IN THE UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION

In re: COLLINS & AIKMAN CORPORATION, et al. Debtors.

Chapter: 11 Case No. 05-55927 (SWR) Jointly Administered (Tax Identification # 13-3489233) Hon. Steven W. Rhodes
Hearing Date: January 25, 2007 at 11:00 a.m. Objection Deadline: January 18, 2007 at 4:00 p.m.

MACKAY SHIELDS LLC'S OBJECTION TO ADEQUACY OF DISCLOSURE STATEMENT FOR THE FIRST AMENDED JOINT PLAN OF COLLINS & AIKMAN AND ITS DEBTOR SUBSIDIARIES MacKay Shields LLC (MacKay) hereby submits this objection (the "Objection") to the adequacy of the Disclosure Statement For The First Amended Joint Plan Of Collins & Aikman And Its Debtor Subsidiaries (the "Disclosure Statement"), and states the following: BACKGROUND 1. On May 17, 2005, the Debtors filed voluntary petitions for relief under

Chapter 11 of the United States Bankruptcy Code. 2. Prior thereto, MacKay purchased certain debt securities of one of the

Debtors,1 specifically the 10% Senior Notes due 2011 (the "Senior Notes") and the 12% Senior Subordinated Notes due 2012 (the "Senior Subordinated Notes"), on behalf of its investment advisory clients.
1

Capitalized terms shall have the meanings ascribed to them in the Disclosure Statement unless otherwise defined herein.

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0555927070118000000000008

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THE PLAN AND DISCLOSURE STATEMENT 3. On or about December 22, 2006, the Debtors filed the Disclosure

Statement together with the First Amended Joint Plan Of Collins & Aikman Corporation And Its Debtor Subsidiaries (the "Plan") (annexed to the Disclosure Statement as Appendix A). As relevant hereto, the Plan Classified Claims as follows: Class 6 - Senior Note Claims and PBGC Claims; Class 7 - Senior Subordinated Note Claims; and Class 9 - Subordinated Securities Claims. Disclosure Statement ("D.S."), V, B, 8, 9 and 11; Plan, II, B, 4, 5 and 7. 4. Senior Note Claims are claims arising from the "10% unsecured notes

due 2011 issued pursuant to the Senior Note Indenture." Plan, I, A, 124 and 127. 5. Senior Subordinated Note Claims are claims arising from the "12%

senior subordinated notes due August 15, 2012 issued pursuant to the Senior Subordinated Note Indenture." Plan, I, A, 128 and 131. 6. Subordinated Securities Claims are claims "subject to subordination under

[,] Section 510(b) of the Bankruptcy Code, including any and all claims whatsoever . . . arising from the purchase, sale or holding of " a security of the Debtors or their affiliates. Plan, I, A, 135. 7. Under the Plan, Holders of Allowed Class 6 and 7 Claims receive a pro

rata share of a percentage of the Litigation Recovery Interests, provided that the Holder votes to accept the Plan.2 D.S., V, B. 8-9; Plan III, C, 4-5.

A similar condition to be eligible to receive a pro rata share of a percentage of the Litigation Recovery Interests; i.e., that the Holder vote in favor of the Plan, is imposed on Holders of Allowed Claims in Class 5 (General Unsecured Claims).

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Holders of Class 9 Claims receive no distribution under the Plan. D.S.,

V, B. 11; Plan, III, C, 7. 9. The Plan and Disclosure Statement also provide broad releases and

injunctive relief in favor of various non-Debtors (without demonstrating the required extraordinary circumstances and consideration for such extraordinary relief). 10. With regard to the releases and injunctions afforded by the Plan, the

following definitions are relevant: (a) "Debtor Releasees" includes the Debtors' officers, directors and

employees employed by the Debtors within six (6) months of the Effective Date; attorneys, financial advisors, accountants and other professionals; and the Releasing Parties and their current and former officers and directors and professionals, and does not include any NonReleased Parties. Plan, I, A, 36. (b) "Non-Released Parties" includes those persons listed on Exhibit A

to the Plan as potential defendants in any Retained Causes of Action. Plan, I, A, 84; see also n.3, infra. (c) "Releasing Parties" includes the Creditors Committee and its

members, DIP Lender and Agent, Prepetition Lender and Agent, and Steering Committee and its members. Plan, I, A, 115. PRELIMINARY STATEMENT 11. A disclosure statement may be approved as adequate only if it contains

