Free Motion to Stay - District Court of Delaware - Delaware

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE Case No. _________________ In re: RADNOR HOLDINGS CORPORATION, et al., § § § § § § § § § § § § § § § § § § § § Chapter 11 Case No. 06-10894-(PJW) Jointly Administered Adv. Pro. 06-50909

Debtors. __________________________________ THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF RADNOR HOLDINGS CORPORATION, et al., Appellants, v. TENNENBAUM CAPITAL PARTNERS, LLC, et al., Appellees.

EMERGENCY MOTION FOR STAY PENDING APPEAL AND CORRESPONDING EXTENSION OF THE BID, AUCTION AND SALE DEADLINES1 The Official Committee of Unsecured Creditors (the "Committee") of Radnor Holdings Corp. and certain of its affiliates (collectively, the "Debtors" or "Radnor"), by and through undersigned counsel, on an emergency basis, move the Court to stay the Judgment In Favor of Defendants On All Counts (the "Judgment") entered by the United States Bankruptcy Court for the District of Delaware on November 16, 2006, and correspondingly to extend the bid, auction,
1

Earlier today, the Committee filed a similar Motion for Stay in the Bankruptcy Court and requested an Emergency Hearing on such Motion. Given the exigencies of the circumstances and given that the Bankruptcy Court has yet to rule on the Motion, we are filing this Motion with the District Court.

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and sale schedule (with the auction presently scheduled to be held on November 20, 2006 and the closing to be held following the sale hearing on November 21, 2006) to allow the Committee to exercise its right to appeal the Judgment on an expedited basis. The Committee filed its notice of appeal of the Bankruptcy Court's Judgment and underlying Findings of Fact and Conclusions of Law and the Amended Findings of Fact and Conclusions of Law (collectively, the "Findings")2 on an emergency basis and simultaneously moved for a stay in the Bankruptcy Court. Given the emergency nature of this stay request, the Committee is also filing this emergency motion to avoid any delay in the administration of this Court's appellate review in the event that the stay is denied by the bankruptcy court. SUMMARY OF ARGUMENT A stay of the Judgment and corresponding short postponement of the bid and auction scheduled to commence on Monday, November 20, 2006 followed by the sale hearing and closing on Tuesday, November 21, 2006 is appropriate and necessary for the Committee to exercise its appellate rights. Currently, an auction of the Debtors' assets is scheduled for today, November 20, 2006, with a sale hearing and closing scheduled for November 21, 2006. Based on the Bankruptcy Court's judgment, Tennenbaum's claim was allowed in the amount of $128 million and they have the right to credit bid the entire amount of such claim at the auction. Prior to the Bankruptcy Court's ruling, Four M submitted a competing bid for the Debtors' assets providing a significant recovery to the unsecured creditors. Four M's bid, however, was contingent on the Committee's ability to successfully recharacterize, subordinate or otherwise disallow Tennenbaum's Tranche

2

A copy of the Findings is attached hereto as Exhibit A.

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C debt. If the Committee is successful in its appeal of the Bankruptcy Court's judgment, Four M, or another interested bidder, may be able to outbid Tennenbaum at an auction or propose a plan that results in a recovery. Absent a stay of the Judgment and continuance of the bid, auction and sale dates, the Committee's ability to generate a recovery for the unsecured creditors will be foreclosed. The Committee has simultaneously filed a motion to expedite the appeal. The Committee is not seeking a lengthy delay of the sale process. Tennenbaum will be prejudiced by a short delay of the sale process. The undisputed evidence at trial established that the Debtors have been operating profitably in recent months, and there is no reason to believe that the successful trend will not continue during the moderate extension period necessary for the Committee to prosecute its appeal on an expedited basis. Thus, no party in interest will be prejudiced if a stay and extension of the sale are granted. On the other hand, if such relief is denied and the sale goes forward under the current schedule, the Committee's appeal, no matter how meritorious, may be rendered moot under 11 U.S.C. §363(m), leaving the Committee and its constituents, the unsecured creditors, without any appellate remedy. The accelerated course of these bankruptcy proceedings should weigh heavily on the Court in considering this stay request: The petition was filed on August 21, 2006, the Committee was granted standing to pursue claims in an adversary proceeding on behalf of the Debtor's estate on October 30, 2006, the Committee filed its adversary complaint on October 31, 2006, the trial commenced (without an answer ever being filed) on November 2, 2006, and concluded after 8 full days of testimony on November 14, 2006, and the bankruptcy court entered its Judgment (considering more than a dozen witnesses, and more than 350 documents) on the same day that the parties submitted their proposed findings of fact and conclusions of law, and postNeither the Debtors nor

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trial memoranda. Not surprisingly, in ruling short-order for Tennenbaum, the bankruptcy court adopted almost wholesale Tennenbaum's proposed findings of fact and conclusions of law.3 Given the accelerated schedule under which this case proceeded from complaint to Judgment, coupled with the fact that the exigencies in the form of a cash crisis originally thought to necessitate expedited proceedings are no longer operative, a moderate stay and corresponding extension of the auction and sale deadlines to allow review on appeal would be appropriate. Furthermore, the likelihood of the Committee's success on the merits of the appeal, and the virtual certainty that the Committee and its constituents, the unsecured creditors, will suffer irreparable harm absent a stay, support granting a stay of the effectiveness of the Judgment. FACTUAL AND PROCEDURAL BACKGROUND 1. RADNOR'S FINANCIAL CRISIS. In August 2005, Radnor was overleveraged, insolvent and desperate for additional capital. Declining profitability and rising debt from Radnor's aggressive expansion of

manufacturing capacity had stripped the value of CEO Michael Kennedy's 80% equity stake, and Radnor needed $50 million of new capital to stay afloat pending a subsequent attempt at an elusive IPO that would delever the Company and reverse the negative value of Kennedy's equity.

3

The use of proposed orders for ruling that go beyond housekeeping orders is uniformly discouraged, Anderson v. City of Bessemer, 470 U.S. 564 (1985), because does not give "assurance that the trial court gave careful attention to the evidence and the arguments presented and reached a decision only after personal analysis." In re Colony Square Co., 60 B.R. 1003, 1016-17 (N.D. Ga. 1986); accord, e.g., In re Dixie Broad., Inc., 871 F.2d 1023, 1030 (11th Cir.), cert. denied, 493 U.S. 853 (1989); In re Wisc. Steel Corp., 48 B.R. 753, 763 n.7 (N.D. Ill. 1985); Fields v. City of Tarpon Springs, 721 F.2d 318, 320-21 (11th Cir. 1983); Kaspar Wire Works, Inc. v. Leco Eng'g & Machine, Inc., 575 F.2d 530, 543 (5th Cir. 1978); Keystone Plastics, Inc. v. C & P Plastics, Inc., 506 F.2d 960, 962-63 (5th Cir. 1975). Here, the bankruptcy court's virtual wholesale adoption of Tennenbaum's proposed findings of fact and conclusions of law, while understandable based on the accelerated course of proceedings necessitated by the auction and sale schedule, is not insignificant and should warrant at least an opportunity to revisit the ruling now that the exigent circumstances are shown no longer to exist.

