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KRAMER LEVIN NAFTALIS & FRANKEL LLP Kenneth H. Eckstein Robert T. Schmidt P. Bradley O’Neill Daniel M. Eggermann 1177 Avenue of Americas New York, New York 10036 212-715-9100 Attorneys for JPMorgan Chase Bank, N.A., as Collateral Agent UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: DEWEY & LEBOEUF LLP, Debtor. Chapter 11 Case 12-12321 (MG)

STATEMENT OF JPMORGAN CHASE BANK, N.A., AS COLLATERAL AGENT, IN SUPPORT OF DEBTOR’S MOTION FOR ENTRY OF A FINAL ORDER AUTHORIZING USE OF CASH COLLATERAL AND OTHER RELIEF

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TABLE OF CONTENTS Page

TABLE OF AUTHORITIES................................................................................................................... ii PRELIMINARY STATEMENT .............................................................................................................. 1 ARGUMENT A. The Prepetition Secured Creditors are Entitled to Adequate Protection ............................. 4 B. Liens on the Avoidance Actions are Permissible and are Necessary Here to Adequately Protect the Prepetition Secured Lenders from Diminution in the Value of their Collateral.............................................................................................5 C. Section 506(c) Waivers are Appropriate..............................................................................8 D. The Payment of Professional Fees is Warranted ...............................................................10 E. The Provision Governing the Compromise of Receivables is Appropriate .......................12 F. The Objections Relating to the Challenge Period and Investigation Have Been Addressed .................................................................................................................13 G. The Objections Relating to Indemnification Should Be Overruled ...................................14 H. The Former Partners Committee’s Objection Relating to the Carve-Out and Budget Should Be Overruled ......................................................................................15 I. Other Objections of the Former Partners Committee Have Been Adequately Addressed or Should Otherwise Be Overruled ..............................................16 J. The Excess Cash Collateral Sweep is Appropriate ............................................................18 PRAYER FOR RELIEF .......................................................................................................................20

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TABLE OF AUTHORITIES Case Opinions Page

In re AFCO Enters., Inc., 35 B.R. 512 (Bankr. D. Utah 1983) ...................................................... 9 In re Amron Techs., Inc., 376 B.R. 49 (Bankr. M.D. Ga. 2007)................................................... 11 In re AppliedTheory Corp., No. 02-11868, 2008 Bankr. LEXIS 1373 (Bankr. S.D.N.Y. Apr. 24, 2008)...................... 6 In re Carbone Cos., 395 B.R. 631 (Bankr. N.D. Ohio 2008) ......................................................... 5 In re Colad Group, Inc., 324 B.R. 208 (Bankr. W.D.N.Y. 2005) .................................................. 9 Hartford Fire Ins. Co. v. Norwest Bank Minn., N.A. (In re Lockwood Corp.), 223 B.R. 170 (B.A.P. 8th Cir. 1998)................................................................................... 9 Mann v. Chase Manhattan Mortgage Corp., 316 F.3d 1 (1st Cir. 2003) ..................................... 11 In re TCI 2 Holdings, LLC No. 09-13654 (Bankr. D.N.J. Mar. 17, 2009), ECF No. 258 ............................................ 11 United Savs. Ass’n of Texas v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365 (1988) ..................................................................................................... 11-12 Unsecured Creditors Comm. of Debtor STN Enters. v. Noyes (In re STN Enters.), 779 F.2d 901 (2d Cir. 1985).............................................................................................. 17 Statutes 11 U.S.C. § 361 ............................................................................................................................... 5 11 U.S.C. § 361(1) .................................................................................................................. 10, 12 11 U.S.C. § 361(2) ....................................................................................................................... 5-6 11 U.S.C. § 363(c), (e) .................................................................................................................... 4 11 U.S.C. § 506(b) ................................................................................................................... 10-11 11 U.S.C. § 506(c) ..................................................................................................................... 8-10 11 U.S.C. § 541 ............................................................................................................................... 6 11 U.S.C. § 550 ............................................................................................................................... 6 11 U.S.C. § 552(b) ........................................................................................................................ 17

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JPMorgan Chase Bank, N.A. (the “Collateral Agent”), in its capacity as collateral agent under that certain Intercreditor Agreement dated as of April 16, 2010 (the “Intercreditor Agreement”), hereby submits this statement (the “Statement”) (a) in support of the abovecaptioned Debtor’s (“Dewey” or the “Debtor”) Corrected Motion for Entry of Interim and Final Orders Pursuant to 11 U.S.C. §§ 105, 361, 362, 363 and 507, Rules 2002, 4001 and 9014 of the Federal Rules of Bankruptcy Procedure (1) Authorizing Use of Cash Collateral, (2) Granting Adequate Protection, (3) Modifying the Automatic Stay, and (4) Scheduling a Final Hearing (the “Motion”), ECF No. 16, and (b) in response to certain objections thereto (the “Objections”).1 In support of this Statement, the Collateral Agent respectfully submits as follows: PRELIMINARY STATEMENT2 1. The Prepetition Secured Lenders supported Dewey while this once

prominent law firm explored stand-alone and merger alternatives, but ultimately failed. The causes of that failure will be debated in the months and years to come, but it appears obvious that the combination of substantial financial debt, mounting trade liabilities, pension liabilities, increasing obligations to retired partners and the extraordinary contractual commitments to current partners – the owners of the firm – overburdened the firm and ultimately caused it to fail. Despite defaults on its secured obligations, the Prepetition Secured Lenders granted waivers, extensions and concessions and allowed the firm to continue to use cash collateral to pay payroll, rent, insurance and other operating expenses. When it became clear that merger transactions would not succeed and that the firm’s options were severely limited, the Prepetition Secured Lenders, at the request of the firm’s management, continued to fund the firm outside of a court
1

