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FOX ROTHSCHILD LLP Yann Geron Nicole N. Santucci (Of Counsel) 100 Park Avenue, Suite 1500 New York, New York 10017 (212) 878-7900 Attorneys for Yann Geron, Chapter 7 Trustee

Hearing Date: October 19, 2011 Hearing Time: 11:00 a.m.

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK --------------------------------------------------------x In re : : THELEN LLP, : : Debtor. : --------------------------------------------------------x

Chapter 7 Case No. 09-15631 (ALG)

TRUSTEES REPLY TO OBJECTIONS TO HIS MOTIONS FOR ORDERS (i) AUTHORIZING HIM TO FILE UNDER SEAL SETTLEMENT AGREEMENTS WITH THE DEBTORS FORMER PARTNERS, AND (ii) APPROVING STIPULATIONS RESOLVING TRUSTEES CLAIMS ASSERTED AGAINST CERTAIN FORMER PARTNERS OF THE DEBTOR TO THE HONORABLE ALLAN L. GROPPER, UNITED STATES BANKRUPTCY JUDGE: Yann Geron (the Trustee), the chapter 7 trustee of the estate of Thelen LLP (the Debtor), the above-captioned debtor, by his attorneys, Fox Rothschild LLP, as and for his reply to the various objections, respectively, of Michael S. Elkin and Jeffrey P. Rosenstein1 [DE 341], Kenneth A. Adler [DE 347], Michael V. Blumenthal [DE 348], Jeffrey B. Steiner et al. [DE 354], Jonathan Russo et al. [DE 357] (collectively, the Objections), applications, dated September 27, 2011, for orders: to Trustees

(i) pursuant to Section 105(a) of the

Michael S. Elkin and Jeffrey P. Rosenstein have filed a reservation of rights on alleged claims by Iron Mountain against the Settling Partners arising from client file storage and destruction. Because it is not a substantive objection, this Reply does not specifically address the reservation of rights.

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Bankruptcy Code, authorizing him to file under seal settlement agreements with the Debtors former partners (the Seal Motion) [DE 333 and 334], and (ii) pursuant to Bankruptcy Rule 9019, (a) approving settlement agreements between the Trustee and certain former partners of the Debtor (the Settling Partners), (b) finding that such settlements are in good faith, and (c) barring certain claims against Settling Partners (the Settlement Approval Motion) [DE 335 and 336], upon information and belief , respectfully sets forth and represents: Background 1. The Seal Motion and the Settlement Approval Motion were served upon

all know creditors and parties in interest of this estate, including all former partners of the Debtor against whom the Trustee has asserted Claims 2. In total, notice of the motions was mailed to over 650 parties who have filed proofs of claim against the Debtors estate or otherwise appeared in this bankruptcy proceeding, as well as approximately 250 former partners (inclusive of the Settling Partners). Furthermore, notice of the motions and the filings associated with the motions were posted on the Trustees web site for this case, and the Trustee is informed that this site experienced a total of 234 unique hits since September 27, 2011. 2. The absence of any substantive objections to the settlements from the

trade creditors is notable. Of the more than 650 creditors and parties in interest who received actual notice, exclusive of former partners, only one trade creditor, Iron Mountain Information Management, Inc. (Iron Mountain), filed a limited objection to the Settlement Approval Motion [DE 345]. The Iron Mountain limited objection does not challenge the settlements under

Capitalized terms not otherwise defined herein shall have the same meaning ascribed to them in the Settlement Approval Motion.

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Bankruptcy Rule 9019, but seeks to preserve certain claims as between Iron Mountain and the Settling Partners3. 3. The absence of objections from the vast majority of the non-settling

partners is equally notable. Of the approximately 250 former partners of Thelen who were served with notice of the Trustees motions, a total of 19 partners (two individuals and three groups) have filed five Objections. 4. In response to certain inquiries, on October 12, 2011, the Trustee filed a These

supplemental declaration in support of the motions (the Declaration) [DE 342].

inquiries primarily related to: (i) the underlying economics of the proposed settlements, (ii) the most favored terms provision, and (iii) the contemplated third-party bar. provided additional disclosures and information to clarify these issues. 5. As is further detailed below, each of the Objections must be overruled. The Declaration

