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Full title: Motion objecting to claim(s) 25; 48 of Various creditors filed by Debtor 1 Minnesota School of Business, Inc.. An affidavit or verification, Proposed order. Hearing scheduled 6/8/2021 at 10:00 AM at Courtroom 2B, 2nd floor, 316 North Robert Street, St. Paul, Judge William J. Fisher. (Andre, Samuel) (Entered: 05/06/2021)
Document posted on May 5, 2021 in the bankruptcy, 16 pages and 0 tables.
Bankrupt11 Summary (Automatically Generated)
By this Motion, the Debtors seek an order disallowing and expunging in whole Claim Nos. 25 and 48 filed against the Debtors in Case No. 19-33629 (together, the “Claims”).Minnesota School of Business, Inc. and Globe University, Inc. (the “Debtors”) move the Court for entry of an order disallowing and expunging Claim Nos. 25 and 48 in Case No. 19-33629 (the “Claims”).As part of these cases, the State asserted claims against the Debtors in the total amount of $51,714,921.24; this amount stemmed from a judgment obtained in the Minnesota state courts based on various claims brought against the Debtors on behalf of residents of the State of Minnesota who were former students of the Debtors and who held and made payments on institutional loans with the Debtors for violations of Minnesota consumer protection laws.To the extent the Claimant is asserting that the Debtors are liable for the Claimant’s student loan with the Debtors or their federal student loans based on theories that were rejected by the State Court Order, the Claims should be disallowed.However, when submitted in a form that does not comply with applicable Bankruptcy Rules, a proof of claim does not constitute prima facie evidence of the validity of the claim amount, and therefore the burden remains on the creditor to prove the claim is valid.
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Document ContentsUNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MINNESOTA Jointly Administered Under Case No. 19-33629 (WJF) In re: Minnesota School of Business, Inc., Case No.: 19-33629 Globe University, Inc., Case No.: 19-33632 Chapter 11 Cases Debtors. NOTICE OF HEARING AND MOTION OBJECTING TO CLAIMS (CLAIM NOS. 25 AND 48, CASE NO. 19-33629) TO: The entities identified in Local Rule 9013-3(a)(1): 1. Minnesota School of Business, Inc. (“MSB”) and Globe University, Inc. (collectively, the “Debtors”) move the Court for the relief requested below and give notice of hearing. 2. The Court will hold a hearing on this Motion at 10:00 a.m. on June 8, 2021, in Courtroom 2B, Warren E. Burger Federal Building and U.S. Courthouse, 316 North Robert Street, St. Paul, Minnesota 55101. The hearing will be held telephonically. Participants may dial in to the hearing using the following instructions: a. Dial 1-888-684-8852; b. When prompted, enter ACCESS CODE: 5988550; c. When prompted, enter SECURITY CODE: 0428. 3. Any response to the Motion must be filed and served not later than June 3, 2021, which is five (5) days before the time set for the hearing (including Saturdays, Sundays and holidays). UNLESS A RESPONSE OPPOSING THE MOTION IS TIMELY FILED, THE COURT MAY GRANT THE MOTION WITHOUT A HEARING.
14. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. §§ 157 and 1334, Fed. R. Bankr. P. 5005, and Local Rule 1070-1. This is a core proceeding. 5. This motion arises under 11 U.S.C. §§ 502 and 507, Fed. R. Bankr. P. 3001 and 3007, and Local Rules 3007-1 and 9013-1–3. This motion is filed under Fed. R. Bankr. P. 9014 and Local Rules 9013-1. 6. By this Motion, the Debtors seek an order disallowing and expunging in whole Claim Nos. 25 and 48 filed against the Debtors in Case No. 19-33629 (together, the “Claims”). The Claims should be disallowed and expunged for failure to articulate a colorable cause of action against the Debtors or include necessary documentation.1 BACKGROUND AND PROCEDURAL POSTURE I. The Debtors’ Bankruptcy Cases. 7. The Debtors filed petitions for relief under chapter 11 of the Bankruptcy Code on November 20, 2019. The cases are being jointly administered. 8. The Debtors continued in possession of their respective assets and the management of their business as debtors-in-possession pursuant to Bankruptcy Code sections 1107(a) and 1108 until entry of the Court’s order approving the appointment of the Chapter 11 Trustee James A. Bartholomew (the “Trustee”) on May 13, 2020. 9. The Court filed a Notice of Chapter 11 Bankruptcy Cases (Dkt No. 2) that, among other things, established March 18, 2020 as the deadline by which creditors must file proofs of claim. 1 In this Motion, the Debtors seek the disallowance and expungement of the Claims from the claims register. However, through this Motion, the Debtors are not objecting to the Claimant’s potential inclusion in the State’s notice and payment process described herein.
