Case KG Doc 504 Filed 12/13/18 Page 1 of 21 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 Case KG Doc 504 Filed 12/13/18 Page 1 of 21 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Heritage Home Group LLC, et al., 1 Debtors. Chapter 11 Case No (KG) (Jointly Administered) Hearing Date: January 17, 2019 at 2:00 p.m. (ET) Objection Deadline: December 27, 2018 at 4:00 p.m. (ET) MOTION OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR ENTRY OF AN ORDER GRANTING DERIVATIVE STANDING AND AUTHORITY TO PROSECUTE AND SETTLE CLAIMS ON BEHALF OF THE DEBTORS ESTATES The Official Committee of Unsecured Creditors (the Committee ) of HHG Heritage Home Group LLC and its affiliated debtors and debtors in possession (collectively, the Debtors ), by and through its undersigned counsel, files this motion (the Motion ) for entry of an order substantially in the form attached hereto as Exhibit A (the Proposed Order ), pursuant to sections 105(a) and 1109(b) of title 11 of the United States Code, 11 U.S.C. 101 et seq. (the Bankruptcy Code ), granting standing to the Committee to assert, prosecute, litigate, negotiate, and, with Court approval, settle the derivative claims and causes of action set forth in the draft complaint 2 attached hereto as Exhibit B (the Complaint ) on behalf of and for the benefit of the Debtors estates. In support thereof, the Committee respectfully states as follows: Introduction and Relief Requested 1. KPS Capital Partners, L.P. and its affiliates and related parties as specifically set forth in the Complaint (collectively, KPS ) acquired the Debtors business in 2013, through a 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, include: Heritage Home Group LLC (9506); HH Global II B.V. (0165); HH Group Holdings US, Inc. (7206); HHG Real Property LLC (3221); and HHG Global Designs LLC (1150). The Debtors corporate headquarters is located at 1925 Eastchester Drive, High Point, North Carolina, The Committee reserves the right to revise the Complaint further prior to filing the same

2 Case KG Doc 504 Filed 12/13/18 Page 2 of 21 combination of a $125 million equity investment and a purported $100 million term loan (the Term Loan ). Upon its acquisition of the Debtors, KPS quickly consolidated all of the Debtors distinct brands and replaced upper management with people who lacked the industry experience and the relationships necessary to facilitate sales and foster trust with customers. As a result, the Debtors distinct brands quickly lost recognition in the industry, customers lost faith in the brands and sales drastically decreased. 2. Notwithstanding the Debtors precipitous financial and operational deterioration, KPS, in its insider position, continued to dumped more and more cash into the Debtors. While these cash infusions were labeled as loans, KPS did not act as a lender and the Debtors did not act as borrowers and these purported loans were disguised equity investments and should be recharacterized as such. Facts supporting this include (i) despite the Debtors obligations to make fixed interest payments, the Debtors did not make any cash interest payment or principal payment and KPS did not take any action to enforce the Debtors obligations under the Term Loan in the form of a demand, default notice or entry into a forbearance agreement; (ii) the default provisions under the Term Loan did not have the typical protections one would find in a document negotiated at arm s length; (iii) the numerous amendments and related documents entered into were inconsistent; (iv) KPS, in its insider position, continued to extend maturity dates and provide more and more capital to the Debtors in the form of cash infusions (the Cash Infusions ) without requiring new or additional collateral even though the Debtors liquidity and solvency continued to diminish; (v) the Debtors did not have the ability to obtain outside third party financing for each of the Term Loan or Cash Infusions; (vi) any payments under the Term Loan or Cash Infusions were all subordinate to the Debtors then-existing senior secured asset

3 Case KG Doc 504 Filed 12/13/18 Page 3 of 21 backed loan with PNC Bank, National Association ( PNC ); and (vi) the Debtors did not create a sinking fund for the repayment of the Term Loan. 3. KPS also used its insider status, knowledge and control to protect its position in the contemplated bankruptcy proceedings by purchasing a $15 million last-out participation (the Participation ) in the Debtors then-existing asset-backed with PNC, rather than simply issue another amendment to the Term Loan. As a result, once the Debtors did file their Chapter 11 proceedings, KPS was in a position to serve as a DIP Lender and roll up the Term Loan as part of the Debtors DIP financing. This transaction was effectuated at a time when the Debtors were insolvent and inadequately capitalized, demonstrating that it would be unlikely that KPS would be repaid on the Participation except within a bankruptcy context. The Participation was funded where anticipated recoveries on the sale/liquidation of the Debtors assets put the Participation at risk of no or less than full repayment, such that it was unclear whether it would be repaid at all. Moreover, by structuring the Participation, KPS was able to position itself to profit by repayment with interest, before the payment of the Debtors other unsecured creditors and while the Debtors were insolvent. Thus, although the Participation subsumed the terms and conditions of the ABL, as set forth more fully in the Complaint, the facts demonstrate that the parties intended the Participation be equity rather than debt and the Participation, along with the Term Loan and Cash Infusions should be recharacterized as such, or, alternatively, be subordinated under Section 510(c) of the Bankruptcy Code. 4. During this time KPS also used its insider status, knowledge and control of the Debtors management and operations to take advantage of the Debtors by charging the Debtors and receiving close to $5 million in purported travel and consulting fees without providing

