Free Objections - District Court of Delaware - Delaware

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE In re RADNOR HOLDINGS CORPORATION, et al., Debtors. _______________________________ The Official Committee Of Unsecured Creditors, Appellants, v. Tennenbaum Capital Partners, LLC, et al., Appellees. _______________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Civil Action No. 06-782 (***)

Chapter 11 Case No. 06-10894 (PJW) Jointly Administered

OPPOSITION OF APPELLEES TR ACQUISITION CO. INC., TENNENBAUM CAPITAL PARTNERS, LLC, SPECIAL VALUE EXPANSION FUND, LLC, SPECIAL VALUE OPPORTUNITIES FUND, LLC AND JOSE E. FELICIANO TO MOTION OF APPELLANTS OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR ORDER EXPEDITING APPEAL OF CERTAIN ISSUES Appellees TR Acquisition Co., Inc. ("TRAC"), Tennenbaum Capital Partners, LLC, Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC, and Jose E. Feliciano (collectively, "Tennenbaum") hereby respectfully submit this opposition to the motion ("Motion") of appellants the Official Committee of Unsecured Creditors ("Committee") for an order expediting the appeal of certain professional fee issues, and in support thereof state as follows: Introduction The Motion asks the Court to expedite six of the ten issues that the Committee itself identified as the appeal issues, and to stay the others. Those six issues

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do not stand to benefit the Committee or the unsecured creditors that they represent at all; they relate solely to whether the lawyers and other professionals for the Committee will be paid (the "Fee Issues"). The Motion is seriously misguided and should be denied for three independent reasons. First, the Committee's assertion that, absent a ruling first (and a reversal) on the Fee Issues, it will not be able to retain counsel to prosecute the remaining appeal issues, is meritless. Greenberg Traurig already represents the Committee, has not sought to withdraw and cannot withdraw without court approval. In any event, Greenberg Traurig essentially litigated the trial on a contingency fee basis, and there is no record evidence, nor logic, for the proposition that it would not do so on appeal as well. Second, the appeal should be dismissed, not expedited. The entire appeal is moot because it seeks to revisit the order approving the sale of substantially all of the Debtors' assets to TRAC (the "Sale Order"), but the sale has already occurred. Additionally, the appeal of the Fee Issues should be dismissed because the Committee itself, as opposed to its lawyers and other professionals, has no standing to pursue it. Third, rather than requiring immediate Court action, the Fee Issues are not even ripe for adjudication, and certainly should not be heard on an expedited basis. Whether the Committee's professionals' fee applications will be allowed at all is a subject currently pending before the Bankruptcy Court, and a hearing is not scheduled until March 13, 2007. It also bears noting that the Motion is replete with errors, misstatements of the Record and the like, some of which TRAC notes below.

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I.

THE COMMITTEE WILL PROSECUTE THE APPEAL.

HAVE

COMPETENT

COUNSEL

TO

The Committee's public policy arguments are a red herring for two reasons. Greenberg Traurig may not withdraw as counsel without Bankruptcy Court approval, and the prosecution of this appeal would proceed on the same basis as did prosecution of the adversary proceeding: on a contingency fee basis. A. Greenberg Traurig May Not Withdraw As Counsel Without Court Approval. The entire premise of the Motion is misplaced. The Committee contends that it "is not in a position to obtain adequate legal representation for the ongoing expense of pursuing rights on appeal," and that it "lacks the ability to participate effectively in this appeal or the related appellate proceedings, or otherwise prosecute its appeals, unless relief first is granted with respect to the Committee's professional fees." Motion ¶ 30. No other ground for expediting the Fee Issues has been submitted. The Committee's argument entirely ignores the fact that the Committee already has counsel which is not permitted to withdraw absent bankruptcy court approval. The Bankruptcy Court approved the Committee's motion to retain Greenberg Traurig as its counsel (Dkt. 240), and Greenberg Traurig remains the Committee's lawyers. District Court Local Rule 83.71 provides: An attorney may withdraw an appearance for a party without the Court's permission when such withdrawal will leave a member of the Bar of this Court appearing as attorney of record for the party. Otherwise, no appearance shall be withdrawn except by order on a motion duly noticed to each party and served on the party client, at least ten days before the motion is presented.... Local Rule 83.7 (emphasis supplied).
1

District Court Local Rule 83.7 applies in bankruptcy cases. See Bankruptcy Court Local Rule 9010-2.

