DEBTOR’S REPLY TO OBJECTIONS AND MEMORANDUM

Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 1 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. LAS V E G A S FENNEMORE CRAIG, P.C. Laurel E. Davis (NV Bar No. 3005) Jon T. Pearson (NV Bar No. 10182) 300 South Fourth Street, Suite 1400 Las Vegas, Nevada 89101 Telephone: (702) 692-8000 E-mail: ldavis@fclaw.com Counsel for Debtor and Debtor-in-Possession E-filed August 25, 2008 UNITED STATES BANKRUPTCY COURT DISTRICT OF NEVADA In re XYIENCE INCORPORATED, a Nevada corporation, Debtor. Chapter 11 No. BK-S-08-10474-MKN Date of Hearing: August 26, 2008 Time of Hearing: 1:30 a.m. Location: 300 Las Vegas Blvd. South Courtroom #2 Las Vegas, Nevada 89101 DEBTOR’S REPLY TO OBJECTIONS AND MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF CONFIRMATION OF ITS PLAN OF REORGANIZATION Xyience Incorporated, the debtor and debtor-in-possession in the above-captioned voluntary chapter 11 case (the “Debtor”), submits this Reply to Objections and Memorandum of Points and Authorities in support of Confirmation of its Plan of Reorganization (the “Plan”) [Dkt. No. 191].1 The Debtor relies upon the following memorandum of points and authorities, the accompanying Declaration of Omer Sattar (“Supporting Sattar Declaration”), the Brief in Support of Section 506(c) Surcharge [Dkt. 285], the pleadings, papers and other records on file herein, and 1 All Defined terms in these Points and Authorities and the accompanying Declaration of Omer Sattar shall have the meaning set forth in the Plan and/or Disclosure Statement, unless otherwise stated herein. 23603.4 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 2 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the argument and any further evidence presented to this Court at the time of the Plan Confirmation Hearing. 2 MEMORANDUM OF POINTS AND AUTHORITIES I. PRELIMINARY STATEMENT There are three objections to the Plan, Plaintiff Shareholders’ Objection to Debtor’s Plan of Reorganization (“Plaintiff Shareholders’ Objection”) [Dkt. No. 261], Limited Objection of Shareholder John P. Bertuccini to Debtor’s Modified Joint Plan of Reorganization dated 5/19/08 with Certificate of Service (“Mr. Bertuccini’s Objection”) [Dkt. No. 262], and Objection of Official Committee of Unsecured Creditors to Debtor’s Plan of Reorganization (“Committee’s Objection”). Without any supporting case authority or admissible evidence, the Plaintiff Shareholders’ Objection raises three points: (1) the obvious fact that there are insufficient assets in the bankruptcy estate to provide a distribution to shareholders; (2) a challenge to the Key Management Secured Claim based upon the allegations of the Shareholder Derivative Action; and (3) if the stock is cancelled as provided for under the Plan, then the shareholders will lack standing to pursue their alleged direct claims arising in the Shareholder Derivative Action. Because it lacks the requisite case authority and evidence, the Shareholders’ Objection should be summarily overruled by this Court. See Local Rule 9014. Mr. Bertuccini’s Objection likewise appears to rely upon allegations contained in the Shareholder Derivative Action, and it also lacks supporting case authority and admissible evidence. Therefore, the Bertuccini Objection should also be summarily overruled by this Court. See Local Rule 9014. The Committee Objection raises five points: (1) Class 4 has not accepted the Plan; (2) the case is administratively insolvent and not all administrative claimants consent to the Plan; (3) the 2 26 FENNEMORE CRAIG , P.C. L AS V EGAS The filing of this document was delayed due to a power outage and associated computer problems. Debtor’s counsel apologizes for this unavoidable delay. 23603.4 2 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 3 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS plan is not feasible; (4) funds are not immediately available to pay U.S. Trustee fees; and (5) the Committee wants time to propose an alternative plan. As will be more fully set forth below, in response to the Committee Objection, the Debtor states as follows: (1) the Ballot Tabulation (Dkt. 287) demonstrates that Class 4 has neither accepted nor rejected the Plan; (2) all administrative claimants except Committee local and Chicago counsel have consented to payment of their claims pursuant to the Plan; (3) as a liquidating plan, the plan is feasible; (4) U.S. Trustee fees are current and paid; and (5) any competing plan should be kept on a very short time frame. The Debtor’s exclusive period to confirm a plan expired on July 17, 2008, yet no one – not the Committee, not a shareholder, not another creditor – filed a competing plan of reorganization. Assuming that the Committee’s objections to the Debtor’s Plan prevail and defeat confirmation, those very same objections will also apply to any plan filed by the Committee. It appears that the only difference between the Debtor’s Plan and a Committee Plan will be the fact that the Committee, either acting as the Advisory Committee to the Liquidating Trustee or alternatively acting itself as the Liquidating Trustee for the estate, will have binding authority to make all decisions with respect to Litigation Claims (i.e., all remaining assets of the Estate except for the Manchester Sale Proceeds and the Administrative Carve Out). The Debtor proposes that if the Court is not inclined to confirm the Debtor’s Plan, the more appropriate course of action is for this Court to convert the case to Chapter 7. Otherwise, this already administratively insolvent chapter 11 case will only incur more Chapter 11 administrative expenses that must be paid through a Plan that likewise may not be capable of confirmation. Should the Court consider granting the Committee’s request for time to file and solicit votes for its Plan, the Debtor asks that such a process be kept on a very short time frame to limit the additional chapter 11 administrative costs incurred for this process. Additionally, the Debtor asks that the Debtor be given until September 2, 2008 within which to amend its disclosure statement; and the amended disclosure statement and Debtor’s Plan be sent out with the 23603.4 3 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 4 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS Committee Plan with one ballot for both plans. Finally, the Debtor asks that the Committee be required to file its plan by September 2, 2008, until September 16, 2008 within which to solicit votes on a combined ballot for the Debtor’s Plan and the Committee’s Plan, and that the Court schedule the combined plan confirmation hearings to occur approximately one week later. II. STATEMENT OF PROCEDURAL HISTORY AND RELEVANT FACTS A. Procedural History and Historical Background The Debtor and the Plan are described in detail in the Disclosure Statement. In the interests of brevity, the Debtor will not repeat the Procedural History as set forth in its Disclosure Statement, [Dkt. No. 231, at pp. 10-14,], and it is incorporated by reference as though fully set forth at length. B. Ballot Solicitation and Voting The Ballot Tabulation is set forth