Case BLS Doc 1756 Filed 09/19/14 Page 1 of 7 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 Case BLS Doc 1756 Filed 09/19/14 Page 1 of 7 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Chapter 11 REVSTONE INDUSTRIES, LLC, et al., Case No BLS Debtors. (Jointly Administered Hearing Date: 10 a.m. Response Deadline: 9/19/14 Re: Dkt. No MEDLEY CAPITAL CORPORATION S RESPONSE TO DEBTORS FOURTH OMNIBUS OBJECTION (SUBSTANTIVE SEEKING TO RECLASSIFY CLAIMS Medley Capital Corporation ( Medley, by and through its undersigned counsel, hereby submits this response (the Response to the Debtors Fourth Omnibus Objection (Substantive Seeking to Reclassify Claims [Dkt. No. 1670] (the Objection and, in support thereof, states as follows: PRELIMINARY STATEMENT 1. Medley s claims, which the Debtors now seek to reclassify, arise out of the admitted misappropriation and fraudulent scheme perpetrated on Medley and its borrowers non-debtor affiliates of the Debtors, who (like the Debtors were controlled by George Hofmeister. Instead of Medley s borrowers having use of the funds lent to them for working capital purposes, more than $3.8 million was misappropriated from the borrowers by Ascalon Enterprises, LLC ( Ascalon, an affiliate of the Debtors (controlled by Hofmeister. Ascalon then diverted Medley s loan proceeds to the then insolvent Debtors (the Misappropriated Funds during the fall of Ascalon and Hofmeister admitted to the misappropriation in DMSLIBRARY01:

2 Case BLS Doc 1756 Filed 09/19/14 Page 2 of 7 July Because the Misappropriated Funds were wrongfully obtained by the Debtors who knew (because of Hofmeister of the misappropriation, the Debtors never had a right to use those funds and the funds never became property of the Debtors estates. To the extent the Debtors were in possession of those funds, Medley held a perfected security interest therein pursuant to U.C.C , and/or the Debtors held those funds in trust on behalf of Medley. 2. Accordingly, Medley filed proofs of claim (both on its own behalf and on behalf of its borrowers as their secured creditor against the Debtors to recover the Misappropriated Funds. And while the Debtors argue that Medley s claims are merely unsecured claims, Medley has a secured claim by virtue of U.C.C , or in the alterative, by virtue of the constructive trust that must be imposed on the Misappropriated Funds. BACKGROUND 3. On December 3, 2012, Revstone Industries, LLC ( Revstone Industries and Spara, LLC ( Spara each commenced a voluntary case under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. 101 et seq. (the Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware (the Court. 4. On January 7, 2013, Greenwood Forgings, LLC ( Greenwood and US Tool and Engineering, LLC ( US Tool ; together with Revstone Industries, Spara, and Greenwood, collectively, the Debtors, each commenced a voluntary case under Chapter 11 of the Bankruptcy Code in this Court. 5. On June 26, 2013, Medley timely filed identical proofs of claim (the Claims against each of the Debtors for secured amounts equal to the Misappropriated Funds (not less than $3,890,

3 Case BLS Doc 1756 Filed 09/19/14 Page 3 of 7 6. Medley asserts the Claims against the Debtors for amounts lent to MW Crow, Inc. ( Crow and MW General, Inc. ( General together with Crow, collectively, the Borrowers pursuant to a certain Credit Agreement, dated as of June 29, 2012 (as amended, the Credit Agreement among Medley, the Borrowers and others. 7. Under the Credit Agreement, Medley lent the Borrowers more than $15 million. Instead of all the loan proceeds being available for use by the Borrowers as working capital and other intended purposes as required by the Credit Agreement, the Misappropriated Funds were diverted to Ascalon and then transferred to the Debtors. 8. At the time the Misappropriated Funds were misappropriated from the Borrowers by Ascalon and subsequently transferred to the Debtors, all of the entities were under the control of George Hofmeister. The Debtors have admitted George Hofmesiter s control over the Debtors and Ascalon. See Complaint to Avoid and Recover Fraudulent Transfers, Adv. Pro BLS (Bankr. D. Del. Jan. 27, 2014; Complaint to Recover Healthcare Plan Assets and Related Relief, Adv. Pro BLS (Bankr. D. Del. Jan. 27, In a letter agreement dated July 19, 2013, a copy of which is attached hereto as Exhibit A, Ascalon admitted that it took the Misappropriated Funds from the Borrowers and then transferred the Misappropriated Funds to the Debtors in one or more transfers. 10. Medley asserted the Claims against the Debtors to recover the Misappropriated Funds on the basis that it had a perfected lien in such funds, and/or a constructive trust should be imposed on the misappropriated funds, which the Debtors knew (through Hofmeister were misappropriated. 11. On July 28, 2014, the Debtors filed the Objection. To prove the allegations contained its Claims and to rebut the arguments raised by the Debtors in the Objection, Medley 3

