Matt V HSBC Exhibit - F-2

Section 9.2 Break-Up Fee; Expense Reimbursement.
(a) If one or more Sellers sell, transfer, lease or otherwise dispose of, directly or
indirectly, including through an asset sale, stock sale, merger or other similar transaction, al!
or substantially all of the Business or the Purchased Assets in a transaction or a series of
transactions with one or more Persons other than Purchaser in any circumstance, including in
accordance with the Bidding Procedures (such event being an "Alternative Transaction''),
Sellers shall pay to Purchaser, within two Business Days after the consummation of the
Alternative Transaction, an amount in cash equal to $2,000,000 (the "Break-Up Fee").
(b) If this Agreement is terminated in accordance with 9.1 (b)(iii) (and neither
Purchaser nor any of its Affiliates is a Proximate Cause Pruty), 9.1 (b)(v), 9.1(c){i) (and neither
Purchaser nor any of its Affiliates is a Proximate Cause Party), 9.1 (c)(ii) (and neither
Purchaser nor any of its Affiliates is a Proximate Cause Party), or 9.1 (c){iii) (and neither
Purchaser nor any of its Affiliates is a Proximate Cause Party), then promptly upon receipt by
Sellers of an invoice delivered by Purchaser to Sellers itemizing Purchaser's reasonable, actual
out-of-pocket fees and expenses, including reasonable attorneys' fees, expenses of its financial
advisors, and expenses of other consultants, incurr-ed in connection with the transactions
contemplated by this Agreement (the aggregate amount of such out-of-pocket fees and
expenses, the "Expense Reimbursement"), which invoice Purchaser shall deliver to Sellers
within I 0 Business Days after the date of such termination, as applicable, Sellers shall pay to
Purchaser in cash an amount equal to the Expense Reimbursement; Rrovided, that the Expense
Reimbursement payable by Sellers to Purchaser shall, under no circumstances, exceed
$2,000,000 in the aggregate.
Section 9.3 Procedure and Effect of Termination. If this Agreement is terminated in
accordance with Section 9.1, this Agreement shall become void and of no further force and effect
(subject to the provisions of this Article IX) and the transactions contemplated by this Agreement
shall be abandoned, without further action by any party, and no party shall have any Liability or
further obligation to any other party resulting from such termination (a) except for the provisions
of: (i) the parties' obligations under that certain Confidentiality Agreement, dated November 22,
2006, between Parent and Carrington (the "Confidentiality Agreement"), (ii) Article IX
(Termination); and (iii) Sections 13.1 (Fees and Expenses), 13.2 (Amendment; Waiver), 13.3
(Publicity), 13.4 (Notices), I 3.6 (Entire Agreement; No Third Party Beneficiaries), 13.8
(Governing Law), 13.9 (Venue and Retention of .Jurisdiction), and 13.12 (Assignment), all of
which shall remain in full force and effect; and (b) except that no such termination shall relieve
any party from any Liability (other than for special, incidental, punitive, exemplary or
consequential damages and lost profits) which such party may have to another party for Losses
arising out of any breach of this Agreement by such party which occurs upon or prior to the
tennination of this Agreement. In connection with any termination of this Agreement, each party
shall use its commercially reasonable efforts to cause all filings, applications and other
submissions made by such party to any Government Entity or Person pursuant to this
Agreement, to the extent practicable, to be withdrawn from such Government Entity or Person to
which made
5165824 3 06!46040
-59-
Case 1:10-cv-11621-PBS Document 128-7 Filed 11/20/12 Page 1 of 74
AHTICLEX
BIDDING PROCEDURES
Section I 0.1 Bidding: Procedures Without limiting the other prov1s1ons of this
Agreement, the Bidding Procedures (in the form of Schedule I to Exhibit A hereto), shall be a
schedule to the Bidding Procedures Order and thus, together with the other schedules thereto,
shall constitute a part of the Bidding Procedures Order, and references herein to the Bidding
Procedures Order shall be deemed to include all of the schedules thereto, including the Bidding
Procedures.
ARTICLE XI
INDEMNIFICATION
Section II I Survival. The representations and warranties of the parties in this
Agreement, any Ancillary Agreement or any certificate or other instrument delivered pursuant to
this Agreement, and the right to assert a claim under this Article XI with respect to any such
representations and warranties, shall survive the Closing for a period of nine months, except that
if written notice asserting any bona fide claim for indemnification under this Article XI shall
have been given within the applicable survival period, the representations and warranties that are
the subject of such claim shall survive until such claim is fully and finally resolved.
Section 112 Sellers' Agreement to Indemnify. If the Closing occurs, subject to the
tenns ofthis Article XI, from and after the Closing, Sellers shall jointly and severally indemnify
and hold harmless the Purchaser Indemnified Parties from and against all Losses (collectively,
the "Purchaser Danmges") suffered or incurred by the Purchaser Indemnified Parties as a result
of or arising out of any of the following:
{a) any breach of or any inaccuracy in any representation or warranty made by
either Seller in this Agreement, any Ancillary Agreement or any certificate or other instrument
delivered by either Seller at the Closing; or
(b) any breach by either Seller of or failure by either Seller to perform any
covenant or agreement of such Seller contained in this Agreement, any Ancillary Agreement
or any certificate or other instrument delivered by such Seller at the Closing; or
(c) the ownership or operation of the Purchased Assets or the Business prior to the
Closing Date; or
(d) the Excluded Assets or the Retained Liabilities.
Purchaser agrees that, from and after the Closing, the indemnification provided by Sellers as set
forth in this Article XI is the exclusive remedy of the Purchaser Indemnified Parties for a breach
by either Seller of any representation, warranty, covenant or agreement contained in this
Agreement, any Ancillary Agreement or any certificate or other instrument delivered by either
Seller at the Closing, except with respect to (i) Purchaser Damages arising from fraud,
51658243 06146040
~ 6 0 ~
intentional misstatements or intentional misconduct of any Seller or its Affiliates and (ii} the
equitable remedies set forth in Section 13.14.
Section 11.3 Limitations on Sellers' Agreements to Indemnify The obligations of
Sellers to indemnify and hold harmless the Purchaser Indemnified Parties pursuant to Section
11.2 are subject to the following limitations:
(a) In calculating amounts payable to Purchaser, the amount of any indemnified
Purchaser Damages shall be determined without duplication of any other Purchaser Damages
for which a claim by any Purchaser Indemnified Party has been made.
(b) The amount of any Purchaser Damages shall be reduced by any amount
actually received by any Purchaser Indemnified Party with respect thereto under any third
party insurance coverage. If a Purchaser Indemnified Party makes a claim for indemnification
under Section II .2, such Purchaser lndemnified Party shall use its commercially reasonable
efforts to collect any amounts available under such insurance coverage. If the Purchaser
Indemnified Party receives an amount under insurance coverage with respect to Purchaser
Damages at any time subsequent to any indemnification provided by either Seller pursuant to
Section 11.2, then such Purchaser Indemnified Party shall promptly reimburse such Seller for
any payment made or expense incurred by such Seller in connection with providing such
indemnification up to such amount received by such Purchaser Indemnified Party, but net of
any expenses incurred by the Purchaser Indemnified Parties in collecting such amount Such
amounts shall not be deemed to constitute Losses for the purposes of determining whether any
Losses exceeded the Basket Amount To the extent either Seller makes any indemnification
payment pursuant to Section I 1.2 in respect of Purchaser Damages for which any Purchaser
Indemnified Party has a right to recover against an insurance company, such Seller shall be
subrogated to the right of the applicable Purchaser Indemnified Party to seek and obtain
recovery from such insurance company.
(c) Any written notice delivered by a Purchaser Indemnified Party to either Seller
seeking indemnification pursuant to this Agreement with respect to Purchaser Damages shall
set forth, with as much specificity as is reasonably practicable, the basis of the claim for
Purchaser Damages, the sections of this Agreement which fonn the basis for the claim, copies
of all material written materials relating to such claim and, to the extent reasonably
practicable, a reasonable estimate of the amount of the Purchaser Damages that have been or
may be sustained by the Purchaser Indemnified Party.
Section I I .4 Purchaser's Agreement to Indemnify. If the Closing occurs, subject to the
terms of this Article Xr, from and after the Closing, Purchaser shall jointly and severally
indemnify and hold harmless the Seller Indemnified Parties from and against all Losses
(collectively, the "Seller Damages") incurred by the Seller Indemnified Parties as a result of or
arising out of any of the following:
(a) any breach of or any inaccuracy in any representation or warranty made by any
Purchaser in this Agreement, any Ancillary Agreement or any certificate or other instrument
delivered by any Purchaser at the Closing; or
51658243 06146040
~ 6 1 -
(b) any breach by any Purchaser of or failure by any Purchaser to perfom1 any
covenant or obligation of such Purchaser contained in this Agreement, any Ancillary
Agreement or any certificate or other instrument delivered by such Purchaser at the Closing;
or
(c) the ownership or operation of the Purchased Assets or the Business after the
Closing Date; or
(d) the Assumed Liabilities
Sellers agree that, from and after the Closing, the indemnification provided by Purchaser
as set forth in this Article Xl is the exclusive remedy of the Seller Indemnified Parties for a
breach by any Purchaser of any representation, warranty, covenant or agreement contained in
this Agreement, any Ancillaty Agreement or any certificate or other instrument delivered by any
Purchaser at the Closing, except with respect to (i) Seller Damages arising from fraud,
intentional misstatements or intentional misconduct of any Purchaser or its Affiliates and (ii) the
equitable remedies set forth in Section 13.14.
Section 11.5 Limitations on Purchaser's Agreement to Indemnify. The obligations of
Purchaser to indemnify and hold harmless the Seller Indemnified Parties pursuant to Section 11.4
are subject to the following limitations:
(a) In calculating amounts payable to Sellers, the amount of any indemnified Seiter
Damages shall be determined without duplication of any other Seller Damages for which a
Claim by any Seller Indemnified Party has been made.
(b) The amount of any Seller Damages shall be reduced by any amount actually
received by any Seller Indemnified Party with respect thereto under any third party insurance
coverage. If a Seller Indemnified Party makes a claim for indemnification under Section 11.4,
such Seller Indemnified Party shall use its commercially reasonable efforts to collect any
amounts available under such insurance coverage. If the Seller Indemnified Party receives an
amount under insurance coverage with respect to Seller Damages at any time subsequent to
any indemnification provided by any Purchaser pursuant to Section 11.4. then such Seller
Indemnified Party shall promptly reimburse any Purchaser for any payment made or expense
incurred by such Purchaser in connection with providing such indemnification up to such
amount received by such Seller Indemnified Party, but net of any expenses incurred by the
Seller Indemnified Parties in collecting such amount. To the extent any Purchaser makes any
indemnification payment pursuant to Section 11.4 in respect of Seller Damages for which any
Seller Indemnified Party has a right to recover against an insurance company, such Purchaser
shall be subrogated to the right of the applicable Seller Indemnified Party to seek and obtain
recovery from such insurance company.
(c) Any written notice delivered by a Seller Indemnified Party to any Purchaser
seeking indemnification pursuant to this Agreement with respect to Seller Damages shall set
forth, with as much specificity as is reasonably practicable, the basis of the claim for Seller
Damages, the sections of this Agreement which form the basis for the daim, copies of all
material written materials relating to such claim and, to the extent reasonably practicable, a
5165824.3 06146040
-62-
reasonable estimate of the amount of the Seller Damages that have been or may be sustained
by the Seller l ndemni fied Party,
Section 11.6 Other Limitations on and Treatment of Certain Claims for
Indemnification.
(a) Basket. Sellers shall not have any liability pursuant to Section 11.2(a) unless
and until the aggregate amount of all Losses incurred or suffered by the Purchaser Indemnified
Parties for which they are entitled to indemnification pursuant to Section 11.2(a) exceeds 1%
of the Cash Purchase Price {the "Basket Amount"), but in the event such Losses exceed the
Basket Amount, Sellers shall be liable and responsible to the Purchaser lndemnitied Parties for
the full amount of such Losses (subject to Section 1 I .6(b)), without reductio11 for the Basket
Amount.. Purchaser shall not have any liability pursuant to Section I I .4{a) unless and until the
aggregate amount of all Losses incurred or suffered by the Seller Indemnified Parties for
which they are entitled to indemnification pursuant to Section I 1.4(a} exceeds the Basket
Amount, but in the event such Losses exceed the Basket Amount, Purchaser shall be liable and
responsible to the Seller Indemnified Parties for the full amount of such Losses (subject to
Section 1 I .6(b)), without reduction for the Basket Amount.
(b) Maximum. In no event shall Sellers' aggregate liability pursuant to Section
I 1.2 for Losses incurred or suffered by the Purchaser Indemnified Parties exceed the
Indemnification Holdback Amount In no event shall Purchaser's aggregate liability pursuant
to Section 11.4 for Losses incurred or suffered by the Seller Indemnified Parties exceed the
Indemnification Holdback Amount.
(c) Claims Based on Fraud or Intentional Misrepresentation .. Notwithstanding
anything to the contrary contained in this Agreement or in any Ancillary Agreement, nothing
shall be deemed to limit any party's rights Lo recover any or all Losses incurred or suffered by
it relating to or arising out of or in connection with fraud or intentional misrepresentation, it
being understood and agreed that (i) Purchaser's right to recover such Losses shall not be
limited to the Indemnification Holdback Amount, and any claim hereunder against Sellers not
satisfied pursuant to Section I I .9 hereof shall constitute an allowed administrative expense
claim arising in the Bankruptcy Cases and shall be treated with such priority in any subsequent
or superseding bankruptcy case (including any bankruptcy case under Chapter 7 of the
Bankruptcy Code) and (ii) any claims under this Section 11.6(c) shall be satisfied from the
lndemnification Holdback Amount only after payment in full of (or reserving for) all of
Purchaser's other claims for Purchaser Damages under the other provisions of this Article XI.
Section 11 .7 Claims. As soon as is reasonably practicable after becoming aware of a
claim for indemnification under this Agreement involving a claim (or the commencement of any
proceeding or investigation) of the type described in Section 11.2 or 11.4, the Indemnitee shall
give written notice to the Indemnitor of such claim; provided, that the failure of the Indemnitee
to give such written notice shall not relieve the Indemnitor of its obligations under this Article XI
except to the extent (if any) that the Indemnitor shall have been prejudiced thereby. If the
Indemnitor does not object in writing to such indemnification claim within .30 calendar days of
receiving written notice thereof; the Indemnitee shall be entitled to recover promptly (subject to
Sections I 1.6(a) and ill) from the Indemnitor and the Indemnitor shall promptly pay to
5165824.3 06146040
-63-
Sections 11.6(a) and (hl) to the Indemnitee the amount of such claim (but such recovery shall not
limit the amount of any additional indemnification to which the Indemnitee may be entitled
pursuant to Section 11.2 or Jl.d), and no later by the Indemnitor shall be permitted
with respect thereto. If within such period the Indemnitor agrees that it has an
indemnification obligation but objects that it is obligated to pay only a lesser amount, the
Indemnitee shall, pursuant to Sections 11.2, ill and ill, nevertheless be entitled to recover
from the Indemnitor and the Indemnitor shall promptly pay to the Indemnitee the lesser amount,
without prejudice to the Indemnitee's claim for the ditTerence.
Section I 1.8 Third Party Indemnification. The obligations of any Indemnitor to
indemnify any Indemnitee under this Article XI with respect to Purchaser Damages or Seller
Damages, as the case may be, resulting from the assertion of liability by third parties (including
Government Entities), shall be subject to the following terms and conditions:
(a) Notice of Third Party Claims: Assumption of Defense .. The indemnitee shall
give notice as promptly as is reasonably practicable to the Indemnitor of the assertion of any
claim or the commencement of any Proceeding or investigation by any Person not a party
hereto (a "Third Party Claim") in respect of which indemnity may be sought under this
Agreement, which notice shall contain reasonable details concerning such Third Party Claim;
provided, that the failure ofthe Indemnitee to give notice shall not relieve the Indemnitor of its
obligations under this Article XI except to the extent (if any) that the Indemnitor shall have
been prejudiced thereby The Indemnitor may, at its own expense, (i) participate in the
defense of any such Third Party Claim and (ii) upon written notice to the Indemnitee and the
Indemnitor's delivering to the Indemnitee a written agreement that the Indemnitee is entitled
to indemnification pursuant to Section I 1.2 or ill for all Losses arising out of such Third
Party Claim and that the Indemnitor shall be liable for the entire amount of any Loss resulting
therefrom, at any time during the course of any such Third Party Claim assume the defense
thereof; Qrovided, that (A) the Indemnitor shall provide written evidence reasonably
satisfactory to the Indemnitee demonstrating that the Indemnitor has a sufficient amount of
assets for purposes of such assumption of defense. (B) the Indemnitor's counsel is reasonably
satisfactory to the Indemnitee and (C) the Indemnitor shall thereafter consult with the
Indemnitee upon the Indemnitee's reasonable request for such consultation from time to time
with respect to such Third Party Claim. If the Indemnitor assumes such defense, the
Indemnitee shall have the right (but not the duty) to participate in the defense thereof and to
employ counsel, at its own cost and expense, separate from the counsel employed by the
Indemnitor If, however, the Indemnitee reasonably detennines in its judgment that
representation by the Indemnitor's counsel of both the Indemnitor and the Indemnitee would
present such counsel with a conflict of interest, then such Indemnitee may employ separate
counsel to represent or defend it in any such Third Party Claim and the Indemnitor shall pay
the reasonable fees and disbursements of such separate counsel. Whether or not the
Indemnitor chooses to defend or contest any such Third Party Claim, upon the request of the
Indemnitee, the other Parties shall provide reasonable cooperation to the Indemnitee with
respect thereto.