4 Case KG Doc 504 Filed 12/13/18 Page 4 of 21 reasonably equivalent value for these fees. Additionally, the Debtors paid interest to KPS as part of the Participation which constituted a fraudulent transfer. 5. As set forth more fully in the Complaint, the timeline of all of these transactions will show that the Debtors were insolvent and not paying their debts as they became due almost from inception. Also during this time, KPS and others treated the Debtors as one company and the Debtors acted as one company as (i) corporate formalities were not observed, (ii) each of the Debtors used the assets of other debtors during this time and (iii) some of the debtors had overlapping board members. 6. As such, the Committee seeks to commence an action against KPS to: (a) recharacterize the Term Loan, Cash Infusions and the Participation as equity interests and preserve all related liens and security interests granted thereunder for the Debtors estates, or alternatively, (b) subordinate the Term Loan, Cash Infusions and the Participation, (c) avoid and recover funds fraudulently transferred, which transfers include the travel and consulting fees and interest payments made in connection with the Participation, by the Debtors to KPS on behalf of the Debtors estates and their creditors, under both the Bankruptcy Code and Delaware law, and (d) enter a judgment substantively consolidating the Debtors estates. The Committee has a right to relief under multiple theories, including: a. Recharacterization of Debt as Equity. The Committee is entitled to recharacterize the Term Loan, Participation and Cash Infusions as equity interests because, despite being styled as debt, the evidence available to the Committee at this time indicates that the parties did not intend these investments be repaid, but rather, were simply dressing up equity investments as loans in order to protect their repayment rights vis a vis other creditors in a potential bankruptcy scenario

5 Case KG Doc 504 Filed 12/13/18 Page 5 of 21 b. Equitable Subordination Under Section 510(c) of the Bankruptcy Code. Alternatively, the Committee is entitled to equitably subordinate the Term Loan, Participation and Cash Infusions as equity interests in their entirety because of KPS control, insider status and inequitable conduct as result of its positions throughout its history of insider dealings with the Debtors and its control of the Debtors operations and management, including its last ditch effort to benefit from the Debtors financial collapse through the purchase of the Participation. c. Avoidance and Recovery of Fraudulent Transfers. Under applicable fraudulent transfer law, the Committee can avoid the numerous transfers made by the Debtors to KPS, which transfers include consulting fees and interest payments in connection with the Participation, for which one or more Debtors did not receive reasonably equivalent value and/or valuable consideration under sections 544(b) and 548(a)(1)(A) and (B) of the Code and 6 Del. Code 1304(a)(1) and/or 1304(a)(2). Therefore, the Committee may seek to recover the avoided transfers pursuant to section 550 of the Code. d. Substantive Consolidation. Under applicable law, the Committee can seek a judgement to substantively consolidate the Debtors estates under section 105 of the Bankruptcy Code where (i) the different Debtors operated and were treated as one company under common control and were treated as one company under common control; (ii) the Debtors each used the assets of other Debtors; (iii) corporate formalities were not followed; and (iv) some of the Debtors had over-lapping board members. 7. Additionally, the Debtors cannot bring the causes of action outlined in the Complaint because of the stipulations contained in the final DIP Order (defined below), which

6 Case KG Doc 504 Filed 12/13/18 Page 6 of 21 order authorized the Debtors to incur $98.0 million in post-petition financing from PNC and KPS as DIP lenders (the DIP Lenders ). As a condition for the DIP financing, the DIP Lenders required that the Debtors agree to these stipulations in the final DIP Order, which stipulations provide that the DIP Lenders liens and claims (including those of KPS) are valid and binding and are not subject to challenge, re-characterization, or any other defense. The DIP Order makes these stipulations binding upon all other parties in interest unless a timely challenge is filed by a party with appropriate standing. 8. Following the entry of the DIP Order, the Committee undertook an investigation of the matters addressed in the Debtors stipulations in the DIP Order and other matters concerning the liens and claims of PNC and KPS. This investigation uncovered (i) the transfers set forth above that are subject to avoidance and recovery under sections 544 and 548 of the Bankruptcy Code and under 6 Del. Code sections 1304(a)(1) and/or 1304(a)(2); (ii) debts subject to equitable subordination or re-characterization as equity; and (iii) facts to support the substantive consolidation of the Debtors estates. If these claims are successful, the estate and its creditors stand to reap substantial benefits. 9. Accordingly, by this Motion, the Committee requests entry of the Proposed Order substantially in the form attached hereto as Exhibit A pursuant to sections 105(a) and 1109(b) of the Bankruptcy Code granting derivative standing and authority to prosecute Counts III and VI (avoidance and recovery of actual fraudulent transfers), Counts IV and VII (avoidance and recovery of constructive fraudulent transfers) and Counts V and VIII (avoidance and recovery of actual and constructive fraudulent transfers under Delaware state law) set forth in the draft Complaint attached hereto as Exhibit B, including, without limitation, the assignment of the Debtors claims to the extent necessary. As will be set forth below, Count I (recharacterization),

