WITNESS INDEX DECLARANTS DIRECT CROSS REDIRECT RECROSS for Douglas Sullivan Tagawa-49 (cross) Bennett-69 (cross) Kohn-73 (redirect), Tagawa-80 (recross) for Michael Kahn (no cross) - 86 (Rebuttal) Brown-143 (cross) Bennett-151 (cross) for Michael Hennigan Bennett-87 (cross) Kohn-98 (cross) for Lynn Schoenmann Bennett-101 (cross) Tagawa-105 (cross) Bennett-138 (recross). CLOSING ARGUMENTS Mr. Brown's - for the Trustee. . . . . . . . . . . 154 Mr. Kohn's - for CIBC . . . . . . . . . . . . . . . . 160 Mr. Bennett's - for Bondholders. . . .. . . . . . 167 Mr. Tagawa' s - for Shareholders. . . . . . . . 185 Mr. Schochet's - for Ramius Capital. . . . . . .195 Ms. Ball's - for the Trade commitee. . . . .. . 199 EXHIBIT INDEX FOR RESPONDENT IDENTIFIED RECEIVED A Dr. Black's report 64 65 B Verizon's claim filed on May 29th, 2001 SAN FRANCISCO, CALIFORNIA, FRI., SEPTEMBER 13, 2002, 8:45 A.M. THE CLERK: All rise. THE COURT: Please be seated. May I have your appearances, please? MR. BROWN: Good morning, Your Honor. Ken Brown on behalf of trustee Lynn Schoenmann. Also here in court on behalf of Ms. Schoenmann are Doug Sullivan, Michael Kahn from the law firm of Folger, Levin and Kahn and John Fiero also from the Pachulski firm. Ms. Schoenmann is also in court today. THE COURT: Thank you. MR. BENNETT: Good morning, Your Honor. Bruce Bennett and joining me shortly, Sid Levinson of Hennigan, Bennett and Dorman on behalf of the bondholders who that filed the opposition. My partner, Michael Hennigan, is with me in the courtroom. MR. TAGAWA: Good morning, Your Honor. Barry Tagawa for equity holder, Frank Harding. MS. ALBERTS: Good morning, Your Honor. Katherine Alberts of Jones, Day, Reaves & Pogue for the Ad Hoc Trade Creditors Committee. I have with - - here my colleague, Corinne Ball. We filed an application for pro hoc vitae. will you let her appear today? THE COURT: Any objection? MR. BROWN: I guess. - 1 - THE COURT: Okay, yes. I'm sorry. Okay. Did you have an objection? MR. BROWN: No, Your Honor. THE COURT: Okay. MS. BALL: Thank you, Your Honor. MR. SCHOCHET: Good morning, Your Honor. Harvey Schochet on behalf of Ramius Capital. MR. KOHN: Good morning, Your Honor. Shalom Kohn, Sidley, Austin, Brown & Wood on behalf of Canadian Imperial Bank as agent for the secured lenders. MS. MYLES: Good morning, Your Honor. Kristin Myles representing verizon. With - - from Munger, Tolles & Olsen. With me also is Mr. william Pratt from Kirkland & Ellis also representing Verizon. MR. PRATT: Good morning, Your Honor. THE COURT: Good morning. There's one question I'd like to raise. I just saw this morning a paper from the Ad Hoc Trade Committee raising the question of allocation and how it might bear on this hearing. And the question I have is, what bearing does the allocation question have on the reasonableness of this settlement? My understanding from the papers received from the trustee and from what I understood to be the scope of the motion before us, is that the question of allocation is not before the Court at this hearing. But it's also obvious that - 2 - the trustee contemplates it being necessary, that there will have to be some further settlement or proceedings to determine how proceeds of the settlement, if there's any settlement, would be allocated. I suppose if it goes to trial, then the finder of fact will make those determinations. But I'd like to hear from the parties what bearing it has on the question of rather the I settlement should be approved. MR. BROWN: Your Honor, I think actually that the allocation issue had been raised by the bondholders in their brief as well. And we've addressed that in our papers. I think the bottom line is that we believe it is completely irrelevant to the determination before the Court today and should not be dealt with today, that it is premature and perhaps will be completely unnecessary to ever deal with it. What the trustee is seeking today is the determination from the Court that a settlement of the claims, whatever those claims might be of these two estates, arising out of the determination of the merger agreement, that the release of those claims for 175 - - a payment of $175 million from Verizon is reasonable, at the low end of the range of reasonableness. The issue of assuming that settlement is reasonable, how that money gets split up, if at all, between the estates is something that, if it needs to be determined, can be left for - 3 - another day. There is nothing in the settlement, there will be nothing in the order that relates in anyway to allocation. All such rights on behalf of all interested parties, including both estates, would be expressly reserved. The reason, Your Honor, that we don't believe that this issue may ever have to be resolved is because of the - - kind of - - there's multiple factors involved here. First, there is an issue as to, separate and apart from anything else, what the respective claims to these proceeds might be by both estates. But putting that aside for a moment, there are also other assets at the operating subsidiary. The assets could be substantial, they're primarily preference claims. We don't know, of course, until we've done a thorough analysis, but it's quite possible that it could be more than enough to pay the trade creditors or the creditors at the subsidiary level. At least as much if not more than the bondholders would get if they were allocated - - the creditors of the parent would get if they were allocated all the proceeds of the settlement. If it turns out that way, it's - - it, in all likelihood, as a practical matter, be unnecessary to ever allocate the proceeds of the settlement to get a pari passu or more distribution to the trade creditors at the subsidiary level. In addition, there's the issue of substantive consolidation, which, of course, would moot any necessity to - 4 - ever go into any of that. We think that what should happen is that the Court should consider on the merits the reasonableness of $175 million settlement to resolve the claims arising out of the determination of the merger. And then, as soon as possible, after that settlement is approved, now that there's an Ad Hoc Trade Committee and obviously the bondholders are capably represented. There's also an indentured trustee represented by Pillsbury Winthorp. The parties need to sit down and discuss a consensual resolution of this thing and we are quite confident that there's a high likelihood of them getting there. And what we would suggest in order to motivate everyone is that after the Court approve this settlement, that it set a status conference out 30 days, at which time, if the matter hasn't been able to be resolved, that we would then come back and set trial dates, discovery cutoffs, and briefing schedules on the issue of substantive consolidation and allocation. But today, it is not necessary to deal with, and in fact, all it can do is prejudice these estates because we are losing money every day this thing isn't funded. And moreover, as we pointed out in our reply brief, if this thing doesn't get done before the end of the year because of some changes in the tax law, we'll taking an additional $4 million tax hit at least on the proceeds of this settlement. Any - - also any delay - - - 5 - just simply, delays that any distribution to creditors. THE COURT: Okay. All I wanted to hear about was the relationship of the allocation issue. MR. BROWN: Okay. Have I adequately addressed that for you, Your Honor? THE COURT: I have no more questions from you. I would like to hear from the other two creditor groups. MR. BENNETT: Good morning, Your Honor. There are multiple reasons why it's relevant today. Let's start with where we are in this case and what the law says, which is, I guess, the place we're suppose to start. We have four separate debtors. We have a whisper of substantive consolidation. It was in our papers. It was support by no facts. Today, there's not been substantive consolidation of any estate. The Bankruptcy Code, at least, the last time I read it, never uses the word "debtor" in the plural. It uses the word "debtor" in the singular. You have a debtor that I care about, which I'll call parent or some would call group, which has certain claims. The parent today, there's an order being sought on behalf of four debtors, miraculously. Of course, only two debtors were parties to the lawsuit. How that happened I don't know. But parent, or group, has certain claims. Those claims are set to be settled today. - 6 - The first question that every court is supposed to answer is, settled for what. That question the trustee has refused to answer. They've said, we'll work it out some other day. That's abdication. And then they said they won't work it out. There will be a discussion. The starting point is how much money is parent going to get in exchange for its claims. The starting point is, how much money is the subsidiary, the plaintiff's subsidiary, going to get for its claims. Another important point, there are creditors out there in these two other entities that received a notice talking about $175 million settlement that was - - that they're given releases for in a lawsuit that they weren't even plaintiffs in. So, the trustee hasn't even said what their allocation is with respect to the settlement. And nobody outside this courtroom has any reason to believe, based upon the notice that was sent that those two entities are entitled to anything at all. I think it's manifestly the case. The Bankruptcy Code has one section where it says that in one estate, you can deal with property that someone I else owns. It's Bankruptcy Code Section 363(f). Apart from the fact that there's not 363(f) motion before the Court, none I of the standards that would say that the parent judge can reach into the subsidiary and deal with both claims together. Or - 7 - vis-a-versa. That the subsidiary case, judge and trustee, can reach in and deal with the subsidiary parent claims together. The only place we ever allow that is in the circumstances under 363(f). 9019, by the way, in (c) which isn't even applicable to this case, but it's the only place it refers to the issue, also talks about singular. It talks about the estate. If there's a vacuum of authority here, there's a total vacuum of authority for what the trustee says he wants to do. He wants to take another shortcut. He wants to substantively consolidate the cases for the time being. Just for today, let's pretend it doesn't matter where the money goes. There's only bank accounts for separate entities here. Now, this can't be delayed not even a month. Why? Because the trustee also has on calendar a motion to pay the banks. The banks have a - - they're primary obligors of the subsidiary. They're guarantors of the rest. As I understand the facts of this case, the bank lent the money to the operating company. It didn't lend the money to the parent company. So, we're going to come to the next hearing and the trustee, in its papers, magically forgot the estate boundaries and doesn't discuss them, we're going to say, pay the banks. Well, my first question is, which debtor is paying. I think the primary obligor is the one that's suppose to pay. But we - 8 - don't know how much money the primary obligor has. And if the guarantor is paying, then there's a subrogation right that ought to be carefully preserved. And the parent would succeed to the secured claim, including the post-petition adequate protection claim of diminution of cash collateral that the bank had. But are we suppose to get through the next hearing by hand-waving as well? Now, there was also a very important practical reason why we should be doing it separately. As another point that we make in our papers, which is a cornerstone of the next part of this hearing, is that this Court's mission as described by many cases and in the trustee's brief in no fewer than four places, is to determine whether a particular settlement is within the range of reasonableness in terms of value of a particular piece of litigation. Does it make it more complicated or less for this Court to have to aggregate all the claims of all the entities and determine the range as opposed to say, okay, some of these claims may be parent claims and some of these claims may be subsidiary claims. Let's see which are which and let's look at those ranges. Mixing it all together today is inappropriate. If we mix it all together today, are we saying that the Court's somehow made some pre-determination of what the split has to be? Because you can have a subsequent split which is - 9 - inconsistent with what the Court thought it was approving for one or two of these estate's claims. There is no legal authority for this hearing until the consideration is split up. There is nothing for the judge in the parent's case to do because you don't know what the settlement is in the parent's case. There is nothing for the judge in the subsidiary's case to do. If the cases should have been substantively consolidated, there should have been a motion. If there are conflicts that the trustee shouldn't have done this all by herself, she should have said so. But if they weren't, and if it was something she should manage, she should divide it up. She should tell every party-in-interest what's in it for them. She should give notice to creditors and say, your estate's going to get this, your estate's going to get that, so that people have notice about what's going on here. And so that this Court can apply the rule that even the trustee says is the right rule. But the most important point, there's no plural in the Bankruptcy Code. And these cases haven't been substantively consolidated. So there's nothing to do yet today. That's what the law says. Now, the other point he says is practicality. We ought to do this now because we get the money sooner. Well, again, I don't think practicality is suppose to overcome what - 10 - the law says. And it's also not suppose to overcome the trustee's prior mistake. We already had problems with the motion the trustee filed in this case. It first relied on mediator testimony. The Court rightly convinced them they shouldn't be doing. We very early on pointed out they had an allocation problem. They've refused to address it. Said, too expensive to do it now. Well, if there's a problem with the way they proceeded, it"' s their problem, not our problem. And we should follow the law, not follow expediency. THE COURT: Okay. Ms. Ball, I think you wanted to - - or Ms. Albert. You're the party - - you also raised this question. MS. BALL: Good morning, Your Honor. We - - forgive us being a recent arrival. We're doing everything we can to catch up, but yes. My client's were advised that - - of the position being taken by the bondholders very recently. Until that time, there was one trustee prosecuting an action on behalf of Northpoint Communications Group, Inc. and Northpoint, Inc. Two plaintiffs prosecuted jointly. August 13th, an application to settle those lawsuits on behalf of both of those estates and the other debtors. To the extent, Your Honor, that the bondholders believe that you cannot approve the settlement without - - which we do not subscribe to, without allocating, then, Your Honor, - 11 - we believe that the representatives of the estates of the operating companies, the Trade Creditors, need to be able to munically participate in the hearing. And if that's the case, Your Honor, then we need to be armed with the same information that the parent bondholders were. I think, Your Honor, it's somewhat late in the day primarily because under the settlement, it's my understanding, that Verizon, in terms of settling these actions, is looking for totalties, piece from everyone of these debtors. And the trustee, to enhance its estate, wants to do this settlement and deliver what it can deliver, which is total piece. Your Honor, if we're to be barred from - - if the Trade Creditors be barred from getting further recovery, the allocation issue, it seems, Your Honor, you have to decide. Overrule the parent's objections. We will deal with it later. The action was brought. It has been brought jointly. The settlement was brought on behalf of all the estates. And it's too late, Your Honor, now to go back and redo it unless we're going to do the allocation from beginning to end. In that respect, Your Honor, if - - we can't put this genie back in the bottle, and I think that is our concern, then we would ask Your Honor for a continuance to get up to speed. THE COURT: What I don't understand is what you really want today. Do you - - I'm not going to decide the I allocation issue today. I'm not going to allocate the - 12 - proceeds. Whatever else I do, I'm not going to do that. It's - - reading your papers, I didn't understand whether you wanted this to be put over in all circumstances, to do the allocation before the - - there's a hearing on this, whether you wanted to put over whether or not there's an allocation or whether you're concerned only that there be no allocation today without your being able to participate in that issue. MS. BALL: Certainly the latter, Your Honor. But, should Your Honor - - I think Your Honor's being called on today to rule on whether or not allocation is the horse that has to come before the cart. And with respect, Your Honor, that's the ruling that current bondholders are looking for. And if you were inclined to overrule their objection, then you can go ahead with the merits of the settlement. Our concern, then, Your Honor, goes down to meaningful participation in that hearing because I believe, Your Honor, the facts adduced at that hearing may be later used in determining the rights of the parties on allocation. We're sensitive, of course, to the trustee's desire to maximize the value of the estate. We would not want to be prejudiced if facts relating to allocation were to come up as Your Honor went ahead to approve the merits of the settlement as to whether or not it meets the standards and falling within I the range of reasonableness. - 13 - It's a very difficult concept to put back in the bottle once the parent bondholders have unleashed it and as they pursue their attack on the settlement. THE COURT: Does - - is your trade group support or oppose the settlement or have no opinion? MS. BALL: Your Honor, we don't have enough information to have an opinion reading only that information that's publically available. They had thought that, you know, contend to work with the trustee until very recent events which indicate that this allocation issue might be very much a part of this settlement. I think, Your Honor, our primary concern is that the trade creditors not be foreclosed or prejudiced in anyway should Your Honor determine to go forward on the merits of approving the settlement. Because, Your Honor, we believe there will facts relevant to testing this settlement that might change the impression Your Honor has as to whether or not this is a claim on behalf of one plaintiff in the action or the other. Obviously, the best of all worlds for us is a short continuance so we can participate in that hearing. But as of this day, Your Honor, we do not have sufficient information to challenge the adequacy of this settlement. And, in fact, the trade creditors have relied on their fiduciary, the trustee, till this point, until this allocation point was raised, which - 14 - I think Your Honor fairly places the trustee in a very awkward position. THE COURT: One of the things that - - what - - does - - what's the outstanding amount of debt against the parent at this point? MS. BALL: I'd have to defer to Mr. Brown. MR. BROWN: I guess the parent, Your Honor, I believe the bond debt claims is at the level of about 420, 420 million. THE COURT: So it's the same amount listed in the schedules. MR. BROWN: Yeah. THE COURT: None of that's been paid and there is no other significant debt. MR. BROWN: Nothing's been paid and it is a $400 million principal claim with pre-petition interest. And no post-petition interest accrued. So it stayed at the same level since the claim filed. THE COURT: And what about the subsidiary? MR. BROWN: Ms. Schoenmann just tells me it's anywhere from 50 million to 116 million. The scheduled debt, I think, was closer to the 116. {Pause} MR. BROWN: I think - - MS. SCHOENAMM: It's a difficult number to quantify, Your Honor, because in looking at the claims that have been - 15 - filed in the subsidiary level, it's apparent when you analyze the actual claims themselves that a good number are objectionable claims. There are equity holders that have filed claims as creditors in subsidiaries. So the face value of what has been filed is really not a meaningful number. In analyzing the claims, we believe it's going to fall somewhere in the range of 50 million to 116 million. And I know that's a broad range, but - - THE COURT: 1-1-6 or 1-6-0? MS. SCHOENAMM: 1-1-6. MR. BENNETT: Your Honor, I might add that, and I can't imagine that - - THE COURT: So that leaves at least, if you were to combine them, it would leave at least 75 to 80 percent of the debt in the parent. MS. SCHOENAMM: On a consolidated basis, we would expect that the settlement would result in a recovery of something in the area of about 18 cents on the dollar. THE COURT: But looking at the pools of debt, one pool is approximately - - is at least three times or more as large as the other. MS. SCHOENAMM: Oh, correct. MR. BROWN: Probably more, Your Honor. MS. SCHOENAMM: probably more. MR. BROWN: The bond debt works, that the trade debt - 16 - or the debt at the sublevel under any scenario. And I think because the trustee also believes that although we're reluctant to - - you know, we don't have a hard number on the unsecured debt at the parent, but there - - a lot of the debt, you know, just by way of ballparking this, a lot of the unsecured debt was at the subsidiary level where the connection providers at the early part of the case, who all entered into cure agreements in order to have their connection agreements assigned to AT&T - - THE COURT: So it may wind up being less. MR. BROWN: They're all - - they all disappeared. There are full releases as part of that. And that was tens of millions of dollars of debt. THE COURT: Is that in the 116? MR. BROWN: I believe it is. I believe you have to back all of that out of the 116. MS. SCHOENAMM: Yes. MR. BROWN: So we think it's probably closer to the 50 than it is the 116, but we're reluctant to really present or represent a hard number right now other than to say the range is probably closer to the $50 million level. Which means then that even in an allocation, you're talking about 10 or 12 percent of the debt residing at the subsidiary level and - - you know, 88 to 90 percent residing at the parent level. And going back to the practical reality of this, you - 17 - have to get a very small amount of money down to the subsidiary to get a pari passu distribution. THE COURT: Are there assets in the subsidiary that - - MR. BROWN: There are, Your Honor, we - - THE COURT: Well, there're no assets in the parent other than the lawsuit. MR. BROWN: No. That's our understanding. THE COURT: And the stock which is - - MR. BROWN: We know that there were - - again, taking out the vendors that were cured because we don't have preference claims against them either, but if you back those out and you back out the landlord payments, that there were - - in face amount, $90 million of payments that went out in the 90 days from the operating entity. So, you know, that doesn't factor in a course, ordinary course, and new value defenses which obviously will reduce that number, but there is something there. And there may well be enough there that just that alone would get enough money to the sub to pay the sub's creditors, i.e. the trade, a greater distribution than the bondholders would get even if all the proceeds of the settlement were allocated to the bonds. We don't know that for sure yet, but it's certainly - - THE COURT: What are the assets? - 18 - MR. BROWN: Pardon me? THE COURT: You've got some preference actions. Is there anything else? Is there any cash? MR. BROWN: There's $1.5 million coming into the estate at the operating level from a settlement with Comdisco. MS. SCHOENAMM: We also have - - THE COURT: Now, there were some assets that were sold early in the case. MR. BROWN: There- - THE COURT: They've all been used to pay the banks? MR. BROWN: Well, not yet. I mean, how much cash is in the estate right now? Pretty much all of the operating entity assets. MS. SCHOENAMM: Right. There's a couple of million. A handful of receivables that were collected, some tax refunds. We are also pursuing refunds of sales taxes which could amount to another million and a half. So there's perhaps 5 million in total plus preferences that we expect to utilize in the subsidiary level. THE COURT: Okay. Mr. Bennett, you have your hand up. MR. BENNETT: Yeah, I - - well, you skipped a little too quickly over the parents asset profile. As the record even in this hearing reveals, in September of - - just prior to the I bankruptcy case, the parent sold its preferred stock to Verizon - 19 - for $150 million. That $150 million went down into the subsidiary. So, in addition to all the other rights of the parent, the parent has a claim against the subsidiary of at least $150 million and maybe more. It was the parent's money when it sold its preferred stock to Verizon. MS. BALL: Your Honor, I think we're underscoring that once this genie's out of the bottle, it has many roads. Mr. Bennett's just alluding to another intercompany issue. And I haven't heard from the trustee nor do we know whether or not there's intercompany issues going the other way. THE COURT: Well, there may be. I'm just trying to get a sense where the bulk of the debt is. And it sounds like the bulk of the debt is at the parent level. MR. BROWN: That would be a correct assessment, Your Honor. MS. BALL: I think that's right, Your Honor. THE COURT: A fairly large bulk of the debt. Without deciding any of these issues now, what I have to get here is I have some sense from reading the papers of where a more likely allocation would fall. If it were indeed wholly belong to one versus the other and if these were running directly cross-ways, then it would be much more troublesome than if the most likely sort of allocation, if there are truly separate interests were similar to the way the debt lies. MS. BALL: But, Your Honor, it serves, I think, to - 20 - underscore that most concepts are, this difficulty does keep coming back as Your Honor - - excuse me - - even indicated, as you read the papers that we haven't even seen yet, that the issue is there. THE COURT: Okay. MS. BALL: Thank you. THE COURT: Couple other people want to be heard about this I think. MR. SCHOCHET (Ramius's lawyer ): Your Honor, I have not seen the issues raised previously about allocation, but I'm not surprised about it. This case, I think, given where we are today for this hearing is in an unusual context because we're in a Chapter 7 case. And I think that really lends a lot to why allocation is being raised today. And I've heard allocation and substantive consolidation whispers, these are words that usually apply, not always, but usually apply in the context of a plan. And I think we ought to at least toss that out there. I appreciate we're in Chapter 7, we're not in Chapter 11. But my point is this, perhaps the case should be converted to Chapter 11, perhaps, so that these allocation, which are really plan issues, consolidation, all of these issues can be properly addressed. If this case had remained in a Chapter 11 and there had been committee representation and participation, I have no - 21 - doubt that the Chapter 11 trustee would have been talking about these very issues in the context of this proposal. I don't think the Chapter 11 trustee, had there been one, would have brought this forward without participation of the constituents, the people's whose stakes are here in this court today. It seems to me that that is absolutely key to this. I appreciate that it's in Chapter 7. It doesn't mean it needs to stay there. And if the case were converted back to Chapter 11 with representation, with opportunities for people to figure out things like allocation among the entities, then it seems to me that this would be proceeding in a fashion that would be more typical particularly of an asset of this size. Yes, I know this is teed up as a Rule 9019 proposal, but to say the least, this is about as odd as it gets. This is a huge amount of money that's even odder because it's in Chapter 7 with enormous amount of claims and equity interest. The suggestion I just heard before is that it's on the low end. It may well be that if constituents had been more participatory in the process, that the proposal would not have been here today, or that, or that had the proposal been here today, it would have been more in the context of parties having talked about the very issues that now are up in the air today. So I think that these issues are important and perhaps the case, and I just toss this out for the Court's consideration, a conversion back to Chapter 11 with - 22 - opportunities to discuss these very issues. Because I think they very much weigh on whether or not the settlement amount if appropriate should occur. THE COURT: Thank you. MR. SCHOCHET: Thank you. THE COURT: Mr. Kohn. ( CiBC's lawyer ) MR. KOHN: Thank you, Your Honor. Your Honor, I have two observations. The first is, I think it's undisputed that whichever entity it is that deserves the money, so to speak, the first dollars go to the bank whether in terms of the guarantee, the board or what have you. Mr. Bennett says you have to figure out who really should pay if it comes down to it at the end of the day. And that may be right, but that's a contractual matter based on the rights respected between principal obligators and guarantors and the like. But that doesn't have anything to do with the settlement. The second observation I wanted to make is that both of these entities are plaintiffs in the litigation and the underlying offset. Certainly the trustee would not have had it in its interest to go off and confuse the jury in this already complicated case even more by asking for a verdict in terms of who should get it. Now that you're going to give me a verdict, which one should get it and what are the damages. It's quite obvious - 23 - that before the complexity of the damage calculation, all that would have done is played into the hands of Verizon in trying to get the jury confused, you know, kind of move the shells back and forth so that there's no damages in either. If this had gone to trial and there had been a verdict, and there had come back as a general verdict, we would have been facing all the allocations issues that we have here, there's no guarantee that in any lawsuit, you will even, indeed, separate it to go discern who's getting what. And therefore, I think what we are doing here today, as the Court considers the probabilities of success, we're really replicating where we were and where we would have been had we held a trial. Which is to say, if the debtor throwing, if I would, as much muck against the wall as it could in one differentiated way and trying to appeal to the sympathy of the jury. And trying to get a good verdict out of the jury. And we weigh - - and allocation thereafter is a high class problem. So if the niceties is saying, go, look at it debtor by debtor might be very nice, but that is not reflective of what the real theoretical - - the real practical issue is of the settlement. We're asking that this trustee had an undifferentiated lawsuit before the jury and is settling that undifferentiated lawsuit. And there's no reason that the Court could not put itself exactly in that position. There's no significance of that debtor, as used in the singular, to really - 24 - decide, given that, given this mass of stuff that we have, the trustee - - and is that settlement on a global basis fair. MR. BENNETT: Your Honor, I just want to correct a factual inaccuracy. I hope we can agree about things that you can look up and just figure out in writing. This was - - this lawsuit wasn't a undifferentiated mass of allegations. The complaint's a part of the record. The only entity that sued on a contract basis was the parent. The only one. The only agreement that's mentioned as being the source of a fraud is the provisions of the merger agreement. The only agreement that the subsidiary ever signed was a funding agreement, was an agreement for a loan that it would have had to repay. It wasn't undifferentiated and Your Honor's first observation was right. A special jury verdict would have told us everything that we needed to know. THE COURT: Okay. Let me think just a second here. (Pause) THE COURT: All right. Here's what I'm going to rule on this. First of all, we're not going to allocate today, if the settlement is approved, any of the proceeds of the settlement. Number two, the process isn't really affected very much by whether the proceeds have been allocated beforehand or after. - 25 - The third, we cannot allow the possibility that there could have been a special verdict at trial specifically allocating these things to preclude a settlement because there are too many benefits from settlements to fail to approve one simply because it doesn't provide all the benefits of a - - an adjudication. Now, in this particular case, that being the case, there might be some circumstances in which it would be essential to figure out who's getting what beforehand. But in this case, there are two models that can corne up. One is an lllocation according to the respective merits of the claim. And I think I can do that as easily beforehand as after. The - - or easily after this hearing as if we were trying to do the allocation before: I don't think the bondholders, given what they've argued about -the case, can complain about the lack of notice. They're arguing that it's all theirs. They opposed it, the settlement, whether it's all theirs or not. The other side, nobody on the other side is saying it all belongs to the sub. Nobody's asserted that. And nobody's come forward for the creditors for the sub saying, wait a minute, we object to the going forward until there's an allocation because we want to know exactly what our share is. Perhaps most important in this case, I don't think we - - there is going to be a huge turn in this case according to - 26 - how - - whether there's a substantive consolidation or not because the - - it looks as if the vast bulk of the creditor claims exist at the parent level. And it's fairly obvious the more compelling claim in the lawsuit, but not the only claim, belongs to the parent. The contract claim is - - if there's going to be two separate claims, if they're not undifferentiated - - it's the contract claim that's the stronger claim and that's consistent here with - - in other words, there may not be much difference between an allocation according to the merits and the splitting of these estates of substantive consolidation. But we'll deal with that when it comes up. As I say, the key thing here is we cannot deal with a - - refuse to approve a settlement simply because there's an allocation that hasn't been completed. At least not in these circumstances. It's not going to change things very much given the objections that have been raised, the objections that haven't been raised and the underlying facts. And I - - I've seen enough of the evidence here that I can - - I will be able to deal with the allocation - - or the settlement issue without in any indirect way deciding the allocation issue. Yes? MS. BALL: Your Honor, if I may. Obviously, certain parties here have been privy to information and facts that those of us who are concerned about the allocation have not - 27 - been. And I would ask Your Honor that you - - for purposes if you are going forward on the merits, exclude evidence relating to the allocation or on the weighing of benefits contributed by either Northpoint Group, the parent, or Northpoint, Inc., the sub, because that's exactly, exactly the fear we have, Your Honor. But the genie's out of the bottle. We've got to keep it out of this hearing or we'd like to participate. THE COURT: As I say, I've read all the papers in this case and I don't think it's necessary to decide whether the settlement is appropriate under (a) and (c) factors, to get into the kind of level of detail that creates findings that will prejudice the allocation issue. I think the allocation issue turns on a lot of facts that are, as I see them, in addition to the facts that determine the amount of the aggregate claims. There are other facts that have to be considered for that issue that just aren't before us today. MS. BALL: Your Honor, if I may? THE COURT: So, I'm not at all concerned that I will be in a - - in either a sub rosa way or a formal way deciding the allocation issue today. And if there may be - - there may be some evidence that will ultimately bear on the allocation issue, but that doesn't mean that we won't hear all - - additional evidence at another time that also bears on the allocation issue and the issue will be reserved and will remain - 28 - open. MS. BALL: Thank you, Your Honor. But again, we are not in a position to really deal with the evidence that comes in today that raises the allocation issue and are very disadvantaged. THE COURT: But there's - - we're not determining the allocation issue. MS. BALL: Thank you, Your Honor. THE COURT: Yes. MR. BROWN: I assume that Your Honor is overruling all of the requests, the various requests for continuance and we don't need to address those further? THE COURT: Well, let me go on with some of the others. Does anybody want to add anything to what's been said in their papers? Other requests for continuance? MR. SULLIVAN: I would only note that obviously Verizon and other people who haven't identified themselves are still in the courtroom. Just proceed with caution. MR. SCHOCHET: Your Honor, may I be heard again? THE COURT: Yes. MR. SCHOCHET: On the request? Thank you. I again respectfully suggest that had the case been in a Chapter 11 posture, I think that the settlement discussions would have gone in some different fashion. The outcome may have been the same, but these allocation issues, I think, would have been - 29 - addressed much earlier because the trustee in a Chapter 11 capacity would have felt more duty-bound to have conversations with the