Case reb Document 39 Filed 03/03/2008 Page 1 of 9 UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF GEORGIA GAINESVILLE DIVISION

Transcription

1 Case reb Document 39 Filed 03/03/2008 Page 1 of 9 UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF GEORGIA GAINESVILLE DIVISION In re: ) Chapter 11 ) CORNERSTONE MINISTRIES ) Case No reb INVESTMENTS, INC. ) ) Debtor. ) Judge Brizendine ) PRELIMINARY OBJECTION OF THE OFFICIAL COMMITTEE OF CREDITORS HOLDING UNSECURED CLAIMS TO THE DEBTOR S MOTION FOR AUTHORITY TO CONTINUE EMPLOYMENT OF ENABLE BUSINESS SOLUTIONS, INC. PURSUANT TO EXISTING ADVISORY AGREEMENT [DOCKET NO. 7] The Official Committee of Creditors Holding Unsecured Claims (the Committee ) hereby files this preliminary objection (the EBS Objection ) to the abovecaptioned debtor s (the Debtor ) Motion for Authority to Continue Employment of enable Business Solutions, Inc. ( EBS ) Pursuant to Existing Advisory Agreement (the EBS Motion ). In support of this EBS Objection, the Committee states as follows: BACKGROUND OF THE RELIEF REQUESTED IN THE EBS MOTION 1. Through the EBS Motion the Debtor requests this Court s authority to retain and compensate EBS on a postpetition basis pursuant to the terms contained in the prepetition Advisory Agreement and First Amendment to Advisory Agreement (the Prepetition Contract ). See Motion 12. The Debtor further requests that, to the extent the Court determines that EBS is professional person within the meaning of section 327 and 328 of title 11 of the United States Code (the Bankruptcy Code ), EBS employment be continued and that EBS be retained and paid on a postpetition basis. Id. 7. The Debtor does not, however, request authority at this time to assume the

2 Case reb Document 39 Filed 03/03/2008 Page 2 of 9 Prepetition Contract (which in fact was renegotiated and materially modified just two days prior to the commencement of this case). Id. PRELIMINARY OBJECTION 2. The EBS Motion should be denied for a number of reasons. First, EBS is already obligated to perform the services for which the Debtor seeks to retain EBS in the EBS Motion and the only effect of granting the EBS Motion would be to elevate EBS claims over the claims of the Debtor s other general unsecured creditors. Second, EBS is not a disinterested person that the Debtor can retain as a professional person under the Bankruptcy Code. Third, the Debtor provides insufficient disclosure of amounts paid to EBS prior to the Debtor filing its bankruptcy petition and the economic and legal basis for the provisions contained in the Prepetition Contract and the basis for the amendments to the Prepetition Contract on the eve of the Debtor s bankruptcy filing. A. There is no necessity for granting the relief requested in the EBS Motion because EBS is obligated to provide services pursuant to the Prepetition Contract. 3. There is no showing of any necessity for the relief requested in the Motion. EBS is a non-debtor counterparty to a prepetition executory contract with the Debtor the Prepetition Contract. Given the timing of the execution of the amendment to the Prepetition Contract and EBS apparent significant influence and/or control of the Debtor, EBS execution of the Prepetition Contract was presumably made in express contemplation of the filing of this bankruptcy case. 4. As a non-debtor counterparty to a prepetition executory contract, EBS is prohibited by operation of the automatic stay from refusing to continue to provide services under the Prepetition Contract. See In re Friedman s, 372 B.R. 530, (Bankr. S.D. Ga. 2007). Were EBS to terminate the Prepetition Contract, or otherwise - 2 -

3 Case reb Document 39 Filed 03/03/2008 Page 3 of 9 withhold the services it agreed to provide in the Prepetition Contract, it would be liable to the Debtor for compensatory (and potentially punitive) damages arising from that violation of the automatic stay. See id.; 11 U.S.C. 362(k). Because EBS is legally required to continue providing the services it agreed to provide under the Prepetition Contract, the basis for the relief requested in the Motion that the failure to grant the Motion might cause a disruption in management that might impair the Debtor s going concern value (see EBS Motion 10) is no basis for granting the EBS Motion at all. Any such disruption in management could only arise from deliberate non-performance of the Prepetition Contract, which would be tantamount to a willful violation of the automatic stay. Therefore, there is no necessity for granting the relief requested in the EBS Motion. 5. Additionally, it is worth noting (and the Court considering at this time) the Committee s position that regardless of whether this Court determines that EBS is a professional person, the Committee objects to any fees being paid to EBS under the Prepetition Contract until the Committee has had an opportunity to investigate the various inter-affiliate relationships between and among the Debtor, EBS, and various other related parties and advisors, as further set forth below and in other objections the Committee is filing contemporaneous herewith. And therefore the EBS Motion should be denied. B. The EBS Motion should be denied because EBS is not a disinterested person, and there has been no disclosure of the basis for the economic and other terms contained in the EBS Motion. i. EBS is not a disinterested person