Specifically, this Statement responds to the Objections filed by (i) the Official Committee of Former Partners (the “Former Partners Committee”), ECF No. 74 (the “Former Partners Committee Objection”), and (ii) the Pension Benefit Guaranty Corporation (the “PBGC”), ECF No. 72 (the “PBGC Objection”).
2

Capitalized terms not defined herein have the meanings ascribed to them in the Motion or in the Interim Order.

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proceeding, allowing the Debtor access to cash to permit key practice groups to continue to operate effectively and transition to new firms as opportunities arose. This allowed the partners to continue to provide uninterrupted legal services, thereby reducing potential claims against the estate. Dewey consumed approximately $43 million of the Prepetition Secured Lenders’ cash collateral between April 16 (the Revolver’s original maturity date) and the Petition Date. 2. The daily press reports of partner departures, mismanagement, exorbitant

partner contracts and even the commencement of a criminal investigation by the District Attorney were too much for the firm and its partners to bear. Today, all but two of the partners are gone. Gone with them are millions of dollars in compensation, much of it paid with borrowed money over the past several months. Left behind, in addition to more than $225 million of secured debt, are, among other things, unfunded retirement benefits, uncollected accounts receivable, potential litigation claims, half a million boxes or more of client files, and office space in midtown that is vast, luxurious and empty. 3. In the absence of a strategy for the case and adequate funding, this Case,

like virtually every significant law firm bankruptcy to date, could easily devolve into a quagmire of uncontrolled litigation. In an effort to avoid that result, the Prepetition Secured Lenders have agreed to allow millions of dollars of their cash collateral to continue to be used to fund what amounts to a multi-million dollar wind-down budget. The Prepetition Secured Lenders have agreed to do this even in the absence of any replacement liens on hard assets, looking only to potential litigation recoveries for security. And, while certain of these expenditures will

facilitate the collection of accounts receivable, most are general estate expenses, such as rent, salaries, equipment leases, insurance, funding for the Debtor’s and Committees’ professionals and client file management.

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4.

As they committed to do at the first day hearing, the Debtor and the

Collateral Agent reached out to the estate’s unsecured creditor fiduciaries seeking to negotiate the form of a final cash collateral order and budget to govern the Debtor’s operations for the next seven weeks. The official committee of unsecured creditors appointed in this Case (the

“Creditors’ Committee”) accepted this invitation and entered into discussions. After days of negotiations, the Debtor, the Collateral Agent, a majority of the Prepetition Secured Creditors and the Creditors’ Committee have reached agreement on the terms of a consensual cash collateral order. The Collateral Agent and the Prepetition Secured Lenders believe that this agreement represents a material step toward consensus among creditors in this Case and lays the foundation for an orderly resolution of estate affairs. 5. The parties’ agreement is in the process of being documented in the form

of a proposed Final Order (the “Proposed Final Order”) that will be submitted to the Court in advance of the Final Hearing (although we understand that the budget (the “Budget”) may still be in the process of negotiation at the time this Statement is filed). Its principal terms include the following:  The Debtor will be permitted to use the Prepetition Secured Lenders’ Cash Collateral through the end of July, in accordance with the Budget, to allow this Case to stabilize and to permit the Debtor and its creditor constituents to explore whether a reasonable partner settlement could be achieved, thereby avoiding a litigation morass. The Budget will contemplate the use of Cash Collateral to pay various ongoing expenses to facilitate the wind-down, including the funding of employee payroll, benefits, insurance, file storage, and rent. The Budget will also provide funding for estate professionals, including separate legal counsel for both Committees and a financial advisor whose services can be made available to both Committees. As adequate protection for diminution in value of the Collateral, the Prepetition Secured Lenders will receive adequate protection liens on all assets of the Debtor, including chapter 5 causes of action and the proceeds thereof solely to the extent of all expenditures authorized under the Interim Order and the Final Order. The Prepetition Lenders have agreed not to seek adequate protection for any other losses or decline in collateral value during this period.

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 

The Creditors’ Committee’s challenge period shall be extended to 90 days and its investigation budget shall be capped at $100,000. The Committees will be provided with certain consent rights with respect to certain material modifications to the Budget or modifications to the cash management system. The Committees will also be given notice of reductions or write-downs of accounts receivable or works-in-process that exceed $200,000. They will also be provided with the same financial reporting that is provided to the Collateral Agent. The Proposed Final Order will be modified so that the mere commencement of a Challenge no longer results in an Event of Default. Finally, the Proposed Final Order will include a Section 506(c) waiver as well as a waiver only by the Debtor and the Committees of seeking “equities of the case” relief under Section 552(b) (but preserving the Court’s ability to consider “the equities of the case”). Although the order does not reflect an agreement with the Former Partners

6.