(b) Settlement or Compromise. Any settlement or compromise made or caused to
be made by the Indemnitee or the lndemnitor, as the case may be, of any Third Party Claim
shall also be binding upon the Indemnitor or the Indemnitee, as the case may be, in the same
5165824.3 06146040

manner as if a final judgment or decree had been entered by a court of competent jurisdiction
in the amount of such settlement or compromise; provided, that (i) no obligation, restriction or
Loss shall be imposed on the Indemnitee as a result of such settlement without its prior written
consent, and (ii) the Indemnitee shall not compromise or settle any Third Party Claim without
the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld,
conditioned or delayed.
(c) Failure of Indemnitor to Act. If the Indemnitor does not elect to assume the
defense of any Third Party Claim, then any failure of the Indemnitee to defend or to
participate in the defense of any such Third Party Claim, or to cause the same to be done, shall
not relieve the Indemnitor of its obligations hereunder.
Section 11.9 Set Off Against Indemnification Holdback Amount Subject to Sections
.!.J...W and fhl, if any Purchaser Indemnified Party is entitled to receive any amount frcim any
Seller under Section 11.2 of this Agreement, the Purchaser Indemnified Party shall only seek
recovery from the Indemnification Holdback Amount for, and shall retain from the
Indemnification Holdback Amount, as much of such amount as is possible
Section 11.10 Release of Indemnification Holdback Amount
(a) On the date that is nine months after the Closing Date (the "Holdback Release
Date"), the Escrow Agent shall pay to Sellers, from the Indemnification Holdback Amount, an
amount (the "Holdback Release Amount") equivalent to (i) the Indemnification Holdback
Amount, minus (ii) all prior amounts distributed to Purchaser pursuant to and in accordance
with the Escrow Agreement, minus (iii) any amounts necessary (as determined by Purchaser in
its reasonable judgment) to satisfy any Pending Claims theretofore asserted by any Purchaser
Indemnified Party pursuant to Article XI (such amounts relating to such Pending Claims are
collectively referred to hereinafter as the "Unresolved Portion"), together with a sum
equivalent to interest on such Holdback Release Amount accruing from the Closing Date to
and including the Holdback Release Date.
(b) If there is an Unresolved Portion of the Indemnification Holdback Amount as
of the Holdback Release Date, the Escrow Agent shall continue to retain the Unresolved
Portion from and after the Holdback Release Date until the resolution of such Pending Claims
giving rise to the Unresolved Portion, and following the final settlement in accordance with
the Escrow Agreement of all such Pending Claims and the retention of all amounts from the
Unresolved Portion payable to the Purchaser Indemnified Parties with respect to such Pending
Claims, the Escrow Agent shall pay to Sellers the balance, if any, of the Indemnification
Holdback Amount, together with a sum equivalent to interest on such balance accruing from
the Closing Date to and including the date of payment of such balance to Sellers.
Section I I .11 Purchase Price Adjustments .. Any amounts payable under Section 11.2 or
Section 11.4 shall be treated by Purchaser and Sellers as an adjustment to the Purchase Price.
51658243 06146040
-65-
ARTICLE XII
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser reptesents and warrants to Sellers that all of the statements contained in this
Article XII, are true and correct as ofthe date of this Agreement.
Section 12.1 Legal Power: Omanization: Qualification of Purchaser. Purchaser has
been duly incorporated, and is validly existing and in good standing under the Laws of its
jurisdiction of incorporation, has all requisite power and authority to execute and deliver this
Agreement and the Ancillary Agreements and to consummate the transactions contemplated
hereby, and has taken all necessary corporate or other action to authorize the execution, delivery
and performance of this Agreement
Section 12.2 Binding Agreement. This Agreement has been duly executed and
delivered by Purchaser and, assuming due and valid authorization, execution and delivery by
Sellers, this Agreement constitutes a legal, valid and binding obligation of Purchaser,
enforceable against Purchaser in accordance with its terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar
Laws of general application affecting enforcement of creditors' rights generally and (b) the
availability of the remedy of specific performance or injunctive or other forms of equitable relief
may be subject to equitable defenses and. would be subject to the discretion of the court before
which any proceeding therefor may be brought Each Ancillary Agreement will be duly and
validly executed and delivered by Purchaser at or prior to the Closing, and upon such execution
and delivery (assuming such Ancillary Agreement constitutes a valid and binding obligation of
each other party thereto) will constitute the legal, valid and binding obligation of Purchaser,
enforceable against Purchaser in accordance with its respective terms.
Section 12.3 No Conflict or Default Neither the execution and delivery of this
Agreement nor the consummation by Purchaser of the transactions contemplated hereby will
result in a violation of, or a default under, or conflict with, or require any consent, approval or
notice under, any material contract, trust, commitment, agreement, obligation, understanding,
arrangement or restriction of any kind to which Purchaser is a party or by which Purchaser is
bound or to which any properties or assets owned by Purchaser are subject Consummation by
Purchaser of the transactions contemplated hereby will not violate, or require any consent,
approval or notice under, any provision of any material judgment, order, decree, statute, Law,
rule or regulation applicable to such Purchaser.
Section 12.4 Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the transactions contemplated
hereby based upon arrangements made by or on behalf of Purchaser
51658243 06146040
-66-
ARTICLE X111
MISCELLANEOUS
Section 13 .1 Fees and Expenses Except as set forth in this Agreement, all costs and
expenses incurred in connection with this Agreement and the consummation of the Transaction
shall be paid by the party incurring such expenses.
Section 132 Amendment; Waiver. This Agreement may be amended, modified and
supplemented only by a v.rritten instrument signed by all of the parties hereto expressly stating
that such instrument is intended to amend, modify or supplement this Agreement. No failure or
delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege .. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies provided by Law.
Section I 3.3 Publicity. The initial press release with respect to the execution of this
Agreement shall be a joint press release reasonably acceptable to Purchaser and Sellers.
Thereafter, until the Closing, or the date the transactions contemplated hereby are terminated or
abandoned pursuant to Article IX, none of Sellers, Purchaser nor any of their respective
Affiliates shall issue or cause the publication of any press release or other public announcement
with respect to this Agreement or the transactions contemplated hereby without prior
consultation with the other party, except as may be required by Law or by any listing agreement
with a national securities exchange or trading market.
Section I 3.4 Notices. All notices and other communications hereunder shall be in
writing and shall be delivered personally by hand, by facsimile (which is confirmed) or sent by
an overnight courier service to the parties at the following addresses (or at such other address for
a party as shall be specified by such party by like notice):
if to Purchaser, to:
Carrington Mortgage Services, LLC
c/o Carrington Capital Management, LLC
599 Putnam Avenue
Greenwich, CT 06830
Attn: Bruce Rose
Facsimile: (203) 661-6378
with copies to (which copies shall not constitute notice):
5!65824 J 06146040
Carrington Mortgage Services, LLC.
c/o Carrington Capital Management, LLC
599 Putnam A venue
Greenwich, CT 06830
Attn: Diane Citron
-67-
and
Facsimile: (203) 661-6378
Mayer, Brown, Rowe & Maw LLP
71 South Wacker Drive
Chicago, IL 60606
Attn: Elizabeth Raymond
Facsimile: (312)706-8192
ifto Sellers, to:
New Century Financial Corporation
184000 Von Karman, Suite 1000
Irvine, CA 9.2612
Attn: Brad Morrice
Facsimile: (949) 224w5703
with copies to (which copies shall not constitute notice):
and
and
and
5165824.3 06146040
New Century Financial Corporation
184000 Von Kannan, Suite I 000
Irvine, CA 92612
Attn: Terry Theologides
Facsimile: (949) 471-8135
O'Melveny & Myers LLP
275 Battery Street, Suite 2600
San Francisco, CA 941 I I
Attn: C. Brophy Christensen, Jr.
Facsimile: (415) 984-8701
Hahn & Hessen LLP
488 Madison Avenue
New York, New York I 0022
Attn: Mark Power
Facsimile: (212) 478-7400
Hahn & Hessen LLP
488 Madison Avenue
-68-
New York, New York I 0022
Attn: Mark S. Indelicato
Facsimile: (.212) 478-7400
All notices given pursuant to this Section 13.4 shall be deemed to have been given (i) if
delivered personally on the date of delivery or on the date delivery was refused by the addressee,
(ii) if delivered by facsimile transmission, when transmitted to the applicable number so
specified in (or pursuant to) this Section 13.4 and an appropriate answerback is received or (iii) if
delivered by overnight courier, on the date of delivery as established by the retum receipt or
courier service confirmation (or the date on which the courier service confim1s that acceptance of
delivery was refused by the addressee).
Section 13.5 Counterparts. This Agreement may be executed in two or more
counterparts, afl of which shall be considered one and the same agreement and shall become
effective when two or more counterparts have been signed by each of the parties and delivered to
the other parties. Copies of executed counterparts transmitted by telecopy or other electronic
transmission service shall be considered original executed counterparts, provided receipt of such
counterparts is confirmed.
Section 13.6 Entire Agreement; No Third Party Beneficiaries. This Agreement and the
Sale Approval Order (a) constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the subject matter hereof
and thereof, except for the Confidentiality Agreement, which shall remain in full force and effect
until the Closing, and (b) is not intended to confer any rights or remedies upon any Person other
than the parties hereto and thereto.
Section 1.3 7 Severabilitv. Any term or provision of this Agreement that is held by a
court of competent jurisdiction or other authority to be invalid, void or unenforceable in any
situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms
and provisions hereof or the validity or enforceability of the offending tem1 or provision in any
other situation or in any other jurisdiction. If the final judgment of a court of competent
jurisdiction or other authority declares that any term or provision hereof is invalid, void or
unenforceable, the parties agree that the court making such determination shall have the power to
reduce the scope, duration, area or applicability of the term or provision, to delete specific words
or phrases, or to replace any invalid, void or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the intention of the
invalid or unenforceable term or provision
Section 13.8 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
DELAWARE WITI-IOUT GIVING EFFECT TO RULES GOVERNING THE CONFLICT OF
LAWS AND, TO THE EXTENT APPLICABLE, THE BANKRUPTCY CODE
Section 13.9 Venue and Retention of.lurisdiction. All actions brought, arising out of or
related to the transactions contemplated in this Agreement shall be brought in the Bankruptcy
Court, and the Bankruptcy Court shall retain jurisdiction to determine any and all such actions
5165824.3 06146040
-69-
Section 13. I 0 Time of Essence. Each of the parties hereto hereby agrees that, with regard
to all dates and time periods set forth or referred to in this Agreement, time is ofthe essence.
Section 13.11 No Consequential Damages. In no event will any party to this Agreement
be liable to any other party for any punitive, exemplary, indirect, special, incidental or
consequential damages, including lost profits or savings, damage to business reputation or loss of
opportunity.
Section 13 .. 12 Assigmnent. This Agreement shall be binding upon, inure to the benefit of
and be enforceable by the parties and their respective successors and assigns; provided, that
neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned
by any of the parties hereto (whether by operation of Law or otherwise) without the prior written
consent of the other parties, except that on or after the Closing Date, Purchaser may assign its
rights and obligations hereunder to an Affiliate or Affiliates of Carrington. No assignment of
rights or obligations pursuant to this Section 13.12 shall relieve the assigning party of its
obligations hereunder.
Section 1J.l3 Fulfillment of Oblirzations Any obligation of any party to any other party
under this Agreement, which obligation is performed, satisfied or fulfilled completely by an
Affiliate of such party, shall be deemed to have been performed, satisfied or fulfilled by such
party.
Section 13. I 4 Specific Perfonnance. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. lt is accordingly agreed that Purchaser
shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in Delaware state court, this being in addition to any other
remedy to which they are entitled at Law or in equity.
Section 13.15 Waiver of Bulk I ransfer Laws.. Seller and Purchaser agree to waive
compliance with Article 6 of the Uniform Commercial Code as adopted in each of the
jurisdictions in which any of the Purchased Assets are located to the extent that such Article is
applicable to the transactions contemplated hereby,
Section 13.16 Personal Liability. This Agreement shall not create or be deemed to create
or pennit any personal liability or obligation on the part of any officer, director, employee,
Representative or investor of any party hereto,
Section 13.17 No Riuht of Setoff Except as othenvise provided herein, including the
Indemnification Holdback Amount as contemplated in Articles IV and XI, no party nor any
Affiliate thereof may deduct from, set off, holdback or otherwise reduce in any manner
whatsoever any amount owed to it hereunder or pursuant to any Ancillary Agreement against any
amounts owed hereunder or pursuant to any Ancillary Agreement by such Person to any other
party or any of such other party's Affiliates.
[SIGNATURES ON FOLLOWING PAGE]
5165824.3 06146040
-70-
IN WITNESS WHEREOF, Purchaser and Sellers have executed this Agreement or
caused this Agreement to be executed by their respective officers thereunto duly authorized as of
the date first written above.
5160095
CARRINGTON MORTGAGE SERVICES, LLC
By: CatTing len Capital Management, LLC, its
managing member
NEW CENTURY FINANCIAL CORPORATION
as Seller and Debt01 and Debtor-in-Possession
By __________________________ ___
Name:
Title:
NEW CENTURY MORTGAGE CORPORATION
as Seller and Debtor and Debtor-in-Possession
By __________________________ ___
Name:
Title:
IN WITNESS WHEREOF, Purchaser and Sellers have executed this Agreement or
caused this Agreement to be executed by their respective officers therewtto duly authorized as of
the date first written above.
CARRINGTON CAPITAL MANAGEMENT,
LLC
By:
By ________________________ __
Name:
Title:
CARRINGTON MORTGAGE SERVICES,
LLC
By:
By ________________________ _
Name:
Title:
NEW CENTURY FINANCIAL
CORPORATION
By __ ~ ~ ~ ~ - - - - - - - - - - - - - - - - - - -
Name:
Title:
NEW CENTURY MORTGAGE
CORPORATION
as Seller and Deb rand Debtor-in-Possession
B y ~ ~ ~ ~ ~ - - - - - - - - - - - - - - - - - - -
Name:
Title:
Exhibit B
State Exemption Statutes
Arl<ansas Fair Mortgage Lending Act- Ark. Code 23-39 502(6)(B)(xv)
California Residential Mortgage Lender/Serviccr- Section 50003(g)(9) of the California
Financial Code
District of Columbia Mortgage Lender and Broker Act- D.C. Code 26-1102(11)
Florida Mortgage Brokerage and Lending Act- Fla. Stat. 494.006(l)(b)
Georgia Residential Mortgage Act- O.C.G.A. 7-1-1001(5)
Kentucky Mortgage Loan Company Act- Ky. Rev. Stat.
Minnesota Residential Moaigage Originator and Seavicer Licensing Act- Minn. Stat. Ann.
58.02, Subd. 2(b)(7)
Utah Residential Mortgage Practices Act- Utah Code Ann. 61-2c-105
RLF 1-3154880-1
Exhibit C
Cure Amounts
OBJECTING PARTY OBJECTOR'S PROPOSED
-
CURE
ADT Security Services, Inc. $108,748.36
Affiliated Computer Services, Inc. and ACS $1,961,995.00
Commercial Solutions, Inc.
AT&T Corp. $1,314,259.66 (as of April2, 2007)
CB Richard Ellis Corporate Facilities Management, $565,884.35 (as of April 30, 2007)
Inc.
Data-Link Systems, L.LC. $1,193,567.73 (as of April 30,
2007)
Federal Express Corporation $354,816.54
Fidelity National Infom1ation Services, Inc. $2,493,182.99
Fisetv Solutions, Inc. $60,469.31 (as of April 30, 2007)
General Electric Capital Corp. $1,270,000
Irwin Mortgage Corp. and Irwin Financial Corp. $72,860.55
KST Data, Inc. $215,654.67
LandAmerica Default Services Company $815,042.62
National City Commercial Capital Company, LLC $44,973.06
National Field Representatives, Inc. $807,594.50
Oracle USA, Inc. To be determined
Premier Print and Services Group, Inc. $152,937.87
Safeco Financial Institution Solutions, Inc. $96,266.09
Speedpay, Inc. $53,022.00 (as of April 2, 2007)
Sprint Cmmnunications Company L.P. d/b/a Sprint $1,178,035.81
Nextel Corp.
