Case 8:12-bk CB Doc 14 Filed 11/05/12 Entered 11/05/12 18:09:12 Desc Main Document Page 1 of 78

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1 Main Document Page 1 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Richard M. Pachulski (CA Bar No ) James I. Stang (CA Bar No ) Dean A. Ziehl (CA Bar No ) Linda F. Cantor (CA Bar No. 15E3762) Debra I. Grassgreen (CA Bar No ) PACHULSKI STANG ZIEHL & JONES LLP Santa Monica Blvd., Suite 1300 Los Angeles, CA Telephone: 310/ Facsimile: 310/ rpachulski@pszjlaw.com jstang@pszjlaw.com dziehl@pszjlaw.com lcantor@pszjlaw.com dgrassgreen@pszjlaw.com Proposed Attorneys for Debtor and Debtor in Possession In re: American Suzuki Motor Corporation, 1 UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA Debtor. SANTA ANA DIVISION Case No.: 12- ( ) Chapter 11 NOTICE OF EMERGENCY MOTION AND EMERGENCY MOTION FOR ENTRY OF AN INTERIM AND FINAL ORDER PURSUANT TO SECTION 363 OF THE BANKRUPTCY CODE APPROVING THE ENGAGEMENT CONTRACT OF (I) M. FREDDIE REISS AS CHIEF RESTRUCTURING OFFICER OF THE DEBTOR AND (II) FTI CONSULTING, INC. TO ASSIST THE CRO, NUNC PRO TUNC TO THE PETITION DATE; AND MEMORANDUM OF POINTS AND AUTHORITIES [Declaration of M. Freddie Reiss, Proposed Chief Restructuring Officer, in Support of Emergency First Day Motions Filed Concurrently Herewith] TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE, THE OFFICE OF THE UNITED STATES TRUSTEE, THE DEBTOR S PREPETITION AND POSTPETITION LENDER, THE CREDITORS APPEARING ON THE LIST FILED IN ACCORDANCE 1 The last four digits of the Debtor s federal tax identification number are (8739). The Debtor s address is: 3251 East Imperial Highway, Brea, CA DOCS_SF: /001

2 Main Document Page 2 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA WITH RULE 1007(D) OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE, AND PARTIES REQUESTING SPECIAL NOTICE: PLEASE TAKE NOTICE THAT American Suzuki Motor Corporation, as debtor and debtor in possession (the Debtor ), hereby moves this Court for entry of an interim and final order approving, on an interim basis, the Engagement Contract regarding the Employment of (i) M. Freddie Reiss as Chief Restructuring Officer ( CRO ) of the Debtor and (ii) FTI Consulting, Inc. to assist the CRO nunc pro tunc to the Petition Date (the Motion ) as set forth in the Memorandum of Points and Authorities annexed hereto. PLEASE TAKE FURTHER NOTICE that the Debtor requests approval of the Engagement Contract because it has determined that obtaining the services of a CRO and other personnel with turnaround and chapter 11 experience will substantially enhance their ability to (a) operate and meet their administrative obligations in this Bankruptcy Case and (b) preserve and maximize the value of their assets pending any sale. PLEASE TAKE FURTHER NOTICE that the Debtor requests that the relief sought herein be granted on an emergency basis because the retention of the CRO and FTI, are essential to the Debtor s ability to seamlessly operate under chapter 11. Therefore, pursuant to Local Rule (a) of the Local Bankruptcy Rules of the United States Bankruptcy Court for the Central District of California (the Local Rules ), 2 the Debtor requests that this Motion be heard on an emergency basis. PLEASE TAKE FURTHER NOTICE that the Motion is based on this Notice and Motion, the Notice of Emergency Motions that will be filed and served upon obtaining a hearing date for the Debtor s First Day Motions, the attached Memorandum of Points and Authorities, the Declaration of M. Freddie Reiss, Proposed Chief Restructuring Officer, in Support of Emergency First Day Motions (the Reiss Declaration ) filed concurrently herewith, the arguments of counsel and other admissible evidence properly brought before the Court at or before the hearing on this Motion. In addition, the Debtor requests that the Court take judicial notice of all documents filed with the Court in this case. 2 Pursuant to Local Bankruptcy Rule (a)(3), no separate motion for an expedited hearing is required. DOCS_SF: /001 2

3 Main Document Page 3 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA PLEASE TAKE FURTHER NOTICE that any opposition or other response to the Motion may be filed with the Court and served on proposed counsel for the Debtor at the above address any time before the hearing, or may be presented at the hearing on the Motion. You will receive a separate notice of the date and time of the hearing on this Motion. Your failure to timely object may be deemed by the Court to constitute consent to the relief requested herein. PLEASE TAKE FURTHER NOTICE that the Debtor will serve this Notice and Motion and the attached Memorandum of Points and Authorities on: (a) the Office of the United States Trustee, (b) the creditors appearing on the list filed in accordance with Rule 1007(d) of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), (c) counsel to Suzuki Motor Corporation, the Debtor s prepetition and postpetition lender, and (d) the parties that file with the Court requests for notice of all matters in accordance with Bankruptcy Rule To the extent necessary, the Debtor requests that the Court waive compliance with Local Bankruptcy Rule and approve service (in addition to the means of service set forth in such Local Bankruptcy Rule) by overnight or electronic delivery. In the event that the Court grants the relief requested by the Motion, the Debtor shall provide notice of the entry of the order granting such relief upon each of the foregoing parties and any other parties-in-interest as the Court directs. The Debtor submits that such notice is sufficient and that no other or further notice be given. WHEREFORE the Debtor respectfully requests that this Court enter an interim order, substantially in the form attached hereto as Exhibit B: 20 (a) approving the Engagement Contract nunc pro tunc to the Petition Date as set forth in 21 the attached Memorandum of Points and Authorities; and DOCS_SF: /001 3

