smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 1 of 16

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1 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 1 of 16 FULBRIGHT & JAWORSKI L.L.P. 666 Fifth Avenue New York, NY Telephone: Facsimile: Hearing Date: June 21, 2012 at 10:00 a.m. (EDT) David L. Barrack, Esq. Paul Jacobs, Esq. Courtney Slatten Katzenstein, Esq. Counsel to the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT x In re: THE CONNAUGHT GROUP, LTD., et al., Debtors x Chapter 11 Case No (SMB) (Jointly Administered) DEBTORS REPLY TO OBJECTIONS TO MOTION FOR ENTRY OF AN ORDER AUTHORIZING IMPLEMENTATION OF (I) KEY EMPLOYEE RETENTION PLAN AND (II) KEY EXECUTIVE INCENTIVE PLAN The above-captioned debtors and debtors in possession (collectively, the Debtors )1 file this reply (the Reply ) to the Objections filed by the United States Trustee (the U.S. Trustee ) and the Official Committee of Unsecured Creditors (the Committee ), and dated May 15, 2012 and June 13, 2012 respectively, to the Debtors Motion (the Motion ) for entry of an order authorizing implementation of the debtors proposed (I) key employee retention plan (the Retention Plan ), and (II) key executive incentive plan (the Incentive Plan and, together with the Retention Plan, the Bonus Plans ), and in support of the Motion the Debtors file the Declaration of Maury Satin dated June 19, 2012 in Support of Debtors Motion for Entry of an 1 The Debtors, together with the last four digits of each Debtor s federal tax identification number are: The Connaught Group, Ltd. (8384); Limited Editions for Her of Nevada LLC (7669); Limited Editions for Her of Branson LLC (8078); Limited Editions for Her LLC (2197); and WDR Retail Corp. (8865). 1

2 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 2 of 16 Order Authorizing Implementation of (I) Key Employee Retention Plan and (II) Key Executive Incentive Plan and Debtors Reply to Objections of the Motion (the Satin Declaration ), annexed hereto as Exhibit A, and the Declaration of Eileen Balaban-Eisenberg dated June 19, 2012 in Support of Debtors Motion for Entry of an Order Authorizing Implementation of (I) Key Employee Retention Plan and (II) Key Executive Incentive Plan and Debtors Reply to Objections of the Motion (the Balaban-Eisenberg Declaration ), annexed hereto as Exhibit B. In support the Motion and this Reply, the Debtors respectfully state as follows: INTRODUCTION 1. At the hearing on this matter, one fact will not be contested or be in issue, the Debtors naked auction was wildly successful, above all expectations of the Committee. The Committee will with some glee admit that at the closing, the estate retained approximately $25 million of cash, in addition to the purchase price of $20 million and additional cash equivalent of $2 million. As of the Petition Date, while we believed the case was administratively solvent and the secured creditors would be paid, it was not anticipated that so much value could be created for the unsecured creditors. After paying $12 million in secured debt, much of which was paid from cash flow during the case, the estates presently hold between $ 17,500,000 and $20,000,000 for distribution to unsecured creditors. This value was not created by accident. It was the result of the effort of the Debtors, and particularly their financial advisors who executed on their post-petition business plan. 2. The Debtors seek permission from the Court to pay.007% of the proceeds from the Court approved sale of Debtors business in incentive bonuses to four key employees whose tireless efforts and loyalty enabled the Debtors to maintain the going concern value of the Debtors business, market the companies and consummate the sale of substantially all Debtors 2

3 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 3 of 16 assets a mere two months after the filing of these cases for approximately $20 million in cash and $2 million in cash equivalents, more than double the sole prepetition offer for the Debtors business of $8.4 million. This Court may grant the relief requested pursuant to Bankruptcy Code 365(b) and 503(c)(3), inter alia, because payment of the bonuses pursuant to the Bonus Plans is justified by the facts and circumstances of the case and is an appropriate exercise of business judgment by the Debtors. 3. The Debtors do not seek approval under Bankruptcy Code 503(c)(1) or (2), which regulate only payments made to insiders as defined in Code 101(31). The Key Employees 2 are not insiders as defined in Code 101(31) and thus not subject either Code 503(c)(1) or (2). Nor does either section apply to the proposed payments to Eileen Balaban- Eisenberg, the Key Executive. The bonus proposed for Ms. Balaban-Eisenberg is an incentive plan, not a retention or severance plan subject to Code 503(c)(1) or (2), respectively. Nor does Bankruptcy Code 503(c)(3), which prohibits compensation not justified by the facts and circumstances of the case, prohibit payment of the proposed bonuses. The payments are clearly justified and are a proper exercise of the Debtors reasonable business judgment. 4. In fact, the extraordinary efforts of Ms. Balaban-Eisenberg and the Key Employees brought significant value to the estates and, as a result, a return to the unsecured creditors. The continued employment of these four key employees was critical to success of these cases, and relying upon the Debtors promise of additional compensation under the Bonus Plans, the employees remained in Debtors employ through consummation of the asset sale to ensure that success, assuming tasks well in excess of their prepetition duties and responsibilities. The costs associated with the Bonus Plans are reasonably necessary and more than justified by the actual benefits obtained. Moreover, there is no evidence of the abuses Congress sought to 2 Unless otherwise defined herein, capitalized terms have the same meaning as in the Motion. 3

4 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 4 of 16 stem in establishing limitations upon the payment of post-petition compensation to insiders in enacting 503(c) of the Bankruptcy Abuse Prevention and Consumer Protection Act ( BAPCPA ) in The Debtors Motion should be granted in full. SUMMARY OF FACTS 5. Prior to the Petition Date, the Debtors had received only one offer to purchase their business for $8.4 million. Satin Affidavit at p. 3, para. 5. In fact, the original budget submitted by the Debtors in connection with their request to use cash collateral predicted that there would be no excess cash to pay unsecured creditors at the end of these cases. Satin Declaration at p. 3, para. 6. Due to the lack of desirable offers for the business, the Debtors understood the need to preserve the value of the estate by maintaining the business as a going concern while continuing to market the company for an expedited sale or other structured arrangement. Id. See also Balaban-Eisenberg Declaration at p. 3, para. 8. The efforts of Ms. Balaban-Eisenberg and the Key Employees supported and enhanced the Debtors going concern value, resulting in a healthy interest in the auction sale of the Debtors business. Satin Declaration at p. 8, para. 20. The auction, which began with a bid of $ 10 million (and was subject to a number of conditions), concluded with a winning bid of $22 million in cash and cash equivalents that closed the next day. The experience, expertise and involvement of the Key Employees and the Key Executive (together, the Key Personnel ) were critical to the success of the sale process. Satin Declaration at pp. 7, 8, para Early on, the Debtors understood that in order pursue a sale of their business as a going concern, the Key Personnel would be called upon to perform tasks above and beyond their prepetition duties and responsibilities. Balaban-Eisenberg Declaration at p. 3, para. 9. See also Satin Declaration at pp. 7, 8, paras. 17, 19. Thus, prior to the Petition Date, William 4