Committee, the issues raised by both Committees were largely identical and each of the issues has been addressed in the resolution reached with the Creditors’ Committee. The Collateral Agent, however, has engaged in a dialogue with counsel for the Former Partners Committee and will continue to do so. 7. For the reasons set forth below, the revised Proposed Final Order, as

supported by the Creditors’ Committee, is reasonable and appropriate and should be approved by the Court in its entirety. ARGUMENT A. The Prepetition Secured Creditors are Entitled to Adequate Protection 8. Section 363(c)(2) of the Bankruptcy Code clearly provides that a debtor

may not use a secured creditor’s cash collateral unless that creditor consents or unless the court, after notice and a hearing, authorizes such use in accordance with the other provisions of Section 363. Section 363(e), in turn, requires the court to condition the use of cash collateral upon the provision of “adequate protection” or to prohibit its use outright. 11 U.S.C. § 363(c)(2) and (e).

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9.

The Debtor in this case proposes to use the Prepetition Secured Creditor’s

Cash Collateral to administer the Case. Among other things, it plans to use Cash Collateral to (i) liquidate the Debtor’s assets, (ii) dispose of the Debtor’s former client files, (iii) return office space and leased equipment, (iv) evaluate, administer and litigate claims against the estate, (v) investigate, prosecute and/or settle estate claims and causes of action and (vi) confirm a chapter 11 plan. (Mitchell Declaration ¶ 8.) 10. Because the only cash in the estate is the Prepetition Secured Lenders’

Cash Collateral, the Debtor must provide the Collateral Agent with adequate protection. B. Liens on Avoidance Actions are Permissible and are Necessary Here to Adequately Protect the Prepetition Secured Lenders from Diminution in the Value of their Collateral 11. Adequate protection insulates a secured creditor from diminution in value

of its collateral caused by the Debtor’s use of that collateral during the pendency of the automatic stay. 11 U.S.C. § 361(2); In re Carbone Cos., 395 B.R. 631, 635 (Bankr. N.D. Ohio 2008) (“test is whether the secured party’s interest is protected from diminution or decrease as a result of the proposed used of cash collateral”). The determination as to what constitutes adequate protection is made on a case-by-case basis. Section 361 of the Bankruptcy Code suggests several forms of adequate protection, one of which is the provision of additional or replacement liens on estate property. 11 U.S.C. § 361. 12. In this case, however, the availability of potential replacement liens is

extremely limited. Dewey is out of business. It is not generating additional work-in-process or accounts receivable. Unlike an operating business, as accounts are collected and cash is used, cash collateral is depleted and no new accounts are created or become available for replacement liens. The Debtor’s remaining assets aside from accounts receivable are of limited value, and, in any event, are already subject to the Prepetition Secured Lenders’ liens. -5-

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13.

Here, the Proposed Final Order provides that, as adequate protection, the

Collateral Agent shall be granted additional and replacement liens on all assets of the Debtor and its estate. Those assets include all rights, claims and causes of action of the Debtor and its estate, including, without limitation, any claims or causes of action arising under chapter 5 of the Bankruptcy Code and the proceeds thereof. 14. While the Former Partners Committee argues that the granting of such

liens is improper, it offers no legal basis on which to treat chapter 5 causes of action differently from other unencumbered property of the estate. Section 541 of the Bankruptcy Code provides that the commencement of a chapter 11 case creates an estate comprised of, among other things, (i) all legal or equitable interests of the debtor in property as of the commencement of the case and (ii) any interest in property that the trustee recovers under Section 550 of the Bankruptcy Code (which provides the mechanism for recovery under chapter 5 causes of action). Nothing in Section 541 distinguishes between avoidance action proceeds and any other property of the estate, much less limits a debtor-in-possession’s ability to encumber those assets for the benefit of the estate. Indeed, as Judge Gerber recognized in In re AppliedTheory Corp., such avoidance action proceeds, like other property of the estate, can be encumbered to provide adequate protection to a secured lender: I was surprised to see the Creditors’ Committee arguing that under no circumstances could the Lenders have a claim on the proceeds of avoidance actions and other initially unencumbered assets, even if necessary to give them adequate protection. Of course those assets started out unencumbered. But those assets can thereafter be encumbered (or made available to satisfy superpriority claims), if necessary to provide adequate protection. That’s expressly authorized under section 361(2). No. 02-11868, 2008 Bankr. LEXIS 1373, at *3-4 (Bankr. S.D.N.Y. April 24, 2008). 15. On this basis, courts have authorized the grant of liens on the proceeds of

