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Full title: Joint Reply of Debtor and Official Committee of Unsecured Creditors in Support of the Joint Motion of Debtors and Official Committee of Unsecured Creditors for Entry of an Order Approving the Stipulation with Mayr-Melnhog Holz Holding AG (related document(s)869, 906) Filed by Klausner Lumber Two LLC, Official Committee of Unsecured Creditors (Butz, Daniel) (Entered: 08/06/2021)

Document posted on Aug 5, 2021 in the bankruptcy, 7 pages and 0 tables.

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LLC, the debtor and debtor-in-possession (the “Debtor,” or “KL2”) in the above-captioned chapter 11 case, and the Official Committee of Unsecured Creditors (the “Committee”) by and through their undersigned counsel, hereby submit this reply in support of the Joint Motion of Debtors and Official Committee of Unsecured Creditors for Entry of an Order Approving the Stipulation with Mayr-Melnhof Holz Holding AG the (“Settlement Motion”)2 and in response to Carolina Sawmills, L.P.’s (“Carolina Sawmills”) objection to the Settlement MotionFirst, with respect to the expense reimbursement, MMH incurred roughly $324,000 in expenses in connection with this transaction, but only $300,000 of those expenses were reimbursed because of the Court approved cap on the reimbursement of such expenses. The idea that a disputed unsecured claim of MMH would be enough for MMH to commit to pay $30 million in new money for KL2’s assets without any other bid protections is just not a reasonable assumption, and, as provided in the pleadings filed with this Court in support of approving MMH as the stalking horse bidder and the stalking horse protections, MMH would not have agreed to serve as the stalking-horse without such customary protections. Given that (a) there is no dispute that MMH provided millions of dollars prepetition on an unsecured basis that was received and used by KL2 and the settlement reduces MMH’s claim against KL2 by as much as approximately $2.4 million, (b) the $300,000 in expense reimbursements were all reviewed by the Committee and the U.S. Trustee and paid in accordance with procedures approved by this Court, and (c) compelling evidence that MMH’s stalking horse bid conferred a substantial benefit on the estate, it is doubtful that such an objection would be successful.Instead, a debtor may seek approval of a settlement over major creditor objections as long as it carries its burden of establishing that the balance of the Martin factors, including the paramount interests of creditors, weighs in favor of settlement.”

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE Chapter 11 In re Case No. 20-11518-KBO Klausner Lumber Two LLC, Hearing Date: August 11, 2021 at 10:00 a.m. Debtor.1 RE: D.I. 869 and 906 JOINT REPLY OF DEBTOR AND OFFICIAL COMMITTEE OF UNSECURED CREDITORS IN SUPPORT OF THE JOINT MOTION OF DEBTORS AND OFFICIAL COMMITTEES OF UNSECURED CREDITORS FOR ENTRY OF AN ORDER APPROVING THE STIPULATION WITH MAYR-MELHOG HOLZ HOLDING AG Klausner Lumber Two LLC, the debtor and debtor-in-possession (the “Debtor,” or “KL2”) in the above-captioned chapter 11 case, and the Official Committee of Unsecured Creditors (the “Committee”) by and through their undersigned counsel, hereby submit this reply in support of the Joint Motion of Debtors and Official Committee of Unsecured Creditors for Entry of an Order Approving the Stipulation with Mayr-Melnhof Holz Holding AG the (“Settlement Motion”)2 and in response to Carolina Sawmills, L.P.’s (“Carolina Sawmills”) objection to the Settlement Motion [Docket No. 906] (the “Objection”): Reply 1. The settlement with MMH proposed through the Settlement Motion is reasonable and satisfies the applicable standards under Bankruptcy Rule 9019 and section 105 of the 1 The last four digits of the Debtor’s federal EIN are 4897. The Debtor’s mailing address is P.O. Box C, Redding Ridge, CT 06876. 2 Capitalized terms used but not otherwise defined herein have the meanings ascribed to them in the Settlement Motion.

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Bankruptcy Code. Only Carolina Sawmills has objected to the Settlement Motion, but its Objection has no merit and should be denied in its entirety. 2. Indeed, Carolina Sawmills’ Objection is notable for its complete lack of citation to the applicable standard to evaluate the settlement or, indeed, any standard, case law, statute or rule in support of any part of its Objection. 3. Carolina Sawmills does not dispute that MMH loaned KL1 and KL2 a significant amount of money prepetition on an unsecured, joint and several basis, nor does it dispute that, in the absence of its arguments concerning MMH’s break-up fee and expense reimbursement, the settlement is fair and reasonable or a proper exercise of the Debtor’s business judgment. 4. Instead, Carolina Sawmills argues, without support, that MMH’s receipt of a break-up fee and expense reimbursement in connection with the successful sale of the Debtor’s business was for prepetition diligence and was an “improperly allowed” administrative expense. Obj. at ¶¶ 20-23. MMH’s pre-petition claim with respect to the loans it extended to KL1 and KL2 has no relation to its role as stalking horse bidder or receipt of the break-up fee or expense reimbursement. 5. First, with respect to the expense reimbursement, MMH incurred roughly $324,000 in expenses in connection with this transaction, but only $300,000 of those expenses were reimbursed because of the Court approved cap on the reimbursement of such expenses. In other words, MMH took an 8% haircut or loss on expenses, but respected the agreed-upon cap and did not seek anything beyond that cap. The breakdown of expenses was shared with the Committee and with the United States Trustee, who had no objection, prior to payment. Had Carolina Sawmills, or any other party-in-interest, requested this information the Debtor would have provided it. However, as has unfortunately become the norm in this case, Carolina Sawmills has 2