4 Main Document Page 4 of 78 1 (b) granting such other and further relief as the Court deems appropriate under the circumstances of this Bankruptcy Case. Dated: November 5, 2012 PACHULSKI STANG ZIEHL & JONES LLP By /s/ Debra I. Grassgreen Richard M. Pachulski James I. Stang Dean A. Ziehl Linda F. Cantor Debra I. Grassgreen Proposed Attorneys for Debtor and Debtor in Possession 10 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA DOCS_SF: /001 4

5 Main Document Page 5 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Richard M. Pachulski (CA Bar No ) James I. Stang (CA Bar No ) Dean A. Ziehl (CA Bar No ) Linda F. Cantor (CA Bar No ) Debra I. Grassgreen (CA Bar No ) PACHULSKI STANG ZIEHL & JONES LLP Santa Monica Blvd., Suite 1300 Los Angeles, CA Telephone: 310/ Facsimile: 310/ rpachulski@pszjlaw.com jstang@pszjlaw.com dziehl@pszjlaw.com lcantor@pszjlaw.com dgrassgreen@pszjlaw.com Proposed Attorneys for Debtor and Debtor in Possession In re: American Suzuki Motor Corporation, 1 UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA Debtor. SANTA ANA DIVISION Case No.: 12- ( ) Chapter 11 MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEBTOR S MOTION PURSUANT TO SECTION 363 OF THE BANKRUPTCY CODE FOR ENTRY OF AN ORDER APPROVING THE ENGAGEMENT CONTRACT OF (I) M. FREDDIE REISS AS CHIEF RESTRUCTURING OFFICER OF THE DEBTOR AND (II) FTI CONSULTING, INC. TO ASSIST THE CRO, NUNC PRO TUNC TO THE PETITION DATE 1 The last four digits of the Debtor s federal tax identification number are (8739). The Debtor s address is: 3251 East Imperial Highway, Brea, CA DOCS_SF: /001

6 Main Document Page 6 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA TABLE OF CONTENTS I. Jurisdiction... 1 II. Background... 1 III. Relief Requested... 3 IV. Qualifications... 4 A. Qualifications of M. Freddie Reiss... 4 B. Qualifications of FTI... 5 V. Services to be Provided... 6 VI. Professional Compensation... 9 VII. General Disinterestedness of FTI VIII. Indemnification and Liability Limitation Provisions IX. Basis for Relief A. Retention of FTI Is Critical to the Debtor s Success X. Notice DOCS_SF: /001

7 Main Document Page 7 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA TABLE OF AUTHORITIES CASES Baron & Budd, P.C. v. Unsecured Asbestos Claimants Comm., 2005 WL , *14 (D.N.J. Feb. 25, 2005) Comm. Of Equity Sec. Holders v. Lionel Corp. (In re Lionel), 722 F.2d 1063, 1070 (2d Cir. 1983) 14 Fulton State Bank v. Schipper (In re Schipper), 933 F.3d 513, 515 (7 th Cir. 1991) In re Adva-Lite, Inc., Case No (KJC) (Bankr. D. Del. Mar. 16, 2007) In re Calpine Corp., Case No (Bankr. S.D.N.Y. Jan 17, 2007) In re Continental Airlines, 203 F.3d 203, 211 (3d Cir. 2000) In re Delaware & Hudson R.R. Co., 124 B.R. 169, 176 (Bankr. D. Del. 1991) In re Fairfield Residential LLC, Case No (Bankr. D. Del Jan 13, 2010)... 15, 17 In re Fatburger Restaurants of California, Inc., et al., Case No (Bankr. C.D. Cal. Feb. 16, 2011)... 15, 16, 18 In re Global Home Products, LLC, Case No (KG) (Bankr. D. Del. May 4, 2006) In re Hoop Holdings, LLC, Case No (BLS) (Bankr. D. Del Apr. 22, 2008) In re Integrated Resources, Inc., 147 B.R. 650, 656 (Bankr. S.D.N.Y. 1992) In re Leiner Health Products, Inc., Case No (KJC) (Bankr. D. Del. Apr. 8, 2008) In re Linens Holding Co., Case No (CSS) (Bankr. D. Del May 28, 2008) In re Montgomery Ward Holding Corp., 242 B.R. 147, 153 (Bankr. D. Del. 1999) In re Motor Coach Industries International, Inc., Case No (Bankr. D. Del Oct. 15, 2008) In re Pappas Telecasting, Inc., Case No (Bankr. D. Del June 26, 2008) In re Sea Containers Ltd., Case No (KJC) (Bankr. D. Del. May 8, 2007) In re The Holliston Mill, Inc., Case No (MFW) (Bankr. D. Del. June 6, 2007) In re Tokheim Corp., Case No (RJN) (Bankr. D. Del. Feb. 25, 2003) In re TOUSA, Inc., Case No (Bankr. S.D. Fla. Mar. 26, 2008); In re American Home Mortgage Holdings, Inc., Case No (Bankr. D. Del. Sept. 5, 2007) In re Westcliff Medical Laboratories, Inc., Case No (Bankr. C.D. Cal. June 25, 2010).. 15, 16, 18 In re World Health Alternatives, Inc., Case No (PJW) (Bankr. D. Del. Mar. 15, 2006) Myers v. Martin (In re Martin), 91 F.3d 389, 395 (3d Cir. 1996) Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985) Stephens Indus., Inc. v. McClung, 789 F.2d 386, 390 (6 th Cir. 1986) United States v. Energy Resources Co., 495 U.S.545, 549 (1990) STATUTES 11 U.S.C U.S.C U.S.C U.S.C , 16, U.S.C U.S.C U.S.C U.S.C RULES Fed. R. Bankr. P Fed. R. Bankr. P DOCS_SF: /001

