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7/29/2019 Doc 568 National Union Fire Insurance Fund of Pittsburgh Objection to First Amended Disclosure Statement of FORBA-Church Street Health Management
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UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF TENNESSEE (NASHVILLE DIVISION)
---------------------------------------------------------------------------IN RE: ) Chapter 11
)CS DIP, LLC (f/k/a Church Street Health Management, LLC), ) Case No. 12-01573
)SSHC DIP, LLC (f/k/a Small Smiles Holding company, LLC ) ) Case No. 12-01574
)FNY DIP, LLC (f/k/a FORBA NY, LLC) ) Case No. 12-01575
)Debtors.
1) Jointly Administered) under Case No.) 12-01573
----------------------------------------------------------------------------
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.S
OBJECTIONS TO FIRST AMENDED PROPOSED DISCLOSURE STATEMENT
DATED DECEMBER 13, 2012, WITH RESPECT TO FIRST AMENDED JOINT PLAN
OF REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES
BANKRUPTCY CODE
National Union Fire Insurance Company of Pittsburgh, Pa. (National Union),
by its attorneys, objects to the First Amended Proposed Disclosure Statement dated December
13, 2012 (the Disclosure Statement) filed by the Debtors and the Official Committee of
Unsecured Creditors (the Committee), together, the Plan Proponents, with respect to the
First Amended Plan of Reorganization dated December 13, 2012 (the Plan), because it lacks
adequate information as required by section 1125 of the Bankruptcy Code and is otherwise
misleading.
1 All capitalized terms not otherwise defined in these Objections shall refer to those terms asdefined in the Plan and Disclosure Statement.
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The Debtors contend that National Union issued certain dental professional
liability insurance policies. As set forth below, National Union contends that any such insurance
policies between National Union and the Debtors should be rescinded or otherwise reformed for
the reasons being contested in the Coverage Litigation (see below). However, National Union
files this objection to the Disclosure Statement out of an abundance of caution because the
Debtors contend that National Union issued binding policies and the validity of those policies is
currently disputed.
PRELIMINARY STATEMENT
Through their proposed Plan, though not clearly disclosed, the Debtors apparently
seek to obtain the extraordinary relief provided by the Bankruptcy Code in order to resolve a
large, but unquantified, number of claims. The centerpiece of the Plan is a personal injury trust
(the Liquidating Trust) to handle all of the Patient-Related Claims. Specifically, the Debtors
intend to channel these liabilities to the Liquidating Trust, relieving themselves of the financial
burden of these claims. In order to fund the Liquidating Trust, the Plan purports to or may
attempt to bind National Union to the Plans provisions without its consent and to abrogate its
contractual and legal rights. Indeed, the Debtors appear to be attempting, through confirmation
of the Plan, to transform policies issued by National Union into a new form of obligation that the
Debtors may simply draw upon irrespective of the terms and limitations of existing obligations.
Although the Debtors appear to believe that they may do anything and everything
under the guise of Plan confirmation, the Bankruptcy Code does not expand the Debtors rights
against others beyond what they were at the commencement of the case, and neither the Code
nor non-bankruptcy law authorizes the Debtors attempt to strip National Union of its contractual
and legal rights, as the Plan purports or may attempt to do. Nor does the Court have subject
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matter jurisdiction, whether in the Plan confirmation process or otherwise, to finally resolve non-
core issues concerning prepetition contractual rights. Under the circumstances, the Plan is
patently unconfirmable as a matter of law.
The Disclosure Statement is also fatally defective and cannot be approved. The
purpose of a Disclosure Statement is to inform parties in interest of their treatment under the Plan
and to provide information sufficient to allow interested parties to make intelligent decisions in
voting on or objecting to the Plan. 11 U.S.C. 1125(a)(1). The Plan proposed here is hopelessly
(and, perhaps, intentionally) vague and confusing and the Disclosure Statement clarifies none of
its deficiencies. Most significantly the Debtors and their Disclosure Statements have not
provided key documents and critical information. Among the material inadequacies of the
Disclosure Statement are the following:
The Disclosure Statement fails to provide any information on the terms of theLiquidating Trust Agreement, Claim Approval Structure or Claim DistributionProcedures, thus depriving interested parties of crucial disclosure concerningthe framework and criteria for the resolution of Patient-Related Claims.
The Disclosure Statement does not adequately discuss the ways in whichNational Unions rights and interests are impaired by the Plan. Indeed, theDisclosure Statement is affirmatively misleading in that it fails to disclose thatthe Plan violates National Unions contractual and legal rights and that thePlan violates several provisions of the Bankruptcy Code.
The Disclosure Statement does not explain that the Plans breaches of theDebtors contractual obligations may adversely affect and/or void coveragethat otherwise might be available for certain claims against the Debtors.
The Disclosure Statement does not disclose potential conflicts-of-interestinherent in the structure of the Liquidating Trust.
The Disclosure Statement fails to provide a liquidation analysis as required by11 U.S.C. 1129(a)(7).
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For these reasons, as further amplified below, the Court should reject the Debtors
Disclosure Statement.
BACKGROUND
A. The Debtors and the Patient-Related ClaimsDebtor SSHC DIP, LLC was the parent of a group of companies that provided
dental practice management services to 67 Dental Centers serving low income families in 22
states. (DS2
at 11.) In or around 2007, the Office of the Inspector General of the U.S.
Department of Health and Human Services (OIG) and the U.S. Department of Justice (DOJ)
each commenced separate investigations of the Debtors and the Dental Centers. (DS at 15.)
Subsequently, several state Attorneys General began parallel state investigations of the Debtors
and the Dental Centers. (Id.) In January 2010, the Debtors entered into a settlement agreement
with the U.S. Department of Justice and the 22 states where the Debtors did business, agreeing to
pay $24,000,000 over a five year period and to certain compliance measures, including the
engagement of an independent monitor to oversee the quality of care the Debtors provided at
their Dental Centers. (Id.)