4 Case BLS Doc 1756 Filed 09/19/14 Page 4 of 7 has served discovery requests on the Debtors seeking information and documents related to their receipt and use of the Misappropriated Funds. RESPONSE A. Medley Holds a Security Interest in the Misappropriated Funds Pursuant to the Uniform Commercial Code. 12. Medley holds a secured claim against the Debtors estates by virtue of the fact that it holds a security interest in the Misappropriated Funds pursuant to the Uniform Commercial Code. As discussed above, Medley lent funds including the Misappropriated Funds to the Borrowers for working capital purposes. In exchange, the Borrowers granted Medley (and Medley perfected a security interest in all the assets of the Borrowers, including the Misappropriated Funds. 13. While the Misappropriated Funds constituted part of Medley s collateral for the loans, the Misappropriated Funds were diverted to Ascalon and then transferred to one or more of the Debtors. But simply because the Misappropriated Funds were misappropriated does not mean that Medley s security interest therein disappeared. To the contrary, U.C.C provides, in part, a perfected security interest continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest. U.C.C (1(a (emphasis added. And Medley clearly did not authorize the Borrowers to dispose of the Misappropriated Funds by transferring them to Ascalon and the Debtors. Accordingly, Medley s security interest in the Misappropriated Funds continued even after they were wrongfully obtained by the Debtors. 14. Once the Misappropriated Funds were in the Debtors hands, it is unclear how such funds were used. But if the Debtors used the Misappropriated Funds, Medley s security interest continued either in the Misappropriated Funds themselves or in the proceeds thereof. 4

5 Case BLS Doc 1756 Filed 09/19/14 Page 5 of 7 Under U.C.C (1(b, [a] security interest attaches to any identifiable proceeds of collateral. 1 Thus, Medley holds a perfected security interest in the proceeds of the Misappropriated Funds to the extent that the Debtors ultimately used or disposed of the Misappropriated Funds. 15. Moreover, the Borrowers and the Debtors were under the control of George Hofmeister when the Misappropriated Funds were transferred. Hofmeister knew, and thus the Debtors knew, that they had no right to the Misappropriated Funds, which were unequivocally the Borrowers assets. In fact, Hofmeister orchestrated the scheme to misappropriate the funds from the Borrowers for the ultimate use of the Debtors. Thus, there is no credible argument that the Debtors were buyers in the ordinary course. 16. In light of the foregoing, Medley continues to hold a security interest in the Misappropriated Funds or the proceeds thereof. Medley therefore holds secured claims against the Debtors with respect to the Misappropriated Funds. B. In the Alternative, the Court Should Impose a Constructive Trust on the Misappropriated Funds. 17. In the alternative, Medley and the Borrowers are entitled to the Misappropriated Funds because the Misappropriated Funds were never the Debtors property. Accordingly, a constructive trust should be imposed on the Misappropriated Funds, giving rise to a secured claim. 18. [A] constructive trust arises when a person entitled to property is under the equitable duty to convey it to another because he would be unjustly enriched if he were permitted to retain it. Kaplon v. Chase, 690 S.W.2d 761, 763 (Ky. Ct. App (citing Becker v. 1 To the extent that the Debtors used the Misappropriated Funds to pay their secured creditors, Medley could hold equitable subrogation claims or an equitable lien against the Debtors assets and stand in the shoes of the Debtors other secured creditors. 5