8 Main Document Page 8 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA The above-captioned debtor and debtor in possession (the Debtor ) hereby files this motion (the Motion ) for entry of an order approving the letter agreement (the Engagement Contract ) dated November 5, 2012, by and between the Debtor and FTI Consulting, Inc. ( FTI, or the Firm ), nunc pro tunc to the November 5th, 2012 (the Petition Date ). Pursuant to the Engagement Contract, M. Freddie Reiss ( Mr. Reiss ) will serve as Chief Restructuring Officer ( CRO ) and additional individuals (the Additional Personnel ) employed by FTI will provide other critical management services to the Debtor. In support of this Motion, the Debtor submits the Declaration of M. Freddie Reiss (the Reiss Declaration ), and further respectfully represents as follows: I. JURISDICTION The Court has jurisdiction over this matter pursuant to 28 U.S.C. 157 and This matter is a core proceeding within the meaning of 28 U.S.C. 157(b)(2). Venue is proper in this District pursuant to 28 U.S.C and The statutory bases for the relief requested herein are sections 105 and 363 of title 11 of the United States Code (the Bankruptcy Code ). II. BACKGROUND On the date hereof (the Petition Date ), the Debtor filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the Bankruptcy Code ). The Debtor continues to operate and manage its affairs as a debtor in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee, examiner, or committee has been appointed in this chapter 11 case. The Debtor was established in 1986 as the sole distributor in the continental United States of Suzuki automobiles, motorcycles, all-terrain vehicles, and marine outboard engines (the Suzuki Products ). Suzuki Motor Corporation ( SMC ), the 100% interest holder in the Debtor, manufacturers substantially all of the Suzuki Products 1 and is not a debtor in this or any other insolvency proceeding. As of the Petition Date, the Debtor has approximately 295 employees across 1 The ATVs are manufactured by an 80% owned affiliate of the Debtor. An overview of the Suzuki Products manufactured by SMC, its affiliates, and certain unaffiliated entities is included in the Declaration of M. Freddie Reiss, Proposed Chief Restructuring Officer, in Support of Emergency First Day Motions. DOCS_SF: /001

9 Main Document Page 9 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA three divisions: automotive (the Automotive Division ), motorcycles and all-terrain vehicles (the Motorcycles/ATV Division ), and outboard marine motors and related products (the Marine Division ). In the operation of its business, the Debtor purchases Suzuki Products from SMC and certain other non-debtor affiliates. In turn, the Debtor wholesales virtually its entire inventory through a network of independently owned and unaffiliated dealerships located throughout the continental United States. The dealers then market and sell the Suzuki Products to retail customers. As of the Petition Date, there are approximately 220 automotive dealerships, over 900 motorcycle/atv dealerships, and over 780 outboard marine dealerships. Through dealers, the Debtor also sells a portion of its automotive inventory (less than 10%) to car rental companies and others (less than 2%) that lease the vehicles to retail customers. The Debtor also purchases the majority of its automotive parts from SMC and certain unaffiliated companies and resells them to the automotive dealers and authorized warranty service providers. The Debtor determined that its Automotive Division is facing and will continue to face a number of serious challenges in the highly regulated and competitive automotive industry in the continental U.S. market. The challenges include unfavorable foreign exchange rates, disproportionally high and increasing costs associated with meeting more stringent state and federal automotive regulatory requirements unique to the continental U.S. market, low sales volumes, a limited number of models in its line-up, and existing and potential litigation costs. The Debtor has exhausted all available means to reduce the cost of operating the Automotive Division for it to operate profitably. Accordingly, the Debtor determined that the best way to preserve and enhance the value of its overall business is to wind down new sales of the Automotive Division in the continental U.S. and realign its business focus on the long-term growth of its Motorcycles/ATV and Marine Divisions. Contemporaneous with the filing of this case, the Debtor filed a plan of reorganization (the Plan ). Under the proposed Plan, the Motorcycles/ATV and Marine Divisions will remain largely unaffected including the warranties associated with such products. As part of its restructuring, NounCo, Inc., a wholly owned subsidiary of SMC, will purchase the Motorcycles/ATV and Marine DOCS_SF: /001 2