7 Case KG Doc 504 Filed 12/13/18 Page 7 of 21 Count II (equitable subordination) and Count IX (substantive consolidation) are direct claims and not derivative estate claims that require approval of this Court prior their commencement. By this Motion the Committee also requests authority to take all actions the Committee determines necessary and appropriate in its sole discretion in connection with the authority granted in this Motion, including, but not limited to, the exclusive right to settle all claims and causes of action brought by the Committee. Jurisdiction 10. This Court has jurisdiction over this matter pursuant to 28 U.S.C. 157 and 1334 and the Amended Standing Order of Reference from the United States District Court for the District of Delaware dated February 29, Venue of these cases and this Motion in this District is proper pursuant to 28 U.S.C and This is a core proceeding pursuant to 28 U.S.C. 157(b)(2). The statutory and legal predicates for the relief requested herein are sections 105(a) and 1109(b) of the Bankruptcy Code. 11. Pursuant to Local Rule (f), the Committee consents to the entry of a final judgment or order with respect to this Motion if it is determined that this Court would lack Article III jurisdiction to enter such final order or judgment absent the consent of the parties. Background The 2013 Bankruptcy Sale to KPS and KPS Investments, Control and Operations of the Debtors Businesses 12. In November 2013, the Debtors were formed when affiliates and designees of KPS acquired the brand portfolio of Furniture Brands, Inc. through a bankruptcy sale for $295 million. 3 This acquisition was financed by a KPS entity who paid $225 million, characterizing it as a loan consisting of (i) the $100,000,000 Term Loan and (ii) a $125 million equity 3 The subject case is styled In re FBI WindDown, Inc. (f/k/a Furniture Brands Int l, Inc.), Case No (CSS), in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court )

8 Case KG Doc 504 Filed 12/13/18 Page 8 of 21 contribution to the Debtors. At this time, the Debtors also borrowed $70 million under an assetbased credit facility from PNC. From and after this acquisition, KPS and its related entities became the indirect shareholders through several offshore holding companies. 13. At the time of KPS acquisition, the Debtors operated three separate and unique business units, Thomasville & Co., Luxury Group and Broyhill. Nevertheless, upon information and belief, KPS undertook strong measures to reduce the number of members of upper level management, replaced them with KPS employees with very little industry experience and relationships, consolidated all of the Debtors brands on both the marketing and manufacturing fronts, renamed all brands as Heritage and moved them all to one location and consolidated the Debtors leases and sales forces. Upon information and belief, this consolidation caused the brands to lose recognition in the industry and customers to lose faith in the brand overall and leave, all leading to a drastic decrease in sales. 14. As more detailed in the Complaint, in addition to the Term Loan, investment funds controlled by KPS made the Cash Infusions totaling $35 million, which advances were characterized as loans when no traditional lenders would loan such funds to the Debtors. The Term Loan and the Cash Infusions were advanced under circumstances that mirrored that of equity contributions as (i) KPS immediately agreed to defer cash interest payments totaling $32.4 million in the form of payment in kind interest, (ii) KPS provided these additional cash infusions without requiring new or additional collateral and extended the Debtors maturity dates at least twice, (iii) the Debtors never made a payment on the principal or interest on the so called loans and KPS never sought to enforce it, (iv) the loan agreement contained skeletal default remedies that KPS never intended to exercise, and (v) corporate formalities were not followed in the course of these transactions, as evidenced by the underlying agreements and documents. Upon

9 Case KG Doc 504 Filed 12/13/18 Page 9 of 21 information and belief, all of these transactions were made at a time when the Debtors were insolvent and becoming deeper and deeper in debt. 15. Also during this time -- while the Debtors liquidity was diminishing and the Debtors became insolvent -- the Debtors transferred to KPS a total of $4,870,000 in payments for travel and consulting fees. These transfers provided zero benefit to the Debtors estates and are not supported by agreements between the parties. 16. As its available capital continued to decrease, the Debtors also entered into a $105,000,000 asset backed lending facility with PNC (the ABL Facility ), to refinance the Debtors then existing facility with PNC and to add an additional advance. In connection with the ABL Facility, PNC and KPS entered into an intercreditor agreement whereby, among other things, KPS agreed to subordinate its liens and security interests in its collateral to PNC s liens and security interests, thereby significantly enhancing PNC s collateral position even though the value of the collateral, at that time, did not support the facility. 17. Seven months later KPS and PNC then entered into a participation agreement whereby KPS purchased the Participation in the ABL Facility where KPS received a subordinated non-voting, last-out participation in the amount of $15,000,000 with the option to purchase additional last out non-voting participations. The Participation was subordinated to the ABL Facility, and as non-abl lenders, the KPS participants had no say in PNC s decisions regarding the ABL Facility, were not entitled to attend related meetings and had no access to any professionals regarding the ABL Facility. This transaction also included provisions that (i) modified the calculation of the borrowing base to include the aggregate amount of participations, as like the Debtors other assets, (ii) prohibited payments on the Term Loan and (iii) addressed the disposition of the Debtors assets. Upon information and belief, the Participation and related

10 Case KG Doc 504 Filed 12/13/18 Page 10 of 21 transactions were entered into at a time when the parties knew the Debtors were insolvent, planning to file bankruptcy and lacked operating capital when no other third party lender would loan such funds. KPS used its insider status, control and knowledge of the Debtors management and operations to take advantage of PNC s protections to best position themselves in the event of such filing and profited with the receipt of cash interest payments, to the detriment of the Debtors creditors. The Debtors Chapter 11 Filing 18. The Debtors filed their Chapter 11 petition on July 29, 2018 (the Petition Date ), claiming that unexpected operating losses, failure to develop a sales base, rapidly shifting consumer browsing and buying habits, among other things, were reasons for filing the bankruptcy. 19. As set forth more fully in the Complaint, KPS conduct from 2013 to the Petition Date demonstrates that they were using its insider status and control and acted as equity holders in an effort to protect its investment, rather than as a traditional lender who would not manage or control the Debtors operations. Throughout this period, while the Debtors were taking on additional debt and their business was struggling, KPS did not receive any interest or principal payments, took no enforcement action, extended maturity dates, entered into inconsistent amendments and took no new collateral to secure the additional advances. By continuing to infuse cash into the Debtors four additional times after its initial loan in 2013, while at the same time stripping the Debtors of over $4 million for unsubstantiated travel and consulting fees, KPS was able to keep control over the Debtors operations and management and manipulate their decisions and management to KPS benefit and the detriment of the Debtors creditors

