Case KG Doc 358 Filed 10/09/18 Page 1 of 17 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE.

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1 Case KG Doc 358 Filed 10/09/18 Page 1 of 17 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Heritage Home Group LLC, et al., 1 Debtors. Chapter 11 Case No (KG) (Jointly Administered) Hearing Date: November 14, 2018 at 2:00 p.m. (ET) Objection Deadline: October 23, 2018 at 4:00 p.m. (ET) MOTION OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR ENTRY OF AN ORDER GRANTING STANDING AND AUTHORITY TO PROSECUTE AND SETTLE CLAIMS ON BEHALF OF DEBTORS ESTATES The Official Committee of Unsecured Creditors (the Committee ) 2 appointed in the above-styled cases of the within debtors and debtors in possession (collectively, the Debtors ), by and through its undersigned counsel, files this motion (the Motion ) for entry of an order substantially in the form attached hereto as Exhibit A (the Proposed Order ), pursuant to sections 105(a) and 1109(b) of title 11 of the United States Code, 11 U.S.C. 101 et seq. (the Bankruptcy Code ), granting standing to the Committee to assert, prosecute, litigate, negotiate, and, with Court approval, settle the claims and causes of action (the Claims ) set forth in the draft complaint attached hereto as Exhibit B (the Complaint ) on behalf of and for the benefit of the Debtors estates and granting a short extension of the Initial Challenge Period, if necessary, to permit the Committee to complete its final area of inquiry. In support thereof, the Committee respectfully states as follows: 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, include: Heritage Home Group LLC ( Heritage ) (9506); HH Global II B.V. (0165); HH Group Holdings US, Inc. (7206); HHG Real Property LLC (3221); and HHG Global Designs LLC (1150). 2 To the extent a term is not defined in this Motion, the term should be interpreted as defined in the DIP Order (defined below)

2 Case KG Doc 358 Filed 10/09/18 Page 2 of 17 INTRODUCTION AND RELIEF REQUESTED 1. The Debtors filed the DIP Motion (defined below) on the Petition Date, seeking authority to obtain $98 million in postpetition financing from PNC Bank, National Association (in its various capacities, PNC ), as the administrative agent and collateral agent for itself and the other financial institutions party to the DIP Facility (defined below) from time to time. PNC also served as administrative agent and collateral agent to the Debtors under the ABL Loan (as defined below). 2. KPS Special Situations Fund III (A) L.P. (in its various capacities, KPS ) is the administrative agent and collateral agent for itself and the other financial institutions, lenders and investors party to the prepetition Term Loan (defined below) from time to time. In addition, in October 2017, KPS purchased a subordinated, last-out participation in the ABL Loan to provide the Debtors with $15 million of liquidity within nine months of the commencement of the Debtors bankruptcy cases. 3 KPS and PNC shall be collectively referred to herein as the Lenders. 3. As a condition for the DIP Facility, the Lenders required and the Debtors agreed to a series of stipulations in the DIP Order (defined below). The Debtors have stipulated, among other things, that the Lenders liens are valid and binding and are not subject to challenge, recharacterization, or any other defense. The DIP Order makes these stipulations binding upon all other parties in interest unless a timely challenge is filed by a party conferred with standing. The DIP Order provides the Lenders with broad releases from the Debtors absent a timely challenge. 3 The parties to the Term Loan and/or last-out participation include, but are not limited to, KPS, KPS Special Situations Fund III LP, KPS Special Situations Fund III (SUPPLEMENTAL), LP, KPS Special Situations Fund III (AIV), LP, and KPS Offshore Investors Ltd.. All of the foregoing, together with KPS Capital Partners, LLC and KPS Capital Partners, LP, shall be collectively referred to herein as the KPS Parties

3 Case KG Doc 358 Filed 10/09/18 Page 3 of Following the entry of the DIP Order, the Committee undertook a comprehensive investigation of the facts and statements contained in the Debtors stipulations and other matters relating to the Lenders and their liens in and claims against the Debtors assets. 4 As a result of this investigation, the Committee uncovered several purported liens and security interests that were not properly perfected and may not be enforceable. Thus, if the claims discussed below are successful, the estate and its creditors stand to reap substantial benefits. 5. By this Motion, the Committee requests entry of the Proposed Order substantially in the form attached hereto as Exhibit A pursuant to sections 105(a) and 1109(b) of the Bankruptcy Code, granting derivative standing and authority to prosecute the Complaint attached hereto as Exhibit B, including, without limitation, the assignment of the Debtors claims to the extent necessary, and granting a short extension of the Initial Challenge Period, if necessary, against PNC to complete the Committee s investigation of the Lane Divestitures (defined below). The Committee also requests authority to take all actions that it determines, in its sole discretion, necessary and appropriate in connection with the authority granted in connection with this Motion, including, but not limited to, the exclusive right to settle any and all claims and causes of action brought by the Committee on behalf of the Debtors estates. JURISDICTION 6. This Court has jurisdiction over this matter pursuant to 28 U.S.C. 157 and 1334, the Amended Standing Order of Reference from the United States District Court for the 4 The Committee also requested information concerning the prepetition Lane Divestitures (defined below), which are not directly related to the Lenders liens and claims. The Debtors provided some information concerning these prepetition sales; however, until recently, the Debtors (and the Committee) have been very focused on the sale of the Luxury assets. The information that the Committee received concerning the Lane Divestitures raise some potential issues, and the Committee has requested some additional information. Some, but not all of that additional information has been provided to the Committee. The Committee believes that the potential issues may sound in affirmative relief against PNC for which the Committee does not require derivative standing to pursue. In an abundance of caution, the Committee seeks herein a short extension for cause of the Challenge Period against PNC to finalize its investigation as to the Lane Divestitures

