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Objection Deadline: September 13, 2012 at 4:00 p.m. Hearing Date: September 20, 2012 at 10:00 a.m.

David M. Friedman (DFriedman@kasowitz.com) Adam L. Shiff (AShiff@kasowitz.com) Robert M. Novick (RNovick@kasowitz.com) Jeffrey R. Gleit (JGleit@kasowitz.com) KASOWITZ, BENSON, TORRES & FRIEDMAN LLP 1633 Broadway New York, New York 10019 Telephone: (212) 506-1700 Facsimile: (212) 506-1800 Counsel for the Official Committee of Former Partners UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------X : In re : : DEWEY & LEBOEUF LLP, : : Debtor. : : ---------------------------------------------------------------X

Chapter 11 Case No. 12-12321 (MG)

OBJECTION OF THE OFFICIAL COMMITTEE OF FORMER PARTNERS TO THE DEBTORS MOTION FOR ENTRY OF AN ORDER, PURSUANT TO BANKRUPTCY RULE 9019 AND 11 U.S.C. 105(a) AND 362, APPROVING PARTNER CONTRIBUTION SETTLEMENT AGREEMENTS AND MUTUAL RELEASES FOR PARTICIPATING PARTNERS The Official Committee of Former Partners (the FPC) appointed in the chapter 11 case of the above-captioned debtor and debtor-in-possession (the Debtor or Firm) submits this objection (the Objection) to the Debtors Motion for Entry of an Order, Pursuant to Bankruptcy Rule 9019 and 11 U.S.C. 105(a) and 362, Approving Partner Contribution Settlement Agreements and Mutual Releases for Participating Partners (the PCP Motion). For the reasons set forth herein, the FPC believes that the PCP Motion should be denied.

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PRELIMINARY STATEMENT The PCP Motion seeks an unlawful advisory opinion that the PCP1 is in the best interests of the estate. Although the Debtor nominally seeks approval of the PCP under Bankruptcy Rule 9019, the settlements cannot be implemented except through confirmation of a plan of reorganization. Until then, there is no case or controversy to confer subject matter jurisdiction over the PCP Motion. The Court may not determine this critical plan element when there is no plan on file and no disclosure statement has been approved. Nor should the Court do so. Isolating approval of the PCP from approval of a plan deprives the court and stakeholders of a meaningful context in which to evaluate the PCP: its impact, for good or for bad, upon the timing and amounts of distributions to creditors; the amount of administrative expenses the estate may incur or save; the means of implementation of the settlement, including post-confirmation governance matters; the implementation of PCP releases, including controversial third-party injunctions; and a liquidation analysis. Furthermore, without adequate disclosure and a solicitation and voting process, it is impossible to know whether for purposes of confirmation or analysis of the Rule 9019 factors if there is creditor support for the PCP that extends beyond those who are direct participants in the proposed transaction. Finally, evaluating the PCP at this time threatens to waste estate and judicial resources. As long as the terms of the still-hypothetical plan for implementation of the PCP are unknown, as long as there is continuing optionality for Participating Partners to withdraw from the PCP, as long as a plan has not obtained the requisite creditor approval for confirmation, and as long as any examiner that may be appointed has not concluded its investigation, consideration of the

Capitalized terms used but not defined herein shall have the meanings assigned to them in the PCP Motion.

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PCP is a needless gamble of time and effort because any of these (and many other) contingencies may be resolved in a manner that moots the PCP Motion. In any event, the PCP Motion is without merit because it is predicated upon an incorrect legal standard. The PCP is a proposed transaction between the Debtor and its insiders and affiliates. Such a transaction must be evaluated under the entire fairness doctrine, not, as the PCP Motion suggests, the Debtors subjective (and conflict-riddled) business judgment. The Debtor thus is required to demonstrate that the PCP is entirely fair as to both price and process. The Debtor cannot surmount that burden for multiple reasons. First, the settlement process has been indelibly tainted by management conflicts. The Debtor is managed by individuals who remain partners and who were actively engaged in many of the Debtors most controversial pre-petition actions. Even if they are well-intentioned, they have personal relationships with former colleagues, personal biases regarding pre-petition transactions and the cause of the Debtors demise and, most importantly, concerns with regard to their own personal exposure. Second, there was no arms-length bargaining that is at the heart of any fair deal. The evidence establishes that the Debtor never demanded the return of anything close to the roughly $430 million that it paid out to partners in 2011 and 2012, and the Debtor completely ignores the period prior to 2011. Rather, the Debtor negotiated a minimum aggregate amount for the PCP that would be acceptable to the Debtors Secured Lenders those creditors who were the least at risk and thus started out by proposing a settlement for less than 21% of its potential disgorgement claims, and was negotiated down from there. This is either a stunningly negligent negotiating tactic or a result of interestedness. If the PCP is approved, no one will ever know