5 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 5 of 16 Rondina, the Debtors CEO and sole shareholder ( Rondina ), and Ms. Balaban-Eisenberg met with Maury Satin, the Debtors Chief Restructuring Officer, and the Debtors professionals to discuss retention and incentive bonuses for key employees. See Satin Declaration at p. 5, para. 9; Balaban-Eisenberg Declaration at p. 4, para. 11. Shortly after the Petition Date and immediately after the resignation of the Debtors Vice President of Operations, Ms. Balaban- Eisenberg met with Rondina to discuss the importance of retaining the remaining key employees. Balaban-Eisenberg Declaration at p. 4, 5, para. 13. See also See Satin Declaration at p. 6, para. 13. Rondina, after consultation with the Debtors professionals, authorized the Retention Bonus to encourage the Key Employees to remain at the companies and perform the additional duties. Balaban-Eisenberg Declaration at p. 4, 5 paras Rondina, also after consultation with the Debtors professionals, decided that Ms. Balaban-Eisenberg too would be eligible for a performance bonus in the event of either a successful sale of substantially all of the Debtors Assets or the filing of a chapter 11 plan of reorganization. 3 Balaban-Eisenberg Declaration at p. 4, 5, paras. 13, 15. See also Satin Declaration at pp. 6,7, paras. 13, 17. At no time after the filing of these cases did the Key Personnel signal their intention to resign from the Debtors. See Satin Declaration at p. 7, para The Debtors internal cash collateral budgets, provided to the Committee on numerous occasions, always included a line item for the employee incentive and retention plans. Satin Declaration at p. 4, para. 7; Balaban-Eisenberg Declaration at p. 4, para. 7. The first pages of the internal cash collateral budgets for the weeks of January 27, 2012; February 17, 2012; and March 2, 2012, which show the Employee Retention line item, are attached to the 3 The Debtors could have filed the Motion seeking approval of the proposed Bonus Plans in March 2012 so as to be heard at the monthly hearing date set in these cases for April. Because the fast track auction and sale of substantially all of the Debtors assets was scheduled for April, the Debtors concluded that it would be prudent to file the Motion to be heard at a later date. Accordingly, the Motion was filed a month later for hearing in June. 5

6 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 6 of 16 Satin Declaration as Exhibit A thereto. Satin Declaration at p. 4, para. 7. Because the internal cash collateral budget was a cash flow budget and the money for employee Bonus Plans was not to be spent during the period, those line items did not include a dollar amount. 4 Id. But Debtors had anticipated that $160,000 would be spent on employee bonus plans since prior to negotiation of the initial cash collateral budget. Id. See also Balaban-Eisenberg Declaration at p. 4, para In reliance upon the proposed bonuses, the Key Personnel undertook significant additional duties and responsibilities far in excess of their existing duties, working extraordinarily long hours to maintain the value of the Debtors businesses as a going concern, all for the benefit of the unsecured creditors. Balaban-Eisenberg Declaration at pp. 3, 4, 5-7, paras. 9, These individuals worked nights, weekends, and holidays with no additional compensation, building and maintaining relationships with and meeting the needs of the Debtors existing lenders, creditors, vendors, potential lenders, potential purchasers, and other parties seeking to support a plan of reorganization. See Satin Declaration at p. 8, para. 19; Balaban-Eisenberg Declaration at pp. 5-7, paras In sum, the tireless efforts of the Key Personnel enabled the Debtors to maintain their normal operations while maximizing the value of the Debtors estates for the benefit of all creditors. Satin Declaration at p. 9, para Ms. Balaban-Eisenberg s efforts in particular were critical to all aspects of the Auction, Sale, and the Debtors restructuring efforts. See Satin Declaration at p. 8, paras. 19, 20. Ms. Balaban-Eisenberg worked side by side with the Debtors professionals, including the Debtors financial advisors who were marketing the companies, attending every meeting relating to the Debtors marketing and restructuring efforts. Balaban-Eisenberg Declaration at 4 The January budget shows an entry of $150,000 to be spent on Employee Retention sometime in March. The anticipated amount was increased to $160,000 prior to negotiation of the initial cash collateral budget. 6

7 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 7 of 16 pp. 6,7, paras. 19, 20. Ms. Balaban-Eisenberg attended most every meeting with potential purchasers. Balaban-Eisenberg Declaration at pp. 5, 6 para. 17. She attended most every meeting of the Committee requiring a representative of the Debtors, met individually with a number of the Debtors creditors, and spoke to dozens of individual creditors every week. Balaban-Eisenberg Declaration at p. 7, para. 70. She attended most every hearing in these cases. Balaban-Eisenberg Declaration at pp. 5 7, paras. 17, 20. In short, Ms. Balaban- Eisenberg was on call 24/7, often speaking to the Debtors creditors, manufacturers, professionals and potential investors late at night and on the weekends. Balaban-Eisenberg Declaration at pp. 5 7, paras See also Satin Declaration at p. 8, paras. 19, 20. Ultimately, Ms. Balaban-Eisenberg s testimony through her affidavit was key to the Debtors request for approval of the sale process. 10. The retention and incentivisation of the Key Personnel resulted perhaps in excess of $10 millions of dollars in additional value for the Debtors. See Satin Declaration at p. 7 9, paras During the first few week of these cases, and in addition to the additional administrative burdens imposed by the filing, the Key Personnel and the Debtors professionals worked furiously to structure, subject to Court approval, a fast track auction sale of substantially all of the Debtors assets. Satin Declaration at p. 8, paras. 19, 20. On April 13, 2012 the Debtors closed the sale of substantially of the their assets for approximately $22 million in cash and cash equivalents and retained $2.5 million of cash. 11. The Debtors and their professionals then turned their attention to the preparation of a proposed plan of reorganization and disclosure statement (the Proposed Disclosure Statement ), which were filed on June 5, A hearing on adequacy of the Debtors Proposed Disclosure Statement is scheduled for July 17, Pursuant to the Debtors 7

8 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 8 of 16 Proposed Plan, prepetition unsecured creditors make up the only impaired class and will receive payment on account of their claims from a liquidating trust containing between $17,500,000 and $20,000,000 in cash, far in excess of all previous estimates of creditor recovery. This is after paying $12 million of secured debt. 12. Now that the sale has been consummated and a hearing scheduled on the Debtors Proposed Plan, the Debtors now turn their attention to fulfilling their promises to the Key Personnel, who were instrumental in the success of these cases. BASIS FOR RELIEF Payment pursuant to the Bonus Plans is an appropriate exercise of the Debtors reasonable business judgment. 13. Bankruptcy Code 503(c)(1) and (2), applying solely to payments to insiders, are not applicable. The Key Employees are not insiders as defined in Bankruptcy Code 101(31) but were merely mid-level salaried employees. Rather, Rondina had all authority and control over the Debtors and was in charge of all decision making at the Debtors. Satin Declaration at p. 5, paras. 10, Accordingly, the Debtors are entitled to the relief requested under 365(b) and 503(c)(3). See In re Dana Corp., 358 B.R. 567 (Bankr. S.D.N.Y. 2006)(J. Lifland)( Dana II ). See, also, In re Mesa Air Group, Inc Westlaw (Bankr. S.D.N.Y. 2010); In re Global Home Products, Inc., 369 B.R. 778 (Bankr. D. Del 2007); In re Nobex Corp., 2006 Banr. LEXIS 417 (Bankr. D. Del. 2006). Specifically, 503(c)(3) allows payment under a postpetition bonus plan if justified under the facts and circumstances of the case. Dana II, 358 B.R. at 576. In fact, the test in section 503(c)(3) appears to be no more stringent a test than the one courts must apply in approving any administrative expense under section 503(b)(1)(A). Id. The inquiry is essentially whether the debtor properly exercised proper business judgment in 8