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of its collateral on numerous occasions. See, e.g., Final Cash Collateral Order at 20-21, In re Evergreen Solar, Inc. (No. 11-12590) (Bankr. D. Del. Sep. 8, 2011) (Walrath, J.), ECF No. 171; Final DIP and Cash Collateral Order at 18-20, 26, In re New Stream Secured Capital, Inc. (No. 11-10753) (Bankr. D. Del. Apr. 25, 2011) (Walrath, J.), ECF No. 266; Final Cash Collateral Order at 10-11, In re Am. Media, Inc. (No. 10-16140) (Bankr. S.D.N.Y. Dec. 6, 2010), ECF No. 85; Stipulation and Final Cash Collateral Order at 9-10, In re Metro-Goldwyn-Mayer Studios Inc. (No. 10-15774) (Bankr. S.D.N.Y. Dec. 2, 2010) (Bernstein, J.), ECF No. 162; Final DIP and Cash Collateral Order at 32, In re Saint Vincents Catholic Medical Centers of New York (No. 1011963) (Bankr. S.D.N.Y. May 17, 2010) (Morris, C.J.), ECF No. 285; Final DIP and Cash Collateral Order at 21, 24, In re Uno Restaurant Holdings Corp. (No. 10-10209) (Bankr. S.D.N.Y. Feb. 18, 2010), ECF No. 156; Final Cash Collateral Order at 14, In re DBSD N. Am., Inc. (No. 09-13061) (Bankr. S.D.N.Y. July 22, 2009) (Gerber, J.), ECF No. 221; Agreed Cash Collateral Order at 5, In re BH S&B Holdings LLC (No. 08-14604) (Bankr. S.D.N.Y. Jan. 8, 2009), ECF No. 251; Final DIP and Cash Collateral Order at 12-13, 15, In re PRC, LLC (No. 0810239) (Bankr. S.D.N.Y. Feb. 28, 2008), ECF No. 189. 16. This case is an extreme one. The Former Partners Committee itself

acknowledges that the use of cash collateral will result in “dollar-for-dollar diminution of the Secured Lenders’ lien.” (Former Partners Committee Objection at 2.) Nevertheless, no party has identified any assets of the Debtor or its estate, other than the chapter 5 causes of action, that are available to provide adequate protection for the use of Cash Collateral, that have value and that are not already subject to the existing liens. Where cash collateral will be used to fund the pursuit or resolution of the avoidance actions themselves, moreover, there is nothing inequitable in allowing adequate protection liens to attach to such causes of action.

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17.

While the Court was reluctant to approve liens on chapter 5 causes of

action before the appointment of the Creditors’ Committee, it was willing to consider the issue anew at the Final Hearing. The Creditors’ Committee has now been appointed and, after negotiating various limitations and concessions, supports the granting of liens on the avoidance actions. In these circumstances, it is entirely appropriate to approve the granting of adequate protection liens on all assets of the Debtor and its estate, including avoidance actions and the proceeds arising therefrom to the extent of any budgeted expenditures under the Interim Order and Final Order. C. Section 506(c) Waivers are Appropriate 18. The Former Partners Committee next objects to the Debtor’s waiver of its

right to surcharge the Prepetition Secured Lenders’ Collateral under 11 U.S.C. § 506(c), § 105(a), or on other similar bases. This challenge too should be rejected. 19. A section 506(c) waiver is appropriate in light of the Prepetition Secured

Lenders’ willingness (a) to subordinate their adequate protection liens to the budgeted fees and Carve-Out, and (b) to permit the funding of this Case through the use of Cash Collateral. Indeed, courts in this district have routinely granted section 506(c) waivers in final cash collateral orders. See, e.g., Final DIP and Cash Collateral Order at 45-46, In re Grubb & Ellis Co. (No. 1210685) (Bankr. S.D.N.Y. Mar. 22, 2012), ECF No. 801; Final Cash Collateral Order at 15, In re MF Global Holdings, Ltd. (No. 11-15059) (Bankr. S.D.N.Y. Dec. 14, 2011), ECF No. 275; Final DIP and Cash Collateral Order at 17-18, In re Borders Group, Inc. (No. 11-10614) (Bankr. S.D.N.Y. Mar. 16, 2011), ECF No. 404; Final Cash Collateral Order at 21, In re Am. Media, Inc. (No. 10-16140) (Bankr. S.D.N.Y. Dec. 6, 2010), ECF No. 85; Final DIP and Cash Collateral Order at 9-10, In re Mesa Air Group, Inc. (No. 10-10018) (Bankr. S.D.N.Y. Mar. 5, 2010), ECF

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No. 423; Final Cash Collateral Order at 15, In re First Republic Group Realty, LLC (No. 0913983) (Bankr. S.D.N.Y. Oct. 1, 2009), ECF No. 113.3 20. The Former Partners Committee’s sole basis for objection is its conclusory

assertion that that “this case will be run almost entirely for the benefit of the Secured Lenders.” (Former Partners Committee Objection ¶ 14.) But that is not the case at all. The expenditures contemplated by the Budget will fund the orderly administration of this Case, and include many items that benefit all parties-in-interest – including former partners. Among other things, the Budget provides for the payment of Debtor and Committee professional fees, employee salaries, rent, insurance and the orderly management and disposition of client files and records (an obligation that the estate, as a law firm partnership, undoubtedly owes to its clients). Apart from that, unsecured creditors will benefit from an orderly and accurate claims reconciliation process and from the successful pursuit or resolution of litigation against third parties (including former partners and possibly their new firms). Expenditures leading to the collection of accounts receivable will reduce the Prepetition Secured Lenders’ potential deficiency claims, which will also redound to the benefit of unsecured creditors. As a result of these significant expenditures and other concessions, the Creditors’ Committee has affirmatively consented to a Section 506(c) waiver.

