UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK --------------------------------------------------------- x : Chapter 11 In re : : LEHR CONSTRUCTION CORP., : Case No.

11-10723 (SHL) : : Debtor. : : -------------------------------------------------------- x MEMORANDUM OF LAW IN SUPPORT OF THE UNITED STATES TRUSTEES MOTION FOR AN ORDER DIRECTING THE APPOINTMENT OF A CHAPTER 11 TRUSTEE TO: THE HONORABLE SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE: Tracy Hope Davis, the United States Trustee for Region 2 (the United States Trustee), in furtherance of her duties and responsibilities set forth in 28 U.S.C. 586(a)(3) and (5), hereby moves, and together herewith, files her memorandum of law in support of this motion for an order directing the appointment of a Chapter 11 trustee (the Motion) pursuant to 11 U.S.C. 1104(a)(2) and (e). In support, the United States Trustee represents and alleges as follows: INTRODUCTION On May 4, 2011, a grand jury indicted four current senior executives of LEHR Construction Corp. (the Debtor) on charges of enterprise corruption, grand larceny and money laundering in connection with an alleged scheme to defraud their construction clients of at least $30 million over the past decade (the Indictment). See New York County District Attorney Press Release dated May 4, 2011, attached as Exhibit A to the Affirmation Pursuant to Local Rule 9077-1(a) in Support of the Order to Show Cause. Because of the Indictment, the United States Trustee has reasonable grounds to suspect that current management engaged in fraud,

dishonesty and criminal conduct pursuant to Section 1104(e) of the Bankruptcy Code. The United States Trustee is not in possession of evidence leading to the Indictment and is not in a position to prove the allegations of the Indictment. A Chapter 11 trustee, however, should be appointed in the Courts discretion under Section 1104(a)(2) to protect the interests of the public and creditors. ARGUMENT The Court Should Order The Appointment of a Chapter 11 Trustee Section 1104(a)(2) of the Bankruptcy Code provides: (a) At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of a trustee (2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor . . . . 11 U.S.C. 1104(a)(2). Section 1104(e) of the Bankruptcy Code provides in pertinent part that: the United States trustee shall move for the appointment of a trustee under subsection (a) if there are reasonable grounds to suspect that current members of the governing body of the debtor, the debtors chief executive or chief financial officer, or members of the governing body who selected the debtors chief executive or chief financial officer, participated in actual fraud, dishonesty or criminal conduct in the management of the debtor. 11 U.S.C. 1104(e). The United States Trustee must seek an order requiring appointment of a chapter 11 trustee whenever the reasonable grounds to suspect standard is met. In re The 1031 Tax Group, LLC, 374 B.R. 78, 87 (Bankr. S.D.N.Y. 2007) (quoting Section 1104(e)). The statutory requirement that the U.S. Trustee bring such a motion [under Section 1104(e)] does

not alter the standard for deciding whether to grant the motion. Rather, 1104(a)(1) & (2), and the cases interpreting these subsections, continue to control whether a trustee should be appointed. 1031, 374 B.R. at 87. The United States Trustee has the burden of showing by clear and convincing evidence that the appointment of a trustee is warranted. In re Bayou Group, LLC, 2009 WL 1162421, at *4 (2d Cir. May 1, 2009); 1031, 374 B.R. at 85. The United States Trustee has brought this Motion because there are reasonable grounds to suspect that four current senior members of the Debtors management team participated in actual fraud, dishonesty or criminal conduct in the management of the Debtor. A grand jury has indicted them on charges of enterprise corruption, grand larceny and money laundering in connection with an alleged scheme to defraud their construction clients of at least $30 million over the past decade. An indictment establishes probable cause to believe that these defendants committed the offenses of which they are charged. See Rothstein v. Carriere, 373 F.3d 275 (2d Cir. 2004)(malicious prosecution case); Savino v. City of New York, 331 F.3d 63, 68 (2d Cir. 2003) (same). Probable cause constitutes a probability or substantial chance of criminal activity, United States v. Valentine, 539 F.3d 88, 93 (2d Cir. 2008), giving rise to this Offices conclusion that there are reasonable grounds to suspect criminal activity on the part of Debtors management.1 Under Section 1104(a)(2), the Court may appoint a trustee if it is in the interest of the creditors . . . and other interests of the estate. 11 U.S.C. 1104(a)(2). The provision gives the court discretion to appoint a trustee when doing so would serve the parties and estates interests.

