Free Notice (Other) - District Court of Connecticut - Connecticut

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UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE ) ) Plaintiff, ) ) versus ) ) STATE STREET BANK and TRUST ) COMPANY as Trustee for Junior ) Subordinated Secured PIK Notes,) ) Defendant. ) UNITED STATES OF AMERICA, Adversary No. 01-04605 Chapter 11 Courtroom No. 2 824 Market Street Wilmington, Delaware 19801

October 1, 2003 11:30 A.M.

TRANSCRIPT OF STATUS CONFERENCE BEFORE HONORABLE PETER J. WALSH UNITED STATES CHIEF BANKRUPTCY JUDGE APPEARANCES: For Scott Cable: Klett Rooney Lieber & Schorling By: PETER J. DUHIG, ESQ. The Brandywine Building 1000 West Street, Suite 1410 Wilmington, Delaware 19801 Akin, Gump, Strauss, Hauer & Feld, LLP By: ABID QURESHI, ESQ. 590 Madison Avenue New York, New York 10022 For the Plaintiff, United States of America: U.S. Department of Justice, Tax Div. By: ALAN SHAPIRO, ESQ. 555 4th Street, N.W. Room 7122 Washington, DC 20001 Brandon McCarthy

ECRO:

Proceedings recorded by electronic sound recording, transcript produced by transcription service. ______________________________________________________________ 435 Riverview Circle, New Hope, Pennsylvania 18938
e-mail [email protected]

TRANSCRIPTS PLUS

215-862-1115

(FAX) 215-862-6639

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Appearances: (continued) For U.S. Bank formerly State Street Bank: Walsh, Monzack & Monaco By: FRANCIS A. MONACO, JR., ESQ. 1201 N. Orange Street, Suite 400 Wilmington, Delaware 19801 Shipman & Goodwin, LLP By: PETER W. BENNER, ESQ. One American Row Hartford, Connecticut 06103-2819 For Media Communication parties: Zuckerman Spaeder, LLP By: VIRGINIA W. GULDI, ESQ. One Commerce Center 1201 Orange Street, Suite 650 Wilmington, Delaware 19801 Ashby & Geddes By: JOE HANDLON, ESQ. 222 Delaware Avenue, 17th Floor Wilmington, Delaware 19801 Sidley Austin Brown & Wood By: GUY NEAL, ESQ. 1501 K Street NW Washington, DC 20005-1401

For Allstate Insurance Company:

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INDEX DEPOSITION READING Mr. Mr. Mr. Mr. Armstrong Churchill Bloch Doppel PAGE 14 17 22 50

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1

THE COURT:

Please be seated.

Okay.

As I understand

2 it, we're here to resolve the discovery dispute, the motion to 3 compel. I want to get a better understanding of what's going And as I understand it, the Chapter 11 And Judge Shiff's

4 on in this case first.

5 case is still pending in Connecticut.

6 decision as to the effect that a Chapter 11 plan cannot be 7 confirmed absent the payment of tax. And I guess my question

8 is why doesn't somebody move to convert the case to Chapter 7? 9 And if you converted it to Chapter 7, I'm not sure what happens 10 to the tax liability, but it's certainly clear that in a 11 Chapter 11, there would be no third party releases. 12 And so I'm -- I guess I'm wondering why this dispute

13 can't be resolved in the context of the Chapter 7 case without 14 regard to the adversary proceeding being resolved. 15 wish to respond to that inquiry? 16 MR. SHAPIRO: Good morning, Judge Walsh. My name is Anybody

17 Alan Shapiro, I represent the United States. 18 happened in this case.

A lot has

And I don't want to suggest that my

19 memory of every event in it is perfect, but I believe that the 20 Government did make a motion to convert the case to the Chapter 21 7. 22 23 24 Honor -25 THE COURT: And was the motion scheduled for a THE COURT: And -We made that motion in addition, Your

MR. SHAPIRO:

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1 hearing or -2 MR. SHAPIRO: I believe that it's either been denied

3 and then appealed, and an appeal is pending, or it was denied 4 and nothing further could be done with it. 5 that is not perfect. But my memory on

I do recall, however, that one of the

6 reasons the Government made the motion was because it felt that 7 an impartial trustee should be appointed, which would impact 8 decisions regarding whether to assert the attorney/client 9 privilege. 10 We felt that there as a conflict of interest that is

11 pretty obvious and prevents the debtors' management from making 12 unbiased decisions since they have a financial interest in this 13 matter regarding the assertion of the attorney/client 14 privilege. 15 THE COURT: Does anybody else have an understanding

16 of what's going on in Connecticut? 17 MR. BENNER: Your Honor, Peter Benner for the

18 indenture trustee, State Street Bank, now U.S. Bank by change 19 of name. 20 My understanding is that there is an appeal in My recollection is it is of a motion to appoint a

21 Connecticut.

22 trustee, and I'm not positive that there was a conversion 23 motion attached to that but that the motion itself was the 24 appointment of a trustee for the purpose that Mr. Shapiro noted 25 in terms of representing the debtor and not having any reason

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1 to continue separation between the debtor and the estate 2 itself. 3 So, there is an appeal pending in Connecticut. I

4 don't believe Judge Shiff, the Connecticut Bankruptcy Judge, by 5 denying the motion to appoint the Trustee, would have favorably 6 entertained a motion to convert. Although, again, we'd have to

7 go back and double-check to be sure what was actually the 8 nature of that motion. But the basis, I believe, for the

9 denial of the motion to appoint a trustee was that the case is 10 basically now going to be resolved, for all practical purposes, 11 within the context of this case pending before you. The

12 adversary proceedings would then determine the outcome of the 13 remainder of the case. 14 THE COURT: But, again, we can verify that. All right. Well, what I'm getting to is

15 I think -- I hope everybody would agree with me that Judge 16 Shiff's opinion in denying confirmation makes it absolutely 17 clear that absent payment of the tax, which is an 18 administrative expense, there cannot be a Chapter 11 plan 19 confirmed. You cannot satisfy 1129(a)(7), I guess it is, or

20 (9), I forget which, with respect to the administrative expense 21 claim. 22 And if that's so, it seems to me that conversion or Obviously it's Judge Shiff's case, so But in looking at this matter,

23 dismissal is inevitable.

24 I can't do anything about that.

25 I was just curious as to why that course of the proceeding

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1 hasn't taken place. 2 3 4 5 MR. BENNER: THE COURT: MR. BENNER: THE COURT: Your Honor, I wish we had -May I --- a better answer for you this morning. Does anybody believe that a Chapter 11

6 plan can be confirmed absent payment of the tax? 7 8 Honor. 9 not -10 11 12 THE COURT: MR. BENNER: THE COURT: Yeah, well --- able to answer at this point. I think Judge Shiff's opinion makes it So, I'm not concerned MR. BENNER: I don't know if that's the case, Your

I simply am not -- having not looked at that issue, I'm

13 abundantly clear that that's the law.