in the accompanying Declaration of Laurel E. Davis (Dkt. 287). In summary, Class 1 is deemed to accept; 100% of Class 2, the Zuffa Superpriority Claim has voted “yes;” Class 3, Key Management, has submitted no ballot; the 26 Class 4 ballots from total Claims of $11,759,591.67 are split, with 8 “yes” ballots holding Claims of $6,626,072.19; and 18 “no” ballots holding Claims of $5,133,519.48; and Class 5 (Equity) is deemed to reject. C. Supplemental Declaration of Omer Sattar Debtor’s Assets 1. On March 6, 2008, the Debtor filed a Motion for Order Approving the Sale of Property Free and Clear of Liens, Claims, et al. (“Sale Motion”). [Dkt. No. 149]. The Sale Motion came on for hearing on April 1, 2008, at which time the Bankruptcy Court approved the Sale Motion and Manchester Consolidated Corp. (“Manchester”) acquired the Debtor’s Assets free and clear of all liens and claims. [Dkt. No. 178]. Manchester acquired the Assets for a total consideration of $15,017,000, which consisted of a cash payment of the Manchester Sale Proceeds to the Debtor in the amount of $200,000, and assumption of more than $14.8 Million in 23603.4 4 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 5 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS secured debt – the secured claim held by Zyen – which included Zyen’s post-petition claim for the Zyen DIP Financing Loan. (Sattar Declaration, ¶ 4.) 2. The Debtor’s sale of Assets to Manchester closed on April 16, 2008. Nevada Title Company continues to hold the Manchester Sale Proceeds of $200,000 in escrow, pending further Order of the Bankruptcy Court. (Sattar Declaration, ¶ 5.) 3. Post-petition, Fennemore Craig has held the $225,000 Administrative Carve Out in Based upon the Bankruptcy Court’s July 28, 2008, Order regarding its Trust Account. Professional fee applications (Dkt. No. 248), Fennemore Craig applied $75,000 of the Administrative Carve Out in partial satisfaction of its fees and costs. (Sattar Declaration, ¶ 6.) 4. As of this date, the Debtor’s Assets consist of the Manchester Sale Proceeds of $200,000, the remaining Administrative Carve Out of $145,125, a pending claim made on the Debtor’s Directors and Officers Insurance Policy, and all Litigation Claims, which in the Plan is broadly defined to include any Bankruptcy avoidance claims, the Shareholder Derivative Action pending as Adv. Proc. 08-1107, an action against Richard Bergeron pending as Adv. Proc. 081082, and the Committee’s Action against Zyen pending as Adv. Proc. 08-1094. Mr. Sattar believesthat it is more appropriate to have the Liquidating Trustee, rather than the Debtor, should move forward with these Litigation Claims, and he have therefore not undertaken the necessary review and analysis to make preference and other demands or to move forward with the pending litigation on a substantive basis. (Sattar Declaration, ¶ 7.) 5. It is Mr. Sattar’s business judgment as the Debtor’s authorized representative that a chapter 11 liquidation of the estate’s remaining assets under the supervision and control of a Liquidating Trustee would be more efficient and less expensive than a liquidation of this case after conversion of this case to a chapter 7 case. (Sattar Declaration, ¶ 8.) Administrative Expenses 6. On July 28, 2008, Mr. Sattar authorized Fennemore Craig to apply its $75,000 (Sattar post-petition retainer in partial payment of its allowed first interim fee application. 23603.4 5 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 6 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS Declaration, ¶ 9.) 7. On August 19, 2008, Mr. Sattar authorized Fennemore Craig to pay from the Administrative Carve Out $4,875 to the Office of the U.S. Trustee in payment of U.S. Trustee fees accrued through August 31, 2008. U.S. Trustee fees due from the Debtor are current, and there are no unpaid fees. (Sattar Declaration, ¶ 10.) Resignation as Liquidating Trustee and Selection of Alternative Trustee 8. The Debtor’s Disclosure Statement filed July 15, 2008 as Docket 231, and the accompanying Liquidating Trust Agreement attached as Exhibit 2 both identified Mr. Sattar as the Liquidating Trustee. (Sattar Declaration, ¶ 11.) 9. Subsequent to July 15, 2008, Mr. Sattar decided to step down as the proposed Liquidating Trustee because based upon further review and discussion with creditors and other parties in interest, Mr. Sattar agreed that the most appropriate course of action in this case was for me to step down as the proposed liquidating trustee and to instead select an independent third party to act as Liquidating Trustee, and to allow the Official Committee of Unsecured Creditors (“Committee”) to act as a non-binding Advisory Board to the Liquidating Trustee. Mr. Sattar believes that this arrangement is in the best interests of the Debtor, creditors and parties in interest. (Sattar Declaration, ¶12.) 10. Debtor’s counsel then served and filed a Supplement to the Disclosure Statement on July 17, 2008 (Dkt. 238) which modified the definition for “Liquidating Trustee” making it clear that Mr. Sattar would not serve as Liquidating Trustee and that he would instead locate a panel trustee to act in this role. (Sattar Declaration, ¶ 13.) 11. Thereafter, Mr. Sattar researched appropriate candidates to act as Liquidating Trustee, and Mr. Sattar ultimately selected William A. (“Biff”) Leonard, Jr. who is a Nevada Chapter 7 panel Trustee. On July 31, 2008 (Dkt. 255), Debtor’s counsel served and filed a Second Supplement to the Disclosure Statement was submitted identifying as the Liquidating Trustee, which included Mr. Leonard’s resume as Exhibit 3. (Sattar Declaration, ¶ 14.) 23603.4 6 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 7 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS Negotiations with the Committee 12. Since July 17, 2008, extensive discussions have been held among the Debtor and the Committee, through counsel, in a good faith effort to resolve the Committee’s objections to the Debtor’s Plan and Disclosure Statement. Much of those discussions have centered around the scope of the Committee’s role as Advisory Board to the Liquidating Trustee, and whether or not the Advisory Board would have the final decision making power with respect to the pending litigation herein. Those discussions are ongoing, and Mr. Sattar is hopeful that a mutually agreeable resolution can be reached prior to the Plan Confirmation hearing. (Sattar Declaration, ¶ 15.) 