Walz Postal Solutions, Inc. $75,617.94
RLFI-3154880-1
In re:
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
Chapter 11
NEW CENTURY TRS HOLDINGS
INC., a Delaware corporation, ct at.,
1
Case No. 0 7 ~ 1 0 4 1 6 (KJC)
Jointly Administered
Debtors.
EMERGENCY MOTION OF DEBTORS AND DEBTORS IN POSSESSION FOR (I) AN
ORDER (A) APPROVING BIDDING PROCEDURES AND BID PROTECTIONS IN
CONNECTION WITH AUCTION OF CERTAIN ASSETS, (B) SCHEDULING
HEARING TO CONSIDER PROPOSED SALE OF CERTAIN ASSETS AND
APPROVING FORM AND MANNER OF NOTICE THEREOF AND (C) GRANTING
RELATED RELIEF AND (II) AN ORDER (A) APPROVING THE PROPOSED SALE
AND (B) GRANTING RELATED RELIEF
New Century TRS Holdings, Inc., a Delaware corporation, New Century
Financial Corporation, a Maryland corporation, and their direct and indirect subsidiaries, each as
a debtor and debtor-in"possession (collectively, the "Debtors"), by and through their undersigned
counsel, hereby submit this emergency motion (the "Motion") pursuant to sections 1 05(a), 363,
503 and 507 of title 11 ofthe United States Code, 11 U.S.C. 101-1532 (the "Bankruptcy
Code"), and Rules 2002, 6004 and 9014 of the Federal Rules of Banhuptcy Procedure (the
"Bankruptcy Rules"), for the entry of (i) an order (a) approving bidding procedures and bid
protections in connection with an auction of certain assets, (b) scheduling a hearing (the "Sale
1
The Debtors are the following entities: New Century Financial Corporation (flk/a New Century REIT,
Inc.}, a Maryland corporation; New Century TRS Holdings, Inc (flk/a New Century Financial Corporation), a
Delaware corporation; New Century Mortgage Corporation (flk/a JBE Mortgage) (d/b/a NCMC Mortgage
Corporate, New Century Corporation, New Century Mortgage Ventures, LLC), a California corporation; NC Capital
Corporation, a California corporation; Homel23 Corporation (flk/a The Anyloan Corporation, 1800anyloan.com,
Anyloan.com), a California corporation; New Century Credit C01poration (f/k/a Worth Funding Incorporated), a
California corporation; NC Asset Holding, L.P. (flk/a NC Residual II Corporation), a Delaware limited partnership;
NC Residuallll Corporation, a Delaware corp01ation; NC Residual IV Corporation, a Delaware corporation; New
Century R.E 0 Corp., a California corporation; New Century R E.O 11 Corp., a Calitbrnia corporation; New
Century R.E.O. III Corp, a California corporation; New Century Mortgage Ventures, LLC (d/b/a Summit Resort
Lending, Total Mortgage Resource, Select Mortgage Group, Monticello Mortgage Services, Ad Astra Mortgage,
Midwest Home Mortgage, TRA TS Financial Services, Elite Financial Services, Buyers Advantage Mortgage), a
Delaware limited liability company; NC Deltex, LLC, a Delaware limited liability company; NCoral, L P., a
Delaware limited partnership.
RlF 13134266-2
Hearing") to consider approval of a proposed sale of ce1tain assets (the "Sale") to Greenwich
Capital Financial Products, Inc .. , or such other prevailing bidder, pursuant to the terms and
conditions of that certain Asset Purchase Agreement, dated as of April 2, 2007, and approving
the form and manner of notice thereof {the "Sale Notice") and (c) granting certain related relief
(the "Bidding Procedures Order") and {ii) an order approving the Sale and granting related relief
(the "Sale Order"). In support of this Motion, the Debtors respectfully state as follows:
JURISDICTION
1. This Court has jurisdiction over the suqject matter of this Motion pursuant
to 28 U.S .. C. 157 and 1334. Venue is proper in this district pursuant to 28 U.S.C. 1409(a).
This is a core proceeding w1der 28 U.S.C. 157(b)(2).
2. The statutory predicates for the relief sought in this Motion are
Bankruptcy Code Sections IOS(a), 363, 503 and 507 and Bankruptcy Rules 2002, 6004 and
9014.
BACKGROUND
2
3. New Century Financial Corporation, a Maryland corporation ("NCF'') and
publicly owned real estate investment trust, is one of the largest specialty mortgage finance
businesses in the United States. Through its subsidiaries and its primary holding company
subsidiary, New Century TRS Holdings, Inc., a Delaware corporation ("New Century TRS" and
together with NCF and the other debtor subsidiaries, the "Debtors''), NCF originates, purchases,
sells, and services mortgage loans nationwide. NCF historically focused on "subprime" lending,
or lending to individuals whose borrowing needs were generally not fulfilled by traditional
financial institutions because they did not satisfy the credit, documentation or other underwriting
2
The facts and circumstances discussed in this section are set forth in the Declarations of Monika
McCarthy and Holly Etlin in Supp01t of Chapter II Petitions and Request for First Day Relief.
2
RLFl-3134266-2
standards prescribed by conventional mortgage lenders and loan buyers. In September 2005,
NCF through some ofits subsidiaries also began offering conventional mortgage loans,
including: "Alt-A" mortgage loans, loans insured by the Federal Housing Administration
("FHA"), and loans guaranteed by the Veterans Administration ("VA"). During the fiscal year
ending December 31, 2006, the Debtors originated or purchased approximately $60 billion of
mortgage loans, most of which were sold in the secondary market. Since their inception, the
Debtors have issued or enabled over $220 billion in loans. These loans have helped millions of
homebuyers and homeowners across the nation access credit and realize the benefits of home
ownership, including many who might not otherwise have been able to do so.
4.. On February 7, 2007, NCF announced that it would restate its quatierly
financial statements for the first, second, and third quarters of 2006 after the Debtors discovered
that there may be enors in the application of generally accepted accounting principles regarding
NCF's allowance for loan repurchase losses. The announcement resulted in the filing of various
securities class action lawsuits and shareholder derivative suits ..
5. On March 2, 2007, NCF aimotmced that it could not timely file its Annual
Report on Fonn I 0-K and that KPMG LLP, NCF's independent auditors, could not complete its
audit ofNCF's 2006 financial statements until after completion of the internal investigation by
NCF' s audit committee. NCF also atmounced that the Securities and Exchange Commission had
requested a meeting with NCF to discuss these events and that the United States Attorney's
Office had commenced a criminal inquiry.
6. These announcements, together with increased borrower defaults that have
adversely affected the subprime mortgage market nationwide, had a devastating impact on the
Debtors' business .. Shortly after the March 2, 2007 atmouncement, the financial institutions that
provide the sh011 term credit facilities that the Debtors need to originate atld purchase loans {each
3
RLFI-3134266-2
a "Warehouse Lender"), commenced exercising remedies against the Debtors, thereby
threatening their viability. During the following week, the Warehouse Lenders made margin
calls in excess of $150 million, which the Debtors were tmable to satisfy fully. Thereafter, the
Warehouse Lenders began restricting and ultimately ceased providing funding for loans
originated by the Debtors. Each ofthe Warehouse Lenders has declared the Debtors in default
under its credit facility.
7. As a result of the defaults, the Warehouse Lenders have exercised
remedies under their agreements with the Debtoxs, including asse1ting control of the cash flow
from the loans they financed and in some instances exercising strict foreclosure or commencing
foreclosure sales of the Debtors' loans. The lack of cash flow from these loans has further
exacerbated the Debtors' liquidity situation.
8. Although the Debtors have not had sufficient resources or access to credit
to miginate loans, the Debtors continue to operate their mortgage loan servicing business in
accordance with their historically high standards and comply with their obligations under their
agreements with indenture trustees and other parties to provide servicing for mmigage loans.
Because their financing for servicing advances has also been terminated, the Debtors' liquidity
has been additionally constrained by their being required to provide necessary loan servicing
advances from their own working capital.
9. During the weeks leading up to the Petition Date (as defined below), the
Debtors, aided by their professional advisors, including investment bank Lazard Freres & Co.
LLC (''Lazard"), sought sources of additional financing, infusions of debt and/or equity capital,
or a sale of their businesses to a strategic or financial investor.
10. The Debtors' inability to originate loans and the exercise of remedies by
the Warehouse Lenders have left the Debtors in a severe liquidity crisis. Without a prompt sale
4
RLFI-3134266-2
of the Debtors' mortgage loan servicing business and loan origination platform, those businesses
will not be viable and the value will be destroyed. Accordingly, the Debtors have commenced
these chapter 1 I cases to pursue an expedited sale of these businesses and the Debtors' other
assets for the benefit of the Debtors' stakeholders.
11. Although the Debtors have been unsuccessful in obtaining financing that
would permit them to continue originating loans, Debtors were successful in obtaining debtor in
possession financing of up to $150 million, which they expect will provide sufficient working
capital to maintain and stabilize their businesses through the sale of the Debtors' operating
businesses and other assets.
12. On April 2, 2007 (the .. Petition Date"), the Debtors filed the instant
petitions for relief. Further, a motion for joint administration of the Debtors' bankruptcy cases is
pending before the Court The Debtors are operating their business and mariaging their affairs as
debtors and debtors in possession.
RELIEF REQUESTED
13. The Debtors hereby request, pursuant to Bankruptcy Code Sections 105,
363, 503 and 507 and Bankruptcy Rule 6004, that the Court enter orders facilitating the prompt
auction of certain of their assets. Specifically, the Debtors seek the entry of the Bidding
Procedures Order that approves bidding procedures and stalking horse bid protections in
cmmection with an auction of certain of their assets, sets a Sale Hearing to consider approval of
the Sale and the Sale Notice and grants related relief In addition, the Debtors seek the entry of
the Sale Order that authorizes and approves the Sale and grants related relief.
NEED FOR IMMEDIATE SALE
14. The Debtors have commenced these bankruptcy cases in order to
downsize their operations, reduce expenses, promptly market their businesses and consummate
5
RLFI-3134266-2
sales of assets as soon as practicable. Prior to commencing these cases, the Debtors, working
with their investment banker, Lazard Freres & Co. LLC ("Lazard"), aggressively marketed their
businesses. This resulted in expressions of interest, bids and committed offers for various assets
and components of their businesses.
15. Those offers included a proposal by Greenwich Capital Financial
Products, Inc. ("Greenwich") to purchase a pool of mortgage loans and mortgage-backed
residual interests in securitization trusts for aggregate proceeds of $50,000,000. The mortgage
loans consist of a pool of slightly over 2,000 residential mortgage loans owned by the Debtors.
Most of these loans were originated by the Debtors and then sold to securitization trusts and
whole loan buyers. But because the bOITowers on these loans defaulted soon after the disposition
occuned, the buyer had the right to, and did, require the Debtors to repurchase the loans. Other
loans in this pool were originated by the Debtors but never disposed of in a loan sale. The
mortgage-backed securities that Greenwich is seeking to buy consist of residual class interests
issued by various securitization trusts that the Debtors received when they disposed of loans.
16. The Debtors and Lazard broadly sought offers for these loans and residual
backed securities and a number of prospective buyers conducted diligence and
expressed interest in them. Greenwich made an offer to purchase them which the Debtors
concluded established a reasonable floor for an auction and, accordingly, on April2, 2007, the
Debtors entered into an Asset Purchase Agreement (the "APA") with Greenwich whereby
Greenwich agreed to purchase these mortgage loans and mortgage-backed securities (as more
completely described in the APA, the "Purchased Assets") for aggregate proceeds of
$50,000,000 pursuant to Bankruptcy Code Section 363. This sale is su(>ject to higher and better
bids and, if qualifying bids are submitted, an auction. A copy of the AP A is attached hereto as
Exhibit A.
6
RlFI-3134266-2
17. As more fully described in the Debtors' simultaneously filed motion for
authorization to obtain postpetition financing, Greenwich and The CIT Group/Business Credit,
Inc, ("CIT," and together with Greenwich, the "DIP Lenders") also concurrently agreed to
provide the Debtors with debtor in possession financing ("DIP Financing"). Among other
things, the proposed DIP Financing will help finance the Debtors' continued operations as a
going concem so that the Debtors can pursue a number of asset sales, including this particular
auction. The Debtors concluded, in their business judgment, that the stalking horse bid made by
Greenwich for the Purchased Assets and the proposed DIP Financing were each fair. And each
was the best offer the Debtors received for the respective transaction. The DIP Lenders are
willing to provide financing only if Greenwich is given a fair opportunity to pursue its bid for the
Purchased Assets. As a result, one condition of the DIP Financing requires that the Court
approve the bidding procedures discussed herein by April 10, 2007.
18. The Debtors believe this process is appropriate and will facilitate each of
the Debtors' primary Specifically, it will provide the Debtors with the funding
necessary to satisfy their liquidity demands and help stabilize their business so they can pursue
going concern sales of their assets, as well as offering a reasonable stalking horse bid from
Greenwich on the Purchased Assets. Thus, the Debtors have filed this Motion to approve
bidding procedures for the sale of the Purchased Assets to Greenwich for aggregate proceeds of
$50,000,000, to overbid.
19. Simply put, the Debtors are in a struggling industry - the sub-prime
residential mortgage industry. Without the liquidity available through the DIP Financing, the
Debtors will stmggle to continue to operate as a going concern and it will be extremely difficult,
if not impossible, to conduct orderly sales of their assets and businesses. The Sale, in
with the DIP Financing, provides a unique opportunity for the Debtors to preserve
7
RLF 1-3134266-2
their businesses as going concerns and maximize their value for the estates. And as noted above,
the tem1s of the DIP Financing requires that these bid procedures be approved by April 10,2007.
Consequently, the Debtors believe, in the exercise of their business judgment, that the relief
sought by this Motion is not only reasonable, but necessary under the circumstances of this case
to maximize the value of the estates for creditors.
THE APA AND THE SALE OF ASSETS
20. Pursuant to the AP A, the Debtors propose to sell the Purchased Assets to
Greenwich (or such other third party as Greenwich may designate) free and clear of all liens,
claims and encumbrances for an aggregate purchase price of $50,000,000. This purchase price
will be paid by satisfying any obligations outstanding under the DIP Financing at the time of the
closing, up to the amount of the purchase price, with the remaining balance (if any) to be paid in
cash (subject to a holdback for certain contingent costs and potential deductions).
3
21. The AP A contains certain minimal representations and warranties and
provides for a $3,000,000 45-day holdback to cover such matters as (i) the Debtors releasing the
borrower on a loan that was sold to Greenwich, (ii) material changes in the foreclosure laws of
the state in which the property is located and (iii) the Debtors' failure to transfer servicing of
these loans to a servicer selected by the buyer. While the Debtors would have preferred no
representations and warranties and no holdback, and bargained hard for both, the sort of matters
that could allow Greenwich to look to the holdback could have a significant impact on the value
of the loans and are generally believed to have a relatively low dsk of occurring. Even so, the
Debtors will evaluate any competing bids for such matters as whether they provide superior
3
The description of the APA provided herein is an overview of certain of the significant tenns ofthe Sale
The Court and interested parties should refer to the APA, a copy of which is attached hereto as E:<hibit A, for
complete and detailed terms thereof. To the extent the description of the sale described in this Motion is
inconsistent in any way from the terms of the APA, the terms ofthe APA shall prevail.
8
RLFI-3134266-2
terms for the estates with respect to representations and warranties and the presence or absence
of a holdback.
22. The Debtors believe that the proposed Sale provides a reasonable floor for
an auction and that the bidding procedures and protections required by Greenwich provide a fair
opportunity for open and spirited bidding.
THE BIDDING PROCEDURES
23. As set forth in greater detail in Exhibit B attached hereto, Greenwich and
the Debtors have negotiated the following proposed procedures and deadlines for the
contemplated auction and sale of the Purchased Assets (the "Bidding Procedures"):
4
A. Notice:
The Debtors, in consultation with Lazard, have developed a list of parties
whom the Debtors believe may potentially be interested in and whom the
Debtors reasonably believe would have the financial resources to
consummate a purchase of the Purchased Assets. The list includes both
potential strategic investors and potential financial investors (each,
individually, a "Contact Party," and collectively, the "Contact Parties").
Within two business days of the entry of the Bidding Procedures Order,
the Debtors and their advisors will send notice of the proposed Sale, the
process for obtaining diligence materials, the process for qualifying as a
bidder, the due date for bids and the proposed time and date of the Auction
(as defined below) to Contact Parties and other parties in interest and
prospects that have or may be identified as potential bidders for the
Purchased Assets. The Debtors will also publish notice of the proposed
sale and bidding procedures in the Wall Street Journal (National Edition).
B. Data Room and Access to Information:
Infonnation relevant to the Purchased Assets for evaluation by interested
parties, including certain books and records, material contracts and other
financial and operational information for due diligence investigation, will
be made available via an online data room on intralinks to bidders who
have executed a valid nondisclosure agreement. Specific information for
'
1
The following is intended for summary purposes only. To the extent the description in this Motion is
inconsistent in any way from the Bidding Procedures, the terms of the Bidding Procedures shall govern
9
RLF131342662
RLF 1-3134266-2
accessing the dataroom will be provided after execution of such
agreements. The diligence period will take place from April 9, 2007
tluough April 26, 2007.
