UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re COLLINS & AIKMAN CORPORATION,

et al Debtor. / STATEMENT OF UNITED STATES TRUSTEE REGARDING PROPOSALS FOR REVIEW OF PROFESSIONAL FEES Third Avenue Trust and the debtors recently responded to this Courts invitation for recommendations regarding review of professionals fees in these cases [docket nos. 4163 and 4166]. Separately, the United States Trustee has filed a motion for appointment of an examiner under 11 U.S.C. 1104(c)(2) to investigate the debtors and their professionals administration of these cases, which investigation would include an inquiry into whether professional fees being charged to the estates are appropriate under the circumstances. A copy of the United States Trustees motion is attached to this Statement. Although the debtors oppose fee review as unnecessary, they appear to recognize its inevitability and therefore propose a fee evaluation committee as an alternative to an examiner. The United States Trustee respectfully disagrees with that proposal for three principal reasons. First, a fee committee cannot, as a matter of law, substitute for an examiner. Under section 1104(a)(2), the debtors $901 million of unsecured bond debt mandates appointment of an examiner. The alternative of a committee is not contemplated. Second, as a practical matter, a fee committee with a representative of the debtors and the litigation trust administrator as members (which is what the debtors propose) could not perform an investigation with the same independence as expected of an examiner under the Bankruptcy Code Case No. 05-55927-SWR Chapter 11 HON. STEVEN W. RHODES

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and as required for this investigation. One of Third Avenues allegations is that during the course of the case it questioned the debtors and various professionals regarding fees and the utilization of professional services, but was rebuffed. Another of the issues is whether appropriate and timely decisions were made by debtors management, the creditors committee, and their professionals regarding whether the company should remain a going concern or should be liquidated, and once the decision to liquidate was reached, whether debtors management took appropriate steps to manage costs, including professional fees and expenses. Common sense and the Bankruptcy Code (see 11 U.S.C. 1106(a)(3) & (4) and 1107(a)) both tell us that the debtors, no matter how well-intentioned, are not capable of reliably investigating themselves with respect to such matters. The debtors opposition to fee review last December and more recently reveals as much. For good reason, the Bankruptcy Code reserves required investigations of a debtor to independent examiners and trustees. Id. Third, the debtors proposed fee committee would be formed after confirmation (which is when the litigation trust is formed and its administrator is appointed). Delaying the start of the investigation until after confirmation will make the investigation unnecessarily difficult. Each day that passes while the debtors continue their wind down results in records and personnel being dispersed. Moreover, such a delay means that the examiners report would not be available in time to inform the Court and parties in interest about issues related to confirmation of the plan, such as the appropriateness of the various releases and exculpations the plan provides, and the impact on the value of the estate if certain professional claims were to be allowed or disallowed. Third Avenue has made troubling allegations that merit an independent investigation. The allegations were broadly reported, and it is important to the integrity of the bankruptcy system that

an independent person be appointed to investigate them and to publicly report his or her findings. Under the Bankruptcy Code, that role is filled by an examiner or trustee, not by a committee. Based upon the foregoing, the United States Trustee therefore requests that this Court, in lieu of appointing a fee committee, grant the relief sought by the United States Trustee in the attached motion and order the appointment of an examiner pursuant to 11 U.S.C. 1104(c)(2). SAUL EISEN UNITED STATES TRUSTEE Ohio/Michigan Region 9 /s/ Stephen E. Spence (P32923) Steve.E.Spence@usdoj.gov Trial Attorney Office of the U.S. Trustee 211 West Fort Street - Suite 700 Detroit, Michigan 48226 313.226.7911

By:

Dated: February 23, 2007

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re COLLINS & AIKMAN CORPORATION, et al Debtor. / EXHIBIT LIST Exhibit A Motion of the United States Trustee for Appointment of an Examiner Case No. 05-55927-SWR Chapter 11 HON. STEVEN W. RHODES

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re COLLINS & AIKMAN CORPORATION, et al Debtor. / Case No. 05-55927-SWR Chapter 11 HON. STEVEN W. RHODES