2II. The State of Minnesota’s Claims Against the Debtors. 10. On March 13, 2020, the State of Minnesota (the “State”) filed Claim No. 952 against the Debtors (the “State’s Claim”).3 The State’s Claim provides that it has “statutory and parens patriae authority to enforce and pursue remediation for violations of Minnesota’s consumer-protection laws.” (Claim No. 95 at 4.) As further stated in the State’s Claim, the State pursued and obtained restitution orders against the Debtors, and the State is charged with sending notices and claim forms to eligible students. (Id. at 6–16.) In short, the restitution claims belong to, and are pursued by the State of Minnesota. 11. The State’s Claim against the Debtors is based on violations of Minnesota’s consumer protection laws and is further broken down into two categories: a. Violations of the CFA and DTPA. These claims relate to “false and misleading representations to prospective students, concerning, among other things, the employability of graduates of Debtors’ criminal-justice program.” (States Claim at 2.) b. Violations of Minnesota’s anti-usury and lender-licensing statutes. These claims relate to high-interest loans made by the Debtors to their students in excess of Minnesota’s usury rate and without a required lending license. (Id.) 12. Prior to the filing of these bankruptcy cases, the Hennepin County District Court in the State of Minnesota in Court File No. 27-CV-14-12558 (the “Hennepin County Lawsuit”) entered the Findings of Fact, Conclusions of Law, and Order (the “State Court Order”). A true 2 The State filed Claim No. 95 against Minnesota School of Business in Case No. 19-33629, and Claim No. 9 against Globe University, Inc. in Case No. 19-33632. 3 Pursuant to a settlement agreement approved by the Court on December 22, 2020, the State’s Claim is currently allowed in the amount of $35,000,000. (Dkt. Nos. 322, 336.)
3and correct copy of the State Court Order is attached to the Declaration of James C. Brand in Support of Motion Objecting to Claim (Dkt. No. 398) as Exhibit A. As part of the State Court Order, the Hennepin County District Court found that the Debtors committed fraud as to the Debtors’ former criminal-justice degree students and consequently ordered injunctive relief, civil penalties, fees and costs, and restitution. (Ex. A at 131–32.) The Minnesota Supreme Court subsequently upheld the restitution order. State by Ellison v. Minn. Sch. of Business, Inc., 935 N.W.2d 124, 140 (Minn. 2019). 13. The Debtors were also found liable for usurious and illegal lending to students. Following an interlocutory appeal from a summary judgment ruling on the illegal lending claim, the Minnesota Supreme Court issued a decision in July 2018 rejecting the Debtors’ arguments that they were exempt from Minnesota’s 8%-usury cap and holding Debtors liable for illegal lending. State v. Minnesota Sch. of Bus., Inc., 899 N.W.2d 467 (Minn. 2017). After a remedies trial on the State’s illegal-lending case, the Hennepin County District Court ordered refunds of interest paid by student borrowers on illegal loans. (See Dkt. No. 57 at 6.) The District Court, however, denied restitution for principal paid on illegal loans, along with pre-judgment interest, civil penalties, and recovery of payment of the State’s costs and fees. (Id.) On appeal in June 2019, the Minnesota Court of Appeals held that full refunds (including for principal payments), prejudgment interest, and civil penalties and costs and fees should have been awarded. State v. Minnesota Sch. of Bus., Inc., No. A18-1761, 2019 WL 2333921, at *7–13 (Minn. Ct. App. June 3, 2019), review denied (Aug. 20, 2019). 14. As described in the State’s Agreement Resolving Claim Objections with the Debtors, the State’s Claim represents the full and final allowed claim of the State based on its judgment against the Debtors. (See Dkt. No. 322 at 8–9.) The State’s Claim represents the full
4amount owed by the Debtors to the State on behalf of its upheld fraud and usurious lending claims brought against the Debtors on behalf of their former students. (Id.) The parties further agreed that they retained the right to file objections to the allowance of any claims filed by former students in these bankruptcy cases on any basis, including on the grounds that such claims are duplicative of the State’s Claim. (Id. at 9.) 