13. In the event that the Debtor and the Committee are not able to reach an amicable resolution of the Committee concerns prior to August 26, 2008 at 1:30 p.m., Mr. Sattar believes that it is in the best interests of the Debtor, estate, creditors and parties in interest to move forward with the Plan Confirmation hearing. Any further delay in commencing the Plan Confirmation hearing will unnecessarily increase chapter 11 administrative expenses to the detriment of the estate and its creditors. (Sattar Declaration, ¶ 16.) III. LEGAL ARGUMENT A. The Disclosure Statement Should Be Approved on a Final Basis On July 15, 2008, the Debtor filed its Ex Parte Application for Order: (1) Conditionally Approving Disclosure Statement; and (2) Setting a Hearing to Determine Adequacy of Disclosure Statement and Confirmation of Debtor's Plan of Reorganization (“Disclosure Statement Motion”). [Dkt. No. 232]. Pursuant to Rule 3016(c) of the Local Rules of Bankruptcy Practice of the United States District Court for the District of Nevada (“LR”) and pursuant to an Order of the Court entered on July 16, 2008, Docket No. 233, the Debtor’s Disclosure Statement was conditionally approved by this Court for mailing to creditors and parties in interest. The Debtor did file two supplements: (1) a Supplement to Disclosure Statement, Docket No. 238, on July 17, 2008, and (2) a Second Supplement to Disclosure 23603.4 7 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 8 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS Statement, Docket No. 255, on July 31, 2008. Consequently, the Disclosure Statement, as Supplemented, should be approved. While the relief sought in the Disclosure Statement Motion focused on preliminary approval, the Disclosure Statement Motion also discussed the standards for final approval of a Disclosure Statement under Section 1125(a)(1) of the Bankruptcy Code and LR 3016(d), and it demonstrated that the Disclosure Statement contained adequate information that would enable a hypothetical reasonable investor to make an informed judgment on the Plan. In the interest of brevity, the Debtor directs this Court to the Disclosure Statement Motion, Docket No. 232, and requests that this Court approve the Disclosure Statement on a final basis. B. All Applicable Requirements for Plan Confirmation Have Been Satisfied Under the Bankruptcy Code, a plan of reorganization shall be confirmed if all of the applicable confirmation requirements set forth in Section 1129 of the Bankruptcy Code are satisfied. See In re Commercial Western Fin. Corp., 761 F.2d 1329, 1338 (9th Cir. 1985); accord In re Fur Creations by Varriale Ltd., 188 B.R. 754, 758-59 (Bankr. S.D.N.Y. 1995); In re Greate Bay Hotel & Casino, Inc., 251 B.R. 213, 220-21 (Bankr. D. N.J. 2000). The balance of this Memorandum demonstrates that the Plan satisfies each of the applicable requirements of Section 1129 of the Bankruptcy Code. 1. The Plan Complies with the Applicable Provisions of Section 1129(a)(1) of the Bankruptcy Code. To satisfy Section 1129(a)(1) of the Bankruptcy Code, a plan must satisfy the applicable provisions of Title 11 of the United States Code. There are two applicable provisions: (1) Section 1122 of the Bankruptcy Code, which governs the classifications of claims and interests; and (2) Section 1123, which governs a plan’s content. classification and content are proper. a) The Plan Properly Classifies Claims and Interests As discussed below, the Plan’s A plan proponent has broad discretion to adopt classifications schemes in a plan of 23603.4 8 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 9 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS reorganization. The Bankruptcy Code’s only restriction on this discretion is that a plan may place a claim or an interest in a particular class only if the claim or interest is substantially similar to the other claims or interests in that class. See 11 U.S.C. § 1122(a). The Debtor’s Plan properly classifies claims and interests. (See Plan at Sections 2 and 3.) That is, claims and interests are only placed in classes where they are substantially similar to all other claims and interest in that class. b) Content: The Plan Contains All Mandatory Provisions and Two Permitted Provisions Section 1123 of the Bankruptcy Code lists both the content that a Plan must include and those contents that a Plan may include. As demonstrated below, the Debtor’s Plan contains all seven mandatory provisions listed in Section 1123 of the Bankruptcy Code, to the extent that such provisions are necessary, as well as two permitted provisions. (1) Mandatory Plan Provisions i. The Plan Designates Classes of Claims and Interests The Plan satisfies the requirements of Section 1123(a)(1) of the Bankruptcy Code in that the Plan designates classes of claims, other than claims of a kind specified in Sections 507(a)(1), 507(a)(2), or 507(a)(7) of the Bankruptcy Code, and classes of interests. (Id. at Sections 2 and 3.) ii. The Plan Lists All Unimpaired Classes The Plan satisfies the requirements of Section 1123(a)(2) of the Bankruptcy Code in that the Plan specifies the classes of claims that are not impaired under the Plan, and the treatment thereof. (Id. at Section 4.) iii. The Plan Describes the Treatment of Impaired Classes The Plan complies with the requirements of Section 1123(a)(3) of the Bankruptcy Code in that the Plan specifies the treatment of impaired classes of claims and treatment of impaired classes of interests. (Id.) 23603.4 9 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 10 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS iv. Except as Otherwise Agreed, the Plan Provides the Same Treatment for Each Claim or Interest within a Class. The Plan complies with the requirements of Section 1123(a)(4) of the Bankruptcy Code in that the Plan provides the same treatment for each claim or interest of a particular class. (Id.) v. The Plan Includes Adequate Means for its Implementation. Section 1123(a)(5) of the Bankruptcy Code requires that a plan provide adequate means for the plan’s implementation. The means for implementing the Plan are set forth in Section 5 of the Plan and are adequate to enable the Debtor to implement the Plan in compliance with Section 1123(a)(5) of the Bankruptcy Code. In sum, the means for implementing the Plan include, without any limitation and except as otherwise provided in the Plan: 1. From and after the Effective Date, the Liquidating Trust shall act in the place and stead of the Debtor, its directors, officers and employees. 2. Xyience Incorporated shall be dissolved pursuant to Section 78.622 of the Nevada Revised Statutes without action on the part of the Debtor’s directors, Debtor’s officers or holders of Xyience Incorporated Equity Interests; however, the Liquidating Trustee may delay that dissolution to the extent that it is necessary to do so to pursue Claims, continue or commence litigation. 3. resigned. 4. The Cash and other Assets shall be delivered to the Liquidating Trustee to be held All of the officers and directors of Xyience Incorporated shall be deemed to have and preserved pursuant to the Liquidating Trust Agreement as property of the Estate to be paid in accordance with the Plan. 5. The Liquidating Trust Agreement shall be executed and the Liquidating Trust shall be deemed effective. The Debtor shall settle the Liquidating Trust by irrevocably delivering, assigning and conveying all Assets to the Liquidating Trust, including all rights to prosecute 23603.4 10 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 11 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS Litigation Claims. 