IN THE UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re: COLLINS & AIKMAN CORPORATION,

et al. Debtors. ) ) ) ) ) ) ) ) Chapter 11 Case No. 05-55927 (SWR) (Jointly Administered)

Honorable Steven W. Rhodes

THE HONORABLE STEVEN W. RHODES, CHIEF UNITED STATES BANKRUPTCY JUDGE JOINT FINAL PRE-TRIAL ORDER KZC Services, LLC and John R. Boken (Boken and collectively, KZCS), and the C&A Post-Consummation Trust (the Post-Consummation Trust), by and through their undersigned counsel, submit this Joint Final Pre-Trial Order for entry by the Court in connection with the Trial scheduled for June 24, 2008. I. JURISDICTION This is a core proceeding pursuant to 28 U.S.C. 157(b)(2), over which this Court has jurisdiction pursuant to 28 U.S.C. 1334. II. KZCS CLAIMS KZCS seeks entry of an order approving its final fee application filed with the Court on November 12, 2007 (the Final Fee Application), for compensation and reimbursement of the reasonable and necessary services KZCS provided to the Debtors for the period from May 17, 2005 through October 12, 2007 (the Final Fee Period). During the Final Fee Period, KZCS total reasonable and necessary compensation aggregated $44,440,563.00 and expenses incurred aggregated $4,668,143.71, for a total compensation

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and expense reimbursement request of $49,108,706.71. KZCS Final Fee Application has been computed based on the hourly rates charged by the KZCS personnel working on the matter multiplied by the number of hours worked, or the lodestar. KZCS was engaged pursuant to a Services Agreement which was approved (with modifications not relevant here) by Orders of the Court dated June 9, 2005 (the June 9 Retention Order) and July 18, 2005 (the July 18 Retention Order, and together with the June 9 Retention Order, the Retention Orders). The Post-Consummation Trust concedes that KZCS rates are within the range of rates charged in the market by first quality financial advisory firms in the restructuring industry. There is no contention that KZCS engaged in duplication of effort, waste, inefficiency or provided unnecessary services. There is no challenge to any of KZCS expenses. The Objector concedes that these cases were extraordinarily difficult and placed incredible demands on the professionals who served in them. KZCS submits that the evidence will show that KZCS challenged services, like all of the other services it performed in these cases, satisfied the terms of its retention and all applicable professional standards. KZC disputes the notion that there was a delay in the resolution of these cases, or that anything KZC did or failed to day was the proximate cause of such alleged delay or any alleged harm that any party suffered as a result of such alleged delay. See Skinner v. Square D Co., 445 Mich. 153, 160 (1994). KZCS fees and expenses must be evaluated under the standard of what was reasonable and necessary based upon the facts available to it at the time its services were performed. Courts in the Sixth Circuit and elsewhere have held that the reasonableness of a professionals fees and attendant services is not to be determined against perfect hindsight, but rather should be evaluated against the circumstances existing at the time such services 2

were rendered. See, e.g., In re New Boston Coke Corp., 299 B.R. 432, 439 (Bankr. E.D. Mich. 2003); In re James Contracting Group, Inc., 120 B.R. 868, 872-73 (Bankr. N.D. Ohio 1990); see also In re Gadzooks, Inc., 352 B.R. 796, 810 (Bankr. N.D. Tex. 2006). Courts have explicitly held that the test in determining the reasonableness of a professionals fees is whether [such professionals] exercised their best judgment in performing the services at the time such services were performed. See, e.g., Boston Coke, 299 B.R. at 439; James Contracting, 120 B.R. at 872-73. The evidence will demonstrate that KZCS satisfied this standard. A professional should not be penalized solely for the lack of success of a chapter 11 reorganization. See, e.g., Boston Coke, 299 B.R. at 439; James Contracting, 120 B.R. at 872. JPMorgan Chase Bank, N.A. (JPM), the Agent for the Prepetition Lenders (the Lenders), and the Post-Consummation Trusts predecessor in interest, acknowledged this in its Statement With Respect to the Appointment of a Fee Examiner (Doc. No. 4159) when it stated: The Agent recognizes that it is unfair and inappropriate to focus the blame on the Estate Professionals for the disappointing results. After all, the reorganization attempts in these cases were unsuccessful principally because of business related reasons and failures, not due to poor legal or financial advice. (4). [T]here is no requirement that the services at issue resulted in actual benefit to the estate, rather such services must have been reasonably likely to benefit the estate. See, e.g., Boston Coke, 299 B.R. at 439; James Contracting, 120 B.R. at 872.