MOTION OF THE UNITED STATES TRUSTEE FOR THE APPOINTMENT OF AN EXAMINER The United States Trustee hereby moves that this Court order the appointment of an examiner under 11 U.S.C. 1104(c)(2). The examiner would investigate the debtors and their professionals administration of these cases and report to the Court on whether the compensation requested by professionals is justified under the circumstances. In support of this Motion, the United States Trustee respectfully represents and alleges as follows:

I. Factual Background to Appointment of an Examiner 1. 17, 2005. 2. With the assistance of their professionals, the debtors have remained in possession The debtors commenced these cases by filing voluntary chapter 11 petitions on May

of their estates and have operated their businesses as debtors in possession under 11 U.S.C. 1107(a) and 1108. No trustee or examiner has been appointed. 3. During the entire period that these cases have been pending, the debtors have had the

exclusive right to propose a plan of reorganization. Initially they used this prerogative to pursue both

reorganization and liquidation strategies. They even filed a plan of reorganization premised on the former strategy. Subsequently, the debtors abandoned that reorganization strategy in favor of a liquidation. Presently, they are sponsoring a plan that contemplates the sale, wind down and liquidation of their estates. No plan has been confirmed. 4. Approximately thirteen firms have rendered professional services chargeable to the

estates. As of August 31, 2006, nearly six months ago, such charges amounted to $78,186,190. See Third Avenue Trusts Brief in Support of Examiner, Exhibit A (schedule of professional fees) [docket no. 4163]. Professional services rendered between August 31, 2006 and when any confirmed plan becomes effective will undoubtedly add tens of millions of dollars to the total. The extent of professional fees and expenses is therefore significant when compared to the $165.5 $230 million value the debtors ascribe to the estates. See Disclosure Statement, Exhibit C (Liquidation Analysis) [docket no. 3974]. 5. After the debtors abandoned their reorganization strategy, the debtors largest

creditor, Third Avenue Trust, questioned whether it was appropriate to grant the compensation requests of the professionals who had been involved in the failed reorganization strategy. Third Avenue questioned compensation for services that seemed to anticipate a reorganization even after it became apparent, or should have been apparent, that a reorganization was not feasible. See Third Avenues Opposition (to various fee applications) [docket nos. 3602-3613] and Brief in Support of Examiner. 6. The Court determined that Third Avenues allegations, standing alone, did not justify

the denial of professionals interim fee applications. The Court did, however, suggest that it would entertain a request for the appointment of a fee examiner to look into professional fees in this case. 2

7.

The United States Trustee believes that the allegations made by Third Avenue raise

serious questions that require answers before professionals are awarded final compensation and receive the exculpation and releases provided under Article XIII of the proposed plan. See Plan [docket no. 3976]. As is explained below, an examiner, appointed under 11 U.S.C. 1104(c)(2) is the appropriate person to make such inquiry. Indeed, because the debtors have $901 million in unsecured bond debt (First Day Affidavit of Jay B. Knoll [docket no. 19], at p. 8 21 & 22), an examiner is mandatory. 8. The statutory predicates for the relief requested in this Motion are 11 U.S.C.

1104(c)(2) and 1106(a)(3), (a)(4) and (b). This court has jurisdiction over this Motion under 28 U.S.C. 1334 and 157(a). Appointment of an examiner is a core matter under 28 U.S.C. 157(b).

II. Authority for Appointment of an Examiner 9. Section 1104(c)(2) requires the Court to order the appointment of an examiner in a

case where (a) no trustee has been appointed under section 1104, (b) no plan has been confirmed, and (c) the debtors fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes, or owing to an insider, exceed $5 million. Specifically: If the court does not order the appointment of a trustee under this section, then at any time before the confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of an examiner to conduct such an investigation of the debtor as is appropriate, including an investigation of any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor of or by current or former management of the debtor, if . . . (2) the debtors fixed, liquidated, unsecured debts, other than debts for goods, services, or taxes, or owing to an insider, exceed $5,000,000. 11 U.S.C. 1104(c)(2). 3

10.