15. While the State was successful in some aspects of the Hennepin County Lawsuit, the State Court Order specifically rejected other claims and made findings that are binding on the parties here. As part of the Hennepin County Lawsuit, the State also asserted in separate counts that the Debtors misrepresented: (i) their former students’ ability to transfer credits earned while enrolled with the Debtors to other schools (Ex. A at 117); (ii) their job placement rates and career services to their students (id. at 125); (iii) their accreditation (id. at 119); and (iv) the sales aspects and selectivity process of their admissions process by holding out their admissions representatives as “counselors” or “advisors” when they were instead allegedly salespeople (id. at 120). 16. The Hennepin County District Court specifically rejected each of these claims and instead held that: a. “Whether a student’s credits are likely to transfer depends on the school to which the student intends to transfer” and that any affirmative statements made by the Debtors’ admissions representative to the contrary were not authorized by the Debtors. (Id. at 118.) The Court therefore found that the Debtors timely, effectively, and clearly advised their students that transfer of credit was up to the receiving institution, and consequently that the Debtors did not deceive their
5students regarding the students’ abilities to transfer credits to other education institutions. (Id. at 119.) b. The Debtors calculated placement rates consistent with federal law and therefore the State could not pursue claims against the Debtors for misrepresentations under state consumer protection statutes. (Id. at 126). c. That no evidence established that the Debtors’ placement rates were false or misleading or that the Debtors did not, in fact, provide career services to their students. (Id. at 127-128.) d. That the Debtors consistently and accurately identified themselves as nationally accredited educational institutions to their students, whereas no evidence illustrated that the Debtors misrepresented their accreditation status to their students. (Id. at 119–20.) e. That the Debtors’ admissions representatives acted consistent with their titles and that insufficient evidence existed showing that the Debtors systematically misrepresented the selectivity of their admissions process. (Id. at 121, 124–25.) These findings have not been overturned and are binding on the parties. III. The Claims Are Filed On An Objectionable Bases. 17. Claim No. 25 was filed on December 24, 2019, by Jennifer Ann Nelson (the “Claimant”). Pursuant to the claim form, the Claim seeks payment of an unsecured claim in the amount of $3,000 on the basis that “I believe I completed 2 or 3 classes with them (1 semester) and they gave me a loan for that, that I paid off”. Claim No. 25 fails to attach any supporting documentation.
618. Claim No. 48 was filed on January 19, 2020, by “Jennifer Brockway”. Based on the Debtor’s books and records, “Jennifer Brockway” is the same person as the Claimant. Both Claim No. 25 and Claim No. 48 were signed by the Claimant and listed the same address, phone number, and e-mail for notice purposes. Claim No. 48 does not list any additional information from Claim No. 25 in the claim form; however, Claim No. 48 attached a loan statement for the Claimant’s federal student loans held by the U.S. Department of Education showing a total loan amount of $9,401. Claim No. 48 states that it amends a claim already filed but fails to list the claim that it amends. Based on the above information, however, Claim No. 48 appears to amend Claim No. 25 by adding supporting documentation in the form of the loan statement. 19. The Claimant was a prior student of the Debtors enrolled in the Debtors’ Bachelor of Science Degree: Forensic Accounting beginning on July 14, 2014. The Claimant’s enrollment with the Debtors ended on September 25, 2014, at which time the Claimant withdrew from their Bachelor’s degree program. 20. As part of their enrollment with the Debtors, the Claimant signed an enrollment agreement; under the agreement, the Claimant waived any claims against the Debtor if not asserted via arbitration within twelve months of the date of the claim arose and waived any claims for a refund of tuition or fees for any quarter if the Claimant completed 60 percent of the quarter. The Debtors explicitly disclaimed any guarantee of employment for the Claimant in the enrollment agreement. 21. As a student, the Claimant received one or more institutional loans from the Debtors, as well as a federal student loans during their time enrolled as a student with the Debtors. To the extent any institutional loans were determined to be illegal in the State Court Lawsuit, any of those amounts included in the Claims are duplicative of the State’s Claim and
