IN THE BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. Chapter 11. Chapter 11

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1 IN THE BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA IN RE: W.S. LEE & SONS, INC. Debtor-in-Possession. BANKRUPTCY NO Chapter 11 IN RE: LEE SYSTEMS SOLUTIONS, INC. Debtor-in-Possession. BANKRUPTCY NO Chapter 11 THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS, v. Movant, ATLANTIC MILLS INC., ALTOONA CITY AUTHORITY, CISCO SYSTEMS CAPITAL CORP., CURVE BASEBALL, LP, EDGECRAFT CORP., FIORE TRUE VALUE HARDWARE, GUTTMAN OIL COMPANY, HANDGARDS, INC., HILLANDALE FARMS, IBM CORPORATION, LACAS COFFEE CO., MCCARTNEY S INC., NMHG FINANCIAL SERVICES, PHOENIX MANAGEMENT SERVICES, PRIMMS, RANDY MOYER AUTO GLASS, ROBERT DONALDSON, SCOTT ELECTRIC, UNITED PARCEL SERVICE, YOUNG, OAKES, BROWN & CO., INC., Respondents.

2 COMMITTEE OF UNSECURED CREDITORS SECOND OMNIBUS OBJECTION TO ALLOWANCE OF CERTAIN PROOFS OF CLAIM AND NOW, comes the Official Committee of Unsecured Creditors (the Committee ), by and through its counsel, Bernstein Law Firm, P.C., and files this Committee s Second Omnibus Objection to Allowance of Certain Proofs of Claim, and in support thereof respectfully represents as follows: PROCEDURAL BACKGROUND 1. On March 14, 2006, W.S. Lee & Sons, Inc. ( W.S. Lee ), commenced this case by filing a voluntary Chapter 11 petition pursuant to Title 11 of the U.S. Code, 11 U.S.C. 101, et seq. (the Code ). Lee Systems Solutions, Inc. ( L.S.S. ) is a wholly owned subsidiary of W.S. Lee. L.S.S. filed its own Chapter 11 Bankruptcy on March 14, 2006, Bankr. No This Court has jurisdiction over this objection pursuant to 28 U.S.C and This matter is a core proceeding under 157 of the Code. W.S. Lee and L.S.S. are referred to herein collectively as the Debtors. 3. The statutory predicates for the relief requested herein are 502 of the Code, and Rules 3002 and 3007 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ). FACTUAL BACKGROUND 4. Movant, the Official Committee of Unsecured Creditors is the entity created by and pursuant to Section 1102 of the Code, with the powers and authority conferred upon a Committee pursuant to Section 1103 of the Code, and has an address, for purposes of this proceeding, of c/o Robert Bernstein, Esquire, Attorney for the Committee, Bernstein Law Firm, P.C., Suite 2200 Gulf Tower, Pittsburgh, PA

3 5. The Debtors are W.S. Lee and Sons Inc. ( W.S. Lee ) and Lee Systems Solutions, Inc. ( L.S.S.), and are acting as Debtors-in-Possession with all of the rights and duties provided under Section 1107 of the Code. 6. Respondents are creditors who either filed proofs of claims against the Debtors or were listed as creditors on the Debtors Bankruptcy Petition. 7. On June 26, 2006 the Debtors filed an Emergency Motion for Order Approving Modification to Order Authorizing Debtors-in-Possession to Incur Administrative Debt on a Secured Basis, and Authorizing Debtors-in-Possession to Make Down Payment on Pre-Petition Secured Debt with Proceeds of Receivables that Constitute Collateral for the Pre-Petition and for Expedited Hearing Thereon (the Motion ). 8. On July 7, 2006, the Committee filed an Objection to the Motion (the Objection ) averring, inter alia, that Debtors were not in default of the Cash Collateral Order, the secured lender ( Omega Bank ) was adequately protected and there was no reason or justification for taking the Debtors available cash and paying it to the secured lender. The Debtors and Omega Bank disputed the averments made in the Objection. 9. In order to avoid costly litigation and in the best interest of the Debtors estates, the parties agreed to resolve their differences in the form of a standstill while they attempted to formulate a mutually agreeable resolution to the Debtor s Motion, which standstill was formally adopted and approved by this Honorable Court by an Order dated July 14, 2006 (the Standstill Order ). 10. W.S. Lee, L.S.S., the Committee, and Omega Bank, acting by and through their respective counsel, agreed, subject to the approval of the Court, to a settlement of the case as regards the treatment to be afforded to the holders of allowed unsecured claims not entitled to priority in the Plan to be proposed by W.S. Lee and L.S.S., as well as guaranteeing said

