redacted version of document filed under seal …hearing date and time: february 16, 2010 at 9:00...
TRANSCRIPT
HEARING DATE AND TIME: February 16, 2010 at 9:00 a.m. (prevailing Eastern time)
REDACTED VERSION OF DOCUMENT FILED UNDER SEAL
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George A. Davis, Esq.Andrew M. Troop, Esq.Howard R. Hawkins, Jr., Esq.Israel Dahan, Esq.CADWALADER, WICKERSHAM & TAFT LLPOne World Financial CenterNew York, New York 10281Telephone: (212) 504-6000Facsimile: (212) 504-6666
– and –
Mark C. Ellenberg, Esq.Peter Friedman, Esq.700 6th Street, NWWashington, DC 20001Telephone: (202) 862-2200
Attorneys for Lyondell Chemical Company, et al.
UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORK----------------------------------------------------------------x
In re:::: Chapter 11
LYONDELL CHEMICAL COMPANY, et al., : Case No. 09-10023 (REG):
Debtors. : Jointly Administered----------------------------------------------------------------xOFFICIAL COMMITTEE OF UNSECURED CREDITORS, on behalf of the Debtors’ Estates,
:::
Plaintiff, : Adversary Proceedingv. :
:No. 09-01375 (REG)
CITIBANK, N.A., et al., :Defendants. :
----------------------------------------------------------------x
DEBTORS’ OMNIBUS REPLY TO OBJECTIONS TO THE DEBTORS’ MOTION TO APPROVE SETTLEMENT WITH
FINANCING PARTY DEFENDANTS IN COMMITTEE LITIGATION
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TABLE OF CONTENTS
PAGE(S)
TABLE OF AUTHORITIES ..................................................................................................... iii
THE COMMITTEE OBJECTION.............................................................................................. 1
Preliminary Statement ......................................................................................... 1
The Real Story .................................................................................................... 7
(1) The Settlement ............................................................................. 7
(2) The Litigation Subcommittee and its Process................................ 9
(3) Cadwalader and Cooper.............................................................. 18
(a) Cadwalader Disclosed Its Relationships and Acted In Accord With Its Court-Approved Retention .................... 18
(b) The Committee Was Fully Aware That Cadwalader Was Analyzing the Committee Litigation On The Debtors’ Behalf ............................................................................. 20
(c) The Committee’s Allegations Of Conflict Are Fundamentally Incompatible With Its Allegations Regarding the Bridge Lenders’ Desire to Settle............... 27
(d) The Committee’s False Allegations Regarding Stephen Cooper............................................................................ 27
LEGAL ARGUMENT ............................................................................................................. 29
I. THE DEBTORS HAVE STANDING TO MANAGE THE ESTATE’S CLAIMS, AND THERE IS NO NEED FOR A SEPARATE, PRIOR SHOWING REGARDING WITHDRAWAL OF THE COMMITTEE’S DERIVATIVE STANDING.............................................................................. 29
II. THE DEBTORS HAVE NOT LOST THEIR STANDING TO PROPOSE A 9019 SETTLEMENT DUE TO CONFLICT, COLLUSION OR OTHERWISE.................................................................................................... 35
III. THE SETTLEMENT FALLS WITHIN THE RANGE OF REASONABLENESS....................................................................................... 37
(A) Benefits of Settlement vis-à-vis the Probabilities of Ultimate Success .................................................................................................. 39
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(1) Benefits of the Settlement for the Estate ..................................... 39
(2) Benefits of the Settlement for Unsecured Creditors..................... 41
(3) Probabilities of Success on the Merits ........................................ 46
(4) The Committee Fails to Meaningfully Address Two Significant Issues ....................................................................... 48
(a) The Perfect Storm of Late 2008 ...................................... 48
(b) The CMAI Credibility Issues .......................................... 49
(5) Additional Issues........................................................................ 49
(a) Recovery Levels Even If the Committee Prevailed As to Financial Condition ........................................................ 50
(b) Analysis Regarding Avoidance of Claim Obligations...... 52
(c) Analysis of Repayment of Interest .................................. 55
(d) Preservation of Liens; Section 551 .................................. 55
(e) Ability to Prevail on Phase I-A If the Committee Loses Phase I ............................................................................ 57
(f) Pickering Analysis is Results-Driven and Vastly Overstates Potential Recoveries to the Unsecured Creditors ............. 58
(6) Comparison of Benefits of Settlement to Range of Outcomes ................................................................................... 60
(B) The Committee’s Opposition to the Settlement ...................................... 61
(C) Arm’s-Length Bargaining ...................................................................... 63
(1) Purported Conflicts of Cadwalader and Cooper .......................... 64
(2) No Evidence of Collusion........................................................... 71
(3) Arm’s-Length Negotiations ........................................................ 75
The Committee Objection Should Be Overruled ................................................ 78
THE LAW DEBENTURE OBJECTION.................................................................................. 79
THE COLUMBUS HILL OBJECTION ................................................................................... 83
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TABLE OF AUTHORITIES
Page(s)
CASES:
In re A & T Paramus Co., Inc.,253 B.R. 606 (Bankr. D.N.J. 1999) ..................................................................................... 68
AboveNet, Inc. v. Lucent Techs., Inc. (In re Metromedia Fiber Network, Inc.),Adv. Proc. No. 04-08564A, 2005 Bankr. LEXIS 3168(Bankr. S.D.N.Y. Dec. 20, 2005) ........................................................................................ 51
ACC Bondholder Group v. Adelphia Commc’ns Corp.(In re Adelphia Commc’ns. Corp.),361 B.R. 337 (S.D.N.Y. 2007) ............................................................................................ 32
ACC Bondholder Group v. Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.),367 B.R. 84 (S.D.N.Y. 2007) .............................................................................................. 32
In re Adelphia Commn’cs Corp.,368 B.R. 140 (Bankr. S.D.N.Y. 2007).................................................... 37, 38, 45, 46, 51, 61
In re Adelphia Commc’ns Corp.,327 B.R. 143 (Bankr. S.D.N.Y. 2005), aff’d, 337 B.R. 475 (S.D.N.Y. 2006)............................................................ 34, 39, 61, 62, 78
Adelphia Recovery Trust v. Bank of Am., N.A.,390 B.R. 80 (S.D.N.Y. 2008) .........................................................................................50, 51
Air Line Pilots Ass’n, Int’l v. Am. Nat’l Bank & Trust Co. (In re Ionosphere Clubs, Inc.), 156 B.R. 414 (S.D.N.Y. 1993), aff’d sub nom., Sobchack v. Am. Nat’l Bank & Trust Co. (In re Ionosphere Clubs, Inc.), 17 F.3d 600 (2d Cir. 1994)............................................ 37
Allegaert v. Perot,565 F.2d 246 (2d Cir. 1977)................................................................................................ 69
Allstate Fabricators Corp. v. Flagstaff Foodservice Corp.(In re Flagstaff Foodservice Corp.),56 B.R. 899 (Bankr. S.D.N.Y. 1986)................................................................................... 58
Berry v. School Dist. of Benton Harbor,184 F.R.D. 93 (W.D. Mich. 1998)....................................................................................... 78
In re Best Prods.,168 B.R. 35 (Bankr. S.D.N.Y. 1994), aff’d sub nom., Resolution Trust Corp. v. Best Prods. Co. (In re Best Prods. Co.), 68 F.3d 26 (2d Cir. 1995) ..............................46-47, 53, 68
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PAGE(S)
Boyer v. Crown Stock Distribution, Inc.,587 F.3d 787 (7th Cir. 2009)............................................................................................... 54
In re Cadet Mfg. Co.,No. 99-30304, 2006 WL 1343435 (Bankr. W.D. Wash. May 15, 2005) .............................. 72
In re Cajun Elec. Power Coop., Inc.,230 B.R. 715 (M.D. La. 1999) ............................................................................................ 72
In re Caldor, Inc.-NY,193 B.R. 165 (Bankr. S.D.N.Y. 1996)................................................................................. 65
Cames v. Joiner (In re Joiner),319 B.R. 903 (Bankr. M.D. Ga. 2004)............................................................................47, 60
In re CF Holding Corp.,164 B.R. 799 (Bankr. D. Conn. 1994) ............................................................................28, 70
In re Codesco, Inc.,18 B.R. 997 (Bankr. S.D.N.Y. 1982)................................................................................... 65
Cohen v. Nat’l Union Fire Ins. Co. (In re County Seat Store, Inc.),280 B.R. 319 (Bankr. S.D.N.Y. 2002)................................................................................. 78
Commodore Int’l Ltd. v. Gould (In re Commodore Int’l Ltd.),262 F.3d 96 (2d Cir. 2001).................................................................................................. 31
Concerned Parents of Jordan Park v. Hous. Auth.,934 F. Supp. 406 (M.D. Fla. 1996)...................................................................................... 69
In re Congoleum Corp.,No. 03-51524, 2007 WL 1428477 (Bankr. D.N.J. May 11, 2007)........................................ 72
Conn. Gen. Life Ins. Co. v. United Cos. Fin. Corp. (In re Foster Mortg. Corp.),68 F.3d 914 (5th Cir. 1995)................................................................................................. 62
In re Consupak, Inc.,87 B.R. 529 (Bankr. N.D. Ill. 1988) .................................................................................... 66
Cosoff v. Rodman (W.T. Grant Co.),699 F.2d 599 (2d Cir.), cert. denied, 464 U.S. 822 (1983) ..............................................47, 78
Dacotah Mktg. & Research LLC v. Versatility, Inc.,21 F. Supp. 2d 570 (E.D. Va. 1998) .................................................................................... 78
In re Doctors Hosp. of Hyde Park, Inc.,474 F.3d 421, 431 (7th Cir. 2007) ....................................................................................... 45
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PAGE(S)
In re Dunes Hotel Assocs.,No. C/A 94-75715, 1997 WL 33344253 (Bankr. D.S.C. Sept. 26 1997),aff’d sub nom., Dunes Hotel Assocs. v. Hyatt Corp.,245 B.R. 492 (Bankr. D.S.C. 2000)..................................................................................... 66
In re Enron Corp.,No. 01-16034(AJG), 2002 WL 32034346 (Bankr. S.D.N.Y. May 23, 2002)...................64, 67
In re Exide Techs.,303 B.R. 48 (Bankr. D. Del. 2003).................................................................................62, 63
In re Fred Leighton Holdings, Inc., et al.,Case No. 08-11363 (Bankr. S.D.N.Y.) ................................................................................ 67
Glinka v. Murad (In re Housecraft Indus. USA, Inc.),310 F.3d 64 (2d Cir. 2002).................................................................................................. 31
In re Heissinger Res., Ltd.,67 B.R. 378 (C.D. Ill. 1986)................................................................................................ 68
In re Herberman,122 B.R. 273 (Bankr. W.D. Tex. 1990)............................................................................... 66
In re Hibbard Brown & Co.,217 B.R. 41 (Bankr. S.D.N.Y. 1998)..............................................................................37, 46
In re Idearc Inc.,No. 09-31828, 2009 WL 5205346 (Bankr. N.D. Tex. Dec. 22, 2009) .................................. 45
In re Internet Navigator, Inc.,293 B.R. 198 (Bankr. N.D. Iowa 2003) aff’d sub nom.,On-Line Servs. Ltd. v. Bradley & Riley P.C. (In re Internet Navigator, Inc.),301 B.R. 1 (B.A.P. 8th Cir. 2003) ....................................................................................... 68
Johnson v. State,974 F. Supp. 185 (E.D.N.Y. 1997) ...................................................................................... 70
King v. Calypso Mines, LLC, et. al.,Case No. 08-01645 (Bankr. S.D.N.Y.) ................................................................................ 67
King’s Grant Golf Acquisition LLP v. Abercrombie (In re T 2 Green, LLC),364 B.R. 592 (Bankr. D.S.C. 2007)..................................................................................... 72
In re Kobra Props.,406 B.R. 396 (Bankr. E.D. Cal. 2009)............................................................................64, 65
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PAGE(S)
In re Matco Elecs.,287 B.R. 68 (Bankr. N.D.N.Y 2002) ..............................................................................72, 78
McClelland v. Grubb & Ellis Consulting Servs. Co. (In re McClelland),418 B.R. 61 (Bankr. S.D.N.Y. 2009)................................................................................... 66
McDonald v. Chicago Milwaukee Corp.,565 F.2d 416 (7th Cir. 1977)............................................................................................... 78
Mfrs. & Traders Trust Co. v. Goldman (In re Ollag Constr. Equip. Corp.),578 F.2d 904 (2d Cir. 1978)........................................................................................... 57-58
Morris v. St. John Nat’l Bank (In re Haberman),516 F.3d 1207 (10th Cir. 2008)........................................................................................... 57
Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007)................................................................................................ 45
In re MUMA Servs., Inc.,286 B.R. 583 (Bankr. D. Del. 2002).................................................................................... 68
Nellis v. Shugrue,165 B.R. 115 (S.D.N.Y. 1994) .......................................................................................37, 47
Newby v. Enron Corp. (In re Enron Corp. Secs.),No. H-01-3624, No. H-01-3913, 2003 WL 22962792 (S.D. Tex. Nov. 5, 2003).................. 71
NextWave Personal Commc’ns, Inc. v. FCC (In re NextWave Personal Commc’ns, Inc.), 235 B.R. 305 (Bankr. S.D.N.Y. 1999), aff’d, 241 B.R. 311 (S.D.N.Y.),rev’d on other grounds, 200 F.3d 43 (2d Cir. 1999)........................................................53, 54
Official Comm. of Equity Sec. Holders v. Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.),371 B.R. 660 (S.D.N.Y. 2007), aff’d, 544 F.3d 420 (2d Cir. 2008)...................................... 30
Official Comm. of Equity Sec. Holders v. Official Comm. of Unsecured Creditors of Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.),544 F.3d 420 (2d Cir. 2008)...........................................................................................30, 32
Official Comm. of Unsecured Creditors v. Cajun Elec. Power Coop., Inc. (In re Cajun Elec. Power Coop., Inc.),119 F.3d 349 (5th Cir. 1997)............................................................................................... 62
Official Comm. of Unsecured Creditors of Int’l Distrib. Ctrs., Inc. v. James Talcott, Inc. (In re Int’l Distrib. Ctrs, Inc.),103 B.R. 420 (S.D.N.Y. 1989) ............................................................................................ 38
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PAGE(S)
Official Comm. of Unsecured Creditors of TOUSA, Inc. v. Citicorp North America, Inc. (In re TOUSA, Inc.),Nos. 08-10928-JKO, 08-1435-JKO, 2009 WL 3519403(Bankr. S.D. Fla. Oct. 30, 2009).......................................................................................... 54
Official Comm. of Unsecured Creditors of Tower Auto. v. Tower Auto., Inc. (In re Tower Auto., Inc.),241 F.R.D. 162 (S.D.N.Y. 2006)......................................................................................... 62
Official Unsecured Creditors Comm. of Valley-Vulcan Mold Co. v. Ampco-Pittsburgh Corp. (In re Valley-Vulcan Mold Co.),237 B.R. 322 (B.A.P. 6th Cir. 1999), aff’d, 248 F.3d 1154 (6th Cir. 2001)..................... 67-68
Ortiz v. Fibreboard Corp.,527 U.S. 815 (1999), remanded, 527 U.S. 1031 (1999) .................................................. 77-78
In re Owens Corning,419 F.3d 195 (3d Cir. 2005), cert. denied, 547 U.S. 1123 (2006)......................................... 51
In re PaineWebber Ltd. P’ships Litig.,171 F.R.D. 104 (S.D.N.Y.), aff’d, 117 F.3d 721 (2d Cir. 1997)................................ 71-72, 78
Pepper v. Litton,308 U.S. 295 (1939)............................................................................................................ 51
Plaza Equities LLC v. Pauker (In re Copperfield Invs., LLC),401 B.R. 87 (Bankr. E.D.N.Y. 2009) .................................................................................. 62
Protective Comm. for Indep. S’holders of TMT Trailer Ferry, Inc. v. Anderson,390 U.S. 414 (1968).......................................................................................................36, 46
Rafool v. Goldfarb Corp. (In re Fleming Packaging Corp.),Nos. 03-82408, 04-8166, 2007 WL 4556981 (Bankr. C.D. Ill. Dec. 20, 2007)..................... 78
In re Ray,314 B.R. 643, 660 (Bankr. M.D. Tenn. 2004) ..................................................................... 64
In re Revelle,256 B.R. 905, 913 (Bankr. W.D. Mo. 2001)........................................................................ 61
In re Rusty Jones, Inc.,134 B.R. 321 (Bankr. N.D. Ill. 1991) .................................................................................. 64
Rutter & Wilbanks Corp. v. Shell Oil Co.,314 F.3d 1180 (10th Cir. 2002), cert. denied, 539 U.S. 915 (2003)...................................... 71
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PAGE(S)
Smart World Techs., LLC v. Juno Online Servs. Inc.`11 (In re Smart World Techs., LLC),423 F.3d 166 (2d Cir. 2005)................................................................................................ 33
Smith v. Alleghany Corp.,394 F.2d 381 (2d Cir. 1968) cert. denied, 393 U.S. 939 (1968) ........................................... 72
Susman v. Lincoln Am. Corp.,561 F.2d 86 (7th Cir. 1977)................................................................................................. 78
Szwak v. Earwood,No. 07-2092, 2009 WL 872482 (W.D. La. March 26, 2009), rev’d on other groundssub nom. In re Bodenheimer, Jones, Szawk, & Winchell L.L.P.,No. 09-30360, 2009 WL 5103546 (5th Cir. Dec. 29, 2009)................................................. 72
In re Telesphere Commc’ns, Inc.,179 B.R. 544 (Bankr. N.D. Ill. 1994) .................................................................................. 54
Tornabene v. Gen. Dev. Corp.,88 F.R.D. 53 (E.D.N.Y. 1980) ............................................................................................ 78
UAW v. General Motors Corp.,05-CV-73991-DT, 2006 WL 891151 (E.D. Mich. Mar. 31, 2006)....................................... 71
Union Sav. Bank v. Augie/Restivo Baking Co. (In re Augie/Restivo Baking Co.), 860 F.2d 515 (2d Cir. 1988)............................................................................................... 51
United States v. AWECO, Inc. (In re AWECO, Inc.),725 F.2d 293 (5th Cir.), cert. denied, 469 U.S. 880 (1984) .................................................. 38
Unofficial Comm. of Equity Holders of Penick Pharm., Inc. v. McManigle (In re Penick Pharm., Inc.),227 B.R. 229 (Bankr. S.D.N.Y. 1998)................................................................................. 66
Unsecured Creditors’ Comm. v. Noyes (In re STN Enterprises),779 F.2d 901 (2d Cir. 1985)................................................................................................ 31
Vanguard Airlines, Inc. v. Sarah & William Hambrecht Found.(In re Vanguard Airlines, Inc.),302 B.R. 292 (Bankr. W.D. Mo. 2003) ............................................................................... 62
In re Water’s Edge L.P.,251 B.R. 1 (Bankr. D. Mass. 2000) ..................................................................................... 67
In re Whitney Place Partners,147 B.R. 619 (Bankr. N.D. Ga. 1992) ................................................................................. 66
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STATUTES & OTHER AUTHORITIES:
11 U.S.C. § 1107(a) (WESTLAW 2010) .................................................................................. 64
Lawrence P. King, Collier on Bankruptcy ¶ 327.04[7][b] (15th ed. rev. 2008) ........................... 64
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Lyondell Chemical Company and its affiliated debtors in the above-captioned
chapter 11 cases (collectively, the “Debtors”) submit this omnibus reply to the objections (and
joinders) to the Debtors’ motion pursuant to Rule 9019 of the Federal Rules of Bankruptcy
Procedure (the “Motion”), seeking an order approving the proposed settlement of certain claims
asserted on behalf of the estate by the Official Committee of Unsecured Creditors (the
“Committee”). Objections have been filed by (i) the Committee (the “Committee Objection”),
(ii) Law Debenture Trust Company of New York, as Indenture Trustee for the Millenium Notes
(the “LD Objection”), and (iii) Columbus Hill Capital Management, L.P. and CQS Directional
Opportunities Master Fund Limited as holders of 2015 Notes (the “CH Objection,” and together
with the Committee Objection and LD Objection, the “Objections”).1 The Debtors respectfully
submit that the Objections should be overruled and the proposed settlement should be approved.
THE COMMITTEE OBJECTION
Preliminary Statement
1. The Debtors propose to settle claims against the Financing Party
Defendants on eminently fair terms. The settlement both guarantees unsecured creditors a $300
million cash payment and gives the unsecured creditors the exclusive right to the proceeds of
pending estate claims against other defendants, claims that the Committee itself has valued at
over $3 billion. The guaranteed payment will provide, on the effective date of the Debtors’ plan
of reorganization (as filed, the “Plan”), an estimated 11.5 percent recovery on the approximately
$2.8 billion of unsecured claims asserted against entities where the liens and claims of the
Financing Party Defendants could potentially be avoided. Thus, the $300 million payment,
1 Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Debtors’ Memorandum of Law in Support of Motion to Approve Settlement with Financing Party Defendants in Committee Litigation, filed contemporaneously with the Motion (the “9019 Memo”).
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combined with the proceeds of the continuing estate claims, gives the unsecured creditors the
potential for being paid in full.
2. It bears emphasizing that, but for the settlement before the Court, the
unsecured creditors would not have exclusive rights to the continuing estate claims against the
other defendants. Indeed, the value of these continuing estate claims is demonstrated by the
prior settlement offers—including offers made by and between the Committee and the Financing
Party Defendants—which proposed elaborate alternative mechanisms for sharing in future
recoveries from such estate claims. It also bears emphasizing that the settlement is not tied to the
pending Plan, or to any particular plan.
3. From the outset, the Debtors urged the Financing Party Defendants and the
Committee to negotiate a settlement among themselves. The settlement ultimately obtained by
the Debtors came after months of negotiations between the Financing Party Defendants and the
Committee. During those negotiations, the Financing Party Defendants moved closer and closer
to the realistic settlement range for the claims against them, while the Committee essentially
remained unchanged in its demand for a 50% dividend on general unsecured claims. The
settlement also came after a mediation process, urged on the Financing Party Defendants and the
Committee by the Debtors, reached impasse. Finally, the settlement came after the Litigation
Subcommittee exhaustively studied the merits of the Committee Litigation and at a time when
market conditions for obtaining necessary exit financing looked favorable. As stewards for the
entire estate, and their 15,000 employees, the Debtors were not only empowered, but obligated,
to assert control over the case timetable and move towards plan confirmation.
4. The Committee’s remarkably virulent Objection to the settlement is an
exercise in obfuscation and diversion. Perhaps realizing that the package negotiated by the
Debtors is more than fair, the Committee scrupulously ignores the substantial upside of the
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continuing claims to its constituents. In all of the 131 pages of objection hurled at the settlement
by the Committee, this aspect of the settlement is mentioned but once, and then in a footnote.