Though the Court may entertain arguments by former partners of the Debtor, the partners do not appear to have a direct cognizable economic stake as creditors of this estate in the outcome of these motions. In any event, as the record will demonstrate amply, and as is evidenced by the absence of objection from effectively all of the parties who do have an economic stake as creditors of this estate, the Trustees determination to enter into the contemplated settlement agreements represents a sound exercise of his business judgment, results in a favorable economic benefit to the Debtors estate, and falls well above the lowest level of reasonableness standard required to approve a settlement.
3

The Iron Mountain limited objection is a reservation of rights on alleged claims by Iron Mountain against the Settling Partners arising from client file storage and destruction. This Reply does not address the Iron Mountain limited objection. It is anticipated that this limited objection will be addressed on of before the Trustees motions

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The Partner Objections a. Certain of the Objecting Former Partners Lack Standing to Object to the Motions 6. As a threshold issue, certain of the former partners who have interposed

objections to the motions lack standing to object because they do not have any economic interest at stake. Several of these partners did not file proofs of claims4. Therefore, their interests in this matter is limited to their purported interests for return of capital, and such interests are in the nature of equity which would not receive any distribution until all other general unsecured claims are paid in full. 7. The claims docket in this case indicates a total of 694 claims filed, with

face values aggregating $18.9 million in priority claims, and $145.9 million in general, unsecured claims. Additionally, Citibanks secured claim is approximately $5 million. Even with recovery of payments from the Settling Partners, the assets of this estate comprise a fraction the total alleged claim amount. Therefore, there is no evidence available at this time which would indicate that general, unsecured creditors will be paid in full in this case. Partner equity claims, whether time-barred or timely, are economically unaffected by the results of the Trustees motions. 8. At best, those equity-based partners of Thelen are parties in interest under

Section 1109(b) of the Bankruptcy Code holding an equity interest at stake with no economic value. While interested party status may give them an ability to be heard by the Bankruptcy Court, by virtue of their lack of creditor status, these partners do not have standing to object to
are heard.
4

These partners include Kenneth A. Adler, Garry Berman, Michael S. Elkin, Andrew Kramer, Bruce

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the instant motions. See In re Quigley Co., Inc., 391 B.R. 695, 702-703, 391 B.R. 695 (Bkrtcy. S.D.N.Y. 2008) (finding that a party in interest must still satisfy the general requirements of the standing doctrine, and that an objecting party must allege a personal stake in the outcome of controversy). 9. The remaining handful of partners who have interposed Objections to the

Trustee motions, and who did file timely proofs of claim, have asserted a number of bases for claims against the Debtor in their respective proofs of claim, most notably alleging indemnity claims. Based on the current economics of this estate, and the nature of these claims specifically, the actual economic value of these claims to these partners, if any, is likely low. 10. Respectfully, even for those partners who did file proofs of claim and are

at least facially creditors, the issue does not appear to be about maximizing estate assets. Rather, it appears that partners challenging the contemplated settlements are seeking to exert procedural leverage in an effort to reduce their own personal exposure on the Claims. Again, with all due respect to these partners, the estate Claims against these non-settling partners will not be reduced or affected by the proposed settlements, and procedural leveraging will not change this fact. As detailed below, the only provision affecting non-settling partners is the Most Favored Terms provision, and as written and applied, this provision will not affect the Trustees ability to settle with any partner. b. The Partners Objections to the Seal Motion should be Overruled 11. In light of the public nature of bankruptcy dockets, the Settling Partners

desire to not have personal financial information readily available for anyone to see, and due to

Meyerson, Norman Roos, Jeffrey P. Rosenstein, and Frederick Whitmer.

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the wider interest of the press in these matters, the Trustee believes it is within the sound discretion of this Court to authorize the settlement agreements (which contain specific, individual financial disclosures) to be filed under seal and that the objections should be overruled. This is why the Trustee brought this application under Section 105 and not Section 107 of the Bankruptcy Code. 12. Alternatively, in the event this Court determines that the settlement

agreements can not be filed under seal, the Trustee respectfully submits that such agreements should be redacted to eliminate each Settling Partners personal financial information and settlement amounts (subject to the Settling Partners approval). c. The Partners Objections to the Settlement Approval Motion Should be Overruled 13. The objections to the Settlement Approval Motion generally allege the

following: (i) the individual settlement agreements and amounts need to be disclosed in order for this Court to make a determination as to their reasonableness, (ii) the Most Favored Terms provision should be stricken, and (iii) the contemplated third party bar is too broad and should be denied. 14. The financial disclosures provided in the Declaration give the objecting

parties adequate information relating to the economic impact the contemplated settlements will have upon the Debtors estate. Specific information has been provided regarding the estimated face value of the Claims asserted against all former partners, the face value of the Claims asserted against the Settling Partners, and the compromised value to be realized by the estate from the Settling Partners under the contemplated settlement agreements.