6 Case BLS Doc 1756 Filed 09/19/14 Page 6 of 7 Neurath, 149 Ky. 421, 149 S.W. 857 ( There can be little doubt that the Debtors were unjustly enriched by knowingly receiving the Misappropriated Funds. 19. It is undisputed that the Debtors received the Misappropriated Funds from Ascalon based on the actions of George Hofmeister, who also controlled the Debtors. Medley never consented to the Borrowers transferring the funds to Ascalon or to the insolvent Debtors. Thus, the Misappropriated Funds never belonged to the Debtors in the first instance. 20. Medley is required to show nothing more than the Debtors acquired the Misappropriated Funds by virtue of fraud, or where, though acquired originally without fraud, it is against equity that it should be retained by him who holds it. Kaplon, 690 S.W.2d at 763 (quoting Hull v. Simon, 278 Ky. 442, 449, 128 S.W.2d 954, 958 (1939. Here, George Hofmeister orchestrated a scheme to defraud Medley by diverting the Misappropriated Funds to the Debtors. Indeed, even in the absence of fraud (which exists here, it would be patently inequitable for the Debtors to benefit from funds that were never theirs in the first instance. Thus, under applicable Kentucky law, Medley is entitled to the imposition of a constructive trust on the Misappropriated Funds. 21. Medley believes that discovery will demonstrate that its funds can be traced from the Borrowers, to Ascalon, and then to the Debtors. And, accordingly, under applicable Kentucky law, the Court should impose a constructive trust on the Misappropriated Funds (or other property acquired therewith, and grant Medley a secured claim in the amount of the Misappropriated Funds. 2 Kentucky law should apply here because that is where the misappropriation occurred. 6

7 Case BLS Doc 1756 Filed 09/19/14 Page 7 of 7 CONCLUSION 22. Fundamentally, Medley and its Borrowers were defrauded by a scheme orchestrated by George Hofmeister whereby the Misappropriated Funds were diverted from the Borrowers to Ascalon and then to the Debtors. The Debtors never had a right to receive or use the Misappropriated Funds, Medley never approved the transfers to Ascalon and the Debtors, and George Hofmeister and Ascalon have effectively admitted that the Misappropriated Funds were fraudulently diverted to the Debtors. Also, the Misappropriated Funds and the proceeds thereof have always remained part of Medley s collateral. 23. Based on the foregoing, Medley respectfully requests that Medley s Claims remain classified as secured claims, a constructive trust be imposed on the Misappropriated Funds, and that it be granted such other and further relief as the Court deems just an proper. Dated: September 19, 2014 Wilmington, Delaware Respectfully submitted, THE ROSNER LAW GROUP LLC /s/ Frederick B. Rosner Frederick B. Rosner (DE #3995 Scott J. Leonhardt (DE # N. Market Street -Suite 810 Wilmington, DE Telephone: ( rosner@teamrosner.com leonhardt@teamrosner.com - and - KING & SPALDING LLP Arthur J. Steinberg 1185 Avenue of the Americas New York, New York Telephone: ( Counsel for Medley Capital Corporation 7

