the debtors in these chapter 11 cases and the last four

i I 11•!ll1

In re: Chapter 11 (Jointly Administered)

REVSTONE INDUSTRIES, LLC, et al.' Case No. 12-13262 (BLS)

Debtors. Related Docket No. 2010

The Official Committee of Unsecured Creditors (the "Committee") of

Revstone Industries, LLC ("Revstone"), by and through its undersigned counsel,

hereby objects (the "Objection") to the motion of Revstone, Spara, LLC ("Spara"),

Greenwood Forgings, LLC ("Greenwood"), and US Tool & Engineering, LLC ("US

Tool"), the above-captioned debtors and debtors-in-possession (collectively, the

"Debtors"), for entry of an order pursuant to sections 105 and 363 of 11 U.S.C.

§§ 101-1532 (as amended and applicable in these bankruptcy cases, the "Bankruptcy

Code") and Rule 9019 of the Federal Rules of Bankruptcy Procedure (the

"Bankruptcy Rules") authorizing and approving a settlement agreement (the

The Debtors in these Chapter 11 Cases and the last four digits of each Debtor's federal tax identification numbers are: Revstone Industries, LLC (7222); Spara, LLC (6613); Greenwood Forgings, LLC (9285); and US Tool and Engineering, LLC (6450). The location of the Debtors' headquarters and the service address for each of the Debtors is c/o Huron Consulting Group Inc., 900 Wilshire Drive, Suite 270, Attn: John C. DiDonato, CRO, Troy, MI 48084.

Case 12-13262-BLS Doc 2058 Filed 03/19/15 of 28

"Medley Settlement" or the "Medley Settlement Agreement") with Medley Capital

Corporation, on behalf of itself, as Administrative Agent, and as Collateral Agent

(Docket No. 2010) (the "Medley 9019 Motion"). In support of the Objection, the

Committee states as follows:

irTI:nh ~i'i TiTi~i~1+1

1. On December 3, 2012 (the "Petition Date"), Revstone and

Spara each filed a voluntary petition for relief under chapter 11 of the Bankruptcy

Code in the United States Bankruptcy Court for the District of Delaware (the

"Court").

2. On December 17, 2012, the Office of the United States

Trustee for the District of Delaware (the "U.S. Trustee") appointed the Committee in

the Revstone bankruptcy case pursuant to Bankruptcy Code section 1102(a)(1).

3. Thereafter, Greenwood, US Tool, and TPOP, LLC ("TPOP")

filed petitions under chapter 11 of the Bankruptcy Code. To date, the U.S. Trustee

has not appointed an official committee in the Spara, Greenwood, US Tool, or TPOP

bankruptcy cases.

4. The Debtors are operating their businesses as

debtors-in-possession pursuant to Bankruptcy Code sections 1107 and 1108. To

date, no trustee or examiner has been appointed in any of the Debtors' bankruptcy

cases.

2


IL - . rnrnrm,

5. Medley Capital Corporation ("Medley") filed four

substantially similar proofs of claims (collectively, the "Medley Claims") against

each of the Debtors. Specifically, Medley filed proof of claim 234 (against

Revstone), proof of claim 235 (against Spara), proof of claim 236 (against

Greenwood), and proof of claim 237 (against US Tool) asserting secured claims

equal to the funds (not less than $3,890,926.45) that Medley alleges were

misappropriated (the "Funds") by the Debtors' direct or indirect parent, Ascalon

Enterprises, LLC ("Ascalon"), and then purportedly transferred to Revstone and

Spara.

6. Medley is party to a credit agreement dated June 29, 2012 (the

"Credit Agreement"), among Medley, MW Crow, Inc. ("Crow"), MW General, Inc.

("General" and together with Crow, the "Borrowers"), and other unidentified parties.

Pursuant to the Credit Agreement, Medley was to loan funds to the Borrowers.

Upon information and belief, the Borrowers are non-debtor affiliates of Ascalon

and/or the trusts established by George Hofmeister for the benefit of his children

(collectively, the "Children's Trusts"). The Borrowers are not within the

organizational structure of Revstone or Spara, and are not direct or indirect

subsidiaries of any of the Debtors.

7. On July 19, 2013, Medley, Ascalon, and Revstone Aero, LLC

("Aero"), another non-debtor affiliate of Ascalon and/or the Children's Trusts that is


not within the organizational structure of Revstone or Spara, and is not a direct or

indirect subsidiary of any of the Debtors, allegedly signed an acknowledgement and

agreement of affiliate obligor (the "Ascalon Acknowledgement"). A copy of the

Ascalon Acknowledgement is attached hereto as Exhibit A. According to the

Ascalon Acknowledgement, Aero allegedly served as the guarantor to Borrowers

under the Credit Agreement. The Ascalon Acknowledgment was based on a letter

signed by Mr. Hofineister, as chairman of Ascalon, and was acknowledged and

agreed to by Aero (again by Mr. Hofineister as its chairman) and Medley.

8. In the Ascalon Acknowledgement, Ascalon states that it

received value for the Ascalon Acknowledgement. Ascalon further states that it

owes Aero for an intercompany advance that Ascalon received, and from which it

then transferred $2,452,741.32 to Revstone and $1,064,311.16 to Spara. The

Ascalon Acknowledgement states that these funds belonged to the Borrowers under

the Credit Agreement. Neither Revstone nor any of the other Debtors are parties to

the Ascalon Acknowledgement. See Exhibit A.

9. On July 24, 2014, the Debtors filed their Fourth Omnibus

Objection (Substantive) Seeking to Reclassify Claims (Docket No. 1670) (the

"Claims Objection"). By the Claims Objection, the Debtors sought to reclassify the

Medley Claims from secured claims to general unsecured claims on the basis that:

[Medley's] [c]laim[s] stat[e] no basis or supportable legal theory to justify a secured claim against any of the Debtors. None of the Debtors are alleged as guarantors of the claimants' financing to non-Debtor affiliates MW Crow, Inc. and MW General, Inc. Further,

4


contrary to the requirements of Bankruptcy Rule 3001(c)(1), no document is attached to the claim to support the alleged secured claim.

See Claims Objection, Exhibit B at Page 3. In the Claims Objection, the Debtors

further reserved all rights to object to the Medley Claims as general unsecured

claims. See Claims Objection, at ¶ 16.

10. On September 19, 2014, Medley filed its Response to the

Claims Objection (Docket No. 1756) (the "Medley Response"). In the Medley

Response, Medley asserted for the first time that it held a security interest in the

Funds pursuant to section 9-315(a) of the Uniform Commercial Code ( the

"U.C.C."), and reiterated that under Kentucky state law, the Court should impose a

constructive trust on the funds. In so doing, Medley relied heavily on the veracity of

the Acknowledgment. See Medley Response, at ¶¶ 17, 19-20.

11. Both Medley and the Debtors served discovery requests in

connection with the Claims Objection and the Medley Response. See Docket Nos.

1757 and 1816. The Debtors and Medley adjourned the hearing on the Claims

Objection pending completion of discovery.

12. On February 27, 2015, Medley filed its Limited Objection to

Debtors' Joint Chapter 11 Plan of Reorganization (Docket No. 2000) (the "Medley

Plan Objection"). By the Medley Plan Objection, Medley argued that the Debtors

are required to hold at least $3,890,926.45 in escrow on account of the Medley

Claims until the Claims Objection could be resolved.

5


C. The Medley Settlement

13. On March 6, 2015, after Medley's filing of the Medley Plan

Objection that the Debtors and Medley successfully negotiated the Medley

Settlement, the Debtors filed the Medley 9019 Motion. Under the proposed Medley

Settlement, the approval of which the Debtors seek through the Medley 9019

Motion, the Debtors will pay Medley $85,000.00 in satisfaction of its alleged secured

claim.2 The Medley Claim, reduced by $85,000.00, will then be reclassified and

allowed as general unsecured claims totaling $3,805,926.45. These claims will be

allowed against Revstone and the Spara based on the amounts identified in the

Ascalon Acknowledgment as having been transferred to Revstone (69.7% of the

Funds) and Spara (30.3% of the Funds). Accordingly, Medley will hold an allowed

general secured claim against Revstone in the amount of $2,652,730.74, and Medley

will hold an allowed general secured claim against Spara in the of $1,153,195.71.

