Room Store-895-Motion of The Offical Committee of Unsecured Creditors For Entry of An Order Directing The Appointment of A Chapter 11 Trustee

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION In re: ROOMSTORE, INC. Debtor. MOTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR ENTRY OF AN ORDER DIRECTING THE APPOINTMENT OF A CHAPTER 11 TRUSTEE The Official Committee of Unsecured Creditors (the Committee) of RoomStore, Inc., (the Debtor) hereby moves this Court (the Motion) for entry of an order pursuant to sections 105(a), 1104(a)(1),1104(a)(2) and 1104(c) of title 11 of the United States Code (as amended, the Bankruptcy Code) and Rules 2007.1 and 9014 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules), appointing a chapter 11 trustee. Committee respectfully states as follows: Preliminary Statement The current situation for unsecured creditors is dire. On July 18, 2012, the DIP lender served notice on the Committee that it has declared defaults under the DIP loan and intends to exercise its rights against its collateral, which is comprised of the Debtors remaining assets. It did so in part because it just learned, as did the Committee, that, despite collecting sales taxes from customers, the Debtor did not pay those sales taxes to the taxing authorities as it had
Tyler P. Brown (VSB No. 28072) Justin F. Paget (VSB No. 77949) Eric W. Flynn (VSB No. 78488) HUNTON & WILLIAMS LLP Riverfront Plaza, East Tower 951 East Byrd Street Richmond, Virginia 23219-4074 Telephone: (804) 788-8200 Telecopier: (804) 788-8218 Counsel for the Official Committee of Unsecured Creditors
Chapter 11 Case No.: 11-37790-DOT
In support of the Motion, the
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represented to the DIP lender that either it had done or was going to do in its borrowing certificates. Instead, it used those funds to pay other expenses. Upon information and belief, the DIP lender has not agreed to fund the Debtors wind-down because, similar to the Committee, it has lost all faith and confidence in the Debtors Board of Directors (the Board) due to this and other transgressions. Throughout this bankruptcy proceeding the Committee has been concerned that the Board, dominated by the heavy hand of the Chairman of the Board, Steven L. Gidumal (the Chairman), was pursuing a motive other than maximizing the recovery for unsecured creditors. The Debtors proposed plan of reorganization and disclosure statement have confirmed what the Committee suspected, that the Board was adopting a risk it all strategy for an unachievable distribution to the holders of equity security interests, including the hedge fund run by its Chairman. Sadly, it is only now, after the Board has piloted the Debtor to complete and utter financial ruin, that the Committees suspicions have been confirmed. The Court should order the immediate appointment of a chapter 11 trustee in order to protect the value remaining in the Debtors substantial non-operating assets for unsecured creditors for the following reasons. First, the appointment of a chapter 11 trustee represents what may be the last hope for convincing the DIP lender to fund an orderly wind-down. The
Committee, and upon information and belief, the DIP lender, have lost all faith and confidence in the abilities of the Board to manage the Debtors remaining affairs, which has caused the current standstill over funding, as a result of the following indiscretions of the Debtor: Failure to pay sales taxes of up to $2 million despite collecting those taxes from customers and using those funds to pay other expenses, despite representing to the DIP lender that those taxes were being paid;
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Filing a disclosure statement and chapter 11 plan just prior to the Court-approved extension of exclusivity that proposes to distribute money to equity security holders before unsecured creditors are to be paid in full; Seeking approval of a chapter 11 plan that would maintain control of the Debtor in designees of the current Board, while simultaneously attempting to retain control over fiduciary duty claims that the Committee believes the Debtors estate has against members of the Board; Filing a disclosure statement that recklessly suggests to creditors they may achieve an 80% return on their claims, when the Debtor knew at the time of filing that such a result was unachievable; Burning close to $10 million in operating cash and incurring significantly increased administrative claims at a time when the Debtor was wildly missing its sales and cash forecasts and knew it soon would be out of cash; Running the retail operations to the point of absolute illiquidity, despite knowing by April 2012 that even hitting unachieved sales targets would lead to continued deterioration of liquidity without a cash infusion; The Chairmans refusal to allow the Debtor to honor its agreement with the Committee to permit the Debtors financial advisor to prepare by February 1, 2012, an outline and timeline for a going concern sale process of the retail stores and MDG to be put in place in advance of a liquidation; The Boards failure to market for sale the Debtors 65% interest in Mattress Discounters Group LLC (MDG) before running out of cash, including its failure to hire an investment banker acceptable to the DIP lender and the Committee, despite the Debtors obligation to do so in a stipulation and Court Order for the purpose of marketing those assets as soon as possible. The willful failure of the Chairman and the outside directors on the Board to comply with the Rule 2004 Order by their repeated delay and refusal to turn over to the Committee the documents requested; Despite repeated demands for the Debtors compliance, the Debtors willful violation of the Final DIP Orders requirement that the Debtor establish and fund a Professional Fee Escrow Account, which the Committee specifically negotiated as part of its consent to the DIP Loan; Collecting payments earmarked for rent from the acquirer of the Dallas GOB inventory and lease designation rights and then, risking default under that sale, diverting those payments from the intended landlords to fund other expenses; and Allowing its retail stores to accept deposits, and, in some cases, full payment, from customers for merchandise to be delivered in the future when the Debtors
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Board must have concluded previously that delivery of the merchandise was unachievable. Second, the interests of creditors would be best served by the appointment of a professional to handle the Debtors wind-down who understands the importance of transparency and fiduciary obligations to the Court and parties in interest, which the Board has failed to achieve as evidenced by the following transgressions by the Debtor: Interference by the Board, and particularly the Chairman, with the Debtor using the bankruptcy professionals retained by the Debtor to carry out the work they were hired to do; Failing to disclose the Chairmans secret $2 million bid for the minority interest in MDG early in the bankruptcy case, at a time when the Chairman was on the Board and simultaneously was acting as one of the Debtors representatives on the board of managers of MDG; Failing to disclose that a current member of the Board was for many years, and up to one month before the bankruptcy filing, a licensed real estate agent with the firm retained as the Debtors real estate professional and using that professional outside its scope of employment so that the Chairman could control the marketing process of the Debtors Dallas retail stores; and Objecting to the fees of the Debtors and Committees professionals for the purpose of managing cash flow and without proper grounds.
Any one of these indiscretions and events would, standing alone, support the appointment of a trustee in the interests of creditors. When taken together, they demonstrate real concerns about the Boards duties of care and loyalty, suggest, at a minimum, gross negligence in the management of the Debtor, and compel the appointment of a chapter 11 trustee as being in the best interests of creditors, who have completely lost confidence in the Debtors Board and Chairman. Despite repeated requests of the Committee, the Board has refused to cede control absent protection from the claims the Committee believes a trustee or other independent party should investigate against the Board.
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The immediate appointment of a chapter 11 trustee may allow the major constituencies to negotiate an agreement with the DIP lender for wind-down funding and an expeditious, but appropriate, process for the marketing and sale of the Debtors remaining assets, including its interest in MDG. The funding of such process is essential to preserving value for unsecured creditors. As the Debtor has proven, it cannot hope to achieve a successful outcome because of the lost confidence by all major constituents, and the current refusal of the DIP lender to fund any wind-down process. Allowing the Committee and other creditor constituencies a chance to reach an agreement with a chapter 11 trustee for a fair wind-down process, without interference from the current Board, is preferable to conversion of the case to chapter 7. Value to creditors will best be preserved by allowing an independent professional to consider the options while the Debtor still employs the back-office staff that supplies shared services to Mattress Discounters, of which the Debtor is a 65% interest holder, and still has both the staff and retail employees that are needed to support the ongoing retail store liquidation efforts being run by the Hilco JV and others. In short, immediate conversion may increase administrative claims against the estate, while also decreasing the value to creditors of the remaining assets if operations are completely shut down. Having a chapter 11 trustee appointed will allow for consideration of all options. Jurisdiction 1. This Court has jurisdiction over the Motion pursuant to 28 U.S.C. 157 and
1334. This is a core proceeding pursuant to 28 U.S.C. 157(b)(2). Venue is proper before this Court pursuant to 28 U.S.C. 1408 and 1409. 2. The statutory predicates for the relief requested herein are sections 105(a) and
1104 of the Bankruptcy Code.
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Background General Background 3. On December 12, 2011 (the Petition Date), the Debtor filed a voluntary petition
for relief under chapter 11 of title 11 of the Bankruptcy Code. Pursuant to sections 1107 and 1108 of the Bankruptcy Code, the Debtor is continuing to operate its business and manage its properties as a debtor in possession. 4. On December 19, 2011, the Office of the United States Trustee for the Eastern
District of Virginia, Richmond Division (the UST) appointed the Committee to represent all unsecured creditors of the Debtor pursuant to section 1102 of the Bankruptcy Code. 5. The Debtor initially obtained post-petition financing (the DIP Loan) from Wells