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Tennenbaum Capital Partners, LLC, Special Value Expansion Fund, LLC, and Special Value Opportunities, LLC, (collectively "Tennenbaum") presented Radnor's only option in August 2005. Lehman Brothers, which had been engaged to assist Radnor in its effort to raise capital, was rejected by several other potential investors due to concerns about Radnor's debt level and unrealistic earnings expectations.4 One of Tennenbaum's core investment strategies is to invest in distressed companies in order to acquire equity of the company in a restructuring transaction.5 On October 27, 2005, upon completing its due diligence, Radnor and Tennenbaum entered into a series of agreements for the purchase of preferred stock with an aggregate liquidation preference of $25 million, pursuant to which agreement Tennenbaum: (i) had the right to appoint a director and observer to the Debtors' board6; (ii) had the right to appoint 40% of the Debtors' Board in the event of an earnings miss7; and (iii) had the right of approval before the Debtors could file a registration statement, hire new officers, dispose of substantially all of its assets, or enter into a merger or consolidation8. In addition, as a precondition to closing, Tennenbaum required that Radnor enter into a written employment agreement with Kennedy, and played an active role in the negotiation of Kennedy's employment agreement.9

4

See Kennedy, 11/2/06 Tr. at 355-59, 11/6/06 Tr. at 487; Hastings, 11/7/06 Tr. at 878, 892-93; Hopkins 11/7 Tr. at 94750, 960-66; Finigan, 11/8/06 Tr. at 1117, 1131-32; Palm, 11/8/06 Tr. at 1220-21; Exs. 18, 28, 32, 299, 300. Simultaneously with filing this motion, the Committee submitted copies of the unofficial transcripts referred to herein to the District Court on a CD. See Feliciano, 11/2/06 Tr. at 189-90. Hastings, 11/7/06 Tr. at 929; Exs. 78 at 18-19. See Kennedy, 11/3/06 Tr. at 386; Hastings, 11/7/06 Tr. at 901, 927-28; Ex. 78, at 18-19; Ex. 79, at 1-2. See Kennedy, 11/6/06 Tr. at 583-84; Ex. 78 at 20-21. See Feliciano, 11/2/06 Tr. at 122-23; Kennedy, 11/3/06 Tr. at 372-73, 11/6/06 Tr. at 498-500; Ex. 77 at 26; Ex. 80, at 3; Ex. 168; Ex. 171, at TCPE947.

5 6 7 8 9

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Thereafter, on December 1, 2005, Radnor and Tennenbaum closed on Tranche A loans and Tranche B loans, bringing $95 million into Radnor.10 During the months that followed, Tennenbaum had complete and unfettered access to Radnor's financial and operating information: (i) Tennenbaum received as much, if not more, of Radnor's financial and operating data on a day-to-day and week-to-week basis as Kennedy11; and (ii) Tennenbaum had at least bi-weekly calls with Radnor's financial staff12. With that information, on April 4, 2006, Radnor and Tennenbaum closed on Tranche C loans, bringing into Radnor an additional $23.5 million, $3.2 million of which went to pay the first interest payment on the Tranche A and Tranche B loans.13 Tennenbaum received detachable warrants to purchase 7% of all classes of Radnor's outstanding stock in exchange for the funds that Tennenbaum advanced as part of Tranche C. Additionally, as a condition of the Tranche C loans,

Tennenbaum had (i) the right to designate a majority of Radnor's board upon the acceleration of Tranche C14, and (ii) a $10 million personal guaranty from Kennedy15. Prior to closing on Tranche C, as required by the bond indenture, Radnor solicited the unsecured bondholders for consent, which the bondholders gave but based only on publicly available information -- the bondholders did not have the benefit of the complete financial and

10 11

Feliciano, 11/2/06 Tr. at 119; Exs. 91-94. See Feliciano, 11/2/06 Tr. at 119-20, 127-33, 212, and 11/3/06 Tr. at 249-53, 325-27; Kennedy, 11/3/06 Tr. at 410-13, 11/6/06 Tr. at 521-25; Hastings, 11/7/06 Tr. at 902-03; Mehrotra, 11/3/06 at 289-90, 297-301; Kelly, 11/7/06 Tr. at 838-39; Ex. 119, 122, 124, 125, 133, 136-137, 144-145, 151-152, 154-155, 188-189, 211, 226, 347. See Feliciano, 11/2/06 Tr. at 127-33; Feliciano, 11/3/06 Tr. at 249-53; Mehrotra, 11/3/06, at 297-301; Kelly, 11/7/06 Tr. at 838-39; Ex. 211, 347. See Feliciano, 11/2/06 Tr. at 154, 235; Kennedy, 11/3/06 Tr. at 441, 11/6/06 Tr. at 553-54; Kelly, 11/7 Tr. at 823, 82930; Exs. 171-76, 178-79. See Kennedy, 11/3/06 Tr. at 439-40; Ex. 173, at 1-2. See Feliciano, 11/2/06 Tr. at 159; Kennedy, 11/3/06 Tr. at 434; Ex. 171.

12

13

14 15

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operating data that had been provided to Tennenbaum.16 None of the other unsecured creditors were solicited for their consent.17 By May 2006, as Radnor's financial crisis escalated, Tennenbaum became involved in every facet of Radnor's restructuring efforts.18 More specifically: (i) Tennenbaum led the hiring of Radnor's new COO, Stanford Springel19; (ii) Tennenbaum's general counsel attended certain of Radnor's board meetings20; and (iii) Tennenbaum participated in hiring Radnor's bankruptcy counsel and restructuring advisor21. Steven Darr, the unrebutted restructuring and valuation expert who testified at trial, opined that Radnor was insolvent as of October 27, 2005, December 1, 2005, and April 4, 2006.22 Darr further opined that Radnor had insufficient capital to pay its ongoing operating expenses and interest on its debt, and that Radnor's financial ratios could be brought in line with industry standards only if the Tranche A loans and Tranche B loans were treated as equity and not debt.23 As a result of the foregoing transaction, $158.6 million in assets once available to satisfy unsecured creditors' claims as of October 27, 2005 were wiped out, leaving the unsecured creditors with nothing.24

16 17 18 19 20 21 22 23 24

See Feliciano, 11/2/06 Tr. at 235-38; Kennedy, 11/3/06 Tr. at 456-57, 11/6/06 Tr. at 536-37; Exs. 167, 186, 320. See Kennedy, 11/6/06 Tr. at 596. See Feliciano, 11/2/06 Tr. at 166-67; Mehrotra, 11/3/06 Tr. at 300-01. See Feliciano, 11/2/06 Tr. at 166. See Kennedy, 11/3/06 Tr. at 446-48; Ex. 214. See Feliciano, 11/2/06 Tr. at 171-766; Ex. 228. See Darr, 11/6/06 Tr. at 641-45, 11/7/06 Tr. at 781-82; Ex. 346 at 8-18 & Exs. I-O. See Darr, 11/6/06 Tr. at 644-45; Exs. 356 at -19 & Exs. P & Q. See Darr, 11/6/06 Tr. at 670-72; EX. 346 at 20 & Ex. R.