C. Qualified Bidders:
To be eligible to participate in the Auction and be deemed a "Qualified
Bidder," each party must submit a binding written offer to purchase all or
some of the Purchased Assets to the Debtors, Lazard and any Official
Committee of Unsecured Creditors appointed in these cases that satisfies
each of the following conditions:
I. States that the bidder, on its own or together with another
Qualified Bidder, offers to purchase the Purchased Assets
upon the terms and conditions substantially as set forth in
the APA.
II. States that the bidder is prepared to enter into a legally
binding purchase and sale agreement or similar agreement
for the acquisition of the Purchased Assets on tem1s and
conditions no less favorable to the Debtors than the terms
and conditions contained in the AP A
Ill. Is accompanied by a clean and duly executed asset
purchase agreement (a "Modified APA") and a marked
Modified AP A reflecting the variations from the APA
executed by Greenwich.
IV. States that the bidder is financially capable of
conswnmating the transactions contemplated by the
Modified APA
V. States that such Qualified Bidder's offer is irrevocable until
the closing of the purchase of the Purchased Assets if the
Qualified Bidder is the Successful Bidder or the B a c k ~ u p
Bidder (as those tem1s are defined below).
VL Contains such financial and other information that will
allow the Debtors to make a reasonable determination of
the bidder's financial and other capabilities to consummate
the transactions contemplated by the Modified AP A,
including without limitation such financial and other
information setting forth adequate assurance of future
perfonnance under Bankruptcy Code Section 365 (if
applicable) in a f01m requested by the Debtors to allow the
Debtors to ser\re such information within one business day
10
RL.F 1-3134266-2
after receipt of such information on counter-parties to any
contracts or leases being assigned in connection with the
proposed sale.
VIL Identifies with particularity each and every executory
contract and unexpired lease, the assumption and
assignment of which is a condition to closing.
VIII. Does not request or entitle the bidder to any transaction or
break -up fee, expense reimbursement or similar type of
payment.
IX. Fully discloses the identity of each entity that will be
bidding for the Purchased Assets or otherwise participating
in connection with such bid, and the complete terms of any
participation ..
X. Is likely to result in value to the Debtors, in the Debtors'
reasonable judgment after consultation with their financial
and legal advisors, that is more than the aggregate of the
value of the sum of (a) the Purchase Price (as defined in the
APA), plus (b) the amount ofthe Break-Up Fee (as defined
below), plus (c) $500,000.
XL Does not contain any due diligence or financing
contingencies of any kind, and does contain evidence that
the bidder has received debt and/or equity funding
commitments or has financial resources readily available
suf-ficient in the aggregate to finance the purchase of the
Purchased Assets, which evidence is reasonably
satisfactory to the Debtors.
XII. Includes evidence of authorization and approval from the
bidder's board of directors (or comparable governing body)
with respect to the submission, execution, delivery and
closing of the Modified APA;
XIII. Is accompanied by a cash deposit of at least $1,000,000
(the "Good Faith Deposit").
A competing bid meeting the above requirements shall constitute a
"Qualifying Bid" and such bidder shall be a "Qualified Bidder." The
Debtors may aggregate separate bids from Qualified Bidders to cteate a
Qualifying Bid. The Debtors shall make a determination regarding
whether a bid is a Qualifying Bid and shall notify bidders when their bids
have been determined to be qualified by no later than 5:00p.m .. (prevailing
11
Rl-F 1-3134266-2
Eastern time) on April30, 2007. Greenwich shall be deemed a Qualifying
Bidder and the APA constitutes a Qualifying Bid for all purposes.
D. Deadline for Submission of Bids:
All Qualified Bids must be submitted by no later than 5:00p.m.
(prevailing Eastern time) on April26, 2007 (the ''Bid Deadline") to:
I. The Debtors:
Lazard Freres & Co. LLC
30 Rockefeller Plaza
New York, NY 10020
Facsimile: (212)
Email: Evan.Geller@lazard.com
Attention: Evan Geller
with a copy to:
O'Melveny & Myers LLP
275 Battery Street, Suite 2600
San Francisco, CA 94111
Facsimile: (415) 984-8701
Email: bchristensen@omm. com
Attention: Suzzanne Uhland, Esq.
C Brophy Christensen, Esq.
and
Richards, Layton & Finger, P.A.
One Rodney Square
Wilmington, DE 19899
Facsimile: (302) 651-7701
Email: ramos@rlf.com
Attention: Mark D. Collins, Esq.
Marcos A Ramos, Esq.
IL Greenwich Capital Financial Products, Inc.
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, CT 06830
Facsimile: (20.3) 422M4478
Attention: Jon Stapleton
with a copy to:
12
Rl F 13134266-2
Kirldand & Ellis LLP
777 South Figueroa Street
Los Angeles, CA 90017
Facsimile: (213) 680-8500
Attention: Bennett L. Spiegel, Esq.
Ill. Official Committee ofUnsecured Creditors
[to be determined]
E. No Qualifying Bids:
If no timely, conforming Qualifying Bids are submitted by the Bid
Deadline, the Debtors shall not hold the Auction (as defined below) and
instead shall request at the Sale Hearing that the Court approve the APA
with Greenwich.
F. Auction:
In the event that the Debtors timely receive one or more Qualifying Bids
other than the APA, the Debtors shall conduct an auction (the "Auction")
with respect to the Purchased Assets. The Auction will take place starting
on a date and at a time during the week of April 30, 2007 selected by the
Debtors, which date and time will be identified in the notice identifying
the Qualifying Bidders. The Auction will be conducted at the offices of
O'Melveny & Myers LLP, Times Square Tower, 7 Times Square, New
York, NY 10036, or such other location as designated by the Debtors in a
notice to all Qualified Bidders. The Auction shall be govemed by the
following procedures:
L Only representatives ofthe Debtors, Greenwich, Qualifying
Bidders and the Official Committee of Unsecured Creditors
shall be entitled to be present at the Auction.
II. Only Greenwich and Qualifying Bidders shaH be entitled to
make any subsequent bids at the Auction.
Ill. Greenwich may make a credit bid at the Auction pursuant
to Bankruptcy Code Section 363(k) of amounts owed under
the DIP Loan Agreement and may credit bid the amount of
the Breakup Fee.
IV. Each Qualifying Bidder shall be required to confirm that it
has not engaged in any collusion with respect to the bidding
or the sale.
13
RlF 1-3134266-2
V. Greenwich and the Qualifying Bidders shall appear in
person at the Auction, or through a duly authorized
representative.
VI. Bidding shall commence at the amount of the highest
and/or best Qualifying Bid submitted by the Qualifying
Bidders prior to the Auction.
VIL Qualifying Bidders may then submit successive bids in
increments of at least $1 00,000 higher than the bid at which
the Auction commenced and then continue in minimum
increments of at least $1 00,000 higher than the previous
bid.
VIII. All Qualifying Bidders shall have the right to submit
additional bids and make additional modifications to the
AP A or Modified APA, as applicable, at the Auction.
IX. The Auction will be conducted so that each Qualified
Bidder will be infonned of the tem1s of the previous bid.
The Auction shall continue until there is only one offer that the Debtors
determine, s u ~ j e c t to Court approval, is the highest and best offer from
among Qualifying Bidders and Greenwich submitted at the Auction (the
"Successful Bid"). In making this decision, the Debtors may consider,
without limitation, the amount of the purchase price, the fom1 of the
consideration being offered, the likelihood of the bidder's ability to close a
transaction and the timing thereof; the number, type and nature of any
changes to the AP A requested by each bidder, and the net benefit to the
Debtors' estates. The bidder submitting such Successf1.1l Bid shall become
the "Successful Bidder," and shall have such rights and responsibilities of
the purchaser, as set forth in the applicable Modified APA. For purposes
of determining the Successful Bid, any overbid submitted by Greenwich
shall be deemed to include the full amount ofthe Breakup Fee (as defined
below). Within tluee (3) days after the adjournment of the Auction, the
Successful Bidder shall complete and execute all agreements, contracts,
instmments and other documents evidencing and containing the terms and
conditions upon which the Successful Bid was made. Bids made after the
close of the Auction shall not be considered by the Court.
G. Back-Up Bidder and Return of Deposits
If an Auction is conducted, the party with the next highest or otherwise
Qualifying Bid (including for this purpose Greenwich), as detem1ined by
the Debtors in the exercise of their business judgment, at the Auction shall
14
be required to serve as a back-up bidder (the "Back-up Bidder") and keep
such bid open and irrevocable until the earlier of 5:00pm (prevailing
Eastern time) on the third (3rd) business day following the conclusion of
the Auction or the closing of the sale transaction with the Successful
Bidder. Following the Sale Hearing, if the Successful Bidder fails to
consumate an approved Sale because of a breach or failure to perfom1 on
the part of such Successful Bidder, the Back-up Bidder will be deemed to
be the new Successful Bidder, and the Debtors will be authorized, but not
required, to consummate the Sale with the Back-up Bidder without further
order of the Court.
Except as otherwise provided in the Bidding Procedures, the Good Faith
Deposits shall be retumed to each bidder not selected by the Debtors as
the Successful Bidder or the Back-up Bidder by no later than the fifth (5th)
business day following the conclusion of the Auction. The Good Faith
Deposit of the Back-up Bidder shall be held by the Sellers until the earlier
ofthe eight (8t
11
) business day following the conclusion of the Auction, or
twenty-four (24) homs after the closing ofthe Sale with the Successful
Bidder.
1-L Bidding Protections:
Greenwich shall be entitled to a break-up fee of $1,000,000 (the "Breakup
Fee") to be paid by the Debtors in the event they consummate a sale of all
or a material portion of the Purchased Assets with a third party other than
Greenwich. The Breakup Fee shall be paid in cash as an administrative
expense with priolity over any and all administrative expenses of the kind
specified in Sections 503(b) or 507(b) of the Bankruptcy Code and shall
be payable pursuant to the terms of the AP A.
THE SALE HEARING AND NOTICE THEREOF
24. The Debtors request that the Court schedule a Sale Hearing on or about
May 7, 2007 to consider approval of the Successful Bid (or the AP A, if no Qualifying Bid other
than that of Greenwich is received or accepted) and the Sale. At the Sale Hearing, the Debtor
will seek the entry of the Sale Order authorizing and approving the sale of the Purchased Asset to
Greenwich or other Qualified Bidder, as applicable, pursuant to the terms and conditions set
forth in the AP A or Modified AP A, as the case may be.
15
Rlf 1-3134266-2
25. Bankruptcy Rule 6004 provides that ''[n]otice of a proposed use, sale, or
lease of property, other than case collateral, not in the ordinary course of business shall be given
pursuant to Rule 2002(a)(2) (c)(l), (i), and (k) and, if in accordance with 363(b)(2)
of the code." Fed. R. Bankr. P. 6004(a). Essentially, Bankruptcy Rule 2002 requires the Debtors
to give all creditors and certain other parties ''at least 20 days' notice by mail" ofthe Sale.
Bankruptcy Rule 6004 also provides that to the proposed Sale "shall be filed and
served not less than five days before the proposed action or within the time fixed by the court."
Fed. R. Bania. P. 6004(b).
26. . The timing of the auction and sale process and the proposed date for the
Sale Hearing requested by the Debtor is well within the notice procedures mandated by the
Bankruptcy Rules as they will be providing at least twenty days notice required by the
Bankruptcy Rules .. Moreover, scheduling the Sale Heating for on or about May 7, 2007 is
necessary as the failure to close the Sale by May 18, 2007, may be an event of default under the
APA It is also reasonable given the marketing performed by the Debtors and Lazard prior to
commencing these cases. These marketing eff01ts were diligently pursued by them and, while
this p10cess was underway, the Debtors continued to experience significant financial and
liquidity difficulties. Under the circumstances facing the Debtors, and the significant and
carefully targeted marketing prior to the Petition Date, the Debtors believe that the
reasonableness of the proposed auction and sale process is evident Finally, and perhaps most
significantly, it is necessary to obtain the maximum recovery for creditors.
27. Accordingly, the Debtor requests that the Sale Heming to approve the sale
ofthe Purchased Assets and to consider any properly submitted objections be held on May 7,
2007. The Debtors intend to provide notice ofthe Sale Hearing by service and publication of the
16
RLF 1-3134266-2
notice attached hereto as Exhibit C The Debtors also intend to publish notice of the Sale
Hearing in the National Edition of The Wall Street Journal, prior to the Sale Healing.
28" The Debtor further requests that, pursuant to Banluuptcy Rule 9014,
objections, if any, to the Sale: (a) be in writing; (b) comply with the Banlauptcy Rules and the
Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Comt for the
District of Delaware; (c) be filed with the Clerk of the Bankruptcy Comi for the District of
Delaware, Third Floor, 824 Market Street, Wilmington, Delaware 19801, at least five (5) days
prior to the Sale Hearing and (d) with a copy served on and received by: (i) counsel for the
Debtors, O'Melveny & Myers LLP, 275 Battery Street, Suite 2600, San Francisco, CA 94111,
Attention: Suzzanne Uhland, Esq. and O'Melveny & Myers LLP, 400 South Hope Street, Los
Angeles, CA 90071, Attention: Ben I-L Logan, Esq.; (ii) counsel for the Debtors, Richards,
Layton & Finger, P.A., One Rodney Square, P.O. Box 551 Wilmington, Delaware 19899,
Atiention Mark D. Collins, Esq.; (iii) Greenwich Capital Financial Products, Inc., 600
Steamboat Road, Greenwich, CT 06830, Atiention: Jon Stapleton; (iv) counsel to Greenwich,
Kirkland & Ellis LLP, 777 South Figueroa Street, Los Angeles, CA 90017, Attention: Beru1ett
L. Spiegel, Esq and Shirley Cho, Esq.; (v) counsel to Greenwich, Pachulski Stang Ziehl Young
Jones & Weintraub, 919 North Market Street, 17th Floor, P.O. Box 8705, Wilmington, DE
19899, Attention: Laura Davis Jones, Esq.; (vi) counsel to the Official Committee ofUnsecured
Creditors [to be detem1ined] and (vii) the Office of the United States Trustee, 844 King Street,
Suite 2207, Lockbox 3 5, Wilmington, Delaware 19801.
APPROVAL OF BREAKUP FEE
29. Pursuant to the APA, Greenwich shall be entitled to a Breakup Fee of
$1 ,000,000 in the event the Debtors consummate a sale of all or a material portion of the
Purchased Assets to a third party other than Greenwich, which is to be paid in cash as an
17
RLFI-3134266-2
administrative expense with priority over any and all administrative expenses of the kind
specified in Sections 503(b) or 507(b) of the Bankruptcy Code.
30. Bidding incentives, such as the Breakup Fee, encourage a potential
purchaser to invest the requisite time, money and effmt to negotiate with a debtor and perform
the necessary due diligence attendant to the acquisition of a debtor's assets, despite the inherent
risks and uncertainties of the chapter 11 process. "Agreements to provide breakup fees or
reimbursement of fees and expenses are meant to compensate the potential acquirer who serves
as a catalyst or 'stalking horse' which attracts more favorable offers'' In re S.N.A. Nut Co., 186
B.R. 98, 101 (Bankr. N.D. Ill. 1995); see also In re 995 Fifth Ave. Associates L.P., 96 B.R 24,
28 (Bantu. S.D.N.Y. 1992) (bidding incentives may "be legitimately necessary to convince a
white knight to enter the bidding by providing some form of compensation for the risks it is
undertaking'') (citation omitted).
31.. A proposed bidding incentive, such as the Breakup Fee, should be
approved when it is in the best interests of the estate. S.N.A. Nut Co., 186 B.R at 104; see also
In re America West Airlines, Inc., 166 B.R. 908 (Bankr. D. Ariz. 1 994); In re Hupp Indus . Inc.,
140 B.R 191 (BankL N.D. Ohio 1992). Typically, this requires that the bidding incentive
provide some benefit to the debtor's estate. Calpine Comoration v. O'Brien Environmental
Energy. Inc. On re O'Bden Environmental Energy, Inc.), 181 FJd 527, 533 (3rd Cir. 1999)
(holding even though bidding incentives are measured against a business judgment standard in
non-banlcruptcy transactions the administrative expense provisions of Banlcruptcy Code Section
50.3(b) govern in the banlauptcy context).
32. Here, the only bid protection is a modest Breakup Fee that is clearly
market and provides a benefit to the estate. The Breakup Fee is a topping fee that constitutes 2%
of the overall purchase price offered by Greenwich for the Purchased Assets and will only be
18
RlFI-3134266-2
paid if the Purchased Assets are sold to a higher bidder - meaning that the Debtors, following an
auction process, would have to determine that such other bid is higher and better than
Greenwich's offer for the Purchased Assets, including factoring into the competing bid the cost
ofthe Breakup Fee. If this occurs, the Debtors will effectively net at least the amount offered by
Greenwich, as payment of the Breakup Fee will come exclusively from any overbid and will not
reduce the amount paid to the estates. There are no other bid protections such as expense
reimbursement provisions, and the Debtors have the ability to consider bids for less than all of
the Purchased Assets if the Debtors are able to combine a collection of other bids into a bid that
tops Greenwich's highest offer.