Fargo, N.A. (Wells Fargo), but the Debtor found a replacement lender in Salus Capital, LLC (Salus), authorized pursuant to this Courts Order (I) Authorizing Debtor to Enter into Amendment Agreement with Salus Capital Partners, LLC and (II) Supplementing Final Financing Order (the Supplemental DIP Order) [Doc. No. 339], entered on February 8, 2012. 6. The Chairman is the founder and President of Virtus Capital LP, a hedge fund,
which owns 487,338 shares in the Debtor, which equates to just under 5% of the equity security interests, the threshold for public reporting of trades in the stock. He was appointed to the Board in April 2011 at the request of Virtus and one or more other hedge funds who hold large blocks of shares in the Debtor. He became Chairman in the month prior to the Petition Date, when the prior chairman resigned. The Failure to Secure Wind-Down Financing and Revelations of Misdirected Funds 7. On July 18, 2012, Salus sent a notice to the Debtor, the Committee, and the
United States Trustee stating that it has declared defaults under the DIP loan and intends to
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exercise its rights against its collateral, which is comprised of the Debtors remaining assets. After three business days, Salus will have the authority under the Final DIP Order to begin exercising its rights, including foreclosing or commencing Article 9 liquidation sales of the Debtors remaining assets. The Committee believes that appointing a chapter 11 trustee may facilitate an agreement with Salus to fund an expeditious, but appropriate, marketing process of the Debtors remaining assets in lieu of a foreclosure or fire sale. 8. The inability of the Debtor to secure funding for the wind-down has put at
substantial risk the value of the MDG interests. While that asset is the most valuable asset of the estate, it is being put in jeopardy because Salus wants to be paid back its DIP Loan in short order. Meanwhile, the minority interest holder in MDG, Ray Bojanowski, wants to buy out the Debtors interest from Salus. Unless there is a fair auction process for the MDG interests, the estate may not recover fair value for those interests. If a trustee is not appointed to negotiate an appropriate wind-down budget with Salus, Salus may look for a quick sale of the interests to Mr. Bojanowski, which will harm unsecured creditors. Having a chapter 11 trustee at the table may help achieve a fair sale process. 9. The Committee has recently learned that the unwillingness of Salus to agree to
fund the Debtors wind-down derives from, upon information and belief, the mismanagement of the Debtors finances and misdirecting of funds. 10. For example, the Debtor collected sales taxes from its customers, or received sales
taxes from the purchaser of the Debtors Dallas store assets, and then paid those amounts to Salus as payments on the DIP loan. When Salus subsequently funded amounts under the budget for the sales taxes, the Debtor used such amounts to pay other expenses, resulting in the accrual
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of up to $2 million in back sales taxes. By using these amounts for other purposes, the Debtor is out of trust. 11. The Debtors refusal to recognize (or competently anticipate) its liquidity issues
also caused the Debtor to miss making payroll on time for the wage period ending on June 29, 2012. The Debtor also failed to timely pay rent at a number of its stores despite receiving funds earmarked for rent from the purchaser of the Debtors Dallas store assets. While Salus later agreed to fund the payroll under the DIP Loan on an emergency basis, as well as rent, Salus has not accepted the Debtors latest proposed budget. 12. In addition, the Debtor received deposits and, in certain cases, full payment from
customers for merchandise ordered as long ago as May 2012, but is now unable to fulfill those orders or provide refunds to customers. Indeed, the Debtor currently is directing customers to its website, www.roomstore.com, which has been replaced with two links -- one to a short letter stating that the company is out of business, and the other to a proof of administrative expense claim form. It appears that the Debtor has collected and used these deposits to fund other expenses and must have known, at some point in this process, that collecting deposits from consumers was no longer consistent with operating in good faith. 13. After the Final Store Closing, as a result of these revelations, the Debtor failed to
secure wind-down funding and operated on an individual expenditure approval basis with Salus, which has resulted in gross inefficiencies during the wind-down process and squabbling over receipts submitted for as little as thirteen dollars. unsustainable. The Debtors Hastily Filed Plan and Disclosure Statement This manner of operating proved
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14.
On February 16, 2012, the Debtor filed its Motion for Entry of an Order Pursuant
to 11 U.S.C. 1121(d) Extending Debtors Exclusive Periods in Which to File a Chapter 11 Plan and Solicit Votes Thereon (the Exclusivity Motion) [Doc. No. 353], requesting an extension of the exclusive periods for filing and soliciting votes on a chapter 11 plan. In support of that motion, the Debtor stated, among other things, that it had timely paid its post-petition debts, which the Committee has subsequently learned was inaccurate. The Committee objected to the Exclusivity Motion, see Doc. No. 427, citing as its principal concerns the failure of the Debtor to demonstrate any reasonable prospect for a viable plan and the operational cash burn that was occurring during the pursuit of a turnaround without adequate consideration of a sale of the business. 15. On April 3, 2012, at the hearing on the Exclusivity Motion, the Court overruled
the Committees objection, but limited the Debtors extension to 60 days for the filing of a plan. 16. On June 6, 2012, on the eve of the expiration of the Debtors exclusive filing
period, the Debtor filed its chapter 11 plan (the Plan) and disclosure statement (the Disclosure Statement). [Doc. Nos. 633 and 634, respectively]. The Debtor failed to negotiate with the Committee any of the terms of the Plan or the contents of the Disclosure Statement prior to filing.1 The Plan and Disclosure Statement were filed after the Debtor had run out of cash, had stopped paying many vendors, landlords, and professionals, and had accepted deposits, and, in
On the eve of filing the Plan, Debtors counsel discussed with Committee counsel the fact that certain provisions of the proposed Plan might not be acceptable to the Committee, but might be negotiated later. After the Plan was filed, the Committee first learned, for example, that control of the estate is proposed under the Plan to remain with a Board to be controlled by persons selected by the existing Board, and the Plan contemplates a distribution to equity after unsecured creditors achieve an 80% distribution on their claims. The Debtor has said the Board is unwilling to cede control absent a release of threatened fiduciary duty claims. And, while the proposed Plan directly violated the absolute priority rule, it is abundantly clear now that unsecured creditors will never obtain 80% and equity, therefore, will receive nothing under the proposed Plan. Thus, while certain of the provisions might have been subject to negotiation after the Plan was filed, the Plan reveals what the Board was trying to achieve in this case, control over the assets to try to obtain a recovery for equity, irrespective of its fiduciary duties to unsecured creditors.
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some cases, full payment, from customers for merchandise that it knew it could not deliver. See www.roomstore.com, Notice of Store Closing and Proof of Administrative Claim (to which the Debtor asked Committee professionals to direct all customers who requested refunds or to pickup furniture that they had ordered). 17. Incredibly, despite the Debtor running out of cash and accruing significant
administrative claims, the Disclosure Statement projects a payout to unsecured creditors of 100% (less 20% depending on the Debtors realization of certain tax credits, which would then be paid over to current equity holders). How the Debtor could achieve this result when
scheduled claims total more than $26.5 million and filed claims total approximately $38.5 million is beyond the understanding of the Committee. See Disclosure Statement, at 16. 18. The Disclosure Statement also provides that the Debtor expects from the sale of
its Operating Assets to obtain more than sufficient funds to pay in full the Allowed Secured Claim of Salus. Disclosure Statement, at 18. 19. Notwithstanding that the Debtor actually may be administratively insolvent, the
Disclosure Statement provides that under the terms of the Plan, the Debtors current Board of Directors will retain control over the disposition of the Debtors remaining assets. Under the terms of the Plan, a new Board will be created with majority control held by current Board members. See Plan 6.04. This will permit the current Board to control all causes of action of the Debtors estate, including potential claims against the very same Board members that oversaw the collapse of the company. The current Board is aware of these potential claims as a result of the General Liability Notice of Occurrence/Claim that the Debtor filed with its D&O insurance carrier on March 23, 2012, after receipt of notice from the Committee that claims may exist against the Board.
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Substantial Operating Losses and Missed Forecasts During the Case 20. The Debtor has suffered an extraordinary operational cash burn since the Petition
Date. The Debtor has missed its forecasted sales nearly 80% of the time and typically by between 20% and 55% to the downside.2 21. In order to manage its cash over the course of the bankruptcy, the Debtor
implemented a plan to avoid paying parties who did not demand cash before providing services or delivering goods, such as bankruptcy professionals and certain vendors. For example, on April 16 and 17, 2012, in a series of emails, the Board made a premeditated decision to object to all professional fees above a threshold amount, as follows: No Professional bills will be paid until I [the CEO] approve them and notify [the Chairman]. We will object to all unreasonable invoices (FTI, Lowenstein, Hunton Williams [sic], A&M and Kaplan (Lowensteins local counsel --Troy Savenko) which will take (according to Brian) 15 days to dispute and possibly another 15 days to reconcile after 30 days (or so) dating to be billed. Greenberg Traurig is a bit more challenging. Since they are counsel to Salus, they do not bill us, they bill Salus, who pays them and sweeps our account.
