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  1. 1. CERTIFICATE OF SERVICE I, Christopher M. Samis, hereby certify that a true and correct copy of the foregoingAlleged Debtors Response to Petitioning Creditors Motion Pursuant to Del. Bankr. L. R. 9006-1 (e) for an Order Shortening Time for Notice of the Hearing to Consider the Expedited Motionof Petitioning Creditors for the Appointment of a Trustee Pursuant to 11 US. C. §§ 105(a),1I 04(a)(I) and II 04(a)(2) was served upon all parties in interest, by first class mail and/or handdelivery on May 21, 2012, at the following addresses:BDCM Opportunity Fund II, LP United States TrusteeOne Sound Shore Drive 844 King Street, Room 2207Suite 200 Lockbox #35Greenwich, CT 06830 Wilmington, DE 19899-0035Black Diamond CLO 2005-1 Adviser L.L.C. Adam G. Landis, Esq.One Sound Shore Drive Kerri K. Mumford, Esq.Suite 200 Landis Rath & Cobb LLPGreenwich, CT 06830 919 Market Street Suite 1800Spectrum Investment Partners LP Wilmington, DE 198011250 Broadway19th Floor Counsel to Petitioning CreditorsNew York, NY 10001RLFI 604674lv.2
  2. 2. IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWAREIn re: Chapter 11ALLIED SYSTEMS HOLDINGS, INC., Case No. 12-11564 (CSS) Alleged Debtor. Re: Docket No. 12In re: Chapter 11ALLIED SYSTEMS, LTD. (L.P.), Case No. 12-11565 (CSS) Alleged Debtor. Re: Docket No. 12 Hearing Date: TBD Objection Deadline: TBD ALLEGED DEBTORS RESPONSE TO PETITIONING CREDITORS MOTION PURSUANT TO DEL. BANKR. L.R. 9006-l(e) FOR AN ORDER SHORTENING TIME FOR NOTICE OF THE HEARING TO CONSIDER THE EXPEDITED MOTION OF PETITIONING CREDITORS FOR THE APPOINTMENT OF A TRUSTEE PURSUANT TO 11 U.S.C. §§ lOS(a), 1104(a)(l) AND 1104(a)(2) COME NOW the Alleged Debtors and file this response seeking denial of the Petitioning Creditors Motion Pursuant to Del. Bankr. L.R. 9006-I(e) for an Order Shortening Time for Notice of the Hearing to Consider the Expedited Motion of Petitioning Creditors for the Appointment of a Trustee Pursuant to II U.S. C. 105(a), 1104(a)( I) and II04(a)(2) (the "Motion to Shorten Time"). In making this response, the Alleged Debtors do not waive their request that venue of this case be transferred to the United States Bankruptcy Court for the Northern District of Georgia, where their earlier Chapter 11 caseS are pending. PRELIMINARY STATEMENT In their motion for the appointment of a trustee, the Petitioning Creditors (two hedge funds that present themselves as three creditors by virtue of one hedge funds having divided its ownership with an affiliate) assert that "[t]his Motion and these cases are not about a group of RLFl 604674lv.2
  3. 3. disgruntled minority lenders in a credit facility." Expedited Motion of Petitioning Creditors forthe Appointment of a Trustee pursuant to 11 U.S.C. §§ 105(a), 1104(a)(J) and 1104(a)(2)[Docket no. 13] p. 6, filed May 17, 2012 (Trustee Motion"). Do not believe it. The TrusteeMotion, as well as the commencement of these involuntary cases, is nothing more than a tacticalmove by the hedge funds to gain leverage in ongoing negotiations. 1 Even if the Trustee Motion were on firm ground (which it is not), there is no question thata hearing during the gap period would be inappropriate. Section 303(g) provides for theappointment of an interim trustee during the gap period only if an order for relief under Chapter7 is sought and if necessary to prevent loss to the estate. In the one case relied upon byPetitioning Creditors for the appointment of a trustee during the gap period in an involuntarycase seeking an order for relief under Chapter 11, the bankruptcy court found extraordinarycircumstances where the debtor was not operating its business and was fraudulently diverting itsassets during the gap period. To that end, the court concluded that serious and irreparable injurywould result without the immediate appointment of an independent trustee. Nothing in the Motion to Shorten Time or the supporting affidavits comes close toalleging, must less proving, any exigent circumstance that would justify hearing the TrusteeMotion during the gap period, much less taking the drastic step of shortening the AllegedDebtors time to respond and prepare for