Instead, the Committee repeatedly, and misleadingly, characterizes the proposal before the Court
as merely a “$300 million” settlement.
5. The Committee Objection also seeks to focus the Rule 9019 hearing on
everything but the settlement itself. In particular, the Committee asserts that relationships of
Cadwalader and Stephen Cooper with various of the Financing Party Defendants tainted the
settlement, and led to a collusive “sweet-heart” deal among the Debtors and the Financing Party
Defendants. This diversionary gambit cannot withstand scrutiny:
Cadwalader fully disclosed its representations of Financing Party Defendants at the time of its retention as Debtors’ counsel, and Cadwalader expressly and publicly retained the ability to participate in negotiations with those parties on behalf of the Debtors.
The Committee itself asked Cadwalader to investigate the claims against the Financing Party Defendants, form a view as to them, and advise the Debtors on the subject.
The Committee had full knowledge of Cadwalader’s activities. Cadwalader repeatedly appeared in Court as Debtors’ counsel on matters related to the Committee Litigation, its fee applications filed with the Court explicitly referenced work analyzing the merits of the Committee Litigation and advising the Debtors on the same, the Committee initiated several meetings with Cadwalader to discuss the litigation, Cadwalader openly managed discovery of the Debtors concerning the litigation, and Cadwalader attended all depositions. Cadwalader also negotiated the Mediation Order with the Committee and the Financing Party Defendants and participated in both mediation sessions with the Committee’s knowledge. Never once did the Committee suggest that Susman Godfrey LLP, rather than Cadwalader, should be performing these functions.
The relationships of Cooper with the Financing Party Defendants identified by the Committee are patently benign.
After being given access to every email and document relating to contacts among Cadwalader and the Debtors on the one hand, and the Financing Party Defendants on the other hand, the Committee cannot identify a
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single instance in which Cadwalader or the Debtors disclosed to the Financing Party Defendants either their views on the merits or a settlement range. The two incidents the Committee relies on as evidence to the contrary are clumsily distorted.
The legal advice provided to the Litigation Subcommittee by Francis Conrad fully inoculates the settlement from any assertion of taint. Judge Conrad formed his views in complete isolation from Cadwalader. He reached conclusions with respect to the merits of the litigation that are completely consistent with the settlement. The wholly independent expert advice of Nexant and NERA, which are also fully consistent with the settlement, further buttresses the conclusion that the process was free of taint. NERA, alone, spent nearly 2,000 hours analyzing the Debtors’ financial condition.
Most importantly, the Committee’s own narrative is inconsistent, on its face. The Committee asserts that the Bridge Lenders, led by Merrill Lynch, launched independent, unsolicited settlement overtures to the Committee on the eve of, and during, mediation. The Committee trumpets the Bridge Lender settlement initiative as evidence that a great deal was around the corner, had the Debtors simply not settled. What the Committee fails to apprehend is that the Bridge Lender settlement initiative unequivocally disproves the existence of collusion with the Debtors. If, as the Committee asserts, the Financing Party Defendants, especially Bridge Lender Merrill Lynch, had Cadwalader and Cooper in their pockets, and if, as the Committee asserts, the Financing Party Defendants and the Debtors planned to ink a cheap settlement as soon as mediation failed, the Bridge Lenders’ unilateral instigation of settlement discussions with the Committee on the eve of mediation is utterly inexplicable. The Committee, apparently blinded by its own vituperation, does not even acknowledge this inherent—and fatal—flaw in its story.
6. In a further effort to stop the Court from looking at the merits of the
settlement itself, the Committee challenges the Debtors’ standing to agree to a settlement after
the Court’s grant of STN standing to the Committee. This proposition is directly contrary to
established case law in the Second Circuit, which provides that a debtor in possession has the
inherent authority to resolve matters involving the estate assets even where STN standing has
been granted to a committee, and that a committee’s standing may be revoked when it is no
longer in the “best interests” of the estate. In support of its position, the Committee asserts that
the “best interests of the estate” test for standing to settle somehow differs from the “best
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interests of the estate” standard for assessment of the settlement itself. The logical extension of
the Committee’s position is that the Debtors could have obtained a settlement that is in the best
interests of the estate, but the Court could not even consider it, let alone approve it. To even
state this proposition is to demonstrate that it cannot possibly be the law. And, indeed, the
authorities relied on by the Committee do not support their position.
7. Approximately 100 pages into its brief, the Committee finally gets around
to discussing the merits of the settlement itself. The Committee’s entire argument on why the
settlement is not within the range of reasonableness is emblemized by the astonishing assertion
that no meaningful obstacles stood in the way of a Committee victory on the merits. To be sure,
the Committee’s underlying position in the litigation has some strengths. Avoidance claims
based on the failure of a $20 billion LBO one year after closing are hardly frivolous. By
ensuring a meaningful cash recovery up front and the opportunity to obtain substantial upside
thereafter, the proposed settlement appropriately acknowledges this reality.
8. But the Committee has never come to grips with the fact that the fourth
quarter of 2008 encompassed the worst financial collapse since the Great Depression, and that, to
boot, LyondellBasell was further injured by a once-in-a-century hurricane and a fatal crane
accident. Many an LBO case has foundered on the rocks of unforeseeable economic collapse.
This case has that, and much more. For the Committee to dismiss the “perfect storm squared”
problem as inconsequential simply defies reality and common sense.
9. What is more, the Committee ignores the lack of credibility of its own
expert, Chemical Market Associates, Inc. (“CMAI”), which is a gaping wound at the heart of the
Committee’s case. Each of the Committee’s other experts relied on CMAI for the proposition
that the management projections used to justify the LBO were unreasonable. If CMAI’s opinion
on this question falls, the Committee’s other experts fall, as well. Yet CMAI was the exact same
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expert that issued a favorable report to the Financing Party Defendants (upon which they relied)
at the time of the transaction. CMAI’s attempt to disparage its prior work is shocking to any
professional, even a neutral one. In addition, CMAI’s use of a proprietary “black box” model as
the foundation for its current report has further eroded its credibility, and led to a pending motion
to exclude CMAI as an expert. This problem at the heart of the Committee’s case cannot be
ignored.
10. The Committee’s attempt to analyze and dispose of each of the other
significant legal issues identified in the Debtors’ Motion further emphasizes the uphill battle the
Committee faced. In deciding the Motion, the Court’s task is not to rule on the merits of each
issue. The Court needs only to acknowledge that the issues exist, they are serious, and a loss by
the Committee on any one of them would eliminate or materially diminish any recovery for the
unsecured creditors. The Committee’s detailed briefing only confirms that the issues do exist
and that they are serious.
11. The Committee also fails to grapple with the fact that its own judgment on
settlement is compromised. In pursuing this litigation, the unsecured creditors are gambling with
house money. If they win, they benefit. If they lose, they lose nothing. Absent avoidance of the
Financing Party Defendants’ liens, the unsecured creditors are hopelessly out of the money, a
fact even the Committee acknowledges. Thus, for all of the aspersions cast by the Committee in
the direction of the Debtors and their counsel, the Committee’s own decision making is the most
subject to the taint of bias.
12. The Debtors are the stewards of this bankruptcy case. They had the power
and the obligation to obtain this settlement. The settlement is plainly sound. It should be
approved.
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The Real Story
13. In an extensive fact section, the Committee Objection paints a distorted
picture of the settlement and the process through which it was obtained. In the following pages,
it will be established that: (1) the complete settlement has the potential of paying the unsecured
creditors in full, (2) the settlement was the product of the full Litigation Subcommittee, each
member of which brought a high level of skill and experience to the deliberative process, (3) the
Litigation Subcommittee conducted a thorough, diligent and fair process, with the assistance of
an able and independent team of economic and legal professionals, (4) neither Cadwalader’s nor
Cooper’s relationships with Financing Party Defendants undermine the credibility of the
settlement process, (5) the Committee knew from the commencement of Rule 2004 discovery to
the day the settlement was announced precisely what services Cadwalader was providing, and
(6) there was no collusion among the Debtors and the Financing Party Defendants.
(1) The Settlement
14. As explained in the Debtors’ initial brief in support of the Motion, the
settlement provides general unsecured creditors a $300 million cash payment on the effective
date of a plan, plus distribution exclusively to the unsecured creditors of the proceeds of the
claims in the Committee complaint that are not settled and are to continue. The settlement is not
tied to the pending plan of reorganization filed by the Debtors. It will be effective on the
confirmation of any plan. In the event of a liquidation, unlikely as that may be, the general
unsecured creditors would receive the first $300 million of proceeds from the Financing Party
Defendants’ collateral. See Settlement Agreement, § 2.2.
15. Evidence placed in the record by the Committee itself shows that the
estate claims that are to continue to be litigated have significant value, and could easily cause the
general unsecured creditors to be paid in full. The face value of the claims against non-settling
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defendants is approximately $13 billion. Even if the Committee were to recover only 20% on
those claims, it would obtain $2.6 billion—more than enough to pay eligible unsecured creditors
in full.
16. The Committee has brought claims exceeding $2.575 billion against both
Access Industries (including a $300 million preference claim) and the prepetition directors and
officers of Lyondell and Basell. See Compl. [Dkt. No. 1] (Counts III, V, VIII, IX, X, XIII, XIV,
XVI, XVII). Previously, the Committee has referred to these claims as a “slam dunk” and “low
hanging fruit.” See Ex. 1 (July 21, 2009 Hr’g Tr.) at 113:19-114:9. The Committee has also
asserted claims against former Lyondell shareholders seeking the return of the merger proceeds
in the amount of approximately $11.3 billion. See Compl. [Dkt. No. 1] (Count IV).
17. [REDACTED]
18. Settlement proceeds will be shared among creditors with estimated claims
of between $2.4 billion at the low end and $2.87 billion at the high end, with a midpoint of $2.64
billion (all current estimates include the 2015 Noteholders’ claims of $1.354 billion). At that
claims range, the $300 million cash payment on the effective date is worth between 10.5 cents
and 12.4 cents, with a midpoint of 11.4 cents. The addition of $1 billion in recoveries from non-
Financing Party Defendants would create a range of 45.2 cents to 54.2 cents, with a midpoint of
49.7 cents.
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(2) The Litigation Subcommittee and its Process
19. The Litigation Subcommittee was formed in late June 2009. See
Declaration of James Gallogly, dated February 5, 2010 (the “Gallogly Decl.”) ¶ 24. It is
composed of Stephen Cooper, the only Supervisory Board Member not named as a defendant by
the Committee, Kevin McShea, the Chief Restructuring Officer, and James Gallogly, the new
CEO. Each member of the Subcommittee possesses extensive experience and training on issues
relevant to the Committee Litigation. Cooper is a well-known turnaround manager. He has been
responsible for managing some of the most complex reorganization cases filed under the
Bankruptcy Code. See Supplemental Declaration of Stephen Cooper, dated February 6, 2010
(the “Suppl. Cooper Decl.”) ¶ 6. Kevin McShea, a principal at AlixPartners, also has extensive
turnaround management experience, and has been directly involved in managing the post-
petition operations of LyondellBasell. See Declaration of Kevin McShea, dated February 5,
2010 (the “McShea Decl.”) ¶ 5. Jim Gallogly practiced law for thirteen years and has nearly
thirty years of experience in the energy and petrochemical industries. See Gallogly Decl. ¶ 5.
These are strong, independent thinkers. They were perfectly capable of forming their own views
on issues such as the Committee Litigation. None of them was going to be bamboozled by
counsel, consultants or each other. At the end of the day, each Litigation Subcommittee member
formed an independent view about the litigation, the appropriateness of making a settlement
offer, and the appropriate range for a settlement. See Gallogly Decl. ¶¶ 8, 18-21; McShea Decl.
¶¶ 11-12; see also Ex. 3 (Jan. 11, 2010 Transcript of the Deposition of Stephen F. Cooper (“Jan.
11, 2009 Cooper Tr.”)) at 142:21-149:11.
20. From the moment the Committee commenced its informal Rule 2004
discovery into the claims it ultimately brought on behalf of the Debtors’ estates, the Debtors have
conducted a thorough and open-minded investigation into the merits of those claims. The
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Debtors had no pre-conceived notions as to whether or not the December 2007 transaction was a
fraudulent transfer.2 Instead, the Debtors and their counsel:
sorted through, analyzed and produced hundreds of thousands of pages of documents;
worked with company witnesses to understand the relevant facts;
attended all Rule 2004 depositions (asking few questions, but listening as a factual record was developed); and
met with counsel to the Committee on several occasions to discuss the facts and the Committee’s proposed complaint.3
21. In order to enable the Debtors to take an informed position on the
Committee’s STN motion, Cadwalader prepared a “white paper” (the “White Paper”). This
document reflected research on pertinent legal issues and summarized the facts, as they evolved
through the Rule 2004 discovery process.
22. Ultimately, the Debtors consented to the Committee’s request for STN
standing, with two key caveats. First, as stewards responsible for ensuring that the Debtors “did
not die on the operating room table,” the Debtors urged the Court to hold an expedited hearing
on the critical “financial condition issue.” See Ex. 1 (July 21, 2009 Hr’g Tr.) at 41:9-18; 42:11-
20, 43:7-47:16. Second, the Debtors expressly (and always) reserved their rights to propose a
settlement of the claims asserted by the Committee on behalf of the estate, and requested (as did
the Committee) that the issue of whether the Debtors had legal authority to propose a settlement
2 By contrast, Brown Rudnick time charges show that Committee counsel had substantially drafted their proposed complaint even before taking Rule 2004 deposition discovery. See Ex. 4 (Select pages from Exhibit B to First Application for Interim Professional Compensation) [Dkt. No. 1999].3 These meetings were not as useful as they might have been. Lead counsel for the Committee unleashed an unprofessional tirade of profanities when anyone raised even the slightest questions about the Committee’s analysis or its chance of establishing its case with less than 100% certainty. See Suppl. Cooper Dec. ¶¶ 3, 9; see also Ex. 5 (Feb. 3, 2010 Transcript of the Deposition of Edward S. Weisfelner (“Weisfelner Tr.”))at 193:12-198:13.
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be reserved for another day. See Ex. 6 (June 11, 2009 Palmer Email to Weisfelner, et al.); Ex. 7
(June 29, 2009 Palmer Letter to Weisfelner); Ex. 8 (Debtors’ Surreply to STN Motion of the
Committee) [Dkt. No. 2276]; Ex. 1 (July 21, 2009 Hr’g Tr.) at 34:12-35:2. Indeed,
notwithstanding the Committee’s feigned surprise, the Committee had always been aware that
the Debtors reserved the right to propose a settlement of estate claims. See Ex. 8 (Debtors’
Surreply to STN Motion of the Committee); Ex. 1 (July 21, 2009 Hr’g Tr.) at 32:16-37:10,
112:24-113:7, 195:21-196:16; Ex. 9 (Oct. 26, 2009 Hr’g Tr.) at 17:24-18:7; Ex. 10 (Oct. 29,
2009 Hr’g Tr.) at 33:25-24:7.
23. After the Committee was granted STN standing, the Debtors continued
evaluating the merits of the Committee Litigation, researching the caselaw, producing more
documents, attending depositions and appearing at status conferences. As the case evolved,
Cadwalader periodically updated the White Paper.
24. Although they had reserved the right to settle the claims asserted by the
Committee on behalf of the estate, the Debtors actively tried to foster settlement negotiations
between the Committee and the Financing Party Defendants. See Ex. 3 (Jan. 11, 2010 Cooper
Tr.) at 91:3-13, 178:20-179:2, 190:19-24, 210:17-211:12; Ex. 11 (Jan. 22, 2010 Transcript of the
Deposition of George Davis (“Davis Tr.”)) at 124:2-22; Ex. 12 (Jan. 21, 2010 Transcript of the
Deposition of Marshall Huebner (“Huebner Tr.”)) at 170:5-15; see also Ex. 13 (Sept. 7, 2009
Palmer Email to Weisfelner). The Financing Party Defendants and the Committee did exchange
some settlement proposals. See, e.g., Ex. 14 (Aug. 13, 2009 Barr Email to Davis, et al.) The
Financing Party Defendants made three discrete, successively better settlement offers. See
Comm. Obj. at 32-34. However, the Committee essentially remained fixed on demanding a 50%
dividend. Id.; Ex. 15 (Oct. 5, 2009 Golden Email to Barr, et al.).
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25. As discovery progressed, and the negotiations among the Committee and
the Financing Party Defendants sputtered, the Litigation Subcommittee periodically met and
educated itself as to relevant developments. See Ex. 16 (Sept. 29, 2009 Weisfelner Email to
Pohl, et al.); Ex. 17 (July, 20 2009 Litig. Subcomm. Minutes); Comm. Obj., Ex. 30 (Aug. 12,
2009 Litig. Subcomm. Minutes); Ex. 18 (Oct. 15, 2009 Litig. Subcomm. Minutes); Comm. Obj.,
Ex. 31 (Oct. 23, 2009 Litig. Subcomm. Minutes).
26. In late October, with trial approaching and the Financing Party Defendants
and the Committee still far apart, the Court ordered mediation. The Debtors fully supported the
mediation process, see Ex. 10 (Oct. 29, 2009 Hr’g Tr.) at 33:20-22, and the mediation order
issued by the Court gave the Debtors the full right to participate in the mediation and to receive
the other participants’ mediation statements. See Mediation Order [Dkt. No. 209]. As the
mediation approached, the Litigation Subcommittee decided to retain additional advisors to
assess the Committee Litigation. Specifically, the Litigation Subcommittee retained NERA to
independently evaluate the Debtors’ financial condition and review and assess the expert reports
submitted by the parties, as well as retired Bankruptcy Judge Francis Conrad, to give an overall
independent analysis of the merits of the Committee Litigation based on his substantial
experience.4 See NERA Decl. ¶¶ 5-7; Suppl. NERA Decl. ¶¶ 5-7. The Debtors also sought
4 The Committee suggests that the Litigation Subcommittee’s retention of consultants “raises more questions about the propriety of the Debtors’ conduct than it answers.” See Comm. Obj. at 30 & n.35. This remarkable assertion is based, at least in part, on a distortion of Marshall Huebner’s deposition testimony. See id. Huebner actually testified that the Litigation Subcommittee’s retention of “an entire slate of multiple professionals to come together solely for the purpose of analyzing and examining a litigation . . . and guiding the Debtors towards parameters of a settlement,” “despite the fact that people often settle at very high-stakes litigation with only the professionals retained on the first day,” was a unique and “material factor as to proving up the propriety and reasonableness of the settlement from the perspective of the estate.” See Ex. 12 (Huebner Tr.) at 1402:21-141:11, 142:18-143:19 (emphasis added); see also Ex. 19 (Dec. 4, 2009 Davis Email to Huebner).
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advice from previously retained industry expert Nexant on the merits of expert reports, and
retained Mark Victor, a recognized expert on the process of conducting rigorous analysis of
complex, multi-variable problems, to prepare a decision tree regarding the probabilities and
values of litigation outcomes.
27. The Debtors attended the first mediation on November 17, 2009. At no
point during the day did the Committee make any effort to meet directly with the Debtors to
discuss settlement. At the end of the first session, the Financing Party Defendants asked the
Debtors whether they would enter into direct settlement negotiations. The Debtors declined to
do so. See Ex. 12 (Huebner Tr.) at 168:3-170:15; Ex. 11 (Davis Tr.) at 266:19-270:13; Ex. 3
(Jan. 11, 2010 Cooper Tr.) at 211:7-12.
28. Prior to the second mediation session on December 3, 2009, the Litigation
Subcommittee met with increasing frequency. Over the course of five extended meetings in the
last week of November and the first week of December, the members reviewed and discussed a
200-page slide presentation from Cadwalader canvassing the issues in the Committee Litigation
and possible remedies. See Cooper Decl. ¶ 18-24. (The Committee has this presentation; they The Committee also complains that it was not aware of the fact that experts were being retained. See Comm. Obj. at 30 & n.34 (“[C]ounsel to the Committee can represent that it first learned of the consultants’ retentions at the December 4 hearing, when the Court was informed of the Proposed Settlement.”). It is not all clear why the Committee’s knowledge about the retentions, vel non, is pertinent to the issues before the Court. However, the Examiner’s report, which was delivered to the Committee on November 30, 2009 clearly stated that the Litigation Subcommittee had “recently retained separate legal and financial advisory professionals to provide advice on the Committee Adversary.” See Examiner Report at 34 [Dkt. No. 3348]. Indeed, the Committee later complains that the Examiner was misled, because independent legal counsel was not retained. See Comm. Obj. at n.62. So, clearly, the Committee was aware of the retentions prior to December 4, its “representation” to the Court notwithstanding. And, in making the allegation that the Examiner was misled, the Committee ignores the retention of Judge Conrad.
Moreover, during this timeframe, the Committee made no effort to engage the Debtors with respect to the Debtors’ role in the mediation or with respect to a possible settlement and never answered e-mails from the Debtors asking the Committee to explain its position on an important issue relating to calculation of recoveries for unsecured creditors. See Ex. 49 (Nov. 26, 2009 Friedman Email to Pohl).
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have not identified an error, an example of bias, or an inconsistency with the assertions made to
support the Motion.) The Subcommittee also heard directly from NERA and Nexant. See
National Economic Research Associates, Inc. Declaration, dated December 18, 2009 (the
“NERA Decl.”) ¶¶ 25-26; Supplemental Declaration of National Economic Research Associates,
Inc., dated February 6, 2010 (the “Suppl. NERA Decl.”) ¶ 14; Declaration of Michael
Kratochwill, dated December 21, 2009 (the “Nexant Decl.”) ¶¶ 15-16. Their declarations make
clear that the presentations made by NERA and Nexant were based on information they
independently chose to review (indeed, NERA, had unfettered access to every document
produced in the Committee Litigation). See NERA Decl. ¶¶ 20-27; Suppl. NERA Decl. ¶¶ 6-19;
Supplemental Declaration of Michael Kratochwill, dated February 5, 2010 (the “Suppl. Nexant
Decl.”) ¶¶ 2-6. The Committee asserts that NERA and Nexant were manipulated or guided in
their analyses by Cadwalader, but fails to cite a single shred of evidence to support that claim.
The record, in fact, makes clear that the opinions NERA and Nexant presented to the Litigation
Subcommittee were entirely their own—and entirely consistent with the settlement proposed by
the Debtors. See NERA Decl. ¶¶ 25-26; Suppl. NERA Decl. ¶¶ 14-16; Suppl. Nexant Decl.
¶¶ 2-6.
29. The Litigation Subcommittee also benefited from the analysis of Judge
Conrad, who viewed his role as being an independent arbiter of the evidence and not an advocate
for either the Financing Party Defendants or the Committee. Judge Conrad was not ready to give
his views to the Litigation Subcommittee until December 2, and his window of availability on
that day conflicted with the only window open for another consultant, Mark Victor.