4 treatment by Omega under the agreed upon circumstances (the Settlement Agreement ). A true and correct copy of the Settlement Agreement is attached hereto as Exhibit A. 11. This Honorable Court approved the Settlement Agreement via an Order dated October 24, Pursuant to the Settlement Agreement, the Debtors agreed to create a fund from sources agreed upon by W.S. Lee, L.S.S., and Omega Bank, for the benefit of the Unsecured Creditor Class in the amount of $1,100, (the Fund ). 13. The Unsecured Creditor Class is defined by the Settlement Agreement as the general unsecured creditors of both W.S. Lee and Lee Systems Solutions: not entitled to priority under section 507 of the Code who have been (a) scheduled by one of the Debtors as liquidated, noncontingent and not disputed, or (b) filed timely claims against a Debtor or the Debtors and (c) whose claims have not been objected to by a Debtor, the Committee, or any other party in interest in a Court of competent jurisdiction, excluding claims allowed as PACA Trust Claims, claims allowed as 503(b)(9) claims, and claims disallowed as PACA Trust Claims or 503(b)(9) claims for reasons such as having been paid, product not having been received, spoilage, samples, etc., or whose claims, if objected are allowed by final order of Court. Notwithstanding the preceding, the [unsecured] Creditor Class shall not include any claim of Omega, insiders (as defined by the Bankruptcy Code) or the claims of S&T Bank, and/or the claims of Pennsylvania Industrial Development Authority or ABCD, except as set forth [in the Settlement]. 14. The Settlement Agreement grants the Committee the right to police the Unsecured Creditor Class, by way of filing objections or otherwise, to limit the members of the class and their claims. 15. On April 25, 2006, this Court entered Order establishing August 23, 2006 (the Bar Date ) as the last day for filing proofs of claim against the Debtor by non-governmental creditors and establishing September 11, 2006 as the last day for filing proofs of claim against the Debtor by governmental creditors.

5 16. On May 5, 2006, W.S. Lee served notice on all creditors (the Bar Date Notice ) advising them of the Bar Date. 17. Since the Bar Date, the Committee and its professionals, in conjunction with the Debtors and their professionals, have diligently and carefully reviewed and scrutinized each proof of claim filed in both cases and every creditor listed on Debtors petitions. This process has included, inter alia, (a) comparing the filed claims with the corresponding amounts listed, if any, on the Debtors schedules of assets and liabilities, (b) reviewing the Debtors accounts payable ledgers in relation to the filed claims, (c) contacting some of the claimants to request additional information pertaining to their claims and reviewing all information received, and (d) consulting with the Debtors management and retained professionals with respect to the merits of the claims. 18. On December 18, 2006, the Committee filed its First Omnibus Objection to Allowance of Certain Proofs of Claims (the First Claim Objection ). 19. A hearing was held on the First Claim Objection on February 1, On November 7, 2006, Debtors filed their Chapter 11 Plan of Reorganization (the Plan ) and Disclosure Statement. 1 In the Plan, Debtors propose to eliminate the entity known as L.S.S. and emerge from bankruptcy as only W.S. Lee. Hence, the creditors of both Debtors will be paid from the Fund and this objection has been filed in both cases. Objection #1: Leases Assumed by Debtors 21. In the Plan, Debtors propose to assume various leases. Lessors whose leases have been assumed are listed as Class 4 claimants in the Plan (the Assumed Lessors ). Pursuant to the Plan, on the Effective Date of the Plan, the Debtors will cure all arrearages owed to the Assumed Lessors. Hence, the Assumed Lessors claims should be expunged. 1 The Disclosure Statement and Plan are filed at Doc. nos. 806 and 807 respectively.