7should be disallowed. As noted above, the Debtors are not objecting to the Claimant’s potential inclusion in the State’s Claim. 22. Instead, the Claims appear to assert, without any legal basis, that the Debtors are liable for the Claimant’s federal student loans that the Claimant used to attempt to obtain their Bachelor’s degree in Forensic Accounting. RELIEF REQUESTED 23. The Debtors seek an order disallowing and expunging the Claims. 24. Pursuant to Local Rule 9013-2(a), this Motion is verified and is accompanied by a memorandum, proposed order, and proof of service. 25. The Debtors give notice pursuant to Local Rule 9013-2(c) that, if an evidentiary hearing is held as to this Motion, they may call (i) the Chapter 11 Trustee James Bartholomew, or (ii) Jeanne Herrmann, the former chief operating officer of the Debtors, to testify regarding the facts set out in this Motion. WHEREFORE, the Debtors respectfully request that the Court enter an order: A. Disallowing and expunging the Claims; and B. Granting such other and further relief as the Court deems just and equitable. Dated: May 6, 2021 /e/ Samuel M. Andre Clinton E. Cutler (#0158094) James C. Brand (#387362) Samuel M. Andre (#0399669) FREDRIKSON & BYRON, P.A. 200 South Sixth Street Suite 4000 Minneapolis, MN 55402-1425 (612) 492-7000 ATTORNEYS FOR THE DEBTORS
9UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MINNESOTA Jointly Administered Under Case No. 19-33629 (WJF) In re: Minnesota School of Business, Inc., Case No.: 19-33629 Globe University, Inc., Case No.: 19-33632 Chapter 11 Cases Debtors. MEMORANDUM OF LAW IN SUPPORT OF MOTION OBJECTING TO CLAIMS (CLAIM NOS. 25 AND 48, CASE NO. 19-33629) Minnesota School of Business, Inc. and Globe University, Inc. (the “Debtors”) move the Court for entry of an order disallowing and expunging Claim Nos. 25 and 48 in Case No. 19-33629 (the “Claims”). The supporting facts are set forth in the verified motion (the “Motion”). All capitalized terms herein have the meaning ascribed to them in the Motion. For the reasons set forth below, the Claims should be disallowed and expunged in their entirety. BACKGROUND The Debtors refer to the facts stated in the Motion. LEGAL STANDARD A proof of claim filed in a bankruptcy proceeding is deemed allowed unless a party in interest objects. 11 U.S.C. § 502(a); see also Gran v. IRS (In re Gran), 964 F.2d 822, 827 (8th Cir. 1992). If an objection is filed, the objector must come forward with evidence rebutting the claim. Gran, 964 F.2d at 827; In re Oriental Rug Warehouse Club, Inc., 205 B.R. 407, 410 (Bankr. D. Minn. 1997). If the objecting party produces such evidence, the burden of proof shifts to the claimant to produce evidence of the validity of the claim. Gran, 964 F.2d at 827; Oriental Rug, 205 B.R. at 410. “In other words, once an objection is made to the proof of claim,
10the ultimate burden of persuasion as to the claim’s validity and amount rests with the claimant.” Oriental Rug, 205 B.R. at 410 (internal citations omitted). Section 502(b)(1) of the Bankruptcy Code in particular provides, in relevant part, that a claim may not be allowed to the extent that “such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law . . . .” 11 U.S.C. § 502(b)(1). OBJECTION A. To the Extent the Claims Relate to Illegal Lending, the Claims are Duplicative of the State’s Claim. It appears that the Claims are based on an institutional loan that the Claimant obtained from the Debtors. Any such claim, however, if valid, would be duplicative of the State’s Claim asserted against the Debtors.1 Duplicative claims are explicitly and routinely disallowed and expunged under the Bankruptcy Code. See Bankr. R. 3007(d)(1); see, e.g., In re Residential Capital, LLC, 524 B.R. 465, 471 (Bankr. S.D.N.Y. 2015) (court expunged duplicative claims earlier in the cases); In re MF Glob. Holdings Ltd., Case No. 11-02790 (MG), 2012 WL 5499847, at *1 (Bankr. S.D.N.Y. Nov. 13, 2012) (same); In re Worldcom, Inc., Case No. 02-13533 (AJG), 2005 WL 3875191, at *8 (Bankr. S.D.N.Y. June 3, 2005). As part of these cases, the State asserted claims against the Debtors in the total amount of $51,714,921.24; this amount stemmed from a judgment obtained in the Minnesota state courts based on various claims brought against the Debtors on behalf of residents of the State of Minnesota who were former students of the Debtors and who held and made payments on institutional loans with the Debtors for violations of Minnesota consumer protection laws. These claims belong directly to the State. State by Hatch v. Cross Country Bank, Inc., 703 N.W.2d 562, 1 The Debtors do not waive any additional objections to the Claims that may arise as part of the claims objection process.