8 Case BLS Doc Filed 09/19/14 Page 1 of 7 EXHIBIT A

9 Case BLS Doc Filed 09/19/14 Page 2 of 7 ACKNOWLEDGEMENT AND AGREEMENT OF AFFILIATE OBLIGOR July 19, 2013 Medley Capital Corporation 375 Park Avenue, 33rd Floor New York, New York Attention: Office of the General Counsel Revstone Aero LLC 2250 Thunderstick Drive, Suite 1203 Lexington, Kentucky Attention: Office of the General Counsel Re: Intercompany Advance from Revstone Aero LLC Ladies and Gentlemen: Reference is made to that certain Amended and Restated Forbearance Agreement, dated as of June 24, 2013 (the "Forbearance Agreement", made among Revstone Aero, LLC ("Holdings", as "Guarantor", and MW Crow, Inc. and MW General, Inc., as "Borrowers" (the "Borrowers"; and together with Holdings, the "Credit Parties", and Medley Capital Corporation, in its capacities as sole "Lender," "Administrative Agent" and "Collateral Agent ("Medley". Capitalized terms used herein, but not expressly defined herein, shall have the meanings given to such terms in the Forbearance Agreement (or in the Credit Agreement defined therein. We, Ascalon Enterprises, LLC ("Ascalon", ''we" or "us" are an Affiliate of Holdings. Holdings has provided us with a copy of the Forbearance Agreement, and requested that we provide the following assurances to Holdings and Medley in regard thereto for its benefit and the benefit of the Borrowers, which are also our Affiliates. Accordingly, for value received by us, we hereby acknowledge, certify and agree to, with and for the benefit of Holdings and Medley as follows: 1. Acknowledgements. We hereby acknowledge and certify to Holdings and Medley that: (a the Intercompany Advance is due and owing by us to Holdings in the amount of $3,871,000 on the date hereof, with no defense, counterclaim, set-off or similar right on our part in respect thereof; (b the initial disbursement of the Intercompany Advance was made in October of2012 in the amount of$2,450,000; DMSLIBRARYO I :

10 Case BLS Doc Filed 09/19/14 Page 3 of 7 (c subsequent thereto, in November of 2012, Holdings made additional disbursements of the Intercompany Advance to us, or for our benefit, in the approximate amounts of$1,047,000 and $349,000; (d we, in turn, disbursed the proceeds of each disbursement of the Intercompany Advance either (i to the extent of the $2,452,741.32, to or for the benefit of our wholly-owned subsidiary, Revstone Industries, LLC ("Industries", in one or more disbursements for use in its business operations (the "Industries Transfer" (ii to the extent of $1,064,311.16, to or for the benefit of our wholly-owned subsidiary, Spara, LLC ("Spara", in one or more disbursements for use on its business operations (the "Spara Transfer"; the Spara Transfer and the Industries Transfer, collectively, the "Ascalon Transfers"; (e the Ascalon Subsidiaries subsequently filed, and are presently the subject of, a Bankmptcy Case (as defined below; (f all funds used by Holdings to make disbursements of the Intercompany Advance and, in turn, all funds used by us to make disbursements of the Ascalon Transfers, were funds that belonged to the Borrowers, representing funds borrowed by them from Medley as sole Lender under the Credit Agreement and intended for use in their respective business operations (and for no other purpose; (g the right to receive, collect and enforce payment of the Intercompany Advance is freely transferrable by Holdings; (h Holdings has notified us of the transfer of its right to receive, collect and enforce payment of the Intercompany Advance to Medley, acting in its capacity as Collateral Agent, as described more particularly in the Forbearance Agreement; (i we have received no notice from Holdings of any assignment, in whole or in part, of the right of Holdings to receive, collect and enforce payment of the Intercompany Advance except to Medley in its aforesaid capacity; and G pursuant to the Forbearance Agreement, Medley as Collateral Agent has all requisite rights necessary to make a claim on us for the Intercompany Advance and receive the Intercompany Advance from us. (k our right to receive, collect and enforce payment of the Ascalon Transfers is freely transferrable by us, subject only to any limitation thereon arising under the Bankruptcy Case; (1 we have made no assignment of our right to receive, collect and enforce payment of the Ascalon Transfers; and\ (m as of the date hereof, the indebtedness represented by the Ascalon Transfers is not evidenced by any promissory notes or other instruments, and is not secured.

