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Joseph A. Friedman (State Bar No. 07468280) Jason B. Binford (State Bar No. 24045499) KANE RUSSELL COLEMAN & LOGAN PC 3700 Thanksgiving Tower 1601 Elm Street Dallas, Texas 75201 Telephone - (214) 777-4200 Telecopier - (214) 777-4299 Email: ecf@krcl.com PROPOSED ATTORNEYS FOR DEBTORS ALL SMILES DENTAL CENTER, INC. AND AS PROPERTY HOLDINGS, LLC

THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION IN RE: ALL SMILES DENTAL CENTER, INC., et al. 1 DEBTORS.

CASE NO. 12-32924-SGJ-11 Chapter 11 Jointly Administered Hearing: June 26, 2012 at 1:30 p.m. Objection Deadline: June 15, 2012

DEBTORS MOTION FOR ENTRY OF AN ORDER UNDER 11 U.S.C. 105, 363, AND 503 AUTHORIZING IMPLEMENTATION OF DEBTORS MANAGEMENT INCENTIVE BONUS PLAN A HEARING WILL BE CONDUCTED ON THIS MATTER ON JUNE 26, 2012 AT 1:30 P.M. IN COURTROOM #1, UNITED STATES COURTHOUSE, 1100 COMMERCE STREET, DALLAS, TEXAS. ANY RESPONSE SHALL BE IN WRITING AND FILED WITH THE CLERK, AND A COPY SHALL BE SERVED UPON COUNSEL FOR THE MOVING PARTY ON OR PRIOR TO JUNE 15, 2012. IF A RESPONSE IS FILED A HEARING MAY BE HELD WITH NOTICE ONLY TO THE OBJECTING PARTY.

The Debtors in these chapter 11 cases are All Smiles Dental Center, Inc. and AS Property Holdings, LLC.

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The debtors and debtors-in-possession in the above-styled bankruptcy cases, (the "Debtors") file this Motion for Entry of an Order Under 11 U.S.C. 105, 363, and 503 Authorizing the Implementation of Debtors' Management Incentive Bonus Plan (the "Motion") and in support thereof respectfully state as follows: JURISDICTION AND VENUE 1. This Court has jurisdiction over this matter pursuant to 28 U.S.C. 157 and

1334. This is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(A). Venue is proper in this district pursuant to 28 U.S.C. 1409. BACKGROUND 2. On May 2, 2012 (the "Petition Date") the Debtors each filed voluntary petitions

for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). Since that time, the Debtors have continued to operate as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. 3. On May 4, 2012, the Court entered an Order Directing Joint Administration of the

Debtors' Chapter 11 Cases [Doc. No. 28], thus providing that the Debtors' cases shall be administered under case number 12-32924. 4. On May 15, 2012, the United Trustee appointed the Official Committee of

Unsecured Creditors (the "Committee") in these cases. 5. On May 17, 2012, counsel for the Debtors met with then-proposed counsel for the

Committee to discuss all pending matters in the cases, including an outline of the proposed Management Incentive Bonus Plan. Since that meeting, the Debtors understand that the

Committee is seeking to retain new counsel. As such, the Debtors do not currently know the Committee's position on the relief requested herein.
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6.

As explained in greater detail in the Declaration of Neil Minihane in Support of

First Day Motions [Doc. No. 21] (the "Declaration"), 2 debtor All Smiles Dental Center, Inc. ("Inc.") is a management service organization providing management support services for nondebtor All Smiles Dental Professionals, P.C. ("PC"). Due to various regulatory events described in the Declaration and the unprofitability of the remaining orthodontic business, Inc. and PC believe that PC must exit the orthodontic practice in an expedited manner in the early part of these Chapter 11 cases. Inc. is in the process of assisting PC to exit orthodontics consistent with the professional responsibilities outlined by the State Board of Dental Examiners ("SBDE") of PC's dentists and orthodontists to their patients. THE MANAGEMENT INCENTIVE BONUS PLAN 7. The Debtors have identified eight employees of Inc. who provide services in key

areas or who have particular knowledge and experience regarding the matters vital to the ongoing operations, assisting PC's exit from the orthodontic business, and the reorganization of the Debtors (the "Key Employees"). Moreover, as other employees have been terminated or voluntarily left for other employment, many of the Key Employees have been asked to expand their roles and assume new responsibilities. Not only have the Key Employees been vital to the efficient administration of the Debtors' estates up until now, but they have been identified by the Debtors' management as being integral to the Debtors' successful reorganization. Accordingly, the Debtors' Interim President, Neil Minihane, has devised a Management Incentive Bonus Plan, as described below, to incentivize these Key Employees by offering bonus payments based on specifically identifiable milestones associated with the Debtors' proposed exit from Chapter 11.

