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Full title: Objection to Claim by Claimant(s) Deloitte Financial Advisory GMBH.. Filed by Klausner Lumber Two LLC. Objections due by 5/17/2021. (Attachments: # 1 Notice # 2 Exhibit A # 3 Exhibit B # 4 Exhibit C # 5 Exhibit D) (Butz, Daniel) (Entered: 05/03/2021)
Document posted on May 2, 2021 in the bankruptcy, 14 pages and 0 tables.
Bankrupt11 Summary (Automatically Generated)
(“Klausner Holding”), and Klausner Nordamerika Beteiligungs GmbH (“Nordamerika,” and collectively with KL1, KL2, and Klausner Holding, the “Klausner Entities”) dated September 30, 2019, Deloitte was to “support the management of Klausner Lumber with M&A Advisory Services in connection with the current refinancing of the financial obligations of Klausner Lumber.”KL1 filed its bankruptcy case on April 30, 2020, and KL2 filed the Bankruptcy Case on June 10, 2020.2 2 The Deloitte Engagement Letter provides that “this engagement shall end at such time as Deloitte FA hands its written final report, containing its original signature, to the Client or, in the absence of any such written report, at such time as Deloitte FA has completed the engagement. Deloitte’s position is essentially nothing more than the assertion that it should obtain a success fee because KL1 and KL2 closed on sales of their assets, regardless of the fact that Deloitte played little to no role in such sales and was a complete bystander to the robust and fulsome sale process conducted by the Debtor’s professionals in this Court.In the MMH claim against KL2, MMH included, as part of its claim, approximately $250,000 of expenses incurred by “Deloitte” for services “Deloitte” allegedly performed on MMH’s behalf. Another financial advisor, Scharpenack GMBH (“Scharpenack”), has also filed proofs of claim against KL1 and KL2 arising from an alleged contract with KL1 and KL2; Scharpenack, like Deloitte, contends that KL1 and KL2 agreed to pay it a success fee in connection with the sale of their assets.7 44.
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Document ContentsIN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Chapter 11 KLAUSNER LUMBER TWO LLC, Case Nos. 20-11518 (KBO) Debtor.1 (Jointly Administered) Response Deadline: May 17, 2021, 4:00pm Hearing Date: June 16, 2021, 10:00 a.m. OBJECTION OF DEBTOR KLAUSNER LUMBER TWO LLC TO THE PROOF OF CLAIM FILED BY DELOITTE FINANCIAL ADVISORY GMBH Debtor Klausner Lumber Two LLC (the “Debtor” or “KL2”), by and through its counsel, hereby submits the following objection (this “Objection”) pursuant to section 502 of title 11 of the United States Code (the “Bankruptcy Code”) and Rule 3007 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) to the Proof of Claim (the “Claim”) filed by Deloitte Financial Advisory GMBH (“Deloitte” or “Claimant”). [Claim No. 25]. In support of this Objection, KL2 states as follows: INTRODUCTION AND FACTUAL BACKGROUND 1. The United States Bankruptcy Court for the District of Delaware (the “Court”) has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). Venue in this district is proper pursuant to 28 U.S.C. §§ 1408 and 1409. 2. The statutory predicates for the relief requested herein are section 502 of the Bankruptcy Code and Bankruptcy Rule 3007. 1 The last four digits of the Debtor’s EIN are 4897. The Debtor’s mailing address is P.O. Box C, Redding Ridge, CT 06876.
