3 Transcripts of New Century Mortgage Bankruptcy Hearings From May 2007

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 4, 2007 3:00 p.m. TRANSCRIPT OF TELEPHONE CONFERENCE 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 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 Mark D. Collins, 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 Bonnie Glantz Fatell, 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 A. Brent Truitt, Esq. Hennigan Bennett & Dorman, LLP 245 Park Ave. New York, NY 10167 For Deutsche Bank Structured Products Andrew J. Gallo, Esq. Bingham McCutchen, LLP 150 Federal Street Boston, MA 02110 Nicholas J. Cremona, Esq. Kaye Scholer, LLP 425 Park Ave. New York, NY 10022
For Bank of America:
3 For Bingham McCutchen, LLP: Tracey B. Pastan, Esq. Bingham McCutchen, LLP 399 Park Ave. New York, NY 10022 Rachel B. Mersky, Esq. Monzack & Monaco, PA 1201 N. Orange Street Wilmington, DE 19899 Eric M. Sutty, Esq. The Bayard Firm 222 Delaware Ave.-Ste. 900 Wilmington, DE 19899 Matthew Botica, Esq. Winston & Strawn, LLP 35 W. Wacker Drive Chicago, IL 60601 Daniel Butz, Esq. Morris Nichols Arsht & Tunnell, LLP Chase Manhattan Centre 1201 N. Market Ste. Wilmington, DE 19899 Don Beskrone, Esq. Ashby & Geddes 500 Delaware Ave.-8th Fl. Wilmington, DE 19899 Joseph McMahon, Esq. Office of the United States Trustee 844 King St.-Ste. 2207 Lockbox 35 Wilmington, DE 19801 Jason Smith Writer's Cramp, Inc. 6 Norton Rd. Monmouth Jct., NJ 08852 732-329-0191
For RBC:
For
For Kodiak Funding:
For Morgan Stanley Mortgage:
For Safeco Financial:
For The U.S. Trustee:
Audio Operator: Transcribing Firm:
Proceedings recorded by electronic sound recording, transcript produced by transcription service.
4 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: THE CLERK: THE COURT: Judge Carey. On the record Jason. Yes, Sir. The Court is now in session. This is
I have asked counsel to make themselves available
for this telephone conference to address two pleadings that were filed today; first was the Motion of the United States Trustee -- well, three pleadings -- of the United States Trustee to Continue the Debtors Motion for Sale-Related Incentive Pay and other matters and the Motion to Limit and Shorten Notice in connection therewith, as well as the Expedited Motion of UBS for an Extension of Time to File the Supplemental Memorandum of Law, along with the accompanying documents. Lets address, first, the U.S. Trustees motion. Your Honor, good afternoon. Joseph
MR. MCMAHON:
McMahon for the United States Trustee.
I apologize, I was Your Honor,
disconnected from the call and had to hop back on.
the U.S. Trustees motion, filed yesterday evening, requests that the Court continue the hearing on the Incentive Retention Compensation Motion pending the hearing on the United States Trustees Motion to Appoint a Chapter 11 Trustee or Examiner. Your Honor, to give you some background, some of which is in the motion, the initial motion, the Incentive Retention Pay Motion, was filed on April 11th, 2007. And we subsequently
filed our Motion for Appointment of a Chapter 11 Trustee on the 17th, about a week later. Your Honor, on last Thursday
5 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 evening, I believe it was on April 26th, we were advised by Debtors counsel that they were in the process of restructuring the compensation plans that were the subject of the Incentive Retention Motion, and we were given a extension of the objection deadline, from the Debtors standpoint, to review and object to those plans pending their filing. The restructure
plans were filed on May 1st, and they reflected a fairly substantial restructuring of the proposed Incentive Retention Plans. Some people were shifted from one plan to the other.
Certain persons were added to the plans. Your Honor, with respect to the request that weve made, we believe that in light of our review of the plan as restructured that it would be fitting for the relief thats requested in the motion to be tabled pending the consideration of the Trustee Examiner Motion. THE COURT: 15th at 1:30? MR. MCMAHON: That is correct. Such that the hearing And thats scheduled for hearing on May
on the Trustee Examiner could go forward, and Your Honor, the reason why we believe it would be appropriate is as follows. Our Trustee Examiner Motion relays -- does raise issues with respect to the fitness of current management to be leading the Chapter 11 cases going forward and, in the alternative, seeks an independent person to look at issues relating to certainly the accounting and financial statement irregularities which
6 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 occurred pre-petition. And also, it contemplates potentially a
broader focus for the examination. Your Honor, certainly one of the things that we believe that either a Chapter 11 Trustee or an Examiner will be doing or should be doing, if and when appointed, is to review the necessity and the propriety of awarding the bonuses that have been requested, certainly looking at the benchmarks for payment of what the bonuses that have been proposed and other issues specific to the plans. issues. And in light of -- and other attendant
And, Your Honor, we believe that that review is
entirely appropriate, given the -- especially in the case of a Chapter 11 Trustee would have control of the operations of the Debtors. And it would be an appropriate role for an Examiner
to play in light of the allegations that have been raised with respect to the pre-petition accounting and financial statement irregularities. Your Honor, there have been some other developments in the case which certainly factor into the U.S. Trustees concerns with respect to the plans and the timing of this Courts consideration of it. Your Honor, the Debtors have failed to
receive what we call a qualifying bid to sell the wholesale origination platform as a going concern and have publically announced that they will be conducting another RIF or reduction in force of a substantial number of employees; that is, they have laid off a substantial number of employees since the
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 heard? MS. UHLAND: Yes, this is Suzzanne Uhland from Well, you petition date, and in light of the -- both the pre-petition irregularities and the continuing reductions in force which the Debtors are implementing, we believe that the, you know, the integrity of the process and the system at this point demands that these bonus plans like the ones that are proposed get the review of an independent fiduciary or an independent examiner, to the extent that this Court is inclined to grant that relief on the 15th THE COURT: Thank you. Does anyone else care to be
OMelveny & Myers for the company, for New Century.
know, just for many of the reasons that were just -- or the facts and circumstances that have just been explained by the U.S. Trustee, that is, you know, the very reason we cannot afford to delay this matter. First, Your Honor, the, you know, the original plan had been -- you know, the concepts of the plan was set on regular notice by the time we set it for hearing on the 7th, and the Debtors have been working very hard, have been in dialog with the Creditors Committee, and have been working to take into account the prior rulings in this case and the prior concerns addressed by the United States Trustee to create a very deliberate process to restructure their plans to gain the support of the Creditors Committee and to avoid disputes of
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 the United States Trustee with respect to the scope of 503. What we filed, it did take a deliberate process, and when we were still engaged with Creditors Committee in these discussions, but determined on Monday or on Tuesday to file the plans that we had to the extent that we had restructured them. And then further, since Tuesday, weve continued to work with Creditors Committee to make further economic -- selected economic reductions in the plan, and actually further responding to some of the issues raised by the Trustee. So
that we are now at a point, as of this morning, we have reached agreement with the Committee on the terms in accordance with the structure set out in the amendment, again with some changes further reducing the economics with benefit of the estate. The process thats lead to this point has been, you know, a healthy dialog and debate, with the Committee pressing the Debtor on the business need for these plans. But more
importantly, these plans, like all these retention plans, lose their effectiveness every day that theyre not approved. massive downsizing did occur, or is occurring. The
You know, 2,000
employees were being RIF'd and this is just going to make -- I guess I dont understand how that weighs into delaying these plans because now these key people that are necessary to completing the other transactions and maximizing the value of the unsold loan platform technology and other assets are at greater risk in light of the massive disruption that occurred
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 when we, as we had committed to the Creditors we would, engaged in a major downsizing to reduce operating costs when we did not receive a timely platform bid. So the Debtors have been, you know, engaging and managing this process as we are responsive to the Creditors' concern and, frankly, responsive to their own known duties to maximize value, reduce cost. And theyve been working hard, not only
with an independent compensation consultant, but with Alex Partners, whos had a major role as a sort of an independent advisor helping structure these plans and access the personnel needs to accomplish the remaining substantial tasks ahead of them, again, at a very difficult situation in light of the, you know, first the initial reduction in force, but this very substantial reduction of force that is being processed right now. Accordingly, Your Honor, we, with the Creditors Committee, having reached our agreement with the Creditors Committee -they can address you on their concurrence on the absolute business need to, you know -- for the plans and for the plans, you know, the lessening of the efficacy of these plans with every day of delay. So we believe that the changes to the
plans do -- certainly do not warrant a continuation of the hearing, and we cannot withstand a business, you know, on the business basis, the further continuance. With respect to the Trustee Motion, you know, that -- you
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 heard? MR. INDELICATO: Yes, Your Honor. This is Mark know, if the proposal is to ask these individuals to wait around, not only 'til the 15th, but until a Trustee is appointed, would have an opportunity to go back and review the essentially, you know, what the Alex Partners professionals have already reviewed in business judgment, what the Creditors Committee has already reviewed as the business judgment, you know, that is in effect denying the plans and truly jeopardizing this process because that now creates, you know, such an uncertain future for these individuals who weve been able to retain most of them to date. Were not retaining
everybody even that weve already promised an incentive and retention payment to just because of the difficulty of this case. But that would be a very negative -- you know, have a
very negative impact on the goals of the Debtor and the Committee and the -- you know, to reach -- to maximize the values and retain these employees to do so. THE COURT: Thank you. Does anyone else care to be
Indelicato from Hahn & Hessen on behalf of the Committee. Your Honor, I would echo many of the comments made by Debtors counsel. The Court -- and I did not expect or intend
to argue the merits of the motion, but I think the Court needs to understand a little bit of the flavor of how this motion started and where its ending up.
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 This was a motion, Your Honor, that was filed in which they sought payments in excess of $7 million to a variety of their employees. The Committee initially told the Debtors that Weve worked with
they had significant problems with that.
them and gotten it to the point where theyve filed an amended one, which was still, in the Committees mind, too rich. We
went back with them and we negotiated further, and weve got significant additional reductions, which we can go through with the Court on Monday at the appropriate hearing. To lead this Court to believe that theres no independent fiduciary whos watching over this estate for the benefit of Creditors, I wont say I take offense to it, but I believe its a misnomer. The Committee has been actively involved in every
step of this case and has clearly been watching out for the benefit of Creditors, and they are fiduciaries and they have been acting responsibly. With respect to the U.S. Trustees motion, Your Honor, one of the things that has concerned the Creditors Committee is the fact that, as Debtors counsel stated, every day that we wait more people are leaving. We are approaching the sale of what
may be the most significant asset of this estate, the servicing platform, and in fact, a lot of potential bidders have expressed concern to us that a lot of the employees are leaving, which is one of the reasons we put this incentive plan in place so that we make sure that the employees are around and
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 we can establish our conditions under the Carrington transaction. Your Honor, this transaction -- the -- at least having the motion heard on Monday is important for the very reasons Mr. McMahon doesnt want to have it heard. As he pointed out,
2,000 employees were RIF'd yesterday and that was in consultation with the Creditors Committee. We had put some
very strict guidelines in place with the Debtor to ensure that if there was anybody out there to purchase the origination platform that it would be a real bid and that we would not be wasting estates assets. We have made a determination with the
Debtor that, in fact, there were no realistic bids, and unfortunately, those employees had to be terminated. But that
only, you know, exemplifies why this motion needs to be heard sooner than later. Because if we delay it any longer, Im
fearful that more people will leave, and it could affect the value of the remaining assets. The Committees position here is -- well, you know, very one sided, Your Honor. We want to maximize the value of these We can fight about a lot of the
estates and these assets.
other stuff later, but right now we got sales on the horizon, we need the employees to get it done. We think the U.S. Let
Trustees Motion to Adjourn the Hearing should be denied.
us go forward with the motion and the offer of proof on Monday. I think the Court will understand why this is needed. They
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 will understand the role the Committee has played in skinning down this plan and that the benefits the estates will receive in going forward. So for those reasons, Your Honor, we believe
we should have this hearing on Monday. With respect to the U.S. Trustees motion and how the two play into this, I dont think that is appropriate. As I said,
I believe as fiduciaries we have done our job and represented the interests of Creditors in this estate, and the U.S. Trustees motion will be dealt with in, you know, in an appropriate manner. MR. MCMAHON: THE COURT: to be heard. ALL: (No verbal response). All right, go ahead. Your Honor, briefly. First, one of the Your Honor, may I respond? Well, let me just ask if anyone else cares
THE COURT: MR. MCMAHON:
arguments said by both the Debtors and the Committee is the negative impact that it will have on the Debtors employees. Well, there are three key sales that are -- have been the subject of proceedings before this Court in the past month. The wholesale origination sale is off to the side for now. The
LONFA residual sale, which an auction was held on this week and there will be a sale hearing next week, Your Honor, that -- the need to have employees around to sell those or, you know, whatever employee expectations were with respect to the plan
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 are now effectively by the wayside, meaning that those sales have concluded. There would be absolutely no prejudice in
pushing the hearing on this motion off pending a hearing on the Trustee Examiner Motion with respect to the employees involved in assisting in that sale. With respect to the servicing, Your Honor, the promise of those employees having a job when this process is gone is the important consideration here because they are effectively making a decision whether to stay or go based upon that and not based upon whether or not theyre getting a bonus. The effect
of the relief that the U.S. Trustee is requesting would have no less a deterrent or, say, a negative effect upon the employees than good faith negotiations between the Committee and the Debtors over the relief thats been requested. If the plans
started at X and have effectively been reduced significantly, meaning the compensation proposed under it, then certainly whatever expectations that certain employees had with respect to the plan as was initially filed have already been frustrated. And Im not saying that that necessarily, Your
Honor, that that result, you know, with respect to those plans where were at now means that its not a consideration for the servicing employees. the primary concern. I would submit, Your Honor, that its not It couldnt be because the relief that
the U.S. Trustee is requesting on this teleconference is no different than the effect that the good faith negotiations that
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 the Committees having with the Debtors would have on the process. With respect to the independence of the corporate consultant and Alex Partners, the independent compensation consultant answers to the Board. In fact, its been retained
to provide consulting services to the Board, and Alex Partners is -- the retention is proposed, the 363 retention, where an Alex Partners person would be serving as an officer with certain support staff. They are not independent in the sense
that they do not ultimately answer or consult with the Debtorsin-Possession. And Your Honor, with respect to the independent fiduciary argument, our point was not to suggest that the Committee does not have a role to play in the process or that the Committee is not independent certainly. But the critical thing to remember
is that the Debtors are the entities that are coming forward with the request for relief. to pay the bonuses. Theyre the ones that are seeking
This motion was not proposed by the
Committee, and the issue is were talking about review of an action of the Debtor-in-Possession. And thats an important
distinction to make when were talking about what is being proposed here. So for all of the reasons which I initially described, Your Honor, and certainly in this reply, we urge the Court to continue the hearing pending consideration of a Trustee
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 Examiner Motion. THE COURT: All right. Mr. McMahon, what Im going to
do is schedule the hearing, the U.S. Trustees Motion -hearing on the U.S. Trustees Motion to Continue the Hearing on the Debtors motion and schedule it for hearing on Monday. heres what I envision. that have merit. Both sides, I think, make arguments And
So let me see what record is developed in Let me see what
support of the Debtors motion on Monday.
opportunity the U.S. Trustee either has or hasnt had to review the latest iteration of that to which the Committee and the Debtor and perhaps others have agreed and then make a decision about whether to consider granting substantive relief or whether it should be delayed further. Look, the case came in with warts that weve talked about before, so I think the U.S. Trustee is right to say, "Wait a minute, you know, these things need to be looked at." On the
other hand, I agree with the Committee and the Debtor that the most immediate concern is that in a business that is and has from the beginning said it intends to liquidate, making sure that whatever is left in the way of value be maximized. And I
dont think until I see or hear the record -- and I think we need to do something more than just a proffer, on this motion in any event -- Im not going to know which way to go, whether to decide on the merits or whether to postpone for the reasons that the U.S. Trustee has argued, or perhaps for other reasons.
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 So Im going to sign the order scheduling the U.S. Trustees Motion to Continue the Hearing for Monday at 10 o'clock. there any questions? MS. UHLAND: THE COURT: No, Your Honor. All right. Thank you. Are
Lets turn to the second
matter, and that is UBS Motion for Extension of Time to File Supplemental Memorandum, et cetera. MR. MILLER: Paul Hastings. Ill hear from UBS.
Your Honor, this is Keith Miller from Your Honor, we --
With me is Richard Chesley.
by way of background, on May 5th UBS filed a complaint and a Motion Seeking a Temporary Restraining Order. Prior to the
hearing on April 12th, the Debtors -- the Defendant Debtors, along with UBS, entered into an agreement to adjourn the TRO Motion at that time. At the April 12th hearing, we put on -Namely they were
into the record the terms of that agreement.
that the Debtors would provide UBS with two reconciliations; one being a reconciliation of payments that they had received for UBS loans during the month of March, and the other a reconciliation with respect to payments that they received from April 2nd through April 12th, the date of the hearing. further, they agreed that to the extent there was these reconciliations showed that payments were made on behalf of UBS loans, they would -- and they were not transferred to UBS, that they would transfer those funds within -- shortly thereafter, within 1 or 2 business days. And
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 We did receive two reconciliations from the Debtors; one what we claim to be post-petition, one is pre-petition. way we look at it is the pre-petition would be the March reconciliation. The post-petition is the reconciliation In reviewing the preThe
between April 1st and April 12th.
petition reconciliation, we quickly noticed that not all of the loans that were supposed to be on that reconciliation were accounted for. Specifically -- and we were able to determine Specifically, the reconciliation was
this in a half a day.
missing over 1,000 loans that we knew, based on the trial balance that was provided to the new servicer, Countrywide, that the Debtors had received payment on. We quickly tried to
speak to the Debtor and tried to get a better understanding of why these loans were not on a reconciliation. Unfortunately,
because I think of a number of scheduling problems, we were not able to have that conversation until yesterday afternoon. During yesterday late afternoon, we heard for the first time that the reason the loans were not on the reconciliation is because I think the position the Debtors are now taking for the first time that these funds were co-mingled. And
therefore, since they were co-mingled, their position is that theyre not necessarily UBS property any longer. have a difference of opinion on that. We obviously
The fact -- the mere
fact that the Debtor co-mingled the funds doesnt destroy the aspect that -- of the trust that was clearly, expressly
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 provided for in the Repurchase Agreement and the other documents. So unfortunately, we felt that there was a need to explain the situation and explain what has been happening. And
therefore, we filed these papers yesterday for Your Honors consideration. THE COURT: MR. TRUITT: Let me hear from the Debtor. Yes, Your Honor, this is Brent Truitt of First of
Hennigan, Bennett & Dorman for the Debtor Defendants.
all, these supplemental filings came as a complete surprise to us last night. There was no effort to discuss them with us,
which is contemplated by Local District Rule 7.1.1., even though we were in discussions with UBS yesterday afternoon. What they filed was 20 or so pages of entirely new arguments and allegations and testimony, including a new witness or affiant that was not included in their original papers. Now, these papers do require a response because we believe they do not accurately describe either the process that has taken place since the April 12th hearing or the results of the reconciliation. And we do need some time to gather the facts
from those who are actually involved in that process, which are primarily the accounting people, and to respond in writing. They even acknowledge in their motion that these -- that their filings are not technically replies. In fact, what they are --
they go beyond what is contemplated by reply deadlines that
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 theyve already missed. They call the sections in their brief
supplemental statement of facts and supplemental argument. Its entirely new material that were seeing for the first time. However, even if it were a reply, it would be untimely under Local Rule 7071, which we believe does apply. an adversary proceeding context. We are in
And their order scheduling --
the expedited order scheduling a hearing on the TRO, which was on consent, did not contemplate a reply. They filed a Notice
of Completion of Briefing which did not include any reply or any mention that one was forthcoming. So Your Honor, what we ask for is a short adjournment of Mondays hearing so that we be given an opportunity to respond to the supplemental papers in writing, not just for us, but for the Court to have time to review their papers, as well as any response we might submit. Absent that, an adjournment, we
would object to the filing of the untimely papers and ask that they be stricken from the record. THE COURT: Well, let me ask this of the Debtor.
Assuming that Id be inclined to push this hearing off to the 15th, what assurance could you give UBS that the -- just to be plain about it -- the bad things that have happened wont be worse by the 15th? MR. TRUITT: Well, first of all, Your Honor, I -- we
dispute that bad things have happened, and I think they would
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 agree that discussions are ongoing as late as yesterday. will attempt to resolve any differences, but I cannot give assurance that we will be successful. But I can give them We
assurances that we will continue in good faith to attempt to resolve them. Meanwhile, we would have enough time to
adequately respond to this latest filing. THE COURT: Well, let me ask the question another way. What
UBS says, among other things, you have our money.
assurance can they have and could you give the Court that between now and then, if in fact it is their money, it wont be spent? MR. TRUITT: Well, I think, Your Honor, the affidavit
that we put in with our responsive papers answers that question, which is there are adequate funds, if they do establish that it is their money and they do establish, notwithstanding any co-mingling, that theyre entitled to it. I think we -- the evidence that we have already submitted to the Court shows that if at the time of the hearing that determination is made, there will be adequate resources to pay them. THE COURT: MR. MILLER: Does UBS have any reply briefly? Your Honor, I think under the
circumstances -- and we have asked the Debtors if theyd be willing to do this, and that is under the circumstances to -given the fact that there are a number of motions that are
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 pending regarding payment of bonuses, we are quite concerned that money may not be there if this gets continued. Weve
asked the Debtors if theyd be willing to put in an escrow account the approximately 3.2 million that we think is, at this point in time, is missing, pending a resolution. told us that they would not do that. They have
I think under the
circumstances that that is something that the Court should consider. MR. TRUITT: THE COURT: MR. TRUITT: Well -- Your Honor, may I be heard? Go ahead. Whether or not those discussions have
taken place, and I was not personally party to any such discussion, that is a new request of the Court, which is not properly before the Court, nor have we had time to adequately respond to that. Court, Your Honor. So thats not a pending motion before the Right now the only thing before the Court
is their request to file late some papers for a hearing thats scheduled to take place on Monday morning. THE COURT: Well, which I am inclined to grant. But
as a consequence to that, the Debtor has said, well, its new information and we want time to reply. request. And thats a fair
But I think what follows from that is the Courts
concern, and Im sure UBS, that its not prejudiced in any way, given the volatility of the situation at the Debtor, you know, in connection with the financial condition. And I think
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 today? its a fair concern. Court would have. So even if UBS had not raised it, the I guess
So, I mean, theres the choice.
Ill leave it to the Debtor.
I mean, one way to approach it is
for me to grant the relief and that if the Debtor wants more time to consider the new information, it needs to convince me that UBS will not be harmed by the delay. Now, whether that So
means escrowing funds or something else, I wont say. heres what Im going to do.
Ill put the -- I am going to
grant the relief thats been requested, but at Mondays hearing, if the Debtor provides, at least to the Courts satisfaction or an arrangement with which UBS otherwise agrees, that it wont suffer prejudice as a result of a delay, Ill put the hearing over to the 15th or some future date if the parties agree. So heres what Im going to do. Okay, Ill sign the order
setting -- granting the relief that UBS has requested with respect to filing the supplemental memorandum, but understand its without prejudice to the Debtor to press its request that the hearing be further postponed because of the filing of the new information. If the Debtor wishes to file a reply, its
free to do so, but from the Courts standpoint, its not presently necessary. MR. TRUITT: THE COURT: Are there any questions? No, Your Honor. Okay. Is there anything further for
24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 CERTIFICATION I certify that the foregoing is a correct transcript from the electronic sound recording of the proceedings in the aboveentitled matter. Honor. THE COURT: this hearing. And I will see you Monday. That concludes MR. MCMAHON: MR. TRUITT: THE COURT: No, Your Honor. No. All right. Counsel, thank you all for I appreciate
making yourselves available on such short notice. it. UNIDENTIFIED SPEAKER: Your Honor?
Thank you, Your
Court is adjourned.
(Court adjourned)
Lewis Parham
___________________________ Signature of Transcriber
5/18/07 __________ Date
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 May 21, 2007 10:09 a.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. BEN LOGAN, ESQ. Embarcadero Center West 275 Battery Street San Francisco, CA 94111-3305 Mayer, Brown, Rowe & Maw LLP By: THOMAS S. KIRIAKOS, ESQ. SEAN SCOTT, ESQ. 71 S. Wacker Chicago, Illinois 60606-4637 Womble Carlyle Sandridge & Rice By: STEVEN K. KORTANEK, ESQ. 222 Delaware Avenue, 15th Floor Wilmington, DE 19801 Brandon McCarthy
For Carrington Capital Management, LLC & Carrington Mortgage Services, LLC: For Carrington Capital Management, LLC & Carrington Mortgage Services, LLC: Audio Operator:
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 the Unsecured Creditors Committee: Blank Rome, LLP By: BONNIE GLANTZ FATELL, ESQ. Chase Manhattan Centre 1201 Market Street Suite 800 Wilmington, DE 19801 Blank Rome, LLP By: REGINA STANGO KELBAN, ESQ. One Logan Square 130 North 18th Street Philadelphia, PA 19103-6998 Hahn & Hessen LLP By: MARK T. POWER, ESQ. MARK INDELICATO, ESQ. DON GRUBMAN, ESQ. JAMES LAUGHLIN, 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: EDWARD ROSENTHAL, ESQ. 919 Market Street Suite 1401 P.O. Box 1070 Wilmington, DE 19899 Winston & Strawn LLP By: MATTHEW BOTICA, ESQ. 35 W. Wacker Drive Chicago, Illinois 60601-9703 For Fidelity: Baker Hostetler By: DONALD WORKMAN, ESQ. Washington Square, Suite 1100 1050 Connecticut Avenue, NW Washington, DC 20036-5304
For Kochak:
J&J COURT TRANSCRIBERS, INC.
3 APPEARANCES (Cont'd.) Smith Katzenstein Furlow LLP By: KATHLEEN MILLER, ESQ. The Corporate Plaza 800 Delaware Avenue P.O. Box 410 Wilmington, DE 19899 For the Debtors: Richards, Layton & Finger, P.A. By: MARCOS A. RAMOS, ESQ. MICHAEL MERCHANT, ESQ. CHRISTOPHER M. SAMIS, ESQ. One Rodney Square 920 N. King Street P.O. Box 551 Wilmington, DE 19899 Gebhardt & Smith LLP By: MIKE GALLERIZZO, ESQ. 401 East Pratt Street Ninth Floor World Trade Center Baltimore, MD 21202 Kirkland & Ellis, LLP By: JOSHUA SUSSBERG, ESQ. Citigroup Center 153 East 53rd Street New York, New York 10022-4675 Kirkland & Ellis, LLP By: SHIRLEY CHO, ESQ. 777 South Figueroa Street Los Angeles, CA 90017 Monzack and Monaco, P.A. By: RACHEL B. MERSKY, 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 GECC:
For Citigroup:
For Greenwich:
For RBC:
For Deutsche Bank National Trust Co.:
4 APPEARANCES (Cont'd.): Pepper Hamilton, LLP By: DAVID B. STRATTON, ESQ. Hercules Plaza Suite 5100 1313 Market Street P.O. Box 1709 Wilmington, DE 19899 For Premier Printing: Stevens & Lee By: JOSEPH GREY, ESQ. 1105 North Market Street Wilmington, DE 19801 Hunton & Williams By: JASON HARBOUR, ESQ. BENJAMIN ACKERLY, ESQ. Riverfront Plaza East Tower 951 East Byrd Street Richmond, VA 23219 Eckert Seamans By: SUSAN POPPITI ESQ. 300 Delaware Avenue Suite 1210 Wilmington, DE 19801 Ashby & Geddes By: GREGORY ALAN TAYLOR, ESQ. 500 Delaware Avenue 8th Floor P.O. Box 1150 Wilmington, Delaware 19899 Edwards, Angell, Palmer & Dodge, LLP By: WILLIAM CHAPMAN, ESQ. 919 North Market Street Wilmington, DE 19801 Bingham McCutchen, LLP By: RICHARD AGINS, ESQ. One State Street Hartford, CT 06103
For Wells Fargo/C-Bass:
For Litton Loan Servicing:
For UBS:
For Countrywide & GMAC CF:
For Deutsche Bank:
5 APPEARANCES (Cont'd.): For Bank of America: Kaye Scholer LLP By: NICHOLAS CREMONA, ESQ. 425 Park Avenue New York, NY 10022 Potter, Anderson & Corroon, LLP By: GABRIEL R. MACCONAILL, ESQ. Hercules Plaza 1313 North Market Street Wilmington, DE 19801 For Murray Capital Management, Inc.: For Washington Mutual: Murray Capital Management, Inc. By: MARTI MURRAY Connolly Bove Lodge & Hutz By: MARC PHILLIPS, ESQ. The Nemours Building 1007 North Orange Street Wilmington, DE 19899 Lowenstein Sandler PC By: IRA LEVEE, ESQ. 65 Livingston Avenue Roseland, New Jersey 07068-1791 Phillips, Goldmen & Spence By: ROBERT GOLDMAN, ESQ. 1200 N Broom Street Wilmington, DE 19806-4204 Drinker Biddle & Reath By: ANDREW KASSENER, ESQ. 1100 N. Market Street Wilmington, DE Heiman Gouge & Kaufman By: SUSAN KAUFMAN, ESQ. 800 King Street Wilmington, DE 19801
For NY State Teachers Retirement System:
For Data-Link/Fiseru:
For HSBC:
For QKC Maui Owner, LLC:
6 APPEARANCES (Cont'd.): For DIP Lenders: Pachulski Stang Ziehl Young Jones & Weintraub LLP By: TIMOTHY P. CAIRNS, ESQ. Wilmington, DE Office 919 North Market Street, 17th Floor P.O. Box 8705 Wilmington, DE 19899-8705 Monzack and Monaco, P.A. By: KEVIN MANGAN, ESQ. 1201 North Orange Street Suite 400 Wilmington, DE 19899 Chadbourne & Parke LLP By: JOSEPH SMOLINSKY, ESQ. 30 Rockefeller Plaza New York, NY 10112 Young, Conaway, Stargatt & Taylor LLP By: MICHAEL NESTOR, ESQ. The Brandywine Building 1000 West Street, 17th Floor Wilmington, DE 19801 For KST Data, Inc. Goldman Sachs: Klehr, Harrison, Harvey, Branzburg & Ellers, LLP By: CHRISTOPHER WARD, ESQ. 919 Market Street, Suite 1000 Wilmington, DE 19801-3062 Duane Morris LLP By: CHRISTOPHER WINTER, ESQ. 1100 North Market Street Suite 1200 Wilmington, DE 19801-1246 Becker & Becker, P.A. By: RICHARD BECKER, ESQ. 1701 Augustine Cut Off Ofc 535 Wilmington, DE 19803
For Oracle USA:
For CSFB:
For Hartford Fire Insurance:
For Regions Bank:
7 APPEARANCES (Cont'd): For Union Bank of California: Pepper Hamilton LLP By: DAVID FOURNIER, ESQ. Hercules Plaza, Suite 5100 1313 Market Street P.O. Box 1709 Wilmington, DE 19899-1709 For National City: Lamm Rubenstone Lesavoy Butz & David LLC By: SHERRY LOWE, ESQ. 3600 Horizon Blvd, Suite 200 Trevose, PA 19053
TELEPHONIC APPEARANCES: For Credit Suisse First Boston Mortgage Capital LLC and DLJ Mortgage Capital, Inc.: For Deutsche Bank, Inc.: For Speedpay, Inc.: For A C S: For Oracle USA, Inc.: For United States Trustee: For New Century TRS Holdings, Inc.: For Compensation Design Group: For Bank of America: For Law Offices of David J. Stern, PA: Chadbourne & Park, LLP By: CHRISTY RIVERA, ESQ.
Bingham McCutchen, LLP By: RICHARD AGINS, ESQ. Frank/Gecker LLP By: JEREMY KLEINMAN, ESQ. Gerard Singer Levick & Busch By: Michelle Shriro Day Pitney, LLP By: AMISH DOSHI, ESQ. US Trustee Office of Wilmington By: WALT THEUS, ESQ. Windels, Marx, Lane & Mittendors By: SCOTT MATTHEWS, ESQ. Compensation Design Group By: FRANK GLASSNER Daye Scholer, LLP By: NICHOLAS CREMONA, ESQ. Law Offices of David J. Stern PA By: FREDERIC DISPIGNA, ESQ.
8 TELEPHONIC APPEARANCES (Cont.d): For Union Bank of California: Jeffer Mangels Butler & Marmaro By: BARRY FREEMAN, ESQ. For Murray Capital Mgmt.: For UBS Real Estate Securities, Inc.: For Greenwich Capital Financial Products: For Wells Fargo Bank: Murray Capital Management, Inc. By: MARTI MURRAY Paul Hastings Janofsky & Walker By: KIMBERLY NEWMARCH, ESQ. Kirkland & Ellis By: BENNETT SPIEGEL, ESQ. Kelley Drye & Warren LLP By: JONATHAN HOOK, ESQ.
9 1 2 THE COURT: MS. UHLAND: Hello. Good morning, Your Honor. Suzanne
3 Uhland of O'Melveny & Myers for New Century. 4 Your Honor, with respect to this morning's agenda, I We would
5 would like to proceed in order with one exception.
6 like to take on initially the debtors' motion with respect to 7 certain -- the different bond issues because we'd like to get 8 this facilitated quickly because we need to actually get out to 9 certain states today and notify them with respect to the 10 outcome of that proceeding. 11 Or the proceeding today on that.
So if that's acceptable to Your Honor, we'd like to
12 take that matter on first. 13 14 hearing. 15 THE COURT: Does anyone have an objection to the
Then let's proceed. MR. LOGAN: Thank you, Your Honor. Ben Logan of
16 O'Melveny & Myers.
Let me briefly advise the Court on the
17 status of our resolution of two of the objections that were 18 filed to this motion. 19 First off, Credit Suisse/First Boston filed a limited
20 objection principally related to the first proposal we had from 21 the Hartford. In discussions with counsel for Credit
22 Suisse/First Boston before the start of Court and based on my 23 representation that we would be going forward, not with the 24 Hartford, but with bond safeguard and also because we filed the 25 adequate protection motion last week, set for hearing on May J&J COURT TRANSCRIBERS, INC.
10 1 30th, Credit Suisse withdraws their objection and they 2 authorized me to so advise the Court. 3 In addition, the Unsecured Creditors Committee filed
4 an objection which largely reflected the status of work with 5 the Committee at the time to try to devise a better means for 6 the estate to realize the surety bonds. And I'm pleased to And that's
7 report that we've -- I think we've gotten there.
8 will be the subject of the presentation on the motion which 9 I'll turn to now. 10 11 of this. Your Honor, we will have a proffer to make at the end But let me first describe the situation. New Century
12 operates in a regulated industry, several regulated industries. 13 And in order to conduct it's servicing business, which is the 14 subject of the motion to approve the sale later today, it needs 15 licenses. In order to have those licenses, many, not all, but The same is also true for
16 many states require surety bonds. 17 the loan origination business. 18
Historically, New Century obtained the surety bonds
19 to operate in the various states through bonds issued by the 20 Hartford Company. They were unsecured because at the time
21 people thought New Century was a very good, stable credit. 22 They totaled slightly in excess of $20 million. 23 Shortly pre-petition, the Hartford notified New
24 Century that it was terminating all those bonds going forward. 25 And typically, either pursuant to the bond agreement or state
11 1 law, the Hartford was free to do that for any reason generally 2 on 30 to 60 days notice. And as a result, shortly after the
3 debtors filed the petitions, they're facing a situation where 4 those bonds would expire generally in late April or early May. 5 It varied from state to state. 6 crisis. But the debtors were facing a
If those bonds terminated pursuant to the notices, New Any prospect for a
7 Century would not have licenses to operate.
8 going concern sale, the servicing business would be killed. 9 Any effort to sell the loan origination platform similarly 10 would be killed. And as a result, the debtors engaged in
11 negotiations with the Hartford over possibly rescinding those 12 notices of termination or reaching an accommodation. 13 After substantial give and take during the middle New Century worked hard to
14 part of April, a deal was struck.
15 pare down the number of bonds it needed, really looking hard at 16 the state requirements, to maintain a going concern business 17 for the loan origination platform and also the servicing 18 business. 19 20 amount. The total bonds aggregated about $6.7 million face And the Hartford was willing to extend those for 120
21 days in return for $5 million cash collateral, cash collateral 22 to secure not on the $6.9 million of reinstated bonds, but also 23 to cash collateralize, cross collateralize Hartford's unsecured 24 obligations for bonds that predated the filing of the 25 petitions.
12 1 That was the subject of a lot of negotiations. The
2 debtors pushed hard for a better deal, but the Hartford, quite 3 frankly, had a lot of leverage at the time and they stuck to 4 their guns. And despite a lot of efforts to negotiate for a
5 lower amount of cash collateral and better terms, the Hartford 6 said, no, it's $5 million. And they really did look at it.
7 They advised the debtors as having a substantial element of 8 buttressing their position with respect to the pre-petition 9 bonds. 10 Incidentally, the debtors' records indicate that So it's a And one that
11 there's never, ever been a call on these bonds. 12 contention obligation, but it's an obligation.
13 was important to the Committee in particular that we strive not 14 to cross collateralize. 15 In any event, on May 3, bids were due on the loan No qualified bids were submitted and as
16 origination platform.
17 a result, the debtors promptly recalculated their bond needs if 18 one pulled out the bonds which were required only for the loan 19 origination business. And the result of that was a reduced
20 bonding need down from -- close $7 million down to 21 approximately $3.8 million. 22 The debtors approached the Hartford. Since the
23 Hartford had insisted on $5 million of cash collateralization 24 for approximately $6.9 million of bonds, new bonds, it was our 25 hope that the Hartford would reduce the cash collateralization
13 1 requirement. At least initially, they declined to do so
2 explaining that this was viewed by the Hartford as a package 3 where the cash collateralization was probably more important to 4 them to secure the pre-petition obligations than it was the new 5 bonds, which after all were only going to be in place for 120 6 days and were needed to get us to a close of the sale of the 7 servicing business which will take a while after the Court 8 conducts the hearing today, assuming the Court approves that 9 sale. And there also are likely to be transition services
10 where the debtors will need to maintain licenses for a period 11 of time until the party that was view -- was the stocking horse 12 at the time and ultimately, you'll hear, was the winning bidder 13 at the auction, until they obtain their licenses. 14 In any event, after the Hartford told the debtors
15 they would not change the proposal, the debtors contacted two 16 brokers who deal in this industry, Willis of Arizona and AON. 17 And they endeavored to find alternative surety bonding 18 companies. And the debtors, in fact, received two proposals.
19 One from Bond Safeguard Company and that is, indeed, the 20 proposal we are going to suggest, we're going to move to go 21 forward today with. And another from a company that AON
22 identified, but AON identified them very late in the process. 23 And the debtors' evaluation was that that proposal
24 was economically equivalent to the one from Bond Safeguard and 25 quite frankly, just the logistics are daunting to switch horses
14 1 on one of these surety companies. There's a lot of work
2 involved with the states to make sure they're comfortable that 3 the bonds are in place. The debtors undertook substantial
4 efforts to coordinate with the states and with Bond Safeguard 5 Company in Willis to get the new bonding proposal in place. 6 That took people -- it required people to do extraordinary 7 things. To switch horses again to go with the AON proposal,
8 which judged by the debtors, just not to be feasible. 9 In any event, the proposal before the Court today is
10 to approve a proposal where Bond Safeguard Company will issue 11 new bonds. They will have a one-year duration which gives us
12 greater latitude to work on transition services with the 13 winning bidder for the servicing business. 14 The debtors have worked very closely with Committee
15 counsel to scrutinize yet again the quantity of bonds needed. 16 And it's been reduced down to approximately $2.1 million. 17 that's based upon some direct one-on-one conversations and 18 written confirmations from the states, giving them exactly what 19 the debtors are going to be doing going forward. So again, the And
20 amount of cash collateral was reduced very substantially. 21 The proposal has no cross collateralization because
22 Bond Safeguard doesn't have any preexisting bonds to 23 collateralize. That's very attractive for a number of reasons.
24 Obviously, cross collateralization is not preferred if there's 25 any alternative, but beyond that, the debtors are posting this
15 1 approximately $2.1 million of cash collateralization in order 2 to secure some bonds that will hopefully be outstanding for a 3 fairly limited time period. 4 To the extent those secure obligations also of a
5 short time duration, the debtors prospects or the estate's 6 prospects of getting some of that collateral back as 7 substantially enhanced. Bond Safeguard has agreed to word with
8 the debtors and to the extent that they get comfortable, that 9 there will be no claims under the bonds, to release back the 10 cash collateral. 11 the debtors. 12 In contrast, if the cash collateral secured some 20 No promises, but they will work closely with
13 some million dollars of bonds for a multitude of different 14 operations in a multitude of different states, it's the 15 debtors' assessment that it will be much more difficult to get 16 those bonds back. 17 18 affairs. In any event, Your Honor, that's the state of That's the proposal. The debtors have worked very
19 closely with the Creditors Committee on this and thanked them 20 for their efforts both to help us pare down the number of bonds 21 required, but to help us evaluate the alternative proposals. 22 Today is a critical date. 23 I should have mentioned the Hartford did extend the And
24 expiration of their cancellation notices through today.
25 the reason Ms. Uhland asked that we have this heard first is we
16 1 need to get this order entered as soon as possible, assuming 2 the Court approves it. And then there are some logistics that
3 people of New Century will undertake to make sure that the new 4 bonds are, in fact, issued and the licenses maintained so the 5 estate can get to a close of the sale of the servicing 6 business. 7 That's my presentation. I'm prepared to make a
8 proffer unless there are any questions or -9 10 11 THE COURT: MR. LOGAN: THE COURT: I have a couple questions. Certainly. One, does this moot the Hartford response
12 that was filed yesterday? 13 14 that. MR. LOGAN: I'll have to let Hartford respond to
Some of the questions they raised the proffer was going I -- at least from our perspective,
15 to address, Your Honor. 16 the Hartford -17 THE COURT:
Well, let me ask, is Hartford represented
18 here today? 19 MR. WINTER: Good afternoon, Your Honor. Chris
20 Winter with Duane Morris for Hartford Fire Insurance. 21 Your Honor, I believe my co-counsel, Scott Leo, is on And Mr. Leo has been admitted pro hoc
22 the phone this morning. 23 vitae. 24 25 THE COURT: MR. WINTER:
I do not see him on the list. Scott?
17 1 2 3 THE OPERATOR: THE COURT: MR. WINTER: Mr. Leo has not dialed in, Your Honor.
Thank you. Okay. Then Chris Winter for Hartford
4 Fire Insurance, Your Honor. 5 6 MR. WINTER: (Laughter) Your Honor, we filed the response
7 because we believed that there seemed to be some holes in the 8 diligence that the debtor had engaged in. We also wanted to
9 point out to the Court that we had extended these bonds after 10 reaching an agreement with the debtor. 11 Hartford had significant additional flexibility on
12 issues like cross collateralization, the entire amount of the 13 cash collateral that really weren't explored. 14 bit surprised to see Bond Surety brought in. We were a little Frankly, Hartford
15 is a larger bonding company with a higher rating and we just 16 wanted to point these items out to Your Honor. 17 THE COURT: Okay. Sounds like a U.S. Trustee And
18 objection, actually.
Well, can you answer the question?
19 that is at this point, given the debtors change of course, is 20 the reply now moot? 21 Or is there an outstanding objection? Your Honor, I believe the -- we will We would raise the
MR. WINTER:
22 have to concede the reply is likely moot.
23 issue and ask the question of whether the debtor is pursuing 24 the best course with respect to meeting its bonding 25 requirements. And in listening to the upcoming proffer, I
18 1 would pose the question, is the debtor sure that Bond Surety 2 can meet all of its bonding requirements. Just as a for
3 instance, I understand that initially the debtor had indicated 4 that it required a bond in the State of Vermont. Bond Surety I
5 is not licensed to issue bonds in the State of Vermont.
6 understand that the debtor has now changed its requirements so 7 that it doesn't require a bond in the State of Vermont. 8 Perhaps the debtor can speak to that. 9 THE COURT: All right. Does anyone else care to be
10 heard preliminarily? 11 12 13 MR. WINTER: THE COURT: MS. KELBAN: Thank you, Your Honor. Thank you. Good morning, Your Honor. Regina Stango
14 Kelban from Blank Rome on behalf of the Official Committee of 15 Unsecured Creditors. 16 Your Honor, Mr. Logan has accurately characterized From our perspective, the Committee was
17 what has transpired.
18 very concerned with the Hartford proposal because, number one, 19 of the cross collateralization and the bootstrapping of pre20 petition unsecured claims into super priority claims of 21 potentially 21 million, plus secured claims of potentially 5 22 million. And we were extremely concerned about that and I --
23 we're actually surprised to see that Hartford is now coming 24 back at the last moment because they showed, in our view, very 25 little flexibility.
19 1 However, we do view the Bond Safeguard to be a much
2 better proposal for the estate in light of the fact that it's 3 limited to approximately $2.3 million maximum collateral. 4 They're only getting administrative claims for any draws under 5 their bonds. We believe that the fact that there's no ability
6 to cross collateralize because they weren't a pre-petition 7 surety company, that that will keep it cleaner and neater and 8 we have a much greater chance of getting our collateral back 9 under any liquidating plan for the Unsecured Creditors. 10 So with those, you know, factors, we very much, you We worked
11 know, encouraged in support of this revision.
12 diligently with debtors' in-house team, their consumer 13 regulatory folks. Our consumer regulatory folks from Blank
14 Rome have reviewed all their licensing and they've -- we've 15 gotten comfortable that that's one of the reasons the numbers 16 have come down. That there were excess licenses or excess
17 bonds out there that were just not needed in light of what 18 exactly they were doing in each state. 19 one of the examples. 20 that is not required. 21 So I think in light of all this, Your Honor, this is So -- and Vermont was
We were -- we got more comfortable that
22 a much better proposal for the estate because it really gives 23 the estate an opportunity to get their collateral back at the 24 end of the day and we're hopeful that no draws will be on the 25 bonds. Thank you, Your Honor.
20 1 THE COURT: Thank you. All right. And I have just
2 one other question. 3 amended motion. 4 5 6 MR. LOGAN: THE COURT: MR. LOGAN:
There is reference in the responses to an
Yes, sir. I haven't seen that. That was filed, I believe last Thursday,
7 Your Honor. 8 THE COURT: Well, is it -- see, the motion that's in
9 the binder is titled motion, it's not titled amended motion. 10 MR. LOGAN: We have a -- I'd be more than happy to
11 give you my copy, Your Honor. 12 13 14 15 THE COURT: MR. LOGAN: THE COURT: Thank you. (Pause) Yeah, it wasn't in the binder. That was filed last Thursday or Friday,
16 Your Honor, and at the time we wanted to maintain flexibility 17 to see if the AON proposal would come through in sufficient 18 time, to see if the Hartford would come back with something 19 that was more attractive to the estates. 20 Bond Safeguard proposal in some detail. 21 22 23 24 25 THE COURT: MR. LOGAN: THE COURT: (Pause) Bear with me for just a minute. (Pause) All right. Thank you. You may proceed. It does mention the
Thank you, Your Honor.
21 1 2 that? 3 4 MR. LOGAN: THE COURT: Pardon? I'm sorry, I -THE COURT: Do you need your motion back again to do
Do you need your copy of the motion back
5 to do that? 6 7 8 9 it. 10 Your Honor, just one real brief comment. We did talk MR. LOGAN: THE COURT: MR. LOGAN: No, I don't, Your Honor. All right. It will lighten my load for you to keep
11 to Hartford on Monday, a week ago, and got a proposal from Mr. 12 Leo on Thursday. At the time, we did have dialogue and the
13 greatest sticking issue, quite frankly, was the cross 14 collateralization. If the Hartford were willing to cave on First I've
15 that, we might have been in a different situation.
16 heard that they had any flexibility on that issue at all. 17 But be that as it may, we've got our proposal now and
18 we just simply don't have time to continue to evaluate 19 alternatives. It's critically important that we maintain in
20 place these bonds so that we maintain the licenses so we can 21 carry out the going concern sale. And at some point in time,
22 one needs to just make a decision and get on with life. 23 That then turns me to the proffer. We have in the Marc, stay Mr.
24 court Mr. Marc Loewenthal. 25 there, stay there.
Marc you can sit still.
Spelled M-a-r-c, L-o-e-w-e-n-t-h-a-l.
22 1 Loewenthal was the senior vice-president for Enterprise Risk 2 Management and chief privacy officer for New Century Financial 3 Corporation. His responsibilities include the insurance and So these bonds are
4 regulatory affairs of the corporation. 5 within his jurisdiction. 6
He joined New Century in October of 2002.
At the
7 time he joined, he was president of E-Conduit Corporation which 8 was an entity that the debtors acquired in 2002. It was a
9 consulting company that provided consulting services to various 10 consumer financial institutions, debtor buyers collection 11 agencies and collection law firms with respect to various 12 regulatory issues. 13 Prior to that, he was with Providian Financial
14 Corporation, again, as senior vice-president for public policy 15 and the chief privacy officer. And before that, he was a
16 partner at the law firm Arter & Hadden. 17 Mr. Loewenthal would testify that prior to the
18 petition date, the debtors obtained their surety bonds which 19 were critical to maintaining their licenses, from the Hartford 20 Company. It had -- the debtors had approximately 360 bonds in
21 total with an aggregate face amount of slightly in excess of 22 $20 million. 23 unsecured. 24 He would testify that prior to the petition date, He would testify that all of those bonds were