Medley will, not surprisingly, have no claims against U.S. Tool or Greenwood,

neither of which is expected to make any distributions to creditors holding allowed

unsecured claims. Indeed, the Revstone and Spara estates and their respective

creditors, will be compelled to should all of the burden of such claims if the claims

are allowed as requested in the Medley Settlement.

14. The parties to the proposed Medley Settlement are the Debtors

and Medley. The Committee, which is the sole fiduciary of the Revstone estate

It is unclear what amounts the individual Debtors will contribute to the $85,000.00 to be paid to Medley on the Effective Date of the Plan for Medley's alleged secured claims.

6


without conflicting obligations to other estates (such as Spara, Greenwood, US Tool,

and TPOP), was not included in any substantive way in the settlement negotiations.

Notwithstanding the failure to include the Committee in the negotiations, the

proposed Medley Settlement harms the Committee's constituents by substantially

increasing the unsecured claims anticipated to be allowed against Revstone through

the allowance of claims against Revstone that have no basis.

15. The proposed reclassification and allowance of the claims

without any opportunity to object substantively to such claims significantly increases

the general unsecured claims pool to the detriment of unsecured creditors of

Revstone and Spara. As set forth herein, the Committee believes and expects that

discovery will demonstrate that no claims are owed to Medley by either Revstone or

Spara, whether on a secured or unsecured basis.

16. The Debtors apparently agree that they have no liability to

Medley. Indeed, the only business justification offered by the Debtors for reaching

an agreement that significantly prejudices Revstone and Spara's general unsecured

creditors is to avoid litigation costs and avoid a contested confirmation hearing. See

Medley 9019 Motion at ¶ 13 (the Debtors filed the Medley 9019 Motion "to avoid

the escalating costs of litigation with Medley and the potential obstacle to the

Debtors' efforts to confirm the Plan and declare the Effective Date ...."). As set

forth below, though minimizing legal expenses in this case is a laudable goal, it is


improper to approve a settlement that significantly prejudices innocent creditors of

Revstone over the objection of such creditors' sole fiduciary.

17. For the reasons set forth below, the Medley Settlement

Agreement should not be approved. Medley does not have any claims against the

Debtors, whether on a secured or unsecured basis. Therefore, the Medley 9019

Motion fails to pass muster under the factors articulated in Myers v. Martin (In re

Martin), 91 F.3d 389 (3d Cir. 1996). Accordingly, the Court should deny the Medley

9019 Motion.

[I]II I

L~► 17~7 f7~T~~►6Tih: ~1~~~1`~ ii'71~i ~~~iTiT

18. The Medley Settlement should not be approved because

Medley does not have valid claims against the Debtors, none of which were parties

to the Credit Agreement or the Ascalon Acknowledgement, and whose books and

records show no liability to Medley. Even if Medley did otherwise have valid claims

against Revstone (which it does not), upon information and belief, the Borrowers (or

some other party) have satisfied the Borrowers' obligations under the Credit

Agreement. Moreover, even if Revstone were liable under the Credit Agreement

and/or Ascalon Acknowledgement (which it is not), any claim held by Medley

should be disallowed pursuant to Bankruptcy Code section 502(d) because

Revstone's obligations for any such liability are avoidable.


19. When a claim objection is made, the burden of proof regarding

the validity of the claim shifts between the parties. See In re Sea Containers, Ltd.,

No. 06-11156 (KJC), 2009 WL 2208128, at *2 (Bankr. D. Del. July 22, 2009)

(citing In re Allegheny Int'l, Inc., 954 F.2d 167, 173 (3d Cir. 1992)); see also In re

Lampe, 665 F.3d 506, 514 (3d. Cir. 2011) (stating "the claimant always has the

burden of persuasion in a contested proceeding"). In Allegheny Int'l, the Third

Circuit Court of Appeals explained this burden shifting as follows:

Initially, the claimant must allege facts sufficient to support the claim. If the averments in his filed claim meet this standard of sufficiency, it is "prima facie" valid. In other words, a claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant's initial obligation to go forward. The burden of going forward then shifts to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim. It is often said that the objector must produce evidence equal in force to the prima facie case .... In practice, the objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency. If the objector produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence . . . . The burden of persuasion is always on the claimant.

Allegheny Int'l, 954 F.2d at 173-74 (citations omitted).

20. Therefore, "the burden of proof is an essential element of the

claim itself; one who asserts a claim is entitled to the burden of proof that normally

comes with it." In re United Companies Fin. Corp. , 267 B.R. 524, 527 (Bankr. D.

Del. 2000) (quoting Raleigh v. Ill. Dept. of Revenue, 530 U.S. 15, 21 (2000)).


21. The Bankruptcy Rules provide that, if a claim is based on a

writing, the original or a duplicate of the writing must be attached to the proof of

claim. See Fed. R. Bankr. P. 3001(c)(1). If the writing is lost or destroyed, a

statement explaining that occurrence must be filed. Id.

22. Where a claimant fails to produce such documentation, the

claim will not be allowed. See In re Olympus Healthcare Grp., Inc., No. 01-1849

(MFW), 2004 WL 144240, at *3 (Bankr. D. Del. Jan. 23, 2004) (finding the claimant

filed to meet his burden to establish a claim under section 502(a) of the Bankruptcy

Code, the requirements of Bankruptcy Rule 3001(c), or the Statute of Frauds of the

controlling states' law).

23. Here, Medley has failed to meet its initial burden of asserting

a prima facie valid claim. A proof of claim is prima facie valid if it "alleges facts

sufficient to support a legal liability to the claimant." Allegheny Int'l, 954 F.2d at

173. As an initial matter, the Medley Claims fail because Medley provided no

documentary support for its claims. The only documentation attached to the proof of

claim was a summary of alleged facts proposed by Medley. The proof of claim did

not even include a copy of the Credit Agreement or the Ascalon Acknowledgement.

24. Moreover, subsequent discovery has indicated that there is no

reliable evidence that Revstone or the other Debtors were ever in control or

possession of the Funds. Specifically, neither Revstone nor any of the other Debtors

are parties to the Credit Agreement or the Ascalon Acknowledgement. Moreover,

10


the Debtors further reviewed their books and records for any reference to the alleged

transfers. See Medley 9019 Motion at ¶ 9. The Debtors' bank account statements

and cash management records indicate that the Debtors have no record of the alleged

transfers. See Debtors' Letter to the Court dated December 22, 2014 (Docket No.

1904) (the "Debtors' Response to the Motion to Compel Letter") (stating that "[T]he

Debtors produced their bank account statements and even their cash management

account statements and unaudited income statements they could locate, all of which

do not show any transfer(s) of Funds (or part of the Funds) into or out of the

Debtors' accounts."); see also Transcript of January 22, 2015 Hearing at 8:19-9:5,

attached hereto as Exhibit B.

25. The only indication that Revstone received any funds related

to the Credit Agreement is the Ascalon Acknowledgment, signed only by Mr.

Hofmeister, as the Chairman of Aero, not the Debtors. In the Ascalon

Acknowledgment, Mr. Hofmeister states that Ascalon disbursed the Funds to

Revstone and Spara on an unspecified date or dates.

26. However, the Ascalon Acknowledgment is inherently

unreliable for a number of reasons. As a preliminary matter, such alleged statement

is inadmissible hearsay. See Fed. R. Evid. 801(c) and 802. Moreover, the self-

serving nature of the Ascalon Acknowledgement makes the inadmissible hearsay

even more suspect. Specifically, through the acknowledgement, Mr. Hofmeister

attempts to divert liabilities from companies he still currently controls to those over

11


which he has already lost control, and for which he through the Children's Trusts,

that he also controls, will receive no recovery at any rate. In particular, on January

17, 2013, prior to the Ascalon Acknowledgement, Revstone amended its operating

agreement to replace Mr. Hofmeister (formerly Revstone's President) with John

DiDonato of Huron Consulting Group ("Huron"), as Chief Restructuring Officer

("CRO") of Revstone to make bankruptcy decisions. Further, at or around the same

time, the board of Revstone was reconstituted to include two independent managers.

Thus, at the time of the Ascalon Acknowledgement, Mr. Hofmeister had no authority

to bind Revstone and his statement cannot be regarded as a statement against the

interest of Revstone.