11570 (Minn. Ct. App. 2005); see also In re Taibbi, 213 B.R. 261, 267 (Bankr. E.D.N.Y. 1997) (state consumer protection agency’s “ability to enforce such claims on behalf of defrauded consumers in the state court leads this Court to conclude that it is the creditor to whom the debt is owed”) (internal citations omitted). To the extent the Claims are based on a claim of illegal lending, they are duplicative of the State’s Claim. If the duplicative Claims re not formally expunged or disallowed, the Debtors would face double liability based on the same claim while the Claimant will recover twice—once through the State’s recovery on its allowed claim and once again through the Claims. Accordingly, to the extent the Claims are based on a claim of illegal lending, the Claims should be disallowed and expunged. B. Other Potential Claims Against the Debtors Should Be Disallowed Pursuant to the Findings of the Hennepin County District Court. From the face of the Claims, it is impossible to determine the basis for the Claims. To the extent the Claimant is asserting that the Debtors are liable for the Claimant’s student loan with the Debtors or their federal student loans based on theories that were rejected by the State Court Order, the Claims should be disallowed. The findings in the State Court Order are binding on not only the State, but the former students as well. A final judgment or consent decree entered in a parens patriae suit brought by a state on behalf of its citizens is conclusive as to those citizens and is binding on their rights. See U.S. E.P.A. v. City of Green Forest, Ark., 921 F.2d 1394, 1404 (8th Cir. 1990); Alaska Sport Fishing Ass’n v. Exxon Corp., 34 F.3d 769, 773 (9th Cir. 1994) (finding private citizens barred under res judicata from asserting claims brought by state in parens patriae suit where state brought claims on their behalf and issues in controversy in both suits were substantially identical); United States v. Olin Corp., 606 F. Supp. 1301, 1308 (N.D. Ala. 1985) (finding plaintiffs barred by res judicata in suing for public
12nuisance after final judgment in parens patriae suit brought by state on their behalf). The Debtors should not be forced to again defend themselves against claims previously and finally decided in the State Court Lawsuit. C. The Claims Do Not Assert Valid Claims Against the Debtors. The Debtors object to the allowance of the Claims because the Claimant failed to assert a valid basis for a claim against the Debtors. As seen from the Claims themselves and their attached documentation, the Claimant failed to articulate any colorable cause of action against the Debtors under applicable law. Instead, the Claims simply state that the basis for the claim, is “I believe I completed 2 or 3 classes with them (1 semester) and they gave me a loan for that, that I paid off”. The Claims appear to assert, without any legal basis, that the Debtors are liable for the Claimant’s institutional loan or federal student loans held by the U.S. Department of Education that the Claimant used in attempting to obtain their Bachelor’s degree in Forensic Accounting, which they withdrew from in 2014. Even if the Claimant could articulate a cause of action against the Debtors, the Claimant waived any such cause of action pursuant to their enrollment agreements with the Debtors by failing to assert any such claim since the time of their enrollment. Further, the Claims fail to comply with Official Form 410, as required by Bankruptcy Rule 3001(a), and therefore is not entitled to a presumption of prima facie validity. In general, the evidentiary effect of a proof of claim properly filed in accordance with applicable Bankruptcy Rules constitutes “prima facie evidence of the validity and amount of the claim.” Fed. R. Bankr. P. 3001(f). The burden “then shifts to the objector to establish that the claim fits within one of the exceptions set forth in [§] 502(b) . . . .” In re Dove-Nation, 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004). However, when submitted in a form that does not comply with applicable Bankruptcy Rules, a proof of claim