Accordingly, Judge Conrad gave his views to Cadwalader partner Mark Ellenberg, while Victor
reviewed a decision tree with the Subcommittee. See Declaration of Francis Conrad, dated
February 5, 2010 (the “Conrad Decl.”) ¶ 20. Ellenberg relayed Judge Conrad’s conclusions to
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the Litigation Subcommittee the same day, as soon as Victor was done. The following day,
December 3, Judge Conrad gave Ellenberg his view as to an appropriate range for settlement of
the Committee Litigation. Judge Conrad has subsequently reviewed Ellenberg’s notes from
December 2 and December 3, and confirmed them to be faithful and accurate. See Conrad Decl.
¶ 21-22. Judge Conrad’s declaration establishes conclusively that he rendered independent
advice that reflected his own view of the merits of the litigation, and the advice he provided to
the Litigation Subcommittee via Cadwalader was not shaped in any way by Cadwalader.
See Conrad Decl. ¶¶ 13-19. Most importantly, the settlement now proposed by the Debtors is
entirely consistent with Judge Conrad’s conclusions regarding an appropriate settlement amount.
See Conrad Decl. ¶ 22. Pursuant to the Court’s direction, the Debtors have provided Ellenberg’s
notes to the Committee (and to no other party). The Committee has not even attempted to
dispute that the settlement entered into by the Debtors and the Financing Party Defendants is
fully consistent with the analysis and advice Judge Conrad provided to the Litigation
Subcommittee.
30. In assimilating the information provided by Cadwalader, NERA, Nexant,
Judge Conrad, and the decision tree, the Litigation Subcommittee relied on the knowledge and
experience of its own members. In the end, the Litigation Subcommittee evaluated all of the
available material, formulated its own view on an appropriate settlement range, and unanimously
authorized Cooper to make a settlement proposal to the Financing Party Defendants. In every
way, the settlement proposal was the Litigation Subcommittee’s—not Cadwalader’s, not
Cooper’s, not anyone else’s. Having become fully informed as to the merits of the Committee
Litigation, the Litigation Subcommittee then authorized Cooper to make a “take it or leave it”
offer to the Financing Party Defendants, if and when the mediation ended at an impasse.
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31. On December 3, 2009, when the mediation was declared at an impasse and
officially terminated by the mediator, the Debtors and the Financing Party Defendants, for the
first time, engaged in direct discussions regarding a settlement. See Ex. 20 (Dec. 3, 2009
McLaughlin Email to Weintraub, et al.) Up to that moment, the Debtors had not given the
Financing Party Defendants any sign they would be willing to negotiate. Up until that point, the
Debtors had rejected all of the Financing Party Defendants’ overtures regarding settlement. See,
e.g., Ex. 12 (Huebner Tr.) at 91:2-4 (Cadwalader was “a very reluctant counterparty on the issue
of the right to settle”); Ex. 11 (Davis Tr.) at 266:19-270:13 (responding to Financing Party
Defendant inquiries after the first mediation, Davis indicated that the Debtors were not
considering settlement at that point in time); Ex. 3 (Jan. 11, 2010 Cooper Tr.) at 213:6-14 (at a
November 17, 2009 meeting, the Debtors “were being encouraged [by the Financing Party
Defendants] to consider settling and we were resisting that encouragement”).5 The Debtors did
not share their advisors’ views of the merits of the Committee Litigation with the Financing
Party Defendants at any time. See Ex. 12 (Huebner Tr.) at 170:9-10; Ex. 11 (Davis Tr.) at
317:19-318:5.
32. Even though the Litigation Subcommittee had agreed upon the terms of a
settlement and authorized Cooper to deliver it, the Debtors did not immediately disclose it.
Rather, upon termination of the mediation, the Debtors first ascertained the terms of the
Financing Party Defendants’ last offer: (1) delivery to general unsecured creditors of common
stock representing 2.5% of the pre-dilution common equity of the reorganized LyondellBasell,
5 Contrary to the assertion that the Debtors “telegraphed” their desire to settle these cases, Huebner was plainly told the Debtors were not prepared to engage in settlement discussions at that time. See Ex. 12 (Huebner Tr.) at 125:2-22. Indeed, prior to December 3, 2009, the only information that Davis provided to Huebner on the subject was that, should the Debtors ever decide to make a settlement offer, the form of consideration would be cash, not securities. Id. at 254:16-257:7
USActive 18357390.6 - 17 -
(2) delivery to the general unsecured creditors of seven-year warrants representing an additional
2.5% of pre-dilution equity, (3) the Financing Party Defendants would retain their subordination
rights against the 2015 Notes, (4) the unsecured creditors could recover against non-settling
defendants, but the Financing Party Defendants’ would participate in the recovery to the extent
of the subordination rights against the 2015 Notes, and (5) establishment of a litigation trust
funded with $15 million to pursue claims against non-settling defendants. See Suppl. Cooper
Decl. ¶ 5; Ex. 11 (Davis Tr.) at 139:13-140:16.6 While the nominal value of the equity and
warrants was approximately $255 million, when adjusted for dilution by the rights offering
included in the plan, the value dropped to approximately $205 million. Further, since the
Financing Party Defendants would retain their subordination rights against the 2015 Notes, the
Financing Party Defendants would effectively claw back 50% of the value. Thus, the total value
of this offer to the Committee was approximately $100 million of equity and warrants on the
effective date, plus only 50% of the recoveries from prosecution against non-settling defendants.
See Suppl. Cooper Decl. ¶ 6.7
33. Later that day, Cooper presented the Litigation Subcommittee’s settlement
offer to the Financing Party Defendants on a take it or leave it basis. The proposal represented a
significant increase over the Financing Party Defendants’ offer. Specifically, the Debtors’
demanded that the Financing Party Defendants (i) make $300 million available in cash to
unsecured creditors, (ii) assign their “scoop rights” against 2015 Noteholders to the Debtors, to
6 See also Ex. 11 (Davis Tr.) 145:20-147:19, 150:7-158:13.7The Committee tries to portray the value of the last Financing Party Defendant offer at the nominal value of $255 million, based on the inclusion of that figure in the draft December 4, 2009 Litigation Subcommittee meeting minutes. However, it is very clear that the value to the Committee was $100 million, plus 50% of the recoveries from prosecution against non-settling defendants. See Suppl. Cooper Decl. ¶ 6; Comm. Obj., Ex. 47 (Draft Dec. 4, 2009 Litig. Subcomm. Minutes); Ex. 11 (Davis Tr.) at 357:15-359:8.
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be waived by the Debtors if the Indenture Trustee for the 2015 Noteholders did not oppose the
settlement or the Plan, and provided that the Debtors would waive the same scoop rights with
respect to proceeds from the litigation trust on the same condition, thus effectively making all
litigation trust proceeds available to unsecured creditors, and (iii) resolve the intercreditor
disputes between the Senior Secured Lenders and the Bridge Lenders. Significantly, the
Indenture Trustee for the 2015 Noteholders has not objected to the settlement.
(3) Cadwalader and Cooper
34. The Committee dedicates many pages of its Objection to the proposition
that relationships between Cadwalader, Cooper and various of the Financing Party Defendants
undermines the credibility of the settlement.8 The facts demonstrate, however, that the
Committee’s strenuous efforts are in vain.
(a) Cadwalader Disclosed Its Relationships and Acted In Accord With Its Court-Approved Retention
35. The record is clear that Cadwalader fully disclosed its relationships at the
outset of the case, that the relationships did not, in fact, have any impact on the settlement, and
that the fully independent legal analysis of Judge Conrad undercuts completely any suggestion
that the legal analysis relied on by the Litigation Subcommittee was slanted in favor of the
Financing Party Defendants. The record is also clear that the Committee was not only fully
aware of Cadwalader’s role, but that it actively invited Cadwalader to play that role. Finally, the
record is clear that there was no collusion between Cadwalader (or any other Debtor
8 The baseless allegation of conflicts is a familiar page from the Committee’s playbook. Its motion for the appointment of an examiner was predicated on dark assertions of purported conflicts of interest (including on Cadwalader’s part, although at the time the assertion was that Cadwalader was biased in favor of Access) and breaches of fiduciary duty. The Examiner’s report demonstrates that every allegation levied at the time was false. Undaunted by the truth, the Committee has come back for more; but the falsity of its allegations are, again, easy to demonstrate.
USActive 18357390.6 - 19 -
representative) and the Financing Parting Defendants. Indeed, the Committee’s own narrative,
which depends heavily on the Bridge Lenders’ settlement overtures on the eve of mediation,
directly disproves the existence of collusion.
36. Cadwalader, Wickersham & Taft LLP traces its lineage to 1792. The firm
approaches its professional responsibilities with the utmost seriousness and care. In that vein, in
February 2009, Cadwalader filed a retention application and supporting declaration that
disclosed its client relationships with LyondellBasell creditors (including the percentages of firm
income represented by those relationships). Specifically identified as firm clients were Merrill
Lynch, Bank of America, Goldman Sachs and UBS, and affiliates of those institutions. In its
retention application, Cadwalader stated that it “believes negotiating with these parties does not
present a conflict.” See Comm. Obj., Ex. 8 (Palmer Ret. Decl.) ¶ 13. It logically follows that, in
order to negotiate on behalf of the Debtors regarding bankruptcy matters, Cadwalader can advise
the Debtors in connection with those bankruptcy matters. If the Committee believed Cadwalader
could not negotiate with the Financing Party Defendants, it had an obligation to raise the issue
with the Court. The Committee raised no objection when Cadwalader’s retention as general
counsel to the Debtors was before the Court for approval. The Committee raised no objection
when it obtained STN standing and proceeded to prosecute its complaint against the Financing
Party Defendants. The Committee raised no objection when its members and counsel
participated in mediation sessions attended by Cadwalader as counsel to the Debtors in
November and December 2009. The Committee raised no objection until now, when the Debtors
took an action that the Committee wishes to oppose.
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(b) The Committee Was Fully Aware That Cadwalader Was Analyzing the Committee Litigation On The Debtors’ Behalf
37. No doubt aware that its objections may be viewed as coming too late, the
Committee suggests that it did not understand Cadwalader’s involvement with the litigation and
the Litigation Subcommittee. Comm. Obj. at 79 n.62 (“the Committee certainly was not aware
that CWT . . . [was] providing substantive advice as to the propriety of the UCC Litigation [to
the Litigation Subcommittee].”) The Committee’s expression of surprise is difficult to take
seriously. See Ex. 22 (July 7, 2009 Hawkins Email to Weisfelner, et al.); Ex. 23 (Aug. 12, 2009
Palmer Letter to Weisfelner). Cadwalader:
met with the Committee’s counsel on multiple occasions to discuss the merits of the litigation;
attended every single deposition;
participated in multiple hearings and scheduling conferences;
participated in both mediation sessions; and
expressly encouraged the Committee and Financing Party Defendants to seek a consensual resolution of the Committee Litigation.
38. At the threshold, the Committee specifically requested that the Debtors’
CEO, Gallogly, instruct Cadwalader to evaluate the litigation and provide advice to the Debtors.
See Gallogly Decl. ¶ 10; Suppl. Cooper Decl. ¶¶ 2-3; Ex. 11 (Davis Tr.) at 88:14-89:15, 338:4-
339:17, 348:4-14. Ed Weisfelner testified that Cadwalader’s views of the merits of the litigation
mattered to him “because Cadwalader [was] supposed to be counseling the Litigation
Subcommittee.” See Ex. 5 (Weisfelner Tr.) at 226:7-12. The Committee and Cadwalader met
on June 4, 2009 and June 12, 2009 to discuss the merits of the litigation. Ex. 24 (May 30, 2009
Wissner-Gross Email to Friedman, et al.); Ex. 25 (June 8, 2009 Palmer Email to Weisfelner).
Indeed, as shown by the attached email from Committee counsel, the Committee was sending
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Cadwalader draft complaints prior to the meetings and soliciting Cadwalader’s advice and
comments. See Ex. 24 (May 30, 2009 Wissner-Gross Email to Friedman, et al.); Ex. 26 (June 3,
2009 Elstad Email to Davis, et al.). Based on the June 12, 2009 meeting, the Committee made
several edits to its complaint. Time charges of both law firms show that the meeting lasted about
an hour, and a large number of documents and points were discussed.9 The Committee
Objection now cites that very meeting as evidence of Cadwalader’s alleged hostility to the
Committee and the Committee Litigation, saying Hawkins and Weiss expressed a “dismissive
view regarding the merits of the Lender Claims.” Comm. Obj. at 12.
39. By the Committee’s own admission, the Committee specifically asked
Cadwalader for a third meeting in October 2009 to discuss the merits of its case.10 See Ex. 5
(Weisfelner Tr.) at 226:7-228:8. Weisfelner “thought the Debtors should be ultimately weighing
in on what the Debtor thought were the merits of the litigation or, even a subset of that, weighing
in on what the Debtor thought were the propriety of settlement positions that were being adopted
by the parties.” See Ex. 5 (Weisfelner Tr.) at 226:25-227:11.
40. Further, Cadwalader’s openness about the role it played in advising the
Debtors regarding the Committee Litigation extends to court filings: Cadwalader’s Second
Interim Application For an Order Allowing Compensation for Professional Services Performed
by Cadwalader During the Period from May 1, 2009 Through and Including August 31, 2009 is
9 See Ex. 11 (Davis Tr.) at 179:24-180:7, 363:24-364:5 (statement by Mr. Wissner-Gross).10 The Committee’s contention that Cadwalader cancelled this meeting without justification and “declined to reschedule” has been retracted. See Comm. Obj. at 20, n.33. After repeating this allegation at his deposition, Weisfelner subsequently testified that “maybe I need to correct my testimony” because “I tend to think that people did make issue of . . . whether the meeting would make more sense before or after [the Committee’s] expert reports were available for [Cadwalader’s] review.” See Ex. 5 (Weisfelner Tr.) at 252:8-22, 263:13-22. Further, Weisfelner could not recall whether the Committee had ever attempted to reschedule that meeting. Id. at 253:3-20.
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explicit that “the attorneys at Cadwalader drafted a white paper memorandum describing the
Creditors’ Committee’s claims and factual context, and evaluating legal basis for claims.”
Cadwalader further noted: “Cadwalader expended a significant amount of time on addressing
the Creditors’ Committee’s action to pursue claims against the Debtors’ prepetition lenders. See
Ex. 27 (Cadwalader’s Second Interim Application); see also Ex. 28 (Cadwalader’s First Interim
Application). Cadwalader’s efforts included reviewing and analyzing the complaint filed by the
Creditors’ Committee against prepetition lenders subsequent to the Court’s grant of STN
standing.” This application was filed on November 6, 2009 and the objection deadline was
November 23, 2009. During that timeframe the Committee participated in a mediation at
Cadwalader’s offices and knew Cadwalader attorneys were in attendance. But the Committee
never objected to Cadwalader’s compensation application.11
41. The Committee’s apparent amnesia on Cadwalader’s role has occurred
before. On October 12, 2009, Brown Rudnick claimed that it was unaware that Cadwalader was
drafting the White Paper regarding the Committee Litigation. George Davis’s written response
to Brown Rudnick attorney Stephen Pohl makes clear that the Committee has had full knowledge
of Cadwalader’s role in these cases:
Steve:
Your email suggests your surprise with the fact that the Debtors have analyzed the strengths and weaknesses of the claims asserted in the Committee litigation in order to form their own independent conclusions regarding those claims. Such analysis was performed and the white paper
11 Moreover, the Committee received Cadwalader’s monthly time records which indicate in great detail that Cadwalader provided advice to the Litigation Subcommittee and analyzed the estate claims being pursued by the Committee and never raised an issue or objected to Cadwalader’s fees. See Ex. 29 (Cadwalader June Time Records); Ex. 30 (Cadwalader July Time Records); Ex. 31 (Cadwalader August Time Records); Ex. 32 (Cadwalader September Time Records); Ex. 33 (Cadwalader October Time Records).
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was prepared by CWT at the instruction of Steve Cooper. Indeed, at a breakfast meeting among Ed, Steve, Jim Gallogly and me at or about the time Jim became involved with Lyondell, Ed requested that Steve commission CWT to perform a thorough review of the claims to be asserted in the Committee litigation. In our initial response to the STN motion dated July 7, 2009, we said at paragraph 4:
“Both prior to and since the filing of the Standing Motion, counsel for the Debtors have conducted their own investigation and legal analysis of the merits of each of the principal claims the Committee now seeks to assert. The Debtors undertook this independent investigation and analysis, with the express encouragement of the Committee’s counsel, so that the Debtors and their counsel could have a complete and informed understanding of the strengths and weaknesses of the proposed claims and their impact on the Debtors’ reorganization plans and process.”
The white paper has been provided to the members of the Litigation Committee. Consistent with our longstanding practice, the white paper has not been discussed with the members of the Supervisory Board (except Mr. Cooper in his capacity as a member of the Litigation Committee). All relevant and available discovery has been reviewed and taken into consideration. The white paper will continue to be updated as and when appropriate based on future deposition testimony.
See Ex. 34 (Oct. 12, 2009 Davis Email to Pohl) (emphasis added).12
42. Moreover, there is no evidence that Cadwalader’s relationship with its
clients in unrelated matters had any impact on the settlement. Cadwalader never discussed with
Financing Party Defendants the merits of the Committee Litigation or a proposed settlement.
After receiving access to every document and email that passed among the Debtors and the
Financing Party Defendants, and after depositions of each of the law firms involved, the
Committee Objection cites just two instances where the Debtors supposedly disclosed their view
on the merits to the Financing Party Defendants. See Comm. Obj. at 77. The first is a May 2009
12 Indeed, Davis testified that “not only did [Weisfelner] not ever suggest that, he actually asked that we be authorized and mandated to investigate the claims on behalf of the company, and at no point in all of the discovery, in all of our participation at all the depositions, at all of our participation in mediation sessions and the like has it ever been raised, until most recently, that there was any issue whatsoever with Cadwalader’s involvement.” See Ex. 11 (Davis Tr.) at 347:12-348:3.
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conversation between a Cadwalader attorney, Joshua Weiss, and Merrill Lynch counsel Michael
Simes. According to the Committee, Weiss “privately assured” Simes that “there wasn’t
anything to” the Committee’s claims. See Comm. Obj. at 11-12, 27-28, 77. Setting aside the
facts that this was a statement made before the Committee had obtained STN standing, before the
Committee provided the Debtors with a copy of their draft complaint, and that Weiss was one of
many Cadwalader attorneys involved in this case (and not one of the senior members of the
Cadwalader team), the Committee distorts completely Simes’ deposition testimony. As the
deposition transcript makes clear, Weiss spoke to Simes in order to try to obtain Merrill Lynch’s
production in response to the Committee’s Rule 2004 motion. At the time, Merrill Lynch was
refusing to give other parties, including the Debtors, this production. Simes testified that “in
convincing me to give [the Debtors] the documents, [Weiss] said look, we’re looking into this
too and here’s what we’ve seen, I don’t think there’s anything to the claims, you should just give
us your documents.” See Ex. 36 (Jan. 15, 2010 Transcript of the Deposition of Michael Simes
(“Simes Tr.”)) at 198:10-204:6. Thus, viewed in full context, Weiss’s statement is completely
benign. Further, according to Simes, this was the only conversation he had with Weiss regarding
Weiss’s views on the Committee’s claims. See Ex. 36 (Simes Tr.) at 201:21-204:6.13
13 The Committee also alleges that Cadwalader interfered with discovery by objecting to questions during depositions and asking follow-up questions. In the 24 depositions conducted in the discovery phase of litigation, Cadwalader did not ask a single question other than at the two depositions of David Witte of CMAI on October 22, 2009 and November 30, 2009. At those depositions, Cadwalader asked a total of thirteen questions. See Ex. 37 (Oct. 22, 2009 Transcript of the Deposition of David Witte) at 349:9-350:20; Ex. 38 (Nov. 30, 2009 Transcript of the Deposition of David Witte) at 447:13-451:3. The Committee also points to an instance of questioning at the deposition of Alan Bigman during the Rule 2004 phase of discovery, where Cadwalader purportedly engaged in speaking objections and instructed Bigman not to answer questions about his interest in a Blavatnik-controlled company. See Comm. Obj. at 11. The transcript actually reflects that Bigman acknowledged that he had an interest in an entity controlled by Blavatnik. The Cadwalader attorney merely objected to, and Bigman refused to answer, questions concerning the amount of that interest. See Ex. 39 (May 28, 2009 Transcript of the Deposition of Alan Bigman) at 23:13-27:19. There is no nexus, at all, between this question and the Committee’s (in)ability to develop its merits case.
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43. The second instance cited by the Committee is an email sent by Weiss to
John Berry, counsel to LeverageSource, S.a.r.l., during the Witte deposition. In the email, Weiss
described Witte as “bought and paid for.” See Comm. Obj. at 77. It is actually surprising that
the Committee would raise this example. Witte’s report for CMAI, which represents a full
about-face from the CMAI report delivered to the Financing Party Defendants at the time the
LBO closed, is a very serious problem for the Committee’s case. CMAI’s conduct and
testimony were quite shocking. Weiss was simply expressing the feelings that any legal
professional, neutral or not, would have while witnessing it. That this is one of the two, and only
two, examples the Committee relies on to prove an improper exchange of views between the
Debtors and the Financing Party Defendants on the merits demonstrates the hollowness of the
Committee’s accusation.
44. The Committee’s focus on dealings with Stephen Quine, a Merrill Lynch
vice-president who manages credits, including this bankruptcy and the Fred Leighton
bankruptcy, see Comm. Obj. at 18-19, is also lacking in evidentiary support. Notably, the
Committee does not—and cannot—allege that Quine ever discussed the merits of the Committee
Litigation or its settlement with anyone from Cadwalader. Given the degree of attention that the
Committee Objection devoted to Quine, the Committee’s failure to ask either the Cadwalader
30(b)(6) witness or the Merrill Lynch 30(b)(6) witness whether there had been any such
conversations speaks volumes.