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2.

RADNOR'S DEMISE INTO BANKRUPTCY COURSE OF PROCEEDINGS.

ON

ACCELERATED

On August 21, 2006 (the "Petition Date"), the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The Debtors continue in the possession of their properties and management of their business as debtors-in-possession ("DIP"), pursuant to 11 U.S.C. §§1107 and 1108. No trustee or examiner has been appointed. On August 31, 2006, the Office of the United States Trustee appointed the Committee, the members of which are U.S. Bank, N.A. (the indenture trustee for the bonds), The Airlie Group (a bondholder), Barclays Bank PLC (a bondholder), Peritus I Asset Management LLC (a bondholder), Total Deyro Chemicals USA, Inc. (a trade creditor), Lyondell Chemical Company (a trade creditor), and Polar Plastics, Inc. (a trade creditor and holder of an unsecured note for payment of purchase price). On the Petition Date, the Debtors filed Debtors' Motion for (I) an Order (A) Establishing Bidding Procedures Relating to the Sale of the Debtors' Assets, (B) Scheduling a Hearing to Consider the Proposed Sale and Approving the Form and Manner of Notice Thereof, (C) Establishing Procedures Relating to the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases, Including Notice of Proposed Cure Amounts, (D) Approving Bid Protections, and (E) Granting Certain Related Relief; and (II) an Order (A) Approving The Proposed Sale, (B) Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases, And (C) Granting Certain Related Relief (the "Sale Motion"). The Sale Motion sought two levels of relief: (i) approval of procedures for bidding on substantially all of the Debtors' assets (the "Bid Procedures"); and (ii) approval of the sale to Tennenbaum of substantially all of the Debtors' assets (the "Proposed Sale").

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On September 11, 2006, the Committee filed its objection to the Bid Procedures on multiple grounds (the "Bid Procedures Objection"), specifically reserving the Committee's rights to object to the Proposed Sale. See Bid Procedures Objection, n.2. [Docket No. 144] The Debtors and the Committee reached an agreement regarding certain modifications to the proposed Bid Procedures that resolved the Committee's Bid Procedures Objections. On September 22, 2006, the bankruptcy court entered the Order Pursuant to 11 U.S.C. §§ 105 and 363 and Fed. R. Bankr. P. 2002 and 6004 (I) Establishing Bid Procedures Relating to the Sale of the Debtors' Assets, (II) Scheduling a Hearing to Consider the Proposed Sale and Approving the Form and Manner of Notice Thereof, (III) Establishing Procedures Relating to the Assumption and Assignment of Certain Executory Contracts and Unexpired Leases, Including Notice of Proposed Cure Amounts, (IV) Approving the Break-Up Fee and Expense Reimbursement Provision, and (V) Granting Related Relief (the "Bid Procedures Order"). On October 13, 2006, the Debtors' filed a purchase price estimate (the "Purchase Price Estimate") for the Proposed Sale. The estimated total unadjusted purchase price is $224,680,000 (the "Current Purchase Price"). On October 18, 2006, the Committee filed its Objection to Proposed Credit Bid (the "Credit Bid Objection"), objecting to Tennenbaum's ability to credit bid its claims. In addition, the Credit Bid Objection incorporated by reference the arguments contained in the adversary proceeding complaint filed as an exhibit to that certain Motion for Order Granting the Committee Standing to Prosecute Actions on Behalf of the Debtors' Estates Against Tennenbaum Capital Partners, LLC, Special Value Expansion Fund, LLC, Special Value Opportunities, LLC, and Jose E. Feliciano, and for Related Relief (the "Motion for Standing"), also filed on October 18, 2006.
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On October 30, 2006, over the Debtors' objections, the bankruptcy court entered that certain Order Granting the Official Committee of Unsecured Creditors Standing to Prosecute Actions on behalf of the Debtors Estates Against Tennenbaum Capital Partners, LLC, Special Value Expansion Fund, LLC, Special Value Opportunities, LLC, and Jose E. Feliciano and Related Relief (the "Standing Order"). On October 31, 2006, pursuant to the Standing Order, the Committee commenced this adversary proceeding by filing a complaint against Tennenbaum, seeking to disallow its approximately $128 million proof of claim and thereby to avoid a credit bid by Tennenbaum at the imminent auction and sale. On November 3, 2006, the Debtors appealed the Standing Order to this Court, without obtaining a stay. On November 2, 2006, in the absence of a stay pending the Debtors' appeal, the bankruptcy court commenced an 8-day trial on the adversary complaint against Tennenbaum. At the outset of the trial, the bankruptcy court granted the Debtors' Emergency Motion to Join Adversary Proceeding or, in the Alternative, to Intervene as of Right. At the conclusion of the Trial, the Committee submitted a Notice of Withdrawal of Certain Counts of the Complaint Pursuant to Fed.R.Bankr.P. 7015, and thereafter the parties submitted their respective proposed Findings of Fact and Conclusions of Law, as well as summaries of the legal standards and factual support for each of the remaining counts in the Complaint. In addition, at the request of the bankruptcy court, the Committee submitted a Statement of Claims Supported by the Expert Testimony of Stephen B. Darr. 3. THE COMMITTEE'S ATTEMPT TO EXTEND THE AUCTION AND SALE DEADLINES. On November 15, 2006, the Committee filed its emergency motion to facilitate a higher and better bid through a limited extension of certain deadlines as set forth in the Bid Procedures

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Order (the "Alternative Transaction Motion"). In connection with the Alternative Transaction Motion, the Committee submitted the term sheet for the proposed bid by Four M Investments, LLC ("Four M").25 In that motion, which only Tennenbaum opposed, the Committee requested the Court to extend the deadline for the submission of bids, the auction date and the sale hearing by approximately 12 days to allow the Committee and Four M to complete their negotiations, Four M to complete certain limited due diligence, and Four M's financing sources to complete their financial due diligence so that commitments may be issued. Four M's bid was contingent on the disallowance, subordination or recharacterization of Tennenbaum's Tranche C debt. Four M's bid was valued at $250 million. The bankruptcy court heard the Alternative Transaction Motion on November 16, 2006 at 4:00 p.m. Before hearing the motion, the bankruptcy court announced from the bench the court's decision denying each of the Committee's claims for relief against Tennenbaum in the Tennenbaum Adversary Proceeding. In light of the Court's decision, the bankruptcy court continued the hearing on the Alternative Transaction Motion to allow the parties time to assess the impact of the decision on the financing for the proposed Four M transaction.26 From the outset, the Committee has expressed concern about Tennenbaum's ability to credit bid and its potential impact on the market place. The market place has now spoken. No other bids have been submitted and Tennenbaum is poised to purchase the Debtors' assets without contest.