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Thus, Greenberg Traurig may not withdraw as counsel without Judge Walsh's approval. See Worldspan, L.P. v. The Ultimate Living Group, LLC, 2006 U.S. Dist. LEXIS 21451 (D. Del. Apr. 20, 2006) (denying a motion to withdraw as counsel under Local Rule 83.7). No such motion has been made, and it would be inappropriate for this Court, sitting on appeal, to assume such a motion would be granted. Indeed, many courts have denied motions to withdraw premised solely on the lawyers' complaint that they were not being paid. See, e.g., In re Albert, 277 B.R. 38 (Bankr. S.D.N.Y. 2002); In re Edsall, 89 B.R. 772 (Bankr. N.D. Ind. 1988); In re Cuddy, 322 B.R. 12 (Bankr. D. Mass. 2005). Moreover, unquestionably Greenberg Traurig's withdrawal would cause delay in these appeals, which is an independent ground to deny any motion to withdraw. See Worldspan, 2006 U.S. Dist. LEXIS 21451 at *2; Rusinow v. Kamara, 920 F.Supp. 69, 71 (D.N.J. 1996); Chester v. May Dep't Store Co., 2000 U.S. Dist. LEXIS 50; 2000 WL 12896, *1 (E.D. Pa. 2000). In short, Greenberg Traurig remains the Committee's counsel. Until it convinces Judge Walsh that it should be permitted to withdraw due to non-payment -which it very well might never do -- the Committee simply cannot be heard to argue that absent an expedited (and favorable) ruling on the Fee Issues, the Committee will not be adequately represented. B. The Committee May Employ Appellate Counsel on the Same Basis as Trial Counsel: A De Facto Contingency Basis. The Motion's premises is baffling for another reason: the lawyers for the Committee took exactly the same risk of non-payment in prosecuting the adversary proceeding that they would be taking in prosecuting the appeal. Thus, it is difficult to

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understand how the Committee can allege that it can attract lawyers to take a $5 million gamble in litigating, but not the much smaller amount in appealing. The Committee and its professionals knew from the earliest days of the Debtors' bankruptcy cases that they were taking their representation essentially on a contingency fee basis (other than $300,000)2. The Committee and its professionals knew that there were insufficient assets to pay all claims,3 and that assets would be available to pay the Committee professionals only if they prevailed in their litigation against Tennenbaum Lenders for recharacterization or equitable subordination, which they failed to do. Indeed, one of the Committee's repeated objections during the Chapter 11 cases was that the proposed Asset Purchase Agreement would result in no distribution to other creditors. See, e.g., Dkt. 144 (Committee's objection to the bidding procedures motion) at ¶1 (sale would "leav[e] nothing for any non-insider creditor"); ¶8 (sale "will leave hardly any cash to cover the administrative expenses . . . let alone the Debtors'

consolidated arms-length liabilities."); ¶10 ("Indeed, the unsecured creditors will actually be worse off than if these cases were filed as liquidating Chapter 7 cases ..."). As a result, the Committee's professionals knew that they were taking the case on a contingency fee basis. Indeed, the Bankruptcy Court repeatedly warned the Committee that the estate would not be burdened by Committee professional fees absent a showing of benefit to the estate from their litigation against Tennenbaum, which they failed to show. At the

This amount was set aside in the Debtor in Possession loan to fund investigations of claims against Tennebaum ($200,000) and the Debtors' revolving lender, Silver Point ($100,000). 3 This was the case because the total of secured claims alone was more than TRAC's stalking horse bid for substantially all of the assets of the Debtors. Thus, unless either TRAC was substantially overbid at an auction or the Committee was able to set aside Tennebaum's secured interest -- neither of which occurred -- the assets of the estate would be sold for less than the amount of the secured debt.