14 that what we're engaged in here in this adversary proceeding is 15 a side show because the real action is up there and I don't 16 know how -- I don't know why it's not proceeding to a Chapter 7 17 or dismissed. And I don't know how the tax can be avoided in

18 that bankruptcy case, regardless of what happens in the 19 adversary proceeding. 20 don't either. Well, if nobody has the answer to it, I

But I would hope that the parties would look

21 into that and perhaps pursue the solution in the Bankruptcy 22 Chapter case itself. 23 Okay. Mr. Shapiro, could you give me a little

24 background on the government's theory for the 25 recharacterization count of your complaint? I'm not sure I

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1 understand it. 2 MR. SHAPIRO: There's a body of case law that

3 basically says that in tax matters, the substance of a 4 transaction governs over the form of the transaction. In other

5 words, the taxpayer is free to label documents or instruments 6 as debt or stock. But the tax authority is not required to

7 necessarily agree with the characterization or label that the 8 individuals attach to their transactions if the economic 9 substance of them is inconsistent. And the Court Holding

10 Doctrine is a very old case on the Substance Over Form 11 Doctrine. I don't think anybody in this room would dispute the

12 general principle that in tax matters substance over form 13 controls a wide array of different types of cases, including 14 instances in which the government seeks recharacterization of a 15 note as an equity instrument. 16 In this particular case, I kind of am in a quandary

17 because I could talk to you for hours about why I think the 18 notes should be recharacterized as equity, but I realize that 19 the Court simply doesn't have that kind of time today. And at

20 the same time, I'm a little bit hesitant to try to give you an 21 abridged version out of fear that if I don't really provide you 22 with the full panoply of all the facts, that I might leave you 23 with a weaker opinion of my case. 24 But in a nutshell, I guess, to try to move things

25 along, we believe that looking at these notes from the time

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1 that they were put into effect that if you look back to 1988 2 when the predecessor to these -- to the notes that are in issue 3 in this case, which are referred to as the junior subordinated 4 PIK note instruments, the debt to equity ratio of the debtor 5 was extreme, it was forty to one. They set up a leverage

6 buyout where they purchased the company basically setting up 7 the capital structure with $180 million worth of notes and only 8 four and a half million dollars worth of stock. And there's a

9 variety of reasons that I'm sure that they wanted to do that, 10 certainly interest deductions for the company would be better 11 than having to get the tax treatment you get for dividends. 12 But as the events that we'll provide to the Court by

13 way of a summary judgment motion will make clear, by the time 14 this floundering economically wiped out position of the junior 15 subordinated PIK notes came to a head at the 1996 bankruptcy, 16 the company's value in the marketplace was so low that if the 17 company were sold, as indicated by the company's own 18 liquidation analysis attached to its disclosure statement and 19 plan in the 1996 bankruptcy, made clear that the notes that are 20 at issue in this case would receive no payment. Interestingly,

21 the management of the debtor had a financial tie to those 22 notes. Their management incentive agreement provided for them

23 to receive a portion of any recovery on them, which is why we 24 have emphasized repeatedly in this case that we feel that there 25 is a conflict of interest there.

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1

We also feel that when you look at the financial

2 circumstances of this debtor leading into the 1996 bankruptcy, 3 they had already been through one restructuring and the cable 4 market did not take an increase in value, and the company was 5 having trouble paying its debts and the problem persisted and 6 they tired to sell the company and couldn't get a price that 7 was anywhere near close enough to pay all of their various note 8 instruments, let alone anything to their stockholders, that by 9 the time they were rolling around in 1996 and, again, were 10 unable to satisfy all of their notes and the senior lender 11 wanted to pull out, there simply wasn't any real value if you 12 simply looked at what would happen if you sold this company and 13 what monies would be available and the distribution to all of 14 the various layers of debt that had been used to do the 15 leverage buyout back in 1988, to pay the taxes that would 16 result from the sale and then have anything left to pay to the 17 note holders in question in this case, let alone the stock -18 the small amounts of stock that the same individual or same 19 entities also held. And there's a large body of case law

20 dealing with what analysis do you apply in cases where the 21 government seeks to recharacterize debt as equity. 22 out a bunch of factors. 23 In the 3rd Circuit, there's a case called Finhay And, frankly, And it lays

24 (phonetic), which lists quite a few of them.

25 there's a great variety of cases all over the country dealing

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1 with the different types of factors that one looks at, whether 2 the capital structure was too thin, whether the interest was 3 too high, whether the notes themselves are accurately drawn as 4 note instruments which, you know, there's no one factor which 5 is determinative whether another creditor or lender would have 6 made a same type of loan under similar circumstances. Which,

7 by the way, the deposition testimony makes clear that even 8 these investors acknowledge they wouldn't have made the same 9 investment that they essentially made in the 1996 bankruptcy 10 but for the fact that they already had all their money tied up 11 from the early 1988 leverage buyout where they invested their 12 money and never got a penny of it back, not even an interest 13 payment. And it seems highly unlikely that any creditor would In fact, I think it

14 have made the same type of loan either.

15 would be virtually impossible to find a legitimate arm's length 16 third party lender to make a loan as reflected in the 17 instruments issued under the confirmed 1996 bankruptcy plan. 18 But if we were to go through an analysis of applying

19 all of the factors that the case law on debt recharacterization 20 applies to the facts that we will marshal and put before you in 21 this case, we feel that it is just overwhelmingly clear that 22 the note instruments that were issued in conjunction with the 23 1996 bankruptcy plan were, in substance, equity instruments. 24 They were extremely high risk. I mean even coming out of the

25 1996 bankruptcy, the company's own projections of its cash flow

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1 show that it would not be able to retire all of its various 2 note instruments issued under the plan as they reached 3 maturity. 4 It would take, unfortunately, just too many hours to

5 go through this exercise of fact -- proving fact for fact for 6 fact for fact why the government today in the position I'm in 7 here today to prove our entire case for you here to day. 8 mean I took ten depositions. I

There are literally hundreds if I used

9 not thousands of pages of deposition testimony.

10 hundreds of exhibits, they were complicated financial documents 11 to prove our case. The government has an expert witness who

12 has issued a report on this very topic and we've had 13 evaluations performed as well. 14 THE COURT: The company -Is your

Let me ask you a question.

15 theory that the debt instruments even prior to the `96 plan 16 confirmation were really equity? 17 MR. SHAPIRO: No. Our theory is that at the time

18 that the instruments were issued, the 1996 bankruptcy plan 19 confirmed allowed for these new junior subordinated PIK note 20 instruments to be issued, from the time that they were issued, 21 we believe that the substance of them was that they really were 22 equity instruments. 23 However, that being said, we think that it is useful

24 evidence and that it is relevant evidence to see what was the 25 character and nature of the predecessor notes that led into the

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1 new notes that were issued under the bankruptcy plan.