13. On June 10, 2020 (the “Petition Date”), the Debtor filed a voluntary petition under chapter 11 of the Bankruptcy Code, commencing the above-captioned case (the “Bankruptcy Case”). The Debtor continues to operate its business and manage its property as debtor-in-possession pursuant to §§ 1107(a) and 1108 of the Bankruptcy Code. 4. On June 25, 2020 the United States Trustee (the “U.S. Trustee”) for the District of Delaware appointed an official committee of unsecured creditors (the “Creditors’ Committee”). No party has requested the appointment of a trustee or examiner in the Bankruptcy Case. 5. The Debtor was the owner of a substantially complete timber sawmill in Enfield, Halifax County, North Carolina. Additional detail regarding the Debtor, its business, and the events leading to the commencement of the Bankruptcy Case is set forth in the Declaration of Robert Prusak in Support of Debtor’s Bankruptcy Filing. (D.I. 6). 6. Deloitte has filed the Claim against KL2 arising from a contract related to services that Deloitte allegedly performed in furtherance of KL2’s efforts to sell its assets or refinance its debt. The Claim is duplicative, legally deficient, and factually unsupported and should be denied in full. Deloitte’s Contract 7. Deloitte is a financial advisor that was retained long before the commencement of the Bankruptcy Case. 8. Pursuant to an engagement letter (the “Deloitte Engagement Letter”) by and among Deloitte and KL2, Klausner Lumber One LLC (“KL1”), Klausner Holding USA Inc. (“Klausner Holding”), and Klausner Nordamerika Beteiligungs GmbH (“Nordamerika,” and collectively with KL1, KL2, and Klausner Holding, the “Klausner Entities”) dated September 30, 2019, Deloitte was to “support the management of Klausner Lumber with M&A Advisory
2Services in connection with the current refinancing of the financial obligations of Klausner Lumber.” (Deloitte Engagement Letter, attached as Exhibit B, at 1). The Deloitte Engagement Letter further described the work that Deloitte was to perform in an attached Annex 1 to the Deloitte Engagement Letter. (Id., at 8). 9. In exchange for the work to be performed by Deloitte, Deloitte was to earn fixed retainers in the total amount of €125,000, and in the event of a successful sale or refinancing of “Klausner Lumber,” Deloitte would be paid a success fee of €500,000-€700,000, which amount would depend on “measures and criteria regarding the successful conduct of negotiations to the benefit of Klausner.” (Id., at 2-3). 10. Pursuant to the terms and conditions of the Deloitte Engagement Letter, this success fee would purportedly remain payable even if a transaction occurred in the 12 months after termination of the Deloitte Engagement Letter, provided that Deloitte would only be entitled to 50% of such success fee if a “transaction” closed between 6 and 12 months after termination of the Deloitte Engagement Letter. 11. The Deloitte Engagement Letter further provided that the success fee was to be borne “depending on the proportion of the refinancing/purchase price allocated/received to/by each company. However, all contractual parties [were] jointly liable for the full payment.” (Id., at 3). Deloitte’s Retention by a Potential Purchaser for KL2’s Assets 12. Prior to the filing of the Bankruptcy Case, Deloitte undertook a separate engagement in which it agreed to perform due diligence services for a potential purchaser for KL2’s assets. 13. Specifically, upon information and belief, in November of 2019 (less than two
3months after the execution of the Deloitte Engagement Letter), Deloitte delivered a letter to a representative of Mayr-Melnhof Holz AG (“MMH”) outlining “the preliminary understanding of Klausner and [MMH] regarding a joint transaction.” (See Draft Memo, attached as Exhibit C). The letter from Deloitte detailed a series of proposed transactions between MMH and KL1, KL2, and other Klausner-related entities. 14. In connection with the proposed transactions, Deloitte was to provide “[f]inancial, tax due diligence and tax structuring for [MMH],” and “[f]inancial and tax solvent seller report on all KHU and KL1 directly or indirectly related Klausner-entitities [sic].” (Id., at 5). 15. Later, during the course of the Bankruptcy Case, MMH also emerged as a bidder for the assets of KL1 and KL2, though ultimately MMH’s bid was unsuccessful (as discussed below). 