2

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October 27, 2006 hearing on whether the Bankruptcy Court should grant the Committee derivative standing to prosecute claims of the estate, the Bankruptcy Court warned the Committee not to waste estate resources: But let me make this comment. Quite candidly, as some of these Counts I consider -- how should I put it -- longshots and if we spend -- how many days are we going to have for this trial? ....Well let me just say that if at the end of the day these Counts don't have merit sufficient for me to enter anything in your favor, come fee application time, you may be subject to a severe adjustment....I'm not making a judgment....I don't know enough about this -- I've read your complaint, but I haven't seen the evidence. But it's going to be a very expensive proposition and unless the estate benefits, I'm going to ask why anybody should be paid for what we did. (October 27, 2006 Transcript, attached hereto as Ex. 1, at 75-76). The Bankruptcy Court conducted eight days of trial between November 2 and November 14, 2006 (the "Trial"). During Trial, the Bankruptcy Court again repeatedly warned the Committee that it saw no basis for at least some of the claims. See, e.g., Tr. 1435 ("The only count they left out was loss of consortium, and some of these counts don't stand a chance of even being seriously considered."); Tr. 1639 ("I must tell you very candidly, if at the end of the day this complaint goes nowhere, I may wish to examine the committee members under oath."); Tr. 336 ("Strikes me that the committee is swinging for the fence. So far its been an infield pop."). Given these repeated statements by the Court, the Committee's professionals can hardly be surprised that they will not be paid for trial. It was a contingency

representation (other than $300,000). It is hard to fathom why the appeal should be any different -- and why that matters in attracting counsel. II. THE APPEAL SHOULD BE DISMISSED. No portion of the appeal should be expedited. Instead, the entire appeal should be dismissed as moot, or in the alternative the Fee Issues should be dismissed 6
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because the Committee, as opposed to its lawyers, have no standing to pursue such issues. A. The Appeal is Moot. The Committee knows that appellees TRAC and Tennenbaum are planning to file a motion to dismiss the appeal on mootness grounds. The sale closed on Nov. 29, 2006, more than $80 million has been paid by TRAC to numerous parties, new contracts have been entered into between TRAC and many of the former vendors and customers of the Debtors and numerous new mortgages and security agreements have been entered into by TRAC encumbering the purchased assets. Accordingly, there can be no appellate review of the Sale Order because (1) there is no practical relief that this appellate court could grant that would not affect the validity of the sale (the doctrine of statutory mootness under 11 U.S.C. §363(m),4 and (2) even if such relief could conceivably be fashioned, implementation of that relief would be inequitable as it would require disgorgement by third party creditors of millions of dollars and the unwinding of numerous implemented and ongoing contractual obligations between TRAC and such third party creditors (the doctrine of equitable mootness in the bankruptcy context). Knowing that TRAC intended to file a motion to dismiss the appeal on mootness grounds just as soon as a judge is assigned to this appeal, the Committee decided to try to preempt that inevitability by seeking a stay of all appellate questions (including of course, mootness) until the Committee gets a hearing on its professional fee

4

"The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal." 11 U.S.C. § 363(m).

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issues. This Court should not abide such procedural manipulations cloaked in public policy arguments. Rather than include all of its section 363(m) mootness arguments in this pleading, Tennenbaum will brief the issue when a Judge is assigned to this appeal. B. The Committee Lacks Standing to Pursue the Fee Issues. TRAC also intends to move to dismiss the appeal of the Fee Issues because the Committee -- as opposed to Greenberg Traurig and the rest of the professionals employed by the Committee -- lacks standing to prosecute these issues. To be entitled to standing to appeal an order of the bankruptcy court, the appellant must be a "person aggrieved" by the bankruptcy court's order. Gen. Motors Corp. v. Dykes (In re Dykes), 10 F.3d 184, 187 (3d Cir. 1993); Richardson v. Treacy (In re Richardson Indus. Contractors, Inc.), 2006 U.S. App. LEXIS 15252, *5 (3d Cir. June 20, 2006). The Third Circuit repeatedly has held that a litigant is a "person aggrieved" only if the order of the bankruptcy court "diminishes their property, increases their burdens, or impairs their rights." In re Dykes, 10 F.3d at 187; In re Combustion Eng'g, Inc., 391 F.3d 190, 214 (3d Cir. 2004). In re Richardson Indus. Contractors, Inc., 2006 U.S. App. LEXIS 15252 at *5. It is clear that the Fee Issues do not diminish the Committee's property, do not increase the Committee's burdens and do not impair the Committee's rights. Creditors committees do not pay their own professionals; committee professionals only get paid by the bankruptcy estate. See 11 U.S.C. § 330. If the estate lacks sufficient funds to pay professionals, committee members do not come out-of-pocket to pay their professionals, but rather the professionals simply do not get paid. That is one of the risks

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for professionals undertaking a committee engagement.