25 shortly prior to the petition date, the Hartford sent the
23 1 debtors cancellation notices for all those bonds that were 2 effective generally in late April or early May. He would
3 further testify that beginning about the end of the first week 4 of April, the debtors engaged in negotiations with the Hartford 5 about possible extensions or terminations of those cancellation 6 notices. 7 And he will testify after substantial give and take
8 transpiring several weeks, ultimately an agreement was reached 9 that was set forth in the original motion, where the Hartford 10 did agree to extend the cancellation notices until today, which 11 was selective because it was the next omnibus hearing date 12 which could allow this motion to be heard on regular notice for 13 a change. 14 It also provided that the Hartford would receive $5
15 million of cash collateral and that that cash collateral and a 16 super administrative priority would secure both the new bonds, 17 which would be issued for 120 days, and also the pre-petition 18 bonds. 19 He would testify that of the total -- there was
20 approximately $6.7 million that were going to be reinstated 21 under that proposal. And he would testify that approximately
22 3.8 million of that were designated to support the servicing 23 business and $2.8 million of that total were designated to 24 support the loan origination business. And he would testify
25 that unfortunately on May 3, bids were due for the loan
24 1 origination business and no qualified bids were submitted. 2 He would then testify that very shortly thereafter
3 the debtors engaged in further negotiations with the Hartford 4 in an effort to reduce the amount of cash collateral the 5 Hartford would require. And he would testify that over the
6 course of about a week, the Hartford considered the matter and 7 ultimately concluded that it would not budge from its existing 8 proposal and explain that they viewed the package as a total 9 package and that the cross collateralization was a very 10 important feature for them. And indeed, they viewed their risk
11 probably as being more attendant to the pre-petition bonds than 12 to the new bonds that would be issued for a short time period. 13 He would testify that at that point, he directed
14 people on his staff to explore any possible alternative, to 15 aggressively scour the marketplace. And they did so primarily
16 through two brokerage companies, Willis of Arizona and AON. 17 And he would testify that the first company to come back with a 18 proposal was Willis. Willis identified a bonding company known
19 as Bond Safeguard of Arizona. 20 He would testify that Bond Safeguard has a best
21 rating of A minus and V which is slightly lower than the 22 Hartford's. But he would testify that members of his staff
23 worked directly with the appropriate regulators of each of the 24 states to insure the debtors that Bond Safeguard was acceptable 25 to the state regulators in each of those states. And he would
25 1 testify that the state regulators affirmed that Bond Safeguard 2 was acceptable and therefore bonds issued by Bond Safeguard 3 would be fully effective to achieve the objectives of this 4 motion. 5 He would testify that the proposal from Bond
6 Safeguard was superior to the Hartford proposal in several 7 respects. First off, that the amount of collateralization
8 would be pegged to whatever the face amount of the bonds was. 9 So if we needed $3.8 million, there'd be $3.8 million of cash 10 collateral. And if we were able to pare down the list further,
11 the amount of cash collateral would be reduced dollar for 12 dollar. 13 He would testify that their proposal was to issue
14 bonds for one year because that's the period of time they 15 operate under and which gave the debtors greater flexibility to 16 have a longer transition period, if necessary, with the winning 17 bidder on the servicing platform. 18 He would testify that, of course, there was no cross And he would testify that the fees to be
19 collateralization.
20 charged were approximately -- not approximately, were exactly 21 30 cents per $1,000 of bonds, which as things work out, equates 22 to about $60,000. 23 He would testify that AON located another bonding
24 company, International Fidelity Insurance Company, which was 25 willing to make a very similar proposal, but that that proposal
26 1 came in so late that it just was adjudged by the debtors not to 2 be realistic to try to switch gears and go with that proposal. 3 Plus it offered no advantages over the Bond Safeguard proposal. 4 So other than trying to maintain flexibility in case Bond 5 Safeguard fell apart for whatever reason, the debtors saw no 6 reason to emphasize that as a primary alternative. 7 He would further testify that members of his staff
8 worked very closely with counsel for the Creditors Committee 9 and directly with state regulators to make absolutely sure that 10 bonds were obtained for every state where the debtors needed 11 bonds to maintain their licenses, and that no bonds were paid 12 for in states where they were unnecessary. And he would
13 testify that there were direct one-on-one conversations with 14 the state regulators to make sure that the debtors, to the best 15 -- the absolute best of their ability, were obtaining the 16 correct number of bonds, no more, no less. 17 He would testify that the states were quite They were willing to respond in
18 cooperative in that effort.
19 writing so the debtors have written confirmations from the 20 states that the bonds being obtained are those that are needed. 21 And for states which have been dropped from the proposal, we 22 have written -- the debtors have written confirmations from the 23 states that those bonds are not needed. 24 He would testify that that effort generated the
25 dropping of the State of Vermont, for example, but that's just
27 1 one example. And he would testify that as a result, the number
2 of bonds that are needed have a face -- the bonds that are 3 needed have a face amount of $2.096 million. The order that
4 we're going to present to the Court contains some additional 5 flexibility to go up to $2.3 million. And he would testify
6 that that's purely based on the belief that it would be prudent 7 to have some level of comfort, just in case something untoward 8 happens today as we implement the bonds. And he would testify
9 that the Creditors Committee endorses that approach. 10 Finally, he would testify that these bonds are
11 critical to maintaining the licenses necessary to carry out a 12 sale of the servicing business. He would testify that it's And he
13 critically important that the order be entered today.
14 would finally testify that based upon all the efforts the 15 debtors made, there is no other surety that would provide bonds 16 on a superior basis. No surety would provide bonds post-
17 petition on an unsecured basis; that under the standards of 18 364, this is the best collateral package that could be obtained 19 and that it's a fair and reasonable package. 20 end of the proffer. 21 THE COURT: Does anyone care to examine Mr. And that's the
22 Loewenthal? 23 24 approach? 25
I hear no response. We do have an order, Your Honor. May I
MR. LOGAN:
THE COURT:
Yes.
28 1 2 MR. LOGAN: (Pause) Your Honor, I was just advised by Ms.
3 Kelban that they would like to make one minor change to the 4 order which is fine with the debtors. 5 interlineate it. 6 7 We could probably just
It's in paragraph number 11. All right. The next to last line, it starts with the
THE COURT: MR. LOGAN:
8 word "filed".
And their proposal is to replace the word So strike the word Just to
9 "filed" with "served on Bond Safeguard."
10 filed and replace that with served on Bond Safeguard. 11 save the burden of filing objections with the Court. 12 THE COURT: All right.
I've made that change.
Does
13 anyone else care to be heard in connection with this motion or 14 the form of order? 15 presented. 16 No response. I see that the amount has been reduced Revised form of order that's been
17 to 2.3 million. 18
Okay, very good. And Your Honor, if Mr. Loewenthal could
MR. LOGAN:
19 be excused, we really do need to call the states and let them 20 know that the order has been signed. 21 22 THE COURT: MS. KELBAN: Certainly. Your Honor, as this matter has been
23 concluded, may I be excused? 24 25 THE COURT: MS. KELBAN: You may. Thank you.
29 1 2 THE COURT: MS. UHLAND: The order has been signed. Thank you, Your Honor. We are now, I I
3 think, prepared to move forward with the sale hearing today. 4 think that -5 THE COURT: Let me just say for the record, Ms. To the extent that the
6 Uhland, forgive me for interrupting.
7 Hartford reply can, in anyway, be considered to be an objection 8 or still outstanding in anyway, I overrule it based on the 9 record that's made here today. 10 11 12 MS. UHLAND: THE COURT: MS. UHLAND: Thank you, Your Honor. All right. Your Honor, with respect to the sale
13 hearing, we believe that we've resolved all objections that we 14 are considering today. 15 We're prepared to go forward.
We did -- the Committee and the debtors, just before
16 the hearing, received some minor additional language changes 17 that we may need to finalize which I think we'll be able to do 18 rather quickly at the end of the proceeding. 19 propose to go forward. 20 Mr. McMahon. But I think we
And I believe, I want to confirm with
Are the U.S. Trustee's language changes to the
21 sale order acceptable or have those been resolved? 22 MR. MCMAHON: Your Honor, good morning. Joe McMahon
23 for the United States Trustee.
Our language changes were
24 incorporated into the form of order. 25 THE COURT: Thank you.
30 1 MS. UHLAND: With that, Your Honor, I propose to
2 proceed with the presentation and the proffer and then maybe 3 briefly coordinate with Creditors Committee counsel and then we 4 can walk through the various changes to the order. 5 6 7 8 THE COURT: MR. DOSHI: THE COURT: MR. DOSHI: All right. Excuse me, Your Honor. Yes. My name is Amish Doshi. I'm an attorney
9 with the firm of Day Pitney and we represent Oracle USA, Inc. 10 in this matter. Counsel just indicated that she believes that I'm not sure if this is an
11 all objections have been resolved.
12 appropriate time or if -- I have a few concerns regarding the 13 proposed order which we received this morning. So I'm not sure
14 if this an appropriate time or if I can be heard at a later 15 date. Whatever Your Honor wishes, I can proceed in that
16 manner. 17 MS. UHLAND: Your Honor, I think it may make sense to
18 go through -- as we go through the changes to the proposed 19 order, maybe immediately before that, we can hear Oracle's 20 concerns with respect to the form of order at that time. 21 22 Mr. Doshi? 23 24 25 MR. DOSHI: THE COURT: MR. DOSHI: That's is fine, Judge. Thank you. Thank you. Let's proceed then. THE COURT: All right. Is that all right with you,
31 1 2 MS. UHLAND: MR. FREEMAN: Thank you. Your Honor, this is Barry Freeman at
3 Jeffer Mangels.
With respect to what was just said on behalf
4 of Oracle I think that it's also true with respect to the Union 5 Bank objection and I have no problem reserve -- speaking later. 6 But I just wanted to make the same statement. 7 8 THE COURT: MS. UHLAND: All right. Thank you, Your Honor. The assets that
9 the debtor is seeking approval to sell today consists of its, 10 what we refer to as its loan servicing platform. 11 The loan servicing platform includes its mortgage These are the contractual rights to service
12 servicing rights. 13 the loans.
And in respect to the debtors, it's approximately
14 servicing rights with respect to $18 billion of loans. 15 The servicing advances made with respect to those And in addition, in
16 loans of approximately $63 million.
17 connection with the Carrington sale, the debtors are also, with 18 respect to the sale to Carrington, selling their servicing 19 business. In other words, the going concern aspects of the
20 sale including certain -- potentially certain contractual 21 obligations and employees liabilities being assumed by 22 Carrington. 23 As the Court is aware, the court order entered a bid
24 procedures order with respect to the Carrington proposed sale 25 or the servicing proposed sale of April 20th, and thereafter,
32 1 the debtors scheduled and noticed an auction for May 16th with 2 bids due on May 10th. 3 The original stocking horse bid was, at the time,
4 valued -- because the valuation of the bids depends on -- it 5 was based on a percentage basis on the servicing rights and the 6 servicing advances, we valued as of the commencement of the 7 auction the Carrington original bid at approximately 147 8 million based on the servicing advances and excluding certain 9 other factors such as the crediting and the breakup fee. 10 Immediately prior to the -- I'm sorry, on May 10th,
11 the debtors received approximately three additional qualified 12 bids for the assets. The additional parties submitting bids
13 included Ellington Management Group, LLC, I'll refer to it as 14 Ellington; Morgan Stanley Mortgage Capital, Inc., Morgan 15 Stanley; and a joint bid by Credit-based Asset Servicing and 16 Securitization LLC, which we'll refer to as C-Bass; and 17 Barclay's Bank, PLC, Barclay's. And Carrington, based on the
18 Court's prior order, had already been qualified as a bidder for 19 the assets. 20 After the bids were received, the debtors, Lazard
21 (phonetic) and the Creditors Committee met and evaluated and 22 discussed the economic terms of the bids. They also analyzed
23 different methods by which the different bidders could improve 24 an economic and uneconomic portions of their bid through the 25 process and prior to the auction process.
33 1 Prior to the auction, the debtors, Lazard and the
2 Creditors Committee determined that the bid from Morgan 3 Stanley, which had submitted a gross qualifying bid of 152 4 million was the highest and best bid. And on May 16th, when
5 the debtors and the representatives of the debtors, Lazard and 6 the Creditors Committee met to commence the auction, they 7 notified the other parties that the Morgan Stanley bid is the 8 highest and best bid which would be the bid for the other 9 bidders to beat. We assembled at the offices of O'Melveny
10 Myers in New York at 10 a.m. on May 16th. 11 For the purposes of the auction, the debtors In other words, because the
12 evaluated the bids on a net basis.
13 servicing advances are currently financed by the Citigroup, the 14 debtors backed out those portions and certain other liabilities 15 from the bids so that we could bid -- compare the bids on an 16 apples to apples basis. For example, certain of the bidders
17 were bidding only on the mortgage servicing rights whereas 18 other bidders were bidding on the ongoing operations. And
19 therefore, the debtors together with Lazard and the Creditors 20 Committee, made certain adjustments in the bidding process to 21 take that into account. 22 Over the 10-hour auction, the debtors conducted 18
23 rounds of spirited and competitive bidding, during which time, 24 each bidder would announce their economic and non-economic 25 terms of their bids.
34 1 Relatively early in the bidding process, Ellington
2 and C-Bass chose not to submit higher and better bids and 3 voluntarily dropped out of the auction. Thereafter, only
4 Carrington, which was bidding on the platform, the mortgage 5 servicing rights and the advances; and Morgan Stanley bidding 6 only on the mortgage services rights and the advances remained. 7 In the final round of bidding, Morgan Stanley bid a
8 net amount of approximately -- again this is net amount -- of 9 approximately 148 million. Or gross bid of 185 million. In
10 connection with that bid, Morgan Stanley indicated it would 11 only make such a bid if it would be the debtors and the 12 Creditors Committee -- or the debtors would, with the Creditors 13 Committee's consent -- use its discretion to relieve Morgan 14 Stanley from its obligation to be a backup bidder. 15 The debtors, after consultation with the Creditors
16 Committee, determined that it would commit to use its 17 discretion to relieve Morgan Stanley from being a backup bidder 18 if it would submit that bid. 19 Thereafter, Carrington bid and that amount of
20 approximately $150 million, or gross bid of approximately $184 21 million. Morgan Stanley declined to raise its bid. Thus the
22 debtors declared Carrington's final bid as the highest and best 23 bid at the auction. Over the course of the auction, Carrington
24 consistently improved the economic and non-economic terms of 25 its bid over the numerous 18 rounds of the auction.
35 1 In considering the Carrington bid to be the highest
2 and best bid, the debtors considered that -- in a consultation 3 with the Creditors Committee, these following factors. And
4 some of these I'll walk through later which are changes from 5 the original Carrington APA to the asset purchase agreement 6 we're seeking to approve today. 7 First, the hold-back was reduced -- was the smallest
8 of any bidders and was reduced by Carrington to a fixed amount 9 of $5 million. 10 The Carrington bid, because it was a going concern
11 bid, resulted in the fewest unsecured claims against the 12 estate. 13 Further, Carrington was committed to retaining
14 substantially all relevant, current employees, ensuring 15 continuity of the business and avoided termination charges and 16 other rejection claims. 17 Further, and this is a change from the original
18 Carrington bid, Carrington agreed to pay accrued -- or assume 19 accrued and unpaid vacation time for substantially all relevant 20 employees. 21 Importantly, Carrington modified their bid to assume
22 the cure expenses with all assumed contracts except for the 23 servicing agreements. 24 Based on these modifications, together with the
25 overall price, the debtors determined in consultation with
36 1 Creditors Committee that the Carrington bid represented the 2 highest and best bid. 3 As a result of these various changes, I'd like to
4 briefly describe some major changes from the Carrington 5 agreement. And we can, if necessary, go through in more detail
6 in the APA, from the filed agreement to the one seeking to be 7 approved today. 8 With respect to the contract, as I noted, except for
9 the servicing agreements, Carrington is assuming the cure costs 10 with respect to contracts to be assumed. In light of that
11 modification, the debtors have changed the agreement to provide 12 a 60-day period during which Carrington may determine to assume 13 or reject the contracts that are on the current list of 14 proposed contracts, or proposed to be assumed contracts. 15 Further, the debtors and Carrington have worked out a
16 mechanism where, to the extent there are some subsequently 17 identified contracts, the debtors may seek to assume and assign 18 those contracts if Carrington sur-request on the debtors 19 consent. 20 Further, as I noted, Carrington is assuming
21 liabilities with respect to the paid time off for the employees 22 that it is -- for the servicing employees that it is going to 23 hire. 24 25 number. It has reduced the hold-back to a fix $5 million
37 1 It has also agreed to modify a certain document
2 destruction language to accommodate requests from the SCC to 3 assure the documents are not inadvertently or not -- or 4 untimely destroyed to the extent the SCC requires those 5 documents for additional investigation purposes. 6 With respect to the economics of the bids, initially
7 Carrington had bid 50 basis points on the loans that are the 8 subject of the servicing. 9 to be the winning bidder. 10 the servicing advances. Ultimately, they bid 69 basis points And Carrington had bid 90 percent on
And in their winning bid, bid 95
11 percent on the servicing advances. 12 Your Honor, there are some detailed further language
13 in the order and in the asset purchase agreement itself to deal 14 with some of the issues with respect to the debtors' 15 obligations that it's going to retain with respect to the 16 servicing agreements. But in essence, as I noted, Carrington
17 is assuming the cure obligations for all agreements other than 18 the servicing agreements. 19 With respect to the servicing agreements, there are
20 certain, what we refer to as servicing obligations, that are 21 obligations that the servicer, which is, in this case, New 22 Century Mortgage, owes to the indentured trustees under those 23 servicing agreements. I propose to describe this in more
24 detail when we review the order. 25 With respect to each of the separate trustees, Wells
38 1 Fargo and Deutsche Bank which are trustees for different of the 2 indentures, the debtors have resolved their objections to the 3 cure amounts in slightly different ways. 4 With respect to Wells Fargo, Wells Fargo's withdrawn
5 its objection on cure and has -- the debtors have agreed to a 6 $150,000 reserve for cure amount for certain legal expenses to 7 be incurred by Wells Fargo. 8 and other expenses. And as I said, we will -- legal
We will walk through that precise language
9 which creditors committee and the debtors are still refining. 10 But we should be able to do that momentarily. 11 With respect to Deutsche Bank, the parties are in
12 discussions about establishing an appropriate mechanism to 13 again resolve the servicer obligations. And are in process to
14 resolve the service obligations that arise prior to the closing 15 date that the estate will remain liable for, both in terms of 16 having those obligations reserved for and established to the -17 satisfactorily to the debtor and the Court. 18 agree with the servicer. 19 What I would propose to do now, Your Honor, is The debtors cannot
20 perhaps have the purchaser address the issues with respect to 21 the adequate assurance obligations for the Court. Thereafter,
22 provide the proffer and then walk through the changes to the 23 order. 24 25 THE COURT: All right. Good morning, Your Honor. Tom
MR. KIRIAKOS:
39 1 Kiriakos, Mayer Brown and Row and Mau on behalf of the 2 Carrington entities that are parties to the asset purchase 3 agreement. 4 As debtors counsel indicated, Wells Fargo and
5 Deutsche, in their capacities as indentured trustees under the 6 pertinent servicing agreements, that the APA contemplates to be 7 assumed and assigned to the purchaser at closing, filed 8 adequate assurances objections. We have worked with both
9 indentured trustees to resolve those objections. 10 The order that was filed with the Court this morning The -- since we filed
11 substantively included those agreements.
12 that order, we've had a few additional clarifications that we 13 can take you through when debtors' counsel takes you through 14 the entire order. But essentially, the substance of the
15 agreement was what we sent over. 16 Essentially, the adequate assurances objections have
17 been resolved entirely assuming that prior the closing date, 18 the conditions and the servicing agreements Section 602 or 502, 19 depending on which of the servicing agreements it is, that have 20 to be satisfied under those agreements for a merger or 21 consolidation which includes a sale substantially of all the 22 assets of the servicing entity have been satisfied. 23 forth in the order. That's set
And that would resolve the adequate
24 assurances objection. 25 In addition, we have language that makes it clear,
40 1 and this was read into the record at the auction and has been 2 refined in both the order and the APA. 3 identical in both. The language is
To the effect that while Carrington is not
4 assuming any pre-petition -- pre-closing liability with respect 5 to what happened to the mortgage loans before the closing date, 6 thereafter Carrington will undertake those obligations. 7 And example I can give you, specific an example is
8 for example, if there was a counterclaim filed against the 9 securitization trust based on something that happened pre10 closing, Carrington is obligated to defend that counterclaim, 11 but it's not liable for any claims arising from the 12 counterclaim if they should be adjudicated. It's that type of
13 post-petition, post-closing performance with respect to pending 14 lawsuits, et cetera. Or lawsuits that are brought relating to And
15 the pre-closing period that really is the focus of that. 16 the language has been negotiated with both the indentured
17 trustees and it's identical in both the order and the APA. 18 Also, there is a separate agreement that Carrington
19 has committed to to provide both indentured trustees with 20 updates regarding its state licensing efforts during the post21 closing period. That obligation is to provide monthly reports
22 that summarize the process of the progress of the status of 23 that progress and that are to include a certification to the 24 effect that the information included in those reports is 25 accurate and Carrington is proceeding in good faith with the
41 1 process. The obligation to deliver those monthly reports ends
2 on the earlier of the six-month anniversary date of the closing 3 and when we've gotten all of our then necessary state licenses. 4 So that, hopefully, is an accurate summary of the
5 resolution of the adequate assurances objections of the 6 indentured trustees. 7 8 9 THE COURT: Thank you. Thank you. Mark Power I figured I'd
MR. KIRIAKOS: MR. POWER:
Good morning, Your Honor.
10 from Hahn and Hessen, counsel to the Committee. 11 jump in here and throw our cents in. 12
Your Honor, today's a terrific day for this estate.
13 We worked really hard over the last week to have a really 14 positive auction. We have about $50 million more than we had
15 before the auction started in terms of net value to the estate. 16 In addition to that, the contract has been improved This buyer is taking the employees and the
17 substantially.
18 business operating and it is -- therefore, we don't have all 19 those transitional problems. 20 It is -- the buyer is going to look at all the
21 contracts and decide what it needs to take and what it can take 22 in connection with operating the business. 23 significant claim reduction to this estate. 24 In addition to that, as a result of the negotiations That will result in
25 that took place at the auction and over the weekend, we think
42 1 there's significant legal improvements in terms of the 2 documentation and protecting the estate in terms of going 3 forward. 4 So all of the things are tremendous for this estate We have worked a lot with the debtor to try to I want to
5 in our view.
6 get the best value we could for these assets.
7 compliment on the record the debtors and the debtors' 8 professionals for doing a terrific job in working with the 9 Committee to maximize the value. They worked with both counsel
10 for the Committee and the financial advisors to really try to 11 get the best we could for the auction. 12 done that. 13 Your Honor, I can report to you that of all the four And we think we have
14 bidders that we observed at the auction and negotiated with 15 each one, everyone acted in good faith and there was no 16 evidence of any collusion in connection with the auction. And
17 the Committee is satisfied and could report, Your Honor, that 18 we thought that all parties acted in good faith. 19 This buyer in particular was tremendous in terms of
20 working with us to try to get through the issues and problems. 21 Even though they had a contract previously, they were in good 22 faith negotiated the changes before the bid procedures order 23 was entered; negotiated subsequent changes during the auction; 24 and proceeded to negotiate acceptable changes over the weekend. 25 Counsel for the buyer worked all weekend to get the indentured
43 1 trustees satisfied and he deserves a compliment on the record 2 today. 3 Your Honor, the Committee is extremely satisfied with
4 this motion before the Court and we'd ask the Court to approve 5 it and we stand behind it. I will say that the order is a fast
6 moving target, but it's changed from midnight last night to 7 even today and, actually, even as we speak. There will be some
8 changes that we'll have to go through that and we'll try to get 9 that done so that we can get it up to Your Honor and signed 10 today. 11 12 motion. 13 14 THE COURT: All right. Thank you. Susan We're very close to getting that language corrected. But with that, we'd ask that this Court approve this
MS. POPPITI:
15 Poppiti on behalf of Wells Fargo.
I would like to introduce to My office filed a motion
16 the Court my co-counsel, Ben Ackerly.
17 for admission pro hoc vitae of Mr. Ackerly. 18 19 THE COURT: Welcome. Good morning, Your Honor. I represent
MR. ACKERLY:
20 Wells Fargo Bank as the trustee under certain of the servicing 21 agreements that are being assumed and assigned. And I just
22 want to correct a couple of things that Carrington's counsel 23 has said with respect to the cure amount and the adequate 24 assurance issue and that specifically relates to the 6-month 25 period.
44 1 Under the order, Wells Fargo has agreed to withdraw
2 its objection to the cure amount, but the consideration for 3 that is the debtor providing a reserve amount to cover Wells 4 Fargo's costs in connection with the transfer of the servicing 5 rights from the debtors to Carrington. And the order as its
6 currently drafted proposes to limit that to a six-month period, 7 but in fact, it's going to take longer than six months to 8 complete the transfer of the licensing that's required to 9 Carrington. 10 11 licensed. Each state probably requires that the servicer be And to the extent there are state requirements for
12 licensing, we need a certification that that's been 13 accomplished. So we have an issue with respect to that which It's a small issue.
14 hopefully we can resolve. 15
The second issue also relates to the six-month period
16 and that's in paragraph 10 and I've spoken to counsel for the 17 Committee. But we do not propose that there be any six-month
18 limitation on the rights of the Wells Fargo as trustee. 19 Finally, Your Honor, and I've spoken -- this is just Wells Fargo is not an It's simply a
20 a, I think a real technicality.
21 indentured trustee under these documents. 22 trustee, not an indentured trustee. 23 to make those changes. 24 25 the order.
And I think they've agreed
But with those three points in mind, we are okay with
45 1 MR. KIRIAKOS: Your Honor, points -- Tom Kiriakos on
2 behalf of Carrington.
Points two and three are the Committee's And whatever they
3 issues and I don't have a problem with that. 4 can work out is fine. 5
However, on the first point, that was discussed over We have every intention and every expectation of There
6 the weekend.
7 satisfying our licensing requirements within six months.
8 is no additional -- that also is the period contemplated on the 9 transition services agreement, contemplated by BAPA. 10 to be done way before six months. 11 My conversations with counsel's partner over the We expect
12 weekend in no way, shape or form extended beyond a period of 13 six months. I don't quite know what they're now asking for,
14 but whether it relates to our obligation to provide these 15 monthly reports or not. But the agreement that we had over the
16 weekend was, you know, the earlier of six months or when we're 17 done with our licensing. And we do not -- and I want to make
18 it clear on the record, we do not think this process is going 19 to take longer than six months. 20 THE COURT: Let's do this, so that we keep some Let's complete the evidentiary record, And anyone who wishes to
21 momentum going here.
22 after which I'll take a break.
23 discuss issues concerning the form of order will have the 24 opportunity to do that with the parties and I'll give you time 25 to do that. And then we'll -- then you can take me through the
46 1 order. 2 3 4 again. How's that? MR. ACKERLY: MR. DOSHI: Thank you, Your Honor.
And, Your Honor, I'm sorry to interrupt When
This is Amish Doshi on behalf of Oracle USA.
5 would you like to hear about the concerns that the parties have 6 with respect to this sale motion? 7 THE COURT: well, if it relates to a substantive If it relates
8 matter, I'll hear those before we take a recess.
9 to, you know, finalizing language under this moving target of a 10 proposed order, you can do that during the recess. 11 MR. DOSHI: I think it relates to substantive --
12 although it's something that may or may not be fixed with the 13 order, but I believe it's substantive, Your Honor. 14 THE COURT: All right. Well, let me hear the
15 debtors' evidentiary record and we'll see if anyone wants to 16 cross examine any witness. And then I'll hear substantive Okay?
17 objections to the extent any are still outstanding. 18 19 20 MR. DOSHI: THE COURT: MS. UHLAND: Thank you, Judge. You're welcome.
Your Honor, I'd like to proffer the
21 testimony of Ari Nathan Lefkowitz and he's present in the 22 courtroom. 23 Your Honor, if Ari Lefkowitz were called to testify,
24 he would testify as follows: 25 He would testify that he is a director with Lazard
47 1 Freres & Co. and that he joined Lazard's restructuring group in 2 2002 and has advised on numerous clients through the 3 restructuring process, including Asia Global Crossing, GenTech 4 Kaiser Aluminum, Metro Media Fiber Network, Millichron 5 (phonetic), Spectrasite, Zylog and 360 Networds. 6 Prior to joining Lazard's restructuring group, Mr.
7 Lefkowitz worked in Larard's technology, media and 8 telecommunications group. 9 Mr. Lefkowitz graduated magna cum laude from
10 Dartmouth College with an AB in history and also earned a JD 11 with distinction from Stanford University. 12 Called as a witness, Mr. Lefkowitz would further
13 testify as follows: 14 In his role as a director with Lazard, Mr. Lefkowitz
15 is a key participant in Lazard's efforts to advise the debtor 16 on a broad range of financial topics and one of his roles was 17 to help oversee the marketing and sale of the debtors' 18 servicing platform and assets. Mr. Lefkowitz directly
19 participated in that process, including attending and helping 20 conduct the auction of those assets on May 16th, 2007. 21 He will testify that in a time prior to and after the
22 Court approved the bidding procedures for the sale of the 23 debtors' servicing related assets, that Lazard had 24 approximately six people devoted to the marketing of the assets 25 and the auction and sale process. That Lazard conduct --
48 1 collected diligence materials on the assets and established a 2 data room where prospective bidders could review and evaluate 3 those materials. 4 Lazard also initiated communications with parties As part of this process,
5 previously identified as bidders.
6 Lazard spoke with approximately 40 interested parties and 7 approximately 30 parties executed non-disclosure agreements and 8 evaluated the assets. 9 He would further testify that the proposed sale and
10 auction of the assets were publically advertised in the 11 national edition of the Wall Street Journal on April 30th, 12 2007. 13 He would testify that Lazard worked closely with the
14 debtors throughout the process of marketing assets for sale and 15 the debtors provided substantial and essential assistance in 16 marketing the assets and bringing the assets to sale including 17 responding to numerous requests for information from potential 18 bidders. 19 He would testify that he believes that the marketing
20 and due diligence process and management of the debtors and 21 Lazard was open thorough and fair to all potential bidders. 22 And following the extensive marketing of the assets and 23 aggressive pursuit of the bids and perspective purchasers, a 24 number -- four bidders submitted qualified bids by the May 10th 25 deadline.
49 1 Specifically, he would testify that the debtors The parties in
2 received three qualified bids for the assets.
3 addition to Carrington submitting qualified bids included 4 Ellington Management Group, LLC, Ellington; Morgan Stanley 5 Mortgage Capital, Inc., Morgan Stanley; and a joint bid by 6 Credit-based Asset Servicing and Securitization, LLC, C-Bass; 7 and Barclay's Bank, PLC, Barclay's. 8 He would testify that after the bids were received,
9 the debtors, Lazard and the Creditors Committee and their 10 professionals evaluated and discussed the economic terms of the 11 various bids as well as the terms and conditions of the 12 proposed asset purchase agreements submitted by the bidders. 13 They also analyzed the methods through which, pursuant to the 14 auction process, they could improve both the economic and non15 economic aspects of the proposals. 16 After reviewing the various bids, the debtors and
17 Lazard notified Ellington, Morgan Stanley and the joint 18 bidders, C-Bass and Barclay's that they were qualified bidders. 19 The debtors and Lazard also notified all qualified bidders that 20 Morgan Stanley had submitted the highest and best bid for the 21 assets with a qualifying gross bid of 152 million. 22 He would testify that prior to the auction, the
23 debtors, Lazard and the Creditors Committee professional 24 discussed with Morgan Stanley certain terms of its proposed 25 asset purchase agreement to determine if Morgan Stanley would
50 1 agree to improve the terms of the agreement. Morgan Stanley
2 agreed to a majority of the proposed modifications. 3 He would testify that on May 16th, representatives of
4 the debtors, Lazard and the Creditors Committee and its 5 advisors, Carrington and the other qualified bidders, 6 Ellington, Morgan Stanley and C-Bass/Barclay's, assembled at 7 the offices of O'Melveny Myers in New York at 10 a.m. for the 8 auction. 9 The debtors thereafter commenced the auction with the
10 Morgan Stanley bid of 152 million and the improved asset 11 purchase agreement terms as the then highest and best bid that 12 competing bidders would have to top. 13 For the purpose of the auction, the debtors evaluated At the commencement of the auction,
14 each bid on a net basis.
15 the debtors explained to all of the bidders the debtors 16 analysis of the Morgan Stanley's bid and the debtors derivation 17 of the net basis of that bid. As explained by the debtors to
18 all qualified bidders, Morgan Stanley's gross bid of 152 19 million corresponded to a net bid of 99 million. 20 He would testify that over the next 10 hours, the
21 debtors conducted 18 rounds of spirited and competitive bidding 22 during which bidders would announce the economic and non23 economic terms of their bids. After each round of bidding, the
24 debtors, in consultation with the Creditors Committee, selected 25 the bid they deemed the highest and best which included an
51 1 analysis of economic and non-economic terms and the net basis 2 of the bid. 3 He would testify that frequently there were breaks
4 between rounds of bidding for parties to consider the economic 5 and non-economic terms offered by the highest and best bid in 6 the previous round. During these periods, the debtors, Lazard
7 and the Creditor Committee extensively discussed the terms of 8 the bids with the bidders and made suggestions on how the 9 bidders could improve their bids. 10 Over the subsequent rounds of bidding, the purchase
11 price and other terms of the transaction improved significantly 12 and the number of bidders in the auction declined. Relatively
13 early in the course of the bidding process, both Ellington and 14 C-Bass/Barclay's each chose not to submit a higher bid and 15 voluntarily dropped out of the auction. Thereafter, only
16 Carrington, bidding on the platform, the MSRs and advances, and 17 Morgan Stanley, bidding only on the MRSs and advances remained. 18 Carrington and Morgan Stanley then engaged in several
19 rounds of head-to-head bidding producing in each such round 20 more economic value for the debtors and their estates. 21 He would further testify that during the course of
22 the bidding, the debtors, using their discretion with regard to 23 bid procedures after consultation with the Committee, accepted 24 a bid from Morgan Stanley pursuant to which the debtors 25 selected not to obligate Morgan Stanley to be the backup
52 1 bidders. Thereafter, additional rounds of bidding ensued
2 between Morgan Stanley and Carrington and the net value of the 3 final bidding increased by approximately $6 million. 4 In the final round of bidding, Morgan Stanley bid a
5 net amount of approximately 148 million or a gross amount of 6 185 million. And Carrington then bid a net amount over the 150
7 -- of over 150 million, a gross bid of approximately 184 8 million. Morgan Stanley declined to raise its bid, thus the
9 debtors declared Carrington's final bid as the highest and best 10 bid. At approximately 7:30 p.m. Eastern Standard Time, the
11 auction concluded. 12 In declaring Carrington the highest and best bid, the
13 debtors, Lazard and the Creditors Committee considered several 14 factors including: 15 (1) Carrington offered the highest overall purchase
16 price for the assets in a gross amount of approximately $184 17 million with the corresponding net value to the estate of 150 18 million; 19 (2) the Carrington's proposed hold-back from the
20 gross purchase price was the smallest of any bidders at 21 approximately 5 million, that being $8 million less than the 22 hold-back provided in Carrington's original stocking horse bid; 23 (3) the Carrington's bid resulted in the fewest -- in
24 fewer unsecured claims against the estate; 25 (4) that Carrington was committed to retaining
53 1 substantially all relevant current employees, thereby ensuring 2 continuity of the business and avoiding potentially costly 3 termination charges; 4 (5) Carrington agreed to pay or assume accrued and
5 unpaid vacation time for substantially all relevant employees; 6 (6) Carrington agreed to assume contract cure costs
7 or contracts other than the servicing agreements; and 8 (7) that Carrington agreed to the modification in the
9 asset -- to the asset purchase agreement and sale orders 10 requested by parties -- certain other parties-in-interest. 11 Further, Mr. Lefkowitz would testify that the
12 auction, which took place over 10 hours and 18 rounds of 13 bidding, involving four qualified bidders, including Carrington 14 as a stocking horse bidders, was well-conducted and open and 15 fair to all participants and caused bidders to submit highly 16 competitive bids in increasing amounts; that the efforts of the 17 debtors, Lazard and the Creditors Committee to encourage 18 bidders to improve the economic and non-economic in the terms 19 of their bids facilitated the auction process and submission of 20 improved and higher bids; and further, that each of the parties 21 and the bidders engaged in hard-thought, arms-length 22 negotiations at all time, participating at all times in good 23 faith. 24 25 And that would conclude the proffer of Mr. Lefkowitz. THE COURT: Would anyone like to examine Mr.
54 1 Lefkowitz? I hear no response. Debtors have anything else in
2 support of the motion? 3 MS. UHLAND: Your Honor, simply to reiterate or to The
4 duplicate the comments of the Creditors Committee.
5 debtors, as well as their professionals, were extremely pleased 6 with the outcome of the servicing agreement, were appreciative 7 of the conduct of all of the bidders, and in particular of the 8 ultimate purchaser who worked with the debtors in good faith 9 over the course of this weekend to reach an asset purchase 10 agreement that's greatly improved from the prior asset purchase 11 agreement. 12 But in all, Your Honor, we ask the at the Court Again, we're very pleased with the
13 approve the motion.
14 outcome, the debtors and their employees. 15 THE COURT: All right. Can you now walk me through
16 the objections and responses that are listed on the agenda? 17 Tell me what remains or what we're hearing at the cure hearing. 18 MS. UHLAND: Yes, Your Honor. Let me frame this
19 briefly on what we -- we sent -- we filed a notice designed to 20 do a couple of matters. 21 In addition to a cure hearing, there were some
22 objections under C-1 and C-2, either as a financial 23 accommodation or raising issues of non-assignability. In
24 addition to the cure amounts being preserved for that later 25 date, those objections are also to be heard at that later date.
55 1 We're not seeking to overrule any aspect of those objections 2 today. 3 4 5 June. 6 So, Your Honor, if we're walking through the THE COURT: MS. UHLAND: June 27th is the date, right? Yes, our -- their second omnibus in
7 objections, my understanding -- I don't have the name on A. 8 I'll have to have someone check that one. 9 bid procedures motion that was resolved. 10 moment. 11 Moving on to B, I understand the U.S. Trustee's And as we -- Your Honor, many of I think this was a Let's skip that for a
12 objections are resolved.
13 these were bid procedure objections, so I think that many of 14 these have been resolved in connection with the bid 15 proceedings. 16 I believe C, the initial C-Bass objection was
17 resolved in connection with the bidding procedures order. 18 D, the objection of Citigroup was resolved by
19 inclusion of language in the asset purchase agreement that was 20 agreed to at the time of the bid procedures order and is 21 unchanged. 22 Item E is -- was the original Wells objection to the
23 bid procedures order that was resolved at that time with 24 respect to bidding issues. 25 MR. SUSSBERG: Your Honor, Jonathan Sussberg from
56 1 Kirkland Ellis on behalf of Citigroup. We just saw a copy of
2 the order today and I know you said we'll deal with that at 3 recess. But I just wanted to let you know, there's a paragraph
4 in there that deals with Citigroup's claim and I just wanted to 5 speak with debtors' counsel at the recess. 6 7 8 THE COURT: Very well. Thank you.
MR. SUSSBERG: MS. UHLAND:
Oh, Item A, I've just been -- sorry to
9 jump out of order -- is the GECC's objection to the bidding 10 procedures which was resolved. 11 We'll also check, the Item F doesn't have the So I'll skip that momentarily.
12 identity of the objector there.
13 That was a Duetsche Bank objection to the bid procedures which 14 as to bid procedures I believe was resolved. 15 I just had confirmation of that. 16 17 The next -- then G is not an objection. Now, in starting in Item H, as we get to the That's correct.
18 objections to the sale or the assignment, the objection filed, 19 H, is being heard on June 27th, as are I, J, K, L, M and N. I
20 believe the objection of C-Bass is moot as they are not a -- as 21 Carrington is the prevailing bidder. 22 are being continued to the 27th. 23 Objection W we believe we're resolving today. Y we are resolving today. X is Z, AA, P, Q, R, S, T, U and V
24 being continued to the 27th.
25 BB, CC, DD are being continued to the 27th.
EE we're resolving
57 1 today. That's adequate assurance. F, with respect to cure With respect to
2 matters, we're continuing to the 27th.
3 adequate assurance, to the extent that remains, we should be 4 resolving today. GG we're resolving today. And HH and II are
5 the debtors and Carrington's and the Committees responses. 6 THE COURT: All right. I guess I should ask
7 initially whether any of those who filed the objections or 8 responses that we've just gone through have any disagreement 9 with how the debtor has proposed they be treated. 10 11 Committee. MR. POWER: Your Honor, Mark Power, counsel to the
I think because there are people on the phone, we
12 should be very clear exactly what's being done on the cures. 13 Basically, the process today is that to the extent a
14 party was noticed with the original cure amount and did not 15 file an objection or response, that amount is deemed to be the 16 cure amount and the buyer has the option of basically 17 satisfying that cure and taking that contract or not and 18 rejecting it. 19 And they have 60 days to do that.
If a party filed an objection as to cure, that amount
20 that they listed with their own in their objection is now on a 21 schedule that will be attached to this order which is deemed to 22 be the new maximum cure amount which is the maximum amount that 23 party can then assert as a cure under the assumption and 24 assignment of its contract. 25 Carrington has the right over the next 60 days to
58 1 basically either (1) pay that amount and therefore have the 2 contract assumed and assigned since that will satisfy the cure 3 that the third party says is what's owned, in which case, that 4 -- there will be no reason to have a hearing on the 27th since, 5 obviously, they're getting paid what they're asking for; or 6 have the amount -- have the hearing on the 27th as to a 7 disputed amount and maybe try to litigate that issue as to what 8 exactly is owed so Carrington has the right to get the 9 assumption of that contract if it can prove a lower amount; or 10 simply reject that contract if Carrington doesn't want it and 11 has 60 days to do that as well. 12 So it seems to me the record should be very clear on All the cure claims, so that everyone
13 what's being done.
14 understands, are being continued to the 27th, but we try to 15 basically say if this is your number that you think you're 16 owed, the buyer has the option of paying that, taking the 17 contract. 18 Everything else is being reserved. As to all other objections that aren't cure related,
19 that relate to C-1 and C-2, those are also being adjourned to 20 June 27th and that includes Oracle's objection that it has in 21 terms of its software and I think Union has an objection as to 22 financial accommodation contracts. Those are being adjourned
23 to the 27th and be dealt with with the buyer. 24 So, I just think the record should be very clear as
25 to what's being proposed here and I think that may help
59 1 streamline some of this. So the relief being sought today is
2 to deal with the Deutsche and the Wells Fargo Bank objection 3 and to deal with all adequate assurance objections and then fix 4 the maximum cure amounts. 5 is being adjourned. 6 Court today. 7 THE COURT: All right. Let me then hear from any of And I think beyond that everything
And that's really what we're asking the
8 the objectors on the list we've just been through. 9 10 Honor. 11 Inc. MR. DOSHI: Thank you -- excuse me. Thank you, Your
Amish Doshi with Day Pitney on behalf of Oracle USA,
Your Honor, is I may, it's a little bit of background to
12 kind of just set forth the concerns we have and additional 13 concerns which in light of Mr. Power's presentation, an 14 additional concern which I'd like to address as well. 15 By way of background, the asset purchase agreement as
16 amended indicates that one of the items, that's Schedule 5.2, 17 sought to be assumed and assigned is, and I quote, Oracle18 database, close quotes. In other parts of the asset purchase
19 agreement, the debtors are also seeking to assume and assign 20 certain, and I quote, intellectual property licenses, 21 transferred intellectual property, IT assets related to the 22 business and software contracts. 23 terms in the contract. 24 side. 25 Oracle, according to its records, has that the Oracle All of these are defined
That's on the asset purchase agreement
60 1 and one or more of the debtors entered into a Oracle license 2 and services agreement along with an ordering document which is 3 -- which has a contract for a technical support which is set to 4 expire, the support portion of it is set to expire on May 27, 5 2007. 6 I'll get back to the May 27th in a second. In addition to this -- these licenses that were
7 acquired by one or more of the debtors under this agreement, 8 Oracle's records also indicates that one or more of the debtors 9 acquired licenses for other Oracle software prior to this 10 agreement, in January of 2000 and in May of 2000. So, that's
11 by the way of background in terms of what the debtors seek to 12 assume and assign and what Oracle's records indicate. 13 Based on the description that we -- that was provided
14 in the asset purchase agreement, Oracle has no idea as to what 15 they're seeking to assume and assign. And the reason that is
16 important is, one, because it relates to cure, and second, 17 relates to the 365(c)(1) objection that Oracle has. I
18 understand that those two portions are being adjourned to June 19 27th. However, what the order currently provides is while
20 they're seeking to adjourn this, they're also seeking to fix 21 the cure amount as they have set forth. 22 I don't know what version of the order I have is, but
23 the order I have is the one that was circulated at 24 approximately 8:30 this morning. 25 Oracle. It fixes an amount for
Granted it's a nominal amount, but that relates to
61 1 only one particular agreement. 2 We cannot determine which contracts are sought to be If it's one of the other ones that is
3 assumed and assigned.
4 being sought to assumed or assigned, the cure amount is 5 significantly higher. 6 So, while they're seeking to adjourn certain issues,
7 at the same time, the cure amount is being fixed as well as -8 and specifically I refer to paragraphs 21 and 34 of the 9 proposed order, where 21 says that no party can -- is -- non10 debtor party, I'm sorry, is hereby barred, enjoined or 11 prohibited from asserting a claim against the debtor other than 12 the maximum cure amount. 13 Now, if it's one of the other contracts that's being
14 sought to assumed and assigned, then the cure amount is a lot 15 different. And by this general description of, quote, Oracle-
16 database, we're not sure which licenses or agreements are being 17 referred to. 18 So that's the first point. If the debtors are -- and
19 the purchaser are seeking to adjourn every single agreement, no 20 matter what it is, to June 27th, that's a different story. But
21 based on the Exhibit C to the proposed order, it appears that 22 they want to link it just to the one cure amount that was 23 cited. 24 Secondly, that's -- the amount that was cited, we
25 cited a specific amount, but it was a reservation including I
62 1 said at least that amount. In light of the fact that we don't
2 have a description of which contracts are sought to be assumed, 3 we have to include the caveat for at least. 4 With respect to the 60 days that was referenced as
5 well as the March 27th date that I referenced where the current 6 support for certain licenses is going to expire, the debtors 7 want 60 days to make a decision as to which contracts they're 8 going to assume and assign. However, by May 27th, prior to the
9 hearing as well as prior to the 60-day time period, the cure 10 amounts are going to change again. So the order as it provides
11 right now does not provide that -- if anything happens during 12 the 60-day period or any additional cure, based on the order, 13 the non-debtor party is bound by this amount even though 14 additional cure amount would accrue during the 60-day period. 15 Now, normally, these licenses are for a year. So
16 we're not talking about one or two months. 17 be significant. 18
And the amount can
The third point is in -- with respect to while they
19 seek to adjourn matters to June 27th, paragraph 34 of the 20 proposed order states that to the extent that Carrington needs 21 to operate under or use the benefits of any assumed contract 22 before it becomes an accepted contract, and I skip over some 23 language, Carrington shall have a temporary license up to the 24 contract notification deadline at its sole cost and expense to 25 use and operate under such assumed contract. Provided,
63 1 however, that the granting of such license shall not be deemed 2 to constitute a defacto assignment or assumption of the assumed 3 contract until such time as the assumed contract becomes an 4 accepted contract. 5 However, for the 60-day period, they are, in fact,
6 assuming and assigning the Oracle contracts which 365(c)(1) 7 does not prohibit unless Oracle consents. And at this point,
8 they're seeking 60 days to assume it and they're -- that's -9 we have an objection especially in light of the support having 10 -- is set to expire by the end of this week. 11 MR. KIRIAKOS: Your Honor, Tom Kiriakos on behalf of
12 Carrington.
I can respond to almost all of that, I think, in a
13 way that hopefully will address almost all of it. 14 First, we have a great deal of empathy for what the They've been a particular area
15 APA schedules say or don't say.
16 of concentration and trying to get the schedules accurate and 17 right and comprehensible is something we've spent or tried to 18 spend a lot of time on. 19 lot of empathy. 20 With respect to the concern about the $1200 amount So, in that sense, as I said, I have a
21 binding Oracle in the event that there are these other 22 agreements that they're not focused on, that we weren't focused 23 on in the APA. I think the simple solution on that is on