Subsequent to the Debtors settlement with the DOJ and the various states, a
number of lawsuits were filed throughout the country by or on behalf of the Dental Center
patients against certain of the Debtors, Dental Centers and Dentists, alleging claims for damages
based upon treatment received at the Dental Centers. In addition to the Patient Litigation, the
Debtors contend that at least approximately 1100 additional patients or former patients have
retained counsel to assert similar claims against the Debtors, the Dental Centers and the Dentists.
2 DS means the Disclosure Statement.
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(DS at 16.) The Debtors also contend that [i]t is unknown how many additional patients or
former patients may eventually assert claims. (Id.)
On May 24, 2012, the Court entered an order authorizing the sale of substantially
all of the Debtors assets free and clear of all liens, claims and encumbrances, approving the
asset sale agreement (the Sale Agreement) between the Debtors and the buyer, CSHM LLC
(the Buyer), and authorizing the Debtors assumption and assignment of executory contracts
and unexpired leases. ([Docket No. 418] the Amended Sale Order). Under the Sale Order and
the Sale Agreement, the National Union Policies are Excluded Assets which were not acquired
by the Buyer. (Sale Order, 11.) The Debtors contend that, upon consummation of the Sale
Agreement, the principal assets of the Debtors estate will be insurance coverages and certain
potential causes of action. (DS at 20.)
B. The Debtors Insurance ProgramThe Debtors contend that they maintained insurance coverage to protect against
the risks of its business, including professional liability. (DS at 20.) Among this insurance
coverage, the Debtors contend they maintain insurance policies from National Union: (i) naming
certain of the Debtors as named insureds (the 2008-2010 Entity Policies); and (ii) naming
certain Dentists employed by the Dental Centers as named insureds (the 2008-2010 Dentist
Policies and collectively with the Entity Policies, the National Union Policies). (DS at 20-21.)
As set forth below, the existence or validity of such coverage is under dispute. The National
Union Policies each contain identical clauses providing National Union with the following
contractual rights, among others:
Notice. Written notice shall be given to National Union in the event of any dentalincident which may reasonably be expected to give rise to a claim fordamages to which the insurance applies being made against an insured.
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Defense. National Union has the right and duty to defend the insured against anyclaim to which the insurance applies, subject to National Unions right toinvestigate, defend and appoint an attorney to defend any suit as National Uniondeems expedient.
Assistance and Cooperation. The insured shall cooperate with National Union inthe investigation, settlement or defense of the claim or suit and will assistNational Union in the enforcement or any right against any person or organizationwhich may be liable to the insured because of injury or damage to which theinsurance may also apply.
No Action against National Union. No action shall lie against National Unionunless, as a condition precedent thereto, there shall have been full compliance withall of the terms of the policy.
Assignment. The insureds rights and duties under the insurance may not betransferred.
OBJECTIONS TO APPROVAL OF DISCLOSURE STATEMENT
Section 1125 of the Bankruptcy Code requires that the Disclosure Statement
provide adequate information, defined as:
information of a kind, and in sufficient detail, as far as is reasonablypracticable in light of the nature and history of the debtor and thecondition of the debtors books and records, that would enable ahypothetical reasonable investor typical of holders of claims orinterests of the relevant class to make an informed judgment about theplan, but adequate information need not include such informationabout any other possible or proposed plan.
11 U.S.C. 1125(a)(1).
The determination of what constitutes adequate information is within the
discretion of the bankruptcy court. See In re Cardinal Congregate I, 121 B.R. 760, 764-65
(Bankr. S.D. Ohio 1990). A disclosure statement should not be approved if it fails to provide
sufficient information about risks regarding the means by which a plan is to be funded. See id. at
764. A disclosure statement must contain all material information relating to the risks posed to
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creditors and equity holders under the proposed plan of reorganization. SeeIn re Unichem, 72
B.R. 95 (Bankr. N.D. Ill. 1987).
A. The Disclosure Statement Should Not Be Approved Because It Fails To ProvideAnyInformation About The Claims Resolution Procedures Necessary For InterestedParties To Make An Informed Judgment About The Plan.
The Disclosure Statement fails to provide information concerning the procedures
that the Liquidating Trustee may unilaterally implement for the allowance and payment of
Patient-Related Claims (the Claim Approval Structure (CAS) and Claim Distribution
Procedures (CDP) (DS at pp. 34-35.) Moreover, the Disclosure Statement fails to attach and
provides only vague details about the Liquidating Trust Agreement that will establish the
Liquidating Trust and describe the Liquidating Trustees duties, obligations and powers. (DS at
22, 34-35.) The CDP, CAS, and Liquidating Trust Agreement are essential to understanding the
Debtors strategy for liquidating and paying Patient-Related Claims.3
The Debtors cannot deny that the CAS, CDP and Liquidating Trust are the
primary centerpieces of its proposed reorganization, because they will describe the sole
mechanism for liquidating, determining and paying holders of the over Patient-Related Claims:
Pursuant to the Liquidating Trust Agreement, the LiquidatingTrustee may, subsequent to the Effective Date, implement astructure for the submission, review and allowance of Class 5(a)Claims, and/or for the procedures for distribution from theLiquidating Trust to holders of Allowed Class 5(a) Claims. AnyClaims Approval Structure and/or Claim Distribution Proceduresshall be binding upon and will govern distributions to all Class 5(a)
3In addition, page 25 of the Disclosure Statement refers to Liquidating Trust Procedures andTrust Distribution Procedures that would govern the treatment of Patient-Related Claims.(DS at 25.) Neither the Disclosure Statement nor the Plan contains definitions forLiquidating Trust Procedures or Trust Distribution Procedures. To the extent that theseprocedures are different from the CAS and CDP, the Debtors failure to disclose theseprocedures is an additional and separate reason why the Disclosure Statement fails to provideadequate information under 11 U.S.C. 1125(a)(1).
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Claim holders whose claims are unsatisfied at the time ofestablishment of the structure or procedures, and will provide theexclusive remedy to all holders of unsatisfied Class 5(a) Claims.Any such Claim Approval Structure and/or Claim DistributionProcedures shall require approval by the Trustee Advisory
Committee, the Bankruptcy Court, after notice and hearing, and besubject to such other approvals as provided for in the LiquidatingTrust Agreement. Any monetary distribution to the Holders ofPatient Interests will be determined and paid in accordance withthe approved Claim Approval Structure and/or Claim DistributionProcedures and the Liquidating Trust Agreement.