45. Similarly, the Committee’s allegation that “at no point during Rule 2004
discovery or during discovery in the Adversary Proceeding did Cadwalader ever provide any
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assistance to Committee’s counsel,” finds no support in the record.14 See Comm. Obj. at 76-77;
Ex. 41 (Apr. 2, 2009 Pohl Email to Friedman, et al.); Ex. 42 (Apr. 8, 2009 Friedman Email to
Pohl, et al.). The Debtors have voluntarily provided the Committee’s counsel and experts with
multiple meetings with Debtor personnel and access to more site visits of the Debtors’ plants
worldwide than the Financing Party Defendants ever received. See Ex. 11 (Davis Tr.) at 323:17-
328:8. From day one of the Committee’s investigation, the Debtors (through Cadwalader) have
bent over backwards to be responsive in producing documents to the Committee.15 Until the
settlement was reached, the Committee never complained that Cadwalader was in any way
preventing it from prosecuting its case or providing assistance to the Financing Party Defendants,
and it still cannot even allege that its case was impeded.16
14 The Committee’s statement to the contrary notwithstanding, Cadwalader never provided the Financing Party Defendants or other defendants access to any witness. See Ex. 11 (Davis Tr.) at 316:21-317:16. Equally disingenuous is the Committee’s contention that Cadwalader assisted the Financing Party Defendants by providing them with “a confidential CMAI document.” See Comm. Obj. at 36, n.43. The document at issue is a CMAI Multi-Client Report that is publicly available for purchase by CMAI clients. Moreover, the Committee had refused to provide this report in document production because it claimed it was “irrelevant.” See Ex. 40 (Nov. 19, 2009 Committee Response To Defendants’ Document Request). By providing an “irrelevant” document, Cadwalader was not assisting Access and certainly was not assisting the Financing Party Defendants. 15 The Debtors worked expeditiously to provide the Committee with all responsive documents in connection with both their Rule 2004 discovery requests and adversary proceeding discovery requests (and the Financing Party Defendants’ document requests). Overall, the Committee received just under 700,000 pages of documents from the Debtors—over 100,000 pages more than the total productions received from Citibank, UBS, ABN AMRO and Goldman Sachs combined.16 Davis testified that “I don’t believe there has ever been a complaint [by the Committee] in connection with document discovery or depositions about any of the conduct of Cadwalader or the information that was provided. I think there might have been disagreements on the scope of what should be provided, but in terms of Cadwalader dragging its feet or the company not providing information or not making witnesses available, I don’t think there’s been a single complaint registered with the Court throughout this whole process.” See Ex. 11 (Davis Tr.) at 315:20-316:20.
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(c) The Committee’s Allegations Of Conflict Are Fundamentally Incompatible With Its Allegations Regarding the Bridge Lenders’ Desire to Settle
46. Last, but hardly least, the Committee’s effort to prove collusion is undone
by its own narrative. If the Financing Party Defendants—and particularly Merrill Lynch—knew
all along that Cadwalader would steer the Debtors into a lowball settlement, there would have
been absolutely no reason for the Bridge Lenders to seek a separate peace with the Committee on
the eve of mediation. See Comm. Obj., Ex. 45. Documents and deposition testimony establishes
that in late November 2009, counsel for the Bridge Lenders and the Committee met at the Bridge
Lender’s request to discuss settlement. Id. While the parties disagree on what, if anything, was
offered during these meetings, the simple fact that counsel for the Bridge Lenders—and
particularly Merrill Lynch—sought to explore separate settlement negotiations with the
Committee five days before the second mediation (and after the Financing Party Defendants
were aware that the Debtors had retained consultants to evaluate the merits of the litigation)
makes it abundantly clear that the Financing Party Defendants did not believe a lowball deal with
the Debtors was in the offing.
(d) The Committee’s False Allegations Regarding Stephen Cooper
47. Throughout its Objection, the Committee alleges that Stephen Cooper is
also conflicted. See Comm. Obj. at 61. Again, the record fails to support the allegation. Indeed,
the Examiner found that Cooper is “meaningfully informed, disinterested, and acting in good
faith as related to . . . the scope of [Examiner’s] investigation.” See Examiner Report at 11.
48. Nevertheless, the Committee asserts that prior to his deposition in January
2010, Cooper did not disclose his alleged “material business relationships” with [REDACTED]
[REDACTED] [REDACTED]. See Comm. Obj. at 20-21. The relationships the Committee
cites are completely benign. They were either personal in nature or terminated years before
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Cooper’s employment by the Supervisory Board and the formation of the Litigation
Subcommittee.17 See Suppl. Cooper Decl. ¶¶ 8-10; Ex. 3 (Jan. 11, 2010 Cooper Tr.) at 45:3-8;
46:7-13; 46:21-47:23; 48:15-50:8.18
49. In Enron, a matter cited by the Committee, Cooper was prohibited from
advising the debtors there in connection with any litigation involving any “current or former
clients or entities that are investors in the equity fund controlled by Cooper.” At that time (sight
years ago), Citibank was an equity investor in a fund Cooper managed; therefore, the order
prevented him from providing such advice to Enron. See Ex. 3 (Jan. 11, 2010 Cooper Tr.) at
32:21-33:4. As the Committee knows, Cooper no longer controls that equity fund because it
liquidated approximately two years ago. See Suppl. Cooper Decl. ¶ 9; Ex. 3 (Jan. 11, 2010
Cooper Tr.) at 18:25-22:18. Thus, the provisions in the Enron order simply have no relevance
here. Finally, Cooper testified that any relationships he may have with some of the Financing
Party Defendants did not enter into his decisions regarding, the timing of, or the terms of, the
settlement. See Ex. 3 (Jan. 11, 2010 Cooper Tr.) at 45:3-50:8; Suppl. Cooper Decl. ¶ 10.
50. The Committee’s assertion that Cooper was somehow motivated to enter
into the settlement because he was “entitled to receive a success fee” also falls flat. See Comm.
Obj. at 22-23. The Committee cannot establish any concrete link between the potential bonus
and the settlement because none exists.
17 The Committee’s allegation that Cooper had a conflict because of his relationship with [REDACTED] highlights how silly its allegations are: as Cooper testified, he has business checking accounts there. See Ex. 3 (Jan. 11, 2010 Cooper Tr.) at 46:21-47:23. Indeed, when Cadwalader attempted to ask similar questions of Weisfelner during his deposition, the same Brown Rudnick attorney who deposed Cooper, Sigmund Wissner-Gross, instructed Weisfelner not to answer the question because “[i]t’s a ridiculous question to ask of Mr. Weisfelner.” See Ex. 5 (Weisfelner Tr.) at 245:13-14.18 The fact that these are relationships in which Cooper has money managed by Financing Party Defendants, rather than investments in Financing Party Defendants, distinguishes this case from In re CF Holding Corp., 164 B.R. 799, 806-07 (Bankr. D. Conn. 1994).
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51. Casting its net ever-wider, the Committee has also noted that McShea’s
firm, AlixPartners, works “for all of the Bridge Lenders and several other defendants.” See
Comm. Obj. at 21, n.26. McShea’s retention as CRO, however, was approved without any
objection by the Committee and the suggestion of conflict is meritless.
52. The Committee wastes a substantial amount of time with its recycled and
previously rejected allegations that the Debtors and the Financing Party Defendants committed
misconduct aimed at harming unsecured creditors via the DIP Financing and the process by
which the Debtors have solicited bids for equity financing. Rather than discuss what has already
been disproven on multiple occasions, the Debtors refer the Court to the Examiner Report and
the Court’s own order denying the Committee’s Motion to Expand the Scope of the Examiner,
which specifically found that the “[t]he Examiner has completed the investigation previously
approved by the Court and has given no cause for concern as to the Debtors’ conduct.”
See Order Denying Motion of Official Committee of Unsecured Creditors to Expand the Scope
of Examiner’s Investigation and Duties [Dkt. No. 3705] (emphasis added).
Legal Argument
I. THE DEBTORS HAVE STANDING TO MANAGE THE ESTATE’S CLAIMS, AND THERE IS NO NEED FOR A SEPARATE, PRIOR SHOWING REGARDING WITHDRAWAL OF THE COMMITTEE’S DERIVATIVE STANDING
53. The Committee argues that because it was granted standing to prosecute
the Committee Litigation, the Debtors must first persuade the Court to withdraw the
Committee’s standing before being permitted to ask the Court to consider the proposed
settlement. Comm. Obj. at 56. The Committee also argues that a finding by the Court that the
proposed settlement is in the best interests of the estate, such that it should be approved, cannot
also have the practical effect of withdrawing the Committee’s standing. Id. at 57. The
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Committee’s positions reflect not only a calculated disregard for common sense but also a
fundamental misunderstanding of both the facts of its grant of derivative standing and the law as
set forth in the Adelphia decisions. See Official Comm. of Equity Sec. Holders v. Official
Comm. of Unsecured Creditors of Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.),
544 F.3d 420 (2d Cir. 2008) (“Adelphia-Cir.”); Official Comm. of Equity Sec. Holders v.
Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.), 371 B.R. 660 (S.D.N.Y. 2007)
(“Adelphia-Dist.”), aff’d, 544 F.3d 420 (2d Cir. 2008).
54. The Committee argues that “[p]rior to withdrawal of a committee’s
standing based upon a settlement being proposed over the objection of the committee, a court
must inquire whether the considerations that first justified the conferral of STN authority have
changed so as to warrant withdrawal,” i.e., that the decision to withdraw standing requires a
change in circumstances. Comm. Obj. at 56. The Committee cites no direct legal authority on
this point, but instead bases this notion on the happenstance that in Adelphia, in deciding to
transfer claims from the equity committee to the litigation trust, “the court engaged in another
‘best interest test,’ predicated on the changed factual circumstances.” Adelphia-Dist., 371 B.R. at
673. It is not surprising that the Court in that case considered the best interests of the estate
when altering the arrangement for the management of estate assets, but it hardly follows that
changed circumstances are the sine qua non for withdrawing standing.19
55. The unarticulated assumption at the heart of the Committee’s contentions
is that the Committee was granted exclusive standing with respect to all aspects of the
management of the claims asserted in the Committee Litigation, including an exclusive right to
19 In any event, the Debtors submit that a Rule 9019 inquiry predicated on a newly presented opportunity to resolve the estate’s claims against the Financing Party Defendants and proceed toward emergence from chapter 11 should suffice to fulfill the Committee’s artificial procedural obstacle.
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try to settle them—which simply is not so. The law is quite clear that the Debtors, as debtors in
possession, retain their inherent standing to manage the property of the estate, including estate
claims. It is undisputed that the claims asserted in the Committee Litigation are property of the
estate, and the Committee likewise acknowledges that (at least as a general matter) the debtor in
possession is the steward of estate claims. These legal realities are not altered by the granting of
derivative standing to a third party, whether under Unsecured Creditors’ Comm. v. Noyes (In re
STN Enterprises), 779 F.2d 901 (2d Cir. 1985), Commodore Int’l Ltd. v. Gould (In re
Commodore Int’l Ltd.), 262 F.3d 96 (2d Cir. 2001), or Glinka v. Murad (In re Housecraft Indus.
USA, Inc.), 310 F.3d 64 (2d Cir. 2002).20
56. The Committee’s argument for its exclusive standing to settle appears to
be little more than the complaint that “[i]t should not be without consequence that . . . the
Committee was the only party authorized . . . to prosecute valuable estate claims.” Comm. Obj.
at 47. This argument answers itself: the consequence is that the Committee was authorized, in
the Debtors’ stead, to prosecute those claims. Where the reason why derivative standing was
granted is a contractual limitation on prosecution of claims by the Debtors, however, it does not
logically follow (even where the ability to prosecute carries with it the ability to settle) that the
Committee was exclusively authorized to settle or engage in other aspects of managing the
estate’s claims.21
20 At footnote 48 of its Objection, the Committee notes that the Debtors are wrong to cite Adelphia-Cir.for the proposition that a committee with STN standing “shares the labor of litigation with the debtor-in-possession,” perhaps arguing that because the Second Circuit was quoting Commodore, such sharing is limited to Commodore standing cases. Comm. Obj. at 55 n.48. A closer reading of the Adelphia cases would reveal that the committee at issue was authorized under STN. The fact that the Second Circuit nonetheless cited Commodore suggests that it recognized no meaningful difference for these purposes.21 It also does not logically follow that a debtor would be deprived of the ability to obtain approval of an otherwise proper settlement even where standing was transferred to a committee for a reason other than contractual waiver. For example, a committee might be empowered to prosecute a claim against a
USActive 18357390.6 - 32 -
57. The Committee does nothing more to support its underlying assumption of
exclusivity than to make one throw-away reference to ACC Bondholder Group v. Adelphia
Commc’ns Corp. (In re Adelphia Commc’ns Corp.), 361 B.R. 337 (S.D.N.Y. 2007), for the
proposition that the consent of a committee authorized to litigate is necessary for settlement. In
that case, however, the district court found, on a request for a stay pending appeal of this Court’s
approval of a settlement, only that there was a likelihood of success on the merits with respect to
the argument that the Court had erred in approving a settlement made by the debtor without the
committee’s consent, where the debtor’s ability to participate in resolving the dispute had been
previously limited by the Court and made subject to the committee’s participation. Id. at 355-
57.22 The Debtors here have not been similarly limited, however, and moreover, the Second
Circuit has since made it crystal clear that “[i]t would be contrary to the reasoning of this
Circuit’s precedent to hold that the bankruptcy court’s grant of derivative standing vested the
Equity Committee with a veto over both the court and the debtor-in-possession.” Adelphia-Cir.,
544 F.3d at 424-25. Thus, it could not be clearer in this Circuit that derivative standing to sue
does not, unless expressly conferred, impart exclusive standing to settle. It is equally clear that a
grant of standing does not give the Committee the right to veto any proposed settlement.
58. The Committee’s second contention is that a determination by the Court to
approve the proposed settlement cannot itself effect a withdrawal of the Committee’s standing,
because the two acts are governed by different standards, notwithstanding they both use the
debtor’s sole director and shareholder for breach of fiduciary duty based simply on the relationship between the director/shareholder and the debtor. Still, if a debtor were to propose a settlement that satisfies the requirements for approval of a settlement with an “insider,” a court could still logically conclude that it is in the best interest of the estate to approve such a settlement.22 Ultimately, the merits were never reached because the putative appellant failed to post the bond required for the stay. See ACC Bondholder Group v. Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.), 367 B.R. 84, 88 (S.D.N.Y. 2007).
USActive 18357390.6 - 33 -
concept of the “best interests of the estate,” and they may implicate different “factual
underpinnings.” Comm. Obj. at 57. What the Committee proposes necessarily implies that a
settlement proposed by a debtor, which would otherwise be approved as being in the best
interests of the estate if the party with derivative standing sought approval, would have to be
rejected or ignored by the Court because the first, somehow different, best interests hurdle could
not be met. This cannot possibly be the law.23
59. The Committee also contends that rather than affirming the Debtors’
central role in overseeing and managing estate claims, Smart World Techs., LLC v. Juno Online
Servs. Inc. (In re Smart World Techs., LLC), 423 F.3d 166 (2d Cir. 2005), actually requires the
Debtors to be treated as meddling interlopers with respect to the Committee Litigation. Comm.
Obj. at 50-51. Specifically, the Committee reads Smart World to mean that “where an estate
claim is already being prosecuted by a court-authorized party (here, the Committee), a party with
little economic interest in the claim (here, the Debtors) should not be allowed to settle the claim
while the prosecuting party is engaging in precisely the function intended by the conferral of
standing . . . . [T]he litigation should be protected from unwarranted interference with the
prosecuting party’s efforts to maximize the value of its claims.” Id. (emphasis added).24
23 To the extent the Committee argues that the standard for granting or revoking derivative standing must be different—and greater—than the standard under Rule 9019 because the former utilizes “best interests of the estate” in the context of “maximizing” the estate, rather than requiring only that the settlement be higher than the lowest point in the range of reasonableness, and thus that it would be inconsistent to allow a settlement considered under the lower standard to dislodge a committee authorized under the higher standard, the argument is undermined by the Committee’s own argument regarding its ability to settle. See Comm. Obj. at 46-47, 57, 78, 126. The Committee acknowledges that settlement is “consistent with the value-maximizing function of derivative standing,” and cites case after case of committees with derivative standing being permitted to settle under Rule 9019. Id. at 47. 24 The emphasized text lets slip the Committee’s candid (and erroneous) view that the claims belong to the Committee rather than the estate.
USActive 18357390.6 - 34 -
60. In this argument the Committee advances the astonishing view that the
Debtors are “a party with little economic interest in the claim”—as though debtors in possession
(having fiduciary duties to the estate) were no different than individual creditors (with duties to
no one other than their own self-interest). Id. at 51. This speaks volumes about the Committee’s
failure to comprehend or accept the central role and interests of the Debtors, as debtors in
possession, and the nature and impact of the claims being settled on the administration of these
cases. For the Committee, which answers only to unsecured creditors who in this case are
hopelessly out of the money, prosecution of the Committee Litigation is the only avenue to a
recovery. In essence, the unsecured creditors are gambling with house money—they can win,
but they can’t lose. If the company suffers in the process of holding out for the last dollar, it is
their adversaries—the Financing Party Defendants—that lose, not the unsecured creditors. It is
inevitable that this affects the Committee’s objectivity in assessing the settlement value of the
litigation claims.
61. By contrast, the Debtors have duties to the estate as a whole, and not to
any particular constituency of creditors.25 See In re Adelphia Commc’ns Corp., 327 B.R. 143,
165 (Bankr. S.D.N.Y. 2005) (“a debtor’s board is the fiduciary for all parties in interest, who
naturally have competing interests with respect to limited assets that are insufficient to satisfy
everyone’s needs and concerns”) (emphasis in original), aff’d, 337 B.R. 475 (S.D.N.Y. 2006).
The Debtors have never been under the impression that they were relieved of that fiduciary duty
25 The Committee claims, instead, that a debtor owes its fiduciary obligations “to the ‘prime beneficiaries of its estate’: its unsecured creditors.” Comm. Obj. at 60. Even if generally true that unsecured creditors are the estate’s primary beneficiary, that is not the case here, where unsecured creditors are out of the money unless they can avoid liens. If the liens are not avoided, then the Financing Party Defendants are the primary beneficiary of the Debtors’ estates. This is a conflict that only the Debtors, as a neutral party, can balance.
USActive 18357390.6 - 35 -
upon the grant of derivative authority to the Committee, and have continually tried to balance the
interests of all creditors and the need of the company to emerge from bankruptcy.
62. The Committee attempts in vain to distinguish itself from the equity
committee in Adelphia, by noting that Adelphia involved (i) the transfer of claims, (ii) where the
equity holders were “hopelessly out of the money.” Comm. Obj. at 52. Whether the
management of estate property involves claims being settled or transferred (and then settled or
otherwise resolved), the debtor in possession’s right and duty to manage such assets is what is at
issue. Moreover, the notion that wild success in pursuing claims could change the fortunes of the
unsecured creditors in this case from out of the money to in the money was no less true for the
equity-holders in Adelphia; in fact, if anything, unsecured creditors of the Debtors (sitting behind
more than $20 billion of secured debt) are more hopelessly out of the money than the equity-
holders were in Adelphia (sitting behind “only” $6.5 billion of unsecured debt).
II. THE DEBTORS HAVE NOT LOST THEIR STANDING TO PROPOSE A 9019 SETTLEMENT DUE TO CONFLICT, COLLUSION OR OTHERWISE
63. The Committee contends, under several headings in the Objection and
without citation to legal authority, that the proposed settlement “should not be considered for
approval by the Court under the standards of Rule 9019” because it allegedly is not a bona fide
settlement that can be presented to the Court as a prima facie product of arm’s-length bargaining
between the parties. See Comm. Obj. at 52-53. As such, the Committee claims, the settlement is
not consistent with fairness and due process. Id. at 53. The Committee misses the obvious: the
Rule 9019 hearing is the due process that allows settlements to be made.
64. In one form or another, the Committee’s arguments amount to a motion to
divest the Debtors of their inherent standing to settle, on the basis of the Debtors’ alleged
collusion with the Financing Party Defendants and Cadwalader’s alleged conflicts. The
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Committee argues, essentially, that if the Court had been called upon to find, at the time that
STN standing was granted, whether the Debtors had improper motives that would disqualify
them from any role in the management of the Committee Litigation claims, the Court would have
done so—and/or that the same improper motives prevent the Debtors from settling the claims
now. See id. at 52-53.
65. This argument, however, is unavailing. Assuming that the Debtors need
make any showing of “procedural” good faith to propose a settlement of a claim for which a
committee has received STN authority to pursue, that showing can be no different than the
showing required as part of the TMT analysis. See, generally, Protective Comm. for Indep.
S’holders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-25 (1968); see also 9019
Memo ¶¶ 62-65, 116, 118 , 128 (discussion of TMT). They must be one and the same, and in
any event, neither logically can be a roadblock to approval of a settlement which the Court
otherwise would be prepared to approve after application and balancing of all of the TMT
factors, no one of which necessarily is dispositive. If not so, bankruptcy’s preference for
consensual resolution of disputes and efficient administration of cases would be turned on its
head. It makes no sense that a result which the Court is prepared to find is in the best interests of
the estate (a concept which extends beyond the litigants to this dispute) could not be
implemented based solely on questions as to process.
66. Of course, for the reasons set forth in more detail below, there is no
sustainable factual or legal basis to conclude that the proposed settlement was not arrived at in
good faith and as the result of appropriate arm’s-length negotiations. The allegations about
Cadwalader’s bias, apart from being untrue, are completely neutralized by Judge Conrad. Free
from any conceivable bias, Judge Conrad reached virtually identical legal conclusions, and the
settlement is fully consistent with his recommendations. Similarly, the carefully pieced together
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story of collusion among the Debtors’ representatives and the Financing Party Defendants is torn
to shreds by the Bridge Lenders’ mediation-eve settlement overtures.
III. THE SETTLEMENT FALLS WITHIN THE RANGE OF REASONABLENESS
67. Because the Debtors have standing to propose a settlement of the
Committee Litigation,26 the analysis turns to whether the Debtors have met the standard for
approval of that settlement under Rule 9019. The standard for approval of a settlement is
familiar: a bankruptcy court must find the settlement is fair and equitable, reasonable, and in the
best interests of the debtor’s estate. See, e.g., Air Line Pilots Ass’n, Int’l v. Am. Nat’l Bank &
Trust Co. (In re Ionosphere Clubs, Inc.), 156 B.R. 414, 426 (S.D.N.Y. 1993), aff’d sub. nom.,
Sobchack v. Am. Nat’l Bank & Trust Co. (In re Ionosphere Clubs), 17 F.3d 600 (2d Cir. 1994).
And settlements are favored in bankruptcy. In re Hibbard Brown & Co., 217 B.R. 41, 46 (Bankr.
S.D.N.Y. 1998); Nellis v. Shugrue, 165 B.R. 115, 123 (S.D.N.Y. 1994) (“the general rule [is]
that settlements are favored and, in fact, encouraged by the approval process outlined above”).
68. Equally familiar is that no mini-trial need be conducted in connection with
a hearing on a settlement; simply a canvassing of the issues. In re Adelphia Commn’cs Corp.,
368 B.R. 140, 225 (Bankr. S.D.N.Y. 2007) (“Adelphia-Conf.”). The Court properly can rely on
a wide variety of evidence and experiences as it “canvass[es] the issues” to determine whether
the settlement meets the standards set out in TMT and falls within the “range of reasonableness.”
Id. at 225, 227-31. The Committee complains, however, that “beyond a list of open issues, the
Debtors have provided absolutely no information or evidence to justify their willingness to
26 As described above, the Debtors were not deprived of settlement standing when the Committee was authorized to prosecute the Committee Litigation and their actual conduct in negotiating the settlement is but one of several TMT factors for the Court to consider.