This Committee was no

different. As Greenberg Traurig disclosed in its retention application, "Other than as set forth above,5 there is no proposed arrangement to compensate Greenberg Traurig in connection with its representation of the Committee." See Dkt. 146 (Application to retain Greenberg Traurig, attached hereto as Ex. 2) at ¶ 15; id. at Ex. A. (Affidavit of Victoria Watson Counihan in support of the Application to retain Greenberg Traurig) at ¶ 15. Thus, if the Sale Order is affirmed, and the Committee professionals can be paid no more than $300,000 out of the outrageous $5 million + bill they have run up as of the end of November 2006, there is no circumstance in which the Committee or its members will be required to pay the remaining $4.7 million. Rather, the Professionals simply will have a claim (if allowed) that will be unpaid. While that might make the Professionals (if their claims were allowed) "persons aggrieved," it does not render the Committee itself -- the only appellant -- a "person aggrieved." If the Committee

professionals are not paid and are left with a claim, the Committee's property will not be diminished since its members will pay no extra money to the Professionals, the Committee will have no increased burdens, and the rights of the Committee and its members (as opposed to its Professionals) to payment will be unimpaired. Simply put, the wrong entity pursued the appeal of the Fee Issues, so that portion of the appeal must be dismissed, not expedited. When Judge Walsh enters orders on the applications of the Professionals for allowance of fees and expenses, those orders

This reference is to Greenberg Traurig applying for fees and expenses from the estate, the billable rates of the Greenberg Traurig employees and what types of expenses would be reimbursable.

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may be the subject of separate appeals by the Professionals. This appeal however, is not the proper proceeding for addressing those not yet determined bankruptcy court issues. III. THE FEE ISSUES ARE NOT EVEN RIPE FOR ADJUDICATION. Rather than requiring immediate attention, the Fee Issues are not yet ripe for resolution. Thus, rather than expedite the appeal of these issues, the Court should either dismiss them or, at a minimum, hold them in abeyance until they become ripe. The Fee Issues are not ripe because there is no Record evidence that the Committee's professionals will have allowed claims which may be paid, regardless of how this Court rules on the Committee's theoretical appeal issues on the allocation of allowed professional fees. Indeed, the Committee's professionals only just filed their applications for payment of fees incurred in the first three months of the chapter 11 cases on December 15, 2006. (See Docket Nos. 762, 764, 765 and 767 and attached exhibit). Tennenbaum and the Debtors objected to these fee applications, and the court appointed fee examiner has not yet finalized his review of the fee applications. Thus, the

Bankruptcy Court has yet to rule on the propriety of any of those fee applications. A hearing in the Bankruptcy Court to consider the Committee's professional fee applications is scheduled for March 13, 2007. (See Docket No. 807; Motion ¶ 8). Because none of the Committee professionals has had their fees allowed, none of the inequities the Committee complains about in the Motion has yet occurred. Thus, the issues that the Committee seeks an adjudication on are at this point only hypothetical, and no parties should be forced to address them on an expedited basis. Indeed, that is the entire point of the doctrine of ripeness -- precious judicial resources should not be wasted on deciding hypothetical issues that have not yet come to fruition.

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See Hoxha v. Levi, 465 F.3d 554, 565 (3d Cir. 2006); Peachlum v. City of York, Pennsylvania, 333 F.3d 429, 433-34 (3d Cir. 2003). IV. THE MOTION BADLY MISSTATES THE RECORD. The Motion should be denied for the reasons set forth above. In addition, in considering the Motion, the Court should be aware that the Motion is replete with inaccuracies and mischaracterizations of the Bankruptcy Court's rulings and the Record on this appeal. This section points out only some of those inaccuracies and

mischaracterizations. Perhaps the most relevant mischaracterization of fact in the Motion is the notion that the Committee sought a stay of the Sale Order, the order that is the subject of this appeal. That simply is wrong. The Bankruptcy Court entered the Sale Order on November 21, 2006, and no motion for stay of that order was ever filed by the Committee or anyone else. That is one of the very reasons that the sale was effectuated and this appeal was rendered moot, as noted in Section II(A) above. Perhaps the Committee is confusing its request that the Bankruptcy Court postpone the hearing on the Sale Order with a request to this Court, on a motion for stay pending appeal, that the Sale Order itself be stayed. But no motion for a stay of the Sale Order was ever filed. Second, the Committee fails to tell this Court that the Bankruptcy Court entered an order that the Committee consented to (the DIP Financing Order entered on September 22, 2006, which is attached as Exhibit 4 to the Motion) which expressly prohibited the use of any collateral of the Debtors' secured lenders to prosecute claims against such secured lenders, including Tennenbaum, with the exception of $300,000. (See DIP Financing Order ¶ 26). The DIP Financing Order was not the result of any