9 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 9 of 16 awarding the bonus. Id. As noted by Judge Lifland in Dana II, 503(c) was not intended to foreclose a chapter 11 debtor from reasonably compensating employees, including insiders, for their contribution to the debtor s reorganization. Dana II, 358 B.R. at Payment pursuant to the Bonus Plans is a proper exercise of the Debtors business judgment. In looking to a number of factors in evaluating proposed compensation packages, courts generally take a holistic view, Dana II, 358 B.R. 571, and will apply those factors applicable in the case, Global Home Products 369 B.R. at 786 (relying upon some but not all factors set forth in Dana II). The Bonus Plans satisfy the applicable factors enunciated in Dana II: (1) the proposed plans were directly related to the success of the Sale, and (2) the costs constitute only.007% of the proceeds of the sale and are therefore eminently reasonable. See Dana II, 358 B.R. at Here, The Key Personnel were instrumental in the success of the Debtors reorganization. They played a critical role in the successful operation of the business during the pendency of the bankruptcy, Mesa, 2010 Westlaw (compensation appropriately compensated the Debtors Executives for their efforts since the filing of the bankruptcy petition and going forward ), and their full experience, expertise and enthusiastic involvement with the Debtor[s] were critical to the Debtors successful implementation of the debtor s court approved sale procedure. Nobex, 2006 Bankr. Lexis The remaining factors relating to due diligence, an inquiry into industry standards, and the use of independent counsel cannot reasonably apply in the light of the size of these cases, the amount of the proposed bonuses and the speed with which these cases have been conducted. No due diligence efforts to investigate the need for a plan were necessary: after the departure of a key employee early in the case, it was clear that plans were necessary to 9

10 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 10 of 16 maintain the going concern value of the Debtors business pending the marketing and sale of the business. Any additional inquiry would have been unreasonably costly and a waste of precious time and resources. 18. Moreover, the cost of the bonuses vis a vis the benefit obtained is more than reasonable and in the best interests of the estate. Dana II, 358 B.R. 576; Nobex, 2006 Bankr. LEXIS 417. The costs of proposed bonuses are small, representing only.007% of the proceeds from the sale of the Debtors assets. The benefits are substantial: $22 million in actual realized sale proceeds and $2.5 million in cash retained resulting in payment in full of secured claims ($12 million) and a liquidation trust containing no less than $17,500,000. It clear that the Bonus Plans produced value for the Debtors estate. The Debtors believe the costs associated with the Bonus Plans are reasonably necessary and justified by the actual benefits. 19. The proposed bonuses satisfy the requirements of 363(b) of the Bankruptcy Code. Bankruptcy Code 503(c)(1) and (2) do not apply. 20. Bankruptcy Code 503(c)(1), prohibiting retention plans, applies only to transactions between the debtor and its insiders. 11 U.S.C. 503(c)(1). Similarly, Bankruptcy Code 503(c)(2) prohibits the payment of severance to an insider. 11 U.S.C. 503(c)(2). The Retention Plan promised bonuses to Key Employees who were not insiders of the Debtors, and thus is not prohibited by either 503(c)(1) or (2) of the Bankruptcy Code. Moreover, the Incentive Plan was not a retention or severance plan, but was calculated to incentivize management to bring value to the Debtors estate, and therefore are not subject to Bankruptcy 10

11 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 11 of 16 Code 503(c)(1) and (2). 5 Bankruptcy Code 503(c)(1) and (2), therefore do not apply to either of the Bonus Plans. The Key Employees are not insiders. 21. The Key Employees are not insiders of the Debtors, as defined under the Bankruptcy Code. Bankruptcy Code 101(31) defines an insider as a director, officer, person in control, partnership in which the debtor is a general partner, general partner or relative of one of such individuals. 11 U.S.C. 101(31). The Key Employees do not serve, nor have they ever served, as officers, directors, persons in control, or relatives of any such person, of the Debtors, nor is there any evidence to the contrary. 22. In fact, Rondina was Debtors Chief Executive Officer, founder, and sole shareholder. Satin Declaration at p. 5, para. 10. He was the creative designer for and oversaw all of Debtors brands. Id. As the owner of the Debtors and their CEO, he ultimately had all authority and control over the Debtors, Id., and was in charge of all decision making at the Debtors. Satin Declaration at p. 5, para Balaban-Eisenberg was Debtors Executive Vice-President and managed Debtors global production team, overseeing all aspects of each collection s development, from its inception and design to its fabrication and delivery. Satin Declaration at p. 5, para. 11; Balaban-Eisenberg Declaration at p. 2, paras. 4, 5. Her responsibilities also included overseeing operations at The Connaught Group, Ltd. and making decisions with other members of the Debtors management on the content of each of Debtors clothing lines. Balaban- Eisenberg Declaration at p. 2, para. 5. Balaban-Eisenberg had authority over the Debtors 5 Because the Incentive Plan is not subject Bankruptcy Code 503(c)(1) or (2), it is not necessary to determine whether the Key Executive is an insider as defined in section 101(31) of the Code. Global Home Products, 369 B.R. 784 n.8. 11

12 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 12 of 16 production, including ordering from suppliers and engaging venders for the manufacture of Debtors clothing. Satin Declaration at p. 5, para No other individuals, including the Key Employees, had any authority to make any decisions that would affect Debtors operations without the expressed consent or approval of Rondina or Balaban-Eisenberg. Satin Declaration at pp. 5-6, para. 12. The Incentive Plan was not a severance plan but was an incentive plan that produced value to the Debtors estate. 25. The Incentive Plan is not a pay to stay plan, rather it was intended to compensate the Key Executive for her extraordinary efforts in the event of a successful sale or the filing of a plan of reorganization. Global Home Products, 369 B.R. at 783. See, also, Nobex, 2006 Bankr. LEXIS 417 (Bankr. D. Del. 2006). 26. Nobex is squarely on point. In that case, the debtor sought to preserve the value of its assets while pursuing the sale of the debtor s business. Nobex, 2006 Bankr. LEXIS 417. The debtor argued that the experience, expertise and involvement of key employees were critical to the sale procedure and sought implementation of a bonus plan for those employees premised upon a proposed sale of the debtor at a price above a stalking horse bid. As in the case at bar, the key employees had not signaled their intention to resign prior to learning of the Bonus Plans. 27. The Nobex court ruled that proposed bonuses were not severance pay governed by Bankruptcy Code 503(c)(1) and (2) where the postpetition efforts of the debtor s executives would extend well beyond their ordinary course responsibilities and [would] be critical to the Debtor s sale efforts. Nobex, 2006 Bankr. LEXIS 417. Specifically, the key employees would be in charge of marketing the debtor s assets and coordinating and overseeing due diligence responses to prospective buyers. The court found that the unique skills and 12

13 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 13 of 16 expertise of the executives were critical to the debtor s successful implementation of the sale procedure... and [the] ability to maximize the value of the debtor s assets, specifically referring to the employees knowledge and understanding of the debtor s particular assets. Id. Moreover, the court ruled that bonuses were reasonably necessary and justified by the likely benefits. Id. 28. Here, too, the Key Personnel were critical to maintaining the going concern value of the Debtors assets, as well as the marketing, and court approved auction and sale procedure. The Bonus Plans were intended to encourage the Key Personnel to act beyond their customary duties and responsibilities. The Key Personnel possessed a unique understanding of the Debtors business and worked tirelessly to support the Debtors reorganization efforts, for example, by responding to every due diligence request and remaining in continual communications with prospective buyers, often working nights and weekends to do so. Without the valuable knowledge and skills and extraordinary efforts of the Key Personnel, the Debtors would have been unable to maximize the value of the estate assets through consummation of the Sale. Significantly, the proposed bonuses constitute merely a fraction of the actual realized proceeds from the Sale. 29. Similarly, in Global Products, the court ruled that where the debtors informed certain of its key employees that the debtors would seek court approval of promised bonuses, the employees were performing in response to financial incentives rather than simply being paid to stay with the debtors after filing. Global Home Products, 369 B.R. at 786. The Court in Global Home Products ruled that the proposed bonus plan was intended to create value by motivating performance, noting that all compensation has a retention element. Id. See, also, Dana II, 38 B.R. at 571 ( merely because a plan has some retentive effect does not mean that 13