In this case all of these elements are met. Unsecured bond indebtedness is $901

million, a plan has not been confirmed, and a trustee has not been appointed. Accordingly, under the plain language of the statute, appointment of an examiner is mandatory. In re Revco D.S., Inc., 898 F.2d 498, 500-01 (6th Cir. 1990), accord In re Loral Space & Comm., Ltd., 2004 WL 2979785 (S.D.N.Y. 2004); see generally Collier on Bankruptcy 1104.03[2].

III. Powers and Duties of the Examiner 11. Sections 1104 and 1106 of the Bankruptcy Code describe the types of powers and

duties that may be assigned an examiner. Specifically, a court may authorize an examiner under section 1104(c) to conduct such an investigation of the debtor as is appropriate, including an investigation of any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor of or by current or former management of the debtor; and under sections 1106(a)(3) and (a)(4) to investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtors business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan; [and]....file a statement of any investigation...., including any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor, or to a cause of action available to the estate. See also section 1106(b). 12. The examination into the roles played by professionals in the administration of these

estates and into the debtors utilization of estate assets to employ professionals to advise and assist them with the administration of the estates constitutes an investigation, within the meaning of

 1104 and 1106, into the management of the affairs of the debtor, the operation of the debtors business and the desirability of the continuation of such business, [a] matter relevant to the case or to the formation of a plan, and, possibly, [a] cause of action available to the estate. Topics of Examination. 13. The United States Trustee seeks an examiner to determine the merit of the allegations

made by Third Avenue. Those allegations were broadly reported, and it is important to the integrity of the system that an independent person be appointed to investigate them and to publicly report his findings. Accordingly, the examiner should investigate the progress of this case through chapter 11, with a particular emphasis on whether appropriate and timely decisions were made by debtors management, the creditors committee, and their professionals regarding whether the company should remain a going concern or should be liquidated. In addition, the examiner should determine if, once the decision to liquidate was reached, debtors management took appropriate steps to manage costs, including professional fees and expenses. 14. In addition, the examiner should be empowered to review applications for

management compensation pursuant to 11 U.S.C. 363 and for professional fees and expenses pursuant to 11 U.S.C. 330 and to recommend to the Court and to parties in interest whether those fees and expenses are appropriate under applicable law and guidelines and should be allowed in the amounts sought. Examiners Report. 15. An expeditious examination is necessary to either put to rest the issue raised by Third

Avenue or to enable the Court and parties in interest to take appropriate action if the examiner concludes that this case has not been administered in accordance with applicable standards. 5

Accordingly, the examiner should be required to prepare and file with the Court a preliminary report within 60 days after the Court approves the appointment of the examiner.1 The timing of the examiners final report should await the recommendation of the examiner in the preliminary report. 16. The reports from this examination should describe the findings and recommendations

of the examiner. They should inform the Court and parties in interest whether grounds exist for objections to compensation of the debtors management team from KZC, or of the professionals of the debtor and the creditors committee. 17. While the examiners ongoing investigation should not delay the Courts

consideration of the proposed plan of reorganization, that plan contains certain provisions, not material to the determination of rights of stakeholders other than professionals and management, that should not be finally approved by the Court until the Court and parties in interest have received and evaluated the examiners final report. Accordingly, the United States Trustee will, upon the entry by the Court of an order directing the appointment of an examiner, file a limited objection to confirmation to preserve parties rights pending the conclusion of the examination. Examiners Authority. 18. The examiner should have authority to retain professionals and standing as a party

in interest to move, appear and be heard on any matters related to his or her duties or appointment. 19. The order appointing the examiner should direct the debtor, the creditors committee,

and other parties in interest to cooperate with the examiner in his investigation.
1

The United States Trustee notes that both the debtors and Third Avenue Trust have filed pleadings with the Court recommending certain persons for appointment as fee examiner for these cases. Upon the entry by the Court of an order directing the appointment of an examiner pursuant to 11 U.S.C. 1104(c), the United States Trustee will, in accordance with his duty under 11 U.S.C. 1104(d), consult with parties in interest before selecting a person to serve as examiner in these cases. The United States Trustee will of course consider the candidates suggested by the debtors and Third Avenue Trust along with other candidates.

20.

