeller Plaza New York, NY 10112
For Greenwich Capital Financial Products
For Credit Suisse First: Boston
5 For the U.S. Trustee: Joseph McMahon, Esq. Office of the United States Trustee 844 King St.-Ste. 2207 Lockbox 35 Wilmington, DE 19801 Matt Yovino Writer's Cramp, Inc. 6 Norton Rd. Monmouth Jct., NJ 08852 732-329-0191
Audio Operator: Transcribing Firm:
Proceedings recorded by electronic sound recording, transcript produced by transcription service.
6 Index Further Direct Cross Redirect Recross Redirect Witnesses For The Debtor: Ms. (by (by (by Etlin Mr. Stern) Mr. Power) Mr. McMahon) 141 173 180 201 204 208 219 198
Mr. Glassner (Voir Dire) Mr. Glassner (by Mr. Stern) (by Mr. McMahon) Witnesses For The Creditor's Committee: Mr. Warren (by Mr. Power)
82
EXHIBITS: US Trustee-1 Order Authorizing Retention
Marked 211
Received 222
SUMMATION BY: Mr. Mr. Stern Mr. Indelicato Mr. McMahon Rebuttal Mr. Stern The Court: Finding 112 258 222 244 248 255
As To Motion As To Motion
7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE CLERK: THE COURT: ALL: All rise. You may be seated.
Good morning all.
Good morning, Your Honor. Good morning, Your Honor, Suzzanne We're
MS. UHLAND:
Uhland of O'Melveny & Myers on behalf of New Century. here this morning on a variety of matters.
Generally we'd like
to proceed in the order of the agenda, but we understand that an agreement has been reached with respect to the last matter on the agenda, the UBS motion, and accordingly -- or largely been reached with respect to that matter. So we would propose
to go ahead and proceed with that and have Mr. Bennett explain where the parties are with respect to that -THE COURT: MS. UHLAND: THE COURT: MR. BENNETT: Very well. -- if that's okay with the Court. Yes, that's fine. Good morning, Your Honor, Bruce Bennett
of Hennigan Bennett & Dorman, special -- proposed special litigation counsel. At least for a little while. I -- Your
Honor, I was not on the telephonic hearing that you conducted on Friday, but I've heard about it, and based upon receiving papers pretty late and not being able to find people on the weekend and wanting to do this in an orderly fashion, what we've agreed to do is escrow $2.67 million into a separate interest bearing account, mechanics to be defined. And to
schedule a hearing on what would be a Preliminary Injunction
8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1:30. Motion for, here's our proposal, either June 11th or June 15th were two dates that are about the time frame that would work for the parties. I don't know what Your Honor's schedule is
but we're looking for some advice in that regard. THE COURT: Do we have any yet? Nancy, what are our June hearing dates? The 11th I will be out of town. Okay.
MR. BENNETT:
(Pause in proceedings) THE COURT: There's an omnibus set for June 14th at
Would that suit, counsel? MR. BENNETT: That's actually a problem for me. If
-- the choices are the 14th at 1:30 or the 27th? THE COURT: 27th at 10. Well, if the Debtor wanted
to move its omnibus from the 14th to the 15th I would do that. MR. BENNETT: That helps me a lot. 14th is a
Thursday, 15th is a Friday. MS. UHLAND: THE COURT: That's fine, Your Honor. All right. Well, we'll move the omnibus
hearing that's now set for June 14th at 1:30 to June 15th at 10 o'clock. And we'll schedule the preliminary injunction hearing
for the same day and time. MR. BENNETT: the parties. Okay. I think that's acceptable to all
There will be an order to follow. All right. Thank you, Your Honor.
THE COURT: MR. BENNETT:
9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. CHESLEY: Your Honor, Richard Chesley, Paul That is acceptable. We appreciate
Hastings, on behalf of UBS.
the Court's indulgence on the schedule. THE COURT: MR. POWER: for the Committee. the adversary. Certainly.
Thank you.
Your Honor, Mark Power from Hahn & Hessen Your Honor, two things in connection with
One is we've been over the weekend working with
the Debtor and UBS to try to get to this point and schedule the hearing. As a part of that the parties have consented to the Originally we were
Committee intervening in the action.
stepping -- we were not intervening because it was an accounting matter. We're now getting into legal issues So the
regarding property rights and secured versus unsecured. Committee has a direct interest in that. And I think the
parties will agree to that and we'll submit that under stipulation to Your Honor. MR. CHESLEY: An Intervention Motion.
Your Honor, we'll simply include that
in the order if that's acceptable to the Court. THE COURT: MR. CHESLEY: It's fine with me. That's fine, thank you, Your Honor.
(Pause in proceedings) THE COURT: Let me ask, will the order cover matter
#10 on the agenda as well in UBS? MR. CHESLEY: THE COURT: Excuse me, Your Honor, matter 10 was -It's UBS's motion to file an exhibit.
10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. THE COURT: MR. CHESLEY: THE COURT: MS. UHLAND: Very well. Thank you. Thank you. Your Honor, the next matter on the MR. CHESLEY: Your Honor, I -- was that granted on --
at the hearing on Friday or was it -THE COURT: MR. CHESLEY: THE COURT: MR. CHESLEY: Maybe -I believe it was. Okay, maybe I did. We can include that in the order just
to clarify that because there is no actual order entered if you -THE COURT: Yes, I remember the supplemental
memorandum being a subject of the request but not specifically the exhibit. But -We'll include that in the order, Your
MR. CHESLEY:
agenda is the application of the Debtors to employ O'Melveny & Myers as co-counsel for the Debtors. prior hearing. This was continued from a
We received a request from the United States
Trustee for some additional disclosures and additional review of the Debtors -- of O'Melveny's client base to check not only the Parties-In-Interest but also all the potential purchasers of assets. This morning we prepared that supplemental declaration and
11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 question. we've submitted it to the United States Trustee to review, and have filed that supplement declaration this morning. With that
filing my understanding is that the U.S. Trustee's issues are resolved and we're prepared to submit the order. THE COURT: that was made today. look at? MS. UHLAND: THE COURT: Your Honor, I have a copy, if I may? Thank you. All right. I have not seen the filing
Does someone have a copy I can take a
(Pause in proceedings) THE COURT: All right, I note that in the O'Melveny Was To
affidavit that there was $190,000 unbilled prepetition. that amount the subject of a prior request for relief? apply it? Or am I thinking of something else? MS. UHLAND:
In our application we asked to apply the
retainer to -- as part of our application we asked Your Honor to the extent something was billed but not yet -- or unbilled at the time of filing that we be allowed upon billing and approve invoice to apply it to the retainer. in our request. THE COURT: Okay. All right, anyone else care to be That was included
hear in connection with this matter? ALL: (No verbal response). I hear no response. That was my only
THE COURT:
Do you have a Form of Order?
12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MS. UHLAND: THE COURT: Yes, I do, Your Honor. Thank you.
(Pause in proceedings) THE COURT: MS. UHLAND: That order has been signed. Thank you, Your Honor. Your Honor, the
next matter is the Debtor's Motion for an Order Authorizing the Payment of Sale Related Incentive Pay to Senior Management and Retention and Incentive Pay to Certain Employees pursuant to section 105, 363 and 503 of the Bankruptcy Code. Your Honor,
we originally filed this motion on April 11th, and we filed an amendment to that motion last Tuesday. What we propose to do at the -- to address the hearing today and the Court's interest in creating a sufficient or hearing testimony to support the Debtor's motion is I will walk through the relief sought by the motion and walk the Court through some of the changes that were made first from the original filing to the amendment, and then some further changes that have been made more recently since -- as a result of further negotiations and discussions with the Creditors Committee. THE COURT: hearing on Friday? There been any developments since the Any further developments? No further developments, Your Honor.
MS. UHLAND:
The Debtors and the Committee have worked to just document the economic agreement that they had reached previously.
13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: All right. And the U.S. Trustee is
pressing her objection? MR. MCMAHON: Your Honor, Joseph McMahon. We are and
we haven't seen the documentation of what's before the Court today. Be nice if we could see a copy of it. THE COURT: Ms. Uhland, I didn't specifically direct
it, but I would have hoped that the U.S. Trustee would have been provided with any documentation prior to today's hearing. I mean one of the arguments that the U.S. Trustee made Friday was, you know, we haven't had time to look at this. MS. UHLAND: THE COURT: Your Honor -I would have thought that immediately
after having voiced that -- maybe it wasn't ready until this morning. I don't know. MS. UHLAND: Explain that if you would. Yes, Your Honor. The changes are not
very complicated to the economics reached with the Committee. But it did take, Your Honor,'til late last night to run those changes and work out the language through the plans. So Your
Honor, we -- it was, like I said, very late last night with travel and we have blackline changes to the plans that we can walk through. But given the late hour I determined to simply But they just simply
walk through -- with them with the Court. were not ready. Previously.
THE COURT:
Well, I'm inclined to grant the U.S.
Trustee's request then.
14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MS. UHLAND: Your Honor, what I would propose we do,
as I said, the changes are rather straightforward, as perhaps we can provide these changes to the Trustee this morning -- the revised plans. These would be the revisions from the exhibits I said, they're very
to the order that were filed on Tuesday. minor modifications.
Perhaps we can adjourn this part of the
hearing 'til 1 o'clock and the Trustee can have an opportunity to review those minor economic changes. THE COURT: MR. MCMAHON: Mr. McMahon? Your Honor, part of this process has
been receiving on an employee by employee basis the specific payments which are proposed to be made under the two plans that are issue in the motion. We started out with a spread sheet
that contained roughly 120 people, and after the amended motion was filed last Tuesday we're down to 90. Now I'm being asked
to, I guess, accept information at some point this morning while we have a hearing going on in other matters, and completing some type of review such that I can be informed for an evidentiary hearing this afternoon. On the employee by employee analysis, Your Honor, I can't say that I'm prepared to do that. And I would agree with Your
Honor that the appropriate thing to do is to move this matter to the 15th pending the consideration of the Trustee Examiner Motion. MR. INDELICATO: Your Honor, Mark Indelicato from
15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Hahn & Hessen on behalf of the Committee. Your Honor, I
sympathize with the U.S. Trustee and I heard the Court's -well, not a direction, suggestion on Friday. But to be fair to
the Debtor, Your Honor, I believe the e-mail was circulated late last night. -THE COURT: You know, I'm not -- please don't We are trying to go through the changes today
interpret my comments as criticism. MR. INDELICATO: THE COURT: No, no, I --
I understand that the process, with
everything that's going on it moves at a number of different levels and eats up all kinds of resources, both legal and otherwise. And that's not my issue. My issue is trying to
balance the need for the quick action that the Debtor here is requesting and that the Committee is consenting to against the objector here, who's raised, I think, some very serious objections about the payments. to, you know, other things. MR. INDELICATO: And what I was gonna get to, Your You know, from officer status
Honor, and I thought what was the Court's suggestion on Friday is, I think there is an essential need that this get resolved today. I think one way or the other. I think the Court needs
to hear the evidence. What I was suggesting is that I'm not so sure giving Mr. McMahon an hour or two to go through it is going to address
16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 his concern on an employee by employee basis. But that may
come out in the testimony that the Court is gonna hear today. The only way you're gonna get that information is from the Debtors. And instead of unfortunately sitting down with the
Debtors maybe we're forced to do it in the evidentiary hearing. Because I think, Your Honor -THE COURT: But see, if the Committee were the
objector here and the Debtor had proposed to proceed in that fashion, you would be objecting. MR. INDELICATO: I would, Your Honor. But the
difference here is, and what we're hearing from the Debtor and what we're hearing from potential bidders is it's imperative that these employees be kept in place and that this -THE COURT: I don't dispute that proposition. You
know, and maybe there are -- except for the U.S. Trustee, who has, maybe there are a few others who would. MR. INDELICATO: Well, Your Honor, what I'm
suggesting is that give us an alternative to try and satisfy the U.S. Trustee and the Court, and I think as the Court laid out, if you're not satisfied and the U.S. Trustee is not satisfied at the end of the testimony we could address that issue then. THE COURT: Well, what I had anticipated was that at
the point -- before we came to the hearing today that the U.S. Trustee would have in her hands whatever would be necessary --
17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 what the Debtors was proposing today. And I find out, again
understanding the circumstances, I'm not necessarily accusing anyone of moving too slowly. true, some have said. In fact the opposite might be
It's the fact that the U.S. Trustee is And what I'm
being forced to come to the hearing unprepared.
hearing you say is, well, Mr. McMahon can listen to the testimony and -MR. INDELICATO: THE COURT: You know, Your Honor -I had
-- that will be good enough.
wanted to hear testimony to convince myself that the need for the speed which was being pursued here was real. And that's I was
really why I didn't grant the Trustee's motion Friday.
giving the proponent here a chance to say, okay, here's -- it's real, we need it now, and I wanted evidence of that. argument of counsel. Not just
But there's an objector here, and it just
seems to me to be putting the U.S. Trustee, and the Court perhaps, at an unfair disadvantage with respect to something that may have some serious issues connected with it. MR. INDELICATO: All I was suggesting, Your Honor, is
give us the opportunity, or give the Debtor the opportunity. And then if the U.S. Trustee, if it has not addressed his concerns it's without prejudice for him to renew his Motion to Adjourn, and maybe there's some way that we could balance his issues against the employee issues and come to resolution. I understand it's not a perfect settlement. It's not a
18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 perfect case. But what I'm just concerned about is just a mere So
adjournment will send a wrong message to the employees. that's what I'm trying to fashion, Your Honor.
I am trying to
balance all the issues, and I certainly appreciate what we're asking the U.S. Trustee to do. issues. THE COURT: Well, I've said from time to time that I But we're trying to balance the
don't view myself as being in the message sending business. More like in the dispute resolution business. that sometimes there are consequences to that. MS. UHLAND: Your Honor, one other point I would -But I understand
we reviewed the United States Trustee's objection, and the changes that we're talking about from the filed motion go to the economics. The Trustee's objections raise issues of the
insider status, and the -- sort of the incentive nature of the plan, none of which have been changed by the virtue of the changes we've agreed to with the Creditors Committee. So we
are here today prepared to address the United States Trustee's objection with our evidentiary record. The fact that we've made further economic reductions in the plan by virtue of our agreement with the Creditors Committee really does not -- in my mind does not alter at all our response to the U.S. Trustee's objections. So we're not
asking the Trustee to respond in realtime to our proposed -you know, to address the changes. We're prepared to, in
19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 affect, proceed on the record on the motion from last Tuesday, as I said with some minor economic modifications. THE COURT: Well, here's what I'm going to do. I
will temporarily adjourn the matter to some point this afternoon, and we'll decide what time it is. break. I will need to
I have a commitment which I entered into before setting So we're going to --
this hearing date that I intend to keep.
I don't know how long the rest of the agenda will take, but we're going to break at 12:15 and probably won't come back until about 2:15 in any event. least that time. So we'll push in matter to at
And then after the U.S. Trustee has had a
chance to review the latest iteration of the proposed plans then we'll take up her request again. MR. MCMAHON: Your Honor, if I could make a request.
As I noted for the record, I have yet to see the employee by employee analysis and spread sheet format, and I'm wondering whether the Debtors can provide that this morning before that hearing. THE COURT: MS. UHLAND: Well, I think they ought to. Yes, Your Honor, I'll just need to
clarify with Mr. McMahon exactly what he's looking for and we'll get it. THE COURT: matter for now. MS. UHLAND: Your Honor, the next motion is the All right, thank you. We'll pass this
20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that one? MR. LOGAN: Your Honor, many of the changes are just Debtors -- the final hearing for the D-I-P financing, and Ben Logan will be handling that for us. MR. LOGAN: Thank you, Your Honor. We were before
the Court on April 3 to have a hearing -- the interim hearing on the Debtor-In-Possession financing. committee's been appointed. Since then obviously a
We had substantial dialogue with
the committee over the terms of the Debtor-In-Possession financing agreement. And indeed we had a hearing originally
set for April 24, was the date initially set for the final hearing on the Debtor-In-Possession credit agreement. That was
continued to today largely to let us continue to pursue issues that the Creditors Committee had raised. And I'm pleased to
report that we have an agreement with the Creditors Committee. There is a revised version of the Final Order, revised from the version that was submitted with the moving papers that reflects the agreements between the Debtor-In-Possession Lenders, the Creditors Committee and the Debtors, which I could hand up to the Court. THE COURT: MR. LOGAN: THE COURT: If you would. It's both.
Your Honor, may I approach? Yes. Okay, well, does it differ from
to reflect the fact that it's a Final Order, as opposed to an Interim Order. But let me just highlight a few examples of
21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 things that with were discussed with the Creditors Committee and reflected in a revised verse of the order. One, in paragraph numbered 3 there is an addition that three days notice had to be given to the Creditors Committee of any proposed amendments to the D-I-P credit agreement. And
just let me add parenthetically there, there was one amendment that occurred during this time frame pursuant to the similar provision of the Interim Order which extended the period of time during which the Debtors and the D-I-P Lenders could agree do provide traunch B. I'm not sure if Your Honor remembers,
traunch B was a supplemental facility that would have been used to take out the Citigroup service or advance facility. So
those negotiations continued on longer than was contemplated at the time of the original D-I-P credit agreement. Paragraph 5, the parenthetical added there reflects the agreement on limiting fees that was undertaken in connection with what we used to call the Greenwich sale. it now the Ellington sale. to bring the two into sync. The Creditors Committee added the paragraph at the bottom that their rights to challenge the cost and expenses for reasonableness are reserved. it's now explicit. Perhaps most significantly, paragraph 7, and there's some corresponding changes throughout the document, liens on That was probably implicit, but I guess we call
But that just is a cross reference
22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 avoiding powers have been stricken. The original motion
contemplated that the D-I-P Lenders would have liens on avoiding powers, not at the time of the interim hearing but they were requesting one at the time of the final hearing. Your Honor gave them a heads up at the time of the interim hearing that that was going to be a tough road to hoe, and it's not being hoed. So that is stricken. And
There's a corresponding change to carve out from the administrative priority any proceeds from avoiding powers. That's found on paragraph 17, for otherwise not granting any lien on avoiding powers would be a little bit illusory, since if they had an administrative priority they could get to the same result. Paragraph 18, paragraph(b), there's been some clarification as to what the Committee can do with the carve out funds. They can investigate the extent, validity, There is some
perfection, et cetera, the liens and the claims.
language in the original order about preventing, hindering or unreasonably delaying, which the parties agreed was a little bit broad. I'm not sure how one investigates or does other So that was clarified.
things the D-I-P Lenders don't like.
Perhaps the next significant change is found in paragraph #21, where the Committee was successful in clarifying that during -- well, first off, extending the notice period before the Secured Lenders can exercise certain remedies from three
23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 business days to five business days, giving us two business days additional time. And adding the language at the end that
during that five business day period the Debtors or the Committee may seek an order from the Court trying to enjoin the D-I-P Lenders from exercising those remedies. And Your Honor, most of the other changes I believe are really just in the nature of clean up. Oh, excuse me. This is a
Paragraph #42 was added at the Committee's request. joint and several borrowing facility.
It is possible that some
of the Debtors may borrow funds under the D-I-P facility and have other Debtors repay those funds. There is a substantial
overlap among the Debtors as to how they're jointly and severally liable on many of the Debtor's credit agreements prepetition, but not entirely. And the Committee quite
properly raised a question as to whether or not if one Debtor borrows the money and another Debtor repays the D-I-P money shouldn't there be a right of contribution that's entitled to an administrative priority? D-I-P Lenders didn't care. the order. The Debtors agreed with that. The
And so we added this paragraph to
It really is part and parcel of the same thing that
was included in the Cash Management Order at the outset of the case. To the extent they're intercompany borrowings they're
entitled to an administrative priority. And that is it as far as the Committee is concerned. should report to the Court that negotiations continue. In I
24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fact, there's a meeting of the D-I-P Lenders Credit Committee this morning about providing additional availability under the Debtor-In-Possession credit facility. have $50 million of availability. that facility this week. Presently the Debtors
They expect to start using
We are hopeful, optimistic, and if
the sun shines on the D-I-P Lenders Creditor -- Credit, not Creditors Committee, Credit Committee, this morning that facility should be expanded. We think it important that it be
expanded in order to allow sufficient liquidity to make sure the Debtors can get to the sale of the servicing business. THE COURT: Well, the five-day forecast I saw in the
news this morning looked pretty good. MR. LOGAN: Good. It's beautiful today. So all I
really care about is today, I hope, Your Honor, because hopefully the sun will continue to shine today and we'll get the good news there. be done. The facility does provide that that can
The Creditors Committee -- Creditors Committee is on They understand the process. And we're
board with that.
hopeful that there will be some additional liquidity opened up. There were two objections we received, Your Honor. They're a little bit old now because this was -- they were filed before the April 24 hearing. One was an objection filed
by Morgan Stanley, and they simply wanted to make sure that some of the very artful language that was put into the Interim Order continued on into the Final Order. It does. We provided
25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 them a copy of the redline of the Order, and I think that they are satisfied. They should be satisfied because it's verbatim
what was in the old order. Second, Goldman Sachs raised an issue that really doesn't relate to the D-I-P loan. They had four loans that were
financed with New Century Warehouse Corporation, the company also known as Access Lending. And those loans were shown to
New Century Mortgage Corporation, one of the Debtors, as a possible take-out investor, and Goldman Sachs raised a question as to whether or not those loans had been returned to them. They initially had -- New Century Mortgage Corporation decided not to take out the loans, and so the loan papers should have been given back to Deutsche Bank, which is the custodian for Goldman Sachs. Goldman Sachs initially said they couldn't find the loan files for four of them. By the time of the April 24 hearing We checked
they'd found two, so the issue was down to two.
with the folks at Access Lending and they think they sent all four back to Deutsche Bank and sent tracking numbers to Goldman Sachs. So I think that issue's resolved. But even if it isn't
it doesn't have anything to do with the Debtor-In-Possession facility for -- we're not purporting to grant liens on any of those loans to the Debtor-In-Possession Lenders. So those are the objections. If the Court prefers, I
could make a proffer very similar to the proffer we made at the
26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reading. first hearing. Mr. Mondava is here again. About the need for
the D-I-P facility, quite frankly, I would suggest, given the absence of any objections to the substance and the Creditors Committee's endorsement of the proposal that we take judicial notice of that prior proffer. But if the Court or other
parties disagree I'm more than happy to go forward. THE COURT: I see no need to repeat the dramatic
I'll consider that as -MR. LOGAN: It's scintillating, Your Honor.
(Laughter) THE COURT: MR. LOGAN: THE COURT: I don't know, I was here. Yes. I'll consider that as part of this
record, but ask whether anyone else cares to be heard? MS. SCHWEITZER: Your Honor, good morning, I'm Lisa
Schweitzer from Cleary Gottlieb Steen & Hamilton for Goldman Sachs Mortgage Company. I am -- we do not have an objection to
the D-I-P Order being entered as it is based on the representation of Mr. Logan on behalf of the Debtors that the two loans in dispute are not being pledged. But obviously
reserve our rights with respect to everything else he said. The tracking numbers and other information were provided to us like midnight going on Saturday. dig into the facts. So we haven't had any time to
But as long as everyone's clear the loans
are not being affected by the D-I-P Order it's not an issue for
27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 today's hearing. THE COURT: MS. KELBON: All right, thank you. Good morning, Your Honor. Regina Stango
Kelbon from Blank Rome on behalf of the Official Creditors Committee. Mr. Logan has accurately stated the changes that
were made in the order, and the Committee was appreciative of the adjournment of the D-I-P Lender and the Debtors from the April 24th hearing because we did use that time to get comfortable with the facility, the necessity, the fees. As Mr.
Logan mentioned, traunch B was never activated by the deadline. So the only thing remaining for the Debtor is the second half of traunch A, which we are hoping today that the D-I-P Lenders will activate so that the Debtor will have further liquidity. But having said that we are in agreement and in support of the D-I-P financing facility. THE COURT: MS. KELBON: THE COURT: MR. RILEY: THE COURT: MR. RILEY: Thank you. Thank you, Your Honor. Does anyone else care to be heard? Yes, Your Honor. Yes, go ahead. My name is Jack Riley. I'm the Trustee
for the Rose Townson Trust at PO Box 13474, Spokane, Washington, 99203. 509-216-6080. 99213, excuse me. My phone number is First I'd
And my fax number is 509-326-4891.
like to apologize for not being able to find a Delaware
28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 attorney on such short notice, as I'm representing myself and the trust. And I didn't receive a notice of the Court
Bankruptcy from my attorney until the 26th of April. I've written out a -- if the Court would allow me to, I've written everything down here as best I can, as I'm not an attorney. But if I could read it to you. THE COURT: Well, tell me first whether you are
objecting to the entry of the order that's been presented to the Court? MR. RILEY: Yes, I'm objecting to the order. The
Rose Townson Trust had a prior lien before New Century took out a lien on a piece of property belonging to Darryl Johnson and Sally Arnay at 4223 South Madison Road, Spokane, Washington, 99206, and the Rose Townson had an existing lien prior to New Century making a lien to -- making a loan on the property, which their New Century title insurance company failed to notify New Century of the Rose Townson Trust existing lien. New Century has recourse to go back at their title insurance company for the amount of their lien, as far as I can understand. And on August the 20th -- August the 3rd the
Townson Trust filed a request for the determination of summary judgment adding a first priority lien in relation and the real estate of Darryl Johnson and Sally Arnay with Judge Patricia C. Williams, U.S. Bankruptcy Court Judge, Eastern District of Washington, bankruptcy case #05-09692-PCW-13. Adversary
29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 proceeding #06-09692-PCW-13. Based on the Court's own ruling
on the Plaintiff's motion for summary judgment on September 22nd, 2006, it is hereby ordered Plaintiff Rose Townson Trust has the first priority lien in the real estate. On October 6
of 2006 attorney Daniel J. Gibbons of law office firm of Paine Hamblin Kaufman Brooke & Miller in Spokane, attorneys for New Century Mortgage. Their address is 717 West Sprague Avenue,
S-P-R-A-G-U-E, Suite 1200, Spokane, Washington, 99201-3505. Phone #509-455-6000. They filed a -- the attorneys -- their attorneys filed a statement of appeal, a notice of appeal, an election from the Bankruptcy Courts order granting the Plaintiff's Motion for Summary Judgment, docket #88, heard by the District Court. Case #05-09692-W-13. New Century filed a Chapter 13. On October 26th the Rose
Adversary proceeding 06-80040.
Townson Trust attorney, Scott R. Smith of Stampa Root Spockman Smith in Spokane, address 720 West Boon Avenue, Suite 200, Spokane, Washington, 9201. case #05-09692-W-13. Phone #509-326-4800. Bankruptcy New
Adversary proceeding #06-80040.
Century Mortgage memorandum in support for stay pending appeal for posting supersedes bond in the amount of $612,591.21. THE COURT: Mr. Riley, excuse me for interrupting,
but what I'd like you to tell me is why you are objecting to the entry of the order. MR. RILEY: Well, we're objecting to the order -- in
30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 other words, our lien was priority lien before New Century made the loan to these people. And they have appealed Judge
Williams ruling that we were allowed the case, and let me read this to you. THE COURT: MR. RILEY: THE COURT: MR. LOGAN: No, don't read anything else. Okay. Let me hear from the Debtor. Your Honor, nothing in the
Debtor-In-Possession financing would adversely or positively or negatively affect anything -- I didn't catch his name, but the person on the phone -THE COURT: MR. LOGAN: made various loans. Mr. Riley. Mr. Riley's talking about. New Century They
They may be subject to first liens.
may be subject to second liens. dispute.
They -- the priority may be in
All the Debtor-In-Possession loan facility does is
grant a lien in New Century's loans, whatever priority they may or may not have, to the D-I-P Lenders. And disputes Mr. Riley
may have concerning the priority of a loan New Century made is an interesting issue, but just not relevant to the Debtor-In-Possession financing. THE COURT: Mr. Riley, do you understand what
Debtor's counsel has just said? MR. RILEY: Yes, but if he let me finish -- it's --
Judge Bonnie R. Sucal, United States District Bankruptcy Judge
31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Mr. Riley. MR. RILEY: THE COURT: MR. RILEY: THE COURT: MR. RILEY: THE COURT: Okay. But the point -The parties raise -Mr. Riley? Yes. The point of it is that if you're for Eastern District of Washington ordered a stay in the case that says, "Before this Court is the parties joint oral request to stay this case in light of New Century's April 2nd, 2007 filing for bankruptcy in the District of Delaware. case #07-10416. THE COURT: I know what the case number is, Bankruptcy
involved in litigation outside of this Court which has been stayed by virtue of the bankruptcy filing, two things. One,
there is a method that can be employed to ask this Court for permission to let that litigation proceed. But secondly, the
point -- and I guess what's before me today is the question which you raised of whether the orders I'm being asked to enter with respect to the financing in any way adversely affects the priority dispute that you have, and it does not. So if that's
the basis for the objection, and again, it's an oral objection, I've seen nothing in writing, I will overrule it. Now is there some other ground upon which you think this order should not be entered?
32 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 attorney. THE COURT: MR. RILEY: Well, you may need to employ one. I can't find one is my problem. I've It MR. RILEY: Well, according to the -- Judge Sucal it
says the Court -- that this litigation cannot forward until the automatic stay of proceedings in bankruptcy -- pending bankruptcy is lifted. THE COURT: And according -That may be correct. And there is a way
for you to come to this Court and ask that the stay be lifted. MR. RILEY: THE COURT: counsel about. MR. RILEY: I see. But I don't have a Delaware Okay. But I'll leave that for you to consult
tried and they're all tied up with this Chapter 11 case. says -- one more thing.
It says, "According to the parties
joint motion for stay is granted the case shall remain stayed until such time either party files a motion to lift the stay." Hello? THE COURT: MR. RILEY: I'm here. Oh. And what we're -- what I'm concerned
about is that if New Century files -- has a sale of that piece of property or the lien on it, their mortgage, where do we stand as far as our lien is concerned? THE COURT: Well, again that's something about which
you should consult counsel, but the rules would require that if
33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 New Century were to undertake a -- or a transaction or request relief from this Court which would affect your interest you would receive notice of that. But again, under the
circumstances I encourage you to consult counsel, and if you wish to move forward with requesting relief from the stay there is a way to do that. And again, if you're doing so on behalf
of the trust you must do so with the aid of counsel. MR. RILEY: I see. And would my attorney here in
Spokane tell me how I could do that or -THE COURT: Well, I don't know what your attorney
knows about bankruptcy, but I'm sure there are plenty of competent bankruptcy counsel somewhere near you. MR. RILEY: again, Your Honor? THE COURT: Okay, now this is -- what is this called It's to lift the stay or -Yes, you need to file a motion asking for
this Court to lift the stay. MR. RILEY: THE COURT: Ask the Court to lift the stay. And it may very well be that under the Now I'm not saying that it
circumstances the Debtor may agree. will or it won't.
But it's not unusual to have such disputes
resolved outside of this Court. MR. RILEY: THE COURT: I see. But that's not for me for here today.
Anything further, Mr. Riley? MR. RILEY: No, that should complete it.
34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. RILEY: THE COURT: Thank you, sir. Thank you, sir. Does anyone else care to be heard in
connection with the D-I-P Order? ALL: (No verbal response). I hear no response. Your Honor, did I hand up the order? You did. And I've signed it. All right,
THE COURT: MR. LOGAN: THE COURT: what's next? MS. UHLAND:
Next, Your Honor, we have the Debtor's
motion to approve the sale of their LNFA and certain residual assets. THE COURT: outstanding? MS. UHLAND: Your Honor, we delivered our proposed Which of the objections are still
language to resolve the State of Ohio objection to the State of Ohio last week. We have not heard back from them either way.
But based on our prior conversations we understand that that resolves their objection. Your Honor, we received -- the objection from the Creditors Committee's resolved. There are objections from the -- objections H and I, which are objections from certain Texas taxing authorities. We have
contacted them and informed them that there's no tangible personal property located in Texas. That's been transferred so
35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 night. like. MS. UHLAND: If you would, Your Honor. I believe objection. THE COURT: Told they were filed late on Friday I'll hand you my copies if you'd I do not believe they are further pressing those objections. And with respect to the National City objection, we are not transferring any of their -- the property listed in those schedules. The United States Trustee filed earlier objections with respect to the sale at the time of the bid procedures. We've
included some language and now some additional language, and I believe that some of it was being reviewed this morning by the Purchaser. agreed to. I'm checking to see whether that had been finally So with those final agreements and language the
United States Trustee's objections are also resolved. So my understanding, Your Honor, is that there are no objections being pressed to the sale. THE COURT: just came in? MS. UHLAND: Your Honor, I'm not sure I saw that What about Maricopa County filings which
Not on the agenda.
since we're not selling any personal -- or tangible personal property, that's I believe in Arizona -- we're selling only loans. We're not selling any of the foreclosed properties as a That we could make the same
result of the loans.
36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 representation that we could to the Texas taxing authorities that no tangible or real personal property in Arizona is being transferred in accordance with the sale. THE COURT: Okay. And it seems to me the objection Okay. Any -- before you proceed,
is directed to that issue.
let me just ask our -- would any of the objectors, or prior objectors, care to be heard? MR. POWER: Your Honor, real briefly, Mark Power for Your Honor, first of all, we'd be
the Creditors Committee.
remiss if we didn't complement the Debtor and the professionals in the auction that occurred last week. run and highly professional in our view. The Debtor worked well with the Committee and we were able to resolve all the issues we raised in connection with the original Asset Purchase Agreement. There were a number of It was very smoothly
provisions that were of concern to us, and the final bidders were able to negotiate in good faith and resolve every one of those issues. So we can withdraw our objection.
Your Honor, I can report to the Court that there was lively bidding at the auction. evening. It lasted pretty much up to the
And that the Committee was very satisfied that the
results of the competitive bidding and the good faith nature of the bidders that the results achieved today represent fair value. And this is the maximum value for these assets. So the
Committee withdraws its objection and supports the sale.
37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MS. UHLAND: Thank you. Thank you, Your Honor. Your Honor,
we're seeking approval today of the sale to the winning bidder, Ellingin -- I'm sorry. Ellington Management Group, LLC for a The purchased assets, as we
purchase price of $58 million.
previously described, consist of approximately 2000 loans owned by the Debtor. Refer to those as loans not financed anywhere. Some
And certain residual interests and securitization trusts.
of these are net interest margin interest, and others are other types of equity residuals. As we described previously at the prior hearing, these assets were difficult for the Debtors to sell prepetition because of the fact that the loans that we're discussing are loans that are frequently lower quality loans. They've been --
either have a documentation issue or for some other reasons have come back into the Debtor's possession. And with respect
to the residual interests that were being sold, some of them are later in life, and also certain of those have documentation issues. Since the Court approved the bidding procedures the Debtors and Lazard engaged in a continuing marketing process, and set the bid deadline pursuant to the procedures as revised as April 30th. The Debtors received five qualified bids. They
received those qualified bids from Countrywide Home Loans; DB Structured Products, Inc.; Credit Based Asset Servicing and
38 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Securitization, LLC, which we refer to as C BASS; Ellington Management Group, LLC; and a joint bid by GMAC Residual Funding Company, LLC, and Oakhill. After those bids were received the
Debtors working with the Creditors Committee analyzed the bids, as well as the proposed forms of asset purchase agreements received by each of those bidders. In connection with that process the Debtors worked closely with the Creditors Committee in an effort to resolve the Creditors Committee's objections and addressed their concerns with respect to the asset purchase agreement. On May 1st the Debtors determined that the Countrywide bid was at that time the highest and best bid. That was based not
only on price but also the fact that the Countrywide bid had several document -- or contract improvements from the Greenwich bid, including the following. First, with respect to the hold back amount, that the hold back would apply not only to the designated items in a -previously identified in the Greenwich purchase agreement would in fact -- but would in fact be applied to all of the reps and warranties contained in the agreements. That it would clarify
that any reduction from the hold back amount, or reduction in purchase price as a result of the breach of reps was only in accordance with the agreed percentage -- or the agreed price reduction percentage that applied to the hold back amounts. In
other words, there could not be -- we were in affect tapping or
39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 predetermining the damage amount with respect to any breach of representation. Further, the Debtors made, and Countrywide agreed to make clarifications with respect to the provisions with the certain residual interests where the certificates had been lost. was the concern by the Creditors Committee there was some ambiguity that there may be some closing delivery requirements while the Debtors did not believe this to be the case with the Greenwich transaction. We clarified that so that it was clear There
that the Debtors, to the extent the certificates were lost, were not required to deliver them to close the sale. With those -- further, instead of a one-year time period on the rep and warranty there is a 90-day period with respect to the effectiveness of the reps and warranties, after which time no claims made on the hold back, the hold back must be returned. On May 2nd, the date of the auction, the Debtors, their representatives, Lazard, the Creditors Committee and its financial advisors all participated at the auction in O'Melveny's offices in New York, commencing approximately 11:30. I will set forth further in a more detailed proffer,
but in essence, Your Honor, over the next 11 hours there were nine rounds of bidding at which each -- and in each round the economic and noneconomic terms of the bids were announced. after each round of bidding the Debtors, together with the And
40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Creditors Committee, determined which bid would be the lead bid for the next round of bidding. At the conclusion of that process in the final round of bidding only two bidders remained, Ellington and CBASS. In the
final round the Ellington bid was 58 million, and the CBASS bid was 57.4 million. Thus Ellington was declared the highest and
best bidder, and deemed the successful bidder for the assets, and CBASS was declared the back up bidder. The Ellington and the CBASS purchase agreements contain the modifications previously requested by the Debtors and the Creditors Committee, and were agreed to in connection with the Countrywide bid with respect to the escrow, the hold back amount, the Debtor's representations and warranties, and the clarifications with respect to the residual certificates. In addition, Your Honor, Ellington agreed to allow the Debtors to in affect address some of the issues with respect to the Ohio loans that are the subject, or potentially the subject of the injunction, allowing the Debtors to, if they can, place those loans with -- if they can't transfer the loans to put those loans effectively to Ellington during the 90-day period, provided that if Ellington does not desire to take those loans they may decline to do so but without a reduction of purchase price. Your Honor, based on this record on this bidding the Debtors and the Creditors Committee determined for the
41 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 documentation reasons and overall price that this bid is the highest and best bid and would seek Court approval of that bid today. Proceeding, Your Honor, that an approximately 20% increase over the purchase price, the Debtors will be paying out the break-up fee, or propose to pay out, and the order provides that they pay the break-up fee to Greenwich as previously agreed and set forth in this Court's order. Your Honor, we would propose to submit a -- I'll try to summarize, but brief proffer to provide the appropriate evidence for the findings in the order, and then, Your Honor, walk through the changes to the order to the one originally proposed. THE COURT: All right. Can we take just a
five-minute break before you proceed? MS. UHLAND: THE COURT: (Court in recess) THE CLERK: MR. LOGAN: All rise. Be seated please. Yep. All right, five minutes.
Your Honor, just a very brief update on The sun did
the Debtor-In-Possession financing facility. shine.
The facility has been up sized to $100 million. THE COURT: MS. UHLAND: Very well, thank you. Some good news today. Your Honor, I'd Mr. O'Dowd
like to proffer the testimony of Mr. Blake O'Dowd.
42 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is in the Courtroom today. with Lazard Freres. Mr. O'Dowd is a managing director
Mr. -- he's one of the senior members of Mr. O'Dowd has been involved in He
Lazard's restructuring groups.
the restructuring of troubled companies for over 12 years.
has been the lead banker on a number of major restructurings, including Fruit of the Loom, Kaiser Aluminum, National Energy Group, and Sun Health Care. He's been involved in several other restructurings in and out of Court, including ATA Airlines, Sellatext, Fox Myer Corp., Marvel Entertainment, Simmons Upholstered Furniture and Wireless One. Mr. O'Dowd has a BA from Duke University and an MBA from New York University. Mr. O'Dowd is one of the managing directors with Lazard leading the engagement, along with Mr. Kurtz in representation of the Debtors. Called to testify Mr. O'Dowd would further testify that since the Court approved the bidding procedures that -- with respect to the Greenwich assets that Lazard had approximately six to eight of its employees devoted to the marketing of the assets and the auction and sale process. That they collected a
diligence materials on the assets and established a data room where perspective bidders could review and evaluate those materials. Lazard always initiated communications with parties they
43 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 previously identified as potential bidders such that they contacted approximately 75 potentially interested parties, approximately 40 of which executed -- expressed interest, and 31 executed nondisclosure agreements with the Debtors with respect to these assets. Following the extensive marketing of the assets, Mr. O'Dowd would testify that the Debtors received five qualified bids for the assets, and that the parties -- by the deadline of the April 30th, and that the parties submitting the qualified bids included Countrywide Home Loans, Inc.; DB Structured Products, Inc.; Credit Based Asset Servicing and Securitization, LLC, or CBASS; Ellington Management Group, LLC; and a joint bid by GMAC Residential Funding Company, LLC, and Oakhill. He would testify that after the bids were received the Debtors, Lazard and the Creditors Committee evaluated and discussed the economic terms of the bids as well as other terms and conditions of the asset purchase agreements by the bidders. They also analyzed the methods in which, pursuant to the auction process, they could improve the terms of the asset purchase agreements in both economic and noneconomic aspects and maximized the value of the assets and the recovery for the Estates. On May 2nd representatives of the Debtors, Lazard and the Creditors Committee and its advisor, FTI, the stalking horse
44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 bidder, Greenwich, and the qualified bidders Countrywide, Deutsche Bank, CBASS, Ellington, and GMAC/Oakhill Venture assembled at the offices of OMelveny & Myers in New York at 10 a.m. for the auction. Prior to commencing the auction the Debtors, Lazard and the Creditors Committee discussed with Countrywide its initial bid, which was at the time the highest at approximately $49 million, and certain terms of the asset purchase agreement to determine if Countrywide would agree to approve the terms of its agreement. Mr. O'Dowd would further testify that Countrywide did agree to the modifications in the asset purchase agreement, including an agreement to reimburse the Debtors for any servicing expenses commencing on April 2nd and thereafter, a willingness to close without obtaining physical certificates for the lost -- where the residuals -- for those that had been lost. A put on any loans that may be subject to a preliminary Capping all liabilities for claims arising
injunction in Ohio.
under the purchase agreement to the $3 million hold back, and setting the amount of damages for any particular loan that could not be transferred based on the predetermined percentage for the unpaid balance of that loan. The Debtors thereafter
commenced the auction with the Countrywide bid of 49 million and improved asset purchase agreement terms. Mr. O'Dowd would further testify that over the next 11
45 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 hours the Debtors conducted nine rounds of spirited and competitive bidding during which the bidders would announce the economic and noneconomic terms of their bid. After each round
of bidding the Debtors in consultation with the Creditors Committee would select the bid they deemed the highest and best bid for the assets. Further, each bidder was given the opportunity to pass during a single round of bidding. However, if they declined to
submit a bid in two consecutive rounds of bidding they were required to withdraw. Mr. O'Dowd would testify that frequently there were breaks between the rounds of biddings for the parties to consider the economic and noneconomic terms offered by the highest and best bid in the previous round and to evaluate the bids they could make for the assets. During these periods the Debtors, Lazard
and the Creditors Committee extensively discussed with the bidders the terms of their bid and made suggestions on how to improve their bids. These suggestions often included
improvements to the asset purchase agreements that the Debtors, Lazard and the Creditors Committee believed to be more favorable to the Estate and greater benefits in addition to maximizing the economic consideration for the assets. Over the subsequent rounds of bidding the purchase price and other terms of the transactions were significantly improved, and as one would expect, the number of bidders
46 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 willing to continue to increase their bids and remain in the auction gradually declined. He would testify that in the final round of bidding, the 9th round, only two bidders remained, Ellington and CBASS. In
the final round of bidding Ellington bid 58 million and CBASS bid 57.4 million for the assets. Thus Ellington was declared
the highest and best bidder and the successful bidder for the assets, and CBASS was declared the back-up bidder. At approximately 9:30 p.m. eastern standard time, or it's actually eastern daylight time, I believe, on May 2nd the auction was concluded. Mr. O'Dowd would further testify in declaring Ellington the highest and best bidders the Debtors, Lazard and the Creditors Committee considered several factors, including that 1) Ellington offered the highest overall purchase price of the assets compared to other bidders, 2) the formula and price calculations employed by Ellington resulted in the smallest amount that could be taken from the hold back and effectively deducted from the purchase price, 3) Ellington agreed to the modifications to the asset purchase agreement and the Sale Order requested by the parties which were part of the Estate additional economic and noneconomic benefits. Mr. O'Dowd would further testify that in his opinion throughout the auction and sales process the assets were aggressively and adequately marketed by the Debtor and Lazard,
47 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and in his opinion the auction was properly advertised and announced, including a publish of notice of the sale hearing and auction in the Wall Street Journal, and Lazard's independent effort to solicit interest from approximately 75 potential buyers. He would further testify that in his opinion the auction that took place over 11 hours and 9 rounds of bidding involving 5 qualified bidders was well-conducted and caused the bidders to submit highly competitive bids in increasing amounts, and that the efforts of the Debtors, Lazard and the Creditors Committee to encourage bidders to improve their economic terms facilitated the auction process and the submission of improved bids. He would further testify that the parties and the bidders engaged in hard fought and arm's length negotiations at all times, and that at all times the participants in the auction acted in good faith with respect to their bids submitted. Finally, he would submit that in his opinion the Ellington bid is the highest and best bid for the assets, represents the maximum value that could be obtained for the assets under the circumstances, and that a well-conducted sale and auction process took place. He would further testify that the other terms Ellington has agreed to incorporate in the asset purchase agreement provide additional benefits to the Estate and the Creditors and
48 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 further improve the value of the Ellington bid, as opposed to other bidders. That concludes the proffer of Mr. O'Dowd. THE COURT: ALL: Does anyone care to examine Mr. O'Dowd?
(No verbal response). I hear no response. Anything further in
THE COURT: support of the sale? MS. UHLAND:
Your Honor, only, Your Honor, to submit
the proposed Order and walk the Court briefly through the changes. THE COURT: Okay.
(Pause in proceedings) MS. UHLAND: Your Honor, let me confirm that the
final language is actually in the order that I'm about the hand up. (Pause in proceedings) MS. UHLAND: Your Honor, I'd like to walk the Court
through the changes but we received -- we made some finer modifications in response to some language requests from the United States Trustee's office, so we're gonna need to run those and bring this back this afternoon. So Your Honor, what
I would propose to hand up to you is -- oh, I do have a -- I have a blackline with all of those change -- with all the changes, but I don't have a clean right now. THE COURT: Okay.
49 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MS. UHLAND: THE COURT: May I approach with the blackline? Yes. Thank you.
(Pause in proceedings) MS. UHLAND: Your Honor, the first three pages of --
where there's changes simply update to correct to the actual purchaser of the assets is. On page 4 of the blackline we've
included some additional language in paragraph (d) requested by the purchaser. THE COURT: Well, this is proposed as a -- well, I What in the record could you point to
guess a finding of fact. to support that finding? MS. UHLAND:
Your Honor, we have submitted the signed
-- previously connected with the Greenwich asset purchase agreement we have submitted a signed asset purchase agreement where the Debtors have made the representations and represented that they're true and correct. THE COURT: MS. UHLAND: That doesn't do it for me. Your Honor, may I -- as I said, this was Maybe I can have the counsel for
a request of the purchaser.
the purchaser come so we can come up with some proposed language. MR. DURRER: Good morning, Your Honor, Van Durrer,
Skadden Arps Slate Meagher & Flom on behalf of Ellington Management Group and its client funds. We had requested that
there be a finding as to this reference instead of incorporated
50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 -- instead of incorporating certain provisions of the asset purchase agreement in the record. I believe there was also a
declaration submitted in connection with the initial motion that described that the Debtors were willing and able to close the sale. We didn't had any reps and warranties that weren't