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how much more money the Debtor could have recovered had it gone into negotiations with the objective of maximizing value rather than appeasement. Third, the Debtor has not analyzed its claims, either before negotiating the settlement or in seeking its approval. Although the PCP Motion is peppered with platitudes about the complexity and uncertainty of litigation (as if any litigation were simple and easy), the Debtor fails to provide any analysis and, indeed, concedes that it performed none regarding potential tort claims against former partners or when the Debtor became insolvent. The Debtor also completely ignores the period prior to 2011, when additional hundreds of millions of dollars were distributed to partners. And the Debtor completely ignores the question of when it became undercapitalized, a condition that may have arisen much earlier than the Debtors as-yet undetermined date of insolvency, which provides an alternative standard to insolvency for asserting constructive fraudulent transfer claims. Similarly, no analysis was performed to recover guaranteed payments to insiders under 11 U.S.C. 548(a)(1)(B)(IV). The paucity of analysis of the merits of the claims the Debtor seeks to settle prevents the PCP from meeting the legal requirements for approval by the Court. Fourth, and flowing naturally from all of the preceding problems, the economics of the PCP are not entirely fair and in fact are well below the range of reasonableness. With vestbusting pride, the Debtor repeatedly touts the roughly 80% participation level in the PCP. The partners widespread enthusiasm for the PCP is the best evidence that the deal is too cheap from the perspective of the estate (an observation repeatedly offered in the press by counsel for the Creditors Committee). The Debtor was not supposed to have been courting potential defendants but maximizing creditor recoveries. The potential defendants enthusiastic support is exactly the wrong reason to approve the PCP.

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The PCP is a collection of hundreds of individual settlements with individual partners, arrived at by reference to a common formula. However, there has been no disclosure by the Debtor of the relative exposure and culpability of the individual settling parties, no doubt because the Debtor has not performed a meaningful analysis. The Court cannot determine, for example, whether a no-fault settlement is appropriate for a particular partner without knowing something about that partners pre-petition activity. The Court cannot determine whether the up to 20% surcharge for potential misconduct by former members of the Executive Committee is appropriate without knowing something about the decisions and other actions taken by Executive Committee members. The PCP simply is an attempt to cut deals at the lowest possible level that some creditors will accept rather than an attempt to maximize the value of the estate. The FPC fully understands and appreciates that there is a benefit to getting money sooner and with greater certainty. But not at all costs. This settlement likely will yield unsecured creditors less than 10 cents on the dollar, maybe much less. While the PCP is certainly expedient, it is the proverbial fast track into a brick wall. While certain creditor constituencies can be expected to voice their support for the PCP, creditor support is but one of many other factors that the Court must consider. And the Court undoubtedly will recognize that claims traders who bought secured debt cheaply and who will profit from their outsized share of the estate are hardly the best spokesmen for the fairness of these settlements. Neither is the Creditors Committee, of which at least two of its three members have much to gain by remaining on good terms with the Debtors departed partners. If creditor support for the PCP is to be meaningfully considered, that support (or nonsupport) should be reflected through creditor suffrage after a disclosure statement has been approved.

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The FPC welcomes a fair settlement of the Debtors claims consistent with the Debtors observance of its fiduciary duties. The PCP does not qualify. BACKGROUND A. The Partner Contribution Plan and PCP Motion. 1. On August 29, 2012, the Debtor filed the PCP Motion. In support of the PCP

Motion, the Debtor submitted the Declaration of Jonathan A. Mitchell (cited herein as Mitchell Decl.), the Debtors Chief Restructuring Officer (the CRO); the Declaration of David Pauker (cited herein as Pauker Decl.), a managing director of Goldin Associates, LLC (Goldin); and the Declaration of Scott E. Ratner, counsel to the Debtor. 2. Under the PCP, a former partners Partner Contribution Amount incorporates

three components: (1) a PCP Amount based on payments received by the former partner during 2011 and 2012 (but not earlier periods such as December 2010); (2) an amount attributable to unreimbursed tax advances made by the Firm on behalf of the partner; and (3) an amount on account of any capital contributions contractually due and owing from the partner. (PCP Motion 6; Pauker Decl. Ex. 1.) The PCP Amount which overwhelmingly is the largest component of the Participating Partners proposed settlement does not allocate individual partners potential liability in connection with tort claims, including breach of fiduciary duty and gross negligence claims. 3. The executed PCP includes the following changes from the version of the PCP

that was made public on July 11, 2012: A reduction of the minimum allocated contribution amount of retirees and of counsel from $25,000 to $5,000 or 10% of amounts received, whichever is greater. (Mitchell Decl. 19.)2

This change resulted in certain retired partners writing checks for $5,000 to avoid the threat of litigation no matter how tenuous the underlying claims may be.

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An increase in the maximum partner contribution to $3.5 million. (PCP Motion 13 n.13; Mitchell Decl. 19.)3 A premium on the payments of members of the Firms Executive Committee. The premium is up to 20% of the partners excess draws and is based on the length of service of such partner on the Executive Committee. (PCP Motion 13; Pauker Decl. 35(b); Mitchell Decl. 21.)4 For partners who received payments in excess of their draws during 2012, an additional 20% payment premium on account of such amounts. (PCP Motion 13.) Participating Partners may receive a reduction of up to 5% of Partner Contribution Amounts based on (a) collection of their accounts receivable between August 1, 2012 and September 15, 2012 in full or at a discount approved by the Collateral Agent for the Debtors Secured Lenders, or (b) $70 million in Partner Contribution Amounts committed by former partners who timely signed and returned a PCP. (PCP Motion 13 n.13.)5 Increased discounts to Participating Partners for payments relating to U.S. and nonU.S. tax advances that were made by the Debtor on behalf of certain partners. (Mitchell Decl. 22.) An obligation for the Debtor to obtain controversial third-party injunctions to be implemented in connection with confirmation of a chapter 11 plan. (Mitchell Decl. 23.) Obtaining the injunction is a condition to the effectiveness of the PCP. In developing the PCP, the Debtor sought aggregate Partner Contribution

4.

