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BARTON BARTON & PLOTKIN, LLP 420 Lexington Avenue New York, New York 10170 212-687-6262 (Tel) 212-687-3667 (Fax) Eric W. Sleeper, Esq. esleeper@bartonesq.com Attorneys for Intelligent Digital Systems, LLC, Russ and Russ PC Defined Pension Plan, and Jay Edmond Russ IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEW JERSEY In Re: VISUAL MANAGEMENT SYSTEMS, INC., et al., Debtors. Honorable Kathryn C. Ferguson Chapter 11 Case No. 10-44748 (Jointly Administered) Hearing Date: September 26, 2011 11:00 a.m. (Oral Argument Requested)

VERIFIED OBJECTION OF INTELLIGENT DIGITAL SYSTEMS, LLC, RUSS AND RUSS PC DEFINED BENEFIT PENSION PLAN, AND JAY EDMOND RUSS TO DEBTORS MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE DEBTORS TO SELL PROPERTY FREE AND CLEAR OF ALL LIENS, CLAIMS AND INTERESTS TO ADAPTIVE VISUAL APPLICATIONS CORP. PURSUANT TO 11 U.S.C. 363 AND FOR A WAIVER OF THE TEN DAY REQUIREMENT PURSUANT TO FEDERAL RULE OF BANKRUPTCY PROCEDURE 6004(h) COMES NOW Intelligent Digital Systems, LLC (IDS), Russ and Russ PC Defined Benefit Pension Plan, and Jay Edmond Russ (collectively, the Objecting Creditors), creditors and parties-in-interest in the above-captioned cases, and, by and through their undersigned counsel, file this Verified Objection to the Debtors motion [Docket No. 109] for entry of an Order authorizing the Debtors to sell property free and clear of all liens, claims and interests to

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Virtual Mobile Security, Inc.1 pursuant to 11 U.S.C. 363 and for a waiver of the ten day requirement pursuant to Fed. R. Bankr. P. 6004(h) (the Motion), and respectfully submit and would show the Court as follows: FACTUAL BACKGROUND 1. Almost a year ago, on November 8, 2010, the Debtors each filed bankruptcy petitions under Chapter 11 of Title 11 of the United States Bankruptcy Code. 2. On or about December 9, 2010, the Debtors filed their Schedules and Statement of Affairs (Schedules) (e.g., Docket No. 29, Case No. 10-44748). 3. The Objecting Creditors were scheduled with claims exceeding $2,400,000 or, approximately, 43% of the Debtors scheduled collective unsecured debts. Proofs of claim concerning the Objecting Creditors claims were further filed on April 1, 2011 (e.g., Creditor Register, Claim Nos. 32-34, Case No. 10-44748). The indebtedness for the Debtors to the Objecting Creditors arises from the breached sale by the Objecting Creditor IDS to the Debtors of proprietary digital video recording technology and other assets - - assets which appear to be the subject of the Debtors current Motion and that they seek to now sell free and clear. 4. On January 3, 2011, the Debtors 341 meeting (the 341 Meeting) of creditors was held, attended by the undersigned and concluded. At the 341 Meeting the Debtors principal, Jason Gonzalez, indicated that as of the commencement of the cases the Debtors were allegedly parties to a Software Development and Technology License Agreement with Royal Services and Rentals Inc. (Royal License Agreement) and an Installation and Evaluation Contract with Speedway Super America, LLC (Speedway Contract). The Debtors principal further indicated that he

The Motion refers to a proposed sale to Adaptive Visual Applications Corporation, but the Agreement therefore annexed to the Motion is executed on behalf of Virtual Mobile Security, Inc. as Buyer.