in the asset purchase agreement that were material from what was originally submitted. So I think there is evidentiary
record foundation for this finding. THE COURT: Well, in the absence of objection I think
I gave pretty wide latitude to what the parties suggest I should make as findings. And it may be that they are all true,
but I don't think there's anything in this record that supports that. It's just -- for me it's just a little bit over that
line, that's all. (Pause in proceedings) THE COURT: I'd take a proffer from the Debtor or its
representative in support of that. MS. UHLAND: MR. DURRER: MS. UHLAND: Right. Yeah, that's what we were actually Right.
(Pause in proceedings) MS. UHLAND: Your Honor, the Debtors have in the
Courtroom today a Mr. Suni Mondava with Lazard, who is very familiar with the asset purchase agreement and the representations made therein by the Debtor. So the Debtors
51 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 could at the conclusion walk you through this order, propose a brief proffer of Mr. Mondava to support that. THE COURT: MS. UHLAND: Very well, thank you. Your Honor, proceeding to the next
changes at the request of the purchaser, they're located on page 6. Notably in paragraph (m) representing that its the
market value and in paragraph (o), establishing it's not entering into improper fraudulent purpose. Your Honor, on page 8, paragraph (s) is the language we've addressed with the United States Trustee with respect to the Debtor's privacy policies. Also on page 8 in the operative
provisions, paragraph 4 we've agreed to change empowered from directed. To directed from empowered. Page 10, paragraph 8 to
clarify that persons receiving notice or have actual knowledge are in addition to Creditors of the Debtors requested to take action to release documents as appropriate of the purchase assets. The next -- paragraph 11 on page 11, take a minute to walk through. This paragraph was included again to clarify the There's two
issues with respect to the lost residual interest. parts of this paragraph.
First, the Debtors are the owners of
the certificates of the residual interest, and the -- they are the owners of the record in the registrar's list of holders of the certificates. The first sentence of this is simply an
instruction to the registrar or the indentured Trustee in this
52 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 case, to recognize the transfer and change the name of the owner. The second sentence is designed that if -- to provide
that if there is a -- the purchaser delivers an acceptable letter of indemnity that's acceptable to the registrar that the registrar or indentured Trustee will issue replacement certificates. This is not compelling the issuance of the
replacement certificates, unless this letter of indemnity or similar insurance is in form and substance satisfactory to the indentured Trustee. On paragraph 15, just a further description with respect to the types of liabilities the buyer is not assuming. On page 13 the superpriority provisions previously afforded Greenwich were eliminated and certainly less relevant in light of the break-up fee issues. And then in paragraph 17 there was some clarifications to this language to respond to concerns by the Creditors Committee that it may be too broad. On page 15 some paragraph -- prior paragraph 22 is deleted because of the -- it's no longer relevant if Greenwich is not the purchaser. And then in what is new paragraph 23 is where we address some of the other objections. Paragraph 23(a) addresses the Trustee's concern that this transfer not be in some way inconsistent with new section 363(o) of the Bankruptcy Code.
53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Section -- paragraph, subparagraph (b) is the language that we delivered last week to the State of Ohio to assure the State of Ohio that defaulted or delinquent loans would not be transferred or sold except in accordance with the existing injunction with respect to the State of Ohio, which requires their consent to transfer delinquent loans. Finally, paragraph 3 relates to -- or addresses the concerns of Deutsche Bank as one of the indentured Trustees to be clear that the residual interests remain subject to the servicing agreements. In other words, we're not stripping away
any obligations or rights, frankly, with respect to the -those interests that are being sold. Paragraph 24 is some language we worked out with the D-I-P Lenders to clarify because there's certain mandatory prepayment provisions that apply in connection with the D-I-P agreement and the sale. There are -- the Debtors, Creditors Committee,
D-I-P Lender have worked to clarify that the efforts of the Debtors to calculate the net cash proceeds resulting from the sale and to provide for their payment as appropriate in accordance with the D-I-P credit agreement. And finally, Your Honor, there's a provision directing the Debtors to pay the break-up fee to Greenwich. Two other, just clarifications, or items to put on the record. The purchaser did want a clarification commitment from
the Debtors that to the extent that the Debtors delivered any
54 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 documentation directing any payments to the D-I-P Lenders directly with respect to these residual interests the Debtors will undertake to correct that and provide a new direction immediately, and we've agreed to do that. Second, Your Honor, in the addition to the changes that I described to -- at a high level to sort of the specific provisions of the asset purchase agreement to address the Creditors Committees and to generally make the bid economically better the Debtors did request and the buyer did agree to include some express document preservation language in the asset purchase agreement that the Debtors have been endeavoring to insure that to the extent there's any regulatory or Federal investigation or any ongoing investigation that we have all documents preserved. Accordingly, Your Honor, what we would propose to do is bring back a clean copy of this this afternoon with the attached executed asset purchase agreement and submit it to the Court at that time. THE COURT: Very well.
(Pause in proceedings) MR. POWER: Your Honor, sorry for the distraction.
We're trying to work through the issue in the, I think (g) in the order regarding the representations. The investment banker
while can certainly testify as to the process and the notice in making sure the highest value was received, cannot testify as
55 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 anyway. MR. POWER: then, because we -THE COURT: You'll -- yes, we're going to, as I said, Okay. Well, can we get a break on that today. today? MR. POWER: Yes, Your Honor, we'll make him available to the actual assets being sold. During the auction there were
several issues raised as to what exactly was being sold and the rights associated with the residuals. Representations were
made to this buyer that certain rights were included with those residuals, and the Debtor I think is comfortable with those representations. The buyer rightfully wants to make sure that
those are accurate today. So since the witness for that specific factual evidence is in California we suggest that we submit an affidavit, if nobody objects today, that would provide basically evidence into the record that the Debtor indeed owns those rights as represented at the auction, so then the buyer is satisfied. And if Your
Honor is satisfied we think Your Honor can enter the order as proposed. That's our current solution. We recognize the
parties can't cross examine, but if nobody objects to that process we think that's appropriate. THE COURT: Is the witness available by telephone
If that's acceptable we can do it that way as well. THE COURT: It's fine with me. Probably simpler,
56 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 adjourn no later than 12:15 and come back like 2:15 I think. MR. POWER: THE COURT: Thank you, Your Honor. Okay. Does anyone else care to be heard
in connection with the proposed sale? ALL: (No verbal response). I hear no response. All right, we'll
THE COURT:
leave the evidentiary record open only for the purpose of taking that one witness by telephone. MS. UHLAND: Okay, Your Honor, thank you very much. I'd like He'll
And we'll bring back the order as well at that time.
to turn this over to Mr. Merchant from Richards Layton. be handling the balance of the matters on this morning's agenda. THE COURT: Very well. Good morning, Your Honor, Mike
MR. MERCHANT:
Merchant of Richards Layton on behalf of the Debtors.
Your
Honor, matter #6 on the agenda is the Debtor's motion to retain the Hennigan Bennett firm as special litigation counsel. Office of United States Trustee raised certain informal concerns with respect to that retention. concerns through an amended Form of Order. We've resolved those Perhaps it's best The
that I approach and hand up the order and I can walk Your Honor through the changes. THE COURT: All right.
(Pause in proceedings)
57 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. MERCHANT: First off, Your Honor, we agree with
the United States Trustee to change the retention from a 327(e) retention to a 327(a) retention. The basis for that change is
that the firm did not represent the Debtors prior to the petition date. Second, Your Honor, there is now a provision in the order specifically disclosing the matters that the Hennigan firm is working on. Specifically the UBS adversary proceeding, the DB
Structured Products adversary proceeding, the Alaska Seaboard Partners adversary proceeding, and then there is potential for future representations, Your Honor, to the extent that 327(a) counsel is conflicted. The Hennigan firm has agreed to file
every 30 days a disclosure with the Court disclosing all matters that they're working on. Additionally, Your Honor, the order makes clear that the Hennigan firm will be paid in accordance with the applicable rules and any orders of this Court, rather than pursuant to the terms of their engagement letter. And finally, Your Honor, there was some language in the original engagement letter regarding the Debtors giving their consent to the Hennigan firm to work on certain matters in the future. The order now makes clear at the request of the United
States Trustee that the Debtor's right to object to any future representations that haven't been disclosed or that may arise in the future are preserved.
58 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. I think that summarizes all the changes to the order, Your Honor. This morning the Hennigan firm did file a supplemental
affidavit verifying that they are disinterested and that they will file additional supplemental disclosures based on further conflicts. THE COURT: Okay. I read the other affidavit. Other
than saying now because the nature of the representation has been changed to a 327(a) representation and that they are disinterested, is there any additional disclosure or difference between that affidavit and the one previously submitted? MR. MERCHANT: No, I don't believe there is, Your
They ran the same conflict check that O'Melveny ran,
that Richards Layton ran, but I think they do claim that they attempted to run additional conflict checks based on the various sales going on and notice to the Creditors Committee, and if there are any additional things that need to be disclosed they will file a supplemental disclosure to that affect. THE COURT: All right. Does anyone else care to be
heard in connection with this application? MR. MCMAHON: Your Honor, good morning, Joseph In connection with the
McMahon for the United States Trustee.
switch of Hennigan Bennetts retention from a section (e) to a section (a) application, it was important to our office to circumscribe the scope of the retention such that Hennigan
59 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bennett will be only performing those matters that exist in 327(a) counsel can provide services with respect to. And in
light of that, Your Honor, you know, our rights with respect to existing 327(a) counsel are reserved. Clearly to the extent
that Hennigan Bennetts employment were to expand to a certain degree perhaps our office will be taking a look at issues relating to existing counsel. THE COURT: ALL: Thank you. Anyone else care to be heard?
(No verbal response). I hear no response. Do you have a Form
THE COURT: of Order for me?
MR. MERCHANT: THE COURT:
I do, Your Honor, if I may approach?
Yes.
(Pause in proceedings) THE COURT: That order has been signed. Thank you, Your Honor. The next
MR. MERCHANT:
matter on the agenda is the Debtor's motion for approval of certain ordinary course professionals procedures. There were
concerns raised with respect to this motion by both the Creditors Committee and the Office of the United States Trustee. I believe we've resolved all of those concerns If I may approach I'll hand
through an amended Form of Order. up a blackline for Your Honor. THE COURT: You may.
(Pause in proceedings)
60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. MERCHANT: Your Honor, there are a number of Perhaps I
changes to walk through with respect to this order. can go through them one by one.
First, at the request of the
Office of the United States Trustee we've added language that requires all ordinary course professionals to file their affidavits within 30 days of the latter of the entry of this order or the date that they start providing services. Second, we've agreed with the Office of the United States Trustee that all affidavits, including affidavits for the professionals that will be identified on Exhibit-A of the order, will go out on 20 days notice so that the Office of the United States Trustee will have an opportunity to look at the disclosures and determine whether further objection is warranted. Third, Your Honor, as many of the ordinary course professionals are providing foreclosure services relating to underlying mortgage loans we've agreed with the Creditors Committee to add language whereby we'll agree to provide notice to the foreclosure professionals of the sale of any underlying mortgage loans, thereby notifying them that they're no longer providing services for the Debtors, and it will be up to the purchaser of those loans as to whether their services will continue. Fourth point, Your Honor, at the request of the Creditors Committee we've added -- we've agreed to add a cap to the total
61 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 payments to be made to all foreclosure professionals under this order. The cap will be $805,000, absent written consent from
the Committee to increase that cap or an order of this Court authorizing us to increase that cap. Fifth point, Your Honor, is also at the request of the Creditors Committee. We've agreed to add an individual cap
with respect to the all of the other professionals on the order. When I say all the other I mean other than the Each of them will have a $150,000
foreclosure professionals.
cap for the case, subject to increase with the consent of the Committee, or by further order of the Court. Sixth point, Your Honor, at the request of the Creditors Committee we've added a provision making clear that the terms of this order are subject to any further Sale Orders entered into this case. Your Honor, seventh point is at the request of both the Committee and the Office of the United States Trustee. We've
agreed to remove certain professionals from Exhibit-A to the motion. I can identify those professionals very quickly. It's
Gibson Dunn & Crutcher; Howry, LLP; Bout & Titis, LLP; Wildman Harrold; Gardeer Winsule; Hanes & Boone; and Sussman Godfrey. We've agreed to remove them, and to the extent necessary we'll file separate applications to retain those professionals. We've also agreed to remove Shapiro Priceman, LLC from Exhibit-A based on a call from their -- from that professional
62 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that they're actually a member of Fisher & Shapiro, LLC, which is also listed, and therefore they don't need to be listed twice. Based on negotiations with the Office of the United States Trustee and the Creditors Committee we've also agreed to amend the caps with respect to the certain of the professionals, and these cap amendments will be reflected in the revised Exhibit-A that I'll pass up with the clean order. Those amendments are as follows. be reduced to $25,000. $10,000. Mayor Brown's cap will
Rodesal & Anders cap will be reduced to Wolf &
Segrew Mian, PLLC will be reduced to $25,000. Broad & Castle were
Wineman will be reduced to $20,000. reduced to $15,000. reduced to $10,000. $10,000.
Carlton Desanta & Frudenberger will be Crane Catin & James also reduced to Deutsche
The Curtis Law Group reduced to $10,000.
Carrigan & Styles would be reduced to $10,000. Tucker will be reduced to $10,000.
And Rutan &
An additional professional listed on Exhibit-A, Your Honor, is Neil Gerber & Eisenberger. They did work for the
Debtors post petition, but the contact at that firm has since left, and I understand that the Debtors will no longer be using their services. So while they are listed as an ordinary course
professional on Exhibit-A we've represented to the Committee that we will not be using their services any longer. And finally, Your Honor, at the request of the Office of
63 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 comment. THE COURT: Go ahead. I think there was one professional It the United States Trustee a form affidavit of disinterestedness is attached to the revised Order as Exhibit-B. covers all the changes to the order, Your Honor. I think that I don't know
if anybody has any comments, or if Your Honor has any questions. THE COURT: Anyone else care to be heard in
connection with this application -- motion? MR. MCMAHON: United States Trustee. Your Honor, Joseph McMahon for the It's my understanding, and I'd just
like counsel to confirm for the record that proposed ordinary course professionals in two areas of services, specifically providing representation to the Debtor's directors in connection with certain litigation, securities class action litigation and derivative suits brought against the company prepetition, as well as services relating to the Audit Committee's investigation of the prepetition accounting and financial statement irregularities that have been well publicized with respect to New Century, professionals providing services in those two areas have been removed from the ordinary course professionals list. MR. MERCHANT: Your Honor, I can respond to that
MR. MERCHANT:
that was listed on there that falls into those categories.
64 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of Order? MR. MERCHANT: I do, Your Honor. The revised list of was unintentional, by mistake, and has since been removed. THE COURT: MS. KELBON: Official Committee. All right, thank you. Regina Stango Kelbon on behalf of the One other representation that the Debtors
have made is that none of the professionals listed on Exhibit-A perform work solely in connection with the mortgage origination platform since that has been shut down and is -- there were no bids received by the bid deadline. the -- our understanding. MR. MERCHANT: THE COURT: So those also are part of
Thank you, Your Honor. That is correct, Your Honor. Does anyone else care to be
All right.
heard in connection with this motion? ALL: (No verbal response). I hear no response. Do you have a Form
THE COURT:
professionals, with the appropriate professionals taken off and the caps revised is Exhibit-A. of disinterestedness. THE COURT: Thank you. Or I should say 327(a) affidavit, Your Exhibit-B is the form affidavit
MR. MERCHANT:
Honor, not disinterestedness. (Pause in proceedings) THE COURT: That order has been signed. Thank you, Your Honor.
MR. MERCHANT:
65 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. HUSTON: Good morning, Your Honor. May it please
the Court, Joseph Huston of Stevens & Lee on behalf of the Movants in -- on agenda item #8, which is the Emergency Motion of certain deferred compensation Beneficiaries for an order directing the United States Trustee to appoint a separate committee for those Beneficiaries. With me today is our
co-counsel Robert Keach of the Bernstein Shur firm from Portland, Maine who has been admitted pro hac vice. The -- we filed -- the original objection deadline was set at noon on Thursday, and because of the Committee's involvement in the auction process we agreed to extend the Committee's deadline until 4 o'clock that day. They filed that day. We
filed a response late on Friday, and we had a copy delivered to Chambers. Did Your Honor get it? THE COURT: MR. HUSTON: This morning. Forgive me on that. We did our best to
get it in early enough to hit the agenda, and we were defeated by the technology gremlins, which were hard at work on Friday. That explains the lateness. And we have additional copies here
if there's anyone in the copy that wishes a copy of that. Mr. Keach will handle the presentation, Your Honor. And as my
namesake found no room at the inn, there is no room at the inn today. So I'll sit back in the gallery, unless Your Honor Thanks. Thank you, Mr. Huston.
wants me to do something else. THE COURT:
That's fine.
66 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. KEACH: Your Honor, Robert Keach from Berstein
Shur for Mr. Schroeder, et al., the former employees and plan Beneficiaries, with respect to the New Century Financial Corp. deferred compensation fund. As Your Honor is aware, we filed
our 1102 Motion only after an unsuccessful attempt to seat a Beneficiary on the Official Committee, and then to interface with the U.S. Trustee's office in the hopes that the U.S. Trustee's office would appoint a Special Committee of Beneficiaries without the need for coming to Court. certainly don't fault the U.S. Trustee's office. moving at an incredibly rapid pace. We
This case is
I think we just ran out of In any event, Your
time, I hope, in terms of our exchange.
Honor, I won't summarize our entire motion or our entire reply memorandum. I would start by saying, Your Honor, that we do have one witness present. I'm prepared to proffer that witness'
testimony or to put him on live, whatever the parties prefer. He is Mr. Martin Warren. He's a former employee of New Century
Mortgage, and a plan Beneficiary. Before I get to that proffer, Your Honor, what we have offered both in the original motion and in the reply memorandum is to establish that these Beneficiaries have a more than colorable claim to the plan assets, that notwithstanding the contentions of both of the -- Official Committee of Unsecured Creditors primarily, and the suggestion by the U.S. Trustee's
67 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 office. This is not an issue where the Estates or un-Estates entitlement to these assets is clear. litigated. the issue. We think it will be
If the Beneficiaries have the capacity to litigate Because we believe that this plan is not a
so-called top hat plan under ERISA, and that these assets are in fact being held in trust for the exclusive benefit of the Beneficiaries. We don't expect that the Court is gonna rule on That is a fact intensive inquiry. But just on
that issue today, of course.
It will require more discovery than we've taken.
the informal disclosures that we've gotten from the Debtors, and I commend the Debtors on their cooperation in getting as much information out to us as was feasible, given the track of these cases, but based on that information alone it is apparent that there are serious issues as to whether or not this plan is a top hat plan, and serious issues as to whose assets these are. That, however, is not the only issue upon which the Beneficiaries need representation, and we believe need an Official Committee. Even if the Beneficiaries were to lose
that issue, Your Honor, the Official Committee could -- and I would hasten to add I think the obvious, and that is that the Official Committee opposes the Beneficiaries on that issues. We are diametrically opposed on the issue of ownership of the assets. Even if we were to lose that issue, and we certainly
68 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 don't expect to, there are serious issues that limit the Official Committee's ability, or any other party's ability to represent these Beneficiaries, all of whom are now former employees after last Thursday. The access of any Creditors to plan assets, even in the case of a top hat plan, and even in a case of a properly functioning rabbi trust is a function of the trust language itself. This trust language, and we attach copies of the trust
to our papers, this trust language says very clearly that the only invasion of the trust assets in the event that insolvency is found and the trust otherwise operates the way it's supposed to operate, is for general Creditors of New Century Financial Corp. I don't think any of us knows sitting here today who those Creditors are, because I certainly haven't seen consolidating statements, as opposed to consolidated statements and 10Qs. I
don't think we know -- I don't specifically know, I'm sure the Debtor may know by now, but we've had no disclosure of what obligations New Century Financial Corp. has as opposed to its affiliates, whether those are contingent or liquidated. And
whether or not they're in the forms of guarantees or otherwise. But it may be that the universe of general Creditors of New Century Financial Corp. is far smaller, and just based on the disclosures and the 10Qs it would apparently -- it'll obviously be far smaller than all of the obligations of all of
69 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 these affiliates. Our position is that even if we lost the top
hat issue the only Creditors we share with are general Creditors of New Century Financial Corp. General Creditors has
been defined in the Molina decision, in fact as a common definition, to mean only Unsecured Creditors, Your Honor. not Secured Creditors with deficiency claims. The Warehouse Lenders, to the extent they have claims against New Century Financial Corp., and again, I don't know that they do, I don't know that anybody other than the Debtor know that at this point, we believe will not share in those assets even if we lose. That is not an issue upon which the The Committee is a fiduciary for And
Committee can represent us.
all of the Unsecured Creditors of all of these Estates, given that it is a unified Committee in a multiDebtor case, and it cannot take the position that the assets are limited to a particular group of Creditors. Your Honor, I think it's
obvious the Debtor can't protect us on that position either. For that very same reason there may be issues, for example, like substantive consolidation where we will be diametrically opposed to the Official Committee. With respect to the issue of the Warehouse Lender's claims and who they're against and what they are and what size they are and whether or not they've properly exercised their rights, this is an issue we care very much about to the extent those are Creditors of New Century Financial. It is an issue that a
70 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Creditors Committee dominated by Warehouse Lenders would find very difficult to address it seems to us. So there are issues
that I think make it apparent that the Committee cannot represent us. And that no other party in the case can
represent these interests. If one were to look at the 1102 factors, Your Honor, this is certainly a large, complex case. I don't think that's
necessarily a determinative factor, but I think also in the -when one is looking at nature of the case as a factor, you also have a look at other factors like the velocity of the case. Like whether or not it's a liquidating or reorganizing case. In a liquidating case where you now have over 500 Beneficiaries of this plan, you have well over 3,000 former employees, about 2,000 of which I understand were laid off last week, employee interests are substantial. And in this case if one looks at
the declared liquidating unsecured claims from the original top 50 list the Beneficiaries with $43 million of contingent potential claims in the aggregate are one of the largest interests in the case. With respect to the factor of groups of Creditors and their interest, Your Honor, you have very different interests between the Beneficiaries, obviously, and the Warehouse Lenders on the Committee, and the other members of the Committee. We've already pointed out the very serious issues of difference with respect to the critical issues to the Beneficiaries.
71 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 With respect to the composition of the Committee, as the U.S. Trustee's response points out, these are substantially financial institutions, but more importantly, that issue goes to whether or not we're otherwise represented on the Committee. We're not. And if one looks at virtually every case that was
sited by the Official Committee and by the U.S. Trustees's office in opposition the Winn-Dixie case the Enron case, Dana, in Gardenridge, in every one of those cases the moving class already had representatives on the Official Committee. And the
issue was whether or not there were intracommittee conflicts that prevented those Committees from functioning, and the issue was whether or not those parties would be outvoted. This is an
issue where we even get a chance to be outvoted, Your Honor, but not at the table. THE COURT: Well, are you suggesting that if the U.S.
Trustee were to add the Beneficiary representative to the Committee that that would solve your problem? MR. KEACH: I don't know that it would -- I think it It
might solve our problem in terms of being at the table.
might give the existing Committee some serious intracommittee conflicts. assets. Particularly on the issue of the ownership of the
And I'm not sure, frankly, how a unified -- and with
respect to this issue of substantive consolidation, or joint and several liability. I'm frankly not sure how a unified It would
Committee could effectively deal with those issues.
72 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 certainly be a very difficult governance problem. I've been involved in cases where with respect to intracompany issues, for example, the Committee has been broken into subcommittees to deal with issues like that. And we have
the Revco example of a Committee being bifurcated when there were problems. insurmountable. So I'm not suggesting that it is But it would be difficult. We do think that a
separate Committee of the Beneficiaries is superior, certainly, to the Beneficiaries, and we think probably would operate more smoothly than simply adding us to the Committee. But being
added to the Committee would be better than not being here. The issues that waive to this -- or I should say go to this Court's exercise of discretion, and I'll be brief, because far be it for me to talk to the Court about how to exercise its discretion. THE COURT: (Laughter) MR. KEACH: Well, let me make a couple, Your Honor. Oh, I get suggestions all the time.
The -- we think this is a case and a situation that does cry out for the exercise of discretion to form a Committee. There
are well over 500 -- our belief is there are 570 Beneficiaries, all of whom are potential Claimants, depending on the outcome of the issue over ownership of the assets. They are admittedly
contingent Claimants with respect to monetary claims, but as Dow Corning teaches us, there is no prohibition on a committee
73 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of contingent claims. of that type. The Official Committee, as I've already pointed out, is going to be opposed to the Beneficiaries on critical issues. We filed this motion as timely as possible, as soon as we were aware we were not going to be on the Committee, and as soon as we were not able to get a timely response from the U.S. Trustee's office, and again, I don't mean that by way of criticism, it just didn't happen. There's also no other effective avenue, Your Honor, for these parties to be represented. It's not at all clear that a And in fact many cases have Committees
503 substantial contribution claim would lie, for example, if the parties were successful in excluding the assets. say that it wouldn't be, but it's far from clear. The -- it is not at all clear, for example, that a contingent fee arrangement could ever be worked out in a case like this that would be effective. It is -- and our witness I don't
will testify, and I'll go through that proffer in a second, it is not likely that even though we have a very large group of Beneficiaries with a lot of money at stake that they would be able to individually or collectively fund their involvement. THE COURT: Well, one question I have is, while there
are some amounts that were listed in the initial motion, I think -MR. KEACH: Sure.
74 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: of Beneficiaries -MR. KEACH: THE COURT: Sure. -- I mean, where do the numbers fall? I -- given the number of -- alleged number
mean, what's -- if that information's in the papers I didn't see it. MR. KEACH: Sure. Actually, we did put some numbers
in the papers to the extent we were able to get them, Your Honor. But let me briefly summarize. The nature of this plan
is that it is very top heavy in terms of the large amounts, but the way you get the large numbers like this, and this goes to our top hat issue, there are a large number of Beneficiaries, in the hundreds, who have relatively small amounts here. I
believe, and I -- we need to get some discovery to back this up, but I believe that half of the Beneficiaries of the plan have amounts less -- certainly less than $100,000, and it may be that an extremely large number of numbers of less than $50,000. I would hasten to point out, Your Honor, that the -- the obvious, but the fact that there is money sitting in trust somewhere also doesn't mean that it's in the pockets of these Beneficiaries. The fact that there is a large amount at stake As
is not a reflection of their individual liquidity.
Mr. Warren would testify, based on his efforts in attempting -and the efforts of others in attempting to organize this group
75 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of Beneficiaries, they simply don't have the kind of liquidity that would permit them, even collectively, to fund the kind of litigation and involvement in these cases that's necessary for the protection of their interest. Mr. Warren would testify, and I'll go to the whole proffer in a second, that even though he has over $830,000, I believe, in the plan, that he individually could not afford to fund the kind of involvement that would be necessary to protect his interest. It -- you simply are dealing with a large unemployed population in an industry that is at least partially collapsing. necessarily. There are not jobs for these people to run to, And the obvious, you know, is occurring. And
that is that they need to ration their assets and their funds in order to get to the next job. THE COURT: See, the question in my mind -- and we
are going to break soon. MR. KEACH: THE COURT: I understand that, Your Honor. But to give you something to think about
over the break, on one level the argument made by the U.S. Trustee and the Committee that a Court shouldn't appoint this Committee for the purpose of saddling the Estate with the cost of litigation of the whose-money-is-it issue. agree with that. And I tend to
But that doesn't foreclose in my mind the
other reasons that you've stated for approving such a
76 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 committee. For example, creating a committee that would be If the Court had authority to do that.
limited in its purpose.
And/or saying that fees for certain services would not be compensable by the Estate. And/or limiting on a monthly basis These are the kinds
the Estate's liability for such services.
of things that are going through my mind, and you might want to think about over the break. And you know, it might be that
you've anticipated that as well. MR. KEACH: Sure. Your Honor, we certainly will
think about them over the break, and I understand we're coming close to the time when Your Honor did indicate that a break would be necessary. Let me only add quickly that I think that, you know, this group, and is our firm to the extent we're chosen to be counsel to this Committee, and approved as such, is willing to be flexible with respect to these issues. It may be, for example,
that the existing retainer funds, as modest as they currently are, could be set aside for the litigation point. Whereas
other services might be compensable out of the Estate upon an appropriate application. We certainly don't have any problem We
with submitting budgets or agreeing to reasonable caps.
have no desire to overlap with all of the functions of the Official Committee. And while I know there are cases out there
that say that additional Committees are supposed to be on a par with other Official Committees, other Courts have been creative
77 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2:15. (Court in recess) THE CLERK: THE COURT: MR. KEACH: All rise. All right. Be seated please. Where were we? break? ALL: (No verbal response). Okay, Court will stand in recess until and we're certainly willing to be creative with limiting the scope of Committees by limiting the scope of what their appointed professionals are able to do. that. We're amenable to
We certainly think that's appropriate under the
circumstances. I'm happy, Your Honor, to do the proffer now, but I see that we're a couple minutes from the break. It may be more
appropriate for me to just start it when we get back. THE COURT: I think it would be. And to the extent
the kinds of things that you and I have just discussed might serve the basis for some agreement, you might want to explore them over the break. make a decision. MR. KEACH: We're -- we have been willing since we If not, we'll have the hearing and I'll
first surfaced, Your Honor, and we remain willing to talk with any constituency here about such issues. THE COURT: All right. Anything else before we
THE COURT:
Your Honor, Robert Keach from Bernstein
78 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 feet. MS. FATELL: Thank you, Your Honor. Bonnie Fatell Before the Shur for Mr. Schroeder and colleagues. I think where we broke, Let
Your Honor, I was about to do the proffer of Mr. Warren.
me start by acknowledging that the parties did take the Court's suggestion. We did have some conversations during the break. We're not in
Some suggestions I think were made by both sides.
a position where I can report that we have reached any understanding, but they were constructive exchanges. I do think that we're at the point where there probably is not likely to be movement on either side, despite, I think, good faith. We're sort of at an impasse, I think. And it's
probably appropriate for us to make the proffer and for the parties to argue the motion. I am prepared to make some
suggestions about containment of cost, along the lines that Your Honor indicated. And I can do that before or after the
proffer, whatever is preferable. THE COURT: Well, I see that Ms. Fatell is on her
from Blank Rome for the Creditors Committee.
proffer is tendered to the Court we'd like to have an offer of proof. I'm not sure where counsel's taking the testimony, and
we think that there are a lot of issues that have been raised in their papers that are not relevant to the hearing today. So
we'd like to hear where -- what's proposed in the proffer if we may.
79 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. KEACH: Certainly. Your Honor, I intended to
have Mr. Warren testify if he were called to testify on really on two issues, and they would be short. The first would be the
efforts to pull together the group of Beneficiaries into some kind of Ad Hoc Committee and to fund their involvement in the case, and the specifics of that and the difficulties in doing that, and the prospects based upon Mr. Warren's direct involvement in that effort for that to continue. That seemed
to me to go directly to the issue of their ability to represent themselves. The second point, and I have a feeling this is the point the Committee wants to talk about, was to simply put in some very limited testimony on the way the plan operated and to whom it was extended. That goes only to this issue that we raised
in the papers that there was a bonafide issue on ownership of the assets. We don't expect that to be litigated today. We
don't expect there to be a decision on that today.
But we did
think it was important to establish that there is a bonafide colorable issue with respect to that. If the Committee wants
to stipulate to that, that i.e., that there's an issue then we can dispense with that portion of the proof. THE COURT: Well, all I'll say on that one is after
having read the papers it sure has to look and feel of an issue. Ms. Fatell? MS. FATELL: Your Honor, we acknowledge that there's
80 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 a dispute. We don't think that this Court needs to hear
testimony as to whether it's a {quote}, "bonafide dispute or colorable dispute." There's a dispute. It exists. And so we
would object to any testimony as to how the plan's been interpreted or how it's been treated, or any of that because -THE COURT: MS. FATELL: THE COURT: And I don't think I have to --- we think that's inappropriate. -- reach it -- frankly, I think on that
aspect of it I just need to make a determination of some identifiable interest. pretty clearly. MR. KEACH: with that then. Thank you, Your Honor. We can dispense And I think the papers demonstrate that
With respect to the proffer on the other
aspects the Beneficiaries witness is Mr. Martin Warren. Mr. Warren is, as I said, a former employee of New Century Mortgage Corporation. He has been terminated. Prior to his
termination his last position with New Century Mortgage was that he was in a management position over an office consisting of more than 60 employees. That during the period of his
employment he did make contributions to the deferred compensation plan. In other words, he is a Beneficiary. That
he has himself approximately $830,000 at risk contributed to the plan and remaining in the plan. That Mr. Warren has been
personally involved in the effort to form an Ad Hoc Beneficiaries Committee, if you will. That he has been
81 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 directly in contact with other former employees who are Beneficiaries. He would testify that it has been extremely difficult to pull that group together because of their individual circumstances, the fact that they are far flung geographically, and their own economic limitations. He would testify that he
has been personally involved in the attempt to raise a fund to finance this effort, including litigation over ownership of the assets, as well as participation in these cases on the other issues that are mentioned in our papers. That to date 98
Beneficiaries have contributed enough on an individual basis to form a retainer of just under $38,000. That those
contributions continue at a very modest and declining rate. And that based on his experience that it would be extremely unlikely that funding would continue from individuals with respect to full participation in these cases by the Beneficiaries, and perhaps even with respect to that litigation. He would testify as to his own circumstance, being a party with $830,000 plus or minus at risk, that if there is no collective action either by an Ad Hoc Committee where hundreds, or at least a hundred or more people are making contributions, or an Official Committee that he could not personally fund the kind of participation that would be required to protect his own interest, including litigating the ownership of the assets.
82 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. POWER: Q. Good afternoon, Mr. Warren. I'm Mark Power, I represent That would be his testimony, Your Honor. the issue of representation. THE COURT: MS. FATELL: the witness. THE COURT: MR. KEACH: All right. Mr. Warren is here. Does anyone care to examine Mr. Warren? Your Honor, we have a few questions of We would offer it on
MARTIN WARREN, CLAIMANT'S WITNESS, SWORN MR. WARREN: THE CLERK: MR. WARREN: Martin Warren, W-A-R-R-E-N. Thank you. Thank you. DIRECT EXAMINATION
the Creditors Committee in this case. A. Q. A. Q. Hi Mark. I just have a few questions. Sure. You personally have approximately 130,000 at stake in this
trust? A. Q. A. Q. Actually, I have, as of -I mean, 830,000. Actually as of Saturday I had $942,000 in there. Are you aware of other individuals who also have similar
amounts in the trust?
Warren - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. A. Q. Yes, sir. And approximately how many people is that? Have this sort of dollar amount in here? Yes. Oh, probably maybe a dozen or so.
83
Have you proposed to all those people about contributing
towards the -- defense of the trust position in this case? A. Q. A. Q. Yes, sir. And have any of those people contributed? Yes, sir. Are those all included in the 90 some thousand, that Of the 90 some people who the counsel
counsel -- I'm sorry.
mentioned were interested in participating, are those people all involved in that? A. I don't know if all of them are. Some of them I guess were
laid off on Thursday, so just a matter of communicating with these individuals. Q. So there's approximately a dozen or so individuals who all
have roughly a million dollars give or take -A. Maybe not that many, but you know, between -- I would say,
you know, over 150,000 to -- I think I'm one of the larger contributors at 942,000. Q. So it's somewhere in that range, and there's at least a
dozen in that range. A. Right.
Warren - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.
84
And your testimony to this Court is that those folks aren't
-- don't have the means to be able to support on their own the defense of their position before this Court? A. Q. Correct. Okay. And have you looked at the personal financial
situation of everyone in that group? A. Q. No, I can't say I have, no. So when you come here and testify to the Court you're
talking about yourself personally? A. Q. Correct. You're not able to testify as to everyone else's economic
situation? A. Q. No, sir. Okay. Let's talk about the steps that you look to in terms
of getting the reputation besides paying your attorney full rates. Have you spoken to any attorneys about doing this on a
contingency fee basis? A. Q. No, sir. Have you talked to any attorneys about doing this on a
class action basis, a class action lawsuit? A. Well, the Ad Hoc Committee is our, you know, our action,
our class -Q. It's not a formal class -- do you understand what a class
action would involve? A. Yes, yes.
Warren - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. You could form a class, create members and then the
85
attorneys could basically be paid out of any recoveries that class receives. A. Q. Are you aware --
We did not do that, no. Are you familiar with the fact that a group of employees
who were just laid off in this case filed an action here as on behalf of a class? A. Q. Yes, sir. And they are seeking to have their position represented who
have similar disputes with this Estate and before this Court as a class action. A. Q. A. Q. Are you familiar with that?
Yeah, based on the WARN Act? Based on the WARN Act -Yes, sir. -- that's correct. But in your case you decided not to go
that route but instead ask this Court to give you special relief and appoint a Committee so your fees can be paid by this Estate separately, is that -MR. KEACH: Your Honor, objection. I think that's
testimony and not a question. MR. POWER: MR. KEACH: I'm asking is that -There's a question buried in that
somewhere but that's not a question. THE COURT: MR. KEACH: Maybe you could -A, argumentative and B --
Warren - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. POWER: MR. KEACH: THE COURT: MR. POWER: THE COURT: BY MR. POWER: Q. A. You elected not to go by class action, is that correct? Well, you know, Mark, we felt that this was our money. I could --- leading -Rephrase. I'll withdraw, Your Honor. Okay.
86
This is the dollars that we individually put into this employee benefit plan. You know, the dollars came out of our pocket, I can show you paychecks for So therefore we
not out of New Century's pocket.
five years of it coming out of our pocket.
felt that it was our money, and you know, unfortunately a lot of these people lost their jobs, including myself. You know, a
lot of those people, including myself, haven't retained or gotten employment, and we want what is rightfully ours. Q. Sir, I'm not questioning that you're entitled to assert If the Court decides you're entitled
what's rightfully yours. to it you'll get it. A. Q. You bet.
My question is the different avenues to get to that point.
One of the avenues that's very legitimate is a class action suit. And in fact that's being done currently, and I'm asking
you whether -- what steps have you taken to look into that avenue as opposed to the current one?
Warren - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 are able. A. the -THE COURT: Overruled. question. provision. MR. POWER: question. MR. KEACH: First -THE COURT: BY MR. POWER: Q. Sustained.
87
Your Honor, objection to the form of the
Let me just -- what steps have you taken to look into class
action suits in this case? A. Q. We have not. You have not. Have you spoken to any counsel, and I may
have asked this but I'm gonna ask it again, about any contingency fee arrangement as opposed to full fees to counsel to represent the -A. Q. No, no, sir. Have you considered whether you might be able to -- strike Are you aware, sir, that there are processes in the
that.
Bankruptcy Code which permit you to seek reimbursement for expenses that are pursued that benefit the Estate? aware of that? MR. KEACH: Your Honor, objection to the form of the Are you
He misstates the actual law relating to that
Your Honor, I'm generally referring to
You may answer, sir, if you
Just, you know, I'll be honest, I wasn't familiar with the
Warren - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 bankruptcy proceedings and the law because I'd never gone through it.
88
Obviously being an employee of New Century now I
know as much as I do, you know, regrettably so, as I, you know, learn more about it. know, your question. BY MR. POWER: Q. But generally speaking, there is a process by which if you I am familiar a little bit about, you
take certain actions and it benefits the Estate you can seek to have those expenses reimbursed. A. Q. Okay. Did you consider pursuing that as a source of recovery in
this case? A. Q. No. So basically the only thing that you and the Committee has
done is basically the current proposal that's set before the Court, is that correct? A. Right. What we've done is we've raised money and we've,
you know, retained the employees that have money into the plan to try to get what's rightfully, we feel is ours. Q. Now, sir, if its your view that the trust funds that are
there that are frozen right now belong to the trust and belong to the Beneficiaries -A. Q. Yes, sir. -- would that satisfy the need for the Committee and you
wouldn't need the Committee any further, is that correct?
Warren - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. MR. KEACH: Your Honor. A.
89
Objection to the form of the question,
I don't understand it and I assume --
Well, yeah, I mean, we'll take the money and we'll call it
a day -THE COURT: -- you know. Overruled.
BY MR. POWER: Q. So the goal of the Committee is purely to establish its
rights to the funds in that trust -A. Q. A. Q. A. Q. A. Q. Yes, sir. -- that's -If we -The only reason you're -Right. -- here before the Court today? Yes, sir, absolutely. And it's not really to deal with any other issues in the
case? A. I have nothing to do with -- you know, I -- my office is
part of the class action lawsuit, you know, in regard to the WARN Act, but our goal for this Committee is to just get that money back. Q. And so is it fair to say that your group, the group of
employees, is satisfied with the representation of the Official Committee with respect to their unsecured claim, with respect
90 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 down. A. Okay, thank you, Your Honor. MR. KEACH: Your Honor, I'll briefly close. Because to all of the claims except for the trust fund moneys? A. Q. Just for the trust fund money, correct. And that's where you dispute that the Committee does not
represent your interest, is that correct? A. Q. Yes, sir. Okay. MR. POWER: THE COURT: BY MR. POWER: Q. A. Thank you. Okay, thanks, Mark. MR. POWER: THE COURT: MR. KEACH: THE COURT: No further. Is there any other cross examination? And no redirect either, Your Honor. All right, thank you, sir, you may step Your Honor, can I just have one second? Yes.
I did -- as I said, we did consider Your Honor's suggestions over the break, and let me say that we -- one of the discussions we had with the U.S. Trustee's office, and I've asked the U.S. Trustee's office if there's a problem disclosing this, and he's indicated it's not so let me throw that out. There was some discussion about expanding the existing Official Committee to add -- and I don't want to suggest this was an
91 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 offer, but there was a suggestion that the existing Committee be expanded to add a Beneficiary member and one other member to get to nine, as opposed to having an even number. The Committee -- after consideration the Beneficiary's Committee decided that that -- or the Ad Hoc Committee decided that was not a proposal that we wish to pursue. As we said,
that is a -- we think it's a good second choice, but a very poor second choice to the first choice. Primarily because, as
I said earlier, we think it creates more problems than it solves, both for the Official Committee and for the Beneficiary member. Some of those problems are inherent in being a minority member and we don't argue that those are unique to this case, but there are some special issues. Not the least of which is
the employees who would be likely to serve are management and former management employees who are already possessed of information. It would be very difficult issues in terms of
dealing with, for example, confidential information they already possess. That information is, to some degree, to the extent it's not completely confidential, useful in the pursuit of the remedies they wish to pursue here, and it may in fact inhibit the ability of the people to recover the funds, rather than further it. asset issue. On top of which we don't think this is a single Or a single issue Committee. It's a multiple
92 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 issue Committee along the four issues we talked about. It is,
yes, certainly, first and foremost that they would be able to draw a fence around these funds and have their funds returned to them. But should that fail, and we don't expect it to, but
should that fail there are other issues relating to substantive consolidation, relating to who gets to share, relating to the size of the Warehouse Lender claims that we're particularly interested in and where we don't think that the Official Committee is poised to represent our interests. With respect to cost containment, Your Honor, one set of ideas we had were as follows, and I don't throw these out as absolutes but as suggestions. First is that the work to date
to either get on the Committee or form the Committee would be compensable from the Estate subject to the usual review by filing a fee application, but not be subject to nuc pro tunc analysis. And secondly, that future work for the Beneficiary's
Committee would be compensable in the typical way that fees are requested, other than what we'll call the declaratory judgment litigation work. With respect to the litigation work, the issue Your Honor raised about the Beneficiaries being paid for that work, we would propose that that would be capped. We would cap the We would have --
amount that would be taken from the Estate. that cap would be a hard cap.
We would take the existing
retainer money and also put it towards that effort,
93 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 live. particularly towards things like expenses for experts in discovery and the like. And if that cap were exceeded it would
have to be funded either out of funds of the Beneficiaries themselves or we would reserve rights under 503 and under ERISAs attorney's fees provision, although there are potential limitations in both of those circumstances. But ERISA does
have an attorney's fees provision for successful recoveries by participants, and I said that in this interest of full disclosure, where it would be paid from the fund itself. But
again, that only works if you win, and it's subject to its own set of limitations that Courts have to apply in awarding those fees. But we would reserve those issues -- our suggestion is And
to have a hard cap on the litigation budget at $250,000. if we go above that we're at risk.
Those are all conditions under which the Committee could I'm sure we could -- we're open to other suggestions
from the Court, and ultimately we'll live with what the Court proposes. But we do think this is a case that cries out for We don't think
representation for these former employees.
they'll be able to represent themselves on this multitude of issues otherwise. Thank you. Thank you. Good afternoon, Your Honor. Again,
THE COURT: MS. FATELL:
Bonnie Fatell for the record for the Creditors Committee. First of all, we'd like to say that we recognize we are dealing
94 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 with former employees. They have sympathetic claims. We
understand that many of them may not have found work since they were terminated by the Debtor. But unfortunately, we can't let
that cloud the judgment and the law that the Court is supposed to follow in terms of whether in fact the Committee, as constituted, adequately represents their interest. And if the
Court finds that it does then that's the end of the question. If the Court finds that it does not the Court then goes to the second question, which is should the Court exercise its discretion considering all of the facts of the case, the burden to the Estate, and a number of other factors I'll get into, and decide that the U.S. Trustee should be directed to appoint a second committee? THE COURT: the inquiry. Well, let's talk about the first step in
And there's kind of an odd dynamic in that
Committees often have members against whose interest the Committee as a whole chooses to act. So that in and of itself
doesn't strike me as a turning point, except that in these circumstances, and the papers that have been submitted in this connection, clearly reflect that while the Committee may very well have, at least initially, made a determination that the funds that are at issue here are, at least in the Committee's view, clearly property of the Estate, this group of interest that seeks the formation of an Official Committee takes a completely opposite view.