The Debtor was able to avoid breaching its financial covenants with Salus for several months because the budget test imposed under the DIP Loan did not test compliance with sales or liquidity. See Third Amendment to Loan and Security Agreement 1.2(o) [Doc. No. 339]. Not until the Debtor and Salus entered into the Fifth Amendment to Loan and Security Agreement, dated as of April 19, 2012 (the Fifth Amendment), did Salus impose a budget test on sales (and liquidity), which substantive change the Debtor omitted in its description of the terms of the Fifth Amendment in its motion filed with Court. See Motion to Approve Fifth Amendment 12 [Doc. No. 514] (The majority of the amended terms are not material.); Fifth Amendment 1.6. Instead, the Debtor touted the benefit of the removal of line item expense testing -- the very testing that allowed the Debtor to perpetuate its substantial operating losses without defaulting under the terms of the DIP Loan. See Motion to Approve Fifth Amendment 13.
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Email from S.Giordano (Apr. 17, 2012 12:04 PM) [Exhibit A]3. 22. Upon information and belief, the Debtor also withheld payment for over five
months from certain of its vendors who were willing to provide the Debtor credit post-petition, despite personal assurance of payment from the Debtors CEO. See Motion for Allowance of Administrative Claim for Post-Petition Goods Provided [Doc. No. 778] (On post-petition debt of $654,204.50, [t]he Debtor has failed to make a single payment on any invoice since the Petition Date, despite multiple promises from its President and Chief Executive Officer, Steve Giordano.); Email from J.Bookner (June 11, 2012 12:31PM) [Exhibit B] (failure to pay $178,705.93 for post-petition deliveries). 23. By April 17, 2012, a mere two weeks after the hearing on the Debtors
Exclusivity Motion, the Debtors CEO informed the Board that the Debtor had entered into a cyclical process whereby growing back-orders of merchandise meant that even if we do well in sales, we will hit the demand of $7M per month and be in a worse position in June. Email from S.Giordano (Apr. 17, 2012 6:06 PM). In other words, by April 2012, the Board knew that the Debtors retail store operations were in a death spiral without an infusion of millions of dollars for additional inventory, but declined to act to save any value for unsecured creditors. Incredibly, the Debtors CEOs email makes reference to the fact that at least one of the Board members had always maintained [this] would happen. Id.
Certain Exhibits referenced in this Motion have been provided by the Debtor to the Committee and have been marked confidential. The Committee entered into a Confidentiality Agreement, dated December 23, 2011, pursuant to which the Committee agreed not to publicly disclose certain information received from the Debtor. The Committee is seeking consent from the Debtor to file with the Court those Exhibits to which the Committee believes the Confidentiality Agreement may apply. In the event the Debtor does not consent, the Committee will seek to file those Exhibits under seal.
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The Liquidation of the Debtors Retail Stores and Remaining Secured Obligations 24. Despite implementing desperate measures to stretch its finances, including failing
to pay bankruptcy professionals, failing to pay vendors, failing to return customer deposits, using funds provided by Salus under the budget for rent and sales taxes to pay other expenses, and stonewalling attempts by the Committee to commence a marketing process of the Debtor to potential strategic and financial buyers, the Debtor finally succumbed. On June 7, 2012, with essentially all liquidity exhausted, the Debtor filed a motion to approve the auction of its remaining retail store assets (the Final Store Closing). See Doc. No. 637. This final step concluded what was over the course of the case essentially a long, drawn-out liquidation of the Debtors retail store assets while burning through over $9 million of operating cash that could have been paid to creditors on their unsecured claims. 25. In total contradiction of the statement in the Disclosure Statement, despite
conducting the Final Store Closing, and having received all but a small percentage of payments from the purchasers of the assets, there remains an outstanding secured obligation owed to Salus of approximately $1.5 million with significant accrued, but unpaid post-petition liabilities, including up to $2 million in sales taxes. Control of the Debtors Remaining Assets 26. Apart from the assets associated with the Debtors retail stores, the Debtor also
owns a 65% equity interest in MDG, a Virginia limited liability company that operates approximately eighty-one retail bedding stores in Delaware, District of Columbia, Maryland and Virginia. MDG is not a debtor in these proceedings. MDG is profitable. The Debtor has valued its 65% interest in MDG at between $7.8 million and $19.5 million, see Disclosure Statement at
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19, although the Committee has never seen an independent valuation supporting the Debtors valuation range. 27. Recently, the Committee learned that the Chairman, who owns an equity stake in
the Debtor through a hedge fund he founded, approached Mr. Bojanowski, the minority stakeholder in MDG, and offered him $2,000,000 for his interest in MDG after the filing of the bankruptcy case. This fact was not disclosed by the Debtor to the Committee, and only become known to the Committee through a pleading recently filed by Mr. Bojanowski. See Declaration of Raymond T. Bojanowski, Exhibit A [Doc. No. 747]. The Chairman was, at the time of the offer, both a director on the Debtors Board and one of the Debtors representatives on MDGs board of managers. 28. In connection with the Stipulation and Agreed Order Between Debtor and Official
Committee of Unsecured Creditors Relating to Fifth Amendment to Loan and Security Agreement [Doc No. 557], the Debtor was required to retain an investment banker to market the Debtors interest in MDG. Without the Committees consent, the Debtor filed an application to retain Northeast Securities Inc. (Northeast) to sell its interest in MDG. See Application to Retain and Employ Northeast Securities, Inc. as Investment Banker for the Debtor and Debtor in Possession Effective as of May 17, 2012 (the Northeast Application) [Doc. No. 588]. The Committee expressed concern regarding Northeasts qualification and experience and the Debtors selection process, and proposed four alternative candidates for the Debtor to consider. 29. The Debtors criteria in selecting Northeast was not immediately clear from the
Northeast Application. Rather, in the Debtors Omnibus Reply to Objections to the Application to Retain and Employ Northeast Securities, Inc. as Investment Banker for the Debtor and Debtor in Possession Effective as of May 17, 2012 Pursuant to 11 U.S.C. 327, 328(a) and 1107 and
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Bankruptcy Rules 2014 and 2016 (the NE Omnibus Response) [Doc. No. 735], filed in response to the objection of the Committee and others, the Debtor states that the alternative investment bankers proposed by the Committee were unsuitable because, [w]hen asked to provide their estimates of proper valuation multiples for MDG, [three of the four alternatives] gave estimates below segment norms and well below the Boards internal valuation estimates, and [the fourth alternative] did not directly respond. Northeast, on the other hand, gave an estimate in line with the Boards internal benchmark, supported by comparable transactions that the Board viewed as appropriate. NE Omnibus Response 17. In other words, the three alternative investment bankers that gave independent indications of value different from the Boards opinion (i.e., the Chairmans) were rejected out of hand by the Debtor. The Board thus sought to retain the only investment banker that held out hope for a return to equity. 30. The Debtor also owns a 31% equity interest in Creative Distribution Services,
LLC (CDS). CDS is a Virginia limited liability company that was formed for the purpose of buying and holding real estate. CDS owns a former retail store operated by the Debtor in Lanham, Maryland, and a distribution center in Orangeburg, South Carolina, which is currently leased to Husqvarna. The Debtor has valued its interest in CDS at between $2.7 million and $3.7 million. Disclosure Statement, at 19. The Committee is not aware of any agreement by other members of CDS to this valuation, or to their consent for the Debtors planned disposition of these assets. 31. In addition, the Debtor owns a distribution center in Rocky Mount, North
Carolina that served as the Debtors main distribution center for its furniture business. Upon information and belief, the Rocky Mount distribution center is unencumbered. The Debtor has valued this asset at between $4 million and $5.5 million. Disclosure Statement, at 19. Again, the Committee has never seen an independent valuation of this asset.
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32.
Pursuant to the Disclosure Statement and Plan, the Debtor proposes that a new
Board be formed for the reorganized entity, the majority of which would be comprised of members of the current Board, see Disclosure Statement, at 32, which presumably would include the Chairman, to manage and sell the Debtors remaining assets. That new Board would have unfettered discretion to make decisions about the liquidation of the remaining assets without any timeframe, parameters or oversight by unsecured creditors (other than a minority position on the new Board), which have the most at stake in the liquidation process. 33. Upon information and belief, these uncertain timelines have contributed to the
refusal of Salus to fund the Debtors wind-down. Absent the appointment of a chapter 11 trustee, the Debtor likely will not have the opportunity to pursue any meaningful marketing process to sell its remaining assets. A chapter 11 trustee will have the opportunity to negotiate with Salus and the other major constituents for an expeditious, but appropriate, marketing and sale process for MDG to pay the balance owed to Salus in full and permit the orderly sale of the Debtors remaining assets. Relief Requested 34. By this Motion, the Committee respectfully requests entry of an order directing
the immediate appointment of a chapter 11 trustee to replace the Board pursuant to sections 105(a), 1104(a)(1) and/or 1104(a)(2) of the Bankruptcy Code. Basis for Relief Requested A. Standard for Appointment of Chapter 11 Trustee 35. Section 1104(a) of the Bankruptcy Code provides that at any time after the
commencement of a chapter 11 case but prior to confirmation of a plan, a bankruptcy court shall order the appointment of a trustee:
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(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or amount of assets or liabilities of the debtor; or (2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets of liabilities of the debtor. 11 U.S.C. 1104(a). The two subsections of 1104(a) are written in the disjunctive, requiring that a movant meet one of the two standards for appointment of a chapter 11 trustee. 36. Even though appointment of a chapter 11 trustee is generally considered an
