IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re ) Chapter 11 ) SP NEWSPRINT HOLDINGS LLC, et al., ) Case No (CSS) ) Debtors. ) Jointly Administered ) Hearing Date: February 7, 2012 at 10:00 a.m. ) Related to Docket Nos. 365 and 415 RAYMOND JAMES & ASSOCIATES, INC. S RESPONSE TO LIMITED OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO THE DEBTORS APPLICATION TO EMPLOY AND TO RETAIN RAYMOND JAMES & ASSOCIATES, INC. AS INVESTMENT BANKER Raymond James & Associates, Inc. ( Raymond James ), by and through its counsel, submits this response (the Response ) to the Limited Objection of the Official Committee of Unsecured Creditors to the Debtors Application to Employ and to Retain Raymond James & Associates, Inc. as Investment Banker (the Objection ). In support of the Response, Raymond James respectfully represents as follows: PRELIMINARY STATEMENT 1. The Objection by the Official Committee of Unsecured Creditors (the Committee ), asserting that (i) the Committee should be permitted to review fees paid to Raymond James pursuant to the reasonableness standard under sections 330 and 331 of Title 11 of the United States Code (as amended, the Bankruptcy Code ), and (ii) the Business Combination Transaction Fee 1 in the context of a credit bid, Sale Process Termination Fee and Testimony Fee set forth in the Retention Application are unreasonable and excessive, is without merit and must be overruled. In resolution of one aspect of the Objection, Raymond James agrees that fees for additional services that are not set forth in the Retention Application will remain subject to Court approval. 1 Capitalized terms not defined herein shall have the meaning ascribed to such terms in the Debtors Application to Employ and to Retain Raymond James & Associates, Inc. as Investment Banker (the Retention Application ).

2 2. Raymond James is a highly respected investment banking firm with an excellent professional reputation. The firm s restructuring group has extensive experience advising corporations, committees and others in complex bankruptcy cases and has significant experience in section 363 asset sales. There is no dispute that (i) Raymond James is qualified to serve as the investment banker for the debtors and debtors-in-possession (the Debtors ), (ii) investment bankers whose principal role is to effectuate the sale of assets are typically retained in bankruptcy cases under sections 327(a) and 328 of the Bankruptcy Code, and (iii) the Committee has cited no binding precedent supporting its argument that an investment banker retained under section 328 should have its fees subject to a subsequent review under Bankruptcy Code section 330 for reasonableness. 3. Delaware case law is clear that a bankruptcy court may not subsequently review fees for reasonableness under Bankruptcy Code section 330, where it has previously determined that the fees in an engagement letter were reasonable terms of employment for purposes of section 328(a) of the Bankruptcy Code. Although no party in interest has a right to subsequently review Raymond James fees for reasonableness, Raymond James has agreed to allow the United States Trustee to review its fees for reasonableness under section 330 of the Bankruptcy Code. Notwithstanding that agreement with the United States Trustee, there is no legal basis pursuant to which the Committee should be entitled to review Raymond James fixed investment banking fees for reasonableness under Bankruptcy Code section 330, and any such request should be denied. 4. Moreover, the Committee s baseless assertion that the sale process is a sham is irresponsible, patently false and potentially libelous and defamatory. There is no factual basis for such an unwarranted allegation. 2 As set forth more fully below, the evidence demonstrates 2 Indeed, Raymond James is analyzing its options with respect to the Committee s baseless attack on the reputation of Raymond James in the public record in order to assert pressure on Raymond James to capitulate to the matters raised in the objection. In fact, Raymond James has already been contacted by the media with respect to these unwarranted and baseless statements in the Committee s Objection. The Committee should issue a retraction with respect to the baseless statements contained in the Objection or refile their objection without such unsupported statements (and, in either instance, Raymond James requests that the Committee indicate its intention in this regard at the Court hearing), which may have caused harm to the reputation of Raymond James and has no factual basis. 2