10 Main Document Page 10 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Divisions and the parts and service components of the Automotive Division. The restructured Automotive Division intends to honor automotive warranties and authorize the sale of genuine Suzuki automotive parts and services to retail customers through a network of parts and service only dealerships that will provide warranty services. The Debtor s Motorcycles/ATV Division is strong and competitively positioned in its market, allowing for long-term growth as economic conditions improve. Similarly, the Marine Division has remained competitive during the recent challenging economic times and the Debtor is working to further build its market share in the marine industry through continued investment in new product development and resuming large-scale marketing events focused on attracting new marine customers. The strategy embodied in the proposed Plan returns the business to its roots in the U.S. market, which began with motorcycles, and is intended to position the overall business for success in the continental U.S. for the benefit of all parties in interest. The Suzuki name is recognized around the world as a brand of quality products that offer reliability and originality. SMC has informed the Debtor that it continues to invest in its operations, improve its overall performance worldwide, and remains committed to manufacturing Suzuki Products for customers around the world. SMC s manufacturing and world-wide distribution of Suzuki automobiles will continue despite the Debtor s wind down of the continental U.S. Automotive Division. Additional factual background regarding the Debtor, including its current and historical business operations and the events precipitating its chapter 11 filing, is set forth in detail in the Declaration of M. Freddie Reiss, Proposed Chief Restructuring Officer, in Support of Emergency First Day Motions (the Reiss Declaration ) filed contemporaneously with this Motion and incorporated herein by reference. III. RELIEF REQUESTED By this Motion, the Debtor requests the entry of an order, pursuant to sections 105 and 363 of the Bankruptcy Code, approving the Engagement Contract attached hereto as Exhibit 1 to the declaration of Mr. Reiss in support of the Motion (the Reiss Declaration ). A copy of the Reiss DOCS_SF: /001 3

11 Main Document Page 11 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Declaration is annexed hereto as Exhibit A. Pursuant to the Engagement Contract, Mr. Reiss will serve as CRO and the Additional Personnel will perform other services required of FTI under the Engagement Contract. In support of this Motion, the Debtor relies on the Reiss Declaration. The Debtor s relief requested herein is necessary to the successful administration of the Bankruptcy Case. The Debtor is seeking interim relief because the Debtor requires the CRO and FTI to immediately begin providing services of an experienced CRO and crisis managers to guide existing management through a restructuring of the Debtor s operations and a successful resolution of its chapter 11 case. Further, any delay of the CRO s and FTI s services could cause irreparable harm to the Debtor s estate. Mr. Reiss and FTI will assist management in evaluating strategic alternatives, communicating with the Debtor s stakeholders, and providing business plan analysis and liquidation analysis for the purpose of preparing a plan of reorganization and disclosure statement to maximize value for the estate. Without such services, it would be difficult, if not impossible, for the Debtor to gather and analyze the financial information necessary to its reorganization and the preparation of a disclosure statement that complies with the requirements of section 1125 of the Bankruptcy Code. A Proposed form of an interim order approving the Motion is annexed hereto as Exhibit B. IV. QUALIFICATIONS A. Qualifications of M. Freddie Reiss Mr. Reiss is a senior managing director at FTI with more than 30 years of experience in strategic planning, cash management, liquidation analysis, covenant negotiations, forensic accounting and valuation. Mr. Reiss specialized in advising on bankruptcies, reorganizations and business restructurings and in providing expert witness testimony for underperforming companies. Mr. Reiss has also acted as interim management, a fiduciary and chief restructuring officer and trustee. The compensation arrangement reflected in the Engagement Contract is consistent with, and typical of, arrangements entered into by Mr. Reiss and other restructuring management consulting experts with respect to rendering similar services for clients such as the Debtor. DOCS_SF: /001 4

12 Main Document Page 12 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Mr. Reiss has advised on more than 100 bankruptcy-related matters. Some of his most notable engagements include: Daewoo Motors America; GE, PG&E, America West, K-Mart, Circle K, Orange County Investors Pool and Executive Life, Refco and Iridium. Additionally, Mr. Reiss has advised on multiple out-of-court restructurings for corporations, such as Euro Disney, Musicland, K-Mart, Syncora, Tower Records and Edwards Theatres. Mr. Reiss s further qualifications are detailed in the Reiss Declaration. B. Qualifications of FTI FTI is a global business advisory firm that specializes in business reorganization consulting and financial restructuring. FTI s market-leading corporate finance division has advised management, senior lenders and unsecured creditors in many of the most significant restructurings and turnarounds in recent years, including Chrysler Motors LLC, General Motors Corporation, Delphi, Tower Automotive, NewPage Corporation, Chrysler Financial Services Americas LLC, Cadence Innovation LLC, Performance Transportation, Inc., Coach America Holdings Inc., Swift Transportation Inc., Northwest Airlines, American Home Mortgage, Bombay Company, Calpine, Global Power, Tower Automotive, Winn Dixie, Refco, Dana Corporation, Bally Total Fitness, Circuit City, Flying J / Big West Oil, Fremont Investment & Loan, Gottschalks, Hawaiian Telecom, Intermet, Lehman Brothers, LyondellBassell, Townsends, Inc., Tribune Company, Nortel Networks, Washington Mutual, WCI Companies and Fairfield Residential. The Debtors have determined that obtaining the services of a CRO and other personnel with turnaround and chapter 11 experience will substantially enhance their ability to (a) operate and meet their administrative obligations in this Bankruptcy Case and (b) preserve and maximize the value of their assets pending any sale. As such, the Debtors have chosen to utilize FTI personnel as appropriate and have appointed Mr. Reiss, of FTI, to the position of CRO, subject to the Court granting this Motion. Further, as a result of prepetition work performed on behalf of the Debtor, FTI has acquired significant knowledge of the Debtor and its business and is now familiar with the Debtor s financial affairs, debt structure, operations and related matters. Likewise, in providing prepetition services to the Debtor since on or about May 18, 2012, FTI s professionals have worked closely with the DOCS_SF: /001 5