4 Case reb Document 39 Filed 03/03/2008 Page 4 of 9 6. The EBS Motion should be denied insofar as it seeks retention of EBS as a professional person because EBS is not a disinterested person and the EBS Motion does not adequately disclose the significant interrelationships between the principals of EBS and the Debtor (and apparently non-debtor affiliates of the Debtor as well), nor does it disclose payments made to EBS in the year prior to the petition date (which may be recoverable as avoidable preferences) or other causes of action which the Debtor may have against EBS. It is notable in this respect that EBS submits no disclosure pursuant to Bankruptcy Rule 2014 to allow this Court to determine whether EBS is in fact a disinterested person, as is required to retain a professional person under the Bankruptcy Code. The Prepetition Contract and the eve of bankruptcy amendment thereto demonstrates the insider nature of the relationship. See 11 U.S.C. 101(2) (definition of affiliate ). In the original Prepetition Contract, the signatory for Cornerstone Capital Advisors, Inc. (now EBS) was John Ottinger. Mr. Ottinger also executed the amendment to the Prepetition Contract, but did so this time for the Debtor, not EBS. The Debtor itself provides further examples of the overly close relationship between the Debtor and its non-debtor affiliates in its most recently filed Form 10-KSB, which it filed on March 29, 2007 with the SEC: On July 1, 2003, we entered into a management and administrative services agreement with Cornerstone Capital Advisors, Inc. ( CCA ) [which is the former name of EBS] for it to provide our administrative, management and executive services. The agreement is for renewable oneyear terms and may be terminated by either party upon 60 days written notice. CCA is subject to the supervision of our board of directors. At the time that this agreement was executed, two of our officers were also officers and directors of CCA. Currently, one officer and one director of ours are employed by CCA. We paid CCA $2,597,428 under this agreement in 2005 and $3,269,549 in *** - 4 -

5 Case reb Document 39 Filed 03/03/2008 Page 5 of 9 In December 2005, our two largest borrowers sold eight senior housing properties to Wellstone Retirement Communities I, LLC ( WRC ) which is managed by CCA, which is also our manager. Two of our directors were also directors of CCA at the time of this transaction. As a result of this transaction, we received $63,190,168 in loan and bond holdings principal and we immediately supplied subordinated financing of $37,901,607 at 9.5% interest and a two year maturity to WRC to purchase the property. *** In September 2006, Jack Wehmiller (President of CMI), John T. Ottinger (CFO of CMI) [Mr. Ottinger submitted a first day affidavit in support of the Debtor s first day motions and also executed the Prepetition Contract on behalf of the Debtor], Cecil Brooks (former President of CMI and CCA and current chairman of CCA s parent company) and Robert Covington (President of CCA) [Mr. Covington is shown as the signatory for EBS on the Prepetition Contract] each acquired an 18.75% ownership interest in Wellstone LLC, our largest borrower. As of December 31, 2006, we have loans outstanding to eight projects owned by Wellstone LLC with total principal of $61,972,530 (41% of our loan portfolio). Seven of the eight project loans were outstanding prior to September 2006 and one loan with outstanding principal of $1,205,780 was added after Messrs. Wehmiller, Ottinger, Brooks and Covington acquired their ownership interests in Wellstone LLC. John T. Ottinger has resigned his position as our CFO effective March 31, See Cornerstone Ministries Investments, Inc. Form 10-KSB for the year ending December 31, 2006 at Part III, Item 12, (emphasis added), a copy of which is attached as Exhibit A to the Committee s objection to the Motion For Establishment Of Procedures For Monthly Compensation And Reimbursement Of Expenses Of Professionals filed contemporaneously herewith. 7. A debtor may only retain a professional person, other than an attorney, pursuant to section 327(a) of the Bankruptcy Code. See 11 U.S.C To be retained under section 327(a), a professional person must be a disinterested person. Id. A disinterested person is one who: (A) is not a creditor, an equity security holder, or an insider; (B) is not and was not, within 2 years before the date of the filing of the petition, - 5 -