3 3. "The usual rule is that if break-up fees encourage bidding, they are
enforceable; if they stifle bidding, they are not enforceable.'' In re Integrated Resources. Inc.,
147 B.R. 650, 660 (S.D.N.Y. 1992). Approving the Breakup Fee will commit Greenwich to
serve as the stalking horse bidder under the Agreement with a bid that starts any additional
bidding or auction for the Purchased Assets at a fair and reasonable purchase price, all to the
benefit of the estates. The Debtors believe that the Breakup Fee will encourage bidding by
serving "any of three possible useful functions: ( 1) to attract or retain a potentially successful
bid; (2) to establish a bid standard or minimum for other bidders to follow; or (3) to attract
additional bidders." Id. at 662. In other words, if the Purchased Assets are sold to a competing
bidder, it will- in all likelihood- be because of Greenwich's crucial role as a stalking horse.
34. In addition, "[a] break-up fee should constitute a fair and reasonable
percentage of the proposed purchase price, and should be reasonably related to the tisk, effort,
and expenses of the prospective purchaser. When reasonable in relation to the bidder's efforts
and to the magnitude of the transaction, breakup fees are generally permissible." Id. As noted
above, the Breakup Fee of$1,000,000 constitutes 2% ofthe overall purchase price offered by
19
RL F 13134266-2
Greenwich of$50,000,000. This is well within the range offees typically paid in other
significant sales transactions that have been consummated in a bankruptcy setting. S e e ~
Consumer News & Business Channel Partnership v. Financial News Network, Inc. (In re
Financial News Network Inc.), 980 F.2d 165, 167 (2d Cit. 1992) (noting that the transaction at
issue provided for a $8.2 million break-up fee on a $149.3 million transaction); Integrated
Resources, 147 B.R. at 662 (approving a $7.5 million break-up fee on a $565 million
transaction); In re Montgomery Ward Holding Corp .. eta!., Case No. 97-1409 (PJW) (Bankr. D.
Del., June 15, 1998) (court approved break-up fee of 2.75%, or $3,000,000 in cmmection with
$110,000,000 sale of real estate).
35. For these reasons, and given the benefits provided by the APA, the
Debtors urge the Court to approve the Breakup Fee.
APPROVAL OF AUCTION PROCESS AND SALE OF ASSETS
36. Bankruptcy Code Section 363(b)(l) provides that a debtor, "after notice
and a hearing, may use, sell or lease, other than in the ordinary course of business, property of
the estate." 11 U.S"C. 363(b)(l). Section 1 05(a) of the Bankruptcy Code provides in pertinent
part that "[t]he Court may issue any order, process, or judgment that is necessary and appropriate
to carry out the provisions ofthis title.'' 11 U.S.C, 105(a).
37. A sale of a debtor's assets should be authorized pursuant to Banlcruptcy
Code Section 363 where the transaction represents an exercise of the debtor's sound business
judgment See, e.g., In re Martin (Myers v. Martin), 91 F.3d 389, 395 (3rd CiL 1996); In re
Montgomery Ward Holding Corp., 242 B.R. 147, 153 (D. DeL 1999); In re Delaware & Hudson
Rv. Co., 124 B.R. 169, 176 (D. DeL 1991); In re Trans World Airlines. Inc., No. 01M0056, 2001
Bankr. LEXIS 980, at *29 (Bankr. D. Del. Apr. 2, 2001).
20
Rl f 1-3134266-2
38, Courts typically consider the following factors in determining whether a
proposed sale satisfies this standard: (a) whether a sound business justification exists for the sale,
(b) whether adequate and reasonable notice of the sale was given to interested parties, (c)
whether the sale will produce a fair and reasonable price for the prope1iy and (d) whether the
parties have acted in good faith. See Delaware & Hudson Ry., 124 B.R. at 176; In re Phoenix
Steel Corp., 82 B.R 334, 335-36 (D.. DeL 1987); In reUnited Healthcare Svs .. Inc., No. 97-
21785, 1997 U.S. Dist LEXIS 5090, at* 13-14 and n.2 (D. N.J. Mar. 26, 1997).
39. A sound business purpose for the sale of a debtor's assets outside the
ordinary course of business may be found where such a sale is necessary to preserve the value of
assets for the estate, its creditors or interest holders. See ~ In re Abbotts Dairies of
Pennsylvania, 788 F .2d 143 (3rd Cir. 1986); In re Lionel Corp., 722 F.2d 1063 (2nd Cir. 1983}.
In fact, the paramount goal in any proposed sale of property of the estate is to maximize the
proceeds received by the estate. See In re Food Barn Stores. Inc., 107 FJd 558, 564-65 (8th Cir.
1997) (in bankruptcy sales, "a primary objective of the Code [is] to enhance the value of the
estate at hand"); Integrated Resources, 14 7 B.R. at 659 ("It is a well-established principle of
bankruptcy law that the ... [debtors'] duty with respect to such sales is to obtain the highest price
or greatest overall benefit possible for the estate.") (quoting In re Atlanta Packaging Products,
Inc., 99 B,R. 124, 1.30 (Bankr. N.D. Ga. 1988)).
40. Courts uniformly recognize that procedures intended to enhance
competitive bidding are consistent with the goal of maximizing the value received by the estate
and therefore are appropriate in the context of bankruptcy sales. See In re Montgomery Ward
Holding Com., Case No. 97-1409 (PJW) (Bankr. D. Del. Aug. 6, 1997); In re Fruehauf Trailer
Corp,, Case No. 96-LS63 (PJW) (Bankr. D. Del. Feb .. 26,1997); Integrated Resources, 147 B.R.
at 659 (such procedures "encourage bidding and to maximize the value of the debtor's assets");
21
RlFI-3134266-2
In re Financial News Network, Inc., 126 B.R. 152, 156 (Bank!. S.D.N.Y. 1991), ("court-imposed
rules for the disposition of assets .. . [should] pro vi de an adequate basis for comparison of offers,
and [should] provide for a fair and efficient resolution of bankrupt estates").
41. The Debtors submit that the proposed Sale with Greenwich or other
Successful Bidder satisfies the "sound business reason test'' The Debtors submit that a prompt
sale of the Purchased Assets presents the best opportunity to maximize the value of the
Purchased Assets for the estates. The Debtors believe that, absent a prompt sale, the value of the
Purchased Assets will substantially decline. In addition, the Debtors believe that the Bidding
Procedures and Sale Notice are the best method by which it can obtain the best price for the
Purchased Assets and provide interested persons with accurate and reasonable notice ofthe Sale.
The Bidding Procedures will allow the Debtors to conduct the Auction in a controlled, fair and
open fashion that will encourage pru1icipation by financially capable bidders who demonstrate
the ability to close a transaction, thereby increasing the likelihood that the Debtors will receive
the best possible consideration for the Purchased Assets by helping ensure a competitive and fair
bidding process. They also allow the Debtors to undertake the Auction process in as expeditious
a manner as possible, which the Debtors believe is essential to maintaining and maximizing the
value oftheir estates. Finally, the Debtors submit that the price offered by Greenwich for the
Puxchased Assets is fair and reasonable. The Debtors and Lazard thoroughly marketed the
Purchased Assets prior to the Petition Date, and the offer made by Greenwich was determined by
the Debtors in their business judgment to be the best available offer for the Purchased Assets.
SALE OF ASSETS FREE AND CLEAR OF LIENS AND INTERESTS
42. The Debtors ft1rther submit that it is appropriate to sell the Purchased
Assets free and clear of claims, interests, liens and encumbrances pursuant to Banlauptcy Code
22
Rlf 1-3134266-2
Section .363(f), with any such claims, interests, liens and encumbrances attaching to the net sale
proceeds ofthe Purchased Assets to the extent applicable.
43. Bankruptcy Code Section 36.3(f) authorizes a debtor to sell assets free and
clear of liens, claims, interests and encumbrances if (i) applicable nonbankruptcy law permits
sale of such property free and clear of such interests, (ii) such entity consents, (iii) such interest
is a lien and the price at which such property is to be sold is greater than the value of all liens on
such property, (iv) such interest is in bona fide dispute (v) or such entity could be compelled, in a
legal or equitable proceeding, to accept a money satisfaction of such interest. 11 U.S.C. 363(f).
44. Because Bankruptcy Code section 363(f) is drafted in the
satisfaction of any one of its five requirements will suffice to permit the sale of the Purchased
Assets "free and clear" of liens and interests. In re Dundee Equity Cow., 1992 Bania. LEXIS
436, at *12 (Bankr. S.D.N.Y. March 6, 1992) ("[s]ection 363(f) is in the such that
the sale free of the interest concerned may occur if any one of the conditions of 363(f) have
been met."); In re Bygaph, Inc., 56 B.R. 596, 606 n.8 (BanlG. S.D.N.Y. 1986) (same); In re
Wolverine Radio Co., 930 F.2d 1132, 1147 n.24 (6th Cir. 1991) (stating that Banlauptcy Code
section 363(f) is written in the disjunctive; holding that the comt may approve the sale "free and
clear" provided at least one of the subsections of Bankntptcy Code section 363(f) is met).
45. The Debtors believe that one or more of the tests of Banhuptcy Code
Section 363(f) are easily satisfied with respect to any Sale involving the Purchased Assets. In
particular, the Debtors believe that any lienl1older will be adequately protected by having their
liens, if any, attach to the cash proceeds ultimately attributable to the Purchased Assets in which
such creditor alleges an interest, in the same order of priority, with the same validity, force and
effect that such creditor had prior to the Sale, subject to any claims and defenses the Debt01s and
their estates may possess with respect thereto.
23
Rl F 1-3134266-2
46. Although Bankruptcy Code Section 363(f) provides for the sale of assets
"free and clear of any interests," the term "any interest" is not defined anywhere in the
Bankruptcy Code. Folger Adam Security v. DeMatteis/MacGregor N, 209 F.3d 252,257 (3rd
Cir. 2000). In the case ofln re Trans World Airlines. Inc., .322 F.3d 283, 2 8 8 ~ 8 9 (3rd Cir. 2003),
the Third Circuit specifically addressed the scope ofthe tem1 "any interest." The Third Circuit
observed that while some courts have "narrowly interpreted that phrase to mean only in rem
interests in property," the trend in modern cases is towards "a more expansive reading of
'interests in property' which 'encompasses other obligations that may flow from ownership of
the property."' ld. at 289. As determined by the Fourth Circuit in In re Leckie Smokeless Coal
Co., 99 F. 3d 573, 581-582 (4th Cir. 1996), a case cited approvingly and extensively by the Third
Circuit in Folger, supra, the scope of Bankruptcy Code Section 363(f) is not limited to in rem
interests. Thus, the Third Circuit in Folger stated that Leckie held that the debtors "could sell
their assets under .36.3(f) free and clear of successor liability that otherwise would have arisen
under federal statute" Folger, 209 FJd at 258.
47. Courts have consistently held that a buyer of a debtor's assets under
Bankruptcy Code Section .363 takes the assets free from successor liability resulting from pre-
existing claims. See The Ninth Avenue Remedial Group v. Allis-Chalmers Corp., 195 B.R. 716,
732 (Bankr. N.D. Ind. 1996) (stating that a bankruptcy court has the power to sell assets free and
clear of any interest that could be brought against the bankruptcy estate during the bankruptcy);
MacArthur Company v. Johns-Manville Corp. (ln re Jolms-Manville Corp.), 837 F.2d 89, 9 3 ~ 9 4
(2d Cir. 198 8) (channeling of claims to proceeds consistent with intent of sale free and clear
under section 363(f) of the BanJauptcy Code); In reNew England Fish Co., 19 B.R. 323, 329
(BankL W.D. Wash 1982) (transfer of property in free and clear sale included free and clear of
Title VII employment discrimination and civil rights claims of debtor's employees); In re
24
Hoffman, 53 B.R. 874, 876 (Banlu. D.R.L 1985) (transfer of liquor license free and clear of any
interest pem1issible even though the estate had unpaid taxes); American Living Systems v.
Bonapfel (In re All Am. Of Ashburn. Inc.), 56 B.R. 186, 190 (Bankr. N.D. Ga. 1986) (product
liability claims precluded on successor doctrine in a sale of assets free and clear); WBO
Partnership v. Virginia Dept. of Medical Assistance Services (In re WBQ Partnership), 189 RR.
97, 104-05 (Bankr. 22 E.D. Va. 1995) (Commonwealth of Virginia's right to recapture
depreciation is an "interest" as used in section 363(f)).
5
48. The purpose of an order purporting to authorize the transfer of assets free
and cleat of all "interests" would be frustrated if claimants could thereafter use the transfer as a
basis to assert claims against the purchaser arising from the Debtors' pre-sale conduct. Under
Bankruptcy Code Section 36.3(f), Greenwich or a Successful Bidder, as the case may be, is
entitled to know that the Purchased Assets do not have attached latent claims that will be asserted
against them after the Sale is completed. Accordingly, and consistent with the above-cited case
law, the Sale Order should state that the purchaser will not be liable as a successor under any
theory of successor liability, for claims that encumber or relate to the Purchased Assets.
FINDING OF GOOD FAITH
49. Bankruptcy Code Section 363(m) provides:
The reversal or modification on appeal of an authodzation under
subsection (b) or {c) of this section of a sale or lease of property
does not affect the validity of a sale or lease under such
authorization to an entity that purchased or leased such property in
good faith, whether or not such entity knew of the pendency ofthe
appeal, unless such authorization and such sale or lease were
stayed pending appeal.
5
Even courts concluding that Bankruptcy Code section 363(f) does not empower them to convey assets
free and clear of claims nevertheless find that Bankruptcy Code section 1 OS( a} provides such authority. S e e ~
White Motor Credit Corp .. 75 B. R. 944, 948 (Bankr. N.D Ohio 1987) (stating that the absence of specific authority
to sell assets free and clear of claims poses no impediment to such a sale, as such authority is implicit in the court's
equitable powers when necessary to cany out the provisions of title II).
25
RL F 1-3134266-2
11 U.S.C. .363(m). While the Bankruptcy Code does not define "good faith," the Seventh
Circuit in In re Andy Frain Services, Inc., 798 F. 2d 1113 (7th Cir. 1986), held that:
The requirement that a purchaser act in good faith ... speaks to the
integrity of his conduct in the course of the sale proceedings.
Typically, the misconduct that would destroy a purchaser's good
faith status at a judicial sale involves fraud, collusion between the
purchaser and other bidders or the trustee, or an attempt to take
grossly unfair advantage of other bidders.
798 F 2d at 1125 (emphasis omitted) (quoting In re Rock Industries Machinery Com., 572 F .2d
1195, 1198 (7th Cir. 1978).
50. The APA was intensely negotiated at arm's-length with all parties
involved acting in good faith. The Debtors therefore request that the Court make a finding that
Greenwich, if it is not overbid at the Auction, has acquired the Purchased Assets in good faith
within the meaning of Bankruptcy Code Section 363(m). In the event there is a Successful
Bidder other than Greenwich, the Debtors intend to present evidence to show that the Successful
Bidder is entitled to the same finding under Banlauptcy Code Section 363(m) ..
FINALITY OF ORDER
51. Banluuptcy Rule 6004(h) provides that an "order authorizing the use, sale,
or lease of property ... is stayed until the expiration of 10 days after entry ofthe order, unless
the court orders otherwise." The purpose of Bankruptcy Rule 6004(h) is to provide suf-ficient
time for an party to appeal before an order can be implemented. See Advisory
Committee Notes to Fed. R. Bankr. P. 6004(h). Although Bankruptcy Rule 6004(h) and the
Advisory Committee Notes are silent as to when a court should "order otherwise" and eliminate
or reduce the 1 0-day stay period, the leading treatise on bankruptcy suggests that the I 0-day stay
period should be eliminated to allow a sale or other transaction to close immediately "where
there has been no objection to the procedure." I 0 Collier on Bankruptcy, 6004.10 (15th rev.
26
RLF 1-3134266-2
ed. 2006). Further. it suggests that if an objection is filed and overruled, and the objecting party
infonns the court of its intent to appeal, the stay may be reduced to the an10W1t of time actually
necessary to file such appeaL ld.
52. The Debtors hereby request that any order approving the sale of the
Purchased Assets be effective immediately upon entry by providing that the 1 stay under
Bankruptcy Rule 6004(g) is waived or, in the alternative, if an objection to the sale ofthe
Purchased Assets is filed, reduce the stay period to the minimum amount oftime needed by the
party to file its appeaL
NOTICE
53. No trustee, examiner or creditors' committee has been appointed in these
chapter 11 cases. Notice of this Motion has been provided to: (1) the Office of the United States
T mstee for the District of Delaware; (2) counsel to Greenwich; (3) the 50 largest unsecured
creditors for the Debtors on a consolidated basis as identified in the Debtors' chapter 11
petitions; and (4) all parties who have timely filed requests for notice under Bankruptcy Rule
2002. In light of the nature of the relief requested herein, the Debtors submit that no other or
fl.uther relief is required.
