Fall Meeting in November 2009

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					                            COMMERCIAL FINANCE COMMITTEE
                                         AND
                         UNIFORM COMMERCIAL CODE COMMITTEE
                                               FALL MEETING


                                  WEDNESDAY, NOVEMBER 4, 2009
                                       CAESARS PALACE
                                      LAS VEGAS, NEVADA
                                      11:00 A.M. – 4:00 P.M.


                                            MEETING AGENDA


10:00 a.m.-11:00 a.m. – Registration – Emperors Ballroom I Foyer


11:00 a.m.-12:30 p.m. – First Presentation – Emperors Ballroom I –


         ISSUES IN SECURED FINANCING ARISING IN RECENT CASES

         A discussion and analysis of issues arising in secured transactions cases that should be of concern
         to transactional attorneys. The program will cover all aspects of secured transactions – scope,
         choice of law, attachment, perfection, priority, and enforcement – and will do so in a format that
         invites substantial participation from everyone in attendance.
         Presented by:   Stephen L. Sepinuck, Professor, Gonzaga University School of Law, Spokane,
         Washington. Professor Sepinuck teaches courses on Secured Transactions, Bankruptcy, Sales, Contracts,
         and Appellate Advocacy.

         Professor Sepinuck has authored articles on a variety of subjects, written five books, and won awards for
         both his teaching and his scholarship. In the 1990s, he served as an advisor to the Drafting Committee that
         revised Article 9 of the Uniform Commercial Code and chaired its Task Force on Deposit Accounts. From
         2006-2009 he served as chair of the ABA’s UCC Committee. More recently, he was appointed as ABA
         Advisor to the new Joint Review Committee for Article 9 of the Uniform Commercial Code and a member
         of the editorial board of The Business Lawyer. He also annually edits the survey of commercial law that
         appears in The Business Lawyer. He is an elected member of the American Law Institute, the American
         College of Commercial Finance Lawyers, and the California State Bar UCC Committee. He is a former
         Associate Dean for Academic Affairs, a current member of the Florida, Massachusetts, and California bars,
         and Scholar in Residence at the law firm of Paul, Hastings, Janofsky & Walker LLP.




12:30 p.m.-1:30 p.m. – Luncheon Buffet (for all registrants) - Emperors Ballroom II



DB02:8596308.2                                                                                   900002.0010
1:30 p.m.-3:00 p.m. – Second Presentation – Emperors Ballroom I


         MEET MICA - An Introduction to the Model Intercreditor Agreement.
         ComFin’s Model Intercreditor Agreement Task Force has developed a market-based form of intercreditor
         agreement. Task Force Leaders will present and explain the new form and its intended use. Current issues
         between first and second lien lenders will be discussed. Our panel will consider the key issues raised in
         intercreditor negotiations between first and second lien lenders and how those issues are addressed in the
         new form, including priority provisions, first lien caps, standstill provisions, permitted modifications and
         bankruptcy provisions. The panel will also discuss the impact of existing intercreditor and inter-lender
         agreements on workouts in today's environment and the effect these intercreditor agreements are having in
         chapter 11 bankruptcy cases.

         Presented by: Gary D. Chamblee, Womble Carlyle Sandridge & Rice, PLLC (Chair of the Task Force);

         Richard K. Brown, Winston & Strawn, LLP (Vice Chair of the Task Force),

         Robert L. Cunningham, Jr., Gibson, Dunn & Crutcher LLP (Vice Chair of the Task Force) and

         Randall Klein, Goldberg Kohn (Vice Chair of the Task Force)



3:00 p.m.-4:00 p.m. – Third Presentation – Emperors Ballroom I


         WORKOUTS THAT WORKED OUT - Operating Companies Successfully
         Navigating Troubled Waters
         Seasoned bankruptcy and restructuring lawyers share stories, strategies, and insights from
         their recent experiences in workouts involving operating companies.
         Presented by:     Cathy L. Reece, Director, Fennemore Craig, P.C., Phoenix, Arizona

         Gregory E. Garman, Gordon Silver, Las Vegas, Nevada

         Jordan A. Kroop, Squire, Sanders & Dempsey L.L.P., Phoenix, Arizona



4:00 p.m. – Adjournment




DB02:8596308.2                                            2                                       900002.0010
ISSUES IN SECURED FINANCING ARISING IN RECENT CASES
                                      ISSUES IN SECURED FINANCING
                                        ARISING IN RECENT CASES


                                                                 Presented by:

                                                    Stephen L. Sepinuck
                                        Professor, Gonzaga University School of Law
                                             Co-chair, Commercial Law Center


Scope and Attachment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
       Problem 1.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
       Problem 2.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Perfection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
        Problem 3.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
        Problem 4.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Enforcement.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
       Problem 5.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
       Problem 6.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Priority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
        Problem 7.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           18
        Problem 8.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           18
        Problem 9.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           19

           Note, all citations in blue are hyperlinks to the cited source on Lexis or Westlaw.
                              ISSUES IN SECURED FINANCING
                                ARISING IN RECENT CASES


                                          Scope & Attachment

         Article 9 of the Uniform Commercial Code, as enacted in the relevant jurisdiction, applies
to any “transaction, regardless of its form, that creates a security interest in personal property or
fixtures by contract.” § 9-109(a)(1). This broad statement is loaded with important concepts.
         The phrase “personal property or fixtures” covers all the various the types of personalty:
accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles,
goods, instruments, investment property, letter of credit rights, and money. There are, however, two
limitations in this phrase. First, the proffered collateral must qualify as property. Rights and
privileges that the law does not regard as property cannot serve as Article 9 collateral. Second, the
collateral must be personal property, not real property (e.g., land, buildings, and easements). Despite
that limitation, Article 9 does apply to security interests in fixtures and other personal property
related to real estate. Such other property may include crops, standing timber, and oil or ore that has
been extracted. Although real estate law may be relevant to such realty-related personal property,
for the most part Article 9 governs.
         The phrase “regardless of its form” indicates that it does not matter how the parties label their
transaction or whether they use a particular set of words. What matters is the substance of the deal.
If the effect of the parties’ arrangement is to make personal property available to satisfy an
obligation, then the transaction creates a security interest and Article 9 governs. This point is
demonstrated by § 1-201(b)(35), which defines the term “security interest.” It expressly provides
that retention of title by a seller of goods is limited in effect to the reservation of a security interest.
The point is also demonstrated, albeit less clearly, by § 1-203. That section provides rather detailed
rules on how to distinguish a lease from a sale with a retained security interest.
         The main scope of the rule in § 9-109(a)(1) is supplemented by several other important rules.
These include § 9-109(a)(3), which makes Article 9 applicable to the sale of accounts, chattel paper,
payment intangibles, and promissory notes, and § 9-109(d)(4), which makes Article 9 applicable to
consignments. These rules are subject to a host of exceptions. See § 9-109(d). Several of the
exceptions are rather minor but some are quite important.

                                             Relevant Code Provisions

                      §   1-201(b)(35)
                      §   1-203
                      §   9-102(a)(20), (28), (72)
                      §   9-109
                      §   9-334(a)


         Attachment is the moment when a security agreement becomes effective. Put another way,
it is when the security interest arises and the collateral becomes liable for the secured obligation.
         The basic requirements for attachment are laid out in § 9-203(b). They require three things:
(I) that value has been given; (ii) the debtor has rights in the collateral or the power to convey rights
Issues In Secured Financing Arising in Recent Cases                                                page 2




in the collateral; and (iii) unless an exception applies, a security agreement has been authenticated
by the debtor.
         Value is defined in § 1-204. It includes any consideration sufficient to support a simple
contract. § 1-204(4). In general, though, it is useful to think of value as being the secured
obligation. A security interest almost invariably secures a debt. If there is no debt – and no promise
to create one – then there is probably nothing for the collateral to secure.1 Note, however, that the
debt may precede the signing of the security agreement. A borrower may grant an effective security
interest to secure an existing debt, even if the creditor provides no new consideration. See
§ 1-204(2).
         The requirement that the debtor have either rights in the collateral or the power to convey
rights in the collateral is merely a codification of a basic principle of property: one cannot give what
one does not have. Nemo dat non quod habet. That basic principle is, however, subject to a few
exceptions. In some cases, a person is be able to transfer more rights to property than the person
actually has. For example, § 2-403 has some important rules on when someone may transfer more
rights to goods than the transferor has. These rules can therefore be relevant to whether a security
interest attaches to those goods. Similarly, a person who has sold accounts may still be able to give
a security interest in those accounts if the buyer did not perfect its interest. § 9-318(b). More
significantly, Article 9 overrides many contractual and legal restrictions on transfer. See
§§ 9-406 through 9-409. These rules, however, are subject to some very important non-uniform
variations in states such as Delaware and New York.
         The requirement of an authenticated security agreement is, in essence, a statute of frauds.
There are some exceptions – most notably if the collateral is in possession of the secured party
pursuant to an oral agreement, see § 9-203(b)(3)(B) – but the requirement is otherwise not waivable.
The description of collateral need not be specific, it must merely reasonably identify what is
described. § 9-108(a). It may – and frequently does – do this by describing the collateral using the
Article 9 classifications. § 9-108(b)(3). Those classifications (but not all subclassifications) are as
follows:

                  Tangibles (Goods)                                     Intangibles




 1
     A security interest can, however, secure a performance obligation, rather than a payment obligation.
Issues In Secured Financing Arising in Recent Cases                                               page 3



                                            Quasi-Intangibles




         There are also several special attachment rules that provide for automatic attachment to some
collateral. Most of these apply after a security interest has attached to some collateral and then
something happens either to the collateral or the debtor. For example, the security interest
automatically attaches to proceeds of the collateral, at least as long as the property received is also
something covered by Article 9. See §§ 9-203(f), 9-315(a)(2). For this purpose, “proceeds” are
defined very broadly, see § 9-102(a)(64), and include whatever the debtor receives in exchange for
the collateral. Similarly, if the collateral is commingled with other goods, as when collateralized
eggs are commingled with flour and yeast to make bread, the security interest will automatically shift
from the original goods to the product or mass that results from the commingling. See § 9-336(a).
See also § 9-203(d), (e) (covering such things as the debtor’s merger with another business).
However, a few of the rules are simply designed to give effect to the likely expectation of the parties
by presuming that if a security interest attaches to some types of collateral it will also attach to
certain other related rights, such as supporting obligations or other credit enhancements. See
§ 9-203(f)–(i).
         A security agreement is free to encumber both property that the debtor owns when the
agreement is entered into and property that the debtor acquires later. See § 9-204(a). However, it
may not cover after-acquired commercial tort claims, unless they happen to constitute proceeds of
other collateral. § 9-204(b).
         A security interest can also attach to many property rights despite a contractual or legal
restriction on the debtor’s right to encumber or transfer those rights. See §§ 9-406, 9-408. The rules
on this point are quite complex: sometimes they override the restriction for all purposes, other times
they override it with respect to the creation of the security interest but leave the secure party with no
way to compel third parties to recognize its interest. The following chart summarizes these rules.
Issues In Secured Financing Arising in Recent Cases                                                                 page 4




                                                                  Payment                                 Health-Care-
                                                Accounts &                              General
                                                                Intangibles &                              Insurance
                                               Chattel Paper                          Intangibles
                                                                 Prom. Notes                              Receivables

                            Prohibits or                            Partly           Unaffected by            Partly
                                                Ineffective
                            Requires Consent    § 9-406(d)(1)
                                                                  Ineffective          Article 9            Ineffective
              Regarding                                         § 9-408(a)(1), (d)                        § 9-408(a)(1), (d)
              Sale
                                                Ineffective       Ineffective        Unaffected by          Ineffective
                            Makes a Default     § 9-406(d)(2)     § 9-408(a)(2)        Article 9            § 9-408(a)(2)
Contractual
Restriction                                                                              Partly               Partly
                            Prohibits or        Ineffective       Ineffective
                            Requires Consent    § 9-406(d)(1)     § 9-406(d)(1)
                                                                                       Ineffective          Ineffective
              Regarding                                                              § 9-408(a)(1), (d)   § 9-408(a)(1), (d)
              Encumbrance
                            Makes a Default     Ineffective       Ineffective          Ineffective          Ineffective
                                                § 9-406(d)(2)     § 9-406(d)(2)        § 9-408(a)(2)        § 9-408(a)(2)


                            Prohibits or                            Partly           Unaffected by            Partly
                                                Ineffective
                            Requires Consent    § 9-406(f)(1)
                                                                  Ineffective          Article 9            Ineffective
              Regarding                                         § 9-408(c)(1), (d)                        § 9-408(c)(1), (d)
              Sale
                                                Ineffective       Ineffective        Unaffected by          Ineffective
                            Makes a Default     § 9-406(f)(2)     § 9-408(c)(2)        Article 9            § 9-408(c)(2)
Legal
Restriction                                                         Partly               Partly               Partly
                            Prohibits or        Ineffective
                            Requires Consent    § 9-406(f)(1)
                                                                  Ineffective          Ineffective          Ineffective
              Regarding                                         § 9-408(c)(1), (d)   § 9-408(c)(1), (d)   § 9-408(c)(1), (d)
              Encumbrance
                            Makes a Default     Ineffective       Ineffective          Ineffective          Ineffective
                                                § 9-406(f)(2)     § 9-408(c)(2)        § 9-408(c)(2)        § 9-408(c)(2)



        If the debtor goes into bankruptcy, the Bankruptcy Code can limit the reach of a security
agreement. In particular, § 552 prevents a prepetition security interest from attaching to property
acquired by the debtor postpetition, unless the new property is either “proceeds, products, offspring,
or profits” of prepetition collateral or constitutes rent or payment for the occupancy of rooms in a
hotel, motel, or other place of public accommodation. 11 U.S.C. § 552(a), (b). Most bankruptcy
courts have used the Article 9 definition of “proceeds” in interpreting and applying these rules. See,
e.g., In re Bumper Sales, Inc, 907 F.2d 1430 (4th Cir. 1990). Whether they will apply the
substantially expended definition of “proceeds” in revised Article 9 remains an open question.
Issues In Secured Financing Arising in Recent Cases                                              page 5




                                            Relevant Code Provisions

                      § 1-204
                      § 2-403
                      § 9-102(a)(1), (7), (12), (28), (56), (57), (59), (64), (71), (77)
                      § 9-108
                      § 9-203
                      § 9-204
                      § 9-315(a)
                      § 9-318(b)
                      § 9-335(a)
                      § 9-336(a)–(c)
                      § 9-401
                      § 9-406(d)–(f), (h)–(j)
                      § 9-407 through § 9-409
                      11 U.S.C. § 552



                                                    Problem 1
                Last year, Bank loaned $75 million to Diversified Enterprises, Inc. In return,
        Diversified executed a security agreement that purported to grant Bank a security
        interest in Diversified’s “existing and after-acquired accounts, chattel paper (both
        electronic and tangible), commercial tort claims, deposit accounts, documents,
        equipment, farm products, general intangibles, inventory, investment property, letter
        of credit rights, and money.” In which of the following items, if any, does Bank have
        a security interest? What, if anything, could Bank have included in the security
        agreement or otherwise have done to obtain a security interest in the items in which
        Bank does not have a security interest?
        A.      Liquor licenses issued to Diversified for the restaurants and lounges in the
                hotels it owns. See Bischoff v. LCG Blue, Inc., 2009 WL 148519 (Cal. Ct.
                App. 2009); Banc of America Strategic Solutions, Inc. v. Cooker Restaurant
                Corp., 2006 WL 2535734 (Ohio Ct. App. 2006); In re Chris-Don, Inc., 367
                F. Supp. 2d 696 (D.N.J. 2005). See also In re Kanoff, 408 B.R. 53 (Bankr.
                M.D. Pa. 2009).
        B.      Diversified’s right to unearned premiums on liability insurance policies
                issued to Diversified and for which Diversified has paid. See, e.g., In re St.
                James Inc.,402 B.R. 209 (Bankr. E.D. Mich. 2009); In re Silver State
                Helicopters, LLC, 403 B.R. 849 (Bankr. D. Nev. 2009); In re JII Liquidating,
                Inc., 344 B.R. 875 (Bankr. N.D. Ill. 2006).
        C.      $400,000 in Diversified’s deposit accounts, which sum Diversified had
                intended to use to pay (I) $50,000 in federal payroll taxes; (ii) $50,000 in
                social security taxes; (iii) $200,000 to the IRS to cover employees’ income
                tax withholdings; and (iv) $100,000 in state sales taxes. See Insurance
                Company of the State of Pennsylvania v. HSBC Bank of USA, 829 N.Y.S.2d
                511 (N.Y. App. Div. 2007). See also In re Ferandos, 402 F.3d 147 (3d Cir.
Issues In Secured Financing Arising in Recent Cases                                                page 6




                2005). But cf. In re Zwosta, 395 B.R. 378 (6th Cir. BAP 2008); In re M & S
                Grading, Inc., 2009 WL 2497101 (Bankr. D. Neb. 2009).
        D.      The following causes of action brought by Diversified against Megasoft
                Corp., all based on events occurring after Diversified authenticated the
                security agreement.
                1. A claim for intentional interference with contract.
                2. A claim for intentional interference with prospective business relations.
                3. An antitrust claim.
                See Helms v. Certified Packing Corp., 551 F.3d 675 (7th Cir. 2008); Conley
                v. Public Safety Group, Inc., 2009 WL 1492269 (Iowa Ct. App. 2009);
                Waltrip v. Kimberlon, 79 Cal. Rptr. 3d 460 (Cal. Ct. App. 2008); In re Zych,
                379 B.R. 857 (Minn. Ct. App. 2007); § 9-204(b)(2); 9-102(a)(64).


                                               Problem 2
                Seaside Bank is considering making the secured loans described below.
        Assuming in each case that Seaside Bank obtains an attached and perfected security
        interest simultaneously with the making of the loan, if the debtor later goes into
        bankruptcy, what problems with the collateral might Seaside Bank encounter?
        A.      Alpha has a membership interest in a Delaware limited liability company.
                The membership agreement prohibits members from encumbering their
                interests and, under Delaware law, such a restriction is effective. See Del.
                Stat. tit 6, §§ 9-406(i)(5), 9-408(e)(4). Therefore, Beta is offering a security
                interest in the distribution rights from the LLC.
        B.      Beta Corp. has contracted to sell certain assets to Buyer and is offering a
                security interest in the payment due from Buyer. See In re Gateway Access
                Solutions, Inc., 368 B.R. 428 (Bankr. M.D. Pa. 2007); 11 U.S.C. § 365.
        C.      Gamma is a retailer of motor vehicles and is offering a security interest in its
                inventory and receivables. In connection with its sale of vehicles, Delta
                frequently also sells extended warranties, receives incentive payments from
                the manufacturer, and receives a fee from the customer’s lender for
                originating the loan. See In re Greg James Ventures LLC, 2008 WL 4829952
                (Bankr. N.D. Cal. 2008).
Issues In Secured Financing Arising in Recent Cases                                                               page 7




                                                Perfection

        Whereas attachment is when a security interest becomes enforceable against the debtor,
perfection is the time when a security interest becomes generally effective against the rest of the
world. Indeed, perfection is defined in relationship to this effect; a perfected security interest takes
priority over a subsequently created judicial lien. See § 9-317(a).
        In general, perfection requires two things: an attached security interest plus some form of
constructive notice to the world of the secured party’s interest in the collateral. This form of
notification can occur in any of several different ways:

                C   filing a financing statement in the appropriate state office;
                C   taking possession of the collateral (directly or through an agent);
                C   acquiring control of the collateral;
                C   getting the security interest noted on a certificate of title; or
                C   filing in a federal office (such as for aircraft, ships, and copyrights).

On occasion, perfection even occurs automatically without the secured party having to do anything
to provide notice. In general, the proper method to perfect depends on the classification of the
collateral. As the following chart shows, for some classes of property, there is only one way to
perfect; for other classes, the secured party may perfect in any of several different ways.

                                      Perfection by Collateral Type

                                   Filing          Possession         Control                Automatic

                                                                                                    T
     Accounts                        T                                                 (if not a significant portion
                                                                                                of accounts)


                                     T                   T                 T                        T
     Certificated Securities
                                                                                               (temporary)



                                     T                   T                 T
     Chattel Paper
                                                    (if tangible)    (if electronic)


     Commercial Tort
                                     T
     Claims


                                     T                   T                                          T
     Consumer Goods * †
                                                                                                 (PMSI)



     Deposit Accounts                                                      T



                                     T                   T                 T                        T
     Documents of Title
                                                    (if tangible)    (if electronic)           (temporary)



     Equipment * †                   T                   T
Issues In Secured Financing Arising in Recent Cases                                                                        page 8




                                     Filing             Possession            Control               Automatic


     Farm Products                     T                     T



     General Intangibles †             T

     Goods Held By Issuer
     of Nonnegotiable                  T                   T **
     Document

     Goods Held by Bailee              T                   T ††


     Health Care                                                                                          T
                                       T                                                       (if granted to the health
     Insurance Receivables                                                                           care provider)

                                                                                                          T
     Instruments                       T                     T                                (temporary; permanent for
                                                                                              sales of promissory notes)


     Inventory *                       T                     T


     Investment Property                                                                                  T
     (other than Certificated          T                                         T
                                                                                             (for broker or intermediary)
     Securities)


     Letter of Credit
                                                                                 T
     Rights


     Money                                                   T



                                       T                                                                  T
     Payment Intangibles
                                                                                                      (if a sale)


                                                             T
     Software †                        T               (if embedded in
                                                            goods)


     Supporting
                                                                                                          T
     Obligations


         * Except for motor vehicles covered by a certificate of title statute. Perfection in such goods is
                accomplished by having the security interest noted on the certificate.

         † Except when a federal filing system preempts Article 9’s filing system, such as when the collateral
                 is aircraft, ships, railroad cars, or copyrights.

         ** Can be obtained by the bailee's receipt of notification of the secured party's interest. § 9-312(d).

         †† Can be obtained by the bailee's authenticated acknowledgment that it holds for the secured party's
                 benefit. § 9-313(c).
Issues In Secured Financing Arising in Recent Cases                                                              page 9




         If a security interest is to be perfected by filing a financing statement in the appropriate state
office, rather than by filing in a federal recording system, see § 9-311(a), complying with a certificate
of title statute, see § 9-311(b), or taking possession or control of the collateral, see §§ 9-312(b),
9-313, 9-314, then the secured party will need to determine in which state to file.
         The basic rule, subject to the few exceptions noted in the chart below, is that to perfect a
security interest by filing a financing statement, the financing statement must be filed in the
jurisdiction where the debtor is “located.” § 9-301(1).

                  Exceptions to the Basic Rule of Filing in the Debtor’s Location

                      Type of Collateral                   W here to File               Code Section

                 Goods subject to a fixture      Jurisdiction where the goods are
                                                                                       § 9-301(3)(A)
                 filing                          located

                 Goods consisting of timber      Jurisdiction where the goods are
                                                                                       § 9-301(3)(B)
                 to be cut                       located

                                                 Jurisdiction where the wellhead
                 As-extracted collateral                                               § 9-301(4)
                                                 or minehead is located

                 Farm products (with respect     Jurisdiction in which the farm
                                                                                       § 9-302
                 to an agricultural lien)        products are located


        For the purpose of the Basic Rule, the debtor’s location depends upon the type of entity the
debtor is.

                                              Location of the Debtor

          Type of Debtor                              “Location” of the Debtor                         Code Section

 Individual (including a sole
 proprietorship) whose principal        Jurisdiction of the individual’s principal residence.       § 9-307(b)(1)
 residence is in the United States

                                        If the debtor’s principal residence is in a jurisdiction
                                        whose law affords public notice of security interests,
                                        the law of the jurisdiction of the individual’s principal
 Individual whose principal
                                        residence governs (and the secured party must comply
 residence is not in the United                                                                     § 9-307(b)(1), (c)
                                        with “perfection” requirements in that jurisdiction
 States
                                        rather than file a financing statement under the UCC).
                                        If the foregoing is not applicable, the District of
                                        Columbia.

 “Registered organization”
                                                                                                    §§ 9-102(a)(70),
 organized under the law of a State 1   The State in which the organization is registered.
                                                                                                    9-307(e)
 of the United States




 1
     “State” includes the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and any other territory
or insular possession of the United States. § 9-102(a)(76).
Issues In Secured Financing Arising in Recent Cases                                                           page 10




          Type of Debtor                            “Location” of the Debtor                       Code Section

                                      1. In the state that the law of the United States
                                      designates, if the law designates a state of location.
                                      2. In the state that the registered organization
 “Registered organization”
                                      designates, if the law of the United States authorizes     §§ 9-102(a)(70),
 organized under the law of the
                                      the registered organization to designate its state of      9-307(f)
 United States
                                      location.
                                      3. In the District of Columbia, if neither paragraph (1)
                                      nor (2) applies.

                                      1. If the debtor has only one place of business and
                                      that place of business is in the United States, the
                                      jurisdiction of its place of business.
                                      2. If the debtor has more than one place of business,
                                      and its chief executive office is in the United States,
 Organization (other than a           the jurisdiction of its chief executive office.
                                                                                                 §§ 1-201(a)(25),
 registered organization organized    3. If the debtor’s sole place of business or chief
                                                                                                 (27), 9-307(b)(2)
 under the law of a State or of the   executive office, as applicable, is located in a
                                                                                                 & (3), & (c)
 United States)                       jurisdiction whose law affords public notice of
                                      security interests, the law of the jurisdiction of the
                                      organization’s sole place of business or chief
                                      executive office, as applicable.2
                                      4. If none of the foregoing is applicable, the District
                                      of Columbia.

                                      In the State in which the branch or agency is licensed,
                                      if all branches and agencies of the bank are licensed in
                                      only one state. If not all branches and agencies of the
                                      bank are licensed in only one state:
 A branch or agency in the United
                                      1. In the state that the law of the United States
 States of a bank that is not
                                      designates, if such law designates a state of location.    § 9-307(f) & (I)
 organized under the law of the
                                      2. In the state that the branch or agency designates, if
 United States or a State
                                      the law of the United States authorizes the branch or
                                      agency to designate its state of location.
                                      3. In the District of Columbia, if neither paragraph (1)
                                      nor (2) applies.

 Foreign air carrier under the        The jurisdiction of the designated office of the agent
 Federal Aviation Act of 1958, as     upon which service of process may be made on behalf        § 9-307(j)
 amended.                             of the carrier.


 United States                        In the District of Columbia.                               § 9-307(h)




 2
     In such a case, the secured party must comply with “perfection” requirements of that foreign
jurisdiction, rather than perfect by filing a financing statement under the UCC.
Issues In Secured Financing Arising in Recent Cases                                                             page 11




         Type of Debtor                                “Location” of the Debtor                        Code Section

                                        A person that ceases to exist, have a residence, or have
                                        a place of business continues to be located in the
                                        jurisdiction specified by § 9-307(b) & (c) (i.e., the
                                        general rules on location of debtor).
                                        A registered organization continues to be located in
 Unusual Situations                     the jurisdiction specified by § 9-307(e) or (f)              § 9-307(d) & (g)
                                        notwithstanding: (1) the suspension, revocation,
                                        forfeiture, or lapse of the registered organization’s
                                        status as such in its jurisdiction of organization; or (2)
                                        the dissolution, winding or cancellation of the
                                        existence the registered organization.

        In general, the financing statement should be filed in the central office designated for that
purpose by the applicable state. § 9-501(a)(2). However, in cases involving certain realty-related
collateral, the financing statement should be in a different office.

                                 Exceptions to Centralized State Filing

                      Type of Collateral                 W here to File               Code Section

                                                 The office designated for the
                 As-extracted collateral or      filing or recording of a record
                                                                                    § 9-501(a)(1)(A)
                 timber to be cut                of a mortgage on the related
                                                 real property

                 The financing statement is      The office designated for the
                 filed as a fixture filing and   filing or recording of a record
                                                                                    § 9-501(a)(1)(B)
                 the collateral is goods that    of a mortgage on the related
                 are or will be fixtures         real property


                                                 The office designated by the
                 Transmitting Utility                                               § 9-501(b)
                                                 applicable state



Of course, as with everything else in the Uniform Commercial Code, lawyers must be on the lookout
for non-uniform rules on this issue. For example, George requires local filing for security interests
in “growing crops,” Ga. Code. Ann. § 11-9-501(a)(1)(A), and Arkansas requires local filing for
“equipment used in farming operations, or farm products, or accounts arising from the sale of farm
products,” Ark. Code Ann. § 4-9-501(2).
         Maintaining perfection of a security interest can be a challenging proposition. Most
financing statements are effective for only five years, and to remain effective beyond that period the
secured party must file a continuation statement within the six-month period immediately preceding
the expiration of the five-year term. § 9-515(a), (c)-(e). Beyond that, the secured party may have
to deal with the fact that the debtor’s location changes, the debtor’s name changes, the debtor has
transferred the collateral to a new owner, or that the nature of the collateral has changed. Article 9
contains numerous rules on whether the secured party need do anything in response to these events
and, if so, how quickly.
Issues In Secured Financing Arising in Recent Cases                                               page 12




                                           Relevant Code Provisions

                      §   8-106
                      §   8-301
                      §   9-103 through § 9-108
                      §   9-301 through § 9-314
                      §   9-501 through § 9-511
                      §   9-516
                      §   9-517
                      §   9-520



                                                  Problem 3
                Three years ago, Bank loaned $23 million to Digital Enterprises, Inc., a
        company that invents new high-tech devices and the software for them. In return,
        Digital executed a security agreement that purported to grant Bank a security interest
        in Digital’s “existing and after-acquired accounts, chattel paper (both electronic and
        tangible), commercial tort claims, deposit accounts, documents, equipment, farm
        products, general intangibles, inventory, investment property, letter of credit rights,
        and money.” The Bank regards Digital’s intellectual property as a major component
        of the collateral.
        A.      Does Bank need to file with the U.S. Patent Office to perfect its security
                interest in existing Diversified’s patents? See In re Tower Tech, Inc., 67 Fed.
                Appx. 521 (10th Cir. 2003); In re Cybernetic Services, Inc., 252 F.3d 1039
                (9th Cir. 2001), cert. denied, 534 U.S. 1130 (2002); In re Coldwave Systems
                LLC.,368 B.R. 91 (Bankr. D. Mass. 2007); In re Phoenix Systems &
                Components, Inc., 2007 Bankr. Lexis 603 (Bankr. D. Neb. 2007); In re
                Pasteurized Eggs Corp., 296 B.R. 283 (Bankr. D.N.H. 2003).
        B.      If not, should Bank file with the U.S. Patent Office anyway? See 35 U.S.C.
                § 261. Compare McKesson Automation, Inc. v. Swisslog Italia S.P.A., 2008
                WL 4820506 (D. Del. 2008), with Kowalski v. Mommy Gina Tuna Resources,
                2008 WL 583553 (D. Haw. 2008).
        C.      Diversified has an active research and development department that promptly
                files for patent protection on the new devices invent by the employees who
                work there. What, if anything, should Bank do to be sure that it has a
                perfected security interest in the patent rights for any such new inventions?
        D.      What must Bank do to perfect its security interest in Digital’s existing and
                future copyrights? What, if any, problems does the answer to this question
                present? Compare In re World Auxiliary Power Co., 303 F.3d 1120 (9th Cir.
                2002), with In re Peregrine Entertainment, Ltd., 116 B.R. 194 (C.D. Cal.
                1990); In re Avalon Software, Inc., 209 B.R. 517 (Bankr. D. Ariz. 1997); In
                re AEG Acquisition Corp., 127 B.R. 34 (Bankr. C.D. Cal. 1991), aff’d, 161
                B.R. 50 (9th Cir. BAP 1993).
Issues In Secured Financing Arising in Recent Cases                                              page 13




                                               Problem 4
                Investment Banker is attempting to put together a securitization transaction
        involving consumer car loans. The loans will be originated by car dealers, who will
        perfect a security interest in each car sold and will then assign the secured loans to
        a special purpose entity. The special purpose entity will use the loans to back
        securities that it issues representing an ownership interest in the pool of car loans.
        The special purpose entity will contract with Servicer to service all the car loans.
        What perfection problems, if any, does this proposed deal present? See In re Clark
        Contracting Services, Inc., 399 B.R. 789 (Bankr. W.D. Tex. 2008). See also In re
        Johnson, 407 B.R. 364 (Bankr. D. Ark. 2009); § 9-310 & cmt. 4.
Issues In Secured Financing Arising in Recent Cases                                              page 14




                                            Enforcement

        After default, the secured party may use judicial process to obtain possession of the collateral,
to foreclose on the collateral (such as by having the sheriff sell it), or both. Alternatively, Article 9
allows the secured party to proceed non-judicially: to simply repossess the collateral on its own or
with the assistance of an agent, and then to foreclose on its own. The secured party may also mix
these different processes, for example by using judicial process to obtain possession and then
foreclosing pursuant to Article 9, or by privately repossessing the collateral and then using judicial
process to foreclose. See § 9-601(a)(1), (c). In repossessing without judicial process, the secured
party must be careful not to breach the peace, see § 9-609(b)(2), a vague term imbued with the gloss
of hundreds of judicial decisions.
        When foreclosing under Article 9, a secured party has three options: disposition, acceptance,
and collection. A disposition is a sale, lease, or license of the collateral. It may be conducted
through a public auction – as a judicial sale would be – but is more commonly effected through a
privately negotiated transaction. The main constraint on the secured party is that all aspects of the
disposition – its method, manner, time, place, and terms – must be commercially reasonable. See
§ 9-610(b). Although a low price alone does not make a disposition commercially unreasonable, it
suggests that the other aspects should be carefully scrutinized. See § 9-627(a), § 9-610 comment 10.
        The proceeds of a disposition go first to cover the costs associated with it, then to the secured
party to pay off the secured obligation, then to any junior lienor who has demanded a share of the
proceeds. The debtor is then entitled to any surplus that remains. § 9-615(a). A disposition
discharges the security interest being foreclosed and all junior liens, but does not affect senior liens.
§ 9-617(a).
        An acceptance – also known as a strict foreclosure – occurs when the debtor (and anyone else
with an interest in the collateral) consents to allow the secured party to simply keep the collateral in
full or partial satisfaction of the secured obligation. See § 9-620. In the case of full satisfaction,
consent may be manifest simply by the failure to object after notification of a proposal is sent. In
the case of partial satisfaction, consent must be manifest in a record authenticated after default. See
§ 9-620(c). If the collateral is consumer goods, acceptance is not permitted if 60% of the secured
obligation has been paid. See § 9-620(e). In such a case, the secured party must conduct a
disposition within 90 days after taking possession. See § 9-620(f).
        Collection is a foreclosure method applicable to receivables, such as accounts, instruments,
chattel paper, and payment intangibles. After a default under the terms of the security agreement,
the secured party is authorized to simply direct the person obligated on the collateral – typically
called the account debtor – to make payment directly to the secured party. See § 9-607(a). Account
debtors who ignore such an instruction and pay the debtor after receiving it, do not discharge their
obligation and thus may still have to pay the secured party (i.e., pay a second time). See § 9-406(a).
However, most defenses to payment that the account debtor has against the debtor can also be
asserted against the secured party. See § 9-404(a).
Issues In Secured Financing Arising in Recent Cases                                                page 15




                                           Relevant Code Provisions

                      §   1-201(b)(20)
                      §   1-304
                      §   1-309
                      §   9-102(a)(3)
                      §   9-335(e), (f)
                      §   9-403
                      §   9-404(a), (b)
                      §   9-406(a)-(c), (g)
                      §   9-601 through § 9-628



                                                  Problem 5
                You represent Defendant, who has been sued for fraud and misrepresentation
        in connection with a business transaction. As part of a settlement that the parties
        have provisionally agreed to, Defendant will pay the plaintiff $400,00 over time, and
        this obligation will be represented by a promissory note. The note is to be secured
        by some equity securities that Defendant owns. However, Defendant has made it
        clear that she does not want be on the hook if the value of the collateral falls. The
        plaintiff’s attorney has sent you a draft of the settlement agreement. It includes a
        grant of a security interest in the equity securities as well as the following language:

                 In the event of default on the terms of the Promissory Note,
                 Defendant hereby authorizes Secured Party to sell any or all of
                 the Collateral. Any such sale must be made according to
                 standard commercial practices as are then observed by entities in
                 the business of selling securities, or at public auction provided
                 thirty days prior written notice is provided to Defendant.
                 Defendant shall not remain personally liable for any deficiency.

        Does this language adequately protect Defendant? If not, what changes would you
        suggest? See Barunstein v. Pickens, 593 F. Supp. 2d 834 (D.S.C. 2009).


                                                  Problem 6
                Several years ago, Bank made a sizeable loan to Dealership, Inc., a retailer of
        new and used motor vehicles. The loan is secured by Dealership’s existing and after-
        acquired equipment, inventory, accounts, and chattel paper, as well as by its 100%
        ownership interest in Subsidiary, Inc., through which Dealership offers financing to
        its customers. The loan is also guaranteed by Dodge, the principal owner of
        Dealership. Dealership has now defaulted on the loan and Bank wishes to foreclose
        on the stock in Subsidiary.
        A.      How should Bank conduct the disposition?
Issues In Secured Financing Arising in Recent Cases                                          page 16




        B.      What, if anything, should Bank have put in the security agreement to deal
                with this issue? See §§ 9-602(7), 9-603(a), 1-302(b)? What risks, if any,
                does Bank have in relying on such language in the security agreement? See
                Long John Silver’s, Inc. v. DIWA III,Inc., 2009 WL 127651 (E.D. Ky. 2009).
Issues In Secured Financing Arising in Recent Cases                                                 page 17




                                                    Priority

         When two or more parties – other than the debtor – claim an interest in the collateral, their
relative priority determines which of them comes first. This is not a matter of chronology: the
sequence in which they may seek to extract value from the collateral. It is a matter of right: who gets
the first value out of the collateral. In other words, if the collateral is not worth enough to satisfy all
of them, which of them will be permitted to extract value from the collateral (until paid in full) and
which of them will be disappointed with little or no recovery. Rarely do parties share the same
priority.
         The priority of a security interest depends largely on whether it is perfected. If it is perfected,
the manner and timing of perfection may also be highly relevant. Often these facts will simply be
used to ascertain a creditor’s priority under the applicable priority rule. In other cases, however, they
may affect which priority rule applies. Article 9 has dozens of different priority rules. The trick to
resolving a priority dispute is to ascertain which rule or rules apply (yes, more than one rule may
govern a single dispute). As with most of the other concepts in Article 9 – e.g., classification,
attachment, perfection – the analysis is collateral specific. That is to say the classification,
attachment, perfection, or priority of a security interest may be different for different items of
collateral. For this reason, priority can change over the life of a transaction, as the debtor sells
collateral to generate proceeds.
         For the most part, isolating the applicable priority rules depends on the following six factors,
listed in likely order of importance:
           (i) The type of property involved (e.g., goods, chattel paper, etc.);
           (ii) What type of interest in the collateral the competing claimant has;
           (iii) Whether, when, and how the secured party perfected;
           (iv) Whether one or both interests is a PMSI;
           (v) Whether the secured obligation includes future advances; and
           (vi) Whether property has been commingled or become an accession or fixture.
The type of interest held by the competing claimant refers to the fact that the competing claimant
could also have a lien – either a judicial lien, security interest, or statutory lien – or could be someone
who has retained or acquired rights in the collateral up or down the chain of title (up the chain you
might find a lessor or licensor; down it might be a purchaser, lessee, or licensee). It is vital to
appreciate the differences between these different types of claimants and the terminology used in the
Code to distinguish them. For example, a “buyer” is different from a “purchaser.” Compare
§ 1-201(b)(9) with (29), (30).

                                             Relevant Code Provisions

                      §   1-201(b)(9), (29), (30)
                      §   9-102(a)(52)
                      §   9-201
                      §   9-317 through § 9-334
                      §   9-335(c), (d)
                      §   9-336(e), (f)
                      §   9-337 through § 9-342
Issues In Secured Financing Arising in Recent Cases                                                  page 18




                                               Problem 7

                 Dregs sells wines produced by a number of local wineries. Most of Dregs’s
        customers are wealthy individuals or expensive restaurants. Although the restaurants
        have the ability to accept delivery and store the wine they purchase from Dregs, many
        of the individuals do not. As a courtesy to such individual customers, Dregs often
        retains possession of the wine they purchase until such time as they request delivery.
                 For the last several years, Sinister Bank has had a perfected security interest
        in all of Dregs’s existing and after-acquired inventory and accounts. Six months ago,
        Dregs began experiencing severe cash-flow problems and it has now fallen several
        payments behind on its debt to Sinister Bank. At the bank’s urging, Dregs offered
        its regular customers a 20% discount on new purchases. Baron was one such
        customer. Baron paid Dregs $15,000 for several cases of wine, with the
        understanding that Dregs would store the wine until Baron requested delivery.
        Shortly after payment was received, Sinister Bank swept Dregs’s deposit accounts
        and demanded possession of all remaining inventory. As between Baron and Sinister
        Bank, who is entitled to the wine for which Baron has paid but not received? See In
        re Dorsesy Trailer Co., Inc., 2009 WL 764572 (Bankr. M.D. Ala. 2009); In re
        Carolina Wine Co., Inc., 2009 WL 2399944 (Bankr. E.D.N.C. 2009); In re Sunbelt
        Grain WKS, LLC, 406 B.R. 918 (Bankr. D. Kan. 2009).


                                               Problem 8

                  Distributor, a Delaware corporation, purchases oil and gas from numerous
        “Producers,” the operators of oil and gas wells in Texas. The Producers lease the oil
        and gas rights to the property they work from “Lessors,” the owners of the mineral
        rights. These rights tend to be highly fractionalized. Distributor is to pay the
        Producers in the month following delivery for the oil and gas it purchases. The
        Producers in turn pay Lessors the applicable royalties.
                  Bank has a security interest in all of Distributor’s existing and after-acquired
        inventory and a proper financing statement filed in Delaware. A non-uniform
        provision to the Texas Commercial Code gives the Producers an automatically
        perfected purchase-money security interest in all oil and gas in the hands of the first
        purchaser (i.e., Distributor), and the proceeds thereof, to secure payment of the
        purchase price. Tex. Bus. & Com. Code § 9.343.
                  Distributor suffered catastrophic trading losses in the energy markets, forcing
        it to file for bankruptcy at a time when it owed Producers approximately $57 million
        for oil and gas it had purchased. As between Bank and the Producers, who has
        priority in the oil and gas purchased from the Producers and its proceeds? In re
        SemCrude, L.P., 407 B.R. 112 (Bankr. D. Del. 2009). See also In re SemCrude, L.P.,
        407 B.R. 82 (Bankr. D. Del. 2009); In re SemCrude, L.P., 407 B.R. 140 (Bankr. D.
        Del. 2009).
Issues In Secured Financing Arising in Recent Cases                                             page 19




                                               Problem 9

                Three years ago, State Bank acquired and perfected a security interest in all
        of Double Dealer’s existing and after acquired equipment, inventory, and accounts.
        Double Dealer is a wholesaler that generally sells to its customers on open account.
        With its financial situation deteriorating, Double Dealer has been looking for ways
        to favor Friend, one of its unsecured creditors. It therefore obtained the consent
        Customer, its largest client, to alter Customer’s payment terms as to both past and
        future sales. Under the new arrangement, Customer is to pay Friend directly.
        Assuming that this will make Friend a third-party beneficiary of Double Dealer’s
        contract with Customer, who between State Bank and Friend will have the prior
        claim to Customer’s payment obligation? See In re Publishers Consortium, Inc.,
        2009 WL 2958649 (2d Cir. 2009).
MEET MICA - An Introduction to the Model Intercreditor
                    Agreement.
      INTRODUCTION TO THE ABA MODEL INTERCREDITOR AGREEMENT

               By Gary D. Chamblee, Womble Carlyle Sandridge & Rice, PLLC

                Chair of the ABA Model Intercreditor Agreement Task Force

      (November 4, 2009. Commercial Finance Committee Fall Meeting in Las Vegas)



Introduction

       So-called “second lien” financing has played an increasingly important role in the debt

markets over the last five to six years. This type of lending involves high leverage and is usually

part of a syndicated loan facility with multiple lenders. The issuers of the second lien financing

piece may be a group of banks and other institutional investors or may be a group of

bondholders. In the typical second lien transaction, both the first lien lender and the second lien

lender have a lien on the same assets. The second lien lender subordinates its lien on those assets

to the lien of the first lien lender but usually does not subordinate its right to payment. In other

words, these transactions involve lien subordination but not payment subordination. The first

lien loan is usually structured as a revolving loan (or a revolving facility and a term loan facility)

while the second lien loan is usually a term loan. The interest rate on second lien loans has

historically been higher than first lien loans but less than comparable mezzanine loans. Unlike

mezzanine loans, second lien loans do not include an equity component. Variations on that

structure exist such as an ABL tranche secured by a first lien on current assets with a term loan

tranche secured by a first lien on fixed assets of the borrower and a second lien on the borrower’s

current assets. Although certain issues come up in almost every second lien financing

transaction, including lien subordination, standstill provisions and waivers of certain bankruptcy




                                                  1
rights, there is a great deal of variation among lenders in how the provisions dealing with those

issues are drafted.

        The second lien market has grown at an accelerating rate over the last few years.
According to the Loan Pricing Corporation (LPC), the dollar volume of second lien loans grew
from approximately $8 billion in 2003 to over $29 billion in 2006. In the second quarter of 2007
second lien loans reached $15.21 billion, the highest quarter recorded for second lien issuance
since its inception. Like other forms of leveraged finance, second lien financing fell sharply with
the credit crisis that hit the financial markets in the summer of 2007. Since that time, the volume
of second lien financings, has fallen sharply. By the second quarter of 2009, second lien
issuance was under $300 million.