Capitalized terms not otherwise defined in this Motion have the meanings ascribed to them in the Declaration.

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The Management Incentive Bonus Plan is necessary, reasonable, and in the best interests of the Debtors' estates. 3 8. The Management Incentive Bonus Plan consists of two bonus payments. At the

discretion of the Debtors' management, the first bonus payment will be payable upon the Debtors' successful management of PC's exit from orthodontic services. This is a key element to PC being able to shift its practice area to solely general dentistry, and hence, to the Debtors' reorganization into a company only supporting a general dentistry practice. The Debtors, with the critical assistance of the Key Employees, are currently working toward this goal. This includes labor-intensive tasks such as providing staff, record access, and logistics related to the orthodontists' preparation of letters to patients advising of termination of treatment or managing the SBDE professional dismissal process while managing the customer services issues with orthodontic patients and their families. Without the assistance of the Key Employees, PC would not be able to timely and professionally exit the orthodontic practice, resulting in significant additional costs to PC and the Debtors' estates arising from lack of organization and profitability in the orthodontic business at PC. 9. At the discretion of the Debtors' management, the second bonus payment will be

payable upon the Debtors' successful exit from bankruptcy, as evidenced by this Court's confirmation of a plan of reorganization. After the Debtors facilitate PC's exit from the

orthodontic practice, the services of the Key Employees will continue to be required in order to complete the myriad of tasks associated with the successful restructuring of PC as a general dentistry practice managed by Inc. These services include, but are not limited to, removing Inc. personal property, turning over the facilities to the respective landlords, reorganizing the
3

Mr. Minihane is not a "Key Employee" and will not receive any bonus under the proposed Management Incentive Bonus Plan.

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management operations to support the different PC needs, record relocation and organization, identifying and installing processes and procedures associated with the State Settlement Agreement Requirements, 4 identifying the executory contracts and leases to be assumed or rejected by the Debtors, developing financial projections, identifying the amount of exit financing necessary, working through the myriad of patient and employee uncertainty issues associated with the bankruptcy process and answering general questions associated with the plan and with the Debtors' business. 10. The gross amount of the Management Incentive Bonus Plan payments will be up

to $180,250. Each installment will total up to $90,125. There will be no carry over from the first installment to the second. The eight Key Employees eligible for bonuses under the Management Incentive Bonus Plan are: Name John Bevill Esther Castaneda John Garry Spring Helser Diana Loft Michael Lozich Jon Morgan Lisa Mullinix 11. Position Operations Director West Human Resource Manager Controller Doctor Recruiter Facilities Director Chief Compliance Officer Vice President of Information Technology Operations Director - East

All of the Key Employees are employees of Inc. None of the Key Employees

have any affiliation with the Debtors' equity holder and post-petition lender, ASDC Holdings, LLC. Moreover, of the eight Key Employees eligible under the Management Incentive Bonus Plan, only 1 employee (Chief Compliance Officer Michael Lozich) arguably is an "insider," as defined under section 101(31) of the Bankruptcy Code. Given the host of regulatory issues facing the Debtors, Mr. Lozich will play a key role in both assuring a proper exit from
4

For more information on the State Settlement Agreement, see the Declaration beginning at 13.

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orthodontics and in properly restructuring the general dentistry practice, along with negotiating and managing the implementation of the Corporate Integrity Agreement contemplated in the State Settlement Agreement. 12. The specific amount of the Management Incentive Bonus Plan payment each Key

Employee will be eligible to receive will be based upon percentage of the Key Employee's salary ranging from 15% to 25%. Seven of the Key Employees received offer letters upon the

commencement of their employment proposing bonus payments consistent with this percentage of their salary. The remaining Key Employee did not receive such an offer letter. This Key Employee will be eligible to be paid a bonus at the low end of the percentage range. 13. Contemporaneously with the filing of this Motion, the Debtors are filing a motion

to file the complete Management Incentive Bonus Plan under seal (the "Motion to Seal"). The complete Management Incentive Bonus Plan shows confidential and proprietary information including the current salary of each Key Employee and the percentage bonus payments. The

Motion to Seal will also seek a protective order providing procedures for parties in interest to request a copy of the complete Management Incentive Bonus Plan and to maintain its confidentiality. RELIEF REQUESTED 14. By this Motion, the Debtors seek authority, under sections 105(A), 363(b)(1), and

503(c) of the Bankruptcy Code, to implement the Management Incentive Bonus Plan. Actual payment of any bonus under the Management Incentive Bonus Plan, however, will be at the discretion of the Debtors' management.