95 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 So it seems to me that as a practical matter the Unsecured Creditors Committee is going to be acting adversely, completely adversely, to this group of interest. So while I recognize
that there are often conflicting interests among Committee members, or between a member and the Committee as a whole, it seems to me that in this case this Committee is no friend of this group of Beneficiaries. MS. FATELL: Your Honor, on that narrow issue of
whether in fact this fund is subject to the general Creditors' claims or whether it is a trust fund for these individuals, the Court is correct, we are directly adverse. issue. As to if in fact they are not entitled to that fund then they're general Unsecured Creditors, just like everybody else that the Committee represents. And the fact that they may have That is a single
claims that those funds should not inure to the benefit of all general Unsecured Creditors, and some group may be carved out of that, that's an issue that the Committee, as well as the Debtor, will have to grapple with in terms of proposing a plan of liquidation. In terms of whether in fact there are substantive consolidation issues. deal with it every day. The Committee will deal with that. They
In fact, Your Honor, in the amendments
that were made to the D-I-P Order that was submitted to the Court earlier today, paragraph 42 was added by the Committee to
96 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 specifically address the concerns of the other Estates and the Creditors of those Estates in the event that there were moneys going back and forth between the various entities. So the Committee's very sensitive to that issue, and is very active on all the issues that will affect Committee's -the Creditors getting a recovery in this case. So I don't But
disagree that on that narrow issue they will be adverse. is that sufficient to justify this Estate incurring the expense, the interference, the possible banging heads of
different Committees and so many factions breaking up in this case because there's one single issue that this group of Ad Hoc Committee people believe that they're entitled to pursue, and they believe this Estate should fund their right to pursue that? And that's where -THE COURT: MS. FATELL: THE COURT: Well I think the answer --- we take issue with it, Your Honor. Yes, and the answer to that question I
think depends on step two in the analysis. MS. FATELL: And we think that in terms of whether
they are adequately represented -- all the Committee has done with respect to determining if this is a top hat plan or rabbi trust is look at the documents that have been provided. There's been no discovery. There's been no even informal So the If it turns
discussions or complete production of documents. Committee's going on the face of the documents.
97 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 agreement? out that the Committee is wrong then there will be discussions about that, and we're certainly open to looking at what the law is and what the facts are and determining what that issue is. But on its face the Committee has to take the position, because thats what the documents say, that upon insolvency those funds are property of the Estate. THE COURT: And what if I were to deny the request What would
for the formation of an additional Committee?
happen to the funds that apparently now exist in some identifiable form, pending some judicial determination about to whom they belong? MS. FATEL: Your Honor, we have agreed with the
Debtor at the last hearing, and I believe with the Ad Hoc Committee, that those funds would remain in a segregated account. We certainly would suggest that those funds continue
to remain in that segregated account until theres a final resolution. THE COURT: Is there a temporal limitation on that
Has it been embodied in an Order? MS. FATEL: It is. I believe it is in the Order
that raised this emergency hearing. THE COURT: MS. FATEL: Okay. And we would agree that that should
continue in place with respect to that. THE COURT: All right.
98 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MS. FATEL: So, we dont think that theyre in
jeopardy that those funds are going to be dissipated or distributed to all Unsecured Creditors. Your Honor, there are And And
Unsecured Creditors, as I said, until proven otherwise. all Unsecured Creditors in this case have the same goal. thats to maximize value. Its to ensure that theres
integrity in the process, that all of the assets are being exposed to good faith negotiations and an auction process, to the extent thats appropriate, to reduce claims so that theres more money available to go around to Creditors. And we dont
think that the Creditors Committee -- its not aligned with this group of Creditors on all of those issues. this is a single issue. They argue, and they go through a series of arguments as to why their interests are different. They say that this is a We think that
large and complex case, that its moving quickly, and that things needed to be sorted out quickly in terms of who wants what and who had claims. concern. The Creditors Committee has that same
We dont think that that gives any credibility to
there having to be a separate committee, because the Unsecured Creditors Committee is addressing all of that. They say that there are various groups of Creditors with different interests, and that these employees are seeking a narrow issue. We acknowledge that. Thats why we think that They talk
they should not have their own separate Committee.
99 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 about the composition of the Committee not being sufficiently varied. The composition of the Committee was created by the
Office of the United States Trustee after consideration of all of the questionnaires that were submitted, after interviewing various parties that were at the organizational meeting in an effort to be a participant on the Official Creditors Committee. And in the U.S. Trustees discretion, they determined that this was a Committee that was representative of all Creditor interests. interest? Is it representative of somebody that has a $40,000 Yes. It may not be of the same magnitude that the
people have who is on the Committee, but certainly they are representing all Creditors. And to the extent that something
enures to the benefit of those holding larger unsecured claims, it also enures to the benefit of those holding smaller unsecured claims. They talk about the - one of the issues is the inability of the Committee to function. Theres been no question that There are
this Committee is not functioning appropriately.
issues that come up from time to time where there are Committee members that may have a different view than the Committee. There are also some issues that come up where a Committee member has to recuse itself. Thats done all the time. To the
extent that there are issues where there need to be subcommittees formed, again that is done all the time. in every large case, and its very effective. Its done
100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 On the other hand, to create multiple committees - and again we just heard that there is a WARN Act Class Action Committee that is acting as an Ad Hoc Committee. If this Court
were to grant this group of employees a Committee, what would be - there would be no reason for the Ad Hoc Committee for the WARN Act Claimants to come in and argue that they too have a different view, and theyre not represented by the Unsecured Creditors Committee. This case could be burdened with
multiple, multiple committees. And its not unlike any other large case where there are divergent interests and theres one Committee. And the
committee represents all of those Unsecured Creditor interests. So, we wholly dispute that that should be a basis to say that they are not adequately represented. In fact, Your Honor, it For the
is rare and unusual to have additional Committees.
number of cases that they - there are multiple cases where Committees have been denied. Id like to just read briefly, if I may, from a Law Review article that, in fact, the Movants cited in their materials. Its from the Marquette Law Review in the summer of 1990, titled Creditors Committees Under Chapter 11 of the United States Bankruptcy Code, Creation, Composition, Powers and Duties. And at page 593 and 594, the authors state, Adequate
representation exists through a single Committee, as long as the diverse interests of the various Creditor groups are
101 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 represented on and have participated in that Committee. The
Court, referring to the Sharon Steel Court, which is a Western District of Pennsylvania Court in this Circuit, noted that the appointment of separate Committees is an extraordinary remedy, and emphasized its concerns that separate Committees often complicate negotiations, add delay to the reorganization process, and add an additional layer of administrative expense on the Debtors Estate. The Sharon Court added that separate
Committees and the separate teams of professionals that they entail {quote} rarely contribute to the spirit of compromise that is intended as the guiding star of Chapter 11. {close quote}. Your Honor, we think that that is particularly relevant to this case. Committees. have. There will be the potential for multiple This particular committee has one focus that they
It will create a lot of tension if they are on the Then they are within the
Committee, as has been proposed. Committee.
They can raise the issues that they have concerns
with, separate and apart from the one issue we know there will be litigation over. Any other issues that they have, theyre
welcome to and encouraged to raise them to the Committee, and the Committee will consider them and take appropriate action. Your Honor, as far as the testimony that weve heard, I beg to differ with counsels characterization of it, because the witness conceded that they do have a single issue. That
102 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 their focus is on getting these funds that they think they are entitled to. And that they dont have an issue with anything Now, I appreciate
else that the Unsecured Creditors is doing.
that the witness is not a lawyer, and his lawyer may have other views, but, Your Honor, this is a single focus. the goal. And this is
And there is no reason why this Estate should fund
this litigation or any other litigation that is adverse to the Estate or to Creditors. There are a whole host, Im sure, of
issues out there where Creditors are adverse to the Estate. Why shouldnt they come into this Court and say, Im not being adequately represented. fees. I want this Estate to fund my legal The people who theyre
They have raised some money.
talking about, are people who are at the higher level of income in this company, both former and present employees. And it seems surprising to me that if they believe that they are correct, and this is not rabbi trust, and they are entitled to those funds and that they are not subject to the general claims of Creditors, then I would think that if theyre making income at the level that they are to put in that kind of money into a trust, that they would be able to gather enough resources together to fund litigation. are THE COURT: I hear in that argument echoes of a D-IAlternatively, there
P Lender seeking to limit the amount of investigation costs that a Committee might incur, and be reimbursed for out of its
103 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 minute. MS. FATEL: THE COURT: Okay. If they win in their position, is it cash collateral or loan proceeds. MS. FATEL: Your Honor, the point I wanted to add is They have not
that they have not pursued other options.
considered coming in for a significant contribution reimbursement. They have not looked at Well - class action, et cetera. - let me - lets talk about that for a
THE COURT: MS. FATEL: THE COURT:
conceivable that the Estate should pay their fees? MS. FATEL: I dont know why the Estate would pay
their fees if they win. THE COURT: And thats why 503, I think, goes away
as a potential source of recovery. MS. FATEL: million, potentially. If they win, theyre gonna get $42 It seems to me that that fund should be
able to cover their legal fees. THE COURT: It may very well. All Im saying is
that if they win, I dont see how relief under 503 could be granted. But maybe Im missing something. MS. FATEL: Well, no. The point I wanted to add,
Your Honor, is if they dont win, and they have their own Committee --
104 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MS. FATEL: Thats - then a) theyre duplicative of the
Creditors Committee; and b) if they do add value, they have an avenue to come in and ask for reimbursement for their expenses. THE COURT: The only way they add value to the
Estate is by losing, it seems to me, arguably. MS. FATEL: Your Honor. Well, I think thats where we come out, Were
And thats whats so troubling about this.
asking - were being asked by a single group of Creditors to fund litigation that will be adverse to the Estate, and will, if they are correct, enure solely to their benefit. We just
dont see that the law supports that the Court should exercise its discretion and appoint a Committee for that purpose. you. THE COURT: MR. MCMAHON: Thank you. Your Honor, good afternoon, Joseph Id like to step back Thank
McMahon for the United States Trustee.
and just go over some of the procedural steps which occurred up to the point of the plan Beneficiaries filing the instant motion. Your Honor, we filed - excuse me - our office formed
an Official Committee of Unsecured Creditors on the first Monday in April. And as its noted in the motion, Mr.
Schroeder, I believe, submitted a questionnaire on behalf of himself individually, and also on behalf of the Ad Hoc Group, however defined or undefined it was as of that date, for
105 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 representation on the Committee. They came to the table seeking seats on the Official Committee of Unsecured Creditors. that. Theres no question about And
And our office appointed a 7-member Committee.
neither Mr. Schroeder nor any other Ad Hoc Committee members were appointed to the Committee at that time. A few days later, we received a letter from the plan Beneficiaries through Mr. Keach. exhibit to our objection. And its attached as an
And that letter requested The idea of getting a seat
appointment of this Committee only.
on the Official Committee of Unsecured Creditors had apparently been abandoned by the plan Beneficiaries. So as is our typical
course of action in these types of circumstances, our office forwarded that correspondence to, and Ill call it, the Court of Constituencies in the case, the Debtors, the Official Committee of Unsecured Creditors, and also the D-I-P Lenders, and offered them an opportunity to respond to the letter by April 20. I believe that a couple days short of that deadline,
the instant motion was filed prior to our having, I guess, the opportunity to review those responses pre-filing. So, Your
Honor, our paper lays out, I think, what our essential position is on the legal issues with respect to adequate representation and whether this Court should exercise its discretion in terms of appointing a Committee. Id like to address a few points that the Court raised in
106 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that regard. First, theres - the Court in its comments
immediately prior to the break for lunch, suggested that there possibly could be - draw a distinction between the services that were performed relating to the pursuit of the asserted trust funds, and separate out or to call other case-related services. It is I think at best unclear at this point, Your There are
Honor, whether there would be such unique division.
certainly the - first, the risk that there would be a collateral litigation initiated by the Committee, if formed, where the bankruptcy case, the main case, could be used as a front with respect to obtaining leverage or addressing issues that really should be addressed in connection with the core is this property of the Estate or not litigation. And issues like substantive consolidation, who gets to share in the proceeds, in the event that there is an adverse ruling, it seems to me, Your Honor, that they really are, as you say, secondary issues to the lead issue of whether or not a Committee should be appointment. And with recognizing that,
Your Honor, given that the Committee is willing to represent today on the record that those funds can remain segregated, presumably pending an up or down ruling on that point, I think that weve really taken care of basically, essentially all the purposes that were going to be served by this Committee that Your Honor had suggested could be compensated, or would be, I guess, potentially proper to be compensated from the Estate,
107 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 because theres no dissipation risk. Well have presumably the And the chips will
litigation on that issue will go forward. fall where they will.
The issues of whether the Estate should be substantively consolidated and who gets to share, I mean, I suggest, Your Honor, that in its normal course of operation, the Official Committee of Unsecured Creditors in these large jointly administered cases has a host of representatives from varying Estates, and it routinely deals with the substantive consolidation issue. Meaning that you will have
representatives of one Estate potentially squaring off against the representatives of another Estate, and debate about the issue. And the Committee formation process deriving, I guess, That
the representation of multiple Estates can handle that. is an issue that the Committee can address as it is constituted.
And theres really no suggestion by the plan Beneficiaries that somehow the Committee, as its presently constituted, is unable to address substantive consolidation issues per se. any substantive suggestion simply wouldnt square with the history of practice in this District. So at the end of the day, Your Honor, I think another point to emphasize is that - is the witness testimony. And I And
found the end of the questioning to be rather illustrative as to really whats going on here and how Your Honor should weigh
108 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the so-called - the other services, or the collateral services in deciding whether or not to exercise its discretion in appointing a Committee. about the money. The witness clearly said that this is
Meaning whether we get our money or not.
And, again, any issues involved on the case with respect to substantive consolidation or who gets to share, simply is secondary to that consideration. So based upon the evidentiary record which was developed on cross examination by counsel for the Official Committee of Unsecured Creditors, I think theres a clear basis for supporting the conclusion that the relief thats requested in the motion can be denied today. Your Honor, one other point. With respect to the proposal
thats been made, my understanding is that the Committees proposal going forward, to the extent that the Court would grant relief, would encompass fees relating work to getting a Committee appointed. And, Your Honor, to be clear, we
categorically oppose the formation of the Committee thats being requested. But one point I did want to make clear is that if it is the Committee begins its work when its appointed. And it is
far from, I guess, a clear conclusion that a Committee that Im sorry, the fees that are incurred by a Creditor or Creditors in seeking to have an Official Committee formed, constitutes a substantial contribution under 503(b). That is
109 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 just simply a side note that I wanted to make in terms of the proposal which counsel has floated. So, again, I think the core legal issues are laid out well in our papers, Your Honor. questions or concerns THE COURT: Mr. Keachs remarks. Just one, Mr. McMahon, that I take from Is the U.S. Trustee still open to adding Unless the Court has any specific
to the Committee a Beneficiary representative? MR. MCMAHON: THE COURT: Your Honor, may I have a moment? Yes, you may.
(Pause in proceedings) MR. MCMAHON: Your Honor, in the to and fro of phone
calls during the lunch hour, we did discuss this topic with the Committees representatives. that possibility. We are still open to discussing
The problem is weve never got to a point of
passing it along to the people that we need to, because it was basically rejected THE COURT: MR. MCMAHON: THE COURT: MR. MCMAHON: THE COURT: MR. MCMAHON: THE COURT: I understand. - by the Committees representatives. All right. But we are open to the possibility. Thank you. Thank you. All right. Anyone else? Before I go Okay,
back to the Movants here, anyone else care to be heard?
110 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 quickly. briefly. MR. KEACH: Let me just address a few points very
First, the issue of escrowing the funds, while
certainly appreciated by the Beneficiaries - two points. First, the trust document itself now provides that the funds, even after the point of insolvency, cannot be disbursed without a Court Order - without the Order of a Court of competent jurisdiction. So while were certainly happy to have done that
through an Order of this Court into a concession of the various constituencies, its what the trust provides. And - but more importantly, it does not put money in the pockets of the Beneficiaries. And while its easy to focus on
the dozen or so people who have 150,000 up to 8 or 900,000 in the fund, that does not address the dire needs of those people who have, you know, 50,000 or less in the fund and who are now employed - unemployed, I should say, and now need this money to pay their own mortgages. So, Your Honor, its nice to
escrow the money, but these are issues that need to be addressed very promptly. On this issue of expense and interference, while we dont suggest that no expense is at issue here, what we did indicate was that we capped the litigation amount at 250. were open on that. And certainly
The rest of - you know, we spent I think
in the neighborhood of 50 or $60,000 to get here between both sets of counsel. And going forward with respect to the non-
111 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 litigation issues, I expect those fees would be very modest. And with all due respect to my colleagues in the Courtroom, you know, if that all adds up to 3 or $400,000, thats not a good day in these cases - in some cases. layers of expense here. So, were not adding huge
Were talking about fairly modest
expense for the benefit of nearly 600 former employees, most of whom desperately need this money. And the interests of the
typical case dealing with conflicting interest dont deal with 600 claimants. When youre dealing with 600 claimants with
claims in the aggregate of this size, youre usually dealing with retirees or bondholders or other people that are so diverse that, in fact, additional Committees do get formed. With respect to this issue that this will lead to a floodgate of additional Committees, I think, Your Honor, thats just not likely. More importantly, to the extent theyre
concerned about the WARN Act employees, one of the suggestions I thought about making in the papers and withheld because its not really our prerogative, is that certainly this Committee could be the springboard for a Committee of former employees. They will soon constitute in number one of the largest Claimant classes in this case. And it would not create an undue
conflict for us, for example, to have the WARN Act Claimants joining this Committee. Thats not our prerogative. That But that That
would be something for the U.S. Trustee to consider.
doesnt mean there has to be two additional Committees.
The Court - Finding 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 just means this Committee might expand its scope.
112
In closing, Your Honor, I think its somewhat ironic that we have a - and I mean no disrespect to the financial institutions involved. institutions. Im sure theyre all wonderful
But we have a Committee consisting, among
others, of Deutsche Bank, Credit Suisse, and Sea Bass, who are financial institutions who unquestionably could afford their own lawyers to finance their interests as deficiency claimants in these cases, arguing that the employees, some of whom have $50,000 or less at stake, should not get any assistance with respect to their legitimate claims in the case. thats assisting the process. perversion of the process. need this representation. Its interesting that two - I think at least two, if not three members of the Committee, either themselves or their affiliates, were bidders at the last auction. I mean thats I dont think
I think to some degree thats a
And that these employees really do
not a typical Committee in any circumstances, unless youre in a sub-prime mortgage case. But these are legitimate interests
of legitimate employees who are desperately in need of the money. I would submit that if you look at the history and
policy of this section, this is what Congress had in mind when it gave the Court power to exercise its discretion. would ask the Court to do so. THE COURT: Thank you. All right. Im prepared to And we
113 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 make my ruling now. In looking at the factors that a Court
should consider - and I dont think the parties disagree about that - I look at whether the Unsecured Creditors Committee, as presently constituted, can provide adequate representation to this set of Claimants. There are often disagreements between
or among Committee members, and between those members and the Committee as a whole. This is one of those circumstances in
which the Claimants and the Committee are diametrically opposed. And I dont suppose as the dispute ensues, that And ultimately it may fall to this Court to But the
thatll change.
make a determination about entitlement to those funds.
fact that there is this dispute does not, I think as the Code and the law anticipates, mean that within that language, this Committee cant adequately represent the Claimants. Now, even if that were so, even if I concluded that this Committee could not adequately represent the Claimants, I look at other factors. I look at the cost to the Estate. I have
not changed my initial view -- while there hasnt been much of a record made in the way of how much it would cost to fund this litigation. I havent changed my initial view, based upon the
submissions and now upon argument of counsel and the testimony given, that I dont think the process was intended to have the Estate fund this litigation issue. It just - it doesnt make
sense to me that that should occur, even if there is some difficulty involved with many of the Beneficiaries, at least as
114 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 its been alleged, in their being able to afford their own representation. Lots of bankruptcy cases, probably most of
them I see, have lots of Claimants who are owed very small amounts. Yes, it might be argued that Unsecured Creditors Committees are more suited or better suited to representing their interests, unlike the situation here. enough of a situation here to sway me. But thats not
I dont think this
case, at least as far as this goes, is particularly complex and requires that there be an added Committee to represent these interests. Nor do I think, necessarily, that adding it would
make the case all that more complex, because of the narrow issue involved. And with respect to the narrow issue involved, the papers are clear that at least right now the issue is entitlement to the funds. And the witness confirmed this. And while I
appreciate counsels efforts to say, Well, there may be other issues which would require a separate Committee, and there may be, the record made today doesnt support the creation of an additional Committee at this time. alternatives that might be pursued. has discussed them. There are other And counsel for both sides
It could be that maybe in connection with
the WARN Act Claimants there could be a Former Employee Committee which would deal with the narrow issue and others. And thats not necessarily an invitation. All it is, is the
115 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Courts impression and determination that there are other alternatives, including the U.S. Trustee acknowledging that shes still open to adding a member of this constituency to the Committee. Now, I understand that there may be situations in
which that means if one member is added, there may be a number of seven to one votes. But that's not necessarily unusual in
Committees with divergent interests, and certainly not enough, at least on this record, to tell me that that would make this Committee dysfunctional. So for these reasons, I am going to
deny the relief without prejudice and ask that counsel confer and submit an order under certification which provides for this ruling that I made for the reasons I've stated on the record, and to the extent that the Movants wish to have it, to include a provision that indicates the funds should remain segregated until further order of this Court. about what should go in the order? MR. KEACH: No, Your Honor, and we certainly would Are there any questions
like to continue at the invitation of the other parties the order that segregates the funds until further order. THE COURT: the next matter. All right, thank you. Let's move on to
Or let me ask this, at what point did we want
to do our telephone witness in connection with the sale? MR. HUSTON: THE COURT: MR. HUSTON: Pardon me, Your Honor -Yes, Mr. Huston. -- Joseph Huston on behalf of the
116 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 his voice? MS. UHLAND: THE COURT: I can, Your Honor. All right, lets have him sworn in then. Deferred Comp. Claimants. There are some -- my folks have some At this point, our
travel connections that they need to make. business is concluded. THE COURT: MR. HUSTON: MS. UHLAND: May we be excused? You may. Thank you very much.
Your Honor, I think we can do -I think we can do that
address the Greenwich Sale Order now. rather quickly. THE COURT: MS. UHLAND: Okay.
Hold on one second.
All right, Your
Honor, we now have the original reflecting the changes we discussed this morning. I just want to confirm that we have
Mr. Kevin Dwyer on the telephone. MR. DWYER: MS. UHLAND: THE COURT: Ms. Uhland? MS. UHLAND: THE COURT: Yes, I do. And can you confirm that you recognize Yes, I'm on, Suzzanne. Thank you. Let me just -- do you know Mr. Dwyer,
KEVIN DWYER, DEBTORS' WITNESS, SWORN THE CLERK: Please state your full name and spell
your last name for the Court.
117 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. DWYER: THE CLERK: MS. UHLAND: Kevin Joseph Dwyer, D-W-Y-E-R. Thank you. Your Honor, to facilitate his
testimony, I was going to proffer the contents of his testimony and then make him available for cross and for questions of the Court. THE COURT: MS. UHLAND: All right, go ahead. Mr. Dwyer, who's on the phone, if
called to testify, would testify that he is a Vice President of New Century Mortgage Corporation and has been since September of 2005, and that he is the Vice President with responsibility for the Debtors' secondary market operations. He would further
testify that he is familiar with the Debtors' activities with respect to the sale of its loans, including its loans not financed anywhere, as well as the Debtors' matters with respect to its residuals and sale of those residuals. Mr. Dwyer would further testify that he was involved in the negotiation and documentation process originally of the Greenwich Asset Purchase Agreement, including in that respect reviewing the representations made by the Debtor in connection with the Asset Purchase Agreement and assisting in and reviewing the schedules to the Asset Purchase Agreement prepared by New Century. He would further testify that he has
reviewed the Asset Purchase Agreement proposed to be entered into between the Debtors and Ellington, including the changes
118 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 made by Ellington to the representations that had previously -the Debtor had previously made to Greenwich. Mr. Dwyer would further testify that the representations and warranties of the seller set forth in section -- excuse me, Article 4 of those -- of that agreement are true and correct as of the date made. He would further testify with respect to the
purchased assets that the Debtors own the purchased assets identified in the Asset Purchase Agreement as defined therein, which purchased assets include the defined term "residuals," which means the Debtor's interests, rights and titles to the residuals set forth on the schedule to the Asset Purchase Agreement and the related securitization clean-ups calls to the extent the clean-up calls are held by the owner of the residuals. And that would conclude Mr. Dwyer's testimony with
respect to the accuracy of the representations and warranties. THE COURT: All right. Ms. Uhland, the blackline
Form of Order that I was shown earlier says, "All of the representations of the sellers in the APA are true and correct as of the date hereof," which is the date of the order. heard from the proffer, Mr. Dwyer would testify that the representations were true and correct as of the date they were made. MS. UHLAND: Your Honor, I asked -- I did not Let us -- if we could As I
observe that provision in the order.
just confirm with Mr. Dwyer that they are -- I dont know if I
119 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 signed. MS. UHLAND: Thank you, Your Honor. can ask a direct question? THE COURT: MS. UHLAND: Go ahead. Mr. Dwyer, are the representations and
warranties in the agreement true and correct as of today's date? MR. DWYER: THE COURT: Yes, they are. All right, thank you. Does anyone else Mr. Dwyer,
care to examine Mr. Dwyer? thank you very much. MR. DWYER: MS. UHLAND:
I hear no response.
Youre welcome, Your Honor, thank you. Your Honor, I now have the final -- the
original of the Asset Purchase Agreement -- I mean, I'm sorry, the Asset Sale Order, if I may pass it up? THE COURT: Yes, you may. I assume others have had
a chance to review it at this point? MS. UHLAND: THE COURT: Yes, they have, Your Honor. All right. Does anyone care to be heard
on the final revised draft of the Form of Order? ALL: (No verbal response). I hear no response. That order has been
THE COURT:
(Pause in proceedings) MS. UHLAND: Your Honor, we'd now like to turn to
the Retention and Incentive Plan Motion.
120 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. MCMAHON: McMahon again. All right. Mr. McMahon? Joseph
Your Honor, good afternoon.
Your Honor, we approach today with a hearing on
the United States Trustee's Motion to Continue the Hearing on this particular motion, the Incentive Retention Plan Motion, scheduled as per Friday's teleconference. And Your Honor
indicated that he wanted to hear the full evidentiary record developed before ruling on that motion. The matter which I
presume I'm being asked to address right now is the fact that as of the time this Omnibus Hearing started at 10 o'clock a.m. this morning, I had not been presented with the latest documentation relating to the negotiated plans in the form they are being presented to the Court; and my understanding is the Court had not either. Your Honor, I received the employee grid, which breaks down by employee what payments the Debtors are proposing to make to the plan participants around 11:15 this morning, and between being at this hearing and getting back to my desk and doing some type of -- conducting negotiations with the plan Beneficiaries' counsel, I will represent to the Court that I haven't had a detailed opportunity to take a look at the paper that I've been presented with. Do I generally understand the
fact that they -- the negotiations proceeded in a manner that the Committee negotiated some additional changes that are presumably favorable to the Debtors' estates such that the
121 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 proposal -- the total amount of dollars proposed to be paid out has been reduced? Yes, I do understand that. But again, if
the question being posed to our office is would we appreciate the additional time to review the plans to discuss them internally, perhaps to communicate with the representatives of the estates regarding the plans, we would. where our office stands on this issue. THE COURT: MS. UHLAND: All right, thank you. Your Honor, briefly just on that issue, There's two That's basically
and I don't -- I'll talk about it a little more. changes that were made to the plans.
One is the continuing
negotiations with the Creditors Committee to provide them concessions. The other reason that the plans were difficult to
change is the plan totals decrease as the number of participants decrease, and we are structuring the plans by pools. The Debtors have continued to lose employees every day,
and particularly after last week's events, lost a substantial number of employees, including eight or nine of the plan participants between Wednesday, when we gave the roster to McMahon, to Sunday night. So keeping that roster updated to
keep track of the people who are being lost is the primary reason that we were unable to get the completed revised roster to Mr. McMahon before today. I'm very concerned that the
Debtors, who are in desperate need of their employees, not be punished for the fact that they, you know, are already losing
122 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the employees that these plans are intended to retain and -and trying to accurately reflect that, and further that we're making economic concessions with the Creditors Committee, something would seem sort of contrary to sort of the purpose the Debtors and Creditors Committee jointly view, you know, the intended purpose of these plans. Those are the two main
reasons, the economic concessions and the loss of participants that flow through the documents that made the documentation difficult to provide. Your Honor, what we would propose to do today is walk through the plans, which in structure are the plans that we filed with the -- the amended plans we filed with the Court on Tuesday. Walk through those plans. And I'd like to provide
the Court with some additional exhibits/Cliff Note versions of the plans, it might be more readable, and explain to the Court the economic changes that we've waled through. But the Trustee's primary objections, as we understand them, are to the linking the plans to incent -- to making sure that the plans truly to incent the behavior intended and are not {quote} {unquote} "lay-ups"; that these plans are necessary to the sale process and are properly calibrated. The Trustee's
other primary objection relates to clarifying the insider status of the participants to ensure compliance with 503. On
both of those points, Your Honor, the Debtors again feel that these plans are unchanged from those filed last week, and
123 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 further, the Debtors intend to make an evidentiary record through direct testimony that Mr. Stern of Richards Layton's going to be handling the witnesses second. So I'd like to take
some time going through the structure of the plans and then presenting both of those issues through the witness testimony. We'll be having Ms. Holly Etlin of Alex Partners testifying on the business need, and Mr. Frank Glassner, who's the Debtors' compensation expert, also testifying on the plan structure. THE COURT: All right, let's do this. I'll allow
the Debtor to proceed in that manner, and at the conclusion of the evidentiary hearing, I'll hear again from the U.S. Trustee. MS. UHLAND: Thank you, Your Honor. Your Honor, to
start, I'd propose to hand up and make available to the parties in the Courtroom a brief summary of the terms of the plan as they currently stand. (Pause in proceedings) THE COURT: MS. UHLAND: THE COURT: Almost on cue. May I approach, Your Honor? You may.
(The Court receives document) THE COURT: Thank you.
(Pause in proceedings) MS. UHLAND: Your Honor, when the Debtors originally
constructed these plans, they constructed them such that the participants in the plans would by motivated to assist and
124 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 participate and maximize value in the Debtors' sale process. Further, with respect to the lower level employees that were participants in the plan, the Debtors proposed to make retention payments. Before getting to these plans that were
filed last week, between the time they were originally filed and the time we filed them last week, we made three important changes to the plan. The sale structure and targets were unchanged as far as the thresholds to meet for the sales. But what the Debtors did
do in light of the previous rulings in this case with respect to the scope of insider status is they restructured what was previously their retention plan to leave in the retention plan a limited number of employees and, instead, created a new incentive plan that would include a broader range of what we might call senior employees that the Debtors did not take a position -- or officers -- but based on ruling in this case and in an abundance of caution, the Debtors re-drew the lines on who should be included in the incentive plan. Further, out of
the Debtors' eight executives originally in the incentive plan, only four executives were included in the new Key Employee Incentive Plan. In drawing the line on who was in the incentive plan, the Debtors included all titled employees at the parent company, NCF, and all titled employees with the title of Senior Vice President or Executive Vice President at the mortgage company
125 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 or other operating companies. Further, the Debtors did a
further review of the Vice Presidents at New Century Mortgage Company to determine if there were any who could arguably be in policy making positions or had any influence over the terms of this plan. Accordingly, there are certain Vice Presidents in
Human Resources and the legal department and finance who were moved, though they had the Vice President title at the operating company, were moved up into the incentive plan to avoid any arguments with respect to their status. Now as constructed, and I'll return back to this -- our term sheet here, we have 33 employees in the incentive plan. This includes six of the individuals who were previously in the wholesale retention plan that this Court approved with respect to the lower level employees for New Century Mortgage. includes, as I had mentioned, four EMC members. It also
Those four EMC
members, as we set out in our papers, include the company's General Counsel, Chief Operating Officer, who's also responsible for the Debtors' intellectual -- the Debtors' IT Department, Mr. Anthony Meola, with whom this Court is familiar as one of the Executive Vice Presidents of the Company, and Mr. Robert Lambert, who's the Debtors' -- leads the Debtors' Human Resources Department. The new revised incentive plan provides for award targets in a range from 10 to 30% of annual base salary. This is the
total amount paid if all three stalking horse bids and targets
126 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 are met, thresholds are met. The targets contribute to the --
or each sale contributes in a different way, and these percentages have shifted as we've continued to make concessions with the Creditors Committee. But in essence, the balance of
the total incentive payment reflects the difficulty of achieving the desired sale. Accordingly, looking at this
second to last bullet point, for the LNFA transaction that was just approved, that would contribute to the total target at 13% at threshold. assets, 45%. million. For the servicing, it's sale, 42%, on the other The target price for these other assets is 32.5
The Debtors did not previously disclose that number
because we were still in the process of collecting or soliciting bids for the loan platform origination business, and the financial advisors requested that we not present a price that might be taken by the market one way or the other. Included in these other assets, then, would be the technology that remains that supported our loan origination platform. To the extent that the sale of the Access business
results in proceeds to the Debtors, that would be included in these other assets, the Access transaction that the Court approved on the 24th. Further, the Debtor has remaining
financial assets, including it's membership interests or their partnerships interests in the Carrington funds, that's separate from the Carrington Servicing documentation, which assets may be difficult to sell and they have transferability issues.
127 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Expressly not included in these other assets because it's not an asset that's going to be sold under 363 is the Debtors' tax refund claim. That's not considered a saleable asset for the
purposes of these plans. The Debtors' second plan is largely a retention plan, except for the very top tiers of employee who have some portion of their compensation tied as well to incentive in order to align those employees with the Debtors' senior management. The
total target -- and this can be a combination of incentive and retention for those in the top tier, is 10 to 25% of base salary. And for these top tiers, approximately 40% is a
retention payment and 60% based on achieving the performance metrics. For the servicing employees in the plan, the retention date is an earlier date, and there are approximately 20 servicing employees out of the 83 in the plan. Those employees
need to remain through June 9th to receive their retention payments, whereas others need to remain through July 9th. The threshold prices work as follows, and it's been, again, another thing that's sort of, I think, complicated the documentation somewhat is the threshold prices are based on formulating a pool that's contributed to the two plans for the incentive payment, and then each participant in a plan gets a set percentage of the amount. And that percentage will be
determined based on when the roster is final, we'll have target
128 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 numbers in there for the dollar amount of award, and then those will all be converted to percentages. The plan is not a pool plan such that if any of the employees voluntarily terminates prior to the award being made, the pool does not increase or remain the same size for the other employees, so we will -- we set these numbers -- we'll set them as of today, but if there are voluntary terminations or terminations for cause, again, these plans -- the total numbers and the expense to the estate will be altered -reduced. So with respect to the Carrington -- I'm sorry, the Greenwich/Ellington transaction, the plan will provide a total funding in both plans at the stalking horse price of 265,234. And then because of the provision that it would allow 2% of the sale price above 47.25 million, the total contribution at 58 million would be -- this is the total, inclusive of the 265 -482-34. We are not paying amounts -- we are not contributing
to the plan and paying to the employees the amounts that are subject to holdback until paid. Accordingly, before the
holdback, only 420-234,000 will be paid. With respect to the servicing transaction, because of the structure of the servicing sale which is based on a basis point as a percentage basis because the number of loans that are subject to the servicing fluctuate and therefore the total proceeds to the Debtor will be determined at the sale price
129 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 based on the audit. But when the Debtors are comparing the
bids to get a better bid, it's really based on a percentage basis for the loans that are being serviced in connection with the servicing rights. Accordingly, the Carrington bid is at a
50 basis points at present, and so the pool that's contributed for the servicing assets is 829,969. Now, the Carrington bid is currently the subject of a -as currently structured also has a cash holdback, so notwithstanding that it's being priced on a basis point mechanism, if there is a held-back amount, the pool will be -the amount will be reduced based on any amounts held back. with a 10% holdback, only 90% of that amount will be paid. Similarly, if we receive a payment -- a bid of 10% greater than the 55 basis points -- I'm sorry, of the bid of 50 basis points -- did I flip my numbers -- 90% will be paid on the current proposal given the Carrington holdback. If the deal increases So
on a percentage basis, the starting amount of the 829 will be increased on the same percentage basis. With respect to the other assets, which are the group I described before, largely the loan origination platform technology and the other financial assets, including the membership interests in the Carrington funds, no amounts will be paid until proceeds reach 32.5 million. As Ms. Etlin will
describe, the disposition process of those is just started and has not even started for some of those assets. Upon reaching
130 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that, the pools will be funded at a $908,164. And in a even
more updated economic agreement with the Creditors Committee, we've agreed that the sharing above that amount or the contribution above that amount for the first 5 million -- or it's not quite 5 million -- up to 37.375 million, 2% of the proceeds will go to contribute the fund, and above that sort of second target amount, 6% of the proceeds will go to contribute the funds. As I noted before, no payments will be made to employees who voluntarily terminate or for employees terminated for cause. Further, no payments will made to any plan participant
pending any internal investigation of such participant's conduct. Now, I note -- I will note briefly here that the
United States Trustee noted that provision, but wanted to raise the additional concern about the SEC's investigation with respect to employees. In that regard, the Debtors provided
initially the complete roster to the Securities Exchange Commission and, in fact, made some deletions at the request of the Securities and Exchange Commission. Accordingly, the
revised plan roster is -- we've reviewed with the Securities and Exchange Commission and they've raised no objection. So
that part of the review was done prior to the completion of the roster that we're asking to be approved today. I'd like to pass up one other summary that we've also provided to the United States Trustee that gives a little more
131 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 detail about the categories of employees that are subject to the plan, if I may hand this up? THE COURT: MS. UHLAND: Yes. Thank you.
The totals on this exhibit split out
between the two plans the numbers I just described for the asset pools and, in addition, describes by general area the categories -- or participants in the plans. Briefly, because we are going to have discussions or testimony to describe the business purpose of the plans, at a high level, again, the structure was to create a sales related plan on the incentive portion and to create a distribution of proceeds to balance between the efforts required for the different plans and to ensure that there was an incentive structure such that the employees would, you know, on a very successful result receive substantially more payment. And
again, this is why -- one of the reasons that the bulk of the plan is weighted and the incentive plan is weighted toward the other asset categories. As the Court is aware, that bar, you
know, has been raised, even lately, with the fact that the Debtors received no bids for their loan origination platform and are now going to be attempting to achieve that goal based on the sale of their other assets, you know, other remaining assets under 363. Between -- as I noted before, between filing the original plans and this plan, the Debtors made substantial reductions in
132 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the economics and made the changes I described above to move anyone who could be, by rule of this case or by the Debtors' own concern on the policy review standard, an insider up into the second plan. Since filing the Tuesday plan, the Debtors engaged in continued and further discussions with the Creditors Committee. And I'd like to walk through briefly what the economic changes were between the filing of the Tuesday plans and the plans today. Most importantly, and the key economic change -- or
there's really two key economic changes made by the Debtors since the Tuesday plan. First, the target for the other asset
pool was reduced by approximately 25%; in other words, the total pool that would be available on distribution of those amounts. And while the pool was reduced the -- there was sort
of to create a more incentive structure, while the initial -the floor pool was reduced for remaining threshold, the sharing on the upside was increased such that instead of a flat 2% above the target of 32.5, it's now the stepped 2.5% and 6% I previously described. Further, and this is another point that should address one of the issues raised by the United States Trustee, the discretionary incentive pool, or critical retention pool, we've used both names, was reduced from $250,000 to $175,000. And
again, I believe this does address the U.S. Trustee's concern on this matter, no individual can be paid more than $40,000 or
133 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 20% of their base salary without Creditors Committee consent. Also at the Creditors Committee's request, the Debtors and the Creditors Committee clarified the provisions with respect to the holdbacks; in other words, that at the time the sale closes that the pool will be funded net of any held back amount, with the held back amount only to be paid as received. This was a two-fold interest of encouraging the Debtors and their representative to both minimize amounts immediately, you know, held back out of sales and further encourage the employees to maximize the recoveries from any holdbacks or escrows in the asset transactions. And finally, Your Honor, with respect to the delivery of the release, the Creditors Committee requested that we be clear that the release be delivered by the participants prior to payment instead of thereafter, similar to the release provisions that the Debtors and the Creditors Committee worked out in connection with the wholesale retention plan payments that the Court previously approved. Again, Your Honor, those are the modifications, in addition to the loss of employees that have changed since Tuesday. Notably, we've reduced the total number of employees
participating in the plan; I believe that the are 11 fewer employees since Tuesday -- 11 employees who are no longer participating, which is a substantial attrition over the last week. It's been a very -- last week was a very difficult week
134 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 with the Debtors with the reduction in force, as well as -- and these were -- these were voluntary terminations, not parties who were RIF'd by the Debtors. And then further, there was one
employee added in to sort of address the fact to compensate in an area where the other employees had been -- were no longer going to be employees of the Debtors. Accordingly, as we now -- if we're looking at the revised detailed schedule, the total cost, if all targets are met, would be -- and the full discretionary pool is paid, would be approximately 3.2 million. If all targets are met just at
target, we expect to -- we can add to that, and we've now calculated the amount that we would receive with the Ellington transaction, so that would amount would increase with the holdback by an approximately another $160,000. So
approximately 3.37 million if we hit every target with the Greenwich overbid and if all employees remain employed and therefore remain entitled to all the payments. Your Honor, I believe on the legal objections, that as we've -- both the restructuring that we did and filed on Tuesday, that we've addressed the issues the United States Trustee raised with respect to 503. After the conclusion of With
the testimony we will walked through that issue again.
respect to the incentive nature of the plans, Your Honor, we believe that's best addressed through the testimony of Ms. Etlin, who can talk about why the plans address -- why the
135 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 plans are motivating and necessary and are not {quote} {unquote} "lay-ups" as the case law warns us against. And with
respect to the U.S. Trustee's legal objections, we believe as restructured and with the additional information which was presented into the Court today, that the Trustee's concerns about the Securities and Exchange Commission investigations have been addressed, as have the U.S. Trustee's concerns about the payments to be made to individuals in connection with the additional pool. With that, Your Honor, I'd like to turn it over to Mr. Stern to present our evidence. THE COURT: All right. Before we do that, let's And before the evidentiary
take a short break, say 10 minutes.
presentation, I'd just like -- I would like to hear first briefly from the U.S. Trustee to see what objections, if any, remain. MS. UHLAND: THE COURT: (Court in recess) MR. MCMAHON: Your Honor, good afternoon. Prior to Thank you, Your Honor. Court will stand in recess.
the break, Your Honor asked for a presentation from our office as to whether the plans as revised resolved our objections in any way, and the answer to that question is no. As our
objection notes, there are two concerns under -- having to do with sub-section 503(c)(1), and then four concerns dealing with
136 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 50C -- 503(c)(3), excuse me. With respect to 503(c)(1), the
two issues are, first, whether this plan as it is currently postured is a disguised retention program. The second issue is
whether the plans seek to make retention payments to insiders. And in that regard, Your Honor, I note that while the Debtors have, I guess, attempted to shift Senior Vice Presidents and Vice Presidents across the company, across various corporations, as a result of our previous consideration of the insider issue in a different context, there are still, admittedly, in the text of the amendment Vice Presidents and Assistant Vice Presidents who are, by definition, corporate officers, they have been appointed officers pursuant to the bylaws, who are slated to receive retention payments under the plans; specifically, the retention plan. With respect to (c)(3), Your Honor, we have argued the plans have to be justified by the facts and circumstances of the cases. And the first consideration basically mirrors the The second