16. By simultaneously contracting to provide services for KL1 and KL2, and for MMH, Deloitte was advising both sides of a potential transaction between those entities. 17. On or about June 23, 2020, MMH filed a proof of claim against KL1, asserting that it was owed amounts due from KL1, among others, on prepetition loans made by MMH. On June 23, 2020, MMH filed a proof of claim against KL2, which was subsequently amended on December 20, 2020, similarly asserting that MMH was owed amounts due from KL2, among others, on prepetition loans made by MMH. (See Claim Nos. 32, 192). The Commencement of the Bankruptcy Case 18. KL1 filed its bankruptcy case on April 30, 2020, and KL2 filed the Bankruptcy Case on June 10, 2020.2 2 The Deloitte Engagement Letter provides that “this engagement shall end at such time as Deloitte FA hands its written final report, containing its original signature, to the Client or, in the absence of any such written report, at such time as Deloitte FA has completed the engagement. Notwithstanding this, either party may terminate the engagement upon written notice of 30 days to the end of any calendar month, unless otherwise agreed (such as
419. Deloitte did not perform any services for any of the Klausner Entities at any time following the chapter 11 filings of KL1 or KL2. 20. During the course of the Bankruptcy Case, KL2 was able to complete the sale of its assets to subsidiaries of Binder Beiteligungs AG (“Binder”). 21. Deloitte did not solicit Binder regarding any potential sale or refinance. The sale of KL2’s assets closed on January 8, 2021. 22. Similarly, during the course of its bankruptcy case, KL1 was able to complete the sale of its assets to subsidiaries of Binder, and Deloitte did not solicit Binder regarding any potential sale or refinance of KL1. The sale of KL1’s assets closed on September 21, 2020. Deloitte’s Claim 23. Deloitte filed the Claim on September 23, 2020, before the sale to Binder of either KL1 or KL2’s assets had even closed. 24. Deloitte filed claims in the amount of €736,000 against each of KL1 and KL2, asserting that the basis for its claims was a success fee “relating to refinancing of the Debtor’s financial obligations pursuant to an engagement letter.” 25. Deloitte did not, however, provide any description of the work it had performed to earn the alleged success fee or any explanation for the how it arrived at the claimed sum of €736,000. 3 RELIEF REQUESTED 26. For the reasons set forth below, the Debtor objects to the Claim. By this where Deloitte FA is engaged on specifically delineated projects or sections of projects).” (Deloitte Engagement Letter, at 11). It further provides that either party may “at any time” declare rescission of the Deloitte Engagement Letter for good cause. Included among the definition of “good cause” is “the opening of insolvency proceedings.” (Id.) 3 Upon information and belief, the Claim is composed of the sum of €36,000, representing the unpaid portion of Deloitte’s retainer, and €700,000, representing Deloitte’s claim for a success fee, apparently at the highest range provided for in the Deloitte Engagement Letter.
5Objection, the Debtor respectfully requests that the Court enter an order pursuant to section 502(b) of the Bankruptcy Code and Bankruptcy Rule 3007 disallowing or modifying the Claims as requested herein. ARGUMENT AND BASIS FOR RELIEF 27. Pursuant to section 101 of the Bankruptcy Code, a creditor holds a claim against a bankruptcy estate only to the extent that (a) it has a “right to payment” for the asserted liabilities and (b) the claim is otherwise allowable. 11 U.S.C. §§ 101(5), (10). 28. When asserting a claim against a bankrupt estate, a claimant must allege facts that, if true, would support a finding that the debtor is legally liable to the claimant. See In re Allegheny Int’l Inc., 954 F.2d 167, 173 (3d Cir. 1992); Svenska Taendsticks Fabrik Aktiebolaget v. Irving Tr. Co. (In re Int’l Match Corp.), 69 F.2d 73, 76 (2d Cir. 1934) (finding that a proof of claim should at least allege facts from which legal liability can be seen to exist). Where the claimant alleges sufficient facts to support its claim, its claim is afforded prima facie validity. Allegheny Int’l, 954 F.2d at 173. A party wishing to dispute such a claim must produce evidence in sufficient force to negate the claim’s prima facie validity. Id. In practice, the objecting party must produce evidence that would refute at least one of the allegations essential to the claim’s legal sufficiency. Id. at 173- 74. Once the objecting party produces such evidence, the burden shifts back to the claimant to prove the validity of its claim by a preponderance of the evidence. Id. at 174. The burden of persuasion is always on the claimant. Id. I. The Claims Should Be Denied as Factually Unsupported. 29. Deloitte has not made any effort to support its entitlement to the success fee that it claims under the terms of the Deloitte Engagement Letter. 30. First, the Deloitte Engagement Letter required Deloitte to “support the
