You are on page 1of 17

1 2 3 4 5 6 7 8 9 10 11 12

KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

LEE R. BOGDANOFF (State Bar No. 119542) JONATHAN S. SHENSON (State Bar No. 184250) DAVID M. GUESS (State Bar No. 238241) KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 Avenue of the Stars, 39th Floor Los Angeles, CA 90067 Telephone: (310) 407-4000 Facsimile: (310) 407-9090 Bankruptcy Counsel for Debtors and Debtors In Possession Debtors' Mailing Address 3411 N. Perris Blvd. Perris, CA 92571 National R.V. Holdings, Inc.'s Tax I.D. #XX-XXX-1079 National R.V., Inc.'s Tax I.D. #XX-XXX-5022 UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA RIVERSIDE DIVISION In re NATIONAL R.V. HOLDINGS, INC., a Delaware corporation; NATIONAL R.V., INC., a California corporation, Debtors. Case No.: Chapter 11 Jointly Administered with Case No.: 6:07-17937-PC NOTICE OF MOTION AND MOTION OF DEBTORS AND DEBTORS IN POSSESSION FOR ORDER AUTHORIZING PURCHASE OF AN EXTENSION OF, AND TAIL COVERAGE FOR, DEBTORS' DIRECTOR AND OFFICER LIABILITY INSURANCE POLICY; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF; DECLARATION OF BRUCE COX CONKLIN, JR. IN SUPPORT THEREOF Date: Time: Place: Hearing March 26, 2008 10:30 a.m. Courtroom 303 U.S. Bankruptcy Court 3420 Twelfth Street Riverside, CA 92501 6:07-17941-PC

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

1 2 3 4 5 6 7 8 9 10 11
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

TO THE HONORABLE PETER H. CARROLL, UNITED STATES BANKRUPTCY JUDGE; THE OFFICE OF THE UNITED STATES TRUSTEE; COUNSEL FOR THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS; THE DEBTORS'

SECURED LENDERS; AND OTHER PARTIES INTEREST: PLEASE TAKE NOTICE that on March 26, 2008 at 10:30 a.m. a hearing will be held before the Honorable Peter H. Carroll, United States Bankruptcy Judge, on this Motion of Debtors and Debtors in Possession for Order Authorizing Purchase of an Extension of, and Tail Coverage for, Debtors' Director and Officer Liability Insurance Policy (the "Motion"), filed by National R.V. Holdings, Inc. and National R.V., Inc., the debtors and debtors in possession in the above-captioned cases (the "Debtors"). PLEASE TAKE FURTHER NOTICE that, through the Motion, the Debtors shall move the Court, pursuant to Bankruptcy Code section 363(b)(1), for entry of an order authorizing the purchase of a short extension (the "Extension") and tail coverage (the "Tail")1 for their director and officer liability "claims-made" insurance policy in the amount of $10 million (the "D&O Policy") The Debtors specifically seek authority to purchase an Extension for a period not to exceed six months and a six-year Tail (collectively, the "Post-Petition Coverage") which together will cost approximately $250,000.2 PLEASE TAKE FURTHER NOTICE that the pertinent facts and circumstances supporting the relief requested herein are set forth in the accompanying Memorandum of Points and Authorities. This Motion is based upon the accompanying Memorandum of Points and Authorities, the accompanying Declaration of Bruce Cox Conklin, Jr., the record in these cases, the arguments and representations of counsel, and any oral or documentary evidence presented at

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

The Extension provides additional coverage going forward for directors and officers relating to their future acts or omissions. The Tail, by contrast, provides coverage for claims made within the period the Tail is effective (here, six years), but only with respect to claims relating to acts or omissions occurring any time prior to the expiration of the Extension. The Debtors believe that Wells Fargo Bank, N.A. ("Wells Fargo"), their principal secured lender, will consent to the expenditure of cash collateral necessary to acquire the Post-Petition Coverage. To the extent that Wells Fargo does not approve of this expenditure, however, the Debtors seek authorization, by and through this Motion, to use cash collateral for this purpose.