And that

2 when you look at those, you would most likely come to the same 3 conclusion that leading into the 1996 bankruptcy plan the 4 predecessor notes likewise also had an equity substance nature 5 to them. 6 It's not mandatory that we prove that the predecessor

7 notes were in fact or in substance equity instruments in order 8 for us to sustain our case as to the notes in question. And by

9 the way, Your Honor, it is the defendants that have the burden 10 of proof on this issue. They have to prove that the

11 instruments in question, in fact, were debt instruments. 12 THE COURT: Okay. All right, let's proceed with the

13 discovery dispute. 14 15 point? 16 17 THE COURT: Yes. Before I start, Your Honor, I really MR. SHAPIRO: Do you want me to continue on that

MR. SHAPIRO:

18 must apologize.

I normally come more prepared to talk about a But my mind was so

19 subject like the one that you began with.

20 focused on the oral argument I'm about to get into that I 21 apologize for not having a more polished presentation for you. 22 In our motion to compel papers, we indicated that a

23 man named Richard Churchill was a member of the Board of 24 Directors of Scott Cable prior to the 1996 bankruptcy. During

25 discovery, following the filing of the motion to compel, it

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1 became clear that, in fact, Mr. Churchill did not become a 2 member of the Board of Directors until after the confirmation 3 of the 1996 bankruptcy plan. 4 I want to point that out, not only just out of my

5 obligation to try to make clear the facts in the record, but 6 also because this is important for purposes of whether or not 7 certain privileges or immunities were waived by disclosures to 8 third parties. The depositions reveal additional reasons to

9 grant the government's motion to compel. 10 At Page 117 of the CEO of Scott Cable's deposition

11 transcript, Mr. Armstrong, beginning at Line 13, the question 12 is: 13 "Q And who did you hear the idea of providing the security

14 interest to the junior subordinated note holders from?" 15 16 "A There's a series of objections followed by an answer: It came up in a meeting with our attorneys and Rich I don't recall

17 Churchill and John Flanagan from the company. 18 specifically who put it on the table." 19 "Q 20

That's the first time that you had heard of that idea?" Mr. Zensky, who represented Mr. Armstrong at the

21 deposition said: 22 "MR. ZENKY: In connection with the junior

23 subordinated note holders, correct?" 24 25 "A Yes." "MR. SHAPIRO: Yes."

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1 "Q 2 "A

Where did the discussion take place?" At Baer Marks and Upham. That's a law firm where Mr.

3 Bloch works or worked." 4 "Q Where he worked, yes. And was Mr. Bloch one of the

5 attorneys present for this conversation when you first heard of 6 the idea of providing a security interest to the junior 7 subordinated PIK note holders of Scott Cable?" 8 "A 9 He was." And, again, at Page 251, the deposition transcript of

10 Bruce Armstrong -11 12 THE COURT: I'm sorry. And he is? Mr. Armstrong is?

MR. SHAPIRO:

Mr. Armstrong was the CEO of Scott

13 Cable and he may still be technically. 14 15 THE COURT: Okay. At Page 251 of his deposition

MR. SHAPIRO:

16 transcript, beginning at Line 21, the question: 17 "Q Is it accurate to say that at the early November, 1995

18 meeting of DLJ, the note holders of Scott Cable, yourself and 19 perhaps some others, that there was discussion about providing 20 a security interest to the junior subordinated note holders 21 under a restructuring plant." 22 "A 23 Yes." At Page 255 and 256 of Mr. Armstrong's deposition

24 transcript, beginning at Line 14, the question: 25 "Q At the meeting in early November, 1995, attended by

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1 representatives of DLJ, representatives of Scott Cable and its 2 management, the unsecured note holders and other note holders 3 of Scott Cable, was a representation made by Scott Cable or DLJ 4 that a security interest to be provided to the junior 5 subordinated note holders under a proposed restructuring plan 6 would provide them with a better recovery for their junior 7 subordinated PIK notes in the event of a subsequent sale of 8 Scott Cable?" 9 10 "A 11 An objection follows by: I believe it was, yes." At Page 289 of Mr. Armstrong's deposition transcript,

12 question at Line 8 begins: 13 "Q All right. Did you have any discussions with the

14 investors in the junior subordinated PIK notes and Scott Cable 15 during 1995 and during 1996 or during 1996 prior to the 16 confirmation of the plan of Scott Cable in bankruptcy about the 17 need to obtain a security interest for, amongst other reasons, 18 to position the junior subordinated PIK notes to be paid ahead 19 of any taxes that would result from either a liquidation, 20 subsequent bankruptcy and sale of the assets of Scott Cable or 21 subsequent voluntary sale of the assets of Scott Cable 22 occurring after its 1996 bankruptcy?" 23 24 "A Series of objections followed by: We discussed the desirability. I don't know that we used

25 the word need."

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1 "Q

You discussed the desirability of obtaining a security

2 interest for the purpose stated in my prior question." 3 4 "A 5 6 "Q More objections followed by the answer: For the purpose stated, among other reasons, taxes, yes." On 292 and 293 of his deposition, it says: With that in mind, let me rephrase the question. Is it

7 accurate to say that during 1995 or 1996, but prior to the 8 confirmation of Scott Cable's 1996 bankruptcy plan, that you 9 were involved in at least one discussion with investors in the 10 junior subordinated PIK notes in which it was considered 11 desirable and people spoke of the desirability of obtaining a 12 security interest for, among other reasons, positioning the 13 junior subordinated PIK notes to be paid ahead of any taxes 14 that would result from a sale of Scott Cable assets after 15 confirmation of the 1996 bankruptcy plan, whether it be in some 16 sort of liquidation, some sort of voluntary sale or even in a 17 subsequent bankruptcy." 18 19 "A 20 "Q Yes." And do you recall which representatives of the investors A series of objections followed by the answer:

21 were part of that discussion with you?" 22 "A 23 24 25 My only recollection of an individual was Rich Churchill." I'll move on to Mr. Churchill. THE COURT: Okay. And tell me who Mr. Churchill is?

MR. SHAPIRO:

I will tell you that Mr. Churchill was

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1 the head of the venture capitalists fund or firm that is 2 comprised of Media Communications, Milk Street Partners, Inc., 3 Church Street Partners, Inc. and T.A. Investors, who are the 4 defendants in this case -- are amongst the defendants in this 5 case. 6 At Page 247 of Richard Churchill's deposition

7 transcript, the question at Line 3: 8 "Q Was it also your understanding prior to the filing of the

9 bankruptcy of Scott Cable in 1996 that any capital gains taxes 10 that were owed and for which there were insufficient net 11 operating losses to offset were supposed to be paid by Scott 12 Cable before any payments were made for junior subordinated PIK 13 notes." 14 15 "A 16 17 "Q Yes." At 263 and 264 of Mr. Churchill's deposition: But from the perspective of Media Communications and Milk There were objections followed by the answer:

18 Street and Chestnut Street, reorganization was essential to 19 obtaining some sort of recovery on the junior subordinated 20 notes, is that correct?" 21 22 "A 23 "Q Yes." Because if there was no reorganization in 1996 of Scott Objection. Answer:

24 Cable, the likelihood was that the junior subordinated notes 25 would receive no payment at all, is that correct?"

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1 "A 2

Yes." At 272 through 274 of Mr. Churchill's deposition, it

3 says, beginning at Line 1, question: 4 "Q Well, there's something else that was a new feature with

5 the junior subordinated notes in the context of the 1996 6 bankruptcy plan, and that was the provision of a security 7 interest in the assets of Scott Cable, is that correct?" 8 "A 9 "Q Yes." And that security interest was subordinated to at least

10 two other layers of debt instruments, is that correct?" 11 "A 12 "Q Yes." Wasn't there real concern on the part of Media

13 Communications, Milk Street and Chestnut Street that in the 14 event that the assets of Scott Cable were sold, that taxes 15 would have to be paid on the capital gains, and that wouldn't 16 leave anything to pay the junior subordinated notes?" 17 18 "A 19 "Q There were objections followed by the answer: That was a consideration." In fact, that was a consideration before filing the

20 bankruptcy plan in 1996 by Scott Cable, correct?" 21 22 "A 23 "Q Yes." And it was another consideration during the filing and Another objection followed the answer:

24 negotiations that took place in the 1996 Scott Cable 25 bankruptcy, at least for Media Communications, Milk Street and

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1 Chestnut Street." 2 3 "A 4 "Q Yes." And that's at least one reason why that Medical" -- it Objection. Answer:

5 should have been Media, it's a typo -- "That Medical 6 Communications and Milk Street and Chestnut Street wanted a 7 security interest, is that correct?" 8 "A 9 "Q Yes." All right. So, Milk Street, Media Communications and

10 Chestnut Street were preparing themselves for the possibility 11 of a sale of the assets of Scott Cable following confirmation 12 of the 1996 bankruptcy plan to try to position themselves to 13 get paid ahead of any capital gains taxes that would be owed 14 from the sale of the assets of the company, is that correct?" 15 16 "A 17 "Q Yes." And did you discuss that, that strategy of obtaining a There were objections followed by the answer:

18 security interest to prepare for the potential sale of the 19 assets of Scott Cable with attorneys from Media Communications 20 or Milk Street or Chestnut Street?" 21 22 "A Objection. Answer: I remember having a

I believe I testified earlier.

23 conversation with attorneys.

I don't remember who they --

24 whether they were representing us or the company." 25 And finally with respect to Mr. Churchill at Page 313

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1 of his deposition transcript. 2 "Q

Question at Line 5:

Isn't it true that the reason that Media Communications,

3 Milk Street and Chestnut Street Partners wanted a 4 reorganization of Scott Cable to take place in 19966 was 5 because if one was not effectuated, they stood to loose all or 6 substantially all of their investment in the junior 7 subordinated notes?" 8 9 "A 10 11 "Q 12 "A 13 "Q Objection. Followed by the witness answering:

Do you mean by reorganization, a Chapter 11 proceeding?" Mr. Shapiro: Any kind." Yes." What consideration did Milk Street, Media Communications

14 and Chestnut Street Partners provide for the security interest 15 that they obtained in conjunction with their junior 16 subordinated notes in the 1996 Scott Cable Bankruptcy?" 17 18 "A 19 A series of objections, the answer: I don't know." And that takes us finally to Mr. Bloch. Mr. Bloch

20 was and perhaps still is the attorney for Scott Cable 21 Communications. When I say still is because technically Scott

22 Cable is still an entity, but we all know that basically it's a 23 bank account and not an active going concern right now. But he

24 did indicate that at his deposition that he was the attorney 25 for Scott Cable Communications prior to and during the 1996

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1 bankruptcy and even I guess through the 1998 bankruptcy, as 2 well. 3 The relevant information from Mr. Bloch is found

4 beginning at 69 through 70 of his deposition transcript, 5 beginning at Line 17. 6 "Q During 1990 through 1992, did you do any research,

7 analysis or provide any advice or counseling regarding the 8 application of the insolvency statute, a statute of federal law 9 providing certain circumstances under which an officer of a 10 corporation could be held personally liable for nonpayment of 11 taxes of a company with respect to Mr. Simmons or Scott Cable 12 Communications?" 13 14 "A 15 "Q There were a series of objections and answer: On advice of counsel, I can't answer that." Did Mr. Simmons express to you any concerns about

16 potentially being held personally liable for nonpayment of 17 taxes with respect to Scott Cable and using any available funds 18 to pay creditors other than the Internal Revenue Service?" 19 20 answer: 21 "A 22 On the advice of counsel, I cannot answer that." Mr. Simmons was the head and the found of Simmons Mr. Simmons was the one who initially found and There were additional objections following by an

23 Communication.

24 proposed the idea of a leverage buyout to Media Communications, 25 Mr. Churchill and the other primary investors in the leverage

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1 buyout, such as Allstate Insurance Company.

Mr. Simmons was

2 part of the -- became the head of a management company that 3 operated Scott Cable after the leverage buyout in 1988. 4 Sometime around 1993 or 1994, he chose to retire and he was 5 replaced by Mr. Armstrong. 6 individuals. So, that's the linkage of these

Mr. Armstrong had already been working for the

7 management company, he moved up to this higher level position 8 and acquired, I believe, a stock interest, as well, in Scott 9 Cable at that time. 10 The Insolvency Statute that was referenced earlier is

11 also important because in some of the documents that we 12 attached to our motion to compel papers, there were some 13 handwritten notes by an individual named James Wade. Mr. Wade

14 worked with Mr. Churchill from Media Communications, Milk 15 Street, Church Street Partners and T.A. Investors. And he also

16 did some overseeing and some work for his entities regarding 17 the investment in Scott Cable Communications. 18 Mr. Wade apparently attended some telephone and in-

19 person meetings and he took down notes which were discussed in 20 a deposition and the notes themselves were also, as I 21 indicated, made part of the government's motion to compel 22 papers. 23 Specifically, there was a reference in his notes to

24 Steve Simmons being concerned about insolvency and potential 25 personal liability. So, I'm trying these things together for

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1 you. 2 At Page 86 of Mr. Bloch's deposition transcript,

3 beginning at Line 5: 4 "Q When were you aware or when did it come to your attention

5 that there was concern on the part of Scott Cable and/or its 6 management that a future sale of assets of Scott Cable would 7 not provide sufficient proceeds to pay the junior subordinated 8 PIK notes if the taxes resulting from that sale also had to be 9 paid first." 10 11 "A 12 There were a series of objections and -On the advice of counsel, I cannot answer that question." -- was the answer. At 107 and 108 of Mr. Bloch's

13 deposition transcript, beginning Line 21: 14 "Q Isn't it true that during the 1995 and/or 1996 time period

15 that you provided either research analysis, negotiation and/or 16 other types of work regarding efforts to obtain a security 17 interest for the junior subordinated PIK note holders in Scott 18 Cable Communications to attempt to position those note holders 19 to receive recovery on their note instruments ahead of any 20 taxes that would result from a future sale of assets of Scott 21 Cable?" 22 23 "A 24 There were some objections following by an answer: On the advice of counsel, I cannot answer that question." At Page 112 and 113 of the deposition of Mr. Bloch,

