JEFFREY C. KRAUSE (Cal. State Bar #94053 Email: jkrause@stutman.com EVE H. KARASIK (Cal. State Bar #155356 Email: ekarasik@stutman.com GREGORY K. JONES (Cal. State Bar #153729 Email: gjones@stutman.com STUTMAN, TREISTER & GLATT PROFESSIONAL CORPORATION 1901 Avenue of the Stars, 12th Floor Los Angeles, CA 90067 Tel: (310 228-5600 Fax: (310 228-5788 Steven McCartin Texas State Bar No. 13374700 GARDERE & WYNNE, LLP 3000 Thanksgiving Tower 1601 Elm Street, Suite 3000 Dallas, Texas 75201 Tel: (214 999-4250 Fax: (214 999-3250 Email: smccartin@gardere.com [Proposed] Reorganization Counsel for Debtors R.E. Loans, LLC, Capital Salvage, Inc., and R.E. Future, LLC IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION In re R.E. LOANS, LLC, a California limited liability company; CAPITAL SALVAGE, a California corporation; and R.E. FUTURE, LLC, a California limited liability company, Debtors. Case Nos. Jointly Administered with Case Nos. Chapter 11 Hearing Date: [To Be Scheduled] Time: Place: OF MOTION FOR ORDER AUTHORIZING DEBTORS TO (A OBTAIN POSTPETITION FINANCING ON A SUPERPRIORITY, SECURED AND PRIMING BASIS IN FAVOR OF WELLS FARGO CAPITAL FINANCE, LLC ("WELLS FARGO"; (B TURNOVER CASH COLLATERAL TO WELLS FARGO; (C PROVIDE ADEQUATE PROTECTION TO WELLS FARGO AND THE NOTEHOLDERS; AND (D ENTER INTO POSTPETITION AGREEMENTS WITH WELLS FARGO
I, James A. Weissenborn, declare as follows: 1. I am over eighteen (18 years of age and if called upon I would competently testify to the matters set forth herein from my own personal knowledge, except as otherwise stated. To the extent this declaration addresses issues that occurred prior to January of 2010 my knowledge of such facts is based on the books and records of R.E. Loans, LLC ("R.E. Loans", which are maintained in the ordinary course of business. A. Engagement of Mackinac Partners And My Role 2. I am a principal of Mackinac Partners. Effective in January of 2010, Mackinac Partners was engaged by R.E. Loans to provide consulting services to assist R.E. Loans in dealing with its existing defaults to its creditors, including Wells Fargo Capital Finance, LLC ("Wells Fargo" and the "Noteholders," as defined in the "Motion For Order (I Authorizing Debtors To (A Obtain Interim Postpetition Financing On A Superpriority, Secured And Priming Basis In Favor Of Wells Fargo Capital Finance, LLC; (B Use Cash Collateral On An Interim Basis; (C Provide Adequate Protection To Wells Fargo Capital Finance, LLC And The Noteholders; And (D Enter Into Postpetition Agreements With Wells Fargo Capital Finance, LLC; (II Modifying The Automatic Stay; And (III Scheduling, And Establishing Deadlines Relating To A Final Hearing Authorizing The Debtors To Obtain Postpetition Financing And Use Of Cash Collateral; Memorandum Of Points And Authorities" (the "DIP Financing Motion". The terms of the proposed debtor in possession loan are set forth in the term sheet, a true and correct copy of which is attached to the Addendum as Exhibit "G" thereto and made a part hereof. When Mackinac Partners was originally engaged, R.E. Loans was already in default on its obligations to Wells Fargo and to the Noteholders. 3. Effective April 10, 2010, the responsibilities of Mackinac Partners were expanded, and I became the Chief Restructuring Officer of R.E. Loans. Because R.E. Loans had no infrastructure to manage the real property that it was acquiring as the result of various foreclosure sales, as described in more detail in paragraphs 10 through 12, below, employees of Mackinac Partners assumed day-to-day responsibility for the management of the assets of OF MOTION RE POSTPETITION FINANCING, etc. Page 1
R.E. Loans and its wholly owned subsidiaries. With respect to the notes receivable held by R.E. Loans, Mackinac Partners assumed responsibility for negotiations with the borrowers ("R.E. Loans' Borrowers" and, when appropriate, foreclosure proceedings to obtain title to the underlying real property collateral (the "Underlying Real Property Collateral". With respect to real property collateral ownership of which was obtained through such foreclosure sales (the "REO", Mackinac Partners assumed responsibility for managing the REO, making decisions regarding payment of necessary carrying costs, and efforts to market and sell at all relevant times the REO. At all relevant times I have been the representative of Mackinac Partners ultimately responsible for supervising the other Mackinac Partners' employees working for R.E. Loans and the efforts to restructure R.E. Loans' assets and obligations. 