constituents at that point. We did file a request for a continuance. We simply think that we don't understand what the crisis is here. We don't see any compelling need to go forward until the groups - - we have an Ad Hoc Trade Creditors Committee who is, I think, appearing for the first time, we have for the most part, as far as I know, constituents be they equity security holders or creditors who are really just trying to understand what's been going on over the last year. It's been a very significant lawsuit. There's been some public statements. There's been some general puffery and that's the normal course of litigation posturing, I suppose, on both sides. But the number is a big amount. And at least our client has not had an opportunity to valuate the proposal and we take no position on it. It may be an appropriate number. We don't know. We doubt it. We just heard that it's on the low end. That would suggest to us that perhaps it isn't. But perhaps it is. We don't know. We're not aware of any compelling need to move this forward, however, at a breakneck pace. We appreciate the efforts of one counsel on behalf of an equity security holder and one group on behalf of a group of bondholders to do - 30 - something to take a look at the evidence in the case. We have not had that chance yet. But we do think that there - - that it makes far more sense to slow down the process, try to bring some fairness, if you will, in to it to give the constituent classes a chance to really understand this. Low end is not something that gives, I wouldn't think, anyone in this courtroom who's recovery depends on the low end the kind of sense that they ought to have in this. So, does that make it fair? I don't know. But it seems to me that slowing down the process to give creditors an opportunity to organize, talk amongst themselves, understand this, maybe even discuss allocation, which, again, I really do think is something that's more akin to - - I'd have to use the word plan, is the right way to go. I think it's simple. I think it's practical. And above all, I think it's fair. There is simply no compulsion to move this forward today. THE COURT: Now, if - - let's just assume, arguendo, that the settlement value is in the vicinity of 175 million. Let's assume it's 500 million, okay? What does - - good does it do your client to have this in a Chapter 11? What proper - - what legitimate say are you going to have about the allocation? MR. SCHOCHET: Because, Your Honor, that's specifically the point, I think. In a Chapter 11 case, it may - 31 - very well be that equity would be - - simply deemed to be out of the money. But in most cases, where the dollars are of this magnitude, there are at least discussions. There are at least that. And it might even be that the equity security holders of property - - THE COURT: Is that always a good thing? MR. SCHOCHET: Well. THE COURT: I mean, there's a lot of literature that that's a very bad feature of Chapter 11, that equity just says, we're not going away unless you throw us something we're not really suppose to have. - MR. SCHOCHET: Then it seems to me, Judge, that under those circumstances, if other classes believe that equity is taking an inappropriate position, they can always seek to propose a plan anyway. But, the process of Chapter 11, I think, does scream out for conversation. That is Chapter 11. It is dialogue. It may be short dialogue. It may be lengthy dialogue, but usually, in these kinds of cases, with the dollars we're talking about, be it 175 or 500 or any other number, there is some conversation. And that's why Chapter 11 in this country works. (**)It may be that equity would still be out of the money at the end of the day. That is entirely possible. But we don't know that. The other point I would add is that an equity group may very well bring something to bear on the process that - 32 - would be helpful from the standpoint of the estate, that perhaps others have missed. There stake, after all, is huge. They have every incentive to think real hard. That's why, Your Honor. THE COURT: Okay. Thank you. MR. BROWN: Your Honor, if I might just point out a couple things to the Court which I think would be helpful. First of all, it's notable from footnote one of the bondholders brief that Mr. Schochet's client is also represented by Mr. Bennett. Ramius is part of the bondholder group and it's also Mr. Schochet's client. So I think that's pertinent. Mr. Schochet has also, on several occasions, stated that I said that this is, you know, a low end settlement. That's not what I said. I said that's the standard that the Court needs to determine this by is whether or not the settlement falls at the low end. (see page 3) We don't think it did. We think it falls far above that. Just to clarify. The difference between where this settlement is and where the standard is, the bear minimum standard for the Court to approve the settlement. The other part of this is just, again, the practical reality of this. There is no evidence. The bondholder's evidence is, I think, Mr. Hennigan has testified he thinks the settlement value of this case is max. MR. SULLIVAN: Hey. - 33 - MR. HENNIGAN: Excuse me. MR. BROWN: Oh, sorry. I apologize. Anyway, I think Verizon has to be cleared from the courtroom for me to say that. The point is, in order to get - - just let me articulate for the Court what the economics are for equity. Never mind. I'm not going to go there. Not going to go there. I'm done. THE COURT: Okay. Let me say one thing and then I think we should get on with the hearing. One, I don't think it's appropriate to convert the case to Chapter 11 at this point for a couple of reasons. One is the - - we have very competent counsel on both sides of this trial and in a process that was very well funded by both sides. And a process that where settlement went through the - - went through discovery, a settlement was reached. This was done at arm's length in a professional manner. If it's off, it's not off by orders of magnitude. The - - for - - what I understand of the debt structure here, the range of settlement would have to be three times or more what it is now for there to be anything for shareholders, point number one. Point number two, if there's a plan, there are other things that happen. To not accept a settlement runs into other problems because you have a secured creditor and you have to provide them reasonable assurance that they're going to get paid and I don't know how you're going to do that in a - 34 - litigation case. The last thing is we have two creditors - - two - - the shareholders here, basically, and I will reiterate this later, are playing with other people's money. They don't have any stake under this to walk away from. The shareholders. The entity creditors do. They would - - their - - it's in their interest to oppose this settlement whether or not it's a good settlement. Their preference doesn't mean a whole lot in this case because it's automatic and because they want to play with other people's money. Third, we have two shareholders who have timely come into this proceeding and asked then allow to participate.. So - - and fourth, we have the position against the settlement being very ably asserted by the bondholders counsel. And the last point here is that a hearing on a settlement is not a trial on the merits of the lawsuit. It's a hearing to determine whether this settlement is in the range of reasonableness. We do not need - - you can state your opinion about this. You can make an argument. But I don't have to let everybody participate in discovery, in factual discovery, the same way we would at a trial. the case law is very clear. This is not a mini- trial. And the reason that a mini-trial isn't required is it could become so expensive that the process of - - the benefits - 35 - of settlement would be lost. So, I'm going to reject all the requests for continuance on the grounds that the issue has been very ably teed up by parties with a real interest in this proceeding. And the Court, through the process that's been set up to date, will have presented to it in a very able manner, all sufficient information to enable the Court to determine whether this meets the A&C Property standards. I think what we need now, I've read everybody's briefs. I think what we need now is cross-examination of the declarants and I think we need to excuse Verizon at some point very soon. MR. BROWN: We'd like to excuse Verizon and then we'll know who's left, too. THE COURT: Okay. Fair enough. MR. BROWN: Those - - actually, were there some procedural matters that you wanted to deal with? MS. MYLES: One procedural matter, Your Honor. THE COURT: I'll be glad to hear them. MS. MYLES: There's been a motion to strike a declaration that was submitted on behalf of Verizon. The declaration submitted documents that were part of the trial record. It was the declaration of Mr. Kim. THE COURT: The only - - I want to say the following about the documents. This is a matter in which I'm going to - 36 - basically be hearing from expert witnesses about the value of this action. I'm not trying the facts of the case. The only thing I'm inclined to rule about the declarations is to make - - to allow them in for whatever consideration I deem appropriate. The one thing I want to note very clearly for everybody is that the effect I'm giving to Judge Weinstein's declaration. So I'm inclined to overrule those objects. With respect to Judge Weinstein's declaration, as I've said previously, I think the only matter for which I'm going to take it is that this case went before a mediator. The mediator's job is to get the parties to agree. The mediator does not adjudicate things on the merits. And his - - I don't think it's appropriate to receive any evidence about what he thought the case was worth because he's not subject to cross-examination. He should not be subject to cross-examination. Mediators shouldn't be hauled into court. And anything he said is very ambiguous as to whether it relates to the merits or whether it's just a devise to try to induce the parties to settle. So, the parties who objected to any of this and to the substance of his comment other than I did a mediation and they reached a settlement, I'm going to strike the declaration for any use other than that. MR. BENNETT: Your Honor, I think that actually the declaration submitted by Verizon is in a different class than - 37 - the other evidentiary objections. It's one thing for an expert to rely on hearsay - - THE COURT: Which they can do that. MR. BENNETT: - - and to use that as part of their opinion. But the declaration submitted by the associate of Lungertole (phonetic), she was not qualified as an expert in anything. She did not provide testimony about anything. That declaration put a bunch of documents before the Court which then, in Verizon's brief, were argued for the truth of the matter asserted in those documents. They were not foundation for an expert opinion. Whatever else may be said about the rest of the exhibits offered, each and everyone offered by Verizon has no placed in this record. THE COURT: Well, I'll - - I'm going to deal with that later. I'll rule on that at the end of the matter. Okay? MS. MYLES: So you don't need to hear from me, Your Honor? THE COURT: No. Not now. You can address it if you wish. MS. MYLES: Just very briefly, the documents are not being offered for the truth of the matters as stated therein. They're being offered to show what was part of the trial record in this case. What was - - every document that was submitted by Mr. Kim in his declaration is a piece of the trial record. There's nothing in there that's outside the trial record. What - 38 - he has presented to the Court are documents that were before the trustee in her consideration of the settlement and that also would have been before the Court and a jury had the case gone to trial. THE COURT: Thank you. MR. TAGAWA: Your Honor, one more thing. THE COURT: Yes. MR. TAGAWA: To the extent that this Court is granting the motion to strike Judge Weinstein's declaration, I would also ask that the Court strike any portions of Mr. Kahn's and Mr. Sullivan's declarations that refer to Judge Weinstein's statements or opinions that were offered during the course of the mediation and all references with respect to Judge Weinstein's statements. THE COURT: Let me deal with this this way. I think all I want to do is make clear on the record that the way I - - I don't think anything Judge Weinstein said should be accepted for the truth of the statement he made. He may have said the case was worth X. It - - that - - we have no idea what value that should be given for all the reasons I've described. We don't know how much he studied the papers before him. We don't know whether he really thought that was what the case was worth or whether that was just something he told the parties to try to get them to settle. The art of being a settlement judge is only vaguely - 39 - related to the merits of the action. It's assessing what the parties want and steering them to a place where they both - - where they find common ground. And so, I just - - I think the best way to deal with this is just to make very clear and on the record that I am not relying on whatever he said as having any bearing to - - on the real value of the case. I think that the fact that they went to a mediation and that these are very competent counsel on both sides and that the case went to settlement shortly before trial after a great deal of discovery was done has a lot more to say about the settlement than what the mediator said at the hearing. So, I'm going to deal with any references to that in that regard. And I'm attaching no weight to the number he put on it. Whether it was related directly in his declaration or whether it's related indirectly through someone else's declaration. Obviously, I heard the number. So I've heard it. And it's just a question in what - - the way I consider it, I think the best way to consider it is to say I think it doesn't bear any necessary relationship to the true merits of the case because of the nature of the role of the mediator. And I'm not going to be induced to give it any inappropriate value because of that. MR. TAGAWA: I appreciate that, Your Honor, but it seems to me that the trustee's declarant's, Mr's. Kahn and - 40 - Sullivan have in their declarations given a lot of weight to the mediator's statements. THE COURT: Well, then maybe - - if that's so, if their case relies on that, then - - and if that's all they have, then maybe they're in trouble. But- - MR. TAGAWA: Thank you, Your Honor. THE COURT: Okay. So let's let the Verizon people leave and then let's - - MS. MYLES: Thank you, Your Honor. If we're needed, we'll be right outside. THE COURT: If - - there should be a couple conference rooms over there. Why don't you check now to make sure they're open. The Marshall will help you with that. If there's any problem - - MS. MYLES: I think that one of them is. Thank you, Your Honor. THE COURT: Okay. We just want you to be comfortable. Okay. MR. BROWN: I guess as the final housekeeping matter, Your Honor, the question is who is here and who gets to stay given the kind of brain damage we all did with respect to the procedures order and getting everybody signed up with confidentiality provisions. THE COURT: All right. MR. BROWN: But certainly Mr. Kohn is part of the - 41 - order as are all the bondholder counsel and Mr. Degou (phonetic) with Verizon is out of the courtroom. And there are a couple other people here in the context of being here with the trustee. But beyond that - - and the U.S. Trustee, of course, nobody else was part of that order. Nobody else has signed a confidentiality agreement. MS. BALL: Your Honor, we had made a request in our document - - in our pleading to modify that order to permit the representatives of the Trade Committee to participate. THE COURT: Is there any reason why I can't - - why don't we identify who these folks are. If they have any reasonable relationship to the case, I can simply make them subject to that order and just get their oral agreement that they have no objection to that. MS. BALL: Thank you. THE COURT: I want to let people who have - - who are not defendants in this lawsuit but who are related to creditors in this case, I want to let them participate as much as I can. And I will - - I think my power to do orders will probably take care of this. So if you have any - - the doubt about the identity of anyone here, and we can just ask whether - - everybody to identify themselves and everybody who hasn't signed the order, describe the order briefly and then we'll make sure that - 42 - everybody agrees to be followed by, to follow it, to be bound by it. MS. BALL: Your Honor, I'll be standing on behalf of Jones Day for the Trade, we agree to be bound by the order. THE COURT: And you've seen the form of the order. MS. BALL: Yes, we have, Your Honor. THE COURT: So you know its terms. Okay. That's fine. MR. KUHNER: Good morning, Your Honor. Chris Kuhner of Kornfield, Paul and Nyberg. We're the co-counsel for the administrative claimants. We have a class action, Warn Act, administrative claim. THE COURT: Okay. MR. SCHOCHET: Ramius- - THE COURT: Do you understand the basic terms of the confidentiality agreement? MR. KUHNER: Enough. I've learned of it this morning, Your Honor, that it may come up at this hearing. So I'm not - - THE COURT: Okay. Well, I don't remember all the terms. Maybe Mr. Brown will describe it to everyone and then you can tell me whether you have any objection to being subjective to it. {Pause} THE COURT: Okay. Do you want to describe the - 43 - confidentiality agreement? MR. BROWN: Oh, I'm sorry. I- - THE COURT: - - which would be imposed by order upon everybody who's allowed to remain, may have the choice of whether to be subject to that or not to remain. Because I think it's important that this information regarding the characteristics of this lawsuit be preserved against people who shouldn't know of it. (Pause) MR. BROWN: And since nobody's going to walk away with documents, so that - - from this hearing, so that issue isn't on the table. I think the main thing is that no information gets communicated to clients effectively, and you maintain the information in the strictest confidence. The order provided that you could disclose it in order to oppose the hearing today with experts, but I don't think that's going to apply. I think the bottom line is you can't - - THE COURT: You can't tell anybody including your clients. MR. BROWN: - - you can't tell anybody, including your clients, what happens, what the evidence put on here today is. That's - - THE COURT: Obviously, you can describe the result because that will be a public - - the findings and conclusions - 44 - will be public matters. MR. KUHNER: That's acceptable, Your Honor. THE COURT: Okay. Anybody else want to - - MR. SCHOCHET: Your Honor, just to confirm it. Ramius Capital reports is happy to be bound by that. And incidentally, to clarify, I think Mr. Brown's misunderstanc,ing. We represent the equity side of that institution, not the bond side. There is an equitable. THE COURT: The other thing is that, you know, subject to what I said before, I - - at the conclusion of the evidence, I'm going to give a short bit of time for all the people to comment on it. Certain people are going to be permitted by their prior participation to put in evidence. Other people can comment and state their position. Okay. There are a few more people that I don't know who - - how they're related to the case, so. MR. KOHN: They're with us. THE COURT: They're with you. Okay. Ma'am? MS. BARNETT: My name is Karen Barnett. I'm with Latham & Watkins. We represent Citadel, a secured creditor. And they're just interested in the outcome of the hearing and the result. THE COURT: Okay. (Pause) MR. KOHN: Your Honor, I think they're one of the - 45 - houses that bought into the bank deal. MR. BROWN: Oh, okay. THE COURT: Okay. Okay. Do you agree to be bound by this order? MS. BARNETT: I do agree. I'm simply to report the result to them. THE COURT: Report the result. Okay. And the two gentlemen in the back? MR. HENNIGAN: Michael Hennigan, Your Honor. THE COURT: Oh, okay. MR. GERGER: Richard Gerger - - THE COURT: Okay. I understand. All right, now. Thank you all for straightening that out. How do you want to proceed? MR. BROWN: Your Honor, what I'd like to do is we offered Doug Sullivan's direct testimony through his declaration and present him for cross-examination. THE COURT: Okay. MR. TAGAWA: Your Honor, I - - before proceeding with that, I had made a request in my opposition papers that we be allowed some discovery into attorney/client privilege matters between Folgers, the trustee and the Pachulski firm. THE COURT: I'm not allowing any further discovery. Again, this is not a trial on the merits of this thing. This is a hearing into the question of whether this is within the - 46 - range of reason and we - - I'm not going to allow - - put this off for any further discovery. But you may cross-examine the witness if you wish. MR. SULLIVAN: I take I go up there, Your Honor? THE COURT: The usual spot. Not for you, but for witnesses. DOUGLAS W. SULLIVAN, DECLARANT, SWORN THE CLERK: State your full name and address for the record. THE WITNESS: Is this on? THE COURT: Should be. THE WITNESS: Douglas W. Sullivan. My address is 275 Battery Street, San Francisco, California. THE COURT: Okay. Who's going to go first? Again, you've - - I assume you worked out some allocation of your time? MR. BENNETT: Actually, Your Honor, we haven't been able to do that and I would actually need some instruction from the Court on what the allocation will be. THE COURT: Why not half and half? MR. BENNETT: If that's Your Honor's order, we'll live by it. I think our position is a lot more important, but - - THE COURT: Do you want to go first? MR. TAGAWA: I guess so. THE COURT: Now, how many - - let's just block this - 47 - out a bit. Who do you wish to cross-examine? Which declarants MR. BENNETT: The trustee, Your Honor. THE COURT: The trustee and counsel? MR. BENNETT: The trustee, Your Honor. THE COURT: So, you don't wish to cross-examine counsel? MR. BENNETT: Not unless I hear anything that suggests - - THE COURT: Okay. That's it. MR. BENNETT: Unless I hear something - - THE COURT: Okay. MR. BENNETT: - - different as a result of - - THE COURT: Okay. Mr. Tagawa, who do you want to cross-examine? Which declarants? MR. TAGAWA: Well, I'd like to cross-examine all of them. All that the trustee plans to call, at least, briefly, Your Honor. THE COURT: Okay. I'm going to assign - - I told each side they would - - with two objections, there'd be up to three hours. I'm going to give you each the same amount of time. I'm not dividing it by witness. So you have up to an hour and a half, you have up to an hour and a half to do whatever you want with. Okay? MR. KOHN: Your Honor, just - - does the three hours - 48 - I - - I know you said this, include oral argument time or just cross-examination time? THE COURT: I think it ought to include argument, too. And again, you get half and half. Use it how you wish. I will keep track. MR. TAGAWA: Should I go to the podium, Your Honor, or may I plead here? Or should I - - THE COURT: If you find it more convenient to question that - - I know you have a lot of documents. If you'd rather use the table, you may. CROSS-EXAMINATION BY MR. TAGAWA : Q. Hi, Mr. Sullivan. Barry Tagawa. MR. TAGAWA: May I sit down, too, Your Honor? Is that okay? THE COURT: Absolutely. As long as you behave, you can sit down and hit the table. And I expect you will, so it's - - BY MR. TAGAWA: Q. Mr. Sullivan, it was your opinion before this - - or at the time of the settlement that was reached with Verizon, that Northpoint, the plaintiff in the Verizon litigation, had a good case against Verizon, correct? A. Your question's really asking what were the risks on liability and damages, when you say good case, and I think that - 49 - Sulllvan - Cross there were significant risks. I can't disagree with what Judge Weinstein said in terms of 50/50. I think depending upon how Verizon presented its case and focused on particular aspects of I the case, the risks could have been significantly greater than 50/50. And there was a significant risk with an adverse result for many of the reasons I've identified in my declaration. And so, in the sense is it a good case, yes, we were going to go to the jury, hopefully, on many aspects, including breach of contract. And, yes, we were excited about the case, but there were significant down sides. Q. You believe at the time of the settlement that you would have reached the jury on your cause of action for breach of contract, correct? THE WITNESS: Your Honor, I'm in a dilemma here. First, I presumed this is all sealed? THE COURT: Yes, this is a closed proceeding and the - - THE WITNESS: Secondly, I think that really dives into what I regard as work product, attorney/client. And I'm - - THE COURT: I don't see how that cannot be open at this point. You have to discuss the merits of the case to come up with this settlement and we're sealing it for the purposes of preserving it for - - in any setting except for this hearing. THE WITNESS: All right. - 50 - Sulllvan - Cross THE COURT: So that objection is going to have to be overruled. The trustee puts the merits of the case at issue. THE WITNESS: Yes, we were confident that we would reach the jury issues of liability and damages with respect to the breach of contract case. BY MR. TAGAWA: Q. What were you going to ask the jury to award for breach of contract? A. We had a variety of experts to testify for breach of contract. Our principal damages expert was Professor McFadden. Professor McFadden offered two damage numbers, one at approximately $750 million and one at approximately $850 million. We also has Mr. Regan prepared to testify with respect to ' damages. Mr. Regan had a variety of theories of damages which presented significant risks based upon what Verizon had - - evidence that Verizon had raised. For example, Mr. Regan had a discounted cash flow analysis of approximately $2 billion. Q. Excuse me, I'm just asking for what figure would you have asked the jury for? A. Well, the problem is I can't answer that without describing the risk that some of the damage figures that Mr. Regan would testify would have been allowed by the court to actually reach the jury. There were significant risks that the damage figures that Mr. Regan had presented might not reach the - 51 - Sulllvan - Cross jury. Q. Well- - A. So. Q. - - your counsel, that is Mr. Brown, will be given the opportunity I suppose to ask you questions on re-direct concerning your thoughts on the risks of Mr. Regan's opinions. But my question, which you haven't answer, sir, is what number would you have asked the jury to award on the breach of contract cause of action? THE COURT: I think that - - you're a hostile witness clearly and you can engage in a little bit of explanation. You know, our two witnesses were blank and blank and so we would have asked for - - obviously, you would have asked for 2 billion unless the judge took it away. THE WITNESS: Right. THE COURT: This is not the time for you to explain and justify your opinion, but to answer the question as directly as possible, only going into detail so that the answer is not misleading. THE WITNESS: Okay. Mr. Regan had a range of damages from about $522 million up to, as he testified in his deposition, up to about $4.6 billion. So, we could have presented all those numbers had the court allowed us from Mr. Regan. - 52 - Sulllvan - Cross BY MR. TAGAWA: Q. You could have and would have, correct? A. We would have intended to, yes. Q. In addition, you had Mr. Howell as an expert on damages, correct? A. On the fraud damages. Q. Now, is it - - was it your opinion at the time of the settlement that you, you're cause of action for fraud would have reached the jury? A. I didn't have an opinion. Q. Your firm had successfully defended a motion for summary adjudication brought by Verizon on the fraud cause of action, correct? A. Yes. I was certainly hopeful that at a directed verdict or non-suit level that the court would reaffirm that. Q. At the time you entered into - - or agreed to the settlement, it was your opinion that you would have reached the jury on your fraud cause of action, correct? A. I was certainly hopeful that that would be the case based on the summary judgment ruling. Q. Judge McBride had found in deciding Verizon's motion for summary adjudication that you had proven a prima facie case on your fraud cause of action, correct? A. He found there were disputed issues of fact and he upheld - - or denied the motion. - 53 - Sulllvan - Cross Q. Assuming that your fraud cause of action was allowed to reach the jury at trial, what damage figure would you have asked the jury to award for simply compensatory damages for fraud? A. $1.4 billion. Q. And that would have been based on Mr. Howell's testimony? A. Yes. Q. Was that damage testimony by Mr. Howell disputed by verizon? A. Yes. Q. What figure - - well, strike that. Assuming that your fraud cause of action had reached the jury - - and perhaps I should back up a little bit. Would you have been the lead trial counsel in the Northpoint v. Verizon case? A. Mike Kahn and I were going to split the lead. Q. Did you have any agreement between the two of you of how you would split the roles between you? Meaning were you going to be doing opening statements and closing arguments or was Mr. Kahn going to do that? A. I was likely to do opening and we hadn't made any decisions beyond that. Q. Had you discussed amongst - - among you who would cross- examine which witnesses of Verizon's? A. Some, yes. Q. Had you discussed among you who would put on your own - 54 - Sulllvan - Cross witnesses on direct? A. Some, yes. Q. At the time that you entered into the settlement, or at the time that your client entered into the settlement, had you prepared any motions in limine? A. Yes. Q. And what motions in limine had you prepared? THE WITNESS: This is all fair game? They were not filed. THE COURT: Yes. THE WITNESS: we had a series of motion in limine. The principal ones were focused on trying to keep out of evidence statements that Northpoint had made in SEC filings. We also had motions in limine to keep out evidence of stock sales, for example. I'd say the principal one, though, was - - one of the principal one was to keep out statements in our SEC statements which suggested that Northpoint had acknowledged that there was a material adverse change or that Northpoint's financial condition was such that it would suffer a material adverse change. Q. Had you intended to file any motion in limine to exclude any of Verizon's evidence concerning whether or not there was a MAC based on the carve-outs or exclusions to the MAC such as dating industry, U.S. economy, or NASDAQ Technology Index? A. No. - 55 - Sulllvan - Cross Q. Do you have any opinion with respect - - have you identified for me now all of the motions in limine that you had! intended to bring? A. No, I don't have a list and I can't recall them. There were about 10 to 15. Q. Do you have, or at the time that you entered into the settlement, did you have an opinion as to whether or not you would prevail in your motions in limine? Some or all of them? A. Well, some of them I certainly thought we'd prevail in such as keeping out evidence of stock sales. There was also - - I now recall another one - - there was also a motion in limine to keep out evidence that we had not done a year-end audit, that the audit had been terminated following the filing of this bankruptcy proceeding. And I was hoping we would prevail in those. I thought that was likely. Q. Any other motions in limine that you had prepared that you believed you would prevail on? A. Not that I can think of. THE COURT: What evidence of stock sales were you trying to keep out and why? THE WITNESS: They were - - Verizon would ask the witnesses whether they sold stock to suggest that they were selling stock because it looked like a material adverse change was on the way. Items such as that. THE COURT: Oh. You mean the motive of certain - 56 - Sulllvan - Cross insiders. THE WITNESS: Yes. BY MR. TAGAWA: Q. Now with respect to your fraud cause of action, assuming that - - well, describe for me how you - - well, would you have asked for punitive damages from the jury if you had gotten your fraud cause of action to the jury? A. We would have certainly asked for a finding that the conduct was oppressive, fraudulent, despicable. And if we got that box checked, then there would have hopefully been a second phase in which we would have asked for punitive damages to be assessed. Q. Did you have any - - well, strike that. Now at the time you entered into - - or your client entered into the settlement agreement, you believed that you would have reached the jury on your third cause of action for negligent misrepresentation, correct? A. Again, that was the subject for a motion for summary I judgment by Verizon that we prevailed on. But I think there was a risk that that one would be taken away by way of a directed verdict, for example. So, I didn't form an opinion as to likelihood. I was certainly hopeful in light of the court's ruling on the fraud claim that it would get to the hearing. Q. I understand there's a risk on all causes of action, but did you have a particular opinion that your risk of not being - 57 - Sulllvan - Cross able to bring your cause of action for negligent misrepresentation to the jury was somehow greater than your - - the risks associated with breach of contract and intentional fraud? A. Yes. Q. And what's the basis for that? A. Well, the basis is our - - originally, our fraud claim, the demur was upheld. And we only - - it was after we amended, we were able to survive a second demur. In addition, if you look at the New York Faulkner case where they literally quoted at considerable length our fraud claim, although in a securities context, the court found that a motion to dismiss the case - - the bondholder's fraud claim should be dismissed under the Securities law and cited some facts that were potentially problematic in our case. For example, the court found that the fact that Verizon paid $150 million on September 6th after signing the merger agreement to be evidence that Verizon, in fact, intended to do the merger. The court also cited the particular evidence we were relying upon for our fraud claim, including in particular two letters and found that that was not evidence of fraud. So, I did consider it to be a significant risk. Q. With that attached, don't - - well, strike that. Your firm had offered to the trustee to undertake representation of Northpoint's interest in this case on a contingency basis, - 58 - Sulllvan - Cross correct? A. We did offer that sometime prior to - - no, let me back up don't know if we offered a contingency fee for the trustee. now for Northpoint, we offered to undertake the case on a contingency basis at one point. I'm not sure if we also made that same offer to the trustee. Q. To the best - - what were the terms of the contingency offer that you made for representation for Northpoint? A. It was a sliding scale that started at something like 33 percent for a particular amount. So, for example, I'm guessing now, but I think the amount was like 50 million, so that we would get 33 percent of any recovery up to 50 million. If the recovery was over 50 million, then the percentage went down to something like 20 percent. And after - - another recovery, if it got over, say, 100 - - 200 million, we would have gone for 10 percent of anything over that. Something along those lines. Q. Isn't it true that you had offered, or your firm had offered the trustee to represent the trustee on behalf of Northpoint at a 33 percent compensation for any recovery made through settlement and 40 percent in the event it went to trial? A. As I said, it was - - my recollection is it was a sliding scale, that over a certain amount, it became a different amount. And I didn't recall the 40 percent if there was a trial. Could be that it was 40 percent if it went to trial and - 59 - Sulllvan - Cross the recovery was under 50 million. But, for example, let's assume the recovery was 100 million. My recollection was we'd get 33 percent of the first 50 million and we'd get a different percentage for the recovery over 50 million. Q. Let me show you - - MR. TAGAWA: May I approach the witness, Your Honor? THE COURT: Yes. BY MR. TAGAWA: Q. This is a document entitled "Motion of Chapter 7 trustee, E. Lynn Schoenmann, for an order authorizing contingency fees for trustee and her accountants" and a memorandum of points and authorities in support thereof. Referring you to page 21 of that document. MR. TAGAWA: And I do have copies for other counsel, too. THE COURT: Okay. BY MR. TAGAWA: Q. Referring you to line 13 on that page, the motion states, "without the litigation financing, Folger was only willing to proceed on a standard contingency fee basis (33 percent of proceeds before trial and 40 percent after, plus costs)." Do you see that, sir? A. I do. - 60 - Sulllvan - Cross Q. Does that refresh your recollection as to what your firm had offered to represent the trustee on? Or the terms under which your firm was moving to represent the trustee in this case? A. No. And I'm highly confident that the proposal we made was as I previously described it. Q. So, in other words, you believe that this statement on page 21 of the trustee's earlier motion is incorrect? A. I believe it's partially correct. Again, it would be up to 50 million, but over 50 million, the percentage drops. Or I could have the 50 million figure slightly wrong. It might have been 40 million or something, but I believe it was 50 million. Q. When your firm made the offer to Northpoint to represent it - - strike that. Does this document refresh your recollection that after engaging or after discussing with Northpoint the possibility of your firm coming in on a contingency fee arrangement, that your firm did, in fact, make an offer to the trustee on a contingency arrangement? A. As I'm sitting here, I now recall that Ken Brown called me up at one point and asked, based on the prior Northpoint - - the prior contingency arrangement we'd offered to Northpoint, whether we would give our lowest contingency offer. And I think that the one we gave