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contemplated that the Royal License Agreement and Speedway Contract would form the backbone of the Debtors anticipated quick reorganization. 5. No plan of reorganization (Plan) was filed by the Debtors prior to termination of the exclusive period in March, 2011. The Debtors were granted one extension of their exclusive period by Order entered on March 8, 2011 (Doc. No. 55) to file their Plan by June 6, 2011 and solicit acceptances thereof no later than August 5, 2011. No Plan, however, was filed, nor votes solicited therefore, by the extended dates and no further extensions thereof having been granted, the Debtors exclusivity expired months back. No Plan has been filed since. 6. Other than minimal motion practice, and the filing of monthly operating reports showing, at best, limited business activity, the case dockets are bereft of any other real activity in the cases or with these Debtors over the past ten months since the commencement of these cases. 7. On the heels of this inactivity, the Debtors now propose to sell substantially all of their operational assets for the sum of $180,000 paid out over six (6) months to an entity vaguely identified as Virtual Mobile Security, Inc. o/b/o Adaptive Visual Applications Corp. (the Putative Buyer) whose principal is Lionel Sonntag (Sonntag). The proposed purchase price amounts to, at best, approximately one percent (1%) of the Debtors scheduled prepetition indebtedness. 8. The Debtors, further, by way of their Motion seek to direct the de minimus sale proceeds be used solely to pay (i) certain administrative claims, including post-petition payroll, of Mr. Gonzalez himself ($15,000) and Mr. Bergman ($7,500), and fees of the United States Trustee, (ii) $20,000 to Debtors counsel for any approved fees and (iii) the remainder (approximately $137,000) to the Debtors alleged secured creditor, collectively referred to as Enable. It is also proposed that stock in the minimally capitalized Putative Buyer would be given solely to Enable.

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While proposing such a distributive scheme, the Debtors provide nothing whatsoever on scheduled priority and unsecured claims exceeding $6,000,000. SUMMARY STATEMENT 9. The Debtors propose to sell substantially all (if not all) of their operational assets outside (i) the ordinary course of business and (ii) a plan and pursuant to a sub rosa plan agreement. 10. As such, the proposed sale requires even closer scrutiny. That scrutiny should also involve consideration of such factors as (i) business justification for the sale, (ii) whether the price offered represents fair value, and (iii) the bona fides or good faith associated with the sale. On all accounts, the Debtors proposed sale falls woefully short on each of those considerations. Additionally, the sale would benefit, albeit negligibly, a single creditor, i.e., Enable, with an unproven alleged secured claim. 11. The proposed purchase price amounts to no more than 1% of the Debtor scheduled prepetition indebtedness. The proceeds thereof disenfranchise 99% of the Debtors scheduled prepetition creditor claims. Business justification? To pay the Debtors principals post-petition salary, allowed fees of the Debtors counsel, and less than 1% of a single creditors (i.e., Enables) indebtedness and meager shares in a minimally capitalized company, pursuant to a sub rosa plan. Clearly, this is unsupportable under the Bankruptcy Code. 12. Fair value? There are no appraisals. There are no third-party valuations. There has been no public sale. The proposed private sale effectively eliminates any real competitive auction/sale process to establish an objective fair value analysis. No broker or investment banker was retained to sell the assets. Instead, the Debtors principal (not a broker or sale expert) has certified to unspecified minimal sales efforts. Again providing no basis as to fair value. 13. Bond Fides/Good Faith? The Motion provides no information as to how the Debtors came to identify the Putative Buyer or the particulars as to the negotiation of the sale. In fact, the 4

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Motion provides almost no information at all about the Putative Buyer and its prinicipal or even their financial wherewithal to satisfy the six-month payout of the purchase price. As tabs1 and 2 hereto show, the limited public information about the Putative Buyer and its principal hardly speaks to their bona fides. 14. Additionally, nothing in the Motion addresses what personal benefit(s) there are to the Debtors principal, any of their Board members, or their other employees in pursuing the proposed sale - - a sale of virtually no value to almost 99% of the Debtors prepetition creditors. Indeed, even the motivation of Enable in not opposing the sale is questionable given the negligible financial value of this sale. OBJECTIONS I. The Proposed Sale Requires Strict Scrutiny. 15. Because the Debtors seek to sell substantially all of their assets in an expeditious process pursuant to Bankruptcy Code 363, and thereby avoid the safeguards afforded by a plan confirmation process under the Bankruptcy Code, the transaction undeniably requires closer scrutiny than a typical proposed sale of assets outside the ordinary course of business. In re President Casinos, Inc., 314 B.R. 784, 785 (Bankr. E.D. Mo. 2004) (stating that a sale of all, or substantially all, of the assets of a Chapter 11 estate in the absence of a confirmed plan, while not forbidden, is subject to close scrutiny by creditors and the court); Mission Iowa Wind Co. v. Enron Corp., 291 B.R. 39, 43 (S.D.N.Y. 2003). 16. The general criteria for approving the sale of assets outside the ordinary course of business under Section 363(b) of the Bankruptcy Code requires that a valid business justification exist for the sale, that the price represent fair value and that the parties negotiated and entered into the sale transaction in good faith. In re Abbotts Dairies of Pa., Inc. 788 F.2d 143, 149-50 (3d Cir. 1986); In re Montgomery Ward Holding Corp., 242 B.R. 147 (D. Del. 1999) 5