13does not constitute prima facie evidence of the validity of the claim amount, and therefore the burden remains on the creditor to prove the claim is valid. AFY v. N. Plains Feeders, Inc., 482 B.R. 830, 839–40 (D. Neb. 2012) (quoting In re Porter, 374 B.R. 471, 483 (Bankr. D. Conn. 2007); see Caplan v. B-Line (In re Kirkland), 572 F.3d 838, 840–41 (10th Cir. 2009); In re Duke and King Acquisition Corp., No. 10-38652, Dkt. No. 571 (Bankr. D. Minn. Jul. 2, 2012) (granting liquidating trust’s objections based upon lack of adequate supporting documentation). If the claimant fails to identify any evidence supporting its claim following objection, the proof of claim may properly be denied in its entirety. AFY, 374 B.R. at 845; see also In re Duke and King Acquisition Corp., Dkt. No. 571. Bankruptcy Rule 3001(a) requires that a filed proof of claim must “conform substantially to the appropriate Official Form.” Fed. R. Bankr. P. 3001(a). The appropriate Official Form is Official Form 410, which requires the claimant “[a]ttach redacted copies of any documents that support the claim, such as promissory notes, purchase orders, invoices, itemized statements of running accounts, contracts, judgments, mortgages, and security agreements.” Official Form 410. If such documents are not available, the claimant must explain as much in an attachment to the proof of claim. Id. If a proof of claim is submitted that does not conform substantially to Official Form 410 and its requirements, the proof of claim does not comply with Bankruptcy Rule 3001(a). See Fed. R. Bankr. P. 3001(a). The Claims are not entitled to a presumption of prima facie validity because it fails to articulate a claim against the Debtors or to attach supporting documentation or information that shows or explains the basis for the amount claimed against the Debtors. See In re Moore & Moore Trucking, LLC, No. 20-10925, 2020 WL 6122753, at *3 (Bankr. E.D. La. Sept. 14, 2020) (stating a proof of claim without supporting documentation does not receive prima facie validity); In re Brown, 603 B.R. 786, 792 (Bankr. D.S.C. 2019) (same).
14Without a presumption of validity, the Claimant must offer some additional evidence to survive this objection. Unless the Claimant responds to this Motion by articulating bases for the Claims and providing evidence in support, the Claimant will have failed to meet their burden and the Claims should be disallowed and expunged in their entirety. CONCLUSION For all of the foregoing reasons, the Debtors respectfully request that the Court grant the relief requested in the Motion. Dated: May 6, 2021 /e/ Samuel M. Andre Clinton E. Cutler (#0158094) James C. Brand (#387362) Samuel M. Andre (#0399669) FREDRIKSON & BYRON, P.A. 200 South Sixth Street Suite 4000 Minneapolis, MN 55402-1425 (612) 492-7000 ATTORNEYS FOR THE DEBTORS
15UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MINNESOTA Jointly Administered Under Case No. 19-33629 (WJF) In re: Minnesota School of Business, Inc., Case No.: 19-33629 Globe University, Inc., Case No.: 19-33632 Chapter 11 Cases Debtors. ORDER GRANTING MOTION OBJECTING TO CLAIMS (CLAIM NOS. 25 AND 48, CASE NO. 19-33629) This case is before the court on Minnesota School of Business, Inc. (“MSB”) and Globe University, Inc.’s (collectively, the “Debtors”) Motion Objecting to Claims (Claim Nos. 25 and 48, Case No. 19-33629) (the “Motion”). Based on the Motion and the file, IT IS ORDERED: 1. The motion is granted. 2. Pursuant to section 502(b) of the Bankruptcy Code, Claim Nos. 25 and 48, Case No. 19-33629, are hereby disallowed and expunged in their entirety. 3. The disallowance and expungement of Claim Nos. 25 and 48 does not constitute any admission or finding with respect to any other claim in these cases. 4. The Debtors and the Trustee are authorized to take any and all actions that are necessary and appropriate to give effect to this Order. DATED: ______________________________ William J. Fisher United States Bankruptcy Judge