4. Since April 10, 2010, I served as the Chief Restructuring Officer of R.E. Loans. Throughout this time period, I have had authority to deal with day-to-day operational issues at R.E. Loans, but prior to September 12, 2011 (the "Petition Date", I reported to B-4 Partners, LLC ("B-4", in its capacity as the sole manager of R.E. Loans, which approved all major decisions. As a practical matter, this meant obtaining final approval of all major decisions from Walter Ng or Kelly Ng, in their capacities as managers of B-4. Effective as of the Petition Date, subject to this Court's approval of the Application (as defined below, the following management changes will be implemented: (1 B-4 will resign as the sole manager of R.E. Loans; (2 in its capacity as the sole member of R.E. Loans, B-4 will elect Mackinac as the sole manager of R.E. Loans; (3 R.E. Loans will resign as the sole manager of R.E. Future, LLC, a California limited liability company ( R.E. Future ; (4 in its capacity as the sole member of R.E. Future, R.E. Loans will appoint Mackinac as the sole manager of R.E. Future; (5 each of the directors of Capital Salvage, a California corporation ( Capital Salvage will resign; (6 R.E. Loans, as the sole shareholder of Capital Salvage, will vote by unanimous consent to appoint me as the sole director of Capital Salvage and to consent to my election as the President of Capital Salvage; and (7 in my capacity as the sole director of Capital Salvage, I will vote by unanimous consent to elect myself the President of Capital Salvage. I have caused R.E. Loans to OF MOTION RE POSTPETITION FINANCING, etc. Page 2
file simultaneously with the Financing Motion, the "Application To Authorize Employment Of Mackinac Partners On An Interim And Final Basis From The Petition Date, To Provide Interim Management And Management Assistance To The Debtors Pursuant To 11 U.S.C. 363" (the Application to approve the engagement of Mackinac and of me personally. B. The Debtors' Organizational Structure And Assets 5. R.E. Loans owns 100% of the issued and outstanding stock of Capital Salvage. Capital Salvage is a California corporation. R.E. Loans is the sole member of R.E. Future, which is a California limited liability company. 6. B-4 is the sole member of R.E. Loans. The members of B-4 throughout most of the Debtors' history were Walter Ng, Kelly Ng, Barney Ng, and Bruce Horowitz, each of whom owned 25% of B-4. Walter Ng was a manager of B-4 at all relevant times before he filed his chapter 11 petition on May 12, 2011. Walter is a debtor and debtor in possession in a chapter 11 case in the United States Bankruptcy Court for the Northern District of California, Oakland Division. Bruce Horowitz was also a manager of B-4 until September 24, 2009. At that time, Bruce Horowitz resigned as a manager of B-4 and sold his 25% interest in B-4 to Kelly Ng. Kelly Ng also became a manager of B-4 on September 24, 2009. As a result, the members of B-4 are currently Walter Ng (25%, Barney Ng (25% and Kelly Ng (50%. Kelly Ng is the manager of B-4, which is, in turn, the only member and the manager of R.E. Loans. 7. Until September of 2009, Barney Ng was also the president of Bar-K, Inc. ("Bar-K". Barney Ng resigned as the President of Bar-K in September of 2009. At that time Kelly Ng became the president of Bar-K. Bar-K originated most of R.E. Loans' loans to R.E. Loans' Borrowers and serviced R.E. Loans' loans until October 1, 2010. Lend, Inc. assumed responsibility for servicing R.E. Loans' notes receivable on October 1, 2010. Kelly Ng is the President of Lend, Inc. Effective September 15, 2011, the employees of Lend, Inc. that provided such services will be transferred to R.E. Loans and R.E. Loans will assume full and complete responsibility to service its own portfolio of notes receivable under my direction. OF MOTION RE POSTPETITION FINANCING, etc. Page 3