(DS at 34-35) (emphasis added).
Without the CAS and CDP, National Union indeed all of the Debtors
constituents and interested parties are in the impossible position of having to evaluate the
Disclosure Statement without a complete Plan ever having been circulated. All interested parties
are statutorily entitled to read, digest and analyze the CAS, CDP and Liquidating Trust
Agreement for 25 days prior to the hearing or approval of the Disclosure Statement. They will
provide information concerning the operational guidelines, governing principles and controlling
entities of the Liquidating Trust. Without the CAS, CDP and Liquidating Trust Agreement, the
Plan and Disclosure Statement are substantially incomplete.4
Because the CAS and CDP are missing, the Disclosure Statement fails to provide
any information concerning how the CAS and CDP will value Patient-Related Claims. Such
values lie at the heart of the entire claim resolution process. Moreover, because the Disclosure
Statement fails to provide specific details about the provisions of the Liquidating Trust
4 National Union will not speculate on the precise contents of the CDP but reserves all of itsrights with respect to it, including without limitation, the right to amend and supplementthese Objections if the CDP is eventually filed. On information and belief, National Unionexpects that the CDP may violate its contractual rights and may purport to discharge theDebtors from their contractual obligations under the Policies. As discussed below, thiswould create a substantial risk that the Policies will be violated or that other insurancecoverage may be vitiated and that no insurance coverage would exist for the Patient-Related
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Agreement, the Disclosure Statement fails to provide crucial information about the
administration of the Liquidating Trust. Without these documents, neither National Union nor
any other interested party can possibly make an informed judgment about the merits of the Plan.
Moreover, the Debtors failure to disclose the terms of the CAS, CDP and
Liquidating Trust Agreement prevents National Union from evaluating whether the Liquidating
Trust will ever be required to enforce appropriately rigorous standards to avoid payment of
unmeritorious Patient-Related Claims, or those that are not insured by the National Union
Policies under any theory. (See Section H below.)
Without any of this crucial information it is impossible to understand how the
Liquidating Trust will be implemented and, accordingly, whether the Plan is feasible and/or
capable of satisfying the specific requirements for confirmation under the Bankruptcy Code. The
absence of the CAS, CDP and Liquidating Trust Agreement renders the Plan incomplete and the
Disclosure Statement wholly inadequate in disclosing the terms of the Plan.
B. The Disclosure Statement Should Not Be Approved Because It Fails To ProvideAnyLiquidation Analysis for the Debtors If the Debtors were Liquidated Under Chapter7 of the Bankruptcy Code
11 U.S.C. 1129(a)(7)provides that a plan may only be confirmed if each holderof an impaired claim either accepts the plan or
will receive or retain under the plan on account of such claim orinterest property of a value, as of the effective date of the plan, thatis not less than the amount that such holder would so receive or
retain if the debtor were liquidated under chapter 7 of this title onsuch date.
11 U.S.C. 1129(a)(7), commonly referred to as the best interests test, guarantees that unless it
otherwise agrees, each claimholder will receive at least as much under a proposed plan of
Claims.
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reorganization as it would have received under a liquidation of the debtor under chapter 7 of the
Bankruptcy Code. For this reason, every plan proponent who would rely on the best interests
test must include a liquidation analysis in the disclosure statement. In re Sierra-Cal, 210 B.R.
168, 176 (Bankr. E.D.Cal. 1997).
Here, the Disclosure Statement fails to include any liquidation analysis for the
Debtors, even though the Disclosure Statement expressly states that a copy of the Debtors
Liquidation Analysis is being provided as an Exhibit to the Disclosure Statement. (DS at 3.)
Because the liquidation analysis is missing, the Disclosure Statement fails to provide any
information that would allow a claimholder to determine whether they are truly receiving as
much as they would otherwise receive if the Debtors were liquidated under Chapter 7 of the
Bankruptcy Code.
The Plan Proponents failure to provide a liquidation analysis is especially
problematic because the Disclosure Statement does not explain how the holders of Patient-
Related Claims would receive a better recovery from the proposed Liquidating Trust at the center
of the Plan Proponents Plan than they would if the Debtors were liquidated. As the Disclosure
Statement contemplates, the Debtors proposed Liquidating Trust would use a portion of its
available funds to pay administrative costs (DS at 25), which would not exist if the holders
pursued their claims in the tort system. The absence of a liquidation analysis renders the Plan
incomplete and the Disclosure Statement wholly inadequate in disclosing the Plans potential
economic benefit to claimholders.
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C. The Disclosure Statement Fails To Disclose Adequate Information About TheLiquidating Trustee Or The Trust Advisory Committee That Will Administer The
Proposed Liquidating Trust
The Disclosure Statement fails to disclose the identity of the proposed Liquidating
Trustee or provide any information about the individual. Instead, the Disclosure Statement
provides that an informational notice that will identify the Plan Proponents proposed
Liquidating Trustee will be provided sometime prior to the Confirmation Hearing along with the
Plan Proponents proposed Confirmation Order. (DS at 22.) As the Liquidating Trust is central
to the Plan, the Liquidating Trustee would play a crucial role in the Debtors proposed
reorganization. As a result, knowing the identity of the Debtors proposed Liquidating Trustee
would allow claimholders to determine whether or not the Debtors proposed Liquidating Trust
will be adequately administered. Moreover, the Debtors do not explain why such information
should be withheld from impaired claimholders until just prior to the Confirmation Hearing, and
possibly after they would have voted to accept or reject a plan that largely turns upon the
administration of the proposed Liquidating Trust.
Similarly, the Disclosure Statement fails to identify adequate information about
the Trust Advisory Committee. The Disclosure Statement only states that the Trust Advisory
Committee will be established pursuant to the Liquidating Trust Agreement and identifies three
individuals that the Committee has nominated to serve as initial members. (DS at 22.) Like the
Liquidating Trustee, the Disclosure Statement and Plan make the Trust Advisory Committee
responsible for advising the Liquidating Trustee about the administration of the Liquidating
Trust and the reorganized debtors. (Id.) For this reason, the Disclosure Statement should identify
each member of the Trust Advisory Committee. Alternatively, the Disclosure Statement should
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provide information about how the members of the Trust Advisory Committee will be selected
and who will have the ability to nominate individuals to the Trust Advisory Committee.