        Despite the rapid growth in this market, there has been little standardization of terms.
Although certain issues come up in almost every second lien financing transaction, including lien
subordination, standstill provisions and waivers of certain bankruptcy rights, there is a great deal
of variation among lenders in how the provisions dealing with those issues are drafted. The
Model Intercreditor Agreement Task Force was formed in 2007 with the goal of developing a
balanced, market-based model form of intercreditor agreement that specifies the rights of first
lien and second lien lenders holding pari passu senior debt secured by identical collateral and
that fairly protects the respective interests of first lien and second lien lenders while reflecting
market expectations and standard practices. The final draft of the Model Intercreditor Agreement
with commentary is nearing completion. The most recent draft is available on the Task Force
website. 1

        Although the volume of new second lien transactions has declined, interest in

intercreditor issues involving first and second lien loans remains high. One of the reasons for

1
 Gary D. Chamblee (Womble Carlyle Sandridge & Rice, PLLC) serves as Chair of the ABA
Model Intercreditor Agreement Task Force. The Vice Chairs of the Task Force are Alyson Allen,
Ropes & Gray LLP, Christian Brose, McGuire Woods LLP, Richard K. Brown, Winston & Strawn, LLP,
Robert L. Cunningham, Jr. Gibson, Dunn & Crutcher LLP, Randall Klein, Goldberg Kohn and Jane
Summers, Latham & Watkins LLP. The Editor of the Model Intercreditor Agreement is Howard
Darmstadter. The Task Force has over 200 members. Information about the Task Force can be
obtained from Gary Chamblee at gchamblee@wcsr.com or at the Task Force website at
http://www.abanet.org/dch/committee.cfm?com=CL190029
                                                 2

WCSR 4115761v2
this is the relative lack of reported bankruptcy cases involving the waiver provisions commonly

seen in intercreditor agreements for second lien financing. Additionally, the courts in those cases

which have been reported have often reached inconsistent conclusions.              There are many

intercreditor agreements still in place for outstanding loans and, as defaults increase, the

strengths and weaknesses of these existing agreements will be tested inside and outside of

bankruptcy. Another factor sparking interest in intercreditor arrangements is that unsecured

creditors in this unstable economy are attempting to improve their positions relative to senior

secured creditors by seeking to obtain second priority liens on the collateral held by the senior

creditors. For example, unsecured bond creditors may attempt to exchange their unsecured debt

for a secured debt position subordinate to the senior lender holding a first priority lien on all of

the borrower’s assets.    Or a mezzanine lender secured only by pledge of the membership

interests in the borrower may push for a second lien on the borrower’s assets.


The Lien Priority Provisions


The heart of the intercreditor agreement is the lien subordination provision pursuant to which the

second lien lender agrees that its lien on the common assets will be junior and second in priority

to the lien of the first lien lender, including typically both liens on personal property and liens on

real estate. Even at this preliminary stage of the intercreditor agreement, the first lien lender and

the second lien lender are likely to have different points of view as to how broadly the lien

subordination provision should be worded. The first lien lender is likely to insist that its lien on

the common assets should remain superior even if the first lien lender fails to properly perfect its

lien or allows its lien to lapse or its lien is avoided in bankruptcy or otherwise. The first lien

lender will argue that this type of “absolute” priority provision implements one of the basic



                                                  3

WCSR 4199649v1
purposes of an intercreditor agreement which is to agree in advance on the relative position of

the parties in order to avoid expensive and protracted litigation.


       A typical lien subordination provision taken from the current draft of the Model
Intercreditor Agreement and providing for absolute lien priority for the first lien lender
regardless of perfection, lack of perfection or avoidance is as follows:
 
       “Seniority of Liens Securing First Lien Obligations  
       A  Lien  on  Collateral  securing  any  First  Lien  Obligation  will  at  all  times  be  senior  and 
       prior in all respects to a Lien on such Collateral securing any Second Lien Obligation, and 
       a Lien on Collateral securing any Second Lien Obligation will at all times be junior and 
       subordinate in all respects to a Lien on such Collateral securing any First Lien Obligation. 
       Except  as  otherwise  expressly  provided  herein,  the  priority  of  the  Liens  securing  First 
       Lien Obligations and the rights and obligations of the Parties will remain in full force and 
       effect irrespective of  
             (a)         how  a  Lien  was  acquired  (whether  by  grant,  possession,  statute, 
                         operation of law, subrogation, or otherwise),  
             (b)         the  time,  manner,  or  order  of  the  grant,  attachment,  or  perfection  of  a 
                         Lien,  
             (c)         any provision of the UCC or other applicable law,  
             (d)         any defect in, or non‐perfection, setting aside or avoidance of, a Lien or a 
                         First Lien Loan Document or a Second Lien Loan Document,  
             (e)         the modification of a First Lien Obligation or a Second Lien Obligation, 
             (f)         the  modification  of  a  First  Lien  Loan  Document  or  a  Second  Lien  Loan 
                         Document, 
             (g)         the subordination of a Lien on Collateral securing a First Lien Obligation 
                         to a Lien securing another obligation of a Grantor or other Person,  
             (h)         the exchange of a security interest in any Collateral for a security interest 
                         in other Collateral, 
             (i)         the commencement of an Insolvency Proceeding, or 
             (j)          any other circumstance whatsoever, including a circumstance that might 
                         be a defense available to, or a discharge of, a Grantor in respect of a First 
                         Lien  Obligation  or  a  Second  Lien  Obligation  or  holder  of  such 
                         Obligation.” 




                                                         4
     The second lien lender, on the other hand, will argue that giving the first lien lender
absolute priority even if its lien is not perfected or is subsequently avoided in bankruptcy is
fundamentally unfair and may result in a windfall to the unperfected first lien lender to the
disadvantage of the second lien lender and other creditors. First and second lien lenders typically
agree not to challenge the priority, perfection, or validity of their respective liens. However, if a
first lien agent fails to perfect, or maintain perfection, of its lien, second lien lenders will often
argue, particularly in negotiated middle-market transactions, that an agreement to continue to
treat an unperfected first lien lender as being perfected vis-à-vis the second lien lender converts
lien subordination into payment subordination to unsecured indebtedness. Therefore, second lien
lenders and their counsel will often take the position that only collateral in which, at any time,
both first and second lien lenders have a valid and perfected security interest not subject to
avoidance as a preferential transfer or otherwise by the debtor or a trustee in bankruptcy should
be subject to the lien priority provisions. The draft Model Intercreditor Agreement contains an
alternative priority provision favorable to second lien lenders which provides that the second lien
lender will be subordinate only to the extent that the first lien lender maintains a valid and
perfected first priority lien in the common collateral:

     “Seniority of Liens Securing First Lien Obligations  
             A  Lien  on  Collateral  securing  any  First  Lien  Obligation  will  at  all  times  be  senior 
       and prior in all respects to a Lien on such Collateral securing any Second Lien Obligation, 
       and a Lien on Collateral securing any Second Lien Obligation will at all times be junior 
       and  subordinate  in  all  respects  to  a  Lien  on  such  Collateral  securing  any  First  Lien 
       Obligation, so long as the Lien securing the First Lien Obligations is valid, perfected [and 
       unavoidable][and is not avoided in an Insolvency Proceeding]. 
              Except  as  otherwise  expressly  provided  herein,  the  priority  of  the  Liens  securing 
       First  Lien  Obligations  and  the  rights  and  obligations  of  the  Parties  will  remain  in  full 
       force and effect irrespective of  
                      (a)          how a Lien was acquired (whether by grant, possession, 
                                   statute, operation of law, subrogation or otherwise),  
                      (b)          the  time,  manner,  or  order  of  the  grant,  attachment  or 
                                   perfection of a Lien,  
                      (c)          any provision of the UCC or other applicable law,  
                      (d)          the  modification  of  a  First  Lien  Obligation  or  a  Second 
                                   Lien Obligation, 
                      (e)          the  modification  of  a  First  Lien  Document  or  a  Second 
                                   Lien Document, 


                                                         5
                     (f)         the subordination of a Lien on Collateral securing a First 
                                 Lien Obligation to a Lien securing another obligation of 
                                 a Grantor or other Person, 
                     (g)         the exchange of a security interest in any Collateral for a 
                                 security interest in other Collateral, 
                     (h)         the commencement of an Insolvency Proceeding.” 

     In practice, the vast majority of intercreditor agreements to date have adopted the first lien

lender’s position on this issue.


First Lien Caps


       The Model Intercreditor Agreement includes a fairly broad definition of “First Lien
Obligations” which encompasses principal, interest, fees, indemnity obligations, the cost of
unwinding hedging obligations and cash management obligations: However, it also provides for
a “First Lien Cap” in an agreed-upon maximum principal amount and provides that the Second
Lien Lender will be subordinate only to the extent that the principal amount of the first lien loan
does not exceed the First Lien Cap. The definition of “First Lien Obligations” in the Model
Agreement reads as follows:

       “First Lien Obligations means all Obligations of the Grantors under 
             (1)        the  First  Lien  Credit  Agreement  and  the  other  First  Lien  Loan 
                        Documents,  
             (2)        the  guaranties  by  Holdings  and  the  Guarantor  Subsidiaries  of  the  First 
                        Lien Obligations,  
             (3)        any  Hedge  Agreement  (even  if  the  counterparty  or  an  Affiliate  of  the 
                        counterparty  ceases  to  be  a  lender  under  the  First  Lien  Credit 
                        Agreement),  
                 
             (4)        any Cash Management Agreement, or 
             (5)        any agreement or instrument granting or providing for the perfection of 
                        a Lien securing any of the foregoing, 
       except  that  the  aggregate  principal  amount,  without  duplication,  of  the  First  Lien 
       Obligations  (other  than  Obligations  under  Hedge  Agreements  or  Cash  Management 
       Agreements) in excess of the First Lien Cap (as defined below) will not be First Lien 
       Obligations. 
       Notwithstanding  any  other  provision  hereof,  the  term  “First  Lien  Obligations”  will 
       include  accrued  interest,  fees,  costs  and  other  charges  incurred  under  the  First  Lien 

                                                      6
       Credit Agreement and the other First Lien Loan Documents, whether incurred before or 
       after  commencement  of  an  Insolvency  Proceeding,  and  whether  or  not  allowable  in  an 
       Insolvency Proceeding.  
       To the extent that any payment with respect to the First Lien Obligations (whether by or 
       on behalf of any Grantor, as proceeds of security, enforcement of any right of set‐off or 
       otherwise)  is  declared  to  be  fraudulent  or  preferential  in  any  respect,  set  aside  or 
       required to be paid to a debtor in possession, trustee, receiver or similar Person, then the 
       obligation  or  part  thereof  originally  intended  to  be  satisfied  will  be  deemed  to  be 
       reinstated and outstanding as if such payment had not occurred. [emphasis added]” 

        This definition provides that any principal amount in excess of the agreed-upon “First
Lien Cap” will not be considered “First Lien Obligations” for purposes of the intercreditor
agreement. This means, for example, that the agreement by the second lien lender to subordinate
the lien of its loan applies only to the extent that the first lien lender does not increase its loan in
excess of the First Lien Cap. Similarly, the buy-out provisions of the agreement which permit
the second lien lender to purchase the first lien loan at par following the occurrence of an event
of default only apply to the portion of the first lien loan that does not exceed the agreed-upon
cap. In this definition, only the principal outstanding under the first lien loan is subject to the
First Lien Cap. The second lien lender may argue that this is unfair and that the cap should also
apply to accrued and unpaid interest, default interest, fees and expenses, hedging obligations and
cash management obligations. In the absence of a cap on expenses and fees, the second lien
lender may also argue that the first lien lender has an incentive to run up expenses and fees
following an event of default in order to make it more difficult for the second lien lender to bid at
the foreclosure sale or to purchase the first lien debt.

The current draft of the Model Intercreditor Agreement includes the following definition of
“First Lien Cap”:

        “First Lien Cap means $[__________] less  
                 
             (a)        principal payments applied to term loans that are First Lien Obligations,  
             (b)        permanent reductions of commitments under the revolving facility, and  
             (c)        reimbursements  of  drawings  under  letters  of  credit  constituting  First 
                        Loan  Obligations  (Letters  of  Credit  )  to  the  extent  that  any  such 
                        reimbursement  results  in  a  permanent  reduction  of  the  letter  of  credit 
                        commitment amount under the First Lien Loan Documents,  
                        excluding reductions resulting from a Refinancing  
                        [, and plus  

                                                      7
               (y)     the aggregate amount of all Second Lien Adequate Protection Payments 
                       to the extent paid from a DIP financing or Proceeds of Collateral [, and 
               (z)             if there is an Insolvency Proceeding, [$___________]]].“ 

     While a First Lien Cap is designed to protect the second lien lender from unanticipated
increases in the first lien debt, the first lien lender will want to make sure that it has a sufficient
“cushion” under the First Lien Cap to increase its loan by a reasonable amount to deal with
additional cash needs by the borrower as part of a loan workout or otherwise. In the absence of
unusual provisions in the first lien credit agreement (for example, delayed draw term loans or
accordion features), the typical amount of the First Lien Cap at the end of a negotiated
transaction would be in the range of 110% to115% of the aggregate loan amount of the First Lien
Obligations, with 110% being the most common percentage used.

     Especially in the current economic environment, a first lien lender should strongly consider
including an additional “cushion” for Debtor in Possession (“DIP”) financing to be provided by
the first lien lender in the event of bankruptcy. The definition of First Lien Cap in the Model
Agreement includes optional provisions for including DIP financing under the First Lien Cap.

     Many intercreditor agreements simply state that amounts in excess of the first lien cap are

not first lien obligations. These agreements do not address the matter further. This leaves a lot

of room for speculation. What is the result of the first lien creditor exceeding the cap? The

second lien lender may argue that exceeding the cap is a breach of the intercreditor agreement by

the first lien creditor and should allow the second lien creditor to assume first lien priority. That

would be a result outside of the intent of the parties to the intercreditor agreement. Even though

obligations in excess of the first lien cap are not “first lien obligations”, the liens securing the

first lien obligations (including UCC Financing Statements and mortgages or deeds of trust) are

usually filed before the second lien UCC Financing Statements and mortgages or deeds of trust

and would therefore remain first priority liens under the “first to file” rule. There is no guidance

with respect to treatment of the excess in such a case.


                                                   8
     A common alternative in intercreditor agreements in which the parties and their counsel

have actually considered this issue is to assign third lien priority to all first lien obligations in

excess of the first lien cap. This most closely aligns with the parties’ expectations and assigns a

specific “waterfall” of priorities.


     The Model Intercreditor Agreement includes the following option for dealing with this

issue:


         “Subordination of Liens securing Excess First Lien Obligations  
         (a)     All Liens securing Second Lien Obligations [up to but not exceeding any Second 
         Lien Cap] will be senior in all respects and prior to any Lien on the Collateral securing 
         any Excess First Lien Obligations, as defined below (but only with respect to such excess 
         amounts),  and  all  Liens  securing  any  Excess  First  Lien  Obligations  will  be  junior  and 
         subordinate in all respects to any Lien securing a Second Lien Obligation [up to but not 
         exceeding the Second Lien Cap]. 
         (b)     Excess  First  Lien  Obligations  means  the  sum  of  the  principal  amount  of  the 
         loans  outstanding  under  the  First  Lien  Loan  Documents,  the  undrawn  amount  of  all 
         outstanding Letters of Credit, [and the outstanding amount of Obligations under Hedge 
         Agreements] that exceeds the First Lien Cap, plus interest and fees on such amounts.  
         (c)    With  respect  to  the  Excess  First  Lien  Obligations  and  Collateral  (including 
         Proceeds) therefor, mutatis mutandis 
         (1)      First  Lien  Claimholders  will  have  obligations  (other  than  the  obligations  in 
         respect  to  the  Standstill Period) analogous  to  the  obligations  Second  Lien  Claimholders 
         have under this Agreement in respect of the Second Lien Obligations [not in excess of the 
         Second Lien Cap], and  
         (2)     Second  Lien  Claimholders  will  have  rights  analogous  to  the  rights  First  Lien 
         Claimholders have under this Agreement with respect to the First Lien Obligations not in 
         excess of the First Lien Cap, and the Collateral (including Proceeds) therefor.  
         (d)       To the extent that Second Lien Claimholders hold a senior lien under this section 
         1.x, their duties (and limitations on their responsibilities, duties and liability) with respect 
         to  First  Lien  Claimholders,  Excess  First  Lien  Obligations  and  the  Collateral  (including 
         Proceeds) will (mutatis mutandis) be the same as the duties (and limitations) First Lien 
         Claimholders have as holders of a senior Lien with respect to Second Lien Claimholders 
         and the Collateral (including Proceeds) under this Agreement. 
         (e)    Nothing  in  this  section  will  waive  any  default  or  event  of  default  under  the 
         Second Lien Loan Documents resulting from  
         (1)      the incurrence of Obligations under the First Lien Loan Documents in excess of 
         the First Lien Cap, or  

                                                         9
       (2)     the grant of Liens under the First Lien Collateral Documents securing any such 
       excess amounts,  
       or the right of Second Lien Claimholders to exercise any rights and remedies under the 
       Second Lien Loan Documents as a result thereof.” 

No Contest Provisions


       Because an intercreditor agreement only binds the parties to the agreement, and not third

parties, a first lien lender or a second lien lender may try to get around the provisions of the

intercreditor agreement by enlisting the borrower or another creditor to challenge the lien priority

provisions or other provisions of the intercreditor agreement. In order to avoid these indirect

attacks on priority, perfection or enforceability of the provisions of the intercreditor agreement,

both the first and second lien lenders may want to include a “no contest” provision in the

intercreditor agreement. The “no contest” provision in the current draft of the Model

Intercreditor Agreement reads as follows:


       “Prohibition on Contesting Liens; No Marshalling  

       (a)      First  Lien  Agent  will  not  contest  in  any  proceeding  (including  an  Insolvency 
       Proceeding)  the  validity,  enforceability,  perfection,  or  priority  of  any  Lien  securing  a 
       Second Lien Obligation, but nothing in this section 1.8 will impair the rights of any First 
       Lien Claimholder to enforce this Agreement, including the priority of the Liens securing 
       the First Lien Obligations or the provisions for exercise of remedies.  
       (b)    Second  Lien Agent  will  not  contest  in any  proceeding  (including  an  Insolvency 
       Proceeding) the validity, enforceability, perfection, or priority of any Lien securing a First 
       Lien Obligation, but nothing in this section 1.8 will impair the rights of any Second Lien 
       Claimholder to enforce this Agreement, including the priority of the Liens securing the 
       Second Lien Obligations or the provisions for exercise of remedies. 
       (c)     Until the Discharge of First Lien Obligations, Second Lien Agent will not assert 
       any  marshalling,  appraisal,  valuation  or  other  similar  right  that  may  otherwise  be 
       available to a junior secured creditor.” 

Standstill Provisions




                                                       10
Another key component of an intercreditor agreement between first and second lien lenders is a

so-called “standstill” provision. If a first lien lender decides to permit a second lien on its

collateral, it is extremely important to the first lien lender that it not be forced into precipitous

action by the second lien lender if the borrower defaults and that it have the power under the

intercreditor agreement to control the enforcement process so that it will have the time and

contractual flexibility to reach a workout agreement with the borrower or, if a workout fails, to

enforce its lien and complete the foreclosure process.

       The second lien lender will be concerned, on the other hand, that delayed action by the

first lien lender may result in a deterioration of the value of the collateral and of the borrower’s

financial position. The typical solution to this issue in an intercreditor agreement is to give the

first lien lender a set period of time, typically 120-180 days (the “Standstill Period”), in which

the first lien lender will have the exclusive right to pursue remedies against the collateral. If the

first lien holder fails to act during the Standstill Period, then the junior creditor may pursue its

own remedies, including initiating a foreclosure proceeding on the shared collateral. However,

the intercreditor agreement typically provides that if the first lien lender initiates its remedies

during the Standstill Period, then it will continue to have an exclusive right to exercise those

remedies so long as it diligently pursues the exercise of its rights and remedies with respect to all

or any material portion of the shared collateral.

       The “standstill” provisions in the current Model Intercreditor Agreement are typical of
this type of provision and state that:
   “Who May Exercise Remedies  
       (a)     Subject  to  subsections  (b)  and  (c)  below,  until  the  Discharge  of  First  Lien 
       Obligations, First Lien Claimholders will have the exclusive right to  
                c
             (1)  ommence and maintain an Enforcement Action (including the rights to set‐off or 
       credit bid their debt),  




                                                     11
                 s
              (2)  ubject  to  section  1.10,  “Release  of  Liens  or  Guaranties,”  make  determinations 
         regarding the release or disposition of, or restrictions with respect to, the Collateral, and 
                 o
              (3)  therwise enforce the rights and remedies of a secured creditor under the UCC 
         and the Bankruptcy Laws of any applicable jurisdiction,  
         so long as the Liens granted to secure the Second Lien Obligations attach to the Proceeds 
         thereof, subject to the relative priorities described in section 1.1.  
         (b)    Notwithstanding  the  preceding  section  3.1(a),  Second  Lien  Claimholders  may 
         commence  an  Enforcement  Action  or  exercise  rights  with  respect  to  a  Lien  securing  a 
         Second Lien Obligation if 
               (1)  120‐180]  days  have  elapsed  since  Second  Lien  Agent  notified  First  Lien  Agent 
                  [
         that the Second Lien Obligations were due in full as a result of acceleration or otherwise 
         (the Standstill Period),  
                  F
               (2)  irst Lien Claimholders are not then diligently pursuing an Enforcement Action 
         with  respect  to  all  or  a  material  portion  of  the  Collateral  or  diligently  attempting  to 
         vacate any stay or prohibition against such exercise, and 
                  a
               (3)  ny acceleration of the Second Lien Obligations has not been rescinded[, and 
                  n
               (4)  o Grantor is then a debtor in an Insolvency Proceeding]. 2 ” 



         If a second lien lender accedes to the demand of a first lien lender for a Standstill Period,

it will still want to make sure that it is not worse off in terms of its remedies than it would be if it

were an unsecured creditor. The intercreditor agreement will typically give the second lien

lender the right to take certain specific actions to avoid losing its enforcement rights or lien rights

during the Standstill Period. Those rights may include the right of the second lien lender to file a

claim in any insolvency proceeding, to take actions to create, perfect or preserve its lien on the

collateral; to file a proof of claim in any bankruptcy proceeding; and to vote on any plan of

reorganization.

Modification Provisions in Intercreditor Agreements




2
  Second lien claimants will likely take the position that the bankruptcy laws should dictate what rights the first and 
second lien claimholders have if an insolvency proceeding is commenced, and that a blanket prohibition on remedies 
is not appropriate. 

                                                          12
        Both the senior and junior lien holder want the ability to modify their respective loan

documents without the consent of the other lender and, at the same time, to prevent the other

lender from modifying its loan documents in a way that prejudices the rights of the opposing

lender (for example, by increasing the amount of the loan). The usual compromise in an

intercreditor arrangement is to give both lenders approval rights over certain material

modifications to the other lender’s loan documents.



        The second lien lender may find itself in serious trouble if it fails to properly restrict the

first lien lender’s ability to modify the loan, especially any right to increase the amount of the

loan.   The case of Buena Vista Home Entertainment, Inc. v. Wachovia Bank, N.A. (In re

Musicland Holding Corp.), 374 B.R. 113 (S.D.N.Y. 2007) demonstrates how “boilerplate”

provisions in an intercreditor agreement may effectively permit a senior lender to dramatically

increase the amount of the senior loan with the result that the expectations of the second lien

lender are dashed and the second lien ends up “under water.” In that case in bankruptcy court,

the plaintiffs were a group of secured trade creditors who had a second lien position on inventory

which was subordinate to a first lien on all assets securing a $200 million revolving credit loan.

The trade creditors entered into an intercreditor agreement with the senior lenders in which they

consented to “any amendment, modification, supplement, extension, renewal or restatement of

any of the Revolving Loan Debt or the Revolver Credit Agreement.” The term “Revolving Loan

Debt” was defined broadly in the intercreditor agreement to refer to “any and all obligations,

liabilities and indebtedness of every kind, nature and description” owed by the borrowers at any

time to the senior lenders.




                                                 13
       When the borrowers needed additional funds which the senior lenders were unwilling to

provide, the borrowers turned to a third-party lender, Harris, N.A., who agreed to make a $25

million term loan. If made independently, the Harris loan would have been third in priority

behind the senior lenders and the trade creditors. To avoid that result, Harris and the senior

lenders amended the Revolver Credit Agreement to bring Harris into the syndicate of lenders as

a senior lender and to provide for a $25 million term loan. Because of the essentially unlimited

right to amend the Revolver Credit Agreement and the broad definition of “Revolving Loan

Debt”, the senior lenders argued that the term loan qualified as “Revolving Loan Debt” as

defined in the intercreditor agreement and that the intercreditor agreement clearly permitted any

and all amendments to the Revolver Credit Agreement. The trade creditors argued that they had

an expectation or understanding that they “bargained for a lien that was subordinate only to

obligations under the borrower’s existing revolving credit facility”. Pointing to what it called the

“unambiguous” provisions of the intercreditor agreement, the Bankruptcy Court held that the

provisions of the intercreditor agreement were sufficiently broad on their face to allow the senior

lenders to amend the Revolver Credit Agreement to bring in a term lender.

       The provisions in the current draft of the Model Intercreditor Agreement dealing with
amendments and refinancings provide as follows:
   “Permitted Modifications 
       Except as otherwise expressly provided in this section 2,  
                t
             (a)  he First Lien Obligations may be modified in accordance with their terms, and 
       their  aggregate  amount  increased  or  Refinanced,  without  notice  to  or  consent  by  any 
       Second Lien Claimholder, provided that the holders of any Refinancing Indebtedness (or 
       their agent) bind themselves in a writing addressed to Second Lien Claimholders to the 
       terms of this Agreement, and 
            (b)         the  Second  Lien  Obligations  may  be  modified  in  accordance  with  their 
       terms, and their aggregate amount increased or Refinanced, without notice to or consent 
       by any First Lien Claimholder. 




                                                     14
         However,  no  such  modification  may  alter  or  otherwise  affect  sections  1.1,  “Seniority  of 
         Liens  Securing  First  Lien  Obligations,”  or  1.8,  “Prohibition  on  Contesting  Liens;  No 
         Marshalling.”  
          
         Modifications Requiring Consent 3 
         Notwithstanding  the  preceding  section  2.1,  Second  Lien  Agent  must  consent  to  any 
         modification to  or  Refinancing  of  the  First  Lien  Obligations,  and  First  Lien  Agent  must 
         consent to any modification to or Refinancing of the Second Lien Obligations, that: 
         (a)        increases  the  aggregate  principal  amount  of  loans,  letters  of  credit,  bankers 
         acceptances, bonds, debentures, notes or similar instruments or other similar extensions 
         of  credit  [(but  excluding  obligations  under  Hedge  Agreements  or  Cash  Management 
         Agreements) [and, for Second Lien Obligations, any increase resulting from payment of interest 
         in  kind  permitted  under  the  Second  Lien  Credit  Agreement  as  in  effect  on  the  date  hereof)]]  or 
         commitments therefor beyond 
                  f
               (1)  or the First Lien Obligations, the First Lien Cap, or 
                 f
              (2)  or the Second Lien Obligations, the [amount permitted under the First Lien Credit 
         Agreement] OR [ Second Lien Cap]; 
         (b) increases  
                  t
              (1)  he  interest  rate  or  yield,  including  by  increasing  the  “applicable  margin”  or 
         similar component of the interest rate or by modifying the method of computing interest, 
         or  
                  a
               (2)   letter of credit, commitment, facility, utilization, or similar fee  
         so  that  the  combined  interest  rate  and  fees  are  increased  by  more  than  [_____]%  per 
         annum 4  in the aggregate [at any level of pricing], but excluding increases resulting from  
              (A)        increases in an underlying reference rate not caused by a modification or 
         Refinancing of such Obligations,  
              (B)         accrual of interest at the “default rate” defined in the loan documents at 
         the date hereof or, for a Refinancing, a rate that corresponds to the default rate, or  
              (C)            application of a pricing grid set forth in the loan documents at the date 
         hereof;  
         (c)    for the First Lien Obligations, extends a scheduled amortization payment or the 
         scheduled  final  maturity  date  of  the  First  Lien  Credit  Agreement  or  a  Refinancing 
         beyond  the  scheduled  final  maturity  date  of  the  Second  Lien  Credit  Agreement  or 
         Refinancing;  

3
  The scope of restrictions on amendments is highly negotiated and varies depending on the market in question. The
“laundry list” approach set forth here is frequently encountered in middle market transactions. Larger syndicated
loan transaction and bond second lien deals often have fewer restrictions on first lien claimholders. The restrictions
in this section may be largely addressed in the applicable loan documents as obligations of Borrower rather than in
the intercreditor agreement.
4
 The amount of any permitted percentage increase in the interest rate is subject to negotiation between the parties. A
maximum 2% per annum increase is a typical agreed-upon amount.

                                                              15
(d)     for the First Lien Obligations, modifies a mandatory prepayment provision in a 
manner [prohibited by the Second Lien Credit Agreement] OR [that allows amounts that would 
otherwise be required to be used to prepay First Lien Obligations to be retained by the Grantors to 
an amount greater than permitted under the Second Lien Credit Agreement]; 
(e)     for the First Lien Obligations, increases the amount of Proceeds of dispositions of 
Collateral that are not required to be used to prepay First Lien Obligations and that may 
be retained by the Grantors to an amount greater than permitted under the Second Lien 
Credit Agreement; 
(f)      for  the  First  Lien  Obligations,  modifies  a  covenant  or  event  of  default  that 
directly  restricts  one  or  more  Grantors  from  making  payments  under  the  Second  Lien 
Loan  Documents  that  would  otherwise  be  permitted  under  the  First  Lien  Loan 
Documents as in effect on the date hereof;  
(g)      for the Second Lien Obligations, modifies covenants, defaults or events of default 
to make them materially more restrictive as to any Grantor, except for modifications to 
match  changes  made  to  the  First  Lien  Obligations  so  as  to  preserve,  on  substantially 
similar  economic  terms,  any  differential  that  exists  on  the  date  hereof  between  the 
covenants,  defaults  or  events  of  default  in  the  First  Lien  Loan  Documents  and  the 
covenants, defaults or events of default in the Second Lien Loan Documents;  
(h)      for the Second Lien Obligations, brings forward any date upon which a payment 
of  principal  or  interest  is  due,  or  otherwise  decreases  the  weighted  average  life  to 
maturity;  
(i)     for  the  Second  Lien  Obligations,  changes  a  prepayment,  redemption,  or 
defeasance provisions so as to require a new payment or accelerate an existing payment 
Obligation; or 
(j)       for the Second Lien Obligations,  
       c
    (1)  hanges  a  term  that  would  result  in  a  default  under  the  First  Lien  Credit 
Agreement,  
          i
       (2)  ncreases the Obligations of a Grantor, or  
        c
     (3)  onfers  additional  rights  on  a  Second  Lien  Claimholder  in  a  manner  materially 
adverse to a First Lien Claimholder.  
[ALTERNATIVE SECTION FOR ASSET‐BASED LENDING TRANSACTION] 
      [(*)          for  the  First  Lien  Obligations,  increases  the  Advance  Rate  applicable  to  the 
Borrowing  Base  to  a  rate  higher  than  the  Advance  Rate  on  the  date  hereof,  or  modifies  the 
definitions of “Borrowing Base,” “Eligible Account,” “Eligible Inventory,” or “Reserves” in the 
First Lien Credit Agreement on the date hereof so as to increase the amount of credit available to 
Borrower,  provided,  that  the  First  Lien  Collateral  Agent’s  discretion  to  establish  additional 
reserves,  to  release  reserves  and  to  determine  eligibility  will  not  be  affected  or  limited  in  any 
manner.] 
[END OF ALTERNATIVE SECTION]” 




                                                      16
Intercreditor Issues in Bankruptcy

           Another area of dispute between first and second lien holders are the respective rights of
the parties in bankruptcy. The first lien lender will often insist that the second lien lender waive
certain of its rights in any bankruptcy proceeding.                             For example, in most intercreditor
arrangements the first lien lender will require that the junior lien holder agree that it will not
contest any request by the first lien holder for “adequate protection” and that it will not object to
the first lien lender’s use of cash collateral or to any DIP financing under Section 364 of the
United States Bankruptcy Code.


           The Model Intercreditor Agreement permits the first lien lender to seek use of cash
collateral and DIP financing on the following terms:


      Cash Collateral and DIP Financing 
           (a)  Until  the  Discharge  of  First  Lien  Obligations,  if  an  Insolvency  Proceeding  has 
           commenced,  Second  Lien  Agent,  as  holder  of  a  Lien  on  the  Collateral,  will  not  contest, 
           protest or object to, and will be deemed to have consented to,  
           (1)  any  use,  sale  or  lease  of  “cash  collateral”  (as  defined  in  section  363(a)  of  the 
           Bankruptcy Code), and  
           (2) Borrower or any other Grantor obtaining DIP Financing  
           if First Lien Agent consents 5  in writing to such use, sale or lease or DIP Financing,  
           provided that 
           (i) Second Lien Agent otherwise retains 6  its Lien on the Collateral, [and] 
           (ii) any Second Lien Claimholder may seek adequate protection as permitted by section 
           6.4 and, if such adequate protection is not granted, Second Lien Agent may object under 
           this section 6.1 solely on such basis [, and  
           (iii)  after  taking  into  account  the  use  of  cash  collateral  and  the  principal  amount  of  any  DIP 
           Financing (after giving effect to any Refinancing of First Lien Obligations) on any date, the sum 
           of the then outstanding principal amount of any First Lien Obligations and any DIP Financing 




5
    See note to section 6.2 below.
6
 First lien claimholders will want no interference with the use of cash collateral, but second lien claimholders will
not want to have their other interests “primed” or have their liens stripped, by reason of the broad concept of “use”
of collateral.

                                                                17
         does not exceed the First Lien Cap 7  on such date and such DIP Financing is pari passu with or 
         superior in priority to the then outstanding First Lien Obligations]. 8   
         Upon written request from First Lien Agent, Second Lien Agent, as holder of a Lien on 
         the Collateral, will join any objection by First Lien Agent to the use, sale or lease of cash 
         collateral  for  any  purpose  other  than  adequate  protection  payments  to  Second  Lien 
         Claimholders. 9 
         (b) [Any customary “carve‐out” or other similar administrative priority expense or claim 
         consented to in writing by First Lien Agent to be paid prior to the Discharge of First Lien 
         Obligations will be deemed for purposes of section 6.1(a)  
         (1) to be a use of cash collateral, and  
         (2) not to be a principal amount of DIP Financing  
         at the time of such consent.] 10 
         No Second Lien Claimholder may provide DIP Financing to a Borrower or other Grantor 
         secured  by  Liens  equal  or  senior  in  priority  to  the  Liens  securing  any  First  Lien 
         Obligations[, provided that if no First Lien Claimholder offers to provide DIP Financing to 
         the  extent  permitted  under  section  6.1(a),  then  a  Second  Lien  Claimholder  may  seek  to 
         provide  such  DIP  Financing  secured  by  Liens  equal  or  senior  in  priority  to  the  Liens 
         securing any First Lien Obligations, and First Lien Claimholders may object thereto.] 11 




7
  As noted above in connection with the definition of “First Lien Cap,” it may be desirable to formulate the cap
differently in the context of a DIP financing. Common approaches include (i) an incremental cushion for a DIP
financing, or (ii) a cap that is the lesser of the first lien cap and some cushion over outstanding first lien obligations
at the commencement of the case.
8
 This clause is applicable when the first lien cap is tied to a borrowing base. Consideration should be given as to
whether cash collateral objections could be asserted by second lien agent if the amount of collateral diminution,
when added to the first lien obligations, would exceed the first lien cap.
9
  The market has developed to generally give first lien claimholders the power to compel second lien claimholders to
consent to the diminution of collateral, in the form of use of cash collateral or permitting additional secured
financing even if the first lien obligations are sufficiently oversecured that first lien claimholders are otherwise not
motivated to police the excess use of cash collateral or DIP financing. On the other hand, the market has not
similarly developed to give first lien claimholders the ability to use second lien claimholders’ rights of adequate
protection in order to more effectively prevent the diminution of collateral. This draft proposes both sets of rights in
favor of first lien claimholders.
10
   Some intercreditor agreements attempt to restrict first lien claimholders from consenting to the subordination of
the lien securing first lien obligations and, in turn, such agreements often exclude DIP financing from the scope of
such restriction. However, the treatment of “carve-outs” is often omitted or not considered the same as if first lien
agent made advances to fund retainers for professionals. This form treats carve-outs as a use of collateral, but not as
though they are the same as if being incurred or used as of the date such “carve-out” obligations are incurred. An
alternative approach would be to treat administrative carveouts as extensions of credit that need to be capped. If this
approach is taken, additional consideration should be given to the first lien cap and the inclusion of additional,
incremental amounts in the event of an insolvency proceeding, and to the need to reflect clear dollar limits on
administrative carveouts in the DIP orders.
11
  First lien claimholders may want an absolute bar on second lien claimholders attempting to provide “priming”
DIP financing, while second lien claimholders will generally resist any limitation against DIP financing due to the
ability of third parties to propose the same. A compromise position is bracketed.

                                                            18
        [(c) Nothing in this section 6.1 limits or impairs the right of Second Lien Agent to object to any 
        motion regarding DIP Financing (including a DIP Financing proposed by one or more First Lien 
        Claimholders) or cash collateral to the extent that  
        (1) the objection could be asserted in an Insolvency Proceeding by unsecured creditors generally[, 
        is consistent with the other terms of this section 6.1, and is not based on the status of any Second 
        Lien Claimholder as holder of a Lien], or  
        (2) the DIP Financing does not meet the requirements of section 6.1(a).] 12 

        Despite the frequency of these types of agreements and waivers in intercreditor

agreements, there have been only a relatively few cases addressing the enforceability of such

provisions in bankruptcy and those cases have reached differing results. Section 510(a) of the

Bankruptcy Code acknowledges the continued effectiveness in bankruptcy of a “subordination

agreement”. However, courts have reached different results from each other when the rights

waived by the second lien lender in the intercreditor agreement involve basic bankruptcy rights

beyond lien subordination or payment subordination.


                 In Bank of America, Nat’l Ass’n v. North LaSalle St. Ltd. P’ship (In re 203 N.

LaSalle St. P’ship), 246 B.R. 325, 331 (Bankr. N.D. Ill. 2000), for example, the intercreditor

agreement granted the first lien creditor the right to vote the junior lien holder’s claims in

bankruptcy. The Bankruptcy Court held that the subordination agreement could not affect the

voting rights of the junior lienor in bankruptcy pursuant to Section 510(a) of the Bankruptcy

Code, in disregard of Section 1126(a) of the Bankruptcy Code which provides that the holder of

a claim may vote to accept or reject a plan under Chapter 11.


        On the other hand, in Blue Ridge Investors, II, LP v. Wachovia Bank, N.A. (In re Aerosol

Packaging, LLC), 362 B.R. 43 (Bankr. N.D. Ga. 2006), the intercreditor agreement granted the


12
  Second lien claimholders may seek to preserve unsecured creditor objections to a DIP financing, while first lien
claimholders may expect second lien claimholders not to object in any capacity so long as a DIP financing satisfies
the parameters specified in the intercreditor agreement.

                                                        19
first lien lender the right to vote the claims of the second lien holder in any bankruptcy

proceeding. When the debtor proposed a plan under Chapter 11 of the Bankruptcy Code, the

second lien lender voted against the plan and claimed that the voting restriction in the

intercreditor agreement was invalid under the authority of LaSalle and similar cases. The first

lien lender used the grant of voting rights by the second lien lender in the intercreditor agreement

to vote in favor of the plan on behalf of the second lien lender.          The Bankruptcy Court

interpreted the scope of Section 510(a) broadly as permitting the enforcement of subordination

agreements (including delegation of voting rights) so long as such agreements are enforceable

under applicable nonbankruptcy law. Since the subordination agreement was enforceable under

applicable Georgia nonbankruptcy law, the Bankruptcy Court upheld the right of the first lien

lender to vote on behalf of the second lien lender pursuant to the delegation of authority in the

intercreditor agreement.


Conclusion:


        Representation of either a first lien lender or a second lien lender in negotiating an

intercreditor arrangement that protects your client’s interest while recognizing the legitimate

interests and concerns of the other party in order to actually reach an agreement can be difficult

in ordinary times. In extraordinary times like these when the agreement negotiated by the parties

may well be tested in litigation or bankruptcy and when the price of missing an important point

may be your client’s loss of lien priority or an essential protection in bankruptcy, the stakes are

very high. The hope of the Task Force is that the Model Intercreditor Agreement will introduce

practical issues and help guide practitioners representing first and second lien creditors through

some of the difficult times that still lie ahead.