24 Exhibit C to the order that we will tender to you, we'll put to 25 be determined, TBD. Not hold them to the 1200. And as we work
64 1 through it with Oracle, we'll get to the right amount. 2 we'll litigate it. 3 it. Or
They'll have all their rights to litigate
So I think that ought to be responsive to that concern and
4 that ought to address it. 5 With respect to the support agreement that's If,
6 terminating by its terms on May 27th, that is what it is.
7 in fact, it terminates and it terminates under applicable, non8 bankruptcy law, then it doesn't survive, it can't be assumed 9 and we couldn't look to assume it unless Oracle was willing to 10 enter into a new agreement. 11 And finally, I think most importantly, the whole
12 purpose of the 60-day period is to give Carrington an 13 opportunity to work through these agreements relating to the 14 platform and to talk to the non-debtor parties and to try to 15 resolve or get a handle on both the cure amounts and the terms 16 for going forward. So that's the whole purpose of the 60 days.
17 We had every intention of working with Oracle in terms of 18 whether its intellectual property or software licenses. 19 necessary. 20 assign it. It's
And in that sense, paragraph 34 does not assume or It just allows us to, as we operate the business in
21 that post-closing period, not have things grind to a halt 22 because we have -- because of the use of the intellectual 23 property. 24 THE COURT: Well, it seems to me that the order needs One is
25 to provide two things, if it doesn't now provide it.
65 1 that to the extent -- because of the passage of time and the 2 providing of services, cure amounts change, that the counter3 parties can't be locked in to a number as of today. 4 And secondly, that to the extent that under
5 applicable bankruptcy or non-bankruptcy law, Carrington would 6 not have the right to use, even temporarily, something which 7 the debtor is now purporting to convey to it. The Oracle
8 objection is the order can't say to the contrary and I would 9 tend to agree with that. 10 MR. KIRIAKOS: Your Honor, I can tell you from
11 Carrington's perspective, we would agree to both those changes 12 in the order. That in particular, into the lead-in of 34, we
13 would say to the extent permissible under applicable non14 bankruptcy law and have that be the lead-in to paragraph 34. 15 16 17 THE COURT: All right. Your Honor, this is -For one minute if you
UNKNOWN PERSON: MR. POWER:
Wait a minute.
18 would, because there's one thing I mentioned -- I missed, which 19 Counsel for Oracle correctly pointed out. 20 gap period between -- for the cures. We didn't miss the
Basically, the deal is
21 that the buyer is picking up all post-closing obligations that 22 arise under those contracts. So it's not really a cure amount.
23 It's really just a -- the buyer has an obligation to basically 24 pay those as he operate whether or not that contract's 25 ultimately rejected or assumed for post-closing amounts.
66 1 We do agree that there may be a situation where today
2 a certain amount is owed and when we enter the -- when we 3 close, there may be another amount owed and we will provided 4 for that gap period to cover that and reserve those rights. 5 But that's, I think, pretty much it. 6 Your Honor, that's, by the way, the administrative
7 the claim which we would have to pay anyway assuming it's an 8 allowed claim. 9 know, the pre. The cure really relates to what we think, you But we understand there are some administrative So we did actually try to
10 components in that cure amount.
11 provide and protect the parties on that regard. 12 13 THE COURT: MR. DOSHI: All right. Your Honor, this is Amish Doshi again on Just to respond to --
14 behalf of Oracle USA, Inc. 15 16 point. 17 18 MR. DOSHI: THE COURT: THE COURT:
You know what, don't do that at this
Oh, sorry. I now understand what your issue is and Use the time during recess to the
19 I've heard from others.
20 extent you can to see whether, in fact, Carrington has 21 adequately addressed your concerns. 22 we'll talk some more. 23 24 MR. DOSHI: Sure. Thank you, Your Honor. Mike And if it hasn't, then
MR. GALLERIZZO:
25 Gallerizzo representing General Electric Capital Corporation.
67 1 We interpose to objections, one to the notice to assume and 2 assign GE's master security agreement. 3 proposed sale itself. 4 I believe we have resolved the objection to the I The other is to the
5 notice to assume and assign the master security agreement.
6 had a discussion this morning with counsel for Carrington and 7 they are willing to remove from the schedule of contracts to be 8 assume our master security agreement and related promissory 9 notes, understanding that it was probably a mistake to include 10 it on there. 11 And I'll let counsel confirm that. Your Honor, back to what I said That's
MR. KIRIAKOS:
12 earlier about trying to get the schedules right. 13 correct.
The master security agreement should not have been
14 listed as a contract and we agree and we'll fix that in the 15 schedules. 16 However, just so we're clear, the collateral with
17 respect to that master security agreement is included in the 18 assets that we're acquiring. So it's moving that portion of
19 GECC's claim from the executory contract bucket to the pre20 petition secured claim bucket. The lien with respect to --
21 which -- with respect to that collateral will attach to the 22 proceeds of the sale. 23 MR. GALLERIZZO: That brings me to the objection to
24 the sale itself.
Counsel has indicated -- counsel for
25 Carrington has indicated that the sale includes GE's assets.
68 1 We reviewed the schedules that are appended to the asset 2 purchase agreement and it's not clear that all of the assets in 3 which GE holds a lien are being transferred, whether they are 4 or they're not. And I brought that to this Court's attention We supplied copies of And I understand this
5 during the bidding procedures hearing.
6 our schedules to counsel for the debtor.
7 is moving quickly, Your Honor, and I empathize with all counsel 8 in trying to determine what assets are being sold. 9 I think the debtor has attempted to make -- to deal One, by providing that our
10 with this in a couple of ways.
11 lien, to the extent we have a lien in the assets that are being 12 sold, will attach to the proceeds of sale. In addition,
13 they've revised the order and to the extent that under 14 363(f)(5), to the extent that we could be compelled to take a 15 cash payment in satisfaction of our debt, they are trying to 16 have this sale approved over our objection. 17 My only comment would be the following, Your Honor,
18 because once again, we don't know what is being sold, what 19 isn't. The list merely lists some computers, some IT There are other creditors in this
20 equipment, no ID numbers.
21 case that have that type of equipment out to this particular 22 debtor. 23 And from our perspective, there are two things, okay.
24 One, we have not consented to this sale because we don't know 25 what is being sold. Number two, earlier, during bidding
69 1 procedures, we objected on the basis that there was no 2 allocation of proceeds to the particular assets being sold 3 because we believe that is -- that procedure is just fraught 4 with problems. 5 But lastly, I think the debtor is trying to get
6 around 363(f) by using (f)(5) and I would note for Your Honor, 7 Judge Walrath's opinion in the case of In re Kellstrom 8 Industries which is exactly what the debtor in that particular 9 case did in order to get that sale approved although on 10 significantly different types of facts. 11 creditor. 12 It wasn't a secured
It was an Article 2 type lien. But in that particular case, the creditor argued, and
13 so would we, that if we're going to approve this sale under 14 (f)(5) that our interest -- GE's interest, to the extent that 15 our assets are being sold, needs to be adequately protected. 16 And in the Kellstrom decision, Judge Walrath ruled that meant 17 that the creditor needed to be paid in full the amount of its 18 claim, i.e. if they're selling all of our assets, whatever 19 we're owed on those assets in which we have liens, they would 20 be required to pay that out of the sales proceeds as adequate 21 protection. 22 And I would quote for Your Honor the Kellstrom It's a 2002 decision
23 decision which is at 282 Bankruptcy 787. 24 from Judge Walrath.
And maybe this is something that I can
25 discuss with debtors' counsel during the break, but I just
70 1 raised those objections at this point, Your Honor. 2 3 4 Lee. THE COURT: MR. GREY: Thank you. Your Honor, Joseph Grey from Stevens and We filed
I represent Premier Print and Services Group.
5 basically what amounts to a cure objection now.
And I do have
6 one new issue which arises from the papers we received this 7 morning, the new form of order. 8 to counsel. It's a minor one, I can talk
But basically, I'd like to see something in the
9 order or at least something on the record that makes it clear 10 that nothing in this order is going to impair the rights of 11 creditors to come in and seek immediate assumption or 12 assignment -- assumption or rejection of their contracts. I
13 don't think the order says that now, but I -- I don't think the 14 order impairs that now, but I just want to make sure. 15 16 THE COURT: All right. Anyone else care to be heard? Barry Freeman for
MR. FREEMAN:
Yes, Your Honor.
17 Union Bank, Jeffer Mangles. 18 19 THE COURT: Yes.
Is it all right to speak now?
MR. FREEMAN:
Okay.
We have a limited objection One is identification of the
20 which relates to a few issues.
21 contract which I assume will be worked out with the debtor. 22 There is a servicing contract for -- on these deposit accounts 23 which as of now has no cure. 24 could change. During the 60-day period, that
So if we could have the similar language that
25 was mentioned through the Oracle position, that would be
71 1 helpful. 2 And then the primary concern is a reference to assume
3 and assign a security agreement dated as of March 14th which is 4 a security agreement secured by securing a reimbursement 5 obligation under a -- one of several letters of credit that 6 were issued to the debtor. This one, I -- we believe is form
7 workers comp and it has cash collateralized by about $800,000 8 plus some accrued interest. And it's not clear exactly, first
9 of all, if it can be assigned. 10 But in getting over that issue, exactly to just
11 assign the security agreement without dealing with the letter 12 of credit and the reimbursement obligation and the cash doesn't 13 make a lot sense and we need to work that out. And that's
14 something that hopefully the order which reflected the 15 preliminary preference to that was for the Oracle order and 16 nothing under the law would be effected. If something could be
17 similar for Union Bank, that would be appreciated. 18 19 THE COURT: MR. POWER: Anyone else care to be heard? Your Honor, as to the last objector, my
20 understanding is, based on conversations I had with him 21 yesterday and the debtor and that that contract, the security 22 agreement is going to be taken off the schedule in terms of the 23 letter of credit. 24 MR. FREEMAN: Well, if that's fine, that resolves the
25 issue, obviously.
72 1 MR. POWER: Well, we'll ask purchaser's counsel to I know he's sitting here, a
2 confirm that when he has a moment.
3 moving target, but I think that one is a financial combination 4 contract from the Committee and debtors' point of view, 5 obviously. So we'll confirm that and then advise you shortly
6 if that will be taken off. 7 MR. FREEMAN: All right. Thank you. I appreciate
8 that and I appreciate the time, Your Honor. 9 MR. POWER: Your Honor, we do have a chicken and egg
10 problem in that obviously Wells Fargo and Deutsche had 11 objections outstanding. And we hope we have dealt with them in
12 the order, although I'm pretty sure we're going to end up 13 slightly changing the language when Your Honor gives us a 14 break. 15 Does Your Honor want to go through what we proposed Or simply reserve their objections till I'm trying to
16 to resolve those now?
17 after we get the order and discuss it then? 18 streamline the process. 19 THE COURT:
Well, I guess what I'd like to do is have Or at least subject to And then after our break,
20 all of the agreements memorialized. 21 preparing the final form of order.
22 just have you come back to me with whatever differences remain. 23 MR. POWER: Well, should I -- I've been asked, at Your Honor said, if you have any
24 least, to put on the record. 25 objections.
Well, those objections are obviously outstanding
73 1 until Your Honor has the order. So should I at least describe
2 what I think the resolution is now to preserve the objections? 3 Or do you want me -4 THE COURT: No, no. If those objections have been
5 resolved, I don't need to hear them now. 6 7 MR. POWER: THE COURT: Well, there is one -What I want to know now is -- before I
8 leave, just for the break, is -9 10 11 MR. POWER: THE COURT: MR. POWER: Okay. -- to hear -- I want to know what's left. That's fine, Your Honor. And if you
12 could just agree that those parties could raise any objections 13 if we can't finally agree to the language. 14 THE COURT: Yes, yes. I didn't mean to foreclose
15 that because I'm always hopeful they can be worked out. 16 17 MR. POWER: Thank you. Very briefly, Your Honor, Dennis We
MR. DREBSLY:
18 Drebsly on behalf of Deutsche Bank National Trust Company. 19 have an objection. 20
I want to say first for the record, with the help of
21 the Carrington people working over the weekend and changes 22 they've agreed to, we've resolved the adequate assurance 23 objection. We've also talked to the debtor and the Committee
24 for a methodology to withdraw -- to come to a resolution as to 25 cure amount and a methodology for ultimately resolving that
74 1 objection. I think during the break we'll discuss it further.
2 And either we will come to a cure amount by way of stipulation 3 shortly or we will have another hearing before this Court to 4 set a schedule for that resolution. 5 THE COURT: All right. Thank you. Okay. So the
6 universe of objections for disposition today has reduced itself 7 to those posed by Oracle, GECC, Premier Print, Union Bank, 8 Deutsche Bank and Wells Fargo. 9 Okay. Does that do the list?
Seems to me we should break now, see whether And then I'll come back
10 remaining issues can be worked out.
11 and address whatever hasn't yet been resolved. 12 13 14 MS. UHLAND: THE COURT: MS. UHLAND: And go through the rest of the agenda? Don't worry, I won't forget. The -- okay. How long should we break,
15 Your Honor? 16 17 think? 18 MS. UHLAND: I think there's all the objections. Agreed? We THE COURT: Well, how much time will you need, do you
19 could probably get that done in 20 or 30 minutes. 20 MR. KIRIAKOS:
I think we might need up to an hour,
21 but if we can compromise at 40 or 35, I'll come back and talk 22 to you. 23 THE COURT: Well, no, I -- I had something else I
24 wanted to accomplish today, but I, early this morning, came to 25 the realization that that was not going to happen, so. I'm
75 1 yours for the day. I'm content to take an hour at this point
2 if the parties will put it to good use. 3 4 5 6 7 8 MS. UHLAND: MS. UHLAND: THE COURT: MS. UHLAND: THE COURT: Okay. Okay. Anything before we break?
No, Your Honor. All right. Court will stand in recess.
(Recess) Your Honor, I think except for one issue
9 and maybe -- I think we've reached agreement with respect to 10 language with respect to the objectors. And what we would
11 propose to do with respect to those that we've resolved is walk 12 the Court through the proposed language changes from the draft 13 filed this morning rather than trying to do a -- since parties 14 got a chance to review that. 15 16 THE COURT: MS. UHLAND: Okay. We did not reach agreement with GECC.
17 So we'll have to point out where in the order the debtors 18 believe we've already addressed their concerns. And then I
19 guess the other question is whether we're done with Oracle and 20 Union Bank. 21 MR. KIRIAKOS: Tom Kiriakos, Your Honor. I believe
22 that we're done with Union Bank and we can on the record 23 respond to a concern of Premier Printing. And I think we have
24 one issue with Oracle remaining that Oracle's counsel is 25 talking to his client about. And we'll be able to outline --
76 1 if we have a resolution on that, we can outline the entire 2 resolution. 3 you. 4 MS. UHLAND: Your Honor, would you like us to walk And if not, we're down to one issue to present to
5 through the change to the order and discuss the GECC issue 6 after? 7 8 THE COURT: MS. UHLAND: Yes. Okay. And then some of this language So on
9 has been worked through by counsel for the Committee.
10 those explanations, he was going to -- we're just going to go 11 through the order in order. 12 bit. 13 14 THE COURT: MS. UHLAND: That's fine. So again, Your Honor, what I'm working And our But we may be tag teaming it a
15 from would be the version that was filed this morning. 16 first paragraph to consider is paragraph 3.
And this relates
17 to the Citi Corp issues and the servicer advances. 18 19 THE COURT: MS. UHLAND: Okay. I'm going to read this language into the
20 order -- at the very end of the sentence, it currently provides 21 for payment. And the last phrase of that paragraph says,
22 "Subject to the debtors' and Creditors Committee's verification 23 of such payment --" 24 25 THE COURT: MS. UHLAND: I see it. And then we're adding as an insert to
77 1 that or a proviso at the conclusion of that. "Provided, 2 however, nothing herein shall determine or be deemed to be an 3 admission by any party as to the amount, extent, validity, 4 enforceability, perfection or priority of any claim or lien 5 asserted by Citigroup Global Markets Realty Corp with respect 6 to the servicer agreements facility, provided further, however, 7 all rights of all parties with respect to such issues are 8 reserved." 9 The next change is in paragraph 7, the second to last We'd like to add a After the defined term,
10 line of the paragraph, paragraph 7. 11 clarification with respect to this.
12 where it says "remaining objection", the sentence goes on "the 13 hearing on the assumption assignment of such assumed contract," 14 we're adding a parenthetical after "assumed contract" to 15 provide "(which, for the avoidance of doubt, includes any 16 assumed contract to which Oracle USA, Inc. or Union Bank is a 17 party)". 18 With respect to the change -- there are also changes One
19 to paragraph 8 and I'm going to defer to -- I'm sorry. 20 more sentence on 7. 21 MR. KIRIAKOS:
Your Honor, I'm sorry, Tom Kiriakos.
22 An additional clarifying sentence at the end of 7 consistent 23 with the parenthetical just read into the record will read, 24 "All rights and objections of Oracle USA, Inc. and Union Bank 25 of California concerning the assumed contracts are reserved for
78 1 resolution at such hearing." That was a Union Bank request We took for granted it should
2 that we're happy to accommodate.
3 also extend to Oracle in terms of the reservation. 4 5 THE COURT: MS. UHLAND: Very well. Mr. Power is going to generally
6 describe, we've got substantial changes to paragraph 8 which 7 have been agreed to. 8 MR. POWER: So he will generally describe this. Your Honor, Mark Power from Hahn and I think with respect to
9 Hessen, counsel for the Committee.
10 Wells Fargo and Deutsche, probably it's little quicker if we 11 just explain what we're doing and -- because the language is -12 unless you want me to the entire paragraph in the record, I 13 think counsel for both sides have agreed to the language. And
14 we intend on revising it back at the office of the buyers and 15 then submit it under certification. So I would -- if it's okay
16 with Your Honor, I think the easier way is just to go through 17 the concepts. And it's obviously subject to the final language
18 that we're going to have. 19 20 THE COURT: MR. POWER: Go ahead. With Wells Fargo, Your Honor, there's a
21 number of changes that were in the prior order submitted this 22 morning as to adequate assurance that Carrington will provide 23 and those aren't changing. 24 There also is a -- I guess we had a little bit of
25 chicken and egg problem with respect to adequate assurance
79 1 because this buyer isn't technically licensed in every state 2 yet as to do the servicing. And so, basically, it needs to
3 become a licensed servicer in order to satisfy the criteria 4 under the servicing agreement as well as other things. 5 That requires Wells Fargo to do monitoring in Carrington
6 connection with the requirements to satisfy that.
7 has agreed to provide written reports giving monthly updates 8 consistent with the order to Wells Fargo in connection with 9 those efforts. And Wells Fargo is incurring expenses and fees And it's really kind
10 in order to monitor that going forward.
11 of an adequate assurance type of situation. 12 The estate, in order to facilitate that process,
13 recognizing that not every criteria may be satisfied, but we 14 think it will be very shortly, we've agreed to set aside 15 $150,000 from the sale proceeds to cover reasonable costs and 16 out-of-pocket costs and expenses that Wells Fargo may have in 17 connection with that monitoring. And that will -- and they'll
18 basically do what Your Honor sees all the time which is submit 19 the invoices or statements. We have a right to object and
20 we'll basically proceed in that manner. 21 In addition to that, Wells Fargo has agreed to So
22 withdraw their cure objections that are in the complaint. 23 the order makes clear that basically any cure claims in
24 connection with these agreements are subject to the $150,000 25 carve-out. And with those changes and the other changes, I
80 1 think that resolves everything, but the buyer counsel may not, 2 so. 3 MR. KIRIAKOS: Tom Kiriakos, Your Honor. Just so
4 it's clear, state licensing is not, and Carrington's position 5 has been consistent with this from the start, state licensing 6 is not a requirement of the referenced sections in the order 7 for the assignment of the servicing agreements. 8 the 502 I've referenced earlier. 9 position on that is clear. 10 We have agreed, as I said earlier, to provide monthly The 602 and
I just wanted to make our
11 reports to Wells Fargo and Deutsche as to our -- the progress 12 of our state law licensing. We're happy to do that. The terms
13 of that and with respect to whatever attorneys' fees and 14 reserves, that's between the Committee and Wells Fargo and 15 we're fine with that. 16 The only change we've agreed to with respect to that
17 requirement, instead of referencing a six -- earlier of six 18 months and when we get the licenses, we're removing the six19 month period and we're inserting the phrase "the term of the 20 transition services agreement". And the transition services
21 agreement is to run for six months. 22 My understanding of Wells Fargo's issue was, well,
23 what if we end up extending the transition services agreement 24 for up to eight months, the six months doesn't work. And so So
25 we've agreed to use the term transition services agreement.
81 1 if it gets extended, the period gets extended. 2 with that. And we're happy
But that's the only change we've agreed to with
3 respect to data at post-closing date obligation. 4 MR. POWER: With that clarification, Your Honor, I Deutsche is the next one.
5 think that deals with Wells. 6
Deutsche Bank, Your Honor, we have a separate Deutsche had significant cure claims raised in
7 resolution.
8 their objection that, quite frankly, we're not in a position to 9 resolve today. It requires, in essence, some further
10 investigation into diligence by Deutsche and a time for the 11 debtor and the Committee to respond to that. 12 So what -- we also have not yet agreed today, but we
13 are getting close in the substantial negotiations as to what we 14 will reserve for their cure amount. To set aside, which will
15 be the maximum cure amount that they may be entitled to assert 16 with respect to this cure dispute under their objection. 17 18 Honor. So there are several things going to happen, Your We are going to try to work out a stipulation in the
19 next two days with Deutsche, with the debtor, the Committee and 20 Deutsche which will provide for a protocol, as I think 21 Deutsche's counsel mentioned, and ask -- set up a procedure. 22 They'll have roughly, I think, 75 days or so to finish their 23 investigation analysis of the potential claims. 24 time to respond. We'll have
And if we can't resolve it, we'll seek a
25 hearing before this Court, similar to a cure cost dispute
82 1 mechanism resolution that Your Honor sees frequently in these 2 situations. 3 The stipulation will provide for whatever we agree to
4 as a reserve from the purchase price for the cure amounts. 5 There also is a provision in the cash management order, Your 6 Honor, entered previously which Deutsche has certain rights 7 with respect to that order and those will continue and we will 8 basically provide for that in the stip, at least for the 9 closing date. 10 And basically, that stipulation will come forth.
Your Honor, what we would like to do on this one,
11 it's not in the order specifically, is Deutsche wants to 12 protect it's rights. That if we can't agree to that
13 stipulation in the next few days and submit it on a 14 certification, that we have a hearing backup before the closing 15 because otherwise we haven't fixed the cure amount reserve. 16 if it's okay with Your Honor, we'd like to schedule this for 17 the 30th. We have an omnibus hearing before this Court. So
18 Hopefully we'll have it resolved by then and we can submit a 19 stipulation. 20 21 22 you? 23 But that's a backup holding date that would work. That's fine. Okay. Subject to that, does that satisfy
THE COURT: MR. POWER:
Let me Deutsche for an assessment. MR. DREBSLY: Yes, I believe counsel has correctly Just one in clarification. That any
24 stated our agreement.
25 reserve amount that we agree to will not be subject to any
83 1 superior lien. We don't want to agree to an administrative
2 expense and then have some adequate assurance lien prime us and 3 there's no money in the estate to actually pay that. So that
4 money would be reserved and given a priority status so that -5 well, let me say the corpus of that can't be invaded by any 6 subsequent order of the Court relating to giving someone a 7 super priority lien over it. 8 MS. UHLAND: That's consistent with our
9 understanding, Your Honor. 10 To reflect these discussions, there will be some I'm in 10. So the next
11 minor changes as well in paragraph 10.
12 paragraph is, to discuss, is paragraph 18 which is another 13 paragraph that needs to be modified to address the Citigroup 14 issues. And paragraph 18 will be revised to provide, in the
15 second line where it says clarify instead of to pay off "the" 16 obligations, will pay off "all" obligations. 17 And the balance of the paragraph, we're going to
18 delete all the phrases after where it says "8.3L of the APA", 19 and I'm not going to reread it, but we're going to reinsert the 20 same language that I read earlier that is going to be inserted 21 in paragraph 3, the provided however language. 22 Paragraph 20, Your Honor, we're making a
23 clarification to address the concerns of some of the cure 24 objectors. The first line of paragraph 20, where it says "The
25 maximum potential liabilities the debtors may have for cure
84 1 costs," and we're going to add the sentence there, "as of the 2 date of the filing of the objection". 3 THE COURT: Let me ask the phone participants please Okay. I'd like to ask the court
4 to put their phones on mute.
5 call operator to disconnect from the phone call, that person 6 who's typing I can hear. 7 8 9 person. 10 THE OPERATOR: THE COURT: Yes, Your Honor.
I didn't know we could cut out just one
I learned that only recently. MS. UHLAND: And, Your Honor, at the end of paragraph
11 20, to clarify some of these timing issues with the cures, 12 we're going to insert the following. "To the extent any cure
13 costs --" and I think I'm going to have Mr. Power read his own 14 writing on this one. 15 16 Honor. MR. POWER: My glasses aren't helping me. I don't think glasses would help, Your
The paragraph will read as follows and this is for
17 people on the phone as well. 18 "To the extent any cure costs accrue on an assigned
19 contract," assigned contracts are all contracts but the 20 servicing agreements of the contract, "after the entry of this 21 sale order, but before the --" actually that's not going to 22 work. It's "after the date of the filing of the objection,"
23 I'm going to make that change right here on the record, "but 24 before the closing date," which is the date this deal will 25 close hopefully, "such cure costs, to the extent allowed, will
85 1 be (1) paid by Carrington to the extent such assigned contract 2 becomes an accepted contract; or (2) the debtor -- by the 3 debtors as an allowed administrative claim to the extent it 4 satisfies the administrative priority criteria under 11 USC 5 503(b)(1)." 6 In other words, Your Honor, we've dealt with the gap
7 period between the date the objections were filed and the 8 amounts are fixed and the date of closing, so if anything 9 accrues during that period, either Carrington will pay if they 10 take the contract or the debtor will pay it if they don't take 11 the contract, subject to our rights to object to the allowance 12 of the amount and also whether it's a priority or not. And
13 that hopefully satisfies that gap period issue that Your Honor 14 raised and the objectors raised. 15 MR. HAZELTINE: Your Honor, if I may briefly, William I spoke with
16 Hazeltine on behalf of Wells Postal Solution. 17 debtors counsel during the break.
We have an amount that I
18 think at the time the objection was filed was not in arrears, 19 so it wasn't in default. 20 amount after the hearing. 21 I also understand that it's on it's way and it should If it is, then it's not an issue and I can But I just I actually can provide him with that
22 be delivered today.
23 let him know and he can take it off the list. 24 wanted to raise that.
And as I understand it, this does not
25 include any amounts that have been -- any services that have
86 1 been provided that haven't been billed yet. I -- those are, as Thank you,
2 I understand it, the ones that are being accrued. 3 Your Honor. 4 MS. UHLAND:
Moving on from that, Your Honor, the
5 next -- paragraph 30, Your Honor, and I believe this is to 6 address some of the concerns perhaps of the United States 7 Trustee. It's to clarify -- it will now read, "To the extent
8 of any inconsistency between the provisions of this sale order 9 and the Carrington agreement, the disposition documents or any 10 documents executed in connection therewith, the provisions 11 contained in this sale order shall govern." 12 13 well. In paragraph 34, and I'll just reread this one as This is to address the concerns of the assignability
14 issues of the licenses. 15 "To the extent (1) permitted by applicable law, and
16 (2) Carrington needs to operate under or use the benefits of 17 any assumed contract before it becomes an accepted contract (or 18 as provided in Section 2.5 of the Carrington agreement), the 19 debtor hereby grants Carrington full authority up to the 20 contract notification deadline and at its sole cost and expense 21 to use or operate under such assumed contract necessary for the 22 operating of the servicing business provided, however," and 23 then it continues with the rest of the balance of the contract. 24 Of that provision as previously drafted. 25 In paragraph 40 --
87 1 2 UNKNOWN PERSON: MS. UHLAND: Hello?
-- there's some further, again,
3 clarifications and so I'm going to now read how the first 4 sentence will read and then the balance of the paragraph is 5 stricken. 6 "Nothing contained in the sale order, the Carrington
7 agreement or disposition documents shall be deemed to release, 8 discharge or prejudice claims, if any, Wells Fargo or DB and TC 9 may have against (1) the original or preclosing non-debtor 10 parties to the pertinent securitization documents; (2) debtor 11 entities other than debtor other than debtors who are parties 12 to the assumed contracts; or (3) debtor entities who are party 13 to the assumed contracts for claims that do not arise under or 14 relate to such assumed agreements." 15 paragraph will then be stricken. 16 17 18 19 USA, Inc. MR. DOSHI: THE COURT: MR. DOSHI: Excuse me, Your Honor? Yes. This is Amish Doshi on behalf of Oracle And the balance of that
Again, I don't want to interrupt counsel, but I just
20 want to note that the changes reference in paragraph 34, we 21 still have an issue and at some point after the presentation I 22 would like to address the issue that we still have outstanding. 23 MS. UHLAND: That's fine, Your Honor. I believe that
24 may be what counsel for the purchaser noted at the beginning. 25 THE COURT: Okay.
88 1 2 MR. DOSHI: MS. UHLAND: Thank you. Your Honor, with respect to paragraph So I'm just going to
3 41, there are two clarifying changes.
4 reread the first portion up to the "provided however". 5 "Any claim under the Carrington agreement against the
6 debtors not satisfied pursuant to 11.6(c) of the Carrington 7 agreement shall constitute an allowed administrative claim 8 under 503(b) and 507(a)(1) of the Bankruptcy Code and shall be 9 treated with such priority if the above-captioned bankruptcy 10 cases convert to cases Chapter 7 of the Bankruptcy Code." 11 then the balance of that paragraph remains the same. 12 Then, Your Honor, in Exhibit C, we have two With respect to CB Richard Ellis, after their And
13 modifications.
14 cure amount, it should say "as of April 30th, 2007". 15 16 THE COURT: MS. UHLAND: Okay. And with respect to Oracle USA, as
17 previously agreed by the purchaser, I believe a TBD is being 18 inserted in lieu of the $1200. 19 MR. KIRIAKOS: Is that correct?
That's right, Your Honor, I can
20 confirm that.
And to the extent that Union Bank also should be
21 listed on that Exhibit C and I'm not sure if it is, should be 22 or not, that would also be a TBD although the language we read 23 in earlier about complete reservation ought to address the 24 Union Bank's concerns on that. 25 MS. UHLAND: To -- we did want to confirm on the
89 1 record, I believe this was the Premier Printing objection, that 2 the debtors acknowledge that they reserve the right to bring 3 any appropriate motions to compel assumption or assignment. 4 And this order does not circumscribe those rights. 5 Further, Your Honor, as I noted, we were unable to So we can discuss that. It
6 resolve the objection with GECC.
7 may make sense to first address the remaining issues with 8 Oracle before going on to the GECC objection. 9 10 THE COURT: MR. DOSHI: All right. Let's do that. Amish Doshi,
Good afternoon, Your Honor.
11 again, for the record on behalf of Oracle USA, Inc. 12 Specifically, it appears the remaining objection that
13 we have relates to paragraph 34 of the proposed order as -14 even as revised as read and included. The point being the
15 language, even as revised, still does not address the concern 16 in light of the fact that the hearing is being adjourned with 17 respect to whether or not they can assume and assign these 18 contracts. 19 27th. 20 The fact that they've included the phrase to the It's being adjourned to July -- I'm sorry, June
21 extent permitted by non-bankruptcy law or something to that 22 effect still does not change from the fact that a determination 23 of whether or not non-bankruptcy law permits this is not going 24 to occur until June 27th. So in essence, they're getting the
25 right to use these licenses without satisfying 365(c)(1) and
90 1 they cannot use these licenses without Oracle's consent. 2 determination is not going to be made until the June 27th 3 hearing. So the additional language does nothing for the And a
4 interim period between now and June 27th. 5 6 7 MR. KIRIAKOS: THE COURT: I'm ready to address that.
Go ahead. But it does in this sense. There has
MR. KIRIAKOS:
8 not yet been a determination that, in fact, the debtor can't 9 grant authority to the purchaser to do this. 10 determination has not yet been made yet. 11 Oracle has a clear view on it. That
I understand that
But we haven't litigated it and And as Oracle itself has
12 we haven't looked at the licenses.
13 acknowledged as between Oracle and Carrington, we don't quite 14 know what the universe of the documents is. 15 first point. 16 The second point is that in no way, shape or form is So that's the
17 Carrington claiming that any damages that Oracle suffers 18 between the closing, whether it happens on June 6th or June 19 16th, June 13th and the hearing date on June 27th, it's not 20 liable for. On the contrary. If there's a determination on
21 June 27th that we -- that they can't be assumed, and in 22 addition, as a result of that lack of assumption, the debtor 23 didn't have ability to assume, the debtor didn't have the 24 authority to grant us this authority under applicable non25 bankruptcy law, we will stipulate that Oracle has all its
91 1 rights to assert damages for us with respect to any damages it 2 suffers between the period of the closing date, whenever that 3 is, and June 27th. 4 And I think that does respond to the concerns and
5 adequately addresses them and does everything that needs to be 6 done in the context of this transaction. 7 MR. DOSHI: Thank you. The
Your Honor, if I may just respond.
8 question is not about damages at this point. 9 putting the cart before the horse. 10 not it can be assumed or assigned.
This is kind of
The question is whether or We're not at the stage I
11 where determining what damages Oracle may or may not have. 12 mean, we're at the stage where we can't even identify what 13 contracts are being sought to be assumed and assigned. But
14 even if they -- they're seeking to assume and assign contracts 15 that they haven't even identified yet. 16 THE COURT: Well, it doesn't trouble me to put
17 language in the order that restricts the parties from acting in 18 a way that's inconsistent from state law or applicable non19 bankruptcy law. 20 What troubles me is the sense I get that Carrington
21 and the debtor, if Carrington sees the need, are prepared to 22 use the intellectual property without Oracle's consent and 23 worry about the consequences later. That's not a situation I'm But I
24 interested in condoning by virtue of the sale order.
25 don't -- I wouldn't mind language like has been suggested which
92 1 enables the use provided any necessary consent is obtained. 2 you understand what I'm trying to say? 3 MR. DOSHI: Your Honor, I take it that question was Do
4 for the debtors and the purchasers? 5 THE COURT: Well, it was for anyone who thought they
6 might not understand what I was trying to convey. 7 MR. KIRIAKOS: Your Honor, what I thought you were
8 trying to convey was that the onus on Carrington and the 9 debtors is more than taking a calculated risk that if we don't 10 have it by closing, we'll just resolve it at June 24th rather 11 then onus was on Carrington to come to a conclusion before 12 closing whether or not Oracle's consent under applicable non13 bankruptcy law was required in order to even have the authority 14 to use it between closing and the date of the assumption. 15 if we -- and then seek that consent from Oracle. 16 THE COURT: Yeah, what I'm saying is this. By virtue And
17 of the sale order, I don't want to set up the structuring so 18 that, you know, Carrington can move ahead and then shift the 19 burden to Oracle to come running into this Court to say, you 20 know, they're doing something they shouldn't be doing. I don't
21 know whether you can build in some notice provision or some 22 other process which if there is a dispute and consent is not 23 had, or there is a dispute about whether consent -24 25 MR. KIRIAKOS: THE COURT: Is needed.
-- is required, that the parties can come
93 1 easily back without -- well, in such a way that Oracle's 2 alleged or asserted rights wouldn't be impaired. 3 MR. KIRIAKOS: Your Honor, I'm confident we can work
4 on both, a notice feature and a process feature that gets us 5 back in front of you if we can't work it out. 6 THE COURT: Okay. Seems to me that that would be the How does Oracle feel about that?
7 way to be on to it anyway. 8 MR. DOSHI:
I -- conceptually, Your Honor, if the
9 language states that they would need Oracle's consent, you 10 know, in the interim period, I think that would be sufficient. 11 And Your Honor -12 13 14 15 today. THE COURT: MR. DOSHI: THE COURT: I'm not -- I'm not --- hit it on the head -I'm not going to make that determination I'm going to leave open for a I
That's the whole point.
16 later determination that issue if the parties can't agree.
17 don't want either tie Oracle's hands, but I don't want to do 18 anything that has the aura of condoning the allegedly improper 19 use of Oracle's intellectual property. 20 Well, I think Carrington's counsel got my idea and I
21 would be prepared to bless that kind of arrangement and I'd 22 like you to consult with Oracle and see if you can come up with 23 something that's acceptable. 24 25 MR. KIRIAKOS: MR. DOSHI: We will, Your Honor. I
I'm happy to discuss it, Your Honor.
94 1 apologize for the confusion. I did not -- I'm not sure I
2 understand what language is being proposed by Carrington's 3 counsel. 4 THE COURT: All right. Well, to the extent it can't Okay.
5 be resolved, I'll make a decision. 6 MR. DOSHI: Sure.
I'm happy to discuss this further
7 with both the debtors' counsel and Carrington's counsel if 8 necessary. 9 10 GECC? 11 MR. LEVEE: Ira Levee, Lowenstein Sandler. I'm here THE COURT: All right. Does that leave us just with
12 on behalf of AT&T at this point, Your Honor.
While we were
13 sitting here, I received an email from my office, from one of 14 the attorneys in my office who had been notified by AT&T who 15 did not receive any notice about this hearing or the cure 16 amounts and -17 18 THE COURT: MR. LEVEE: But here you are. Well, I was here on behalf of somebody
19 else and they sent me the email and asked if I could address 20 that. They said that AT&T didn't receive a notice. Apparently
21 the notice went to an old address and then finally caught up 22 with AT&T at their new address. And they would like to reserve
23 their rights with respect to any cure claim. 24 25 THE COURT: MS. UHLAND: Debtor have any response? Your Honor, to the extent they file a
95 1 late cure objection, I think that we can deal with it under 2 legal standards and obviously we're not trying to prejudge the 3 merits of that today. 4 5 6 7 right. 8 MR. GALLERIZZO: One housekeeping matter, Your Honor, I THE COURT: MR. LEVEE: THE COURT: Me neither. Thank you, Your Honor. Okay. Anyone else other than GECC? All
9 and then we can proceed to the objection of the sale itself.
10 would request that the debtor and the purchaser be required to 11 follow the amended schedule to the notice of assignment 12 indicating that the master security agreement and the related 13 promissory notes are not being assumed, basically deleting it 14 from that notice. 15 MR. KIRIAKOS: We certainly commit to do that. The
16 only question is timing, Your Honor.
We'll absolutely get it
17 done before closing, but I -- we'll commit to that. 18 19 THE COURT: All right. Thank you, Your Honor. The
MR. GALLERIZZO:
20 objection to sale that remains open, Your Honor, we had three 21 specific objections. We still haven't resolved the issue of
22 what assets of GE -- that GE has liens against are being sold. 23 There is no allocation in this order. 24 in order to -25 THE COURT: Hold on. What the debtor has done
96 1 2 MR. GALLERIZZO: THE COURT: Okay.
Before we get to allocation, even given
3 the pace of the process, debtor hasn't been able to identify 4 that which it is selling? 5 MS. UHLAND: By category and location, yes, but by
6 serial number, we haven't completed that audit piece yet. 7 8 THE COURT: MS. UHLAND: How long will that take? I'm going to ask Carrington counsel if
9 he has a sense of how long do you think that's going to -- that 10 kind of process will probably take? 11 MR. KIRIAKOS: Your Honor, I have no idea. We've
12 been asking and asking and asking.
This is -- as I tried to
13 gently note earlier, this has been a source of frustration for 14 us also. 15 MS. UHLAND: Certainly, you know, prior to the
16 closing, Your Honor, we'll be, you know, concluding that 17 process. So I would say probably, to get the correct serial
18 numbers, I think it's probably going to take us two weeks to 19 complete that process. 20 MR. GALLERIZZO: We have several weeks ago, Your
21 Honor, provided the debtor, right after the bidding procedures 22 hearing, with a listing of the collateral against which we hold 23 liens as well as our leased assets. 24 descriptive detail. So they have that
It's just a matter of matching up against
25 what they're selling.
97 1 THE COURT: I mean, it doesn't seem to me to be an
2 unreasonable request. 3 MS. UHLAND: I agree, Your Honor, it's certainly not It's just been -- this is the And, as the But I think
4 an unreasonable request.
5 operating business in the midst of operating.
6 Court knows, everything else that's been going on.
7 now, with this closing behind us, that we're -- we'll be able 8 to complete those -- that process. 9 process behind us. 10 MR. GALLERIZZO: May I ask counsel when we can expect With this sale approval
11 to see a list?
Do you have a guesstimate one way or another?
12 Before closing, are you saying one day before closing? 13 MS. UHLAND: Say we will -- we don't have anyone from
14 Alex Partners here to commit, but I will -- we will use our 15 every effort to have it done in two weeks time. 16 17 THE COURT: So. Okay. That's acceptable, Your
MR. GALLERIZZO:
18 Honor, in terms of timing.
But what it does is it leads us Once again, we don't know
19 into a cart before the horse issue.
20 what's being sold here today, but I think we can get by that if 21 appropriate protections are placed in the order to protect GE 22 and other creditors for that matter, although I'm only here 23 representing GE, obviously. 24 In this particular case, the debtor has not provided
25 an allocation in the order as to how proceeds from this sale
98 1 will be paid to specific creditors. They have done so openly
2 and told this Court that they want to wait until after the sale 3 is done before that allocation is provided. 4 improper. I think that's
Your Honor has given your position on that at the You tentatively ruled on that. We
5 bidding procedures hearing. 6 talked about it. 7 THE COURT:
Well, I wasn't going to hold up the
8 bidding procedures for that reason. 9 MR. GALLERIZZO: Yes, that's correct. I think it's I think what
10 fraught with problems, as we've said previously.
11 it does is it just allows for a host of litigation at the end 12 of these proceedings and down the road in terms of what assets 13 are -- what is payable to the specific secured creditors for 14 the assets that are sold. 15 Honor. Some of the assets may be gone, Your
Those sorts of issues are what we're going to be
16 dealing with down the road. 17 We've talked to the debtor about having an
18 opportunity to physically see the assets and appraise them. 19 The debtor is not responding to that request. You know, they
20 indicated they would look into it and they have not responded 21 to us. So we're faced with a situation that closing is around We
22 the corner, we don't know what assets are being sold.
23 haven't been provided with access to the assets to figure out, 24 you know, what the value of those assets are today. 25 debtor, we have not consented to the sale. And the
We specifically
99 1 said so in our objection. The debtor is attempting to get
2 around the lack of consent under 363(f)(5) and basically 3 alleging that GE can be compelled to take a money satisfaction 4 in connection with this case. 5 Or in connection with this sale. That
I think they read that section incorrectly.
6 particular section, for GE to be compelled to take a money 7 satisfaction, the debtor would be required, under state law, to 8 pay its claim. Its claim against these particular assets that
9 we're talking about, the assets that we loaned the money 10 against, because if you remember, Your Honor, we have loans and 11 we have leases. But if we're talking about the assets we have
12 loaned monies against, we're owed approximately $7.4 million. 13 We have, indeed, filed a motion for relief from stay as to all 14 the assets which are scheduled later in June for hearing. 15 Basically, under the case law that I was alluding to
16 earlier, Your Honor, in the big case, in Delaware's the 17 Kellstrom case, Judge Walrath looked at this decision, 18 although, albeit the creditor in that case was an Article 2 19 creditor and not an Article 9 creditor. But I think the
20 decision of Kellstrom still is applicable here because in 21 determining that you can do a sale under 363(f)(5) in that 22 particular circumstance and alleviate the Article 2 rights of 23 that particular creditor. The Judge came to the conclusion,
24 however, that under state law, you could only alleviate those 25 rights if that particular creditor was paid in full. And the
100 1 same holds true here. GE, it's lien, it's claim could only be
2 satisfied by payment in full of its claim under state law. 3 So what I had suggested to the debtor and the
4 Creditors Committee and they refused is that this order provide 5 that we, GE, be provided with adequate protection to the extent 6 that basically from the proceeds of sale are claims against the 7 assets that sold would be paid in full. But that's the face
8 amount of the claim, not the debtors taking the position that 9 they believe we're only entitled to the fair market value of 10 the assets that are being sold in terms of what we'd be 11 entitled to from the sale. 12 There's another decision that talks about issues of
13 value and that's out of the bankruptcy court in New Jersey. 14 It's In re W.D. Hal LLC (phonetic). And I'll acknowledge to
15 this Court there's a split of authority over whether value 16 indicates the face amount of claims, or whether value indicates 17 what the value of the collateral is being sold is. I believe
18 in this particular district, at least, the only case I could 19 find on that issue was Judge Walrath's opinion in Kellstrom. 20 And by -- in discussing 363(f)(3), she indicated that that sale 21 couldn't be approved under that particular section because the 22 proceeds from the sale were not sufficient to satisfy the 23 claims against that particular -- those particular assets which 24 were the claims of the Article 2 creditor and I believe Bank of 25 America had a competing lien also.
101 1 So, I guess in conclusion, Your Honor, what I'm
2 suggesting and we're asking the Court to do is we don't want to 3 bottle up the sale, but we have to protect our rights. We
4 don't mind the sale going forward in terms of what the numbers 5 are and what the Creditors Committee has done to get further 6 numbers and what the debtor had done to bring further bidders 7 to the table. We don't want to stand in the way that. But for
8 us to not object to this sale would seriously affect our 9 interest. 10 So we've objected on the 363(f). We believe that the
11 Court could approve the sale, okay, over the objection if we 12 were provided with adequate protection in the form of a 13 provision in the order that said our claim would be paid at 14 closing. And that's in essence what was provided in the
15 Kellstrom decision. 16 Absent -- and absent that, Your Honor, I think, you
17 know, that the sale cannot be approved over our objection, at 18 least with respect to our particular equipment to the extent 19 it's being sold as part of the sale. 20 THE COURT: All right. Adequate protection, the
21 theory of it in bankruptcy has always been tied to the value of 22 the collateral, not the claim amount, wouldn't you agree? 23 MR. GALLERIZZO: In all instances but under 363(f).
24 Under 363(f), the problem that is when you look into the 25 Legislative history of 363(f), it's clear that the Legislature
102 1 intended that to be a protective device for secured creditors 2 so that they can't -3 THE COURT: And I know that there's a division of
4 authority about how you add up, what numbers you use to add 5 up -6 7 MR. GALLERIZZO: THE COURT: Sure.
-- to figure out whether a secured party Well, let me hear from others. Okay.
8 can block a sale or not. 9 10 11 MR. GALLERIZZO: THE COURT: MS. UHLAND:
Thank you. Your Honor, a couple of points. First,
12 with request to the request for inspection, I think there was 13 maybe some confusion there, but certainly after we provide a 14 schedule, we'll continue to dialogue with GECC and work 15 something out with them with respect to any requested 16 inspection rights. 17 18 THE COURT: MS. UHLAND: How many locations are involved? We only have two locations with the
19 servicing equipment, Indiana and the larger location in 20 California. So we're hoping that we can sort of get our focus
21 on doing inventory starting today and work towards that to 22 complete the schedules or, you know, add the detail to the 23 schedules. 24 But again, we will work with GECC with respect to the Once we get this schedule
25 appropriate inspection rights.
103 1 produced, we think that will be more helpful for a step over. 2 With respect to the adequate protection and the sale
3 objection, Your Honor, I would just note that as counsel noted, 4 the case he is citing is an Article 2 case. In respect, it
5 involves -- you know, it involved paying the full purchase 6 price of assets under an Article 2 agreement. 7 secured claim Article 9. 8 THE COURT: Well, it was -- it wasn't technically a But it had to do with the rights of the It was not a
9 lien, the Court noted.
10 seller who hadn't yet delivered goods. 11 12 MS. UHLAND: THE COURT: Right. So I wonder functionally, whether for
13 this purpose, GECC's counsel isn't right. 14 MS. UHLAND: With respect to a -- I guess my view,
15 Your Honor, is that with respect to -- 363(f) says and it 16 addresses the interest of a debtor -- 363(f) talks about 17 selling free and clear an interest in property. And in this
18 case, Your Honor, we would pause it that with respect to GECC's 19 secured claim, that there interest in property referred to in 20 363(f) is their secured claim under the Code, not their 21 unsecured claim or their deficiency claim. 22 Accordingly, Your Honor, where we would then assert
23 that for the purposes of creating adequate protection 24 requested, that what we have set forth in paragraph 3 of our 25 order that provides that any lien will attach to the proceeds
104 1 of the sale with the same validity, priority, force and effect 2 that they now have against the purchases assets. 3 THE COURT: All right. Or is it? And tell me why that is
4 meaningful to GECC.
I mean, tell me what it means. Are there proceeds
5 Who are they competing against, if anyone?
6 which would be free to satisfy that lien without competing 7 interest? 8 See, the record doesn't tell me this. MS. UHLAND: Your Honor, and I can -- let me lay out
9 the facts and then make sure that we've got the appropriate 10 record that is necessary to establish it. 11 The facts are, we have a DIP loan and a servicer Our debtor-in-possession loan is up to a
12 advance facility.
13 maximum, with a second tranche, of about $50 million after the 14 mandatory prepayment. And the servicer advance facility had an Accordingly, the sale
15 outstanding amount of $32 million.
16 proceeds has substantial value in excess -- substantial sale 17 proceeds in excess of the GECC secured claims, even if asserted 18 at their full amount. 19 So as a -- based on the record so far in the case and
20 the DIP loan that's reference in the sale order and the Citi 21 Bank loan for which we've expressly addressed how we're going 22 to deal with those secured creditors in the sale order, there 23 appear to be ample proceeds even if the full amount -- even if 24 the claim is fully secured. 25 THE COURT: So that the amount of the liens, if you
105 1 carried the debts, their face value are less than the proceeds. 2 MS. UHLAND: Yes, that's correct, Your Honor. So the
3 issue is -- so, yes, so we believe that since there is 4 substantial equity in the sale proceeds, if you will, that 5 their lien is adequately protected pending the determination of 6 the total secured amount of their claim. 7 THE COURT: And what assurance would GECC have that
8 such proceeds wouldn't be dissipated? 9 MS. UHLAND: We could confirm, Your Honor, on the