III. POST-CONSUMMATION TRUSTS CLAIMS The C&A Post-Consummation Trust objects to the amount of fees sought by KZCS. The basis for the objection by the Trust is the production of projections (Projections), prepared by the Debtors, with the active direction and assistance of KZCS and John Boken, the Chief Restructuring Officer, during the course of the cases that were divorced from operational reality. Many parties and the Court reasonably relied on the Projections to make decisions in during the chapter 11 cases. The parties included the Unsecured Creditors Committee and the Prepetition Secured Lenders1. The reliance proved unwarranted because of the inaccurate Projections. These expectations existed from November 2005 through the fall of 2006, causing an excessive delay in being able to bring the cases to a conclusion, reducing the recovery of the Lenders and increasing professional fees. The evidence will show that, notwithstanding its standing as a world-class turnaround specialist with deep financial, operational and strategic experience, KZCS deferred to the Debtors operating management with respect to the most critical of those decisions i.e., whether the dramatic cost savings and revenue improvements projected by operating management should be included in the Debtors business plan. That deference and failure to timely validate the projections against plant level financials and other records proved exceedingly costly, as it facilitated the issuance of wholly inaccurate projections that (a) undermined the Debtors going concern sale efforts and (b) prolonged these cases even while

During the cases, JPM acted as the Administrative Agent for the Prepetition Secured Creditors (the Agent). Several holders of Prepetition Secured Debt formed a steering committee, with whom the Agent consulted with throughout the case. JPM also acted as agent for the DIP Lenders while a DIP Loan was outstanding. The DIP Lenders were paid in full during the case. The Prepetition Secured Lenders are referred to as the Lenders. 4

the Plastics business lost millions of dollars per month and the Debtors customers prepared to re-source major programs. The Sixth Circuit uses the lodestar approach to determine whether professional compensation is reasonable under section 330. In re Boddy, 950 F.2d 334, 337-38 (6th Cir. 1991). Under that approach, fees are initially calculated by multiplying the [professionals] reasonable hourly rate by the number of hours reasonably expended. Id. at 337 (internal quotation marks omitted). Once that amount is calculated, the court may consider other factors, including the results obtained by the relevant professional. Id. at 338. In accordance with the Sixth Circuits guidance, bankruptcy courts in the Circuit have not hesitated to look beyond the initial lodestar figure to determine whether fees should be awarded under section 330. For example, in In re EWI, Inc., 208 B.R. 885 (Bankr. N.D. Ohio 1997), the bankruptcy court explained that, [i]n addition to developing a lodestar figure when evaluating fees, the court should consider both (1) the quality factor i.e., the quality of advocacy required and delivered, considering the difficulty of the issues, skills called for, time constraints and the professional's personal qualifications and (2) the result factor i.e., the bottom line recovered for the estate and the creditors. Id. at 891 (emphases added). Based on those factors, the EWI court found that Schroder Wertheim & Co., the investment bank hired to sell the debtors business, failed to perform as the circumstances required. Id. at 892. Although Schroder marketed the debtors property and identified a stalking-horse bidder under tight time constraints, the court found that Schroder did not aggressively pursue[] other interested parties or otherwise act to maximize the sale price. Id. at 892-93. Consequently, the court declined to award Schroder the $300,000 fee provided for in Schroders fee agreement, and instead reduced that fee by 25%. Id. at 893. 5

Similarly, in In re Big Buck Brewery & Steakhouse, Inc., No. 04-56761-R, 2006 WL 1343461 (Bankr. E.D. Mich. 2006, this Court partially disallowed fees requested by the debtors special consultants for time spent preparing projections. In allowing only 30% of the fee amount requested, the Court noted that the consultants projections were both inadequate, because they only projected revenue and expenses over a six-month period, and inaccurate, because they included questionable income and revenue. Id. at *2. As in EWI, therefore, this Court looked beyond the mere product of hours worked and hourly rates, and refused to award fees that were unjustified given the applicants performance. See also In re Woodward East Project, Inc., 195 B.R. 372, 377 (Bankr. E.D. Mich. 1996 (Rhodes, C.J.) (declining to award compensation for some hours worked by debtors attorney where the attorneys quality of work was substantially below that normally and customarily provided by debtors counsel in similar cases); In re Arnold, 162 B.R. 775, 777 (Bankr. E.D. Mich. 1993) (determination of the market rate for a particular applicants services should not necessarily end a courts analysis under section 330; [i]f the applicants performance is substantially better or worse than predicted by the market based on the applicants track record, then an upward or downward adjustment in the hourly rate may be appropriate); In re Allied Computer Repair, Inc., 202 B.R. 877, 885 (Bankr. W.D. Ky. 1996 (numerous courts have held that . . . the results obtained . . . carries the greatest determinative weight in evaluating fees under section 330). Based on the logic of cases such as EWI and Big Buck Brewery, this Court should not award KZCS all the fees it has requested. By any standard, KZCS is one of the worlds premier restructuring advisors, and its billing rates reflect that reputation. During these cases, the blended hourly rate for KZCSs professional services (including the services of paraprofessionals) has been $448.08. Mr. Boken in particular billed $695 per hour for his time. 6

