IN THE UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re: COLLINS & AIKMAN CORPORATION,

et al. Debtors. ) ) ) ) ) ) Chapter 11 Case No. 05-55927 (SWR) (Jointly Administered) Honorable Steven W. Rhodes

HEARTLAND INDUSTRIAL PARTNERS, L.P. AND AFFILIATES RESPONSE TO THE COLLINS & AIKMAN LITIGATION TRUSTS SIXTY-EIGHTH OMNIBUS OBJECTION TO CLAIMS (INSUFFICIENT BOOKS AND RECORDS) (Re: Docket No. 9833) Heartland Industrial Partners, L.P. (Heartland) and its affiliates (the Heartland Affiliates, together with Heartland, the Claimants),1 by their undersigned attorneys, hereby respond (the Response) to the Collins & Aikman Litigation Trusts (the Trust) Sixty-Eighth Omnibus Objection to Claims (Insufficient Books and Records) (Docket No. 9833) (the Objection). In support of the Response, the Claimants state as follows: INTRODUCTION The Court should overrule the Objection because the Trust has not rebutted the presumption of prima facie validity afforded the Claimants Claims (as defined herein) under the Bankruptcy Code. The Trust fails to specifically set forth, or even allege, facts or evidence with probative force sufficient to overcome the prima facie validity of the Claims. Indeed, the Trust has not proffered any facts or evidence regarding the lack of a necessary element to the Claims or why any portion of the Claims is not otherwise valid. The Trust merely asserts that it is unable to verify C&As obligation to the Claimants. However, more than conclusory
1

This Response is submitted by, on behalf and for the benefit of, and includes any of Heartland, the Heartland Affiliates and any other affiliated entity that may be indemnified pursuant the Services Agreement (as such term is defined herein).

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statements denying liability are necessary to rebut the presumption raised by the timely filing of a proof of claim. The Trust, as the objecting party, must come forth with evidence which, if believed, would refute at least one of the allegations essential to the Claims. The Trust has not satisfied that burden and, thus, the Court should overrule the Objection. BACKGROUND 1. On or about November 12, 2007, the Claimants timely filed proof of claim

no. 8762 (the Second Amended POC)2 asserting in detail various liquidated and unliquidated claims against Collins & Aikman Corporation (C&A) (collectively, the Claims) (a) arising under that certain Services Agreement by and among Heartland, C&A and Collins & Aikman Products Co. (together with C&A, the Debtors), dated February 23, 2001 (as subsequently amended, including on or about August 7, 2001, March 15, 2004 and May 6, 2004) (the Services Agreement), and (b) for indemnification and contribution under applicable state or federal law. The Claimants attached to their POCs documentary evidence, including a copy of the Services Agreement, detailing and supporting their Claims. 2. Specifically, the Claimants asserted a general unsecured claim, in the

amount of $6,050,000.00, and an unliquidated general unsecured claim for indemnification under the terms of the Services Agreement. The Claimants also asserted general unsecured claims in the amounts of (a) $10,052,165.95 for advisory fees, reimbursable expenses and transaction fees payable as of the Petition Date pursuant to the Services Agreement, and (b) $23 million for unpaid advisory fees arising after the Petition Date as damages resulting from the Debtors rejection and breach of the Services Agreement.
2

The Second Amended POC amended and superseded proof of claim no. 8742, which the Claimants timely filed on or about August 31, 2007 (the First Amended POC), which in turn amended and superseded proof of claim no. 5249 that the Claimants timely filed on or about January 6, 20006 (the Original POC).

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A.

Indemnification Claims Under The Services Agreement 3. In the Services Agreement, the Debtors agreed to indemnify and hold

harmless Heartland, its affiliates and their respective partners, (both general and limited), members (both managing and otherwise), officers, directors, employees, agents and representatives . . . from and against any and all losses, claims, damages and liabilities . . . related to, arising out of or in connection with the advisory and consulting services contemplated by the Services Agreement. Services Agreement, 5. Accordingly, the Claimants are entitled to indemnification under the Services Agreement for claims asserted against them based on services they provided pursuant to the Services Agreement. 4. Certain of the Claimants are defendants in the litigations styled: (a) Mainstay High Yield Corporate Bond Fund v. Heartland Industrial

Partners, L.P., et al., (Case No. 2:07-CV-10542), currently pending before the United States District Court for the Eastern District of Michigan (the Mainstay Litigation); (b) In re Collins & Aikman Securities Litigation, (Case No. 03-CV-

71173), currently pending before the United States District Court for the Eastern District of Michigan; (c) Egleston v. Heartland Industrial Partners, L.P., et al. (Case No.