a hearing on the appointment of a trustee. As for theirallegation of gross mismanagement, the Petitioning Creditors rely on the Alleged Debtorsceasing, over a year ago, to provide services at unprofitable rates to certain customers. Indeed,the vast majority of the allegations relate to events that took place in 2007 (the appointment ofthe board and senior management), 2008 (operating losses and defaults under the senior secured These hedge funds purchased their interests on the secondary market; however, they do not reveal whenthey purchased their interest and at what discount, notwithstanding that Bankruptcy Rule 1003 specifically requiresthis informalion from transferees. 2RLFI 6046741 v.2
  4. 4. credit facility) and 2009 (amendments to the credit facility). Notably, Black Diamond andSpectrum fail to identify any purported wrongdoing in 2012 that would give rise to theappointment of a trustee. As for their allegation that a trustee is needed immediately in thebest interests of creditors, the Petitioning Creditors complain that Alleged Debtors have beenunwilling to engage in negotiations with respect to restructuring. Even if this were true -- whichit is not, this is hardly an issue to be addressed during the gap period. As set forth in the Declaration of Scott Macaulay filed herewith, the Alleged Debtors andtheir 20 or so subsidiaries (collectively "Allied") have been managing their business as well as itcan be managed under the difficult circumstances in their industry over the last few years. - 3RLF!604674lv.2
  5. 5. As to the Trustee Motion itself, the Alleged Debtors will respond in detail in due course,But they unequivocally state that (1) they have not mismanaged their business; and (2) they donot have conflicting fiduciary duties so as to make the appointment of a trustee in the bestinterest of creditors. The Court should accordingly deny the Motion to Shorten Time, and ultimately deny therequest for an appointment of a trustee. FACTUAL OVERVIEW I. Allied Systems Holdings, Inc., which is an alleged debtor, is the ultimate parentof about 20 other companies including Allied Systems, Ltd. Allied Systems Holdings, Inc. is aprivately held Delaware corporation headqljartered in Atlanta, Georgia. Allied SystemsHoldings, Inc. has three direct subsidiaries: Allied Automotive Group, Inc., a Georgiacorporation, Axis Group, Inc. also a Georgia corporation, and Haul Insurance Limited, which is acaptive insurance company incorporated under the laws of the Cayman Islands. Allied System,Ltd., which is the other Alleged Debtor, is a Georgia limited partnership and is a subsidiary ofAllied Automotive Group, Inc. 2. Allieds major line of business is carried out by Allied Automotive Group, Inc.and its direct and indirect subsidiaries (collectively, the "Allied Automotive Group"). 2 Thismajor line of business, known in the industry as "car-haul," is the transport of light vehicles,such as automobiles, sport-utility vehicles and light trucks, from manufacturing plants, ports,auctions, and railway distribution points to automobile dealerships in the United States and2 The following Allied subsidiaries are part of the Automotive Group: Allied Automotive Group, Inc.;Allied Systems, Ltd. (L.P.); Allied Systems (Canada) Company; QAT, Inc.; RMX LLC; Transport Support LLC;F.J. Boutell Driveaway LLC; GACS Incorporated; Commercial Carriers, Inc.; and Allied Freight Broker LLC. 4RLFl 6046741 v.2
  6. 6. Canada. The trips are generally what are known in the industry as "short hauls," with eachaveraging less than two hundred miles. Allieds major customers are automobile manufacturers. 3. Allied Automotive Group transports light vehicles by means of tractor trailers (the"Rigs") specially designed for transporting light vehicles. As of the end of 2011, Allied ownedabout 2,400 Rigs, which operated out of about 44 terminals, most of which were leased andlocated in the United States and Canada. 4. Allied Automotive Groups drivers and most of its terminal employees areunionized. These employees (the "Teamster Employees") are members of local unions affiliatedwith the International Brotherhood of Teamsters (the "Teamsters"), which negotiates on behalfof the local unions and their members. Allied employs about 1,835 people of whom about 1,062are Teamster Employees. 