IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

Chapter 11 In re Bicent Holdings LLC, et al., Debtors. Case No. 12-11304 (KG) (Jointly Administered)
Hearing Date: July 30, 2012 at 2 p.m. Objections Due: July 23, 2012 at 4 p.m. Extended to July 23, 2012 at midnight for the U.S. Trustee

UNITED STATES TRUSTEES OBJECTION TO CONFIRMATION OF THE DEBTORS FIRST AMENDED JOINT PLAN OF REORGANIZATION Roberta A. DeAngelis, the United States Trustee for Region 3 (U.S. Trustee), by and through her undersigned attorneys, hereby submits this Objection to Confirmation of the Debtors First Amended Joint Plan Of Reorganization under Chapter 11 of the Bankruptcy Code (the Plan)[Dkt. No. 205], and in support of that objection states as follows: PRELIMINARY STATEMENT 1. The Debtors Plan, which provides zero distribution to unsecured

creditors, is not confirmable because it contains releases to be given by the Debtors in favor of numerous non-debtor parties who have not made a substantial contribution to the Plan, and which otherwise fail to comply with the elements required for such releases under applicable law. The Debtors Plan is also not confirmable because it contains an exculpation clause that is not limited to estate fiduciaries, as required by the case law in this District. 2. For these reasons, as set forth in greater detail below, confirmation of the

Debtors Plan should be denied, unless the Debtors limit the scope of their releases and the exculpation provision to what is permissible under applicable law.

JURISDICTION 3. Under (i) 28 U.S.C. 1334, (ii) applicable order(s) of the United States

District Court for the District of Delaware issued pursuant to 28 U.S.C. 157(a), and (iii) 28 U.S.C. 157(b)(2), this Court has jurisdiction to hear and determine this objection. 4. Pursuant to 28 U.S.C. 586(a)(3), the U. S. Trustee is charged with

administrative oversight of the bankruptcy system in this District. Such oversight is part of the U. S. Trustees overarching responsibility to enforce the laws as written by Congress and interpreted by the courts. See United States Trustee v. Columbia Gas Systems, Inc. (In re Columbia Gas Systems, Inc.), 33 F.3d 294, 295-96 (3d Cir. 1994) (noting that the U. S. Trustee has public interest standing under 11 U.S.C. 307 which goes beyond mere pecuniary interest); Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500 (6th Cir. 1990) (describing the U. S. Trustee as a watchdog). 5. Under 11 U.S.C. 307, the U.S. Trustee has standing to be heard on the

issues raised in this objection. FACTUAL BACKGROUND 6. On April 23, 2012 (the Petition Date), the Debtors filed voluntary

petitions for relief under chapter 11 of the Bankruptcy Code. The Debtors have been in possession of their respective properties and operate their business as debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 7. The U.S. Trustee has not appointed an official committee of unsecured

creditors, due to lack of sufficient interest. 8. On April 30, 2012, the Debtors filed the Disclosure Statement for Debtors

Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the Disclosure

Statement) [Dkt. No. 49]. On June 8, 2012, the Debtors filed their Amended Disclosure Statement Dated as of June 8, 2012, for Debtors First Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the Amended Disclosure Statement), which attached the amended Plan [Dkt. No. 206]. 9. See Dkt. No. 207. 10. The Plan provides for the following distributions: (a) Administrative claims, priority claims and DIP Financing Claims1 are to be paid in full. See Plan, III.A, D and E and IV.A. (b) The First Lien Credit Facility Lenders shall receive 95% of the New Bicent Common Interests, to be issued on the Effective Date. See Plan, IV.C.2. (c) The Second Lien Credit Facility Lenders shall receive $1.5 million in cash and New Warrants for 5% of the New Bicent Common Interests, and all outstanding Second Lien Agent Fee Claims shall be paid in full, provided the class of Second Lien Credit Facility Lenders vote to accept the Plan. See Plan, IV.D.2. (d) General unsecured creditors, mezzanine credit facility claimants and equity interests shall not receive any distribution under the Plan, and are presumed to reject the Plan. See Plan, IV.E, F, H and I. 11. The Plan contains broad releases (the Debtor Releases) to be given by On June 8, 2012, this Court approved the Amended Disclosure Statement.

the Debtors in favor of numerous non-debtor parties ( the Released Parties). The Plan also contains an exculpation provision that benefits those same Released Parties, as well as the

Any capitalized terms not defined herein shall have the definition provided in the Plan.