25 26

Four M subsequently filed a timely bid. In light of the bankruptcy court's entry of the Judgment, Four M has elected not to pursue its bid.

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On November 20, 2006, the Debtors commenced the auction at 9:00 a.m. E.T. Tennenbaum did not even attend the auction. Furthermore, the Debtors announced that they now valued Tennenbaum's bid at $186 million to $190 million. The Debtors adjourned the auction to 5:00 p.m. E.T. on November 20, 2006 because they did not yet have an agreement with Tennenbaum on the terms of an asset purchase agreement, the estates are allegedly administratively insolvent based on Tennenbaum's offer and the Committee had requested an extension of the auction and the sale hearing. 4. THE JUDGMENT. On November 16, 2006, the bankruptcy court entered its Findings and Judgment. THE STANDARD FOR GRANTING A STAY Bankruptcy Rule 8005 contemplates that a bankruptcy court can protect the rights of the parties while an appeal of one of its orders is pending: [T]he bankruptcy judge may suspend or order the continuation of other proceedings in the case under the Code or make any other appropriate order during the pendency of an appeal on such terms as will protect the rights of all parties in interest. The Third Circuit has recognized that "a myriad of circumstances can occur that would necessitate the grant of a stay pending appeal in order to preserve a party's position." In re Highway Truck Drivers & Helpers Local Union #107, 888 F.2d 293, 298 (3d Cir. 1989). The granting of a motion for a stay pending appeal is commended to the bankruptcy court's sound discretion. In re United Merchants & Mfrs., Inc., 138 B.R. 426, 430 (D. Del. 1992). The standards that guide a court in the exercise of its discretion to grant stay relief are similar to the standards that govern the issuance of a preliminary injunction, and accordingly applies the following well-known four factors: (i) whether the moving party has a strong
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likelihood of success on the merits of the appeal; (ii) whether the movant will be irreparably harmed absent a stay; (iii) whether the issuance of the stay will substantially injure the other parties interested in the proceeding; and (iv) where the public interest lies. Republic of the Philippines v. Westinghouse Elec. Corp., 949 F.2d 653, 658 (3d Cir. 1991). The analysis contemplates "individualized judgments in each case," id., such that no single factor is outcome determinative. In re Allegheny Health, Educ. & Research Found., 252 B.R. 309, 321 (W.D. Pa. 1999); In re Roth American, Inc., 90 B.R. 94, 95 (Bankr. M.D. Pa. 1988). The "likelihood of success" test must not be taken too literally; a court need not "confess error" to grant a stay. Evans v. Buchanan, 435 F. Supp. 832, 843 (D. Del. 1977). Indeed, on balance, the more likely it is that the movant will suffer irreparable harm absent a stay, the less strong the showing of success on appeal needs to be, and vice-versa. E.g., Nordhoff Invs., Inc. v. Zenith Elecs. Corp. (In re Zenith Elecs. Corp.), 250 B.R. 207, 215 (D. Del. 2000) ("Zenith I"), aff'd, 258 F.3d 180 (3d Cir. 2001) ("Zenith II"); accord, e.g., Sofinet v. INS, 188 F.3d 703, 707 (7th Cir. 1999). In Evans, the court explained: Although this standard is similar to one of the tests for issuance of a preliminary injunction, the posture of a case is significantly different when preliminary injunctive relief is sought from when a stay is requested. In the former, the Court has not ruled on the merits of the case and need only make an initial determination of the reasonable probability of the applicant's eventual success. In the latter, the Court has issued its determination, after a full consideration on the merits. The above-quoted standard would seem to require that a district court confess to having erred in its ruling before issuing a stay. Common sense dictates that a literal reading of the standard would lead most probably to consistent denials of stay motions, despite the immediate threat of substantial irreparable injury to the movant. The almost inescapable conclusion is that the standard cannot mean what its language would indicate.... In a case where the movant will suffer irreparable injury in the absence of a stay, consideration of the merits of the movant's appeal permits an evaluation of
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whether that injury is likely to occur in any event. It seems illogical, however, to require that the court in effect conclude that its original decision in the matter was wrong before a stay can be issued. Id. at 843-44; accord, e.g., Rothenberg v. Ralph D. Kaiser Co., Inc., 200 B.R. 461 (D.D.C. 1996) (probable irreparable harm is principal prerequisite to issuance of discretionary stay pending appeal); In re City of Bridgeport, 132 B.R. 81 (Bankr. D. Conn. 1991) (likelihood of injury is primary consideration, such that injury is imminent, and not remote or speculative). Moreover, there is strong support for the proposition that courts should give serious consideration to motions seeking a preservation of the status quo pending appeal in the bankruptcy context. In re Gucci (Paolo v. Sinatra), 105 F.3d 837 (2d Cir. 1997). In Gucci, upon the district court's denial of a stay, the parties sought a stay in the Second Circuit, but prior to the Second Circuit's ruling on the stay the sale authorized by the underlying order was consummated and a motion to dismiss as moot followed. Id. at 838-39. The Second Circuit, noting the limited scope of review under §363(m) after the sale had been consummated, expressed concern that the district court's denial of the stay request effectively denied meaningful review on appeal and cautioned: On this motion to dismiss an appeal involving a bankruptcy sale, we write to alert district judges to a major and perhaps unappreciated significance of their action, after denying a stay pending appeal, in denying even a one-day stay to permit a party to seek a stay pending appeal from the Court of Appeals. 105 F.3d at 838. The Second Circuit thus admonished that where, as here, significant and substantially irreversible actions may occur immediately upon the issuance of an order, the lower court has an affirmative responsibility to preserve issues for the consideration of the appellate court: [W]here an appellant timely moves to stay a judicially authorized sale, a district court's denial of that motion will similarly limit the issues on appeal. Although
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an appellant's challenge to a sale authorization might raise meritorious arguments, a district court's denial of a requested stay has the effect of precluding this Court from reviewing those issues, other than the good faith of the purchaser, if the sale has closed in the interim. It becomes important for district judges to appreciate the special consequences of denying a stay of a bankruptcy sale, even a very brief stay to permit this Court time to consider whether a stay pending appeal is warranted. Id. at 840 (emphasis added). In addition, Bankruptcy Rule 8005 enables this Court to "tailor relief to the unique circumstances of the case, `[n]otwithstanding Rule 7062,' by making any `appropriate order during the pendency of an appeal on such terms as will protect the rights of all the parties in interest.'" In re Trans World Airlines, Inc., 18 F.3d 208, 212 (3d Cir. 1994); Quarles v. Miller, 193 B.R. 779, 782 (W.D. Va. 1996). Thus, Rule 8005, by its express terms provides this Court with broad discretion. Trans World Airlines, 18 F.3d at 211 n.6; Quarles, 193 B.R. at 782. Indeed, Bankruptcy Rule 8005 is "a flexible tool which permits a bankruptcy court to uniquely tailor relief to the circumstances of the case, so that the appellate process will neither undo nor overwhelm the administration of the bankruptcy case." In re Gleasman, 111 B.R. 595, 599 (Bankr. W.D. Tex. 1990) (holding that a bankruptcy judge "can design stays to avoid unjust results, taking into consideration all the exigencies of the entire bankruptcy case."). ARGUMENT 1. THE COMMITTEE IS LIKELY TO SUCCEED ON THE MERITS. The Judgment rests on several legal errors that provide strong grounds for appeal. a. The Bondholders' Acquiescence.