"information of a kind, and in sufficient detail, as far as is reasonably practical in light of the nature and history of the debtor and the condition of the debtor's books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan." 11 U.S.C. 1125(a). Courts have ample

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discretion to determine what constitutes adequate information. In re Ionosphere Clubs, Inc., 179 B.R. 24, 25 (Bankr. S.D.N.Y. 1995). Although adequacy is determined on a case-by-case basis under a fact-specific flexible standard, id., a disclosure statement must contain "simple and clear language delineating the consequences of the proposed plan on [creditors'] claims and the possible [Bankruptcy] Code alternatives so that [creditors] can intelligently accept or reject the Plan." In re Copy Crafters Quickprint, Inc., 92 B.R. 973, 981 (Bankr. N.D.N.Y. 1988). A disclosure statement must clearly inform the average unsecured creditor what it is going to get, when it is going to get it, and what contingencies there are to getting its distribution. In re Ferretti, 128 B.R. 16, 19 (Bankr. D.N.H. 1991). OBJECTION 12. MacKay submits that in certain respects, the Disclosure Statement does

not contain sufficient information to enable a reasonable person to make an "informed judgment about the Plan." The Disclosure Statement and the Plan contain broad and ambiguous provisions and/or omit material facts that may mislead holders of claims or interests from making an informed judgment about the Plan. Accordingly, the Disclosure Statement should not approved. 13. Specifically, MacKay objects to the adequacy of the Disclosure Statement

and to the Plan on the following grounds: (a) the Plan treats members of the same class differently without any

explanation or justification; and (b) the Disclosure Statement and Plan release various non-Debtors

without disclosing the requisite unusual circumstances and consideration justifying such non-Debtor releases. 14. To the extent any objection, in whole or in part, contained herein is

deemed to be an objection to confirmation of the Plan rather than, or in addition to, an objection

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to the adequacy of the Disclosure Statement, MacKay reserves its right to assert such objection, as well as other objections, to confirmation of the Plan. A. The Plan Discriminates Among Members Of The Same Class. 15. Pursuant to 11 U.S.C. 1123(a)(4): (a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall . . . (4) provide the same treatment for each claim or interest of a particular class . . . (Emphasis added.) 16. With respect to Classes 5, 6 and 7, the Plan provides that only those

holders of allowed claims who vote in favor of the Plan are entitled to receive a distribution of Litigation Recovery Interests. Conversely, those holders who do not vote or who vote against the Plan receive no distribution, despite that the Holder's respective class may have accepted the Plan and the Plan is confirmed. This discriminatory treatment is not permitted by the

Bankruptcy Code. See 11 U.S.C. 1123(a)(4). 17. Although this may not be the same disparate treatment afforded creditors

in Class Five Nevada Claimants v. Dow Corning Corporation (In re Dow Corning Corporation), 280 F.3d 648 (6th Cir. 2002), the Court's opinion that "section 1123(a)(4) requires that claims of creditors that are members of the same class be treated equally . . . [and] disparate treatment of members of the same class violates Section 1123 (a)(4)'s equal treatment requirement," Dow Corning, 280 F.3d at 659-60, is applicable here. 18. By granting only those creditors who vote in favor of the Plan the right to

receive a distribution, the Plan, if confirmed, discriminates against holders of the same claims who do not vote to accept the Plan, or who do not vote at all. If the Plan is confirmed, then all

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creditors in the same class must be treated the same. The Debtors cannot hold creditors hostage so that they vote in favor of the Plan. 19. While the violation of 11 U.S.C. 1123(a)(4) may be considered a

confirmation objection, at the very least, the Disclosure Statement must provide the basis for the unequal treatment of members of the same class. Indeed, no explanation whatsoever is provided. B. The Plan And Disclosure Statement Contain Improper Releases And Injunction Provisions. 20. Pursuant to the Plan, third-party claims against certain non-Debtors are

released, waived and/or discharged regardless of whether the Holder of a Claim or Equity Interest votes in favor of the Plan, against the Plan or does not vote at all. D.S., V, J, 3: Plan, XII, C. 21. Such non-Debtors may include current or potential parties against whom

creditors may have valid claims. 22. Although the Non-Released Parties (appearing on Exhibit A to the Plan)

are purportedly not being released from third-party claims, the release is ambiguous.3 23. Furthermore, in addition to the broad and ambiguous releases under the