5. Allieds much smaller line of business is carried out by Axis Group, Inc. and itsdirect and indirect subsidiaries (collectively the "Axis Group"). 3 This line of business includesarranging for and managing vehicle distribution services, automobile inspections, auction andyard management services, vehicle tracking; vehicle accessorizing, and dealer preparationservices for the automotive industry in the United States and Canada, and providing yardmanagement services in Mexico. The Axis Group operates from 39 terminals located in theUnited States, Canada, and Mexico. The Original Chapter 11 Case 6. The Alleged Debtors and most of their direct and indirect subsidiaries(collectively "Allied") were reorganized in Chapter 11 cases (collectively the "Original Chapter11 Case") that were filed in the Northern District of Georgia on July 31, 2005 and that resulted in3 The following Allied subsidiaries are part of the Axis Group: Axis Group, Inc.; CT Services, Inc.; CardinTransport LLC; Terminal Services LLC; Axis Canada Company; Axis Areta, LLC; Logistic Technology, LLC;Logistic Systems, LLC. 5RLF! 604674lv.2
  7. 7. a plan of reorganization (the "Allied Plan of Reorganization"), which was confirmed by now-Chief Bankruptcy Judge C. Ray Mullins and became effective in May 2007. 4 As a result of thereorganization, Allieds then unsecured creditors became the shareholders of Allied SystemsHolding, Inc. Although the Original Chapter 11 Case is ready to be closed (indeed, a motion fora final decree was recently filed), at this point it remains an open and pending case in Atlantabefore Judge Mullins. 7. In the Original Chapter 11 Case, Allieds goals were to ( 1) increase revenue byincreasing customer pricing, (2) deleverage by conversion of debt into equity, and (3) reducelabor costs through reductions in compensation and changes in work rules with respect to theTeamsters Employees and through shared sacrifice from non-union employees. 8. These goals were largely achieved, with significant aid from two private equityfunds, Yucaipa American Alliance Fund I, LP and Yucaipa Alliance (Parallel Fund I, L.P.(collectively "Yucaipa"). During the original Chapter 11 Case, Yucaipa, among other things, (1)acquired about two-thirds of a series of unsecured notes that Allied had issued in the principalamount of $150 million; (2) was the catalyst for obtaining an agreement with the Teamsters forconcessions ("Labor Modifications") reducing wages of Allieds Teamster Employees by 15%for a three-year period; (3) financed the acquisition of Rigs for Allieds use; (4) supported a planto convert general unsecured debt into equity; and (5) aided Allied in securing the exit financing(the "Exit Financing") essential to its reorganization.4 Allied Systems Holdings, Inc. is the successor by merger with Allied Holdings, Inc., which was theultimate Allied parent when the Original Chapter 11 Case was filed. When the Allied Plan of Reorganizationbecame effective, Allied Systems Holdings, Inc. was created as a subsidiary of Allied Holdings, Inc., which wasmerged into Allied Systems Holdings, Inc., the surviving corporation. Thus, in connection with the OriginalChapter 11 Case, the terms "Allied" and "Debtors" exclude Allied Systems Holdings, Inc. and include AlliedHoldings, Inc. Also, in connection with the Original Chapter II Case, the term "Debtors" includes certain indirectAllied subsidiaries that no longer exist. Certain indirect Allied subsidiaries formed under the law of Mexico andBermuda were not Debtors. 6RLFl 6046741v.2