27
RlFI-3134266-2
WHEREFORE, the Debtors respectfully request that the Court (i) grant tllis
Motion; (ii) enter an order substantially in the form as Exhibit D hereto, approving the Sale
Procedures and scheduling a hearing to consider and approve the Sale Transaction; (iii) after
final hearing, approve the Sale Order in a form to be submitted to the Court; and (iv) grant such
other and futther relief as is just and proper.
Dated: April 2, 2007
Wilmington, Delaware
RLFI-3134266-2
Respectfully submitted,
~ ; _ _
Michael J. Merchant (No. 3854)
Marcos A Ramos (No. 4450)
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
P.O. Box 551
Wilmington, Delaware 19899
(302) 651-7700
-and-
Suzzrume S. Uhland
Ben H. Logan
Brian Metcalf
O'MELVENY & MYERS LLP
275 Battery Street
San Francisco, California 94111
(415) 984-8700
PROPOSED ATTORNEYS FOR DEBTORS
AND DEBTORS IN POSSESSION
28
In re:
Chapter 11
INC., a Delaware corporation, et a l . , ~
Case No. 07-10416 (KJC)
Debtors.
Hearing Date: June 27, 2007 at 10:00 a.m.
(Requested)
Objection Deadline: June 20, 2007 at 4:00 p.m.
(Requested)
MOTION OF DEBTORS AND DEBTORS IN POSSESSION FOR AN
ORDER (A) APPROVING SUPPLEMENT NO. 1 TO THE ASSET
PURCHASE AGREEMENT BY AND AMONG NEW CENTURY FINANCIAL
CORPORATION AND CERTAIN OF ITS SUBSIDIARIES AND ELLINGTON
MANAGEMENT GROUP, L.L.C. ON BEHALF OF ITS CLIENT FUNDS,
(B) AUTHORIZING SALE OF CERTAIN LOANS TO PURCHASER OR ITS
DESIGNEE(S), FREE AND CLEAR OF ALL LIENS, CLAIMS,
ENCUMBRANCES AND INTERESTS AND (C) GRANTING RELATED RELIEF
a debtor and debtor-in-possession (collectively, the "Debtors"), by and through their undersigned
counsel, hereby submit this motion (the "Motion") pursuant to sections 105(a) and 363 of title 11
of the United States Code, 11 U.S.C. 101 -1532 (the "Bankruptcy Code"), and Rules 2002,
6004 and 9014 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), for the
entry of (i) an order {a) approving Supplement No. 1 to the Asset Purchase Agreement (the
1
The Debtors are the following entities: New Century Financial Corporation (1k/a New Century REIT,
Inc.), a Maryland corporation; New Century TRS Holdings, Inc. (flk/a New Century Financial Corporation), a
Delaware corporation; New Century Mortgage Corporation (flk/a JBE Mortgage) (d/b/a NCMC Mortgage
Anyloan.com), a California corporation; New Century Credit Corporation (f7kla Worth Funding Incorporated), a
California corporation; NC Asset Holding, L.P (f7kla NC Residual II Corporation); a Delaware limited partnership;
NC Residual III Corporation, a Delaware corporation; NC Residual IV Corporation, a Delaware corporation; New
Century R.E.O. Corp, a California corporation; New Century RE.O II Corp., a Califomia corporation; New
Century REO. III Corp., a Califomia corporation; New Century Mortgage Ventures, LLC (d/b/a Summit Resort
Midwest Home Mortgage, TRATS Financial Services, Elite Financial Services, Buyers Advantage Mortgage), a
Delaware limited liability company; NC Deltex, LLC, a Delaware limited liability company; NCoral, L.P., a
LA3:1133695 7
RLFI31644231
"Supplement") by and among New Century Financial Corporation and certain of its subsidiaries
and Ellington Management Group, L.L.C on behalf of its Client Funds ("Ellington" or the
"Purchaser''), (b) authorizing the sale of certain mortgage loans and assets to the Purchaser or its
designee(s), free and clear of all liens, claims encumbrances and interests (the "Sale") and (c)
granting related relief. In support ofthis Motion, the Debtors respectfully state as follows:
JURISDICTION
1. This Court has jurisdiction over the s u ~ j e c t matter of this Motion pursuant
to 28 U.S.C. 157 and 1334. Venue is proper in this district pursuant to 28 U.S.C. 1409(a).
This is a core proceeding under 28 U.S.C. 157(b)(2).
Bankruptcy Code Sections lOS( a) and 363 and Bankruptcy Rules 2002, 6004 and 9014.
BACKGROUND
.l New Century Financial Corporation, a Maryland corporation (''NCF") and
subsidiary, New Century TRS Holdings, Inc., a Delaware corporation, NCF originates,
purchases, sells, and services mortgage loans nationwide. NCF historically focused on
"subprime" lending, or lending to individuals whose borrowing needs were generally not
fulfilled by traditional financial institutions because they did not satisfy the credit,
documentation or other underwriting standards prescribed by conventional mortgage lenders and
loan buyers. In September 2005, NCF through some of its subsidiaries also began offering
conventional mortgage loans, including: "Alt-A" mortgage loans, loans insured by the Federal
Housing Administration ("FHA"), and loans guaranteed by the Veterans Administration ("VA").
lA3:11336957
RU:l-3164423-1
2
During the fiscal year ending December 31, 2006, the Debtors originated or purchased
approximately $60 billion of mortgage loans, most of which were sold in the secondary market.
Since their inception, the Debtors have issued or enabled over billion in loans. These loans
have helped millions ofhomebuyers and homeowners across the nation access credit and realize
the benefits of home ownership, including many who might not otherwise have been able to do
so.
4. On April2, 2007 (the "Petition pate"), the Debtors filed the instant
petitions for relief and the Debtors' bankruptcy cases are being jointly administered pursuant to
an order of the Court. The Debtors are operating their business and managing their affairs as
5. On the Petition Date, the Debtors filed a motion to approve bidding
procedures and the sale of a pool of approximately 2,200 unencumbered mortgage loans with an
unpaid balance of $173 million and mortgage-backed residual interests in securitization trusts
(the "LNF A") to Greenwich Capital Financial Products, Inc. ("Greenwich") for $50 million.
Prior to the hearing on the sale procedures motion, the Debtors, their investment banker Lazard
Freres & Co. LLC ("Lazard"), the Official Committee of General Unsecured Creditors (the
"Creditors' Committee") and Greenwich continued to discuss the financial terms and other
aspects ofthe proposed transaction. Among other things, the parties determined that the face
value of the LNF A was $170 million instead of $173 million and therefore, adjusted the purchase
price to $47.25 million. Greenwich further agreed to lower its break up fee to $945,000 and cap
its auction related expenses. Pursuant to an order entered by the Court on 2007, the
Debtors held an auction of the LNFA in New York on May 2, 2007 (the "Auction"). After
extensive marketing ofthe LNFA and aggressive pursuit ofbids and prospective purchasers, five
qualified bidders emerged and attended the Auction. Ellington was the ultimate winner at the
LA3: 1133695 7
RLFI-3164423-1
3
Auction, bidding $58 million for the LNF A. After a hearing arguments and considering the
evidenced proffered in support ofthe sale, on May 7, 2007, the Court entered an order approving
the sale of the LNF A to Ellington (the "First LNF A Sale") pursuant to the Asset Purchase
Agreement by and among NCF and certain of its subsidiaries and Ellington dated May 16, 2007
(the "Original APA").
6. The Debtors now seek to supplement the Original AP A to sell an
additional approximately 180 unencumbered loans with an unpaid balance of approximately $17
million and 6 real properties obtained in foreclosures of such mortgage loans (the "LNF A
Mortgage Assets") as set forth in the Supplement which incorporates the terms of the Original
AP A. The Debtors were not able to include the LNF A Mortgage Assets in the First LNF A Sale
because the documents and files related to the LNF A Mortgage Assets were not sufficient or
complete at the time. After discussions with the Creditors' Committee, the Debtors concluded
that it was in the best interest of estates to try to sell the additional LNF A Mortgage Assets to
Ellington by supplementing the Original AP A for the same price on the same terms and
conditions reached after extensive marketing and negotiations at the Auction.
7. By order entered on May 23, 2007, the Court authorized the sale of the
Debtors' servicing business (the "Carrington Sale") to Carrington Mortgage Services, LLC, an
affiliate of Carrington Capital Management, LLC ( .. Carrington"). At the closing of the
Carrington Sale, Carrington will transfer the sale proceeds to the Debtors and the Debtors will
enter into an agreement with Carrington to transition the servicing business. The Debtors will
continue operating the servicing business in the ordinary course while it is transitioned to
Carrington. The Debtors estimate that the transition period could take up to six months but may
be continued upon request from Carrington from time to time. The Debtors are in the process of
liquidating additional technology and other assets of the estates.
LA3:ll33695 7
RLF l-3164423-1
4
RELIEF REQUESTED
8, The Debtors hereby request, pursuant to Bankruptcy Code Sections 105
and 363 and Bankruptcy Rule 6004 that the Court enter an order approving the Sale ofthe LNF A
Mortgage Assets to the Purchaser as set forth in the Supplement and granting related relief.
THE SUPPLEMENT AND THE LNFA MORTGAGE ASSETS
9. The Debtors propose to sell the LNF A Mortgage Assets to Ellington (or
such other third party as Ellington may designate) free and clear of all liens, claims and
encumbrances for an aggregate purchase price of $4,446,901.48.
2
This purchase price will be
paid by satisfying any obligations outstanding under the DIP Financing at the time of the closing,
up to the amount of the purchase price, with the remaining balance (if any) to be paid in cash
(subject to a holdback for certain contingent costs and a potential proportionate deduction in the
event the unpaid principal balance ofthe LNF A Mortgage Assets as of closing is lower than the
current unpaid principal balance V
10. The Supplement contains certain minimal representations and warranties
and provides for a $309,625.00 45-day holdback, subject to terms substantially similar to the
holdback provisions of the Original AP A, to cover such matters as (i) the Debtors releasing the
borrower on a loan that was sold to Ellington, (ii) material changes in the foreclosure laws of the
state in which the property is located and (iii) the Debtors' failure to transfer servicing of these
loans to a servicer selected by the buyer. This holdback is subject to proportionate reduction if
the aggregate purchase price is reduced as described above,
2
The proposed sale of the LNF A Mortgage Assets is contingent upon approval by the Board of Directors
and this Court
3
Tl1e description of the Supplement provided herein is an overview of certain of the significant terms of the
Sale. The Court and interested parties should refer to the Supplement, substantially in the form attached hereto as
Exhibit A, for complete and detailed terms thereof To the extent the description of the sale described in this Motion
is inconsistent in any way from t11e terms of the Supplement, the terms of the Supplement shall prevail.
lA3:1133695 7
RlFI-3164423-1
5
11. The LNF A Mortgage Assets generally consists of mortgage loans and the
real property securing mortgage loans as set forth on Schedule 1 ofthe Supplement. Prior to the
Petition Date, the Debtors originated mortgage loans and then generally sold the loans to
securitization trusts and whole loan buyers. The pool of LNF A Mortgage Assets include some
loans that the Debtors had not yet disposed of prior to the Petition Date. The pool may also
consist of some loans sold to securitization trusts or to whole loan buyers but repurchased by the
Debtors pursuant to the terms of these agreements when the borrowers on these loans defaulted
soon after the disposition occurred.
12. The Debtors request Court approval to sell the LNF A Mortgage Assets to
Ellington free and clear of any liens, claims or interests with any valid liens on the assets sold
attaching to the sale proceeds. Ellington has offered to pay $4,446,901.48 for the LNFA
Mortgage Assets on the terms and conditions set forth on the Supplement, substantially in the
fom1 attached hereto as Exhibit "A". The Debtors believe that the proposed Sale is the highest
and best offer obtainable for the LNF A Mortgage Assets.
APPROVAL OF SALE OF ASSETS
13. Bankruptcy Code Section .363(b)(l) provides that a debtor, "after notice
the estate." II U.S. C. 363(b)(l). Bankruptcy Rule 6004 provides that "[n]otice of a proposed
use, sale, or lease of property, other than cash collateral, not in the ordinary course ofbusiness
shall be given pursuant to Rule 2002(a)(2), (c)(l), (i) and (k) and, if applicable, in accordance
with 363(b)(2) of the code." Fed. R. Bankr. P. 6004(a). Essentially, Bankruptcy Rule 2002
requires the Debtors to give all creditors and certain other parties "at least 20 days' notice by
mail" ofthe Sale "unless the court for cause shown shortens the time or directs another method
of giving notice''. Section 1 05(a) of the Bankruptcy Code provides in pertinent part that "[t]he
lA3: 1133695 7
RLFI-3164423-1
6
Court may issue any order, process, or judgment that is necessary and appropriate to carry out
the provisions ofthis title!' 11 U.S.C. 105(a).
14. A sale of a debtor's assets should be authorized pursuant to Bankruptcy
Code Section .363 where the transaction represents an exercise of the debtor's sound business
judgment. See, e.g., In re Martin (Myers v. Martin), 91 F..3d 389, 395 (3rd Cir. 1996); In re
Montgomery Ward Holding Corp., 242 B.R. 147, 153 (D. Del. 1999); In re Delaware & Hudson
Rv. Co., 124 B.R. 169, 176 (D. Del. 1991); In re Trans World Airlines. Inc., No. 0 1 ~ 0 0 5 6 , 2001
Bankr. LEXIS 980, at *29 (Bankr. D. DeL Apr. 2, 2001 ).
15. Courts typically consider the following factors in determining whether a
(b) whether adequate and reasonable notice ofthe sale was given to interested parties,
(c) whether the sale will produce a fair and reasonable price for the property and (d) whether the
Steel Corp., 82 B.R. 334, 335-36 (D. DeL 1987); In reUnited Healthcare Svs .. Inc., No. 97-
assets for the estate, its creditors or interest holders. See u In re Abbotts Dairies of
Pennsylvania, 788 F.2d 143 (3rd Cir. 1986); In re Lionel Corp., 722 F.2d 1063 (2nd Cir. 198.3).
proceeds received by the estate. See In re Food Barn Stores. Inc., 107 F . .3d 558, 564-65 (8th Cir.
1997) (in bankruptcy sales, "a primary objective of the Code [is] to enhance the value of the
estate at hand"); Integrated Resources, 147 B.R. at 659 ("It is a well-established principle of
bankruptcy law that the ... [debtors'] duty with respect to such sales is to obtain the highest
lA3:1133695 7
RlF1-31M423-1
7
price or greatest overall benefit possible for the estate.") (quoting In re Atlanta Packaging
Products, Inc., 99 B.R. 124, 130 (Bankr. N.D. Ga. 1988)).
17. The Debtors submit that the proposed Sale of the LNFA Mortgage Assets
to Ellington satisfies the "sound business reason test." The prompt sale of the LNF A presents
the best opportunity to maximize the value of the LNF A Mortgage Assets for the estates. The
Debtors have already tested the market price for the LNF A Mortgage Assets at the auction held
for similar assets on May 2, 2007. Ellington has agreed to purchase the LNF A Mortgage Assets
at the same price and on the same terms and conditions as the First LNF A Sale. Selling the
LNF A Mortgage Assets without another auction protects the estates from further decline in the
value of the LNF A Mortgage Assets due to additional defaults and foreclosures on subprime
loans, the inherent risks of selling property at auction and further transaction costs of marketing
the assets and holding an auction. The Debtors believe that the Sale is the best method by which
it can obtain the best price for the LNF A Mortgage Assets and provide interested persons with
accurate and reasonable notice of the Sale.
18. The Debtors further submit that it is appropriate to sell the LNF A
Mortgage Assets free and clear of claims, interests, liens and encumbrances pursuant to
Banlcruptcy Code Section 363(f), with any such claims, interests, liens and encumbrances
attaching to the net sale proceeds of the LNF A Mortgage Assets to the extent applicable.
19. Bankruptcy Code Section 363( f) authorizes a debtor to sell assets free and
clear of liens, claims, interests and encumbrances if (i) applicable nonbanlauptcy law permits the
lA3:1133695.7
RLFl-31644231
8
legal or equitable proceeding, to accept a money satisfaction of such interest 11 U.S. C. 363(f).
20. Because Bankruptcy Code section .363() is drafted in the disjunctive,
satisfaction of any one of its five requirements will suffice to permit the sale of the LNF A
Mortgage Assets "free and clear" of liens and interests. In re Dundee Equity Corp., 1992 Bankr.