4 Case KG Doc 358 Filed 10/09/18 Page 4 of 17 District of Delaware dated February 29, 2012, and the DIP Order. Venue of these cases and this Motion in this District is proper pursuant to 28 U.S.C and This is a core proceeding pursuant to 28 U.S.C. 157(b)(2). The statutory and legal predicates for the relief requested herein are sections 105(a) and 1109(b) of the Bankruptcy Code. 7. Pursuant to Local Rule (f), the Committee consents to the entry of a final judgment or order with respect to this Motion if it is determined that this Court would lack Article III jurisdiction to enter such final order or judgment absent the consent of the parties. BACKGROUND KPS Parties Acquisition of the Debtors and These Chapter 11 Cases 8. In November of 2013, pursuant to a bankruptcy sale, 5 certain of the KPS Parties (as affiliates/designees of KPS Capital Partners, LP) formed the Debtors 6 and acquired the brand portfolio of Furniture Brands Int l, Inc. for $295 million and structured $100 million of the purchase price as a term loan credit facility (the Term Loan ) on the Debtors books. The KPS Parties treated $125 million of the purchase price as an equity contribution. The balance of the acquisition was funded through a $70 million asset-based credit facility made by third-party lenders. 9. At the time of the KPS Parties acquisition, the Debtors predecessor operated three separate and unique business units, Thomasville & Co., Luxury Group, and Broyhill. 10. In March 2017, the Debtors entered into a $105,000,000 asset backed lending facility with PNC (the ABL Loan ) to refinance the Debtors then-existing, third-party facility and to add an additional advance. In connection with the ABL Loan, the Lenders entered into 5 The bankruptcy was styled In re FBI WindDown, Inc. (f/k/a Furniture Brands Int l, Inc.), Case No (CSS), filed in the United States Bankruptcy Court for the District of Delaware. 6 The KPS Parties own the Debtors

5 Case KG Doc 358 Filed 10/09/18 Page 5 of 17 an intercreditor agreement whereby, among other things, KPS agreed to subordinate its liens and security interests in the Debtors assets to PNC s liens and security interests. 11. On October 25, 2017, in lieu of contributing equity to the Debtors, KPS purchased a subordinated, non-voting, last-out (subordinated) participation in the ABL Loan in the amount of $15,000,000 in the ABL Loan (the KPS Participation ), which increased the availability under the ABL Loan to $120 million and was advanced to the Debtors to provide them with liquidity. 12. In December 2017, only seven months prepetition, the Debtors entered into two separate, back to back, substantial transactions whereby they sold their Lane and Lane Venture businesses (collectively, the Lane Divestitures ). Specifically, the Debtors sold (i) their Lane business to United Furniture Industries, Inc. for over $25 million and (ii) their Lane Venture business to Bassett Furniture Industries for over $15 million. While the Debtors state in their first day affidavit [Docket No. 12 at Paragraph 41] that these transactions created much needed liquidity, pursuant to closing documents, substantially all if not all of the proceeds from these sales went to PNC. 7 Debtors Chapter 11 Filing 13. On July 29, 2018 (the Petition Date ), each of the Debtors filed petitions for relief under chapter 11 of the Bankruptcy Code, claiming that unexpected operating losses, 7 The Committee has requested but has not yet received all of its requested information relating to the Lane Divestitures, including, but not limited to, information on the marketing process, indications of interest, fairness opinions and information on PNC s involvement for each of these transactions. At this time the Committee has issues and concerns with respect to the timing and process with respect to these transactions, especially in light the Debtors impending bankruptcy and that they did not benefit from any additional liquidity as the sale proceeds all went to PNC. The Committee interprets the DIP Order to carve-out any lender-liability-type claims from the 60 day requirement to commence any lien-perfection and adequate protection-type claims against PNC. In the event the Court interprets the DIP Order otherwise, the Committee reserves the right (and seeks an extension of the Challenge Period for such purpose) to amend the Complaint to include any additional claims supported by additional information it receives and this shall constitute identifying any potential lender-liability-type claims

6 Case KG Doc 358 Filed 10/09/18 Page 6 of 17 failure to develop a sales base, rapidly shifting consumer browsing and buying habits, among other things, as the reasons for the filing of their chapter 11 cases. 14. On the Petition Date, the Debtors also filed their Motion for Interim and Final Orders (I) Authorizing the Debtors to (A) Obtain Post-Petition Financing and (B) Utilize Cash Collateral of Secured Parties, (II) Granting Adequate Protection, (III) Modifying the Automatic Stay, and (IV) Granting Related Relief, Pursuant to 11 U.S.C. 105, 361, 362, 363(c), (d) & (e), 364(c), 364(d)(1), 364(e), and 507(b) [Docket No. 11] (the DIP Motion ). 15. The DIP Motion sought the entry of interim and final orders authorizing the Debtors to enter into a debtor-in-possession revolving loan credit facility with PNC, consisting of (A) a senior secured, super-priority revolving loan credit facility in the aggregate amount of up to $98.0 million a final basis (the DIP Facility ), and (B) a roll-up of up to $83,432, owed under to PNC under the Debtors pre-petition financing with PNC. 16. On August 29, 2018, the Court entered a final order approving the DIP Motion [Docket No. 209] (the DIP Order ). 17. Subject to other permitted liens and the Carve-Out, the DIP Order grants PNC automatically perfected first priority priming liens and security interests to secure the DIP Facility in all of the Debtors unencumbered assets. See DIP Order, Docket No. 209 at Paragraph The DIP Order further grants PNC an automatically perfected junior security interests on other assets of the Debtors, subject to permitted liens that were perfected prior to the Petition Date or that are validly perfected subsequent to the Petition Date as permitted by Bankruptcy Code section 546(b). Id. at Paragraph 2.1.2(B)