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discount the Committee’s claims,” and that the Debtors have failed to provide any support for
their “range of reasonableness” calculations. Comm. Obj. at 123. Not only is this complaint
disingenuous (as the Debtors were directed not to place their analyses on the record),27 but it
betrays a misunderstanding of the nature of the Rule 9019 inquiry. The Debtors are not, as the
Committee asserts, “asking the Court to simply trust that their calculations are valid.” Id. To the
contrary, the Debtors have identified the issues and the difficulties faced by the parties—on both
sides—and ask the Court to make its own “informed, independent judgment” about them. See
Adelphia-Conf., 368 B.R. at 225 (quoting Official Comm. of Unsecured Creditors of Int’l
Distrib. Ctrs., Inc. v. James Talcott, Inc. (In re Int’l Distrib. Ctrs, Inc.), 103 B.R. 420, 422
(S.D.N.Y. 1989)). Ultimately, the subjective assessment by the Debtors (or the Committee, for
that matter) is beside the point, because the Court’s process of determining whether or not the
proposed settlement is reasonable is not for the Court to check the parties’ arithmetic. The
Debtors are confident that upon a canvassing of the issues, the Court will find that the settlement
is well within the range of reasonableness.
69. The Committee also argues that the Court cannot determine whether the
settlement is fair and equitable based upon the existing record. See Comm. Obj. at 123
(“[a]pproval of a settlement without a sufficient factual foundation will inherently constitute an
abuse of discretion.”) (citing United States v. AWECO, Inc. (In re AWECO, Inc.), 725 F.2d 293,
299 (5th Cir.), cert. denied, 469 U.S. 880 (1984)). This is patently untrue. The Court has
mountains of information, as developed through extensive trial preparation over the last several
27 As the Committee is aware, the Court required the Debtors to make those details available only to the Committee, to enable the Committee to identify any inconsistencies between the Debtors’ analysis and their 9019 Memo. The Debtors did make those details available, and the Committee has failed to identify a single inconsistency.
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months, including (by way of example) each litigant’s expert and expert rebuttal reports, each
litigant’s factual and legal contentions, each litigant’s motion to dismiss based on certain legal
issues, and each litigant’s position on the viability of the CMAI testimony. See Dkt. No. 255,
256, 277, 278, 298, 302, 303, 316, 318. Indeed, it is the rare 9019 motion that has a record on
the merits as fully developed as the record here.
(A) Benefits of Settlement vis-à-vis the Probabilities of Ultimate Success
70. The first TMT factor involves weighing the benefits of the settlement
against the probabilities of success. Adelphia, 327 B.R. at 160. The Committee’s analysis on
this is flawed from the outset because it fails to honestly assess the benefits of the proposed
settlement.
(1) Benefits of the Settlement for the Estate
71. A persistent theme in the Committee Objection is that the settlement is not
in the Debtors’ best interests. This argument fails, because the Committee cannot refute that
(a) now is the time for the Debtors to exit chapter 11, and (b) this settlement paves the way
towards the exit.
72. The Debtors are ready to emerge from bankruptcy now. In little more than
twelve months, the Debtors have completed their operational restructuring. Burdensome
contracts have been rejected, unprofitable plants shut down, thousands of proofs of claims have
been expunged or settled, necessary down-sizing has been accomplished (with fair severance
packages) and the Debtors have recruited a strong new senior management team. There are few,
if any, benefits for the Debtors staying in bankruptcy. To the contrary, lingering in bankruptcy
can only cause substantial unease to employees, suppliers and vendors throughout the world.
73. Additionally, the Debtors are on the verge on completing an
unprecedented financial restructuring. When the Debtors made the settlement proposal, they had
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a clear opportunity to obtain $2.5 billion in new equity financing and sufficient new exit debt
financing to replace the much more expensive DIP New Money Loan. The Debtors also
formulated a plan of reorganization that will convert billions of dollars of old debt into new
equity. In these uncertain times, there is no guarantee that financing will remain available. The
Court need look no further than the value-destruction that occurred in the Delphi chapter 11
cases to recognize that when a debtor is ready to emerge, it must.
74. The settlement enables the Debtors to realize the full promise of its
progress: once a fair resolution of the estates’ claims against the Financing Party Defendants is
achieved, the Debtors can emerge from chapter 11. To say that the settlement occurred
prematurely (i.e., before the Phase I trial) ignores that the Committee and the Financing Party
Defendants have asserted that the Phase I trial would have been only the beginning—each would
have fought over entity-level solvency and capitalization and appropriate remedies during Phase
I-A. And, of course, multiple appeals would have ensued. The Committee suggests that so long
as it pursues claims in Phase I-A, a plan with a substantial litigation reserve is mandatory. This
novel proposition has no basis in law and is unacceptable to holders of the Debtors’ fulcrum
security. In essence, the Committee wants the unsecured creditors to have a permanent
filibuster, blocking the Debtors from reorganizing. By negotiating a fair settlement for
unsecured creditors, the Debtors have broken the intercreditor logjam.
75. The settlement also addresses other intractable issues: the Debtors
required the Senior Lenders and Bridge Lenders to resolve on their own terms their intercreditor
dispute. This dispute also posed a major obstacle to the Debtors’ ability to reorganize. Acting as
fiduciaries for all stakeholders, the Debtors also negotiated to ensure that 2015 Noteholders
would have the choice between a guaranteed, meaningful recovery or seeking to litigate highly
improbable claims against the Debtors and the Financing Party Defendants. Finally, in
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developing the settlement proposal, the Debtors also sought to ensure that the Millennium
Noteholders also received a distribution, notwithstanding the challenges they faced in obtaining
any recoveries. Providing recoveries for all of the unsecured constituencies and paving the way
towards a reorganization is strong evidence that the settlement is in the Debtors’ best interests.
(2) Benefits of the Settlement for Unsecured Creditors
76. The Committee has ignored (i) data demonstrating that the economic
benefits of the settlement for its constituents are greater today than when it was reached, and
(ii) the actual terms of the settlement, which put far more than just $300 million of value into the
hands of unsecured creditors.
77. First, the Committee has ignored important updated information provided
by the Debtors regarding the value of the cash payment to eligible general unsecured creditors.
Specifically, as the Committee was aware before it filed its papers, settlement proceeds will not
be shared among creditors with estimated claims of $3.2 billion at the high end. See Declaration
of Robb McWilliams (“McWilliams Decl.”) ¶ 10, Ex. A. Rather, settlement proceeds will be
shared among creditors with currently estimated claims (as of early December 2009) of between
$2.4 billion at the low end and $2.87 billion at the high end, with a midpoint of $2.64 billion (all
current estimates include the 2015 Noteholders’ claims of $1.354 billion). Id. at Ex. A. At that
claims range, the fixed $300 million effective date cash payment alone is worth between 10.5
cents and 12.4 cents, with a midpoint of 11.4 cents.
78. This reduction in the overall estimated claims pool is not unexpected.
Throughout these cases, AlixPartners’ claims estimates have decreased as the Debtors’ analysis
of claims has become more refined and the Debtors’ decisions with respect to assumption or
rejection of executory contracts, particularly the assumption of contracts that effectively will
remove unsecured creditors from the claims pool, have become more precise. McWilliams Decl.
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¶¶ 9-10. This work has occurred completely independently of the Committee Litigation and the
downward trajectory of claim estimates is typical in large chapter 11 cases.
79. Indeed, subsequent events show that actual claims ranges at the six entities
highlighted in the Motion that were reviewed by the Litigation Subcommittee as one factor in
assessing a reasonable settlement proposal have decreased meaningfully since early December
2009. The following chart has been updated for current information (which has previously been
shared with the Committee), as of today, and shows relevant claims ranges for these entities:
Debtor EntityUnsecured Claims (High Estimate)
Unsecured Claims (Low Estimate)
Refinanced Debt
Distributable Value
Lyondell Chemical Company $469,411,237 $321,320,859 $4,370,000,000 $1,239,000,000
Equistar Chemicals, LP $322,061,211 $187,316,503 $1,750,000,000 $1,319,000,000
Houston Refining LP $159,489,865 $115,172,734 $510,000,000 $1,023,000,000
Basell USA Inc. $166,294,378 $106,409,363 $444,013,000 $377,000,000
Millennium Petrochemicals, Inc. $66,769,962 $38,188,300 -- $156,000,000
Millennium Specialty Chemicals, Inc. $21,853,709 $12,897,603 -- $59,230,000
80. Thus, the overall high end of the claims range at these six entities is now
approximately $1.2 billion—or 25% lower than previous estimates.28 The low end of the claims
range is now approximately $780 million, or 35% lower, and the midpoint of the claims range is
now approximately $1.04 billion, or 30% lower than prior ranges.
81. Subsequent events, however, also suggest that the lower claims pool at
these six entities may have less value to share at these entities (absent the fixed consideration of
the settlement). Projected cash emergence needs have increased because of the need for
increased borrowings under the DIP ABL Loan. Accordingly, the Debtors estimate that these
28 The Committee creates recovery scenarios that include approximately $300 million in unsecured claims at Millennium America Inc., Millennium US OpCo, LLC and LyondellBasell Industries AF S.C.A., entities which have no value.
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entities could have approximately 7% less distributable value today than they did two months
ago. Therefore, if the Debtors were to conduct a new analysis today of potential unsecured
creditor litigation recoveries, it would undoubtedly point to lower recoveries. While this type of
“mapping analysis” was only one of the inputs considered by the Litigation Subcommittee—
combined with the advice of NERA, Nexant, Judge Conrad and the members’ own knowledge
and expertise—it confirms that the proposed settlement is completely reasonable.
82. Second, and more fundamentally, the Committee has ignored the benefits
of the settlement beyond the $300 million in cash. It makes virtually no reference to the billions
of dollars of estate claims that unsecured creditors will be able to assert against non-settling
defendants, armed with a $15 million war chest if the settlement is approved. It fails to
acknowledge that, unlike prior offers the Committee both made and received, the Committee’s
constituents will enjoy not only the $300 million in cash on an exclusive basis, but also
recoveries from the non-settling defendants on an exclusive basis.29
83. The Committee’s refusal to acknowledge the value of these claims is a
conspicuous omission from its 131-page brief.
84. In the absence of the settlement, if the Committee went to trial against the
Financing Party Defendants and lost, but the estate later recovered the alleged Access preference
(Count XIV of the Committee’s complaint), unsecured creditors—being totally out-of-the-
money—would not share in any of the recovery, although the Debtors’ estates would be enriched
by $300 million (which also would be of no indirect benefit to out-of-the-money unsecured
29 As noted elsewhere, the creditor pool to which these proceeds may be distributed includes the 2015 Notes. Under the settlement, the Debtors are receiving the right to enforce, waive or otherwise assign, the Senior Lenders’ subordination and turnover provisions against the 2015 Noteholders, and under the Plan, the 2015 Noteholders will be able to share in this consideration under certain circumstances, including if they support confirmation of the Plan.
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creditors). Under this settlement, however, if the unsecured creditors do prevail on the Access
preference claims, they will recover $600 million in total. Recovering on that claim alone would
double recoveries for eligible unsecured creditors to 21%–24.8% when they could have
recovered nothing at all.
85. The same holds true for the estates’ $750 million claim against Access
based on Access’ refusal to fund Lyondell Chemical under a pre-petition credit facility (Count
XVII of the Committee’s complaint). The Committee could lose against the Financing Party
Defendants but still prevail against Access and recover damages for the benefit of the estate—
damages to which unsecured creditors would have no claim without the settlement. Under the
settlement, however, proceeds of that lawsuit also will go to eligible unsecured creditors and, if
they accept the Plan, 2015 Noteholders. An incremental $750 million recovery would bring
payouts to unsecured creditors (including the 2015 Noteholders) to more than 45%, again
without the Committee ever prevailing at trial on the financial condition argument.
86. In addition to these two claims, the Committee also is seeking an
additional $1.5 billion from Access and former directors and officers (Counts III, V, VIII, IX, X,
XIII and XVI of the Committee’s complaint) and approximately $11.3 billion from former
Lyondell shareholders as a return of merger consideration (Count IV of the Committee’s
complaint). Combined with the guaranteed cash recovery under the settlement and the other
claims being assigned to unsecured creditors, even partial success on these additional claims
could result in 100% recoveries for eligible general unsecured creditors. As previously noted,
the Committee itself has introduced into the record evidence that these claims, even adjusted for
litigation risk, have substantial value.
87. In sum, the settlement provides unsecured creditors the best of both
worlds: a guaranteed cash recovery and a chance (funded by the settlement itself) at enormous
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upside. If the litigation against third parties succeeds, unsecured creditors will be made whole or
quite nearly whole. If the litigation does not succeed, it will reflect substantial weakness in the
Committee’s case against the Financing Party Defendants and the $300 million guaranteed
payment the Debtors have achieved for unsecured creditors would represent more than these
creditors are otherwise entitled to receive.
88. The Committee disregards any of these additional benefits when it asserts
that the settlement does not exceed the lowest end in the range of reasonableness.30 The failure
to account for them, however, is a mistake of both fact and law. See, e.g., Motorola, Inc. v.
Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 459-60,
465 (2d. Cir. 2007) (noting that settlement of fraudulent transfer lawsuit under which secured
lenders agreed to fund litigation trust with substantial funds and waive claims such that
unsecured creditors could share in proceeds was fair, although vacating settlement on other
grounds); In re Doctors Hosp. of Hyde Park, Inc., 474 F.3d 421, 431 (7th Cir. 2007) (approving
settlement where estate “still had live claims to press against other defendants,” in addition to
cash recovery); In re Idearc Inc., No. 09-31828 (BJH), 2009 WL 5205346, at *32 (Bankr. N.D.
Tex. Dec. 22, 2009) (approving settlement essential to debtor’s emergence from chapter 11, in
which lenders waived deficiency claims to the extent of the first $30 million recovered by a
litigation trust, to be paid to unsecured bondholders, in addition to cash recovery); Adelphia-
Conf., 368 B.R. at 275-76 (confirming plan providing for equity committee to receive
distribution from a Contingent Value Vehicle, and recognizing that the plan gave otherwise out-
30 As otherwise noted, the Committee also fails to acknowledge that obtaining for unsecured creditors the exclusive rights to these benefits represents a meaningful enhancement to any proposal made by the Financing Party Defendants to the Committee, or for that matter, by the Committee to the Financing Party Defendants.
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of-the-money equityholders more than they were entitled to); In re Hibbard Brown, 217 B.R. at
47 (approving settlement where class members would recoup 30% of their exposure to the
debtor’s fraudulent activities and, in addition, retain the right to pursue non-participants for
additional recoveries).
89. Given that the Committee fails to understand (or else, to acknowledge) the
full benefits of the proposed settlement, it is hardly surprising that it fails to properly analyze
whether the settlement falls within the range of reasonableness.
(3) Probabilities of Success on the Merits
90. As noted in TMT, an adequate and intelligent consideration of the merits
is perhaps the most important factor in the settlement analysis. 390 U.S. at 424-25. See
Adelphia-Conf., 368 B.R. at 238 (“the first and most fundamental of the factors relevant to an
assessment of the wisdom of a compromise is each side’s likelihood of success”). In this case,
questions about the Committee’s ability to prevail on its claims against the Financing Party
Defendants clearly justify the settlement.
91. The Committee argues that the Debtors must demonstrate that the
Committee is unlikely to prevail to meet their burden with respect to the Motion. See Comm.
Obj. at 122-23. The Committee misapprehends the relevant inquiry for purposes of this hearing.
The issue is not whether the Committee will surely lose, but whether there are significant
disputes of law and fact that create a meaningful likelihood that the Committee could lose that
must be balanced against the recoveries the settlement provides for unsecured creditors.
Adelphia-Conf., 368 B.R. at 226 (“‘In administering reorganization proceedings in an
economical and practical manner it will often be wise to arrange the settlement of claims as to
which there are substantial and reasonable doubts.’”) (quoting TMT, 390 U.S. at 424); In re Best
Prods. Co., Inc., 168 B.R. 35, 54 (Bankr. S.D.N.Y. 1994) (approving the settlement after
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concluding with respect to solvency “that there would be potentially credible evidence on both
sides of the issue of solvency with the result that this would be a very, very hard case to
predict.”), aff’d, 68 F.3d 26 (2d Cir. 1995); Nellis, 165 B.R. at 123 (“Although a judge must
consider the fairness of the settlement to the estate and its creditors, the judge is not required to
assess the minutia of each and every claim. The bankruptcy judge does not have to decide ‘the
numerous questions of law and fact raised by appellants . . . .’”) (quoting Cosoff v. Rodman
(W.T. Grant Co.), 699 F.2d 599, 613 (2d Cir.), cert. denied, 464 U.S. 822 (1983)).
92. The Committee also has mischaracterized the Debtors’ statement
regarding the overall probabilities on the financial condition issue at the heart of the Phase I trial
(that “neither side is a clear winner”) as an “admission” that the issue is a “toss-up.” Comm.
Obj. at 81. The fact that the Debtors recognize that the parties have strong and weak points
across the multitude of issues hardly means that the Debtors believe the chances of success
amount to a “toss up,” either on the financial condition issue or on a range of other issues that
impact recoveries available to unsecured creditors.31 Moreover, while the Committee proceeds
on the premise that the Debtors believe the case is a “toss up,” worth 50%, the cases the
Committee cites speak of a “probability” of success, not a case in which the outcome is a toss up.
In this regard, the Committee’s citation of Cames v. Joiner (In re Joiner), 319 B.R. 903, 909
(Bankr. M.D. Ga. 2004), contains a gross misquote: the court there wrote that “when there is a
probable chance of success in a case that will result in a 100 percent payout, settling the case for
what amounts to less than a 40 percent dividend over the objection of the parties with the most to
lose is not reasonable.” The Committee misquotes Cames by the insertion of “[50%]” to stand in
31 As Cooper stated in his deposition, “I thought it was -- your [the Committee’s] chances were somewhere between maybe two in ten to four in ten, but . . . I didn’t think by any stretch of the imagination was it a coin toss . . .” See Ex. 3 (Jan. 11, 2010 Cooper Tr.) at 159:19-25.
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for “probable.” See Comm. Obj. at 82. But probable means better than 50%; it means that the
result is likely.
(4) The Committee Fails to Meaningfully Address Two Significant Issues
93. In its probability assessment of the strength of its case in chief, the
Committee makes the startling statement that it “rejects” the Debtors’ contention that the record
includes “anything remotely constituting ‘obstacles,’ serious or otherwise, to the Committee’s
ability to prevail on the estate’s claims for fraudulent conveyance.” Comm. Obj. at 86. This
statement simply is incredible. One need look no further than the “perfect storm” of
unforeseeable events in late 2008 and the serious questions regarding the credibility of the
Committee’s lead expert, CMAI, to see that there are serious obstacles to the Committee
prevailing on its case.32
(a) The Perfect Storm of Late 2008
94. The Committee fails to even acknowledge what the Debtors’ former CEO,
Volker Trautz, described as the “perfect storm squared” of unforeseeable events in late 2008.
Trautz and other witnesses testified that these unforeseen events caused the Debtors to file
chapter 11 bankruptcy in early 2009. See Ex. 43 (May 20, 2009 Transcript of the Deposition of
Volker Trautz (“Trautz Tr.”)) at 135:23-136:6. The Financing Party Defendants laid out in great
detail Trautz’s testimony and other facts which support their contentions that LyondellBasell
became insolvent because of the perfect storm, not because of the LBO. The Court need not
determine whether the Financing Party Defendants would have prevailed in light of the “perfect
32 Indeed, the Committee’s blind zealotry in the face of substantial evidence of the “perfect storm” and substantive challenges to CMAI’s credibility necessarily devalues its own assessment of the merits of its claims against the Financing Party Defendants.
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storm” argument. The Committee’s insistence that it was not an obstacle to its recovery,
however, is not believable.
(b) The CMAI Credibility Issues
95. Another significant challenge the Committee would have faced relates to
the questions of the credibility of its leading expert, David Witte of CMAI. Much of the
Committee’s case hangs on the revisions to Lyondell Chemical’s 2007 projections retrocasted by
CMAI. If CMAI’s testimony were disregarded or excluded by the Bankruptcy Court, the
Committee would not have been able to prevail. Although the Committee in its Objection
highlights the potential credibility issues with respect to the Financing Party Defendants’ fact
witnesses, see Comm. Obj. at 92, it completely overlooks the same hurdle as faced by David
Witte and CMAI. The issue of CMAI’s credibility has been discussed and briefed at length, and
the Debtors will not re-plow that ground. It suffices to say that whether or not CMAI’s report
was credible or valid was a relevant consideration for members of the Litigation Subcommittee.
See Gallogly Decl. ¶ 21; Ex. 3 (Jan. 11, 2010 Cooper Tr.) at 157:4-7, 273:12-277:13. While the
Court need not decide what if any weight it would give CMAI’s report at trial, it can certainly
evaluate how this challenge to CMAI’s credibility affects whether or not the proposed settlement
is in the range of reasonableness.
(5) Additional Issues
96. The Perfect Storm and CMAI Credibility are but two of the many critical
issues the Committee would face at trial. Contrary to the Committee’s position, any fair
assessment of the disputed issues makes clear that the Committee faced real obstacles in its
ability to prevail on the Debtors’ financial condition and any meaningful analysis as to the range
of reasonableness, therefore, must reflect that reality.
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(a) Recovery Levels Even If the Committee Prevailed As to Financial Condition
97. The Committee assumes that if it prevailed on the “financial condition
issue,” all unsecured creditors would automatically recover in full. See Comm. Obj. at 87. This
assumption ignores a number of hotly contested legal issues regarding the nature of remedies
applicable in a fraudulent transfer case, the outcome of which could substantially impact the
range of recoveries.
98. First and foremost, as the parties have often discussed on the record, even
if the lenders lost their liens, the recovery for unsecured creditors would be swamped by the
lenders’ now unsecured claims, except in the highly unlikely event of claim subordination or
complete avoidance of the claims themselves. Key to all of this is the location of value, and of
claims, by legal entity.
99. The Debtors demonstrated in the 9019 Memo that the law is clear that
even if liens or obligations are avoided, unsecured creditors will be limited to recoveries against
the individual Debtor against which they have a claim. 9019 Memo at ¶¶ 113-114. Put another
way, liens and obligations can only be avoided to the extent necessary to satisfy the unsecured
creditors of a specific legal entity. The Committee contends otherwise, arguing that any residual
subsidiary value must be available to the parent for the benefit of its unsecured creditors. Comm.
Obj. at 111.