27 28

1 2 3 4 5 6 7 8 9 10 11
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

or prior to the time of the hearing on the Motion. PLEASE TAKE FURTHER NOTICE that any response and request for hearing, in the form required by Local Bankruptcy Rule ("LBR") 9013-1(a)(7), must be filed and served on (i) the Debtors' bankruptcy counsel, Klee, Tuchin, Bogdanoff & Stern LLP (at the address indicated above in the top left-hand corner of this Notice), (ii) counsel for the Official Committee of Unsecured Creditors (the "Creditors' Committee"), Pachulski Stang Ziehl & Jones LLP, Attn: Hamid R. Rafatjoo, Esq., 10100 Santa Monica Boulevard, 11th Floor, Los Angeles, CA 90067, Fax: (310) 201-0760; and (iii) the Office of the United States Trustee, Attn: Timothy J. Farris, Esq., 3685 Main St., Suite 300, Riverside, CA 92501, Fax: (951) 276-6973, not later than Wednesday, March 12, 2008. Letters, e-mails, telephone inquiries and the like do not satisfy the requirement for a timely written objection or response. Moreover, LBR

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

9013-1(a)(11) provides that, if you do not timely file and serve an objection or response, the Court may find that you have consented to the relief requested in the Motion. WHEREFORE, the Debtors respectfully request that this Court enter an order authorizing the Debtors to purchase the Post-Petition Coverage, and for such other and further relief as the Court deems necessary and appropriate.

DATED: February 29, 2008

/s/ David M. Guess DAVID M. GUESS, an Attorney with KLEE, TUCHIN, BOGDANOFF & STERN LLP Bankruptcy Counsel for Debtors and Debtors in Possession

1 2 3 4 5 6 7 8 9 10 11
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

MEMORANDUM OF POINTS AND AUTHORITIES I. STATEMENT OF FACTS A. General Background.

The Debtors' principal business is the manufacture and distribution of recreational vehicles throughout the United States and Canada. Since 1964, from their Perris, California facility, the Debtors have designed, manufactured, and marketed some of the industry's highest quality "Class A" gas and diesel RVs across several branded product lines, including Dolphin, Pacifica, Sea Breeze, Surf Side, Tradewinds, and Tropi-Cal. As of the Petition Date, the Debtors were the ninth largest manufacturer of "Class A" motor homes in the country. B. Status of These Cases.

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
3

The Debtors commenced these cases by filing voluntary petitions for relief under chapter 11 of the Bankruptcy Code on November 30, 2007 (the "Petition Date") in order to conduct an orderly liquidation of their assets for the benefit of the economic stakeholders of their estates, expecting to derive value from primarily three sources: (a) the prosecution of the Kemlite Litigation; (b) the orderly sale of inventory, both finished and unfinished motor homes, parts and replacements, and other valuable items on hand; and (c) the collection of accounts receivable, general intangibles (including intellectual property) and other assets. The Debtors have made substantial progress in these cases since the Petition Date. Earlier this week, the Debtors obtained a verdict in the Kemlite Litigation of approximately $3.5 million. While happy to have prevailed in the litigation, the amount of the verdict was less than the Debtors had hoped to obtain.3 Next, the Debtors have aggressively marketed their inventory and have been able to enter into several agreements to sell their finished RVs for over seventy cents on the dollar. The Debtors first sold their then-completed inventory of 77 finished RVs to Dennis Dillon RV, LLC ("Dillon") for nearly $7.5 million. Thereafter, Dillon contracted to purchase an additional

The Debtors are still in the process of assessing the verdict and its implications.