C. The Debtors' Assets 8. R.E. Loans was a hard money lender that made loans to R.E. Loans' Borrowers. All or substantially all of the R.E. Loans' loans were initially secured by firstpriority deeds of trust on the Underlying Real Property Collateral, which is owned by R.E. Loans' Borrowers. 9. The notes receivable still owned by R.E. Loans are listed in Exhibit "A" hereto and made a part hereof, which reflects the approximate unpaid principal balance ("UPB" of each loan and the names of the respective R.E. Loans' Borrower and the location of the Underlying Real Property Collateral securing each loan. The "UPB" is not intended to reflect the value of the loan or of the Underlying Real Property Collateral. Rather, it reflects the best information currently available to R.E. Loans regarding the unpaid principal balance owing by each of R.E. Loans' Borrowers. Because the terms of many of the loans made by R.E. Loans provided for reserves to fund interest and other charges the UPB may include some or all accrued interest during the term of many of the loans. UPB does not include interest or fees and charges not funded through such loan reserves. It does not include such charges after the maturity date of any of the loans and the actual balance owing by each of R.E. Loans' Borrowers exceeds the UPB. The UPB amounts shown on Exhibit "A" hereto are the best information currently available to R.E. Loans, but R.E. Loans reserves its right to contend that these amounts do not reflect the entire balance of R.E. Loans' claims against each of R.E. Loans' Borrowers, and these amounts are not intended to constitute admissions or a waiver of any claims against R.E. Loans' Borrowers. 10. In 2008, the United States economy in general and real estate development in particular entered into the worst economic downturn since the Great Depression. Virtually all of the R.E. Loans' Borrowers that had outstanding loan balances due to R.E. Loans in 2008 have defaulted. As a result, the Debtors have no regular cash flow. R.E. Loans has worked with many of R.E. Loans' Borrowers in an effort to maximize the recovery on the defaulted loans, but in other instances R.E. Loans has been forced to foreclose. OF MOTION RE POSTPETITION FINANCING, etc. Page 4
11. R.E. Loans has foreclosed on 17 loans that had an original UPB of approximately $308.6 million and is in the process of foreclosing on 4 additional loans that have an aggregate UPB of approximately $74 million. The foreclosed loans and loans currently in foreclosure constitute approximately 58.3% in aggregate amount of the unpaid balance of all loans in R.E. Loans' portfolio. In addition, R.E. Loans holds 19 loans with an aggregate unpaid balance of approximately $273 million that are in default, but on which it has not yet commenced foreclosure proceedings. 12. R.E. Loans retained title to certain REO acquired through foreclosure proceedings. The real estate owned by R.E. Loans is listed in Exhibit "B" hereto, which is made a part hereof. The "UPB" on that Exhibit reflects the unpaid principal balance (as described in Paragraph 9, above of the loan on which R.E. Loans foreclosed, not the value of the REO. When R.E. Loans acquired property as the result of credit bids at foreclosure sales, it transferred title to some of the properties to each of its wholly owned subsidiaries, Capital Salvage and R.E. Future (the "REO Subsidiaries". In exchange for each such transfer the REO Subsidiary that received title delivered a promissory note payable to R.E. Loans and secured by the same REO. The one exception to this structure is the property known as "Perdido Key", title to which was conveyed to Capital Salvage. Capital Salvage has not delivered to R.E. Loans a note or deed of trust to pay for Perdido Key. The real estate owned by each REO Subsidiary and the amounts of the notes payable by each REO Subsidiary to R.E. Loans are listed in Exhibit "C" hereto, which is made a part hereof. Based on the best information currently available the actual value of each of these properties is far less than the face amount of the note secured by that property, so the REO Subsidiaries have no equity. If, however, there were equity in any of the REO owned by the REO Subsidiaries above and beyond the balance due on the notes payable by the REO Subsidiaries, R.E. Loans would benefit from that equity because it owns 100% of the equity of the REO Subsidiaries. 13. In addition to secured loans, R.E. Loans invested approximately $21 million to acquire a membership interest in R.E. Reno, LLC, a California limited liability OF MOTION RE POSTPETITION FINANCING, etc. Page 5