6. The Xyience Incorporated Equity Interests shall be deemed cancelled and extinguished without further act or action under any applicable agreement, law, regulation, order or rule. 7. All Assets received by the Liquidating Trust shall be applied and Distributed in accordance with the Liquidating Trust Agreement and the Plan. (2) Permitted Provisions Under Section 1123(b) of the Bankruptcy Code. i. Section 1123(b)(1) of the Bankruptcy Code: Impairment and Non-impairment. Section 1123(b)(1) of the Bankruptcy Code provides that a plan may impair or leave unimpaired any classes of claims, secured or unsecured, or of interests. The Plan specifies which classes are impaired and which classes are unimpaired under the Plan. (See Plan at Sections 3 and 4.) ii. Section 1123(b)(2) of the Bankruptcy Code: Assumption and Rejection of Executory Contracts and Unexpired Leases. With respect to Section 1123(b)(2) of the Bankruptcy Code, all executory contracts or unexpired leases shall be rejected on the Effective Date of the Plan. Accordingly, the Plan complies both with the classification provisions of Section 1122 of the Bankruptcy Code and with the mandatory and permissive provisions of Section 1123 of the Bankruptcy Code. iii. Section 1123(b)(5): Modification of Secured Claim of Key Management The surcharge of the Key Management secured claim is the subject of the Debtor’s separate Memorandum of Points and Authorities in Support of Section 506(c) surcharge. See Docket 285. 2. The Debtor as the Proponent of the Plan Has Complied with the Applicable Provisions of Section 1129(a)(2) of the Bankruptcy Code. Section 1129(a)(2) of the Bankruptcy Code provides that a plan may be confirmed only 23603.4 11 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 12 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS if the proponent of the plan complies with the applicable provisions of Title 11 of the United States Code. The principal purpose of Section 1129(a)(2) of the Bankruptcy Code is to require that the Court ascertain whether the proponent of the plan has complied with Section 1125 of the Bankruptcy Code. See In re Jeppson, 66 B.R. 269, 296-97 (Bankr. D. Utah 1986); In re Troy & Sports Warehouse, Inc., 37 B.R. 141, 149 (Bankr. S.D.N.Y. 1984) (“the proponent must comply with the ban on post-petition solicitation of the plan unaccompanied by a written disclosure statement approved by the court in accordance with [Sections] 1125 and 1126 [of the Bankruptcy Code]”). Section 1125(b) of the Bankruptcy Code provides that a proponent may not solicit acceptances of its plan unless, at or before the time of such solicitation, there is transmitted to the solicitee both a copy of the plan and a court-approved disclosure statement. See 11 U.S.C. § 1125(b); In re Cal. Fid., 198 B.R. 567, 571 (9th Cir. BAP 1996); accord In re Treasure Bay Corp., 212 B.R. 520, 540-41 (Bankr. S.D. Miss. 1997). Pursuant to an Order of the Court entered on July 16, 2008, the Disclosure Statement was conditionally approved by the Court for mailing to creditors and parties-in-interest. On July 17, 2008, the Debtor provided notice of the Confirmation Hearing to, and served a copy of the Disclosure Statement and Plan on, all creditors in Classes 2, 3 and 4. [Dkt. No. 235.] The Debtor also served the Notice of the Confirmation Hearing to consider the Disclosure Statement and Plan (“Confirmation Notice”) on all other creditors, equity holders, and parties-in-interest in this case. Creditors, equity holders and parties-in-interest that only received the Confirmation Notice were invited to request copies of the Plan and Disclosure Statement from Debtor’s counsel. Thus, the proponent of the Plan, the Debtor, has complied with the requirements set forth in Section 1129(a)(2) of the Bankruptcy Code. 3. The Plan is Proposed in Good Faith: Section 1129(a)(3) of the Bankruptcy Code. Section 1129(a)(3) of the Bankruptcy Code requires that a plan must be proposed in good faith and not by any means forbidden by law. The Debtor is not aware of any objection to 23603.4 12 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 13 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS the Plan on the basis that it was not proposed in good faith or was proposed by any means forbidden by law. Rule 3020(b)(2) of the Federal Rules of Bankruptcy Procedure provides that, if no such objection is timely filed, the court may determine that the plan has been proposed in good faith and not by any means forbidden by law without receiving evidence on such issues. Fed.R.Bankr.P. 3020(b)(2). 4. Compensation of Professionals Will Remain Subject to Court Approval: Section 1129(a)(4) of the Bankruptcy Code. Section 1129(a)(4) of the Bankruptcy Code requires that any payment to be made by the proponent, by the Debtor, or by a person issuing securities or acquiring property under the plan, for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to the approval of, the court as reasonable. Final fee applications will be filed in this case no later than the Administrative Claim Bar Date. Thus, all professional fees and expenses will remain subject to the jurisdiction of the Court, and ultimately the approval of the Court as reasonable. 5. The Debtor Has Disclosed Post-Petition Officers: Section 1129(a)(5) of the Bankruptcy Code. Section 1129(a)(5) of the Bankruptcy Code requires that the proponent of a plan has disclosed the identity of any individual proposed to serve, after confirmation, as a director or officer of the debtor, or voting trustee of the debtor, and the identity of any insider that will be employed or retained by the reorganized debtor, and then nature of any compensation for such insider. That section also requires that he appointment to, or continuance in an office by such an individual is consistent with the interest of creditors and equity security holders and with public policy. As set forth in the Plan, from and after the Effective Date of the Plan, a Liquidating Trust shall act in the place and stead of the Debtor, its directors, officers and employees. All officers and directors of the Debtor shall be deemed to have resigned. The Debtor has disclosed the identity of the proposed Liquidating Trustee, Mr. William A. (“Biff”) Leonard, Jr. 23603.4 13 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 14 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS Accordingly, the Plan complies with Section 1129(a)(5) of the Bankruptcy Code. 6. The Plan Does Not Require Approval of any Regulatory Commission: Section 1129(a)(6) of the Bankruptcy Code. The Plan does not require any such approval. 