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machinations between the Debtors, Tennenbaum and the Bankruptcy Court. The DIP Financing Order was entered with the consent of the Committee, and the Committee was acutely aware of the provisions of paragraph 26. The Committee should not now be allowed to collaterally attack that order. Third, The Committee tries to lend an air of reasonableness to its litigation strategy by claiming at least three times that it raised "many of the same claims and objections" (or in one instance, "numerous claims and objections") also raised by counsel for the Debtors' special committee of the board of directors. That contention is meritless. The special committee's counsel, WilmerHale, raised questions about only one of the multitude of issues which the Committee chose to litigate in far flung litigation which Judge Walsh rejected en toto. Even on that one issue, WilmerHale expressed doubts. To try to suggest that the Committee's litigation strategy was "just like WilmerHale's," and therefore reasonable, is revisionist history at its worst. Finally, in their Motion, the Committee asserts that TRAC acquired the Debtors' assets by a credit bid, attempting to leave an impression that credit was the only form of consideration paid by TRAC. In truth, in addition to its credit bid, TRAC also paid more than $80 million in cash to the Debtors' creditors, and further assumed more than $30 million of additional debt from the Debtor's creditors. The evidence submitted by the Debtors to the Bankruptcy Court established that the value to creditors of TRAC's bid for the Debtors' assets exceeded $210 million. In short, the Committee has taken great liberties with the Record. The Record itself does not support the Motion.

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75 1 to get their day in court on all of these claims. 2 So whether it's evidence of that or otherwise, hold Don't try to get in the

3 it off until the end of that trial. 4 way of that trial with the 9019.

However, I just want to

5 understand what our role will be with respect to 9019s and 6 settlements, whether or not the Committee or whether or not any 7 other creditors are interested in that. Because we may just

8 step aside and let the litigation go forward and on the 16th or 9 whenever Your Honor enters your opinion, we'll deal with the 10 circumstances. 11 I throw that out. That was a concern of theirs. I

12 have a concern as to what I'm supposed to do as a fiduciary now 13 to try to settle this. 14 party litigation. 15 THE COURT: Okay, what -- I'll leave it up to you and I don't want to participate in the two-

16 Mr. Goldman whether you want to be here for that first trial. 17 18 MR. GALARDI: THE COURT: Okay. Quite

But let me make this comment.

19 candidly, as some of these Counts I consider -- how should I 20 put it -- longshots and if we spend -- how many days are we 21 going to have for this trial? 22 MR. CITERA: Two, three, four?

I thought on Wednesday you'd given us

23 about six or seven. 24 MR. GALARDI: Which is our concern about settlement

25 and all of that, Your Honor. J&J COURT TRANSCRIBERS, INC

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76 1 THE COURT: Well, let me just say that if at the end

2 of the day these Counts don't have merit sufficient for me to 3 enter anything in your favor, come fee application time, you 4 may be subject to a severe adjustment. 5 6 7 8 MR. CITERA: THE COURT: MR. CITERA: THE COURT: I understand. I'm not making a judgment. Sure, no, I understand. I don't know enough about this -- I've But it's

9 read your complaint, but I haven't seen the evidence.

10 going to be a very expensive proposition and unless the estate 11 benefits, I'm going to have to ask why anybody should be paid 12 for what we did. 13 Did you say six or seven days? If you -- I think we're starting

MR. CITERA:

14 Thursday, Friday and then I thought you had cleared out most of 15 the following week. 16 17 18 days. 19 20 21 MR. CITERA: THE COURT: MR. CITERA: yeah. Well, I said six or seven, Judge. MR. GALARDI: THE COURT: I hope Your Honor can stand the trial. Well, what I've cleared is six

Okay.

How many witnesses do you have? We're -- I guess that goes to part of We are working with Tennenbaum to put

22 the pretrial issues.

23 together the exhibits in chronological order as the Court 24 suggested as well as a witness list. 25 MR. OSTROW: About 15. Ken Ostrow

Good morning, Your Honor.

J&J COURT TRANSCRIBERS, INC

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