13 Main Document Page 13 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Debtor s management, its financial institutions and other advisors. Accordingly, FTI has developed relevant experience regarding the Debtor that will assist it in providing effective and efficient services to the Debtor in this Bankruptcy Case. As such, the Debtor believes that FTI is well-qualified and able to advise them in a costeffective, efficient and timely manner. The Debtor has been advised by FTI that it will endeavor to coordinate with the other professionals retained in this Bankruptcy Case to eliminate unnecessary duplication or overlap of work. Therefore, the Debtor submits that the retention and employment of FTI is in the best interests of their estates, creditors and other stakeholders in this Bankruptcy Case. V. SERVICES TO BE PROVIDED By this Motion, the Debtor seeks an order authorizing the employment of FTI to provide restructuring management services, crisis management services, and CRO services as described in the Engagement Contract (the Services ). FTI will assist in managing all aspects of the Bankruptcy Case leading to the transfer or sale of certain business divisions through a plan or sale motion and a possible refinancing, restructuring or modification of any or all of the Debtor s existing debts, other obligations or equity. In addition, FTI will assist in managing the Debtor s day-to-day operations, including cash management, financial reporting and business strategy. FTI will provide restructuring and crisis management services as requested by the Debtor and described in the Engagement Contract, including, but not limited to the following: 1. Develop a proactive vendor relations and communications program to ensure an orderly Chapter 11 reorganization process; 2. Prepare, analyze and monitor historical, current and projected financial affairs, including without limitation, if necessary, schedules of assets and liabilities, statements of financial affairs, periodic operating reports, analyses of cash receipts and disbursements, analyses of cash flow forecasts, management of cash flow, analyses of various asset and liability accounts, analyses of any unusual or significant DOCS_SF: /001 6

14 Main Document Page 14 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA transactions between themselves and any other entities, and analyses of proposed restructuring transactions; 3. Assist the Debtor with the communications and negotiations, at your request and under your guidance, with lenders, creditors, and other parties-in-interest including the preparation of financial information for distribution to such parties-in-interest; 4. Compile and prepare financial information necessary due to requirements of the Bankruptcy Court and/or Office of the US Trustee; 5. Prepare a valuation of businesses and a liquidation valuation for a reorganization plan and disclosure purposes; 6. Along with counsel, review executory contracts and providing recommendations to assume or reject; 7. Along with counsel, identify and/or review preference payments, fraudulent conveyances and any other causes of action; 8. Assess the Debtor s long-term viability and business strategy; 9. Assist management to develop strategic and operational plans to address the needs of stakeholders to return the Debtor to financial stability; 10. Work with counsel to develop strategic solutions to address demands of divergent stakeholders; 11. Negotiate and implement a financial restructuring plan; 12. Assist the Debtor in identifying, reviewing and negotiating debtor in possession ( DIP ) financing, if required; 13. Review and evaluate the claims process; 14. Attend meetings and court hearings as may be required; 15. Render expert testimony as requested from time to time; 16. Assist with the preparation and filing of financial information required by the Court and the Office of the US Trustee; 17. Provide such other similar services as may be requested by ASMC, the Chairman and/or Board of Directors; DOCS_SF: /001 7

15 Main Document Page 15 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Prepare valuations of the Debtor s significant assets, if required; 19. Identify nonessential assets to be sold and managing the sale process; 20. Assist management with the development and execution of a crisis communications plan; and 21. Work with the Board of Directors including the special committee of independent directors. The Debtor agrees that FTI will provide M. Freddie Reiss to serve in the capacity of Chief Restructuring Officer ( CRO ). Mr. Reiss will continue to operate in the capacity of CRO under the protection of Chapter 11 of the U.S. Bankruptcy Code. In his capacity as CRO, Mr. Reiss will report directly to the Board of Directors. The CRO s duties include, but are not limited to the following: 1. Lead efforts to facilitate the Debtor s restructuring and sale efforts; 2. Lead management efforts to identify and implement both short-term and long-term liquidity generation and profit improvement in an effort to improve the ongoing viability of the Debtor; 3. Lead negotiations with the secured lenders and other parties, as appropriate, to facilitate restructuring efforts; 4. In his capacity as CRO, Mr. Reiss will not be a member of the Board of Directors, but is expected to participate in Board meetings in order to report on the progress of the turnaround and restructuring initiatives; and, 5. Perform the typical duties of a CRO, and other services as mutually agreed to by Mr. Reiss and the Debtor. To address and handle the above responsibilities on behalf of the Debtor, the CRO will be assisted by Additional Personnel provided through FTI at various levels, all of whom have a wide range of skills and abilities related to this type of assignment. All such Additional Personnel will be subject to the agreements in the Engagement Contract with respect to titles, pay rates and other descriptions set forth therein except as modified by this Motion. The Additional Personnel will serve at the direction of the Debtor s Board of Directors. The most recent list of Additional Personnel is set forth in Exhibit 1 to the Engagement Contract and lists employee names, titles and hourly rates and whether such employees are expected to be engaged on a full-time or part-time basis. Notwithstanding anything in the Engagement Contract to the contrary, the Debtor is permitted to indemnify those persons serving as corporate officers on the same terms as provided to the Debtor s other officers and directors under the corporate bylaws and applicable state law. There DOCS_SF: /001 8