11 Case KG Doc 504 Filed 12/13/18 Page 11 of 21 The DIP Order 20. On the Petition Date the Debtors filed a motion for authority to obtain postpetition financing with the DIP Lenders and related [Docket No. 11] (the DIP Motion ) consisting of (i) a senior secured, super-priority revolving loan credit facility in an aggregate amount up to $25.0 million (the DIP Facility ) and (ii) a roll-up of up to $83,432, owed to PNC under the Debtors pre-petition asset-based credit facility. On August 29, 2018, the Court entered a final order approving the DIP Motion (the DIP Order ) [Docket No. 209]. 21. With a few exceptions, the DIP Order granted automatically perfected first and second priority liens and security interests to secure the DIP Facility in substantially all of the Debtors assets. 22. Paragraphs E and F of the DIP Order also contain stipulations by the Debtors, including admissions relating the validity, amount and enforceability of the claims and liens of (i) PNC under the pre-petition secured asset-backed facilities and (ii) KPS under the Term Loan and Participation (collectively, the Pre-Petition Obligations ). The DIP Order specifically provides that: The Pre-Petition Obligations constitute allowed, legal, valid, binding, enforceable, and non-avoidable obligations of Pre-Petition Borrower and Pre-Petition Guarantors, and are not subject to any offset, deduction, defense, counterclaim, avoidance, recharacterization, or subordination pursuant to the Bankruptcy Code or any other applicable law, and the Debtors do not possess and shall not assert any claim, counterclaim, setoff, or defense of any kind, nature or description which would in any way affect the validity, enforceability, and nonavoidability of any of the Pre-Petition Obligations. 23. Section 5.1 of the DIP Order provides that the extent, legality, validity, perfection, enforceability of all matters with respect to the Pre-Petition Obligations are subject only to the rights of any party in interest with requisite standing prior to the expiration of the challenge periods set forth in the DIP Order

12 Case KG Doc 504 Filed 12/13/18 Page 12 of The DIP Order requires that a challenge must be commenced by the Committee: (i) 60 days from the date of the formation of the Committee with respect to all matters relating to the claims and liens of PNC and (ii) 120 days from the date of the formation of the Committee with respect to all matters relating to the claims and liens of KPS under the Term Loan and the Participation. DIP Order at Section The DIP Order further provides that this challenge period will be tolled to three business days from the entry of an order granting the Committee standing to prosecute objections asserted in a draft complaint if the Committee files a motion for standing with a draft complaint identifying and describing all objections consistent with applicable law and rules of procedures. Id. 26. Following the entry of the DIP Order, the Committee commenced an investigation into the liens and claims asserted by both PNC and KPS, intercompany debts and transfers, and various other matters. As a result of this investigation, the Committee seeks to avoid and recover certain fraudulent transfers pursuant to sections 544(b) and 548(a)(1)(A) and (B) of the Bankruptcy Code and 6 Del. Code section 1304(a)(1) and/or section 1304(a)(2) (collectively, the Derivative Claims ), which claims are more fully set forth in Exhibit B. 5 The Complaint also seeks to recharacterize, or, alternatively, equitably subordinate certain claims held by KPS and 4 The specific references to the Committee and creditors with respect to this challenge period presumes that the Court has the authority to confer such derivative standing on the Committee or other creditors. The Committee expressly requests the Court to assign the Debtors claims as set forth in the Complaint (as may be amended) to the Committee in the event that such claims are colorable and the presumption is incorrect. Without which, such language has no meaning (and is thus superfluous) and the Court would have waived estate rights without proper (and, in fact, misleading) notice thereof. 5 While motions for derivative authority generally are resolved prior to the filing of a complaint, the DIP Order requires the Committee to file the Complaint simultaneously with the Motion for tolling to apply to the challenge period provided for in the DIP Order. Pursuant to several consensual extensions agreed to by the parties, the Committee s deadline to file this Motion was extended to December 13,

13 Case KG Doc 504 Filed 12/13/18 Page 13 of 21 substantively consolidate the Debtors estates (collectively, the Direct Claims ), which claims are more fully set forth in Exhibit B. Relief Requested 27. Section 1109(b) of the Bankruptcy Code provides that [a] party in interest, including... a creditors committee... may raise and may appear and be heard on any issue in a case under this chapter. 11 U.S.C. 1109(b). Granting derivative standing to a creditors committee to act on behalf of a debtor s estate is an appropriate exercise of a bankruptcy court s equitable powers. See Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, (3d Cir. 2003) (determining that section 1109(b) and other sections of the Bankruptcy Code demonstrate Congress approval of derivative suits by creditors committees to recover property for the benefit of the estate, and that bankruptcy courts may exercise their equitable powers to confer such derivative standing); Infinity Investors Ltd ex rel. Yes! Entm t Corp. v. Kingsborough (In re Yes! Ent mt Corp.), 316 B.R. 141, 145 (D. Del. 2004) ( In Cybergenics, the Third Circuit recognized that the Bankruptcy Court, as a court of equity, has the power to authorize a creditor s committee to sue derivatively to recover property for the benefit of the estate. ); see also PW Enters., Inc. v. N.D. Racing Comm n (In re Racing Servs., Inc.), 540 F.3d 892, 904 (8th Cir. 2008) (stating that derivative standing is available to creditors committees); Commodore Int l Ltd. v. Gould (In re Commodore Int l Ltd.), 262 F.3d 96, 100 (2d Cir. 2001) (same); Fogel v. Zell, 221 F.3d 955, 965 (7th Cir. 2000) (same); Canadian Pacific Forest Prods. Ltd. v. J.D. Irving, Ltd. (In re Gibson Grp., Inc.), 66 F.3d 1436, 1446 (6th Cir. 1995) (same). 28. Granting derivative standing to a creditors committee is particularly appropriate where a debtor-in-possession exercises the powers that would otherwise vest in a bankruptcy trustee. Cybergenics, 330 F. 3d at The lack of a trustee immediately gives rise to the