LEXIS 4.36, at *12 (Bankr. S.D.N.Y. March 6, 1992) ("[s]ection 363(f) is in the disjunctive, such
that the sale free of the interest concemed may occur if any one of the conditions of 363(f)
have been met."); In re Bygaph, Inc., 56 B.R. 596, 606 n.8 (Bankr. S.D.N.Y. 1986) (same); In re
Wolverine Radio Co., 930 F.2d 1132, 1147 n .. 24 (6th Cir. 1991) (stating that Bankruptcy Code
section 363(f) is written in the disjunctive; holding that the court may approve the sale "free and
clear" provided at least one of the subsections of Bankruptcy Code section 363(f) is met).
21. The Debtors believe that one or more of the tests of Bankruptcy Code
Section 363(f) are easily satisfied with respect to the Sale ofthe LNFA Mortgage Assets. In
particular, the Debtor'S believe that any lienholder will be adequately protected by having their
liens, if any, attach to the cash proceeds ultimately attributable to the LNF A Mortgage Assets in
which such creditor alleges an interest, in the same order of priority, with the same validity, force
and effect that such creditor had prior to the Sale, subject to any claims and defenses the Debtors
and their estates may possess with respect thereto.
22. Although Bankruptcy Code Section 363(f) provides for the sale of assets
Bankruptcy Code. Folger Adam Security v. DeMatteis/MacGregor N, 209 F.3d 252, 257 (3rd
Cir. 2000). In the case of In re Trans World Airlines. h1c., 322 F.3d 283, 288-89 (3rd Cir. 2003),
the Third Circuit specifically addressed the scope of the term "any interest" The Third Circuit
observed that while some courts have "narrowly interpreted that phrase to mean only in rem
LA3:1133695 7
Rlfl-31644231
9
interests in prope1ty," the trend in modern cases is towards "a more expansive reading of
the property."' Id. at 289. As determined by the Fourth Circuit in In re Leckie Smokeless Coal
Co., 99 F.3d 573, 581-582 (4th Cir. 1996), a case cited approvingly and extensively by the Third
their assets under 363(f) free and clear of successor liability that otherwise would have arisen
under federal statute." Folger, 209 F.3d at 258.
Bankruptcy Code Section 363 takes the assets free from successor liability resulting from pre-
existing claims. See The Ninth A venue Remedial Group v. Allis-Chalmers Corp., 195 B.R. 716,
7.32 (Bank.r. N.D. Ind. 1996) (stating that a bankruptcy court has the power to sell assets free and
clear of any interest that could be brought against the banlcruptcy estate during the bankruptcy);
MacArthur Company v. Johns-Manville Corp. (In re Johns-Manville Corp.), 8.37 F.2d 89, 93-94
(2d Cir. 1988) (channeling of claims to proceeds consistent with intent of sale free and clear
under section 363(f) of the Bankruptcy Code); In reNew England Fish Co., 19 B.R. 323, 329
(Bankr. W.D. Wash. 1982) (transfer of property in free and clear sale included free and clear of
Hoffman, 53 B.R. 874, 876 (Bankr. D.RL 1985) (transfer of liquor license free and clear of any
interest permissible even though the estate had unpaid taxes); American Living Systems v.
Bonapfel (In re All Am. Of Ashbum. Inc.), 56 B.R. 186, 190 (Bankr. N.D. Ga. 1986) (product
Partnership v. Virginia Dept. ofMedical Assistance Services (In re WBO Partnership), 189 B.R.
lA3:1133695 7
RLFI-3164423-1
10
97, 104-05 (Banlcr. 22 E.D. Va. 1995) (Commonwealth ofVirginia's right to recapture
depreciation is an "interest" as used in section 363()).
4
and clear of all "interests" would be frustrated if claimants could thereafter use the transfer as a
Bankruptcy Code Section 363(f), the Purchaser is entitled to know that the LNFA Mortgage
Assets does not have attached latent claims that will be asserted against them after the Sale is
completed. Accordingly, and consistent with the above-cited case law, the Sale Order should
state that the purchaser will not be liable as a successor under any theory of successor liability,
for claims that encumber or relate to the LNF A Mortgage Assets.
25. Banlauptcy Code Section 363(m) provides:
The reversal or modification on appeal of an authorization under
subsection (b) or (c) of this section of a sale or lease of property
good faith, whether or not such entity knew of the pendency of the
stayed pending appeal.
11 U.S.C. 363(m). While the Bankruptcy Code does not define "good faith," the Seventh
Circuit in In re Andy Frain Services, Inc., 798 F.2d 1113 (7th Cir. 1986), held that:
4
free and clear of claims nevertheless find that Banlcruptcy Code section 1 05(a) provides such authority. ~ I n re
White Motor Credit Corp., 75 B.R 944, 94& (Bankr. N.D. Ohio 1987} {stating that the absence of specific authority
equitable powers when necessary to carry out the provisions oftitle 11).
lA3;1 133695 7
RLF!-3164423-l
11
798 F.2d at 1125 (emphasis omitted) (quoting In re Rock Industries Machinery Com., 572 F.2d
1195, 1198 (7th Cir. 1978).
26. The negotiation and execution of the terms and conditions ofthe Sale and
the Supplement were conducted in good faith and at arm's length. The Sale price and the terms
and conditions of the Supplement are nearly identical to the First LNFA Sale and were
determined based upon the outcome of the Auction. The Supplement, substantially in the form
attached hereto as Exhibit "A", incorporates the terms of the Original AP A and replicates the
price, terms and conditions of the First LNFA Sale. The Purchaser in no way induced, caused, or
required the commencement ofthe chapter 11 filings of the Debtors and no common identity of
directors or controlling stockholders exists between the Purchaser and any of the Debtors. All
payments to be made by the Purchaser and other agreements or arrangements entered into by the
Purchaser with the Debtors in connection with the Sale have been disclosed. There is no
evidence that the Purchaser has violated section 363(n) ofthe Bankruptcy Code by any action or
inaction. Ellington is entering into the Sale in good faith and is a good faith purchaser and is
entitled to such finding under Bankruptcy Code Section 363(m).
FINALITY OF ORDER
27. The Debtors further request that, pursuant to Bankruptcy Rule 6004(h), the
order approving the Sale not be stayed for any period of time after the entry of such orders.
28. Bankruptcy Rule 6004(h) provides that an "order authorizing the use, sale,
or lease of property ... is stayed until the expiration of 10 days after entry of the order, unless
the court orders otherwise." The Debtors request that any order approving the Sale of the LNF A
Mortgage Assets be effective immediately by providing that the 1 O ~ d a y stay under Bankruptcy
Rule 6004(h) is waived.
LAJ:I133695.7
RLFI-31644231
12
29. The purpose of Bankruptcy Rule 6004(h) is to provide sufficient time for
an objecting party to appeal before an order can be implemented. See Advisory Committee
Notes to Fed. R. Bankr. P. 6004(h). Although Banlauptcy Rule 6004(h) and the Advisory
Committee Notes are silent as to when a court should "order otherwise" and eliminate or reduce
the 1 0-day stay period, the leading treatise on bankruptcy suggests that the 1 0-day stay period
should be eliminated to allow a sale or other transaction to close immediately "where there has
been no to the procedure." 10 Collier on 6004.10 (15th rev. ed. 2006).
Further, it suggests that if an objection is filed and overruled, and the objecting party informs the
court of its intent to appeal, the stay may be reduced to the amount of time actually necessary to
file such appeal. Id.
30. The Debtors hereby request that any order approving the sale of the LNF A
Mortgage Assets be effective immediately upon entry by providing that the 1 0-day stay under
Banlauptcy Rule 6004(h) is waived or, in the alternative, if an objection to the Sale of the LNF A
Mortgage Assets is filed, reduce the stay period to the minimum amount oftime needed by the
party to file its appeal.
NOTICE
31. No trustee has been appointed in these chapter 11 cases. Notice of this
Motion has been provided to: (1) the Office ofthe United States Trustee for the District of
Delaware; (2) counsel to the Examiner; (3) counsel to Greenwich Capital Financial Products,
Inc. and The CIT Group/Business Credit, Inc., the Debtors post-petition senior secured lenders;
(4) counsel to the Official Committee of Unsecured Creditors; (5) all of the parties that have filed
UCC"l financing statements against the Debtors; (6) the Internal Revenue Service; and (7) all
parties entitled to notice under Local Rule 2002-1 (b). In light of the nature of the relief
requested herein, the Debtors submit that no other or further notice is required.
LAJ:ll33695 7
RLFI-3164423-1
13
WHEREFORE, the Debtors request that the Court (i) grant the Motion; (ii) enter
an order substantially in the form attached as Exhibit "B" hereto and (iii) grant such other and
further relief as is just and appropriate.
LA3:1133695 7
Rl Fl-31644231
14
Dated: June 12, 2007
LAJ: 1133695.7
RLFI-3164423-1
~ # - ~
at'kD.Olliils (No. 2981)
Christopher M. Samis (No. 4909)
RICHARDS, LAYTON & FINGER, P.A
One Rodney Square
P.O. Box 551
Wihnington, Delaware 19899
(302) 651-7700
-and-
Suzzanne S. Uhland
Ben H. Logan
Emily R. Culler
275 Battery Street
(415) 984-8700
ATTORNEYS FOR DEBTORS AND
DEBTORS IN POSSESSION
15
In re:
Chapter 11
INC., a Delaware corporation, et at.,'
Case No. 07-10416 (KJC)
Debtors.
Hearing Date: June 27, 2007 at 10:00 a.m.
(Requested)
Objection Deadline: June 20, 2007 at 4:00 p.m.
(Requested)
MOTION OF DEBTORS AND DEBTORS IN POSSESSION FOR AN
ORDER (A) APPROVING SUPPLEMENT NO. 1 TO THE ASSET
PURCHASE AGREEMENT BY AND AMONG NEW CENTURY FINANCIAL
CORPORATION AND CERTAIN OF ITS SUBSIDIARIES AND ELLINGTON
MANAGEMENT GROUP, L.L.C. ON BEHALF OF ITS CLIENT FUNDS,
(B) AUTHORIZING SALE OF CERTAIN LOANS TO PURCHASER OR ITS
DESIGNEE(S), FREE AND CLEAR OF ALL LIENS, CLAIMS,
ENCUMBRANCES AND INTERESTS AND (C) GRANTING RELATED RELIEF
a debtor and debtor-in-possession (collectively, the "Debtors"), by and through their undersigned
counsel, hereby submit this motion (the "Motion") pursuant to sections 1 05( a) and 363 of title 11
of the United States Code, 11 U.S.C. 101 -1532 (the "Banla:uptcy Code"), and Rules 2002,
6004 and 9014 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), for the
entry of (i) an order (a) approving Supplement No. 1 to the Asset Purchase Agreement (the
1
The Debtors are the following entities: New Century Financial Corporation (flk/a New Century REIT,
Inc.), a Maryland corporation; New Century TRS Holdings, Inc. (flkla New Century Financial Corporation), a
Delaware corporation; New Century Mortgage Corporation (flkla JBE Mortgage) (cllb/a NCMC Mortgage
Anyloan.com), a California corporation; New Century Credit Corporation (flkla Worth Funding Incorporated), a
California corporation; NC Asset Holding, L.P. (flkla NC Residual II Corporation), a Delaware limited partnership;
NC Residual III Corporation, a Delaware corporation; NC Residual IV Corporation, a Delaware corporation; New
Century R.E.O. Corp, a California corporation; New Century RE.O II Corp., a Califomia corporation; New
Century RE.O. III Corp., a California corporation; New Century Mortgage Ventures, LLC (cl/b/a Summit Resort
Midwest Home Mortgage, TRATS Financial Services, Elite Financial Services, Buyers Advantage Mortgage), a
Delaware limited liability company; NC Deltex, LLC, a Delaware limited liability company; NCoral, L.P-, a
LA3:1133695 7
RLF 13164423-1
"Supplement") by and among New Century Financial Corporation and certain of its subsidiaries
and Ellington Management Group, L.L.C, on behalf of its Client Funds ("Ellington" or the
"Purchaser''), (b) authorizing the sale of certain mortgage loans and assets to the Purchaser or its
designee(s), free and clear of all liens, claims encumbrances and interests (the "Sale") and (c)
granting related relief. In support ofthis Motion, the Debtors respectfully state as follows:
JURISDICTION
1. Tlus Court has jurisdiction over the s u ~ j e c t matter of this Motion pursuant
to 28 U.S.C. 157 and 1334. Venue is proper in this district pursuant to 28 U.S.C. 1409(a).
This is a core proceeding under 28 U.S.C. 157(b )(2).
Bankruptcy Code Sections 1 OS( a) and 363 and Bankruptcy Rules 2002, 6004 and 9014.
BACKGROUND
3. New Century Financial Corporation, a Maryland corporation (''NCF,) and
subsidiary, New Century TRS Holdings, Inc., a Delaware corporation, NCF originates,
purchases, sells, and services mortgage loans nationwide. NCF historically focused on
"subprime" lending, or lending to individuals whose borrowing needs were generally not
fulfilled by traditional financial institutions because they did not satisfy the credit,
documentation or other underwriting standards prescribed by conventional mortgage lenders and
loan buyers. In September 2005, NCF through some of its subsidiaries also began offering
conventional mortgage loans, including: "Alt-A" mortgage loans, loans insured by the Federal
Housing Administration ("FHA"), and loans guaranteed by the Veterans Administration ("VA").
LA3:11336957
RlFI-3164423-1
2
During the fiscal year ending December 31, 2006, the Debtors originated or purchased
approximately $60 billion ofmortgage loans, most of which were sold in the secondary market.
Since their inception, the Debtors have issued or enabled over $220 billion in loans. These loans
have helped millions ofhomebuyers and homeowners across the nation access credit and realize
the benefits of home ownership, including many who might not otherwise have been able to do
so.
4. On April2, 2007 (the "Petition Date"), the Debtors filed the instant
petitions for relief and the Debtors' bankruptcy cases are being jointly administered pursuant to
an order of the Court. The Debtors are operating their business and managing their affairs as
5. On the Petition Date, the Debtors filed a motion to approve bidding
procedures and the sale of a pool of approximately 2,200 unencumbered mortgage loans with an
unpaid balance of$173 million and mortgage-backed residual interests in securitization trusts
(the "LNF A") to Greenwich Capital Financial Products, Inc. ("Greenwich") for $50 million.
Prior to the hearing on the sale procedures motion, the Debtors, their investment banker Lazard
Freres & Co. LLC ("Lazard"), the Official Committee of General Unsecured Creditors (the
"Creditors' Committee") and Greenwich continued to discuss the financial terms and other
aspects ofthe proposed transaction. Among other things, the parties determined that the face
value of the LNFA was $170 million instead of$173 million and therefore, adjusted the purchase
price to $4725 million. Greenwich further agreed to lower its break up fee to $945,000 and cap
its auction related expenses. Pursuant to an order entered by the Court on Aprill2, 2007, the
Debtors held an auction of the LNFA in NewYork on May 2, 2007 (the "Auction"). After
extensive marketing ofthe LNF A and aggressive pursuit of bids and prospective purchasers, five
qualified bidders emerged and attended the Auction. Ellington was the ultimate winner at the
LA3: 1133695 7
RLFl-3164423-1
3
Auction, bidding $58 million for the LNFA. After a hearing arguments and considering the
evidenced proffered in support ofthe sale, on May 7, 2007, the Court entered an order approving
the sale of the LNFA to Ellington (the "First LNF A Sale") pursuant to the Asset Purchase
Agreement by and among NCF and certain of its subsidiaries and Ellington dated May 16, 2007
(the "Original AP A").
6. The Debtors now seek to supplement the Original AP A to sell an
additional approximately 180 unencumbered loans with an unpaid balance of approximately $17
million and 6 real properties obtained in foreclosures of such mortgage loans (the "LNF A
Mortgage Assets") as set forth in the Supplement which incorporates the terms of the Original
APA. The Debtors were not able to include the LNFA Mortgage Assets in the First LNFA Sale
because the documents and files related to the LNFA Mortgage Assets were not sufficient or
complete at the time. After discussions with the Creditors' Committee, the Debtors concluded
that it was in the best interest of estates to try to sell the additional LNF A Mortgage Assets to
Ellington by supplementing the Original AP A for the same price on the same terms and
conditions reached after extensive marketing and negotiations at the Auction.
7. By order entered on May 23, 2007, the Court authorized the sale ofthe
Debtors' servicing business (the "Carrington Sale") to Carrington Mortgage Services, LLC, an
affiliate of Carrington Capital Management, LLC ("Carrington"). At the closing of the
Carrington Sale, Carrington will transfer the sale proceeds to the Debtors and the Debtors will
enter into an agreement with Carrington to transition the servicing business. The Debtors will
continue operating the servicing business in the ordinary course while it is transitioned to
Carrington. The Debtors estimate that the transition period could take up to six months but may
be continued upon request from Canington from time to time. The Debtors are in the process of
liquidating additional technology and other assets of the estates.