7 Case KG Doc 358 Filed 10/09/18 Page 7 of Paragraphs E and F of the DIP Order contain several binding stipulations, agreements and acknowledgements by the Debtors (the DIP Stipulations ) relating to the ABL Loan, the Term Loan, and the KPS Participation, including the following: a. As of the Petition Date, the aggregate amount of all of the Debtors pre-petition obligations owed to PNC under the ABL was not less than $82,235,349.85, plus additional letters of credit and accrued and accruing interest, additional fees, charges, costs and expenses (collectively, the Pre-Petition Revolving Obligations ); b. Acknowledgement of the KPS Participation and its inclusion in the Pre-Petition Revolving Obligations; c. The Pre-Petition Revolving Obligations constitute allowed, legal, valid, binding, enforceable, and non-avoidable obligations of the Debtors and the applicable guarantors, and are not subject to any offset, deduction, defense, counterclaim, avoidance, recharacterization, or subordination pursuant to the Bankruptcy Code or any other applicable law, and the Debtors do not possess and shall not assert any claim, counterclaim, setoff, or defense of any kind, nature or description which would in any way affect the validity, enforceability, and nonavoidability of any of the Pre-Petition Revolving Obligations; d. The Pre-Petition Revolving Obligations are secured by valid, perfected, enforceable and non-avoidable first priority security interests and liens granted by the Debtors and such liens are valid, binding, enforceable, non-avoidable, and properly perfected; e. As of the Petition Date, the aggregate amount of all of the Debtors pre-petition obligations owed to PNC under the Term Loan was $167,401,802 (the Pre-Petition Term Loan Obligations ); f. The Pre-Petition Term Loan Obligations constitute allowed, legal, valid, binding, enforceable, and non-avoidable obligations of the Debtors and the applicable guarantors and are not subject to any offset, deduction, defense, counterclaim, avoidance, recharacterization or subordination pursuant to the Bankruptcy Code or any other applicable law, and the Debtors do not possess and shall not assert any claim, counterclaim, setoff, or defense of any kind, nature or description which would in any way affect the validity, enforceability, and nonavoidability of any of the Pre-Petition Term Loan Obligations; and g. The Pre-Petition Term Loan Obligations are secured by valid, perfected, enforceable and non-avoidable first priority security interest and liens granted by the Debtors, and such liens are valid, binding, enforceable, non-avoidable and properly perfected. 19. Paragraph 5.1 of the DIP Order also contains certain representations, covenants and waivers by the Debtors relating to the extent, legality, validity, perfection, enforceability of the

8 Case KG Doc 358 Filed 10/09/18 Page 8 of 17 liens, interests and claims of PNC and KPS, subject only to the rights of any party in interest with requisite standing in accordance with the DIP Order. 20. Paragraph 5.4 of the DIP Order also contains broad releases whereby the Debtors each release PNC and KPS of all possible claims and causes of action. 21. Section 5 of the DIP Order requires that any challenge by the Committee must be commenced by the Committee, (i) with respect to PNC and its liens, interests, collateral and claims relating to, among other things, the ABL Loan and related transactions and documents, 60 days from the date of the Committee s formation and (ii) with respect to, among other things, the Term Loan and the KPS Participation and its liens, interests, collateral and claims and related transactions and documents, 120 days from the date of the Committee s formation (collectively, the Initial Challenge Period ). See DIP Order at Paragraph The DIP Order further provides that the Initial Challenge Period will be tolled to three business days from the entry of an order granting the Committee standing to prosecute objections asserted in a draft complaint if the Committee files a motion for standing with a draft complaint identifying and describing all Objections consistent with applicable law and rules of procedures. See DIP Order at Paragraph Following the entry of the DIP Order, the Committee commenced a comprehensive investigation into the liens, interests and claims asserted by both PNC and KPS. 8 The specific references to the Committee and creditors with respect to the Initial Challenge Period presumes that the Court has authority to confer such derivative standing on the Committee or other creditors. The Committee expressly requests the Court to assign the Debtors claims as set forth in the Complaint (as may be amended) to the Committee in the event that such claims are colorable and the presumption is incorrect. Without which, such language has no meaning (and is superfluous), and the Court would have waived estate rights without proper (and, in fact, misleading) notice thereof

9 Case KG Doc 358 Filed 10/09/18 Page 9 of 17 As a result of this investigation, the Committee filed the Complaint as an exhibit to this Motion. 9 The Complaint seeks a declaratory judgment that PNC and KPS did not perfect their liens with respect to certain pre-petition collateral, including, but not limited to, certain cash, intellectual property and other assets of the Debtors located outside of the United States, which Claims are more fully set forth in the Complaint. 10 The Complaint further seeks substantive consolidation of the Debtors as a predicate to determine that certain assets are unencumbered and the value of which are available for unsecured creditors. 24. The Committee demanded that the Debtors commence an adversary proceeding against the Lenders, which the Debtors refused with a reservation to challenge colorability of such claims. RELIEF REQUESTED 25. Section 1109(b) of the Bankruptcy Code provides that [a] party in interest, including... a creditors committee... may raise and may appear and be heard on any issue in a case under this chapter. 11 U.S.C. 1109(b). Granting standing to a creditors committee to act on behalf of a debtor s estate is an appropriate exercise of a bankruptcy court s equitable powers. See Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, (3d Cir. 2003) (determining that section 1109(b) and other sections of the Bankruptcy Code demonstrate Congress approval of derivative suits by creditors committees to recover property for the benefit of the estate, and that bankruptcy courts may exercise their equitable powers to confer such derivative standing); Infinity Investors Ltd ex 9 While motions for derivative authority generally are resolved prior to the filing of a complaint, the DIP Order requires the Committee to file the Complaint as an exhibit to the Motion for tolling to apply to the Initial Challenge Period. 10 The Committee continues to investigate other potential claims against KPS and may file a separate motion for standing to bring those claims