D. The Disclosure Statement Fails To Disclose The Details of Potential Contingent FeeArrangements Between the Liquidating Trust and Potential Law Firms RegardingRetention for the Coverage Litigation
Although the Disclosure Statement states that the Committee is currently
negotiating with several law firms to represent the proposed Liquidating Trust in the Coverage
Litigation (DS at 21), the Disclosure Statement provides no information about the potential
contingent fee arrangements that they are proposing for the representation of the Liquidating
Trust. Specifically, the Disclosure Statement does not explain how any contingent fee
arrangement would affect the potential recoveries for holders of Patient-Related Claims. This
information is of critical importance because the Plan Proponents treatment of Patient-Related
Claims would conceivably depend upon the Liquidating Trusts allocation of a finite sum of
money, from which it will pay claims. A contingent fee arrangement between a law firm and the
proposed Liquidating Trust could significantly impact the amount of funds available to distribute
to holders of Patient-Related Claims. Therefore, the Disclosure Statement should provide
information concerning the contingent fee arrangement that they propose to offer to law firm that
will represent the Liquidating Trust in the Coverage Litigation.
E. The Disclosure Statement Fails to Adequately Disclose The Disputed FactsConcerning the 2008-2010 Entity Policies and 2008-2010 Dentist Policies
The Disclosure Statement fails to provide adequate information about the
National Union Policies. (DS at 20-21.) Indeed, the Disclosure Statements description of these
Policies is inadequate and misleading.
First, the Debtors descriptions of the National Union Policies are incomplete.
The 2008-2010 Dentist Policies consist of two separate insurance policies National Union issued
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to debtor SSHC, LLC that potentially afford, subject to the terms, conditions, limitations and
exclusions contained therein, professional liability coverage limited to damages because of a
covered dental incident for certain Dentists scheduled as individual named insured dentists for
the policy periods from December 1, 2008 through December 1, 2009 (the 2008-2009 Dentist
Policy) and December 2009 through December 1, 2010 (the 2009-2010 Dentist Policy). The
limits of insurance set forth under each of the 2008-2010 Dentist Policies are $1 million for
Each Dental Incident Per Individual Named Insured Dentist subject to $3 million Individual
Named Insured Dentist Aggregate. The limits of insurance for each of the 2008-2010 Dentist
Policies are further identified as none for Each Dental Incident All Other Insureds Combined
Limit and All Other Insureds Aggregate Limit.
The 2008-2010 Entity Policies consist of two separate insurance policies National
Union also issued to debtor SSHC, LLC that potentially afford, subject to the terms, conditions,
limitations and exclusions contained therein, professional liability coverage limited to damages
because of a covered dental incident for the Debtors, as named insureds, and certain other
entities, including scheduled Dental Centers, as additional insureds for the policy periods from
September 26, 2008 through September 26, 2009 (the 2008-2009 Entities Policy) and
September 26, 2009 through September 26, 2010 (the 2009-2010 Entities Policy). The limits
of insurance set forth under each of the 2008-2010 Entities Policies are $5 million Each Dental
Incident Per Individual Named Insured Dentist subject to a $6 million Individual Named
Insured Dentist Aggregate Limit. The limits of insurance for each of the 2008-2010 Entities
Policies are further identified as none for Each Dental Incident All Other Insureds Combined
Limit and All Other Insureds Aggregate Limit.
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Second, the Debtors descriptions of the National Union Policies either fail to
disclose or mischaracterize relevant coverage exclusions under the National Union Policies. In
this respect, each of the National Union Policies afford coverage, if any, for sums that National
Unions respective insureds are legally obligated to pay as damages because of certain covered
dental incidents, but only in connection with claims either first made in writing or deemed to
have been made during the applicable policy period or otherwise reported during an Extended
Reporting Period, if any. The 2008-2009 Dentist Policy and the 2008-2009 Entities Policy have
long since expired and so, in the absence of an Extended Reporting Period, there can be no
coverage under either of those policies absent claims reported or deemed to have been reported
during the applicable policy period. Because all, or virtually all, of the Patient-Related Claims
and similar claims against Dentists and Clinics that have been made and may in the future be
asserted in the Patient Litigation will not have been reported during the applicable policy
period, there can be no coverage under the 2008-2009 Dentist Policy or the 2008-2009 Entities
Policy.
Furthermore, there can be no coverage under any of the National Union Policies
absent damages because of a dental incident, which is defined in each of the National Union
Policies to mean as any act, error or omission in the rendering of or failure to render
professional services by an insured or by any person for whose acts, errors, or omissions the
insured is held legally liable. Professional services are defined under the National Union
Policies to mean dental services provided to others by a person trained and qualified to perform
those services pursuant to a valid and unrestricted dental, dental hygiene or dental assisting
certificate or license. Additionally, coverage may further be limited or otherwise excluded under
each of the National Union Policies based, among other things, on: (1) Exclusion B, which bars
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coverage for dental incidents arising out of any dishonest, fraudulent, criminal or knowingly
wrongful acts, errors or omissions; (2) Exclusion O, which bars coverage for an expected or
intended dental incident; (3) Exclusion A, which bars coverage for dental incidents that
occurred prior to the inception date of each of the National Union Policies and which any insured
knew or should have known would result in, or had resulted in, a claim; and (4) the Other
Insurance Clause.
Disclosure of these specific coverage exclusions is critical to a comprehensive
understanding of the Debtors purported coverage under the National Union Policies. As a
result, the Debtors descriptions of the National Union Policies in the Disclosure Statement
should contain language that adequately informs potential claimholders about these additional
facts concerning these Policies.
F. The Disclosure Statement Fails to Adequately Disclose Relevant Facts Concerningthe Governmental Investigations Involving the Debtors
The Disclosure Statement also fails to provide adequate information concerning
the U.S. Department of Justice and state Attorneys General Investigations. (DS at 15.)