2:06-CV-13555), currently pending before the United States District Court for the Eastern District of Michigan (together with (b) above, the Securities Litigation); (d) Collins & Aikman Corporation and Collins & Aikman Products Co.

v. Heartland Industrial Partners, L.P., (Adv. Pro. No. 07-05592 (SWR)), currently pending in the Bankruptcy Court;

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(e)

Collins & Aikman Corporation and Collins & Aikman Products Co.

v. Heartland Industrial Partners, L.P., Heartland Industrial Associates, L.L.C., Heartland Industrial Group, L.L.C., David Stockman and Jane and John Doe Nos. 1-50, (Adv. Pro. No. 0705650 (SWR)), currently pending in the Bankruptcy Court (together with (d) above, the Avoidance Litigation); (f) Collins & Aikman Corporation and Collins & Aikman Products Co.

v. David A. Stockman, et al., (Case No. 07-CV-265), currently pending in the United States District Court for the District of Delaware (the Delaware Litigation); and (g) Aurelius Capital Master, LTD v. Stockman, et al, (Case No.

08/601483), currently pending in the Supreme Court of the State of New York, County of New York (the "Aurelius Litigation"). 5. Claimants also were (a) defendants in the litigation styled MacKay Shields

LLC v. Heartland Industrial Partners, L.P., et al., Case No. 05-74912, before the United States District Court for the Eastern District of Michigan which dismissed this litigation on October 19, 2006 and (b) appellees in the ensuing appeal, which the United States Court of Appeals for the Sixth Circuit dismissed on January 17, 2007 (collectively, the MacKay Litigation). 6. Claimants also have incurred and expect to incur additional costs and

expenses (including attorneys fees) in connection with various governmental investigations (the Investigations) concerning C&A, and it is possible that Claimants will be involved in additional investigations and/or named as defendants in additional actions asserting claims against it in connection with services provided to Debtors under the Services Agreement or otherwise.

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7.

In connection with the Mainstay Litigation, the Securities Litigation, the

MacKay Litigation, and/or the Investigations, Claimants had incurred costs (including attorneys fees and disbursements) (collectively Costs) in excess of approximately $6,050,000.00 at the time of filing the Second Amended POC. Claimants expect to incur substantial additional Costs in connection with the Mainstay Litigation, the Securities Litigation, the Avoidance Litigation, the Delaware Litigation, the Aurelius Litigation and/or the Investigations and may incur liability for damages in connection with such present and future litigations and investigations (collectively Damages). 8. The Debtors have not paid Claimants for any of their Costs relating to the

MacKay Litigation, the Mainstay Litigation, the Securities Litigation, the Avoidance Litigation, the Delaware Litigation, the Aurelius Litigation and/or the Investigations.3 The Costs and Damages incurred by Claimants in connection with the MacKay Litigation, the Mainstay Litigation, the Securities Litigation, the Avoidance Litigation, the Delaware Litigation, the Aurelius Litigation and/or the Investigations (including any judgments against or settlements with the Claimants) may constitute claims for which the Claimants must be indemnified by the Debtors under the Services Agreement. Claimants, additionally, may have and assert a claim for indemnification or contribution for such Costs and Damages under applicable state or federal law. Accordingly, the Claimants asserted in the Second Amended POC a general unsecured claim for
3

Certain of the Claimants Costs related to these litigations and investigations have been paid by either (a) American Home Assurance Company (American Home) under the Executive and Organization Liability Insurance Policy No. 490-41-15 (the American Home Policy) issued to C&A, or (b) American International Specialty Lines Insurance Company (AISLIC) under the Risk Capital Protector Policy (the AISLIC Policy) issued to Heartland Industrial Group, LLC and/or similar policies issued in earlier years. Both the American Home Policy and the AISLIC Policy contain provisions that subrogate the respective insurer to payments received by the insureds or the insureds rights of recovery and requiring the insureds to seek such payments and preserve such rights of recovery, including, but not limited to, asserting indemnification or contribution rights. Accordingly, to the extent necessary, the term Claimants herein and in the Second Amended POC includes American Home and AISLIC in their respective capacities as subrogated insurers.