10 Case KG Doc 358 Filed 10/09/18 Page 10 of 17 rel. Yes! Entm t Corp. v. Kingsborough (In re Yes! Entm t Corp.), 316 B.R. 141, 145 (D. Del. 2004) ( In Cybergenics, the Third Circuit recognized that the Bankruptcy Court, as a court of equity, has the power to authorize a creditor s committee to sue derivatively to recover property for the benefit of the estate. ); see also PW Enters., Inc. v. N.D. Racing Comm n (In re Racing Servs., Inc.), 540 F.3d 892, 904 (8th Cir. 2008) (stating that derivative standing is available to creditors committees); Commodore Int l Ltd. v. Gould (In re Commodore Int l Ltd.), 262 F.3d 96, 100 (2d Cir. 2001) (same); Fogel v. Zell, 221 F.3d 955, 965 (7th Cir. 2000) (same); Canadian Pacific Forest Prods. Ltd. v. J.D. Irving, Ltd. (In re Gibson Grp., Inc.), 66 F.3d 1436, 1446 (6th Cir. 1995) (same). 26. Granting standing to a creditors committee is particularly appropriate where a debtor-in-possession exercises the powers that would otherwise vest in a bankruptcy trustee. Cybergenics, 330 F. 3d at The lack of a trustee immediately gives rise to the proverbial problem of the fox guarding the henhouse. Id. at 573. Debtors may be unwilling to pursue claims against individuals or businesses, such as critical suppliers, with whom it has an ongoing relationship that it fears damaging. Id. (citing Canadian Pac. Forest Prods. v. J.D. Irving, Ltd. (In re Gibson Group, Inc.), 66 F.3d 1436, 1441 (6th Cir. 1995). Granting standing to a creditors committee thus provides a critical safeguard against lax pursuit of avoidance actions and other claims of the estate. Id. 27. In the Third Circuit, a creditors committee may be granted standing upon a showing that: (a) the trustee or debtor-in-possession unjustifiably refuses a demand to pursue an action; (b) the committee has a colorable claim or cause of action; and (c) the committee seeks and obtains leave from the bankruptcy court to prosecute the action for and in the name of the

11 Case KG Doc 358 Filed 10/09/18 Page 11 of 17 debtor or trustee. See Cybergenics, 330 F.3d at 566; In re Yes! Entm t Corp., 316 B.R. at 145. The Committee satisfies all three of these elements here. I. Debtors Cannot and Have Refused to Pursue the Claims 28. Derivative standing generally is granted where a debtor unjustifiably or unreasonably refuses to pursue claims that would benefit the estate. Yes! Entm t, 316 B.R. at 145; see Cybergenics, 330 F.3d at 568. However, a committee or other party-in-interest is not required to make a formal demand that a debtor pursue claims where it is plain from the record that no action on the part of the debtor would have been forthcoming and that such a demand would be futile. Official Comm. of Unsecured Creditors of Nat l Forge Co. v. E. Roger Clark (In re Nat l Forge Co.), 326 B.R. 532, 544 (W.D. Pa. 2005) (finding that a formal request of the debtor to bring an action waived under DIP financing orders would have been futile as debtor could not have seriously entertained the idea ); see also Louisiana World Exposition, Inc. v. Fed. Ins. Co. (In re Louisiana World Exposition, Inc.), 832 F.2d 1391, (5th Cir. 1987) (stating that the court would not remand so that the committee could make formal demand upon debtor where conflicts would likely prevent the debtor from pursuing litigation adverse to its directors and officers). 29. Here, the Committee demanded that the Debtors pursue the Claims and the Debtors responded, recognizing the futility thereof because the Debtors have stipulated in the DIP Order that they do not possess and shall not assert any claim, counterclaim, setoff, or defense of any kind, nature or description.... See DIP Order at Paragraph E(ii). The Debtors have likewise stipulated that, as to the pre-petition Term Loan obligations, the Debtors do not possess and shall not assert any claim, counterclaim, setoff, or defense of any kind, nature or description.... See DIP Order at Paragraph E(vi)

12 Case KG Doc 358 Filed 10/09/18 Page 12 of Paragraph of the DIP Order provides that the DIP Order, including the stipulations and admissions discussed above, is binding on the Debtors, their Estates, all parties in interest in the Cases and their respective successors and assigns, including any trustee or other fiduciary appointed in the Cases.... See DIP Order at Paragraph The DIP Stipulations that the Committee seeks to contest, thus, bind, and cannot be challenged by, the Debtors. Although no formal demand that the Debtors pursue the Claims is required here, In re Nat l Forge Co., 326 B.R. at 544, the Committee made such demand, which the Debtors refused. 31. The Debtors have admitted that they cannot bring the Claims. The Debtors and their management negotiated and agreed to the liens and security agreements with PNC and KPS that the Committee seeks to challenge through the Claims. The Debtors reaffirmed those liens and security agreements in connection with the DIP Financing and the DIP Order, which contains findings that the liens and security agreements are valid, perfected, and unavoidable. Moreover, Section 5.4 of the DIP Order grants PNC and KPS broad releases thereby precluding the Debtors from bringing any derivative claims. This creates a clear conflict of interest. The Debtors will not undermine their own work product by bringing the Claims themselves and challenging the very liens and stipulations to which they negotiated and agreed. See In re Louisiana World Exposition, Inc., 832 F.2d at Accordingly, the Debtors cannot and will not assert the Claims challenging the liens and collateral securing the ABL Loan and/or the Term Loan. The Committee satisfies the first element necessary for derivative standing. II. Committee Has Colorable Claims 33. The burden to satisfy the requirement that the Committee have colorable claims