  8. 8. 9. Yucaipa and the Teamsters joined Allied as proponents of the Allied Plan ofReorganization. As of the effective date of the Allied Plan of Reorganization, Allied Holdings,Inc. created Allied Systems Holdings, Inc. as a subsidiary and merged into it. As provided in theAllied Plan of Reorganization, the outstanding stock of Allied Holdings, Inc. was canceled andAllied Systems Holdings, Inc. issued new common stock to Allieds general unsecured creditors,with Yucaipa becoming the owner of about 63% of the equity. Also as of the effective date,Allieds Exit Financing and the Labor Modifications became effective. The Decline in Allieds Revenues 10. In 2010, Allied had revenue of about $543 million. In 2011, Allied hadsubstantially less revenue (about $343 million) because, in the first quarter of 2011, Alliedceased providing car-haul services to several customers who forced Allied to renew theircontracts with unsustainable pricing during the recession in 2008 and 2009. This reductionoccurred after Allied approached substantially all of its car-haul customers for rate increases,because the rate levels then in effect were not sustainable and did not cover operating costs.New long-term contracts and rate increases were achieved with Ford and several smallercustomers in the United States and with Ford, Mazda, Hyundai, Kia, Honda, Nissan andMitsubishi in Canada. General Motors, Chrysler, Toyota, and Honda in the United Statesrefused to accept the rate increases and, consequently, Allied discontinued providing car-haulservices to these companies. 11. A major reason for the unsustainable rate levels that caused Allied to ceaseproviding car-haul services to several substantial customers was the drastic decline of production("OEM Production") by original equipment manufacturers of light vehicles since the Allied Planof Reorganization became effective in May 2007. This decline is a result of the recession which 7RLF! 6046741 v.2
  9. 9. began in December 2007. The recession hit the domestic automobile market particularly hard,with General Motors Corporation and Chrysler LLC commencing bankruptcy cases in 2009 andshutting down most production until their assets could be sold. 12. As a result of the drastic decline in OEM production, there was an industry-wideoversupply of capacity to transport light vehicles. The fierce competition among truckingcompanies (both union and non-union) and railroads for contracts to transport these vehicles ledAllieds customers to substantially reduce the rate of compensation offered to Allied and itscompetitors. Thus, lower OEM production combined witb lower rates of compensation causedAllied to suffer losses in the years since its reorganization in 2007. 13. The aggregate industry OEM production of light vehicles in North America in2007 was approximately 15 million units. OEM production declined drastically in 2008 and2009 witb a slight improvement in 2010, when production was 11.9 million units. Reflecting Ithat decline in production, Allied transported 6.9 million vehicles in 2007 and had revenue of$823 million, while in 2010, Allied transported 4.5 million vehicles and had revenue of$ 543million. 14. While the rate of compensation to Allied for transporting light vehicles has beendeclining, Allieds expenses in many areas have increased. For example, the rate ofcompensation of its Teamster Employees increased by more than 15% in June 2010 andincreased again in June 2011. Also, as the Rigs age, they require more maintenance and capitalimprovements. LEGAL STANDARDS 15. Bankruptcy Code § 303, dealing with involuntary bankruptcy cases, contemplatesthe appointment of a trustee in the gap period, but under circumstances very different from those 8RLFl 6046741 v.2
  10. 10. presented in this case. As a threshold matter, it is well-established that the appointment of aChapter 11 trustee is an extraordinary and disfavored remedy. Since there is a strongpresumption against appointing an outside trustee, the need for such an appointment must beproved by clear and convincing evidence. In re Marvel Entertainment Group, Inc., 140 F.3d463, 471 (3rd Cir. 1998). To that end, there is a strong presumption that the debtor should bepermitted to remain in possession absent a showing of need for such a remedy. 16. Section 303(g) provides for the interim appointment of a trustee (1) if the petitionseeks an order for relief under Chapter 7, and (2) if necessary to preserve the property of theestate or to prevent loss to the estate. Neither condition exists here. First, the petitions in thesecases seek relief under Chapter 11, not Chapter 7. Second, the allegations of grossmismanagement and malfeasance relate to Allieds ceasing to provide service under unprofitablecontract (which occurred more than a year ago), and to amendments to Allieds senior debtdocuments that closed in 2008 and 2009. Moreover, the thrust of the Motion is not preservationof property of the estate, but the alleged unwillingness of the Debtors-under the control ofYucaipa-"to engage the Petitioning Creditors in restructuring negotiations." 