The bankruptcy court ruled that, "the Committee's claims are barred by the equitable defense of acquiescence, as applied by the Delaware courts." Findings 40 at ¶41. And the Court explained the basis for its ruling as follows: "95% of the noteholders, including a majority of the
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members of the Committee, ... voted in favor of Tranche C and accepted $675,000 in exchange for their consent. Thus, they have acquiesced to the Tranche C Loans. Having acquiesced to it, they cannot now be heard to argue that Tranche C should be treated as equity, nor that entering into Tranche C was a breach of fiduciary duty." Id. at ¶42. In other words, the Court has found that the entire Committee is barred from bringing its claims because certain bondholders who are also members of the Committee, but do not make up the entire committee, allegedly acquiesced. Id. at ¶¶42-43. The Court's ruling is not likely to be sustained on appeal. For one thing, certain of the claims asserted by the Committee are derivative claims belonging to the Debtors, which claims the bankruptcy court granted the Committee standing to prosecute on behalf of the Debtors' estates. And even as to those claims that the bankruptcy court has determined to be direct claims, the Committee has asserted those claims on behalf of the entire creditor body, not just bondholders. Moreover, that the bondholders on the Committee allegedly acquiesced cannot be applied to the entire Committee as a binding waiver. As a matter of fact, the bondholders do not even constitute a majority of the Committee (they are 3 of 7 members), and more importantly the Committee represents the entire body of unsecured creditors and accordingly must act as fiduciaries for all creditors. The Court's ruling does not find any decisional authority in bankruptcy. Id. And, the far-reaching policy implications of a decision that seems to rest on the Court's view based on an assumption and personal experience27 is readily apparent and warrant review by this Court on appeal.

27

See Findings at 16 & ¶42 ("The consent of the noteholders is, in my view, clear evidence of the acknowledgment that the Company had serious liquidity problem and that the Tranche C secured debt transaction had the prospects of a solution to that problem.").

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b.

Tennenbaum's Insider Status.

An "insider" of a corporate debtor is defined in 11 U.S.C. §101(31)(B), as: (i) a director of the debtor; (ii) an officer of the debtor; (iii) a person, e.g., individual, partnership or corporation, 11 U.S.C. § 101(41), controlling the debtor; (iv) a partnership in which the debtor is a general partner; (v) a general partner of the debtor; (vi) a relative of a general partner, director, officer or person in control of the debtor. Courts have consistently held that the "inclusive" definition of an "insider" in §101(31)(B) is "not limited to the examples given." Shubert v. Lucent Techs., Inc. (In re Winstar Commc'ns, Inc.), 2003 WL 21356090, *9 (Bankr. D. Del. May 29, 2003); see also, e.g., In re Missionary Baptist Found. of Am., Inc., 712 F.206 (5th Cir. 1983) (recognizing that definition reflects expansive view of the scope of the insider class such that the definition is not limiting and must be flexibly applied); Dressel Assocs. v. Beaver Valley Builder's Supply, Inc., 177 B.R. 507, 513 (Bankr. W.D. Pa. 1995) (recognizing that the "six ... categories of corporate insider ... are not exhaustive, and that the "definition ... is flexible and not amendable to precise formulation"). See also The News Journal Co. v. Little Caesars of Del., Inc., 2000 WL 33653432, *2 (Del. Com. Pl. Oct. 20, 200) (similarly interpreting Delaware's nearly identical statutory definition as "expansive rather than exhaustive"). More specifically, and pertinent to the Committee's appeal of the Judgment, when a corporation designates one of its officers, directors, or employees to serve on the board of another entity, it is the corporation and not the individual acting as the corporation's representative that is considered an insider. E.g., Committee of Creditors Holding Unsecured Claims v. Citicorp Venture Capital, Ltd. (In re Papercraft Corp.), 165 B.R. 980, 984-87 (Bankr. W.D. Pa. 1994), withdrawn on other grounds, 187 B.R. 486, 494-96 (Bankr. W.D. Pa. 1995),

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reversed and remanded on other grounds, 211 B.R. 507, 513 (Bankr. W.D. Pa. 1995); Dressel, 177 B.R. at 513. And, with respect to whether the control exerted is sufficient to bestow insider status, "[a]ny person or entity whose relationship with the debtor is sufficiently close so as to subject the relationship to careful scrutiny may qualify as an `insider.'" In re Student Finance Corp., 335 B.R. 539, 547 (D. Del. 2005) (citing In re Karen Louise Demko, 264 B.R. 404, 408 (Bankr. W.D. Pa. 2001)); accord, e.g, Official Comm. of Unsecured Creditors v. Austin Fin. Servs., Inc. (In re KDI Holdings, Inc.), 277 B.R. 493, 511 (Bankr. S.D.N.Y. 1999) (quoting S. Rep. No. 989, 95th Cong., 1st Sess. 25 (1978)); accord, e.g., Shubert, 2005 W.L. 4705075 at *34; Walsh v. Dutil (In re Demko), 264 B.R. 404, 408 (Bankr. W.D. Pa. 2001). And as applied to an entity, the court must examine whether the suspect creditor (i) had more ability to assert control than other creditors, (ii) made management decision for the debtor, (iii) directed work performance, and (iv) directed payment of the debtor's expenses, ultimately to determine whether the day-to-day control over operations and policy reflects such influence as to be deemed an insider. ABC Elec. Serv. Inc. v. Rondout Elec. Inc. (In re ABC Elec. Serv. Inc.), 190 B.R. 672 (Bankr. M.D. Fla. 1975); accord, e.g., Shubert, 2005 W.L. 4705075 at *34; Official Comm. of Unsecured Creditors v. Credit Suisse First Boston, 299 B.R. 732, 743 (Bankr. D. Del. 2003); Official Unsecured Creditors Comm. v. Citicorp N. Am., Inc., 132 B.R. 869, 894 (Bankr. N.D. Ill. 1991). The significance to the bankruptcy court's Judgment, of course, is that an insider's conduct that gives rise to a claim is subject to more rigorous scrutiny in determining whether the claim should be subordinated such that the burden is shifted. Fabricators, Inc. v. Technical Fabricators, Inc. (In re Fabricators, Inc.), 926 F.2d 1458, 1465 (5th Cir. 1991); accord, e.g., In re Mid-Am. Waste Sys., Inc., 284 B.R. 53, 69 (Bank. D. Del. 2002).
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Here, the Court found that "Kennedy, not Tennenbaum, was in control of the Debtors," Findings 20 at ¶57, because Tennenbaum did not exercise day-to-day control over Radnor's business affairs or dictate Radnor's business policy and operations. And therefore, the Court found, Tennenbaum could not be deemed "an insider for purposes of equitable subordination." Id. at 27, ¶11. The bankruptcy court misapplied the standard. Tennenbaum: (i) was a preferred stockholder28; (ii) had the right to appoint a director and observer to the Debtors' board and actually did29; (iii) had the right to appoint 40% of the debtor's Board in the event of an earnings miss30; (iv) was an active participant in the negotiation of Kennedy's employment agreement31; (v) had the right of approval before the Debtor could file a registration statement, hire new officers, dispose of substantially all of its assets, or enter into a merger or consolidation32; (vi) received as much, if not more, of the Debtors' financial and operating data on a day-to-day and week-to-week basis as Kennedy33; (vii) had at least bi-weekly calls with the Debtors' financial staff34; (viii) had the right to designate a majority of the Debtors' board upon the acceleration of Tranche C35, and (ix) had a $10 million personal guaranty from Kennedy, the Debtors' majority shareholder36. The bankruptcy court's Judgment