extraordinary remedy, if cause is found under 1104(a)(1), appointment of a chapter 11 trustee is mandatory. In re Funge Systems, Inc., 2002 Bankr. LEXIS 1937 (Bankr. E.D. Va. October 17, 2002) (citing Marvel Entertainment, 140 F.3d at 471). 37. Further, if cause exists, a motion for appointment of a trustee should be filed even
prior to expiration of the debtors exclusive periods in order to avoid unnecessary cost and delay in a chapter 11 case. See e.g., In re Colorado-Ute Elec. Assn., Inc., 120 B.R. 164, 175 (Bankr. D. Colo. 1990) ([I]f facts and circumstances warrant the appointment of a trustee, it is not appropriate to wait to file [a trustee motion] until the termination of the exclusive period. Such a deferral will only further delay the progress toward the effective rehabilitation and reorganization of the debtor.). 38. Even in the absence of cause, the Court may still appoint a trustee pursuant to
section 1104(a)(2) if it is in the interest of creditors, any equity security holders, and other interests of the estate. 11 U.S.C. 1104(a)(2); see also, In re Sharon Steel Corp., 871 F.2d 1217, 1226 (3d Cir. 1989) (Subsection (a)(2) allows appointment of a trustee even if no cause exists.); In re Euro-American Lodging Corp., 365 B.R. 421, 428 (Bankr. S.D.N.Y. 2007) (same); and In re Ionosphere Clubs, Inc., 113 B.R. 164, 168 (Bankr. S.D.N.Y. 1990) (same). 17
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39.
A moving party has the burden of showing by clear and convincing evidence
that the appointment of a trustee is warranted. In re Tanglewood Farms, Inc., Case No. 1006719-8-JRL, 2011 WL 606820 at *2 (Bankr. E.D.N.C. Feb. 10, 2011); see also, Adams v. Marwil (In re Bayou Group, LLC), 564 F.3d 541, 546 (2d Cir. 2009). 40. There are many factual scenarios that have been held to support the appointment
of a trustee under section 1104(a), many of which are relevant here, including: 41. material conflicts of interest preventing the debtor from discharging its fiduciary duties to creditors;4 a lack of confidence in the debtors abilities to manage its business and discharge its fiduciary duties;5 and acrimony between the debtor and its creditors;6 The Committee submits that the circumstances of this case warrant appointment
of a chapter 11 trustee under each of the two bases provided in section 1104(a). As a result of the Boards conduct in this case, cause exists under section 1104(a)(1) to replace the Board
See, e.g., Marvel, 140 F.3d at 471; Cajun Elec., 69 F.3d at 751; In re Eurospark Indus., Inc., 424 B.R. 621 (Bankr. E.D.N.Y. 2010); In re Euro-American Lodging Corp., 365 B.R. 421 (S.D.N.Y. 2007); In re Bellevue Place Assocs., 171 B.R. 615 (Bankr. N.D. Ill. 1994); In re Microwave Prods. of Am., Inc., 102 B.R. 666 (Bankr. W.D. Tenn. 1989); In re McCorhill Publg Inc., 73 B.R. 1013 (Bankr. S.D.N.Y. 1987); In re Humphreys Pest Control Franchises, Inc., 40 B.R. 174 (Bankr. E.D. Pa. 1984); In re Great Ne. Lumber & Millwork Corp., 20 B.R. 610 (Bankr. E.D. Pa. 1982); In re Philadelphia Athletic Club, Inc., 15 B.R. 60 (Bankr. E.D. Pa. 1981); Smith v. Concord Coal Corp. (In re Concord Coal Corp)., 11 B.R. 552 (Bankr. S.D. W. Va. 1981); In re L.S. Good & Co., 8 B.R. 312 (Bankr. W. Va. 1980).
See, e.g., Sharon Steel, 871 F.2d 1217; Petit, 182 B.R. 64; Eurospark Indus., 424 B.R. 621; ColoradoUte Elec. Assn., 120 B.R. at 176; Microwave Prods. of Am., 102 B.R. 666; Concord Coal Corp., 11 B.R. 552. See, e.g., Marvel, 140 F.3d at 471-72; Cajun Elec. Power Coop. v. Cent. La. Elec. Co. (In re Cajun Elec. Power Coop.), 69 F.3d 746, 751 (5th Cir. 1995), majority op. withdrawn and dissenting op. adopted, 74 F.3d 599, 600 (5th Cir. 1996); Petit v. New England Mortg. Servs. Inc., 182 B.R. 64 (D. Me. 1995); Colorado-Ute Elec. Assn., 120 B.R. at 176; In re Bible Speaks, 74 B.R. 511 (Bankr. D. Mass. 1987).
6
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with a chapter 11 trustee. In addition, the interests of creditors would be best served by the appointment of an independent chapter 11 trustee pursuant to section 1104(a)(2). B. Cause Exists Under Section 1104(a)(1) for Replacement of the Debtors Board of Directors with an Independent Chapter 11 Trustee 42. Section 1104(a)(1) sets forth a nonexclusive list of factual predicates that support
a finding of cause for the appointment of a chapter 11 trustee, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management. 11 U.S.C. 1104(a)(1); see also In re IPofA West Oaks Mall, LP, Case No. 07-33649-KRH, 2007 WL 3223295, at *3 (Bankr. E.D. Va. Oct. 29, 2007) (the list of bases upon which cause may be found for the appointment of a chapter 11 trustee under 1104(a) is nonexclusive); In re Ricco, Inc., 2010 Bankr. LEXIS 1916 (Bankr. N.D. W. Va. June 28, 2010); Gomez v. United States, 2010 U.S. Dist. LEXIS 14403, 4-5 (W.D. Va. Feb. 18, 2010); and In re Marvel Entmt Group, Inc., 140 F.3d 463, 472 (3d Cir. 1998). 43. The Fourth Circuit has held that section 1104(a)(1) should be flexibly applied
because the concepts of incompetence, dishonesty, gross mismanagement and even fraud all cover a wide spectrum of conduct. Comm. of Dalkon Shield Claimants v. A.H. Robins Co., Inc., 828 F.2d 239, 242 (4th Cir. 1987). 44. A chapter 11 debtor owes fiduciary duties to its estate, including obligations to
protect and conserve property in its possession for the benefit of creditors and [to refrain] from acting in a manner which could damage the estate, or hinder a successful reorganization. Ionosphere, 113 B.R. at 169 (citations omitted); see also West Oaks Mall, 2007 WL 3223295 at *3. Where a debtors management suffers from material conflicts of interest that prevent it from discharging its fiduciary duties, an independent trustee should be appointed. See West Oaks Mall, 2007 WL 3223295, at *3; see also, Marvel, 140 F.3d at 473 and Cajun Electric, 74 F.3d at
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600. Indeed, the willingness of courts to leave debtors in possession is premised upon an assurance that the officers and managing employees can be depended upon to carry out the fiduciary responsibilities of a trustee. Commodity Futures Trading Commn. v. Weintraub, 471 U.S. 343, 355 (1985). Therefore, the appointment of a trustee is a power which is critical for the Court to exercise in order to preserve the integrity of the bankruptcy process and to insure that the interests of creditors are served. Intercat, Inc., 247 B.R at 920. 45. For example, in In re Cardinal Industries, Inc., 109 B.R. 755 (Bankr. S.D. Ohio
1990), the Official Committees of Unsecured Creditors of the two debtors moved for the appointment of a chapter 11 trustee under section 1104(a)(1) by alleging (1) a lack or responsiveness by the debtor to communications and requests by the committees for financial and other information; (2) concern regarding the accuracy of the debtors record keeping; (3) an inability to stem operational losses; (4) unreasonable delay in marketing and selling unneeded assets; (5) conflicts in interest; and (6) a stalled negotiation process of the debtors chapter 11 plan. The bankruptcy court in Cardinal Industries held that notwithstanding the lack of clear evidence of dishonesty or fraud, the factors cited by the committees, when taken together, supported the appointment of a trustee pursuant to 1104(a)(1) because they evidenced a serious loss of confidence in current management. 46. Similarly, in In re Ionosphere Clubs, Inc., 113 B.R. 164 (Bankr. S.D.N.Y. 1990),
the bankruptcy court appointed a chapter 11 trustee upon the Official Committee of Unsecured Creditors motion pursuant to section 1104(a)(1). The bankruptcy court cited to the Debtors inability to formulate a business plan and make operating projections which have a longevity of more than several months, along with the continuing enormous operating losses being sustained by the estate. Ionosphere, 113 B.R. at 170. In addition, the bankruptcy court noted the
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demonstrated insufficient stability and resolve [of the Debtors] in keeping to its promises and agreements with the Committee and the risk posed to unsecured creditors funds by keeping in place current management. Id. The bankruptcy court refused to credit the Debtors arguments that leaks from the Committee and a general market downturn were to blame. Id. at 171. 47. In this case, there are a number of factors remarkably similar to the ones set forth
in Cardinal Industries and Ionosphere that demonstrate a total loss of confidence in current management by the Committee, Salus, individual creditors, and other parties in interest, and the need for the immediate appointment of an independent chapter 11 trustee. Gross Inability to Accurately Forecast Finances, Sustained Operational Losses and Misdirected Funds Have Resulted in the Inability to Secure Wind-Down Funding 48. Substantial operating losses combined with an inability of management to reliably
forecast operating results are sufficient grounds for appointment of a chapter 11 trustee. See In re Ionosphere Clubs, Inc., 113 B.R. 164, 170 (Bankr. S.D.N.Y. 1990). In this case, the Debtor incurred substantial operating losses, far in excess of managements forecast. For example, between the Petition Date and the week ending March 4, 2012, a forecast period of less than four months, the Debtor incurred operational losses in excess $5.2 million with a projected loss of only $3.5 million. See DIP Budget (Jan. 18, 2012). Stated differently, the Debtor underforecasted its short-term operational cash burn by nearly 50%. 49. The Debtors longer term forecast of its operational cash burn missed actual
results by an even greater degree. The Debtor projected an operational cash burn of $3.6 million between the Petition Date and the week ending June 17, 2012. During that time period, the Debtor incurred an actual operational cash burn of $8.5 million, representing a miss of its forecast by an astonishing $4.9 million, or 136%.
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50.
Information provided in the Disclosure Statement also reflects current
managements gross inability to value its assets. The Debtor stated that it expected more than sufficient funds from the auction of its remaining retail store assets to pay its DIP lender in full. Instead, the Debtor currently owes Salus approximately $1.5 million, and has unpaid sales taxes of perhaps as much as $2 million that Salus believed already had been paid. 51. Incredibly, the Disclosure Statement also provides that unsecured creditors will
receive a 100% payout of the allowed amount of their claims (less 20% carved out for equity holders). In contrast, the Debtor has scheduled unsecured claims totaling nearly $27 million.7 The Debtor currently owes approximately $1.5 million to Salus, owes up to $2 million in back sales taxes, has not paid professionals since February, and has accrued substantial other administrative expense claims, see Motion for Allowance of Administrative Claim for PostPetition Goods Provided [Doc. No. 778]. Thus, no calculation, even assuming the very highest (and unsupportable) valuations in the Disclosure Statement and unprecedented success in claims reconciliation, could result in a 100% return to unsecured creditors. These facts demonstrate either the Debtors total incompetence or that the Disclosure Statement reflects the continued illusion regarding the prospects for the Debtors reorganization created by the Chairman and the Board. 52. Of significant concern to the Committee was the Boards refusal to recognize and