Research has not disclosed any decisions defining reasonable grounds to suspect under Section 1104(e) in the context of an indictment of Debtors management.

1031, 374 B.R. at 90. The twin goals of the standard for appointment of a trustee should be protection of the public interest and the interests of the creditors . . . and facilitation of a reorganization that will benefit both the creditors and the debtors . . . . Id. at 91 (courts emphasis and ellypses) (quoting In re Ionosphere Clubs, Inc., 113 B.R. 164, 168 (Bankr. S.D.N.Y. 1990)). Courts have considered the following factors: (i) the trustworthiness of the debtor; (ii) the debtor in possessions past and present performance and prospects of the debtors rehabilitation; (iii) the confidence -- or lack thereof -- of the business community and of the creditors in present management; and (iv) the benefits derived by the appointment of a trustee balanced against the cost of appointment. 1031, 374 B.R. at 91 (quoting Ionosphere, 113 B.R. at 168); see also In re Microwave Products of America, Inc., 102 B.R. at 675 (Bankr.W.D.Tenn.1989); In re Cardinal Indus. Inc., 109 B.R. 755, 767 (Bankr. S.D. Ohio 1990). Here, the Debtors Executive Vice President and Director, Executive Vice President for Operations, Finance Director, and Chief of Estimating and Cost Control have been indicted. As noted, the Indictment alleges, among other things, a scheme to defraud the Debtors clients over the past decade. The United States Trustee does not possess evidence of the allegations of the Indictment and is not in a position to prove such allegations. The Indictment, however, raises serious issues which taint current management merely because the Indictment is pending. It appears, therefore, that the Indictment will hamper the Debtors ability to finish jobs in progress, wind-down its operations and successfully collect account receivables. The appointment of an independent trustee to operate the Debtors business under these circumstances is in the best interest of creditors and the Debtor itself to ensure that the Debtors operations are being conducted in accordance with appropriate business standards. 4

With respect to the benefits of a Chapter 11 trustee balanced against the cost of appointment, redressing the concern that the Debtor be managed by an untainted fiduciary outweighs the cost of appointment of a Chapter 11 trustee. See In re Colorado-Ute Electrical Assn Iinc., 120 B.R. 164, 177 (Bankr. D. Col. 1990) (independent trustee would expend less on professional fees because his relationships with creditors and other parties would be less confrontational and litigious). WHEREFORE, the United States Trustee respectfully requests that the Court enter an order directing the appointment of a Chapter 11 Trustee and grant such other relief as the Court deems just, fair and equitable. Dated: New York, New York May 5, 2011 Respectfully submitted, TRACY HOPE DAVIS UNITED STATES TRUSTEE REGION 2 By: /s/ Susan D. Golden Susan D. Golden, Esq. Trial Attorney 33 Whitehall Street, 21st Floor New York, New York 10004 Tel. (212) 510-0500