1 2 3 4 5 6 7 8 9 10 11
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

68 finished RVs for approximately $6.75 million. In order to complete this massive order, the Debtors are currently in the process of building out much of their remaining raw materials and WIP (work-in progress) into finished RVs. By mid-March, the build-out should be complete. In addition, the Debtors have been successful in selling other assets, including their South Coast Reactive Organic Gas Emission Reduction Credits, which the Debtors were able to sell for nearly $1.6 million. The Debtors also have collected millions of dollars in accounts receivable since the Petition Date. The Debtors have also signed a listing agreement with a broker (subject to Court approval) to sell their real property in Florida. Finally, in order to ensure that they continue to maximize value for these estates, the Debtors filed a motion for authority to enter into a liquidation agreement with BIDITUP Auctions Worldwide, Inc. to assist them in liquidating (through a public auction and otherwise) their remaining tangible personal property, including raw materials, service parts, chassis, and FF&E (furniture, fixtures and equipment), and the like, and certain intellectual property (including product lines and tangible personal property relating thereto). If approved, the Debtors expect to receive no less than $1.5 million (and likely more) from this liquidation arrangement. In sum, the Debtors are well on their way toward completing their liquidation, and intend to get a chapter 11 plan and disclosure statement on file by the end March. C. The D&O Policy, Extension and Tail.

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Prior to the Petition Date, in the ordinary course of their business, the Debtors at all times maintained director and officer liability insurance coverage. As of the Petition Date, the Debtors maintained a director and officer liability insurance policy with National Union Fire Insurance Company of Pittsburgh, Pennsylvania, which provides for $10 million in coverage per claim, with the annual, aggregate coverage capped at $10 million (the "D&O Policy"). The Debtors maintained an additional $5 million of excess coverage with XL Specialty Insurance Co. for the D&O Policy, for a cumulative total of $15 million in coverage. The D&O Policy is a "claims-made" policy. In other words, the policy covers claims made only during the period of the policies. The D&O Policy and the excess coverage expire in accordance with their terms on March 30, 2008. The D&O Policy's policy limits are $10 million

1 2 3 4 5 6 7 8 9 10 11

for all loss in the aggregate, including defense costs. The "Self-Insured Retention" ("SIR") for securities claims is $350,000 per claim, and $150,000 per claim for all other claims.4 The Debtors have determined that it is appropriate to purchase a short extension of their $10 million D&O Policy (the "Extension"), which will provide coverage for claims asserted under their existing "claims-made" D&O Policy for an additional period of six months, and related tail coverage for six years commencing after the expiration of the Extension (collectively, the "Post-Petition Coverage"), which will cost approximately $250,000. The Debtors are not seeking authority to acquire an extension or tail for the $5 million of excess coverage. D. The Extension of the D&O Policy is Necessary for the Successful Implementation of Liquidation and Wind-down.

As noted above, the Debtors are attempting to complete the liquidation of their hard assets, and intend to file a chapter 11 plan and disclosure statement by the end March.
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

12
Consistent with their fiduciary duties, the Debtors' directors and officers have been ably and

13
competently steering these cases over the past three months. The Debtors believe that a six

14
month extension of the D&O Policy will be sufficient to cover the period necessary to enable the

15
Debtors to prosecute and confirm their chapter 11 plan (taking into account the potential for

16
delays, which may be unavoidable). The Extension will not only facilitate the Debtors' ability to

17
retain their directors and officers, but also ensure that they are able to make the decisions

18
necessary to maximize value for the constituents in these cases and facilitate a prompt and

19
orderly wind-down of the Debtors and their estates.

20 21 22
claims that have been or may be asserted against their officers and directors. The Debtors E. The Policy is an Asset of the Estate. As noted, the D&O Policy expires on March 30, 2008. The Debtors are not aware of any

23
recognize, however, that parties in interest have not had an opportunity to conduct meaningful

24
diligence in connection with determining whether, and to what extent, the estates or anybody

25
else may have claims that can be made against the D&O Policy or whether the directors and

26 27 28
4

SIR is similar to a deductible in that the Debtors are responsible for paying up to the SIR per claim before the insurance will apply. Once the SIR is exhausted per claim, the insurer is responsible for making payments up to the policy limits.

1 2 3 4 5 6 7 8 9 10 11
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

officers themselves will assert indemnification or other claims against the Debtors (which could otherwise be satisfied by the policy). This is not surprising. As is typically the case, from the outset, the Debtors have been focused on proceeding with the quick, orderly disposition of their assets and wind-down of their business, with an eye toward maximizing value for the estates and, at the same time, limiting the amount of post-petition obligations for rent, storage and the like. The Debtors suspect the Creditors' Committee and creditors have similarly devoted their time, attention and resources to these matters. Matters concerning claims and claims analysis usually come much later in the process, and will in these cases. Once a plan is confirmed and becomes effective, the estate representative will need to turn its attention to the evaluation of claims. In view of these facts, while the Debtors do not know whether any claims can or will be made against the D&O Policy, they believe it is important to preserve what could potentially be a valuable asset of the estates by providing parties, including these estates, with additional time to assert claims against policy. F. Wells Fargo Bank, N.A.