Plan, the Plan permanently enjoins any Holder of a Claim or Interest that accepts any distribution under the Plan or whose claim is released under the Plan from continuing or commencing any action, in any manner, in any place that does not comply with or is inconsistent with the provisions of the Plan. D.S., V, E; Plan, XII, E. This again is, at best, very broad and

Debtors filed Exhibit A and an amended Exhibit A on January 16, 2007, ultimately consisting of more than 2000 pages of parties to the Retained Actions. This apparently is a list of parties against whom the Debtors have certain causes of action as identified on the Exhibit. Because the list of causes of action does not appear to include those causes of action belonging to third-parties, such third-party claims are not definitively preserved and may be released.

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ambiguous, and in the absence of unusual circumstances and adequate consideration, is not permissible. 24. While much of the case law addresses non-consensual releases of claims

against a non-debtor, the same law is applicable to injunctions, because they essentially provide a release of such claims by prohibiting an action from going forward. The Plan injunction

effectively releases non-Debtors from any and all liabilities for claims that may be asserted by MacKay or other creditors, despite the fact that they are receiving nothing for such release.4 25. The Plan release and injunction are nonconsensual and are not supported

by any consideration. The underlying facts here do not even remotely resemble the factual underpinnings for the releases allowed in SEC v. The Drexel Burnham Lambert Group, Inc. (In re The Drexel Burnham Lambert Group, Inc.), 960 F.2d 285 (2d Cir. 1992); cert. dismissed, 506 U.S. 1088, 122 L. Ed.2d 497, 1133 S.Ct. 1070 (1993); Abel v. Shugrue (In re Ionosphere Clubs, Inc.), 184 B.R. 648 (S.D.N.Y. 1995); and Menard-Sanford v. Mabey (In re A.H. Robins Co., Inc.), 880 F.2d 694 (4th Cir. 1989), cert. denied, 493 U.S. 959, 110 S.Ct. 376, 107 L.Ed.2d 362 (1989). The Debtors herein fail to provide in either the Plan or Disclosure Statement any factual basis to establish the required unusual circumstances which justify confirmation of a plan containing such extraordinary relief. 26. In In re St. Johnsbury Trucking Co., Inc., 185 B.R. 687 (S.D.N.Y. 1995),

the federal government sought a stay of the order confirming the debtors plan because the plan provided for the release of certain non-debtors from claims under the federal environmental and tax statutes. The district court noted that the debtor failed to conclusively establish the

propriety of . . . the releases. 185 B.R. at 689. The court recognized the requirement that clear and discrete circumstances be established to justify non-debtor releases.
4

Although a creditor may receive a distribution on account of its Allowed Class 6 and/or 7 Claims, that is not sufficient consideration as contemplated by the line of cases set forth herein. There is no evidence that any consideration is being provided to creditors by the parties being released.

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27.

In The LTV Corp. v. The Aetna Casualty and Surety Co. (In re

Chateauguay Corp.), 167 B.R. 776 (S.D.N.Y. 1994), the court noted that the broad power provided to the Bankruptcy Court by 11 U.S.C. 105(a) does not give unfettered discretion to discharge a non-debtor from liability. Id. at 780. In addition to Drexel, the Court considered MacArthur v. Johns-Manville Corp., 837 F.2d 89, 93 (2d Cir. 1988), cert. denied, 488 U.S. 868, 109 S.Ct. 176, 102 L.Ed.2d 145 (1988) and A.H. Robins, supra, where the debtors provided clear factual support and unusual circumstances existed so as to allow the respective courts to conclude that the releases were essential to the reorganization because the released parties were making substantial contributions to the reorganizations. 28. The Third Circuit in Gillman v. Continental Airlines (In re Continental