In addition, KZCS billed the Debtors approximately $1.6 million for the time spent by Messrs. Cooper and LoBiondo serving on the Board. KZCS blames Mr. Macher and his management team for failing to reach the cost reductions that were a very material part of the Projections. This alleged direction, which was not the subject of any written resolution or court approval is a clear conflict of interest for KZCS and directors Cooper and LoBiondo. KZCS further claims the Board of Directors directed KZCS to not participate in certain critical aspects of the Projections and it therefore has no blame. It claims that Capstone Advisory Group, LLC, the Agents financial advisors, knew of the problems with regard to the projections and was therefore not mislead. KZCS denies both participation and blame. As the Chief Restructuring Officer and financial advisors, KZCS had a duty to carry on due diligence and a duty, if it did not do so, to at the least inform parties that it did not do so. KZCS failure to do either requires a significant reduction in its fees. IV. STIPULATION OF FACTS 1. On May 17, 2005 (the Filing Date), the Debtors filed their voluntary

petitions for relief under chapter 11 of title 11 of the United States Code (the Bankruptcy Code), commencing these chapter 11 cases. During the pendency of these cases, the Debtors operated their businesses and managed their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. Just prior to Filing Date, David Stockman was relieved from his duties both as Chairman of the Board and CEO of the Debtors. Subsequently, the Chief Financial Officer and others were terminated amid allegations of criminal accounting fraud. 2. Pursuant to the Retention Orders, this Court authorized the above-

captioned debtors (collectively, the Debtors), to retain KZCS as the companys financial 7

advisor and Boken as its Chief Restructuring Officer (CRO) under the terms of a Services Agreement dated May 17, 2005 (the Services Agreement), as amended by the Retention Orders. This was the first time Mr. Boken acted in the role of CRO. 3. One of the issues which KZCS and others, identified early in these cases

was the need for strong and experienced operating management. On July 7, 2005, the Debtors appointed Frank Macher (Macher) as President and Chief Executive Officer. At or about that time, the Debtors appointed Stephen Cooper (Cooper) and Leonard LoBiondo (LoBiondo), each managing directors of KZCS, as members of the Board of Directors. The composition of the Board, upon Macher, Cooper and LoBiondo joining, expanded the Board from ten members to thirteen.. At all relevant times after the retention of KZCS and Boken, all of the members of the Debtors Board besides Cooper and LoBiondo were independent of, and not affiliated in any way with KZCS. The Board also appointed a Restructuring Committee, consisting of Cooper, LoBiondo, Macher, and three other members of the Board. After the resignation of the Chief Financial Officer very early in the cases, the Company was without a CFO until March 2, 2006, when it promoted Mr. Tim Trenary from Controller to the position of CFO. 4. JPM served as Agent for the Lenders (the Lender Agent) during the

entire chapter 11 cases. During the time a DIP Loan was outstanding, JPM served as Agent (the DIP Agent) for the DIP Lenders. JPM, on behalf of the Lenders, is now a member of the PostConsummation Trust Board. Capstone Advisory Services, LLC (Capstone) served as financial advisor to the Lender Agent2 during the entire course of the chapter 11 cases. Capstone also served as advisor to the DIP Agent during the time a DIP Loan was outstanding. Capstone is the Trustee of the Post-Consummation Trust and Peter Nurge, the Capstone Managing Director that
2

The Lender Agent acted on behalf of a group of the Lenders and consulted with a subset 8

led the engagement by Capstone on behalf of both the DIP Agent and Lender Agent, was appointed Plan Administrator of the Post-Consummation Trust. The law firms that represented the Lender Agent during the chapter 11 cases, Dykema Gossett PLLC and Wachtell Lipton Rosen & Katz, are among those serving as counsel for the Post-Consummation Trust. 5. From virtually the inception of these cases, the financial advisors to the