14 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 14 of 16 the plan, overall, is retentive rather than incentivizing in nature ). Here, the Key Personnel did not demand, but were informed of, and, in the frantic first two months of these cases, relied upon the Debtors promises to make payment under the Bonus Plans. Moreover, all parties in interest have had notice of the Debtors intent to seek approval of the Bonus Plans. As was the case in Global Products, every budget approved by the Debtors lenders provided for the payment of the promised bonuses. Global Products, 369 B.R. at The U.S. Trustee and the Committee argue that, because the proposed Bonus Plans do not contain payment thresholds tied to specific performance parameters, the Bonus Plans are impermissible retention and/or severance plans. Even if the Code imposed such a restriction, the actual realized proceeds from the Sale exceeded any potential performance parameters the parties possibly could have foreseen prior to filing or even the auction sale itself and serve as proof that that the Bonus Plans indeed operated to incentivize the Key Personnel to maximize value of the Debtors Assets. BAPCA was not enacted to foreclose the payment of bonuses for extraordinary postpetition efforts by key executives. 31. Congress enacted 503(c) of BAPCA to stem the tide of abusive retention bonuses given to executives simply for remaining in the debtor s employ after the filing of a bankruptcy petition. Global Home Products, 369 B.R. at 784. See, also, Dana II, 358 B.R. at 575. As in Global Home Products, [t]his is not a situation where management has come and by virtue of bankruptcy filing holding the creditor constituencies hostage to the fact that they have history and 6 In an affidavit annexed to its objection to the Motion, the Committee submits that it was advised by the Debtors management that the Debtors had not designed any type of employee incentive plan. Declaration of Kate Matson in Support of the Objection of the Official Committee of Unsecured Creditors to the Debtors Motion Pursuant to Sections 363(b), 365(a) and 503(c) of the Bankruptcy Code and Fed. R. Bankr. P and 9014 for an Order Authorizing Implementation of (I) Key Employee Incentive Plan, and (II) Key Employee Retention Plan(the Matson Declaration ), at para. 6. The Matson Declaration does not identify who from the Debtors management was present at the meeting or even exactly when the meeting took place and thus does not negate the fact that beginning early in these cases the Debtors provided notice of their intent to pay incentive bonuses in the approved budgets. 14

15 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 15 of 16 familiarity with the company, have asked for large bonuses simply to stay around and be retained. Id. (emphasis added). 32. The Key Personnel did much more than simply stay with the Debtors. They undertook significant additional functions that were critical to the maintenance of the Debtors business and the success of these cases. They worked grueling hours on nights and weekends. Recognizing the Debtors financial difficulties and eager to contribute to the Debtors rehabilitation, in March 2009 the Key Executive had even voluntarily agreed to reduce her compensation by $40,000 per year, resulting in an aggregate reduction in compensation through the Sale of more than the proposed $105,000 Incentive Bonus. Only after the resignation of another critical employee did the Debtors, upon their own initiative, offer up the Bonus Plans to the Key Personnel. Throughout the short tenure of these cases, the Key Personnel worked tirelessly to enhance value for all creditors. There is no abuse present in this case of the sort targeted by 503(c) of BAPCA. This Court should authorize the Debtors to make payment in full under the Bonus Plans. 15

16 smb Doc 353 Filed 06/19/12 Entered 06/19/12 15:15:49 Main Document Pg 16 of 16 CONCLUSION WHEREFORE, the Debtors respectfully request that this Court grant the Motion, deny the objections filed thereto and enter the Proposed Order granting the relief requested herein and granting to the Debtors such other further relief as is just and proper. Dated: June 19, 2012 New York, New York FULBRIGHT & JAWORSKI L.L.P. B y: /s/courtney Slatten Katzenstein, Esq. David L. Barrack, Esq. Paul Jacobs, Esq. Courtney Slatten Katzenstein, Esq. 666 Fifth Avenue New York, NY Telephone: Facsimile: dbarrack@fulbright.com pjacobs@fulbright.com ckatzenstein@fulbright.com Counsel to the Debtors and Debtors in Possession 16

17 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 1 of 13 FULBRIGHT & JAWORSKI L.L.P. 666 Fifth Avenue New York, NY Telephone: Facsimile: Hearing Date: June 21, 2012 at 10:00 a.m. (EDT) David L. Barrack, Esq. Paul Jacobs, Esq. Mark C. Haut, Esq. Counsel to the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x In re: THE CONNAUGHT GROUP, LTD., et al., Debtors x Chapter 11 Case No (SMB) (Jointly Administered) DECLARATION OF MAURY SATIN IN SUPPORT OF DEBTORS MOTION FOR ENTRY OF AN ORDER AUTHORIZING IMPLEMENTATION OF (I) KEY EMPLOYEE RETENTION PLAN AND (II) KEY EXECUTIVE INCENTIVE PLAN AND DEBTORS REPLY TO OBJECTIONS TO THE MOTION I, Maury Satin, declare as follows: 1. I serve as the Chief Restructuring Officer ( CRO ) of each of the above-captioned debtors (collectively, the Debtors ) 1 in these chapter 11 cases pursuant to an order of this Court dated March 5, I have held this position since December 29, I submit this declaration in support of the Debtors Motion Pursuant to Sections 105(a), 363(b), 503(b(1)(A)(i) and 503(c) of the Bankruptcy Code and Fed. R. Bankr. P for Entry of an Order Authorizing Implementation of (I)Key Employee Retention Plan and (II) 1 The Debtors, together with the last four digits of each Debtor s federal tax identification number are: The Connaught Group, Ltd. (8384); Limited Editions for Her of Nevada LLC (7669); Limited Editions for Her of Branson LLC (8078); Limited Editions for Her LLC (2197); and WDR Retail Corp. (8865)

18 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 2 of 13 Key Executive Incentive Plan (Docket No. 240) (the Motion ) 2 and Debtors Reply to Objections to Motion for Entry of an Order Authorizing Implementation of (I) Key Employee Retention Plan and (II) Key Executive Incentive Plan (Docket No. 2 ) (the Reply ). 3. Since my retention as CRO, I have become generally familiar with the Debtors day-to-day operations, business affairs, and books and records, as well as the Debtors efforts to improve cash flows and profitability, obtain DIP financing, negotiate with potential investors, negotiate with prospective buyers, negotiate a cash collateral agreement with the Debtors lenders, sell their businesses as a going concern, and prepare a liquidation plan. I have worked closely with the Debtors management, executive officers and professionals, including, its financial advisors and accountants. I was closely involved in the auction and sale of substantially all of the Debtors assets which closed on April 13, 2012 (the Sale ). 4. Prior to Debtors chapter 11 petitions being filed on February 9, 2012 (the Petition Date ), the Debtors sought out and evaluated options for all of the following: attracting an investor, implementing a plan of reorganization, selling the company outright or through an auction with a stalking horse purchaser, and obtaining debtor-in-possession financing. I participated in all aspects of the prepetition efforts since my retention by the Debtors on December 29, Prepetition, the Debtors negotiated up to the documentation stage for a debtor-in-possession loan to fund working capital needs throughout the case. After careful consideration and having consulted with their professionals, Debtors concluded that the proposed loan would not have been in the best interest of Debtors creditors because it had several onerous terms that would have resulted in a default perhaps leaving the unsecured creditors with nothing. As a result, Debtors did not complete the debtor-in-possession financing. 2 Unless otherwise defined herein, all capitalized terms shall have the same meaning as in the Motion