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17. The proposed purchase price of $180,000 falls far short of the amount of the claims of all parties against the Debtors and their estates. At the proposed price, the sale will yield virtually no benefit to the vast majority (if not virtually all) of the Debtors creditors. Whether or not the proposed sale price represents fair value cannot be determined based on the complete absence of any appraisal or objective valuation information. Additionally, while the sale purports to be subject to higher and better offers, there are no Court-approved procedures for the same and no evidence of any public advertising for the sale thereby effectively eliminating any competitive public sale to determine whether any purchase price would constitute fair value. II. The Sale Letter Agreement is an Improper Sub Rosa Plan. 18. The Letter Agreement annexed as Exhibit A to the Motion is an impermissible sub rosa plan, which is itself sufficient reason to deny the relief sought in the Motion. 19. A transaction is an impermissible sub rosa plan if it disposes of all or substantially all of the debtors assets without following the Bankruptcy Codes procedural protections in connection with the development and approval of a plan of reorganization, such that the sale itself is a de facto plan. The procedural protections provided in the Bankruptcy Code include, among other things, the right to receive a detailed disclosure statement from a debtor and the right to vote on the proposed plan. 20. Because of the importance of these protections to ensuring that creditors are treated fairly, courts have rejected proposed post petition agreements between debtors and select creditors that have the effect of dictating material terms of a plan of reorganization without complying with the Bankruptcy Codes procedural requirements for plan confirmation. In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983) (The debtor and the bankruptcy court should not be able to short circuit the requirements of Chapter 11 for confirmation of a reorganization plan by establishing the terms of the plan sub rosa in connection with the sale of assets); See 6

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also In re Decora Industries , Case No. 00-4459-JJF, 2002 WL 3232749 at *8 (D. Del. May 20, 2002) (the focus of sub rosa plan analysis is oriented toward those situations in which a debtor proposes to sell all of its assets without the benefit of a confirmed plan or a court-approved disclosure statement.); In re Swallens Inc., 269 B.R. 634, 638 (BAP 6th Cir. 2001) (At least when a party in interest objects, a bankruptcy court cannot issue orders that bypass the requirements of Chapter 11, such as disclosure statements, voting, and a confirmed plan, and proceed to a direct reorganization on the terms the court thinks best, no matter how expedient that might be.) 21. It is also a fundamental policy of bankruptcy law that a debtor-in-possession has an affirmative, overarching duty to reorganize and maximize estate assets for the benefit of all creditors, not just a select few or, as in this case, just a singular creditor. In re R.H. Macy & Co., 170 B.R. 69, 74 (Bankr. S.D.N.Y 1994) (citing NLRB v. Bildisco & Bildisco, 465 U.S. 513, 527 (1984)). 22. Where there is a proposed sale in Chapter 11 of substantially all of a debtors property in exchange for retirement of some or all of alleged secured debt, without the protections of the disclosure statement and plan process, as here, the transaction must be closely scrutinized and the transaction proponent bears a heightened burden. See In re Channel One Communications, Inc., 117 B.R. 493, 496 (Bankr. E.D. Mo. 1990) (citing In re Industrial Valley Refrigeration & Air Conditioning Supplies, Inc., 11 B.R. 15, 17 (Bankr. E.D. Pa. 1987)); see also In re CGE Shattuck, LLC, 254 B.R. 5, 12 (Bankr. D.N.H. 2000); In re Wilde Horse Enterprises, Inc., 136 B.R. 830, 841 (Bankr. C.D. Cal. 1991). 23. Section 363 asset sales should not be used to circumvent the protections for unsecured creditors mandated in the Bankruptcy Code. In re Westpoint Stevens, Inc., 330 B.R. 30, 52 (S.D.N.Y. 2005) (stating that it is well established that section 363(b) is not to be utilized as a 7