stop the Debtors death spiral after the communication from the Debtors CEO in mid-April 2012. At that point, the Board knew that the Debtors liquidity situation would continue to deteriorate, regardless of improvement in sales, unless the Debtor received a major cash infusion. Email from S.Giordano (Apr. 17, 2012 6:06 PM) [Exhibit A]. At least one of the Board
Filed proofs of claim total approximately $38.5 million, but this does not include substantial lease rejection damages that have yet to be filed. Disclosure Statement, at 16.
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members had predicted this outcome. Id. The Chairman, who had taken it upon himself to handle capital raising, knew that a cash infusion before June would be impossible. Gidumal Tr. 141:3-7 (Mar. 29, 2012) [Exhibit D]; 175:8-24 (Mar. 30, 2012) [Exhibit D]. The Committee submits that the Boards refusal to shut down operations much earlier than it did significantly reduced the potential distribution to unsecured creditors. 53. Instead of making a decision in the best interest of creditors to pursue strategic
alternatives, including considering the immediate commencement of GOB sales in April 2012, the Board, led by its Chairman, drove the Debtor off the financial cliff. The lack of funding caused the Debtor to miss payroll temporarily and created serious confusion and concern among the Debtors remaining employees at a time when the estate desperately needs their continued service in order to carryout the retail store liquidations. Moreover, the Debtor collected amounts from the purchaser of the Debtors Dallas store assets that were earmarked for the payment of rent and used those amounts to pay other expenses. As the Committee has now learned, the situation grew so dire that the Board misdirected amounts received from Salus under the budget for the payment of sales taxes in an amount up to $2 million. As a result, Salus has lost all faith in the Board, refused to fund the Debtors wind-down operations, and has issued a notice that it has declared defaults under the DIP loan and intends to exercise its rights under the Final DIP Order to foreclose or liquidate its collateral, which includes the Debtors remaining assets. 54. The immediate appointment of a chapter 11 trustee may salvage any opportunity
to reach an agreement with Salus for wind-down funding, which will permit an orderly liquidation of the Debtors remaining assets. A chapter 11 trustee, with the assistance from Committee professionals, should be able to quickly prepare a reasonable budget for the Debtors wind-down and may instill needed confidence in the continued negotiations for funding.
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The Chairman and the Board Have Demonstrated Allegiance to Equity Holders Over Unsecured Creditors 55. The Committee believes that the Chairman and the Board have disregarded
fiduciary duties to maximize value for unsecured creditors in their pursuit of a return for equity. The Court need only look to the Plan and Disclosure Statement as evidence. At the hearing on the Exclusivity Motion, the Court heard evidence regarding the Debtors substantial operational cash burn and the Debtors failure to utilize its bankruptcy professionals, particularly its financial advisor. The Court gave the Debtor 60 additional days to file a plan, but the Board squandered the opportunity by continuing to fail to involve the Debtors financial advisor in the process and by filing an unconfirmable chapter 11 plan that calls for a distribution to equity holders before unsecured creditors are paid in full. 56. According to the Debtors proposed Disclosure Statement: [D]epending on the amount received from the Debtors Assets, including the MDG Interest and CDS Interest, there is a reasonable likelihood that [current equity holders] may receive a distribution in the future. The limitation on the payment [of 80%] to Holders of Allowed Unsecured Claims is, in part, due to the delay in Interest Holders being able to utilize a tax benefit by recognizing a potential loss of the value of their Interests upon Confirmation of the Plan, which in turn directly benefits Unsecured Creditors. Disclosure Statement, at 21. The logic in the consideration supporting the carve out of 20% from the return of unsecured creditors and payment of that amount to equity could only come from someone putting the interests of equity first. It is black letter law that, under the absolute priority rule, any assets of the Debtors estate, including tax benefits, must be received by unsecured creditors until their claims are paid in full, before equity interests are eligible to receive a distribution. See Bank of America Natl Trust & Savings Assn. v. 203 N. LaSalle St., 526 U.S.
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434, 119, S.Ct. 1411, 143 L.Ed. 2d. 607 (1999) (referencing the requirement of Bankruptcy Code 1129(b)(2)(B)(ii)). 57. The Plan also provides for the continued control of the Debtors affairs post-
confirmation by the current Board members. The Debtor only offers a token minority seat to a representative of the unsecured creditors. Plan 6.04. Thus, under the terms of the Plan, the current Board would control potential claims of the Debtors estate against current Board members, when the Board is aware that such claims may exist following the General Liability Notice of Occurrence/Claim sent to the Debtors D&O insurance carrier on March 23, 2012. This is just another example of the Chairman and the Board serving the wrong master in violation of its fiduciary duties to unsecured creditors. 58. The Chairman and Boards allegiance to equity is further evidenced by their
blackbox approach to managing the bankruptcy. For example, the Chairman fed only selective information to the Debtors bankruptcy professionals. On one particular meeting of the Debtors bankruptcy professionals with representatives of Salus, neither Debtors counsel nor financial advisor could answer key questions regarding the strategic plans of the Debtor. S.Coulombe Tr. 35:12-25, 36:1-14 (Apr. 3, 2012) [Exhibit E]; S.Coulombe Tr. 49:9-25, 50:1-24 (Mar. 20, 2012) [Exhibit F]. 59. The Chairman also improperly utilized the Debtors real estate professional to
negotiate the sale of the Debtors Dallas store inventory when that professional was only approved to market the Debtors leases. See Objection to Debtors Application for Order Supplementing Order Authorizing Employment and Retention of Julius M. Feinblum Real Estate Consultant Nunc Pro Tunc [Doc. No. 745]. The Chairman insisted on using the real estate professional because the Chairman knew that he could ultimately exercise unfettered control
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over the negotiation of the sales transaction. S.Giordano Tr. 56:11-25, 57:1-10 (Mar. 22, 2012) [Exhibit G]. 60. In order to conceal his allegiance to equity, the Chairman compartmentalized not
only the Debtors professionals, but members of senior management as well. For example, the Chairman relieved the Debtors CEO of any involvement with exploring strategic alternatives, equity raising, or negotiating the sale of assets, and restricted or attempted to restrict the Debtors CEO from contact with the Committee, Salus, the Debtors real estate professional, and Mr. Bojanowski. S. Giordano Tr. 52:19-25, 53:1-7 (Mar. 20, 2012) [Exhibit G]; Email from
S.Giordano (Feb. 22, 2012 10:52 AM) [Exhibit H]; Email from S.Gidumal (Mar. 12, 2012 4:15 PM) [Exhibit I] (When Giordano butts in on this as inevitably he will do, please tell him to deal through me. Steve [Giordano] has been stripped of all negotiating authority on the leases and on Dallas.); Email from S.Gidumal (Mar. 5, 2012 4:20 PM) [Exhibit J] (expressing annoyance with the CEOs unilateral Salus meeting and referencing that such meeting would be discussed at the Board meeting where the CEO was stripped of his authority). The Chairman then
misrepresented to the Debtors CEO that he had gotten us the exit funding. Email from S.Giordano (Feb. 22, 2012 10:52 AM) [Exhibit H]. 61. Even now, with the illusion surrounding the prospects of reorganization of the
Debtors retail stores evaporated, the Chairman will not give up control of the Debtor absent a release for all of his transgressions to date. These claims must be investigated by an independent party. A trustee likely will conclude, as the Committee has concluded, that the Chairmans goal throughout the case was a return for equity, which he sought to pursue through control of the Debtors interest in MDG, irrespective of what the value of that asset may have meant for restructuring the Debtor. In fact, the Chairmans paramount interest has always been MDG. As
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the Chairman testified during this deposition, he would never sell the Debtors interest in MDG, even if it meant saving Roomstore. Gidumal Tr. 137:21-25, 138:1 [Exhibit D]. 62. The Chairmans post-petition attempt to acquire the minority interest in MDG
comports with his plan. The plan all along was to carefully control, manage, and reap a windfall from the long-term sale of MDG. Thus, it is not a total surprise that Mr. Bojanowski recently revealed that he received an undisclosed offer by the Chairman of $2,000,000 for his minority interest in MDG after the Petition Date. Of course, as the Chairman also sat on the board of managers of MDG at the time, his failure to disclose his offer is inexcusable. 63. Evidence of the Chairmans wayward plan also flows from the Debtors attempt
to hire Northeast as its investment banker to market MDG. The Committee, Salus, and Mr. Bojanowski objected to the proposed retention of Northeast because of doubts concerning the process employed by the Chairman in selecting Northeast, and in Northeasts experience in the relevant industry. See Limited Response of Raymond T. Bojanowski [Doc No. 629]; Committee Objection [Doc No. 710]; Salus Response [Doc. No. 748]; and Surreply of Raymond T. Bojanowski [Doc No. 747]. The Debtor decided to hire Northeast over the alternative
investment bankers proposed by the Committee solely because [w]hen asked to provide their estimates of proper valuation multiples for MDG, [three of the four alternatives] gave estimates below segment norms and well below the Boards internal valuation estimates, and [the fourth alternative] did not directly respond. Omnibus Response 17 [Doc. No. 735]. In other words, the Chairman dismissed the alternative investment banker candidates because they disagreed with his unrealistic valuation of MDG, instead providing suggestions of value that would not realize a return for equity. Only on the day of the hearing, facing objections from each major
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creditor constituency, did the Chairman realize his folly, and the Debtor asked to continue the matter. But, the damage has been done. 64. Ironically, as a result of the Chairmans approach to this case, the realization of