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

The Debtors believe that Wells Fargo Bank, N.A. ("Wells Fargo"), their principal secured lender, will consent to the expenditure of cash collateral necessary to acquire the Post-Petition Coverage. To the extent that Wells Fargo does not consent to this expenditure, however, the Debtors hereby seek authorization to use Wells Fargo's cash collateral over its objection. II. LEGAL ARGUMENT Section 363(b)(1) of the Bankruptcy Code provides that "[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." 11 U.S.C. 363(b)(1). Courts have repeatedly held that a bankruptcy court should authorize a debtor to use estate property under section 363(b)(1) whenever the request is supported by some rational, articulated business purpose. See, e.g., Stephens Indus., Inc. v. McClung, 789 F.2d 386, 390 (6th Cir. 1986); In re Continental Air Lines, Inc., 780 F.2d 1223, 1226 (5th Cir. 1986); In re Lionel Corp., 722 F.2d 1063, 1066 (2d Cir. 1983); Walter v. Sonwest

1 2 3 4 5 6 7 8 9 10 11
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

Bank (In re Walter), 83 B.R. 14, 19-20 (B.A.P. 9th Cir. 1987). This was explained by the Bankruptcy Appellate Panel for the Ninth Circuit in In re Walter: [T]here must be some articulated business justification for using, selling, or leasing the property outside the ordinary course of business. . . . Whether the preferred business justification is sufficient depends on the case. As the Second Circuit held in Lionel, the bankruptcy judge should consider all salient factors pertaining to the proceeding and, accordingly, act to further the diverse interests of Debtor, creditors and equity holders, alike. Id. (quoting Continental). See also In re Ernst Home Ctr., 209 B.R. 974, 979 (Bankr. W.D. Wash. 1997) ("The Court may approve the FADCO Transaction if [the debtor] has established some articulated business justification for the transaction.") (internal quotations omitted). Where a debtor proffers a rational justification, there is a strong presumption that the decision was made in good faith and in the company's best interests. See, e.g., In re Integrated Resources, Inc., 147 B.R. 650, 656 (Bankr. S.D.N.Y. 1992). Moreover, under the "business judgment rule," there is a presumption that, where the debtor's appropriate governing authority implements and follows fair procedures in making a decision, it acts in good faith and for a rational business purpose. See, e.g., In re S.N.A. Nut Co., 186 B.R. 98, 102 (Bankr. N.D. Ill. 1995) ("The Board of Directors is in the business of running the corporation. If the procedures utilized by the Directors were applied fairly, and the Directors do not violate any of their fiduciary duties, then, under the business judgment rule their decision will not be secondguessed.") (citations omitted). Bankruptcy Code section 363 does not require, however, that the Court substitute its own business judgment for that of the debtor. See, e.g., In re Ionosphere Clubs, Inc., 100 B.R. 670, 678 (Bankr. S.D.N.Y. 1989); In re Highway Equip. Co., 61 B.R. 58, 60 (Bankr. S.D. Ohio 1986). Rather, the Court should ascertain whether the debtor has articulated a valid business justification for the proposed transaction. See, e.g., Lewis v. Anderson, 615 F.2d 778, 781 (9th Cir. 1979). This is consistent with the "broad authority to operate the business of a debtor . . . [which] indicates congressional intent to limit court involvement in business decisions by a trustee . . . [so that] a court may not interfere with a reasonable business decision made in good faith by a trustee." In re Airlift Int'l, Inc., 18 B.R. 787, 789 (Bankr. S.D. Fla. 1982).