The Former Partners Committee Objection ignores these extensive recent precedents permitting Section 506(c) waivers in this district, focusing instead on dated precedent from other jurisdictions. This precedent is inapposite here. See Hartford Fire Ins. Co. v. Norwest Bank Minn., N.A. (In re Lockwood Corp.), 223 B.R. 170, 176, 176 n.7 (B.A.P. 8th Cir. 1998) (striking 506(c) waiver on the basis of binding Eighth Circuit precedent and noting critically that such precedent “makes it difficult for debtors in possession to negotiate cash collateral agreements with their prepetition lenders,” that it “will also hinder courts from allowing the use of cash collateral,” and that courts’ ability to provide adequate protection “has now become, in many situations, an exceedingly difficult task to accomplish”); In re Colad Group, Inc., 324 B.R. 208, 220-222, 224 (Bankr. W.D.N.Y. 2005) (declining to grant 506(c) waiver to prepetition/DIP lender where, among other things, court found that enforcement of DIP financing terms would constitute criminal usury under New York law); In re AFCO Enters., Inc., 35 B.R. 512, 515 (Bankr. D. Utah 1983) (permitting trustee to levy 506(c) surcharge against secured creditor where no 506(c) waiver was present).

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21.

Accordingly, the Collateral Agent and the Prepetition Secured Lenders

submit that the grant of a section 506(c) waiver in the Proposed Final Cash Collateral Order is a fair, appropriate and permissible condition to the consensual use of the Prepetition Secured Lenders’ Cash Collateral. D. The Payment of Professional Fees is Warranted 22. The Former Partners Committee also objects to the payment of the

Prepetition Secured Lenders’ professional fees and expenses as a form of adequate protection under the Proposed Final Order. (Former Partners Committee Objection ¶¶ 15-17.) In

particular, it asserts that the payment of such a form of adequate protection violates Section 506(b) of the Bankruptcy Code. 23. Section 361(1) of the Bankruptcy Code expressly authorizes certain forms

of adequate protection. One of the forms of adequate protection it authorizes is periodic cash payments to the lender. Nothing in that statute indicates that such cash payments may not include a payment for the professional fees and expenses of the secured lender. No doubt for this reason, this Court has adhered to the standard practice of granting adequate protection in the form of payment of secured lenders’ professional fees in appropriate circumstances. See, e.g., Final DIP and Cash Collateral Order at 40, In re Velo Holdings Inc. (No. 12-11384) (Bankr. S.D.N.Y. Apr. 23, 2012), ECF No. 85; Final DIP and Cash Collateral Order at 17-18, In re Ener1, Inc. (No. 12-10299) (Bankr. S.D.N.Y. Feb. 17, 2012), ECF No. 50; Final DIP and Cash Collateral Order at 28, In re General Maritime Corp. (No. 11-15285) (Bankr. S.D.N.Y. Dec. 15, 2011), ECF No. 141; Final Cash Collateral Order at 10, In re First Republic Group Realty, LLC (No. 09-13983) (Bankr. S.D.N.Y. Oct. 1, 2009), ECF No. 113; Final DIP and Cash Collateral Order at 17-18, In re PRC, LLC (No. 08-10239) (Bankr. S.D.N.Y. Feb. 28, 2008), ECF No. 189.

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24.

Notwithstanding this body of law, the Former Partners Committee argues

that adequate protection payments measured by a lender’s legal fees somehow run afoul of Section 506(b) of the Bankruptcy Code, which permits oversecured creditors to include legal fees and expenses in the amount of their secured claims. This argument is a red herring. 25. The payments of fees and expenses contemplated by the Proposed Final

Cash Collateral Order are not payments of the Prepetition Secured Lenders’ claims under Section 506(b); they are adequate protection payments made to compensate the Prepetition Secured Lenders for the acknowledged diminution in value flowing from the use of their collateral during this Case. (Former Partners Committee Objection at 2 (“[T]he use of cash collateral is likely to result . . . in a dollar-for-dollar diminution of the Secured Lenders’ lien.”).) As such, Section 506(b) is not implicated by the proposed payment of the Prepetition Secured Lenders’ professional fees as a form of adequate protection. 26. The Former Partners Committee relies principally on an unpublished

bench decision in TCI 2 Holdings, LLC (No. 09-13654) (Bankr. D.N.J. Mar. 17, 2009) (Wizmur, J.), ECF No. 258, which is, in turn, premised upon a misapplication of the Supreme Court’s decision in United Savs. Ass’n of Texas v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365 (1988).4 In Timbers, the Supreme Court held that a secured creditor whose collateral was actually increasing in value was not entitled to adequate protection payments to compensate it for the bare inability to lift the stay and foreclose. Timbers, 484 U.S. at 368-69. In so ruling, the Supreme Court noted that an award of interest to the creditor (who was undersecured) would be inconsistent with the limitations of Section 506(b).
4