6 22. The following creditors are Assumed Lessors that filed proofs of claim against the Debtors for arrears and/or rejection of lease damages owed under a lease that is to be assumed by the Debtor. The claims of these Assumed Lessors, as listed below, should be expunged: a. Cisco Systems Capital Corp., at claim no. 260 in the amount of $6,940.34; b. IBM Corporation, at claim no. 21 in the amount of $164,187.13; c. Guttman Oil Company, as scheduled by W.S. Lee on Schedule F of its Petition, in the amount of $90,735.49; d. NMHG Financial Services, at claim no. 2 in the amount of $345, ; expunging the claims of the Assumed Lessors. Objection #2: Executory Contracts Assumed by Debtors 23. In their Plan of Reorganization (the Plan ), Debtors propose to assume various executory contracts (the Assumed Executory Contracts ). Creditors whose executory contracts have been assumed ( Assumed Executory Contract Creditors ) are listed as Class 5 claimants in the Plan. Pursuant to the Plan, on the Effective Date of the Plan, the Debtors will cure all arrearages owed on the Assumed Executory Contracts. Hence, the claims of the Assumed Executory Contract Creditors should be expunged. 24. The following are Assumed Executory Contract Creditors that filed proofs of claim against the Debtors for arrears and/or breach of contract damages owed under the Assumed Executory Contracts. The claims of the Assumed Executory Contract Creditors, as listed below, should be expunged: a. Primms, at claim no. 258 in the amount of a $55, unsecured claim; 2 NMHG Financial Services lease no was assumed by Motion of the Debtors (Doc. no. 948).

7 b. Robert Donaldson, as scheduled by W.S. Lee on Schedule F of its Petition, in the amount $ expunging the Assumed Executory Contract Creditors claims. Objection #3: Debtor s Professionals Phoenix Management Services 25. Phoenix Management Services ( Phoenix ) is listed on Schedule F of W.S. Lee s Petition as having a general unsecured claim in the amount of $39, Subsequent to the Petition Date, the Debtors hired Phoenix as financial advisors to the company. A true and correct copy of the written agreement (the Agreement ) between Phoenix and the Debtors is attached hereto as Exhibit B Pursuant to the Agreement, on March 13, 2006, Debtors paid Phoenix a $70,000 retainer (the Retainer ). Phoenix had the right to debit the Retainer for all fees related to the preparation of the Debtors Chapter 11 filing. 28. Upon information and belief, any amount listed on the Petition owed to Phoenix has been paid pursuant to the Agreement via a draw on the retainer. 29. Therefore, the amount listed on Debtor s Petition for Phoenix Management Services should be expunged. expunging Phoenix Management Services claim listed on Schedule F. of W.S. Lee s Petition. 3 The Agreement was attached to Debtor s Application to Employ Phoenix Management Services. See Doc. No. 3.

8 Young, Oakes, Brown & Co. 30. Young, Oakes, Brown & Co. ( Young Oakes ) is listed on Schedule F of W.S. Lee s Petition as having a general unsecured claim in the amount of $7, On September 22, 2006, W.S. Lee filed its Application to Employ Young Oakes Brown & Co. as Accountants ( Application to Employ Accountants ) (Doc. no. 618). 32. Attached to the Application to Employ Accountants was the Declaration of Rex H. Kaup (the Declaration ), a principal of Young Oakes. A true and correct copy of the Declaration is attached hereto as Exhibit C. Paragraph seven (7) of the Declaration states, in relevant part: As of the Petition Date, Young Oakes had performed pre-petition services for the Debtors, for which compensation was unpaid in the amount of $7,100. Provided that Young Oakes is employed in these proceedings, Young Oakes agrees to waive all amounts due and owing to Young Oakes by the Debtors for such prepetition services as of the Petition Date. 33. Young Oakes was employed by the Debtors via this Court s Order dated September 25, 2007 (Doc. no. 621). 34. Therefore, Young Oakes has waived the $7,100 claim listed on Schedule F of W.S. Lee s Petition and said claim should be expunged. expunging Young, Oakes, Brown & Co. s claim listed on Schedule F. of W.S. Lee s Petition. Objection #4: Curve Baseball, LP 35. Curve Baseball, LP filed a proof of claim against W.S. Lee, at claim no. 241, for rejection of lease damages stemming from the Debtors five (5) year lease of a Sky Box at a baseball stadium owned and/or operated by Curve Baseball, LP. The claim includes unpaid rent