27. The Ascalon Acknowledgment also specifically states that

Ascalon was solely responsible for making the transfers. Because Ascalon was

responsible for the transfers, Ascalon and Mr. Hofmeister, not Revstone and Spara

should be held liable to Medley.

28. For all of these reasons, Medley has failed to establish that it

has a claim against Revstone or the other Debtors.

IL • r 1 I E. r 1, n T.

1 .1 1 1

29. Even if Medley had a claim against Revstone and/or Spara,

upon information and belief, the Borrowers (or some other party) have repaid

12


Medley the amount borrowed and due under the Credit Agreement, thereby

satisfying the Medley Claims.

30. Contemporaneously with the filing of this Objection, the

Committee served interrogatories, requests for production of documents, and

requests for admission upon Medley and Ascalon. The Committee believes that

Medley, Ascalon, , and/or some other party possess documents that will demonstrate

that the Borrowers' obligations under the Credit Agreement have been satisfied and

that Medley, therefore, has no claims against any of the Debtors. At a minimum, the

Medley 9019 Motion should not be approved until the Committee has had the

opportunity to complete discovery into the payments Medley has already received on

account of the alleged underlying obligations. Medley should not be permitted

double (or more) recovery on account of its alleged claim, particularly when such

recovery would come at the expense of Revstone's unsecured creditors.

31. Moreover, to the extent that Medley has already been paid, the

Debtors have a claim against Medley, for, among other things, the fees and expenses

incurred in litigating such false claims.

32. To the extent that the Court concludes that Revstone somehow

is obligated on the Credit Agreement and/or Ascalon Acknowledgement (which it is

not), the Medley Claim still should be disallowed pursuant to Bankruptcy Code

section 502(d). That section provides:

13


Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522 (f), 522 (h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.

11 U.S.C. § 502(d).

33. Here, any incurrence by Revstone of obligations under the

Credit Agreement and/or the Ascalon Acknowledgement is avoidable under

Bankruptcy Code sections 544 and/or 548. As noted above, the Debtors' books and

records indicate that neither Revstone nor any of the other Debtors received any of

the Funds. Accordingly, none of the Debtors received any value, much less

reasonably equivalent value, for the alleged obligations. Moreover, any such

obligations may also be avoided under Bankruptcy Code section 547 to the extent

Medley is determined to be an insider. The Committee reserves the right to file a

lawsuit to the extent this Court determines that Revstone has incurred such

obligation and further determines that this contested matter is not sufficient to assert

such arguments.

34. In the Attachment to the Medley Claims, the Response to the

Claims Objection, and the Medley letter to the Court dated October 17, 2014 (Docket

No. 1794) (the "Medley Initial Discovery Letter"), Medley asserts that it has a

secured claim by virtue of U.C.C. § 9-315, or under a constructive trust theory. 14


35. However, as Medley admits, it cannot have a secured claim

based on a lien in identifiable portions of the Funds, unless Medley "prove[s] its case

by tracing." See Medley Initial Discovery Letter at p. 2. Specifically, Medley

admits that:

Tracing discovery is needed to prove [Medley's] case. What Medley knows for sure (based on a written confession obtained over a year ago) is that Mr. Hofineister and Ascalon Enterprises, LLC (the Debtors' parent company) misappropriated funds lent by Medley to non-Debtor affiliates shortly before the Debtors' bankruptcy filings, and those funds were wrongfully transferred to the Debtors.

36. Thus, even if Medley can prove that funds were transferred to

Revstone, under applicable law, Medley still has the burden of tracing funds to

"identifiable cash proceeds" of collateral that would be automatically perfected

under U.C.C. § 9-315. See In re Milton Abeles, LLC, No. 812-70158, 2013 WL

5304014 at *2 (Bankr. E.D.N.Y. Sept. 20, 2013) ("[U.C.C.] section 9-315 provides

that `proceeds' of a secured creditor's collateral must be `identifiable proceeds.'

Proceeds that are commingled with other property are `identifiable' only if `the

secured party identifies the proceeds by a method of tracing."); Off. Comm. of

Unsecured Creditors v. Catholic Diocese of Wilmington, Inc. (In re Catholic Diocese

of Wilmington, Inc.), 432 B.R. 135, 151 (Bankr. D. Del. 2010) (finding that "lowest

intermediate balance test" applicable, that the claimant bears the burden of

identifying and tracing the funds "to and from the [relevant] account[s]," and that

15


tracing trust funds through book entries, rather than through account statements was

not permissible).

37. Thus, in order to have a valid secured claim, Medley bears the

burden first of proving that its claim with the Borrowers was secured. If Medley

satisfies that burden, then Medley bears the burden of tracing the allegedly Funds to

Revstone and Spara as identifiable proceeds. The Debtors' cash management

records and bank account statements apparently contain no record of these transfers.

See Debtors' Response to the Motion to Compel Letter at 3-4 ("[T]he Debtors

produced their bank account statements and even their cash management account

statements and unaudited income statements they could locate, all of which do not

show any transfer(s) of Funds (or part of the Funds) into or out of the Debtors'

accounts."); see also Transcript of January 22, 2015 Hearing at 8:19-9:5, attached

hereto as Exhibit B. Accordingly, Medley is unable to meet its burden, because

Medley cannot trace the initial distribution of these funds to Revstone or any of the

other Debtors.

38. Medley alternatively asserts a constructive trust through the

Medley Claims. However, pursuant to Bankruptcy Rule 700 1(1), an adversary

proceeding must be commenced prior to the imposition of a constructive trust. First,

the relief sought is a "proceeding to recover money or property." Fed. R. Bankr. P.

7001(1). Likewise, Bankruptcy Rule 7001(2) requires that an adversary proceeding

be commenced to determine an "interest in property." Fed. R. Bankr. P. 7001(2).

K


Moreover, as a constructive trust is "other equitable relief' pursuant to Bankruptcy

Rule 7001(7), Medley must first commence an adversary proceeding (which it has

not done). Because an adversary proceeding has not commenced, Medley is not

entitled to a constructive trust. See In re Haber Oil Co. Inc. , 12 F.3d 426 (5th Cir.

1994) (reversing a bankruptcy court's imposition of a constructive trust in part

because the debtor did not receive all procedural protections guaranteed by adversary

proceeding).

39. Moreover, in the Third Circuit, in order to establish a

constructive test, the complainant must "identify and trace the trust funds if they are

commingled." Goldberg v. N.J. Lawyers' Fund for Client Protection , 932 F.2d 273,

280 (3d Cir. 1991). Likewise, under Kentucky state law, 3 funds must be traced in

order for a constructive trust to be imposed. Commw. Cabinet for Human Res. v.

See. of Am. Life Ins. Co. , 834 S.W.2d 176 (Ky. Ct. App. 1992).

40. As set forth above, the Debtors have no record of these alleged

transfers in their bank account statements and cash management records. Medley

does not, and cannot, trace these funds to Revstone or any of the other Debtors, and

accordingly, has no secured claims under any constructive trust theory.

Medley argues that Kentucky law applies because it claims (without providing any support) that the transfers occurred in Kentucky. See Response to the Claims Objection at Page 6 n. 20. Even assuming it is true that the transfers occurred in Kentucky, the Committee believes that a conflict of laws analysis must be done, and that Delaware has the most significant relationship to the imposition of the constructive trust. In re Orion Refining Corp., 341 B.R. 476, 484 (Bankr. D. Del. 2006); see also Restatement (Second) of Conflict of Laws § 148(2) (1971). Accordingly, under Delaware law, in addition to tracing the funds, Medley must prove fraud, a breach of fiduciary duty, or some other unconscionable behavior in order for a constructive trust to be imposed. Adams v. Jankouskas, 452 A.2d 148, 152 n. 4 (Del. 1982). To date, Medley has not provided such proof.

17


(3d Cir. 2006); see also In re Exide Techs. , 303 B.R. 48, 67 (Bankr. D. Del. 2003)

("the Bankruptcy Court [must] determine that a proposed compromise forming part

of a reorganization plan is fair and equitable") (citations omitted); Protective Comm.

for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson , 390 U.S. 414, 424

(1968). The "fair and equitable" standard requires courts to consider (1) the

probability of success in the litigation; (2) the difficulties, if any, to be encountered

in the matter of collection; (3) the complexity of the litigation involved, and the

expense, inconvenience, and delay necessarily attendant thereto; and (4) the

paramount interests of the creditors. Martin , 91 F.3d at 393.