point about the targets not being real incentives.
point is -- has to do with the rational relationship between the incentives and the work performed by the various employees who either were creating a second class of investment bankers who really arent. The third has to do with the existence of
the critical retention pool, and the fourth has to do with the pending investigations and whether we should be going forward with this issue. And I guess you could probably collapse out
137 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 McMahon. MR. MCMAHON: MR. STERN: Okay. Good afternoon, Your Honor. May it with the consideration of our Motion to Continue. Honor would like me to -THE COURT: No, thank you, I appreciate that, Mr. Unless Your
please the Court, Bob Stern from Richards, Layton & Finger on behalf of the Debtors. Your Honor, Ive been asked to present
Debtors' Motion to Approve its Incentive and Retention Plans. Before I do that, however, we filed, I believe it was today or perhaps sometime earlier, a redacted version of the employee roster; in other words, all of the folks who we propose to have receive either incentive or retention pay under these plans, and that roster provides specific information about employee, position, and amounts that they might receive under certain sales or for retention. The U.S. Trustee has asked us to file an unredacted version of that roster, but we feel we can only do so if it is filed under seal, so at the request of the U.S. Trustee this afternoon, we are making now an Oral Motion under Section 107(b) to File the Entire List Under Seal, and Ill briefly explain the basis of that motion, but Ive added at the end of Ms. Etlins testimony the facts Your Honor would need in order to grant that motion. So Ill simply alert the Court that
were making that motion now, give the Court a quick preview of
138 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the basis for that motion, and otherwise table it until we finish and Your Honors had a chance to hear Ms. Etlins testimony. THE COURT: unredacted list? MR. STERN: THE COURT: MR. STERN: Yes. All right. Were not hiding that from him. We just Does the U.S. Trustee have a copy of the
dont want it to be part of the public record. THE COURT: MR. STERN: I understand. Okay. The basis, Your Honor, for our
Oral Motion under Section 107(b) is that we want to protect the companys confidential information. Frankly, the data on the
amounts that employees could or would receive is competitively sensitive information, among other things. As Ms. Etlin will
testify, such information could be used by competitors to essentially hire away the employees that we have deemed most critical. All they really need to do is see what we propose to
pay them to incentivize them to stick around and top it, and then we are at risk of losing those employees. Moreover, as a general matter, the company does not disclose specific employee compensation information because of a concern that it may cause some dissension among the ranks, frankly; one employee looking at what the other employees getting and getting disgruntled. So very generally, but
139 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 probably primarily for the reason of a concern about the ability of competitors to use this data, we would like to keep it confidential. And Ms. Etlin will
provide such testimony, and then I suppose well return to the motion under 107(b) at the end of the day. Your Honor, turning to the motions, as the Court is aware, on April 11th, the Debtors filed their Motion Seeking Approval of the Incentive and Retention Plans. Now, I think its fair
to say a lot has happened since then, and Ms. Uhland has summarized many of the events, and Ill spare everyone a repetition of that summary. I think suffice to say, we come to
Court today with plans that have been modified to address the concerns of the Committee, and in our view, concerns previously expressed by the Court and the U.S. Trustee. It bears
emphasizing, Your Honor, that the Committee, which in essence is writing the checks for these plans, is fully on board with and supports the plans. Your Honor has already heard the general basis for the U.S. Trustees objections to our plans, and with due respect to the U.S. Trustee, Your Honor, we believe we can refute those objections today as a matter of fact and as a matter of law. We will demonstrate that the incentive plans are indeed true incentive plans. We will demonstrate that the participants in
the retention plan, theres about 28 Vice Presidents and Assistant Vice Presidents among the approximately 90 total
140 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 participants in that plan, give or take, are not officers as that term is used in the Bankruptcy Code. And we will
demonstrate that the plans themselves represent informed exercises of the Debtors business judgment and are entitled to approval under Section 503(c) -- 503(3)(c), excuse me. Your
Honor, we will, at the end of the day, ask the Court to approve the plans today, as in our view it is critical that the plans be approved today. Frankly, and youll hear some of this in
the testimony, we simply cannot wait to afford any longer. Now, this afternoon, Your Honor, Im going to proceed as follows. First Im going to call two witnesses. The first one
is Holly Etlin of Alex Partners, the Debtors' financial advisors. I think in terms of ordering, then it would make Then
sense for me to present Ms. Etlin for cross examination.
Ill proceed to Frank Glassner of Compensation Design Group. Mr. Glassner -- or I should say Compensation Design Group are the Debtors' compensation advisors. Of course, then, if anyone
wants to cross examine Mr. Glassner, theyll be free to do so. And then well discuss, Your Honor, the applicable legal standards, the application of the facts that have been presented today to those standards, and why the Debtors believe the plans should be approved. I suspect when I sit down, the
Committee and the U.S. Trustee may have some things to say as well. Your Honor, may I call my first witness? THE COURT: You may.
141 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. STERN: Q. A. Q. A. Q. A. Q. A. Q. Ms. Etlin, by whom are you employed? Alex Partners. And what is your position, maam? Im a managing director. Did you join the firm as a managing director? Yes, I did. And when was that? In January of this year. Would you please provide a brief overview of Alex Partners' the stand. HOLLY ETLIN, DEBTORS' WITNESS, SWORN THE CLERK: Please state your full name and spell MR. STERN: Your Honor, Debtors call Holly Etlin to
your last name for the record. MS. ETLIN: Holly Felder Etlin, E-T-L-I-N. DIRECT EXAMINATION
business? A. Certainly, Alex Partners is a over 600 person international
consulting firm, and while it has multiple lines of business, it is best known as being one of the preeminent crisis and turnaround management consulting firms in the world. Q. Do officers or employees of Alex Partners occasionally
serve as or serve in officer roles at distressed businesses? A. Yes, we frequently serve as CRO and CEO and often CFO
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 titles, as well. Q. Okay.
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Would you please summarize your responsibilities as
a managing director of Alex Partners? A. Managing director is the highest level of professional We are responsible for directing the cases
within the firm.
that the firm has, actually taking those officer roles, as well as selling and marketing work on behalf of the firm. Q. A. Q. A. Maam, by whom were you employed before Alex Partners? Crossroads Solutions Group. Okay, and what is Crossroads Solutions Group? It is also a crisis management and turnaround firm of
smaller scale than Alex Partners. Q. A. What was your last position at Crossroads? I was a principal, which is the highest title in that firm,
and the co-leader of the restructuring practice for the firm. Q. A. Q. A. And how long were you with Crossroads? Four years. By whom were you employed prior to Crossroads? For 23 years I was with Deloitte Consulting, the last 5 of
which I was the national leader of their restructuring practice. Q. So how many years of experience, maam, do you have in
providing financial advice in restructuring or reorganization engagements? A. Slightly in excess of 27 years.
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. A. Do you have any professional certifications? Yes, I do. And what are those? I am a CTP, a Certified Turnaround Professional, and a
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CIRA, which is Certified Insolvency and Reorganization Advisor. Q. A. Are you a member of any professional organizations? Yes, Im a member of the ABI, the AIA, which is the
Association of Insolvency Advisors, the IWIRC, the International Womens Insolvency Reorganization Confederation, INSOL, as well as the Turnaround Management Association. Q. Have you had any upper level positions with the Turnaround
Management Association? A. Yes, Turnaround Management Association is an 8,000 member
professional association, the largest in our business, and Im the immediate past Chairman of that association. Q. A. Q. When was Alex Partners retained by the Debtors? On March 21st of this year. Are you the lead professional for Alex Partners on the
engagement? A. Q. Yes, I am. Okay. What type of services has Alex Partners provided to
the Debtors? A. We have -- we were engaged to provide a variety of crisis
management services to the Debtors, including but not limited to management of the treasury and cash forecasting function for
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the company, assisting the company with the preparation for operating within a Chapter 11 environment, assisting both
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counsel and management with those issues, assisting the company with stabilizing its servicing operation, and dealing with vendors and others who were disturbed by the companys precipitous decline in financial condition, working with the management team on the various operational issues the company has had, including the reductions in force that have occurred, conversations with vendors, landlords and others pertaining to the current condition the company is in. Q. Since your engagement by the Debtors in March, have you
spent literally 100% of your professional time working for the Debtors? A. Q. Yes, I have. Okay. And as a result of your work for the Debtors, have
you become familiar with the Debtors' business operations? A. Q. Yes. Okay. Can you generally describe what the Debtors'
business was pre-petition and whats happened to the business since then? A. Certainly. The company, as I think has been stated in this
Court on several occasions, was the second largest originator of sub-prime mortgage loans in the country last year. They
originated approximately $50 billion in mortgage loans, which at an average of $200,000 apiece is a lot of mortgage loans.
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
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Unfortunately, in the early part of March, the company found itself without its warehouse lines of credit, which were lines that it utilized in order to continue to make loans, and found itself unable to make mortgage loans. Therefore, given that
the origination of mortgage loans was a primary source of revenue for the company, the company effectively found itself in early March without any form of revenue. Q. A. And what happened next? Well, the company engaged in Lazard to assist them in
evaluating a variety of strategic options and attempted to find a buyer or equity investor for the business who would do so outside the context of a Chapter 11 filing. They had a number
of parties who came through the company, who spoke with them, who attempted to look at the company. Unfortunately, those
parties concluded that they were not interested in doing such an investment outside the context of a Chapter 11 filing. Therefore, the company proceeded to prepare for and file itself for protection under Chapter 11. In addition, as part of that process, the management team became convinced that the size the company was at the time was not going to be a size that anyone, even in the context of a Chapter 11 filing, was going to be interested in buying. so on the first day of the filing we executed a lay off of approximately 50% of the companys employees. We downsized the And
business by over 3,000 people to try to bring the size of the
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 loan origination platform business to a size that the management team thought would ultimately be saleable. Of
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course, I think the newspaper accounts and things that happened last week tell the story on that. Unfortunately, there were no
offers for that business and the Debtor executed a further reduction in force last week. We currently have slightly less
than 1,000 employees left at the company, approximately 370 of which are at corporate, and slightly over 500 of which are employed in the servicing operations of the business. Q. You said theres currently less than 1,000 employees at the
company? A. Q. That is correct. Just for comparison purposes, how many employees,
approximately, were at the company 2 months ago? A. Q. Almost 6,300. Okay. Maam, are you involved with the Debtors' sale
efforts? A. Q. Yes, I am. Okay, and can you describe your involvement just summarily
please? A. Certainly. Our rule is to assist Lazard and the management
team in developing due diligence materials for the process with regard to all of the various sales, working closely with the management team, getting those up on an internet based data site, an interlink site, to facilitate the various bidders due
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 diligence, and also coordinating the various kinds of interviews and on-site visits that occur with regard to the various business operations. Q.
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Ill ask you to go into some more detail about the sales
processes and the assets being sold and things like that in a moment, but just to give us a starting point, can you briefly identify the categories of assets that are being sold? A. Certainly. Theyre basically the assets that are covered
by the plans that are subject to this hearing today, and then there are certain other assets of the Debtors, but those are not subject to a 363 sale process. So the first is the sale
that was just completed this morning, which was the sale of loans not financed anywhere, which are loans that have either been put back to the Debtors or for which the Debtors did not originally securitize them or put them in a securitization facility, as well as certain residual interests that the Debtors owned in assets that were previously securitized and owned by others; so thats sort of the first category. The second category is an operating business, and that is the servicing platform business. That platform continues to
service loans owned by the Debtor, by Carrington, and also by Morgan Stanley. Thats the business that employs slightly more It operates in Santa Ana, California,
than 500 people today.
and is continuing to collect money on behalf of those parties, process loans, also perform reconciliations associated with the
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 various activities of the warehouse lenders. The third
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category consists of a variety of other assets, which have been previously described in Court. The interest in the Carrington
funds, access lending, which was the subject of a sale hearing previously in this Court. business. Theres a small title insurance
There are -- obviously, we had hoped to sell the
loan origination platform and were not successful doing so and unfortunately had to lay off many of those employees, but the company still does hope to sell the actual custom technology that was created for that loan origination platform, as well as certain IT assets and potentially employees who will go with that custom design software and help with training, et cetera, for the buyer of that asset. Q. Okay. Im going to return to each of those three
categories and were going to talk about the steps that have been taken done so far for these sales, and the steps that remain to be taken. the Ellington sale. approved today? A. Q. Yes, it is. Okay. What have the Debtors' employees done so far, say Lets start with, I guess what Ill call Is that the name of the purchaser that was
through today, in order to support or facilitate the Ellington sale? A. So the Ellington sale is not simply a single financial It is a pool of approximately 2,000 loans, and each of
asset.
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those loans has documentation associated with it, performance criteria, past performance criteria that had to be extracted from the Debtors' records and made available to parties, as well as then the residual interests which, again, the Debtor had to be capable of providing documentation that those interests were actually owned and what they consisted of and all of the various documentation that goes along with the performance of the pools of assets to which those residuals might be related. So that the Debtors management team was
involved in a fairly comprehensive process to extract that data, as well as to make it available to potential parties who were interested in buying those assets. Q. Notwithstanding the fact that the Ellington sale was
approved today, is there work yet to be done by the Debtors' employees to consummate the Ellington sale? A. Yes, very substantial work. The Ellington sale documents
require, specifically, the delivery of all of that documentation successfully to Ellington, and theres actually a holdback that the Debtors would like to ultimately receive thats pending the actual documentation, the receipt of the documentation, and the transfer of all of that data successfully to the buyer. Q. A. Q. And how much is that holdback? So I believe its approximately $3 million. Now what happens if the Debtors' employees dont perform
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 all this hard work and provide the information to the purchaser? A.
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So, well, in one case the deal could not close, potentially
not close at all in the most extreme view, and its -- and in the less extreme view, you could have an issue with actually receiving the full amount of the proceeds under the holdback. Q. Lets chat for a moment, if we could, about the second
category, the Carrington sale, if I can use that to summarize it. What is the status of the Carrington servicing platform
asset sale? A. No, the Carrington stalking horse agreement was filed, if
not at the exact same time, we sought protection under Chapter 11, shortly thereafter. However, because of the speed with
which that agreement was put together, Carrington has continued, subsequent to that date through todays date, to do additional due diligence on their own behalf with regard to that transaction. In addition, theyre actively in the
servicing platform, have had professionals in the servicing platform making substantial information requests. My team in
the servicing platform, the Alex Partners team, is responsible for helping manage and fulfill those requests so that they dont significantly interfere with the day-to-day operations of the servicing platform. But the fact of the matter is is that
a lot of people and a lot of data have to be involved in making sure that Carringtons requests are satisfied. Carringtons
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not the only interested party in this business so there have been other parties doing due diligence, coming on site to have meetings, and doing other kinds of activities with regard to the sale process right through todays date. Q. I think youve probably answered, in large part, my next
question, but Ill ask it anyway to see if you want to add anything to your answer. What have the Debtors' employees done
so far in support of the Carrington sale? A. Theres been very substantial data associated with that.
Carrington, as any bidder for this kind of asset, would want to know that the company had adequate systems and people and expertise in place to properly service a long portfolio the size that the company currently services. They would want to
know that the company was complying with the terms and agreements of those servicing contracts, and so theres been a very substantial amount of data gathering associated with that, as well as understanding the companys policies and procedures with regard to the non-performing portions of the loans in those portfolios, given that this is a sub-prime loan portfolio, which requires a lot more hands-on attention and activity than a regular credit rated portfolio of mortgage loans. Q. And what remains to be done by the Debtors' employees in
order to consummate the Carrington sale? A. Well, the first threshold issue is were required to retain
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a minimum number of them in order to close that transaction in the first place. So the first thing they have to do is at There is
least agree to stick around, which is no small issue.
a competitive servicer of loans who opened up a brand new facility and held extensive job fairs in the second week of this case, and who has been actively trying to recruit the companys personnel. But in addition to that, its not a fait
accompli that Carrington will be the purchaser of those assets, it may be some other party, but if it were to be Carrington, Carrington does not currently have the licenses necessary to actually take over, close and operate a servicing operation. And so we would be obligated, under the terms of a transition services agreement, to continue to assist them in operating those businesses until such time they obtain their own licenses and were able to take over the operation of those servicing businesses. And theres a lot of transition that would occur. If a
buyer were to actually be a current operator of a servicing platform, it would still take approximately 3 to 4 weeks to set up for the actual transfer of the service assets to that buyer, and then theres about a 30 to a 60 day tail whereby you still continue to receive checks from borrowers and other kinds of reconciliation activity that you need to do to support the full and complete transfer of that business over to the successful buyer.
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.
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You referenced, I think, a requirement under the Carrington
agreement that the Debtors essentially deliver a certain number of employees identified by the purchaser under the agreement, is that right? A. That is correct. Its a certain percentage. If I recall
correctly, I think its 75% of the employees that were in the platform at the time the stalking horse agreement was signed. Q. A. And what happens if we dont deliver the 75% of employees? I believe at Carringtons option they have an option of not
closing. Q. Okay. Now, while all of these things that youve just
described have been going on at the servicing business and the related businesses, do the employees still need to run those businesses? A. Oh, absolutely. Theres a lot of activity going on, not
just the running of the actual servicing business, but frankly, were, as of last week, only 30 days into this case. And so
there are huge amounts of activity that are ongoing in every aspect of the business operation of the company, not only pertaining to the issues with regard to the very rapid downsizing of the business, the need to dispose of properly facilities and leases and assets and those kinds of things, but also all of the ongoing issues associated with the various -the SEC investigation, the various regulatory departments in every state in which the company has done business, theres
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very active contact with each state, and those are licensing issues. And again, we have to maintain the licenses in order
to be able to transfer an operating business to Carrington or another purchaser on the servicing side, so there are lots of different kinds of activities ongoing at the company, in addition to just supporting the sale process. Q. Lets talk about the status of the last bucket of assets, What is the status of
which well just call "other assets." the sale of the other assets? A.
That process has only just barely commenced with regard to We dont have any stalking horse bids for
the other assets.
any of those items other than the Access transaction, which this Court has already heard, but which I think the Court will remember, while there is a nominal value placed on that sale, it is subject to an actual earn-out provision. And so there
are things that need to happen in order to actually ultimately receive those proceeds from Access. Q. And just so that the Court understands whats going on with
this business as well, or these businesses I think I should say, what have the Debtors' employees done so far in support of selling these other assets? A. So, well, first the Debtors employees had to and have been
continuing to identify all of the various kinds of smaller miscellaneous assets that the company has that are not particularly hard assets; you know, theyre not tables and
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 chairs, or leases. to find.
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Those are the things that are kind of easy
Its the companys investment in Carrington and the
issues associated with the potential transferability of that, its Access, its -- again, I mentioned the small title insurance company and other kinds of things like this. And of
course we were, until unfortunately last week, very actively marketing the origination platform. And there were huge
activities associated with preparing the materials associated with that sale process, supporting Lazard in the sale process, the demos of the IT component of that operating business, and then, now, the continuing process associated with trying to market and successfully sell just the IT components since the employees have actually been terminated as of last week. Q. And just to round out the record, although I think youve
probably mentioned some of these things already, what remains to be done by the employees to hopefully consummate sales of these other assets? A. Well, probably the most important issue is that the
servicing platform and its IT requirements were not set up to be separate and easily segregable from the normal IT operations of the company. And many systems are linked together. We need
to figure out what goes with the servicing platform, what is related to the technology sale, and what, frankly, systems and data the ongoing estates need in order to properly perform their function of filing a Plan of Reorganization and winding
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 down the process as it pertains to the remainder of the business.
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So thats one example of several activities that are
still ongoing and require some fairly substantial technical input of the companys employees. Q. You mentioned previously that with respect to the other Whats the outlook for the
assets, theres no stalking horse. sale of the other assets? A.
Well, its -- we would hope that it was good, but obviously
that component of this plan is much more highly speculative than the other components. The other components are And certainly, for
speculative as to timing and amount.
example, in the case of Carrington, there could be a downward adjustment just as easy as there could be an upward adjustment, based upon the ongoing due diligence efforts. But at least
there is, I think, a sense among the companys employees that that business -- there will be a successful buyer. The other
assets pieces, its not necessarily known what the sale might bring. Commensurately, weve tried to structure the incentive
compensation to reflect some of the risks that the employees perceive potentially with the successful sale of those assets. Q. Now, all the work that youve just described in great
detail that has been done by the Debtors' employees so far to support and facilitate the asset sales and that remains to be done to support and facilitate the asset sales, could that work be done by the Debtors' investment bankers?
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. No.
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Lazards job is to work with the various buyers in the Lazard works at a much higher level. And
negotiations.
certainly they do not have nearly the kind of detailed knowledge with regard to these assets and businesses that the companys employees do. And so there is a logical break
between the role of the companys employees, frankly our role as advisors to the business, and Lazards role. Q. Now, in addition to participate -- and I think you In addition to
discussed a little bit of this a moment ago.
participating in the sales processes and otherwise running the various businesses, what other kinds of work have the Debtors' employees been doing? A. Well, we have just completed -- unfortunately, going from
6,300 employees to less than 1,000, so the HR and benefits portion of the company has been completely consumed with just getting the appropriate documentation to people that you would normally deliver to them as part of their termination; the COBRA notification and everything associated with that process, making sure that we get, you know, security passes and lap tops back from people and that we secure the various office sites that have been vacated by the Debtors as the various two rounds of downsizing that have occurred. Now, one round was on April 2nd, the second round was just last week, about 30 days later. Theres a huge amount of
follow-on activity associated with all that process.
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Substantially all of the companys desks and chairs and file cabinets are subject to various forms of equipment financing, equipment leasing arrangements, identifying which are on which agreement, and what the rights or those various lenders or lessors are and how we go about seeing that their rights are protected with regard to these assets and making sure that we maximize the value of these assets, which now constitute, you know, used office furniture. Theres just a whole host of Of course,
different kinds of activities that are going on.
the schedules and (indiscern.) preparation is the thing thats now consuming the accounting department, for example. Q. Lets turn to the plans that are proposed for approval
today, the Key Employee Incentive Plan, and the Key Employee Incentive Retention Plan. plans? A. Q. A. Q. A. Yes, I am. Okay, do you know how the plans were developed? Yes. How were they developed? A joint effort between the compensation committee of the Maam, are you familiar with those
Board of Directors, CDG, O'Melveny, input from me, and then input from the senior management team as to the potential participants in the plans and the basis for the plans. Q. A. Okay, and did you personally have a role with the plans? Yes, Im the individual from Alex Partners who was involved
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in the discussions around the development of the plans, and also the potential participants in those plans. Q. Did you assist in identifying employees who should be
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included to, for example, accomplish the sales in the plans? A. Yes. I interacted with every member of the -- whats
called the EMC of the company, the Executive Management Committee of the company, the top eight employees who direct all of the significant business units of the company. And I
had direct interactions with each of them with regard to critical employees within their portions of the business and the role they would potentially play as part of this process. Q. A. Q. A. Q. A. Have the Debtors approved the plans? Yes. Okay. Yes. Why did you do that? Because I think its in the best interests of the estates. And did you advise the Debtors to approve the plans?
I believe that while we dont have as many employees in these plans as we would have probably preferred to have under other circumstances, that the employees that are in these plans are the bare minimum necessary to really see us through the balance of the process without significant disruption. Q. Is there generally, among the employee ranks, uncertainty
regarding the business? A. Yes, that would be an understatement.
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Are there currently high levels of turnover? Yes.
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The company has had -- in addition to the downsizes
that were planned, the company was experiencing extremely high turnover when I first walked in the door on March 21st, and while that has somewhat slowed, again, I think it has been noted earlier today that when we first filed this plan, there were 11 people in this plan who are no longer with us because since we have been attempting to get this plan approved, they have voluntarily resigned. Q. Are the employees who the Debtors have identified for
inclusion in the two plans easily replaced? A. No, many of them have either very specific technical
knowledge associated with the actual industry that the company is in, or very specific supervisorial or managerial knowledge regarding how the company actually operates that would be very difficult, frankly, to replace if they were to depart. Q. A. Is this an easy time for the company to hire replacements? No. When Im not here in Court I spend full time at the And unfortunately, the amount
company in Irvine, California.
of press that the company has received, the unfortunate derogatory comments that have been made by the U.S. Trustees Office and others that have then been picked up by the press have really contributed to, frankly, just absolute -- its almost hard to describe. to happen next. People just dont know whats going
They dont -- you know, normally we would file
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 a bankruptcy and we would communicate to employees, "Okay, were in, we've got this approved for you, weve got that
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approved for you, and were gonna -- you know, were gonna have this course of action, and its going to take about this long, and this is what your expectations could be." But they
continue to read just horrible things being said about the company in the press, and so they dont know what to believe, and particularly with regard to people who are part of the U.S. Government saying some of those things. They dont know
whether that reflects, frankly, the view of Your Honor or something else. These are the kinds of questions I get on a daily basis from people who, normally in my experience, at this point in the case, we would have been able to substantially calm them down, have them focus on the work at hand, and not be worried about maybe next week someone will change their mind and they wont get paid out their vacation or their pay check will bounce or the other kinds of things that you typically have happen with an employee being concerned about in the first 4 or 5 days of a case, as opposed to now 30 days into the case still being worried about that. Q. Are the Debtors asking these plan participants, these
identified employees, to take on additional responsibilities and expend significantly more time and energy than contemplated by the normal terms of their employment in order to assist the
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Debtors in, you know, accomplishing these asset sales? A. Yes, all of this other stuff comes on top of the things
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that they need to do day-to-day.
Now, while we no longer have
the origination business so people who had a heavy portion of their day-to-day business activity devoted to that have been able to switch over to some of these activities, I think its fair to say that all of the companys employees are working much longer hours and much more extensively than theyre used to doing in the past. Q. Do the Debtors have authority to honor pre-petition
incentive plans for these employees? A. Q. No, they do not. And in the past, has a substantial portion of the New
Century employees' compensation been incentive and performance based? A. Yes, in addition to the commission retention program which
we talked about early on in the days of these cases, a very large percentage, I think, you know, 25, 30% of the average middle management employee's total compensation package was part of the incentive programs of the company, and that includes the people in the General Counsels Office, people in Accounting, HR, and other places. And theyre obviously very
conscious of the fact that those incentives are no longer in place. Q. So in essence, because those incentives are no longer in
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 place, are the employees essentially working for a pay cut? A. Q. So, yes, and I hear about it fairly frequently.
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Maam, are the employees listed in the plans essential to
the successful consummation of the sales of the Debtors' assets? A. Q. A. Yes. And why is that? Because the functions that theyre being asked to perform
as part of this process are essential to successfully closing those sales and transitioning those assets and businesses to the buyers. Q. Do the individuals who were identified for participation in
the plans have specialized knowledge? A. Q. Yes, they do. Okay. Now, why do the plans provide for incentive pay for
consummation of sales of assets for which the Debtor already has or had stalking horse bids? A. Well, again, I think we previously discussed the fact that,
for example, Carrington was subject to substantial additional due diligence, and the price on Carrington could just as easily have gone down rather than up as a result of this continuing due diligence. In addition, that original Asset Purchase
Agreement was signed without all of the schedules to the agreement being fully complete because of the timing under which it was done. So there are a lot of fine point details,
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because of the speed with which these sales have needed to be made in order to preserve the most value for the estate that needed follow-on, even after the transaction was initially inked. And of course, then, all of the competing bidders for
those assets had continuing due diligence after that process. Again, sometimes in these sale transactions, in determining a stalking horse, weve had substantial due diligence occur at the company already. In this case, substantially all the due
diligence with regard to the bidders occurred after some of the stalking horse bids were entered into. There were some parties
involved early on, but many more of those involved in the sale process were involved after those bids were filed with the Court. And then, of course, theres the issue with regard to
documentation and transfer of those assets. Q. And do the stalking horse agreements have closing
conditions? A. Q. Yes, they all have fairly extensive closing conditions. Now, let me backtrack for just one moment cause I want to We
address a question to some testimony you gave previously. already discussed the fact that pre-petition, the Debtors provided incentive based compensation for their employees, right? A. Q. Yes. Okay.
And youll recall your testimony that the Debtors
have not continued post-petition with their pre-petition
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 incentive plans, right? A. Q. Thats correct. Okay.
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Now, at the time the employees were working on the
stalking horse bids, do you believe they expected to continue to receive some form of incentive pay? A. Q. Yes, I do. Okay, but as things currently stand, they would not receive
such incentive pay, would they? A. Q. A. Thats correct. Okay. We did not, however, have time or, frankly, have sorted
through at the time the ability to say that the employees definitively one way or the other what form of incentives we might be in a position to provide them. So they continued to
work under an assumption that the portions of their compensation that were available to them pre-petition would continue to be available post-petition. Q. So absent approval of these plans today, those employees
would not have, I guess, their beliefs fulfilled, would they? A. Q. Thats correct. Maam, would you describe the consummation of the stalking
horse bids as "lay-ups"? A. Q. A. No. And why not? Well, again, I think Ive testified that as it pertains to
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Carrington, theyve probably done more extensive due diligence since the signing of the stalking horse bid than after, and were, you know, continuing to hear feedback from them with regard to that process, as well as the other parties coming through. The same, by the way, is true, frankly, of the
Ellington transaction in that there were very, very extensive documentation issues that have to occur in order for the sale to actually close. Companys employees in the capital markets
area have been working very extensively on making sure that we can actually provide that documentation at the time of closing. Q. Now, why did the Debtors tie the incentive pay for all of
the plan participants to the asset sales? A. Because of the nature of where the company is today,
theres not going to be a Reorganized Debtor, and the thought was that we should pick those things that are most easily identifiable and measurable for the included employee. employee knows what the transaction is. The
The employee can very
clearly identify it, and the amount of the transaction is measurable. Q. Are the sales essentially the most important activities
that the company is currently engaged in? A. Yes, by far and away they are the activities that will
generate the most value for the estates, in addition to the tax return preparation, which will hopefully yield a fairly large income tax receivable.
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.
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By using sales as the measure for incentive pay, does it
allow the Debtors to keep the plan structure simpler? A. Yes, again, one of the key issues with an incentive plan,
and particularly one in a post-petition environment, is you want the employee to believe that the measurement criteria for the plan are readily identifiable. measuring them on soft issues. You dont want to be
You want to be measuring them
on something very hard and measurable and relatively public. Q. Is it practical to come up with 100 different incentive
plans for 100 different employees? A. No, its very impractical, and particularly given all the
other things the Debtors are doing, the fact that we even have three different pools is a little more complex than many of the plans that Ive put in place in similar cases. Q. Are all the plan participants in one way or another engaged
in activities that support the asset sales? A. Q. Yes. Are the plan participants required to waive any other post-
petition incentive or retention compensation or claims such as Warn Act claims in order to qualify for payment under the plans? A. Q. Yes, they are. Okay. If a plan participant voluntarily terminates or is
terminated with cause, can the participant receive incentive or retention pay?
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. No, they cannot.
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If the participant is subject to investigation by the Audit
Committee, do the Debtors have the right to delay payment in order to complete the investigation to determine if the employee should be terminated for cause? A. Thats correct. Any amount thats due that employee under
the incentive plan pursuant, for example, to Ellington, since the Ellington transaction has just been approved by the Court, would be escrowed until such time as a determination was made whether or not the employee was eligible to receive that money. Q. Maam, given all youve told us about the plans, do you
have a view regarding the reasonableness of the plans? A. Q. A. Q. A. Q. Yes, I do. Whats your view? Theyre reasonable. For the reasons youve already discussed in detail? Thats correct. Okay. Maam, do you have a view of what might happen if
the plans are not approved? A. Q. A. Yes, I do. And what is your view? Well continue to have the turnover that we have I would suspect that we will rapidly lose some
experienced.
substantial percentage of the employees covered by these retention plans, and more importantly, weve got 371 corporate
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 employees and weve got over 500 servicing employees.
169 The lack
of approval of this plan would send a message to the balance of the companys employees, even if they arent covered by this plan, that there is some risk with regard to all of their other compensation arrangements. No matter what I could say to them,
at that point they would be -- have sufficient disbelief that, frankly, I think a large portion of them would be out looking for jobs. Q. Ms. Etlin, if the plans are not approved, and are not
approved immediately, do you think that could adversely affect the Debtors' ability to consummate their sales? A. Q. A. Yes. Okay. Are there currently morale problems at the Debtors?
Yeah, I think Ive already alluded to the fact that there
are very difficult morale problems at the company. Q. Tell me about what happened with the reduction in force
last week? A. Last week was very, very sad. Brad Maurice, the CEO of the
company, gathered the employees in the corporate headquarters, and I was physically there for that announcement, into a room and announced the fact that the company was unable to find a buyer for the origination platform. tears in the room and a great upset. There were substantial After that, frankly, the
company emptied out and by approximately 12:30, 1 oclock in the afternoon, there were very few people left in the company
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 headquarters that day. Q. A. day. Q. Has the current delay, and I dont use that word Did even people who had not been RIF'd, leave? Thats correct.
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Almost everyone left and went home for the
pejoratively, has the delay in getting the plans put into place so far caused any employees who we wanted to stay, who we had originally listed as participants in the plans, to leave? A. Q. Yes. And in fact, I think we heard earlier thats why we had to
revise the plans, 'cause some of the folks are leaving, arent they? A. Thats correct, and the fact that -- because the listing --
while we couldnt tell employees that we could assure them that the plan would be approved, we did attempt to tell them that they were included individually in the plan, and while we couldnt guarantee them what the amounts might ultimately be because we were negotiating with the Committee and it was subject to Court approval, we did give them an idea of the range of the payments in the plan. And then they asked when it
was we thought it would be approved, and we told them when it was. And unfortunately in several cases, they didnt believe
that they could wait. Q. Thank you. Ms. Etlin, I want to ask you just a few more
questions.
First, a couple of questions that relate to the
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U.S. Trustees position that some of the Vice Presidents and Assistant Vice Presidents are officers and, accordingly, insiders. Lets discuss some of the plan participants' role at Youre generally familiar with the participants Thats
the Debtors.
set forth in the Key Employee Incentive Retention Plan. the lower level plan, right? A.
Yes, there are actually many of those employees I work with
day to day. Q. Okay. And youre aware of the fact that 28 participants in
that plan have the title of either Vice President or Assistant Vice President? A. Q. Yes, I am. Okay. Why were those individuals included in the Key
Employee Incentive Retention Plan, sorry, the lower level plan, as opposed to the Key Employee Incentive Plan? A. Because of the nature of their jobs. Again, I think its
been discussed in Court previously that this is a financial institution, and as such, you know, practically everyone including the janitor has a VP or AVP title. And so while many
of those employees may have that title, the nature of their job function is more supervisorial or middle and lower level management, as opposed to something constituting an actual officer or policy maker of the company. Q. A. Is that pretty common in the financial services industry? Yes, it is.
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. And lets just chat about those individuals for The 28 participants in the Key Employee
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another moment.
Incentive Retention Plan, who have the title of Vice President or Assistant Vice President, are any of them officers of the parent company? A. Q. No, theyre not.. Okay. Do any of them function in the role of a senior
officer with regards to policy making, for instance? A. No. MR. STERN: Okay. Your Honor, Im now just going to
ask a couple of questions about the confidentiality issues that we discussed and then Ill close. BY MR. STERN: Q. Ms. Etlin, if detailed information about the proposed
incentive and retention payments to these participants was publicly disclosed, would that information be useful to the Debtors' competitors? A. Q. A. Yes, it would be. And whys that. Well, it sets the bar for how much of a signing bonus you If you know
have to give to somebody youre trying to hire.
that theyre subject to an incentive retention plan that could pay a range of lets say 25 to $50,000, all you have to do is include that to up the ante to the extent that you want to recruit them.
Etlin - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 questions. Q.
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So competitors could use that same information to hire away
our critical employees? A. Yes, and in addition, given that you know that the awards
are a range of salary, that also gives you a pretty good proxy for what the employees actually making and disclosing confidential employee compensation information. Q. So, disclosing this information could, at the end of the
day, defeat the purpose of the incentive and retention plans, couldnt it? A. Yes, well, the other issue obviously is its a matter of
general business practice that people do not disclose inside a company what other employees make. Q. A. Q. Is that because it could cause dissension within the ranks? Absolutely. Thank you, Ms. Etlin, I have no further questions. MR. STERN: cross examination. THE COURT: All right, let me ask, before we go to And Your Honor, I tender Ms. Etlin for
the U.S. Trustee, anyone else whos in support of the plan to - who wishes to examine Ms. Etlin to step up now. MR. POWER: Your Honor, I have a couple of
Give me one second. THE COURT: MR. POWER: All right. Your Honor, Ill be brief. CROSS EXAMINATION
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. POWER: Q. Ms. Etlin, I heard your testimony.
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Could you please focus
a little bit -- Id like to focus on the claim side, and these people are part of this plan, and what they will do to assist the estate in terms of dealing with claims. with the term EPD? A. Q. A. Q. A. Q. Yes, I am. And what does that term mean to you? So, its an early payment discount. Well, early payment default. Default, yes. And its actually in connection with the warehouse lenders The - Are you familiar
and their claims, if they find that their loans they put back that they assert are in early payment defaults, the company has to take those back? A. Q. Yes. And are you familiar that -- with those potential claims in
this estate? A. Q. Yes. And do you have a sense of what the volume of those claims Are they in the tens of millions, hundreds of
might be?
millions, any sense? A. Q. I think theyre in something that begins with a billion. A billion, okay. Is it your understanding that some of the
people who are part of this are company people who have
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knowledge of how those claims work and how the arrangements for warehouse lenders work? A. Yes, specifically the capital markets, people in the plan,
as well as a number of the accounting department people in the plan, are the primary parties with knowledge of refuting those potential claims that would come from the various parties, not only the warehouse lenders, which you mentioned, but the parties of securitizations, which also have those kinds of potential rights, whole loan purchasers, and others. Q. Now those people are being incentivized to stay and help
the company and you yourself work through those claims and try to resolve them so this Court doesnt have a huge amount of litigation to deal with, is that correct? A. Q. Thats correct. Do you have a view as to what -THE COURT: (Laughter) MR. POWER: Were working hard, Your Honor. I have Youre doing that all for me?
another reason, though, I'm about to ask. THE COURT: BY MR. POWER: Q. Which is do you have a view of whether it would be less Okay.
expensive for the estate to retain those people to help resolve those claims or to retain outside professionals, such as accountants and financial advisors, to resolve those claims?
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Well, its way less expensive. Its always way less
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expensive to retain the people who have the greatest knowledge with regard to the claims, be they a vendor claim, a lender claims, the claims weve been discussing, and others. And
thats the reason that I fought so hard to retain the core group of people that weve retained at the company, so that we can actually have an accelerated claims reconciliation process as part of this case and really get to a timely claims pool for purposes of a plan. Q. So not only is the plan designed to assist in getting the
sales done, its also designed to cut costs in terms of professionals and get to a plan sooner, is that - A. Absolutely. If I ended up with a large amount of turnover
on this case, not only would it necessitate hiring of lots of people from organizations like account-temps and others, but I would have to also put a large number of additional Alex Partners people on site, and frankly, it is way more efficient and effective to use the companys own people who have that great accumulated knowledge to do the process. Q. Thank you. Lets talk briefly about the origination
platform. equipment.
I think you described generally the leases and the Lets talk about the volume. Approximately how
many leases and locations were part of that platform around the country? A. Do you know?
300 approximately.
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q.
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And is the company currently now, because its shut down,
have to work through rejecting those leases, and getting the equipment, and assembling all that information for 300 locations throughout the country? A. Yes, and in addition, to comply with the requests of the
SEC and others, all data associated with -- confidential data associated with the actual operations of the loan process in those branches, and all of the IT equipment has to be specially lifted out, secured, categorized, and shipped back to Southern California where it will be retained until such time as were free to wipe the hard drives and return things and destroy actual paper records. So theres a very complex process. Its
not just sort of abandoning or selling off the actual furniture in those locations. Its actually lifting out all of those
assets associated with that information gathering process. Q. And are the Debtors' employees, with the assistance and
oversight of Alex Partners, going to try to vacate those places so the leases can be rejected? A. Yes, were in the process of trying to do that as quickly
as possible now. Q. And will that help decrease the claims that are asserted
against this estate? A. Q. Yes. And those are administrative priority claims currently, for
the post-petition period?
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A.
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For the post-petition rent as well, yes, and were having
negotiations simultaneously with as many landlords as we can possibly handle in an attempt to also minimize the landlords ultimate claim for the rejection of that lease. Q. One other area, if you could you briefly describe to the
Court where you started with the plan, and I guess through the good faith negotiations, where youre ending up just in terms of gross numbers, so the Court can get a sense of the efforts made by the Debtor in terms of making this plan reasonable, at least in our view? A. Yeah, Im trying to remember exactly back to the original
plan that was filed with the Court, Mr. Powers, I think Q. A. Wasnt it slightly more than $7 million when you first - Yeah, I think it has been reduced by over half from the
original plan that was contemplated. Q. And the original plan that was contemplated also had senior
management involved, including the Chairman and other people, is that correct? A. Yes, the entire executive management team of the company
was originally included in the plan, and as we previously announced, the company and the management team and the Board agreed that a number of them would step aside and voluntarily remove themselves from the plan in order to facilitate the timely approval for the companys employees. Q. So in addition to basically more than 50% reduction in the
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 side? questions. THE COURT:
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dollar amount and the taking out of the senior people, was also the focus of the plan shifted from basically guaranteed payments to incentive based payments based on sales and performance? A. Is that fair to characterize it that way?
Yes, there were a greater number of people that actually
had a retention component to their overall compensation under the plan, and now a greater number of people are in solely the incentive portion. And only those people who are not officers
of the company are down in the portion that has a retention portion. Q. Just one more question. Are you aware of certain buyers or
potential buyers of the assets expressing concern about retaining employees? A. Q. Yes, we hear it fairly regularly. And is that something that theyve indicated was a major