Customers, the Prepetition Agent and the Creditors Committee were stationed at the Debtors corporate premises. 6. The process of creation of the 2006 Plan, which was formally released on

January 24, 2006 after Board approval, took several months. The 2006 Plan was preceded in November, 2005 by the Revised Post-Closing Date Budget. 7. There were two principal means by which the Debtors sought to achieve

the turnaround in Plastics and the forecast of $265 million in EBITDA in the 2006 Plan: the price increases negotiated with the Customers in late 2005, totaling over $116 million and approximately $123 million in cost savings and manufacturing . Seventy percent of the cost savings and manufacturing efficiencies were not to be realized until the second half of 2006. 8. The 2006 Plan was superseded by the dissemination of the 4+8 Plan (that

is, four months of actual results and eight months of projections) on June 8, 2006. The 4+8 Plan projected 2006 EBITDA of approximately $179 million. In early July 2006, the Debtors received two proposals to purchase substantially all of their assets, and one proposal to purchase just the Soft Trim business.

of that group acting as a steering committee for the Lenders (the Steering Committee). 9

9.

On August 20, 2006, a further revision to the 2006 forecast, based in part

on actual plant financials was issued in the form of the so-called 6+6 Plan (six months of actual results and six months of projections) which forecast 2006 EBITDA of approximately $105 million. In mid-October 2006, the Lender Agent, the Steering Committee, and the Debtors determined that a stand-alone plan, while possible, was of significant risk to overall recovery on the Lenders prepetition secured claims. After consultation with the Lender Agent and the Steering Committee and ensuring their agreement, the Debtors announced their intention to sell all of their assets and immediately set forth to pursue that course of action. 10. By Order dated May 24, 2007, the Court entered an Order (the Fee

Examination Order) appointing Judy A. ONeill as fee examiner (Fee Examiner) pursuant to Rule 706 of Federal Rules of Evidence and section 105 of the Bankruptcy Code. 11. On July 18, 2007, the Court entered an order confirming the Debtors

chapter 11 plan (the Plan), which outlined how proceeds from the controlled sale and winddown of the Debtors operations were to be distributed to creditors. On October 12, 2007, the Plan became effective (the Effective Date). Under the Plan, all of the Debtors assets that were not transferred to the Litigation Trust or the residual trusts were transferred as of the Effective Date to the Post-Consummation Trust. 13. On October 22, 2007, the Fee Examiner filed her final report (the

Report) in accordance with the Fee Examiner Order. 14. On November 12, 2007, KZCS filed its Final Fee Application for

compensation and reimbursement of the reasonable and necessary restructuring services KZCS provided to the Debtors during the Final Fee Period, for a total compensation and expense reimbursement request of $49,108,706.71. 10

V. ISSUES OF FACT TO BE LITIGATED 1. Whether KZCS services in connection with the 2006 Plan and the 4+8

Plan complied with the terms of the Services Agreement and the standard of care for financial advisory firms in the restructuring industry. 2. 3. Whether Bokens work met the standard of care for a CRO. Whether the services provided by KZCS were consistent with the

representations made by KZCS to the Agent for the Prepetition Secured Lenders and the Court. 4. Whether there was a delay in completion of the cases caused by the

actions or omissions of KZCS. 5. Whether the actions or inactions of KZCS caused other damages to the

Prepetition Secured Creditors or other creditors. 6. Whether KZCS failed to exercise its best professional judgment at the

time it rendered the challenged services. 7. Whether KZCS actions or omissions caused any of the alleged harm on

which the Post-Consummation Trusts Objection is based. 8. Whether KZCS met its burden of proof demonstrating the reasonableness

of the fees it has requested. 9. The appropriate amount of fees to award KZCS.

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VI. ISSUES OF LAW TO BE LITIGATED What fees should KZCS be awarded pursuant to Section 8 of the Order Approving the Services Agreement with KZC Services, LLC and John R. Boken, entered by the Court on June 9, 2005. VII. EVIDENCE PROBLEMS LIKELY TO ARISE AT TRIAL The admissibility of any testimony by the Fee Examiner and the Report, and any other documents listed as Subject to Review/Objection or Object on the exhibits lists annexed hereto as Schedules A and B. VIII. WITNESSES A. KZCS Witnesses on its Direct Case 1. 2. 3. 4. John R. Boken. Stephen Cooper. Judy ONeill, Fee Examiner. Selected deposition testimony from Peter Nurge, Peter Chadwick, Tim Trenary, Fred Caruso and Judy ONeill. All witnesses on the Post-Consummation Trusts witness list. KZCS reserves the right to call rebuttal witnesses.