3 the integrity of this sale process, Raymond James demonstrable and beneficial work to date on the engagement, and that Raymond James has every interest in focusing on procuring the highest possible cash bids for the assets from third-parties, something that the lenders and the Committee would both welcome and Raymond James fee structure incentivizes it to do so. 5. Furthermore, the Business Combination Fee, Sale Process Termination Fee and Testimony Fee are reasonable and provide a benefit to the Debtors estates. Indeed, as set forth more fully below, such fees are below market and specifically tailored to the challenges inherent in this case--vigorously pursuing cash sales to third-parties while protecting the estate from substantial fees in the event of credit bidding. As more fully set forth in the response of the Debtors to the Objection, the proposed retention of Raymond James was heavily negotiated for several months and the terms of the proposed retention of Raymond James are below market and more than reasonable. 6. Finally, Raymond James has agreed that to the extent that it may seek additional compensation for services rendered to the Debtors not currently included in its Retention Application, the fees for additional services will be subject to Court approval. RELEVANT BACKGROUND 7. The relevant background was set forth in the Retention Application and is incorporated herein by reference. ARGUMENT A. The Committee Should Not Be Permitted to Review Fees Paid to Raymond James Pursuant to Bankruptcy Code Sections 330 and The Bankruptcy Code expressly permits the retention of professionals on many different terms, including a percentage basis, hourly rate or flat fee. 11 U.S.C. 328(a) (authorizing the debtor to employ a professional person on any reasonable terms and Raymond James reserves all rights against counsel for the Committee for such baseless unwarranted statements in the public record and is considering pursuing the imposition of sanctions against counsel pursuant to Federal Rule of Bankruptcy Procedure

4 conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or on a contingent fee basis. ). Once the terms of a professional s retention have been approved, a court may only change them after the conclusion of such employment, if such terms and conditions prove to have been improvident in light of the developments not capable of being anticipated at the time of the fixing of such terms and conditions. Id. 9. Under binding Delaware precedent, there is no basis for the Committee to argue that it should have an opportunity to subsequently review Raymond James fees for reasonableness under Bankruptcy Code section 330. In In re Northwestern Corp., 332 B.R. 534 (D. Del. 2005), the bankruptcy court made a finding in the retention order of Houlihan, Lokey Howard & Zukin Capital, Inc. ( Houlihan ) that the terms of the financial advisor s engagement letter were reasonable terms of employment for purposes of section 328(a) of the Bankruptcy Code. Notwithstanding that finding, the bankruptcy court subsequently reduced the fees awarded to Houlihan by reviewing the terms and conditions of the financial advisor s engagement pursuant to section 330 of the Bankruptcy Code. On appeal, the Delaware District Court held the bankruptcy court abused its discretion by reviewing the financial advisors fees under section 330 of the Bankruptcy Code because once the Bankruptcy Court has determined that the terms and conditions of a professional s compensation are reasonable, it may thereafter reduce that compensation only if it determines, under 328(a), that such terms and conditions prove to have been improvident in light of developments at the time of the fixing of such terms and conditions. Id. at (citing In re Federal Mogul-Global Inc., 349 F.3d 390, 397 (3d Cir. 2003)). Thus, by the Court determining that the proposed fees are reasonable in the retention order, there is no second review of Raymond James fees for reasonableness under section 330 of the Bankruptcy Code. See also A. Resnick & H. Somner, Collier on Bankruptcy, [1] at (16 th ed. 2010) ( A court may not revisit the prior determination as to the reasonableness of an agreement previously approved unless it determines that the terms and conditions proved to be improvident. ) (citations omitted). 4

5 10. Although the Committee failed to disclose to the Court the above In re Northwestern Corp. District Court precedent, the case of In re Northwestern Corp., 344 B.R. 40 (D. Del. 2006) cited by the Committee supports Raymond James s position that the Committee is not entitled to review Raymond James fees for reasonableness under Bankruptcy Code section 330. In In re Northwestern Corp., 344 B.R. 40 (D. Del. 2006), the bankruptcy court initially approved the engagement letter terms of Lazard Freres & Co LLC ( Lazard ) as reasonable, including a $5.5 million restructuring fee. In reviewing Lazard s final fee application, the bankruptcy court reduced, by 50%, the restructuring fee of Lazard based on a reasonableness analysis under Bankruptcy Code section 330(a). On appeal, the district court held that the bankruptcy court applied an improper standard and abused its discretion. Id. at 43. In reaching that conclusion, the district court stated that once the Bankruptcy Court has determined that the terms and conditions of a professional s compensation are reasonable, it may thereafter reduce that compensation only if it determines, under 328(a), that such terms and conditions prove to have been improvident in light of developments at the time of the fixing of such terms and conditions. Id. at 43 (citing In re Federal Mogul-Global Inc., 349 F.3d 390, 397 (3d Cir. 2003)). 11. Thus, the Committee has no legal basis to review all of Raymond James fees pursuant to the reasonableness standard under section 330 of the Bankruptcy Code. All the Committee relies upon for this request is four retention orders, which hold no precedential weight, and are not binding. Moreover, there is no discussion in the Objection as to whether these are consensual orders or whether the court analyzed the issues and reached a determination, taking into consideration the Delaware case law set forth above. Although there is no legal basis for the Committee s request, each of the four orders is also distinguishable and further supports Raymond James position that its fees for transactional services as an investment banker should not be subject to section 330 review for reasonableness. 12. For instance, the Committee attached as Exhibit A to its Objection an order in the case of In re Schutt Sports, Inc. authorizing the employment and retention of Oppenheimer & 5