But that observation is plainly not

The other cases cited by the Former Partners Committee do not address whether adequate protection payments could be paid in amounts equal to professional fees and expenses. See Mann v. Chase Manhattan Mortgage Corp., 316 F.3d 1, 6 (1st Cir. 2003) (secured creditor does not violate automatic stay by failing to file a 506(b) application while continuing to accrue postpetition legal fees chargeable to chapter 13 debtor); In re Amron Techs., Inc., 376 B.R. 49, 54 (Bankr. M.D. Ga. 2007) (oversecured creditor entitled to fees under § 506(b)).

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controlling here. Section 361(1) expressly authorizes cash payments to the extent of diminution in value. As such, it would not have been applicable in Timbers, where there was no diminution in value; 361(1) is controlling here, however, where diminution in value is conceded. In fact, the Supreme Court explicitly recognized that, had the collateral in Timbers been declining in value, as is the case here, the secured lender would have been entitled to cash payments as adequate protection. Id. at 370 (“Thus, it is agreed that if the apartment project in this case had been declining in value petitioner would have been entitled, under § 362(d)(1), to cash payments or additional security in the amount of the decline, as § 361 describes.”). 27. There is simply nothing inappropriate in the Debtor’s making cash

payments to the Prepetition Secured Lenders in amounts equal to their professional fees and expenses. Notably, the Creditors’ Committee has agreed to this aspect of the Proposed Final Order, which is the result of the compromise of competing points and legal positions of the parties in the case. E. The Provision Governing the Compromise of Receivables is Appropriate 28. The Former Partners Committee also objects to the allegedly “unfettered

discretion” the Interim Order afforded to the Debtor to write down or reduce accounts receivable (“A/R”) and unbilled works-in-process (“WIP”). (Former Partners Committee Objection ¶ 18.) As an initial matter, the Interim Order did no such thing. The Interim Order provided that the Debtor could not write off or reduce A/R or WIP without the consent of FTI – the Collateral Agent’s financial advisor. There is no party with a greater financial interest than the Collateral Agent in maximizing the value of the A/R and WIP that secures the Prepetition Obligations. As a result, FTI’s required consent on write-downs and reductions of A/R and WIP is an appropriate and permissible check on the Debtor’s business judgment.

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29.

Moreover, it bears emphasis that the negotiation and reduction of A/R and

WIP is a practice in which a law firm engages in the ordinary course of business. Law firms routinely reduce the amount of WIP before billing clients and then often negotiate with clients for reductions in their bills for any number of reasons. Here, these negotiations will often be highly time-sensitive, such that the benefits to the estate of a settlement may be lost if there is a delay in approval and execution. It is therefore critical that the Debtor retain the flexibility to execute on A/R settlements quickly. 30. In any event, this provision has been modified as a result of the

negotiations with the Creditors’ Committee to provide that the Creditors’ Committee will be given two business days’ notice of any write-downs or reductions in excess of $200,000. Such notice has been agreed to by the Creditors’ Committee and appropriately balances the Debtor’s need to settle A/R and WIP with the Creditors’ Committee’s desire to exercise reasonable oversight. F. The Objections Relating to the Challenge Period and Investigation Have Been Addressed 31. The Former Partners Committee contends that a 60-day challenge period

is insufficient and suggests that a 90-day period is appropriate. (Former Partners Committee Objection ¶ 18.) As part of their negotiations with the Creditors’ Committee, the Prepetition Secured Creditors have agreed to extend the Challenge Period to 90 days from entry of the Final Order. This objection is therefore moot. 32. The Former Partners Committee likewise contends that the $25,000

committee investigation budget provided under the Interim Order is insufficient. The Debtor, the Collateral Agent and the Creditors’ Committee have now agreed to increase the investigation budget to $100,000. Such a budget is both reasonable and fair in light of the size and financial

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constraints present in this case. It also exceeds those provided in many other major chapter 11 cases adjudicated by this Court. See, e.g., Final DIP and Cash Collateral Order at 43, In re Grubb & Ellis Co. (No. 12-10685) (Bankr. S.D.N.Y. Mar. 22, 2012), ECF No. 801 (investigation budget limited to $50,000); Final DIP and Cash Collateral Order at 40, In re Uno Restaurant Holdings Corp. (No. 10-10209) (Bankr. S.D.N.Y. Feb. 18, 2010), ECF No. 156 (investigation budget limited to $50,000). See also Final Cash Collateral Order at 17, In re Evergreen Solar, Inc. (No. 11-12590) (Bankr. D. Del. Sep. 8, 2011) (Walrath, J.), ECF No. 171 (investigation budget limited to $50,000). G. The Objections Relating to Indemnification Should Be Overruled 33. The Former Partners Committee objects to the indemnification of the