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK --------------------------------------------------------- x : Chapter 11 In re : : LEHR CONSTRUCTION CORP., : Case No. 11-10723 (SHL) : : Debtor. : : -------------------------------------------------------- x ORDER TO SHOW CAUSE SCHEDULING A HEARING TO CONSIDER THE MOTION OF THE UNITED STATES TRUSTEE SEEKING AN ORDER DIRECTING THE APPOINTMENT OF A CHAPTER 11 TRUSTEE Upon the attached motion (the "Motion") of Tracy Hope Davis, the United States Trustee for Region 2, pursuant to 11 U.S.C. 1104 and 1112(b) of the Bankruptcy Code, seeking an order directing the appointment of a Chapter 11 Trustee and upon the memorandum of law and affirmation of Susan D. Golden, Esq. submitted in support of the Motion; and it appearing that an order to show cause scheduling a hearing to consider the Motion is necessary and beneficial to the estate and its creditors; and it further appearing that no notice need be given; and after due deliberation and sufficient cause appearing therefor, it is hereby ORDERED, that the Debtor in the above-named chapter 11 case and all other parties in interest show cause at ____ o'clock in the _m. on May __, 2011 before the Honorable Sean H. Lane, Bankruptcy Judge, in the United States Bankruptcy Court, Alexander Hamilton Custom House, One Bowling Green, New York, New York 10004, or as soon after as counsel may be heard, why this Court should not enter an order granting the relief requested in the Motion and directing the appointment of a Chapter 11 Trustee, and it is further

ORDERED, that service of this Order To Show Cause, the Motion and Memorandum of Law and supporting documents be provided by e-mail or fax upon: (i) James Beldner, Esq., at Cooley LLP, counsel for the Debtor and (ii) Sean C. Southard, Esq., at Klestadt & Winters LLP, counsel for the Creditors Committee on or before the __ day of May 2011, and that such service shall be deemed good and sufficient service and notice of the Motion and hearing scheduled herein, and that no other or further notice is necessary or required; and it is further ORDERED, that responses, if any, to the relief requested in the Motion shall be in writing, shall set forth with particularity the grounds for such opposition or other statement of position, shall be filed with the Bankruptcy Court, and served upon the Office of the United States Trustee, 33 Whitehall Street, 21st Floor, New York, New York 10004, Attention: Susan D. Golden, Esq., with a courtesy copy delivered directly to the Chambers of the Honorable Sean H. Lane, Bankruptcy Judge, in a manner reasonably calculated to be received before ___ oclock __m. on May __, 2011. Dated: New York, New York May , 2011 HONORABLE SEAN H. LANE BANKRUPTCY JUDGE

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK --------------------------------------------------------- x : Chapter 11 In re : : LEHR CONSTRUCTION CORP., : Case No. 11-10723 (SHL) : : Debtor. : : -------------------------------------------------------- x AFFIRMATION PURSUANT TO LOCAL RULE 9077-1(a) IN SUPPORT OF ORDER TO SHOW CAUSE Susan D. Golden hereby affirms: 1. I am an attorney employed at the office of the United States Trustee, located at 33

Whitehall Street, New York, New York 10004. 2. I submit this affirmation in support of the Order To Show Cause for an order

directing the appointment of a Chapter 11 Trustee and accompanying memorandum of law contemporaneously herewith. 3. On May 4, 2011, a grand jury indicted four current senior executives of the

Debtor on charges of enterprise corruption, grand larceny and money laundering in connection with an alleged scheme to defraud their construction clients of at least $30 million over the past decade. See New York County District Attorney Press Release dated May 4, 2011, attached hereto as Exhibit A. 4. As more fully set forth in the Motion and Memorandum of Law, the immediate

relief requested herein is necessary because the executives of the Debtor should not be left in control of the estate. Accordingly, this office requests that the Court schedule a hearing on the Motion.

5.

I submit that, under these circumstances, it is appropriate to move by order to

show cause rather than notice of motion. 6. Trustee. /s/ Susan D. Golden Susan D. Golden No prior request for the relief requested has been made by the United States

EXHIBIT A

New York County District Attorney's Office

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New York County District Attorney's Office

District Attorney Cyrus R. Vance, Jr.