10 record that we maintain in a, you know, a balance in DIP 11 account of that total amount of their claim pending the 12 resolution of their secured claim. 13 MR. KIRIAKOS: Your Honor, Tom Kiriakos on behalf of
14 Carrington.
From Carrington's perspective, obviously, we
15 wouldn't have any objection to that and we think the fix for 16 GECC in the order, if I could just point you to the language. 17 The language that debtors' counsel read, "Any and all such 18 liens shall attached", we could assert after "liens" in 19 parentheses, including without limitation any adequate 20 protection claims in connection therewith to preserve that 21 issue on the record. And then at the end we could add, with
22 respect to GECC specifically, that pending the resolution of 23 its claim to the proceeds, the -- an amount of the sale 24 proceeds in the full amount of their claim shall be reserved. 25 And I would think both those changes would address
106 1 any concern that GECC would have today in order to let the sale 2 be approved and go forward. 3 4 Committee. MR. POWER: Your Honor, Mark Power from the
Your Honor, we have one caveat to that proffer by
5 debtor and Carrington on the estate's behalf. 6 GECC's claim, as I understand it, is bifurcated.
7 They have approximately 2 million or so against telephone 8 systems. It's unclear yet whether some of those systems are
9 being sold as part of this transaction or as part of the 10 origination platform. So I want to make it clear that what we
11 reserve for out of the sale proceeds is the claim relating to 12 some of the equipment that's being sold here, not the entire 13 claim. Some of which may not relate to those other assets. We
14 have to work through that issue as to exactly what's being 15 sold, but we're not reserving for basically assets that aren't 16 being sold. It really has to be the claim related -- base
17 amount of the claim related to the assets being sold. 18 THE COURT: Well, I think that's all that's required I'm assuming
19 provided there's a way to make that allocation. 20 that there is. 21 MR. POWER:
Well, yes, Your Honor, I think there is
22 because as I understand GECC, they have two telephone -- major 23 telephone equipments that are approximately $2 million or so. 24 And then they have a separate master lease with all the various 25 and individual pieces of equipment. I think we're under that
107 1 master lease here. 2 So we'll try to work it out, but I just want to be
3 clear that when GECC's counsel got up and said, well, it's $7 4 million, I don't think that's what we're talking about in this 5 sale. And to the extent we are, we will put $7 million or But to the extent it only relates to
6 whatever the claim is.
7 the master lease and not the other equipment, then that will 8 not be reserved for. That's simply -- they're going to get Thank
9 their equipment back unless we can sell it for more. 10 you. 11 MR. GALLERIZZO:
If I may clarify, Your Honor, this
12 has been going fast.
The master security agreement that was
13 originally in the notice to assume, that is the security 14 agreement that relates to five promissory notes and that master 15 security agreement, we have liens against a host of assets, 16 okay. I mean, there -- I want to say thousands of computers,
17 et cetera. 18 I don't know what Mr. Carrington and his client are I don't think he
19 trying to purchase as part of this sale. 20 knows at this point. 21
And that remains to be decided.
The point I was making was those assets, we have a
22 master security agreement, all debt is secured by all assets. 23 So, you know, I don't know how we make that allocation down the 24 road if it's determined that they're buying half of the assets, 25 whether, you know, we decide just to split the debt down the
108 1 middle. I just -- I don't know how an allocation can be made
2 and albeit the reason why it's a problem during a sale before 3 you know what's being sold. 4 So I just wanted to make that clear. And counsel's
5 correct, we do have two leases where it's like -- where it's 6 less than 2 million. 7 million four. I think it's about a million five or a But I'm not sure
It's in our lift stay motion.
8 whether Mr. Carrington and his client -- or his client are 9 trying to buy those assets also. Those are leases. I would
10 think they'd want to assume those leases, have them assumed by 11 the debtor and assignment. They haven't done that to date. So
12 I don't -- and I know they have the right under this order to 13 go out and scoop up miscellaneous contracts that they may want 14 that they decide after the fact. 15 that. And maybe we can talk about
But I want to make the record clear that we've got those
16 two distinct types of scenarios here. 17 MS. UHLAND: And I think -- I think what -- the
18 specific promissory notes are secured by a single security 19 agreement. And we believe today that there's some equipment in
20 the security agreement that, for the purposes of this order, 21 unless you otherwise agree, we'll reserve the amount -- the 22 total amount of all these promissory notes. 23 24 25 MR. GALLERIZZO: MS. UHLAND: Okay. That's --
until we otherwise agree. That's acceptable, Your Honor. I
MR. GALLERIZZO:
109 1 think if they reserve and -- you know, if I could ask for one 2 more thing that I reserve the right or my client reserves the 3 right down the road to make a claim as to the full amount of 4 these proceeds irrespective of this particular order here. I
5 don't want this order, and I'm asking the Court not to let this 6 order waive our right to make that claim down the road based 7 upon the cases that I've cited to Your Honor. 8 THE COURT: Well, put it this way. The sale order But I guess the
9 isn't meant to be that determination, okay.
10 other side of that coin is I want it understood that there be 11 nothing that would occur later in this proceeding which would, 12 in anyway, give GECC the freedom to attack collaterally the 13 sale order. 14 MR. GALLERIZZO: Understood. We're not attempting -And
15 what I'm trying to do, Your Honor, is preserve all rights. 16 we're not trying to hold up -17 THE COURT: And I don't think anybody here is
18 intending to impair them in that way. 19 MR. GALLERIZZO: So if we could include some language
20 in there that indicates as such, we'd ask that. 21 MR. KIRIAKOS: Your Honor, I'm not Mr. Carrington and
22 to the extent there is a Mr. Carrington, his last name isn't 23 Carrington, it's Rhodes -24 THE COURT: He shares an office with Mr. Duplefex
25 (phonetic), I think.
110 1 MR. KIRIAKOS: Yes, thank you. I think the language
2 that I suggested in terms of specifically referencing the 3 adequate -- including any adequate protection claims in 4 connection with those liens gives GECC everything they need on 5 that reservation. And whatever their rights are, whatever
6 their claims are, whatever their allocation is they can fully 7 reserve to fight those out later as long as, you know, there's 8 no collateral attack on the sale after it happens. 9 10 THE COURT: MS. UHLAND: All right. And as I understood the reservation, Is
11 he's not reserving the right to go after all the proceeds.
12 that -- you're reserving to go after the full reserve amount, 13 is that correct? 14 MR. GALLERIZZO: We're reserving the right to go
15 against the full reserve amount, that's correct. 16 17 18 19 MS. UHLAND: Okay. Thats correct. Does that --
MR. GALLERIZZO: THE COURT: MR. POWER:
All right.
I'm sorry, I just thought I'd interject. We are not agreeing --
20 Mark Power, counsel for the Committee.
21 we haven't argued this, so we're not putting language in the 22 order that says that the objection is sustained as to GECC 23 because I personally don't agree with the (f)(5) analysis. 24 think it's an (f)(3) analysis. 25 we're not conceding -I
And I want to make clear that
111 1 2 3 THE COURT: MR. POWER: THE COURT: I'm not making a determination. Okay. Thank you, Your Honor.
Parties apparently have made an agreement
4 which I am willing to bless. 5 MS. UHLAND: So, Your Honor, we would then, in
6 accordance with the aforementioned agreement, include to 7 paragraph 3 a clarification with respect to liens that it 8 includes without limitation, adequate protection claims and we 9 will further provide that we will reserve from the proceeds the 10 claim amount of GECC. The secured claim -- well, the total
11 claim amount as opposed to the lease amount of GECC. 12 MR. GALLERIZZO: And there will be a reservation of
13 rights provision in there also that we just talked about. 14 15 rights. MS. UHLAND: Yes, there will be a reservation of
With that, Your Honor, I would ask that the Court Then, what we will do is go back and further
16 approve the sale.
17 revise the sale order -- or to make all the changes agreed to 18 on the record today and redistribute it and submit it under 19 certification of counsel. My expectation is that that will not
20 happen this afternoon, that that will happen sometime tomorrow. 21 22 right. THE COURT: Well, I'll be around all week. All
Let me just ask for the record, does anyone else care
23 to be heard in connection with the sale motion? 24 MR. KIRIAKOS: Your Honor, one point of
25 clarification.
I think that, one, we have every hope of
112 1 getting it done this afternoon, so, we're not going to give up 2 on that. And, two, I think that's an accurate expectation with
3 respect to all the objections except to the extent, although 4 we're going to try, if we can't work out the language with 5 Oracle and Oracle still needs to be heard on that. So I'm
6 concerned about leaving court on the assumption that we're 7 going to give you a certificate of counsel and then not being 8 able to do it and having that argument heard. 9 THE COURT: I'll take the matter up with counsel by
10 conference telephone if you are unable to -11 12 13 14 MR. KIRIAKOS: THE COURT: Okay.
-- finalize the order. We appreciate that, Your Honor. Tim Cairns,
MR. KIRIAKOS: MR. CAIRNS:
Good afternoon, Your Honor.
15 Pachulski Stang Ziehl Young Jones and Weintraub on behalf of 16 the DIP lenders. 17 The -- we have been involved in the process of And because some of
18 revising the order prior to the hearing.
19 the revisions we asked for has specifically been change now, 20 we'd just like to make a reservation on the rights on the 21 record. I'm sure that the debtors will be circulating the
22 revised order under the certification of counsel to the DIP 23 lenders, but we'd just like to make that reservation on the 24 record. 25 THE COURT: All right.
113 1 MS. LOWE: Good afternoon, Your Honor. Sherry Lowe,
2 I represent National City.
And we pretty much echo all the We also have
3 objections that have been raised and found by GE.
4 filed objections, and basically, it still comes to the 5 reoccurring issue of what assets are being sold. 6 position is absolutely the same. And our
We just can't identify
7 whether or not National City's assets are included in the sale 8 or not. 9 So with respect to any sales order that is proposed
10 to the Court, we really would like to see some language that 11 will provide for when a list will be provided so that we can 12 adequately protect our rights or not. 13 difficult to determine that. 14 We have a list of assets that is several pages long And, you know, today It's just really
15 which we have attached to our objection.
16 there's not -- there's nothing to compare it to to make that 17 discernment as to whether or not our assets are included. 18 Thank you, Your Honor. 19 THE COURT: Well, let me ask this. Were you in the
20 courtroom for the duration of the hearing today? 21 22 MS. LOWE: THE COURT: Yes. Okay. Before we broke, I went through a
23 list of the objections that were still outstanding and when I 24 didn't mention National City, you didn't pop up. 25 wondering why. And I'm
114 1 MS. LOWE: I'm not sure if I was here for the part We filed
2 where you listed all the objections that were filed. 3 them some time ago, Your Honor. 4 filed.
It's nothing that we recently
It's a limited objections to all of the sale motions.
5 And so -6 THE COURT: But what I said was, before we broke, I
7 made a list, a very short list of those objections -8 MS. LOWE: Then I must have stepped out of the court, I apologize.
9 Your Honor, when you were go through your list. 10 11 12 THE COURT: MS. LOWE: THE COURT:
See what you might miss when you do that? I apologize, Your Honor. You got to be careful. All right. Does
13 the debtor have any response? 14 15 MS. LOWE: Thank you. Your Honor, my understanding is that
MS. UHLAND:
16 National City is a lessor and they're -- it's not the same 17 situation that we just discussed with GECC. 18 they did file a cure objection. 19 issue will be reserved over. And accordingly,
We did, you know, their cure
And you know, I think we're now
20 in the situation with the modification to the sale where there 21 is the opportunity for the purchaser to take their 60 days to 22 review whether they're going to assume or reject the particular 23 leases. 24 You know, it's just a slightly different situation
25 than the GECC situation.
115 1 MS. LOWE: That's not entirely correct, Your Honor. And
2 We are a secured creditor and we have five leases, yes.
3 the secured creditor portion of our claim is an assignment from 4 GECC. So -- and that was attached to our limited objections.
5 So that's -- to be accurate on the record, we have both 6 positions in this matter. 7 MS. UHLAND: That wasn't clear to me, Your Honor.
8 Then I would propose, Your Honor, that the current language 9 that we put in for -- at least with respect to the -10 preserving the -- you know, we have language that protects them 11 now. Their lien will attach to the proceeds to the extent they And to the extent we are -- we were
12 have a valid lien.
13 preparing the same list, the same inventory that -- two weeks, 14 that will be prepared for National City as well. 15 THE COURT: All right. And what's the magnitude of
16 what you claim to be owed on your secured debt? 17 18 19 20 21 right. MS. LOWE: THE COURT: MS. LOWE: THE COURT: It's less than half a million, Your Honor. All right. Thank you. Anyone else? I hear no response. All Thank you.
Based on this record and the resolution of the
22 objections and hopefully the working out of the appropriate 23 language, I am prepared to approve this sale and will act 24 favorably upon a sale order when presented under certification. 25 (Pause, announcement)
116 1 THE COURT: We're going to take a short recess until
2 they finish this.
Once they start the noise, it will be So court will stand in recess.
3 impossible to conduct business. 4 5 THE COURT:
(Recess) All right. Are we ready to move to
6 another agenda item? 7 MS. UHLAND: Your Honor, did you complete your ruling
8 with respect to the -- before the rude interruption? 9 THE COURT: I did. I'm content to rest on the
10 proposed findings and conclusions that are contained in the 11 formal order. I am satisfied that the debtor has met the
12 requisite standards for the relief that has been requested 13 here. 14 MS. UHLAND: Thank you, Your Honor. With that, we
15 are prepared to move to the next agenda item which is the 16 finalization of our order regarding the examiner. 17 18 19 MS. UHLAND: Your Honor, we -(Pause, announcement) Your Honor, as the Court is aware, both
20 the United States Trustee and the debtors and the Creditors 21 Committee separately submitted proposed orders with the Court. 22 We did attempt to work out some agreed language about have a 23 conference call over the weekend. And -- but were not able to
24 complete really any conclusion on that because we weren't able 25 to, sort of, go beyond sort of a general discussion with the
117 1 parties from the point of view of the United States Trustee's 2 office. 3 So we did -- the debtors did try to file sort of what Our understanding is that the
4 was our attempted compromise.
5 Trustee either doesn't or doesn't have authority to agree to 6 that language now. Mr. Indelicato was going to walk through He's been focused on that as I've
7 sort of where we are now.
8 been tied up with the sale process for the parties. 9 MR. MCMAHON: If I may approach, Your Honor. Your Honor, we Joseph
10 McMahon for the United States Trustee.
11 submitted a proposed form of order and we are talking about the 12 United States Trustee's motion for appointment of an examiner 13 being granted in some form. 14 In terms of procedure, perhaps it would be helpful
15 for, you know, I guess our office to -- I mean, present our 16 proposed form of order to the Court to walk through the 17 differences that we have with the debtors on critical items. 18 And then for the debtors and Committee to respond given that we 19 were the moving party. 20 THE COURT: Well, let me ask you this. Have you
21 reviewed the most recent reiteration of the debtors' and 22 Committee's proposed order? 23 24 have a -25 THE COURT: They seem to address at least some of the MR. MCMAHON: Your Honor, we have and we still
118 1 issues that the U.S. Trustee seem to have. 2 MR. MCMAHON: Your Honor, we did have a discussion
3 with debtors' counsel and Committee's counsel over the weekend. 4 And while they were -- those discussions were helpful in 5 understanding where the parties were coming from, I think we 6 still have some fundamental differences about which form the 7 order should take. 8 THE COURT: All right. Go ahead. Now what should I
9 have in front of me, Mr. McMahon. 10 MR. MCMAHON: Your Honor, if I may, I would like to
11 approach and hand you a copy of the -- our form of order with 12 numbered paragraphs. And also, the form of order that was
13 submitted by debtors' counsel this morning, which is also 14 numbered. 15 16 I think it would be helpful. THE COURT: I have them. Okay. I have them.
MR. MCMAHON:
Your Honor, as a general matter,
17 we're concerned about whether the examiner is going to be able 18 to independently carry out its duties or is going to be an 19 entity that's, say, tied down or restricted by specific 20 provisions that are in this proposed form of order. And let me
21 start, Your Honor, with our first -- I guess our first general 22 objection which is the work plan paragraph which is in, I 23 guess, the fourth ordered paragraph of the debtors and 24 Committee's version. 25 And is not present in our version at all.
Your Honor, we start with the -- our office starts
119 1 with the general belief that the scope guides the examiner's 2 actions and that in connection with professional retentions, 3 using an analog that this Court sees frequently, the scope of 4 the proposed work to be done by a professional general 5 describes what the professional is authorized to do, doesn't 6 detail every action to be taken pursuant to that authority. 7 And there is, I guess, a tail-end review of whether or not the 8 professional has, in fact, heeded to its scope of work with 9 regard to the fee application process. 10 The order is initially proposed by the debtors and
11 Committee contained a, what we would describe, as a fairly 12 onerous work plan requirement. It would require that the
13 examiner would not be available even to begin to start working 14 until the debtors and Committee had basically signed off on a 15 work plan that the examiner had proposed. 16 The current version of the order still requires to --
17 the examiner to prepare a work plan and to -- and in our view, 18 Your Honor, it's unclear, first, why this particular provision 19 needs to be there. As a practical matter, if we define the
20 examiner's scope appropriately, we don't see a need for the 21 examiner to map out in consultation with the debtor's 22 representatives and the Committee's representatives exactly 23 each and every step or how the examiner plans to go about doing 24 the investigation. Certainly the scope of what the examiner is
25 allowed to do will inform that process.
120 1 So we have some concern that whether the particular
2 purpose of the work plan is to give parties who may want to 3 restrict the examiner at a later date, and we'll get to 4 concerns specific to that, a hook of some type to do so. 5 The bottom line with that provision, Your Honor, is
6 that we have a defined -- we're going to have a defined scope 7 of examination. We don't believe that the work plan is -- in
8 its pared down form contained in the debtors and Committee's 9 proposed form of order a necessary provision. 10 inform or assist the process at all. 11 The second general concern that we have, Your Honor, And we have language It doesn't
12 is with respect to the scope provision.
13 in our proposed form of order -- we're dealing with the third 14 order paragraph, Your Honor, in both forms of order. And there
15 is expressed language in there referring to causes of action, 16 meaning that the examiner would report on causes of action to 17 the extent that the examination would identify them. And the
18 debtors and the Committees have deleted that language from the 19 proposed form of order. 20 And a couple of things, Your Honor. First, we
21 believe that it -- the central purpose of the examination is 22 linked to the role of the examiner in identifying those causes 23 of action. In other words, the reason why the examination is
24 being performed is not simply to have and say a historical 25 recitation of what occurred. Just simply laid out there for
121 1 the public to see. Rather that we're in a court of law. This
2 bankruptcy process does have, I guess, a central purposing 3 conclusion to be met. That the examiner's role in defining,
4 identifying potential causes of action that might be identified 5 in connection with the examiner's investigation is an important 6 part of the report. 7 It gives it some essential value.
And in that, as a side effect, Your Honor, we note
8 that the examiner approaches the identification of causes of 9 action that may be found in connection with the investigation 10 from a different angle than a party litigant in connection with 11 the bankruptcy process. 12 It very may well have a positive effect on the
13 bankruptcy process to the extent that you have an independent 14 third person who is able to look at causes of action and 15 discern which ones have merit, which ones don't, to 16 conservation of this court and perhaps the resources of other 17 courts. 18 The -- as a side point, on this particular note, Your
19 Honor, we not that neither the debtors nor the Committee are 20 under a obligation, an expressed obligation to investigate. 21 Under Section 1107 of the Bankruptcy Code, the investigatory 22 features of the examiners role are carved out from the debtor23 in-possession duties. I'm referring to the specific provisions And then the relevant
24 of 1106 that govern the examination.
25 part of the Committee's scope in the Bankruptcy Code, Your
122 1 Honor, refers to the fact that the Committee may investigate 2 claims and causes of action. 3 So in sum on this point, Your Honor, we believe it's
4 essential that the examiner be allowed to look at what occurred 5 here. And to the extent that the examiner deems it to be
6 appropriate to comment on, to identify causes of action that 7 have merit. 8 The third point of fundamental disagreement that we
9 have, Your Honor, is with respect to what are called the 10 cooperation provisions. And these fall into, I guess, what we
11 would call two separate categories. 12 The first deals with what I'll just describe as,
13 referring to the debtors and the Committee's order, as the 14 privilege paragraphs. We have a general provision in our form
15 of order, paragraph 4, that neatly indicates that exactly how 16 matters are going to proceed under the proposes examination as 17 we see it. Meaning that the debtors and Committee are -- as
18 the language is in our order, shall fully cooperate with the 19 examiner in the performance of any of the examiner's duties in 20 the investigation. And the debtors and the Committee shall use
21 their respective best efforts, coordinate with the examiner to 22 avoid unnecessary interference with or duplication of the 23 investigation. 24 The debtors and the Committee, in their proposed form
25 of order take that simple paragraph, I guess break it out into
123 1 two or three paragraphs based on how you look at it, and then 2 insert a number of provisions that we just do not believe need 3 to be adjudicated at this point. We're just simply trying to
4 authorize the appointment of an examiner. 5 Paragraph 6 deals with procedures for addressing
6 document requests subject to relevance and privilege 7 objections. 8 privilege. 9 Paragraph 7 deals with the -- apparently suggests Deals with the issue of the applicability of
10 that the examiner would take documents from the Committee 11 subject to certain confidentiality provisions. Clearly what
12 the ultimate affect of that would be on the issuance of 13 whatever report of findings that the examiner may have, that's 14 a question for a separate day. 15 And paragraph 8 is basically a provision saying that
16 subject to the cooperation paragraphs, that the debtors and 17 Committee's powers are not otherwise affected. 18 I think our general point here, Your Honor, is that
19 with respect to paragraph 6-8, our question is do we 20 essentially need to address these issues in the context of this 21 order. We think that whatever the extent that privilege is
22 applied, the Court is well capable of addressing those issues 23 outside of the context of this order. To the extent that there
24 are issues regarding confidentiality of documents and the like, 25 that this Court can address those issues outside of the context
124 1 of this order. 2 Our critical concern here, Your Honor, is that that
3 not -- that issue not get addressed in the context, in this 4 particular context. 5 6 THE COURT: Why? Your Honor, I would suggest that first,
MR. MCMAHON:
7 it's a preference.
It's a standpoint of the preference of the The second point is, Your Honor, that I
8 United States Trustee.
9 don't think that we can, you know, I guess fully evaluate what 10 the intended effect of some of this may or may not be on the 11 examiner's work. In other words, that isn't it a situation
12 where we'd just get the examiner appointed, have the examiner 13 come back and to the extent that issues like this need to be 14 worked out with the debtors and Committee, that those issues 15 could be worked out. 16 THE COURT: See, it seems to me that with the first
17 two points you made, there is some merit to the U.S. Trustee's 18 argument that the provisions as they've been suggested by the 19 debtor and the Committee might arguably impair the examiner's 20 work, or slow it down in any event. 21 I don't see that in connection with the so-called
22 cooperation provisions that the debtor and the Committee has 23 proposed. 24 MR. MCMAHON: Your Honor, the part of the concern we
25 have with the so-called cooperation provisions is that there's,
125 1 I guess, if you take a look at the expressed language of them, 2 the issue that we have is part of, I guess, a package of 3 concerns relating to this order as to whether or not the 4 examiner is an independent party that is going to be doing an 5 investigation. Or whether the examiner is somehow, I guess, a
6 subservient to what the needs or demands of the debtors and the 7 Committee are in connection with the process. 8 The -- we appreciate the fact that both the debtors
9 and the Committee would have concerns with respect to the 10 conduct of the examination and how information issues are going 11 to be addressed in connection therewith. 12 are going to be addressed therewith. 13 But with respect to the -- those paragraphs 6-8, we How privilege issues
14 just generally believe that they're issues best left for a day 15 when the examiner is onboard and can speak with the debtors and 16 Committee with respect to those. 17 The -- Your Honor, the -- there's a -- there are,
18 what I call, on the second point of this subpart under 19 cooperation, there's a, I guess, minor differences between our 20 paragraph between cooperation with the federal government and 21 other investigations in connection with what the examiner's 22 doing, meaning that the examiner's required to coordinate with 23 other pending investigations. 24 I don't feel a compelling need to run through the
25 specific language changes, but they're minor and I don't see a
126 1 significant difference between -- or a significant need to have 2 the debtors' language, which is in paragraph 7, I guess be 3 addressed as opposed to just simply accepting our paragraph 5. 4 The fourth point, Your Honor, has to deal with the And I'm
5 report, how it's going to be submitted and timing.
6 referring to the debtors and Committee's order paragraph number 7 9, which is at the bottom of page 4 of the version that was 8 filed this morning and our paragraph number 6. 9 the top of page 3 of our version. 10 We contemplate an interim report, Your Honor, being Certainly we think that And that's at
11 submitted to the Court within 90 days.
12 there's a bear amount of work and labor that the examiner is 13 going to have to do to get his/her or its arms around what 14 occurred at New Century. And we believe that at that point,
15 the examiner can come forward to court, report on what the 16 examiner has done to date and identify the additional areas of 17 examination that need to be concluded in order for the scope of 18 the examiner's investigation or mandate to be fulfilled. 19 The debtors and the Committee want essentially, Your
20 Honor, the right to shut down the investigation after 90 days. 21 In other words, there is effectively a provision which allows 22 the parties to walk in at the 90-day point and address whether 23 or not the investigation should go on for a 91st day. 24 Your Honor, give the fact that the Court found that
25 the interest of creditors, equity security holders, the estates
127 1 were best served by authorizing this investigation, we 2 certainly do not believe that it's appropriate to get involved 3 in setting a horizon on the investigation such that we have a 4 firm date as to when the Court expects this to be over. 5 Rather, we think the more prudent way of approaching
6 this is to allow the examiner to get in there, to begin the 7 work of investigating the matters which the examiner is in 8 charge to investigate pursuant to the form of order. And then
9 to have an interim report at the 90th day and then allow that 10 process to go forth from there. 11 Certainly, Your Honor, given that the, I believe,
12 that both proposed forms of order contemplate that there will 13 be fee review consistent with what -- which what is done for 14 the debtors and Committee's professionals under Section 330. 15 That it is -- it is that those procedural checks provide the 16 level of comfort and certainty that this Court needs in order 17 to address the examination going forth. 18 So, Your Honor, those, I guess, four -- those are the I will note that
19 four key concerns that we have, Your Honor.
20 with respect to the preamble of the debtors' order, we had some 21 discussion with debtors' counsel with respect to exactly what 22 it was that procedurally that occurred last Tuesday. We
23 believe that the Court did grant our motion for the appointment 24 of a trustee. 25 I'm sorry, for an examiner, excuse me. Here's what happened. If I'd ask for a
THE COURT:
128 1 show of hands in the courtroom at the conclusion of the 2 evidentiary record, if anybody thought the Court wasn't going 3 to appoint an examiner, I doubt few, if any, hands would have 4 gone up. 5 I wouldn't have asked the debtor to vote. So that an examiner was going to be appointed was What I suggested, however, I guess, before I
6 inevitable.
7 technically made that ruling, and the parties understanding 8 that it was coming, quite sensibly got together and said, okay, 9 we'll consent. 10 And that's what happened.
Now, has the debtors and Committee's recent -- most Are you
11 recent iteration of that satisfied the U.S. Trustee? 12 okay with how they've now described it? 13 14 moment. 15 16 THE COURT: Okay. MR. MCMAHON:
Your Honor, if I could just have one
MR. MCMAHON:
Your Honor, provided that the text of
17 the order would not refer to an amended motion by us -- I mean, 18 we brought a motion for an examiner and right when we were 19 getting ready to put our case on, the debtors did a -- came 20 forward and said they were indicating that they were willing to 21 consent to the employment of an examiner, I think that that 22 would be okay. 23 THE COURT: Yeah, I think it's -- that there was a And I think that's
24 concern that it not be a C-2 appointment.
25 what was meant -- that's what I took it, the amendment,
129 1 reference to an amendment to mean. 2 3 from. 4 5 6 Honor. MR. MCMAHON: Thank you. THE COURT: Okay. Those are our critical concerns, Your I understand where the Court's coming
MR. MCMAHON:
I'd just like the ability to respond to whatever
7 arguments that the debtors and the Committee put on. 8 THE COURT: All right. Somebody has an active PDA.
9 Would you turn it off, please, because it does interfere with 10 the sound system. 11 Thank you. Good afternoon, Your Honor. Mark
MR. INDELICATO:
12 Indelicato from Hahn and Hessen on behalf of the Committee. 13 Your Honor is correct. All we were doing in the
14 preamble was trying to grapple with reality and they did not -15 the U.S. Trustee did not make the motion under C-1, they made 16 it under C-2. 17 that purpose. 18 Your Honor, I'll try to walk the Court through what And quite honestly, Your Honor, So we were just trying to clarify the record for
19 we tried to do in our order.
20 what we tried to do is in drafting this order, we took what we 21 thought was a practical approach. We thought at the conclusion
22 -- or in the context of last week's motion, Ms. Uhland made a 23 statement as to what we believed the scope was going to be and 24 we were trying to get to what the Court's concern as to the 25 what, they why, the where, the how these accounting
130 1 restatements were happening. And so that's what we believed
2 the scope was to be and I believe on behalf of the Committee, 3 that's what we consented to. 4 debtor consented to as well. 5 The U.S. Trustee's order, Your Honor, however, I And if you look at the way And I believe that's what the
6 think takes that a little further.
7 they look at the scope of it, I guess it's in their third 8 decreed paragraph on page 2, it talks about, in (a), 9 investigate any and all accounting and financial 10 irregularities, which is what we have kept in our revised 11 draft. 12 Then it goes on, after -- for the three-quarters of
13 2006, talks about identifying and evaluating any claims or 14 rights of actions that the estates might have arising from or 15 related to such irregularities or misstatements. 16 exactly sure what that means, Your Honor. We're not
Is this going to be
17 a public document that's going to evaluate the merits of 18 potential causes of actions that the debtor has before the 19 Committee, who are the ultimate beneficiaries are, have had an 20 opportunity to review it? Is it -- could it potentially Are they going to be the ones
21 prejudice causes of action?
22 charged with pursuing the causes of action? 23 None of this was clear, Your Honor. What we thought
24 we all agreed to is have the examiner go in and do the 25 examination, find out what happened. And then we can all
131 1 decide what the next step is going to be. And if you take that
2 down and you look at (b), Your Honor, then to otherwise perform 3 duties under 1106(a)(3) and (a)(4), well, doesn't that the 4 exception that swallows the rule? Because if you look at the
5 provisions under (a)(3), it is really the provisions of what a 6 trustee is supposed to be doing. And to the extent not
7 otherwise ordered by court order, to investigate acts, conduct, 8 liabilities, financial conditions, I mean, that's basically 9 what the debtor -- what the Committee is doing, Your Honor. 10 So there was some concern that adding that provision
11 in, you know, nullifies, in fact, the limited scope in which we 12 thought the examiner was being appointed. And, Your Honor,
13 there was -- just to be clear, there was a typo in our order. 14 When we referred to in our scope, 1106(a)(3), it really was 15 meant to be (a)(4), just so the record is clear. 16 17 18 19 The next thing, Your Honor -THE COURT: Well, let me ask you this. Sure.
MR. INDELICATO: THE COURT:
What's the harm in having the person who
20 does the investigation making a suggestion about what claims 21 may exist as a result of information found in the course of the 22 investigation? Seems to me that follows naturally from having
23 conduct such an investigation. 24 25 well may. MR. INDELICATO: Your Honor, it may, in fact, very
But maybe, then, that report should be filed under
132 1 seal. Maybe there should be different protections available to
2 both the debtor and the Creditors Committee because there were 3 various investigations going in. 4 We tried not to get into all of that in this context And we were hoping we could deal with some of But if there's going to be recommendations
5 of the order.
6 those issues later.
7 about the potential merits of causes of action, I would suggest 8 that that record, at least initially, be filed under seal. 9 Because we would not want, potentially, any potential third10 parties to know what the strengths and weaknesses of the 11 debtors' case is before the litigation is commenced. 12 until the litigation is concluded. 13 Your Honor, the next point that I would like to Again, we tried to do this If you look at Or even
14 address is sort of the work plan.
15 in a sort of constructive, practical approach.
16 the way the U.S. Trustee did it, they want to put the onus on 17 the debtor and the Creditors Committee to cooperate with the 18 examiner. 19 And in essence, in order to do that -THE COURT: Well, let me put it this way. Wouldn't
20 you think that's what's expected? 21 MR. INDELICATO: Well, Your Honor, we don't have a
22 problem sitting down with the examiner, understanding where 23 he's going, telling him where we are going, where we have been, 24 what the debtor has done, and suggest a cause of action. 25 doesn't need to follow what we suggested. He
And that's why we
133 1 changed it in our revised order. What we want to do is we want
2 to have some cooperative effort so that he understands what 3 we've done. He doesn't have to -- he's free subject to this
4 Court's ruling, subject to all parties' rights to object, free 5 to do what he thinks is appropriate. But I think to have him
6 not sit down with us, I think, would be foolish. 7 And also, as I understand the way this is done, he's He's not going to
8 going to go conduct his examination.
9 necessarily be checking in with the debtor and the Creditors 10 Committee. So we don't know what he has done or what he is
11 doing until he submits his interim report. 12 So what in essence you would be asking the Committee
13 to do is stand down on some of these issues which relates to 14 other things until the examiner is finished with his due 15 diligence. And I think that would be a mistake. I think this
16 case is moving quickly enough that the Committee needs to be up 17 and running. We have a 2004 order that we're working out the
18 language with the debtor and they have begun to provide us with 19 information. And we intend to exercise our fiduciary duties
20 and examine what has gone on with this case in addition to and 21 aside from the accounting irregularities. 22 So we think that the work plan, again, was just a
23 mechanism that we tried to put in place so that we could 24 cooperate with him or her, whoever it is, and they can 25 cooperate with us. They're free, once we have this plan, to go
134 1 and do what they need to do. But we thought not to have it
2 would be not appropriate and might be a waste of the estate 3 assets. 4 THE COURT: Well, you wouldn't expect the examiner to
5 ask the Committee to develop a work plan for the examiner's 6 review, would you? 7 MR. INDELICATO: Well, Your Honor, the difference I
8 think here is the examiner has a very -- not a very narrow 9 focus, but it is investigating the accounting irregularities. 10 And what we had suggested is -- and Your Honor, there were two 11 things the Committee was very concerned about and one of the 12 reasons we objected to the U.S. Trustee's motion. 13 Number one was cost. The Committee was very
14 concerned about cost.
And if the Court looked at our original What -- we could get away
15 order, we had suggested a budget.
16 from the budget issue, Your Honor, is we deal with the work 17 plan. If we understand where they're going, yeah, in broad To the sense they
18 brush, we tell them what our concerns are.
19 choose not to listen to us, they do so with their own peril and 20 we reserve our rights to object to at a later date. 21 THE COURT: Well, cost is a concern of the Court as
22 well, but under the circumstances, I really don't think there 23 was an option but for the appointment of an examiner. 24 25 Honor. MR. INDELICATO: No, and we understand that, Your
But we just want the Court to understand where our
135 1 concerns are and what the issues that the Committee has are. 2 So that's what the work plan was and we thought, in the revised 3 version, we address some of those comments. 4 And I think -- and this is the -- you know, let this
5 record be clear as I think I tried to make it the last time. 6 The Committee fully intends to exercise its rights and 7 obligations in investigating the acts, conducts and activities 8 of this debtor. It's not -- we're not shall. We are and we
9 are in the process of it and this is a very diligent Committee 10 and they're going to take that role seriously. 11 Your Honor, some of the other issues that the U.S.
12 Trustee was concerned about was the privilege issues, the 13 cooperation issues. Again, he pointed out the paragraph about
14 the Committee providing him -- the examiner with information 15 subject to whatever confidentiality agreement we have with the 16 debtor. We put that in in order to be helpful, not to be a Right now we do have a confidentiality provision,
17 hindrance.
18 at least in principle, working with the debtor to the extent 19 they have provided us with information. We would like to be
20 able to short-circuit some of the examiner's activities and 21 provide them with a download of whatever information we have. 22 But we can only do that if they're going to take it subject to 23 the same confidentiality provisions we have. 24 With respect to the privilege, Your Honor, this is
25 something that we expressed to the U.S. Trustee at the time we
136 1 were -- at the hearing last week. There are issues regarding
2 the various governmental agencies, various documents, various 3 privileges. And to the extent the examiner requesting
4 documentation that is subject to the privilege, all parties 5 need to reserve their rights. We don't want later to say that
6 there was a global waiver our of privilege because, in fact, 7 documents had been made available to the examiner. So that was
8 another way of preserving for the benefit of the estate, at 9 least at this point in time, the debtors' privilege. 10 To the extent that issue comes up and there's a What we
11 dispute, the Court is quite capable of handling it.
12 were trying to do is short-circuit some of the disputes so that 13 every -- we weren't running to the Court for every little 14 dispute. 15 The next issue that they raised, Your Honor, was -Your Honor, I
16 let's see -- was the timing of the report.
17 thought what we did there is, again, address the concerns of 18 the U.S. Trustee. They said, in fact, we need 90 days. We
19 want it to be an interim report before we go to a 60 days and a 20 final report. But we said, okay, if that's what you want, we But again, once the examiner issues his
21 can live with that.
22 report, we wanted to make sure that all parties knew that 23 everybody was reserving their rights. I'm not saying that
24 we're not going to be 100 percent behind the examiner's report. 25 But to the extent either the costs are out of control, the
137 1 scope is out of control, or any other things is -- what we 2 wanted to make clear is that the parties are reserving their 3 rights to come into the Court and tell you what we believe 4 about the report. 5 So, again, it's not a matter of impinging or
6 hindering anyway what the examiner is doing, but the Committee 7 wants its rights preserved. 8 I know the Court is. 9 added to the order. 10 I think Your Honor, again, to some -- the way we It is concerned about the cost, as
And that's why those provisions were
11 looked at this is, and I think the Court -- well, the Court 12 knows it right because you are the Court. And the fact that
13 the appointment of an examiner was, in fact, ultimately a 14 foregone conclusion, but we did have some issues that we worked 15 out and we did agree on a scope for what we believed the 16 examiner's report would be. 17 scope. 18 I think our order does, in fact, address what we I believe this goes beyond the
19 believed was the Court's concerns, what was -- the agreement 20 between the debtor, the Committee and the U.S. Trustee's office 21 as to what the scope would be. I think the scope that they I believe the provisions that
22 have in the order is over broad.
23 we put in here regarding the work plan or a suggested meeting, 24 however, the Court would like to phrase it, so that we can tell 25 them where we are and to hopefully short-circuit some of it.
138 1 And I believe the provisions with respect to the privilege 2 subject to the confidentiality to the Committee. I think
3 that's all another mechanism, Your Honor, of forcing or 4 promoting the free flow of information. 5 So we believe we have addressed in our order that was
6 delivered to Your Honor this morning a lot of the issues of the 7 U.S. Trustee and we would propose that that's the order that 8 the Court signs. 9 10 briefly. 11 MR. MCMAHON: Very briefly in response, Your Honor. Thank you. Thank you. Mr. McMahon, anything
THE COURT:
12 With respect to causes of action, Your Honor, we believe that 13 our scope is appropriate. It's laid out in our order. The
14 issues relating to examiner's with expanded powers to bring 15 causes of action and sealing of the examiner's report are not 16 here before the Court today. 17 THE COURT: Well, but let me ask this. I do think
18 it's appropriate that the examiner be in a position to suggest 19 that there may be claims owned by the estate which should be 20 brought against various entities or individuals. It also seems
21 to me that it may be appropriate to have that portion of a 22 report, if there is a portion of the report devoted to that, 23 filed under seal. 24 You're not suggesting that should be foreclosed.
25 You're just suggesting that the issue should be kept open and
139 1 left to the discretion of the examiner? 2 MR. MCMAHON: Your Honor, that is correct. In other
3 words, if the parties' rights to argue that a portion of the 4 report, or something larger, should be sealed at a later 5 date -6 THE COURT: But once it's been filed, it's public
7 information.
Would you be amendable to having a draft report
8 submitted in advance to certain entities? 9 MR. MCMAHON: Your Honor, could I consult with my
10 colleague, Mr. Berra (phonetic), before responding? 11 12 13 MR. MCMAHON: THE COURT: Yes. (Pause) Your Honor, to respond to the Court's
14 question, we're a bit concerned about what providing a copy of 15 the report to other parties-in-interest would have insofar as 16 -- we're concerned about the pre-filing -- I guess a vetting of 17 the report. I believe what we can -- that what would be
18 appropriate is to the extent that there were certain issues 19 limited to whether or not portions of the report should be 20 filed under seal could be addressed before the examiner were to 21 file an interim or file a report. 22 that goal could be worked out. 23 24 THE COURT: All right. And I believe that they -- the debtors That a mechanism to achieve
MR. MCMAHON:
25 and the Committee added a provision to that affect in the
140 1 proposed form of order. They don't ask for more. They just
2 simply ask for the right to argue that the report should be 3 filed -- portions or all of the report should be filed under 4 seal. And we acknowledge that they can reserve the rights to
5 do that. 6 7 here. On the work plan issue, Your Honor, a couple points First, we obviously anticipate that the examiner's going Frankly, I
8 to be talking to the debtors and the Committee.
9 don't know how the examiner gets from point A to point B 10 without doing so. And it just seems like this entire issue of
11 a work plan is designed to -- is formalized in a way that gives 12 other parties-in-interest leverage over the examiner in what we 13 all know the examiner's going to be doing anyway. 14 THE COURT: Well, I don't know if the word is But it does have the feel of some
15 leverage necessarily. 16 measure of control. 17
I agree. Well, I think that Committee counsel's
MR. MCMAHON:
18 argument certainly acknowledges as much where he said that, you 19 know, I want a work plan and I want to be able to refer to that 20 at a later date. 21 THE COURT: But, you know, the Committee's desire to
22 control costs is well-motivated, at least as far as I can tell 23 and understandable. 24 I think. And because, you know, we said it before,
I'm sure they feel as if the Court decided to spend a
25 little bit more of their money.
141 1 MR. MCMAHON: Your Honor, I understand the
2 Committee's concern with respect to cost and, like the Court, 3 our office shares those concerns generally. With respect to
4 the cooperation point, Your Honor, I just want to make another 5 point. Like there's this specter of an entire shutdown of
6 whatever the Committee's doing during the pendency of the 7 examiner's investigation's been raised. And the paragraph that
8 we have, the way it's worded, refers to cooperation to avoid 9 unnecessary interference with the investigation. 10 And to the extent that the Committee would have
11 discrete areas that it would need to look into, that -- and 12 say, touched upon the examination that required, for example, 13 in connection with a plan process of some other issue that 14 needed to be addressed. Certainly, with the language that we
15 have in our order, it would be within the Court's province to 16 address whether or not the Committee and the examiner could 17 work on the same time on those issues. 18 The specter of a shutdown, a complete shutdown of the
19 Committee I don't think is warranted by the proposed language 20 that we have in our order. Certainly, it contemplates
21 cooperation and the unnecessary interference language we 22 believe is entirely appropriate and reasonable. 23 The third point, Your Honor, that I want to raise And with
24 generally in response is with respect to timing.
25 respect to the report, Your Honor, again, I think what is
142 1 important here is that setting a 90-day absolute bar on what 2 the examiner's going to do effects how the examiner will be 3 going about his business. 4 THE COURT: I don't view the Committee's formulation
5 as providing that.
Frankly, I don't think it matters, what we
6 call the first report which could very well be the last report. 7 If somebody has an issue about whether something should go 8 forward or shouldn't go forward, I'm certain it will be 9 expressed. 10 MR. MCMAHON: I understand, Your Honor. We just --
11 we're concerned about the -- there being language or a 12 situation there where parties can just stop or attempt to 13 impede the examiner from completing what the examiner is 14 charged with doing. 15 THE COURT: Look, I understand that the U.S. Trustee
16 says that provision has that feel about it, but as I see the 17 way it would likely develop is that there'll be a report. 18 to the extent the Committee comes in screaming, saying the 19 examiner has run amok, it may be that limitations or an end to 20 the examiner's duties would be appropriate. 21 To the extent that the examiner says, I've just hit You won't believe what's yet to come And in a And
22 the tip of the iceberg.
23 and more is required, that, too, would be considered.
24 way, it almost doesn't matter what that provision in the order 25 says conceptually. But I understand your concern.
143 1 MR. MCMAHON: Your Honor, in some -- we're concerned
2 about the way the debtors and Committee's proposed form of 3 order appears to invite litigation. It's cumbersome, it's
4 inefficient and it does raise the specter of whether the 5 examiner is going to be subservient to the Committee, debtors 6 or both. It reverses what the Code contemplates about the And for those reasons, Your Honor, we
7 examiner's independence.
8 believe that our form of order should be adopted. 9 And I would just note one thing. Counsel for Kodiak
10 who Your Honor initially met at the last hearing on the 11 Trustee/examiner motion has requested that the debtors' 12 stipulation regarding their belief that Kodiak is not an 13 insider, as that term is defined in the Bankruptcy Code, the 14 incorporated in the proposed form of order, we don't have a 15 problem with that stipulation. That was given to us today by
16 Kodiak's counsel and I just wanted to note that for the record. 17 18 THE COURT: All right. Thank you.
MR. INDELICATO:
Your Honor, just some very short On the first issue, the Court has The And
19 points and I will be brief.
20 put your finger on the concern of the Committee.
21 Committee's concerns initially and primarily were costs.
22 we had in our discussions with the U.S. Trustee's office had 23 initially suggested that there be a reasonable budget put forth 24 by the examiner so that way, the costs could be contained. We
25 were told that a budget was completely out of the question and
144 1 that we should focus on the scope and other issues. 2 Your Honor, we would be agreeable to taking out the
3 work plan issues if we can get a reasonable budget about what 4 the examiner's fees or charges are going to be for the initial 5 90-day period and then we can revisit them again. You know,
6 our concern is containing the costs, understanding what's going 7 on. We thought by doing the work plan and the meeting, at
8 least we could deal with it that way since the idea of the 9 budget, at least we thought, was unacceptable. 10 unacceptable to the Committee. It may still be
I mean, to the U.S. Trustee.
11 But that was our initial focus and that's initially what we 12 wanted to deal with. 13 Your Honor, the second point is if you listen to Mr.
14 McMahon, when we talked about what the Committee can do going 15 forward, he said -- and I try not to quote because my hearing 16 isn't that great, but he said, to the extent the Committee 17 needs to investigate discrete areas during this period of time, 18 like the negotiation of a plan, they can do that. Your Honor,
19 what he's saying is that the examiner is taking the place of 20 the Committee in exercising its fiduciary obligations under the 21 Bankruptcy Code. That's what we are concerned about. That's
22 what we are looking to prevent.
The examiner is in to do, at The Committee
23 least initially, that discrete examination. 24 isn't in to do a discrete examination. 25
The other point, Your Honor, is on -- and I
145 1 understand the Court's concern and I understand the U.S. 2 Trustee's concern about filing the report under seal. But to
3 the extent the examiner finds things that are actionable 4 relating to the accounting irregularities, Your Honor, that is 5 going to have far-reaching implications in this case. And
6 without having that filed under seal and having made that a 7 document of public record, we're going to have -- and no matter 8 who the potential defendants are, there's going to be an 9 insurance company involved who is going to be all over that 10 report any which way from Sunday looking for potential defenses 11 on behalf of their client. 12 So we implore the Court and the U.S. Trustee, this
13 document, to the extent it's going to make recommendations 14 about potential causes of action, it needs to be filed under 15 seal or at least there needs to be an agreement that the report 16 will be shared with the Committee prior to its filing so we 17 have an ability to speak to the examiner about those issues. 18 And the final point, Your Honor, is I believe the
19 record was clear on the debtors' position with respect to 20 Kodiak. One of the issues that we had, and we went to C-1 and
21 not C-2, was the whole issue about the insider and there were 22 some discrepancies. And, Your Honor, although the Committee