Amounts of approximately $89 million (out of total aggregate distributions of approximately $430 million made in 2011-2012). (PCP Motion 7; Pauker Decl. n.2.) As of the date of the PCP Motion, the Debtor stated that Participating Partners had agreed to make approximately $71 million in settlement payments. (PCP Motion 9; Pauker Decl. 13.)

The increase in the cap impacts only one partner. The PCP Motion does not provide an explanation as to why this partner is entitled to the benefit of this cap or how the cap benefits the estate. Despite the premium, the contributions of certain Executive Committee members will end up being lower under the current PCP than they were under the July iteration of the PCP as a result of the other modifications made by the Debtor. As a result of the Debtor reaching the $70 million threshold, it appears that all Participating Partners will receive a 5% discount.

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5.

However, the $71 million in Partner Contribution Amounts is contingent on the

satisfaction of various future conditions. For example, [t]he PCPs do not resolve Unfinished Business Claims involving DLs largest rainmakers but leave them to be settled or otherwise resolved by September 30, 2012. (PCP Motion 14, Pauker Decl. 15; see also PCP Motion 6 n.6, 15 n.16.) If the Debtor is unable to settle an Unfinished Business Claim by the September 30th deadline, the partner against whom the Unfinished Business Claim can be asserted can terminate his or her PCP by written notice to the Debtor by October 5, 2012, thereby withdrawing his contribution from the supposed $71 million the PCP will bring to the estate. (Id. 15 n.16.)6 6. The PCP obligates the Debtor to exchange mutual releases with, and to obtain a

third-party injunction for the benefit of, Participating Partners. (PCP Motion at 6.) Under the terms of the PCP, the Debtor is asking the Court to approve of the controversial injunction now on an advisory basis, although it will be implemented in a yet-to-be-proposed chapter 11 plan. (Id.) Also, in connection with confirmation of a chapter 11 plan, the Debtor is obligated to request a Bar Order that, among other things, is intended to preclude any liability of any of the Releasees to any person or entity for indemnification, contribution, or otherwise on any claim that is or arises from the Debtor Released Claims and where the alleged injury to such person or entity arises from that persons or entitys alleged liability to the Debtor. (Id. 15 n.15.)7

The risk of firms not settling Unfinished Business Claims increased as a result of the recent decision in the Thelen LLP chapter 7 case. See Geron v. Seyfarth Shaw LLP, No. 12-01364 (WHP) (S.D.N.Y. Sept. 4, 2012) [Docket No. 23] (holding that under New York law a defunct law firm does not have a property interest in hourly fee arrangements). The FPC plans to vigorously contest the Bar Order at the appropriate time.

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B.

The Evidence Establishes That the Debtor Did Not Investigate Tort Claims and Improperly Reverse-Engineered the PCP to Provide a Minimally Acceptable Recovery to the Secured Lenders to the Detriment of the Entire Estate. 7. During the discovery process in connection with the PCP Motion, the Debtor has

readily admitted that it failed to investigate the claims it seeks to settle as part of the PCP. (See Transcript of Deposition of Jonathan A. Mitchell, Sept. 12, 2012 (Mitchell Tr.), at 39:6-22 (Q. . . . . was there an investigation of the underlying facts surrounding the Executive Committees actions [within the two year period prior to the bankruptcy case]? . . . A. The answer is no.); id. at 60:13-14 (Q. Did you investigate tort claims? A. No.); Transcript of Deposition of Steven Horvath III, Sept. 11, 2012, at 63:25-64:5 (Q. . . . Did anyone employed or retained by the Debtor conduct an investigation of the Executive Committee? A. The Executive Committee? Not to my knowledge.); Transcript of Deposition of David Pauker, Sept. 12, 2012 (Pauker Tr.), at 75:3-5 (we did not conduct the kind of investigation that we might have conducted as a court appointed examiner); Transcript of Deposition of Janis Meyer, Sept. 11, 2012, at 74:14-19 (Q. And was there any factual investigation with potential tort claims? . . . A. No.).)8 8. Worse, the evidence obtained during the course of this discovery clearly

establishes that the PCP was reverse-engineered to provide a minimally acceptable recovery to the Debtors Secured Lenders rather than to maximize value to the estate as a whole. (See Pauker Tr. at 50:18-51:2 ([I]nstead of doing that bottoms-up approach, I determined we determined that we needed to take a top-down approach. That meant making an effort, a first effort early on to ascertain what we thought was a reasonable range for a total settlement between the creditors and the lenders and the estate on the one hand and the partnership on the

The testimony of the Debtor and its professionals eviscerates any argument that the appointment of an examiner in this case should be denied.