was the same or very similar. Or at least, reaffirmed that orally. Q. So your firm did make an oral offer of a contingency - 61 - Sulllvan - Cross arrangement to the trustee? A. That's my recollection. Q. Can you - - or do you recall what year or month that was? That is to say, to the best of your ability, can you tell me what date that was that your firm made that offer to the trustee? A. My recollection is Ms. Schoenmann became trustee in like around June 7 of 2001 and it would have been shortly thereafter. Q. At the time that your firm made that offer, was it your opinion that liability was a toss-up? A. At that stage, we'd done three depositions, hadn't even completed the third. I think we were still in the evaluating phase. And I certainly hadn't made any recommendations to anybody as to what - - as to the likelihood of success at that stage. Q. But your firm had made an internal evaluation of the likelihood of success at the time you made the offer, correct? A. Right. If you define "success" did I think that the case was good enough that we would likely get some recovery whether by way of settlement or trial, the answer's yes. That's why we were willing to take it on a contingency basis. Q. Now, were you the one that verbally made that offer to Mr. Brown? Or was it Mr. Kahn? A. I believe I had the conversation with Mr. Brown. And I - 62 - Sulllvan - Cross can't recall, there may have been a piece of paper that followed it. I can't recall. Q. Had you discussed that offer with Mr. Kahn before you verbally approached Mr. Brown? A. We discussed that within the partnership. Mr. Kahn, myself and our managing partner. Q. Anyone else in your firm have any discussion or input into, whether or not to make this offer to the trustee? A. Oh, I think people may have been consulted, but I think substantively, it was the three of us. Q. Would it be fair to say that all three of you agreed that this would be a good offer to make? Or you were authorized to make that offer to the trustee? A. Yes. Q. Assuming that your client had been successful in obtaining a billion dollar or multi-billion dollar judgment against verizon, is it your opinion that your client would have any difficulty in collecting on that judgment from verizon? Well, let me rephrase that to narrow it. Do you have an opinion as to whether or not verizon would have sufficient assets to cover that judgment? A. I was aware that they make in revenue $66 billion a year approximately. I was not particularly concerned, at least in the short term, that weld have any problem collecting ajudgment that we obtained from Verizon. - 63 - Sulllvan - Cross Q. Isn't it true that $150 million was approximately Verizon's revenue for one day? A. Verizon - - $67 billion down to a single day, I believe, it equates to $184 million. Q. So in your - - to the best of your knowledge, Verizon made $184 million per day? A. That's revenue. Q. Revenue. Now the merger agreement that Northpoint was suing under called for a breakup fee or bust up fee of $100 million against Northpoint in the event that Northpoint shareholders voted against the merger, correct? A. I saw that. in your papers, but I have not ever personally reviewed that aspect of the merger. Or if I did, I don't recall doing so. I was aware there were term sheets along those lines, but I did not review the final provision for that. I don't have any reason to doubt it since you raised it in your papers. Q. On behalf of your client, you intended to introduce the testimony of Professor Bernard Black of Stanford Law School, correct? A. Yes. MR. TAGAWA: Your Honor, one of the documents that I'd like to have introduced as an exhibit at this hearing would be Dr. Black's report. Unfortunately, it wasn't attached to my declaration earlier and no one else seems to have done it. So, - 64 - Sulllvan - Cross it's my understanding that this was one of the exhibits to the confidential settlement - - or mediate - - settlement conference statement that Northpoint had submitted in the San Francisco Superior Court. It was left off of Mr. Sullivan's exhibit. THE COURT: Is there any objection? MR. BROWN: Could I see what the document is? MR. TAGAWA: Sure. MR. BROWN: It's okay. Okay. THE COURT: Then it's admitted. Go ahead. Do you have a copy for me? MR. TAGAWA: Yeah, I - - for you, Your Honor? Yes. THE COURT: Are there any pre-marked exhibits? MR. TAGAWA: No, Your Honor. THE COURT: Okay. Why don't we just call this Respondent's A. All right? MR. TAGAWA: I have no objection. THE COURT: And it is admitted. Go ahead, please. BY MR. TAGAWA: Q. Referring you to page 3 of that opinion - - or report, sir, paragraph 2 states that, "Under industry custom and practice, compliance with closing conditions including the 'no MAC' condition is determined only at the closing date." Do you see that? - 65 - Sulllvan - Cross A. Yes, I do. Q. Did Verizon have any - - or to your knowledge, was verizon planning to introduce any evidence to dispute that opinion? A. Yes. They had two experts, Ms. Hitterich who was an expert, I believe, from Columbia Law School. And also another expert who's name is escaping me right now, Mr. Lambert, professor at Hastings, to rebut his statements and that statement's also qualified elsewhere in Mr. Black's opinions. Q. Referring you to page 4, paragraph 3. Well, strike that. Referring you to page 5, paragraph 7. Professor Black states, "I know of no merger agreement involving two public companies in which one party has the right to terminate the merger agreement based on the other party's failure to satisfy a closing condition that can potentially be satisfied by the bust-up date, other than a material breach of the merger agreement by the other party (in the case where the merger agreement, unlike the verizon/Northpoint merger agreement does not permit the breach to be cured). In light of the serious adverse consequences to the seller often occurring if the merger is terminated, it does not make business sense for a merger agreement to permit - 66 - Sullivan - Cross early termination based on failure to satisfy a closing condition that can potentially be satisfied by the bust-up date. " Do you see that? A. Yes, I do. Q. Did Verizon have any evidence, to your knowledge, that it intended to submit at trial which disputed that opinion? A. Substantial evidence. THE COURT: I'm sorry. I didn't hear your answer. WITNESS: Substantial evidence. THE COURT: Okay. THE WITNESS: Can describe it if you want. BY MR. TAGAWA: Q. Referring you to page 6, paragraph 10. Professor Black states, "The merger agreement requires that a decision to terminate be 'authorized by the respective board of directors of Verizon or Northpoint.' verizon acted contrary to industry custom and practice when it terminated the merger agreement by terminating without the required authorization of verizon's board of directors. II - 67 - Sullivan - Cross Did Verizon dispute that it had a contractual obligation to have termination authorized by its board of directors? A. verizon was contending that it received "authorization" and they were also contending that a material adverse affect had occurred. Therefore, there was no obligation to close regardless of board authority. But beyond that, I don't think so. Q. It's my - - strike that. Verizon did not dispute that it did not receive approval of its - - or authorization from its board of directors prior to termination of the merger agreement, correct? A. No. They were contending that the board had authorized it. That was their contention. Q. Did you - - were there any documents evidencing board authorization by Verizon of the termination prior to the termination itself? A. Verizon's contention was that a resolution adopted at the time of the merger on August 7 gave them the requisite authority. And actually, I believe one of their expert witnesses seconded that. In addition, they were contending that the corporate leadership council, which was involved in the decision to terminate and as a - - and contains the Co-CEO's who are members of the board, that that was sufficient. MR. TAGAWA: No further questions, Your Honor, at this time. - 68 - Sullivan - Cross THE COURT: Okay. Any- - MR. BENNETT: Your Honor, I have just two. THE COURT: Okay. MR. BENNETT: Actually, it might be three. THE COURT: You can do four if you want. Go ahead. MR. BENNETT: No. I'll be very brief. CROSS-EXAMINATION BY MR. BENNETT: Q. Mr. Sullivan, did you receive and review a request for production of documents that was submitted by the bondholders? A. I did. Q. Did it call for any documents that you regarded as privilege? A. I believe so. Q. Did you produce any of those documents? A. We produced six protocol letters. Q. Did- - A. Six letters that we had sent to the agent and to the agent pursuant to the protocol order. Q. Was there any document that you regarded as privileged that was called for by that document request that you did not produce? A. Can I see the document request? Q. You may. Sure. MR. BENNETT: Your Honor, I think this is Mr. - 69 - Sullivan - Cross Sullivan's time. THE WITNESS: With respect to number 1, that's documents provided by the trustee or the litigation counsel to the agent, I don't believe there was any - - pursuant to protocol, I believe all of those were produced. So there wouldn't have been any others. Number two, I do not believe there were any privileged document would help. Number 3 is deposition transcripts and video tapes and those were produced. Number 4 was just declarations and exhibits filed in connection with summary judgment and nothing privileged was withheld there. Number 5 is trial exhibits that have been marked or identified and there were none as of that date. So no privileged materials were held. Number 6 relates to expert reports and nothing was withheld that was privileged. Same with number 7. Number 8, it says, "All documents containing analysis of damages that were incurred by Northpoint arising from allegations set forth in second amended complaint," and yes, there were undoubtedly tremendous volumes of privileged documents withheld. It would include all our research analysis and the like. Number 9, there were no privileged documents that I'm aware of that were withheld. Number 10 is all documents relied upon by the trustee in connection with their decision to enter - 70 -Sullivan - Cross into the proposed settlement. I don't believe we had written communications with trustee, so I don't - - I'm not sure whether any were withheld or not. I'm not sure if any were withheld on that one or not. All documents - - number 11 is all documents generated in connection with the mediation. We turned over the mediation brief. Mr. Kahn mayor may not have taken notes, I don't know, at the mediation. If he did and they are preserved, they would not have been produced. And that would also cover number 12 which is documents reflecting settlement discussions between the trustee and verizon. Again, to the extent that Mr. Kahn or Ms. Schoenmann may have taken notes, those would have been withheld assuming they still existed. And that's the end of the document request. BY MR. BENNETT: Q. Was there any effort made to search for and comprehensively catalog the tremendous volumes of documents that you testified were withheld? A. Well, the documents I'm referring to it says documents relating to damages. That would include, obviously, any - - would include, for instance, memos I may have prepared following discussions with experts or it may have included research memos on recoverability of damages and, no, we did not seek to prepare a list of those documents. - 71 - Sullivan - Cross Q. Did you ever collect them in one place? A. No. Q. Did you ever produce a privilege log, cataloging what you did not produce that was responsive to this document request? A. No. Q. SO, I have no idea what documents might exist evidencing your prior opinions on any of the points that you've testified to here? A. Say that again? Q. Would I, based upon your document production, be able to tell if you ever made any statements, concerning evaluation of the litigation, different from the ones you've made here today? A. If you're talking about my statements, I'm unaware of any document that would reflect statements by me anywhere evaluating the merits of the lawsuit as you've just described. And so, there would not be any documents I prepared that would be inconsistent with my testimony. Q. I appreciate that. That was my question MR. BENNETT: Thank you, Your Honor. THE COURT: Okay. MR. TAGAWA: I have a few follow-up, although Mr. Brown, perhaps may - - wants to go. I have a few follow-up in response to Mr. Bennett's questions, Your Honor. MR. KOHN: Well, I was going to ask him a couple of questions, too, so perhaps we can decide about the order. - 72 - THE COURT: Okay. You count against them. MR. KOHN: Right. I - - I'll take that as - - THE COURT: Mr. Tagawa, do you have some more? Well, let's do the re-direct before you do more cross, okay? MR. BROWN: We're not going to redirect, Your Honor. THE COURT: No, but basically, Mr. Kohn counts as re- direct. MR. TAGAWA: Thank you, Your Honor. REDIRECT EXAMINATION BY MR. KOHN: Q. Mr. Sullivan, how long have you been working on this case? A. Since approximately December 1, 2000. Q. And what percentage of your time have you spent on it? A. It varied, but certainly in the first five - - four or five months, probably - - what percentages are, but let's say 75 percent. I was probably working close to 200 hours a month up through March of 2001 on the case. Somewhere in that vacinity. Q. And after that? A. After that it died down between then and November, say, of 2001 when they were doing lots of document productions and the like. After that, in the year 2002, this year, and from November 2001, tremendous amounts of time, often 200 or more hours a month. Q. Okay. So you may have 1,000 or more hours in the case? A. I'm sure I do. Sullivan - Redirect - 73 - Q. Okay. And if your firm were going to proceed to try this, about how much money do you think you would have made on the trial? A. You mean, what was our budget for the - - Q. For the trial, yeah. A. - - for the trial? I think we were budgeting it would cost about $5 - 600,000 per month and the trial was estimated to be six weeks. Q. Now, if this case settles, I gather you're not going to make anything at the trial, right? A. That's true. Q. Okay. Now, Mr. Tagawa asked you a bunch of questions about things going to a jury and the damage for a billion dollars and the things that you would have asked for, did your firm recommend this settlement? A. We did. Q. And could you explain, given the possibilities of going to the jury for $4 billion, why it is that you recommended the settlement? A. I can. MR. BENNETT: Objection, that's direct testimony that was supposed to be submitted in full on the 29th of August. It's inappropriate for this examination. MR. TAGAWA: I agree, Your Honor. I join in the objection. Sullivan - Redirect - 74 - THE COURT: I don't know why it wouldn't be. MR. KOHN: Well, I think it was in his thing, but he asked Mr. Tagawa a bunch of questions about various events. And I suppose I could phrase it by asking him - - THE COURT: Why don't you ask about the specific matters that Mr. Tagawa asked about. That's within the scope of cross - - redirect. BY MR. KOHN: Q. Focusing on Mr. Tagawa, okay, and the questions he was asking you about the big amount that you could have asked of the jury. In light of that factor, could you address your comments to why you recommended your settlement, notwithstanding those specific factors that Mr. Tagawa asked you about? MR. TAGAWA: Your Honor, I'd like to object because in this witness's direct declaration, the declaration testimony submitted - - the direct testimony of this witness submitted by declaration, there is nowhere stated in it that he recommended to his client to settle. All he says is that he supports the settlement as being in the reasonable - - as being reasonable, but he never states that he recommended it. THE COURT: The objection is overruled. It's a semantic difference. I think what you ought to go through is he asked a lot of questions about damages and he asked questions about the material adverse affect clause. That's Sullivan - Redirect - 75 - really what he focused on. So you should ask your redirect questions about that. MR. KOHN: Right. I was just going to ask about the damage point. I mean, yeah. BY MR. KOHN: Q. Sometimes when you ask - - would you agree with me that when you ask, sometimes you ask juries for a big number, you might get lucky and get that big number? MR. BENNETT: Objection, leading. MR. KOHN: It was preparatory, Your Honor. THE WITNESS: I can answer Your Honor's question. MR. KOHN: All right. THE COURT: It's overruled. You may answer that. THE WITNESS: Which question am I answering? BY MR. KOHN: Q. Well, why - - I'll withdraw the question. You can answer the Court's question. THE COURT: I didn't answer - - ask a question. MR. KOHN: I think - - but I think you sort of restated the question about focusing on the damage question. THE COURT: You ask a question. I made a ruling. It wasn't a question. MR. KOHN: Okay. BY MR. KOHN: Q. All right. If you would, Mr. Sullivan, focusing on the Sullivan - Redirect - 76 - damage - - possible damage you could ask from the jury and giving the large number that that could have resulted in had the jury bought the theory or have it influenced, could you explain the basis for your recommendation, in light of that factor Mr. Tagawa was asking about? A. As I said, we had two experts, Mr. Regan on damages and also Mr. - - Professor McFadden on damages with respect to breach of contract and Mr. Howell for fraud. With respect to Mr. Regan, his higher damage numbers were predicated principally on a discounted cash flow basis. There were a number of frailties with that as pointed out in evidence produced by Verizon. For example, in the SEC statements that Northpoint filed, it said, we're a young business where we can't say we have a proven track record. This is actually in an exhibit to my declaration. But he - - basically in those statements, Northpoint is saying that there is significant risk that Northpoint will ever achieve profitability and that it never has been profitable and that it's a start-up business. Those statements, coupled with the law dealing with recoverability of loss profits created significant risk with respect to the discounted cash flow number. In addition, the discounted cash flow number both from - - that Verizon had developed and that Mr. Regan had developed had a number of elements in it such as, it's called value-added Sullivan - Redirect - 77 - services. Value-added services include stuff like video over DSL program that Northpoint paraphrased as Blast and it involved a lot of projections about future business that had not even been developed yet. So there was significant risk that the court might regard that as speculative and not allow it. In addition, with respect to the $750 million number, Verizon had offered evidence that there were no damages at all. And I'm now focusing on the $750 million number as testified to by Professor McFadden. And one of the big concerns was Mr. Anastazzi, Verizon's expert, had come up with a no-damage theory. And the no-damage theory was essentially that Northpoint would have failed anyway. And that was predicated on the fact that the deal was not going to close until approximately May 2001. The termination was on November 29, 2000. So there was an interim period from when Verizon terminated, November 29, 2000, until closing following approval by the FCC and Department of Justice, up to May 2001. And the issue was, could Northpoint survive in that time period regardless of whether Verizon terminated. And one of the main issues - - or one of the main problems was whether or not Northpoint had sufficient financing. verizon was to put up $200 million under the funding Sullivan - Redirect - 78 - agreement on January 1 to get Northpoint over that time period. unfortunately, the funding agreement was predicated on Northpoint not losing more than $85 million in the fourth quarter. And verizon came up with compelling evidence that Northpoint would have been well in excess of those funding requirements, hence, as of January I, Northpoint would have had no money, would have run out of money anyway. In fact, Northpoint's losses for the fourth quarter were in the range of $111 million as compared with the bank covenants of 85 million. And if Northpoint did not come under the 85 million in bank covenants, verizon had the absolute right not to fund on January 1 and your clients, the banks, had the absolute right not to provide any further financing as well. So Mr. Anastazzi's testimony was that Northpoint would not have come up with any financing whatsoever in January, would have gone bankrupt in January anyway and that the termination was merely a termination in recognition of the inevitable. Q. Okay. Thank you. THE COURT: Anymore? That it? MR. TAGAWA: I have more, Your Honor. THE COURT: Okay. Hold on a second. Okay. You can recross limited to the subject of the redirect. MR. TAGAWA: Thank you, Your Honor. - 79 - RECROSS EXAMINATION BY MR. TAGAWA: Q. Mr. Sullivan, I believe in response to Mr. Bennett's questions, you said you were not aware of any writing from you with your opinions to the trustee concerning the merits of the litigation, is that correct? A. Concerning the probably of - - MR. KOHN: Your Honor, was that the redirect? I though you just said the recross is limited to the redirect. But now it looks like he's crossing the cross. THE COURT: I don't think that has anything to do with the redirect. It has to do with the other cross. MR. TAGAWA: I think I'm entitled to ask questions based on other cross-examinations that occurs with this witness. THE COURT: All right. You know, I've limited you in time. I think I'm going to let you go with this. We will be saved the problem of excessive time just by the time limit itself. So you may go ahead. MR. TAGAWA: Thank you, Your Honor. BY MR. TAGAWA: Q. Was that your testimony, sir? A. My recollection was the letters we wrote to Ms. Schoenmann were the same as the protocol letters that we wrote to the lenders and agents. And that therefore, they were not written Sulllvan - Recross - 80 - communications analyzing the litigation, but instead, we had meetings. Q. Did you verbally communicate to the trustee any opinions concerning - - that you had concerning the merits or likelihood of success at any point during the Verizon litigation? A. Yes. Q. And were you advising the trustee that she had a good case? A. I - - again, I think that was literally your first question. If it okay to answer? THE COURT: Yes. Everything's open. THE WITNESS: My statements to the trustee were obviously we had a strong breach of contract claim, that there was significant risk, that at one point, I think I through out a figure, I thought 60 percent before the experts. And I said - - she said, what percent would you give it? I said, I'd give it about 60 percent chance of us having success on liability. She - - this was before the experts. Following the experts and the testimony in particular of Mr. Anastazzi, I said I was more concerned about the probability of success on liability. And that I was concerned with, for example, witness statements they had obtained, that further increased the risk. For instance, a witness statement from Trevor Thomas calling into question the business practices of Northpoint's executives. Sulllvan - Recross - 81 - And I was also concerned about the continuing press in Worldcom, Enron and the like because Mr. Anastazzi had come up with analyses and compare - - comparables to the business practices that were being alleged in those instances. And I was concerned about the affect on the jury. So, I don't believe I gave another percentage to Ms. Schoenmann, but I told her that I thought the risk had increased. BY MR. TAGAWA: Q. With respect to Mr. Kohn's questions to you, sir. The banks had a MAC clause in their lending agreement, is that correct? A. The banks did, yes. Q. And that MAC clause was, in fact, broader than the MAC clause contained in the Verizon agreement, correct? A. If you mean by broader, it allowed the banks not to fund under a much less stringent standard, that's correct. There were no exclusions for the data industry, for the u.s. economy or for the stock market in the bank MAC clause. In addition, the bank MAC clause specifically included the word "prospects" allowing the bank not to fund if there were - - change in Northpoint's prospects. It also had a more subjective determination in that it allowed the banks to, quote, I think it said reasonably likely to have a material adverse affect. That that was the determination to be made as distinct from the Northpoint litigation, the clause said a - - something having or Sulllvan - Recross - 82 - which will have a material adverse affect. Q. Now the bank did not declare a MAC prior to December 31, 2000, correct, against Northpoint? A. No, they did not. Q. In fact, the bank's witness testified that there was no MAC under the bank's MAC clause with respect to Northpoint, correct? A. Mr. Parks, I can't recall if he said that they didn't invoke it because they believe it or if he said there was actually no MAC. But Mr. Parks of CIBC said from his perspective under the bank clause, there was not a MAC. Actually, I take it back. I don't think he said under the - - I take it back. That probably misstates his testimony. His testimony was probably with - - I can't recall whether his testimony was with respect to the bank clause. I'm now thinking it was more likely with respect to the Verizon merger agreement and that he was saying there was no MAC, but I'm not sure on that. Q. To your knowledge, did CIBC declare a MAC against Northpoint before December 31, 2000? '". A. Northpoint intentionally did not seek additional monies I under the bank loan because they were orally advised that if I they did seek money, they might not like the response. Q. Okay. Yes or no question, sir. To your knowledge, did CIBC declare a MAC under the MAC clause with Northpoint before - 83 - December 31, 2000? A. The reason I answered it the way I did was because there was no event to trigger the banks making that analysis. Plus they had covenants of - - the covenants for the loan of 85 million and 111 million, hence there was no need for them to do that. And I don't think there was a triggering event. But if you want to know, did they stand up and say there was a MAC, the answer is no. MR. TAGAWA: No further questions, Your Honor. THE COURT: Okay. Mr. Bennett, anymore questions?- MR. BENNETT: No, Your Honor. THE COURT: Anybody - - any redirect? Okay. MR. BROWN: No redirect from the trustee, Your Honor. THE COURT: Okay. Thank you, Mr. Sullivan. You may step down. (Witness excused) THE COURT: I think we need to take a break. Who's next. You want to cross-examine the trustee. Who else do you want to examine? MR. BENNETT: I actually have a scheduling problem. Mr. Hennigan has to leave by 2:30. If it's at all possible for us to accommodate him - - MR. KAHN: Me, too. I agree. I want to be out of here by 2:30. THE COURT: We're going to go as fast as we can. I - 84 - think, you know, we'll maybe do sandwiches or something, you know, when the time comes. Let's - - when do you want - - you want to examine the trustee? MR. BENNETT: I do want to examine the trustee. I was just going to propose we could possibly take Mr. Hennigan out of order, but if that's a problem - - THE COURT: Well, maybe we'll be - - MR. BENNETT: - - or offends Mr. Kahn, I suppose we can't do that. THE COURT: Maybe we can put the trustee later because the trustee doesn't have to fly anywhere. Okay? So, who else is to be examined? We'll deal with all the out-of- town people first. I think that makes sense. MR. BROWN: I think it's just Mr. Kahn, the trustee and Mr. Hennigan. I believe that Mr. - - THE COURT: But it - - MR. BROWN: Mr. Tagawa, you - - MR. TAGAWA: Well, I was planning to testify, too, and give Your Court the benefit of my opinions if you were interested. THE COURT: Well, you get to - - they get to cross- examine you. You submitted a statement. And I don't know - - MR. BROWN: We may have a brief cross-examination. THE COURT: I don't know whether they want to cross- examine or not. Okay. Let's take a break. Let's try to keep Kahn - Cross - 85 - it as quick as we can because I want to let everybody go home. Mr. Levinson, did you have something you wanted to say? MR. LEVINSON: Oh, no. I was just anticipating you. THE COURT: Okay. So let's be sure we're back here by 20 after and then we'll go with the next of the witnesses to be cross-examined. We will do the trustee after all the out- of-town people are done. Okay. (Recess) THE COURT: Please be seated. Now is the next witness Mr. Kahn? MR. BENNETT: Unless we can take Mr. Hennigan out of order. THE COURT: Well, they all need to leave. So, let's do Mr. Kahn, then we'll do Mr. Hennigan. MICHAEL KAHN, DECLARANT, SWORN THE CLERK: Would you state our full name and address for the record. THE WITNESS: Michael Kahn, K-a-h-n, 275 Battery Street, San Francisco. MR. TAGAWA: I have no questions of you, Mr. Kahn. MR. BENNETT: No questions, Your Honor. MR. KAHN: Well, I'll state, Your Honor, we're willing to retroactive do any contingency that we recommended. THE COURT: All right. Thank you, Mr. Kahn. You're excused. - 86 - (Witness excused) THE COURT: Okay. Now, the only other declarants are Ms. Schoenmann which we're going to do later, and Mr. Hennigan. Okay. Let's do Mr. Hennigan and - - MICHAEL HENNIGAN, DECLARANT, SWORN THE COURT: Okay. MR. BROWN: Your Honor, the trustee has no questions for Mr. Hennigan. THE COURT: Okay. MR. TAGAWA: I have no questions of Mr. Hennigan. THE COURT: Okay. MR. BENNETT: Your Honor, I have a couple of questions in the category of rebuttal and to deal with Your Honor's ruling on the affect of the trustee's - - actually of the mediator's declaration I think I need to deal with. Mr. Hennigan, in part, relied upon this declaration and I want to make sure that I make clear that it's not a necessary part of his testimony. THE COURT: I understand. Okay. Go ahead. MR. BENNETT: Okay. So, it's two parts. CROSS-EXAMINATION BY MR. BENNETT: Q. Mr. Hennigan, would you briefly take the Court through the process pursuant to which you generated or rearranged a reasonable outcome for this case? Hennigan - Cross - 87 - MR. BROWN: Your Honor, that's - - objection, that's direct, Your Honor. It's been done in his declaration. MR. BENNETT: Your Honor, he did it in declaration working off the trustee. There was a couple - - I finished - - asked him for an independent basis without using the - - relying upon what the mediator said. MR. KOHN: Your Honor - - MR. BROWN: Your Honor, you had made it very clear from the get-go when you were here on the 23rd what the mediator's testimony would be used for. It's exactly the same as you said today. To the extent Mr. Hennigan relied on the mediator's - - THE COURT: Okay. I think - - I don/t want to - - MR. BENNETT: We were confronted with a flurry of declarations that repeated the mediator's testimony over and over and over again. We didn't know what was going to happen when we actually got to court. MR. KOHN: Your Honor, I would suggest that Mr. Hennigan simply say if the issue is did he rely on the mediator, he can simply ask him, is your testimony the same given the Court's ruling on the mediator. And he says yes, we/re done with that issue. THE COURT: For one thing, listen, my letting the statement of the mediator in and saying what I'm going to make of this statement doesn't mean that these people can't rely on Hennigan - Cross - 88 - it. They can rely on all sorts of things. They're experts. Okay? So if you want to ask some question, does what the Judge say about what he thinks the value that is have any affect on you, you may go ahead. MR. BENNETT: Okay. THE COURT: But, I don't think it means that he can't rely on it - - MR. BENNETT: Let me try it a different way. THE COURT: - - or that these people can't rely on it. I'm not going to rely on it and I wanted to make that clear so that his statement, directly or indirectly, pursuant to the objection that was raised, I'm not taking for the truth of the matter asserted myself. Okay. Because it's hearsay. Experts can rely on hearsay. So you go ahead. MR. BENNETT: Let me try it. BY MR. BENNETT: Q. Was there any independent basis for your opinion concerning the range of reasonable outcomes for this case besides the mediator's recommendation? A. Yes. We did a full work-up of this case as though we were evaluating ourselves inside our own law firm. Q. Mr. Hennigan, you heard some testimony from Mr. Sullivan concerning the likelihood in his view or possibility in his view that Northpoint would be permitted to run out of cash toward the end of the year 2000 rendering it enable to close Hennigan - Cross - 89 - the purchase agreement. Mr. Hennigan, how do you evaluate that statement in the context of the evidence in this case that you reviewed? A. Two ways. First of all, based upon our analysis of the case, the only serious risk to the case, the contract version of the case was that testimony. In other words, we believed based upon our work-up that the overwhelming likelihood would be that Mr. Kahn and Mr. Sullivan would prevail at trial on all the other contract issues and would prevail at a number in excess of $800 million. In fact, in excess of $900 million. So we were left then with this, what I call, late-coming wild card with respect to what we call the mercy killing argument, that this was a - - this is a walking corpse and they wouldn't have made it to the finish line. In order for that testimony to prevail in the courtroom, the very banks that are here in this courtroom supporting the settlement because they're going to get 100 percent of their recovery, would have had to testify in the trial that they would have let this company die prior to the finish line. We thought it was extremely unlikely, given the benefit of 20/20 hindsight and the role that self-interest frequently plays in the coloring of testimony, that the banks actually would testify anything - - to anything other than they would have worked cooperatively with Northpoint to ensure that they reached the finish line. Hennigan - Cross - 90 - So, it's - - so, in our judgment, this being the only risk that was more challenging than the others to deal with, we believed that when the trial was actually presented, the overwhelming likelihood would be that the very banks who are here today, who are partisans in this proceeding and would have been partisans in the trial, would have offered testimony that would have enabled Mr. Kahn and Mr. Sullivan to have persuaded the jury that the company would have survived. However, that is the wild card that let us come down to 50/50 rather than a much, much higher number which I now understand Mr. Sullivan agreed with until he heard that testimony. Q. Mr. Hennigan, do you allow your firm to take cases on a - - solely on a contingency fee basis where the outcome is a 50/50 proposition? A. We try not to. Q. Mr. Hennigan, there was also some testimony by Mr. Sullivan concerning his doubts and concerns relating to the testimony of his damage experts. Were you hear and listening to that - - did you hear that testimony? A. Yes. Q. Mr. Hennigan, do you have a reaction to his concerns about the use of his witnesses testimony? A. In our evaluation, we frankly disregarded the high numbers and did our own damage evaluation. Our own damage evaluation Hennigan - Cross - 91 - is really quite simple and a little bit different from what was done by the plaintiff's experts. But it produces what I would call an objective and very difficult to argue with $930 million damage number which is simply the value of the merger to the Northpoint entity had it occurred, which is the 45 percent of the aggregate contribution that was being made Verizon assuming no value at all remaining in Northpoint assets. That $930 million dovetailed very nicely or very close to the range that Professor McFadden was opining about and we thought could be used as an objective measure to get there. So, contrary to the notion - - we thought contrary to the notion that it would be a $750 million case, at a minimum. We really thought it was going to be a $930 million case at a minimum or at least in that range. And I would say candidly to my colleagues across the aisle here that it's a rare occasion when you get a Nobel Laureate testifying in front of jury as to what your damages are. We think between your scale and the powerful testimony of that witness that the odds are that in the event of a recovery, it would have been squarely in that range. THE COURT: Let me ask you a question. I want to understand this because I've looked - - tried to look at the structure myself. You come up with 930 million - - THE WITNESS: Yes. THE COURT: - - by allocating the - - to the value of Hennigan - Cross - 92 - the contract, the merger contract, 45 percent of what the Verizon was going to put in. THE WITNESS: Right. THE COURT: Now, maybe I'm - - maybe I misconceived this. I thought Verizon was putting assets of 1.3 in. Northpoint was putting its assets in. And the resulting company would be owned 55/45. THE WITNESS: We actually devalued - - we adjusted the amounts that were coming in for an approximation of the devaluation that had occurred in DSL assets as a result of the market decline. So the way we came up with 935 million, actually, was the value - - the 45 percent value of $300 million in cash, $1.0 billion of assumed market value - - THE COURT: Okay. But that is the value of 45 percent of the resulting business? THE WITNESS: That's correct. THE COURT: Okay. THE WITNESS: And, frankly, without getting into great depth about whether or not that was precisely the way - - that's probably the way we would have proceeded had we tried the case, but it gave us an objective way of evaluating Professor McFadden and in - - THE COURT: It's a slightly different approach than he used. THE WITNESS: A different approach, but in our Hennigan - Cross - 93 - judgment, close enough. It validated the numbers. But - - and that's why when I came back with my judgment about what the range of settlement value was, it was taking off of Professor McFadden rather than our own independent analysis. THE