company ("R.E. Reno". This gives R.E. Loans ownership of approximately 42.8% of R.E. Reno's membership interests. R.E. Reno also sold $29 million of membership interests to other investors. 14. R.E. Reno made a $50 million loan to One South Lake Street, LLC ("OSLS", the owner of the real property used to operate the Siena Hotel and Casino in Reno, Nevada (the "Siena". This loan was secured by a first-priority mortgage on the assets of OSLS. Barney Ng, a 25% member of B-4 and the former president of Bar-K, Inc., is the sole member of OSLS. OSLS defaulted and R.E. Reno commenced foreclosure proceedings. In July, 2010 OSLS filed a chapter 11 petition. The Siena was closed in late October of 2010 and sold at a Bankruptcy Court auction sale on November 12, 2010. The purchase price was only $3.9 million, and R.E. Reno will only receive a portion of the net sale proceeds because the assets sold include both R.E. Reno's collateral and certain personal property. R.E. Loans will be entitled to (1 reimbursement of advances R.E. Loans made to fund R.E. Reno's out-of-pocket enforcement expenses, and (2 approximately 42.8% of R.E. Reno's recovery, net of expenses incurred. Assuming the existing proposed settlement is implemented, R.E. Reno will receive approximately $2.7 million on account of its loan to OSLS in the principal amount of $50 million. D. Debtors' Secured Debts 15. Because neither R.E. Loans' Borrowers nor R.E. Loans has the cash needed to pay property taxes that are accruing on a current basis, liens have arisen against the Underlying Real Property Collateral and the REO. Because the liens securing these taxes are senior to R.E. Loans' liens on these assets, when R.E. Loans has acquired the REO that property has already been subject to secured tax obligations and the liens securing such obligations have survived R.E. Loans' foreclosure sales. Attached as Exhibit "D" hereto and made a part hereof is a list of the Underlying Real Property Collateral that secures obligations owing to R.E. Loans by R.E. Loans' Borrowers and the best information available to R.E. Loans concerning the amount of all ad valorem tax obligations secured by senior liens on the Underlying Real Property OF MOTION RE POSTPETITION FINANCING, etc. Page 6
Collateral. Attached as Exhibit "E" hereto and made a part hereof is a list of the REO currently owned by the Debtors and the best information available to R.E. Loans concerning the amount of all ad valorem tax obligations secured by senior liens on the REO. The aggregate amount of the taxes secured by senior ad valorem liens on the Underlying Real Property Collateral and the REO is approximately $10 million. The tax amounts shown on these Exhibits are the best information currently available to R.E. Loans, but R.E. Loans reserves its right to contest the amount of such taxes and these amounts are not intended to constitute admissions that these taxes are due or a waiver of any defenses to these amounts. Mackinac's projections assume that all secured taxes and interest that continues to accrue thereon will be paid in cash as each parcel of REO is sold. As a result, the projections for R.E. Loans' future cash flow all assume that the taxes secured by the REO or the Underlying Real Property Collateral will be paid in full, with interest at the statutory rate when each parcel is sold. The Debtors intend to file a chapter 11 plan that will also provide for payment of these taxes and interest accruing thereon. 16. R.E. Loans' records show that it originally raised the capital to fund the secured loans to R.E. Loans' Borrowers by selling membership interests in R.E. Loans. In April of 2007, R.E. Loans stopped selling membership interests. As of April of 2007, R.E. Loans had approximately 3,000 members, but its sole manager was B-4. R.E. Loans' records show that at that time it had debts of no more than a few million dollars. 17. During 2007, R.E. Loans granted two security interests in all notes receivable held by R. E. Loans. In July of 2007, R.E. Loans granted a security interest to Wells Fargo in substantially all of R.E. Loans' personal property. On December 1, 2007, R.E. Loans completed the exchange offer described below, and granted a subordinate security interest in all notes receivable held by R.E. Loans to secure the "Exchange Notes," as defined below. 18. In July of 2007, Wells Fargo provided a $50 million senior secured credit facility to R.E. Loans to fund its operations. True and correct copies of the original Loan and Security Agreement dated as of July 17, 2007 and the subsequent amendments thereto are OF MOTION RE POSTPETITION FINANCING, etc. Page 7