42. The movant must satisfy each of these factors by a

preponderance of the evidence. Martin, 91 F.3d at 393. See also In re Capmark Fin.

Grp., Inc. , 438 B.R. 471, 490, 501 (Bankr. D. Del. 2010) (citing Grogan v. Garner ,

498 U.S. 279, 291 (1991)); see also Velde v. First Int'l Bank & Trust (In re Y-Knot

Constr., Inc.), 369 B.R. 405, 408 (B.A.P. 8th Cir. 2007) ("Trustee, as the party

seeking the approval of the Settlement Agreement, has the burden of showing by a

preponderance of the evidence that the proposed settlement is in the best interest of

the estate. "). Besides the Martin factors, courts may also consider "all other factors

relevant to a full and fair assessment of the wisdom of the proposed compromise."

18


See In re Nutritional Sourcing Corp., 398 B.R. 816, 833 (Banks. D. Del. 2008)

(citing In re Marvel Entm't Grp., Inc., 222 B.R. 243, 249 (D. Del. 1998)).

43. In this case, assessing and balancing the harm to Revstone

creditors of settling the Medley Claims in the manner contemplated by the Medley

9019 Motion, the fact that Creditors are not parties to the Credit Agreement or the

Ascalon Acknowledgement, that the Debtors' books and records (including their

bank account statements and cash management records) show that Revstone and the

other Debtors are not liable to Medley, the Medley Settlement should not be

approved. Indeed, the Debtors have only asserted that the cost of litigating the

Medley Claims and the delays of such litigation would cause, support the approval of

the Medley Settlement. In light of the substantial harm the proposed settlement will

cause Revstone Creditors, this justification alone does and cannot support the

approval of the proposed settlement with Medley. Accordingly, the Medley

Settlement should not be approved.

44. With respect to the first Martin factor, for a settlement to be

approved as a fair and equitable, a debtor must demonstrate a risk of failure should

the matter be litigated. Martin, 91 F.3d at 393. The Debtors have not demonstrated

that there is any risk of failure should the matter be litigated. Rather, the Debtors

have asserted facts that show that the Debtors are not liable to Medley.

m


45. Moreover, the Debtors seek approval of the Medley

Settlement over the objection of the Committee, charged exclusively with protecting

the rights and interests of Revstone's unsecured creditors, the very constituents

prejudiced by the proposed settlement. The Debtors, who bear the burden of

demonstrating that the Medley Settlement is fair and equitable, have not offered any

evidence to show a low probability of success with litigating the Medley Claims.

Indeed, every pleading filed by the Debtors in connection with the Medley Claims

indicates the opposite. Therefore, the Medley 9019 Motion should be denied on this

basis alone.

46. Further, by producing its bank account statements and cash

management records, the Debtors have established that Medley cannot trace any

funds to Revstone or the other Debtors, and therefore, Medley has no claim against

the Debtors. Thus, on this basis as well, Medley cannot recover against Revstone or

Spara and the Medley Settlement should not be approved.

is ryEuy JrTi . 1-

47. With respect to the second Martin factor, Medley bears any

collection risk, not the Debtors. Specifically, the Debtors are not seeking to collect

from Medley. Rather, Medley is seeking to collect an alleged obligation from the

Debtors. Accordingly, the Debtors have no collection risks. This factor also weighs

against approval of the Medley Settlement.

20


• 1 1 , ,1 . . 1 p • 1 1 CG .I 1 I I ; , ~ .

48. In the Medley 9019 Motion, rather than address the high

probability of success in this litigation, the Debtors argue that litigation with the

Medley would be prohibitively long and costly. See Medley 9019 Motion, at ¶¶ 13,

24, and 25. However, the resolution of claims asserted by the Medley is not a unique

or difficult issue.

49. Nor should the timing of the confirmation hearing dictate the

approval of the Medley 9019 Motion. Rather, the Bankruptcy Code directly

addresses contingent and unliquidated claims such as the Medley Claims for plan

voting purposes. Indeed, the Bankruptcy Code specifically provides a mechanism

for estimating any contingent or unliquidated claim for which the fixing or

liquidation of which would unduly delay administration of the bankruptcy cases.

Specifically, Bankruptcy Code section 502(c), in relevant part, states:

There shall be estimated for purpose of allowance under this section —

(1) any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case. .

11 U.S.C. § 502(c).

50. Courts have regularly applied Bankruptcy Code section 502(c)

to estimate contingent claims for purposes of voting and distribution. See, e.g. ,

Bittner v. Borne Chem. Co., Inc. , 691 F.2d 134, 136-37 (3d Cir. 1982) (rejecting

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shareholders' argument of entitlement to a claim for the present value of the

probability that shareholders would be successful in the underlying litigation and

estimating the claims at zero because the probability of success is uncertain); In re

Granite Broad. Corp. , 385 B.R. 41, 52 (S.D.N.Y. 2008) (affirming bankruptcy

court's order estimating claim at zero for allowance, voting, and distribution

purposes); In re Trident Shipworks, Inc. , 247 B.R. 513, 514 (Bankr. M.D. Fla. 2000)

(an estimation proceeding may be used for purposes of voting on a plan, and to

determine the distribution amount).

51. Bankruptcy Code section 502(c) provides an effective

mechanism for estimating the Medley Claims. Indeed, Bankruptcy Code section

502(c) requires the Bankruptcy Court to estimate contingent or unliquidated claims

for purposes of allowance when the fixing or liquidating of such claim would unduly

delay administration of the cases. See 11 U.S.C. § 502(c). The policy behind

Bankruptcy Code section 502(c) is to convert all claims against a debtor into dollar

amounts. See H.R. Rep. No. 595, 95th Cong., 1st Sess. 354 (1977) Rep. 989, 95th

Cong., 2d Sess. 65 (1978). Estimation is a tool utilized regularly by debtors, and

could be used here. Rather than avail themselves of the tools provided by the

Bankruptcy Code to eliminate or reduce the Medley Claims, however, the Debtors

instead seek authority from the Court to allow the Medley Claims in more than the

amounts even asserted by Medley. Thus, the Medley Claims should not be allowed.

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52. Proceeding either under Bankruptcy Code section 502(c) or by

pursuing the litigation regarding the Medley Claims in accordance with the deadlines

set in the Initial Scheduling Order, would not be complex or unduly time consuming.

53. The Debtors' reluctance to incur the cost of retrieving,

reviewing, and producing responsive emails — a task that is necessary in even the

simplest of litigation — is not sufficient justification to allow the Medley Claims. For

these reasons, the Debtors have failed to carry their burden with respect to the third

Martin factor. 4

W. • ~ ,; r , ;, ;.

54. The final Martin factor likewise weighs against approval of

the Medley Settlement. When evaluating whether a settlement is fair and equitable,

courts often look at how a settlement affects not only the parties to a settlement, but

non-settling creditors. See, e.g. , Will v. Northwester Univ. (In re Nutraquest, Inc.),

434 F.3d 639, 645 (3d Cir. 2006) ("[u]nder the `fair and equitable' standard, we look

to the fairness of the settlement to other persons, i.e., the parties who did not

settle."); Cullen v. Riley (In re Masters Mates & Pilots Pension Plan), 957 F.2d 1020,

1026, 1031 (2d Cir. 1992) ("where the rights of one who is not a party to a settlement

are at stake, the fairness of the settlement to the settling parties is not enough to earn

the judicial stamp of approval," and requiring determination that "no one has been

To the extent that professionals employed by the Debtors prefer not to pursue litigation, the Committee's professionals are prepared to do so.

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set apart for unfair treatment"); In re Crowthers McCall Pattern , Inc. , 114 B.R. 877,

885 (Bankr. S.D.N.Y. 1990) ("major pre-confirmation transactions, such as .. .

settlement ... raise the concern that the scheme of Chapter 11 will be distorted ...

[a] transaction which would effect a lock-up of the terms of a plan will not be

permitted.")