23 hasn't had an opportunity to review it, a finding like that or 24 even a stipulation like that could have far-reaching 25 implications far beyond this motion. So I think the record,
146 1 with respect to the debtors' stipulation, speaks to itself and 2 I don't believe that needs to be in the order. 3 4 THE COURT: MS. MILLER: Thank you.
I see there are others stood to be heard. Good afternoon, Your Honor. Kathy
5 Miller on behalf of Fidelity National Information Services, 6 Inc. I'm here with my co-counsel, Don Workman, from the firm We did file the motion for pro hoc, And with Your
7 of Baker and Hostetler.
8 but the order's not yet reached Your Honor.
9 Honors permission, they'd like to be heard on this issue. 10 11 12 THE COURT: MS. MILLER: MR. WORKMAN: Very well. Thank you, Your Honor. Thank you, Your Honor. Don Workman
13 from Baker and Hostetler for Fidelity National Information 14 Services. I'm not going to repeat what our Committee's able
15 counsel and Blank Rome and Hahn and Hessen have done a -16 represent us very well. 17 I just want to state for the record and my client I guess the first thing he would say
18 wants to make it clear.
19 is that he certainly agrees with the Court's statement that we 20 were concerned that the Court decided to spend our money. 21 The second point is Fidelity, as the largest trade And it's not really -- I heard a
22 creditor, is very concerned. 23 lot about control here. 24 control.
It's a concern for getting out of
We don't want to see an examiner run amok and spend It's not the debtors' money. It's not the U.S.
25 our money.
147 1 Trustee's money. 2 While we understand the importance and obviously the
3 concern of the Court, we want to underscore, embolden, 4 italicize and circle with a big red marker the concern that the 5 examiner not be out of control. To that end, we believe that
6 the language that the Committee and debtor have put together 7 accomplishes that goal of keeping things from getting out of 8 control. 9 Your Honor, as co-chair of the Committee, I would
10 also state that I was somewhat offended of the notion that the 11 examiner is an independent third party and somehow that, by 12 inference, the Committee would not exercise its fiduciary duty 13 as what we see as a pretty independent third party. We have
14 been diligent, indeed, almost vicious in keeping after the 15 debtors in this case. 16 our job. 17 I understand the Court's going to order it again. I We don't need an examiner to help us do
18 emphasize, my client wants to emphasize that the examiner, 19 through the Court's order, be kept from getting out of control. 20 Thank you, Your Honor. We would ask, as a creditor, the Court Thank
21 enter the order that the Committee has put together. 22 you. 23 24 THE COURT: MR. LEVEE: Thank you. Good afternoon, Your Honor.
Ira Levee,
25 Lowenstein Sandler for the New York State Teacher's Retirement
148 1 System. We filed a statement in support of the United States
2 Trustee's proposed form of order and we're here to state that 3 again on the record. 4 Now, there was one paragraph that wasn't discussed. It's
5 It appears in the U.S. Trustee's proposed form of order. 6 the last paragraph.
We had made some suggestions to the U.S.
7 Trustee and he incorporated those in his proposed order, but 8 they were not included in the proposed order by the Committee 9 and the debtors. And that has to do with the language where it
10 says, "Shall impede the right of the United States Trustee or 11 any other party-in-interest to request any other lawful 12 relief," so on and so forth. And then later on it says that
13 "if during such investigation other relevant matters are 14 revealed in which the United States Trustee or any other party15 in-interest," we believe that that's the appropriate language. 16 In the order submitted by the Committee and the
17 debtor, the beginning language states "The United States 18 Trustee or any other party." And then later on, the language
19 is just limited to the debtor, Committee or the United States 20 Trustee and it doesn't include any other party-in-interest. 21 And I feel that to be consistent, those two descriptions of the 22 parties should be the same. 23 24 THE COURT: MR. BOTICA: Thank you, Your Honor.
Thank you. Good afternoon, Your Honor. Matthew
25 Botica, Winston and Strawn for Kodiak Funding.
Your Honor,
149 1 we're dealing with two forms of orders. The order proposed by
2 the debtor is silent on the C-2 issue and the fact that we are 3 not proceeding and we do not have any issue with respect to 4 that order if that is the form which the Court adopts. 5 If the Court works off the U.S. Trustee's form, there
6 is a sentence that begins on the last line of page 1 and 7 carries over and states that the -- an examiner under C-1, the 8 failure to deal with C-2 obviated the need for the Court to 9 consider the issues raised under C-2. If that were the form
10 you were to use, Your Honor, we think it would be appropriate 11 to have a proviso at that point that says, provided the debtors 12 did stipulate on the record that Kodiak Funding is not an 13 insider as such term is defined under the Bankruptcy Code. 14 That is the agreement we reached last Tuesday when we It was put in the record by Ms. Uhland and And just to avoid any doubt
15 were resolving it.
16 we confirmed that on the record.
17 going forward as to what that provision means in the U.S. 18 Trustee's order, I would like to have that proviso added. 19 THE COURT: Well, since this is going to be a C-1
20 appointment, doesn't that render any C-2 issue moot for 21 purposes of this relief? 22 MR. BOTICA: As I said, if it were totally silent on And the debtors'
23 C-2, I wouldn't have any issue with that. 24 form of order is.
So once we get into a discussion of C-2, it
25 then troubles me that someone might argue months down the road
150 1 that somehow we gave up our right with respect to the debtors' 2 stipulation. 3 fine. 4 5 6 THE COURT: MR. BOTICA: THE COURT: All right. Thank you. Okay. What I'm going to do is both forms I'm going I hear your position. If you just instruct that provision, it would be
7 of order contain provisions that I think are good.
8 to draft my own form of order based upon the parties 9 submissions. 10 I hope taking the best from each. Your Honor, just to clarify the
MS. UHLAND:
11 typographical error in the debtors and the Committee's order. 12 We referred to (a)(3) instead of (a)(4). We did mean to refer
13 to (a)(4) and we are very concerned that (a)(3) will broaden 14 the scope. 15 THE COURT: It would -- I agree with you. Okay.
16 Let's move on. 17 MR. MERCHANT: Good afternoon, Your Honor. Mike
18 Merchant of Richards, Layton & Finger on behalf of the debtors. 19 Your Honor, No. 4 on the agenda is the debtors' There was an The U.S.
20 application to retain Compensation Design Group.
21 objection filed to that application by the Committee.
22 Trustee also informally raised certain concerns with respect to 23 the application. 24 We believe we've -- in connection with the agreement
25 with CDG, we think we've resolved all pending objections to
151 1 that application. And I do have a revised form of order and a
2 blackline, if I may approach. 3 4 THE COURT: You may. Thank you.
MR. MERCHANT:
Your Honor, at the request of the
5 United States Trustee, we've changed it from a 327(e) retention 6 to a 327(a) retention because we're not dealing with attorneys. 7 Most of the Committee's concerns related to And the way we've addressed that, Your Honor, is That will It's a
8 compensation.
9 CDG will be paid a one-time flat fee of $64,000.
10 compensate them for all fees, all expenses incurred. 11 one-time payment.
They will file a first and final fee
12 application and the fees will be subject to reasonableness 13 review under Section 330. 14 Your Honor, there's some additional provisions in the We've added the
15 order that I would also like to hand out.
16 Planet Hollywood indemnification language at the request of the 17 Office of the United States Trustee. We've also made clear
18 that CDG will not be providing any additional services in the 19 case. And that was added at the request of the Creditors Lastly are -THE COURT: It struck me that if their work wasn't
20 Committee. 21
22 finished, it had to be close to finished. 23 24 25 MR. MERCHANT: THE COURT: Right.
All right. It is finished, Your Honor. There's
MR. MERCHANT:
152 1 also a limited waiver of the local rule with respect to time 2 records. They will be permitted to -- actually, let me point But they'll be able to And that is And I We
3 out the exact provision, Your Honor.
4 record their time in half hour increments.
5 reflected in paragraph 8 of the order, Your Honor.
6 believe those changes address all the pending objections. 7 would ask that the application as amended be granted. 8 THE COURT: Anyone else care to be heard in
9 connection with this application? 10 MR. INDELICATO: Your Honor, Mark Indelicato on Based on the statements made by Mr.
11 behalf of the Committee.
12 Merchant and the limitation of $64,000 in compensation and the 13 fact that they've agreed to do no more work and Your Honor 14 would be surprised that, in fact, they did not think their work 15 was concluded which was a concern for the Committee. But based
16 on those representations, the Committee's objection is 17 resolved. 18 19 signed. 20 MR. MERCHANT: Thank you, Your Honor. Your Honor, I THE COURT: All right. Thank you. The order's been
21 believe No. 5 on the agenda's already been addressed. 22 23 THE COURT: Hope so. We can move to No. 6 on the agenda
MR. MERCHANT:
24 which is the debtors' motion to assume and assign certain non25 residential real property leases.
153 1 Your Honor, there were a number of objections filed
2 with respect to that motion, all of which seem to be cure 3 amount objections. 4 objections. And I believe we've resolved each of those
So I can walk Your Honor through how we've
5 resolved them quickly and then I can pass up an amended form of 6 order. 7 The first objection, Your Honor, was filed by Ryan They
8 Ridge in which they contested the proposed cure amount.
9 asserted a proposed cure amount of 29 thousand, 370 thousand 10 dollars and 45 cents [sic]. The debtors have agreed to that
11 cure amount and we've revised Exhibit A to the order to reflect 12 that. 13 With respect to the RBC Mortgage/RBC Hold Co.
14 objection, Your Honor, that objection related to three separate 15 leases. With respect to lease ID CA056, which is the San Diego The debtors
16 lease, they asserted a cure amount of $22,851.82.
17 have agreed to that cure amount and we've reflected that in 18 Exhibit A to the order. 19 With respect to lease ID HI005, one of the Hawaii
20 leases, the assignment with respect to that lease actually fell 21 through. So we've pulled that off of the order. I don't know
22 the current status of that lease, whether we'll be seeking 23 another assignment or whether we'll be rejecting it at this 24 point, but it is not included in this order. 25 The third lease they referenced, Your Honor, is lease
154 1 ID IL001 which is the Champagne, Illinois lease. They've
2 asserted a cure amount of $11,050.74, and the debtors have 3 agreed to that cure amount at well and it will be reflected in 4 the amended Exhibit A. 5 They've also requested that the debtors verify that
6 there will be removal and security -- some security of any 7 items covered by personal property leases and I'll make that 8 statement on the record that, yes, we will comply with that, 9 Your Honor. 10 11 objection. 12 NB09. Moving to the next objection is the RJS Properties That relates to the lease identified by lease ID
They've asserted a cure amount of $5,460, Your Honor.
13 The debtors have agreed to that and that will also be reflected 14 in the revised Exhibit A to the order. 15 The Fidelity National Information Services objection,
16 Your Honor, that's listed on the agenda was actually an 17 objection to the notice relating to the Carrington sale. 18 not an objection to this motion. 19 20 objection. And lastly, Your Honor, the OKC Maui Owner LLC lease That objection actually relates to the same Hawaii It's
21 release that I referenced earlier where the assignment has 22 fallen through. 23 order. 24 I believe that covers all the changes, Your Honor, The one thing I would So it's no longer listed on Exhibit A to the
25 and addresses each of the objections.
155 1 note is with respect to several of these cure amounts where the 2 debtors have noted zero and now we've agreed to a greater 3 amount, that was just because of some problems with respect to 4 lease payments going through. And I understand that several of
5 the payments that would be included within these revised 6 amounts are actually -- the checks are actually in the mail. 7 So as they are paid in the ordinary course, they would reduce 8 the amounts owed. 9 THE COURT: All right. Does anyone else care to be I hear no response.
10 heard in connection with this motion? 11 12 13 14 15 THE COURT: MR. MERCHANT: THE COURT:
May I approach, Your Honor? Thank you.
You may.
(Pause) That order has been signed. Thank you, Your Honor. I'm going to
MR. MERCHANT:
16 cede the podium to Mr. Logan for the last matter on the agenda. 17 18 THE COURT: MR. LOGAN: All right. Down to the few and faithful, Your Honor.
19 Your Honor, the last motion is a motion to establish some 20 procedures for granting relief from the automatic stay to the 21 extent that Porter's, the first lien debt, want to foreclose 22 their first lien debt and wipe out the second lien debt that's 23 owned by the debtors. 24 We did receive some objections and there has been I want to make one thing very clear at the
25 some dialogue.
156 1 outset and there was probably confusion in the motion. 2 our fault. 3 This is intended as a voluntary procedure. If a That's
4 secured creditor, a first lien creditor, wants to go the old 5 fashion relief from the stay route, that's fine. We just
6 thought it would be prudent and advisable to save us all money 7 and time and effort to establish some streamline procedures 8 that would let people operate probably at a lower cost to 9 themselves and a lower cost to the estates. 10 11 THE COURT: MR. LOGAN: But nobody likes your $1,000 fee. Nobody like our -- actually, that's not Once it was pointed out that the --
12 quite true, Your Honor.
13 that that was voluntary, at least one of the objections, 14 Litton, said fine. 15 or not. 16 Most of the objections, I think, were premised on the They'll evaluate whether that makes sense
17 understandable, but incorrect notion that we were forcing them 18 to pay $1,000. If they don't want to pay $1,000 and they want
19 to file a motion for relief from the stay and go through the 20 process, that's their call. 21 The $1,000, quite frankly, Your Honor, was designed
22 to make some money for the estates, but also designed to 23 reflect the fact that it would be substantial savings, we 24 think, for most movants and probably much greater than $1,000. 25 So it very simply was designed to have a streamline process and
157 1 because we would be saving a substantial amount for the moving 2 parties, the quid pro quo from the estate's perspective was to 3 require $1,000. Not a huge amount of money, not the world's And since
4 biggest issue, but that was, in fact, the process.
5 it's entirely voluntary, the objections about how there's no 6 authorization in the Code to charge for a relief from the stay, 7 I think they're inappropriate. If people want to go the old
8 fashion route, they're free to do so. 9 Beyond that, Your Honor, there were a number of A number of the objectors
10 objections related to the timing.
11 said that 45 days was too long, 30 days would be more 12 appropriate. We agree. We have crafted a revised form of
13 order, the one makes it crystal clear that this is a voluntary 14 process. People are free to go seek relief from the stay if And secondly, shorting the time
15 they are so inclined to do so. 16 period to 30 days. 17
A number of the other objectors had a concern that
18 some of the information we requested, which we've cribbed from 19 some orders in other cases, would violate some consumer privacy 20 statutes. And we've again changed the form of the order to the The
21 extent it would violate a consumer privacy statute, fine. 22 movant does not have to provide that information. 23
And other than that, Your Honor, we do propose we It ought to save
24 think the procedure is fair and simple. 25 parties' resources.
If they still want to go forward, they're
158 1 free to do so. Indeed, there are a number of relief from stay
2 matters that are set for May 30th and then again for the next 3 omnibus in June. We were hopeful that we could reach But if we
4 resolution with the parties under these procedures. 5 can't, we made a good effort. 6 THE COURT: All right.
Well, let me ask whether
7 anyone else cares to be heard in connection with this motion. 8 MR. DISPIGNA: Yes, Your Honor. Frederic DiSpigna.
9 I represent -- I'm representing my firm, the Law Office of 10 David J. Stern, but we represent eight different mortgage 11 lenders or servicers and we filed an objection. 12 I've also filed a motion for relief for omnibus stay
13 relief seeking stay relief to proceed with foreclosure with 14 regard to 207 properties which is a possible alternative 15 procedure. The debtors make the point that this $1,000 is, you
16 know -- I appreciate that they're no longer stating that the 17 procedure is mandatory, but it's not simply an either/or 18 proposition. Either take the debtors' procedure and pay the
19 $1,000 or go your own separate way and file a motion for relief 20 from stay. 21 There's not to prevent the Court sua sponte from
22 coming up with a procedure for the creditors today, banding 23 together and proposing a procedure to simplify matters for the 24 Court and for the creditors that does not call for this $1,000 25 and it does not call for the documentation that the debtors are
159 1 seeking. 2 One of the problems I have is that in Florida, there
3 is no right for the debtor to reinstate the mortgage once it's 4 been accelerated by the creditor and foreclosure has begun. 5 The only right a junior lien holder has is to pay the first 6 mortgage off in full. So I doubt that the debtor is intending
7 to do that in any of these cases. 8 I also feel that the only critical issue that the
9 creditor should have to establish is that its lien is senior 10 and that the mortgagor, the property owner, is not paying the 11 mortgage. That the mortgage is in default and its properly in
12 foreclosure court. 13 If the debtor wants to propose that there's a
14 sufficient equity cushion, that the movant should be prohibited 15 from proceeding, then the burden should be on the debtor to 16 come forward upon evidence as to the value of the property and 17 why there isn't a protective equity cushion. Barring that,
18 there's really no reason why we should not be able to go 19 forward with our motion after having established that we are 20 superior and that the mortgage is, in fact, in default. 21 22 THE COURT: MR. BECKER: Thank you. Good afternoon, Your Honor. Richard
23 Becker for both Regions Bank and I'm local counsel for Mr. 24 DiSpigna who we just heard from, and I would note for the 25 record, who has been admitted pro hoc vice previously.
160 1 I think I bring a little different perspective than Your
2 most of the lawyers in this courtroom, Your Honor. 3 Honors probably not familiar with my face.
Most of my work in
4 dealing with this type of activity is in doing foreclosures 5 here in Delaware and in representing first mortgage holders in 6 consumer affairs, Chapter 13, Chapter 7. And I think I can
7 state that if the Court approves the debtors' now voluntary 8 proposal, and we appreciate that making it voluntary does 9 change the field a little bit, I think it's unlikely that any 10 of the National lenders are going to take advantage of paying 11 out $1,000. 12 There are guidelines in place between the attorneys You have to file
13 that do this work and the mortgage companies. 14 a motion for relief real fast. 15 what's going to happen.
You can't wait 30 days to see
The lenders send you weekly or monthly
16 reports telling you that you're in default of your obligations 17 and filing things, if you don't file things right away. So the
18 Court's still going to get the motions for relief even if 19 particular lenders decide to try to avail themselves of the 20 procedure, it would be duplicative effort, not either/or 21 effort. 22 I also think that it's unlikely that you're going to In my experience, it takes a lot
23 see any payments of $1,000.
24 longer than 30 days to get $1,000 out of any of these mortgage 25 companies to pay any costs. It's just they take their time.
161 1 That's the way the bureaucracies seem to work. New Century was It's
2 that way when I did work for New Century five years ago.
3 unfortunately not practical to think that the $1,000 is there. 4 If the Court and if the debtors really want to
5 fashion something that's going to save some administrative 6 costs that's going to prevent the Court from having to address 7 motion after motion after motion for relief, then the $1,000 8 has got to go and there's got to be no payment and it really 9 has to be an administrative cost saving concept and not a 10 revenue raiser. 11 And the only other concept that I wanted to bring to
12 the Court's attention today and it's somewhat addressed in the 13 proposed form of order that I saw earlier today was that some 14 of the lenders mentioned it and I've mentioned it, we do want 15 some sort of a finality if there is a procedure in place that 16 we are going to use. Merely an open ended, if there's no
17 objection filed or if there's no reinstatement made which is 18 even more out of court, then you have relief from the automatic 19 stay. That's not going to satisfy a lot of state court judges.
20 And I -- the language I think that was put in was that the 21 moving party can apply to the Court for an order if nothing 22 happens within the now 30 days. And perhaps it might be
23 changed, that there ought to be some sort of a standard 24 stipulation that can be filed and applied to the Court as an 25 order as opposed to just an individual entity coming in and
162 1 saying nobody responded. 2 3 THE COURT: Thank you, Your Honor.
Thank you. Good afternoon, Your Honor. Andrew
MR. KASSENER:
4 Kassener, Drinker Biddle & Reath for HSBC.
Counsel before me
5 and probably counsel after me will have the same -- stated the 6 same positions. HSBC has thousands of these mortgages, Your The cost of just getting this
7 Honor, 120 now in foreclosure.
8 ball rolling would be $120,000 for handling charges. 9 Obviously, HSBC would not be able to participate in what is now 10 called a voluntary program. 11 I think the goal here, Your Honor, is not only the
12 efficient administration and, I guess, revenue raising for the 13 estate, but really the goal is to ease the burden on this Court 14 in dealing with these matters. 15 the debtors. 16 achieving. 17 We are -- we would be happy to sit down with the Right now, we're being That should a primary goal of
That's a goal that HSBC is interested in
18 debtor and talk about those procedures.
19 put in a position where we will be forced to do it the old 20 fashion way as it's been called. But we'll file our omnibus
21 motion for relief with hundreds of motions, comply with local 22 rules and see where we go from there. 23 I would like to ease the burden on this Court. The
24 $1,000, that's obviously a non-starter, but the concepts of 25 reinstatement --
163 1 THE COURT: Well, it's really only 850 because the It's only 850. Well, I guess they're only going to But the point is,
2 filing fee's $150, so. 3 MR. KASSENER:
4 make it up on volume, though, Your Honor.
5 there were three aspects, and putting aside the money, that 6 have been touched upon that really are going to deter us being 7 able to work something through. And we would like to work
8 something through that is in everyone's best interest. 9 What is this reinstatement concept? It's vague in
10 the proposed order. 11 Honor.
I don't know 3what reinstatement is, Your
There could be 50 different versions of reinstatement
12 under state law and those should be worked out. 13 The idea of having to put evidence to the debtor is a Not sure what that means
14 -- the term "evidence" was used. 15 either. Again, a vague term.
These all could be worked out,
16 but there should be a procedure that deals with these two 17 issues in addition to the fee issue which, again, this should 18 not be used as a revenue enhancement vehicle. This should be
19 used as a way to ease the administration of this estate. 20 So those are our issues, Your Honor. We would prefer
21 that we have procedure that will work and not have a procedure 22 that will force a number of lenders, perhaps all of them, to 23 just have to go it the old fashion way. 24 where HSBC is at this point. 25 THE COURT: Make me feel like I'm back in the Eastern And I think that's
164 1 District of Pennsylvania, all those relief from stay motions. 2 MR. KASSENER: I don't even want to think about what
3 Act 6 -- how Act 6 would be impacted on this one, Your Honor. 4 5 6 THE COURT: All right. Thank you, Mr. Kassener.
MR. KASSENER: MR. CHAPMAN:
Thank you. Good afternoon, Your Honor. William
7 Chipman, Edwards Angell Palmer & Dodge on behalf of 8 Countrywide. 9 about. 10 Most of our objections have already been talked
I'd like to just express for Your Honor our concerns. We have hundreds of these mortgages right now that We also have identified about six
11 fall within this category.
12 other categories that don't fall within this procedure where we 13 may have to, in our contemplating filing relief stays on 14 different fact patterns, different relationships with the 15 debtor. 16 Your Honor, most of what the debtors changed order
17 does, does address some of our concerns moving the 45 days to 18 30 we think is appropriate and we're agreeable to that. But
19 more importantly, we think there has to be a procedure in 20 place, otherwise this motion doesn't make any sense. We don't
21 think anybody's going to volunteer to pay $1,000 and we 22 certainly won't participate in that procedure. And we do think
23 the primary focus should be relieving the burden on the Court. 24 So the $1,000 fee for us is a non-starter. It would
25 cost us $320,000 to get the ball rolling under these procedures
165 1 if we were to bring this -- our 320 some odd mortgages through 2 this procedure. 3 4 means. Your Honor, we, too, do not know what reinstatement Is this a deemed assumption? Who would be reinstating? Would they be What happens Then this
5 Would the debtors be paying the mortgage?
6 responsible until the property's foreclosed upon? 7 if, after they reinstate, there's another default.
8 order should provide for immediate relief from the stay so that 9 we're not constantly back before Your Honor filing notices, 10 waiting another 30 days. 11 Someone alluded to paying the senior lender in full. Does that mean
12 Again, we don't know what reinstatement means. 13 paying the senior lender in full? 14
There's also the issue of adequate protection while If they're going to
15 we're waiting for this process to unfold.
16 reinstate, who is going to be paying the first lenders' 17 payments while we're waiting for the foreclosure still to be 18 brought? By the debtors or someone else? We're not even sure If they're
19 who would be doing the foreclosure at that point. 20 reinstated. 21 Your Honor, we do need finality.
What -- if there's
22 no objection currently or there's reinstatement, or no 23 reinstatement, the stay's lifted automatically. 24 expedited procedure after that to get an order. We do need an Maybe that can
25 be done by stipulation as one counsel recommended.
166 1 If there's an objection or litigation, what happens?
2 In other words, if we've -- if they do file some sort of 3 objection or for reinstatement, then what happens? 4 back to the Court to figure out what's adequate? 5 to be doing what? Do we come
Who's going And
Who's going to be making the payments? If someone subsequently
6 then again, the default issue. 7 defaults, what then happens? 8
These procedures are incomplete.
Your Honor, with regard to the notice requirements
9 and what information has to be provided, in our objection we 10 basically just think that whatever we would provide under a 11 Section 362 motion for relief from stay should be the standard 12 here. It shouldn't be more complex. If we're trying to
13 streamline this process and make it more efficient, we 14 shouldn't be required to provide more documentation, including 15 documentation that may violate privacy laws. 16 There's a local rule on point, Your Honor, Rule 4001-
17 1 that sets forth the standard for relief from stay motions. 18 And we think that that standard should be in the order. 19 And again, Your Honor, I think the debtors tried to We do not want to be in a position
20 address the privacy issues.
21 we have to provide information that would violate privacy laws. 22 So in sum, Your Honor, I think all these issues are
23 kind of being said over and over again, but the bottom line is 24 we believe there needs to be a procedure here. Otherwise we're
25 going to be before Your Honor bringing stay relief motion after
167 1 stay relief motion. 2 The only other point I'd like to -- some If that is applicable
3 clarification on is the $1,000 fee.
4 mortgage by mortgage or if we bring one notice for 300 5 foreclosures. 6 order. Obviously that wasn't clear in the initial
If we could get away with paying $1,000 and getting 300
7 of them heard under one notice, or if we have to pay $300,000. 8 Thank you, Your Honor. 9 10 THE COURT: Thank you. Good afternoon, Your Honor. At the risk of being And I echo Marc
MR. PHILLIPS:
11 Phillips for Washington Mutual.
12 repetitive, we, too, object to the $1,000 payment. 13 the sentiments of previous counsel. 14
With regard to the documentation, we also believe
15 that the documents that are requested are going to be overly 16 burdensome and we request that either the applicable title 17 policy or a copy of the recorded mortgage or deed of trust 18 would be sufficient documentation to satisfy the notice 19 requirements that the debtors would require. 20 With regard to orders from relief of stay to satisfy
21 the state courts, we believe that there needs to be some sort 22 of procedure in place or else it could take another 30 days on 23 top of the 30 days that the debtors already have in order to 24 get an appropriate order. So some sort of omnibus procedure to
25 get these orders approved in batches to streamline the
168 1 procedures would be appreciated. 2 3 THE COURT: Thank you. Your Honor, good afternoon. I'll be Thank you.
MR. MCMAHON:
4 very brief.
Joseph McMahon for the United States Trustee.
5 While we did not file papers in connection with this motion, we 6 do -- our office does share some of the concerns voiced by the 7 objectors. Certainly, the clarification that the procedures
8 are voluntary instead of mandatory is a positive development. 9 But the fee charging and other aspects, the -- in the event the 10 procedures are not mandatory, they are voluntary, we would 11 share, I think, generally the same observation that some of the 12 objectors have which is whether they -- the procedures are 13 reasonably calculated to achieve their goal of preventing -- or 14 at least preventing some of the work building up on this Court. 15 Thank you. 16 17 THE COURT: Thank you. Good afternoon, Your Honor. Susan
MS. POPPITI:
18 Poppiti on behalf of Litton Loan Servicing.
My client did file
19 an objection to this motion, but for the record, Your Honor, I 20 would like to join in the objections with respect to the $1,000 21 fee payment. 22 23 24 25 Thank you. No more piling on. You're up, Mr. Logan.
THE COURT: MR. LOGAN: THE COURT: MR. LOGAN:
I couldn't hear that, Your Honor. No more piling on. You're up. Let me address
Thank you, Your Honor.
169 1 some of the concerns. 2 3 4 THE COURT: MR. LOGAN: THE COURT: Before you do. Yes, sir. Let me just give you my overall
5 impression and that is it's almost always a good thing when a 6 -- in a case of any size, there are similar matters of a great 7 volume to be addressed at some procedure be adopted. 8 the concept is a good one. But I think you have more I think
9 discussion to do with those who've expressed their views here 10 toward the goal of developing a process that might be better 11 suited to the needs of the constituents. 12 MR. LOGAN: Your Honor, I understand that. And let
13 me address some of the concerns because I think they 14 misapprehend some of the facts and some of the law, quite 15 frankly. 16 First off, we've heard a parade of either horribles
17 or great benefits, depending on one's perspective about how 18 many hundreds or thousands of these motions will be filed and 19 how much money we would either make or not make based on the 20 $1,000 fee. 21 Your Honor, New Century has mortgages left, but it's And so we're -- I think we
22 sold off the vast majority of them.
23 have a misapprehension that this is a problem that's going to 24 occupy a substantial amount of the Court's time or generate 25 huge profits for the company. Unfortunately, it won't, on the
170 1 latter. I guess the first is not unfortunate. But we just By and large,
2 don't have that many mortgages that are left.
3 the sale to Ellington disposed of most of the loans not 4 financed anywhere. There are still some left. I'm told
5 somewhere in the neighborhood of $20 million worth of loans, 6 but it's just not that huge a volume. And therefore, I think
7 the parade of horribles we heard about is misguided. 8 New Century still services loans, but it doesn't hold And that's sale So I just don't
9 the mortgages in its own name in those cases. 10 will also hopefully close in mid-June or so.
11 think we're talking about that big an issue, quite frankly, 12 either a problem or a benefit. 13 a second. 14 Secondly, I believe it was Mr. Stern who was speaking But I want to return to that in
15 on behalf of a law firm instead of a national creditor which 16 has its own set of issues as to whether or not he really has 17 standing to raise these concerns. But leave that aside, his
18 argument focused on a premise that a movant doesn't need to 19 establish that the debtor has no equity in the property. 20 That's not the law. 362(g)(1) says the movant has the burden
21 on that very issue, whether or not the debtor has equity in the 22 property. In order to get relief from the stay, the movant
23 must show there's no equity in the property and it's not 24 necessary for any effective reorganization. 25 It may well be that a number of the second lien loans
171 1 that the debtor still have are valuable estate assets. And if
2 his client wants to get relief from the automatic stay or any 3 of the other parties objecting, if they want to get relief from 4 the stay, it is their burden to establish that the debtors have 5 no equity in those second liens. 6 Which gets me to the next issue which is what kind of And I'm going to show -- I'm
7 evidence do they have to propose.
8 going to delve into an area with some trepidation because it's 9 the Delaware local rules which I actually do read, as I certify 10 I do. Local Rule 4001 provides that when a party files a
11 motion, they have to provide a good faith estimate of the value 12 of the property in comparison to their liens. 13 The debtors respond with a good faith estimate. And
14 if there's a factual dispute, the Court is to have an 15 evidentiary hearing. And I haven't ever been involved in a
16 relief from stay matter in Delaware or quite frankly any place 17 else in a goodly number of years, but I would assume if that 18 there's a dispute on that issue, that is the factual issue that 19 is at issue. The movant has the burden of proof according to
20 the statute and it must put on some kind of appraisal or other 21 testimony as to the value of the property. 22 Having said all of that, our only purpose was to get
23 something that would help us assess whether or not this was 24 worth reinstating, which is the next issue I want to get to. 25 Or is it something that we ought to just not fight whatsoever,
172 1 not spend administrative resources, trying to save a second 2 lien that has no value. And we would be pleased or willing to
3 adjust the order to comply exactly with the local rules. 4 If the movant comes forward with a good faith
5 estimate of the value of the property and the value of the 6 liens, that will sustain it's burden in the first instance. 7 And if the debtors contest that, we can get off into 8 evidentiary issues if we can't reach resolution. But we are
9 comfortable with striking the provision that we are seeking 10 that they have to come up with an appraisal, a formal 11 appraisal, a good faith estimate as set forth in the local 12 rules in Delaware would suffice. 13 MR. DISPIGNA: Your Honor, Frederic DiSpigna, if I
14 may respond. 15 16 THE COURT: MR. LOGAN: Let Mr. Logan finish, please, first. That gets to the issue as to what we And that probably reflects the fact
17 meant by reinstatement.
18 that I'm from California and reinstatement is a legal concept 19 used in California. It basically means to cure a default and
20 therefore you're back -- just like reinstatement under the 21 Bankruptcy Code. That's what we meant and I appreciate that And we'd be happy
22 there can be variations from state to state.
23 to work out procedures that say the debtors, during this 30-day 24 time period, must take actions under applicable non-bankruptcy 25 law, that would prevent the first lien holder from proceeding
173 1 with the foreclosure. And whether that means reinstatement if
2 we got a California mortgage, whether that means paying off the 3 first lien lender in full if it's a state like, apparently, 4 Florida where there is no reinstatement concept, that's fine. 5 We use reinstatement as a generic, both in California
6 and the Bankruptcy Code, the two perhaps leading sources of 7 legal knowledge -8 9 THE COURT: MR. LOGAN: Well, you're at least half right anyway. Half right. As to what we meant, but we
10 can work out the concept as it applies to states that are not 11 quite so enlightened. 12 Your Honor, the objectors also had a concern about
13 how one actually gets an order that they can show to their 14 title company and that's -- we can work that out. Again, the
15 form of the order we proposed seeks to have them file an 16 application to the Court for the entry of an order. 17 streamline process is fine. Whatever
I don't want to spend the estates'
18 $1,000 if we actually get it on that process, but we're also 19 willing to accommodate their concerns with a piece of paper 20 issue from the Court that they can show parties and whether 21 it's a certification from counsel and an automatic stipulation 22 or an automatic order, I'm sure we can work that part out. 23 Next to last thing. The finality issue. A number of
24 the objectors had a concern that the debtors might reinstate 25 and then later default 30 days later. I can't imagine that the
174 1 debtors would be quite that stupid, but if they were, again, we 2 have no concern that if the debtors take advantage of this 3 process once and later default, upon a certified motion by the 4 movant that the debtors have defaulted, fine, they can have 5 relief from the stay. 6 That would give them finality. Again, back to my I
And that gets me to the $1,000.
7 first point, there's just not that many mortgages involved. 8 don't think we're talking about hundreds of thousands of 9 dollars.
But in order to avoid any concern along those lines, And I think
10 someone asked for a volume discount, in essence.
11 probably the better way to phrase it is that we are -- we 12 didn't envision this as a huge money-making adventure. 13 can cap it at $10,000 per motion would be acceptable. So, we And if
14 somebody has more than 10 properties, fine, they get a volume 15 discount. 16 It was just an effort to try to recognize the fact
17 that filing the motion, whether it's for one property or 270 18 properties and putting on evidence about equity in 270 19 properties has got to be very expensive for the movants. We do
20 have a desire to streamline the process so we don't burden Your 21 Honor and we don't burden counsel for the debtors, but quite 22 frankly, a lot of this is a freebie for the movants. And we
23 thought it only appropriate that there be some quid pro quo. 24 And I think the cap at $10,000, and it's purely voluntary, 25 ought to be an appropriate resolution. If people don't accept
175 1 that, I guess we'll learn. 2 when it happens. 3 THE COURT: Thank you. All right. Mr. DiSpigna, you And we'll deal with that if and
4 may respond now, if you'd like. 5 MR. DISPIGNA: Thank you, Your Honor. First of all,
6 with regard to the fact that it may not be that big a deal, I'm 7 not exactly certain what mortgages were sold. I reviewed the
8 schedule that was attached to the motion for sale of various 9 mortgages and compared it to my list of mortgages. And of my
10 206 mortgages that I'm seeking stay relief on at present, only 11 eight of them were included in the list of mortgage being sold. 12 So for my clients, it's still a big problem of 198 mortgages. 13 Capping it at $10,000 might very well make it doable But that's only going to
14 for my clients and I appreciate that.
15 be beneficial to firms or lenders that have a significant 16 number and can accumulate them to take advantage of those 17 savings. 18 With regard to 362(g), while 362(g) does say that the
19 burden is on the movant to establish equity in the property, I 20 feel that's only true if equity in the property is an issue. 21 362 gives one basis, 362(d) gives one basis for relief from 22 stay that the debtor has no equity in the property and it's not 23 necessary to an effective reorganization. 24 basis for relief under 362(d). That's not the only
There's also for cause such as If we're not being
25 adequate -- lack of adequate protection.
176 1 paid, we're not being adequately protected. 2 3 THE COURT: Well, maybe, maybe. Also the local rules and the Code Also --
MR. DISPIGNA:
4 really contemplate, with the stay relief, an individual 5 property owner and a foreclosure and not a situation where a 6 senior lien holder is seeking relief against a junior lien 7 holder. So the issue of the equity in the property is not It's the equity
8 really the equity in the real estate itself.
9 in the mortgage, the second mortgage, whether or not there's 10 any equity above and beyond the first mortgage that it's going 11 to make it worthwhile for the second mortgage holder to try and 12 hang onto it. 13 That's a decision the debtor needs to make, whether But that should not
14 they want to fight the foreclosure or not.
15 be an impediment to the first lien holder establishing their 16 right to stay relief. 17 18 THE COURT: Thank you. Your Honor, it is getting late in the What I understood from
MR. KASSENER:
19 day as I'm sure the Court observes.
20 comments to the Bench and then some remarks from debtors' 21 counsel is now a willingness to have a discussion with the 22 objecting parties on some procedures that may be acceptable to 23 all sides and actually ease the burden on the Court. 24 those discussions occur now. 25 and maybe now they can. I suggest
They were not occurring before
And we would be, from HSBC's point of
177 1 view, prepared to participate in those discussions to work out 2 a mutually acceptable order. 3 THE COURT: Yeah, and I do think there is advantage
4 to the perspective movants here to try to work something out 5 with the debtors because if we get down to having -- actually 6 to have a number of evidentiary hearings, based on my prior 7 experience in consumer cases, I'm sure your clients aren't 8 going to want to send appraisers to testify. 9 relevant factor. 10 MR. KASSENER: Could be. So, from -- again, from If that's a
11 HSBC's point of view, we would be prepared to have that 12 dialogue and see if we can get there. 13 we'll have to see what happens next. 14 15 THE COURT: All right. And if we can't, then Thank you, Your Honor.
Thank you.
MR. CHAPMAN:
Your Honor, for the record, William Countrywide would also
16 Chapman again on behalf of Countrywide.
17 like to participate with the debtors and all the objectors to 18 come up with a fair process, including expanding it beyond 19 maybe just the second lien issue. Like I said before, we have
20 seven different scenarios where we may have to file motions and 21 we'd like to get a procedure in place that we can file maybe 22 for more than just the second lien scenario. 23 THE COURT: Yeah. And the sooner the better because
24 if there are motions on and more coming, the quicker the issue 25 is addressed, as the debtor has recognized, that the better
178 1 that we'll all be, I think. 2 MR. BECKER: And one followup point, Your Honor. The comment about this isn't going to Unfortunately,
3 Again, Richard Becker.
4 be a huge issue as loans get sold off.
5 assignments don't get recorded at the recorder deeds office 6 very quickly by the buyers and motions are going to get filed 7 for relief on properties that are no longer assets of the 8 estate. And that will shake out through the process, but if
9 something could be built into this process, it would be 10 helpful. 11 THE COURT: All right. Thank you. All right. Mr.
12 Logan, I guess my thought is that we would put this matter over 13 to another hearing date. I'd be willing to put it on as soon
14 as the 30th if you think that that's sufficient time to have 15 discussions. 16 17 If not, I'd put it to a date in June. May 30th -Yes, May 30th at 2:30. Okay. Stat it to the
MR. LOGAN: THE COURT:
18 omnibus hearing date. 19 20 MS. UHLAND: THE COURT:
Anything further for today?
Nothing today, Your Honor, thank you. All right. Thank you all. That
21 concludes this hearing. 22 23 24 25
Court is adjourned. * * * * *
179 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: May 29, 2007
11 J&J COURT TRANSCRIBERS, INC. 12 13 14 15 16 17 18 19 20 21 22 23 24 25
UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE
IN RE:
. . NEW CENTURY TRS HOLDINGS, INC.,. a Delaware corporation, et al.,. . Debtors. . .
Chapter 11 Case No. 07-10416(KJC) (Jointly Administered) May 30, 2007 (2:36 p.m.) (Wilmington)
TRANSCRIPT OF PROCEEDINGS BEFORE THE HONORABLE KEVIN J. CAREY UNITED STATES BANKRUPTCY COURT JUDGE
Proceedings recorded by electronic sound recording; transcript produced by transcription service.
2 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: All rise. Please be seated.
THE COURT: Good afternoon, all. UNIDENTIFIED SPEAKER: Good afternoon. MR. MERCHANT: Good afternoon, Your Honor. Mike
Merchant of Richards, Layton & Finger on behalf of the debtors. Your Honor, I believe the first 14 matters on the
agenda are all continued to the omnibus hearing date scheduled for June 15th. Matter number 15 on the agenda is a
stay relief motion filed with respect to certain Florida properties, and Ill cede the podium to the movant to present that motion. THE COURT: All right. MR. DiSPIGNA (TELEPHONIC): Should I speak now? This is attorney Frederick DiSpigna. THE COURT: This is number 15 on the agenda. MR. DiSPIGNA (TELEPHONIC): Yes, Your Honor. Frederick DiSpigna. THE COURT: Go ahead. MR. DiSPIGNA (TELEPHONIC): This is, Your Honor, the stay relief motion. I spoke with debtors counsel. We
exchanged e-mails earlier today, and we agreed to continue this as well. Debtors counsel will - the debtor will advise
us if there are any specific properties that theres no objection to, in which case well submit an order for relief on those properties. The debtor has indicated that we have
3 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 Becker. provided sufficient information to make a determination. MR. MERCHANT: Your Honor, if I may interrupt. THE COURT: Im sorry. MR. MERCHANT: I think hes actually addressing another matter on the agenda. MR. DiSPIGNA (TELEPHONIC): You said Florida properties. MR. MERCHANT: This is two or three Florida properties. This isnt the omnibus Thats Mr.
MR. DiSPIGNA (TELEPHONIC): Okay.
Im sorry, thats Mr. Beckers matter. THE COURT: All right. MR. BECKER: Your Honor, Richard Becker. Im sorry
for the confusion. well.
In the back, we couldnt quite hear as
This is a motion for relief from automatic stay with
regard to junior mortgages held by the debtor on two Florida properties where Regents Bank has the first mortgage. debtor has not filed a response and does not oppose the motions at this time. There were two - the response deadline The
was extended to last Friday and then a CNO was filed late yesterday. I dont know if it made it into the CNO binder or Reviewing the CNO form of order which we
not, Your Honor.
filed, theres a typographical error contained in the address for one of the two properties. The typographical error
describes the property as Lake May Jess Shore and its like
4 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 Mary. I do have a revised form of order today, Your Honor,
if I may hand it forward which has Lake Mary. THE COURT: You may. MR. BECKER: Thank you, Your Honor. THE COURT: Does anyone else care to be heard in connection with this motion? I hear no response.
MR. BECKER: Your Honor, as the motion is unopposed, we would request the Court enter the order. THE COURT: The orders been signed. MR. BECKER: Thank you, Your Honor. MR. MERCHANT: Your Honor, matter number 16 on the agenda is the debtors second customer programs motion. There have been - There were no objections filed with respect to that motion, however, we did receive certain comments from the Office of the United States Trustee requesting that caps be set forth in the order, and I did work with my client to come up with reasonable caps, and weve circulated a revised order to the U.S. Trustee, and theyve approved it. that weve proposed are with respect to the customer restitution plan, any payments shall not exceed $130,000 in the aggregate, and thats inclusive of the $90,000. approved pursuant to the first day order. It was The caps
Any customer
program payments made on account of refund demands received from FHA and VA shall not exceed $20,000 in the aggregate. Customer program payments made in response to requests for
5 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 approach? the return of escrow customer hold-backs shall not exceed $60,000 in the aggregate, and weve also agreed that any and all payments made on account of such requests shall be made from amounts being held by the debtors in escrow or from funds that were being held in escrow and have since been released to the debtors by their respective escrow agent and shall not be satisfied from property of the estate. And
lastly, Your Honor, we agreed that any customer program payments made on account of refunds of unallowable fees charged by the debtors to borrowers shall not exceed $80,000 in the aggregate. THE COURT: So, how much extra from amounts previously approved does that come to? MR. MERCHANT: Well, Your Honor, I believe only the customer restitution plan payments cover payments that were also approved pursuant to the first day order. So of the
amounts I just discussed, theres a $130,000 cap with respect to those payments, 90,000 of which has already been approved and gone out the door. payments. So, its 40,000 in additional
All of the other caps are new amounts that are
being sought for the first time pursuant to this motion. THE COURT: All right. Does anyone else care to be I hear no response.
heard in connection with this motion?
MR. MERCHANT: I have a revised order if I may
6 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: Yes. MR. MERCHANT: Your Honor, I just realized that theres an error on the bottom of the order page, so, well submit a revised form under certification of counsel, if thats acceptable. THE COURT: Very well. MR. MERCHANT: Your Honor, for the next matter on the agenda Im going to turn the podium over to Ben Logan. MR. LOGAN: Thank you, Your Honor. This is the
motion to approve a cash collateral stipulation with Citigroup Real Estate. I dont have the full name in front
of me, but the Citigroup Real Estate group which provided the servicer advance facility. motion. There are no objections to the
The stipulation was negotiated at length with It reflects finally the
counsel for the Creditors Committee.
resolution of something thats been pending for quite awhile. We thought the DIP facility might take out the Citigroup facility. That never happened, so we decided we needed to
bring this to a head and resolve it, and it is resolved in this stipulation which probably will be a fairly short duration because when the Carrington sale closes, which we hope will be within a couple of weeks, that also will take out the Citigroup facility, but nonetheless, in order to make sure this just doesnt languish any further, we negotiated a stipulation, and there are no objections. Im happy to
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 answer any questions the Court has or anyone else. THE COURT: I do not have any questions. Does
anyone else care to be heard in connection with this motion? MR. SUSSBERG: Good afternoon, Your Honor. Joshua I
Sussberg from Kirkland & Ellis on behalf of Citigroup. just want to agree with everything Mr. Logan said. I
appreciate the efforts from the debtors as well as the Creditors Committee in negotiating the stipulation. We
appreciate that proceeds from the sale of the Carrington servicing business asset purchase agreement will repay Citi in full, but the stipulation, you know, will in the short term provide Citi with its cash collateral and all parties rights are reserved with respect to collections on advances pre-petition. Thank you, Your Honor.
THE COURT: Thank you. MR. LOGAN: And if I may approach, I have one of the worlds simplest orders. THE COURT: You may. been signed, simply. MR. MERCHANT: Mike Merchant again, Your Honor. Matter number 18 on the agenda is the debtors motion to retain AP Services LLC as crisis managers for the debtors. Your Honor, there were no objections filed with respect to that motion, however, we did receive a number of comments from the Office of the United States Trustee, and weve been Thank you. That order has
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 working with them to resolve those comments. There are still
a few outstanding issues with respect to the form of order, and I simply havent had time to run the proposed changes by APS. So what we would propose to do is continue to work with
the U.S. Trustees Office to resolve their concerns, and if we can reach agreement on an acceptable form of order, well submit it under certification of counsel. If we cant reach
agreement, well be back before Your Honor on June 15th. THE COURT: Very well. MR. MERCHANT: Thank you, Your Honor. Your Honor,
matter number 19 on the agenda has been continued to June 15th. Matter number 20 on the agenda will be handled by my
colleague Christopher Samis, and Ill cede the podium to him. MR. SAMIS: Good afternoon, Your Honor. on behalf of the debtors. Chris Samis
Let me just say that, number one,
this is the first time I think Ive ever appeared before Your Honor, so, its a pleasure. THE COURT: Welcome. MR. SAMIS: I am going to talk briefly about what weve referred to around the office as the omnibus stay relief procedures motion. Youll recall from the last
hearing that there were numerous objections, and I think that weve resolved them largely. To the extent that we havent,
Im sure someone will step up to the podium and point out that Im incorrect, but I would just like to walk Your Honor
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 through the changes if I might. original in this folder. I have a blackline and an
If I could approach, I Thank you.
THE COURT: That would be helpful.
MR. SAMIS: We had four main considerations, and as Im sure Your Honor is aware from the previous hearing. was the $1,000 payment. consideration. Well call that the cost One
The other was the production burden that was Then there were privacy concerns and
placed on the movant.
there was also a concern as to certainty, as to how there could be some procedure that was established whereby the movant could ascertain and provide evidence that a stay had actually been lifted. Ill just go paragraph by paragraph.
At paragraph (2), youll note that essentially weve relaxed the informational requirements, essentially to zero in on the documents that are just actually completely and totally necessary for the debtors to kind of determine the appropriate course of action under the procedures. Youll