attached to the "Addendum To Joint Stipulation And Agreed Interim Order: (I Authorizing Debtors To (A Obtain Post-Petition Financing On A Super-Priority, Secured And Priming Basis In Favor Of Wells Fargo Capital Finance, LLC; (B Use Cash Collateral On An Interim Basis, (C Provide Adequate Protection To Wells Fargo Capital Finance, LLC And The Noteholders, And (D Enter Into Post-Petition Agreements With Wells Fargo Capital Finance, LLC; (II Modifying The Automatic Stay, And (III Scheduling A Final Hearing Pursuant To Bankruptcy Rule 4001" (the "Addendum" filed concurrently herewith as Exhibit "A" thereto and made a part hereof. The UCC-1 financing statements are attached to the Addendum as part of Exhibit "B" thereto and made a part hereof. The balance owing to Wells Fargo as of the Petition Date was approximately $68 million. 19. The second-priority security interest in the notes payable to R.E. Loans was granted effective December 1, 2007, pursuant to the form of exchange notes, the Security Agreement, and "Exchange Agreement," true and correct copies of which are attached to the Addendum as Exhibits "I", "J", and "K", respectively, thereto and made a part hereof. The Security Agreement securing the Exchange Notes expressly provides that the security interest granted to secure the Exchange Notes is subordinate to the Wells Fargo first-priority security interest. Section 3.6(b of the Exchange Agreement reads as follows: The lien on [R.E. Loans'] assets established by the security agreement (the "Lien" will be subordinate to the lien of any Company Borrowings, including the WFF Lien. In addition, the terms of the WFF LOC provide for the payment of principal and interest on the WFF LOC on a priority basis under specified circumstances from certain income and assets of the Company, including from revenues and income generated by Portfolio Loans and from proceeds payable to the Company with respect to Portfolio Loan principal or the exercise of the Company's rights and remedies with respect to the Portfolio Loans. Company Borrowings is defined at page 2, paragraph E of the Exchange Agreement to state that R.E. Loans "is specifically authorized to enter into loan agreements and lines of credit with institutional and other lenders for the purpose of borrowing operating capital and capital funds in order to make portfolio loans and for such other purposes as the Manager may determine (... such borrowings shall be collectively referred to as the 'Company Borrowings'." The Summary OF MOTION RE POSTPETITION FINANCING, etc. Page 8
of Reorganization Plan, a true and correct copy of which is attached to the Addendum as Exhibit "M" thereto and made a part hereof, is incorporated into the Confidential Memorandum accompanying the R.E. Loans Reorganization Plan and Note Program, dated October 2007, which was approved by the Exchange Agreement. The Summary of Reorganization Plan states that "The Note Documents will subordinate the Fund's obligations under the Investor Notes to its obligations as borrower under the WFF Loan Documents." (Addendum Exhibit "L" at page 2. The "R.E. Loans, LLC Reorganization Plan and Note Program Confidential Memorandum dated October, 2007", a true and correct copy of which is attached to the Addendum as Exhibit "L" and made part hereof also contains several subordination provisions, at page 2 (confirming subordination of the Noteholders' lien on R.E. Loans' assets to "other Company Borrowings, including the WFF Line of Credit", page 5 ("the WFF Line of Credit will be secured by a senior lien", and page 13 (the Noteholders' lien is "junior to the liens imposed by Company Borrowings...". 20. R.E. Loans thereafter engaged in an exchange offer. On December 1, 2007, R.E. Loans consummated an exchange offer pursuant to which each member of R.E. Loans, other than B-4, received a promissory note in exchange for the member's membership interest (the "Exchange Notes". Its records show that pursuant to the exchange offer, R.E. Loans issued Exchange Notes in the aggregate face amount of $743 million in exchange for the interests of its members. R.E. Loans' records indicate that the dollar amount of the Exchange Note delivered to each former member was equal to the balance of that member's capital account, including the principal invested and interest accrued but not paid, as of the date the exchange offer closed. As of the Petition Date, there were approximately 2,800 Exchange Notes outstanding, held by 1,400 separate individuals or entities. In some instances a single person holds more than one Exchange Note in different capacities or through different accounts, including retirement accounts. 21. The Exchange Notes issued to the former members have at all time been secured by second-priority security interest in substantially all of the R.E. Loans' notes OF MOTION RE POSTPETITION FINANCING, etc. Page 9