Specifically, the Debtors description of the DOJ Investigation and State Investigations is
inaccurate and incomplete, in part, because the Debtors have not accounted for three qui tam
lawsuits commenced by former employees of certain of the Dental Centers against the Company
and the respective Dental Centers. These qui tam lawsuits preceded and, indeed, were
responsible for prompting the subsequent nationwide Medicaid fraud investigation of the
Company by the DOJ, the OIG and various state authorities, including several Attorneys General
offices. As acknowledged by the DOJs press release dated January 20, 2010, the governments
investigation of the Company resulted in the settlement allegations of Medicaid fraud made
against the Company under the False Claim Act in exchange for $24 million, plus interest. The
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press release further credits the governments investigation of the Company to three lawsuits
filed under the qui tam, or whistleblower, provisions of the False Claims Act. The qui tam
actions referenced in the DOJs press release were each filed by former employees of certain of
the Dental Centers and include: United States ex rel. McDaniel v. FORBA Holdings, LLC, No.
07-3416 (D. Md.), filed December 21, 2007; United States of America and Commonwealth of
Virginia ex rel. Angela Crawford v. Small Smiles of Roanoke LLC, Case No. 7:08-cv-00370
(W.D. Va.), filed June 12, 2008; and John J. Haney o/b/o United States of America v. Childrens
Medicaid Dental of Columbia, LLC d/b/a Small Smiles, Case No. 3:08-CV2562 (D.D.C.),
filed July 16, 2008.
Furthermore, the Debtors suggestion that the investigative news report airing on
WJLA ABC 7 local news, concerning alleged abuses at the Dental Centers in the Washington
D.C. area, was either contemporaneous with or immediately followed the government
investigation is misleading because those events occurred in the reverse order the government
investigation by the DOJ, OIG and others followed the first of the qui tam actions, which was
filed in December 2007, as well as the news report, which aired in November 2007.
As a result, the Disclosure Statement should contain language that adequately
discloses these additional facts concerning the governmental investigations to potential
claimholders.
G. The Disclosure Statement Fails to Adequately Disclose Relevant Facts Concerningthe Patient Litigation and Coverage Litigation
The Debtors version of the history of the underlying Patient Litigation and the
Coverage Litigation is inaccurate and misleading. (DS at 16-17.)
First, the Debtors description of the history of the Patient Litigation is
incomplete. Since the Companys settlement of the Medicaid fraud investigation with the DOJ in
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January 2010, a total of ten lawsuits (four in New York, three in Ohio and three in Oklahoma)
have been filed against the Company and certain of the Dentists and Dental Centers. To date, at
least three of those lawsuits (two in Ohio and one in Oklahoma) have been dismissed and are no
longer pending against the Debtors or the corresponding Dentists or Dental Centers. In addition,
three lawsuits have been filed against certain of the Dentists and Dental Centers, but not the
Company, in New York, Colorado and Oklahoma. Of these three lawsuits, none of which
involve the Company, the Dental Center named in the Oklahoma lawsuit has since settled and
been dismissed as a defendant. Accordingly, of the thirteen (13) lawsuits filed against the
Company, the Dentists and/or the Dental Clinics (collectively, the Patient Litigation), three
have been dismissed in their entirety and three do not involve the Company at all. At present,
Patient Litigation involving the Company, certain Dentists and/or certain Dental Centers is
underway in New York, Oklahoma, Ohio and Colorado.
Second, the Plan Proponents inaccurately suggest that National Union denied
coverage for the Patient Litigation and commenced the Coverage Litigation seeking rescission or
reformation of the National Union Policies in connection therewith, presumably to avoid
National Unions policy obligations. (DS at 16-17.) To the contrary, National Union has
honored and continues to honor all of its obligations under the National Union Policies
irrespective of the rescission and reformation causes of action asserted in the Coverage
Litigation. In that regard, under the terms, conditions, limitations and exclusions of each of the
National Union Policies, National Union has a duty to defend any claim to which the National
Union Policies apply, but has no such duty as to any claim to which the National Union
Policies do not apply. Therefore, National Union has afforded a defense to its insureds under the
National Union Policies subject to a full and complete reservation of rights with respect to any
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and all lawsuits, including the Patient Litigation, wherein National Unions duty to defend has
been triggered by allegations of potentially covered dental incidents as set forth in each of the
National Union Policies. National Union has also disclaimed coverage for lawsuits, including
those comprising the Patient Litigation, whenever the corresponding allegations in those
complaints did not implicate coverage under the National Union Policies.
Accordingly, and notwithstanding any suggestion to the contrary by the Debtors,
National Unions recognition of its duty to defend, and its corresponding agreement to undertake
the defense of its insureds, under the National Union Policies was in no way influenced by the
Coverage Litigation or otherwise offered in exchange for any consideration in the Coverage
Litigation. Instead, National Unions decision to defend was solely based upon the allegations
asserted in each of the pleadings filed in the Patient Litigation and the language of the National
Union Policies. At present, National Union is defending the Debtors and those Dentists and/or
Dental Centers that qualify as insureds under the National Union Policies in connection with
each of the lawsuits comprising the Patient Litigation subject to a full and complete reservation
of all of National Unions rights under the National Union Policies.
Furthermore, the Debtors fail to disclose that their counterclaim for bad faith
refusal to honor the National Union Policies as asserted in the Coverage Litigation was dismissed
by the United States District Court for the Middle District of Tennessee upon motion brought by
National Union.