Airlines), 203 F.3d 203 (3d. Cir. 2000), provides a thorough analysis of third party releases, supporting the rationale of those cases which have permitted third parties releases and injunctions where the parties that were enjoined (creditors) were provided with some meaningful consideration for the loss of their rights against non-debtors. Continental, at 212. Drexel, supra, at 293; Kane v. Johns-Manville Corp. (In re Johns-Manville Corp.), 843 F.2d 636, 640, 649 (2d Cir. 1988); A.H. Robins, supra, 880 F.2d at 702. The consideration was provided through substantial contributions paid by the non-debtor parties in exchange for their releases. Continental at 213. 29. Although the Sixth Circuit has also held that 11 U.S.C. 524(e) may not

prohibit the release of a non-debtor, it appears to follow the majority rule that that non-debtor releases may only be permitted under certain unusual circumstances. See Class 5 Nevada Claimants v. Dow Corning Corporation (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir. 2002), cert. denied 537 U.S. 816, 123 S. Ct. 85, 154 L. Ed.2d 21(2002). In Dow Corning, the court held that section 524(e) does not, by its terms, prohibit a bankruptcy court from issuing third-party injunctions that protect non-debtors and therefore, enjoining claims against nondebtors in order to uphold a reorganization plan is consistent with the bankruptcy courts primary -8-

function. Id. at 656-657. 11 U.S.C. 1123(b)(6) permits a reorganization plan to include any appropriate provision not inconsistent with the applicable provisions of this title. Hence the court held that at the very least, such an injunction is not inconsistent with the Code. Dow Corning, at 657. Nevertheless, the Sixth Circuit noted that enjoining third-parties from suing non-debtors is a dramatic measure which must be used cautiously and is only appropriate in unusual circumstances. Id. at 658. And in order to determine whether unusual circumstances exist, the court held that when seven factors are present, the bankruptcy court may issue such an injunction.5 See also In re National Staffing Services, LLC, 338 B.R. 35, 37 (Bankr. N. D. Ohio 2005) (citing Dow Corning, at 658, "the Sixth Circuit has therefore held that before such an injunction may be imposed, 'unusual circumstances' must exist"). 30. Neither the Plan nor the Disclosure Statement demonstrates that the

potential releases satisfy any of the Dow Corning factors. Indeed, no unusual circumstances exist here. 31. Confirmation of a plan requires that the plan satisfy all of the elements of

11 U.S.C. 1129(a). The Plan shall comply with the applicable provisions of [Title 11 of the United States Codes; i.e., the Bankruptcy Code]. 11 U.S.C. 1129(a)(1). 32. Here, the Plan does not comply with the applicable provisions of Title 11,

specifically 11 U.S.C. 524(e) and 1123(a)(4). 33. 11 U.S.C. 524(e) provides that:

In re Dow Corning Corp. seven factors include: (1) There is an identity of interests between the debtor and the third party, usually an indemnity relationship, such that a suit against a non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate; (2) The non-debtor has contributed substantial assets to the reorganization; (3) The injunction is essential to reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against parties who would have indemnity or contribution claims against the debtor; (4) The impacted class, or classes, has overwhelmingly voted to accept the plan; (5) The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction; (6) The plan provides an opportunity for those claimants who choose not to settle to recover in full and; (7) The bankruptcy court made a record of specific factual findings that support its conclusions. Id. at 658.

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the discharge of a debt of a debtor does not affect the liability of any other entity on, or the property of any other entity for such debt. 34. If it is the Debtors intention to enjoin non-Debtor third parties without

demonstrating unusual circumstances, then the Disclosure Statement describes a plan of reorganization that is unconfirmable on its face and, therefore, should not be approved. See, e.g., In re 266 Washington Associates, 141 B.R. 275, 288 (Bankr. E.D.N.Y. 1992) (A disclosure statement will not be approved where, as here, it describes a plan which is fatally flawed and thus incapable of confirmation.), affd, 147 B.R. 827 (E.D.N.Y. 1992); In re Copy Crafters Quickprint, Inc., 92 B.R. 973, 980 (Bankr. N.D.N.Y. 1988) ([A]pproval [of a disclosure statement] should be withheld if it is apparent that the plan will not comply with [Bankruptcy] Code 1129(a)); In re Pecht, 57 B.R. 137, 139 (Bankr. E.D.Va. 1986) (If, on the face of the plan, the plan could not be confirmed, then the court will not subject the estate to the expense of soliciting votes and seeking confirmation). This principle applies here. The Plan (and