note that the evidence thats required to be provided now only deals with liens that are senior to the lien of the debtors estates to the extent known by the moving party, and also youll note that it only now deals with providing those papers that have been filed - there is court actions that affect the status of the foreclosure and not all papers. Then at paragraph (3) - and, Your Honor, if you have any questions, feel free to stop me at any time - youll notice
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 that now a single notice can cover multiple parties, thats been clarified at paragraph (3). So there wont be numerous
notices or to the extent that we can eliminate numerous notices, well do so. At paragraph (4) youll notice that
theres now a $10,000 aggregate cap regardless of the number of notices. This was discussed, I think, last time at the
hearing and brought up, and I think that eases a lot of the cost burden thats been placed on the movants. At paragraph
(5), youll notice that we actually - a lot of the complaints last time focused on the opaque term that we used, a reinstatement. Weve now expanded or weve eliminated the
word reinstatement and now were saying essentially were calling them the action necessary to the extent permitted by and as provided by applicable non-bankruptcy law to prevent foreclosure rather than just calling it reinstatement. has the same effect, but I think it makes everyone more comfortable. Then at paragraph (6), youll notice that no It
action by the debtors after 30 days equals an automatic lifting of the stay, and if the debtors decide to pursue the reinstatement and then default under the note or other security documents, the stays also automatically lifted unless the debtors object within two days of that notice being filed by the moving party. And then finally, at
paragraph (9), were actually attempting to limit - this addresses the privacy concern that was raised by a couple of
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 the parties. Were actually trying to limit disclosure where So, to
the disclosure would run afoul of any privacy laws.
the extent that we would be providing the Committee with information that, you know, might run afoul of any applicable federal or state privacy law, were limiting that. There is
a slight inter-lineation, youll also note, at paragraph (9) that the Committee suggested just so that its limited to the extent that the information would actually implicate those privacy rights that were talking about. Then, finally, at
paragraph (10), and this is the absolute last change, basically this deals with the certainty aspect that essentially if a party files a certification of counsel or an order under a certification of counsel, essentially, you know, stating that the stay has been lifted, the debtors will have three days to respond to that, and if they do not within that time, the order may be granted by the Court, and I think that addresses the concerns about certainty and proof after the fact that the stay has actually been lifted. So, to the
extent that Your Honor has any questions, Ill answer them, but to the extent that you do not, I would ask that you enter the order. THE COURT: So that - Im trying to think of just mechanically how, normally when a certification of counsel gets filed and the chambers copy is delivered and the Court will act on it right away.
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 MR. SAMIS: Uh-huh. THE COURT: So, how will we insure that I dont act prematurely. MR. SAMIS: Understood. I guess we could establish
a - or we could attempt to establish a procedure whereby maybe its filed with the debtors and the debtors hold it in escrow before submitting it to the Court. be - but then again THE COURT: Well, you can file it electronically MR. SAMIS: Right. THE COURT: - and simply not deliver the chambers I guess that could
copy until the appropriate time. MR. SAMIS: Thats true. would be effective. THE COURT: Because I just love to sign things as soon as they come in and MR. SAMIS: Your Honor, and I thank you for that. Generally, Im very pleased with that. THE COURT: All right, well, let me hear from others first, but if we go, I think I prefer to do it that way, and it doesnt have to be embodied in the order so long as everyone understands it. MR. SAMIS: Understood. THE COURT: But, I dont know maybe it needs to be embodied in the order. Lets think about that. Okay, do any That would also - that
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 of the objectors care to be heard? MR. COHEN: Good afternoon, Your Honor. Cohen, Drinker, Biddle & Reath on behalf of HSBC. Howard Your
Honor, after the last hearing, I reached out to debtors counsel to try and resolve HSBCs issues. Based on those
discussions and the changes accepted today, HSBC only has a few remaining objections. First, Your Honor, HSBC continues
to maintain that the debtors not entitled to any fee whether for revenue purposes or otherwise. Im not aware of any
court in this country that has approved such a fee, and I dont believe that this Court should set the precedent. Second, Your Honor, the debtor has requested that HSBC provide certain papers filed in the foreclosure proceedings even though the debtor already has those papers. Again, HSBC
believes that such a request is burdensome and that that should be stricken also. Thank you. Any of the other objectors care
THE COURT: Okay. to be heard?
MR. CHIPMAN: Your Honor, for the record, William Chipman, Edwards, Angel, Palmer & Dodge on behalf of Countrywide. Your Honor. The changes are satisfactory to Countrywide, We have been working with the debtors on the
form of order, and I think that this satisfies most of our concerns with regard to loans where we have a senior lien and the debtors have a junior lien. Well also be working with
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 papers? MR. SAMIS: With respect to the papers, we can address Your Honors concern and submit it under counsel for the debtors on other stay relief issues that arent impacted by this order. THE COURT: All right, so, your objection is either withdrawn or resolved. MR. CHIPMAN: Its resolved. THE COURT: All right, thank you. MR. CHIPMAN: Thank you. THE COURT: Any other objector care to be heard? will assume then those who have not stepped forward, their objections have been resolved or abandoned. Let me ask the I
debtor to respond briefly to HSBCs remaining comments. MR. SAMIS: Your Honor, I think the main response that we have is it remains that its a voluntary procedure. To the extent that they dont want to work within that procedure, you know, were willing to entertain working with them through the traditional route, filing a motion for relief from stay and then addressing THE COURT: The Court makes more money when they file motions, thats for sure. MR. SAMIS: That is true, but I think that really encapsulates our response. THE COURT: All right, and with respect to the
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 heard? MR. POWER: Yes, Your Honor. Good afternoon. Mark certification. I think thats probably the best -
THE COURT: No, Im talking about HSBCs comment that all the estate foreclosure papers must be transmitted. These are papers HSBC says which the debtor already has. MR. SAMIS: And to the extent the debtor - I think that the real reason for including that language is to actually streamline the procedures so that the debtor is not required to go back and dig through its records. THE COURT: Im sure thats the reason. MR. SAMIS: Yeah, and again, to the extent that they have that concern, Id say that theyre not required to participate. THE COURT: Well, what are they getting for their thousand bucks if they have to give you the papers again? MR. SAMIS: Well, I think theyre getting, number one, the certainty, I think, of following the procedure, and, you know, the absolute proof, and again, an economic decision, I think, that everyone of the participants is going to have to make and determine whether or not, you know, following our omnibus procedures is appropriate. THE COURT: All right. Does anyone else care to be
Power from Hahn & Hessen, counsel to the Creditors Committee. Your Honor, with respect to the last issue on the papers, the
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 heard? Committee doesnt have those papers, and, quite frankly, the foreclosure complaint and the procedures would have to be filed in connection with the lift stay motion anyway, so its really no additional burden than what theyd already have to do. So we would ask that the order as modified be approved, Thank you. Anyone else care to be The debtor did
and we support this order.
THE COURT: All right. All right.
I hear your response.
exactly what I asked it to do at the last hearing, and I think youve come as far as you need to come in terms of resolving those objections, and with respect to the remaining objections, I agree with the debtor. This is a voluntary
program and HSBC need not participate if it chooses not to, and the amount of the fee, it seems to me either singly or in the aggregate is reasonable and certainly - well, put it this way, not so high that it would dissuade people from in and of itself participating in the program. If it does, sobeit.
Okay, I would like the order to be further revised to specifically contain a certification procedure as I suggested it be amended, but upon submission of that order under certification, I will act favorably upon it. MR. SAMIS: Thank you, Your Honor. MR. POWER: Your Honor, item number 21 is the application to retain my firm as the co-counsel to the Creditors Committee. We received no formal objections. The
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 U.S. Trustee did have some issues. issues, we believe. Weve addressed those
Specifically, we filed earlier this
morning, Your Honor, and I dont think your chambers would have gotten a copy yet, but a supplemental affidavit which set forth basically three things in addition to the affidavit we had previously submitted. First, the U.S. Trustee wanted
to make sure that we had done the same conflict search that the debtor did with the full list of parties. had done that full search. We actually
The prior affidavit had just
referenced the top fifty creditors, but in fact, we had done the full search. supplement. Second - So weve confirmed that in the
Second is the U.S. Trustee has asked to confirm
which of those entities that we do have conflicts with, revenues from those entities constitute more than one percent of the firms revenues over three years. In the affidavit,
weve listed those entities where we specifically have represented them in other matters not in this case; all right? Its a total of six institutions, Your Honor.
Finally, the U.S. Trustee has asked us to confirm that the firm did not represent nor has it in the past represented either KPMG, which is the prior auditors of the debtor; Ellington Management, which is the successful purchaser of the notes and the mortgage loans; and Carrington Capital Management, which is the winner of the servicing business. THE COURT: Do you have a copy of the affidavit with
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 you? MR. POWER: I do, Your Honor. THE COURT: May I have it? Thank you. Okay.
MR. POWER: I believe that satisfies the U.S. Trustees questions, and we have no - weve received no other objections, Your Honor, so I would ask Your Honor to approve the motion and enter an order. THE COURT: All right. Does anyone else care to be I hear no
heard in connection with this application? response.
Do you have a form of order with you? MR. POWER: I do, Your Honor. THE COURT: Thank you. MR. POWER: Thank you. MR. CARICKHOFF: Good afternoon, Your Honor. David The order has been signed.
Carickhoff of Blank Rome on behalf of the Creditors Committee. The next item on the agenda is the Committees No formal objections were
application to retain Blank Rome.
filed, but we too have received informal comments from the Office of the United States Trustee. Mr. McMahon to resolve those issues. Weve been working with I believe through a
series of telephone conversations, e-mails, and the filing of an amended affidavit, Bonnie Fatell earlier today, and amending a form of order that I can hand up to Your Honor, weve addressed the Office of the United States Trustees issues. I have a revised form of order. I also have the
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 amended affidavit that was filed, if I can approach with those? THE COURT: Yes, please. Thank you.
MR. CARICKHOFF: The amended affidavit was primarily designed to address the original statement that was filed by Ms. Fatell included an incorrect list. Weve amended that to
attach the appropriate list that was searched by our firm, and that includes the major parties in these cases, Your Honor, the top fifty, the UCC parties, et cetera. With
respect to the proposed form of order that I handed Your Honor, the Office of the United States Trustee had asked that we add at the beginning of paragraph (3) of that order, the language that says, subject to Bankruptcy Code 1103). THE COURT: Does anyone else care to be heard in connection with this application? order has been signed. MR. CARICKHOFF: Thank you, Your Honor. The next I hear no response. That
item on the agenda is the Committees application to retain FTI Consulting, and this is another situation where we have been working with the Office of the United States Trustee to resolve their comments. We believe that we have a revised
form of order and a supplemental affidavit that was filed by Mr. Starr to address the U.S. Trustees concerns, if I may approach? THE COURT: You may. Thank you.
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 MR. CARICKHOFF: If I could start with the proposed form of order, Your Honor. THE COURT: Okay. MR. CARICKHOFF: The first ordered decretal paragraph indicates as modified herein. Flipping over to
page 2 of the order, the second full paragraph, midway through it, it has a provided, however, and what that clause does is it allows the Office of the United States Trustee to review the monthly fee arrangement with FTI under 330 on a reasonableness standard. The following paragraph,
Your Honor, deals with the completion fee that was negotiated between the Committee and FTI. Essentially, the way it was
originally drafted was upon one of three events FTI would be entitled to a completion fee. One was the confirmation of a Two was the sale of
plan of liquidation or reorganization.
substantially all the debtors assets, and three was upon the conversion of the debtors cases. This was revised such that
the third item, which was the conversion of the cases, was pulled out of that list and instead of that being automatic, Your Honor, it goes out on notice to parties in interest, and the rights of those parties are reserved to object at an appropriate time. THE COURT: All right. supplemental affidavit address? MR. CARICKHOFF: The supplemental affidavit And what does the
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 response. McMahon. addresses a couple of issues that were raised by the Office of the United States Trustee. In particular, one of the
outside directors of FTI is a partner at the law firm of Kirkland & Ellis, and if Your Honor looks at paragraph (6) of that supplemental affidavit, thats the section that deals with the U.S. Trustees issues on that, and it essentially describes the ethical law thats been put in place with respect to Mr. Stamus who is a partner at Kirkland & Ellis with respect to these Chapter 11 cases. THE COURT: All right, thank you. Does anyone else
care to be heard in connection with this application? MR. McMAHON: Your Honor, good afternoon, Joseph Just a, I guess, minor point with respect to Under the proposed form of order thats
counsels comments.
been provided to us and that weve agreed to, we have the right to review both the monthly fees and the completion fee under the reasonableness standard. I think that counsel in
his presentation only referenced the monthly fees themselves. THE COURT: All right, thank you. MR. McMAHON: Thank you. THE COURT: Anyone else care to be heard? That order has been signed. MR. MERCHANT: Your Honor, Mike Merchant again for the record. Matter number 24 on the agenda is the omnibus I hear no
stay relief motion that Mr. DiSpigna was referring to earlier
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 agreement. THE COURT: All right. And I wouldnt want to do Honor. on the phone. We have reached an agreement to continue that In the last few days, Mr. DiSpigna
to the June 15th hearing.
has provided New Century with the information needed to make an assessment as to the stay relief requested. There just
simply hasnt been enough time to make that assessment with respect to 206 loans. So what weve agreed to do is continue We will work with him in the
it to the June 15th hearing.
meantime, try to make a decision on as many of those loans as we can to the extent we consent to some of the stay relief requests, and the Committee consents as well, and Mr. DiSpigna could submit a form of order with respect to those loans under certification of counsel. We dont have any
problem with that, and the balance of his motion thats left over can go forward on June 15th. Weve agreed that we will
not challenge the standing of his law firm to pursue the motion, and we wont object to the form of the motion. MR. DiSPIGNA (TELEPHONIC): That is correct, Your Frederick DiSpigna. MR. MERCHANT: I believe thats the scope of our
anything to upset the possible amicable resolution of that matter. All I will say is that I would not prefer that
others who are contemplating filing such a motion do it through the use of a law firm. Rather, the Court would
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 prefer, for reasons which are obvious, that parties be named in motions rather than law firms being the movant, and Ill say no more. Okay, June 15th.
MR. MERCHANT: Very well, Your Honor. MR. DiSPIGNA (TELEPHONIC): Thank you, Your Honor. MR. MERCHANT: Matter number 25 on the agenda, I believe, is going to be addressed by Committee counsel. THE COURT: Very well. MR. POWER: Your Honor, Mark Power from Hahn & Hessen, counsel to the Committee. Your Honor, I have a form
of stipulation that weve been able to hammer out with Deutsche Bank National Trust counsel and the debtors counsel. May I approach? THE COURT: Yes. Thank you.
MR. POWER: If Your Honor recalls, last week we were before Your Honor on the sale order for the Carrington sale of the servicing business. One of the claims of the cure
objectors was Deutsche Bank who is the trustee for a number of the trusts which are subject to the pooling and service agreements which will be assumed and assigned to Carrington on the closing date. Deutsche filed an objection both to The adequate
adequate protection and to the issue of cure. protect resolved last week.
The cure issue was not resolved.
If Your Honor recalls, we basically put in the order a reservation of rights with an intention of filing a
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 stipulation. parties. This stipulation embodies the agreement of the
Deutsche filed an objection which laid out
basically a potential cure claim based on alleged servicing breaches by the debtor of its servicing obligations under the pooling and servicing agreements. Deutsche was in the
process of having an accountant go through and audit those records and servicing to determine what the extent of that claim is, but the objection indicated the claim could be as high as $27.8 million. In addition to that - Well, included
in that number is also a certain amount of fees and expenses and other costs that Deutsche has asserted the debtor is obligated to pay under the indemnification provisions of the pooling and servicing agreements, and the cash management order that Your Honor entered on the first day provides for the debtor basically to comply with those indemnification obligations under the PSAs. types of claims. So, they essentially have two
This stipulation basically sets forth a
reserve of a certain amount of funds from the Carrington sale to protect Deutsche and the trust in the event those claims are actually allowed ultimately and to set up a protocol or procedure to basically exchange discovery, complete the investigation of the servicing obligations, and then if we need to, if we cant resolve it, litigate them before Your Honor. What weve decided to do is reserve $10 million of
the proceeds from the sale, which would basically be set
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 aside to cover the potential cure claims related to the breaches of the servicing obligations. This will be separate
than the cost and expenses which I mentioned, which are approximately a million three, which will continue to be operated under the cash management order and the indemnity obligations on the PSA. However, Your Honor, weve added a
provision that with respect to those costs and expenses, Deutsche is going to provide that information to us, and we have a right to review it and object to it. So, theres no
decision being made in this stipulation as to whether those claims are valid or should be paid. Its simply a process to
continue to pay them, and the provision of the cash management order shall stay in effect until the closing on the transaction. With respect to the $10 million, whats
envisioned is, Deutsche will have, I think, till July 31, I believe, Your Honor, paragraph (8), to finish the auditing and accounting and produce basically a written summary of what it believes its secured claim damages are. Then the
debtor and the Committee will have 75 days after - Im sorry, till October 5th to basically analyze that and come up with its own analysis as to what those damages are. And then we
either can try to resolve that through a consensual matter which well bring forth a 9019 to Your Honor, or we would schedule an evidentiary hearing to litigate that issue and determine whether there actually is a cure damage claim
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 thats valid and should be allowed. procedures, Your Honor. Thats basically the
The only thing it does do in terms
of substantive rights, is it, obviously, sets aside the $10 million, and it caps the cure claim as to the potential servicing breaches at the $10 million. Now I should mention,
if Your Honor recalls last week, a lot of the contracting parties had filed cure objections as of the date of the objection deadline, and we had that gap period, what we call it. That gap period still exists with Deutsche because
Deutsche doesnt know, you know, whats going to happen between now and closing. So the stipulation reserves
Deutsches ability to bring those claims, if it discovers other claims that arose, post-objection deadline. So the $10
million cap applies to pre-objection deadline and the stub period basically they reserve the rights to bring those claims later. those claims. I think theres a 75-day deadline to bring Thats basically the protocol, Your Honor. I
think its, you know, somewhat standard in these cure objections. here. Its obviously a significant amount of money
Truthfully, Deutsche doesnt quite yet know even if It believes there are, but it hasnt yet So this process is designed basically to
there are claims. determined that.
avoid a lot of litigation, streamline the process, and try to come to a, you know, basically get the facts and then figure out whether we have to litigate or not. In the stipulation
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 November? MR. POWER: As long as its not the Wednesday before Thanksgiving THE COURT: All right. Thanksgiving? MR. POWER: Thats fine. indicates thats fine, Your Honor. THE COURT: All right, Tuesday, November 20th at - Do you think I can set that for 10:30? Yeah, 10:30. Now, I do Deutsches counsel How about two days before dates? MR. POWER: Well, I think - our deadline - the debtor and the Committees deadline is October 5. So I think there is an outside date for a pretrial conference, which we would seek to be sometime towards the end of the year, Your Honor. I dont know if Your Honor is able to set that now or
would rather us approach the Court when were done with the discovery process. THE COURT: How far out to your omnibus hearing
were talking into November, November or December would be a perfect date, Your Honor. THE COURT: And how far out have I set omnibus hearing dates in this case? MR. POWER: I dont believe that far out. only - only through July that I recall, Your Honor. THE COURT: How would you like to have a date in I think
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 it. have a question. MR. POWER: Yes, Your Honor. THE COURT: Does this stipulation have the effect, arguably, of taking whats arguably an unsecured claim and making it a secured claim? MR. POWER: No, Your Honor, because these agreements are really the main thing that Carringtons buying, so in order to assume and assign them, the debtor has to basically cure and pay and satisfy all outstanding obligations. Deutsches arguing that these are breaches under that agreement that are - basically, theyre entitled a damage claim for and they have to be compensated. believe they do. So, I dont
I believe, if they prove to Your Honors
satisfaction that these are allowed claims, they would have to be paid in order to sell this agreement to Carrington and these are the core agreements as part of that sale. THE COURT: Okay. Does anyone else care to be heard I hear no response.
in connection with this matter?
MR. POWER: Your Honor, I have the original which is signed by the parties. THE COURT: Did you fill in that date? MR. POWER: I didnt but Ill do that now. approach, Your Honor? THE COURT: Yes. Thank you. All right, Ive signed May I
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 MR. LOGAN: Thank you, Your Honor. Ben Logan again.
Turning to item number 26, which is the debtors motion to provide adequate protection. Let me give the Court a little
bit of a very quick overview and then turn to a scorecard, if you will, of where we stand with various objectors and parties who weve worked with and, therefore, there are no objections. Your Honor, I dont think anybody, at least of
the debtors side, anticipated when the case was filed that these sort of issues would be anywhere near the way theyve turned out to be. a thorny problem. We have a thorny problem, the estates have It turns out that various parties, either
parties to master repurchase agreements - Im not going to call them warehouse lenders today - or parties who purchased loans from the debtors had monies that were collected into the debtors general collection account prior to the petition date. I want to be very clear, were not talking about We did
anything post-petition but as of the petition date.
not anticipate when the case was filed that there would be any substantial claims for any such funds. It turns out that
theres a limited quantity of money that was in the collection account, about $42.1 million on the petition date, and as one started to work through the process with various claimants to it, the amount being claimed, sometimes with claims that the debtors, quite frankly, think are substantially inflated, but nonetheless claimed, exceeds the
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 amount that was available, the raise, if you will, for various trust fund claimants. That then led to - well, it UBS was the
threatened litigation and brought litigation. winner of the race to the courthouse.
They brought an
adversary proceeding, and as a result of which, weve had various interim resolutions with UBS, but theyre interim resolutions, interim only. Other parties to master
repurchase agreements - Im going to have to come up with some shorthand, REPO participants told us that they were concerned that the process ought not to favor the winner, the most litigious among them, and we agreed with that. A
similar situation existed with purchasers of loans who purchased loans from the debtors pre-petition, but monies floated into the general collection account pre-petition because borrowers had not recognized yet that they were supposed to send money to the new servicer, again, commingled in the general collection account, and we also believed it was appropriate to treat those folks on an omnibus fair basis, and as a result, we worked closely with the Creditors Committee and certainly with the major REPO participants to try to resolve or develop a system that would be a fair procedure so that all parties interest would be protected, including the debtors and the Creditors Committees rights to assert that none of these are trust funds or that none of these amounts could withstand an attack under Bankruptcy Code
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 25 544. The debtors have seven major REPO participants.
Three of them did not object to this motion, and thats because, at least I believe, Im confident, that they were parties to the development of the order and the motion and support it. Those include Credit Suisse First Boston, Bank Indeed, we had a stipulation
of America, and Deutsche Bank.
with Deutsche Bank that was approved by the Court at the last hearing to deal with some ancillary issues involving Deutsche Bank in which they agreed to support this motion. It was in
- I guess it had been filed at that time and the work was in process. We also have reached an agreement in principal with
Morgan Stanley, which did file an objection and a counter motion. Morgan Stanley is the most substantial, in terms of
dollars at issue of our REPO participants and accordingly, Im quite pleased that we have reached an agreement in principal with Morgan Stanley, which Ill turn to momentarily. We also had an objection filed by Citigroup
Real Estate Group which just wanted a clarification that the adequate protection we were offering would not prime their liens in case their liens were deemed to be valid, not avoidable liens and thats certainly what we intended. I add
a note parenthetically that the stipulation that we presented a few minutes ago fully reserves any claims the Committee could have or the debtor might have to challenge Citigroups liens. Its purely if they have non-avoidable, valid,
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 perfected liens. prime those. Nothing were offering today is intended to
And that brings me then to the fact that we do Im not sure if
have three objections that are outstanding.
when I explained the Morgan Stanley procedures, which I did before court, at least a preview for several of them, whether those objections will be resolved, but I must assume that they are not. The motion is unusual, Your Honor. This is a
motion by the debtors to provide adequate protection to people whether they want it or not. We are -
THE COURT: They want protection but not necessarily adequate protection. MR. LOGAN: They want a different form of protection, if you will. But none of them have a motion
pending to seek another form of adequate protection with the possible exception of Morgan Stanley, which filed a crossmotion that if we didnt have agreement with them, I would argue is untimely, et cetera, et cetera, but fortunately, we dont have to get to that. We tried to be proactive and
whether they wanted it or not and with the full reservation of all their rights to argue that its not adequate, are proposing to give the warehouse lenders and the loan purchasers every ounce of adequate protection we have available. Were not trying to prime anybody. We are
seeking to give them junior liens on essentially all estate assets, subject, of course, to a carve-out for voiding powers
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 and professional fees and also a super-administrative priority junior to the super-administrative priority granted to the DIP lenders. So, were offering to give them
essentially everything weve got with the full reservation of rights as to what theyre entitled to, both on their part and on the debtors and the Committees part. In the motion, we
indicated that as things develop further, we very well could seek to supplement or replace that form of adequate protection with another form of adequate protection, and that really turns me to the agreement with Morgan Stanley which we want to outline briefly and then Ill turn into a little bit more detail as to the issues that really are quite complicated legally or at least theyre substantial legal issues and factual issues which the parties are going to have to resolve. The motion that we are seeking to have the Court
approve today is just a first step in a process to an issue that I think will be a very important issue in these cases well get resolved, we think, under this kind of framework with a procedure that protects peoples rights on a collected basis. The agreement with Morgan Stanley, which we propose
to incorporate into a revised form of order that well work on after the hearing, would provide that the debtors will provide to each of the warehouse lenders and the loan purchasers by June 29th, the debtors reconciliation of various amounts that are claimed by the parties. Thats a
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 drop-dead date. Its been a painful process to get that work
done, and I want to explain why that is in a few minutes, but June 29th would be the drop-dead date. In addition, when the
Carrington sale closes, thats the sale of the servicing business, the debtors will institute a proceeding which we will work out the details of later. Its probably in the
nature of an interpleader action, Your Honor, where the debtors will deposit into an interest bearing account, escrow account maintained somewhere, funds equal to the amount of cash the debtors had on the petition date, which is approximately $42.1 million, in a collection account into which the various alleged trust funds were deposited, as well as some other monies, and then procedures will be developed to litigate over who is entitled to that money, if anyone. It may be an estate asset. It may be subject to avoidance.
But thats the basic agreement with Morgan Stanley, which we are comfortable with, the Committee supports, and that we would propose to include in the form of order. Let me
explain a bit more in detail about the situation, why we are where we are. The REPO participants typically had
agreements that provided - actually it varied a fair amount. They provided that New Century sold, at least ostensibly sold to them various mortgage loans and, in the case of Morgan Stanley, some residual interest, with a concurrent promise or obligation to buy those loans back and in the interim, until
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 they are bought back, pay interest, typically denominated the price differential. The agreements varied substantially as
to what happened with respect to collections on the mortgage loans during the time that the repurchase agreement was still extant. not. Some of them had blocked accounts set up, many did
Those that had blocked accounts typically did not block And almost uniformly the REPO
them until mid-March.
participants understood that regularly scheduled collections of monthly principle and interest from the borrowers went into a general collection account, and monies were settled up monthly after the fact. And as a result, we have a
hodgepodge of legal claims by the repurchase participants that monies either post a declaration of an event of default and the blockage of an account are their monies or their collateral, and we also have issues as to whether or not monies that were collection prior to those exercises of revenues are their property or their collateral. Loan
purchasers typically would buy loans from New Century and at the time they purchased them, instructions were given to transfer the servicing from New Century Mortgage Corporation to the new servicer, and letters and instructions were given to the consumers who were the actual obligors on the underlying mortgage loans to make payment to the new servicer. Lo and behold, people dont always follow their
instructions to the letter of the mail that they get which
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 they often think is junk mail. In any event, some quantity
of money came into the debtors pre-petition that was again deposited in the general collection account and the loan purchasers assert that is trust property held for their benefit. I have a stop. Both the repurchase agreements and
these agreements for the sale loans have trust language. They have language that the debtors will hold monies in trust. The truth of the matter is, though, that the practice They
as understood was that monies were not held in trust.
were put into a general collection account, which gets me to the first significant legal issue and its one of tracing. We had $42,136,000 and change in this collection account on the petition date. The case law is quite clear, including a
decision from the Third Circuit, that a party asserting trust bonds - Im quoting now from City of Farrell vs. Sharon Steel. Cant read my own handwriting as to what the citation The Third
is, but its a Third Circuit case from 1994.
Circuit held that for a trust claimant to establish that funds are held in trust, it must first off demonstrate a trust relationship and a legal relationship, which I want to return to in a second, and second identify and trace to that trust funds if theyve been commingled. situation. Thats our
And the real issue is, how does one trace monies
into this collection account because we have, for better or worse, a variety of claimants who are trying to trace monies
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 that add up to a greater total than the amount of money that was there. The Third Circuit in Sharon Steel and also in
Columbia Gas has endorsed the lowest intermediate balance test, which is very common, and that works fine when theres one trust claimant, but when you have multiple trust claimants trying to assert tracing into the same fund and they all could look to the same intermediate balance, its very likely that the total will add up to more than the raise, and Im afraid that were probably going to be striking out on fairly fresh turf as to what happens, assuming that these claimants can establish the basic trust analysis, which is far from certain, but thats the problem we face. As we have started to develop the facts, it appears
that the claimants will aggregate more than the raise thats available to satisfy these various trust arguments. And I
should have noted that the Third Circuit and various other courts have been very clear that the burden is on the claimant to establish this tracing. that they can just assert. burden to establish. So, its not something
They have, in fact, a financial
The second substantial legal issue is There,
the interplay with Bankruptcy Code 544 and 541(d).
a number of courts have held and theres legislative history that 541(d), which basically says, property held in trust isnt property of the estate. There are a number of cases
that hold that that is fine and well and good as long as it
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 is a bona fide true trust arrangement, which is very tough to establish when funds are commingled. I wont bother the I
Court with a recitation of some of the authority on that. do note, however, that Indymac, which was the one loan
purchaser that filed an objection to the motion, cited one of the leading cases, Churchill Mortgage Corporation, but its a tough showing to establish first off that its a bona fide trust, which is a thorny issue when funds are coming when people are asserting a constructive trust. In other words,
the documentation written by lawyers who deal with fine points said that thou shall hold it in trust, but the business people implementing it didnt hold it in trust. Ergo, you said you would hold it in trust, if you didnt hold it in trust; is it subject to a constructive trust? That is
an issue we all have to resolve as litigation ensues or resolutions occur consensually. If in fact it was held in
some sort of constructive trust, theres a split of authority as to whether or not Bankruptcy Code 544 nonetheless can avoid that constructive trust. There are a variety of Third
Circuit - not Third Circuit, Circuit Court of Appeals cases that hold that 544 does avoid a constructive trust. For
example, Belyle vs. Plunkett, its a case of the Sixth Circuit, but there are about three or four cases like that. Columbia Gas which is a Third Circuit case says that 541(d) says that a constructive trust is not property of the estate
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 but doesnt reach the 544 issue. Judge Balick has a decision
that says 544 does trump a resulting trust, which is generally a stronger trust than a constructive trust. But
again, those are the kind of issues that were going to have to resolve, again, either consensually or through litigation, and the Unsecured Creditors Committee has been very clear with us that they want to - they need to reserve all their rights to assert that this is unencumbered property available for unsecured creditors. That gets me to the third legal
issue and thats with respect to the repurchase participants. Throughout the proceedings, weve spent a fair amount of time dealing with special provisions of the Bankruptcy Code that exempt repurchase participants from the automatic stay and give other special rights. Those are generally found in
Bankruptcy Code 362(b)(7), which says the automatic stay does not prevent a repurchase participant from setting off claims that it has against the debtor or realizing on property that it holds. And in 559, which allows a repurchase
participant to liquidate its claims, those are important provisions. If a party fits within the safe harbor of the
definition of a repurchase participant, they get certain very material rights. But those rights do not include taking Collier makes this A
property that is held by the estate.
point very clearly at paragraph 559.04 subparagraph (4). repurchase participant or another party subject to the
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 special rules adopted by Congress is entitled to self-help rights, as Collier puts it, to liquidate a repurchase agreement or to sell property it holds. For example, if it
holds the mortgage loans and it fits within the parameters of the definition of a repurchase participant, the automatic stay doesnt prevent it from selling the loans, but it doesnt say anywhere in the Bankruptcy Code that a repurchase participant is able to come grab cash that it asserts is held in a constructive trust held by the estates. There are a
variety of cases that deal what exactly are the rights of a repurchase participant? Barclay cites probably the leading
case for the proposition that anything related to a repurchase participant is their property. Its an absolute
true sale, and thats the Granite Partners vs. Bear Sterns case decided by the 7th District of New York. Ive got to And that
work on my handwriting - in the mid-1990s sometime.
case came up in the context of whether or not a repurchase participant has an obligation to dispose of mortgage loans in a commercially reasonable manner, which it would if in fact it is a disguised financing, secured financing. the Court said, No, it doesnt. They are sales. And there
These are different animals.
Theres a split of authority on that.
Theres a case out of New Jersey, Bevill Bresler & Sullivan Asset Management Corporation which was later affirmed by the Third Circuit in a slightly different context, which holds
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 that repurchase agreements for hybrids, as the Third Circuit said, theyve got many of the characteristics, in fact, most of the characteristics of the secured financing, and there the Court looked at a variety of factors including whether or not the repurchase participant had to hold the property that was quote, sold to it, sold in quotes, or was free to dispose of it. Basically, this came up on the context of
either government securities or Ginnie Maes. I dont remember which, but since those are essentially fungible, the repurchase buyer could trade out those government securities as long as it replaced it with like kind, and the Court said that that was one of the significant factors that would argue in favor of treating this as a true sale. Thats not present
in our situation, and there is a serious issue as to whether or not the repurchase agreements are true sales or disguised financings. question. The Bankruptcy Code doesnt answer that It says, if you are a repurchase participant,
whether it is a true sale or disguised financing, you get certain rights that I enumerated. question of, What are you? disguised secured financing? It doesnt answer the
Are you a true sale or are you a That is a thorny issue that In
will have to be litigated or resolved consensually.
addition, if it deemed to be a disguised financing, if the repurchase agreements are deemed to be disguised financings, there will be issues as to whether or not then they have
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 collateral. The repurchase agreements, by and large, say
that if and when the Court determines that a repurchase participation agreement, repurchase agreement should be recharacterized as a disguised financing, at that point in time, a lien is granted to the repurchase participant counter-party. The Ixis (phonetical) agreement which Ixis Theres a serious Its a Again,
attach to its motion is a good example.
issue as to whether or not that works, post-petition. springing lien that would be granted post-petition.
these are all issues that Im sure the loan purchasers will have one very strong view on and the parties to the repurchase agreements will have another various argument on. Under Gap these agreements are treated as financings. tax law, theyre treated as financings. Under
But in any event,
what they are an what their rights are is an issue were going to have to deal with. that? So what do we do about all of
And what we concluded in working with the Creditors
Committee is that we should move pro-actively so that we dont encourage others to act as UBS did to bring litigation to try to win a race to a courthouse and obtain an advantage over others, and as a result, we will offer to give every ounce of adequate protection we have to parties and let the chips fall where they may either through consensual resolution or through litigation. A number of the objectors
raised a question as to how substantial this adequate
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 protection is. Is it ephemeral? Is it something thats just
a risk or is it real?
Well, Your Honor, as the Court is
aware, there are two very major sales that have been approved by the Court recently. The sale to Ellington of various
residuals and L&FA realized net of a hold back for the estate, $54 million. The Carrington sale, again, net of hold Theres a tax
backs will realize about $145 million.
receivable that the estate is processing of $111 million under a quick refund procedure established in the Internal Revenue Code. Theres an interest in the Carrington fund
itself thats carried on Carringtons books that write at $50 million that the estate proposes to sell, and there are a variety of other assets that will be the subject of other auction motions brought before the Court in the near future, and in addition, I think as we all have to acknowledge, there are undoubtedly going to be litigation claims related to the restatement that presumably will yield some recoveries for creditors. So, Your Honor, the long and short of it is that
in working closely with the Creditors Committee and as many of the repurchase participants as we could reach out to, we think weve reached a fair procedure, a procedure that gives them adequate protection notwithstanding the fact that they didnt seek it and has a procedure to monetize that from the sale of the Carrington proceeds which is the agreement that we reached with Morgan Stanley. Its a pro-active measure.
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 One that with the perfect wisdom and view of hindsight I wish we had done earlier, but none of us knew that we were going to have these sorts of issues, and we think its incumbent upon a fair administration of the estates that we develop a collective process of this sort. I also ought to be clear
that the motion today does not seek to prejudice any of the loan purchasers or the parties to the repurchase agreements from filing another motion. They dont have one pending, but
if they want to file one or an adversary proceeding theyre free to do so. Well certainly argue that weve already
given them adequate protection, but theyre not bound by that. So it is a - In one sense its an elegantly simple
motion, one that provides a form of adequate protection. Were not asking the Court to determine that it is fully adequate, but were trying to establish a fair and rational procedure so that parties are not advantaged by being more litigious than others. Honor. THE COURT: Thank you. MR. POWER: Good afternoon, Your Honor. from Hahn & Hessen, counsel to the Committee. Mark Power Thats all I have to say, Your
Your Honor,
for more years than I want to admit of years of practice, Ive never represented a committee where we actually got up and supported an adequate protection motion which wasnt brought by the secured creditor. If Your Honor recalls,
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 initially in the case, this case had approximately $40-some million in cash and there was a DIP loan outstanding. At the
time when we first got involved, about a week later, we did look at whether - the cash position of the estate and what the potential claims were. We knew that there were potential
claims, but I think all information that we were given at the time was that those claims were significantly less and didnt think it would be an issue here. As we got further into the
case a few weeks later, the debtor discovered and then revealed to the Committee its discovery that in fact the claims might be substantially higher than they originally thought. The debtor did have one centralized account and its
money plus all the other collection monies were all put into that account with a kind of an end-of-the-month reconciliation, plus it had also had monies in various subsidiaries that it had moved up pre-petition to try to get ready for the bankruptcy and make sure it had control of all funds, which is one of the things it did in terms of its debtor-in-possession duties to make sure that funds werent, you know, in places which each couldnt account for. of that and because we were advised, you know, to our surprise that in fact the claims were going to be significantly higher and we werent sure yet as to parties rights, as to whose rights these funds were, whether they were other peoples money, whether they were cash collateral, Because
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 or whether they were the debtors proceeds. We pushed the
debtor and the debtor readily agreed to file this motion, which is very unusual and the reason is because - two reasons, primarily. One is, Your Honor has said several
times before us and weve heard you, I want to make sure that no one is adversely affected while this case is pending. this is a debtor where the debtors inventory is cash, primarily collections of funds and servicing of funds. Its And
not a typical case where you know where your secured party is and you know whose property is whom. This is a case where
you have over 20 parties that may have funds involved in the centralized account, and right now, nobody knows exactly whose money that is and what those parties rights are. So
we were faced with the situation, one, obviously we need to get to the sales and liquidate this estate and do that in an orderly process to maximize the value for everybody including most of the same creditors who are claiming monies in those funds. We also needed a process to make sure everyone was
protected, that we didnt end up in a situation where two months later we say, Oops, we shouldnt have spent this, the debtor shouldnt have done this or that. This motion is Were
designed, basically, to preserve everybodys rights.
highly confident that this estate will have in excess of $200 million of unencumbered funds. I think debtors counsel did
not indicate to Your Honor that the DIP loan balance is
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 currently zero. The Citibank will be paid in full out of the
Carrington sale, and those services and advances are separate money they arent related to the monies were talking about. Its a separate account. separate to this. So, basically, Citibanks liens are
So the proposal is simply, as best we can The other
do - I should say one other thing, Your Honor.
issue were trying to avoid is we envision that within the next few weeks Your Honor would have literally 20 adversary proceedings filed and 20 TROs and 20 emergency motions all seeking basically the exact same thing that UBS and Deutsche have sought in this case. And so we could see that was going
to come down the pike very shortly, and we know where were going to end up, which is that all the parties are going to claim that theyre entitled to these monies that are there, and the debtor and the Committee are going to argue that, No, we think your claims may be unencumbered or some of those funds are the estate funds. In order to streamline that
process, avoid extensive litigation, a lot of time and expense both on the REPO participants and the loan purchasers part and on the debtor and on the Committees part, this motion was done pro-actively to cut out that litigation expense and try to preserve the status quo. and, Your Honor, I should mention a few other things in addition to what Mr. Logan mentioned. retroactive. The relief sought is So,
In other words, parties are being provided
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 adequate protection as of the petition date. So, were
trying to make sure that if anybodys rights were affected and they didnt move within the last - since the beginning of this case, theyre still protected. So its not a situation
where the first one who jumped into court is rewarded for that reason. So, the adequate protection is being sought
here basically goes back to the petition date and reserves everybodys rights. THE COURT: When is it expected that the Carrington sale will close? MR. POWER: The outside date is June 15, the proposed date is between the 7th and 13th. There is a
possibility that it will be extended a few weeks depending on regulatory issues or approvals by Fannie Mae and some licensing issues, but I think for sure it will be by the end of June. MR. LOGAN: Thats my understanding, Your Honor. There are discussions which Im not involved in, but what Ive heard is that its mid- to late-June. MR. POWER: Ive been involved in those discussions, Your Honor, and I can confirm that. The solution with Morgan
Stanley is, I think Id like to expand on that a little, Your Honor, so the parties in the room can see where were going and Your Honor can understand where were going. What we
envision is once we close the Carrington sale, setting aside
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 the balance of the cash as of the petition date, in an escrow account accruing interest, the debtor has promised with the assistance of the Committee, and I should inform Your Honor that the Committees financial advisors, as of a few weeks ago, have been onsite at the debtors premises working with the debtors financial advisors to go through the reconciliations and make sure this process is - basically were onboard with the entire process, and theyre doing that now. Theyve committed to finish the reconciliations by the Based on the experience weve
end of June if not earlier.
seen, a number of the REPO participants and mortgage loans will probably have questions either because theyre going to have loans where they didnt receive payment and the debtor doesnt reflect any receipt of payment, so theres going to be a certain amount of reconciliation process thats going to have to occur. But, if Your Honor would envision a process
over the next 30 to 60 days where basically the facts would have been resolved here because there should be any issue about whether monies were received or not received and where those monies are. Once the facts are resolved, we envision,