14 Case KG Doc 504 Filed 12/13/18 Page 14 of 21 proverbial problem of the fox guarding the henhouse. Id. at 573. Debtor may be unwilling to pursue claims against individuals or businesses, such as critical suppliers, with whom it has an ongoing relationship that it fears damaging. Id. (citing Canadian Pac. Forest Prods. v. J.D. Irving, Ltd. (In re Gibson Group, Inc.), 66 F.3d at 1441). Granting derivative standing to a creditors committee thus provides a critical safeguard against lax pursuit of avoidance actions and other claims of the estate. Cybergenics, 330 F.3d at In the Third Circuit, a creditors committee may be granted derivative standing upon a showing that: (a) the trustee or debtor-in-possession unjustifiably refuses a demand to pursue an action; (b) the committee has a colorable claim or cause of action; and (c) the committee seeks and obtains leave from the bankruptcy court to prosecute the action for and in the name of the debtor or trustee. See Cybergenics, 330 F.3d at 566; In re Yes! Ent mt Corp., 316 B.R. at 145. The Committee satisfies all three of these elements. I. The Debtors Are Prohibited From Pursing the Derivative Claims 30. Derivative standing generally is granted where a debtor unjustifiably or unreasonably refuses to pursue claims that would benefit the estate. In re Yes! Entm t Corp., 316 B.R. at 145; see Cybergenics, 330 F.3d at 568. However, a committee or other party-in-interest is not required to make a formal demand that a debtor pursue claims where it is plain from the record that no action on the part of the debtor would have been forthcoming and that such a demand would be futile. Official Comm. of Unsecured Creditors of Nat l Forge Co. v. E. Roger Clark (In re Nat l Forge Co.), 326 B.R. 532, 544 (W.D. Pa. 2005) (finding that a formal request of the debtor to bring an action waived under DIP financing orders would have been futile as debtor could not have seriously entertained the idea ); see also Louisiana World Exposition, Inc. v. Fed. Ins. Co. (In re Louisiana World Exposition, Inc.), 832 F.2d 1391, (5th Cir. 1987) (stating that the court would not remand so that the committee could make formal demand

15 Case KG Doc 504 Filed 12/13/18 Page 15 of 21 upon debtor where conflicts would likely prevent debtor from pursuing litigation adverse to its directors and officers). 31. Here, any request that the Debtors pursue the Derivative Claims would be futile because the Debtors have stipulated in the DIP Order that, as to the Pre-Petition Obligations, they do not possess and shall not assert any claim, counterclaim, setoff, or defense of any kind, nature or description.... See DIP Order at Paragraph E(ii). 32. Additionally, section of the DIP Order provides that the DIP Order, including the stipulations and admissions discussed above, is binding on the Debtors, their Estates, all parties in interest in the Cases and their respective successors and assigns, including any trustee or other fiduciary appointed in the Cases.... DIP Order at Section The stipulations contained in the DIP Order to which the Committee seeks to contest are thus binding on and cannot be challenged by the Debtors. No formal demand that the Debtors pursue the Derivative Claims is required. In re Nat l Forge Co., 326 B.R. at Further, it is highly unlikely that the Debtors would bring the Derivative Claims even if they were permitted to do so. The Debtors and their management negotiated and agreed to certain agreements with KPS that the Committee seeks to challenge through the Derivative Claims. The Debtors reaffirmed these agreements in connection with their DIP financing and agreed to the DIP Order, which contains findings that the liens and security agreements are valid, perfected, and unavoidable. This creates a clear conflict of interest. The Debtors are not likely to undermine their own work product by bringing the Derivative Claims themselves and challenging the liens and stipulations that they negotiated and agreed to. See In re Louisiana World Exposition, Inc., 832 F.2d at

16 Case KG Doc 504 Filed 12/13/18 Page 16 of The Debtors also are unlikely to take any action adverse to KPS. The Derivative Claims seek, among other things, to avoid and recover various transfers from a party with whom it has an ongoing business relationship with. See Cybergenics, 330 F.3d at 573 (stating that a debtor may be unwilling to pursue claims against individuals or businesses, such as critical suppliers, with whom it has an ongoing relationship that it fears damaging. ). 35. Accordingly, the Committee is justified in its conclusion that the Debtors cannot, and even if permitted would not, assert the Derivative Claims such that the first element necessary for derivative standing is satisfied. II. The Committee Has Colorable Claims and Causes of Action 36. The burden to satisfy the requirement that the Committee have colorable claims and causes of action is a relatively easy one to make. Adelphia Communs. Corp. v. Bank of Am. (In re Adelphia Communs. Corp.), 330 B.R. 364, 376 (Bankr. S.D.N.Y. 2005). A committee is not required to present its proof when seeking derivative standing. Id. (eschewing an extensive merits review and stating that a mini-trial is not required ) (emphasis in original). Rather, the court should undertake the same analysis as when a defendant moves to dismiss a complaint for failure to state a claim. In re Centaur, LLC, Case No , 2010 Bankr. LEXIS 3918, at *13 (Bankr. D. Del. Nov. 5, 2010); see also Official Comm. of Unsecured Creditors v. Sabine Oil & Gas Corp. (In re Sabine Oil & Gas Corp.), 562 B.R. 211, 216 (S.D.N.Y. 2016) (stating that the proper inquiry is whether the claims would survive a defendant s motion to dismiss. ) (citation omitted). 37. When considering a motion to dismiss a complaint, a court must accept as true the allegations and facts pleaded in the complaint and any and all reasonable inferences derived from those facts. Unger v. Nat l Residents Matching Program, 928 F.2d 1392, 1400 (3d Cir. 1991). A motion to dismiss may be granted only if, after accepting the allegations in the complaint as