25 the attorney for Scott Cable, beginning at Line 23, question:

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1 "Q

Isn't it true that during 1996 and before the confirmation

2 of a bankruptcy plan for Scott Cable Communications that the 3 management of Scott Cable, together with the investors in the 4 junior subordinated PIK note instruments, recognized and 5 discussed in your presence the fact that there as a great 6 unlikelihood that a sale of Scott Cable's assets or stock would 7 produce sufficient sale proceeds for there to be a recovery on 8 the junior subordinated PIK note instruments unless those notes 9 could be somehow paid ahead of the taxes resulting from the 10 gain on the sale of those assets?" 11 There were a series of objections on that, following

12 an answer at Page 114: 13 "A 14 15 question: 16 "Q Did you prepare any memoranda or written communications I can't answer that question." At 119 and 120 of Mr. Bloch's deposition transcript,

17 that discuss a security interest to be provided to the junior 18 subordinated PIK note holders and Scott Cable?" 19 20 120: 21 "A 22 23 Question: 24 "Q Did you participate in any negotiations regarding a I can't answer that question." At 122 and 123 of Mr. Bloch's deposition transcript. There were more objections, followed by an answer at

25 security interest or security agreement for the junior

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1 subordinated PIK note holders during the Scott Cable 1996 2 bankruptcy?" 3 "A 4 "Q To the best of my recollection, the answer is yes." Who did you have the negotiations with regarding a

5 security interest and/or security agreement for the junior 6 subordinated PIK note holders and Scott Cable during 1996?" 7 "A I believe it was with the attorneys for the junior

8 subordinated debt holders." 9 "Q What were the names of the attorneys for the junior

10 subordinated debt holders?" 11 "A Arnold Zaff, I'm not sure who else from his firm was

12 involved, but there were others, I believe." 13 125 of Mr. Bloch's deposition transcript. Question: Was Question

14 at 11, Line 11. 15 "Q

Was Mr. Churchill present for any of the discussions?

16 Mr. Churchill present during any of the negotiations that you 17 mentioned regarding discussion of security interest for the 18 junior subordinated PIK notes in Scott Cable Communications?" 19 "A 20 I believe so." At 136 and 137, beginning Line 15 of Mr. Bloch's Question:

21 deposition transcript. 22 "Q

Did you participate in any negotiations regarding the

23 consideration, if any, that was supplied by or was to be 24 supplied by the junior subordinated PIK note holders for a 25 security interest in Scott Cable?"

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1 2 "A 3 "Q Yes."

There were objections, followed by an answer:

When did those discussions take place or negotiations,

4 rather?" 5 "A At the time of all of the restructuring discussions,

6 whenever those were." 7 "Q Does the 1995/1996 time frame seem about right to you for

8 those negotiations?" 9 "A 10 Yes." And finally at 151 and 152 of the deposition Question:

11 transcript of Mr. Bloch, beginning Line 11. 12 "Q

Did you engage in any discussions regarding what, if any,

13 consideration was or was to be supplied by the junior 14 subordinated PIK note holders and Scott Cable for the security 15 interest that they received under the bankruptcy plan that was 16 confirmed in 1996?" 17 Mr. Coreschi (phonetic), who represented Mr. Bloch at

18 the deposition, or perhaps he represented the debtor, it was 19 hard for me to distinguish, there was also a Mr. Weingart that 20 I believe also represented Mr. Bloch. 21 objection, same instruction. Mr. Coreschi said, "Same

Mr. Bloch, if you need me to

22 repeat the instruction, let me know." 23 24 "THE WITNESS: "MR. CORESCHI: I do need you to." The question as phrased does not

25 specify whether any such discussions occurred with any parties

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1 in particular.

Therefore, I'm going to instruct you to

2 interpret that question to apply only to any discussions that 3 may have taken place with individuals other than your client, 4 or at which individuals other than your client were present. 5 On that basis, you can answer." 6 "MR. WEINGART: I join in the objection and the

7 instruction." 8 "A If you don't mind, I need to listen to the question

9 again." 10 11 "A 12 13 "Q Yes." Was Mr. Bloch's answer. Question: It was reread. The answer is:

Who was present at those discussions that you just

14 answered about?" 15 "A 16 "Q 17 "A I'm not sure." Do you recall some of the people that were present?" Well, my discussions, I believe, always would have been I just

18 with an attorney for the subordinated lenders present.

19 don't recall who -- which attorney or who was that attorney." 20 These portions or passages of these transcripts

21 indicate at the outset obviously that there were discussions 22 with third parties. There was a waiver, numerous waivers of

23 the privileges and immunity that have been asserted by the 24 defendants to the government's motion to compel. It seems

25 quite obvious from reading these passages together that there

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1 were a number of discussions where the junior subordinated PIK 2 note, holders' representatives or attorneys were meeting with 3 representatives, attorneys for the debtor or the actual CEO of 4 the debtor and discussing important elements of the 5 government's case involving consideration, if any, that was 6 supplied for a security interest, motivation for obtaining a 7 security interest, inequitable conduct in obtaining a security 8 interest. The list would just go on and on, but it's already

9 described quite accurately in the Government's motion to compel 10 papers as to the various topics that were obviously being 11 discussed in conjunction with these meetings that are testified 12 to. But the substance of them we're just not able to get

13 because of all of the assertions of privilege and instructions 14 to some of these witnesses not to testify. 15 And it would seem that the government has exhausted

16 its ability to find this information, either in the documents 17 that it has been able to get or through taking these 18 individuals' depositions. And obviously at the time that the

19 government filed the motion to compel, it hadn't even taken all 20 of these depositions. And so there's some argument in there

21 that it would be an extra burden for the government to have to 22 take the depositions, but a lot of these depositions have now 23 been taken. 24 But it's our position that these passages taken

25 together show that there were actual discussions where waiver

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1 of attorney/client privilege on the relevant topics raised in 2 the motion to compel were discussed. And those same topics and

3 types of information more than like, we believe, would be found 4 discussed in the documents that we seek to have compelled, only 5 in greater detail and providing more facts, dates, indications 6 of who was present and what these strategies were supposed to 7 be for. And those things would bear upon the government's

8 equitable subordination claim in terms of whether the conduct 9 amounts to inequitable conduct or whether just the result would 10 be inequitable, which is another way of establishing 11 U.S.C. 11 510(c). 12 In addition, these same topics of discussion that

13 were mentioned in these passages and that we believe would also 14 be found in these documents that we seek to have compelled are 15 at issue. Because as pointed out quite a lot in our motion to

16 compel and reply brief, the defendants in this case, of 17 necessity, must show that they provided meaningful, valid, 18 adequate consideration for the security interest that went with 19 the note instrument that's in question in this case. They have

20 to be able to show that their conduct was not inequitable. 21 There's a variety of things, but they're listed in I believe, frankly, at Page 33 an 34 of the motion

22 our papers.