13 Case KG Doc 358 Filed 10/09/18 Page 13 of 17 and causes of action is a relatively easy one to make. Adelphia Communs. Corp. v. Bank of Am. (In re Adelphia Communs. Corp.), 330 B.R. 364, 376 (Bankr. S.D.N.Y. 2005). A committee is not required to present its proof when seeking derivative standing. Id. (eschewing an extensive merits review and stating that a mini-trial is not required ) (emphasis in original). Rather, the court should undertake the same analysis as when a defendant moves to dismiss a complaint for failure to state a claim. In re Centaur, LLC, 2010 Bankr. LEXIS 3918, at *13 (Bankr. D. Del. Nov. 5, 2010); see also Official Comm. of Unsecured Creditors v. Sabine Oil & Gas Corp. (In re Sabine Oil & Gas Corp.), 562 B.R. 211, 216 (S.D.N.Y. 2016) (stating that the proper inquiry is whether the claims would survive a defendant s motion to dismiss. ) (citation omitted). 34. When considering a motion to dismiss a complaint, a court must accept as true the allegations and facts pleaded in the complaint and any and all reasonable inferences derived from those facts. Unger v. Nat l Residents Matching Program, 928 F.2d 1392, 1400 (3d Cir. 1991). A motion to dismiss may be granted only if, after accepting the allegations in the complaint as true and viewing them in the light most favorable to the plaintiff, the plaintiff is still not entitled to any relief. Doug Grant, Inc. v. Greate Bay Casino Corp., 232 F.3d 173, 183 (3d Cir. 2000), cert. denied, 532 U.S. 1038, 121 S. Ct. 2000, 149 L. Ed. 2d 1003 (2001). In the context of motions for derivative standing, Delaware courts favor a general analysis of the allegations over a line-by-line or claim-by-claim analysis of proposed complaint. See In re Distributed Energy Systems, Corp., No KG (Bankr. D. Del. July 30, 2008), Transcript of Proceedings at 44 ( And the colorable claim issue, of course, is plausibility.... I don t even have to find that it has merit; I just have to find that it s not without merit. )

14 Case KG Doc 358 Filed 10/09/18 Page 14 of Here, the Committee has well founded, colorable claims that are clearly plausible and can withstand a motion to dismiss. The Complaint attached hereto as Exhibit B contains detailed allegations supporting findings that, among other things, certain liens claimed by PNC and KPS are invalid and certain assets are unencumbered. The Claims are not only colorable, but are compelling. The Committee believes that the strength of its Claims will only increase through formal discovery. 36. The Committee s Claims thus are colorable and satisfy the second element necessary for derivative standing. III. Committee Seeks Authority to Prosecute the Claims 37. By this Motion, the Committee seeks the authority to prosecute the Claims as required by the third element necessary for derivative standing. The Committee has established both (a) that the Debtors are prohibited from pursuing the Claims by the DIP Order, have a clear conflict of interest that otherwise would prevent them from pursuing claims against the Lenders and have refused to prosecute the Claims, and (b) that the Claims are colorable claims, which will withstand a motion to dismiss. Conferring derivative standing on the Committee to pursue the Claims is warranted and appropriate in this case. 38. Accordingly, the Committee satisfies all three elements necessary to confer derivative standing upon the Committee. The Motion should be granted and the Committee allowed to pursue the Claims for the benefit of the estate and its creditors. Further, this process required by the DIP Order would have no meaning unless the Committee constitutes an entity that may be conferred derivative standing under Delaware (and other applicable) law. In the DIP Order, the Court and the parties clearly acknowledge that there will be some independent party that would be conferred standing to commence and prosecute colorable challenges to the Lenders claims and liens. To the extent that the Committee would not constitute such a party

15 Case KG Doc 358 Filed 10/09/18 Page 15 of 17 under Delaware law, the Court has authority to assign the Debtors Claims to the Committee to effectuate the express language and intent of the DIP Order. IV. Exclusive Authority of Committee to Settle the Claims 39. The Committee also requests the exclusive authority to negotiate and enter into settlements regarding the Claims, subject to Court approval pursuant to Federal Rule of Bankruptcy Procedure Exclusive authority to settle claims is frequently included in orders conferring derivative standing upon a creditors committee. See In re Evergreen Solar, Inc., Order Granting Leave, Standing and Authority to the Official Committee of Unsecured Creditors of Evergreen Solar, Inc. to Commence, Prosecute, and Settle Claims on Behalf of the Debtor s Estate and Related Relief, Case No MFW (Bankr. D. Del. Oct. 28, 2011) [Docket No. 382] (granting derivative standing to unsecured creditors committee and providing that the committee shall have the exclusive right and authority to negotiate and enter into settlements on behalf of the Debtor s estate with respect to certain causes of action); In re Majestic Capital, Ltd., Order (I) Authorizing the Official Committee of Unsecured Creditors to (A) Assert and Prosecute Certain Claims and Causes of Action in the Name of and on Behalf of the Debtors Estates, and (B) Move for Authority to Compromise Any Such Claims and Causes of Action, and (II) Granting Related Relief, Case No CGM (Bankr. S.D.N.Y. Dec. 12, 2011) [Docket No. 211] (granting derivative standing to unsecured creditors committee and providing that it shall have the exclusive right, without further order of the Court, to move for authority, pursuant to Bankruptcy Rule 9019, to compromise any of the Estate Claims ); In re Old Carco LLC, Order Authorizing the Official Committee of Unsecured Creditors to Pursue Certain Claims on Behalf of the Estate of Debtor Old Carco LLC, Case No AG (Bankr. S.D.N.Y. Aug. 13, 2009) [Docket No. 5151] (granting creditors committee derivative