9 for the years 2006, 2007, 2008, 2009, and 2010 for the amounts of $14,000, $15,500, $17,000, $18,000 and $19,000 respectively. 36. Pursuant to 502(b)(6) of the Code, rejection of lease damages from the termination of a lease of real property cannot exceed the greater of one year s rent or 15% of the total amount remaining due on the lease (not to exceed three years) plus any unpaid rent due under such lease on the earlier of the Petition Date or the date on which the lessor repossessed the property. 37. Under the lease, a $1,000 down payment was due on September 1 of the calendar year preceding each baseball season of the term. The remaining balance of the annual rent was due on or before December 31 of the calendar year preceding each baseball season of the term. 38. Therefore, rent for the 2006 season (during which Debtors filed for bankruptcy) was due as follows: $1,000 due on September 1, 2005 and the remaining $13,000 due on December 1, As indicated in Curve Baseball s proof of claim, the $1,000 deposit was paid. Hence, Curve Baseball is entitled to $13,000 for rent for the 2006 season plus one-year rejection of lease damages. The rent due within one year of the Petition Date was as follows: $1,000 due on September 1, 2006 and $14,500 on December 1, 2006 ($15,500 total). 39. Hence, Curve Baseball is entitled to a $28,500 claim. The remainder of Curve Baseball s claim should be expunged. reducing Curve Baseball s claim to $28,500. Objection #5: Handgards, Inc. 40. Handgards, Inc. ( Handgards ) filed a proof of claim against W.S. Lee, claim no. 273, in the amount of $92, On the proof of claim, Handgards indicated that $32, of the claim is for goods sold (which amount corresponds to the amount listed by W.S. Lee on Schedule F of its Petition as owed to Handgards) and $60,000 of the claim is for Agreement 2006 Marketing Program. Attached to the proof of claim is a statement from Tom Lore of

10 Handgards indicating that W.S. Lee was paid $60,000 in exchange for the inclusion of Handgards products in W.S. Lee s 2006 Marketing Program (the Marketing Agreement ). Also attached to the proof of claim is a cancelled check in the amount of $60,000 in the name of W.S. Lee and a Handgards generated Report of Competitive Activity, which appears to indicate the existence of the Marketing Agreement. Attached hereto as Exhibit D is Handgards proof of claim and the attachments thereto. 41. Upon information and belief, Debtor performed all of its obligations under the Marketing Agreement. In fact, Handgards makes no indication to the contrary in its proof of claim. 42. Therefore, Handgard is not entitled to return of the $60,000 paid to W.S. Lee pursuant to the Marketing Agreement. Handgard s proof of claim should be reduced to $32, reducing Handgard Inc. s claim to $32, Objection #6: Outstanding 503(b)(9) claims of Lacas Coffee Co., Inc. 43. Lacas Coffee Co., Inc. ( Lacas ), filed a proof of claim against W.S. Lee, at claim no. 75 and in the amount of $30,199.72, and also filed a proof of claim against L.S.S in case no , at claim no. 24 in the amount of $5, On August 24, 2006, Lacas filed its Declaration of 503(b)(9) claim alleging that $10, was entitled to an administrative priority under 503(b)(9) of the Code (the Lacas 503(b)(9) Action ). Debtors objected to Lacas 503(b)(9) claim on the grounds that Debtors had valid setoffs against the alleged 503(b)(9) amounts. To date, the litigation in the Lacas 503(b)(9) Action has not been resolved.

11 45. To the extent that a portion of Lacas claim is allowed as a 503(b)(9) administrative priority expense, Lacas total unsecured claim against the Debtors should be reduced by an equivalent amount. reducing Lacas claim by any amounts allowed as a 503(b)(9) claim. Objection #7: No supporting documentation 46. Pursuant to Bankruptcy Rule 3001, in order for a proof of claim to receive a presumption of validity, supporting documentation must be attached to the proof of claim. See In re Chain, 255 B.R. 278 (D. Conn. 2000) ( Where a creditor's proof of claim does not set forth sufficient factual allegations to support its claim, it is not entitled to the presumption of prima facie validity, and the creditor bears the burdens of going forward, as well as that of proving its claim by a preponderance of the evidence ). 47. The following creditors failed to attach any supporting documentation to their respective proofs of claim filed against W.S. Lee. These proofs of claim, as listed below, should be expunged: a. Atlantic Mills Inc., at claim no. 94, in the amount of $4,270.00; b. Edgecraft Corp., at claim no. 133, in the amount of $307.62; c. Fiore True Value Hardware, at claim no. 79, in the amount of $1,669.95; d. Hillandale Farms, at claim no. 54, in the amount of $31,651.76; e. Randy Moyer Auto Glass, at claim no. 113, in the amount of $2,098.80; and f. United Parcel Service, at claim no. 59, in the amount of $1, The following creditors failed to attach any supporting documentation to their respective proofs of claim filed against L.S.S in case no These proofs of claim, as listed below, should be expunged:

12 a. Altoona City Authority, at claim no. 20, in the amount of $3,034.62; b. McCartney s Inc., at claim no. 33, in the amount of $1,390.21; and c. Scott Electric, at claim no. 9, in the amount of $1, expunging the aforementioned creditors claims that were filed without supporting documentation. Objection #8: Conagra Foods and Citicorp Leasing 49. Conagra Foods filed a proof of claim, at claim no. 255 and in the amount of $36, W.S. Lee listed Conagra Foods Culinary Products and Conagra Foods Packaged Foods Co. on Schedule F of its Petition, with claims of $4, and $15, respectively. 51. L.S.S. listed Conagra Foods on Schedule F of its Petition, with a claim of $2, Upon information and belief, the proof of claim filed at no. 255 is filed on behalf of Conagra Foods, Conagra Foods Culinary Products, and Conagra Foods Packaged Foods Co. This is evidenced by the invoice attached to Conagra Foods proof of claim, containing a letterhead with the names of Conagra Foods Packaged Foods Co., Conagra Foodservice Co., and Conagra Foods Culinary Products. A true and correct copy of Conagra Foods proof of claim is attached hereto as Exhibit E. 53. Therefore, the amounts listed on Schedule F of W.S. Lee and L.S.S. s Petitions for Conagra Foods, Conagra Foods Culinary Products, and Conagra Foods Packaged Foods Co. should be stricken as they are superceded by Conagra Foods proof of claim filed at claim no Similarly, Citicorp Del-Lease, Inc. filed a proof of claim against W.S. Lee, at claim no. 40, in the amount of $22,

13 55. W.S. Lee listed Citicorp Leasing and Citicorp Vendor Finance, Inc. on Schedule F of its Petition with claims of $2, and $4, respectively. 56. Upon information and belief, Citicorp Leasing, Citicorp Vendor Finance, Inc. and Citicorp Del-Lease, Inc. are the same entity and are all represented by Citicorp Del-Lease s proof of claim, at claim no. 40, filed against W.S. Lee. 57. Therefore, the amounts listed on Schedule F of Debtors Petitions for Citicorp Leasing and Citicorp Vendor Finance, Inc. should be stricken as they are superceded by Citicorp Del-Lease s proof of claim, at claim no. 40, filed against W.S. Lee. expunging the claims listed on Schedule F of W.S. Lee s Petition for Conagra Foods, Conagra Foods Culinary Products, and Conagra Foods Packaged Foods Co. and Citicorp Leasing, Citicorp Vendor Finance, Inc. Objection #9: CMC Associates, Inc. 58. Bankruptcy Rule 3001(c) states: When a claim, or an interest in property of the debtor securing the claim, is based on a writing, the original or a duplicate shall be filed with the proof of claim. If the writing has been lost or destroyed, a statement of the circumstances of the loss or destruction shall be filed with the claim. 59. CMC Associates, Inc. ( CMC ) filed a proof of claim, claim no. 95, in the amount of $67, claiming that the amount owed was for engineering services. Attached to its proof of claim, CMC includes an invoice indicating $83,975 as the total amount due for Engineering Services and listing two (2) $8,000 payments made by W.S. Lee. 60. However, CMC fails to include any contract evidencing an agreement between either W.S. Lee or L.S.S. and CMC for engineering services. Moreover, after review of Debtors books and records, neither W.S. Lee nor L.S.S. has any record of an outstanding balance owed to CMC.

14 WHEREFORE, the Committee requests this Honorable Court enter an Order expunging CMC s proof of claim. Respectfully submitted, BERNSTEIN LAW FIRM, P.C. By:_/s/ Kirk B. Burkley Kirk B. Burkley, Esquire PA I.D. #89511 Scott E. Schuster, Esquire PA ID # Suite 2200 Gulf Tower Pittsburgh, PA (412) Attorneys for the Official Committee of Unsecured Creditors