Disclosure Statement) - or at least those portions purporting to enjoin claims against non-Debtors without providing adequate justification and consideration and to treat class members differently - do not satisfy the Bankruptcy Codes confirmation requirements. 35. The Court need not await the resolution of confirmation objections. These

facial defects render the Plan unconfirmable as a matter of law and should preclude further consideration of the Disclosure Statement. 36. Third-party releases, the related injunctions, and the requirement that a

creditor vote in favor of the Plan in order to be entitled to receive a distribution must be eliminated or or least sufficiently explained and justified. 37. The Plan, in effect, creates a trap for the unwary, potentially imposing an

involuntary release of claims in favor of numerous non-debtor insiders and agents with no

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corresponding benefit or consideration to the creditor. Hence, any ambiguity that creates the impression that such a release is being provided must be clarified through additional disclosure. CONCLUSION 38. Based on the foregoing, MacKay respectfully requests that an order be

entered (i) denying approval of the Disclosure Statement until the modifications set forth above are made to the Disclosure Statement and Plan, and (ii) granting such other and further relief as the Court deems just and proper. Dated: January 18, 2007 Respectfully submitted,

LOWENSTEIN SANDLER PC By: /s/Michael S. Etkin Michael S. Etkin, Esq. (ME-0570) Ira M. Levee, Esq. (IL-9958) 65 Livingston Avenue Roseland, New Jersey 07068 (973) 597-2500 (Telephone) (973) 597-2481 (Facsimile) Bankruptcy Counsel for MacKay Shields LLC BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP Steven B. Singer, Esq. John C. Browne, Esq. 1285 Avenue of the Americas, 38th Floor New York, New York 10019-6031 (212) 554-1400 (Telephone) (212) 554-1444 (Facsimile) Counsel for MacKay Shields LLC

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IN THE UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION

In re: COLLINS & AIKMAN CORPORATION, et al. Debtors.

Chapter: 11 Case No. 05-55927 (SWR) Jointly Administered (Tax Identification # 13-3489233) Hon. Steven W. Rhodes

CERTIFICATE OF SERVICE I, Ira M. Levee, of full age, certify that on January 18, 2007, I caused a copy of MacKay Shields, LLC's Objection To Adequacy Of Disclosure Statement For The First Amended Joint Plan Of Collins & Aikman And Its Debtor Subsidiaries to be served filed electronically with the Court and served electronically and via first class mail on the parties listed on Exhibit A, except for the United States Trustee, who is being served via facsimile and regular mail. I further caused a copy of the Objection to be delivered by Federal Express to the Clerk, United States Bankruptcy Court for the Eastern District of Michigan. Dated: January 18, 2007 /s/ Ira M. Levee Ira M. Levee Lowenstein Sandler PC 65 Livingston Avenue Roseland, NJ 07068 973.597.2480 (Telephone) 973.597.2481 (Facsimile) Bankruptcy Counsel for MacKay Shields, LLC

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EXHIBIT A Richard M. Cieri, Esq. KIRKLAND & ELLIS LLP 153 East 53rd Street New York, NY 10022 (212) 446-4800 (Telephone) (212) 446-4900 (Facsimile) rcieri@kirkland.com Counsel for the Debtors Counsel for the Debtors Joseph M. Fischer CARSON FISCHER, P.L.C. 4111West Andover Road West - Second Floor Bloomfield Hills, Michigan 48302 (248) 644-4840 (Telephone) (248) 644-1832 (Facsimile) jfischer@carsonfischer.com

David L. Eaton, Esq. Ray C. Schrock, Esq. Marc J. Carmel, Esq. KIRKLAND & ELLIS LLP 200 East Randolph Drive Chicago, Illinois 60601 (312) 861-2000 (Telephone) (312) 861-2200 (Facsimile) deaton@kirkland.com rschrock@kirkland.com mcarmel@kirkland.com Counsel for the Debtors

Michael S. Stamer, Esq. Akin Gump 590 Madison Avenue New York, NY 10022 (212) 872-1000 (Telephone) (212) 872-1002 (Facsimile) mstamer@akingump.com Counsel for the Committee

Thomas B. Radom, Esq. Butzel Long, P.C. 100 Bloomfield Hills Parkway Bloomfield Hills, MI 48304 (248) 258-1413 (Telephone) (248) 258-1439 (Facsimile) radom@butzel.com Counsel for the Committee

Stephen E. Spence, Esq. Office of the United States Trustee 211 West Front Street, Suite 700 Detroit, MI 48226 (313) 226-7911 (Telephone) (313) 226-7952 (Facsimile)

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