Prepetition Secured Lenders in respect of claims or liabilities incurred in connection with the Cash Collateral order, with a carve-out for any claims or liabilities resulting from gross negligence or willful misconduct. (Former Partners Committee Objection ¶ 18.) It is not unusual, however, for secured lenders to receive such limited protection in consideration for their consent to the use of cash collateral. Indeed, this Court has found that similar indemnification provisions are appropriate in a number of cases. See, e.g., Final DIP and Cash Collateral Order at 13-14, In re General Maritime Corp. (No. 11-15285) (Bankr. S.D.N.Y. Dec. 15, 2011), ECF No. 141; Final DIP and Cash Collateral Order at 18-19, In re Metaldyne Corp. (No. 09-13412) (Bankr. S.D.N.Y. June 23, 2009), ECF No. 296. 34. Notably, the Creditors’ Committee has agreed to the proposed

indemnification provisions. Accordingly, the Former Partners Committee’s objections in this regard should be overruled.

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H.

The Former Partners Committee’s Objection Relating to the Carve-Out and Budget Should Be Overruled 35. The Former Partners Committee objects to the Carve Out Cap limiting

Debtor Professional Fees and Committee Fees and Expenses provided in the Interim Order, asserting that the amount must be increased from $250,000 to no less than $1,000,000. But $250,000 is more than reasonable in light of the circumstances of this case and precedent given by this Court and other courts within this district. See, e.g., Final DIP and Cash Collateral Order at 40, In re Grubb & Ellis Co. (No. 12-10685) (Bankr. S.D.N.Y. Mar. 22, 2012), ECF No. 801 (carve-out for professional fees capped at $200,000); Final Cash Collateral Order at 12, In re First Republic Group Realty (No. 09-13983) (Bankr. S.D.N.Y. Oct. 1, 2009), ECF No. 113 (carve-out for professional fees capped at $250,000); see also Final DIP and Cash Collateral Order at 7, In re Bedford Commc’ns., Inc. (No. 10-10902) (Bankr. S.D.N.Y. Apr. 20, 2010) (Bernstein, J.), ECF No. 49 (carve-out for professional fees capped at $250,000). The Former Partners Committee cites no authority to the contrary. Indeed, the Creditors’ Committee

supports the Carve-Out. Accordingly, the Former Partners Committee’s objection in this regard should be overruled. 36. The Former Partners Committee further objects to any attempt to control

Committee expenses through the Budget, arguing that it is the province of the Court to determine the appropriate incurrence of fees and expenses by the Committees in the discharge of their duties. While the Court is, of course, always free to determine the reasonableness of fees, it is also appropriate for the party funding those fees to set reasonable boundaries. Indeed, cash collateral orders routinely provide for negotiated budgets that govern the expenditure of committee fees.

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37.

Here, the Budget permits the generous expenditure of up to $750,000 for

the Creditors’ Committee’s legal and financial advisors. The Former Partners Committee will have the benefit of the Creditors’ Committee’s financial professionals. The Budget also provides an additional $60,000 through July 31 for separate legal counsel for the Former Partners Committee to monitor the Case. Those budgeted amounts were the subject of extensive

negotiations with the Creditors’ Committee and provide ample funds to permit the Creditors’ Committee to adequately represent the interests of all creditors (including former partners, to the extent they are creditors), while providing a smaller amount of additional cash to permit the Former Partners Committee to monitor the Case and appear and be heard if necessary. This is not a case that needs two separate committees and is certainly not a case that can afford two committees. The budgeted amounts for the Committees’ professional advisors are supported by the Creditors’ Committee, and, under the circumstances of this Case, are fair and appropriate. I. Other Objections of the Former Partners Committee Have Been Adequately Addressed or Should Otherwise Be Overruled 38. The Former Partners Committee argues that there should be no event of

default under any cash collateral order triggered by the commencement of a Challenge. (Former Partners Committee Objection ¶ 18.) As part of their negotiations with the Creditors’

Committee, the Prepetition Secured Lenders have agreed to modify the events of default such that the mere commencement of a Challenge by any one of the Committees no longer triggers an Event of Default. 39. In addition, the Former Partners Committee suggests that it should be

granted automatic standing to commence a Challenge. (Former Partners Committee Objection ¶ 18.) There is no basis for such a request. Under the law of this Circuit, a statutory committee has no independent authority to prosecute litigation on behalf of a debtor’s estate. To achieve

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standing, a committee must first obtain permission of the Court after demonstrating, among other things, that colorable claims exist. See Unsecured Creditors Comm. of Debtor STN Enters. v. Noyes (In re STN Enters.), 779 F.2d 901, 905 (2d Cir. 1985). The Former Partners Committee has made no effort to demonstrate that colorable claims exist and provides no basis for being excepted from this requirement. Unless and until such a showing is made, neither of the Committees should be given standing to bring actions on behalf of the Debtor’s estate.5 Accordingly, this aspect of the Former Partners Committee Objection should be overruled. 40. Finally, the Former Partners Committee argues that the Section 552(b)