100. The Committee’s argument cannot be squared with Adelphia Recovery
Trust v. Bank of Am., N.A., 390 B.R. 80 (S.D.N.Y. 2008) (“A.R.T.”). In that case, Judge
McKenna, relying on a long line of cases, found that the recovery trust had no standing to bring
an action to avoid the obligations of the subsidiaries for the benefit of their corporate parents’
creditors. The Committee attempts to distinguish this case from A.R.T., arguing that here, the
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parent debtors also are avoidance plaintiffs, and that under the auspices of Pepper v. Litton, 308
U.S. 295, 308 (1939), equitable principles should prevail. Yet the Committee’s equitable
argument would effect a back-door substantive consolidation by making the assets of one entity
available to creditors of another—something the District Court in A.R.T. specifically warned
against in dismissing the plaintiff’s fraudulent transfer claims: “[C]orporate identities [of each
separate Debtor] were maintained, and records reflected exactly when and how money was
spent, and for which entity’s benefit . . . [T]he ACC Bondholder Group was plainly right . . . that
substantive consolidation would be a highly unlikely result.” A.R.T., 390 B.R. at 88 (quoting
Adelphia-Conf., 368 B.R. at 219). Here, no one has suggested even a remotely plausible claim
for substantive consolidation. See In re Owens Corning, 419 F.3d 195, 211 (3d Cir. 2005)
(proponent of substantive consolidation must prove either (i) that pre-petition, the entities
disregarded separateness so significantly their creditors relied on the breakdown of entity borders
and treated them as one legal entity or (ii) that post-petition, their assets and liabilities are so
scrambled that separating them would be prohibitive and hurts all creditors), cert. denied, 547
U.S. 1123 (2006); Union Sav. Bank v. Augie/Restivo Baking Co., Ltd. (In re Augie/Restivo
Baking Co., Ltd.), 860 F.2d 515, 519 (2d Cir. 1988) (substantive consolidation of bankruptcy
cases should be used only after it has been determined that all creditors will benefit because
untangling of debtors’ affairs is either impossible or so costly as to consume assets). For that
reason, the Committee’s argument with regard to “upstreaming” the value of the subsidiaries for
the benefit of their parent must fail.33
33 The Committee also relies on AboveNet, Inc. v. Lucent Techs., Inc. (In re Metromedia Fiber Network, Inc.), Adv. Proc. No. 04-08564A, 2005 Bankr. LEXIS 3168, at *28 (Bankr. S.D.N.Y. Dec. 20, 2005), but the court there had only remarked in dicta: “[w]ithout deciding the point, if a parent corporation were to prefer a particular creditor over other creditors by causing a solvent subsidiary to guarantee the parent’s debt to the preferred creditor within three months of the parent’s bankruptcy filing to the potential
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101. The consequences of A.R.T. are significant—because unsecured creditors
can recover from the legal entities at which they are creditors, recoveries will be limited by
(a) what is available at each entity to distribute; (b) the substantial amount of liens the Financing
Party Defendants are likely to retain, given the “old and cold” debt they refinanced; and (c) any
obligations retained by the Senior Secured Lenders at entities that have value to distribute at
actual borrowers like Lyondell Chemical.
(b) Analysis Regarding Avoidance of Claim Obligations
102. The Committee misstates the Debtors’ position with regard to claim
avoidance under § 548(c) of the Bankruptcy Code. See Comm. Obj. at 101. While claim
avoidance certainly is generally available as a remedy, in this case, the Court has the ability to
avoid the liens only, and not avoid the claims or order disgorgement of interest and fees already
received.
103. Its Objection reveals that the Committee itself surely has less confidence
in its ability to avoid claims than it lets on. In the Objection, the Committee observes several
times that “the Bridge Lenders were out of the money and only stood to arguably gain in their
inter-creditor dispute with the First Lien Lenders if the First Lien Lenders and the Bridge
Lenders lost at Phase I.” Comm. Obj. at 39; see also id. at 126 (“the priority scheme between the
Senior Lenders and the Bridge Lenders is affected by the outcome of the UCC Litigation; indeed,
if the UCC Litigation were to succeed and the liens avoided, the position of the Bridge Lenders
prejudice of other creditors, there might be a basis to argue that such a guarantee constituted a transfer within the ambit of Section 547(b).” Even if AboveNet were not dicta on this point, and even if the guarantees here had been given within the statutory preference period (which they were not), that a subsidiary guaranty may be avoidable as a parent’s preferential transfer hardly means that the parent’s creditors are allowed to reach a subsidiary’s assets.
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(who are hopelessly out of the money) would presumably improve, as they believe they . . .
would be permitted to share pro rata with the stripped Senior Lenders as unsecured creditors.”).
The only way this makes any sense is if liens are avoided in Phase I, but the claims of the Bridge
Lenders are not.
104. In any event, while the remedy of claim avoidance may technically be
available, “[i]nvalidation seems particularly draconian in a legitimate LBO because the creditors
actually parted with value.” Best Prods., 168 B.R. at 59 (emphasis added). In approving a
settlement of a purported fraudulent transfer, the bankruptcy court assumed obligations would
not be avoided because “no matter how successful the outcome, the Banks would remain
creditors.” Id. at 61. Similarly, the Financing Party Defendants here “actually parted with
value” to the tune of $20 billion, including $10 billion lent directly to Lyondell Chemical. There
is little doubt that the most likely outcome would be that the Court would decide, in determining
the appropriate remedy, to avoid the lien, but permit the direct borrowing obligations (as opposed
to upstream guarantees) to stay in place, or perhaps, avoid only those obligations that constitute
true upstream guarantees when no direct benefit was received by the guarantor.
105. The cases cited by the Committee are inapplicable. In NextWave Personal
Commc’ns, Inc. v. FCC (In re NextWave Personal Commc’ns, Inc.), 235 B.R. 305 (Bankr.
S.D.N.Y.), aff’d, 241 B.R. 311 (S.D.N.Y.), rev’d on other grounds, 200 F.3d 43 (2d Cir. 1999),
the bankruptcy court avoided as constructively fraudulent the debtor’s obligations to the FCC
arising out of its bid for certain auctioned licenses. In selecting this remedy, the bankruptcy court
specifically distinguished the FCC licensing case before it from LBO cases, such as Best
Products, where the debt owed to lenders is supported dollar-for-dollar by loans actually
advanced by lenders and received by debtors. Id. at 313. It explained that, by contrast, the FCC
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gave no consideration for the fraudulent obligation owed to it, and to enforce these obligations
would constitute a windfall to the FCC. Id.
106. The Committee also points to a Seventh Circuit decision in Boyer v.
Crown Stock Distribution, Inc., 587 F.3d 787 (7th Cir. 2009), as a recent example of a case
where the liens and obligations were both avoided in a fraudulent transfer case. However, the
obligation avoided in Boyer was not a bank loan to finance an LBO.34 Rather, the court there
avoided a sham secured note between two closely held companies in which the obligor was
controlled by a former insider of the obligee. Id. at 796. No money was parted with in exchange
for the promissory note—a fundamental and meaningful distinction from this case, where the
Financing Party Defendants parted with $20 billion dollars. Id.
107. Despite the Committee’s assertion that avoidability of obligations is too
fundamental to even require case law support, these two cases (plus the equally distinguishable
TOUSA decision) were all the Committee was able to muster.35 Comm. Obj. at 110. Thus, the
ability to avoid obligations at borrowers like Lyondell Chemical represents one of the substantial
obstacles the Committee would have to overcome in its litigation. The consequences of failing
34 Similarly, TOUSA, which the Committee repeatedly cites, also was not an LBO finance case, but rather a case where equity interests chose to encumber a failing company with a huge new debt to settle litigation over a joint venture. Official Comm. of Unsecured Creditors of TOUSA, Inc. v. Citicorp N.A., Inc. (In re TOUSA, Inc.), Nos. 08-10928-JKO, 08-1435-JKO, 2009 WL 3519403 (Bankr. S.D. Fla. Oct. 30, 2009). The Committee also makes an extensive (and erroneous) argument that the Debtors’ settlement analysis involved reliance on savings clauses like those rejected in TOUSA. The Debtors never considered the savings clauses as a defense and the 9019 Memo makes no mention of them.
35 The Committee also points to a case it believes was inadvertently cited by the Financing Party Defendants, In re Telesphere Commc’ns, Inc., 179 B.R. 544 (Bankr. N.D. Ill. 1994), and argues that the court there concluded that, if fraudulent transfer action against LBO lenders was successful, lenders could have retained their liens and claims, but only to the extent they gave value in good faith. Comm. Obj. at 109. In fact, the court there carefully limited its remarks to circumstances where lenders had full knowledge of the purpose of the transaction they were making. Telesphere, 179 B.R. at 556 n.18.
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to avoid that obligation would result in billions of dollars in claims at Lyondell Chemical (a
borrower of $10 billion under the Senior Facility) on par with the claims of general unsecured
creditors.
(c) Analysis of Repayment of Interest
108. The Committee confidently argues that if it were to prevail on financial
condition, it would automatically recover all pre-petition interest paid to the Financing Party
Defendants. See Comm. Obj. at 117-18. It does not cite any case holding that such a black-letter
law exists. Moreover, the Committee completely fails to explain how it could recover all pre-
petition interest (much less fees and expenses) in light of the facts that: (a) a substantial portion
of the interest was paid on account of loans to non-debtors; (b) $7.1 billion in loans were used to
refinance “old and cold” debt, and this portion of the Financing Party Defendants’ liens and
obligations would not be avoided; (c) the Financing Party Defendants would likely be permitted
to retain their claims against direct borrowers; and (d) many of the Financing Party Defendants
would appear to have strong defenses against disgorgement under section 550 of the Bankruptcy
Code.
(d) Preservation of Liens; Section 551
109. A critical issue that could substantially limit recoveries for unsecured
creditors is the treatment of the $7.1 billion used to refinance “old and cold” debt. The
Committee has not pointed to a single case indicating that the Financing Party Defendants would
be unable to retain the liens for the $7.1 billion. However, the Committee concludes that even if
the liens securing the “old and cold” debt are not avoidable or the debt and liens associated
therewith are reinstated, recoveries to unsecured creditors would not be affected due to its
reading of section 551 of the Bankruptcy Code. Comm. Obj. at 102. It makes no sense,
however, to presume that preservation of billions of dollars in liens at Debtor entities with
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insufficient value would not materially impact the recovery of unsecured creditors at those
entities.
110. As an example, at Lyondell Chemical, the LBO debt refinanced $4.37
billion in secured debt. Accordingly, at Lyondell Chemical, the Senior Lenders will be able to
retain liens up to a value of $4.37 billion related to refinancing “old and cold” debt, and claims of
general unsecured creditors are, at the midpoint, $395 million. With less than $1.4 billion in
total distributable value at that entity, it is far from a foregone conclusion that unsecured
creditors would recover in full at that entity, much less recover anything if the Court were to find
that the “old and cold debt” would recover on a priority basis and capture all of the value at that
entity.
111. The Committee argues, based on its reading of section 551 of the
Bankruptcy Code, that “any surviving or reinstated liens of the Financing Party Defendants
would be . . . pari passu with” avoided liens preserved for the benefit of the estate. Comm. Obj.
at 107. Using Lyondell Chemical as an example, the Committee’s view is that if the Senior and
Bridge liens securing $20.7 billion dollars in debt are avoided and secured creditors retain
secured claims of only $4.37 billion resulting from refinancing “old and cold” debt, then (i) the
prepetition liens against Lyondell Chemical will be split into two buckets, one securing a claim
of approximately $16.3 billion and the other securing a claim of $4.37 billion; (ii) Lyondell
Chemical’s $1.4 billion in distributable value would be allocated between these two buckets
(approximately $1.1 billion in value going with the $16.3 billion “avoided” secured claim bucket
and approximately $300 million in value going with the $4.37 billion “unavoided” secured claim
bucket); and (iii) unsecured creditors with claims of $395 million (using the current midpoint of
estimate claims at that entity) would benefit first from the value ascribed to the “avoided lien”
and be paid in full. Needless to say, this would give unsecured creditors a mammoth windfall
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(i.e., unsecured creditors would receive 100% recoveries while secured creditors would recover
$1.0 billion of their claims (or less than 25% of their claims)) in the face of what has been
conceded to be validly refinanced debt.
112. The cases the Committee cites do not support this application of section
551. The purpose of section 551 is to ensure that junior lienholders do not receive a windfall by
“improving their position at the expense of the estate when a senior lien is avoided.” Morris v.
St. John Nat’l Bank (In re Haberman), 516 F.3d 1207, 1210 (10th Cir. 2008). It does not follow
from this purpose that liens retained by a senior lienholder would share pari passu with liens
preserved by the estate, because in that circumstance there would be no junior lienholder that
would receive a windfall. A statute designed to prevent a windfall should not be used to create
one.36
(e) Ability to Prevail on Phase I-A If the Committee Loses Phase I
113. The Committee’s contention that, even if it loses on the financial condition
issue on a consolidated basis it could win handily at the entity level, is hard to conceive.
See Comm. Obj. at 94-95. If the Debtors are solvent taken as a whole, it would follow that
subsidiaries could not be rendered insolvent, in particular because individual debtors have
contribution and subrogation rights. The Committee Objection focuses on limiting the
application of contribution, but does not address subrogation. The Debtors took this issue into
account when considering the value of the litigation. The Committee relies on Mfrs. & Traders 36 The Committee’s analysis ignores that the Financing Party Defendants would have unsecured deficiency claims that may share on a parity with the claims of unsecured creditors in any liens avoided for the benefit of the estate. The Committee’s analysis also ignores the fact that $12 billion of the approximately $20 billion of secured debt is secured by a first priority lien on the Debtors’ assets, while the remaining $8 billion of Bridge Lender debt is secured by a junior priority lien. Therefore, if the Committee’s pari passu lien-sharing theory were correct, it is more likely that the $4.475 billion of liensretained by the Financing Party Defendants would share with the $7.525 billion of avoided first liens.
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Trust Co. v. Goldman (In re Ollag Constr. Equip. Corp.), 578 F.2d 904, 908 (2d Cir. 1978), for
the proposition that that subrogation and contribution rights “would be worth little” because co-
obligors were all insolvent. Comm. Obj. at 95. On the contrary, the Second Circuit found that
the District Court’s finding that Ollag’s subrogation right against Deplan was of minimal worth
was clearly erroneous. Id. at 908. In fact, the court noted that “we are left in murky obscurity
regarding the actual value of Ollag’s contingent assets” because the value of the debtor’s rights
of subrogation and contribution were not even considered below. Id. The other case the
Committee cites in support of this contention, Allstate Fabricators Corp. v. Flagstaff Foodservice
Corp. (In re Flagstaff Foodservice Corp.), 56 B.R. 899 (Bankr. S.D.N.Y. 1986), deals solely with
the value of the right of contribution. Id. at 906.
(f) Pickering Analysis is Results-Driven and Vastly Overstates Potential Recoveries to the Unsecured Creditors
114. In support of its argument concerning the value of the litigation to the
Committee, the Committee submitted the declaration of Ben Pickering of Mesirow Financial
Consulting, LLC (“Mesirow”). Pickering provides eight scenarios of potential recovery to
general unsecured creditors, assuming in each one that the Committee was successful on its
fraudulent transfer claims against the Financing Party Defendants. Pickering’s eight scenarios
for recoveries for the general unsecured creditors range between $2.185 billion to $4.026 billion,
which is 64% to 100% of total general unsecured claims, assuming (as Pickering does) that the
value of unsecured claims is $3.216 billion.37 Importantly, Pickering testified that he is not
providing any expert or legal opinion as to the likelihood of the Committee actually achieving
the recoveries depicted in his scenarios and, in fact, did no risk adjustment or weighing
37 As noted above, based upon the most recent AlixPartners claims analysis, the aggregate amount of unsecured claims is far less than the amount assumed by Pickering.
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whatsoever with respect to his scenarios. See Ex. 44 (February 5, 2010 Transcript of the
Deposition of Ben Pickering (“Pickering Tr.”)) at 69:7-15. In addition, Pickering acknowledged
that all of scenarios were based on assumptions given to him by Brown Rudnick, and that he
made no at all effort to all run other potential recovery scenarios. See Ex. 44 (Pickering Tr.) at
61:10-67:14.
115. Among the assumptions that drive Pickering’s scenarios are (1) that the
Court would not give the Financing Party Defendants priority for their claims associated with the
$7.1 billion in merger proceeds used to refinance pre-existing debt, and (2) that the Court would
always require the Financing Party Defendants to disgorge all post-petition adequate protection
and pre-petition interest and fees, totaling over $3 billion. During his deposition, Pickering
acknowledged that were the Court to grant full priority on the claims associated with $7.1 billion
in pre-existing debt and not require the disgorgement of pre-petition interest and fees, his
recovery scenarios would be dramatically lower, and far less than the recovery the general
unsecured are obtaining under the proposed settlement. See Ex. 44 (Pickering Tr.) at 94:12-25,
114:16-120:11.
116. Even more troubling is Pickering’s assumption, again, at the direction of
Brown Rudnick, that claims of the general unsecured creditors may rise by 25% or 50% and,
therefore, he runs recovery scenarios taking into account such increases in claims amount. See
Ex. 44 (Pickering Tr.) at 69:21-71:13. At the time Pickering filed his declaration, his employer,
Mesirow, was provided by the Debtors with new claims information that showed that general
unsecured claims estimates were lower than the amount used in Pickering’s declaration by
approximately 20%. See Ex. 45 (Jan. 26, 2010 Friedman Email to Pohl, et al.). Thus, Pickering
should have known better than to submit to the Court recovery scenarios using 25%-50%
increases in claims estimates.
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117. In contrast to Pickering, the Debtors have run a recovery scenario,
Scenario 1, under which the Court gives full priority to the $7.1 billion in pre-existing debt and
does not disgorge pre-petition fees and interest.38 See Ex. 46. Scenario 1 assumes the new,
lower claims and total distributable value amounts and also assumes that the Court finds
fraudulent transfer, avoids all liens (except with respect to the $7.1 billion in merger proceeds
used to repay pre-petition debt), avoids upstream guarantees (except that the lenders are left with
claims against their direct borrowers), and requires the lenders to repay post-petition adequate
protection in the amount of $343 million (the portion of adequate protection paid on the avoided
liens). As depicted in Scenario 1, the recovery to the general unsecured creditors under either
scenario would be less than 10% of their claims pool. Even were the Court to disgorge pre-
petition transaction fees in the amount of $700 million, as assumed by Pickering, the recoveries
to the general unsecured creditors under Scenario 1 would only increase to approximately 11%
of the total unsecured creditors claims pool as depicted in Scenario 1(A). See Ex. 46.
(6) Comparison of Benefits of Settlement to Range of Outcomes
118. When all of these issues are canvassed, it is clear that the benefits of the
settlement are reasonable in light of probability of the Committee’s ultimate success in litigation
and the limited potential recoveries available to unsecured creditors were it to prevail.39
38 In support of the Motion, the Financing Party Defendants have submitted the Declaration of Jay I. Borow of Capstone Advisory Group, LLC, dated February 8, 2010, that provides six additional scenarios, with ranges of recovery for the general unsecured creditors between $116 million and $472 million. 39 The Committee’s reliance on (misquoted) cases such as Cames, 319 B.R. at 909, is misplaced. The relevant inquiry is whether the recovery obtained by the debtor adequately reflects the risk in the litigation. In Cames, the court rejected a settlement granting unsecured creditors 38% recoveries on a lawsuit, because the defendant had conceded that to win he would have had to recant his prior testimony given under oath, and the lawsuit was not factually or legally complex. Those facts bear no resemblance to the Committee Litigation, where the Committee must overcome legal and factual obstacles to recover anything, and the 38% settlement proposed in Cames bears little resemblance to the settlement which provides for the possibility of full recoveries. Id. at 908-09.
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Ironically, after attempting (through the Pickering Declaration) to mathematically compute what
its recoveries could be, the Committee correctly cites this Court’s previously articulated concern
that “there are dangers in trying to fix probabilities with too much precision, as if the litigation
recoveries are subject to a mathematical model.” Adelphia-Conf., 368 B.R. at 236.40 The
outcome of myriad issues in this litigation (as with virtually all litigation that is settled) is far
from certain, and no model can pinpoint the ideal settlement amount. Rather, the Debtors submit
that based on a canvassing of all the factual and legal issues before the Court, the proposed
settlement that provides guaranteed recovery plus significant upside tied to the merits of the
Committee’s case falls well within the range of reasonableness.
(B) The Committee’s Opposition to the Settlement
119. The Committee urges the Court to deny the Motion simply because the
Committee opposes the settlement. But the Committee’s opposition is only entitled to be given
“modest weight,” Adelphia, 327 B.R. at 164. Where a settlement is in the best interests of a
debtor’s estate, opposition from unsecured creditors is not an obstacle to approval. See id. at
In re Revelle, 256 B.R. 905 (Bankr. W.D. Mo. 2001), is similarly inapposite. In Revelle, the court upheld creditors’ objections to a settlement between a trustee and a debtor. Id. at 913. Pre-petition, the debtor had been convicted of murdering his wife and waived any claims he might have had to proceeds of a life insurance policy covering his wife in favor of a trust benefiting his children. Id. at 908. The debtor’s conviction was reversed, and the trustee sued him and the trust to recover the life insurance proceeds, arguing that the waiver was a fraudulent transfer; the trustee then proposed a settlement with the debtor providing recoveries of 7.8% to unsecured creditors and creditors objected. Id. at 908-09. In denying approval of the settlement the court noted that the debtor’s waiver of his rights appeared inconsistent with settled Missouri law and concluded that the objectors had a “substantial probability” of prevailing in the litigation—which revolved around a single legal issue and was “not complex.” Id. at 912-13. Based on this analysis, the court believed that unsecured creditors had a “substantial probability” of achieving 100% recoveries. Id. at 913. Thus, Revelle has no applicability here.40 The context in Adelphia-Conf. was substantially different because there were far fewer legal issues that impacted what recoveries would have been available to the plaintiff if it had recovered. Nevertheless, the principle has general applicability.
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164-65. Moreover, as this Court stated in Adelphia, “the approval of a settlement . . . must be
considered in light of the reasons for any opposition.” Id. at 165 (emphasis original).