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$6,050,000.00, representing its liquidated Costs at the time of filing the Second Amended POC in connection with the Mainstay Litigation, the Securities Litigation, the MacKay Litigation, and/or the Investigations, and an unliquidated general unsecured claim for future Costs and Damages in connection with the Mainstay Litigation, the Securities Litigation, the Avoidance Litigation, the Delaware Litigation and/or the Investigations and any future lawsuits or investigations. B. Claims For Prepetition Amounts Under The Services Agreement 9. Pursuant to the Services Agreement, Claimants agreed to and did render to

the Debtors certain advisory and consulting services as described in the Services Agreement. In exchange for such services, Claimants were to be paid by the Debtors an Advisory Fee (as defined in the Services Agreement) in equal quarterly installments, payable at the beginning of each quarter, over the course of a calendar year. As of May 17, 2005 (the Petition Date), the Debtors owed Claimants Advisory Fees for the first two quarters of calendar year 2005 in the total amount of $2 million. The invoices submitted to the Debtors reflecting the outstanding prepetition Advisory Fees are attached to the Second Amended POC. 10. The Debtors also agreed under the Services Agreement to reimburse

Claimants for the reasonable out-of-pocket costs and expenses (collectively, the Expenses) incurred by Claimants in connection with the services rendered to the Debtors under the Services Agreement. As set forth in the Second Amended POC, the Debtors owed Claimants $3,152,165.95 in nonreimbursed Expenses as of the Petition Date. 11. Under the Services Agreement, the Claimants were also entitled to the

payment of certain transaction fees (the Transaction Fees) upon the consummation of specified transactions (the Transactions) by the Debtors. Among the Transactions consummated by the

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Debtors with the assistance of Claimants were (i) the offering of senior subordinated notes and/or the amendment and restatement of C&A Products senior secured credit facility, consummated in 2004 (the Bond Refinancing), and (ii) a lease financing in Hermasillo, Mexico (the Lease Financing), consummated in 2004. In connection with the Bond Refinancing, Claimants were entitled to a Transaction Fee of $5 million, of which $4 million remained outstanding as of the Petition Date. With respect to the Lease Financing, Claimants were entitled to a Transaction Fee of $900,000, which remained unpaid in its entirety as of the Petition Date. An invoice reflecting the Lease Financing Transaction Fee, as well as a copy of the Third Amendment to the Services Agreement providing for the Bond Refinancing Transaction Fee are both attached to the Second Amended POC. 12. Accordingly, the Second Amended POC asserted against the Debtors a

general unsecured Claim under the Services Agreement in the aggregate amount of $10,052,165.95 for Advisory Fees ($2,000,000), Reimbursable Expenses ($3,152,165.95), and Transaction Fees ($4,900,0000) as of the Petition Date. C. Claims For Rejection Of The Services Agreement 13. On July 18, 2007, the Court entered its Order (the Confirmation Order)

Confirming First Amended Joint Plan of Collins & Aikman Corporation And Its Debtor Subsidiaries (the Plan). The Plan became effective on October 12, 2007 (as defined in the Plan, the Effective Date). The Debtors rejected the Services Agreement pursuant to the Plan effective as of the Effective Date. Rejection of an executory contract constitutes a permitted breach of such contract under the Bankruptcy Code. 11 U.S.C. 365(g). The breach is deemed to have occurred immediately prior to the Petition Date. 11 U.S.C. 365(g)(1). The damages

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resulting from the breach are general unsecured prepetition claims. In re Orion Pictures Corp., 4 F.3d 1095, 1098 (2d Cir. 1993). 14. The Services Agreement provides for the Debtors to continue to pay

Advisory Fees to the Claimants until the earlier of (a) the tenth anniversary of the Services Agreement, or (b) the date on which the Heartland and the Heartland Affiliates hold, directly or indirectly, beneficial ownership of less than 25% of the common equity interests of the Debtors. See Services Agreement 3. The Claimants ownership of the Debtors common stock did not drop below 25% prior to the Effective Date. Accordingly, as a result of the Debtors rejection and breach of the Services Agreement, the Claimants incurred damages for the unpaid Advisory Fees through February 23, 2011, which is the tenth anniversary of the Services Agreement. During the period from the Petition Date through the February 23, 2011, the Debtors owed Claimants Advisory Fees for the last two quarters of calendar year 2005, all four quarters of 2006 though 2010 and the first quarter of 2011, in the total amount of $23 million. Accordingly, in the Second Amended POC the Claimants asserted a general unsecured Claim in the amount of $23 million for unpaid Advisory Fees arising after the Petition Date as damages resulting from the Debtors rejection and breach of the Services Agreement. D. The Trusts Objection 15. On or about July 30, 2008, the Trust filed the Objection to the Second

Amended PC and the First Amended POC,4 and certain other proofs of claims,5 stating only that

The Claimants previously consented to the disallowance of the First Amended POC and the Original POC because they were ultimately amended and superseded by the Second Amended POC. The Objection also included proof of claim nos. (a) 5642, 7554 and 5330 on behalf of Daniel P. Tredwell, Samuel Valenti III and W. Gerald McConnell, who will file a separate response, (b) 4653 on behalf of Timothy D. Leuliette, who has already filed a response to the Objection, (c) 6878 on behalf of David A. Stockman, and (d) 5250 on behalf of Leuliette McConnell Valenti and Tredwell Heartland Director Indemnification. The Claimants have been unable to determine the nature of proof of claim no. 5250 and whether it was filed by or on (cont'd) 8