19 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 3 of In addition, prior to the Petition Date the Debtors negotiated with a perspective stalking-horse bidder, whose offer would have guaranteed the Debtors estates only $8.4 million. Again, after careful consideration and having consulted with their professionals, Debtors determined that it was not in their best interest to agree to the stalking horse bid. Part of the calculation was that the secured debt was approximately $12 million. Hence, it was possible that no money would be available for unsecured creditors. 6. Debtors then determined with the aid of their financial advisors that the best course would be to file and seek the use of cash collateral from Debtors prepetition secured lenders. If executed correct, this offered the prospect of greatest recovery for the Debtors and their creditors. Debtors negotiated a structured liquidation budget with their prepetition lenders to allow the use of cash collateral to maximize the value of their estates. In my initial declaration, Declaration of Maury Satin (A) In Support of Debtors Chapter 11 Petitions and First Day Motions and (B) Pursuant to Local Bankruptcy Rule filed on Petition Date (Docket No. 12), I explained to the Court that Debtors were in the early stages of the Spring 2012 selling season and Debtors needed cash collateral in order to secure the balance of inventory requirements for the spring selling season. Based on the initial cash collateral budget, Debtors anticipated that a successful spring selling season would be sufficient to ensure payment of the Debtors prepetition lenders secured claims because funds for creditors would be available from collections or receivable. But Debtors did not anticipate any cash remaining for any other creditors. Debtors hoped that further negotiations could take place with prepetition lenders to ensure additional cash collateral usage and a continuation of Debtors businesses as a going concern until a naked auction for Debtors assets could take place. A detailed examination of Debtors efforts in the Sale process can be found in Declaration of Michael A. O Hara in

20 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 4 of 13 Support of Debtors' Motion Pursuant to 11 U.S.C. Sections 105, 332, 363, 365, 503, and 507 and Fed. R. Bankr. P. 2002, 6004, 6006, and 9006, For Entry of (I) An Order Approving (A) Bidding Procedures, (B) Notice of Sale, Auction, and Sale Hearing, (C) Assumption Procedures and Related Notices, (D) Appointing a Consumer Privacy Ombudsman, and (E) Approving the Expense Reimbursement; and (II) An Order Approving the Sale of Substantially All of the Debtors' Assets (Docket No. 55) and Declaration of Michael A. O'Hara in Support of Debtors Motion for an Order Approving the Sale of Substantially All of Debtors Assets (Docket No. 189). 7. Debtors cases were commenced on the Petition Date based upon the structured liquidation plan negotiated with Debtors prepetition lenders. Debtors internal cash collateral budgets, which I believe were provided to the Committee on numerous occasions, always included a line item for employee Incentive and Retention Plans (the Bonus Plans ). The first pages of the internal cash collateral budgets for the weeks of January 27, 2012; February 17, 2012; and March 2, 2012, which show the Employee Retention line item, are attached hereto as Exhibit A. Because the internal cash collateral budget was a cash flow budget and the money for employee Bonus Plans was not to be spent during the period, those line item did not include a dollar amount. 3 But Debtors had anticipated that $160,000 would be spent on Bonus Plans since prior to negotiation of the initial cash collateral budget. 8. On or about the Petition Date, Debtors Vice President of Operations gave notice of his resignation. His final day employed by the Debtors was February 24, He played a crucial role within the Debtors businesses. Debtors Vice President of Operations was responsible for logistics and operation of all of Debtors facilities. At Debtors warehouse he was responsible for the shipment of Debtors goods to Wardrobe Consultants and their customers 3 The January budget shows an entry of $150,000 to be spent on Employee Retention sometime in March. The anticipated amount was increased to $160,000 prior to negotiation of the initial cash collateral budget

21 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 5 of 13 in order for sales to take place. In his final month at the Debtors, he oversaw the move of the businesses and employees from Debtors headquarters to an expanded, location within the city. During this period he also worked closely with me in order to identify cost savings and cut expenses both prepetition and postposition. 9. Prior to filing of the chapter 11 cases, William Rondina ( Rondina ) and Eileen Balaban-Eisenberg ( Balaban-Eisenberg ) discussed with me and Debtors professionals the retention and incentive bonuses to key employees. These discussions included who should be paid pursuant to Bonus Plans, how much those individuals should be paid, and the ultimate purpose of such plans, maximizing the value of Debtors assets for the benefit of all stakeholders including Debtors unsecured creditors. It was during these discussions that the $160,000 figure for Bonus Plans was decided upon, but the terms of any Bonus Plans were not decided upon. 10. Rondina was Debtors Chief Executive Officer, founder, and sole shareholder. He was the creative designer for and oversaw all of Debtors brands. As the owner of the Debtors and their CEO, he ultimately had all authority and control over the Debtors. 11. Balaban-Eisenberg was Debtors Executive Vice-President and managed Debtors global production team, overseeing all aspects of each collection s development, from its inception and design to its fabrication and delivery. Her responsibilities also included overseeing operations at The Connaught Group, Ltd. and making decisions with other members of the Debtors management on the content of each of Debtors clothing lines. 12. In my opinion, Rondina was in charge of all decision making at the Debtors. Balaban-Eisenberg had authority over had authority over Debtors production, including ordering from suppliers and engaging venders for the manufacture of Debtors clothing. To my knowledge, I never noticed any other individuals, including the Key Employees described below,

22 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 6 of 13 having any authority to make any decisions that would affect Debtors operations without the expressed consent or approval of Rondina or Balaban-Eisenberg When Debtors Vice President of Operations gave notice of his resignation, Debtors management became particularly interested in retaining and incentivizing Debtors essential personnel. At this point Mr. Rondina and Ms. Balaban-Eisenberg, upon consultation with myself and Debtors professionals, articulated the terms of such plans and identified those key individuals to be affected by the Bonus Plans. Through these discussions, they identified Dennis Gulla, Debtors Vice President of Information Technology, ( Gulla ), Susan Klope, Debtors Lead Designer, ( Klope ), Susan Davis, Debtors Vice President of Operations ( Davis, and together with Gulla and Klope the Key Employees ), and Balaban-Eisenberg (the Key Executive, and together with the Key Employees, the Key Personnel ) as the Key Personnel to incentivize with the Bonus Plans in order to maintain the Debtors businesses as a going concern and maximize the value of Debtors assets for the benefit of its creditors. 14. In his role as Vice President of Information Technology, Gulla oversaw the Debtors information technology system, which facilitated Debtors relationship with its Wardrobe Consultants, the gateway to the Debtors customers, by recording orders, tracking shipments, and providing metrics on all aspects of Debtors sale process. Klope oversaw all design efforts related to the Carlisle Brand and managed the design staff. Debtors design staff were the heart of their business and the starting point for all of Debtors businesses value. Davis, previously the Senior Production Vice President of the Carlisle Brand, oversaw and was responsible for purchasing of fabrics, negotiations with manufactures, and managing the course of production such that designs are transformed into finished products to be sold. In her role as

23 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 7 of 13 Executive Vice President, Balaban-Eisenberg was responsible for worldwide production and importation of all of Debtors' clothing. 15. At no time after the filing of the cases did the Key Personnel signal their intention to resign from the Debtors. 16. After Debtors Vice President of Operations gave notice of his resignation, Debtors decided on a Retention Plan for the Key Employees in order to ensure they remained with the Debtors for the benefit of the estate. After the Retention Plan had been devised, Debtors informed the Key Employees in February 2012 that one of them would receive an award payment of $15,000 and the other two would receive award payments of $20,000 after the closing of a going concern sale or the filing of a reorganization plan if they remained employees of the Debtors. 17. Debtors also decided on an Incentive Plan for the Key Executive in order to ensure her continued outstanding efforts, above and beyond her job responsibilities, in order to ensure the best possible outcome for the Debtors estates and their creditors. Debtors informed the Key Executive that she would receive an incentive payment of $105,000 conditioned on a successful closing of a sale of substantially all of the Debtors assets or the filing of a chapter 11 plan of reorganization by April 30, The experience, expertise, understanding of the Debtors operations, customer and supplier relationships, and infrastructure, and involvement of the Key Employees were essential to the success of the Sale. Prior to the Petition Date, the Debtors reduced their employee count by more than 140 people in an effort to reduce operating costs and preserve and maximize the value of their assets. While effective, these reductions meant additional responsibilities for the