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other.); Pauker Tr. at 60:10-19 (Q. So the first goal was to figure out the aggregate number, [to] make sure that secured lenders were happy with that number and then you could begin figuring out a way to divvy it up? A. Thats true, except we were constantly, as we were looking at an aggregate number also looking at potential allocations below[.]).) Most troubling, it appears that the PCP process began when the former partners (i.e. potential litigation targets) still controlled the Debtors day-to-day operations. (See Pauker Tr. at 47:10-15 (It would be fair to say that there were partners of the firm involved in the initial decision to pursue a settlement of partner claims. That such a settlement, if effected, would potentially have as an object releasing claims against them.).) All of these facts taken in conjunction mandate denial of the PCP Motion. OBJECTIONS I. THE PCP MOTION IS PREMATURE AND UNRIPE. 9. The PCP Motion seeks an impermissible advisory opinion that should not be

provided by the Court. The United States Constitution limits the jurisdiction of federal courts to actual cases or controversies. Preiser v. Newkirk, 422 U.S. 395, 401 (1975). Similarly, under the Federal Declaratory Judgments Act, Congress authorized declaratory judgments only in ... case[s] of actual controversy. 28 U.S.C. 2201 (2012). For a court to have subject matter jurisdiction over a declaratory judgment action, there must be a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941) (emphasis added). 10. Like Article III courts, bankruptcy courts cannot issue advisory opinions. In re

Nunez, No. 98-9077, 2000 U.S. Dist. LEXIS 12078, at *17 (E.D.N.Y. Mar. 17, 2000) (citing State of New Jersey, Dept of Envtl. Protection and Energy v. Heldor Indus., Inc., 989 F.2d 702 10

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(3d Cir. 1993)). Where otherwise proper, a request for a declaratory judgment in connection with a bankruptcy case must be sought through an adversary proceeding, which the Debtor certainly has not done. See Fed. R. Bankr. P. 7001.9 11. In addition to being real and immediate for purposes of jurisdiction, a

controversy must meet the related requirement of being ripe for adjudication. That is, the disagreement must not be nebulous or contingent but must have taken on fixed and final shape so that a court can see what legal issues it is deciding, what effect its decision will have on the adversaries, and some useful purpose to be achieved in deciding them. Public Service Commission v. Wycoff Co., 344 U.S. 237, 244 (1952) (emphasis added). Accordingly, [a] claim is not ripe for adjudication if it rests upon contingent future events that may not occur as anticipated, or indeed may not occur at all. Texas v. United States, 523 U.S. 296, 300 (U.S. 1998) (internal citation and quotation omitted); see also Thomas v. City of New York, 143 F.3d 31, 34 (2d Cir. 1998) (a court cannot entertain a claim which is based upon contingent future events that may not occur as anticipated, or indeed may not occur at all.) (internal quotation omitted). 12. Although there has been no shortage of adversity during this case, the PCP

Motion does not satisfy the requirement of sufficient immediacy and reality for purposes of subject matter jurisdiction, and the PCP is subject to far too many material contingencies to satisfy the doctrine of ripeness. The Debtor has made this abundantly clear by its express concessions that the injunctions and releases it seeks to provide Participating Partners must be provided through a plan of reorganization. For example:

Bankruptcy Rule 7001 states, in relevant part, that [t]he following are adversary proceedings (7) a proceeding to obtain an injunction or (9) a proceeding to obtain a declaratory judgment relating to any of the foregoing . See Fed. R. Bankr. P. 7001.

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Under the terms of the PCPs, the scope of the injunction [for the benefit of Participating Partners] must be approved now, but it will be implemented later through a confirmed Chapter 11 plan. (PCP Motion at 6.) The Effective Date will occur when the last of the following events has occurred the Bankruptcy Court shall have entered a Final Order confirming a Chapter 11 plan that (i) incorporates the terms of the PCPs, including the releases and injunctions provided for therein . (PCP 11(a).) If the injunction and releases are not approved as part of a plan, the PCP will be terminated. (PCP Motion 6-7.) The PCP was also modified to obligate the Debtor to obtain an injunction to be implemented in connection with the confirmation of a Chapter 11 plan. Without this concession, I do not believe that the Debtor would have received the level of participation that it currently has with respect to partners executing the PCPs. (Mitchell Decl. 23.) 13. The Debtor has not proposed any plan, and before any plan can be considered it

remains subject to modification based upon ongoing discussions and negotiations among opposing constituencies in this case, subject to approval of a disclosure statement, and subject to acceptance by the requisite number of voting creditors. The Court will also decide on September 20, 2012 whether it is appropriate, as the FPC urges, for the PCP to undergo investigation and vetting by an examiner. Furthermore, it is as yet unknown whether there will be a settlement of the Participating Partners Unfinished Business Claims by September 30, 2012. If those claims are not resolved satisfactorily, Participating Partners may terminate their PCP participation up until October 5, 2012, in which case the PCP commitments may fall short of the $71 million threshold.10 If each of these contingencies does not occur in the manner that the Debtor supposes, the Court and the estate may never need to expend time and effort on litigation over whether the PCP meets the entire fairness standard.

10

There are also concerns that the Grimaldi Agreement, the Accini Agreement and the UK Amendment may not close.

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14.