55. Courts are especially sensitive to creditors who were not part

of any negotiations, but whose rights are nonetheless affected by the settlement. See,

, In re Nutritional Sourcing Corp. , 398 B.R. at 836-38 (Bankr. D. Del. 2008)

(denying confirmation of a plan because certain trade creditors whose rights were

severely impacted by settlement were not afforded "meaningful participation" in

negotiations of settlement); In re Covington Props., Inc. , 255 B.R. 77, 79-80 (Bankr.

N.D. Fla. 2000) (holding that a settlement was not fair and equitable because it

insulated insiders from litigation outside of the bankruptcy context by cutting off

claims held by certain creditors); In re Mavrode , 205 B.R. 716, 721 (Bankr. D.N.J.

1997) (a proposed settlement will necessarily fail where one creditor benefits at the

other creditors' expense, but holding that because the funds for settlement came from

funds outside of the estate, that the creditors were not prejudiced). As set forth

above, the Debtors and Medley reached their proposed settlement without input from

the Committee, and indeed, at the Committee's objection.

56. In chapter 11 liquidations more deference is shown to the

unsecured creditors' viewpoint than in reorganization cases "because the principle

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[sic] underlying rationale for the `business judgment rule,' i.e., that a DIP is entitled

to some free reign in fulfilling its perceived mission of aiding the economy ... is

lacking in such circumstances." In re S.N.A. Nut Co., 186 B.R. 98, 105 (Bankr.

N.D. I11. 1995) (denying a break-up fee opposed by the creditors' committee).

Creditors' committees, in particular, are given special deference and the committee's

severe opposition to a settlement is a basis for denying approval. See Exide Techs.,

303 B.R. at 70 ("Unsecured creditors are not voluntary investors in the Debtor and

their position on the settlement, under these circumstances, is entitled to substantial

weight. "). Indeed, in Exide Technologies, the court determined that a settlement was

not in the "paramount interests of creditors" under Martin because the unsecured

creditors overwhelmingly opposed the proposed settlement, were not included in the

negotiation of its terms, and would be directly affected by its implementation of the

settlement. Id. at 70-71.

57. In this instance, such consideration underscores that the

Medley 9019 Settlement is unreasonable, and not in the paramount interests of

creditors. Specifically, the Medley Claims Objection can be completed timely and

with minimal expense relative to the cost incurred by the Revstone estate as a result

of the Medley Settlement. Specifically, the Debtors have proposed to pay Medley

$85,000, and allow claims that the Debtors have already acknowledged as baseless

and that will cause the Revstone general unsecured claims pool to expand from an

estimated $24,500,000.00 to $41,500,000.00, to $27,152,730.74 to $44,152,730.74

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(i.e. up to an 11% increase in potentially allowed general unsecured claims in the

Revstone estate alone). The Revstone general unsecured creditors presently only

have $3,000,000.00 available to satisfy the allowed general unsecured claims.

Allowing the Medley Claims as proposed under the Medley Settlement would dilute

the Revstone general unsecured creditors recovery rates from an estimated recovery

of 7.23% - 12.24% to an estimated recovery of 6.79% -11.05 (a decrease of up to

almost 10% in the recovery rates).

58. The Medley Settlement runs counter to the best interests of

Revstone creditors. Medley has filed identical claims against all of the Debtors;

however, the Medley Settlement contemplates Medley receiving $85,000 (from

sources not yet disclosed) on account of a potentially allowed secured claim, and the

balance of its clam being allowed as a general unsecured claim (which 70% of such

unsecured claim against Revstone and 30% of such unsecured claim against Spara).

Indeed, it appears that Revstone's unsecured creditors are being forced to pay

substantial amounts to potentially settle large, but baseless claims, including those

asserted against the Debtors' other estates. In short, Revstone's unsecured creditors

are unfairly shouldering the burden of the Medley Settlement, while the unsecured

creditors of Spara, Greenwood, and US Tool, benefit at Revstone's expense.

59. The apparent basis for allocation of the majority of Medley's

allowed claims to Revstone, is Mr. Hofineister's self-serving Ascalon

Acknowledgement. As this Court is aware, Mr. Hofmeister is embroiled in litigation


in this Court and in other jurisdictions regarding his fraudulent dealings through

Ascalon and its affiliated companies. Ultimately, Mr. Hofmeister, as the mastermind

of the many fraudulent transfers effected through Ascalon, will be liable to numerous

innocent creditors. To the extent that Medley can prove Mr. Hofmeister fraudulently

transferred money, it is Mr. Hofmeister, not the Debtors, and Revstone's unsecured

creditors, who should be held liable.

60. Accordingly, because the Debtors have failed to satisfy their

burden of demonstrating by a preponderance of the evidence that the Medley

Settlement is fair and equitable, the Medley Settlement should not be approved.

61. The Committee reserves its right to supplement and amend

this Objection, seek formal discovery with respect to the same, and introduce

evidence at any hearing relating to the Medley 9019 Motion and this Objection.

Further, the Committee reserves the right to respond to, further object to, or join in

any objection or argument made by any person relating to the Medley 9019 Motion,

and to Respond to the Medley Plan Objection, or any other pleading filed by Medley.

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WHEREFORE, for the reasons set forth herein, the Committee

respectfully requests that the Court sustain the Objection, deny the Medley 9019

Motion, and grant the Committee such further relief as is just and proper under the

circumstances.

Dated: March 19, 2015

/s/ Mark L. Desgrosseilliers Mark L. Desgrosseilliers (Del. Bar No. 4083) Matthew P. Ward (Del. Bar No. 4471) Ericka F. Johnson (Del. Bar No. 5024) Womble Carlyle Sandridge & Rice, LLP 222 Delaware Avenue, Ste. 1501 Wilmington, DE 19801 Telephone: (302) 252-4320 Facsimile: (302) 661-7738 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Counsel for the Official Committee of Unsecured Creditors of Revstone Industries, LLC

WCSR 33777757v6


EXHIBIT A

Case 12-13262-BLS Doc 2058-1 Filed 03/19/15 Page 1 of 7

ACKNOWLEDGEMENT AND AGREEMENT OF AFFILIATE OBLIGOR

Medley Capital Corporation 375 Park Avenue, 33rd Floor New York, New York 10152 Attention: Office of the General Counsel

Revstone Aero LLC 2250 Thunderstick Drive, Suite 1203 Lexington, Kentucky 40505 Attention: Office of the General Counsel

July 19, 2013

Re: Intercompany Advance from Revstone Aero LLC

Ladies and Gentlemen:

Reference is made to that certain Amended and Restated Forbearance Agreement, dated as of June 24, 2013 (the "Forbearance Agreement"), made among Revstone Aero, LLC ("Holdings"), as "Guarantor", and MW Crow, Inc. and MW General, Inc., as "Borrowers" (the "Borrowers"; and together with Holdings, the "Credit Parties"), and Medley Capital Corporation, in its capacities as sole "Lender," "Administrative Agent" and "Collateral Agent ("Medley"). Capitalized terms used herein, but not expressly defined herein, shall have the meanings given to such terms in the Forbearance Agreement (or in the Credit Agreement defined therein).

We, Ascalon Enterprises, LLC ("Ascalon", ''we" or "us") are an Affiliate of Holdings. Holdings has provided us with a copy of the Forbearance Agreement, and requested that we provide the following assurances to Holdings and Medley in regard thereto for its benefit and the benefit of the Borrowers, which are also our Affiliates. Accordingly, for value received by us, we hereby acknowledge, certify and agree to, with and for the benefit of Holdings and Medley as follows:

1. Acknowledgements. We hereby acknowledge and certify to Holdings and Medley that:

(a) the Intercompany Advance is due and owing by us to Holdings in the amount of $3,871,000 on the date hereof, with no defense, counterclaim, set-off or similar right on our part in respect thereof;

(b) the initial disbursement of the Intercompany Advance was made in October of2012 in the amount of$2,450,000;

DMSLIBRARYO I :21098885.2


(c) subsequent thereto, in November of 2012, Holdings made additional disbursements of the Intercompany Advance to us, or for our benefit, in the approximate amounts of$1,047,000 and $349,000;

(d) we, in turn, disbursed the proceeds of each disbursement of the Intercompany Advance either (i) to the extent of the $2,452,741.32, to or for the benefit of our wholly-owned subsidiary, Revstone Industries, LLC ("Industries"), in one or more disbursements for use in its business operations (the "Industries Transfer") (ii) to the extent of $1,064,311.16, to or for the benefit of our wholly-owned subsidiary, Spara, LLC ("Spara"), in one or more disbursements for use on its business operations (the "Spara Transfer"; the Spara Transfer and the Industries Transfer, collectively, the "Ascalon Transfers");