24 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 8 of 13 Key Employees, whose efforts in a variety of areas were essential to the continued operation of the Debtors. 19. During the weeks between the Petition Date and the closing of the Sale, Balaban- Eisenberg performed duties and assumed responsibilities that greatly exceeded the scope of her prepetition employment including building and maintaining relationships with and meeting the needs of the Debtors existing lenders, creditors, vendors, potential lenders, potential purchasers, and other parties seeking to support a plan of reorganization, and facilitating all aspects of the Auction and Sale. In doing so, Balaban-Eisenberg worked nights, weekends, and holidays on behalf of the Debtors for months with no added compensation. 20. From my vantage point, I saw the Key Employees and Balaban-Eisenberg play a crucial role in maintaining the going concern value of the Debtors businesses and ensuring a successful Sale to maximize the return for Debtors creditors. Balaban-Eisenberg in particular attended scores of meeting with myself and Debtors professionals as well as with representatives of most, if not all, of the 57 investors, potential purchasers, potential lenders, and liquidators who executed non-disclosure agreements with the Debtors prior to the Sale

25 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 9 of 13

26 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 10 of 13 Exhibit A

27 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 11 of 13

28 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 12 of 13

29 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit A - Declaration of Maury Satin Pg 13 of 13

30 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit B - Declaration of Eileen Balaban-Eisenberg Pg 1 of 16 FULBRIGHT & JAWORSKI L.L.P. 666 Fifth Avenue New York, NY Telephone: Facsimile: Hearing Date: June 21, 2012 at 10:00 a.m. (EDT) David L. Barrack, Esq. Paul Jacobs, Esq. Mark C. Haut, Esq. Counsel to the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x In re: THE CONNAUGHT GROUP, LTD., et al., Debtors x Chapter 11 Case No (SMB) (Jointly Administered) DECLARATION OF EILEEN BALABAN-EISENBERG IN SUPPORT OF DEBTORS MOTION FOR ENTRY OF AN ORDER AUTHORIZING IMPLEMENTATION OF (I) KEY EMPLOYEE RETENTION PLAN AND (II) KEY EXECUTIVE INCENTIVE PLAN AND DEBTORS REPLY TO OBJECTIONS TO THE MOTION I, Eileen Balaban-Eisenberg, declare that: 1. I was the Executive Vice President of The Connaught Group, Ltd. and the other above-captioned debtors and debtors in possession (collectively the Debtors or Connaught ) 1 on February 9, 2012 (the Petition Date ) and continued in that role through the sale of the Debtors assets as a going concern, which closed on April 13, I submit this declaration in support of the Debtors Motion Pursuant to Sections 105(a), 363(b), 503(b(1)(A)(i) and 503(c) of the Bankruptcy Code and Fed. R. Bankr. P for Entry of an Order Authorizing Implementation of (I)Key Employee Retention Plan and (II) 1 The Debtors, together with the last four digits of each Debtor s federal tax identification number are: The Connaught Group, Ltd. (8384); Limited Editions for Her of Nevada LLC (7669); Limited Editions for Her of Branson LLC (8078); Limited Editions for Her LLC (2197); and WDR Retail Corp. (8865)

31 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit B - Declaration of Eileen Balaban-Eisenberg Pg 2 of 16 Key Executive Incentive Plan (Docket No. 240) (the Motion ) 2 and Debtors Reply to Objections to Motion for Entry of an Order Authorizing Implementation of (I) Key Employee Retention Plan and (II) Key Executive Incentive Plan (Docket No. 353) (the Reply ). 3. I began my career with the R.H. Macy Company in After completing that company s management training program, I worked in its private label group, where I built an expertise in the importation, design, and manufacture of women s finer sportswear. 4. I worked for Connaught for 23 years. 3 I joined The Connaught Group, Ltd. in 1989 as Production Manager for the Carlisle Collection. In April 2002, I became Vice President of Production and advanced to my final position as Executive Vice President in As Executive Vice President, I was responsible for worldwide production and importation of all of Connaught s collections, including Carlisle, Per Se, and Etcetera. At its height in 2007, Connaught s revenue surpassed $150 million but fell to approximately $108 million in 2010 as consumer spending fell as a result of the global economic crisis. 5. I managed a global production team, overseeing all aspects of each collection s development, from its inception and design to its fabrication and delivery. My management responsibilities also included overseeing operations at The Connaught Group, Ltd. and making decisions with other members of the Debtors management on the content of each clothing line, season after season. The Key Employees 6. The efforts of a core group of three key employees, Dennis Gulla, Debtors Vice President of Information Technology, ( Gulla ), Susan Klope, Debtors Lead Designer, ( Klope ), and Susan David, Debtors Vice President of Operations ( Davis, and together with 2 3 Unless otherwise defined herein, all capitalized terms shall have the same meaning as in the Motion. After the sale of the Debtors businesses as a going concern on April 13, 2012, I resigned from my position rather than taking a job with the new company

32 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit B - Declaration of Eileen Balaban-Eisenberg Pg 3 of 16 Gulla and Klope the Key Employees ) were essential to maintaining the Debtors businesses as a going concern. 7. The Key Employees were not insiders of the Debtors and had no control over the company. They do not serve, nor have they ever served, as officers, directors, persons in control, or relatives of any such person. William Rondina ( Rondina ) was the sole shareholder and Chief Executive Officer ( CEO ) of the Debtors. As the owner of the Debtors and their CEO, he ultimately had all authority and control over the Debtors. As Executive Vice President, I was an officer of the Debtors and was responsible for worldwide production and importation of all of Debtors' clothing. Bonus Plans 8. From the Petition Date, Debtors planned to complete a going concern Sale of Debtors businesses. Debtors and their professionals were well aware that the value of Debtors businesses as a going concern greatly exceeded the value of Debtors assets sold through liquidation outside the ordinary course of business. As such, Debtors primary goal both before and after the Petition Date was to ensure continued operation of the Debtors businesses and maintaining of the going concern value of those businesses. The peaks and valleys in profits of Debtors businesses resulting from sales primarily only occurring during four selling seasons dictated that the value of Debtors estate could only be maximized for a short period of time. 9. In January 2012, prior to the Petition Date, Debtors management, including myself, and Debtors professionals were scouring Debtors business operations for any possible opportunity to cut costs and in doing so we contemplated potential reductions in staff. From this process, Debtors reduced their employee count by more than 140 people in an effort to reduce operating costs and preserve and maximize the value of their assets. While effective, these reductions meant additional responsibilities for remaining employees and made it critical that

33 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit B - Declaration of Eileen Balaban-Eisenberg Pg 4 of 16 Rondina and I properly manage the remaining employees to maintain the value of the Debtors businesses As a natural result of this staff evaluation process, we began to identify key personnel who we knew we could not do without during this troubling time for Connaught. During this period, I had discussions with Rondina, Maury Satin, Debtors Chief Restructuring Officer, ( Satin ), and Debtors professionals regarding the possible payment of retention and incentive bonuses to key employees at some point down the line. 11. In the days and weeks prior to the Petition Date, when Debtors were negotiating a cash collateral budget with their prepetition secured lenders, Debtors and their professionals settled on the sum of $160,000 for these incentive and retention plans (the Bonus Plans). It was my understanding from the earliest cash collateral budget that they included payments pursuant to Bonus Plan, and my expectation was that these payments would total $160, On or about the Petition Date, Debtors Vice President of Operations gave notice of his resignation. His final day at Connaught was February 24, He played an important role in Debtors businesses overseeing the day-to-day operations as Debtors facilities in New York City, including both the offices and the warehouse. He had been essential in Debtors cost cutting efforts and oversaw the plans for consolidation of Debtors two New York City offices. He was precisely the sort of person that Debtors had determined was indispensible to Connaught. 13. Upon the departure of the Vice President of Operations, Rondina and I, after consulting with Satin and Debtors professionals, concluded that Debtors should go forward with Bonus Plans in order to retain and incentive those individuals that Debtors could not operate without. Rondina decided at this point that the recipients of payments pursuant to the