16 Main Document Page 16 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA shall be no other indemnification of FTI or its affiliates. Accordingly, as part of this Motion, the Debtor requests that the Court approve the indemnification provisions as set forth therein as modified by the above language. Notwithstanding any provisions of the Engagement Contract to the contrary, consistent with the Jay Alix Protocol implemented by the Office of the United States Trustee, Mr. Reiss and FTI agree that: (a) (b) (c) In the event the Debtor seeks to have any of the Additional Personnel assume executive officer positions other than Mr. Reiss, or to materially change the terms of the engagement by modifying the functions of the executive officer personnel, a motion to modify the employment as such will be filed. No principal, employee, or independent contractor of FTI and its affiliates will serve as a director of the Debtor during the pendency of the Debtor s chapter 11 case. For a period of three (3) years after the conclusion of the engagement, neither FTI nor any of its affiliates will make any investments in the Debtor. VI. PROFESSIONAL COMPENSATION The Debtor and FTI have agreed to the proposed compensation and payment structure summarized below and set forth in detail in the Engagement contract (the Fee Structure ): (a) (b) Monthly Fee: The Debtor has agreed to pay the CRO a monthly, nonrefundable advisory fee of $100,000 (the Monthly Fees ) for the services of the CRO outlined in the Engagement Contract. The initial term for CRO services will be six (6) months and month-to-month thereafter. Payment will be due following entry of an order approving the Services Agreement between the Debtor and FTI and on the 1 st of each month thereafter. Payments are to be made directly to Mr. Reiss. If a plan of reorganization is confirmed, Mr. Reiss will transition to become the plan administrator at a monthly rate to be determined by the parties at such time. It is contemplated that the CRO will average approximately thirty (30) hours per week over the initial six (6) month term of the Engagement. Standard Hourly Rate: Fees in connection with this Engagement for Additional Personnel assisting the CRO will be based upon the time incurred providing the Services, multiplied by FTI s standard hourly rates applicable in the United States, summarized as follows: Per Hour Senior Managing Directors $780 - $895 Directors / Managing Directors $560 - $745 Consultants / Senior Consultants $280 - $530 Administrative / Paraprofessional $115 - $230 DOCS_SF: /001 9

17 Main Document Page 17 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA (c) (d) Cash on Account: The Debtor paid FTI $500,000 (the Deposit or Retainer ), which funds are to be held on account to be applied to FTI s professional fees and expenses for services provided under the Engagement Contract until the completion of the engagement. Success Fee: FTI retains the ability to request a success fee on or after the effective date of a plan of reorganization confirmed in this Bankruptcy Case. The structure of the success fee will be negotiated and determined by the parties at such time. In addition to the hourly rates set forth above, the Debtor shall reimburse both FTI and the CRO respectively for all reasonable out-of-pocket expenses incurred in connection with this engagement such as travel, lodging, telephone and facsimile charges. FTI shall file with the Court, with copies to the United States Trustee and all official committees, a monthly report of staffing on the engagement for the previous month. Such report shall include the names and functions filled of the individuals assigned. All staffing shall be subject to review by the Court in the event an objection is filed. FTI shall file with the Court (and serve copies on the United States Trustee and any official committees appointed in this case contemporaneously with such filing) reports of compensation earned and expenses incurred on at least a quarterly basis. Such reports shall contain summary charts which describe services provided, identify the compensation earned by each executive officer and staff employee provided, and itemize the expenses incurred. Time records for all FTI Additional Personnel other than the CRO shall (i) be appended to the reports, (ii) contain detailed time entries describing the task(s) performed, and (iii) be organized by project category. When FTI personnel are providing services at an hourly rate, such personnel shall record their time entries in increments of no greater than one-half hour (.5). All compensation shall be subject to review by the Court in the event an objection is filed. The first quarterly report will be submitted forty-five (45) days from the end of the first calendar quarter after the Petition Date and will cover the period to and including the last day of the first quarter after the Petition Date. This procedure will continue at three month intervals thereafter. Because FTI is not being employed as a professional under section 327 of the Bankruptcy Code, it will not be submitting regular fee applications pursuant to sections 330 and 331 of the Bankruptcy Code. FTI will, however, submit certain reports described above. DOCS_SF: /001 10