120. Here, the Committee opposes the settlement based on its incorrect view
that it is below the range of reasonableness and was the product of collusion and ultimately not
in the best interests of the Debtors’ estates. Because the Committee is wrong on each point, a
fortiori, the Committee’s reasons for opposing the settlement are invalid, and its opposition
should be given little weight. As noted in Cajun Electric, unsecured creditors simply do not and
cannot have a veto right over a settlement that is fair where that settlement is indispensable to
getting out of bankruptcy. Official Comm. of Unsecured Creditors v. Cajun Elec. Power Coop.,
Inc. (In re Cajun Elec. Power Coop., Inc.), 119 F.3d 349, 358 (5th Cir. 1997) (approving
settlement over the opposition of the creditors’ committee, where the settlement “would remove”
a “major impediment to reorganization” without “altering the creditors’ rights under the”
Bankruptcy Code.) The Committee’s total failure to mention Cajun or the host of other cases
cited by the Debtors on this point is significant.41
121. The Committee, however, relies upon In re Exide Techs., 303 B.R. 48
(Bankr. D. Del. 2003), numerous times to suggest that rejection of a proposed settlement by
unsecured creditors should be accorded “substantial weight.” See Comm. Obj. at 61, 74, 76, 78,
41 Conn. Gen. Life Ins. Co. v. United Cos. Fin. Corp. (In re Foster Mortg. Corp.), 68 F.3d 914, 919 (5th Cir. 1995) (“we are creating no per se rule allowing a majority of creditors in interest to veto a settlement”); Plaza Equities LLC v. Pauker (In re Copperfield Invs., LLC), 401 B.R. 87, 96 (Bankr. E.D.N.Y. 2009) (approving settlement over the objection of the largest creditor and noting that a creditor-even a creditor holding the overwhelming majority of claims in the case-may not arbitrarily veto a settlement that otherwise satisfies the criteria for approval.); Official Comm. of Unsecured Creditors of Tower Auto. v. Tower Auto., Inc. (In re Tower Auto., Inc.), 241 F.R.D. 162, 171-72 (S.D.N.Y. 2006) (affirming approval of a settlement over the objection of the creditors’ committee, wherein retirees gave up significant value to creditors receiving significant value); Vanguard Airlines, Inc. v. Sarah & William Hambrecht Found. (In re Vanguard Airlines, Inc.), 302 B.R. 292, 306-07 (Bankr. W.D. Mo. 2003) (approving settlement despite opposition of unsecured creditors).
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128 (citing Exide, 303 B.R. at 67, 70-71).42 The Committee fails to acknowledge that the
creditors’ views in Exide were only accorded substantial weight “under these circumstances,”
which included that the proposed settlement was far below the range of reasonableness. 303
B.R. at 70 (disapproving settlement that offered no more than $8.5 million, amounting to only
1.4% recovery for unsecured creditors, given claims estimate and a possible range of litigated
outcomes between $78.6 million and $500 million). As the Debtors have demonstrated, this
settlement is fair and equitable under TMT and meets the other Texaco factors. Thus, Exide is
entirely consistent with Adelphia: creditor opposition must be weighed in light of the reasons for
the opposition. Unlike in Exide, creditor opposition here is tainted by the “house money” effect
and based on an unsustainably optimistic view of the law and the facts.
(C) Arm’s-Length Bargaining
122. The Committee focuses much of its objection on the seventh TMT/Texaco
factor, making the centerpiece of its collusion argument a purported plot between the Financing
Party Defendants and the Debtors to shortchange unsecured creditors. The Committee’s
argument is best understood (and dismissed) through the words of William Shakespeare: it is full
of sound and fury, signifying nothing.43 The futile attempts to smear fellow members of the bar
(and the false denial that the Committee has known of the very conduct it now complains of for
months) merely confirms what has been apparent since the very beginning of these cases: the
Committee will say and do anything.
123. The Committee’s false contentions on collusion can be grouped into three
broad subjects: (a) purported undisclosed and disabling conflicts on the part of Cadwalader and
42 The Committee has acknowledged, however, that Exide permits a debtor to propose a settlement that is reached without the involvement of a committee with STN standing. See Comm. Obj. at 61.43 See William Shakespeare, Macbeth, Act V, Scene 5, Lines 27-28.
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Cooper; (b) alleged collusion by Cadwalader with the Financing Party Defendants; and (c) the
negotiations not at arm’s length. Each of these baseless allegations will be addressed in turn.
(1) Purported Conflicts of Cadwalader and Cooper
124. As a professional retained with Court approval, any question of
Cadwalader conflicts is governed by disclosure. In re Enron Corp., No. 01-16034(AJG), 2002
WL 32034346, at *5 (Bankr. S.D.N.Y. May 23, 2002) (“Disclosure is the cornerstone of the
retention process”). Cadwalader disclosed every connection it has with any of the Financing
Party Defendants, including the percentage of revenue generated from its relationships with
certain Financing Party Defendants. See Comm. Obj., Ex. 8 (Palmer Ret. Decl.) ¶ 13, Schedule
2.44 Cadwalader’s retention by the Debtors was approved by the Court on this basis. See Ex. 47
(Order Authorizing the Employment and Retention of Cadwalader, Wickersham & Taft LLP as
Attorneys for the Debtors) [Dkt. No. 952].
125. This retention (and reservation of rights to negotiate with existing clients)
was perfectly proper under the Bankruptcy Code. Section 327 of the Bankruptcy Code provides
that an attorney’s representation of a creditor “does not per se deprive that attorney of
‘disinterested’ status” such that the attorney is barred from employment by a debtor-in-
possession. In re Kobra Props., 406 B.R. 396, 403 (Bankr. E.D. Cal. 2009) (discussing
Bankruptcy Code section 327); 11 U.S.C. § 1107(a); see also In re Ray, 314 B.R. 643, 660
(Bankr. M.D. Tenn. 2004) (Bankruptcy Code will “overlook an attorney’s representation of the
debtor and a creditor absent an objection where there is no actual conflict.”); Collier on
Bankruptcy P327.04[7][b] (“section 327(c) recognizes that it is not necessary that an attorney or
44 Thus, this case starkly contrasts with In re Rusty Jones, Inc., 134 B.R. 321 (Bankr. N.D. Ill. 1991), cited by the Committee, where the court reduced the fees of the debtor’s attorneys where they failed to disclose extensive relationships with the debtor’s dominant shareholders in the retention application.
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other professional person who has represented or who currently represents a creditor of the
debtor automatically be deemed either adversely interested or not disinterested . . . .”).
126. Federal courts and the Bankruptcy Code both acknowledge that a unique
and important characteristic of bankruptcy reorganization cases is that they tend to involve “so
many financial institution creditors that most firms with the requisite expertise in matters of
commerce and finance at the scale required will have conflicts that would be difficult to
overcome.” In re Kobra, 406 B.R. at 406.45 Therefore, the Debtors’ rightful choice of
professionals should be respected and the Debtors’ inherent standing to settle claims belonging
to the estate should not be disturbed by the Committee’s baseless allegations regarding alleged
conflicts. See In re Caldor, Inc.-NY, 193 B.R. 165, 170 (Bankr. S.D.N.Y. 1996) (“Public policy
favors permitting parties to retain professionals of their choice.”) (citing In re Codesco, Inc., 18
B.R. 997, 999 (Bankr. S.D.N.Y. 1982) (“‘[o]nly in the rarest cases should the trustee be deprived
of the privilege of selecting his own counsel . . .’”) (internal citations omitted)).46
127. Not only were the terms of Cadwalader’s engagement appropriate, but
Cadwalader has scrupulously adhered to the terms of its retention agreement. It has never
engaged in bankruptcy litigation against the Financing Party Defendants. Rather, with the full
knowledge of—and with the encouragement of—the Committee, Cadwalader has advised the
Litigation Subcommittee on aspects of the Committee Litigation.
45 The Committee’s reliance on Kobra is inexplicable. There, the court required conflicts counsel where the former counsel for the creditors committee in the case was subsequently retained by the trustee. That has no bearing on this situation.46 It is puzzling how the Committee is able to allege, on one hand, that Cadwalader is disabled by conflicts, while on the other hand ignoring the client relationships of its own counsel, Brown Rudnick, with certain of the Financing Party Defendants. See Ex. 5 (Weisfelner Tr.) at 229:21-231:10; see Ex. 21 (Affidavit of Edward Weisfelner in Support of Retention Application of Brown Rudnick) at Ex. B.
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128. The record evidence demonstrating that the Committee has long been
aware that Cadwalader was advising the Debtors and the Litigation Subcommittee is so
overwhelming, obvious and undeniable that it is beyond comprehension how the Committee
could possibly assert that “the Committee certainly was not aware that CWT . . . [was] providing
substantive advice as to the propriety of the UCC Litigation [to the Litigation Subcommittee].”
See Comm. Obj. at 79, n.62. Literally hundreds of pieces of evidence put the lie to this
contention.
129. Given the length and depth of the Committee’s knowledge of
Cadwalader’s actions, it is painfully obvious that the Committee’s denial that it knew what
Cadwalader was doing, and its conflict allegations are purely a litigation tactic.47 This is
especially true with respect to the Committee’s personal attacks on Cadwalader partners George
Davis and Howard Hawkins—both members of the bar well-familiar to the Bankruptcy Court.
The Committee alleges that Davis and Hawkins represented Merrill Lynch in unrelated matters
during the pendency of this case, and that this disabled them from advising the Debtors. This is
47 Many of the authorities that the Committee cites are easily distinguishable from the issues before this Court. See Comm. Obj. at 58-61. These cases set forth the fiduciary obligations of debtors and debtors-in-possession but in no way address issues involving conflict of interest or settlement. See In re Whitney Place Partners, 147 B.R. 619, 622 (Bankr. N.D. Ga. 1992) (declining to find debtors’ counsel jointly and severally liable for Bankrupcy Rule 9011 sanctions for alleged bad-faith chapter 11 filing because attorney’s errors were likely the result of inexperience); In re Consupak, Inc., 87 B.R. 529, 552 (Bankr. N.D. Ill. 1988) (reducing fees of trustee and its attorney due to trustee’s mismanagement of funds of the debtor’s estate); McClelland v. Grubb & Ellis Consulting Servs. Co. (In re McClelland), 418 B.R. 61, 64 (Bankr. S.D.N.Y. 2009) (appraisers retained by debtor were not liable for damages arising from alleged undervaluing of assets); Unofficial Comm. of Equity Holders of Penick Pharm., Inc. v. McManigle (In re Penick Pharm., Inc.), 227 B.R. 229, 230-31 (Bankr. S.D.N.Y. 1998) (finding patented process developed post-petition was property of the estate and not the debtor); In re Dunes Hotel Assocs., No. C/A 94-75715, 1997 WL 33344253, at **1, 17 (Bankr. D.S.C. Sept. 26, 1997) (granting motion of creditor to dismiss chapter 11 case because, inter alia, the debtor filed the case in bad faith), aff’d sub nom., Dunes Hotel Assocs. v. Hyatt Corp., 245 B.R. 492 (Bankr. D.S.C. 2000); In re Herberman, 122 B.R. 273, 288 (Bankr. W.D. Tex. 1990) (finding that income of urologist who filed individual chapter 11 debtor physician was property of the estate).
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nonsense. First, the retention application expressly stated that Cadwalader would continue to
represent these other clients in matters unrelated to these estates, and the order approving
Cadwalader’s retention application expressly did not state that attorneys representing clients in
unrelated matters would be walled-off from advising the Debtors. Given that neither Hawkins
nor Davis had any confidential information about Merrill Lynch germane to this matter, such an
ethical wall is unnecessary. Second, those lawyers’ representations of Merrill Lynch affiliates
are a matter of public record48 and the Committee has admittedly known their involvement in
advising the Debtors about the Committee Litigation for more than six months without
expressing a single concern. See Ex. 5 (Weisfelner Tr.) at 212:21-221:19; Ex. 11 (Davis Tr.) at
88:14-89:15, 338:4-339:17, 348:4-14; Gallogly Decl. ¶ 10; Suppl. Cooper Decl. ¶ 2.
130. The law is clear: allegations of conflict cannot be used as a litigation
tactic. See Enron, 2002 WL 32034346, at *5 (Bankr. S.D.N.Y. May 23, 2002) (disclosure
process “places a burden upon the applicant to disclose and a burden upon the United States
Trustee, and other parties in interest, to raise their concerns in a timely manner”) (emphasis
added); In re Water’s Edge, 251 B.R. at 10-11 (motion to disqualify Brown Rudnick as counsel
for debtors was procedurally barred because “[Brown Rudnick] fully disclosed its prior
involvement” with interested parties and objector “filed no objection until . . . 31 days after
[Brown Rudnick’s retention] application had been filed.” (emphasis added)); Official Unsecured
Creditors Comm. of Valley-Vulcan Mold Co. v. Ampco-Pittsburgh Corp. (In re Valley-Vulcan
48 See, e.g., Notice of Appearance and Request for Notice and Papers filed by George A. Davis on behalf of Merrill Lynch Mortgage Capital, Inc., dated April 16, 2008 [Dkt. No. 4] in In re Fred Leighton Holdings, Inc., et al., Case No. 08-11363 (Bankr. S.D.N.Y.) (RDD); Notice of Appearance in Adversary Proceeding and Request for Notice and Papers filed by Howard R. Hawkins, Jr. on behalf of Merrill Lynch Mortgage Capital, Inc., dated Oct. 30, 3008 [Dkt. No. 3] in King v. Calypso Mines, LLC, et. al., Case No. 08-01645 (Bankr. S.D.N.Y.) (RDD).
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Mold Co.), 237 B.R. 322, 338 (B.A.P. 6th Cir. 1999) (finding that the creditors committee’s
delay in raising conflicts issue constituted a waiver of its rights), aff’d, 248 F.3d 1154 (6th Cir.
2001); In re Internet Navigator, Inc., 293 B.R. 198, 208 (Bankr. N.D. Iowa 2003) (finding waiver
when shareholders waited to object to conflicts until after the settlement of claims), aff’d sub
nom., On-Line Servs. Ltd. v. Bradley & Riley P.C. (In re Internet Navigator, Inc.), 301 B.R. 1
(B.A.P. 8th Cir. 2003); In re MUMA Servs., Inc., 286 B.R. 583, 588-89 (Bankr. D. Del. 2002)
(finding an implied waiver of conflicts when one year passed since the disclosure of conflicts
was made); In re A & T Paramus Co., Inc., 253 B.R. 606, 616-17 (Bankr. D.N.J. 1999) (finding
waiver when more than a year had passed since the conflict was known).49
131. Indeed, settlement of a fraudulent conveyance action involving a
leveraged buy-out has been approved over objections that debtors’ counsel, who represented the
debtor in settlement negotiations (but not during the litigation), had a conflict of interest. See In
re Best Prods., 168 B.R. at 62-64. In so ruling, Judge Brozman found that because objectors had
received notice of the retention of the allegedly conflicted attorneys, thus the objectors “knew all
along that there was a possibility that claims could be brought” and they did not object at the
time. Id. at 62-63; see also In re Heissinger Res., Ltd., 67 B.R. 378, 384 (C.D. Ill. 1986)
49 In support of its argument that Cadwalader was conflicted, the Committee cites to outdated Ethical Canon 5-14 of the New York Lawyer’s Code of Professional Responsibility. However, the new attorney conduct rules, the New York Rules of Professional Responsibility, were adopted on April 1, 2009, over two months before the Committee brought its complaint. Rule 1.7(a) replaces Ethical Canon 5-14 and provides in part that “[e]xcept as provided in paragraph (b), a lawyer shall not represent a client if a reasonable lawyer would conclude that either: (1) the representation will involve the lawyer in representing differing interests; or (2) there is a significant risk that the lawyer’s professional judgment on behalf of a client will be adversely affected by the lawyer’s own financial, business, property or other personal interests.” Davis made clear at his deposition that the alleged conflict was considered by both Cadwalader and Gallogly, an experienced attorney, and it was determined that while Cadwalader could not actively pursue the litigation against current clients, Cadwalader could advise the Litigation Subcommittee on the litigation and possible settlement. See Ex. 11 (Davis Tr.) at 229:2-24; Gallogly Decl. ¶ 14.
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(overruling objection and affirming approval of Rule 9019 settlement where lender, who was
party to the settlement agreement and a former client of the trustee’s attorney, “was represented
exclusively by another attorney with respect to the complaint and order involved, and all
negotiations leading up to it.”). The Second Circuit has noted that allegations of conflict of
interest “have become ‘common tools of the litigation process, [employed] for purely strategic
purposes.’” See Allegaert v. Perot, 565 F.2d 246, 251 (2d Cir. 1977) (affirming denial of
appellant’s motion for disqualification) (citations and quotations omitted); Concerned Parents of
Jordan Park v. Hous. Auth., 934 F. Supp. 406, 408 (M.D. Fla. 1996) (finding that waiting until
two months before the close of discovery and five months after filing the lawsuit—when the
party knew of conflict months before filing suit—constituted waiver).
132. Additionally, a central theme of the Committee’s allegations is that
Cadwalader, conflicted from giving honest advice to the Debtors, manipulated the Litigation
Subcommittee into a low-ball settlement, and thus the settlement is effectively collusive. The
Committee’s theory ignores the substantial independent analysis conducted by NERA, Nexant,
Judge Conrad and the members of the Litigation Subcommittee. All of these advisors presented
analysis completely consistent with the settlement proposed here.
133. The Committee’s allegations about Cooper’s purported conflicts are
equally spurious.50 The Examiner in this case has already confirmed that Cooper is independent 50 The allegations concerning the conflicts of interests regarding the other members of the Litigation Subcommittee, Gallogly and McShea, should likewise be rejected. McShea has no past or present or personal relationship with any of the Financing Party Defendants, while Gallogly’s relationship is only with Merrill Lynch, which acts as a holding and disbursement agent for stock that Gallogly’s received when he retired from ConocoPhillips. See McShea Decl. ¶ 14; Gallogly Decl. ¶ 33. Any relationship that McShea’s firm, AP Services, LLC, has with the Financing Party Defendants was fully disclosed in its retention application. See AP Services Retention Application [Dkt. No. 813]. Moreover, as set forth in their declarations, any purported relationship that Gallogly and McShea had with any of the Financing Party Defendants or any other defendant did not affect any decision they made as members of the Litigation Subcommittee. See Gallogly Decl. ¶ 34; McShea Decl. ¶ 15.
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and unconflicted. Nothing put forth by the Committee demonstrates otherwise. Cooper’s
alleged “material business relationships” with [REDACTED] [REDACTED] [REDACTED] are
not conflicts. Cooper has no contracts with any Financing Party Defendant; he derives no
income from any of them and none of them are investors in any of his businesses.
134. The idea that everyday banking relationships like Cooper’s could
constitute a material conflict of interest is absurd and would result in extreme conflicts rules that
would have a debilitating effect not only on the legal system but also on the business world
generally. See Johnson v. State, 974 F. Supp. 185, 189 (E.D.N.Y. 1997) (petitioner suffered no
prejudice from alleged conflict of interest of juror who held accounts in bank that petitioner had
defrauded).
135. Moreover, Cooper’s views on an appropriate settlement with the
Financing Party Defendants could not conceivably impact his relationship with [REDACTED] as
a manager of his private funds, or vice versa. See Ex. 3 (Jan. 11, 2010 Cooper Tr.) at 45:3-8;
46:7-13, 46:21-47:23, 48:15-50:8. The fact that these are relationships in which Cooper has
money managed by Financing Party Defendants, rather than investments in Financing Party
Defendants, distinguishes this case from In re CF Holding Corp., 164 B.R. at 806-07. Similarly,
the notion that Cooper is conflicted because of his relationship with [REDACTED] highlights
how silly the Committee’s allegations are: as Cooper testified, he has business checking accounts
there. See Ex. 3 (Jan. 11, 2010 Cooper Tr.) at 47:7-49:4.51 The Committee does not cite a single
51 Who among us does not have a bank account or other custodial account at one of the defendants in this litigation? More generally, if the Committee were right, then no law firm or other professional could be retained in a bankruptcy case without the disclosure of such mundane information by the firm, each of its partners, and the members of their immediate families. Needless to say, that is not what is done, because, as the Committee’s counsel has noted, it is ridiculous. See n.17, supra.
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case to support its notion that the types of relationships Cooper has would bar him from
negotiating a settlement with the Financing Party Defendants.
136. Equally irrelevant is the Committee’s reference to Cooper’s retention in
Enron, in which he was prohibited from advising the debtors in connection with any litigation
involving any “current or former clients or entities that are investors in the equity fund controlled
by Cooper.” See Comm. Obj. at 22. Indeed, the reference to Enron demonstrates why Cooper
has no conflict here. During Enron, Citibank was an equity investor in a fund Cooper managed;
as the Committee knows, Cooper no longer controls that equity fund because it liquidated
approximately two years ago. See Ex. 3 (Jan. 11, 2010 Cooper Tr.) at 18:25-22:18. A long-
completed investment does not pose a conflict.
(2) No Evidence of Collusion
137. The Committee also attempts to establish that actual collusion occurred
between the Debtors and the Financing Party Defendants throughout the course of these cases.
Comm. Obj. at 10-24, 68-79. Courts generally presume the absence of fraud or collusion unless
there is evidence to the contrary. See Rutter & Wilbanks Corp. v. Shell Oil Co., 314 F.3d 1180,
1189 (10th Cir. 2002) (in a class action case, noting “[a]bsent some more concrete evidence of
collusion than Objector’s conclusory allegations and inferences, we decline to disturb the district
court’s conclusion that the settlement was not . . . collusive.”), cert. denied, 539 U.S. 915 (2003);
UAW v. General Motors Corp., 05-CV-73991-DT, 2006 WL 891151, at *21 (E.D. Mich. Mar.
31, 2006) (in a class action case, in “the absence of any credible evidence showing collusion, this
presumption is conclusive in this case.”); Newby v. Enron Corp. (In re Enron Corp. Secs.), No.
H-01-3624, No. H-01-3913, 2003 WL 22962792, at *3 (S.D. Tex. Nov. 5, 2003) (in a class
action case, stating “‘[e]vidence’ may be the critical term with respect to this factor” and finding
the objector did not provide any concrete evidence of collusion); In re PaineWebber Ltd. P’ships
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Litig., 171 F.R.D. 104, 132 (S.D.N.Y.) (in a securities class action case, holding “an allegation of
collusion will not stand in the absence of any credible evidence”) (citing Smith v. Alleghany
Corp., 394 F.2d 381, 391-92 (2d Cir.),cert. denied, 393 U.S. 939 (1968)), aff’d, 117 F3d 721 (2d
Cir. 1997).52
138. Additionally, it takes more than conclusory allegations based on
speculation to show collusion. Szwak v. Earwood, No. 07-2092, 2009 WL 872482, at *9 (W.D.
La. March 26, 2009) (in a 9019 case, refusing to find collusion in reaching the settlement
because the objector’s allegations were based only on “his own unsupported characterizations”),
rev’d on other grounds sub nom. In re Bodenheimer, Jones, Szwak, & Winchell L.L.P., No. 09-
30360, 2009 WL 5103546, at *6-7 (5th Cir. Dec. 29, 2009); In re Cajun Elec. Power Coop., Inc.,
230 B.R. 715, 753 (M.D. La. 1999) (in confirming a plan including a settlement, finding no
collusion in reaching the settlement given the lack of “any credible testimony to support these
allegations of collusion”); King’s Grant Golf Acquisition LLC v. Abercrombie (In re T 2 Green,
LLC), 364 B.R. 592, 611 (Bankr. D.S.C. 2007) (in a 9019 case, approving a settlement after
finding “no evidence of collusion”); In re Congoleum Corp., No. 03-51524, 2007 WL 1428477,
at *2 (Bankr. D.N.J. May 11, 2007) (in determining good faith in connection with an asset sale
under section 363(b) of the Bankruptcy Code, finding “An objector has to show more than an
opportunity to collude; an objector must provide some evidence or indication of actual
collusion.”); In re Cadet Mfg. Co., No. 99-30304, 2006 WL 1343435, at *7 (Bankr. W.D. Wash.