                                                    20
Dealing with Intercreditor Issues
   in Today's Loan Markets
  The Role of the ABA Model Intercreditor
                 Agreement

  ABA Commercial Finance Committee Fall Meeting
                 November 4, 2009
Presenters

Gary D. Chamblee                        Randall Klein
Womble Carlyle Sandridge & Rice, PLLC   Goldberg Kohn
gchamblee@wcsr.com                      randall.klein@goldbergkohn.com




Richard K. Brown                        Robert L. Cunningham
Winston & Strawn LLP                    Gibson, Dunn & Crutcher LLP
rbrown@winston.com                      rcunningham@gibsondunn.com




                                                                         2
        ABA Model Intercreditor
        Agreement Task Force
•   The dollar volume of second lien loans grew
    from $8 billion in 2003 to over $29 billion in
    2006
•   In the second quarter of 2007, second lien
    loan volume reached $15.21 billion
•   By the second quarter of 2009, second lien
    issuance was under $300 million

                                                 3
     ABA Model Intercreditor
      Agreement Task Force

•   Despite rapid growth, there has been little
    standardization of terms
•   Certain issues arise in nearly every second lien
    transaction
•   Task Force was formed in 2007 with the goal of
    developing a balanced, market-based model form
    of intercreditor agreement

                                                       4
      ABA Model Intercreditor
       Agreement Task Force

•   Current Task Force membership exceeds 200
    members
•   Final draft with commentary is nearing
    completion.
•   Model Agreement provides needed guidance
    to practitioners

                                                5
          First Lien Debt Caps

•   Extent of First Lien priority
•   Scope of First Lien obligations
•   Adequate First Lien "cushion"




                                      6
         First Lien Debt Caps

•   DIP financing
•   Waterfall
•   Second Lien debt cap




                                7
    Second Lien Standstill Provisions

•     Standstill period
•     Continuation of standstill
•     Exercise of unsecured creditor remedies




                                                8
       Coercive DIP Roll-Ups
•   Lyondell, Aleris and others
•   100% to amend waterfall?
•   100% to amend pro rata sharing?
•   100% to subordinate liens?
•   Required lenders “consent” to being primed
•   Bankruptcy Court indifference

                                                 9
                     Priming DIPs

•   The relevant positions:
        (i)   Prohibition on Second Lien priming First Lien
        (ii) Requirement to support DIP proposed by First Lien
•   "Crossover" First Lien /Second Lien deals
•   Enforceability and damages
•   First Lien priming First Lien
•   Third party proposed DIPs

                                                                 10
   Consent to First Lien Cash
Collateral Use and DIP Financing

•   Typical intercreditor agreement provisions
•   Real world impact
•   Enforceability and damages
•   Tousa


                                                 11
          Section 363 Sales

•   The Chrysler syndrome - So what's new?
•   Credit Agreement - lender "drag along"
    problems
•   Court interpretation of intercreditor agreement
    waivers




                                                 12
    Collateral Valuation Issues

•   Allocation of sale proceeds – When is it an
    issue?
•   Some solutions?
•   Valuation challenges – Idearc and Ion




                                                  13
     Permitted Plan Distributions
•   Post-reorganization liens granted on same
    collateral to secure 1st and 2nd priority debt
•   Other property or transfers on account of
    “secured claim” – are these “proceeds”?
•   Non-cash consideration received at 363 sale
    (WestPoint Stevens)
•   Equity distributions before the 1st lien debt has
    been “paid in full”
                                                        14
WORKOUTS THAT WORKED OUT - Operating Companies
     Successfully Navigating Troubled Waters
                            UNITED STATES BANKRUPTCY COURT
                               NORTHERN DISTRICT OF OHIO
                                    EASTERN DIVISION

 In re                                                 Jointly Administered Under
                                                       Case No. 03-44577
 SNYDERS DRUG STORES, INC., and
 DRUG EMPORIUM, INC., et al.,                          Chapter 11

                                                       Successor to Judge Bodoh
                          Debtors.                     (Judge Pat E. Morgenstern-Clarren)




                   THIRD AMENDED JOINT PLAN

                  Thomas J. Salerno
                   Jordan A. Kroop                                    Michael Gallo
                   Craig D. Hansen                                  Timothy Reardon
         SQUIRE, SANDERS & DEMPSEY L.L.P.                 NADLER NADLER & BURDMAN CO., LPA
          Two Renaissance Square, Suite 2700                      20 Federal Plaza West
              40 North Central Avenue                                   Suite 600
               Phoenix, Arizona 85004                           Youngstown, Ohio 44503
                    (602) 528-4000                                   (330) 744-0247

          Counsel to Snyders Drug Stores, Inc.                 Counsel to Drug Emporium, Inc.
                   and Western Drug                                 and its Subsidiaries

                                         Scott L. Hazan
                                         Brett H. Miller
                          OTTERBOURG, STEINDLER, HOUSTON & ROSEN, P.C.
                                        230 Park Avenue
                                   New York, New York 10169
                                         (212) 661-9100

                                       Counsel to Official Committee
                                          of Unsecured Creditors



 Dated: March 19, 2004




Phoenix/277611.1
                                                                TABLE OF CONTENTS
                                                                                                                                                                Page

INTRODUCTION ....................................................................................................................................................... 1
ARTICLE 1.  DEFINITIONS AND RULES OF INTERPRETATION................................................................ 2
ARTICLE 2.  SUBSTANTIVE CONSOLIDATION OF ESTATES.................................................................. 13
      2.01. Request for Substantive Consolidation. ........................................................................................ 13
      2.02. Effect of Substantive Consolidation.............................................................................................. 13
      2.03. No Impact On Secured Claims...................................................................................................... 13
ARTICLE 3.  TREATMENT OF UNCLASSIFIED CLAIMS ........................................................................... 13
      3.01. Unclassified Claims. ..................................................................................................................... 13
      3.02. Allowed Administrative Claims.................................................................................................... 13
      3.03. Preserved Ordinary Course Administrative Claims. ..................................................................... 14
      3.04. Allowed Priority Tax Claims. ....................................................................................................... 14
      3.05. Professional Fee Claims................................................................................................................ 14
      3.06. Post-Effective Date Professional Fees. ......................................................................................... 14
      3.07. Payment of Interim Amounts. ....................................................................................................... 15
      3.08. Lessor Substantial Contribution Claim. ........................................................................................ 15
ARTICLE 4.  CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS................................................. 15
      4.01. Summary of Classification............................................................................................................ 15
      4.02. Specific Classification................................................................................................................... 16
ARTICLE 5.  TREATMENT OF CLAIMS AND EQUITY INTERESTS ......................................................... 17
      5.01. Class 1 – DIP Claim...................................................................................................................... 17
      5.02. Class 2 – DIP Subrogation Claims................................................................................................ 17
      5.03. Class 3 – Priority Claims. ............................................................................................................. 17
      5.04. Class 4 – Reclamation Claims....................................................................................................... 17
      5.05. Class 5 – Secured Tax Claims....................................................................................................... 18
      5.06. Class 6 – TD Loan Claim.............................................................................................................. 18
      5.07. Class 7 – McKesson Term Loan Claim. ....................................................................................... 19
      5.08. Class 8 – McKesson Trade Claim. ................................................................................................ 20
      5.09. Class 9 – Miscellaneous Secured Claims. ..................................................................................... 21
      5.10. Class 10 – General Unsecured Claims and Rejection Claims. ...................................................... 22
      5.11. Class 11 – Other Acquirer Claims. ............................................................................................... 22
      5.12. Class 12 – Equity Interests and Equity Related Claims. ............................................................... 22
ARTICLE 6.  IMPLEMENTATION OF PLAN ................................................................................................. 22
      6.01. New McKesson Supply Agreement. ............................................................................................. 22
      6.02. New DIP LCs................................................................................................................................ 22
      6.03. Subordinated Debt......................................................................................................................... 23
      6.04. Plan Funding. ................................................................................................................................ 23
      6.05. Exit Financing Facility.................................................................................................................. 24
      6.06. Certificate of Incorporation and By-Laws. ................................................................................... 24
      6.07. Private Company Status. ............................................................................................................... 24
      6.08. Cancellation of Securities, Instruments and Agreements.............................................................. 24
      6.09. Effectiveness of Securities, Instruments, Agreements and Documents. ....................................... 24
      6.10. No Corporate Action Required ..................................................................................................... 24
      6.11. Directors and Officers................................................................................................................... 24
      6.12. Operation Pending Effective Date................................................................................................. 25
      6.13. Oversight Committee. ................................................................................................................... 25
      6.14. Assumption of Restructuring Agreement...................................................................................... 25
ARTICLE 7.  EXECUTORY CONTRACTS AND UNEXPIRED LEASES ..................................................... 25
      7.01. Assumption or Rejection of Executory Contracts and Unexpired Leases..................................... 25
      7.02. Approval of Assumption or Rejection. ......................................................................................... 26
      7.03. Cure of Defaults. ........................................................................................................................... 26
      7.04. Rejection Damages Bar Date. ....................................................................................................... 26
      7.05. Carlton Financial Rejection Damages Claim. ............................................................................... 26
      7.06. Indemnification Obligations.......................................................................................................... 27
      7.07. Benefit Plans. ................................................................................................................................ 27
ARTICLE 8.  SECURITIES TO BE ISSUED UNDER THE PLAN .................................................................. 28
      8.01. New Common Stock. .................................................................................................................... 28
      8.02. Stock Transfer Restrictions. .......................................................................................................... 28
      8.03. McKesson Warrant. ...................................................................................................................... 28


Phoenix/277611.1
                                                           TABLE OF CONTENTS (cont.)
                                                                                                                                                                Page

         8.04.    Section 1145 Exemption. .............................................................................................................. 29
ARTICLE 9.        CONFIRMATION WITHOUT ACCEPTANCE FROM ALL IMPAIRED CLASSES .............. 29
ARTICLE 10. DETERMINATION OF CLAIMS ............................................................................................... 29
         10.01. Objections to Claims..................................................................................................................... 29
         10.02. Disputed Claims Reserve. ............................................................................................................. 29
         10.03. Distributions upon Allowance or Disallowance of Disputed Claims............................................ 29
         10.04. Contingent Claims......................................................................................................................... 30
ARTICLE 11. PRESERVATION OF LITIGATION CLAIMS........................................................................... 30
         11.01. Preserved Litigation Claims.......................................................................................................... 30
         11.02. Prosecution of Preserved Litigation Claims.................................................................................. 30
         11.03. Distribution of Preserved Litigation Claims Proceeds. ................................................................. 30
         11.04. Preservation of Insurance.............................................................................................................. 30
ARTICLE 12. CONDITIONS PRECEDENT ...................................................................................................... 30
         12.01. Conditions to Confirmation. ......................................................................................................... 30
         12.02. Conditions to Effectiveness........................................................................................................... 32
         12.03. Waiver of Conditions. ................................................................................................................... 32
ARTICLE 13. TITLE TO PROPERTY; DISCHARGE; INJUNCTION; EXCULPATION ............................... 33
         13.01. Vesting of Assets. ......................................................................................................................... 33
         13.02. Discharge. ..................................................................................................................................... 33
         13.03. Injunction. ..................................................................................................................................... 33
         13.04. Exculpation. .................................................................................................................................. 34
         13.05. Releases. ....................................................................................................................................... 34
         13.06. Preserved Litigation Claims and Disputed Claims Resolution. .................................................... 35
         13.07. Third Party Action. ....................................................................................................................... 35
         13.08. Preservation of Insurance.............................................................................................................. 35
ARTICLE 14. RETENTION OF JURISDICTION .............................................................................................. 35
         14.01. Jurisdiction.................................................................................................................................... 35
ARTICLE 15. AMENDMENT AND WITHDRAWAL OF PLAN..................................................................... 36
         15.01. Amendment of Plan. ..................................................................................................................... 36
         15.02. Revocation or Withdrawal of Plan. ............................................................................................... 37
ARTICLE 16. MISCELLANEOUS ..................................................................................................................... 37
         16.01. Effectuating Documents; Further Transactions; Timing............................................................... 37
         16.02. Exemption From Transfer Taxes. ................................................................................................. 37
         16.03. Binding Effect............................................................................................................................... 37
         16.04. Governing Law. ............................................................................................................................ 37
         16.05. Modification of Treatment of Claims............................................................................................ 37
         16.06. Setoffs. .......................................................................................................................................... 37
         16.07. Notices. ......................................................................................................................................... 38
         16.08. Delivery of Notices. ...................................................................................................................... 39
         16.09. Termination of Statutory Committees........................................................................................... 39
         16.10. Severability. .................................................................................................................................. 39
         16.11. Plan Documents. ........................................................................................................................... 39
         16.12. Inconsistency................................................................................................................................. 39
         16.13. Subordination................................................................................................................................ 39
         16.14. Withholding and Reporting Requirements.................................................................................... 40
         16.15. Post-Effective Date Fees; Final Decree. ....................................................................................... 40
         16.16. De Minimis Distributions.............................................................................................................. 40
         16.17. Method of Payment; Payments, Filings, and Notices Only on Business Days. ............................ 40
Exhibits to Plan:
Exhibit A         Reorganized Snyders Certificate
Exhibit B         Reorganized Snyders By-Laws
Exhibit C         Preserved Litigation Claims
Exhibit D         McKesson Warrant
Exhibit E         Restructuring Agreement
Exhibit F         Assumed Executory Contracts and Unexpired Leases
Exhibit G         Rejected Executory Contracts and Unexpired Leases
Exhibit H         New Subordinated Debt Promissory Note



Phoenix/277611.1                                                                  ii
                                            INTRODUCTION

         DE OF NORTHEASTERN OHIO, INC., an Ohio corporation; DRUG EMPORIUM, INC., a
Delaware corporation; DE HOLDING COMPANY, INC., a Delaware corporation, HOUSTON
VENTURE, INC., an Ohio corporation; EMPORIUM VENTURE, INC., an Ohio corporation; RJR
DRUG DISTRIBUTORS, INC., a Delaware corporation; DRUG EMPORIUM OF MICHIGAN, INC., a
Delaware corporation; DE MICHIGAN MANAGEMENT CO., a Delaware corporation; DRUG
EMPORIUM OF MARYLAND, INC., a Delaware corporation; DRUG EMPORIUM EXPRESS, INC., a
Delaware corporation; SNYDERS DRUG STORES, INC., a Minnesota corporation; WESTERN DRUG
OF BILLINGS, INC., a Montana corporation; and SNYDERS WESTERN DRUG L.L.C.; debtors and
debtor-in-possession in the above-captioned, jointly-administered Chapter 11 cases and the Official
Committee of Unsecured Creditors appointed by the United States Trustee in the above-captioned,
jointly-administered Chapter 11 cases propose the following joint plan for the resolution of the Debtors’
outstanding claims and equity interests. All Creditors, Equity Interest holders, and other parties-in-interest
should refer to the Disclosure Statement for a discussion of the Debtors’ history, businesses, properties,
results of operations, and events leading up to the proposal of this Plan and for a summary and analysis of
this Plan and certain related matters.

        All holders of Claims against, and Equity Interests in, the Debtors are encouraged to read
this Plan, the Disclosure Statement and the related solicitation materials in their entirety before
voting to accept or reject this Plan.

        Subject to the restrictions on modifications set forth in Section 1127 of the Bankruptcy Code (as
defined below), Rule 3019 of the Federal Rules of Bankruptcy Procedure, and Section 15.01 of this Plan,
the Debtors expressly reserve the right to alter, amend, or modify this Plan with the prior written consent
of the Committee one or more times before its substantial consummation.




Phoenix/277611.1                                      1
                                       ARTICLE 1.
                        DEFINITIONS AND RULES OF INTERPRETATION

         For purposes of this Plan, except as expressly provided or unless the context otherwise requires,
all capitalized terms not otherwise defined have the meanings ascribed to them in Article 1 of this Plan.
Any term used in this Plan that is not defined in this Plan but is defined in the Bankruptcy Code or the
Bankruptcy Rules retains the meaning ascribed to that term in the Bankruptcy Code or the Bankruptcy
Rules. Whenever the context requires, terms include the plural as well as the singular, the masculine
gender includes the feminine gender, and the feminine gender includes the masculine gender.

         As used in this Plan, the following terms have the following meanings:

         1.01. Acquirer. KHMI, together with its Affiliates and/or permitted assignees.

        1.02. Acquirer Subrogation Claim. The Claim of the Acquirer against the Estates created by
CIT’s drawing on the Katz Letters of Credit and the New DIP LCs in connection with the satisfaction of
the DIP Claim as set forth in Section 5.01 of this Plan.

        1.03. Acquirer Trade Debt Participation Agreement. The Subordinated Participation
Agreement dated as of September 11, 2003 between the Acquirer and McKesson under which Acquirer
purchased a subordinated participation of $10,000,000 in the McKesson Trade Claim in exchange for a
cash payment by the Acquirer to McKesson of $10,000,000.

        1.04. Acquirer Trade Debt Participation Claim. The Claim of the Acquirer in the amount of
$10,000,000 resulting from the Acquirer’s performance of its obligations under the Acquirer Trade Debt
Participation Agreement.

         1.05. Administrative Claim. A Claim for any cost or expense of administration of the Chapter
11 Cases Allowed under Section 503(b), 507(b) or 546(c)(2) of the Bankruptcy Code and entitled to
priority under Section 507(a)(1) of the Bankruptcy Code, including, without limitation: (a) fees payable
under 28 U.S.C. § 1930; (b) actual and necessary costs and expenses incurred in the ordinary course of
the Debtors’ business; (c) actual and necessary costs and expenses of preserving the Estates or
administering the Chapter 11 Cases; (d) all Professional Fee Claims to the extent Allowed by Final Order
under Section 330, 331, or 503 of the Bankruptcy Code; and (e) the Lessor Substantial Contribution
Claim.

       1.06. Administrative Claims Bar Date. The first Business Day that is 30 days after the
Confirmation Date.

        1.07. Administrative Fee Order. The Administrative Order Under 11 U.S.C. §§ 105(a) and 331
Establishing Procedures for Interim Compensation and Reimbursement of Expenses for Professionals,
entered by the Bankruptcy Court on October 9, 2003.

         1.08. Affiliate. With respect to any specified Person, any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with such Person and, with respect
to any specified natural Person, any other Person having a relationship by blood, marriage, or adoption
not more remote than first cousins with such natural Person. For purposes of this definition, “controlling”
(including, with correlative meanings, the terms “controlled by” and “under direct or indirect common
control with”), as used with regard to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement, or otherwise.


Phoenix/277611.1                                     2
          1.09. Allowed. (a) A Claim that has been allowed by a Final Order (including the Claim of CIT
and the DIP Lenders under the DIP Facility) or (b) with respect to any Claim against, or Equity Interest
in, any of the Debtors: (i) (A) proof of which, request for payment of which, or application for allowance
of which, was filed or deemed filed with the Bankruptcy Court on or before the Bar Date, the
Administrative Claims Bar Date, the Professional Fee Bar Date, or the Rejection Damages Bar Date, as
applicable, for filing proofs of claim or equity interest or requests for payment for Claims of such type
against any of the Debtors or such date as established by order of the Bankruptcy Court, even if such date
is after the Bar Date, the Administrative Claims Bar Date, the Professional Fee Bar Date, or the Rejection
Damages Bar Date, as applicable; or (B) a Claim or Equity Interest that is allowed by the Debtors with the
prior written consent of the Committee or such other procedure as the Committee finds appropriate in
any contract, instrument, indenture, or other agreement entered into in connection with this Plan; and (ii)
in each case, a Claim or Equity Interest as to which no objection to its allowance or motion to estimate for
purposes of allowance has been interposed within the applicable period of limitation fixed by this Plan,
the Bankruptcy Code, the Bankruptcy Rules, or the Bankruptcy Court or, as to which any such objection
or motion has been interposed, to the extent allowed by a Final Order. The term “Allowed,” when used to
modify a reference in this Plan to any Claim, Equity Interest, Class of Claims, or Class of Equity
Interests, means a Claim or Equity Interest (or any Claim or Equity Interest in any such Class) that is so
allowed (e.g., an “Allowed Secured Claim” is a Claim that has been allowed to the extent of the value, as
determined by the Bankruptcy Court under Section 506(a) of the Bankruptcy Code, of any interest in
property of the Estate securing such Claim).

        1.10. Avoidance Actions. All statutory causes of actions preserved for the Estates under Sections
510, 542, 543, 544, 545, 547, 548, 549 and 550 of the Bankruptcy Code.

         1.11. Ballot. The form of ballot or ballots distributed with the Disclosure Statement to holders of
Claims and Equity Interests entitled to vote on this Plan on which an acceptance or rejection of this Plan
is to be indicated.

        1.12. Bankruptcy Code. Title 11 of the United States Code, 11 U.S.C. §§ 101-1330, as amended
from time to time and as applicable to the Chapter 11 Cases.

        1.13. Bankruptcy Court. The United States District Court for the Northern District of Ohio,
Eastern Division having jurisdiction over the Chapter 11 Cases and, to the extent of any reference under
28 U.S.C. § 157, the bankruptcy unit of such District Court under 28 U.S.C. § 151.

       1.14. Bankruptcy Rules. Collectively, the Federal Rules of Bankruptcy Procedure as
promulgated under 28 U.S.C. § 2075 and any Local Rules of the Bankruptcy Court, as applicable to the
Chapter 11 Cases.

         1.15. Bar Date. The date or dates fixed by the Bankruptcy Court by which Persons asserting a
Claim against, or Equity Interest in, the Debtors (except Administrative Claims and Claims arising from
the rejection of executory contracts and unexpired leases in accordance with Section 7.04 of this Plan) are
required to file a proof of claim or equity interest or a request for payment or be forever barred from
asserting a Claim against or Equity Interest in the Debtors or their property, from voting on this Plan, and
from sharing in distributions under this Plan.

        1.16. Benefit Plans. All benefit plans of whatever type or nature that the Debtors provided to
their employees, whether now in existence or previously terminated, including, but not limited to, all
401(k) plans, medical insurance plans, accidental death and dismemberment plans, disability plans, tuition
reimbursement plans, dental insurance plans, and life insurance plans, and any rights of employees to
extended coverage arising from any Benefit Plan whether under the terms of the Benefit Plans, under
COBRA, or under applicable law.



Phoenix/277611.1                                     3
       1.17. Business Day. Any day other than a Saturday, Sunday, or legal holiday (as defined in
Bankruptcy Rule 9006).

        1.18. Cash. Currency, checks drawn on a bank insured by the Federal Deposit Insurance
Corporation, certified checks, money orders, negotiable instruments, and wire transfers of immediately
available funds.

         1.19. CBAs. Collectively, the Warehouse CBA, Pharmacist CBA, and Clerk CBA.

       1.20. Chapter 11 Cases. The jointly administered cases under Chapter 11 of the Bankruptcy
Code in which the Debtors are the debtors and debtors-in-possession, pending before the Bankruptcy
Court.

        1.21. CIT. CIT Group/Business Credit, Inc., as administrative agent for all the DIP Lenders
under the DIP Facility.

        1.22. Claim. A claim against any Debtor or its property as defined in Section 101(5) of the
Bankruptcy Code, including, without limitation: (a) any right to payment, whether or not such right is
reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured, or unsecured arising at any time before the Effective Date; or
(b) any right to an equitable remedy for breach of performance if such breach gives rise to a right to
payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed, secured, or unsecured.

         1.23. Class. A category consisting of holders of Claims or Equity Interests substantially similar in
nature to the Claims or Equity Interests of other holders placed in that category, as designated in Article 4
of this Plan.

        1.24. Class 10 Fund. Cash in the amount of $4,750,000.00 plus any excess from the Reclamation
Fund in accordance with Section 6.04 of this Plan.

       1.25. Clerk CBA. The collective bargaining agreement titled Retail Clerks Agreement Between
Snyder Drug Stores, Inc. (Minneapolis, Minnesota) and United Food and Commercial Workers Local
#653 (June 10, 2001-June 5, 2004).

        1.26. COBRA. The Consolidated Omnibus Budget Reconciliation Act of 1986, as amended, and
the regulations promulgated under that act.

        1.27. Collateral. Any property or interest in property of the Estates subject to a Lien to secure the
payment or performance of a Claim, the Lien not being subject to avoidance under the Bankruptcy Code
or otherwise invalid under the Bankruptcy Code or applicable state law.

        1.28. Committee. The Official Committee of Unsecured Creditors appointed in the Chapter 11
Cases in accordance with Bankruptcy Code § 1102, as the same may be amended from time to time, and a
co-proponent of this Plan.

         1.29. Confirmation Date. The date on which the Bankruptcy Court enters the Confirmation
Order.

        1.30. Confirmation Hearing. The hearing held by the Bankruptcy Court to consider
confirmation of this Plan under Section 1129 of the Bankruptcy Code, as such hearing may be continued
or adjourned from time to time.



Phoenix/277611.1                                     4
       1.31. Confirmation Order. The order of the Bankruptcy Court confirming this Plan in
accordance with the Bankruptcy Code.

        1.32. Consolidated Estate. The Estates of the Debtors resulting from the substantive
consolidation of the Debtors in accordance with Section 2.02 of this Plan.

        1.33. Contingent Claim. Any Claim for which a proof of claim has been filed with the
Bankruptcy Court: (a) which was not filed in a fixed amount, or which has not accrued and depends on a
future event that has not occurred and may never occur, and (b) which has not been Allowed on or before
the Confirmation Date.

      1.34. Creditor. Any holder of a Claim, whether or not such Claim is an Allowed Claim,
encompassed within the statutory definition set forth in Section 101(10) of the Bankruptcy Code.

        1.35. Cure. The payment on the Effective Date of Cash or other property as a condition to the
assumption or assumption and assignment by any Debtor of an executory contract or unexpired lease of
nonresidential real property, in accordance with Section 365(b) of the Bankruptcy Code.

       1.36. D&O Policy. Any directors and officers liability insurance policy or any applicable errors
and omissions policy applicable to directors and officers of any Debtor.

         1.37. Debtors. DE of Northeastern Ohio, Inc., an Ohio corporation; Drug Emporium, Inc., a
Delaware corporation; DE Holding Company, Inc., a Delaware corporation, Houston Venture, Inc., an
Ohio corporation; Emporium Venture, Inc., an Ohio corporation; RJR Drug Distributors, Inc., a Delaware
corporation; Drug Emporium Of Michigan, Inc., a Delaware corporation; DE Michigan Management Co.,
a Delaware corporation; Drug Emporium of Maryland, Inc., a Delaware corporation; Drug Emporium
Express, Inc., a Delaware corporation; Snyders Drug Stores, Inc., a Minnesota corporation; Western Drug
of Billings, Inc., a Montana corporation; and Snyders Western Drug L.L.C., a Montana limited liability
company; as debtors and debtors-in-possession in the Chapter 11 Cases, in accordance with Sections 1107
and 1108 of the Bankruptcy Code.

         1.38. DEI. Drug Emporium, Inc., a Delaware corporation and one of the Debtors.

        1.39. Deferred Trade Balance. The Deferred Trade Balance in the principal amount of
$5,022,556 plus $72,620.93 in accrued interest upon such principal amount as of the Petition Date plus
$60.94 in late fees accrued as of the Petition Date, in each case, owed by the Debtors under the McKesson
Supply Agreement.

         1.40. DEMP. Collectively, DE of Northeastern Ohio, Inc., an Ohio corporation; Drug Emporium,
Inc., a Delaware corporation; DE Holding Company, Inc., a Delaware corporation, Houston Venture, Inc.,
an Ohio corporation; Emporium Venture, Inc., an Ohio corporation; RJR Drug Distributors, Inc., a
Delaware corporation; Drug Emporium Of Michigan, Inc., a Delaware corporation; DE Michigan
Management Co., a Delaware corporation; Drug Emporium of Maryland, Inc., a Delaware corporation;
Drug Emporium Express, Inc., a Delaware corporation; i.e., all Debtors other than Snyders, Western Drug
of Billings, Inc. and Snyders Western Drug L.L.C.

       1.41. DIP Facility. The $160,000,000 debtor-in-possession financing facility between the DIP
Lenders and the Debtors, as approved by the Bankruptcy Court in accordance with the DIP Financing
Order.




Phoenix/277611.1                                   5
        1.42. DIP Financing Order. The order or orders of the Bankruptcy Court approving and
authorizing the terms of the DIP Facility in the Chapter 11 Cases in accordance with the DIP Loan
Documents.

         1.43. DIP Lenders. CIT, as administrative agent, and all lenders under the DIP Loan Documents.

       1.44. DIP Loan Documents. All documents and instruments evidencing, setting forth the terms
and implementing the terms of the DIP Facility executed in the Chapter 11 Cases and as approved by the
DIP Financing Order.

        1.45. Disallowed. In reference to a Claim, a Claim or any portion of a Claim that has been
disallowed, overruled, withdrawn, or expunged by Final Order.

        1.46. Disclosure Statement. The written disclosure statement relating to this Plan including,
without limitation, all exhibits and schedules to such disclosure statement, in the form approved by the
Bankruptcy Court under Section 1125 of the Bankruptcy Code and Bankruptcy Rule 3017.

          1.47. Disputed. With respect to Claims or Equity Interests, any Claim or Equity Interest: (a) that
is listed in the Schedules as unliquidated, disputed, or contingent, or as to which the Debtors or any other
party-in-interest have (i) interposed a timely objection or request for estimation, or (ii) sought to equitably
subordinate or otherwise limit recovery in accordance with the Bankruptcy Code and the Bankruptcy
Rules, in each case where such listing, objection, request for estimation, or action to limit recovery has
not been withdrawn or determined by a Final Order; or (b) that is a Contingent Claim.

         1.48. Distribution Record Date. The date, established in the Confirmation Order, by which the
identities of the holders of Claims and Equity Interests are determined for purposes of entitlement to
receive distributions under this Plan.

       1.49. Effective Date. The later of: (a) the first Business Day that is eleven days after the
Confirmation Date and on which no stay of the Confirmation Order is in effect; and (b) the first Business
Day on which all of the conditions set forth in Section 12.02 of this Plan have been satisfied or waived in
accordance with the terms of this Plan.

        1.50. Effective Date Cash Fund. Cash reserved by Reorganized Snyders in an amount, together
with the Katz Capital Contribution and the Exit Financing Facility, sufficient to make all distributions of
Cash required under this Plan.

        1.51. Equity Interest. Any interest in any of the Debtors, including Old Snyders Common Stock,
represented by any class or series of common or preferred stock issued before the Effective Date, and any
warrants, options, or rights to purchase any such common or preferred stock.

         1.52. Equity Related Claim. Any Claim arising from the rescission of a purchase or sale of an
Equity Interest, or for damages arising from the purchase or sale of an Equity Interest, or any Claim by
any Person that asserts equitable or contractual rights of reimbursement, contribution, or indemnification
arising from such Claim, including any Claim that has been or may be asserted against any of the Debtors
and their respective officers and directors asserting violations of federal securities laws including, without
limitation, actions under Sections 11 and 15 of the Securities Act and Sections 10(b) and 20 of the
Exchange Act, and Rule 10b-5 promulgated by the SEC under the Exchange Act, and any applicable non-
federal law.

        1.53. Estates. The estates for each Debtor created in the Chapter 11 Cases in accordance with
Section 541 of the Bankruptcy Code.



Phoenix/277611.1                                      6
       1.54. Exchange Act. The Securities Exchange Act of 1934, as amended, and the regulations
promulgated under that act.

        1.55. Exit Financing Facility. The post-Effective Date working capital revolving credit
financing and, if applicable, term facility between Reorganized Snyders and a lender selected by
Reorganized Snyders containing terms and conditions in form and substance reasonably acceptable to
Reorganized Snyders, including any extension or modification of the DIP Facility.

         1.56. Final Order. An order or judgment of the Bankruptcy Court: (a) as to which the time to
appeal, petition for certiorari, or move for reargument or rehearing has expired, or as to which any right to
appeal, petition for certiorari, reargue, or rehear has been waived in writing in form and substance
satisfactory to the Debtors and the Committee; and (b) if an appeal, writ of certiorari, or reargument or
rehearing has been sought, as to which the highest court to which such order was appealed, or certiorari,
reargument or rehearing was sought, has determined such appeal, writ of certiorari, reargument, or
rehearing, or has denied such appeal, writ of certiorari, reargument, or rehearing, and the time to take any
further appeal, petition for writ of certiorari, or move for reargument or rehearing has expired; provided,
however, that the filing of a motion under Rule 59 or 60 of the Federal Rules of Civil Procedure, or any
analogous rule under the Bankruptcy Rules, with respect to such order does not prevent such order from
being a Final Order.

        1.57. General Unsecured Claim. Any Claim against one or more of the Debtors other than a
Secured Claim, the McKesson Term Loan Claim, the McKesson Trade Claim, the TD Loan Claim, an
Administrative Claim, an Intercompany Claim, a Reclamation Claim, a Priority Tax Claim, a Priority
Claim, an Equity Related Claim, or a Rejection Claim.

        1.58. Intercompany Claim. Any Claim held by a Debtor against any other Debtor arising at any
time before the Effective Date.

         1.59. IRS. The Internal Revenue Service.

        1.60. Katz Capital Contribution. Cash paid by the Acquirer on the Effective Date in an amount,
after consideration of the Effective Date Cash Fund, necessary to make the Effective Date payments to
the Class 10 Fund, the Reclamation Fund, Administrative Claims, and Priority Claims, in an amount not
to exceed $20,000,000.

        1.61. Katz Letters of Credit. Collectively the letters of credit and cash deposit arranged by
KHMI in favor of CIT and issued by The Toronto-Dominion Bank: (a) dated July 2, 2003 in the original
face amount of $10,000,000; (b) dated May 27, 2003 in the original face amount of $5,000,000; (c) dated
July 12, 2002 in the original face amount of $10,000,000; (d) dated April 16, 2002 in the original face
amount of $10,000,000; and (e) the cash deposit in the amount of $10,000,000 held by CIT and made on
or about July 18, 2003.

         1.62. Katz Two. Katz Two Holdings (Minnesota) Inc., a Minnesota corporation.

        1.63. KEHI. Katz Enterprises Holdings Inc., an entity organized and existing under the laws of
Ontario, Canada.

         1.64. KEMI. Katz Enterprises (Minnesota) Inc., a Minnesota corporation.

         1.65. KHMI. Katz Holdings (Minnesota) Inc., a Minnesota corporation.




Phoenix/277611.1                                     7
         1.66. LC Sub-Debt. The New DIP LCs and any amounts owing to KEHI, KHMI, or any of their
respective Affiliates by way of subrogation or otherwise as a result of draws upon the Katz Letters of
Credit, the New DIP LCs, and realization of the cash collateral, converted on the Effective Date to
secured debt of Reorganized Snyders and subordinated in form and substance satisfactory to McKesson to
all indebtedness and other obligations at any time owing by Reorganized Snyders to McKesson.

        1.67. Lessor Substantial Contribution Claim. The Allowed Administrative Claim of counsel
for various holders of Rejection Claims, in an amount not to exceed $120,000, under Bankruptcy Code
§ 503(b)(4).

       1.68. Lien. A lien as defined in Section 101(37) of the Bankruptcy Code, except a lien that has
been avoided in accordance with Section 544, 545, 546, 547, 548, or 549 of the Bankruptcy Code.

         1.69. Maximum Amount. With respect to any Disputed Claim: (a) the amount agreed to by
Reorganized Snyders and the holder of such Claim subject to the Committee’s consent under Section 1.09
of this Plan; (b) the amount, if any, estimated or determined by the Bankruptcy Court in accordance with
Bankruptcy Code § 502(c); or (c) absent any such agreement, estimation or determination, the amount set
forth in the proof of claim filed by the holder of such Claim or, if no amount is so set forth, the amount set
forth in the Schedules for such Claim or, if no amount is so set forth, the amount estimated by
Reorganized Snyders in its good faith discretion, in consultation with the Committee.

        1.70. McKesson. McKesson Corporation, a Delaware Corporation or its designees, successors
and assigns.

      1.71. McKesson Borrowers. Snyders, DEI, and KEMI, as joint and several borrowers under the
McKesson Loan Agreement.

        1.72. McKesson Collateral Documents. The McKesson Security Agreement and any other
security agreements, guarantees, and pledge agreements executed by any Snyders Related Entities in
order to secure the obligations of the Debtors under or in connection with the McKesson Supply
Agreement.

          1.73. McKesson Guaranty. The Guaranty dated as of July 22, 2003, made by McKesson in favor
of CIT.

        1.74. McKesson Letter of Credit. The Letter of Credit in the face amount of $10,000,000 issued
for the benefit of CIT for McKesson’s account to support McKesson’s obligations under the McKesson
Guaranty.

       1.75. McKesson Loan Agreement. The Credit Agreement dated as of September 24, 2001, as
amended, restated, supplemented, or otherwise modified from time to time in accordance with its terms,
among the McKesson Borrowers, as joint and several borrowers, and McKesson, as lender.

       1.76. McKesson Security Agreement. The Security Agreement dated as of September 24, 2001,
made by the Snyders Related Entities as debtors, and McKesson, as secured party, as amended, restated,
supplemented or otherwise modified from time to time in accordance with its terms.

       1.77. McKesson Supply Agreement. The Amended and Restated Supply Agreement dated as of
September 24, 2001, as amended, restated, supplemented, or otherwise modified from time to time in
accordance with its terms, between Snyders and DEI as customers and McKesson as supplier.




Phoenix/277611.1                                      8
        1.78. McKesson Subrogation Claim. The Claim of McKesson against the Estates created by the
posting of the McKesson Letter of Credit in connection with the satisfaction of the DIP Claim as set forth
in Section 5.01 of this Plan.

        1.79. McKesson Term Loan Claim. The Claim of McKesson Allowed against the Debtors in the
amount of $45,217,013.48 as of the Petition Date consisting of (a) $40,121,775.61 arising under the
McKesson Loan Agreement and (b) $5,095,237.87 constituting the Deferred Trade Balance arising under
the McKesson Supply Agreement, plus, in each case, accrued and accruing unpaid interest and fees and
other amounts.

        1.80. McKesson Trade Claim. The Claim of McKesson arising under the McKesson Supply
Agreement (excluding the Deferred Trade Balance) Allowed against the Debtors in the aggregate amount
of $21,636,000, as of the Petition Date.

         1.81. McKesson Warrant. The warrant issued to McKesson in accordance with Section
5.07.b(iii) of this Plan to purchase Warrant Shares, substantially in the form attached to this Plan as
Exhibit D.

       1.82. New Common Stock. The common stock, $0.01 par value per share, to be authorized under
the Reorganized Snyders Certificate to be filed with the Minnesota Secretary of State as of the Effective
Date.

        1.83. New DIP LCs. All letters of credit or cash deposits that the Acquirer posted in favor of CIT
or the DIP Lenders as of the Petition Date but before the Effective Date to credit enhance the DIP Facility
in the amount of $10,000,000.

        1.84. New McKesson Supply Agreement. The McKesson Supply Agreement, as amended by
Article 6 of the Restructuring Agreement, governing the terms and conditions of McKesson’s supply of
goods and merchandise to Reorganized Snyders as customer from and after the Effective Date.

        1.85. New Subordinated Debt. All secured debt owed by Reorganized Snyders to Acquirer from
and after the Effective Date that is subordinated in form and substance satisfactory to McKesson to all
indebtedness and other obligations at any time owing by Reorganized Snyders to McKesson, as further
described in Section 6.03 of this Plan, substantially in the form attached to this Plan as Exhibit H.

         1.86. New TD Interest Rate. Interest under the TD Loan as modified by the terms of this Plan at
a rate per annum equal to the non-default rate of interest set forth in the TD Loan Agreement plus 60 basis
points.

        1.87. Old Snyders Common Stock. The equity interests represented by duly authorized, validly
issued, and outstanding shares of common stock of Snyders, together with all accrued and unpaid
dividends on such shares, and all options, warrants, or rights to acquire such common stock existing at
any time before the Effective Date.

        1.88. Other Acquirer Claims. All Claims comprised of all amounts (other than New
Subordinated Debt) that Snyders or Reorganized Snyders owes to the Acquirer, whether from capital
contributions, subordinated loans, or otherwise as of the Effective Date.

        1.89. Oversight Committee. A committee that will come into existence on the Effective Date to
be comprised of no more than three members: two Creditors selected by the Committee from the holders
of Allowed Class 10 Claims as representatives of holders of such Claims and a designee of Tops Markets,
LLC, as a representative of the holders of Rejection Claims.



Phoenix/277611.1                                    9
        1.90. Person. Any individual, corporation, partnership, limited liability company, limited liability
partnership, joint venture, association, joint-stock company, trust, unincorporated association or
organization, governmental agency or associated political subdivision.

         1.91. Petition Date. September 11, 2003, the date on which the Debtors filed their voluntary
petitions commencing the Chapter 11 Cases.

        1.92. Pharmacist CBA. The collective bargaining agreement titled Snyders Drug Stores, Inc.
Agreement (Pharmacists), United Food and Commercial Workers Union District Local 653-AFL-CIO
(June 10, 2001-June 5, 2004).

        1.93. Plan. This Joint Plan, either in its present form or as it may be amended, supplemented or
modified from time to time in accordance with the terms of this Plan, including, except where the context
otherwise requires, all its annexed exhibits and schedules.

        1.94. Plan Documents. Collectively: (a) the Reorganized Snyders Certificate; (b) the
Reorganized Snyders By-Laws; (c) the McKesson Warrant; and (d) the Restructuring Agreement, copies
of which are attached as exhibits to this Plan or which will be filed with the Bankruptcy Court no later
than ten days before the Confirmation Hearing.

        1.95. Post-Effective Date Senior Indebtedness. All indebtedness of Reorganized Snyders
obtained after the Effective Date and secured by liens pari passu with or senior to the liens securing the
TD Loan under a revolving credit facility provided by a financial institution reasonably satisfactory to
McKesson and under loan documentation in form and substance reasonably satisfactory to McKesson.

        1.96. Preserved Litigation Claims. Subject to Section 13.05 of this Plan, all rights, claims, torts,
liens, actions, causes of action, Avoidance Actions, avoiding powers, proceedings, debts, contracts,
judgments, offsets, damages and demands whatsoever in law or in equity, whether known or unknown,
contingent or otherwise, that one or more of the Debtors or the Estates may have against any Person
including, without limitation, those listed in Exhibit C to this Plan. Failure to list a Preserved Litigation
Claim in this Plan does not constitute a waiver or release by the Debtors or Reorganized Snyders of such
Preserved Litigation Claim.

          1.97. Preserved Ordinary Course Administrative Claim. Any Administrative Claim based on
liabilities incurred by any Debtor in the purchase, lease, or use of goods and services in the ordinary
course of its business including, without limitation, Administrative Claims on account of services
provided after the Petition Date to a Debtor by its employees, and Claims for unpaid rent or contract
payments arising under a rejected executory contract or unexpired lease of nonresidential real property
after the Petition Date and before the effective date of the rejection of such contract or lease, but
excluding Professional Fee Claims.

        1.98. Priority Claim. Any Claim (or portions of such Claim) entitled to priority under Section
507(a) of the Bankruptcy Code other than Priority Tax Claims and Administrative Claims.

        1.99. Priority Tax Claim. Any Claim of a governmental unit entitled to priority under Section
507(a)(8) of the Bankruptcy Code.

        1.100. Professional. A Person: (a) employed in the Chapter 11 Cases in accordance with an order
of the Bankruptcy Court under Section 327, 328 or 1103 of the Bankruptcy Code and to be compensated
for services under Sections 327, 328, 329, 330, and 331 of the Bankruptcy Code; or (b) for whom
compensation and reimbursement has been Allowed by a Final Order under Section 503(b) of the
Bankruptcy Code.



Phoenix/277611.1                                     10
         1.101. Professional Fee Bar Date. The first Business Day that is 60 days after the Confirmation
Date.

        1.102. Professional Fee Claim. An Administrative Claim for compensation and reimbursement
of expenses of a Professional rendered or incurred before the Effective Date submitted in accordance with
Section 328, 330, 331, or 503(b) of the Bankruptcy Code.

         1.103. Pro Rata. A proportionate share, such that the ratio of the consideration distributed on
account of an Allowed Claim or Equity Interest in a Class to the amount of such Allowed Claim or Equity
Interest is the same as the ratio of the amount of the consideration distributed on account of all Allowed
Claims or Equity Interests in such Class to the amount of all Allowed Claims or Equity Interests in such
Class.

        1.104. Reclamation Claim. Any Claim against a Debtor by any Person arising out of the sale of
goods to a Debtor in the ordinary course of such Person’s business, provided that such Person has
otherwise satisfied the requirements of Section 546(c) of the Bankruptcy Code, the Uniform Commercial
Code, or other non-bankruptcy statutory requirements, as applicable, and any order of the Bankruptcy
Court regarding such Claims, as satisfied under Section 5.04 of this Plan, or as otherwise agreed to by the
Debtors and the holder of a Reclamation Claim, with the Committee’s consent.

      1.105. Reclamation Fund. Cash in the amount of $500,000.00 for use in the payment of Allowed
Reclamation Claims in Class 4, comprising a portion of the Effective Date Cash Fund.

         1.106. Rejection Claims. All Claims arising from the rejection by any Debtor of an executory
contract or unexpired lease of nonresidential real property either during the Chapter 11 Cases or in
connection with this Plan, including, without limitation, Claims for future rents under Bankruptcy Code
§ 502(b)(6) or future contract payments and Unsecured Claims for unpaid rent or contract payments
accruing before the Petition Date. Rejection Claims do not include Claims for unpaid rent or contract
payments arising under a rejected executory contract or unexpired lease of nonresidential real property
after the Petition Date and before the effective date of the rejection of such contract or lease; such Claims
are Preserved Ordinary Course Administrative Claims.

       1.107. Rejection Damages Bar Date. The first Business Day that is 30 days after the
Confirmation Date.

         1.108. Reorganized Debtors. The Debtors on and after the Effective Date.

         1.109. Reorganized Snyders. Snyders, or ay successor to Snyders by merger, consolidation,
acquisition or otherwise, on and after the Effective Date.

        1.110. Reorganized Snyders By-Laws. The By-Laws of Reorganized Snyders, substantially in
the form included as Exhibit B to this Plan.

       1.111. Reorganized Snyders Certificate. The Certificate of Incorporation of Reorganized
Snyders, substantially in the form included as Exhibit A to this Plan.

       1.112. Restructuring Agreement. The Restructuring Agreement between the McKesson, the
Acquirer, Snyders, DEI, KEMI, and KEHI dated as of September 11, 2003, attached as Exhibit E to this
Plan.

      1.113. Retiree Benefits. Payments to any Person for the purpose of providing or reimbursing
payments for retired employees of the Debtors and of any other entities as to which the Debtors are



Phoenix/277611.1                                     11
obligated to provide retiree benefits and the eligible spouses and eligible dependents of such retired
employees, for medical, surgical, or hospital care benefits, or in the event of death of a retiree under any
plan, fund, or program (through the purchase of insurance or otherwise) maintained or established by the
Debtors before the Petition Date, as such plan, fund, or program was then in effect or as later amended.

       1.114. Schedules. The schedules of assets and liabilities, the list of holders of interests, and the
statements of financial affairs filed by the Debtors under Section 521 of the Bankruptcy Code and
Bankruptcy Rule 1007, as such schedules, list, and statements may have been or may be supplemented or
amended from time to time.

         1.115. SEC. The United States Securities and Exchange Commission.

         1.116. Section 1113 Order. The Order of the Bankruptcy Court authorizing the modification,
effective on the Effective Date, of the Pharmacist CBA and Clerks CBA.

        1.117. Secured Claim. Any Claim, to the extent reflected in a proof of claim as a secured Claim,
which is secured by a Lien on Collateral to the extent of the value of such Collateral, as determined in
accordance with Section 506(a) of the Bankruptcy Code, or, if such Claim is subject to setoff under
Section 553 of the Bankruptcy Code, net of such setoff.

        1.118. Secured Tax Claim. Any Claim of any governmental unit or associated political
subdivision that is secured by a Lien on property of an Estate by operation of applicable law including,
without limitation, every Claim for unpaid real, personal property, or ad valorem taxes.

        1.119. Securities Act. The Securities Act of 1933, as amended, and the regulations promulgated
under that act.

         1.120. Snyders. Snyders Drug Stores, Inc., a Minnesota corporation and one of the Debtors.

         1.121. Snyders Related Entities. Collectively, the Debtors, KEMI, KEHI, KHMI, and Katz
Two.

         1.122. TD Loan Agreement. The Credit Agreement dated as of September 24, 2001, between the
Debtors and certain other Snyders Related Entities as borrowers and McKesson or Bank One, N.A. (as
assignee of The Toronto Dominion (Texas), Inc.) as administrative agent and the various lenders from
time to time parties thereto, as amended, restated, supplemented or otherwise modified from time to time
in accordance with its terms.

         1.123. TD Loan Claim. The Claim of McKesson and Bank One, N.A. (as McKesson’s assignee)
arising under the TD Loan Agreement and the other TD Loan Documents Allowed against the Debtors in
the aggregate amount of $40,387,667.78 as of the Petition Date (consisting of $40,000,000 of principal,
$387,667.78 of accrued and unpaid interest).

       1.124. TD Loan Documents. All loan documents relating to the TD Loan Agreement, including
the TD Loan Agreement and any security agreements, guaranties and pledge agreement executed by any
Snyders Related Entities under or in connection with the TD Loan Agreement.

         1.125. Warehouse CBA. The collective bargaining agreement by and between Snyders and
Chauffeurs, Teamsters, Warehousemen and Helpers Local Union No. 377, Affiliated With the
International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America, dated as of
October 1, 2002, as it may have been amended and supplemented.




Phoenix/277611.1                                    12
       1.126. Warrant Shares. Shares of New Common Stock in Reorganized Snyders that may be
purchased in accordance with the McKesson Warrant.

                                      ARTICLE 2.
                         SUBSTANTIVE CONSOLIDATION OF ESTATES

        2.01. Request for Substantive Consolidation. This Plan constitutes a motion for substantive
consolidation of the liabilities and properties of all Debtors. This Plan requests that confirmation of this
Plan constitute the Bankruptcy Court’s granting of such motion.

          2.02. Effect of Substantive Consolidation. As a result of the substantive consolidation of the
liabilities and properties of all Debtors, upon the Effective Date: (a) the Chapter 11 Cases will be deemed
to be consolidated into the Chapter 11 Case of Snyders as a single consolidated case; (b) all property of
the Estate of each Debtor will be deemed to be property of the Consolidated Estate; (c) all Claims against
each Estate will be deemed to be Claims against the Consolidated Estate, any proof of claim filed against
one or more of the Debtors will be deemed to be a single Claim filed against the Consolidated Estate, and
all duplicate proofs of claim for the same Claim filed against more than one Debtor will be deemed to be
expunged; (d) unless otherwise provided in this Plan, all Equity Interests in any Debtor other than
Snyders will be deemed to be extinguished for all purposes, and no distributions under this Plan will be
made on account of any such Equity Interests; (e) all Intercompany Claims will be deemed Disallowed,
discharged and eliminated, and no distributions under this Plan will be made on account of Intercompany
Claims; (f) all guarantees by one Debtor of the obligations of any other Debtor or in favor of any other
Debtor will be deemed eliminated, and no distributions under this Plan will be made on account of Claims
based upon such guarantees; and (g) for purposes of determining the availability of the right of setoff
under Bankruptcy Code § 553, all Debtors will be treated as one consolidated entity so that, subject to the
other provisions of Bankruptcy Code § 553, debts due to any Debtor may be set off against the debts of
any other Debtor.

         2.03. No Impact On Secured Claims. Substantive consolidation under this Plan has no effect on
valid, enforceable and unavoidable Liens, except for Liens that secure a Claim that is eliminated by virtue
of substantive consolidation and Liens against Collateral that are extinguished by virtue of substantive
consolidation. Substantive consolidation under this Plan does not create a Claim in a Class different from
the Class in which a Claim would have been placed in the absence of substantive consolidation. The
substantive consolidation contemplated in this Plan does not affect any applicable date for purposes of
pursuing any Avoidance Actions.

                                       ARTICLE 3.
                            TREATMENT OF UNCLASSIFIED CLAIMS

         3.01. Unclassified Claims. As provided in Section 1123(a)(1) of the Bankruptcy Code,
Administrative Claims and Priority Tax Claims are not classified for purposes of voting on, or receiving
distributions under, this Plan. Holders of such Claims are not entitled to vote on this Plan. All such
Claims are instead treated separately in accordance with Sections 3.02 and 3.06 of this Plan and in
accordance with the requirements set forth in Section 1129(a)(9)(A) of the Bankruptcy Code.

         3.02. Allowed Administrative Claims.

                 a. Generally. Each Allowed Administrative Claim (other than a Preserved Ordinary
Course Administrative Claim or Professional Fee Claim) will be paid in full in Cash (or otherwise
satisfied in accordance with its terms) on the latest of: (a) the Effective Date; (b) such date as may be
fixed by the Bankruptcy Court, or as soon thereafter as practicable; (c) the tenth Business Day after such




Phoenix/277611.1                                    13
Claim is Allowed, or as soon thereafter as practicable; and (d) such date as the holder of such Claim and
the Debtors or Reorganized Snyders agree.

                b. Requests for Payment. All requests for payment of an Administrative Claim (other
than a Preserved Ordinary Course Administrative Claim or Professional Fee Claim) must be served on
Reorganized Snyders and filed with the Bankruptcy Court no later than the Administrative Claims Bar
Date. If a holder of an Administrative Claim (other than a Preserved Ordinary Course Administrative
Claim or Professional Fee Claim) fails to file and serve such request by the Administrative claims Bar
Date, such holder will be forever barred and discharged from asserting such Administrative Claim against
the Debtors or Reorganized Snyders.