18 Main Document Page 18 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA VII. GENERAL DISINTERESTEDNESS OF FTI Although the Debtor does not propose to retain FTI under section 327 of the Bankruptcy Code, FTI has nonetheless performed a computerized conflict check and, to the best of its knowledge and except to the extent disclosed in the Reiss Declaration, does not hold any interest adverse to the interests of the Debtor s estate. Furthermore, by the Reiss Declaration, Mr. Reiss provides full and complete disclosure in order to demonstrate that the Firm satisfies all requirements that would be imposed by the Bankruptcy Code and Bankruptcy Rules for employment in this case. FTI has agreed not to share with any person or entity any compensation received by it in the Debtor s case, except as among the members, associates, and employees of FTI. Neither FTI, nor any of its principals, employees, agents or affiliates has any connection with the Debtor, its creditors, the United States Trustee or any other party with an actual or potential interest in the Bankruptcy Case or their respective attorneys or accountants, except as set forth in the Reiss Declaration. From time to time, FTI has provided services, and likely will continue to provide services, to certain creditors of the Debtor and various other parties adverse to the Debtor in matters unrelated to the Bankruptcy Case. These unrelated matters involve numerous attorneys, financial advisors, and creditors, some of whom may be claimants or parties with actual or potential interests in this case or may represent such parties. FTI personnel and their family members may have business associations with certain creditors of the Debtor unrelated to the Bankruptcy Case. Additionally, in the ordinary course of its business, FTI may engage counsel or other professionals in unrelated matters who now represent, or who may in the future represent, creditors, or other interested parties in the Bankruptcy Case. The Debtor maintains business relationships with numerous shareholders, lenders, creditors and other parties. FTI may have advisory or other commercial or professional relationships with such entities or persons completely unrelated to the Debtor or its business affairs. No such relationships are in any way related to the Bankruptcy Case. DOCS_SF: /001 11

19 Main Document Page 19 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Because the Debtor is a large enterprise with numerous creditors and other relationships, FTI is unable to state with certainty that every client relationship or other connection has been disclosed. In this regard, if FTI discovers additional information that requires disclosure, FTI will file a supplemental disclosure with the Court. FTI has not been retained to assist any entity or person other than the Debtor on matters relating to, or in connection with, the Bankruptcy Case. If this Court approves the proposed employment of FTI by the Debtor, FTI will not accept any engagement or perform any services for any entity or person other than the Debtor in the Bankruptcy Case. FTI will, however, continue to provide professional services to, and engage in commercial or professional relationships with, entities or persons that may be creditors of the Debtor or parties in interest in the Bankruptcy Case, provided, however, that such services do not relate to, or have any direct connection with, the Bankruptcy Case. The Debtor does not owe FTI any amount for services performed or expenses incurred prior to the Petition Date and thus FTI is not a prepetition creditor of the Debtor. Accordingly, the Debtor believes that FTI is a disinterested person as defined in section 101(14) of the Bankruptcy Code. DOCS_SF: / VIII. INDEMNIFICATION AND LIABILITY LIMITATION PROVISIONS The Engagement Contract contains standard indemnification and limitation of liability language with respect to FTI s services. Notwithstanding any provisions of the Engagement Contract to the contrary, in accordance with the Protocol, FTI has agreed otherwise, as set forth below. With respect to Mr. Reiss in his capacity as CRO, the Debtor shall indemnify the CRO on the same terms as provided to the Debtor s directors under the Debtor s by-laws and applicable state law. 2 2 Contemporaneously with the filing of this Motion, the Debtor filed the Motion of Debtor for an Order Authorizing the Debtor to Honor All Obligations Arising Under Indemnity Agreements With its Directors and Proposed Chief Restructuring Officer (the D&O Indemnification Motion ). Mr. Reiss is among the individuals covered by the D&O Indemnification Motion. The scope of the proposed indemnification hereunder is intended to be substantially similar to the terms of the indemnification under the D&O Indemnification Motion. However, the relief sought by the D&O

20 Main Document Page 20 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA With respect to the Additional Personnel, the Debtor shall have no obligation to indemnify FTI or to provide contribution or reimbursement to FTI for any claim or expense that is either (a) judicially determined to have resulted primarily from the willful misconduct, gross negligence, bad faith or self-dealing of FTI; or (b) settled prior to a judicial determination as to FTI s willful misconduct, gross negligence, bad faith or self-dealing but determined by the Court, after notice and a hearing, to be a claim or expense for which FTI should not receive indemnity, contribution or reimbursement under the terms of the Engagement Contract. If FTI believes that it is entitled to the payment of any amounts by the Debtor on account of the Debtor s indemnification with respect to the Additional Personnel, including without limitation the advancement of defense costs, before the earlier of (a) the entry of an order confirming a chapter 11 plan in this Bankruptcy Case (that order having become a final order no longer subject to appeal) and (b) the entry of an order closing, dismissing or converting this chapter 11 case, FTI must file an application to this Court seeking such payment, and the Debtor may not pay any such amounts to FTI before the entry of an order by this Court approving the payment; provided, however, that the foregoing is intended only to specify the period of time during which the Court shall have jurisdiction over any request for indemnification by FTI, and is not a provision limiting the duration of the Debtor s obligation to indemnify FTI. Finally, notwithstanding any provisions of the Engagement Contract to the contrary, FTI has agreed not to raise or assert any defense based upon jurisdiction, venue, abstention or otherwise to the jurisdiction and venue of this Court to hear or determine any controversy or claims with respect to, in connection with, arising out of, or in any way related to FTI s engagement in this Bankruptcy Case. DOCS_SF: / IX. BASIS FOR RELIEF Section 363 of the Bankruptcy Code provides, in relevant part, that a debtor in possession after notice and a hearing, may use, sell or lease, other than in the ordinary course of business, Indemnification Motion and the DIP Financing Motion also includes collateral securing the Debtor s indemnification obligation and such collateral is not intended to apply to the relief sought by this Motion.