Debtors, and the Reorganized Debtors, even though most of the parties to be exculpated are not fiduciaries of the Debtors estates.2 Debtors Releases 12. principal part: On the Effective Date, the Debtors and the Reorganized Debtors, on behalf of themselves and their Estates, shall be deemed to release unconditionally (a) all of their respective direct and indirect shareholders and owners as well as their, and each of their direct and indirect shareholders and owners, respective officers, directors, members, employees, partners, managers, advisors, attorneys, financial advisors, accountants, and other professionals and representatives, including Bicent Prime Holdings LLC, Beowulf, Beowulf (Bicent) LLC, Beowulf (Bicent) IU LLC, Natural Gas Partners VIII, L.P., Natural Gas Partners IX, L.P., NGP IX Offshore Holdings, L.P. and Paul Prager, (b) (i) the DIP Agent, DIP Lenders and the Issuing Bank (as defined in the DIP Credit Facility), (ii) the First Lien Agent, First Lien Credit Facility Lenders, First Lien Consenting Lenders, Goldman Swap Counterparty and the Issuing Bank (as defined in the First Lien Credit Agreement) and other agents thereunder . . . and (iii) the Second Lien Agent, Second Lien Credit Facility Lenders and Second Lien Consenting Lenders . . . ; and (c) officers, directors, principals, members, employees, partners, subsidiaries, affiliates, advisors, attorneys, financial advisors, accountants, and other professionals and representatives of each of the parties listed in clauses (b)(i) through (b)(iii) above (all such parties in (a), (b) and (c), collectively, the Released Parties, and each a Released Party) from any and all claims, obligations, suits, judgments, damages, rights, Causes of Action and liabilities whatsoever, whether known or unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity or otherwise (including, without limitation, those arising under 11 U.S.C. 541-550 and interest or other carrying costs, penalties, legal, accounting and other professional fees and expenses and incidental, consequential and punitive damages payable to third parties), based in whole or in part upon actions taken solely in their respective capacities described above or any omission, transaction, event or other occurrence taking place on or prior to
2

The provision in the Plan addressing the Debtors Releases provides, in

The Plan also includes third party releases. See Plan VIII.J. Such releases are being given solely by those entities that vote to accept the Plan and who do not check a box on the ballot that allows them to opt-out of the releases. See id. Therefore, no general unsecured creditors, or any other holders of claims or interests in non-voting classes, shall be deemed to give any releases under the Plan. 4

the Effective Date in any way relating to the Debtors, the Chapter 11 Cases or the Plan, except that (i) no individual shall be released from any act or omission that constitutes gross negligence or willful misconduct as determined by a Final Order, . . . Plan VIII.I. Exculpation 13. The Plan provision titled Exculpation provides, in principal part:

The Debtors, the Reorganized Debtors, and the other Released Parties (i) shall have no liability whatsoever to any holder or purported holder of an Administrative Claim, a Claim, or an Equity Interest for any act or omission in connection with, or arising out of, the Plan, the Disclosure Statement, the Restructuring Support Agreement, the negotiation of the Plan, the Disclosure Statement or the Restructuring Support Agreement, the negotiation of the Plan Supplement Documents, the pursuit of approval of the Plan or Disclosure Statement or the solicitation of votes for confirmation of the Plan, the Chapter 11 Cases, the consummation of the Plan, the administration and implementation of the Plan or the property to be distributed under the Plan, or any transaction contemplated by the Plan or Disclosure Statement or in furtherance thereof except for any act or omission that constitutes willful misconduct or gross negligence as determined by a Final Order, and (ii) in all respects, shall be entitled to rely upon the advice of counsel with respect to their duties and responsibilities under the Plan. This exculpation shall be in addition to, and not in limitation of, all other releases, indemnities, exculpations and any other applicable law or rules protecting such Released Parties from liability; provided that, nothing herein shall constitute a release of any rights, claims, defenses and obligations in respect of the Barclays Swap Termination Dispute, including any amounts that may be owing by the Barclays Swap Counterparty to the Debtors under, or in respect of, the Barclays Swap Agreements.

Plan, VIII.K.1.