       3.03. Preserved Ordinary Course Administrative Claims. Each Allowed Preserved Ordinary
Course Administrative Claim will be paid in full in Cash at Reorganized Snyders’ election either: (a) in
accordance with the terms and conditions under which such Claim arose; or (b) in the ordinary course of
Reorganized Snyders’ business. Such payments will be made without further action by the holder of such
Claim.

         3.04. Allowed Priority Tax Claims. Any Allowed Priority Tax Claim will be paid in full in Cash
on the later of (i) the Effective Date and (ii) the tenth Business Day after such Claim is Allowed;
provided, however, that the Debtors or Reorganized Snyders may elect to pay such Claims through
deferred Cash payments over a period not exceeding six years after the date of assessment of such Claim,
of a value as of the Effective Date, equal to the Allowed amount of such Claim. In that event, such
payments will be made in equal annual installments of principal, plus interest on the unpaid portion of the
Allowed Priority Tax Claim accruing from the Effective Date at the rate set forth in Internal Revenue
Code Sections 6621 and 6622. The first such payment will be made on the latest of: (a) the Effective
Date; (b) the tenth Business Day after the date on which an order allowing such Claim becomes a Final
Order, or as soon thereafter as practicable; and (c) such other time as is agreed upon by the holder of such
Claim and the Debtors or Reorganized Snyders; provided, however, that Reorganized Snyders retains the
right to prepay any such Allowed Priority Tax Claim, or any remaining balance of such Claim, in full or
in part, at any time on or after the Effective Date without premium or penalty.

        3.05. Professional Fee Claims. Each Allowed Professional Fee Claim will be paid in full in
Cash: (a) no later than three days after such Professional Fee Claim is Allowed; (b) upon such other terms
as may be mutually agreed upon between the holder of such Allowed Professional Fee Claim and the
Debtors or Reorganized Snyders; or (c) in accordance with the terms of any applicable administrative
procedures order entered by the Bankruptcy Court. Each Person seeking an award by the Bankruptcy
Court of Professional Fees must file with the Bankruptcy Court and serve on Reorganized Snyders its
final application for allowance of compensation for services rendered and reimbursement of expenses
incurred through the Confirmation Date within 60 days after the Effective Date.

         3.06. Post-Effective Date Professional Fees. All claims of Professionals for services rendered
after the Effective Date in connection with the Chapter 11 Cases and this Plan including, without
limitation, those relating to consummation of this Plan, any appeal of the Confirmation Order, the
preparation, filing and review of Professional Fee Claims, the prosecution of Preserved Litigation Claims,
and the resolution of Disputed Claims, must be paid by Reorganized Snyders upon receipt of an invoice
for such services, or on such other terms as Reorganized Snyders and the relevant professional may agree,
without the need for further Bankruptcy Court authorization or entry of a Final Order. Reorganized
Snyders has ten days after receiving any such invoice to object to any item contained in such invoice. If
Reorganized Snyders and any Professional cannot agree on the amount of post-Effective Date fees and
expenses to be paid to such Professional, such amount is to be determined by the Bankruptcy Court.




Phoenix/277611.1                                    14
          3.07. Payment of Interim Amounts.

                 a. Payments Through Effective Date. Subject to the holdback provisions of the
Administrative Order and this paragraph, on the Effective Date the Debtors or Reorganized Snyders will
pay all amounts owing to Professionals for all outstanding amounts payable relating to prior periods
through the Effective Date. In order to receive payment on the Effective Date for unbilled fees and
expenses incurred through such date, the Professionals must estimate fees and expenses due for periods
that have not been billed as of the Effective Date and must deliver such estimate to the Debtors, counsel
for the Debtors, counsel for the Committee, counsel for McKesson and counsel for CIT not later than five
days before the Effective Date. Within 45 days after the Effective Date, a Professional receiving payment
for the estimated period must submit a detailed invoice covering such period in the manner and providing
the detail as set forth in the Administrative Fee Order. Should the estimated payment received by any
Professional exceed the actual fees and expenses for such period, this excess amount will be credited
against any unpaid fees of such Professional or, if the unpaid fees and insufficient, repaid by such
Professional.

                b. Escrow For Holdback Amounts. On the Effective Date, the Debtors or Reorganized
Snyders will place in escrow with the Debtors’ counsel Cash equal to the holdback amounts for all
Professionals under the procedures established in the Administrative Fee Order. The Debtors’ counsel
will hold these amounts in trust for the Professionals with respect to whom fees have been held back
under the Administrative Fee Order. Such funds will not be considered property of the Debtors,
Reorganized Snyders, the Estates, or any affiliates or successors of such entities. The remaining amount
of the Professional Fee Claims owing to the Professionals must be paid to such Professionals by the
Debtors’ counsel from the escrowed funds when such Claims are Allowed by the Bankruptcy Court.
When all Professional Fee Claims have been paid in full, the remaining escrowed funds held by the
Debtors’ counsel will be paid to Reorganized Snyders.

        3.08. Lessor Substantial Contribution Claim. On the Effective Date, the Debtors or
Reorganized Snyders will pay the Lessor Substantial Contribution Claim in Cash in the following
manner: (a) $100,000 to Mayer, Brown, Rowe & Maw, LLP, to be distributed among itself and that
firm’s co-counsel in accordance with an agreement among such counsel with a group of holders of
Rejection Claimants; and (b) $20,000 to Hahn, Loeser & Parks LLP, to be distributed among that firm
and Messerli & Kramer PA in accordance with an agreement among those two firms as co-counsel to
Carlton Financial Corporation. None of the Debtors, the Reorganized Debtors, the Committee, CIT, or
McKesson may object to the amount or Allowance of the Lessor Substantial Contribution Claim.

                                          ARTICLE 4.
                        CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS

         4.01. Summary of Classification. In accordance with Section 1123(a)(1) of the Bankruptcy
Code, all Claims of Creditors and holders of Equity Interests (except those Claims receiving treatment as
set forth in Article 3 of this Plan) are placed in the Classes described below for all purposes, including
voting on, confirmation of, and distributions under, this Plan:

Class 1            DIP Claim                              Unimpaired. Deemed to accept.
Class 2            DIP Subrogation Claims                 Impaired. Entitled to vote.
Class 3            Priority Claims                        Unimpaired. Deemed to accept.
Class 4            Reclamation Claims                     Impaired. Entitled to vote.
Class 5            Secured Tax Claims                     Unimpaired. Deemed to accept.




Phoenix/277611.1                                   15
Class 6            TD Loan Claim                                Impaired. Entitled to vote.
Class 7            McKesson Term Loan Claim                     Impaired. Entitled to vote.
Class 8            McKesson Trade Claim                         Impaired. Entitled to vote.
Class 9            Miscellaneous Secured Claims                Impaired or unimpaired depending on
                                                               Debtors’ election. May be entitled to vote.
Class 10           General Unsecured Claims and Rejection      Impaired. Deemed to reject.
                   Claims
Class 11           Other Acquirer Claims                        Impaired. Deemed to reject.
Class 12       Equity Interests and Equity Related             Impaired. Deemed to reject.
               Claims
          4.02. Specific Classification.

                     a. Class 1 – DIP Claim. Class 1 consists of the Claim of the DIP Lenders under the DIP
Facility.

                 b. Class 2 – DIP Subrogation Claims. Class 2 consists of the McKesson Subrogation
Claim and the Acquirer Subrogation Claim. Each holder of a DIP Subrogation Claim is considered to be
in its own separate subclass within Class 2 and each such subclass is deemed to be a separate Class for
purposes of this Plan.

                     c. Class 3 – Priority Claims. Class 3 consists of all Priority Claims.

                     d. Class 4 – Reclamation Claims. Class 4 consists of all Reclamation Claims.

                 e. Class 5 – Secured Tax Claims. Class 5 consists of all Secured Tax Claims. Each
holder of a Secured Tax Claim is considered to be in its own separate subclass within Class 5, and each
such subclass is deemed to be a separate Class for purposes of this Plan.

                     f. Class 6 – TD Loan Claim. Class 6 consists of the TD Loan Claim.

                     g. Class 7 – McKesson Term Loan Claim. Class 7 consists of the McKesson Term
Loan Claim.

                     h. Class 8 – McKesson Trade Claim. Class 8 consists of the McKesson Trade Claim.

                i. Class 9 – Miscellaneous Secured Claims. Class 9 consists of all Secured Claims other
than the Secured Tax Claims in Class 5, the TD Loan Claim in Class 6, the McKesson Term Loan Claim
in Class 7, the McKesson Trade Claim in Class 8, and the Claims of the DIP Lenders in Class 1. Each
holder of a Miscellaneous Secured Claim is considered to be in its own separate subclass within Class 9,
and each such subclass is deemed to be a separate Class for purposes of this Plan.

              j. Class 10 – General Unsecured Claims and Rejection Claims. Class 10 consists of all
General Unsecured Claims and Rejection Claims.

                     k. Class 11 – Other Acquirer Claims. Class 11 consists of all Other Acquirer Claims.

                 l. Class 12 – Equity Interests and Equity Related Claims. Class 12 consists of all
Equity Interests, including Equity Interests in any Debtor held by any other Debtor and Equity Interests
based on Old Common Stock, and Equity Related Claims.



Phoenix/277611.1                                         16
                                       ARTICLE 5.
                        TREATMENT OF CLAIMS AND EQUITY INTERESTS

         5.01. Class 1 – DIP Claim.

               a. Impairment and Voting. Class 1 is unimpaired by this Plan. The DIP Lenders are
deemed to have accepted this Plan and will not be solicited to vote on this Plan.

                 b. Distributions. On the Effective Date, CIT, as agent for and on behalf of the DIP
Lenders, will receive: (i) all Cash proceeds derived from any draws on the New DIP LCs, and the Katz
Letters of Credit; and (ii) Cash in an amount equal to the remainder of the DIP Lenders’ Claim under the
DIP Facility after application of the Cash proceeds derived from all draws on the New DIP LCs, the Katz
Letters of Credit, and the Exit Financing Facility. The McKesson Letter of Credit will be released upon
payment in full of the DIP Claim on the Effective Date.

         5.02. Class 2 – DIP Subrogation Claims.

                a. Impairment and Voting. Class 2 is impaired by this Plan. All holders of Allowed
Claims in Class 2 are entitled to vote on this Plan.

                   b. Treatment.

                        (i) McKesson Subrogation Claim. On the Effective Date, in full satisfaction of
the McKesson Subrogation Claim, the McKesson Letter of Credit will be released, discharged, and
extinguished; provided, that McKesson will retain all its rights, claims and Liens against the Snyders
Related Entities in connection with the McKesson Subrogation Claim until the McKesson Letter of Credit
has been released, discharged and extinguished in full as set forth in Section 5.01.b of this Plan.

                       (ii) Acquirer Subrogation Claim. On the Effective Date, the Acquirer
Subrogation Claim will be satisfied by a combination of: (a) the conversion of the LC Sub-Debt into New
Common Stock in accordance with Section 5.07.b(iii)(B) or (C) of this Plan; and (b) the conversion of the
LC Sub-Debt into New Subordinated Debt in accordance with Section 6.03 of this Plan.

         5.03. Class 3 – Priority Claims.

                a. Impairment and Voting. Class 3 is unimpaired by this Plan. All holders of Allowed
Claims in Class 3 are deemed to have accepted this Plan and will not be solicited to vote on this Plan.

                 b. Distributions. Each holder of an Allowed Priority Claim will receive Cash in an
amount equal to such Allowed Priority Claim upon the latest of: (i) the Effective Date; and (ii) the tenth
Business Day after such Priority Claim is Allowed, or as soon thereafter as practicable unless, before the
latest of the above dates, the holder of such Claim and Reorganized Snyders agree in writing to a different
date.

         5.04. Class 4 – Reclamation Claims.

                  a. Disputed Nature of Claims. All Reclamation Claims are Disputed under this Plan as
follows: (i) all Reclamation Claims are Disputed by virtue of the primacy of the DIP Lenders’ security
interests in the underlying goods sold over any Reclamation Claims arising from the sale of those
underlying goods; (ii) all Reclamation Claims are Disputed by virtue of the primacy of the senior security
of McKesson held to secure the Claims in Classes 6, 7, and 8; and (iii) all Reclamation Claims other than
that filed by the Harvard Drug Group are Disputed as to amount.



Phoenix/277611.1                                    17
                b. Impairment and Voting. Class 4 is impaired by this Plan. All holders of Allowed
Claims in Class 4 are entitled to vote on this Plan.

                 c. Distributions. Each holder of an Allowed Reclamation Claim will receive Cash in the
lesser amount of 50% of the amount of the Allowed Reclamation Claim and the Pro Rata portion of the
Reclamation Fund. Each holder of an Allowed Reclamation Claim will be paid upon the latest of: (i) the
Effective Date; and (ii) the tenth Business Day after such Priority Claim is Allowed, or as soon thereafter
as practicable; unless, before the latest of the above dates, the holder of such Claim and Reorganized
Snyders agree in writing to a different date.

               d. Disallowed Reclamation Claims. If a Reclamation Claim or any portion of a
Reclamation Claim is Disallowed as to its entitlement to priority as a Reclamation Claim under
Bankruptcy Code § 546(c)(2)(A), such Disallowance is without prejudice to such Claim or portion of
such Claim being Allowed as a General Unsecured Claim in Class 10.

               e. Excess Reclamation Fund Amounts. Any excess remaining in the Reclamation Fund
after payment of Allowed Reclamation Claims will be added to the Class 10 Fund as and when such
excess amounts (if any) become available.

         5.05. Class 5 – Secured Tax Claims.

                a. Impairment and Voting. Class 5 is unimpaired by this Plan. All holders of Allowed
Claims in Class 4 are deemed to have accepted this Plan and will not be solicited to vote on this Plan.

                 b. Distributions. Each holder of an Allowed Secured Tax Claim will receive Cash in an
amount equal to such Allowed Secured Claim upon the latest of: (i) the Effective Date; (ii) such date as
may be fixed by the Bankruptcy Court, or as soon thereafter as practicable; (iii) the tenth Business Day
after such Claim is Allowed, or as soon thereafter as practicable; and (iv) the date on which such Claim is
scheduled to be paid in the ordinary course of business under applicable law or regulation; unless, before
the latest of the above dates, the holder of such Claim and Reorganized Snyders agree in writing to a
different date.

         5.06. Class 6 – TD Loan Claim.

                 a. Impairment and Voting. Class 6 is impaired under this Plan. McKesson is entitled to
vote on this Plan.

                   b. Treatment.

                         (i) Continuation of TD Loan. As of the Effective Date, Reorganized Snyders will
assume, confirm and ratify the TD Loan Agreement and the other TD Loan Documents and the TD Loan
will remain outstanding and will not be modified or otherwise affected by this Plan except as provided in
this Section 5.06, unless McKesson agrees in writing in its sole and absolute discretion. McKesson retains
all the rights and remedies of TD under the TD Loan Agreement and the TD Loan Documents, and
McKesson will be entitled to exercise all such rights and remedies as permitted by the TD Loan
Documents and applicable law, except to the extent such rights and remedies are expressly modified in
this Section 5.06.

                          (ii) Modifications to TD Loan. On the Effective Date:




Phoenix/277611.1                                     18
                                 (A) McKesson will waive all default interest in respect of the TD Loan
and interest will be deemed to have accrued on the outstanding principal amount of the TD Loan Claim
from the last full timely payment of interest until the Effective Date at the New TD Interest Rate;

                               (B) Reorganized Snyders must pay to McKesson in Cash all unpaid
interest accrued through the Effective Date under the TD Loan Agreement calculated at the New TD
Interest Rate;

                               (C) All then-existing events of default under the TD Loan Agreement
will be deemed cured, provided that such cure will not (1) constitute a release of, and will not affect,
Reorganized Snyders’ obligation to pay principal, interest, and other amounts owing under the TD Loan
Agreement (as modified by this Plan) when due nor (2) relieve Reorganized Snyders or any other Snyders
Related Entity from performing from and after the Effective Date all its obligations under the TD Loan
Agreement (as modified by this Plan) and the other TD Loan Documents;

                               (D) And thereafter, the non-default rate of interest under the TD Loan
Agreement (as modified by this Plan) will be equal to the New TD Interest Rate.

                         (iii) Deemed Cure of Defaults. From and after the Effective Date, Reorganized
Snyders will not be in default under the TD Loan Agreement (as modified by this Plan) as a result of any
action or inaction or condition relating solely to DEMP.

                         (iv) Retention of Liens. As security for payment of the TD Loans, McKesson will
retain all Liens and security interests in the personal property of the Snyders Related Entities securing the
TD Loans as of the Effective Date, including, without limitation, any such Liens and security interests
granted under (A) the Security Agreement dated as of September 24, 2001 by and among the Debtors,
KEMI and Toronto Dominion (Texas), Inc., as administrative agent for certain secured parties and
(B) any copyright security agreements, trademark security agreements and pledge agreements related to
such Security Agreement. Each such security agreement, copyright security agreement, trademark
security agreement and pledge agreement is assumed, ratified and confirmed in all respects. The guaranty
of the TD Loan issued by Katz Two and any Liens upon any collateral in connection with such guaranty
are expressly preserved for the benefit of McKesson.

         5.07. Class 7 – McKesson Term Loan Claim.

                 a. Impairment and Voting. Class 7 is impaired by this Plan. McKesson is entitled to
vote on this Plan.

                   b. Treatment.

                         (i) Optional Assumption by Acquirer. Acquirer may, at Acquirer’s sole option,
elect to assume, immediately before the Effective Date, joint and several liability for the McKesson Term
Loan Claim, whereupon the McKesson Term Loan Claim will become the joint and several obligation of
the Acquirer and the McKesson Borrowers. If the Acquirer elects to assume the McKesson Term Loan
Claim such assumption will be effected in a manner and under arrangements in form and substance
reasonably satisfactory to McKesson. Notwithstanding such assumption, the Acquirer will have no right
of contribution, indemnity, reimbursement or similar claim against any Debtor, McKesson Borrower, or
an Affiliate of any Debtor or McKesson Borrower as a result of any such assumption of the Term Loan.

                          (ii) Release of McKesson Borrowers. As of the Effective Date, McKesson will
release the McKesson Borrowers (as well as the Acquirer if the Acquirer has elected to become jointly
and severally liable for the McKesson Term Loan Claim as contemplated in Section 5.07.b(i) above) from



Phoenix/277611.1                                     19
their respective obligations in respect of the McKesson Term Loan Claim in exchange for and in
consideration as set forth in Section 5.07.b(iii) below.

                          (iii) Issuance of McKesson Warrant. On the Effective Date, for and in
consideration of the release of the McKesson Term Loan Claim as set forth in Section 5.07.b(ii) above
and other financial accommodations made by McKesson as set forth in this Plan, Reorganized Snyders
will issue the McKesson Warrant under one of the following three alternatives, which Acquirer must
select by written notice to McKesson on or before the Effective Date:

                              (A) McKesson receives the McKesson Warrant to purchase Warrant
Shares comprising 12.5% of the New Common Stock, measured on the exercise date of such McKesson
Warrant; provided that the Acquirer must convert on the Effective Date all LC Sub-Debt in excess of
$20,000,000 to New Common Stock that is pari passu with the Warrant Shares;

                                (B) McKesson receives the McKesson Warrant to purchase Warrant
Shares comprising 6.25% of the New Common Stock, measured on the exercise date of such McKesson
Warrant; provided that on the Effective Date (i) the Acquirer must convert all LC Sub-Debt in excess of
$38,500,000 to New Common Stock that is pari passu with the Warrant Shares, and (ii) the Acquirer and
McKesson must enter into a subordinated participation agreement in form and substance satisfactory to
McKesson under which Acquirer must purchase on the Effective Date a participation in the principal
amount of the TD Loan in an amount equal to $20,000,000 in exchange for a cash payment by the
Acquirer to McKesson in the amount of $16,250,000, which participation amount will be subordinated to
the prior payment in full of the remainder of the TD Loan Claim in form and substance satisfactory to
McKesson. Such purchase of a subordinated participation in the TD Loan would be without recourse to
McKesson, would be made without any representation or warranty as to the validity or collectibility of the
TD Loan Claim, and would not be refundable for any reason;

                                (C) McKesson does not receive the McKesson Warrant; provided that on
the Effective Date the Acquirer and McKesson must enter into a loan purchase agreement in form and
substance satisfactory to McKesson under which the Acquirer must purchase on the Effective Date the
TD Loan in full in exchange for a cash payment by the Acquirer to McKesson in an amount equal to the
sum of $34,000,000 plus all unpaid interest accrued on the TD Loan at the New TD Interest Rate. Such
assignment of the TD Loan would be without recourse to McKesson, would be made without any
representation or warranty as to the validity or collectibility of the TD Loan Claim, and would not be
refundable for any reason.

         5.08. Class 8 – McKesson Trade Claim.

                 a. Impairment and Voting. Class 8 is impaired by this Plan. McKesson is entitled to
vote on this Plan.

                   b. Treatment.

                        (i) Payment. Reorganized Snyders will pay the McKesson Trade Claim in the
ordinary course of business in accordance with the terms of the New McKesson Supply Agreement.

                      (ii) Additional Security. On the Effective Date, the Acquirer will secure the
McKesson Trade Claim by providing, or causing to be provided, either cash collateral or a letter of credit
for McKesson’s benefit issued by a financial institution reasonably satisfactory to McKesson, in either
case in an amount equal to $10,000,000, under documentation in form and substance satisfactory to
McKesson.




Phoenix/277611.1                                   20
                       (iii) Continuation of Claim and Liens. As of and following the Effective Date, the
McKesson Trade Claim will be the obligation of Reorganized Snyders under the New McKesson Supply
Agreement. As security for Reorganized Snyders’ obligations under the McKesson Trade Claim,
McKesson will retain all Liens and security interests in the personal property of the Snyders Related
Entities held by McKesson as of the Effective Date including, without limitation, the Liens and security
interests granted to McKesson under the McKesson Collateral Documents, including without limitation
the McKesson Security Agreement, and under any order of the Bankruptcy Court entered in the Chapter
11 Cases concerning the Debtors’ use of cash collateral, each of which will be assumed, ratified, and
confirmed by Reorganized Snyders.

                       (iv) Acquirer Trade Participation Claim. The Acquirer Trade Participation Claim
will be converted to New Subordinated Debt on the Effective Date and will be subordinated to all Claims
of McKesson in Classes 6 and 8.

         5.09. Class 9 – Miscellaneous Secured Claims.

                 a. Impairment and Voting. Depending on the option selected by the Debtors under
Section 5.09.c below, the holders of Allowed Secured Claims in Class 9 may be impaired under this Plan.
If a particular Allowed Secured Claim in Class 9 is impaired under this Plan, the holder of such Claim is
entitled to vote on the Plan. If a particular Allowed Secured Claim in Class 9 is unimpaired under this
Plan, the holder of such Claim is deemed to accept the Plan and that holder’s vote on this Plan will not be
solicited. For purposes of voting and receiving distributions under this Plan, each holder of an Allowed
Secured Claim in Class 9 is considered to be in its own separate subclass within Class 9, and each such
subclass is deemed to be a separate Class for purposes of this Plan.

                  b. Retention of Liens. The holders of Allowed Secured Claims will retain their Liens on
their Collateral, except as otherwise provided in Section 5.09.c below.

                c. Options; Treatment. On or before ten Business Days following the Bankruptcy
Court’s approval of the Disclosure Statement, with respect to each holder of an Allowed Secured Claim in
Class 9, the Debtors will elect one of the following alternative treatments for each such Allowed Secured
Claim and provide prompt notice of the elected option to the holders of each such Allowed Secured
Claim:

                        (i) Abandonment. Before the Effective Date, the Debtors will abandon or
surrender to the holder of such Allowed Secured Claim in Class 9 the Collateral securing such Allowed
Secured Claim. Any Claim for deficiency asserted by a holder of an Allowed Secured Claim in Class 9
must be filed with the Bankruptcy Court within 30 days following the Effective Date. Any such Claim for
deficiency will be treated in accordance with Section 5.10 below as an Allowed General Unsecured
Claim. An Allowed Secured Claim treated in accordance with this option is impaired under this Plan.

                         (ii) Cash. On the Effective Date, or as soon thereafter as practicable, Reorganized
Snyders will pay the holder of an Allowed Secured Claim in Class 9, on account of such Allowed Secured
Claim, Cash equal to its Allowed Secured Claim, or such lesser amount to which the holder of such Claim
and Reorganized Snyders agree, in full satisfaction and release of such Claim. An Allowed Secured Claim
treated in accordance with this option is unimpaired under this Plan.

                         (iii) Cure; Reinstatement. Any default, other than a default of a kind specified in
Section 365(b)(2) of the Bankruptcy Code, owed to a holder of an Allowed Secured Claim in Class 9 will
be Cured or reinstated on or before the Effective Date. An Allowed Secured Claim treated in accordance
with this option is unimpaired under this Plan.




Phoenix/277611.1                                    21
         5.10. Class 10 – General Unsecured Claims and Rejection Claims.

                a. Impairment and Voting. Class 10 is impaired by this Plan. All holders of Allowed
Claims in Class 10 are deemed to reject this Plan.

                b. Distributions. Each holder of an Allowed Claim in Class 10 will receive: (i) a Pro
Rata portion of the Class 10 Fund upon the latest of (A) the Effective Date and (B) the tenth Business
Day after such Claim is Allowed, unless, before the latest of the above dates, the holder of such Claim
and Reorganized Snyders agree in writing to a different date; and (ii) a Pro Rata portion of all recoveries
from Preserved Litigation Claims (including Avoidance Actions), if any, net of all fees and costs the
Oversight Committee may incur in realizing such recoveries.

         5.11. Class 11 – Other Acquirer Claims.

                a. Impairment and Voting. Class 11 is impaired by this Plan. All holders of Allowed
Claims in Class 11 are deemed to reject this Plan and, therefore, will not be solicited to vote on this Plan.

                 b. Distributions. The Acquirer will not receive or retain any rights, property, or
distributions on account of its Other Acquirer Claims under this Plan.

         5.12. Class 12 – Equity Interests and Equity Related Claims.

                a. Impairment and Voting. Class 12 is impaired by this Plan. All holders of Allowed
Claims in Class 12 are deemed to reject this Plan and, therefore, will not be solicited to vote on this Plan.

                 b. Distributions. As of the Effective Date, all Equity Interests and Equity Related Claims
will be canceled and extinguished without further action under any applicable agreement, law, regulation,
order, or rule. The holders of Equity Interests and Equity Related Claims will not receive or retain any
rights, property, or distributions on account of their Equity Interests or Equity Related Claims under this
Plan.

                                          ARTICLE 6.
                                    IMPLEMENTATION OF PLAN

        6.01. New McKesson Supply Agreement. As of the Effective Date: (a) Reorganized Snyders
will assume the New McKesson Supply Agreement under Bankruptcy Code § 365(a); (b) such
assumption will constitute adequate cure of any defaults under the New McKesson Supply Agreement;
and (c) such assumption will constitute adequate assurance of future performance of the New McKesson
Supply Agreement under Bankruptcy Code § 365(b). As of the Effective Date, Reorganized Snyders will
assume all outstanding amounts due in respect of the New McKesson Supply Agreement other than the
Deferred Trade Balance, including both the unpaid balance under the McKesson Trade Claim and any
amounts accrued for post-Petition Date merchandise under any applicable order of the Bankruptcy Court
regarding the Debtors’ use of cash collateral or otherwise. All such outstanding amounts will be paid in
the ordinary course of business according to the terms of the New McKesson Supply Agreement.
Reorganized Snyders’ obligation to repay such outstanding amounts will continue to be secured in the
manner set forth in Section 5.08.b of this Plan. McKesson will not charge Reorganized Snyders any
penalties or add-backs for any pre-Petition Date, pre-assumption defaults under the New McKesson
Supply Agreement or on account of any pre-Petition Date failure to make prompt payment under the New
McKesson Supply Agreement or the McKesson Supply Agreement.

      6.02. New DIP LCs. After the Petition Date and before the Effective Date, Acquirer posted the
New DIP LCs to credit enhance the DIP Facility. On the Effective Date, as part of the payment and



Phoenix/277611.1                                     22
satisfaction of the Class 1 DIP Claim, CIT has agreed to draw or realize upon, as the case may be, the
New DIP LCs, to the extent that such letters of credit were not already drawn or cash collateral realized
upon before the Effective Date. Any amounts owing to the Acquirer by way of subrogation or otherwise
as a result of draws or realizations upon the New DIP LCs will be converted on the Effective Date to New
Subordinated Debt.

         6.03. Subordinated Debt.

                a. Conversion. On the Effective Date, the Acquirer and Reorganized Snyders will
convert the following indebtedness and financial accommodations into New Subordinated Debt: (a) all
outstanding indebtedness of Reorganized Snyders to the Acquirer under the Acquirer Trade Debt
Participation Agreement; (b) all new cash or other financial accommodations provided to, or for the
benefit of, Snyders by the Acquirer after the Petition Date and before the Effective Date, including the
Katz Capital Contribution; and (c) the LC Sub-Debt, after giving effect to the conversion, if any, of LC
Sub-Debt into New Common Stock in accordance with Section 5.07.b(iii) of this Plan.

                b. Additional Subordinated Debt. All new cash or financial accommodations that the
Acquirer provides to Reorganized Snyders from and after the Effective Date (other than Post-Effective
Date Senior Indebtedness) will be contributed to Reorganized Snyders in the form of New Subordinated
Debt. The New Subordinated Debt referred to in this Section 6.03.b may not exceed $20,000,000 unless
reasonably required by Reorganized Snyders for general corporate purposes or to effect payments
required under this Plan. Except as expressly set forth in this Section 6.03.b, nothing in this Section 6.03.b
is to be construed to limit the new cash or financial accommodations that the Acquirer provides to
Reorganized Snyders from and after the Effective Date to $20,000,000.

                c. Interest. Subordinated Debt will accrue interest from and after the Effective Date at a
rate of 11% per annum, provided, however, that such interest will be payable exclusively by the issuance
of additional New Subordinated Debt for so long as McKesson holds the McKesson Warrant or Warrant
Shares.

          6.04. Plan Funding. Funds to be used to make Cash payments under this Plan will come from the
Effective Date Cash Fund, which includes the Class 10 Fund and the Reclamation Fund, and which will
be created and funded on the Effective Date from, among other things, the operation of the Debtors’
business, asset dispositions, the Katz Capital Contribution, and borrowings under the Exit Financing
Facility. The Effective Date Cash Fund will include a reserve of Cash sufficient to make appropriate
distribution under this Plan on account of any Disputed Claim that would have been entitled to
distribution from the Effective Date Cash Fund if such Disputed Claim were an Allowed Claim on the
Effective Date. If and when any such Disputed Claim becomes an Allowed Claim, Cash sufficient to
make appropriate distribution under this Plan on account of such Claim will be made from such reserved
Cash in the Effective Date Cash Fund. The Effective Date Cash Fund will be held in trust by Reorganized
Snyders for the benefit of holders of Allowed Claims in Classes 4 and 10, and will not be subject to the
claims of creditors of the Debtors or Reorganized Snyders or any affiliates or successors, in this or any
subsequent proceeding, except to the extent provided in this Plan. No later than five Business Days before
the first date scheduled for the commencement of the Confirmation Hearing, the Debtors will file with the
Court a detailed accounting of the Debtors’ good faith estimate of the amount of Cash required by
Reorganized Snyders to fund: (a) the Class 10 Fund; (b) the Reclamation Fund; (c) amounts required to
be distributed under this Plan in respect of Administrative Claims, Priority Tax Claims, Preserved
Ordinary Course Administrative Claims, Professional Fee Claims and all Claims in Classes 1, 2, 3, and 9
(whether such Claims are projected to be Allowed or Disputed as of the Effective Date or otherwise
payable on a date other than the Effective Date); and (d) any Cure of any assumed executory contracts
and unexpired leases of nonresidential real property under Section 7.03 of this Plan. If Allowed




Phoenix/277611.1                                     23
Reclamation Claims in Class 4 do not exhaust the Reclamation Fund, any excess Cash in the Reclamation
Fund will be added to the Class 10 Fund.

         6.05. Exit Financing Facility. On or before the Effective Date, Snyders or Reorganized Snyders,
as the case may be, will execute the Exit Financing Facility, which among other things will (a) be
effective as of the Effective Date, (b) be a senior secured facility, and (c) contain terms and conditions in
form and substance acceptable to Snyders, Reorganized Snyders and McKesson, consistent with the
Restructuring Agreement.

         6.06. Certificate of Incorporation and By-Laws. As of the Effective Date and without any
further action by the stockholders or directors of the Debtors or Reorganized Snyders, Snyders’ certificate
of incorporation and by-laws will be amended and restated substantially in the forms of the Reorganized
Snyders Certificate and the Reorganized Snyders By-Laws, which will provide for, among other things,
the authorization of all acts necessary to implement this Plan including, without limitation, the issuance of
1,000,000 shares of New Common Stock and the McKesson Warrant. The Reorganized Snyders
Certificate and the Reorganized Snyders By-Laws will also prohibit (to the extent required by Bankruptcy
Code § 1123(a) and (b)) the issuance of non-voting equity securities. After the Effective Date,
Reorganized Snyders may amend and restate its certificate of incorporation and by-laws as permitted by
applicable law.

        6.07. Private Company Status. Following the Effective Date, Reorganized Snyders will
maintain no registration under the Exchange Act and will file no reports with the SEC or otherwise be
subject to the reporting requirements under the Exchange Act. The New Common Stock will not be
traded on any recognized stock exchange or over-the-counter securities market.

         6.08. Cancellation of Securities, Instruments and Agreements. On the Effective Date, except
to the extent provided otherwise in this Plan, all securities, and all agreements, instruments, and other
documents evidencing or governing any Claims or Equity Interests, will be automatically deemed
terminated, canceled and extinguished with respect to the Debtors and the Chapter 11 Cases (all without
further action by any Person), and all obligations of the Debtors under such instruments and agreements
will be deemed fully and finally satisfied, released, and discharged.

         6.09. Effectiveness of Securities, Instruments, Agreements and Documents. On the Effective
Date, all securities, instruments, agreements, and documents issued, entered into, delivered, or filed under
this Plan, including, without limitation, the New Common Stock, the Plan Documents, and any security,
instrument, agreement or document entered into, delivered or filed in connection with any of the
foregoing, will be deemed to become effective, binding, and enforceable in accordance with its respective
terms and conditions.

        6.10. No Corporate Action Required. As of the Effective Date: (a) the adoption, execution,
delivery, and implementation of all contracts, leases, instruments, releases, and other agreements related
to or contemplated by this Plan; and (b) the other matters provided for under, or in furtherance of, this
Plan involving corporate action required of the Debtors, will be deemed to have occurred and become
effective as provided in this Plan, and will be deemed authorized and approved in all respects without
further order of the Bankruptcy Court or any further action by the stockholders or directors of the
Debtors.

         6.11. Directors and Officers.

                a. Initial Board of Directors. The initial board of directors of Reorganized Snyders
following the Confirmation Date will be comprised of one director: Daryl A. Katz.




Phoenix/277611.1                                     24
                  b. Initial Officers. Snyders’ officers serving immediately before the Effective Date will
serve as the initial officers of Reorganized Snyders on the Effective Date.

                 c. Indemnification and Insurance. Reorganized Snyders will provide all directors with
indemnification rights and officers and directors liability insurance and will compensate its directors in
accordance with practices customary for entities of its type. Those directors and officers serving the
Debtors immediately before the Effective Date and not continuing in office after the Effective Date, if
any, will be terminated without cause as of the Effective Date and will be indemnified by Reorganized
Snyders for all actions taken while acting as directors and officers for the Debtors in accordance with the
Debtors’ certificates of incorporation, by-laws, or contracts, or applicable state law on account of services
provided by such officers and directors to the Debtors from the Petition Date through and including the
Effective Date.

        6.12. Operation Pending Effective Date. Until the Effective Date, the Debtors will continue to
operate their businesses, subject to all applicable requirements of the Bankruptcy Code and the
Bankruptcy Rules.

         6.13. Oversight Committee. On the Effective Date, the Oversight Committee will be formed.
The Oversight Committee may enact its own by-laws governing its own conduct. If any member of the
Oversight Committee dies or resigns after the Effective Date, the remaining members of the Oversight
Committee will have the right to designate a successor from among the holders of Allowed Claims in
Class 10. If such dying or resigning member is the member selected by the holders of Rejection Claims,
only the holders of Rejection Claims will have the right to designate a successor from among the holders
of Rejection Claims. If an Oversight Committee member assigns its Claim or releases the Debtors from
payment of the balance of its Claim, such act will constitute a resignation from the Oversight Committee.
Until a vacancy on the Oversight Committee is filled, the Oversight Committee will function in its
reduced number. Upon the entry of the final decree and following all payments being made to holders of
Allowed Claims in Classes 4 and 10 under this Plan, the Oversight Committee will be dissolved and the
members released and discharged from all further authority, duties, responsibilities, and obligations
related to and arising from and in connection with the Chapter 11 Cases, and the retention or employment
of the Oversight Committee’s attorneys, accountants, and other agents, will terminate. The Oversight
Committee may retain, at its option, such professionals as it deems necessary to fulfill its functions as set
forth in Article 10 and Article 11 of this Plan. All expenses of the Oversight Committee are to be paid, or
otherwise reserved, from the Class 10 Fund.

        6.14. Assumption of Restructuring Agreement. On the Effective Date, Reorganized Snyders
will assume and ratify the Restructuring Agreement and all the obligations of the Debtors under or related
to the Restructuring Agreement, which will constitute the legal, valid, and binding obligations of
Reorganized Snyders, fully enforceable against Reorganized Snyders according to such agreement’s
terms. Neither this Plan nor the entry of the confirmation Order will affect, impair, waive or otherwise
modify any of the obligations of any Snyders Related Entity under, to, or in connection with the
Restructuring Agreement.

                                    ARTICLE 7.
                     EXECUTORY CONTRACTS AND UNEXPIRED LEASES

        7.01. Assumption or Rejection of Executory Contracts and Unexpired Leases. The executory
contracts and unexpired leases between any Debtor and any Person (other than the Restructuring
Agreement, McKesson Supply Agreement and the New McKesson Supply Agreement) are dealt with as
follows:




Phoenix/277611.1                                     25
                 a. Assumption of Executory Contracts and Unexpired Leases. All executory contracts
and unexpired leases set forth on the schedule of assumed executory contracts and unexpired leases filed
with the Bankruptcy Court as part of Exhibit F to this Plan that exist between any Debtor and any Person
will be assumed by Reorganized Snyders or assumed and assigned (as indicated on Exhibit F to this Plan)
as of the Effective Date, except for any executory contract or unexpired lease: (a) that has been rejected in
accordance with an order of the Bankruptcy Court entered before the Confirmation Date; or (b) as to
which a motion for approval of rejection of such executory contract or unexpired lease, if applicable, has
been filed with the Bankruptcy Court before the Confirmation Date.

             b. Assumption of Modified CBAs. The Pharmacist CBA and Clerks CBA will be
deemed assumed, as modified under the Section 1113 Order, as of the Effective Date.

                 c. Gibson Management License Agreement. Confirmation of this Plan does not affect
in any way Gibson Management Group L.P.’s rights under the License Agreement dated January 10, 2003
between Drug Emporium, Inc. as licensor and Gibson Management Group as licensee, specifically the
latter’s perpetual, exclusive right to use the trademarks and service marks described in that agreement in
the operation of drug stores in Texas and parts of Louisiana and Arkansas. Reorganized Snyders is bound
by all terms and conditions of the License Agreement from and after the Effective Date as successor-in-
interest to Drug Emporium, Inc.

                 d. Rejection of Executory Contracts and Unexpired Leases. All executory contracts
and unexpired leases that exist between any Debtor and any Person and either are set forth on the
schedule of rejected executory contracts and unexpired leases filed with the Bankruptcy Court as part of
Exhibit G to this Plan or do not appear on Exhibit F to this Plan as assumed will be deemed rejected as of
the Effective Date, except for any executory contract or unexpired lease that has been assumed or rejected
in accordance with an order of the Bankruptcy Court entered on or before the Confirmation Date. The
Warehouse CBA will be deemed rejected as of the Confirmation Hearing.

         7.02. Approval of Assumption or Rejection. Entry of the Confirmation Order constitutes:
(a) the approval under Sections 365 and 1113 of the Bankruptcy Code of the assumption and assignment
of the executory contracts and unexpired leases assumed and assigned under this Plan or otherwise during
the Chapter 11 Cases; and (b) the approval under Sections 365 and 1113 of the Bankruptcy Code of the
rejection of the executory contracts and unexpired leases rejected under this Plan or otherwise during the
Chapter 11 Cases. Notwithstanding anything contained in this Section 7.02 to the contrary, the Debtors
retain the right to add to, or delete from, the schedule of rejected executory contracts and unexpired leases
any executory contract or unexpired lease that is initially an assumed executory contract or an assumed
unexpired lease on the Schedules or in Exhibit F to this Plan.

        7.03. Cure of Defaults. On the Effective Date or as soon thereafter as practicable, Reorganized
Snyders will Cure any defaults under any executory contract or unexpired lease assumed or assumed and
assigned under this Plan in accordance with Section 365(b)(1) of the Bankruptcy Code.

         7.04. Rejection Damages Bar Date. All proofs of claims relating to Claims arising from the
rejection of any executory contract or unexpired lease under this Plan are required to be filed with the
Bankruptcy Court no later than the Rejection Damages Bar Date. Any such Claim not filed within that
time will be forever barred. With respect to any executory contract or unexpired lease rejected by the
Debtors before the Confirmation Date, the deadline for filing such Claims is as set forth in previous
orders of the Bankruptcy Court.

         7.05. Carlton Financial Rejection Damages Claim. Notwithstanding Section 7.04 of this Plan,
Carlton Financial Corporation has, as of the Effective Date, an Allowed Claim arising under the rejection
of its unexpired lease of personal property with the Debtors in the amount of $1,100,00.00, subject only to



Phoenix/277611.1                                     26
reduction dollar-for-dollar by the value of net proceeds obtained from the sale of the personal property
subject to the Carlton Financial Corporation personal property lease with the Debtors, to which Carlton
Financial Corporation will be solely entitled. The Debtors and the Reorganized Debtors will ensure the
security of such personal property pending any such sale and will cooperate with Carlton Financial
Corporation’s efforts to effect such sale and with the removal of the personal property once sold. On April
1, 2004, the Debtors will pay Carlton Financial Corporation the regular monthly rental for April 2004
under the personal property lease between those parties.

         7.06. Indemnification Obligations. Any obligations of any Debtor to indemnify any Person
serving as a fiduciary of any employee benefit plan or employee benefit program of any Debtor, under
charter, by-laws, contract, or applicable state law is deemed to be an executory contract and assumed by
Reorganized Snyders as of the Confirmation Date (but subject to the occurrence of the Effective Date).
Any obligation of any Debtor to indemnify, reimburse, or limit the liability of any Person, including but
not limited to any officer or director of any Debtor, or any agent, professional, financial advisor, or
underwriter of any securities issued by any Debtor related to any acts or omissions occurring before the
Petition Date is rejected, canceled, and discharged under this Plan as of the Confirmation Date (but
subject to the occurrence of the Effective Date), and any Claims resulting from such obligations are
Disallowed under Bankruptcy Code § 502(e). Notwithstanding any of the foregoing, nothing contained in
this Plan affects, impairs, or prejudices the rights of any Person covered by any applicable D&O Policy
with respect to such policy or policies. Moreover, Reorganized Snyders will maintain in force for three
years following the Effective Date appropriate D&O Policies covering pre-Effective Date directors and
officers of the Debtors and containing substantially the same provisions and limits of coverage as the
policies that were in force on the Petition Date. Reorganized Snyders will be responsible for paying the
deductible or retention amounts under such policies for such three-year period.

         7.07. Benefit Plans.

                  a. Generally. On the Effective Date, all Benefit Plans will be either assumed or rejected
and terminated as of the Confirmation Date as indicated on Exhibits F and G to this Plan, if not earlier
terminated or assumed by the Debtors before the Confirmation Date. Any such terminations will be
completed according to the terms and conditions of each Benefit Plan and effected in conformity with all
statutory and regulatory requirements including such notice provisions as may apply. Any undistributed,
vested benefits of the terminated Benefit Plans will be distributed to the participants as provided by
statute, the applicable regulations and the Benefit Plans’ provisions.

                b. Regulatory Approvals. In order to ensure that the Benefit Plans’ terminations comply
with the terms of the Benefit Plans, the applicable statutes and regulations, the Debtors will, if necessary,
obtain any approvals of the relevant regulatory agencies, such as the Pension Benefit Guaranty
Corporation, the IRS, and the Department of Labor, in respect of such terminations, provided, however,
that any disputes relating to the termination of any Benefit Plans will be heard and determined by the
Bankruptcy Court, which retains jurisdiction over all matters related to the terminated Benefit Plans.

                c. Retirees. If any of the Claims of retirees against the Debtors may give rise to
indemnification claims by the Debtors under agreements between a Debtor and any third party, the
Debtors will, if necessary or appropriate, assign such indemnification rights and claims to any such
retiree. Notwithstanding anything in this Section 7.07 or elsewhere in this Plan to the contrary,
Reorganized Snyders will continue to honor all obligations of the Debtors owed to any retiree under any
Benefit Plan as of the Confirmation Date solely to the extent, and for the duration of the period, the
Debtors are contractually or legally obligated to provide such benefits, subject to any rights of the Debtors
or Reorganized Snyders under applicable law.




Phoenix/277611.1                                     27
                 d. Pacific Employers Insurance Company. Reorganized Snyders will continue to meet
all the Debtors’ obligations under the workers’ compensation, automobile and excess commercial general
liability insurance policy or policies issued by Pacific Employers Insurance Company, covering the
Debtors from September 19, 2001 through September 19, 2003, and all related program agreements,
including, without limitation, the continued defense of all claims (where the Debtors are so obligated
under the policies), and the provision and maintenance of letters of credit and paid loss deposit funds
under such program agreements. Nothing in the Joint Plan will impair, negate, limit, or restrict any right
of Pacific Employers Insurance Company of recoupment or setoff in any applicable paid loss deposit fund
or any rights of Pacific Employers Insurance Company in applicable letters of credit, paid loss deposit
funds, or other collateral securing the Debtors’ obligations.