7. The Plan Complies with the Best Interest Test: Section 1129(a)(7) of the Bankruptcy Code. Section 1129(a)(7) of the Bankruptcy Code requires that, as to each impaired class of claims or interest, the holder of a claim or interest of such class has either accepted the Plan or it will receive or retain under the Plan property of a value, as of the Effective Date of the Plan, that is not less than the amount that such holder would receive or retain if the Debtor was liquidated under chapter 7 on the Effective Date. This is commonly referred to as the “best interest test.” See In re M. Long Arabians, 103 B.R. 211, 216 (9th Cir. BAP 1989); In re Diversified Investors Fund XVII, 91 B.R. 559, 561 (Bankr. C.D. Cal. 1988). The Debtor believes the Plan is in the best interest of the creditors. In general, to determine what holders of Allowed Claims in each Class would receive if Debtor was liquidated, the Bankruptcy Court must determine what funds would be generated from liquidation of the Debtor’s assets. Such liquidation funds would be reduced by the costs and expenses of the liquidation and by such additional Administrative Claims and the use of the Chapter 7 for the purpose of liquidation. In light of the fact that this is a Liquidating Plan which creates a Liquidating Trust to reduce all Assets to cash for distribution to creditors, the liquidation analysis here is not as significant as it would be for in chapter 11 case which will reorganize. Thus, the creditors will receive at least, if not more, than they would if this case is converted to a chapter 7. Additionally, pursuant to the Liquidating Trust, the Liquidating Trustee will be compensated by payment of three percent (3%) of Liquidation Proceeds. Despite these similarities to Chapter 7 liquidation, the Debtor’s President believes that the Liquidating Trust will be more cost effective and efficient than a chapter 7 liquidation, and the liquidation analysis therefore favors 23603.4 14 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 15 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS confirmation of the Debtor’s Plan. 8. The Plan Has Been Accepted by All Classes Whose Acceptance is Required: Section 1129(a)(8) of the Bankruptcy Code. Section 1129(a)(8) of the Bankruptcy Code requires that each class of claims or interests has accepted a plan or that such class is not impaired under a plan. A class which is not impaired is deemed to have accepted the plan. See 11 U.S.C. § 1126(f). Conversely, a class that is impaired, but the plan provides that the holders of claims or interests of such class shall receive nothing for their claims or interests are deemed to have rejected the plan. See 11 U.S.C. § 1126(g). However, where as here, a debtor cannot meet the requirement of Section 1129(a)(8) of the Bankruptcy Code, because at least one impaired class of claims has not consented to the proposed plan, the Debtor may invoke the “cram down” provisions of Section 1129(b)(1) with respect to such non-consenting, impaired classes. As discussed more fully in Section III.C. of this Memorandum, the Debtor will satisfy all of the “cram down” requirements as to the impaired Classes – Classes 3, 4, and 5 – that have not voted to accept, or have been deemed to have rejected the Plan. The Plan reflects that Class 1 is unimpaired and, thus, is deemed to have accepted the Plan. Class 2 is impaired under the Plan, and it has voted to accept the Plan. [Dkt. No. 247.] Class 3 did not submit a ballot, and the holders of Class 4 claims neither accepted nor rejected the Plan. Id. Class 5 is impaired under the Plan, and it is deemed to have rejected the Plan because the Plan provides that holders of Equity Interests in Class 5 shall neither receive nor retain any property or other consideration on account of their respective Equity Interests. Because Classes 3 and 4 have not voted to accept the Plan and Class 5 is deemed to reject the Plan, Section 1129(a)(8) of the Code has not been satisfied. Therefore, the Debtor seeks to cram down the plan on Classes 3 and 4, and the Debtor seeks to confirm the Plan pursuant to Section 1129(b) of the Bankruptcy Code. 23603.4 15 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 16 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS As will be discussed in detail below in Section III.C. of this Memorandum, this Court should confirm the Plan pursuant to Section 1129(b) of the Bankruptcy Code because the Plan “does not discriminate unfairly” and is “fair and equitable” as to the rejecting classes – Classes 3, 4, and 5. 9. The Plan Provides Appropriate Treatment for Priority and Tax Claims: Section 1129(a)(9) of the Bankruptcy Code. Under subparagraph (A) of Section 1129(a)(9) of the Bankruptcy Code, a plan must provide that administrative claims and expenses entitled to priority under Sections 507(a)(2) or 507(a)(3) of the Code will receive, on the Effective Date of the Plan, cash equal to the allowed amount of the claim unless the holder of the claim agrees to a different treatment. The Debtor believes that the Plan complies with Section 1129(a)(9)(A) because it is unaware of any Allowed Administrative Expense Claims, other than professional fees and the Zuffa Marketing super-priority administrative claim. The Plan provides that each Allowed Administrative Claim shall be paid by the Liquidation Trust (or otherwise satisfied in accordance with its terms) from Available Cash upon the latest of: (a) the Initial Distribution Date; (b) such date as may be fixed by the Bankruptcy Court, or as soon thereafter as practicable; (c) the tenth (10th) Business Day after such Claim is Allowed, or as soon thereafter as practicable; and (d) such date as the holder of such Claim and the Debtor or Liquidating Trustee shall agree upon. All holders of Administrative Claims except counsel for the Committee have consented to the Plan’s proposed treatment of their Administrative Claims. 10. The Plan Has Been Accepted by An Impaired Class: Section 1129(a)(10) of the Bankruptcy Code. Section 1129(a)(10) of the Bankruptcy Code requires that at least one class of claims that is impaired under the Plan accept the Plan, determined without including acceptances of the Plan by any insider. The creditor in Class 2, Zuffa Marketing, has voted to accept the Plan, 23603.4 16 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 17 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS [Dkt. No. 247]. 11. The Plan is Feasible: Section 1129(b)(11) of the Bankruptcy Code. Section 1129(a)(11) of the Bankruptcy Code provides that a plan may be confirmed only if confirmation is “not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan,” giving rise to the feasibility requirement for confirmation. See 11 U.S.C. § 1129(a)(11); In re Trans Max Tech., Inc., 349 B.R. 80, 91 (Bankr. D. Nev. 2006); see In re Patrician St. Joseph Parnters Ltd. P’ship, 169 B.R. 669, 674 (Bankr. D. Ariz. 1994). A plan meets the feasibility standard if the plan offers a reasonable prospect of success and is workable. In re Patrician St. Joseph Parnters Litd. P’ship, 169 B.R. at 674. The prospect of financial uncertainty does not defeat plan confirmation on feasibility grounds since a guarantee of the future is not required. Id. In addition, the mere potential for failure of the plan is not sufficient to disprove feasibility. Id.; In re Drexel Burnham Lambert Group, Inc., 138 B.R. 723, 762 (Bankr. S.D.N.Y. 1992); see Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352 (9th Cir. 1986). In fact, the possibility of failure is not failure, because “[t]he Code does not require the debtor to prove that success is inevitable, and a relatively low threshold of proof will satisfy [Section] 1129(a)(11) [of the Bankruptcy Code] so long as adequate evidence supports a finding of feasibility.” In re Trans Max Tech., Inc., 349 B.R. at 92; In re Brotby, 303 B.R. 177, 191 (9th Cir. BAP 2003). As one court has articulated, “[a]ll that is required is that there be reasonable assurance of commercial viability.” In re Prudential Energy Co., 58 B.R. 857, 862 (Bankr. S.D.N.Y. 1986). The Debtor’s Plan is a liquidating plan. It amply satisfies these standards. 