Third, the Debtors description of National Unions rescission and reformation
causes of action as asserted in the Coverage Litigation is inadequate and thus misleading. In the
Coverage Litigation, National Union is seeking to rescind the National Union Policies because of
the Companys failure to disclose certain material information to National Union that increased
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National Unions risk of loss thereunder. National Union contends that the Company failed to
disclose, among other things, prior to issuance of the National Union Policies: the governments
nationwide Medicaid fraud investigation targeting the Company, the Dentists and the Dental
Centers; the existence of and allegations raised in the three qui tam actions brought under the
False Claim Act against the Company and certain of the Dental Centers that prompted the
governments nationwide Medicaid fraud investigation; the multiple claims relating to the
governments nationwide Medicaid fraud investigation that the Company made to its prior
professional liability insurance carrier; the non-renewal of the Companys prior professional
liability insurance by its former insurance carrier due to claims experience; and the Companys
own knowledge of systemic problems with the Dental Centers while under the management of
the former owners, including, according to allegations the Company made against the former
owners in a lawsuit filed in a Colorado federal court, a pervasive business culture that
emphasized production over quality dental care in contravention of applicable laws and accepted
standards of dental care.
Alternatively, National Union seeks in the Coverage Litigation to reform the
National Union Policies to reflect the true intent of the parties, including but not limited to the
intended limits of liability under the 2008-2010 Entities Policies. In that regard, National Union
contends that, as currently written, neither of the 2008-2010 Entities Policies affords any
coverage to scheduled named insureds, including SSHC DIP, LLC and the other Debtors, or
scheduled additional insureds, including any of the scheduled Dental Centers, because none of
them are Individual Named Insured Dentists. National Union further contends that neither
National Union nor the Company intended for each of the 2008-2010 Entities Policy to provide
no coverage to the entities scheduled as named insureds or additional insureds thereunder.
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Instead, National Union asserts that each of the 2008-2010 Entities Policies should be reformed,
consistent with the 2008-2010 Dentist Policies, to afford limits of insurance of $5 million Each
Dental Incident All Other Insureds Combined Limit subject to a $6 million All Other Insureds
Aggregate Limit and none for Each Dental Incident Per Individual Named Insured Dentist
and Individual Named Insured Dentist Aggregate Limit.
As a result, the Disclosure Statement should contain language that adequately
discloses these additional facts concerning the Patient Litigation and Coverage Litigation to
potential claimholders.
H.
The Disclosure Statement Fails To Disclose That The Plan Violates National UnionsRights and the Debtors Contractual Obligations and Fails To Disclose The Risk
That The Plan May Thus Vitiate Available Insurance Coverage
For any insurance coverage to be potentially available, the Debtors must respect
National Unions contractual rights and must honor their own contractual obligations. Because
the Plan contemplates violating National Unions contractual rights and the Debtors contractual
obligations, the Disclosure Statement must discuss the ways in which the National Unions rights
are impaired under the Plan and must disclose the risk that no coverage will be available to
satisfy Patient-Related Claims.
1. The Disclosure Statement Should Disclose That The Plan ViolatesNational Unions Right To Defend, Investigate and Settle the Patient-
Related Claims And As A Result, May Vitiate Coverage.
National Union has the contractual right to participate in the defense,
investigation, and settlement of claims to which the insurance applies. The Disclosure
Statement, however, fails to adequately disclose that the Plan contemplates violating this
contractual right. (DS at 35) (Any monetary distribution to the Holders of Patient Interests will
be determined and paid in accordance with the approved Claim Approval Structure and/or Claim
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Distribution Procedures and the Liquidating Trust Agreement). In addition, the Disclosure
Statement fails to disclose the material risk that the Plans violation of this fundamental
contractual right could vitiate any available coverage under the 2008-2010 Entity Policies and
2008-2010 Dentist Policies.
In Wallace & Gale, In re The Wallace & Gale Co., No. 85-4-0092 (Chapter 11),
Transcript Of Oral Ruling (Bankr. D. Md. July 22, 1998), the bankruptcy court was asked to
confirm a proposed plan of reorganization that like the Plan purported to eliminate the
insurers rights to control the defense, investigation, and settlement of asbestos bodily injury
claims for which coverage was sought. In a ruling from the bench, the Wallace & Gale court
denied confirmation of the plan and acknowledged the importance of the insurers contractual
rights, holding that a plan that violates such rights cannot be confirmed:
If it is to be liable for any judgment rendered against the insured,[an insurer] has a right to make certain that a proper defense ismade to the claim and that unwarranted or overstated andconclusive claims are exposed and defeated. . . .
[W]e are dealing with a contract. The Court does not have thepower to alter the terms giving the insurer the right to control thedefense with the duty that is imposed upon that the insurers todefend and indemnify. . . .
I find that the cornerstone of the Plan is the wrenching away ofthese controls bargained for by the [insurance] carriers. And inplacing these same controls in the hands of the persons suing theDebtor.
Trans. at 119-21 (citing Sherwood Brands, Inc. v. Hartford Acc. & Indem., 347 Md. 32, 689 A.2d
1078 (1997)); see alsoACandS Inc. v. Aetna Cas. & Sur. Co., 764 F.2d 968 (3d Cir. 1985)
(recognizing the enforceability of an insurers right to control the defense and settlement of
claims in asbestos bodily injury context). Thus, the Disclosure Statement must disclose the
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violation of these contractual rights and the material risks associated with the Plans attempt to
violate the contractual rights.5
Here, the National Union Policies (and related contractual agreements) provide
that National Union will undertake the defense of the Patient Litigation, as well as the
investigation, prosecution and settlement of Patient-Related Claims, including claims asserted in
the Patient Litigation. As set forth in the insuring agreements contained in each of the National
Union Policies, National Union has the right to investigate, defend, and appoint an attorney to
defend any suit as [National Union] deem[s] expedient.6 If the CAS and CDP do not preserve
National Unions contractual rights to undertake the investigation, prosecution and resolution of
Patient Related Claims, the Plans provisions could vitiate the 2008-2010 Entity Policies and
2008-2010 Dentist Policies.
Further, the risk that the CAS and CDP could vitiate coverage is evident because
the Disclosure Statement admits that the amount of additional patients or former patients that
may eventually assert claims is partially dependent upon the outcome of the pending Patient
Litigation. (DS at 16) (The number of additional claims that may be asserted is likely
dependent in part on the extent to which the plaintiffs in the New York Litigation and the
Oklahoma Litigation are successful in establishing liability in their cases.) Thus, if the as-yet
undisclosed CAS and CDP contain generous procedures and structures that do not preserve
5The Disclosure Statement also fails to disclose the risk that the Plan is not feasible because
implementation of the Plan would purport to deprive National Union of its statutory right toobject to unmeritorious Patient-Related Claims, which is independent of their contractualrights. See 11 U.S.C. 502(a); In re Keck, Mahin & Cate, 241 B.R. 583, 596 (Bankr. N.D.Ill. 1999);In re Standard Insulations, Inc., 138 B.R. 947 (Bankr. W.D. Mo. 1992).