May 15, 2005) (in a 9019 case, finding no evidence of fraud or collusion supporting objector’s
allegations).
52 The Committee’s reliance on In re Matco Elecs., 287 B.R. 68, 76 (Bankr. N.D.N.Y 2002) is misplaced. That case involved release of claims against insiders. The present settlement, as the Committee well knows, has nothing to do with insiders.
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139. No collusion occurred here. As explained above, other than a passing
comment made before the Committee had even filed its complaint (which has been manipulated
out of context by the Committee), Cadwalader never discussed the merits of the Committee
Litigation or the terms of the proposed settlement with any of the Financing Party Defendants.
140. The Committee further contends that the Debtors colluded with the
Financing Party Defendants by cooperating with and assisting them in litigation, while remaining
hostile to the Committee. See Comm. Obj. at 76-77. Specifically, the Committee complains that
(i) “the Debtors and the FPDs actually behaved like parties on the same side of the negotiating
table, sharing strategies, legal theories, and assessments of the Committee’s case,” Comm. Obj.
at 76, (ii) Cadwalader interfered with discovery by objecting to questions during depositions and
asking follow-up questions, id. at 76-77, and (iii) Cadwalader “routinely huddled with counsel to
the FPDs, conferring during breaks or offering Defendants’ witnesses softball questions,” and
“routinely behaved as if it was one of the attorneys for the Defendants,” id. at 76-77, and “sought
to undermine the Committee’s presentation of its claims, and was quite open about its
disagreement of the Committee’s presentation of claims against CWT’s own clients,” id. at 12,
77 n.61, but Cadwalader (iv) never “provide[d] any assistance to Committee’s counsel,” id. at
77, and (v) was “dismissive” of the Committee’s claims, id. at 12. As discussed above, however,
the Committee either alleges baldly, or else mischaracterizes or misconstrues all of its putative
support for, these observations. None of them are true.
141. It should be noted, again, that as with the Committee’s allegations
concerning disabling conflicts of interest, the Committee failed to act (or even complain) with
respect to the Debtors’ or Cadwalader’s purported conduct until faced with the prospect of the
present settlement, making the welter of allegations now spewing forth all the more incredible.
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142. The Committee also infers collusion from the false premise that the
interests of the Financing Party Defendants and the Debtors are aligned, and thus the parties must
share a common purpose, and therefore be in league, to (a) rid the estate of the Committee
Litigation, and (b) intentionally minimize its value for the estate by striking the lowest plausible
settlement value. Comm. Obj. at 26-27, 60-61, 74-76. This is false. The Debtors, as fiduciaries
to the entire estate, have been motivated by several goals: (i) to emerge from bankruptcy, (ii) to
resolve thorny intercreditor issues among the Senior Secured Lenders, the Bridge Lenders and
the 2015 Noteholders that affect the value of the Debtors not only directly but also indirectly
through the value of non-debtor affiliates in Europe, and (iii) to the extent possible, to obtain a
distribution for out-of-the-money unsecured creditors. The value of the proposed settlement is
that it furthers all three of these goals.
143. Yet the Committee, of course, contends that collusion or other impropriety
is to be inferred because the Debtors’ motivation has not been the single-minded maximization
of returns for unsecured creditors—as purportedly evident in the settlement’s allegedly leaving
cash value “on the table.” See Comm. Obj. at 61, 78. However, the Committee fundamentally
misunderstands the split nature of the litigation as an asset of the estates, and as demonstrated by
the terms of the settlement itself, is wrong about the Debtors’ commitment to maximizing returns
for unsecured creditors.
144. It is clear that the Committee, as fiduciary for just the unsecured creditors,
views the Committee Litigation only as an accretive endeavor—i.e., adding value for the benefit
of unsecured creditors. Thus, in its Objection the Committee focuses on the value-maximizing
purposes of derivative standing, and criticizes the Debtors for appearing not to seek to maximize
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the value of the claims.53 From the Debtors’ perspective, however, while the Committee
Litigation is an accretive endeavor with respect to the claims against the non-settling defendants,
with respect to the claims asserted against the Financing Party Defendants, it is essentially an
intercreditor allocation question. Fulfilling the Debtors’ mandate to maximize value for the
estate, the proposed settlement (as a settlement of the allocative portion of the Committee
Litigation) provides interest-free funding for the continued prosecution of the remaining
(accretive) portions of the litigation, the entire benefit of which now will redound to the
unsecured creditors.
(3) Arm’s-Length Negotiations
145. Finally, the Committee also argues that the proposed settlement cannot be
approved under the Rule 9019 standard because it was not negotiated at arm’s length, repeatedly
complaining that there was little or no negotiation of the Debtors’ settlement proposal. Comm.
Obj. at 1-2, 4, 41-45, 70-71. Citing case after case, the Committee argues that a long history of
back-and-forth adversarial interactions between parties to be “the most compelling evidence of a
bargain arrived at arm’s length,” and then ignores the history of the negotiations between the
Financing Party Defendants, on one hand, and the Committee, as derivative plaintiff for the
estate, on the other. See Comm. Obj. at 68. Yet that history of negotiations is the obvious
foundation upon which the proposed settlement is built.
146. Over the course of more than three months, the Committee and the
Financing Party Defendants, with the Debtors’ periodic encouragement, negotiated with respect
to at least three offers by the Financing Party Defendants and two offers by the Committee,
53 Specifically, the Committee accuses the Debtors of dereliction in their duty to maximize recoveries, seeComm. Obj. at 69, by being improperly motivated to simply “eliminate the ‘only thing’ standing in the way of confirmation.” The Committee grossly mischaracterizes the Debtors’ motivation.
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followed by two rounds of mediation conducted by an experienced and distinguished mediator.
In response to the Committee’s demands, the Financing Party Defendants improved their offer
several times. All through this history, the Debtors kept themselves aware of the important
developments (and to the extent they were not aware, it was only because the Committee took no
steps at any time to inform either Cadwalader or any other Debtors’ representative regarding the
prosecution and resolution of the estates’ claims).
147. Ultimately, after the mediation process ended in impasse, and facing
alternatives not in the estates’ best interests, the Debtors picked up where the Committee left off
and reached accord on a substantial improvement over the Financing Party Defendants’ last
offer.54 The fact that the Financing Party Defendants had been asking the Debtors to join the
settlement discussion for some time does not alter the history of negotiations, or the conclusion
that the settlement was reached at arm’s length.
148. In considering how best to achieve a fair settlement, the Litigation
Subcommittee considered various negotiation strategies, including further rounds of adversarial
offer and counteroffer with the Financing Party Defendants. Having closely followed the course
of the litigation, negotiation, and mediation between the Financing Party Defendants and the
Committee, the Litigation Subcommittee chose instead to make its demand to the Financing
Party Defendants on a “take it or leave it” basis, i.e., as a best and final offer, making it clear that
the Debtors would walk away and the defendants would face an immediate trial if the Financing
54 The Committee’s contention that the Debtors’ “interference” scuttled an ongoing negotiation with the Bridge Lenders is not supported by the facts. Certainly, by the time the second mediation session ended in impasse, the Bridge Lenders had concluded that further discussions with the Committee regarding a separate peace would be pointless, given the Committee’s continually unacceptable demands. See Ex. 12 (Huebner Tr.) at 227:4-229:2; Ex. 36 (Simes Tr.) at 105:6-109:24.
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Party Defendants did not accept the offer.55 Thus, the development of the proposed settlement
was not a single-offer event, as the Committee would have the Court believe, but the culmination
of a long, iterative process.
149. Despite this genesis, the Committee has criticized the settlement as not
being an arm’s-length deal on the theory that the settlement is so low as to be a one-sided
bargain. Of course, the settlement only seems low to the Committee because it mischaracterizes
and de-values the terms before comparing the value to an unrealistic assessment of the
probabilities of and potential recoveries from the case. Moreover, notwithstanding the
Committee’s arguments to the contrary, the settlement appropriately accounts for Count XII of
the Committee’s complaint (the aiding and abetting claim against Merrill Lynch) because if the
liens at issue are avoided, the Committee would get a litigation recovery (the risk of which is
reflected in the settlement), but if the liens are not avoided, the claim against Merrill Lynch will
fail. Comm. Obj. at 73. The Committee further alleges that the settlement is not arm’s-length
because the Financing Party Defendants exerted an undue influence on the Debtors by means of
the DIP Financing Order. See Id. at 6-8, 74-75. The Examiner, however, already has found
otherwise. See Examiner Report at 60.
150. None of the cases cited by the Committee with respect to arm’s-length and
collusion are apposite. They fall into three broad categories: (1) cases in which courts express
concern about the perverse incentives for plaintiffs’ counsel to settle a class action, see Ortiz v.
55 The Committee complains that the settlement was done on the eve of trial, presuming that a better settlement could have been achieved during or after trial. The Committee complains that the Debtors pushed for an early trial based on the argument that a trial would force a settlement; they illogically say this contradicts the idea that a good time to settle is on the eve of trial. However, Cooper testified to the Debtors’ belief that the best opportunity was just before trial, as in trial the parties would likely polarize, one side would conclude it had the upper hand, or a party facing loss might instead chose to appeal.
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Fibreboard Corp., 527 U.S. 815, 852, remanded 527 U.S. 1031 (1999); Tornabene v. Gen. Dev.
Corp., 88 F.R.D. 53, 60 (E.D.N.Y. 1980); (2) cases in which the court found no collusion or
conflict, see W.T. Grant, 699 F.2d at 613; McDonald v. Chicago Milwaukee Corp., 565 F.2d
416, 426 (7th Cir. 1977); Berry v. School Dist. of Benton Harbor, 184 F.R.D. 93, 105 (W.D.
Mich. 1998); PaineWebber, 171 F.R.D. at 132; Cohen v. Nat’l Union Fire Ins. Co. (In re County
Seat Store, Inc.), 280 B.R. 319, 327 (Bankr. S.D.N.Y. 2002); and (3) cases in which the facts are
entirely different from those here, see Susman v. Lincoln Am. Corp., 561 F.2d 86, 88 (7th Cir.
1977) (court denied class certification because, among other things, the attorney’s fees would be
greater than any potential recovery and one of the plaintiffs was a law firm partner of the
plaintiffs’ class counsel); Dacotah Mktg. & Research LLC v. Versatility, Inc., 21 F. Supp. 2d
570, 577-79 (E.D. Va. 1998) (court found that a release given to a third-party defendant by the
plaintiff for one dollar was collusive because the plaintiff hoped to get information in exchange
to prosecute its case against the non-settling defendant); In re Matco Elecs., 287 B.R. at 78 (court
disapproved a settlement in part for not being arm’s-length because the settling parties were
insiders of the debtor); Rafool v. Goldfarb Corp. (In re Fleming Packaging Corp.), Nos. 03-
82408, 04-8166, 2007 WL 4556981, at *2 (Bankr. C.D. Ill. Dec. 20, 2007) (disapproving
settlement that “settle[d] nothing” and provided no payment or other tangible benefit to the
estate, but instead would embroil the trustee in other lawsuits).
The Committee Objection Should Be Overruled
151. As this Court stated in Adelphia, “the approval of a settlement cannot be
regarded as a counting exercise. Rather, it must be considered in light of the reasons for any
opposition, and the more fundamental factors—such as benefits of settlement, likely rewards of
litigation, costs of litigation and downside risk . . .” Adelphia, 327 B.R. at 165 (emphasis in
original). In considering the fundamental factors, however, the Court should not lose sight of the
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reason for the Committee’s opposition here: the unsecured creditors have no other hope of
recovery—thus the Committee has everything to gain and nothing to lose by holding out for
more, even if that means holding up this reorganization for everybody else.
152. On behalf of the estate, to whom the Debtors and their counsel have
faithfully borne their fiduciary duties, and for the benefit of unsecured creditors as well, who
stand to receive a fair distribution, the Debtors respectfully request that the Committee’s
Objection be overruled and the settlement be approved.
THE LAW DEBENTURE OBJECTION
153. The arguments of Law Debenture Trust Company of New York (“Law
Debenture”), as Indenture Trustee for the Millennium Notes (as defined in the LD Objection) fail
as well. Like the Committee, Law Debenture fails to recognize that holders of the Millennium
Notes will not only receive cash distributions, but they will also become beneficiaries of a well-
funded litigation trust seeking to recover more than enough to pay the Millennium Notes in full.
Thus, its contention that Millennium Noteholders (as defined in the LD Objection) are not
receiving substantial value for their claims is simply wrong.
154. Law Debenture’s central mistake is its assumption that the Millennium
Noteholders would necessarily recover anything even if the Committee prevailed in pursuing
estate claims. The Millennium Notes have direct claims against Millennium America, Inc.
(“MAI”) and certain affiliated entities, which are shell entities with no operations or assets. The
only entities in the Millennium “chain” that are operating companies with value are Millennium
Specialty Chemicals, Inc. (“MSC”) and Millennium Petrochemicals, Inc. (“MPI”), which are
indirect subsidiaries of MAI. The Millennium Noteholders did not bargain for claims against
MSC and MPI (unlike the Financing Party Defendants); the Millennium Noteholders are merely
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creditors of the indirect equity holder(s) of MSC and MPI. And, as the Debtors have set forth
previously, under A.R.T., liens or obligations are only avoided to the extent necessary to satisfy
the creditors of a particular debtor entity, not for the benefit of equity or creditors of a different
entity.
155. Law Debenture argues, however, that provisions in the Millennium Note
Indenture and the credit agreement under which the Financing Party Defendants obtained
guarantees against the Millennium entities, limit guarantees at MPI and MSC (and all of MAI’s
restricted subsidiaries) to 15% of the Consolidated Net Tangible Assets (“CNTA”) of MAI and
its subsidiaries (the limitation referred to as the “CNTA Limitation”). In essence, Law
Debenture asserts that the Financing Party Defendants’ guarantees are so small that residual
value would flow up and permit MAI to make some distributions to the Millennium Noteholders.
Law Debenture is correct that the relevant documents contain the CNTA Limitation, but even if
the CNTA Limitation were in force on the facts of these cases (which the Debtors neither
concede nor contest at this time), Law Debenture would be wrong on the facts.
156. The CNTA limitation is based on Millennium’s qualifying assets as of
December 20, 2007, the date on which the Financing Party Defendants’ guarantee claims against
MPI and MSC arose. LyondellBasell made contemporaneous public disclosures in its audited
financial statements that the Financing Party Defendants obtained guarantees for $350 million
against the Millennium entities, including MPI and MSC. See Comm. Obj., Ex. 57 (2007 Form
10-K, Millennium Chemicals, Inc., dated March 28, 2008). The Millennium 10-K explicitly
notes:
Millennium recorded push-down debt to the extent allowed under the indenture governing Millennium’s 7.625% Senior Debentures due 2026. Under the indenture, Millennium may not incur additional indebtedness in excess of 15% of Millennium’s Consolidated Net Tangible Assets
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(“CNTA”), as defined. As a result, Millennium recognized $350 million of push down debt.
Id. at 85; see also McWilliams Decl. ¶14. “Push-down” debt is debt recognized up to the CNTA
Limitation. Having never previously challenged the validity of the publicly disclosed $350
million CNTA Limitation, Law Debenture (and the Committee) simply ignore it. Instead they
rely on a litigation-driven CNTA Limitation created without a shred of valid support to argue
that value would flow up to creditors of MAI. There is no basis at all to rely on this post hoc
calculation.56
157. The implications of the Financing Party Defendants’ $350 million
guarantee claim could be severe for the Millennium Noteholders: together, MPI and MSC have
approximately $133.5 million in total residual distributable value, assuming that unsecured
creditors at those entities (measured at the midpoint of the range of unsecured creditors) are paid
in full as a result of a victory by the Committee. Of course, Law Debenture and the Committee
both fail to recognize that when solvency is measured on an entity-by-entity level, the potential
applicability of the CNTA Limitation imposes a substantial hurdle to the Committee proving that
debtors such as MSC and MPI were rendered insolvent or with unreasonable small capital as a
result of the 2007 transaction. If the CNTA Limitation is applicable, these entities only
guaranteed $350 million in debt in 2007, not the entire $20.7 billion incurred in the LBO.
158. In any event, because the Financing Party Defendants have at least $350
million in guarantees, they would recover all $133.5 million of that residual value based upon the
56 While the Committee’s calculation purportedly relies on and even cites information from Millennium’s 10-K, it fails to acknowledge the contemporaneous calculation of the CNTA Limitation and concocts its own CNTA Limitation as $105 million. The Committee’s “expert,” Ben Pickering, then takes his artificially manufactured cap and divides it pro rata among the various Millennium subsidiaries to further limit recoveries of the Financing Party Defendants. This pro rata allocation has no basis in the Millennium Indenture, which actually provides that any subsidiary of MAI may incur debt up to the CNTA Limitation. See Millennium Indenture, § 11.09.
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appropriate application of A.R.T. There would be no value available to flow up to fund a
distribution at MAI.57 In light of this, it is apparent that the settlement is completely fair and
equitable with respect to Millennium Noteholders. Indeed, one of the great benefits of the
proposed settlement is that it provides for recoveries to all creditors of individual debtor estates
affected by the transaction that created the Debtors, notwithstanding the challenges they may
have faced in recovering through litigation.
159. Finally, it is not clear why Law Debenture believes that distributions to the
2015 Noteholders would harm the Millennium Noteholders in any way—a major theme of Law
Debenture’s objection. As Law Debenture recognizes, to the extent Millennium Noteholders
could recover anything as a result of the Committee Litigation (a speculative assumption, as
explained above), it can only recover from the value of companies in the Millennium “chain,”
while the 2015 Noteholders have claims against a variety of entities (albeit claims subject to
contractual subordination and turnover provisions). Moreover, it is presumptuous of Law
Debenture to assume the Court will ultimately grant it standing to pursue fraudulent transfer
claims against the 2015 Noteholders. Law Debenture may well be unable to prove any injury or
any of the other elements necessary to obtain standing to pursue these claims, including whether
such pursuit would be in the best interests of the Debtors’ estates.58
57 Even if value flowed up to MAI as a result of the application of the CNTA Limitation, very little of it would be available for distributions to the holders of the Millennium Notes, unless the liens and claims of the Financing Party Defendants at MAI were successfully avoided. By its terms, the CNTA Limitation does not limit the debt that MAI could incur. MAI incurred all of this debt on a secured basis, and all of this secured debt is more than 80 times as much as the Millennium Notes debt.58 In any event, to the extent intercreditor litigation proceeds after the Debtors emerge from chapter 11, by definition it cannot distract from the reorganization process. In contrast, resolving litigation against the Financing Party Defendants permits the Debtors to move forward with a chapter 11 plan.
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160. For these reasons, the objection of Law Debenture to the settlement should
be overruled.
THE COLUMBUS HILL OBJECTION
161. The objection filed by Columbus Hill Capital Management, L.P.
(“Columbus Hill”) and joinder filed by CQS Directional Opportunities Master Fund Limited
(“CQS”), as holders of 2015 Notes, should also be overruled. Columbus Hill makes no attempt
to demonstrate how or why the proposed settlement of the fraudulent conveyance against the
Financing Party Defendants is outside the range of reasonableness or not otherwise in the estates’
best interests. Rather, Columbus Hill argues that the settlement should not be approved because
it “fails to take into account the 2015 Noteholders’ viable claims,” which, as Columbus Hill
admits, “are not subject to” the settlement. Columbus Hill’s argument that the settlement fails
because its claims, which are not being settled, will likely provide it a full recovery, is a non
sequitur and should be rejected.
162. Specifically, Columbus Hill asserts that because it will “likely” have its
claims paid in full as a result of the “significant likelihood” of success on (a) its claims in the
2015 Notes Adversary Proceeding59 and (b) its guarantee claims against certain non-debtor
affiliates (the “2015 Noteholder Claims”), the settlement is “woefully inadequate.” This makes
no sense. Under the terms of the proposed settlement and the Debtors’ proposed Plan, the 2015
Noteholders are free to either accept whatever recovery the proposed settlement provides to them
(which reflects a fair recovery in light of the circumstances) and waive further litigation against
the Financing Party Defendants, or refuse to accept proceeds from the proposed settlement and
59 These include claims to invalidate a December 2007 Intercreditor Agreement (pursuant to which the 2015 Noteholders are subordinated to a class of senior secured creditors) and for equitable subordination.
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continue to litigate the 2015 Noteholder Claims. Thus, even if Columbus Hill’s assertions
regarding the validity of the 2015 Noteholder Claims were true—and they are not—they provide
no basis whatsoever to deny approval of the proposed settlement.
163. Under the applicable 9019 standards, the fact that the proposed settlement
requires the 2015 Noteholders to waive their potential challenges in order to participate in any
recovery does not render the settlement unreasonable. To the contrary, the 2015 Noteholders
should not be heard to complain about a settlement which gives them the option to take a
substantial guaranteed recovery or retain their right to pursue a full recovery—an outcome which
they suggest is “likely.” Prior to the settlement being reached, Columbus Hill and the 2015
Noteholders’ only options were to incur the time and expense involved in litigating their claims
or to drop them.
164. Finally, Columbus Hill takes issue with the Plan’s proposal “to nullify the
guarantee claims of the 2015 Noteholders against Non-Debtors by providing for an ‘Enforcement
Sale’ by the security agent under the senior secured credit agreement under the December 2007
Intercreditor Agreement.” CH Obj. at 15. Columbus Hill claims that if it prevails in the 2015
Notes Adversary Proceeding (as defined in the CH Objection) and can demonstrate that the
December 2007 Intercreditor Agreement is unenforceable, “the security agent will not be able to
enforce the December 2007 Intercreditor Agreement and will therefore not be able to compel the
cancellation of the Non-Debtor guarantees securing the 2015 Notes.” Id. at 15. It further claims
that the Enforcement Sale cannot be used to nullify the 2015 Noteholders’ guarantees if the
guarantees and related pledges underlying the sale are unenforceable. These are irrefutably plan
confirmation issues that have no place being addressed in connection with a 9019 motion.
165. For these reasons, the CH Objection should be overruled.
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166. For all of the foregoing reasons, the Debtors respectfully request rejection
of the Objections, entry of an order approving the settlement, and such other and further relief as
is just.
Dated: New York, New YorkFebruary 10, 2010
CADWALADER, WICKERSHAM & TAFT LLP
/s/ George A. DavisGeorge A. Davis, Esq.Andrew M. Troop, Esq.Howard R. Hawkins, Jr., Esq.Israel Dahan, Esq.One World Financial CenterNew York, New York 10281Telephone: (212) 504-6000Facsimile: (212) [email protected]@[email protected]@cwt.com
– and –
Mark C. Ellenberg, Esq.Peter Friedman, Esq.700 6th Street, NWWashington, DC 20001Telephone: (202) [email protected]@cwt.com
Attorneys for Lyondell Chemical Company, et al.