Furthermore, until the Debtor has disclosed, via an approved disclosure statement,

the relationship between the PCP and estate valuation, creditors recoveries, and other rights typically established through a plan, it is impossible to know the shape and scope of the controversy, or whether it may turn out to be moot. Issues related to confirmation, such as whether or not to approve releases or injunctions, and other objections to confirmation should be considered at the confirmation hearing. See, e.g., In re Specialty Equip. Co., 3 F.3d 1043, 1045 (7th Cir. 1993) (referencing earlier bankruptcy court ruling that validity of plan releases was confirmation issue not disclosure statement issue). 15. Particularly instructive in this regard is the Courts decision in In re Adelphia

Communications Corp., 307 B.R. 432 (Bankr. S.D.N.Y. 2004). There, the debtors already had filed a chapter 11 plan (unlike here), and also indicated that the plan was intended to serve as a launching pad for negotiations of an amended plan that would have broader support. The Adelphia debtors plan proposed a reorganization that would entail a distribution of securities to certain creditors in respect of their claims. In response, a group of subordinated creditors (the Sub Debt) commenced an adversary proceeding (unlike here) to seek a pre-confirmation ruling that the terms of their indenture did not require that they turn over their anticipated equity distributions to senior creditors. Id. at 433-34. Judge Gerber held that the dispute did not satisfy either the case or controversy requirement or the ripeness doctrine, because the parties were attempting to pre-litigate a plan confirmation issue. Judge Gerber explained, that even assuming, arguendo, that this Court decided the issues the Sub Debt holders want this Court now to consider, and decided them in the Sub Debts favor, there are a multitude of scenarios under which all of this would have turned out to be an idle exercise, or the wrong exercise, because

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later factual developments changed or eliminated the issues to be decided. Id. at 436. The Adelphia court further explained: All parties agree that the concerns voiced by the Sub Debt holders would be a sound basis for an objection to confirmation, and, if upheld by the Court, would bar confirmation. But consideration of confirmation comes at a markedly later time in the process, when all or substantially all of the contingencies described above would have sorted themselves out. If the Debtors keep exclusivity, and if they do not amend this plan, and if they push it forward for confirmation, and if it secures the necessary votes, and if it then comes up for confirmation, the same Sub Debt holders concerns can be addressed, as an objection to confirmation, at which time the issues then can appropriately be decided. Likewise, if, as is possible and perhaps likely, a different plan is proposed for confirmation, Sub Debt holders concerns, if any, can be addressed in the context of the facts as they exist at that time. Id. at 439. 16. Furthermore, the Adelphia court recognized the concerns that the Debtor seems to

have here, and that they could not carry the day: The Court understands, and is sympathetic to, the points made by the Sub Debt holders that an early ruling might facilitate their negotiations; that they would know better what litigation positions they might wish to take if they knew what the outcome would be in this controversy; and that efforts on the part of the Debtors to confirm what would turn out to be an unconfirmable plan would be time consuming and costly. But these points do not confer subject matter jurisdiction where it is lacking, and in any event prove too much. Because as the Creditors Committee fairly argues, were such an argument to carry the day, bankruptcy courts would be beset with requests for numerous advisory opinions, many of which ultimately would have no practical application. Id. at 440-41 (internal citation quotation omitted). 17. While consideration of the PCP now might serve certain parties parochial

agendas, litigation tactics or negotiating positions, the PCP Motion is nonetheless a request for an advisory opinion of an isolated although undoubtedly important term for a plan of reorganization that has not been filed, let alone readied for a confirmation hearing in compliance with the disclosure and voting protections of chapter 11. The proper time for consideration of the PCP is in connection with confirmation of a plan, when and if the Debtor reaches that

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milestone. The Court lacks jurisdiction to consider the PCP at the present time, and adjudicating the PCP when there are numerous material contingencies that may render it moot unnecessarily risks a significant waste of time and resources. II. A. THE DEBTOR FAILS TO MEET ITS BURDEN UNDER THE ENTIRE FAIRNESS DOCTRINE AND UNDER BANKRUPTCY RULE 9019. Legal Standards. 18. Even if the Court should determine to consider the PCP Motion at the present

time, the PCP Motion should be denied because the Debtor cannot satisfy its burden under Bankruptcy Rule 9019. Bankruptcy Rule 9019(a) provides that [o]n motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Fed. R. Bankr. P. 9019(a). This Court has recently explained that a court may not simply defer to a debtor in possessions judgment, but must independently evaluate the reasonableness of the settlement. HSBC Bank USA, N.A. v. Fane (In re MF Global Inc.), 466 B.R. 244, 247 (Bankr. S.D.N.Y. 2012) (internal citation omitted). Accordingly, [c]ourts have developed standards to evaluate if a settlement is fair and equitable, and identified factors for approval of settlements. Wenzel v. Partsearch Techs., Inc. (In re Partsearch Techs., Inc.), 453 B.R. 84, 102 (Bankr. S.D.N.Y. 2011) (citing Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 462 (2d Cir. 2007)). Such factors include, among others: the extent to which the settlement is the product of arms-length bargaining; and the balance between the litigations possibility of success and the settlements future benefits.

Partsearch, 453 B.R. at 102 (internal quotations and marks omitted). [T]he burden of persuading the Court that the settlement should be approved rests with the proponents of the settlement. In re Matco Elecs. Group, Inc., 287 B.R. 68, 76 (Bankr. N.D.N.Y. 2002).

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19.