11 Case BLS Doc Filed 09/19/14 Page 4 of 7 2. Payment of Intercompany Advance. We agree with holdings and Medley to pay to Medley on demand by Medley the full amount of the Intercompany Advance, and not to pay any portion of Intercompany Advance to Holdings or any other Person subsequent hereto or raise any defense, right of offset or counterclaim that we may have as against Holdings in respect of any such payment, otherwise then existing in our favor (provided that we shall continue to retain any such claims against Holdings which, in the absence hereof, would have given rise to such defense, right of offset or counterclaim. 3. Assignment of Claims Against Industries. Without limitation of our obligation to pay to Medley, as assignee of the Intercompany Advance, upon demand by Medley, the full amount of the Intercompany Advance, we hereby unconditionally and irrevocably transfer and assign to Medley outright all of our right, title, interest, claims and causes of action in and to, or arising under or in connection with om claims against each of the Ascalon Subsidiaries, including without limitation the Ascalon Transfers and under claims numbers C0468 and C0469, copies of which are attached hereto (the "Claims", as the debtors-in-possession in Case No (the "Bankruptcy Case" under Title 11 of the United States Code (the "Bankruptcy Code" in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court", and any and all other proofs of claim filed or to be filed by us with the Bankruptcy Court in respect of the Claims, with the understanding that any and all amounts recovered by Medley in regard to the Claims (including any in excess of the Intercompany Advance can and will be used by Medley to reduce the Obligations of the Borrowers and Holdings owing to Medley under the Credit Agreement until fully paid and satisfied. We hereby waive any objection to the transfer of the Claims to Medley on the books and records of the Ascalon Subsidiaries and the Bankruptcy Court, and hereby waive to the fullest extent permitted by law any notice or right to a hearing as may be imposed by Rule 3001 of the Federal Rules of Bankruptcy Procedure, the Bankruptcy Code, applicable local bankruptcy rules or applicable law. We acknowledge and understand, and hereby stipulate, that an order of the Bankruptcy Court may be entered without further notice to us and recognizing Medley as the sole owner and holder of the Claims for all purposes, including, without limitation, voting and distribution purposes. We further agree, upon the reasonable request of Medley or Holdings, at any time and from time to time, to promptly to execute and deliver all such further docmnents and to promptly take all such action as may be reasonably necessary or appropriate in order more effectively to confirm or carry out the provisions of this letter agreement. This letter agreement constitutes our entire agreement with Holdings and Medley in respect of the subject matter thereof. This letter agreement shall be binding on our successors and assigns, and shall inure to the benefit of Medley and its successors and assigns. This letter agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same agreement, and may be delivered by personal delivery or by electronic file and any such delivery shall be deemed to be an original document. THIS LETTER AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

12 Case BLS Doc Filed 09/19/14 Page 5 of 7 Very truly yours, ASCALON ENTERPRISES, LLC eister

13 Case BLS Doc Filed 09/19/14 Page 6 of 7 Richard T. Allorto, Jr. Chief Financial Officer

14 Case BLS Doc Filed 09/19/14 Page 7 of 7 Richard T. Allorto, Jr. Chief Financial Officer

15 Case BLS Doc Filed 09/19/14 Page 1 of 3 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Chapter 11 REVSTONE INDUSTRIES, LLC, et al., Case No BLS Debtors. (Jointly Administered CERTIFICATE OF SERVICE I, Scott J. Leonhardt, hereby certify that on September 19, 2014, a copy of the foregoing Medley Capital Corporation's Response to Debtors' Fourth Omnibus Objection (Substantive Seeking to Reclassify Claims [Dkt. No. 1670; dated 7/28/14] was served via First-Class Mail upon the parties listed on the attached Exhibit A. Dated: September 19, 2014 Wilmington, Delaware THE ROSNER LAW GROUP LLC /s/ Scott J. Leonhardt Frederick B. Rosner (DE 3995 Scott J. Leonhardt (DE Market Street, Suite 810 Wilmington, DE Tel.: ( leonhardt@teamrosner.com Local Counsel for Medley Capital Corporation { }

16 Case BLS Doc Filed 09/19/14 Page 2 of 3 Exhibit A

17 Case BLS Doc Filed 09/19/14 Page 3 of 3 Pachulski Stang Ziehl & Jones LLP Laura Davis Jones, Esq. 919 N. Market Street, 17 th Floor P.O. Box 8705 Wilmington, DE Office of the US Trustee Jane Leamy, Esq, J. Caleb Boggs Federal Building 844 N. King Street, Suite 2207 Lock Box 35 Wilmington, DE Womble Carlyle Sandridge & Rice, LLP Matthew Po Ward, Esq. 222 Delaware Avenue, Suite 1501 Wilmington, DE {