28 29 30 31

See Exs. 77-79. Hastings, 11/7/06 Tr. at 929; Exs. 78 at 18-19. See Kennedy, 11/3/06 Tr. at 386; Hastings, 11/7/06 Tr. at 901, 927-28; Ex. 78 at 18-19; Ex. 79 at 1-2. See Feliciano, 11/2/06 Tr. at 122-23; Kennedy, 11/3/06 Tr. at 372-73, 11/6/06 Tr. at 498-500; Ex. 77, at 26; Ex. 80, at 3; Ex. 168; Ex. 171, at TCPE947. See Kennedy, 11/6/06 Tr. at 583-84; Ex. 78 at 20-21. See Feliciano, 11/2/06 Tr. at 119-20, 127-33, 212, and 11/3/06 Tr. at 249-53, 325-27; Kennedy, 11/3/06 Tr. at 410-13, 11/6/06 Tr. at 521-25; Hastings, 11/7/06 Tr. at 902-03; Mehrotra, 11/3/06 at 289-90, 297-301; Kelly, 11/7/06 Tr. at 838-39; Ex. 119, 122, 124, 125, 133, 136-137, 144-145, 151-152, 154-155, 188-189, 211, 226, 347. See Feliciano, 11/2/06 Tr. at 127-33; Feliciano, 11/3/06 Tr. at 249-53; Mehrotra, 11/3/06 at 297-301; Kelly, 11/7/06 Tr. at 838-39; Ex. 211, 347. See Kennedy, 11/3/06 Tr. at 439-40; Ex. 173 at 1-2. See Feliciano, 11/2/06 Tr. at 159; Kennedy, 11/3/06 Tr. at 434; Ex. 171.

32 33

34

35 36

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is irreconcilable with these undisputed facts. Tennenbaum engaged in inequitable conduct by taking advantage of Radnor's undercapitalization for its own benefit, using its position to divert to itself the pool of assets previously available to satisfy unsecured creditors' claims. See, e.g., In re Logue Mech. Contracting Corp., 106 B.R. 436, 438 (Bankr. W.D. Pa. 1989) ("When a corporation is undercapitalized, a shareholder must not be permitted to call his capital contribution a loan in order to reduce the risk of loss."). The case law, as set out above, is clear that the burden of proof for equitable subordination claims turns on the threshold determination of insider status. If the bankruptcy court erred in finding that Tennenbaum was not an insider at the time of the Tranche C transaction, then the court also applied the wrong burden of proof for this claim. Hovis v. Powers Constr. Co., Inc. (In re Hoffman Assocs., Inc.), 194 B.R. 943, 966 (Bank. D.S.C. 1995) (holding that subordination in light of inequitable conduct "is consistent with the basic goal of equality of distribution in bankruptcy"). Tennenbaum intervened with a financial strategy when Radnor was in a financial crisis and engaged in a high-stakes, dubious growth strategy with little hope of success -- based on Darr's undisputed expert testimony -- and as was surely apparent to Tennenbaum in the exercise of its due diligence. Tennenbaum agreed nonetheless to provide financing with full knowledge that the strategy was likely to fail, as shown by Tennenbaum's contemporaneous documentation at the time of the transaction. By the close of Tranche A and Tranche B, Tennenbaum was in place as Radnor's largest secured creditor on a loan that Tennenbaum surely knew was likely to go into default, reducing the pool of assets available to satisfy unsecured creditors' claims by at least the $25 million in new "secured debt" advances by Tranche A and Tranche B. See In re Mid-American, 284 B.R. at 71 (holding that injury caused by "inequitable conduct in reasonable
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proximity to bankruptcy or while the corporation is in financial distress decreases the likelihood of the recovery of claims by general creditors, and thus injures them").37 Here, the injury is directly quantifiable, as Darr has shown that the pool of assets available to satisfy the claims of unsecured creditors shrank from $158.6 million to none.38 Tranche C, as an extension of the same inequitable conduct falls even harder under the same analysis. By the time of that

transaction, April 4, 2006, Tennenbaum was entrenched in Radnor's operations and finances, and Tennenbaum obtained a $10 million personal guaranty from Kennedy, giving Tennenbaum influence over the majority shareholder.39 Tennenbaum was clearly an insider under those circumstances. E.g., In re Papercraft, 187 B.R. at 495. And after Tranche C, Tennenbaum increased its penetration in Radnor's financial and operational affairs, obtaining access for its general counsel to Radnor board meetings, influencing the selection of bankruptcy counsel and restructuring advisors. c. The Exclusion of Professor Rocks' Expert Report and Testimony.