6 Co. ( Oppenheimer ) as both financial advisor and investment banker under sections 327 and 328 of the Bankruptcy Code. Similarly, the Committee attached as Exhibit B to its Objection an order in the case of In re Lang Holdings, Inc. authorizing the employment and retention of Duff & Phelps Securities, Inc. (Duff & Phelps ) as both financial advisor and investment banker under sections 327 and 328 of the Bankruptcy Code. In both cases, the investment banker was also acting as the financial advisor. Here, Raymond James is not acting as the financial advisor to the Debtors, but has an exclusive role as an investment banker. 13. Furthermore, the Committee attached as Exhibit C to its Objection the order approving the retention of Houlihan as the debtors investment banker in the case of Advanced Marketing Services, Inc. Rather than supporting the Committee s Objection that it should be entitled to review all of Raymond James fees, this order supports the proposition that the transaction fees that were heavily negotiated should not be subject to the Committee s review under section 330 and Similarly, the order attached as Exhibit D further supports the position that Raymond James fees are not subject to a reasonableness review of section 330. In In re Pliant Corp., the debtors sought to employ and retain Jeffries & Co. ( Jefferies ) as the debtors investment banker. In that order, Jefferies compensation was subject to the standard of review provided for in section 328(a) of the Bankruptcy Code, and not subject to any other standard of review under section 330 of the Bankruptcy Code, except for the review of Jeffries request for the payment of a success fee. 3 Section 6 of the Houlihan retention order, attached as Exhibit C to the Committee objection, provides in pertinent part as follows: Notwithstanding the approval of the Houlihan Lokey s retention pursuant to section 328(a) of the Bankruptcy Code, the United States Trustee (the U.S. Trustee ), the Debtors and the Committee shall be permitted to review the Monthly Fees pursuant to the reasonableness standards set forth in section 330 of the Bankruptcy Code; provided, however, that the number of hours spent by Houlihan Lokey s personnel during any given monthly period shall not be the sole basis for any objection by the U.S. Trustee, the Committee or the Debtors as to the reasonableness of the Monthly Fees. All other fees to which Houlihan Lokey is entitled, including the Financing Fees, M&A Transaction Fees and restructuring Transaction Fees, shall be subject to review by the United States Trustee, the Committee, the Debtors and all parties in interest under the standards set forth in section 328(a) of the Bankruptcy Code. (emphasis added). 6

7 15. Although Raymond James should not be required to have its fixed fees evaluated by the Committee under section 330 of the Bankruptcy Code (in addition to the review by the U.S. Trustee), there can be no legitimate dispute that even under a section 330 standard of review, Raymond James would be entitled to the compensation specified in the retention application. Raymond James has devoted significant time, effort and expense across multiple groups, including Debt Origination and Restructuring, Paper and Forest Products, Financial Sponsors, Environmental Services, among other areas within Raymond James. Raymond James employees have already collectively expended over 1700 hours in connection with this case. 16. Within approximately one week of the initial kick-off meeting with the Debtors, Raymond James prepared and began to distribute a descriptive three page preliminary information circular ("Teaser") for distribution to potential interested parties prior to executing an non-disclosure agreement. Within approximately one month of the initial kick-off meeting with the Debtors, after having conducted multiple meetings, many conference calls, and s with various employees of the Debtors and its representatives, Raymond James prepared a detailed, eighty page, Confidential Information Memorandum ("CIM") for distribution to prospective bidders after such prospective party executed a non-disclosure agreement. 17. Raymond James has established and maintained on-line data rooms where potential buyers could retrieve comprehensive diligence materials and other information regarding the Debtors. 18. Raymond James prepared a potential buyer list based on a comprehensive search by multiple groups within Raymond James, including Debt Origination and Restructuring, Paper and Forest Products, Financial Sponsors, and Environmental Services. Additionally, Raymond James requested input from and received additional contacts from various professionals involved in this bankruptcy case including Alix Partners, Debtors counsel, and the Committee. Additionally, Raymond James received additional potential interested parties to contact from the lenders. Raymond James contacted potential buyers via phone calls, s 7