The order appointing the examiner should be without prejudice to the right of the

examiner, the United States Trustee or any other party in interest to seek an expansion of the scope of examination. WHEREFORE, the United States Trustee requests that the Court enter an order, substantially in the form of the order attached hereto, directing the appointment of an examiner, and that the Court grant such other and further relief as is just and proper.

SAUL EISEN UNITED STATES TRUSTEE Ohio/Michigan Region 9

By

/s/ Stephen E. Spence (P32923) Steve.E.Spence@usdoj.gov Trial Attorney Office of the U.S. Trustee 211 West Fort St - Suite 700 Detroit, Michigan 48226 (313) 226-7911

Dated: February 23, 2007

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re COLLINS & AIKMAN CORPORATION, et al Debtor. / ORDER GRANTING THE MOTION OF THE UNITED STATES TRUSTEE FOR THE APPOINTMENT OF AN EXAMINER Upon the motion (the Motion) of the United States Trustee pursuant to 11 U.S.C. 1104(c)(2) for the appointment of an examiner in the above-captioned cases; adequate notice of the Motion having been given; upon due consideration; and sufficient cause appearing therefor, IT IS ORDERED: 1. The Motion is granted as provided herein, and the United States Trustee is directed Case No. 05-55927-SWR Chapter 11 HON. STEVEN W. RHODES

to appoint an examiner (the Examiner) pursuant to 11 U.S.C. 1104(c)(2), subject to approval of this Court. 2. The Examiner shall investigate the progress of this case through chapter 11, with a

particular emphasis on whether appropriate and timely decisions were made by debtors management (including the debtors' management team from KZC Services LLC and individuals and entities affiliated with KZC), the official committee of unsecured creditors in these cases (the Creditors Committee), and their professionals regarding whether the debtors business(es) should remain a going concern or should be liquidated. In addition, the Examiner shall determine if, once the decision to liquidate was reached, debtors management took appropriate steps to manage costs, including professional fees and expenses. Finally, the Examiner shall review applications for management compensation pursuant to 11 U.S.C. 363 and for professional fees and expenses pursuant to 11 U.S.C. 330 and shall recommend to the Court and to parties in interest whether those fees and expenses are appropriate under applicable law and guidelines and should be allowed in the amounts sought.

3.

In conducting these investigations, the Examiner shall use best efforts to coordinate

with and to avoid interference with any investigations being conducted by the Securities and Exchange Commission, the United States Department of Justice, the Commodities Futures Trading Commission, or other governmental agencies, and, if necessary, will follow a protocol to be established with the investigatory agencies for the sharing of information to the extent that such sharing benefits the Debtors estates, and such sharing of information shall be subject to appropriate conditions to protect the Debtors estates. 4. The Debtors and the Examiner shall mutually coordinate and cooperate in connection

with the performance of any of the Examiners duties. The Debtors shall provide to the Examiner all non-privileged documents and information that the Examiner deems relevant to discharge the Examiners duties under this Order. If the Examiner seeks the disclosure of documents or information as to which any of the Debtors assert a claim of privilege and the Examiner and the Debtors are unable to reach a resolution on whether or on what terms such documents or information should be disclosed to the Examiner, the matter may be brought before the Court for resolution. 5. The Creditors Committee and the Examiner shall mutually coordinate and cooperate

in connection with the performance of any of the Examiners duties. The Creditors Committee shall provide to the Examiner all non-privileged documents and information that the Examiner deems relevant to discharge the Examiners duties under this Order. If the Examiner seeks the disclosure of documents or information as to which the Creditors Committee asserts a claim of privilege and the Examiner and the Creditors Committee are unable to reach a resolution on whether or on what terms such documents or information should be disclosed to the Examiner, the matter may be brought before the Court for resolution. 6. The Examiner shall prepare and file with the Court a preliminary report of the

investigation within 60 days after the Court approves the appointment of the Examiner. The timing of the Examiners final report of the investigation shall await the recommendation of the Examiner in the preliminary report. 7. Until the Examiner has filed the Examiners report or reports pursuant to 11 U.S.C.