risk factor in terms of being able to purchase the business? A. Yes, as I had previously indicated, its actually
documented in the Carrington deal that we must retain a certain minimum percentage of the employees in the servicing platform in order to have them remain committed under the Asset Purchase Agreement. MR. POWER: Thank you, Your Honor, no further
All right, anyone else on the proponent
Okay, U.S. Trustee.
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. MCMAHON: Q. Ms. Etlin, good evening. CROSS EXAMINATION
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Youre not an investment banker,
would that be a fair statement? A. Q. Thats correct, Im a turnaround and crisis manager. And you dont provide executive search consultant services,
is that accurate? A. Q. A. Q. Thats accurate. Youre not an economist, would that be a fair statement? Thats correct. And would it be a fair statement that AP Services, your
firm, doesnt provide services in any of the three aforementioned areas which I just mentioned? A. I believe so, other than temporarily taking officer roles
which might fall under the, you know, executive search I guess is how you -- area, I dont believe so. Q. Well, executive search I would define as assisting
executives in becoming employed at other places within a given industry. A. Q. No, were not engaged in that business. Okay. Now, with respect to the plans that are before the
Court today, when did the construction of the plans begin? A. There was a discussion ongoing with regard to the need for
the plans when I walked in the door, you know, on March 21st. I dont know how much earlier that discussion had been
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occurring, but clearly there was a significant concern on the part of management with regard to the extensive turnover the company was having and expected it would continue to have through this process. Q. Okay, and do you know when the plans were in the form that
theyre presented to the Bankruptcy Court with the initial filing of the motion were finalized? A. I believe they were finalized just very shortly before the
actual filing of the motion. Q. So it would have been in very late March or early April,
would that be fair? A. Oh, no, by before the filing of the motion, I mean within
24 to 48 hours before the filing of the motion. Q. Okay. Now, prior to the submission to the Bankruptcy
Court, were the completed incentive and retention plans presented to senior management for their review? A. I dont believe that the senior management was, other than
the one or two of them that sit on the Compensation Committee, were asked to attend Compensation Committee meetings, were actually involved in the detail review of those plans. The
primary responsibility for the review of those plans rested with the Compensation Committee and the Board of Directors. know Mr. Maurice and Mr. Lambert, in their respective positions, were involved extensively in those discussions. Q. Okay. At the time the plans were presented to New I
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Centurys Compensation Committee, who was on the committee? A.
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The Compensation Committee consists of Fred Forester, whos
the Chairman of the Board, and Don Lang, who is a member of the Board of Directors. I also believe Mr. Maurice sits on the
committee, and Mr. Lambert does attend some meetings of the committee, but I dont believe, since he is not a director of the business, he sits, I think, at their invitation, because he is the SVP in charge of the compensation benefits and Human Resources area of the company. Q. Okay. And the Compensation Committee reviewed and approved
those plans, correct? A. Q. Yes. Okay. Were they ever presented to the full Board prior to
being filed with the Bankruptcy Court? A. Q. Yes. Okay, so the review, if I got the chronology correct, it
went to Compensation Committee, the Board subsequently as a whole approved the plans, and then they were filed, correct? A. Q. That is correct. And that entire process occurred within, you know, 24 to 48
hours before the filing of the motion? A. Thats correct. The Debtors' Board has been meeting very
actively, and I believe at that time were still in the mode of meeting if not every day, every other day. Q. Okay. Now, the plans were presented to the Compensation
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Committee in the form of a proposal, I presume, correct? A. Yes, the Compensation Committee, I believe, gave a
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direction to CDG to think through the kinds of provisions that one might include in this kind of a plan and asked for assistance from the companys professionals, O'Melveny and us with regard to the scope or the kinds of people that might be included in such a plan and what kinds of typical provisions there were, those kinds of things. Q. Okay. And at the time the plans were initially presented
to the Compensation Committee, was it your view that the plans as they were presented then were the bare minimum necessary to achieve the goals you wanted to achieve by implementing the plans? A. Well, there were multiple revisions, so let me -- I think
the first revision, as is often the case -- the first draft, as is often the case, included a lot of people and some fairly substantial amounts of money to be paid to those people. And
part of our role and part of the role of the companys counsel is then to talk through the reasonableness, given the context of the case, and whether that amount is, you know, high, low or otherwise. So I do not believe that it would be fair to
characterize the initial drafts of the plan that I saw as being ones that would be the bare minimum. there today. Q. So your testimony is, then, that even before the plans in I think we certainly are
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the forms that they were filed with the Bankruptcy Court made it to that point, that there were drafts that included more employees, more money, is that correct? A. Q. Yes. Okay. Now, you working in conjunction with CDG, the other
professionals, made a -- presented something to the Compensation Committee, the plans in the proposed form, correct? A. Actually, CDG made the presentation, and we were asked by
the Compensation Committee -- I and the other professionals were asked for commentary as the Compensation Committee reviewed those things. But the plans were actually -- the sort
of laboring oar for the development of the plans themselves and the structure of the plans belong to CDG. The inclusion of the
employees was the role of management and myself and others. Q. Were there any -- was there anything in the plans as they
were proposed to the Compensation Committee on the eve of the filing of the motion that was rejected by the Compensation Committee? Any recommendations that you made, that CDG made,
that the Compensation Committee said, "No, cant have this"? A. Q. A. Yes. What? I think there were several revisions to take the plan down,
and there was discussion of some of the provisions that ultimately ended up in the plan with regard to the employees
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who might be subject to investigation by the Audit Committee, that kind of thing. Q. Okay. And you turned around and made certain revisions
along the lines of what you just described, correct? A. I made them, management made them, when we went back to
certain people within management and said its really too many people, what can we do; you know, those kinds of things. It
was a very collaborative process with multiple points of input. Q. Okay. The presentation to the Boards Compensation
Committee, who was present at that presentation of the plans, if you will? MR. STERN: which time? MR. MCMAHON: Were talking -- I think weve only Ill rephrase to make Excuse me, Im sorry, objection. At
referenced one meeting in the testimony. it clearer. Thank you.
BY MR. MCMAHON: Q. With respect to the presentation of the plans to the
Compensation Committee prior to the filing of the motion with the Bankruptcy Court, there was presentation that you referenced which CDG led, correct? A. Yes, there were actually multiple meetings, but youre
talking about the one just prior to the formal approval, correct? Q. Correct.
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Yes. What date did that occur on? I dont specifically recall. I believe Ive already
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testified it was within 24 to 48 hours of filing the motion. Q. A. Now, who was present at that meeting? I believe the individuals that I previously referenced, I think the companys I know Ms.
either in person or on the phone.
General Counsel typically participates, as well.
Uhland was present, Mr. Glassner from CDG, the members of the Comp Committee. Q. A. And yourself? I dont recall whether I was present at that particular
meeting or the one right before -- I cant specifically say I was specifically present at that final meeting at which that approval was given. Q. Okay. Now, at a certain point, the Debtors communicated to
the proposed plan participants their status as such, correct? You had to let them know that they were being incentivized or designated to be retained, correct? A. Yes, there were quiet conversations. Again, there was no
formal written notice because obviously anything we do is subject to approval by the Bankruptcy Court. So you cant, you
know, provide written notice to employees until such time as the plan is approved. But there were quiet conversations
between the members of the EMC and many, if not all, of the
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employees that were potentially covered by the plans; not right away, but fairly shortly after filing the motion. Q. Okay. So in fact, the employees were not informed that
they were designated as plan participants until after the motion was filed, is that your testimony? A. The employees who were actually covered by the ultimate
plan that was filed were informed after the plan was filed. However, there was substantial conversation internally at the company, and people wondering about when we were going to file it, and whether or not they were going to be included prior to the filing of that motion. Q. Okay, now, lets put this in context then. When did the
company retain Lazard? A. Well, I think it was March 12th, but Im not entirely sure.
It was sometime in that portion of March. Q. Okay, and Lazard immediately started its work of leading
the Debtors' sale efforts, correct? A. Q. Yes. Lazard put together offer and sale materials with respect
to the sale of what Ill call the LNFA and the residuals portfolio, correct? A. Q. Yes. Lazard put together materials to sell the servicing
business, correct? A. Yes, all of those things were in the process when we were
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They werent all complete at the time, for example, I
walked in the door. Q. When did the Debtors enter into a confidentiality agreement
with Greenwich Capital with respect to the LNFA residual portfolio? A. Q. I dont specifically recall. And when did the Debtors enter into -- begin negotiations
over the terms of an Asset Purchase Agreement with respect to the LNFA residuals portfolio with Greenwich? A. Those conversations were already somewhat under way when I
walked in the door, but I dont have a specific recollection of when they commenced. Q. Okay. And do you recall when the actual Asset Purchase
Agreement with Greenwich was executed? A. Q. No, I dont. Basically, would it be fair to say it was at or around the
time the Debtors filed for bankruptcy protection? A. Q. Yes. You basically walked into Bankruptcy Court with that deal
on the table, correct? A. Q. That is correct. Lets switch to the servicing business. Do you have an
understanding as to when the Debtors began their negotiate -oh, strike that. Do you understand as to when Carrington
executed a confidentiality agreement with respect to its
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 pursuit of the servicing business? A. Q. No. Do you have an understanding as to whether that event
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occurred before or after you came on board? A. Q. I do not. Okay. Do you have an understanding as to when Carrington
began negotiating with the Debtors over the terms of the proposed servicing sale? A. Q. I do not. Do you have an understanding as to whether those
negotiations commenced prior to the bankruptcy filing or not? A. Well, I would assume they did, given that we filed with the
bankruptcy filing and Asset Purchase Agreement it was filed shortly after the filing, but how much prior I wouldnt know. Q. Just out of curiosity, in light of some of your testimony,
what is your precise role on this engagement for Alex Partners? A. I believe Ive already described that. Would you like me
to repeat it? Q. Well, sure, I would like to understand specifically what
your sale related role is. A. Certainly. We are responsible for assisting the company
with gathering all of the due diligence materials necessary to support the various sale processes, vetting those between management and Lazard to make sure that theyre accurate, and then making those available in an organized form to the various
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 parties. Q.
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So the company walks -- the company files for bankruptcy
protection, and it almost immediately thereafter filed the Greenwich Sale Motion and the Carrington Sale Motion, correct? A. Q. Thats correct. All right. And basically simultaneously, it also filed the
Motion Seeking Approval of the plans that are before the Bankruptcy Court today, correct? MR. STERN: Im sorry, objection. Are you asking
whether the Plan Motion was filed at the same time as the petitions were filed? MR. MCMAHON: it clearer. THE COURT: BY MR. MCMAHON: Q. At or around the same time you filed the Motion to Sell the All right. I may have mis-heard. No, Ill rephrase the question to make
Servicing Assets and the LNFA residual portfolio, you also filed the Motion to Approve the Incentive and Retention Plans as they existed at that time, correct? MR. STERN: Sorry, Your Honor, can I object? I
think its of record the date that the Motion to Approve the Incentive Plans was filed. Im not sure if the dates are as I can say that the motion to
close as the U.S. Trustee thinks.
-- the original Motion to Approve the Plans, my understanding just based on looking at the motion, as April 11th, if that
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 helps anyone. MR. MCMAHON: Your Honor, Ill just move on. I
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think we can establish this some other way. THE COURT: BY MR. MCMAHON: Q. Now, from the companys perspective, which representatives Thank you.
of the company actually communicated to the employees that they were going to be plan participants? A. I think Ive already testified that those would have been
the responsible members of the Executive Management Committee of the company, the top eight people in the company. It was
their responsibility to communicate as appropriate, quietly with their directly supervised employees their inclusion in the plan. Q. Okay. You did not directly participate in any of those
discussions, did you? A. The initial discussion, no. Ive had discussions with a
number of employees included in the plan with regard to the context of the plan. You know, there are questions from
employees practically every day about the plan. Q. All right, but the initial communication of their plans,
their status as plan participants was handled by the eight members of that management committee, correct? A. Yeah, that would be appropriate. Those are the people --
those are the bosses of the people who work at the company.
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. Given your role with the company, did you
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participate in the process of identifying the sale related performance metrics under the plans? A. If by sale performance related metrics you mean the
potential threshold values and the percentages, I was part of the discussions with regard to what might be appropriate, yes. Q. Okay. Which of the Debtors' other representatives or
employees were involved in that discussion? A. Well, the primary party involved in the design of the plans
was obviously CDG, Mr. Frank Glassner, who is present in Court today. And he was sort of the primary party for organizing the
thought process around that, but frankly, all of the Debtors' professionals participated in and contributed thoughts and comments with regards to the potential structure of those plans and what might be appropriate incentive based compensation given the circumstances. Q. Okay. Were there any persons with investment banking
experience involved in that discussion? A. Yes, Lazard was involved and consulted with regard to the
threshold values and some of the asset groupings. Q. Okay. And would it be fair to say that -- was it Lazard
that actually provided the threshold values, the target numbers that were part of the plans as they were originally filed? A. I dont know whether they -- its proper to characterize I think that they had substantial
that they provided them.
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 input.
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Frankly, part of them were already documented, and two
of them were documented in Asset Purchase Agreements, and the third is an estimate based upon a multi-party discussion, and thats the value attributed to the other asset segment. Q. Now, in constructing the incentive and retention plans,
would it be fair to say that retaining these employees is the primary goal? A. No, I think its fair to say that compensating these
employees for the extraordinary effort being asked of them to make sure that these sales close successfully is the primary goal. Q. A. Okay. So -- but would retention be one of the goals?
Well, as to the employees in the bottom tier plan, theres
a specific retention portion, so yes it is one of the goals. Q. Okay. And with respect to the incentive plans, your
testimony is that retention of these employees, keeping them aboard, is not a goal of the plan? MR. STERN: Objection, that was not the testimony.
The question was is it the primary goal of the incentive plan, and thats what her testimony addressed. THE COURT: BY MR. MCMAHON: Q. With respect to the incentive plan, is retention one of the Sustained.
goals of the plan? A. Certainly, its one of the hoped for outcomes. If you
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provide someone with an incentive and tell them that if they voluntarily resign they wont receive it, you certainly want them to stick around. Q. Okay. Now during your time of being assigned to this
particular engagement, are you generally aware of the -- become generally familiar with the companys operations? A. Yes, I believe I already asked that question -- answered
that question. Q. All right, and with respect to the designation of employees
as plan participants under the plans, you previously identified I guess two considerations which factored into that analysis. The first was their -- any specialized knowledge they had relating to the industry, was that a factor, is that correct? A. There was a discussion of the importance of the specialized
knowledge the employee had with regard to the industry, yes. Q. And was their importance to completing the proposed sale A factor in determining which plan
processes a factor as well?
participants were actually selected for participation? A. Yes, as I think I previously testified, there was a
substantial concern, and frankly, it did occur with regard to the Ellington sale, that the initial stalking horse bid was subsequently reduced because certain assets were determined to not be saleable as part that process. And the stalking horse
bid was reduced from 50 million to 47.25 million as a result of that. There were similar concerns with regard to the
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Carrington deal. Q.
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Well, were there any other factors that were considered in
determining whether to make someone a plan participant, aside from the two factors we just discussed? MR. STERN: I guess objection, Your Honor, There were a number of things
especially at this late hour.
that were discussed earlier in the testimony, and I think now its just a memory game as to what Ms. Etlin can recall that she testified before. THE COURT: MR. MCMAHON: Any response? Your Honor, I believe the witness
testimony was -- there was testimony elicited as to two factors. I think on cross Im entitled to confirm whether or
not there were any additional factors that played into the determination as to whether these individuals should be plan participants or not. THE COURT: repetitious. MR. MCMAHON: Sure. I'll allow it, but lets not be
Would you please repeat the question?
BY MR. MCMAHON: Q. Sure. Aside from the factors we just discussed, are there
any other factors that the company considered in determining whether to designate someone as a plan participant? A. The -- and Ill just go through them from top to bottom, as
Etlin - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I cant remember exactly which two factors weve already previously discussed.
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Specialized knowledge is one, which is Theres also
specialized knowledge of the industry.
accumulated historical knowledge with regard to their job function within the company and the transactions and various activities that passed over their desk, where the documents are, how to go about obtaining them from the various systems, et cetera. Theres also the ability to replicate that
knowledge; the ease with which we might replicate that knowledge from the outside should that employee choose to take a job elsewhere and the affect that might have on the sale process, both as to timing and potentially as to amount because of the contingencies associated with that. be the primary factors. I think those would I cant
There may be others.
specifically recall as I sit here today. Q. All right. I have a few more questions for you, Ms. Etlin.
First, would it be fair to characterize these bankruptcy cases as liquidating Chapter 11 cases, based upon your experience? A. Yes, were attempting -- I mean, theres obviously a broad Were attempting to sell
variety of liquidating Chapter 11's.
as much as an operating business and to preserve employee jobs as possible, but that certainly falls under that broad category. Q. Okay. And the Debtors -- you testified the Debtors have Theyre compensating Lazard, what, some
retained Lazard.
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figure north of $5 million for their work in leading the sale processes, is that correct? A. I guess. Again, I wasnt a party to Lazards fee I assume theyre going to be compensated for the
negotiation.
extensive work theyve incurred here. Q. Okay. Turning to, specifically, the Vice Presidents and
Assistant Vice Presidents that are part of the retention plans, do you have an understanding as to what their base salary ranges were in 2006, say exclusive of bonus compensation? A. Q. Not that I can specifically recall as I sit here today. Okay. Do you know what their total compensation
arrangements were, salary plus bonus? A. No, if I cant recall the first item, I certainly cant
recall the second. Q. Now, in the last version of the plans that were proposed to
the Bankruptcy Court, six employees of the wholesale division were added to the plans, correct? A. That is correct. Those were the employees that were
excluded from participation in the commission guarantee program that the Debtors had put in place prior to the filing. Q. Okay, so they were the subject of the -- I guess the prior
litigation between our office and the Debtors regarding the Wage Motion, correct? A. Q. Yes, that is correct. So let me get this straight. The Debtors come forward to
Etlin - Redirect 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. STERN: Q. redirect? MR. STERN: questions, Your Honor. questions, Ms. Etlin. REDIRECT EXAMINATION I think I have just three or four the Bankruptcy Court seeking relief. We object. The Court
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overrules that relief, and then you come back to the Court and you propose that they receive incentive compensation, is that it? A. Is that the progression? So -- sir, I was present in the Court that day, and I heard And I, frankly,
what was said with regard to those employees. disagree with your characterization.
It was determined that
they were inappropriate to include in the form of the plan that was being approved in conjunction with the First Day Motions, and the Debtor was, I believe in my opinion, encouraged to come back and include them in some form of further retention plan, and the Debtor chose to do so. Q. Okay. Now -- so the Debtors added these individuals to the
plans. that.
I presume that their compensation is -- well, strike
MR. MCMAHON: this witness. THE COURT:
I dont have any further questions for
All right, thank you.
Is there any
And theyre going to be very general
There were a lot of questions asked of you about, I guess,
Etlin - Redirect 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 work that Lazard did prior to the petition date. some testimony on that subject? A. Q. Yes. Okay. If Lazard, for instance, was putting packages of
199 Do you recall
information together for providing to potential purchasers, where was Lazard going to get that information? A. From the companys employees and from us. As a matter of
fact, that was one of our first most specific tasks was to help them with an extraordinary volume of information that needed to be obtained from a variety of company employees where there just wasnt time enough in the day for them to do it. Q. And I think we addressed this point in your direct, but it At the time the employees were working on
may bear repeating.
the sales pre-petition, even if the plans themselves with all their specifics were not yet on file, do you believe that the employees were operating under a belief that they would eventually be provided with some form of incentive pay? A. Q. Yes, I do. Okay. Do you think that we need the employees that have
been identified in the incentive and retention plans to get across the finish line on the sales that have been proposed? MR. MCMAHON: THE COURT: BY MR. STERN: Q. One or two questions on the Assistant Vice Presidents and Objection, asked and answered. Sustained.
Etlin - Redirect 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 able to. A. the Vice Presidents. These are the individuals, as youll
200
recall, who have been proposed for the retention plan, okay, the retention portion of the plan. There may or may not be
some incentive compensation for some of them, but even though you dont know their exact compensation, all 28 of them, are these Assistant VPs and VPs among the most highly compensated individuals at the Debtors? A. No. As a matter of fact, I previously characterized them
as the individuals that would often bear, in other companies that Ive worked with, the supervisor title. Theyre middle
management to lower middle management individuals. Q. If I were to suggest a range of approximately 45,000 to
200,000 would that help to refresh your recollection as to approximately the salaries of these individuals? MR. MCMAHON: Objection. The witness previously
testified she doesnt know. THE COURT: Overruled. You may answer if you're
That would, for that level of employee -- and again, about
a third of them Ive actually had personal interaction with at this point, and so, you know, I would expect that that would be sort of the normal compensation range for somebody of that level of the company. But again, I have -- as I testified
previously, I have no specific knowledge of what they actually make.
Glassner - Voir Dire 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. STERN: Q. A. Q. Mr. Glassner by whom are you employed? Compensation Design Group. S-S-N-E-R. THE CLERK: Thank you. VOIR DIRE Glassner. FRANK B. GLASSNER, DEBTORS WITNESS, SWORN THE CLERK: down. MR. STERN: THE COURT: MR. MCMAHON: THE COURT: No further questions, Your Honor. Okay. Is there any recross?
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No, Your Honor. All right, thank you. You may step
Well take a 10 minute recess and resume with the next
witness. (Court in recess) MR. STERN: -- appreciate the Court's indulgence.
The next witness will be a lot shorter and then we'll hopefully proceed to argument. THE COURT: MR. STERN: Very well. Your Honor, Debtors call Frank
Could you state your full name and spell
your last name for the record. MR. GLASSNER: My name is Frank B. Glassner, G-L-A-
If I refer to that entity as CDG, will you know what Im
talking about?
Glassner - Voir Dire 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Yes, I would. Okay, whats your position at CDG?
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Im the Chief Executive Officer and also the leader of the
Executive Pay Practice. Q. A. Q. A. Q. A. Q. A. Sir, did you found CDG? Yes, I did. And when was that? That was 1991. And you have been with CDG since 1991? Yes, I have. What does CDG do? Compensation Design Group is a compensation consulting
firm. Q. A. Does CDG have any areas of specialty? Yes, it does. In the field of executive pay, incentive
pay, wage and salary administration, performance management, performance appraisal as it relates to compensation programs, sales and marketing incentives, and board of directors pay and compensation issues as it relates to a board of directors. Q. A. Q. A. Q. A. Sir, where were you employed before CDG? At Deloitte & Touche. How many years were you there? Approximately four. And what was your last position at Deloitte & Touche? I had a D Firms Global Rewards Practice.
Glassner - Voir Dire 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. A. Q. A. Q. A.
203
And what was the Deloitte & Touche Global Rewards Practice? It was the compensation practice. Where were you employed before Deloitte & Touche? KPMG Pete Marwick. And how many years were you there? Approximately five. Last position at KPMG? The head of the Western U.S. and Asia Pacific Compensation
Practice. Q. Sir, if my math is correct, youve spent the last 30 plus
years working in the field of Compensation and Strategy Consulting, is that correct? A. Q. Yes, sir. Do you have experience providing advice on compensation and
incentive plans to clients in either bankruptcy proceedings or reorganizations? A. Q. Yes. Okay. And approximately how many engagements, for
companies in either bankruptcy proceedings or that were going through reorganizations, have you had? A. Q. Approximately 25. Okay. Has a substantial portion of your consulting
experience revolved around developing strategically oriented compensation and incentive plans? A. Yes.
Glassner - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. STERN: Q. Mr. Glassner, has CDG previously provided compensation Q.
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Do you consider yourself to be an expert in the development
of compensation and incentive plans? A. Q. A. Yes. And why is that? Ive spent the better part, if not my entire career, doing
that. Q. Okay. Have you ever been qualified as an expert in your
field -- excuse me, have you ever been qualified as an expert in the field of compensation? A. Q. A. Q. A. Yes, I have. And how many times was that? Twice. And what court was that in? The State of California Superior Court Family Law Division. MR. STERN: Your Honor, Debtors proffer Mr.
Glassner as an expert on compensation and incentive plans. THE COURT: MR. MCMAHON: Your Honor. THE COURT: MR. STERN: You may proceed. Thank you, Your Honor. DIRECT EXAMINATION Is there any objection? No objection from the U.S. Trustee,
consulting services to the Debtors?
Glassner - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. Yes. When did you start? Approximately 2003.
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And have you, personally, provided compensation -- excuse
me, have you personally provided advice to the Debtors since 2003? A. Q. Yes. Okay. And what type of advice has CDG provided to the
Debtors since 2003? A. Advice in the field of its executive pay plans, select
incentive plans, board of directors pay plans, and compensation issues as it relates to advising the Compensation Committee. Q. As a result of the work that youve done for the Debtors
over the last three plus years, have you become generally familiar with the Debtors and their business operations? A. Q. Yes. And are you, generally, familiar with the -- excuse me,
compensation structure for the Debtors employees? A. Q. Yes. Are you familiar with the Debtors Key Employee Incentive
Plan and Key Employee Incentive Retention Plan? A. Q. A. Yes. Did you play a role with respect to those plans? Yes.
Glassner - Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. What was your role? Assisted in the design of those programs.
206
And when you say you assisted in the design, can you help
me with that a bit? A. Yes, the company, you know, presented the situation of its
reorganization to us, as well as a number of metrics, employees, et cetera., and we designed the plans. Q. So the company provided the goals and the positions
involved and you designed the plans around that? A. Q. A. Q. Yes. Okay. And did you advise the Debtors to adopt the plans?
Yes, we did. Okay. And did you participate in discussions with other
representatives of the Debtors and other folks regarding the plans? A. Q. Yes. Who else was involved in the discussions in which you
participated? A. Select senior management and, where appropriate, the Board
of Directors, specifically the Compensation Committee. Q. Okay. And who are the members of the Compensation
Committee? A. The Compensation Committee would consist of Fred Forrester,
whos also the Lead Independent Director and Chairman, Dr. Harold K. Black, Donald Lang, and Michael Sachs.
Glassner - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Was the CEO present for discussions concerning the
207
incentive and retention Plans? A. Yes, where appropriate. However, discussions involving the
Chief Executive Officer, himself, he was asked to leave the room. Q. A. Q. Okay. And did he do that?
Yes, he did. Okay. Sir, do you have an opinion as to the reasonableness
of the plans? A. Q. A. Q. A. Yes. And what is your opinion? The plans are reasonable. Okay. And why do you believe the plans are reasonable?
Given the magnitude of the situation, as well as the
devastating effect that, from a situational standpoint, it has on its employees, we believe the plan appropriate, as well as important. Q. Okay. Do you have an opinion as to whether the incentives
in the plans are likely to motivate employees to meet the objectives of the plans? A. Q. A. Yes. And whats that opinion? They would certainly lead them to achieve the successful
disposition of the assets. Q. And do you have an opinion as to whether the payment
Glassner - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. MCMAHON: amounts under the plans are conservative? A. Q. Theyre reasonable towards the conservative side, yes. Okay.
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Do you have an opinion of what might happen if the
plans are not approved? A. Q. A. Yes. And what is your opinion? That that would probably provide another significant
incentive for not having a successful disposition of assets and, for that matter, an incentive to leave. Q. A. So people would leave and the sales would fail? I dont know to the degree that they would fail, but that
would certainly be an incentive, you know, not for the maximization and disposition of assets or possibly could cause it to fail, yes. Q. Let me ask it this way. People may leave and the sales may
fail? A. Q. Yes. Okay. Thank you Mr. Glassner. No further questions at
this time. THE COURT: MR. POWER: questions, Your Honor. THE COURT: All right, U.S. Trustee. CROSS EXAMINATION The Committee have any questions? One second, Your Honor. I have no
Glassner - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Mr. Glassner, good evening. In how many Chapter 11
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bankruptcy cases filed after October 17th of 2005 has CDG been retained in? A. Q. Can you clarify the question? Sure. Im asking for bankruptcy cases that filed for
protection, Chapter 11 cases have filed for protection after October 17th of 2005, how many cases has CDG been retained in? A. Q. A. Q. Two. Can you name them? Yes, United Airlines and New Century. Ill just adjust my hearing aid, I apologize, it was United
Airlines? A. Q. Thats correct. Okay. Now United Airlines was a reorganizing case,
correct? A. Q. Yes. So New Century is the only Chapter 11 case which filed New Century is the
after October 17th of 2005 -- strike that.
only Chapter 11 case after October 17th, 2005 that CDG has been involved in, which was a liquidation or is a liquidation? A. Im not actually sure whether its a liquidation or a
reorganization at this point. Q. A. Q. You dont know? I dont. Okay. All right, how many clients in the sub-prime
Glassner - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 mortgage lending industry does CDG have, aside from New Century? A. Q. Just New Century. Okay. We heard your qualifications, sir, youre not an
210
investment banker, is that correct? A. Q. A. Q. A. Q. Thats correct. Right. Youre not an executive search consultant, correct?
Absolutely not. And youre not an economist, either, correct? No. And CDG doesnt provide services with respect to any of
three aforementioned areas, correct? A. Q. No. All right. Given your expertise, sir, are you aware of any
empirical studies of liquidating Chapter 11 cases which address the correlation between employee productivity and the prices obtained for the sales of assets? A. Q. Could you clarify the question, Im confused? Sure. Are you aware, given your expertise, are you aware
of any empirical studies of liquidating Chapter 11 cases which address whether there is a correlation between employee productivity on the one hand and the prices obtained for the sale of the companys assets on the other? A. As Ive stated, sir, Im not an economist and Im not
qualified to draw those conclusions.
Glassner - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. THE COURT: Certainly. Thank you. Q. Okay.
211
Youre not familiar with any such studies based upon
your current position from reading materials in journals and the like? A. Again, Im not an economist. Im not qualified to draw
those conclusions. Q. Very good. Now when was CDG retained for the purpose of
putting together the compensation plans that are the subject of the present motion? A. Q. CDG has had retention since 2003. Let me re-ask my question. Theres a motion on file,
correct? A. Q. To the best of my knowledge, yes. All right, and CDG was retained to provide services in
connection with constructing the plans that were -- are the subject of that motion, correct? A. Q. Yes. CDG was retained to provide advice to the Compensation
Committee in connection with the plans that are the subject of the motion, correct? A. Yes. MR. MCMAHON: Id like to mark an exhibit, Your
(U.S. Trustees Exhibit-1 marked for identification) BY MR. MCMAHON:
Glassner - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. Sir, Im gonna ask you to take a look at Exhibit U.S.
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Trustee-1 and tell me if you recognize the document? (Witness reviews document) Yes, I do. What is the document? The document is an Application of Debtors and Debtors-in-
Possession for Order Authorizing the Retention and Employment of Compensation Design Group, this compensation specialist to the Debtors, nunc pro tunc, to the Petition Date pursuant to Sections 327 Sub (e), and 328 of the Bankruptcy Code and Bankruptcy Rules 2014, 2016, and 5002. Q. Now if we take a look at Exhibit B to the application,
there are two separate engagement letters appended thereto, correct? A. Q. Can you direct me to them? Sure its Exhibit B, I want to say its in the middle of
the document, and the first engagement letter is dated March 9th and its entitled Engagement Letter for Management Services. Do you see that? A. Q. Yes, I do. Okay. Now under this first engagement letter here, which
is entitled Engagement Letter for Management Services, the letter indicates there in paragraph 1.1 that the -- you were retained to provide advice regarding {quote} total compensation arrangements {end quote} related to the
Glassner - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
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management, the company, and its board of directors, correct? A. Q. Yes. Now under the second engagement letter, which is appended
at the end of the first, its entitled CDG Engagement Letter for NCFC Board of Directors. front of you? A. Q. Yes. All right, and if you would describe for me, sir, how the Do you have that document in
services in the second engagement letter differ from the services youre providing in connection with the first? A. 1.1 under this letter states that CDG agrees to provide
assistance to the NCFC Board of Directors, through its Compensation Committee or the Chairman of the Board of Directors, by providing consulting services concerning executive and board compensation arrangements as related to the Boards responsibilities set forth in its charter. CDG
acknowledges and agrees that the engagement shall be directly with the Board. With respect to any services rendered by CDG
to the Board, CDG and the Board acknowledge that any changes to this agreement must be approved by the Board and CFC shall not be a party to such engagement and the Board shall assume the rights and obligations of NCFC hereunder. Q. Okay. Now the -- so under the first engagement letter Would that
youre constructing a compensation plan, correct?
be fair, youre providing advisory service related to the
Glassner - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. A. construction of a compensation plan? A.
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No, I think that what would be a fair statement would be
that we were advising the company on its total compensation arrangements up to, and including, but not limited to, its base salary arrangements, its incentive pay, its executive pay, et cetera. And it would be fair to state that under the
engagement letter for the NCFC Board of Directors, under best practices, that we would be providing counsel to the NCFC Board of Directors, through its Compensation Committee, to all of their arrangements or things that they had oversight under, as it states under their charter, including the companys total compensation programs, executive pay as it relates to its Section 16 officers, as well as their own pay, as well as their general oversight of the company. Q. Sir, with respect to the services that are contemplated -MR. STERN: Im sorry, Id like the witness to be
able to finish his answer. THE COURT: Thank you. I would too.
BY MR. MCMAHON: Q. A. With respect to the services that are -May I finish my answer? THE COURT: Go ahead. I will restate that as it relates
Thank you, Your Honor.
to the Board of Directors, that we provide advisory services to
Glassner - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
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them and the Board of Directors under all things that they have under their charter, including oversight of the companys total compensation programs, executive pay arrangements, and for that matter, total compensation arrangements as it relates, specifically, to Section 16 officers, as well as their own arrangements, the arrangements of the Board of Directors. in general, the Board of Directors, through its charter and best practices, has general oversight of the companys total compensation programs. BY MR. MCMAHON: Q. And youre providing advice both to management and the So,
Board, with respect to the total compensation arrangements, is that accurate? A. Q. That is correct. Okay. Now paragraph 22 of the application thats before
you is Exhibit U.S. Trustee-1 indicates that you and a Mr. Jason Taylor were the CDG employees that were providing the bulk of the services -A. Q. A. Q. A. Can you direct me? -- under the engagement letters, is that accurate? On what page is that, sir? Its paragraph 22 of the application. Theres many paragraphs here, maybe you can direct me to
it, just to save the Courts time. Q. Page 8.
Glassner - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Yes, sir.
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Now in preparing your advice and recommendations relating
to the compensation plans, did you consult with any employees or professionals of the Debtors on the subject of identifying potential plan participants? A. I -- can you ask me the first question, you had mentioned
someones name? Q. A. Q. Sure, let me break it down. Yes. Did you provide any advice or recommendation to New
Centurys management regarding who should be a participant in the compensation plans that are the subject of this motion? A. Specifically with regard to the Key Employee Incentive
Plans? Q. A. Q. A. Correct. Yes. All right. And I might clarify that, we were presented with the
participants of the plan, we did not advise them on the choice of employees. Q. Okay. With respect to your advice or recommendations
relating to the plans, did you consult with any employees or professionals on the subject of the sale related performance metrics that are embodied in the plan? A. To the degree that we were advised of those metrics, yes,
Glassner - Cross 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
217
we were advised of those metrics by company employees, as well as the Board of Directors. Q. So you did not say -- you did not generate or come up with
those metrics, you were learned of them from the company, is that accurate? A. We were advised of them by the company and the Board of
Directors, who I believe were also advised, or I should say, specifically, the Compensation Committee, who reviewed them with the Finance & Audit Committee to assure that those metrics were correct and then we were given those metrics. Q. Now New Century ultimately acted on your advice and filed
the motion thats before the Court, correct? MR. STERN: Im sorry, theres a motion thats an
exhibit and theres a motion that were talking about today. Im sorry to interrupt, I just to make sure I know which motion youre talking about. MR. MCMAHON: Sure, were talking about the motion
that was filed initially with the Court. A. Im still confused. Im not sure which motion youre
talking about. MR. STERN: Is it the Retention Application or the
Motion to Approve the Plans, Im sorry, is my question, sir? BY MR. MCMAHON: Q. Let me back up and rephrase. What form did the advice
which you provided to management take?
Glassner - Redirect 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. The advice was on the specific architecture of the plan
218
presented. Q. Okay. Did you comment on the plans that were presented in
writing or did you have oral communications with the companys management or both? A. Q. Both. Did either the Debtors, you know, the companys management
or New Centurys Board reject any recommendations you made relating to which employees should be designated as participants? A. Q. We did not state which employees should be in the plan. You didnt make any recommendations on that subject, one
way or the other? A. No. MR. MCMAHON: Your Honor, I dont have any further
questions for this witness. THE COURT: BY THE COURT: Q. Mr. Glassner, without regard to the purpose of either plan, All right.
how would you describe to me the similarities and differences between the two? A. Q. A. The similarity and differences between the two -Plans that the Court is being asked to approve today. The similarities between the two of them are both plans,
from the standpoint of being an incentive expert, both plans
Glassner - Redirect 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. STERN: Q. Sir, you were asked some questions about having two are really incentives for the successful disposition of the
219
assets and the maximization of the disposition of the assets for the Creditors. Q. What are the differences? How would you describe the
differences? A. The differences are is that the lower plan, the Key
Employee Incentive Retention Plan, has a retention element to it, where appropriate, that would assure, where appropriate, that those employees are retained for a specific period of time with a guaranteed retention portion for the period of time that they stay with the company. THE COURT: MR. STERN: Any redirect? I have just, I think, literally one or
two questions, Your Honor, and with due respect to Mr. McMahon, I think it was because there was almost a little bit of discovery taken on the retention application and I just want to make sure the record is clear on a couple of points. REDIRECT EXAMINATION
different engagement letters, do you recall being asked questions about them? A. Q. Yes, I do. Is having two different engagement letters, one -- and I
think was described as being -- and you were providing services
Glassner - Redirect 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
220
to management and the other to the Board of Directors, is that accurate? A. Yeah, I think it was directed to me, personally, and, no, Our firm Compensation Design Group
that is not correct.
provides counsel to the company, both to the Board of Directors and to management. Generally, in best practices to the degree
that advice is given directly to management or based on the companys compensation programs, that is conducted primarily by Jason Taylor with oversight by me, Frank Glassner. I primarily
provide counsel and direction to the Board of Directors with input from Jason and other senior executives. Q. I guess what I wanted to ask you, is having these, you
know, two different engagement letters consistent with best practices? A. Q. A. Yes, absolutely. And are there any studies that support that? Yes, theres a recently completed Blue Ribbon Panel that
was put together by Dr. Carolyn Brancato, on behalf of the Conference Board with a panel of experts, as well as input from over 370 public company directors, which basically concluded that there was no evidence that better governance was given by one consulting firm or two consulting firms. As a matter of
fact, you know, quite contrary to it, with regard to Home Depot, Pfizer, the New York Stock Exchange, Global Crossing, et cetera., both companies were represented at the board level and
Closing Argument - Mr. Stern 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A.
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management level by, in fact, two different compensation firms and I think that, without going into depth, the end results of those were obvious. To the degree that companies use one
consulting firm to advise, or I should say a public company using one consulting firm to advise both the board or directors and senior management, that we have stringently followed those guidelines. MR. STERN: THE COURT: MR. MCMAHON: THE COURT: Okay, no further questions, Your Honor. Any recross? No, Your Honor. Thank you, sir, you may step down.
Thank you, Your Honor. (Witness steps down) THE COURT: All right, does the Debtor have any
other evidence in support of its motion? MR. STERN: I think were done with our witnesses,
Your Honor, and would like to proceed with argument, if thats okay with you. THE COURT: she has any evidence. Well let me ask the U.S. Trustee whether I take it there are no witnesses, but is
there any other evidence youd like to offer in support of your objection? MR. MCMAHON: Your Honor, just to complete the
record, I would like to move the admission of Exhibit U.S. Trustee-1 and also have the Court take judicial notice of the
Closing Argument - Mr. Stern 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 point. THE COURT: MR. STERN: Is there any objection to either? No, I think Id have a hard time
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Debtors Application to Employ Lazard in the Retention Order. I have copies here available for the Court. THE COURT: MR. MCMAHON: Right. I dont think thats a controversial
objecting to either, Your Honor. THE COURT: All right, theyre admitted.
(U.S. Trustee Exhibit-1 admitted into evidence) THE COURT: Thank you. All right, does the
Committee have any evidence it wishes to offer? MR. POWER: on the record -THE COURT: MR. POWER: THE COURT: MR. STERN: All right. -- clearly before the Court. Lets proceed with argument then. Okay, Your Honor, youve heard the I think its helpful to go back No, Your Honor. The Committee will rely
facts, lets look at the law.
to the specific bases for the U.S. Trustees objection because then we can walk through those bases and, respectfully, I hope prove to the Court that those, the objection should be overruled. The U.S. Trustees arguments essentially fall into -- or objections, Your Honor, essentially fall into three buckets.
223 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The first argument is that the Key Employee Incentive Plan may be a disguised retention plan because in the U.S. Trustees view the goals are too easily met, which makes it more like a retention plan. And, accordingly, the Key Employee Incentive
Plan may violate 503(c)(1) because the participants are insiders. The second argument is that as to the 28 Vice Presidents and Assistant Vice Presidents in the Key Employee Incentive Retention Plan who will receive retention payments, that plan violates 503(c)(1) because these 28 V.P.s and Assistant V.P.s, supposedly, are officers and, thus, insiders. And the last argument really, although its got many subparts, is that the plans are not justified by the facts and circumstances of the case. And, Your Honor, we respectfully
submit that the facts that were presented to the Court today, as well as the applicable law, are contrary to the U.S. Trustees positions. And let me break those three positions
down and address them individually. Lets start out with the Key Employee Incentive Plan. Your Honor, the Key Employee Incentive Plan is just that. is an incentive plan. It
While every good incentive plan has some
retention component because it motivates employees to -- excuse me, because it motivates employees to stay to earn the incentive. You cant earn the incentive if you leave. The
question is, and as I think Your Honor, himself, has previously
224 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 recognized, what is the primary purpose of the incentive plan? Is it incentive or is it retention? And based on the evidence
that was presented today, Your Honor, it is clear that the primary purpose of the Key Employee Incentive Plan is incentives not retention. The employees are -- entitlement to
payment under that is not based on employment through a specified date. They can stay on the job forever, quite
frankly, Your Honor, but if the business goals arent accomplished the participants dont get paid their incentive bonus. Everyone agrees, by the way, that those business goals The testimony that Your Honor
are beneficial to the Estate.
heard today was that the business goals are not lay ups and that there accomplishment is not assured. The participants And, Your
have important roles to play to achieve those goals.
Honor, the evidence on those points today is un-rebutted and un-refuted. The U.S. Trustee cites two cases in opposition, one of them is In Re: Dana, where the Court observed that certain EBIDAR targets at issue were not lay ups, and In Re: Nobex, where there was incentive pay based upon achieving a sale price in excess of a very low $3.5 million stalking horse bid and the incentive plan in that case actually expressly recognized specific tiers up to and in excess of $15 million. In other
words, about four times the size of the low stalking horse bid. Now neither of those cases says that you cant use the
225 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 achievement of a stalking horse bid as a trigger for incentive pay, which is essentially what the U.S. Trustee is arguing today. In fact, the U.S. Trustee cites no case that says you
cant use the achievement of a stalking horse bid as a trigger for incentive pay. And, Your Honor, thats not surprising The facts of record
because each case turns on its own facts.
here demonstrate that the employees of the Debtors have already engaged in a incredible amount of work in reliance on the belief that they would receive some form of incentive pay and that there is still an incredible amount of work for these employees to do in order to consummate these sales. Your
Honor, selling these assets is not like selling a car, where you simply agree on price and the purchaser drives off. Now a similar incentive plan, to the plans before the Court, Your Honor, was approved by Judge Gross in the Global Home Products case, which we cite in our motion. And the order
in that case reflects the fact that there was some similarity between the plans. And Id just like to take a moment and hand
up a copy of that order because if walk through it well, in fact, see that there was similarities in the plan in that case and the ones that were seeking to have approved today. hand up the copy of the order, Your Honor? THE COURT: Yes. Can I
(The Court receives document) MR. STERN: Lets essentially walk through the
226 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 findings on the second page in this order. a few paragraphs, Your Honor. I just want to read
There is a great risk at this
hour that I may turn into mush mouth, but Ill do my best not to. It is hereby found, and determined, that the motion involves the creation of a performance based management incentive plan, as such plan has been modified as set forth in the record at the hearing. Conditioned and payable upon the
closing of a going concerned sale of substantially all assets of the Burns Group, Debtors. Given the financial condition of
the Burns Group, Debtors, a prompt sale of substantially all of the assets of the Burns Group is critical to maintaining the going concerned value of such business. The Debtors have
proposed a going concerned sale of substantially all assets of the Burns Group, Debtors, for a purchase price of approximately $33.5 million, subject to certain adjustments. The modified
incentive plan is designed to appropriately compensate the Burns sale employees to ensure that they remain motivated to perform the requisite tasks to effectuate a going concerned sale of the Burns Group, Debtors, given the enormous additional burdens placed on the Burns sale employees from the time of the decision to sell the assets through the approval of the sale procedures, and that will be required of those employees through the closing of the sale. MR. MCMAHON: Your Honor, Joseph McMahon, just one