ARGUMENT The Debtors Releases and Exculpation Are Impermissibly Broad Under Applicable Law 14. The Debtor Releases and the exculpation provision set forth in the Plan are

contrary to the standards set forth by this Court in In re Washington Mutual, Inc., 442 B.R. 314 (Bankr. D. Del. 2011)(Walrath, J.), In re Tribune Company, 464 B.R. 126 (Bankr. D. Del. 2011)(Carey, J.), and other applicable case law, as detailed below. A. Releases by the Debtors and Their Estates 15. The Plan provides broad releases by the Debtors and their estates of many

non-debtor parties. Pursuant to this Courts decision in Washington Mutual, and Tribune, among others, the five factors set forth in In re Zenith Elecs. Corp., 241 B.R. 92, 110 (Bankr. D. Del 1999) and In re Master Mortgage Inv. Fund, Inc., 168 B.R. 930, 937-38 (Bankr. W. D. Mo. 1994) should be considered to determine whether, notwithstanding 524(e) of the Code, a plan may provide for releases by debtors of non-debtor entities. See Washington Mutual, 442 B.R. at 346; Tribune 464 B.R. at 186; In re Spansion, Inc., 426 B.R. 114, 142-43, n. 47 (Bankr. D. Del 2010)(Carey, J.) ; In re Coram Healthcare Corp., 315 B.R. 321, 335 (Bankr. D. Del. 2004)(Walrath, J). Those factors are as follows: i. identity of interests between debtor and non-debtor releasee, so that a suit

against the non-debtor will deplete the estates resources (e.g. due to debtors indemnification of non-debtor); ii. iii. iv. v. substantial contribution to the plan by non-debtor; necessity of release to the reorganization; overwhelming acceptance of plan and release by creditors; and payment of all or substantially all of the claims of the creditors and

interest holders under the plan.

Washington Mutual, 442 B.R. at 346 (citing Zenith, 241 B.R. at 110 (citing Master Mortgage, 168 B.R. at 937)); Tribune 464 B.R. at 186 (citing Zenith). The factors are neither exclusive nor conjunctive requirements, but simply provide guidance in the Courts determination of fairness. Tribune 464 B.R. at 186, citing Washington Mutual, 442 B.R. at 346. 16. In the present cases, neither the Plan nor the Disclosure Statement address

whether any of the Zenith factors are met for any of the Released Parties. It appears, however, that none of the Zenith factors are present with respect to any of the Released Parties, except that the first factor, identify of interest, may apply to a few of the Released Parties, as discussed in more detail below. 17. For ease of analysis, the Released Parties can be broken down into the

following categories: (i) The Debtors officers, directors, members, employees, partners, managers, advisors, attorneys, financial advisors, accountants, and other professionals and representatives, including Paul Prager, who is the CEO of the Debtors. (ii) The Debtors direct and indirect shareholders and owners, and all of such shareholders and owners respective officers, directors, members, employees, partners, managers, advisors, attorneys, financial advisors, accountants, and other professionals and representatives, including the Beowulf entities that supply the Debtors officers. (iii) The DIP Agent and DIP Lenders, which are a subset of the First Lien Credit Facility Lenders. (iv) (v) (vi) The First Lien Agent and First Lien Credit Facility Lenders. The Second Lien Agent and the Second Lien Credit Facility Lenders. The officers, directors, principals, members, employees, partners, 7

subsidiaries, affiliates, advisors, attorneys, financial advisors, accountants, and other professionals and representatives of the DIP Agent and DIP Lenders and of the First and Second Lien Agents and First and Second Lien Credit Facility Lenders. 18. With respect to the first Zenith factor, which is identity of interests

between the Debtors and non-debtor releasees, the only Released Parties as to whom such factor could arguably apply are Mr. Prager and the other officers of the Debtors, and the Beowulf entities who employed such officers. The first Zenith factor would not appear to have any application to any of the other Released Parties, such as the Debtors shareholders and owners, the Debtors lenders, or the lenders officers, directors, members, employees, affiliates and professionals. 19. As to the second Zenith factor, the Debtors have not identified any

substantial contribution made to the Plan by any of the Released Parties. An example of a substantial contribution would be if a Released Party made a lump sum payment to the Plan, thereby allowing the Debtors to make a distribution to unsecured creditors. See, e.g., Coram, 315 B.R. at 335. In Coram, after examination of the Zenith factors, this Court allowed the debtors to release noteholders who had contributed $56 million in funding to the plan, which funds allowed the debtors to repay in full all creditors other than the noteholders, as well as make a significant distribution to the debtors shareholders. Id. None of the Released Parties in the present cases has made any cash contribution, or any other substantial contribution, to the Plan. (a) The Debtors officers, employees and professionals have not made a substantial contribution to the Plan. While such persons may have assisted in negotiating or drafting the Plan, that alone does not qualify as a contribution to the Plan that would justify a release. See Washington