6management of Klausner Lumber with M&A Advisory Services in connection with the current refinancing of the financial obligations of Klausner Lumber,” and to specifically perform the actions described in Annex 1 to the Deloitte Engagement Letter. 31. In its Claim, Deloitte has failed to identify any actions that it took that would satisfy the requirements provided for in the Deloitte Engagement Letter to earn such a success fee. Indeed, Deloitte’s Claim fails to identify or specify any action of any kind that it took in relation to the Deloitte Engagement Letter or any of the requirements provided for therein. 32. As noted herein, the Deloitte Engagement Letter further stated that the amount of the success fee could be from €500,000-€700,000, depending on “measures and criteria regarding the successful conduct of negotiations to the benefit of Klausner.” 33. However, the Claim fails to provide any support to Deloitte’s entitlement to any success fee, let alone what “measures and criteria” would support its entitlement to the larger success fee it seeks or how it met those “measures and criteria.” 34. As set forth on the attached Declaration, Deloitte did not bring Binder—the purchaser of KL1’s and KL2’s assets—to KL1’s or KL2’s attention. (Declaration of Robert Prusak, attached as Exhibit D, at ¶¶ 5, 6). Furthermore, Deloitte played no role in facilitating the ultimate sale of either Debtor’s assets, much less successfully conducting negotiations, as required by the Deloitte Engagement Letter.4 (Id., at ¶ 4). Cf. In re Rolling Thunder Gas Gathering, L.L.C., 348 B.R. 803, 810-811 (Bankr. D. Kan. 2006) (claim based on promissory note and mortgage disallowed under section 502(b) of the Bankruptcy Code because the debtor received no loan proceeds); Senior Transeastern Lenders v. Official Comm. Of Unsecured 4 While Deloitte may argue that its prepetition efforts facilitated MMH’s interest in the debtors which in turn benefited the debtors because MMH was the backup bidder for both debtors’ chapter 11 asset sales, any such benefit is tainted by Deloitte simultaneously serving as an advisor to MMH. See infra note 6 and accompanying text.
7Creditors (In re TOUSA, Inc.), 680 F.3d 1298, 1313-1315 (11th Cir. 2012) (holding committee could avoid liens where the debtor was not the entity “for whose benefit” the transfer was made). 35. Deloitte has not provided evidence of its entitlement to any success fee, much less entitlement to the highest possible success fee due under the Deloitte Engagement Letter. 36. Deloitte’s position is essentially nothing more than the assertion that it should obtain a success fee because KL1 and KL2 closed on sales of their assets, regardless of the fact that Deloitte played little to no role in such sales and was a complete bystander to the robust and fulsome sale process conducted by the Debtor’s professionals in this Court. Deloitte’s position is untenable and should not be countenanced by this Court. 37. Per the Deloitte Engagement Letter, Deloitte was required to perform services in exchange for its success fee, and it has failed to meet its burden of showing that it earned that fee. As a result, the Claim should be denied. II. The Claim Should Be Denied or Reduced Because the Deloitte Engagement Letter Was Effectively Terminated Before the Sale of KL1’s or KL2’s Assets Was Completed. 38. Even if the Claim was adequately supported, it must also be denied, at least in part, because the Deloitte Engagement Letter was terminated well before the sale of KL2’s assets closed. KL1 filed its bankruptcy case on April 30, 2020, and Deloitte ceased performing work for any of the Klausner Entities before that date. Thus, the Deloitte Engagement Letter was effectively terminated as of that date at the latest. Moreover, both KL1 and KL2 retained other professionals in their respective bankruptcy cases to advise on and conduct assets sales under section 363 of the Bankruptcy Code,5 further evidencing that Deloitte played no role in the 5 See, e.g., Order Authorizing the Employment and Retention of Cypress Holdings LLC as Investment Banker, Pursuant to Sections 327 and 328 of the Bankruptcy Code Effective (in Part) as of the Petition Date [Docket No. 196]; Order Authorizing (I) the Employment and Retention of Asgaard Capital LLC to Provide the Debtor with a