17 Case KG Doc 504 Filed 12/13/18 Page 17 of 21 true and viewing them in the light most favorable to the plaintiff, the plaintiff is still not entitled to any relief. Doug Grant, Inc. v. Greate Bay Casino Corp., 232 F.3d 173, 183 (3d Cir. 2000), cert. denied, 532 U.S. 1038, 121 S. Ct. 2000, 149 L. Ed. 2d 1003 (2001). In the context of motions for derivative standing, Delaware courts favor a general analysis of the allegations over a line-by-line or claim-by-claim analysis of proposed complaint. See In re Distributed Energy Systems, Corp., No KG (Bankr. D. Del. July 30, 2008), Transcript of Proceedings at 44 ( And the colorable claim issue, of course, is plausibility.... I don t even have to find that it has merit; I just have to find that it s not without merit. ). 38. Here, the Committee has well-founded, colorable claims that are clearly plausible and can withstand a motion to dismiss. The Complaint attached hereto as Exhibit B contains detailed allegations supporting findings that, among other things, certain transfers by the Debtors should be avoided as fraudulent conveyances pursuant to sections 544(b) and 548(a)(1)(A) and (B) of the Bankruptcy Code and 6 Del. Code section 1304(a)(1) and/or section 1304(a)(2), and that certain claims held by KPS should be re-characterized as equity and/or equitably subordinated. The claims are not only colorable, but are compelling. The Committee believes that the strength of its claims will only increase as formal discovery is conducted. 39. The Committee s Derivative Claims thus are colorable and satisfy the second element necessary for derivative standing. III. The Committee is Seeking Leave from the Bankruptcy Court to Prosecute the Derivative Actions 40. By this Motion, the Committee seeks the authority to prosecute the Derivative Claims as required by the third element necessary for derivative standing. The Committee has established both (a) that the Debtors are prohibited from pursuing the Derivative Claims by the DIP Order, and also have a clear conflict of interest that otherwise would prevent them from

18 Case KG Doc 504 Filed 12/13/18 Page 18 of 21 pursuing claims against KPS and (b) that the Derivative Claims are colorable claims that will withstand a motion to dismiss. Conferring derivative standing on the Committee to pursue the Derivative Claims is warranted and appropriate in this case. 41. That the Committee filed the draft Complaint along with this Motion does not alter this conclusion. While motions for derivative standing are usually decided in advance, derivative standing is available nunc pro tunc in appropriate circumstances, including where a party is facing an impending statute of limitations or other filing deadline. Official Comm. of Unsecured Creditors v. Cablevision Sys. Corp. (In re Valley Media, Inc.), Case No (PJW), Adv. Pro. No , 2003 Bankr. LEXIS 940, at *7 (Bankr. D. Del. Aug. 14, 2003); Catwil Corp. v. Derf II (In re Catwil Corp.), 175 B.R. 362, 364 (Bankr. E.D. Cal. 1994) (nunc pro tunc approval is appropriate where time was of the essence ); see also Official Comm. of Unsecured Creditors of America s Hobby Ctr. v. Hudson United Bank (In re America s Hobby Ctr.), 223 B.R. 275, 281 (Bankr. S.D.N.Y. 1998) ( While courts find that the better practice is for the plaintiff to secure approval before filing the complaint, [they] will not foreclose the ability of a court to make its approval of the representation retroactive to the time of the filing. ) (citation omitted). 42. Here, the Committee filed this Motion and the Complaint simultaneously out of an abundance of caution and in compliance with the requirement established by the DIP Order for tolling. 43. Accordingly, all three elements necessary to confer derivative standing upon the Committee have been met. The Motion should be granted and the Committee allowed to pursue the Derivative Claims for the benefit of the estate and its creditors. To the extent that the Committee would not constitute such a party under Delaware law, the Court has the authority to