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A.

The Management Incentive Bonus Plan Should be Authorized Under Bankruptcy Code Sections 105(a) and 363(b) 15. The Debtors ability to maximize the value of their estates for the benefit of all

creditors depends largely upon incentivizing certain Key Employees. The Key Employees have critical institutional knowledge and experience with the Debtors business operations. Defections of Key Employees at this point would likely cause the Debtors to incur significant costs in recruiting and attracting similarly qualified replacements. Finding qualified replacement employees with similar institutional knowledge would be extremely difficult, if not impossible. 16. Accordingly, because the Key Employees plan an important role in the operation

of the Debtors' business, and because they will play an important role in managing PC's exit from orthodontics and the transformation to a general dentistry practice, as well as the formulation and execution of the Debtors' reorganization, it is imperative that compensation incentives be in place. (1) Implementation of the Management Incentive Bonus Plan is a Valid Exercise of the Debtors' Business Judgment Under Bankruptcy Code Section 363(b)

17.

Bankruptcy Code section 363(b)(1) permits implementation of the Management

Incentive Bonus Plan. Section 363(b)(1) permits a debtor-in-possession to use property of the estate other than in the ordinary course of business after notice and a hearing. 11 U.S.C. 363(b)(1). Uses of estate property outside the ordinary course of business may be authorized if the debtor demonstrates a sound business purpose. See In re Montgomery Ward Holding Corp., 242 B.R. 147, 153 (D. Del. 1999) (affirming bankruptcy court approval of key employee retention program and stating that in determining whether to authorize the use, sale, or lease of property of the estate under [section 363(b)], courts require the debtors to show that a sound business purpose justifies such actions); Myers v. Martin (In re Martin), 91 F.3d 389, 395 (3d
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Cir. 1996) (noting that under normal circumstances, courts defer to a trustees judgment concerning use of property under section 363(b) when there is a legitimate business justification); In re Del. & Hudson R.R. Co., 124 B.R. 169, 176 (D. Del. 1991) (explaining that the Third Circuit has adopted the sound business purpose test to evaluate motions brought pursuant to section 363(b) of the Bankruptcy Code). 18. A debtors use of reasonable bonuses and other incentives to maintain and

incentivize employees is a valid exercise of a debtors business judgment. See, e.g., In re Am. West Airlines, Inc., 171 B.R. 674, 678 (Bankr. D. Ariz. 1994) (it is the proper use of debtors business judgment to propose bonuses for employees who helped propel the debtor successfully through the bankruptcy process); In re Interco Inc., 128 B.R. 229, 234 (Bankr. E.D. Mo. 1991) (debtors business judgment was controlling in the approval of a performance/retention program). 19. The Debtors ability to maximize the value of their assets would be substantially

hindered if the Debtors are unable to maintain and incentivize the Key Employees who possess institutional knowledge and experience. Because the Management Incentive Bonus Plan will provide Key Employees with appropriate financial incentives, the recoveries to the estates will be maximized. 20. Accordingly, the Debtors believe they have demonstrated sound business

judgment and that the relief requested herein is in the best interests of the Debtors, their estates, and their creditors.

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(2)

Implementation of the Management Incentive Bonus Plan is Also Authorized Under Bankruptcy Code Section 105(a)

21.

Bankruptcy Code section 105(a) authorized the Court to issue any order, process,

or judgment that is necessary to carry out the provisions of [the Bankruptcy Code]. 11 U.S.C. 105(1). As outlined above, the Debtors believe retention of the Key Employees and

implementation of the Management Incentive Bonus Plan are critical to their ability to maximize the value of the estates. Accordingly, implementation of the Management Incentive Bonus Plan an appropriate exercise of the Debtors business judgment, necessary and in the best interest of the Debtors, their estates, and their creditors, and should be approved under Bankruptcy Code sections 105(a) and 363(b). B. The Management Incentive Bonus Plan Should be Authorized Under Bankruptcy Code Section 503(c)(3) 22. Although the Debtors believe the Management Incentive Bonus Plan should be

approved based on their sound business judgment pursuant to section 363(b)(1), out of an abundance of caution, the Debtors also seek approval of the Management Incentive Bonus Plan under Bankruptcy Code section 503(c)(3). 23. Section 503(c)(3) permits implementation of the Management Incentive Bonus

Plan under the facts and circumstances of these chapter 11 cases. Section 503(c) sets forth certain criteria courts may use when approving payments to insiders and other transfers or obligations that are outside the ordinary course of business. 11 U.S.C. 503(c). Bankruptcy Code section 503(c) includes three subsections: (a) a general prohibition on retention plans for insiders; (b) limitations on severance payments to insiders; and (c) standards governing other transfers to officers. 11 U.S.C. 503(c). For the reasons set forth herein, the Management Incentive Bonus Plan does not implicate Bankruptcy Code sections 503(c)(1) and 503(c)(2).
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24.