8debtors’ asset sales or any other aspect of the debtors’ chapter 11 cases. The sale of KL1’s assets closed on September 21, 2020, and the sale of KL2’s assets closed on January 8, 2021. Accordingly, the Deloitte Engagement Letter was terminated by the time either sale of KL1’s or KL2’s assets closed. 39. The Deloitte Engagement Letter does provide that Deloitte would remain eligible for a success fee even after termination of the Deloitte Engagement Letter, so long as a sale or refinancing closed within 12 months of termination. However, by its own terms, the Deloitte Engagement Letter reduces the success fee to only 50% of the success fee if the transaction closes between 6 and 12 months after termination of the Deloitte Engagement Letter. Because the sale of KL2’s assets occurred during that 6 to 12 month window, to the extent Deloitte is entitled to a success fee at all, such fee must be reduced by 50%. III. The Claim Should Be Denied Due to Deloitte’s Simultaneous Work for a Potential Bidder for KL2’s Assets. 40. Through the Claim, Deloitte seeks a success fee based theoretically on its efforts to maximize the sale price obtainable for KL2’s assets through a sale of assets. Deloitte does not disclose in the Claim that Deloitte was also working with MMH in MMH’s efforts to acquire KL1 and KL2 (through a loan to own strategy). Those efforts were apparently successful enough that MMH consummated a loan to KL1 and KL2, resulting in MMH’s proofs of claim against KL1 and KL2, claims of nearly $5 million each.6 41. Deloitte’s Claim should also be denied based on this simultaneous work for MMH. In the Deloitte Engagement Letter, Deloitte agreed to “support the management of Chief Restructuring Officer and Certain Additional Personnel and (II) the Designation of Robert Prusak as Chief Restructuring Officer for the Debtor, Effective as of the Petition Date [Docket No. 198]. 6 In the MMH claim against KL2, MMH included, as part of its claim, approximately $250,000 of expenses incurred by “Deloitte” for services “Deloitte” allegedly performed on MMH’s behalf.
9Klausner Lumber with M&A Advisory Services,” including specifically to “be the main point of contact for Klausner Lumber and will coordinate the approach of” MMH. (Deloitte Engagement Letter, at 1). In the defined “Scope of Work” on Annex 1 to the Deloitte Engagement Letter, Deloitte agreed to, among other items, assist KL2 with the “negotiation and structuring of the term sheet with [MMH],” “ongoing communication with [MMH] and request of (non-binding) LOI,” “[e]valuation and presentation of the LOI received from [MMH],” and “coordination of the due diligence process and facilitate Management presentations with [MMH].” (Annex 1 to Deloitte Engagement Letter). 42. Deloitte could not have effectively provided these services to KL2 while also advising MMH in its own negotiations. In the course of the transaction negotiations, MMH’s goal would have been to offer the lowest possible price to KL2, while KL2’s goal would have been the opposite. To the extent that Deloitte was advising MMH, it could not have complied with its requirements under the Deloitte Engagement Letter. As a result, it is entitled to no success fee, and its Claim should be disallowed. IV. To the Extent Not Denied in Full, the Claim Should Be Minimized as Duplicative. 43. In addition to the Claim, Deloitte has also filed an identical claim arising from the Deloitte Engagement Letter against KL1. Another financial advisor, Scharpenack GMBH (“Scharpenack”), has also filed proofs of claim against KL1 and KL2 arising from an alleged contract with KL1 and KL2; Scharpenack, like Deloitte, contends that KL1 and KL2 agreed to pay it a success fee in connection with the sale of their assets.7 44. Thus, two different entities have now filed four different claims against two 7 Contemporaneously with the filing of this Objection, KL2 has commenced an adversary proceeding objecting to the proof of claim filed against it by Scharpenack. Likewise, KL2 understands that KL1 will be objecting to both Deloitte and Scharpenack’s claims.