any meaningful value from MDG is at risk. Unless the Court appoints a chapter 11 trustee to negotiate a potential expeditious, but appropriate, marketing process for MDG, the estate may not recover the full value for the Debtors interest in that asset. Numerous Indiscretions by the Debtor Under the Iron Grip of the Chairman Have Resulted in the Loss of Confidence in the Debtor 65. In conjunction with the gross inaccuracy of the Debtors financial projections, and
its extraordinary cash burn, the numerous indiscretions of the Debtor under the thumb of the Chairman have caused a total loss of confidence in the Board by the Committee, and upon information and belief, Salus, individual creditors, and Mr. Bojanowski. A significant loss of confidence in management by the very parties that the Debtor must deal with in order to successfully navigate this bankruptcy case is grounds for appointment of a chapter 11 trustee. See In re Cardinal Industries, Inc., 109 B.R. 755, 765 (Bankr. S.D. Ohio 1990). 66. One such indiscretion was the breach of two agreements with the Committee, one
of which was embodied in a stipulation and agreed order. As the bankruptcy court in Ionosphere pointed to, breaches of agreements with the Committee support the appointment of a chapter 11 trustee. Ionosphere, 113 B.R. at 170. 67. The first occurred, as the Committee has previously articulated, following entry
by the Debtor on February 1, 2012, into a side letter agreement with the Committee. The Debtor agreed to provide a timeline and outline of a process for marketing the company as a going concern to potential strategic buyers. The purpose of this request was to preserve value for unsecured creditors that would be lost if the Debtor was forced to liquidate based on a default on
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the DIP loan or failure to achieve milestones accompanying the DIP Loan. Upon information and belief, the Chairman directed the Debtor to disregard its obligations under the side letter, failing to hold even a single Board meeting to discuss the marketing of the Debtor to a strategic buyer as envisioned in the side letter. As the Committee now believes, had the Debtor marketed its business as a going concern, the illusion of the prospect for the Debtors reorganization would have disappeared in time for significant value for unsecured creditors to have been preserved. 68. The second occurred when the Debtor breached its agreement to begin a process
for marketing the Debtors interest in MDG. Pursuant to the Fifth Amendment Stipulation, which the Committee demanded be embodied in a court order as a result of the Debtors breach of the side letter, the Debtor agreed to execute a retention agreement with an investment banker on or before May 18, 2012, and to implement a marketing process for the Debtors interest in MDG as soon as possible. Fifth Amendment Stipulation 3 [Doc. No. 557]. Rather than jointly seek an investment banker candidate with the Committee, or ask for a list of candidates acceptable to the Committee, the Chairman, as has become customary, embarked on his own search and produced a candidate that neither the Committee, Salus nor Mr. Bojanowski found acceptable. 69. The Committee agreed to the Debtor having more time to select an alternative
investment banker premised on the condition that the Debtor contact and consider the alternative investment bankers offered by the Committee. As discussed above, the Chairman then dismissed the alternative bankers because they offered a realistic valuation of MDG. 70. If the Chairman was truly interested in acting on behalf of unsecured creditors, he
would not have adopted such an antagonistic position in connection with the retention of an investment banker to sell a non-operating asset, presumably for the primary if not exclusive benefit of unsecured creditors, particularly when it was a stipulation with the Committee that
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drove the process. As a result, the Committee and other creditors have no confidence in the ability of the Board to dispose of the Debtors remaining assets in a way that benefits unsecured creditors. 71. The Debtor also breached the Final Order Authorizing the Debtor to Obtain Post-
Petition Financing (Final DIP Order) [Doc. No. 222] despite repeated requests from the Committee to comply. Section 2.5.3 of the Final DIP Order provides: Each Friday, the Debtor will utilize a portion of the proceeds of the Revolving Credit Loans extended by Agent and Lenders to Debtor in accordance with the terms and conditions set forth in the Loan Agreement and the other Loan Documents to wire into an escrow acccout for the benefit of the Professionals (the Professional Fee Escrow Account). This provision in the Final DIP Order was specifically negotiated by the Committee in connection with the Committees agreement to consent to the DIP Loan. Upon repeated
inquiries, the Debtor finally admitted to never funding the Professional Fee Escrow Account. Email from L.Brubaker (Apr. 20, 2012 7:36 PM) [Exhibit K] (noting that escrow payments were not scheduled until June 2012). Further, despite agreement by the Debtor at the request of the Committee to fund the Professional Fee Escrow Account with catch-up payments, upon information and belief, the Debtor has not funded the Professional Fee Escrow Account with a single dime during the pendency of this case. Instead, professionals of the estate have not been paid since February, which would not have occurred if the Debtor had complied with the Final DIP Order. 72. Rather than ensure that sufficient funding would be available for professionals to
properly serve the Debtor and the Committee, the Chairman has directed the Debtor to object to professionals requests for payment. For example, in mid-April, sensing an impending cash shortage, the Debtor, under the direction of the Chairman, adopted a plan to object to all professional invoices that exceeded a threshold amount. Email from S.Gidumal (Apr. 16, 2012 30
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7:09 PM) [Exhibit A] ([I]t may require a bit of flexibility among you, me, Lewis and Brian to pull this all of timely in a way that helps Roomstores cash levels.). In furtherance of this plan, the Debtor prepared its objections to professional fees, including those of the Debtors, Saluss and the Committees professionals, prior to receiving the professionals monthly fee statements. Email from S.Giordano (Apr. 16, 2012 5:55 PM) [Exhibit A] (The only invoice we have received so far for March is a big one from Greenburg Traurig [sic]. Brian is waiting until we get the fourth DIP amendment signed before sending a letter he drafted to Greenburg Traurig [sic] and others (when we are invoiced) which he will use as a basis for his court objections on professional fees in general.) (emphasis added). The Debtor has since continued to object to professional fees without asserting a sound basis in an apparent attempt to manage cash flow, contributing to the loss of confidence in current management. 73. Confidence in the Chairman and the Board also has been lost as a result of the
lack of cooperation with the Committees investigation. As set forth in the Committees Rule 2004 Motion [Doc. No. 450] and the Motion for Show Cause [Doc. No. 567], the Debtor has been slow and non-responsive to certain of the Committees request for documents necessary for the Committee to conduct its investigation of the Debtors acts, conduct, assets, liabilities and financial condition pursuant to section 1103(c). Despite numerous requests from the
Committee, and the Courts entry of an order requiring the Debtor to produce documents, the Committee still believes that the Debtor has refused to fully respond to the document requests, particularly as the relate to the Chairman and the Board. Letter to A.Behlmann [Exhibit L]. 74. The Debtors failure to disclose key facts in this bankruptcy case also have
contributed to the total loss of confidence in current management. For example, the Debtor failed to disclose that its Chairman of the Board himself approached [the minority interest
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holder of MDG] post-bankruptcy with an offer of approximately $2 million to purchase [the minority interest holders] 35% interest in MDG. Declaration of Raymond T. Bojanowski [Doc. No. 747]. The Debtor also failed to disclose that a member of the Board was a licensed real estate agent with the Debtors real estate professional for a number of years and as recently as one month prior to the Petition Date. 75. To inject confidence into the remainder of this case, the Court should appoint a
chapter 11 trustee. An independent fiduciary may improve negotiations with Salus to secure funding for the Debtors wind-down, and salvage significant value for the Debtors remaining assets through an expeditious, but appropriate, marketing process. B. Appointment of a Trustee Under Section 1104(a)(2) Would be in the Best Interest of Creditors 76. Section 1104(a)(2) provides a more flexible standard for appointment and gives
the court discretion to appoint a trustee when to do so would serve the parties and estates interest. Marvel, 140 F.3d at 474. In determining whether a trustee should be appointed under section 1104(a)(2), courts lookto the practical realities and necessities. Ionoshpere, 113 B.R. at 168 (quoting Hotel Assocs., Inc. v. Trustees of Cent. States Se. & Sw. Areas Pension Fund (In re Hotel Assocs., Inc.), 3 B.R. 343, 345 (Bankr. E.D. Pa. 1980)). Among the factors considered by courts are: (i) the trustworthiness of the debtor; (ii) the debtor in possessions past and present performance and prospect for the debtors rehabilitation; (iii) the confidence - or lack thereof - of the business community and of creditors in present management; and (iv) the benefits derived by the appointment of a trustee, balanced against the cost of the appointment. Ionosphere, 113 B.R. at 168 (citations omitted). 77. The Committee submits that the reasons cited above support the appointment of a
chapter 11 trustee under section 1104(a)(1), but also support the appointment of a trustee under
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section 1104(a)(2). In addition, under section 1104(a)(2), the Court should weigh the costs of appointing a trustee against the benefits. 78. At this juncture of the case, the Debtor has cut its staff down to those essential
employees required to run the support systems for the liquidators. Most mid-level and some senior management have been terminated. The Debtor is no longer operating retail stores. The Committee believes that the cost of installing a trustee would be minimal given the current stage of the wind-down of the Debtors operations. 79. However, there is substantial value in the Debtors remaining assets that deserves