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adopted a “shoot first, ask questions later” approach that has exponentially increased the administrative costs it now claims it is trying to protect against. 6. Second, with respect to the break-up fee, there is no question that MMH’s stalking-horse bid provided a substantial benefit to the estate and that it was a validly allowed post-petition administrative expense.3 As this Court well knows, in the bankruptcy sale context, bid protections must provide an actual benefit to a debtor’s estate and be necessary to preserve the value of estate assets. O’Brien Envtl. Energy, Inc., 181 F.3d 527, 537 (3d Cir. 1999); see also In re Reliant Energy Channelview LP, 594 F.3d 200, 206-07 (3d Cir. 2010). This was proven not only at the hearing designating MMH as the stalking horse bidder but was also irrefutably confirmed by the wildly successful auction for KL2’s assets, which included robust bidding and over-bidding by MMH and other bids. In fact, MMH stayed in the auction until the last round. Whether MMH had a general unsecured claim at the time is entirely irrelevant. In fact, as this Court knows, creditors often bid on a debtor’s assets and regularly receive stalking horse protections (sometimes even secured creditors who are credit bidding receive such protections, although this is rarer). The idea that a disputed unsecured claim of MMH would be enough for MMH to commit to pay $30 million in new money for KL2’s assets without any other bid protections is just not a reasonable assumption, and, as provided in the pleadings filed with this Court in support of approving MMH as the stalking horse bidder and the stalking horse protections, MMH would not have agreed to serve as the stalking-horse without such customary protections. And Carolina Sawmills fails to cite a single case that suggests being a potential creditor of the estate is relevant for an O’Brien analysis. 3 While not before the Court, the issue of whether MMH should receive a break-up fee or expense reimbursement as part of its stalking horse bid was vigorously litigated by Carolina Sawmills prior to the Court’s approval, although the issue of MMH’s then unfiled prepetition claim was not discussed. See, e.g. D.I. 409 at pp. 14-17. 3

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7. But regardless, because Carolina Sawmills failed to address the applicable standard for approving a settlement, it ignores that, if KL2 or the Committee were to object to MMH’s claims on these bases, the objection would need to be litigated. Given that (a) there is no dispute that MMH provided millions of dollars prepetition on an unsecured basis that was received and used by KL2 and the settlement reduces MMH’s claim against KL2 by as much as approximately $2.4 million, (b) the $300,000 in expense reimbursements were all reviewed by the Committee and the U.S. Trustee and paid in accordance with procedures approved by this Court, and (c) compelling evidence that MMH’s stalking horse bid conferred a substantial benefit on the estate, it is doubtful that such an objection would be successful. But what is certain is that the litigation would foist additional burden, delay, and expense on the Debtor’s estate. These factors weigh heavily in favor of approving the settlement. See, e.g., Meyers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir. 1996) (identifying four factors to be considered in assessing a Rule 9019 Motion: “(1) the probability of success in litigation, (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily in attending it; and (4) the paramount interest of the creditors.”). See also In re W.R. Grace & Co., 475 B.R. 34, 77-78 (D. Del. 2012) (“In analyzing the compromise or settlement agreement under the Martin factors, courts should not have a ‘mini-trial’ on the merits but rather should canvas and see whether the settlement falls below the lowest point in the range of reasonableness.”). 8. Carolina Sawmills further contends that the Settlement Motion is premature because it disputes the Debtor’s ownership free and clear of the proceeds of the sale of the Debtor’s assets. Carolina Sawmills argues that this dispute precludes a determination of whether the proposed settlement “will benefit KL2’s estate and its creditors.” Obj. at ¶ 25. But, as Carolina Sawmills knows (or should know), that is not standard for determining whether a settlement should 4