16 Case KG Doc 358 Filed 10/09/18 Page 16 of 17 standing, including exclusive right to prosecute and settle these claims on behalf of CarCo estate ). 40. The exclusive authority to settle the Claims is especially appropriate in this case given the Debtors close relationship with and financial reliance upon the Lenders. The same conflicts of interest that exist with respect to the assertion of the Claims also affect the settlement of such claims. The Committee should have the sole right to settle the Claims in order to ensure that the value of such claims has been maximized for the benefit of the estate and its creditors. NOTICE 41. The Committee will provide notice of this Motion to the following parties or their respective counsel, if known: (i) Debtors; (ii) the Office of the United States Trustee for the District of Delaware; (iii) PNC; (iv) KPS; and (v) any party that has requested notice pursuant to Bankruptcy Rule The Committee submits that, in light of the nature of the relief requested, no other or further notice need be given. RESERVATION OF RIGHTS 42. The Committee reserves the right to amend the Complaint on any and all additional factual or legal grounds that would support a colorable claim or cause of action and to seek any other or additional relief available to the Committee upon the entry of an order granting this Motion, and, to the extent necessary, to seek additional standing to bring any other or additional causes of action or claims against any other party

17 Case KG Doc 358 Filed 10/09/18 Page 17 of 17 WHEREFORE, the Committee respectfully requests that the Court enter an order, substantially in the form attached hereto as Exhibit A, granting the Committee standing to assert the Claims, and granting such other and further relief as the Court deems necessary and appropriate. Dated: October 9, 2018 Wilmington, Delaware Respectfully submitted, /s/ Aaron H. Stulman Christopher M. Samis (No. 4909) L. Katherine Good (No. 5101) Aaron H. Stulman (No. 5807) WHITEFORD, TAYLOR & PRESTON LLC The Renaissance Centre, Suite North King Street Wilmington, DE Telephone: (302) Facsimile: (302) and- Solely with Respect to the KPS Parties Richard J. Bernard, Esq. Leah Eisenberg, Esq. FOLEY & LARDNER LLP 90 Park Avenue New York, NY Telephone: (212) Facsimile: (212) Counsel for the Official Committee of Unsecured Creditors

18 Case KG Doc Filed 10/09/18 Page 1 of 2 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Heritage Home Group LLC, et al., 1 Debtors. Chapter 11 Case No (KG) (Jointly Administered) Hearing Date: November 14, 2018 at 2:00 p.m. (ET) Objection Deadline: October 23, 2018 at 4:00 p.m. (ET) NOTICE OF MOTION OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR ENTRY OF AN ORDER GRANTING STANDING AND AUTHORITY TO PROSECUTE AND SETTLE CLAIMS ON BEHALF OF THE DEBTORS ESTATES PLEASE TAKE NOTICE that the undersigned counsel filed the Motion of Official Committee of Unsecured Creditors for Entry of an Order Granting Standing and Authority to Prosecute and Settle Claims on Behalf of the Debtors Estates (the Motion ) with the United States Bankruptcy Court for the District of Delaware (the Court ). PLEASE TAKE FURTHER NOTICE that a hearing (the Hearing ) on the Motion will be held on November 14, 2018 at 2:00 p.m. (ET), before the Honorable Kevin Gross at the United States Bankruptcy Court, 3 th Floor, Courtroom No. 3, 824 Market Street, Wilmington, Delaware, PLEASE TAKE FURTHER NOTICE that any responses or objections to the Motion must be in writing, filed with the Clerk of the Court, 824 Market Street, 3 rd Floor, Wilmington, Delaware and served upon and received by the undersigned counsel on or before 4:00 p.m. on October 23, 2018 (ET) (the Objection Deadline ). 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, include: Heritage Home Group LLC ( Heritage ) (9506); HH Global II B.V. (0165); HH Group Holdings US, Inc. (7206); HHG Real Property LLC (3221); and HHG Global Designs LLC (1150) v1

19 Case KG Doc Filed 10/09/18 Page 2 of 2 IF NO OBJECTIONS TO THE MOTION ARE TIMELY FILED, SERVED AND RECEIVED IN ACCORDANCE WITH THIS NOTICE, THE COURT MAY GRANT THE RELIEF REQUESTED IN THE MOTION WITHOUT FURTHER NOTICE OR A HEARING. Dated: October 9, 2018 Wilmington, Delaware Respectfully submitted, /s/ Aaron H. Stulman Christopher M. Samis (No. 4909) L. Katherine Good (No. 5101) Aaron H. Stulman (No. 5807) WHITEFORD, TAYLOR & PRESTON LLC The Renaissance Centre, Suite North King Street Wilmington, Delaware Telephone: (302) csamis@wtplaw.com kgood@wtplaw.com astulman@wtplaw.com - and - Solely with Respect to the KPS Parties Richard J. Bernard, Esq. Leah Eisenberg, Esq. FOLEY & LARDNER LLP 90 Park Avenue New York, NY Telephone:(212) Facsimile: (212) rbernard@foley.com leisenberg@foley.com Counsel to Official Committee of Unsecured Creditors v1 2