COURT: Let me ask you this about it. Where is the money that was to go in included - - there was to be a credit for any preferred stock purchasor. THE WITNESS: Correct. THE COURT: And that money did go into the company? THE WITNESS: That's correct. THE COURT: How is that properly accounted for, if one does this sort of approach? THE WITNESS: Well, I - - we have our damage team actually here and I believe that we accounted for that. At least I certainly hope we did. So. MR. BENNETT: Do you want this? THE WITNESS: Show you the way we did it. Yes. MR. BROWN: Your Honor, and I'm just going to - - this is beyond the scope of redirect or rebuttal here. We're going into what presumably has - - could have been part of their main case. We're going into, you know, an elaboration of the damage analysis that was part of the declaration. Certainly the bondholders objected loudly when Mr. Kohn attempted to do that with - - MR. BENNETT: Your Honor was supposed to make an Hennigan - Cross - 94 - independent determination. This is exactly what you're supposed to do. THE COURT: Well, I'm going to - - I think that the question of Mr. McFadden's - - Professor McFadden's analysis was put in. This is evidence related to that. Basically, the line of testimony here was that the main witness was Professor McFadden. And the - - it's implicit, if not explicit, that that was the most reliable evidence of what the likely good recovery would be. And I think they can raise questions about that testimony. I just wanted to ask one question which I've asked. BY MR. BENNETT: Q. I'm - - think you ought to use this to answer the Judge's question about how you factored in the initial purchase of $150 million of preferred stock. A. These are our calculations and I was going to then, look to my left and see - - to confirm that we did, in fact, take that into consideration. UNKNOWN SPEAKER: Yes, that's why the cash is 300 - - I mean based on the 650, the cash being put in by verizon - - THE COURT: No, no. We have no testimony here. THE WITNESS: It is my understanding that that was factored in, Your Honor. (Pause) THE COURT: Let me ask one more question. My understanding that the total amount of consideration going from Hennigan - Cross - 95 - Verizon 'to Northpoint, some in cash, cash was in different categories. There were other assets. That the value the parties put upon that was 1.3 billion. Have I misunderstood? THE WITNESS: I believe that the aggregation of assets in order to get to 1.3 needs to be - - the DSL assets need to be devalued by some approximation. THE COURT: I - - but when they sign this agreement that the total amount that Verizon was putting in was 1.3. Did I get that number wrong? THE WITNESS: I thought it was 1.4, but - - MR. SULLIVAN: Your Honor, it was $513 million in assets and 800 million in cash of which they paid $150 million and change worth of preferred stock. So- - MR. SULLIVAN.: The total is - - THE COURT: - - that's 1.315. MR. LEVINSON: Your Honor, just one clarification. The 513 million was book value of the assets. To get to the 1.3 was 800 million in cash and 513 book value of the verizon assets. THE COURT: Okay. What is the evidence of the book - - of the actual value of those assets with book value of 515? THE WITNESS: The way we did it, Your Honor, was we took that $513 million worth of book value, assessed what it's market value was, both at the time of the merger and at the time of the breach, and concluded that the market value of Hennigan - Cross - 96 - those assets was about a billion dollars. And we did that two ways. We worked off of Professor Cornell's analysis of the general devaluation of DSL stocks and basically took what we believed the market value was at the time of the merger which was much higher than that and devaluated it by approximately 85 percent. THE COURT: Okay. Go on please. BY MR. BENNETT: Q. And one follow-up question to that. Did Northpoint's experts value that pool of assets in anyway different from the 1 billion? A. No. Q. Mr. Hennigan, during the mediation process, I think it was testified that there was some late-breaking information concerning criticism about the manner in which Northpoint kept its books and dealt with some of its customers. Using your experience as a trial lawyer, would you please explain how that would factor into your evaluation of the case? MR. BROWN: Your Honor, objection. Why isn't that part of the direct? It was certainly all set forth in Mr. Sullivan's declaration and Mr. Hennigan had every opportunity to address that in his declaration. MR. BENNETT: It was the response to Mr. Kohn's question, Your Honor. THE COURT: I'll give them some time, some limited Hennigan - Cross - 97 - amount of time here. THE WITNESS: There's other things that brought us to a 50 percent conclusion. Those were also wild cards that came in at the end that would have criticized the pricewaterhouse audit and the internal bookkeeping by the company. It's difficult to evaluate under these circumstances. Those were going to be, obviously, factors in the trial. They had a skilled trial team that was going to be able to deal with those and whatever else came up. MR. BENNETT: No further questions. THE COURT: Any further examination? MR. BROWN: No, Your Honor. THE COURT: Okay. Mr. Kohn does I can see. MR. KOHN: Thank you, Your Honor. CROSS-EXAMINATION BY MR. KOHN: Q. Mr. Hennigan, you talked about our clients, the banks. Did you talk to any of our clients and ask what they would have testified on this subject? A. No, but I've been through about 100 trials with people just like your clients, including your client. Q. So you thought they would have said something that mayor may not true if that was their interest. A. Absolutely not. I think people always testify to the truth the way they remember it on the day they testify, but Hennigan - Cross - 98 - that is frequently, if not always, colored by perceptions of self-interest. Q. Now, you said they would have financed this debtor going forward, right? That was your testimony? A. I'm going - - I - - what I testified to was that I believed that it was highly probable that the banks would have recalled that they would have found a way to have this company survive to the merger day. Q. Okay. And how much would it have cost to do that? Do you know how - - what the company's budget was? Cash, dollars, how many? A. I know the company was going to run out of cash before - - Q. How much? A. It was going to be zero before they got to the merger date unless they - - Q. And you - - A. - - unless they were able to procure financing. Q. Do you know how much they would have needed to get there? A. To get to the end? Q. Yeah. A. It's in the hundreds of millions. Q. Do you know how much the banks already had outstanding at the time? Of the merger date, at the time they recalled a MAC, do you know how much they had outstanding? A. I know it's less than 175. - 99 - Q. Yeah. Do you know exactly how much it was? A. I heard it here today in the courtroom, but I don't recall the exact. Q. Do you it was 85 million? A. Don't know. Q. Okay. In your experience, do you think somebody with 85 million at stake would put up hundreds of millions of dollars to get to the end point? A. In my experience, somebody with $85 million at stake in a trial figures out a way to remember his state of mind in a way that produces a result. Q. Okay. Now you talked about the contingent fee, that you've - - you know, your firm - - you evaluated this the way you do contingent fees, right? A. Yes. Q. Okay. And do you ever lose a case that you take on a contingent fee? A. Yeah, we did that once. Q. Okay. And do you have this case on a contingent fee? A. Do I have this case on a contingent fee? Q. Yes. A. No. We'd like to have one. We'd like to have it on a contingent fee. MR. KOHN: Thank you. THE COURT: Any other questions? Thank you, Mr. Schoenmann - Cross - 100 - Hennigan. You may step down. (Witness excused) THE COURT: Okay. The trustee? Okay. LYNN SCHOENMANN, TRUSTEE, SWORN THE CLERK: State your full name and address for the record. THE WITNESS: Lynn Schoenmann, 800 Powell Street, San Francisco. CROSS-EXAMINATION BY MR. BENNETT: Q. The settlement consideration includes more than $175 million, is that correct? A. The - - could you repeat that? Q. Does the settlement consideration include something in addition to the $175 million? A. If you're asking about the claims, yes. In addition to the $175 million, Verizon agreed to withdraw something in excess of $30 million in claims. Q. Okay. Could you tell us a little bit about the claims? A. They are unsecured claims. I don't know what you're - - I don't know what to tell you about them. They are claims that were filed, I believe, in the communications case. Q. Okay. Did you perform any - - make any effort to evaluate what that release is worth? A. Well, what it's worth really depends on the ultimate Schoenmann - Cross - 101 - recovery for the unsecured debtors. So I know it's worth something less than 30 million. And I don't know what the number is. Q. Okay. Did you regard the claims as essentially allowable in that amount or more? A. We never got to that process. Q. Did you think they were allowable in any amount? A. I don't know. Q. Did you look at them? A. I looked at the face value of them. I didn't look at any underlying substantiation or documentation, no. Q. Do you believe they are enforceable in any amount at all? A. I don't know. Q. Did you check to see if they've been previously released? A. I don't recall. Q. Is it a possibility they were previously released? A. I assume there is. Your Honor, I'm not trying to be difficult. The $30 million in withdrawal of claims was not an integral part of the settlement. It wasn't even discussed at this - - at the mediation. So, it's not something that's - - Q. But it was a part of settlement? A. It was at the end, yes. Q. And it made it into all your pleadings in describing the consideration for the settlement? A. That's correct. Schoenmann - Cross - 102 - Q. Okay. I'm going to hand you a copy of a claim filed by Verizon. It's actually one of several that they filed, on May 29th, 2001. At the same time, I'm going to draw your attention to a page that, for some reason has page 17 on the top of it, but it is not the 17th page. I suppose this would be Exhibit B. Could you please read the language that's between the two words that say plus? You can read it to yourself. THE COURT: What page number? MR. BENNETT: It's marked 17 in the upper right-hand corner, but it's not the 17th page. It's about page 3. THE WITNESS: You're referring to the - - MR. BENNETT: For some reason it's the fax marking. I'm using the fax marking. THE COURT: Attachment to proof of claims? Is that what it's called? MR. BENNETT: Yes. That's correct, Your Honor. THE COURT: Okay. Thank you. THE WITNESS: The word plus is in here. Which are you referring to? BY MR. BENNETT: Q. The words between the two - - the word plus in bold appears in two places. And I'm suggesting that - - I would appreciate it if you would read to yourself, you don't have to read it aloud, the language between the two bold plus. A. I've read it. Schoenmann - Cross - 103 - Q. Now, does this refresh your recollection as to whether Verizon had any claim for $31 million at the time you sat down to negotiate with them? A. No, it doesn't. Q. It doesn't? A. No. Q. Then how - - what do you think this language means? I'm 'having trouble. A. I don't understand your question. Q. What does this language mean? A. The total amount of the proof of claim. The claim which has been filed is for $31 million. This had been filed several times. I have seen it. There are other smaller claims that have been filed by Verizon in the estate. This references a stipulation and order regarding the assumption and assignment to AT&T of network contracts and related co-location sites with Verizon. And it indicates that this $31 million may not, in fact, be a good claim. Q. Do you know that you checked into this before you entered into your negotiations with Verizon? A. No. Q. Did you know this when you accepted this consideration or release of the $31 million in claims? A. I knew that there were - - there had been filed in the estate a number of claims by Verizon. And as part of the Schoenmann - Cross - 104 - settlement, as - - and - - it just appeared to be prudent to get those released. It was part of the global nature of the settlement and it did not require any investigation on my part as to the underlying substance of the claims. Q. So- - MR. BENNETT: I have no further questions. THE COURT: Okay. Mr. Tagawa, do you have any questions of this witness? MR. TAGAWA: Yes, Your Honor. CROSS-EXAMINATION BY MR. TAGAWA: Q. Ms. Schoenmann, earlier this year on January 31, 2002, you filed a motion for an order authorizing contingency fees for trustee and her accountants, correct? A. I don't recall the date specifically, but, yes, I did. Q. And in that - - let me just show it to you so it's clear. This has already been marked as Respondent's Exhibit A. And if you look at the last page, on page number 23, is that your signature there? A. Yes, it is. Q. Now, what I've handed you consists of the motion and the memorandum of points and authorities in support of it. Now in this motion, you were seeking compensation of a 3 percent fee based on the total recovery in this case for yourself, correct? A. That's correct. Schoenmann - Cross - 105 - Q. And that this would be paid only in the event that - - or paid to you only in the event that there was a recovery in this case, meaning if there were no recovery and Northpoint lost, you would get nothing, correct? A. That's my understanding, correct. MR. BROWN: I believe that was my recollection of your application. The offer was. THE WITNESS: That was the proposal, correct. BY MR. TAGAWA: Q. At that time, did you have any opinion as to the likelihood of prevailing - - Northpoint prevailing in the Verizon litigation? A. In January of 2002? . Q. As of January 31, 2002. A. I believed at that point in time that we had a credible case, probably a strong case, certainly a reasonable and realistic case, some expectation of recovery. I can't tell you, looking in hindsight, how strongly I felt about that or what I thought the actual level of recovery would be, but certainly there was merit to the case in my mind. Q. Did you put any kind of percentage estimate as to the likelihood that Northpoint was going to prevail at that time? A. No. No, no specific percentage. I think in hindsight I certainly thought we had better than a 50/50 chance, just in general terms. But I had no specific number in mind. I just Schoenmann - Cross - 106 - thought we had a good case. Q. Was that based on your - - was your opinion in that regard formed independently or was that based on conversations that you had with Folger and - - or Folger, Levin and Kahn? A. Certainly I relied on the advice of my professionals, yes. Litigation counsel. Q. Did you formulate any opinion other than what they told you? A. Well, this wasn't done in a vacuum. I did have conversations with any number of people. So I can't say solely on the basis of the advice of counsel. But certainly primarily on the basis of advice from counsel and their evaluation of the case. Q. As of this period, as of January 31, 2002, had there - - strike that. Referring you to page 4, line 3 of that document. A. Yes. Q. The motion states the estates most valuable asset is that certain action pending in the Superior Court for San Francisco styled Elam Shung (phonetic) and trustee for Northpoint, et cetera, correct? A. Yes. Q. And that was your opinion at that time? A. Yes. Q. It still is your opinion today? A. Yes. Schoenmann - Cross - 107 - Q. Referring you to page 5, line 25. This states, "The court entered its order authorizing the retention and employment of Folger as special litigation counsel of trustee in the Verizon litigation on July 16, 2001." Do you see that? A. Yes. Q. Do you recall receiving an offer from Folger, Levin and Kahn at that point to undertake representation of you or Northpoint's interest on a contingency fee basis? A. You know, I don't specifically recall that. At the time that I was appointed in June, I knew that there had been an offer by Folger, Levin and Kahn to represent the estate on a contingency basis. I believe it was just my assumption that that offer was still on the table. I mean, I know that it was referenced. I don't remember any specific occasion when someone from Folger, Levin and Kahn specifically came to me and said, I am proposing to represent the estate on a contingency basis. It simply was a - - it was defacto, it was there from before my appointment. And I assume going forward that that was an option, and I don't recall anything said by either Mr. Sullivan or Mr. Kahn which would have indicated that that wasn't an option. Q. Referring you to paragraph - - or page 21 of that document, line 13 states, Schoenmann - Cross - 108 - "Without the litigation financing, Folger was only willing to proceed on a standard contingency fee basis (33 percent of proceeds before trial and 40 percent after plus costs)." Is that - - is it your recollection that you had not received that offer from Folger, Levin? Or Folger, Levin and Kahn? A. Well, as I said, I knew that that offer predated my appointment and in conversations with Mr. Sullivan, it was implicit that that was still an option to the best of my recollection. Q. Now, as of on October 15, 2001, you as trustee brought a motion to approve the loan agreement with A.G. Middlemarch for a qualified underbidding and that motion came up for hearing in this Court, correct? A. That's correct. Q. And at that hearing there were approximately 30 bids made? A. There were a large number of bids made. I don't recall the exact number, but 30 sounds like it's probably a good number. Q. And referring you to page 6 of this document, line 27, just so you can refresh your recollection. A. We're still talking about - - Q. The same document. A. - - the same document? Schoenmann - Cross - 109 - Q. This says, "After approximately 30 bids were made, Monarch Global Capital Associates, LLC emerged as the winning bidder and the Court authorized the trustee to enter into a loan agreement with Monarch. The loan agreement executed by the parties requires Monarch to advance up to $8 million at zero interest. The only consideration it will receive is 5.5 percent of any settlement prior to the presentation of evidence at trial and 6 percent of any settlement or judgment thereafter. It was also required to pay A.G. Middlemarch's breakup fee which is not part of the loan.1I To your knowledge, was that loan agreement with Monarch approved by this Court on those terms? A. Yes. Q. In your motion, you also sought a 1 percent contingency fee of the gross proceeds of this verizon litigation for your accountants in addition to their compensation based on customary hourly rates as may be approved by this Court, correct? A. Yes. Q. Referring you to page 21 - - or sorry, page 20, line 15, Schoenmann - Cross - 110 - you state at the beginning of paragraph 21, "The trustee submits that under the facts and circumstances present in these cases, a contingency is the only appropriate compensation." At the bottom of that paragraph, starting on line 22, you state, "The trustee is not cherry-picking these cases after the fact, but rather is seeking the contingency fee up front in a quantified amount well justifi~d by the risk of non-payment in these cases. Moreover, a contingency fee completely aligns the trustee's economic interests with those of the estates by creating a further incentive for her to maximize the recovery in the Verizon litigation rather than to settle at a level that pays secured and administrative claims." Do you see that? A. Yes. Q. Is it your understanding that you currently, without a contingency fee arrangement on the proceeds of this Verizon litigation, do not have sufficient incentive to maximize the recovery in the verizon litigation? Schoenmann - Cross - 111 - A. No. Q. Is it your understanding or is it your position that without a contingency fee you are - - your economic interests are not completely aligned with the economic interests of the estate? A. No. Q. Well, why did you say here on page 20 that a contingency fee completely aligns the trustee's economic interests with those of the estate? A. Generally, that is by definition what a contingency fee is. Q. Well, you have a duty under Section 326 to maximize the recovery of the debtor in the Verizon litigation, correct? A. Factoring in elements of risk, yes. °I mean, if you're suggesting that I have an obligation to, you know, roll the dice to get the maximum amount possible, I think that overstates. I have an obligation to achieve the maximum return which also includes the consideration of the risk of no return. Q. Okay. Let's ask you a hypothetical. A. Um-hmm. Q. Assume with me that Northpoint has a 60 percent chance of prevailing in the Verizon litigation today. A. Okay. Q. And it has an upside potential of $4 billion to recover in the Verizon litigation today. What is your understanding as to Schoenmann - Cross - 112 - whether or not $175 million is within the range of reasonableness for you to accept? MR. BROWN: Objection, the hypothetical is irrelevant and it assumes facts not in evidence. THE COURT: I think that the hypothetical is hard to assess. Are you suggesting that the hypothetical was that there is a 60 percent chance of recovering 4 billion? Or there's a 60 percent chance of recovering something in a case in which the asset of recovery may be as much as 4 billion? Those are very different questions. So I think the question is hard to answer. MR. TAGAWA: All right. Let me try to break it down. BY MR. TAGAWA: Q. Is it your opinion, Ms. Schoenmann, that Verizon would have a hard time to satisfy a billion dollar judgment? A. I have no reason to believe that right now they would have any trouble satisfying it. Q. What about within one or two years into the future, do you see any likely difficulties in collecting on a billion dollar judgment from Verizon? A. Well, that's speculative and I think if at six months ago, if anyone had asked if I had thought there would be a problem in collecting a billion judgment from Worldcom, we p~obably would have said no. I don't know how we judge that. It's a - - it seems to me the environment out there is not as stable as it Schoenmann - Cross - 113 - was when we first started pursuing this lawsuit and is actually quite volatile. And I don't know that I would want to make those predictions about any company. Q. SO you have factored in some discount based on your concern that Verizon may not be able to satisfy a billion dollar judgment one or two years into the future? A. No. No discount, just common sense. Q. Okay. So if we assume that Verizon will have no trouble paying a billion dollar judgment in the futur~ that Northpoint may obtain, if you assume with me now, let's take this assumption, that there's a 50 percent chance that Northpoint would prevail on its breach of contract claim. And that Northpoint, if it were to prevail, would get somewhere between 750 million to 850 million dollars for its breach of contract claim. Is it your opinion that $175 million settlement is within the range of reasonableness in that situation?' A. Well, I would observe that a 50 percent chance of recovery of $800 million is not the same thing as saying that we have 100 percent chance of a recovery of $400 million. And yes, it's a 50 percent chance of recovery in your example of 800 million. It's also a 50 percent recovery of zero. And within that context, it is my opinion based on the advice of the experts and the professionals that I was working with, yes, $175 million is a reasonable amount. Schoenmann - Cross - 114 - possibility of recovery in excess of a billion dollars, correct? Or at least, Mr. Howell will testify that Northpoint's damages for fraud were 1.4 billion, correct? A. That's correct. That's correct. Q. And you, yourself, gave statements to the press that recovery up to $4 billion was within the range of possibilities, correct? A. I said that - - yes, that the recovery at trial could be as much as $4 billion. Q. Did you get that number, $4 billion, from your counsel, Folger, Levin and Kahn? Or did you come up with that somewhere else? A. I arrived at that number based on the advice of counsel, based on discussion with counsel, based on the pleadings, based on the complaint, based on the damages that we were asking for. Q. SO your counsel basically told you in privileged circumstances, meaning attorney/client privilege circumstances, that they though $4 billion was within the realm of possibility as a recovery, correct? A. No, not - - no. MR. BROWN: Objection, misstates the witnesses testimony. THE WITNESS: No. No, that does misstate it. BY MR. TAGAWA: Q. Did they - - Schoenmann - Cross - 115 - A. There was a complaint on file. I'm sure you've read the complaint, I've read the complaint. The complaint asks for a certain amount of money. punitive damages was also asked for. It was clear from the pleadings that, in fact, with an award of punitive damages, it could go up to 4 billion. Q. So you're saying, without having received any word from - - or any spoken indication from anyone at Folger, Levin and Kahn, you, based on your review of the amended complaint, independently came to the conclusion that $4 billion was a possibility? A. Well, let me try again. That misstates it also. I had a lot of information to consider. I had the advice of my counsel. I had their evaluation. I had the complaint. I had any number of factors. And based on all of that in the aggregate, I was comfortable saying that the upper limit of the recovery could be as high as $4 billion. Q. In saying that, did you attach any percentage likelihood of that result - - A. No. Q. - - in your mind? A. No. Q. So, can you - - I think you've now testified that, under a hypothetical situation where there's a 50 percent chance of recovery against verizon, both between 750 million to 850 million dollars and no problems whatsoever in verizon's Schoenmann - Cross 116 satisfying that judgment, that you believe $175 million settlement is within the range of reasonableness. And you said, I think, that there is no mathematical way to arrive at that number in your mind, is that correct? A. If - - what I think I said was that one needs to consider that a 50 percent chance of recovery of $800 million is not the same thing as 100 percent chance of a recovery of $400 million. I don't believe there is any kind of mathematical formula that you can use to come to the $175 million. It's rather a result of the aggregate of consideration of all the factors, the experts, the advice of counsel, the current environment and it was my conclusion that $175 million was a reasonable amount. Q. Can you tell me exactly what factors you considered to arrive or how you - - what formula, what method you used to arrive at that number? A. I did not use a mathematical formula. I relied on the advice of counsel. I took very seriously the remarks of the mediator at - - Judge Weinstein at the mediation, the analysis of the experts and the anticipated defense of Verizon at trial. Q. Isn't it true that before you received the $175 million settlement offer from Verizon, Mr. Kahn told you that he expect Verizon to be making a counter offer somewhere between $80 million and $180 million? A. I have seen that in your pleadings. I believe you're incorrect on the $180 million. I never expected them to come Schoenmann - Cross 117 back at $180 million. Q. Isn't it true that you had told Mr. Kahn that you would reject a settlement offer from Verizon that came in between 80 million to 180 million dollars as insufficient? A. No, that's not correct. I never - - I do not recall the number of 180 million dollars ever even being mentioned. It was my view that $80 million would be insufficient and I believe I indicated that I would find $150 million insufficient. But I don't know where the $180 million that you're referring to come from. I - - that was not considered. MR. TAGAWA: Your Honor, I think I need a break here to locate some documents. And I know we are around a lunch recess time. Could I request a lunch recess. THE COURT: I think probably everybody needs to eat. How do you - - let's just talk a minute here about what we're going to do. You have some more examination? MR. TAGAWA: I don't have very much more. THE COURT: Okay. MR. BENNETT: I have a handful of questions that have risen as well. THE COURT: So, we have probably half an hour, something like that? MR. BENNETT: Five minutes for me. THE COURT: Okay. Why don't we take some time for lunch and then come back and finish this. And then I can hear - 118 - your arguments. I think that - - why don't we just break for lunch and then not break separately for the arguments. Okay. So I want people to go home and these counsel need to get home. And so let's, if we can, keep this lunch short. There are sandwich - - there's a place right here on the corner where you can get a piece of pizza. Let's not go the gourmet route for this lunch and I will join you by not going the gourmet route. I'll get a sandwich or a piece of pizza. MR. KOHN: I just thought it would be helpful, Your Honor, to the parties if you kind of - - since you're keeping score about the time, if everybody knew who had what left. THE COURT: I don't think anybody's going to come anywhere near the limits. Mr. Tagawa has used about - - he hasn't got much time left because he's used 25 minutes this time, 31 - - he's got about 20 minutes left. 20/25 minutes left. So I assume this will be pretty quick at the end. And we will, I think, finish the examination within a half an hour. Can - - when do you want to come back? Do you want to come back at a quarter to one or one? I want to be able to hear your argument and let you folks get your plan in, if possible. MR. BROWN: Half an hour is ample for us. MR. BENNETT: One, please. This will give us - - could we have 45 minutes? Thanks. THE COURT: If we come at one, when do you folks have - 119 - to leave to get back? 2:30 is that what you want? MR. KAHN: It's okay, Your Honor. MR. BENNETT: They're local. MR. KAHN: I'll stay as long - - THE COURT: Okay. Well, I don't think we're going to be much beyond that at any event. MR. KAHN: Yeah. I've sort of blown through my deadline, so, that's okay. THE COURT: Okay. Well, let's take 45 minutes, then. Give people a little bit of time to breath. So I'll see you at one. One by that clock and let's start right away at one. (Recess at 12:15 p.m.) - 120 - SAN FRANCISCO, CALIFORNIA, FRI., SEPTEMBER 13, 2002, 1:00 P.M. THE CLERK: All rise. THE COURT: Please be seated. Okay. MR. BENNETT: Your Honor, I believe Mr. Brown is in the restroom. THE COURT: Okay. Hold on a second please. We're not getting a recording here. We need to correct this. (Pause) THE COURT: What's happening? (Pause) THE COURT: Anyone know any good stories? MR. BROWN: Your Honor, what are we waiting for? THE COURT: We don't have - - the recorder isn't working and we want a transcript. So, one of our technical people is coming up. This is a digital recording system. And if this doesn't work, we will go to something else. Let me see what I - - well, let's see if this works quickly first. And then if it doesn't work, we'll find some kind of a recorder to use. Okay. Are you ready to proceed? Obviously, that isn't on your clock. Go ahead, please. MR. TAGAWA: Thank you, Your Honor. Schoenmann - Cross - 121 - CROSS-EXAMINATION BY MR. TAGAWA: Q. Ms. Schoenmann, before we broke for lunch, I was asking you whether you recall to ever being told by Mr. Kahn that he expected Verizon to be making a settlement offer to you somewhere in the range of between 80 to 100 million dollars. And your testimony was you don't recall him telling you that? A. Are you talking about outside of the context of the mediation? Q. I'm talking about after the two-day mediation had been completed - - well, let's go back. Let's try to go through this and - - A. Because there were numbers that we were talking about during the two days of mediation when we were both in the mediation. Q. Did you - - what was - - was it - - is it true that the first settlement offer you made to Verizon on behalf of the plaintiffs in the Verizon litigation was for $1.1 billion on July 1, 2002? A. That's the amount. I don't remember precisely the date, but that's probably the date as well. Q. And do you recall - - well, strike that. Is there some reason that you did not ask Verizon for $4 billion? A. I arrived at the $1.1 billion settlement offer after discussions with my counsel. I - - as a settlement offer, I Schoenmann - Cross 122 don't - - I don't understand your question. You're suggesting that as a settlement offer, I would ask for the outside upper limit? Q. As a fiduciary for your estate and your interests, I'm asking whether or not it occurred to you to make an offer for a billion dollars? A. I don't know if I specifically thought about it, but if I had, I would have thought that unrealistic. Q. Did you think that as a fiduciary for the estate of asking for anything above $1.1 billion in your initial settlement offer? A. Yes. Q. And what was it that made you decide not to do that? A. The advice of counsel, discussions with counsel. Q. Is it true that on July 3rd, Verizon counter offered for settlement at $1 million? A. Yes, they did. Q. Was that the first settlement offer you received on behalf of Verizon? A. Yes. Q. Is it true, then, that the parties proceeded to a mandatory mediation before retired Judge Weinstein held on July 17 and 18, 2002? A. We proceeded to mediation in front of Judge Weinstein, yes. Schoenmann - Cross 123 Q. And on July 17, Verizon made a settlement offer to you of $80 million to settle, correct? A. $80 million was the number that was on the table. Q. They made that offer to you, correct? A. You know, I don't know if it was a formal settlement offer, but it was understood that $80 million was a number that they were willing to offer. Q. How did you reach that understanding? A. Discussions with my counsel and with Judge Weinstein. Q. And so, when the mediation adjourned on July 18 before Judge Weinstein, there were no further settlement offers made between either side, correct? A. There was no further settlement offer on my side. There were numbers that were talked about, but, no, Verizon did not make a firm offer of any number. Q. When the mediation before Judge Weinstein concluded on July 18, did Verizon's representatives indicate to you that they would be returning to New York to seek further settlement authority? A. Yes. Q. At that point, or on or about that point, did Mr. Kahn indicate to you something to the effect that he believed Verizon would make a settlement offer in the range of 80 million to 180 million dollars when they came back? A. No, I do not remember that $180 million number. It's Schoenmann - Cross 124 entirely possible it was talked about. We had been talking for two days about ranges of numbers and Verizon had led us to believe that they would go back to New York and come back to us with some firm offer that exceeded the $80 million. And that was how it was left. Q. Do you recall a schedule being set up whereby that offer from Verizon was to be communicated to Judge Weinstein on Monday morning, July 22? A. I recall that we were - - that it was agreed that we would attempt to - - that verizon would attempt to get back to Judge Weinstein on Monday. I think there was some question because they were in New York, east coast/west coast, as to whether that was really going to happen. But that was the target, that was the goal. Q. And do you recall in response to Mr. Kahn's informing you that Verizon would be making an offer in the range of 80 million to 180 million saying that you would reject that settlement offer? Or a settlement offer in that range? A. I - - would you repeat that? Q. Do you recall that in response to Mr. Kahn advising you that he expected verizon to make a settlement offer in the range of 80 million to 180 million dollars, you advised Mr. Kahn that you would reject a settlement offer in that range? A. Okay. First of all, as I said, I don't recall Mr. Kahn specifically telling me that he expected Verizon to call with a Schoenmann - Cross 125 settlement in the range of 80 to 100 million - - 180 million dollars. I don't recall the $180 million number. In general terms, we were talking about various ranges of numbers. He did indicate that he expected they would come with an offer in excess of the $80 million. And it was my view at the time, that I wouldn't except $80 million. Q. Did you advise CIBC of the settlement negotiations as they were going on? A. I did not. Mr. Kahn did. There were several conversations and Mr. Kohn was on the speaker phone with Mr. Kahn and I on the other side on some occasions. So, there were discussions and generally, it was Mr. Kahn talking to Mr. Kohn. Q. So you never talked to Mr. Kohn directly yourself concerning these settlement negotiations or discussions between, say, July 1st through July 23rd? A. July 1st? Q. July 1st when you first offered 1.1 billion. A. There were no settlement discussions between July 1st and the mediation. Q. Okay. Well, your first offer was on July 1st for $1.1 billion, correct? A. Right, right. Q. Did you talk to Mr. Kohn for CIBC concerning that settlement offer? A. I may have. I don't recall if I made that call or if Mr. Schoenmann - Cross 126 Kahn made that call. Q. Let me just show you a copy of a renewed motion of CIBC for relief from stay or in the alternative to compel trustee to settle litigation that was filed under seal on or about July 19, 2002. And I'm referring to page 5, lines 7 and 8. And unfortunately, this is my only copy. But would you read that into the record, please? A. Line 7 and 8? Yeah. It says, "CIBC is also advised that the trustee has indicated that she will reject a settlement offer in the 80 million - - in the 80 to 180 million dollar range. It does not know the basis, if any, for the trustee's decision.1I Q. Okay. Just for the record, also, would you read the paragraph immediately preceding that. And I think it might even start on the page before. A. Okay. Q. Into the record. A. "According to the reports from Northpoint's litigation counsel, Michael Kahn, the two-day mediation resulted in extensive discussion