to be under the auspices of an independent bankruptcy professional. With the total loss of confidence in the Board, and conflicts of interest that drive the Chairmans decision making (with the Boards acquiescence), the Committee submits that the benefits of a trustee far outweigh the costs. Moreover, the inability of the Debtor to reach an agreement with Salus regarding the financing of the wind-down, and the intent of Salus to exercise its rights under the Final DIP Order to foreclose on its collateral, leaves significant risk and potential harm to the assets remaining in the estate. 80. Acrimony between a debtor and its creditors is another basis for the appointment
of a trustee under section 1104(a)(2). Marvel, 140 F.3d at 472. See also, In re V. Savino Oil & Heating Co., 99 B.R. 518, 527 n.11 (Bankr.E.D.N.Y. 1989) (Where, as here, it appears that no meaningful progress towards reorganization is possible because of deep rooted animosities between a Debtor and major creditors, an independent reorganization trustee may well be necessary to insulate the reorganization process from paralytic conflict.). 81. Obstructionist behavior by the Chairman has poisoned the relationship between
the Committee, as well as other creditors and interested parties, and the Debtor. As discussed
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above, the Chairman has refused to cooperate fully with the Committees document requests. His compartmentalization of the Debtors bankruptcy professionals has left the Committee, at times, with very limited access to important information. 82. So long as the Chairman and the current Board remains, the Committee and
individual creditors of the Debtors estate simply cannot trust the Board to perform in a manner that will be in the best interests of the Debtors estate or creditors. The Committees
investigation and other facts in this case have revealed the Chairmans true agenda. As a result, if the Board remains as presently staffed, the balance of this case will surely be unnecessarily litigious, expensive, and unproductive. Given its severity, this acrimony between the Board and the Committee, in and of itself, is sufficient reason to appoint a chapter 11 trustee. Moreover, if Salus exercises its rights against its collateral, a quick sale of the Debtors interest in MDG without a marketing process may result in the substantial loss of value for the estate. The appointment of chapter 11 trustee may represent the last hope for unsecured creditors to realize any value in this case. Notice 83. Notice of this Motion has been given to the Core Group and the 2002 List as
required by the Order Establishing Notice, Case Management and Administrative Procedures [Docket No. 189] and Local Bankruptcy Rule 2004-1.8 In light of the nature of the relief requested, the Committee submits that no further notice is required. WHEREFORE, the Committee respectfully request that this Court appoint a chapter 11 trustee to replace the Debtors Board of Directors, and such other and further relief as this Court deems appropriate.
Capitalized terms used in this paragraph 22 but not otherwise defined herein shall have the meanings set forth in the Order Establishing Notice, Case Management and Administrative Procedures [Docket No. 189].
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Dated:
July 19, 2012
HUNTON & WILLIAMS LLP /s/ Justin F. Paget Tyler P. Brown (VSB No. 28072) Justin F. Paget (VSB No. 77949) Eric W. Flynn (VSB No. 78488) HUNTON & WILLIAMS LLP Riverfront Plaza, East Tower 951 East Byrd Street Richmond, Virginia 23219-4074 Telephone: (804) 788-8200 Telecopier: (804) 788-8218 Counsel for the Official Committee of Unsecured Creditors
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LOCAL BANKRUPTCY RULE 2002-1 CERTIFICATE OF SERVICE I hereby certify on this 19th day of July, 2012, a copy of the foregoing was delivered by electronic means to all parties who receive notice in this case pursuant to the Courts CM/ECF system and/or by electronic mail pursuant to the Order Establishing Notice, Case Management and Administrative Procedures [Docket No. 189] docketed in this case. /s/ Justin F. Paget Tyler P. Brown (VSB No. 28072) Justin F. Paget (VSB No. 77949) Eric W. Flynn (VSB No. 78488) HUNTON & WILLIAMS LLP Riverfront Plaza, East Tower 951 East Byrd Street Richmond, Virginia 23219-4074 Telephone: (804) 788-8200 Telecopier: (804) 788-8218 Counsel for the Official Committee of Unsecured Creditors
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79005.000002 EMF_US 41193613v4
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Exhibit A
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[POTENTIALLY SUBJECT TO CONFIDENTIALITY AGREEMENT - Omitted Pending Debtors Consent or Motion to File Under Seal]
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Exhibit B
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Lambert, Matthew A.
From: Sent: To: Cc: Subject: Brookner, Jason [JBrookner@andrewskurth.com] Monday, June 11, 2012 12:31 PM krosen@lowenstein.com; bbuechler@lowenstein.com; Brown, Tyler; Paget, Justin F. King, Bruce RoomStore: Post-petition Payables to Steve Silver Company
Attachments: Roomstore post petition AR.pdf Gentlemen (and in particular, Ken and Bruce), we represent Steve Silver Company, a prepetition and postpetition creditor of The RoomStore, Inc. The Debtor has failed to pay $178,705.93 in postpetition payables to Steve Silver, for postpetition deliveries made. Such amounts are now past due. A schedule showing the invoice amounts, dates due, etc. is attached hereto for your convenience. There is also an additional $17,175.08 coming due between June 21 and June 23, as well as another $11,224.73 coming due on August 7, all for deliveries that have already been made. Please advise whether the Debtor will promptly make payment of the past due amounts and whether the Debtor intends to promptly pay the amounts coming due in June and August (or whether the Debtor is willing to pay the June and August amounts right now). If the Debtor has any issues/disputes with the attached spreadsheet, please let us know so that we can work through any such issues/disputes in an effort to avoid the time and expense for both parties in connection with filing a request for payment of administrative claim and having a contested hearing. Many thanks in advance.
Jason S. Brookner Partner Andrews Kurth LLP 1717 Main Street, Suite 3700, Dallas, Texas 75201 214.659.4457 Phone | 214.659.4829 Fax 450 Lexington Avenue, New York, New York 10017 212.850.2835 Phone | 212.850.2929 Fax Email: jbrookner@akllp.com vCard | Bio | andrewskurth.com
Confidentiality Notice: The information contained in this e-mail and any attachments to it may be legally privileged and include confidential information intended only for the recipient(s) identified above. If you are not one of those intended recipients, you are hereby notified that any dissemination, distribution or copying of this e-mail or its attachments is strictly prohibited. If you have received this email in error, please notify the sender of that fact by return e-mail and permanently delete the e-mail and any attachments to it immediately. Please do not retain, copy or use this e-mail or its attachments for any purpose, nor disclose all or any part of its contents to any other person. Thank you
7/3/2012
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Treasury Circular 230 Disclosure: Any tax advice in this e-mail (including any attachment) is not intended or written to be used, and cannot be used, by any person, for the purpose of avoiding penalties that may be imposed on the person. If this e-mail is used or referred to in connection with the promoting or marketing of any transaction(s) or matter(s), it should be construed as written to support the promoting or marketing of the transaction(s) or matter(s), and the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
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Roomstore, Inc. Post petition open invoices (after 12/12/2011 bankruptcy date) SUMMARY AS OF 6/11/2012: Past Due Due 6/21 6/23/2012 Due 8/7/2012 TOTAL at 6/11/2012
178,705.93 17,175.08 11,224.73 207,105.74
DETAIL INVOICES AT 6/11/2012: Invoice# Inv Date Due Date Terms 1041361 12/30/2011 1/29/2012 Net 30 1046030 1/19/2012 5/18/2012 Net 120 1046596 1/23/2012 5/22/2012 Net 120 1061218 3/22/2012 4/21/2012 Net 30 1064294 4/2/2012 5/2/2012 Net 30 1064419 4/3/2012 5/3/2012 Net 30 1064526 4/3/2012 5/3/2012 Net 30 1064534 4/3/2012 5/3/2012 Net 30 1065113 4/5/2012 5/5/2012 Net 30 1065114 4/5/2012 5/5/2012 Net 30 1065829 4/9/2012 8/7/2012 Net 120 1065830 4/9/2012 8/7/2012 Net 120 1065831 4/9/2012 5/9/2012 Net 30 1065832 4/9/2012 5/9/2012 Net 30 1065833 4/9/2012 5/9/2012 Net 30 1065834 4/9/2012 5/9/2012 Net 30 1065835 4/9/2012 5/9/2012 Net 30 1066077 4/10/2012 5/10/2012 Net 30 1066078 4/10/2012 5/10/2012 Net 30 1066235 4/10/2012 5/10/2012 Net 30 1066291 4/10/2012 5/10/2012 Net 30 1066494 4/11/2012 5/11/2012 Net 30 1067192 4/13/2012 5/13/2012 Net 30 1069135 4/23/2012 5/23/2012 Net 30 1069619 4/24/2012 5/24/2012 Net 30 1069621 4/24/2012 5/24/2012 Net 30 1071379 4/30/2012 5/30/2012 Net 30 1071910 5/2/2012 6/1/2012 Net 30 1072671 5/7/2012 6/6/2012 Net 30 1076390 5/22/2012 6/21/2012 Net 30 1076391 5/22/2012 6/21/2012 Net 30 1076564 5/22/2012 6/21/2012 Net 30 1077471 5/24/2012 6/23/2012 Net 30
Invoice Amt Open Amt Days Old 24.50 24.50 164 11,084.70 5,454.75 144 33,471.64 16,394.28 140 102.90 102.90 81 20.58 20.58 70 102.90 102.90 69 41,946.84 41,946.84 69 7,472.50 7,472.50 69 16.66 16.66 67 20.58 20.58 67 10,529.73 10,529.73 63 695.00 695.00 63 681.10 681.10 63 17,304.84 17,304.84 63 611.52 611.52 63 1,722.84 1,722.84 63 1,155.42 1,155.42 63 18,112.00 18,112.00 62 22,198.00 22,198.00 62 20,638.27 20,638.27 62 19.60 19.60 62 32.83 32.83 61 24,207.77 24,207.77 59 41.16 41.16 49 117.60 117.60 48 144.06 144.06 48 125.44 125.44 42 20.58 20.58 40 16.41 16.41 35 9.31 9.31 20 123.48 123.48 20 16,972.47 16,972.47 20 69.82 69.82 18 229,813.05 207,105.74
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Exhibit C
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Exhibit D
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IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION
IN RE: ROOMSTORE, INC., Debtor.
1
) )
Case No. 11-37790-DOT Chapter 11
ORIGINAL
2004 EXAMINATION OF STEVEN L. GIDUMAL
VOLUME I
March 29th, 2012
Halasz Reporting & Videoconference 1011 E. Main Street, Suite 220 Richmond, VA 23218-1644 Reported by: Keith Williamson, RPR
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would contemplate raising outside capital, which I believe is doable. There's a lot of interest in the business, particularly if it's stabilized. If it's not stabilized there is no interest. So I think we could raise capital on the assumption that we stabilize it and a significant amount. Now the ying yang of this, to give you one issue, is the 503 (b)(9) claims are somewhere between two and three million dollars. The good news is that the preference claims are about 2.6 million. So we
might be able to draw on the preference to fund some of the reclamation. I may be throwing my words around, but I meant the 503(b) (9)s. What's the right word for that, is that administrative reclamation?
You're doing just fine.
503
(b)(9) is
the correct way to refer to it.