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be approved.4 Moreover, Carolina Sawmills’ position is not in the best interest of creditors because, if taken at face value, it would result in the complete shutdown of the administration of this case until its claim to ownership of the Debtor’s sale proceeds is resolved. There is no basis for such heavy-handed relief, and even Carolina Sawmills has not requested it. 9. But putting that aside, it should be sufficient for present purposes to state simply that Carolina Sawmill’s Objection is inapposite. The issue before the Court is whether the Debtor’s proposed settlement with MMH falls within the lowest range of reasonableness and are valid exercises of the Debtor’s business judgment. In re Capmark Fin. Grp. Inc., 438 B.R. 471, 475-76 (Bankr. D. Del. 2010); Dai-Ichi Kangyo Bank, Ltd. v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 242 B.R. 147, 153 (D. Del. 1999). 10. As set forth in the Settlement Motion and this Reply, the Stipulation should be approved. Carolina Sawmills is not the only creditor in this case and should not be permitted to hold up resolution of a favorable and heavily negotiated settlement based on concerns regarding the expenses incurred in the administration of the estate.5 11. Carolina Sawmills further objects to the provision of the proposed settlements that would bind creditors to the terms of the settlements. Carolina Sawmills asserts that this provision would interfere with its ability to prosecute its own (as-of-yet-unfiled) objection to MMH’s claim. 4 “There is no per se rule that the views of a committee or other creditors are dispositive on the reasonableness of a settlement. A per se rule would unduly expose the Debtors to the demands of creditors preferring to risk estate assets in a litigation lottery or litigate under blackmail or strong-arm strategies. Instead, a debtor may seek approval of a settlement over major creditor objections as long as it carries its burden of establishing that the balance of the Martin factors, including the paramount interests of creditors, weighs in favor of settlement.” In re Capmark Fin. Grp, Inc., 438 B.R. 471, 519 (Bank. D. Del. 2010). 5 Carolina Sawmills’ concerns about administrative expenses in the Objection are also ironic since, by objecting to the Settlement Motion, Carolina Sawmills has ensured that there will need to be a contested hearing on this motion, which of course will require the Debtor to incur additional expenses in preparation. 5

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Again, Carolina Sawmills’s position here is contradictory. If Carolina Sawmills is ultimately correct that it has a lien on the Debtor’s sale proceeds, then, if the Court does not approve this settlement, it will have no reason to prosecute its own objection to MMH’s claim. If Carolina Sawmills is wrong (as the Debtor and Committee contend), and Carolina Sawmills does not have a lien on the sale proceeds, then KL2’s stakeholders—including Carolina Sawmills—will benefit from the approval of the Settlement Agreement. Thus, in either case, Carolina Sawmills will have no basis to continue to assert its objection to MMH’s claim. In any event, if this Court approves the Settlement Motion, Carolina Sawmills will be bound by this Court’s determination. See In re Medomak Canning, 922 F.2d 895 (1st Cir. 1990) (“A trustee in bankruptcy is a fiduciary representing the estate and creditors. . . . In order efficiently to administer the estate, a trustee’s court-approved settlement must have finality, and settling parties must be assured that those the trustee represents will not relitigate settled claims. Such a result is implicitly recognized in Bankruptcy Rule 9019, which requires notice to interested parties prior to approval of such a settlement.”); Morris v. Zimmer (In re Zimmer), 623 B.R. 151 (Bankr. W.D. Pa. 2020). In addition, MMH would not enter into this settlement if it did not bind all other parties-in-interest in the KL2 and KL1 bankruptcy cases. 12. For the foregoing reasons, the Debtor and Committee respectfully request that this Court overrule the Objection, grant the Settlement Motion, and approve the Debtor’s proposed settlement with MMH. 6

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Dated: August 6, 2021 Respectfully submitted, MORRIS, NICHOLS, ARSHT & TUNNELL LLP /s/ Daniel B. Butz Robert J. Dehney (No. 3578) Eric D. Schwartz (No. 3134) Daniel B. Butz (Bar No. 4227) 1201 North Market Street, 16th Floor P.O. Box 1347 Wilmington, Delaware 19899-1347 Telephone: (302) 658-9200 Facsimile: (302) 658-3989 Email: dbutz@morrisnichols.com -and- Kim Martin Lewis, Esq. (admitted pro hac vice) Travis Bayer, Esq. (admitted pro hac vice) DINSMORE & SHOHL LLP 255 East Fifth Street, Suite 1900 Cincinnati, Ohio 45202 Phone: (513) 977-8200 Facsimile: (513) 977-8141 Email: kim.lewis@dinsmore.com travis.bayer@dinsmore.com Bankruptcy conflicts counsel for Klausner Lumber Two LLC ARMSTRONG TEASDALE LLP /s/ Eric M. Sutty Eric M. Sutty (No. 4007) Jonathan M. Stemerman (No. 4510) 300 Delaware Avenue, Suite 210 Wilmington, DE 19801 Telephone: (302) 824-7089 Email: esutty@atllp.com jstemerman@atllp.com Counsel to the Official Committee of Unsecured Creditors 7

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