“equities of the case” waiver should make clear that the Debtor’s waiver does not bar the Committees from asserting “equities of the case” claims under Section 552(b). There is nothing improper, however, about certain parties’ being required to waive section 552(b) claims, so long as such waiver does not restrict the Court’s ability to consider the equities of the case. The Proposed Final Order does not contain any such restriction. See, e.g., Final DIP and Cash Collateral Order at 22, In re Velo Holdings Inc. (No. 12-11384) (Bankr. S.D.N.Y. Apr. 23, 2012), ECF No. 85 (debtors and creditors’ committee jointly waiving 552(b) claims); Final DIP and Cash Collateral Order at 17-18, In re Borders Group, Inc. (No. 11-10614) (Bankr. S.D.N.Y. Mar. 16, 2011), ECF No. 404 (same); Final DIP and Cash Collateral Order at 15, In re Uno Restaurant Holdings Corp. (No. 10-10209) (Bankr. S.D.N.Y. Feb. 18, 2010), ECF No. 156 (same). Indeed, the Creditors’ Committee has agreed that the Final Order can provide that the Debtor and the Committees shall be deemed to have waived the right to assert the “equities of the case” under Section 552(b), so long as the Court retains the authority to do so. Accordingly, the Former Partners Committee Objection in this regard should be overruled.

5

The Creditors’ Committee had raised the same objection but nevertheless has consented to an order that does not provide automatic committee standing.

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J.

The Excess Cash Collateral Sweep is Appropriate 41. The Proposed Final Order will provide that the Debtor shall, on a weekly

basis, pay to the Collateral Agent, for distribution to the Prepetition Secured Lenders in accordance with the Intercreditor Agreement, all cash on hand in excess of $10,000,000 plus certain accrued-but-unpaid fees, employee costs and expenses. The Former Partners Committee has not objected to this provision. While the Creditors’ Committee had initially objected to this provision, it agreed not to pursue this objection in light of additional language that has been added clarifying that, to the extent it is determined that any cash distributed thereunder does not constitute Cash Collateral, the Court retains the authority to fashion an appropriate remedy. 42. To the extent the Court has any concerns as to the propriety of the Excess

Cash Collateral sweep, the Collateral Agent asserts that the sweep is entirely appropriate. As the Court noted at the Interim Hearing, to the extent the Prepetition Secured Lenders have a security interest in the Cash Collateral, there is nothing inherently improper about paying over a portion of that cash to the Prepetition Secured Lenders. Indeed, courts have regularly approved cash collateral orders that provide for payments to be made to prepetition secured lenders on account of prepetition secured debt. See, e.g., Final DIP and Cash Collateral Order at 24-25, 31, In re Velo Holdings Inc. (No. 12-11384) (Bankr. S.D.N.Y. Apr. 23, 2012), ECF No. 85; Final Cash Collateral Order at 16, In re DTZ Rockwood LLC (No. 09-13566) (Bankr. S.D.N.Y. July 22, 2009) (Bernstein, J.), ECF No. 49; Agreed Cash Collateral Order at 7-8, In re BH S&B Holdings LLC (No. 08-14604) (Bankr. S.D.N.Y. Jan. 8, 2009), ECF No. 251; Amended and Restated Stipulation and Final Cash Collateral Order at 18-19, In re PLVTZ, Inc. (No. 07-13532) (Bankr. S.D.N.Y. Mar. 18, 2008) (Gerber, J.), ECF No. 615; Final Cash Collateral Order at 23, In re M. Fabrikant & Sons, Inc. (No. 06-12737) (Bankr. S.D.N.Y. Dec. 18, 2006) (Bernstein, J.), ECF No. 93. - 18 -

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43.

And, as the Court recognized at the Interim Hearing, if it is determined

that any Excess Cash Collateral is not in fact the Prepetition Secured Lenders’ Cash Collateral, then any such Excess Cash Collateral may need to be returned to the estate. Accordingly, the Proposed Final Order clarifies that the Court retains the ability to fashion an appropriate remedy if the circumstances require it. The Excess Cash Collateral sweep is supported by the Creditors’ Committee and, based on the Budget, will leave the Debtor with more than sufficient funds to cover any budgeted items (including certain accrued-but-unpaid fees, employee costs and expenses) plus the permitted 5% variances. 44. Accordingly, the Collateral Agent submits that the Excess Cash Collateral

sweep contemplated in the Proposed Final Cash Collateral Order is a fair, appropriate and permissible condition to the consensual use of the Prepetition Secured Lenders’ Cash Collateral.

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WHEREFORE, the Collateral Agent respectfully requests that the Court (i) overrule the Objections in their entirety, (ii) approve the relief requested in the Cash Collateral Motion as modified and reflected in the Proposed Final Order and (iii) grant such other and further relief as the Court deems just, equitable and proper. Dated: June 11, 2012 KRAMER LEVIN NAFTALIS & FRANKEL LLP By:/s/ Kenneth H. Eckstein__________________ Kenneth H. Eckstein Robert T. Schmidt P. Bradley O’Neill Daniel M. Eggermann 1177 Avenue of Americas New York, New York 10036 212-715-9100 Attorneys for JPMorgan Chase Bank, N.A., as Collateral Agent

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