Mutual, 442 B.R. at 349-50, 354. In Washington Mutual, this Court held that there was no basis for allowing debtor releases or third party releases of the debtors directors, officers, or professionals when their only contribution was the negotiation of the global settlement and plan, which was part of their jobs, for which they received compensation. Id. Moreover, as in the present cases, the debtors directors, officers and professionals in Washington Mutual were to receive exculpation for their post-petition activities, and therefore the Court found that releases were unnecessary, duplicative and exceed the limits of what they are entitled to receive. 442 B.R. at 350. The same is true here. (b) There is no indication that any of the Debtors shareholders and owners, let alone such shareholders and owners officers, directors, employees, and professionals, contributed any funds to the Plan, or otherwise made any substantial contribution to the Plan. (c) The DIP Lenders made the DIP loan, but such a loan is not a contribution to the Plan. Moreover, the DIP Lenders will be repaid such loans in full under the Plan. See Plan, III.E. The DIP Lenders will also provide exit financing, but such financing will be used for the benefit of the DIP Lenders, as well as to the First Lien Credit Facility Lenders and the Second Lien Credit Facility Lenders, who will be the shareholders in the reorganized Debtors. See Exhibit F to the Plan Supplement, Dkt. No. 275 (proposed term sheet for Exit Financing). The unsecured creditors will not benefit from such financing. (d) There is nothing in the Plan or Disclosure Statement to indicate that the First and Second Lien Credit Facility Lenders have made contributions to the Plan. (e) Finally, there is no evidence that the last category of Released Parties, which are the lenders officers, directors, members, employees, affiliates and professionals, have provided any contribution to the Plan.

20.

As to the third Zenith factor, the Debtors have not asserted, let alone

provided proof, that the release of any of the Released Parties is necessary to the reorganization. 21. The fourth and fifth Zenith factors cannot be met under any circumstance

under the Debtors Plan. Those factors are (a) the overwhelming acceptance of plan and release by creditors, and (b) payment of all or substantially all of the claims of the creditors and interest holders under the plan. There cannot be an overwhelming acceptance of plan and release by creditors because the unsecured creditors are not permitted to vote on the Plan, and are deemed to reject it. Nor does the Plan provide for payment of all or substantially all of the claims of the creditors and interest holders. To the contrary, the Plan provides that no portion of the claims of any unsecured creditors or interest holders will receive any distribution under the Plan. 22. Finally, the releases being provided by the Debtors in favor of the DIP

Lenders, First Lien Credit Facility Lenders and Second Lien Credit Facility Lenders, as well as those entities officers, directors, members, employees, affiliates and professionals, are also duplicative of the expansive releases such entities received in the Final Order Authorizing the Debtors to Obtain Post-Petition Financing (the DIP Financing Order). See Dkt. No. 117, E.h (pp. 17-19).3

The releases in the DIP Financing Order provide that the Debtors, and anyone who claims an interest by, through or under them or their estates, forever and irrevocably release, discharge and acquit the former, current or future DIP Agent, DIP Lenders, First and Second Lien Agents and First and Second Lien Credit Facility Lenders, and each of their respective former, current or future officers, employees, directors, owners, members, professionals and other representatives from any and all claims or liabilities, whether known or unknown, arising out of, or relating to the DIP Financing, DIP Documents, First Lien Documents, Second Lien Documents, or the transactions contemplated thereunder, including any avoidance, set-off, recharacterization, subordination, or lender-liability claims, any claims 10

23.

In sum, none of the Zenith factors appear to be present for any of the

Released Parties, except that the first factor, identity of interests, may be present for the officers of the Debtors, and the Beowulf entities who employed those officers. That factor alone is insufficient to justify the Debtors release of their officers or the Beowulf entities, let alone the release of any other of the Released Parties. See Washington Mutual, 442 B.R. at 349-350 (finding insufficient basis for the debtors release of their directors, officers and professionals, even though one of the Zenith factors, identity of interest, was present), citing Gillman v. Continental Airlines (In re Continental Airlines), 203 F.3d 203, 216 (3d Cir. 2000). 24. The Debtors have the burden to establish whether the Zenith factors have

been met as to each of the non-debtors who are the beneficiaries of the Debtor Releases. Because an evidentiary predicate is necessary to approve the Debtor Releases, the U.S. Trustee reserves argument on this issue until the record at the confirmation hearing is closed. B. Exculpation 25. Section VIII.K.1 of the Plan provides an exculpation in favor of all of the