Bankruptcy Code section 503(c)(1) pertains solely to retention plans and section

503(c)(2) addresses only the requirements for severance plans. Neither provision applies to performance or incentive-based plans. See In re Nellson Neutraceutical, Inc., 369 B.R. 787, 804 (Bankr. D. Del. 2007) (finding plan was not retention-based because primary purpose was motivation and section 503(c) was not applicable); In re Global Home Prods., LLC, 369 B.R. 778, 787 (Bankr. D. Del. 2007) (The Court is fully satisfied that Debtors are asking it to approve incentive, not retention plans and, therefore, 503(c) does not come into play.). Further, if sections 503(c)(1) and (c)(2) are not operative, a court may consider whether the payments are permissible under section 503(c)(3), which limits payments made to management and employees, among others, outside the ordinary course, unless such payments are shown to be justified under the facts and circumstances of the chapter 11 case. In re Dana Corp., 358 B.R. 567, 576 (Bankr. S.D.N.Y. 2006). Because the Management Incentive Bonus Plan is not

motivated by retention or severance, but rather is an incentive-based plan tied to specific milestones, the Management Incentive Bonus Plan should be analyzed by the Court under section 503(c)(3). Id. (finding that section 503(c)(3) gives the court discretion as to bonus and incentive plans, which are not primarily motivated by retention or in the nature of severance). 25. The test applied to analyze a plan under section 503(c)(3) is no more stringent

than the test applied in approving an administrative expense under section 503(b)(1)(A). Id. (citing In re Nobex Corp., 2006 WL 4063024 (Bankr. D. Del. Jan. 19, 2006) (concluding that section 503(c)(3) was nothing more than a reiteration of the standard under section 363 under which courts had previously authorized transfers outside the ordinary course of business based on the business judgment of the debtor)). The business judgment standard is the proper standard for determining whether incentive programs are justified under section 503(c)(3). See,
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e.g., In re Borders Group, Inc., 453 B.R. 459, 474 (Bankr. S.D.N.Y. 2011) (finding that "the legal standard under section 363(b) is no different than section 503(c)(3)," and that therefore the business judgment test applied); Nellson Neutraceutical, 269 B.R. at 804 (same); Global Home Prods., 369 B.R. at 787 (same). 5 Because the Debtors designed and plan to implement the Management Incentive Bonus Plan using proper business judgment, as discussed above, the Court should authorize payments under the Management Incentive Bonus Plan pursuant to section 503(c)(3). Accordingly, the Debtors submit that the requirements contained in section 503(c)(3) are satisfied and the Management Incentive Bonus Plan should be approved by the Court. PRAYER WHEREFORE, the Debtors respectfully request that this Court: (i) grant this Motion and the relief requested herein; (ii) enter the proposed order attached hereto; and (iii) grant such other and further relief as it deems just and proper.

But see In re Pilgrim's Pride Corp., 401 B.R. 229, 236-37 (Bankr. N.D. Tex. 2009) (holding that section 503(c)(3) "is intended to give the judge a greater role: even if a good business reason can be articulated for a transaction, the court must still determine that the proposed transfer or obligation is justified in the case before it."). While the Debtors do not agree that a higher standard than the Debtors' business judgment is applicable, the facts and circumstances of these cases support granting the Motion, even under the standard articulated in Pilgrim's Pride.
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Dated: May 25, 2012.

Respectfully submitted,

KANE RUSSELL COLEMAN & LOGAN PC By:/s/ Jason Binford Joseph A. Friedman Texas State Bar No. 07468280 Jason B. Binford Texas State Bar No. 24045499 3700 Thanksgiving Tower 1601 Elm Street Dallas, Texas 75201 Ph: (214) 777-4200 Fax: (214) 777-4299 Email: jfriedman@krcl.com PROPOSED COUNSEL FOR THE DEBTORS CERTIFICATE OF SERVICE This is to certify that service of the foregoing document was effected through Electronic Notice for Registered Participants and to all creditors shown on the attached Official Service List by e-mail (if an e-mail address is indicated), or otherwise by United States Mail, first class postage prepaid, on the 25th day of May, 2012. /s/Jason Binford Jason B. Binford

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