(e) the Ascalon Subsidiaries subsequently filed, and are presently the subject of, a Bankmptcy Case (as defined below);

(f) all funds used by Holdings to make disbursements of the Intercompany Advance and, in turn, all funds used by us to make disbursements of the Ascalon Transfers, were funds that belonged to the Borrowers, representing funds borrowed by them from Medley as sole Lender under the Credit Agreement and intended for use in their respective business operations (and for no other purpose);

(g) the right to receive, collect and enforce payment of the Intercompany Advance is freely transferrable by Holdings;

(h) Holdings has notified us of the transfer of its right to receive, collect and enforce payment of the Intercompany Advance to Medley, acting in its capacity as Collateral Agent, as described more particularly in the Forbearance Agreement;

(i) we have received no notice from Holdings of any assignment, in whole or in part, of the right of Holdings to receive, collect and enforce payment of the Intercompany Advance except to Medley in its aforesaid capacity; and

G) pursuant to the Forbearance Agreement, Medley as Collateral Agent has all requisite rights necessary to make a claim on us for the Intercompany Advance and receive the Intercompany Advance from us.

(k) our right to receive, collect and enforce payment of the Ascalon Transfers is freely transferrable by us, subject only to any limitation thereon arising under the Bankruptcy Case;

(1) we have made no assignment of our right to receive, collect and enforce payment of the Ascalon Transfers; and\

(m) as of the date hereof, the indebtedness represented by the Ascalon Transfers is not evidenced by any promissory notes or other instruments, and is not secured.


2. Payment of Intercompany Advance. We agree with holdings and Medley to pay to Medley on demand by Medley the full amount of the Intercompany Advance, and not to pay any portion of Intercompany Advance to Holdings or any other Person subsequent hereto or raise any defense, right of offset or counterclaim that we may have as against Holdings in respect of any such payment, otherwise then existing in our favor (provided that we shall continue to retain any such claims against Holdings which, in the absence hereof, would have given rise to such defense, right of offset or counterclaim.

3. Assignment of Claims Against Industries. Without limitation of our obligation to pay to Medley, as assignee of the Intercompany Advance, upon demand by Medley, the full amount of the Intercompany Advance, we hereby unconditionally and irrevocably transfer and assign to Medley outright all of our right, title, interest, claims and causes of action in and to, or arising under or in connection with om claims against each of the Ascalon Subsidiaries, including without limitation the Ascalon Transfers and under claims numbers C0468 and C0469, copies of which are attached hereto (the "Claims"), as the debtors-in-possession in Case No. 12-13262 (the "Bankruptcy Case") under Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), and any and all other proofs of claim filed or to be filed by us with the Bankruptcy Court in respect of the Claims, with the understanding that any and all amounts recovered by Medley in regard to the Claims (including any in excess of the Intercompany Advance) can and will be used by Medley to reduce the Obligations of the Borrowers and Holdings owing to Medley under the Credit Agreement until fully paid and satisfied. We hereby waive any objection to the transfer of the Claims to Medley on the books and records of the Ascalon Subsidiaries and the Bankruptcy Court, and hereby waive to the fullest extent permitted by law any notice or right to a hearing as may be imposed by Rule 3001 of the Federal Rules of Bankruptcy Procedure, the Bankruptcy Code, applicable local bankruptcy rules or applicable law. We acknowledge and understand, and hereby stipulate, that an order of the Bankruptcy Court may be entered without further notice to us and recognizing Medley as the sole owner and holder of the Claims for all purposes, including, without limitation, voting and distribution purposes.

We further agree, upon the reasonable request of Medley or Holdings, at any time and from time to time, to promptly to execute and deliver all such further docmnents and to promptly take all such action as may be reasonably necessary or appropriate in order more effectively to confirm or carry out the provisions of this letter agreement.

This letter agreement constitutes our entire agreement with Holdings and Medley in respect of the subject matter thereof. This letter agreement shall be binding on our successors and assigns, and shall inure to the benefit of Medley and its successors and assigns. This letter agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same agreement, and may be delivered by personal delivery or by electronic file and any such delivery shall be deemed to be an original document.

THIS LETTER AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.


Very truly yours,

ASCALON ENTERPRISES, LLC

eister


Richard T. Allorto, Jr.Chief Financial Officer


EXHIBIT B _____________


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UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE

IN RE: ) Case No. 12-13262 (BLS) ) Chapter 11 REVSTONE INDUSTRIES, LLC ) et al., ) Debtors. ) Courtroom No. 1 ) 824 Market Street ) Wilmington, Delaware 19801 ) ) January 22, 2015 ) 11:30 A.M.

TRANSCRIPT OF HEARING BEFORE HONORABLE BRENDAN L. SHANNON

UNITED STATES BANKRUPTCY JUDGE

TELEPHONIC APPEARANCES: For the Debtors: Pachulski Stang Ziehl & Jones

By: COLIN ROBINSON, ESQUIRE 919 North Market Street Wilmington, Delaware 19801

For Medley Capital: King & Spalding, LLP By: THADDEUS WILSON, ESQUIRE 1185 Avenue of the Americas New York, New York 10036 ECRO: DANA MOORE Transcription Service: Reliable 1007 N. Orange Street Wilmington, Delaware 19801 Telephone: (302) 654-8080 E-Mail: [email protected] Proceedings recorded by electronic sound recording: transcript produced by transcription service.


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INDEX

Page NOTICE OF AGENDA MATTERS: For Medley Capital, by Mr. Wilson 3,10,13,18 For the Debtors, by Mr. Robinson 8,11,15,17


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THE COURT: Good morning, counsel, this is Judge

Shannon. I understand from the operator that all necessary

parties are on the call this morning. This is a

teleconference in the Revstone Industries family of cases,

case number 12-13262. The genesis of this telephonic

discovery conference is correspondence from the parties dated

December 22nd and December 24th of 2014, regarding the

litigation with Medley Capital and the Debtors. I have had

an opportunity to review the parties’ correspondence as well

as to take a look at the file of my correspondence from

October 24th, 2014. I will hear first from counsel for

Medley.

MR. WILSON: Good morning, Your Honor, Thad Wilson

on behalf of Medley Capital Corporation. I am with the King

& Spalding Firm. Your Honor, as you are aware, we filed a

letter to Your Honor regarding the necessary discovery that

we believe we need to show and respond to the Debtors’

objection to Medley’s claims in the case. Discovery was

propounded under Rules 33, 34, 36 and was completely within

the scope of Rule 26(b) because the discovery was all

reasonably calculated to lead to the discovery of admissible

evidence.

Principally, Your Honor, we are here today because

while Medley served its discovery back on September 19th of

last year, the Debtors have yet to produce any documents


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regarding Medley’s discovery, other than the Debtors’ bank

account statements, some bank account statements from what

the Debtors have informed us are cash management orders or

cash management accounts held at Bank of America that were

held by or held in the name of an affiliate of the Debtor.

They produced certain income statements, although they are

unaudited for certain of the Debtors, we don’t have certain

statements including balance sheets, etc. from the Debtors,

but merely just unaudited income statements.

Principally, though, the Debtors have informed us

that they did an e-mail search that would otherwise purport

to be responsive to Medley’s discovery request. That e-mail

search, although they have never provided the terms of such

search, produced over 5,000 e-mails that are potentially

responsible to Medley’s request. We attempted to meet and

confer with the Debtors and try to find out why they would

not produce those e-mails. The response was they didn’t want

to go through the time and expense of actually reviewing and

otherwise producing those e-mails.

As Your Honor is aware, Rule 26 does not absolve

someone from producing documents, merely on cost and expense

alone. We know that there are potentially responsive e-mails

due to Medley’s own production of e-mails and other documents

to the Debtors. Principally, Your Honor, there are some e-

mails between the general counsel of the Debtors, Revstone


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Industries, LLC, a gentleman by the name of Dan Smith who was

the general counsel of Revstone through September of 2014, in

which Dan Smith indicated that Ascalon, the non-Debtor parent

company of the Debtors, “loaned to Revstone the funds that

were stolen from Medley out of its borrowers accounts.”