                                          ARTICLE 8.
                           SECURITIES TO BE ISSUED UNDER THE PLAN

        8.01. New Common Stock. Principal provisions of the New Common Stock are summarized as
follows:

                a. Authorization. The Reorganized Snyders Certificate authorizes the issuance of
1,000,000 shares of New Common Stock. On the Effective Date, or as soon thereafter as practicable,
Reorganized Snyders will issue approximately 1,000,000 shares of such New Common Stock in
accordance with Section 6.06 of this Plan, which will represent 100% of the equity in Reorganized
Snyders, including any Warrant Shares, as of the Effective Date. All shares of New Common Stock to be
issued in accordance with this Plan (including, without limitation, those shares issuable upon the exercise
of the McKesson Warrant) will, at issuance, be duly authorized, validly issued, fully paid, and non-
assessable. The holders of such shares will have no preemptive or other rights to subscribe for additional
shares.

                   b. Par Value. The New Common Stock will have a par value of $0.01 per share.

                 c. Rights. The New Common Stock will have such rights with respect to dividends,
liquidation, voting, and other matters as are set forth in the Reorganized Snyders Certificate and as
provided under applicable law, including, without limitation, the right to one vote per share.

         8.02. Stock Transfer Restrictions. Following the Effective Date, no Person holding shares of
New Common Stock may transfer, and Reorganized Snyders will not register the transfer of, such shares
of New Common Stock, whether by sale, assignment, gift, bequest, appointment or otherwise, if such
transfer would cause the aggregate number of outstanding shares of New Common Stock to be held of
record by 500 or more Persons. Any purported transfer of shares of New Common Stock in violation of
this Section 8.02 will be null and void, and the purported transferee, with respect to the shares transferred,
will have no rights as a stockholder of Reorganized Snyders and no other rights against or with respect to
Reorganized Snyders.

       8.03. McKesson Warrant. In accordance with Section 5.07.b(iii) of this Plan, on the Effective
Date, Reorganized Snyders will issue to McKesson the McKesson Warrant entitling McKesson to
purchase Warrant Shares of New Common Stock.

                 a. Terms. The McKesson Warrant will be in form and substance satisfactory to
McKesson and will include, without limitation: (a) a 10-year exercise term; (b) an exercise price per
Warrant Share equal to $100 divided by the number of underlying Warrant Shares then purchasable under
the McKesson Warrant; (c) full anti-dilution protection; (d) registration rights, including, without
limitation, “piggy-back” registration rights; and (e) co-sale and “tag along” rights.




Phoenix/277611.1                                     28
                 b. Put and Call Rights. The McKesson Warrant will be subject to put and call rights
exercisable after the fourth anniversary of the Effective Date. Call rights per underlying Warrant Share
will be exercisable for fair market value plus a 10% premium. Put rights per underlying Warrant Share
will be exercisable for fair market value. Fair market value per underlying Warrant Share will be
determined by mutual agreement of McKesson and Reorganized Snyders or by independent third party
valuation. Such put and call rights will be more fully set forth in the McKesson Warrant.

         8.04. Section 1145 Exemption. In accordance with Bankruptcy Code § 1145, the issuance of the
New Common Stock and the McKesson Warrant under this Plan is exempt from the registration
requirements of Section 5 of the Securities Act and any state or local law requiring registration for offer
or sale of a security or registration or licensing of an issuer of, underwriter of, or broker dealer in such
securities.

                                ARTICLE 9.
         CONFIRMATION WITHOUT ACCEPTANCE FROM ALL IMPAIRED CLASSES

        Classes 10 and 12 are deemed to reject this Plan in accordance with Bankruptcy Code § 1126.
The Debtors and the Committee intend to use the provisions of Bankruptcy Code § 1129(b) to satisfy the
requirements for confirmation of this Plan with respect to Classes 10 and 12.

                                         ARTICLE 10.
                                   DETERMINATION OF CLAIMS

         10.01. Objections to Claims. Notwithstanding the occurrence of the Effective Date, and except
as to any Claim that has been Allowed before the Effective Date, Reorganized Snyders may object to the
allowance of any Claim against the Debtors or seek estimation of any Claim on any grounds permitted by
the Bankruptcy Code. Without limiting the foregoing, Reorganized Snyders will prosecute, at its expense,
any objections to Claims in Class 10 and may choose, at its sole discretion, not to object or to settle any
Class 10 Claim asserted in an amount of $100,000.00 (or such lesser amount as Reorganized Snyders and
the Oversight Committee agree) or less over the amount set forth for such Claim in the Schedules.
Reorganized Snyders must consult with, and obtain the approval of, the Oversight Committee with
respect to any decision regarding any Class 10 Claim asserted in an amount in excess of $100,000.00 over
the amount set forth for such Claim in the Schedules. If Reorganized Snyders believes it desirable not to
object, or to continue to object, to a Class 10 Claim and the Oversight Committee disagrees, the Oversight
Committee may elect to take over the prosecution of such objection to such Claim, with all the Oversight
Committee’s expenses for such prosecution coming from the Class 10 Fund. Reorganized Snyders will
prosecute any objections to any Claims in good faith. Any objections to any Claims must be brought by
filing the appropriate pleading in the Bankruptcy Court at any time before the first Business Day that is
180 days after the Effective Date or such later date as the Bankruptcy Court may approve. Reorganized
Snyders must, no less frequently than once every 30 days, provide the Oversight Committee with a
reconciliation report of all activity with respect to objections to Claims.

        10.02. Disputed Claims Reserve. From the Class 10 Fund, Reorganized Snyders will establish
the Disputed Claims Reserve following the Effective Date. For purposes of establishing the Disputed
Claims Reserve, Reorganized Snyders will be required to estimate each Disputed Claim in Class 10 at the
Maximum Amount of such Claim. Notwithstanding anything to the contrary contained in this Plan, the
Maximum Amount of such Claim will constitute the maximum amount at which such Disputed Claim in
Class 10 may be Allowed.

         10.03. Distributions upon Allowance or Disallowance of Disputed Claims. No distributions
will be made to any holder of a Claim unless and until such Claim becomes an Allowed Claim. If a Claim
is not an Allowed Claim as of the Effective Date, distributions on account of such Claim will commence



Phoenix/277611.1                                    29
only when such Claim becomes an Allowed Claim after the Effective Date or as otherwise specifically
provided in this Plan. To the extent a Disputed Claim becomes an Allowed Claim, Reorganized Snyders
will make a distribution in accordance with the terms of this Plan applicable to Claims of the Class in
which such Claim resides. Such distribution will be made from the Disputed Claims Reserve. To the
extent a Disputed Claim is Disallowed, the Cash held in the Disputed Claims Reserve in respect of such
Disallowed Claim will be removed from the Disputed Claims Reserve and included within the Class 10
Fund to be used for distribution to holders of Allowed Claims in Class 10.

         10.04. Contingent Claims. Until a Contingent Claim becomes an Allowed Claim or is
Disallowed, such Claim will be treated as a Disputed Claim for all purposes related to distributions under
this Plan. The holder of a Contingent Claim will be entitled to a distribution under this Plan only when
and if such Contingent Claim becomes an Allowed Claim. Any Contingent Claim for reimbursement or
contribution held by a Person that may be liable with any Debtor on a Claim of a Creditor is Disallowed
as of the Effective Date if: (a) such Creditor’s Claim is Disallowed; (b) such Claim for reimbursement or
contribution is contingent as of the Effective Date; or (c) such entity asserts a right of subrogation to the
rights of such Creditor under Bankruptcy Code § 509.

                                       ARTICLE 11.
                            PRESERVATION OF LITIGATION CLAIMS

        11.01. Preserved Litigation Claims. Subject to Section 13.05 of this Plan, in accordance with
Bankruptcy Code § 1123(b)(3), all Preserved Litigation Claims, if any, are retained and reserved for the
benefit of holders of Allowed Claims in Class 10. The Oversight Committee is designated as the Estates’
representative under Bankruptcy Code § 1123(b)(3)(B) for purposes of the Preserved Litigation Claims.

         11.02. Prosecution of Preserved Litigation Claims. The Oversight Committee will have the
authority to prosecute, defend, compromise, settle and otherwise deal with any Preserved Litigation
Claims, and will do so in its capacity as a representative of the Estates in accordance with Bankruptcy
Code § 1123(b)(3)(B). The Oversight Committee will bear the fees and costs associated with litigating
such Preserved Litigation Claims from the Class 10 Fund. The Oversight Committee will have sole
discretion to determine in its business judgment which Preserved Litigation Claims to pursue, which to
settle, and the terms and conditions of those settlements.

        11.03. Distribution of Preserved Litigation Claims Proceeds. All monetary judgments and
awards resulting from the settlement or prosecution of the Preserved Litigation Claims will be distributed
to the holders of Allowed General Unsecured Claims in Class 10 after deduction of the reasonable and
necessary fees and costs that the Oversight Committee incurs in the prosecution and/or settlement of the
Preserved Litigation Claims.

        11.04. Preservation of Insurance. Any discharge and release of the Debtors from Claims as
provided in this Plan, except as necessary to be consistent with this Plan, will not diminish or impair the
enforceability of any insurance policy that may cover Claims against any Debtor or any other Person.

                                           ARTICLE 12.
                                      CONDITIONS PRECEDENT

         12.01. Conditions to Confirmation. The following are conditions precedent to confirmation of
this Plan:

               a. Approval of Disclosure Statement. The Bankruptcy Court has entered a Final Order
approving the Disclosure Statement.




Phoenix/277611.1                                     30
               b. Form of Confirmation Order. The Confirmation Order has been entered in form and
substance reasonably acceptable to the Debtors, the Committee, and McKesson. If the Debtors and the
Committee are unable to reach an agreement with any party regarding the form and substance of the
Confirmation Order, the Bankruptcy Court will resolve all such disputes.

                   c. Substance of Confirmation Order. The Confirmation Order contains the following:

                          (i) The provisions of the Confirmation Order are nonseverable and mutually
dependent;

                        (ii) Approval of the assumption, rejection, or assumption and assignment of all
executory contracts and unexpired leases under this Plan;

                      (iii) Approval of the assumption of the TD Loan Documents, the Restructuring
Agreement, the McKesson Collateral Documents, including without limitation the McKesson Security
Agreement, and the New McKesson Supply Agreement by Reorganized Snyders;

                        (iv) All executory contracts or unexpired leases assumed and assigned by the
Debtors during the Chapter 11 Cases or under this Plan remain in full force and effect for the benefit of
Reorganized Snyders or any assignees of such contracts or leases, as the case may be, notwithstanding
any provision in any such contract or lease (including those described in Bankruptcy Code § 365(b)(2)
and (f)) that prohibits or conditions such assignment or transfer or that enables, permits or requires
termination of such contract or lease;

                       (v) The Debtors are released and discharged from all obligations arising under all
executory contracts and unexpired leases rejected by the Debtors during the Chapter 11 Cases or under
this Plan;

                        (vi) This Plan does not provide for the liquidation of all or substantially all of
Snyders’ property and Confirmation is not likely to be followed by the need for further financial
reorganization of Reorganized Snyders or the need for further financial reorganization of any Debtor;

                            (vii) Except as expressly provided in this Plan, the Debtors are discharged as of
the Confirmation Date from all Claims and any “debt” (as that term in defined in Section 101(12) of the
Bankruptcy Code) that arose on or before the Confirmation Date, and the Debtors’ liability in respect of
such Claims and debts is extinguished completely, whether reduced to judgment or not, liquidated or
unliquidated, contingent or noncontingent, asserted or unasserted, fixed or unfixed, matured or
unmatured, disputed or undisputed, legal or equitable, or known or unknown, or that arose from any
agreement of the Debtors that has either been assumed or rejected in the Chapter 11 Cases or under this
Plan, or obligation of the Debtors incurred before the Confirmation Date, or from the Debtors’ conduct
before the Confirmation Date, or that otherwise arose before the Confirmation Date including, without
limitation, all interest, if any, on any such debts, whether such interest accrued before or after the Petition
Date;

                      (viii) In accordance with Bankruptcy Code § 1123(b)(3)(B), the Oversight
Committee is appointed as the representative and agent of the Estates to prosecute, compromise, or
abandon any Preserved Litigation Claims in accordance with this Plan;

                         (ix) Findings and conclusions sufficient to provide a basis for, and supporting the
Bankruptcy Court’s authorization of, substantive consolidation of the Estates in accordance with Sections
2.01 and 2.02 of this Plan;




Phoenix/277611.1                                      31
                        (x) Retention of jurisdiction of the Bankruptcy Court to the fullest extent
permissible by applicable law, and at least to the extent contemplated by Article 14 of this Plan.

        12.02. Conditions to Effectiveness. The following are conditions precedent to the occurrence of
the Effective Date:

                   a. The Confirmation Date has occurred;

                b. The Confirmation Order is a Final Order, except that the Debtors reserve the right to
cause the Effective Date to occur notwithstanding the pendency of an appeal of the Confirmation Order,
under circumstances that would moot such appeal;

                   c. The Section 1113 Order has been entered and is a Final Order;

              d. No request for revocation of the Confirmation Order under Section 1144 of the
Bankruptcy Code has been made, or, if made, remains pending;

               e. The Exit Financing Facility has been fully executed, has closed, and has funded and
the DIP Claim has been paid in full in Cash;

                 f. The Bankruptcy Court in the Confirmation Order has approved the retention of
jurisdiction provisions in Article 14 of this Plan;

                 g. The form and substance of all securities, instruments, agreements, and documents
necessary to implement the transactions contemplated by this Plan, including the Plan Documents, are
reasonably satisfactory to the Debtors and McKesson;

                h. Reorganized Snyders retains sufficient Cash (from all applicable sources) on the
Effective Date to make distributions to holders of Allowed Claims required by this Plan to be made on the
Effective Date and the Effective Date Cash Fund has been funded;

                 i. Each of the Plan Documents and all other securities, instruments, agreements and
documents to be issued, entered into, delivered, or filed under this Plan have been issued, entered into,
delivered or filed and have become effective; and

                 j. The Reorganized Debtors receive all regulatory approvals, which have become final
and nonappealable or any period of objection by regulatory authorities has expired, as applicable, and all
other material approvals, permits, authorization, consents, licenses, and agreements from other third
parties necessary or appropriate to permit the transactions contemplated by this Plan and any related
agreements and to permit the Reorganized Debtors to carry on their business after the Effective Date in a
manner consistent in all material respects with the manner in which it was carried on before the Effective
Date (collectively, the “Approvals”). The Approvals must not contain any condition or restriction that
materially impairs the Reorganized Debtors’ ability to carry on their business in a manner consistent in all
respects with the manner as proposed to be carried on by the Reorganized Debtors under this Plan..

         12.03. Waiver of Conditions. The conditions to confirmation and the Effective Date may be
waived in whole or in part by the Debtors and the Committee (and where applicable, McKesson and CIT
(with respect to Section 12.02.e)) at any time without notice, an order of the Bankruptcy Court, or any
further action other than proceeding to Confirmation and consummation of this Plan.




Phoenix/277611.1                                      32
                                     ARTICLE 13.
               TITLE TO PROPERTY; DISCHARGE; INJUNCTION; EXCULPATION

         13.01. Vesting of Assets. Subject to the provisions of this Plan, all property of the Estates will
vest in the Reorganized Debtors on the Effective Date free and clear of all Liens, Claims, and Equity
Interests, except as otherwise provided in this Plan. From and after the Effective Date, the Reorganized
Debtors may operate their business, and may use, acquire, and dispose of property free of any restrictions
of the Bankruptcy Code, including the employment of, and payment to, Professionals, except as otherwise
provided in this Plan or the Confirmation Order. Except as otherwise provided in this Plan, the rights
afforded in this Plan and the treatment of Claims against the Debtors and Equity Interests provided in this
Plan are in exchange for, and in complete satisfaction, discharge and release of, all such Claims and
Equity Interests.

        13.02. Discharge. Except as provided in this Plan or the Confirmation Order, the rights granted
under this Plan and the treatment of Claims and Equity Interests under this Plan are in exchange for and in
complete satisfaction, discharge, and release of, all Claims including any interest accrued on General
Unsecured Claims from the Petition Date and termination of all Equity Interests. Except as provided in
this Plan or the Confirmation Order, Confirmation: (a) discharges Snyders and the Reorganized Debtors
from all Claims or other debts that arose before the Confirmation Date, and all debts of the kind specified
in Sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not: (i) a proof of claim based on
such debt is filed or deemed filed under Section 501 of the Bankruptcy Code; (ii) a Claim based on such
debt is Allowed under Section 502 of the Bankruptcy Code; or (iii) the holder of a Claim based on such
debt has accepted this Plan; and (b) terminates all Equity Interests and other rights of Equity Interests in
the Debtors except as expressly provided in this Plan.

         13.03. Injunction. Except as provided in this Plan or the Confirmation Order, as of the
Confirmation Date, all entities that have held, currently hold or may hold a Claim or other debt or liability
that is unclassified by this Plan or that is classified by Article 4 of this Plan or is subject to a distribution
under this Plan or an Equity Interest or other right of an equity security holder that is terminated under
this Plan are permanently enjoined from taking any of the following actions on account of any such
Claims, debts, liabilities, Equity Related Claims, or terminated Equity Interests or rights: (a) commencing
or continuing in any manner any action or other proceeding against the Debtors or the Reorganized
Debtors (including any officer or director or other Person acting as a representative or otherwise on behalf
of the Debtors or the Reorganized Debtors); (b) enforcing, attaching, collecting or recovering in any
manner any judgment, award, decree, or order against the Debtors or the Reorganized Debtors, or their
respective property; (c) creating, perfecting, or enforcing any Lien or encumbrance against the Debtors or
the Reorganized Debtors, or their respective property; (d) asserting a setoff, right of subrogation, or
recoupment of any kind against any debt, liability, or obligation due to the Debtors or the Reorganized
Debtors, or their respective property; and (e) commencing or continuing any action, in any manner, in any
place, that does not comply with or is inconsistent with the provisions of this Plan or the Bankruptcy
Code. Nothing in this Section 13.03 or elsewhere in this Plan is to be construed or is to have the effect of
extinguishing, or prohibiting or otherwise limiting, the right of any holder of a Claim to assert a right to
setoff or recoupment arising in connection with such Claim as part of the resolution and treatment of such
Claim in accordance with the terms of this Plan. Notwithstanding the foregoing, nothing in this Section
13.03 may be deemed to enjoin McKesson from exercising any rights or claims McKesson may have,
whether by agreement or under applicable law, against the Reorganized Debtors or any Snyders Related
Entity in connection with a post-Effective Date default or event of default under any agreement or
instrument between or among McKesson, the Reorganized Debtors and/or any Snyders Related Entity,
including, without limitation, the New McKesson Supply Agreement, the TD Loan Documents (as
modified by Section 5.06 of this Plan), the New McKesson Supply Agreement, the McKesson Security
Agreement, and the Restructuring Agreement.




Phoenix/277611.1                                       33
         13.04. Exculpation. None of the Debtors, the Committee, McKesson, CIT, the Reorganized
Debtors, the Oversight Committee, or any of their respective officers, directors, members, or employees
have or will incur any liability to any holder of a Claim or Equity Interest, or any other party in interest,
or any of their respective members or former members, agents, employees, representatives, financial
advisors, attorneys, or affiliates, or any of their predecessors, successors, or assigns, for any act or
omission in connection with, relating to, or arising out of, the Chapter 11 Cases, the negotiation and
execution of the Restructuring Agreement, the negotiation and pursuit of confirmation of this Plan, the
consummation of this Plan, or the administration of this Plan excluding the obligations of the Debtors and
the Reorganized Debtors under this Plan and their acts or omissions constituting gross negligence, bad
faith, or willful misconduct, as finally determined by a court of competent jurisdiction, and in all respects
are entitled to reasonably rely upon the advice of counsel with respect to their duties and responsibilities
under this Plan or in the context of the Chapter 11 Cases.

         13.05. Releases.

                  a. As To McKesson. As of the Effective Date, each of the Snyders Related Entities
irrevocably release and forever discharge each of McKesson, and its successors, assigns, agents,
shareholders, directors, officers, employees, attorneys, U.S. subsidiary corporations, U.S. affiliated
corporations, U.S. affiliates, from any and all claims, debts, liabilities, demands, offsets, obligations,
costs, expenses, actions and causes of action, of every nature and description, known and unknown, which
such Snyders Related Entity now has or at any time may hold, by reason of any matter, cause or thing
occurred, done, omitted, or suffered to be done before the Effective Date, excluding, however, claims for
amounts due in the normal course of business from McKesson under the New McKesson Supply
Agreement. The Debtors expressly ratify and confirm the releases of McKesson set forth in the final cash
collateral stipulation and order between the parties entered by the Bankruptcy Court in the Chapter 11
Cases.

                  b. As To DIP Lenders. As of the Effective Date, each of the Snyders Related Entities
irrevocably release and forever discharge each of the DIP Lenders, and each of such DIP Lender’s
successors, assigns, agents, shareholders, directors, officers, employees, attorneys, subsidiary
corporations, affiliated corporations, affiliates, from any and all claims, debts, liabilities, demands,
offsets, obligations, costs, expenses, actions and causes of action, of every nature and description, known
and unknown, which such Snyders Related Entity now has or at any time may hold, by reason of any
matter, cause or thing occurred, done, omitted, or suffered to be done before the Effective Date. The
Debtors expressly ratify and confirm the releases of the DIP Lenders set forth in the final order
authorizing the DIP Facility entered by the Bankruptcy Court in the Chapter 11 Cases.

                 c. As To Snyders Related Entities. As of the Effective Date, except as set forth in this
Plan, each holder of a Claim, whether Allowed or Disallowed at any time, irrevocably releases and
forever discharges each of the Snyders Related Entities, and its successors, assigns, agents, shareholders,
directors, officers, employees, attorneys, consultants, advisors, subsidiary corporations, affiliated
corporations, Affiliates, from any and all claims, debts, liabilities, demands, offsets, obligations, costs,
expenses, actions and causes of action, of every nature and description, known and unknown, which such
holder now has or at any time may hold, by reason of any matter, cause or thing occurred, done, omitted,
or suffered to be done before the Effective Date, excluding, however, claims for amounts due under this
Plan; provided that nothing in this Plan releases any Snyders Related Entity from any of its obligations to
McKesson or any other holder of a Claim under or in connection with: (i) any right, agreement or claim
relating to any company, entity or operations in Canada; or (ii) the McKesson Subrogation Claim (until
the McKesson Letter of Credit has been released, discharged and extinguished in full), the TD Loan
Documents (as modified by Section 5.06 of this Plan), the New McKesson Supply Agreement, the
McKesson Collateral Documents, including without limitation the McKesson Security Agreement, the
Restructuring Agreement, or any other document between or among McKesson and any Snyders Related


Phoenix/277611.1                                     34
Entity executed in connection with or arising from the Plan; or (iii) the DIP Claim (until the New DIP
LCs and the Katz Letters of Credit have been drawn by CIT and the remainder of the DIP Claim has been
paid in Cash) or any other agreement between or among the DIP Lenders and any Snyders Related Entity
executed in connection with or arising from this Plan.

                 d. Binding Nature of Releases. No Person that either (i) objected to the approval of the
disclosure statement in support of a previous plan in the Chapter 11 Cases by filing a written objection or
similar pleading with the Bankruptcy Court relating to the hearing conducted on January 22, 2004 or
(ii) submitted a “Class 12 Ballot” in connection with such previous plan “opting out” of the releases
contained in this Section 13.05, is bound by such releases.

         13.06. Preserved Litigation Claims and Disputed Claims Resolution. Notwithstanding
anything to the contrary in this Plan, any non-Debtor party to a Preserved Litigation Claim or a Disputed
Claim that has obtained or obtains relief from the automatic stay or from the injunction provisions
contained in Section 13.03 of this Plan to pursue resolution of their Claim in a forum other than the
Bankruptcy Court will not be deemed to have violated any provision of this Plan by seeking a resolution
as to Allowance, Disallowance, or amount of such Claim in such other forum, provided that the
classification and distributions on account of any such Claim, once liquidated and Allowed or
Disallowed, remain solely and exclusively subject to the Bankruptcy Court’s continuing jurisdiction
under Article 14 of this Plan and the terms and conditions of this Plan. Any such Claims are subject to the
provisions of Section 1.69 of this Plan for voting and distribution purposes.

        13.07. Third Party Action. Neither this Plan nor the Confirmation Order is to be construed to
enjoin or otherwise affect in any way any right of ID Media, Inc. and Initiative Media Worldwide to
pursue any cause of action or claim against Heil Brice Retail Advertising.

        13.08. Preservation of Insurance. The discharge and release from Claims as provided in this
Plan, except as necessary to be consistent with this Plan, do not diminish or impair the enforceability of
any insurance policy that may cover Claims against the Debtors or any other Person.

                                           ARTICLE 14.
                                    RETENTION OF JURISDICTION

        14.01. Jurisdiction. Notwithstanding the entry of the Confirmation Order and the occurrence of
the Effective Date, the Bankruptcy Court will retain such jurisdiction over the Chapter 11 Cases after the
Effective Date as is legally permissible including, without limitation, jurisdiction to:

                 a. Allow, disallow, determine, liquidate, classify, estimate, or establish the priority or
secured or unsecured status or the amount of any Claim, including the resolution of any request for
payment of any Administrative Claim and the resolution of any and all objections to the allowance or
priority of Claims;

               b. Grant or deny any applications for allowance of compensation or reimbursement of
expenses authorized under the Bankruptcy Code or this Plan;

                 c. Resolve any matters related to the assumption, assumption and assignment, or rejection
of any executory contract or unexpired lease to which a Debtor is a party and to hear, determine and, if
necessary, liquidate, any Claims arising from, or Cure related to, such assumption or rejection;

                   d. Ensure that distributions to holders of Allowed Claims are accomplished in accordance
with this Plan;




Phoenix/277611.1                                      35
                e. Decide or resolve any motions, adversary proceedings, contested or litigated matters,
and any other matters and grant or deny any applications or motions involving the Debtors that may be
pending on the Effective Date;

                 f. Enter such orders as may be necessary or appropriate to implement or consummate the
provisions of this Plan and all contracts, instruments, releases, and other agreements or documents created
in connection with this Plan or the Disclosure Statement;

               g. Resolve any cases, controversies, suits or disputes that may arise in connection with
the consummation, interpretation or enforcement of this Plan, or any Person’s obligations incurred in
connection with this Plan;

                 h. Hear and determine any motion or application to modify this Plan before or after the
Effective Date under Bankruptcy Code § 1127 or modify the Disclosure Statement or any contract,
instrument, release, or other agreement or document issued, entered into, filed or delivered in connection
with this Plan or the Disclosure Statement; or hear or determine any motion or application to remedy any
defect or omission or reconcile any inconsistency in any Bankruptcy Court order, this Plan, the Disclosure
Statement, or any contract, instrument, release, or other agreement or document issued, entered into, filed
or delivered in connection with this Plan or the Disclosure Statement, in such manner as may be necessary
or appropriate to consummate this Plan, to the extent authorized by the Bankruptcy Code;

                i. Issue injunctions, enter and implement other orders, or take such other actions as may
be necessary or appropriate to restrain interference by any entity with consummation or enforcement of
this Plan;

                 j. Enter and implement such orders as are necessary or appropriate if the Confirmation
Order is for any reason modified, stayed, reversed, revoked, or vacated;

                 k. Determine any other matters that may arise in connection with or related to this Plan,
the DIP Facility, the Disclosure Statement, the Confirmation Order or any contract, instrument, release, or
other agreement or document issued, entered into, filed or delivered in connection with this Plan, the
Disclosure Statement or the Confirmation Order;

                   l. Issue final decrees and enter orders closing the Chapter 11 Cases; and

                 m. Adjudicate the Disputed Claims and the Preserved Litigation Claims (including those
to be initiated and prosecuted by Reorganized Snyders as the Estates’ representative under Bankruptcy
Code § 1123(b)(3)(B)), and any other cause of action or claims of the Debtors.

                                        ARTICLE 15.
                             AMENDMENT AND WITHDRAWAL OF PLAN

        15.01. Amendment of Plan. At any time before the Confirmation Date, the proponents may alter,
amend, or modify this Plan under Bankruptcy Code § 1127(a) provided that such alteration, amendment,
or modification does not materially and adversely affect the treatment and rights of the holders of General
Unsecured Claims or the DIP Claim under this Plan. After the Confirmation Date but before substantial
consummation of this Plan as defined in Bankruptcy Code § 1101(2), one or more of the proponents may,
under Bankruptcy Code § 1127(b), institute proceedings in the Bankruptcy Court to remedy any defect or
omission or reconcile any inconsistencies in this Plan, the Disclosure Statement, the Plan Documents, or
the Confirmation Order, and such matters as may be necessary to carry out the purposes and effects of
this Plan so long as such proceedings do not materially and adversely affect the treatment of holders of
Claims or holders of Equity Interests under this Plan; provided, however, that prior notice of such



Phoenix/277611.1                                       36
proceedings is required to be served in accordance with the Bankruptcy Rules or applicable order of the
Bankruptcy Court.

         15.02. Revocation or Withdrawal of Plan. The proponents reserve the right to revoke or
withdraw this Plan at any time before the Confirmation Date. If this Plan is withdrawn or revoked, then
this Plan will be deemed void and nothing contained in this Plan may be deemed a waiver of any Claims
by or against the Debtors or any other Person in any further proceedings involving the Debtors or an
admission of any sort, and this Plan and any transaction contemplated by this Plan may not be admitted
into evidence in any proceeding.

                                            ARTICLE 16.
                                          MISCELLANEOUS

         16.01. Effectuating Documents; Further Transactions; Timing. The Debtors and Reorganized
Snyders are authorized and directed as of the Effective Date to execute, deliver, file, or record such
contracts, instruments, releases, and other agreements or documents, and to take such actions as may be
necessary or appropriate to effectuate and further evidence the terms and conditions of this Plan. All
transactions required to occur on the Effective Date under the terms of this Plan are deemed to have
occurred simultaneously.

         16.02. Exemption From Transfer Taxes. In accordance with Bankruptcy Code § 1146(c):
(a) the issuance, distribution, transfer, and exchange of the New Common Stock or assets or property of
the Estates; (b) the creation, modification, consolidation, or recording of any deed of trust or other
security interest, the securing of additional indebtedness by such means or by other means in furtherance
of, or in connection with, this Plan or the Confirmation Order; (e) the execution, assignment,
modification, or recording of any lease or sublease; and (f) the execution, delivery, or recording of a deed
or other instrument of transfer under, in furtherance of, or in connection with, this Plan, the Confirmation
Order, or any transaction contemplated above, or any transactions arising out of, contemplated by, or in
any way related to, the foregoing are not subject to any document recording tax, stamp tax, conveyance
fee, intangibles or similar tax, mortgage tax, or real estate transfer tax, or other similar tax or
governmental assessment and the appropriate state or local government officials or agents are directed to
forego the collection of any such tax or assessment and to accept for filing or recordation any of the
foregoing instruments or other documents without the payment of any such tax or assessment.

        16.03. Binding Effect. This Plan is binding on, and inures to the benefit of, the Debtors and the
holders of all Claims and Equity Interests, including the holders of Equity Related Claims, and their
respective successors and assigns.

        16.04. Governing Law. Except to the extent that the Bankruptcy Code or other federal law is
applicable or as provided in any document entered into in connection with this Plan, the rights, duties and
obligations of the Debtors and any other Person arising under this Plan are governed by, and construed
and enforced in accordance with, the internal laws of the State of New York, without giving effect to New
York’s choice of law provisions.

         16.05. Modification of Treatment of Claims. Reorganized Snyders reserves the right to modify
the treatment of any Allowed Claim in any manner adverse only to the holder of such Claim at any time
after the Effective Date upon the prior written consent of the holder whose Allowed Claim treatment is
being adversely affected.

         16.06. Setoffs. The Debtors and Reorganized Snyders may, but are not required to, set off or
recoup against any Claim or Equity Interest and the payments or other distributions to be made under this
Plan in respect of such Claim, Claims of any nature whatsoever that arose before the Petition Date that the



Phoenix/277611.1                                    37
Debtors may have against the holder of such Claim or Equity Interest to the extent such Claims may be
set off or recouped under applicable law, but neither the failure to do so nor the fact of any Claim or
Equity Interest under this Plan becoming Allowed constitutes a waiver or release by the Debtors or
Reorganized Snyders of any such claim that it may have against such holder.

         16.07. Notices. Any notice required or permitted to be provided under this Plan is required to be
in writing and served by one of the following: (a) certified mail, return receipt requested, postage prepaid;
(b) hand delivery; (c) reputable overnight courier service, freight prepaid; or (d) fax; addressed as follows:

              If to the Debtors:      Snyders Drug Stores, Inc.
                                      14525 Highway 7
                                      Minnetonka, MN 55345
                                      Attn:    General Counsel
                                      Telephone: (925) 935-5441
                                      Fax:         (925) 936-2512

                      Copy to:        Squire, Sanders & Dempsey, L.L.P.
                                      40 North Central Avenue, Suite 2700
                                      Phoenix, Arizona 85004
                                      Attn:     Thomas J. Salerno, Esq.
                                                Jordan A. Kroop, Esq.
                                      Telephone: (602) 528-4000
                                      Fax:          (602) 253-8129

               If to McKesson:        McKesson Corporation
                                      One Post Street
                                      San Francisco, CA 94104
                                      Attn:     Alan Pearce
                                      Telephone: (415) 983-7509
                                      Fax:          (415) 983-8464

                      Copy to:        White & Case, LLP
                                      3 Embarcadero Center
                                      Suite 2210
                                      San Francisco, CA 94111
                                      Attn:     David F. Dedyo, Esq.
                                      Telephone: (415) 544-1000
                                      Fax:          (415) 544-0202

            If to the Oversight       Otterbourg, Steindler, Houston & Rosen, P.C.
                    Committee:        230 Park Avenue
                                      New York, New York 10169
                                      Attn:     Scott L. Hazan, Esq.
                                                Brett H. Miller, Esq.
                                      Telephone: (212) 661-9100
                                      Fax:          (212) 682-6104

                     If to CIT:       The CIT Group/Business Credit, Inc.
                                      10 South LaSalle Street
                                      Chicago, IL 60603
                                      Attn:     Portfolio Manager, Snyders Drug Stores, Inc.
                                      Fax:      (312) 424-9740


Phoenix/277611.1                                     38
               With a Copy to:       Jones Day
                                     77 West Wacker Drive
                                     Chicago, IL 60601
                                     Attn:     Robert J. Graves, Esq.
                                               Brad B. Erens, Esq.
                                     Telephone: (312) 782-3939
                                     Fax:          (312) 782-8585

         16.08. Delivery of Notices. If personally delivered, such communication is deemed delivered
upon actual receipt; if faxed in accordance with this Plan, such communication is deemed delivered noon
of the first Business Day following transmission; if sent by overnight courier in accordance with this Plan,
such communication is deemed delivered noon of the first Business Day following deposit with such
courier; and if sent by U.S. mail in accordance with this Plan, such communication is deemed delivered as
of the date of delivery indicated on the receipt issued by the relevant postal service; or, if the addressee
fails or refuses to accept delivery, as of the date of such failure or refusal. Any party to this Plan may
change its address for the purposes of this Plan by giving notice of such change.

        16.09. Termination of Statutory Committees. All statutory committees appointed in the
Chapter 11 Cases terminate on the Effective Date and thereafter have no further authority, duties,
objections and responsibilities in respect of the Chapter 11 Cases, except with respect to preparation,
review and filing of, and objections to, applications for compensation and reimbursement of expenses.

         16.10. Severability. If the Bankruptcy Court finds this Plan or any provision of this Plan to be
invalid, illegal or unenforceable, or if the Bankruptcy Court cannot confirm this Plan under Bankruptcy
Code § 1129, the Bankruptcy Court, at the Debtors’ and the Committee’s request, may retain the power to
alter and interpret this Plan or any such provision to make it valid or enforceable to the maximum extent
practicable, consistent with the original purpose of the provision held to be invalid or unenforceable, and
such provision will then become applicable as altered or interpreted. The Confirmation Order constitutes
a judicial determination and provides that each term and provision of this Plan, as it may have been
altered or interpreted in accordance with the foregoing, is valid and enforceable in accordance with its
terms.

         16.11. Plan Documents. Forms of the Plan Documents may be inspected in the office of the
Clerk of the Bankruptcy Court during normal business hours. Holders of Claims or Equity Interests may
obtain a copy of the Plan Documents upon written request to the Debtors in accordance with Section
16.07 of this Plan. Notwithstanding anything to the contrary contained in this Plan, including without
limitation any reference in this Plan to documents in the forms annexed to this Plan as exhibits, the
Debtors may revise any Plan Document (i) by filing such revised Plan Document with the Bankruptcy
Court more than ten days before the deadline for voting on this Plan, or (ii) with the written consent of all
parties in interest that are entitled to vote on this Plan and are materially and adversely affected by such
revision.

        16.12. Inconsistency. If any inconsistency between this Plan and the Disclosure Statement exists,
the provisions of this Plan govern. If any inconsistency between this Plan and any Plan Document exists,
the provisions of the Plan Document govern.

       16.13. Subordination. The distributions under this Plan take into account the relative priority of
each Claim in connection with any contractual subordination provisions relating to such Claim.
Accordingly, distributions under this Plan are not and may not be subject to levy, garnishment,
attachment, or other legal process by any holder of a Claim or Equity Interest purporting to be entitled to




Phoenix/277611.1                                     39
the benefits of such contractual subordination, and all such holders are deemed to have waived any and all
contractual subordination rights they otherwise may have had.

         16.14. Withholding and Reporting Requirements. In connection with this Plan and all
instruments issued in connection with this Plan, the Debtors or Reorganized Snyders, as the case may be,
are required to comply with all withholding and reporting requirements imposed by any federal, state,
local or foreign taxing authority, and all distributions under this Plan remain subject to any such
withholding and reporting requirements. The Debtors and Reorganized Snyders, as the case may be, are
authorized to take all actions necessary to comply with such withholding and reporting requirements.
Notwithstanding any other provision of this Plan, each holder of an Allowed Claim that has received a
distribution under this Plan of New Common Stock or Cash has sole and exclusive responsibility for the
satisfaction or payment of any tax obligation imposed by any governmental unit, including income,
withholding and other tax obligation on account of such distribution.

         16.15. Post-Effective Date Fees; Final Decree. Reorganized Snyders will be responsible for
paying any post-Effective Date fees under 28 U.S.C. § 1930(a)(6) and the filing of post-confirmation
reports, until a final decree is entered. A final decree will be entered as soon as practicable after
distributions have commenced under this Plan. Notice of application for a final decree need be given only
to those holders of Claims and Equity Interests and other parties that, after the Effective Date, have
specifically requested such notice.

         16.16. De Minimis Distributions. No distributions of less than $10 will be made to any Creditor
on account of any Claim. If a claimant holding an Allowed Claim does not receive a distribution owing to
the provisions of this Section 16.15 on the Effective Date or any subsequent date, then the Allowed Claim
remains eligible for distributions on the first date set for distributions when such distribution exceeds $10.
No payments or distributions under this Plan of fractions of dollars will be made at any time. When any
such fractional dollar payment or distribution would otherwise be required, the actual payment or
distribution made will reflect a rounding, up or down, of such fraction to the nearest whole dollar. When
the amount held in reserve is below an amount to be determined by Reorganized Snyders and the
Oversight Committee, the balance will be donated to a charity of the Oversight Committee’s choosing.

        16.17. Method of Payment; Payments, Filings, and Notices Only on Business Days. Payments
of Cash required to be made under this Plan are required to be made by check drawn on a domestic bank
or by wire transfer from a domestic bank. Whenever any payment, distribution, filing, delivery, or notice
to be made under this Plan is due on a day other than a Business Day, such payment, distribution, filing,
delivery, or notice may instead be made, without interest or penalty, on the immediately following
Business Day.

Dated: March 19, 2004
SNYDERS DRUG STORES, INC., on behalf of OFFICIAL COMMITTEE OF UNSECURED
itself and its subsidiaries and affiliates, all Debtors CREDITORS of Snyders Drug Stores, Inc. and its
and Debtors-In-Possession                               subsidiaries and affiliates

By:      /s/ Andrew Giancamilli                        By:     /s/
         Andrew Giancamilli                                    American Greetings
         Chief Restructuring Officer                           Chair




Phoenix/277611.1                                     40
      s nt rs

Gary D. Chamblee                        Randall Klein
Womble Carlyle Sandridge & Rice, PLLC   Goldberg Kohn
gchanlblee@wcsr.com                     randall.klein @goldbergkohn.com




Richard K. Brown                        Robert L. Cunningham
Winston & Strawn LLP                    Gibson, Dunn & Crutcher LLP
rbrown@winston.com                      rcunningham@gibsondunn.com
 ABA Model Intercreditor Agreement·
           Tas Force

• The dollar volume of second lien loans grew
  from $8 billion in 2003 to over $29 billion in
  2006
• In the second quarter of 2007, second lien loan
  volume reached $15.21 billion
• By the second quarter of 2009, second lien
  issuance was under $300 million
 ABA Model IntercreditorAgreement
           Task Force

• Despite rapid growth, there has been little
  standardization of terms
• Certain issues arise in nearly every second lien
  transaction
• Task Force was formed in 2007 with the goal of
  developing a balanced, market-based model form
  of intercreditor agreement
 ABA Model Intercreditor A reement
           Task Force

• Current Task Force membership exceeds 200
  members
• Final draft with commentary is nearing
  completiol1
• Model Agreement provides needed guidance to
  practitioners
           First Lien D bt Caps

• Extent of First Lien priority
• Scope of First Lien obligations
• Adequate First Lien "cushion"
         First Li nDebt Caps

• DIP financing
• Waterfall
• Second Lien debt cap
   econd ien tandstill Provisions

• Standstill period
• Continuation of standstill
• Exercise of unsecured creditor remedies
         Coercive DIP Rol1-Ups

• Lyondell, Aleris, and others
•   100% to amend waterfall?
•   100% to amend pro rata sharing?
•   100% to subordinate liens?
• Required lenders "consent" to being primed
• Bankruptcy Court indifference
                      Priming DIPs

• The relevant positions:
   (i) Prohibition on Second Lien priming First Lien
   (ii) Requirement to support DIP proposed by First Lien

• "Crossover" First Lien/Second Lien deals
• Enforceability and damages
• First Lien priming First Lien
• Third party proposed DIPs
    Cons-ent to First Lien· Cash Collateral
             se and DIP inancing

• Typical intercreditor agreement provisions
• Real world impact
•    Enforceability and damages
• Tousa
               ection363 al s

• The Chrysler syndrome - So what's new?
• Credit Agreement - lender "drag along"
  problems
• Court interpretation of intercreditor agreement
    •
  waIvers
      Collateral aluation Issues

• Allocation of sale proceeds - When is it an
  issue?
• Some solutions?
• Valuation challenges - Ideare and Ion
     Permitted Plan Distributions

• Post-reorganization liens granted on same
  collateral to secure 1st and 2nd priority debt
• Other property or transfers on account of
  "secured claim" - are these "proceeds ?"
• Non-cash consideration received at 363 sale
  (WestPoil1t Stevens)
• Equity distributions before the 1st lien debt has
  been "paid in full"
                2009 ABA Commercial Finance Section Fall Meeting
                             Las Vegas, Nevada
                                   November 4, 2009




                   Workouts That Worked Out - Operating Compallies
                       Successfully Navigating Troubled Waters




Presented by:


Gregory E. Garman
Gordon & Silver Ltd.
3960 Howard Hughes Parkway, 9th FI
Las Vegas, NV 89169
(702) 796-5555
ggarman@gordonsilver.com

Jordon A. Kroop
Squires, Sanders & Dempsey LLP
40 N. Central Ave., Suite 2700
Phoenix, AZ 85004
(602) 528-4024
jkroop@ssd.com

Cathy L. Reece
Fennemore Craig, PC
3003 N. Central Ave., Suite 2600
Phoenix, AZ 85012
(602) 916-5343
creece@fclaw .com
IN RE GENERAL GROWTH PROPERTIES. INC., 409 B.R. 43 (Bankr. S.D.N.Y. 2009)



       General Growth Properties, Inc. and its subsidiary SPEs filed Chapter 11 cases even

though the subsidiaries may not have qualified for Chapter 11 protection on their own. A group

of secured creditors sought to have the SPE subsidiary entities dismissed from the bankruptcy as

bad faith filings. The Court held that the interests of the debtor-group rather than the individual

SPEs could and should be considered and therefore it was not bad faith to consider the interests

of the debtor-group. The Court refused to dismiss any of the SPE subsidiary entities.



       Secured creditors also alleged a bad faith filing due to the fact that the debtors replaced

the independent directors approved by the lenders and that the new independent directors

considered the interests of the debtor-group rather than the individual SPEs in approving the

bankruptcy filing. The Court held that neither indicated bad faith as the firing and replacing of

the independent directors was not prohibited by the organizational documents and the new

independent directors did not breach any fiduciary duties to any SPEs by considering the

interests of the debtor-group in determining whether to approve the bankruptcy.



       The Court noted that the secured creditors may be inconvenienced by its holding but that

the SPE protections were still in place as the SPE structure is intended to protect against

substantive consolidation of the various SPE entities. The issue of substantive consolidation was

not before the Court.
IN RE DEWEY RANCH HOCKEY, LLC. 2009 WL 3170452 (Bankr.D.Ariz., Sept. 30.2009)



       The debtor group which owns and operates the Phoenix Coyotes, a National Hockey

League (NHL) team located in Glendale, Arizona, filed Chapter 11 cases and at the start asked

the Court to approve the sale and relocation of the team to Canada. The debtor group had a

stalking horse bid from PSE Sports and Entertainment LP (PSE) that wanted to move the team to

Hamilton, Ontario, Canada. During the sale process the NHL attempted to obtain other bids from

parties that would keep the team in Arizona. Also during the process and pursuant to its

constitution and bylaws, the NHL denied the application of the debtor to sell the team to the

stalking horse bidder PSE on character and integrity grounds. When other bidders dropped out,

the NHL made its own bid for the team.



       The City of Glendale, which has a 30 year Arena Management, Use and Lease

Agreement with one of the debtors, objected to the sale and relocation of the team. Pursuant to

the Agreement the team agreed to play all its home games in the Glendale Arena and would not

play its home games at any other location for the 30 hockey seasons after the arena opened. City

of Glendale asserted significant damages if the team were to be relocated and the debtors

countered that the claims would be capped under Section 502(b)(6) to a much smaller amount.



       The Court denied the PSE bid with prejudice stating that it could not conclude that the

interests of the NHL can be adequately protected under Section 363(e) of the Bankruptcy Code.