12. All Bankruptcy Fees Have Been Paid: Section 1129(a)(12) of the Bankruptcy Court. Section 1129(a)(12) of the Bankruptcy Code requires that all bankruptcy fees payable 23603.4 17 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 18 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS pursuant to Section 1930 of Title 28 of the United States Code have been paid or the Plan provides for payment of all such fees on the Effective Date of the Plan. The Debtor is current with its obligations to the United States Trustee. 13. Continuation of Retiree Benefits: Section 1129(a)(13) of the Bankruptcy Code. Section 1129(a)(13) of the Bankruptcy Code requires that a plan must provide for the continuation of payment of retiree benefits as defined in Section 1114 of the Bankruptcy Code, at the level established in accordance with Section 1114 of the Bankruptcy Code. There are no retiree benefits required to be paid under the Plan and this provision is therefore inapplicable. C. The Plan Satisfies the Confirmation Requirements Set Forth in Section 1129(b) of the Bankruptcy Code. Confirmation may occur with or without consent of the holders of each class of claims. See generally 11 U.S.C. § 1129. If all of the requirements for confirmation are met, except that not all impaired classes of claims have accepted the plan, the plan may still be confirmed provided that certain requirements (commonly referred to as “cram down” rules) are met. See 11 U.S.C. § 1129(b)(1). Section 1129(b) provides: [I]f all of the applicable requirements of subsection (a) of this section other than paragraph 8 [which is acceptance by all impaired classes] are met with respect to a plan, the court . . . shall confirm the plan . . . if the plan does not discriminate unfairly and is fair and equitable with respect to each class of claims or interests that is impaired under, or has not accepted, the plan. See 11 U.S.C. § 1129(b)(1) (emphasis added). Thus, Section 1129(b)(1) of the Bankruptcy Code requires that the plan “not discriminate unfairly” and that it is “fair and equitable” with respect to each rejecting impaired class. 1. The Plan Does Not Unfairly Discriminate The unfair discrimination prohibition is the first prong of the “cram down” test. The Bankruptcy Code, however, neither defines, nor does it provide any guidance regarding unfair 23603.4 18 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 19 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS discrimination.3 In interpreting the meaning of unfair discrimination, courts have followed one of four approaches: (i) the “mechanical” approach;4 (ii) the “restrictive” approach;5 (iii) the “broad” approach;6 or (iv) an approach based upon a proposal postulated by Bruce A. Markell (the “Markell Test”).7 The Ninth Circuit has adopted the restrictive approach. See In re Acequia, Inc., 787 F.2d 1352. Under the restrictive approach, courts have held that the unfair discrimination language of 3 Congress explained its intent for having the unfair discrimination language in the Bankruptcy Code: The plan may be confirmed over [a class’s dissent] if the class is not unfairly discriminated against with respect to equal classes . . . . One aspect of this test that is not obvious is that whether one class is senior, equal or junior . . . is relative . . . . [F]rom the perspective trade creditors . . . claims of senior and subordinated debentures may be [both] entitled to share [with trade claims] on an equal basis . . . . The criterion of unfair discrimination is not derived from the fair and equitable rule or from the best interests of creditors test. Rather it preserves just treatment of a dissenting class from the class’s own perspective. H.R. Rep. No. 595, 95th Cong. 1st Sess. 416-17 (1977). 4 The mechanical approach requires that a dissenting class receive the same percentage distribution as all other classes of claim of the same legal priority. See Greystone III Joint Venture, 102 B.R. 560, 571-72 (Bankr. W.D. Tex. 1989). 5 Under the restrictive approach, the concept of unfair discrimination only applies to a plan in which claims or interest have been subordinated. Thus, discrimination in treatment in other contexts is not prohibited. In re Acequia, Inc., 787 F.2d 1352. 6 The Broad Test is used most widely by courts requires consideration of all the facts and circumstances in a case to determine whether discriminatory treatment is unfair. Aztec, 107 B.R. 585, 590 (Bankr. M.D. Tenn.,1989). 7 Bruce A. Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 AM. BANKR. L.J. 227, 228 (1998); see also In re Dow Corning Corp., 244 B.R. 696 (Bankr. E.D. Mich. 1999) (adopting the Markell Test). 23603.4 19 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 20 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS Section 1129(b) was intended by Congress8 to only apply to a very specific and narrow factual situation; claims or interests that have been subordinated. See In re Acequia, Inc., 787 F.2d at 1364; In re Martin, 66 B.R. 921 (Bankr. D. Mont. 1986). If claims or interests have been subordinated, the plan must then “allocate value to the class in a manner consistent with the treatment afforded to other classes with similar legal claims against the debtor.” In re Acequia, Inc., 787 F.2d at 1364; see also In re Martin, 66 B.R. at 929 (stating that “if the Plan protects the legal rights of a dissenting class in a manner consistent with the treatment of other classes whose legal rights are intertwined with those of the dissenting class, then the plan does not discriminate unfairly with respect to the dissenting class”). Since each class under the Plan is of a different rank, with different legal rights, the Debtor believes that there can be no unfair discrimination against any class. In addition, the Plan does not contemplate subordinating any claims or interests. Thus, the Debtor believes that the Plan does not discriminate unfairly against any class or against Classes 3, 4, and 5. 2. The Plan is Fair And Equitable The second prong of the “cram down” rules is that the plan must be “fair and equitable” with respect to the dissenting classes of creditors. The Bankruptcy Code provides considerably more guidance in the application of the “fair and equitable” standard than it does with respect to the “unfair discrimination” standard. The Bankruptcy Code expressly defines “fair and equitable” as it relates to secured claims, unsecured claims and interests. See 11 U.S.C. § 1129(b)(2)(A)(C). 8 See Sponsors’ Remarks, 124 Cong. Rec. S17, 420 (daily ed. Oct. 6, 1978) (statement of Sen. DeConcini): The requirement of the House bill that a plan not ‘discriminate unfairly’ with respect to a class is included for clarity; the language in the House report interpreting that requirement in the context of subordinated debentures, applies equally under the requirements of section 1129(b)(1) of the House amendment. 