5. 6.

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B.

Post-Consummation Trusts Witnesses 1. 2. 3. 4. 5. 6. 7. 8. Peter Nurge. Peter Chadwick. Judy A. ONeill, Fee Examiner. Tim Trenary. Fred Caruso. Selected deposition testimony from KZCSs representatives. All witnesses on the KZCSs witness list. The Trust reserves the right to call rebuttal witnesses. IX. EXHIBITS

A.

KZCS Exhibits 1. 2. 3. See Schedule A, Trial Exhibit List of KZC Services, LLC and John R. Boken. All of the Post-Consummation Trusts exhibits. KZCS reserves the right to amend its schedule of exhibits prior to trial.

B.

Post-Consummation Trusts Exhibits 1. 2. 3. See Schedule B, Trial Exhibit List. All of KZCS exhibits. The Trust reserves the right to amend its schedule of exhibits prior to trial. X. DAMAGES

A.

KZCS Damages

KZCS seeks allowance of its fees in full, and reserves the right to supplement its Final Fee Application to seek recovery of its attorneys fees and costs in defense of the PostConsummation Trusts Objection. B. Post-Consummation Trusts Damages 13

The Post-Consummation Trust sets forth below paragraphs 71 and 72 of its Objection: 71. Although bases exist for objecting to more of KZCSs fees, the PostConsummation Trust is focusing for purposes of this Objection only on the twomonth delay period identified by the Fee Examiner. To quantify the amount by which KZCSs fees should be reduced, the Post-Consummation Trust has calculated the Plastics divisions average operating losses over a two-month period during 2006 approximately $8,029,000.3 The Post-Consummation Trust has also calculated the average professional fees incurred over a two-month period during 2006 approximately $15,256,000. The cost of the two-month delay identified by the Fee Examiner can reasonably be quantified as (i) the average amount lost by the Plastics division in 2006 over a two-month period ($8,029,000), (ii) the average amount paid by the Debtors in professional fees over a two-month period in 2006 ($15,256,000), or (iii) a combination of those two amounts. 72. Alternatively, this Court has discretion to reduce KZCSs fees within the confines of the lodestar figure i.e., by finding that, in the circumstances presented, KZCSs reasonable hourly rate was lower than the high rates charged by KZCS. See, e.g., In re Smith, 256 B.R. 730, 737-38 (W.D. Mich. 2000) (affirming 33% reduction of hourly rates based on bankruptcy courts assessment of the quality of counsels performance); In re Sharp, 367 B.R. 582, 585 (Bankr. E.D. Mich. 2007) (Rhodes, C.J.) (reducing counsels hourly rate from $320 to $265 based on, inter alia, the quality of legal services provided). The Post-Consummation Trust attempted to identify the fees requested by KZCS that were related to the development of the deeply flawed 2006 Operating Plan and 4+8 Plan, but was unable to break out such fees based on the information provided in KZCSs fee applications. Given that KZCS did not conduct adequate due diligence with respect to the Debtors business plans, the Post-Consummation Trust believes that KZCSs hourly fees should be reduced by a substantial percentage across the board. XI. TRIAL The parties estimate that a non-jury trial will take approximately two to four days.

The Plastics divisions monthly operating loss is equal to the sum of (a) unadjusted EBITDA for the Plastics division as reported by the Debtors, (b) 75% of the Debtors overhead (not including professional fees), and (c) the Plastics divisions capital expenditures. Attached hereto as Exhibit 1 is a summary of the calculation used to derive the Plastics divisions average monthly operating loss. Exhibit 1 also quantifies the professional fees incurred by the Debtors on a monthly basis, as well as the two-month average of those fees. 14

XII. SETTLEMENT OR MEDIATION The parties have conferred and considered the possibility of settlement as recently as May 2008. The current status is that there are no ongoing settlement discussions. XIII. FILING OF TRIAL BRIEFS, FINDINGS AND INSTRUCTIONS The Post-Consummation Trust filed a pre-trial brief with the Court. Post-trial briefs, proposed findings of fact and conclusions of law in this case shall be filed on a date to be determined by the Court at the conclusion of trial.

Signed on June 24, 2008 _ __ _/s/ Steven Rhodes _ _ Steven Rhodes 12. Chief Bankruptcy Judge

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