The Debtor cannot meet its burden under Rule 9019 with respect to these two

important factors. First, because the Debtor proposes to settle claims against its insiders and affiliates through the PCP, the transaction is subject to heightened scrutiny. The Debtor states that the proper standard for approval is the business judgment rule. (See PCP Motion 28; Mitchell Decl. 11.) That is incorrect. When a transaction is between insiders, heightened scrutiny applies. See In re Innkeepers USA Trust, 442 B.R. 227, 231 (Bankr. S.D.N.Y. 2010). Approval of such transactions is not determined by reference to the debtors subjective business judgment but rather by an analysis of whether the transaction is entirely fair. See, e.g., In re Integrated Resources, 147 B.R. 650, 656-658 (S.D.N.Y. 1992) (the appropriate test is the entire fairness of a transaction, rather than the business judgment rule when the decision involves interested fiduciaries) (internal citation omitted). In applying heightened scrutiny or the entire fairness doctrine, courts are concerned with the integrity and entire fairness of the transaction at issue, typically examining whether the process and the price of a proposed transaction not only appear fair but are fair, and whether fiduciary duties were properly taken into consideration. See In re Innkeepers USA Trust, 442 B.R. at 231. The PCP is not entirely fair and cannot survive heightened scrutiny for the reasons discussed below. B. The PCP was Negotiated Among Insiders and Not at Arms Length, and is Not in the Best Interests of the Estate. 20. The PCP cannot withstand heightened scrutiny because the transaction was not

fair as to price and arose from a fundamentally flawed process. The Debtor simply cannot show that the PCP was the product of arms-length bargaining. Courts have found red flags exist where settlements are not proposed by disinterested debtors. See In re Matco Elecs. Group, Inc., 287 B.R. at 76; see also In re Actrade Fin. Techs. Ltd., Nos. 02-16212 (ALG) and 02-16213 (ALG), 2009 Bankr. LEXIS 890, at *14, 17 (Bankr. S.D.N.Y. Apr. 13, 2009) (where parties that

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supported settlement had a direct interest in disposing of the litigation, and where [c]reditors who might be harmed by the costs of continued litigation did not object to the [courts prior] conclusion that the litigation should not be settled on the basis proposed, paramount interests of creditors and shareholders were better served by disapproving settlement) (emphasis added); In re Present Co., 141 B.R. 18, 23 (Bankr. W.D.N.Y. 1992) (disapproving settlement where there has been no investigation by a disinterested trustee or examiner. No one supports this proposal other than the parties thereto (who are insiders) and their counsel.). 21. Importantly, in Matco, and similarly to the instant case, [m]uch of the argument

that the Court has heard from the proponents of the Settlement Agreement has emphasized the interests not of the estate and of the Debtors but of [the released party]. Matco, 287 B.R. at 7677 (emphasis added). In the PCP Motion, the Debtor repeatedly emphasizes the benefits of the PCP for the Participating Partners, and stresses the high volume of former partners that signed on to the PCP. It is unclear, however, how partner enthusiasm for the prices they are paying to obtain broad releases and injunctions translates into a fair and reasonable deal for the estate and creditors. To the contrary, Participating Partners eagerness to sign up en masse should be a red flag that this may be a sweeter deal for them than it is for the Debtor, its creditors and the estate. The $71 million price of the PCP is simply not fair to the estate, and it is clear that the Debtor could have bargained for much more if it put the estates interests before the interests of its former partners. 22. Further, the process of negotiating the PCP was not fair for numerous reasons. In

his declaration, Mr. Mitchell, realizing that negotiations between Horvath, Meyer and their former colleagues could not possibly be viewed as arms-length, states that for the purposes of negotiating the PCP, the Wind-Down Committee took a backseat role, and he, as CRO, took the

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reigns. (Mitchell Decl. 25 (With respect to the key decisions regarding the creation, structure, final development and application of the PCP, I had ultimate decision making authority not Horvath or Meyer); id. 7-8 (I am authorized to make decisions with respects to all of the Debtors wind down, in such manner as I, and Zolfo, deem necessary or appropriate . I am only required to discuss my decisions made with members of the Wind-Down Committee to the extent I, in my sole discretion, deem it to be reasonably appropriate.).) But whatever view Mr. Mitchell may have as to his authority, his role as CRO does not vitiate the control held by the members of the Wind-Down Committee with respect to the Debtors affairs or cleanse the taint surrounding the PCP. 23. The process was also unfair because, rather than demand the return of roughly

$430 million that it paid out to partners in 2011 and 2012 (and consider demanding payments from prior years), the Debtor reverse-engineered the PCP by first negotiating the aggregate amount of the PCP with the Secured Lenders prior to making any allocations to individual partners.11 As a result, the PCP represents the minimum settlement amount acceptable to the Secured Lenders (many of whom bought their positions at a discount) to the detriment of other creditors. Most concerning, it appears that Goldin had discussions in April 2012 with the Debtors Office of the Chairman regarding initial PCP proposals. (Pauker Tr. at 47:10-15 (It would be fair to say that there were partners of the firm involved in the initial decision to pursue a settlement of partner claims. That such a settlement, if effected, would potentially have as an object releasing claims against them.).) An estate professional working in concert with the proposed targets of estate causes of action gives rise to an irreconcilable conflict that makes it impossible for the Debtor to satisfy the heightened scrutiny test for an insider settlement.

11

See 8 supra.

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C.