So given the fact that we have this correspondence

from Revstone’s general counsel, and that same correspondence

indicates that he was trying to get the exact numbers of what

money was loaned from Ascalon to Revstone and Spara, the e-

mail traffic indicates, “I am trying to get the exact

numbers.” We know further from the e-mail traffic that he

was trying to get that information from certain employees of

Ascalon. Given the fact that, you know, we know that there

should be other correspondence between Mr. Smith and others

at the Debtors, or at Ascalon or other non-Debtor affiliates,

we believe that there are certainly any number of e-mails

that would otherwise be relevant to our request.

As Your Honor may recall, we were back in front of

you in October of last year on the issue of whether or not

the Debtors could bifurcate the process on the claim

objection, such that they could have a legal hearing or a

hearing on the legal merits of their objection, prior to

producing any documents to us. As Your Honor may recall, you

ordered the parties to meet and confer, and produce the

scheduling order that would otherwise require the Debtors to


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produce documents and otherwise respond to Medley’s discovery

request.

During that process, in conversations with the

Debtors’ counsel, we had initially proposed 30 days for the

Debtors to respond and because of their request saying that

they would have a very difficult time otherwise responding

within 30 days because of the number of e-mails that could

potentially be responsible, they requested 45 days, which we,

otherwise, agreed to. So the issue of the e-mails is nothing

new.

The other thing that I would point out is that the

documents that the Debtors have produced to Medley to date

contain certain gaps in them, for example, from the cash

management accounts we know that there was very little money

in the cash management account prior to the Debtors filing

for bankruptcy, but if one were to look at the, for example,

income statements for Revstone Industries, you would see a $4

million dollar reduction from November to December in the

amount of accounts payable. Well, mysteriously or maybe it’s

highly coincidental, the amounts that were misappropriated

from Medley was almost $4 million dollars. So, you know,

given the fact and the underlying information that we have,

the limited information that the Debtors have provided, we

believe that we are entitled to, not only the e-mails, but

additional discovery as it relates to trying to figure out


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where Medley’s funds went to.

The Debtors claim that, obviously, this a tracing

exercise and because the funds don’t show up in their bank

account statements that that should end the inquiry. That’s

great, that’s their theory of the case, but that doesn’t

square with the documents that we are in possession of. From

Medley’s own records, as Your Honor may recall, there is an

acknowledgement from both George Hofmeister and Ascalon, the

non-Debtor parent company, acknowledging that nearly $4

million dollars was misappropriated from Medley’s borrowers.

Those funds went somewhere and Medley is entitled to

discovery to understand where those funds went.

While tracing may be part of that exercise, it

doesn’t end with tracing, but I would make one observation

for the Court as it relates to tracing and that observation

is the fact that it doesn’t necessarily mean that the tracing

needs to occur to funds. For example, if the funds were used

to pay down accounts payable or were used to pay down loans

that the Debtors otherwise have prior to the bankruptcy

cases, that we would be entitled to know exactly where those

funds were to try to either disgorge those funds from the

ultimate party, but otherwise continue to assert our secured

claim under U.C.C. 9-315.

So given the fact that we know that there are

documents suggesting that the Debtors have additional


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documents that would otherwise be responsive to Medley’s

documents, it had more than two months to otherwise produce

those documents. They are completely within the realm and

scope of Rule 26. We believe that the Court should otherwise

compel the Debtors to produce those documents to Medley.

THE COURT: Okay. Response?

MR. ROBINSON: Good morning, Your Honor, Colin

Robinson, Pachulski Stang Ziehl & Jones on behalf of the

Debtors. With me on the phone is Alan Kornfeld. Your Honor,

thanks for the opportunity to discuss this discovery dispute

this morning with you. Your Honor, taking a step back,

Medley filed a $3.8 million dollar secured claim. The

Debtors’ object to that claim to reclassify it. In response

to our objection, Medley served a discovery. It is not the

theory of the case for the Debtors that the funds need to be

traced, it’s the theory of the case that Medley has asserted

multiple times in front of Your Honor, on the record and in

its pleadings.

So in response to the discovery request, the Debtors

produced its bank statements for the time period in question,

for all four Debtors, if available, Spara has some limited

amount of bank statements because their bank account was

closed much earlier in 2012, unaudited income statements that

we have possession of, as well as after Medley filed its

letter with the Court, the records of Revstone


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Transportation, which was part of the Debtors’ cash

management system. What’s clear from the record is that the

money that Medley is seeking to recover was not in the

Debtors’ accounts and did not go out of the Debtors’ accounts

at any time.

The Case Law in this district is clear, in order to

trace funds, in order for Medley to show that it had a

security interest under 9-315 or to impose a constructive

trust or an equitable lien, Medley has to meet its burden to

trace the proceeds. What the Debtors did was produced the

bank account statements and other bank records consistent

with the position we had taken with Medley informally, that

these money’s were not received in the Debtors’ account and

we couldn’t find this money. We were quite open about that

with Medley and its counsel.

Frankly, we think the e-mail discovery doesn’t

change the fact that the Debtors, there is no evidence of

this money in or out of the Debtors’’ accounts. Having the

Debtors produce, and frankly, Your Honor, it’s not 5,000 e-

mails, that was more of a just putting, for example, a search

term of Medley may have produced 5,000 e-mails, it’s probably

much more. We see it as a burdensome exercise for the estate

and costly. Where Medley is not going to get past the

critical juncture of being the show that the funds came in

and out of the accounts based on the statements we produced.


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Further, there is no other documentation that will change

that fact.

The bottom line is that Medley, to trace their

funds, under the Case Law here in the District of Delaware,

needs to show the money moving in and out of the account.

What we have done is provided them with that discovery. We

do not think that we should be compelled to prove any further

e-mail discovery on it because it doesn’t change that fact.

THE COURT: Okay. Response?

MR. WILSON: Yes, Your Honor, Thad Wilson again on

behalf of Medley. I would note that Medley is entitled to

trace where the funds went. If the Debtors got the money and

then transferred it, even before the petition date, Medley is

entitled to that information to see if the lien transferred

to other property held by the Debtor. We have an

acknowledgement from the general counsel of the Debtors

saying that the funds were loaned to Revstone and Spara,

Revstone Industries, LLC and Spara, LLC. What those funds

were ultimately used for, for the benefit of the Debtors, we

don’t know and that the purpose of our discovery, what we are

trying to understand happened here.

One other observation I would make for the Court is,

you know, counsel for the Debtors just made the point that

there may be more than 5,000 e-mails with Medley’s name on

it. If the Debtors were not in privity with Medley, query as


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to how there could ever be more than 5,000 e-mails that would

otherwise be responsible to that type of discovery. So, you

know, from that perspective, there is certainly enough

information here to suggest that not only are there other

responsive documents and e-mails that would otherwise backup

Medley’s theory of the case, for which its entitled to

discovery, but certainly e-mails that would lead us to

understand, determine and trace where Medley’s stolen funds

were ultimately used for the benefit of the Debtors, as

acknowledged by Revstone’s own general counsel.

THE COURT: Mr. Robinson.

MR. ROBINSON: Thank you, Your Honor. Your Honor,

the first thing that counsel just eluded to was trying to

find where the money went from the Debtors’ accounts. The

first step is to show that the money went into the Debtors’

accounts. We have provided the evidence that it did not.

There does not need to be a further step.

Medley can take the position that well, maybe the

money went somewhere else after the Debtors got it, but the

key point is the Debtors had to have received the money first

and the Debtors did not and that’s what the account

statements show. These are the prepetition accounts from

December 2012 back to June of 2012 and the money’s are there.

There is no necessary next step for there to be further

discovery to say well, it could have gone to A, B or C.


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As to the e-mails, Your Honor, the e-mail traffic

that Medley produced doesn’t change that fact about what is

and is not in the bank accounts of the Debtors. All the

Debtors know is they take Debtor-In-Possession, we look at

our accounts, we say this money is not here, we didn’t

receive it. That fact is not changed by an e-mail

discussion. I’m not going to parse through the e-mail of

what it says and doesn’t say about a loan from Ascalon, but

Your Honor is familiar with the background of this case.