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means of avoiding Chapter 11s plan confirmation procedures, citing In re The Babcock & Wilcox Co., 250 F.3d 955, 960 (5th Cir. 2001) ([T]he provisions of 363 do not allow a debtor to gut the bankruptcy estate before reorganization or to change the fundamental nature of the estates assets in such a way that limits a future reorganization plan.)). The United States Court of Appeals for the Third Circuit expressed that Section 363 sales should not be used to short circuit the plan confirmation process and Section 1129 of the Bankruptcy Code. Abbotts Dairies, 788 F.2d 143, supra. In Abbotts Dairies, the court held that the good faith requirement of a Section 363 sale is to be used to assure that by means of an asset sale, a debtor does not abrogate the protections afforded to creditors under section 1129 and the plan confirmation process. Id. at 150. 24. Any sale transaction that dictates essential terms and seeks to short circuit creditors rights should go through a plan approval process, which includes disclosure requirements under section 1125 of the Bankruptcy Code, voting requirements under section 1126 of the Bankruptcy Code, the best interest of creditors test under section 1129(a)(7) of the Bankruptcy Code, and the absolute priority rule of section 1129(b)(2)(B) of the Bankruptcy Code. 25. Moreover, part of showing the necessity of a Section 363 transaction includes showing appropriate marketing of the assets, as part of the exercise of the debtor-in-possessions fiduciary duties to creditors. Marketing efforts must be designed to maximize the returns to the estate. In re WPRV-TV, Inc., 983 F.2d 336, 342 (1st Cir. 1983). 26. The Letter Agreement is effectively a sub rosa plan because it constitutes a complete disposition of all the debtors valuable operational assets and impermissibly dictates the terms of the distribution of the related sale proceeds to the disenfranchisement of 99% of the Debtors scheduled creditor claims.

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27. Such an attempt to short circuit the plan confirmation process is fundamentally inconsistent with the Bankruptcy Code and is itself sufficient reason to deny the Debtors Motion. III. The Proposed Sale is Fraught with Issues Requiring Denial of the Relief Sought 28. As already pointed out, while the Debtors seek to sell the core assets of their estates the Motion contains no objective valuation information whatsoever. There are no appraisals. There are no valuation analyses by any outside source. The Debtors listed the value of their principal assets in their Schedules as largely unknown and the Debtors Motion does nothing to establish an objective value for those assets now some nine (9) months later. 29. The lack of any credible valuations is only exacerbated by the Debtors creating a private sale. As such, the sale allegedly subject to higher and better offers has involved no public notice (other than a docket entry) or advertising to put other potentially interested parties on notice. As a result, there is no public competitive auction/sale process that itself could be looked upon as establishing an objective fair value analysis. 30. The Certification (oddly, not an Affidavit) of Mr. Gonzalaez submitted with the Motion does little to rectify the absence of any reliable valuation information. The majority of this Certification addresses alleged (albeit unsuccessful) pre-petition attempts to locate new investors and capital to maintain the Debtors then existing operation and not an asset sale marketing effort. Indeed, there is nothing in the Certification to establish any particular skill set or expertise of Mr. Gonzalez to act as a broker of the type of assets proposed to be sold - - as opposed to an actual broker or investment banker. Additionally, for the almost one year post-petition period, Mr. Gonzalez Certification references having located only one other potential buyer (i.e., Quamtel) which the Debtors apparently chose not to pursue, in part, because a singular creditor, 9