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it cannot verify that the Debtors had any obligation to pay the claimants and/or the claims. Objection, p. 3. The Trust extended the deadline for the Claimants to respond to the Objection until October 13, 2008. For the reasons set forth in this Response, the Claimants respectfully request the Court to overrule the Objection. ARGUMENT 16. The filing of a proof of claim constitutes prima facie evidence of its

amount and validity. Fed. R. Bankr. P. 3001(f); In re Planet Hollywood International, 274 B.R. 391, 394 (D. Del. 2001); citing In re Allegheny Intern Inc., 954 F.2d 167, 173 (3d Cir. 1992). Thus, pursuant to Rule 3001(f), if a party objects to a claim, the objecting party carries the burden of going forward with evidence to overcome the prima facie validity and amount of the claim. In re Johnson, 384 B.R. 763, 769 (Bankr. E.D. Mich. 2008); In re Hughes, 313 B.R. 205, 208 (Bankr. E.D. Mich. 2004). Stated differently, the objecting party must produce evidence which would refute at least one of the allegations that is essential to the legal sufficiency of the [claimant's] proof of claim. In re Dow Corning Corp., 250 B.R. 298, 321 (Bankr. E.D. Mich. 2000); In re Reilly, 245 B.R. 768, 773 (B.A.P. 2d Cir. 2000). This evidence must be of a probative force equal to that of the creditors proof of claim. In re Hinkley, 58 B.R. 339, 348 (Bankr. S.D. Tex. 1986); aff'd., 89 B.R. 608; aff'd, 879 F.2d 859; see, also, In re Lewis, 80 B.R. 39, 40 (E.D. Pa. 1987); citing 3 Collier on Bankruptcy 502.02 at 502-22. 17. Based on Rule 3001(f)'s express language, more than conclusory

statements denying liability are necessary to rebut the presumption raised by the timely filing of
________________________ (cont'd from previous page) behalf of any Heartland Affiliates. Counsel for the Claimants has requested a copy of such proof of claim from counsel to the Trust, but has not received any such copy as of the date of this Response. Accordingly, if and to the extent that proof of claim no. 5250 was filed by or on behalf of any Heartland Affiliate, this Response shall be deemed to include such proof of claim and any claims of the Heartland Affiliates set forth therein.

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a proof of claim. See In re Brown, 221 B.R. 46, 48 (Bankr. S.D. Ga. 1998). Courts can summarily overrule objections that are merely formal objections without evidence, See In re Garner, 246 B.R. 617, 623 (B.A.P. 9th Cir. 2000) (in response to debtors mere assertion that there is no valid obligation to pay...and there are no written documents or other competent evidence of any valid obligations owed to said creditor, the court stated one who chooses to make a mere formal objection is electing to narrow the issue to whether the proof of claim is executed and filed in accordance with the rules.); See also In re Williams, No. 92-50546, 1994 WL 329328, *3 (Bankr. S.D. Ga. March 30, 1994) (merely disagreeing with a claim cannot rise to level of producing evidence equal to weight given to claim itself as is necessary to rebut presumption of prima facie validity). 18. The Claimants POCs were timely filed and meet the requirements of Fed.

R. Bankr. P. 3001(f). Accordingly, the Claimants Claims are presumed valid. 19. While the Trusts Objection of insufficient books and records illustrates

that C&As own books and records are likely insufficient, the Objection fails to meet the Trusts burden of producing evidence to refute any element of the Claimants Claims. Indeed, the Trust ignores the factual basis for, and documentary evidence in support of, the Claims and points to no evidence whatsoever to support its Objection. Therefore the presumption of validity stands, the Objection should be overruled and the Claims should be allowed.

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WHEREFORE, the Claimants respectfully request that the Court enter an order (i) denying the Trusts Objection, (ii) allowing the Claimants Claims in full, and (iii) granting such other and further relief as the Court deems fair and equitable. Dated: October 13, 2008 Respectfully submitted, BARRIS, SOTT, DENN & DRIKER, PLLC /s/ Matthew J. Bredeweg Stephen E. Glazek (P23186) Matthew J. Bredeweg (P67796) 211 West Fort Street Detroit, MI 48226-3281 (313) 965-2493 - and Chris L. Dickerson Stephen D. Williamson SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 333 West Wacker Drive, Suite 2100 Chicago, IL 60606 (312) 407-0700 Counsel to Heartland Industrial Partners, L.P. and its affiliates

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