23 to compel, you'll see at least some of them listed with respect 24 to Allstate. 25 There's also another way of looking at these

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1 passages.

And that is that they also help us understand the

2 government has an exception that it can establish to the 3 assertions of the attorney client privilege, as well as the 4 attorney work product immunity, and that is the Crime-Fraud 5 Exception. 6 In the context of this particular motion to compel,

7 we are attempting to show the Court that we believe we have 8 established a prima facie case of civil tax fraud. And if we

9 have, that, therefore, the assertions of privilege and immunity 10 do not apply or should be overcome and the documents turned 11 over to us. 12 13 In saying that, I want to also immediately -THE COURT: Let me ask a question. With respect to

14 your recharacterization count, do you have to prove fraud? 15 16 17 MR. SHAPIRO: THE COURT: No. Absolutely not.

Okay. And as a matter of fact, what I was

MR. SHAPIRO:

18 getting to was for our equitable subordination count, we do not 19 have to prove fraud. That's why in bringing the topic of fraud

20 up, I do so with a certain amount of concern that there not 21 accidentally be some belief on the part of the Court that while 22 the government's telling you they can make a case of civil tax 23 fraud so, therefore, they must need to show that as a means of 24 making either of their two substantive arguments. 25 fact, that is just not true. And, in

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1

In fact, we can show the equitable subordination

2 under existing case law without any proof of civil tax fraud. 3 That is a much higher burden, much higher evidentiary threshold 4 for us to meet. 5 6 But I bring it up -THE COURT: I was just focusing on the For example, let's say that you

7 recharacterization count.

8 present evidence that is undisputed that the debt to equity 9 ratio was a thousand to one. Is that enough for a court to

10 conclude that it should be recharacterized? 11 MR. SHAPIRO: No, sir. The case law makes clear that

12 in doing the debt equity analysis, if you look at a variety of 13 factors, and as I indicated earlier, the case law is clear that 14 no one factor is determinative. 15 It's an evaluation process.

And as far as intent goes, the case law also makes It is

16 clear that you do that based on the objective evidence. 17 not subject intent that governs the debt versus equity

18 question, which makes sense because, frankly, anybody who has 19 labeled something as a debt instrument and the government is 20 coming in and saying it wants to have it recharacterized would 21 then just be able to say, well, we intended it to be a dead 22 instrument and that would, under that erroneous interpretation, 23 end the case. 24 But there's plenty of case law that makes clear that

25 these factors are used because you're trying to have objective

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1 indicia of how to interpret the economic substance of the note 2 as the interim note for something that should be 3 recharacterized and treated as equity. 4 THE COURT: Okay. Why don't we get to the discovery

5 that's still in dispute?

Because as I understand it, some of

6 the matters have been resolved. 7 MR. SHAPIRO: Would you like me to tell you what is

8 still at issue? 9 10 THE COURT: Yes. Yes. As I understand it, the only

MR. SHAPIRO:

Okay.

11 thing that is still at issue with our motion to compel are the 12 documents that Allstate has declined to produce and that are 13 listed in our motion to compel in a chart. I would ask Mr.

14 Neal, but I believe that probably less than 12 documents there, 15 or roughly about that much. 16 17 18 19 THE COURT: And --

Where are they? And as far as --

MR. SHAPIRO: THE COURT:

Where are they identified? They're in the first -- in the If you give

MR. SHAPIRO:

20 Government's motion to compel, its initial brief.

21 me a moment, I can pull my copy and tell you which page. 22 23 24 THE COURT: UNIDENTIFIED ATTORNEY: Page 29.

(Pause) Well, obviously from this listing, I

25 can't tell -- well, number one, I can't tell whether they're

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1 written communications or whether they're memoranda that were 2 not shared with anyone. How can I tell? For example, the

3 first item is a memo, it doesn't say to whom, it doesn't say 4 from whom. It doesn't say who else got it. How am I supposed

5 to rule on this unless I know that? 6 MR. SHAPIRO: Well, we think that that's Allstate's

7 burden to produce. 8 the -9 10 11 12

We believe that it's quite possible, given

THE COURT:

Is this --- discussion that we've --

MR. SHAPIRO: THE COURT:

Is this the privilege log? It's taken from their privilege log.

MR. SHAPIRO:

13 That was given to me by Allstate. 14 THE COURT: Well, the privilege log has to identify Are

15 who it came from and who it went to and who else got it.

16 you telling me that the privilege log doesn't tell us that? 17 MR. SHAPIRO: What I'm going to answer is that my But

18 memory isn't good enough to commit to an answer on that.

19 Mr. Neal, I'm sure, would be able to answer that question. 20 Some of the people that provided answers with the privilege log 21 did identify who were the parties to a document or who was the 22 author and some did not. And my memory is just not good enough

23 on that particular issue to answer your question, and I don't 24 want to venture a guess. 25 What I tried to do was to include the information

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1 from the privilege log I received to identify the documents as 2 they were identified to me and what the privilege or immunities 3 as asserted by my opponent. 4 THE COURT: And I can't even tell from the For example, the second item on I

5 description what it's about.

6 Page 30 says Allstate Insurance group security adjustment. 7 don't have the foggiest idea what that means. 8 MR. SHAPIRO: I believe I do, which is why I have

9 tried to have that document produced.

What I think that that

10 particular document would indicate is that Allstate was writing 11 down as a loss the junior notes which, of course, would be an 12 indication that they themselves acknowledge that those notes 13 were of limited, if any, value. And, therefore, should not

14 have been given a new note in its place, but rather should have 15 probably been converted to equity under the 1996 bankruptcy 16 plan. That would go to the debt equity issue, as well as the

17 equitable subordination issue because it would be inappropriate 18 on the facts of this case to give yourself a new note and a 19 security interest, which you didn't even have before, for the 20 purposes of trying to position yourself to be paid ahead of 21 taxes from a sale that these people obviously knew that they 22 were planning on doing in a short period of time. 23 24 THE COURT: Well, let me hear from Allstate. Your Honor, could I finish by telling

MR. SHAPIRO:

25 you what other documents are still at issue?

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1 2 time.

THE COURT:

Well, I thought we'd take them one at a

Actually I thought we were going to start with the

3 debtor because I thought that would be the easiest approach. 4 5 debtor. And why don't we don't that? Let's jump ahead to the

I want to find out what -- because I think the

6 documents in their possession, in my view, are probably more 7 important than the documents in the note holder's possession. 8 MR. SHAPIRO: Do you want them -- the debtor

9 representative to -- or do you want me to tell you which debtor 10 documents are at issue? 11 12 issue? 13 MR. SHAPIRO: Okay, I have to grab something. On THE COURT: Tell me which debtor documents are at

14 February 28th, 2003, the debtors' counsel sent me a letter 15 which resolved some of the issues that -- some of the documents 16 that initially were put at issue in the government's motion to 17 compel. 18 They gave us some of the documents. And from this document, it seems to me that the They broke down their

19 debtor provided three privilege logs.