PSE asserted that the payment of a relocation fee would adequately protect the NHL. The Court

disagreed and said that the right to control where members play their home games and the right

to admit only new members who met their written requirements could not be satisfied. The Court
also denied the NHL bid without prejudice indicating that because the bid earmarked amounts to

be paid to certain creditors to the prejudice of other creditors it discriminated unfairly and was

not fair and equitable with respect to each claim of creditors, using the Section 1129(b)(l)

standard .. The Court left the door open for the NHL to amend its bid to address the Court's

concern. On November 2, 2009, the Court approved the amended bid of the NHL and the sale

closed. The City of Glendale issues were not ruled upon.
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------------------------------------x
In re:
                                                                             Chapter II
GENERAL GROWTH PROPERTIES, INC., et aI.,
                                                                             Case No. 09-1 1977 (ALG)

                                              Debtors.                       (Jointly Administered)
________ w _____________________________________________   --------------x

                               MEMORANDUM                  PF OPINION
A P PEA RAN C E S:

KIRKLAND & ELLIS LLP
Co-Counsel for the Jointly Represented Debtors
  By: Richard C. Godfrey, Esq.
      James H.M. Sprayregen, Esq.
      Anup Sathy, Esq.
      Sallie G. Smylie, Esq.
      Gabor Balassa, Esq.
300 North LaSalle Street
Chicago, Illinois 60654

WElL, GOTSHAL & MANGES LLP
Co-Counsel for the Jointly Represented Debtors
 By: Marcia L. Goldstein, Esq.
       Gary T. Holtzer, Esq.
       Adam P. Strochak, Esq.
767 Fifth Avenue
New York, New York 10153

AKIN GUMP STRAUSS HAUER & FELD ULP
COllnsel for the Official Committee of Unsecured Creditors
 By: Michael S. Stamer, Esq.
       Abid Qureshi, Esq.
       Sean E. 0' Donnell, Esq.
One Bryant Park
New York, New York 10036

  By: James R. Savin, Esq.
1333 New Hampshire, N.W.
Washington, D.C. 20036
KILPATRICK STOCKTON LLP
Counsel for Certain Lenders by ING Clarion
 Capital Loan Services LLC as Special Servicer
  By: Todd C. Meyers, Esq.
        Susan A. Cahoon, Esq.
        Alfred S; Lurey, Esq.
        Rex R. Veal, Esq.
        Mark A. Fink, Esq.
1100 Peachtree Street, Suite 2800
Atlanta, Georgia 30309-4530

  By: Jonathan E. Polonsky, Esq.
3 J West 52 nd Street, 14th Floor
New York, New York 10019

ZEICHNER ELLMAN & KRAUSE LLP
Counsel for Wells Fargo Bank, N.A., as Trustee for the
 Registered Holders of Bane of America Commercial
 Mortgage, Inc., Commercial Mortgage Pass-Through
 Certificates, Series 20062; Wells Fargo Bank, N.A., as
 Trustee for the Registered Holders of Credit Suisse First
 Boston Mortgage Securities Corp., Commercial Mortgage
 Pass-Through Certificates, Series 2006 C I and certain
 noteholders, all acting by and through Helios AMC, LLC
 in its capacity as Special Servicer
  By: Stephen F. Ellman, Esq.
         Nathan Schwed, Esq.
         Jantra Van Roy, Esq.
         Robert Guttman, Esq.
575 Lexington A venue
New York, New York 10022

GREENBERG TRAURIG, LLP
Counsel for Metropolitan Life Insurance Company and
 KBC Bank N.V.
  By: Joseph Davis, Esq.
       Bruce R. Zirinsky, Esq.
       Nancy A. Mitchell, Esq.
       Howard J. Berman, Esq.
       Gary D. Ticoll, Esq.
200 Park A venue
New York, New York \0 166




                                         2
ALLAN L. GROPPER
UNITED STATES BANKRUPTCY JUDGE

         Before the Court are five motions (the "Motions") to dismiss certain of the Chapter

11 cases filed by one or more debtors (the "Subject Debtors") that are owned directly or

indirectly by General Growth Properties, Inc. i("GGP"). One of the Motions was filed by

ING Clarion Capital Loan Services LLC ("ING Clarion"), I as special servicer to certain

secured Jenders;2 one ofthe Motions was filed by Helios AMC, LLC ("Helios"),] as special

servicer to other secured Jenders;4 and three of the Motions were filed by Metropolitan Life

Insurance Company and KBC Bank N.V. (together, "Metlife", and together with ING

 liNG Clarion seeks dismissal of the cases of the following Subject Debtors: Bakersfield Mall LLC
(Case No. 09-12062); RASCAP'Realty, Ltd. (Case No. 09-11967); Visalia Mall, L.L.C. (Case No. 09-
 12307); GGP-Tucson Mall L.L.C. (Case No. 09-12155); Lancaster Trust (Case No. 09-12473); HO
Retail Properties II Limited Partnership (Case No. 09-11997); RS Properties Inc. (09-12265);
Sloneslown Shopping Center L.P. (Case No. 09-12283); and Fashion Place, LLC (Case No. 09-12109)
(collectively, the "ING Clarion Debtors").
?
- lNG Clarion is special servicer to Wells Fargo Bank, N.A., as Trustee for the Certificate holders of
Credit Suisse First Boston Mortgage SeCurities Corp., Commercial Mortgage Pass- Through
Certificates, Series 2005-C6; Bank of America, N.A., successor trustee to Wells Fargo Bank, N.A.,
successor-by-merger to Wells Fargo Bank Minnesota, N.A., as Trustee for the Certificate holders of
Wachovia Bank Commercial Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series
2003-C8; U.S. Bank National Association, successor trl1stee to Wells Fargo Bank, N.A., successor-by-
merger to Wells Fargo Bank Minnesota, N.A., as Trustee for the Certificate holders of Wachovia Bank
Commercial Mortgage Trust, Commercial MortgagePass-Through Certificates, Series 2003-C9; EHY
Sub Asset LLC; Metlife Bank, N.A.; Bank of America. N.A., successor trustee to Wells Fargo Bank,
N.A., successol'-by-merger to Wells Fargo Bank Minnesota, N.A., as Trustee for the Certificate holders
of Wachovia Bank Commercial Mortgage Trust, Commercial Mortgage Pass-Through Certificates,
Series 2003-C7; Bank of America, National Association, as successor-by-merger to LaSalle Bank
National Association, as Trustee for the Certi'ficate holders ofML-CFC Commercial Mortgage Trust
2006-3, Commercial Mortgage Pass-Through Certificates, Series 2006-3; Teachers Insurance and
Annuity Association of America; Bank of America, National Association, as successor-by-merger to
LaSalle Bank National Association, as Trustee for the Certificate holders ofLB-UBS Commercial
Mortgage Trust 2003-C7, Commercial Mortgage Pass-Through Certificates, Series 2003-C7; and Bank
of America, N.A., successor-by-merger to LaSalle Bank National Association, as Trustee for the
Certificate holders ofWaehovia Bank Commercial Mortgage Trust, Commercial Mortgage Pass-
Through Certificates, Series 2004-Cl.
3 Helios seeks dismissal ofthe cases of the following Subject Debtors: Faneui! Hall Marketplace, LLC
(Case No. 09-12109) and Saint Louis Galleria L.L.C. (Case No. 09-12266) (together, the "Hellos
Debtors").
~ Helios is special servicer to Wells Fargo Bank, N.A., as Trustee for the Registered Holders of Banc
of America Commercial Mortgage, Inc., Commercial Mortgage Pass-Through Certificates, Series 2006
2; Wells Pargo Bank, N.A., as Trustee for the Registered Holders ofCredil Suisse First Boslon
Mortgage Securities Corp., Commercial Mortgage Pass-Through Certificates, Series 2006 Cl and
certain noteholders.


                                                  3
Clarion and Helios, the "Movants,,).5 Each of the Movants is a secured lender with a loan to

one of the Subject Debtors. The primary ground on which dismissal is sought is that the

Subject Debtors' cases were filed in bad faith. It is also contended that one ofthe Subject

Debtors was ineligible to file. The above-captioned debtors (the "Debtors") and the Official

Committee of Unsecured Creditors appointed in these cases (the "Committee") object to the

Motions. Based on the following findings of fact and conclusions of law, the Motions are

denied.

                                            BACKGROUND
          GGP, one of the Debtors, is a publicly-traded real estate investment trust ("REIT")

and the ultimate parent of approximately 750 wholly-owned Debtor and non-Debtor

subsidiaries, joint venture subsidiaries and affiliates (collectively, the "GGl;> Group" or the

"Company,,).6 The GGP Group's primary business is shopping center ownership and

management; the Company owns or manages over 200 shopping centers in 44 states across

the country. These include joint venture interests in approximately 50 properties, along with

non-controlling interests in several international joint ventures. The GGP Group also owns

several commercial office buildings and five master-planned communities/ although these



5 Metropolitan Life Insurance Company seeks dismissal ofthe cases of the following Subject Debtors:
Providence Place Holdings LLC (Case No. 09-1 2233); Rouse Providence LLC (09-12252); Howard
Hughes Propelties, Limited Partnership           No. 09-12171); 10000 West Charleston Boulevard LLC
(Case No. 09-12040); 9901-9921 Covington Cross, LLC (Case No. 09-12051); and 112011140 Town
Center Drive, LLC (Case No. 09-12042).
   Both Metropolitan Life Insurance Company and KBC Bank N.V. seek dismissal of the cases oflhe
following Subject Debtors: White Marsh Mall LLC (Case No. 09-12317); White Marsh Mall
Associates (Case No. 09-1200 I); White Marsh Phase II Associates (Case No. 09- ~ 2002); and White
Marsh General Partnership (Case No. 09-12000) (collectively, the "Metropolitan Debtors").
6 As further discussed below, 388 of the entities in the GGP Group have tiled for Chapter II
protection: 360 filed on April 16,2009 and an additional 28 filed on April 22, 2009. Por purposes of
convenience, April 16 th is used as the "Petition Date" herein.
7 The GGP Group's principal master planned communities, which are large-scale, long-term
community development projects, are located in Columbia, Maryland; Summerlin, Nevada; and
Houston, Texas. Revenue is generated from these properties through the sale ofimproved land to
homebuilders and commercial developers. (See Declaration of James A. Mesterharm Pursuant to


                                                 4
businesses account for a smaller share of its operations. The Company reported consolidated

revenue of$3.4 billion in 2008. 8 The GGP Group's properties are managed from its

Chicago, Illinois headquarters, and the Company directly employs approximately 3,700

people, exclusive of those employed at the various property sites.

I. Corporate Structure

         The corporate structure of the GGP Group is extraordinarily complex, and it is

necessary to provide only a broad outline for purposes of this opinion. GGP is the general

partner ofGGP Limited Partnership ("GGP LP"), the company through which the Group's
                                      9
business is primarily conducted. GGP LP in turn controls, directly or indirectly, GGPLP,

L.L.C., The Rouse Company LP ("TRCLP"), and General Growth Management, Inc.

("GGMI,,).IO GGPLP L.L.C., TRCLP and GGMl in turn directly or indirectly control

hundreds of individual project-level subsidiary entities, which directly or indirectly own the

individual properties. The Company takes a nationwide, integrated approach to the

development, operation and management of its properties, offering centralized leasing,

marketing, management, cash management, property maintenance and construction

management. l )



Local Bankruptcy Rule 1007-2 In Support of First Day Motions,dated Apri116, 2009, ~ 24 (ECF
Docket No. 13) (the "Mesterharm Declaration"). All parts ofthe Mesterharm Declaration that are
used in this opinion were incorporated by reference into the Supplemental Declaration of James A.
Mesterharm in Support of Debtors' Opposition to the Motions to Dismiss, dated June 16,2009 (the
"Supplemental Mesterharm Declaration"). The Supplemental Mesterharm Declaration was admitted
into evidence, subject to cross-examination, as his direct testimony.
3 Revenues from the GGP Group's shopping center operations are generated through rents, property
management services performed by GGM] (defined below), strategic partnerships, advertising,
sponsorship, vending machines, parking services and the sale of gift cards. (See Mesterharm Dec!.,
April 16, 2009, ~ 23.)
? GGP owns 96% ofGGP LP, with outside parties holding the remaining 4%.
10 GGP LP, GGPLP, L.L.C. and TRCLP are each Debtors, while GGMI is a non-Debtor affiliate that
~rovides management services to the GGP Group, the joint ventures and other unrelated third parties.
 1 "Through this centralized management process, GGP LP provides national support with respect to
substantially all aspects of business operations. Accounting, business development, construction,
contracting, design, finance, forecasting, human resources and employee benefits, insurance and risk


                                                  5
II. Capital Structure

         As of December 31,2008, the GGP Group reported $29.6 billion in assets and $27.3

billion in liabilities. 12 At that time, approximately $24.85 billion ofits liabilities accounted

for the aggregate consolidated outstanding indebtedness of the GGP Group. Of this,

approximately $18.27 billion constituted debt of the project-level Debtors secured by the

respective properties, $1.83 billion of which was secured by the properties ofthe Subject

Debtors. 13 The remaining $6.58 billion of unsecured debt is discussed below.

         A. Secured Debt

        The GGP Group's secured debt consists primarily of mortgage and so-called

mezzanine debt. The mortgage debt is secured by mortgages on over 100 properties, each of

which is typically owned by a sepal'ate corporate entity. The mortgage debt can in turn be

categorized as conventional or as debt further securitized in the commercial mortgage-backed

securities market.

                 (i) Conventional Mortgage Debt

        The conventional mortgage debt is illustrated, on this record, by three of the

mortgages held by Metlife. Each of the three mortgages was an obligation of a separate GGP

subsidiary. There is no dispute that some of the Subject Debtors that issued the Metlife




management, property services, marketing, leasing, legal, tax, treasury, cash management and other
services are provided or administered centrally for all properties under the GGP Group's ownership
and management. Only the most basic building operational needs are addressed at the individual
~roperty level." (Mesterharm Dec!., April 16, 2009, ~ 17.)
 2 Liabilities include the GGP Group's share of indebtedness of its joint ventures.
13 The total debt of the ING Clarion and Helios Debtors was $1,264,938,617. (See Declaration of
Thomas H. Nolan, Jr., dated June 16,2009,148.) (the "Nolan Declaration"). The total debt ofthe
Metlife Debtors was $568,090,030. (Nolan. Decl., June 23, 2009, '117.) The Nolan Declaration and
the Supplemental Declaration of Thomas H. Nolan, Jr., dated June 23, 2009 (the "Supplemental Nolan
Declaration") were admitted into evidence, subject to cross-examination, as his direct testimony.


                                                6
c·




     mortgages were intended to function as special purpose entities ("SPE,,).14 SPE's typically

     contain restrictions in their loan documentation and operating agreements that require them

     to maintain their separate existence and to limit their debt to the mortgages and any

     incidental debts, such as trade payables or the costs of operation. (See, e.g., Metlife MTD

     White Marsh Debtors        '112, ECF Doc. No. 63 J,)15       Metlife asserts, without substantial

     contradiction from the Debtors, that SPE's are structured in this manner to protect the

     interests of their secured creditors by ensuring that "the operations of the borrower [are]

     isolated from business affairs of the borrower's affiliates and parent so that the financing of

     each loan stands alone on its own merits, creditworthiness and value .... " (Metlife MTD

     Providence DebtOJ's, ~ 14., ECF Docket No. 629.) In addition to limitations on indebtedness,

     the SPE's organizational documents usually contain prohibitions on consolidation and

     liquidation, restrictions on mergers and asset sales, prohibitions on amendments to the

     organizational and transaction documents, and separateness covenants. Standard and Poor's,

     Legal Criteria for Structured Finance Transactions (April 2002).16

              The typical SPE documentation also often contains an obligation to retain one or

     more independent directors (for a corporation) or managers (for an LLC). The Metlife loans

     did not contain any such requirement, but for example, the Amended and Restated Operating

     Agreements of both Faneuil Hall Marketplace, LLC ("FHM") and Saint Louis Galleria

     1,1 Howard Hughes Properties, Limited Partnership, 10000 West Charleston Boulevard LLC, 9901-
     9921 Covington Cross, LLC and 112011 140 Town Center Drive, LLC are not identified in the relevant
     Metlife Motion as being SPE's. The terminology is not entirely clear, and Metlife does not suggest
     that the Court dismiss only the motions ofthe SPE's.
     IS Sometimes referred to as a "single-purpose entity" or "bankruptcy remote entity," an SPE has been
     described by one commentator as "an entity, formed concurrently with, or immediately priorto, the
     closing of a financing transaction, one purpose of which is to isolate the financial assets from the
     potential bankruptcy estate of the original entity. the borrower or originator." David B. Stratton,
     Special-Purpose Entilies and Authority to File Bankruptcy, 23-2 Am. Bankr. Inst. J. 36 (March 2004).
     "Bankruptcy-remote structures are devices that reduce the risk that a borrower will file bankruptcy or,
     if bankruptcy is filed, ensure the creditor procedural advantages in the proceedings." Michael T.
     Madison, et. al., The Law of Real Estate Financing, § 13:38 (2008).
     16 See, e.g.. Article XlII of the Operating Agreements orthe Helios Debtors. (Joint Trial Ex. 34, 35.)




                                                        7
                                                                                                \'




L.L.C. ("SLG"), in a section entitled "Provisions Relating to Financing," mandate the

appointment of "at (east two (2) duly appointed Managers (each an 'Independent Manager')

of the Company ... " (Joint Trial Ex. 34,35, Art. XlJI(o)). The Company's view of the

independent directors and managers is that they were meant to be unaffiliated with the Group

and its management. (See Hr'g Tr. 227: 8-14, June 17,2009.) It appears that some of the

secured lenders believed they were meant to be devoted to the interests of the secured

creditors, as asserted by a representative of He Ii os. (See Altman Test. 159:7- J 3, June 5,

2009.) In any event, this aspect of the loan documentation is disclissed fUlther below.

        Although each of the mortgage loans was typically secured by a separate property

owned by an individual debtor, many of the loans were guaranteed by other GGP entities.

One of the Metlife loans, for example, was guaranteed. Moreover, many loans were

advanced by one lender to multiple Debtors. For example, in July 2008, the GGP Group

received a loan from several lenders led by Eurohypo AG, New York Branch, as

administrative agent, the outstanding principal of which totaled $1.51 billion as of the

Petition Date (the "2008 Facility"). GGP, GGP LP and GGPLP, L.L.C. are guarantors, and

24 Debtor subsidiaries are borrowers under the 2008 Facility, which is secured by mortgages

and deeds oftrust on 24 properties. The loan was set to mature on July 11,2011, but was in

default as of the Petition Date due to a cross-default provision triggered by the default of

another multi-Debtor loan called the 2006 Facility. One of the last financings the Debtors

were able to obtain before bankruptcy, in December 2008, was a group of eight non-recourse




                                            8
mortgage loans with Teachers Insurance and Annuity Association of America, in the total

amount of$896 million, and collateralized by eight properties (the "Teachers Loans,,).17

          The typical mortgage loan for the GGP Group members had a three to seven-year

term, with low amortization and a large balloon payment at the end. Some of the mortgage

loans had a much longer nominal maturity date, but these also had an anticipated repayment

date ("ARD"), at which point the loan became "hyper-amortized," even if the maturity date

itself was as much as thirty years in the future. Consequences of failure to repay or refinance

the loan at the ARD typically include a steep increase in interest rate, a requirement that cash

be kept at the project-level, with excess cash flow being applied to principal, and a

requirement that certain expenditures be submitted to the lender for its approval. lB The

Debtors viewed the ARD as equivalent to maturity and the consequences ofa loan becoming

hyper-amortized as equ iva lent to defau It, and historically sought to refinance such loans so as

to avoid hyper-amortization.

                  Oi) Commercial Mortgage-Backed Securities

          Many ofthe GGP Group's mortgage loans were financed in the commercial

mortgage-backed securities ("CMBS") market, represented on these Motions by each of the

loans serviced by ING Clarion and Helios, as special servicers. In a typical CMBS

17 The borrowers under the Teachers Loans are all non-Debtor entities, and the maturity dates range
from five to seven years, with an option for the lender to extend maturity for an additional three years.
The Teachers Loans were not in default as ofthe Petition Date.
IS Examples of the consequences of an ARD can be seen with respect to three ofthe ING Clarion
loans. The ING Clarion loan on the GGP-Tucson Mall L.L.C. reached its ARD on October 13,2008.
The Debtors were unable to refinance or repay the loan and as a result a cash trap was triggered and the
interest rate increased from 5% to 9.26%. While the lender agreed to defer collecting additional
interest in cash and Lo add the obligation to the current principal balance of $]18,000,000, the cash trap
required application of any excess cash to the outstanding principal and interest until the loan was paid
in full. (Supp. Mesterharm Decl., June 16, 2009, ~ 7.) Forthe Valley Plaza Mall, if the loan goes into
hyper-amortization, the regular interest rate of3.9% is increased to the greater of the regular interest
rate plus 5% or the Treasury Rate plus 5%. The outstanding principal balance of the loan is currently
$96,000,000. The same increase is true of the Visalia Mall, with an ARD of January 11,20 I 0 and a
regular interest rate of3.77%. The outstanding principal balance of the loan is currently $42,000,000.
      n
(Id. at    4-5.)


                                                    9
transaction, mUltiple mortgages are sold to a trust qualified as a real estate mortgage conduit

("REMIC") for tax purposes. The REMIC in turn sells certificates entitling the holders to

payments from principal and interest on this large pool of mortgages. (Mesterharm Decl.,

April 16, 2009,    ~   43.) The holders of the CMBS securities typically have different rights to

the income stream and bear different interest rates; they mayor may not have different

control rights. See generally Talcott 1. Franklin and Thomas F. Nealon               m, Mortgage and
Asset Backed Securities Litigation Handbook § 1.6 (April 2008).

        The REM rc is managed by a master servicer that handles               day~to-day   loan

administration functions and services the loans when they are not in default. A special

servicer takes over management of the REMIC upon a transfer of authority. Such transfers

take place under certain limited circumstances, including: (i) a borrower's failure to make a

scheduled principal and interest payment, unless cured within 60 days, (ij) a borrower's

bankl'tlptcy or insolvency, (iii) a borrower's failure to make a balloon payment upon

maturity, or (iv) a determination by the master: serviceI' that a material and adverse default

under the loan is imminent and unlikely to be cured within 60 days.19 While a master

servicer is able to grant routine waivers and consents, it cannot agree to an alteration of the

material terms of a loan or mortgage. A special serviceI' has the ability to agree to modify the

loan once authority has been transferred, but often only with the consent of the holders of the

CMBS securities, or in some cases the holders of certain levels of the debt,

                 (iii) Mezzanine Debt

        The Debtors are also obligors on so-called mezzanine loans from at least four lenders,

of which one, Metlife, is a Movant on these motions to dismiss. In these transactions

19 See, e.g., the definition of "Servicing Transfer Event" contained in Banc of America Commercial
Mortgage, Inc., Series 2006-2 Pooling and Servicing Agreement, which relates to the Faneuil Hall
Marketplace (Joint Trial Ex. 22 at 065.)


                                                 10
generally, and in the Metlife mezzanine loan in particular, the lender is the holder of a

mortgage on the property held by one of the Subject Debtors. The lender makes a further

loan, ordinarily at a higher interest rate, to a single-purpose entity formed to hold the equity

interest in the mortgage-level borrower. The loan to the single-purpose entity is secured only

by the stock or other equity interest of the mortgage level borrower. The single-purpose

entity typically has no other debt and its business is limited to its equity interest in the

property-owning subsidiary.

        B. Unsecured Debt

        In addition to secured debt, members of the GGP Group were obligated on

approximately $6.58 billion of unsecured debt as of the Petition Date. Other than trade debt

incurred by some of the project-level Debtors, most of this debt was an obligation of one or

more of the holding companies, generally at the top levels of the corporate chart. The

principal components of this debt were as follows:

         Under an indenture dated April 16, 2007, GGP LP issued $1.55 billion of3.98%

Exchangeable Senior Notes (the "GGP LP Notes"). The notes are senior, unsecured

obligations ofGGP LP and are not guaranteed by any entity within the GGP Group. The

outstanding principal was $1.55 billion as of the Petition Date, with interest payable semi-
             .            JO
annua II y   In   arrears.-

        Under an indenture dated February 24,1995, TRCLP issued five series of public

bonds (collectively, the "1995 Rouse Bonds"), which were unsecured obligations ofTRCLP,

not guaranteed by any other entity in the GGP Group. Four of the five series remain

outstanding. Additionally, under an indenture dated May 5, 2006, TRCLP and TRC Co-


20Upon the satisfaction of certain conditions, noteholders had the right to exchange the GGP LP Notes
for GGP common stock or a combination of cash and common stock, at GGP LP's option.


                                                 11
Issuer, Inc., issued one series of private placement bonds, in the face amount of $800 million

(the "2006 Rouse Bonds"). The 2006 Rouse Bonds are unsecured obligations ofTRCLP and

TRC Co-Issuer, Inc. and are not guaranteed by any other entity in the GGP Group. The total

aggregate outstanding amount due on the Rouse Bonds as ofthe Petition Date was $2.245

billion. TRCLP was unable to pay the outstanding balance of one series of the Rouse Bonds

upon maturity in March 2009 and received     anotice of default. This default in turn triggered
defaults for each of the other series of Rouse Bonds.

       In February 2006, GGP, GGP LP and GGPLP, L.L.C. became borrowers under a

term and revolving credit facility with Eurpohypo AG, New York Branch serving as

administrative agent (the "2006 Facility"). The 2006 Facility is guaranteed by Rouse L.L.C.,

with GGP LP pledging its equity interest in GGPLP, L.L.C., TRCLP and Rouse LLC and

Rouse LLC pledging its general partnership interest in TRCLP to secure the obligations

under the 2006 Facility. Each ofthe borrower, guarantor and pledgor entities is a Debtor, the

current outstanding balance on the term loan is approximately $1.99 billion, and the

outstanding balance on the revolving loan is $590 million. The facility was not scheduled to

mature until February 24,20 I 0, but fell into default in late 2008 through a cross-default

provision triggered by the default of one of the GGP Group's property-level mortgage loans.

       On February 24,2006, GGP LP issued $206.2 million of junior subordinated notes to

GGP Capital Trust I ("the Junior Subordinated Notes"). GGP Capital Trust J, a non-Debtor

entity, subsequently issued $200 million oftrust preferred securities ("TRUPS") to outside

investors and $6.2 million of common equity to GGP LP. The Junior Subordinated Notes arc

unsecured obligations ofGGP LP, one of the Debtors, and are not guaranteed by any entities

within the GGP Group. The current outstanding principal amount on the notes is $206.2




                                           12
million and the notes mature on April 30,2036. The Junior Subordinated Notes are

subordinate in payment to all indebtedness ofGGP LP, other than trade debt.

        C. Other Debt

        The GGP Group had entered into five interest-rate swap agreements as of December

31,2008. The total notional amount of the agreements was $1.08 billion, with an average

fixed pay rate of3.38% and an average variable receive rate of LIB OR. The Company made

April 2009 payments to only one of the counterparties, and two of the swaps have been

terminated. Additionally, as of December 31,2008, the Company also had outstanding

letters of credit and surety bonds in the amount of $286.2 million.

        With respect to the Company's joint venture interests, GGP LP is the promissor on a

note in the principal amount of $245 million, payable to the Comptroller of the State of New

York, as trustee for the New Vork State Common Retirement Fund, and due on February 28,

2013. It is secured by a pledge ofGGP LP's member interest in the GGPlHomart II L.L.C.

joint venture. Additionally GGP LP is the promissor on a note in the amount of$93,712,500,

due on December 1,2012, payable to Ivanhoe Capital, LP, and secured by a pledge ofGGP

LP's shares in the GGP Ivanhoe, Inc. joint venture.

        D. Equity

        GGP had 312,352,392 shares of common stock outstanding as of March 17, 2009?'

GGP is required, as a REJT, to distribute at least 90% ofits taxable income and to distribute,

or pay tax on, certain of its capital gains. During the first three quarters of2008, GGP

distributed $476.6 million, or $1.50 per share, to its stockholders and GGP LP unitholders,

but it suspended its quarterly dividends as ofthe last quarter of2008.


21This includes 42,350,000 common partnership units of OOP LP> which were converted into an equal
number of shares ofOOP common stock on January 2, 2009.


                                               13
III. The Events of2008-2009

        Historically, the capital needs of the GGP Group were satisfied through mortgage

loans obtained from banks, insurance companies and, increasingly, the CMBS market. As

noted above, these loans were generally secured by the shopping center properties and

structured with three to seven-year maturities, low amortization rates and balloon payments

due at maturity. (Nolan Decl., June 16, 2009,     ~   9.) There is no dispute that the Company's

business plan was based on the premise that it would be able to refinance the debt. The

testimony of Thomas NoJan, the President and Chief Operating Officer ofGGP, is that H[t]his

appmach was standard in the industry, so for many years, it has been rare to see commercial

real estate financed with longer-term mortgages that would fully amortize." (Nolan Decl.,

June 16, 2009,   ~   9.)

       However, in the latter half of2008, the crisis in the credit markets spread to

commercial real estate finance, most notably the CMBS market. This in turn affected the

ability of the GGP Group to refinance its maturing debt on commercially acceptable terms.

(Mesterharm Decl., April 16,2009, '1 10.) The GGP Group attempted to refinance its

maturing project-level debt or obtain new financing, contacting dozens of banks, insurance

companies and pension funds. It also contacted national and regional brokers and retained

the investment banking firms of Goldman Sachs and Morgan Stanley to attempt to securitize

and syndicate the loans. Despite these efforts, the only refinancing the GGP Group was able

to obtain during tbis period was with Teachers Insurance, which is described above.

       The GGP parent entities also attempted to find refinancing for their own mostly

unsecured debt, but efforts to raise debt or equity capital were similarly unsuccessful.

(Nolan. Dec!., June 16, 2009,   ~   20.) GGP hired an investment banking firm that specializes




                                             14
in the restructuring of debt, Miller Buckfire & Co., LLC ("Miller Buckfire"), to attempt to

renegotiate the debt, but the lenders were unwilling to consent to additional forbearance,

which in turn led to defaults and cross-defaults. Furthermore, the GGP Group was generally

unable to sell any of its assets to generate the cash necessary to pay down its debts, as

potential purchasers were themselves unable to acquire financing.

       The Debtors claim that the CMBS structure caused additional roadblocks to the

Company's attempts to refinance its debt or even talk to its lenders. In January 2009, the

GGP Group contacted the master servicers of those loans that were set to mature by January

20 I 0, seeking to communicate with the special servicers regarding renegotiation of the loan

terms. The response from the master servicers was that the Company could not communicate

with the special servicers until the loans were transferred, and that the loans had to be much

closer to maturity to be transferred. The GGP Group subsequently attempted to

communicate with the master servicers regarding only those loans set to mature through May

2009, but received the same response. The Debtors then attempted to contact the special

servicers directly, only to be referred back to the master servicers. Finally, in February 2009,

the GGP Group attempted to call a "summ iL" of special servicers to discuss those loans due

to mature through January 2010, but only one servicer was willing to attend and the meeting

was cancelled. (Nolan. Decl., June 16, 2009,    ~~   18-19.)

       Unable to refinance, the Company began to tap more heavily into its operating cash

fiow to pay both its regular expenses and financial obligations. This in tum left the Company

short of cash to meet prior commitments towards development and redevelopment costs. As

additional mortgage loans began to mature, the Company's liquidity problems grew worse.

ror example, two large loans from Deutsche Bank matured on November 28,2008. In return




                                           15
for brief extensions of the maturity date, Deutsche Bank required the Debtors to increase the

rate of interest 3.75%, from LJBOR plus 225 basis points to LJBOR plus 600 basis points, 75

basis points over the prior default interest rate. Additionally, Deutsche Bank required excess

cash flow from the properties to be escrowed in a lock box account and applied entirely to the

relevant properties, with surplus used to amortize the principal on the relevant loan.

         Based on the state of the markets, the GGP Group began to contemplate the necessity

of a Chapter 11 restructuring, Several ofthe loans went into default and one of the lenders,

Citibank, commenced foreclosure proceedings on a defaulted loan on March 19,2009.::12 On

April 16,2009,360 of the Debtors filed voluntary petitions under Chapter II of the

Bankruptcy Code. An additional 28 of the Debtors filed for protection on April 22, 2009, for

a total of 388 Debtors in the      above~captioned       Chapter 11 cases.

         Upon filing, the Debtors did not dispute that the GGP Group's shopping center

business had a stable and generally positive cash flow and that it had continued to perform

well, despite the current financial crisis. Specifically, they stated "[t]he Company's net

operating income ("NO I"), a standard metric of financial performance in the real estate and

shopping center industries, has been increasing over time, and in fact increased in 2008 over



22 The Citibank loan in the amount of$95 million, secured by the Oakwood Center shopping center,
and guaranteed by GGP LP, GGP and TRCLP, was the only loan that actually reached the foreclosure
stage, and it is the only loan in which the lender has asserted it is undersecured, i.e., that the value of
the property is lower than the loan amount. As of the Petition Date, the other loans that had matured or
defaulted included (a) a loan of approximately $57.2 million secured by the Chico Mall shopping
center, (b) a loan of approximately $186.6 milJ.ionsecured by the .10rdan Creek Town Center.shopping
center, a'portion of which is guaranteed by OOPLP, L.L.C., (c) a Joan of approximately $74.2 million
secured by the Deerbrook Mall shopping center, (d) a loan ofapproximately $81.6 million secured by
the Southland Mall shopping center, (e) a loan of$37.8 million secured by the Prince Kuhio Plaza, a
portion of which is guaranteed by GOP LP, (t) a loan ofapproximately $33.1 million secured by nine
strip centers, and (g) a loan of approximately $105.1 million secured by the Town East Mall, a portion
ofwhicll is guaranteed by GOP LP. Of these property-level loans in default, seven of the ten are
CMBS loans. Each of the borrowers and guarantors on the Las Vegas Loans, Oakwood Loan, Chico
Mall Loan,10rdan Creek Loan, Deerbrook Loan, and Southland Loan, Prince Kuhio Loan, Multi-
Property Loan, and Town East Loan is a Debtor in these chapter 11 cases. (Mesterharm Decl.) April
16, 2009, ~ 33.)


                                                    16
the prior year despite the challenges of the general economy." (Mesterharm Decl., April 16,

2009, ~ 8,iJ Despite this, faced with approximately $18.4 billion in outstanding debt that

matured or would be maturing by the end of2012, the Company believed its capital structure

had become unmanageable due to the collapse of the credit markets.

        The Debtors filed several conventional motions on the Petition Date. The only

motion that was highly contested was the Debtors' request for the use of cash collateral and

approval of debtor-in-possession ("DIP") financing. By the time of the final hearing on May

8, 2009, numerous project-level lenders had objected, based on concerns that the security of

their loans would be adversely affected. Many of these parties argued that it would be a

violation of the separateness of the individual companies for the Debtors to upstream cash

from the individual properties for use at the parent-level entity. After hearing extensive

argument, the Court ruled that the SPE structure did not require that the project-level Debtors

be precluded from upstreaming their cash surplus at a time it was needed most by the Group.

The final cash collateral order, entered on May 14,2009 (ECF Docket No. 527), however,

had various forms of adequate protection for the project-level lenders, such as the payment of

interest at the non-default rate, continued maintenance of the properties, a replacement lien

on the cash being upstreamed from the project-level Debtors and a second priority lien on

certain other properties. OJP financing was arranged, but the DI P lender did not obtain liens

on the properties of the project-level Debtors Lhat cou Id arguably adversely affect the lien

interests of the existing mortgage lenders, such as the Movants.




23 The Company's NO[ for its operations involving the ~peratjng, development and management of its
shopping centers, office buildings and commercial properties totaled $2.59 billion in 2008, which was
a 4.5% increase over the year before. (Mesterharm Dec!., April 16, 2009, ~ 15.) Its NOl accounting
For the development and sale ofland in its master planned communities was $29 million, a decrease
from prior years. (Mesterharm DecL, April 16, 2009, ~ 15.)


                                                 17
        At an early stage in the cases it became clear that several lenders intended to move to

dismiss, and the Court urged all parties who intended to move to dismiss any ofthe cases to

coordinate their motions. Six motions were filed (three by Metlife), with one party

subsequently withdrawing its motion. ING Clarion and Helios, which hold CMBS debt,

argued that their cases should be dismissed because they were tiled in bad faith in that there

was no imminent threat to the financial viability of the Subject Debtors. ING Clarion also

contended that Lancaster Trust, one of the Subject Debtors, was ineligible to be a debtor

under the Bankruptcy Code. Metlife, which holds conventional mortgage debt, similarly

argued that the Subject Debtors were not in financial distress, that the cases were filed

prematurely and that there was no chance of reorganization as there was no possibility of

confirming a plan over its objection.

                                         DISCUSSION

1. Bad Faith Dismissal

        The principle that a Chapter II reorganization case can be dismissed as a bad faith

filing is ajudge-made doctrine. In the Second·Circuit, the leading case on dismissal for the

fi ling of a petition in bad faith is C-TC 9th Av~. P 'ship v. NorIan Co. (In re C-TC 9th Ave.

P'ship), 1 13 F.3d 1304 (2d Cir. 1997), which in turn relied on Baker v. Latham Sparrowbush

Assocs. (In re Cohoes Indus. Terminal, Inc.), 931 F.2d 222 (2d Cir. 1991). Under these

decisions, grounds for dismissal exist if it is clear on the tiling date that "there was no

reasonable likelihood that the debtor intended to reorganize and no reasonable probability

that it would eventually emerge from bankruptcy proceedings." In re C-TC 9th Ave. P'ship,

113 F.3d at 1309-10, quoting In re Cohoes, 931 F.2d at 227 (internal citations omitted). One

frequently-cited decision by Ch ief Judge Brozman of this Court has restated the princi pIe as




                                            18
follows: "[T]he standard in this Circuit is that a bankruptcy petition will be dismissed if both

objective futility of the reorganization process and subjective bad faith in filing the petition

are found." In re Kingston Square Assocs., 214 B.R. 713, 725 (Bankr. S.D.N.Y. 1997)

(emphasis in original); see also In re RCM Global Long Term Capital Appreciation Fund,

Ltd., 200 B.R. 514, 520 (Bankr. S.D.N.Y. 1996).

       No one factor is determinative of good faith, and the Court "must examine the facts

and circumstances of each case in light of several established guidelines or indicia,

essentially conducting an 'on-the-spot evaluation of the Debtor's financial condition [and]

motives.'" In re Kingston Square, 2 J4 B.R. at 151, quoting In re Little Creek Development

Co., 779 F.2d 1068, 1072 (5th Cir. 1986). "It is the totality of circumstances, rather than any

single factor, that will determine whether good faith exists." In re Kingston Square, 214 B.R.

at 725, citing Cohoes, 931 F.2d at 227. Case Jaw recognizes that a bankruptcy petition

should be dismissed for lack of good faith only sparingly and with great caution. See Carolin

Corp. v. Miller, 886 F.2d 693, 700 (4th Cir. 1989); see also In re G.S. Distrib., Inc., 331 B.R.

552, 566 (Bankr. S.D.N.Y. 2005).

       C-TC 91h Ave. P'ship, like many of the other bad faith cases, involved a single-asset

real estate debtor, where the equity investors in a hopelessly insolvent project were engaged

in a last-minute effort to fend off foreclosure and the accompanying tax losses. See also

Little Creek Development Co., 779 F.2d 1068. Thus, many of the following factors listed by

the C- TC Court as evidencing bad faith were characteristics ofthis type of case:

       (1) the debtor has only one asset; (2) the debtor has few unsecured
       creditors whose claims are small in relation to those of the secured
       creditors; (3) the debtor's one asset is the subject of a foreclosure action as
       a result of arrearages or default on the debt; (4) the debtor's financial
       condition is, in essence, a two party dispute between the debtor and
       secured creditors which can be resolved in the pending state foreclosure



                                           19
        action; (5) the timing of the debtor's filing evidences an intent to delay or
        frustrate the legitimate efforts of the debtor's secured creditors to enforce
        their rights; (6) the debtor has little or no cash flow; (7) the debtor can't
        meet current expenses including the payment of personal property and I'eal
        estate taxes; and (8) the debtor has no employees.

In re C-TC 9th Ave. P'shp., 113 F.3d at 1311. Relatively few of these factors are relevant to

the cases at bar, and two of the Movants, INO Clarion and Helios, expressly disavowed

reliance on the C-TC bad faith formulation at the hearing on the Motions, conceding in effect

that there was a reasonable likelihood that the Debtors intended to reorganize and could

sllccessfully emerge from bankruptcy. (See Hr'g Tr. 18:2-3; 18: 14-19:22; 44: 1-2.) These

Movants instead argue that the filings, when examined from the perspective of the individual

Debtors, were premature. The third Movant, Metlife, did not expressly disavow reliance on

the C-TC formulation. However, its contentions were not based on the argument that the

debtors did not intend to reorganize. Metlife argued that the Debtors could never confirm a

plan over its objection, implying that Metlife would never agree to a plan proposed by the

Debtors. Then, having staked out a position that the Debtors might characterize as evidence

of bad faith, Metlife contended that the Subject Debtors' subjective bad faith was evidenced

by the prematurity of the filing and various actions taken by the Debtors that are further

analyzed below.

       A. Objective Bad Faith: Prematurity

       All three Movants support their contention that the Chapter 11 filings of these

Debtors were, in effect, premature by reliance on the few cases that have dismissed

Chapter II petitions where the debtor was not in financial distress at the time of

filing, where the prospect of Jiability was speculative, and where there was evidence

that the filing was designed to obtain a litigation advantage. The leading decision is

In re SGL Carbon Corp., 200 F.3d 154 (3d    Cir. 1999), in which the debtors filed

                                          20
Chapter II petitions for the express purpose of protecting themselves from antitrust

litigation. At the same time they published a press release touting their financial

health, as well as their denial of any antitrust liability. The Third Circuit held that

"the mere possibility ofa future need to file, without more, does not establish that a

petition was filed in 'good faith.'" Jd at 164. The principle of SGL Carbon was

followed by this Court in In re Schur Mgml. Co., 323 B.R. 123 (Bankr. S.D.N.Y.

2005), where two debtors filed for bankruptcy to avoid a possible judgment from a

personal injury suit in which they denied allliabil ity and which had yet to go to trial.

In Schur Mgmt., this Court noted that "[i]t would be sheer speculation to guess as to

the amount of a judgment, whether it would be imposed on one or both debtors and

whether it would impair healthy companies with only $14,075 in aggregate liabilities

and a net positive cash flow." 323 B.R. at 127.

        In SOL Carbon and Schur Mgml., the prospect of any liability from pending litigation

was wholly speCUlative. By contrast, the Subject Debtors here carry an enormous amount of

fixed debt that is not contingent. Movants argue nevertheless that none of the Subject

Debtors had a mortgage with a maturity date earlier than March 2010, and that the Subject

Debtors should have waited until much closer to the respective maturity dates on their loans

to file for bankruptcy. Movants contend in effect that the prospect of liabi lity was too remote

on the Petition Date for the Subject Debtors, and that the issue of financial distress and

prematurity offiling cannot be examined from the perspective of the group but only on an

individual-entity basis. Accepting for the moment this latter proposition, the question is

whether the Subject Debtors were in actual financial distress on the Petition Date and

whether the prospect of liability was too remote to justifY a Chapter 11 filing.




                                            21
                  (I) The Financial Distress of the Individual Project Debtors

         The record on these Motions demonstrates that the individual debtors that are the

subject of these Motions were in varying degrees of financial distress in April 2009. Loans

to four of the Subject Debtors had cross-defaulted to the defaults of affiliates or would have

been in default as a result of other bankruptcy petitions. 24 Ofthe loans to the remaining

sixteen Subject Debtors, one had gone into hyper-amortization in 2008. Interest had

increased by 4.26%. Five of the Subject Debtors had mortgage debt maturing or hyper-

amortizing in 2010, two in 2011, and one in 2012. The remaining seven Subject Debtors

were either guarantors on maturing loans of other entities or their property was collateral for

a loan that was maturing, or there existed other considerations that in the Debtors' view

placed the loan in distress, such as a high loan-to-value ratio.

         The Debtors' determination that the Subject Debtors were in financial distress was

made in a series of Board meetings following substantial financial analysis. The Debtors

established that in late 2008 they hired a team of,advisors to assist in the evaluation of either

an in-court or an out-of-court restructuring. The team included Miller Buckfire as

restructuring advisor, AlixPartners LLP as financial advisor, and both Weil Gotshal &

Manges and Kirkland & Ellis as legal advisors. The process of evaluating the Company's

restructuring options took approximately six weeks and encompassed a total of seven Board

meetings and three informational sessions. During these meetings, the Boards discussed

general considerations applicable to the project-level companies, as well as specific facts

relating to the individual properties, with both GOP personnel and the financial, restructuring



24 There was some dispute at the time oftrial as to whether certain ofthe loans were actually in default.
(See Hr'g. Tr. 203:17-205: 17, June 17,2009.) The fact that the parties still could not, as of June 2009,
agree whether there was a default establishes that on the Petition Date the Debtors could not have been
confident that the loans would not be accelerated and foreclosure proceedings commenced.


                                                   22
and legal advisors available. The Boards specifically focused on: "the collapse of the

commercial real estate financing market; the challenges facing the CMBS market and the

practical difficulties of negotiating with CMBS servicers to meaningfully modify loan terms;

integration of the project entities with GGP Group and requirements for securing DIP

financing; and the consequences of filing an entity for bankruptcy individually, outside a

coordinated restructuring with other GGP entities." (Nolan Decl., June 16, 2009,                      ~~   29-35;

Board Minutes - Joint Trial Ex. 1-7.) The Boards also concentrated on three of the above-

referenced filing factors: "(i) defaults or cross-defaults with other loans; (ii) loans that were

maturing in the next three to four years; and (iii) other financial considerations indicating that

restructuring would be necessary, including a loan-to-value ratio above 70 percent.". (ld. at ~

       5
38./

           In addition to these general considerations, the Boards discussed each project-level

entity individually. For each entity, Robert Michaels, the Vice Chairman ofGGP, "provided

an overview of its financial and operational considerations, including the property's

performance, outlook, and projected capital needs. In addition, for each entity, the Boards

received written materials consisting of a fact sheet on the property, an income statement,

and a draft board resolution." (Nolan Decl., June 16,2009, '145.) In these meetings, the

Debtors divided the various property-level entities into separate groups to evaluate whether

to file each individual entity. (See Helios Trial Ex. 16; Nolan Decl., June 16,2009, '138.)26




25 The Debtors introduced an exhibit with respect to the loan-to-value ratios of certain of the properties.
Subsequent to the hearing on these Motions, Metlife filed a Motion in Limine to Exclude Debtors'
Trial Exhibit No. 2 (ECF Docket No. 940) (the "Motion in Limine"). Metlife contended lhat the
exhibit's loan-to-value ratios are not reliable or supported by the record. The Court grants the Motion
in Limine and has not relied on Debtors' Exhibit 2 for purposes of this Opinion.
26 The entities were separated into Groups A through G. Ten factors were used 10 consider whether to
file an entity for bankruptcy, although other considerations were applied depending on the facts and
circumstances related to the entity. The ten factors included:


                                                    23
On April 15,2009 the Boards separately voted to put most of the project-level Debtors into

bankruptcy. Certain Subject Debtors acted by written consent of the directors or managers.27

Fourteen entities were left out of the filing, as none of the ten filing factors was applicable.