Released Parties who are the beneficiaries of the Debtor Releases, and further exculpates the Debtors themselves, as well as the Reorganized Debtors, despite that fact that the latter will not exist until the Plan becomes effective. 26. As stated by the Court in Washington Mutual, an exculpation clause must

be limited to the fiduciaries who have served during the chapter 11 proceeding: estate professionals, the Committees and their members, and the Debtors directors and officers. Washington Mutual, 442 B.R. at 350-51 (emphasis added); accord Tribune, 464 B.R. at 189

under title 11 of the U.S. Code, and all claims with respect to the validity, priority, perfection or avoidability of the liens or claims of the First or Second Lien Agent or First or Second Lien Credit Facility Lenders, or the DIP Agent or DIP Lenders. See DIP Financing Order, Dkt. No. 117, E.h (pp. 17-19). 11

(holding that exculpation clause must exclude non-fiduciaries); In re PTC Holdings LLC, 55 Bankr. Ct. Dec 206, 2011 Bankr. LEXIS 4436, *38 (Bankr. D. Del. Nov. 10, 2011)(Shannon, J.)(sustaining U.S. Trustee objection to the exculpation clause, stating that the exculpation clause here must be reeled into include only those parties who have acted as estate fiduciaries and their professionals); see also In re PWS Holding Corp., 228 F.3d 224, 246 (3d Cir. 2000) (the creditors committee, its members and estate professionals may be exculpated under a plan for their actions in the bankruptcy case, except for willful misconduct or gross negligence). 27. The exculpation clause in the Bicent Plan includes many parties other

than estate fiduciaries, such as the Debtors direct and indirect shareholders and owners, the prepetition First and Second Lien Credit Facility Lenders and agent banks, the DIP Lenders, and all such parties respective officers, directors, members, employees and professionals. In fact, the only parties who are eligible for an exculpation in these cases are the Debtors officers serving during the Chapter 11 cases, and the Debtors attorneys, financial advisors and other professionals. See Washington Mutual, 442 B.R. at 350-51; Tribune, 464 B.R. at 190; PTC Holdings, 2011 Bankr. LEXIS 4436, *38. 28. The Reorganized Debtors are covered by the exculpation clause even

though do not yet exist, and therefore have yet to do anything for which they need exculpation. See Washington Mutual, 442 B.R. at 348 (rejecting the release of the liquidating trustee, because, inter alia, the trustee has not yet taken any action for which he needed a release). The Plans exculpation provision is also impermissibly broad under Washington Mutual, because it covers actions that have not yet occurred. For example, the Debtors, the Reorganized Debtors and all Released Parties are exculpated for the consummation of the Plan, the administration and implementation of the Plan or the property to be distributed under the Plan, or any

12

transaction contemplated by the Plan or Disclosure Statement or in furtherance thereof. . . . Plan, VIII.K.1. 29. Unless the exculpation provision in the Plan is amended so it is limited to

fiduciaries of the Debtors estates, and does not include actions to take place in the future, the Plan should not be confirmed. 4

CONCLUSION 30. As detailed above, the Plan is not confirmable because it the scope of the

Debtor Releases and the exculpation provision are significantly broader than what is permitted under applicable law in this District. 31. The U.S. Trustee leaves the Debtors to their burden and reserves any and

all rights, remedies and obligations to, inter alia, complement, supplement, augment, alter and/or modify this objection, file an appropriate Motion and/or conduct any and all discovery as may be deemed necessary or as may be required and to assert such other grounds as may become apparent upon further factual discovery.

There is a third issue with the exculpation clause, which relates to the provision allowing reliance upon advice of counsel. However, the Debtors counsel has indicated that such provision will be omitted in a further amendment to the Plan. Similarly, there are a number of other objections the U.S. Trustee had with the Plan that appear to have been consensually resolved with the Debtors and will be reflected in such further amendment. The U.S. Trustee reserves all rights with respect to such objections if they are not resolved by way of such further amendment. 13

WHEREFORE, the U.S. Trustee respectfully requests that this Court issue an order denying confirmation of the Plan, and/or granting such other relief as this Court deems appropriate, fair and just.

Dated: July 23, 2012 Wilmington, Delaware

Respectfully submitted, ROBERTA A. DeANGELIS UNITED STATES TRUSTEE By: /s/ Juliet Sarkessian Juliet Sarkessian, Esquire Trial Attorney United States Department of Justice Office of the United States Trustee J. Caleb Boggs Federal Building 844 King Street, Suite 2207, Lockbox 35 Wilmington, DE 19801 (302) 573-6491 (302) 573-6497 (Fax)

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