The Bankruptcy Court granted Tennenbaum's motion in limine to strike the expert report and to preclude the related testimony of Professor Edward Rock. Professor Rock, the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Law School, is a corporate governance expert and his qualifications to testify as an expert in his field was never challenged. The Committee intended to call Professor Rock to testify regarding the accepted
37

The bankruptcy court cited its personal "experience," not on any legal authority, for accepting Feliciano's selfinterested testimony that the influences set out in the documents were "fairly typical" and "reasonable and appropriate" protections under the circumstances. Findings at 6-7 & ¶13. See Darr, 11/6/06 Tr. at 670-72; Ex. 346 at 20 & Ex. R. See Feliciano, 11/2/06 Tr. at 127-33, 159, 212, 11/3/06 Tr. at 249-53; Mehrotra, 11/3/06 Tr. at 289-90, 297-301, 32527; Kelly, 11/7/06 Tr. at 838-39; Kennedy, 11/3/06 Tr. at 410-13, 434, 439-40, 11/6/06 Tr. 521-25; Hastings, 11/7 Tr. at 902-03; Ex. 122, 124, 125, 133, 136-37, 144-45, 151-52, 154-55, 168, 171 at TCPE947, 173 at 1-2, 188-89, 211, 226, 347.

38 39

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corporate governance standards and practices, thereby to assist the trier of fact -- here, the bankruptcy court -- in deciding whether Tennenbaum actions comport. Tennenbaum, conceding Professor Rock's qualifications as an expert, succeeded in striking the report and testimony on grounds that the testimony would: (i) opine on ultimate conclusions of law and fact; and (ii) comprise a collateral attack on the approved bidding procedures. The bankruptcy court's

exclusion of Professor Rock's expert report and testimony is a likely basis for reversal on appeal. Expert testimony is admissible, under Rule 702 of the Federal Rules of Evidence, in any area of "scientific, technical or other specialized knowledge," if such expert testimony will "assist the trier of fact to understand the evidence or to determine a fact in issue." While it is not permissible for an expert witness to testify as to the governing law, since that is the court's purview, Berckeley Inv., Ltd. v. Colkitt, 455 F.3d 195, 217 (3d Cir. 206), expert witnesses are routinely permitted to testify concerning business customs and practices. United States v. Leo, 941 F.2d 181, 196 (3d Cir. 1991); First Nat'l State Bank of N. J. v. Reliance Elec. Co., 668 F.2d 725, 731 (3d Cir. 1981). More specifically, in Wattel v. Browne, 2006 WL 121186, *1 (D. Ariz. May 3, 2006), the court allowed expert testimony on corporate governance standards because "the standards of care that make up those duties and what conduct constitutes a breach of those duties are factual questions and proper subjects for expert testimony." Likewise, in Pereira v. Coogan, 281 B.R. 194, 199-200 (S.D.N.Y. 2002), the court determined that testimony by a corporate governance expert does not usurp the court's role, where the testimony is based on industry standards as established by previous judicial opinions. Indeed, it is recognized that discussion and examples of what "good corporate practices require according to industry custom and practice" can be

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"useful to the trier of fact," and experience in the are of corporate governance "provides a reliable foundation" for opinions on "good corporate practices." Id.40 Here, Professor Rock would have assisted the bankruptcy court with basic standards and practices testimony, of the type routinely admitted to assist triers of fact in deciding issues that require an analysis of complex or specialized fields. Corporate governance is unquestionably a specialized area with its own standards and practices that have developed over decades, and Professor Rock's corporate governance testimony did not fall within the realm of impermissible legal opinion, but rather would have assisted the Court in understanding the parameters of the underlying transaction. Moreover, the limitations on expert testimony in the context of legal opinions have been uniformly expressed as necessary to preserve the trial court's exclusive province to instruct the jury on the law. E.g., Berckeley, 455 F.3d at 217; Leo, 941 F.2d at 196; see also, e.g., Cambra v. The Restaurant School, 2005 WL 2886220, at *4 (E.D. Pa. Nov. 2, 2005) (recognized the distinction between bench and jury trials in terms of the admissibility of documentary evidence during trial). Such concerns are inapposite here, as the trial proceeded without a jury and the Court would have been well-equipped to weigh the testimony with discretion. Professor Rock's testimony was intended to provide appropriate context with which to evaluate Tennenbaum's actions in light of accepted standards and practices of corporate governance, and the Court sitting as trier of fact would have been well-positioned to evaluate the
40

See also, e.g., Consolidated Edison Co. of N.Y., Inc. v. UGI Util., Inc., 310 F. Supp. 2d 592, 600 (S.D.N.Y. 2004) (admitting testimony of corporate governance expert Jonathan Macey regarding company's control of subsidiary); Cary Oil Co. v. MG Refining & Mktg., Inc., 2003 WL 1878246 (S.D.N.Y. April 11, 2003) (admitting law professor's testimony on corporate governance relating to the principles of veil piercing, because it "does not cross the boundaries into an opinion that would tell the jury what decision to reach"); U.S. v. Pelullo, 1993 WL 216127, *6 (E.D. Pa. June 18, 1993) (admitting testimony of Professor Coffee regarding proper corporate practice and procedures with respect to the responsibilities of a CEO).

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weight of Professor Rock's opinions, and to discern any excess. Professor Rock would simply have done what all expert witnesses must do: Professor Rock would have rendered opinions, based upon review of the discovery and trial record, that would clearly have been helpful to provide insight beyond average understanding and experience, and measure by that guiding standard. Professor Rock's testimony -- respectful of the Court's role as trier of fact and arbiter of law in this case -- was improperly excluded and provides a likely basis for reversal on appeal. d. The Deepening Insolvency Analysis.

The Court rejected the Committee's breach of fiduciary duty claims as an attempt to try this case as a purported "deepening insolvency" case, and ruled that the Committee's claim cannot survive by any designation because "a board is not required to wind down operations simply because a company is insolvent, but rather may conclude to take on additional debt in the hopes of turning operations around." Findings 29 at ¶16. And the bankruptcy court accordingly found no fault in Tennenbaum's transactions, citing Seitz v. Detweiler, Hershey & Assoc. (In re CitX Corp.), 448 F.3d 672, 677 (3d Cir. 2006), for the proposition that stock investments like Tennenbaum's $25 million preferred stock investment lessen insolvency rather than increase it and that a loan similarly does not increase insolvency but rather liabilities and assets in the same amount. The bankruptcy court thereon determined that "much of the Committee's case at trial at best would have implicated the duty of care, not the duty of loyalty." Findings 30 at ¶20. The bankruptcy court's application of the lesser duty of care standard is not likely to be upheld on appeal.