20 production and gave us three different privilege logs for the 21 different documents. 22 And in log one, it seems that what is still at issue I'm taking that from

23 is Items 104, 105, 106, 107, 108 and 109.

24 Page 1 and 2 of the February 28th letter which, by the way, 25 Your Honor, I don't think is already in the record. I'm not

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1 sure. 2 3 4

But I'll put it in the record if you want. In addition, on -THE COURT: Well, how I am to know what you -Well, I've just told you which

MR. SHAPIRO:

5 documents. 6 compel. 7 8 9 10

It's the ones -- Log 1 is already in the motion to

You'll see a list of documents that -THE COURT: Okay. -- in the government --

MR. SHAPIRO: THE COURT:

Tell me where I can find them. Actually that one's going to be

MR. SHAPIRO:

11 problematic. 12

Let me get my motion paper. Your Honor, Abid Qureshi on behalf of In connection with our

MR. QURESHI:

13 the debtor.

Perhaps I can assist here.

14 reply with the government's motion, we attached an affidavit 15 from Stanley Bloch, the attorney from whose firm the documents 16 at issue were generated. 17 at issue. 18 Additionally, on the debtors' motion on Page 3 and That declaration lists the documents

19 Page 4 of that motion, the relevant section according to the 20 privilege logs are reproduced. 21 22 MR. SHAPIRO: MR. QURESHI: Abid, which motion is that? This is -- this is the debtors'

23 response to the United States motion dated March 19th of 2003. 24 On Page 3 and going over to Page 4, with that document, for 25 each document which remains at issue, the relevant excerpts

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1 from the privilege log has been reproduced. 2 THE COURT: Okay. So, on Page 3 of 4 of your

3 response, those are the documents in issue for the debtors? 4 MR. QURESHI: Correct. And further detail about

5 those documents is given in the declaration of Stanley Bloch, 6 which was filed in connection with that response. 7 MR. SHAPIRO: Your Honor, I think that it might be

8 useful to put into the record the letter that I'm reading from, 9 which Mr. Qureshi sent to me. 10 documents by number and log. It indicates basically 15 And so if you have the log, then

11 you obviously can also use the item numbers from this letter to 12 see the descriptions that the debtors' counsel provided for the 13 documents and any other information that they may have supplied 14 in their privilege log. 15 16 here. 17 18 MR. SHAPIRO: THE COURT: Okay. Let me hear from the debtor THE COURT: Would that be useful to you?

No, I think I can get what I need from

All right.

19 with respect to the debtors' documents in issue. 20 MR. QURESHI: Thank you, Your Honor. Abid Qureshi

21 from Akin Gump Strauss Hauer and Feld on behalf of the debtor. 22 First, Your Honor, with respect to numerous excerpts

23 that Mr. Shapiro read from the declaration -- from the 24 deposition, rather, of Stanley Bloch, the government never did 25 move to compel the testimony when directions not to answer were

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1 given. 2

So, I did not plan to address that issue. Let me turn to the alleged waiver of the privilege I don't think

3 that the government argues as occurred here.

4 there is any serious dispute that the debtors' documents all 5 represent attorney work product, as well. But let me first

6 address the government's allegations that the attorney/client 7 privilege has been waived. 8 First with respect to the Crime-Fraud Exception, the

9 government in its motion raised the Crime-Fraud Exception as 10 one of its arguments that the privilege has been waived but has 11 put forth absolutely no evidence, no documents and no 12 deposition testimony that we are aware of that supports an 13 allegation that would allow the government to make out a prima 14 facie case of fraud, which it is the government's burden to do. 15 So, on the record that is before the Court, I certainly do not 16 believe that there is a sufficient factual basis for this Court 17 to determine that civil fraud has occurred. 18 And, indeed, I also question whether the government

19 has even met the burden that would be sufficient to allow this 20 Court to conduct an in camera review of the documents. That

21 there must be a showing of a factual basis adequate to support 22 a good faith belief that in camera review might reveal evidence 23 to establish the claim that the Crime-Fraud Exception applies. 24 And that language comes from the United States v. Zoland 25 (phonetic) decision, that's a Supreme Court decision of 1989.

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1 And there simply is no evidence.

Merely the government's

2 argument, nothing to substantiate it. 3 The government has seen many thousands of pages of

4 documents produced by the debtors and does not point to any of 5 these documents in substantiation of this theory. 6 Now, the second principal waiver argument with

7 respect to the attorney/client privilege that the government 8 raises is the at issue waiver. 9 THE COURT: You don't have to argue that. I don't

10 agree with the government on that. 11 MR. QURESHI: Okay. Your Honor, the reminder of my

12 argument goes to these documents all being not only attorney 13 work product, but attorney opinion work product which, in this 14 Circuit, has been accorded, and in all Circuits, indeed, has 15 been accorded a much higher level of protection than mere 16 factual work product. 17 I think the declaration of Stanley Bloch that was

18 submitted with the debtors response to the government's motion 19 to compel establishes that these documents are all opinion work 20 product. And further, that these documents were all prepared

21 in anticipation of the litigation. 22 Now, even for purposes of argument, if we assume that

23 the documents at issue contained only factual work product, 24 which they do not, but just for purposes of argument, even 25 under that lower standard, the government would need to show a

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1 substantial need in order to get past the attorney work product 2 doctrine. 3 And the government has, in my view, fallen woefully The government's claimed need

4 short of making that showing.

5 for these documents, which was in its motion, was to identify 6 witnesses and their roles in the important events, prepare for 7 taking depositions, decide which witnesses to depose, which 8 order to depose them and obtain exhibits to be used at the 9 depositions or trial for substantive or impeachment purposes. 10 In other words, the government hoped that by gaining

11 access to the debtors privilege documents, it would cut short 12 the discovery process for the government, enable it to take 13 fewer depositions and that is not even close to the substantial 14 need showing that is necessary in order to get past an attorney 15 work product claim, and much less so when it comes to opinion 16 work product. 17 Now, in terms of the anticipation of litigation

18 component of the attorney work product doctrine, I would, 19 again, point to the declaration of Stan Bloch. Mr. Bloch and

20 his firm represented the debtors in connection with both of the 21 prior bankruptcies and it establishes the -- in Paragraph 6 of 22 that declaration, he states, "In all instances, a primary 23 motivation in creating the documents at issue was potential 24 litigation arising from various reorganization alternatives. 25 These documents reflect legal and not factual analysis and set

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1 forth legal theories related to an imminent bankruptcy filing." 2 I don't think there's any serious doubt that it is objectively 3 reasonable for attorneys on the eve of a complex chapter 11 4 bankruptcy filing to hold the belief that litigation related to 5 that filing may be a possibility. 6 case with these documents. 7 The United States cites a decision involving the And, indeed, that was the

8 United States versus El Paso, the 5th Circuit in 1982 for the 9 proposition that because there is a tax question ultimately at 10 issue here that the prepared in anticipation of litigation 11 argument is not met. 12 The El Paso case, I think it's worthwhile to direct

13 Your Honor's attention, is completely inapposite on the facts. 14 That case involved efforts by the IRS to gain access to a 15 document referred to as a tax pool analysis which it is my 16 understanding from reading the case is really an accounting 17 document. 18 And the Court found that the work product document

19 did not immunize a tax pool analysis from production because 20 the primary motivation of preparing the document had nothing at 21 all to do with litigation. This was a document prepared in the

22 ordinary course of the company's tax preparation, tax return 23 preparation. 24 It was not prepared for any litigation.