227 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 point. I would -- and say, object to the Courts acceptance of I dont know what
this document by itself under the record.
the point is trying to be made, other than on one day in this district a plan was approved. But we dont have the underlying I think, at a
motion, we dont know what the metrics are.
minimum, its appropriate to limit whatever notice that the Court is taking with respect to what was just given to you. THE COURT: MR. STERN: Comments are noted. Your Honor, I would note, simply, that
this order was expressly cited in our motion, so it shouldnt be a surprise that were discussing it. But, and in fact, I
looked for -- we tried to find a copy of the transcript of this hearing and, apparently, it was never transcribed, so weve got what we got. But anyway, Judge Gross goes on to say the Debtors have demonstrated a compelling and sound business justification for authorizing the modified incentive plan and the terms of such plan are fair and reasonable, under the circumstances, and provide a substantial benefit to the estates. And the modified
incentive plan is a performance based plan that is not subject to the limitations on retention and severance plans set forth in Section 503(c) of the Bankruptcy Code. I provide this, simply, as an example because when one reads the U.S. Trustees objection, one would think that the type of plan we are proposing is very unusual. In fact, it is
228 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 not. case. Every plan depends on the facts and circumstances of the Frankly, if you look at Exhibit A to the order that Ive
just handed up to the Court in Global Home Products, when you look at the incentives as a percentage of annual salary on the last page, I mean, this plan is rather rich, the plan in Global Home Products, compared to our incentive plans, which typically dont go up that high. And anyway, as here, the incentive pay in Global Home was conditioned on closing of a going concerned sale already in hand. As here, the incentive pay in Global Home was designed And
to motivate employees to complete a sale already in hand. Judge Gross ruled that the plan was not retention and severance, or severance, and he approved the plan. Now, Your Honor, the point here is there is nothing unusual about our incentive plans.
At the end of the day, once
again, its a matter of what are the facts, what are the circumstances, and, you know, Your Honors ruling thereon. And
we believe the facts and the circumstances that weve presented to the Court today clearly demonstrate that this is an incentive plan, not a disguised retention plan. Your Honor, the basis of the second objection that the U.S. Trustee has raised -- fair enough, Ms. Uhland reminds me that half of our incentive plan doesnt even have a stalking horse. Thank you very much. This has to do
Turn to the second objection, Your Honor.
229 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 with the 28 Vice Presidents and Assistant Vice Presidents who will receive retention payments under the Key Employee Incentive Retention Plan. And the question is, are they
officers, and as a result, insiders, under the Bankruptcy Code? Now the U.S. Trustee says this is a no-brainer, Your Honor. Regardless of the facts and circumstances of the case or the context, if your position is listed as an officer in the bylaws, you are an officer under 10131(b)(ii). Now Ill pause
for a moment to note that that conclusion is not in the statute and its not in any legislative history cited by the U.S. Trustee. The U.S. Trustees position is based, essentially, on
a single case, Essential Therapeutics, decided in a different context whether an employee was a disinterested person under Section 10114 for purposes of retention under Section 327(a) and on different facts. The employee was a corporate
secretary, which if you reviewed enough bylaws you know that that position, almost always, is one of the officer positions thats expressly required because the secretary has certain duties at the corporate level. Now certainly the U.S. Trustee, Your Honor, cites no precedential Third Circuit or even District of Delaware case that instructs you that you must conclude that all positions that are listed as officers in the bylaws must be deemed officers and, therefore, insiders under the Bankruptcy Code in all circumstances for every purpose. I would respectfully
230 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 submit, Your Honor, that the U.S. Trustees position is that the Court should ignore the facts and circumstances of the case and just look at the bylaws. THE COURT: But Id like --
I think their position is I should read
the Bankruptcy Code in its plain meaning. MR. STERN: Well the Bankruptcy Code, in its plain
meaning, just says officers, it doesnt tell you who are officers for purposes of the Bankruptcy Code. Its not in the
legislative history, its not expressly defined in the statute. It just says officers. There are analogies to be drawn, and
Ill talk about them in a moment, to Securities Law and cases decided where officers fiduciary duties are at hand. And in
both of those circumstances as well, which Ill get to in a moment, even officers -- and that position is mentioned under the Securities Laws, the Courts engage in a facts and circumstances analysis to determine what is meant by officers for application of a Securities Laws, they dont just look at the bylaws. And were gonna come to that in just a minute
because I want to talk, first, about the implications of the position the U.S. Trustee is advocating if the Court were to adopt them today. If you spent any part of your legal career
in the traditional corporate practice, which frankly is where I spent the first decade of mine, Your Honor, youd know where most bylaws come from. their computer systems. Law firms have form bylaws sitting on And when a law firm is asked to set up
231 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 a corporation, they get a call from someone saying we want to set up a corporation, the attorney involved calls up the form bylaws on the computer, inserts the companys name, maybe makes a few other tweaks particular to that company, sends out the bylaws, and they typically get adopted. Now lets assume that the Court were to adopt the U.S. Trustees argument that the employee positions identified as officers in bylaws are automatically officers and thus, insiders, under the Bankruptcy Code. Honors ruling today. Assume thats Your
After the hearing is over, Im going to
walk back to my office, if any of my partners are still there, Im going to seek out one of my corporate partners, and Im gonna ask to see my firms form bylaws. Im gonna take out my
red pen and Im gonna hack out the reference to Vice Presidents and thats gonna be our new form bylaws. So a few years from
now, when were back before the Court, perhaps with some unfortunate company that we helped to set up that ultimately they went bankrupt, and that same company is filing a 503 motion and there is V.P.s and Assistant V.P.s of that company in a retention plan, those same folks wont be officers under the Bankruptcy Code because I struck those positions from the bylaws. And that would be the case, under the Trustees
analysis, even if those Vice Presidents and Assistant Vice Presidents, in our hypothetical company three years from now, were performing the exact same functions as the Vice
232 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Presidents, sorry Im losing my voice, and the Assistant Vice Presidents who were in the retention plans before the Court today. Now that result really doesnt make any sense, but that
is the natural consequence of the U.S. Trustees position. It also illustrates why the Court needs to review the facts of the case and not just the bylaws. Im not saying
theyre irrelevant, but theyre not dispositive, in order to determine whether these Vice Presidents and Assistant Vice Presidents are officers as that term is used, undefined, in the Bankruptcy Code and, thus, insiders for purposes of 10131 and, ultimately, 503. Now the cases cited in our motion and amended motion essentially tell us precisely this. In order to determine
whether an employee is an officer under the Bankruptcy Code, the Court needs to focus on the facts and circumstances of the case, including whether the employee exercised control or policy making functions. And the case I was eluding to just a
moment ago that dealt with Securities Laws issues and breach of fiduciary duty issues is the NMI case that is cited in our motion, and I think thats particularly instructive. In the
NMI case, which by the way was decided by the Bankruptcy Court in the District of D.C. in 1995, the Court was evaluating insider status for purposes of Section 547. And the individual The Court The Court
Defendant who was involved was a Vice President.
said a couple of things that I believe are helpful.
233 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 said {quote} the definition the company was using of officers may not be the same as the definition of officer under 11 U.S.C. Section 10131. applies here. Well that same observation really
Now, of course, because the Bankruptcy Code does
not define the word officer for guidance the Court in the NMI case, looked to cases involving Federal Securities Law and Common Law Fiduciary Duties. Whereas with the Bankruptcy Code,
the law did not specifically define what an officer is, leaving it to a case by case determination and applying by analogy securities and fiduciary duty law, the Bankruptcy Court looked at whether the employee Defendant, the Vice President, was privy to confidential inside information for purposes of analyzing -- or analogizing the securities laws, or was active in setting corporate policy for the fiduciary duty claims. in that case, the answer was no. Now one other thing that the NMI Court said, and I think its noteworthy here and it really helps to encapsulate what the NMI Court was looking at to guide it in its determination. The Court said the employees functions and status viewed relative to the statutes goals, in using the term officer, ought to control whether the person is an officer. talk about the goals of Section 503. Well lets And
I wasnt here for the Does anyone in
prior hearings, but Ive read the transcripts.
this room really think that when Senator Kennedy proposed Section 503, he wanted to net the little fish along with the
234 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 big ones that he was perturbed about? I dont think so and
theres no evidence in any legislative history that he did. And frankly, I think Your Honor recognized all of this as reflected in prior transcripts, in prior hearings in this case. Your Honor evaluated the facts and circumstances that were presented to you in order to determine whether certain employees were officers and, thus, insiders. And specifically
with respect to the Vice Presidents and Assistant Vice Presidents that were presented to you in prior hearings, Your Honor concluded that they were rank and file and, accordingly, not insiders. Your Honor concluded that treating them as Frankly, I would
insiders would lead to an absurd result.
respectively submit thats law of the case at this point. Now the 28 individuals at issue, the Vice Presidents or Assistant Vice Presidents, the testimony is theyre at the subsidiary level. The, again, un-refuted and un-rebutted
testimony establishes that these individuals dont exercise control, they dont participate in policy making functions. Accordingly, Your Honor, under the facts as have been presented to you today, and the case law as weve discussed it, these individuals are not officers under 10131(b)(ii). Accordingly,
theyre not insiders under 10131 and, thus, the Key Employee Incentive Retention Plan cannot violate 503(c)(1) because 503(c)(1) doesnt apply. Now lets turn to the last issue thats the biggest
235 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 bucket, the Trustees position, essentially, that this case, these plans, are not justified, Your Honor, by the facts and circumstances. To the contrary, Your Honor, we believe the
evidence presented to the Court today demonstrates that the facts and circumstances compel the adoption and approval of these plans. Lets just pause for a moment and talk about the standard under Section 503(c)(3). The U.S. Trustee asserts that Section
503(c)(3) does not expressly incorporate the business judgment standard and, therefore, the Court must evaluate the facts and circumstances. Your Honor, thats really just semantics. Its
clear that the business judgment standard applies under the 503(c)(3) facts and circumstances test. In fact, its in our
motion, its on page 21 of the original motion, and we cite Judge Walwraths ruling in Nobex on precisely this point where she says {quote} Section (c)(3) was meant to provide a standard, albeit not as clear, for any other transfers or obligations outside the ordinary course of business. I read
(c)(3) to be the catch all and the standard under 3(c) for any transfers or obligations made outside the ordinary course of business are those that are justified by the facts and circumstances of the case. I find it, quite frankly, nothing
more than a reiteration of the standard under 363 under which courts have previously authorized transfers outside the ordinary course of business and that are based on the business
236 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 judgement of the Debtor. So thats what were talking about
with respect to facts and circumstances, have we demonstrated that they -- that the Debtor properly exercised its business judgment in approving these plans? We all know that the It
business judgment standard is a deferential standard.
shields the Debtors from second guessing by, among others, the United States Trustee. But the United States Trustee does,
indeed, seek to second guess the Debtors business judgment. And with due respect to the United States Trustee, because I know its just doing its job, the U.S. Trustee simply wants, really at the end of the day, the Court to reject the Debtors business judgment in favor of the U.S. Trustees judgment. The U.S. Trustee contends, Your Honor, that the plans are not justified by the facts and circumstances for four reasons. The first of those reasons is that, according to the U.S. Trustee, the Debtors have not explained why closing on the floor bids, to use the U.S. Trustees terms, constitutes an achievement which justifies payment to employees who are otherwise obligated to assist the Debtor with the sale in exchange for salary and benefits. Your Honor, her extensive
testimony today, the employees have done a lot already. Theres still a lot to do. The incentive targets are not lay
ups and without the continuing participation of the employees, and most particularly the identified plan participants, there is a real concern of, by the Debtors and their professionals,
237 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and a real risk that these sales will not happen. That is the
un-refuted, un-rebutted testimony Your Honor heard today. Moreover, since a substantial portion of New Century employees pre-petition compensation was incentive based, and those incentives are not currently available to the employees, theyre currently working at a substantial pay cut. Now were
simply trying to restore some form of the incentive base compensation with an eye at the same time towards accomplishing what are, indisputably, the Debtors most important current business goals. The second reason why the U.S. Trustee asserts that these plans are not justified by the facts and circumstances is the U.S. Trustee contends that the Debtors are not justified in tying compensation to the sale process, especially where these sales are being conducted by an investment banker. Now with
due respect to the U.S. Trustee, that position reflects a fundamental misunderstanding of what the plan participants will be doing. We are not looking to have 100 auctioneers. Your
Honor has heard substantial testimony today, again, unrebutted, un-refuted as to what these plan participants need to do to continue to run these businesses, to take the steps that will maximize value and will help complete the sales. Those
steps, those processes, will go on long after the gavel has banged and a winning bidder has been declared. In the Debtors
business judgment we need participants, not investment bankers,
238 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to do this and there is no evidence that the investment bankers could do this. Your Honor, the evidence establishes that, absent the adoption of the incentive and retention plans, it may indeed be difficult for the Debtors to complete their asset sales. And
with due respect to the U.S. Trustee, the U.S. Trustee offers no contrary evidence on that point today. Your Honor, the third point that the U.S. Trustee makes on the facts and circumstances test is the U.S. Trustee complains that the Debtors have, this is really sort of a narrow point, unfeddered discretion on the critical retention pool, that was originally $250,000, you know, when we filed last week as a -you know, even if that was a valid complaint when the U.S. Trustee filed the objection, as a result of agreements reached with the Committee, its no longer true. The amount has been
reduced to $175,000 and without Committee approval no individual may received more than $40,000 or 20% of his or her salary. The last point the U.S. Trustee raises, Your Honor, and its, on the one hand an argument in connection with the facts and circumstances test, on the other hand its a separate motion filed by the U.S. Trustee to continue the hearing, is the U.S. Trustee contends that these plans should be tabled, indefinitely, pending the completion of an investigation by the SEC, by the U.S. Attorneys Office, and any trustee or examiner
239 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that the Court may or not choose to appoint a week from now. Your Honor, and, again, with due respect to the U.S. Trustee, if someone asked me to come up with a recipe for disaster for these cases, I would be hard pressed to come up with a better one that what the U.S. Trustee has proposed because lets be clear, Your Honor, the U.S. Trustees proposal, in effect, means there will be no incentive or retention plans and the Debtors sale processes will be jeopardized. THE COURT: Well heres a concern that I share with What
the U.S. Trustee and its from the Courts standpoint. assurances does this record hold that there would be no
incentive payment, of any kind, made to an individual who might have been involved in any of the whats been referred to, generally, as irregularities which were described in the First Day Affidavit? I mean, other than that, theres been no
evidence in any of the series of hearings weve had, and Im not suggesting there needed to have been, of who did what to whom when. What assurance can you give the Court that
incentive payments wont be made to somebody who for those reasons, arguably, shouldnt get anything else? MR. STERN: Your Honor. I think I would respond in two ways,
First, theres two pieces of evidence, I think,
before Your Honor today to give Your Honor some comfort that its unlikely that would happen. One of the pieces of evidence
240 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is the fact that the SEC, which as you know is conducting an investigation, has looked at this roster and said okay. They
dont have a problem with the individuals who are included. And the second one is that the companys own Audit Committee, which of course is conducting an investigation as well, has the right, and the ability, that if anyone happens to be in these plans who is under investigation, the Audit Committee has the right to essentially cause that payment not to be made and to be escrowed pending completion of that investigation as to whether the individual should be cleared and as a result paid, or not cleared and as a result terminated with cause, and under the plans they wont get the payment. THE COURT: being completed? MR. STERN: By the Audit Committee? I cant answer Well when will such an investigation
that other than to say Im not sure that we need -- Im not sure that thats the ultimate determinative point since even if the Investment Committee is simply looking at someone right now, and hasnt completed the investigation, they have the ability to escrow the payment until theyre done. THE COURT: MS. UHLAND: Well payments are to be made -Let me add one point. The initial
phase of the internal investigation has been completed and an initial report provided to the Audit Committee and the current roster reflects, actually in cases where the current roster, in
241 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fact, rather than relying on this particular division, eliminated any individuals that would have been subject to question by the Audit Committee. So that the initial part of
the review has been already undertaken, we still have the fall back provision with respect to escrowing additional payments if theres further individuals investigated. THE COURT: Well are further individuals being
investigated at this point? MR. UHLAND: My understand is not by the internal --
by the Audit Committee their initial phase should be done in light of our -- the fact that were in Chapter 11 and theres other formal investigations being undertaken. The plan is not
to incur the additional expense of having independent legal counsel continue the investigation. THE COURT: MR. STERN: All right. Your Honor, the second point I wanted to
make and I think its -- I mean, we need to be candid with the Court. Can I stand here and absolutely guarantee to you that
theres no chance that one of these hundred and some odd individuals someday will be determined to have engaged in irregularities? I mean, I cant say that, but I can say that
steps have been put in place to make that highly unlikely, which I think is the best we can do. And in the event that it
were to turn out the unlikely event that someone received a payment who engaged in irregularity, we would have to deal with
242 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that issue at that time. But I think the important thing,
also, to remember is that not approving these plans because of the possibility that someone may someday have been determined to have engaged in an irregularity, truly, would be to throw the baby out with the bath water because we would run a serious risk, as the un-refuted testimony is today, of undermining these sales without these incentive plans. And frankly, Your Honor, the U.S. Trustee has not provided us -- I certainly understand Your Honors concerns, but theres certainly no case law that weve seen that suggests delaying an important incentive or retention plan to complete pending investigations. The U.S. Trustee hasnt offered any other And, you know, the sales really are, at
cases that do that.
the end of the day -- I mean were here for a very important reason, Your Honor saw how concerned Ms. Etlin is. These sales Your
are probably the most critical events in these cases.
Honor heard whats happening at the company with the employees. We need these incentive and retention plans in place now. mean thats why were all here at 7:00, and I apologize for that, in the evening in order to properly motivate the employees over the next few months. a pay cut. Theyre already working at I
Theyre already, you know, in I guess I would call
an adverse work environment in terms of just how upset people are as to whats been going on. If these plans are delayed or
denied, Your Honor has heard testimony that many more employees
243 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 are likely to simply leave. I mean why would they stay?
I would also note, Your Honor, that it would be, ultimately, a bad idea to delay implementation of these plans pending completion of investigations, when we truly have no idea when these investigations will be completed. In the case
of any trustee or examiner that Your Honor might appoint in a week, we dont even know when an investigation is gonna start. Every day that these plans are not approved, they lose a bit of their effectiveness, we lose some employees. It would not be
wise, I respectfully submit, Your Honor, to risk further attrition in the employee ranks. I think Your Honor will be happy to hear these words. In
conclusion, the testimony today establishes, Your Honor, that the plans are reasonable. The business goals triggering the The incentives arent paid if
incentives, are important ones. the goals arent met.
The goals, themselves, are not lay ups.
The un-rebutted and un-refuted testimony of the Debtors compensation expert is that the plans are reasonable, and in fact, conservative. Absent adoption of the plans now, employee
moral will be hurt and the Debtors business goals jeopardized. The Debtors also are obtaining something in return. heard this from Ms. Etlin. Youve
Any participants who are going to
receive incentive or retention compensation under the plan are required to forego any other post-petition incentive or retention compensation or WARN Act claims. These plans, Your
Closing Argument - Mr. Indelicato 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Committee. MR. INDELICATO: Honor, reflect a classic exercise of the Debtors business
244
judgment and I would, once again, note importantly are fully supported as youll hear in a moment by the Committee, the folks who are writing the check. Your Honor, we need the plans, we need them now. Accordingly, we would respectfully request that Your Honor grant the motion. Thank you. Thank you. Let me hear from the
THE COURT:
Your Honor, Mark Indelicato from And I will only
Hahn & Hessen on behalf of the Committee.
repeat two or three words that were said by Debtors Counsel. The plans, as they exist today, are reasonable. Your Honor, we have gotten to the same point as the Debtor today in supporting the plans by two very different routes. The plan as originally filed, as has been brought to the Courts attention, provided for $7 million in payments. At
that amount, Your Honor, we would have been standing shoulder to shoulder with the U.S. Trustee objecting to the amounts. We
worked diligently with the Debtor in attempts to get a plan in which we thought was reasonable and a plan in which we shifted from retention to incentive, the amounts that would be paid to the various employees. It was very important to the Committee,
Your Honor, that this plan did one thing and one thing only, maximize the value to the Estate from these various sales. And
245 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 we had three buckets of sales. We had the Greenwich Sale,
which is now the Ellington Sale, we have the Carrington Sale coming up and we have the sale of the other assets which has no stalking horse bidder yet. Your Honor, as we were negotiating it, events overtook us. So we were negotiating, in fact, on the night that the Greenwich sale with the sale to Ellington was concluded, or at least the bidding process was concluded. And one thing I will
say for the Debtor, Your Honor, at a time when they received an additional $11 million, they didnt try and take another bite at the Committee and say weve achieved success here, we want to increase that piece. They were, at least, fair on that.
And they negotiated in good faith on the basis of the other two portions of the sale. But what we said to them is you need to
take from the minimum bid and we need to push that to, particularly with the rest of the assets, we need to push that to an incentive piece. So we reduced the amount that they
would receive, significantly, with respect as Ms. Etlin testified, 25% on the rest of the assets which have no stalking horse. You need to reduce that by 20% and well work with you
to get there, based on the additional value that you receive. And, in fact, those negotiations continued through lunch today until we came to the resolution thats before the Court. With respect to the Carrington Sale and the Greenwich Sale, there were two additional concessions that we got the
246 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Debtor to make. The Debtor, initially, wanted to pay the We said, no, there are hold
bonuses on the gross sales price. backs on that.
We need the employees to stay around to work Between the
out those hold backs, thats very important to us.
two sales, without any modifications, thats $14 million, three for the Greenwich and eleven for the Carrington Sale, and we want the employees motivated to get that money in. So, in
fact, we will agree to pay it, but we will agree to pay it as, and when, those retentions -- those hold backs come in. that was a significant concession made by the Debtor. Some other changes that were insisted by the Committee, Your Honor, were the releases, and the broad releases, that these employees are gonna be required to sign before they can receive any payment. Its not gonna be a release if, and when, These are releases that they must So that So
they can get around to it.
sign before theyre entitled to any of the payments.
we know that once we make these payments for the services provided, were not gonna have further litigation regarding any employment related claim. the Committee insisted on. Your Honor, what the Committee was looking for in structuring this plan, is to address a lot of the concerns that the U.S. Trustee had. initial stages. plan. And we had those same concerns at the So that was another condition that
We believe that this is truly an incentive
Now is it a perfect plan, no, but it is the best we
247 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 could negotiate under the facts and circumstances of this case to maximize the incentive and the value to the Estate. I will not repeat the arguments made by Mr. Stern with respect to the officers and the directors and who they are and who the officers are, but I think to -- suffice it to say is Ill give you how the Committee looked at it. We looked at it,
Your Honor, as this is an industry in which theres title inflation. And that these Assistant Vice Presidents and Vice
Presidents, in reality, are no more than titles to go out to deal with the people they were dealing with in putting on the loans. So, in fact, do we look at this as giving management,
officers and directors, retention bonuses and bonuses, no we dont. We look at this as a means of compensating the rank and
file and an incentive manner to maximize the value to the Estate. In fact, the original plan contained all eight of the We cut that down to four in
Executive Management Committee.
working with the Debtor, so we understood the concerns of the Court, we understood the concerns of the U.S. Trustee, we werent out to reward the very senior executives who are, in this plan, who are in charge of the company. So, Your Honor, we believe that this was an exercise of the Debtors business judgments. After some prodding by the
Committee, after some intense negotiation with Alex Partners, we got to a proposal in which the Committee could support and tell the Court that we believe that this was necessary to
Closing Argument - Mr. McMahon 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 achieve the maximum value for the Estate.
248
One final thing, Your Honor, because I do want to keep it short is, I know the Court had some concern with respect to the ongoing investigations regarding employees. And let me state,
categorically, that the Committee is not waiving any of its rights to the extent were conducting our own investigation, assuming the Court enters our 2004 order. To the extent we
determine that anybody whos received any payments that they should not have received it because they were involved in any way, shape or form in any of the activities eluded to by the Court, the Committee fully intends to exercise all of its rights and the powers of the Bankruptcy Code to seek disgorgement of those funds to the extent appropriate. So, Your Honor, the Committee is vigilant in this case. They have worked, and worked diligently, to get this thing -this plan down to an amount which we could support. We think
we have achieved those objectives and based on the skinny down plan thats before the Court today, we believe its essential to maximize the value of the Estate and we would ask the Court to approve it. THE COURT: MR. MCMAHON: Thank you. Your Honor, good evening. Prior to
the taking of testimony and the admission of exhibits, I briefly outlined our, say, six points that are of concern to our office in connection with this motion. And while I dont
249 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 want to suggest that the Motion to Continue is of less importance than other elements, it is of significant concern. Ill just follow along the roadmap which Debtors Counsel followed. THE COURT: Well let me address that now. Im
convinced, based on this record, that the U.S. Trustees Motion to Continue the Hearing on this motion should be denied. will deny it. MR. MCMAHON: Okay. Your Honor, the -- there are And I
two 503(c)(1) issues that our office raised in connection with the motion. And I want to address both of them.
The first is that there was -- the incentive plan represents a disguised retention plan and, Your Honor, the primary purpose of the plan has to be retention based upon this record. Your Honor heard Ms. Etlins undisputed testimony
regarding the time line, which is just critical to understanding exactly what is being proposed by the Debtors. The Debtors went out to market, soliciting bids, obtained the two stalking horse bids at which the target incentive prices are being set, meaning that they are the vesting targets, the amount of those two bids. And then, after those two sale
motions or substantially contemporaneous with the filing of those two sale motions, filed a incentive and retention motion, and then disclosed to the participants that they were going to be a part of the plans that were at issue. Now that testimony
250 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is un-controverted and its the Debtors own witness. And I
appreciate the fact that on redirect, Debtors Counsel got up here and said -- asked Ms. Etlin whether or not there was some generalized expectation that there was gonna be an incentive plan put in place or something, some form of bonus, given to these people for staying around. And thats fine. Perhaps the
company made that representation, but until these bankruptcy cases were filed, until those communications occurred, by Ms. Etlins own testimony, they had no idea what the incentive formula was, period. End of discussion. How could they be I
incentivized to do something that they werent aware of? dont understand it.
Forget Dana, forget lay ups, these people Its beyond me
didnt even know they were playing basketball.
that the Debtors can stand here and argue that this is not a disguised KERP. It is, it has to be based upon that testimony. I dont know And if
They didnt even know they were in the game.
what, you know, how you get around that essential fact.
theres ever a plan thats gonna be called a disguised KERP, its one where the employees didnt even know what the incentives were until they had been achieved. I mean, in other It
words, until after the facts those bids had been signed on. speaks for itself.
That is, that is the elephant in the room. And you didnt even
That is what Ms. Etlins testimony was.
hear Debtors Counsel try to even address that point because it doesnt help their effort today, Your Honor. How could you be
251 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 incentivized to do something, under such circumstances, to up or to maximize the value of the Debtors assets? me, it really is. Its beyond
And I think that, if theres one thing that
Your Honor can rule for the U.S. Trustee on today, its that one point. These are retention plans, based upon the testimony
of the Debtors own witness. With respect to the point, Your Honor, about officers. Your Honor, we reviewed each and every case which the Debtor cited in their papers, and the Debtors advocacy in those papers I would describe as, as I said, not addressing the central point of the case. Theyre rather aggressive And if Your Honor would take a
interpretations of the cases.
look at the relevant paragraphs from our objection, which are paragraphs 15 and 16, we go case by case through the authorities that are cited for the proposition that the Debtors are trying to make here today. None of them, not one,
say that when a -- conclude that when a company appoints a person, as an officer according to its bylaws, that person is not an insider based upon the degree of control that they have. In fact, each and every case as demonstrated by the parentheticals which we cite in paragraph 16, make the clear point that if these persons were, in fact, appointed officers pursuant to the bylaws, then they would be what are called statutory insiders, meaning that they would fall within the enumerated categories of Section 10131. And the Debtors really
252 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 are the parties that are seeking to go to legislative history and/or some interpretation that we have to get in to involve an analysis of control or where they fall within the organization. We dont. We dont have to go there. We can rest upon the
plain meaning of the statute and arrive at the conclusion that when the Debtors said individuals are officers, theyre officers, end of discussion. Its the conclusion that Its the conclusion
Essential Therapeutics arrives at.
supported by each and every authority, which they cite in their papers. Thats another point the Debtors dont want to talk I think its critical to go -
about in their closing argument.
- to addressing the issue thats before the Court. The only issue today, Your Honor, is if this Court is gonna look past the plain meaning of the statute. And it,
certainly, is not an observed result, notwithstanding what the Debtors say, for the people who the Debtors consider to be officers to be officers. Completely irrational conclusion.
With respect to our four points under 503(c)(3), Your Honor, with respect to the incentives being real hurdles, I think the testimony of Ms. Etlin, again, addresses that point, which is the following: How can you be working towards Its beyond me, They
something that you dont even know exists yet?
frankly, how this structure is designed to incentivize.
were let known about the incentives after the sale processes were well under way, or virtually done. And those standards
253 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 are not incentivizing. With respect to the point about a second class of investment bankers, Your Honor, I think what the testimony today demonstrates, it certainly supports the U.S. Trustees position in this regard, is that the Debtors didnt need these people to be providing direct interfacing, or services, relating to the sales insofar as directly marketing the assets, directly communicating with the potential bidders. As Debtors Well
Counsel, himself, said We dont a hundred auctioneers. thats fine.
The converse of that, Your Honor, is that what
the Debtors did need these people to do is stay where theyre at and continue what it was they were doing. Completely
consistent with the U.S. Trustees interpretation of the record that the primary purpose of this plan is to keep them right where they are. Again, when you -- I mean, you might as well
just, you know, create another metric that is completely unrelated to what theyre doing for the company. These people
have no control or ability to drive the sale price upward directly. What is essential to the company, and what you have
heard from the testimony, is that it is essential to keep them there to support that sale effort. And I just noted, as
perhaps a slip, I think before the break Mr. Indelicato got up to the podium, after the break I think Ms. Uhland and or other counsel got up to the podium, and what did they say, We need to retain these people. Thats the reason why you have to
254 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 approve this today. Its retain them, it has nothing to do Because its not a
with driving the sale price north.
reasonable expectation, Your Honor, that no matter how well these people perform their specific functions, that theres no testimony in record, theres no person with investment banking experience to explain how the employees could actually effect, or drive, a sale price north by providing such support services. Third, Your Honor, with respect to the slush fund, or called the bonus pool thats undefined in terms of who participates in it right now, we would suggest that it suffers, essentially, from the same problems that the sale performance metrics do, which is that people dont know whether or not to participate or getting it. Again, the issue is whats its
purpose, whats it doing for the company? And finally, Your Honor, I will address the -- our Motion to Continue -- strike that, Your Honor. We do note and share
the -- excuse me, Your Honor, I forgot about the prior ruling on that point, but I do want to note that we do share the Courts concern about the progress of the U.S. Attorneys investigation and making sure that these plans do justice to the situation, rather than worsen it. So, when we come back to the critical point that I want to make here, Your Honor, its the following. That these plans
were not designed to incentivize based upon the testimony of
Rebuttal Argument - Mr. Stern 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the Debtors own witness.
255
And if this plan is not a disguised
retention plan, I dont know what is. THE COURT: MR. MCMAHON: THE COURT: MR. STERN: Thank you. Thank you, Your Honor. Briefly. Ill do my best, Your Honor. I dont
have much of a voice left anyway, so theres not much to worry about. Honor. My friend ably argued several points, first addressing the 503(c)(1) issues. It seems that the Trustees main point in I just want to make a couple of points, I think, Your
this whole proceeding is that the incentive plans are disguised retention plans. stay. It focuses on the fact that we want people to To me
In fact, he calls that the elephant in the room.
its a unicorn, it doesnt exist, but we can call it whatever animal we want. At the end of the day, it is always the case
that -- I mean, theres two things that are, I guess, indisputable here. get paid. If the goals arent met, the people dont
You can stay as long as you want, this is with
respect to the incentive plan, stay as long as you want, but if the goals dont get met and theres no assurance they will get met as weve heard the un-refuted testimony today, you cant get paid. Thats an incentive plan. Every good incentive plan
has, and Your Honor has recognized this, I know it because I read it in one of the transcripts of the hearings I didnt
256 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 attend, that every good incentive plan has a retention component. You cant get the incentive if you dont stay. The
question is what is the primary purpose?
The primary purpose
here, clearly, is to incentivize these folks (a) to complete the sales and (b) to get the best sales price. Now there was some questions, or some statements, made about this is clearly a retention plan because how could the employees be acting on an incentive where a plan, essentially, had not yet been filed. Theres really two responses to that.
Number one, and again this is the un-refuted testimony to the employees, even though there was not a specific plan out there because there couldnt be at that time, had a general expectation that they would continue to receive some form of incentive pay, as they had in the past. But lets just ignore
that for a moment, lets even forget about everything thats happened in the past. My friend simply ignores, and never
addresses, all the things that the folks that were trying to incentivize still need to do. close. None of these deals can just
The un-refuted testimony was that there is still a And lets talk about the
tremendous amount of work to do.
other assets for a second, theres not even a stalking horse. Folks just have to take, rather, really for assets that theyve had difficulty with so far, these are gonna be difficult sales. I think Ms. Etlin testified they were -- this is the most speculative. Theyre really gonna have to work hard if they
257 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 want to make some money on these sales. And as far as, I think there was a related point made, and I just want to make sure I hit it. You know, if I cant
remember it, it cant be important enough to hit it at 7:30 in the evening, Your Honor. Its just the fact that these
employees still have a lot to do in order to get the sales accomplished. As far as the officers go, I mean, look 503(c) is a pretty new statute. and dont say. I mean we can all talk about what the cases do The U.S. Trustee doesnt cite any case that
says under 503(c) if youre in the bylaws as an officer, youre an officer. So were all just dealing with the case law as it
currently exists, really pre-503(c) and were trying to figure out what did Congress mean when it adopted 503(c). And we
believe the better case law, which weve cited and which Ive discussed in detail today, says you have to look at the purposes of the statute and make your own determination, Your Honor, and at some point I suspect there will precedent to guide us. Right now, theres not a whole not. There is some
precedent in this case, which I respectfully submit law of the case, where Your Honor said Assistant V.P.s and V.P.s are not officers for purposes of Section 503. The last thing I think I would say, Your Honor, is that the facts that have been submitted to the record today, our expert has said this is a reasonable plan and it is an
The Court - Finding 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 incentive plan. Theres no contrary expert testimony.
258 All the
testimony that youve heard today talks about just how critical these plans are and how we need them. And I guess maybe Ill try to finish with a little flare. I remember a sort of a phrase I read in the newspaper a couple of weeks ago, Your Honor. I dont remember the context, I
dont remember who said it, but the statement was the greatest enemy of a good plan is the dream of a perfect plan. know that this is a perfect plan. and prod at it? it? I dont
You know, can people poke
Can the U.S. Trustee complain about pieces of
Im sure thats true, but it is a good plan and thats all Thank you, Your Honor. Okay. Let me start by determining the
that the law requires. THE COURT:
standard that Im applying in deciding whether to grant the relief thats been requested. First, I dont think this is a -
- this relief is properly requested under Section 105 or under 363. I will apply a 503(c)(3) standard because, consistent
with my prior ruling with respect to those individuals holding the office of Vice President and Assistant Vice President, they are not, under these circumstances, to be considered officers for purposes of 503. It may be, at some point, there will be a
larger body of case law, to which perhaps Ill contribute, which addresses the issue in a more detailed manner. Frankly,
Id probably prefer that opportunity, but the circumstances here dont permit that.
259 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 There are a number of issues Id like to address in terms of how I view this record and, unfortunately, they may come out in no particular order, but Ill begin. First, by addressing an overall concern. The Trustee
complains that the Debtor, after having been rebuffed in early request for relief, has come back and repackaged, in substance, the same request, but in a different form. Frankly, given a
couple of things, one the newness of 503(c) and some black letter rules about how plans should be designed, there have been a number of different plans proposed in this Court, and other courts, that really go a lot of different ways and take a lot of different forms. Secondly, I think its a good thing that the Debtor went away, tried to rethink and restructure its plans, consulted and negotiated with the Committee, heard the U.S. Trustees objections and came up with a revised plan. And I, frankly,
think the Debtor ought to be -- well lets put it this way, I think have might have been necessary for the Debtor to do that, under these circumstances, rather than simply to say theres no way we can package an incentive plan in an acceptable form. The Debtor argues, persuasively, and Ms. Etlins testimony, I think, was very strong on these points, some of the services yet to be performed are sale related from due diligence to transition and other sale related services, to the requirement of at least one buyer that a certain number of
260 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 employees be available to continue in the business, other downsizing functions that have to be performed, including the extensive human relations and benefits issues that have to be worked through with respect to the thousands of employees whove been laid off, responding to the SEC investigation, other regulatory interface, later on down the line claim support, lease review. Right now, with respect to the sales
particularly, they are the most important activity of the company at the moment. The activity, most likely, to produce And to incentivize employees to
the most value for the Estate.
achieve those goals and perform those activities, which would not otherwise be within their normal job descriptions, I think is necessary under these circumstances. These employees,
according to Ms. Etlins testimony, have specific technical or other knowledge about the business or the industry, which is necessary for the conduct of the Debtors business and for achieving and taking sales to their conclusion. With respect to the criteria that the Debtor has chosen, in a non-liquidating plan you could argue there are lots of other metrics that could be used, like EBIDTA just to name one, increasing cash flows. Those things cant be used It makes no sense and the
appropriately in this type of case.
U.S. Trustee has suggested that theres no viable alternative for the use of criteria. I also note that these employees, as the Debtor has
261 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 alleged from the beginning even in its earlier iteration of incentive, proposed incentive plans, that the employees compensation, historically, has been based on things other than, in addition to, base salary. So its entirely credible
for the Debtor to take the position that there is an expectation by these employees that theres -- there would some incentive compensation as a component of their overall compensation, and the fact of the timing of the request for approval and the development of the sales asserted by the Trustee is being a reason alone to deny the relief, I think, is wrong. I think its off the mark. And I think it ignores the
situation that these Debtors are facing. Theres another element that strikes me, and I mean and it strikes me as an important element, and although its been mentioned, it hasnt been mentioned in quite the way I look at it, and that is the total amount to be paid is about 3.3 million or so, which has already been reduced by over half as a result of negotiations with the Committee. But this amount is
a fraction of the total value to be achieved and preserved by this Estate, and its a small fraction. So it seems to me that
in the Debtors business judgment, if it spends this amount of money, it can preserve literally tens of millions of dollars, or potentially more, worth the value for the Estate, it seems to me to be a very small amount of money well spent. So I conclude that these payments are justified under the
262 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 facts and circumstances of this case and Im prepared to sign an order awarding the relief that the Debtor has requested. Oh, I also wanted to mention the discretionary fund. understand the U.S. Trustees concern that it could be a {quote} slush fund, but it seems to me, again, given the very limited amount thats been placed into the fund and with the Committee oversight, that theres very little likelihood, if any, that award of funds from the discretionary fund would be, in any way, abusive or unwarranted. MS. UHLAND: Thank you very much, Your Honor. The I
plans themselves are exhibits to the proposed order that we would like to submit and there is some final language changes we are incorporating in them to reflect the agreements that weve reached with the Committee. What we would propose to do,
Your Honor, is to prepare the revised order with the complete plans and submit it with the Court tomorrow. THE COURT: All right, and please recite that the
relief is being granted for the reasons Ive stated on the record today and please also include a denial of the U.S. Trustees Motion to Continue this hearing based upon my earlier ruling. Yes, Mr. McMahon? MR. MCMAHON: Just one question, Your Honor, there
is a finding, Letter E, specifically indicating that the Debtors have demonstrated a compelling and sound business justification for authorizing the restructured plans and Im
263 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 wondering whether, in light of Your Courts ruling, would be better to change that to -- that the Court has found that the Debtors have justified plans under the facts and circumstances of the case. THE COURT: statutory language. MS. UHLAND: THE COURT: MS. UHLAND: THE COURT: MR. MCMAHON: Yes, Your Honor, well revise that -All right. -- paragraph. Any other questions about the order? Not this one, Your Honor. I believe It would be consistent with the
theres the open matter of the Motion to Seal. THE COURT: MR. MCMAHON: Is there any objection? Your Honor, based upon the record that
was put before the Court and the Debtors agreement to leave these, you know, six participants, the six top participants under the plans unsealed. Their information will be of public
record, but we are not taking the position based upon Ms. Etlins testimony. THE COURT: Anyone else care to be heard with Ill grant it. This is normally
respect to the oral motion?
the type of information that is, indeed, kept confidential and I do conclude, based on this record, that revealing such information would put the Debtor at a competitive disadvantage at a very critical time. I guess in its soon to be over
264 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 CERTIFICATION I certify that the foregoing is a correct transcript from the electronic sound recording of the proceedings in the aboveentitled matter. adjourned. (Court adjourned) history. well. And you should prepare an order to that effect as
You can include it in the one order if you like. MS. UHLAND: Okay, Your Honor, and then well be
filing that under -- taking appropriate precautions to file the redacted version under seal shortly. THE COURT: MS. UHLAND: All right. Any other questions?
No, Your Honor, I just thank you for
the Courts and the Courts staffs indulgence to stay this late. THE COURT: MS. UHLAND: THE COURT: Your welcome. All right. Thank you very much. Court is
That concludes this hearing.
Lewis Parham
___________________________ Signature of Transcriber
5/18/07 __________ Date
UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE
IN RE:
) ) NEW CENTURY TRS HOLDINGS INC.,) ) ) Debtor. ) ) ) )
Case No. 07-10416-KJC Chapter 11 Courtroom No. 5 824 Market Street Wilmington, Delaware 19801 June 15, 2007 10:04 A.M.
TRANSCRIPT OF OMNIBUS HEARING BEFORE HONORABLE KEVIN J. CAREY UNITED STATES BANKRUPTCY JUDGE APPEARANCES: For the Debtors: Richards Layton & Finger, PA By: MICHAEL MERCHANT, ESQ. RUSS SILBERGLIED, ESQ. One Rodney Square, P.O. Box 551 Wilmington, Delaware 19899 O'Melveny & Myers LLP By: SUZZANNE UHLAND, ESQ. 400 South Hope Street Los Angeles, California 90071 For the U.S. Trustee: Office of the U.S. Trustee By: JOSEPH J. McMAHON, JR., ESQ. 844 King Street Wilmington, Delaware 19899 Jason Smith
ECRO:
Proceedings recorded by electronic sound recording, transcript produced by transcription service. ______________________________________________________________ 435 Riverview Circle, New Hope, Pennsylvania 18938
e-mail CourtTranscripts@aol.com
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215-862-1115 (FAX) 215-862-6639
2 Appearances: (Continued) For Bank of America: Potter Anderson & Corroon, LLP By: GABRIEL MACDONAILL, ESQ. Hercules Plaza, P.O. Box 951 1313 N. Market Street Wilmington, Delaware 19899-0951 Kaye Scholer By: MARGO SCHONHOLTZ, ESQ. NICHOLAS CREMONA, ESQ. 425 Park Avenue New York, New York 10022-3598 For Deutsche Bank Structured Products: Bingham McCutchen LLP By: ANDREW GALLO, ESQ. One State Street Hartford, Connecticut 06103-3178 Saul Ewing, LLP By: MARK MINUTI, ESQ. 222 Delaware Avenue, Suite 1200 P.O. Box 1266 Wilmington, Delaware 19899 Kirkpatrick & Lockhart Preston Gates Ellis LLP By: MICHAEL MISSAL, ESQ. EDWARD FOX, ESQ. REBECCA KLINE DUBHILL, ESQ. 1601 K Street, NW Washington, DC, 20006-1600 For N.Y.S. Teachers Retirement System: Lowenstein Sandler PC By: MICHAEL ETKIN, ESQ. 65 Livingston Avenue Roseland, New Jersey 07068 Baker & Hostetler LLP By: JACK FITZGERALD, ESQ. 45 Rockefeller Plaza New York, New York 10111
For Examiner:
For Fidelity National Information Services et al.:
3 Appearances: (Continued)
For Greenwich Capital Financial:
Pachulski Stang Ziehl Young Jones & Weintraub By: TIM CAIRNS, ESQ. 919 North Market Street, 16th Fl. Post Office Box 8705 Wilmington, Delaware 19899-8705 Kirkland & Ellis By: SHIRLEY CHO, ESQ. BENNETT SPIEGEL, ESQ. 200 East Randolph Drive Chicago, Illinois 60601
For Daniel Rubio, et al: Connolly Bove Lodge & Hutz, LLP By: KAREN BIFFERATO, ESQ. The Nemours Building 1007 North Orange Street P.O. Box 2207 Wilmington, Delaware 19899 Trush Law Firm By: JIM TRUSH, ESQ. Suite 300, 2424 S.E. Bristol Street Newport Beach, California 92660 For the Committee: Blank Rome, LLP By: JASON STAIB, ESQ. Chase Manhattan Centre 1201 Market Street, Suite 800 Wilmington, Delaware 19801 Hahn & Hessen LLP By: MARK POWER, ESQ. MARK INDELICATO, ESQ. 488 Madison Avenue 14th and 15th Floors New York, New York 10022
Appearances: (Continued) Appearing: Rosenthal, Monhait & Goddess, P.A., By: EDWARD ROSENTHAL, ESQ. 919 Market Street, Suite 1401 P.O. Box 1070 Wilmington, Delaware 19899-1070 Murray Capital Management, Inc. By: MARTI MURRAY David J. Stern, P.A. By: FREDERIC J. DISPIGNA, ESQ. Suite 500, 801 South University Drive Plantation, Florida 33324-3314 Paul Hastings Janofsky & Walker By: KIMBERLY NEWMARCH, ESQ. 191 N. Wacker Drive 30th Floor Chicago, Illinois Manatt Phelps & Phillips By: IVAN L. KALLICK, ESQ. ELLEN MARSHALL, ESQ. Chadbourne & Park, LLP By: DOUGLAS E. DEUTSCHE, ESQ. 30 Rockefeller Plaza New York, New York 10112 Mayer, Brown, Rowe & Maw LLP by: THOMAS KIRIAKOS, ESQ. SEAN SCOTT, ESQ. 71 S. Wacker Chicago, Illinois 60606-4637 ICP Consulting, LLC By: MIKE FLYNN