20 Case KG Doc Filed 10/09/18 Page 1 of 3 EXHIBIT A

21 Case KG Doc Filed 10/09/18 Page 2 of 3 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Heritage Home Group LLC, et al., 1 Debtors. Chapter 11 Case No (KG) (Jointly Administered) Re: Docket No. ORDER GRANTING MOTION OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR ENTRY OF AN ORDER GRANTING DERIVATIVE STANDING AND AUTHORITY TO PROSECUTE AND SETTLE CLAIMS ON BEHALF OF THE DEBTORS ESTATES Upon the Motion of Official Committee of Unsecured Creditors for Entry of an Order Granting Derivative Standing and Authority to Prosecute and Settle Claims on Behalf of the Debtors Estates (the Motion ) 2 ; and the Court having reviewed the Motion; and the Court having found that it has jurisdiction to consider the Motion under 28 U.S.C. 157 and 1334; and having found that this is a core proceeding under 28 U.S.C. 157(b)(2); and having found that notice of the Motion was proper and sufficient under the circumstances, and that no other or further notice is required; and having determined that the legal and factual bases set forth in the Motion establish just cause for the relief granted herein; it is hereby IT IS HEREBY ORDERED, ADJUDGED AND DECREED THAT: 1. The Motion is granted, as set forth herein. 2. The Committee is granted exclusive derivative standing and authority to commence and prosecute the Claims in an adversary proceeding, substantially in the form of the 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, include: Heritage Home Group LLC ( Heritage ) (9506); HH Global II B.V. (0165); HH Group Holdings US, Inc. (7206); HHG Real Property LLC (3221); and HHG Global Designs LLC (1150). 2 Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Motion v2

22 Case KG Doc Filed 10/09/18 Page 3 of 3 Complaint attached as Exhibit B to the Motion, including, without limitation, the assignment of the Debtors claims to the extent necessary, for such standing. 3. The Committee is granted authority to take all actions the Committee determines in its sole discretion to be necessary or appropriate in connection with the authority granted in this Order, with the full rights and privileges of the Debtors, including, but not limited to, the sole and exclusive right to enter into settlement negotiations and, subject to Court approval, to settle any claims brought pursuant to this Order. 4. For cause shown, the Committee is granted an extension of the Initial Challenge Period for an additional thirty (30) days from the date of this Order to amend the Complaint to include any claims or causes of action against PNC relating to the Lane Divestitures, and the Committee shall file the Complaint not later than, For the avoidance of doubt, nothing in this Order or the Motion shall in any way affect the Committee s right to seek to amend the Complaint substantially in the form attached as Exhibit B to the Motion on any and all additional factual or legal grounds that would support a colorable claim or cause of action, and/or seek any other or additional relief, or pursue or seek standing to bring any other or additional causes of action or claims against any or all of the Debtors, PNC, KPS, or any other party. 6. The relief set forth in this Order shall be effective as of the date hereof. 7. This Court shall retain jurisdiction with respect to all matters arising from and related to the implementation of this Order. Dated:, 2018 THE HONORABLE KEVIN GROSS UNITED STATES BANKRUPTCY JUDGE v

23 Case KG Doc Filed 10/09/18 Page 1 of 17 EXHIBIT B

24 Case KG Doc Filed 10/09/18 Page 2 of 17 IN THE UNITED STATE BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Heritage Home Group LLC, et al., 1 Debtors. OFFICIAL COMMITTEE OF UNSECURED CREDITORS, on behalf of the estate of the Debtors, Plaintiff, Chapter 11 Case No (KG) (Jointly Administered) Adv. Pro. No against- Heritage Home Group LLC; HH Global II B.V.; HH Group Holdings US, Inc.; HHG Real Property LLC; HHG Global Designs LLC; PNC Bank, National Association, in its various capacities; KPS Special Situations Fund III (A) L.P., in its various capacities; KPS Special Situations Fund III LP; KPS Special Situations Fund III (SUPPLEMENTAL), LP; KPS Special Situations Fund III (AIV), LP; KPS Offshore Investors Ltd.; KPS Capital Partners, LLC; and KPS Capital Partners, LP Defendants. ADVERSARY COMPLAINT The Official Committee of Unsecured Creditors (the Committee ) appointed in the above-captioned chapter 11 proceedings (the Chapter 11 Cases ) of the above-captioned debtors and debtors-in-possession (the Debtors ), alleges for its complaint (the Complaint ) herein as follows: 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, include: Heritage Home Group LLC (9506); HH Global II B.V. (0165); HH Group Holdings US, Inc. (7206); HHG Real Property LLC (3221); and HHG Global Designs LLC (1150)

25 Case KG Doc Filed 10/09/18 Page 3 of 17 NATURE OF ACTION 1. This is an action seeking a determination of the nature, extent, priority, validity and enforceability of encumbrances against property of the Debtors estates. JURISDICTION AND VENUE 2. This Court has jurisdiction over this adversary proceeding pursuant to sections 157 and 1334 of title 28 of the U.S. Code ( Title 28 ). This is a core proceeding under section 157(b)(2) of Title Venue in this court is proper pursuant to sections 1408 and 1409 of title The Committee consents to the entry of final orders and judgment by this Court on the core matters, to the extent such consent is necessary, and on non-core matters, if any. PARTIES Committee 5. On August 8, 2018, the Office of the United States Trustee formed the Committee [Docket No. 87], comprised of the following creditors: FBI Wind Down Inc. Liquidating Trust, Hickory Spring Manufacturing Company, EKH Furniture Industries, Piedmont Packaging, and International Market Centers, LLC. 6. On October 9, 2018, the Committee filed its Motion Of Official Committee Of Unsecured Creditors For Entry Of An Order Granting Standing And Authority To Prosecute And Settle Claims On Behalf Of The Debtors Estates (the Standing Motion ) [Docket No. ] for authority to file and prosecute the within claims and this action. On, the Court entered the order [Docket No. ] granting the Stranding Motion and conferring standing on the Committee to commence and prosecute this action