and actually over the next few weeks, envisioning getting the stipulation with all the parties which basically sets up a protocol where well basically try to brief these issues and brief the different parties legal rights, because I can tell you from having talked to a number of the REPO participants,
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 they are not interested in being encumbered in a long and lengthy process which could last a long time over, you know, whether or not this is their money or how much theyre entitled to. The debtor and the Committee are also not
interested in that kind of lengthy litigation process, but we have an issue where we probably have between 20 and 25 parties who may have rights under certain of these funds. we have to set up a system basically somewhat - an omnibus procedure where basically these issues can be brought before the Court. We can try to resolve them consensually, if If not, we have Your Honor So
possible, and then give notice. resolve the issues.
The overriding issue, of course, for the
Court and for the creditors is, if there are more claims than there is a pool of funds then it has to be determined how those funds are allocated, and that will be an issue that we either have to resolve consensually or litigate it before Your Honor, but thats what we envision doing over the next few weeks. We did support and really pushed the debtor to The Committee has basically stepped up its
file the motion.
oversight and review of the process and is trying to work through to make sure that in essence that everything thats happened in this case is not adversely affecting anybodys rights and making sure that as they existed as of the day of the filing, they still exist. And were confident that this
motion does that and preserves all the other issues to be
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 decided later, including the estates and the Committees issues as to what the estates rights are into these funds, and thats basically the motion thats before Your Honor, and the Committee supports that and asks you to approve it. THE COURT: At this point, what if anything, insofar as it can be determined, is left of the $42 million that was in that account at the inception of the 11? MR. POWER: Your Honor, my understanding is the bulk of those funds have been used to support the operations and continuations of the business. Some have been set aside.
Some have been used to maintain the business operations and continue the servicing business in those efforts. My
understanding is its post-petition, and weve confirmed this to the best we can, all monies collected that any party claims are their monies have been allocated and sent to blocked accounts, so were not dealing with an issue where its an ongoing problem. Its really a petition date issue,
but I believe the bulk of the money has been used, I think is fair to say, Your Honor. THE COURT: All right, thank you. MR. RAVAL: Your Honor, Abi Raval from Milbank Tweed on behalf of Morgan Stanley. I wanted to give a couple of
clarifications I think that weve agreed to as to the agreement with Morgan Stanley, the Creditors Committee, and the debtors, but before that, just state for the record that
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 there are a lot of legal arguments and positions set forth by the Committee counsel and debtors counsel. Suffice it to
say, we reserve our rights to object and disagree and when the appropriate time comes. With respect to the escrow
account, that will be an interest bearing account, and to the extent that one or more of the REPO participants or loan purchasers prevails in collecting monies from that account, the interest bearing on that account would go to that REPO participant or a loan purchaser. Secondly, we also
understand that anyones rights to seek additional interest, i.e., contract interest, however it may be under the various agreements is reserved with, obviously, the rights of the Committee and the debtors to object to that. We also
understand that the liability of New Century is not capped at the escrow amount, but may exceed that, if that be the case. Lastly, on the interpleader action, I think Morgan Stanleys concern is primarily not to be jeopardized by a first-intime, first-in-right rule. So we view the interpleader or
the stipulation that Mr. Power was speaking to be binding on all parties to the MRA purchasing agreements such that they would have to come into this Court if their disputes as to how to allocate this pot if we get there. To the extent, as
Mr. Logan had suggested that someone could file a separate motion for adequate protection, we do have an understanding with Mr. Power and Mr. Logan that Morgan Stanley will be able
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 to proceed at the same time that such other party seeks that motion for adequate protection or other such relief with regards to these proceeds. THE COURT: Thank you. MR. SUTTY: Good afternoon, Your Honor. Eric Sutty
of The Bayard Firm appearing for the Natixis Real Estate Capital, Inc. I would like to move the admission of my co-
counsel, Angela Summers of the firm Cadwalader Wickersham & Taft. She is a member in good standing of the bar of the A motion was filed earlier today.
State of New York.
THE COURT: Thank you MS. SOMERS: Good afternoon, Your Honor. THE COURT: Welcome. MS. SOMERS: I was a bit surprised at the debtors presentation. I suppose because we had heard as an
explanation as to why they needed more time that they had an enormous reconciliation process to engage in. With respect
to Natixis, which is a relatively small claimant and is full of claimants, theyre owed about $1.6 million that was held in trust. Although we are not a large player, our records We You
show that the reconciliation is a two-minute process. received some principal payments. You look at a chart.
know that there are matching interest payments. that they were received. clear to me.
They know
You know, a one-page sheet made it
With respect to some other payments that we are
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 owed principal, again, they were pre-paid, they have loan numbers, you match the loan number, bingo, you know that money is ours. The focus of the motion was not give us time
to argue that this money is not yours because the trust has been broken and its property of the estate. That would have
been a more honest way to approach this, and then we would know where we stood. The long recitation about trust I suppose that
property, et cetera, made that clear to us.
theyre going to spend this month really developing that argument. I havent seen a witness who got up and talked
about the enormous process, how its confusing, how the companys been working around the clock, nothing of that sort. So, from what we can tell, you know, we have people at
Natixis who could come in and have viewing access to the website or the servicer file and determine in very short order what theyre owed and what other people are owed. So
theres really no complicated reconciliation process here. They want a month to develop the trust argument, and I guess thats a little bit surprising to me because I saw that as sort of a grey area. issue number one. They wanted to hash it out, so, thats
Our position is that the document said, Theyre taking
whatever money they received is our money. this money on behalf of us as buyer.
We own property, Whether or not
theyre collecting some monies on it for us.
their trust argument holds if theres any way to break this
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 trust, that if the monies didnt flow, if they get to be rewarded now for having, you know, taken it from the blocked account, transferred it to another account, or used it for their general funds, or used it to survive, is a question for another day, I suppose, and in the meantime, they want to offer us adequate protection on all the remaining assets that are available. against that. That certainly doesnt harm us. Were not
How much protection is provided is pretty Were
nebulous, but, you know, well take it, I suppose. happy to see that a deadlines been put on it.
I think the
attorney from Milbank clarified it, it will be in an interest bearing account. We believe interest accrues on this money
under our underlying documents, so we want to continue to have the right to contract interest. We want to understand
how the debtor will use this time, maybe more specifically. We also ask that if there are any reconciliation issues that they are unable to resolve, vis-a-vis, Natixis, that they give Natixis viewing access to the files so that we may help them determine very quickly how much money we are owed. think that would clarify the process. We
We continue to contend
very strongly that were subject to the safe harbor provisions of the Bankruptcy Code. To our knowledge, we know
of no other sub-prime lending case in which the debtor has tried to grab hold of these funds and use them for their general corporate purposes. This is an extremely novel
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 argument. It calls into question the entire, you know, REPO
market, the structure of these kinds of financings, and as I said, its not been tried in any of the other cases, in any of the other cases, the REPO participants structure was respected and they quickly went in and they exercised their rights under the safe harbor provisions and were able to preserve the rights that they expected to be preserved in bankruptcy. So, I guess in summary I would say that I am
happy to see that theres a timetable as we too requested put on this process, that the money will be in an interest bearing account. We would like the debtor to let us know if
there is any reconciliation issue left outstanding and contact Natixis. We contacted the debtor several times. We We
didnt get any real clarification on the reconciliation.
tried, you know, really no real information flowed back and forth. Now we are in possession of the real information. It
was not easy for us to get, and wed like to proceed with that process and hope that by that point in time, you know, theres no more delays. Were a little bit confused as to
the preservation of peoples rights to continue to pursue their remedies, file complaints, et cetera, et cetera, and how this process is really going to slow that down or get that under control. My understanding is that no party can
have access to money as a result of a judgment or something to that effect, but parties can continue to pursue
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 litigation; is that correct? I dont know.
MR. LOGAN: Im sorry, I wasnt listening. MS. SOMERS: Im asking if parties will be able - if theyre going to be able to continue to pursue litigation on what have you accomplished during this 30-day period other than people cannot get a judgment and access, you know, to debtors funds to satisfy it. Im not exactly sure. You
said that people could continue to file adequate protection motions and to file other, you know, lawsuits or actions against the debtor in an effort to protect their rights. Those were not stayed; is that my understanding? Is it -
MR. LOGAN: Your Honor, we are not waiving any rights we have under the Bankruptcy Code. If people try to
bring actions to foreclose on mortgage loans pledged to them if they think that theyre within a safe harbor, just like they have from the start of the case and indeed many have, if people want to bring a motion before this Court, were not preventing them from bringing a motion before this Court or file an adversary proceeding before this Court with full reservation of all of our rights to defend it including the additional argument we would have that we have already provided adequate protection by virtue of this - I hate to use the word voluntary again, but a proactive effort where weve given people all the adequate protect thats available, coupled with the additional procedure that we discussed out
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 of the Carrington proceeds. Thats all I meant by that.
THE COURT: And I take it that while the form of order has developed since that which has been filed and which I reviewed, it doesnt say that the REPO parties cant do anything; does it? MR. LOGAN: It does not. The interpleader action
might, Your Honor, but thats down the road. THE COURT: Yeah, okay. MS. SOMERS: So, I suppose, Your Honor, in order to, you know, further protect rights, a REPO party could file an adversary proceeding in relation to these trust fund issues. THE COURT: Well, the form of order that Ive seen doesnt preclude that, and Im being told that the order as its being revised doesnt preclude it either. MS. SOMERS: Okay, Your Honor, and with that, Ill conclude that any protection provided is welcome so long as its interest bearing, segregated. We continue to contend
that the money is ours regardless of where it went, and that the debtor should not be rewarded for having sent it to the wrong place and spent it. THE COURT: Well, so that Im clear about the status of your objection, I take it from what you say that youre amenable to having your clients situation covered by the form of order thats being worked on based upon whats been represented today to the Court will be in it.
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 MS. SOMERS: In part because I just found out that all the moneys been spent. THE COURT: And as have I, and I guess my thought is, since the horse is out of the barn, it strikes me that given the concerns that youve expressed, what the debtor is offering is, assuming the Carrington sale closes timely, the best that you could expect under the circumstances. MS. SOMERS: Exactly, Your Honor. THE COURT: Okay, thank you. MS. SOMERS: Thank you. MR. JAFFE: Good afternoon, Your Honor. please the Court, Henry Jaffe. PLC. May it
Im here for Barclays Bank
Your Honor, this morning we filed a couple of motions Both Ken
pro hac vice for my co-counsel in this case.
Coleman who is here as a partner at Allen & Overy is admitted in good standing in the bar of New York, and also his colleague Mr. Dan Guyder. Id like to move for their
admission and ask for your permission to have them appear today on this matter. THE COURT: Very well, welcome. MR. COLEMAN: Thank you, Your Honor. Allen & Overy on behalf of Barclays Bank PLC. Ken Coleman of We filed an
objection, and I dont intend to rehash what is in our objection. Your Honor can read it. THE COURT: I did.
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 described. MR. COLEMAN: Now, whats extraordinary about that, Your Honor, is that if you look at these facts in the most charitable form from the debtors perspective, on a best case basis, this was cash collateral, and the Code says you cant MR. COLEMAN: Thank you. There was no information
in the motion, as far as we could discern, to demonstrate that this was cash collateral. cash collateral. Adequate protection goes with
So you need to have cash collateral before
the discussion of adequate protection even becomes relevant. What we did hear is that Barclays money may have been commingled with Morgan Stanleys money and other THE COURT: Well, what youre hearing is that it was commingled. MR. COLEMAN: Yeah, but THE COURT: Not that it might have been. MR. COLEMAN: But that my money is commingled with Morgan Stanleys money doesnt make it the debtors money; okay? And Im not sure - I mean, I did hear that the moneys
been spent, which kind of forces all our backs to the wall on this and leaves us with very little choice, but Im not sure if I heard the money was spent only pre-petition or if the money was also spent post-petition, which of course raises a very serious issue. THE COURT: I heard post-petition as it was
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 use cash collateral unless you get the consent or your get a court order, and were hearing about this in virtually June for the first time. collateral at best. So there was an unauthorized use of cash It could also be outright conversion of I do agree with the notion that
other peoples property.
under these circumstances and with a full reservation of rights for everybody, including on the unauthorized use of cash collateral, that there needs to be a collective process. Its the only thing that makes sense here, and were onboard with the notion. Were not onboard with the details because
they havent been shared with us yet, and we hope to be involved in that process. But I would like to point out that
the case law on this issue is not, as was described to Your Honor. I mean, the Bevill Bresler case, which is 20 years
ago decided in the District Court of New Jersey held that assets subject to repurchase pursuant to what was then the PSA form, which is now the BMA form, which is what everybody uses, that those assets are truly sold, and once the mortgages are truly sold, it goes without saying that the proceeds from those mortgages are also owned by the purchaser of the mortgage. So the sort of smoking mirrors effect in
the motion and in Mr. Logans presentation today I think is not representative of the state of law. Theres Bevill
Bresler, theres the Drysdale case, SEC v. Drysdale, and theres Granite Partners, and those cases hold that assets
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 held subject to repurchase are truly sold. Theres not one
case that Im aware of which held otherwise and the suggestion that Bevill Bresler somehow was different and that it held something different from what the Court in the Southern District of New York held in Granite Partners is just not accurate. Now, in terms of process, and we hope to,
you know, start being involved in that, but one thing that you know, I know Mr. Power is a careful lawyer and he was very helpful this morning before court explaining a few of these facts to me, but the one thing that does not give me comfort that he asks the parties to take comfort in is that the Committee who wants all of us to be unsecured is watching over the debtor who thinks were all unsecured. So this is
not a comforting fact, and I think we need to talk about some procedure whereby we can get comfortable as the purported owners of money that the accounting is appropriate, and I will say, I havent seen it, but my understanding from my client is that pre-petition in the ordinary course data was provided which made it very simple, I think as Ms. Somers understood as well, which made it readily apparent on a loan level basis what money came in and which counterparty its attributable to. We havent seen that, and thats why in our
papers we try to guess at what we think should be turned over to us. We havent seen the loan level detail, and we assume
that the accounting process and the reconciliation process
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 thats ongoing and is going to produce some data will be at the loan level of information. So, I guess in short, you
know, we have no choice but to go along with a collective process. Well take a look at the data. Well reserve our
rights to object to the data and to the inferences drawn from the data. Wed like to be involved. I mean everybody seems We
to be reasonable people involved in this proceeding.
would hope that we could agree collectively on a sensible cost-effective process, but we think that the form of the order might take some time to agree among all these parties. So, we ask that no order be entered today on this subject until we all have the ability to review it and comment. THE COURT: Sounds to me like youll have that opportunity. MR. COLEMAN: Thank you, Your Honor. THE COURT: All right. MR. LOOMIS: Good afternoon, Your Honor. My name is
Gaston Loomis, and Im with the Wilmington office of Reed Smith. I would like to move for the admission pro hac vice
of Claudia Springer whos in our Philadelphia office, the managing partner of our Philadelphia office of Reed Smith. We will file papers if we havent already done so. THE COURT: All right, thank you. Welcome. Claudia
MS. SPRINGER: Good afternoon, Your Honor. Springer for Indymac Bank.
I represent the mouse that
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 roared, I guess. The creditor here that - Well, not the
creditor but the entity here that has perhaps the smallest claim but somewhat of a unique situation. repurchase participant. We are not a The debtor
We are a loan purchaser.
never even made the argument in its papers that our funds were property or ever property of this estate or that they constituted cash collateral, and thats because they did not. The debtor, contrary to the assertions by Mr. Logan customarily, after loans were purchased outright, as my client did, sent the payments that were made by the individual borrowers directly to Indymac Bank in the form that they were received. deposited at all. The funds were never to be Why?
They were to be turned over.
Because they didnt - the debtor had absolutely no interest in those funds, was never supposed to take possession of them, was never supposed to deposit them in any of their accounts. What occurred here, I believe, was a conversion of
our funds and while we applaud the debtors efforts and the Committees efforts to try to come to some sort of resolution of this, at least a temporary one to protect interests of various parties as much as they possibly can, we do want to draw that distinction and certainly may seek to be treated differently than other parties because we view our situation differently. Having said that, we were a little bit
surprised when we came to court today because I have had
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 conversation with Mr. Logan prior to today. One of the
reasons that we did not immediately file a complaint is because we have been trying to work with the debtor to try to do something to resolve this situation. I might add that we
believe that some of the funds that are in question as far as Indymac is concerned, came in post-petition, not prepetition, and Ive already talked to Mr. Logan about setting up a procedure to trace those funds, because we believe that those funds should automatically be turned over to us if in fact they were received by the debtor post-petition. However, we do want to certainly participate in the process of reviewing the form of order. our rights. We want to reserve all of
We agree with the other parties that to the
extent that payments are not made when they should have been made that interest will accrue at the contract rate, and we ask to be included now in the process of reviewing any form of order and passing on any form of order that is presented to Your Honor in connection with this motion. THE COURT: Thank you. MR. CHESELY: Your Honor, Richard Chesely, Paul Hastings on behalf of UBS. I guess its somewhat ironic that
were going last because were certainly the subject of I actually think what transpired with respect to this motion. If I could, Your Honor, I want to seek a little clarification, then just make two quick observations. First
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 of all, we filed a limited statement really as it relates to UBS because we do have a hearing set. Yes, we were first in
line, and, Your Honor, were not going to apologize for exercising our rights. In fact, with what we have heard here It has
today, it was appropriate, it was prudent to do it.
put UBS in, I would say, a unique position vis-a-vis some of the other parties today. There is nothing in the form of
order that continues or stays our hearing that is set for June 15th. Wed like to get some clarification that in fact
that is correct because obviously we are pursuing down that path with a number of issues with the debtors and with the Committees involvement and obviously before we go down that, wed like that clarification. MR. SUSSBERG: Quick statement, Your Honor. I
actually want to agree with Mr. Logan if what he said is post everyone else. of Citigroup. Josh Sussberg from Kirkland & Ellis on behalf We had filed a limited objection just to make
it clear that the replacement lien thats being granted is subordinate to Citigroups lien and the advances, and I believe the form of order will reflect that. Honor. THE COURT: All right. MR. CHESELY: Yeah, if you can clarify that. I Thank you, Your
didnt hear that, I heard a little bit of that, but I wanted to make sure that we understand where we stand with respect
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 to the hearing on the 15th. MR. LOGAN: Your Honor, theres nothing in this order that says that - effects one way or another of their hearing date. MR. CHESELY: Thank you. THE COURT: Without, I suppose, prejudice to the debtors position that it ought to, but thats for June 15th. MR. CHESELY: Thats for June 15th. THE COURT: Understood. MR. CHESELY: If I could, Your Honor, there is one point I do need to clarify based upon what we heard today and that relates to the issue of the reconciliation, and I think its important certainly for UBS and it may in fact be for the other participants here that this is not solely about the money. Yes, thats a significant piece but at least for UBS This is about the
we have a sense of what that is.
information as well, and whats important about that, Your Honor, is the history underlying 559 of the Code made clear that Congress intended for counter-parties to repurchase agreements such as UBS to be able to liquidate their property without the delay caused by the insolvency of that other party. Yet that delay is what is really the driving force
behind this, Your Honor, and with respect to the reconciliations, weve heard today now theyre look at the end of June to provide this information. UBS was here in
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 April. Were supposed to get the information in April, again
in May, and now were hearing that this information - I dont know whether this relates to UBS or not, may not be available until July. This is information that youve heard from party
after party that is routinely provided on an hour basis, not a week basis, and the problem, Your Honor, is that without this basic information, at least UBS is not in a position to liquidate its loans, and without that, Your Honor, there is a status quo. Unfortunately it is not the status quo that
Congress contemplated with respect to 559, and thats why its imperative at least for us to proceed before you on the 15th. Thank you. THE COURT: Before we go back to the debtor, let me just ask if anyone else cares to be heard. MS. SCHONHOLTZ (TELEPHONIC): Your Honor, Margot Schonholtz for Bank of America. briefly. Im with Kaye Scholer. Just
Contrary to what we expected today, Mr. Logan
argued the merits at length and that was not to be the purpose of todays hearing. Were also hearing for the first I
time, as are others, that the money has all been spent.
dont want to burden todays record with a response, but we cant let it go unanswered either, and we need to reserve all of our rights pursuant to our discussion with the debtors counsel and Committee counsel and as set forth in the proposed order that we saw last night. We understand
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 listening today that there will be serious revisions to the order, and our support of this motion is based on our agreement to the revised order. THE COURT: Thank you. MS. SCHONHOLTZ (TELEPHONIC): Thank you. MR. GALLO: Good afternoon, Your Honor. Andrew
Gallo from Bingham McCutchen for DB Structured Products. Ill just echo the same comments that we just heard from the counsel for Bank of America. protection motion. We do support the adequate
We have not seen the order thats been
discussed today that includes the compromised negotiated with Morgan Stanley so we would reserve all of our rights with respect to the arguments made on the record today and to review that particular order. Thank you, Your Honor.
MR. LOGAN: Your Honor, let me address first off again some things the motion and the order do not try to do. Post-petition collections, as counsel for Indymac indicated, to the extent monies have come in post-petition, the debtor certainly has intended and believes has turned over those proceeds to anybody who either is a REPO participant or a loan purchaser. Indeed, Ive been told, that to the extent
hard checks have been sent and have been FedEx-ed off the next day. If theres a problem with that, let us know. We
are not seeking to do anything with respect to post-petition collections. The second thing were not trying to do is
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 affect blocked accounts. To the extent a REPO participant
had a blocked account and monies were deposited in that blocked account, by and large, they have taken the money out of the blocked accounts, and sobeit. What were talking
about is a situation - and I want to illustrate some of the quandary we face by using the Natixis or Ixis as theyre commonly called as an example. Natixis filed with its
pleading a copy of its master repurchase agreement, and Section (5)(a) of that agreement provides that the buyer agrees that the debtor can continue to collect monies and deposit them pursuant to its normal procedures until theres an event of default. what it says. Im paraphrasing here a bit, but thats
That is fairly commonly used in agreements,
and thats why the reconciliation process is one that takes more than just an hour to, and UBS illustrates it. Mr.
Chesley complains mightily that the debtors did not provide a reconciliation to UBS. to UBS. The debtors provided a reconciliation
UBS didnt agree with it, but thats a different
issue, and the principal issue with UBS was what is the status of monies that came in during the first part of March when people make their normal monthly P&I payments, principal and interest payments, and it went not into any blocked account as was past practice. collection account. It went into the general
UBS thought that the reconciliation the
debtors provided was inappropriate because it did not show
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 that those monies went into a blocked account or should have gone into a blocked account. should have. Debtors dont think that they
We are not opposed to having everyone reserve
their rights with respect to issues of that sort or providing that sort of data, but that is the kind of information that no one just doesnt push a button and suddenly the data appear. I wish that it was a simpler process. Quite frankly
its taken me a long time to understand, and I probably dont fully understand the complexities. Like I said at the outset
and Barclays is going to illustrate this point, we didnt think that this was a serious issue when the case was filed. Perfect hindsight we would have proceeded far differently. And Barclays really does illustrate that. Barclays is quite
a bit different than the other REPO participants because prepetition, on March 16th, theres an agreement reached with Barclays that they reference in their papers as a walkaway agreement, is what its commonly called, where Barclays agreed that it would take its loans, go off and do with them as it saw fit, and waive any deficiency claims against the debtors. The quid pro quo was that the debtors and Barclays
would do an accounting so the collections received of interest on those loans from March 1 to March 16 would be for the debtors benefit compared to the quote, price differential, which is the amount that - the proxy for interest under the warehouse loan facility, and whoever owed
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 fold. the other money and it wasnt clear at the time who would whom what and indeed the debtors thought the chances were quite high that Barclays would owe the debtors money, would pay the other. Barclays now believes that theres, I think,
approximately a million six that was owed to them based on that reconciliation, but its not a current repurchase facility. It may be a general unsecured claim, given the
nature of the walkaway agreement, but again, it illustrates the fact that these are not simple matters. Getting down to We
the final point though, Your Honor, we are where we are. are offering to give the warehouse - the master repurchase
participants every last shred of adequate protection we can give them, the same thing for the loan purchasers. THE COURT: Well, let me ask you about that. MR. LOGAN: Sure. THE COURT: One of the objectors argued that the best position that the estate would have or that the debtors would have would be that these were secured claims rather than someone elses property, and if that were the case, the argument went just now, that you were using cash collateral without either consent or an order of this Court. respond? MR. LOGAN: Your Honor, the response is, is several First off, there are serious issues as to whether or Can you
not its cash collateral including the springing lien issue I
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 mentioned. But, Your Honor, like I said, if we had known
that there were claims in excess - if we had known that there were material claims at the outset of the case, we would have proceeded far differently. THE COURT: Well, let me ask you another question. Why shouldnt I make this an inquiry for the examiner? MR. LOGAN: Well, Your Honor, I guess because we will provide to each of the parties that are subject to the motion all the data - We certainly are willing to share that with them. They are going to have their views on the data.
They also are going to have their ability to bring actions if they deem it appropriate. The parties will have the ability
to question - I guess the bottom line, Your Honor, is that we are willing to put into an escrow account the full amount of cash that was there on the petition date. the situation once it developed. Were dealing with
If the examiner - I dont
know what the examiner would add to it, quite frankly, Your Honor. We have parties whose interests are at stake who are Its an issue over dollars, and I
fighting over dollars.
dont know what the examiner would add. THE COURT: Well, given some of the arguments that have been made today, while I would acknowledge that the center of the dispute for the parties may be the dollars, Im kind of scratching my head from the Courts standpoint in terms of the argument about the unauthorized use of cash
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 collateral. It troubles me for reasons which Im sure are Okay, anyone else care to be heard in
obvious to you.
connection with this motion? MR. POWER: Your Honor, just one quick point. wont belabor the issue. I
In connection with the examiner, I
will tell you they havent talked to a number of the parties involved in this. Everybody wants an expedited and As soon as the
streamlined procedure to try to resolve this.
Committee identified this issue, we jumped right on it and today were here before Your Honor primarily as a result of those efforts. A lot of the reconciliations have been done
and I want to assure the Court and some of the parties that at least the Committees financial advisors are there and theyve been working with AlixPartners to make sure its done. The issue is that theres a cutoff date, a shift
notice in the middle of March which makes it difficult to reconcile all of the numbers. I will also tell you basically
what Ive heard is the debtor believes the numbers are, you know, X, and a lot of these other parties give a Y number. So theres obviously a certain reconciliation process thats going on to resolve those two. To us and the Committee, the
first issue that well have to resolve by this Court is the issue of, is the maximum amount of claims the amount of cash that existed in the account as of the petition date, because if it is, then we have a fundamental issue as to how that
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 money is divided among any valid claimants. If its not and
parties are entitled to a certain more, then its kind of an individual process that will be determined by individual litigations. So the way we envision this going forward, is
that threshold issue would have to be resolved and we would work out a procedure to do that. to end up. So thats where were going
But I want to assure the Court that the Committee
is well aware of the issues and is making sure that it is trying to oversee and fulfill its obligations to this Court in making sure this process is done correctly and that nobodys injured. THE COURT: Well, I dont mean in any way to disparage the Committees efforts in this connection, but while various parties have various duties to the Court, at center youre working for your clients. for me. The examiner works
So, it offers a little bit of a different
perspective, maybe, and thats why Ill tell you now Im going to consider it. MR. POWER: We understand, Your Honor. Our view is
that since we hope to have the reconciliation done within a few weeks, well know very well whether we have significant issues regarding the accounting and whats going on, and that that issue may be better just simply deferred because - to not have an overlap on top of it because I think the Committee wants to get the facts straight, have everyone
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 agree to the facts and basically decide what the legal issues are. THE COURT: All right, thank you. MR. POWER: Thank you. MS. SCHONHOLTZ (TELEPHONIC): Your Honor, Margot Schonholtz for Bank of America, briefly. I would never
quibble with Your Honors statement that an examiner might or might not be appropriate. I would only request that whatever
Your Honor decides not delay the process for reconciling and distributing funds to parties like BofA and others who have been disadvantaged in part by this process already and are trying hard to get their money in a way thats not litigious and not costing the estate money. THE COURT: All right, thank you. MS. SOMERS: Your Honor, only because we recite as an example, Id like to clarify one point. The Natixis
agreement regardless of the provision that was read into the record by the debtors counsel, said that at all times any monies received are property of Natixis, number one. Number
two, in terms of more specifics, we sent a notice of default out in early March. At that time we sent a notice that said That notice was
all monies must go into the blocked account. violated.
The majority of monies were seeking to collect The money was not
were received after that point in time.
put in the blocked account, and as far as I could tell, it
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 was spent post-petition. for the debtor. So the facts here are not very good I think under the
Id like to clarify that.
circumstances, the money should have been put in the blocked account, and we shouldnt be, you know, faced with the dilemma were faced with today. With respect to the
examiner, I would only say that were seeking clarity quickly, and we want it in the most cost-effective way and defer to Your Honor as to whether an examiner is an appropriate way or not to do that. THE COURT: Understood. All right. Mr. Logan, I
take it that what the debtor anticipates doing now is continuing and concluding its discussions with the various parties who are interested in this matter, resulting hopefully in a form of order to which everyone can agree, and that that will be submitted to the Court under certification or do you anticipate further hearing. mechanically wishes to address this. MR. LOGAN: Well, Your Honor, in the first instance, we would certainly hope it will be a fully consensual order, and well endeavor to do that. If that doesnt prove Tell me how the debtor
possible, I guess well have to have a further hearing. THE COURT: How long would you anticipate the discussion process will take? MR. LOGAN: I hope not very long. I may be
inappropriately optimistic, but I would hope that we would be
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 matter? able to resolve that by the end of this week or early next week. THE COURT: Well, shall we put this over to the 15th for a status anyway? MR. LOGAN: Thats fine. THE COURT: In case something good doesnt happen in the interim? MR. LOGAN: Thats fine, Your Honor. THE COURT: Okay. Shall we move on to the next
Have we in essence addressed the UBS adversary or is
there more to be told? MR. CHESELY: Your Honor, Richard Chesely. nothing else for today. continued. THE COURT: All right. whats now item 29 on the agenda. Okay, lets move on to After the hearing on the Theres
The status conference has been
U.S. Trustees motion, I received a letter from Mr. McMahon dated May 25th and a response from Mr. Merchant with respect to whether a specific suggestion made by the U.S. Trustee should be added to any form of order which would be signed. So, I wanted to talk with the parties about that today before actually entering an order, and Ill give the first opportunity to the U.S. Trustee to be heard. MR. McMAHON: Your Honor, good afternoon. McMahon for the United States Trustee. Joseph
After the May 24th
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 announcement by the debtors, I think its no surprise the reason why our office wrote to Your Honor regarding the subject. Basically, we have a simple point. An examination
has been authorized.
I think that the concern of the Court,
the United States Trustee, and the parties in interest is to insure that the examination be complete as to the concerns and issues that have been raised by the debtors financial statements and accounting matters. And with respect to that,
Your Honor, there are, I guess, two concerns, one dealing with time frame, the other dealing with scope or substance that we want to insure that the proposed language dealing with scope address. First, with respect to time frame,
certainly the announcement last week by the debtors raises the question of when did this all begin. We have now heard
that the apparent conclusion of the debtors is that the 2005 financial statements have been implicated by some of the same issues that led to the need to restate the 2006 financials, and certainly we want the examiner to be able to address these issues, the genesis of them, whether they take us back into - and Im just hypothetically stating, Your Honor, the third or fourth quarter of 2004. If the examiner needs to go
back that far, if the examiner needs to comment on the integrity of the financials for periods outside of the ones that the debtors have identified to date, then the examiner should have that latitude. The second, Your Honor, goes to
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 the issue of substance, and certainly the debtors announcements specifically with respect to the 2006 restatement, Your Honor, identified the key issues that led to their belief that there was a need to restate the financials. We want the - As the proposed language that we
submitted to Your Honor in the letter suggests, we want the examiner to have the latitude to comment on any errors, any irregularities in the accounting of the financial statement, and I think its important to note, Your Honor, now that that latitude should - is necessary because it seems to our office readily apparent that the scope of the period in question is expanding, and we dont know necessarily whether there are new and distinct issues that 2005 present, that, you know, carried over into 2006 or maybe there are similar issues. The bottom line is that the examiner should have the ability both from the standpoint of time frame and from the standpoint of substance to do the work that the examiner needs to do. We believe that the proposed language that we
submitted, Your Honor, which I think simply adjusts the language such that to allow the examiner to do the job that the examiners being charged with doing is appropriate. just added the words, including but not limited to such irregularities, errors, or misstatements. We believe that We
that language will take care of the substance and time frame issues that I identified on the record today, and the
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 inclusion of Romanet II, the reference to the 2005 financials, certainly addresses the announcement of last week, and specifically, Your Honor, a third point that was raised in the context of this hearing, our office would fully support the inclusion of issues relating to the alleged dissipation of funds that have been addressed here on the record, and our proposed language gave the - at the outset and the scope that we argued for at the hearing on May 21st, gave the examiner full authority under 1106(a)(3) and (a)(4) to do what the examiner needed to do, and without going back and trying to, I guess, re-craft language that would encompass, you know, concerns that the Court raised here today, perhaps it would be appropriate that that language be left as is and the examiner be given direction as to the Courts concerns with respect to the issues that were raised in connection with the adequate protection motion argued before Your Honor here today. So, I hope that the Court has
a clear understanding as to the reason why we wrote last week. We fully believe that the - an expansion of the
language from what we argued on May 21st is appropriate, and, Your Honor, we would fully support the suggestion that the scope of the examination encompass the matters that Your Honor raised today and would suggest that in response to the concerns of the parties or whether, you know, the practical issue of addressing the bankruptcy issues going forward can
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 go hand in hand with the examination. We believe they can.
In other words, the examiner can look into the issue of why and how while the parties work towards a resolution that addresses their economic issues. So, unless the Court has
specific questions for me, that would conclude our presentation. THE COURT: Thank you. MR. LOGAN: Your Honor, on the scope of the examiner, the debtors also sent a letter to the Court. We
dont have any problem, any concern about including within the examiners scope or issues related to the 2005 financials, and we think that that was already incumbent or inherent in the prior language. If theres any issue about
that, we dont have any concern about making that express. The debtors, as they were investigating the implications of the 2006 restatement concluded that the same issues might affect 2005 and we think, therefore, its inherent to what the examiner was going to do, but we have no problems with making it express. About the only other thing I would say,
this kind of goes back - it does go back to the other issue we just left. I would urge the Court to hold in abeyance any
expansion of the examiners scope to look at the issues involving the repurchase participants until we finish that process. I think you heard them say that slowing down the If the Court concludes later
process would be inappropriate.
83 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 its appropriate to expand the examiners scope of work sua sponte the Courts certainly free to do that or their request. But on the issue that the Court had on the agenda We dont
today, I think its a word-smithing issue only. have a conceptual problem.
THE COURT: Well, heres my thought about that and it is, I like words to be complete within their four corners, and I think the U.S. Trustees proposed language does that. The debtors suggest that the order refer to announced errors. Well, theyre not, you know, that could be subject to interpretation. So Im inclined to go, for that reason, with
the U.S. Trustees language, but before I did I wanted to give the debtor a chance to talk to me. MR. POWER: Your Honor, Mark Power from Hahn & Hesson, Committee counsel. The only issue that the Committee
had with the language, we understood the order to already cover, quite frankly, all the facts that gave rise to the restatements, and that would go to the prior periods. The
problem with the U.S. Trustees language is that its rather broad and could be read to basically require an audit, a reauditing of both the years financials completely because it basically says that the examiner is charged with basically examining everything in connection with all the financials of 05 and 06, and we didnt understand that basically the Courts decision or the parties understanding to be that.
84 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 also. It really related to the specific issues as to why theyre being restated because the expense and cost and delay of basically doing an whole new audit for 05 and 06 would be tremendous and basically of little value to the estate or the Court or even the government to the extent it has an interest. So our view was that we have no problem with
including the language regarding looking at 2005, but we would rather the language not be so broad as to basically be read to basically require a new audit and basically investigate everything thats ever done in connection with two years of financials, which could be interpreted as the way the U.S. Trustees language is as drafted. THE COURT: All right, thank you. MR. LOGAN: Your Honor, just one brief footnote, In looking at the language the U.S. Trustee proposed
and it relates to a slightly different issue that there was colloquy on at the last hearing, and that is the examiner, under their language, would also identify and evaluate claims the creditors might have, and if I remember correctly, there was a lot of dialogue about the appropriateness or inappropriateness of that and certainly keeping under seal anything because you dont want to have a public document that says either a claim is weak or a claim is strong or weighs the pros and cons. So, just as a footnote, just - we I think the Court
would urge the Court to be cautious.
85 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 indicated the Court was going to craft its own order by taking language from both, but on that particular point, I think its important for all of our interests to make sure we dont have a public statement of the strength or weaknesses or causes of action against third parties that might adversely affect those causes of action. THE COURT: Well, I guess we live in a world where anything can happen, but it would be shocking to me if an examiner who thought there were claims, would evaluate them in a public filing. I find that kind of even beyond remote Mr.
in terms of a possibility, but I understand the concern. McMahon?
MR. McMAHON: Your Honor, a couple of things briefly in response to Committee counsels concern. Consistent with
the idea that the examination will have some focus and that there are costs-related concerns, I dont think that anyone is contemplating the examiner, I guess, redoing the 2005 and 2006 financials himself or herself. THE COURT: And I hadnt contemplated that either. MR. McMAHON: So, with regard to the issues raised by debtors counsel and in response, I would just note that I think we made our point about that pretty clear on May 21st, meaning that, we do believe that the examiner will discharge his duties with respect to evaluating claims and causes of action carefully, and that I do believe that the record is
86 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 clear that our office even indicated that some type of procedure, you know, in terms of addressing matters with the Committee and the debtors we expect the examiner is going to be conversing with those parties. THE COURT: Let me - There is one other thing that I did want to discuss with the parties and that is the, I guess, Ill call it protocol that was anticipated in the form of order that was submitted by the debtor and the Committee, assuming I enter an order by the end of the week, how long will it take the U.S. Trustee to appoint an examiner? MR. McMAHON: Your Honor, could I just have a moment to consult? THE COURT: Yes. MR. McMAHON: Your Honor, we believe that wed be able to submit the application within a couple of days. THE COURT: All right, because I tend to agree with the U.S. Trustee that the procedure for outlining what the examiner intended to do was a little bit too controlling, but I thought it might not be a bad idea to require that the parties after appointment meet and confer and discuss those issues, and I just - the question I have for the parties is, would it be helpful for after such a meeting for the parties to come back on a status basis and just tell me what the result of that meeting was and to give the parties whatever aid they might need to have the process move forward as
87 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. efficiently as possible, and I dont mean to micro manage it, and I dont mean to interfere with what the order will say the examiner should do, but I wanted to ask you whether you thought that would be helpful? MR. LOGAN: Your Honor, absolutely. I think if the
examiner and the Committee and the other parties, the debtors can reach resolution then thats super and pieces broken out, and if not, we can give a status report to the Court, but I think that makes eminent good sense. MR. POWER: Your Honor, the Committee agrees with We think it might be helpful. We obviously - In
connection with the 2004 the Committees doing, we envision sitting down with the examiner and going through and coming up with some kind of a reasonable arrangement. So I think
having a status report and the U.S. Trustee would want to be involved that, I know the debtor is, we think makes perfect sense. THE COURT: Mr. McMahon? MR. McMAHON: Your Honor, we have no objection to the examiner coming in for, I guess, an initial status conference before the Court. THE COURT: Would that be the - would the June 15th hearing be too soon? MR. McMAHON: This is under the assumption that the order would be entered by this Friday?
88 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: Yes. MR. McMAHON: I think that would work for our office, Your Honor. THE COURT: Okay. Im seeing a nod of assent from All
Committee counsel and the debtors okay with it as well. right, Ill build that into the order. conclude our agenda items for the day? Okay. Does that
All right, I have a
couple of things - if it does, I have a couple of things that Id like to - Court housekeeping matters. I had asked for
recommendations from the parties for a fee auditor, and I received two, and for reasons which should draw no negative inference from anybody, Ive decided not to accept either of the recommendations and ask that I receive further recommendations, particularly from the U.S. Trustee, but Ill ask that by Friday of this week, June 1st, if the parties will submit, and you can submit them by e-mail if you prefer to my chambers e-mail address, the names of at least a couple more, and I emphasize nobody should draw a negative inference from my declining to take the suggestions that have been submitted. Okay. The other issue I wanted to cover is, I
understand theres been a request for an additional hearing date during the week of June 25th. We have a hearing set for
June 27th already, so, my question is, why isnt that good enough? Maybe theres a good reason, but this would be an
opportunity for you to tell me why in person.
89 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 blank.) Mr. Ramos. MR. LOGAN: Your Honor, I know that there are some sale motions that are coming up and THE COURT: Scheduled for June 21st at 2, and I understood this further request was as a follow-up to something in connection MR. LOGAN: We have a status call almost daily, and I heard that June 21st related to the sale motion. loss, Your Honor, as to say I really dont know. guessing. (The remainder of this page is intentionally left Im at a Id be MR. LOGAN: Your Honor, since Im not aware of the request, Im at a loss. but Im not aware of it. THE COURT: Nancy, who did we get the call from? It could have come from my office,
90 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 /s/ Elaine M. Ryan Elaine M. Ryan 2801 Faulkland Road Wilmington, DE 19808 (302) 683-0221 June 4, 2007 I, Elaine M. Ryan, approved transcriber for the United States Courts, certify that the foregoing is a correct transcript from the electronic sound recording of the proceedings in the above-entitled matter. THE COURT: All right, well, dont guess. someone get back to Ms. Hunt, please. Just have
If its a real
problem, Ill consider the request, but my preference would be to use the 27th, if you can. for today? adjourned. UNIDENTIFIED SPEAKER: Thank you, Your Honor. (Whereupon at 4:51 p.m., the hearing in this matter was concluded for this date.) All right, anything further Court is
Thank you, that concludes this hearing.