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Enable, was not impressed with the offer. To the extent it could, the Certification provides no real evidence as to the specifics of any appropriate marketing efforts undertaken by the Debtors or the extent thereof. 31. There is also elements of good faith and business justification, or the lack thereof, which the Court should also consider with respect to the Motion. 32. As to good faith there are several considerations. First, the Motion contains almost no information about the Putative Buyer, its principal or even their financial wherewithal to satisfy the purchase price over a six month period. Similarly, there is no information how this Buyer came to be identified, the negotiation of the proposed sale thereto, or the bona fides thereof. Additionally, the limited publicly available information the Objecting Creditors could find is hardly encouraging as set forth under tab 1 hereto. The Putative Buyer itself also appears to have been incorporated in Nevada only slightly before execution of the Letter Agreement with a reported capitalization of $210,000. Leaving one commentator (Investorshub) to ask with respect to the Debtors attempted sale: What is this setup for? See Tab 2 annexed hereto. The same commentator went on to note, [i]snt this weird? A ONE-MAN company buying [the Debtors] what is going on behind the scenes what we dont understand as of yet. Tab 2 at p.6. 33. Beyond the limited, unflattering, information about the principal of the Putative Buyer, the Motion also fails to address what the sale contemplates for the Debtors and its principal, Mr. Gonzalez. 34. Mr. Gonzalez Certification suggests that absent the proposed sale, the Debtors will likely lose many of its service accounts [which are not quantified] and remaining staff [most recently, no more than 6 full time and 3 part time employees]. The suggestion being that postsale, the Putative Buyer may be contemplating maintaining some business operations to realize some value from the assets to be sold raising the question of whether Mr. Gonzalez or any other 10

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employee of the Debtors would continue to provide any services to the Putative Buyer and, if so, pursuant to what terms. That is, nothing addresses what personal benefit(s), if any there are to the Debtors principal, any of their Board members, or other employees in seeking to push through this proposed sale transaction of almost no value to almost 99% of the Debtors creditors. 35. The sale also seeks to set a definitive distribution scheme for any sale proceeds. That includes payments to Mr. Gonzalez, to Debtors counsel, with remaining amounts to a singular creditor, Enable. It also proposes to provide Enable a minority interest in the minimally capitalized Putative Buyer and yet no continuing revenue stream to the Debtors estates (by, for instance, licensing the Debtors technology) of potential benefit to many more of the Debtors creditors. As to Enable, the Motion simply says it appears to be a secured creditor of the Debtors. Thus, even the Debtors seem to harbor some question about that alleged secured status of Enable. While Enable filed proofs of claim against the Debtors (see Claims Register, Claim Nos. 15-17; Case No. 10-44748), they simply attach copies of various debenture agreements executed by a singular Debtor and no other documentation or security filings. For all intents and purposes, the validity and perfection of Enables claims have simply gone unproven before this Court to date. At the same time, even assuming arguendo that Enables claims are secured, one is left wondering what its motivation is here when the expressed return on their debt is less than one percent (1%). IV. The Sale Proceeds Dont Even Appear Sufficient to Pay Administrative and Other Expenses Related to Confirmation of a Plan A. Administrative Expenses and Priority Claims 36. Any sale process must also generally be structured in such a way as to ensure that the estates will have sufficient cash to administer any remaining assets, wind-down the Debtors

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estates and pay all administrative expenses and priority claims in cash on the effective date of any plan. 37. It is well-settled that a plan cannot be confirmed unless all administrative expense claims are paid in full, in cash, on the plans effective date. See 11 U.S.C. 1129(a)(9)(A); In re Hechinger Inv. Co. of Delaware, 298 F.3d 219, 224 (3d Cir. 2002). The same is generally true for other priority claims or to confirm a plan after any sale closes. The inability to confirm a plan generally constitutes cause to dismiss a chapter 11 case - - not to prolong it. 11 U.S.C. 1112(b). B. Wind-Down Budget 38. The Debtors estates would also likely require cash in order to fund a budget to ensure that a Chapter 11 plan, even if just a liquidating one, can be finalized, confirmed and implemented. To that end, any successful bid should as part of the purchase price, provide an adequate amount of cash to fund a wind-down budget as agreed upon by the Debtors and their creditors for the administration of the Debtors remaining assets and the wind-down of the Debtors estates (the Wind-Down Budget). 39. The Putative Buyers bid does nothing of the sort. V. The Proposed Sale Appears to Leave the Debtors Estates Administratively Insolvent and Trigger Substantial Unsecured Liabilities 40. The proposed sale to the Putative Buyer appears to leave little, if any, cash for the estates to cover administrative expenses of the Debtors Chapter 11 proceedings, let alone provide any source of recovery for the Debtors general unsecured creditors. A Section 363 sale of substantially all of a debtors assets in Chapter 11 is appropriate only when it is a step to confirmation of a Chapter 11 plan. See In re Prime Succession, Inc., et al, Case No. 03-25063BKC-PGH (Bankr. S.D. Fla. 2003). In other words, the proceeds from the sale, among other