(Nolan Decl., June 16, 2009, ~ 49; Helios Trial Ex. 16; Hr' g Tr. 196: 9-21, June 17, 2009.)

         Movants contend that, in the name of the "doctrine" of "prematurity," the Debtors

had a good faith obligation to delay a Chapter 11 filing until they were temporally closer to

an actual default. For the following reasons, these Debtors were justified in filing Chapter 11

petitions when they did.

         We start with the statute. Chapter X ofthe former Bankruptcy Act expressly required

that a petition be filed in good faith, providing that "[u]pon the filing ofa petition by a



       (I) The Company is a borrower or guarantor under a credit facility that is currently in default and
            for which no forbearance has been obtained .
     . (2) The Company is a borrower or guarantor under a credit facility that is currently in a
            forbearance period that can be terminated at the Lender's discretion.
       (3) The default of General Growth Properties, Inc; or another entity within the General Growth
            Properties structure and/or a bankruptcy filing by an entity guaranteeing the Company's debt
            triggers an Event of Default under the Company's existing loan.
       (4) The Company owns a property which is subject to an existing cash trap that has been
            implemented.
      (5) The Company is a borrower or guarantor under a loan that matures within the next three to
            four years.
      (6) The Company is part ofa project in which one or more subsidiaries or affiliates are under
            consideration for filing to facilitate a restructuring.
      (7) The Company is the general partner of a partnership that is under consideration for filing.
      (8) The Company is subject to multiple other filing considerations, including a loan which has a
            loan-to-value ratio in excess of70%.
      (9) The Company holds unencumbered assets and is filing to facilitate the inclusion of such assets
            as part of an overall corporate restructuring.
      (J 0) The Company may be part of a non-core asset disposition process that could be facilitated by
            a section 363 sale in bankruptcy.
(Helios Trial Ex. 16.)
27 In their capacity as managers of Providence Place Holdings, LLC, White Marsh, LLC and 10000
West Charleston Boulevard, LLC, Thomas Nolan and Robert Michaels signed consents on April 15,
2009 for those entities to file bankruptcy. (Sup. Nolan Dec!., June 23, 2009, ~ 4.) On that same date,
Nolan, as president of the general partners of Howard Hughes Properties, L.P., White Marsh Mall
Associates, and White Marsh Phase II Associates, president of the general partner of the managing
partner of White Marsh General Partnership, and sole member of 990 1-921 Covington Cross, LLC,
signed consents for those entities to file bankruptcy. (Sup. Nolan Decl., June 23, 2009, ~~ 5-6.) The
resolutions attached to the Town Center Drive petition indicate that the officers of the sole member,
Howard Hughes Properties, L.P., authorized the bankruptcy.


                                                   24
debtor, the judge shall enter an order approving the petition, if satisfied that it complies with

the requirements ofthis chapter and has been filed in good faith, or dismissing it if not so

satisfied." Bankruptcy Act of 1898 § 141,11 U.S.c. § 541 (1976) (repealed 1978). Neither

Chapter XI nor XII contained a similar good faith requirement, and the good faith provisions

were one of the many parts of Chapter X that debtors avoided by filing under Chapter XI and

that Congress rejected when it structured Chapter II of the Bankruptcy Reform Act of 1978.

         Indeed, when Congress adopted the Bankruptcy Abuse Prevention and Consumer

Protection Act of2005 ("BAPCPA"),28 it significantly strengthened the provisions of § 1112,

requiring the Court to dismiss or convert an abusive Chapter 11 case. 29 BAPCPA added

several factors to the prior list of grounds for dismissal. Significantly, it did not provide

expressly that a Chapter 11 case should be dismissed for bad faith in filing, and all of the

listed grounds for dismissal relate to a debtor's conduct after the filing, not before. Similarly,

in 2005 Congress added several provisions designed to shorten Chapter 11 cases, 30 but it

omitted any requirement that the Court hold an initial hearing on a Chapter II debtor's bona

fides or good faith.

         The Code's omission of any such hearing, which would doubtless invite significant

litigation at the start of every Chapter I J case, ;is nevertheless consistent with another of the

Code's innovations, ordinarily leaving the deotor in possession and not appointing a trustee.




28 Pub. L. No.1 09-8, April 20, 2005, 119 Stat 23 (2005).
29 For example, § J 112 now provides that if there is "cause" for dismissal or conversion, the Court
musl act, within a brief period and after a hearing, "absent unusual circumstances specifically
identified by the court that establish that the requested conversion or dismissal is not in the best interest
of creditors and the estate .... " II U.S.c. § 1112(b)(J).
30 See, e.g., the amendment to § 112 J (d) putting a limit on extensions of exclusivity.




                                                     25
These provisions carry out the goal of the          1978 Bankruptcy Code to incentivize a debtor to
file earlier rather than later, so as to preserve the value of the estate. 31

         In light of the statute, this Court declines the invitation to establish an arbitrary rule,

ofthe type desired by Movants, that a debtor is not in financial distress and cannot file a

Chapter 11 petition if its principal debt is not due within one, two or three years. The

Movants did not establish that the Debtors' procedures for determining whether to file the

individual Subject Debtors were unreasonable or that the Debtors were unreasonable in

concluding that the disarray in the financial market made it uncertain whether they would be

able to refinance debt years in the future. There was no evidence to counter the Debtors'

demonstration that the CMBS market, in which they historically had financed and refinanced

1110st of their properties, was "dead" as of the Petition Dale,32 and that no one knows when or

jfthat market will revive. Indeed, at the time of the hearings on these Motions, it was

anticipated that the market would worsen, and there is no evident means of refinancing

billions of dollars of real estate debt coming due in the next several years. The following

testimony of Allen Hanson, an officer ofHelios, is telling: "Q. HeJios is aware that there are

debt maturities that will occur in 2009, 2010, 201 I and 2012 that the CMBS market will not

be able to handle through new CMBS issuances, correct? A. Based on the circumstances we

see today, yes." (See Hanson Dep. Tr. 155: 25-156:6, June 5, 2009; Hanson Dep. Tr. 144:14-

145:]0.)




31 "Proposed chapter II recognizes the need for the debtor to remain in contra I to some degree, or else
debtors will avoid the reorganization provisions in the bill until it would be too late for them to be an
effective remedy." H.R. Rep. No. 595, at 233, 95th Cong., 1st Sess. (1977); see also In re SGL
Carbon, 200 F.3d at 163-64; In re Johns-Manville Corp., 36 B.R. at 736.
n For example, CMBS issuances dropped by 97% when the first nine months of2008 are compared
with the same period for 2007. Furthermore, CMBS issuances for the fourth quarter of2008 were 98%
lower than in the fourth quarter of2007. (Mesterharm Decl., April 16, 2009, '141.)


                                                   26
       It is well established that the Bankruptcy Code does not require that a debtor be

insolvent prior to filing. See In re The Bible Speaks, 65 B.R. 415, 424 (Bankr. D. Mass.

1986). In U.S. v. Huebner, 48 F.3d 376, 379 (9th Cir. 1994), the Court noted a corollary that

is equally applicable here: "The Bankruptcy Act does not require any particular degree of

financial distress as a condition precedent to a petition seeking relief." Many other cases

have denied motions to dismiss, despite the fact that the subject debtors were able to meet

current expenses. Tn In re CenturylML Cable Venture,294 B.R. 9 (Bankr. S.D.N.Y. 2003),

for example, the COllrt denied a motion to dismiss because, despite being able to meet current

expenses, the debtor had "a huge financial liability which it does not have the ability to pay

out of current cash flow, and without a substantial liquidation of its assets." 294 B.R. at 35-

36, citing. inter alia. In re Johns-Manville Corp., 36 B.R. 727,736-37 (Bankr. S.D.N.Y.

1984); see also In re Central Jersey A irport Sen/ices, 282 B.R. 176, ) 8 J (Ban!u. D.N.l.

2002); In re Chris-Marine U.S.A .. Inc., 262 B.R. 118, 125 (Bankr. M.D. Fla. 2001).

       The foregoing is not to assert that every stand-alone company with ample cash flow

would necessarily act in good faith by filing a Chapter 11 petition three years before its only

debt came due. However, contrary to Movants' contentions, the Court is not required in

these cases to exam ine the issue of good faith as if each Debtor were wholly independent.

We turn to the interests of the Group as a whole.

               (ii) The Interests of the Group

       Movants argue that the SPE or bankruptcy-remote structure of the project-level

Debtol's requires that each Debtor's financial distress be analyzed exclusively from its

perspective, that the Court should consider only the financial circumstances ofthe individual

Debtors, and that consideration of the financial problems of the Group in judging the good




                                           27
faith of an individual filing would violate the purpose ofthe SPE structure. There is no

question that the SPE structure was intended to insulate the financial position of each ofthe

Subject Debtors from the problems of its affiliates, and to make the prospect of a default less

likely. There is also no question that this structure was designed to make each Subject

Debtor "bankruptcy remote." Nevertheless, the record also establishes that the Movants

each extended a loan to the respective Subject Debtor with a balloon payment that would

require refinancing in a period of years and that would default if financing could not be

obtained by the SPE or by the SPE's parent coming to its rescue. Movants do not contend

that they were unaware that they were extending credit to a company that was part of a much

larger group, and that there were benefits as well as possible detriments from this structure.

If the ability of the Group to obtain refinancing became impaired, the financial situation of

the subsidiary would inevitably be impaired.

       The few cases on point support the Debtors' position that the interests of the group

can and should be considered. In Heis/ey v. u'I.P. Engineered Prods. Corp. (In re u'I.P.

Engineered Prods. COIp.), 831 F.2d 54 (4th Cir. 1987), the Court addressed the propriety of

Chapter 11 filings by solvent subsidiaries ofa parent corporation that had filed its own

Chapter 11 case shortly before the subsidiaries flied. Creditors sought to dismiss the

subsidiaries' cases, arguing that the timing orthe filings and the subsidiaries' admitted

solvency evidenced an abuse of the bankruptcy process. See id. at 56. The Court found

otherwise, stating that is was irrelevant whether the subsidiaries could independently

demonstrate good faith for their filings. Rather, the question was whether the wholly-owned

subsidiaries "should have been included in theJr parent company's bankruptcy estate, when

the parent company had filed in good faith for Chapter II reorganization." Id. The Court




                                           28
found that it was "clearly sound business practice for [the parent] to seek Chapter 11

protection for its wholly-owned subsidiaries when those subsidiaries were crucial to its own

reorganization plan." Id. The Courtexplained that the nature ofa corporate family created

an '" identity of interest' ... that justifies the protection of the subsidiaries as well as the

parent corporation." Id, citing A.H. Robins v. Piccinin, 788 F.2d 994 (4th Cir. 1986), cert.

denied, 479 U.S. 876 (1986). The Fourth Circuit also relied on the pre-Code case of Duggan

v. Sansberry, 327 U.S. 499 (1946), which stated that it was Congress' intent "ordinarily to

allow parent and subsidiary to be reorganized in a single proceeding, thereby effectuating its

general policy that the entire administration of an estate should be centralized in a single

reorganization court." Id. at 510-11.

        The reasoning in UI.P. Engineered Prods. was largely adopted in In re Mirant COIp ..

2005 WL 2148362 (Banlu. N.D. Tex. Jan. 26, 2005), where the Court addressed a motion to

dismiss the case of one of more than 80 related debtors. The Court held that the standard for

assessing the good-faith dismissal of a single stand-alone debtor is di fferent from the

standard applied to "a key operating affiliate placed in chapter 11 in conjunction with

necessary filings by its family of affiliates." Id. at *5. The Court noted that ifthe subsidiary

had not been included in the bankruptcy filing, it would have likely faced repercussions from

the filings by its affiliates, and warned that "[a] failure to file for an entity that is a principal

member of the family could prove disastrous ifreliefin fact was necessary." See id. at *6.

        Movants do not contend that the parent companies acted in bad faith in filing their

own Chapter 11 petitions. The parent companies depended on the cash flow from the

subsidiaries, but much of the project-level debt was in default: from January 1,2009 through

the second week of April 2009, $1.1 billion of the GGP Group project-level debt had




                                              29
matured, none of which the Company had been able to refinance. As ofthe Petition Date,

billions of dollars of project-level debt had also reached hyper-amortization, with several

secured lenders having imposed cash traps. In March 2009, Citibank, a lender on one of the

defaulted loans, had begun foreclosure proceedings against one property. In addition to the

project-level debt, the Group had debt of more than $8.4 billion at the parent level. Much of

this debt was in default and it, too, could not be refinanced. Beyond the unsecured debt of

the parent companies were thousands of equityholders who depended, in large part, on tile

net cash flow of and the equity in the project-level Debtors as a principal source of protection

for their investment.

        Faced with the unprecedented collapse of the real estate markets, and serious

uncertainty as to when or if they would be able to the refinance the    pro.iect~level   debt, the

Debtors' management had to reorganize the Group's capital structure. Movants do not

explain how the billions of dollars of unsecured debt at the parent levels could be

restructured responsibly if the cash flow of the parent companies continued to be based on

the earnings of subsidiaries that had debt coming due in a period of years without any known

means of providing for repayment or refinance. That is not to conclude, as Movants imply,

that the interests of the subsidiaries or their creditors should be sacrificed to the interests of

the parents and their creditors. As further discussed below, there need be no sacrifice of

fundamental rights. The point is that a judgment on an issue as sensitive and fact-specific as

whether to file a Chapter 11 petition can be based in good faith on consideration of the

interests of the group as well as the interests of the individual debtor.

       Indeed, there is authority that under the circumstances at bar, the interests of the

parent companies must be taken into account. The Operating Agreements of many ofthe




                                            30
project-level Debtors contained provisions that required the appointment of two

"Independent Managers.,,33 The Operating Agreements do not enumerate the duties of the

Independent Managers except in the following instance, which is obviously highly relevant

to the instant Motions: "To the extent permitted by law, .. the Independent Managers shall

consider only the interests of the Company, including its respective creditors, in acting or

otherwise voting on the matters referred to in Article XIJJ (p)." (Joint Trial Ex. 34, 35.)

(emphasis added), Article XIII (p) requires the "unanimous written consent of the Managers

of the Company, including both of the Independent Managers" before the SPE can take any

action to file or consent to the filing, as debtor, of any bankruptcy proceeding. (Id.) The

Operating Agreements further provide that, "in exercising their rights and performing their

duties under this Agreement, any Independent Manager shal! have a fiduciary duty of loyalty

and care sim ilar to that of a director of a business corporation organized under the General

Corporation Law of the State of Delaware." (Jd.)


3J   Independent Manager is defined in the ING Clarion Debtors' documents as a:

           natural person who is not ... (i) a stockhol~er, oirector, manager ... , trustee,
           officer, employee, partner, member, attorney or counsel of the Company or any
           Affiliate oFthe Company; Oi) a creditor, customer, supplier or other Person who
           derives any of its purchases or revenues from its activities with the Company or
           any A ffiliate of the Company; (iii) a Person controlling or under common
           control with any such stockholder, partner, member, creditor, customer, supplier
           or other Person; or (iv) a member of the immediate family of any such
           stockholder, director, officer, employee, partner, member, creditor, customer,
           supplier or other Person.

(Joint Trial Ex. 34,35). The provision allows a "person who satisfies the foregoing definition other
than subparagraph (ii)" to serve as Independent Manager if "such individual is an independent manager
provided by a nationally-recognized company that provides professional independent directors,
managers or trustees ... or if such individual receives customary director, manager or trustee's fees for
so serving .... " (Joint Trial Ex. 34, 35.) Similarly, an individual who "otherwise satisfies the foregoing
definition except for serving as an independent director, manager or trustee of one or more Affiliates of
the Company that are 'Special Purpose Entities'" may serve as Independent Manager if such individual
is "provided by a nationally recognized company that provides professional independent directors,
managers and trustees .... " (Joint Trial Ex. 34,35). The Operating Agreements for the Helios Debtors
define special purpose entity slightly differently, as "an entity whose organizational documents contain
restrictions on its activities and impose requirements intended to preserve such entity's separateness in
compliance with rating agency standards." (Joint Trial Ex. 34, 35.)


                                                    31
          The drafters of these documents may have attempted to create impediments to a

bankruptcy filing; in considering a filing, the Independent Managers are directed to consider

only the interests ofthe Company, including its "creditors" - meaning the lender as the only

substantial creditor of the entity. However, it is also provided, appropriately, that the

Independent Managers can act only to the extent permitted by applicable law, which is

deemed to be the corporate law of Delaware. Delaware law in turn provides that the

directors of a solvent corporation are authorized - indeed, required - to consider the interests

of the shareholders in exercising their fiduciary duties. In North American Catholic

Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007), the

Delaware Supreme Court held for the first time that the directors of an insolvent corporation

have duties to creditors that may be enforceable in a derivative action on behalf of the

corporation. But it rejected the proposition of several earlier Chancery cases that directors of

a Delaware corporation have duties to creditors when operating in the "zone of insolvency,"

stating

           [w]hen a solvent corporation is navigating in the zone of
           insolvency, the focils for Delaware directors does not change:
          directors must continue to discharge their fiduciary duties to the
          corporation and its shareholders by exercising their business
          judgment in the best interests of the corporation for the benefit of
          its shareholder owners.

930 A.2d at 101 (emphasis suppJied)?4 This statement is a general formulation that leaves

open many issues for later determination             for example, when and how a corporation should


34 The Court thus rejected certain of the holdings in Production Resources Group. LL.C. v. NCT
Group, Inc., 863 A.2d 772 (Del. Ch. 2004) and foolnote 55 in Credit Lyonna/s Bank Nederland. N. V,
v. Palhe Communications Corp., 1991 bel. Ch. LEX(S 215 n. 55 (Del. Ch. 1991); see also Trenwick
Am. Litig. Trust v. Ernst & Yaung, L.1.. P., 906 A.2d 168, 195 (De\. Ch. 2006) ("Ifa plaintiff seeks to
state a claim premised on the notion thai a corporation was insolvent and that the directors of the
corporation were therefore obligated to consider the corporation's creditors, as an object of their
fiduciary beneficence, the plaintiff must plead facts supporting an inference that the corporation was in
fact insolvent at the relevant time. ").


                                                   32
be determined to be insolvent. But there is no contention in these cases that the Subject

Debtors were insolvent at any time - indeed, Movants' contention is that they were and are

solvent. Movants therefore get no assistance from Delaware law in the contention that the

Independent Managers should have considered only the interests of the secured creditor when

they made their decisions to file Chapter 11 petitions, or that there was a breach of fiduciary

duty on the part of any of the managers by voting to file based on the interests of the Group.

       The record at bar does not explain exactly what the Independent Managers were

supposed to do. It appears that the Movants may have thought the Independent Managers

were obligated to protect only their interests. For example, an officer oflNG Clarion

testified that "the real reason" he was disturbed by the Chapter 11 filings was the inability of

the fndependent -Managers to prevent one:

       Well, my understanding of the bankruptcy as it pertains to these
       borrowers is that there was an independent board member who was
       meant to, at least from the lender's point of view, meant to prevent
       a bankruptcy filing to make them a bankruptcy~remote, and that
       such filings were not anticipated to happen.

(Altman Dep. Tr. 159:7-13, June 5, 2009.) However, ifMovants believed that an

"independent" manager can serve on a board solely for the purpose of voting "no" to

a bankruptcy filing because of the desires of a secured creditor, they were mistaken.

As the Delaware cases stress, directors and managers owe their duties to the

corporation and, ordinarily, to the shareholders. Seen from the perspective of the

Group, the filings were unquestionably not premature.

       B. Inability to Confirm a Plan

       In addition to prematurity, Metlife contends that objective futility has been

established and its cases should be dismissed because the Subject Debtors will never




                                           33
                                                        35
be able to confirm a plan over its opposition.               In making this argument, it is Metlife

that is acting prematurely. There is no requirement in the Bankruptcy Code that a

debtor must prove that a plan is confirmable in order to file a petition. See In re

CenturylML Cable Venture, 294 B.R. 9, 36 (Bankr. S.D.N.Y. 2003), citing In re

Brown, 951 F.2d 564, 572 (3d Cir. 1991); In re Lizeric Realty Corp., 188 B.R. 499,

503·04 (Bankr. S.D.N.Y. 1995); In re Toyota a/Yonkers, 135 B.R. 471, 476-77

(Bankl'. S.D.N.Y. 1992). Courts have consistently refused to dismiss on this ground

before a plan has been proposed. See In re ReM Global, 200 B.R. 514, 524 (Bankr.

S.D.N.Y. 1996); Faflich Assocs. v. Court Living Corp. (In re Court Living Corp.),

1996 U.S. Dist. Lexis 13588, at *13-*14 (S.D.N.Y. Sept. I, 1996) (conversion); In re

Lizeric Realty Corp., 188 B.R. 499, 503-04 (Bankr. S.D.N.Y. 1995) (rejecting

argument that plan could not be confirmed because creditor would not give approval);

In re Hempstead Realty Associates, 38 B.R. 287, 290 (Bankr. SD.N.Y. 1984). These

cases reflect the reality that parties often find it in their best interests to agree on the

terms of a plan, despite their litigating posture, as well as the fact that debt can always

be left unimpaired.

         The cases relied upon by Metlife are not to the contrary. None dismissed a

Chapter 11 petition prior to the proposal of a plan. See In re 266 Washington Assocs.,

141 B.R. 275 (Bank 1'. E.D.N.Y.), aff'd, 147 B.R. 827 (E.D.N,Y. 1992) (debtor had

filed plan and parties had attempted settlement before court found reorganization

impossible); In re 499 W. Warren Street Assocs. Ltd. P'ship, 151 B.R. 307 (Bankr.

N.D.N.Y. 1992) (plan had been filed and voted on by creditors); In re Lumbar Exch.

35 Metlife's argument is that the Metlife Debtors have no other creditors, that it holds the only impaired
claim and that the Debtors will never be able to satisfy the condition of § 1129(a)( 10) ofthe
Bankruptcy Code that the plan be accepted by one class of impaired creditors.


                                                   34
Ltd. P'ship, 125 B.R. 1000 (Bankr. D. Minn. 1991) (debtor had offered model plan

and subsequent official plan, and unsecured creditors' committee had submitted a

model plan). It is also consistent with § 1112(b)(4)(J) of the Bankruptcy Code,

defining cause for dismissal of a case as including failure to "file or confirm a plan,

within the time fixed by this title or by order of the court."

        Metlife's argument that a plan cannot be confirmed over its objection reflects

its view of the leverage it has in the subject cases. Its invocation ofits asserted

leverage is ironic, in view of the fact that Metlife also asserts that the Subject

Debtors' filings were taken in subjective bad faith. I n any event, we turn to the

requirement that a Chapter 11 filing be made in subjective good faith.

        C. Subjective Faith

        The second element in analyzing whether a Chapter 11 petition has been filed in good

faith is whether the debtor has exercised subjective good faith. The test in C-TC gIlt Ave.

P 'ship is a two-fold test, requiring proof of subjective bad faith as well as objective futility.

113 F 3d at 1309-10; see also Carotin Corp. v. Miller, 886 F.2d at 700-701 (discussing

reasons for requiring a "two-pronged inquiry.")'

        Movants do not contend that the Boards of the respective debtors did not act

deliberately, or that they did not have an intent to reorganize the companies. III addition to

their contentions relating to prematurity and lack of financial distress, they assert that the

Subject Debtors acted in subjective bad faith because (i) they failed to negotiate prior to

Filing, and (ii) the initial "Independent Managers" of several of the SPE's were fired and

replaced shortly before the Petition Date.




                                             35
               (i) Failure to Negotiate

       The Bankruptcy Code does not require that a borrower negotiate with its lender

before fiiing a Chapter II petition. BAPCPA contains a requirement that a consumer debtor'

obtain credit counseling before filing, 11 U.S.c. § 109(h), and an obscure provision of

BAPCPA provides that an unsecured claim on a consumer debt can be reduced by up to 20%

if the lender "unreasonably refused to negotiate a reasonable alternative repayment

schedule," as defined. 11 U.S.c. § 502(k). Neither ofthese provisions has any relevance

here, except to demonstrate that Congress knows how to impose a filing requirement when it

wants to do so. There are often good reasons for a commercial borrower and its lender to

talk before a bankruptcy case is filed. But that does not mean that a Chapter II case should

be deemed filed in bad faith ifthere is no prepetition negotiation.

       On this record, there is no evidence that pre-filing talks would have been

adequate to deal with the extent of the problem. Indeed, there is no evidence

Movants would have been willing to work with the Subject Debtors. None of the

Movants adduced testimony from witnesses with final decision-making authority who

said that they would have been willing to refinance or modify the terms of the

respective Subject Debtors' loans. (See Hr' g Tr. 92:14-19 108: 16-22, June 17,2009;

Hanson Dep., 61:9-16; Hr'gTr. 129:2-9, 130;.5-132:14, 165:6-9, ]69:23-171:13,

173:4-9; 213:5-214:24, June 24,2009.) There is much evidence in the record that the

Debtors could not even get the CMBS lenders to talk to them. As discussed above,

the CMBS structure gave the special servicers the right to negotiate an extension or

refinancing ofa loan. The special servicers could only be appointed, however, if the

loan was in default or nearing a default. For example, Wachovia Securities, the




                                          36
master servicer 09 several INO Clarion loans with the Subject Debtors, refused to

negotiate and stated that the loans would have to default before they even could be
                                       36
transferred to the special servicer.        Helios took the same position with respect to one

of the Subject Debtors, contending that, "even after the commencement of a

foreclosure action, SLO would still not have an immediate need to file for bankruptcy

unless and until it was unable to achieve a resolution prior to the foreclosure sale of

its property." (Helios Reply, p. 8.) The Subject Debtors did not act in bad faith when

they failed to delay Chapter 11 petitions until the CMBS loans defaulted or were

roreclosed.

         Metlife was not encumbered with the master servicerlspecial servicer

structure, but there is no indication that it would have readily agreed to a refinancing

of any of its loans. Internal documents from Metlife's files show that its investment

analysts had concluded that the loan-to-value ratios on several of its properties were

too high and that millions of dollars of debt had to be repaid before refinancing would

be considered. (Hr' g Tr. 208:5-209: 10, June 24, 2009; Debtors' Trial Ex. 60 at

Met/GGP 1679; Hr'g Tr.        155:13~156:5,    June 24,2009.) In December 2008, the head

of real estate investments at Metlife identified its debt exposure to GOP (as a group)

as a "lessons learned opportunity." (Debtors' Trial Ex. 71; Hr'gTr. 174:16-20,

176: 10-177: 12, June 24, 2009.) A director and member of the research group

responded, "We wouldn't do a loan with GGP now, given their problems." (Hr'g Tr.

180: 10-15, June 24, 2009; Debtors' Trial Ex. 71 at Met/GGP 02660.) Metlife



36OOP contacted Wachovia Securities, a master servicer with respect to three loans. Wachovia would
not discuss appointing a special servicer and revising the terms on one loan until one month before
maturity, and the other two loans matured and were in defaurt before they wcre turned over to the
special servicer. (Nolan. Dec!., June 16,2009,' 17.)


                                                37
followed up in March 2009, by identifying GGP's "deteriorating financial capacity"

as a reason to downgrade the Providence Place loan below investment grade, and it

decided that Metlife should "take a pass" on the loan at maturity, rather than

refinance or extend the loan. (Hr'g Tr. 140:1-14; 142:18-143:2, 144:24-145:24,

146:10-148:16, June 24,2009; Debtors' Trial Ex. 70 at Met/GGP 00031,00035;

Debtors' Trial Ex. 72.) Obviously, none of this proves what Metlife would have done
                                                          l


if the Debtors had opened negotiations before filing under Chapter II, but it does

support the conclusion that the Debtors' decision not to negotiate before filing was

reasonable and made in good faith. 37

                   (ii) The Discharge of the Independen t Managers

         The second principal bad faith charge against the Debtors is that they engineered the

discharge of the original Independent Managers of some of the Subject Debtors and replaced

them with other Independent Managers. The basic facts are not in dispute. As discussed

above, the Operating Agreements of some of the SPE's required that there be two

independent managers or directors. The organizational documents permitted these

independent managers to be supplied by a "nationaJly recognized company that provides

professional independent directors, managers and trustees." In the cases at bar, Corporation

Service Company ("eSC") supplied at least two "independent managers" who served on the
                                                                                    s
Boards of over 150 project-level debtors. (Joint Trial Ex. 34, 35.i                     It does not appear that

these managers had any expertise in the real estate business and as mentioned above, some of

37 On the subject of good faith, it is also suggestive that Metlife now states that it categorically refuses
to agree to a plan that impairs its claim. (Metlife Reply. ~ 22.) Such inflexibility and unwillingness to
negotiate undermines Metlife's contention that it would have been willing to work with the Debtors
~repetition to refinance its loans.
 8 Although the record is not altogether clear, it appears that esc supplies these directors in the same
fashion as it provides filing and other ministerial services for corporations. Nolan testified that "My
understanding is thaI they serve on multiple boards. I do not know how they source their directors."
(Hr'g Tr. 218: 12-17, June 17,2009.)


                                                     38
the lenders thought the independent managers were obligated to protect their interests alone.

As articulated by Debtors' counsel, "the assumption by the lenders was that the independent

director was not really independent" (Hr'g Tr. 62: 20-21, June 17,2009.)

         In any event, it is not disputed that the CSC-appointed independent managers were,

prior to the Petition Date, terminated from the Boards of those of the Subject Debtors that

maintained the independent-manager requirement. (Hr' g Tr. 211-221, June 17, 2009.) The

terminations "came as a surprise" to the independent managers because there was "no prior

indication such termination was being contemplated." (Manager Dec!. at ~5/9 Moreover,

the managers did not learn of their termination until after the bankruptcy filings.40 It is also

undisputed that the Debtors selected two "seasoned individuals," Charles Cremens and John

Howard, to serve as successor independent managers or directors on the Boards. Cremens

and Howard served on the Boards during the spring of2009 when the Debtors reviewed their

restructuring prospects and ultimately voted to file under Chapter 1 I. Nolan explained the

decision to replace the independent managers as follows:

         Given the significance, complexity, and time-consuming nature of
         assessing potential bankruptcy filings involving numerous entities,
         the project entities' stockholders and members desired independent
         managers with known experience in restructuring environments
         and complex business decisions, who understood the capital
         markets, who could commit significant time to learning about the
         projects, and who would bring critical, independent thinking to the
         restructuring challenges these project entities were facing.




39 To supplement the record, Helios offered into evidence declarations from the two independent
managers, together with exhibits thereto (Helios Trial Ex. 19,20) (the "Manager Declarations").
While the affiants describe the circumstances of their termination, they do not offer any evidence as to
their expertise or why they were on the Boards.
40 The Company sent notice of termination to CSC in a letter dated April 16,2009. The termination
leiter cited March 4,2009 as the effective date of the termination of the managers and included a
schedule showing that at least one CSC-supplied independent manager, director, or trustee had been
removed from the boards of 159 GGP project-level entities. (Exhibit B to Manager Dec!.).


                                                   39
(Nolan Decl., June 16.2009, '126). NoJan also asserted that the terminations were not

disclosed to CSC or to the original managers themselves until after the bankruptcy

filings due to concern that such information "could subject the company to pUblicity

about potential restructuring strategies ... " and because the Debtors had no contractual

obligation to inform the managers. (Hr'g Tr. 224: 24-25,225: 1, 13-14, June 17,

2009.)

         On this record it cannot be said that the admittedly surreptitious firing ofthe

two "I ndependent Managers" constituted SUbjective bad faith on the palt of the

Debtors sufficient to require dismissal of these cases. The corporate documents did

not prohibit this action or purport to interfere with the rights of a shareholder to

appoint independent directors to the Board.41 The new Independent Managers

satisfied the requirements of that position. As discussed above, the Independent

Managers did not have a duty to keep any of the Debtors fi'om filing a bankruptcy

case. As managers of solvent companies charged to act in the same fashion as

directors of a Delaware corporation, they had a primajacie fiduciary duty to act in the

interests of "the corporation and its shareholders:" Gheewalla, 930 A.2d at 101. It

may be for that reason that the two CSC-nominated Independent Managers voted in

favor of the Chapter II Filings of those debtors on whose boards they still served.

         In In re Kingston Square Assoc., the Court declined to grant motions to

dismiss on bad faith grounds where the debtors' management, precluded from filing



~l Both of the CSC-nominated independent managers acknowledged in declarations filed with the
Court that, upon examination of "further evidence from GGP to ensure that [each independent
manager] was properly removed and replaced as per Article XIlI (0) of the Amended and Restated
Limited Liability Company Agreement," it was determined that each independent manager "was
properly removed and replaced in accordance with the terms outlined" in the organizational
documents. (Manager Decl. '16, 7).


                                               40
voluntary cases, colluded with creditors to engineer involuntary filings. The Court

found that this far more egregious action was "suggestive of bad faith," but that the

cases should not be dismissed as the collusion was not rooted in a "fraudulent or

deceitful purpose" but designed "to preserve value for the Debtors' estates and

creditors." 214 B.R. at 734, 736. 42

         The Debtors here have established that the filings were designed "to preserve

value for the Debtors' estates and creditors," including the Movants. Movants are

wrong in the implicit assumption of the Motions that their rights were materially

impaired by the Debtors' Chapter II filings. Obviously, a principal purpose of

bankruptcy law is to project creditors' rights. See Young v. Higbee Co., 324 U.S.

204,210(1945). Secured creditors' access to their collateral may be delayed by a

filing. but secured creditors have a panoply of rights, including adequate protection

and the right to post-petition interest and fees if they are oversecured. 11 U.S.C. §§

361,506(b). Movants complain that as a consequence of the filings they are

receiving only interest on their loans and have been deprived of current amortization

payments, and Metlife complains that it is not even receiving interest on its

mezzanine loan, which is secured only by a stock interest in its borrower's subsidiary.

However, Movants have not sought additional adequate protection, and they have not

waived any of their rights to recover full principal and interest and post-petition

interest on confirmation of a plan. Movants complain that Chapter 11 gives the


~2 Indeed, while the Movants. particularly Helios, devoted 'considerable attention to the independent
manager issues in their papers and at trial, the precise basis for challenging the replacement ofthe
independent managers remains unclear. As noted, Movants have conceded that the Debtors did not
violate the corporate documents in firing the initial Independent Managers. Furthermore, ING has
declined to ask the Court to find "that the way these entities landed into bankruptcy by replacing
independent directors" was "wrongful" or indicative of bad faith. (Hr'g Tr. 19: 1-3, 13-16, June 17,
2009.)


                                                  41
Debtors excessive leverage, but Metlife asserts it has all the leverage it needs to make

sure that its rights wi II be respected.

           It is clear, on this record, that Movants have been inconvenienced by the

Chapter 11 filings. For example, the cash flows of the Debtors have been partially

interrupted and special servicers have had to be appointed for the CMBS obligations.

However, inconvenience to a secured creditor is not a reasOn to dismiss a Chapter 11

case. The salient point for purposes of these Motions is that the fundamental

protections that the Movants negotiated and that the SPE structure represents are still

in place and will remain in place during the Chapter II cases. This includes

protection against the substantive consolidation of the project-level Debtors with any

other entities. There is no question that a principal goal ofthe SPE structure is to

guard against substantive consolidation, but the question of substantive consolidation

is entirely different from the issue whether the Board of a debtor that is part of a

corporate group can consider the interests of the group along with the interests of the

individual debtor when making a decision to fi.Je a bankruptcy case. Nothing in this

Opinion implies that the assets and liabilities Marty of the Subject Debtors could

properly be substantively consolidated with those of any other entity.

       These Motions are a diversion from the parties' real task, which is to get each

of the Subject Debtors out of bankruptcy as soon as feasible. The Movants assert

talks with them should have begun earlier. It is time that negotiations commence in

earnest.




                                            42
II. Eligibility of the Lancaster Trust to File under Chapter 11

        JNG Clarion also moves to dismiss the Chapter 11 case filed by Lancaster

Trust, one of the Subject Debtors, on the ground it is an Illinois land trust and is

ineligible to file. An Illinois land trust has been described as "a legal device whose

primary function is to hold legal and equitable title to real estate," which "is not, and

does not attempt to be, an active business or commercial entity." In re North Shore

Nat '[ Bank of Chicago. Land Trust No. 362, 17 B.R. 867, 869 (Bankr. N.D. III. 1982).

        The facts are uncontested. Lancaster Trust was formed in 1979 and became a

part of the GGP Group in June of 1998. It is the owner of the Park City Mall and the

borrower under a loan serviced by ING Clarion, which is secured by the Park City

Center. Lancaster Trust is described only as an "Illinois Trust" in its loan

documentation, not as a "land trust." Nevertheless, JNG Clarion contends that

Lancaster Trust is ineligible to file for protection under the Bankruptcy Code because

it does not maintain certain of the characteristics of a business entity, in that it lacks

employees, independent managers, a governing board or officers, and the

transferability of equity interests. The Debtors argue that the Lancaster Trust

operates as a business trust because of its corporate attributes and because it transacts

business for the benefit of investors, and thus that it is eligible to be a debtor under

Chapter II.

       The Bankruptcy Code provides that a "person" may be a debtor under Chapter

II and that the term "person" includes a "corporation." 11 U.S.C. §§ 109(d),

101(41). The term "corporation" in turn includes a "business trust." 11 U.S.C. §

101 (9)(A)(v). However, neither the Bankruptcy Code nor its legislative history



                                            43
defines the term "business trust." See Shawmut Bank Conn. v. First Fidelity Bank (In

re Secured Equip. Trust ofEastern Air Lines), 38 F.3d 86, 89 (2d Cir. 1994). The

question is whether the Debtors have met their burden of proof of establishing that the
                                                                                           43
Lancaster Trust was eligible to file because it operates as a business trust.

          In Secured Equipment, the Second Circuit addressed the question whether a

"trust" should be considered a "business trust." The Court stated that "a basic

distinction between a business trust and other trusts is that business trusts are created

for the purpose of carrying on some kind of business, whereas the purpose of a                     non~


business trust is to protect and preserve the res." Id. at 89 (internal citations omitted).

An important factol' is whether the trust's purpose is to generate profit. Id. at 91. The

Court concluded that each "inquiry must focus on the trust documents and the totality

of tile circumstances ..." Id. at 90-9\, citing In re St. Augustine Trust, 109 B.R. 494,

496 (Bankr. M.D.Fla.1990).44 Other courts have recognized that a trust that conducts

business activities directed at generating a profit is' a business trust eligible to file

under the Bankruptcy Code. See Merrill v. Allen (In re Universal CLearing House

Co.), 60 B.R. 985, 992 (D. Utah 1986) (court examined activity for which trust

designed and authority granted to trustee); Westchester County Civil Ser. E 'ees Ass 'n

Benefit Fund v. Westchester County (In re Westchester County Civil Servo E 'ees Ass 'n

Benefit Fund), 111 B.R. 451,456 (Bankr. S.D.N.Y. 1990) ("If a trust condllcts some



43 The petitioner bears "the ultimate burden of establishing that the alleged debtor is an eligible debtor
under the Bankruptcy Code .... " In re Secured Equip., 38 F.3d at 89, citing in re Bl'aten, 99 B.R.
579,583 (Bankr. S.D.N.Y. 1989).
4q Because the trust in Secured Equipment was not created to run a business or to generate a profit, but

only to act as a vehicle to facilitate a secured financing, the Court found the entity was not a business
trust. See id. at 90. "Rather, it was established merely to secure the repayment of the
certificateholders' loans to Eastern. As such, its purpose was to preserve the interest that the
certificateholders had already been guaranteed, not to generate it." ld at 90.


                                                    44
business or commercial activities for the benefit of the beneficiaries to the enterprise,

it may qualifY as a 'business trust.'" ); see also In re Cooper Properties Liquidating

Tnlst, Inc., 6] B.R. 531, 536 (Bankr.W.D.Tenn.1986) (trust created to wind up the

affairs ofa predecessor corporation was a business trust).

         There is ample evidence in the record that Lancaster Trust is a profit-making

enterprise and that its purpose goes beyond merely conserving a trust res or holding

title to land. As the Park City Mall owner and operator, it is an active participant in

various business activities aimed at earning a profit. It is the named lessor in leases

with its tenants, the borrower under a loan agreement, party to various service

contracts, and explicitly authorized to conduct business in Pennsylvania. (See Nolan

Dec!., June 16, 2009, ~154; Debtors Trial Ex. 20.) ING Clarion argues that Lancaster

Trust has no board, officers or stockholders, but these are characteristics of some

closely-held business entities. TNG argues that the Trust has an outside termination

date and that the interest of Lancaster Trust's sale beneficiary is "non-transferable,"

but "restrictions on the transfer of shares, particu larly in the case of close

corporations, are also common." In re T.A. T. Property, 2009 Bankr. Lexis 739. at *4

n.3 (Bankr. S.D.N.Y. February 20, 2009).45 ING states that Lancaster Trust has no

employees and is managed by a GGP Group entity, but this is also a characteristic

shared by many, ifnot all of the project-level Debtors. Indeed, ING Clarion made no

effort to distinguish the Lancaster Trust from any of the other Movants or from any of

the other project-level Debtors in terms of its business characteristics, except that it

was formed as an JIlinois trust.


45 There is also evidence in the record that the ownership interest in the Lancaster Trust was transferred
at least once, when the GGP Group acquired it.


                                                   45
        Cases that have found an Illinois land trust to be ineligible to be a debtor

under the Bankruptcy Code have involved entities very different from the Lancaster

Trust. In In re North Shore Nat. Bank a/Chicago, Land Trust No. 362, 17 B.R. at

869, the Court found an Illinois trust specifically identified as a land trust to be

ineligible because it "is not ... an active business or commercial entity ... It is merely

a legal device whose primary function is to hold legal and equitable title to real

estate." See also In re Dolton Lodge Trust No. 35188,22 B.R. 918 (Bankr. N.D. III.

1982), Movants rely heavily on In re Woodsville Realty Trust, 120 B.R. 2 (Bankr. D.

N.H. 1990), where the Court considered the non-transferability of interests as one of

many factors relevant in determining whether the trust had the attributes of a

corporation. However, in Woodsville, the Court found that the debtor had failed to

show any significant corporate attributes in the structure and operation of the trust.

1d. at 5 (emphasis in original). SimiIal'ly, in In re Treasure Island Land Trust, 2 B.R.

332 (Bankr. M.D. Fla. 1980), the Court held that a trust which was "unable to point to

any business activity in which it was actively engaged" was not eligible to be a debtor

under the Code on theory that it was a business trust. Id. at 335.

       On the record as a whole, the Court finds that the Lancaster Trust is a business trust

eligible to file under Chapter 11.




                                            46
                                        CONCLUSION

        For the reasons set forth above, the motions to dismiss are denied. The Debtors are

directed to settle an order on five days' notice.



Dated: New York, New York
       August 11,2009
                                                 lsi Allan L. Gropper
                                                 UNITED STATES BANKRUPTCY JUDGE




                                            47
~\


                           IN THE UNITED STATES BANKRUPTCY COURT                               SEP 3 0 2009
                                   FOR THE DISTRICT OF ARIZONA                                UNITED STATES
                                                                                            BANKRUPTCY COURT
                                                                                        FOR THE DISTRICT OF ARIZONA
                                        MINUTE ENTRY/ORDER

                            FOR MATTER TAKEN UNDER ADVISEMENT

     Bankruptcy Judge:     Hon. Redfield T. Baum

     Case Name:            Dewey Ranch Hockey. LLC                 Chapter 11

     Case No.:              2:09-bk-09488-RTBP

     Subject of Hearing:   Hearing on the Sale oftlle Phoenix Coyotes t a National Hockey League
                           Team located in Glendale, Arizona

     Date Matter Ruled
     Upon:                  Septeniber 2, 2009

     Date Ruled Upon:, September 30,2009


            Submitted to the court are the two competing bids to purchase various assets comrlionly

     considered the Phoenix Coyotes, a National Hockey League team currently located in Glendale,

     Arizona. The auction and the proceedings related thereto have been hotly and vigorously

     contested by all of the involved parties. In connection with the auction sale proceedings, the

     attomeys for the parties have inundated the court with multiple motions, massive briefs and legal

     memorandums, numerous expert opinions on antitrnst and other esoteric issues, conflicting

     declarations on issues tangentially related to the bankruptcy auction sale and tile assertion of

     many satellite issues. For the reasons set forth below, the court can not approve either bid.
   I. THE FACTS AND BACKGROUND LEWING TO THE BANKRUPTCY AUCTION

       There is a significant factual history here leading up to these bankruptcy cases and this

auction. That history creates the stage upon which these parties now come before this court

regarding a sale of the hockey team.

               A.     THE PHOENIX COYOTES

       hl January 1996, the National Hockey League ("NHL" or "League") approved the change

of ownership and authorized the relocation of the Winnipeg Jets to Phoenix, Arizona. The

team's name was changed to the Phoenix Coyotes ("Coyotes"). The Coyotes have ndt been a

particularly successful team on the ice having never won a playoff series since moving to

Arizona and have not made the playoffs since moving to a new, state afthe art arena in Gle:ndale,

Arizona ill 2003. More importantly, from the bankruptcy perspective, the Coyotes have lost

money every year since moving to AriZona. The Coyotes audited financial statements for the

years 2004 - 2008 show the following devastating results:

       DeficitiNo Equity      Operating Loss         Total Loss

2004   $258,830,000           $49,425,000            $75,352,000

2005   $309,505,000           $26,786,000            $50,675,000

2006   $384,848,000           $31,410,000            $75,343,000

2007    $36,854,000          $107,763,000           $117,175,000

2008   $108,985,000           $54,817,000            $72,131,000

Further, in accordance with an auditor's obligations under generally accepted accourtting

principles, each ofthese annual financial statements contain a statement by the certified pub1ic

accountants that the financial statements "raise substantial doubt as to the Company's ability to'
continue as a going concern",

        In September 2006, Jeny Moyes ("Moyes") purchased a controlling interest (91.7%) in

the Coyotes from Steve Ellman ("Ellman"), who transfelTed his entire interest in the Coyotes,

which transfer of ownership was approved by the NHL. Their entire agreements involved more

assets and liabilities than just the Coyotes but those other agreements are not relevant to the

issues before the court. However, their agreements included significant cancellation of debts

owed by the Coyotes resulting in the material change in the Deficit/No Equity from 2006 to 2007

as reflected above.   Moyes or entities he controlled advanced the ftmds needed to pay the

operating deficits of the Coyotes until approximately August 2008.