receivable. The collateral agent for the Noteholders was Development Specialists, Inc. ("DSI", which recorded a UCC-1 financing statement for the benefit of all Noteholders on November 27, 2007. DSI has since resigned as collateral agent and no replacement collateral agent has been appointed. In addition, the Noteholders listed in Exhibit "F" hereto, which is made part hereof, also filed UCC-1 financing statements on the dates set forth in that Exhibit. Nothing in the Exchange Agreement or the Exchange Notes authorized the individual Noteholders to file such UCC-1 Financing Statements. 22. R.E. Loans' records indicate that immediately after the issuance of the Exchange Notes, R.E. Loans had increased its obligations to approximately $790 million, including the balances due on the newly issued Exchange Notes and the Wells Fargo senior secured credit facility. The exchange may have rendered R.E. Loans insolvent, undercapitalized, or unable to meet its obligations as they became due. 23. Because Wells Fargo's documentation provided for R.E. Loans' grant to Wells Fargo of a first-priority security interest in all notes payable to R.E. Loans, this includes the notes payable by the REO Subsidiaries. Similarly, because the Noteholders were granted a second- priority security interest in all notes payable to R.E. Loans, this also includes the notes payable by the REO Subsidiaries. 24. In addition, R.E. Loans granted to Wells Fargo a first-priority deed of trust or mortgage on each of the properties acquired by R.E. Loans through foreclosure sales. True and correct copies of these deeds of trust are attached to the Addendum as Exhibit "E" thereto and made a part hereof. No lien was granted on Perdido Key because of the large transfer taxes that would have been incurred for recording such a grant. No lien was granted to the Noteholders on any of the real estate acquired by R.E. Loans directly. 25. Nothing in R.E. Loans' records indicates that R.E. Loans ever executed or delivered or recorded a deed of trust or mortgage on any of the REO owned by R.E. Loans or the REO Subsidiaries to secure the Exchange Notes. The Exchange Notes are payable with interest only until December 1, 2012, when they are all due and payable. OF MOTION RE POSTPETITION FINANCING, etc. Page 10
26. The Exchange Notes and the Wells Fargo line of credit were both in default for an extended period of time prior to the Petition Date. Pursuant to the terms and conditions of the operative loan agreements between R.E. Loans and Wells Fargo, Wells Fargo declared a default under its line of credit in August of 2008. After that default was declared, Wells Fargo was under no obligation to make additional advances to R.E. Loans. The Debtors ceased making interest payments on account of the Exchange Notes during September, 2008. Between that date and the Petition Date, Wells Fargo and R.E. Loans entered into a series of forbearance agreements during which time Wells Fargo did not exercise its rights or remedies and funded R.E. Loans' operations through optional protective advances. In early 2010, Wells Fargo was still funding such optional protective advances, based on approved budgets generated by Mackinac. E. Need For Debtor In Possession Financing 27. R.E. Loans' assets are extremely illiquid. R.E. Loans made loans to real estate developers that were secured by real property in various early stages of development and raw land. The property owned by the R.E. Loans Borrowers generates little or no income. As a result, R.E. Loans is not receiving any material current payments from R.E. Loans' Borrowers, and receives incoming cash only when and if it sells individual assets. 28. In many instances, the fact that the asset that R.E. Loans owns is a note secured by a mortgage, not the Underlying Real Property Collateral, has made the sale process far more challenging. Attempting to liquidate promissory notes payable to R.E. Loans by R.E. Loans' Borrowers who are currently in default may generate less value than might be generated by first foreclosing on the Underlying Real Property Collateral and then taking appropriate steps to maximize the orderly liquidation value of the underlying real estate collateral. The Debtors do not, however, have sufficient cash flow to pay their current operating expenses to engage in this activity. 29. The Debtors do not have current appraisals of all of the Debtors' assets. The appraisals of the Debtors' REO and the Underlying Real Property Collateral which the OF MOTION RE POSTPETITION FINANCING, etc. Page 11