6 The National Union Policies also provide that National Union will not, however, settle anyclaim or suit without the consent of the designated representative of [the Company],which may not be unreasonably withheld.
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National Unions contractually mandated participation rights, such procedures and structures
could increase the amount of future claimants which would have the effect of jeopardizing the
Debtors contended insurance coverage. Moreover, such generous procedures and structures for
the resolution of claims asserted in the Patient Litigation could also dilute the recoveries of all
Patient-Related Claims.
2. The Disclosure Statement Should Disclose That The Plan May VitiateCoverage By Violating the Debtors Continuing Duty To Cooperate
With National Union In The Defense And Investigation of Patient-
Related Claims
The Debtors have an affirmative, continuing duty to cooperate in the defense and
investigation of all claims under the National Union Policies. The Disclosure Statement,
however, fails to adequately disclose that the Plan contemplates violating this contractual
obligation and that such a violation could vitiate any available insurance coverage for Patient-
Related Claims. See 14 Couch on Ins. 199:13 (2003) (As a general rule, an insureds breach
of a cooperation clause precludes coverage and releases the insurer from its responsibilities).
The Disclosure Statement fails to disclose that the Plan does not affirmatively
require the Liquidating Trust or the Liquidating Trustee to satisfy all of their continuing
contractual obligations that are conditions of continued insurance coverage.
Moreover, although the Disclosure Statement states that the as-yet undisclosed
CAS and CDP will be the exclusive means for treatment of Patient-Related Claims under the
Plan (DS at 34-35), the Disclosure Statement fails to describe these procedures and structures to
allow National Union to ascertain whether such structures and procedures protect National
Unions contractual right to cooperation.
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Because the Plan purports to disregard the Debtors post-confirmation duties of
cooperation and other contractual obligations to National Union, there is a substantial yet
undisclosed risk that any available insurance coverage may be vitiated. The failure of the
Disclosure Statement to adequately disclose the material risks that insurance coverage may not
be available makes it materially misleading.
3. The Disclosure Statement Should Disclose That The Plan May VitiateCoverage By Violating Certain Anti-Assignment Restrictions
The insurance coverage that the Plan Proponents contend is provided by National
Union is subject to certain restrictions prohibiting the assignment of coverage. Indeed, as one of
the condition precedent to coverage, each of the National Union Policies expressly states that the
Companys rights and duties under this insurance may not be transferred. The Plan, however,
contemplates that the Debtors will transfer certain Insurance Rights against the Insurance
Carriers for the Coverage of the Patient-Related Claims by transferring the post-confirmation
Debtors Equity Interest to the Liquidating Trust. (DS at 22.) The Disclosure Statement must
disclose the material risk that this disguised transfer of the Insurance Rights may be
unenforceable under applicable state insurance law and may vitiate any available insurance
coverage.
4. The Disclosure Statement Should Disclose That The Plan May VitiateCoverage By Violating National Unions Right To Pay Only Covered
Claims
It is well settled that insurance proceeds may be used only for the payment of
actually covered claims, not for the insureds general liabilities. See, e.g., Celotex Corp. v. AIU
Ins. Co. (In re Celotex Corp.), 152 B.R. 661, 664-65 (M.D. Fl. 1993) (holding that even in
bankruptcy, the insured continues to have the burden of proving that its excess losses are the
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result of a covered claim as defined by the policy). The Disclosure Statement and Plan,
however, contemplate that insurance proceeds will be used to pay non-covered claims.
Specifically, the Plan and Disclosure Statement propose to establish as-yet undisclosed CAS and
CDP to treat Patient-Related Claims, which is defined as
any Claim against, or remedy or liability sought from anyDebtor, whether or not such Claim, remedy or liability is reducedto judgment, liquidated, unliquidated, fixed, contingent, matured,unmatured, disputed, undisputed, legal, equitable, secured orunsecured, whether or not the facts of or legal bases therefor areknown or unknown, under any theory of law, equity, admiralty orotherwise (including piercing he corporate veil, alter ego andsimilar theories), arising out of actual or alleged property damage,
death, bodily injury, sickness, disease, medical monitoring or otherpersonal injuries (whether physical, emotional or otherwise) to theextent allegedly arising out of or based on, directly or indirectly, inwhole or in part, the provision of dental services by any Debtor oran Entity for which any Debtor allegedly has liability, includingany Claim, remedy or liability for compensatory damages (such asloss of consortium, lost wages or other opportunities, wrongfuldeath, medical monitoring, survivorship, proximate, consequential,general and special damages) or punitive damages related thereto,and any Claim under any settlement of a Patient-Related Claimentered into by or on behalf of any Debtor prior to the
Commencement Date.
(Plan at 7) (emphasis added). The Plans definition of Patient-Related Claim is broad enough to
cover both covered claims under the 2008-2010 Entity Policies and 2008-2010 Dentist Policies
and non-covered claims. This is of particular importance because many of the claims asserted in
the Patient Litigation are for intentional torts such as battery. Indeed, the gravamen of the
Patient-Related Claims is intentional misconduct allegedly motivated by financial gain. While
such intentional torts would not be covered claims under the National Union Policies, they would
be encompassed within the definition of Patient-Related Claim under the proposed Plan.
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Moreover, the definition of Patient-Related claim is also broad enough to cover
non-valid claims. (Plan at 7) (definition of Patient-Related Claim covers claims whether or not
the facts of or legal bases therefor are known or unknown)
The Disclosure Statement must disclose that any available insurance coverage
exists only for actually covered Claims under the National Union Policies, to the extent that such
Policies are determined to exist and/or are not rescinded, and that attempts to use insurance
proceeds for any other purpose could vitiate coverage in its entirety.