19 Case KG Doc 504 Filed 12/13/18 Page 19 of 21 assign the Debtors claims to the Committee to effectuate the express language and intent of the DIP Order. IV. Exclusive Authority of the Committee to Settle Derivative Claims 44. The Committee requests the exclusive authority to negotiate and enter into settlements regarding Derivative Claims, subject to Court approval pursuant to Federal Rule of Bankruptcy Procedure Exclusive authority to settle claims is frequently included in orders conferring derivative standing upon a creditors committee. See In re Evergreen Solar, Inc., Order Granting Leave, Standing and Authority to the Official Committee of Unsecured Creditors of Evergreen Solar, Inc. to Commence, Prosecute, and Settle Claims on Behalf of the Debtor s Estate and Related Relief, Case No MFW (Bankr. D. Del. Oct. 28, 2011) [D.I. 382] (granting derivative standing to unsecured creditors committee and providing that the committee shall have the exclusive right and authority to negotiate and enter into settlements on behalf of the Debtor s estate with respect to certain causes of action); In re Majestic Capital, Ltd., Order (I) Authorizing the Official Committee of Unsecured Creditors to (A) Assert and Prosecute Certain Claims and Causes of Action in the Name of and on Behalf of the Debtors Estates, and (B) Move for Authority to Compromise Any Such Claims and Causes of Action, and (II) Granting Related Relief, Case No CGM (Bankr. S.D.N.Y. Dec. 12, 2011) [D.I. 211] (granting derivative standing to unsecured creditors committee and providing that it shall have the exclusive right, without further order of the Court, to move for authority, pursuant to Bankruptcy Rule 9019, to compromise any of the Estate Claims ); In re Old Carco LLC, Order Authorizing the Official Committee of Unsecured Creditors to Pursue Certain Claims on Behalf of the Estate of Debtor Old Carco LLC, Case No AG (Bankr. S.D.N.Y. Aug. 13, 2009) [D.I. 5151] (granting creditors committee derivative standing, including exclusive right to prosecute and settle these claims on behalf of CarCo estate )

20 Case KG Doc 504 Filed 12/13/18 Page 20 of The exclusive authority to settle the Derivative Claims is especially appropriate in this case given the Debtors close relationship with and financial reliance upon KPS. The same conflicts of interest that exist with respect to the assertion of the Derivative Claims also affect the settlement of such claims. The Committee should have the sole right to settle the Derivative Claims in order to ensure that the value of such claims has been maximized for the benefit of the estate and its creditors. Notice 46. Notice of the this Motion has been given to the following parties, or, in lieu thereof, to their counsel, if known: (i) the Debtors; (ii) the Office of the United States Trustee for the District of Delaware; (iii) PNC Bank, National Association, in its capacity as Pre-Petition Agent and DIP Agent; (iv) KPS Special Situations Fund III (A), L.P. in its capacity as Pre- Petition Term Agent; (v) the parties included on the Debtors consolidated list of thirty (30) largest unsecured creditors, as filed with the Debtors Chapter 11 petitions; and (vi) any party who has filed a formal requests for notice in these Chapter 11 Cases pursuant to Bankruptcy Rule The Committee submits that, in light of the nature of the relief requested and the circumstances surrounding these Chapter 11 Cases, no other or further notice is required or necessary. Reservation of Rights 47. The Committee reserves the right to amend the Complaint on any and all additional factual or legal grounds that would support a colorable claim or cause of action and to seek any other or additional relief available to the Committee upon the entry of an order granting this Motion, and, to the extent necessary, to seek additional standing to bring any other or additional causes of action or claims against any other party

21 Case KG Doc 504 Filed 12/13/18 Page 21 of 21 WHEREFORE, the Committee respectfully requests that the Court enter an order, substantially in the form attached hereto as Exhibit A, granting the Committee standing to assert the Derivative Claims, and granting such other and further relief as the Court deems necessary and appropriate. Dated: December 13, 2018 /s/ Aaron H. Stulman Wilmington, Delaware Christopher M. Samis (No. 4909) L. Katherine Good (No. 5101) Aaron H. Stulman (No. 5807) WHITEFORD, TAYLOR & PRESTON LLC The Renaissance Centre, Suite North King Street Wilmington, DE Telephone: (302) Facsimile: (302) and- Richard J. Bernard, Esq. Leah Eisenberg, Esq. FOLEY & LARDNER LLP 90 Park Avenue New York, NY Telephone: (212) Facsimile: (212) Counsel for the Official Committee of Unsecured Creditors

22 Case KG Doc Filed 12/13/18 Page 1 of 2 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Heritage Home Group LLC, et al., 1 Debtors. Chapter 11 Case No (KG) (Jointly Administered) Hearing Date: January 17, 2019 at 2:00 p.m. (ET) Objection Deadline: December 27, 2018 at 4:00 p.m. (ET) NOTICE OF MOTION OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR ENTRY OF AN ORDER GRANTING DERIVATIVE STANDING AND AUTHORITY TO PROSECUTE AND SETTLE CLAIMS ON BEHALF OF THE DEBTORS ESTATES PLEASE TAKE NOTICE that the undersigned counsel filed the Motion of Official Committee of Unsecured Creditors for Entry of an Order Granting Derivative Standing and Authority to Prosecute and Settle Claims on Behalf of the Debtors Estates (the Motion ) with the United States Bankruptcy Court for the District of Delaware (the Court ). PLEASE TAKE FURTHER NOTICE that a hearing (the Hearing ) on the Motion will be held on January 17, 2019 at 2:00 p.m. before the Honorable Kevin Gross at the United States Bankruptcy Court, 3 th Floor, Courtroom No. 3, 824 Market Street, Wilmington, Delaware, PLEASE TAKE FURTHER NOTICE that any responses or objections to the Motion must be in writing, filed with the Clerk of the Court, 824 Market Street, 3 rd Floor, Wilmington, Delaware and served upon and received by the undersigned counsel on or before 4:00 p.m. on December 27, 2018 (ET) (the Objection Deadline ). IF NO OBJECTIONS TO THE MOTION ARE TIMELY FILED, SERVED AND RECEIVED IN ACCORDANCE WITH THIS NOTICE, THE COURT MAY GRANT THE 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, include: Heritage Home Group LLC ( Heritage ) (9506); HH Global II B.V. (0165); HH Group Holdings US, Inc. (7206); HHG Real Property LLC (3221); and HHG Global Designs LLC (1150) v1