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things, must be adequate to pay all administrative and priority claims in full, in cash, on the plans effective date and to cover ongoing expenses. See 11 U.S.C. 1129(a)(9). 41. Courts have declined to allow Section 363 sales of substantially all of a debtors assets where such sales would leave the debtors estate with such scant value as to frustrate reorganization. In PBGC v. Braniff Airways Inc. (In re Braniff Airways, Inc.), 700 F.2d 935 (5th Cir. 1983), rehg denied, 705 F.2d 450 (5th Cir. 1983), for example, the court reasoned, were this transaction approved, and considering the properties proposed to be transferred, little would remain save fixed based equipment and little prospect or occasion for further reorganization. 700 F.2d at 940. See also In re Feinstein Family Pship, 247 B.R. 502 (Bankr. M.D. Fla. 2000) (denying trustees motion to sell fully encumbered property to a credit bidder and holding that a trustee should not act as the lenders liquidating agent). 42. Acquirers in section 363 must also be prepared to provide some basic consideration to unsecured creditors. As the Supreme Court has affirmed, [a] principal goal of the reorganization provisions of the Bankruptcy Code is to benefit the creditors of the Chapter 11 debtor by preserving going-concern values and thereby enhancing the amounts recovered by all creditors. In re Timbers of Inwood Forest Associates, Ltd., 808 F.2d 363, 373 (5th Cir. 1987), affd, 484 U.S. 365 (1988) (emphasis added). Were the Debtors and any successful bidder to seek to effect a sale that benefits an alleged secured creditor to the exclusion of unsecured creditors, they would violate good-faith requirements inherent in all Chapter 11 cases. See, e.g., In re Brown, 951 F.2d 564 (3d Cir. 1991). 43. Because the proposed purchase price is not even sufficient to satisfy Enables alleged secured claim, the sale benefits only a singular creditor, i.e., Enable. Courts have declined to approve section 363 sales that only benefit a secured creditor. See, e.g., In re Fremont Battery Co., 73 B.R. 277, 279 (Bankr, N.D. Ohio 1987) (sustaining objection to proposed sale of assets 13

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which would benefit only secured creditor); In re Encore Health Assocs., 312 B.R. 52 (Bankr W.D.Pa. 2004) (finding no business justification as sole purpose of section 363 sale was to liquidate assets for benefit of secured creditors). This Court should not permit the debtors to abuse the Chapter 11 process as no business reason, other than maybe satisfying a de minimus amount of the outstanding indebtedness to Enable and to pay the salary of the Debtors principal and maybe some allowed fees of Debtors counsel presently exists to justify the sale. 44. Clearly, the proposed sale does not maximize value to the estates. WHEREFORE, for each of the foregoing reasons, the Objecting Creditors respectfully request that the Debtors Motion be denied and that the Court grant the Objecting Creditors such further relief as the Court deems appropriate. Dated: September 19, 2011 BARTON BARTON & PLOTKIN, LLP By: /s/ Eric W. Sleeper Eric W. Sleeper (ES-0528) 420 Lexington Avenue New York, New York 10170 RUSS & RUSS P.C. Daniel P. Rosenthal, Esq., of Counsel 543 Broadway Massapequa, New York 11758 Attorneys for the Objecting Creditors

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