And moreover, there were facts particular to that

25 case about that document having been shared with people outside

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1 of the company.

But for my purposes, I think it is important

2 to note that the documents at issue here were not accounting 3 documents. These were opinion work product documents that went

4 to potential litigation on the eve of complex Chapter 11 5 bankruptcy filings. 6 7 I have nothing further. THE COURT: If you have any questions? Okay. I'm going to rule

No questions.

8 on this one. 9 10 11 you. 12 I think the privilege has been waived with respect to And let MR. SHAPIRO: THE COURT: Judge Walsh, may I respond to this?

Not unless you want me to rule against

13 the debtor documents under the Crime-Fraud Exception. 14 me tell you why I believe that.

And I focus on the Section

15 510(c) issue or count raised by the government. 16 First of all, Judge Shiff found that the plan in the

17 second case was a rather convoluted scheme to avoid paying a 18 tax and specifically he found that under Section 1129(d), the 19 entire plan was a tax avoidance purpose. 20 And if this scheme was started in the first plan,

21 then I think there's a good argument that the first plan could 22 be viewed as a fraud on the Court. 23 requirements in the bankruptcy law. There's two good faith First is the case law,

24 which is supported in this District, regarding good faith 25 filing.

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1

And if the scheme was to get a res judicata effect

2 for the secured debt in the first case to carry out the 3 avoidance attacks in the second, then the first case could be 4 viewed as a bad faith filing which could certainly give rise to 5 a subordination under 510(c). 6 The second good faith requirement in the Bankruptcy And if there was a tax

7 Code obviously is Section 1129(a).

8 avoidance scheme and the first Chapter 11 case was the first 9 step in that scheme, and it was designed to produce a res 10 judicata protection for the first step, I believe that that 11 first step, namely the first case, could have been viewed as a 12 bad faith plan. 13 And quite frankly, this issue, it seems to me, could

14 possibly implicate a bankruptcy fraud under Section 157 of 15 Title 18. So, I conclude that it is appropriate for the

16 government to discover these documents which lead up to the 17 first plan confirmation in 1996 and which may then lead up to 18 or be segues to the second plan. And I think all of the

19 documents identified on Pages 3 and 4 of the debtors' response 20 fall within that time frame. 21 Therefore, I think it's appropriate for the Court to

22 examine these documents in camera and decide whether they 23 should be produced if I find that they're relevant to the 24 issues raised by the complaint. So, that's my ruling with

25 respect to the debtors' documents.

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1 2

Now, let's talk about the next batch. MR. HANDLON: Your Honor, good afternoon. Joe

3 Handlon from Ashby and Geddes, local counsel for Allstate. 4 With me in court today is Guy Neal from Sidley Austin Brown and 5 Wood. I would ask that he be heard on all Allstate's matter.

6 We'll file a motion this afternoon. 7 8 9 THE COURT: MR. NEAL: THE COURT: Okay. Good afternoon -And tell me, what documents are we

10 talking about? 11 12 13 14 15

Where do I find them? Certainly, Your Honor. Or their identity. The last point? I didn't hear you? They appear --

MR. NEAL: THE COURT: MR. NEAL: THE COURT: MR. NEAL:

Their identity, where do I find them. They do not appear in the government's

16 description, which is a cribbed version of Allstate's privilege 17 log. The cribbed version appears on 29 through 31 of the

18 government's motion, motion to compel filed on January 17th. 19 20 with -21 22 23 24 MR. NEAL: THE COURT: MR. NEAL: THE COURT: Yes. -- that I found -Your Honor -I think this description is inadequate THE COURT: Oh, okay. This is the one we started out

25 for me to address the issue.

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1 2 Honor.

MR. NEAL:

I would share in your belief in that, Your

I mean you will note further on in the agenda today

3 that Allstate moves to intervene and for good reason, but we 4 will get to that later. These documents, Your Honor, just by

5 their very dates, you will see they predate the bankruptcy 6 filing, most of them do, by a year or two. 7 first point, Your Honor. 8 My second point is nothing that you heard from Mr. That would be my

9 Shapiro this afternoon or this morning into this afternoon 10 regarding the deposition transcripts, none of that related 11 whatsoever to Allstate in specific. Allstate is one of the

12 note holders and one of the investors in Scott Cable, giving 13 credence to the adage that no good deed goes unpunished, 14 Allstate invested money in `88, restructured its obligation in 15 `93 in an out-of-court restructuring and in an in-court 16 restructuring before Your Honor in `96 had its debt obligation 17 restructured from an unsecured obligation to a secured 18 obligation. 19 Now, Your Honor, there's simply no assertion, number

20 one, by Mr. Shapiro that our privilege log was inadequate. 21 There is very little challenge, if at all, that the assertion, 22 the attorney/client privilege assertion is being raised 23 improperly. 24 The only thing that appears at issue in the

25 Government's motion is whether or not the two exceptions are

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1 applicable to the attorney client privilege.

That is one, the

2 at issue exception, which Your Honor has discussed relating to 3 the debtor. I would submit we have the same argument.

4 Allstate has not put at issue any of these documents or any 5 attorney/client communication. There is no good faith reliance

6 upon advice of counsel at issue in Allstate. 7 Indeed, Your Honor, Allstate has not even filed an So, it is

8 answer or been allowed to intervene in this case.

9 hard to imagine, Your Honor, nor has it been deposed in a 10 30(B)(6) deposed. So, nor can it be alleged that we have put

11 at issue any of these documents, that number one. 12 Number two, this goes to the Crime-Fraud Exception, In light of what I heard a few minutes ago

13 Your Honor.

14 regarding your ruling, Allstate stands in a much different 15 position than the debtors here. Again, there is no prima facie

16 showing that Allstate, a note holder, one of many investors 17 relied -- excuse me -- was seeking to perpetrate a fraud or, 18 more importantly, that to give the exact language of the 19 exception here, that there is any indication that these 20 documents reflect communications made by the client to a lawyer 21 for the purpose of giving advice for the commission of a fraud 22 or a crime. Nothing in what Mr. Shapiro indicated in these

23 deposition transcripts which he provided to us this morning, 24 nothing in the record, nothing in this motion seemed to 25 indicate that Allstate --

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1

THE COURT:

Well, let me ask you a question.

If your

2 client, a representative of your client, had a discussion with 3 a representative of the debtor, to the effect that, hey, we 4 know how to beat this tax liability by converting to a secured 5 debt and then your representative, your client's representative 6 went back and said to his lawyer, research t