23 Case KG Doc Filed 12/13/18 Page 2 of 2 RELIEF REQUESTED IN THE MOTION WITHOUT FURTHER NOTICE OR A HEARING. Dated: December 13, 2018 Wilmington, Delaware Respectfully submitted, /s/ Aaron H. Stulman Christopher M. Samis (No. 4909) L. Katherine Good (No. 5101) Aaron H. Stulman (No. 5807) WHITEFORD, TAYLOR & PRESTON LLC The Renaissance Centre, Suite North King Street Wilmington, Delaware Telephone: (302) csamis@wtplaw.com kgood@wtplaw.com astulman@wtplaw.com - and - Solely with Respect to the KPS Parties Richard J. Bernard, Esq. Leah Eisenberg, Esq. FOLEY & LARDNER LLP 90 Park Avenue New York, NY Telephone:(212) Facsimile: (212) rbernard@foley.com leisenberg@foley.com Counsel to Official Committee of Unsecured Creditors v1 2

24 Case KG Doc Filed 12/13/18 Page 1 of 3 EXHIBIT A

25 Case KG Doc Filed 12/13/18 Page 2 of 3 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Heritage Home Group LLC., et al., 1 Debtors. Chapter 11 Case No (KG) (Jointly Administered) Re: Docket No. ORDER GRANTING MOTION OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR ENTRY OF AN ORDER GRANTING DERIVATIVE STANDING AND AUTHORITY TO PROSECUTE AND SETTLE CLAIMS ON BEHALF OF THE DEBTORS ESTATES Upon the Motion of Official Committee of Unsecured Creditors for Entry of an Order Granting Derivative Standing and Authority to Prosecute and Settle Claims on Behalf of the Debtors Estates (the Motion ); 2 and the Court having reviewed the Motion; and the Court having found that it has jurisdiction to consider the Motion under 28 U.S.C. 157 and 1334; and having found that this is a core proceeding under 28 U.S.C. 157(b)(2); and having found that notice of the Motion was proper and sufficient under the circumstances, and that no other or further notice is required; and having determined that the legal and factual bases set forth in the Motion establish just cause for the relief granted herein; it is hereby IT IS HEREBY ORDERED, ADJUDGED AND DECREED THAT: 1. The Motion is granted, as set forth herein. 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, include: Heritage Home Group LLC (9506); HH Global II B.V. (0165); HH Group Holdings US, Inc. (7206); HHG Real Property LLC (3221); and HHG Global Designs LLC (1150). The Debtors corporate headquarters is located at 1925 Eastchester Drive, High Point, North Carolina Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Motion

26 Case KG Doc Filed 12/13/18 Page 3 of 3 2. The Committee is granted exclusive derivative standing and authority to commence and prosecute an adversary proceeding, substantially in the form of the Complaint attached as Exhibit B to the Motion, seeking to avoid and recover certain transfers made by the Debtors to KPS and/or seeking to equitably subordinate and/or recharacterize certain claims held by KPS, including, without limitation, the assignment of the Debtors claims to the extent necessary, for such standing. 3. The Committee is granted authority to take all actions the Committee determines in its sole discretion to be necessary or appropriate in connection with the authority granted in this Order, with the full rights and privileges of the Debtors, including, but not limited to, the sole and exclusive right to enter into settlement negotiations and, subject to court approval, to settle any claims brought pursuant to this Order. 4. For the avoidance of doubt, nothing in this Order or the Motion shall in any way affect the Committee s right to seek to amend the Complaint substantially in the form attached as Exhibit B to the Motion on any and all additional factual or legal grounds that would support a colorable claim or cause of action, and/or seek any other or additional relief, or pursue or seek standing to bring any other or additional causes of action or claims against any or all of the Debtors, KPS, or any other party. 5. The relief set forth in this Order shall be effective as of, This Court shall retain jurisdiction with respect to all matters arising from and related to the implementation of this Order

27 Case KG Doc Filed 12/13/18 Page 1 of 34 EXHIBIT B

28 Case KG Doc Filed 12/13/18 Page 2 of 34 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: HERITAGE HOME GROUP LLC., et al., 1 Debtors. OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR HERITAGE HOME GROUP LLC, et al., Plaintiff, Chapter 11 Case No (KG) (Jointly Administered) Adv. Pro. No. v. KPS SPECIAL SITUATIONS FUND III (A), L.P.; KPS SPECIAL SITUATIONS FUND III, LP; KPS SPECIAL SITUATIONS FUND III (SUPPLMENTAL), LP; KPS SPECIAL SITUATIONS FUND III (AIV), LP; KPS OFFSHORE INVESTORS LTD..; KPS CAPITAL PARTNERS, LP; KPS CAYMAN MANAGEMENT III LTD.; KPS INVESTORS III, LTD.; KPS INVESTORS III, LP; KPS INVESTORS III (AIV), LP; KPS INVESTORS III (AIV), LTD., Defendants, PNC BANK, NATIONAL ASSOCIATION, Nominal Defendant. COMPLAINT Plaintiff, Official Committee of Unsecured Creditors (the Committee ) for Heritage Home Group LLC, et al., by and through undersigned counsel, does hereby bring suit 1 The Debtors in these Chapter 11 Cases, along with the last four digits of each Debtor s tax identification number, as applicable, are: Heritage Home Group LLC (9506) ( HHG ); HH Global II B.V. (0165) ( HH Global II ); HH Group Holdings US, Inc. (7206) ( HHG Holdings ); HHG Real Property LLC (3221) ( HHG Property ); and HHG Global Designs LLC (1150) ( HHG Designs ).