Debtors have or are aware of because Wells Fargo has obtained these appraisals are listed in Exhibit "G" which is attached hereto and made a part hereof. Based on those appraisals and Mackinac's projections, I believe that the net orderly liquidation value of the Debtors' assets is substantially greater than the sum of real property taxes secured by such property (approximately $10 million and the balance owing to Wells Fargo (approximately $68 million, but substantially less than the aggregate balance owing on the Exchange Notes (approximately $776 million, including more than $138 million of accrued interest. 30. If the Debtors were to liquidate their assets on an expedited basis, including the illiquid notes that are currently in default, the Debtors should be able to satisfy the ad valorem tax lien claims against such properties and the secured pre-petition indebtedness owed to Wells Fargo. Such a liquidation would, however, reduce the ultimate recoveries available to the Noteholders. If the assets are not sold on an expedited basis, each month the Debtors will incur preservation costs (real estate management, insurance, brokerage, financial advisory, and professional fees -- which costs have been funded pre-petition by Wells Fargo and would continue to be funded by Wells Fargo post-petition (subject to the terms of the DIP financing facility. To maximize the net recovery to the Noteholders, the Debtors must balance the potential increase in gross sales price from holding and, in some instances improving, specific assets, against the substantial carrying costs, including new property taxes and interest accruing on existing property taxes. 31. The Debtors cannot continue their business effort absent debtor in possession financing. The Debtors' cash collections consist of receiving payments from R.E. Loans' Borrowers and the REO Subsidiaries, usually from the sale of real estate, which is itself collateral for R.E. Loans' secured loans to R.E. Loans' Borrowers. As and when real property transactions close, the Debtors receive sale proceeds. The Debtors have virtually no performing loans and generate very little monthly cash flow. The gross cash available each month is sporadic because it is entirely dependent on closing sales. Accordingly, the Debtors OF MOTION RE POSTPETITION FINANCING, etc. Page 12
need financing so that they can pay necessary preservation costs and expenses of their property management operations each month as those expenses are incurred. 32. The proceeds of the DIP Facility will be used to preserve or enhance the Underlying Real Property Collateral and the REO and to maximize its orderly liquidation value. 33. If the Debtors were not permitted to manage the Debtors' assets, but were required to liquidate that portfolio immediately, the aggregate liquidation value would probably be sufficient to pay the following debts: (a the aggregate balance owing to Wells Fargo (about $68 million, (b unpaid ad valorem taxes (about $10 million, (c future interest accruing on the foregoing balances, and (d the costs of liquidation. The immediate liquidation of the assets would not likely yield any meaningful return to any other creditors, including the noteholders. Even the most expedited liquidation scenario will probably take approximately six months. This value would be far less than an orderly management of these assets could bring, in great part because the assets owned by the Debtors include promissory notes secured by raw land and development property, rather than the Underlying Real Property Collateral. There is a very limited market for these defaulted promissory notes, and efforts to sell these notes, virtually all of which are currently in default, may generate substantially less than an orderly liquidation of the Underlying Real Property Collateral. While the Debtors have agreed under the DIP Facility to list the secured promissory notes for sale, the Debtors will only sell notes if a buyer can be found that would pay a price that is not substantially discounted from the value of the Underlying Real Property Collateral. In the meantime, the Debtors will continue their efforts to obtain title to the Underlying Real Property Collateral. 34. In contrast, if the Debtors are allowed to manage the portfolio and the REO Subsidiaries' assets over the next three to five years, and obtain payments from the R.E. Loans' Borrowers or repossess and foreclose upon the Underlying Real Property Collateral, the Debtors should be able to satisfy the ad valorem taxes and the indebtedness owed to Wells Fargo, and to enhance the recoveries by the Noteholders. Mackinac projects that if the Debtors are permitted to manage the Debtors' loan portfolio and the REO Subsidiaries' assets, the net OF MOTION RE POSTPETITION FINANCING, etc. Page 13