17. It has been held that there is no statutory authority for the appointment of atrustee in the gap period of an involuntary Chapter 11 case. In the Matter of Beaucrest RealtyAssociates, 4 B.R. 164 (Bankr. E.D.N.Y. 1980). Similarly, in another involuntary Chapter IIcase in which a motion for the appointment of a trustee was filed during the gap period, thebankruptcy court denied the motion on the evidence presented during the gap period and onlygranted it on a strong showing after the debtor consented to the order of relief and wasproceeding as a debtor in possession. See In re St. Louis Globe-Democrat, Inc., 63 B.R. 131(Bankr. E.d. Mo. 1985). 9RLFI 6046741 v.2
  11. 11. 18. In the case of Professional Accountants Referral Services, upon which PetitioningCreditors rely, a trustee was appointed during the gap period of an involuntary case seeking reliefunder Chapter 11. In re Professional Accountants Referral Servs., Inc., 142 B.R. 424 (Bankr. D.Colo. 1992). In that case, the bankruptcy court held that, under the circumstances presented atrustee could be appointed "on an interim and emergency basis." !d. at 425. Thus, the movantswere required to demonstrate "serious and irreparable injury without the forthwith appointmentof an independent, disinterested, competent trustee." Id. at 429. 19. In that case, the debtor was a telemarketing firm which was not currentlyoperating. Its financial statements "were fabricated from whole cloth and contained importantmisstatements and/or outright falsifications ."!d. at 426. The Debtor was continuing to divert itsassets to the owners other companies and the court found it probable that an order of reliefwould be entered. Testimony in that case revealed that management had directed subordinateemployees to falsify submissions to a government agency and also revealed other fraudulentconduct by management which, if not immediately remedied, would cause severe andirreversible injury to the debtors creditors. ARGUMENT The Petitioning Creditors Do Not Meet the Extraordinary Hurdle Required for Appointing a Trustee in the Gap Period 20. The Motion to Shorten Time is decidedly lacking in allegations of the naturefound in Professional Accountants Referral Services for the simple reason that there is noevidence supporting any fraud or other serious wrongdoing on the part of the Alleged Debtorsand their subsidiaries. Nevertheless, Petitioning Creditors assert that this Court should take thedrastic step of appointing a Chapter 11 trustee to take charge of Alleged Debtors businessduring the gap period of these involuntary bankruptcy cases, and that it should do so almost 10RLFl 6046741 v.2
  12. 12. immediately, without g1vmg Alleged Debtors and other interested parties a reasonableopportunity to respond, If anything, the circumstances of this case justify enlarging, rather thanshortening, the tight deadlines for responding to the Trustee Motion set forth in Del. Bankr, LR.9001-l(c), which provides that notice of a motion such as the Trustee Motion ordinarily must beprovided at least fourteen (14) days prior to the hearing date, with the deadline for objections tobe no later than seven (7) days before the hearing date. In determining whether PetitioningCreditors, who presumably have been preparing their Involuntary Bankruptcy Petitions andrelated papers on their own timetable for weeks (if not months), have met their significant burdento demonstrate such dire and exigent circumstances as would justify bringing their TrusteeMotion to a hearing on only a few days notice, or whether (as Alleged Debtors submit) they aremerely seeking a tactical advantage, this Court need look no further than the virtuallynonexistent support Petitioning Creditors offer for their Motion to Shorten Time. HavePetitioning Creditors given this Court any reasonable factual basis to conclude that this Courtshould rush to put Alleged Debtors under the control of a Trustee on a few days notice? 