Your Honor is aware that the Debtors are in

litigation with Ascalon, that there was, for lack of a better

term, a shell game with the movement of money by Ascalon, not

the Debtors, but by Ascalon. The Debtors don’t have access

to Ascalon’s records. Furthermore, the Debtors done have

access to the records of the entities that Medley loaned the

money to initially. The Debtors have given Medley what it

needs in order to trace. It shows that they can’t trace,

again, we shouldn’t have to proceed forward. It’s just an

exercise the estate should not be forced to go to from an

expense, a timing, it’s just not necessary.

THE COURT: Mr. Wilson, let me ask you one closing

question, which is having heard the Debtors’ position, why

is, I guess I want to know and I know you’ve touched on this,

but I would like your direct answer to the Debtors’ point

that their production thus far of the Debtors’ business


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records reflects that the money never came to the Debtor.

Why isn’t that a show stopper?

MR. WILSON: Well, thank you, Your Honor, for the

question. First of all, there are two ways that Medley can

obtain a secure claim under 9-315. One is under 9-315(a)(1),

which is that when your collateral is transferred without you

consent, then your lien otherwise continues in that

collateral. When the cash is your collateral, you don’t

otherwise, necessarily need to trace it; that’s point one.

Second point is under (a)(2), it’s only with respect to

proceeds that you have to trace. We know from Revstone’s own

general counsel that the funds were loaned to Revstone and

Spara because he admits it in an e-mail and says I need to

understand more as to why and how much was loaned to each

entity.

Now, while it may not necessarily show up in the

bank account statements for the Debtors because they were not

using their bank accounts for those purposes, they were using

a cash management system that was run by non-affiliate

Debtors. To the extent that there were, for example,

payables, a payable balance of over $4 million dollars that

miraculously reduced on the eve of bankruptcy down to $70

million dollars, I think it’s highly coincidental, if not

more than coincidental that Medley’s $4 million dollars that

were misappropriate couldn’t have been used, for example, to


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pay down payables.

To the extent that the Debtors got the benefit of

the stolen funds and they otherwise didn’t necessarily show

up in the Debtors’ bank account statements, we are still

entitled to trace to find out what happened to those funds,

whether they actually went into the Debtors’ bank accounts or

not, they may still have received the benefit of those and

used them to buy additional property, buy inventory, pay down

receivables, pay down debts or other loans that were made to

the Debtors prior to the petition date. The answer is we

just don’t know.

We at Medley have a curtain drawn based on what we

know from the information that was provided to us by the

Debtors, which is very limited information, and our own

records which show that the funds were loaned to Revstone and

Spara. Given the fact that our records show that, we are

entitled to find out what happened to those loans and what

the Debtors actually did with those money’s. Now, it may be

the case that they were on paper loans, but the Debtor still

received the benefit of those loans and that’s why we are

entitled to continue to trace our funds, notwithstanding that

those amounts may not show up in the Debtors’ bank account

statements.

I can’t tell you today that in the cash management

accounts there is no deposits that were made that were


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necessarily part of the funds that were misappropriated from

Medley’s borrowers. We are still going through that process

and trying to peel back the onion on that.

THE COURT: Okay. I understand.

MR. ROBINSON: Your Honor, if I may.

THE COURT: Briefly.

MR. ROBINSON: Very briefly, Your Honor, two points.

Your Honor, an e-mail is not an initia of a secured loan. An

e-mail exchange that says there was a loan, that’s not how a

security interested is created. This discussion does not

change the money didn’t come in the Debtors’ account and the

money didn’t go out of the Debtors’ account because it didn’t

come into the Debtors’ account; that’s the evidence we

provided. The records available to the Debtors is clear on

that. Thank you, Your Honor.

THE COURT: Okay. I am going to require the Debtors

to produce. I understand the Debtors’ argument with respect

to the relevance or significance of the e-mails and the

significance of what they have already produced that would

support their position that there is in fact no viable claim

to a secured claim for Medley in this case, but we did deal

with issue at the outset of these proceedings and as a

practical matter, it would seem to me that the decision to

preclude discovery beyond that threshold question of tracing

and bank account activity would seem to me to be inconsistent


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with the decision that I made that the Court would permit

discovery and not bifurcate the matter to a limited issue

under 9-315 and then potentially deal with the matter at a

later point.

So I have made that decision and we are going to

abide by it. I also am not necessarily satisfied that the

scope of the discovery, as it’s been described, is the end of

the inquiry or the end of the exercise. As a practical

matter, it may be true that we will go to a hearing at some

point and I will conclude, consistent with the Debtors’

argument and expectation that in the absence of any ability

to trace funds, that the security interest may fail, but I

think we are going to allow Medley to develop their case,

develop their theory and the Debtor will, of course, have an

opportunity to fully develop its defenses, but I will permit

and authorize the discovery as its been requested.

I believe that that means that we do need to,

perhaps, revisit the scheduling order that the parties have

negotiated. I would ask that the parties confer with respect

to that and get me a revised or updated scheduling order

that’s consistent with the Court’s direction with respect to

the scope of the discovery that will be permitted in this

proceeding, okay. Are there any questions?

MR. ROBINSON: Yes, Your Honor, Colin Robinson for

the Debtors. Just along with the scheduling, what we also


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intend to do is meet and confer with Medley, with regards to

search terms for the e-mails so we can at least, you know,

narrow the universe so it’s a quicker process for both

parties.

THE COURT: And it seems to me that it ought to be

at least a relatively focused search, at least as the context

has been described to me. Let me ask one other question and

this comes from the parties’ correspondence. I don’t

necessarily want to open a different can of worms, but I

note, particularly, in your response, Mr. Robinson, your

point is that a lot of the inquiry, or a lot of the

information or a lot of the activity that Medley either

complains about or is suspicious of involves Ascalon and not

the Debtor.

So the question I have is whether or not Ascalon is

intended to become or is a party to this proceeding? I just

don’t want to get far down the path and have the parties

conclude or disagree about whether or not we have been able

to deal with this matter in its entirety. So whether you

answer this question today or we confer on it, it’s really

just my inquiry given the correspondence that I have seen

from the parties. I will allow, Mr. Robinson, if you will

respond to that first and then I will hear from Medley.

Again, if you want to defer, think about and get

back to me on that, that’s fine. I’m not encouraging or


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telling people to go out and pick fights with anybody else,

but I did note that that was a pretty strong theme in the

Debtors’ submission. Mr. Robinson.

MR. ROBINSON: Your Honor, thank you. No, the

Debtors do not intend to draw in Ascalon into this dispute

for a multiple of reasons, but that is the short answer, Your

Honor. Thank you.

THE COURT: Mr. Wilson.

MR. WILSON: Yes, Your Honor, at this point in time

I don’t believe that Medley intends to bring Ascalon into the

matter in the bankruptcy case. Obviously, Medley is

preserving all of its rights and abilities to otherwise

pursue Ascalon outside of the bankruptcy proceedings, but we

are still evaluating whether or not and how to otherwise

bring Ascalon into the proceedings given the fact that they

have admitted to the misappropriate of the funds in the first

instance.

THE COURT: Okay. Well, I appreciate the response.

Again, I would caution you not to read too much into my

question or anything into it. Obviously, I don’t have the

full context of this dispute, as it’s still in progress, so

it was really for my own edification to get a sense of

whether or not there would be an expansion of this proceeding

and I appreciate the guidance from counsel. I will look

forward to receiving a revised scheduling order and I do


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expect that the parties will meet and confer with respect to

discovery, search terms, etc.

In addition, I would again encourage counsel to get

me on the phone if there are issues with respect to process

and discovery. I certainly got your letters and they have

provided me with a good deal of context, but that is not a

requirement that I typically impose. So even short of having

it come to full tuition, if you’ve got issues, you’re welcome

to get me on the phone. I usually find that that’s more time

effective and cost effective. Thanks very much, counsel.

Have a good day.

MR. WILSON: Thank you, Your Honor.

MR. ROBINSON: Thank you.

(Court Adjourned)

CERTIFICATE

I certify that the foregoing is a correct transcript from the

electronic sound recording of the proceedings in the above-

entitled matter.

/s/Mary Zajaczkowski January 27, 2015 Mary Zajaczkowski, CET**D-531 Date


the debtors in these chapter 11 cases and the last four

Documents