realizable proceeds from dispositions over the next three to five years could be increased by more than $100 million, even after all accruing property level expenses. 35. The proposed DIP Facility does not provide the Debtors with 3 to 5 years to maximize the value of their assets. The term of the proposed DIP Credit Facility and the Exit Credit Facility that Wells Fargo has offered (on a non-binding basis would give the Debtors through the end of 2012 to pay off the balance owing to Wells Fargo, with interim asset liquidation requirements. Under this exit financing and the DIP Credit Facility R.E. Loans must obtain and turn over to Wells Fargo cash proceeds during the period from July 31, 2011, though January 31, 2012 of not less than $25 million and an additional $25 million every 3 months thereafter. These payments are not net of new advances by Wells Fargo but are net of all costs of sale and taxes that are paid from such dispositions. Paying off Wells Fargo should not require liquidation of the entire portfolio. Satisfying Wells Fargo's amortization schedule will likely reduce the net realizable proceeds from the amounts set forth in paragraph 34. The extent of any such reduction is difficult to estimate, but the availability of the proposed financing should allow the Debtors to avoid the larger loss in value that would result from the immediate liquidation of the Debtors' assets as described in Paragraph 33, above. F. DIP Credit Facility Terms 36. Attached to the Addendum as Exhibits "H" and "N" thereto and made a part hereof are true and correct copies of (1 the proposed Ratification Agreement, and (3 a one year cash flow budget commencing from Petition Date. The general terms thereof are as follows: (a a facility of up to $21.5 million under which Wells Fargo will make periodic advances pursuant to the terms and conditions of the DIP Facility Loan Documents and the DIP Financing Order; (b To be secured by first-priority priming liens on all of the Debtors' assets, and Wells Fargo will receive a superpriority administrative expense claim for any unpaid obligations under the DIP Facility; (c Interest at LIBOR plus 14% interest; (d Initial term of six (6 months, unless otherwise extended, but Wells Fargo has also provided a non-binding term sheet providing for extending the terms of its financing through December 31, 2012, if an agreed OF MOTION RE POSTPETITION FINANCING, etc. Page 14
plan of reorganization is confirmed, to give the Debtors additional time to effect an orderly disposition of enough assets to pay off the balance due Wells Fargo; and (e periodic pay downs to Wells Fargo during the term of the DIP Facility and the exit facility under the plan. Confirmation of a plan to which Wells Fargo will agree is subject to various conditions, including without limitation, an effective date not later than six (6 months after the Petition Date, unless extended pursuant to the terms set forth in the Ratification Agreement. G. Mackinac Partners' Efforts to Find Alternative Credit Facility 37. Mackinac spent significant time and effort searching for the best available debtor in possession financing. We attempted to obtain financing from lenders other than Wells Fargo. I identified fifteen (15 potential lenders, each of which executed confidentiality agreements and fourteen of these potential lenders performed some level of due diligence. Three of these potential lenders signed term sheets with Wells Fargo to acquire its existing debt and discussed with Mackinac potential terms of ongoing financing, which was conditioned on them acquiring Wells Fargo's existing secured claims. 38. If the Debtors were to pursue any of the alternative debtor-in-possession financing alternatives, each of the prospective lenders informed Mackinac that it would provide such financing only if it could be granted a first-priority lien on substantially all of the Debtors' assets. Wells Fargo has informed me that it opposes any other lender obtaining a first-priority security interest in Wells Fargo's collateral, unless Wells Fargo is indefeasibly paid in full in cash first. I declare under penalty of perjury that the foregoing is true and correct. Executed this day of September, 2011 at,. James A. Weissenborn OF MOTION RE POSTPETITION FINANCING, etc. Page 15