6 Case reb Document 39 Filed 03/03/2008 Page 6 of 9 a director, officer, or employee of the debtor; and (C) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason. See 11 U.S.C. 101(14). A professional person retained pursuant to section 327(a) who is later found not to be disinterested may be denied all compensation by the Court. See, e.g., In re Prince, 40 F.3d 356, 359 (11th Cir. 1994). Indeed, where there is a facially plausible claim for a preference, that preference exposure must resolved before the professional person can be retained. See In re Pillowtex, Inc., 304 F.3d 246, 255 (3d Cir. 2002). 8. The EBS Motion does not contain sufficient information to allow this Court to determine whether EBS is disinterested, including, among many other things, what, if any, facially plausible preference payments EBS may have received in the preference period. Additionally, based on the disclosures the Debtor made in its last 10- KSB, as well as the signatures on the Prepetition Contract and the eve-of-bankruptcy amendment to the Prepetition Contract, it appears that EBS may be controlled by persons who control or have controlled the Debtor. Similarly, it is at least conceivable, because EBS appears to exercise significant control over the Debtor, that the Debtor may have claims against EBS. Therefore, while the Committee reserves its rights in the event the Debtor wishes to make further disclosures regarding whether EBS could be disinterested, it does not appear to the Committee at this juncture that such a showing has been made

7 Case reb Document 39 Filed 03/03/2008 Page 7 of 9 ii. The EBS Motion contains insufficient disclosure of the economic and other terms of the Prepetition Contract and the basis for the amendment immediately prior to the Debtor s bankruptcy filing. 9. The EBS Motion contains inadequate disclosure of the economic and legal basis for the Prepetition Contract and the significant amendments that were made to it on the eve of the Debtor s bankruptcy filing. First, there is no disclosure of the basis for significant alteration of the economic terms of the Prepetition Contract. In the original contract, EBS was entitled to a fee based upon the Debtor s Gross Income. See original Prepetition Contract 9. In contrast, the amendment to the Prepetition Contract, signed on February 8, 2008, shifts the fee structure to a flat monthly fee of $171,600 (i.e., in excess of $2 million per year) (see Amended Prepetition Contract 1). What makes this change particularly problematic is that there is absolutely no disclosure of the amount that EBS was paid in the years prior to the Debtor s bankruptcy petition (or the amount that the Debtor would expect to owe EBS for the upcoming year had the Debtor not agreed to the eve-of-bankruptcy amendment to the Prepetition Contract) or the steps that the Debtor took to ensure that the payments that it proposes to make to EBS are consistent with what a third party would charge the Debtor to provide similar services. Nor is there any discussion of the basis for a guaranteed amount to be paid to EBS under the amendment to the Prepetition Contract. Therefore the EBS Motion contains insufficient disclosure to allow this Court to approve the EBS Motion. 10. Similarly, there are at least two objectionable legal terms in the Prepetition Contract, both of which are both undisclosed and unaddressed in the EBS Motion. First, the Prepetition Contract contains an indemnity of EBS by the Debtor, which is inappropriate given that the Debtor has now filed for bankruptcy (see original Prepetition - 7 -

8 Case reb Document 39 Filed 03/03/2008 Page 8 of 9 Contract 18). The Debtor leaves unaddressed in the EBS Motion whether it would undertake to perform the indemnity obligations were the EBS Motion to be granted. In the Committee s view, it would be impermissible for EBS to undertake such an obligation. Similarly left undisclosed and unaddressed by the EBS Motion is the explicit waiver by the Debtor of Miller & Martin PLLC s conflict of interest in the representing both parties (the Debtor and EBS) to the eve-of-bankruptcy amendment to the Prepetition Contract. See amended Prepetition Contract 4. The Debtor should make supplemental disclosures of its basis for agreeing to waive such a substantial conflict of interest, particularly given that the Debtor also seeks to retain Miller & Martin as special counsel in this bankruptcy case. 1 RESERVATION OF RIGHTS 11. The Committee reserves its rights to supplement or amend this EBS Objection, as well as all of its other rights, for any reason. 1 This waiver of Miller & Martin s conflict of interest is addressed further in the Committee s Preliminary Objection To The Application For Approval Of Employment Of Miller & Martin PLLC As Special Counsel To The Debtor filed contemporaneously herewith

9 Case reb Document 39 Filed 03/03/2008 Page 9 of 9 WHEREFORE, because there is no necessity in granting the Motion and because there has been no showing that EBS is disinterested, the Committee respectfully requests that the Motion be denied. Respectfully submitted this 3rd day of March ALSTON & BIRD LLP /s/ William S. Sugden Dennis J. Connolly (Ga. Bar No ) William S. Sugden (Ga. Bar No ) 1201 West Peachtree Street Atlanta, GA Telephone: (404) Facsimile: (404) Proposed Counsel to the Official Committee of Creditors Holding Unsecured Claims - 9 -