26 Case KG Doc Filed 10/09/18 Page 4 of 17 Defendants 7. On July 29, 2018 (the Petition Date ), each of the Debtors filed a petition for relief under chapter 11 of title 11 of the U.S. Code (the Bankruptcy Code ) in this Court. 8. Debtor HH Global II B.V. ( Global ) is a Dutch holding company, the direct 100% owner of Holdings (defined below), and indirect owner of the other Debtor entities as well as direct and indirect owner of the Non-Debtor Foreign Affiliates (defined below). 9. Debtor HH Group Holdings US, Inc. ( Holdings ) is a Delaware corporation and the direct 100% owner of the other Debtor entities. 10. Debtor Heritage Home Group LLC ( Heritage ) is a Delaware limited liability company and, upon information and belief, the sole operating company among the Debtor entities. 11. Debtor HHG Real Property LLC ( Real Property ) is a Delaware limited liability company and, upon information and belief, was formed to hold certain interests in real property. 12. Debtor HHG Global Designs LLC ( Global Designs ) is a Delaware limited liability company and, upon information and belief, was formed to hold certain interests in intellectual property. 13. PNC Bank, National Association (in its various capacities, PNC ) is the administrative agent and collateral agent for itself and the other financial institutions party to the ABL Loan (defined below) from time to time. 14. KPS Special Situations Fund III (A), L.P. (in its various capacities, KPS ), 2 is the administrative agent and collateral agent for itself and the other financial institutions, lenders 2 KPS Special Situations Fund III (A), L.P. is described in that certain Term Loan Credit Agreement (referenced in 23 below) as a Delaware limited partnership, and is described in the Participation Agreement as a Cayman Islands exempted limited partnership

27 Case KG Doc Filed 10/09/18 Page 5 of and investors party to the Term Loan (defined below) from time to time, as well as a participant under the Participation Agreement (defined below). 15. KPS Special Situations Fund III, LP, a Delaware limited partnership, is a participant under the Participation Agreement. 16. KPS Special Situations Fund III (SUPPLEMENTAL), LP, an Alberta limited partnership, is a participant in the Term Loan and a participant under the Participation Agreement. 17. KPS Special Situations Fund III (AIV), LP, is a participant in the Term Loan. 18. KPS Offshore Investors Ltd., is a participant in the Term Loan. 19. KPS Capital Partners, LLC, a Delaware limited liability company, is a general partner of KPS Special Situations Fund III, LP. 20. Upon information and belief, KPS Capital Partners, LP, a Delaware limited partnership, is the asset or investment manager of KPS, KPS Special Situations Fund III LP, KPS Special Situations Fund III (SUPPLEMENTAL), LP, KPS Special Situations Fund III (AIV), LP, KPS Offshore Investors Ltd., and KPS Capital Partners, LLC. 21. KPS, KPS Special Situations Fund III LP, KPS Special Situations Fund III (SUPPLEMENTAL), LP, KPS Special Situations Fund III (AIV), LP, KPS Offshore Investors Ltd., KPS Capital Partners, LLC, and KPS Capital Partners, LP shall be referred to collectively herein as the KPS Parties. FACTS Operations and Corporate Structure of Debtors 22. The Debtors, along with their Non-Debtor Foreign Affiliates (defined below), are a global designer and manufacturer of furniture and home furnishings. As outlined in the Declaration of Robert D. Albergotti in Support of Chapter 11 Petitions and First-Day Motions 4

28 Case KG Doc Filed 10/09/18 Page 6 of 17 (the First Day Declaration, Docket No. 12), the Debtors are headquartered in High Point, North Carolina and are world leaders in designing, manufacturing, sourcing and retailing home furnishings. The First Day Declaration states that the Debtors operate under three business units: (1) Thomasville & Co., which is comprised of Thomasville, Drexel, and Henedron, (2) Luxury Group, which is comprised of Hickory Chair, Pearson, and Maitland-Smith, and (3) Broyhill. The Debtors market their products through a wide range of channels, including company-owned Thomasville retail stores, interior design partners, multi-line/independent retailers, and mass merchant stores. The Debtors also distribute their products internationally through a number of partnerships with key wholesale channels in a variety of markets and sell branded and private label products to certain governmental and hospitality customers, both domestically and around the world. 23. KPS Capital Partners, LP (or its affiliate/designee) formed the Debtors in November 2013 when it acquired the brand portfolio of Furniture Brands, Inc. through a bankruptcy sale 3 for $295 million. The KPS Parties structured $100 million of the purchase price as a term loan credit facility (the Term Loan ) secured by the assets of the Debtors and $125 million as an equity contribution. The balance of the acquisition price was funded through a $70 million asset-based credit facility made by third-party lenders to the Debtors (the Initial ABL Loan ). The KPS Parties became the controlling shareholders of the Debtors. 24. The Debtors have the following non-debtor foreign affiliates ( Non-Debtor Foreign Affiliates ): a. HHGroup de Mexico S. de R.L. de C.V., a Mexican company ( HHG Mexico ); 3 The sale occurred in In re FBI WindDown, Inc. (f/k/a Furniture Brands Int l, Inc.), Case No (CSS), United States Bankruptcy Court for the District of Delaware (the FBI Bankruptcy Case )