21. The main support Petitioning Creditors proffer for their Motion to Shorten Time,the first of the four items of support they offer on pages 3-4 of that Motion and the overridingfocus of their Trustee Motion, is the assertion that Yucaipas position as majority shareholderand controlling First Lien Lender of the Alleged Debtors creates unspecified "conflicts ofinterest" that allegedly prevent the Alleged Debtors from discharging their fiduciary duties, inways that Petitioning Creditors never specifically identify in their Motion or, for that matter, inany of the papers filed in connection with their Involuntary Petition. When do PetitioningCreditors contend that this "conflict of interest" arose, creating a sudden emergency whereby thisCourt must rush, within the next few days, to appoint a Chapter II Trustee to run the Alleged IIRLFl 604674lv.2
  13. 13. Debtors businesses? As set forth in the Trustee Motion and supporting papers, PetitioningCreditors base their contrived and erroneous "conflict of interest" argument on the fact thatYucaipa acquired a majority of Alleged Debtors first lien debt from ComVest InvestmentPartners III ("ComVest") in August of2009, as permitted under a Fourth Amendment to AllegedDebtors First Lien Credit Agreement. 22. Petitioning Creditors argue in these involuntary bankruptcy cases that the FourthAmendment to the First Lien Credit Agreement is invalid. This same argument is being made inan action that they filed on January 18,2012 against Yucaipa in the Supreme Court of the Stateof New York, Index No. 650150/2012 (the "New York Action"). 23. Moreover, the same argument was addressed in an even earlier action. Thatearlier case involved a counterclaim for declaratory relief brought by CIT Group/BusinessCredit, Inc. ("CIT"), Administrative Agent for all the lenders under the First Lien CreditAgreement (including Petitioning Creditors) in an action filed by Yucaipa and Allied SystemsHoldings, Inc. against CIT in the Superior Court of Fulton County, Georgia, Civil Action No.2009-CV-177574 (the "CIT Action"). After extensive discovery and summary judgmentbriefing, the parties mutually dismissed the CIT Action with prejudice on December 5, 2011.Petitioning Creditors were on notice of the CIT Action and gave a deposition in that case, butnever objected or intervened in it. 24. In sum, the Petitioning Creditors Involuntary Petitions and Trustee Motion arenothing more than the latest in a series of tactical maneuvers to exert pressure on Yucaipa andother parties to purchase Petitioning Creditors rights under their credit agreements with AllegedDebtors on the most favorable terms possible. Petitioning Creditors do not suggest (much lessprove) that Alleged Debtors Board or management are committing fraud or that there is any 12RLFI 6046741 v.2
  14. 14. danger of Alleged Debtors assets being suddenly wasted or depleted, but rather base theirTrustee Motion and Motion to Shorten Time on three year old, discredited assertions of conflictof interest, which have been litigated to conclusion in one case and may soon be litigated toconclusion in another pending case, Stripped of its unsupp011ed conclusions, their Motion toShmicn Time offers no concrete basis to deprive Alleged Debtors and other interested parties ofa reasonable time to respond to Petitioning Creditors overreaching and baseless Trustee Motion,Accordingly, their Motion to Shorten Time should be denied.Dated: May 21,2012 Wilmington, Delaware (No, 2981) Christopher M. Samis (No, 4909) RICHARDS, LA YION & FINGER, PA One Rodney Square 920 North King Street Wilmington, Delaware 19801 Telephone: (302) 651-7700 Facsimile: (302) 651-7701 E-mail: collins@rlfcom E-mail: samis@rlf.com -and- Jeffrey W. Kelley (GA Bar No. 412296) Ezra H, Cohen (GA Bar No. 173800) TROUTMAN SANDERS LLP Bank of America Plaza 600 Peachtree Street, Suite 5200 Atlanta, Georgia 30308-2216 Telephone No.: (404) 885-3000 Facsimile No.: (404) 885-3900 E-Mail: jeffley .kelley@troutmansanders,eom E-Mai I: ezra.cohen@troutmru1smKiers.eom Counsellor Alleged Debtors 13RtF! 6046741v.2