34 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit B - Declaration of Eileen Balaban-Eisenberg Pg 5 of 16 Bonus Plans would be the three Key Employees and myself (the Key Executive, and together with the Key Employees, the Key Personnel ). 14. After consultation with their professionals, Debtors decided upon the amounts to be paid to each professional. In additional, they decided that the payments to Key Employees would be made pursuant to a retention plan that required their continued employment through the closing of a going concern sale or the filing of a reorganization plan. The Key Employees were informed of the terms of the bonus plan and the amounts they stood to be paid if they adhered to its requirements. 15. After consolation with their professionals, Debtors also decided that they would seek to incentivize my efforts going forward by offering me an incentive bonus condition on the closing of a successful sale of substantially all of the Debtors assets or the filing of a chapter 11 plan of reorganization by April 30, From Petition Date to Sale 16. Prior to the Petition Date, Debtors negotiated with a potential stalking horse bidder. The highest stalking horse bid offered would have guaranteed the Debtors estates only $8.4 million. At the time, this amount would have guaranteed satisfaction of Debtors secured debt with little if any remaining for Debtors other creditors. 17. From the time this stalking horse offer was rejected only days before the Petition Date, Debtors primary goal was to maintain the value of the business and complete a Sale as soon as possible. During the nine weeks between the Petition Date and the closing of the Sale, I continued to work tirelessly to achieve this goal, just as I had in the weeks and months prior to the Petition Date. For some time, I had been working well beyond my duties with regard to Debtors production with no additional compensation. I participated in plans and efforts for potential new investment into Connaught, reorganization, debtor-in-possession financing, and

35 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit B - Declaration of Eileen Balaban-Eisenberg Pg 6 of 16 sale of the companies. Each potential opportunity involved not only a review of the options but countless meeting with Debtors professionals and the counterparties to the potential transactions performing their due diligence. After the Petition Date, these efforts only escalated as Debtors negotiated with 57 investors, potential purchasers, potential lenders, and liquidators who executed non-disclosure agreements with the Debtors prior to the Sale. High on the priority list for many of these individuals was the opportunity to meet and discuss the Debtors businesses with management, and in the overwhelming majority of these situations, I served in that role. 18. After the resignation of Debtors Vice President of Operations, I also took on many of his responsibilities including the day-to-day operations of Debtors facilities in New York City. Despite all these additional responsibilities, I continued to oversee Debtors global production team. Debtors needed to continue obtaining Debtors clothing in order to meet the sale demands of the current selling season, retain Debtors Wardrobe Consultant Network, and maintain the going concern value of Debtors businesses. But Debtors manufactures were entirely oversees and many were unwilling to continue shipments without immediate payment for goods. I was only able to maintain Debtors relationships with these manufactures by countless middle of the night phone calls with my counter parts in China and assurances of future payments. 19. In my role overseeing Debtors production, including all fabric and payments to manufacturers, I was responsible for ensuring compliance with Debtors cash collateral budget and avoiding default. In addition, I worked extensively with Richter, Debtors financial consultants, on budgets and evaluation of purchase requirements in order to determine what goods could be bought to ensure continued operation of the Debtors businesses and additional recovery for Debtors creditors. Our conclusions and the financial information backing them up

36 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit B - Declaration of Eileen Balaban-Eisenberg Pg 7 of 16

37 smb Doc Filed 06/19/12 Entered 06/19/12 15:15:49 Exhibit B - Declaration of Eileen Balaban-Eisenberg Pg 8 of 16 Exhibit A

38 smb Doc Filed 02/24/12 06/19/12 Entered 02/24/12 06/19/1212:40:53 15:15:49 Exhibit G B - Declaration Affidavit of of Eileen Balaban-Eisenberg Pg 29 of of 916 FULBRIGHT & JAWORSKI L.L.P. 666 Fifth Avenue New York, NY Telephone: Facsimile: David L. Barrack, Esq. Paul Jacobs, Esq. Mark C. Haut, Esq. Proposed Counsel to the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x In re: THE CONNAUGHT GROUP, LTD., et al., Debtors x Chapter 11 Case No (SMB) (Jointly Administered) AFFIDAVIT OF EILEEN BALABAN-EISENBERG IN SUPPORT OF THE MOTION TO SHORTEN THE TIME FOR NOTICE OF THE HEARING TO CONSIDER THE DEBTORS MOTION PURSUANT TO 11 U.S.C. 105, 332, 363, 365, 503 AND 507 AND FED. R. BANKR. P. 2002, 6004, 6006, AND 9006, FOR ENTRY OF (I) AN ORDER APPROVING (A) BID PROCEDURES, (B) NOTICE OF SALE, AUCTION, AND SALE HEARING, (C) ASSUMPTION PROCEDURES AND RELATED NOTICES, (D) APPOINTING A CONSUMER PRIVACY OMBUDSMAN; AND (E) APPROVING THE EXPENSE REIMBURSEMENT; AND (II) AN ORDER APPROVING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTORS ASSETS STATE OF NEW YORK ) ) ss. COUNTY OF NEW YORK ) Eileen Balaban-Eisenberg, being duly sworn, deposes and says: 1. I am the Executive Vice President of The Connaught Group, Ltd. and the other above-captioned debtors and debtors in possession (collectively the Debtors or Connaught ). 1 1 The Debtors, together with the last four digits of each Debtor s federal tax identification number are: The Connaught Group, Ltd. (8384); Limited Editions for Her of Nevada LLC (7669); Limited Editions for Her of Branson LLC (8078); Limited Editions for Her LLC (2197); and WDR Retail Corp. (8865)

39 smb Doc Filed 02/24/12 06/19/12 Entered 02/24/12 06/19/1212:40:53 15:15:49 Exhibit G B - Declaration Affidavit of Eileen Balaban-Eisenberg Pg 310 of of I submit this Affidavit on behalf of the Debtors in support of their request that the Court shorten the time for notice of the hearing to consider the Sale Motion as more fully described in the Motion to Shorten the Time for Notice of the Hearing to Consider the Debtors Motion Pursuant to 11 U.S.C. 105, 332, 363, 365, 503, and 507 and Fed. R. Bankr. P. 2002, 6004, 6006, and 9006, for Entry of (I) an Order Approving (A) Bidding Procedures, (B) Notice of Sale, Auction, and Sale Hearing, (C) Assumption Procedures and Related Notices, (D) Appointing a Consumer Privacy Ombudsman, (E) Approving the Expense Reimbursement; and (II) an Order Approving the Sale of Substantially all of the Debtors Assets (the Motion to Shorten Time ) I have participated in all negotiations with potential purchasers and am fully familiar with the timing issues with respect to Debtors ability to sell their businesses as a going concern, and the extraordinary value to the Debtors of such a sale as detailed in the Sale Motion. As described herein, the Debtors operate through four selling seasons. Purchase of fabrics, manufacturing of clothing, and other pre-sale tasks need to be undertaken far in advance. I am advised that normal procedures for a hearing would extend the sale process beyond the dropdead date for obtaining summer clothing shipments for 2012 and ordering fabric for fall 2012 selling season as detailed herein. Qualifications 4. I began my career with the R.H. Macy Company in After completing that company s management training program, I worked in its private label group, where I built an expertise in the importation, design, and manufacture of women s finer sportswear. 2 Capitalized terms not herein defined shall have the same meaning as in the Motion to Shorten Time or the Sale Motion