Ll\3:1133695 7
RLF 1-3164423-1
4
RELIEF REQUESTED
8. The Debtors hereby request, pursuant to Bankruptcy Code Sections 105
and 363 and Banlauptcy Rule 6004 that the Court enter an order approving the Sale of the LNFA
Mortgage Assets to the Purchaser as set forth in the Supplement and granting related relief.
THE SUPPLEMENT AND THE LNFA MORTGAGE ASSETS
9. The Debtors propose to sell the LNF A Mortgage Assets to Ellington (or
such other third party as Ellington may designate) free and clear of all liens, claims and
encumbrances for an aggregate purchase price of $4,446,901.48.
2
This purchase price will be
paid by satisfying any obligations outstanding under the DIP Financing at the time of the closing,
up to the amount of the purchase price, with the remaining balance (if any) to be paid in cash
(subject to a holdback for certain contingent costs and a potential proportionate deduction in the
event the unpaid principal balance ofthe LNF A Mortgage Assets as of closing is lower than the
current unpaid principal balance V
10. The Supplement contains certain minimal representations and warranties
and provides for a $309,625.00 45-day holdback, s u ~ j e c t to terms substantially similar to the
holdback provisions of the Original AP A, to cover such matters as (i) the Debtors releasing the
borrower on a loan that was sold to Ellington, (ii) material changes in the foreclosure laws of the
state in which the property is located and (iii) the Debtors' failure to transfer servicing of these
loans to a servicer selected by the buyer. This holdback is subject to proportionate reduction if
the aggregate purchase price is reduced as described above.
2
The proposed sale ofthe LNFA Mortgage Assets is contingent upon approval by the Board ofDirectors
and this Court
3
The description of the Supplement provided herein is an overview of certain of the significant terms of the
Sale. The Court and interested parties should refer to tile Supplement, substantially in the form attached hereto as
Exhibit A, for complete and detailed terms thereof To the extent the description of the sale described in this Motion
is inconsistent in any way from t11e terms of the Supplement, the terms of the Supplement shall prevail.
LA3:1133695 7
RLFJ-3164423-1
5
11. The LNF A Mortgage Assets generally consists of mortgage loans and the
real property securing mortgage loans as set forth on Schedule 1 ofthe Supplement. Prior to the
Petition Date, the Debtors originated mortgage loans and then generally sold the loans to
securitization trusts and whole loan buyers. The pool of LNFA M01tgage Assets include some
loans that the Debtors had not yet disposed of prior to the Petition Date. The pool may also
consist of some loans sold to securitization trusts or to whole loan buyers but repurchased by the
Debtors pursuant to the terms of these agreements when the borrowers on these loans defaulted
soon after the disposition occurred.
12. The Debtors request Court approval to sell the LNF A Mortgage Assets to
Ellington free and clear of any liens, claims or interests with any valid liens on the assets sold
attaching to the sale proceeds. Ellington has offered to pay $4,446,901.48 for the LNF A
Mortgage Assets on the terms and conditions set forth on the Supplement, substantially in the
fom1 attached hereto as Exhibit "A". The Debtors believe that the proposed Sale is the highest
and best offer obtainable for the LNF A Mortgage Assets.
APPROVAL OF SALE OF ASSETS
13. Bankruptcy Code Section .363(b)(l) provides that a debtor, "after notice
the estate." II U.S.C. 363(b)(l). Bankruptcy Rule 6004 provides that "[n]otice of a proposed
use, sale, or lease of property, other than cash collateral, not in the ordinary course ofbusiness
shall be given pursuant to Rule 2002(a)(2), ( c )(1 ), (i) and (k) and, if applicable, in accordance
with 363(b )(2) of the code." Fed. R. Bankr. P. 6004(a). Essentially, Bankruptcy Rule 2002
requiresthe Debtors to give all creditors and certain other parties "at least 20 days' notice by
mail" ofthe Sale "unless the court for cause shown shortens the time or directs another method
of giving notice". Section 1 05(a) of the Bankruptcy Code provides in pertinent part that "[t]he
lA3: 1133695 7
RLFI-3164423-1
6
Court may issue any order, process, or judgment that is necessary and appropriate to carry out
the provisions ofthis title." 11 U.S.C. 105(a).
14. A sale of a debtor's assets should be authorized pursuant to Bankruptcy
Code Section .363 where the transaction represents an exercise of the debtor's sound business
judgment. See, e.g., In re Martin (Myers v. Martin}, 91 F3d 389, 395 (3rd Cir. 1996); In re
Montgomery Ward Holding Corp., 242 B.R. 147, 153 (D. Del. 1999); In re Delaware & Hudson
Rv. Co., 124 B.R. 169, 176 (D. Del. 1991); In re Trans World Airlines. Inc., No. 01-0056,2001
Bankr. LEXIS 980, at *29 (Bankr. D. DeL Apr. 2, 2001).
15. Courts typically consider the following factors in detennining whether a
(b) whether adequate and reasonable notice ofthe sale was given to interested parties,
(c) whether the sale will produce a fair and reasonable price for the property and (d) whether the
Steel Corp., 82 B.R 334, 335-36 (D. DeL 1987); In reUnited Healthcare Svs .. Inc., No. 97-
assets for the estate, its creditors or interest holders. S e e ~ In re Abbotts Dairies of
J?,ennsylvania, 788 F.2d 143 (3rd Cir. 1986); In re Lionel Corp., 722 F.2d 1063 (2nd Cir. 198.3).
proceeds received by the estate. See In re Food Bam Stores. Inc., 107 F .. 3d 558, 564-65 (8th Cir.
1997) (in bankruptcy sales, "a primary objective ofthe Code [is] to enhance the value of the
estate at hand"); Integrated Resources, 147 B.R at 659 ("It is a well-established principle of
bankruptcy law that the ... [debtors'] duty with respect to such sales is to obtain the highest
LA3:1133695 7
RlFI-3164423-1
7
price or greatest overall benefit possible for the estate.") (quoting In re Atlanta Packaging
Products, Inc., 99 B.R. 124, 130 (Bankr. N.D. Ga. 1988)).
17. The Debtors submit that the proposed Sale of the LNFA Mortgage Assets
to Ellington satisfies the "sound business reason test." The prompt sale of the LNF A presents
the best opportunity to maximize the value of the LNF A Mortgage Assets for the estates. The
Debtors have already tested the market price for the LNF A Mortgage Assets at the auction held
for similar assets on May 2, 2007. Ellington has agreed to purchase the LNF A Mortgage Assets
at the same price and on the same terms and conditions as the First LNF A Sale. Selling the
LNF A Mortgage Assets without another auction protects the estates from further decline in the
value of the LNF A Mortgage Assets due to additional defaults and foreclosures on subprime
loans, the inherent risks of selling property at auction and further transaction costs of marketing
the assets and holding an auction. The Debtors believe that the Sale is the best method by which
it can obtain the best price for the LNF A Mortgage Assets and provide interested persons with
accurate and reasonable notice ofthe Sale.
18. The Debtors further submit that it is appropriate to sell the LNFA
Mortgage Assets free and clear of claims, interests, liens and encumbrances pursuant to
Banlauptcy Code Section 363(f), with any such claims, interests, liens and encumbrances
attaching to the net sale proceeds of the LNF A Mortgage Assets to the extent applicable.
19. Bankruptcy Code Section 363(f) authorizes a debtor to sell assets free and
clear of liens, claims, interests and encumbrances if (i) applicable nonbankruptcy law permits the
LA3:1133695.7
RLF131644231
8
legal or equitable proceeding, to accept a money satisfaction of such interest 11 U.S.C. 36.3(f).
20. Because Bankruptcy Code section .363(f) is drafted in the disjunctive,
satisfaction of any one of its five requirements will suffice to pennit the sale of the LNFA
Mortgage Assets "free and clear" of liens and interests. In re Dundee Equity Corp., 1992 Bankr.
LEXIS 4.36, at *12 (Bankr. S.D.N.Y. March 6, 1992) ("[s]ection 363(f) is in the such
that the sale free of the interest concemed may occur if any one of the conditions of 363(f)
have been met."); In re Bygaph, Inc., 56 B.R. 596, 606 n.8 (Bankr. S.D.N.Y. 1986) (same); In re
Wolverine Radio Co., 930 F.2d 1132, 1147 n..24 (6th Cir. 1991) (stating that Bankruptcy Code
section 363(f) is written in the disjunctive; holding that the court may approve the sale "free and
clear" provided at least one of the subsections of Bankruptcy Code section 363(f) is met).
21. The Debtors believe that one or more of the tests of Bankruptcy Code
Section 363(f) are easily satisfied with respect to the Sale ofthe LNFA Mortgage Assets. In
particular, the Debtors believe that any lienholder will be adequately protected by having their
liens, ifany, attach to the cash proceeds ultimately attributable to the LNFA Mortgage Assets in
which such creditor alleges an interest, in the same order of priority, with the same validity, force
and effect that such creditor had prior to the Sale, subject to any claims and defenses the Debtors
and their estates may possess with respect thereto.
22. Although Bankruptcy Code Section 36.3(f) provides for the sale of assets
Bankruptcy Code. Folger Adam Security v. DeMatteis/MacGregor N, 209 F.3d 252, 257 (3rd
Cir. 2000). In the case ofh1 re Trans World Airlines. Inc., 322 F.3d 283, 288-89 (3rd Cir. 2003),
the Third Circuit specifically addressed the scope of the tenn "any interest" The Third Circuit
obsexved that while some courts have "narrowly interpreted that phrase to mean only in rem
LA3:1133695 7
RLFI-3164423-1
9
interests in property," the trend in modern cases is towards "a more expansive reading of
the property."' Id. at 289. As determined by the Fourth Circuit in In re Leckie Smokeless Coal
Co., 99 F.3d 573, 581-582 (4th Cir. 1996), a case cited approvingly and extensively by the Third
their assets under 363(f) free and clear of successor liability that otherwise would have arisen
under federal statute." Folger, 209 F.3d at 258.
Bankruptcy Code Section 363 takes the assets free from successor liability resulting from pre-
existing claims. See The Ninth A venue Remedial Group v. Allis-Chalmers Corp., 195 B.R. 716,
732 (Bankr. N.D. Ind. 1996) (stating that a bankruptcy court has the power to sell assets free and
clear of any interest that could be brought against the bankruptcy estate during the bankruptcy);
MacArthur Company v. Jolms-Manville Corp. (In re Johns-Manville Corp.), 837F.2d 89, 93-94
(2d Cir. 1988) (channeling of claims to proceeds consistent with intent of sale free and clear
under section 36.3(f) ofthe Bankruptcy Code); In reNew England Fish Co., 19 B.R. 323, 329
(Bankr. W.D. Wash. 1982) (transfer ofproperty in free and clear sale included free and clear of
Hoffinan, 53 B.R. 874, 876 (Bankr. D.R.L 1985) (transfer ofliquor license free and clear of any
interest permissible even though the estate had unpaid taxes); American Living Systems v.
Bonapfel (In re All Am. Of Ashburn. Inc.), 56 B.R 186, 190 (Bankr. N.D. Ga. 1986) (product
Partnership v. Virginia Dept. ofMedical Assistance Services (In re WBQ Partnership), 189 B.R.
LA3:1133695 7
RLF\3164423-1
10
97, 104-05 (Bankr. 22 E.D. Va. 1995) (Commonwealth ofVirginia's right to recapture
depreciation is an "interest" as used in section 363()).
4
and clear of all "interests" would be frustrated if claimants could thereafter use the transfer as a
Bankruptcy Code Section 363(f), the Purchaser is entitled to know that the LNFA Mortgage
Assets does not have attached latent claims that will be asserted against them after the Sale is
completed. Accordingly, and consistent with the above-cited case law, the Sale Order should
state that the purchaser will not be liable as a successor under any theory of successor liability,
for claims that encumber or relate to the LNF A Mortgage Assets.
25. Banlauptcy Code Section 363(m) provides:
The reversal or modification on appeal of an authorization under
subsection (b) or (c) of this section of a sale or lease of property
good faith, whether or not such entity knew of the pendency of the
stayed pending appeaL
11 U.S.C, 363(m). While the Bankruptcy Code does not define "good faith," the Seventh
Circuit in In re Andy Frain Services. Inc., 798 F.2d 1113 (7th Cir. 1986), held that:
4
free and clear of claims nevertheless find that Bankruptcy Code section 1 05( a) provides such authority. See In re
White Motor Credit Corp., 75 B. R 944, 94& (Bankr. N.D. Ohio 19&7) {stating that the absence of specific authority
equitable powers when necessary to carry out the provisions of title 11).
LA3: 1133695 7
RLF 1-3164423-l
11
798 F.2d at 1125 (emphasis omitted) (quoting In re Rock Industries Machinery Com., 572 F.2d
1195, 1198 (7th Ck 1978).
26. The negotiation and execution of the terms and conditions ofthe Sale and
the Supplement were conducted in good faith and at arm's length. The Sale price and the terms
and conditions of the Supplement are nearly identical to the First LNF A Sale and were
determined based upon the outcome of the Auction. The Supplement, substantially in the form
attached hereto as Exhibit "A", incorporates the terms of the Original AP A and replicates the
price, terms and conditions of the First LNFA Sale. The Purchaser in no way induced, caused, or
required the commencement ofthe chapter 11 filings of the Debtors and no common identity of
directors or controlling stockholders exists between the Purchaser and any of the Debtors. All
payments to be made by the Purchaser and other agreements or arrangements entered into by the
Purchaser with the Debtors in connection with the Sale have been disclosed. There is no
evidence that the Purchaser has violated section 36.3(n) of the Bankruptcy Code by any action or
inaction. Ellington is entering into the Sale in good faith and is a good faith purchaser and is
entitled to such finding under Bankruptcy Code Section 363(m).
FINALITY OF ORDER
27. The Debtors further request that, pursuant to Bankruptcy Rule 6004(h), the
order approving the Sale not be stayed for any period of time after the entry of such orders.
28. Bankruptcy Rule 6004(h) provides that an "order authorizing the use, sale,
or lease of property ... is stayed until the expiration of 10 days after entry of the order, unless
the court orders otherwise." The Debtors request that any order approving the Sale of the LNF A
Mortgage Assets be effective immediately by providing that the 1 O ~ d a y stay under Bankruptcy
Rule 6004(h) is waived.
LAJ:ll33695.7
RLFI-3164423-1
12
29. The purpose ofBanlauptcy Rule 6004(h) is to provide sufficient time for
an objecting party to appeal before an order can be implemented. See Advisory Committee
Notes to Fed. R. Bankr. P. 6004(h). Although Bankruptcy Rule 600401) and the Advisory
Committee Notes are silent as to when a court should "order otherwise" and eliminate or reduce
the 1 0-day stay period, the leading treatise on bankruptcy suggests that the 1 0-day stay period
should be eliminated to allow a sale or other transaction to close immediately "where there has
been no to the procedme." 10 Collier on 6004.10 (15th rev. ed. 2006).
Further, it suggests that if an is filed and overruled, and the objecting party informs the
court of its intent to appeal, the stay may be reduced to the amount of time actually necessary to
file such appeal. Id.
30. The Debtors hereby request that any order approving the sale of the LNF A
Mortgage Assets be effective immediately upon entry by providing that the 1 0-day stay under
Banlauptcy Rule 6004(h) is waived or, in the alternative, if an to the Sale of the LNF A
Mortgage Assets is filed, reduce the stay period to the minimum amount of time needed by the
party to file its appeal.
NOTICE
31, No trustee has been appointed in these chapter 11 cases. Notice of this
Motion has been provided to: (1) the Office ofthe United States Trustee for the District of
Delaware; (2) counsel to the Examiner; (3) counsel to Greenwich Capital Financial Products,
Inc. and The CIT Group/Business Credit, Inc", the Debtors post-petition senior secured lenders;
(4) counsel to the Official Committee ofUnsecured Creditors; (5) all of the parties that have filed
UCC-1 financing statements against the Debtors; ( 6) the Internal Revenue Service; and (7) all
parties entitled to notice under Local Rule 2002-1 (b). In light of the nature of the relief
requested herein, the Debtors submit that no other or further notice is required.
LAJ:l 133695 7
RLFI-3164423-1
13
WHEREFORE, the Debtors request that the Court (i) grant the Motion; (ii) enter
an order substantially in the form attached as Exhibit "B" hereto and (iii) grant such other and
further relief as is just and appropriate.
LA3: 1133695 7
RLFI-31644231
14
Dated: June 12, 2007
LA3:1133695.7
RLFI-3164423-1
~ # . ~ ~
arkD.01liils (No. 2981)
Christopher M. Samis (No. 4909)
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
P.O. Box 551
Wilmington, Delaware 19899
(302) 651-7700
-and-
Suzzanne S. Uhland
Ben H. Logan
Emily R. Culler
275 Battery Street
(415) 984-8700
ATTORNEYS FOR DEBTORS AND
DEBTORS IN POSSESSION
15

Matt V HSBC Exhibit - F-2

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Matt V HSBC Exhibit - F-2

Uploaded by

Copyright:

Available Formats

Section 9.2 Break-Up Fee; Expense Reimbursement.

You might also like