of the merits of the case, but little in the way of offers or counter-offers. On July 17th, Verizon made a settlement offer of $80 million which the trustee did not Schoenmann - Cross 127 accept. The mediation continued on July 18th, but adjourned without any additional offer being made. However, Verizon's representatives stated that they would be returning to New York to seek additional settlement authority. Mr. Kahn advised CIBC that based on various informal conversations, he believes that verizon will make a settlement offer in the range of 80 million to 180 million dollars. In terms of schedule, that offer is set to be communicated to Judge Weinstein on Monday morning, July 22nd, and communicated to the trustee no later than Tuesday morning, July 23rd." Q. So it's your testimony that you never told Mr. Kahn that you, as trustee, would reject any settlement offer between 80 to 180 million dollars? A. No, I did not say that. Q. So, in other words, this statement filed by Mr. Kohn on behalf of CIBC is false. Is that your testimony? A. No. Q. Well- - A. I don't - - I'm missing something. I don't see the contradiction that you're talking about. Schoenmann - Cross 129 best explanation to this contradiction is that Mr. Kahn and Mr. Kohn had some kind of communication? A. I can't explain it. I just know that I don't recall the 180 upper limit. Q. with respect to your declaration that you filed in support of this motion, I'd like to - - and you stated in your declaration that you have personal knowledge of the facts set forth herein and if called upon as a witness, you could and would competently testify hereto. Do you recall that? A. Yes. Q. Showing you a copy of that declaration, do you have personal knowledge of the matters contained in paragraph 2 of that declaration? A. paragraph 2, that the debtor's filed voluntary petitions on January 16th? And that they managed to - - continued to manage their business? Yes. Q. You were there when they did that? A. No, I wasn't there, but I've seen the documents and I have discussed all of these matters with my counsel. I have personal knowledge, I believe. I don't think it's a misstatement to say that I have personal knowledge of the fact that the debtor's filed their voluntary petitions on January 16th, 2001. I don't think I needed to be there to have personal knowledge of that. But I don't want to argue with you. If you - - if that's not your interpretation, I guess Schoenmann - Cross 130 reasonable minds can disagree. Q. What about the statements contained in paragraph 3 of your declaration that's contained on the first page there of your declaration. Do you have personal knowledge of those facts stated? A. That they entered into - - that Northpoint entered into a merger agreement and a funding agreement with Verizon in August 2000? And the terms of it? Q. Yes, do you have personal knowledge of that? A. I've read the documents, yes. Q. And that gives you personal knowledge? A. Well, under my interpretation, I believe so. Q. And would you read - - A. perhaps I'm misinformed on that. Q. And would you read the rest of that paragraph, ma'am, and tell me if you have, in your opinion, personal knowledge as to the rest of those statements on that page? MR. BROWN: Your Honor, I'm going to object here. I mean, I don't know if this is - - I don't see any relevance in this to the issue of whether or not this is a fair and reasonable settlement. I mean, he - - what Mr. Tagawa is doing is mincing words. This is all semantics. These are clearly issues that are before the Court. They were in a myriad of papers and declarations that were filed before the Court by the debtor. Schoenmann - Cross 131 the fact that Ms. Schoenmann may have knowledge of this by reading the declarations that have been submitted by the debtor reading the initial papers filed by the debtor or reading the complaint I don't think makes any difference to this court's analysis on the - - on these issues that are contained in the first two paragraphs of her declaration. THE COURT: What is the relevance of it? Of the objection? I mean, why do you care? MR. TAGAWA: Well, my point is that the trustee has made objections to my declaration, my client's declaration, Mr. Hennigan's declaration, Verizon's declarations - - THE COURT: And objections - - objections - - you raised objections if you want without - - to the declaration. You don't - - MR. TAGAWA: The point is - - THE COURT: You don't to - - MR. TAGAWA: The point is that I - - THE COURT: - - have to expend your time which you don't have much of examining her about it. MR. TAGAWA: I move to strike those paragraphs from this - - the declaration, Your Honor, as incompetent and not based on personal knowledge. MR. BROWN: Your Honor, I have a suggestion. That Your Honor can take judicial notice of the date the debtor filed the petitions, the date this case was converted to a Schoenmann - Cross 132 Chapter 7 and the date Ms. Schoenmann was appointed. Your Honor can also take judicial notice of the matters stated in paragraph 3 with respect to what's in the merger agreement and what's in the complaint. So, we don't need - - we do not need to and are not relying on paragraph 2 and 3 of Ms. Schoenmann's declaration to have those facts before the Court. THE COURT: Well, how relevant is it to this when the petition was filed? I mean - - MR. TAGAWA: It also goes to credibility, Your Honor. THE COURT: The objection is overruled. This is just silliness. These are matters that are either of record and in the case or they are matters that just reflect her understanding as she went through this process. BY MR. TAGAWA: Q. Let's go back briefly - - may I have the files - - Ms. Schoenmann, to the factors that you considered that $175 million was in the range of reasonableness for a case of this magnitude and under these circumstances. Was one of the factors you considered the amount of secured debt of the estate? A. I would say no, at the - - except in a very indirect way. Q. What way would that be? A. Well, certainly I look at any recovery for any estate in terms of what benefit that will be to any - - the class of creditors. And - - well, in looking at the $175 million and Schoenmann - Cross 133 what recovery that amounts to for unsecureds, you, of course, have to back out the secured lender because they get paid in full. So, it's something that's understood. It certainly did not relate to the merits of the reasonableness of the amount of the settlement. Q. So, in other words, if the secured debt was $200 million, in your view, a $175 million settlement of this case would still be in the range of reasonableness? A. Well, you know, I think that's speculation that I never would have had to go to because if there were 200 million of secured debt, I don't know that I would have litigating this. MR. BROWN: I'm going to object to the question. It calls for speculation. Ms. Schoenmann beat me to the punch. THE COURT: I'll overrule the objection. I understand. I think it has a purpose. BY MR. TAGAWA: Q. To your knowledge, Ms. Schoenmann, does the amount of - - or did the amount of unsecured debt in this case enter into your mind as a factor in any way in determining that this was within the range of reasonableness? A. It entered into my mind. I was aware of the magnitude of the secured debt. I was aware of the magnitude of the unsecured debt. I was aware of the magnitude of the preferred stock. I was aware of all of those factors. This isn't something that's done in a vacuum. Schoenmann - Cross 134 But to the extent of concluding that $175 million was a reasonable amount to agree to under all of the facts and circumstances of the case, if it was a factor at all, it was a very small incidental factor. Q. Would that be true as far as the equity holders, too? The number of equity holders and whatever their amount of equity was in the company at the time of the breach, alleged breach, by Verizon? A. No, the equity holders is a different issue that's really almost moot because as the numbers worked out, in order for there to have been any recover whatsoever - - any recovery whatsoever for the common stock shareholders as opposed to preferred, it was apparent that the minimum amount of recovery to generate anything for equity would have been $750 million. And given the - - given our assessment that were we to prevail on the issue of liability, most likely range of recovery would not have exceeded that amount. It became apparent that the equity holders were not a - - they were in all probability out of the money in any event. Q. Did you, in arriving at this settlement figure as reasonable in your mind, consider the factor that possibly former officers and directors of Northpoint had made false and misleading statements in Northpoint's accounting? A. I don't know that former officers and directors of Northpoint did, in fact, make false or misleading statements. Schoenmann - Cross 135 It became apparent through the course of the mediation that Verizon was intent upon alleging that and using that as a defense. So I had to be aware of that. Q. All right. You were aware of that. Did - - was that part of your analysis as to whether or not I would - - you would take' a lower value for settlement of this case? A. It was part of my analysis of the risks to going forward with litigation, yes. Q. Do you have any assessment in your mind as to how much of a reduction you attribute to that allegation that former officers and directors of Northpoint made false and misleading statements in their accounting? A. I did not quantify it. It was a matter of just being aware of the risks. Q. Do you have any opinion on that now? A. In terms of quantifying it as a percentage, number of points of deduction? Q. In any way, shape or form you can? A. I think that the allegation of fraudulent accounting on the part of Northpoint had, at the time of the mediation, potentially more credibility with the jury than it probably had six months before. I think those allegations would have been met with a great deal of scepticism in a stable environment. But once we - - after the worldcom's/Enron's allegations, media attention to - 136 - fraudulent accounting by chief executive officers and corporate officers, it was more of a concern to me than it had been earlier in the process. What I thought was unlikely to make an impression on a jury early on, all of a sudden, because of the environment that we were in, I thought that there was a greater risk that those kinds of allegations would find some credibility with the jury. Q. Are you saying - - when you said just now that you believed that those allegations of false and misleading statements in the Northpoint accountings would have been resolved in favor of Northpoint under a more stable environment - - A. No, I think - - Q. - - are you saying that in your opinion, Northpoint's former officers and directors did not make false and misleading statements in their accounting? A. I don't know if they did or they didn't. And I don't sitting here today if they did or they didn't. Q. Do you have any - - you don't have any opinion in that regard? A. I think they probably didn't. I think there are transactions that could be subject to different interpretations. And so I think there are risks today, in this environment, that we wouldn't have based in an earlier environment. MR. TAGAWA: No further questions, Your Honor. Schoenmann - Recross 137 THE COURT: Okay. MR. BENNETT: Your Honor, I just have a few more. THE COURT: Okay. MR. BROWN: Your Honor? RECROSS EXAMINATION BY MR. BENNETT: Q. On the issue of - - MR. BROWN: Hold on a second. Well, I mean - - he has had - - Mr. Hennigan has had an opportunity already to cross Ms. 3choenmann and has concluded his cross-examination. So I don't know on what basis he's continuing it. THE COURT: Let's have redirect. Let's have the redirect, if there's any. MR. KOHN: I have no redirect, Your Honor. THE COURT: Okay. Now what is it you want to ask? MR. BENNETT: Your Honor, there are a couple of lines of increased adjusted by the recent testimony. I have five ninutes of questions. THE COURT: All right. Go ahead. BY MR. BENNETT: Q. Is it correct that you testified that the collectability if the judgment against Verizon was a factor in your analysis? A. I had no concerns about short-term collectability. Q. Did you have concerns about long-term collectability? A. I had a sense that anything was possible. Schoenmann - Recross 138 Q. Did that affect, in anyway, your assessment of the litigation? A. I would say no. If it did, in such a small amount that I I don't think so. Q. Did you read the papers that you filed with the Court before they were filed seeking approval of this motion? A. Yes, I did. Q. Did they say whether or not the factor of collectability points one direction or another in connection with this approving of settlement? A. I recall that it's mentioned. Q. And is it mentioned as a factor that that supports the settlement or is it mentioned as a neutral factor or is it mentioned as not a factor at all? A. I think it's mentioned as a very minor factor. A remote possibility, but a possibility which is my assessment of it, which is my assessment of it. Q. So- - A. I'm simply saying I didn't give a great deal of weight to it. Q. Did you perform any investigation at all into Verizon's financial affairs? THE COURT: Can I just step in here? I don't see the trustee as having raised in this motion this question of collectability as a factor. There's always, unless - - I Schoenmann - Recross 139 suppose even with the federal government there's some risk. This just wasn't identified as a fact that the trustee relied on in the motion. These debtors - - I don't take it that way and I don't see the trustee making a case for that. Okay? MR. BENNETT: Okay. THE COURT: So you don't need to beat that horse. BY MR. BENNETT: Q. When did you find out about the allegations that there were some impropriety in connection with Northpoint's accounting? A. I think there was an acknowledgment - - well, certainly, all along Verizon was making the argument that material adverse affect had occurred because of - - which they were attempting to establish by reference to financial statements and financial issues. And there were always issues about whether or not the number of lines that Northpoint was recording was perhaps a little inflated, different ways of defining what an active line was. Those kinds of issues were always there and I was aware of them. The first time that I really understood that they were going to make a serious case of fraud on the part of Northpoint was, in fact, during the mediation. Q. Did you call Mr. Galinski (phonetic) and ask him about it? A. No, I did not. Schoenmann - Recross 140 Q. Why not? Mr. Galinski was the CFO at the relevant time, wasn't he? A. I believe so. Q. Why didn't you call him? A. Because my counsel had already deposed him and I was with my counsel and I was relying on the advice of my counsel. I saw no need for me to make an independent phone call to Mr. Galinski or anyone else. Q. So you don't know what Mr. Galinski thinks of the allegations? A. Sitting here right now? Q. Yeah. A. No, I couldn't tell you. Q. Did you do anything else to investigate the truth or falsity of the allegations? A. I discussed it with my counsel. Q. Did - - and what did they say? A. And I listened to Judge Weinstein. And part of Judge Weinstein's advice was that to a certain extent, what I had to be aware of was the risk that whether or not there was truths - - there was truth to these allegations, the risk that a jury would believe there was truth to these allegations. Q. What-did your lawyers tell you? A. My lawyers essentially told me the same thing. That there was risk that the jury would believe these allegations. - 141 - MR. BENNETT: No further questions. THE COURT: Okay. Any other questions? MR. BROWN: No, Your Honor. THE COURT: Thank you, Ms. Schoenmann. You may step down. MS. SCHOENMANN: Thank you. (Witness excused) THE COURT: Okay. I'm glad to hear your arguments. MR. BROWN: Your Honor, I believe I would like to put Mr. Kahn on for rebuttal testimony. THE COURT: Okay. MR. TAGAWA: Your Honor, before we do that, I will offer myself for cross-examination. I have submitted a declaration myself. THE COURT: They haven't asked to cross-examine you. MR. TAGAWA: Fine. THE COURT: You - - and there are other declarations here that - - Mr. Kahn, who has not been cross-examined. So, your declaration stands. Okay. I think we swore you in before and nobody asked you any questions. MR. KAHN: Right. THE COURT: So you were sworn earlier. MICHAEL KAHN, DECLARANT, PREVIOUSLY SWORN MR. BROWN: The witness is sworn? THE COURT: He is sworn. Kahn - Rebuttal 142 REBUTTAL EXAMINATION BY MR. BROWN: Q. Mr. Kahn, are you familiar with Mr. Hennigan's declaration in which he testified that he believed the reasonable range of settlement for the verizon litigation is between 375 million and 425 million dollars? A. I'm familiar with the conclusion. I'm not exactly - - haven't exactly memorized the declaration. Q. Do you have any of your own opinions with respect to the value - - the reasonable range of settlement value for the verizon litigation? MR. BENNETT: Objection, that would be part of direct? MR. BROWN: It's rebuttal to Mr. - - MR. TAGAWA: I'm joining the objection, Your Honor. MR. BROWN: It's rebuttal to Mr. Hennigan's testimony, Your Honor. THE COURT: Why don't you - - you can ask the question in the form of do you have any comments about his range? It's the same thing. BY MR. BROWN: Q. Mr. Kahn, do you have any comments about Mr. Hennigan's testimony on the reasonable range of the settlement values of the Verizon litigation, i.e. that they are between - - it is between 375 and/or 425 million dollars? Kahn - Rebuttal 143 A. Well, I think Mr. - - I hold Mr. Hennigan in high regard and I've had a lot experience with him. Mr. Hennigan tends to be an optimist. Mr. Hennigan didn't have the burden of having met the witnesses and seeing them up close and personal and trying to assess the risk of their being exploding on us on the witness stand. And there were significant witness risks that we had in this case. And Mr. Hennigan said that he believed that a couple of the risk factors that he identified were the predominant risks, but we're a much bigger risk than that. Our case, in large measure, was based on the acceptance by the jury of the testimony of Liz Fetter and Mike Galinski. And we spent a lot of time with Liz Fetter and Mike Galinski. I think they are terrific people. I think they're honest. But Liz Fetter is not someone who is uniformly responded to well. She can be very hard-edged and is very opinionated and is not necessarily completely predictable under cross-examination. I would not wish to venture Ms. Fetter into a courtroom and be cross-examined by Mr. Hennigan, for example. I think it would be a big problem. And so, we had the risk that she - - she has so much baggage with all these additional things, there was going to a two or three-day cross-examination of Ms. Fetter. And if the jury decided that Ms. Fetter was not telling the truth or decided it didn't like Ms. Fetter, we were dead. We just Kahn - Rebuttal 144 couldn't carry the day. We had the same problem with Mr. Galinski. On the other hand, their main witness was a guy named Babbio who, I think, was too polished. And I think we would have done an okay job with him, but he was very polished. They had their president, who I deposed, Mr. Zineberg, was an extremely impressive man. And I have a very convincing story. So, I agree with Mr. Hennigan that we had a good liability case. And I think it was a lot better in July of 2002 than it was in January of 2000 when we first got the case. But we had big risks that these witnesses would not be accepted and our story was not believed on top of the other risks. I came to deal with all that, with the realization that I may have to decide whether the $80 million position was going to be reasonable because Mr. Kohn made it clear to us that he was going to come to the court regardless. And so, if we were offered no more than $80 million, I had to decide in my own mind whether that was reasonable, in the low end of reasonableness. I concluded that I could get more than 80 million. And we fought very hard to get more than 80 million and we turned out to be right. But when we were in the 80 to 100 million dollar range, had we been persuaded that there was absolutely no more money, had they been able to persuade of us that, it would be very difficult, given the risks here of a complete defensive Kahn - Rebuttal 145 verdict, it would have been very difficult to conclude that it was unreasonable to accept that offer. An 80 million to 100 million dollar offer was, to use the vernacular here, probably in the low range of reasonableness. We didn't have to face that because I believed that I could talk them into a bigger number. And we could leverage it into a higher number. But that was the context in which I addressed that issue. What was - - what were we going to do if Mr. Kohn caused this hearing before the judge and the judge said to me, well, why was this reasonable to take the $80 million. And given the risks that we were facing, the damage risks identified here, the contract risks and also the witness risks, the risk of the assertion of fraud by our people, given all those risks, it was - - I would have been very hard pressed to say that taking $80 million was unreasonable given the amount of money there was. One other point, I agree with Mr. Hennigan 100 percent. In fact, I consider it a professional compliment that he likes my Nobel prize winner. My take on the case was it was going to be darn difficult to convince any jury to give huge dollars. It's always hard to get a jury to give huge dollars. And the reason - - I mean, the very first thing we did when we got this case was we hired the Nobel prize winner to make this assessment because I believed that would be a credibility anchor. Kahn - Rebuttal 146 And I think Mr. Hennigan verified that today when he said the 750 number. And I heard that from Weinstein and I heard it in the settlement discussions. That was a tremendous piece of leverage because it was a great piece of credibility that we had. But we had a problem because the numbers were big. They're just big numbers and we had to deal with the big number problem. And I don't - - I know I'm not supposed to disagree, but - - with my partner, but I do disagree with one thing he said. We weren't going to make any decision about what to ask this jury for until the day we asked the jury. We make a decision as to how much we can ask the jury based on how the testimony comes in, how things have developed, who's been deemed credible, who isn't credible. And we likely would certainly have evaluated rather we could ask for nothing more than 750 if they did a good enough job on Mr. Regan. Judge Weinstein, for what it was worth, didn't like Regan. He thought Regan was exaggerated. He thought Anastazzi was exaggerated. So we may have been stuck with that as our top number. So, for all those reasons, I don't completely disagree with Mr. Hennigan, but I do disagree that what he claims as the range of reasonableness is correct, I think that it does not evaluate really important risks that were present and I think it's, therefore, too high. Kahn - Rebuttal 147 MR. TAGAWA: Your Honor, I'll just move to strike the answer as non-responsive. THE COURT: Overruled. BY MR. BROWN: Q. Mr. Kahn, in Mr. Hennigan's declaration, it appears that the methodology you used to come up with this range of settlement value at between 375 million and 425 million was to take the expert who had testified that damages could be in the range, I think - - your Nobel prize winning expert testified that damages were in range of 75 - - 750 million to approximately 850 million and then just assign 50 percent chance of succeeding on liability and thereby coming up with the 375 million to 425 million reasonable settlement range. Do you have any opinions on the appropriateness of that methodology? A. The problem with that methodology is that it has no utility in the real world. There is - - no one says to you you have a 50 percent chance of 800 million so we'll give you 400 million. So then the question is, does that probability does that result in leverage to the defendant to cause the defendant to pay more money. I think the answer to that is no. And the best illustration I can give you is, we do a lot of defense work also. We do both sides. And if somebody comes to me and says we have a billion Kahn - Rebuttal 148 dollar case and you have a 10 percent chance of losing. If we assess a 10 percent chance of losing to our client in a billion dollar case, never in a million years would we tell them to pay $100 million. We would tell them you have a 10 percent chance of losing. You ought to fight this thing because 99 - - 90 times out of a hundred you're going to win. And so in that - - in an example like that, maybe we would pay a portion of defense costs in advising. No defendant in deciding what to pay takes the total amount of money and divides it by the percentage that somebody arbitrarily assigns to it. Second of all, even if you take that as Mr. Hennigan's view, for the purposes of argument, that he really believes that, you've got to understand that that's just his view. Verizon takes a completely different view. Verizon had a much, much more aggressive view from the defense side. And so, in terms of the reality of what's a reasonable settlement, you have a - - in terms of what's reasonable to get as a settlement, you have to measure what the other side is reasonably going to be able to expect that they should pay under those circumstances. And I don't know of any defendant who would take an $800 million damage number and say, well, we have a 50 percent of losing, so it we'll give you $400 million. So, I - - you know, I just don't think it has utility in the real world. I've seen a lot of people apply the analysis, Kahn - Rebuttal 149 but at the end of the day, what they really do, is they take the advice of really good lawyers like Mr. Hennigan, and ask him what does his stomach think. What would Mr. Hennigan really think he could get in this case. What are the odds of it and what are the likelihood we can get it into settlement and come up with a judgment. I'm sure that's how Mr. Hennigan operates and that's why he's so successful and we try to do the same thing. Q. Mr. Kahn, did you assign any value at all to the withdrawal of verizon's proofs of claim against the debtors in determining the reasonableness of $175 million settlement? Or in advising the trustee that you thought the settlement was reasonable? A. None whatsoever. I didn't even know about - - and, in fact - - THE WITNESS: This is a sealed record, right? THE COURT: Yes. MR. KAHN: If Verizon would have said that they wouldn't have withdrawn them, we didn't pay for them. We- - that was not in the calculus in any way, shape or form. And basically, we sort of - - we got them to throw it in. Lynn said she wanted to be done with them. And they said, absolutely not. You're going to bargain for this. And they said, we have $30 million of claims and they're good claims and we want them. And we said, well, we can sue you for things then, Kahn - Cross 150 too, that we don't, you know, we don't know about. And I threatened them. And then they said, maybe we want to be done with them also. But they - - you know, maybe Mr. Bennett knows better than I do, but I'll tell you one thing, Verizon certainly didn't think they had a release. They were kicking and screaming and they were threatening to blow up the deal if we made them give them up. And I told them that that wasn't fair for us to do that because we had not bargained for that. We - - you know, we didn't negotiate it. We didn't discuss it. It wasn't part of the deal. MR. BROWN: I have no further questions, Your Honor. THE COURT: You want to do some cross? CROSS-EXAMINATION BY MR. BENNETT: Q. Mr. Kahn, when did you meet Ms. Fetter? A. When - - within a week or two of the determination of the merger. Q. So, that was back in the end of 2000? A. You tell me. Whenever it was. Whenever the - - they - - Q. The merger was determinative of how much - - A. They terminated the merger. All heck broke loose in Northpoint. They called us over and said, we have a big problem. This is Liz Fetter. Q. And you spent a lot of time with her then? A. I spent time with her then. I spent time with her - 151 - preparing for her deposition. I spent time with her in her deposition. Q. Okay. Did you meet Mr. Galinski? A. I met him at the same time and had less, but - - less exposure to him, but exposure to him also. MR. BENNETT: Thank you. No further questions. THE COURT: Any further questions? Okay. Thank you, Mr. Kahn. You may step down. (Witness excused) THE COURT: Are you ready to go? MR. BROWN: Are you? THE COURT: Yes. MR. BROWN: I think we're done with the witnesses. MR. SULLIVAN: Your Honor, as I walked into the courtroom or walked out last time, verizon wanted to know what - - if they could just be called in after the testimony, to know within what portion, if any, they can participate in. So I told them I would just mention it to you at the - - you know, before argument. MR. BROWN: I think they did want to make some comments to the Court. perhaps- - THE COURT: I don't know what they could say that they didn't put in their papers, but let's - - MR. SULLIVAN: I simply said I would mention it to you. - 152 - THE COURT: Yeah. MR. BENNETT: You know, the whole premise that they were here to begin with was the pretense that they actually hac a proof of claim in this case and were a material creditor. That's where we started back when these procedures were first started. THE COURT: Well, they do if the settlement isn't approved, I guess. MR. BENNETT: Well, no. The settlement that's embodied in this, they were paid. It says so in the proof of claim that's part of the record of this case. MR. BROWN: I don't think that's actually correct, Mr. Bennett. I think that they acknowledged that they were paid 20 million. And then I think their claim is for 31. It's not clear what they're saying. They did enter into a release as part of the cure. MR. BENNETT: Right. MR. BROWN: And so, I - - my view is always this, this probably has to go away. Maybe we have to make a summary judgment or something like that, but they filed this after they entered the release. So I have no idea what they had in mind. And they're asking - - their claim is for $31 million. They say they were paid 20. Are they asking for the difference or are they asking for 31. We just - - you know, we never had to get there because we said, look, you're gone if - - as part - 153 - of these settlement. But it was never assigned any value. But the point is, the proof of claim is on file and it hasn't been objected to. And there are multiple other small claims by Verizon in addition to the $31 million claims, some of which may not have been released by the cure stipulation. THE COURT: But they've been released by this settlement. MR. BROWN: They've been released by the settlement. THE COURT: Okay. I don't know what they can tell us that would be very helpful. MR. BROWN: That's fine, Your Honor. I just - - you know - - the point that - - THE COURT: They've had a - - they have not been party to any of this testimony. There's nothing they can add on the basis of that because they don't know about it. And they filed a statement and which I've read. So, I think, let's go on without them. Makes it much more difficult - - if they're here, it makes it much more difficult for you to argue freely and I don't want to do that. I don't want to cause that. MR. BROWN'S CLOSING ARGUMENT MR. BROWN: Your Honor, I don't think there's a whole lot that I can add to the declarations of Mr. Kahn and Mr. Sullivan as well as the testimony that they've provided today and to the briefs that have been filed. I just - - there's a couple of matters I'd like to address that I don't think were - 154 - adequately covered in the testimony. One is this issue about the Verizon proofs of claim which we just touched on briefly. They were never considered- by anybody as part of this settlement. They were never assigned any value. I had been aware that they existed. I believe that at least the large one for 31 million was going to go away even though Verizon had filed it after they purportedly had released those claims. But, you know, as an - - out of an abundance of caution, once the settlement had been achieved, once the $175 million had been arrived at, it effectively started out as 175 million just for releases of all claims arising out of the merger agreement. It then - - when we said, look, we want you to withdraw all your claims and we'll give you global releases of any other claims we might have, they ultimately decided they'd go along with that. By the by, we looked closely at what other claims we had against Verizon, all the estates, and determined conclusively that they - - there weren't any. There weren't any. I mean, the only ones - - I - - let me back track on that one for one moment. MR. BENNETT: Objection, Your Honor. Evidence is closed. THE COURT: I think so. MR. BROWN: Okay. We're kind of in a funny position - 155 - here today, Your Honor, at least I feel this is a funny position of trying to justify after the fact $175 million settlement. That is a lot of money. And frankly, I'm surprised that we're kind of in this position that we are today. But be that it may, I think the trustee and the trustee's counsel believes that this is a very good deal for the estate in the context of a settlement given the significant risks that exists at - - from going to trial on this. And the serious risks that we would get nothing. You have to keep in mind the context of this and that is, this all started because Verizon thought that they were very right on their - - that they were well within their rights in terminating the merger based on the MAC. And, in fact, went right into Delaware court seeking a summary judgment on the issue. They ultimately ended up out here mired in litigation, but, you know, they thought that they were well within their rights, and they've got some very good evidence that they were given the - - given where this company was and where it was headed when they terminated. So, you know, we think that 175 million is a lot to get in a settlement for a company that, at least, under verizon's evidence, you know, was going to die anyway, whether or not verizon terminated. And I think there is a good deal of - 156 - evidence that Verizon would have put in the record to that affect. The only evidence that's before the Court that this settlement is not within the range of reasonableness is Mr. Hennigan's testimony and Mr. Tagawa's testimony. Mr. Hennigan's testimony is, as we discussed, is essentially that you look at the one expert report focused on the 750 to 850 million dollars multiplied by 50 percent. For reasons that have been explained, I think articulately by Mr. Kahn, that is not the way to evaluate the reasonableness of this settlement. Among other things, it simply does not take into consideration the fact that there was a lot of evidence that Verizon was going to put on that created serious risk that there was either no damages, or that the damages were a lot less than 70 - - 750 million. And it does not appear that Mr. Hennigan's methodology accounted for that risk. Mr. Kohn's cross-examination of Mr. Hennigan, I also believe, revealed that Mr. Hennigan didn't adequately consider or even understand the possibility that Verizon had evidence that Northpoint was going to be out of money prior to the closing of the merger. I think that was glossed over and inadequately understood and considered by Mr. Hennigan. And moreover, Mr. Hennigan was not even sure in his damage analysis what numbers were in and what numbers were out - 157 - and had to seek assistance from people in the back of the courtroom. So, I just think that needs to be considered in evaluating Mr. Hennigan's testimony on the range of reasonableness of this settlement. Mr. Tagawa's testimony on the reasonableness of this settlement, I think, that position of the trustee is set forth adequately in the objections, but just to summarize, there was no testimony in his declaration that Mr. Tagawa has ever even conducted a jury trial. Did not indicate that he'd reviewed any of the documents, depositions - - or any of the depositions. He clearly hasn't interviewed witnesses, hasn't had an ability to observe their demeanor. And there really is simply no basis, no foundation for anything he says in his declaration with respect that 175 million not being an adequate settlement amount. So, again, going back to the A&C properties test, I mean, the Court - - the primary issue for the Court to determine here is whether or not this - - the probability of success on the merits, given the risks that have been identified, whether or not 175 million adequately reflects those risks, and whether or not this settlement, and we think it's more - - it's better than the low end of the range of reasonableness. But, the bottom line is that appears to be what the Court has to determine in approving the settlement is that it's at the low end of the range of reasonableness given the four - 158 - A&C Property factors. And I would submit that of the four factors, the critical ones for the Court to consider - - the two critical ones for the Court to consider are probability of success on the merits. I don't think it's a significant factor about collectibility. Delay, complexity of the case. I guess what I - - I think that was addressed in the declaration and the papers. And, again, one of the things I would mention is that there was no recognition in Mr. Hennigan's testimony for the fact that Verizon said in its papers that if there was an adverse judgment, it would appeal. And that an appeal would then delay this months, if not years. In the meantime, you know, we have a creditor, a secured creditor, that alleges it's over-secured, incurring default interest all the while. And, you know, any money that we get ultimately is going to be subject to that dramatically increased claim. So, bottom line is, the risk of delay here is substantial and the costs are concrete outside of the settlement. So I think that the risk of delay that exists outside of