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

1 2 3 4 5 6 7 8 9 10 11
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

Here, for the reasons articulated above, the Debtors believe that obtaining the PostPetition Coverage is a sound exercise of their business judgment. III. CONCLUSION After careful analysis, and in the exercise of their sound business judgment, the Debtors have determined, and respectfully submit, that for all the foregoing reasons the relief requested in this Motion is in the best interests of their estates. WHEREFORE, the Debtors respectfully request that this Court enter an order authorizing the Debtors to purchase the Post-Petition Coverage, and for such other and further relief as the Court deems necessary and appropriate.

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

DATED: February 29, 2008

/s/ David M. Guess DAVID M. GUESS, an Attorney with KLEE, TUCHIN, BOGDANOFF & STERN LLP Bankruptcy Counsel for Debtors and Debtors in Possession

1 2 3 4 5 6 7 8 9 10 11 12
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

DECLARATION OF BRUCE COX CONKLIN, JR. I, Bruce Cox Conklin, Jr., declare as follows: 1. I am the Senior Managing Director of Kibel Green, Inc., the Debtors' financial and

management consultant in the chapter 11 bankruptcy cases of National R.V. Holdings, Inc. and National R.V., Inc. (collectively, the "Debtors") 2. I have more than 30 years of experience in the business management, operations

and turnaround industries. I specialize in full-service financial and operational consulting and interim management. I have served as Interim Chief Executive Officer and Chief Restructuring Officer for numerous companies in multiple industries, including wireless communications and construction machinery. I have also served as a consultant to executive management,

performing strategic, operational and financial reviews, developing business plans and investment analyses, and implementing business transitions. 3. In my capacity as a financial and management consultant, and in conjunction with

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
1

the efforts of other members of the Debtors' senior management, for the past several months I have been involved with all aspects of the Debtors' affairs, including business operations, strategic planning, financial reporting, human resources, legal affairs and other management activities, including the Debtors' efforts to address their current financial difficulties. I am often on-site and am in daily contact with management. 4. Based upon all of the foregoing, I have developed an intimate familiarity with:

(a) the Debtors' business and financial history, and their current business and financial situation and (b) the financial and operational details of the Debtors' business operations. 5. I submit this declaration in support of the accompanying Motion of Debtors and

Debtors in Possession for Order Authorizing Purchase of an Extension of, and Tail Coverage for, Debtors' Director and Officer Liability Insurance Policy (the "Motion").1 Except as otherwise stated herein, if called as a witness, I could and would competently testify to the matters set forth herein from my own personal knowledge.
Capitalized terms not otherwise defined in this Declaration shall have the meaning ascribed to them in the Motion.

28

1 2 3 4 5 6 7 8 9 10 11 12
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

6.

Earlier this week, the Debtors obtained a verdict in the Kemlite Litigation of

approximately $3.5 million. While happy to have prevailed in the litigation, I understand that the amount of the verdict was less than the Debtors had hoped to obtain. 7. The Debtors have aggressively marketed their inventory and have been able to

enter into several agreements to sell their finished RVs for over seventy cents on the dollar. The Debtors first sold their then-completed inventory of 77 finished RVs to Dennis Dillon RV, LLC ("Dillon") for nearly $7.5 million. Thereafter, Dillon contracted to purchase an additional 68 finished RVs for approximately $6.75 million. In order to complete this massive order, the Debtors are currently in the process of building out much of their remaining raw materials and WIP (work-in progress) into finished RVs. By mid-March, the build-out should be complete. 8. In addition, the Debtors have been successful in selling other assets, including

their South Coast Reactive Organic Gas Emission Reduction Credits, which the Debtors were able to sell for nearly $1.6 million. 9. The Debtors also have collected millions of dollars in accounts receivable since

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

the Petition Date. 10. The Debtors have also signed a listing agreement with a broker (subject to Court

approval) to sell their real property in Florida. 11. In order to ensure that they continue to maximize value for these estates, the

Debtors filed a motion for authority to enter into a liquidation agreement with BIDITUP Auctions Worldwide, Inc. to assist them in liquidating (through a public auction and otherwise) their remaining tangible personal property, including raw materials, service parts, chassis, and FF&E (furniture, fixtures and equipment), and the like, and certain intellectual property (including product lines and tangible personal property relating thereto). If approved, the

Debtors expect to receive no less than $1.5 million (and likely more) from this liquidation arrangement. 12. I believe the Debtors are well on their way toward completing their liquidation,

and intend to get a chapter 11 plan and disclosure statement on file by the end March.