The Debtor Has Failed to Show That the PCPs Mostly Speculative Benefits Outweigh the Risks of Litigating Certain Valuable Claims. 1. 24. An Investigation by an Independent Fiduciary Is Necessary To Properly Evaluate the PCPs Supposed Benefits. Without any investigation into the underlying claims,12 it is impossible to

determine whether or not the benefits of the PCP outweigh the benefits of litigating certain of the Debtors most valuable claims, such as those against Executive Committee members. See In re Remsen Partners, Ltd., 294 B.R. 557, 567-568 (Bankr. S.D.N.Y. 2003) (rejecting settlement proposed by chapter 7 trustee where the failure by Trustees counsel to independently investigate [facts pertaining to the settlement] resulted in an arguably unbridgeable hole in the record); In re Spielfogel, 211 B.R. 133, 140-141 (Bankr. E.D.N.Y. 1997) (rejecting settlement of dissolution action proposed by chapter 11 trustee where the Court finds that the Trustee did not adequately investigate the value of the estates interest in the Dissolution Action because he failed to ascertain pertinent facts from the Debtor that might have led to a more realistic valuation); Royal Bank of Pa. v. Grosse (In re Grosse), No. 96-1204, 1997 Bankr. LEXIS 2351, at *21 (Bankr. E.D. Pa. Oct. 15, 1997) (rejecting settlement under Bankruptcy Rule 9019 where [t]he Chapter 7 trustees investigation has been superficial, thus underscoring the lack of protection of the creditors interest in this matter); In re Present Co., 141 B.R. at 23 (rejecting chapter 11 debtors proposed settlement, in part, because there had been no investigation by a disinterested trustee or examiner). 25. The PCP offers all Participating Partners broad releases from liability to the

estate, including former members of the Executive Committee and members of the Wind-Down Committee. Throughout the PCP Motion, the Debtor emphasizes how many partners signed on to the PCP. The FPC does not dispute their eagerness because the PCP is a great deal for those
12

See 7 supra.

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with significant liability to the estate, including those with liability arising prior to January 2011. But the question left unanswered by the PCP Motion is whether the proposed settlement of this liability is fair to the estate. The Debtor simply does not know because it never did the work to find out. Indeed, Mr. Pauker readily admits in his declaration that [d]uring the several months available to fully develop the PCP, there was neither time nor financial resources available to fully investigate the potential liability of individual members of the Executive Committee. (Pauker Decl. 34.)13 26. In addition to the Debtors failure to investigate claims it may hold against the

Executive Committee, the Debtor has repeatedly admitted that it has not conducted an investigation into the value (or underlying facts) of any of the claims that the estate plans to release (and, in any event, it lacks the fiduciary capacity to do so). At the section 341 meeting of creditors, the CRO admitted to the Debtors failure to conduct any investigation whatsoever into potential avoidance actions and other claims: MS. JARVIS: And then can you tell me the approximate or give me an approximate value of the claims that are being released, so fraudulent transfer claims for 2011, fraud tort claims, claims being released to third parties. MR. MITCHELL: No. MS. JARVIS: Whats the approximate value? MR. MITCHELL: We havent examined or valued what those what those claims would be. (Audio tape: 341 Meeting of Creditors, at 40:30-40:50 (Aug. 15, 2012) (available on request from the Office of the United States Trustee, Region 2).) Without an investigation having been undertaken, there is no way that the Debtor nor anyone else, including the Court can
13

This statement contradicts Mr. Paukers earlier statement that [t]o develop proposals for the PCP, it was necessary to investigate, review and analyze potential claims that could be asserted against partners that would be subject to compromise as part of a settlement. (Pauker Decl. 17.)

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formulate an informed view as to whether the PCP falls within the range of reasonableness or whether the estate, its creditors, and third parties are losing out on millions of dollars of recoveries many times the cost of an examiner that would be available but for the PCP. Deference should not be afforded to the views of the Wind-Down Committee, who are conflicted based upon their participation in the PCP and relationships with their former partners. (Mitchell Decl. 26(c) (Meyer and Horvath are not required to pay a Partner Contribution Amount and their PCPs have been modified to reflect that a cash payment is not required).) The retention of the CRO, of course, does not cleanse the Wind-Down Committees taint. See Pereira v. Cogan (In re Trace Intl Holdings, Inc.), No. 00-619, 2001 U.S. Dist. LEXIS 2461, at *40-41 (S.D.N.Y. Mar. 8, 2001), revd sub nom. on other grounds, Pereira v. Farace, 413 F.3d 330, 346-347 (2d Cir. 2005) (quoting Grimes v. Donald, No. Civ. A. 13358, 1995 Del. Ch. LEXIS 3, at *25 (Del. Ch. Jan. 11, 1995)) (While powers may be delegated to a CEO or other officers of the company, the board may not either formally or effectively abdicate its statutory power and fiduciary duty to manage and direct the management of the business and affairs of the corporation.); RSL Commcns PLC v. Bildirici, No. 04-5217, 2006 U.S. Dist. LEXIS 67548, at *13-14 (S.D.N.Y. Sept. 14, 2006) (same). 27. It is impossible for the Debtor to make a credible showing with respect to the

balance between the possible costs and benefits of pursuing avoidance and other claims against partners without analyzing those claims. In particular, the Debtor has never provided any analysis whatsoever as to when it first became insolvent, and it completely dismisses the period prior to 2011 when additional hundreds of millions of dollars were distributed to partners. (Pauker Decl. 33 (only discussing the payments to partners in 2011 and forward, [t]he settlement also resolves potential fraudulent conveyance claims relating to the $349 million paid