A
You wouldn't call it reclamation or
administrative, would you?
For purposes of our discussion I'm okay
with you calling them reclamation if that's what you want to call it.
It's a tongue twister, the 5 0 3 . Let's call them reclamation.
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get a million and a half to go to the creditors. If we raise five maybe we can get a half a million to a million, because people want to see the money in the business. Maybe we can try to overwhelm the problem a little bit if we sell the CDS assets and we get maybe four million in, let's say we find that maybe the next of that four million two is needed to stabilize inventory and advertising and so on, but the next two may end up going to the end of the case is surplus and therefore you're going to use that to pay out the investors. To anticipate your next question, and even though you didn't want me to say it and Troy didn't want me to lead it, I do want to get this out, what we don't want to do is sell to Mattress Discounter. That is not, in your side, putting my hat, putting my fiduciary hat on you guys, you should be loathe to sell that under any circumstances.
So from your perspective even if
RoomStore has to get completely liquidated but for the 65 percent interest in MDG, your view would be the company should still not sell it to save RoomStore? A Yes, that's my view.
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COMMONWEALTH OF VIRGINIA AT LARGE, to wit:
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5
I, Keith Williamson, RPR, Notary Public in and
for the Commonwealth of Virginia at large certify that the aforementioned appeared before me, was sworn by me, and was thereupon examined by counsel and that the foregoing is a true, correct, and full transcript of the testimony adduced. I further certify that I am neither related to nor associated with any counsel or party to this proceeding, nor otherwise interested in the event thereof. Given under my hand and notarial seal at Richmond, Virginia, on March 31st, 2012.
6
7
8
9
10 11
12 13 14 15 16
Keith Williamson, RPR Notary Public in and for the Commonwealth of Virginia at Large
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IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION
IN RE: ROOMSTORE, 1NC.t Debtor.
1
) )
Case No. 11-37790-DOT Chapter 11
1 1
ORIGINAL
2004 EXAMINATION OF STEVEN L. GIDUMAL
VOLUME I1
March 30th, 2012
Halasz Reporting & Videoconference 1011 E. Main Street, Suite 220 Richmond, VA 23218-1644 Reported by: Keith Williamson, RPR
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merging growth equities and providing financial statements or other data to them? A I think we did. And what did you provide? They asked for our financials and we They asked for information on
Q
A
sent them that.
Mattress Discounters and we sent them that.
I take it from your testimony though
that like Oppenheimer, Emerging Growth Equities would need to see a return to positive sales year over year and you don't project that to happen until probably the fall at the earliest; is that correct? A Yeah. It's hard to say because maybe In my head I'm
we'll have a good May and June.
thinking like when did we - - when did sales really start hitting the wall because of our lack of inventory last year, and then how would that reflect because we're coming back with a stronger inventory footprint this year. So July, August and September, October were definitely those four months and let's cleave off October because by that time it's clear we should be able to do better in October because we were having problems by then. But these interesting months of July, August and September were definitely
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COMMONWEALTH OF VIRGINIA AT LARGE, to wit:
I, Keith Williamson, RPR, Notary Public in and for the Commonwealth of Virginia at large certify that the aforementioned appeared before me, was sworn by me, and was thereupon examined by counsel and that the foregoing is a true, correct, and full transcript of the testimony adduced. I further certify that I am neither related to nor associated with any counsel or party to this proceeding, nor otherwise interested in the event thereof. Given under my hand and notarial seal at Richmond, Virginia, on March 31st, 2012.
Keith Williamson, RPR Notary Public in and for the Commonwealth of Virginia at Large
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Exhibit E
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UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF VIRGINIA IN RE: . . . ROOMSTORE, INC., . . . . Debtor. . . . . . . . . . . . . . .. Case No. 11-37790-DOT
701 East Broad Street Richmond, VA 23219 April 3, 2012 11:15 a.m.
EXCERPTED TRANSCRIPT OF THE TESTIMONY OF STEPHEN COULOMBE BEFORE HONORABLE DOUGLAS O. TICE, JR. UNITED STATES BANKRUPTCY COURT CHIEF JUDGE APPEARANCES: For the Debtor: Lowenstein Sandler PC By: BRUCE D. BUECHLER, ESQ. 65 Livingston Avenue Roseland, NJ 07068 Hunton & Williams LLP By: TYLER P. BROWN, ESQ. Riverfront Plaza, East Tower 951 East Byrd Street Richmond, VA 23219 Greenberg Traurig LLP By: JEFFREY M. ROSENTHAL, ESQ. 200 Park Avenue Florham Park, NJ 07932
For the Official Committee of Unsecured Creditors:
For Salus Capital:
For Mattress Discounters Arent Fox LLP Group & Raymond T. By: MARK B. JOACHIM, ESQ. Bojanowski: 1050 Connecticut Avenue, NW Washington, DC 20036 Proceedings recorded by electronic sound recording, transcript produced by transcription service ______________________________________________________________ J&J COURT TRANSCRIBERS, INC. 268 Evergreen Avenue Hamilton, New Jersey 08619 E-mail: jjcourt@jjcourt.com (609) 586-2311 Fax No. (609) 587-3599
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Coulombe - Cross/Brown
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1 the loan requires the debtor to start a GOB sale process for 2 the entire company beginning April 16? 3 A 4 Q Thats my understanding. And at this point Salus has not agreed to extend that
5 deadline of April 15 have they? 6 A 7 Q They have not extended the deadline to date. Right. And a request has been made by the debtor of Salus
8 that they do so, correct? 9 A 10 Q 11 A 12 Q Thats correct. And the request has not been granted, correct? To my knowledge as of this date it hasnt been granted. All right. Were you in -- have you been involved in
13 discussions with Salus about the loan and the debtors 14 performance against the loan? 15 A Ive had a number of discussions with representatives from
16 Salus. 17 Q And some of those discussions centered around the fact
18 that the debtor has on occasion missed some of its budget 19 requirements? 20 A 21 Q Yes. And as part of those discussions did the, did the
22 representatives of Salus want to know what was going on with 23 the Dallas sale transaction? 24 A 25 Q Yes. And did they ask you about it? WWW.JJCOURT.COM
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Coulombe - Cross/Brown
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1 A 2 Q
On many occasions. And you were not in a position to provide the details
3 about that, correct? 4 A Thats correct, but they did have access to the board
5 member who was involved in the Dallas discussions. 6 Q Well that wasnt my question, Mr. Coulombe. My question
7 to you was you didnt have access to that information, correct? 8 A 9 Q 10 A 11 Q I think I have stated I wasnt involved in -Right. -- those discussions. And Mr. Buechler was on that call with you with Salus and
12 he didnt have the information about the Dallas transaction 13 either did he? 14 A 15 Q Thats correct. Thats because the board was handling it, not the debtors
16 financial representative and not the debtors counsel, correct? 17 A 18 Q 19 that. I think Ive stated that before. Right. Is Salus worried about, well, let me rephrase
Are you worried about the liquidity of this debtor going
20 forward? 21 MR. BUECHLER: Objection, speculation and no
22 foundation as to how the -23 24 A THE COURT: You may answer.
Following the sale of, of Dallas as is proposed, the
25 companys liquidity does increase and were coming into a WWW.JJCOURT.COM
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Coulombe - Redirect/Buechler
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1 you know if the Salus business people had access to people at, 2 at the debtor RoomStore who were familiar with the proposed 3 transaction? 4 A 5 6 Honor. 7 8 9 10 11 12 13 * * * * * C E R T I F I C A T I O N I, JANET D. PERSONS, court approved transcriber, THE COURT: MR. BROWN: Anything else, Mr. Brown? Nothing else, Your Honor. I believe that to be true. MR. BUECHLER: Nothing further on redirect, Your
(END OF REQUESTED PORTION)
14 certify that the foregoing is a correct transcript from the 15 official electronic sound recording of the proceedings in the 16 above-entitled matter to the best of my ability. 17 18 19 /s/ Janet D. Persons 20 JANET D. PERSONS 21 J&J COURT TRANSCRIBERS, INC. 22 23 24 25 WWW.JJCOURT.COM Date: April 25, 2012
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Exhibit I
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Room Store-895-Motion of The Offical Committee of Unsecured Creditors For Entry of An Order Directing The Appointment of A Chapter 11 Trustee

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Room Store-895-Motion of The Offical Committee of Unsecured Creditors For Entry of An Order Directing The Appointment of A Chapter 11 Trustee

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Case 11-37790-DOT

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Chapter 11 Case No.: 11-37790-DOT

In support of the Motion, the

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1104 of the Bankruptcy Code.

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Information provided in the Disclosure Statement also reflects current

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July 19, 2012

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178,705.93 17,175.08 11,224.73 207,105.74

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IN RE: ROOMSTORE, INC., Debtor.

Case No. 11-37790-DOT Chapter 11

March 29th, 2012

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You're doing just fine.

the correct way to refer to it.

You wouldn't call it reclamation or

administrative, would you?