the settlement is meaningful and should be considered by the Court. And finally there's, you know, the paramount inter~ of the creditors here. We have bondholders that hold about $163 million of claims out of - - principal amount out of a total of 400 million, so 41 - - something less than 41 percent. - 159 - Fifty-nine percent of the bondholders are not here complaining. And I think that is a significant fact that shouldn't be lost in the Court's consideration of this in terms of considering the interest of the creditors. I think it's a reasonable inference for the Court to draw that the bondholder who are objecting tried to get as many of them on board as the could. And all they could come up with was about 40 percent. Second point is that irrespective of the fact that we're not dealing with allocation issues today, there's a bunch of trade credit here who is not objecting to the settlement. That, you know, that could be anywhere from 50 to 100 million dollars or so. And, of course, we have the secured lender and the post-petition litigation lender, both of whom support this settlement. That debt is approximately $70 million. So just Ion that factor alone, Your Honor, the great weight of creditors are not here or objecting and in fact, significant portion of them are supporting the settlement. And based on that, as well as the papers we've submitted to the Court, I would urge the Court to grant the trustee's motion and find that this settlement falls within the range of reasonableness. THE COURT: Okay. Thank you. MR. KOHN'S CLOSING ARGUMENT MR. KOHN: Your Honor, for the Court to look at the settlement and try to decide which way to sort it out, you can - 160 - go about it in a couple of ways. One way is to kind of sit there and read all these expert depositions and reports and everything else like that and try to decide how you would decide that case if you were a pro-typical juror. And then figure out how the settlement would come in the range of that. And that's certainly relevant because it sets forth the fact and the ranges of opinion. And, you know, in the course of preparing our side of the case, we've done that, we will put. And I suggest to the Court, that if you kind of work a little of that, that you will discover that this is a craps shoots. I mean, there are a lot of arguments on both sides. The debtor might prevail. verizon might prevail. The expert reports were extraordinarily complex. And on that basis I think the Court would look at it and say, is it reasonable to reach the settlement amongst all the ranges of possibilities, given all that evidence back and forth, is this a reasonable settlement? I think there's only one answer. Of course, it is. The other way you could look at this is say, okay, now I have experts on this side and on that side and I want to decide who has greater credibility and so on and so forth. And some of the credibility didn't kind of come through because the live - - the direct testimony was in the deposition and those are kind of - - you know, they don't carry a lot of emotion - 161 - given that they're on printed page. And the way that - - reacted to this is to look and see presumably between Mr. Hennigan and Mr. Kahn and Mr. Sullivan, they're all coming in and saying, hey I think - - they're saying it's a reasonable settlement. Mr. Hennigan is saying it's not a reasonable settlement. Underlying what the Folger, Levin firm did was a process. It's a process that isn't somebody studying a file for two weeks and saying this is what I think and this is my view. It's a process that people who have devoted thousands of hours to litigating this case, who, as the Court knows, trial lawyers have invested interest in a case and when you take away a trial from a trial lawyer, you're kind of stealing his youngest child because they love doing this and love getting the vindication. THE COURT: I'm giving them back to their children. (Laughter) MR. KOHN: Yeah. THE COURT: So they can see their kids. MR. KOHN: And it's significant, Your Honor, that - - and as Ms. Schoenmann testified, trial counsel recommended the settlement. Mr. Kahn testified that he would have probably gotten comfortable if he had to be - - make that call, a settlement much lower, of eighty two hundred million. This is a decision made in real time under real - 162 - pressure by people with real responsibility for making that decision. So when you're evaluating the reasonableness of the settlement, and assessing the credibility of the people that are recommending it and are testifying that this is an appropriate settlement, the fact that somebody has a stake and money on the line, and the Folger firm will lose a million dollars they could have made on trial, both tells to say there's a lot of weight that should be given to the view on that side of the house. with respect to Mr. Hennigan, and I don't know him, but I respect Mr. Kahn and if he respect Mr. Hennigan, I guess that halo carries over, I found the testimony today extremely unusual. I guess part of it is because I grew up when the ethical rule was that the lawyer couldn't be in the case if his partner was a material witness. Now they've change that. But one reason for the rule was because there are issues about credibility that come up. Mr. - - it's odd that of all of the people, and with the trial lawyers and experts that could have been done, the bondholders picked the partner of the lawyer who had the case. And I think that is something that should weigh in the Court's consideration. Also, it became clear during my cross-examination that on a critical point of Mr. Hennigan's analysis, there was a lack of information and a lack of knowledge. He said that I - 163 - thought it was a much higher percentage of probability of success, but I was worried about this fraud claim that the banks - - excuse me, I misstated. I was worried that the banks - - that this company would run out of money, and I concluded that the banks would end up testifying that there's no way they would have let this company run out of money. And he said that without ever talking to a bank. He said it without ever knowing that the I price for keeping the debtor alive would have been a couple hundred million dollars and the banks only had $85 million of skin in this game. And that somehow or another, the jury would have had to believe the banks who had $85 million at risk, in the face of this company, which is the evidence we're showing that their lines plummeting and their revenues restated and everything else like that, would have put another couple of hundred million dollars on line to keep the 85 million alive. Now that's not credible and I'm sure if Mr. Hennigan knew those facts, he would not have said that and he would have not come to those conclusions. But that's what happens when you ask somebody to evaluate a case when they been in it for two weeks as opposed to being in it for almost two years. And I so when you consider which side of the room you ought to give weight to, I think those are very relevant. Let's - - I want to talk a little bit about the - 164 - alternative to the settlement which is the suggestion that if we don't approve the settlement, we're going to go to trial. And on that issue, I've been a broken record of this Court. One advantage, Your Honor, of approving the settlement, is you won't have to hear that song out of me anymore. But as Ms. Schoenmann said, So percent of $800 million is not the same as 100 percent of 400 million. Mr. Kahn talked about that in terms of the practical issues of how you advise a client in terms of settling. And we don't use - - simply use these mathematical averages. And for myself, I promised you a story and I'm going to give your story with your indulgence. And it's the three statisticians who go duck hunting. And I don't know if the Court has heard this, but the first statistician takes a shot at the duck and misses the duck a foot behind the duck. And the second statistician takes a shot and gets the duck a foot in front of the duck. And the third statistician says, we got him. And I think that's the problem that we have. A year ago - - THE COURT: I want to tell you about judges someday. (Laughter) THE COURT: Because they're duck hunting, too. A law professor and a court of appeals judge and a bankruptcy judge. But we'll save that for the end here. (Laughter) - 165 - MR. KOHN: Okay. Thank you, Your Honor. The point, Your Honor, is that if this goes to trial, we have a real problem, because whatever you say about probabilities and assurances and everything else like that, nobody knows when the case goes into the jury room where it will come and where it will come out. And all of the computations and all the statisticians and all the, you know, charts and decision trees and everything else like that don't matter. And we've been saying that if anybody really believed in what they were saying to oppose the settlement, they just ought to take us out, they probably have to take minor count because of the (indiscernible). These bondholders are capable of doing that. They have the financial wherewithal. It's very easy to come in and objection. But at a certain point - - yeah, a year ago, we were okay. The Court said, you know, I came, I wanted relief from the stay. I didn't, you know, trust the process. And the Court basically said, let's see how this thing develops, we're here. And we would say that if the Court were disposed to deny the settlement, that it certainly both, is credibility for the bondholders and at least fundamental fairness. And, in fact, denial before you go to trial would be conditioned on taking out the secured creditors, taking out Monarch, being sure there's enough to payout their claims in full as it would - 166 - be in the settlement. So that we're not at risk on something which is really a gamble. I mean, the dice game could be absolutely fair. The odds and the statistics would be fair. But no one would say a trustee should take $175 million and bet it on a fair bet at a roulette table or a throw on dice or something else like that. That's just not how the system should run. And so, if the Court were disposed to deny the settlement, and for the reasons I said, it shouldn't, it should be conditioned on giving us that protection. THE COURT: Okay. Thank you. MR. BENNETT'S CLOSING ARGUMENT MR. BENNETT: I don't think I've used up very much of my time and am going to spend a little longer than I might otherwise in oral argument because there are a lot of things I need to cover. First, I want to start repositing some specific things I heard in the last 20 minutes or so. And perhaps as good a place to start as any is with the last comments that Mr. Kohn made about the role of probabilities and the role of economic analysis in courtrooms today. There's a famous mathematician named Polos who wrote a book called "Innumerousy". And I specially know a lot about this because I have a Bachelor's Science in Applied Math and did a lot of work in this area. - 167 - It is true that American's buy too much insurance, a I lot too much insurance. And the reason they buy too much insurance is they don't believe in the quantification of risk. They just don't. There's no convincing. It turns out to be true that when you're dealing with an uncertain event, that having 400 is the same as a 50 percent probability of having 800. Judge Posner's figured that out a long time ago. He's wrote a lot of books and become a very rich man, I suspect, explaining that to everyone who would listen to him. He is absolutely right. The problem that most Americans have and most people not really grounded in math, is they never quite believe that it's 50 percent. Fifty percent to people, there's been lots of psychological research, it always looks like only a 25 percent chance of winning. The math really does work. There are long proofs that prove it. And we're going to believe it in court sooner or later. They already are and they're already using that nethodology. We have to grapple with an uncertain event. We nust value an uncertain event. We cannot throw up our hands and say because the event's uncertain and it could be zero, anything is okay. As I will come to later, too much of the testimony in this case sounds like that to me. On the point of whether or not an expert like Mr. Hennigan, who is one of my partners - - and by the way, you - 168 - could have asked him about anything you want, we were not going to make any privilege objection - - we only had a couple weeks to get into this which was an unusual procedure for such a big deal. What are we to make of the argument that someone who only has two weeks to evaluate it shouldn't be allowed to have an opinion that counts. We have Bankruptcy Code Section 9109. It says, the Court's supposed to be able to evaluate the settlement. If the people who have two weeks to evaluate the settlement can never count, what are we doing here? Was the notice of this hearing so hopelessly inadequate that no one could ever prepare a case in response? Were the tools that we were given to respond to this case so hopelessly inadequate that I can never possibly convince the Court that this particular settlement should not be approved? I hope that's not what this is about. I hope this whole hearing wasn't just a huge waste of everyone - - the bondholder's hired time because it was not possible for us to make a persuasive argument because they had 16, 18, 24 months into it and we only had a few weeks. We only had a few weeks because we only got a few weeks and that has to be enough. If it's not enough, this hearing shouldn't take place today, and there should be more time. The same point goes to the 41 percent of the bondholders. It is extremely tough to organize bondholders in - 169 - any circumstances. In our current environment, they have so many things - - other things to do, it's extremely tough. While people made efforts to run down bondholders and talk to them, they couldn't make the efforts they wanted to. There is no other bondholder that's standing up here and saying accept the settlement. There are 41 percent saying not to. Concerning the issue of an appeal. There was certainly a risk of appeal. Mr. Brown misspoke when he said that Mr. Hennigan didn't deal with that. He sure did. He said, well, there's a flip side to appeals. You get interest to what is now a pretty high rate, you know, post-judgment. They balance. You also, of course, eliminate collectibility risk because you get a bond. There - - one more digression. It's kind of like the story, but it's about this case. At the end of the day, very often lawyers fall back on process. It's the way we try to figure out whether what happened was what should have happened and whether a reasonable result could be obtained. I think one of the themes that we heard today was that the trustee's side was a well-oiled machine that considered absolutely everything and did absolutely everything they possibly could to zero in on the right number. And because they think it's reasonable, we should think it's reasonable. But we know at the end of the day, this case went - 170 - from a $1 million-1.1 billion spread to a $175 million settlement in roughly a four or five-day period of time. A lot happened in that four or five days. I'm not testifying. This is all in the record. They got a new declaration from a new expert from Verizon. Mr. Anastazzi, I think, is the way you pronounce his name, but I'm not sure. And they got the two direct - - declarations from the former employees. The former employees of Northpoint who started to raise the first tangible concerns about the possibility that Northpoint's financial statements had problems. And by the way, there are words I think, not positive, in some of the declarations that there was a restatement. Restatement is actually a term of art. There were no restatements. Restatements is where you have a 10K or a 10Q filed with the SEC. You retract it and you have to replace it. Here, what at most happened was there was an earnings announcement, one of those conference call announcements, and then the subsequent - - before the subsequent 10Q or 10K, there were revisions. It happens all the time. That's not a restatement. Just wanted to get that out of the way. What did they do in that four days? What happened in those four days? Well, one of the things that happened is Mr. Kohn checks in. He files a motion under seal. Only the banks - 171 - and the trustee gets to see it. No other party-in-interest knows that there's pressure. A secured creditor is saying they want to take this baby away from the trustee. probably take away her chance at her 4 percent or 3 percent contingency fee. They find out that there's some new evidence, which, by the way, Mr. Galinski's deposition, which I've read, didn't cover. At least, didn't cover very precisely. But no one calls him. That's really surprising. This is the issue that everyone's matching up to what's going on in the media. They're matching it up to Worldcom. They're matching it up to Enron. It's the straw that's breaking the camel's back and no one picks up the phone. Then there's another window. I'm a bankruptcy lawyer. I do some litigation. I know a little bit about it. You're a bankruptcy judge. And hazardous to say, both you and I know a little bit relatively about the commercial litigation process, but we know a lot about the bankruptcy process. And these guys thinks it's important, too. There's a lot of effort at rehabilitation. There was one thing that was intensively bankruptcy that was going on here and that was the verizon claim. Now, it's really good to have Mr. Kahn, after lunch and after the facts are out, say, oh, I never relied on that at all. The problem is, in all the papers they filed with the Court, the $35 million release is referred to about 7, 8, 9 times. And - 172 - it's included among the important factors, the important terms of the settlement. Now, all of sudden never cared. But the trustee's testimony is really clear. She had even look. One trip, first thing that occurred to me, 30 some - - $31 million of claims, pull the docket. I was astonished. Several iterations of claims and one of them recites the fact that 30.2 of the $31 million was subject to release upon payment of the 20 and it says the payment's been received. They just haven't figured - - finished their reconciliation yet downstairs. Those documents have got to be in Ken Brown's office. No one looked. We don't ever get insights into the level of due diligence somebody used during a process. We got this one. This was then. This was at the time they were doing it. They were shooting blind. So, how much confidence can we have in this process? And how much confidence can we have when they say, trust me, which they do as to some other issues that we will get to in a second. There are standards. There are four factors. There are - - isn't any disagreement that there are four factors. Excuse me for a second. I have to get - - One of the factors I'm going to come back to in a minute, which is the one that's labeled "Likelihood of success on the merits". That's been given judicial gloss when we talk about finding a reasonable range and determining whether the - 173 - settlement is within it. The second factor was a factor of collectibility - - verizon's ability to respond to a judgment. Now, Your Honor said you didn't think the trustee viewed it as a factor. And it didn't sound like it's important. And it shouldn't have been. That factor shouldn't have cost the creditors a nickle. It should have been a non-factor. Why? Verizon doesn't have an A rating. It has an A plus rating. We talked - - we heard about Worldcom. That was kind of interesting, but who knew about Worldcom. Worldcom never had an A plus rating. Worldcom was, at best, for a very short period of its life a borderline investment grade credit. A plus is well into investment grade credit. In fact, I checked on the break, the Citicorp's parent has A plus rated indebtedness. They have some a little higher, but they have a big tranche of A plus rated indebtedness. That's really good stuff. What is - - is Verizon Worldcom? No, Verizon isn't worldcom. Verizon is the successor to Bell Atlantic, GTE and Verizon Cellular. Bell Atlantic and GTE being enormous regulated arbauchs which have a rate of return, that they are 9rotected by statute and they just print money. Verizon Cellular is the largest cellular company in the United States of America. It prints money. That's why verizon is an A plus credit. It is not a fiber-optic network - 174 - carrier. It is not a CLEC. It is not an ELEC. It is none of those things that are clogging bankruptcy courts throughout the country. And it's not even one of those that went into a business that was like them. The application tells us what the trustee did. Not what the ex-post justification is when confronted with the realities in this Court. And what does she say when we talk about difficulties with collection? Although the trustee believes that Verizon is financially sound, she also concerned, mistake in the original, that the recent collapse of the telecommunications asset valuations could impair Verizon's ability to satisfy a large judgment in the future. Well, she didn't do anything to figure out whether there was or wasn't a problem, and she had McFadden, who she could have asked during a coffee break, as to whether or not Verizon beared any resemblance to anything else? The record is, the trustee did consider it. The record is it cost us money. The record - - and the factor should not have applied. Complexity of litigation. To this one, I owe it to my friend, Mr. Tagawa, who went and found the transcript of the trial-setting conference in state court. Here, in the pleading offered to Your Honor on page 7, we are told how complex this is. Well, I read the complaint, too. I was struck that for this big a case, it didn't seem complex. It was one - 175 - transaction document, the merger agreement. At least, that's what the focus of the pleading is. It was a one contract claim, two carefully related, slightly different element fraud claims. That was it. Yet we're being told it's enormously complex. Yes, there are lots of facts, but I think they boil down to a relatively handful in the hearing today. I don't think Mr. Sullivan lies to courts, but when he addressed the state court, he said this was a simple case. Ready for trial immediately. Just three causes of action, one contract. And here again, I didn't get a chance to see what's really in Mr. Sullivan's files and what the advice he really gave other people and what his impressions really were, and I'm never going to get to. But this one little - - another glimmer into Mr. Sullivan's reality when he was confronting a judge the last time around is an important consideration. In the pleading, we're told it's complex. In the state court, we're told it's not complex. Was this a factor that cost us money? It should not have been. The interest of creditors. Much ink has been spilled on it. The unsecured creditors have money in the game, as Your Honor observed, and money at risk. And believe that in this very hasty and complex settlement process, things were overlooked. The standards weren't met. There was some sloppiness and it was settled for too little. - 176 - The last standard was the standard that may be properly so has gotten the most attention in court today. And that is the standard of the so-called likelihood of success and within the bounds of reasonableness. When I ask someone to evaluate a piece of litigation for me in my cases, and it happens all the time, I want someone to grapple with the case. I want to hear the good and I want to hear the bad and I want to hear a valuation of both. Not valuation, evaluation, as a basic element. I would like the person I send away to give me the report not to become an advocate for one side of the case or the other. I want a valuation. I don't think a person can fairly and honestly evaluate or value a claim by focusing on one side of it anymore, as I said in our papers, than we would expect a real estate appraiser to evaluate a building by telling us only what was wrong with it. In a 363 context and Rule 909 is a distant but still relative of that, we would never accept as evidence of value an appraisal that said the roof leaks, the basement leaks, the windows leak, the elevators are broken. The fact that the building might be on Park Avenue and 45th Street in New York not being mentioned. We wouldn't do that. So we turn to the declarations. And Mr. Sullivan's being the one with the most details the appropriate place to start. I can't find the positive consideration in Mr. - 177 - Sullivan's declaration. I've looked very hard. The Court should, too. What Mr. Sullivan has told us is this case has an enormous amount of elements that have been said about it by the other side that might have risks. We could go through each and everyone of them seriatim. I don't think Your Honor wants me to. But I'll go back to the two allegations that the financial statements of Northpoint were, in some way, deficient. Being - - call Galinski during that mediation, that would have been the first thing I would have done. Did they talk to him between the mediation and now to find out what his side of the story was? Apparently not. No one evaluates whether the statements made by the Northpoint witnesses were true or not true. You may get an evaluation now when someone comes up after me, but in the evidence, there was none. They didn't do it. And with factor after factor set out in the Sullivan declaration, you have a laundry list of things that experts on the other side have said with no effort to put into context or without any reflection at all that Folger, Levin and Kahn has investigated this contention and has reached the following conclusion, in pleadings filed under seal. Your Honor's entitled to that. That's important. It would be balanced. It would lead to a range. It would give a basis for independent evaluation. - 178 - The truth about Mr. Sullivan's declaration is that it supports a settlement of a dollar as well as it supports a settlement of $175 million. It doesn't deal with the value of the case. It preys on what Professor Polos wrote about in his book, "Innumeracy". It preys on the fact that Americans, probably people in other cultures, too, have a tendency to exaggerate the significance of risk in evaluating outcomes. So he gives us lots and lots of risks. He doesn't give us evaluation. At the end of the declaration, and Mr. Kahn's declaration, and the trustee's declaration, we are told by all three, we have each determined that this is within the bound of reasonableness. And in the reply pleading, Mr. Brown says, you've got it, Judge, because we told you it's true. It's a sight variant of the pleading he tried last time, which is, I can't possibly imagine what Mr. Bennett or his clients will ever say that might have any bearing on whether this Court would approve this settlement. That was at the continuance motion. That was outrageous. This is derivative of that outrageousness. We are asked to trust them. We are asked that because they say it's within the range of reasonableness, it is within the range of reasonableness. And only finally on rebuttal, when confronted with someone who tried to use tools, that Judge Posner's been encouraging courts to use and which - 179 - courts have in fact used, he modifies his prior testimony and says, I've got a new idea. There really is a range. And 80 was outside it, but at somewhere above 80 because I turned down 80, so above 80, anywhere above 80 and 175 is above 80. Your Honor, accepting the conclusionary testimony that it's within the range of reasonableness without the grappling with the facts that I think is necessary to make that determination is the same as not making any independent exercise of judgment. It is the same as rubber-stamping a trustee. It's no different. There's another interesting thing. And if - - it's quite remarkable. It shows again, I think, a failure in a case that was presented to you. At the hearing on - - at the - - in the mediation session, the trustee filed a brief. There were four expert reports attached and while they made very sure in their initial presentation to you to attach all of Verizon's expert reports, somehow they were left off. And so, we gave you two because we thought this was pretty interesting stuff and we didn't know how you could possibly give the Court a fair impression litigation without it. And then we've got another one back attached to the opposition, not authenticated, but I'll stipulate it's an authentic copy from Mr. Brown. And there was one more. It was from Professor Bernard Black from the Stanford Law School. And it was authenticated by my friend during the cross-examination - 180 - of Mr. Sullivan, I think. There have been a couple of essential issues. We talked about the financial statement issue and the fact that the trustee didn't check it out. That's the test throwing out the argument. But Mr. Black also opined on one of the other essential issues in the case and that was he's opining on Verizon's analysis on why Northpoint failed. I hope the Court has a copy. Professor Black is a very distinguished fellow. THE COURT: What page? MR. BENNETT: The page I'm going to is page 8, paragraph 17. And he opines, "The principle adverse event pointed to by Verizon - -" And the background explains this all in quite detail. "- - involves the general affect of affecting the data industry. The financial failure of smaller internet service providers such as Flashcom, Zion and PSM. verizon failed to consider whether the effect on Northpoint of the failure of smaller ISPs was excluded from consideration by the carve-out from the MAC definition for facts, events, changes or effects that are generally applicable to the data industry." - 181 - He goes on. Generally, it's the same affect. Now, there's a strange debate here. Mr. Black's got the provision right. It's cited right above. The MAC clause is about facts, events, changes or effects that are generally applicable to the data industry. When Mr. Cornell evaluated this provision and he was Verizon's principal witness on the point before they got the new witness, the Verizon tune was, well, if the daily industry was affected by X percent and verizon was affected by X plus Y percent - - excuse me, Northpoint was affected X plus Y percent, then it's not included in the provision because, I think he was saying, Northpoint was affected more than the data industry generally. But that's not what the clause says. What the cause says is that if the event or change affected the data industry, it doesn't say that it can't have distant proportion impact-on you. It's the difference between the - - focusing on the underlying cause of the problem and the ultimate impact. There is no doubt that Northpoint is, as we say in the finance world, a high-data company. It was smaller. It was more concentrated. It was much more sensitive to movements in the data industry. Events in the data industry that, as Mr. Cornell said, affected Microsoft a little bit, affected Northpoint a lot. But Professor Black is saying is Mr. Cornell got it all wrong. These things affected the data industry. They - 182 - affected Northpoint a lot and more. That's not the point. The point is is - - Northpoint was a small boat bobbing on a very violent sea, affected much greater by others. That - - and others. That's why it sort of partner. The fact that it got knocked over by that sea while others did not get knocked over by that sea is not a material adverse affect under this contract. But Black wasn't important enough to present to you. Didn't make it into their package. Those are the four factors. We think their process reveals that there were problems in their analysis at the time they did it. The only part about that process that you and I completely understand, they blew. They didn't ask obvious questions. There's no reason to credit it. They were then supposed to come and justify it by grappling with their case, giving you the good and the bad, discussing it in a balanced way, helping you form an independent range. They didn't do that until after the fact. All we have is a lot of risk that we're supposed to be afraid of which means take anything. And they took what they became convinced was the last offer they were going to see, which, by the way, is nowhere in the factors. The fact that you have a stubborn defendant doesn't mean you settle lower. In addition, they cite numerous other things that cost us money. We can never find out how much, they'll never tell us. But they were factors that didn't belong. And they - 183 - all cost us more money. In addition to the reason we started out, because I still can't tell how much the parent gets in this deal, this deal is not within the bounds of reasonableness. It doesn't meet the other factors. It shouldn't be approved. And at a minimum, the trustee should be starting over again, but I think this case should be going forward to trial. Thank you. THE COURT: Okay. I have one question for you. Is there any case law that says when they bring a motion for approval of a settlement, they have to not act as an advocate for the trustee, but have to sort of act as counsel for both sides and layout the best arguments both ways? MR. BENNETT: Your Honor, if you read A&C Properties, it talks about their five-day hearing and the idea is to give the Court a record to make an independent judgment. I think when you read those cases, you can't come away thinking that what they're supposed to do is analogous to what an appraiser is suppose to do, is tell you what it's worth. It's not in any particular case, it's in every case. Tell me what it's worth, within a range. When Mr. Hennigan testified, he testified what the center of the range was. He said, there's a range. It just doesn't go all the way down from the low 400, high 300 down to 175. All the cases say that. And you don't have to look it up in the 363 context. And this is the same. - 184 - THE COURT: Okay. Anyone? Thank you. Yes? Who's next? MR. TAGAWA: Your Honor, I am - - MR. BROWN: Your Honor, if I could just - - before you start. I think - - we've been keeping rough time here and Mr. Tagawa, we think, has about five minutes. THE COURT: I'll give him a little longer than that. We have time. MR. TAGAWA: Thank you, Your Honor. MR. TAGAWA'S CLOSING ARGUMENT MR. TAGAWA: Your Honor, I am not a bankruptcy lawyer, per se. I am more of a litigator than a bankruptcy lawyer. I do get involved in bankruptcy occasionally, but I'm probably the opposite of Mr. Bennett who does bankruptcy primarily, some litigation. THE COURT: This isn't primarily a bankruptcy question. MR. TAGAWA: Okay. I understand. THE COURT: primary question here is what is this action likely worth? MR. TAGAWA: My- - THE COURT: For settlement value. MR. TAGAWA: My comments, I guess, will begin with this, that in 20 days, Verizon settlement position changed by $175 million. July 3rd, they were at $1 million, by July 23rd, - 185 - they were at $175 million. They made an $80 million jump in 17 days and then they made a $95 million jump up from the 80 to get to 175. And in my experience, when you're talking settlement with a party and you're trying to get the most money that you can out of settlement, you don't end up seeing larger jumps by the party that you're trying to get money out of or squeeze noney out of. Then, normally, you get smaller jumps and you get more into dickering. I know that the question here is whether or not - - not whether we got the best settlement or even the mid-range. I mean, it seems like the trustee is conceding this is in the low range. However, what is the low range for this settlement? and I think we've had testimony from Mr. Kahn here, that in his opinion, 80 to 100 million would have been in the low range in his mind to release - - he would have considered recommending that or supporting that. I - - with all due respect to Mr. Kahn who - - and I do have a lot of respect for him and his firm - - I don't think that that is a reasonable settlement. And I don't think that that is within the low range. I don't believe that $180 nillion is in the low range. And I'll get into some other reasons why. But before I do that, I think I would like to start off by saying - - stepping back and saying this is a court of. - 186 - justice and we are basically here to try to do justice to the parties and considering all of the circumstances. And what we have here is Verizon on the other side who - - the undisputed evidence is that they made a strategic decision to terminate the merger agreement with Northpoint. They thought about it before doing it. They negotiated arguably in bad faith with us, possibly defrauding us into the agreement. And then they pull the plug on us, leaving us high and dry. The entire estate or the entire value of Northpoint crumbles as a result. And we are here now to try to do justice to the creditors and the estate of Northpoint. When - - and I consider the factors here in terms of what the Ninth Circuit has said we ought to consider. The probability of success that we're going to prevail on our causes of action. It's basically, I think, 100 percent that we would get - - or at least 90 percent chance that we would get to the jury on all of our causes of action, at least fraud and breach of contract. Maybe not negligent misrepresentation based on what Mr. Sullivan testified to, but fraud and breach of contract are going to the jury. And the damages that are going to be sought on those causes of action are going to be immense. We have testimony from these experts that the trustee has put on as to what their opinions of the likelihood of success is. And I suggest to you that their testimony is not - 187 - really credible. That Folger, Levin and Kahn had initially evaluated this case and offered to do it on a contingency fee. And I don't believe a firm of that caliber would do a case on a contingency fee with even a 60 percent or 50 percent chance of likelihood of success. I believe in their evaluation, when they initially evaluated it, all the way up to the time of their hiring, they thought had a much better chance of winning the case than 60 percent at the top, 50 percent at the bottom. I think that the statements made by Folger, Levin's attorneys to the press suggests that, in fact, that the case was a very strong one. They had a very