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15.

The concessions made by the Trustee with respect to the Claims against

the Settling Partners were applied consistently across the board because these partners were all similarly situated. Each of the Settling Partners executed an identical stipulation, with the sole changes being made based on that partners specific number of units, amount of capital due, and amount of loan repayment due. No consideration was given to individual financial wherewithal of the Settling Partners who have signed the proposed stipulations. 16. Consequently, there is no need for individual settlement amounts or

stipulations to be disclosed as part of the process for approving the overall settlements. Allowing such a result would unfairly prejudice the individual Settling Partners by disclosing individual financial information (for example, the amounts of units they owned and the amounts they have to repay to the estate) against their will. These partners have collectively agreed to pay nearly $5 million and should be entitled to the benefit of the confidentiality provision governing their individual agreements. 17. As detailed in the Declaration, the Most Favored Terms provision was

carefully drafted in order to allow the Trustee the necessary flexibility to assess factual and legal issues raised by other partners which were not relevant or applicable to the Settling Partners, while at the same time, providing a method to equalize the ultimate concessions granted with respect to future settlements. 18. The intention behind the Most Favored Terms provision is to ensure that

later settling partners who are identically situated in contractual terms vis-a-vis the Debtor will be treated in a substantially similar manner, but not materially better than, the Settling Partners. However, if there are partners who are situated in a different contractual manner with the Debtor 7
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which requires an adjustment to the settlement construct the Trustee utilized with the Settling Partners, such adjustments will remain within the Trustees discretion and will not trigger any administrative claim in favor of the Settling Partners on account of the Most Favored Terms provision, provided such adjustments are consistent with the Debtors partnership agreements and the partners rights thereunder. 19. Although there is the possibility that the Most Favored Terms provision

may have the practical effect of discouraging the Trustee from giving discretionary discounts that favor a later partner or group of partners over the Settling Partners, the Trustee is nevertheless able to do so if he believes that such a settlement is within the best interests of the estate notwithstanding any potential violation of Most Favored Terms provision. 20. It appears that the parties objecting to the proposed settlement agreements

on the grounds of the Most Favored Terms provision are concerned that such provision will prohibit the Trustee from taking into consideration contractual defenses which were not applicable to, or asserted by, the Settling Partners. This is simply not the case. 21. The remaining objections by partners to Settlement Approval Motion

relate to the proposed third party bar on Estate Claims. It appears these parties are concerned that they possess direct claims against the Debtors former management, who are parties to the contemplated settlement agreements, and that the third party bar will prohibit them from asserting such claims. 22. As detailed in the Declaration, the contemplated third party bar releases

only direct claims held by the Trustee, the Debtor or its estate (with the exception of the Jewel Claims), against the Settling Partners, or third party claims which are derivative of those claims. 8
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There is nothing specific or implied in the settlement agreements which would release direct claims of third parties against the Settling Partners. 23. Furthermore, the Declaration specifically addresses this point and states

Certain partners have raised with me issues relating to claims against management of the Debtor, and the effect of the release of those claims under the proposed stipulations. First, I am not aware of evidence strongly supporting such claims. Second, I have significant questions as to damages which the estate may be able to collect on account of such alleged claims. Third, to the extent such third party claims theoretically exist, they may be barred by the doctrine of in pari delicto. Fourth, I believe such claims play into the internal disputes at Thelen leading to the firms demise, and any such litigation would play out issues which should be resolved and closed as part of this chapter 7 process. 24. Accordingly, objections to the Settlement Approval Motions based upon

the proposed language of the third party bar should be overruled. Conclusion 25. For all of the foregoing reasons, the Trustee respectfully submits that the

objections should be overruled and the Seal Motion and Settlement Approval Motion should be approved and that he be granted such other relief as is just. Dated: New York, New York October 18, 2011 FOX ROTHSCHILD LLP Attorneys for Yann Geron, Chapter 7 Trustee By: s/ Yann Geron Yann Geron Nicole N. Santucci (Of Counsel) 100 Park Avenue, Suite 1500 New York, New York 10017 (212) 878-7900

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