10debtors arising from roughly the same engagement. As might be expected given that situation, the Debtor believes that in light of the Scharpenack claims, the Claim is duplicative and should be denied, at least in part, on the following grounds. 45. First, the work anticipated to be performed by Deloitte and Scharpenack is duplicative. Separately paying two entities to perform the same task is wasteful and duplicative, and the Claim should be minimized accordingly. 46. Moreover, the Claim is duplicative of the Claim filed by Scharpenack. Deloitte and Scharpenack have each filed proofs of claim in the full amount of their respective success fees. But the Klausner Entities were each signatories to the Deloitte Engagement Letter and the contract with Scharpenack and are not separately liable for the entire amount of the respective success fees. Granting all proofs of claim against KL1 and KL2 in full would permit Deloitte and Scharpenack to “double dip” (or in this case, “quadruple dip”) at the expense of KL1’s and KL2’s estates. Deloitte’s Claim must therefore be minimized accordingly. 47. Lastly, in light of the tremendous efforts undertaken by KL1’s and KL2’s professionals in orchestrating and achieving successful sales of the debtors’ assets (who have rightly received their own Court-approved success fees), Deloitte would receive an unjustified and unwarranted windfall in the event this court allowed Deloitte to recover its “success fee.” V. The Claim Should Also Be Disallowed Because Deloitte Can Recover Against Non-Debtor Parties. 48. Finally, the Claim should be denied or, to the extent that the Claim is allowed at all, it should be partially disallowed because it improperly seeks full payment of Deloitte’s success fee even though other parties are responsible for payment of the Claim. 49. The Deloitte Engagement Letter stated that Deloitte’s success fee was to be borne “depending on the proportion of the refinancing/purchase price allocated/received to/by each
11company,” and that “all contractual parties being jointly liable for the full payment.” (Deloitte Engagement Letter, at 3). 50. By the terms of the Deloitte Engagement Letter, Deloitte is entitled to seek payment in full of any Claim it may have from non-debtor parties, and upon information and belief, Deloitte is actively attempting to do so. For this reason, the Claim must be denied or reduced to the extent that any portion of the success fee is attributable to or are recovered from other parties. ADJOURNMENT OF HEARING 51. The Debtor reserves the right to seek an adjournment of the hearing on any Responses to this Objection. In the event that the Debtor seeks such an adjournment, it will be noted on the notice of agenda for the hearing, and such agenda will be served on the affected claimant by serving the person designated in the Response. RESERVATION OF RIGHTS 52. Nothing contained in this Objection nor any actions taken by the Debtor or any other party pursuant to relief that may be granted by entry of the Proposed Order is intended or should be construed as: (a) an admission as to the validity of any particular Claim (including any Proof of Claim) against the Debtor or any other party; (b) a waiver of the Debtor’s or any other party’s rights to dispute any particular Claim (including any Proof of Claim); (c) a promise or requirement to pay any particular Claim (including any Proof of Claim); (d) an implication or admission that any particular Claim (including any Proof of Claim) is of a priority or type specified in this Objection; or (e) a waiver or limitation of the Debtor’s or any other party’s rights under the Bankruptcy Code, the Bankruptcy Rules, the Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Court for the District of Delaware (the “Local
12Rules”), or any other applicable law. NO PRIOR REQUEST 53. No prior request for the relief sought herein has been made to this or any other court. NOTICE 54. Notice of this Objection will be given to: (a) the Office of the United States Trustee for the District of Delaware; (b) Deloitte; and (c) all parties requesting notice pursuant to Bankruptcy Rule 2002. The Debtor submits that, under the circumstances, no other or further notice is required. WHEREFORE, KL2 requests that this Objection be sustained and the Court (a) enter an order substantially in the form attached hereto as Exhibit A, disallowing the Claim as set forth herein, and (b) grant such other relief as is just and proper. Dated: May 3, 2021 MORRIS, NICHOLS, ARSHT & TUNNELL LLP Wilmington, Delaware /s/ Daniel B. Butz Robert J. Dehney (No. 3578) Eric D. Schwartz (No. 3134) Daniel B. Butz (Bar No. 4227) Nader A. Amer (Bar No. 6635) 1201 North Market Street, 16th Floor P.O. Box 1347 Wilmington, Delaware 19899-1347 Telephone: (302) 658-9200 Facsimile: (302) 658-3989 Email: email@example.com firstname.lastname@example.org and DINSMORE & SHOHL LLP Travis M. Bayer (admitted pro hac vice) Kim Martin Lewis (admitted pro hac vice)
13255 East 5th St., Suite 1900 Cincinnati, Ohio 45202 Tel: 513-977-8200 Email: email@example.com firstname.lastname@example.org Counsel to Klausner Lumber Two LLC