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to former partners during 2011. Payments made during 2011 were made at a distinctly different time, well before partners had begun leaving the Firm.).)14 At best, the Debtor makes passing reference to issues regarding insolvency, (Pauker Decl. 30 (it would be easier to demonstrate that the Firm was insolvent immediately prior to the bankruptcy filing, but that is progressively more challenging as the timeframe became more remote), but never even discusses when the Debtor became undercapitalized an alternative standard to insolvency and a condition which may have arisen much earlier given the debtors crushing guaranteed obligations to partners. Nor does the Debtor discuss potential claims arising under the alternative standard of section 548(a)(1)(B)(IV), which does not require that the debtor prove insolvency. In short, there is a paucity of analysis of the merits of the claims being settled where applicable law requires far more. 28. The Debtors approach is overly simplistic. Through the PCP, the Debtor is

settling certain valuable claims without assessing their actual value. Without any investigation whatsoever into the value of the claims being settled by the PCP, it is impossible for retired partners to make an informed decision in connection with approval of the PCP and the Debtors request for its approval must be denied. 2. 29. The PCPs Benefits Are Speculative and Depend on Satisfaction of Future Conditions. The PCPs future benefits are, at best, speculative, and therefore cannot be

accurately measured against the risks of litigating the underlying claims. The Debtor avers that the approximate $71 million in settlement payments pledged by Participating Partners through the PCP far exceeds the lowest point in the range of reasonableness[.] (PCP Motion 6.) However, as indicated throughout the PCP Motion, this pledged amount is actually contingent
14

One can easily infer that the persons that retained Goldin have significant liability if all or a portion of 2010 payments were included in the PCP calculation.

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on the satisfaction of certain future conditions and may end up being significantly lower. For example, if the Firms largest rainmaker Participating Partners new firms are unwilling to settle their Unfinished Business Claims by September 30, 2012, these Participating Partners may terminate their PCP agreements in writing by October 5, 2012, thereby lowering the value of the PCP to the estate. In the PCP Motion, the Debtor has not disclosed how the withdrawal of these Participating Partners from their PCP agreements would affect the PCPs $71 million valuation. Based on the recent Thelen decision, it is highly unlikely that these claims will settle by the September 30, 2012 deadline, and increasingly likely that these Participating Partners will have the option to terminate their PCP agreements. Moreover, there are contingencies with respect to the Grimaldi Agreement, the Accini Agreement, and UK Amendment that can further reduce the PCP amount. (Mitchell Decl. 26.) Thus, the eventual value of the PCP may be markedly different. The Debtor does not explain why accelerated approval in advance of these contingencies is required. The Debtors request for approval of the PCP must be denied until material contingencies are resolved and the final PCPs true value and benefits can be evaluated by parties in interest. III. THE PCP IS AN UNLAWFUL SOLICITATION. 30. Although the PCP is not a traditional solicitation of votes on a plan, it contains

numerous features which require the conclusion that it is, indeed, a solicitation. For example, partners plainly equity holders and, in some cases, creditors are asked to relinquish their claims against and interests in the Debtor in exchange for a release. Simply put, partners are being offered valuable consideration in exchange for their claims and interests. Nonetheless, this solicitation has taken place with no disclosure whatsoever, let alone an approved disclosure statement, with regard to the value of the claims they are being asked to relinquish or the

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consideration they are receiving. It is immaterial that the PCP is not denominated a plan it unquestionably has the effect and purpose of discharging claims in exchange for value. To permit such a solicitation to proceed in violation of section 1125 sets a dangerous precedent for debtors to manipulate uninformed creditors into making unwise decisions. 31. Indeed, that is exactly what has happened here. A significant number of retirees

have accepted the PCP solely out of fear. They have been threatened with unsubstantiated and unexplained claims which they do not understand. Yet, these retirees have grudgingly paid the freight because they are afraid of the threats and unfamiliar with the issues. Their claims should not be relinquished by coercion they are entitled to no less than the adequate information mandated by section 1125 of the Bankruptcy Code before they are compelled to make the decision required of them by the PCP. In re Source Enters., No. 06-11707, 2007 Bankr. LEXIS 4770, at *6-7 (Bankr. S.D.N.Y. July 31, 2007) (Section 1125 of the Bankruptcy Code mandates that before creditors may be solicited to vote on a chapter 11 plan, the plan proponent file a disclosure statement that provides adequate information to holders of claims interests so they can make a decision as to whether or not to vote in favor of the plan.); Sure-Snap Corp. v. Bradford Nat'l Bank, 128 B.R. 885, 890 (D. Vt. 1991) (Adequate information would necessarily include prospective tort claims . . . .); In re New Hampshire Electric Coop., Inc., 131 B.R. 249, 252 (Bankr. D.N.H. 1991) (I believe on reflection here that the proposed relief under the pending motions in effect would obviate the procedural safeguards and protection that Congress intended to have in the reorganization process once the debtor was given the initial control of the process.). RESERVATION OF RIGHTS 32. The PCP Motion should be denied. If granted, however, the FPC requests that

any order approving the PCP contain language clearly stating that the direct claims of Non24

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Settling Partners are not released by the PCP or affected by the requested injunction or Bar Order. CONCLUSION For the reasons set forth above, the FPC respectfully requests that the PCP Motion be denied. Dated: September 13, 2012 New York, New York

KASOWITZ, BENSON, TORRES & FRIEDMAN LLP /s/ David M. Friedman David M. Friedman (DFriedman@kasowitz.com) Adam L. Shiff (AShiff@kasowitz.com) Robert M. Novick (RNovick@kasowitz.com) Jeffrey R. Gleit (JGleit@kasowitz.com) 1633 Broadway New York, New York 10019 Telephone: (212) 506-1700 Facsimile: (212) 506-1800 Counsel for the Official Committee of Former Partners

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