I. The Disclosure Statement Should Not Be Approved Because It Fails To DiscloseAny Legal Basis That Would Give The Liquidating Trust The Right To Assumption
of Dentists And Clinics Rights To Compromise Or Settle Claims That They MayHave Against Any Insurer Without Right To Any Distribution Under the Plan
The Plan seems to purport to unilaterally appropriate to the Liquidating Trust the
Dentists right to compromise or settle claims without the consent of the Dentists or any
compensation:
the Dentists do on the Effective Date irrecoverably grant theLiquidating Trust the right and power (subject to approval by the
Trust Advisory Committee and the approval of the BankruptcyCourt after notice and a hearing) to compromise, settle, release,and receive the proceeds of any and all claims that the Dentistsmay have against any or all Insurance Carriers, subject in all eventsto the restrictions contained in Section 4.18(c) of the Plan.
(DS at 35) Similarly, the Plan also purports to unilaterally appropriate to the Liquidating Trust
the Clinics right to compromise or settle claims without consent or compensation:
the Clinics do on the Effective Date irrecoverably grant theLiquidating Trust (subject to approval by the Trust AdvisoryCommittee and the approval of the Bankruptcy Court after noticeand a hearing) to compromise, settle, release and receive theproceeds of any and all claims that the Clinics may have againstany or all Insurance Carriers, subject in all events to the restrictionscontained in Section 4.19(c) of the Plan.
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(DS at 36). The Disclosure statement fails to identify a legal basis that would allow it to
appropriate the Dentists and Clinics property without any compensation or consent, and fails to
disclose that in the absence of consideration this unilateral appropriation may be unenforceable.
RESERVATION OF RIGHTS
National Union expressly reserves, and does not waive, all of its rights, defenses,
limitations and/or exclusions in connection with the contractual rights, contractual obligations,
applicable law or otherwise. National Union further reserves all rights to assert any and all such
rights, defenses, limitations and/or exclusions in any appropriate manner or forum whatsoever
(including, without limitation, any of its rights to have any non-core matter relating to the
interpretation of its contractual rights and the Debtors contractual obligations adjudicated by the
United States District Court). Nothing contained in these Objections shall be deemed to expand
any coverage that may otherwise be available under any insurance policies or any rights to
payment under settlements.
National Union further reserves all of its rights to raise the issues contained in
these Objections and any other related issues in any procedurally appropriate contested matter
and/or adversary proceeding including, without limitation, objections to confirmation of the Plan
and a separate adversary proceeding requesting any declaratory and/or injunctive relief with
respect to any contractual rights that may be adversely affected by confirmation of the Plan.
National Union further reserves all of its rights to object to any claim for coverage
under any policies and/or any claim for payment under any settlement agreements, to seek
declaratory and/or injunctive relief to the extent that treatment of the contractual rights,
contractual obligations and/or confirmation of the Plan violates any terms or conditions of any of
policies and/or settlements or gives rise to any defenses on behalf of National Union.
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Nothing in these Objections shall be construed as an acknowledgment that any
policies or pre-petition settlement agreements cover or otherwise apply to any claims, losses or
damages on account of any claims or otherwise, or that any such claims or causes of action are
eligible for payment. National Union reserves the right to seek an adjudication that the Debtors
have waived or forfeited any available coverage under the policies.
Finally, National Union reserves its rights to amend, modify or supplement these
Objections in response to, or as a result of, the filing of additional documents by the Debtors, any
discovery being conducted in connection with the Plan and Disclosure Statement, and/or any
submission in connection with the Plan, Disclosure Statement or this bankruptcy case filed by
any party-in-interest. National Union also reserves the right to adopt any other objections to
approval of the Disclosure Statement filed by any party.
CONCLUSION
For the reasons set forth above, the Disclosure Statement describes a Plan that is
unconfirmable as a matter of law, fails to provide adequate information regarding material
aspects of the Plan, fails to disclose that the Plan violates National Unions contractual and legal
rights, fails to disclose material risks associated with the Plan. Without such fundamental
information, the Disclosure Statement cannot satisfy the minimum standards required by section
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1125 of the Bankruptcy Code and is materially misleading. Accordingly, the Disclosure
Statement should not be approved.
Dated: December 28, 2012
Respectfully submitted,
/s/ H. Buckley Cole
H. Buckley Cole, Esq. (BPR #011811)Hall Booth Smith & Slover, P.C.611 Commerce StreetThe Tower, Suite 3000Nashville, TN 37203T: 615.313.9911F: [email protected]
Michael S. Davis, Esq. (Pro Hac Vice)Zeichner Ellman & Krause, LLP575 Lexington AvenueNew York, NY 10022T: 212-223-0400F: [email protected]
Scott D. Greenspan, Esq. (Pro Hac Vice)Sedgwick LLP
225 Liberty Street28th FloorNew York, NY 10281-1008T : 212-422-0202F : [email protected]
#694261v4/JVR/11120.001
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CERTIFICATE OF SERVICE
I hereby certify that on this the 28th day of December, 2012 a true and correct copy of the
foregoing Document was filed electronically. Notice of this filing was sent by operation of the
Courts electronic filing system to all parties indicated on the electronic filing receipt (including
the parties listed below). Parties may access this filing through the Courts electronic filing
system.
Katie G. StenbergWaller Lansden Dortch & Davis, LLP511 Union Street, Suite 2700Nashville, TN 37219
Beth Roberts DerrickOffice of the U. S. Trustee
701 BroadwaySuite 318Nashville, TN 37203
John H. RowlandBaker, Donelson, Bearman,
Caldwell & Berkowitz, P.C.211 Commerce Street, Suite 800Nashville, Tennessee 37201
Paul K. FerdinandsKing & Spalding
1180 Peachtree StreetAtlanta, Georgia 30309
Robert A. Guy, Jr.Frost Brown Todd, LLC
The Pinnacle at Symphony Place150 3
rdAvenue South, Suite 1900
Nashville, Tennessee 37201
By: /s/H. Buckley Cole
H. Buckley Cole (BPR #011811)
Hall Booth Smith, P.C.
611 Commerce Street, Suite 3000
Nashville, TN 37203