21 Main Document Page 21 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA property of the estate. 11 U.S.C. 363(b). Under applicable case law in this and other circuits, if a debtor s proposed use of its assets pursuant to section 363(b) of the Bankruptcy Code represents a reasonable business judgment on part of the debtor, such use should be approved. See e.g., Myers v. Martin (In re Martin), 91 F.3d 389, 395 (3d Cir. 1996) (citing Fulton State Bank v. Schipper (In re Schipper), 933 F.3d 513, 515 (7 th Cir. 1991)); Stephens Indus., Inc. v. McClung, 789 F.2d 386, 390 (6 th Cir. 1986); Comm. Of Equity Sec. Holders v. Lionel Corp. (In re Lionel), 722 F.2d 1063, 1070 (2d Cir. 1983); In re Montgomery Ward Holding Corp., 242 B.R. 147, 153 (Bankr. D. Del. 1999); In re Delaware & Hudson R.R. Co., 124 B.R. 169, 176 (Bankr. D. Del. 1991) (courts have applied the sound business purpose test to evaluate motions brought pursuant to section 363(b)); In re Integrated Resources, Inc., 147 B.R. 650, 656 (Bankr. S.D.N.Y. 1992) (quoting Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985)) ( [T]he business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the actions were in the best interests of the company. ). Bankruptcy courts have analyzed the propriety of a debtor s employment of corporate restructuring officers, advisors and professionals under section 363 on numerous occasions and have determined it is an appropriate exercise of the debtor s business judgment to employ a restructuring professional in this manner. 3 See In re Westcliff Medical Laboratories, Inc., Case No (Bankr. C.D. Cal. June 25, 2010); In re Fatburger Restaurants of California, Inc., et al., Case No (Bankr. C.D. Cal. Feb. 16, 2011); In re Fairfield Residential LLC, Case No (Bankr. D. Del Jan 13, 2010); In re Motor Coach Industries International, Inc., Case No (Bankr. D. Del Oct. 15, 2008) (approving retention of CRO and crisis managers); In re Pappas Telecasting, Inc., Case No (Bankr. D. Del June 26, 2008); In re Linens Holding Co., Case No (CSS) (Bankr. D. Del May 28, 2008); In re Hoop Holdings, LLC, Case No (BLS) (Bankr. D. Del Apr. 22, 2008); In re Leiner Health Products, Inc., Case No (KJC) (Bankr. D. Del. Apr. 8, 2008); In re TOUSA, Inc., Case No (Bankr. S.D. Fla. Mar. 26, 3 Because of the voluminous nature of the orders cited herein, they are not annexed to this Motion. Copies of these orders are available upon request made to the Debtor s proposed counsel. DOCS_SF: /001 14

22 Main Document Page 22 of 78 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA ); In re American Home Mortgage Holdings, Inc., Case No (Bankr. D. Del. Sept. 5, 2007); In re Calpine Corp., Case No (Bankr. S.D.N.Y. Jan 17, 2007). A debtor, pursuant to section 363(b), may employ one or more professionals to act as their restructuring officers or managers or crisis officers or managers. See In re Tokheim Corp., Case No (RJN) (Bankr. D. Del. Feb. 25, 2003). The retention of interim corporate officers and other temporary employees is proper under section 363 of the Bankruptcy Code. Numerous courts have authorized retention of officers utilizing this provision of the Bankruptcy Code, including this Court. See In re Westcliff Medical Laboratories, Inc., Case No (Bankr. C.D. Cal. June 25, 2010); In re Fatburger Restaurants of California, Inc., et al., Case No (Bankr. C.D. Cal. Feb. 16, 2011); In re Fairfield Residential LLC, Case No (Bankr. D. Del Jan. 13, 2010); In re The Holliston Mill, Inc., Case No (MFW) (Bankr. D. Del. June 6, 2007); In re Sea Containers Ltd., Case No (KJC) (Bankr. D. Del. May 8, 2007); In re Adva-Lite, Inc., Case No (KJC) (Bankr. D. Del. Mar. 16, 2007); In re Global Home Products, LLC, Case No (KG) (Bankr. D. Del. May 4, 2006); In re World Health Alternatives, Inc., Case No (PJW) (Bankr. D. Del. Mar. 15, 2006). Additionally, the Court s general equitable powers codified in section 105(a) of the Bankruptcy Code provide ample authority for the relief requested herein. Section 105(a) of the Bankruptcy Code empowers the court to issue any order, process, or judgment that is necessary to carry out the provisions of this title. See 11 U.S.C. 105(a). See also United States v. Energy Resources Co., 495 U.S.545, 549 (1990); In re Continental Airlines, 203 F.3d 203, 211 (3d Cir. 2000) ( Section 105(a) of the Bankruptcy Code supplements courts specifically enumerated bankruptcy powers by authorizing orders necessary or appropriate to carry out provisions of the Bankruptcy Code. ); Baron & Budd, P.C. v. Unsecured Asbestos Claimants Comm., 2005 WL , *14 (D.N.J. Feb. 25, 2005) (reciting the power of the bankruptcy court to issue any order that is necessary or appropriate to carry out the provisions of [title 11] ). This Court in other chapter 11 cases has approved the employment of chief restructuring officer and its staff pursuant to section 363 of the Bankruptcy Code on terms and conditions substantially similar to those in the Engagement Contract. See, e.g., In re Fatburger Restaurants of DOCS_SF: /001 15