1106(4)(A), neither the Examiner nor the Examiners representatives or agents shall make any public disclosures concerning the performance of the Examiners duties, except in hearings before 2

the Court. The Examiner may disclose information and reports to investigative agencies pursuant to any protocol that may be developed under paragraph 3 hereof. 8. The Examiner may retain counsel and other professionals if he or she determines that

such retention is necessary to discharge his or her duties, with such retention to be subject to Court approval under standards equivalent to those set forth in 11 U.S.C. 327. 9. The Examiner and any professionals retained by the Examiner pursuant to any order

of this Court shall be compensated and reimbursed for their expenses pursuant to the procedures established in the Administrative Order Establishing Procedures for Monthly Compensation and Reimbursement of Expenses of Professionals and Official Committee Members [docket no. 290]. Compensation and reimbursement of the Examiner shall be determined pursuant to 11 U.S.C. 330, and compensation and reimbursement of the Examiners professionals shall be determined pursuant to standards equivalent to those set forth in 11 U.S.C. 330. 10. The Examiner shall be a party in interest under 11 U.S.C. 1109(b) with respect

to matters that are within the scope of the duties delineated in this Order or as such duties may hereafter be modified by this Court, and shall be entitled to appear at hearings and be heard with respect to matters that are within the Examiners duties. 11. Nothing in this Order shall impede the right of the Examiner, the United States

Trustee, or of any other party in interest to request any other lawful relief, including but not limited to the expansion or limitation of the scope of the Examiners investigation.

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re COLLINS & AIKMAN CORPORATION, et al Debtor. / NOTICE OF UNITED STATES TRUSTEES MOTION FOR THE APPOINTMENT OF AN EXAMINER Saul Eisen, United States Trustee, has filed papers with the court for an order appointing an examiner in this Chapter 11 bankruptcy proceeding. Your rights may be affected. You should read these papers carefully and discuss them with your attorney, if you have one in this bankruptcy case. (If you not have an attorney, you may wish to consult one.) If you do not want the court to dismiss the case, or if you want the court to consider your views on the motion, within 15 days, you or your attorney must: 1. File with the court a written response or an answer, explaining your position at:1 U.S. Bankruptcy Court 211 West Fort Street Detroit, MI 48226 If you mail your response to the court for filing, you must mail it early enough so the court will receive it on or before the date stated above. You must also mail a copy to: Stephen E. Spence, Esq. Office of the United States Trustee 211 West Fort Street, Suite 700 Detroit, MI 48226 Case No. 05-55927-SWR Chapter 11 HON. STEVEN W. RHODES

2. If a response or answer is timely filed and served, the clerk will schedule a hearing on the motion and you will be served with a notice of the date, time and location of the hearing. If you or your attorney do not take these steps, the court may decide that you do not oppose the relief sought in the motion and may enter an order granting that relief. SAUL EISEN UNITED STATES TRUSTEE Ohio/Michigan Region 9 By: /s/ Stephen E. Spence (P32923) Steve.E.Spence@usdoj.gov Trial Attorney Office of the U.S. Trustee 211 West Fort Street - Suite 700 Detroit, Michigan 48226 313.226.7911

Dated: February 23, 2007

Response or answer must comply with F.R.Civ.P. 8(b), (c) and (e) .

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re COLLINS & AIKMAN CORPORATION, et al Debtor. / Case No. 05-55927-SWR Chapter 11 HON. STEVEN W. RHODES

CERTIFICATE OF SERVICE I hereby certify that on February 23, 2007, I served copies as follows: 1. Documents Served: Motion of the United States Trustee for the Appointment of an Examiner, Notice of Motion and Certificate of Service. Collins & Aikman Corporation 250 Stephenson Highway Troy, MI 48083 First Class Mail

2.

Served Upon:

3.

Method of Service:

SAUL EISEN UNITED STATES TRUSTEE Ohio/Michigan Region 9

By:

/s/ Karen Riggs Karen.Riggs@usdoj.gov Paralegal Specialist Office of the U.S. Trustee 211 West Fort St - Suite 700 Detroit, Michigan 48226 313.226.7259

Dated: February 23, 2007