23603.4 20 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 21 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS a) “Fair and Equitable” as it Relates to a Class of Secured Claims Section 1129(b)(2)(A) of the Bankruptcy Code provides: (i) the secured creditor (I) retains its lien in the collateral (or if the property is transferred under the plan, its lien must attach to the proceeds) to the extent of the allowed amount of the secured claim, and (II) receives deferred cash payments which total the allowed amount of the claim and which have a present value as of the effective date of the plan in an amount at least equal to the value of the collateral; or (ii) the sale of the collateral free and clear of the lien, with the creditor having the right to credit bid and the lien to apply to the proceeds of the sale; or (iii) the secured creditor realizes the “indubitable equivalent” of its secured claim pursuant to the plan.9 11 U.S.C. § 1129(b)(2)(A) (emphasis added). The secured creditor “cram down” inevitably involves a variety of value and valuation issues, including: (i) an analysis of Section 506(a) with respect to whether the creditor is oversecured or undersecured (which involves a determination as to the value of the collateral securing the claim); (ii) an evaluation of the property to be distributed to the creditor under the plan; (iii) an evaluation and present value discount of the stream of payments to be received by the creditor under the plan; and/or (iv) the “indubitable 9 See, e.g., In re Manion, 127 B.R. 887 (Bankr. N.D. Fla. 1991) (stating that a debtor’s plan to convert a five-year balloon note secured by commercial property into a twenty-year note is not fair and equitable to the secured creditor); In re Hulen Park Place, Ltd., 130 B.R. 39 (N.D. Tex. 1991) (30-year term at 9% interest was not fair and equitable); In re VIP Motor Lodge, Inc., 133 B.R. 41 (Bankr. D. Del. 1991). Additionally, in In re Simons, the Court provided the following example: [I]f a secured creditor held a lien on ten lots in a subdivision, it is possible that the plan would be fair and equitable to that creditor if it provided for the sale of three lots with the proceeds being applied to the secured claim, the return of four lots with the value thereof being applied to the secured claim, and the retention of three lots with a remaining secured claim being paid over time such that the present value of the income stream equaled the value of the secured creditors interests in the remaining lots. 113 B.R. 942, 946 (Bankr. W.D. Tex. 1990). 23603.4 21 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 22 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS equivalence” of the secured creditor’s claim. In the event this Court does not permit the Debtor to impose a Section 506(c) surcharge on the Key Management Secured Claim, the Plan then provides that the Key Management Secured Claim will be fully satisfied by payment of the Manchester Sale Proceeds. Thus, with respect to the Key Management Secured Claim, because it will be paid in full, the Manchester Sale Proceeds are the “indubitable equivalent” 10 of the Key Management Secured Claim. Accordingly, the Plan is “fair and equitable” with respect to the Class 3 secured creditor, Key Management. b) “Fair and Equitable” as it Relates to a Class of Unsecured Claims Section 1129(b)(2)(B) of the Bankruptcy Code provides: With respect to a class of unsecured claims – (i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section. 11 U.S.C. § 1129(b)(2)(B). That is, with respect to unsecured claims, a plan is “fair and equitable” if: (i) the holders of claims in the unsecured class receive property under the plan having a present value as of the effective date of the plan in an amount at least equal to the amount of the claim; or (ii) no class junior to the dissenting class receives anything under the plan. Thus, under this provision, a plan will be deemed “fair and equitable” if either subsection is satisfied. See In re Dow Corning Corp., 244 B.R. at 705. If this Court does permit the Debtor to impose a Section 506(c) surcharge, the Key 10 Indubitable means “too evident to be doubted.” MERRIAM-WEBSTER’S DICTIONARY (2008). 23603.4 22 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 23 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS Management Secured Claim would become a Class 5 [sic]11 General Unsecured Claim. In order for this Court to determine that the Plan is “fair and equitable” as to the holders of claims in Classes 4, the Court need only find that no junior class of claims or interests will “receive or retain” any property “on account of such junior claim or interest” under the Plan. The Plan satisfies this test as to the holders of claim in Class 4 because there are no claims that are junior to those claims contained in Class 4 that will retain under the Plan any distribution on account of their junior claims. Accordingly, the Plan is “fair and equitable” with respect to the holders of claims in Class 4 – General Unsecured Claims. D. The Plaintiff Shareholders’ Objection is Incorrect Regarding Direct Claims The Bankruptcy Court has not yet ruled upon a number of substantive motions designed to determine whether or not the Plaintiff Shareholders do, in fact, hold direct claims against the Debtor. In response to those motions, the Court may rule that Shareholder Derivative Action contains only derivative claims which are property of the estate, and that the Plaintiff Shareholders therefore do not hold any direct claims against the Debtor or the estate. Assuming, arguendo, that Plaintiff Shareholders hold direct claims, the Debtor will address the Plaintiff Shareholders’ Plan objection which argues that they will lose standing to pursue their direct claims against the estate. As an initial matter, the Plaintiff shareholders appear to concede in this and other pleadings that the Bankruptcy Estate is the real party in interest to pursue the shareholder derivative claims. (See Plaintiff Shareholders Opposition, Adv. Proc. 08-1107; Dkt. No. 56, at 6:12-22.) Their sole objection on this point is to make it clear that either a chapter 11 Liquidating Trustee or a chapter 7 Trustee should pursue those claims instead of the Debtor. The concept of derivative standing arose when, despite a lack of express statutory The Plan and Disclosure statement contain a typographical error. If a Section 506(c) surcharge is imposed on the Key Management Secured Claim, the Key Management Secured Claim would become a Class 4 General Unsecured Claim, not a Class 5 General Unsecured Claim. Class 5 has been designated for holders of equity interests. 23603.4 11 23 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 24 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS authorization, courts of equity allowed shareholders to pursue valuable actions when the nominal plaintiff (i.e., the corporation) unreasonably refused to do so. Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548, 568 (3d Cir. 2003). The Supreme Court of the United States explained in Ross v. Berhard, 396 U.S. 531, 90 S. Ct. 733, 24 L. Ed. 2d 729 (1970), that the utility of derivative standing as a means of providing equitable redress, not only from “faithless officers and directors,” but also directly from “third parties who had damaged or threatened the corporate properties and whom the corporation through its managers refused to pursue.” 396 U.S. at 534, 90 S. Ct. 733. Under Nevada law, a representative plaintiff (i.e., shareholder) must have owned stock or a membership interest in the corporation “at the time of the transaction of which he complains” and throughout the pendency of the suit (continuous ownership): In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiff’s share or membership thereafter devolved on the plaintiff by operation of law. . . . Nev.R.Civ.P. 23.1; Virgil v. Keever, 100 Nev. 576, 577-78, 688 P.2d 317, 317-18 (1984). Thus, because a derivative claim is brought on behalf of the corporation, a former shareholder does not have standing to asset a derivative claim. Cohen v. Mirage Resorts, Inc., 119 Nev. 1, 19, 62 P.3d 720, 732 (2003). A former shareholder, however, does have standing to seek relief for direct injuries that are independent of any injury suffered by the corporation. Id. Here, Plaintiff Shareholders’ Objection alleges the Plan cannot be confirmed because their direct claims against the directors and officers of the Debtor will be extinguished due when the Debtor’s stock is cancelled pursuant to the Debtor’s Plan (See Plaintiff Shareholders Objection, Dkt. No. 261, at 7:23 through 8:10.) 23603.4 24 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 25 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS This is not correct. Based on the Supreme Court of Nevada’s decision in Cohen v. Mirage Resorts, Inc., and notwithstanding the fact that the Plaintiff Shareholders’ stock will be cancelled under the Debtor’s Plan, they retain standing to seek relief for any direct injuries that are independent of any injury suffered by the corporation. 119 Nev. at 19, 62 P.3d at 732. Consequently, under Nevada law, this potential interest of the Plaintiff Shareholders is not extinguished upon confirmation of the Debtor’s Plan and the objection must therefore be overruled. IV. CONCLUSION As demonstrated through the Disclosure Statement, Plan, Declarations on file herein, Ballot Tabulation, supporting Declaration of Omer Sattar, and Surcharge Brief (Dkt. 285), the objections should be overruled, and the Court should enter an order approving the Disclosure Statement on a final basis and confirming the Plan. If the Court is inclined to grant the Committee’s request for time to file and solicit votes for its Plan, the Debtor asks that such a process be kept on a very short time frame to limit the additional chapter 11 administrative costs incurred for this process. Additionally, the Debtor asks that the Debtor be given until September 2, 2008 within which to amend its disclosure statement; and the amended disclosure statement and Debtor’s Plan be sent out with the Committee Plan with one ballot for both plans. Finally, the Debtor asks that the Committee be required to file its plan by September 2, 2008, until September 16, 2008 within which to solicit votes on a combined ballot for the Debtor’s Plan and the Committee’s Plan, and that the Court schedule the combined plan confirmation hearings to occur approximately one week later. Respectfully submitted, FENNEMORE CRAIG, P.C. By: /s/ Laurel E. Davis Laurel E. Davis Counsel for Debtor and Debtor-in-Possession 23603.4 25 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 26 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS CERTIFICATE OF SERVICE 1. On August 25, 2008, I served the following document(s): DEBTOR’S REPLY TO OBJECTIONS AND MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF CONFIRMATION OF ITS PLAN OF REORGANIZATION 2. [x] I served the above-named document(s) by the following means to the persons as listed below: a. ECF System (attach the "Notice of Electronic Filing" or list all persons and addresses): saebig@williamskastner.com SHEENA R. AEBIG: OGONNA M. ATAMOH: oatamoh@nevadafirm.com, bkecf@nevadafirm.com; paltstatt@nevadafirm.com; sliberio@nevadafirm.com; rmoss@nevadafirm.com KEITH MILES AURZADA: ANTHONY W. AUSTIN: JASON C. FARRINGTON: GREGORY E GARMAN: DOUGLAS D. GERRARD: JAMES D. GREENE: MATTHEW L. JOHNSON: kaurzada@pogolaw.com, grojas@pogolaw.com aaustin@lrlaw.com jason@corylaw.us bankruptcynotices@gordonsilver.com, bknotices@gordonsilver.com DGERRARD@GERRARD-COX.COM, ekaymedellin@gerrard-cox.com bknotice@bhfs.com bankruptcy@mjohnsonlaw.com, mjohnson@mjohnsonlaw.com; candice@mjohnsonlaw.com; mvermillion@mjohnsonlaw.com plawson@huntertonlaw.com PAMELA R. LAWSON: MATTHEW E. MCCLINTOCK: mmcclintock@bellboyd.com, sthoma@bellboyd.com AMBRISH S. SIDHU: ROBERT SPEAR: 23603.4 ecfnotices@sidhulawfirm.com rspear@hutchlegal.com, krigg@hutchlegal.com 26 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 27 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS U.S. TRUSTEE - LV – 11: MATTHEW C. ZIRZOW: [] addresses): [] b. USTPRegion17.lv.ecf@usdoj.gov bankruptcynotices@gordonsilver.com, bknotices@gordonsilver.com United States mail, postage fully prepaid: (list persons and c. Personal Service (List persons and addresses): [] For a party represented by an attorney, delivery was made by handling the document(s) to the attorney or by leaving the document(s) at the attorney's office with a clerk or other person in charge, or if no one is in charge by leaving the document(s) in a conspicuous place in the office. For a party, delivery was made by handing the document(s) to the party or by leaving the document(s) at the person's dwelling house or usual place of abode with someone of suitable age and discretion residing there. [] [x] d. By direct email (as opposed to through the ECF system) (list persons and email addresses): Augie.landis@usdoj.gov Based upon the written agreement of the parties to accept service by email or a court order, I caused the document(s) to be sent to the persons at the email addresses listed below. I did not receive, within a reasonable time after the transmission, any electronic message or other indication that the transmission was unsuccessful. AUGUST LANDIS: [] e. By fax transmission (list persons and fax numbers): Based upon the written agreement of the parties to accept service by fax transmission or a court order, I faxed the document(s) to the persons at the fax numbers listed below. No error was reported by the fax machine that I used. A copy of the record of the fax transmission is attached. [] f. By messenger: I served the document(s) by placing them in an envelope or package addressed to the persons at the addresses listed below and providing them to a messenger for service. (A declaration 23603.4 27 Case: 08-10474-mkn Doc #: 289 Filed: 08/25/2008 Page: 28 of 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 FENNEMORE CRAIG , P.C. L AS V EGAS by the messenger must be attached to this Certificate of Service). I declare under penalty of perjury that the foregoing is true and correct. DATED this 25th day of August, 2008. /s/ Mia Hurtado An Employee of Fennemore Craig, P.C. 23603.4 28