DISTRICT ATTORNEY - NEW YORK COUNTY

FOR IMMEDIATE RELEASE May 4, 2011

CONTACT: Erin Duggan 212-335-9400

DISTRICT ATTORNEY VANCE ANNOUNCES INDICTMENT OF LEHR CONSTRUCTION AND KEY EXECUTIVES IN MULTIMILLION-DOLLAR FRAUD Enterprise Corruption Scheme Involved Inflating Invoices, Secret Deals with Subcontractors Estimated $30 Million Stolen from Clients Manhattan District Attorney Cyrus R. Vance, Jr., today announced the indictment of LEHR CONSTRUCTION CORP. (LEHR), a Manhattan-based construction company, and four of its executives for a scheme that defrauded their construction management clients of at least $30 million over the past decade. The company and its executives - Executive Vice-President and Director JEFFREY LAZAR, Executive Vice-President in charge of Operations TODD PHILLIPS, Finance Director STEVEN HALPER, and Chief of Estimating Department and Cost Control STEVEN WASSERMAN - are charged with Enterprise Corruption, Scheme to Defraud, and Grand Larceny. In addition, LEHR and HALPER are charged with Money Laundering.[1] LEHR is a Manhattan-based construction company paid by its clients to oversee interior renovation construction projects, acting in the capacity of either a general contractor (GC) - in which case it was paid a flat lump sum fee - or as a construction manager (CM), where it was paid a percentage of construction costs. "This construction company was corrupt at all levels, said District Attorney Vance. Its executives developed - and successfully executed - a scheme to steal millions of dollars from their clients. Simply put, they used an over-invoicing scheme to steal from their construction management clients, and then used general contractor jobs to recover the stolen funds. Sadly, greed and corruption impose a hidden, billion-dollar-a-year tax on New York Citys construction industry. This Office and its Rackets Bureau will continue to pursue aggressive investigations to make sure that honest businesses can compete in this vital industry. According to documents filed in court, between 1998 and 2010, LEHR systematically stole money from its CM clients throughout Manhattan. These thefts were recently made possible through a business model created by LEHR executives that shifted costs from LEHRs GC projects to its CM projects. In essence, LEHR had its subcontractors overcharge the CM clients on jobs where it was paid a percentage and, in return, agree to perform work for less money on the GC lump sum projects. This cost shifting maximized LEHRs profits on the GC work because subcontractors performed the work for less than its true worth, without affecting LEHRs profit on CM projects because the client, not LEHR, ultimately paid the inflated costs of the subcontractors. As detailed in court documents, LEHR executives created a document known as the Bid Package, which required that every subcontractor who submitted a bid to LEHR on a CM project inflate its bid by including a series of suspect labor contingencies. These contingencies added anywhere from 10 to 13 percent to the true bid submitted by the subcontractor. After a subcontractor was chosen by the client in consultation with LEHR, that subcontractor would negotiate directly with LEHR and agree upon a reduced actual price for the subcontractors work on the project. LEHR and the subcontractor would further agree upon an inflated purchase order price that would be submitted by LEHR to the CM client. The difference between the inflated purchase order price and the actual negotiated price for the subcontractors work constitutes the majority of the money being stolen from the CM client. This process would be repeated with most of the subcontractors working on the project, and subcontractors would hold the profits from the inflated bills for Lehr. LEHR would later recover these stolen monies through several methods, including having subcontractors perform work on GC projects at the reduced rate, thereby increasing Lehrs profits, or having the subcontractor perform extra work on a particular project at no cost. According to documents filed in court, the entire corporate structure of LEHR was involved in this corrupt scheme to one degree or another. Responsibility for the day-to-day operations of the company were equally divided between JEFFREY LAZAR and TODD PHILLIPS. LAZAR primarily supervised the Sales, Estimating, Cost Control and Purchasing Departments, and PHILLIPS supervised those departments involved in construction and finance. The Estimating Department (overseen by STEVEN WASSERMAN) and the Project/Account Executives (overseen by PHILLIPS) decided how much money each Bid Package was to be worth. The Purchasing Department negotiated with the various subcontractors to determine how much the purchase orders to the client would be inflated. Finance Director STEVEN HALPER, through the Accounting Department, recovered significant amounts of unused Bid Package money from various subcontractors. The Cost Control and Construction Departments utilized monies held by subcontractors in order to reduce the costs of subsequent unrelated projects (both GC and CM). At each step of the process, LEHR put into a place the tools and the instruction needed to commit these crimes. As detailed in court, a conservative estimate is that over the past 10 years, LEHR has defrauded its clients of more than $30 million. The investigation was a joint endeavor between the Manhattan District Attorneys Rackets Bureau and a detail of the Special Investigations Unit of the New York State Police (NYSP) assigned to the Bureau. The indictment announced today is the result of ongoing investigations by the District Attorneys Office into fraud and corruption in the New York City construction industry. Over the past 10 years, the Manhattan District Attorneys Office has obtained convictions and guilty pleas from scores of individuals, including some of the largest general contractors in New York City, for kickbacks and bid-rigging schemes, and recovered more than $40 million through those prosecutions. District Attorney Vance thanked the New York State Police for its assistance in the investigation, including Superintendent Joseph DAmico, Special Investigation Unit Major Matthew S. Renneman, Lieutenant George Nohai, and lead Investigator Gary Titus, who was supervised by Senior Investigator Gustav Talleur. Assistant District Attorney Christopher Beard, Senior Investigative Counsel, and Assistant District Attorney Aaron Sato, assigned to the Rackets Bureau, are handling the prosecution of the case under the supervision of Assistant District Attorney Michael Scotto, Chief of the Rackets Bureau and Deputy Chief of the Investigations Division, and Assistant District Attorney Brenda Fischer, Chief of the Labor Investigations and Construction Fraud Unit. Trial Preparation Assistant Dan Murphy assisted with the case.