3 Transcripts of New Century Mortgage Bankruptcy Hearings From May 2007

Transféré par

Informations du document

Titre original

Copyright

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

3 Transcripts of New Century Mortgage Bankruptcy Hearings From May 2007

Transféré par

Droits d'auteur :

UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE . . Chapter 11 . New Century TRS Holdings, . Inc., et al., . . Debtor(s). .

For Bank of America:

For Kodiak Funding:

For Morgan Stanley Mortgage:

For Safeco Financial:

For The U.S. Trustee:

Audio Operator: Transcribing Firm:

Proceedings recorded by electronic sound recording, transcript produced by transcription service.

I have asked counsel to make themselves available

McMahon for the United States Trustee.

I apologize, I was Your Honor,

disconnected from the call and had to hop back on.

6 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 occurred pre-petition. And also, it contemplates potentially a

And, Your Honor, we believe that that review is

OMelveny & Myers for the company, for New Century.

You know, 2,000

they had significant problems with that.

estates and these assets.

Trustees Motion to Adjourn the Hearing should be denied.

THE COURT: MR. MCMAHON:

This motion was not proposed by the

So let me see what record is developed in Let me see what

support of the Debtors motion on Monday.

Lets turn to the second

Your Honor, this is Keith Miller from Your Honor, we --

With me is Richard Chesley.

into the record the terms of that agreement.

between April 1st and April 12th.

this in a half a day.

The fact -- the mere

Hennigan, Bennett & Dorman for the Debtor Defendants.

they go beyond what is contemplated by reply deadlines that

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 theyve already missed. They call the sections in their brief

And their order scheduling --

UBS says, among other things, you have our money.

I think under the

But I think what follows from that is the Courts

So, I mean, theres the choice.

Ill leave it to the Debtor.

I mean, one way to approach it is

Ill put the -- I am going to

Thank you, Your

5/18/07 __________ Date

J&J COURT TRANSCRIBERS, INC.

For Deutsche Bank National Trust Co.:

J&J COURT TRANSCRIBERS, INC.

For Wells Fargo/C-Bass:

For Litton Loan Servicing:

For Countrywide & GMAC CF:

For Deutsche Bank:

J&J COURT TRANSCRIBERS, INC.

For NY State Teachers Retirement System:

For QKC Maui Owner, LLC:

J&J COURT TRANSCRIBERS, INC.

For Oracle USA:

For Hartford Fire Insurance:

For Regions Bank:

J&J COURT TRANSCRIBERS, INC.

J&J COURT TRANSCRIBERS, INC.

J&J COURT TRANSCRIBERS, INC.

5 would like to proceed in order with one exception.

So if that's acceptable to Your Honor, we'd like to

16 O'Melveny & Myers.

Let me briefly advise the Court on the

7 report that we've -- I think we've gotten there.

16 many states require surety bonds. 17 the loan origination business. 18