8 and meetings and participated in follow-up conversations and correspondence (including GECC, its representatives and other lenders in the pre petition credit facility). As of February 2, 2012, Raymond James contacted over 200 parties, distributed more than 130 non-disclosure agreements and Teasers, and the Debtors have more than 25 prospective bidders under executed non-disclosure agreements. 19. Raymond James has also facilitated the process of negotiating and executing confidentiality agreements, prepared and organized voluminous due diligence information and has ensured potential buyers are aware of the marketing process through repetitive contact. B. The Business Combination Fee in the Context of a Credit Bid, Sales Process Termination Fee and Testimony Fee are Reasonable 20. The Committee s objection to the Business Combination Fee in the context of a credit bid, Sales Process Termination Fee and Testimony Fee as unreasonable and excessive is devoid of merit. As more fully set forth in the reply to the Objection filed by the Debtors, the terms of Raymond James retention were heavily negotiated among Raymond James, the Debtors, the secured lenders and the United States Trustee. The lenders appear to be significantly undersecured in their collateral position and are nevertheless supporting a sale process with a mutual goal of maximizing cash sale proceeds for the benefit of all constituents, including unsecured creditors. Rather than appreciating the flexible and innovative fee structure and the potential value from the sale process that might be conferred on the unsecured creditors, the Committee has chosen instead to burden the estate with unnecessary legal fees and costs as a result of its unfounded arguments against Raymond James retention. 21. In fact, the compensation structure in this case is less than Raymond James has received in other matters. For instance, in Provident Royalties, LLC, et al., Chapter 11 Case No , which is pending in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, the compensation structure was much more favorable to 8

9 Raymond James. In that case, Raymond James received the greater of $750,000 or 0.67% of the credit bid in the event of a credit bid. 22. Another case where compensation structure was more favorable to Raymond James is In re Palm Harbor Homes, Inc., Case No (CSS), which is pending before this Court. In that case, the DIP Lender served as a stalking horse credit bidder, and Raymond James was entitled to a fee with a minimum of $700,000 for a $50 million purchase price (equating to 1.4% of the credit bid), and Raymond James upside was significantly greater (ranging from 2% to 4%) than the present case. 23. In the present case, Raymond James maximum fee in a GECC credit bid scenario (either by Sales Process Termination or Business Combination Transaction) ranges from $300,000 to $550,000 corresponding to a range of 0.11% to 0.20% of the GECC DIP loan and GECC prepetition secured debt outstanding. 24. Thus, the proposed fees to Raymond James are very reasonable, and the fees sought to be approved for Raymond James are less than it has received in similar cases. 25. The Committee argues that Raymond James could receive as much as $500,000 (subject to a credit for monthly advisory fees received). Objection at 19. The reality is that such fees will be reduced by monthly advisory fees received in excess of $150,000. Moreover, Raymond James has already provided services to the Debtors and their estates and such fee is more than reasonable for the services rendered by Raymond James, taking into consideration that it will either receive the Sale Process Termination Fee or the Business Combination Transaction Fee. C. Additional Services That Are Not Currently Included in Its Engagement Letter Will Be Subject to Bankruptcy Court Approval 26. The Raymond James engagement letter also provides that if the Debtors request that Raymond James provide additional services, and subject to any required Court approval, the Debtors and Raymond James shall negotiate in good faith to agree on reasonable 9

10 compensation to Raymond James for those additional services, which shall reflect the customary investment banking fees for institutions of Raymond James stature for similar services. See Engagement Letter at 2(f). Thus, any additional services not currently included in the Raymond James engagement letter for which it is seeking additional compensation will be subject to bankruptcy court approval. CONCLUSION WHEREFORE, Raymond James respectfully requests that the Court (i) grant the Retention Application allowing the Debtors to retain Raymond James under section 328 of the Bankruptcy Code without providing for the Committee to review Raymond James fees for reasonableness under Bankruptcy Code section 330, (ii) overrule the Committee s Objection, (iii) require the Committee to refile the Objection without the offensive sham language, and (iv) grant Raymond such other and further relief as this Court deems just and appropriate. Dated: February 6, 2012 CROWEL & MORING LLP Mark S. Lichtenstein Steven B. Eichel 590 Madison Avenue New York, NY Attorneys for Raymond James & Associates, Inc. By: /s/ Mark S. Lichtenstein Mark S. Lichtenstein 10