       In August 2008, Moyes meet with and advised the NHL that he would no longer fund the

operating losses of the Coyotes. At the request of Moyes and the Coyotes, the :NHL began

advancing funds to pay the Coyotes operating losses. Thereafter and until the May 2009

bankruptcy filings, the NHL has funded the Coyotes ongoing operating losses by early payment

of prospective revenue sharing payments due the Coyotes and, beginning in the fall of 2008, by

loans. During this period of time, there were meetings and regular communications amongst

these parties regarding the on going financial problems of the Coyotes and their efforts to resolve

these problems by finding a new owner to acquire the team from Moyes.

       In early 2009, Moyes hired his personal attorney, Earl Scudder ("Scudder"), to fom1811y

market the team for sale and, additionally, there were contacts with other professional marketeers

of professional sports teams, Scudder routinely communicated with the NHL, particularly with

Commissioner Gary Bettman ("Bettman") and Deputy Commissioner William Daley ("Daley")

regarding his efforts to sell the Coyotes. In the spring of 2009, Richard Rodier ("Rodier"), a


                                                 -3-
Canadian attorney and officer ofPSE Sports and Entertainment LP ("PSE") contacted Scudder

regarding purchasing the Coyotes and relocating the team to Hamilton, Ontario, Canada. The

principal ofPSE is James Balsillie ("Balsillie"). Initially Scudder did not seriouslypmsue the

inquiry from Rodier. However, in April 2009 with no other offers available, negotiations with

PSE for the pmchase of the Coyotes becanle serious. Scudder advised Bettman about that fact

and Bettman told Scudder to not pursue such a deal because the Coyotes were staying in Arizona.

       On May 5, 2009, the Coyotes and three related entities filed chapter 11 bankruptcy

reorganization cases and also executed a purchase and sale agreement with PSE for the sale of

the Coyotes, conditioned upon the team moving to Hamilton.

              B.      THE CITY OF GLENDALE AND THE NEW GLENDALE HOCKEY
                      ARENA

       In November 2001, the City of Glendale ("Glendale"), on the one hand, and Arena

Management Group, LLC, one of the chapter 11 debtors, and other entities including the

Coyotes, on the other hand, all owned and/or controlled by Ellman, entered into the Arena

Management, Use and Lease Agreement ("AMDLA"). Pursuant to the AMULA, Glendale built

a new hockey arena in Glendale, Arizona. That agreement contained a "Team Use Covenant"

wherein the Coyotes covenanted and agreed that it would play all its home games in the Glendale

Arena and would not play its home games "at any other location" for the thirty hockey seasons

after the arena opens for play by the Coyotes. That agreement required Glendale to advance $183

million dollars to build the arena. Glendale issued bonds for approximately $155 million of that

amount. Glenda1e's plan was that the arena would be the main feature of a multi-use sports and

entertainment facility of a planned 233 acre $1 billion development known as Westgate City



                                               -4-
Center.     Ellman was the developer for that project.

          The AMULA also provided that Glendale had the right to have the Team Use Covenant

specifically enforced and the AMULA contained a liquidated damages clause in favor of

Glendale. The liquidated damages clause provided that if the agreement was terminated early

and could not be specificany enforced the damages due Glendale would be calculated by a

complex formula starting at $794,663,034.00 with specified annual reductions therefrom which

were essentially tied to revenues received and adjusted for the then remaining term ofthe thirty

year use covenant. The Coyotes have played all of their home gmnes at the Glendale arena

through the end of the 2009 regular season.

                 C.     THE NAT10NAL HOCKEY LEAGUE

          The NHL is the premier professional ice hockey league, fOlmded iIi 1917. The League is

comprised ofthhty teams, six located in Canada and twenty-four in the United States. The thirty

teams are divided into two conferences and each conference is divided into three divisions. The

conferences and divisions are generally aligned based.on the geographic location of the teams.

The Coyotes are in the "Pacific" division along with teams in Anaheim, Dallas, Los Angeles and

San Jose.

          1. The Pertinent Provisions of the League's Constitution and By;.La:ws.

          The NHL and its member teams are governed by a written constitution and by-laws.

Article 3.5 of its constitution provides that to transfer ownership of a team requires, ari10ng other

requirements, the "consent ofthree-f01.uths ofthemembers oft11e League". Article 4.1 ofits

constitution provides that (1) the League shall have exclusive control over all hockey games

played by the member teams, (2) the home team shall have exclusive control over the hockey


                                                  -5-
games played in its "home territory", and (3) no games and no franchises shall be granted in a

home territory without the written consent of the home team. Section 35 ofthe NHL By-Laws

regarding transfers of ownership provides, among other requirements, that a proposed new

owner should have "sufficient financial resources to provide for the financial stability of the

franchise" and have "good character and integrity". Section 36 of the NHL By-Laws regarding

transfers of locations requires, among other requirements, that a detailed written application for a

transfer be filed no later than JanualY 1 of the year prior to the proposed transfer. An applicant

"shall be afforded an opportunity to make a presentation" to the NHL and its members and the

members can question the appHcant regarding "any aspect of the transactions". This By-Law

lists twenty-four factors to be considered in voting on the relocation application and provides that

the league may require a transfer fee "to reflect the goodwill developed by the League in the new

location" and an indemnification fee "to reflect the goodwill developed by" the neighboring

teams in the new location.

       2. The Prior Dealings Between the NHL and PSElBalsillie.

       PSE's proposed purchase agreement for the Coyotes is the third attempt by PSE and

Balsillie to acquire a NHL team. In 2006, Balsillie sought to purchase the Pittsburgh Penguins

("Penguins"). The parties followed the NHL's procedures for a change in ownerShip of the

Penguins and Balsillie was approved by the NHL to become the owner ofthe Penguit'ls.

However, the parties could not agree in writing on the tenns oftheir transaction and ultimately

Balsilli e tenninated the agreement. Their failure to reach an agreement was in large part due to

issues regarding the ability to relocate the Penguins and the NHL's right to purchase the team

from Balsillie ifhe sought to re10cate it.


                                                 -6-
       In 2007, PSElBalsillie entered into a non-binding term sheet to purchase the Nashville

Predators. Balsillie infOlmed the seller that he would like to relocate the team to Hamilton,

which information was provided to the NHL. There Were discussions amongst the seller, the

NHL, and PSElBalsillie regarding the Nashville lease and arena, the views of PSElBalsillie

regarding relocating to Hamilton, and their request that the NHL consider a conditional

relocation application by them. No binding agreement was ever entered into and the League

never considered whether to approve a change of ownership involving PSElBalsillie or a

conditional relocation.

       Also in 2007, the Canadian Bureau of COlllpetition ("CBC") investigated the NHL's

rules and procedures regarding ownership and relocation illchiding the proposed transactiops of

the Penguins and Predators. The investigation concluded that the NHL's rules and procedures

did not violate any applicable laws.

                            II. THE BANK.:R.UPTCY PROCEEDINGS

       These four debtors filed their chapter 11 petitions on May 5,2009. Also on that date, the

Coyotes signed an Asset Purchase Agreement ("APA") with PSE. The essence of the AP A was

that (1) PSE would pay the Coyotes $212,500,000.00 in cash for the Coyotes and most of its

assets including all of its rights as a member team in the NHL and (2) the bankruptcy cOiut order

approving the sale must expressly provide that the home games wUllld be played at the location

ofPSE's choice in Southern Ontario, Canada, regardless ofthe lack ofcon8ent or agreement of

the NHL and its members. By its temls, the AP A terminated on June 29, 2009. The debtors

obtained an accelerated hearing on its motion to approve such sale. Following extensive

proceedings 011 that motion, the motion was denied without prejudice. See In re Dewey Ranch


                                                -7-
Hockey, LLC., 406 B.R. 30 (Bankr. A2. 2009).

       On May 7,2009, the Coyotes fi1ed an adversary proceeding against the NHL alleging

antitmst claims seeking a permanent injunction to prohibit the NHL from prohibiting the

relocation of the Coyotes to Hamilton. On August 7, 2009, the NHL filed its motion to dismiss

and for summary judgment. Those motions have not been submitted to the court for ruling.

       The foregoing unsuccessful sale proceeding resulted in the unanimous agreement of all

parties, and probably the only thing that all have agreed upon to date, that the Coyotes needed to

be sold to a new owner. Accordingly, at a hearing on June 22,2009, following lengthy

discussions with all parties, the court scheduled two auctions. The first auction was set for

August 5th as a Glendale only auctioIi, i.e., the court would only consider bids from parties

committing to keep the team in Glendale and playing all· home games at the Glendale arena. The

second auction was set for September lOlh for bidders at any location. On July 6, 2009, the comt

entered a detailed order setting forth the bid procedures and requirements for bidders at either

auction.

       One ofthose requirements was that all bidders submit the required change of ownership or

location applications to the NlIL by the COUlt ordered deadline. PSE and two other potential

bidders submitted such applications. On July 29 at a meeting of the NHL Board of Governors

(tearn representatives), the Board voted unanimously to not approve PSE'slBalsillie's application

because Balsillie, in their view, did not have the "character and iritegrity"required under N1ll.,

By-Law 35 to be an oWner of a NHL team. Also at that July 29th l11eeting, the :Board approved ail

ownership transfer to the Reinsdorf group and made 110 decision on the ownership transfer to

another potential bidder, Ice Edge Hockey, awaiting submission of further documents.


                                                 -8~
A.     THE NHL'S DECISION TO REJECT PSE'SIBALSILLIE'S APPLICATION FOR NHL
       MEMBERSHIP

       That decision and the effect thereof on these proceedings has become a hotly contested

issue before tlus court and, therefore, the events at that meeting are summarized here. There is no

record or transcription of that meeting. The memorandum provided the attendees at that meeting

stated that Balsillie had "sufficient fmancial means to ensure the financial stability Mthe

Coyotes". The memorandum also stated that there were five issues relating to his "integrity and

willingness to be a good partner that warrant discussion during his interview", Those five issues

were his conduct regarding the Penguins, the Predators, the CBC' s investigation of the NHL, his

"Wrongdoing at RIM related to the backdating of options", and Ius "conduct relating to his cunent

attempt to purchase the Phoenix Coyotes". The memorandum regarding PSEfBalsillie is twenty-

one pages long. The memorandum regarding the other two potential bidders total nine pages.

The attachments to the memorandui11 regarding PSElBalsiIlie consists of some, and perhaps all, of

the documents relating to the five issues, which materials exceed 200 pages, many of which were

lengthy single spaced documents.

       Regarding the Penguins dealings, there were two main points. First, that Balsillie

committed to the Board he would attempt to keep the team in Pittsburgh. Second, that the NHL

and Executive Committee believe that he orally committed that the NHL would have the right to

buy the team back from him at the same price (the "Call") if he applied to relocate the team from

Pittsburgh. The attorneys for the NHL submitted a proposed draft of the Call to Ba1sillie's

attorney. That right is set forth in paTagraph 19 and states, in principal part:




                                                  -9-
       · ... Purchasers shall sell to League (or any entity designated by the League), the Club and
         all of the Hockey-Related Assets and any and all other assets purchased by the Purchasers
        pursuant to the Purchase Agreement for the Purchase Price - $175 million adjust to actual
            that the Pmchasers actually paid therefor. The closing shall oCCur on a date designated
         by the League. The Purchasers agree that the League may assign its l1ght to so purchase
         the franchise to a third party.

Thereafter, there were numerous and sometimes lengthy communications/negotiations (written

and oral) on multiple topics regarding the proposed transaction including, but not limited to,

deleting the Call right. Ultimately, no agreement was reached and the proposed transaction was

terminated.

       Regarding the Predators dealings, there were three main points: (1) did Balsillie attempt

to devalue the Predators, (2) did he negotiate in bad faith, and (3) were threats made regarding the

CBC. There was a signed, written ternl sheet regarding the proposed Predators' transaction.

That ternl sheet stated, in pertinent part:

       Except with respect to the provisions relating to ... Breakup Fee ... (collectively, the Binding
       Provisions"), .. this Term Sheet does not cOllstitute a legally binding obligation or
       commitment of either of us, and no such legally binding obligation Of commitment shall
       exist unless and tmtil (subject to the terms of the Section below entitled Seller's Option
       Break Up Fee") ... : provided however, that each of the Buyer and Sellers acknowledge and
       agree that the Binding Provisions shall be deemed to be legally binding and enforceable
       obligations between the parties hereto.

       Sellers' Option; Breakup Fee: The Buyer hereby specifically acknowledges and agrees
       that, at any time prior to the execution of the Purchase Agreement, the Sellers shall have
       the option to (l) ... , and (ii) require the Buyer to place $10,000,000 in escrow, with such
       escrowed funds to be automatically released to Sellers as a "break up" fee in the event that
       the Buyer refuses to Close the Transaction because the NHL's Consent Agreement is
       unsatisfactory tathe Buyer for any_reasoll..... Intheeyent that the Buyer refused to amend
       this Tern1 Sheet in accordance with the terms of the first sentence of this Section, then this
       Term Sheet would remain in effect ( as a non-binding ternl sheet); provided, that the
       Sellers would no longer be subject to the terms and conditions ofthe Section above
       entitled "Exclusivity".

Craig Leipold, the then owner ofthe Predators, asserts, and stated at the July 29th meeting, that


                                                 -10-
(1) he believes that his Predator franchise was devalued during the negotiations because Rodier

contacted the Nashville representatives in 2005 inquiring whether the Predators were in

compliance with their net worth requirements under the lease and, if not, whether they were in

default under the lease; that he/the Predators spent two years negotiating with the city on this

issue, spent thousands of dollars in legal fees and that this made the sale ofthe Predators far more

difficult; (2) Balsillie negotiated with him in bad faith because he would 110t make the term sheet

binding and refused to pay the $10,000,000.00 dollar break up fee, and BalsiIlie began taking

"Hamilton Predator ticket orders for the new franchise in Hamilton" wrongfully using the

Predators' trademarks; and (3) Rodim' threatened him with investigation by the CBC ifhe refused

to sell the Predators to Balsillie and that shortly thereafter the CBC did investigate the NHL and

interviewed him.

       Jeremy Jacobs, the long time owner of the Boston Bruins franchise and current chairman

of the NHL Board of Govemors, asserts, and stated at the July 29th meeting, that in 2006 Balsiilie

had agreed to give the NHL the Call right for the Penguins but at the July 29l1i interview he denied

that "he had reached agreement with the Executive Colpinittee regarding the tenilS ofthe tall",

Further, when Balsil1ie was asked if"he would be willing to abide unqualifiedly by the NHL

Constitution and By-Laws, he stated that "he would be willing to abide by the NHL's niles in

Hamilton". His response was interpreted to mean "that he is not willing to comply with the NHL

Constitution and By-Laws now, but that he wants us to trust that in the future he will comply with

them", Based upon the interview, Jacobs concluded, and believes the others also concluded, that

Balsillie ''was 110t willing to comply with League ndes and procedures and would not be a good

business partner".


                                                 -11-
        The memorandum also described the 2007 investigation by the CBC of the NHL regarding

 its proposed transfers of the Predators and Penguins alld the possible relocation of those

. franchisees. During the investigation, the NHL through Bettinan and Daly represented to the

 CBC that the NHL required a majority of owners to approve a neW member or for a member to

 relocate a club's territory. The CBC concluded that the requirements of the NHL were not

 anti competitive and served legitimate needs of the NHL.

        Finally, the memorandum stated that Baisillie, through his attorneys, in the Coyotes

 bankruptcy case, had made statements and taken a number of legal positions that were not in the

 NHL's best interests. Specifically, that his strategy included "attempting to hold the League and

 Commissioner Bettman up to public ridicule as allegedly anti-Canadian and harming the League's

 goodwill with fans ill Phoenix and throughout North America". Further, that his attorneys had

 asserted that (I) the N!iL was an illegal cartel, (2) the Leagues rules were anti-competitive under

 the antitrust laws, (3) the NHL is not a single entity for antitrust purposes, (4) in his agreement he

 required that the Coyotes "initiate antitrust litigation against the NHL", and (5) the BanIcruptcy

 Court had the power to force the sale and relocation of the Coyotes over the NHL's objection.

         At the July 29th meeting, the NHL Executive Committee and the Board of Governors

 voted unanimously to reject Balsillie's membership ap.plication on character and integlity

 grounds. The Reinsdorf Group was approved as a potential member of the NHL and the decision

 regarding Ice Edge was deferred pending sublnission of further information to the NHL.

                B.      THE AUGUST GLENDALE ONLY AUCTION WAS CONTINUED AT
                        THE REQUEST OF THE NHL

        A few days before the scheduled August Glendale only auction, the NHL sought and



                                                  -12-
obtained a continuance of that auction to September 10th • The NHL also sought a continuBllce of

the relocation auction sale until after the end of the Coyotes 2009-10 season. That request was

denied and the September 10lh auction was opened to all bidders at any location.

       The essence of the NHL's request was that there was simply insufficient time for the

probable Glendale only bidders to comply with the numerous requirements by the scheduled

August auction. The NHL stated that the Reinsdorf group was close to a deal with Glendale,

which deal was the most significant outstanding contingency regarding its bid. Ice Edge, a

probable bidder at the Glendale only auction, supported the requested continuance to allow it

more time to conclude its negotiations with all parties so that it could make a definitive bid at the

auction. Ice Edge filed a draft 103 page asset purchase agreement evidencing its assumed bid fot

the Coyotes.

               C.      tHE NHL'S DECISION TO BID AT THE AUCTION

       On August 25 1\ the last day to submit a bid under the court ordered bid procedures, the

NHL submitted its bid in the form of a fifty-three page draft Asset Purchase Agreement with

forty-three pages of exhibits to that draft agreement. By this date, the other two potential bidders

for the Coyotes, the Reinsdorf Group and Ice Edge, who had stated that they would each keep the

team in Arizona, had publicly announced that they would not be submitting any bid(s) at the coutt

auction. The NHL stated that it reluctantly concluded that it should make its bid because doing so

was in the best interests oft11e NHL, the Coyotes, Glendale and the creditors.

        The NHL bid, at this time, was for a total amount 0[$140,000,000.00, which amount

would be reduced by the payment or assumption of the secured debt due SOF and the NHL, the

cure costs, and the amOlmt of assumed lmsecured debt. At this time, the bid did not state the


                                                 -13-
amount of cure costs or unsecured debt which would be assumed under the bid. It appears that the

bid was intended to pay the unsecured creditors in full in cash, but excluding any claims by Moyes

or any Moyes affiliate(s) and any claims of Wayne Gretzky. Its bid also coIIlIilitted to perfoml all

obligations due Glendale under the AMULA until the end of the Coyotes' 2009-10 season and

during that time to   ~ttempt   to find a new owner who would keep the Coyotes in Glendale. The

NHL's bid contemplated that ifby the end of that season there was no new owner in Glendale

then it would sell the teanl "pursuant to a professionally conducted relocation sales process".

               D.        THE AUCTION AND THE RELATED MOTlONS

       Full day hearings on the auction and the nUIherous motions related thereto \vere held on

September 3rd , 10th and 111l1. The parties stipulated into evidence all of the declarations filed with

the court and all of the depositions taken in this case. The parties so agreed because that

procedure was the only way to get the collective issues raised by all the parties submitted to the

court; otherwise it would have taken weeks if not months to submit these iss·lIes.

        1. The Expert Evidence.

       PSE and the NHL both presented expert testimony to support their positions on the

appropriate relocation fee due the NHL if the court approved PSE's bid and the appropriateness of

Hamilton as an NHL site for the Coyotes. Tom Wright is the fonner commissioner ofthe

Canadian Football League and has spent the majority of his business career in the sports industry.

It is his expert opinion that the relocation of the Coyotes is reasonable, comports with the

requirements ofthe NHL, and should be approved. It is his further opinion that the relocation for

the 2009-10 season is possible.

       Andrew Zimbalist ("Zimbalist") is a long time economics professor at Smith College in


                                                   -14-
Massachusetts. He has consulted extensively in the area of sports economics, has testified as an

expert wilness in sports-related litigation and before the U.S. Congress and other govenmlental

bodies. It is his expert opinion that (1) Hamilton is a superior economic location to many of the

metropolitan areas that currently host NHL teams, (2) the highest possible relocation fee that

would be economically reasonable under the standards in the NHL Bylaws is $12.9 million. and

(3) the relocation fee under the "Raiders II" standard is in the range of$11 million to $13 million.

       Andy Baziliauskas has a Ph. D. in economics, has served as a senior economist on the

CBC, and has extensive experience in the antitmst area including eXpert Work in cases involving

alleged violations of competition laws. It is his expert opinion that (1) the relevant market is

professional major league hockey games and the relevant geographic market is regional, centering

on Toronto, (2) the Toronto Maple Leafs possess considerable market power, (3) the Maple Leafs

veto and the NHL' s By-Laws prevent the relocation of an existing NHL franchise to Hamilton,

and are therefore anticompetitive, (4) the NHL's restrictions on franchise relocation are unlikely

to have a valid business justification, and (5) any demand for a significant transfer fee andlor

indemnification fee from a team relocating to Hamilton would be anti competitive.

       Franklin M. Fisher is a professor ofm.icroeconomics, emeIitus, at the Massachusetts

Instihlte of Technology. He has written and testified extensivelY in the areas of antitrust and

sports related matters, with particular emphasis on economic issues pertaining to the geographic

siting of major league sports franchises and the policies and rules that various leagues use to

regulate the creation, sale and relocation of franchises. It is his expert opinion that (1) from an

economic point of view, the NHL operates as a single entity, (2) the NHL has a procompetitive

interest in producing high quality on ice entertainment that can compete successfully in the


                                                 -15-
entertainment market, (3) the NHL has no anticompetitive interest in reviewing the ownership

changes ofindividual franchises. (4) the proposed sale pfthe Coyotes presents the type of

economic circumstances Where the NHVa ownership transfer rules are likely to be particularly

important to safeguard the qtUi.lity ofNHL hockey and promote the league's competitive success,

(5) the potential relocation of the Coyotes to Hamilton would present circumstances in which the

NHVs relocation rules would have a particularly strong economic justification for curbing

extemalities and free riding concems relating to the League's pursuit of geographic diversity,

franchise stability, competitive balance, and community commitment, (6) an NHL decision, were

it to occur, to deny relocation could be justified as reasonable based on the relevant facts and

would not be anticompetitive, and (7) the NHL's authority to levy appropriate relocation and

indemnification fees in the COlltext of fi:anchise relocations is procoinpetitive, Fisher also opined

that the relocation estimates by the NHVs other experts are consistent with the economic

principles presented by him in his testimony and that the approach used by Zirnbalist is wrong ill

at least five import respects as a matter of economic analysis.

       Daniel S. Banett is the founder aJ.ld principal owner ofBartett Sports Group, LLC, a

boutique consulting firm specializing in the business of sports. He has direct experience in

valuing sports franchises. It is his expert opinion that based on the fair market vahles of teams in

Glendale and Hamilton, the appropriate relocation fee here is $101.1 million.

       Michael Rapkoch is the founder and president of Sports Value Consulting, LLC, a

professional valuation and advisory finn to the sports business. He has been involved in the

valuation of over sixty sports franchises, including fifteen NHL franchises.   It is his expert opinion
that based upon the fair values ofthe business enterprise values of a Glendale and Hamilton NHL


                                                 -16-
teams that the relocation fee here is $195 million.

       2. The Bids.

       Only PSE and the NHL submitted bids to pm'chase the Coyotes. On September 11 lh, both

bidders substantially raised and/or improved their bids. PSE's final bid, expressly conditioned

upon the court approving the relocation of the Coyotes to Hamilton, was $212,500,000.00. PSE

also offered to pay Glendale $50,000,000.00 if Glendale withdraw its objection to the sale to PSE.

On September 71h (Labor Day), PSE first offered to purchase Glendale's claim if it would

withdraw its objection to the sale to PSE for the same amount, but the amount could be reduced

by $10,000,000.00 depending upon the amount of the relocation fee due the NHL. PSE also

removed its right to be subtogated to Glendale's claim if Glendale accepted PSE's offer. If

Glendale accepted that offer, PSE's bid was reduced to $192,500,000.00., i.e., a twenty million

dollar reduction froIn $212,500,000.00. Further, PSE also agreed to iuimediately pay the same

group of unsecured creditors as the NHL offered to inlmediately pay iii its bid. These unsecured

claims total approxjmately $11,600,000.00 and represent virtually all of the unsecured claims

excluding some rejection damage claims (particularly Glendale's claim) plus the Moyes and

Gretzky claims. PSE would become subrogated to the rights of the li11Secltred claims it paid. In

simple terms, PSE raised its bid to $242,500,000.00 if Glendale acceptedPSE's $50,000,000.00

offer to withdraw its objection to the sale to PSE, i.e., the Glendale offer effectively added

$30,000,000.00 to PSE's bid.

       The NHL's bid remained $140,000,000.00. However, the NHL for the first time listed the

specific cure costs and trade creditors that it would pay, which claims totaled approximately

$11,600,000.00. Both bids were effectively cash bids.


                                                 -17-
       3. The Debtors' and PSE's Argmnents.

       Leading up to these hearings, the parties submitted massive and lengthy memorandums,

declarations and other documents in support oftheir respective positions and in opposition to the

claims of other parties. The ultimate issue was the resolution of which ofllie two bids was the

highest and best bid for the Coyotes and whether either of those bids satisfied the requirements of

the Code. The parties collectively raised many factual and legal issues which they asserted

supported their positions regarding which bid should be approved by the court.

        The core of the debtors' and PSE'g claims is that under the poWer Mthe Bankruptcy Code

("Code"), the bankruptcy court can and should order the sale of the Coyotes to PSE, including

authorizing the relocation of the Coyotes to Hamilton, notwithstanding the claims and objections

of the NHL and Glendale. Further, that the NHL's actions and inactions regarding the PSE offer

is a quintessential breach of the duty of good faith and fair deEding.

       In support of these core claims, they malce many arguments. They asseli that once the

NHL became a bidder for the Coyotes, it forfeited its right to decide the membership or relocation

requests by the Coyotes and PSE and/or to detennine the relocation fee due it. They point to the

NHL's insider status' and the case law which they assert provides that an insider cannot be

allowed to further its own bid over other bids, the NHL's obvious conflict of interest in

detemlining that Balsillie lacked the required character and integrity to be an NHL member when



        lPost-petition the NHL has (1) been the court approved Section 364 lender to the debtors-
in-possession to fund the ongoing operating losses of the debtors, (2) pUrsuant to stipulated
orders ofthis court had joint control over the debtors' operation based upon proxies obtained by
the NHL pre-petition delivered in connection with the NHL's loans and advances to the debtors,
and (3) become a bidder for the Coyotes. Based on such actions, PSE and the debtors assert that
the NHL is an insider of the debtors.

                                                 -18-
it intended to make its own bid for the Coyotes, and the fundamental tmfaimessofthe July 29 1h

meeting and decision by the NHL. They further assert that the joint relocation application more

than satisfies a good faith application of the NHL's relocation mles. Specifically, they assert that

(1) Glendale is not a financially viable venue for the Coyotes based upon its years of large

financial losses both in Glendale and Phoenix, (2) that Hamilton is a viable NHL market for the

Coyotes based upon the testimony of the experts from all parties, and (3) there is no reasonable

economic basis for the NHL to refuse to consent to the move to Hamilton. They further aSSeIt

that there is overwhelming evidence to establish that the NHL's actions regarding PSE's offer and

the j oint relocation app lication have been done in bad faith. In that regard, they assert that (I) the

NHL's de facto rejection and failure to even consider the relocation application is bad faith, (2)

the NHL's actions and inactions are really to protect the unlawful territorial veto tights of the

Toronto Maple Leafs, (3) the NHL's bid further evidences itsbad faith, (4) the failure of

Commissioner Bettman to disclose at his August 20111 deposition when asked about the NHL's

current plans regarding the Coyotes that the NHL was considering bidding for the Coyotes, and

(5), at a minimum, their arguments establish that there is a bona fide dispute regarding the NHL's

collective rights (consent to membership and ability to relocate) and under Section 363(f)(4) of

the Code such bona fide dispute authorizes the bankruptcy court to approve the sale to PSE fi'ee

and clear of the interests and clainls of the NHL. Finally, PSE places great reliance on a 2006

letter from the Toronto Maple Leafs to Commissioner Bettman which stated, in part:

        The Toronto Maple Leafs do not agree that a relocation of another Club into their home
        territory would be subject to a majority vote. They continue to believe that a unanimous
        vote would be required before a team could be relocated into their home territory. .... The
        Maple Leafs reserve all rights to take whatever actions are necessary to protect their
        exclusive rights to their home tenitory.


                                                  -19-
       The essence of their arguments is that under Section 363 and 365 of the Code and based

upon the facts here, the bankruptcy cowt has the power, and should exercise it, to approve the

sale of the Coyotes to PSE over the objections and without the consent of the NHL and Glendale.

Simply stated, PSE asserts that the executory contract rights of the Coyotes can be assumed and

assigned by the debtors under the provisions of Section 365 of the Code and then sold to it l.mder

the provisions of Section 363 of the Code free and clear of the contractual restrictions of the NHL

and Glendale that require the Coyotes to play all of their home games in Arizona; and that the

bankruptcy court has the power to effectively enter a mandatory injunction requiring that the NHL

accept the "Hamilton Coyotes" as a league member with a designated "home territory" in

Hamilton.

       4. The NHL's Opposition to the Proposed PSE Sale.

       The NHL asselts that there are a number of reasons why the proposed sale to PSE can not

be approved. The NHL argues that (I) Section 365 provides no basis to force a relocation ofthe

Coyotes rather it directs the assumption and assigt1ment of an executory contract which requires

the Coyotes to play their home games in Glendale, (2) the NHL rightfully denied the PSElBalsillie

ownership application on character and integrity grounds, (3) there has been no showing that the

NHL's decision not to consider the joint relocation application was in bad faith or that such

decision was done for anticompetitive reasons~ (4) there has been no showing that an objective

application of the NHL's re10cation rules would compel a relocation to Hamilton, (5) that the

debtors and Moyes have breached their implied covenant of good faith and fair dealing, (6) that

the proposed relocation fee by PSE is insufficient under the Raider's II test, (7) the appropriate

relocation fee is in the range of$lOl to $195 million, (8) the purported Section 363(f)(4) bona


                                                -20-
fide dispute claim is specious, (9) the PSE bid can not adequately protect the interests of the NHL

as required by Section 363 (e), and (10) for various reasons, PSE's bid is not the best bid.

       5. Glendale's Opposition to the Proposed PSE Sale.

       Glendale asserts that its claimed contractual right to specific performance is an interest

under Section 363 and that the Code does not allow a sale fi'ee and clear ofthat interest; and, in

any event, Glendale's interest can not be adequately protected as required by Section 363(e).

Glendale also asserts that rejection of its agreement does not pass the businessjudginent test

and/or the harm to it is so disproportionate to any possible benefit to all creditors that rejection

should be denied.2 Glendale further asserts that the debtors are incorrect in their claim that all of

the damages of Glendale are limited (capped) by SectiOll 502(b)(6); and that the damages to

Glendale in the event of rejection under both the liquidated damages agreement in its contract and

the uncontroverted evidence establish that its damages under the liquidated damage agreement are

in excess of $560,000,000.00 (present value estimated at in excess of $289,000,000.00). Lastly,

Glendale asserts that the proposed relocation sale to PSE does not meet the good faith requirement

of Section 363. In that regard, Glendale claims that the banlITllptcy cases and proposed PSE sale

were filed solely to benefit Moyes, are not in the best interests ofthe creditors, and that Moyes

and his control !lfthe auction process has improperly chilled the bidding and driven away other

bidders.

        On August 18, 2009, Glendale filed an adversary proceedings againSt Moyes alleging that

his more than $100,000,000.00 in loans to the Coyotes and/or the other debtors, evidenced in palt


       2 See.. e.g., In re Pomona Valley Med. Group . Inc, 476 F.3d 665 (9th Cir. 2007); In re
Chi-Feng Huang, 23 RR. 798 (9th CiT. RA.P. 1982); In 1'e Pehlr U.S.A. Instmment Co. Inc., 35
B.R. 561 (Banla'. w.n. Wash. 1983).

                                                  -21-
by proofs of claims filed with this court, should be re-characterized as equity and were not true

loans, that due to his misconduct such claims should be equitably subordinated, and that due to

certain avoidance claims, his proof of claims should be disallowed under Section 502(d) of the

Code. On August 21,2009, Glendale filed an emergency motion seeking that its claims be tried

prior to or at the September 10lh auction. At the September 2 nd hearing, Glendale acknowledged

the obvious impossibility of its request.

           6. Section 363(f)(4) Bona Fide Dispute.

           The parties have briefed and argued their many issues as if this were the actual trial. As

noted at the bearing on these issues, it is critical to note that all of these assertions have been made

in the administrative portion of these chapter 11 cases in connection with the core motions to

assume and assign the Coyotes' NHL rights, to sell the Coyotes, and to reject the AMULA witb

Glendale. Much of the evidence set forth in the declarations including, but not limited to, the

expert declarations is inherently conflicting. For purposes ofthis decision, the court will assume

that the debtors and PSE have established that the interests of the NHL and Glendale are subject

to bona fide dispute as that tenn is used in Section 363(f)(4). Hence, the court need not aJ.ld will

not make any decision on the merits of the many factual and legal issues raised by all of these

parties.

           7. PSE Can Not Adequately Protect the NHL'S Interests as Section363(e) Requires.

           The comer stone of these assertions is PSE's reliance on the right under Section 363(f)(4)

which pemlits a sale free and clear of "any interest" if "such interest is in bona fide dispute".

The purpose of Section 363(f)(4) is to permit property of the estate to be sold free and clear of

interests that are disputed by the representatives of the estate so that liquidation of the estate's


                                                     -22-
assets need not be delayed while such disputes are being litigated. Typically, the proceeds of sale

are held subject to the disputed interest and then distributed as dictated by the resolution of the
                                                   -"J

dispute; such procedure preserves all parties' rights by simply transferring interests from property

to dollars that represent its value. In re Clark, 266 B.R. 163 (9th Cir. B.A.P. 2001).

       Such view is based upon Section 363(e) of the Code which requires the court when selling

property under Section 363 "to provide adequate protection" of any interest in the property being

sold free and clear of that interest. Further that sub-section expressly states, in mandatory

language, that the court "shall prohibit or condition" the proposed sale "as is necessary to

provide adequate protection of such interest". hI most cases involving the foml of adequate

protection required, the interest which is to be removed by the sale of the property free and clear

ofthat interest is a lien or other economic interest, i.e., dollars, which interest can be adequately

protected by impounding funds to pay such interest if it is ultimately detennined to be a valid

interest, as discussed above in Clark. Generally it is relatively easy to determitl.e how to

adequatelypl'otect economic interests. In this court's view, detemlining how to adeqmi.tely protect

non-economic interests, paliicularly the interests claimed here by the NHL is exceedingly more

challenging. PSE asselis that the NHL can be adequately protected by the payment of the

appropriate relocation fee required by the NHL constitution and applicable case law. See Los

Angeles Memorial Coliseum Com'n v. NFL, 791 F.2d 1356 (9th Cir. 1986). However, the NHL

asserts and the court agrees that the NHL has three claimed rights/interests at issue here. First, the

right to admit only new members who meet its written requirements. Second, the right to control

where its members play their home hockey games. The very nature of professional sports requires

some ten~torial restrictions in order both to encourage participation in the venture and to secure to


                                                 -23-
  each venturer the legitimate fruits of that participation. See Los Angeles Memorial Coliseum

  eom'n v. NFL, 726 F.2d 1381, 1396 (9th Cir. 1984). Third, the right to a relocation fee, if

  appropriate, when a member team relocates to a new site. The court doeS not agree with PSE' s

  assertion that the payment of the appropriate relocation fee adequately protects all of the claimed

  interests of the NHL.   This court struggles with how it can adequately protect the NHL's

  membership selection Tight and control over home team location rights if the court were to allow

  PSE to move the Coyotes to Hannltol1. These are not monetary/economic rights such that

  impounding funds would be adequate protection. If the NHL ultimately prevails in litigation on

  these issues and the team has already lIioved to Hamilton in the interim, there will have been no

  adequate protection of the NHL's interest. Such an ultimate outcome is apropos to the old adages

  about closing the barn door after the horse is 10llg gone and how do you un-ring the bell. The

  obvious refi:ain to the first adage is, "it's too late'\ and to the second, "you can't".   In the final

  analysis, the court can not find ot conclude that the interests of the NHL can be adequately

  protected ifthe Coyotes are moved to Hamilton without first having Ii. final decision regarding the

  claimed rights ofthe NHL and the claims of the debtors and PSE. Neither the parties nor the court

  have found much case law wInch would assist in applying the "shall prohibit. .. such sale"

  language in Section 363(e) but this court has the firm sense, based upon the record, that tlie

  situation here directs the application ofthe "shal1 prohibit" requirement of Section 363(e) to this

  sale. In In re Magness, 972 F.2d 689 (6th Cir. 1992), the court prohibited a chapter 7 trustee from

, selling a g01f and country club membership where such sale would move the sale of that

  membership ahead of those on the country club's waiting list. That court relied, in part, on

  Section 363(e)'s shall prohibit standard. ["The interest of the persons presently involved in this


                                                    -24-
orderly succession cannot adequately be protected in any manner except by prohibiting the sale

and assignment of the membership."] 972 F.2d at 697. The requirement of adequate protection

in Section 363(e) is mandatory. If adequate protection cannot be provided, such sale must be

prohibited.     3 Collier on Bankruptcy ~ 363.05[2], at p. 363-42 (15th ed. rev. 2007).

        In summary, the clear statutory statement in Section 363(e) requires that the court "sha11

prohibit" any sale, where the interests sought to be removed by the proposed sale free and clear of

such interests, can not be adequately protected. This conclusion effectively is the end for the

efforts ofPSE, Balsillie, Moyes and the Coyotes to force a sale and relocation of the hockey team

based upon the claimed powers in Section 363(£)(4) of the Code; Le., those efforts and related

motions are denied with prejudice. Given that conclusion, the court does 110t need to resolve the

numerous issues regarding Glendale and the AMULA.

       8. The NHL's Bid.

       There are multiple factors that support the NHL bid. Generally speruci11g, its bid will either

pay the unsecured creditors in full or make a significant payment to them. It will pay the secured

debt in full. It is supported by Glendale and has significant support from some of the other

creditors. It has materially less "execution risks" as noted by some oftI1e creditors.

         However, the court's concems regarding the NHL's bid are the terms of that bid that

allow the NHL to select the unsecured creditors that will be paid in full by the NHL. As

presented, ,the NHL bid allows it to select which WlSecured creditors will be paid in full by the

NHL. It appears that the NHL has selected virtually all of the unsecured creditors 9ther than any

claims by Moyes, Gretzky, or any entity affiliated with them. By the teffi1S ofthe NHL bid, every

dollar that the NHL elects to pay to an unsecured creditor reduces the remaining pot of dollars, on


                                                -25-
a dollar for dollar basis, for those unsecured creditors not selected for payment by the NHt. The

NHL asserts that it is taking this action'because it is in the NHL's commercial interest to do so

and to maintain the good will of the team. In connection with the NHL's bid Commissioner

Bettman stated in his declaratiori that "the bid is structured to allow payment of all legitimate

creditors".

       A sale of a11 ofthe bankruptcy estate's assets may, and probably does, have the practical

effect of deciding issues that would ordinarily arise and be resolved in connection with the

confimlation of a plan of reorganization. Because there is a real danger that a section 363 sale

might deprive parties of substantial rights inherent in the plan confirmation process, sales of

substantial portions of a debtor's assets under Section 363 must be scrutinized closely by the

court. Attempts to detennine plan issues in connection with the sale will be improper and shotlld

result in a denial of the relief requested. See 3 Collier on Bankruptcy 1363.02[3], at p. 363-17

(15th ed. rev. 2007). If a proposed plan of reorganization is contested, it can only be confirmed if,

among other requirements, it does not discriminate unfairly, and is fair and equitable, with respect

to each claim of creditors that is impaired by such plan. 11 U.S.C. § 1129(b)(1).

       It appears to this court that there is a disconnect between the NHL's evidence and bid.

The evidence is that its bid is designed to allow payment of "all legitimate creditorS". It may be

that such statement is ambiguous because it could mean a payment of differing amounts to

legitimate creditors or it could mean payment of all legitimate creditors. If it is the latter meaning

then the bid differs from that evidence. This court is not inclined to approve a sale based upon

critical, aDlbiguous evidence. If that statement means various payments of differing amounts to

legitimate creditors. this court struggles to not conclude that such requirement does not
"discriminate unfairly" and to fInd that such tenn is "fair and equitable". It seems obvious to this

court and the apparent practical effect ofthe NHL's bid is to pay all creditors in full except the

Moyes and Gretzky claimants. Accepting the NHL' s assertion that a buyer in bankruptcy may pay

some trade creditors in full because conmlercial factors and good will so require, that is radically

different from paying virtually all unsecured creditors except the two a buyer views as its

opponents. Generally speaking, where a Section 363 sale will produce suffIcient proceeds to

make a signifIcant payment to the unsecured creditors when the buyer claims the right to

materially control how some or all ofthose proceeds are paid out, such assertion must be

supported by compel1ing evidence; particularly where the proposed distribution by the buyer

appears to be fundamentally inconsistent with the reqUirements of the Code. One of the prime

policies of bankruptcy is equality of dish'ibution amongst the creditors. See Union Bank v.

Wolas, 502 U.S. 151, 112 S.Ct,527, 116 L.Ed 2d 514 (1991). There has been no detennination

that the Moyes and Gretzky claims are 110t "legitimate creditors". It would be inherently unjust

for this court to deprive them oftheir possible rightful share of any proceeds without fIrst

providing all involved a fair trial on their claims.

       For the reasons set forth above, the NHL bid is denied, without prejudice. The denial of

the NHL's bid is done without prejUdice because it seems to the court that the defect in the NHL's

bid could be easily cured by the NHL. In hockey parlance, the court is passing the puck to the

NHL who can decide to take another shot at the sale net or it can pass off the puck.




                                                  -27-
                                        III. CONCLUSION

       For the reasons set forth above, the court can not approve the bids by PSE and the NHL

Therefore, PSE's bid is denied, with prejudice because the interests ofthe NHL can not be

adequately protected as required by Section 363(e) ifthe sale to PSE were approved. The NHL's

bid is denied, without prejudice. As stated above, the NHL can probably cure the defect in its bid if

it elects to make the required amendment(s). Counsel for the debtors shall serve and lodge an

appropriate form of order.



Copy ofthe fore~oing
mailed this c:kv  day of
September, 2009 to:

Susan G. Boswell
QUARLES & BRADY, LLP
One South Church Avenue, Suite 1700
Tucson, Arizona 85701-1621

Thomas Allen
Paul Sala
ALLEN SALA & BAYNE, PLC
Viad Corporate Center
1850 North Central Avenue, Suite 1150
Phoenix, Arizona 85004

Scott J. Greenberg
John J. Rapisardi
CADWALADER WICKERSHAM & TAFT, LLP
One World Financial Center
NewYork,NY 10281

Chad L. Schexnayder
Kristin W. Mazon
JENNINGS HAUG & CUNNINGHAM, LLP
2800 North Central Avenue, Suite 1800
Phoenix, Arizona 85004-1049


                                                -28-
Donald L. Gaffney
SNELL & WILMER, LLP
One Arizona Center
Phoenix, Arizona 85004-2202

Sean O'Brien
GUST ROSENFELD, P.L.C.
201 East Washington Street, Suite 800
Phoenix, Arizona 85004-2327

Jonathan P. Ibsen
Laura A. Rogal
JABURG & WILK, P.C.
3200 North Central Avenue, Suite 2000
Phoenix, Arizona 85012

Edward M; Zachary
BRYAN CAVE LLP
2 North Central Avenue, Suite 2200
Phoenix, Arizona 85004

Kelly Singer
SQUIRE SANDERS & DEMPSEY
40 NOlth Central Avenue, Suite 2700
Phoenix, Arizona 85004-4498

Thomas J. Salerno
Jordan A. Kroop
SQUIRE SANDERS & DEMPSEY, LLP
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004

Larry Lee Watson
Office of the United States Trustee
230 North First Avenue, Suite 204
Phoenix, Arizona 85003-1706




                                        -29-
AlanA Meda
C. Taylor Ashworth
STINSON MORRlSON HECKER, LLP
1850 North Central Avenue, Suite 2100
Phoenix, Arizona 85004

Susan M. Freeman
Stefan M. Palys
LEWIS & ROCA, LLP
40 North Central Avenue
Phoenix, Arizona 85004-4429

Cathy Reece
Nicholas B. Hoskins
FENNEMORE CRAIG, P.e.
3003 North Centra] Avenue, Suite 2600
Phoenix, Arizona 85012-2913

William R. Baldiga
Paul W. Shaw
BROWN RUDNICK, LLP
One Financial Center
Boston, Massachusetts 02111

CarolY"!'l J. Johnsen
Peter W. Sorensen
JENNINGS STROUSS & SALMON, P.L.C.
The Collier Center, 11111 Floor
201 East Washington Street
Phoenix, Arizona 85004-2385

Dale C. Schian
Cody J. Jess
SCHIAN WALKER, P.L.C.
3550 North Central Avenue, Suite 1700
Phoenix, Arizona 85012-1501

Steven M. Abramowitz
VINSON & EUGNS, LLP
666 Fifth Avenue, 26 th Floor.
New York, New York, 10103-0040




                                        -30-
James E. Cross
OSBORN MALEDON, P.A.
2929 North Central Avenue, Suite 2100
Phoenix, Arizona 85012-2794

Anthony W. Clark
SKADDEN ARPS SLATE MEAGHER & FLaM, LLP
One Rodney Square
Wilmington, Delaware 19899

J.Oregory Milmoe
Shepard Goldfein
SKADDEN ARPS SLATE MEAGHER & FLaM, LLP
4 Times Square
New York, New York 10036




                                        -31-