high chance of success and a likelihood of probability of success. We see the Pachulski firm, who represents the trustee, rushing to court as soon as they get appointed, basically on behalf of the general estate or the debtor. And they ask for a contingency fee as well in addition to their customarily hourly fees. We see the trustee herself, who in January of 2002, ask for a contingency fee arrangement. She's got hundreds or thousands of hours into the matter already at that point when she says, I'm ready to give up. If I don't get a - - if I don't - - if we don't get a recovery in this case, I'm ready to take nothing. But give me instead 3 percent of whatever we get. And by the way, my accountants are in for 1 percent, too. - 188 - Please put them in the money here on a percentage basis, too. We've got financing for this case obtained by Monarch. And they're ready to give a zero interest loan to finance the litigation in return for 5.5 percent if it settles or 6 percent if the judgement - - or a judgement is - - or its trial has started and a judgment is rendered against Verizon. Now, all of these people are professionals. They are very astute. They are very shrewd. They are analyzing their likelihood and Northpoint's likelihood of success on the merits with all of their skills. And they are all coming to the Court and saying, we want to take a percentage. We're willing to risk not getting a dime if we lose, but this is where we are financially. Economically, in our self-interest, this is how we think we can get the best dollar. And, in fact, the trustee in her papers, asking for it, basically said to Your Honor, I'm really not going to go to maximize the value of the estate unless you give me a percentage. Unless I can participate on the up-side, I'm not going to do it. And I don't think she has here. I would ask the Court to please take judicial notice if the motion of the Chapter 7 trustee, E. Lynn Schoenmann, for an order authorizing contingency fees for trustee and her accountants, and memorandum of points and authorities and her declaration that was filed on January 31, 2002 in this matter. I also ask the Court to take judicial notice of the - 189 - renewed motion of CIBC for relief from stay, or in the alternative, to compel trustee to settle litigation which was filed under seal on or about July 19, 2002. So I submit to you here, what we have, and I think the evidence has also shown, that when the trustee wants something, they will characterize whatever it is they want in the light most favorable to them. Meaning, if I want an early trial date, this is a simple case. CIBC basically also in its papers that I just cited to you, had characterized this case as a fairly simple, straightforward case. On the other hand, here, when they're coming to ask for approval of the settlement, now, it's a very complicated thing. It deals with all this credibility issues, so forth and so on. Trial is risky. I will vouch with that. I have no dispute with that. But trial is the best and the only way that our American judicial system has come up with to resolve disputes that are legitimate disputes between corporate entities or individuals. And, yeah, it's a risk. Anytime you get into a fight, you risk. You might lose, you might get hurt, but if he's got to go, you got to go. You got to do it. I don't see anyway around that risk. But that doesn't mean that you always cave in to it either. There's been testimony about - - I think the testimony has been 60 percent analysis by Folger, Levin and Kahn on the - 190 - upside. And somehow, after deposing Mr. Anastazzi, they evaluate it down to somewhere downward. They weren't exactly sure how much. And there's been talk about, well, you don't really take half of whatever the amount is, meaning 50 percent of 800,000 is not 100 percent of 400,000. Well, I agree. I'm not saying that that's what it is. But that's what the law says is to take a look at the probability of success, meaning if it's 50 percent or 60 percent, Your Honor is now compelled to make a decision about, or at least factor in what the probability of success is based on the evidence and arguments heard. And I submit to you that 175 million out of 800 million is 21 percent which is nowhere near 50 percent or 60 percent likelihood of probability of - - THE COURT: What was that again? MR. TAGAWA: 175 million divided by 800 million, and I arrive at 800 million as somewhere in between 750 million, the low side, and 850 million, the high side of Professor McFadden, Nobel prize winner that everybody seems to respect. That's 21 percent, Your Honor. And that is not in the range, in the ballpark in my opinion, of 50 percent or to 60 percent evaluation of the merits of the case on probability. And if Your Honor is going to agree that that's close enough, then I don't know what the probability of success factor means because there seems to me it needs to be some sort - 191 - of certainty or predictability with respect to our decisions. And if a 50 percent to 60 percent winner of the case can be factored down to 21 percent, or anywhere in that ballpark, I don't know how probability of success is really being factored in. There's no quantifiable way. Likelihood difficulties of collection, I won't address that because I don't think anybody contends there's a likely difficulty in collection. Complexity of litigation, I think it's - - I don't think there's any doubt about that also. So the last one I have is paramount interest of the creditors. To me the key here - - the keyword here is paramount meaning I - - it seems to me, out of all of these four factors, it's the paramount interest of the creditors that the Court and the trustee ought to be considering first. And that is ahead of the interest of themselves or the administrative personnel or anybody else, basically. I think the paramount interest of the creditors needs to be considered. And that is not something I've heard a lot of here. I've heard the defense, I guess from Mr. Kahn that well, this is a big number, that, you know, juries may be loathed to award a big number. And I hadn't - - I've been in such a rushed period of time here, but - - to research this, but that statement and this whole case sort of reminds me - - or this motion, reminds me of the story that I had heard that Elvis presley's press recordings were, at one time, when he was - 192 - managed by a Colonel Tom Parker, as I recall, was sold by that Colonel Parker for something like $1.7 million back in the 1960s or '70s or something like that. And we all know that the value of Elvis Presley's recordings today is worth much more than that. But I think 1.7 million was a lot of money to Colonel Parker at that time. The point is, yeah, 175 million is a big number. But this Court should not just look at that big number and say, well, that's a big number. I don't think we can get anymore. That's good enough for us. This Court has to look at that big number in the context of the business of Northpoint, the DSL industry today. This is a billion dollar, if not trillion dollar, industry. And we have, in San Francisco, these kinds of businesses doing business here. One of the problems I see, and the other thought I had about this motion is that we have the trustee and Folger, Levin basically turning their guns 180 degrees around and firing it back at the estate saying, these are all the risks, we're going to lose. Or we have a big chance of losing. What are the chances again that we can turn them around to really go after Verizon? And to me, the analogy here that seems appropriate is when you've got Michael Jordan under the basket, and there's nobody defending him. And you say, Michael, take the shot. And Michael, take the shot. And Michael says, no, I can't, I don't want to - 192 - take the shot. I'm going to miss. Well, you've got the rest of the estate saying, I think we're a large part of the estate except for perhaps the secured creditors saying, take the shot. And Michael doesn't want to take the shot. And what are you going to do? Well, I suggest to you that the weight that you afford Mr. Kahn and Mr. Sullivan, I agree that they have studied the case far better than I, far better than bondholder's counsel. But I have a lot of respect for them, and I think that they will do a good job. And that's based on that, that I ask that you deny the motion. THE COURT: Okay. MR. BENNETT: Your Honor, if I might just for a second answer this specific question with specific case sites? i THE COURT: Okay. MR. BENNETT: In three cases, in the matter of Boston and Providence Railroad Corp., 673 F.2d 11. THE COURT: Okay. You got to slow down. Do it again. MR. BENNETT: 673 F.2d 11, Boston and Providence Railroad. THE COURT: Okay. MR. BENNETT: And in A&C Properties, it was a pretty important case, 784 F.2d 1377. That's the leading Ninth Circuit case. THE COURT: I'm very familiar with that. - 194 - MR. BENNETT: Okay. And in Protective Committee for Independent Stockholders of TMT Trailer, which is where A&C comes from, 390 US 414. They'll make the same point. They make the point that the Court has the duty to make its independent determination of value whether or not there's anyone opposing. So- - THE COURT: I- - MR. BENNETT: And if you have to do that, it - - THE COURT: I don't quarrel with that or question that for a second. MR. BENNETT: If you have to do that, you need a record that grapples. You can't have a record that says there's just risk everywhere you look. That's the record from the moving party. MR. BROWN: Your Honor, if I might just briefly respond? THE COURT: About what? I'm going to let these other two people talk briefly. MR. BROWN: Fair enough. MR. SCHOCHET'S CLOSING ARGUMENT MR. SCHOCHET: Your Honor, I come at this from a slightly different perspective. I appreciate we're here on a motion to approve a settlement, but I don't know that this is precedent in the magnitude of the dollars and the impact on the estate in a Chapter 7 case. - 195 - 196 There's a handful of people here. We're all advocates here. I've heard various things about self-interest, innuendo about trustee's self-interest, innuendo about everyone's self-interest. Indeed, equities as well. Everyone has a self-interest here and there's no denying that. But at the end of the day, I think the bankruptcy law speaks to ultimately who really gets to make that determination, besides the Court. And I think it's really the holders of claims and equity interest in the estate. This is not so much a routine settlement or law suit as it is the ultimate disposition of the case. Maybe not the allocation, but the ultimate disposition of a case. It may as well be selling a company lock, stock and barrel. It may as well be a 363 sale of every single thing there is to sell. That's the effect of this case. This is it. Last asset and a huge one at that. And I suggest that the process by which we're here may not be the correct one. I appreciate that there is a rule and it speaks to compromises and controversies and that's what's teed up here. But what we're hearing is over some suggestion before. Well, look at this, the - - this Ad Hoc Bondholders group barely has 40 percent. Well, everyone here, my client as well, we're all ad hoc because we've only had information about this for a couple of weeks. There hasn't been any organized ability to deal with this. - 196 - I'm not aware with the exception of the trustee and I suppose the bank group that anyone is here supporting this. There are people who have very hurriedly done their best to question this. And at the end day, if the system works, the system being bankruptcy, if the system works, it seems to me that the parties who are affected should be permitted to vote, speak in some better organized fashion than a couple of ad hoc groups very quickly trying to assemble. A couple of people invested a tremendous amount of time over the last couple of weeks and I tip my hat to them for trying to figure this out, raise questions. Is it the right amount? I don't know. I'm sure the trustee is very sincere in believing that it is. I think the trustee and her team ought to be thanked. I'm not here to criticize them. They have advocated what they think is the right thing. But I don't think it's their vote. At the end of the day, I think if there's to be an 18 percent distribution, which is what I think the trustee said, on claims if that's the correct amount, that doesn't even address allocation and a whole variety of other issues, I think that the parties-in- interest should be permitted to speak to it in some sense. Well, what's going to happen? You know, cost the estate a little bit more in the way we're told of accruing interest to the extent there is a valid security interest? I don't know. I'm quite sure that's come up once or twice in - 197 - this courtroom, but I don't know that. I suppose that we might hear that verizon will walk and that the case will have to be tried. I suppose that's possible, too. But who's vote is this? There's just a small group of people here today. There are thousands of creditors and equity security holders with enormous amounts at stake. They're not here not because they're in favor of it, that's for sure, because there hasn't been anyone else who's spoke in favor of it. They're not here because they don't know. And if the trustee wants to sell something to them, then that's what the trustee should try to do. And if people who think it is not the right number want to oppose it, then that's what those people ought to be able to do. And if there's to be more discussion, then that's what ought to happen. This doesn't address the allocation issues which I heard for the first time at the outset today. This is about self-interest. I don't think anyone should be criticized for it, least of all the trustee. I'm sure she is here because she thinks she did her job. And I'm sure that other people are here because they don't think the amount is right. But it's not the trustee's vote. This is the ultimate disposition of an entire, enormous estate. And while perhaps plan Chapter 11 isn't the only way to get there, and I'm sure even if it is, it can be done on some accelerated - 198 - process, this is unprecedented to me. I'm not sure I've ever seen anything quite like this before, but I do think that the thousands of holders estates in this case should have the right to be heard. Thank you. THE COURT: Okay. Thank you. Ms. Ball, did you want to say something? MS. BALL: Please, Your Honor. THE COURT: Go right ahead. MS. BALL'S CLOSING ARGUMENT MS. BALL: Your Honor, I rise, one, to clarify something that I think Mr. Brown might have left in your mind. Certainly my clients were immensely disappointed by the number. But as we stand here today, we - - we're not in a position to express support for this settlement at all. In fact, Your Honor, we don't know enough to have a view one way or another on the merits of the substance. We do think, Your Honor, we do echo the law as enunciated to you and would encourage the Court has a heavy burden of the independent investigation. And parts of this record, at least to us, are troubling - - THE COURT: I think it's independent evaluation, not investigation. MS. BALL: Evaluation. THE COURT: I don't think I have to go out and dig things up. - 199 - MS. BALL: Well, I think TMT Trailer theory is fairly clear that Your Honor does have that independent duty and the evidence has to be before you. But one thing I do find troubling on this record, Your Honor, is the speed with which this has come about. The mediation occurred in July and, apparently, only from the cross-examination here today, it appears that once the trustee was armed with an offer of 80 million, we have this motion from the secured creditors who would be fully paid coming immensely on its heels. That motion - - the docket shows no independent resolution of that motion. The docket then shows the application for approval of this settlement. In very close sequence, Your Honor. If this is, in fact, and everyone seems to concur this morning, this afternoon that it is, one of the largest assets of these estates, then, Your Honor, I guess we are back again to saying that's paramount interest of creditors. Your Honor really hasn't heard from the creditors because they're not in a position, at least the trade creditors certainly are not in a position to help Your Honor with your investigation by expressing their view. And Your Honor, I would caution you by taking care of the senior secured creditors may not be what was meant by TMT Trailer theory in asking the Court to take into account the paramount interest of creditors. - 200 - THE COURT: Well, let me ask you all just - - we missed 2:30 and anybody who's here didn't complain at 2:30. MS. BALL: And we're here. THE COURT: I've spent a lot of time thinking about this case. And one of the things I've spent a lot of time thinking about is how the settlement process can be fair in terms of giving as much as possible deference to the wishes of the different constituencies. And recognizing in terms of what deference I give or what weight I give to the wishes of each group, the particular circumstances in which they operate or exist. And I'll - - you know, let me just go through this a little bit. There are at least a couple of dimensions of this, as far as I'm concerned, in terms of deciding, you know, apart from whether the number is fair in light of my own evaluation of this case. I think even if I determine it's fair on the evidence in front of me, it's - - I think this test says listen to creditors. Now - - and shareholders, too, if it's appropriate. Now the concerns I have here with respect to listening to every group are the following: Number one, can I know what they're going to say about the settlement just from who they are as opposed to based upon their evaluation of the case. In other words, is their position in the case automatically cause them to oppose it - 201 - irrespective of the true merits. And with respect to the shareholders, they're always going to oppose this settlement because they aren't going to get anything. The secured creditor, on the other hand, loves this settlement even if he thinks the case is worth $500 million. In his point of view, this is a real nice settlement because they get paid. So, those two groups, you know, I'm not persuaded that they've really thought about this and are struggling within themselves to determine what's in their own interest. The unsecured creditors are in that position because, here, to - - one way or the other, they're walking away from money. They're risking money. Now - - so, I - - they're playing with their own many and as a result, I think the assessment of unsecured creditors is entitled to a lot more weight. There's one other wrinkle that makes this very complicated. And that is, everybody is playing with the secured creditors. And where the unsecured creditors, if there's a bigger verdict, get more money, the secured creditors can only lose. This is a little bit like the evil I've seen in some of the Chapter 11 plans where, you know, all the risks falls on the unsecured creditor, all the benefit goes to the debtor. And this is what I'm struggling with. I'm struggling with how to evaluate this. - 202 - Now, Mr. Kohn - - I'll get to you in a second, Mr. Bennett. I'm going to let everybody speak to this because this is the thing that I'm struggling with most. If somebody would take them out of this, if somebody would take the secured creditors out, I would listen to - - if - - once I - - there's another problem of determining what are the view of the unsecured creditors. But let me tell you, I think 40 percent knows - - get my attention even though there may be 60 percent silent majority out there, they're silent. We don't know exactly what they mean. And if they would buyout the secured creditors, even though I think even if I determined that this settlement is within the range of reason and I'm inclined to think it is, I would go with the creditors because it's their money. One of the things I've tried to do all throughout everything I do in this court is to let people decide for themselves what they want to do. I'm very persistent to debtors that come in and say it's really in the creditors best interest to confirm this plan. I kind of let the creditors vote for themselves. The trouble here is I have two groups of creditors with very different interests. And I'm struggling to reconcile that. Again, it's pretty easy, I don't think that there's any evidence here to suggest that the range of reasonableness is - - have to go up to $500 million which would pay the shareholders off. - 203 - I'm not struggling with how to deal with the shareholders. I'm struggling to deal with these two different groups of creditors because I really want to give appropriate consideration to what they want because it's ultimately their money. MR. BENNETT: Your Honor, in - - I think actually under the facts of this case as they were stated to you by the trustee, you actually don't sit with that same conundrum that you think you do. We have the trustee tell the Court at the very beginning of this hearing that one of the reasons the allocation didn't matter was he's sitting on 90 - - she is sitting with her attorney, the he - - on $90 million worth of potential preference claims that they didn't even bother to investigate yet. This may not be the case where the secured creditor is an all or nothing proposition. THE COURT: Let me go back. You - - Mr. Schochet has talked about a plan. I thought about the idea of considering this like a plan. The trouble here is if you talk about this like a plan, before you were able to use their - - to confirm a plan, you'd have to assure them that they got the value of their property. And, you know, taking the secured creditors money, and putting it on, you know, the - - you know, 36 of the roulette wheel clearly won't do. There's some element of this in trying a lawsuit, it depends to some degree on the facts. My assessment here is - 204 - that the likelihood of a significant recovery is less than 50 percent. If there's a full recovery, the value is such that the, you know, that the case has significant value, but there are real problems with both liability and this question of whether the debtor would have gone down anyway, which don't have to - - which is a damages collection from Professor McFadden's analysis. MR. TAGAWA: Your Honor, I have a suggestion as a litigation counsel and that might be to go back to Judge Weinstein and say, give us $60 million now to Verizon and we'll try this case with a cap, say a maximum exposure of a million dollars meaning there's - - THE COURT: A billion, I think you mean. I think a million they'd take in a second. MS. BALL: Yeah, a million, we're noticed to be here. MR. TAGAWA: A billion dollars. And that any verdict or whatever judgment we come back with over and above that, we will just set aside. THE COURT: There's no evidence that anybody could get that. MR. TAGAWA: Pardon me? THE COURT: There's - - I don't think there's any evidence that anybody could get that. MR. TAGAWA: I think we could also, I mean, offer that is in the event that the judgement came back in Verizon's -205 - favor, that whatever amounts they paid that $50-60 million would be returned to them. THE COURT: Okay. MS. BALL: Your Honor, if I - - THE COURT: Ms. Ball, I want you to comment on this if you can. MS. BALL: Well, Your Honor, being in the middle here with Mr. Bennett's clients, my clients representing fair to one-half of the trade claims. And we understood that it would be 57 to 60 million. But I am reminded of that infamous footnote in credit lienase, Judge Syles' opinion, where he said, where he said there were shifts. For what' it's worth, maybe we should take some learning from his view. His view was that the creditor really shifts, but it doesn't shift in favor of the secured creditor whose money he may be playing with. And his case really dealt with creditors versus equity. This is the famous case with the vicinity insolvency, footnote 10. What he suggested was the risk that Your Honor feels you're burdened with today, in a litigation context, he suggested that risk really comes into play, not at the trial level, but on appeal. And I guess we would be much more sympathetic, much more sympathetic if we were talking about at the appellate level. We really had some of the secured creditors to walk away and was something left. - 206 - There's may - - maybe not a home run for the shareholders, but something left for everyone. Then at that point, we were estopped with the conundrum. But when it was only one class, it seems just litigation should go forward. It absolutely should go forward. I don't know enough. THE COURT: There's only one class? MS. BALL: There was only - - when only one group would recover and there were two or three who might if you continued. That footnote, footnote 10 seems to suggest that maybe you should go forward. You should go forward as long as that possibility is there. He drew the line, however, on appeal. THE COURT: Well, the way I view this is this. I have an obligation here to assess the likely value of this case and for settlement purposes. In other words, figure out what the likelihood of various recoveries are - - MS. BALL: Recoveries might be. THE COURT: - - so that you can discount them. I agree completely with Mr. Bennett that I am not suppose to hear - - in the context of this kind of case to give some overwhelming advantage to settlement versus non-settlement. MS. BALL: That's true. THE COURT: It has a discounted value. If the settlement is in the range of that discounted value, then it meets the first standard of A&C Properties. The question here - 207 - is there's another standard. MS. BALL: Interest creditors. THE COURT: You know, what the creditors say and what I have is competing groups here. And I don't see any way not to - - I don't see any way in which they don't basically cancel each other out. MS. BALL: But, Your Honor - - THE COURT: Again, my point here is that I discount, as I said, the - - MS. BALL: Secured. THE COURT: - - any reflection of the merits of the appeal in the banks - - or the merits of the settlement and their support for it. They don't care. But they do have money at stake and nothing to gain from going out. And in that particular setting, they do have a real interest in being heard here and it's very different from that of a shareholder who are not in the money. They're in the money. Their money's at risk. MS. BALL: But, Your Honor - - THE COURT: without any commensurate gain if it goes forward. The unsecured creditors clear are in the money and they clearly have something relevant to say about this, too, but they're pointing in different directions. And they're both very substantial amounts of money. MS. BALL: Your Honor, I think that's true, but I - 208 - would also point out to Your Honor that at this juncture, it seems, just to - - and I only looked at the docket, that the secureds certainly have been very much involved through the protocol letters as were described today and the first offer was 80 million. You're saying everything that the trustee has done then toward a settlement seem to be falling towards what the unsecured creditors would want, so, I'm not sure that they're cancelling each other out. THE COURT: Well, no. What I'm getting at here is that they wanted to - - just to foreclose on this. And I said they couldn't do that. I said the trustee - - MS. BALL: They could be - - THE COURT: - - had a duty to everybody in the case. And that the one evil that they had to be protected against was to know if there was any possible settlement. So, you know, ifi everybody else just wanted to go to trial and would reject the settlement, we'd never get to this hearing. So, I got them the possibility - - MS. BALL: Ability of a settlement. THE COURT: - - getting a hearing. And that's all the protocol did. MR. BENNETT: Your Honor, I think it's - - again, it's important to focus on this case. Their collateral include - - is a claim, a chosen action. That's what this is right now. MS. BALL: Exactly. - 209 - MR. BENNETT: No one, no one in this room testified to you that it was worth less than 80 today. Not one person. Mr. Kahn turned down 80, says this worth more than 80. That covers the Bank of Monarch. You have to credit that testimony. That's what Mr. Posner and all of the cases are telling you to do is believe in the analysis that everyone agrees on which is you are dealing with an asset that covers them, that adequately protects them. That's not controverted today. It's two different questions. One is whether you're going to turn my property and their property into 175 - - my clients property and their property into $175 million. It's a separate question whether their current collateral package impairs them or not. And there is not a word of evidence in this courtroom that they are impaired from a view of collateral value. They never had cash. They don't have cash yet. THE COURT: I understand that. MR. BENNETT: Whether they get to have cash is the big picture. THE COURT: I understand that. All I'm suggesting to you is that because of their position of being in the money, they have the right to be considered just like you do. MR. BENNETT: But - - okay. That part's fine. But they don't get to take the ball and go home or - - THE COURT: I never - - I wouldn't - - I haven't let them take their ball and go home. - 210 - MR. BENNETT: Or frustrate a plan unless they are - - have proof that they are at risk. Even if a plan says continue to pursue the case. MR. KOHN: I have a number of comments about Mr. Bennet's other argument, but I want to talk just to this issue at the moment. THE COURT: This is the, to me the pivotal issue at because I - - MR. KOHN: Right. Our collateral might be worth $80 million today at the minimum in the word applied mathematics and probabilities and statistics. But when we go to trial, it may not be worth $80 million. It may be worth nothing. It's kind of like somebody saying, how come it rained today. There was only a 40 percent chance of rain. You know? We came and brought our motion on when the rubber was: hitting the road. When this case was going to trial. It's real good to play around and hope that something happens, you know, and it might worth and we got to push it. We mail our motion for $80 million to get the process going, be sure we got a hearing before Your Court and we didn't lose the timing. And the trustee did the settlement. But from the certain point when they walk into the jury room, when they go into the trial to make, then we know it's a binary issue. You win or you lose. And you're subject to all these risks. So every theoretical computation no longer - 211 - holds mustard. Very interesting for all the talk about applied math, there's a lot of math, but no application. No check. And then we talk a little bit about applied math because you want to look - - the Court says, let's see what the bondholders want. The bondholders are walking away, the suggestion is, from, let's say, $70 million will be left after you payoff the secureds and the admins. They're walking away from 70 million to make or break. Let's talk about - - THE COURT: It's more than that, right? MR. KOHN: I don't care what number it is. 90 million. MR. BENNETT: It's- - MS. BALL: The unsecureds, Your Honor? I mean, the bondholders committees? MR. KOHN: I mean collectively the bondholders and the unsecureds. Give me a number. MS. BALL: The unsecureds. MR. KOHN: A hundred million. I mean, over - - after you're done. THE COURT: All the - - MR. KOHN: Whatever it is, hundred - - let's - - THE COURT: - - people without priority. MR. KOHN: Without admin priority. It's an illustration. A $100 million. Now let's talk about the bet. - 212 - Let's say they got a bet. The bet is, let's say the case might be worth zero, it might be worth 350. And then say, I'm going to wager 100, which is no shock, in case it's worth 350, I'm going to get another 175. So I wager 100 to get 275 on a 50/50 bet. THE COURT: When you wage 100 to get - - or let's say 55 to get 55. MR. KOHN: And if it turns out zero - - I'm not - - but from their point of view, if it turns out zero and they're wrong, they're not losing 175 because I'm contributing to their loss. THE COURT: I know. I understand the point. MR. KOHN: So, it's not - - you know, you can listen to them only after they take care of us. THE COURT: You're betting 55 to get 55. They're betting 100 to get - - MR. KOHN: Right. And they're betting my 55 to get themselves up there and that's the problem with this. MR. SCHOCHET: Your Honor, may I be heard one more time? Just on this general philosophy. I think what I'm hearing is that - - THE COURT: You're hereby appointed Professor of General Philosophy. (Laughter) MR. SCHOCHET: Thank you. Thank you. Well, I'm glad - 213 - this discussion is going in the direction I was trying to push it toward because I say again, I don't think it's our vote. I don't think it's the trustee's vote. I think there's thousands of people who should have some opportunity - - I don't know what that context is. It really can't be a plan. We know that because how do you disseminate this information. This is closed. We don't want Verizon to know. There are certainly hurdles to overcome to figure out a way to take even a straw pole. We do know the people who are here have, for the most part, with the exception of the bank group, spoken against it. I think Mr. Tagawa actually had a pretty interesting concept. And one thing that would do, since Verizon isn't in the room, is smoke out Verizon. What did verizon do when they planned its settlement strategy? They figured out, I know what the claims are in the bankruptcy case. Who do I need to make happy. Well, the bank group. Got to come up with something else. What's that minimum amount? Now they may have taken that in the context of what the case was worth. They looked at their downside just because everybody on the side of Northpoint looked at their upside, but I am positive they did what every other smart person does, and they're smart people, they figured what's the number - - who do I have to buy off on this? That's what they did. Mr. Tagawa had a very interesting - - there are cases - 214 - that are tried with a cap. And maybe the number isn't come up with 16 cash. What if they came up with 20 in cash. Who knows? Mr. Kohn's group, with maybe a little kicker, might say, it's not so bad. And that's the process of the dialogue. If all of a sudden Verizon said my worse case is that I haven't bet the company, they might say okay to that. The shareholders might be in the game. I'm hearing the shareholders aren't in the game, and yet - - and I'm hearing most of this for the first time today because I've just got involved in the case, the equity is at the parent. The bonds are at the parent. I gather the trade is down below. The lawsuit primarily, I gather, is at the parent. So, I'm not sure that equity is not above the trade with respect to proceeds here. I don't know what they are. But I don't know what they aren't either. That's the purpose if the discussion to see if perhaps a collaborative effort - - and I guess probably what this has lacked thus far is a collaborative effort of different constituencies and there is a little bit of every constituency here. Is it representative? probably not. But there are ad hoc groups that at least took the time to come here today. THE COURT: Well, I don't think I - - thank you very nuch. I don't think I've been given any, to me, any answer that really solves the problem. I have here a settlement that, and I'll - - when I get to this, I'll go through it, but I think - 215 - mathematically is within the range of reason. My only pause is that we have some people in the case who want to utilize this asset in a different way and they constitute a large portion of a very important constituency. But, there is an - - a symmetry that results here from taking this - - from rejecting an otherwise good settlement on the basis of their preference where the benefits of it are shared in a way that's disproportionately harmful - - the risks are disproportionately harmful to another group. And I find it very hard in that context to say that the fourth factor in A&C Properties points in the direction of saying no. MR. BENNETT: Well, Your Honor - - THE COURT: If it were a uniformed group where everybody shared the risks and benefits in a similar way, it would be easier to say, well, you just - - there's just more of you in dollars than there are of these other people. MR. BENNETT: Your Honor, I think you should give - - if that's your ruling, we don't agree with it, but would like at least to get the opportunity for some reasonable period of time to get the group together and give them information that they don't currently have to see whether they'll buy it out. THE COURT: Who doesn't - - who currently doesn't - - oh, buy it out. MR. BENNETT: The current - - - 216 - THE COURT: On behalf of - - well, you - - MR. BENNETT: It would be a separate syndicate that ~ould be substitute lenders for that particular position. It nay include some but not all of the bondholders. There would De conditions. THE COURT: Yes. MS. SCHOENMANN: Your Honor, if I could comment on that. THE COURT: You have a different - - MS. SCHOENMANN: The suggestion that the bondholders buy out the debt is not a new one. It's one that I've pursued with bondholders for at least the last year. So this is not some new idea that Mr. Bennett has corne up with. MR. BROWN: Let me - - that is true. We were hoping to be able to swing for the defense, if you will, Your Honor, and knew of Your Honor's concern about this conflict between the secured creditor and the unsecured credit. It was something that we hoped would get out of the way because the terrain is very different obviously, from both our perspective and from your perspective. If it is, then it has been something - - a tune we have been blowing for a long time. No one went out and did it. THE COURT: You know, if going back to mathematics, it - - quite apart from the preference issue, valuing the case and then reducing it to dollars by way of settlement involves - 217 - much less of a conflict, in a sense, than trying it against the wishes of one of the people. MR. BENNETT: The only barrier I have to figuring that out is information, moving information that I have into - - THE COURT: You mean about buying them out? MR. BENNETT: Right. THE COURT: Okay. MR. BENNETT: And there are no time limits on accepting this deal as has been pointed out numerous times. This thing does not drop dead. THE COURT: Is this sort of thing stayed? MR. BROWN: I'm - - is what? I don't understand? THE COURT: Is there a 10-day stay on this under the rules? MR. BROWN: Well, the settlement doesn't get funded for 10 days after the order is entered. But the settlement agreement says - - THE COURT: Because of appeals. MR. BROWN: No, it wasn't - - I mean, the settlement - - this was a point of some contention, but the settlement agreement says Verizon has to pay the trustee $175 million within 10 days of the entry. It's not the entry of a final order. It's the entry of the order. So it has nothing to do with appeals. Once you've entered the order, 10 days later, verizon - 218 - has to pay whether or not there is an appeal. It is - - the only contingency on the settlement is the entry of an order by this Court. THE COURT: Okay. MR. BENNETT: And 10 days isn't even enough to do the copying for the documents that we're - - much less getting all the agreements that will be necessary to move the information around. THE COURT: Ms. Ball, what's your point on this? If the matter is stayed, if the effectiveness is stayed for a period of time, Mr. Kohn's clients get interest. And this interest is going to be paid by unsecured creditors. MS. BALL: Your Honor, I think the interest, one, for an asset that is key to this estate. The fact that the trustee thouldn't want to disengage to make sure the major creditor groups are all in alignment, I find a little bit baffling. To lot have the time to have that exchange with the people that they represent. So, I think, Your Honor, if we have some - - THE COURT: My question, though, is if there is delay, they get money in the meantime. MS. BALL: I understand, Your Honor, it will be coming out of the money that my clients are next in line on. if it's not from the settlement for sure. If it's from the preferences or anywhere else. MS. SCHOENMANN: Your Honor, I think that number - 219 - should be quantified. MR. BROWN: What number are we talking - - I was - - MS. SCHOENMANN: The cost. MS. BALL: The interest cost. THE COURT: How much is the daily interest rate on :his $55 million? MR. BROWN: I think what I - - I think there are two numbers that I quantified some time ago. And it was - - THE COURT: I know, and I - - but I don't remember. MR. BROWN: I - - but I'm trying to put it together. the two components were the approximate monthly interest on the bank that at that - - their asserted ten and a quarter interest rate which I think is about 500,000. THE COURT: And the default rate? MR. BROWN: Their asserted default rate is ten and a quarter. The non-default rate is 2 percent. THE COURT: And that's never been adjudicated? MR. BROWN: Whether they're entitled to default has not been adjudicated. On top of that, there's the interest that the trustee doesn't get on the portion of the money that it doesn't distribute to the secured creditors. THE COURT: But all that's there money. That's not Mr. Kohn's money. MR. BROWN: All that is their money, right. MS. SCHOENMANN: That's our money. - 220 - THE COURT: Yeah. MR. BROWN: Well, presumably, the money that they - - that gets paid to the secured creditor is there money, too. It just all serves to erode unsecured creditor claims. THE COURT: What I mean is, Mr. Kohn's clients are joing to be paid that money if the settlement is approved later, or if they're taken out. MR. BROWN: Correct. THE COURT: Yeah. So it's really the unsecured creditor's money that's being put at risk if this is approved later. MR. KAHN: Your Honor? MS. SCHOENMANN: Your Honor, I would - - MR. KAHN: Your Honor, I'd like to make a couple observations. MR. BENNETT: He's a witness. THE COURT: Please go ahead. MR. KAHN: I would like to make a couple of observations. All of what's happened here was anticipated by our process that you set up. And the first thing I want to tell Your Honor is we got a lot more money because you set up this process. THE COURT: Which process? MR. KAHN: The process of - - the protocol whereby Mr. Kohn couldn't but had to come here. And then you would hold a - 221 - hearing in which there would be adversary process in which people would fight over this. If you had set up a process, but didn't - - wasn't like this, they would have offered us $80 million. And that would have been the end of it. But they were afraid of this process. They were afraid that the interchange, the - - Mr. Bennett or whoever - - wasn't going to be Mr. Bennett - - and they were especially concerned about Monarch because Monarch was the lender, would come in and say 80 million is ridiculous. It's much too low. And you would reject. So, because you set up a process where the settlement would be scrutinized heavily under a reasonableness standard in an adversary process - - THE COURT: I didn't do that. That's the way the Code works and the rules. MR. KAHN: But I - - what you said - - you rejected - - you set up this protocol that caused this to work this way. THE COURT: I didn't let them foreclose. MR. KAHN: Exactly. But the point is you set up this protocol that worked this way. What I'm trying - - the point I'm trying to make is, there's a lot more money in this deal because of what you did, because of the anticipation of this hearing. And that worked greatly to the advantage of everybody in the estate. The second point I want to make is, if you decide you - 222 - don't want to take this settlement, there are going to be at least two significant ramifications. One is going to be, I don't think you'll ever make a deal with anybody who thinks that they're then going to have to come and negotiate it subsequently in a fashion in which there's no finality. It- - vou need to - - you're going to need to find a process in which an offer can be made to them so that they know that they can accept an offer rather than tee up a position that's going to be bandied. The second think I would like to point out and it's a practical problem, if you delay this much longer, I mean, if you delay it the next week or two or three, we can live with that. But if you delay this much longer, we don't have a company here. I'm a plaintiff. I have to call witnesses. I don't have anybody working for me. I have to get all these people together and I have to get them to cooperate with me to put on a case. We have that ready. We settled it. It dissipated. we have to put it back together. If we for some reason set up a process that delayed this six months or a year - - THE COURT: That - - there's not going to be anything like under any circumstances. MR. KAHN: Yeah, I just wanted the Court to lnderstand we don't have - - we're not the usual plaintiff with a company and a witness. - 223 - THE COURT: No, no. There's not going to be anything like that. MR. BROWN: The issue is how long to get to trial though. Your Honor, even if there's a short delay here, how Long before we get to trial is really the question. Because it presents the same problem for Mr. Kahn. MR. KAHN: We're prepared to go ahead. And, you cnow, Mr. Tagawa doesn't think we can do it, that's fine. But I do want to point out that, you know, I'm not a bankruptcy Lawyer. And I don't know what you had to do or didn't have to do. But I settled this case. And I settled it in a room with people who paid us a lot more money than I thought they should because they felt that there was going to be this process. And so, you - - that resulted in your getting more money. THE COURT: Okay. Thank you all very much. Can you hold on a few more minutes. I'm just going to go through this decision. And I'm going to - - let me just tell you what I'm going to do very quickly. And then I'll go through it in detail. This - - if this thing doesn't close, I'm going to provide this in this order, that it's approved. It doesn't - - Verizon doesn't need to pay for 10 days? MR. BROWN: Right. THE COURT: Right? Okay. MR. BROWN: They're obligated to pay in 10 days. - 224 - THE COURT: All right. I'm not going pay them - - I'm not going to let them pay earlier than 10 days either. Okay? MR. BROWN: Well, I don't think that's an issue. THE COURT: And yeah, I'm sure they probably want the float. It's enough money. But in any case, I don't know whether there's any likely thing we can package that can be put together here. But rather than listening to all sorts of things about it now, I will approve this without the money being paid for 10 days. And if the creditors want to try to put together some alternative, a plan for an alternative package, and tell me what the time frame on that is, I can consider that during the 10 days. But I don't have anything in front of me now. Nobody's offered anything. MR. BROWN: There's just one huge concern here, Your Honor. Are we talking about Mr. Hennigan putting together a perspective to syndicate this thing and send it out to bondholders? I mean, I - - that's - - THE COURT: I don't know what they're going to do. They haven't made - - MR. BROWN: What information can they transmit? THE COURT: Can I finish, please? Can I just finish? I have no idea that they can do anything shortly. I haven't heard anything. Nobody's come up to this point and said, let us buy them out. They've just said, don't approve the settlement. I don't think it's appropriate for me at this - 225 - point to say, oh, let's put this approval off on the theory that they may come up with something. There is 10 days before the money's paid. If they've got some wonderful scheme that is doable in a short period of time for buying everybody out, I can consider that during the 10 days without holding anything up here. I have 10 days for them to bring a motion to put this case on a completely different track. But it won't slow up the 10 days. And I - - but I've just reserved the right during the 10 days, if they do come up with the silver bullet, to give them - - to stay the implementation to allow them time. But there's no automatic stay at all. MR. BENNETT: Your Honor, the - - unfortunately, the terms of the agreement are it becomes effective upon the entry of the order. So the settlement becomes a settlement upon the entry of the order even though the payment is delayed. So the only effective way for the Court to give anyone time to come up with something to talk to you about, and I will not describe it as a scheme, I'll describe it as plan, small "p", is for you to stay the effectiveness of the order for at least some period of time. Now, it is after the close of business New York time, so no one can hear about the results of this hearing tonight. Everyone should keep in mind. THE COURT: Okay. - 226 - MR. BENNETT: But the only ruse that works is the stay - - is a stay of order for some period of time and I don't think it should be six months. So, Mr. Kahn doesn't have to worry. THE COURT: Well, you don't need to worry about that. MR. TAGAWA: Your Honor, why can't you take it under advisement and read the exhibits that have been introduced? THE COURT: I've read a lot of the exhibits. I've read many, many things in this case. MR. SCHOCHET: Your Honor, it occurs - - THE COURT: I've had this all week and I've - - I got up - - I've been getting up at a quarter to four some of the mornings to read this stuff. MR. SCHOCHET: It occurs to me that entry of the order has a number of consequences. I think what the Court is after is to basically give parties an opportunity to effectively buyout something under some small \\p" plan so that there isn't an order in here. And I would suggest that perhaps maybe what makes more sense is to indicate the intent, perhaps 15 days from now and I'll come back to the moment to enter the order approving it unless something has happened because otherwise, there is to be a motion to vacate and what is the effect of the order in the meantime. I would also ask for 15 days simply because this is the time of the year for a number of people who might invest, - 227 - who have other commitments, holidays and things and that sort. So I would ask that 15 days be the time period here. But I think the Court's advise and an order will be entered in 15 jays unless something has happened, accomplishes the same outcome. THE COURT: Okay. What I'm going to do - - I don't have an order today. MR. BROWN: Pardon me? THE COURT: I'm not going to sign an order today. You can lodge one if you want. Do you have an order? MR. BROWN: I do have an order. THE COURT: Okay. You can lodge it here. I'm not going to sign it today and I'm not going to tell you till Monday what I'm going to do about this. I'll think about this a little bit. But I - - I will - - I may sign it Monday, I may, you know, do something else. But I won't sign it before Monday. I'm not going to do anything at this point to - - other than just go through the rest of this ruling and tell you what the ruling is. And basically, the ruling here is that unless I - - unless and until I give them time for some - - to come up with some additional scheme, then I - - I'm going to approve this subject only to that possibility. The problem I see with this alternative, which has not been discussed before, is it's really a plan because you're - 228 - not just going to put up the money and only take, you know, the first $55 million that comes out. Nobody's going to do that. that's why they won't do it. That's why the banks won't do it. I just think this is very, very complicated. And again, I'm struggling with this and I, you know, I hope you - - I'm doing my best. But I see this as being a situation in where the interest of different creditor groups, the approach to whether to settle or not is as much as what's at stake as anything else here, is point in different directions. And maybe, in that case, I should just go with the trustee's judgment which is support, at least, with respect to the size of the number. The only question I have is about the preference of the parties. MR. BROWN: Your Honor, I - - MS. SCHOENMANN: Preference of the parties. MR. BROWN: Oh, okay. I'm sorry. I just didn't hear. THE COURT: Okay. So, let me go through this and again, thank you for your patience and all your comments. First of all, the standard for this - - for whether I approve the settlement is, as stated in A&C properties, everyone agrees, at least, that A&C properties governs, and there are four considerations under A&C Properties. The first has to do with the merits of the action and I think some of the language in A&C Properties is hard to - 229 - understand. I'm going to restate it in a way that I think makes sense. And that is, whether the settlement amount is consistent with a court's evaluation of the likelihood of prevailing on liability and, you know, considered in a nathematical correct way with the likely outcome if there is a - - to be a recovery. In other words, if you had a certain recovery of $100 and they - - a likelihood of prevailing of exactly .25, the value is 25. The second consideration - - and I will go into that in some detail. The second consideration is collection risks. the third consideration, I think, is best really described as the delay and expense of not settling. And the last risk is really - - it's called the paramount interest of creditors. tell, of course, that's what the bankruptcy estates are for. I think the key words are there, giving deference to their wishes then they're stated. With respect to the procedure in this hearing, the case law makes very clear that I only have to hold a trial, or even a mini-trial, on the merits of the claim. I need to take appropriate evidence, appropriate in the amount and character, so I can evaluate all of those four standards. And, of course, lost notably, what the action is. What the likelihood of prevailing are and what the likely damages are. And, of course, I should give a forum to the parties-in-interest to express their views about the proposed settlement under the - 230 - fourth standard. I'm quite confident that through this hearing, and especially through all the papers you've given me, I've gotten a fairly good idea, and again this is not a trial, I'm not adjudicating it, but a fairly good idea of what this case is and what the evidence is. And it's supporting all the claims. I would note here that one of the things I've done is I've looked - - I've specifically given the character of what's been done by the trustee here and I know they're in a funny position of having first been counsel arguing the greatest recovery in the case. And then being forced to represent the trustee and say, but there are risks. I've gone to look to the documents that have come in, sometimes through the opposing parties, which - - in which they were speaking in the prior mode. I looked at their - - the plaintiff's settlement conference statement. And I looked at the plaintiff's expert reports. Especially the - - Professor McFadden's report. And I've tried very much here not to just - - I haven't relied on the fact that the trustee wants to settle. I haven't relied on any of the expert witnesses in particular. I've given them consideration, but I've also looked at the underlying documents and with what knowledge I have, tried to evaluate what this case is worth. I want to note again, regarding the procedure, that - 231 - think I have three parties that carne in in a timely manner and said we want to be heard at this hearing, and we want to present evidence. And I made some provision for that. One of the reasons I haven't gone beyond that is I think from the parties I've gotten here, from both sides, I've gotten a lot of information and the - - you know, I know you can't give me all the information about this fairly complex case in one day, but it's been very well presented and I've gotten what I think is a very competent presentation on both sides of the issue. In light of - - I got very, very recently a request to appoint an equity committee and to provide compensation for the equity committee after I had gone through a great deal of the evidence in this case. And I - - my finding is that it's not Likely to be very helpful. The range of settlement here, reasonable range of settlement, the exactly perfect settlement may not be $175 million, but it's not over $500 million. And the settlement range here is such that we're really talking about a case that if the case is settled at a - - at the amount that is in the reasonable range of settlement, shareholders are not going to get anything. And what they say about this, about the settlement value, is - - I'm very, very strongly convinced that their opposition comes from the fact that they're just not getting - 232 - anything. And that the point of view that's been put forth against the settlement has been sufficiently argued by others that I've heard the facts. Okay. Now, let me go through these standards in order. Let me take the easiest ones first. Collection risks. I don't think the trustee's made any case that there's any collection risks that any greater than - - that's more than minimal. You have a very credit-worthy defendant here. I suppose there's always some scenario under which somebody might not be able to pay. I don't think the trustee's made any argument that I should give any serious consideration to settling because of collection risks. I also don't think there's any evidence that the trustee has given away any money for that. The trustee - - when people bring these motions, and they go through the A&C Properties test, they cite everything they can. And the fact that they mentioned some things, I mean, innocuous comments about, well, there's always some possibility, doesn't mean they gave away any money. And I don't - - the trustee said she didn't give away any money and I think that's entirely credible. Delay and expense if not settled. I think the - - two things are very clear here. This case is basically ready for trial. You have to get a trial date again, but it's basically ready for trial on the one hand and it's entirely credible. - 233 - And I would be shocked if it didn't happen. If there was a substantial judgment, there will be an appeal. That's inherent in the process. Now, the question is, does that - - do those Likelihoods suggest that there's some strong impetus here to settle? No. This is what you have when anytime there's a large case. And I don't think the trustee has - - I don't think there's any indication the trustee is giving away any significant amount of money for this. Now, the trustee does - - should give away a little money for this because there is some delta between what the banks are getting and what they're going to earn on post- judgment interest. So that's worth some consideration. Let me talk last about the issues that I talked about a few minutes ago. Deference to the views of creditors. What I have here is an objection from 40 percent of the ducks - - reneral unsecured creditors, sorry, of the parent corporation. I have a statement from a significant number of the trade creditors that they just haven't had time to look at this. I lave support from secured claims totally $55 million. The bondholders objecting are 168, is that what it was? 168 million. Now, I am looking carefully in various ways at what this support in opposition and not appearance means. As I said earlier, first of all, I note that the fact that the other - 234 - bondholders haven't objected and that trade creditors haven't formally objected doesn't mean that they affirmatively support this. It's ambiguous. It's very ambiguous. It may result from inertia. It may result from not having time to review it. It may result from not really having an opinion. I do treat the bondholder objection as an objection raised by a large proportion of unsecured creditors and even if they should substantively consolidate it, they still constitute a large proportion of the debt. They have to be - - their views have to be taken very seriously. In this regard, it's also important to note that the parties coming to this hearing come here with very different interests that affect how they vote and what that - - how they - - what their expressions of positions are and what that reflects. As I've noted earlier, the shareholders will oppose, even if it were a good idea, because they have no reason not to. Unless it goes to trial, they're not going to get anything out of this case. And they're not risking their money. As I noted earlier, the support of the secured creditors doesn't depend on the merits of it, what they are - - their money is very much at stake. And if it goes to trial, at the behest of other people, they stand to gain nothing and lose everything. The position of the unsecured creditors is something to be taken very seriously because they're playing with their - 235 - own money in such a way that I feel that these people really believe that they could do better in another way. I don't think this is just pro forma because I - - we're not going to get anything, we might as well object. You're walking away from a lot of money. I think it reflects a sincere, and in this particular case, given the character of counsel, an informed, for their point of view and well investigated view that they could do better in another way. Or they would like to take a different approach. different parties have different views toward risk and benefit. As I said earlier, struggling with this, and I've spent a lot of time thinking about this, given the very different interest and the different benefits and awards that come out of rejecting the settlement between these two groups of creditors, the unsecured and the bondholders, it's very hard to say that the interest of creditors points clearly in one direction or another given the current structure of the debt. And it's the fact that I've given a great deal a consideration to here and I - - what I've come to, and I will state it very clearly, is that I don't think the particular votes, given the characteristics of the two classes, are a basis to justify turning away a settlement that is - - that meets the first standard of A&C Properties. That is, that the discounted value of the claims is commensurate - - properly discounted value of the causes of actions is commensurate with - 236 - the amount being paid. So, let me turn to the merits. First thing that's very obvious here and that nobody is contesting is that this cause of action, these causes of action, have substantial worth. $175 million is not what everybody wants, but it's a serious amount of money and it reflects a very serious claim here. They - - the - - there are some causes of action that might very well succeed. Everyone seems to be sort of coalescing around Professor McFadden's viewpoint as to the likely range of a full recovery on the breach of contract claim. I looked at this opinion, I read this opinion, and I thought about the transaction myself independent of that. And I think you're all right for the reason that this looks at the transaction in the way that the parties looked at it. It values - - it takes the corporate value assigned by the two parties and then it discounts it for what has happened in terms of the payment of the - - the buying of the preferred stock and the decline of the value in some of these assets between the time the agreement was reached and the time of this termination. And it's a very - - you know, it's a coherent way of looking at these things. And you - - and it's - - so it's - - because that makes sense to me. You have to remember, of course, that that's the plaintiff's expert. And even if that - 237 - general approach comes in, even if that's what the jury buys, there is going to be evidence to the contrary. So I don't think one can consider that a hard number even if the jury buys that general way of looking at things. The - - probably the biggest difference that I see looking at this case from the way the objecting parties have described this is I see that there's more than - - I view this as being more than one risk and that this is - - this mayor may not be a toss up on liability in the sense of there being a claim for breach of the merger agreement which basically turns on whether there was a material adverse affect. That seems to me correctly to be a close question and on which the plaintiff's have a good case. That doesn't mean that it's a 100 percent case, but it's a significant chance to prevail. Obviously, this corporation, Northpoint, suffered some very quick, serious losses. But the carve-out to the material adverse affect clause raises serious questions about whether there was a material adverse affect within the meaning of that clause. It's a very serious question. And it's appropriate to, I think, give the debtor a 50 percent chance, perhaps a little bit more of succeeding in that claim. It's - - certainly 50 percent is in the general range of things. The problem is, I think, in applying the 50 percent rate directly to the mid-range of Professor McFadden's damage - 238 - report for this because there are two additional contingencies. One is that even if they accept Professor McFadden's approach, the number may not be the same because there's all sorts of evidence one could argue back and forth about about just how did the value of these assets change over those two months. The second thing, though, is the death nell, the death throes theory here. And I think that that is a very separate risk from the question of whether there was a material adverse affect within the fairly narrow meaning of this clause. And the jury could say, you know, they shouldn't have done that under the contract, but it really wouldn't have mattered anyway because Northpoint wouldn't have made it. And even the opponents to this settlement have acknowledged, Mr. Hennigan, that that was the greatest risk in the case. That that was a very serious risk. And from when you saw about how much cash the debtor was burning, how much credit they had available to them, that's a very credible claim. The other thing that's on here is, one has to give some thought to, is how this is seen in the eyes of a jury. and I don't see this as being the sort of case where the jury is automatically going to say, oh, that horrible big corporation just did in those little guys. There's an - - it's also very possible that they'll say, you know, that just made a lot of sense. Those people were going down the tubes and why - 239 - should the other guy throw good money after bad. That's on the contract claim. With respect to the fraud claim, I think this claim has some value, obviously because the range of damages there is more open-ended and they did get to go to the jury on it. If you pass summary judgment, you're probably going to get to go to the jury. You're probably not going to get non-suited. The problem here is, again, looking at this - - just the bare facts of this, the fact that they put in 150 million for the preferred stock right away really does make this case lot look bad on the level that a jury is probably going to think of it at. And so that that is - - and the theories that they - - you know, they - - this heavily negotiated contract, you know, was a trick, those kind of claims are just probably not going to have a lot of legs, although they clearly have some value. So if one goes back and one takes something in sort if a mid to lower range of Professor McFadden's - - within his range, not the below his range, but sort of the low end of his range, and then applies these other two discounts which must be multiplied, the discount of no breach of the contract at all and then the discount for, if even if there is a breach, they - - the jury says, well, it was a breach, but, geez, it really didn't matter, then you're in the range of a couple hundred thousand dollars, $175-200 thousand. And this is not out of - 240 - whack. MR. BROWN: Million. THE COURT: Million, sorry. I'm not use to dealing in numbers that big. But, the discount becomes - - coupled together, those two discounts are collectively much greater than 50 percent. And when you don't take all of Professor McFadden's money, but just, you know, the - - at least, you know, the lower end of it, giving them the bulk of it, then you're right in the range of what happened here. I want to say one more thing, and that is, in looking at this, the process does matter some. How the settlement was reached. Now, I can't remember who said this, maybe it was you, Mr. Bennett, but their coming in here and saying, well, we know more about this case. That isn't what I'm getting at at all. I don't think - - I think they have to point to objective things. They can't say trust me in terms of valuing this. But we - - but comparing this settlement to how some other settlements are reached, it - - the process looks like the estate was very carefully represented in circumstances where it wasn't compelled to settle. And I - - what I mean is this. The trustee went out and got a large war-chest to fund this. And that was - - the other side knew about that and knew that these people had enough money to go through trial and that they were able to prepare adequately for the trial. The settlement happened after the discovery, if not - 241 - totally completel was substantially complete. There was a lot of discovery time. people weren/t walking around in the dark in this matter. The - - there was no rush in the sense that the debtor didn't need to liquidate something out of business necessity. This is not an operating case where we/ve got to get whatever we can or we/re going to shut down. We have to take a steep discount because of compulsion. I think they had the freedom to look at this as a case in which we need to figure out what this is worth properly discounted and see if we can settle it for that discounted amount. Now, when you settle casesl you don/t get 100 cents on the dollar. That/s true. Ninety-five percent of cases settle. So 95 percent of cases don/t get 100 cents on the dollar. And A&C Properties doesn/t require that. They require that the settlement be a good settlement. And I think there/s every indication here that as a settlement I this is a good settlement. Now, againl I will consider over the weekend whether there's any reason to stay this to let you come up with some plan for buying them out. And my initial - - the more that I think about thisl the more that I think it/s a very cumbersome process because it/s basically a plan. At least as a planl it has the benefit ofl if you're going to take them out, you don't have this problem of how do you deal with the secured creditor. - 242 - You pay them off. But I think it's a slow process because you can't just buyout these claims without dealing with the other secured - - the other unsecured creditors. And then you have the whole problem of different incentives between the two groups that exist now. It's a very, very difficult process. Okay. Any questions? You submit your order and I'll hold it. MR. BROWN: I do have a question, and that is - - THE COURT: Okay. Have I forgotten anything that I should address? I guess that's one thing. Okay. That's not what you want to ask. Go ahead. MR. BROWN: The question I have is, you know, we - - the concept of considering what the bondholder group, what the creditor may - - group may do in theory, in terms of taking out the secured debt, in theory, you know, I - - it's an interesting concept. As a practical matter, my concern is how - - aside from the problems you've addressed, how does it get done without disseminating information? And I know that's got to be a problem for Mr. Bennett as well to deal with because the last thing he wants to do is disseminate information which may result in the preservation of this lawsuit. But then, what has happened here today, Verizon has access to him and how do we deal with that problem? How can anybody assess this as an investment without getting the information that we don't want - 243 - to get into verizon's hands? MR. BENNETT: I suppose in the first instance, we have to figure that out and make a proposal that the debtor accepts. THE COURT: I think that there are all sorts of problems and that's why I'm not staying this. I just - - I don't see any easy way to do it. And I'd like to let them control their own destiny. But I - - you know, I suppose the simplest thing is that people who don't - - who are at such a level that they can deal with this in a very - - level of sophistication and a level of wealth, that they can deal with this on - - without - - you know, the quickest way in terms of securities, just buy that claim. Or one person buys it. So you're not syndicating anything. That's the quickest way. Whether that will ever happen, I don't know, but it is cumbersome and that's why I'm not thinking about it. I don't know that there's any easy way to do it. I know the bank will probably sell, given 100 percent. MR. KOHN: For 100 - - we don't make any more, we don't make any less, Your Honor. I think our - - there will be some computations to our prices. I have one question, ~our Honor. Mr. Brown has filed a motion for authority to pay us some money which is now set for the 23rd. And I'm just trying to figure out how that fits with the schedule of whatever it is - 244 - we're doing now. MR. BROWN: I can - - I don't think it matters. The only - - what we're seeking - - I have a hearing set for the 23rd. It's a motion to authorize, but not compel the trustee to pay an amount that the trustee and her financial advisors determine is the undisputed amount of the bank debt. The- - we're not - - THE COURT: Assuming you have this - - MR. BROWN: Assuming we have the money. THE COURT: Assuming the settlement's approved? MR. BROWN: Assuming the settlement's approved and we have the money. But you could approve that order even - - approve - - authorize us to pay even if we don't have the money because all we're seeking is authorization to pay an undisputed amount. And so - - and the idea being we want to stop the bleeding as soon as possible when we have the money. THE COURT: I understand. I understand the question about the interest rate and the undisputed amount. MR. BROWN: And - - I have an order. THE COURT: Thank you all for your efforts. I know you had to work very fast and very hard. MR. SULLIVAN: One other thing, Your Honor. I know when we walk outside the door, we're going to get 15 questions from Verizon's contingent. I take it the answer should be simply it's taken under submission? - 245 - THE COURT: Well, I think you can say that the settlement has been approved unless the Court gives the objecting parties a chance to buy it out. Buyout the bank and prosecute the claim. But, you know, it's very difficult to do that quickly because unless they just buy the bank's claim and get in the position of the bank and don't try to get any additional rights, it's a plan. And it's very, very difficult. MR. SULLIVAN: Understood, Your Honor. MR. BROWN: The order is identical to the order I iattached as an exhibit to the motion with one exception. The - - the connocum (phonetic) to paragraph, the last paragraph of the order now states, because of the issues that have arisen in the interim, that neither the order or the settlement agreement has any affect on the allocation of the proceeds. All rights therein being reserved - - THE COURT: That's good. That's the other finding I want to make. I'm not dealing with that. What I've said here is I don't think - - I haven't made any determination in my own mind, let alone on the record, that has any - - have any affect on a motion for substantive consolidation, as I understand the facts of this case. MS. BALL: Or on the grounds, Your Honor, they participate in the settlement. THE COURT: Yeah. I mean, well, the real question ibout what the value is. Whether the value of the claim is - 246 - disproportionate to the different amounts of the claims or whether there should otherwise be substantive consolidation. I'm quite - - I feel quite content that that's an open question in my own mind as well as on the record. MR. BROWN: May I approach? THE COURT: Yes, you may. MS. BALL: Are we done? THE COURT: Okay. Thank you all. ALL COUNSEL: Thank you, Your Honor. (Whereupon, the proceedings in the above-entitled matter were adjourned.) - -000- - CERTIFICATE I certify that the foregoing is a correct transcript, from the electronic sound recording of the proceedings in the above-entitled matter. October 7, 2002 Susan Holcomb, Transcriber - 247 - source visitor Home