For Murray Capital Management, Inc.: For David J. Stern:
For UBS Real Estate Securities, Inc.:
For Manatt Phelps & Phillips: For Credit Suisse First Boston, et al:
For Carrington Capital Management, LLC:
For ICP Consulting, LLC:
5 Appearances: (Continued) For TRS Holdings, Inc.: Irell & Manella LLP By: JEFF REISNER, ESQ. Suite 900, 1800 Avenue of the Stars Los Angeles, California 90067-4276 Jeffer, Mangels, Butler & Marmaro LLP By: BARRY FREEMAN, ESQ. 1900 Avenue of the Stars Seventh Floor Los Angeles, California 90067 Skadden Arps Slate Meagher & Flom By: ERIC DAVIS, ESQ. One Rodney Square, P.O. Box 636 Wilmington, Delaware 19899-0636
For Union Bank of California:
For Skadden, et al:
6 1 2 3 THE COURT: Good morning, all. Good morning, Your Honor. Mike
UNIDENTIFIED ATTORNEY: MR. MERCHANT:
4 Merchant from Richards Layton and Finger on behalf of the 5 debtors. 6 Your Honor, I think wed like to take the last matter
7 on the agenda first, which is the status report regarding the 8 first meeting with the examiner. 9 10 THE COURT: MS. UHLAND: Very well. Good morning, Your Honor. Suzzanne
11 Uhland of O'Melveny and Myers for the debtors. 12 you -13 14 MR. MISSAL: MR. FOX:
And why dont
Mike Missal.
Edward Fox from
15 Kirkpatrick and Lockhart Preston Gates Ellis as proposed 16 counsel for the examiner. 17 18 19 THE COURT: MR. FOX: Good morning and welcome.
Thank you, sir. Your Honor, we met yesterday. The
MS. UHLAND:
20 counsel for the debtors, the counsel for the Creditors 21 Committee and the examiner, his counsel, and members of the 22 Office of the United States Trustee. We had an initial meeting
23 yesterday to discuss things as sort of some of the mechanics on 24 privilege issues and confidentiality, as well as to provide the 25 examiner an overview of the issues so that they could start
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7 1 thinking about different discovery or, you know, pacing 2 (sic/phonetic) items. 3 We had a very productive meeting. One benefit as a
4 result of the prior investigation, New Century has already been 5 developing a document database thats coded by issues, and 6 were working to get the examiner and his counsel access today 7 so they can start having the same access to the document 8 information that we have on file. 9 Were also working to coordinate with the companies
10 counsel to the independent counsel that conducted the companys 11 investigation to provide that work product to the examiner, 12 both to accelerate the process and to hopefully reduce expense 13 to the estates as part of that investigation. 14 On a -- on a mechanic, taking actually from other
15 cases where theres been an examiner order, and I think the 16 parties have a chance to sit down and talk and reflect on some 17 -- what some of the issues might be, the parties will be 18 working together with the Trustees Office, the Committee and 19 Examiner to have a sort of modest request to the have the Court 20 a further stipulation or a further order really to address 21 three issues: 22 First, the mechanics of how well be filing our What
23 proposal and -- on -- how well file the Courts order.
24 we intend to do is have it filed -- have the examiner file it 25 under seal with a motion to unseal whatever -- all or whatever
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8 1 portions the examiner believes should be unsealed. That was a
2 process that I believe the Trustees Office worked through in 3 the -- was it the Revco (phonetic) case, Joe? I think it was -
4 - one of the cases that -- that represented to the Trustees 5 Office I had previous had experience in. 6 MR. McMAHON: Your Honor, good morning. Joseph
7 McMahon for the United States Trustee. 8 We did discuss this idea in concept yesterday where
9 the Examiners report would be filed under seal, but the -10 with a motion to unseal filed by either our Office or the 11 Examiner, well work out the logistics. 12 But the -- the burden to -- with respect to 107 would In other words, it would just
13 remain on the objecting parties.
14 be like a reverse mechanic designed to ensure that the report 15 is filed with the Court actually before parties in interest get 16 to see the final work product. 17 And with respect to the issues that debtors counsel
18 is discussing, we had a discussion about concepts yesterday, 19 Your Honor. My understanding is that the debtors counsel has
20 taken the laboring oar insofar as drafting up the order as to 21 the specific issues that Ms. Uhland is outlining. 22 We would obviously like to take a look at the order
23 and reserve the right to be heard on that at the appropriate 24 time. 25 MS. UHLAND: Yes, Your Honor. I envision that well
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9 1 have a -- a certificate of counsel that -- or a certification 2 of counsel that its completely consensual, or we obviously 3 will come back. 4 5 But thats the plan.
The other two issues, I think, were simpler: One, we wanted to make sure that the work product of
6 the Examiner was maintained as confidential, sort of post 7 filing the report within issues -- uh -- in other cases where 8 civil litigants have sought to get the examiners work papers. 9 And then we would like to have some -- I think weve
10 been sort of sorting the privilege issues, just a more -- a 11 refined language to ensure that the privilege is protected and 12 the debtors and the Committee, to the extent they share 13 privileged information, the Examiner can be assured of their 14 protection. 15 Like I said, I envision this to be a rather short
16 order and well be circulating drafts of that to the parties 17 early next week. 18 19 meeting. And I think thats all I had to report on from the I dont know whether Examiners counsel had any
20 further reports. 21 MR. MISSAL: Yes, Your Honor. Id just like to I found it very
22 underscore what was said about the meeting. 23 productive and helpful. 24 this point. 25
Everybody is cooperating very well at
We also met separately with counsel for the
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10 1 Creditors Committee to discuss their specific concerns, as 2 well. I think we had a good dialogue and I believe were off
3 to a good start. 4 5 6 7 MR. MERCHANT: THE COURT: MS. UHLAND: Very well. Thank you.
Thank you, Your Honor. (Pause) Your Honor, Mike Merchant again, for
8 the record. 9 10 items: 11 12 Agenda Items 1 through 6 have been continued. And on Agenda Items 7 through 12, CNOs were filed and If we could walk through the agenda on the other
13 I believe Your Honor has entered orders on all of those. 14 15 THE COURT: I have. Agenda Item Number 16 is the motion to This was before
MR. MERCHANT:
16 retain A.P. Services, LLC as crisis managers.
17 Your Honor at the last hearing at which we told you that we 18 were working on a consensual form of order. 19 get there, but weve gotten there. 20 We have an agreed form of order with the Office of And It took a while to
21 the United States Trustee that resolves their concerns.
22 perhaps the best thing for me to do would -- would hand up a 23 clean copy and a black line of the order and walk Your Honor 24 through the changes. 25 THE COURT: Very well.
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11 1 2 3 4 5 6 7 MR. MERCHANT: MR. MERCHANT: THE COURT: MR. MERCHANT: (Pause) Your Honor, there have been -(Pause) If I may have one moment, Your Honor.
All right. (Pause) Your Honor, there have been two The first amendment was
8 amendments to the engagement letter.
9 filed prior to the last hearing, and I think is included in the 10 hearing binder. 11 The second amendment to the engagement letter was It was just entered into this week, and I have a copy of it
12 just filed yesterday.
13 I dont know whether Your Honors seen it. 14 with me, if I may approach. 15 16 17 18 THE COURT:
Notice of second amendment? Yes.
MR. MERCHANT:
THE COURT: I have that. MR. MERCHANT: Okay. I dont know if Your Honors But sort of the concept set
19 had an opportunity to review it.
20 forth in that second amendment are incorporated into the form 21 of order, and the United States Trustee wanted me to just point 22 that out to Your Honor. 23 THE COURT: All right. Why dont you -- before we go
24 through the order, why dont you give me a current report on 25 the status of debtors management?
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12 1 2 3 MR. MERCHANT: THE COURT: MS. UHLAND: Ms. Uhland can provide it.
Thank you. Thank you, Your Honor. The debtors are,
4 prior to these turnover -- the current turnover, was managed 5 largely by their CEO, Brad Morrice, as well as their CFO, Taj 6 Bindra. 7 And then in addition theres what they call an
8 Executive Management Committee, which includes the general 9 counsel, Joseph Eckroth, the Chief Operating Officer, and those 10 that I would say would be the four primary officers on the EMC, 11 which also included the -- the head of Human Resources, Robert 12 Lambert and the head of Loan Production, Anthony Meola, who 13 this Court has -- has seen in court, as well as the head of 14 Capital Markets, Kevin Cloyd. As head of Capital Markets, that
15 really his role also included head of Servicing -- or does 16 include head of Servicing. 17 So, what has happened is the CFO, Mr. Bindra, whos a His services have been replaced
18 public company CFO, resigned.
19 by Michael Tinsley of AlixPartners, given that the role of CFO 20 is largely a bankruptcy reporting function at this point. 21 company felt that it was more appropriate to bring in a 22 restructuring person simply and -- and since Michael Tinsley 23 had been the controller. 24 The head of Loan Production, Mr. Meola, really once The
25 the -- the platform sale did not go forward, his usefulness to
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13 1 the company and the efforts, it was not longer apparent, and 2 didnt really have much function at the company. So, weve
3 been trying to, as the company has been shrinking, trying to 4 identify the more expensive officers and relieving them of 5 their duties. 6 So, Mr. Meola and Mr. Morrice, whos the CEO, were
7 both terminated on last Friday. 8 Holly Etlin, who had been appointed recently as CRO
9 was also appointed CEO. 10 What we expect going forward is that the core
11 leadership will be Holly running as the CEO, serving really as 12 a CRO to finish the asset sales and take the company through 13 the Chapter 11, supported by Michael Tinsley as her CFO. 14 The core -- Ill call core business competencies that
15 are remaining are the former general -- the current general 16 counsel, Terry Theologides is still with the company, and still 17 in management. We expect him to be sort of -- through our next
18 phase of getting through this transition, hes going to be 19 taking on a leadership role with that. 20 And Kevin Cloyd, whos the head of Capital Markets,
21 whos been helpful in the servicing sale and the person who is 22 sort of leading the sales of the LNF -- the LNFA sales and 23 these remaining asset sales is also sort of the industry expert 24 who is sort of staying on in senior management to guide us 25 through this next phase.
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14 1 And then our head of H.R. -- and our H.R. Department
2 is still pretty complete because of the continuing employee 3 issues that were seeing there. 4 And, as well, our COO is remaining, certainly through But, again, as a large
5 the sale of some of this technology.
6 high level CF -- COO, you know, its -- I expect at some point 7 this summer, hell also be transitioning. And well be really
8 staying with, like I said, these -- the two -- the general 9 counsel and head of Capital Markets as our core industry 10 specialists. 11 12 THE COURT: Thank you. With that, Your Honor, I can walk Your
MR. MERCHANT:
13 Honor through the changes in the form of order, the material 14 changes. 15 16 THE COURT: All right. If Your Honor will look to the recital
MR. MERCHANT:
17 paragraph, there is references to the two amendments to the 18 engagement letter. 19 the Court. 20 Paragraph 3 makes clear that the success fee is not Thats being put off for a later Like I said, both of them were filed with
21 being approved by this order.
22 day and all rights of the Committee and the U.S. Trustee to 23 object to the nature and amount of any success fee are fully 24 reserved. 25 In Paragraph 4, APS has agreed to waive the break
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15 1 fee, which is contemplated under Paragraph 4 of Schedule 1 to 2 their engagement letter. 3 Paragraph 5 relates to the indemnification of APS That makes clear that they
4 employees serving in officer roles.
5 shall not provide -- the debtor shall not provide 6 indemnification to employees not serving in officer roles. 7 And Paragraph 7 makes clear that the retainer It will be
8 provided to APS is not a replenishing retainer. 9 drawn down as the case moves on. 10
Paragraph 8 makes clear that personnel serving in
11 officer capacity are subject to the same fiduciary duties and 12 obligations as are applicable to other persons serving in such 13 capacity as corporate officers under applicable law. 14 And Paragraph 9 contain a number of other provisions
15 that were lifted directly from the JayAlix protocol. 16 I think that summarizes all the changes to your -- to The U.S. Trustee is standing, he may
17 the order, Your Honor. 18 have further comment. 19 20 THE COURT:
Mr. McMahon? Your Honor, good morning. Were
MR. McMAHON:
21 satisfied with the form of order.
And just to underscore one
22 point in that last section regarding the JayAlix protocol. 23 Consistent with the protocol, neither Ms. Etlin nor any other 24 A.P. Services personnel will be assuming a position on the 25 debtors Board of Directors. Thats to maintain a clear
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16 1 division between the people who would serve as the function and 2 the officers who are operating the company. 3 THE COURT: Very well. Thank you. Does anyone else
4 care to be heard in connection with this motion or the proposed 5 form of order as its been modified? 6 7 8 9 10 THE COURT: (No audible response heard) THE COURT: I hear no response. (Pause) The orders been signed. Thank you, Your Honor. Your Honor,
MR. MERCHANT:
11 Agenda Item 17 is the application to retain Sheppard Mullin 12 Richter and Hampton, LLP. 13 There were concerns raised to that application by the Weve been able to resolve
14 U.S. Trustee and the Committee.
15 those concerns through a consensual form of order. 16 Sheppard Mullin will serve as special counsel and
17 litigation counsel to the debtors, which will include defense 18 in the Rubio litigation, which Your Honor will hear a little 19 bit more about today; counsel with respect to the sale of non20 debtor New Century Warehouses assets, which Your Honor has 21 already previously approved. And theyll also provide limited
22 services incident to corporate matters on which they were 23 working on prior to the petition date. 24 25 order. Like I said, Your Honor, there is a revised form of If I may approach, I can walk Your Honor through the
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17 1 changes. 2 THE COURT: Ill tell you what. Before you do that,
3 Id rather address this in the big picture. 4 5 6 7 MR. MERCHANT: THE COURT: Sure.
The Committee filed an omnibus objection. Yes.
MR. MERCHANT: THE COURT:
Obviously in a concern which is shared by
8 the Court, that the case not be suffocated by the weight of its 9 professional. And that is not a criticism of any professional,
10 and Im aware of the -- you know, the breadth of the companys 11 operations and the need for certain specialized assistance. 12 But give me the big picture on how this was resolved
13 with the various -14 15 MR. MERCHANT: THE COURT: Sure. And then -And if
-- proposed professionals.
16 and then we can deal with them on an individual basis.
17 the Committee also wants to respond to that, I would appreciate 18 it. 19 MR. MERCHANT: Sure. Your Honor, we heard the And I think
20 Committees concerns, and its a valid concern. 21 weve -- weve addressed that in two ways: 22
Weve worked with the Office of the United States
23 Trustee and weve worked with the Committee to be very specific 24 in these orders as to the discreet matters that these 25 professionals will be working on.
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18 1 In addition to that, we had a number of calls with And as a result of those calls, in-house
2 the Committee.
3 counsel to New Century prepared a description of what each 4 professional is working on and a range of their anticipated 5 fees and costs with respect to the work that they will be 6 doing. 7 Based on that sort of fee forecast that we provided
8 to the Committee, they came back to us with proposed caps, 9 either monthly or case caps, or going forward caps with respect 10 to the work that those professionals will be working on based 11 on where the Committee views things as going. We took those
12 caps to the professionals, and I think most of the orders that 13 youre going to see have caps. 14 So, now the Committee, you know, can rest assured
15 that absent us coming back to the Court, you know, the fees or 16 expenses for a certain professional will not exceed the capped 17 amount on a monthly or a case basis. 18 resolved most of the concerns. 19 20 heard? 21 MR. INDELICATO: Good morning, Your Honor. Mark THE COURT: All right. Does the Committee wish to be And thats how weve
22 Indelicato from Hahn and Hessen on behalf of the Committee. 23 Your Honor, let -- let me just take you back a step The
24 and so youll understand where the Committee came from.
25 Court asked before for an update on the management of the
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19 1 debtor, and Ms. Uhland gave you a synopsis of where we are 2 today. 3 But what we didnt go through was the role that the The Committee is very concerned,
4 Committee has been playing.
5 and youre going to hear that deemed throughout, with the costs 6 in the case and the costs associated with the professionals and 7 with the operations and with the debtors management. And so
8 weve been working with the debtor and Ms. Uhland and Ms. Etlin 9 to work down a wind down scenario and budget and procedure so 10 that we can control the cost. 11 When we -- when we looked at all of the
12 professionals that were being retained, the Committee had a 13 number of issues: 14 One is we have very reputable firms in -- in -- in
15 Ms. Uhlands and in RLF, why cant they do a lot of these 16 things? And in that regard, we asked the debtors in-house
17 counsel to provide us an analysis of what was being done, why 18 it needed to be done by this particular firm, and what the 19 costs would be. 20 And to the extent there was a firm that was doing --
21 winding down its operations, limiting its fees going forward, 22 or was related to an asset that was going to be recovered, the 23 Committee focused on that. 24 You -- theres going to be two items, Irell and
25 Manella and ICP, which the Committee hasnt yet really gotten
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20 1 their hands around and become comfortable with the fees being 2 charged. 3 So, were going to adjourn those and well get to
4 that and sort of maybe take those in steps and pieces and see 5 if we can resolve the Committees concerns. 6 be back to the Court. 7 So, what we did is to the extent there was a finite And if not, well
8 function, that they were providing either for the servicing of 9 the servicing platform or the sale of the assets, we defined 10 those -- the parameters, we asked them what they were going to 11 be going forward, and we put a monthly cap and an overall cap 12 on the fees. So, that to the extent youre going to see -- and
13 there are a lot of firms being retained, but we felt with the 14 institutional knowledge that they had, and the caps that we put 15 in place, at least we felt, although we werent thrilled with 16 the number of firms and the potential for the duplication of 17 efforts, we felt that we would put a harness around that with 18 the fee caps on a monthly basis and an overall cap. 19 So, that was the Committees way of saying, okay, we
20 hear what the debtor is saying, we understand these -- these 21 firms have institutional knowledge, but were just not going to 22 open the checkbook and let it, you know, every firm that wants 23 to get retained in this case be retained without some collars. 24 So, -- and well go through them more specifically as we go 25 through the individuals, but that was the parameters under
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21 1 which the Committees approached its objection and approached 2 the resolution. 3 4 5 THE COURT: Thank you. Youre welcome.
MR. INDELICATO: THE COURT:
Anyone else care to be heard
6 preliminarily? 7 8 9 (No audible response heard) THE COURT: All right. Lets proceed.
MR. MERCHANT:
And Mr. Indelicato is correct, we --
10 you know, were only going forward today with respect to the 11 professionals where we were able to get them comfortable, and 12 we have an agreed form of order. Wherever theres an
13 outstanding issue, were going to continue that to a later 14 hearing and continue to work with them. 15 So, if I may approach, Your Honor, I have a clean and
16 a black line of the Sheppard Mullin order. 17 THE COURT: Ill tell you what, can you give me --
18 give them all -- all to me together? 19 20 MR. MERCHANT: THE COURT: Absolutely.
Not that I want to deprive you of any
21 exercise, but maybe its more efficient that way. 22 MR. MERCHANT: I have separate folders for each
23 professional. 24 line. 25
Each contains a clean, each contains a black
THE COURT:
All right.
Thank you.
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22 1 MR. MERCHANT: If Your Honor looks at the black line
2 of the Sheppard Mullin order, the second so ordered paragraph 3 specifically defines the discreet matters that Sheppard Mullin 4 will be working on. 5 It also includes a monthly fee cap of twenty-five
6 hundred dollars for corporate matters on which they were 7 working on prior to the petition date. 8 The fourth so ordered paragraph, Your Honor, contains
9 a -- well, provides that the aggregate amount of fees from June 10 1st, 2007 going forward shall not exceed $35,000. And thats
11 not inclusive of the twenty-five hundred dollar monthly cap on 12 the corporate matters. 13 Your Honor, Ill also point out that Sheppard Mullin
14 filed a supplemental affidavit of Mette Kurth addressing 15 certain conflicts and disclosure issues raised by the Office of 16 the United States Trustee. 17 That was filed late yesterday, Your Honor. I do have
18 a copy, if Your Honor would like to view it. 19 THE COURT: No, that wont be necessary. All right.
20 Anyone else care to be heard in connection with this 21 application? 22 MR. INDELICATO: Your Honor, Mark Indelicato from
23 Hahn and Hessen again. 24 And I just -- I think -- Ill say this once, and I But the Committee
25 dont think we need to say it for each one.
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23 1 has agreed to monthly caps and fee caps. Obviously thats We have
2 subject to the Committees review for reasonableness.
3 put all of the professionals on warning that we want to make 4 sure theres no duplication of effort. 5 To the extent there are discreet matters that they But -- but we are
6 need to handle, they will be paid for it.
7 going to look at these fee applications very carefully. 8 THE COURT: Yeah, and I -- Im still reviewing the
9 second set of recommendations for fee auditor in this case. 10 And I, hopefully within the next week, will have one appointed. 11 And I will ask the fee auditor to give particular You know, not
12 attention to possible duplication of services.
13 just limited to when the lawyers are talking to each other, but 14 to anything else that might fall into that category. 15 16 17 18 19 THE COURT: MR. INDELICATO: THE COURT: Thank you, Your Honor.
All right. (Pause) That order has been signed. Thank you, Your Honor. The next
MR. MERCHANT:
20 application, Agenda Item 18, is the application to retain 21 Manatt, Phelps and Phillips, LLP as special securitization 22 counsel to the debtors. 23 Their work includes reviewing and analyzing the
24 agreements under which mortgage loan servicing is performed for 25 loans owned by Securitization Trust and other third persons,
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24 1 and interfacing with bankruptcy counsel regarding the 2 aforementioned contracts and industry practice relating to such 3 contracts, and providing advice and services relating to the 4 sale of such assets in connection with these Chapter 11 cases. 5 Again, weve revised the order to address concerns
6 raised by Office of the United States Trustee and the 7 Committee. 8 THE COURT: Does anyone else care to be heard in
9 connection with this application? 10 11 12 13 14 THE COURT: (No audible response heard) THE COURT: I hear no response. (Pause) That order has been signed. Thank you, Your Honor. Agenda Item Your
MR. MERCHANT:
15 Number 19 is the application to retain ICP Consulting.
16 Honor, we have continued this to the omnibus hearing scheduled 17 for June 27th at 10 A.M. 18 Agenda Item 20 is the Committees application to Your Honor, that was mistakenly put on
19 retain Hahn and Hessen. 20 the agenda.
I believe it was approved at the last hearing.
21 So, weve strucken it from the amended agenda. 22 23 THE COURT: All right. Agenda Item 21 is the stay relief I dont believe there have been
MR. MERCHANT:
24 motion filed by Midfirst Bank.
25 any objections filed to that, but I can cede the podium to
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25 1 Midfirst Banks counsel. 2 3 4 THE COURT: THE COURT: All right. (Pause) Apparently not. I didnt see a form of Did I just miss
5 order in the papers. 6 it? 7
Is there one somewhere?
MR. MERCHANT:
I honestly dont recall, Your Honor.
8 Its not our motion, but I dont think our client has a problem 9 with the relief requested in the motion. 10 THE COURT: All right. Well, will you follow-up with
11 movants counsel then? 12 13 14 MR. MERCHANT: THE COURT: I will.
All right. I will. Agenda Item 22 is the Your Honor, this is
MR. MERCHANT:
15 application to retain Irell and Manella.
16 another application where were still working with the 17 Committee. 18 Wed like to continue this to a further date. Irell and Manella has -- has asked -- theyve
19 inquired as to whether theres a possibility of the application 20 being continued to the June 21st hearing. 21 omnibus date. Its a special hearing. Thats not an
I think theres one
22 motion on for that hearing at this point. 23 24 25 THE COURT: Thats fine. Thank you, Your Honor.
MR. REISNER: MR. POWER:
Your Honor, Mark Power from Hahn and
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26 1 Hessen. 2 That motions going to move to the 27th. So, this
3 would be the only thing on for the 21st.
And respectfully, you
4 know, wed prefer if it could move to the 27th because -5 6 on. 7 8 9 MR. POWER: THE COURT: MR. POWER: Were -But thats going to be moved? Im going to tell you a little bit, were THE COURT: I thought that other matters was still
10 going to move that to the 27th. 11 THE COURT: Okay. Then, yes, lets move this matter
12 to the 27th, as well. 13 MR. POWER: Maybe counsel could appear by phone if
14 thats necessary. 15 16 THE COURT: Yes, thats fine with me. Your Honor, this is Jeffrey Reisner of
MR. REISNER:
17 Irell and Manella. 18 19 THE COURT: Yes. We appreciate the Courts calendar and
MR. REISNER:
20 related issues. 21 We also should report to the Court that we have an
22 agreement with the Committee that in the event that our 23 applications ultimately disapproved by the Court, that we will 24 be -- that we will be entitled to fees subject to 25 reasonableness, of course, through the date that the Court
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27 1 makes that decision. 2 The reason thats very important is Irell continues
3 to actively assist the debtor with respect to defense of the 4 WARN Act litigation and with respect to certain employee 5 benefit matters. That assistance is needed now. Its been on
6 -- its been ongoing.
And its the only way to really prevent
7 further prejudice potentially to Irell. 8 MR. INDELICATO: Your Honor, this is Mark Indelicato
9 from Hahn Hessen again. 10 They are correct. We had a discussion last night.
11 When we were unable to come to a resolution on the overall 12 retention application, what I did commit to them is to the 13 extent theyve incurred fees that are reasonable and necessary 14 and to protect the estate, particularly even for the adjourned 15 hearing, that to the extent ultimately the application is not 16 allowed, subject to the reasonableness, we would not oppose the 17 payment of their fees just because their ultimate application 18 was not approved. 19 We do have some concerns, again, and this is one. Were going to try
20 And weve addressed our concerns with them.
21 and theyre going to provide us with information to give us 22 budgets on a piecemeal basis for each stage of the litigation 23 so that we understand what the cost is going to be going 24 forward. 25 And we understand, and we think the Court
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28 1 understands, that although there is a WARN Act litigation out 2 there, as WARN Acts are treated outside of bankruptcy, they are 3 treated much differently in bankruptcy, and we just want to 4 make sure that to the extent there is any liability, were not 5 sure there is any, we use the estate funds to settle it as 6 opposed to litigate it and conserve estate assets. 7 So, thats really what were focusing on with this.
8 We had told them, subject to the Courts calendar, we would try 9 and get it on next week because of their issue. But we will
10 still commit to them that we will work next week to try and get 11 it resolved. And if we come to a resolution, either we will
12 come back on the 27th and maybe submit it under certification 13 of counsel, whichever the parties agree. But we have agreed
14 that their fees will be paid to the extent its reasonable, and 15 we will work to come to some resolution on some discreet 16 budgets on the phases of the litigation. 17 18 THE COURT: Thank you. Your Honor, good morning. Joseph
MR. McMAHON:
19 McMahon for the United States Trustee. 20 We are not taking the position with respect to Irell That is whether or
21 and Manellas qualification to be employed.
22 not they hold an interest adverse and consistent with Section 23 327(e). But the only, I guess, qualified objection that I
24 would have to the Committees proposal is that in the event 25 that this Court were to find that there was a problem in that
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29 1 regard, then I think that the -- I guess paying the -- Irell 2 and Manella for that stub period would become an issue. 3 I dont, you know, I guess, come to the podium to
4 create an issue, but just merely to identify our concern with 5 respect to the proposed resolution in that regard. 6 THE COURT: All right. Well, the Court need make no
7 ruling on that today. 8 All right. 9 10 11 12 excused? 13 14 15 THE COURT: MR. REISNER: MR. McMAHON: MR. REISNER:
And so Ill leave that to a later day.
Your Honor -Thank you. -- this is Jeffrey Reisner. May I be
You may. Thank you. Your Honor, Agenda Item Number 23 is
MR. REISNER: MR. MERCHANT:
16 the application to retain Skadden Arps Slate Meagher and Flom, 17 LLP as special regulatory counsel. 18 Again, Your Honor, weve reached agreement and a There are basically two changes to
19 consensual form of order. 20 the form of order: 21
The effective date of -- the retention has been
22 revised to April 16th, 2007 as opposed to the petition date. 23 And Skadden has agreed to an aggregate case cap of
24 $230,000 with the understanding that the cap will be revised if 25 litigation in connection with the regulatory action in the
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30 1 State of Ohio is to heat up. 2 MR. INDELICATO: The only point being, Your Honor, is
3 if its revised, its going to be revised subject to Court 4 order, and all parties reserve their rights to then reexamine 5 the issue. 6 THE COURT: All right. I do have a question or two
7 about this one.
And that is in light of the other
8 representations that the firm has in connection or related to 9 the bankruptcy, Id like specifically to know what, if any, 10 other ongoing representations in connection with the bankruptcy 11 Skadden intends to maintain, other than the representation of 12 the debtor? 13 MR. INDELICATO: Your Honor, Ill let Skadden answer
14 that question.
But I will tell the Court that this was an And in
15 issue that was of particular concern to the Committee.
16 the interest of full disclosure, one of the members of the 17 Committee is represented by Skadden. They were not involved in
18 the discussions, they did recuse themselves. 19 We have asked the question of whether appropriate And weve been assured
20 ethical walls have been established.
21 that since the inception of the case and the inception of the 22 representations of the various parties, appropriate ethical 23 walls have been established. 24 We also spoke to the debtor about the need for We have been assured by
25 Skadden with respect to this item.
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31 1 debtors in-house counsel that on these issues, not only has 2 Skadden been involved for some period of time, it has enormous 3 institutional knowledge, but that also they are the premier 4 experts on this issue in this area. 5 And that given the constraints of the budgets that
6 weve put in place, the debtors representations, Skaddens 7 representations regarding the ethical walls, the Committee felt 8 is was the best use of the estates funds to sort of let them 9 be retained to finalize what theyre doing. And then if
10 anything else comes up, we reserve the right to sort of 11 reexamine that. 12 13 THE COURT: MR. DAVIS: Very well. Good morning, Your Honor. Eric Davis
14 from Skadden Arps Slate Meagher and Flom LLP. 15 At this point, let me just explain the ethical walls
16 that weve created, Your Honor, and then with -- to your 17 pointed question, Mr. Baker represents McGuire, which is on the 18 Committee. And Mr. Durrer, whos been before this Court
19 before, represents Ellington. 20 There is -- there was another purchaser that was
21 interested at one point, but I do not believe thats ongoing. 22 That was D.E. Shaw. And the other representation in there that
23 was related to the case involved a former director of the -24 the company. 25 Century. But that is, again, not in connection with New
Its in connection with his involvement with some
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32 1 Federal matters, and not -- not with respect to New Century. 2 Its not a representation of New Century or against New 3 Century. 4 We actually began the process back in March, Your
5 Honor, when we took on representations that would be related to 6 the New Century matter. We created ethical walls within the
7 firm, specifically setting up teams that were divested from 8 each other. 9 The point about the Skadden representation in New There
10 Century is only related to State Regulatory matters. 11 were I think, 12 matters in the beginning.
Its a very small
12 team out of -- out of D.C., and they have no involvement in the 13 bankruptcy case. Im the only actual bankruptcy attorney
14 involved on the New Century side, and thats just for retention 15 purposes. 16 Otherwise, there are no bankruptcy attorneys at
17 Skadden involved in the case and were not providing any type 18 of advice with respect to the bankruptcy case. Its all just
19 with respect to State Regulatory matters at this point. 20 THE COURT: Well, are there -- for example, are there And whether -- in
21 any ongoing sale related representations?
22 the pipeline or which have been approved or which have closed, 23 but which might require further or might give rise to further 24 regulatory issues? See, one concern I have is you might be on
25 both sides of that fence.
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33 1 MR. DAVIS: We havent been on both sides of that The Ellington representation
2 mess at all.
I dont believe so.
3 is the only one thats actually before this Court with respect 4 to assets at this time. 5 I saw that -- again, I stayed so far apart from that
6 process that I just read in the DDR that theres going to be a 7 further sale of assets to Ellington of about four -- a little 8 over $4 million. But theres no involvement at all -- no due
9 diligence or anything from the Skadden Arps team that handled 10 regulatory matters for New Century. 11 debtors to provide information. 12 What they do is they interact with the State Theyre not asked by the
13 Regulatory agencies with respect to the origination business, 14 and theyre not involved in the asset process at all in that 15 end. 16 17 THE COURT: MR. DAVIS: All right. So, theres no both sides of the issue,
18 Your Honor, on that. 19 THE COURT: All right. Or in connection with any
20 other matter. 21 22 23 MR. DAVIS: THE COURT: MR. POWER: Not that Im aware of. All right. Your Honor, its Mark Power from Hahn and
24 Hessen, counsel for the Committee. 25 I should mention, Skadden definitely is involved I --
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34 1 with buyers and potential buyers of asset sales that are 2 currently before the Court, and that will be going forward. I
3 am not aware of any regulatory matters in connection with those 4 asset sales that they would then be representing the debtor on 5 the other side. 6 I should also report that the sale that Ellington did Previously taken
7 prevail on which was the 170 million LNFAs.
8 out of that sale were the Ohio based loans that were not 9 purchased by Ellington. And Skadden, on behalf of the debtor,
10 is assisting the debtor in the regulatory matters in Ohio. 11 So, I believe that issue, which clearly would have
12 been a conflict, I think, from the Committees point of view, 13 and probably from the Courts, has been separated because 14 Ellington basically carved that out of what they acquired. 15 theyre not on both sides of that transaction. So,
And thats the
16 only one that Im aware of, which would have that kind of 17 problem. 18 19 THE COURT: MR. DAVIS: All right. And just to be totally clear, were not
20 going to be on both sides of any transaction with respect to 21 regulatory matters, Your Honor. 22 The -- the lawyers involved out of D.C. are not They are regulatory
23 involved in M and A transactions.
24 attorneys handling State Regulatory matters with respect to 25 doing business in particular jurisdictions. Theyre not
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35 1 involved in drafting A.P.s or anything along that line. 2 3 McMahon? 4 MR. McMAHON: Your Honor, we had a -- a discussion THE COURT: All right. Thank you, Mr. Davis. Mr.
5 with Skadden regarding the very issue that you -- the Court 6 identified with respect to the conflict concern. 7 And after speaking with Skadden, reviewing the
8 application, and considering, I guess, the -- what the 9 possibilities would be if we were to raise that issue 10 specifically with the Court, we did arrive at a -- some -- a 11 resolution, in part, with Skadden reflected in the start date 12 for the employment. There are economic consequences to that.
13 And I just wanted to note that for the Court. 14 THE COURT: All right. Thank you. Does anyone else
15 care to be heard in connection with this application? 16 MS. UHLAND: Your Honor, just briefly. Skadden
17 reflected that they were involved in the regulatory matters for 18 the loan origination platform. But because theyre also, in
19 effect, involved in all of the regulatory matters, in effect, 20 for the servicing licenses, and as the Court knows, we are -21 we are planning to have a transition services arrangement with 22 Carrington, so the maintenance of these -- this ability to 23 service our loans is critical, and thats one of the reasons 24 the debtors and the Creditors Committee are so -- feel its so 25 important that we continue this retention.
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36 1 2 3 THE COURT: THE COURT: All right. Thank you.
(Pause) That answers my questions. The order has
4 been signed. 5 MR. MERCHANT: Thank you, Your Honor. The next
6 matter on the agenda is Agenda Item Number 24, its the 7 application to retain Howrey LLP, special outside counsel to 8 the Special Investigative Committee, Subcommittee of the Audit 9 Committee of the Board of Directors. 10 Again, weve revised the form of order to address
11 certain issues raised by the Office of the United States 12 Trustee and the Committee. 13 through those changes. 14 15 THE COURT: If you would. If Your Honor looks at the third soIm happy to walk Your Honor
MR. MERCHANT:
16 ordered paragraph, it makes clear that the compensation to be 17 paid to Howrey is subject to the applicable sections of the 18 Bankruptcy Code, the Bankruptcy Rules, the Local Rules, and any 19 administrative order of this Court. 20 The fourth so ordered paragraph, Your Honor, makes
21 clear that to the extent the debtors seek to retain either of 22 the professionals mentioned in Paragraph 3 of the retainer 23 agreement, and those are entities related to Howrey, the 24 debtors will file further applications with the Court. And I
25 dont think theres any anticipation that we will be seeking to
TRANSCRIPTS PLUS
37 1 retain those professionals. 2 If Your Honor looks at the fifth so ordered
3 paragraph, it makes clear that the debtors are not waiving any 4 future undisclosed connections Howrey may have with any 5 interested party. 6 The sixth so ordered paragraph makes clear that the
7 Court shall have jurisdiction over any issues relating to 8 Howreys employment or compensation. 9 And the seventh so ordered paragraph provides a
10 $25,000 aggregate cap for all fees incurred from June 1st, 2007 11 going forward. 12 THE COURT: Does anyone else care to be heard in
13 connection with this application? 14 MR. INDELICATO: Your Honor, both with respect to
15 Howrey and Hillarim (phonetic), and which well hear from 16 later, these are counsel that was retained by the debtors -- of 17 the Board of Directors Audit Committee to conduct a special 18 investigation. Howrey was conducted for a very specific person
19 -- to investigate a very specific issue and individual. 20 The Committee agreed to the increase in cap, the But the reason they agreed it is
21 $25,000, reluctantly.
22 apparently weve been informed that they havent made their 23 presentations yet, and theyre going to make their 24 presentations to the Board and to the Committee and to the 25 Examiner, and thats why weve agreed to it.
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38 1 But with respect to both of them, and weve made this
2 point to the debtor, and wed like to make it to the Court is 3 that our view is that the Audit Committee has done their job. 4 They are needed to transfer the information to the Examiner. 5 To the extent the Audit Committee believes there is any 6 additional investigations going forward, the Committee would 7 object to that unless we had consented to it, and maybe the 8 Examiner is required to consent, as well, and bring it to this 9 Court. 10 So, we have agreed to it, and weve dealt with that But thats really our concern with
11 in the orders in the caps.
12 those -- those entities going forward. 13 14 THE COURT: MS. UHLAND: Thank you. And just to confirm, Your Honor, from
15 the debtors point of view, we completely agree with the 16 Committee. 17 Our view is that the Audit and the -- the Special
18 Investigation Committee and this additional Subcommittee should 19 report to the Committee at this point exactly where they are, 20 what their work product is, and if the Committee and the 21 Examiner collectively feel that in the cost benefit -- on a 22 cost benefit basis it makes more sense for them to complete 23 something, and they all agree on that, then thats appropriate. 24 And otherwise, the goal is to, in effect, transition -25 transition this to the Committee and the examiner.
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39 1 2 3 4 THE COURT: THE COURT: All right. Thank you.
(Pause) The orders been signed. Tank you, Your Honor. I believe the
MR. MERCHANT:
5 last retention application today is the application to retain 6 Grant Thornton, LLP as tax accountant for the debtors. 7 The Office of the United States Trustee did file a The issues raised by the
8 formal objection to the application.
9 Office of the United States Trustee have been revised to -- a 10 revised -- have been addressed through a revised form of order 11 and the filing of a supplemental affidavit. 12 13 of order. 14 15 THE COURT: Yes, please. Most of the changes are in Paragraph 3 I can walk Your Honor through the changes to the form
MR. MERCHANT:
16 to the order, Your Honor. 17 With respect to the tax compliance services,
18 Paragraph 2 of the Attachment A in their engagement letter will 19 be deleted in its entirety. And that relates to
20 indemnification and limitation of liability provisions. 21 With respect to tax consulting services, Paragraphs
22 2A and 2C of Attachment A will be deleted in their entirety. 23 And Paragraph 2B will be modified by the language
24 contained in the order, which basically subjects those 25 provisions to the Planet Hollywood language.
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40 1 In addition to those changes to your order -- to the
2 order, Your Honor, weve also filed a supplemental affidavit of 3 Donald Dahl, which attaches a payment run for the 90 days 4 preceding the petition date, and sets forth the agreement of 5 Grant Thornton to pay back $6,770 relating to an invoice that 6 the United States Trustee believes is arguably preferential. 7 The affidavit also contains the agreement of Mr. Dahl
8 to waive any claim relating to that repaid amount. 9 10 THE COURT: All right. And I believe that addresses all of
MR. MERCHANT:
11 the U.S. Trustees concerns, Your Honor. 12 THE COURT: Does anyone else care to be heard in
13 connection with this application? 14 15 (No audible response heard) THE COURT: I hear no response. Ive reviewed it.
16 And based upon the changes that have been made, have no 17 questions. 18 19 MR. MERCHANT: THE COURT: Thank you, Your Honor.
Other than I dont know why I keep seeing
20 applications that parties know Im not going to approve over 21 the objection of the U.S. Trustee that have these provisions in 22 them. 23 MR. MERCHANT: I understand, Your Honor. A number of
24 those engagement letters were entered into pre-petition before 25 we had an opportunity to voice our opinions. So --
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41 1 2 THE COURT: All right. We knew there were issues, and we
MR. MERCHANT:
3 worked with the U.S. Trustee on them. 4 5 THE COURT: Thank you. Agenda Item Number 26, Your Honor, is Weve continued that
MR. MERCHANT:
6 the motion of GECC for relief from stay. 7 to the June 27th hearing. 8 9 THE COURT: All right.
MR. MERCHANT:
And Agenda Item Number 27 is the And
10 motion of Daniel J. Rubio and others for relief from stay.
11 I believe there may be some form of agreement on a continuance 12 there, but I will cede the podium to my colleague, Mr. 13 Silberglied, and the movant, to address those issues. 14 15 THE COURT: Very well. Good morning, Your Honor. Karen
MS. BIFFERATO:
16 Bifferato on behalf of the Rubio plaintiffs.
I wanted to
17 introduce my co-counsel, Jim Trush from the Trush Law Firm. 18 Hes previously in this case been admitted pro hac vice. 19 20 THE COURT: MR. TRUSH: Welcome. Good morning, Your Honor. James Trush of
21 the Trush Law Office, counsel in the Rubio action in the 22 Central District of California, and appearing here pro hac 23 vice, along with co-counsel, Karen Bifferato. 24 MR. SILBERGLIED: Your Honor, for the record, Russ
25 Silberglied, Richards Layton and finger.
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42 1 We -- I hate to do this after Your Honor has prepared Um -- uh -- while the hearing had already
2 for the hearing.
3 started this morning, we were made a settlement proposal -4 settlement, not on the case itself, but on the stay relief 5 motion. 6 I have no authority whatsoever to accept that stay Its not even business hours in California yet.
7 relief motion.
8 I havent talked to the Creditors Committee about the 9 proposal. 10 I dont know whether its something that we will
11 entertain or not, but at the minimum, it makes sense to 12 continue the hearing so we could consider this and talk to our 13 client and talk to the Creditors Committee about it. 14 We dont like to do that anymore because I actually
15 have a witness here who was ready to go and came in from 16 California, but with Your Honors permission, we would put this 17 over to the hearing on the 27th. 18 THE COURT: All right. Does anyone else care to be
19 heard on this request? 20 21 (No audible response heard) MR. SILBERGLIED: The stay will stay in effect
22 pursuant to this agreement until weve considered this, talked 23 to the Creditors Committee, and come back to the Court either 24 way. 25 MR. TRUSH: Your Honor, James Trush for the movants.
TRANSCRIPTS PLUS
43 1 We had a couple details of the continuance proposal that may be 2 appropriate for putting on the record. We had proposed that
3 Mr. Silberglieds witness provide us with a proffered testimony 4 so that if we could potentially stipulate to that and the 5 witness wouldnt have to come back next time. 6 And the other proposal was I think we agreed that
7 there werent going to be any further response or opposition 8 filed by the debtor in advance of the next time that this 9 matters heard if its not settled prior to that. 10 that was our agreement. 11 MR. SILBERGLIED: Well, I certainly agree to the I believe
12 latter, and its in compliance with the Local Rules, which 13 dont permit me to file a surreply. 14 doing so. 15 With respect to the former in providing him with So, we had no intention of
16 proposed proffered testimony, I think I said Id consider it. 17 Im not sure I agreed to it. 18 19 THE COURT: Well, sounds like you did -Certainly if we can stipulate the
MR. SILBERGLIED:
20 facts, we would like to do so. 21 22 THE COURT: Sounds like you didnt agree to it yet. Yes. We would certainly like to But how much were
MR. SILBERGLIED:
23 agree to stipulate to facts, if possible.
24 going to do so, I -- we have not yet determined. 25 THE COURT: Yeah. And Id prefer not to get into
TRANSCRIPTS PLUS
44 1 evidentiary presentations now, especially if he who is offering 2 the witness isnt inclined to do so. 3 4 5 6 All right. Thank you. Thank you, Your Honor.
MR. SILBERGLIED: THE COURT:
Put it over to the 27th. Your Honor, Agenda Number 28 is the
MR. MERCHANT:
7 omnibus relief from stay motion filed by the law office of 8 David J. Stern, P.A. 9 omnibus hearing. 10 I -- I believe movants counsel is on the phone. But This matter was continued from the last
11 I can report that they provided us with information in advance 12 of the last hearing. 13 client. We took that information back to our
My client has informed me that we have no objection
14 to the requested stay relief with respect to any of the 206 15 loans. 16 So, we would be fine with movant submitting a form of
17 order under certification of counsel. 18 19 THE COURT: All right. Frederic Dispigna, Your Honor, on
MR. DISPIGNA:
20 behalf of the movant. 21 22 23 24 THE COURT: Yes, do you wish to be heard? No, thats fine.
MR. DISPIGNA: THE COURT:
All right. Ill -- Ill have a -- a proposed
MR. DISPIGNA:
25 order by, uh, Mr. Merchant.
TRANSCRIPTS PLUS
45 1 2 3 4 5 6 THE COURT: Very well. Thank you. May I be excused?
MR. DISPIGNA: THE COURT:
Thank you.
Yes. Your Honor, that -That -- Im sorry. Thats all right. Your
MR. INDELICATO: THE COURT:
Oops.
MR. INDELICATO:
Too quick.
7 Honor, the only thing the Committee would request if the debtor 8 has done an analysis, if they would just share that with the 9 Committee so that we are comfortable that they have no interest 10 in any of the 260 (sic) loans, then we could, you know, consent 11 to the entry of the order. But we havent seen their analysis,
12 so wed like to see that before we make a determination. 13 14 15 THE COURT: All right. Thank you.
MR. INDELICATO: MR. MERCHANT:
Your Honor, Agenda Item Number 29 is That was continued to the
16 the adequate protection motion. 17 hearing on the 21st.
But I believe Mr. Power has indicated
18 that thats going to be continued to the omnibus date scheduled 19 for the 27th. 20 MR. POWER: Good morning, Your Honor. Mark Power
21 from Hahn and Hessen. 22 Im shocked were going to be done today on Friday by But this matter, Your Honor, is a moving target.
23 11, I think.
24 We have been in -- the debtor and the Committee have worked 25 closely. But we did provide counsel for a number of the
TRANSCRIPTS PLUS
46 1 parties involved in this a draft order. They have given back -2 they have worked together actually and assisted us in giving 3 back collective comments on that order which were extensive and 4 we got that back a few days ago. 5 Given the amount of parties involved and the amount
6 of issues involved, and the logistics of the parties, what 7 weve decided to do is the debtor and the Committee have 8 committed to provide these parties a response to that order on 9 Monday -- by Monday. 10 And the -- were trying to save the Court and all the
11 parties a tremendous amount of expense dealing with the tracing 12 issues that are involved in this matter, which can be 13 tremendous, by trying to work with the debtors to have can be 14 produced and whats feasible. And weve had some productive
15 conversations in that regard with debtors counsel and 16 Committees counsel and some of the people. 17 We would anticipate trying to work through a We decided -- originally we were But when
18 consensual order next week.
19 going to go to the 21st for this continued hearing.
20 we looked at the logistics, we decided it was more practical to 21 put this on for the 27th. 22 I have been in communication with all the counsel and
23 basically advised them of this and I am not aware of anybody 24 objecting to the adjournment to the 27th of this matter. 25 We will -- the debtor has agreed and the Committee
TRANSCRIPTS PLUS
47 1 has agreed to certain conditions as a part of that adjournment: 2 First, that this does not end up pushing off the In other words, we
3 reconciliation deadline of June 29.
4 originally advised your Court that we were going to try to -5 the debtor was going to try to get the reconciliations done, 6 and the Committee review it. 7 deadline. 8 Second, the Committee and the debtor have agreed that Were going to stick with that
9 when the for Carrington closes, funds will be escrowed from 10 that. And we will continue to agree to that, were not
11 changing our position. 12 So, when that sale, which is scheduled to close
13 before the end of June, those monies will be escrowed, if not 14 sooner. 15 Depending on what happens in the case. Third is weve committed to certain deadlines to try And I think were
16 to move this forward, and weve done that.
17 going to try to have a meeting next week in New York and then 18 hopefully resolve it. 19 The fourth item, Your Honor, is if the parties do
20 have a consensual order that everyone can agree to, and we can 21 submit a certification, we will try to do that by the end of 22 next week. And, therefore, not need a hearing before Your But were working towards that
23 Honor on the 27th, God willing. 24 goal. 25
I should give Your Honor forewarning, and this is a
TRANSCRIPTS PLUS
48 1 moving target. But the order basically provides for the escrow Provides for the production of And then in essence, the parties
2 and the adequate protection. 3 information to the parties.
4 have a period to come back and respond and try to work out 5 those issues so we dont litigate over, you know, thousands of 6 entries and back accounts. 7 And then the parties are supposed to have a stay
8 period in which they will try to meet, lay out the legal 9 positions of everybody and see if they can resolve the matter 10 consensually before we get into the next round, which would 11 either be litigation or some form of alternative dispute 12 resolution mechanism. 13 We havent agreed to that now. So, what weve agreed And then well
14 to is stay everything. 15 see where we go. 16
Everybody will freeze.
I should mention also, not to -- UBS is part of these They have a separate piece, but its related to
17 discussions. 18 this.
And they have been intimately involved in the whole So, it may be that we can fold all that in.
19 negotiation. 20
So, thats an update Ive -- I told counsel that I And thats why we were happy to tell
21 would provide the Court.
22 the Court we dont think well need the hearing for the 21st, 23 so Your Honor can mark that off the calendar, and well move it 24 to the 27th. 25 THE COURT: Very well. Thank you.
TRANSCRIPTS PLUS
49 1 MR. MERCHANT: Your Honor, I believe thats all we
2 have for today.
Agenda Item Number 30 has also been continued So, theres nothing further. Well, given how the 27th is
3 to the hearing on the 27th. 4 THE COURT:
All right.
5 shaping up, anybody have any notion of what kind of time you 6 will need on that day. I know that there are things which are
7 in process, which may affect the answer, but just as an initial 8 matter. 9 MS. UHLAND: Your Honor, I think were going to If the Rubio motion goes forward, I would say hour and a half. Theres a
10 require substantial time.
11 thats an evidentiary matter. 12
Weve moved the technology sale motion.
13 number of contracts to be signed there.
So, there could be --
14 I think its been taking us an hour and a half to two hours, 15 kind of on average on our record on that. And then this
16 adequate protection matter based on preference agreements is 17 another -18 19 20 a half. (Attorneys conferring off-the-record) MS. UHLAND: -- another transact -- another hour and
And then we have a further asset sale motion that we
21 sought on shortened time. 22 23 24 25 THE COURT: MS. UHLAND: THE COURT: MS. UHLAND: All right. So, were starting at ten, arent we? Yes, we are. Oh, good. Okay.
TRANSCRIPTS PLUS
50 1 2 3 4 5 6 hearing. 7 8 9 10 11 12 I, Karen Hartmann, certify that the foregoing is a C E R T I F I C A T I O N THE COURT: MS. UHLAND: THE COURT: And Ive scheduled nothing else. All right. All right. Thank you, Your Honor. Anything further for today?
(No audible response heard) THE COURT: Thank you, all. That concludes this
Court will stand in recess. (Proceedings Adjourn at 10:59 A.M.)
13 correct transcript to the best of my ability, from the 14 electronic sound recording of the proceedings in the above15 entitled matter. 16 17 /s/ Karen Hartmann Date: June 24, 2007
18 TRANSCRIPTS PLUS 19 20 21 22 23 24 25
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3 Transcripts From New Century Mortgage Bankruptcy Hearings From 2007 Includes Holly Etlin and Missal