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When Feliciano, as Tennenbaum's designee, joined Radnor's board, the company was at least operating in the vicinity of insolvency, and its condition did not improve throughout Feliciano's tenure.41 Feliciano's fiduciary duty of loyalty therefore extended beyond the

company's shareholders to Radnor's unsecured creditors. See In re High Strength Steel, Inc., 269 B.R. 560, 569 (Bankr. D. Del. 2001) (director of insolvent corporation owes a fiduciary duty to the unsecured creditors); Credit Lyonnais Bank Nederland v. Pathe Commc'ns Corp., 1991 WL 277613, * 34 (Del. Ch. Dec. 30, 1991) (directors owe fiduciary duties to creditors when the corporation is "operating in the vicinity of insolvency"). The fiduciary duty to creditors requires that the directors of an insolvent company "maximize the value of the assets for payment of unsecured creditors." In re High Strength, 269 B.R. at 569. See also Odyssey Partners, L.P. v. Fleming Co., 735 A.2d 386, 417 (Del. Ch. 1999). Feliciano breached his duty of loyalty to Radnor and to the unsecured creditors when he used the information he obtained as a director to negotiate the Tranche C loans for the benefit of Tennenbaum, which further depleted the assets available to satisfy the unsecured creditors' claims. 2. THE COMMITTEE WILL SUFFER IRREPARABLE HARM ABSENT A STAY. Without a stay of the bankruptcy court's Judgment, the Committee will be irreparably harmed as its effort to appeal will be rendered moot. As noted above, the Debtors commenced the auction on Monday, November 20, 2006 and presumably the sale will be consummated at the sale hearing and closing on Tuesday, November 21, 2006. In that event, the Committee's appeal

41

See Darr, 11/6/06 Tr. at 641-45, 11/7/06 at 781-82; Ex. 346 at 8-18 & Exs. I-O.

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to this Court may become moot under 11 U.S.C. §363(m). See Zenith II, 258 F.3d at 185-86; Continental Airlines, 91 F.3d at 561. Thus, in the absence of a stay pending appeal, the Committee may be denied the ability to exercise meaningfully its due process appeal rights. 3. A STAY PENDING APPEAL WILL NOT VISIT SUBSTANTIAL HARM UPON RADNOR OR TENNENBAUM. The relatively short time needed to accommodate the Committee's appeal to this Court will not visit any harm on Radnor, or any party in interest. The Committee is committed to pursuing the appeal on an expedited basis, if permitted to do so. The Debtors' counsel advised the Court at the hearing on the Committee's Alternative Transaction Motion that he could not represent that Radnor was in any immediate danger of running out of funds in the event of a short postponement, and the Debtors' periodic filings show that the Debtors have been running profitably ahead of budget since the commencement of these proceedings. 4. A STAY PENDING APPEAL WILL SERVE THE PUBLIC INTEREST. To the extent that the public interest is implicated by this matter at all, a stay pending the appeal will serve that interest. The primary public policy underlying the bankruptcy laws is the just and fair administration and distribution of the assets of the estates. As previously stated, Radnor is generating sufficient revenues to sustain its operations. Unnecessarily rushing the bid, auction and sale procedure, the effect of which will deprive the Committee of its right to appeal the Judgment allowing a $128 million claim by Tennenbaum, and virtually guaranty its success with credit bid, cannot be squared with the public's interest. It would also preclude the

Committee from pursuing the bid with Four M in the event the Judgment is overturned - a bid that results in a recovery for the unsecured creditors.

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In addition, where, as here, there is a possibility of an appeal becoming moot without a stay, a stay pending appeal will serve the public interest by preserving the right to an effective appellate process. Licensing by Paolo, Inc. v. Sinatra (In re Gucci), 105 F.3d 837, 840 (2d Cir. 1997). Indeed, the public-interest requirement for granting a stay to avoid the deprivation of due process is overwhelming. NO BOND IS NECESSARY The Court has discretion to grant a stay pending appeal under Rule 8005 without requiring the posting of a supersedeas bond, Zenith II, 258 F.3d at 191; Schwartz v. Covington, 341 F.2d 537 (9th Cir. 1965); In re Byrd, 172 B.R. 970, 974 (Bankr. W.D. Wash. 1994), and the exercise of such discretion is warranted here. The purpose of such a bond "is to protect the adverse party from potential losses resulting from the stay." In re United Merchants & Mfrs., Inc., 138 B.R. 426, 430 (D. Del. 1992). But where the adverse party will not suffer any losses as a result of a stay pending appeal, a bond is not necessary. Zenith II, 258 F.3d at 191; United Merchants, 138 B.R. at 430. Here, the entry of a modest stay so that the Committee can pursue an expedited appeal will not harm in any way the Debtors' business, nor prejudice Tennenbaum. Indeed, the

undisputed evidence at trial established that the Debtors are showing a positive economic trend with sufficient cash flow generated in recent months to sustain its operations, and there is no reason to expect any quantifiable harm will occur during a prompt and expedited appeal process. There is accordingly no likely loss to the Debtors or any party in interest if the bid, auction and sale schedule is delayed by a modest extension pending the Committee's appeal of the bankruptcy court's Judgment to warrant a supersedeas bond.

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CONCLUSION The Debtors' financial picture has greatly improved and is trending upward, and the undisputed evidence presented at trial confirmed that the Debtors will easily survive a short extension of the current bid, auction and sale schedule to allow the Committee to pursue an expedited appeal of the Judgment. As argued by the Committee in the Emergency Motion of the Official Committee of Unsecured Creditors to Facilitate a Higher and Better Bid Through a Limited Extension of the Bid, Auction, and Sale Deadlines as contained in the Bid Procedures Order [Docket No. 277], filed on November 16, 2006, the undisputed testimony at trial by the Debtors' Chief Restructuring Officer, Stan Springel, demonstrated unequivocally and without dispute was that the Debtors' financial picture has demonstrated a marked improvement and is trending upward, and accordingly would tolerate a modest extension to the current schedule. No prejudice will weigh on the Debtors or Tennenbaum as a result of a modest extension. On the other hand, the benefit to the Committee's right to appeal is absolute. A brief extension would allow the Committee the opportunity to exercise its right to appeal to this Court, to raise the legal issues that warrant consideration, the importance of which cannot be overstated in this accelerated proceeding. Indeed, the bankruptcy court itself

recognized the unusual schedule of these proceedings: "I don't think I have ever had a trial of this magnitude where I did not have a post trial briefing and a number of months to make a decision." (Tr. 806). Yet, here, the bankruptcy court heard nearly two weeks of testimony, and only one day later announced its ruling and almost wholesale adopted Tennenbaum's proposed order submitted a day earlier. Based on the foregoing, the Committee respectfully requests the Court to stay the bankruptcy court's Judgment and to postpone the imminent auction and sale so that the
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Committee will have an opportunity expeditiously to appeal to this Court, and to grant such other and further relief as the Court shall deem equitable and proper.

Dated: Wilmington, Delaware November 20, 2006 GREENBERG TRAURIG, LLP /s/ Victoria W. Counihan Donald J. Detweiler (I.D. No 3087) Victoria W. Counihan (I.D. No 3488) The Nemours Building 1007 North Orange Street, Suite 1200 Wilmington, Delaware 19801 Telephone: 302-661-7667 Fax: 302-661-7360 - and Francis A. Citera Nancy A. Peterman Nancy A. Mitchell 77 West Wacker Drive, Suite 2500 Chicago, IL 60601 Telephone: 312-456-8400 Fax: 312-456-8435 COUNSEL TO THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS

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