Defendant Information: LEHR CONSTRUCTION CORPORATION New York, NY Charges: Enterprise Corruption, class B felony, 1 count Scheme to Defraud in the First Degree, class C felony, 1 count Money Laundering in the Second Degree, class C felony, 2 counts Grand Larceny in the Second Degree, class C felony, 8 counts Grand Larceny in the Third Degree, class D felony, 2 counts

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New York County District Attorney's Office

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Grand Larceny in the Fourth Degree, class E felony, 1 count STEVEN HALPER, D.O.B. 6/30/43 Franklin Lakes, NJ Charges: Enterprise Corruption, class B felony, 1 count Scheme to Defraud in the First Degree, class C felony, 1 count Money Laundering in the Second Degree, class C felony, 2 counts Grand Larceny in the Second Degree, class C felony, 8 counts Grand Larceny in the Third Degree, class D felony, 2 counts Grand Larceny in the Fourth Degree, class E felony, 1 count JEFFREY LAZAR, D.O.B. 3/3/68 New York, NY Charges: Enterprise Corruption, class B felony, 1 count Scheme to Defraud in the First Degree, class C felony, 1 count Grand Larceny in the Second Degree, class C felony, 8 counts Grand Larceny in the Third Degree, class D felony, 2 counts Grand Larceny in the Fourth Degree, class E felony, 1 count TODD PHILLIPS, D.O.B. 6/7/58 New York, NY Charges: Enterprise Corruption, class B felony, 1 count Scheme to Defraud in the First Degree, class C felony, 1 count Grand Larceny in the Second Degree, class C felony, 8 counts Grand Larceny in the Third Degree, class D felony, 2 counts Grand Larceny in the Fourth Degree, class E felony, 1 count STEVEN WASSERMAN, D.O.B. 7/14/52 Freeport, NY Charges: Enterprise Corruption, class B felony, 1 count Scheme to Defraud in the First Degree, class C felony, 1 count Grand Larceny in the Second Degree, class C felony, 8 counts Grand Larceny in the Third Degree, class D felony, 2 counts Grand Larceny in the Fourth Degree, class E felony, 1 count A class B felony is punishable by up to 25 years in prison, a class C felony is punishable by up to 15 years in prison, a class D felony is punishable by up to 7 years in prison, and a class E felony is punishable by up to 4 years in prison. ### Additional news available at: www.manhattanda.org Follow us at twitter.com/ManhattanDA New York County District Attorney | duggane@dany.nyc.gov | 212-335-9400 [1] The charges contained in the indictments are merely allegations, and the defendants are presumed innocent unless and until proven guilty.

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