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3 Transcripts From New Century Mortgage Bankruptcy Hearings From 2007 Includes Holly Etlin and Missal

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UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE IN RE: . . . NEW CENTURY TRS HOLDINGS, . INC., et al., . . Debtors. . . . . . . . . . . . . . . . . . .

Case No. 07-10416-KJC

For the Debtors:

For Positive Software:

For Deutsche Bank National Trust Co.:

J&J COURT TRANSCRIBERS, INC.

For Bank of America, N.A.:

J&J COURT TRANSCRIBERS, INC.

For Citi Corp.:

For Alaska Seaboard Limited Partners:

For Morgan Stanley Company:

For Squire, Sanders & Dempsey:

For Deutsche Bank:

For Bank of America:

For Murray Capital Management, Inc.:

J&J COURT TRANSCRIBERS, INC.

For Washington Mutual:

J&J COURT TRANSCRIBERS, INC.

J&J COURT TRANSCRIBERS, INC.

3 behalf of the debtor.

Last week the complaint was filed.

21 application made for temporary restraining order.

9 1 permits. And from our perspective, Your Honor, we would ask

3 Tuesday, Your Honor? 4 to that date. 5 week.

We would have no opposition to adding it

We certainly would not want it to slip past next

I do understand theres a lot

Your Honor, this is Brent Truitt.

MR. YURKEWICZ: THE COURT:

-- I would be surprised if activities

J&J COURT TRANSCRIBERS, INC.

11 1 2 1:30. 3 THE COURT: All right. Well make it April 27th at

7 at 4:00 well say.

Prevailing eastern time.

13 have before this Court. 14 15 16 THE COURT:

Very well. Thank you, Your Honor. May I

MR. YURKEWICZ: MR. TRUITT:

Your Honor, this is Brent Truitt.

21 now defer the podium to Ms. Uhland. 22 MS. UHLAND:

Good morning, Your Honor.

23 Uhland of OMelveny Myers on behalf of New Century.

J&J COURT TRANSCRIBERS, INC.

12 objection to loan servicing bidding procedures?

19 shortened notice and hearings and youve experience that.

13 1 deadline of yesterday. 2 THE COURT: I was also handed some things in

7 United States Trustees objection is resolved.

15 Electric Capital we believe can be deferred.

J&J COURT TRANSCRIBERS, INC.

20 bid are as follows:

9 telephone connection. 10 phone on mute. 11

The Carrington proposal and agreement

18 a collective economic decrease, collectively.

21 110 percent of the purchase price is reduced as follows.

19 1 bid. Im sorry, did I -- okay, well, let me -- to get the

4 Hessen, counsel for the Committee.

This Carrington bid provides for an

J&J COURT TRANSCRIBERS, INC.

9 Carrington, they have a right to object. 10 number as -11 THE COURT:

Well, when you say object, you mean, at

12 the auction? 13 MR. POWER: At the sale hearing, Your Honor. If we

19 something like this. 20 bidding -21 22 MR. POWER: THE COURT:

There will be -- assuming theres

Yes. -- there will be a round of bidding. The

23 bids will be evaluated.

The bidders will be told, usually in

21 1 fashion. But at some point, the debtor will make a decision