1 2 3 4 5 6 7 8 9 10 11 12
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

13.

I have reviewed the Debtors' director and officer liability insurance coverage and

have consulted at length regarding such coverage with the Debtors' management, their insurance broker, Marsh Risk & Insurance Services, Inc., and their other professionals. 14. I understand that, prior to the Petition Date, in the ordinary course of their

business, the Debtors at all times maintained director and officer liability insurance coverage. 15. As of the Petition Date, the Debtors maintained a director and officer liability

insurance policy with National Union Fire Insurance Company of Pittsburgh, Pennsylvania, which provides for $10 million in coverage per claim, with the annual, aggregate coverage capped at $10 million (the "D&O Policy"). Furthermore, as of the Petition Date, the Debtors maintained an additional $5 million of excess coverage with XL Specialty Insurance Co. for the D&O Policy, for a cumulative total of $15 million in coverage. 16. The D&O Policy is a "claims-made" policy. In other words, the policy covers

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

claims made only during the period of the policies. The D&O Policy and the excess coverage expire in accordance with their terms on March 30, 2008. The D&O Policy's policy limits are $10 million for all loss in the aggregate, including defense costs. The "Self-Insured Retention" ("SIR") for securities claims is $350,000 per claim, and $150,000 per claim for all other claims. 2 17. Based upon the insurance quotes that I have seen, I believe that a short extension

of the $10 million D&O Policy (the "Extension"), which will provide coverage for claims asserted under the Debtors' existing "claims-made" D&O Policy for an additional period of six months, and related tail coverage for six years commencing after the expiration of the Extension (collectively, the "Post-Petition Coverage"), which will cost approximately $250,000. 18. Based on my experience with liquidating chapter 11 cases such as this one, I

believe that a six month extension of the D&O Policy should be sufficient to cover the period necessary to enable the Debtors to prosecute and confirm their chapter 11 plan.

SIR is similar to a deductible in that the Debtors are responsible for paying up to the SIR per claim before the insurance will apply. Once the SIR is exhausted per claim, the insurer is responsible for making payments up to the policy limits.

1 2 3 4 5 6 7 8 9 10 11 12
KLEE, TUCHIN, BOGDANOFF & STERN LLP 1999 AVENUE OF THE STARS, 39TH FLOOR LOS ANGELES, CALIFORNIA 90067 TELEPHONE: (310) 407-4000

19.

The Extension will not only facilitate the Debtors' ability to retain their directors

and officers, but also ensure that they are able to make the decisions necessary to maximize value for the constituents in these cases and facilitate a prompt and orderly wind-down of the Debtors and their estates. 20. I am unaware, and I believe the Debtors to be likewise unaware, of any claims that

have been or may be asserted against their officers and directors. 21. At this point, parties in interest simply have not had an opportunity to conduct

meaningful diligence in connection with determining whether, and to what extent, the estates or anybody else may have claims that can be made against the D&O Policy or whether the directors and officers themselves will assert indemnification or other claims against the Debtors (which could otherwise be satisfied by the policy). 22. From the outset, the Debtors have been focused on proceeding with the quick,

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

orderly disposition of their assets and wind-down of their business, with an eye toward maximizing value for the estates and, at the same time, limiting the amount of post-petition obligations for rent, storage and the like. Based on my extensive interactions and discussions with them, I suspect the Official Committee of Unsecured Creditors and creditors have similarly devoted their time, attention and resources to these matters. 23. While I am unaware of any claims can or will be made against the D&O Policy, I

feel it is important to preserve what could be a valuable asset of the estates by providing parties, including these estates, with additional time to assert claims against policy. 24. In my judgment, for the reasons set forth in the accompanying Motion, the Post-

Petition Coverage is appropriate and should be approved. It is customary, based upon my experience in chapter 11 cases, for directors and officers to procure and maintain directors and officers liability insurance. Moreover, the policy itself may serve as an asset available to the