40 smb Doc Filed 02/24/12 06/19/12 Entered 02/24/12 06/19/1212:40:53 15:15:49 Exhibit G B - Declaration Affidavit of Eileen Balaban-Eisenberg Pg 411 of of I have worked for Connaught for 23 years. I joined The Connaught Group, Ltd. in 1989 as Production Manager for the Carlisle Collection. In April 2002, I became Vice President of Production and advanced to my current position as Executive Vice President in As Executive Vice President, I am responsible for worldwide production and importation of all of Connaught s collections, including Carlisle, Per Se, and Etcetera. At its height in 2007, Connaught s revenue surpassed $150 million but fell to approximately $108 million in 2010 as consumer spending fell as a result of the global economic crisis. 6. I manage a global production team, overseeing all aspects of each collection s development, from its inception and design to its fabrication and delivery. My management responsibilities also include overseeing operations at The Connaught Group, Ltd. and making decisions with other members of the Debtors management on the content of each clothing line, season after season. The Essential Wardrobe Consultants 7. Connaught designs and produces new clothing each year to correspond with each design season: spring, summer, fall, and holiday. Each season lasts only a few weeks, but the overwhelming majority of Connaught s sales takes place through independent contractors ( Wardrobe Consultants ) during the selling seasons. Only excess items from each season are liquidated through Connaught s outlet stores. The difference in sale price to Connaught between selling through Wardrobe Consultants and liquidating at outlet stores is nearly 4½ times. In other words, when sold through the Wardrobe Consultants, an item sells for a price that is 4½ times more than the price that would be obtained if the same item was liquidated at outlet stores. The spring season is currently underway. The summer season begins March 21, 2012; however, early sales actually begin on March 19, The fall selling season is scheduled to begin on July 12,

41 smb Doc Filed 02/24/12 06/19/12 Entered 02/24/12 06/19/1212:40:53 15:15:49 Exhibit G B - Declaration Affidavit of Eileen Balaban-Eisenberg Pg 512 of of Wardrobe Consultants are able to obtain the highest sale price for its clothing, sell the majority of Connaught s goods, and generate the majority of its profits in the few weeks of each selling season. Wardrobe Consultants do not sell in stores. They meet with customers through individual appointments in which they provide the personalized service and attention to detail absent from the conventional shopping experience. 9. Wardrobe Consultants are independent contractors who are not contractually bound to work exclusively for Connaught. Their continued service is therefore dependent on continued operation of Connaught and a regular flow of Connaught goods. In most cases, Wardrobe Consultants have appointments scheduled with customers during the selling season made weeks or months in advance. Wardrobe Consultants and their connection to choice customers are the key to the Debtors more than $100 million in annual sales. The Summer Season 10. Debtors clothing is designed by employees in the New York offices. Fabrics are then purchased primarily in Italy, but also from France, Scotland, Japan, and other nations. Fabrics are then shipped by air to manufacturers in East Asia, most of which are located in Hong Kong. These factories produce the clothing to the Debtors design specifications and ship the finished dresses, suits, and other garments (each a Piece and together the Pieces ) by air to the Debtors Long Island City warehouse. On arrival, shipments of clothing are inspected for quality purposes before being shipped to Wardrobe Consultants and customers. 11. Maintaining the production schedule is absolutely essential to the going concern value of the business. In many ways, Connaught s clothing is a perishable good. Each Piece is most valuable at the beginning of the selling season, and its value and sale price only decrease as the season ends and it is sent to an outlet store for liquidation. Moreover, delay in the seasonal

42 smb Doc Filed 02/24/12 06/19/12 Entered 02/24/12 06/19/1212:40:53 15:15:49 Exhibit G B - Declaration Affidavit of Eileen Balaban-Eisenberg Pg 613 of of 9 16 sales schedule will cost Connaught customers who will have already made their clothing purchases and Wardrobe Consultants who will have turned to other clothing lines. 12. Connaught s summer season begins in late March. Pieces for the summer season have already been designed and manufactured, but many of them remain in the possession of the manufacturers who will not make delivery without assurances of payment. Customer orders for these summer goods will begin once Wardrobe Consultants appointments with their customers begin at the start of the summer season. In order to maintain the maximum value Connaught will receive from the sale of the summer Pieces, they must be in its possession and ready to ship when customer orders are made. Given Connaught s current reliance on cash collateral, which does not provide for use of that capital for purchase of summer goods, the best way to ensure these payments are made, the summer season proceeds without disruption, and relationships with manufacturers and Wardrobe Consultants are maintained is a shortened expedited timeline for bidding and sale of the Debtors as a going concern to a purchaser who will provide the capital necessary for summer clothing purchases. The Fall Season 13. Fabrics are typically ordered six and seven months prior to the beginning of a season. For instance, the current spring season fabrics were ordered in July Fabric orders have a particularly long lead time. After orders are placed, final fabrics must go through an extensive and time consuming color approval process. Delays in purchasing fabric can have a severe impact on a selling season s sales months before it is set to begin. 14. Fabric orders for Fall typically take place in December or January, but Connaught s financial difficulties have delayed the fabric orders. However, I am confident that Connaught can have a successful fall season if fabric orders are made in March

43 smb Doc Filed 02/24/12 06/19/12 Entered 02/24/12 06/19/1212:40:53 15:15:49 Exhibit G B - Declaration Affidavit of Eileen Balaban-Eisenberg Pg 714 of of A March order date will allow fabrics to be selected, approved, and shipped to manufacturers in time to allow Connaught to have a curtailed, but still profitable, fall selling season. Skipping the fall season in its entirety would both greatly decrease Connaught s 2012 sales as well as significantly undermine Connaught s relationship with both Wardrobe Consultants and customers. March 1, 2012 Bidding Procedure Hearing and March 2012 Sale Date 16. Wardrobe Consultants are essential to the operation of Connaught and to its value as a going concern. They provide the majority of Connaught s sales and are able to maximize Connaught s profits. Any delay or cancellation in the seasons could have a devastating effect on Connaught s ongoing relationship with the Wardrobe Consultants. Failure to have summer stock in Connaught s possession on time and failure to order fabrics for the fall season will have a detrimental effect on their relationships with their customers and in turn could lead Wardrobe Consultants to no longer sell Connaught s goods. 17. Given the timing of the 2012 summer season and the need to order fabrics for fall 2012, any sale of Connaught as a going concern must take place by the end of March 2012, if not earlier. A March sale date, gives the purchaser enough time to ensure delivery of summer goods and make fabric purchases for fall Debtors need a sale or other transaction in place at an early enough date that the purchaser or other investment party will provide the capital necessary for summer and fall purchases. The current cash collateral agreement with the banks does not provide for use of that capital. I have been advised that in order to conduct the most competitive sale, the Bidding Procedure Hearing should be scheduled for March 1, Despite these time constraints, I believe that a March 1 Bidding Procedure Hearing and a March sale date will allow (i) the summer season to progress according to schedule, (ii) the fall season to be successful, and (iii) Connaught to maintain its relationships

44 smb Doc Filed 02/24/12 06/19/12 Entered 02/24/12 06/19/1212:40:53 15:15:49 Exhibit G B - Declaration Affidavit of Eileen Balaban-Eisenberg Pg 815 of of 9 16 with the Wardrobe Consultants, thereby maximizing the going concern value of Connaught s assets. A sale on any later date would have a disastrous effect on summer and fall season sales, would damage the relationships with the Wardrobe Consultants, and would significantly lower the value of Connaught as a going concern. [Remainder of Page Intentionally Left Blank]

45 smb Doc Filed 02/24/12 06/19/12 Entered 02/24/12 06/19/1212:40:53 15:15:49 Exhibit G B - Declaration Affidavit of Eileen Balaban-Eisenberg Pg 916 of of 9 16